Chapter 9

ACCOUNTING FOR ACCOUNTS RECEIVABLE

 Valuing Account Receivable
Direct write-off method Allowance method

uncollected -----> debited to bad debt expense uncollected -----> debited to bad debt expense
------> credit allowance for doubtful accounts
Doesn’t match bad debt expense to
sales revenue in the income statement
or to show the net (cash) realizable Written off -----> debited allowance for doubtful accounts
value of the accounts receivable in the ------> credit A/R
statement of financial position. This method ensures that accounts receivable are reported in
the statement of financial position at their net (cash) realizable
value which is the net amount expected to be collected from
customers in cash.

Net realizable value = accounts receivable – allowance for doubtful accounts.

Debit +
As a % of receivables
Credit -
Important note
Problem (1):
At December 31, 2019, the trial balance of Mark Company contained the following amounts before adjustments:
Debit Credit
Account Receivable 165000
Allowance for doubtful accounts 1,200

Instructions:
1. Prepare the adjusting entry at December 31, 2019, to record bad debt expense if the company estimates that 5% of accounts receivable will be
uncollectible.
2. Show the statement of financial position presentation of accounts receivable at December 31, 2019.
3. On January 20, 2020, a $900 account receivable is written off as uncollectible. Prepare the journal entry to record the write-off.
4. On March 15, 2020, a $500 of the account that was written off on January 20, was collected. Prepare the journal entries to record that
recovery.
5. Repeat part (3) above assuming that the company uses the direct write-off method instead of the allowance method in accounting for
uncollectible accounts receivable.
6. What are the weaknesses of the direct write off method in accounting for uncollectible accounts receivable.
Solution:
1.The required balance in the allowance for doubtful accounts after adjustment = total estimated bad debts = $165,000 ×
5% = $8,250
Bad debt expense = $8,250 + 1,200 debit balance in the allowance for doubtful before adjustments = $9,450

Date Account title and explanation Dr. Cr.

2019 Bad debt expense 9,450
Dec.31 Allowance for doubtful
9,450
accounts

2. Mark Company
Statement of financial position

Account Receivable ` 165,000

Less: Allowance for doubtful Accounts 8,250
156,750
 3 & 4. Date Account title and explanation Dr. Cr.
2020 Allowance for Doubtful Accounts 900
Jan.20 Accounts Receivable
900
Accounts Receivable 500
March Allowance for Doubtful
15 Accounts
500
Cash 500
March Accounts Receivable 500
15

5.

Date Account title and explanation Dr. Cr.

2020 Bad debt expense 900
Jan.20 Account Receivable
900
6. Weakness of the direct write off method:
a) Poor matching between revenues and expenses
b) Since there is no allowance for doubtful accounts under this method, accounts receivable is reported in the
statement of financial position at gross amount not at net (cash) realizable value.
Problem 9-5A
Solution:
A) The allowance method must be used as the balance of the account is already given which means that the company must be
using this method. The account wouldn’t exist if they were using the direct-off method.

B) Bad debt expense 10,750 11,750 - 1000

Allowance for doubtful Accounts 10,750

C) Bad debt expense 12,750 11,750 + 1000

Allowance for doubtful Accounts 12,750

D) Allowance for doubtful Accounts 3000

Account Receivable 3000

E) Bad debt expense 3000

Account Receivable 3000

F) Allowance for doubtful accounts is a contra asset account. It is subtracted from the gross amount of A/R so that the A/R
Is reported at the net realizable value.
Ex. 197

Instructions
a) Prepare the adjusting entry on December 31, 2020, to recognize bad debt expense.

(b) Assume the same facts as above except that the Allowance for Doubtful Accounts account had a $500 debit balance before the current
year's provision for uncollectible accounts. Prepare the adjusting entry for the current year's provision for uncollectible accounts.

(c) Assume that the company has a policy of providing for bad debts at the rate of 1% of sales, that sales for 2020 were $550,000, and that
Allowance for Doubtful Accounts had a $650 credit balance before adjustment. Prepare the adjusting entry for the current year's provision
for bad debts.
Solution
($120,000x1%) + ($20,000x3%) + ($10,000x6%)
(a) Bad Debt Expense 5,300
+ ($10,000x12%) + ($8,000x30%) = 6000
Allowance for Doubtful Accounts
5,300 6000 - 700

($120,000x1%) + ($20,000x3%) + ($10,000x6%)

(b) Bad Debt Expense 6,500 + ($10,000x12%) + ($8,000x30%) = 6000
Allowance for Doubtful Accounts
6,500 6000 + 500

(c) Bad Debt Expense ($550,000 × 1%) 5,500

Allowance for Doubtful Accounts
5,500
Ex. 200

Megan's Products is undecided about which basis to use in estimating uncollectible accounts. On December 31, 2020, the
balance in Accounts Receivable was $308,000 and net credit sales amounted to $2,700,000 during 2020. An aging analysis of
the accounts receivable indicated that $31,000 in accounts are expected to be uncollectible. Past experience has shown that
about 1% of net credit sales eventually are uncollectible.

Instructions
Prepare the adjusting entries to record estimated bad debt expense using the (1) percentage of sales basis and
(2) the percentage of receivables basis under each of the following independent assumptions:

(a) Allowance for Doubtful Accounts has a credit balance of $2,300 before adjustment.

(b) Allowance for Doubtful Accounts has a debit balance of $370 before adjustment.
Solution:
1) Bad Debt Expense ($2,700,000 × .01) 27,000
Allowance for Doubtful Accounts
27,000

(2a) Bad Debt Expense ($31,000 – $2,300) 28,700

Allowance for Doubtful Accounts
28,700

(2b) Bad Debt Expense ($31,000 + $370) 31,370

Allowance for Doubtful Accounts
31,370