Solution: the Allowance Method

1
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
• 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?

At adjusting journal entry.
2
Class Problem 1

• 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.

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
Class Problem 2

• 1. Sale on November 1, 2008
• 2. Interest accrual at December 31, 2008
• 3. Collection of loan and interest at 1/31/09

Notes Receivable 10,000 Sales Revenue
10,000
Interest Receivable 100 Interest Revenue
100
Cash 10,150 Notes Receivable 10,000 Intere
st Receivable 100 Interest Revenue
50
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Problem 7-1A (page 304)

• 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

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Problem 7-1A (page 304)

• 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

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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
502,500 (JE2)
(JE1) 630,000
(JE3) 3,000
18,900 (AJE)
3,000 (JE3)
17,850 E
E 229,500
Part 3 Net A/R 229,500- 17,850
211,650

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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
502,500 (JE2)
(JE1) 630,000
(3) 3,000
14,820 (AJE)
3,000 (JE3)
13,770 E
E 229,500
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

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Problem 7-1A, Part 4

• 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

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Problem 7-2A

• 1. Aging Schedule Uncoll.
• Current 200,000 x .10 20,000
• lt 1 mo. 60,300 x .25 15,075
• 1-2 mos. 35,000 x .35 12,250
• gt 2 mos. 45,000 x .75 33,750
• Total 340,300 81,075
• End Allow
• 2. Show higher uncoll. for that customer (dont
  write off until bankruptcy court settles assets)

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Problem 7-2A

• 3. Balance sheet
• Accts. Receivable 340,300
• Less Allowance for DA 81,075
• A/R Net 259,225