ACC 250 · Ch8 Receivables and Bad Debts
How Crocs and Costco report bad debts in their 10-K filings.
Crocs: Form 10-K, year ended Dec 31, 2024 ($ thousands) · Costco: Form 10-K
The problem
Should Crocs record the loss now, in the year of the sale, or later, when a customer actually fails to pay?
Crocs · Balance sheet, Dec 31, 2024
| $K | |
|---|---|
| Cash and cash equivalents | 180,485 |
| Accounts receivable, net | 257,657 |
| Inventories | 356,254 |
| Other current assets | 77,873 |
| Total current assets | 872,269 |
| Property, goodwill, brands and other | 3,939,884 |
| Total assets | 4,812,153 |
Why does the line say “net”? Net of what?
Crocs · Accounts receivable
As printed in the 10-K
Accounts receivable, net of allowances of $31,579 and $27,591, respectively 257,657 305,747
| $K | |
|---|---|
| What customers owe Crocs | 289,236 |
| Less: Allowance for doubtful accounts* | (31,579) |
| Accounts receivable, net | 257,657 |
Allowance for doubtful accounts (ADA)
The amount of receivables the company estimates it will never collect. A contra-asset: it is subtracted from accounts receivable.
*Crocs’s “allowances” also include reserves for customer returns and discounts. For simplicity, we treat all of it as the allowance for doubtful accounts.
Crocs · During 2024
| $K | |
|---|---|
| Balance, Dec 31, 2023 | 27,591 |
| + New estimates (bad debt expense) | ? |
| − Accounts written off | ? |
| Balance, Dec 31, 2024 | 31,579 |
| Estimate (year-end adjusting entry) | Dr | Cr |
|---|---|---|
| Bad debt expense | ✓ | |
| Allowance for doubtful accounts | ✓ |
| Write-off (a customer defaults) | Dr | Cr |
|---|---|---|
| Allowance for doubtful accounts | ✓ | |
| Accounts receivable | ✓ |
The big idea
When the expense is recorded
When Crocs estimates the loss, in the same period as the sale. That is the matching principle.
When a customer finally defaults
The write-off only moves the amount out of AR and out of the allowance. No new expense, and net AR does not change.
Crocs · Putting it in perspective
Costco · The contrast
What Costco’s 10-K says
Receivables are recorded net of an allowance, and the allowance was immaterial, too small to matter to investors.
Before we start Ch8
Ch8 Concepts · Review
Method 1. Direct write-off
Record BDE only when a specific account is deemed uncollectible. No estimate. The expense lands in a later period than the sale, so it violates matching. Not allowed under GAAP; used for tax purposes.
Method 2. Allowance method (GAAP)
At the end of each period, estimate BDE and record it in an adjusting entry, in the same period as the credit sales. A/R is reported net of the allowance.
Ch8 Concepts · Review
| Event | Entry | Effect |
|---|---|---|
| Credit sale | Dr A/R (+A) / Cr Sales revenue (+R) | Assets ↑, revenue ↑ |
| Period-end estimate (AJE) | Dr BDE (+E) / Cr ADA (+xA) | Net A/R ↓, net income ↓ |
| Write-off | Dr ADA (−xA) / Cr A/R (−A) | No change to net A/R or net income |
ADA = allowance for doubtful accounts (contra-asset). BDE = bad debt expense (operating expense).
Ch8 Concepts · Review
% of credit sales method
BDE = this period’s credit sales × the historical % of bad debt losses. Then ADA increases by that BDE.
EX. Credit sales $120K, 2% historical losses → BDE = $2,400.
Dr BDE 2,400 / Cr ADA 2,400
ADA equation
Ending ADA = Beginning ADA + BDE − Write-offs
ADA is a balance sheet account (what is still expected to go uncollected). BDE is an income statement account (this period’s adjustment).
The aging of A/R method is in the lecture notes’ appendix (not for exam).
Sources
Crocs amounts in $ thousands. Condensed lines (“other current assets”, “property, goodwill, brands and other”) are derived from reported totals. Crocs’s reported allowances include reserves for returns and discounts as well as doubtful accounts; these slides treat the total as the allowance for doubtful accounts.