Problem 9-5B (Concluded)
June 15 Notes Receivable—R. Solon…………………………. 2,000
June 21 Notes Receivable—J. Felton…………………………. 9,500
Aug. 14 Cash……………………………………………………………. 2,034
Interest Revenue*……………………………………. 34
Sept. 19 Cash……………………………………………………………. 9,690
Interest Revenue*……………………………………. 190
Nov. 30 Allowance for Doubtful Accounts………………….. 12,684
Part 2
Analysis Component: When a business pledges its receivables as security
for a loan and the loan is still outstanding at period-end, the business must
disclose this information in notes to its financial statements. This is a
SERIAL PROBLEM — SP 9
Serial Problem — SP 9, Business Solutions (50 minutes)
1. a. Bad debts expense is recorded as 1% of total revenues:
1. b. Bad debts expense is recorded as 2% of accounts receivable:
2016
Instructor note: It might help to stress that the beginning balance for the Allowance for
Doubtful Accounts is zero, which is unusual and exists because this is the first period that the
company applies the allowance method.
2016
June 30 Bad Debts Expense………………………………………. 48
3. Many small business owners use the direct write-off method of
recording bad debts expense. The direct method is a simple and
straightforward method of accounting for bad debts expense. It can
Reporting in Action — BTN 9-1
1. Apple’s receivables at September 28, 2013, are $13,102 million.
2. Accounts receivable turnover for 2013 ($ millions)
4. Liquid assets as a percent of current liabilities ($ millions)
Sep. 28, 2013: = 126.9%
Sep. 29, 2012: = 106.0 %
Comments: Current liabilities are obligations that are due to be paid or
liquidated within one year or one operating cycle of the business,
whichever is longer. Typically, cash provided from the operations of the
5. Note 1 to Apple’s financial statements describes its accounting
policies. That note reports that: “All highly liquid investments with
maturities of three months or less at the date of purchase are classified
as cash equivalents.”
6.Solution depends on the financial statement information obtained.
$170,910
$10,746 + $18,383 + $10,930 + $791
$38,542
$14,259 + $26,287 + $13,102 + $1,764
$43,658
Comparative Analysis — BTN 9-2
1. Accounts Receivable Turnover ($ millions)
Apple (Current Year):
Apple (Prior Year):
2. Average Collection Period (or “Average Days’ Sales Uncollected”)
Interpretation: The average collection period for Google is longer than
3. Both companies appear reasonably efficient in collecting accounts
receivable. Apple collects them over a shorter period of time in both
years. Both Apple and Google showed an unfavorable trend with a
shorter collection time for the prior year.
$156,508
($7,885 + $5,427) / 2
$170,910
($13,102 + $10,930) / 2
Ethics Challenge — BTN 9-3
1. If the estimate for bad debts is reduced then less Bad Debts Expense
will be recognized on the income statement resulting in a higher net
2. Accounting procedures often allow for alternate methods or require the
use of estimates. Therefore, managers have some leeway in their
3. An informed owner or an effective board of directors will be aware of
alternate accounting methods and how estimates can affect the
Communicating in Practice — BTN 9-4
TO: Sid Omar
FROM: (Your Name)
DATE: _______________
SUBJECT: Difference Between Bad Debts Expense and Allowance
For Doubtful Accounts
In accounting for credit sales and bad debts, we report sales revenue in the
period the sales are made, even though some credit sales do not result in
Determining Bad Debts Expense
Bad debts expense represents the estimated amount of the year’s sales
Determining Allowance For Doubtful Accounts
The Allowance for Doubtful Accounts unadjusted balance at the end of the
year is the cumulative result of recording bad debts expense and writing
Sid, I hope this clarifies the matter for you. If you have further questions,
please call me.
Taking It to the Net — BTN 9-5
1. At December 31, 2013, eBay’s ($ millions) net accounts receivable were
$899, and at December 31, 2012, its net accounts receivable were $822.
2.
$ millions
December 31,
2013
December 31,
2012
Gross accounts receivable………………….. $1,005 $911
3. These percentages seem high compared to other companies, but
Teamwork in Action — BTN 9-6
Instructor note: Computations for the aging schedule are in the Problem 9-3A solution.
The check figure for total estimated uncollectibles is $41,650.
Adjusting entry
Dec. 31 Bad Debts Expense…………………………………….. 27,150
Allowance for Doubtful Accounts……………. 27,150
To record estimated bad debts.*
December 31, 2015, Balance Sheet Presentation
* Total of each age category.
** Net Realizable Accounts Receivable.
Entrepreneurial Decision — BTN 9-7
1. Computation of added annual net income or loss
a.
Added Monthly Net Income or Loss under Plan A
Increased sales…………………………………………………….. $250,000
b.
Added Monthly Net Income or Loss under Plan B
Increased sales…………………………………………………….. $500,000
Entrepreneurial Decision — BTN 9-7 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).
Plan (A) might expand its product into new markets, and could increase
Taking credit cards for these online sales reduces its risk of
The client company does run some unknown risk associated with
Hitting the Road — BTN 9-8
Telephone calls to VISA and American Express are the source of
information for this solution. VISA reports that the average transaction fee
Some merchants often choose not to accept certain cards because the
Global Decision — BTN 9-9
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 turnover