Accounts Receivable

Hard Test

Key Things to Know

j

Practice as You Learn

Self Test

b

Easy Test

h

Medium Test

i

Hard Test

Hard Test

Click the “Check Your Answer” box below each problem to reveal the correct answer and explanation.

1. During the first year of operations credit sales were $290,000 and collections on credit sales totaled $215,000. During the year, the company wrote off $8,000 in uncollectible accounts. A summary of the accounts receivable aging at the end of the year follows:

Estimated collectible
Current 40,000 97%
30 Days 15,000 70%
60 Days 10,000 40%
90 Days    5,000             5%
  Total   70,000

During the year, the company recorded bad debt expense using the % of sales method, using a historical 6% of sales. A final adjustment to bad debt expense is made using the % of accounts receivable aging method.

A. Prepare the journal entry (for the year) to record bad debt expense using the % of
sales method.

B. Prepare the journal entry to record write-offs during the year.

C. Prepare the journal entry at December 31, (year end) to adjust bad debt expense
using the % of accounts receivable method using aging categories

D. What will be reported for total bad debt expense for the year?

E. What will be reported on the balance sheet at the end of the year?

Answer
  1.A.

   Credit sales 290,000
x Historical % sales     x .06
= Bad debt expense  17,400

Record the calculated amount

Bad Debt Expense                                        17,400
           Allowance for uncollectible accounts                17,400

Increase bad debt expense
Increase the allowance account

1.B.
Allowance for uncollectible accounts        8,000
         Accounts receivable                                      8,000

Decrease the allowance account
Decrease accounts receivable

1.C.

Balance x % uncollectible = Amount uncollectible

(1 less % collectible)
40,000   X   .03 1,200
15,000   X   .30 4,500
10,000   X   .60 6,000
5,000   .95 4,750
Total estimated
uncollectible		 16,450

16,450 must be the ending must be the balance in the allowance account

First year of operations beginning balance in the allowance account equals 0.
The adjustment to bad debt is computed as follows:

Beginning allowance balance        0
+ bad debt expense % sales (17,400)
– write-offs 8,000
+ bad debt expense % a/r          ??
= ending allowance balance (16,450) as calculated above

The allowance account must be increased (credit) by $7,050 to get to the ending balance to be 16,450 calculated. Bad debt expense is increased for the same amount

Bad Debt Expense                           7,050
           Allowance for uncollectible accounts  7,050

1.D.
Total bad debt expense is everything recorded in the bad debt expense account:

Recorded using % Sales 17,400
Recorded using % A/R   7.050
Total bad debt expense 24,450

1.E.

Accounts Receivable 70,000
– allowance for uncollectible accounts (16,450)
= net accounts receivable 53,550

Net accounts receivable must be reported on the balance sheet.

2. During the current year the company had credit sales of $875,000 with terms of 2/15,n30. The company collected $832,000 from customers during the year and 30% of collections qualified for the sales discount. The beginning balance in accounts receivable and the allowance account was $139,000 and $22,000, respectively. During the year $7,000 of accounts were written off and 18,000 was returned. Returns are estimated to be 3% of credit sales. One invoice that was written off for $765 was collected after it was written off. At the end of the year, the company estimated total uncollectible accounts to be $13,000. The company uses the gross method to record sales.

Record all required entries related to accounts receivable for the year.

Answer
There are 6 transactions that are recorded related to accounts receivable:
1) credit sales for the current period
2) collections from customers
3) write-offs
4) estimate of bad debt expense
5) estimate of returns and returns
6) account that was paid that was previously written off.

1) Accounts Receivable         875,000
               Sales                                875,000

2) Cash                              582,400
            Accounts Receivable              582,400

(832,000 x 70% did not take the discount)

Cash                                244,608
Sales Discounts                   4,992
            Accounts Receivable          249,600

(832,000 x 30% = 249,600 x 2% = 4,992 discount)

3) Allowance for Uncollectible Accounts         7,000
               Accounts Receivable                                7,000

4) Bad debt expense                                          2,765
              Allowance for uncollectible accounts            2,765

Bad debt expense is recorded to the allowance account. Use the allowance account to determine the amount recorded:

Beginning allowance account (22,000)
+ – Bad debt expense ??
– Write-offs 7,000
+ Write-off reversals    (765)
Ending allowance account (13,000)*

*The amount the company estimates won’t be collected

Bad debt expense must be 2,765 in order for allowance balance to be 13,000

5) Sales Returns                       26,250
          Allowance for Returns            26,250

Allowance for Returns                18,000
              Accounts Receivable          18,000

6) Collection of the account previously written off:

Accounts Receivable                                               765
            Allowance for uncollectible accounts                     765

Cash                                               765
           Accounts receivable                       765

3. The company regularly factors receivables with a finance company. The terms of the factor are a fee of 3% and withholding of 10% (the estimated uncollectible amount) until all receivables are collected. For the first two months of the year the company factored $220,000 and $350,000 respectively. During the first 2 months of the year the finance company collected $180,000 related to the first month sales and $155,000 related to the second month sales.

Record all required journal entries related to the factor of receivables for the company who sold the receivables for the first and second month.

Answer
The factor is done with recourse since cash is withheld until all receivables are collected.

1st Month:

Compute the finance fee:
220,000 x 3% = 6,600

Compute the estimated uncollectible amount:
220,000 x 10% = 22,000

Compute the amount received initially:
220,000 x 90% = 198,000

Compute the amount to be received later from factor:
220,000 x 10% = 22,000

2nd Month:

Compute the finance fee:
350,000 x 3% = 10,500

Compute the estimated uncollectible amount:
350,000 x 10% = 35,000

Compute the amount received initially:
350,000 x 90% = 315,000

Compute the amount to be received later from factor:
350,000 x 10% = 35,000

Journal Entries:

1st Month:

Cash 191,400
Loss on sale of A/R 28,600
Receivable from factor 22,000
           Recourse Liability 22,000
           Accounts Receivable 220,000

198,000-6,600 = 191,400
22,000 + 6,600 = 28,600

 

2nd Month

Cash 304,500
Loss on sale of A/R 45,500
Receivable from factor 35,000
           Recourse Liability 35,000
           Accounts Receivable 350,000

315,000 – 10,500 = 304,500
35,000 + 10,500 = 45,500