Chapter Seven Alternate

Demonstration Problem #1

At the end of the year, the M. I. Wright Company
showed the following selected account balances:

Sales (all on credit)$300,000
Accounts Receivable..800,000
Allowance for Doubtful Accounts. 38,000

Required:
1. Assume the company estimates that 1% of all
credit sales will not be collected.
a. Prepare the proper journal entry to
recognize the expense involved.

b. Present the balances in Accounts
Receivable and Allowance for
Doubtful Accounts as they would
appear on the balance sheet. Also
show the net realizable Accounts
Receivable.

Required:
2. Assume the company estimates that 5% of its
accounts receivable will never be collected.
a. Prepare the proper journal entry to
recognize the expense involved.

b. Present the balances in Accounts
Receivable and Allowance for Doubtful
Accounts as they would appear on the
balance sheet. Also show the net
realizable Accounts Receivable.

Required:
3. Under each of the two assumptions
(described in #1 and #2 above), prepare the
proper journal entry for the following event.

June 3 John Shifty, who owes us $500,
informs us that he is broke and
cannot pay. We believe him.

At the end of the year, the M. I. Wright Company
showed the following selected account
balances:
Sales (all on credit)$300,000
Accounts Receivable..800,000
Allowance for Doubtful Accounts. 38,000

1. Assume the company estimates that 1% of all
credit sales will not be collected.
a. Prepare the proper journal entry to
recognize the expense involved.

PERCENT OF SALES METHOD
1.a. Percent of Sales
DR CR
Dec. 31 Bad Debts Expense 3,000
Allowance for Doubtful Accounts 3,000
To record estimated bad debts
$300,000 x 1% = $3,000
Current
Period Sales
Estimated
Bad Debt %
X
Adjusted
Journal Entry
=
At the end of the year, the M. I. Wright Company
showed the following selected account
balances:
Sales (all on credit)$300,000
Accounts Receivable..800,000
Allowance for Doubtful Accounts. 38,000

1. Assume the company estimates that 1% of all
credit sales will not be collected.

b. Present the in Accounts
Receivable and Allowance for Doubtful
Accounts as they would appear on the
balance sheet. Also show the net
realizable Accounts Receivable.

balances
1.b. Percent of Sales
Present the balances in Accounts Receivable and Allowance
for Doubtful Accounts as they would appear on the balance
sheet.
38,000
(3,000)
41,000
Allowance for
Doubtful Accounts
Beginning Balance
Adjusting Entry
Ending Balance
DR CR
Dec. 31 Bad Debts Expense 3,000
Allowance for Doubtful Accounts 3,000
To record estimated bad debts
1.b. Percent of Sales
800,000
(41,000)
759,000
Accounts
Receivable
Beginning Balance
Adjusting Entry
Ending Balance
Sales (all on credit)$300,000
Accounts Receivable..800,000
Allowance for Doubtful Accounts. 38,000
38,000
3,000
41,000
Allowance for
Doubtful Accounts
1.b. Percent of Sales
Net Realizable Accounts Receivable

$800,000 41,000 =

Accounts
Receivable
-
Allowance
for Doubtful
Accounts
=
Net
Realizable
$759,000
1.b. Percent of Sales
Present the balances in Accounts Receivable and Allowance
for Doubtful Accounts as they would appear on the balance
sheet. Also show the net realizable Accounts Receivable.


M.I. Wright Company
Balance Sheet
December 31
Assets
Cash $_________
Accounts Receivable $800,000
Allowance for Doubtful
Accounts
(41,000) $759,000
Equipment $_________
At the end of the year, the M. I. Wright Company
showed the following selected account
balances:
Sales (all on credit)$300,000
Accounts Receivable..800,000
Allowance for Doubtful Accounts. 38,000

2. Assume the company estimates that 5% of its
accounts receivable will never be collected.
a. Prepare the proper journal entry to
recognize the expense involved.

PERCENT OF ACCOUNTS RECEIVABLES METHOD
2.a. Percent of Accounts Receivable
$800,000 x 5% = $40,000
DR CR
Dec. 31 Bad Debts Expense 2,000
Allowance for Doubtful Accounts 2,000
To record estimated bad debts
38,000
2,000
40,000
Allowance for
Doubtful Accounts
Accounts
Receivable
x
Estimated
Bad Debt %
=
Accounts
Receivable Ending
Balance
At the end of the year, the M. I. Wright Company
showed the following selected account
balances:
Sales (all on credit)$300,000
Accounts Receivable..800,000
Allowance for Doubtful Accounts. 38,000

2. Assume the company estimates that 5% of
its accounts receivable will never be collected.

b. Present the balances in Accounts
Receivable and Allowance for Doubtful
Accounts as they would appear on the
balance sheet. Also show the net
realizable Accounts Receivable.



2.b. Percent of Accounts Receivable
Present the balances in Accounts Receivable and Allowance
for Doubtful Accounts as they would appear on the balance
sheet.

DR CR
Dec. 31 Bad Debts Expense 2,000
Allowance for Doubtful Accounts 2,000
To record estimated bad debts
38,000
(2,000)
40,000
Allowance for
Doubtful Accounts
Beginning Balance
Adjusting Entry
Ending Balance
2.b. Percent of Accounts Receivable
Sales (all on credit)$300,000
Accounts Receivable..800,000
Allowance for Doubtful Accounts. 38,000
800,000
(40,000)
760,000
Accounts
Receivable
38,000
2,000
40,000
Allowance for
Doubtful Accounts
Beginning Balance
Adjusting Entry
Ending Balance
2.b. Percent of Accounts Receivable
Net Realizable Accounts Receivable

$800,000 40,000 = $760,000

Accounts
Receivable
Allowance
for Doubtful
Accounts
Net
Realizable
-
=
2.b. Percent of Accounts Receivable
Present the balances in Accounts Receivable and Allowance
for Doubtful Accounts as they would appear on the balance
sheet.

M.I. Wright Company
Balance Sheet
December 31
Assets
Cash $_________
Accounts Receivable $800,000
Allowance for Doubtful
Accounts
(40,000) $760,000
Equipment $_________
At the end of the year, the M. I. Wright Company
showed the following selected account
balances:
Sales (all on credit)$300,000
Accounts Receivable..800,000
Allowance for Doubtful Accounts. 38,000

3. Under each of the two assumptions (described
in #1 and #2), prepare the proper journal entry
for the following event.

June 3 John Shifty, who owes us $500,
informs us that he is broke and
cannot pay. We believe him.

What is this an example of?
June 3 John Shifty, who owes us $500,
informs us that he is broke and
cannot pay. We believe him.

A) New Credit Sales
B) Net Realizable Value
C) Write-Off
3. Write-Off
For Percent of Sales:
Dec. 31 Allowance for Doubtful Accounts 500
Accounts Receivable 500
To record estimated bad debts
41,000
500
40,500
Allowance for
Doubtful Accounts
3. Write-Off
For Percent of Accounts Receivable:
Dec. 31 Allowance for Doubtful Accounts 500
Accounts Receivable 500
To record estimated bad debts
40,000
500
39,500
Allowance for
Doubtful Accounts
3. Write-Off
Percent of Sales
Percent of Accounts
Receivable
41,000
500
40,500
Allowance for
Doubtful Accounts
40,000
500
39,500
Allowance for
Doubtful Accounts
Ethical Dilemma
Background:
Traditionally, you only borrow money when
you do have excess money to lend.
In Modern World, you DON'T need to have
money to lend it. Yup, weird stuff!!
Example: BANK, using depositors' money to
make a loan
Ethical Dilemma
2008 Financial Crisis
American Dream: Live in your
own house
How? Borrowing money from
the bank
Banks will receive cash +
interest




Ethical Dilemma
The problem?
Increase in Mortgage
demand, Banks
eventually run out of
money to lend out

Ethical Dilemma
BUT,

Welcome to the
ENGINEERED FINANCIAL
WORLD ERA
Ethical Dilemma
Banks sell their mortgage to a BIGGER FINANCIAL
INSTITUTION to receive more money to be lent out
Household's monthly payment goes to that
FINANCIAL INSTITUTION
Those institutions run out of money, so they sell
share (stock) to public AND international public, to
get more money to lend

Ethical Dilemma
They ignore Actual Estimation of BAD
DEBT, so the public doesn't lose confidence
Because of ease to acquire mortgage, house
demand increased ---> price goes up
House booming in the US, attracted
investment from all over the world
Huge CASH FLOW into the US
At first, economy prospered



Ethical Dilemma
But prices inflated, on House price and otherwise
People decreased their bet on house price =
decreased consumption ----> decreased business'
production ---> decreased profit
People got less hours, some got laid off
The SAME people who were laid off, were the
SAME people who had mortgage
NOT able to pay the mortgage back
When many people stop paying their
mortgage, Bank's and other FINANCIAL
INSTITUTIONS ALLOWANCES on DOUBTFUL
ACCOUNT eventually RAN OUT
Ethical Dilemma
Whole system crashed

Ethical Dilemma
U.S. housing policies are the root cause of the current financial
crisis. Other players-- greedy investment bankers; foolish
investors; imprudent bankers; incompetent rating agencies;
irresponsible housing speculators; short sighted homeowners; and
predatory mortgage brokers, lenders, and borrowers--all played a
part, but they were only following the economic incentives that
government policy laid out for them.

- Peter J. Wallison