Accounting: What the Numbers Mean 9th Edition by Wayne W McManus, Daniel F Viele, David H Marshall

Exercise 110

Bad debts analysis—Allowance account and financial statement

The following is a portion of the current assets section of the balance sheets of Avanti’s, Inc., at December 31, 2011 and 2010:

	12/31/11	12/31/10
Accounts receivable, less allowance for bad debts of $9,500 and $17,900, respectively	$173,200	$236,400

Required:

a. If $11,800 of accounts receivable were written off during 2011, what was the amount of bad debts expense recognized for the year? (Hint: Use a T-account model of the Allowance account, plug in the three amounts that you know, and solve for the unknown.)

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b. The December 31, 2011, Allowance account balance includes $3,100 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. Working capital at December 31, 2011?

2. Net income and ROI for the year ended December 31, 2011?

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c. What do you suppose was the level of Avanti’s sales in 2011, compared to 2010? Explain your answer.

Step 1 of 6

Bad debts analysis – Effect on Financial statement and Allowance account

a) The total of bad debt expense for the year is calculated as follows:

Note: The amount of bad debts expense is calculated by;

Therefore, the total of bad debt expense for 2011 is