Chapter 8 Continued: Reporting and Interpreting Receivables, Bad Debt Expense, and Interest Revenue
October 27, 2008
1. Percentage of Sales (Allowance Method).
a. Company B has $530,000 of A/R as of Dec. 31, 2008. The company estimates, based on previous experience, that uncollectible A/R (bad debt) will be 1.75%. How much is Company B’s bad debt?
$530,000 x .0175= $9275
b. What is the appropriate journal entry for part (a)?
Bad Debt Expense9275
Allowance for D. A. 9275
c. On February 1, 2009, Company B has determined that they will not collect the $500 and need to write it off. What is the appropriate journal entry?
Allowance for D.A. 500
A/R500
d. On May 31, 2009, Company B determines that $650 owed to them will be uncollectible. What is the appropriate journal entry for the write off?
Allowance for D.A.650
A/R650
e. What effect does parts (c) and (d) have on the financial statements for 2009?
No effect. We already “expensed” this during a prior period when we made the sale.
f. What is the balance in the allowance at the end of 2009, assuming no other accounts were written off besides those in part (c) and (d) Beginning Balance is $10,000?
Beg Bal+ Bad Debt Expense- Writeoffs= End Bal
10,000+ 9275- 1150=18,125
2. Aging of Accounts Receivable (Allowance Method).
Age of Accounts / Amount / % Bad Debt0-30 days / $675,000 / 1.5%
30-60 days / $455,000 / 3.5%
60-90 days / $230,000 / 6.9%
>90 days / $65,000 / 10.5%
a. Compute the bad debt for each of the above age ranges.
675,000 x 1.5%=10,125
455,000 x 3.5%=15925
230,000 x 6.9%=15870
65,000 x 10.5%=6825
b. Based on the information in part (a), how much do you want (should be) in the allowance for doubtful accounts?
$48,745
c. Company D has $4, 536 in the allowance for doubtful accounts on Dec. 31, 2008. How much bad debt needs to be expensed in order to bring the allowance up to date? What is the appropriate journal entry?
Beg Bal+ Bad Debt Expense- Writeoffs= End Bal
4536+ x -0= $48,745
x=$44,209
d. Company D determines $1,000 to be uncollectible on March 3, 2009. What is the appropriate journal entry?
Allowance for D.A. 1000
A/R1000
e. Company D determines $2,500 to be uncollectible on July 3, 2009. What is the appropriate journal entry?
Allowance for D.A.2500
A/R2500
f. What is the balance in the allowance on Dec. 31, 2009 assuming no other accounts were written off?
Beg. Bal+ Bad Debt Exp.-Writeoffs=End Bal
48,745+ 0 (haven’t calculated yet)- 3,500=45,245
3. Interest on Notes Receivable.
a. Company J gave a $1,000,000 loan to Company D on July 1, 2008. The interest is 10%. Interest and the principal will be collected on June 30, 2009 (the maturity date). What is the initial journal entry for the loan?
N/R1,000,000
Cash1,000,000
b. On December 31, 2008, how much interest has Company J earned?
1,000,000 x .1 x 6/12= $50,000
c. What is the appropriate journal entry for part (b)?
Interest Receivable50,000
Interest Revenue50,000
d. On June 30, 2009, Company D repays the loan plus the interest incurred. How much cash will Company D pay?
Principal=$1,000,000 and Interest=$100,000
e. What is the journal entry for the repayment of the loan and the interest for Company J?
Cash 1,100,000
Interest Receivable 50,000
Interest Revenue 50,000
N/R 1,000,000