MAGIS ACADEMIC MENTORS

ACCOUNTS RECEIVABLE/BAD DEBTS

Terms:
BAD DEBTS (Doubtful Accounts/Uncollectible Accounts) = portion of accounts receivable that is expected to be uncollectible
Expenses - Bad Debts Expense (BDE)/Uncollectible Accounts Expense/Doubtful Accounts Expense
- (recorded in the Income Statement as expense)
Allowances - Allowance for Doubtful Accounts (ADA)/Allowance for Bad Debts/Allowance for Uncollectible Accounts
- (recorded in the balance sheet as a contra-account to Accounts Receivable

I. Direct Write-off - recognizes expense only when the account is written-off

- violation of GAAP (Matching Principle)
A. Write-off:
Dr. Bad Debts Expense 2,000
Cr. Accounts Receivable 2,000

B. Recovery
Dr. Accounts Receivable 2,000
Cr. Bad Debts Expense 2,000
Dr. Cash 2,000
Cr. Accounts Receivable 2,000

II. Allowance Method - estimates Bad Debts Expense and adjusts at the end of the period
A. Step 1: Estimation/Adjustment at the end of period (Dec. 31, 2014)
Dr. Bad Debts Expense 1,000
Cr. Allowances for Doubtful Accounts 1,000

Balance Sheet presentation: (Dec. 31, 2014) Dec. 31, 2014 After Write-off (2015)
Accounts Receivable 10,000 9,500
less: Allowance for Doubtful Accounts (ADA) 1,000 500
Net Realizable Value 9,000 9,000

B. Step 2: Write-off (certain that customer cannot pay) (2015)

Dr. Allowance for Doubtful Accounts 500
Cr. Accounts Receivable 500

C. Step 3: Recovery - Two Pairs of Journal Entries (2015)

Dr. Accounts Receivable 300
Cr. Allowance for Doubtful Accounts 300
Dr. Cash 300
Cr. Accounts Receivable 300

SUMMARY of Events Involving Allowance for Doubtful Accounts:

ADA
Write-off Beginning (Jan 1, 2015)
Recovery
Unadjusted (December 31, 2015)
BDE (adjustment/I.S. (December 31, 2015))
Ending (contra-account/B.S. (December 31, 2015))

SUMMARY of Events affecting Accounts Receivable:

AR
Beginning Collections
Credit Sales Write-off
Recovery Conversion to Notes Receivable
Recovery
Ending
 Magis Academic Mentors
ESTIMATION/ADJUSTMENTS
I. Based on/Percent of Credit Sales/Net Sales/Sales Solution:
(Income Statement Method) ADA
Example: (Write-off) 4,400 5,000 (Beginning: Jan. 1, 2014)
Allowance for Doubtful Accounts, Jan. 1, 2014 (Php): 5,000 500 (Recovery)
Accounts Written Off in 2014 (Php) : 4,400 1,100 - unadjusted/remaining balance
Recovery in 2014: 500 6,000 - BDE/adjustment Dec. 31, 2014*
Credits Sales in 2014 (Php): 100,000 7,100 - ending/contra-account/B.S.**
Accounts Receivable, December 31, 2014 (Php): 50,000 *(Credit Sales x 6%) = (P100,000 x 6%) = P6,000
Estimated Rate based on Credit Sales: 6% **(Ending ADA = P1,100 + P6,000)
Note: Amount Computed = BDE (adjustment)
Requirements:
Determine the Bad Debts Expense for 2014 Adjustment: December 31, 2014
Journalize the Adjustment Dr. Bad Debts Expense 6,000
Show the Balance Presentation of A/R and ADA Cr. Allowance for Doubtful Accounts 6,000

Balance Sheet: December 31, 2014:

Accounts Receivable 50,000
less: Allowance for Doubtful Accounts 7,100
Net Accounts Receivable 42,900

II. Based on A/R or Outstanding A/R (Balance Sheet Method) Solution:

A. Percent of A/R ADA
Example: (Write-off) 4,400 5,000 (Beginning: Jan. 1, 2014)
Allowance for Doubtful Accounts, Jan. 1, 2014 (Php): 5,000 500 (Recovery)
Accounts Written Off in 2014 (Php): 4,400 1,100 - unadjusted/remaining balance
Recovery in 2014: 500 5,400 - BDE/adjustment Dec. 31, 2014**
Credits Sales in 2014 (Php): 100,000 6,500 - ending/contra-account/B.S.*
Accounts Receivable, December 31, 2014 (Php) : 50,000 *A/R x 13%%) = (P50,000 x 13%) = P6,500
Estimated Rate based on Outstanding A/R: 13% **BDE = P6,500 - P1,100
Note: Amount Computed = Ending ADA (contra-account)
Requirements: Adjustment: December 31, 2014
Determine the Bad Debts Expense for 2014 Dr. Bad Debts Expense 5,400
Journalize the Adjustment Cr. Allowance for Doubtful Accounts 5,400
Show the Balance Presentation of A/R and ADA
Balance Sheet: December 31, 2014:
Accounts Receivable 50,000
less: Allowance for Doubtful Accounts 6,500
B. Aging of A/R Net Accounts Receivable 43,500
Example:
Allowance for Doubtful Accounts, Jan. 1, 2014 (Php): 5,000 ADA
Accounts Written Off in 2014 (Php): 4,400 (Write-off) 4,400 5,000 (Beginning: Jan. 1, 2014)
Recovery in 2014: 500 500 (Recovery)
Credits Sales in 2014 (Php): 100,000 1,100 - unadjusted/remaining balance
Break-down of Accounts Receivable as of December 31, 2014: 4,700 - BDE/adjustment Dec. 31, 2014
Age A/R Percent Uncollectible Amount 5,800 - ending/contra-account/B.S.
1 - 30 days 30,000 1% 300 Note: Amount Computed = Ending ADA (contra-account)
31 - 60 days 15,000 20% 3,000 Adjustment: December 31, 2014
Over 60 days 5,000 50% 2,500 Dr. Bad Debts Expense 4,700
Total 50,000 5,800 Cr. Allowance for Doubtful Accounts 4,700

Requirements: Balance Sheet: December 31, 2014:

Determine the Bad Debts Expense for 2014 Accounts Receivable 50,000
Journalize the Adjustment less: Allowance for Doubtful Accounts 5,800
Show the Balance Presentation of A/R and ADA Net Accounts Receivable 44,200
 Magis Academic Mentors
Example: Solution:
As of January 1, 2015, Magis Academic Mentors had the Jan. 2 Dr. Accounts Receivable - Megamall 40,000
following balances: Cr. Sales 40,000
Accounts Receivable: 100,000
Allowance for Doubtful Accounts: 18,000 Jan. 18 Dr. Cash 10,780
Net Realizable Value 82,000 Sales Discount (P11,000 x 2%) 220
Cr. Accounts Receivable - beginning* 11,000
Those who paid within 30 days were granted 2% discount. *(P10,780/0.98)
The following transactions occurred in 2015:
Jan. 2 Sold P40,000 on account to Megamall. Feb. 14 Dr. Accounts Receivable - Gateway 50,000
Jan. 18 Collected P10,780 cash net of 2% sales discount from Cr. Sales 50,000
the beginning accounts receivable.
Feb. 14 Sold P50,000 on credit to Gateway. Mar. 10 Dr. Cash 25,000
Mar. 10 Collected P25,000 from beginning accounts receivable. Cr. Accounts Receivable - beginning 25,000
Mar. 20 Sold P100,000 on account to Trinoma.
Apr. 4 Collected half of the account receivable from Megamall. Mar. 20 Dr. Accounts Receivable - Trinoma 100,000
May 13 Sold P55,000 for cash to MOA. Cr. Sales 100,000
Jun. 1 Trinoma settled its account by issuing a 30-day,
12%-Notes Payable. Apr. 4 Dr. Cash 20,000
Jun. 20 Sold P90,000 on account to Robinsons. Cr. Accounts Receivable - 1/2 Megamall 20,000
Jul. 1 Trinoma paid its Notes Payable together with the interest.
Jul. 7 Collected P60,000 from the beginning accounts receivable. May 13 Dr. Cash 55,000
Aug. 1 Wrote-off the rest of beginning accounts receivable. Cr. Sales 55,000
Aug. 18 Sold P30,000 on credit to Sta. Lucia.
Sept. 20 Collected the 3/4 of the account from Gateway. Jun. 1 Dr. Notes Receivable 100,000
Oct. 1 Wrote off remaining balance of Megamall. Cr. Accounts Receivable - Trinoma 100,000
Oct. 15 Collected the full amount from Robinsons
Nov. 1 Sold P50,000 on account to Powerplant. Jun. 20 Dr. Accounts Receivable - Robinsons 90,000
Nov. 10 Recovered 70% of the written-off account of Megamall. Cr. Sales 90,000
Nov. 20 Wrote-off the balance of Gateway.
Nov. 30 Collected half of the account of Powerplant. Jul. 1 Dr. Cash (P100,000 + P1,000) 101,000
Dec. 1 Sold P30,000 on account to Eastwood Dr. Notes Receivable 100,000
Dec. 8 Collected 80% of the account of Sta. Lucia. Interest Revenue 1,000
Dec. 20 Sold goods with a list price of P15,000 on account to BGC. *(P100,000 x 12% x 30/360)
As a regular customer, BGC was granted 10% trade Jul. 7 Dr. Cash 60,000
discount. Cr. Accounts Receivable - beginning 60,000

Requirements: Aug. 1 Dr. Allowance for Doubtful Accounts 4,000

Journalize the transactions above (ignore cost of goods sold) : Cr. Accounts Receivable 4,000
Prepare the adjusting entries and the presentation of A/R in the (P100,000 - P11,000 - P25,000 - P60,000)
balance sheet under the following methods in estimating
the bad debts: Aug. 18 Dr. Accounts Receivable - Sta. Lucia 30,000
1) 5% of Credit Sales Cr. Sales 30,000
2) 18 % of Outstanding Accounts Receivable
3) Aging based on the ff: Sep. 20 Dr. Cash 37,500
Age % Uncollectible Cr. Accounts Receivable - 3/4 Gateway 37,500
1 - 30 days 10%
31 - 90 days 30% Oct. 1 Dr. Allowance for Doubtful Accounts 20,000
91 days and more 60% Cr. Accounts Receivable - Megamall 20,000

Oct. 15 Dr. Cash 90,000

Cr. Accounts Receivable - Robinsons 90,000

Nov. 1 Dr. Accounts Receivable - Powerplant 50,000

Cr. Sales 50,000
 Magis Academic Mentors
Estimation of Bad Debts:
1) 5% of Credit Sales
Nov. 10 Dr. Accounts Receivable - Megamall 14,000 Allowance for Doubtful Accounts
Cr. Allowance for Doubtful Accounts 14,000 (unadjusted) 4,500 25,175 (BDE)*
Dr. Cash 14,000 20,675 (ending)
Cr. Accounts Receivable - Megamall 14,000
(P20,000 x 70%) *(P503,500 x 5%)
Adjustment:
Nov. 20 Dr. Allowance for Doubtful Accounts 12,500 Dr. BDE 25,175
Cr. Accounts Receivable - Gateway (1/4 x P50,000) 12,500 Cr. ADA 25,175
Balance Sheet:
Nov. 30 Dr. Cash (P25,000 x 98%) 24,500 Accounts Receivable 74,500
Sales Discount (P25,000 x 2%) 500 Less: ADA 20,675
Cr. Accounts Receivable - 1/2 Powerplant 25,000 Net Realizable Value 53,825

Dec. 1 Dr. Accounts Receivable - Eastwood 30,000 2) 18% of Accounts Receivable

Cr. Sales 30,000 Allowance for Doubtful Accounts
(unadjusted) 4,500 17,910 (BDE)**
Dec. 8 Dr. Cash (P30,000 x 80%) 24,000 13,410 (ending)*
Cr. Accounts Receivable - Sta. Lucia 24,000
*(P74,500 x 18%)
Dec. 20 Dr. Accounts Receivable - BGC (P15,000 x 90%) 13,500 **(P13,410 + P4,500)
Cr. Sales 13,500
Adjustment:
Prepare the T-Accounts Dr. BDE 17,910
Accounts Receivable Cr. ADA 17,910
(beg) 100,000 11,000 (Jan. 18) Balance Sheet:
(Jan. 2) 40,000 25,000 (Mar. 10) Accounts Receivable 74,500
(Feb. 14) 50,000 20,000 (Apr. 4) Less: ADA 13,410
(Mar. 20) 100,000 100,000 (Jun. 1) Net Realizable Value 61,090
Credit (Jun. 20) 90,000 60,000 (Jul. 7)
Sales (Aug. 18) 30,000 4,000 (Aug. 1) 3) Aging
503,500 (Nov. 1) 50,000 37,500 Sep. 20) Age Customer AR Percent Amount
(exclude (Nov. 10) 14,000 20,000 (Oct. 1) Uncollectible
recovery) (Dec. 1) 30,000 90,000 (Oct. 15) 1 - 30 days Eastwood 30,000 10% 3,000
(Dec. 20) 13,500 14,000 (Nov. 10) BGC 13,500 10% 1,350
12,500 (Nov. 20) 31 - 90 days Powerplant 25,000 30% 7,500
25,000 (Nov. 30) 91 days Sta. Lucia 6,000 60% 3,600
24,000 (Dec. 8) and more
74,500 Total * 15,450

Allowance for Doubtful Accounts

(unadjusted) 4,500 19,950 (BDE)**
Allowance for Doubtful Accounts 15,450 (ending)*
(Aug. 1) 4,000 18,000 (Beg.)
(Oct. 1) 20,000 14,000 (Nov. 10) **(P15,450 + P4,500)
(Nov. 20) 12,500
(unadjusted) 4,500 Adjustment:
Dr. BDE 19,950
Cr. ADA 19,950

Balance Sheet:
Accounts Receivable 74,500
Less: ADA 15,450
Net Realizable Value 59,050
 Magis Academic Mentors
NOTES RECEIVABLE
I. Valuation:
Interest = Principal x Annual Interest Rate x Time (fraction of a year)
Note: (1 Year = 12 months = 360 accounting days)
A. Issuance
Books of Maker/Borrower Books of Payee/Creditor
Dr. Merchandise Inventory Dr. Notes Receivable
Cr. Notes Payable Cr. Sales

B. Recognizing/Adjustment for Interest at the end of Accounting Period

Books of Maker/Borrower Books of Payee/Creditor
Dr. Interest Expense* Dr. Interest Receivable
Cr. Interest Payable Cr. Interest Revenue*
*[Principal x Rate x Time (fraction of a year since last payment date)]

C. Maturity Date: Payment of Interest and Principal

Case 1: No adjustment before maturity date Case 1: No adjustment before maturity date
Books of Maker/Borrower Books of Payee/Creditor
Dr. Interest Expense Dr. Cash
Notes Payable Cr. Interest Receivable
Cr. Cash Notes Receivable
Case 2: With adjustment before maturity date Case 2: With adjustment before maturity date
Books of Maker/Borrower Books of Payee/Creditor
Dr. Interest Expense Dr. Cash
Interest Payable Cr. Interest Receivable
Notes Payable Interest Revenue
Cr. Cash Notes Receivable

III. Discounting of Notes Receivable with recourse (transfer of the note to a third party)
Computation of Net Proceeds - cash to be received:
Step 1: Determine the Maturity Value (MV)
MV = Principal + Interest = Principal + (Principal x Interest Rate x Time)
Step 2: Determine the discount period (DP): number of days from discounting date to maturity date
Step 3: Compute for the discount (D) using Discount Rate (DR)
Discount (D) = Maturity Value x Discount Rate x Discount Period = MV x DR x DP
Step 4: Compute for Net proceeds (NP): cash received from discounting transaction
NP = Maturity Value - Discount = MV - D

Journal Entries when a Note is Discounted:

Books of Maker/Borrower Books of Payee/Creditor
NO ENTRY Dr. Cash (Net Proceeds)
Cr. Notes Receivable Discounted (liability)
Interest Revenue *
Maturity Date: *(Cash - Notes Receivable Discounted)
A. If the Maker Pays on Maturity (pays on maturity date)
Books of Maker/Borrower Books of Payee/Creditor
Dr. Notes Payable Dr. Notes Receivable Discounted
Interest Expense (Principal x Interest Rate x Time) Cr. Notes Receivable
Cr. Cash (MV = Principal + Interest)
B. If the Marker dishonors the Note (does not pay on maturity date)
Books of Maker/Borrower Books of Payee/Creditor
NO ENTRY Dr. Notes Receivable Discounted
Cr. Notes Receivable
Dr. Accounts Receivable (MV + Protest Fee/Penalty)
Cr. Cash
 Magis Academic Mentors
Example 1: No adjustment before maturity date
On August 23, 2017, Ateneo purchased goods worth P50,000 from Magis Distributor and issued a 120-day, 12%-Notes Payable.
Requirements: Determine the maturity date
Journalize the entries on the issuance and maturity dates.

Solution: ATENEO MAGIS

Issuance
Aug. 23 Dr. Merchandise Inventory 50,000 Aug. 23 Dr. Notes Receivable 50,000
Cr. Notes Payable 50,000 Cr. Sales 50,000

Maturity Date: 8 (Aug) + 30 (Sep) + 31 (Oct) + 30 (Nov) + 21 (Dec)

Dec. 21 Dr. Interest Expense 2,000 * Dec. 21 Dr. Cash 52,000
Notes Payable 50,000 Cr. Notes Receivable 50,000
Cr. Cash 52,000 Interest Revenue 2,000
*(50,000 x 12% x 120/360)

Example 2: With adjustment before maturity date

On October 18, 2017, Miriam College purchased goods worth P80,000 from Magis Company and issued a 90-day, 15%-Notes Payable.
Requirements: Determine the maturity date
Journalize the entries on issuance, adjustment and maturity dates.

Solution: Miriam College MAGIS

Issuance
Oct. 18 Dr. Merchandise Inventory 80,000 Oct. 18 Dr. Notes Receivable 80,000
Cr. Notes Payable 80,000 Cr. Sales 80,000

Adjustment: [Number of days passed = 13 (Oct) + 30 (Nov) + 31 (Dec) = 74]

Dec. 31 Dr. Interest Expense* 2,467 Dec. 31 Dr. Interest Receivable 2,467
Cr. Interest Payable 2,467 Cr. Interest Revenue 2,467
*(80,000 x 15% x 74/360)

Maturity Date: (90 - 74 days)

Jan. 16 Dr. Interest Expense* 533 Jan. 16 Dr. Cash 83,000
Interest Payable 2,467 Cr. Interest Receivable 2,467
Notes Payable 80,000 Interest Revenue 533
Cr. Cash (maturity value) 83,000 Notes Receivable 80,000
*(80,000 x 15% x 16/360)

Example 3: Discounting
On September 1, 2015, Trinoma purchased goods with retail price of P100,000 from Magis Enterprise and issued
a 90-day, 12%-Notes Payable. On October 31, Magis discounted the note with recourse to BPI with a discount rate of 18%.

Requirements: Journalize the transactions from the points of view of both the issuer and maker.
Prepare the journal entries when the maker honors and dishonors the note.

Trinoma Magis
Sep. 1 Dr. Merchandise Inventory 100,000 Sep. 1 Dr. Notes Receivable 100,000
Cr. Notes Payable 100,000 Sales 100,000

Oct. 31 NO ENTRY Oct. 31 Dr. Cash* 101,455

Cr. Interest Revenue** 1,455
Notes Receivable - Discounted 100,000
(see the computation on the next page)
 *Computation for Net Proceeds:
Step 1: Compute for Maturity Value
MV = P100,000 + (P100,000 x 12% x 90/360) = 103,000
Step 2: Compute for discount period
Discount Period = 90 days less Number of days passed
= 90 days - 60 days = 30 days
Step 3: Compute for the discount
Discount = (P103,000 x 18% x 30/360) = 1,545
Step 4: Compute for Net Proceeds (Cash)
Cash = (P103,000 - P1,545) = 101,455

** (P101,455 - P100,000)

Nov. 30 If Trinoma honors (pays) the note: Nov. 30 If Trinoma honors (pays) the note:
Dr. Notes Payable 100,000 Dr. Notes Receivable Discounted 100,000
Interest Expense* 3,000 Cr. Notes Receivable 100,000
Cr. Cash (maturity value) 103,000
*(P100,000 x 12% x 90/360)

If Trinoma dishonors (does not pay ) the note: If Trinoma dishonors (does not pay) the note, Magis will pay the
maturity value plus P1,000 protest fee (penalty).
NO ENTRY Dr. Notes Receivable - Discounted 100,000
Cr. Notes Receivable 100,000
Dr. Accounts Receivable 104,000
Cr. Cash (MV + Protest Fee) 104,000