Handout 1 For Chapter 7 - Recognition and Valuation of Accounts Receivables

Chapter 7: The Recognition and Valuation of Accounts Receivables
Topic 1: Cash Discounts (Sales Discounts)
Gross Method
Net Method
Company A sells $10,000 products to client B. The credit term is 2/10, n/30.
Account Receivable 10,000
Sales Revenue
10,000
Sales Revenue
9,800
Payment on $4,000 of sales received within 10 days
Cash
3,920
Cash
3,920
Sales Discount
80
Accounts Receivable 3,920
Payment on $6,000 of sales received after 10 days
Cash
6,000
Cash
6,000
Account Receivable 120
Sales Discount Forfeited
120
Exercise 1: 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. On June 12, the company received
a check for the balance due from Arquette Company. Prepare the journal entries on Bolton
Company books to record the sale assuming Bolton records sales using the gross method.
price of $2,000 with terms of 2/10, n/60, f.o.b. shipping point. On June 12, the company received
a check for the balance due from Arquette Company. Prepare the journal entries on Bolton
Company books to record the sale assuming Bolton records sales using the net method.
price of $2,000 with terms of 2/10, n/60, f.o.b. shipping point. Prepare the journal entries on
Bolton Company books to record the sale assuming Bolton records sales using the net method,
and Arquette did not remit payment until July 29.
Topic 2: Major transitions relating to Accounts Receivables

Credit sales: Company A made a $10,000 credit sale to client B, assuming no cash discount. The
cost of the items associated with this sale is $9,000.
AR
10,000
Sales Revenue 10,000
COGS 9,000
Inventory
9,000
Part of Accounts Receivable collected: Company A collected $5,000 of the Accounts

Receivables.
Cash
5,000
AR
5,000
Estimated uncollectibles:
1) As the end of the accounting cycles comes, Company A estimated that 10% of the credit
sales will not be collected.
10% * 10,000=1,000
Bad debt expense
1,000
Allowance for doubtful account
1,000
2) As the end of the accounting cycles comes, Company A estimated that 5% of the
accounts receivables will not be collected, assuming the balance of allowance for
doubtful accounts is zero.
5%*5,000=250
Bad debt expense
250
250
Write-off: Strong evidence exists showing that $1,000 of the Accounts Receivable is not
collectible.
AR
1,000
1,000
Recovery of uncollectibles: If new evidence shows that the uncollectible amounts get recovered.
AR
Cash
1,000
1,000
Accounts Receivable
1,000
1,000
Topic 3: Accounts Receivable Recording Bad Debts Expense Using the Allowance
Method
In 2013, Mircle Company has credit sales of $1,800,000 and sales returns and allowances of
$400,000. On December 31, 201X, the companys Accounts Receivable has a debit balance of
$670,000 and Allowance for Doubtful Accounts has a credit balance of $5,650.
1. What amount should be recorded for Bad Debts Expense if the company estimates 3% of
3
credit sales will become uncollectible?

2. What amount should be recorded for Bad Debts Expense if the company estimates 7% of
accounts receivable will become uncollectible?
3. If instead the company uses aging of accounts receivable and has the following
information, what amount should be recorded for Bad Debts Expense?
4. Based on #3 what amount should be recorded for Bad Debts Expense if the Allowance
for Doubtful Accounts has a debit balance of $4,310?
Accounts Receivable
December 31, 201X
$460,000
105,000
75,000
30,000
Age of Accounts
Receivable
Not yet due
0-30 days past due
31-90 days past due
>90 days past due
1.
% Net Sales
$1,400,000
Bad Debt Expense
3%
Expected %
Uncollectible
2%
8%
22%
43%
$42,000
$42,000
Allowance for Doubtful Accounts
2.
% Accounts Receivable
$670,000
Bad Debt Expense
7%
$42,000
$46,900
$41,250
3.
Aging the Accounts
$460,000
$105,000
$75,000
$30,000
2%
8%
22%
43%
$41,250
$9,200.00
$8,400.00
$16,500.00
$12,900.00
$47,000.00
Bad Debt Expense
$41,350
4.
Debit balance
Bad Debt Expense
$41,350
$51,310
4
$51,310

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Chapter 7: The Recognition and Valuation of Accounts Receivables

Topic 1: Cash Discounts (Sales Discounts)

Topic 2: Major transitions relating to Accounts Receivables

Part of Accounts Receivable collected: Company A collected $5,000 of the Accounts

credit sales will become uncollectible?

Allowance for Doubtful Accounts

Allowance for Doubtful Accounts

Bad Debt Expense

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