CB2100 – Intro to Financial Accounting – Semester A 2019/20 Solution_tutorial_week 7

Tutorial questions (P5-3A, P5-4A)

Problem 5-3A (LO 5-3, 5-4, 5-5)
Requirement 1
June 12, 2021 Debit Credit
Accounts Receivable 41,000
Service Revenue 41,000
(Provide services on account)
September 17, 2021
Cash 25,000
Accounts Receivable 25,000
(Receive cash on account)
December 31, 2021
Bad Debt Expense 7,200
Allowance for Uncollectible Accounts 7,200
(Estimate future bad debts)
($16,000 x 45% = $7,200)
March 4, 2022
Accounts Receivable 56,000
Service Revenue 56,000
(Provide services on account)
May 20, 2022
Cash 10,000
Accounts Receivable 10,000
(Receive cash on account)
July 2, 2022
Allowance for Uncollectible Accounts 6,000
Accounts Receivable 6,000
(Write off actual bad debts)
October 19, 2022
Cash 45,000
Accounts Receivable 45,000
(Receive cash on account)
December 31, 2022
Bad Debt Expense 3,750
Allowance for Uncollectible Accounts 3,750
(Estimate future bad debts)
[($11,000 x 45%) − $1,200 = $3,750]
CB2100 – Intro to Financial Accounting – Semester A 2019/20 Solution_tutorial_week 7

Problem 5-3A (concluded)

Requirement 2
Cash Accounts Receivable
25,000 41,000 25,000
Dec. 31, 2021 25,000 Dec. 31, 2021 16,000
10,000 56,000 10,000
45,000 6,000
Dec. 31, 2022 80,000 45,000
Dec. 31, 2022 11,000

Allow. for Uncol. Accts.

7,200 Dec. 31, 2021

6,000 3,750
4,950 Dec. 31, 2022

Requirement 3
2021 2022
Total accounts receivable $16,000 $11,000
Less: Allowance for uncollectible accounts 7,200 4,950
Net accounts receivable $ 8,800 $ 6,050
CB2100 – Intro to Financial Accounting – Semester A 2019/20 Solution_tutorial_week 7

Problem 5-4A (LO 5-4, 5-5)

Requirement 1
Estimated Estimated
Amount percent amount
Age group receivable uncollectible uncollectible
Not yet due $40,000 4% $ 1,600
0-90 days past due 16,000 20% 3,200
91-180 days past due 11,000 25% 2,750
More than 180 days past due 13,000 80% 10,400
Total $80,000 $17,950

Requirement 2
December 31, 2021 Debit Credit
Bad Debt Expense 12,950
Allowance for Uncollectible Accounts 12,950
(Estimate future bad debts)
($17,950 − $5,000 = $12,950)

Requirement 3
July 19, 2022
Allowance for Uncollectible Accounts 8,000
Accounts Receivable 8,000
(Write off actual bad debts)

Requirement 4
September 30, 2022
Accounts Receivable 8,000
Allowance for Uncollectible Accounts 8,000
(Re-establish account previously written off)
September 30, 2022
Cash 8,000
Accounts Receivable 8,000
(Receive cash on account)
CB2100 – Intro to Financial Accounting – Semester A 2019/20 Solution_tutorial_week 7

Take-home questions (E5-19, E5-20, AP5-5)

Exercise 5-19 (LO 5-9)
Requirement 1
December 31, 2021 Debit Credit
Bad Debt Expense 5,500
Allowance for Uncollectible Accounts 5,500
(Estimate future bad debts)
[$5,500 = ($55,000 x 12%) − $1,100]

Requirement 2
December 31, 2021 Debit Credit
Bad Debt Expense 7,800
Allowance for Uncollectible Accounts 7,800
(Estimate future bad debts)
($7,800 = $260,000 x 3%)

Requirement 3
Percentage of Percentage of
receivables credit sales
method method
Total assets −$5,500 −$7,800
Net income −$5,500 −$7,800

In this example, the amount of the adjustment is greater under the percentage of
credit sales approach. This means that both assets and net income will be lower
in 2021 under this approach.
CB2100 – Intro to Financial Accounting – Semester A 2019/20 Solution_tutorial_week 7

Exercise 5-20 (LO 5-9)

Requirement 1
December 31, 2021 Debit Credit
Bad Debt Expense 7,700
Allowance for Uncollectible Accounts 7,700
(Estimate future bad debts)
($7,700 = $55,000 x 12% + $1,100)

Requirement 2
December 31, 2021 Debit Credit
Bad Debt Expense 7,800
Allowance for Uncollectible Accounts 7,800
(Estimate future bad debts)
($7,800 = $260,000 x 3%)

Requirement 3
Percentage of Percentage of
receivables credit sales
method method
Total assets −$7,700 −$7,800
Net income −$7,700 −$7,800

In this example, the amount of the adjustment is greater under the percentage of
credit sales approach. This means that both assets and net income will be lower
in 2021 under this approach.
CB2100 – Intro to Financial Accounting – Semester A 2019/20 Solution_tutorial_week 7

Additional Perspective 5-5

1. Increase income before taxes by $45,000.
If the balance of the allowance for uncollectible accounts before adjustment is
$20,000 and the year-end estimate of future uncollectible accounts is $180,000,
then an adjustment of $160,000 is needed. This adjustment has the effect of
increasing the allowance for uncollectible accounts, which increases bad debt
expense and therefore reduces net income and eventually retained earnings
(stockholders’ equity). By reducing the estimate of future bad debts to only
$135,000, an adjustment of only $115,000 is needed. Therefore, the change
requested by the controller has the effect of increasing income before taxes by
$45,000.

2. Decrease total assets by $45,000.

Allowance for Uncollectible Accounts is a contra-asset to the Accounts
Receivable account. By reporting the Allowance account for $45,000 higher,
total assets are reduced.

3. Yes.
By making the change requested, net income and total assets will increase by
$45,000. Overstating these amounts will make the company appear more
profitable and less risky than it would have otherwise. This type of misreporting
can fool investors and creditors into making suboptimal decisions. Preparing a
new invoice does not change the age of the underlying account receivable, and
the best estimate is the original amount estimated, $180,000. Next year, the
large account may prove uncollectible and require a write off. When this occurs,
investors and creditors (and potentially employees) could suffer financial
damages because the company fails to receive cash that the receivables balances
suggested it was going to collect.

4. No.
However, you are new to the position. You might not be sure that it’s right for
you to question any decision of your superior. It is clear that the superior is
asking you to engage in fraudulent reporting.
Upsetting your superior may reduce your compensation, reduce the likelihood
of promotion, and increase your chance of being fired. You may feel that as
long as your boss told you to do it, then your agreement to go along is
technically the superior’s ethical dilemma; you are just following orders.
However, you should agree that reporting inaccurate numbers is against your
ethical standards. You would be partially responsible for any adverse outcomes
to investors, creditors, employees, and others relying on those reports. Both
your superior and you could incur legal penalties for this fraudulent reporting.