AMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 1 Accounts Receivable: Module 6 Slide 1 Introduction to Accounting II Professor Marc Smith CHAPTER 1 MODULE 1 Accounts Receivable Module 6 Okay, now that we've gone through how to develop the bad debt expense estimate, let's put it to a test and let's take a look at example number three from our website problems. Just read it together. XYZ Company has a $250,000 balance in their accounts receivable at December 31st of 2002. The allowance for doubtful accounts had a $2,100 credit balance at December 31st of 02 right before making the year-end estimate for your bad debit expense. During the year, XYZ Company reported net credit sales of $800,000.AMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 2 Slide 2 In part A, let's start with part A. Part A says let's assume XYZ Company is using the net credit sales method to estimate their bad debt expense and they estimate that their credit sales will be uncollectable to the tune of 2%. Requirement number one: calculate the bad debt expense estimate for the year. The net credit sales method is actually a fairly easy method to employ. What we'll do to come up with our bad debt expense is simply take the net credit sales for the year, given as 800,000, multiplied by the percentage expected to be uncollectable, 2%, and the bad debt expense is estimated as $16,000. Easy stuff. Requirement two is going to be a little bit more involved. It wants us to calculate the net realizable value of XYZ Company's accounts receivable at December 31st of 2002. Now we know that our NRV, our net realizable value, is equal to the accounts receivable minus the allowance for doubtfulAMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 3 accounts. And in order to come up with the allowance balance, you should just get into the habit; you should always do this, in order to calculate correctly the balance in the allowance for doubtful accounts always use a T-account.AMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 4 Slide 3 16,000.00 Accounts Receivable - Allowance for Doubtful Accounts Net Realizable Value $18,100.00 Allowance for Doubtful Accounts $ 2,100.00 $250,000 (18,100) $231,900 Accounts Receivable – Module 6 So let's do it. Here's what we know. We know that right before making the bad debt expense estimate for the current year, it told us in the problem, the allowance had a balance of $2,100 on the credit side. We also know, we just figured out on the previous slide, the bad debt expense for the year was $16,000. We know bad debt expense increases the allowance. That tells me the ending balance in the allowance as of the end of the year, $18,100. So now I'm able to come up with the correct NRV. They give me the accounts receivable balance, $250,000. We've just figured out the allowance, we'll subtract the $18,100, and we have a net realizable value of $231,900.AMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 5 Slide 4 Pa rtB: AgingMethodΣ(Amountofreceivablesx%) Percentage Estimated to be Age Balance Uncollectible Amount Current. . . . . . . . . . $150,000 2% $ 3,000 1-30 days. . . . . . . . 60,000 4% 2,400 31-90 days. . . . . . . 30,000 9% 2,700 Over 90 days. . . . . 10,000 20% 2,000 $250,000 $10,100 The $10,100 represents the required ending credit balance in the allowance for doubtful accounts. Accounts Receivable – Module 6 Look at part B. And it says okay, now let's assume that XYZ Company is using the aging method in order to estimate its bad debt expense. And they've given you an aging schedule there in the problem. And it wants us to do the same two calculations. Come up with the bad debt expense amount and calculate the net realizable value as of December 31st of 02. Now what I’ve done on the slide is I’ve taken your aging schedule and I’ve done that first calculation for each item. For each category in the aging schedule, take the amount of the receivables times the percentage expected to be uncollectable and then you take all of those products and add them up. When you do that in our example you get $10,100. Now remember that $10,100 is not your bad debt expense. It represents the required ending credit balance in the allowance for doubtful accounts.AMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 6 Slide 5 X $2,100 + X = $10,100 X = $8,000 = bad debt expense $10,100.00 Allowance for Doubtful Accounts $ 2,100.00 Accounts Receivable – Module 6 So let’s setup a T-account. Here’s what we know. The allowance before the bad debt expense estimate had a balance of $2,100 on the credit side. From the aging schedule we figured out the ending credit balance is $10,100 so we solve for X. And we’re able to calculate the bad debt expense for 2002 to be $8,000.AMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 7 Slide 6 Accounts Receivable - Allowance for Doubtful Accounts Net Realizable Value $250,000 (10,100) $239,900 Par tB : AgingMethodAccounts Receivable – Module 6 The second requirement for the problem wants us to calculate the net realizable value of the accounts receivable at December 31st. It’s an easy one to do now that we’ve set up that T-account. We know that the accounts receivable had a balance of $250,000. We just figured out using our aging schedule; remember the aging schedule gives us the ending credit balance in the allowance for doubtful accounts, so we know that the ending balance was $10,100, giving us a net realizable value of $239,900. Now take a look at the third requirement. Requirement three says this. Calculate the bad debt expense for 2002 but let’s assume the allowance for doubtful accounts had a $2,100 debit balance right before making the year-end estimate for bad debt expense.AMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 8 Slide 7 X X - $2,100 = $10,100 X = $12,200 = bad debt expense $10,100.00 Allowance for Doubtful Accounts $ 2,100.00 Accounts Receivable – Module 6