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Receivables and Interest Assignment -

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1. Bad Debt Expense and the Allowance for Bad Debts

Required - Prepare a short explanation to the trainee on the difference between bad debt expense and the allowance for bad debts.

Answer -

Allowance for Bad Debts or Bad Debt Reserve

Bad debt expense

This method is known as the allowance method of write off  bad debts but the allowances are shown as a contra account to that of the A/R account.

This method is known as the direct write off account.

doubtful debt or allowance for doubt ful debt  is an account receivable that might become a bad debt at some point in the future. You may not even be able to specifically identify which open invoice to a customer might be so classified. In this case a company has to create a reserve account  for accounts receivable that may eventually become bad debt and is known as allowance for doubtful debt  

A bad debt is an credit sales account or accounts receivables which hat has been clearly identified as not being collectible. This means that you remove that specific account receivable from the accounts receivable account,

When an entity expects some portion of the A/R to be uncollectible the entity goes on to record allowance (contra asset to A/R) in the books at the time of sales.

Bad debt Expenses are the amounts that are written off form the accounts receivables which equal the amount which is uncollectible.

When the firm actually proceeds to find the actual account that's become bad and uncollectible the same is written off by crediting the A/R account and debiting the allowance account.

For direct write offs the journal entry is to debit the Bad debt expenses account and crediting the accounts receivables account.

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2. Interest on Notes Receivable

Required: For each of the notes receivable, compute the amount of interest revenue earned during 2017. Round to the nearest dollar.

Answer -


Original Principal

Interest Rate

Interest Period During 2017

Interest Revenue

Note 1

$40,000

6%

3 months

$40,000*6%*3/12 = $600

Note 2

$15,000

10%

180 days

$15,000*10%*180/360 = $750

Note 3

$5,000

8%

90 days

$5,000*8%*90/360 = $100

Note 4

$250,000

7%

9 months

$250,000*7%*9/12 = $13.125

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