IAF310 Chapter 7 SS

E7.7 Calculating bad debts, Andy Corp.

Allowance for doubtful accounts (ADA)
Bal 2020.01.01 ($400,000) Given
Uncollectible W/O $500,000 Given
Bad debts (est.) ($576,000) $80,000,000 x 90% s 0.8%, estimated BD
using % of net credit sales
Bal B4 YE adj ($476,000) credit sales
Extra bad debts adjusted at YE ($49,000) -$525,000 minus -$476,000
Bal 2020.12.31 ($525,000) Desired balance given

JE YE adj
Bad debts $49,000
ADA $49,000
This is a typical practise in the real world.
During the year, any uncollectible AR are
written off to the ADA under the allowance
method.

Also, from period to period during the financial

year, bad estimated debts are accrued using a
percentage of net credit sales method.

At year-end, upon careful review and

examination of the AR and AR ageing, the
desirable balance of ADA is derived using a
percentage of net AR method, that may warrants
YE adjustments.
IAF310 Chapter 7 SS
E7.9 Chloe Inc. Calculating bad debts, preparing JEs
Dr. Cr.
Net AR $105,000
Allowance for doubtful accounts $1,950
Sales revenue, all credit sales $684,000
Sales returns and allowance $30,000

a) 1 ### of gross AR

Bad debt expense $6,150

ADA $6,150

2 Bad debt expense $7,758

ADA $7,758

3 Bad debt expense $2,250

ADA $2,250

4 Bad debt expense $3,858

ADA $3,858

b) An unadjusted debit balance in allowance for doubtful accounts at year end is a result, in general, of write-offs du
the total of beginning credit balance in allowance for doubtful accounts, plus the current year bad debt expense a
reviewer of Chloe’s financial statements, we can note that a bad debt expense accrual in the current year is neede
sufficient credit balance in the allowance for doubtful accounts at the end of the year. We would want to ensure th
(net) is valued at net realizable value on the balance sheet.
 An unadjusted debit balance in allowance for doubtful accounts at year end is a result, in general, of write-offs du
the total of beginning credit balance in allowance for doubtful accounts, plus the current year bad debt expense a
reviewer of Chloe’s financial statements, we can note that a bad debt expense accrual in the current year is neede
sufficient credit balance in the allowance for doubtful accounts at the end of the year. We would want to ensure th
(net) is valued at net realizable value on the balance sheet.

c) When an entity assesses lifetime expected credit losses, it should examine at all possible default events over the l
receivable. It would use information available at the reporting date to evaluate a range of possible outcomes (bas
current conditions, and forecasts of future economic conditions) and their probability of occurring.

The allowance method examines the composition of the receivables at the reporting date. A percentage-of-sales
historical bad debt losses only and may not reflect all of the expected credit losses. If a percentage-of-sales appro
accounting period, the allowance method should be applied at the reporting date to further examine the make-up
time. Using the percentage-of-sales approach would only be appropriate if there is also an assessment of the yea
ensure that the Allowance account is appropriate (a mix of procedures). An adjustment may be needed to the acc
debit or credit being made to Bad Debt Expense.

Chloe uses an allowance method and the approach used in #2 and #4 are likely the best, as the aging information
information to assess collectability. Chloe would also want to ensure that information on current and forecasted c
factors like industry and geographic conditions) are also assessed in reviewing the receivables at the reporting da
be more consistent with IFRS 9 where impairment represents "expected credit losses resulting from all possible d
more consistent with an expected loss model).

In some circumstances, there is an agreement in place with a particular customer giving that customer an addition
their account. In this case, the age of the account should not be the primary criteria in assessing whether or not th
collected. Such accounts should be assessed separately and excluded from the aging schedule calculation.

Chloe’s approach to accounting for sales returns differ under IFRS. For sales with a right of return, under IFRS, a
account is credited and Sales Revenue is debited rather than Sales Returns and Allowances.
 ADA
op b4 adj $1,950 Given
bad debt exp ($6,150) Derived
cl ($4,200) $105,000 x 4%

0 - 30 $36,000 1.0% $360

31 - 60 $48,000 5.0% $2,400
61 - 90 $12,200 12.0% $1,464
> 90 $8,800 18.0% $1,584
$105,000 $5,808

ADA
op b4 adj $1,950 Given
bad debt exp ($7,758) Derived
cl ($5,808) Desired balance

ADA
op b4 adj ($1,950) Given
bad debt exp ($2,250) Derived
cl ($4,200) Desired balance - $105,000 x 4%

0 - 30 $36,000 $0 $360
31 - 60 $48,000 $0 $2,400
61 - 90 $12,200 $0 $1,464
> 90 $8,800 $0 $1,584
$105,000 $5,808

ADA
op b4 adj ($1,950) Given
bad debt exp ($3,858) Derived
cl ($5,808) Desired balance

lt, in general, of write-offs during the year exceeding

rent year bad debt expense accrual. As an independent
l in the current year is needed to ensure there is a
. We would want to ensure that accounts receivable
lt, in general, of write-offs during the year exceeding
rent year bad debt expense accrual. As an independent
l in the current year is needed to ensure there is a
. We would want to ensure that accounts receivable

ible default events over the life of the accounts

ge of possible outcomes (based on past events,
y of occurring.

date. A percentage-of-sales approach relies on

f a percentage-of-sales approach is used during the
urther examine the make-up of the receivables at that
lso an assessment of the year-end receivables to
ent may be needed to the account with the offsetting

est, as the aging information should provide more

n on current and forecasted conditions (considering
eceivables at the reporting date. This approach would
s resulting from all possible default events" (that is,

ing that customer an additional grace period in paying

n assessing whether or not the account is likely to be
schedule calculation.

right of return, under IFRS, a Refund Liability

wances.
IAF310 Chapter 7 SS
E7.11 Interesting-bearing and non-interesting bearing notes, Little
a) Option 1 - interesting bearing notes
JE at issuance of interesting bearing notes receivable - 2020.09.30
Notes receivable (NR) $105,000
AR $105,000

JE 2020.12.31
Interest receivable $2,100 $105,000 x 8%/12 x 3, recognize
Interest income $2,100

JE at the end of ther one-year term - 2021.09.30

Cash $113,400 Principal and interest received o
NR $105,000
Interest receivable $2,100
Interest income $6,300 $105,000 x 8%/12 x 9, recognize

b) Option 2 - non-interesting bearing notes

JE at issuance of non-interesting bearing notes receivable - 2020.09.30
NR $105,000
AR $105,000

JE 2020.12.31
NR $2,100
Interest income $2,100 $105,000 x 8%/12 x 3, recognize

JE 2021.09.30
NR $6,300
Interest income $6,300 $105,000 x 8%/12 x 9, recognize

Cash $113,400 To record the collection of NR p

NR $113,400

c) Big Corp.
Statement of income - partial under Option 1
For the period ended December 31, 2020 2021
There is no difference in
Interest income $2,100 $6,300 income earned in 2020 a
options bear interest at 8
Big Corp. bearing” note has the int
amount of the note and i
Statement of income - partial under Option 2 for this. The actual inter
under both options.
 income earned in 2020 a
options bear interest at 8
bearing” note has the int
amount of the note and i
for this. The actual inter
For the period ended December 31, 2020 2021 under both options.

Interest income $2,100 $6,300

d) The liquidity of Big Corp. at December 31, 2020 will

remain unchanged whichever option is selected. Under
option 1, the note balance remains at $105,000 but interest
receivable of $2,100 results in a total of $107,100 under
current assets. Under Option 2, the balance of the note, after
recording the accrual of interest income is also $107,100
under current assets. The cash flows will also be the same
under both options as the amount collected at the maturity
of the note is $113,400.
ring notes, Little Corp.

5,000 x 8%/12 x 3, recognized interest revenue from Oct to Dec

cipal and interest received on 2021.09.30

5,000 x 8%/12 x 9, recognized interest revenue from Jan to Sep

$113,400
$105,000
$8,400

5,000 x 8%/12 x 3, recognized interest revenue from Oct to Dec

5,000 x 8%/12 x 9, recognized interest revenue from Jan to Sep

ecord the collection of NR plus interest

There is no difference in the amount of interest

income earned in 2020 and 2021 because both
options bear interest at 8%. The “non-interest
bearing” note has the interest included in the face
amount of the note and is journalized to account
for this. The actual interest earned is the same
under both options.
income earned in 2020 and 2021 because both
options bear interest at 8%. The “non-interest
bearing” note has the interest included in the face
amount of the note and is journalized to account
for this. The actual interest earned is the same
under both options.
IAF310 Chapter 7 SS
E7.19 Transfer of receivables with recourse, Chessman Corporatio
a) To be recorded as a sale of AR under ASPE, all of the following conditions must be
met:

1. The transferred assets have been isolated from the transferor (put beyond reach
of the transferor and its creditors even in bankruptcy or receivership).

2. The transferee has obtained the right to pledge or to sell either the transferred
assets or beneficial interests in the transferred assets.

3. The transferor does not maintain effective control over the transferred assets
through an agreement to repurchase or redeem them before their maturity.

b) Calculation of net proceeds:

Net cash received $553,500 $600,000 x ( 1 - 2.5% - 5.25%) o
Due from factor $31,500 $600,000 x 5.25%
$585,000
Less Recourse obligation ($6,000) Given
Net proceeds $579,000

Calculation of gain or loss:

AR $600,000
Net proceeds ($579,000)
Loss on sales of receivables $21,000
OR
2.5% finance charge $15,000
Recourse obligation $6,000
Loss on sales of receivables $21,000

JE 2020.08.15
Cash $553,500 $600,000 x ( 1 - 2.5% - 5.25%)
Due from Factor $31,500 $600,000 x 5.25%
Loss on sales of receivables $21,000 $15,000 + $6,000
Recourse obligation $6,000 Given
AR $600,000 Given

c) Factoring the accounts receivable will improve the accounts receivable turnover ratio, if it
were calculated on August 15, 2020, immediately after recording the entry in (b) above.
The balance of accounts receivable used in the denominator will be reduced by the
average of $600,000 and any amounts factored at the other date(s) used in determining the
average accounts receivable, thereby making the ratio higher. If, on the other hand, the
calculation is made well after the factoring transaction, for example, at the fiscal year end,
the balances of sales and average accounts receivable would be unaffected by this
transaction and therefore the accounts receivable turnover ratio would not be affected.
 were calculated on August 15, 2020, immediately after recording the entry in (b) above.
The balance of accounts receivable used in the denominator will be reduced by the
average of $600,000 and any amounts factored at the other date(s) used in determining the
average accounts receivable, thereby making the ratio higher. If, on the other hand, the
calculation is made well after the factoring transaction, for example, at the fiscal year end,
the balances of sales and average accounts receivable would be unaffected by this
transaction and therefore the accounts receivable turnover ratio would not be affected.

d) If the entity prepares financial statements under IFRS, the following conditions are used
to indicate whether treatment as a sale is appropriate. The receivable is considered
transferred (treatment as a sale is appropriate) if:

1. The entity transfers the contractual rights to receive cash flows from the receivable; or

2. Retains the contractual rights to receive cash flows from the receivable, but has a
contractual obligation to pay the cash flows to one or more recipients. In addition, three
conditions must be met:

i) The entity has no obligation to pay amounts to the eventual recipients unless it
collects equivalent amounts from the original receivable.
ii) The entity is prohibited by the terms of the transfer contract from selling or pledging
the original asset other than as security to the eventual recipients for the obligation to pay
them cash flows.
iii) The entity has an obligation to remit any cash flows it collects on behalf of the
eventual recipients without material delay.

In this situation, Cheesman has factored receivables with recourse meaning it is

responsible for payment if the customer does not pay. This would mean that the criteria of
#2 i) above has not been met and the receivable has not been transferred. Therefore, the
receivables would remain on the books of Cheesman and a liability would be recorded for
the amount borrowed.
 sman Corporation
must be

d reach

erred

ssets

0,000 x ( 1 - 2.5% - 5.25%) or $600,000 x 92.25%

0,000 x 5.25%

0,000 x ( 1 - 2.5% - 5.25%)

0,000 x 5.25%
,000 + $6,000

ratio, if it
above.
he
mining the
d, the
year end,
s
cted.
 above.
he
mining the
d, the
year end,
s
cted.

re used
d

vable; or

as a
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riteria of
ore, the
orded for
IAF310 Chapter 7 SS
P7.2
a) Atlantic Inc.
Unadjusted TB at December 31, 2017 Dr Cr
ADA $8,000
Credit sales revenue $1,980,000
Sales returns and allowance $60,000
Sales discount $4,400

Bad debt expense estimated to be 1.5% of net sales ADA

Unadj bal
Credit sales $1,980,000 Bad debt exp
Sales returns and allowance ($60,000) End bal
Sales discount ($4,400)
Net credit sales $1,915,600

At 1.5% of net credit sales, Bad debt expense for 2020 = $28,734 $1,915,600 x 1.5%

b) Central Corps
Amounts estimated to be uncollectible $160,000 Given
AR $1,790,000 Given
ADA ($125,000) Given

AR $1,790,000
Amount estimated to be uncollectible ($160,000)
Net realizable value of AR at 2020.12.31 $1,630,000 Based on AR ending balance

c) Western Co.
Credit sales 2020 $3,200,000
ADA 2020-01-01 ($37,000)
Collection of account W/O in prior years $18,000
Customer accounts W/O as uncollectible in 2020 $36,000
Doubtful accounts for 2020 is based on 4.5% of credit sales

ADA
op bal 2020-01-01 ($37,000) Given
Collection of account W/O in prior years ($18,000) Given
CY W/O as uncollectible $36,000 Given
Bad debt expense ($144,000) $3,200,000 x 4.5%
cl bal 2020-12-31 ($163,000) Using percentage of net credit sales method
d) Pacific Inc.
AR net of ADA $950,000
Customer account W/O as uncollectible during 2020 $24,000
Bad debts expense for 2020 $92,000

AR net of ADA $950,000 100.0% ADA

Add back ADA $68,000 7.2% op bal - 2020-01-01
AR 2020.12.31 $1,018,000 107.2% Bad debts exp
Cust acct W/O in 2020
cl bal 2020-12-31

e) Northern Inc. - 2020.12.31 Dr Cr

Sales revenue - all credit $950,000
Sales discount $21,400
ADA - op balance $34,000
AR - closing balance $610,000

Doubtful accounts are 7% of AR

ADA
Bal before YE adj $34,000
Bad debt expense ($76,700) -$42,700 - $34,000
cl balance 2020.12.31 ($42,700) $610,000 x 7%, balance desired using percentage of AR metho
 ADA
$8,000
($28,734)
($20,734)

915,600 x 1.5%

$18,000

Dr Cr

AR ADA
ADA AR
Bad debt exp ADA
of net credit sales method
ADA
$0 Given, first year of operation
($92,000)
$24,000
($68,000)

sing percentage of AR method

IAF310 Chapter 7 SS
P7.3 Fortini Corporation
AR ADA
op bal 2020-01-01 $475,000 Given op bal - 2020-01-01
Credit sales during 2020 $6,675,000 Given Bad debt based on 0.5%
CY Uncollectibles W/O ($35,500) Given of monthly sales
Recoveries of W/O fr prior yrs $4,000 Given CY W/O
Collections ($6,568,500) Given Recoveries of W/O fr prior yrs
Ra Bal B4 YE adj $550,000 YE W/O per Ageing sch. > 75
YE W/O per Ageing sch. > 75 ($25,000) Bal B4 YE adj
Rc cl bal 2020-12-31 $525,000 Bad debt expense
Desirable balance

AR ageing 0 - 15 days 16 - 30 days 31 - 45 days 46 - 60 days 61 - 75 days

Amount $270,000 $117,000 $80,000 $38,000 $20,000
Exp. % uncollectible 3% 8% 20% 30% 50%
Est. uncollectible $8,100 $9,360 $16,000 $11,400 $10,000

Rb JE 2020.12.31 Alternatively, th
Bad debt expense $44,985 over 75 days ($2
ADA $44,985 collection could
being included i
Rc Fortini Corporation Accounts. There
and the Allowan
Statement of financial position - partial by $25,000.
As at December 31, 2017

Current assets
AR $525,000 100.0%
Less allowance of doubtful accounts ($54,860) -10.4%
AR - net $470,140 89.6%

Rd With everything else remains the same, the bad debt expense adjustment in (Rb) will
decrease the before tax income by $44,985.
ADA
($33,000) Given

($33,375) $6,675,000 x 0.5%

$35,500 Given
($4,000) Given
$25,000
($9,875)
($44,985) Rb
($54,860) From ageing schedule

> 75 days Total

$25,000 $550,000
100%
$54,860 Desired balance of ADA

Alternatively, the accounts which have been outstanding

over 75 days ($25,000) and have zero probability of
collection could be written off immediately rather than
being included in the final Allowance for Doubtful
Accounts. Therefore, the estimated Accounts Receivable
and the Allowance account could also both be reduced
by $25,000.
IAF310 Chapter 7 SS
P7.8 Zhang Ltd.
PV
Payment received 2020-12-31 $36,000 $36,000
a) Annual payment $18,000 $55,844 Excel fx -PV(11%, 4, $18,000),
No. of annual of payment 4 OR Table A-4, n=4, column 11%
Interest 11%
Total PV of the services $91,844

Face value of note $55,844

PV of the note $55,844
$0
b) JE - 2020-12-31
Cash $36,000
Note receivable (NR) $55,844 PV of (4 x $18,000)
Service revenue $91,844

JE - 2021-12-31
Cash $18,000
NR $11,857
Interest income $6,143 $55,844 x 11%

JE - 2022-12-31
Cash $18,000
NR $13,161
Interest income $4,839 $43,987 x 11%

JE - 2023-12-31
Cash $18,000
NR $14,609
Interest income $3,391 $30,826 x 11%

JE - 2024-12-31
Cash $18,000
NR $16,216
Interest income $1,784 $16,216 x 11%

c) From the perspective of Zhang, an installment note reduces the risk of

non-collection when compared to a non-interest-bearing note. For a non-
interest-bearing note, the full amount is due at the maturity of the note. An
installment note provides a regular reduction of the principal balance
in every payment received annually. This is demonstrated in the schedule
of note receivable amortization. In addition, receiving cash earlier enables
From the perspective of Zhang, an installment note reduces the risk of
non-collection when compared to a non-interest-bearing note. For a non-
interest-bearing note, the full amount is due at the maturity of the note. An
installment note provides a regular reduction of the principal balance
in every payment received annually. This is demonstrated in the schedule
of note receivable amortization. In addition, receiving cash earlier enables
it to be used for other purposes.
el fx -PV(11%, 4, $18,000), Value of the NR
Table A-4, n=4, column 11%, 3.10245 x $18,000

Date Payment Interest Disct Amort CV

$55,844 $72,000 - $16,156
12/31/2020 $18,000 $6,143 $11,857 $43,987 11.0%
12/31/2021 $18,000 $4,839 $13,161 $30,826 11.0%
12/31/2022 $18,000 $3,391 $14,609 $16,216 11.0%
12/31/2023 $18,000 $1,784 $16,216 $0

$72,000 $16,156 $55,844

$6,143 $55,844 x 11%

$4,839 $43,987 x 11%
$3,391 $30,826 x 11%
$1,784 $16,216 x 11%
 Notes receivables
op $0
2017.12.31 $55,844
2017.12.31 $0
2017.12.31 $55,844
2018.12.31 ($11,857)
$43,987
2019.12.31 ($13,161)
$30,826
2019.12.31 ($14,609)
$16,216
2020.12.31 ($16,216)
2020.12.31 $0