Question

Receiveables_Assignment - Saved References Mailings Review View Help Table Design Layout Receivables and Interest Assignment Last name: Bad Debt Expense and the Allowance for Bad Debts Assume you are the controller of a large medical equipment company that sells diagnostic machinery to hospitals in the local geographic region. You are currently training new employees, and in a recent training session, you report that total credit sales for the year is $300,000. accounts receivable total $40,000 less a $2,000 allowance for bad debts and bad debt expense is $3,500. After the session, a trainee approaches somewhat confused about why bad debt expense and the allowance balance differ. Required Prepare a short explanation to the trainee on the difference between bad debt expense and the allowance for bad debts Interest on Notes Receivable Interest Calculations: Interest is the amount of money that is paid for the use of money that has been borrowed or to delay re- payment on debt obligations in the table below, four notes are listed with the amount of original principal (amount borrowed), the interest rate (amount paid to borrow money) and the interest period for 2017 Notes receivable for 2017 Original Principal Interest Rate Interest Period During 2017 16% 10% all Note 1 Note 2 Note 3 Note 4 $40.000 $15.000 55.000 $250,000 3 months 180 days 90 days 9 months 17% Required: For each of the notes receivable, compute the amount of interest revenue eamed during 2017. Round to the nearest dollar. Focus 12 F10 F11 F12 Scru F5

Answer 1

1. Allowance for bad debts is an approximation of the revenue that is earned in the year but not recoverable. Hence on the basis of matching concept such money that is not recoverable is charged against the money that is recognised as the revenue. Accordingly the closing allowance is charged as a percentage of accounts receivables or credit sale. In our example it is 5% ie 40000*5% = 2000. Sometimes the actual bad debts of previous year written off in the current year may exceed the allowance for bad debts provided in the previous year (as it is an estimate and not accurate). Thus we end up having debit balance in the Allowance for bad debts account. Therefore, at closure of books, we first provide for the excess bad debts written off and then provide for the current year estimation of allowance for bad debts. Accordingly excess bad debts written off from previous year allowance was excess by 1500. And current year allowance is 2000. Thus total bad debt expense is 3500 debited to Allowance for bad debts 3500 where closing balance of the allowance account is 2000.

2.

Computation of Interest

Note 1	40000*6%*3/12 = 600
Note 2	15000*10%*180/360 = 750
Note 3	5000*8%*90/360 = 100
Note 4	250000*7%*9/12 = 13125
Total interest	14575