Financial Accounting Chapter 9: Receivables

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Supplemental Instruction Handouts

Financial Accounting

Chapter 9:

Receivables

1. At December 31, 2011, AZY Co had $1,550,000 in credit sales for the year. The company believes that 5% of these sales will be uncollectible. Prepare the necessary year end adjusting entry.

Since this question is based on sales, we multiply the credit sales by the percentage that the company feels will be uncollectible. We use this answer in our journal entry:

Bad Debts Expense = $1,550,000 x 5% = $77,500

General Journal Page ____

Date Account Titles and Explanations PR Debit Credit

Dec 31 Bad Debts Expense 77,500

Allowance for Doubtful Accounts 77,500

2. At December 31, 2011, BAC Co had $550,000 in accounts receivable at the end of the year.

The company believes that 3% will be uncollectible. Prepare the necessary year end adjusting entry based on the following independent assumptions:

a) The allowance account has a debit balance of $950.

Total Allowance for Doubtful Accounts = $550,000 x 3% = $16,500

Bad Debts Expense = $16,500 + $950 (debit balance) = $17,450

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b) The allowance account has a credit balance of $2,250.

Total Allowance for Doubtful Accounts = $550,000 x 3% = $16,500

Bad Debts Expense = $16,500 - $2,250 = $14,250

3. The accountant for your company has prepared a schedule of the December 31, 2011,

accounts receivable by age and, on the basis of past experience, has estimated the

percentage of the receivables in each age category that will become uncollectible. This

information is summarized in the following table:

December 31, 2011

Accounts Receivable

Age of

Accounts Receivable

Expected

Percentage

Uncollectible

$95,500 Not Due (under 30 days) 2%

28,650 1 to 30 days past due 4%

12,900 31 to 60 days past due 8%

6,500 61 to 90 days past due 24%

4,550 Over 90 days past due 70%

Prepare the necessary year end adjusting entry based on the following independent

assumptions:

a) The allowance account has a credit balance of $2,350.

Not Due = $95,500 x 2% = $1,910 1 to 30 days = $28,650 x 4% = $1,146 31 – 60 days = $12,900 x 8% = $1,032 61 – 90 days = $6,500 x 24% = $1,560 Over 90 days = $4,550 x 70% = $3,185 Total Allowance for Doubtful Accounts = $8,833

Bad Debts Expense = $8,833 - $2,350 = $6,483

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b) The allowance account has a debit balance of $1,875.

Not Due = $95,500 x 2% = $1,910 1 to 30 days = $28,650 x 4% = $1,146 31 – 60 days = $12,900 x 8% = $1,032 61 – 90 days = $6,500 x 24% = $1,560 Over 90 days = $4,550 x 70% = $3,185 Total Allowance for Doubtful Accounts = $8,833

Bad Debts Expense = $8,833 + $1,875 = $10,708

4. Prepare the necessary general journal entries for the following transactions:

2011

May 1

^st

Accepted a $5,600, six month, 8% note dated this day in granting B. Herman a

time extension on his past due account.

May 1 Notes Receivable 5,600

Accounts Receivable – B. Herman 5,600

September 1

^st

Accepted a $7,500, six month, 8% note dated this day in granting L.

Sherman a time extension on her past due account.

Sept 1 Notes Receivable 7,500

Accounts Receivable – L. Sherman 7,500

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November 1

^st

B. Herman dishonored his note when presented for payment.

Nov 1 Accounts Receivable – B. Herman 5,824

Notes Receivable 5,600

Interest Earned ($5,600 x 8% x 6 ÷ 12) 224

December 31

^st

Wrote off B. Herman’s account as being uncollectible using the allowance

method.

Dec 31 Allowance for Doubtful Accounts 5,824

December 31

^st

Made an adjusting entry to record the accrued interest on the Sherman

note.

Dec 31 Interest Receivable 200

2012

March 1

^st

Sherman honored her note when presented for payment.

Mar 1 Cash 7,800

Notes Receivable 7,500

Interest Receivable 200

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May 10 B. Herman unexpectedly paid off his whole account.

May 10 Accounts Receivable – B. Herman 5,824

May 10 Cash 5,824