8/9/2019 Aes4003 Im09 Slide

1/7

9-19

ILLUSTRATION 9-1PERCENTAGE OF SALES METHOD

Balance of Selected Accounts at Year-End(Before Adjustment)

Allowance for

Doubtful Accounts

150

Accounts Receivable

45,600 150,000

Sales

Based on past experience, it is estimated that 2% of net sales will becomeuncollectible. ($150,000 x .02) = $3,000.

ADJUSTING ENTRY TO RECORD BAD DEBTS EXPENSE

Bad Debts ExpenseAllowance for Doubtful Accounts

3,0003,000

Balance of Selected Accounts at Year-End(After Adjustment)

Allowance forDoubtful Accounts

1503,000

3,150

Accounts Receivable

45,600 150,000

Sales

EMPHASIS ON INCOME STATEMENT RELATIONSHIPS

SALES$150,000

BAD DEBTSEXPENSE

$3,000

8/9/2019 Aes4003 Im09 Slide

2/7

9-20

ILLUSTRATION 9-2PERCENTAGE OF RECEIVABLES METHOD

Balance of Selected Accounts at Year-End(Before Adjustment)

Allowance for

Doubtful Accounts

150

Accounts Receivable

45,600 150,000

Sales

AGING SCHEDULE

Customer

R. AlbertG. ConnerS. DavisB. GordonT. HaigOthers

Number of Days Past Due

$ 500600300900800

42,500

$45,600

$ 600

500

27,800

$28,900

$ 300

200

7,500

$8,000

$ 100

5002,500

$3,100

$ 100

400

2,700

$3,200

$ 100

3002,000

$2,400

TotalNot Yet

Due 130 3160 6190 Over 90

EstimatedPercentageUncollectible 2% 4% 10% 20% 40%

Total Esti-mated BadDebts $ 578 $ 320 $ 310 $ 640 $ 960$ 2,808

Note: Required balance in Allowance account per aging scheduleCredit balance in Allowance account

Adjusting entry amount

$2,808150

$2,658

8/9/2019 Aes4003 Im09 Slide

3/7

9-21

ADJUSTING ENTRY TO RECORD BAD DEBTS EXPENSE

ILLUSTRATION 9-2 (Continued)

Balance of Selected Accounts at Year-End(After Adjustment)

Bad Debts ExpenseAllowance for Doubtful Accounts

2,6582,658

Accounts Receivable SalesAllowance for

Doubtful Accounts

45,600 1502,658

2,808

150,000

EMPHASIS ON BALANCE SHEET RELATIONSHIPS

ACCOUNTSRECEIVABLE

$45,600

ALLOWANCE FORDOUBTFUL ACCOUNTS

$2,808

8/9/2019 Aes4003 Im09 Slide

4/7

9-22

Bad Debts ExpenseAllowance for

Doubtful Accounts

3,000

3,000

ILLUSTRATION 9-3PERCENTAGE OF SALES VS.PERCENTAGE OF RECEIVABLES METHODS

Bad Debts ExpenseAllowance for

Doubtful Accounts

2,658

2,658

PERCENTAGE OF

SALES METHOD

PERCENTAGE OF

RECEIVABLES METHOD

Allowance forDoubtful Accounts

1503,0003,150

Allowance forDoubtful Accounts

1502,6582,808

Allowance forDoubtful Accounts

3,0002,850

Allowance forDoubtful Accounts

2,9582,808

150 150

If the Allowance account had a $150 debit balance before adjustments, the adjusting

entry using the percentage of sales method would not change. If the percentage ofreceivables method is used, the adjusting entry would have to take into considerationthe debit balance in the Allowance account by adding the debit balance to therequired Allowance account balance obtained from the aging schedule.

ADJUSTING ENTRY

Amount DeterminedFrom Net Sales

Balance of AmountDetermined

From Aging Schedule

Bad Debts ExpenseAllowance for

Doubtful Accounts

3,000

3,000

Bad Debts ExpenseAllowance for

Doubtful Accounts($150 + $2,808 = $2,958)

2,958

2,958

ADJUSTING ENTRY

8/9/2019 Aes4003 Im09 Slide

5/7

9-23

EXAMPLE: A company sells $800,000 of its receivables to a financecompany that charges a fee of 2%.

1. SALE OF RECEIVABLES TO A FACTOR

784,00016,000

800,000

CashService Charge Expense

Accounts Receivable

EXAMPLE: A customer purchases goods for $500 using a VISA card.The retailer deposits the credit sales receipts in the bankand the bank charges a 3% fee.

2. NATIONAL CREDIT CARD SALES

48515

500

CashService Charge Expense

Sales

ILLUSTRATION 9-4SALE OF RECEIVABLES

8/9/2019 Aes4003 Im09 Slide

6/7

9-24

DAYS

August 11 60 DaysAug. (3111)SeptemberOctober

October 10

DATE OFNOTE

TERMS OF NOTESTATED IN

MATURITYDATE

ILLUSTRATION 9-5MATURITY DATE OF A NOTE

MONTHS

July 1

February 28

September 15

3 Months

4 Months

2 Months

October 1

June 30

November 15

20301060

March 4 90 Days

Mar. (314)AprilMayJune

June 2

2730312

90

May 14 120 DaysMay (3114)June

JulyAugustSeptember

September 111730

313111

120

8/9/2019 Aes4003 Im09 Slide

7/7

9-25

A $20,000 8%, 3-month note is collected at maturity.

1. NOTE IS HONORED

20,40020,000

400

CashNotes ReceivableInterest Revenue

($20,000 .08 3/12) = $400

A $20,000 8%, 3-month note is dishonored at maturity.

1. NOTE IS DISHONORED

20,40020,000

400

Entry if collection is ultimately expected._________________________________

Accounts ReceivableNotes ReceivableInterest Revenue

20,00020,000

Entry if collection is not anticipated._____________________________

Allowance for doubtful accountsNotes Receivable

ILLUSTRATION 9-6DISPOSITION OF NOTE RECEIVABLE