Problem 5-4B (LO 5-4, 5-5)
Requirement 1
Age group
Amount
receivable
Estimated
percent
uncollectible
Estimated
amount
uncollectible
Not yet due $40,000 3% $1,200
0-30 days past due 11,000 4% 440
Requirement 2
December 31, 2015 Debit Credit
Bad Debt Expense 3,170
Requirement 3
April 3, 2016
Allowance for Uncollectible Accounts 500
Requirement 4
July 17, 2016
Accounts Receivable 100
July 17, 2016
Cash 100
Problem 5-5B (LO 5-3, 5-6)
Requirement 1
Letni should not use the direct write-off method. Even if no accounts are known to
be uncollectible at the time, Paul should estimate future bad debts and record those
Requirement 2
Allowance for uncollectible accounts = $330,000 x 25% = $82,500.
Requirement 3
If Letni uses the direct write-off method, total assets will be overstated and total
Problem 5-6B (LO 5-3)
Requirement 1
Debit Credit
Bad Debt Expense 330,000
Requirement 2
Revised operating income = $2,900,000 − $330,000 (bad debt expense)
Outlet Flooring will meet analysts’ expectations because the revised operating
Requirement 3
Revised operating income = $2,900,000 − $700,000 (bad debt expense)
If Outlet Flooring records bad debt expense for $700,000 instead of $330,000,
Requirement 4
By managing operating income downward, Wanda is “saving” reported income for
the future. If bad debt expense is overestimated this year, then it can be understated
Problem 5-7B (LO 5-3, 5-5)
Requirement 1
Debit Credit
Bad Debt Expense 7,000
Requirement 2
Previts underestimated uncollectible accounts by $80,500. Actual bad debts in the
second year were $87,500 and the company estimated bad debts to be only $7,000.
Requirement 3
Previts should not prepare new financial statements for the first year. The fact that
actual bad debts in 2016 turned out to be different than the amount estimated at the
Problem 5-8B (LO 5-7)
Requirement 1
April 15, 2015 Debit Credit
Notes Receivable 110,000
Requirement 2
December 31, 2015 Debit Credit
Interest Receivable (2015) 9,350
April 15, 2016
Cash 13,200
Interest Receivable (2015) 9,350
December 31, 2016
Interest Receivable (2016) 9,350
Problem 5-8B (concluded)
April 15, 2017
Cash 13,200
Interest Receivable (2016) 9,350
December 31, 2017
Interest Receivable (2016) 9,350
Requirement 3
April 15, 2018 Debit Credit
Cash 123,200
Notes Receivable 110,000
Interest Receivable (2017) 9,350
Problem 5-9B (LO 5-8)
Requirement 1
Sun Healthcare
Group
Select Medical
Receivables
turnover
ratio
=Net sales $1,930 $2,240
Average accounts
receivable
($215 + $202) / 2 ($414 + $353) / 2
Average
collection
period
=365 365 365
Receivables
turnover ratio
9.3 5.8
Compared to Select Medical, Sun Health has a higher receivables turnover ratio
and a lower average collection period, which means it collects cash more quickly
from its customers. The receivables turnover ratio and average collection period for
Requirement 2
The receivables turnover ratio and average collection period provide an indication
of management’s ability to collect cash from customers in a timely manner. A high
receivables ratio suggests that managers are selling to customers that have the
ability to pay their accounts in a timely manner. The more quickly a company can