Chapter Outline
Teaching Notes
2. Days to Collect—Measures the average number of days
from the time from sale on account to collection.
a. Days to Collect = 365 ÷ Receivables Turnover Ratio.
b. Days to collect ratio measures the average number of
days from sale on account to collection.
c. Higher days to collect mean a longer (worse) time to
collect.
3. Comparison to Benchmarks
a. Credit Terms
The “Spotlight on Financial
i. By calculating days to collect you can compare a
company’s collection performance to its stated
collections policy.
Reporting” feature addresses
the impact of the financial
crisis on days to collect.
ii. By comparing the number of days to collect to the
length of credit period, you can gain a sense of
whether customers are complying with the stated
policy.
iii. If customers appear to be disregarding the stated
credit period, that may be a sign they are
dissatisfied with the product or service.
b. Other Companies
i. Receivables turnover ratios and the number of days
to collect often vary across industries.
ii. A company’s turnover should only be compared
with other companies in the same industry or with
its figures from prior periods.
4. Speeding Up Collections
a. Factoring Receivables
i. Factoring—An arrangement where receivables are
sold to another company (called a factor) for
immediate cash (minus a factoring fee).
ii. Factoring could send a potentially negative
message because it often is a last resort for
collecting accounts.
iii. The factoring fee can be as much as 3%.
b. Credit Card Sales
ii. Unlike private credit card programs, where the
seller pursues collection from customers, national
credit card companies and PayPal pay the seller
within one to three days of the sale.
iii. Most banks accept credit card receipts as overnight
deposits into the company’s bank account as if
they’re cash.
iii. A fee is charged for their services, often around 3%
of the total sales price; transaction fees are
included with selling expenses on the income
statement.
The “Spotlight on Controls”
feature addresses the need to
segregate collections and
write-offs.
Chapter Outline
Teaching Notes
IV. Supplement 8A – Direct Write-Off Method
S1 Record bad debts using the direct write-off method.
A. Direct Write-Off Method—A non-GAAP alternative to the
allowance method of accounting for uncollectible accounts.
1. Does not estimate bad debts and does not use an
Allowance for Doubtful Accounts.
2. Reports sales when they occur and bad debt expense
when it is discovered.
3. Appropriate for tax purposes but it is not under GAAP.
a. It breaks the conservatism concept by reporting
accounts receivable at the total amount owed by
customers (an overly optimistic point of view) rather
than what is estimated to actually be collectible (a
more realistic viewpoint).
b. It breaks the matching principle by recording bad debt
expense in the period that customer accounts are
determined to be bad rather than matching the expense
to the revenues reported in the period when the credit
sales are actually made.
B. Journal Entries
1. Under the direct write-off method, no journal entries are
made until a bad debt is discovered.
2. Company determines a $1,000 customer account to be
uncollectible; entry using the direct write-off method:
Bad Debt Expense
1,000
Accounts Receivable
1,000
Supplemental Enrichment Activities
Note: These activities would be suitable for individual or group activities.
1. Handout 8–1
Use Handout 8–1 for an in-class activity designed to review journal entries relating to accounts
receivable (sales, collections on account, write-off, and recoveries). The solution follows the handout
master.
2. Handout 8–2
Use Handout 8–2 for an in-class activity designed to review the estimation of uncollectible accounts
using the aging of accounts method. The solution follows the handout master.
3. Handout 8–3
Use Handout 8–3 for an in-class activity designed to review the estimation of uncollectible accounts
using the percentage of credit sales method. The solution follows the handout master.
4. Handout 8–4
Use Handout 8–4 for an in-class activity designed to review journal entries relating to notes
receivable. The solution follows the handout master.
HANDOUT 8–1
ACCOUNTS RECEIVABLE JOURNAL ENTRIES
Prepare journal entries to record the following transactions:
(1) On December 15, 2016, the company recorded $150,000 sales on credit.
Dec. 15
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
+
Stockholders’ Equity
(2) On December 31, 2016, the company estimated bad debt expenses of $15,000.
Dec. 31
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
+
Stockholders’ Equity
(3) On January 12, 2017, collect $100,000 worth of accounts receivable.
Jan. 12
2017
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
+
Stockholders’ Equity
HANDOUT 8–1, CONTINUED
(4) After many collection attempts, the Company determined on June 15, 2017 that it would not collect
$10,000 in accounts receivables from Pendant Publishing. It decided to write-off this account.
Jun. 15
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
+
Stockholders’ Equity
(5) On July 15, 2017, Pendant Publishing called to say that they have had financial problems but can
afford to pay $7,000 to settle their $10,000 debt in full. Vandolay Industries agreed to these terms, and
reversed $7,000 of the prior write-off. It received a $7,000 check from Pendant the next day.
Jul. 16
Jul. 16
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
+
Stockholders’ Equity
Post the above entries to the following T-accounts:
+ Accounts Receivable (A) –
− Allowance for Doubtful Accounts (xA) +
HANDOUT 8–1 SOLUTION
ACCOUNTS RECEIVABLE JOURNAL ENTRIES
Prepare journal entries to record the following transactions:
(1) On December 15, 2016, the company recorded $150,000 sales on credit.
Dec. 15
Accounts Receivable
150,000
Sales
150,000
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
+
Stockholders’ Equity
Accounts
Receivable
+150,000
Sales
+150,000
(2) On December 31, 2016, the company estimated bad debt expenses of $15,000.
Dec. 31
Bad Debt Expense
15,000
Allowance for Doubtful Accounts
15,000
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
+
Stockholders’ Equity
Allowance
for
Doubtful
Accounts
–15,000
Bad Debt
Expense
–15,000
(3) On January 12, 2017, collect $100,000 worth of accounts receivable.
Jan. 12
Cash
100,000
2017
Accounts Receivable
100,000
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
+
Stockholders’ Equity
Cash
+100,000
Accounts
Receivable
–100,000
HANDOUT 8–1 SOLUTION, CONTINUED
(4) After many collection attempts, the Company determined on June 15, 2017 that it would not collect
$10,000 in accounts receivables from Pendant Publishing. It decided to write-off this account.
Jun. 15
Allowance for Doubtful Accounts
10,000
2017
Accounts Receivable
10,000
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
+
Stockholders’ Equity
Allowance
for
Doubtful
Accounts
+10,000
Accounts
Receivable
–10,000
(5) On July 15, Pendant Publishing called to say that they have had financial problems but can afford to
pay $7,000 to settle their $10,000 debt in full. Vandolay Industries agreed to these terms, and reversed
$7,000 of the prior write-off. It received a $7,000 check from Pendant the next day.
Jul. 16
Accounts Receivable
7,000
Allowance for Doubtful Accounts
7,000
Jul. 16
Cash
7,000
Accounts Receivable
7,000
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
+
Stockholders’ Equity
Allowance
for
Doubtful
Accounts
+7,000
Accounts
Receivable
–7,000
Cash
+7,000
Accounts
Receivable
–7,000
Post the above entries to the following T-accounts:
+ Accounts Receivable (A) –
Dec. 15
150,000
100,000
Jan. 12
10,000
Jun. 15
Jul. 15
7,000
7,000
Jul. 15
End.
Bal.
40,000
− Allowance for Doubtful Accounts (xA) +
15,000
Dec. 31
Jun. 15
10,000
7,000
Jul. 15
12,000
End. Bal.
HANDOUT 8–2
ESTIMATION AND RECORDING OF UNCOLLECTIBLE ACCOUNTS –
AGING OF ACCOUNTS RECEIVABLE METHOD
Part 1
In 2016, Vandolay reported $300,000 in sales. The company’s allowance for doubtful accounts has an
unadjusted credit balance of $12,000. Vandolay Industries accountants prepared the following Aging of
Accounts Receivable:
Customer
Total
Number of days unpaid
0-30
30-60
60-90
Over 90
Alpha Sales
$ 700
$700
Gamma Manufacturing Co.
1,900
$1,900
Delta Shipping Corp.
2,200
$2,200
Epsilon Industries
6,000
$6,000
Theta Manufacturing
1,800
1,800
Zeta Industries
600
600
Other customers
248,800
140,100
36,900
29,800
42,000
Totals
$262,000
$142,000
$40,000
$32,000
$48,000
Vandolay accountants believe that receivables 0-30 days old have a 2% chance of noncollection.
Receivables 30-60 days old have a 4% chance of noncollection. Receivables 60-90 days old have an 8%
chance of noncollection. Receivables over 90 days old have a 20% chance of noncollection. The
company’s allowance for doubtful accounts has an unadjusted credit balance of $12,000. Prepare the
required adjusting journal entry.
Dec. 31
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
+
Stockholders’ Equity
+ Bad Debt Expense (E) –
– Allowance for Doubtful Accounts (xA) +
HANDOUT 8–2, CONTINUED
Part 2
Assume instead that the company’s allowance for doubtful accounts has an unadjusted debit balance of
$400. Prepare the required adjusting journal entry.
Dec. 31
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
+
Stockholders’ Equity
+ Bad Debt Expense (E) –
– Allowance for Doubtful Accounts (xA) +