Question

TLC Inc. manufactures large-scale, high-performance computer systems. In a recent annual report, the balance sheet included the following information ($ in millions):

	2015			2014
Current assets:
Receivables, less allowances of $138 in 2015 and $132 in 2014	$	4,377		$	4,813

In addition, the income statement reported sales revenue of $28,728 ($ in millions) for the current year. All sales are made on a credit basis. The statement of cash flows indicates that cash collected from customers during the current year was $29,737 ($ in millions). There were no recoveries of accounts receivable previously written off.

Required:
1. Compute the following ($ in millions):

1. The net amount of bad debts written off or reinstated by EMC during 2015.
2. The amount of bad debt expense or reduction of bad debt expense that EMC included in its income statement for 2015.

2. Suppose that EMC had used the direct write-off method to account for bad debts. Compute the following ($ in millions):

1. The accounts receivable information that would be included in the 2015 year-end balance sheet.
2. The amount of bad debt expense or reduction of bad debt expense that EMC included in its income statement for 2015.

Answer 1

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TLC Inc.
Answer 1 a	$ Millions	Note
Net Receivables- 2014	4,813.00
Add: Allowances	132.00
Gross Receivables- 2014	4,945.00
Add: Credit sales in 2015	28,728.00
Less: Collection in 2015	29,737.00
Gross Receivables before bad debts- 2015	3,936.00	A
Net Receivables- 2015	4,377.00
Add: Allowances	138.00
Gross Receivables- 2015	4,515.00	B
Bad debts reinstated	579.00	C=B-A
Answer 1 b
Allowances- 2014	132.00
Add: Bad debts reinstated in 2015	579.00
Less: Allowances- 2015	138.00
Reduction of bad debt expense	573.00	D

Answer 2 a

If direct write-off method to account for bad debts then gross receivable of 2015 will be reported as calculated above:

Net Receivables- 2015	4,377.00
Add: Allowances	138.00
Gross Receivables- 2015	4,515.00	See B

Answer 2 b

If direct write-off method to account for bad debts then there would be reduction of bad debt expense (or bad debt recovery) as calculated above:

Reduction of bad debt expense

579.00

See C