Comments on: T-Accounts: A Great Tool for Solving Accounting Transactions

By: John Day

John Day — Wed, 22 Apr 2009 19:03:36 +0000

Nicki: Teacher’s are supposed to be there to teach. When a student asks a sincere question they deserve some clues to help them think if they are stuck. I attribute this attitude to laziness or uncaring. On the other hand, I watch out for students who simply want someone else to do their work. So it is a balance.

I’m guessing that she said “it doesn’t matter” because the question is not related to the information in the problem. She just wants to know what the effect would be on the current ratio and net income and ROE.

Remember that the Allowance account is a contra account to Accounts Receivable. Put the two together and you have “net” Accounts Receivable. When you make an entry into the Allowance account you have already “written-off” an amount to Bad Debts, because Bad Debts is an expense. All this means, (I’m assuming, when she uses the words “writing off”) is when there is no more reason to carry an amount in the Allowance account a journal entry is written to decrease the Allowance account and decrease the A/R account. This is because it has been established that these accounts are worthless and nothing will ever come of them so why carry them on the books.

There is no change in your current assets when you decrease Allowance and decrease Receivables. Therefore, no change in the current ratio, Net Income, or ROE (Return on Equity). There was no change in equity or net income so ROE doesn’t change. Does that make sense?

This is my best shot at this. Let me know if your teacher doesn’t agree. I may be missing something.

John

By: Nicki

Nicki — Wed, 22 Apr 2009 03:07:16 +0000

Oh when I asked: If the 2009 balance in Allowance is 7,200, so how can it consist of 8,400 in past due accounts?

Her response was, “it does not matter.”

Nicki

By: Nicki

Nicki — Wed, 22 Apr 2009 03:05:56 +0000

Well I got nowhere with the teacher-she said to read the pages on the bad debt again-gee helpful.
So I got:
11.a. $14,300
b.1. I am thinking lower ratio. (I finally determine b 1+2 were not actually calculations but an actual question)
b.2. Write offs o an accts rec’v has no effect on the income statement.
c. I have no idea!

This is probably all wrong. Any help appreciated.

Nicki

By: John Day

John Day — Tue, 21 Apr 2009 21:09:42 +0000

Nicki: The dates are important. But I think the question is a little vague.

John

By: Nicki

Nicki — Tue, 21 Apr 2009 19:59:21 +0000

I think what was getting me is if it would have said: we had to right of an additional $16400 at the end of the year. To me the question was saying: you already have 5100 witten off in an account and at the end of the year we detrmined we needed to right off 16400, which makes it sound like this:
16400-5100=11300.

Nicki

By: Nicki

Nicki — Tue, 21 Apr 2009 19:38:07 +0000

I proposed that question in my class forum. It is not in the text but from the teacher.

Finally an aha moment.
So: starting bal 5100+bad debt for the year 16400=21500-09 allowance 7200=$14,300

Gee whiz! Thanks

I will see what response I get from the question about b.

Thanks
Nicki

By: John Day

John Day — Tue, 21 Apr 2009 19:10:46 +0000

Nicki: According to the instructions given in this problem, it looks to me like this:

Bad Debt Allowance 2008 5,100
Add Bad Debt expense 16,400
Sub Ending BD Allow
A/R write off 14,300

Question B makes seems to make no sense because the 2009 balance in Allowance is 7,200, so how can it consist of 8,400 in past due accounts? Does you textbook have an example of this?

Sorry, I may not be helping you much on this.

John

By: Nicki

Nicki — Tue, 21 Apr 2009 17:37:41 +0000

Here is the exact question asked of me:
The following is a portion of the current assets section of the balance sheets of The Sweet Cafe at December 31, 2009 and 2008:
The accounts receivable for 2009 is 243,600

The accounts receivable for 2008 is 215,800

The allowance for bad debts for 2009 is 7,200

The allowance for bad debts for 2008 is 5,100

The bad debt expense for 2009 is 16,400

So with this information if you look at the bad debt allowance for 2008 with the 2009 bad debt expense less the accounts written off then this should equal the bad debt allowance for 2009.

(a.) If bad debts expense for 2009 totaled $16,400, what was the amount of accounts receivable written off during the year?

(b.) The December 31, 2009 Allowance account balance includes $8,400 for a past due account that is not likely to be collected. This account has not been written off. If it had been written off, what would have been the effect of the write off on:
(1.) The current ratio at December 31, 2009?
(2.) Net income and ROE for the year ended December 31, 2009?

(c.) What do you suppose was the level of The Sweet Cafe’s sales in 2009, compared to 200?8 Explain your answer.

I will try to call when I get a moment. Trying to work around a five year old can be tough.

Thanks again,
Nicki

By: John Day

John Day — Mon, 20 Apr 2009 18:56:17 +0000

Nicki: This is too confusing to do through this system. I need more information. Give me a call at 800-720-0126

John

By: Nicki

Nicki — Mon, 20 Apr 2009 17:21:26 +0000

How I understand first is:
What is in my allowance acct now for bad debts.
I am assuming it is the $7200 and $5100 but could be wrong.
Now it says the tota for the year was $16400.
It ask was was the total written off?
I took it as already had $12300 in acct but needed $16,400.
So wrote off an additional $4100.
I am sure I am incoorect though.

Nicki