Problem 9-5B (75 minutes)
Part 1
2012
Nov. 1
Notes Receivable—S. Julian …………………………..
4,800
Accounts Receivable—S. Julian ………………....
4,800
To record note received on account.
Dec. 31
Interest Receivable …………………………………………..
64
Interest Revenue ………………………………………..
64
To record interest earned [$4,800 x .08 x 60/360].
2013
Jan. 30
Cash ………………………………………………………………..
4,896
Interest Revenue* ……………………………………....
32
Interest Receivable ……………………………………..
64
Notes Receivable—S. Julian ……………………....
4,800
To record cash received on note with interest.
*[$4,800 x .08 x 30/360]
Feb. 28
Notes Receivable—King Co ……………………………..
12,600
Accounts Receivable—King Co. ………………....
12,600
To record note received on account.
Mar. 1
Notes Receivable—M. Shelley ………………………....
6,200
Accounts Receivable—M. Shelley ……………....
6,200
To record note received on account.
30
Accounts Receivable—King Co ………………………..
12,684
Interest Revenue ………………………………………..
84
Notes Receivable—King Co ………………………..
12,600
To record receivable for dishonored note
plus interest [$12,600 x .08 x 30/360].
Apr. 30
Cash ………………………………………………………………..
6,324
Interest Revenue ………………………………………..
124
Notes Receivable—M. Shelley …………………....
6,200
To record cash received on note plus interest
($6,200 x .12 x 60/360 = $124).
Problem 9-5B (Concluded)
June 15
Notes Receivable—R. Solon …………………………..
2,000
Accounts Receivable—R. Solon ………………...
2,000
To record note received on account.
June 21
Notes Receivable—J. Felton …………………………..
9,500
Accounts Receivable—J. Felton ………………..
9,500
To record note received on account.
Aug. 14
Cash ……………………………………………………………...
2,034
Interest Revenue* ……………………………………..
34
Notes Receivable—R. Solon ……………………..
2,000
To record cash received on note plus interest.
*[$2,000 x .08 x 72/360] rounded to nearest dollar
Sept. 19
Cash ……………………………………………………………...
9,690
Interest Revenue* ……………………………………..
190
Notes Receivable—J. Felton ……………………..
9,500
To record cash received on note plus interest.
*[$9,500 x .08 x 90/360] rounded to nearest dollar
Nov. 30
Allowance for Doubtful Accounts …………………...
12,684
Accounts Receivable—King Co ………………...
12,684
To record write-off of accounts.
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, Success Systems (50 minutes)
1. a. Bad debts expense is recorded as 1% of total revenues:
$43,853 x .01 = $438.53 which is $439 rounded to nearest dollar.
2014
Mar. 31
Bad Debts Expense ………………………………………..
Allowance for Doubtful Accounts……………...
439
To record estimated bad debts.
1. b. Bad debts expense is recorded as 2% of accounts receivable:
$22,720 x .02 = $454.40 which is $454 rounded to the nearest dollar.
2014
Mar. 31
Bad Debts Expense ………………………………………..
Allowance for Doubtful Accounts……………...
454
To record estimated bad debts.
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.
2. Allowance Balance as of 3/31/14 ………………. $454 Cr.
Less: Account written off ………………………… (100) Dr.
Allowance Balance as of 6/30/14 ………………. $354 Cr. (before adjustment)
Bad Debts Expense ………………………………………..
Allowance for Doubtful Accounts……………...
To record estimated bad debts.
Reporting in Action — BTN 9-1
1. Polaris’s receivables at December 31, 2011, are $115,302 thousand.
2. Accounts receivable turnover for 2011 ($ thousands)
3. Average collection period = 365/ Turnover = 365 / 25.97 = 14.05 days
This time period is about ~15 days because Polaris typically sells its
4. Liquid assets as a percent of current liabilities ($ thousands)
Dec. 31, 2011: = 120.0%
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 Polaris’s financial statements describes its significant
6. Solution depends on the financial statement information obtained.
$584,210
$325,336 + $115,302 + $298,042
$615,531
Comparative Analysis — BTN 9-2
1. Accounts Receivable Turnover ($ thousands)
Polaris (Current Year):
= 25.97 times
Polaris (Prior Year):
2. Average Collection Period (or “Average Days’ Sales Uncollected”)
Polaris (Current Year): 365 days / 25.97 times = 14.05 days
Polaris (Prior Year): 365 days / 22.16 times = 16.47 days
Interpretation: The average collection period for Polaris is shorter than
Arctic Cat because Arctic Cat sells more of its products for longer-term
customers.
3. Both companies appear reasonably efficient in collecting accounts
receivable. Arctic Cat collects them over a longer period of time in both
($29,227 + $38,231)/2
$2,656,949
($115,302 + $89,294)/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
allowance for doubtful accounts.
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
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
had an “abnormal” balance of $16,000. Then, when this year’s bad debts
expense of $59,000 is added to Allowance for Doubtful Accounts, the result
is an ending balance of $43,000.
Sid, I hope this clarifies the matter for you. If you have further questions,
please call me.
Taking It to the Net — BTN 9-5
1. At December 31, 2011, eBay’s ($ thousands) net accounts receivable
2.
$ thousands
December 31,
2011
December 31,
2010
Gross accounts receivable …………….…….
$768,794
$540,851
Allowance for doubtful accounts
(including authorized credits) …………….
87,201
86,485
% of uncollectible accounts …………..…….
11.3%
16.0%
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 9-6
Instructor note: Computations for the aging schedule are in the Problem 9-4A 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.*
* Req. allowance balance ………………..
$41,650 credit
Unadjusted balance ………………………
14,500 credit
Adj. to the allowance …………………….
$27,150 credit
December 31, 2013, Balance Sheet Presentation
Accounts Receivable …………………………………….. $1,220,000*
* 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
Cost of sales …………………………………………………………. (135,500)
Credit card fees ($250,000 x 4.75%) ………………………… (11,875)
b.
Added Monthly Net Income or Loss under Plan B
Increased sales ……………………………………………………… $500,000
Cost of sales …………………………………………………………. (375,000)
Entrepreneurial Decision — BTN 9-7 continued
2. Plan (A) provides a slightly higher income, so if the 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 9-8
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 9-9
1. Accounts Receivable Turnover (Euro in thousands)
2. Average Collection Period (or “Average Days’ Sales Uncollected”)
3. Piaggio is in between Polaris and Arctic Cat in terms of its turnover and