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Problem 1

The Accounts Receivable balance for Knight Consulting is $1,400,000 as of March 31, 2021. Before calculating and recording the months bad debt expense, there is a credit balance in the Allowance for Doubtful Accounts of $17,500. The March 2021 net sales were $19,000,000. In the past several years, 1% of net sales have proven uncollectible. An aging of accounts receivable results in a $203,000 estimate for the Allowance for Doubtful Accounts as of March 31, 2021.

PART A: PERCENT OF SALES METHOD

Assume that Knight Consulting uses the percent of sales method to estimate future uncollectible accounts.

• What adjusting entry does Knight make to record March 2021 Bad Debt Expense?

• What is Accounts Receivable, net on Knights March 31, 2021 Balance Sheet? $___________

• What is Bad Debt Expense on Knights March 2021 Income Statement? $___________

PART B: ANALYSIS OF RECEIVABLES METHOD

Assume that Knight Consulting instead uses the analysis of receivables method to estimate future uncollectible accounts.

• What adjusting entry does Knight make to record March 2021 Bad Debt Expense?

• What is Accounts Receivable, net on Knights March 31, 2021 Balance Sheet? $___________

• What is Bad Debt Expense on Knights March 2021 Income Statement? $___________

Problem 2

Use Starbucks Corporation's financial statement information to answer the following questions.

1. Provide the following account balances for Starbucks

	September 27, 2020	September 29, 2019
Accounts Receivable (gross)
Allowance for Doubtful Accounts
Accounts Receivable, net

2. Which of the above numbers represents the total amount Starbucks is owed by customers as of September 27, 2020?

3. Which of the above numbers represents the amount that Starbucks believes it will not collect from its customers as of September 27, 2020?

4. Which of the above numbers represents the amount that Starbucks believes it will collect from its customers as of September 27, 2020?

5. Provide the journal entry (both accounts and amounts) that Starbucks must have made to record its estimate of Bad Debt Expense in fiscal year 2020.

6. Provide the journal entry (both accounts and amounts) that Starbucks must have made to record Accounts Receivable writeoffs in fiscal year 2020.

Starbucks Corporation's Financial Statements (partial)

Consolidated Balance Sheets In millions of dollars
ASSETS		As of Sept. 27, 2020		As of Sept. 29, 2019
Cash and cash equivalents		$ 4,350.9		$ 2,686.6
Short-term investments		281.2		70.5
Accounts receivable, net of the allowance of $27.1 million as of 9/27/2020 and of $6.7 million as of 9/29/2019		883.4		879.2
Inventories		1,551.4		1,529.4
Prepaid expenses and other current assets		739.5		488.2
Total current assets		$ 7,806.4		$ 5,653.9

Notes to Consolidated Financial Statements (partial)

Footnote 1. Summary of Significant Accounting Policies 1.1 Description of Business We purchase and roast high-quality coffees that we sell, along with handcrafted coffee and tea beverages and a variety of fresh and prepared food items, through our company-operated stores. We also sell a variety of coffee and tea products and license our trademarks through other channels such as licensed stores, grocery and foodservice. 1.3 Fiscal Year Our fiscal year ends on the Sunday closest to September 30. Fiscal year 2020 ended on September 27, 2020, fiscal year 2019 ended on September 29, 2019, and fiscal year 2018 ended on September 30, 2018. 1.10 Accounts Receivable and Allowance for Doubtful Accounts Our receivables are mainly comprised of receivables for product and equipment sales to and royalties from our licensees, as well as receivables from our Global Coffee Alliance and other Channel Development customers. Our allowance for doubtful accounts is calculated based on historical experience, customer credit risk and application of the specific identification method. As of September 27, 2020 and September 29, 2019, our allowance for doubtful accounts was $27.1 million and $6.7 million, respectively. The Company recorded Bad Debt Expense of $24.8 million in fiscal 2020 and $2.5 million in fiscal 2019. The Company wrote off $4.4 million of accounts receivable in fiscal 2020 and $3.8 million of accounts receivable in fiscal 2019.

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