Chapter 7: Q5DQ (page 342)
Explain why writing off a bad debt against the Allowance for Doubtful Accounts does not reduce the estimated realizable value of a company’s accounts receivable.
The write-off methoddoes not affectthe amount ofrealizable value of a company’s accounts receivables.
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BTN 7-3 Anton Blair is the manager of a medium-size company. A few years ago, Blair persuaded the owner to base a part of his compensation on the net income the company earns each year. Each December he estimates year-end financial figures in anticipation of the bonus he will receive. If the bonus is not as high as he would like, he offers several recommendations to the accountant for year-end adjustments. One of his favorite recommendations is for the controller to reduce the estimate of doubtful accounts.
Required
1. What effect does lowering the estimate for doubtful accounts have on the income statement and balance sheet?
2. Do you believe Blair’s recommendation to adjust the allowance for doubtful accounts is within his rights as manager, or do you believe this action is an ethics violation? Justify your response.
3. What type of internal control(s) might be useful for this company in overseeing the manager’s recommendations for accounting changes?
The following selected transactions are from Ohlm Company.
2016
Dec. 16 Accepted a \(10,800, 60-day, 8% note dated this day in granting Danny Todd a time extension on his past-due account receivable.
31 Made an adjusting entry to record the accrued interest on the Todd note.
2017
Feb. 14 Received Todd’s payment of principal and interest on the note dated December 16.
Mar. 2 Accepted a \)6,100, 8%, 90-day note dated this day in granting a time extension on the past-due account receivable from Midnight Co.
17 Accepted a \(2,400, 30-day, 7% note dated this day in granting Ava Privet a time extension on her past-due account receivable.
Apr. 16 Privet dishonored her note when presented for payment.
May 31 Midnight Co. refused to pay the note that was due to Ohlm Co. on May 31. Prepare the journal entry to charge the dishonored note plus accrued interest to Midnight Co.’s accounts receivable.
July 16 Received payment from Midnight Co. for the maturity value of its dishonored note plus interest for 46 days beyond maturity at 8%.
Aug. 7 Accepted a \)7,450, 90-day, 10% note dated this day in granting a time extension on the past-due account receivable of Mulan Co.
Sep. 3 Accepted a $2,100, 60-day, 10% note dated this day in granting Noah Carson a time extension on his past-due account receivable.
Nov. 2 Received payment of principal plus interest from Carson for the September 3 note.
Nov. 5 Received payment of principal plus interest from Mulan for the August 7 note.
Dec. 1 Wrote off the Privet account against the Allowance for Doubtful Accounts.
Required
2. What reporting is necessary when a business pledges receivables as security for a loan and the loan is still outstanding at the end of the period? Explain the reason for this requirement and the accounting principle being satisfied.
Liang Company began operations on January 1, 2016. During its first two years, the company completed a number of transactions involving sales on credit, accounts receivable collections, and bad debts. These transactions are summarized as follows.
2016
a. Sold \(1,345,434 of merchandise (that had cost \)975,000) on credit, terms n/30.
b. Wrote off \(18,300 of uncollectible accounts receivable.
c. Received \)669,200 cash in payment of accounts receivable.
d. In adjusting the accounts on December 31, the company estimated that 1.5% of accounts receivable will be uncollectible.
2017
e. Sold \(1,525,634 of merchandise on credit (that had cost \)1,250,000), terms n/30.
f. Wrote off \(27,800 of uncollectible accounts receivable.
g. Received \)1,204,600 cash in payment of accounts receivable.
h. In adjusting the accounts on December 31, the company estimated that 1.5% of accounts receivable will be uncollectible.
Required
Prepare journal entries to record Liang’s 2016 and 2017 summarized transactions and its year-end adjustments to record bad debts expense. (The company uses the perpetual inventory system and it applies the allowance method for its accounts receivable. Round amounts to the nearest dollar.)
Hitachi, Ltd., reports total revenues of ¥9,616,202 million for its current fiscal year, and its current fiscal year-end unadjusted trial balance reports a debit balance for trade receivables (gross) of ¥2,797,935 million.
a. Prepare the adjusting entry to record its bad debts expense assuming uncollectibles are estimated to be 0.4% of total revenues and its unadjusted trial balance reports a credit balance of ¥10,000 million for the Allowance for Doubtful Accounts.
Warner Company’s year-end unadjusted trial balance shows accounts receivable of \(99,000, allowance for doubtful accounts of \)600 (credit), and sales of $280,000. Uncollectibles are estimated to be 1.5% of accounts receivable.
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