8.

2 Valuing Accounts Receivables

Some receivables will become uncollectible
● Not reported as assets if no future benefit
● Net realizable value: the collectible amount

Receivables are written down to their collectible amount

● By recording bad debt expense
● In the same period as related revenues are recorded

Key issue is to estimate the amount that will not be collected

Three Features of the Allowance Method

1. Amount of uncollectible receivables is estimated and recorded at end of period
2. Actual uncollectibles are written off against the allowance when it is determined the
specified account is uncollectible
3. If an account previously written off is recovered the write off is reversed and the
collection recorded

Allowance for Doubtful Accounts

Deducted from Accounts Receivable in the current assets section of balance sheet
Net realizable value = Accounts Receivable - Allowance for Doubtful Accounts

Estimating the Allowance: Percentage Receivables Approach (Balance Sheet Method)

● Calculates the percentage of receivables that are estimated to be uncollectible
o Based on past experience and credit policy
● Can be applied to total receivables balance or amounts grouped by age
o Requires an aging schedule to be prepared
● Better estimate of net realizable value

1. Recording Estimated Uncollectibles

Estimated amount of uncollectible accounts is:
● Debited to an expense account – bad debts expense
● Credited to a contra asset account – allowance for doubtful accounts

2. Recording Write-Off of Uncollectible Accounts - pg. 418

Amount written-off is debited to the allowance account. The Bad debt expense is not increased
● Expense previously recognized when allowance initially recorded

3. Recovery of an Uncollectible Account

If cash is collected from a customer after the account has been written off:
1. Reverse write-off entry to restore customer’s account
2. Record collection of the account receivable in the usual way
Class Example:
The following information for Woo Wholesalers Co. accounts receivable is available at Dec 31:
Number of Days Accounts Receivable Estimated Percentage
Outstanding Uncollectible
0-30 days $ 85,000 5%
31-60 days 25,000 15%
Over 61 days 10,000 25%
Total $120,000

a) Calculate the estimated uncollectible accounts and the net realizable value of Woo’s
accounts receivable at December 31

Estimated uncollectible accounts = ($85,000 x 5%) + ($25,000 x 15%) + ($10,000 x 25%)

= $10,500
Net Realizable Value = $120,000-$10,500
= $109,500

b) Prepare the adjusting journal entry to record bad debt expense for each of the following
independent situations:

The Allowance for Doubtful Accounts has an unadjusted $2,000 credit balance.
Particulars Debit Credit
Bad Debt Expense (10,500-2,000) 8,500
Allowance of Doubtful Accounts 8,500
To record estimate of uncollectible accounts

The Allowance for Doubtful Accounts has an unadjusted $1,200 debit balance.
Particulars Debit Credit
Bad Debt Expense (10,500+1,200) 11,700
Allowance for Doubtful Accounts 11,700
To record estimate of uncollectible accounts

c) Prepare the required journal entry if Woo learns that its $1,500 receivable from Kruger
Retailers is not collectible.
Particulars Debit Credit
Allowance for Doubtful Accounts 1,500
Accounts Receivable - Kruger Retailer 1,500
To record write off of account receivable
d) Prepare the required journal entries if Woo subsequently collects the $1,500 receivable
from Kruger Retailers that was previously written off.
Particulars Debit Credit
Accounts Receivable - Kruger Retailers 1,500
Allowances for Doubtful Accounts 1,500
To reverse write off of Kruger Retailers’ account receivable.

Cash 1,500
Accounts Receivable - Kruger Retailers 1,500
To record collection from Kruger Retailers