Exam #1B

Question 2 Bad and Doubtful Debts

Part a

Journal entry
Doubtful debt expense         6563
    Doubtful debt provision       6563

2)
Income summary                6563
    Doubtful debt expense         6563

3) Balance sheet
Current Assets
Accounts Receivable                        290850
   less allowance for doubtful debts        14185
                                                         276665

4) Provision method is better because
a) Income is more fairly reported, as one of the expenses of earning is bad debts, and the provision method reports an estimate of this expense in the same accounting period as the income.
b) accounts receivable is more conservatively reported, as it includes a provision for debt that probably won't be collected.
 

Part B

May 1    Note Receivable - Crook        22000
                AR - Crook                    22000
June 30  Interest Receivable              300
              Interest revenue                  300
skip closing entries ...
Aug 31   Cash 22900 - 22900*.15*2/12    22327
              Notes Receivable - Crook        22000
              Interest Receivable               300
              Interest Revenue                   27
Nov 4    AR - Crook                     22960
              Cash                            22960
Dec 17   Prov. for dbftl debts          22960
              AR - Crook                      22960
Feb 2    AR - Crook                     13250
              Prov for dbtfl debts            13250
         Cash                           13250
              AR - Crook                      13250
 

Exam #3A

Question 2Accounts Receivable

• AR is a current asset, Bills may be non-current (longer than 12 months maturity)
• AR does not usually have interest revenue associated, Bills usually do
• AR is not usually discounted, Bills often are
• AR does not usually have a formal legal document associated, Bills usually do

• Direct write off: transactions for bad debt only happen when a particular AR is regarded as a real bad debt. AR is credited and an expense is debited. The net value of AR decreases.
• The provision method attempts to anticipate bad debts, so that when the debt actually occurs, the expense has already been recorded in a earlier period (when the income was earned). The transaction involves transferring from a provision account, contra to AR, and AR, so that the net value of AR is not changed (unless the estimate was too low).

(B)
 
1 June 1994    Notes Receivable - Kiri Kiri    18000
                    AR - Kiri Kiri                    18000
               Interest Receivable               444
                    Unearned Interest Revenue           444
30 June 1994   Unearned Interest revenue         148
                    Interest Revenue                    148
               Interest Reveune                  148
                     Income Summary                     148
               Income Summary                    148
                      Capital                           148
29 Aug 1994    Cash                            18444
                  Notes Receivable - Kiri Kiri         18000
                  Interest Receivable                    444
               Unearned Interest Revenue         296
                  Interest Revenue                       296

(C)
23 Jan        Provision for doubtful debts     3456
                      AR - Mr Lada Garam            3456
28 June       AR - Mr Lada Garam               3456
                      Provision for dbtf debts      3456
29 June       Cash                             3456
                     AR - Mr Lada Garam             3456

(D)
Ending balance, provison: 7800 - 6300 + 2500 = 4000
i) Doubtful debts expense        6000
        Doubtful debts provison        6000
   Income Summary                6000
        Doubtfuf debts expense         6000

ii)
Current Assets
Accounts Receivable                           128987
   less allowance for bad & doubtful debts     10000 
                                                                                                            118987

 Exam #3A

Question 2

ii) Contingent liability
When the creditor discounts a note, cash is received. However, if the note is defaulted, the creditor is liable to make good the maturity value of the note to the entity which discounted the note. So in one sense, there exists a liability to the discounting entity as soon as the note is discounted. However, unlike other liabilities, this liability will probably not arise, because most notes are not defaulted. This potential liability is called a contigent liability, because it may or may not be a real liability. These liabilities should be noted in financial reports, but do not have to reported on the balance sheet as a real liability.

(B)
(i)
31 May    Accounts Receivable            170000
                Sales Revenue                    170000
          Sales Returns and Allowances     4000
                Accounts Receivable                4000
          Cash                           150000
                Accounts Receivable              150000
          Allowance for uncollectible debts 6000
                Accounts Receivable                6000

Allowance uncollectible balance: 14500 - 6000 = 8500
Required: 15000, difference 6500

31 May    Uncollectible Debt Expense      6500
                Allowance for uncollectible debts   6500

ii)
AR balance: 240000+170000-4000-150000-6000 = 250000
Balance Sheet
Current Assets
Accounts Receivable                        250000
   less allowance for uncollectible debt    15000
                                                    235000
 
(C) Skipped, same as other answers
 

Exam #4A

Question 1

try again:

AR due to sales activity
30 June    AR                              640000
                Sales                              640000
Write offs
30 June    Allow. for uncoll. accts          8900
                AR                                   8900

Reqd expense: 0.02 * 640000 = 12800
transaction for the new uncollectible allowance:
30 June    Uncollectible Account Expense    12800
              Allowance for uncoll. accts           12800
 

iii) Direct write off method: expense 8900
     allowance                     : 18900
Allowance method matches better as we all know.

(iv) Direct method: AR reported is
    AR: 219000+640000-599400-8900 = 250700

Allowance method:
    AR: 219000 + 640000 - 599400 - 8900 = 250700
       less allowance: 12800
Net AR reported: 237900
 

(B)

1 Apr 19X2    Note Receivable  P Chan  8000
                  Cash                        8000
31 Dec 19x2   Interest Receivable       540
                  Interest Revenue             540
              Interest Revenuye         540
                  Income Summary               540
1 Apr 19X3    Cash                     8720
                   Note Receivable            8000
                   Interest Receivable         540
                   Interest Revenue            180

(C)
14 Aug    AR B Clift                       3900
                Sales Revenue                    3900
 2 Dec    Note Receivable B Clift          3900
                AR B Clift                       3900
30 Dec    Cash
          (4095 - 4095*.15*(180 - 28)/360) 3836
          Interest Expense                   64
                Note Receivable B Clift          3900

Contingent liabilty arises because if B Clift defaults on the note, the creditor is liable to the bank for the maturity value of the note plus any expenses; the liability is therefore 4095 plus expenses)