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Solution: the Allowance Method

In the year of sale, the AJE to record estimate for all future uncollectibles in 2006 (ex: 4% of sales): Bad Debt Expense 4,000 ADA 4,000 The General JE during 2007 , when a specific A/R is deemed uncollectible (this is called the write-off of a specific A/R): ADA 1,000

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Solution: the Allowance Method

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  1. In the year of sale, the AJE to record estimate for all future uncollectibles in 2006 (ex: 4% of sales): Bad Debt Expense 4,000 ADA 4,000 The General JEduring 2007, when a specific A/R is deemed uncollectible (this is called the write-off of a specific A/R): ADA 1,000 A/R 1,000 (Other uncollectible accounts would also be written off against the allowance account.) When are the income statement and balance sheet affected? Solution: the Allowance Method At adjusting journal entry.

  2. Given the following information: At December 31, 2007, Company Z prepared an aging schedule to determine that the uncollectible accounts receivable at that date were $18,000. The balance in the Allowance for Doubtful Accounts at 1/1/07 was a $3,000 credit. During 2007, the company wrote off $5,000 of specific accounts receivable that were deemed to be uncollectible. Required: prepare the AJE to record the estimated uncollectibles at 12/31/07. Class Problem 1

  3. Solution to Class Problem 1 (1) Post the beginning balance and write-off. (2) Post the desired ending balance. (3) Post the adjusting journal entry. Allowance for Doubtful Accounts 3,000 Beginning (1) (1) W/O 5,000 20,000 AJE (3) 18,000 End. Balance (2) AJE: Bad debt expense 20,000 Allowance for D.A. 20,000

  4. 1. Sale on November 1, 2008: 2. Interest accrual at December 31, 2008: 3. Collection of loan and interest at 1/31/09: Class Problem 2 Notes Receivable 10,000 Sales Revenue 10,000 Interest Receivable 100 Interest Revenue 100 Cash 10,150 Notes Receivable 10,000 Interest Receivable 100 Interest Revenue 50

  5. Part 1 (1)Sales: A/R (80%) 630,000 Cash (20%) 157,500 Sales 787,500 (2)Collection on A/R: Cash 502,500 A/R 502,500 (3) Write-off of specific A/R: Allow. for Doubt. Acct 3,000 A/R 3,000 Problem 7-1A (page 304)

  6. Part 2a: % of Sales Bad Debt Expense is % of credit sales Sales x % = Bad Debt Expense (no analysis of Allowance necessary) Sales on account (credit sales) = 630,000 x .03 = 18,900 BD Exp. AJE(2a): Bad Debt Expense 18,900 Allow. for D.A. 18,900 Problem 7-1A (page 304)

  7. Problem 7-1A (% of Sales) Post A/R: Then post Allowance: (ending balance last) Accts. Receivable Allowance for D A B 105,000 1,950 B (JE1) 630,000 502,500 (JE2) 3,000 (JE3) 18,900 (AJE) (JE3) 3,000 E 229,500 17,850 E Part 3: Net A/R = 229,500- 17,850 = 211,650

  8. Problem 7-1A (2b, % of A/R) Post A/R (same): Then post Allow: (AJE Last) Accts. Receivable Allowance for D A B 105,000 1,950 B (JE1) 630,000 502,500 (JE2) 3,000 (JE3) (3) 3,000 14,820 (AJE) E 229,500 13,770 E Calc. 6% before AJE AJE: Bad debt expense 14,820 Allowance for D.A. 14,820 Part 3: Net A/R = 229,500 - 13,770 = $215,730

  9. Recognition of Bad Debt Expense (AJE): BDExp xx (+Exp, -NI) Decr. SE Allow xx (+Allow) Decr. Assets Write-off: Allow xx (-Allow) Incr. Assets A/R xx (-A/R) Decr. Assets No effect on total assets No effect on I/S No effect on Net A/R Problem 7-1A, Part 4

  10. 1. Aging Schedule: % Uncoll. Current 200,000 x .10 = 20,000 < 1 mo. 60,300 x .25 = 15,075 1-2 mos. 35,000 x .35 = 12,250 > 2 mos. 45,000 x .75 = 33,750 Total 340,300 81,075 End Allow 2. Show higher uncoll. for that customer (don’t write off until bankruptcy court settles assets) Problem 7-2A

  11. 3. Balance sheet Accts. Receivable $340,300 Less: Allowance for DA 81,075 A/R Net $259,225 Problem 7-2A

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