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Accounts & Budget Support LEVEL III

Learning
Guide#2
Unit of Competence: Administer Subsidiary Accounts and Ledgers

Module Title: Administer Subsidiary Accounts and Ledgers

LG Code: BUF ACB3 02 0812

TTLM Code: BUF ACB3M 02 0812

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INTRODUCTION

Welcome to the module “Administer Subsidiary Accounts and Ledgers”. This learner’s
guide was prepared to help you achieve the required competence in “Accounts and Budget
Support Level III”. This will be the source of information for you to acquire knowledge
attitude and skills in this particular occupation with minimum supervision or help from your
trainer.

Summary of Learning Outcomes

After completing this learning guide, you should be able to:

Lo1:- Review accounts receivable process
Lo2:- Identify bad and doubtful debts
Lo3:- Review compliance with terms and conditions and plan recovery action
Lo4:- Prepare reports and file documentation
Lo5:- Distribute creditor’s invoices for authorization
Lo6:- Remit payments to creditors
Lo7:- Prepare accounts paid report and reconcile balances outstanding

How to Use this TTLM

o Read through the Learning Guide carefully. It is divided into sections that cover all
the knowledge, skills and attitude that you need.
o Read Information Sheets and complete the Self-Check at the end of each section to
check your progress
o Read and make sure to Practice the activities in the Operation Sheets. Ask your
trainer to show you the correct way to do things or talk to more experienced person
for guidance.
o When you are ready, ask your trainer for institutional assessment and provide you
with feedback from your performance.

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Lo1:- Review accounts receivable process

1.1 Receipts entered into accounts receivable system are checked for accuracy,
consistency and thoroughness
Classification of Receivables
Receivables can be broadly classified into Trade Receivables and Non-trade Receivables. Trade
Receivables describe amounts owed to the company for goods and services sold in the normal
course of business. Non-trade Receivable arise from many other sources, such as advance to
employees, interest receivables, rent receivables and loan to affiliated companies. Unless we
indicate otherwise, we will assume that all receivables in this unit are trade receivables.

Based on the above broad classification, receivables can be further classified into Account
Receivable and Notes Receivables. Account Receivable refers to amounts due from customers
for credit sales. These receivables are supported by sales invoices or other documents rather than
any formal written promises. Such Account Receivables are normally expected to be collected
within relatively short period, such as 30 or 60 days. They are classified on the balance sheet as a
current asset. On the other hand, Notes Receivable refers to amounts that customers owe, for
which a formal, written instrument of credit has been issued. Notes are usually used for credit
periods of more than sixty days and for transactions of relatively large value. Notes may also be
used in settlement of an open account and in borrowing or lending money.
Receivables usually composed substantial components of firm’s current assets, thus considered
as important factor in evaluating the financial position of a firm. In common they are resulted
from events such as sale of goods or services, loans made, subscriptions obtained from investors
for capital stock or bonds, claims for income tax refunds, claims resulting from litigation, etc.
Receivables from customers frequently represent a substantial part of a business enterprise's
current assets. Poor screening of applicants for credit or an inefficient collection policy may
result in large loses. Consequently, strong accounting controls and effective management of
receivables are typical characteristics of most profitable enterprises.
Receivables may be classified in different manner, such as:
Trade Receivables: they are also called receivables from sales of goods and services. They
result from ordinary revenue-producing activities and they include accounts receivables,
installment receivables, or notes receivables.
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Non-Trade Receivables:- These are receivables from miscellaneous sources. These are
receivables resulting from services which are non-recurring or unusual transactions.
Examples include:
 Claims against insurance companies, legal suit for damages.
 Prospective retuning
 Deposits to cover damages, as guarantee
 Receivables from employees or officers
 Receivables from sale of other assets such as from disposal of plant assets
 Accrual of interest, dividend, rent, royalties
 Overpayment of trade accounts payable, etc.
Receivables may also be classified as open account (a non-written promise to pay) or a note (a
written promise to pay). Open accounts are less formal, mostly non-interest bearing and used for
a shorter period, involve loser amount. On the other hand, notes receivables are represented by
promissory notes that give them a stronger status than ordinary open accounts

LO2. IDENTIFY BAD AND DOUBTFUL DEBTS

2.1 Debtors ledger is regularly reviewed in accordance with organization policy and guidelines
to identify outstanding monies and further information, if required, sought from relevant
sources
INTRODUCTION
Accounting for uncollectible Accounts Receivable

When credit is extended, some amount of uncollectible receivables is generally inevitable

regardless of the care taken in granting credit and the control procedures used. The operating
expense incurred because of the failure to collect receivables is called Uncollectible Accounts
Expense or Bad Debts Expense or Doubtful Accounts Expense.
When does an account as a note become uncollectible? There is no general rule for determining
when an account receivable becomes uncollectible. The fact that a debtor fails to pay an account
receivable according to a sales contract or fails to pay a note on the due date does not necessarily
mean that the account receivable will be uncollectible. The debtor’s bankruptcy is one of the
most significant indications of partial or complete uncollectibility. Other indications include the
closing of the customer’s business and the failure of repeated attempts to collect.

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There are two methods of accounting for uncollectible receivables. The allowance method,
which provides an expense for uncollectible receivables in advance of their write-off (removal
from the ledger) and the direct write-off method, which recognizes the expense only when
accounts receivable are judged to be worthless. We will discuss each of these methods next.
2.2 Bad or doubtful debt status is verified through liaison with debtors
Allowance Method
The allowance method of accounting for bad debts matches the expected loss from uncollectibles
A/R against the sales they helped produce. We must use expected losses since management can’t
exactly identify the customers who won’t pay their bills at the time of sale. This means at the end
of each period the allowance method requires us to estimate the total bad debts expected to result
from that period’s sales. An allowance is then recorded for this expected loss. This method has
two advantages over the direct write-off method:

(1) Bad debt expense is charged to the period in which the related sales are recognized, and
(2) A/R is reported on the Balance Sheet at the estimated amount of cash to be collected.

The allowance method estimates bad debt expense at the end of each accounting period and
records it through an adjusting entry. To illustrate this method, assume the A/R account has a
balance of Br. 50,000 and based on careful study of the experience of other companies, Nile Co.
estimates that a total of Br. 2000 will be uncollectible.

This estimated expense is recorded through the following adjusting entry.

Dec. 31 Uncollectible Accounts Expense 2000
Allowance for Doubtful Accounts 2000
To record estimated bad debts

The amount Br. 2000 is an estimated reduction in A/R;but it cannot be credited to specific
customer accounts or to the A/R controlling account. Instead, a contra asset account entitled
Allowance for Doubtful Accounts is credited.

As with all periodic adjustments the above entry serves two purposes. First, it reduces the value
of the receivable to the amount of cash expected to be realized in the future. This amount, which

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is Br. 48,000 (Br. 50,000 – Br. 2,000), is called the Net Realizable value of the receivables.
Second, the adjusting entry matches the Br. 2000 expense of uncollectibles account with the
related revenues of the period.

Write-off to the Allowance Account

When specific accounts are identified as uncollectible, they are written-off against the Allowance
for Doubtful Accounts. Assume after spending some time trying to collect from Shalla Co., Nile
Co. decides that Shalla’s Br. 200 accounts receivable is uncollectible and makes the following
entry to writ-it off.

Jan. 25 Allowance for Doubtful Accounts 200

A/R-Shalla Co. 200
To write-off uncollectible accounts.

Note two aspects of this entry and its related accounts

Before Write-off After Write-off
A/R 50,000 49,800
Less Allowance for D. a/cs 2,000 1,800
NRV 48,000 48,000
Neither total assets nor net income are affected by the Write-off of a specific account. But both
total assets and net income are affected by the recognized bad debts expense for the year in the
adjusting entry.
2.3 Reporting procedures and appropriate documentation for bad and doubtful debts is
completed in accordance with organization policy and guidelines
Recovery of Uncollectible Accounts

When a customer fails to pay and the account is written-off as uncollectibles, his or her credit
standing is jeopardized. To help restore credit standing, a customer may later choose to
voluntarily pay all or part of the amount owed. A company makes two entries when collecting an
account previously written-off. The first is to reverse the original write-off and reinstate the
customer’s account. For example, assume the amount written-of in the preceding entry is later
collected on February 15.

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On Feb. 15- The entries to record this recovery are:

Feb. 15- A/R Shalla Co. 200
Allowance for Doubtful Accounts 200
To reinstate accounts previously written-off
Feb. 15- Cash 200
A/R-Shalla Co. 200
To record full payment of account

Estimating Uncollectible

The allowance method of accounting for bad debts requires an estimate of bad debts expense to
prepare the adjusting entry at the end of each accounting period. How does a company estimate
bad debts expense? There are two common methods. One is based on the Income Statement
relationship between bad debts expense and sales. The second is based on the Balance Sheet
relationship between A/R and the Allowance for Doubtful Accounts. Both methods require an
analysis of past experience.
Estimating Based on Sales

Accounts receivable are created by credit sales. The amount of credits sales during the period
may therefore be used to estimate the amount of uncollectible accounts expense. The amount of
this estimate is added to whatever balance exists in Allowance for Doubtful Accounts. To
illustrate, assume Wonji Co. has credit sales of Br. 500,000 in 20X2. Based on past experience
and the experience of other Cos, Wonji Co. estimated 0.007% of credit sales are uncollectible.
Using this prediction, the adjusting entry for uncollectible accounts at the end of the period,
20X2 is as follows.

Dec. 31 Uncollectible Accounts Exp. (500,000 X 0.007%) 3500

Allowance for Doubtful Accounts 3500
To record estimated Uncoll. Exp.

This entry doesn’t mean that the Dec. 31, 20X2, balance of Allowance for Doubtful Accounts
will be Br. 3500. A Br. 3500 balance results only if the account had a zero balance prior to

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posting the adjusting entry. For example, assume that Allowance for Doubtful Accounts has a
credit balance of Br. 1000 before adjustment. Now, what will be the balance of Allowance for
Doubtful Accounts be at the end of 20X2 ? It will be Br. 4500. If there had been a debit balance
of Br. 500 in the Allowance for Doubtful Accounts before the year-end adjustment, and the
amount of adjustment. would still have been Br. 3500. What will have been the end balance of
Allowance for Doubtful Accounts at the end of 20X2? (Find by your own!)

Estimate Based on Analysis of Receivables

The longer an A/R remains outstanding, the less likely that it will be collected. Thus, we can
base the estimate of uncollectible accounts on how long the accounts have been outstanding. For
this purpose, we can use a process called Ageing receivables which examines each A/R to
estimate the amount of uncollectible. Receivables are classified by how long they are past their
due date. Then, estimates of uncollectible are made assuming the longer an amount is past due
the more likely it is to be uncollectible. After the outstanding amounts are classified and
analyzed in the Aging schedule the expected balance for the Allowance for Doubtful Accounts
will be estimated. Let’s assume the amount estimated is Br. 5000. So, do you think this is the
adjustment amount required for the current period? NO!

Because, this estimated amount is the expected balance of the Allowance for Doubtful Accounts
after adjustment rather than the current year provision for Uncollectible Accounts Expense.
Therefore, to determine the current year provision we must take in to account the balance before
adjustment in the Allowance for Doubtful Accounts. To illustrate, assume there is as credit
Balance of Br. 1300 in the allowance account before adjustment. The amount to be added to this
balance is therefore Br. 3800 (B.r 5000 – Br. 1200) and the adjustment entry is as follows:

Dec. 31 Uncollectible Accounts Expense 3800

Allowance for Doubtful Accounts 3800
To record Uncollectible expense.
Alternatively, if the Allowance for Doubtful Accounts had an unadjusted debit balance of Br.
700, then the required adjustment is Br. 5700. (Br. 5000 + 700) and the adjustment entry is as
follows:

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Dec. 31 . Uncollectible Accounts Expense 5700

Allowance for Doubtful Accounts 5700
To record Uncollectible expense .

The Direct- Write-Off Method

The Direct Write-off method of accounting for bad debts records the loss from an uncollectible
A/R at the time it is determined to be uncollectible. No attempt is made to predict uncollectible
accounts expense. Bad debt expense is recorded when specific accounts are determined to be
worthless. If Wonji Co. uses a direct write-off method and determines on Feb. 20, it can’t collect
from a customer- Home Co.- Br. 500. The entry to write-off the customer’s account is as follows

Feb. 20 Uncollectible Accounts Expense 500

A/R- Home Co. 500
To write-off Uncollectible accounts

Sometimes an amount previously written off is later collected. This can be due to factors such as
continual collection efforts or the good fortune of a customer. If the account of Home Co. that
was written-off directly to Bad Debit Expense is later collected in full, the following two entries
record this recovery.
Mar. 5 - A/R- Home Co. 500
Uncollectible Accounts Expense 500
To reinstate account
Mar. 5 - Cash 500
A/R- Home Co. 500
To record full payment of account
If the recovery is in the year following the writ- off, there is no balance in the Uncollectible
Accounts Expense account related to the previous year’s write-off and no other write-offs are
expected. So the credit portion of the entry recording the recovery can be made to a Bad Debts
Recoveries revenue account.
To conclude this part companies must weigh at least two principles when
considering use of the direct write-off method

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LO3. Review compliance with terms and conditions and plan recovery action
 Information required for opening accounts may include: amount of initial deposit
 other signatories to the account
 primary account holder's:
 name
 address
 contact details
 purpose for which the account will be used
 Required links to other accounts held.
Discounting Notes Receivable
If the holder of the note is in need of more funds/ cash for current operation, it may be endorsed
or transferred to a bank or any financial agency. This process if called discounting notes
receivable.
When a note is discounted at bank, the bank charges an interest on the maturity value of the note.
This interest is called discount and it is computed using the following formula.
Discount = Maturity value * Discounting rate * Discounting period/time
The amount of money paid to the endorser/ holder of the note who transfers it to the bank
because of high need of cash, is called proceeds/ balance. It is the excess of the maturity value
over the discount, i.e., Proceeds = Maturity value – Discount.
To illustrate a discounting notes receivable, assume that a 90-day, 12% notes receivable for
Br.1800, dated November 8, 2001, is discounted at the bank on December 31, 2001 at the
discounting rate of 14%. Assume a 360-days year.

Required:
1) Determine the due date, discounting period, Interest, the discount, maturity value,
and proceeds.
2) Prepare entries to record discounting of the note.
Solution:
1) Interest = Principal * Rate * Time
= Br. 1800 * 12% * 90 days = Br. 54
360
Maturity value = Principal + interest
= Br.1800 + Br.54 = Br. 1854

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Due date = Terms ........................................ 90 days

Days in November (30-8) 22
Days in December 31
Days in January 31 84
Due date is February 6
Discount period:
December (31-3) 28
January 31
February 6
65 days

November 8 December 3 February 6

(Issuance date) (Discounting date) (Due date)
Discount = Maturity value * Discounting rate * Discounting period
= Br. 1854 * 14% * 65/360 = Br. 46.87 this is the amount to the bank as
an interest.
Proceeds = Maturity value – Discount
= Br. 1854 - Br. 46.87 = Br. 1807.13 this is the amount the holder of the
note will receive from the bank in exchange of the note.
2) Entries on December 3, when the note is endorsed to the bank is (to record the proceeds)
Cash ..................................... Br. 1807.13
Notes Receivable ............................. 1800
Interest income (Br.54 - Br. 46.87) ... 7.13
Note that if the proceeds are greater than the face value of the note, there will be an interest
income to the organization. Otherwise, there will be interest expense. Or if the interest is
greater than the discount the difference is interest income to the discounting notes but if the
interest is less than the discount the difference is charged to interest expense account to the
organization, which discounts the note at bank.

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Dishonored notes
In business organizations, the maker of the note may fail to pay the debt on the due date. Here, in
this case, the note is said dishonored, which is not longer negotiable or transferable. For this
reason the holder usually transfers the claim, including any interest due, to the accounts
receivable. To illustrate this fact, assume a Br. 12,000, 30-days, 12% notes receivable on
December 31, 2001, had been dishonored at the due date (January 20, 2002
Required: 1) Calculate the maturity value.
2) Record entries occurred on the issuance date and maturity date?
Solutions:
1) Interest = Br.12,000 * 12% * 30/360 = Br.120
Maturity value = Br.12,000 + Br.120 = Br.12,120
2) Entries on the issuance date (December 21, 2001)
Notes Receivable ......................... Br. 12,000
Accounts Receivable ................................... Br. 12,000
Entries on the maturity Date (January 20, 2002)
Accounts Receivable ............................. Br. 12,120
Notes Receivable ...................................... 12,000
Interest income .......................................... 120
Dishonored Discounted notes
When a discounted note receivable is dishonored, the holder usually notifies the endorser of such
fact and asks for payment. If the request for payment and notification of dishonor are timely, the
endorser is legally obligated to pay the amount due on the note. The entire amount paid to the
holder by the endorser, including interest, should be debited to the account receivable of the
maker.
To illustrate this fact assume that a 60-day, 12% Br. 42,00 note dated November 8, 2001,
discounted on December 3, 2001 at 14% discounting rate is dishonored at maturity by the maker.
Assume, the bank charged Br.50 as penalty for the failure (called protest fee). Assume further a
360-days accounting year ending on December.
Required: Record all the necessary transactions & compute all the amounts required.

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Due date:
Solutions: Term period .......................................................... 60 days
Days in November (30-8) .................................... 22
38
Days in December ................................................ 31
January 7 is the due date ....................................... 7
Discounting period:
Days in December (31-3) ..................................... 28
January ................................................................. 7
35 day
Interest = Br. 42,000 *12% * 60/360 = Br. 840
Maturity value = Br. 42,000 + Br. 840 = Br. 42,840
Discount = Br. 42, 840 * 14% * 35/360 = Br. 583.10
Proceeds = Br. 42,840 - Br. 583.10 = Br. 42,256.90
Entries: On November 8 (issuance date:
Notes Receivable .............................. Br. 42,000
Accounts Receivable .......................... Br. 42,000
On December 3, 2001 to record the proceeds.
Cash ...................................... Br. 42,256.90
Notes Receivable ..................... Br. 42,000
Interest income ......................... 256.90
On January 7,2002, to record the dishonored discounted note.
Accounts Receivable (42,840 + 50) ................. 42,890
Notes Receivable ............................................. 42,890

Uncollectible Receivables
Regardless of the care used in granting credit and the effectiveness of collection procedures used,
a part of the claims against customers usually proved to be uncollectible. This could be because
of bankruptcy, closing of the debtors business of failure of repeated attempts to collect. In any
way, the operating expense incurred because of the failure to collect receivables is called an
expense /a loss from uncollectible accounts/ doubtful accounts or bad debt Expense.

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There are two methods of accounting for receivables that are believed to be uncollectible.
a) The allowance method (reserve method)
b) The direct write-off (direct charge-off method)
A) The allowance method: This method provides in advance for uncollectible receivables. The
advance provision or estimation for future uncollectibility is made by an adjusting entry at
the end of the fiscal year. It reduces the value of receivables to the amount of cash expected
to be realizable from customers in future. It matches current expense with current revenue.
Example: ABC-company started its operation on January 1, 2001 and chooses to use the
calendar year as its fiscal year. The accounts receivable, has a balance of Br. 200,000
at the end of the period in total.
At this period no specific accounts are believed to be wholly uncollectible. But it seems likely
that some will be collected only in part and that others are likely to become worthless.
Assume based on a careful study, it is estimated that a total of Br. 8000 will eventually proved to
be uncollectible. Then,
i) What is the expected realizable accounts Receivable.
ii) Journalize the entry to record the estimated bad debt expense
iii) what do you think will be the effect of not recording such corrections?
Solution:
i) Net realizable value = Br. 200,000 - Br. 8000 = Br. 192,000
ii) Bad debt expense ........................ Br. 8000
Allowance for uncollectible.................... Br. 8000
The bad debt expense is reported on the income statement but the allowance for
uncollectible is reported on the balance sheet as contra of accounts receivable.
iii) The effect is understating expenses and overstatement of net income, capital and asset
amounts.
Note that the Br. 8000 reduction in accounts receivable cannot yet be identified with a specific
customer accounts in the subsidiary ledger and should, therefore, not be credited to accounts
receivable but to allowance for doubtful account, which is a contra asset account.
Write-offs to the allowance account.
When an account is believed to be uncollectible, the amount is transferred from the allowance for
doubtful account to the accounts receivable.
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Self check
1., assume Br. 2000 of the accounts receivable of customer – x of ABC company has been
determined to be uncollectible during 2002. The adjusting entry to write-off the allowance would
be:
2. If an accounts receivable that has been written-off against the allowance account is later
collected, the account should be re-instated by an entry that is exact reverse of the write-offs
entry:
Assume that ABC Company’s customer-x has paid the Br.2000. Record the entry.

LO4: prepare reports and documentation

This is entry to record collection of cash
The accuracy and sufficiency of information provided includes ensuring:

authenticity of signatures
checks against or links to existing customer account information
completeness of documentation
provision of sufficient documentary evidence (points) to meet the requirements
for establishing a new account
Estimating uncollectible
The estimates of uncollectible at the end of the fiscal period are based on past experiences and
forecasts of future business activities. It is based on either:
a) The amount of sales for the entire period (called an income statement approach) or
b) The amount and age of receivables account at the end of the fiscal period. (called
balance sheet approach).
a) Income statement approach:
Formula:

Estimated Bad debt expense = Net credit sales * Percentage of estimate be to be uncollectible.

The amount of this estimate is added to whatever balance exists in the allowance for doubtful
account.

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Examples: Assume net credit sales on December 31, 2001 for ABC organization is Br.200,
000, estimated uncollectible ..................................... 1.5%
Required: Record the entry
Bad debt expenses (200,000 * 1.5%) ............... 3000
Allowance for uncollectible ............................. 3000
c) Balance sheet approach: The process of analyzing the receivable accounts in terms of
the length of time past due is sometimes called aging of the receivable. The due date of
the account is the base point for determining age. In this method accounts are categorized
individually based on the length of time they have been outstanding and apply the
expected percentage of uncollectible.

Example: At the end of 2001 accounts receivable ledger of ABC company has the balance of
Br.200,000 which can be categorized as follows:
Age group amount Estimated percentage Estimated amount of
(a) of uncollectible uncollectible
(b) C=a*b

Not yet due Br. 80,000 0.5% Br. 400

1-30 days past due 25,000 1% 250
31-60 days past due 20,000 2% 400
61-120 days past due 60,000 5% 3000
More than 120 days
past due 15,000 20% 3000
Br.200,000 Br.7050

The Br.7050 amount is the desired balance of allowance account after adjustment; and to be
deducted from accounts receivable to determine the net realizable value. Assuming that the
allowance for uncollectible account had no balance, the entry to record this new amount is:
Bad debt expense .............................. Br.7050
Allowance for uncollectible ...................... Br.7050
Note that if the allowance account has a debit or credit balance before adjustment, it must be
considered accordingly when the base of the estimation is the balance sheet approach.
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B) Direct write off, method

Under this method of accounting for receivables no valuation of allowance for accounts
receivable is used. The business recognizes no uncollectible account expense until specific
receivables are determined to be worthless. Thus, receivables are not stated at net realizable
value. This method lacks to follow the matching principle.
The entry to record the write-off the uncollectible account is:
Bad debt expense .............................. xxx
Accounts receivable ............................ xxx
To record the recovery of accounts previously written-off is:
Accounting receivable ............................ xxx
Bad debt expense ...................................xxx and
Cash .........................................xxx
Accounts receivable .......................xxx
Self check
1) Assume Br. 2000 of the accounts receivable of customer – x of ABC Company has been
determined to be uncollectible during 2002.

Required: The adjusting entry to write-off the allowance would be:

2) Assume that ABC Company’s customer-x has paid the Br.2000. Record the entry.

Required: prepare the necessary journal entries

3) ABC-company started its operation on January 1, 2001 and chooses to use the calendar
year as its fiscal year. The accounts receivable, has a balance of Br. 200,000 at the end of
the period in total.

At this period no specific accounts are believed to be wholly uncollectible. But it seems likely
that some will be collected only in part and that others are likely to become worthless.
Assume based on a careful study, it is estimated that a total of Br. 8000 will eventually proved to
be uncollectible. Then,
i) What is the expected realizable account Receivable?
ii) Journalize the entry to record the estimated bad debt expense

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iii) What do you think will be the effect of not recording such corrections?

Lo5: Distribute creditor’s invoices for authorization

Information Sheet: - Accounting System and Internal Control

Effective internal control over sale of goods and related cash collections are integral parts of the
system for handling trade accounts receivable. For effective handling of receivables the
following mechanisms should be applied in a business organization:
Segregation of duties: This means separation of responsibilities in a business firm. An
individual who is assigned for recording sales and collection of trade receivables should not be
assigned in handling cash receipts or in preparing bank deposit slips.
Cycle billing:- It is a procedures that insures timely collection of receivables and it involves
billing customer as different time schedules after getting customers classified on different basis
such as geographic location or type of customer.

Accounting Activities for Trade Receivables

In trade receivables the following major activities are treated:
 Recognition of receivables
 Valuation of receivables
 Disposition of receivables
Recognition of receivables: In recording trade accounts receivables the following two questions
should be answered.
1. At what point in the earning process should a trade accounts receivable be recorded? And
2, How should the net amount of a trade accounts receivable be measured so that related
asset, revenue and expense accounts will be accounted accurately?

The answer for question No. 1 is: Trade accounts receivable is recorded when sales are made and
title to the goods is transferred to the buyer, i.e., at the point of sale. It should be noted hat when
customer order is received, goods are produced or when goods are shipped on consignment
receivables should not be recorded or recognized. However, receivables may be recorded for

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work completed on construction type contracts. This is congruent with revenue recognition for
long-term project under percentage completion method.

In recording/ recognizing receivables the following factors should be taken into consideration.
 Trade discount
 Cash/sales discount
 Estimated collection costs for receivables
 Sales returns and allowance
 Allowance for fright-out (Transportation costs)
 Sales tax
 Container deposits (Cash Debit and Credit container deposit liabilities)
Valuation of receivables: It involves determining the net realizable value (present value) of
claims from customers considering the amount due and the estimate of the probability that the
receivable will be collected. This process recognizes doubtful account expense or bad debt
expense related to non-collectability of receivable. Receivables that will never be collected have
a zero value, and the related revenue will not be realized. Thus, the major objective of estimating
this doubtful account is to prevent an overestimate of assets and revenue in the accounting period
in which the sales are made.

Two accounting methods may be adopted to account for doubtful accounts.

a. Allowance method or reserve method
b. Direct-write-off method or direct charge of method.
Allowance method: Under this method, adjustments are made at the end of each accounting
period in order to estimate the amount of receivable that is probable to be unelectable. An
account called allowance for doubtful account is used and the adjusting entry at the end of the
year for this method is presented as follows:
Doubtful account expense -------------- xxx
Allowance for doubtful account -------------- xxx

The objective of this adjustment is to prevent overstatement of assets and revenues in the period
in which the sales is made.
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The net realizable value (carrying amount) of trade accounts receivable which is reported on the
balance sheet is calculated as follows:

NRV of A/R(carrying amount) = Accounts receivable(gross) - Balance of valuation allowance

accounts(after adjustment)

The doubtful account expense recorded may be reported in the income statement as operating
expense (most commonly used practice) or as other non-operating expense or as a deduction
from sales.
Illustration: Account balance of accounts receivable for pear trading at December 31, year 6 is
determined to be a positive balance of $60,000. On the other hand, allowance for doubtful
accounts has a credit balance of $ 2,000 before adjustment and 5% of accounts receivable is
estimated to be uncollectible.
Required:
a. Compute the total amount of the allowance for doubtful account
b. Compute the net realizable value of the receivable
c. Record the adjusting entry

Solution: Current provision for doubtful account = (5%) (60000) = 3000

Adjustment amount bad debt expense is: 3000-2000 = 1000

- The net realizable value of the account receivable at the end of the year (December 31, year 6)
is $60,000 - $3,000 = $57,000
- The adjusting entry on December 31, year 6 is:

Doubtful account expense (bad debt expense) ------ 1000

Allowance for doubtful account --------- 1000
Note that when a given customer’s receivable is manifested uncollectible due to various reasons
the account will be written-off as uncollectible and the entry would be:
Allowance for uncollectible account ------- xxx
Accounts receivable (specific customer) ------ xxx
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This entry has no effect on the net income of the accounting period, on the receivables account
and allowance for uncollectible account.
After accounts receivable is written-off, it is possible for organizations to collect the mount
written-off either in full or partially. This is called recovery or reinstatement of accounts
receivable written-off and the entry would be:
Accounts receivable ----- xxx
Allowance for doubtful account ---- xxx
This is to reverse the written of entry
Cash ---- xxx
Accounts receivable xxx
This is to record the collection of cash
Illustration: Assume that Pear Trading, in the above illustration, write off a customer’s account
that is considered to be uncollectible for $ 670. Assume, further that $450 cash is collected from
the customer whole account had been written of (670)
Required: Record the necessary entries
Solution: Allowance for doubtful account ---- 670
Accounts receivable ---- 670
This is to record the written-off accounts receivable
Accounts receivable --------- 450
Allowance for accounts receivable -------- 450
To reinstate the customers account

Cash ----------- 450

A/R ----------- 450
To record the collection
c. Direct written-off method: This is another method of recognizing doubtful account
expense. Under this method there is no provision or estimation of uncollectibles for
receivables and does not record doubtful accounts beforehand unless specific accounts
are identified to be uncollectible. This method is sometimes called specific write-off
method.

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It is only upon discovery of specific receivable determined to be uncollectible, specific

customer defaulting, a write-off entry performed to record doubtful account expense and
cancel the balance from accounts receivable account with the related account in the
subsidiary ledger, i.e., the entry to record when a special customer is found defauted would
be:
Doubtful account expense ------ xxxx
Accounts receivable ------ xxxx

Under this method, no adjusting entry is required at the end of he period and a valuation
allowance account is not maintained for doubtful accounts.

Lo6: Remit payments to creditors

Information Sheet Recover of written-off Accounts Receivable

Under the direct-written-off method, similar to the case in the allowance method, when an
amount is, either partially or in full, collected there are two entries recorded.
i) when the amount is recovered in the same period in which it is written-off;
where the doubtful account is not yet closed the entry would be:
Account receivable ------- xxx
Doubtful account expense ------ xxx
To record the reversal entry
Cash ------- xxx
A/R ------ xxx
To record the collection of cash
ii) When the amount is recovered in subsequent periods after it is written-off it is
common to credit “doubtful account recovered” account for the balance
recovered. This accounts is reported separately in the income statement as
other revenue. The journal entry follows are:
Account receivable ------- xxx
Doubtful account recovered ------ xxx

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This is to record the recovered amount after it was written-off in one period and recovered in
another period.
Cash ------- xxx
Account receivable ------ xxx
This is to record the collection.

Even if the direct write-off method appears simple and convenient, it has the following
limitations
a. It makes no matching of doubtful account expense with current period revenue.
b. It overstates the carrying amount of receivables.

Disposition of receivables
Disposition of receivables are financing transactions that are commonly used as a source of cash.
It shortens the operating cycle and avoids short-run cash flow problems instead of waiting until
customers pay their accounts. Conversation of accounts receivables into cash may be facilitated
through three means:

 Selling receivable
 Pledging receivables as collateral for loans
 Assigning receivables
Enterprises engaged in the buying of receivables are known as factors, and the process of selling
receivables is called factoring. Factors generally buy receivables outright, that is, without
recourse. Alternatively, factors or other lending institutions may buy receivables with recourse,
or may lend money to the owner of the receivables under a legal arrangement known as
assignment. In such cases customers generally are instructed to make payments directly to the
factors or other lenders. Factoring is san important source of ready cash in different types of
business enterprises.

A pledge of accounts receivable as a collateral for a loan involves no special accounting

problems. Accounting for the sale and the assignment of account receivable is described in the
following sections.

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Lo7: - Prepare accounts paid report and reconcile balances outstanding

Information Sheet Notes Receivables Recognition, Valuation and Disposition

Sale of Receivables
Factoring of receivables involves selling receivables to a third party. Two parties are involved
with the transactions: Transferor (one who transfers the receivables) and Transferee (the factor
or lending institution).
Sale of receivables can happen in two ways:
Without recourse: This involves the shifting of the risk of credit losses, the effort of collection
and the waiting period that result from the granting of credit to the purchaser of the receivables.
But, sales returns and sales discount, issues are to be considered by the transferor.
With recourse basis: when receivables are sold with recourse, the seller (transferor) in effect
guarantees the receivables, and the purchaser (transferee) is reimbursed for failure of debtors to
pay the full amount anticipated at the time of sale.
This type of transfer is accounted and reported as sale of accounts receivable only when all of the
following three conditions are met:

 The transferor surrenders control of the future economic benefits of the receivables; i.e.,
the transferor does not retain the option to purchases the receivable later.
 The transferor can estimate the collectability of receivables in the future.
 The transferee cannot require the transferor to purchase the receivables.
If any of the above condition is not met, the transferor is considered as a secured loan; i.e.,
borrowing using receivables as a collateral. Hence, the amount of the proceeds from the
transferor is reported as a liability resulting from a borrowing transaction. In which case, the
receivable account remains on the transferor’s record. Thus, the only accounting entry required is
to record the liability and interest expense involved.
Accounting treatment: when receivables transferred are considered as sales transaction, the
following accounts treatments, using the illustration given, are occurring.

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Illustration: Assume that account receivable with a carrying amount of $16,800 is sold for
$22,600. If the face amount of the receivable is $23,000, the transaction would be recorded as
follows:

Cash ----- 22600

Allowance for doubtful account (23000-16800) ---- 6200
Accounts receivable ------------ 23000
Gain on sale of A/R (22600-16800) ---- 5800

Associated bad debt expenses in subsequent periods are to be recorded by the factor. The
proceeds received from sale of receivables and the amount of transferred receivables that remain
uncollected at the end of the accounting period should be disclosed in notes to the transferor’s
financial statements.
Assignment of receivables: This involves using receivables and collateral for borrowing. The
assignor is the borrower whereas the assignee is the lender.
Assignment of accounts receivables requires executing the following accounting activities into
the assignor’s records:

i) Amount of assigned accounts receivable would be recorded as “assigned accounts

receivable” being removed from “accounts receivable” account
ii) Liability is recorded for the principal amount of promissory note singed and cash is
recorded for the amount of net proceeds received after the initial interest charge is
deducted. The interest fee deducted is to be recorded as interest expense.
iii) Periodical cash collections from assigned accounts receivable are recorded. These are
immediately accompanied with payment to the assignee for periodical interest
charges on the unpaid balance and the principal amount of the notes payable.
iv) Upon settlement of the note in full, when notes payable has zero balance, balance
outstanding on “assignee accounts receivable” is converted into “accounts receivable”
To illustrate, assume that on January 2, year 1, Admas Company assigned
receivables of $50,000 to Finco, Inc… and received $45,000, less a fee of 2% on the

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amount advanced. Interest at 1% of the unpaid balance of the loan was to be paid
monthly.
The journal entries required in the assignor’s accounting records for the problem given above are
summarized as follows.

January 1, Year1: Assigned account receivable ----- 50,000

Accounts receivable ----- 50,000
Cash (45,000-900) ------ 44,100
Interest expense ------- 900
Notes payable to Finco Inc 45,000
The above entry is for the assignment of accounts receivable by the company (50,000) remitted
90% (45000X100%) of receivables, less 2% fee ($45,000X 0.02= $900)
50.000
Assume further that on January 31, year 1, the company received $30150 from customers and
paid the amount to Finco Inc including interest charges.
January 31, year1” Cash ------ 30150
Assigned account receivable ---- 30150
To record cash collection from assigned A/R
Notes payable to Finco, Inc 29700
Interest expense ($45,000X0.01) 450
Cash ----- 30150
This entry is to record payment to the assignee interest expense and retirement of the loan.
Finally assuming that Adams Company collected 17,000 on February 28 from the assigned
accounts receivables and paid the balance owed to FincoInc 1% interest on153000 unpaid loan
all the related records, are shown below
Cash ------ 17,000
Assigned accounts receivable ---- 17,000
Computations
This is to record cash collection from assigned accounts receivable
Balance due on N/P ---- $45,000
Interest exp (1%X45,000) 450

Collection
TTLM from assigned
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Remaining amount to settle

Principal amount of N/P 297000

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2nd month
Computations:

Balance due on N/P (45,000-30150) = 15300

Interested exp (1%X15300) 153

Amount collected from assigned receivables 17000

Interest expense 153
Full settlement of notes payable 15453

Notes payable –FincoInc 15300

Interest expense 153
Cash 15453
This is to record payment to the assignee: Interest expense and full retirement of the loan.
On February 28, year1, the balance of ‘notes payable’ is null, thus, journal entry is required to
covert or transfer balance in ‘assigned accounts receivable’ to account receivable as is show
(T/account)-the remaining balance is $28/50 Hence the last entry would be from the ledger
Accounts receivable ------ 2,850
Assigned accounts receivable 2850
Assigned A/R
Jan 1. 50,000 30150 Jan 31
17000 Feb 28
2850

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Self-Check Written Test

Directions: Answer all the questions listed below. Use the Answer sheet provided in
the next page:

1. Interest is usually associated with

a. Accounts receivable.
b. Notes receivable.
c. Doubtful accounts.
d. Bad debts
2. The receivable that is usually evidenced by a formal instrument of credit is a (n)
a) Trade receivable.
b) Note receivable.
c) Accounts receivable.
d) Income tax receivable.
3. Which of the following receivables would not be classified as an "other receivable"?
a) Advance to an employee
b) Refundable income tax
c) Notes receivable
d) Interest receivable
4. Notes or accounts receivables that result from sales transactions are often called
a) Sales receivables.
b) Non-trade receivables.
c) Trade receivables.
d) Merchandise receivables.
5. The term "receivables" refers to
a. Amounts due from individuals or companies.
b. Merchandise to be collected from individuals or companies.
c. Cash to be paid to creditors.
d. Cash to be paid to debtors.
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6. A cash discount is usually granted to all of the following except

a. Retail customers.
b. Retailers.
c. Wholesalers.
d. All of these are granted discounts.
7. Which one of the following is not a primary problem associated with accounts receivable?
a. Depreciating accounts receivable
b. Recognizing accounts receivable
c. Valuing accounts receivable
d. Disposing of accounts receivable
8. Trade accounts receivable are valued and reported on the balance sheet
a. In the investment section.
b. At gross amounts less sales returns and allowances.
c. At net realizable value.
d. only if they are not past due

9. under the allowance method, writing off an uncollectible account

a. Affects only balance sheet accounts.
b. Affects both balance sheet and income statement accounts.
c. Affects only income statement accounts.
d. Is not acceptable practice.
10. The net amount expected to be received in cash from receivables is termed the
a. Cash realizable value.
b. Cash-good value.
c. Gross cash value.
d. Cash-equivalent value.
11. If a company fails to record estimated bad debts expense,
a. Cash realizable value is understated.
b. Expenses are understated.
c. Revenues are understated.
d. Receivables are understated.

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12. The existing balance in Allowance for Doubtful Accounts is considered in computing bad
debts expense in the
a. Direct write-off method.
b. Percentage of receivables basis.
c. Percentage of sales basis.
d. Percentage of receivables and percentage of sales basis.
13. When the allowance method is used to account for uncollectible accounts, Bad Debts
Expense is debited when
a) A sale is made.
b) An account becomes bad and is written off.
c) Management estimates the amount of uncollectible.
d) A customer's account becomes past-due.
14. When an account becomes uncollectible and must be written off,
a. Allowance for Doubtful Accounts should be credited.
b. Accounts Receivable should be credited.
c. Bad Debts Expense should be credited.
d. Sales should be debited.
15. The collection of an account that had been previously written off under the allowance
method of accounting for uncollectible,
a. Will increase income in the period it is collected.
b. Will decrease income in the period it is collected.
c. Requires a correcting entry for the period in which the account was written off.
d. Does not affect income in the period it is collected.
16. The percentage of sales basis of estimating expected uncollectible.
a. Emphasizes the matching of expenses with revenues.
b. Emphasizes balance sheet relationships.
c. Emphasizes cash realizable value.
d. Is not generally accepted as a basis for estimating bad debts.
17. An aging of a company's accounts receivable indicates that $9,000 are estimated to be
uncollectible. If Allowance for Doubtful Accounts has a $1,100 credit balance, the adjustment to
record bad debts for the period will require a
a. Debit to Bad Debts Expense for $9,000.
b. Debit to Allowance for Doubtful Accounts for $7,900.

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c. Debit to Bad Debts Expense for $7,900.

d. Credit to Allowance for Doubtful Accounts for $9,000.
18. under the direct write-off method of accounting for uncollectible accounts, Bad Debts
Expense is debited
a. When a credit sale is past due.
b. At the end of each accounting period.
c. Whenever a pre-determined amount of credit sales have been made.
d. When an account is determined to be uncollectible.
19. An alternative name for Bad Debts Expense is
a. Deadbeat Expense.
b. Uncollectible Accounts Expense.
c. Collection Expense.
d. Credit Loss Expense.
20. Bad Debts Expense is considered
a. An avoidable cost in doing business on a credit basis.
b. An internal control weakness.
c. A necessary risk of doing business on a credit basis.
d. Avoidable unless there is a recession.
21. Two methods of accounting for uncollectible accounts are the
a. Allowance method and the accrual method.
b. Allowance method and the net realizable method.
c. Direct write-off method and the accrual method.
d. Direct write-off method and the allowance method.
22. The allowance method of accounting for uncollectible accounts is required if
a. The company makes any credit sales.
b. Bad debts are significant in amount.
c. The company is a retailer.
d. The company charges interest on accounts receivable.
23. Bad Debts Expense is reported on the income statement as
a. Part of cost of goods sold.
b. Reducing gross profit.
c. An operating expense.
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d. A contra-revenue account.
24. When the allowance method of accounting for uncollectible accounts is used, Bad Debts
Expense is recorded
a. In the year after the credit sale is made.
b. In the same year as the credit sale.
c. As each credit sale is made.
d. When an account is written off as uncollectible.
25. The method of accounting for uncollectible accounts those results in a better matching of
expenses with revenues is the
a. Aging accounts receivable method.
b. Direct write-off method.
c. Percentage of receivables method.
d. Percentage of sales method.
26. To record estimated uncollectible accounts using the allowance method, the adjusting entry
would be a
a. Debit to Accounts Receivable and a credit to Allowance for Doubtful Accounts.
b. Debit to Bad Debts Expense and a credit to Allowance for Doubtful Accounts.
c. Debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable.
d. Debit to Loss on Credit Sales and a credit to Accounts Receivable.
27. Under the allowance method of accounting for uncollectible accounts,
a. The cash realizable value of accounts receivable is greater before an account is written
off than after it is written off.
b. Bad debts expense is debited when a specific account is written off as uncollectible.
c. The cash realizable value of accounts receivable in the balance sheet is the same before
and after an account is written off.
d. Allowance for Doubtful Accounts is closed each year to Income Summary.
28. Allowance for Doubtful Accounts on the balance sheet
a. Is offset against total current assets.
b. Increases the cash realizable value of accounts receivable.
c. Appears under the heading "other assets."
d. Is offset against accounts receivable.
29. When an account is written off using the allowance method, the
a. Cash realizable value of total accounts receivable will increase.

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b. Total accounts receivable will decrease.

c. Allowance account will increase.
d. Total accounts receivable will stay the same.
30. If an account is collected after having been previously written off,
a. The allowance account should be debited.
b. Only the control account needs to be credited.
c. Both income statement and balance sheet accounts will be affected.
d. There will be both a debit and a credit to accounts receivable.
31. When an account is written off using the allowance method, accounts receivable
a. Is unchanged and the allowance account increases.
b. Increases and the allowance account increases.
c. Decreases and the allowance account decreases.
d. Decreases and the allowance account increases.
32. Two bases for estimating uncollectible accounts are:
a. Percentage of assets and percentage of sales.
b. Percentage of receivables and percentage of total revenue.
c. Percentage of current assets and percentage of sales.
d. Percentage of receivables and percentage of sales.
33. The percentage of receivables basis for estimating uncollectible accounts emphasizes
a. Cash realizable value.
b. The relationship between accounts receivable and bad debts expense.
c. Income statement relationships.
d. The relationship between sales and accounts receivable.
34. Long Company uses the percentage of sales method for recording bad debts expense.
For the year, cash sales are $500,000 and credit sales are $2,000,000. Management estimates that
1% is the sales percentage to use. What adjusting entry wills Long Company make to record the
bad debts expense?
a) Bad Debts Expense ............................................... 25,000
Allowance for Doubtful Accounts .......................... 25,000
b) Bad Debts Expense ................................................... 20,000
Allowance for Doubtful Accounts .......................... 20,000
c) Bad Debts Expense ............................................... 20,000
Accounts Receivable ............................................ 20,000
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d) Bad Debts Expense .............................................. 25,000

Accounts Receivable ............................................ 25,000
35. The balance of Allowance for Doubtful Accounts prior to making the adjusting entry to
record estimated uncollectible accounts
a) Is relevant when using the percentage of receivables basis.
b) Is relevant when using the percentage of sales basis.
c) Is relevant to both bases of adjusting for uncollectible accounts.
d) Will never show a debit balance at this stage in the accounting cycle.
36. The direct write-off method of accounting for bad debts
a) Uses an allowance account.
b) Uses a contra-asset account.
c) Does not require estimates of bad debt losses.
d) Is the preferred method under generally accepted accounting principles?
37. under the direct write-off method of accounting for uncollectible accounts
a) The allowance account is increased for the actual amount of bad debt at the time of write-
off.
b) A specific account receivable is decreased for the actual amount of bad debt at the time of
write-off.
c) Balance sheet relationships are emphasized.
d) Bad debts expense is always recorded in the period in which the revenue was recorded.
38. An aging of a company's accounts receivable indicates that $4,000 is estimated to be
uncollectible. If Allowance for Doubtful Accounts has a $1,200 credit balance, the adjustment to
record bad debts for the period will require a
a) Debit to Bad Debts Expense for $4,000.
b) Debit to Allowance for Doubtful Accounts for $2,800.
c) Debit to Bad Debts Expense for $2,800.
d) Credit to Allowance for Doubtful Accounts for $4,000.
39. An aging of a company's accounts receivable indicates that $3,000 are estimated to be
uncollectible. If Allowance for Doubtful Accounts has a $1,200 debit balance, the adjustment to
record bad debts for the period will require a
a. Debit to Bad Debts Expense for $3,000.
b. Debit to Bad Debts Expense for $4,200.
c. Debit to Bad Debts Expense for $1,800.
d. Credit to Allowance for Doubtful Accounts for $4,000.

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40. Using the percentage of receivables method for recording bad debts expense, estimated
uncollectible accounts are $25,000. If the balance of the Allowance for Doubtful Accounts is
$8,000 debit before adjustment, what is the amount of bad debts expense for that period?
a. $25,000
b. $8,000
c. $33,000
d. $17,000
42. Using the percentage of receivables method for recording bad debts expense, estimated
uncollectible accounts are $10,000. If the balance of the Allowance for Doubtful Accounts is
$2,000 credit before adjustment, what is the amount of bad debts expense for that period?
a. $10,000
b. $8,000
c. $12,000
d. $2,000
43. Using the percentage of receivables method for recording bad debts expense, estimated
uncollectible accounts are $10,000. If the balance of the Allowance for Doubtful Accounts is
$2,000 debit before adjustment, what is the balance after adjustment?
a. $10,000
b. $12,000
c. $8,000
d. $2,000
44. Using the allowance method, the uncollectible accounts for the year is estimated to be
$28,000. If the balance for the Allowance for Doubtful Accounts is a $7,000 credit before
adjustment, what is the amount of bad debts expense for the period?
a. $7,000
b. $21,000
c. $28,000
d. $35,000
45. Using the allowance method, the uncollectible accounts for the year is estimated to be
$28,000. If the balance for the Allowance for Doubtful Accounts is a $7,000 debit before
adjustment, what is the amount of bad debts expense for the period?
a. $7,000
b. $21,000
c. $28,000
d. $35,000
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46. In reviewing the accounts receivable, the cash realizable value is $16,000 before the write-
off of a $1,500 account. What is the cash realizable value after the write-off?
a. $16,000
b. $1,500
c. $17,500
d. $14,500
47. In 2008, the Fitzu Co. had net credit sales of $750,000. On January 1, 2008, Allowance for
Doubtful Accounts had a credit balance of $16,000. During 2008, $30,000 of uncollectible
accounts receivable were written off. Past experience indicates that the allowance should be 10%
of the balance in receivables (percentage of receivable basis).
If the accounts receivable balance at December 31 was $200,000, what is the required adjustment
to the Allowance for Doubtful Accounts at December 31, 2008?
a. $20,000
b. $34,000
c. $36,000
d. $30,000
48. A company has net credit sales of $900,000 for the year and it estimates that uncollectible
accounts will be 2% of sales. If Allowance for Doubtful Accounts has a credit balance of
$1,000 prior to adjustment, its balance after adjustment will be a credit of
a. $18,000.
b. $19,000.
c. $17,980.
d. $17,000.
49. In 2008, Carpenter Company had net credit sales of 1,125,000. On January 1, 2008,
Allowance for Doubtful Accounts had a credit balance of $27,000. During 2008, $45,000 of
uncollectible accounts receivable were written off. Past experience indicates that the allowance
should be 10% of the balance in receivables (percentage of receivables basis).
If the accounts receivable balance at December 31 was $300,000, what is the required adjustment
to the Allowance for Doubtful Accounts at December 31, 2008?
a. $30,000
b. $112,500
c. $48,000
d. $45,000
Use the following information for questions 50–51. 12/31/07
 Accounts receivable $525,000
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 Allowance (45,000)
 Cash realizable value $480,000
During 2008, sales on account were $145,000 and collections on account were $86,000. Also
during 2008, the company wrote off $8,000 in uncollectible accounts. An analysis of outstanding
receivable accounts at year end indicated that bad debts should be estimated at $54,000.
50. The change in the cash realizable value from the balance at 12/31/07 to 12/31/08 was a
a. $50,000 increase.
b. $59,000 increase.
c. $42,000 increase.
d. $51,000 increase.
51. Bad debts expense for 2008 is
a. $17,000.
b. $9,000.
c. $54,000
d. $1,000.
52. During 2008, Carbondale Inc. had sales on account of $132,000, cash sales of $54,000, and
collections on account of $84,000. In addition, they collected $1,450 which had been written off
as uncollectible in 2007. As a result of these transactions, the change in the accounts receivable
balance indicates a
a. $100,550 increase.
b. $48,000 increase.
c. $46,550 increase.
d. $102,000 increase.
53. Brother Bear Corporation’s unadjusted trial balance includes the following balances (assume
normal balances):
 Accounts Receivable $746,000
 Allowance for Doubtful Accounts 14,200
Bad debts are estimated to be 6% of outstanding receivables. What amount of bad debts expense
will the company record?
a. $44,760
b. $30,560
c. $29,708
d. $45,612

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54. Manning Retailers accepted $75,000 of Citibank Visa credit card charges for merchandise
sold on July 1. Citibank charges 4% for its credit card use. The entry to record this transaction by
Manning Retailers will include a credit to Sales of $75,000 and a debit(s) to
a. Cash $72,000 and Service Charge Expense $3,000.
b. Accounts Receivable $72,000 and Service Charge Expense $3,000.
c. Cash $72,000 and Interest Expense $3,000.
d. Accounts Receivable $75,000.
55. ABC Company accepted a national credit card for a $3,000 purchase. The cost of the goods
sold is $2,400. The credit card company charges a 3% fee. What is the impact of this transaction
on net operating income?
a. Increase by $582
b. Increase by $600
c. Increase by $510
d. Increase by $2,910
56. A 60-day note receivable dated June 13 has a maturity date of
a. August 13.
b. August 12.
c. August 11.
d. August 10.
57. The maturity value of a $90,000, 10%, 60-day note receivable dated July 3 is
a. $90,000.
b. $99,000.
c. $105,000.
d. $91,500.
118. A 90-day note dated June 14 has a maturity date of
a. September 14.
b. September 12.
c. September 13.
d. September 15.
58. A 30-day note dated May 18 has a maturity date of
a. June 18.
b. June 17.
c. June 19.

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d. June 16.
59. A promissory note
a. Is not a formal credit instrument.
b. May be used to settle an accounts receivable.
c. Has the party to whom the money is due as the maker.
d. Cannot be factored to another party.
60. Which of the following is not true regarding a promissory note?
a. Promissory notes may not be transferred to another party by endorsement.
b. Promissory notes may be sold to another party.
c. Promissory notes give a stronger legal claim to the holder than accounts receivable.
d. Promissory notes may be bearer notes and not specifically identify the payee by name.

61. The two key parties to a promissory note are the

a. Maker and a bank.
b. Debtor and the payee.
c. Maker and the payee.
d. Sender and the receiver.
62. When the allowance method of recognizing bad debts expense is used, the entry to recognize
that expense
a. Increases net income.
b. Decreases current assets.
c. Has no effect on current assets.
d. Has no effect on net income.
63. The direct write-off method
a. Is acceptable for financial reporting purposes.
b. Debits allowance for doubtful accounts to record write-offs of accounts.
c. Shows only actual losses from uncollectible accounts receivable.
d. Estimates bad debt losses.
64. Voight Company's account balances at December 31 for Accounts Receivable and
Allowance for Doubtful Accounts were $2,100,000 and $105,000 (Cr.), respectively. An aging
of accounts receivable indicated that $192,000 are expected to become uncollectible. The amount
of the adjusting entry for bad debts at December 31 is

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a. $192,000.
b. $87,000.
c. $297,000.
d. $105,000

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