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CHAPTER 12ESTIMATION OF DOUBTFUL ACCOUNTSProblem 12-1 (AICPA Adapted)Orr Company prepared an aging of accounts receivable on December 31, 2010 and determined that the net realizable value of the accounts receivable was P2,500,000. Additional information is available as follows: Allowance for doubtfu...

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CHAPTER 12 ESTIMATION OF DOUBTFUL ACCOUNTS Problem 12-1 (AICPA Adapted) Orr Company prepared an aging of accounts receivable on December 31, 2010 and determined that the net realizable value of the accounts receivable was P2,500,000. Additional information is available as follows: Allowance for doubtful accounts on January 1 280,000 Accounts written off as uncollectible 230,000 Accounts receivable on December 31 2,700,000 Uncollectible accounts recovery 50,000 For the year ended December 31,2010, what amount should be recognized as doubtful accounts expense? a. 230,000 b. 200,000 c. 150,000 d. 100,000 Solution 12-1 Answer d Allowance – January 1 Recovery of accounts written off Doubtful accounts expense (SQUEEZE) Total Accounts written off Allowance – December 31

280,000 50,000 100,000 430,000 (230,000) 200,000

Since the December 31, 2010 accounts receivable the balance is P2,700,000 and the net realizable value is P2,500,000, the December 31,2010 allowance should be P200,000. The doubtful accounts expense is ”squeezed” by working back from the December 31,2010 allowance balance of P200,000.

Problem 12-2 (AICPA Adapted) An analysis and aging of Jay Company’s accounts receivable at December 31,2010 disclosed the following: Accounts receivable 9,000,000 Allowance for doubtful accounts per book 500,000 Accounts deemed uncollected 640,000 On December 31, 2010, what is the net realizable value of accounts receivable? a. 8,860,000 b. 8,500,000 c. 8,360,000 d. 7,860,000

Solution 12-2 Answer c Accounts receivable Allowance for doubtful accounts Net realizable value

9,000,000 (640,000) 8,360,000

The accounts deemed uncollectible represent the required ending allowance for doubtful accounts.

Problem 12-3 (IAA) Seiko Company reported the following balances after adjustment at the end of 2010 and 2009. 12/31/2010 12/31/2009 Accounts receivable 5,250,000 4,800,000 Net realizable value 5,100,000 4,725,000 During 2010, Seiko wrote off customer accounts totaling P160,000 and collected P40,000 on accounts written off in previous years. What is the amount of doubtful accounts expense for the year ended December 31, 2010? a. 195,000 b. 150,000 c. 120,000 d. 150,000

Solution 12-3 Answer a Allowance – 12/31/2009 (4,800,000 – 4,725,000) Recovery of accounts written off Doubtful account expense (SQUEEZE) Total Accounts written off Allowance – 12/31/2010 (5,250,000 – 5,100,000)

75,000 40,000 195,000 310,000 (160,000) 150,000

Problem 12-4 (IAA) Roanne Company uses the allowance method of accounting for uncollectible accounts. During 2010, Roanne had charged P800,000 to bad debts expense, and wrote off accounts receivable of P900,000 as uncollectible. What was the decrease in working capital as a result of these entries? a. 900,000 b. 800,000 c. 100,000 d. 0 Solution 12-4 Answer b Only the bad debts expense decreases working capital. The write off does not affect anymore the working capital because the effect is offsetting.

Problem 12-5 (AICPA Adapted) Mill Company’s allowance for doubtful accounts was P1,000,000 at the end of 2010 and 900,000 at the end of 2009. For the year ended December 31, 2010, Mill reported doubtful accounts expense of P160,000 in its income statement. What amount did Mill debit to the appropriate account in 2010 to write off uncollectible accounts?

a. b. c. d.

60,000 100,000 160,000 260,000

Solution 12-5 Answer a Allowance for doubtful accounts – 12/31/2009 Doubtful accounts expense Total Accounts written off (SQUEEZE) Allowance for doubtful accounts – 12/31/2010

900,000 160,000 1,060,000 ( 60,000) 1,000,000

The amount of writeoff is determined by simply “squeezing” from the ending allowance balance.

Problem 12-6 (PHILCPA Adapted) Boholano Company uses the statement of financial position approach in estimating uncollectible accounts expense. The entity prepares an adjusting entry to recognize this expense at the end of the year. During the year, the entity wrote off a P100,000 receivable and made no recovery of previous writeoff. After the adjusting entry for the year, the credit balance in the allowance for doubtful accounts was P250,000 larger than it was on January 1. What amount of uncollectible account expense was recorded for the year? a. 250,000 b. 100,000 c. 150,000 d. 350,000 Solution 12-6 Answer d Writeoff Excess of ending allowance over beginning allowance Uncollectible account expense

100,000 250,000 350,000

Problem 12-7 (AICPA Adapted) The following information pertains to Tara Company’s accounts receivable on December 31, 2010: Days Estimated Estimated Outsanding Amount uncollectible 0 - 60 1,200,000 1% 61 -120 900,000 2% Over 120 1,000,000 60,000 3,100,000

During 2010, Tara wrote off P70,000 in accounts receivable and recovered P40,000 that had been written off in prior years. Tara’s January 1, 2010, allowance for uncollectible accounts was P100,000. Under the aging method, what amount of allowance for uncollectible accounts should Tara report on December 31, 2010? a. 90,000 b. 100,000 c. 130,000 d. 190,000 Solution 12-7 Answer a 0 – 60 (1,200,000 x 1%) 12,000 61 – 120 ( 900,000 x 2%) 18,000 Over 120 60,000 Allowance for uncollectible accounts – December 31 90,000 Under the aging method, the amount computed represents the required ending allowance for uncollectible accounts.

Problem 12-8 (AICPA Adapted) Marian Company uses the allowance method of accounting for bad debts. The following summary schedule was prepared from an aging of accounts receivable outstanding on December 31 of the current year: Number of days Probability Outstanding Amount of collection 0 – 30 days 5,000,000 .98 31 – 60 days 2,000,000 .90 Over 60 days 1,000,000 .80 The following additional information is available for the current year: Net credit sales for the year Allowance for doubtful accounts: Balance, January 1 Balance before adjustment, December 31

4,000,000 450,000 (cr) 20,000 (dr)

If Marian Company bases its estimate on the aging of accounts receivable. What is the amount of doubtful accounts expense for the current year? a. 470,000, b. 480,000 c. 500,000 d. 520,000 Solution 12-8 Answer d 0 – 30 days (5,000,000 x 2%) 31 – 60 days (2,000,000 x 10%) Over 60 days (1,000,000 x 20%)

100,000 200,000 200,000

Required allowance – December 31 Add: Debit balance in allowance Doubtful accounts expense

500,000 20,000 520,000

Problem 12-9 (AICPA Adapted) Delta Company sells to wholesalers on terms 2/15, net 30. Delta has no cash sales but 50% of Delta’s customers take advantage of the discount. Delta uses the gross method of recording sales and trade receivables. An analysis of Delta’s trade accounts receivable at December 31, 2010 revealed the following: Age Amount Collectible 0 – 15 days 2,000,000 100% 16 – 30 days 1,200,000 95% 31 – 60 days 100,000 90% Over 60 days 50,000 50% 3,350,000 In its December 31, 2010 statement of financial position, what amount should Delta report as allowance for sales discount ? a. 20,000 b. 32,400 c. 33,500 d. 40,000

Solution 12-9 Answer a The discount is 2% if accounts are paid in 15 days. Thus, of the total accounts receivable, only the amount of P2,000,000 within the “0-15” category is still subject to cash discount. The available discount is 2% times P2,000,000 or P40,000. Since, only 50% of the customers take advantage of the discounts, the cash discount to be recognized is 50% of P40,000 or P20,000. The entry to record this discount is: Sales discount Allowance for sales discount

20,000 20,000

Problem 12-10 (IA A) Brain Company uses the aging method to estimate bad debt losses. The following schedule of aged accounts receivable was prepared at December 31, 2010. 0-30 days 4,500,000 31-60 days 1,500,000 61-90 days 800,000 91-120 days 200,000 Over 120 days 100,000 7,100,000

The following schedule shows the year-end receivables and uncollectible accounts experience for the previous five years. Year-end 0-30 31-60 61-90 91-120 Over Year receivables days days days days 120-days 2009 2008 2007 2006 2005

7,800,000 7,500,000 6,800,000 6,900,000 7,200,000

3% 5 4 4 2

9% 8 11 10 11

17.4% 52.1% 18.0 49.2 19.0 53.7 19.8 51.3 17.8 49.9

84.1% 80.3 82.0 78.5 85.2

The unadjusted allowance for bad debts on December 31, 2010 is P300,000.

What is the correct balance of the allowance for bad debts based on the average loss experience of the entity for the last 5 years? a. b. c. d.

640,700 300,000 340,700 597,500

Solution 12-10 Answer a

0-30 days 31-60 days 61-90 days 91-120 days Over 120 days

Amount 4,500,000 1,500,000 800,000 200,000 100,000 7,100,000

Average rate 3.60% 9.80% 18.40% 51.24% 82.02%

Required allowance 162,000 147,000 147,200 102,480 82,020 640,700

The average rate is determined by adding all the rates for each category divided by 5. For example, the total of the 0-30 days category is 18% divided by 5 equals 3.6%.

Problem 12-11 (AICPA Adapted) The following accounts were abstracted from Manchester Company’s unadjusted trial balance on December 31, 2010: Debit Credit Accounts receivable 5,000,000 Allowance for doubtful accounts 40,000 Net credit sales 20,000,000 Manchester estimates that 3% of the gross accounts receivable will become uncollectible. What is the doubtful accounts expense for 2010? a. 110,000

b. c. d.

150,000 190,000 600,000

Solution 12-11 Answer c Required allowance for doubtful accounts on December 31,2010 (3% x 5,000,000)

150,000

If the percentage of accounts receivable method is used, the amount computed represents the required ending allowance for doubtful accounts. The doubtful account expense is determined as follows: Allowance for doubtful accounts, December 31, 2010 150,000 Add: Debit balance in allowance account before adjustment 40,000 Doubtful accounts expense 190,000

Problem 12-12 (AICPA Adapted) All of Ladd Company’s sales are on credit basis. The following information is available for the current year: Allowance for doubtful accounts – January 1 180,000 Sales 9,500,000 Sales returns and allowances 800,000 Sales discounts 200,000 Accounts written off as uncollectible 200,000 Ladd provides for doubtful accounts expense at the rate 3% of net sales. What is the allowance for doubtful accounts at year-end? a. 435,000 b. 265,000 c. 235,000 d. 241,000 Solution 12-12 Answer c Allowance for doubtful accounts – January 1 Doubtful accounts expense (9,500,000 – 800,000 – 200,000 x 3%) Total Accounts written off Allowance for doubtful accounts – December 31

180,000 255,000 435,000 (200,000) 235,000

Under the percentage of sales method, the amount computed represents the doubtful accounts expense.

Problem 12-13 (AICPA Adapted) The unadjusted trial balance of Barr Company at December 31, 2010 included the following accounts:

Debit 16,000

Allowance for doubtful accounts Sales Sales return

Credit 7,225,000

125,000

Barr estimates its uncollectible receivables at 2% of net sales. What should be reported as doubtful accounts expense for 2010? a. 158,000 b. 144,500 c. 142,000 d. 126,000 Solution 12-13 Answer c Doubtful accounts expense (7,225,000 – 125,000 x 2% )

142,000

Incidentally, the allowance for doubtful accounts on December 31, 2010 is computed as follows: Allowance for doubtful accounts before adjustment (debit) Doubtful accounts expense Allowance for doubtful accounts, December 31

(16,000) 142,000 126,000

Problem 12-14 (AICPA Adapted) Effective with the year ended December 31, 2010, Hall Company adopted a new accounting method for estimating the allowance for doubtful accounts at the amount indicated by the year-end aging of accounts receivable. The following data are available: Allowance for doubtful accounts, January 1 250,000 Provision for doubtful accounts during 2010 (2% of credit sales of P10,000,000) 200,000 Accounts written off 205,000 Estimated uncollectible accounts per aging on December 31 220,000

After year-end adjustment, what is the doubtful accounts expense for 2010? a. 220,000 b. 205,000 c. 200,000 d. 175,000 Solution 12-14 Answer d Allowance for doubtful accounts – January 1 Doubtful accounts expense (SQUEEZE) Total Accounts written off Allowance for doubtful accounts – December 31

Problem 12-15 (IAA)

250,000 175,000 425,000 (205,000) 220,000

Capetown Company began operations on January 1, 2009. Capetown has found that its estimated bad debts expense has been consistently higher than actual bad debts. Management proposes lowering the percentage from 3% of credit sales to 2%. If 2% has been used seen 2009, the balance in allowance for bad debts at the beginning of 200 would have been P320,000 rather than P690,000. Credit sales for 2010 totaled P5,000,000 and accounts written off as uncollectible during 2010 totaled P550,000. What is the bad debt expense for 2010? a. 150,000 b. 100,000 c. 550,000 d. 240,000 Solution 12-15 Answer b Bad debt expense for 2010 (2% x 5,000,000)

100,000

Problem 12-16 (IAA) Albany Company began business in 2007. An examination of the entity’s allowance for bad debts account reveals the following: Estimated bad debts Actual bad debts 2007 550,000 225,000 2008 650,000 350,000 2009 825,000 450,000 2010 No adjustment yet 475,000 In the past, the entity has estimated that 4% of credit sales would be uncollectible. The auditor for Albany Company has determined that the percentage used in estimating bad debts has been inappropriate. The auditor would like to revise the estimate downward to 2%. The entity president has stated that if the previous estimate of bad debt expense is incorrect, the financial statements should be restated using the more accurate estimate. The credit sales for 2010 amounted to P35,000,000. What is the bad debt expense for 2010? a. 1,400,000 b. 700,000 c. 475,000 d. 375,000 Solution 12-16 Answer b Bad debts expense for 2010 (2% x 35,000,000)

700,000

Problem 12-17 (IAA) Oriental Company follows the procedure of debiting bad debt expense for 2% of all new sales. Sales for three consecutive years and year-end allowance account balances were as follows: Sales Allowance for bad debts 2008 3,000,000 40,000 2009 2,800,000 60,000 2010 3,500,000 80.000 What is the amount of accounts written off in 2010? a. 50,000 b. 70,000 c. 10,000 d. 86,000 Solution 12-17 Answer a Allowance for bad debt – December 31, 2009 Bad debt expense for 2010 (2% x 3,500,000) Total Allowance for bad debts – December 31, 2010 Accounts written off in 2010

60,000 70,000 130,000 80,000 50,000

Problem 12-18 (PHILCPA Adapted) Easy Company sells directly to retail customers. On January 1, 2010, the balance of the accounts receivable was P2,070,000 while the allowance for doubtful accounts was a credit of 78,000. The following data are gathered: Credit sales Writeoffs Recoveries 2007 11,100,000 260,000 22,000 2008 12,250,000 295,000 37,000 2009 14,650,000 300,000 36,000 2010 15,000,000 310,000 42,000

Doubtful accounts are provided for as a percentage of credit sales. The accountant calculates the percentage annually by using the experience of the three years prior to the current year.

What amount should be recorded as doubtful accounts expense for 2010? a. b. c. d.

268,000 310,000 300,000 222,000

Solution 12-18 Answer c Credit sales 2007 11,100,000 2008 12,250,000 2009 14,650,000 38,000,000

Writeoffs 260,000 295,000 300,000 855,000

Recoveries 22,000 37,000 36,000 95,000

855,000 – 95,000 Rate = ------------------------- = 38,000,000 Doubtful accounts expense for 2010 (15,000,000 x .02)

300,0000

Allowance for doubtful accounts – 12/31/2010 (78,000+300,000+42,000 – 310,000)

110,000

.02

Problem 12-19 (AICPA Adapted) From inception of operations in 2006, Axis Company carried no allowance for doubtful accounts. Uncollectible receivables were expensed as written off and recoveries were credited to income as collected. On March 1, 2010 (after the 2009 financial statements were issued), management recognized that Axis’ accounting policy with respect to doubtful accounts was not correct, and determined that an allowance for doubtful accounts was necessary.

A policy was established to maintain an allowance for doubtful accounts based on historical bad debt loss percentage applied to year-end accounts receivable. The historical bad debt loss percentage is to be recomputed each year based on all available past years up to a maximum of five years. Information for five years is as follows: Year 2006 2007 2008 2009 2010

Credit sales 1,500,000 2,250,000 2,950,000 3,300,000 4,000,000

Writeoffs 15,000 38,000 52,000 65,000 83,000

Recoveries 0 2,700 2,500 4,800 5,000

Accounts receivable balances were P1,250,000 and 2,000,000 on December 31, 2009 and December 31, 2010, respectively. What amount should Axis Company report as doubtful accounts expense for 2010? a. 97,000 b. 78,000 c. 83,000 d. 92,000 Solution 12-19 Answer d Year 2006 2007 2008 2009 Total 2010 Total

Credit sales 1,500,000 2,250,000 2,950,000 3,300,000 10,000,000 4,000,000 14,000,000

Writeoffs 15,000 38,000 52,000 65,000 170,000 83,000 253,000

Recoveries 2,700 2,500 4,800 10,000 5,000 15,000

Rate in 2009= 170,000 – 10,000 = .016 10,000,000 Rate in 2010= 253,000 – 15,000 = .017 14,000,000

Allowance = 12/31/2009 (1,250,000 x .016) Recoveries in 2010 Doubtful accounts expense for 2010 (SQUEEZE) Total Writeoffs in 2010 Allowance – 12/31/2010 (2,000,000 x .017)

20,000 5,000 92,000 117,000 (83,000) 34,000

The doubtful accounts expense is “squeezed” from the December 31, 2010 required allowance for doubtful accounts.

Problem 12-20 (AICPA Adapted) From inception operations to December 31, 2009, Murr Company provided for uncollectible accounts expense under the allowance method, provisions were made monthly at 2% of credit sales, bad debts written off were charged to the allowance account, recoveries of bad debts previously written off were credited to the allowance account, and no year-end adjustments to the allowance account were made. Murr’s usual credit terms are net 30 days. The balance in the allowance for doubtful acoounts was P120,000 on January 1, 2010. During 2010, credit sales totaled P9,000,000, interim provisions for doubtful accounts were made at 2% of credit sales, P90,000 of bad debts were written off, and recoveries of accounts previously written off amounted to P15,000. Murr prepared an aging of accounts receivable for the first time on December 31, 2010. A summary of the aging is as follows: Classification by Balance in Estimated %

month of sale November – December July – October January – June Prior to January 1, 2010

each category

uncollectible

2,000,000 600,000 400,000 200,000 3,200,000

2% 10% 25% 75%

Based on the review of collectability of the accounts balances in the “prior to January 1, 2010” aging category, additional receivables totaling P60,000 were written off on December 31, 2010. Effective with the year ended December 31, 2010, Murr adopted a new accounting method for estimating the allowance for doubtful accounts at the amount indicated by the year-end aging analysis of accounts receivable. What is the year-end adjustment to the allowance for doubtful accounts on December 31, 2010? a. 305,000 b. 180,000 c. 320,000 d. 140,000 Solution 12-20 Answer d November – December ( 2,000,000 x 2%) July – October ( 600,000 x10%) January ...