ACC-112 (Chapter - 9)

Revision Notes

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 ACC-112 (Chapter - 9) Revision Notes

Accounting for Bad Debts

Allowance Method allowance method requires an estimate to be made for bad

debts. The estimate for the allowance of bad debts could be made by any of the
following methods:

a) Percent of total sales in this case allowance of bad debts is calculated as a

percentage of total sales (cash sales + credit sales)
b) Percent of credit sales in this case allowance of bad debts is calculated as
a percent of credit sales only.
c) Percent of receivables outstanding in this case allowance for bad debts is
calculated as a percent of outstanding receivables as at the end of the
accounting period.
d) Ageing of receivable method each receivable is classified according to the
time period it is past due and then a percent is applied to the each category
of receivable. Generally the receivable that is past due for maximum number
of days is given a higher percentage of bad debts allowance.

In case of methods (c) and (d) above, the adjustment for allowance for
doubtful debts is calculated as follows:

Estimated balance as per method (c) or (d) minus unadjusted balance lying in
account

Accounting entries for the bad debt expense are as follows:

Date Account Title and Explanation Debit Credit

Recording bad debt expense
Dec 31 Bad Debts Expenses $1,000
Allowance for Doubtful Accounts $1,000
To record estimate bad debts

Bad debts expense is reported in income statement as selling expense or

administrative expense.

Allowance for Doubtful Accounts is a contra asset account. It is reduced from the
Accounts Receivable on the assets side of the balance sheet.

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Date Account Title and Explanation Debit Credit

Writing off the bad debt expense
Dec 31 Allowance for Doubtful Accounts $200
Accounts Receivable $200
To write off an uncollectible amount

Date Account Title and Explanation Debit Credit

Recovering a bad debt
Dec 31 Accounts Receivable $200
Allowance for Doubtful Accounts $200
To reinstate account previously written off

Dec 31 Cash $200

Accounts Receivable $200
To record full payment of account

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Practice Questions
1. If the credit balance of the Allowance for Doubtful Accounts account exceeds the amount of a bad debt
being written off, the entry to record the write-off against the allowance account results in:
A. An increase in the expenses of the current period.
B. A reduction in current assets.
C. A reduction in equity.
D. No effect on the expenses of the current period.
E. A reduction in current liabilities.

2. On October 29 of the current year, a company concluded that a customer's $4,400 account receivable
was uncollectible and that the account should be written off. What effect will this write-off have on this
company's net income and total assets assuming the allowance method is used to account for bad debts?
A. Decrease in net income; no effect on total assets.
B. No effect on net income; no effect on total assets.
C. Decrease in net income; decrease in total assets.
D. Increase in net income; no effect on total assets.
E. No effect on net income; decrease in total assets.

3. Newton Company uses the allowance method of accounting for uncollectible accounts. On May 3, the
Newton Company wrote off the $3,000 uncollectible account of its customer, P. Best. On July 10, Newton
received a check for the full amount of $3,000 from Best. On July 10, the entry or entries Newton makes to
record the recovery of the bad debt is:

A. Option A
B. Option B
C. Option C
D. Option D

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4. The allowance method based on the idea that a given percent of a company's credit sales for the period
are uncollectible is:
A. The percent of sales method.
B. The percent of accounts receivable method.
C. The aging of accounts receivable method.
D. Direct write-off method.
E. Factoring method.

5. A method of estimating bad debts expense that involves a detailed examination of outstanding accounts
and their length of time past due is the:
A. Direct write-off method.
B. Aging of accounts receivable method.
C. Percentage of sales method.
D. Aging of investments method.
E. Percent of accounts receivable method.

6. An accounting procedure that (1) estimates and reports bad debts expense from credit sales during the
period the sales are recorded, and (2) reports accounts receivable at the estimated amount of cash to be
collected is the:
A. Allowance method of accounting for bad debts.
B. Aging of notes receivable.
C. Adjustment method for uncollectible debts.
D. Direct write-off method of accounting for bad debts.
E. Cash basis method of accounting for bad debts.

7. On December 31 of the current year, a company's unadjusted trial balance included the following:
Accounts Receivable, debit balance of $97,250; Allowance for Doubtful Accounts, credit balance of $951.
What amount should be debited to Bad Debts Expense, assuming 6% of outstanding accounts receivable at
the end of the current year will be uncollectible?
A. $951.
B. $3,992.
C. $4,884.
D. $5,835.
E. $6,786.

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8. A company ages its accounts receivables to determine its end of period adjustment for bad debts. At the
end of the current year, management estimated that $15,750 of the accounts receivable balance would be
uncollectible. Prior to any year-end adjustments, the Allowance for Doubtful Accounts had a debit balance
of $175. What adjusting entry should the company make at the end of the current year to record its
estimated bad debts expense?

A. Option A
B. Option B
C. Option C
D. Option D

9. A company uses the percent of sales method to determine its bad debts expense. At the end of the
current year, the company's unadjusted trial balance reported the following selected amounts:

All sales are made on credit. Based on past experience, the company estimates 0.6% of credit sales to be
uncollectible. What amount should be debited to Bad Debts Expense when the year-end adjusting entry is
prepared?
A. $1,275
B. $1,775
C. $4,500
D. $4,800
E. $5,500

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10. A company uses the percent of sales method to determine its bad debts expense. At the end of the
current year, the company's unadjusted trial balance reported the following selected amounts:

All sales are made on credit. Based on past experience, the company estimates 0.6% of credit sales to be
uncollectible. What adjusting entry should the company make at the end of the current year to record its
estimated bad debts expense?
A. Debit Bad Debts Expense $2,130; credit Allowance for Doubtful Accounts $2,130.
B. Debit Bad Debts Expense $2,630; credit Allowance for Doubtful Accounts $2,630.
C. Debit Bad Debts Expense $4,300; credit Allowance for Doubtful Accounts $4,300.
D. Debit Bad Debts Expense $4,800; credit Allowance for Doubtful Accounts $4,800.
E. Debit Bad Debts Expense $5,300; credit Allowance for Doubtful Accounts $5,300.

11. A company has $90,000 in outstanding accounts receivable and it uses the allowance method to
account for uncollectible accounts. Experience suggests that 6% of outstanding receivables are
uncollectible. The current debit balance (before adjustments) in the allowance for doubtful accounts is
$800. The journal entry to record the adjustment to the allowance account includes a debit to Bad Debts
Expense for:
A. $4,600
B. $5,400
C. $6,200
D. $6,800
E. None of these

12. The Allowance for Doubtful Accounts:

A. Is a contra asset account.
B. Is used instead of reducing accounts receivable directly.
C. Is debited when uncollectible accounts are written off.
D. All of these.
E. Is credited when bad debts expense is estimated and recorded.

13. Darby uses the allowance method to account for uncollectible accounts. Its year-end unadjusted trial
balance shows Accounts Receivable of $104,500, allowance for doubtful accounts of $665 (credit) and sales
of $925,000. If uncollectible accounts are estimated to be 4% of accounts receivable, what is the amount of
the bad debts expense adjusting entry?
A. $4,845
B. $4,180
C. $3,515
D. $3,700
E. $3,850

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14. Darby uses the allowance method to account for uncollectible accounts. Its year-end unadjusted trial
balance shows Accounts Receivable of $104,500, allowance for doubtful accounts of $665 (credit) and sales
of $925,000. If uncollectible accounts are estimated to be .5% of sales, what is the amount of the bad debts
expense adjusting entry?
A. $4,625
B. $3,960
C. $5,290
D. $4,750
E. $4,825

15. A company uses the percent of receivables method to determine its bad debts expense. At the end of
the current year, the company's unadjusted trial balance reported the following selected amounts:

All sales are made on credit. Based on past experience, the company estimates 3.5% of credit sales to be
uncollectible. What adjusting entry should the company make at the end of the current year to record its
estimated bad debts expense?
A. Debit Bad Debts Expense $13,975; credit Allowance for Doubtful Accounts $13,975.
B. Debit Bad Debts Expense $15,225; credit Allowance for Doubtful Accounts $15,225.
C. Debit Bad Debts Expense $16,475; credit Allowance for Doubtful Accounts $16,475.
D. Debit Bad Debts Expense $7,350; credit Allowance for Doubtful Accounts $7,350.
E. Debit Bad Debts Expense $17,350; credit Allowance for Doubtful Accounts $17,350.

16. A company used the percent of sales method to determine its bad debts expense. At the end of the
current year, the company's unadjusted trial balance reported the following selected amounts:

All sales are made on credit. Based on past experience, the company estimates 1% of credit sales to be
uncollectible. What adjusting entry should the company make at the end of the current year to record its
estimated bad debts expense?
A. Debit Bad Debts Expense $19,750; credit Allowance for Doubtful Accounts $19,750.
B. Debit Bad Debts Expense $15,225; credit Allowance for Doubtful Accounts $15,225.
C. Debit Bad Debts Expense $22,250; credit Allowance for Doubtful Accounts $22,250.
D. Debit Bad Debts Expense $7,350; credit Allowance for Doubtful Accounts $7,350.
E. Debit Bad Debts Expense $21,000; credit Allowance for Doubtful Accounts $21,000.

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17. On September 1, a customer's account balance of $2,300 was deemed to be uncollectible. What entry
should be recorded on September 1 to record the write-off assuming the company uses the allowance
method?
A. Debit Bad Debts Expense $2,300; credit Accounts Receivable $2,300.
B. Debit Allowance for Doubtful Accounts $2,300; credit Bad Debts Expense $2,300.
C. Debit Allowance for Doubtful Accounts $2,300; credit Accounts Receivable $2,300.
D. Debit Bad Debts Expense $2,300; credit Allowance for Doubtful Accounts $2,300.
E. Debit Accounts Receivable $250; credit Allowance for Doubtful Accounts $2,300.

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Solution Key

1. D
2. B
3. A
4. A
5. B
6. A
7. C
8. C
9. D
10. D
11. C
12. A
13. C
14. A
15. C
16. E
17. C

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18. The Connecting Company uses the percent of sales method of accounting for uncollectible accounts
receivable. During the current year, the following transactions occurred:

1. Prepare the general journal entries to record these transactions.

2. If the balance of the allowance for uncollectible accounts was $8,000 on January 1 of the current
year, determine the balance of the allowance for uncollectible accounts at December 31 of the
current year. Assume that the transactions above are the only transactions affecting the allowance
for uncollectible accounts during the year.

Answer

1.
2. Calculation: $8,000 - $8,100 - $2,500 + $6,000 + $9,500 = $12,900

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19. Timmons Company had a January 1, balance in its Allowance for Doubtful Accounts of $7,000 for the
current year. The following transactions and events affected the Allowance for Doubtful Accounts during
the current year:

What amount should appear in the allowance for doubtful accounts in the December 31, balance sheet for
the current year?

Answer

$7,000 - $5,700 + $2,300 + $7,500 = $11,100.

20. At December 31 of the current year, a company reported the following:

Total sales for the current year: $780,000 includes $160,000 in cash sales
Accounts receivable balance at Dec. 31, end of current year: $190,000
Allowance for Doubtful Accounts balance at January 1, beginning of current year: $8,300
Bad debts written off during the current year: $6,800.
Prepare the necessary adjusting entries to record bad debts expense assuming this company's bad debts
are estimated to equal:
(a) 1.5% of credit sales.
(b) 5% of accounts receivable.

Answer

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21. A company has the following unadjusted account balances at December 31, of the current year;
Accounts Receivable of $185,700 and Allowance for Doubtful Accounts of $1,600 (credit balance). The
company uses the aging of accounts receivable to estimate its bad debts. The following aging schedule
reflects its accounts receivable at the current year-end:

1. Calculate the amount of the Allowance for Doubtful Accounts that should appear on the December 31, of
the current year, balance sheet.
2. Prepare the adjusting journal entry to record bad debts expense for the current year.

Answer

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22. A company had the following items and amounts in its unadjusted trial balance as of December 31 of
the current year:

Prepare the adjusting entry to estimate bad debts under each of the following separate situations.
1. Bad debts are estimated to be 2.5% of credit sales.
2. An aging analysis estimates that 8% of the outstanding accounts receivable will be uncollectible.

Answer

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23. A company uses the aging of accounts receivable method to estimate its bad debts expense. On
December 31 of the current year an aging analysis of accounts receivable revealed the following:

Required:
a. Calculate the amount of the Allowance for Doubtful Accounts that should be reported on the current
year-end balance sheet.
b. Calculate the amount of the Bad Debts Expense that should be reported on the current year's income
statement, assuming that the balance of the Allowance for Doubtful Accounts on January 1 of the current
year was $44,000 and that accounts receivable written off during the current year totaled $49,200.
c. Prepare the adjusting entry to record bad debts expense on December 31 of the current year.
d. Show how Accounts Receivable will appear on the current year-end balance sheet as of December 31.

Answer

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