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Chapter 7: Question 14Q (page 362)

What is the normal procedure for handling the collection of accounts receivable previously written off using the direct write-off method? The allowance method?

Short Answer

Expert verified

The direct write-off method does require a single journal entry, but under the allowance method,two journal entries are made one is for re-establishment of balance, and another is for receipt.

Step by step solution

01

Definition of Revenue

Revenue can be defined as the inflow of benefits in the organization occurring because of services and products provided to the customer.

02

Normal Procedure of Recording the Recovery of Bad Debts

1. Direct write of method: Under the direct write-off method, revenue account is credited by the business entity, and the following journal entry is made:

Date

Accounts and Explanation

Debit $

Credit $

xx-xx-xx

Cash

xxx

Bad debts recovered

xxx

2. Allowance method: Under the allowance method, the balance in accounts receivable is re-established, and then the receipt entry is made:

Date

Accounts and Explanation

Debit $

Credit $

xx-xx-xx

Accounts receivables

xxx

Allowance for doubtful accounts

xxx

xx-xx-xx

Cash

xxx

Accounts receivables 鈥� Customer account

xxx

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Most popular questions from this chapter

3. Which of the following statements is false?

(a) Receivables include equity securities purchased by the company.

(b) Receivables include credit card receivables.

(c) Receivables include amounts owed by employees as a result of company loans to employees.

(d) Receivables include amounts resulting from transactions with customers.

Corrs Wholesalers Co. sells industrial equipment for a standard 3-year note receivable. Revenue is recognized at time of sale. Each note is secured by a lien on the equipment and has a face amount equal to the equipment鈥檚 list price. Each note鈥檚 stated interest rate is below the customer鈥檚 market rate at date of sale. All notes are to be collected in three equal annual installments beginning one year after sale. Some of the notes are subsequently sold to a bank with recourse, some are subsequently sold without recourse, and some are retained by Corrs. At year end, Corrs evaluates all outstanding notes receivable and provides for estimated losses arising from defaults.

Instructions

At December 31, 2017, how should Corrs measure and account for the impact of estimated losses resulting from notes receivable that it

(1) Retained and did not sell?

(2) Sold to bank with recourse?

(Expected Cash Flows) On December 31, 2017, Iva Majoli Company borrowed \(62,092 from Paris Bank, signing a 5-year, \)100,000 zero-interest-bearing note. The note was issued to yield 10% interest. Unfortunately, during 2019, Majoli began to experience financial difficulty. As a result, at December 31, 2019, Paris Bank determined that it was probable that it would receive back only $75,000 at maturity. The market rate of interest on loans of this nature is now 11%.

Instructions

(a) Prepare the entry to record the issuance of the loan by Paris Bank on December 31, 2017.

(b) Prepare the entry, if any, to record the impairment of the loan on December 31, 2019, by Paris Bank.

Arness Woodcrafters sells \(250,000 of receivables to Commercial Factors, Inc. on a with recourse basis. Commercial assesses a finance charge of 5% and retains an amount equal to 4% of accounts receivable. Arness estimates the fair value of the recourse liability to be \)8,000. Prepare the journal entry for Arness to record the sale.

(Notes Receivable with Unrealistic Interest Rate) On December 31, 2015, Ed Abbey Co. performed environmental consulting services for Hayduke Co. Hayduke was short of cash, and Abbey Co. agreed to accept a $200,000 zero-interest-bearing note due December 31, 2017, as payment in full. Hayduke is somewhat of a credit risk and typically borrows funds at a rate of 10%. Abbey is much more creditworthy and has various lines of credit at 6%.

Instructions

(a) Prepare the journal entry to record the transaction of December 31, 2015, for the Ed Abbey Co.

(b) Assuming Ed Abbey Co.鈥檚 fiscal year-end is December 31, prepare the journal entry for December 31, 2016.

(c) Assuming Ed Abbey Co.鈥檚 fiscal year-end is December 31, prepare the journal entry for December 31, 2017.
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