When to consider credit balance in doubtful/uncollectible accounts?

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  • #198475
    SGShiver
    Participant

    These questions look the same to me. However, one includes the prior credit balance the other one does not. What am I missing?

    Question 1:

    At January 1, 20X4, Jamin Co. had a credit balance of $260,000 in its allowance for uncollectible accounts. Based on past experience, 2% of Jamin’s credit sales have been uncollectible. During 20X4, Jamin wrote off $325,000 of uncollectible accounts. Credit sales for 20X4 were $9,000,000. In its December 31, 20X4, balance sheet, what amount should Jamin report as allowance for uncollectible accounts?

    Answer:

    $115,000 is Correct: The credit balance of $260,000 in the allowance would be increased by bad debts expense equal to 2% of credit sales of $9,000,000, or $180,000, and decreased by accounts written off of $325,000. As a result, the ending balance will be $115,000.

    Question 2:

    On March 31, 20X3, Vale Co. had an unadjusted credit balance of $1,000 in its allowance for uncollectible accounts. An analysis of Vale’s trade accounts receivable at that date revealed the following:

    Age Amount Estimated uncollectible

    0 – 30 days $60,000 5%

    31-60 days $4,000 10%

    Over 60 days $2,000 $1,400

    What amount should Vale report as allowance for uncollectible accounts in its March 31, 20X3, balance sheet?

    Answer:

    $4,800

    Under the aged analysis approach, the ending balance in the allowance for doubtful accounts is determined by analyzing accounts receivable and identifying the percentage of uncollectible accounts in each category. For Vale:

    * 5% of the $60,000 of accounts 0-30 days past due will be uncollectible, or $3,000

    * 10% of the $4,000 of accounts 31-60 days past due will be uncollectible, or $400

    * $1,400 of the $2,000 of accounts over 60 days past due will also be uncollectible

    FAR- 53, next time 5/5/16
    B: 7/30/16
    A:TBD
    R:TBD

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  • #744580
    Missy
    Participant

    The difference between the two questions is the first one gives the current years' sales so the beginning credit balance was ONLY on prior years sales.

    The second problem is different because it gives the aged A/R balances not the current years sales. In theory part or all of the previous years' uncollectible accounts could be included in the “over 60” part of the aging which is why you need not consider the previous balance.

    Old timer,  A71'er since 2010.

    Finance manager/HR manager

     

     

    Licensed Massachusetts Non Reporting CPA since 2012
    Finance/Admin/HR Manager

    #744581
    Kls238
    Member

    % of sales method is considered an IS approach because it the % of sales give you what you would report on the IS – the BDE for that period. The BDE (% of sales) would be used in the calculation along with the beginning balance, W/O, etc to find the ending uncollectible account balance, which is what you'd report on the BS. Therefore, the beginning uncollectible balance would need to be used. The other methods (% AR and Aging) are considered BS approaches. The calculation of % of AR or Aging give you the ending allowance balance. The only time you need to use the beginning allowance amount in these methods is if you were looking for the plug aka bad debt expense amount for that period.

    Does that help?

    Passed all sections.

    #744582
    SGShiver
    Participant

    mla11692- Thank you for the response. The reason you gave for question 2 makes sense to me now. I could see how $1000 may have already been included in the ending balance since it was not specified when the sale occurred that the $1000 came from. There would be no reason to record the allowance for that twice.

    Kls238- I guess I am still having trouble getting the two methods separated (despite working on this topic for 4 days). So to get this straight your telling me: % of credit sales is an income statement approach and typically the only time we use the beginning balance to get to our allowance. Aging and % of receivables is a balance sheet approach. The only time to add beginning balance is to plug the bad debt expense. So the words to look out for are: % of credit sales, % of receivables, aging, and bad debt expense in each question.

    FAR- 53, next time 5/5/16
    B: 7/30/16
    A:TBD
    R:TBD

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