ACTIVITY I: ACCOUNTING FOR BAD DEBTS

Instructions:
Answer the following questions. Provide explanations and solutions for the computational
problems

1. How are accounts receivable measured after initial recognition? What factors
affect their valuation?

- After initial recognition, accounts receivable are measured at their amortized cost.

Factors affect their valuation

 Sales level- this is the total amount of goods and services. It affects the account receivable
if the sales level became high that leads to higher receivable.
 Credit policy- A strict credit policy may result in lower sales but also lower accounts
receivable balances and a lower risk of non-payment.
 Credit term- it is the conditions set by the company for the customer to pay. The effect of
longer payment can increase sales but also increase the risk of non-payment. While if it is
shorter payment period it can reduce the sales but lower the risk of bad debts.
 The risk of non-payment. This is the potential loss of the company.

2. What is bad debt expense, and how does it impact financial statements?

- bad debt expense is an accounting entries that represent the estimated amounts that a
company expects as customers do not pay their outstanding invoices. It is a key factor in
financial reporting and affect both income statement and balance sheet. It reduces net income
and it is also reduces the value of accounts receivables.

3. What is the allowance for doubtful accounts, and why is it necessary?

- Allowance for doubtful accounts is treated as a contra-asset because it is a deduction to

accounts receivables when determining net realizable value. Is it necessary because it gives
accurate financial reporting by reflecting the potential for uncollectible receivables. It helps
company to prepare for potential bad debts in advance in order to prevent losses.

4. Identify and describe the two methods used in accounting for bad debts.

- When it comes to allowance method an allowance is recognized for bad debts expense when
the collectability of accounts become doubtful. It is accordance with the PFRS’s, estimates and
records bad debt expense at the end of each accounting period, aligning with the matching
principle by recognizing the expense in the same period as the related revenue. It is also
creates a contra-asset account which is allowance for doubtful accounts. While the direct--off
method recognizes bad debts only when the balance of accounts receivable is deemed
uncollectible or worthless.
 5. Between the Direct Write-Off Method and the Allowance Method, which is
generally accepted in accounting? Explain why.

- Allowance method is the generally accepted in accounting because it aligns with GAAP. It is
because this method does not violate the concept of accrual basis of accounting, matching, and
conservatism. providing a more realistic view of the company's receivables and financial
position

6. Draw and label T-Accounts for Accounts Receivable and Allowance for Doubtful
Accounts based on the allowance method.

Allowance for Doubtful accounts

xx beg.
Write-off xx xx recovery
xx bad debt expense

End. xxx

Account receivable
Beg. xx xx write-off
Net credit sales xx xx collections on account
Recovery xx

xxx end.

7. How is the carrying value of accounts receivable computed at the end of the
period? Provide an example computation.

- Carrying Value of Accounts Receivable = Gross Accounts Receivable - Allowance for Doubtful
Accounts

Example:
Gross account receivable = 100,000 (this is the total amount of AR from customer)
Allowance for doubtful accounts = 10,000 ( this is the estimated amount of AR that will likely to
be uncollectible)

Carrying Value of Accounts Receivable = 100,000 - 10,000 = 90,000

The carrying of accounts receivable is 90,000

8. Answer page 221-222 Accounting for bad debts. For requirement a, prepare the
journal entries using Direct Write-Off Method and Allowance Method.
A.

ALLOWANCE METHOD DIRECT WRITE OFF METHOD

Accounts receivables 250,000 Accounts receivables 250,000

Sales 250,000 Sales 250,000

Cash 220,000 Cash 220,000

Accounts receivable 220,000 Accounts receivable 220,000

Bad debt expense 30,000 No entry

Allowance for doubtful accounts 30,000

Allowance for doubtful accounts 15,000 Bad debt expense 15,000

Accounts receivables 15,000 Accounts receivable 15,000

Accounts receivable 8,000 No entry

Allowance for doubtful accounts 8,000

Cash 8,000 Cash 8,000

Accounts receivable 8,000 Gain on recovery 8,000

b.

Allowance for bad debts

9,000 beg.
Write-off 15,000 8,000 recovery
30,000 bad debt expense

End. 32,000

Account receivable
Beg. 120,000
Sales on account 250,000 220,000 collections on account
15,000 write-off
Recovery 8,000 8,000 collection on recovery

135,000 end.
c.

Accounts receivable, end. 135,000

Allowance for bad debts, end (32,000)

Carrying amount of AR, end 103,000

9. How are doubtful accounts estimated?

It is estimated using the 3 methods in estimating doubtful account;

 percentage of net credit sales- Under this method, bad debt expense is computed by
applying a percentage on the net credit sales during the period. The bad debt expense is
computed without regard to the beginning balance of the allowance for doubtful accounts
and write-offs and recoveries
 percentage of receivables- The percentage of receivables method estimates bad debts
based on the current accounts receivable balance. A historical percentage of uncollectible
accounts is applied to the total receivables to determine the allowance.
 aging of receivables- under the aging of receivables method, the required balance of
allowance for doubtful accounts is computed by applying various estimated percentages to
the breakdown of the ending receivable according to ages. The age of receivables is
determined based either on the number of days the receivables are outstanding or on the
number of days the receivables are past due.

10. Answer page 222-223 Estimating doubtful accounts items 5 and 6.

5.

A. Percentage of net credit sales

Allowance for bad debts

12,600 beg.
Write-off 15,800 2,600 recovery
16,200 bad debt expense

End. 15,600

Account receivable
Beg. 180,000
Sales on account 810,000 781,000 collections on account
15,800 write-off

193,200, end.
Accounts receivable, end. 193,200

Allowance for bad debts, end (15,600)

Carrying amount of AR, end 177,600

B. Percentage of ending receivable

Allowance for bad debts

12,600 beg.
Write-off 15,800 2,600 recovery
16,056 bad debt expense

End. 15,456

Account receivable
Beg. 180,000
Sales on account 810,000 781,000 collections on account
15,800 write-off

193,200, end.

Accounts receivable, end. 193,200

Allowance for bad debts, end (15,456)

Carrying amount of AR, end 177,744

6.

Days outstanding amount % uncollectible Required allowance

0-60 190,000 1% 1,900

61-90 240,000 3% 7,200

91-120 30,000 7% 2,100

Over 120 10,000 10% 1,000

Totals 470,000 12,200

 Allowance for bad debts
10,100 beg.
Write-off 4,600 200 recovery
6,500 bad debt expense

End. 12,200

Accounts receivable, end. 470,000

Allowance for bad debts, end (12,200)

Carrying amount of AR, end 457,800