Problem 7-5B (75 minutes)
Part 1
2014
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].
2015
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 7-5B (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
SERIAL PROBLEM — SP 7
Serial Problem — SP 7, Business Solutions (50 minutes)
1. a. Bad debts expense is recorded as 1% of total revenues:
$44,000 x .01 = $440.
2016
Mar. 31
Bad Debts Expense ………………………………………..
Allowance for Doubtful Accounts……………...
440
To record estimated bad debts.
1. b. Bad debts expense is recorded as 2% of accounts receivable:
$22,867 x .02 = $457.34, which is $457 rounded to the nearest dollar.
2016
Mar. 31
Bad Debts Expense ………………………………………..
Allowance for Doubtful Accounts……………...
457
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 3/31/16 ………………. $457 Cr.
Less: Account written off ………………………… (100) Dr.
Bad Debts Expense ………………………………………..
Allowance for Doubtful Accounts……………...
To record estimated bad debts.
3. Many small business owners use the direct write-off method of
recording bad debts expense. The direct method is a simple and
Reporting in Action — BTN 7-1
1. Apple’s receivables at September 28, 2013, are $13,102 million.
2. Accounts receivable turnover for 2013 ($ millions)
3. Average collection period = 365 / Turnover = 365 / 14.22 = 25.67 days
4. Liquid assets as a percent of current liabilities ($ millions)
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
6. Solution depends on the financial statement information obtained.
$170,910
Comparative Analysis — BTN 7-2
1. Accounts Receivable Turnover ($ millions)
Apple (Current Year):
= 14.22 times
Apple (Prior Year):
2. Average Collection Period (or “Average Days’ Sales Uncollected”)
Apple (Current Year): 365 days / 14.22 times = 25.67 days
3. Both companies appear reasonably efficient in collecting accounts
$170,910
($13,102 + $10,930) / 2
Ethics Challenge — BTN 7-3
1. If the estimate for bad debts is reduced then less Bad Debts Expense
will be recognized on the income statement resulting in a higher net
2. Accounting procedures often allow for alternate methods or require the
use of estimates. Therefore, managers have some leeway in their
3. An informed owner or an effective board of directors will be aware of
Communicating in Practice — BTN 7-4
TO: Sid Omar
FROM: (Your Name)
DATE: _______________
SUBJECT: Difference Between Bad Debts Expense and Allowance
For Doubtful Accounts
In accounting for credit sales and bad debts, we report sales revenue in the
period the sales are made, even though some credit sales do not result in
Determining Allowance For Doubtful Accounts
The Allowance for Doubtful Accounts unadjusted balance at the end of the
year is the cumulative result of recording bad debts expense and writing
off specific accounts receivable in all past years. The recognition of bad
Taking It to the Net — BTN 7-5
1. At December 31, 2013, eBay’s ($ 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
Allowance for doubtful accounts
(including authorized credits) …………….
106
89
% of uncollectible accounts …………..…….
10.5%
9.8%
3. These percentages seem high compared to other companies, but
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.
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, 2015, Balance Sheet Presentation
** 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
b.
Added Monthly Net Income or Loss under Plan B
Increased sales ……………………………………………………… $500,000
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).
Plan (A) might expand its product into new markets, and could increase
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