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Note Receivable and Bad Debt Accounting

The document discusses several examples of accounting for notes receivable and allowance for doubtful accounts. In the first example, a $7,000 note receivable is issued and interest of $47 and $233 accrues over time. When paid back, the note and accrued interest of $7,280 is received. The second example calculates interest accrued on multiple notes receivable. The third and fourth examples demonstrate calculating bad debt expense and adjusting the allowance for doubtful accounts balance using the percentage of sales and aging of receivables methods. The final example shows writing off a specific bad debt against the allowance account.

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25 views5 pages

Note Receivable and Bad Debt Accounting

The document discusses several examples of accounting for notes receivable and allowance for doubtful accounts. In the first example, a $7,000 note receivable is issued and interest of $47 and $233 accrues over time. When paid back, the note and accrued interest of $7,280 is received. The second example calculates interest accrued on multiple notes receivable. The third and fourth examples demonstrate calculating bad debt expense and adjusting the allowance for doubtful accounts balance using the percentage of sales and aging of receivables methods. The final example shows writing off a specific bad debt against the allowance account.

Uploaded by

Jaspreet
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd

5-1B – Note receivable

April 30, 2017 Debit Credit


DR Notes receivable 7,000
CR Cash 7,000

June 30, 2017 Debit Credit


DR Interest receivable 47
CR Interest revenue 47

April 30, 2018 Debit Credit


DR Interest receivable 233
CR Interest revenue 233

April 30, 2018 Debit Credit


DR Cash 7280
CR Notes receivable 7000
CR Interest receivable 280

At the company’s year end (June 30), interest has accrued and must be recorded. Yearly interest
on the note is ($7,000 * 7% = $280). However, only 2 months have passed since the note was
issued. Therefore, accrued interest is (2/12 * $280 = $47).

When the loan is paid back, the interest accrued from the company’s year end until the time the
loan is paid must be calculated. 10 months have passed since the company’s year end.
Therefore, accrued interest is (10/12 * $280 = $233).

Both the loan and the interest accrued is paid back when the loan is due ($7,000 + $47 + $233 =
$7,280).
5-2B – Note receivable

May 31, 2017 Debit Credit


DR N/R – Y. Yang (5%) 6,000
CR Consulting revenue 6,000

June, 15 2017 Debit Credit


DR Cash 6,012.50
CR N/R – Y. Yang 6,000
CR Interest Revenue * 12.50

Aug 1, 2017 Debit Credit


DR N/R – Fergus (6%) 3,000
CR Cash 3,000

Nov 15, 2017 Debit Credit


DR N/R – Redflag (8%) 10,000
CR Maintenance rev 10,000

Jan 31, 2018 Debit Credit


DR Int. rec. – Fergus 90
CR Interest revenue 90

Jan 31, 2018 Debit Credit


DR Int. rec. – Redflag 167
CR Interest revenue 167

On June 15, Yang repays note with interest. Interest accrued is ($6,000 * 5% = $300 * 0.5/12 =
$12.50).

(*) This could have been broken into 2 journal entries as in questions 5-1A and 5-1B using an
Interest receivable account.

At year end, interest accrued for loans outstanding must be calculated. Fergus loan ($3,000 * 6%
= $180 * 6/12 = $90). Redflag loan ($10,000 * 8% = $800 * 2.5/12 = $167).
5-3B – Percentage of Sales Method

a)
The first step here is to calculated credit sales.

Total sales – Cash sales = Credit Sales


$430,000 - $60,000 = $370,000

From here, Bad Debts are 3.5% of Credit Sales


3.5% * $370,000 = $12,950 (Note: This is an estimate)

Oct 31, 2017 Debit Credit


DR Bad debt expense 12,950
CR Allowance for 12,950
doubtful accounts

b)
Accounts receivable – Doubtful accounts = A/R Net

Allowance for doubtful accounts


T-account
300
12,950
13,250

$41,000 – $13,250 = $27,750 A/R Net

The company is legally owed $41,000. Company’s accountant expects not to collect on an
estimated $13,250. Therefore, the books reflect this amount (A/R net) $27,750.
5-4B – Aging of Receivables Method

a)
Amount Receivable Estimated Uncollectible Ending Balance of Allowance
42,000 1% 420
15,000 4% 600
6,000 8% 480
5,000 25% 1,250
68,000 2,750

Allowance for doubtful accounts


T-account
1,000
1,750
2,750

Initially the company had $1,000 credit in Allowance for doubtful accounts. The above
calculation showed that the ending balance was a $2,750 credit. Therefore $1,750 credit must be
entered to arrive at that final amount.

Jan 31 Debit Credit


DR Bad debt expense 1,750
CR Allowance for 1,750
doubtful accounts

b)
Accounts receivable – Doubtful accounts = A/R Net

$68,000 – $2,750 = $65,250 A/R Net

The company is legally owed $68,000. Company’s accountant expects not to collect on an
estimated $2,750. Therefore, the books reflect this amount (A/R net) $65,250.
5-5A – Writing off bad debts

Aug 11 Debit Credit


DR Allowance 4,000
CR A/R – Good Sleep 4,000
Hotels

Note that previous questions have either a debit or credit amount under the Allowance account.
This amount is due to previous write-offs. The Allowance is an estimated amount while in
reality the company may write-off more or less than that amount, making the ending balance
either a debit or a credit.

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