Before Class starts….(make sure your name is on all submissions)
Exams have been returned to your mail folders.
Third Homework due 2/27 before class.
Help Session 2/23 1:30-3pm in GBS130.
What questions do you have for me?
– TA Office Hours 6-7 T&R in GBS401 & Accounting
Lab Hours on http://bus.emory.edu/scrosso
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one.
First Exam 102 points: High 102; Low 44;
Median 85; Average 83; Standard deviation 11
Allowance for Doubtful Accts. (T-account)
Allowance for Doubtful Accts.
Beginning
Balance
Recover write-off
Write-off of
accounts
receivable
Accounts Receivable
Recover write
off
Ending Bal.
AJE estimates
bad debt expense
AJE estimates bad debt
expense
Ending
Balance
Beginning Bal.
Credit sales
Bad Debts Expense
Customer pays
AR Write-off
The AJE to record the estimate of
uncollectibles. Aging calculates the
expense amount necessary to
achieve the “desired ending
balance” in the allowance account.
OR % of Sales is the Expense and
then compute EB in Allowance
account.
BE6-1 Analysis of AR:
The following information was taken from the 2009 Annual report of Emerson
Electric Co. Balance Sheet (in millions):
Receivables were in 2009 $3,623 and in 2008 $4,618; less
allowance for uncollectibles of $93 and $90, respectively.
a.
Compute total AR as of the end of 2009 and 2008, and compute the bad
debt allowance as a % of total AR. Did the % increase or decrease?
b.
The bad debt expense reported on Emerson’s 2009 income statement did
not equal $93. Explain why.
Estimating Bad Debt Expenses
• Percent of Sales Method
• Percent of Accounts Receivable Method
• Aging of Accounts Receivable Method
Note on estimating bad debts using the allowance method:
Regardless of which method is used to estimate bad debts
(% of sales, % of accounts receivable, or aging of
accounts), in the final analysis the balance in the allowance
account on the balance sheet should represent a fair
expectation of the amount that will not be collected of the
outstanding accounts receivable. Hence, the net accounts
receivable balance on the balance sheet should represent
the expected “net realizable value” of the receivables.
Accounting for Bad Debts
Specific
Write-off or
Allowance
Method?
Allowance Method:
Estimate Bad Debts Expense each year
and reduce Accounts Receivable using
a contra account. Move the reduction from
the contra to the Accounts Receivable
account when a specific account
is known to be uncollectible
% of Sales Method
Recognize Bad Debts Expense for the
amount of bad debts expected to result
from the current year’s sales, using a
percent of sales
Which
method is used
to estimate bad
debts expense?
Aging of Accounts Receivable Method
Same as the % of Accounts Receivable Method
except it uses different percentages for accounts
based on their age -- higher % for older accounts.
Journal Entries for Allowance Method on next slide
Specific Write-off Method:
Recognize Bad Debts Expense
when individual accounts are
determined to be uncollectible
Entry:
Bad Debts Exp.
Accounts Rec.
xx
xx
% of Accounts Receivable Method
Recognize Bad Debts Expense for the
amount that will cause the contra
account balance to equal the % of yearend accounts receivable not expected to
be collected.
Bad Debts/Doubtful Accounts/Uncollectible Accounts
• Note that we do not know in this year which A/Rs
will not be collected in future. Therefore, we must
estimate uncollectibles.
• We will focus on the % of Sales or Aging of AR to
estimate uncollectibles for the AJE. The
percentage of sales method is simpler, but the
Aging of A/R method is more accurate.
• Under IFRS, the methods used to estimate and
account for uncollectible are very similar to those
under US GAAP.
Percentage of Sales Method
• Usually based on credit sales, but may use
total sales or net sales as basis.
• Calculation:
Sales x % = Bad Debt Expense
(focus on the debit side of the AJE)
• Called the Income Statement approach,
because: revenues x % = expense.
• After making entry find the resulting ending
balance in the Allowance account.
E6-5 Bad debts under the allowance method.
Arlington Cycle Company began operations on 1/1/11.
The company reported the following on its 2011
financials:
Gross sales in 2012 $1,400,000 and $1,500,000 in
2011.
AR in 2012 $600,000 and $650,000 in 2011.
Actual bad debt write-offs in 2012 $22,000 and
$10,000 in 2011.
Arlington estimates bad debts at 2% of gross sales.
Analyze the activity in the allowance for doubtful
accounts T-account, and comment on whether the bad
debt estimate has been sufficient to cover the
writeoffs.
Gross sales in 2012 $1,400,000 and $1,500,000 in 2011.
AR in 2012 $600,000 and $650,000 in 2011.
Actual bad debt write-offs in 2012 $22,000 and $10,000 in 2011.
Arlington estimates bad debts at 2% of gross sales.
Aging Method: Percentages of A/R
• Based on ending A/R and ending Allowance account.
• Calculation:
Ending A/R x % = Ending Allowance
(focus on the credit side of the AJE)
• Called Balance Sheet approach, because: ending
asset x % = ending contra asset.
• Requires the analysis of the Allowance account and
A/R before preparing the AJE.
• An aging schedule of A/R is the most accurate way to
estimate uncollectibles (see Figure 6-11).
Year-end Entries: Bad Debts
•
During 2010, Omega Company had net sales of $11,400,000. Most of the sales were on credit. At the
end of 2010, the balance of Accounts Receivable was $1,400,000, and Allowance for Uncollectible
Accounts had a debit balance of $48,000.
• Omega Company's management uses two methods of estimating uncollectible accounts expense:
the percentage of net sales method and the accounts receivable aging method. The percentage of
uncollectible sales is 1.5 percent of net sales, and based on an aging of accounts receivable, the endof-year uncollectible accounts total $140,000.
1. Prepare the end-of-year adjusting entry to record the uncollectible accounts expense under each
method.
2. What will the balance of Allowance for Uncollectible Accounts be after each adjustment?
Write-off of Accounts Receivable
Colby Company, which uses the allowance method, has Accounts Receivable
of $65,000 and an allowance for uncollectible accounts of $6,400 (credit). The
company sold merchandise to Irma Hegerman for $7,200 and later received
$2,400 from Hegerman. The rest of the amount due from Hegerman had to
be written off as uncollectible. Using T accounts, show the beginning balances
and the effects of the Hegerman transactions on Accounts Receivable and
Allowance for Uncollectible Accounts.
What is the amount of net accounts receivable before and after the write-off?
Aging of AR
Emory Company uses the accounts receivable aging method to estimate uncollectible accounts. At the
beginning of the year, the balance of the Accounts Receivable account was a debit of $90,430, and the balance
of Allowance for Uncollectible Accounts as a credit of $8,100. During the year, the company had sales on account
of $475,000, sales returns and allowances of $6,200, worthless accounts written off of $8,800, and collections
from customers of $452,730. At the end of year (December 31, 2012), a junior accountant for Emory Company
was preparing an aging analysis of accounts receivable.
At the top of page 5 of the report, the following totals appeared:
Customer
Account
Total
Balance Forward $89,640
Not Yet Due
1–30 Days Past
Due
31–60 Days Past
Due
61–90 Days Past
Due
Over 90 Days Past
Due
$49,030
$24,110
$9,210
$3,990
$3,300
To finish the analysis, the following accounts need to be classified:
From past experience, the company has found that the following rates are realistic for estimating uncollectible accounts:
Time
Percentage Considered Uncollectible
Not yet due
2
1–30 days past due
5
31–60 days past due
15
61–90 days past due
25
Over 90 days past due
50
Required
Complete the aging analysis of accounts receivable.
Compute the end-of-year balances (before adjustments) of Accounts Receivable and
Allowance for Uncollectible Accounts.
Prepare an analysis computing the estimated uncollectible accounts.
Calculate Garcia Company's estimated uncollectible accounts expense for the year (round
the amount to the nearest whole dollar).
What role do estimates play in applying the aging analysis? What factors might affect these
estimates?
Liquidity Ratios
• Working Capital =CA-CL
• Current Ratio = CA/CL
• Quick Ratio or Acid Test Ratio =
(CA-Inv & Prepaids)/CL
How are these ratios affected by the journal entries you will
learn this chapter?
Sale on Account:
Cash Collection:
AR Writeoff:
AR Recovery:
Bad Debt AJE: