MINI CASE #2

Instructions: Fill in the blanks _____. Use this mini case to help you study

Kids-At-Play is a toy store that began operations this year. At the end of its first year of operations, Kids-At-Play had accounts receivable totaling $50,000. The store's manager estimates that $1,500 of those receivables will not be collected.

Journal entry to record uncollectible accounts at the end of the year:

12/31_______________________

__________________________

The year-end balance sheet will report the following balances under the Current Assets section:

Accounts receivable$ ______

Less allowance for doubtful accounts $ _____

Net realizable value of accounts receivable$ ______

======

$_______ is the amount of receivables that Kids-At-Play actually expects to collect.

Assume that early in the second year of operations, Kids-At-Play decides to write off as uncollectible a $500 receivable owed by Shirley Smith. This keeps the subsidiary ledger current for references on the credit standing of customers.

Journal entry to write off the uncollectible account:

____________________ _______

___________________________

Many students will want to debit Uncollectible Accounts Expense when writing off an account. Shirley Smith's $500 account was included in the $1,500 uncollectible accounts expense recorded at the end of last year. Therefore, debiting the expense account now would record the expense twice.

After writing off the uncollectible account, the T accounts and balance sheet would appear as follows:

Accounts Receivable Allowance for Doubtful Accounts

Bal. 50,000 Entry to Bal. 1,500

500 Write-off 500

Account

Bal. 49,500 Bal. 1,000

Balance Sheet Presentation:

Accounts receivable$49,500

Less allowance for doubtful accounts 1,000

Net realizable value of accounts receivable$48,500

The net realizable value of accounts receivable did not change. Kids-At-Play still expects to collect $48,500 of its receivables. All that has changed is that the company now knows that Shirley Smith, who owes $500, is one credit customer who will probably not pay. There still is approximately $1,000 in bad debts left to be discovered.

Kids-At-Play received notice that another customer, George Jackson, will not be able to pay his $100 account receivable. Write off the account:

____________________ _______

___________________________

If using the Allowance Method the income statement is impacted when writing off an account: ______ Yes or ____NO

How to record collection of an account that has been written off. Assume that after Kids-At-Play has written off George Jackson's account, he does pay the $100 he owes.

Step 1: The account must be reinstated.

____________________ _______

___________________________

Step 2: The cash received is recorded.

____________________ _______

___________________________

DEMONSTRATION PROBLEM Estimating Uncollectible Accounts Based on Aging of Receivables

When accountants estimate uncollectible accounts based on receivables, they determine what the balance of the allowance for doubtful accounts should be. Assume that an accountant determines that $2,000 of the current accounts receivable (aging receivables) will probably not be collected. Also assume that the Allowance for Doubtful Accounts currently shows a $200 credit balance.

Allowance for Doubtful Accounts

200 Current Balance

_____Amount that must be added to the

account to get the correct balance

2,000 Amount that should be in the account based on the estimate of bad debts

The adjusting entry to record uncollectible accounts is:

____________________ _______

___________________________

Assume that the accountant determines that $2,000 of the current accounts receivable will probably not be collected and that the Allowance for Doubtful Accounts currently shows a $200 debit balance.

Allowance for Doubtful Accounts

Current Balance200

______Amount that must be added to the

account to get the correct balance

2,000 Amount that should be in the account based on the estimate of bad debts

Now, the adjusting entry to record uncollectible accounts is:

____________________ _______

___________________________

Why the Allowance for Doubtful Accounts would have a debit balance. The following T-account explaining the entries which effect the Allowance will show that a debit balance occurs when the amount of bad debts are underestimated and there are more actual write-offs than expected. In the above example, bad debts from the previous period were underestimated by $200. Since the allowance came up short, the entry to record bad debts in the current period is $2,200the current expense of $2,000 plus an extra $200 to catch-up for the amount underestimated last accounting period.

Allowance for Doubtful Accounts

Actual Write-OffAdjusting Entry to

of UncollectibleRecord Estimate of

AccountsUncollectible Accounts

A credit balance occurs when the amount of bad debts are overestimated. The account would have a zero balance if a business perfectly estimated the amount of bad debts.

Compared to the allowance method, the journal entries for the direct write-off method of recording uncollectible accounts are very straight forward. Use the lecture aids that follow to quickly review the basics of the direct write-off method, and ask your students to practice the journal entries using the group learning activity.

Direct Write-Off of Uncollectible Receivables

Under the direct write-off method, the following occur:

1. Uncollectible Accounts Expense is recorded when an account is written off.

NOTE: No attempt is made to estimate the amount of uncollectible accounts in advance.

An Allowance for Uncollectible Accounts is not established.

2. If an account that has been written off is collected, the account is reinstated before recording

the payment received.

The direct write-off method does not require an adjusting entry at the end of the accounting period.

Remember to emphasize that the direct write-off method is theoretically unacceptable, because the expense resulting from uncollectible accounts may be recognized in a different accounting period from the sales revenue from those accounts. Expenses are not matched against revenues. Therefore, the direct write-off method should be used only when the following two conditions exist:

1. It is impossible to estimate uncollectible accounts with any reasonable accuracy.

2. The amount of uncollectible accounts is immaterial.

How do you record the write off when using The Direct Write-off Method:

____________________ _______

___________________________

When do you record the write off when using the Direct Write-off Method:

a) At the end of every year

b) At the beginning of the year

c) When is determined by the company that the account is uncollectable.

If using the DirectWrite off method the balance sheet statement and Income Statement are impacted when writing off an account: ______ Yes or ___NO