Accounting chapter 8

b) Notes Receivable 1,000 Accounts Receivable 1,000

Michael Co. accepts a $1,000, 3-month, 12% promissory note in settlement of an account with Tani Co. The entry to record this transaction is: (a) Notes Receivable 1,030 Accounts Receivable 1,030 (b) Notes Receivable 1,000 Accounts Receivable 1,000 (c) Notes Receivable 1,000 Sales Revenue 1,000 (d) Notes Receivable 1,020 Accounts Receivable 1,020

allowance account

Under the allowance method, a company debits every bad debt write-off to the _____________________and not to Bad Debt Expense.

Recognizing and valuing

What are two accounting issues associated with Accounts receivable?

average collection period

365/Receivables Turnover Ratio. Companies use the average collection period to assess the effectiveness of a company's credit and collection policies. The average collection period should not greatly exceed the credit term period (i.e., the time allowed for payment).

Accounts receivable

an unwritten promise by a customer to pay, at a later date, for goods sold or services rendered. Companies generally expect to collect accounts receivable within 30 to 60 days

Other receivables

include non-trade receivables such as interest receivable, loans to company officers, advances to employees, and income taxes refundable. Classified and reported as separate items in the balance sheet.

allowance method

involves estimating uncollectible accounts at the end of each period. This provides better matching of expenses with revenues on the income statement. It also ensures that receivables are stated at their cash (net) realizable value on the balance sheet.

factor

is a finance company or bank that buys receivables from businesses for a fee and then collects the payments directly from the customers.

Cash (net) realizable value

is the net amount a company expects to receive in cash from receivables. It excludes amounts that the company estimates it will not collect. Estimated uncollectible receivables therefore reduce receivables on the balance sheet through use of the allowance method.

allowance for doubtful accounts

shows the estimated amount of claims on customers that companies expect will become uncollectible in the future. Companies use a contra account instead of a direct credit to Accounts Receivable because they do not know which customers will not pay. The credit balance in the allowance account will absorb the specific write-offs when they occur. The company deducts the allowance account from Accounts Receivable in the current assets section of the balance sheet. Not closed at the end of the year.

reduces

the entry to record the write-off of an uncollectible account_______ both Accounts Receivable and Allowance for Doubtful Accounts.

Bad debt expense

An expense account to record losses from extending credit. Sometimes called uncollectible accounts expense.

52

Prall Corporation sells its goods on terms of 2/10, n/30. It has an accounts receivable turnover of 7. What is its average collection period (days)? 365/ 7 = 52.1

three essential features of accounting method

1. Companies estimate uncollectible accounts receivable and match them against revenues in the same accounting period in which the revenues are recorded. 2. Companies record estimated uncollectibles as an increase (a debit) to Bad Debt Expense and an increase (a credit) to Allowance for Doubtful Accounts through an adjusting entry at the end of each period. Allowance for Doubtful Accounts is a contra account to Accounts Receivable. 3. Companies debit actual uncollectibles to Allowance for Doubtful Accounts and credit them to Accounts Receivable at the time the specific account is written off as uncollectible.

five issues in accounting for notes receivable

1. Determining the maturity date. 2. Computing interest. 3. Recognizing notes receivable. 4. Valuing notes receivable. 5. Disposing of notes receivable.

concentration

A ____________ of credit risk is a threat of nonpayment from a single large customer or class of customers that could adversely affect the financial health of the company.

promissory note

A _____________________ is a written promise to pay a specified amount of money on demand or at a definite time. Promissory notes may be used (1) when individuals and companies lend or borrow money, (2) when the amount of the transaction and the credit period exceed normal limits, and (3) in settlement of accounts receivable.

d

A company can accelerate its cash receipts by all of the following except: (a) offering discounts for early payment. (b) accepting national credit cards for customer purchases. (c) selling receivables to a factor. (d) writing off receivables.

captive finance companies

A finance company owned by a parent company. The purpose of the finance company is to provide financing to customers of the parent company for purchase of the parent company's products or services

honored

A note is_________ when its maker pays in full at its maturity date. For each interest-bearing note, the amount due at maturity is the face value of the note plus interest for the length of time specified on the note.

...

A retailer's acceptance of a national credit card is another form of selling—factoring—the receivable by the retailer.

balance sheet

A write-off affects only ______________accounts, so Cash realizable value stays the same before and after the write off.

Direct write-off method and allowance method.

Accounting uses two methods for uncollectible accounts what are they?

Receivables

Amounts due from individuals and companies that are expected to be collected in cash. One of the largest and most liquid asset a company has.

Notes receivable

Amounts owed to the company; normally interest is charged and the note is repaid in longer than 3 months

735000

An analysis and aging of the accounts receivable of Raja Company at December 31 reveal these data: Accounts receivable $800,000 Allowance for doubtful accounts per books before adjustment (credit) $ 50,000 Amounts expected to become uncollectible $ 65,000 What is the cash realizable value of the accounts receivable at December 31, after adjustment? 800000-65000 =

operating expense

Bad debt expense on the income statement is considered...

Cash (net) realizable value

At what value are accounts receivable reported on the balance sheet?

Importance of aging schedule

Companies should prepare an accounts receivable aging schedule at least monthly. In addition to estimating the allowance for doubtful accounts, the aging schedule has other uses. It helps managers estimate the timing of future cash inflows, which is very important to the treasurer's efforts to prepare a cash budget. It provides information about the overall collection experience of the company and identifies problem accounts.

if you receive full payment for a note a maturity you would

Debit cash (loan amount + interest) Credit notes receivable for loan amount Credit interest receivable / interest revenue

6.4

Eddy Corporation had net credit sales during the year of $800,000 and cost of goods sold of $500,000. The balance in receivables at the beginning of the year was $100,000 and at the end of the year was $150,000. What was the accounts receivable turnover? 800,000 / (100,000 + 150,000 /2) = 800,000 / 125,000 = 6.4

Computing interest

Face value of note x Interest rate x Annual time = Interest

a

Good Stuff Retailers accepted $50,000 of Citibank Visa credit card charges for merchandise sold on July 1. Citibank charges 4% for its credit card use. The entry to record this transaction by Good Stuff Retailers will include a credit to Sales Revenue of $50,000 and a debit(s) to: (a) Cash $48,000 and Service Charge Expense $2,000. (b) Accounts Receivable $48,000 and Service Charge Expense $2,000. (c) Cash $50,000. (d) Accounts Receivable $50,000.

debit bad debt expense, credit allowance of doubtful accounts.

How do you record an estimated uncollectible?

Debit allowance of doubtful accounts, credit accounts receivable.

How would you journalize a write off?

32,000

In 2014, Patterson Wholesale Company had net credit sales of $750,000. On January 1, 2014, Allowance for Doubtful Accounts had a credit balance of $18,000. During 2014, $30,000 of uncollectible accounts receivable were written off. Past experience indicates that the allowance should be 10% of the balance in receivables (percentage-of-receivables basis). If the accounts receivable balance at December 31 was $200,000, what is the required adjustment to Allowance for Doubtful Accounts at December 31, 2014? 200000 x .10 = 20000 30,000 - 18,000 = 12,000 20000 + 12,000 = 32,000

Income statement reporting

In the income statement, companies report bad debt expense under "Selling expenses" in the operating expenses section. They show interest revenue under "Other revenues and gains" in the nonoperating section of the income statement. If a company has significant risk of uncollectible accounts or other problems with its receivables, it is required to discuss this possibility in the notes to the financial statements.

686

Kersee Company on June 15 sells merchandise on account to Soo Eng Co. for $1,000, terms 2/10, n/30. On June 20, Eng Co. returns merchandise worth $300 to Kersee Company. On June 24, payment is received from Eng Co. for the balance due. What is the amount of cash received? 1000-300 = 700 700 x .02 = 14 700-14 = 686

12,000

Net credit sales for the month are $4,000,000 for Marx Clothiers. Its accounts receivable balance is $160,000. The allowance is calculated as 7.5% of the receivables balance using the percentage of receivables basis. The Allowance for Doubtful Accounts has a credit balance of $5,000 before adjustment. How much is the balance of the allowance account after adjustment? Because the estimate is based on a percentage of receivables, the $800 balance in the Allowance accounts must be considered. The ending balance required in the allowance account is 7.5% times $160,000, or $12,000. Since there is already a balance of $5,000 in the allowance account, the difference of $7,000 should be added, resulting in a balance of $12,000. 160,000 x 0.075 = 12,000

Accounts receivable turnover

Measure of both the quality and liquidity of accounts receivable. Indicates how often receivables are received and collected during the period. Computed by dividing net sales by average accounts receivable

direct write off method

Records loss from an uncollectible account receivable when it is determined to be uncollectible. No attempt is made to predict it, debit bad debts expense, and credit accounts receivable. Bad debt expense will show only actual losses from uncollectibles. The company reports accounts receivable at its gross amount without any adjustment for estimated losses for bad debts. the direct write-off method is not acceptable for financial reporting purposes.

reduce

Return of goods and sales discounts and allowances ___________accounts receivable.

d

Schleis Co. holds Murphy Inc.'s $10,000, 120-day, 9% note. The entry made by Schleis Co. when the note is collected, assuming no interest has previously been accrued, is: (a) Cash 10,300 Notes Receivable 10,300 (b) Cash 10,000 Notes Receivable 10,000 (c) Accounts Receivable 10,300 Notes Receivable 10,000 Interest Revenue 300 (d) Cash 10,300 Notes Receivable 10,000 Interest Revenue 300

True

Short-term notes receivable are reported at their cash (net) realizable value.

Recovery of an uncollectible account

The company must make two entries to record the recovery of a bad debt: (1) It reverses the entry made in writing off the account. This reinstates the customer's account. (debit accounts receivable, credit Allowance of doubtful accounts) (2) It journalizes the collection in the usual manner.(Debit to cash, credit to accounts receivable). Reverse write off.

face value

The company records the note receivable at its __________. No interest revenue is reported when the company accepts the note because the revenue recognition principle does not recognize revenue until the performance obligation is satisfied. Interest is earned (accrued) as time passes.

two key parties to a note

The maker, credits Notes Payable. The payee, debits Notes Receivable.

cash realizable value

The net amount a company expects to receive in cash from receivables. Accounts receivable - Allowance of doubtful accounts.

If a company is concerned about extending credit to a risky customer, it could do any of the following

They could require the customer to pay cash in advance. They could require the customer to provide a letter of credit or a bank guarantee. They could contact references provided by the customer, such as banks and other suppliers.

dishonored/defaulted note

This is a note that is not paid in full at maturity. It is no longer negotiable. However, the payee still has a claim against the maker of the note for both the note and the interest. If the lender expects that it eventually will be able to collect, the two parties negotiate new terms to make it easier for the borrower to repay the debt. If there is no hope of collection, the payee should write off the face value of the note.

credit cards

Three parties are involved when national credit cards are used in making retail sales: (1) the credit card issuer, who is independent of the retailer; (2) the retailer; and (3) the customer.

aging the accounts receivable

To more accurately estimate the ending balance in the allowance account, a company often prepares a schedule, called _________________________. This schedule classifies customer balances by the length of time they have been unpaid.After the company arranges the accounts by age, it determines the expected bad debt losses by applying percentages, based on past experience, to the totals of each category. The longer a receivable is past due, the less likely it is to be collected. As a result, the estimated percentage of uncollectible debts increases as the number of days past due increases.

increases, increases

When a merchandiser sells goods it___________(debits) accounts receivable and _____________(credits) sales revenue.

percentage-of-receivables basis

Under the _______________________, management establishes a percentage relationship between the amount of receivables and expected losses from uncollectible accounts. The percentage-of-receivables basis provides an estimate of the cash realizable value of the receivables. It also provides a reasonable matching of expense to revenue.

A company should look at specific loans and receivables to determine if impaired, and then evaluate as a group.

What approach does IFRS require when testing whether the value of loans and receivable are impaired?

notes receivable

What type of receivable is evidenced by a formal instrument and normally requires the payment of interest?

At point of sale of the merchandise

When does a merchandiser records accounts receivable?

when service is preformed

When does a service company recognize accounts receivable?

Determining maturity date

When the life of a note is expressed in terms of months, you find the date when it matures by counting the months from the date of issue. When stated in terms of days, you need to count the exact number of days to determine the maturity date.

Accounts receivable

Which of the following is the debit effect of the journal entry to record the dishonor of a note receivable?

The retailer must wait to receive payment from the issuer.

Which of these statements about Visa credit card sales is incorrect?

Determining from which vendor credit should be requested

Which one of the following is not one of the principles of managing accounts receivable?

A promissory note is not a negotiable instrument.

Which one of these statements about promissory notes is incorrect?

Short-term receivables

______________ are reported in the current assets section of the balance sheet, below short-term investments. They appear after short term investments. Investments are before short-term receivables because these investments are nearer to cash. Companies report both the gross amount of receivables and the allowance for doubtful accounts.