Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 8 Receivables 363

Comparing Estimation Methods. The percent of sales and analysis of receivables

methods of estimating uncollectible accounts can be compared in two different

ways. First, the methods can be compared based on their financial statement empha-

sis. Second, the methods can be compared based on whether bad debt expense or the

Allowance for Doubtful Accounts is the focus of the estimate.

The percent of sales method emphasizes the matching of bad debts expense with

the related credit sales of the period. In doing so, the percent of sales method places

more emphasis on the income statement. The analysis of receivables method empha-

sizes the end-of-the-period net realizable value of the receivables and the related bal-

ance of the allowance account. Thus, the analysis of receivables method places more

emphasis on the balance sheet.

Under the percent of sales method, bad debt expense is the focus of the estimation

process. In other words, the percent of sales method emphasizes obtaining the best es-

timate for bad debt expense for the period. The ending balance for Allowance for

Doubtful Accounts becomes the end result of estimating bad debt expense. For ex-

ample, in the ExTone Company illustration, bad debt expense was estimated as

$45,000 ($3,000,000  11 – 2 %). In recording this estimate, $45,000 was credited to the

Allowance for Doubtful Accounts. Since the Allowance for Doubtful Accounts had

an unadjusted credit balance of $3,250, its ending balance became a credit balance

of $48,250.

In contrast, the analysis of receivables method focuses the estimation process on

obtaining the best estimate for the Allowance for Doubtful Accounts. Bad debt expense

becomes the end result of estimating the Allowance for Doubtful Accounts. For ex-

ample, in the Rodriguez Company illustration, the adjusted balance for the Allowance

for Doubtful Accounts was estimated using the aging method as $3,390. Since the

Allowance for Doubtful Accounts had an unadjusted credit balance of $510, it was

credited for $2,880 ($3,390 $510). The corresponding debit of $2,880 was to Bad Debt

Expense. Thus, the ending balance of Bad Debt Expense becomes $2,880.

The following table summarizes the differences between the percent of sales and

the analysis of receivables methods.

Percent of Sales Method Analysis of Receivables Method

Financial statement Income statement Balance sheet

emphasis

Focus of estimate Bad debt expense Allowance for doubtful accounts

End result of estimate Balance of Allowance for Bad debt expense

Doubtful Accounts

BAD DEBT EXPENSE

Aug. 31 Adjusting entry 3,690

Aug. 31 Adjusted balance 3,690

ALLOWANCE FOR DOUBTFUL ACCOUNTS

Aug. 31 Unadjusted balance 300

Aug. 31 Adjusting entry 3,690

Aug. 31 Adjusted balance 3,390

Q.Before the year-end
adjustment, the Allowance
for Doubtful Accounts has
a debit balance of $3,000.
Using the aging-of-
receivables method, the
desired balance of the
allowance for doubtful
accounts is estimated as
$55,000. The accounts
receivable balance before
adjustment is $290,000.
What is (1) the bad debt
expense for the period,
(2) the balance of the
Allowance for Doubtful
Accounts after adjustment,
and (3) the net realizable
value of the receivables
after adjustment?

A.(1) $58,000
($3,000$55,000);
(2) $55,000; and
(3) $235,000
($290,000$55,000)

If the unadjusted balance of the allowance account had been a debit balance of

$300, the amount of the adjustment would have been $3,690 ($3,390 + $300). In this

case, the bad debt expense account would have a $3,690 balance, but the balance of the

allowance account would still have been $3,390, as shown below.