Accounts Receivable Practice Problems Solution

True/False

1. The allowance for doubtful accounts can temporarily have a debit balance. TRUE (can
occur after write-offs but before bad debt adjusting entry)

2. Total accounts receivable is used on the balance sheet to compute total assets. FALSE (net
Accounts Receivable is used)

3. When a firm recognizes that a specific customer is not able to pay amounts owed from a
previous period, the firm records bad debt expense which decreases net income. FALSE
(record estimated bad debt expense in period of sale; for write-off, reduce AR and
allowance, which has no income statement effect)

4. Managers close to violating a debt covenant may have incentive to underestimate bad debt
expense. TRUE (may have incentive to report higher total assets and/or higher net
income)

5. In a year of strong performance, a firm may create a reserve by underestimating bad debt
expense. FALSE. (Overestimating bad debt expense creates a reserve (excessive
allowance). Then, in future periods, the firm can record less expense, boosting net
income as needed.)

6. All else equal, a firm would prefer to have a lower accounts receivable turnover than its
competitors. FALSE. (Lower AR turnover means the firm is not extending credit and
collecting receivables effectively)

Northrop Technologies reported the following balances:

Credit Sales = 600,000
Write-offs = 2,000
Beginning Accounts Receivable = 50,000
Ending Accounts Receivable = 52,000
Beginning Allowance for Doubtful Accounts = 1,200

If the company estimates bad debt expense based on 0.5% of credit sales, what is the ending
balance in the allowance account? How much cash did Northrop collect?

Bad debt expense = 600000*.5% = 3000

Accounts
Receivable Allowance
50,000 2,000 1,200
600,000 ? ? = Cash collected = 596,000 2,000 3,000
52,000 2,200
On December 31, 2012, Jade Inc, had the following balances before adjustments:
Accounts Receivable $80,000
Allowance for Doubtful Accounts 2,000 credit
Net Sales 500,000

On December 31, 2012, Jade estimates that its bad debt expense is 2% of net sales. What is bad
debt expense for 2012? What is the ending balance in the Allowance for Doubtful Accounts at
12/31/2012? What is net accounts receivable balance reported on the balance sheet?
$500,000 * 2% = $10,000 = Bad Debt expense
2,000 + 10,000 = 12,000 = Allowance
80,000 – 12,000 = 68,000 = Net AR

Instead, assume that Jade uses an aging schedule to estimate uncollectible accounts where the
percentage of uncollectible accounts for each category is given below:
Current $40,000 2%
1 – 30 days past due 30,000 10%
Over 30 days past due 10,000 40%

What is bad debt expense for 2012? What is the ending balance in the Allowance for Doubtful
accounts at 12/31/2012? What is the net accounts receivable balance reported on the balance
sheet?
2%*40,000 + 10%*30,000 + 40%*10,000 = $7,800 = Allowance
7800-2000 = 5800 = Bad Debt expense
80,000 – 7,800 = 72,200 = Net AR
Coleman manufactures camping equipment which it sells to sporting goods retailers. Coleman
has credit sales of $6 million during 2012. Most customers pay promptly but an average of 1.4%
of these sales are never paid. On December 31, 2012, accounts receivable is $470,000. The
Allowance for Bad Debts account, before recognition of 2012 bad debts, has a $1,200 debit
balance.

Most of the sales occur during the period of February through July. In the recent past, an average
of 18% of the December 31 accounts receivable has not been collected.

1) Suppose Coleman uses the percentage of sales method to calculate the allowance for doubtful
accounts. Provide the journal entry to record bad debt expense for 2012. What is net accounts
receivable balance reported on the December 31 balance sheet?
2) Repeat requirement 1, except assume that Coleman uses the percentage of ending accounts
receivable method.

1) Bad debt expense 84,000

Allowance 84,000
Allowance after adjustment = 1,200 debit + 84,000 credit = 82,800
(Note: Coleman has a temporary debit balance in the allowance because write-offs in 2012
exceeded the ending balance in the allowance at 12/31/2011.)
Net accounts receivable at 12/31/12 = 470,000 – 82,800 = 387,200

2) The allowance should be 84,600 (18% * 470,000). It has a 1,200 debit balance. Thus,
Coleman needs to make the following entry:
Bad debt expense 85,800
Allowance 85,800

Net accounts receivable at 12/31/12 = 470,000 – 84,600 = 385,400

MGM conducts extensive hotel and gambling operations. A footnote in MGM's recent annual
report stated the following:
Allowance for uncollectible gaming receivables are provided to reduce gaming receivables and
revenues to amounts anticipated to be collected. Gaming receivables and the related allowance
were as follows (in thousands):
End of Year 2 End of Year 1
Gaming receivables $6,949 $6,945
Allowance for uncollectibles 2,214 2,904
Write-offs 2,294 6,934

a. Assume that MGM uses the percentage of accounts receivable method to determine its
allowance for uncollectibles. What percentage did MGM apply to gaming receivables in
year 2 in order to determine the correct ending balance in the allowance account? How do
you think this percentage compares with those of other industries
2214/6949 = 31.8%
Gambling receivables generally have a much higher rate of default than other industries

b. What was the bad debt expense for year 2?

Allowance
2,904
2,294 ? ? = Bad debt expense = 1604
2,214

Balance at Charged to Write-Offs Balance

Beginning Expenses Net of, at End
of Year Recoveries of Year
(In thousands)
Accounts receivable
Allowance for doubtful accounts
2009 51,600 4,607 (15,204 ) 41,003
2010 41,003 4,944 (22,972 ) 22,975
2011 22,975 18,147 (10,980 ) 30,142

Yahoo! Inc. provided the above schedule in its 10-K for the year ended December 31, 2011.
What was the balance in the allowance account at December 31, 2010 and 2011? Recreate the
two journal entries that Yahoo made in its allowance for doubtful accounts in 2011.

2010 balance = $22,975 and 2011 balance = $30,142

Allowance for Doubtful Accounts 10,980

Accounts Receivable 10,980

Bad debt expense 18,147

Allowance for Doubtful Accounts 18,147
At the end of Year 1, Stumble Inn reported accounts receivable of $300 and an allowance for
uncollectible accounts of $18 on its financial statements. During Year 2, Stumble Inn reported
credit sales of $6,000. At the end of Year 2 but BEFORE the bad debt adjusting entry is
recorded, Stumble Inn has an accounts receivable balance of $360 and an allowance balance of
$84 (debit balance). Using an aging schedule, Stumble Inn estimates that the allowance account
should be $30.

Prepare the journal entries that Stumble Inn recorded for credit sales, write-offs and cash
collected from customers during Year 2. Also, prepare the adjusting entry to record bad debt
expense for the year.

Accounts receivable 6,000

Sales revenue 6,000

Allowance for uncollectibles 102

Accounts receivable 102
(Allowance went from $18 credit to $84 debit, which means a $102 debit write-off)

Cash 5,838
Accounts receivable 5,838
(300+6000-102-Cash collected = 360; cash collected = 5,838)

Bad debt expense 114

Allowance for uncollectibles 114
($84 debit needs to be $30 credit)

Mulberry Company reports the following information for the years ended December 31, 2012
and 2011:
2012 2011
Sales (all on credit) $784,000 $720,000
Accounts Receivable 75,000 65,000

Historically, Mulberry collects 100% of its receivables, so no allowance is necessary.

From the information given above for Mulberry Company, determine the:
a. accounts receivable turnover for 2012
b. days to collect accounts receivable for 2012

a. $784,000/[($75,000 + $65,000)/2] = 11.2

b. 365 days/11.2 = 32.6 days
The following information was taken from Kraft Food’s balance sheet.

(in millions) 2005 2004 2003

Receivables, less allowance of $92, $118 and $114 in
2005, 2004, and 2003, respectively $ 3,385 $ 3,541 $ 3,369

1) Calculate the percentage of gross accounts receivable deemed uncollectible.

2) Net income was $2,632 in 2005 and $2,665 in 2004. If Kraft had used the same percentage in
2005 to determine the balance in the allowance account as it had in prior years, what would
net income have been in 2005?

2005 2004 2003

Allowance 92 118 114
Net Receivables 3385 3541 3369
Gross Receivables 3477 3659 3483

Allowance/Gross Receivables 2.65% 3.22% 3.27%

Allowance using 3.22% 112

Difference -20

The allowance was $92 in 2005 but would have been $112 if Kraft used the same percentage
as in prior years. If the allowance were $20 higher, then bad debt expense would be $20
higher and net income would be $20 lower. 2005 net income would have been $2,612 (an
even greater drop than what was actually reported).

Listed below are sales and accounts receivable for Procter & Gamble and Colgate-Palmolive.
Compute the 2009 average collection period for both firms. Are there any potential explanations
for the difference?

Procter & Gamble Colgate-Palmolive

Sales AR Sales AR
2009 79,029 5,836 15,327 1,678
2008 81,748 6,761 15,330 1,639

PG: 365/(79029/6298.5) = 29.1 days

CP: 365/(15327/1658.5) = 39.5 days
PG is significantly larger and, perhaps, can use its market power to collect more quickly.