Handout 7-1: Vandolay Industries

(1) On December 15, 2009, the company recorded $150,000 sales on credit.

Dec. 15

(2) On December 31, 2009, the company estimated bad debt expenses of $15,000.

Dec. 31

(3) On January 12, 2010, collect $100,000 worth of accounts receivable.

Jan. 12
2006

+ Accounts Receivable (A) –

Dec. 15 150,000

(4) After many collection attempts, the Company determined on June 15, 2010 that it would not
collect $10,000 in accounts receivables from Pendant Publishing. It decided to write-off this
account.

Jun. 15
2007

+ Accounts Receivable (A) – - Allowance for Doubtful Accounts (xA) +

Dec. 15 150,000 15,000 Dec. 31
100,000 Jan. 12

(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.

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 Jul. 16

Jul. 16

+ Accounts Receivable (A) – - Allowance for Doubtful Accounts (xA) +

Dec. 15 150,000 15,000 Dec. 31
100,000 Jan. 12 Jun. 15 10,000
10,000 Jun. 15

Handout 7-2: Vandolay Industries Estimates Bad Debts

In 2010, Vandolay Industries needs to estimate bad debts. It has decided to compare both
methods:

1. Percentage of Credit Sales

2. Aging of Accounts Receivable

In 2010, Vandolay reported $300,000 in sales. Based on prior experience, management estimates
that 2.5% of sales will result in bad debts. Estimate Vandolay’s Allowance for Bad Debts and
record the appropriate journal entries.

Dec. 31

+ Bad debt expense(E) – - Allowance for Doubtful Accounts (xA) +

12,000 BegBal

Vandolay accountants believe that receivables 0-30 days old have a 5% chance of noncollection.
Receivables 30-60 days old have a 10% chance of noncollection. Receivables 60-90 days old
have a 20% chance of noncollection. Receivables over 90 days old have a 40% chance of
noncollection. Estimate Vandolay’s Allowance for Bad Debts and record the appropriate journal
entries. Vandolay Industries accountants prepared the following Aging of Accounts Receivable:

Number of days unpaid

Customer Total
0-30 30-60 60-90 Over 90
Alpha Sales $700 $700
Gamma Manufacturing Co. 1,900 $1,900
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 Delta Shipping Corp. 2,200 $2,200
Epsilon Industries 6,000 $6,000
Theta Manufacturing 1,800 1,800
… … … … … …
Zeta Industries 600 600
Totals $150,00 $90,000 $30,00 $12,000 $18,000
0 0

Estimated uncollectable amount

Dec. 31

+ Bad debt expense(E) – - Allowance for Doubtful Accounts (xA) +

12,000 BegBal

Handout 7-3: Recording and Reporting Allowance for Doubtful Accounts Using the Percentage
of Credit Sales and Aging of Accounts Receivable Methods

InnovativeTech, 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 2010, 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) 1
percent, (2) 15 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, 2010.
Required:
1. Prepare the November 2010 adjusting entry for bad debts.
2. Prepare a schedule to estimate an appropriate year-end balance for the Allowance for
Doubtful Accounts.
3. Prepare the December 31, 2010, adjusting entry.
4. Show how the various accounts related to accounts receivable should be shown on the
December 31, 2010, balance sheet.

Req.1
November 30, 2010 Adjusting Journal Entry:

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Req. 2
The adjustment for estimated Bad Debt Expense for 2010 is computed as follows:
Total 1-30 31-90 > 90
Accounts Receivable $ 89,000 $ 75,000 $ 10,000 $ 4,000
Estimated Uncollectible (%)
Estimated Uncollectible ($)

Req. 3
Allowance for Doubtful Accounts
Unadj. Bal.
Adjustment
Desired Bal.

December 31, 2010 Adjusting Journal Entry:

Req. 4

Handout 7-4: Matrix Inc.

Cash balance per bank, July 31 $9,610

Cash balance per general ledger, July 31 7,430
Outstanding cheques 2,417
Cheque mailed to the bank for deposit, had not reached the bank 500
by the statement date
NSF cheque returned by bank, for accounts receivable 225
July interest earned, on bank statement 30
Cheque no. 781 for supplies expense cleared the bank for $268,
erroneously recorded in the books for $240.
Deposit by Acme Company erroneously credited to our account 486

Prepare the bank reconciliation for Matrix Inc. and make adjusting entries
$
Bank Balance, July 31
Add: Deposit in Transit
Less: Bank Error
Outstanding cheques

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 Adjusted Bank Balance, July 31

Book Balance, July 31 $

Add: Interest

Less: Recording Error

NSF Cheque
Adjusted Book Balance, July31 $

Self-Study Quiz
1) Samsonic wrote off a $45,000 bad debt. Which of the following statements is not true?
a) Net accounts receivable remained the same.
b) Total assets remained the same.
c) The write-off did not affect net income.
d) All of the above statements are not true.

2) What kind of account is allowance for doubtful accounts?

a) Revenue
b) Contra-Revenue
c) Contra-Asset
d) Asset

3) Smores Chocolate Company sets bad debt expense at 3% of its credit sales. The Company
reported total credit sales of $250,000. Before the adjustment, Smores had $2,250 in its
allowance for doubtful accounts. How much bad debt expense did Smores report on its
income statement?
a) $5,250
b) $7,500
c) $9,750
d) None of the above

4) Sonic Inc. uses an aging of accounts receivable to compute bad debts. The aging showed that
$9,000 of accounts receivable were likely not to be collected. Sonic reported total credit
sales of $250,000. Before the adjustment, Sonic had $4,250 in its allowance for doubtful
accounts. How much bad debt expense did Sonic report on its income statement?
a) $4,250
b) $4,750
c) $9,000
d) None of the above

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5) Briloff Co. accountants prepared the following aging totals:
0-30 days old 30-60 days old 60-90 days More than 90 days old
old
Tota $50,000 $35,000 $20,000 $10,000
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Debts 30 days or less had a 98% chance of collection. Debts 30-60 days old had a 95% chance
of collection. Debts 60-90 days old had a 90% chance of collection. Debts more than 90 days
old have a 75% chance of collection. Compute Briloff’s ending balance in the allowance for
doubtful accounts.
a) $6,250
b) $7,250
c) $107,750
d) $115,000

6) The matching principle says:

a) Record an allowance against accounts receivable
b) Write-off customer balances when deemed uncollectible
c) Do not smooth earnings
d) Estimate bad debt expense in the same period as sales are made.