Chapter 8, Problem 8.5AP

(a)

To determine

Accounts receivable

Accounts receivable refers to the amounts to be received within a short period from customers upon the sale of goods and services on account. In other words, accounts receivable are amounts customers owe to the business. Accounts receivable is an asset of a business.

Bad debt expense:

Bad debt expense is an expense account. The amounts of loss incurred from extending credit to the customers are recorded as bad debt expense. In other words, the estimated uncollectible accounts receivable are known as bad debt expense.

Aging of receivables:

A method of determining the estimated uncollectible receivables based on the age of individual accounts receivable is known as aging of receivables method.

Allowance method:

It is a method for accounting bad debt expense, where amount of uncollectible accounts receivables are estimated and recorded at the end of particular period. Under this method, bad debts expenses are estimated and recorded prior to the occurrence of actual bad debt, in compliance with matching principle by using the allowance for doubtful account.

Direct write-off method:

This method does not make allowance or estimation for uncollectible accounts, instead this method directly write-off the actual uncollectible accounts by debiting bad debt expense, and by crediting accounts receivable. Under this method, accounts would be written off only when the receivables from a customer remain uncollectible.

To prepare: The adjusting entry for recording the bad debt expenses at December 31, 2017.

Answer to Problem 8.5AP

Prepare the adjusting entry to record the bad debt expenses at December 31, 2017.

Date	Particulars	Debit	Credit
December 31, 2017	Bad debt expense	$8,700
	Allowance for doubtful accounts		$8,700
	(To adjust the bad debt expense)

Table (1)

Working note:

The aging of accounts receivable indicates that $10,200 of accounts receivable would be uncollectible and the unadjusted credit balance in the allowance for doubtful accounts is $1,500.

Calculate the amount of bad debt expense to be recorded in adjusting entry.

$\begin{array}{c}\begin{array}{l}\text{Bad debt expense to be}\\ \text{recorded in adjusting entry}\end{array}\}\text{= }\left[\begin{array}{l}\text{Total uncollectible accounts}\\ \text{receivable}-\text{Unadjusted credit}\\ \text{balance in allowance for doubtful accounts}\end{array}\right]\\ \text{=}\left[\text{\$10,200}-\$1,500\right]\\ =\$8,700\end{array}$

Alternative method to calculate the amount of bad debt expense to be recorded in adjusting entry using T-account of Allowance for doubtful accounts is as follows.

Allowance for doubtful accounts:

Allowance for doubtful accounts
Date	Particulars	Debit	Date	Particulars	Credit
2017			December 31, 2017	Balance (Unadjusted)	$1,500
			December 31, 2017	Bad debts (Adjusting entry) (Balancing figure)	$8,700
	Total	$0		Total	$10,200
				Ending balance	$10,200

Table (2)

Explanation of Solution

Allowance for doubtful accounts (contra asset account) normal balance is a credit balance. It is given that company M’s uncollectible receivables of the year as per aging of accounts receivable is $10,200. Hence, to bring the allowance for doubtful account balance from $1,500 to $10,200, it is required to increase the bad debt expense and allowance for doubtful accounts by $8,700.

Hence, an increase in bad debt expense (decrease in stockholders’ equity account) is debited with $8,700 and an increase in allowance for doubtful accounts (contra asset account) is credited with $8,700.

(b)

To determine

To prepare: The adjusting entry for recording the bad debt expenses at December 31, 2017.

Answer to Problem 8.5AP

Prepare the adjusting entry to record the bad debt expenses at December 31, 2017.

Date	Particulars	Debit	Credit
December 31, 2017	Bad debt expense	$11,700
	Allowance for doubtful accounts		$11,700
	(To adjust the bad debt expense)

Table (3)

Working note:

The aging of accounts receivable indicates that $10,200 of accounts receivable would be uncollectible, and the unadjusted debit balance in the allowance for doubtful accounts is $1,500.

Calculate the amount of bad debt expense to be recorded in adjusting entry.

$\begin{array}{c}\begin{array}{l}\text{Bad debt expense to be}\\ \text{recorded in adjusting entry}\end{array}\}\text{= }\left[\begin{array}{l}\text{Total uncollectible accounts}\\ \text{receivable}+\text{Unadjusted debit}\\ \text{balance in allowance for doubtful accounts}\end{array}\right]\\ \text{=}\left[\text{\$10,200}+\$1,500\right]\\ =\$11700\end{array}$

Alternative method to calculate the amount of bad debt expense to be recorded in adjusting entry using T-account of Allowance for doubtful accounts is as follows.

Allowance for doubtful accounts:

Allowance for doubtful accounts
Date	Particulars	Debit	Date	Particulars	Credit
December 31, 2017	Balance (Unadjusted)	$1,500	December 31, 2017	Bad debts (Adjusting entry) (Balancing figure)	$11,700
	Total	$1,500		Total	$11,700
				Ending balance	$10,200

Table (4)

Explanation of Solution

Allowance for doubtful accounts (contra asset account) normal balance is a credit balance, but Company M’s has $1,500 debit balance in allowance doubtful accounts. It is given that company M’s uncollectible receivables of the year as per aging of accounts receivable is $10,200. Hence, to bring the allowance for doubtful account balance from debit balance of $1,500 to credit balance $10,200, it is required to increase the bad debt expense and allowance for doubtful accounts by $11,700.

Hence, an increase in bad debt expense (decrease in stockholders’ equity account) is debited with $11,700 and an increase in allowance for doubtful accounts (contra asset account) is credited with $11,700.

(c)

To determine

To prepare: The journal entry to write-off $2,100 of accounts receivable as uncollectible.

Answer to Problem 8.5AP

Prepare the journal entry to write-off the uncollectible.

Date	Particulars	Debit	Credit
January 2018	Allowance for doubtful account	$2,100
	Account receivable		$2,100
	(To record write-off of uncollectible account receivable )

Table (5)

Explanation of Solution

To record this write-off of uncollectible receivables, both allowance for doubtful accounts and accounts receivable must be decreased by $2,100. Hence, a decrease in Allowance for doubtful accounts (contra asset account) is debited with $2,100, and a decrease in accounts receivable (asset account) is credited with $2,100.

(d)

To determine

To prepare: The journal entry to write-off $2,100 of accounts receivable as uncollectible, under direct write-off method.

Answer to Problem 8.5AP

Prepare the journal entry to write-off the uncollectibles, under direct write-off method.

Date	Particulars	Debit	Credit
January 2018	Bad debt expense	$2,100
	Account receivable		$2,100
	(To record write-off of uncollectible account receivable )

Table (6)

Explanation of Solution

To record this write-off of uncollectible receivables under direct write-off method, bad debt expense must be increased and accounts receivable must be decreased by $2,100. Hence, an increase in bad debt expense (increases the stockholders’ equity accounts) is debited with $2,100, and a decrease in accounts receivable (asset account) is credited with $2,100.

(e)

To determine

To describe: The advantages of using allowance method rather than direct write-off method in accounting for uncollectible accounts.

Answer to Problem 8.5AP

Major advantages of accounting for uncollectible accounts using allowance method are as follows:

• This method matches expenses (bad debts) with sales revenues in the same year.
• Under this method, net cash realizable value of the accounts receivables is stated in the balance sheet.

Explanation of Solution

Direct write-off method does not make allowance or estimation for uncollectible accounts, instead allowance method make allowance for doubtful accounts.

The bad debts is a loss incurred out of credit sales, hence bad debt expense is a part of credit sales.  According to the matching principle, any expense that is incurred in a year must be recorded in the same year of revenue recognition. Thus, the allowance method recognizes the bad debt expense using an adjusting entry in the year, in which revenues has been recognized for sales.

Since no allowance would be made under direct-write off method, balance sheet would show only the outstanding accounts receivable, but the allowance method shows the cash realizable value of accounts receivable to exhibit the most accurate collectible amount of the receivables.