Accounting for Accounts Receivable, Bad Debts, & Other Receivables
TARIQ AL-BASHA 1
Recognition of
Accounts
Receivable
Gross Method Net Method

Accounting for Accounts Receivable, Bad Debts, & Other Receivables
TARIQ AL-BASHA 2
BriefExercises
BE7-2
- Restin Co. uses the gross method to record sales made on credit.
- On June 1, 2012, it made sales of $50,000 with terms 3/15, n/45.
- On June 12, 2012, Restin received full payment for the June 1 sale.
- Prepare the required journal entries for Restin Co.
Answer
3/15 means 3% if paid any time within 15 days.
n/45 means the amount is due in 45 days
Gross Method
Date: 1 June 2012
Dr. Accounts Receivable $50,000
Cr. Sale Revenue $50,000
Sales made on credit 3/15, n/45
Date: 12 June 2012
Dr. Cash $48,500 (97% X 50,000)
Dr. Discount $1,500 (3% X 50,000)

Accounting for Accounts Receivable, Bad Debts, & Other Receivables
TARIQ AL-BASHA 3
Cr. Accounts Receivable $50,000
Payment of $50,000 of Sales received fully within the discount period
BE7-3
- Use the information from BE7-2, assuming Restin Co. uses the net method to account for cash
discounts.
- Prepare the required journal entries for Restin Co.
Answer
Net Method
Date: 1 June 2012
Dr. Accounts Receivable $48,500
Cr. Sale Revenue $48,500
Sales made on credit of $50,000 3/15, n/45
Date: 12 June 2012
Dr. Cash $48,500
Cr. Accounts Receivable $48,500
Payment of $50,000 of Sales received fully within the discount period.

Accounting for Accounts Receivable, Bad Debts, & Other Receivables
TARIQ AL-BASHA 4
Bases for
Estimating
Uncollectibles
% of Sales
Bad Debt
Expense to
Sales
% of Receivables
Allowance for
Doubtful
Accounts to AR

Accounting for Accounts Receivable, Bad Debts, & Other Receivables
TARIQ AL-BASHA 5
BE7-4
- Wilton, Inc. had net sales in 2012 of $1,400,000.
- At December 31, 2012, before adjusting entries, the balances in selected accounts were:
o Accounts Receivable $250,000 debit, and
o Allowance for Doubtful Accounts $2,400 credit.
- If Wilton estimates that 2% of its net sales will prove to be uncollectible, prepare the December
31, 2012, journal entry to record bad debt expense.
Answer
% of Sales Method
1,400,000 X 2% = $28,000
Date 31 Dec 2012
Dr. Bad Debt Expense $28,000
Cr. Allowance for Doubtful Accounts $28,000
The bad debt expense is estimated as 2% of net sales $28,000 (1,400,000 X 2%)
T-Accounts
Bad Debt Expense
Debit Credit
Dec. 31 Adj. $28,000

Accounting for Accounts Receivable, Bad Debts, & Other Receivables
TARIQ AL-BASHA 6
Allowance for Doubtful Accounts
Debit Credit
XXX XX Bal. $2,400
Dec. 31 Adj. $28,000
Dec. 31 Bal. $30,400
- The amount of bad debt expense and the related credit to the allowance account are unaffected
by any balance currently existing in the allowance account.
- Because the bad debt expense estimate is related to a nominal account (Net Sales), any balance
in the allowance is ignored.
- Therefore, the percentage-of-sales method achieves a proper matching of cost and revenues.

Accounting for Accounts Receivable, Bad Debts, & Other Receivables
TARIQ AL-BASHA 7
BE7-5
- Use the information presented in BE7-4 for Wilton, Inc.
a) Instead of estimating the uncollectibles at 2% of net sales, assume that 10% of accounts
receivable will prove to be uncollectible. Prepare the entry to record bad debt expense.
b) Instead of estimating uncollectibles at 2% of net sales, assume Wilton prepares an aging schedule
that estimates total uncollectible accounts at $24,600. Prepare the entry to record bad debt
expense.
Answer – a
% of Receivables
- the previous question assumed that the allowance account has a credit amount of 2,400
- the current question estimates the bad debt as a % of AR, $250,000 X 10% = $25,000
the Rule
Allowance for Doubtful Accounts (% of AR) = Estimated Bad Debt – Credit Amount
Allowance for Doubtful Accounts
Allowance for Doubtful Accounts (% of AR) = Estimated Bad Debt + Debit Amount
Allowance for Doubtful Accounts
- therefore, the amount is 22,600 (25,000 – 2,400)

Accounting for Accounts Receivable, Bad Debts, & Other Receivables
TARIQ AL-BASHA 8
Date 31 Dec 2012
Dr. Bad Debt Expense $22,600
Cr. Allowance for Doubtful Accounts $22,600
The bad debt expense is estimated as 10% of accounts receivable $22,600 (250,000 X 10% - 2,400)
T-Accounts
Bad Debt Expense
Debit Credit
Dec. 31 Adj. $22,600
Allowance for Doubtful Accounts
Debit Credit
Dec. 31 Adj. $22,600
Dec. 31 Bal. $22,600
Answer – b
Aging Schedule
- the previous question assumed that the allowance account has a credit amount of 2,400
- the current question estimates the allowance account of 24,600
the Rule

Accounting for Accounts Receivable, Bad Debts, & Other Receivables
TARIQ AL-BASHA 9
Allowance for Doubtful Accounts (% of AR) = Estimated Bad Debt – Credit Amount
Allowance for Doubtful Accounts
Allowance for Doubtful Accounts (% of AR) = Estimated Bad Debt + Debit Amount
Allowance for Doubtful Accounts
- therefore, the amount is 22,200 (24,600 – 2,400)
Date 31 Dec 2012
Dr. Bad Debt Expense $22,200
Cr. Allowance for Doubtful Accounts $22,200
The bad debt expense is estimated as 10% of accounts receivable $22,200 (24,600 - 2,400)
T-Accounts
Bad Debt Expense
Debit Credit
Dec. 31 Adj. $22,200
Allowance for Doubtful Accounts
Debit Credit
Dec. 31 Adj. $22,200
Dec. 31 Bal. $22,200

Accounting for Accounts Receivable, Bad Debts, & Other Receivables
TARIQ AL-BASHA 10
Exercises
E7-3(FinancialStatementPresentationofReceivables)
- Patriot Company shows a balance of $241,140 in the Accounts Receivable account on
December 31, 2012. The balance consists of the following.
1) Installment accounts due in 2013 $23,000
2) Installment accounts due after 2013 34,000
3) Overpayments to creditors 2,640
4) Due from regular customers, of which $40,000 represents accounts pledged as security for a
bank loan 89,000
5) Advances to employees 1,500
6) Advance to subsidiary company (made in 2010) 91,000
- Instructions
- Illustrate how the information above should be shown on the balance sheet of Patriot Company
on December 31, 2012.
Answer
- If the installment accounts are considered collectible within the operating period in 2013.
- If both Advanced to employees and overpayments of creditors are considered material
amounts.
- If the advanced to subsidiary is considered as an investment.

Accounting for Accounts Receivable, Bad Debts, & Other Receivables
TARIQ AL-BASHA 11
Accounts 31-Dec-12
Current Assets
Installment accounts due in 2013 23,000.00
Installment accounts due after 2013 34,000.00
Due from regular customers, of which $40,000 represents accounts pledged as security for a bank loan 89,000.00
Accounts Receivable 146,000.00
Current Assets
Overpayments to creditors 2,640.00
Advances to employees 1,500.00
Other Receivables 4,140.00
Non-Current Assets
Advance to subsidiary company (made in 2010) 91,000.00
Investment 91,000.00

Accounting for Accounts Receivable, Bad Debts, & Other Receivables
TARIQ AL-BASHA 12
E7-4(DetermineEndingAccountsReceivable)
- Your accounts receivable clerk, Mary Herman, to whom you pay a salary of $1,500 per month,
has just purchased a new Audi.
- You decided to test the accuracy of the accounts receivable balance of $117,000 as shown in
the ledger.
- The following information is available for your first year in business.
1) Collections from customers $198,000
2) Merchandise purchased 320,000
3) Ending merchandise inventory 70,000
4) Goods are marked to sell at 40% above cost
- Instructions
- Compute an estimate of the ending balance of accounts receivable from customers that should
appear in the ledger and any apparent shortages.
- Assume that all sales are made on account.
Answer
Cost of Goods Sold = Beginning Inv. + Purchases – Ending
COGS = 0 + 320,000 – 70,000 = 250,000
Sales = 250,000 X 1.40 = 350,000

Accounting for Accounts Receivable, Bad Debts, & Other Receivables
TARIQ AL-BASHA 13
Accounts Amount
Sales 350,000.00
Less: Collections from customers (198,000.00)
Uncollected Balance 152,000.00
Less: Balance per Ledger (117,000.00)
Shortage (Surplus) 35,000.00
$35,000 are enough for the purchase of a new car.

Accounting for Accounts Receivable, Bad Debts, & Other Receivables
TARIQ AL-BASHA 14
E7-5(RecordSalesGrossandNet)
- On June 3, Bolton Company sold to Arquette Company merchandise having a sale price of
$2,000 with terms of 2/10, n/60, f.o.b. shipping point.
- An invoice totaling $90, terms n/30, was received by Arquette on June 8 from John Booth
Transport Service for the freight cost.
- On June 12, the company received a check for the balance due from Arquette Company.
- Instructions
a) Prepare journal entries on the Bolton Company books to record all the events noted above
under each of the following bases.
1. Sales and receivables are entered at gross selling price.
2. Sales and receivables are entered at net of cash discounts.
b) Prepare the journal entry under basis 2, assuming that Arquette Company did not remit
payment until July 29.

Accounting for Accounts Receivable, Bad Debts, & Other Receivables
TARIQ AL-BASHA 15
Answer – a
Bolton Company
Gross Method
2/10: 2% cash discount if paid any time within 10 days.
N/60: the amount is due in 60 days
Free on Board – FOB Shipping Point. FOB shipping point, also known as FOB origin, indicates that
the title and responsibility of goods transfer from the seller to the buyer when the goods are placed
on a delivery vehicle
2nd
June
Dr. Accounts Receivable - Arquette Company $2,000
Cr. Credit Sales Revenue $2,000
12th
June
Dr. Cash $1,960
Dr. Cash Discount $40
Cr. Accounts Receivable - Arquette Company $2,000

Accounting for Accounts Receivable, Bad Debts, & Other Receivables
TARIQ AL-BASHA 16
Net Method
2nd
June
Dr. Accounts Receivable - Arquette Company $1,960
Cr. Credit Sales Revenue $1,960
12th
June
Dr. Cash $1,960
Cr. Accounts Receivable - Arquette Company $1,960
Answer – b
2nd
June
Dr. Accounts Receivable - Arquette Company $1,960
Cr. Credit Sales Revenue $1,960
29th
July
Dr. Cash $2,000
Cr. Accounts Receivable - Arquette Company $1,960
Cr. Cash Discounted Forfeited $40

Accounting for Accounts Receivable, Bad Debts, & Other Receivables
TARIQ AL-BASHA 17
E7-6(RecordingSalesTransactions)
- Presented below is information from Lopez Computers Incorporated.
- July 1 Sold $30,000 of computers to Smallwood Company with terms 3/15, n/60.
- Lopez uses the gross method to record cash discounts.
- 10 Lopez received payment from Smallwood for the full amount owed from the July
transactions.
- 17 Sold $250,000 in computers and peripherals to The Clark Store with terms of 2/10, n/30.
- 30 The Clark Store paid Lopez for its purchase of July 17.
- Instructions
- Prepare the necessary journal entries for Lopez Computers.
Answer
Gross Method
3/15: 3% cash discount if paid any time within 15 days.
N/60: the amount is due in 60 days
1st
July
Dr. Accounts Receivable – Small Wood $30,000
Cr. Credit Sales $30,000
10th
July (within 15 days)

Accounting for Accounts Receivable, Bad Debts, & Other Receivables
TARIQ AL-BASHA 18
Dr. Cash $29,100
Dr. Cash Discounts $900
Cr. Accounts Receivable – Small Wood $30,000
2/10: 2% cash discount if paid any time within 10 days.
N/30: the amount is due in 30 days
17th
July
Dr. Accounts Receivable – Clarke Store $250,000
Cr. Credit Sales $250,000
30th
July (After the discount period)
Dr. Cash $250,000
Cr. Accounts Receivable – Clarke Store $250,000

Accounting for Accounts Receivable, Bad Debts, & Other Receivables
TARIQ AL-BASHA 19
E7-7(RecordingBadDebts)
- Sandel Company reports the following financial information before adjustments.
Dr. Cr.
Accounts Receivable $160,000
Allowance for Doubtful
Accounts
$ 2,000
Sales Revenue (all on credit) 800,000
Sales Returns and Allowances 50,000
- Instructions
- Prepare the journal entry to record bad debt expense assuming Sandel Company estimates bad
debts at (a) 1% of net sales and (b) 5% of accounts receivable.
Answer – a
Net Sales = 800,000 – 50,000 = 750,000
Bad Debt = 750,000 X 1% = 7,500
Dr. Bad Debt $7,500
Cr. Allowance for Doubtful Accounts $7,500

Accounting for Accounts Receivable, Bad Debts, & Other Receivables
TARIQ AL-BASHA 20
Answer – b
Bad Debt = 160,000 X 5% = 8,000
Dr. Bad Debt $8,000
Cr. Allowance for Doubtful Accounts $8,000
Allowance for Doubtful Accounts (% of AR) = Estimated Bad Debt – Credit Amount
Allowance for Doubtful Accounts
Allowance for Doubtful Accounts (% of AR) = 8,000 – 2,000 = 6,000

Accounting for Accounts Receivable, Bad Debts, & Other Receivables
TARIQ AL-BASHA 21
E7-8(RecordingBadDebts)
- At the end of 2012, Sorter Company has accounts receivable of $900,000 and an allowance for
doubtful accounts of $40,000.
- On January 16, 2013, Sorter Company determined that its receivable from Ordonez Company
of $8,000 will not be collected, and management authorized its write-off.
- Instructions
a) Prepare the journal entry for Sorter Company to write off the Ordonez receivable.
b) What is the net realizable value of Sorter Company’s accounts receivable before the write-off
of the Ordonez receivable?
c) What is the net realizable value of Sorter Company’s accounts receivable after the write-off of
the Ordonez receivable?
Answer – a
Dr. Bad Debt Expense $8,000
Cr. Accounts Receivable (Ordonez) – Write off $8,000
Answer – b
900,000 – 40,000 = 860,000
Answer – c
900,000 – (40,000 – 8,000) = 868,000

Accounting for Accounts Receivable, Bad Debts, & Other Receivables
TARIQ AL-BASHA 22
E7-9(ComputingBadDebtsandPreparingJournalEntries)
- The trial balance before adjustment of Estefan Inc. shows the following balances.
Dr. Cr.
Accounts Receivable $80,000
Allowance for Doubtful
Accounts
1,750
Sales, Net Revenue (all on
credit)
$580,000
- Instructions
- Give the entry for estimated bad debts assuming that the allowance is to provide for doubtful
accounts on the basis of (a) 4% of gross accounts receivable and (b) 1% of net sales.
Answer – a
80,000 X 4% = 3,200
Dr. Bad Debt $3,200
Cr. Allowance for Doubtful Accounts $3,200
Allowance for Doubtful Accounts (% of AR) = Estimated Bad Debt + Debit Amount
Allowance for Doubtful Accounts
Allowance for Doubtful Accounts (% of AR) = 3,200 + 1,750 = 4,950
Adjusting Entry

Accounting for Accounts Receivable, Bad Debts, & Other Receivables
TARIQ AL-BASHA 23
Dr. Bad Debt $4,950
Cr. Allowance for Doubtful Accounts $4,950
Answer – b
580,000 X 1% = $5,800
Dr. Bad Debt $5,800
Cr. Allowance for Doubtful Accounts $5,800
Allowance for Doubtful Accounts = $5,800

Accounting for Accounts Receivable, Bad Debts, & Other Receivables
TARIQ AL-BASHA 24
E7-10(Bad-DebtReporting)
- The chief accountant for Dollywood Corporation provides you with the following list of
accounts receivable written off in the current year.
Date Customer Amount
March 31 E. L. Masters Company $7,800
June 30 Hocking Associates 9,700
September 30 Amy Lowell’s Dress Shop 7,000
December 31 R. Bronson, Inc. 9,830
- Dollywood Corporation follows the policy of debiting Bad Debt Expense as accounts are
written off.
- The chief accountant maintains that this procedure is appropriate for financial statement
purposes because the Internal Revenue Service will not accept other methods for recognizing
bad debts.
- All of Dollywood Corporation’s sales are on a 30-day credit basis.
- Sales for the current year total $2,400,000, and research has determined that bad debt losses
approximate 2% of sales.
- Instructions
a) Do you agree or disagree with Dollywood’s policy concerning recognition of bad debt expense?
Why or why not?
b) By what amount would net income differ if bad debt expense was computed using the
percentage-of-sales approach?

Accounting for Accounts Receivable, Bad Debts, & Other Receivables
TARIQ AL-BASHA 25
Answer – a
Percentage-of-sales approach: 2,400,000 X 2% = 48,000
Current List: 7,800 + 9,700 + 7,000 + 9,830 = 34,330
Based on credit terms: 7,800 + 9,700 + 7,000 + 9,830 = 24,500
- The direct write-off approach is not theoretically justifiable even though required for income
tax purposes.
- The direct write-off method does not match expenses with revenues of the period, nor does
it result in receivables being stated at estimated realizable value on the balance sheet.
Answer – b
Percentage-of-sales approach: 2,400,000 X 2% = 48,000
Current List: 7,800 + 9,700 + 7,000 + 9,830 = 34,330
Net Income = 48,000 – 34,330 = 13,760 lower under the Percentage-of-sales approach.

Accounting for Accounts Receivable, Bad Debts, & Other Receivables
TARIQ AL-BASHA 26
E7-11 (Bad Debts—Aging)
- Puckett, Inc. includes the following account among its trade receivables.
- Instructions
- Age the balance and specify any items that apparently require particular attention at year-end.

Accounting for Accounts Receivable, Bad Debts, & Other Receivables
TARIQ AL-BASHA 27
Answer
Date Accounts Amount Date Amount Balance Aging Days 31-Dec
1-Jan Balance forward 700.00 10-Apr 255.00 445.00 100.00 365.00
20-Jan Invoice #1710 1,100.00 28-Jan 1,100.00 - 8.00
14-Mar Invoice #2116 1,350.00 2-Apr 1,350.00 - 19.00
12-Apr Invoice #2412 1,710.00
30-Apr 1,000.00 710.00 18.00
263.00
20-Sep 400.00 310.00 161.00
9-May Invoice #3614 490.00 20-Sep 490.00 - 134.00
17-Oct Invoice #4912 860.00 31-Oct 860.00 - 14.00
18-Nov Invoice #5681 2,000.00 1-Dec 1,250.00 750.00 13.00 43.00
20-Dec Invoice #6347 800.00 29-Dec 800.00 - 9.00
1) Balance forward age 365 days and balance 455
2) Invoice #2412 age 263 days and balance 310
3) Invoice #5681 age 43 days and balance 750
Total 1,505
- Inasmuch as later invoices have been paid in full, all three of these amounts should be
investigated in order to determine they have not paid them.
- The amounts in the beginning balance and #2412 should be of particular concern.

Accounting for Accounts Receivable, Bad Debts, & Other Receivables
TARIQ AL-BASHA 28
E7-12(JournalizingVariousReceivableTransactions)
- Presented below is information related to Sanford Corp.
July 1
- Sanford Corp. sold to Legler Co. merchandise having a sales price of $10,000 with terms 2/10,
net/60.
- Sanford records its sales and receivables net.
July 5
- Accounts receivable of $12,000 (gross) are factored with Rothchild Credit Corp. without
recourse at a financing charge of 9%.
- Cash is received for the proceeds; collections are handled by the finance company.
- (These accounts were all past the discount period.)
July 9
- Specific accounts receivable of $9,000 (gross) are pledged to Rather Credit Corp. as security
for a loan of $6,000 at a finance charge of 6% of the amount of the loan.
- The finance company will make the collections.
- (All the accounts receivable are past the discount period.)
Dec. 29
- Legler Co. notifies Sanford that it is bankrupt and will pay only 10% of its account.
- Give the entry to write off the uncollectible balance using the allowance method.

Accounting for Accounts Receivable, Bad Debts, & Other Receivables
TARIQ AL-BASHA 29
- (Note: First record the increase in the receivable on July 11 when the discount period passed.)
- Instructions
- Prepare all necessary entries in general journal form for Sanford Corp.
Answer
1st
July
Dr. Accounts Receivable, net $9,800
Cr. Credit Sales $9,000
Terms
2/10 = 10th
July
net/60 = 30th
August
5th
July
Dr. Cash $10,920
Dr. Loss on Sales Receivables $1,080
Cr. Accounts Receivable $11,760
Cr. Sales Discount Forfeited $240
9th
July
Dr. Accounts Receivable $180

Accounting for Accounts Receivable, Bad Debts, & Other Receivables
TARIQ AL-BASHA 30
Cr. Sales Discount Forfeited $180
Dr. Cash $5,640
Dr. Interest Expense $360
Cr. Notes Payable $6,000
29th
December
Dr. Accounts Receivable $200
Cr. Sales Discount Forfeited $200
Dr. Allowance for Doubtful Accounts $9,000
Cr. Accounts Receivable $9,000

Accounting for Accounts Receivable, Bad Debts, & Other Receivables
TARIQ AL-BASHA 31
E7-14(JournalizingVariousReceivableTransactions)
- The trial balance before adjustment for Sinatra Company shows the following balances.
Dr. Cr.
Accounts Receivable $82,000
Allowance for Doubtful
Accounts
1,750
Sales, Net Revenue (all on
credit)
$430,000
- Instructions
- Using the data above, give the journal entries required to record each of the following cases.
- (Each situation is independent.)
1) To obtain additional cash, Sinatra factors without recourse $20,000 of accounts receivable with
Stills Finance. The finance charge is 10% of the amount factored.
2) To obtain a one-year loan of $55,000, Sinatra assigns $65,000 of specific receivable accounts to
Ruddin Financial. The finance charge is 8% of the loan; the cash is received and the accounts
turned over to Ruddin Financial.
3) The company wants to maintain Allowance for Doubtful Accounts at 5% of gross accounts
receivable.
4) The company wishes to increase the allowance account by 1½% of net sales.

Accounting for Accounts Receivable, Bad Debts, & Other Receivables
TARIQ AL-BASHA 32
Answer – 1
Dr. Cash $18,000
Dr. Loss on Sale of Receivable $2,000
Cr. Accounts Receivable $20,000
Answer – 2
Dr. Cash $50,600
Dr. Interest $4,400
Cr. Notes Payable $55,000
Answer – 3
Allowance for Doubtful Accounts (% of AR) = Estimated Bad Debt + Debit Amount Allowance for Doubtful Accounts
82,000 X 5% = 4,100 + 1,750 = 5,850
Dr. Allowance for Doubtful Accounts $5,850
Cr. Accounts Receivable $5,850
Answer – 4
430,000 X 1.5% = 6,450
Dr. Bad Debt $6,450
Cr. Allowance for Doubtful Accounts $6,450

Accounting for Accounts Receivable, Bad Debts, & Other Receivables
TARIQ AL-BASHA 33
Problems
P7-2(Bad-DebtReporting)
- Presented below are a series of unrelated situations.
Dr. Cr.
Allowance for Doubtful
Accounts
$4,000
Net Sales $1,200,000
- Halen Company estimates its bad debt expense to be 1½% of net sales.
- Determine its bad debt expense for 2012.
Answer
1,200,000 X 0.015 = 18,000
Dr. Bad Debt $18,000
Cr. Allowance for Doubtful Accounts $18,000
Bad Debt is $18,000

Accounting for Accounts Receivable, Bad Debts, & Other Receivables
TARIQ AL-BASHA 34
- An analysis and aging of Stuart Corp. accounts receivable at December 31, 2012, disclosed the
following.
1) Amounts estimated to be uncollectible $ 180,000
2) Accounts receivable 1,750,000
3) Allowance for doubtful accounts (per books) 125,000
- What is the net realizable value of Stuart’s receivables at December 31, 2012?
Answer
Net Realizable Value = Accounts Receivable – Amounts estimated to be uncollectible
Net Realizable Value = 1,750,000 – 180,000 = 1,570,000

Accounting for Accounts Receivable, Bad Debts, & Other Receivables
TARIQ AL-BASHA 35
- Shore Co. provides for doubtful accounts based on 3% of credit sales.
- The following data are available for 2012.
1) Credit sales during 2012 $2,400,000
2) Allowance for doubtful accounts 1/1/12 17,000
3) Collection of accounts written off in prior years (customer credit was reestablished) 8,000
4) Customer accounts written off as uncollectible during 2012 30,000
- What is the balance in Allowance for Doubtful Accounts at December 31, 2012?
Answer
Allowance for doubtful accounts 1/1/12 17,000
Add: Collection of Accounts Written Offer 8,000
Less: Written Off Uncollectible Accounts -30,000
Add: Bad Debt Expense* 72,000
Allowance for doubtful accounts 31/21/12 67,000
*Bade Debt Expense = 2,400,000 X 3% = 72,000

Accounting for Accounts Receivable, Bad Debts, & Other Receivables
TARIQ AL-BASHA 36
- At the end of its first year of operations, December 31, 2012, Darden Inc. reported the
following information.
1) Accounts receivable, net of allowance for doubtful accounts $950,000
2) Customer accounts written off as uncollectible during 2012 24,000
3) Bad debt expense for 2012 84,000
- What should be the balance in accounts receivable at December 31, 2012, before subtracting
the allowance for doubtful accounts?
Answer
Bad debt expense for 2012 84,000
Less: accounts written off as uncollectible during 2012 -24,000
Allowance for doubtful accounts 31/21/12 60,000
Accounts Receivable, Net 950,000
Add: Allowance for Doubtful Accounts 60,000
Gross Accounts Receivable 1,010,000

Accounting for Accounts Receivable, Bad Debts, & Other Receivables
TARIQ AL-BASHA 37
- The following accounts were taken from Bullock Inc.’s trial balance at December 31, 2012.
Dr. Cr.
Net credit sales $750,000
Allowance for doubtful
accounts
$ 14,000
Accounts receivable 310,000
- If doubtful accounts are 3% of accounts receivable, determine the bad debt expense to be
reported for 2012.
Answer
310,000 X 3% = 9,300 + 14,000 = 23,300
Bad Debt = 23,300

Accounting for Accounts Receivable, Bad Debts, & Other Receivables
TARIQ AL-BASHA 38
P7-3(Bad-DebtReporting—Aging)
- Manilow Corporation operates in an industry that has a high rate of bad debts.
- Before any year-end adjustments, the balance in Manilow’s Accounts Receivable account was
$555,000 and the Allowance for Doubtful Accounts had a credit balance of $40,000.
- The year-end balance reported in the balance sheet for Allowance for Doubtful Accounts will
be based on the aging schedule shown below.
Days Account Outstanding Amount Probability of Collection
Less than 16 days 300,000.00 98%
Between 16 and 30 days 100,000.00 90%
Between 31 and 45 days 80,000.00 85%
Between 46 and 60 days 40,000.00 80%
Between 61 and 75 days 20,000.00 55%
Over 75 days 15,000.00 0%
Total 555,000.00
- Instructions
(a) What is the appropriate balance for Allowance for Doubtful Accounts at year-end?
(b) Show how accounts receivable would be presented on the balance sheet.
(c) What is the dollar effect of the year-end bad debt adjustment on the before-tax income?

Accounting for Accounts Receivable, Bad Debts, & Other Receivables
TARIQ AL-BASHA 39
Answer – a
Days Account Outstanding Amount Probability of Collection Collectible Amount Uncollectible Amount
Less than 16 days 300,000.00 98% 294,000.00 6,000.00
Between 16 and 30 days 100,000.00 90% 90,000.00 10,000.00
Between 31 and 45 days 80,000.00 85% 68,000.00 12,000.00
Between 46 and 60 days 40,000.00 80% 32,000.00 8,000.00
Between 61 and 75 days 20,000.00 55% 11,000.00 9,000.00
Over 75 days 15,000.00 0% - 15,000.00
Total 555,000.00 495,000.00 60,000.00
Total Allowance for Doubtful Accounts = 60,000
Total Bad Debt (0% Probability of Collection) = 15,000
End-Year Allowance for Doubtful Accounts = 60,000 – 15,000 = 45,000
Answer – b
Accounts Receivable = Gross Accounts Receivable – Bad Debt
Accounts Receivable = 555,000 – 15,000 = 540,000
Net Accounts Receivable = 540,000 – 45,000 = 495,000

Accounting for Accounts Receivable, Bad Debts, & Other Receivables
TARIQ AL-BASHA 40
Answer – c
Estimated amount required in the Allowance for
Doubtful Accounts
45,000
Less: Balance in the account after write-off of
uncollectible accounts but before adjustment
($40,000 – $15,000)
-25,000
Required charge to expense 20,000

Accounting for Accounts Receivable, Bad Debts, & Other Receivables
TARIQ AL-BASHA 41
P7-4(Bad-DebtReporting)
- From inception of operations to December 31, 2012, Fortner Corporation provided for
uncollectible accounts receivable under the allowance method:
o provisions were made monthly at 2% of credit sales;
o bad debts written off were charged to the allowance account;
o recoveries of bad debts previously written off were credited to the allowance account;
and
o no year-end adjustments to the allowance account were made.
- Fortner’s usual credit terms are net 30 days.
- The balance in Allowance for Doubtful Accounts was $130,000 at January 1, 2012.
- During 2012, credit sales totaled $9,000,000,
- interim provisions for doubtful accounts were made at 2% of credit sales,
- $90,000 of bad debts were written off, and
- recoveries of accounts previously written off amounted to $15,000.
- Fortner installed a computer system in November 2012, and an aging of accounts receivable
was prepared for the first time as of December 31, 2012. A summary of the aging is as follows.
Classification by Month of Sale Amount Probability of Collection
November–December 2012 1,080,000.00 98%
July–October 650,000.00 10%
January–June 420,000.00 75%
Prior to 1/1/12 150,000.00 20%
Total 2,300,000.00

Accounting for Accounts Receivable, Bad Debts, & Other Receivables
TARIQ AL-BASHA 42
- Based on the review of collectibility of the account balances in the “prior to 1/1/12” aging
category, additional receivables totaling $60,000 were written off as of December 31, 2012.
- The 80% uncollectible estimate applies to the remaining $90,000 in the category.
- Effective with the year ended December 31, 2012, Fortner adopted a different method for
estimating the allowance for doubtful accounts at the amount indicated by the year-end aging
analysis of accounts receivable.
- Instructions
a) Prepare a schedule analyzing the changes in Allowance for Doubtful Accounts for the year
ended December 31, 2012. Show supporting computations in good form. (Hint: In computing
the 12/31/12 allowance, subtract the $60,000 write-off).
b) Prepare the journal entry for the year-end adjustment to the Allowance for Doubtful Accounts
balance as of December 31, 2012.
Answer
Classification by Month of Sale Amount Probability of Collection Collectible Amount Uncollectible Amount
November–December 2012 1,080,000.00 98% 1,058,400.00 21,600.00
July–October 650,000.00 90% 585,000.00 65,000.00
January–June 420,000.00 75% 315,000.00 105,000.00
Prior to 1/1/12**** 90,000.00 20% 18,000.00 72,000.00
Total 2,240,000.00 1,976,400.00 263,600.00
***** 150,000 – 60,000 = 90,000

Accounting for Accounts Receivable, Bad Debts, & Other Receivables
TARIQ AL-BASHA 43
Allowance for doubtful accounts 1/1/12 130,000
Add: Provision for Doubtful Accounts 180,000
Add: Collection of Accounts Written Offer 15,000
325,000
Less: Written Off Uncollectible Accounts -150,000
Add: Increase due to Change in Accounting
Estimate
88,600
Allowance for doubtful accounts 31/21/12 263,600
Provision for Doubtful Accounts = 9,000,000 X 2% = 180,000
Written Off Uncollectible Accounts = 90,000 + 60,000 = 150,000
Increase due to Change in Accounting Estimate = $263,600 – $175,000 = 88,600
Allowance for doubtful accounts 1/1/12 130,000
Add: Collection of Accounts Written Offer 15,000
Less: Written Off Uncollectible Accounts -150,000
Add: Bad Debt Expense* 180,000
Allowance for doubtful accounts 31/21/12 175,000
Answer – b
Dr. Bad Debt $88,600
Cr. Allowance for Doubtful Accounts $88,600

Accounting for Accounts Receivable, Bad Debts, & Other Receivables
TARIQ AL-BASHA 44
P7-5(Bad-DebtReporting)
- Presented below is information related to the Accounts Receivable accounts of Gulistan Inc.
during the current year 2012.
1. An aging schedule of the accounts receivable as of December 31, 2012, is as follows.
2. The Accounts Receivable control account has a debit balance of $372,400 on December 31,
2012.
3. Two entries were made in the Bad Debt Expense account during the year: (1) a debit on
December 31 for the amount credited to Allowance for Doubtful Accounts, and (2) a credit
for $3,240 on November 3, 2012, and a debit to Allowance for Doubtful Accounts because of
a bankruptcy.
4. Allowance for Doubtful Accounts is as follows for 2012.
5. A credit balance exists in the Accounts Receivable (60–90 days) of $4,840, which represents an
advance on a sales contract.

Accounting for Accounts Receivable, Bad Debts, & Other Receivables
TARIQ AL-BASHA 45
- Instructions
- Assuming that the books have not been closed for 2012, make the necessary correcting entries.
Answer
Age Amount Probability of Collection Collectible Amount Uncollectible Amount
Under 60 days 172,342.00 99% 170,618.58 1,723.42
60–90 days* 141,330.00 97% 137,090.10 4,239.90
91–120 days** 36,684.00 94% 34,482.96 2,201.04
Over 120 days*** 19,944.00 75% 14,958.00 4,986.00
Total 370,300.00 357,149.64 13,150.36
*60–90 days =136,490 + 4,840 = 141,330.00
**91–120 days = 39,924 – 3,240 = 36,684.00
*** Over 120 days = 23,644 – 3,700 = 19,944.00
Dr. Bad Debt $3,240
Cr. AFDA $3,240
Dr. Bad Debt $3,700
Cr. AFDA $3,700
Dr. Accounts Receivable $4,840
Cr. Unearned Sales Revenue $4,840

Accounting for Accounts Receivable, Bad Debts, & Other Receivables
TARIQ AL-BASHA 46
Allowance for doubtful accounts 1/1/12 8,750
Add: Collection of Accounts Written Offer 0
Less: Written Off Uncollectible Accounts* -6,940
Add: Bad Debt Expense 18,620
Allowance for doubtful accounts 31/21/12 20,430
* 3,240 + 3,700 = 6,940
Adjustment
Allowance for doubtful accounts 31/12/12 20,430
Less: Correct Balance -13,150.36
Allowance for doubtful accounts 31/21/12 7,279.64
Dr. AFDA $7,279.64
Cr. Bad Debt $7,279.64

Accounting for Accounts Receivable, Bad Debts, & Other Receivables
TARIQ AL-BASHA 47
P7-6(JournalizeVariousAccountsReceivable
Transactions)
- The balance sheet of Starsky Company at December 31, 2012, includes the following.
Notes receivable $ 36,000
Accounts receivable 182,100
Less: Allowance for doubtful accounts 17,300
Total 200,800
- Transactions in 2012 include the following.
1) Accounts receivable of $138,000 were collected including accounts of $60,000 on which 2%
sales discounts were allowed.
2) $5,300 was received in payment of an account which was written off the books as worthless in
2012.
3) Customer accounts of $17,500 were written off during the year.
4) At year-end, Allowance for Doubtful Accounts was estimated to need a balance of $20,000.
This estimate is based on an analysis of aged accounts receivable.
- Instructions
- Prepare all journal entries necessary to reflect the transactions above.

Accounting for Accounts Receivable, Bad Debts, & Other Receivables
TARIQ AL-BASHA 48
Answer
Dr. Cash* $136,800
Dr. Cash Discount** $1,200
Cr. Accounts Receivable $138,000
* 138,000 – (60,000 X 2%) = 136,800
** 60,000 X 2% = 1,200
Dr. Accounts Receivable $5,300
Cr. AFDA $5,300
Dr. Cash $5,300
Cr. Accounts Receivable $5,300
Dr. AFDA $17,500
Cr. Accounts Receivable $17,500
Dr. Bad Debt $14,900
Cr. AFDA $14,900
17,300 + 5,300 – 17,500 = 5,100
20,000 – 5,100 = 14,900