Accounting For Allowance For Doubtful Accounts: Problem 5-3 Jocose Company

ACCOUNTING FOR ALLOWANCE FOR DOUBTFUL ACCOUNTS Problem 5-3 Jocose Company Trans 1:

Trans 2:

Trans 3:

Cash Accounts receivable Sales

800,000 7,200,000 684,000 36,000

Trans 5: Trans 6:

720,000 x 5% sales discount Custom ers w/ discount = 7.2M credit sales x 10%

5,940,000 5,940,000

Sales discount Allowance for sales discount

10,000

Sales return Accounts receivable

80,000

Allowance for doubtful accts Accounts receivable

60,000

Accounts receivable Allowance for doubtful accts

10,000

Cash

10,000

10,000

This account is used bec the discount is still expected.

80,000 To record the writeoff.

60,000 To reestablish the account.

10,000 To record the collection.

Accounts receivable Trans 7:

Gross sales = 800,000 ÷ 10% = 8,000,000 720,000 x 95% (net of discount)

720,000

Accounts receivable Trans 4:

This represents 90% of gross sales (8M x 90%).

8,000,000

Cash Sales discount Accounts receivable Cash

This represents 10% of gross sales.

10,000

Analysis of the Allowance for Doubtful Accounts Allowance for Doubtful Accounts 100,000 beg trans6 60,000 10,000 trans6 50,000 bef. adj. ? DAE ? end

To get the required ending balance, the % of AR is used. The rate is not given so com pute it using the beginning balances. Rate = beginning ADA ÷ beginning AR balance = 100,000 ÷ 2,000,000 = 5%

beg trans1

trans6

Accounts Receivable 2,000,000 7,200,000 720,000 trans2 5,940,000 trans3 10,000 9,210,000

end

80,000 trans5 60,000 trans6 10,000 trans6 6,810,000

Accounts receivable, ending Loss percentage Required allowance (ending ADA)

2,400,000 5% 120,000

Required allowance (ending ADA) Less: ADA before adjustment (T-account) Adjustment (increase in allowance)

120,000 50,000 70,000

Doubtful accounts expense Allowance for doubtful accounts

70,000

2,400,000

Accounts receivable, ending Less: Allowance for doubtful accounts Less: Allowance for sales discount Accounts receivable @ NRV

70,000 2,400,000 120,000 10,000 2,270,000

Problem 5-4 Relentless Company Trans 1:

Cash Accounts receivable Sales

470,000 2,600,000

Cash

1,000,000

Cash (discount is already deducted) Sales discount Accounts receivable Allowance for doubtful accts Accounts receivable

1,455,000 45,000

This represents 3% of the receivable (1.5M x 3%). 1,455,000 collections ÷ 97% = 1,500,000

20,000 20,000

Refer to entry no. 1

Trans 6:

Sales return and allowances Accounts receivable

55,000

Sales return and allowances Cash

10,000

Accounts receivable Allowance for doubtful accts

5,000

Cash

5,000 Accounts receivable

To record collections from custom ers w/ no disc. This represents 97% of the receivable.

1,500,000

Trans 5:

Trans 8:

2,455,000 (1,455,000) 1,000,000

1,000,000 Accounts receivable

Trans 7:

Total sales 3,070,000 less 470,000 cash sales.

3,070,000

Trans 2&3: Analysis of transactions 2 and 3 Total cash received from credit customers Cash received from customers w/ discount Cash received from customers w/o discount

Trans 4:

Refer to transaction no. 5.

Since the return is from credit custom ers,

55,000

AR account is credited.

10,000

Since the return is from cash custom ers, refunds are granted, so cash is credited.

5,000

To reestablish the account.

5,000

To record the collection.

Analysis of the Allowance for Doubtful Accounts & Doubtful Accounts Expense Allowance for Doubtful Accounts 25,000 beg trans4 20,000 5,000 trans8 10,000 bef. adj. 50,000 DAE 60,000 end

beg

Accounts Receivable 600,000

trans1

2,600,000

trans8 end

5,000 3,205,000 625,000

2,500,000 20,000 55,000 5,000

trans2 trans4 trans6 trans8

Since the percentage of sales m ethod is used, the net credit sales is m ultiplied to the loss rate (2%). The resulting figure is the DAE, not the ADA.

Credit sales Less: sales discounts

2,600,000 trans 1 45,000 trans 2

Less: sales returns to credit customers Net credit sales Loss percentage Doubtful accounts expense

55,000 trans 6 2,500,000 2% 50,000

ADA before adjustment Doubtful accounts expense ADA, ending balance

10,000 50,000 60,000

Doubtful accounts expense

50,000

2,580,000 Allowance for doubtful accounts Accounts receivable, ending Less: Allowance for doubtful accounts Accounts receivable @ NRV

50,000 625,000 60,000 565,000

Problem 5-8 Paramount Company Requirement 1: Compute the ADA balance before adjustment

Allowance for Doubtful Accounts 500,000 beg note1 300,000 400,000 DAE 20M x 2% note3 100,000 50,000 note2 550,000 bef. adj. ? adj. ? end required allowance

1: Accounts written off Allowance for doubtful accts

300,000

Accounts receivable 2: Recoveries of accounts written off Accounts receivable 50,000 Allowance for doubtful accts Cash 50,000 Accounts receivable 3: Additional accounts written off Allowance for doubtful accts 100,000 Accounts receivable

Requirement 2: Compute the required ADA balance at year-end Classification Nov to Dec Jul to Oct Jan to June Prior Jan 1, 2020

Amount 5,000,000 2,000,000 1,000,000 400,000*

Total

8,500,000

Loss Rate 5% 10% 25% 75%

Allowance 250,000 200,000 250,000 300,000 1,000,000

*The additional account written off am ounting to 100,000 is already deducted.

Requirement 3: Required allowance (ending ADA) Less: ADA before adjustment (refer to T-account) Adjustment: Increase in ADA and DAE Doubtful accounts expense Allowance for doubtful accounts

1,000,000 550,000 450,000

450,000 450,000

300,000

50,000 50,000

100,000

Problem 5-12 Delta Company

Problem 5-18 Easy Company

Requirement 1: Allowance for sales discount

Analysis of given data:

Analysis of data given: All sales are credit sales, thus, total AR = total Sales. 2% discount is given to accounts paid w/n 15 days. Accounts collectible in 0-15 days Multiply: Sales discount rate Available discount Less: Discounts taken (40k x 50%) Allowance for sales discount

2,000,000 2% 40,000 20,000 20,000 A

Year 2017 2018 2019

Amount 2,000,000 1,400,000 400,000 200,000 4,000,000

Loss 0% 5% 10% 50%

Allowance 70,000 40,000 100,000 210,000 B

Requirement 3: Net realizable value of AR Accounts receivable, gross 4,000,000 Less: Allowance for sales discount 20,000 Less: Allowance for doubtful accts 210,000 Accounts receivable @ NRV 3,770,000

Writeoffs Recoveries 260,000 22,000 295,000 37,000 300,000 36,000 855,000 95,000

The method to be used is the % of credit sales. DAE = Credit sales x Loss Rate Rate is based on the experience of 3 prior years.

Requirement 2: Allowance for doubtful accounts Classification 0 - 15 days 16 - 30 days 31 - 60 days Over 60 days Total

Credit sales 11,100,000 12,250,000 14,650,000 38,000,000

Rate =

855,000 - 95,000 38,000,000

= 2%

Requirement 1: Doubtful Accounts Expense DAE = 15,000,000 x 2% = 300,000 B Requirement 2: Allowance for Doubtful Accounts ADA, 01/01/2020 80,000 DAE for 2020 300,000 Writeoffs for 2020 Recoveries for 2020 ADA, 13/31/2020

(310,000) 40,000 110,000 A

C

Requirement 3: Net realizable value of AR Accounts receivable, 01/01/20 2,070,000 Problem 5-17 Comprehensive Company Same accounting procedure with Problem 5-8 1. ADA balance before adjustment 1,150,000 2. Required ending ADA 1,650,000 3. Doubtful accounts expense 900,000 4. Adjustment to ADA (increase) 500,000 5. Net realizable value of AR 8,250,000

B A C D B

Credit sales during the year Collections during the year Accounts written off, 2020 Recovered accounts, 2020 Collections of recoveries, 2020 Accounts receivable, 12/31/20 Less: ADA, 12/31/20 Accounts receivable @ NRV

15,000,000 (14,000,000) (310,000) 40,000 (40,000) 2,760,000 110,000 2,650,000 A

Problem 5-19 Flappable Company

Problem 5-20 Sky Company

Requirement 1: Allowance for doubtful accounts

Post all the given information in their T-accounts.

Classification 30 days or less 31 - 60 days 61 - 180 days 181 - 1 year Total

Amount 3,000,000 1,500,000 1,200,000 1,200,000 6,900,000

Loss 5% 20% 25% 50%

Allowance 150,000 300,000 300,000 600,000 1,350,000

Allowance for Doubtful Accounts 15,000 2019 writeoff 35,000 30,000 DAE 10,000 2020 A

A: This amount is squeezed from all given data.

Requirement 2: Doubtful Accounts Expense

Accounts Receivable

Compute for the ADA 01/01/2020 balance DAE in prior years = 5% of credit sales Credit sales (2017 to 2019) 23,500,000 Multiply: Loss rate 5% Doubtful accounts expense 1,175,000 Writeoffs (2017 to 2019) (200,000) Recoveries (2017 to 2019) 75,000 ADA, 12/31/2019 1,050,000

2019 sales 2020

880,000

C: This amount is squeezed from all given data.

1,050,000

2020 Writeoffs (200k + 100k add'l) 2020 Recoveries DAE for 2020 (squeezed) ADA, 12/31/2020 (see aging table)

(300,000) 100,000 500,000 A 1,350,000

Requirement 3: Net Realizable Value of AR 6,900,000 1,350,000 5,550,000

35,000 writeoff 15,000 actual return 6,020,000 collection

ADA, 01/01/2020

Accounts receivable, 01/01/2020 Less: ADA, 12/31/2020 Accounts receivable @ NRV

800,000 6,150,000

C

Allowance for Sales Returns 25,000 2019 actual 15,000 10,000 estimated 20,000 2020 A: This amount is squeezed from all given data. Requirement 4: Net Sales for 2020 Gross sales, 2020 Estimated sales return

6,150,000 (10,000)

Net sales, 2020

6,140,000 B

Problem 5-21 1 C This method favors the income statement because there is proper matching of revenue and expenses. 2 A This method emphasizes asset valuation because it presents AR at net realizable value. 3 A Percentage of receivable method allows AR to be presented at net realizable value.The 4 B When using the percentage of sales method, the resulting figure is the DAE and not the ADA. 5 C Only the cash and allowance account are affected when recovering accounts arlready written off. 6 D The resulting figure is the required ending balance of the allowance account. 7 A ADA is measured directly as a result of the aging table while DAE is just a result of the adjustment in ADA. 8 A Allowance method measures the doubtful accounts expense based on experience and estimates. 9 D Choices A to C are methods used to estimate doubtful accounts. 10 B DAE is the resulting figure so there is proper matching of sales and bad debt expense.