Chapter 8, Problem 8.2AP

(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.

Allowance method:

It is a method for accounting bad debt expense, where uncollectible accounts receivables are estimated and recorded at the end of a 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.

Write-off:

Write-off refers to deduction of a certain amount from accounts receivable, when it becomes uncollectible.

To record: The journal entries for the given transactions.

Answer to Problem 8.2AP

Prepare the journal entries for the given transactions as follows:

Transaction	Account Title and Explanation	Debit ($)	Credit ($)
1	Accounts receivable	2,500,000
	Sales revenue		2,500,000
	(To record the sales on account)
2	Sales return and allowances	50,000
	Accounts receivables		50,000
	(To record return the sales return and allowances)
3	Cash	2,200,000
	Accounts receivables		2,200,000
	(To record the collection of receivables)
4	Allowance for doubtful account	41,000
	Account receivable		41,000
	(To record write-off of uncollectible account receivable )
5	Account receivable	15,000
	Allowance for doubtful account		15,000
	(To reverse write-off of receivables)
	Cash	15,000
	Account receivable		15,000
	(To record the collection of cash on account, which is written off previously)

Table (1)

Explanation of Solution

1. 1. $2,500,000 Sale on account increases accounts receivable and sales revenue account. Hence, an increase in accounts receivable (asset account) is debited with $2,500,000 and increase in sales revenue (stockholders’ equity account) is credited with $2,500,000.
2. 2. $50,000 sales return and allowances increases sales return and allowances and decreases accounts receivables. Hence, an increase in sales return and allowances (contra revenue account) is debited with $50,000 and a decrease in accounts receivables (asset account) is credited with $50,000.
3. 3. $2,200,000 collection of cash on account increases cash and decreases accounts receivable by $2,200,000. Hence, an increase in cash (asset account) is debited and a decrease in accounts receivable (asset account) is credited by $2,200,000.
4. 4. To record this write-off of uncollectible receivables, both allowance for doubtful accounts and accounts receivable must be decreased by $41,000. Hence, a decrease in Allowance for doubtful accounts (contra asset account) is debited with $41,000, and a decrease in accounts receivable (asset account) is credited with $41,000.
5. 5. Company recovered $15,000 of bad debts, which is previously written off as uncollectible. Hence, the Company is required to reverse the entry, which is previously written off as uncollectible receivables. Hence, accounts receivable is debited to increase its balance by $15,000, and allowance for doubtful accounts is credited to increase its balance by $15,000.

Now, the collection of cash on account, increases cash and decreases accounts receivable by $15,000. Hence, an increase in cash (asset account) is debited and a decrease in accounts receivable (asset account) is credited with $15,000.

(b)

To determine

the balance in allowance for doubtful accounts and accounts receivable using T-account.

Explanation of Solution

Account receivable
Particulars	Debit	Particulars	Credit
Opening balance	$600,000	(2) Sales returns and allowance	$50,000
(1) Sales revenue	$2,500,000	(3) Cash	$2,200,000
(5) Allowance for doubtful accounts	$15,000	(4) Allowance for doubtful accounts	$41,000
		(5) Cash	$15,000
Total	$3,115,000	Total	$2,306,000
Ending balance	$809,000

Table (2)

Allowance for doubtful accounts
Particulars	Debit	Particulars	Credit
(4) Accounts receivable	$41,000	Opening balance	$37,000
		(5) Accounts receivable	$15,000
Total	$41,000	Total	$52,000
		Ending balance	$11,000

Table (3)

Hence, the ending balance in accounts receivable and allowance for doubtful accounts is $809,000 and $11,000 respectively.

Conclusion

Hence, the ending balance in accounts receivable and allowance for doubtful accounts is $809,000 and $11,000 respectively.

(c)

To determine

To prepare: The adjusting entry for recording the bad debt expenses for 2017, using the

estimated bad debt of $46,000.

Answer to Problem 8.2AP

Prepare adjusting entry to record the bad debt expenses for 2017.

Date	Particulars	Debit	Credit
	Bad debt expense	$35,000
	Allowance for doubtful accounts		$35,000
	(To record the bad debt expense for 2017)

Table (4)

Working note:

It is given that the aging of accounts receivable indicates that the estimated bad debts are $46,000.

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

$\begin{array}{c}\begin{array}{l}\text{Bad debt expense to be}\\ \text{recorded in adjusting entry}\end{array}\}\text{= }\left[\begin{array}{l}\text{Total estimated bad debts}-\text{Credit}\\ \text{balance in allowance for doubtful accounts}\end{array}\right]\\ =\left[\$46,000-\$11\text{,000}\right]\\ =\$35,000\end{array}$

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
Particulars	Debit	Particulars	Credit
(4) Accounts receivable	$41,000	Opening balance	$37,000
		(5) Accounts receivable	$15,000
		Bad debts (Adjusting entry) (Balancing figure)	$35,000
Total	$41,000	Total	$87,000
		Ending balance	$46,000

Table (5)

Explanation of Solution

Allowance for doubtful accounts (contra asset account) normal balance is credit balance. It is given that company’s estimated bad debts as per aging of accounts receivable is $46,000. Hence, to bring the allowance for doubtful account balance to $46,000, it is required to increase bad debt expense and allowance for doubtful accounts by $35,000.

Hence, an increase in bad debt expense (decrease in stockholders’ equity account) is debited with $35,000 and an increase in allowance for doubtful accounts (contra asset account) is credited with $35,000.

(d)

To determine

To compute: The accounts receivable turnover and average collection period.

Answer to Problem 8.2AP

Calculate accounts receivable turnover ratio.

$\begin{array}{c}\text{Accounts}\text{receivable}\text{turnover}=\frac{\text{Net}\text{credit sales}}{\text{Average}\text{net}\text{account}\text{receivable}}\\ =\frac{\text{Net credit}\text{sales}}{\left(\frac{\begin{array}{l}\text{Beginning net accounts}\text{receivable+}\\ \text{Ending net accounts}\text{receivable}\end{array}}{2}\right)}\\ =\frac{\$2,450,000}{\left(\frac{\$563,000+\$763,000}{2}\right)}\\ =3.69\text{times}\end{array}$

Hence, the accounts receivable turnover is 3.69 times.

Calculate the average collection period.

$\begin{array}{c}\text{Average collection period =}\frac{\text{Number of days in a year}}{\text{Accounts receivable turnover}}\\ \text{= }\frac{365\text{ days}}{3.69\text{times}}\\ \text{=99 days}\left(\text{Rounded off}\right)\end{array}$

Hence, the average collection period is 99 days.

Working notes:

Calculate the amount of net sales.

$\begin{array}{c}\text{Net credit sales = Sales on account}-\text{Sales return and allowances}\\ \text{= \$2,500,000}-\$50,000\\ =\$2,450,000\end{array}$

Determine the beginning net accounts receivable.

$\begin{array}{c}\begin{array}{l}\text{Beginning net}\\ \text{accounts receivable}\end{array}\}\text{ =}\left[\begin{array}{l}\text{Beginning accounts receivable}-\\ \text{Beginning allowance for doubtful accounts}\end{array}\right]\\ =\$600,000-\$37,000\\ =\$563,000\end{array}$

Determine the ending net accounts receivable.

$\begin{array}{c}\begin{array}{l}\text{Ending net}\\ \text{accounts receivable}\end{array}\}\text{ =}\left[\begin{array}{l}\text{Ending accounts receivable}-\\ \text{Ending allowance for doubtful accounts}\end{array}\right]\\ =\$809,000-\$46,000\\ =\$763,000\end{array}$

Explanation of Solution

Accounts receivable turnover is a liquidity measure of accounts receivable in times, which is calculated by dividing the net credit sales by the average amount of net accounts receivables. In simple, it indicates the number of times the average amount of net accounts receivables has been collected during a particular period. In this case, 3.69 times the average amount of net accounts receivable has been collected during the period.

Average collection period indicates the number of days taken by a business to collect its outstanding amount of accounts receivable on an average. In this case, 99 days taken by the company to collect its outstanding amount of accounts receivable on an average