 Hello and welcome to the session in which we would look at CPA exam questions that deals with account receivable, allowance for doubtful accounts and bad debt expense. Those topics are extremely important on the CPA exam as well as your accounting courses because all companies will sell on account. As a result you will have allowance accounts and bad debt expense. What I'm going to do in this session start with easy questions then proceeds to more challenging questions. Now if you are studying for the CPA exam or if you are an accounting student I strongly suggest you check out my website farhatlectures.com whether you have a CPA review course or not which you should have a CPA review course. I don't replace this course what I can do. I can be an alternative or a backup explanation for your CPA review course. I explain the material differently. I would say differently I'm not going to say better or worse just differently and this might be good enough for you to increase your score by 10 to 15 points so I'll be the most useful addition to your CPA review course and my resources are created they are organized to mirror image your CPA review course so it's easy to go back and forth between my material and your CPA review course. Your risk with me is one month of subscription if you like it check it out if not you can cancel your potential gain is passing the exam and if not for anything take a look at my website to determine how well or not well your university doing for the CPA exam check out my other accounting courses please connect with me on LinkedIn if you haven't done so and on LinkedIn you will see other people that recommend me after using my resources to pass the exam connect with me on YouTube like this recording Facebook and Instagram as well so let's start with easy questions then we'll proceed to more difficult questions so let's start with a straightforward question and if you don't know this question then you have to stop and say I need to understand my account receivable how are account receivable reported account receivable are normally reported at what okay are they reported at historical cost are they reported at fair market value are they reported at what is it the present value of future cash receipts well this is logical because everything should be reported at present value and account receivable are cash receipts so you would say well this makes sense technically it makes sense but guess what gaps as if you have something for a short period of time which is two three months or less than a year don't worry about the present value of money therefore a is not correct so we don't report them at the present value accounts receivable now for dealing with notes receivable yes you have to compute the present value okay but accounts you don't have to do that current value plus accrued accrued interest now no we don't report them this is simply put what say you the current value plus we accrue interest on them account receivable don't accrue interest notes accrue interest b is out expected amount to be collected yes this is how we report account receivable we report account receivable at the expected amount to be collected so simply put we are going to have an account receivable and we're going to subtract what's called an allowance and this is going to give us this expected amount to be receivable so if we have 10 000 in account receivable and the allowance is 500 it means we can collect we are expecting to collect 9 500 so this is how account receivable are normally reported expected amount to be collected current value less expected collection costs no it's not so this is the first thing expected amount to be collected let's take a look at this question the allowance for in collectible accounts so simply put this account here the allowance is what is it the third charge to expense is it a contra asset account is it a third revenue account is it a quasi liability account i'm not sure if we have anything quad do we have a quasi no we don't have quasi so quasi is out we do have the third revenue the third revenue is unearned revenue in collectible are not the third revenue so we're down to 50 50 is it a contra asset or is it a the third charge expense it's not a the third charge expense the third means it's an expense that we're going to take later it's not allowance for doubtful account is a the allowance is a contra asset it means the balance is credit this is the balance for the allowance so on the exam day if the balance is not giving for the allowance usually it's giving you assume it's a credit balance because it's a contra asset so you need to know this is a contra asset let's take a look at this question adams stores estimates the allowance for in collectible at two percent of account receivable ending account receivable during 2021 adams credit sales and collection were 121 and collection were 134 respectively what was the balance of account receivable january 1st of $130 an account receivable were written off during 2021 and if the allowance had a balance of 600 so they're looking for the beginning account receivable that's what they're looking for so how do you solve this problem you have to analyze account receivable uh we are looking for the beginning we know that sales were 121 on credit 121 collection were 134 and we wrote off 130 dollars and this is going to give us our ending balance so we're not giving the beginning we're not giving the ending this is a problem what we are giving though we are giving the allowance is 600 so simply put we have an allowance and they're telling you the allowance is 600 and we know that the allowance is two percent of ending account receivable well if we take 600 divided by 0.2 percent or two percent 0.02 that's going to give us 30 000 it means account receivable must have been 30 000 so now we have ending well if we have ending then we just have to find beginning now it's easy now it's x plus 121 000 the sales on credit minus the 134 collection minus the 130 equal to 30 000 now if we simplify simplify simply put we're going to have all of this it's going to end up to be a negative 13 130 x minus 13 130 equal to 30 000 x must be 43 130 because 43 130 minus 13 130 will give you an ending balance of 30 000 but the end they're looking for the beginning balance the beginning balance is 43 130 you want to be very comfortable with this analyzing the account receivable beginning balance plus sales on credit minus collection minus right off equal to ending balance so they could give you the information in many different ways they can usually there's one there's beginning balance there's one two three four five there's five pieces of this to this equation and they can ask you about four give you the four and ask you about the fifth so I can give you everything except the collection I can give you everything except everything off I can give you everything except the ending balance so you have to know how to manipulate this formula have have a good understanding about account receivable inside out inside out the following information information relate to Adam's account receivable for 2021 what amount should Adam report for account receivable before allowances at December okay so what's the amount of receivable well we are giving a bunch of balances you are giving the beginning so let's see what we have yeah giving account receivable giving the beginning 857 you are giving credit sales 3 million 310 000 you're giving account receivable written off 52 000 you are giving collection 2 980 oh they're asking for the ending balance as I just said a second ago they give you four and you have to find the fifth if you do this computation let's see what we get if we do that let's get the calculator and make sure that you want to confirm it to see if it's correct 857 plus 3 million 310 000 minus 52 000 written off minus 2 million 980 000 which will give us 1 million 135 the answer is a so the answer is 1 million 135 once again as I just said a second ago they can give you four and you have to find the fifth and in this problem what they did is actually they kind of did they gave you even only three directly in one indirectly so you have to kind of we had to derive the one indirectly let's take a look at this question company Adam company had the following account balances before recording bad debt expense we're giving account receivable allowance with the credit balance credit sales Adam is considering the following approaches for estimating bad debt based on credit sales 3% based on year-end account receivable 6% what amount should Adam charge to bet that expense at the end of 2021 under each method under each method okay so this is important because the allowance have the allowance the allowance for doubtful account you could compute this using two methods either the credit sales or the year-end balances and this is what I emphasize in my lectures for head lectures dot com you have to know the difference between the two so the first they're asking us about the credit sales then the percentage of account receivable I'm going to start with the percentage of sales because it's easy in a sense that it's easy so if you're on the exam day and what you do with the percentage of sales all we have to do take sales on sales on credit one million nine hundred and fifty and then multiply it by point zero three and the answer is fifty eight fifty eight thousand five hundred so that's all you have to do so I can take out a I can take out D I'm down to fifty fifty so all what I did is I took credit sales times the percentage which is given a 3% now for account receivable it's a two-step approach so you have to be very careful with account receivable you cannot do the same thing with the count receivable and here's what happened if you do the same thing if you take a count receivable one million four hundred thousand multiplied by six percent let's assume you did this let's assume you made that you made that mistake and you don't understand how it works and you will choose the wrong answer which is I'm assuming it's giving at eighty four you would say well the answer is eighty four thousand wrong the answer is not eighty four thousand the answer is sixty two thousand now I'm going to explain when it comes to account receivable the percentage of sales receivable this is step one step one is to find your balance in the account so the account receivable method is different than the sales method companies could use either or but you have to know which one are they asking you about so so here's what happened here you have an allowance account and you already have in the allowance account you already have twenty two thousand credit balance and if balance is not giving you assume it's a credit now what you have to have you have to have eighty four thousand so this eighty four thousand has to be here this eighty four thousand has to be here this should be the ending balance okay and what they're asking you here not about the ending balance of the allowance they're asking you about bad debt expense notice what the question is about so to go to go from twenty two thousand to eighty four thousand you need an additional bad debt expense of sixty two thousand therefore the entry will be bad debt expense sixty two thousand credit allowance sixty two thousand for the sales method you debit that expense fifty eight five hundred credit allowance fifty eight five hundred two different method therefore the answer is b so notice they can easily trick you if you don't really understand the account receivable method so that's the trick knowing the difference between the account receivable and the sales method when it comes to estimating bad debt expense and allowance once again if you are a CPA candidate or accounting student I strongly suggest you check out my website farhatlectures.com I can help you I can help you pass the exam put this exam behind you therefore you can focus on your career my risk is thirty dollars you can try me you like it you keep it otherwise you know you just cancel and move on with your life if you like it you have a subscription until you pass and the faster you do it the better off you are keep your course use me in addition to your course good luck study hard and stay safe