1. 1 Solution: the Allowance Method In the year of sale, the AJE to record estimate for all future uncollectibles in 2006 (ex: 4% of sales): Bad Debt Expense4,000 ADA 4,000 The General JE during 2007, when a specific A/R is deemed uncollectible (this is called the write- off of a specific A/R): ADA1,000 A/R 1,000 (Other uncollectible accounts would also be written off against the allowance account.) When are the income statement and balance sheet affected? At adjusting journal entry.

2. 2 Class Problem 1 Given the following information: At December 31, 2007, Company Z prepared an aging schedule to determine that the uncollectible accounts receivable at that date were $18,000. The balance in the Allowance for Doubtful Accounts at 1/1/07 was a $3,000 credit. During 2007, the company wrote off $5,000 of specific accounts receivable that were deemed to be uncollectible. Required: prepare the AJE to record the estimated uncollectibles at 12/31/07.

3. 3 Solution to Class Problem 1 Allowance for Doubtful Accounts 3,000 Beginning (1) (1) W/O 5,000 20,000 AJE (3) 18,000 End. Balance (2) (1) Post the beginning balance and write-off. (2) Post the desired ending balance. (3) Post the adjusting journal entry. AJE: Bad debt expense 20,000 Allowance for D.A.20,000

4. 4 Class Problem 2 1. Sale on November 1, 2008: 2. Interest accrual at December 31, 2008: 3. Collection of loan and interest at 1/31/09: Notes Receivable 10,000 Sales Revenue 10,000 Interest Receivable100 Interest Revenue 100 Cash 10,150 Notes Receivable10,000 Interest Receivable 100 Interest Revenue 50

5. Problem 7-1A (page 304) Part 1 (1)Sales: A/R (80%)630,000 Cash (20%)157,500 Sales787,500 (2)Collection on A/R: Cash502,500 A/R502,500 (3) Write-off of specific A/R: Allow. for Doubt. Acct 3,000 A/R 3,000

6. Problem 7-1A (page 304) Part 2a: % of Sales Bad Debt Expense is % of credit sales Sales x % = Bad Debt Expense (no analysis of Allowance necessary) Sales on account (credit sales) = 630,000 x.03 = 18,900 BD Exp. AJE(2a): Bad Debt Expense 18,900 Allow. for D.A. 18,900

7. Problem 7-1A (% of Sales) Allowance for D A (JE3) 3,000 18,900 (AJE) 17,850 E Accts. Receivable B 105,000 502,500 (JE2) 3,000 (JE3) E 229,500 Part 3: Net A/R = 229,500- 17,850 = 211,650 Post A/R: Then post Allowance: (ending balance last) (JE1) 630,000 1,950 B

8. Problem 7-1A (2b, % of A/R) Allowance for D A (3) 3,000 14,820 (AJE) 13,770 E AJE: Bad debt expense 14,820 Allowance for D.A. 14,820 Part 3: Net A/R = 229,500 - 13,770 = $215,730 Accts. Receivable B 105,000 502,500 (JE2) 3,000 (JE3) E 229,500 Calc. 6% before AJE Post A/R (same): Then post Allow: (AJE Last) (JE1) 630,000 1,950 B

9. Problem 7-1A, Part 4 Recognition of Bad Debt Expense (AJE): BDExpxx (+Exp, -NI) Decr. SE Allowxx (+Allow) Decr. Assets Write-off: Allowxx (-Allow) Incr. Assets A/Rxx (-A/R) Decr. Assets No effect on total assets No effect on I/S No effect on Net A/R

10. Problem 7-2A 1. Aging Schedule: % Uncoll. Current 200,000 x.10 = 20,000 < 1 mo. 60,300 x.25 = 15,075 1-2 mos. 35,000 x.35 = 12,250 > 2 mos. 45,000 x.75 = 33,750 Total340,300 81,075 End Allow 2. Show higher uncoll. for that customer (don’t write off until bankruptcy court settles assets)

11. Problem 7-2A 3. Balance sheet Accts. Receivable$340,300 Less: Allowance for DA 81,075 A/R Net$259,225