Question

Accounts Receivable Exercise What you will learn more about: Bad Debt Allowance for Bad Debt Allowance Method or Balance Sheet Approach Income Statement Approach Accounts Receivable Turnover Average Collection Period Dr. I. Ball, an Optometrist asks you to take a look at his accounts receivable situation for the year. He provides you the following information as of December 31: Accounts Receivable Accounts: Not yet due $43.270 1-30 days overdue 27.100 31-60 days overdue 14,800 More than 60 days overdue 9,700 Estimates of uncollectible accounts are one percent for those accounts not yet due, two percent for those 1-30 days overdue, three percent for those 31-60 days overdue, and five percent for those more than 60 days overdue. The allowance for doubtful accounts has a credit balance of $200 before any adjustments have been made. Cash sales for the period amounted to $12,120 and billed out credit sales amounted to $160,400. Round amounts to the nearest whole dollar. Required #1: Prior to this period the firm has been estimating the bad debt. What does it mean has happened in the past to cause the Allowance Account to have the credit balance mentioned above? Allowance Doubtful Accounts

Answer 1

1.Credit balance of $200/- means in previous year the firm has carried forwarded the same from the previous year

balance Bad debts has been written off

2.

43,270	1%	433
27,000	2%	540
14,800	3%	444
9,700	5%	485
94,770		1,902

Less credit balance 200

Net Amount 1,702

31-Dec Bad debts Expenses Dr 1,702

To Bad Debts Allowance Cr 1,702

Sundry Debtors 94,770

Less Bad Debts 1,702

  Net Sundry Debtors 93,068

3.   

Credit sales		1,60,400
Bad Debts	2.3%	3,689

Sundry Debtors - 160,400

Less Bad Debts Expenses 3,689

Net Sundry Debtors 93,068

4. The Balance Sheet approach calculate the Bad Debts as % of Receivable which the Company can determine from the Previous years data and is thus a more reliable method than Income Statement Method which calculated the Bad Debts based on Credit Sales of the Company thus ignores the historical data & is used mainly by Companies having less Credit sales and more cash sales

5. Weakness - under Balance Sheet Method - It calculates the % on the receivable amount and in reality the Bad debt can appear  much more than it is estimated & can disturb the performance of the Company

Under Income Statement method - Under this the Bad debts may occur at a later stage which means it might disturb the profitability of another period

6. Bad Debts Expense Dr $45

To Jerry McGuire's A/c Cr $45

7.  

A	Cash sales	12,120
B	Credit Sales	1,60,400
A + B	Total Sales	1,72,520
C	A/R	19,860
(A+B)/C	A/R Turnover	8.7

8.

A	Credit Sales	1,60,400
B	Per day Sales	439
C	A/R	19,860
C/B	Average Collection period	45

9. n/30 term means that the patient can pay the co-pay within 30 days without any extra charges. In such a situation

the A/R for the Doctor will increase and Average collection period also will increase.

Suggestion - it can give 3/10, 1/20 ,net 30 term to the patient so that patient can gt 3% discount if paid within 10 days, 1% discount if paid within 20 days which will result in A/R for the Doctor to improve & thus the Average collection period also will improve