Allowance Method for Accounting for Bad Debts At the beginning of 2017, EZ Tech Company's Accounts Receivable balance was $227,000, and the balance in Allowance for Doubtful Accounts was $3,850. EZ Tech's sales in 2017 were $1,700,000, 80% of which were on credit. Collections on account during the year were $1,090,000. The company wrote off $7,000 of uncollectible accounts during the year. Required: 1. Identify and analyze the sales during 2017. Activity Operating Accounts Cash Increase, Accounts Receivable Increase, Sales Revenue Increase Statement(s) Balance Sheet and Income Statement Feedback 1) Determine activity. 1a) Financing activities are transactions (other than payment of interest) involving borrowing from creditors or repaying creditors. This also includes transactions with the company's owners. Businesses borrow money or raise money from selling of their stock. 1b) Investing activities are obtaining money by building up operations or purchasing investment products such as stocks, bonds and annuities. 1c) Operating activities are the sale of products and/or services, and the costs incurred to operate a business. 2) Determine financial statement accounts affected, balance sheet or income statement. Determine accounts and amount of increases/decreases. 3) Balance Sheet accounts: Assets = Liabilities + Stockholders' Equity. Income Statement accounts: Revenues Expenses = Net Income. (Equations must stay in balance) 4) Allowance method estimates bad debts on the basis of either the net credit sales of the period or the accounts receivable at the end of the period. 5) Bad Debts Expense recognizes the cost associated with the reduction in asset value, Accounts Receivable. A contra-asset account is used to reduce the asset to its net realizable value. This is accomplished by creating an allowance account, Allowance for Doubtful Accounts. This is a contra account and causes total assets to decrease. 6) Record total sales earned to Sales Revenue and Accounts Receivable percentage on credit with remaining percentage to Cash. How does this entry affect the accounting equation? If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign. Balance Sheet Income Statement Stockholders' Net Assets = Liabilities + Equity Revenues Expenses = Income Cash fill in the blank 55863cfed009f97_2 340,000 No Entry fill in the blank 55863cfed009f97_4 0 fill in the blank 55863cfed009f97_5 1,700,000 Sales Revenue fill in the blank 55863cfed009f97_7 1,700,000 No Entry fill in the blank 55863cfed009f97_9 0 fill in the blank 55863cfed009f97_10 1,700,000 Accounts Receivable fill in the blank 55863cfed009f97_12 1,360,000 No Entry fill in the blank 55863cfed009f97_14 0 fill in the blank 55863cfed009f97_15 0 No Entry fill in the blank 55863cfed009f97_17 0 No Entry fill in the blank 55863cfed009f97_19 0 fill in the blank 55863cfed009f97_20 0 Feedback Correct Identify and analyze the transactions related to the collections of cash during 2017. Activity Operating Accounts Cash Increase, Accounts Receivable Decrease Statement(s) Balance Sheet only Feedback 1) Determine activity. 1a) Financing activities are transactions (other than payment of interest) involving borrowing from creditors or repaying creditors. This also includes transactions with the company's owners. Businesses borrow money or raise money from selling of their stock. 1b) Investing activities are obtaining money by building up operations or purchasing investment products such as stocks, bonds and annuities. 1c) Operating activities are the sale of products and/or services, and the costs incurred to operate a business. 2) Determine financial statement accounts affected, balance sheet or income statement. Determine accounts and amount of increases/decreases. 3) Balance Sheet accounts: Assets = Liabilities + Stockholders' Equity. Income Statement accounts: Revenues Expenses = Net Income. (Equations must stay in balance) 4) Allowance method estimates bad debts on the basis of either the net credit sales of the period or the accounts receivable at the end of the period. 5) Bad Debts Expense recognizes the cost associated with the reduction in asset value, Accounts Receivable. A contra-asset account is used to reduce the asset to its net realizable value. This is accomplished by creating an allowance account, Allowance for Doubtful Accounts. This is a contra account and causes total assets to decrease. 6) Record collections on accounts to cash and adjustment to Accounts Receivable. How does this entry affect the accounting equation? If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign. Balance Sheet Income Statement Stockholders' Net Assets = Liabilities + Equity Revenues Expenses = Income Cash fill in the blank 9639adf1905703b_2 1,090,000 No Entry fill in the blank 9639adf1905703b_4 0 fill in the blank 9639adf1905703b_5 0 No Entry fill in the blank 9639adf1905703b_7 0 No Entry fill in the blank 9639adf1905703b_9 0 fill in the blank 9639adf1905703b_10 0 Accounts Receivable fill in the blank 9639adf1905703b_12 -1,090,000 No Entry fill in the blank 9639adf1905703b_14 0 fill in the blank 9639adf1905703b_15 0 No Entry fill in the blank 9639adf1905703b_17 0 No Entry fill in the blank 9639adf1905703b_19 0 fill in the blank 9639adf1905703b_20 0 Feedback Correct Identify and analyze the transactions related to the write-offs of accounts receivable during 2017. Activity Operating Accounts Allowance for Doubtful Accounts Decrease, Accounts Receivable Decrease Statement(s) Balance Sheet only Feedback 1) Determine activity. 1a) Financing activities are transactions (other than payment of interest) involving borrowing from creditors or repaying creditors. This also includes transactions with the company's owners. Businesses borrow money or raise money from selling of their stock. 1b) Investing activities are obtaining money by building up operations or purchasing investment products such as stocks, bonds and annuities. 1c) Operating activities are the sale of products and/or services, and the costs incurred to operate a business. 2) Determine financial statement accounts affected, balance sheet or income statement. Determine accounts and amount of increases/decreases. 3) Balance Sheet accounts: Assets = Liabilities + Stockholders' Equity. Income Statement accounts: Revenues Expenses = Net Income. (Equations must stay in balance) 4) Allowance method estimates bad debts on the basis of either the net credit sales of the period or the accounts receivable at the end of the period. 5) Bad Debts Expense recognizes the cost associated with the reduction in asset value, Accounts Receivable. A contra-asset account is used to reduce the asset to its net realizable value. This is accomplished by creating an allowance account, Allowance for Doubtful Accounts. This is a contra account and causes total assets to decrease. 6) Record write-off of accounts receivable to contra-asset account, Allowance for Doubtful Accounts and adjustment to Accounts Receivable. How does this entry affect the accounting equation? If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign. Remember: if a contra account is increased, it will have the effect of decreasing the corresponding financial statement item. If a contra account is decreased, it will have the effect of increasing the corresponding financial statement item. Balance Sheet Income Statement Stockholders' Net Assets = Liabilities + Equity Revenues Expenses = Income Allowance for Doubtful Accounts fill in the blank 2572e806402af80_2 7,000 No Entry fill in the blank 2572e806402af80_4 0 fill in the blank 2572e806402af80_5 0 No Entry fill in the blank 2572e806402af80_7 0 No Entry fill in the blank 2572e806402af80_9 0 fill in the blank 2572e806402af80_10 0 Accounts Receivable fill in the blank 2572e806402af80_12 -7,000 No Entry fill in the blank 2572e806402af80_14 0 fill in the blank 2572e806402af80_15 0 No Entry fill in the blank 2572e806402af80_17 0 No Entry fill in the blank 2572e806402af80_19 0 fill in the blank 2572e806402af80_20 0 Feedback Correct 2. Identify and analyze the adjustments to recognize bad debts assuming that (a) bad debts expense is 4% of credit sales and (b) amounts expected to be uncollectible are 7% of the year-end accounts receivable. a. Identify and analyze the adjustments to recognize bad debts assuming that bad debts expense is 4% of credit sales. Activity Operating Accounts Allowance for Doubtful Accounts Increase, Bad Debts Expense Increase Statement(s) Balance Sheet and Income Statement Feedback 1) Determine activity. 1a) Financing activities are transactions (other than payment of interest) involving borrowing from creditors or repaying creditors. This also includes transactions with the company's owners. Businesses borrow money or raise money from selling of their stock. 1b) Investing activities are obtaining money by building up operations or purchasing investment products such as stocks, bonds and annuities. 1c) Operating activities are the sale of products and/or services, and the costs incurred to operate a business. 2) Determine financial statement accounts affected, balance sheet or income statement. Determine accounts and amount of increases/decreases. 3) Balance Sheet accounts: Assets = Liabilities + Stockholders' Equity. Income Statement accounts: Revenues Expenses = Net Income. (Equations must stay in balance) 4) Allowance method estimates bad debts on the basis of either the net credit sales of the period or the accounts receivable at the end of the period. 5) Bad Debts Expense recognizes the cost associated with the reduction in asset value, Accounts Receivable. A contra-asset account is used to reduce the asset to its net realizable value. This is accomplished by creating an allowance account, Allowance for Doubtful Accounts. This is a contra account and causes total assets to decrease. 6) Under the percentage of net credit sales approach, the emphasis is on expense. The balance in the allowance account before adjustment is ignored. Multiply percentage uncollectable by net sales amount for expense. How does this entry affect the accounting equation? If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign. Remember: if a contra account is increased, it will have the effect of decreasing the corresponding financial statement item. If a contra account is decreased, it will have the effect of increasing the corresponding financial statement item. Balance Sheet Income Statement Stockholders' Net Assets = Liabilities + Equity Revenues Expenses = Income Allowance for Doubtful Accounts fill in the blank 88dbb606205ffb2_2 No Entry fill in the blank 88dbb606205ffb2_4 0 fill in the blank 88dbb606205ffb2_5 No Entry fill in the blank 88dbb606205ffb2_7 0 Bad Debts Expense fill in the blank 88dbb606205ffb2_9 fill in the blank 88dbb606205ffb2_10 Feedback Partially correct b. Identify and analyze the adjustments to recognize bad debts assuming that amounts expected to be uncollectible are 7% of the year-end accounts receivable. Activity Operating Accounts Allowance for Doubtful Accounts Increase, Bad Debts Expense Increase Statement(s) Balance Sheet and Income Statement Feedback 1) Determine activity. 1a) Financing activities are transactions (other than payment of interest) involving borrowing from creditors or repaying creditors. This also includes transactions with the company's owners. Businesses borrow money or raise money from selling of their stock. 1b) Investing activities are obtaining money by building up operations or purchasing investment products such as stocks, bonds and annuities. 1c) Operating activities are the sale of products and/or services, and the costs incurred to operate a business. 2) Determine financial statement accounts affected, balance sheet or income statement. Determine accounts and amount of increases/decreases. 3) Balance Sheet accounts: Assets = Liabilities + Stockholders' Equity. Income Statement accounts: Revenues Expenses = Net Income. (Equations must stay in balance) 4) Allowance method estimates bad debts on the basis of either the net credit sales of the period or the accounts receivable at the end of the period. 5) Bad Debts Expense recognizes the cost associated with the reduction in asset value, Accounts Receivable. A contra-asset account is used to reduce the asset to its net realizable value. This is accomplished by creating an allowance account, Allowance for Doubtful Accounts. This is a contra account and causes total assets to decrease. 6) In applying the percentage of accounts receivable to estimate bad debts expense, the balance already in the allowance account is used and the focus is on the balance sheet. Multiply uncollectable percentage by the ending balance in accounts receivable. The amount determined uncollectible will be the new ending balance for the Allowance for Doubtful Accounts. The change in the Allowance account is the bad debt expense. How does this entry affect the accounting equation? If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign. Remember: if a contra account is increased, it will have the effect of decreasing the corresponding financial statement item. If a contra account is decreased, it will have the effect of increasing the corresponding financial statement item. Balance Sheet Income Statement Stockholders' Net Assets = Liabilities + Equity Revenues Expenses = Income Allowance for Doubtful Accounts fill in the blank 14736a007f93064_2 No Entry fill in the blank 14736a007f93064_4 0 fill in the blank 14736a007f93064_5 No Entry fill in the blank 14736a007f93064_7 0 Bad Debts Expense fill in the blank 14736a007f93064_9 fill in the blank 14736a007f93064_10 3. What is the net realizable value of accounts receivable on December 31, 2017, under each assumption in part (2)? Using the percentage of sales approach, the net realizable value of the receivables is? $fill in the blank 441d52009fbffb4_1 Using the percentage of year-end receivables approach, the net realizable value of the receivables is? $fill in the blank 441d52009fbffb4_2 4. The recognition of bad debts expense reduces the net realizable value by the amount recorded in bad debts expense and the allowance for doubtful accounts . The write-off of accounts has no effect on the net realizable value. Feedback The net realizable value of accounts receivable is the carrying value of the receivables