Bad Debt Expense and the Allowance for Bad Debts

Assume you are the controller of a large medical equipment company that sells diagnostic machinery to hospitals in the local geographic region. You are currently training new employees, and in a recent training session, you report that total credit sales for the year is $300,000, accounts receivable total $40,000 less a $2,000 allowance for bad debts, and bad debt expense is $3,500. After the session, a trainee approaches somewhat confused about why bad debt expense and the allowance balance differ.

Required:

Prepare a short explanation to the trainee on the difference between bad debt expense and the allowance for bad debts.

Interest on Notes Receivable

Interest Calculations:

Interest is the amount of money that is paid for the use of money that has been borrowed or to delay re-payment on debt obligations. In the table below, four notes are listed with the amount of original principal (amount borrowed), the interest rate (amount paid to borrow money) and the interest period for 2017.

Notes receivable for 2017:

Original Principal

Interest Rate

Interest Period During 2017

Note 1

$40,000

6%

3 months

Note 2

$15,000

10%

180 days

Note 3

$5,000

8%

90 days

Note 4

$250,000

7%

9 months

Required:

For each of the notes receivable, compute the amount of interest revenue earned during 2017. Round to the nearest dollar.

Have you ever purchased something from a store, maybe a high Don't miss thist ticket price item such as a piece of furniture, where you had the agreed to pay for it within a certain time after the sale, such as 90 Account Rectien terel days? When you do so, you are purchasing that item on credit. Many companies offer items on credit so they increase sales of products and services to customers. When it sells products and services which are usually paid for in a short period of time, the companies create an account receivable. If business extends an offer to loan money or funds to others, it creates a note receivable. Anote receivable can either be short term or long term. Let's take a look at example for our fictitious business, Red Apple Clinic, Inc. Suppose a patient has a consultation for preventative health care in the month of February. The patient is charged $200 for this service which is billed to him and due by the end of March. According to the matching principle, we record the transaction in the month of February as an account receivable, which is an asset on the balance sheet. This transaction results in an increase to the assets category Considering the accounting equation, assets liabilities+owner's equity, there should be a corresponding effect on another account(s) to make the equation balance. There could be an opposite decrease on the left side of the equation, the assets category, or an increase on the right side, in either the liabilities or owner's equity accounts. What do you think? Let's follow the transaction to determine how the balance sheet remains in balance 1. Patient receives services and pays for it later, creating a $200 increase in Accounts Receivable Assets-LiabilitiesOwners Equity $200 2. Due to accrual based accounting and the revenue recognition principle, a sales transaction increasing revenue would be recorded on the income statement. Revenuers Expenses Income 200 3. This sales revenue would cause an increase in net income Revenues-Expenses Income 5200 4. Because income is transferred to the retained earnings, an increase in net income would cause an increase in owner's equity account. Assets LiabilitesOwners Equity 200 Thus, the domino effect of the transaction on the balance sheet and income statement accounts causes the equation to remain in balance What happens when the receivable is collected in March? Let's follow the flow of this 1. The patient pays his bill in the amount of $200 in March. The clinic collects $200 in cash, which increases the asset account cash