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Chapter 13. Accounting for Bad Debts. Learning Objective 1. Describing how the Bad Debts Expense account and the Allowance for Doubtful Accounts account are used to record bad debts. LO-1. Bad Debts . Debts that come from credit customers who do not pay their bills

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slide1

Chapter 13

Accounting for Bad Debts

© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

learning objective 1
Learning Objective 1

Describing how the Bad Debts Expense account and the Allowance for Doubtful Accounts account are used to record bad debts

LO-1

© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

bad debts
Bad Debts
  • Debts that come from credit customers who do not pay their bills
  • Affects a company’s credit policy
  • Cannot grant credit to just any company

LO-1

© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

bad debts1
Bad Debts

On December 1, 2008, Corey Co. sold merchandise on account for $5,000.

On July 1, 2009, Corey Co. determines that the $5,000 will never be collected.

2008

2009

Dec 1

Sales of

$5,000

recorded

Jul 1

Debt

determined

to be bad

Dec 31

End of

fiscal

year

LO-1

© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

bad debts2
Bad Debts

Bad debts expense should be recognized in the accounting period in which the sales were made.

2008

2009

Dec 1

Sales of

$5,000

recorded

Dec 31

End of

fiscal

year

Jul 1

Debt

determined

to be bad

LO-1

© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

bad debts3
Bad Debts

Solution: Estimate how many of the current sales will be uncollectible

Prepare an

adjusting entry

2008

2009

Dec 31

End of

fiscal

year

Jul 1

Debt

determined

to be bad

Dec 1

Sales of

$5,000

recorded

LO-1

© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

allowance for doubtful accounts
Allowance for Doubtful Accounts
  • Is a contra-asset account
  • Is subtracted from accounts receivable
  • Accumulates expected amount of uncollectibles as of a given date

LO-1

© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

adjusting entry for bad debts
Adjusting Entry for Bad Debts

Dec 31 Bad Debts Expense XXXX

Allowance for

Doubtful Accounts XXXX

Contra-Asset

Account

LO-1

© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

balance sheet presentation
Balance Sheet Presentation

Corbin Company

Partial Balance Sheet

December 31, 200X

Net Realizable Value

Gross Amount

Estimated to be

Uncollectible

Current Assets:

Cash $ 10,400

Accounts receivable $100,000

Less: Allowance for

doubtful accounts 6,000 94,000

Merchandise inventory 300,000

Total current assets $404,400

Total Current Assets

LO-1

© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

net realizable value
Net Realizable Value
  • The amount of Accounts Receivable that is expected to be collected
  • Calculated by subtracting Allowance for Doubtful Accounts from Accounts Receivable

LO-1

© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

writing off an account
Writing off an account

Jul 1 Allowance for Doubtful Accounts 5,000

Accounts Receivable-Discello 5,000

LO-1

© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

learning objective 2
Learning Objective 2

Using the income statement approach and the balance sheet approach to estimate the amount of Bad Debts Expense

LO-2

© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

estimating the amount
Estimating the Amount

Dec 31 Bad Debts Expense XXXX

Allowance for Doubtful Accounts XXXX

How is this amount determined?

LO-2

© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

income statement approach
Income Statement Approach

Bad Debts Expense =

Percentage of net credit sales

Focus is on measuring the expense, which is reported on Income Statement.

Matching requirement-ignores previous balance of Allowance for Doubtful Accounts when estimating Bad Debts Expense for current period.

LO-2

© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

exercise 13 2
Exercise 13-2

Compute Net Sales:

Sales $110,000

Sales Returns & Allowances (500)

Sales Discounts (9,500)

Net Sales $100,000

LO-2

© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

exercise 13 21
Exercise 13-2

LO-2

© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

exercise 13 22
Exercise 13-2

Dec 31 Bad Debts Expense 4,000

Allowance for Doubtful Accounts 4,000

LO-2

© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

exercise 13 23

Accounts Receivable

Allowance for

Doubtful Accounts

5,000

Bal. 30,000

4,000 Adj.

$9,000 Bal.

Exercise 13-2

Any existing balance in the

Allowance account is ignored.

LO-2

© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

balance sheet approach
Balance Sheet Approach

Adjusting entries are based on bringing the Allowance account to a required amount.

  • Method is based on the Accounts Receivable amount and the aging process.

LO-2

© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

balance sheet approach1
Balance Sheet Approach
  • Net realizable value - The amount (accounts receivable – Allowance for doubtful accounts) that is expected to be collected.

Focus is on determining the net realizable value of Accounts Receivable, which is reported on Balance Sheet

LO-2

© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

learning objective 3
Learning Objective 3

Preparing an Aging of Accounts Receivable

LO-3

© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

example

Accounts Receivable

Allowance for

Doubtful Accounts

500

Bal. 30,000

Example

Mayfair Co. has the following balances in its accounts at the end of 2008

LO-3

© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

the following aging schedule is prepared for the end of the year complete the schedule
The following aging schedule is prepared for the end of the year. Complete the schedule.

LO-3

© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

example1

Accounts Receivable

Allowance for

Doubtful Accounts

500

Bal. 30,000

Example

2,179

Desired balance 2,679

LO-3

© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

what if the allowance account had a debit balance of 500 before adjustment

Accounts Receivable

Bal. 30,000

What if the Allowance account had a debit balance of $500 before adjustment?

Allowance for

Doubtful Accounts

500

3,179

Desired balance 2,679

LO-3

© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

learning objective 4
Learning Objective 4

Writing off an account using the Allowance for Doubtful Accounts method

LO-4

© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

allowance for doubtful accounts1
Allowance for Doubtful Accounts
  • When a company deems an account uncollectible, it is written off and no longer considers it an asset.
  • When the journal entry is made, allowance for doubtful accounts and accounts receivable are reduced.

Example: J. Monaco’s account balance of $500 is deemed uncollectible on June 1, 20X8.

LO-4

© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

recording recovered debts using allowance for doubtful accounts
Recording Recovered Debts using Allowance for Doubtful Accounts

Example: Assume J. Monaco paid half of his account balance of $500 on January 3, 20X9.

LO-4

© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

slide29

Exercise 13-4 (a)

Writing off an account using the Allowance for Doubtful Accounts account

LO-2, 4

© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

slide30

Exercise 13-4 (a)

Accts. Rec., Angie Ring

Accts. Rec., Mike Catuc

LO-2, 4

© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

slide31

Exercise 13-4 (a)

Accts. Rec., Mike Catuc

Accts. Rec., Mike Catuc

LO-2, 4

© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

learning objective 5
Learning Objective 5

Using the direct write-off method

LO-5

© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

direct write off method
Direct Write-Off Method
  • Used when a company cannot reasonably estimate bad debt expense
  • Uncollectible accounts are directly written off to current year’s bad debt expense
  • The year sale was made does not matter
  • Allowance for doubtful accounts is not used

LO-5

© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

direct write off method1
Direct Write-Off Method

Example: T. DeStadio’s account balance of $400 is deemed to be uncollectible on May 15, 20X7.

LO-5

© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

direct write off method2
Direct Write-Off Method

Recording Recovered Debts in same year

  • Assume T. DeStadio paid $200 of his balance July 3, 20X7.
  • Reverse the entry made prior by $200

LO-5

© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

direct write off method3
Direct Write-Off Method

Recording Recovered Debts in different year

  • A new account- Bad Debts Recovered is used
  • Assume T. DeStadio paid $200 of his balance on July 3, 20X8.

LO-5

© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

exercise 13 4 b
Exercise 13-4 (b)

Accts. Rec., Angie Ring

Accts. Rec., Mike Catuc

LO-5

© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

exercise 13 4 b1
Exercise 13-4 (b)

Accts. Rec., Mike Catuc

Accts. Rec., Mike Catuc

LO-5

© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

slide39

End of Chapter 13

© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater