24K - views

Chapter 8

Receivables, Bad Debt Expense, and Interest Revenue. PowerPoint Authors:. Brandy Mackintosh. Lindsay . Heiser. Learning Objective 8-1. Describe the trade-offs of extending credit.. Pros and Cons of Extending Credit.

Embed :
Presentation Download Link

Download Presentation - The PPT/PDF document "Chapter 8" is the property of its rightful owner. Permission is granted to download and print the materials on this web site for personal, non-commercial use only, and to display it on your personal computer provided you do not modify the materials and that you retain all copyright notices contained in the materials. By downloading content from our website, you accept the terms of this agreement.

Chapter 8






Presentation on theme: "Chapter 8"— Presentation transcript:

Slide1

Chapter 8

Receivables, Bad Debt Expense, and Interest Revenue

PowerPoint Authors:

Brandy Mackintosh

Lindsay

HeiserSlide2

Learning Objective 8-1

Describe the trade-offs of extending credit.Slide3

Pros and Cons of Extending Credit

Disadvantages

Increased wage costs.

Bad debt costs.

Delayed receipt of cash.

Advantage

Increases the seller’s revenues.Slide4

Learning Objective 8-2

Estimate and report the effects of uncollectible accounts.Slide5

Record sales on account

dr

Accounts Receivable

cr

Sales Revenue

Balance Sheet

Cash

Accounts Receivable

Inventory

Income Statement

Sales RevenueCost of Goods SoldGross Profit…

Bad debt known

Accounts Receivable and Bad Debts

Jan. 1Slide6

Record sales on account

dr

Accounts Receivable

cr

Sales Revenue

Balance Sheet

Cash

Accounts Receivable

Inventory

Income Statement

Sales Revenue

Cost of Goods SoldGross Profit …

Bad debt known

Balance Sheet

Cash

Accounts Receivable

Less: Allowance for Doubtful Accounts

Accounts Receivable, Net

Inventory

Income Statement

Sales Revenue

Cost of Goods Sold

Gross Profit

Bad Debt Expense

Accounts Receivable and Bad Debts

Record estimate of bad debts

Jan. 1

Jan. 31

dr

Bad Debt Expense (+E, -SE) cr Allowance for Doubtful Accounts (+xA, -A)Slide7

Record sales on account

dr

Accounts Receivable

cr

Sales Revenue

Balance Sheet

Cash

Accounts Receivable

Inventory

Bad debt known

Balance Sheet

Cash

Accounts Receivable

Less: Allowance for Doubtful Accounts

Accounts Receivable, Net

Inventory

…Accounts Receivable and Bad Debts

Record estimate of bad debts

Jan. 1

Jan. 31

dr

Bad Debt Expense (+E, -SE)

cr

Allowance for Doubtful Accounts (+xA, -A)

dr

Allowance for Doubtful Accounts (-xA)

cr

Accounts Receivable(-A)Slide8

Allowance Method

The allowance method follows a two-step process, described below:

Make an

end-of-period adjustment

to record the

estimated bad debts

in the period credit sales occur.

Remove (“write off”) specific customer balances when they are

known to be uncollectible

.Slide9

1. Adjust for Estimated Bad Debts

Assume that VFC estimates $900 in bad debts at the end of the accounting period.

1

Analyze

Liabilities

Assets

=

Stockholders’ Equity

+

Allowance for Doubtful

Accounts (+xA) -900

Bad Debt

Expense (+E) -900

2

Record

dr Bad Debt Expense (+E, -SE)

cr Allowance for Doubtful Accounts (+xA, -A)

900

900Slide10

1. Adjust for Estimated Bad DebtsSlide11

2. Remove (Write-off) Specific Customer Balances

VFC writes off $800 receivable from Fast Fashions because the company could not pay its account.

1

Analyze

Liabilities

Assets

=

Stockholders’ Equity

+

Allowance for Doubtful

Accounts (-xA) +800

Accounts

Receivable (-A) -800

2

Record

dr Allowance for Doubtful Accounts (-xA, +A)

cr Accounts Receivable (-A)

800

800Slide12

2. Remove (Write-off) Specific Customer Balances

dr Bad Debt Expense (+E, -SE)

cr Allowance for Doubtful Accounts (+xA, -A)

900

900

dr Allowance for Doubtful Accounts (-xA, +A)

cr Accounts Receivable (-A)

800

800

1/1 Bal.

1/31 Bal.

2/28 Bal.

(2) Write-off

Accounts Receivable

(A)

dr +

cr -

200,000

200,000

199,200

800

(2) Write -off

1/1 Bal.

(1) Estimate

1/31 Bal.

2/28 Bal.

Allow. For Doubtful Accts.

(

xA

)

dr -

cr +

800

14,100

900

15,000

14,200

1/1 Bal.

(1) Estimate

1/31 Bal.

Bad Debt

Expene

(E, SE)

dr +

cr -

0

900

900Slide13

Methods for Estimating Bad Debts

There are two acceptable methods of estimating the bad debts in a given period.

Percentage of Credit Sales Method.

Aging of Accounts Receivable.

Simpler to apply.

More accurateSlide14

Percentage of Credit Sales Method

The percentage of credit sales method estimates bad debt expense by multiplying the historical percentage of bad debt losses by the current period’s credit sales.Slide15

Percentage of Credit Sales Method

VFC has experienced bad debt losses of ¾ of 1 percent of credit sales in prior periods. Credit sales in January total $120,000,

Credit sales for January

Historical bad debt rate

Bad debt expense for January

$ 120,000

0.75%

$ 900

2

Record

dr Bad Debt Expense (+E, -SE)

cr Allowance for Doubtful Accounts (+xA, -A)

900

900Slide16

Aging of Accounts Receivable

While the percentage of credit sales method focuses on estimating Bad Debt Expense (

income statement approach

) for the period, the aging of accounts receivable method focuses on estimating the ending balance in the Allowance for Doubtful Accounts (

balance sheet approach

).

The aging method gets its name because it is based on the “age” of each amount in Accounts Receivable at the end of the period. The older and more overdue an account receivable becomes, the less likely it is to be collectible.Slide17

Aging of Accounts Receivable

VFC applies the aging of accounts receivable method to its Accounts Receivable balances when its quarter ends on March 31. The method includes three steps:

(1)

Prepare an aged list of accounts receivable,

(2)

Estimate bad debt loss percentages for each category, and

(3) Compute the total estimated bad debts.

Age Accounts Receivable.

Step

1Slide18

Aging of Accounts Receivable

Estimate bad debt loss percentages for each category.

Step

2Slide19

Aging of Accounts Receivable

Compute the total estimated bad debts.

Step

3Slide20

Aging of Accounts Receivable

AJE = ($17,240 - $14,200) = $3,040Slide21

Aging of Accounts Receivable

Prepare the AJE for Bad Debt Expense at March 31.

1

Analyze

Liabilities

Assets

=

Stockholders’ Equity

+

Allowance for Doubtful

Accounts (+xA) -2,240

Bad Debt

Expense (+E) -2,240

2

Record

dr Bad Debt Expense (+E, -SE)

cr Allowance for Doubtful Accounts (+xA, -A)

2,240

2,240

3

Summarize

Unadj. Bal.

AJE

Adj. Bal.

Allow. For Doubtful Accts (

xA

)

dr -

cr +

15,000

2,240

17,240

Beg. Bal.

AJE

End Bal.

Bad Debt Expense (E,SE)

dr +

cr -

900

2,240

3,140Slide22

Other Issues

Revising Estimates

-- Bad debt estimates always differ from the amounts that are later written off. If these differences are material, companies are required to revise their bad debt estimates for the current period.

Account Recoveries

-- Collection of a previously written off account is called a recovery

and it is accounted for in two parts. First, put the receivable back on the books by recording the opposite of the write-off. Second, record the collection of the account.Slide23

Other Issues

Let’s assume that VFC collects the $800 from Fast Fashions that was previously written off. This recovery would be recorded with the following journal entries:

(1) Reverse the write-off.

(2) Record the collection.Slide24

Learning Objective 8-3

Compute and report interest on notes receivable.Slide25

Notes Receivable and Interest Revenue

A company reports Notes Receivable if it uses a

promissory note

to document its right to collect money from another party.

Unlike accounts receivable, which are interest free until they become overdue, notes receivable charge interest from the day they are created to the day they are due (their

maturity date

).Slide26

Calculating Interest

Interest (

I

) = Principal (

P

) × Interest Rate (

R

) × Time (

T

)

The time period for

interest calculation

The amount of the

note receivable

The annual interest rate

charged on the noteSlide27

Recording Notes Receivable and Interest Revenue

The four key events that occur with any note receivable are:

1

2

3

4

Date of Note Receivable November 1, 2012

Annual Interest Rate 6%

Amount of the Note $100,000

Maturity Date of Note October 31, 2013

Year End of Company December 31, 2012Slide28

(1) Establishing a Note Receivable

Assume that on November 1, 2012, VFC lent $100,000 to a company by creating a note that required the company to pay VFC 6 percent interest and the $100,000 principal on October 31, 2013.

1

Analyze

Liabilities

Assets

=

Stockholders’ Equity

+

Notes Receivable +100,000

Cash -100,000

2

Record

dr Notes Receivable (+A)

cr Cash (-A)

100,000

100,000Slide29

(2) Accruing Interest Earned

Accrue the interest earned at year-end, December 31, 2012.

Principal (

P

) × Interest Rate (

R

) × Time (

T

) = Interest (

I

)

$100,000 × 6% × 2/12 =

$1,000

2Slide30

(2) Accruing Interest Earned

Accrue the interest earned at year-end, December 31, 2012.

1

Analyze

Liabilities

Assets

=

Stockholders’ Equity

+

Interest

Receivable (+A) +1,000

Interest Revenue

(+R, +SE) +1,000

2

Record

dr Interest Receivable (+A)

cr Interest Revenue (+R, +SE)

1,000

1,000Slide31

(3) Record Interest Received

Record interest received at maturity, October 31, 2013.

Principal (

P

) × Interest Rate (

R

) × Time (

T

) = Interest (

I

)

$100,000 × 6% × 12/12 =

$6,000 Slide32

(3) Record Interest Received

Record interest received at maturity, October 31, 2013.

2

Record

dr Cash (+A)

cr Interest Receivable (-A)

cr Interest Revenue (+R, +SE)

1,000

5,000

6,000

1

Analyze

Liabilities

Assets

=

Stockholders’ Equity

+

Cash (+A) +6,000

Interest

Receivable (-A) -1,000

Interest

Revenue (+R, +SE) +5,000

$5,000 = $100,000 × 6% × 10/12Slide33

(4) Recording Principal Received

The principal amount of the note is received on October 31, 2013.

1

Analyze

Liabilities

Assets

=

Stockholders’ Equity

+

Cash (+A) +100,000

Note

Receivable (-A) -100,000

2

Record

dr Cash (+A)

cr Note Receivable (-A)

100,000

100,000Slide34

Learning Objective 8-4

Compute and interpret the receivables turnover ratio.Slide35

Receivables Turnover Analysis

The

receivables turnover ratio

indicates how many times, on average, this process of selling and collecting is repeated during the period. The higher the ratio, the faster the collection of receivables.

Rather than evaluate the number of times accounts receivable turn over, some people find it easier to think in terms of the number of days to collect receivables (called

days to collect

).Slide36

Receivables Turnover Analysis

Receivable

Turnover

Ratio

=

Net Sales Revenue

Average Net Receivables

(Beginning net receivables + Ending net receivables) ÷ 2

$500,000

$ 50,000

= 10 times

Days to

Collect

=

365

Receivable Turnover Ratio

365

10

= 36.5 daysSlide37

Comparison to Benchmarks

Credit Terms

When companies sell on account, they specify the length of credit period (and any cash discounts for prompt payment). 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.Slide38

Speeding Up Collections

Factoring Receivables

One way to speed up collections is to sell outstanding accounts receivable to another company (called a

factor

). Your company receives cash for the receivables it sells to the factor (

minus a factoring fee

).

Credit Card Sales

Another way to avoid lengthy collection periods is to allow customers to pay for goods using PayPal or national credit cards. This not only speeds up the seller’s cash collection, but also reduces losses from customers writing bad checks. PayPal and Credit card companies charges a fee for their services.Slide39

Chapter 8Supplement 8A

Direct Write-Off MethodSlide40

Direct Write-Off Method

The direct write-off method, does not estimate bad debt. Instead, it

reports Sales when they occur and bad debt expense when it is discovered. This method is

not acceptable for GAAP

.

The reason the method isn’t considered GAAP is because it reports receivables at the total amount owed by customers rather than what is estimated to be collectible and it violates the expense recognition principle (matching principle) by recording bad debt expense in the period the customer’s account is determined to be bad rather than the period when the credit sales are actually made. Slide41

Direct Write-Off Method

A customer account is determined to be uncollectible and $1,000 of Bad Debt Expense needs to be recorded.

2

Record

dr Bad Debt Expense (+E, -SE)

cr Accounts Receivable (-A)

1,000

1,000Slide42

Chapter 8Solved Exercises

M8-10, E8-7, E8-8, E8-9, CP8-4, C8-1Slide43

M8-10 Using the Interest Formula to Compute Interest

Complete the following table by computing the missing amounts (

?

) for the following independent cases.

Case a. $100,000 × 10% × (6/12) =

$5,000

Case b. $3,000 ÷ [$50,000 × (9/12)] =

8%

Case c. [$4,000 ÷ 10%] × (12/12) =

$40,000

a.

b.

c.

Principal Amount of

Note Receivable

$ 100,000

$ 50,000

?

Annual

Interest Rate

10%

?

10%

Time Period

in Months

6

9

12

Interest

Earned

?

$ 3,000

$ 4,000Slide44

E8-7 Computing Bad Debt Expense Using Aging of Accounts Receivable Method

Brown Cow Dairy uses the aging approach to estimate Bad Debt Expense. The balance of each account receivable is aged on the basis of three time periods as follows: (1) 1–30 days old, $12,000; (2) 31–90 days old, $5,000; and (3) more than 90 days old, $3,000. Experience has shown that for each age group, the average loss rate on the amount of the receivable due to uncollectibility is (1) 5 percent, (2) 10 percent, and (3) 20 percent, respectively. At December 31, 2013 (end of the current year), the Allowance for Doubtful Accounts balance was $800 (credit) before the end-of-period adjusting entry is made.

Required:

Prepare a schedule to estimate an appropriate year-end balance for the Allowance for doubtful accounts.

What amount should be recorded as Bad Debt Expense for the current year?

If the unadjusted balance in the Allowance for Doubtful Accounts was a $600 debit balance

,

what would be the amount of Bad Debt Expense in 2013?Slide45

E8-7 Computing Bad Debt Expense Using Aging of Accounts Receivable Method

Req. 1

Total

$ 20,000

$ 1,700

>90

$ 3,000

20%

$ 600

31-90

$ 5,000

10%

$ 500

1 - 30

$ 12,000

5%

$ 600

Estimate Balance in Allowance

Existing Credit Balance in Allowance

Adjusting Journal Entry Amount

$ 1,700

800

$ 900

Req. 2

Allowance for Doubtful Accounts

800

900

1,700

Unadj. Bal.

AJE

Bal.

Req. 3

Allowance for Doubtful Accounts

2,300

1,700

AJE

Bal.

600

Unadj. Bal.Slide46

E8-8 Recording and Reporting Allowance for Doubtful Accounts Using the Percentage of Credit Sales and Aging of Accounts Receivable Methods

Innovative Tech, Inc. (ITI) uses the percentage of credit sales method to estimate bad debts each month and then uses the aging method at year-end. During November 2013, ITI sold services on account for $100,000 and estimated that ½ of one percent of those sales would be uncollectible. At its December 31 year-end, total Accounts Receivable is $89,000, aged as follows: (1) 1–30 days old, $75,000; (2) 31–90 days old, $10,000; and (3) more than 90 days old, $4,000. Experience has shown that for each age group, the average rate of

uncollectibility

is (1) 10 percent, (2) 20 percent, and (3) 40 percent, respectively. Before the end-of-year adjusting entry is made, the Allowance for Doubtful Accounts has a $1,600 credit balance at December 31, 2013.

Required:

Prepare the November 2013 adjusting entry for bad debts.

Prepare a schedule to estimate an appropriate year-end balance for the Allowance for Doubtful Accounts.

Prepare the December 31, 2013, adjusting entry.

Show how the various accounts related to accounts receivable should be shown on the December 31, 2013, balance sheet.Slide47

E8-8 Recording and Reporting Allowance for Doubtful Accounts Using the Percentage of Credit Sales and Aging of Accounts Receivable Methods

Req. 3

Allowance for Doubtful Accounts

1,600

9,500

11,100

Unadj. Bal.

AJE

Bal.

Req. 2

Total

$ 89,000

$ 11,100

>90

$ 4,000

40%

$ 1,600

31-90

$ 10,000

20%

$ 2,000

1 - 30

$ 75,000

10%

$ 7,500

Req. 1

November 30, 2013 AJE

dr Bad Debt Expense (+E, -SE)

cr Allowance for Doubtful Accounts (+xA, -A)

($500 = $100,000 x 0.005)

500

500Slide48

E8-8 Recording and Reporting Allowance for Doubtful Accounts Using the Percentage of Credit Sales and Aging of Accounts Receivable Methods

Req. 4

The accounts related to the accounts receivable can be shown one of two ways on the December 31, 2013 balance sheet:

OR

Accounts Receivable

Less: Allowance for Doubtful Accounts

Accounts Receivable, net of allowance

$ 89,000

(11,100)

$ 77,900

Accounts Receivable, net of Allowance for

Doubtful Accounts of $11,100

$ 77,900Slide49

E8-9 Recording and Determining the Effects of Write-Offs, Recoveries, and Bad Debt Expense Estimates on the Balance Sheet and Income Statement.

Fraud Investigators Inc. operates a fraud detection service.

Required:

Prepare journal entries for each transaction below.

On March 31, 10 customers were billed for detection services totaling $25,000.

On October 31, a customer balance of $1,500 from a prior year was determined to be uncollectible and was written off.

On December 15, a customer paid an old balance of $900, which had been written off in a prior year.

On December 31, $500 of bad debts were estimated and recorded for the year.

2. Complete the following table, indicating the amount and effect ( + for

increase, - for decrease, and NE for no effect) of each transaction. Ignore

income taxes.Slide50

E8-9 Recording and Determining the Effects of Write-Offs, Recoveries, and Bad Debt Expense Estimates on the Balance Sheet and Income Statement.

Req. 1

dr

Accounts Receivable (+A) 25,000

cr

Service Revenue (+R, +SE) 25,000

a.

b.

c.

d.

dr Bad Debt Expense (+E, -SE) 500

cr Allowance for Doubtful Accounts (+xA, -A) 500

dr

Accounts Receivable (+A) 900

cr Allowance for Doubtful Accounts (+xA, -A) 900dr

Cash (+A) 900 cr Accounts receivable (-A) 900

dr Allowance for Doubtful Accounts (-xA, +A) 1,500

cr Accounts Receivable (-A) 1,500 Slide51

E8-9 Recording and Determining the Effects of Write-Offs, Recoveries, and Bad Debt Expense Estimates on the Balance Sheet and Income Statement.

Req. 2Slide52

CP8-4 Accounting for Accounts and Notes Receivable Transactions

Execusmart

Consultants has provided business consulting services for several years. The company uses the percentage of credit sales method to estimate bad debts for internal monthly reporting purposes. At the end of each quarter, the company adjusts its records using the aging of accounts receivable method. The company entered into the following selected transactions during the first quarter of 2013.

During January, the company provided services for $200,000 on credit.

On January 31, the company estimated bad debts using 1 percent of credit sales.

On February 4, the company collected $100,000 of accounts receivable.

On February 15, the company wrote off a $500 account receivable.

During February, the company provided services for $150,000 on credit.

On February 28, the company estimated bad debts using 1 percent of credit sales.

On March 1, the company loaned $12,000 to an employee who signed a 10% note, due in 3 months.

On March 15, the company collected $500 on the account written off one month earlier.

On March 31, the company accrued interest earned on the note.

On March 31, the company adjusted for uncollectible accounts, based on the aging analysis shown on the next screen. Allowance for Doubtful Accounts has an unadjusted credit balance of $6,000.Slide53

CP8-4 Accounting for Accounts and Notes Receivable Transactions (continued)

Required:

For items a – j, analyze the amount and direction (+ or -) of effects on specific financial statement accounts and the overall accounting equation and prepare journal entries.

Show how the accounts receivable and related accounts would be reported in the current assets section of a classified balance sheet.

Name the accounts related to Accounts Receivable and Notes Receivable that would be reported on the income statement and indicate whether they would appear before, or after, Income from Operations.Slide54

CP8-4 Accounting for Accounts and Notes Receivable Transactions

Req. 1Slide55

CP8-4 Accounting for Accounts and Notes Receivable Transactions

Req. 1Slide56

CP8-4 Accounting for Accounts and Notes Receivable Transactions

Req. 1Slide57

CP8-4 Accounting for Accounts and Notes Receivable Transactions

Req. 1Slide58

CP8-4 Accounting for Accounts and Notes Receivable Transactions

Req. 1Slide59

CP8-4 Accounting for Accounts and Notes Receivable Transactions

Req. 1

Desired $8,390 – Current -$6000 = Adjustment $2,390Slide60

CP8-4 Accounting for Accounts and Notes Receivable Transactions

Req. 2

Execusmart Consultants would report Bad Debt Expense before Income from Operations, and Interest Revenue after Income for Operations.

Req. 3

EXECUSMART CONSULTANTS

Partial Balance Sheet

At March 31, 2013

Assets

Current Assets:

Accounts Receivable

Less: Allowance for Doubtful Accounts

Accounts Receivable, Net of Allowance

Note Receivable

Interest Receivable

$ 90,000

8,390

$ 81,610

12,000

100Slide61

C8-1 Comprehensive Exercise for Recording and Reporting Credit Sales and Bad Debts Using the Aging of Accounts Receivable Method

Okay Optical, Inc. (OOI) began operations in January 2013 selling inexpensive sunglasses to large retailers like Walgreen’s and other smaller stores. Assume the following transactions occurred during its first six months of operations.

January 1

- Sold merchandise to Walgreen’s on account for $20,000; the cost of goods to OOI was $12,000.

February 12

- Received payment in full from Walgreen’s.

March 1

- Sold merchandise to

Bravis

Pharmaco

on account for $3,000; the cost of goods to OOI was $1,400.

April 1

- Sold merchandise to Tony’s Pharmacy on account for $8,000. The cost to OOI was $4,400.May 1 - Sold merchandise to Anjuli Stores on account for $2,000; the cost to OOI was $1,200.June 17 - Received $6,500 on account from Tony’s Pharmacy.Required:Complete an aged listing of customer accounts at June 30.Estimate the Allowance for Doubtful Accounts required at June 30, 2013, assuming the following uncollectible rates: one month, 1 percent; two months, 5 percent; three months, 20 percent; more than three months, 40 percent.

Show how OOI would report its accounts receivable on its June 30 balance sheet. What amounts would be reported on an income statement prepared for the six-month period ended June 30, 2013?Bonus Question: In July 2013, OOI collected the balance due from Bravis Pharmaco but discovered that the balance due from Tony’s Pharmacy needed to be written off. Using this information, determine how accurate OOI was in estimating the Allowance for Doubtful Accounts needed for each of these two customers and in total.Slide62

C8-1 Comprehensive Exercise for Recording and Reporting Credit Sales and Bad Debts Using the Aging of Accounts Receivable Method

Req. 2

Accounts Receivable

Estimated Uncollectible (%)

Estimated Uncollectible ($)

Total

$ 6,500

$ 1,600

>3 months

$ 3,000

40%

$ 1,200

3 months

$ 1,500

20%

$ 300

2 months

$ 2,000

5%$ 100

Req. 1

Customer

Anjuli Stores

Bravis Pharmaco

Tony’s Pharmacy

Walgreens

Total

June

(1 Month)

$ -

>3

Months

$ 3,000

$ 3,000

April

(3 Months)

$ 1,500

$ 1,500

May

(2 Months)

$ 2,000

$ 2,000

Total

$ 2,000

3,000

1,500

-

$ 6,500Slide63

C8-1 Comprehensive Exercise for Recording and Reporting Credit Sales and Bad Debts Using the Aging of Accounts Receivable Method

Req. 3

OKAY OPTICAL, INC.

Partial Balance Sheet

At June 30, 2013

Accounts Receivable, Net of Allowance of $1,600 $4,900

OKAY OPTICAL, INC.

Partial Income Statement

For the Six Months Ended June 30, 2013

Sales Revenue

Cost of Goods Sold

Gross Profit

Bad Debt Expense

Income from Operations

$33,000

19,000

14,000

1,600

$12,400Slide64

C8-1 Comprehensive Exercise for Recording and Reporting Credit Sales and Bad Debts Using the Aging of Accounts Receivable Method

Req. 4

OOI did not accurately estimate the precise amounts that would be collected from each customer, yet the total estimate was reasonably accurate at $1,600. OOI underestimated the amount collectible from Bravis Pharmaco (40% of $3,000, or $1,200, was estimated uncollectible where it later turned out to be collectible in full). It overestimated the amount collectible from Tony’s Pharmacy (20% of $1,500, or $300, was estimated uncollectible where it later turned out to show that $1,500 was uncollectible). Looking at Bravis Pharmaco and Tony’s Pharmacy combined, the estimated bad debt for both customers was $1,500, which is only $100 less than the amount the company wrote off.Slide65

End of Chapter 8