© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater...

© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

Accounting for Bad DebtsAccounting for Bad Debts

Chapter 13

Learning Objective 1Learning Objective 1

Describing how the Bad Debts Expense account and the Allowance for Doubtful Accounts account are used to record bad debts


LO-1

Bad Debts Bad Debts Debts that come from credit

customers who do not pay their bills

Affects a company’s credit policyCannot grant credit to just any

company


LO-1

Bad DebtsBad Debts

On December 1, 2008, Corey Co. sold merchandise on account for $5,000.

On July 1, 2009, Corey Co. determines that the $5,000 will never be collected.


Dec 1Sales of $5,000

recorded

2008 2009

Dec 31End of fiscal year

Jul 1Debt

determinedto be bad

LO-1

Bad DebtsBad Debts

Bad debts expense should be recognized in the accounting period in which the sales were made.



recorded

2008 2009


Jul 1Debt

determinedto be bad

LO-1

Bad DebtsBad Debts

Solution: Estimate how many of the current sales will be uncollectible



recorded

2008 2009


Jul 1Debt

determinedto be bad

Prepare an adjusting entry

LO-1

Allowance for Doubtful Allowance for Doubtful AccountsAccountsIs a contra-asset accountIs subtracted from accounts

receivableAccumulates expected amount of

uncollectibles as of a given date


LO-1

Adjusting Entry for Bad Adjusting Entry for Bad DebtsDebts


General Journal

Date Account Titles and

DescriptionPR Dr. Cr.

Dec 31 Bad Debts Expense XXXX

Allowance for

Doubtful Accounts XXXX

Contra-AssetAccount LO-1

Balance Sheet Balance Sheet PresentationPresentation


Current Assets:Cash $ 10,400Accounts receivable $100,000Less: Allowance for doubtful accounts 6,000 94,000Merchandise inventory 300,000Total current assets $404,400

Corbin CompanyCorbin CompanyPartial Balance SheetPartial Balance SheetDecember 31, 200XDecember 31, 200XGross

AmountEstimated to

beUncollectible

Net Realizable

Value

Total Current Assets LO-1

Net Realizable ValueNet Realizable Value


• The amount of Accounts Receivable that is expected to be collected

• Calculated by subtracting Allowance for Doubtful Accounts from Accounts Receivable

LO-1

Writing off an accountWriting off an account


LO-1

General Journal

Page 8

Date Account Titles and Description

PR Dr. Cr.

Jul 1 Allowance for Doubtful

Accounts 5,000

Accounts Receivable-Discello 5,000


Using the income statement approach and the balance sheet approach to estimate the amount of Bad Debts Expense


LO-2

Estimating the AmountEstimating the Amount


General Journal

Page 8 Date Account Titles and

DescriptionPR Dr. Cr.

Dec 31 Bad Debts Expense XXXX

Allowance for DoubtfulAccounts XXXX

How is this amount

determined? LO-2

Income Statement Income Statement ApproachApproach

Bad Debts Expense = Percentage of net credit sales


Focus is on measuring the expense, which is reported on Income

Statement.

LO-2

Matching requirement- ignores previous balance of

Allowance for Doubtful Accounts when estimating

Bad Debts Expense for current period.

Exercise 13-2Exercise 13-2Compute Net Sales: Sales

$110,000Sales Returns & Allowances (500)Sales Discounts (9,500) Net Sales $100,000


LO-2

Exercise 13-2Exercise 13-2


LO-2



General Journal

Page 8

Date Account Titles and Description

PR Dr. Cr.

Dec 31 Bad Debts Expense 4,000

Allowance for DoubtfulAccounts 4,000

LO-2



Accounts ReceivableBal. 30,000

Allowance forDoubtful Accounts

5,0004,000 Adj.

$9,000 Bal.

Any existing balance in theAny existing balance in theAllowance account is ignored.Allowance account is ignored.

LO-2

Balance Sheet ApproachBalance Sheet ApproachAdjusting entries are based on bringing the

Allowance account to a required amount.Method is based on the Accounts Receivable

amount and the aging process.


LO-2

Balance Sheet ApproachBalance Sheet ApproachNet realizable value - The amount (accounts

receivable – Allowance for doubtful accounts) that is expected to be collected.


Focus is on determining the net realizable value of Accounts Receivable, which is reported on Balance Sheet

LO-2


Preparing an Aging of Accounts Receivable


LO-3

ExampleExample

Mayfair Co. has the following balances in its accounts at the end of 2008




500

LO-3


The following aging schedule is prepared The following aging schedule is prepared for the end of the year. Complete the for the end of the year. Complete the schedule.schedule.

LO-3


ExampleExample



500

Desired balance 2,679

2,179

LO-3


What if the Allowance account had What if the Allowance account had a debit balance of $500 before a debit balance of $500 before adjustment?adjustment?


Allowance forDoubtful Accounts 500

Desired balance 2,679

3,179

LO-3

Learning Objective 4 Learning Objective 4

Writing off an account using the Allowance for Doubtful Accounts method


LO-4

Allowance for Doubtful Allowance for Doubtful AccountsAccountsWhen a company deems an account

uncollectible, it is written off and no longer considers it an asset.

When the journal entry is made, allowance for doubtful accounts and accounts receivable are reduced.

Example: J. Monaco’s account balance of $500 is deemed uncollectible on June 1, 20X8.


LO-4

General Journal

Page 8

Date Account Titles and Description PR Dr. Cr.

20X8

Jun 1 Allowance for Doubtful Accounts 500

Accounts Receivable, J. Monaco 500

Recording Recovered Debts Recording Recovered Debts using Allowance for Doubtful using Allowance for Doubtful Accounts Accounts Example: Assume J. Monaco paid half of

his account balance of $500 on January 3, 20X9.


LO-4

General Journal

Page 8


20X9

Jan 3 Accounts Receivable, J. Monaco 250

Allowance for Doubtful Accounts 250

Restores collectible portion

3 Cash 250

Accounts Receivable, J. Monaco 250

Records payment received

Writing off an account using the Allowance for Doubtful Accounts account


LO-2, 4

Exercise 13-4 (a)Exercise 13-4 (a)


LO-2, 4


Accts. Rec., Angie Ring

Accts. Rec., Mike Catuc


LO-2, 4






LO-5

Using the direct write-off method

Direct Write-Off MethodDirect Write-Off MethodUsed when a company cannot

reasonably estimate bad debt expense

Uncollectible accounts are directly written off to current year’s bad debt expense

The year sale was made does not matter

Allowance for doubtful accounts is not used


LO-5

Direct Write-Off MethodDirect Write-Off MethodExample: T. DeStadio’s account

balance of $400 is deemed to be uncollectible on May 15, 20X7.


LO-5

General Journal

Page 8


20X7

May 15 Bad Debts Expense 400

Accounts Receivable, T DeStadio 400

Wrote off account

Direct Write-Off MethodDirect Write-Off MethodRecording Recovered Debts in same

yearAssume T. DeStadio paid $200 of his balance

July 3, 20X7.Reverse the entry made prior by $200


LO-5

General Journal

Page 8


20X7

July 3 Accounts Receivable, T DeStadio 200

Bad Debts Expense 200

Direct Write-Off MethodDirect Write-Off MethodRecording Recovered Debts in different

year A new account- Bad Debts Recovered is used Assume T. DeStadio paid $200 of his balance on July

3, 20X8.


LO-5

General Journal

Page 8


20X8

July 3 Accounts Receivable, T DeStadio 200

Bad Debts Recovered 200

Restores collectible portion

3 Cash 200

Accounts Receivable, T DeStadio 200

Records payment received


Exercise 13-4 (b)Exercise 13-4 (b)

LO-5

Accts. Rec., Angie Ring



Exercise 13-4 (b)Exercise 13-4 (b)

LO-5




End of Chapter 13

© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater...

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