Accounts Receivable
Practice as You Learn
Practice as You Learn
Every homework and test problem you are asked to do will involve 4 transactions.
You must understand how the transactions change the accounts before this subject will make sense to you. Everything will revolve around these 4 things:
1) The sale on credit, which creates the accounts receivable
Accounts Receivable XX
Sales XX
2) The collection of the accounts receivable when a customer pays
Cash XX
Accounts Receivable XX
3) The estimate of bad debt expense – you don’t know exactly how much won’t be collected from customers, but you know you won’t collect it all from past history.
Bad Debt Expense XX
Allowance for uncollectible accounts XX
(when using % of A/R, the debit and credit may be the opposite accounts)
The amount is calculated using % of sales method or % of A/R (aging) method
% of Sales Method:
Sales
X % of sales uncollectible (given)
= Bad debt expense
% of A/R (aging) Method:
Accounts Receivable
X % of A/R uncollectible (given)
= Ending balance of allowance account
4) The write off of an accounts receivable – done only when you know who won’t pay you and exactly how much won’t be collected.
Allowance for uncollectible accounts XX
Accounts Receivable XX
Often the problem will give you ending and beginning balances for the accounts receivable account or the allowance account and ask you to determine other amounts.
When this occurs, use the T accounts and write in all you know to determine what the other amounts have to be to get what the problem is asking for. The beginning amount is always last years ending amount.
A company reported the following accounts receivable as of the end of this year:
| Amount | Est. Uncollectible | |
| Under 30 days | $3,500,000 | 1% |
| 31 to 60 days | 1,200,000 | 3% |
| More than 60 days | 400,000 | 6% |
The company had sales of $35,000,000 for the year, and estimates uncollectible accounts to be approximately 0.25% of sales. The company began the year with $4,200,000 in accounts receivable and collected $34,089,000 of accounts receivable. The beginning balance in the allowance for uncollectible accounts is a normal balance of $32,000.
A. Record the sales for the current year.
B. Record the collections for the current year
C. In March, the company was notified that a receivable in the amount of $11,000 from a customer was not going to be collected. Record this transaction.
D. Record the estimated bad debt expense using the % of sales method for the year.
E. Assuming D. did not occur, record the estimated bad debt expense using the % of A/R (aging) method
F. Assuming D did occur, record the estimated bad debt expense using the % of A/R (aging) method to get a more accurate estimate of total uncollectible accounts.
Answer
A. Record the sales for the current year.
Accounts Receivable $35,000,000
Sales $35,000,000
B. Record the collections for the current year
Cash $34,089,000
Accounts Receivable $34,089,000
C. In March, the company was notified that a receivable in the amount of $11,000 from a customer was not going to be collected. Record this transaction.
Allowance for uncollectible accounts $11,000
Accounts Receivable $11,000
D. Record the estimated bad debt expense using the % of sales method
Bad Debt Expense $87,500
Allowance for Uncollectible Accounts $87,500
Sales $35,000,000
x % uncollectible .0025
= Bad debt expense $87,500
For % of sales, you record the calculated amount – you are calculating the bad debt expense.
E. Assuming D. did not occur, record the estimated bad debt expense using the % of A/R (aging) method
Bad Debt Expense $74,000
Allowance for Uncollectible Accounts $74,000
| Under 30 days | $3,500,000 | x | .01 | = | $35,000 |
| 31 to 60 days | 1,200,000 | x | .03 | = | $36,000 |
| More than 60 days | 400,000 | x | .06 | = | $24,000 |
| Total uncollectible amount | $95,000 |
Ending balance in the allowance account must be $95,000.
The amount that must be recorded to show the $95,000 ending balance as calculated is an additional $74,000.
F. Assuming D did occur, record the estimated bad debt expense using the % of A/R (aging) method
Allowance for Uncollectible Accounts $13,500
Bad Debt Expense $13,500
| Under 30 days | $3,500,000 | x | .01 | = | $35,000 |
| 31 to 60 days | 1,200,000 | x | .03 | = | $36,000 |
| More than 60 days | 400,000 | x | .06 | = | $24,000 |
| Total uncollectible amount | $95,000 |
Ending balance in the allowance account must be $95,000
The amount that must be recorded to show $95,000 ending balance is $13,500 reduction to the account. You have overestimated in the past and to take some back.
A company reported the following on their December 31st financial statements:
| Current Year | Prior Year | |
| Accounts Receivable | $150,000 | $165,000 |
| Allowance for Uncollectible Accts. | ($16,000) | ($14,000) |
| Net Accounts Receivable | $134,000 | $151,000 |
Sales for the current year were $1,800,000 and sales for the prior year were $1,900,000. During the current year $2,000 was written off. During the prior year $1,500 was written off.
A. Determine the amount of bad debt expense that was recorded for the current year.
B. Determine the amount of cash collections for the current year.
Answer
To work this problem, you must know what changes the accounts. Use T accounts for accounts receivable and allowance for uncollectible accounts and put in the information you are given and then solve for bad debt expense and cash collections.
A. The bad debt expense affects only two accounts; the allowance for uncollectible accounts and the bad debt expense account. The current year expense will be the only entry in the bad debt expense account, so use the allowance for uncollectible accounts to solve for it.
The bad debt expense has to be $4,000 to make the allowance account ending balance $13,000.
B. Cash collections affect the accounts receivable account. Write in what you know and solve for cash collections:
Collections has to be $1,813,000 to get the ending balance of accounts receivable of $165,000.
Always do separate T accounts for accounts receivable and allowance for doubtful accounts. Do not net them when recording journal entries.
The accounts are only netted when reported on the balance sheet.
The company sold $250,000 of accounts receivable and incurred a finance fee of 1%.
The company estimated that 2% will be uncollectible. Record the required entries for the company who factored the accounts receivable under both
A. without recourse
B. with recourse
Answer
Compute the finance fee: 250,000 x 1% = 2,500
Compute the estimated uncollectible amount: 250,000 x 2% = 5,000
A. Without recourse:
| Cash 247,500 Loss (fee) 2,500 Accounts Receivable 250,000 |
B. With recourse:
| Cash 247,500 Loss on sale of A/R 7,500 ** Recourse Liability 5,000 Accounts Receivable 250,000 |
** The loss is equal to the fee plus the estimated uncollectible amount.