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Ethics Challenge — BTN 7-3
1. If the estimate for bad debts is reduced then less Bad Debts Expense
will be recognized on the income statement resulting in a higher net
2. Accounting procedures often allow for alternate methods or require the
use of estimates. Therefore, managers have some leeway in their
the manager.
3. An informed owner or an effective board of directors will be aware of
alternate accounting methods and how estimates can affect the
Communicating in Practice — BTN 7-4
TO: Sid Omar
FROM: (Your Name)
DATE: _______________
SUBJECT: Difference Between Bad Debts Expense and Allowance
For Doubtful Accounts
In accounting for credit sales and bad debts, we report sales revenue in the
period the sales are made, even though some credit sales do not result in
Determining Bad Debts Expense
Bad debts expense represents the estimated amount of the year's sales
that will become uncollectible. The reported amount of bad debts expense
Determining Allowance For Doubtful Accounts
The Allowance for Doubtful Accounts unadjusted balance at the end of the
year is the cumulative result of recording bad debts expense and writing
off specific accounts receivable in all past years. The recognition of bad
debts expense at the end of each year has the effect of increasing the
Allowance for Doubtful Accounts balance. However, when specific
accounts receivable are written off, they decrease the Allowance for
Doubtful Accounts balance. Prior to this year's bad debts expense
Taking It to the Net — BTN 7-5
1. At December 31, 2013, eBay’s ($ millions) net accounts receivable were
2.
$ millions
December 31,
2013
December 31,
2012
Gross accounts receivable....................... $1,005 $911
Allowance for doubtful accounts
106 89
3. These percentages seem high compared to other companies, but
eBay’s operations are all online, and the risk of fraudulent transactions
Teamwork in Action — BTN 7-6
Instructor note: Computations for the aging schedule are in the Problem 7-3A solution.
The check figure for total estimated uncollectibles is $41,650.
December 31, 2015, Balance Sheet Presentation
Accounts Receivable............................................$1,220,000*
Less Allowance for Doubtful Accounts............... 41,650 1,178,350**
* Total of each age category.
** Net Realizable Accounts Receivable.
Entrepreneurial Decision — BTN 7-7
1. Computation of added annual net income or loss
a.
Added Monthly Net Income or Loss under Plan A
Increased sales................................................................ $250,000
Cost of sales.................................................................... (135,500)
Additional net income (loss).......................................... $ 78 ,875
b.
Added Monthly Net Income or Loss under Plan B
Increased sales................................................................ $500,000
Cost of sales.................................................................... (375,000)
Entrepreneurial Decision — BTN 7-7 continued
2. Plan (A) provides a slightly higher income, so if the client company can
only pursue one plan now, based purely on the financial aspect, it
should choose Plan (A).
Taking credit cards for these online sales reduces its risk of
uncollectible accounts. The credit card company takes the risk of the
customer not paying.
Hitting the Road — BTN 7-8
Telephone calls to VISA and American Express are the source of
information for this solution. VISA reports that the average transaction fee
it charges merchants is 3%. American Express has a range, depending on
Global Decision — BTN 7-9
1. Accounts Receivable Turnover (KRW in millions)
2. Average Collection Period (or “Average Days’ Sales Uncollected”)
3. Samsung’s results are between Apple and Google in terms of its
