Which allowance method emphasizes asset valuation?
Aging the receivables
Which allowance method offers best matching?
% of gross or net sales - the IS approach
How is the allowance method consistent with accrual accounting?
bad debt expense is recognized in the period in which sales are recognized
Is the direct write-off method consistent with accrual accounting?
No, Direct w/o is not allowed by GAAP b/c bad debt expense is not recognized until determined uncollectible (not necessarily the same period the sale revenue was recognized)
JEs for Allowance: Set-up, W/O, Recovery
Set-Up: DR Bad Debt Exp, CR Allowance;
Write-off: DR Allowance (reduces), CR A/R (reduces);
Recovery: DR Cash, CR Allowance
How does a write-off affect A/R, net income and working capital?
No changes. DR Allowance & CR A/R are included in net accounts receivable, so current assets and working capital remain unchanged
JE(s) for when an account that had been written off is subsequently collected,
the account will first be reinstated with increases to both accounts receivable and the allowance for uncollectible accounts. The collection is then recorded with an increase in cash and a decrease in accounts receivable. The net effect is that cash is increased as is the allowance for uncollectible accounts. There is no effect on net income
When does the allowance account decrease?
when A/R is written off
How is ending A/R calculated?
Accounts Receivable (A/R) Ending Balance = A/R Beginning Balance + Credits Sales – Collections – Accounts written Off
What is factoring?
Factoring is a financial transaction in which a business sells its accounts receivable for cash to a third party (called a factor) at a discount. It is a technique allows business to covert accounts receivable to generate cash more quickly
When the allowance method of recognizing uncollectible accounts is used, how would the collection of an account that was previously written off affect accounts receivable and the allowance for uncollectible accounts?
no effect on A/R; Allowance decreases
Rue Co.'s allowance for uncollectible accounts had a credit balance of $12,000 at December 31, 20X2. During 20X3, Rue wrote-off uncollectible accounts of $48,000. The aging of accounts receivable indicated that a $50,000 allowance for uncollectible accounts was required at December 31, 20X3. What amount of uncollectible accounts expense should Rue report for 20X3?
The allowance before adjustments at the year-end = $12,000 - $48,000 (receivables written-off) = ($36,000) (debit balance). The uncollectible accounts expense = $50,000 - ( - $36,000) = $86,000.
Milton Co. pledged some of its accounts receivable to Good Neighbor Financing Corporation in return for a loan. Explain what this means
“Pledging” accounts receivable means that Milton Co. has used its accounts receivable as collateral to secure a loan, and that Milton still retains control of the receivables.
On April 1, Aloe, Inc. factored $80,000 of its accounts receivable without recourse. The factor retained 10% of the accounts receivable as an allowance for sales returns and charged a 5% commission on the gross amount of the factored receivables. What amount of cash did Aloe receive from the factored receivables?
The sales return allowance for Aloe, Inc is $8,000 ($80,000 X 10%). The loss on factoring for Aloe, Inc is $4,000 ($80,000 X 5%). The journal entry to record this factoring transaction without recourse is:
DR Cash $68,000
DR Loss on factoring 4,000
DR Allowance 8,000
CR A/R 80,000
During the year, Hauser Co. wrote off a customer’s account receivable. Hauser used the allowance method for uncollectable accounts. What impact would the write-off have on net income and total assets?
Neither impacts net income nor total assets. The entry to write off uncollectible accounts receivable (A/R) is:
DR: Allowance XXX
CR: A/R XXX
Tinsel Co.'s balances in allowance for uncollectible accounts were $70,000 at the beginning of the current year and $55,000 at year end. During the year, receivables of $35,000 were written off as uncollectible. What amount should Tinsel report as uncollectible accounts expense at year end?
The uncollectible accounts expense (is the difference between the ending allowance and the allowance before adjustments. The allowance before adjustments = $70,000 - $35,000 (uncollectible accounts receivable written-off) = $35,000. The uncollectible accounts expense = $55,000 - $35,000 = $20,000.
Bee Co. uses the direct write-off method to account for uncollectible accounts receivable. During an accounting period, Bee's cash collections from customers equal sales adjusted for the addition or deduction of the following amounts:
Increase in A/R=Deduction
The balance in Accounts receivable is increased by sales and decreased by collections and accounts written off. An increase in accounts receivable indicates that some of the sales were not collected. If sales are reduced by the increase in accounts receivable the result will be equal to collections and accounts written off. If the accounts written off are deducted, the result will be collections.
Zeta Co. reported sales revenue of $4,600,000 in its income statement for the year ended December 31, 20X1. Additional information is as follows:
- X0 A/R= 1M
- X1 A/R=1.3M
- X0 Allowance (60K)
- X1 Allowance (110K)
Zeta wrote off uncollectible accounts totaling $20,000 during 20X1. Under the cash basis of accounting, Zeta would have reported 20X1 sales of
The beginning balance in accounts receivable of $1,000,000 would have been increased by sales of $4,600,000 and decreased by accounts written off of $20,000. The resulting balance would then be $5,580,000. Since the ending balance was actually $1,300,000, the difference of $4,280,000 must represent collections which would be the amount reported as sales under the cash basis of accounting.
Ward estimates its uncollectible accounts expense to be 2% of credit sales. Ward's credit sales for 20X2 were $1,000,000. During 20X2, Ward wrote off $18,000 of uncollectible accounts. Ward's allowance for uncollectible accounts had a $15,000 balance on January 1, 20X2. In its December 31, 20X2, income statement, what amount should Ward report as uncollectible accounts expense?
Ward uses the income statement approach to calculating bad debts expense. As a result, the expense will be equal to 2% of credit sales of $1,000,000, or $20,000.