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Week
Running Head: WEEK 2 INDIVIDUAL ASSIGNMENTS FROM THE READING
Solutions Guide: Please do not present as your own. This is only meant as a solutions guide for you to answer the problem on your own. I recommend doing this with any content you buy online whether from me or from someone else.
Week 2 Individual Assignments from the Reading
Michael T. Ryan
University of Phoenix
ACC 400 – Accounting for Decision Making
Lee Kroll
May 8, 2010
Week 2 Individual Assignments from the Reading
Chapter 8
3) What are the essential features of the allowance method of accounting for bad debts?
The essential features of the allowance method of accounting for bad debts are:
(1) Uncollectible accounts receivable are estimated and matched against revenues in the same accounting period in which the revenues occurred.
(2) Estimated uncollectibles are debited to Bad Debts Expense and credited to Allowance for Doubtful Accounts through an adjusting entry at the end of each period.
(3) Actual uncollectibles are debited to Allowance for Doubtful Accounts and credited to Accounts Receivable at the time the specific account is written off as uncollectible.
4) Lauren Anderson cannot understand why the cash realizable value does not decrease when an uncollectible account is written off under the allowance method. Clarify this point for Lauren.
Lauren should realize that the decrease in cash realizable value occurs when
estimated uncollectibles are recognized in an adjusting entry. The write-off of an
uncollectible account reduces both accounts receivable and the allowance for
doubtful accounts by the same amount. Thus, cash realizable value does not change.
E8-5) Hachey Company has accounts receivable of $95,100 at March 31, 2007. An analysis of the accounts shows these amounts.
Balance, March 31
Month of Sale / 2007 / 2006March / $65,000 / $75,000
February / 12,600 / 8,000
December and January / 10,100 / 2,400
November and October / 7,400 / 1,100
$95,100 / $86,500
Credit terms are 2/10, n/30. At March 31, 2007, there is a $2,200 credit balance in Al-
lowance for Doubtful Accounts prior to adjustment. The company uses the percentage of
receivables basis for estimating uncollectible accounts. The company’s estimates of bad
debts are as shown below.
Age of Accounts / Estimated % UncollectibleCurrent / 2
1-30 days past due / 7
31-90 days past due / 30
Over 90 days / 50
Instructions
(a) Determine the total estimated uncollectibles.
(b) Prepare the adjusting entry at March 31, 2007, to record bad debts expense.
(c) Discuss the implications of the changes in the aging schedule from 2006 to 2007.
(a) Accounts Receivable Amount % Estimated Uncollectible
Current $65,000 2.0 $1,300
1–30 days past due 12,600 7.0 882
31–90 days past due 10,100 30.0 3,030
Over 90 days 7,400 50.0 3,700
$8,912
(b) Mar. 31 Bad Debts Expense 6,712
Allowance for Doubtful Accounts 6,712
($8,912 – $2,200)
(c) The total balance of receivables increased from 2006 to 2007. However, of concern is the fact that each of the three categories of older accounts increased substantially during 2007. That is, customers are taking longer to pay and bad debts are likely to increase. Management needs to investigate the causes of this change.