HOMEWORK – 3

HW-3
FINANCIAL REPORTING AND ANALYSIS
SAMRAT KANITKAR
FT222092
 PROBLEM 7-1
Comparison of Direct Write-Off and Allowance Methods of Accounting Bad
Debts

Direct Method of Write-Off

Accounts Receivable Bad Debt Expense

Beginning Balance 0

Net Credit Sales $ 6,50,000.00 $ 10,500.00

$ 10,500.00 Direct Write Off
Write-Off
Ending Balance 639500
Net Income
before 145000
Adjustment
Bad Debt Expense 10500

Net Income after

134500
Adjustment

Allowance Method of Write-Off (Income Statement Method)

Allowances for Doubtful

Accounts Receivable Accounts Bad Debt Expense
Beginning Balance 0 0 Beginning Balance
$ 10,500.00
Net Credit Sales $ 6,50,000.00 $ 13,000.00 X
$ 13,000.00
2% of Net Credit Sales
$ 10,500.00
Ending Balance 639500 Write-Off $ 2,500.00 Ending balance

Net Income
before 145000
Adjustment
Bad Debt Expense 13000

Net Income after

132000
Adjustment

Rideaway Bikes does not have a choice as to which method to use for writing off.
There are two problems with using the Direct Method of Write-Off:
a. It is quite possible that all the accounts receivables that are outstanding do not get collected. As a result, by
ignoring this possibility and using the Direct Write-Off Method, Rideaway would likely be overstating its assets in the
Balance Sheet.
b.The Direct Write-Off Method violates the Matching Principle. The cost of selling on credit is termed as a Bad Debt.
This Bad Debt needs to be recognized as an Expense on the Income Statement. As this does not happen when using
the Direct Write-Off Method, Rideaway Bikes ends up overtating the Net Income on the Income Statement.
As a result, the Direct Write-Off Method is not permitted under the regulations prescribed by GAAP.
Hence, for now, Rideaway Bikes must use the Income Statement Method.
 PROBLEM 7-4
Using an Aging Schedule to Account for Bad Debts

1. Aging method
Estimated
Estimated Estimated
Percentage
Category Amount Percentage of Amount of
of
Uncollectibles Uncollectibles
Collectibles

Current $ 5,00,000.00 90% 10% $ 50,000.00

Past Due:
1-30 Days $ 2,00,000.00 70% 30% $ 60,000.00
30+ Days $ 1,00,000.00 25% 75% $ 75,000.00
TOTALS $ 8,00,000.00 $ 1,85,000.00

1. Allowance Method of Write-Off (Aging Method)

Allowances for Doubtful

Accounts Receivable Accounts Bad Debt Expense
Beginning Balance $ - $ 20,000.00 Beginning Balance
Cash Collection
Net Credit Sales $ - $ 1,65,000.00 X $ 1,65,000.00
$ -
$ -
Ending Balance $ 8,00,000.00 Write-Off $ 1,85,000.00 Ending balance

2. Journal Entry
Account Debit Credit

Bad Debt Expenses $ 1,65,000.00

Allowances for Doubtful Accounts $ 1,65,000.00
To account for Estimated Bad Debts
 PROBLEM 7-1A
Allowance Method for Accounting for Bad Debts

1. Journal Entry
Account Debit Credit

Cash $ 1,57,500.00
Accounts Receivable $ 6,30,000.00
Sales Revenue $ 7,87,500.00
Recording Sales Revenue

Cash $ 5,02,500.00
Accounts Receivable $ 5,02,500.00
Recording Cash Collection

Allowances for Doubtful Accounts $ 3,000.00

Accounts Receivable $ 3,000.00
Recording Write-Offs

2a. Allowance Method of Write-Off (Income Statement Method)

Allowances for Doubtful

Accounts Receivable Accounts Bad Debt Expense
Beginning Balance $ 1,05,000.00 $ 1,950.00 Beginning Balance
Collected Cash
Net Credit Sales $ 6,30,000.00 $ 5,02,500.00 $ 18,900.00 X $ 18,900.00
$3,000.00
$ 3,000.00
Ending Balance $ 2,29,500.00 Write-Off $ 17,850.00 Ending balance

2b. Allowance Method of Write-Off (Balance Sheet Method)

Allowances for Doubtful

Accounts Receivable Accounts Bad Debt Expense
Beginning Balance $ 1,05,000.00 $ 1,950.00 Beginning Balance
Collected Cash
Net Credit Sales $ 6,30,000.00 $ 5,02,500.00 $ 14,820.00 X $ 14,820.00
$3,000.00
$ 3,000.00
Ending Balance $ 2,29,500.00 Write-Off $ 13,770.00 Ending balance
 2. Journal Entry
No. Account Debit Credit

Bad Debt Expense $ 18,900.00

2a.
Allowances for Doubtful Accounts $ 18,900.00
Recording Bad Debts

Bad Debt Expense $ 14,820.00

2b.
Allowances for Doubtful Accounts $ 14,820.00
Recording Bad Debts

3. Calculating the Net Realizable value

Income Statement Method Balance Sheet Method
Ending Balances: Ending Balances:
Allowances for Allowances for
$ 17,850.00 $ 13,770.00
Doubtful Accounts Doubtful Accounts
Accounts Receivable $ 2,29,500.00 Accounts Receivable $ 2,29,500.00
Net Realizable Value $2,11,650.00 Net Realizable Value $2,15,730.00

4. Net Realizable Value = Ending Balance of (Accounts

Receivable - Allowances for Doubtful Accounts)
When a Bad Debts Expense is recognized, the Ending
Balance in the Allowances for Doubtful Accounts
increases and as a result, the Net Realizable Value
reduces.

When a Write-Off is recognized, the value merely credits

from the Accounts Receivable and Debits into the
Allowances for Doubtful Accounts.
As a result, recognizing a Write-Off does not have any
effect on the Net Realizable Value and it remans
unchanged.
 PROBLEM 7-8A
Accounts and Notes Receivables

1. Allowance Method of Write-Off (Balance Sheet Method)

Allowances for Doubtful

Accounts Receivable Accounts Bad Debt Expense
Beginning Balance $ - $ - Beginning Balance
Collected Cash
Net Credit Sales $ 6,000.00 $ - $ 6,000.00 X $ 6,000.00
$6,000.00
$ 6,000.00
Ending Balance $ - Write-Off $ - Ending balance

1. Journal Entries
Date Account Debit Credit

Accounts Receivable $ 6,000.00

31-07-2012 Sales Revenue $ 6,000.00
To Record Sales on open account: $6000

Allowances for Doubtful Accounts $ 6,000.00

Accounts Receivable $ 6,000.00
24-12-2012
To Record Write-Off: $6000

Accounts Receivable $ 6,000.00

Allowances for Doubtful Accounts $ 6,000.00
15-01-2013
To record reversal of Write-off: $6000

Cash $ 1,500.00
Notes Receivable $ 4,500.00
15-01-2013 Accounts Receivable $ 6,000.00
To Record Promissory Note: $4500, 8%p.a., 60 days

Cash $ 4,560.00
Interest Receivable $ 60.00
15-03-2013
Notes Receivable $ 4,500.00
To recognize Interest and Notes paid at Maturity

Paxton sent Tuscon a cheque for $1500 on January 15 in order to maintain Trust and alliance
with Tuscon. This would also alow Paxton in future to purchase Merchandise from Tuscon on
Credit and continue a healthy Business relationship.
PROBLEM 8-4
Accelerated Depreciation

1. Accelerated Depreciation
Ignoring Salvage value Initially
Double Declining Rate (DDB) = (100%/Useful Life) * 2
Double Declining Balance Rate = (100%/5) * 2
Double Declining Balance Rate = 40%

Double
Declining
Year Book Value Depreciation Ending Book Value
Balance
Rate
2012 40% $ 6,000.00 $ 2,400.00 $ 3,600.00
2013 40% $ 3,600.00 $ 1,440.00 $ 2,160.00
2014 40% $ 2,160.00 $ 864.00 $ 1,296.00
2015 40% $ 1,296.00 $ 518.40 $ 777.60
2016 40% $ 777.60 $ 177.60 $ 600.00 Residual Value
$ 5,400.00

2. Journal Entries
Date Account Debit Credit

Depreciation Expense: Forklift $ 2,400.00

31-12-2012 Accumulated Depreciation $ 2,400.00
To Record Depreciation Expense: $2400

3. The Double Declining Balance Acceleration Method was used by

Koffman to perform the depreciation so that he can present
minimum taxable income to the IRS with regards to the newly
purchased Fork Lift in the initial years at least.
 PROBLEM 8-8
Amortization of Intangibles

Amortization of Intanglible Assets (31-12-2012)

Legal Life Useful Life Method of Accumulated Current Book
Intangible Asset Date of Amortization Expense per year
Cost (Years) (Years) Depreciation Amortization till date value
Purchase

Trademark 01-01-2005 $ 40,000.00 Undefined Indefinite None $0 (Intangible Asset with Indefinite Life) $ - $ 40,000.00

Patent 01-01-2007 $ 50,000.00 20 10 Straight Line $ 5,000.00 $ 30,000.00 $ 20,000.00

Copyright 01-01-2010 $ 80,000.00 50 20 Straight Line $ 4,000.00 $ 12,000.00 $ 68,000.00

Amount of Amortization Expense to be Value of Accumulated

recorded for the year, 2012 Amortization to be
recorded on the
Balance Sheet as of
December 31, 2012

PROBLEM 8-3A
Book Versus Tax Depreciation

1. Book versus Tax Depreciation

Salvage Value
$ -
of the Truck
Useful Life
6
(Years)
Book Value $ 28,200.00
Calculation for Straight Line Depreciation:
Book Value = $28200; Useful Life = 6 Years
Depreciation Expense per Year = Book Value/Useful Life
= (28200/6) = $4700
Depreciation Depreciation Difference between
Year Expense Expense Depreciation
(Straight Line) (MACRS) Expenses
0 $ - $ - $ -
1 $ 4,700.00 $ 5,650.00 $ -950.00
2 $ 4,700.00 $ 9,025.00 $ -4,325.00
3 $ 4,700.00 $ 5,400.00 $ -700.00
4 $ 4,700.00 $ 3,250.00 $ 1,450.00
5 $ 4,700.00 $ 3,250.00 $ 1,450.00
6 $ 4,700.00 $ 1,625.00 $ 3,075.00
 2. Drafting a Memo for the President
Dear Sir,
This is to inform you that under the prescribed regulations, we are
permitted to use different Depreciation methods for Financial and Tax
Accounting purposes.
The goals that need to be achieved through the accounting processes
differ when depreciating for Tax and Financial accounting. As long as
these goals are being achieved, we are allowed to use two different
methods.
However, once a particular method is chosen for a particular
accounting process, it must necessarily followed for the entire useful
life of the asset.

Yours Sincerely,
Mr. Samrat Kanitkar

PROBLEM 8-6
Cost of Assets, Subsequent Book Values, and Balance Sheet Presentations

Cost of Assets , Subsequent Book values and Balance Sheet Presentations

Type of
Depreciable/ Depreciation/ Book Value Accumulated Book Value
Date of Type of Purchase Depreciation/ Salvage
No. Asset Useful Life Amortizable Amortization at the end of Depreciation/ at the time
Purchase Asset Cost/Book Value Amortization Value
Amount Expense per year the Year Amortization of Sale
Method
01-01-2012 Truck Tangible $ 16,000.00 Straight Line 5 years $ 300.00 $ 15,700.00 $ 3,140.00 $ 12,560.00 $ 3,140.00 NA
a.
01-01-2012 Cab and Oven Tangible $ 10,900.00 None Indefinite NA NA NA $ 10,900.00 $ - NA

Double-Declining
b. 01-01-2012 Equipment Tangible $ 2,700.00 3 years $ - $ 2,700.00 $ 1,800.00 $ 900.00 $ 1,800.00 NA
Balance

c. 01-04-2007 Truck Tangible $ 8,000.00 Straight Line 8 years $ 1,000.00 $ 7,000.00 $ 875.00 $ 6,125.00 $ 4,375.00 $ 3,625.00
d. 01-07-2012 Patent Intangible $ 14,000.00 Straight Line 4 years $ - $ 14,000.00 $ 3,500.00 $ 12,250.00 $ 1,750.00 NA

a. Depreciation of Truck + Cab and Oven b. Purchase of Equipment from another Company
Calculation of Depreciation Rate:
Type of Depreciation Ending Book Ignoring the Salvage value initially,
Date Book Value
Depreciation Expense Value Original Total Cost Percentage = 100%
2012 $ 16,000.00 $ 3,140.00 $ 12,860.00 Useful life of equipment = 3 years
2013 $ 12,860.00 $ 3,140.00 $ 9,720.00 Double-Declining Balance Rate (DDB Rate)
Straight Line
2014 $ 9,720.00 $ 3,140.00 $ 6,580.00 = 2 x (Original Cost Percentage / Useful Life)
Depreciation = 2 x (100% / 3) = 66.67%
2015 $ 6,580.00 $ 3,140.00 $ 3,440.00
2016 $ 3,440.00 $ 3,140.00 $ 300.00 Depreciation Ending Book
Year Book Value DDB Rate
Expense Value
2012 $ 2,700.00 66.67% $ 1,800.00 $ 900.00
For the Oven and Cab, the Purchase Cost s $10900. However, there is no
2013 $ 900.00 66.67% $ 600.00 $ 300.00
depreciation for them, since their useful life is indefinite.
2014 $ 300.00 - $ 300.00 $ -
 c. Sale of Truck after 5 years of Use d. Purchase of Patent
Salvage value of the Truck is given as $1000. Purchase cost = $8000. Salvage value of the Patent is given as $0. Purchase cost = $14000.
Hence, Depreciable Amount = 8000-1000 = $7000. Legal Life = 15 years; Useful Life = 4 years
Depreciation Expense per Year = Depreciable Amount/Useful Life Amortization Expense per Year = Amortizable Amount/Useful Life
=7000/8 = $875 =14000/4 = $3500
Date Book Value Type of Depreciation Ending Book
2007 $ 8,000.00 $ 875.00 $ 7,125.00 Type of Amortization Ending Book
2008 $ 7,125.00 $ 875.00 $ 6,250.00
Date Book Value
Straight Line Amortization Expense Value
2009 $ 6,250.00 $ 875.00 $ 5,375.00 2012 $ 14,000.00 $ 1,750.00 $ 12,250.00
Depreciation
2010 $ 5,375.00 $ 875.00 $ 4,500.00 2013 $ 12,250.00 Straight Line $ 3,500.00 $ 8,750.00
2011 $ 4,500.00 $ 875.00 $ 3,625.00
2014 $ 8,750.00 Amortization $ 3,500.00 $ 5,250.00
Accumulated Depreciation till the Sale of the Truck = 875 * 5 =$4375
2015 $ 5,250.00 $ 5,250.00 $ -
Book Value of the Truck at the time of Sale = $3625