In essence, the loss on sale of receivables represents several
different income statement items. While there is loss of information
from combining these items into a single loss account, the above journal
entry is one of the most common approaches to record sale of receivables.
Effect on statement of cash flows: The $176,000 received from the factor will
also show up as part of operating cash flows. Since the risk of credit loss (bad
An alternative approach is to separately show the three components included
in the loss on sale of receivables as follows:
DR
Allowance for uncollectibles
$ 4,000
DR
Cash
176,000
DR
Interest expense
2,000
DR
Factoring fee
12,000
DR
Receivable from factor—holdback of 5%
10,000
CR Bad debt provision
$ 4,000
CR Accounts receivable
200,000
The debit to the allowance for uncollectibles and the credit to the bad debt
The loss on sale of receivables in the original journal entry is now
Requirement 2:
DR
Sales returns
$3,000
CR Receivable from factor
$3,000
Requirement 3:
To record receipt of payment from the factor:
Atherton will not record a journal entry to record this event. Recall that the
receivables were sold without recourse for bad debts, in which case, the
P8–12. Reconstructing T-accounts
Requirement 1:
Beginning balance
$4,955,000
Provision for doubtful accounts (from income
statement)
5,846,000
Bad debts written-off (plug number)
$6,876,000
Ending balance
$3,925,000
Beginning balance
$31,651,000
Revenue (from income statement)
137,002,000
Bad debts written-off (from ADA)
$6,876,000
Cash collected (plug number)
134,833,000
Ending balance
$26,944,000
DR Provision for doubtful accounts
$5,846,000
CR Allowance for doubtful accounts
$5,846,000
DR Allowance for doubtful accounts
$6,876,000
CR Gross accounts receivable
$6,876,000
DR Cash
$134,833,00
CR Gross accounts receivable
$134,833,000
Requirement 2:
Year 3
Year 2
Year 1
Provision for doubtful accounts
as % of revenue
4.27%
5.98%
6.30%
Revised provision for Year 3 using the Year 2
percentage ($137,002,000 x 5.98%)
$8,192,720
DR
CR
Allowance for doubtful accounts
Beginning balance
$4,955,000
Provision for doubtful accounts (from above)
8,192,720
Bad debts written-off
$6,876,000
Ending balance (plug number)
$6,271,720
Balance sheet presentation of receivables (Year 3)
Note: Altering the Year 3 provision for doubtful accounts does not change
gross accounts receivable.
The revised operating income is calculated below:
Year 3
Operating income before taxes (as reported)
$6,900,000
(+) Provision for doubtful accounts (as reported)
5,846,000
(-) Provision for doubtful accounts (revised)
8,192,720
Operating income before taxes (revised)
$4,553,280
Decrease in operating income
-34.01%
Note that the operating income would have decreased by 34% if Ramsay
had reported the Year 3 bad debts at the same percentage of revenue
Requirement 3:
Year 3
Year 2
Allowance for doubtful accounts as a % of gross A/R 14.57%
15.66%
Revised balance in allowance account
($26,944,000 x 15.66%)
$4,219,430
DR
CR
Allowance for doubtful accounts
Beginning balance
$4,955,000
Provision for doubtful accounts (plug number)
6,140,430
Bad debts written off
$6,876,000
Ending balance (from above)
$4,219,430
The revised operating income is calculated below:
Year 3
Operating income before taxes (as reported)
$6,900,000
(+) Provision for doubtful accounts (as reported)
5,846,000
(-) Provision for doubtful accounts (revised)
(6,140,430)
Operating income before taxes (revised)
$6,605,570
Decrease in operating income
-4.27%
Operating income would have decreased only by about 4% if Ramsay had
reported the Year 3 allowance for doubtful accounts at the same percentage
of gross receivables as it did in Year 2.
Requirement 4:
Requirements 2 and 3 lead to substantially different estimates for bad debt
provision (provision for doubtful accounts). Recall that a bad debt provision
Year 3
Year 2
Gross accounts receivable
$26,944,000
$31,651,000
Revenue
137,002,000
136,354,000
Year-end gross A/R as a % of revenue
19.67%
23.21%
It appears that Ramsay has apparently improved its accounts receivable
Year 3
Gross accounts receivable (as reported)
$26,944,000
Gross accounts receivable (23.21% of revenue)
31,798,164
Difference
($4,854,164)
The above table suggests that Ramsay would have reported almost $5
The intertemporal pattern of the bad debt provision is also consistent with this
intuition:
Year 3
Year 2
Year 1
Provision for doubtful accounts as
% of Revenue
4.27%
5.98%
6.30%
P8–13. Restructuring a note receivable
Requirement 1:
Settlement of note receivable by taking aircraft in exchange for note
receivable:
January 1, 2017:
DR Aircraft
$40,000
DR Loss on receivable restructuring
8,600
CR Note receivable
$45,000
CR Interest receivable
3,600
No additional journal entries are required.
Requirement 2:
Restructuring of note receivable by taking cash and new note receivable in
exchange for original note receivable:
Calculation of Restructuring Loss
Carrying value of note at January 1, 2017
$45,000
Plus: Accrued interest
3,600
48,600
Less: Consideration received
Cash
(5,000)
Restructured note receivable:
PV of interest payments
($4,200 x 3.99271, the present value factor
for a 5 year annuity in arrears at 8%)
$16,769
PV of note receivable
($35,000 x 0.68058, the present value factor
for a payment in 5 years at 8%)
23,821
Present value of restructured note receivable
(40,590)
Loss on receivable restructuring
$ 3,010
January 1, 2017:
DR Cash
$ 5,000
DR Restructured note receivable
40,590
DR Loss on receivable restructuring
3,010
CR Note receivable
$45,000
CR Interest receivable
3,600
Note Receivable Amortization Table
( a ) ( b ) ( c ) ( d )
Date
Interest
income:
[prior (d)
x 8%]
Cash
payment
received
(given)
Increase
(decrease)
in Note
receivable:
[(a) – (b)]
Note
receivable:
[prior (d) +
(c )]
1/1/2014 $40,590
12/31/2014 $3,247 4,200$ (953)$ 39,637
12/31/2015 3,171 4,200 (1,029) 38,608
12/31/2016 3,089 4,200 (1,111) 37,497
12/31/2017 3,000 4,200 (1,200) 36,297
12/31/2018 2,903
*
4,200 (1,297) 35,000
*rounded
December 31, 2017:
DR Cash
$ 4,200
CR Restructured note receivable
$ 953
CR Interest income
3,247
December 31, 2018:
DR Cash
$ 4,200
CR Restructured note receivable
$ 1,029
CR Interest income
3,171
December 31, 2019:
DR Cash
$ 4,200
CR Restructured note receivable
$ 1,111
CR Interest income
3,089
P8–14. Restructuring a note receivable
Requirement 1:
Mikeska Companies
To record the settlement:
DR
Note payable
$72,000
DR
Interest payable ($72,000 x .05)
3,600
CR Cash
$30,000
CR Equipment
12,000
CR Gain on debt restructuring
33,600
Power-line Manufacturing
Cash
Equipment
Loss on receivable restructuring
CR Note receivable
Alternately, this can also be obtained by interpolation.
Present value of Restructured Present value of
future flows @ 4% note amount future flows @ 5%
$86,400 $86,400
60.209,1$
Power-line Manufacturing
1/1/14: To record the modified sum:
DR Restructured note receivable
$74,636
DR Loss on receivable restructuring
964
CR Note receivable
$72,000
CR Interest receivable
3,600
Note: The restructured note is valued at $74,636, the present value of
$86,400 to be received in three years discounted at 5%. The factor is .86384.
12/31/14: To record interest receivable:
DR Restructured note receivable
$3,732
CR Interest income
$3,732
($74,636 x 5% = $3,732)
12/31/15: To record interest receivable:
DR Restructured note receivable
$3,918
CR Interest income
$3,918
[($74,636 + $3,732) x 5% = $3,918]
12/31/16: To record interest receivable:
DR Restructured note receivable
$4,114
CR Interest income
$4,114
[($74,636 + $3,732 + $3,918) x 5% = $4,114]
12/31/16: To record receipt of amount due:
DR Cash
$86,400
CR Restructured note receivable
$86,400
Requirement 3:
Mikeska Companies
$72,000
Interest payable
CR Gain on debt restructure
Restructured note payable
CR Cash
$72,000
Power-line Manufacturing
1/1/14: To record the modified sum:
DR
Restructured note receivable
$62,196
DR
Loss on receivable restructuring
13,404
CR Note receivable
$72,000
CR Interest receivable
3,600
Note: The restructured note is valued at $62,196, the present value of
$72,000 to be received in three years discounted at 5%. The factor is .86384.
CR Interest income
Restructured note receivable
CR Interest income