AMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 1 Accounts Receivable: Module 7 Slide 1 Introduction to Accounting II Professor Marc Smith CHAPTER 1 MODULE 1 Accounts Receivable Module 7 Hi everyone. Now that we’ve gone through a basic example of how to estimate bad debt expense let’s take a look at one that’s a little more complicated. Take a look at example number 4 from our website problems. Let’s just read it together. It says Grandma Veezy’s House of Fun has compiled the following information to determine its year-end estimate of bad debt expense. And you can see the information they’ve given us. They’ve given us the sales. All sales were on account, were on credit. They tell us sales returns and allowances. They give us the accounts receivable balance at the end of the year. They tell us the allowance for doubtful accounts at the beginning of the year. They tell us the amount of accounts receivable that were written off during the year as well as the recoveries--the accounts receivable that had been previously written off but were then collectedAMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 2 during the current year. And part A says let’s assume Grandma Veezy is using the net credit sales method and she has estimated her bad debt expense to be 4% of her net credit sales. Requirement 1: calculate her bad debt expense for the year.AMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 3 Slide 2 PartA: NetCreditSalesMethod1. Baddebtexpense=Netcreditsalesx%$500,000x.04 NOTCORRECTBaddebtexpense=($500,000-$18,000)x. 04Baddebtexpense=$19,280Accounts Receivable – Module 7 Here’s what we know. When using the net credit sales method the bad debt expense is the net credit sales multiplied by the percentage expected to be uncollectable. And at first, this seems like it will be a real easy one to answer. What a lot of us would do would be to take the sales amount of $500,000, multiply by 4%, the percentage expected to be uncollectable, and we would say our bad debt expense is $20,000. And then we are gonna be shocked and very upset when it comes back, no that’s wrong. Big red X drawn right through the work, not correct. And the reason is the bad debt expense is based on the net credit sales and we learned in the very first module of this round of material, the net sales would be your sales minus sales returns and allowances minus sales discounts. Now there are no sales discounts in this problem but we did have $18,000 of sales returns and allowances. So the net credit sales would be the $500,000 of sales minus the $18,000 of sales returns and allowances. Net salesAMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 4 multiplied by the 4% expected to be uncollectable would give us a bad debt expense estimate for the year 19,280. Requirement number 2 wants us to calculate Grandma Veezy’s net realizable value as of December 31st, at the end of the year. And we know the NRV is our accounts receivable minus the allowance. The problem is they don’t tell us what the allowance is at the end of the year. They tell us the allowance at the beginning of the year, at January 1st. But we can figure it out.AMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 5 Slide 3 Bad debt expense Ending Balance Allowance for Doubtful Accounts Write-offs Recoveries Beginning Balance Accounts Receivable – Module 7 We can setup our T-account for the allowance for doubtful accounts. We know we take our beginning balance, plus recoveries, plus the bad debt expense estimate, minus the write-offs, equals the ending balance. And we have all those numbers that we can play with.AMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 6 Slide 4 19,280.00 $33,380.00 Allowance for Doubtful Accounts $12,200.00 7,800.00 $18,500.00 Accounts Receivable - Allowance for Doubtful Accounts Net Realizable Value $420,000 (33,380) $386,620 Accounts Receivable – Module 7 The problem has told us the beginning balance in the allowance, $18,500. It said that the recoveries for the year were $7,800, put that on the credit side. It told us the write-offs for the year were $12,200, put that on the debit side. We just calculated the bad debt expense, $19,280, telling us the ending balance in the allowance for doubtful accounts balance at December 31, $33,380, allowing us to calculate the net realizable value, taking the accounts receivable at December 31st, given in the problem, 420,000, minus our allowance to get an NRV, 386,620. That’s the net credit sales method. Part B says let’s use the aging method and let’s do the whole set of calculations again but assume that Grandma Veezy is using the aging method. And they’ve given us an aging schedule you can see it in the problem.AMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 7 Slide 5 And I remember when using the aging method, I take that aging schedule and for every row, for every category, I take the amount of the receivables times the percentage expected to be uncollectable. And then I add up those products. In this example, that’s $36,200. But I also remember that that number from the aging schedule, that 36,200, not my bad debt expense, rather it is the ending credit balance in the allowance for doubtful accounts. We’re gonna have to force out the bad debt expense using our T account.AMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 8 Slide 6 X $36,200.00 Allowance for Doubtful Accounts $12,200.00 7,800.00 $18,500.00 $18,500 + $7,800 + X - $12,200 = $36,200 X = $22,100 = bad debt expense Accounts Receivable – Module 7 And we know the beginning balance given, $18,500. Don’t forget about the recoveries and the write-offs, they still go into the T account, $7,800, $12,200 respectively. We just figured out from the aging schedule the ending balance in the allowance 36,200,