Week 10 — What the Customers Owe: Estimating, Writing Off, and Earning Interest — Traditional alternative (no AI)

Instructors: publish this instead of the adaptive version if you prefer, and unpublish or delete the adaptive one.

Assignment 9 of the term — estimate the bicycle shop's uncollectible accounts, record the year-end adjustment and a write-off, figure the interest on a note, and set a founder straight about when a bad debt becomes an expense.

This week you met accounts and notes receivable, the direct write-off and allowance methods, the aging schedule, bad debt expense, write-offs and recoveries, and simple interest on a note. In this assignment you work four short problems on the bicycle shop's receivables, interpret each one, and explain this week's ideas to someone who has them wrong. This week's lecture tutorial, quiz, discussion, and Accounting Workshop practise the same ideas from other angles. It builds on Week 4, where you learned expense recognition and made the adjusting entries that put each expense in the period it belongs to.

The task

This week's material is pinned. The direct write-off method records bad debt expense only when the business gives up on a specific account and writes it off; it is not acceptable under GAAP when bad debts are material. The allowance method estimates the uncollectible accounts at the end of each period and records bad debt expense with a credit to Allowance for Doubtful Accounts, a contra asset with a credit balance. An aging schedule groups receivables by how long they are past due and applies a higher estimated uncollectible percentage to older groups; its total is the balance the allowance should have. Bad debt expense is the amount that brings the allowance to that balance. A write-off under the allowance method debits Allowance for Doubtful Accounts and credits Accounts Receivable, leaving net realizable value unchanged. Interest on a note is Interest = Face × Rate × Time, where Time is the fraction of a year.

The running case is an illustrative, unnamed bicycle repair and sales shop, organized as a corporation by two founders; it describes no real business. At the end of Year 3, its customers owe it $40,000, sorted by age, and Allowance for Doubtful Accounts already has a $260 credit balance. Later, the shop gives up on one customer's $350 balance. Separately, a youth cycling program signs a note to the shop.

One of the founders (an illustrative person) sends you this message: "Why record any bad debt now? Nobody has refused to pay us yet, so let's record the loss when a customer actually stops paying. And when we write off that $350, that's another $350 of expense on top of whatever you record now. The cycling program's note is at 6 percent, so it'll pay us $360 of interest." Your job is to answer the way this course would, starting from four small calculations on the shop's books.

Work these four problems, showing your arithmetic:

1. The bicycle shop's receivables at the end of Year 3 are $28,000 not yet due at 1 percent, $7,000 that are 1 to 30 days past due at 4 percent, $3,000 that are 31 to 60 days past due at 10 percent, and $2,000 over 60 days past due at 30 percent. What balance should Allowance for Doubtful Accounts have?
2. The bicycle shop's aging schedule requires an allowance of $1,460, and Allowance for Doubtful Accounts already has a $260 credit balance before the year-end adjustment. How many dollars of bad debt expense does the adjustment record?
3. The bicycle shop's Accounts Receivable is $40,000 when it writes off a customer's $350 balance under the allowance method. How many dollars of Accounts Receivable remain after the write-off?
4. A youth cycling program signs a $6,000, 6 percent, 3-month note to the bicycle shop. Using Interest = Face × Rate × Time, how many dollars of interest does the note earn by maturity?

Beside each answer, add one brief interpretation:

• Problem 1: name the age group that supplies the largest single estimate and explain why older receivables get higher percentages; then say whether the total is the year's expense or the balance the allowance should have.
• Problem 2: write the year-end adjustment as a journal entry, debit first and credit second; give the net realizable value of receivables after it; and say why the entry does not touch Cash.
• Problem 3: write the write-off as a journal entry; give the allowance and the net realizable value after it; and describe, by its effect, how the direct write-off method would record the same $350.
• Problem 4: give the note's maturity value; write the entry the shop records when the program pays at maturity; and explain why the interest is not a full year's.

Explain it to a non-expert

The founder means well and has three things wrong. Write a 3–5 sentence message that explains why the shop records an estimate of bad debts in Year 3, the year of the sales, why the later $350 write-off is not a second expense, and why the note earns less than a full year's interest. Name one limit, such as that the aging percentages are the shop's own estimates a lender would want explained, or that this course gives no tax advice. Explain any technical term in everyday words. More than one good answer is possible.

For a different, ungraded example, imagine a friend who runs a babysitting business and says, "I only lose money on a family that skips out once I give up on them, so I'll worry about it then." Model answer: "You lost that money when you did the work for a family that will not pay, even if you only find out later. Setting aside a small share of what families owe you, based on how often bills have gone unpaid before, shows you honestly what you will really collect this season. A fair caveat: that share is a guess from your own history, so check it against what actually happens."

Use that pattern for the founder, with your own wording and evidence.

Show your arithmetic. A reader should be able to reproduce every number you report from the figures in the problems without guessing which figures or steps you used.

Deliverables

Submit a single report containing:

• the four results, each with the multiplication, subtraction, or interest computation shown and the brief interpretation the task names for that problem;
• the four journal entries: the year-end bad debt adjustment, the $350 write-off, the direct write-off method's entry for the same account, and the collection of the note at maturity, each with the debit first, the credit second, and equal amounts;
• the net realizable value after the adjustment and after the write-off;
• your message to the founder, explaining why the shop records an estimate in Year 3, why the write-off is not a second expense, and why the note earns less than a full year's interest, with one limit; and
• a one-line restatement of the figures you used, so your results are reproducible.

Keep it to roughly one page. Clear and correct beats long.

Choose how you show it. Present your report as written text, or as a recorded audio or video explanation of about three minutes with a transcript, or as a labelled spreadsheet of the aging schedule and the entries with a short explanation. Every form is graded by the same scoring criteria. Submit in any accessible file type or as a link; a recorded response may be submitted as audio or video with a transcript, or as text.

How you'll be graded

The full analytic rubric is attached to this assignment in Canvas.

Academic integrity and AI use

This version is designed to be completed without AI: do the arithmetic, the entries, the interpretations, and the writing yourself. You may use a calculator or a spreadsheet for the arithmetic. State a rule only as the course states it, describe the two methods by their effects rather than ranking them, check every entry so that its debits equal its credits, and give no tax or investment advice. Submitting work you did not write as your own, or copying another student's work, is an integrity violation under the course policy.

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