EX 9-27 Accounts receivable turnover and days’ sales in receivables

H.J. Heinz Company was founded in 1869 at Sharpsburg, Pennsylvania, by Henry J. Heinz. The company manufactures and markets food products throughout the world, including ketchup, condiments and sauces, frozen food, pet food, soups, and tuna. For two recent years, H.J. Heinz reported the following (in thousands):



Year 2 Year 1
Net sales $10,706,588 $10,494,983
Accounts receivable 1,265,032 1,045,338



Assume that the accounts receivable (in thousands) were $1,171,797 at the beginning of Year 1.

a. Compute the accounts receivable turnover for Year 2 and Year 1. Round to one decimal place.
b. Compute the days’ sales in receivables at the end of Year 2 and Year 1. Round to one decimal place.
c. What conclusions can be drawn from these analyses regarding Heinz’s efficiency in collecting receivables?


Answer:
 

a. and b.
Net sales……………………………
Accounts receivable………………
Average accts. receivable………
Accts. receivable turnover………
Average daily sales………………
Days’ sales in receivables………
Year 2 Year 1
$10,706,588 $10,494,983
$1,265,032 $1,045,338
$1,155,185 $1,108,567.5
[($1,265,032 + $1,045,338) ÷ 2] [($1,045,338 + $1,171,797) ÷ 2]
9.3 9.5
($10,706,588 ÷ $1,155,185) ($10,494,983 ÷ $1,108,567.5)
$29,333.1 $28,753.4
($10,706,588 ÷ 365 days) ($10,494,983 ÷ 365 days)
39.4 38.6
($1,155,185 ÷ $29,333.1) ($1,108,567.5 ÷ $28,753.4)



c. The accounts receivable turnover indicates a decrease in the efficiency of collecting accounts receivable by decreasing from 9.5 to 9.3, an unfavorable trend. The number of days’ sales in receivables increased from 38.6 to 39.4 days, also indicating an unfavorable trend in collections of receivables. These unfavorable trends are consistent with the economic downturn that occurred worldwide in Year 1 and Year 2. However, before reaching a final conclusion, both ratios should be compared with those of past years, industry averages, and similar firms.

EX 9-26 Accounts receivable turnover and days’ sales in receivables

Polo Ralph Lauren Corporation designs, markets, and distributes a variety of apparel, home decor, accessory, and fragrance products. The company’s products include such brands as Polo by Ralph Lauren, Ralph Lauren Purple Label, Ralph Lauren, Polo Jeans Co., and Chaps. Polo Ralph Lauren reported the following (in thousands) for two recent years:



For the Period Ending
Year 2 Year 1
Net sales $5,660,300 $4,978,900
Accounts receivable 592,700 486,200




Assume that accounts receivable (in millions) were $576,700 at the beginning of Year 1.

a. Compute the accounts receivable turnover for Year 2 and Year 1. Round to one decimal place.
b. Compute the days’ sales in receivables for Year 2 and Year 1. Round to one decimal place.
c. What conclusions can be drawn from these analyses regarding Ralph Lauren’s efficiency in collecting receivables?


Answer:

a. and b.
Net sales……………………………
Year 2 Year 1
$5,660,300 $4,978,900
Accounts receivable………………
Average accts. receivable………
Accts. receivable turnover………
$592,700
$539,450
[($592,700 + $486,200) ÷ 2]
10.5
$486,200
$531,450
[($486,200 + $576,700) ÷ 2]
9.4
($5,660,300 ÷ $539,450) ($4,978,900 ÷ $531,450)
Average daily sales………………
Days’ sales in receivables………
$15,507.7
($5,660,300 ÷ 365 days)
34.8
$13,640.8
($4,978,900 ÷ 365 days)
39.0
($539,450 ÷ $15,507.7) ($531,450 ÷ $13,640.8)




c. The accounts receivable turnover indicates an increase in the efficiency of collecting accounts receivable by increasing from 9.4 to 10.5, a favorable trend. The days’ sales in receivables also indicates an increase in the efficiency of collecting accounts receivable by decreasing from 39.0 to 34.8, which is a favorable trend. However, before reaching a final conclusion, the ratios should be compared with industry averages and similar firms.

EX 9-25 Receivables on the balance sheet

List any errors you can find in the following partial balance sheet:


Napa Vino Company
Balance Sheet
December 31, 2014
Assets
Current assets:
Cash $ 78,500
Notes receivable $ 300,000
Less interest receivable 4,500 295,500
Accounts receivable $1,200,000
Plus allowance for doubtful accounts 11,500 1,211,500







Answer:
1. The interest receivable should be reported separately as a current asset. It should not be deducted from notes receivable.

2. The allowance for doubtful accounts should be deducted from accounts receivable.

A corrected partial balance sheet would be as follows:





NAPA VINO COMPANY
Balance Sheet
December 31, 2014
Assets
Current assets:
Cash $ 78,500
Notes receivable 300,000
Accounts receivable $1,200,000
Less allowance for doubtful accounts 11,500 1,188,500
Interest receivable 4,500

EX 9-24 Entries for receipt and dishonor of notes receivable

Journalize the following transactions in the accounts of Safari Games Co., which operates a riverboat casino:

Apr. 18. Received a $60,000, 30-day, 7% note dated April 18 from Glenn Cross on account.
30. Received a $42,000, 60-day, 8% note dated April 30 from Rhoni Melville on account.
May 18. The note dated April 18 from Glenn Cross is dishonored, and the customer’s account is charged for the note, including interest.
June 29. The note dated April 30 from Rhoni Melville is dishonored, and the customer’s account is charged for the note, including interest.
Aug. 16. Cash is received for the amount due on the dishonored note dated April 18 plus interest for 90 days at 8% on the total amount debited to Glenn Cross on May 18.
Oct. 22. Wrote off against the allowance account the amount charged to Rhoni Melville on June 29 for the dishonored note dated April 30.


Answer:

Apr. 18 Notes Receivable 60,000
Accounts Receivable—Glenn Cross 60,000
30 Notes Receivable 42,000
Accounts Receivable—Rhoni Melville 42,000
May 18 Accounts Receivable—Glenn Cross 60,350
Notes Receivable 60,000
Interest Revenue 350
($60,000 × 7% × 30/360).
June 29 Accounts Receivable—Rhoni Melville 42,560
Notes Receivable 42,000
Interest Revenue 560
($42,000 × 8% × 60/360).
Aug. 16 Cash 61,557
Accounts Receivable—Glenn Cross 60,350
Interest Revenue 1,207
($60,350 × 8% × 90/360).
Oct. 22 Allowance for Doubtful Accounts 42,560
Accounts Receivable—Rhoni Melville 42,560

EX 9-22 Entries for notes receivable, including year-end entries

The following selected transactions were completed by Easy-Zip Co., a supplier of zippers for clothing:

2013
Dec. 16. Received from Lake Shore Clothing & Bags Co., on account, a $21,000, 90-day, 8% note dated December 16.
31. Recorded an adjusting entry for accrued interest on the note of December 16.
31. Recorded the closing entry for interest revenue.

2014
Mar. 16. Received payment of note and interest from Lake Shore Clothing & Bags Co. Journalize the entries to record the transactions.


Answer:

2013
Dec. 16 Notes Receivable 21,000
Accounts Receivable—Lake Shore
Clothing & Bags Co. 21,000
31 Interest Receivable 70
Interest Revenue 70
Accrued interest
($21,000 × 0.08 × 15/360 = $70).
31 Interest Revenue 70
Income Summary 70
2014
Mar. 16 Cash 21,420
Notes Receivable 21,000
Interest Receivable 70
Interest Revenue 350
($21,000 × 0.08 × 75/360).

EX 9-23 Entries for receipt and dishonor of note receivable

Journalize the following transactions of Sanchez Productions:

July 12. Received a $240,000, 120-day, 7% note dated July 12 from Accolade Co. on account.

Nov. 9. The note is dishonored by Accolade Co.

Dec. 9. Received the amount due on the dishonored note plus interest for 30 days at 9% on the total amount charged to Accolade Co. on November 9.


Answer:

July 12 Notes Receivable 240,000
Accounts Receivable—Accolade Co. 240,000
Nov. 9 Accounts Receivable—Accolade Co. 245,600
Notes Receivable 240,000
Interest Revenue 5,600
($240,000 × 0.07 × 120/360).
Dec. 9 Cash 247,442
Accounts Receivable—Accolade Co. 245,600
Interest Revenue 1,842
($245,600 × 0.09 × 30/360).

EX 9-21 Entries for notes receivable

The series of seven transactions recorded in the following T accounts were related to a sale to a customer on account and the receipt of the amount owed. Briefly describe each transaction.


CASH NOTES RECEIVABLE
(7) 61,509 (5) 60,000 (6) 60,000
ACCOUNTS RECEIVABLE SALES RETURNS AND ALLOWANCES
(1) 75,000 (3) 15,000 (3) 15,000
(6) 60,600 (5) 60,000
(7) 60,600
MERCHANDISE INVENTORY COST OF MERCHANDISE SOLD
(4) 9,000 (2) 45,000 (2) 45,000 (4) 9,000
SALES INTEREST REVENUE
(1) 75,000 (6) 600
(7) 909






Answer:
1. Sale on account.
2. Cost of merchandise sold for the sale on account.
3. A sale return or allowance.
4. Cost of merchandise returned.
5. Note received from customer on account.
6. Note dishonored and charged maturity value of note to customer’s account receivable.
7. Payment received from customer for dishonored note plus interest earned after due date.

EX 9-20 Entries for notes receivable

Doe Creek Interior Decorators issued a 120-day, 7% note for $150,000, dated February 18, 2014, to La Fleur Furniture Company on account.

a. Determine the due date of the note.
b. Determine the maturity value of the note.
c. Journalize the entries to record the following: (1) receipt of the note by La Fleur

Furniture and (2) receipt of payment of the note at maturity.


Answer:

a. June 18 (10 + 31 + 30 + 31 + 18)
b. $153,500 [($150,000 × 7% × 120/360) + $150,000] 
c. (1) Notes Receivable 150,000
Accounts Rec.—Dry Creek Interior Decorators 150,000
Cash 153,500
(2) Notes Receivable 150,000
Interest Revenue 3,500

EX 9-19 Determine due date and interest on notes

Determine the due date and the amount of interest due at maturity on the following notes dated in 2014:


Date of Note Face Amount Interest Rate Term of Note
a. January 22 $55,000 8% 90 days
b. March 9 36,000 5 60 days
c. June 15 78,000 4 45 days
d. September 4 13,800 7 60 days
e. October 1 58,000 6 120 days




Answer:



Due Date
a. Apr. 22
Interest
$1,100 [$55,000 × 0.08 × (90/360)]
b. May 8 300 [$36,000 × 0.05 × (60/360)]
c. July 30 390 [$78,000 × 0.04 × (45/360)]
d. Nov. 3 161 [$13,800 × 0.07 × (60/360)]
e. Jan. 29 1,160 [$58,000 × 0.06 × (120/360)]

EX 9-18 Entries for bad debt expense under the direct write-off and allowance methods

Seaforth International wrote off the following accounts receivable as uncollectible for the year ending December 31, 2014:


Customer Amount
Kim Abel $ 21,550
Lee Drake 33,925
Jenny Green 27,565
 Mike Lamb 19,460
Total $102,500
The company prepared the following aging schedule for its accounts receivable on
December 31, 2014:
Aging Class (Number
of Days Past Due)
Receivables Balance
on December 31
Estimated Percent of
Uncollectible Accounts
0–30 days $ 715,000 1%
31–60 days 310,000 2
61–90 days 102,000 15
91–120 days 76,000 30
More than 120 days 97,000 60
Total receivables $1,300,000




a. Journalize the write-offs for 2014 under the direct write-off method.
b. Journalize the write-offs and the year-end adjusting entry for 2014 under the allowance method, assuming that the allowance account had a beginning balance
of $95,000 on January 1, 2014, and the company uses the analysis of receivables method.
c. How much higher (lower) would Seaforth International’s 2014 net income have been under the allowance method than under the direct write-off method?


Answer:

a.
 Bad Debt Expense 102,500
Accounts Receivable—Kim Abel 21,550
Accounts Receivable—Lee Drake 33,925
Accounts Receivable—Jenny Green 27,565
Accounts Receivable—Mike Lamb 19,460
b.
 Allowance for Doubtful Accounts 102,500
Accounts Receivable—Kim Abel 21,550
Accounts Receivable—Lee Drake 33,925
Accounts Receivable—Jenny Green 27,565
Accounts Receivable—Mike Lamb 19,460
Bad Debt Expense 117,150
Allowance for Doubtful Accounts 117,150
Uncollectible accounts 

Computations:
Aging Class
(Number of Days
Past Due)
Receivables
Balance on
December 31
Estimated Doubtful
Accounts
Percent Amount
0–30 days $ 715,000 1% $ 7,150
31–60 days 310,000 2% 6,200
61–90 days 102,000 15% 15,300
91–120 days 76,000 30% 22,800
More than 120 days 97,000 60% 58,200
Total receivables $1,300,000 $109,650
Unadjusted debit balance of Allowance for Doubtful Accounts
($102,500 – $95,000)……………………………………………………………………… $ 7,500
Estimated balance of Allowance for Doubtful Accounts
from aging schedule…………………………………………………………………… 109,650
Adjustment………………………………………………………………………………… $117,150




c. Net income would have been $14,650 lower in 2014 under the allowance method, because bad debt expense would have been $14,650 higher under the allowance method ($117,150 expense under the allowance method versus $102,500 expense under the direct write-off method).

EX 9-17 Entries for bad debt expense under the direct write-off and allowance methods

Casebolt Company wrote off the following accounts receivable as uncollectible for the first year of its operations ending December 31, 2014:


Customer Amount
Shawn Brooke $ 4,650
Eve Denton 5,180
Art Malloy 11,050
Cassie Yost 9,120
Total $30,000





a. Journalize the write-offs for 2014 under the direct write-off method.

b. Journalize the write-offs for 2014 under the allowance method. Also, journalize the adjusting entry for uncollectible accounts. The company recorded $5,250,000 of credit sales during 2014. Based on past history and industry averages, ¾% of credit sales are expected to be uncollectible.

c. How much higher (lower) would Casebolt Company’s 2014 net income have been under the direct write-off method than under the allowance method?


Answer:


a.
 Bad Debt Expense 30,000
Accounts Receivable—Shawn Brooke 4,650
Accounts Receivable—Eve Denton 5,180
Accounts Receivable—Art Malloy 11,050
Accounts Receivable—Cassie Yost 9,120
b.
 Allowance for Doubtful Accounts 30,000
Accounts Receivable—Shawn Brooke 4,650
Accounts Receivable—Eve Denton 5,180
Accounts Receivable—Art Malloy 11,050
Accounts Receivable—Cassie Yost 9,120
Bad Debt Expense 39,375
Allowance for Doubtful Accounts 39,375
Uncollectible accounts estimate
($5,250,000 × 0.75% = $39,375).





c. Net income would have been $9,375 higher in 2014 under the direct write-off method, because bad debt expense would have been $9,375 higher under the allowance method ($39,375 expense under the allowance method vs. $30,000 expense under the direct write-off method).

EX 9-16 Effect of doubtful accounts on net income

Using the data in Exercise 9-15, assume that during the second year of operations Mack’s Plumbing Supply Co. had net sales of $4,100,000, wrote off $34,000 of accounts as uncollectible using the direct write-off method, and reported net income of $600,000.


a. Determine what net income would have been in the second year if the allowance method (using 1% of net sales) had been used in both the first and second years.

b. Determine what the balance of the allowance for doubtful accounts would have been at the end of the second year if the allowance method had been used in both the first and second years.


Answer:
a. $593,000 [$600,000 + $34,000 – ($4,100,000 × 1%)]
b. $11,700 ($32,500 – $27,800) + ($41,000 – $34,000)

EX 9-14 Entries for bad debt expense under the direct write-off and allowance methods

The following selected transactions were taken from the records of Rustic Tables Company for the year ending December 31, 2014:

June 8. Wrote off account of Kathy Quantel, $8,440.
Aug. 14. Received $3,000 as partial payment on the $12,500 account of Rosalie Oakes. Wrote off the remaining balance as uncollectible.
Oct. 16. Received the $8,440 from Kathy Quantel, whose account had been written off on June 8. Reinstated the account and recorded the cash receipt.
Dec. 31. Wrote off the following accounts as uncollectible (record as one journal entry):




Wade Dolan $4,600
Greg Gagne 3,600
Amber Kisko 7,150
Shannon Poole 2,975
Niki Spence 6,630




31. If necessary, record the year-end adjusting entry for uncollectible accounts.

a. Journalize the transactions for 2014 under the direct write-off method.

b. Journalize the transactions for 2014 under the allowance method, assuming that the allowance account had a beginning balance of $36,000 on January 1, 2014, and the company uses the analysis of receivables method. Rustic Tables Company prepared the following aging schedule for its accounts receivable:


Aging Class (Number
of Days Past Due)
Receivables Balance
on December 31
Estimated Percent of
Uncollectible Accounts
0–30 days $320,000 1%
31–60 days 110,000 3
61–90 days 24,000 10
91–120 days 18,000 33
More than 120 days 43,000 75
Total receivables $515,000




c. How much higher (lower) would Rustic Tables’ 2014 net income have been under the direct write-off method than under the allowance method?


Answer:

a.
 June 8 Bad Debt Expense 8,440
Accounts Receivable—Kathy Quantel 8,440
Aug. 14 Cash 3,000
Bad Debt Expense 9,500
Accounts Receivable—Rosalie Oakes 12,500
Oct. 16 Accounts Receivable—Kathy Quantel 8,440
Bad Debt Expense 8,440
16 Cash 8,440
Accounts Receivable—Kathy Quantel 8,440
Dec. 31 Bad Debt Expense 24,955
Accounts Receivable—Wade Dolan 4,600
Accounts Receivable—Greg Gagne 3,600
Accounts Receivable—Amber Kisko 7,150
Accounts Receivable—Shannon Poole 2,975
Accounts Receivable—Niki Spence 6,630
31 No entry








b.
 June 8 Allowance for Doubtful Accounts 8,440
Accounts Receivable—Kathy Quantel 8,440
Aug. 14 Cash 3,000
Allowance for Doubtful Accounts 9,500
Accounts Receivable—Rosalie Oakes 12,500
Oct. 16 Accounts Receivable—Kathy Quantel 8,440
Allowance for Doubtful Accounts 8,440
16 Cash 8,440
Accounts Receivable—Kathy Quantel 8,440
Dec. 31 Allowance for Doubtful Accounts 24,955
Accounts Receivable—Wade Dolan 4,600
Accounts Receivable—Greg Gagne 3,600
Accounts Receivable—Amber Kisko 7,150
Accounts Receivable—Shannon Poole 2,975
Accounts Receivable—Niki Spence 6,630
31 Bad Debt Expense 45,545
Allowance for Doubtful Accounts 45,545
Uncollectible accounts estimate
($47,090 – $1,545).
Computations:
Aging Class
(Number of Days
Past Due)
Receivables
Balance on
December 31
Estimated Doubtful
Accounts
Percent Amount
0–30 days $320,000 1% $ 3,200
31–60 days 110,000 3% 3,300
61–90 days 24,000 10% 2,400
91–120 days 18,000 33% 5,940
More than 120 days 43,000 75% 32,250
Total receivables $515,000 $47,090
Estimated balance of allowance account from aging schedule…………………… $47,090
Unadjusted credit balance of allowance account*…………………………………… 1,545
Adjustment………………………………………………………………………………… $45,545
* $36,000 – $8,440 – $9,500 + $8,440 – $24,955 = $1,545




c. Bad debt expense under:
Allowance method………………………………………………………………… $45,545
Direct write-off method ($8,440 + $9,500 – $8,440 + $24,955)…………… 34,455
Difference………………………………………………………………………… $11,090
Rustic Tables’ income would be $11,090 higher under the direct write-off method
than under the allowance method.

EX 9-15 Effect of doubtful accounts on net income

During its first year of operations, Mack’s Plumbing Supply Co. had net sales of $3,250,000, wrote off $27,800 of accounts as uncollectible using the direct write-off method, and reported net income of $487,500. Determine what the net income would have been if the allowance method had been used, and the company estimated that 1% of net sales would be uncollectible.


Answer:
$482,800 [$487,500 + $27,800 – ($3,250,000 × 1%)]

EX 9-13 Entries for bad debt expense under the direct write-off and allowance methods

The following selected transactions were taken from the records of Shipway Company for the first year of its operations ending December 31, 2014:

Apr. 13. Wrote off account of Dean Sheppard, $8,450.
May 15. Received $500 as partial payment on the $7,100 account of Dan Pyle. Wrote off the remaining balance as uncollectible.
July 27. Received $8,450 from Dean Sheppard, whose account had been written off on
April 13. Reinstated the account and recorded the cash receipt.
Dec. 31. Wrote off the following accounts as uncollectible (record as one journal entry):


Paul Chapman $2,225
Duane DeRosa 3,550
Teresa Galloway 4,770
Ernie Klatt 1,275
Marty Richey 1,690




31. If necessary, record the year-end adjusting entry for uncollectible accounts.

a. Journalize the transactions for 2014 under the direct write-off method.

b. Journalize the transactions for 2014 under the allowance method. Shipway Company uses the percent of credit sales method of estimating uncollectible accounts expense. Based on past history and industry averages, ¾% of credit sales are expected to be uncollectible. Shipway Company recorded $3,778,000 of credit sales during 2014.

c. How much higher (lower) would Shipway Company’s net income have been under the direct write-off method than under the allowance method?


Answer:


a.
 Apr. 13 Bad Debt Expense 8,450
Accounts Receivable—Dean Sheppard 8,450
May 15 Cash 500
Bad Debt Expense 6,600
Accounts Receivable—Dan Pyle 7,100
July 27 Accounts Receivable—Dean Sheppard 8,450
Bad Debt Expense 8,450
27 Cash 8,450
Accounts Receivable—Dean Sheppard 8,450
Dec. 31 Bad Debt Expense 13,510
Accounts Receivable—Paul Chapman 2,225
Accounts Receivable—Duane DeRosa 3,550
Accounts Receivable—Teresa Galloway 4,770
Accounts Receivable—Ernie Klatt 1,275
Accounts Receivable—Marty Richey 1,690
31 No entry



b.
 Apr. 13 Allowance for Doubtful Accounts 8,450
Accounts Receivable—Dean Sheppard 8,450
May 15 Cash 500
Allowance for Doubtful Accounts 6,600
Accounts Receivable—Dan Pyle 7,100
July 27 Accounts Receivable—Dean Sheppard 8,450
Allowance for Doubtful Accounts 8,450
27 Cash 8,450
Accounts Receivable—Dean Sheppard 8,450
Dec. 31 Allowance for Doubtful Accounts 13,510
Accounts Receivable—Paul Chapman 2,225
Accounts Receivable—Duane DeRosa 3,550
Accounts Receivable—Teresa Galloway 4,770
Accounts Receivable—Ernie Klatt 1,275
Accounts Receivable—Marty Richey 1,690
31 Bad Debt Expense 28,335
Allowance for Doubtful Accounts 28,335
Uncollectible accounts estimate
($3,778,000 × 0.75% = $28,335).

c. Bad debt expense under:
Allowance method………………………...……………………………………… $28,335
Direct write-off method ($8,450 + $6,600 – $8,450 + $13,510)…………… 20,110
Difference ($28,335 – $20,110)………………………………………………… $ 8,225
Shipway Company’s income would be $8,225 higher under the direct write-off
method than under the allowance method.

EX 9-12 Entry for uncollectible accounts

Using the data in Exercise 9-11, assume that the allowance for doubtful accounts for Traditional Bikes Co. had a debit balance of $3,375 as of December 31, 2014. Journalize the adjusting entry for uncollectible accounts as of December 31, 2014.


Answer:

2014
Dec. 31 Bad Debt Expense 47,635
Allowance for Doubtful Accounts 47,635
Uncollectible accounts estimate
($44,260 + $3,375).

EX 9-11 Estimating doubtful accounts

Traditional Bikes Co. is a wholesaler of motorcycle supplies. An aging of the company’s accounts receivable on December 31, 2014, and a historical analysis of the percentage of uncollectible accounts in each age category are as follows:


Age Interval Balance
Percent
Uncollectible
Not past due $ 740,000 ½%
1–30 days past due 390,000 2
31–60 days past due 85,000 4
61–90 days past due 28,000 14
91–180 days past due 42,000 32
Over 180 days past due 15,000 80
$1,300,000






Estimate what the proper balance of the allowance for doubtful accounts should be as of December 31, 2014.


Answer:



Age Interval Balance
Estimated
Uncollectible Accounts
Percent Amount
Not past due $ 740,000 0.5% $ 3,700
1–30 days past due 390,000 2% 7,800
31–60 days past due 85,000 4% 3,400
61–90 days past due 28,000 14% 3,920
91–180 days past due 42,000 32% 13,440
Over 180 days past due 15,000 80% 12,000
Total $1,300,000 $44,260

EX 9-9 Estimating allowance for doubtful accounts

Thunderwood Industries has a past history of uncollectible accounts, as shown below. Estimate the allowance for doubtful accounts, based on the aging of receivables schedule you completed in Exercise 9-8.


Age Class
Percent
Uncollectible
Not past due 2%
1–30 days past due 6
31–60 days past due 12
61–90 days past due 30
Over 90 days past due 75


Answer:


Balance
Not Past
Due
Days Past Due
1–30 31–60 61–90
Over
90
Total receivables 833,500 488,000 166,500 96,000 43,000 40,000
Percentage uncollectible 2% 6% 12% 30% 75%
Allowance for doubtful
accounts 74,170 9,760 9,990 11,520 12,900 30,000

EX 9-10 Adjustment for uncollectible accounts

Using data in Exercise 9-9, assume that the allowance for doubtful accounts for Thunderwood Industries has a credit balance of $6,350 before adjustment on August 31. Journalize the adjusting entry for uncollectible accounts as of August 31.


Answer:

Aug. 31 Bad Debt Expense 67,820
Allowance for Doubtful Accounts 67,820
Uncollectible accounts estimate
($74,170 – $6,350).

EX 9-8 Aging of receivables schedule

The accounts receivable clerk for Thunderwood Industries prepared the following partially completed aging of receivables schedule as of the end of business on August 31:


Not
Due
Past
90
Over
Customer Balance
Days Past Due
Allied Industries Inc.
Archer Company
Zussman Company
Subtotals
 3,000
4,500
5,000
750,000 7,000
5,000
75,000
3,000
480,000
4,500
160,000 28,000


The following accounts were unintentionally omitted from the aging schedule and not included in the subtotals above:



Customer Balance Due Date
Color World Industries $33,000 March 13
Hawks Company 15,000 June 29
Osler Inc. 21,000 July 8
Sather Sales Company 8,000 September 6
Wisdom Company 6,500 August 25







a. Determine the number of days past due for each of the preceding accounts as of August 31.
b. Complete the aging of receivables schedule by adding the omitted accounts to the bottom of the schedule and updating the totals.


Answer:

a. Customer Due Date Number of Days Past Due
Color World Industries March 13 171 days (18 + 30 + 31 + 30 + 31 + 31)
Hawks Company June 29 63 days (1 + 31 + 31)
Osler Inc. July 8 54 days (23 + 31)
Sather Sales Company September 6 Not past due
Wisdom Company August 25 6 days (31 – 25)


b. Aging of Receivables Schedule
August 31
Customer Balance
Not Past
Due
Days Past Due
1–30 31–60 61–90
Over
90
Allied Industries Inc. 3,000 3,000
Archer Company 4,500 4,500
Zussman Company 5,000 5,000
Subtotals 750,000 480,000 160,000 75,000 28,000 7,000
Color World Industries 33,000 33,000
Hawks Company 15,000 15,000
Osler Inc. 21,000 21,000
Sather Sales Company 8,000 8,000
Wisdom Company 6,500 6,500
Totals 833,500 488,000 166,500 96,000 43,000 40,000

EX 9-7 Number of days past due

Toot Auto Supply distributes new and used automobile parts to local dealers throughout the Midwest. Toot’s credit terms are n/30. As of the end of business on October 31, the following accounts receivable were past due:


Account Due Date Amount
Avalanche Auto August 8 $12,000
Bales Auto October 11 2,400
Derby Auto Repair June 23 3,900
Lucky’s Auto Repair September 2 6,600
Pit Stop Auto September 19 1,100
Reliable Auto Repair July 15 9,750
Trident Auto August 24 1,800
Valley Repair & Tow May 17 4,000

Determine the number of days each account is past due as of October 31.


Answer:

Account Due Date Number of Days Past Due
Avalanche Auto August 8 84 (23 + 30 + 31)
Bales Auto October 11 20 (31 – 11)
Derby Auto Repair June 23 130 (7 + 31 + 31 + 30 + 31)
Lucky’s Auto Repair September 2 59 (28 + 31)
Pit Stop Auto September 19 42 (11 + 31)
Reliable Auto Repair July 15 108 (16 + 31 + 30 + 31)
Trident Auto August 24 68 (7 + 30 + 31)
Valley Repair & Tow May 17 167 (14 + 30 + 31 + 31 + 30 + 31)

EX 9-4 Entries for uncollectible receivables, using allowance method

Journalize the following transactions in the accounts of Lamp Light Company, a restaurant supply company that uses the allowance method of accounting for uncollectible receivables:

Mar. 19. Sold merchandise on account to Midnight Delights Co., $37,500. The cost of the merchandise sold was $23,000.

Aug. 31. Received $22,000 from Midnight Delights Co. and wrote off the remainder owed on the sale of March 19 as uncollectible.

Dec. 22. Reinstated the account of Midnight Delights Co. that had been written off on August 31 and received $15,500 cash in full payment.


Answer:

Mar. 19 Accounts Receivable—Midnight Delights Co. 37,500
Sales 37,500
19 Cost of Merchandise Sold 23,000
Merchandise Inventory 23,000
Aug. 31 Cash 22,000
Allowance for Doubtful Accounts 15,500
Accounts Receivable—Midnight Delights Co. 37,500
Dec. 22 Accounts Receivable—Midnight Delights Co. 15,500
Allowance for Doubtful Accounts 15,500
22 Cash 15,500
Accounts Receivable—Midnight Delights Co. 15,500

EX 9-5 Entries to write off accounts receivable

Creative Solutions Company, a computer consulting firm, has decided to write off the $11,750 balance of an account owed by a customer, Wil Treadwell. Journalize the entry to record the writeoff, assuming that (a) the direct write-off method is used and (b) the allowance method is used.


Answer:

a.
 Bad Debt Expense 11,750
Accounts Receivable—Wil Treadwell 11,750
b.
 Allowance for Doubtful Accounts 11,750
Accounts Receivable—Wil Treadwell 11,750

EX 9-6 Providing for doubtful accounts

At the end of the current year, the accounts receivable account has a debit balance of $6,125,000 and net sales for the year total $66,800,000. Determine the amount of the adjusting entry to provide for doubtful accounts under each of the following assumptions:

a. The allowance account before adjustment has a debit balance of $18,000. Bad debt expense is estimated at ¾ of 1% of net sales.

b. The allowance account before adjustment has a debit balance of $18,000. An aging of the accounts in the customer ledger indicates estimated doubtful accounts of $475,000.

c. The allowance account before adjustment has a credit balance of $10,000. Bad debt expense is estimated at ½ of 1% of net sales.

d. The allowance account before adjustment has a credit balance of $10,000. An aging of the accounts in the customer ledger indicates estimated doubtful accounts of $360,000.


Answer:
a. $501,000 ($66,800,000 × 0.0075)
b. $493,000 ($475,000 + $18,000)
c. $334,000 ($66,800,000 × 0.0050)
d. $350,000 ($360,000 – $10,000)

EX 9-3 Entries for uncollectible accounts, using direct write-off method

Journalize the following transactions in the accounts of Pro Medical Co., a medical equipment company that uses the direct write-off method of accounting for uncollectible receivables:

Jan. 30. Sold merchandise on account to Dr. Cindy Mott, $85,000. The cost of the merchandise sold was $50,000.

June 3. Received $48,000 from Dr. Cindy Mott and wrote off the remainder owed on the sale of January 30 as uncollectible.

Nov. 27. Reinstated the account of Dr. Cindy Mott that had been written off on June 3 and received $37,000 cash in full payment.


Answer:

Jan. 30 Accounts Receivable—Dr. Cindy Mott 85,000
Sales 85,000
30 Cost of Merchandise Sold 50,000
Merchandise Inventory 50,000
June 3 Cash 48,000
Bad Debt Expense 37,000
Accounts Receivable—Dr. Cindy Mott 85,000
Nov. 27 Accounts Receivable—Dr. Cindy Mott 37,000
Bad Debt Expense 37,000
27 Cash 37,000
Accounts Receivable—Dr. Cindy Mott 37,000