13

Accounting for Bad Debts

ANSWERS TO DISCUSSION QUESTIONS 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. The matching principle estimates the bad expense in the same period the sale is made, although the actual bad debt may not occur till future periods. The Allowance for Doubtful Accounts accumulates estimated accounts receivable that will not be collectible. Accounts Receivable Allowance for Doubtful Accounts = Net Realizable Value False. In the allowance method, Bad Debts Expense would not be debited. It has the opposite balance of accounts receivable. False. It is an adjusting entry, not a closing entry. Reject. The income statement approach is based on net sales on the income statement. Balance sheet approach. A company would age its accounts receivable to identify uncollected amounts to individual customers by number of days that they are past due. Allowance for Doubtful Accounts Accounts ReceivableXXX Accounts ReceivableXXX Allowance for Doubtful Accounts Cash Accounts ReceivableXXX Both the Allowance account and Accounts Receivable are decreasing. The direct write-off method recognizes a Bad Debts Expense when a customer is deemed uncollectible. This method doesnt fulfill the matching principle. Bad Debts Recovered is an other revenue account that is used when a bad debt is reinstated in the direct write-off method that is not in the same year as the sale.

11. 12. 13.

501

SOLUTIONS TO CHAPTER 13 MINI EXERCISES 1. A. Bad Debts Expense Expense Allowance for Doubtful Accounts Contra Asset B. Bad Debts ExpenseIncome Statement Allowance for Doubtful AccountsBalance Sheet C. Bad Debts ExpenseTemporary Account Allowance for Doubtful AccountsPermanent Account 2. A. B. C. D. Bad Debts Expense Allowance for Doubtful Accounts Income Statement Approach Balance Sheet Approach 600 600 300 300 Debit Credit

3. A. Bad Debts Expense Allowance for Doubtful Accounts Estimate of Bad Debts B. Bad Debts Expense Allowance for Doubtful Accounts Estimate of Bad Debts 4. #1 Allowance for Doubtful Accounts Accts. Receivable, Bill Allen Wrote off Allen Acct. #2 Accounts Receivable, Bill Allen Allowance for Doubtful Accounts Reinstate Allen Acct. Cash Accounts Receivable, Bill Allen Collected from Allen 5. #1 Bad Debts Expense Accounts Receivable, Bill Allen Wrote off Allen Acct. #2 Accounts Receivable, Bill Allen Bad Debts Recovered Restore Allen Acct. Cash Accounts Receivable, Bill Allen Collected from Allen

50 50 50 50 50 50

50 50 50 50 50 50

502

SOLUTIONS TO EXERCISES 13-1.

BOB.COM PARTIAL BALANCE SHEET DECEMBER 31, 200X

Current Assets: Cash Petty Cash Accounts Receivable Less: Allowance for Doubtful Accounts Merchandise Inventory Total Current Assets

$110 0 0 0 00 7 0 00 $70 0 0 0 00 14 0 0 0 00 56 0 0 0 00 19 0 0 0 00 $185 0 7 0 00

13-2. Dec. 31 Bad Debts Expense Allowance for Doubtful Accounts Estimate for Bad Debts 13-3. Dec. 31 Bad Debts Expense Allowance for Doubtful Accounts Estimate for Bad Debts 3 0 0 0 00 3 0 0 0 00 4 0 0 0 00 4 0 0 0 00

503

EXERCISES (CONTINUED) 13-4. (A) 20X5 Dec. 31 Bad Debts Expense Allowance for Doubtful Accounts Estimate of Bad Debts 20X6 Apr. 3 Allowance for Doubtful Accounts Accounts ReceivableAngie Ring Wrote off Customer Account Jun. 4 Allowance for Doubtful Accounts Accounts ReceivableMike Catuc Wrote off Customer Account 20X7 Aug. 5 Accounts ReceivableMike Catuc Allowance for Doubtful Accounts Reinstate Customer 5 Cash Accounts ReceivableMike Catuc Collected from Customer 12 0 0 0 00 12 0 0 0 00 4 0 0 0 00 4 0 0 0 00 3 0 0 0 00 3 0 0 0 00 5 0 0 00 5 0 0 00 5 0 0 00 5 0 0 00

(B) 20X6 Jun. 4 Bad Debts Expense Accounts ReceivableMike Catuc Wrote off Customer Account 20X7 Aug. 5 Accounts ReceivableMike Catuc Bad Debts Recovered Reinstate Customer 5 Cash Accounts ReceivableMike Catuc Collected from Customer 13-5. (A) Dec. 31 Bad Debts Expense Allowance for Doubtful Accounts Estimate for Bad Debts (.015 $200,000) (B) Dec. 31 Bad Debts Expense Allowance for Doubtful Accounts Estimate for Bad Debts
504

0 0 0 00 3 0 0 0 00 5 0 0 00 5 0 0 00 5 0 0 00 5 0 0 00

0 0 0 00 3 0 0 0 00

2 0 0 00 3 2 0 0 00

SOLUTIONS TO A PROBLEMS PROBLEM 13A-1

ANGEL.COM GENERAL JOURNAL PAGE 3

Date 20X7 Dec. 31

Account Titles and Description Bad Debts Expense Allowance for Doubtful Accounts Adjustment for Bad Debts

PR

Dr. 12 0 0 0 00

Cr.

12 0 0 0 00

20X8 Jan.

Allowance for Doubtful Accounts Accounts ReceivableGene Smore To Write off Customer Account Allowance for Doubtful Accounts Accounts ReceivablePaul Jane To Write off Customer Account Accounts ReceivablePaul Jane Allowance for Doubtful Accounts To restore collectible portion Cash Accounts ReceivablePaul Jane Collected from customer Allowance for Doubtful Accounts Accounts ReceivableBob Seager To write off Customer Account Allowance for Doubtful Accounts Accounts ReceivableJill Neuman To Write off Customer Account Accounts ReceivableBob Seager Allowance for Doubtful Accounts To restore collectible portion Cash Accounts ReceivableBob Seager Collected from customer

8 0 0 00 8 0 0 00

Mar.

6 0 0 00 6 0 0 00

Jul.

3 0 0 00 3 0 0 00

3 0 0 00 3 0 0 00

Aug. 19

1 3 0 0 00 1 3 0 0 00

24

7 5 0 00 7 5 0 00

Nov. 19

4 0 0 00 4 0 0 00

19

4 0 0 00 4 0 0 00

505

PROBLEM 13A-2
ALVIE CO. GENERAL JOURNAL PAGE 1

Date Dec. 31

Account Titles and Description PR Bad Debts Expense Allowance for Doubtful Accounts Adjustment for Bad Debts ($5,350 = $1,300 + $450 + $1,600 + $2,000; $5,350 $300 = $5,050)

Dr. 5 0 5 0 00

Cr. 5 0 5 0 00

31

Bad Debts Expense Allowance for Doubtful Accounts Adjustment for Bad Debts ($5,350 + $300)

5 6 5 0 00 5 6 5 0 00

ALVIE CO. PARTIAL BALANCE SHEET DECEMBER 31, 200X B

Current Assets Cash Accounts Receivable Less Allowance for Doubtful Accounts Merchandise Inventory Total Current Assets

$30 0 0 0 00 $152 0 0 0 00 5 3 5 0 00 146 6 5 0 00 12 0 0 0 00 $188 6 5 0 00

506

PROBLEM 13A-3
T.J. RACK GENERAL JOURNAL PAGE 4

Date 20X8 Mar. 13

Account Titles and Description Bad Debts Expense Accounts ReceivableS. Rose To Write off Account Bad Debts Expense Accounts ReceivableP. Soy To Write off Account Accounts ReceivableP. Soy Bad Debts Recovered To record recovered portion Cash Accounts ReceivableP. Soy To record customer payment Bad Debts Expense Accounts ReceivableJ. Miller To Write off Account Bad Debts Expense Accounts ReceivableD. Lovejoy To Write off Account

PR

Dr. 1 8 0 0 00

Cr. 1 8 0 0 00

Apr. 14

7 5 0 00 7 5 0 00

20X9 Nov.

7 5 0 00 7 5 0 00

7 5 0 00 7 5 0 00

Dec.

2 8 5 00 2 8 5 00

Dec. 12

3 7 5 00 3 7 5 00

507

PROBLEM 13A-4
SIMON COMPANY GENERAL JOURNAL PAGE 2

Date 20X8 Jan. 9

Account Titles and Description Accounts ReceivableRays Supply Sales Sold to Customer on Account Allowance for Doubtful Accounts Accounts ReceivablePete Runnels Wrote off Customer Account Accounts ReceivableRoland Co. Allowance for Doubtful Accounts To record collected portion Cash Accounts ReceivableRoland Co. To record collected portion Cash Allowance for Doubtful Accounts Accounts ReceivableLane Drug Write off Customer Account Accounts ReceivableMels Garage Allowance for Doubtful Accounts To record collected portion Cash Accounts ReceivableMels Garage To record collected portion

PR

Dr. 1 5 0 0 00

Cr. 1 5 0 0 00

15

114

6 0 0 00 6 0 0 00

Mar. 17

4 0 0 00 114 4 0 0 00

17

4 0 0 00 4 0 0 00

Apr.

114

4 0 0 00 3 6 0 0 00 4 0 0 0 00

Jun. 15

1 2 0 0 00 114 1 2 0 0 00

15

1 2 0 0 00 1 2 0 0 00

Oct. 18

Allowance for Doubtful Accounts 114 Accounts ReceivableJanes Diner Accounts ReceivableKeen Auto Accounts ReceivableRalphs Hardware Write off Customer Accounts Accounts ReceivableJ.B. Rug Sales Sold to Customer on Account

1 2 0 0 00 2 0 0 00 4 0 0 00 6 0 0 00

Nov. 12

1 9 0 0 00 1 9 0 0 00

508

PROBLEM 13A-4 (CONTINUED)

SIMON COMPANY GENERAL JOURNAL (CONTINUED) PAGE 2

Date Dec. 31

Account Titles and Description Bad Debts Expense Allowance for Doubtful Accounts Adjust for Bad Debts Income Summary Bad Debts Expense Close Bad Debts Expense

PR 612 114

Dr. 6 7 0 0 00

Cr. 6 7 0 0 00

31

312 612

6 7 0 0 00 6 7 0 0 00

ALLOWANCE FOR DOUBTFUL ACCOUNTS

ACCOUNT NO. 114

Balance Date Explanation Jan. 1 Balance 15 Mar. 17 Apr. 9 Jun. 15 Oct. 18 Dec. 31 Adjusting Post Debit Ref. GJ2 6 0 0 00 GJ2 GJ2 3 6 0 0 00 GJ2 GJ2 1 2 0 0 00 GJ2 Credit Debit Credit 4 1 0 0 00 3 5 0 0 00 3 9 0 0 00 3 0 0 00 1 5 0 0 00 3 0 0 00 7 0 0 0 00

4 0 0 00 1 2 0 0 00 6 7 0 0 00

INCOME SUMMARY

ACCOUNT NO. 312

Balance Date Explanation Dec. 31 Adjusting 31 Closing Post Debit Ref. GJ2 6 7 0 0 00 Credit Debit 6 7 0 0 00 Credit -0-

6 1 0 0 00

BAD DEBTS EXPENSE

ACCOUNT

NO. 612

Balance Date Explanation Dec. 31 Closing Post Debit Ref. GJ2 6 7 0 0 00 Credit Debit 6 7 0 0 00 Credit

509

PROBLEM 13A-4 (CONCLUDED)

SIMON COMPANY PARTIAL BALANCE SHEET DECEMBER 31, 20X8

Current Assets Cash Accounts Receivable Less: Allowances for Doubtful Accounts Merchandise Inventory Office Supplies Prepaid Rent Total Current Assets

$13 0 0 0 00 $160 0 0 0 00 7 0 0 0 00 153 103 2 1 $272 0 0 1 2 3 0 0 1 5 6 0 0 0 0 0 00 00 00 00 00

510

SOLUTIONS TO B PROBLEMS PROBLEM 13B-1

ANGEL.COM GENERAL JOURNAL PAGE 3

Date 20X7 Dec. 31

Account Titles and Description Bad Debts Expense for Doubtful Accounts Adjusting Entry

PR

Dr. 14 8 0 0 00

Cr. 14 8 0 0 00

20X8 Jan.

Allowance for Doubtful Accounts Accounts ReceivableWoody Tree Write off Customer Account Allowance for Doubtful Accounts Accounts ReceivableJim Lantz Write off Customer Account Accounts ReceivableJim Lantz Allowance for Doubtful Accounts Restore Customer Account Cash Accounts ReceivableJim Lantz Collected from customer Allowance for Doubtful Accounts Accounts ReceivableMabel Hest Write off Customer Account Allowance for Doubtful Accounts Accounts ReceivableJim OReilly Write off Customer Account Accounts ReceivableMabel Hest Allowance for Doubtful Accounts Restore Customer Account Cash Accounts ReceivableMabel Hest Collected from Customer
511

1 2 0 0 00 1 2 0 0 00

Mar.

6 0 0 00 6 0 0 00

Jul.

6 0 0 00 6 0 0 00

6 0 0 00 6 0 0 00

Aug. 19

7 5 0 00 7 5 0 00

24

9 5 0 00 9 5 0 00

Nov. 19

5 0 0 00 5 0 0 00

19

5 0 0 00 5 0 0 00

PROBLEM 13B-2
ALVIE CO. GENERAL JOURNAL PAGE 1

Date Dec. 31

Account Titles and Description Bad Debts Expense Allowance for Doubtful Accounts Adjustment for Bad Debts ($7,000 = $3,000 + $600 + $1,800 + $1,600; $7,000 $400 = $6,600)

PR

Dr. 6 6 0 0 00

Cr. 6 6 0 0 00

31

Bad Debts Expense Allowance for Doubtful Accounts Adjustment for Bad Debts ($7,000 + $400)

7 4 0 0 00 7 4 0 0 00

ALVIE CO. PARTIAL BALANCE SHEET DECEMBER 31, 20X8 B

Current Assets Cash Accounts Receivable Less Allowance for Doubtful Accounts Merchandise Inventory Total Current Assets

$42 0 0 0 00 $173 0 0 0 00 7 0 0 0 00 166 0 0 0 00 12 0 0 0 00 $220 0 0 0 00

512

PROBLEM 13B-3
T.J. RACK GENERAL JOURNAL PAGE 4

Date 20X8 Mar. 13

Account Titles and Description Bad Debts Expense Accounts ReceivableJill Diamond Write off Customer Account Bad Debts Expense Accounts ReceivableBuffy Hall Write off Customer Account Accounts ReceivableBuffy Hall Bad Debts Recovered Record recovered portion Cash Accounts ReceivableBuff Hall Record customer payment Bad Debts Expense Accounts ReceivableJoe Francis Write off Customer Account Bad Debts Expense Accounts ReceivableJoe Martin Write off Customer Account

PR

Dr. 1 9 5 0 00

Cr. 1 9 5 0 00

Apr. 14

9 0 0 00 9 0 0 00

20X9 Nov.

9 0 0 00 9 0 0 00

9 0 0 00 9 0 0 00

Dec.

8 8 0 00 8 8 0 00

Dec. 12

4 1 0 00 4 1 0 00

513

PROBLEM 13B-4
SIMON COMPANY GENERAL JOURNAL PAGE 2

Date 20X8 Jan. 9

Account Titles and Description Accounts ReceivableLowes Supply Sales Sold to Customer on Account Allowance for Doubtful Accounts Accounts ReceivableKevin Reese Wrote off Customer Account Accounts ReceivableJ. James Allowance for Doubtful Accounts To restore collected portion Cash Accounts ReceivableJ. James To record collected portion Cash Allowance for Doubtful Accounts Accounts ReceivableLong Drug Write off Customer Account Accounts ReceivableMorses Garage Allowance for Doubtful Accounts To restore collected portion Cash Accounts ReceivableMorses Garage To record collected portion

PR

Dr. 1 9 0 0 00

Cr. 1 9 0 0 00

15

114

7 0 0 00 7 0 0 00

Mar. 17

3 0 0 00 114 3 0 0 00

17

3 0 0 00 3 0 0 00

Apr.

114

1 0 0 0 00 4 0 0 0 00 5 0 0 0 00

Jun. 15

3 1 0 0 00 114 3 1 0 0 00

15

3 1 0 0 00 3 1 0 0 00

Oct. 18

Allowance for Doubtful Accounts 114 Accounts ReceivableSals Diner Accounts ReceivableRing Auto Accounts ReceivableNeels Hardware Write off Customer Accounts Accounts ReceivableAble Roy Sales Sold to Customer on Account

2 9 0 0 00 8 0 0 00 1 3 0 0 00 8 0 0 00

Nov. 12

1 9 5 0 00 1 9 5 0 00

514

PROBLEM 13B-4 (CONTINUED)

SIMON COMPANY GENERAL JOURNAL (CONTINUED) PAGE 2

Date Dec. 31

Account Titles and Description Bad Debts Expense Allowance for Doubtful Accounts Adjust for Bad Debts Income Summary Bad Debts Expense Close Bad Debts Expense
ALLOWANCE FOR DOUBTFUL ACCOUNTS

PR 612 114

Dr. 8 9 0 0 00

Cr. 8 9 0 0 00

31

312 612

8 9 0 0 00 8 9 0 0 00

NO. 114

Balance Date Explanation 20X8 Jan. 1 Balance 15 Mar. 17 Apr. 9 June 15 Oct. 18 Dec. 31 Adjusting Post Debit Ref. GJ2 7 0 0 00 GJ2 GJ2 4 0 0 0 00 GJ2 GJ2 2 9 0 0 00 GJ2 Credit Debit Credit 3 3 0 0 00 2 6 0 0 00 2 9 0 0 00 2 0 0 0 00 9 0 0 00 8 9 0 0 00 8 0 0 0 00
ACCOUNT NO. 312

3 0 0 00 1 1 0 0 00 3 1 0 0 00

INCOME SUMMARY

Balance Date Explanation Dec. 31 Closing Post Debit Ref. GJ2 8 9 0 0 00 Credit Debit 8 9 0 0 00 Credit

BAD DEBTS EXPENSE

ACCOUNT

NO. 612

Balance Date Explanation Dec. 31 Adjusting 31 Closing Post Debit Ref. GJ2 8 9 0 0 00 GJ2 Credit Debit 8 9 0 0 00 Credit 0

8 9 0 0 00

515

PROBLEM 13B-4 (CONCLUDED)

SIMON COMPANY PARTIAL BALANCE SHEET DECEMBER 31, 20X8

Current Assets Cash Accounts Receivable Less: Allowances for Doubtful Accounts Merchandise Inventory Office Supplies Prepaid Rent Total Current Assets

$24 0 0 0 00 $170 0 0 0 00 8 0 0 0 00 162 94 3 1 $284 0 0 0 2 2 0 0 0 0 0 0 0 0 0 0 00 00 00 00 00

516

SOLUTION TO REAL WORLD APPLICATION #1

COMPANY BILL CO. DOE CO. DOE CO. FRANCIS CO. FRANCIS CO. JOE CO. JONES CO. ROGER CO. RON CO. TODAYS DATE 31-Dec-X7 31-Dec-X7 31-Dec-X7 31-Dec-X7 31-Dec-X7 31-Dec-X7 31-Dec-X7 31-Dec-X7 31-Dec-X7 TOTAL BALANCE $ 125 2,100 600 1,200 1,500 1,400 700 $7,625 NOT YET DUE INVOICE DATE 05-Oct-X7 01-Nov-X7 18-Dec-X7 08-July-X7 15-Jul-X7 05-Sep-X7 12-May-X7 15-Dec-X7 18-Aug-X7 DUE DATE 04-Nov-X7 01-Dec-X7 17-Jan-X8 07-Aug-X7 14-Aug-X7 05-Oct-X7 11-Jun-X7 14-Jan-X8 17-Sep-X7 DAYS PAST DUE 3160 6190 125 1,200 900 600 1,200 1,500 1,400 2,600 $2,600 900 125 1,200 2,800 900 125 0.01 0.03 0.08 0.12 0.30 1,200 = = = = = 700 2,800 $ 26 DAYS OVERDUE 57 30 Not yet due 146 139 87 203 Not yet due 105

CUSTOMER BILL CO. DOE CO. FRANCIS CO. JOE CO. JONES CO. ROGER CO. RON CO.

130

OVER 90

NOT YET DUE DAYS PAST DUE 130 3160 6190 OVER 90

27 10 144 840 $1,021 350 $671

SOLUTION TO REAL WORLD APPLICATION #2 Although Mr. Flynns friend was correct that the direct write-off method doesnt fulfill the matching principle, this method is required for tax purposes under the 1986 law. Unless bad debt expense is a proportionately large item for the company, there is no need to calculate and show the figures under the bad debts reserve method to make a separate set of figures on financial statements to meet the matching principle. SOLUTION TO REAL WORLD APPLICATION #3 Pete could avoid bad debt by use of credit cards. It is common practice to pass on the cost of credit cards to customers. The issue of the allowance method should have minimal influence in his decision.

517

SOLUTION TO CONTINUING PROBLEM

PAGE 2

Date Apr. 1

Account Titles and Description Bad Debt Expense Accounts ReceivableAccu. Pac

PR

Dr. 9 0 0 00

Cr.

9 0 0 00

518