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Chapter 8. Receivables, Bad Debt Expense, and Interest Revenue. PowerPoint Authors: Brandy Mackintosh Lindsay Heiser. Learning Objective 8-1. Describe the trade-offs of extending credit. Pros and Cons of Extending Credit. Advantage Increases the seller’s revenues. Disadvantages

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Chapter 8

Chapter 8

Receivables, Bad Debt Expense, and Interest Revenue

PowerPoint Authors:

Brandy Mackintosh

Lindsay Heiser


Learning objective 8 1

Learning Objective 8-1

Describe the trade-offs of extending credit.


Pros and cons of extending credit

Pros and Cons of Extending Credit

Advantage

Increases the seller’s revenues.

  • Disadvantages

  • Increased wage costs.

  • Bad debt costs.

  • Delayed receipt of cash.


Learning objective 8 2

Learning Objective 8-2

Estimate and report the effects of uncollectible accounts.


Accounts receivable and bad debts

Accounts Receivable and Bad Debts

Jan. 1

Record sales on account

Bad debt known

drAccounts Receivable

crSales Revenue

Balance Sheet

Cash

Accounts Receivable

Inventory

Income Statement

Sales Revenue

Cost of Goods Sold

Gross Profit


Accounts receivable and bad debts1

Accounts Receivable and Bad Debts

Jan. 1

Jan. 31

Record sales on account

Record estimate of bad debts

Bad debt known

drBad Debt Expense (+E, -SE)

crAllowance for Doubtful Accounts (+xA, -A)

drAccounts Receivable

crSales Revenue

Balance Sheet

Cash

Accounts Receivable

Less: Allowance for Doubtful Accounts

Accounts Receivable, Net

Inventory

Balance Sheet

Cash

Accounts Receivable

Inventory

Income Statement

Sales Revenue

Cost of Goods Sold

Gross Profit

Income Statement

Sales Revenue

Cost of Goods Sold

Gross Profit

Bad Debt Expense


Accounts receivable and bad debts2

Accounts Receivable and Bad Debts

Jan. 1

Jan. 31

Record sales on account

Record estimate of bad debts

Bad debt known

dr Bad Debt Expense (+E, -SE)

cr Allowance for Doubtful Accounts (+xA, -A)

dr Accounts Receivable

cr Sales Revenue

dr Allowance for Doubtful Accounts (-xA)

cr Accounts Receivable(-A)

Balance Sheet

Cash

Accounts Receivable

Less: Allowance for Doubtful Accounts

Accounts Receivable, Net

Inventory

Balance Sheet

Cash

Accounts Receivable

Inventory


Allowance method

Allowance Method

The allowance method follows a two-step process, described below:

Make an end-of-period adjustment to record the estimated bad debts in the period credit sales occur.

Remove (“write off”) specific customer balances when they are known to be uncollectible.


1 adjust for estimated bad debts

Stockholders’ Equity

+

Allowance for Doubtful

Accounts (+xA) -900

Bad Debt

Expense (+E) -900

1. Adjust for Estimated Bad Debts

Assume that VFC estimates $900 in bad debts at the end of the accounting period.

900

900

dr Bad Debt Expense (+E, -SE)

cr Allowance for Doubtful Accounts (+xA, -A)

Record

Analyze

Liabilities

Assets

=

1

2


1 adjust for estimated bad debts1

1. Adjust for Estimated Bad Debts


2 remove write off specific customer balances

Stockholders’ Equity

+

Allowance for Doubtful

Accounts (-xA) +800

Accounts

Receivable (-A) -800

2. Remove (Write-off) Specific Customer Balances

VFC writes off $800 receivable from Fast Fashions because the company could not pay its account.

800

800

dr Allowance for Doubtful Accounts (-xA, +A)

cr Accounts Receivable (-A)

Record

Analyze

Liabilities

Assets

=

1

2


2 remove write off specific customer balances1

2. Remove (Write-off) Specific Customer Balances

900

800

900

800

dr Bad Debt Expense (+E, -SE)

cr Allowance for Doubtful Accounts (+xA, -A)

dr Allowance for Doubtful Accounts (-xA, +A)

cr Accounts Receivable (-A)

Bad Debt Expene(E, SE)

Allow. For Doubtful Accts. (xA)

Accounts Receivable (A)

cr -

cr +

cr -

dr +

dr -

dr +

1/1 Bal.

(1) Estimate

1/31 Bal.

0

900

900

1/1 Bal.

(1) Estimate

1/31 Bal.

2/28 Bal.

800

14,100

900

15,000

14,200

(2) Write-off

(2) Write -off

1/1 Bal.

1/31 Bal.

2/28 Bal.

800

200,000

200,000

199,200


Methods for estimating bad debts

Methods for Estimating Bad Debts

There are two acceptable methods of estimating the bad debts in a given period.

Percentage of Credit Sales Method.

Aging of Accounts Receivable.

Simpler to apply.

More accurate


Percentage of credit sales method

Percentage of Credit Sales Method

The percentage of credit sales method estimates bad debt expense by multiplying the historical percentage of bad debt losses by the current period’s credit sales.


Percentage of credit sales method1

Percentage of Credit Sales Method

VFC has experienced bad debt losses of ¾ of 1 percent of credit sales in prior periods. Credit sales in January total $120,000,

900

900

dr Bad Debt Expense (+E, -SE)

cr Allowance for Doubtful Accounts (+xA, -A)

Credit sales for January

Historical bad debt rate

Bad debt expense for January

$ 120,000

0.75%

$ 900

Record

2


Aging of accounts receivable

Aging of Accounts Receivable

While the percentage of credit sales method focuses on estimating Bad Debt Expense (income statement approach) for the period, the aging of accounts receivable method focuses on estimating the ending balance in the Allowance for Doubtful Accounts (balance sheet approach).

The aging method gets its name because it is based on the “age” of each amount in Accounts Receivable at the end of the period. The older and more overdue an account receivable becomes, the less likely it is to be collectible.


Aging of accounts receivable1

Aging of Accounts Receivable

VFC applies the aging of accounts receivable method to its Accounts Receivable balances when its quarter ends on March 31. The method includes three steps: (1) Prepare an aged list of accounts receivable, (2) Estimate bad debt loss percentages for each category, and (3) Compute the total estimated bad debts.

Step

1

Age Accounts Receivable.


Aging of accounts receivable2

Aging of Accounts Receivable

Step

2

Estimate bad debt loss percentages for each category.


Aging of accounts receivable3

Aging of Accounts Receivable

Step

3

Compute the total estimated bad debts.


Aging of accounts receivable4

Aging of Accounts Receivable

AJE = ($17,240 - $14,200) = $3,040


Aging of accounts receivable5

Stockholders’ Equity

+

Allowance for Doubtful

Accounts (+xA) -2,240

Bad Debt

Expense (+E) -2,240

Aging of Accounts Receivable

Prepare the AJE for Bad Debt Expense at March 31.

2,240

2,240

dr Bad Debt Expense (+E, -SE)

cr Allowance for Doubtful Accounts (+xA, -A)

Record

Analyze

Summarize

Liabilities

Assets

=

cr -

cr +

dr +

dr -

Bad Debt Expense (E,SE)

Allow. For Doubtful Accts (xA)

1

Beg. Bal.

AJE

End Bal.

900

2,240

3,140

Unadj. Bal.

AJE

Adj. Bal.

15,000

2,240

17,240

3

2


Other issues

Other Issues

Revising Estimates -- Bad debt estimates always differ from the amounts that are later written off. If these differences are material, companies are required to revise their bad debt estimates for the current period.

Account Recoveries -- Collection of a previously written off account is called a recoveryand it is accounted for in two parts. First, put the receivable back on the books by recording the opposite of the write-off. Second, record the collection of the account.


Other issues1

Other Issues

Let’s assume that VFC collects the $800 from Fast Fashions that was previously written off. This recovery would be recorded with the following journal entries:

(1) Reverse the write-off.

(2) Record the collection.


Learning objective 8 3

Learning Objective 8-3

Compute and report interest on notes receivable.


Notes receivable and interest revenue

Notes Receivable and Interest Revenue

A company reports Notes Receivable if it uses a promissory note to document its right to collect money from another party.

Unlike accounts receivable, which are interest free until they become overdue, notes receivable charge interest from the day they are created to the day they are due (their maturity date).


Calculating interest

Calculating Interest

Interest (I) = Principal (P) × Interest Rate (R) × Time (T)

The annual interest ratecharged on the note

The amount of thenote receivable

The time period forinterest calculation


Recording notes receivable and interest revenue

Recording Notes Receivable and Interest Revenue

The four key events that occur with any note receivable are:

1

3

2

4

Date of Note ReceivableNovember 1, 2012

Annual Interest Rate6%

Amount of the Note$100,000

Maturity Date of NoteOctober 31, 2013

Year End of CompanyDecember 31, 2012


1 establishing a note receivable

Stockholders’ Equity

+

Notes Receivable +100,000

Cash -100,000

(1) Establishing a Note Receivable

Assume that on November 1, 2012, VFC lent $100,000 to a company by creating a note that required the company to pay VFC 6 percent interest and the $100,000 principal on October 31, 2013.

100,000

100,000

dr Notes Receivable (+A)

cr Cash (-A)

Record

Analyze

Liabilities

Assets

=

1

2


2 accruing interest earned

(2) Accruing Interest Earned

Accrue the interest earned at year-end, December 31, 2012.

2

Principal (P) × Interest Rate (R) × Time (T) = Interest (I)

$100,000 × 6% × 2/12 = $1,000


2 accruing interest earned1

Stockholders’ Equity

+

Interest

Receivable (+A) +1,000

Interest Revenue

(+R, +SE) +1,000

(2) Accruing Interest Earned

Accrue the interest earned at year-end, December 31, 2012.

1,000

1,000

dr Interest Receivable (+A)

cr Interest Revenue (+R, +SE)

Record

Analyze

Liabilities

Assets

=

1

2


3 record interest received

(3) Record Interest Received

Record interest received at maturity, October 31, 2013.

Principal (P) × Interest Rate (R) × Time (T) = Interest (I)

$100,000 × 6% × 12/12 = $6,000


3 record interest received1

Stockholders’ Equity

+

Cash (+A) +6,000

Interest

Receivable (-A) -1,000

Interest

Revenue (+R, +SE) +5,000

(3) Record Interest Received

Record interest received at maturity, October 31, 2013.

6,000

1,000

5,000

dr Cash (+A)

cr Interest Receivable (-A)

cr Interest Revenue (+R, +SE)

Record

Analyze

Liabilities

Assets

=

1

$5,000 = $100,000 × 6% × 10/12

2


4 recording principal received

Stockholders’ Equity

+

Cash (+A) +100,000

Note

Receivable (-A) -100,000

(4) Recording Principal Received

The principal amount of the note is received on October 31, 2013.

100,000

100,000

dr Cash (+A)

cr Note Receivable (-A)

Record

Analyze

Liabilities

Assets

=

1

2


Learning objective 8 4

Learning Objective 8-4

Compute and interpret the receivables turnover ratio.


Receivables turnover analysis

Receivables Turnover Analysis

The receivables turnover ratio indicates how many times, on average, this process of selling and collecting is repeated during the period. The higher the ratio, the faster the collection of receivables.

Rather than evaluate the number of times accounts receivable turn over, some people find it easier to think in terms of the number of days to collect receivables (called days to collect).


Receivables turnover analysis1

Receivables Turnover Analysis

ReceivableTurnover

Ratio

Net Sales Revenue

Average Net Receivables

$500,000

$ 50,000

=

= 10 times

(Beginning net receivables + Ending net receivables) ÷ 2

Days toCollect

365Receivable Turnover Ratio

=

365

10

= 36.5 days


Comparison to benchmarks

Comparison to Benchmarks

Credit Terms

When companies sell on account, they specify the length of credit period (and any cash discounts for prompt payment). By comparing the number of days to collect to the length of credit period, you can gain a sense of whether customers are complying with the stated policy.


Speeding up collections

Speeding Up Collections

Factoring Receivables

One way to speed up collections is to sell outstanding accounts receivable to another company (called a factor). Your company receives cash for the receivables it sells to the factor (minus a factoring fee).

Credit Card Sales

Another way to avoid lengthy collection periods is to allow customers to pay for goods using PayPal or national credit cards. This not only speeds up the seller’s cash collection, but also reduces losses from customers writing bad checks. PayPal and Credit card companies charges a fee for their services.


Chapter 8 supplement 8a

Chapter 8Supplement 8A

Direct Write-Off Method


Direct write off method

Direct Write-Off Method

The direct write-off method, does not estimate bad debt. Instead, it

reports Sales when they occur and bad debt expense when it is discovered. This method is not acceptable for GAAP.

The reason the method isn’t considered GAAP is because it reports receivables at the total amount owed by customers rather than what is estimated to be collectible and it violates the expense recognition principle (matching principle) by recording bad debt expense in the period the customer’s account is determined to be bad rather than the period when the credit sales are actually made.


Direct write off method1

Direct Write-Off Method

A customer account is determined to be uncollectible and $1,000 of Bad Debt Expense needs to be recorded.

1,000

1,000

dr Bad Debt Expense (+E, -SE)

cr Accounts Receivable (-A)

Record

2


Chapter 8 solved exercises

Chapter 8Solved Exercises

M8-10, E8-7, E8-8, E8-9, CP8-4, C8-1


Chapter 8

M8-10 Using the Interest Formula to Compute Interest

Complete the following table by computing the missing amounts (?) for the following independent cases.

a.

b.

c.

Principal Amount of

Note Receivable

$ 100,000

$ 50,000

?

Annual

Interest Rate

10%

?

10%

Time Period

in Months

6

9

12

Interest

Earned

?

$ 3,000

$ 4,000

Case a. $100,000 × 10% × (6/12) = $5,000

Case b. $3,000 ÷ [$50,000 × (9/12)] = 8%

Case c. [$4,000 ÷ 10%] × (12/12) = $40,000


Chapter 8

E8-7 Computing Bad Debt Expense Using Aging of Accounts Receivable Method

Brown Cow Dairy uses the aging approach to estimate Bad Debt Expense. The balance of each account receivable is aged on the basis of three time periods as follows: (1) 1–30 days old, $12,000; (2) 31–90 days old, $5,000; and (3) more than 90 days old, $3,000. Experience has shown that for each age group, the average loss rate on the amount of the receivable due to uncollectibility is (1) 5 percent, (2) 10 percent, and (3) 20 percent, respectively. At December 31, 2013 (end of the current year), the Allowance for Doubtful Accounts balance was $800 (credit) before the end-of-period adjusting entry is made.

Required:

Prepare a schedule to estimate an appropriate year-end balance for the Allowance for doubtful accounts.

What amount should be recorded as Bad Debt Expense for the current year?

If the unadjusted balance in the Allowance for Doubtful Accounts was a $600 debit balance, what would be the amount of Bad Debt Expense in 2013?


Chapter 8

E8-7 Computing Bad Debt Expense Using Aging of Accounts Receivable Method

Req. 1

Total

$ 20,000

$ 1,700

1 - 30

$ 12,000

5%

$ 600

31-90

$ 5,000

10%

$ 500

>90

$ 3,000

20%

$ 600

Estimate Balance in Allowance

Existing Credit Balance in Allowance

Adjusting Journal Entry Amount

$ 1,700

800

$ 900

Req. 2

Allowance for Doubtful Accounts

Allowance for Doubtful Accounts

Unadj. Bal.

600

Unadj. Bal.

AJE

Bal.

AJE

Bal.

800

900

1,700

2,300

1,700

Req. 3


Chapter 8

E8-8 Recording and Reporting Allowance for Doubtful Accounts Using the Percentage of Credit Sales and Aging of Accounts Receivable Methods

Innovative Tech, Inc. (ITI) uses the percentage of credit sales method to estimate bad debts each month and then uses the aging method at year-end. During November 2013, ITI sold services on account for $100,000 and estimated that ½ of one percent of those sales would be uncollectible. At its December 31 year-end, total Accounts Receivable is $89,000, aged as follows: (1) 1–30 days old, $75,000; (2) 31–90 days old, $10,000; and (3) more than 90 days old, $4,000. Experience has shown that for each age group, the average rate of uncollectibility is (1) 10 percent, (2) 20 percent, and (3) 40 percent, respectively. Before the end-of-year adjusting entry is made, the Allowance for Doubtful Accounts has a $1,600 credit balance at December 31, 2013.

Required:

Prepare the November 2013 adjusting entry for bad debts.

Prepare a schedule to estimate an appropriate year-end balance for the Allowance for Doubtful Accounts.

Prepare the December 31, 2013, adjusting entry.

Show how the various accounts related to accounts receivable should be shown on the December 31, 2013, balance sheet.


Chapter 8

E8-8 Recording and Reporting Allowance for Doubtful Accounts Using the Percentage of Credit Sales and Aging of Accounts Receivable Methods

Req. 1

November 30, 2013 AJE

Total

$ 89,000

$ 11,100

1 - 30

$ 75,000

10%

$ 7,500

31-90

$ 10,000

20%

$ 2,000

>90

$ 4,000

40%

$ 1,600

500

dr Bad Debt Expense (+E, -SE)

cr Allowance for Doubtful Accounts (+xA, -A)

($500 = $100,000 x 0.005)

500

Req. 2

Allowance for Doubtful Accounts

Unadj. Bal.

AJE

Bal.

1,600

9,500

11,100

Req. 3


Chapter 8

E8-8 Recording and Reporting Allowance for Doubtful Accounts Using the Percentage of Credit Sales and Aging of Accounts Receivable Methods

Req. 4

The accounts related to the accounts receivable can be shown one of two ways on the December 31, 2013 balance sheet:

Accounts Receivable

Less: Allowance for Doubtful Accounts

Accounts Receivable, net of allowance

Accounts Receivable, net of Allowance for

Doubtful Accounts of $11,100

$ 89,000

(11,100)

$ 77,900

$ 77,900

OR


Chapter 8

  • E8-9 Recording and Determining the Effects of Write-Offs, Recoveries, and Bad Debt Expense Estimates on the Balance Sheet and Income Statement.

  • Fraud Investigators Inc. operates a fraud detection service.

  • Required:

  • Prepare journal entries for each transaction below.

    • On March 31, 10 customers were billed for detection services totaling $25,000.

    • On October 31, a customer balance of $1,500 from a prior year was determined to be uncollectible and was written off.

    • On December 15, a customer paid an old balance of $900, which had been written off in a prior year.

    • On December 31, $500 of bad debts were estimated and recorded for the year.

  • 2. Complete the following table, indicating the amount and effect ( + for

  • increase, - for decrease, and NE for no effect) of each transaction. Ignore income taxes.


Chapter 8

E8-9 Recording and Determining the Effects of Write-Offs, Recoveries, and Bad Debt Expense Estimates on the Balance Sheet and Income Statement.

Req. 1

a.

dr Accounts Receivable (+A)25,000

cr Service Revenue (+R, +SE)25,000

b.

dr Allowance for Doubtful Accounts (-xA, +A) 1,500

cr Accounts Receivable (-A) 1,500

c.

dr Accounts Receivable (+A) 900

cr Allowance for Doubtful Accounts (+xA, -A) 900

dr Cash (+A) 900

cr Accounts receivable (-A) 900

d.

dr Bad Debt Expense (+E, -SE) 500

cr Allowance for Doubtful Accounts (+xA, -A) 500


Chapter 8

E8-9 Recording and Determining the Effects of Write-Offs, Recoveries, and Bad Debt Expense Estimates on the Balance Sheet and Income Statement.

Req. 2


Chapter 8

CP8-4 Accounting for Accounts and Notes Receivable Transactions

Execusmart Consultants has provided business consulting services for several years. The company uses the percentage of credit sales method to estimate bad debts for internal monthly reporting purposes. At the end of each quarter, the company adjusts its records using the aging of accounts receivable method. The company entered into the following selected transactions during the first quarter of 2013.

During January, the company provided services for $200,000 on credit.

On January 31, the company estimated bad debts using 1 percent of credit sales.

On February 4, the company collected $100,000 of accounts receivable.

On February 15, the company wrote off a $500 account receivable.

During February, the company provided services for $150,000 on credit.

On February 28, the company estimated bad debts using 1 percent of credit sales.

On March 1, the company loaned $12,000 to an employee who signed a 10% note, due in 3 months.

On March 15, the company collected $500 on the account written off one month earlier.

On March 31, the company accrued interest earned on the note.

On March 31, the company adjusted for uncollectible accounts, based on the aging analysis shown on the next screen. Allowance for Doubtful Accounts has an unadjusted credit balance of $6,000.


Chapter 8

CP8-4 Accounting for Accounts and Notes Receivable Transactions (continued)

Required:

For items a – j, analyze the amount and direction (+ or -) of effects on specific financial statement accounts and the overall accounting equation and prepare journal entries.

Show how the accounts receivable and related accounts would be reported in the current assets section of a classified balance sheet.

Name the accounts related to Accounts Receivable and Notes Receivable that would be reported on the income statement and indicate whether they would appear before, or after, Income from Operations.


Chapter 8

CP8-4 Accounting for Accounts and Notes Receivable Transactions

Req. 1


Chapter 8

CP8-4 Accounting for Accounts and Notes Receivable Transactions

Req. 1


Chapter 8

CP8-4 Accounting for Accounts and Notes Receivable Transactions

Req. 1


Chapter 8

CP8-4 Accounting for Accounts and Notes Receivable Transactions

Req. 1


Chapter 8

CP8-4 Accounting for Accounts and Notes Receivable Transactions

Req. 1


Chapter 8

CP8-4 Accounting for Accounts and Notes Receivable Transactions

Req. 1

Desired $8,390 – Current -$6000 = Adjustment $2,390


Chapter 8

CP8-4 Accounting for Accounts and Notes Receivable Transactions

Req. 2

EXECUSMART CONSULTANTS

Partial Balance Sheet

At March 31, 2013

Assets

Current Assets:

Accounts Receivable

Less: Allowance for Doubtful Accounts

Accounts Receivable, Net of Allowance

Note Receivable

Interest Receivable

$ 90,000

8,390

$ 81,610

12,000

100

Req. 3

Execusmart Consultants would report Bad Debt Expense before Income from Operations, and Interest Revenue after Income for Operations.


Chapter 8

C8-1 Comprehensive Exercise for Recording and Reporting Credit Sales and Bad Debts Using the Aging of Accounts Receivable Method

Okay Optical, Inc. (OOI) began operations in January 2013 selling inexpensive sunglasses to large retailers like Walgreen’s and other smaller stores. Assume the following transactions occurred during its first six months of operations.

January 1 - Sold merchandise to Walgreen’s on account for $20,000; the cost of goods to OOI was $12,000.

February 12 - Received payment in full from Walgreen’s.

March 1 - Sold merchandise to BravisPharmaco on account for $3,000; the cost of goods to OOI was $1,400.

April 1 - Sold merchandise to Tony’s Pharmacy on account for $8,000. The cost to OOI was $4,400.

May 1 - Sold merchandise to Anjuli Stores on account for $2,000; the cost to OOI was $1,200.

June 17 - Received $6,500 on account from Tony’s Pharmacy.

Required:

Complete an aged listing of customer accounts at June 30.

Estimate the Allowance for Doubtful Accounts required at June 30, 2013, assuming the following uncollectible rates: one month, 1 percent; two months, 5 percent; three months, 20 percent; more than three months, 40 percent.

Show how OOI would report its accounts receivable on its June 30 balance sheet. What amounts would be reported on an income statement prepared for the six-month period ended June 30, 2013?

Bonus Question: In July 2013, OOI collected the balance due from BravisPharmaco but discovered that the balance due from Tony’s Pharmacy needed to be written off. Using this information, determine how accurate OOI was in estimating the Allowance for Doubtful Accounts needed for each of these two customers and in total.


Chapter 8

C8-1 Comprehensive Exercise for Recording and Reporting Credit Sales and Bad Debts Using the Aging of Accounts Receivable Method

Total

$ 2,000

3,000

1,500

-

$ 6,500

June

(1 Month)

$ -

Total

$ 6,500

$ 1,600

May

(2 Months)

$ 2,000

$ 2,000

2 months

$ 2,000

5%

$ 100

April

(3 Months)

$ 1,500

$ 1,500

3 months

$ 1,500

20%

$ 300

>3 months

$ 3,000

40%

$ 1,200

>3

Months

$ 3,000

$ 3,000

Customer

Anjuli Stores

Bravis Pharmaco

Tony’s Pharmacy

Walgreens

Total

Accounts Receivable

Estimated Uncollectible (%)

Estimated Uncollectible ($)

Req. 1

Req. 2


Chapter 8

C8-1 Comprehensive Exercise for Recording and Reporting Credit Sales and Bad Debts Using the Aging of Accounts Receivable Method

Req. 3

OKAY OPTICAL, INC.

Partial Balance SheetAt June 30, 2013

Accounts Receivable, Net of Allowance of $1,600$4,900

OKAY OPTICAL, INC.

Partial Income Statement

For the Six Months Ended June 30, 2013

Sales Revenue

Cost of Goods Sold

Gross Profit

Bad Debt Expense

Income from Operations

$33,000

19,000

14,000

1,600

$12,400


Chapter 8

C8-1 Comprehensive Exercise for Recording and Reporting Credit Sales and Bad Debts Using the Aging of Accounts Receivable Method

Req. 4

OOI did not accurately estimate the precise amounts that would be collected from each customer, yet the total estimate was reasonably accurate at $1,600. OOI underestimated the amount collectible from Bravis Pharmaco (40% of $3,000, or $1,200, was estimated uncollectible where it later turned out to be collectible in full). It overestimated the amount collectible from Tony’s Pharmacy (20% of $1,500, or $300, was estimated uncollectible where it later turned out to show that $1,500 was uncollectible). Looking at Bravis Pharmaco and Tony’s Pharmacy combined, the estimated bad debt for both customers was $1,500, which is only $100 less than the amount the company wrote off.


End of chapter 8

End of Chapter 8


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