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Chapter 7: 3P (page 371)

Manilow Corporation operates in an industry that has a high rate of bad debts. Before any year-end adjustments, the balance in Manilow鈥檚 Accounts Receivable account was \(555,000 and Allowance for Doubtful Accounts had a credit balance of \)40,000. The year-end balance reported in the balance sheet for Allowance for Doubtful Accounts will be based on the aging schedule shown below.

Days Account Outstanding

Amount

Probability of Collection

Less than 16 days

$300,000

.98

Between 16 and 30 days

100,000

.90

Between 31 and 45 days

80,000

.85

Between 46 and 60 days

40,000

.80

Between 61 and 75 days

20,000

.55

Over 75 days

15,000

.00

Instructions

(a) What is the appropriate balance for Allowance for Doubtful Accounts at year-end?

(b) Show how accounts receivable would be presented on the balance sheet.

(c) What is the dollar effect of the year-end bad debt adjustment on the before-tax income?

Short Answer

Expert verified

1. Total allowance for doubtful accounts: $60,000.

2. Net accounts receivables: $495,000.

3. Dollar effect: $20,000.

Step by step solution

01

Definition of Allowance for Doubtful accounts

The contra-asset account that gets adjusted against the gross receivables of the business entity is known as allowance for doubtful accounts. It is calculated as an estimated percentage of gross receivables or credit sales.

02

Balance in allowance for doubtful accounts

Days Account Outstanding

Amount

Probability of Collection

Probability of uncollectible

Amount of uncollectible

Less than 16 days

$300,000

.98

0.02

$6,000

Between 16 and 30 days

100,000

.90

0.10

10,000

Between 31 and 45 days

80,000

.85

0.15

12,000

Between 46 and 60 days

40,000

.80

0.20

8,000

Between 61 and 75 days

20,000

.55

0.45

9,000

Over 75 days

15,000

.00

100

15,000

Total allowance for doubtful accounts
$60,000
03

Representation of accounts receivables on the balance sheet

Particular

Amount $

Accounts receivables

$555,000

Less: Total allowance for doubtful accounts

(60,000)

Net accounts receivable

$495,000

04

Dollar effect of year-end bad debt adjustments on before-tax income

Particular

Amount $

Estimated allowance for doubtful accounts

$60,000

Less: Credit balance in the allowance for doubtful accounts

(40,000)

Dollar effect on before tax income

$20,000

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Most popular questions from this chapter

(Notes Receivable Journal Entries) On December 31, 2017, Oakbrook Inc. rendered services to Beghun Corporation at an agreed price of \(102,049, accepting \)40,000 down and agreeing to accept the balance in four equal installments of $20,000 receivable each December 31. An assumed interest rate of 11% is imputed.

Instructions

Prepare the entries that would be recorded by Oakbrook Inc. for the sale and the receipts and interest on the following dates (prepare an amortization schedule). (Assume that the effective-interest method is used for amortization purposes.)

(a) December 31, 2017.

(b) December 31, 2018.

(c) December 31, 2019.

(d) December 31, 2020.

(e) December 31, 2021.

Of what merit is the contention that the allowance method lacks the objectivity of the direct write-off method? Discuss in terms of accounting鈥檚 measurement function.

On July 1, 2017, Moresan Company sold special-order merchandise on credit and received in return an interest-bearing note receivable from the customer. Moresan will receive interest at the prevailing rate for a note of this type. Both the principal and interest are due in one lump sum on June 30, 2018.

On September 1, 2017, Moresan sold special-order merchandise on credit and received in return a zero-interest-bearing note receivable from the customer. The prevailing rate of interest for a note of this type is determinable. The note receivable is due in one lump sum on August 31, 2019.

Moresan also has significant amounts of trade accounts receivable as a result of credit sales to its customers. On October 1, 2017, some trade accounts receivable were assigned to Indigo Finance Company on a non-notification (Moresan handles collections) basis for an advance of 75% of their amount at an interest charge of 8% on the balance outstanding.

On November 1, 2017, other trade accounts receivable were sold without recourse. The factor withheld 5% of the trade accounts receivable factored as protection against sales returns and allowances and charged a finance charge of 3%.

Instructions

(b) How should Moresan report the interest-bearing note receivable and the zero-interest-bearing note receivable on its balance sheet at December 31, 2017?

GROUPWORK (Income Effects of Receivables Transactions) Sandburg Company requires additional cash for its business. Sandburg has decided to use its accounts receivable to raise the additional cash and has asked you to determine the income statement effects of the following contemplated transactions.

1. On July 1, 2017, Sandburg assigned \(400,000 of accounts receivable to Keller Finance Company. Sandburg received an advance from Keller of 80% of the assigned accounts receivable less a commission of 3% on the advance. Prior to December 31, 2017, Sandburg collected \)220,000 on the assigned accounts receivable, and remitted \(232,720 to Keller, \)12,720 of which represented interest on the advance from Keller.

2. On December 1, 2017, Sandburg sold \(300,000 of net accounts receivable to Wunsch Company for \)270,000. The receivables were sold outright on a without recourse basis.

3. On December 31, 2017, an advance of \(120,000 was received from First Bank by pledging \)160,000 of Sandburg鈥檚 accounts receivable. Sandburg鈥檚 first payment to First Bank is due on January 30, 2018.

Instructions

Prepare a schedule showing the income statement effects for the year ended December 31, 2017, as a result of the above facts.

Because of calamitous earthquake losses, Bernstein Company, one of your client鈥檚 oldest and largest customers, suddenly and unexpectedly became bankrupt. Approximately 30% of your client鈥檚 total sales have been made to Bernstein Company during each of the past several years. The amount due from Bernstein Company鈥� none of which is collectible鈥攅quals 22% of total accounts receivable, an amount that is considerably in excess of what was determined to be an adequate provision for doubtful accounts at the close of the preceding year. How would your client record the write-off of the Bernstein Company receivable if it is using the allowance method of accounting for bad debts? Justify your suggested treatment.
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