Bad Debt Expense and the Allowance for Bad Debts

Bad Debt Expense and the Allowance for Bad Debts

Assume you are the controller of a large medical equipment company that sells diagnostic machinery to hospitals in the local geographic region. You are currently training new employees, and in a recent training session, you report that total credit sales for the year is $300,000, accounts receivable total $40,000 less a $2,000 allowance for bad debts, and bad debt expense is $3,500. After the session, a trainee approaches somewhat confused about why bad debt expense and the allowance balance differ.

Required:

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

Interest on Notes Receivable

 

Interest Calculations:

Interest is the amount of money that is paid for the use of money that has been borrowed or to delay re-payment on debt obligations. In the table below, four notes are listed with the amount of original principal (amount borrowed), the interest rate (amount paid to borrow money) and the interest period for 2017.

Notes receivable for 2017:

Original Principal Interest Rate Interest Period During 2017
Note 1 $40,000 6% 3 months
Note 2 $15,000 10% 180 days
Note 3 $5,000 8% 90 days
Note 4 $250,000 7% 9 months

Required:

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