Accounting quiz #4 (chapter 8)

recovery of uncollectible account

1) reverse entry made in writing off account dr. accounts receivable cr. allowance for doubtful accounts 2) journalize collection normally dr. cash cr. accounts receivable

why sale of receivables?

1. *size of receivables*: captive finance companies (owned by company selling the product--encourage sale of companies products by assuring financing to buyers) 2. *may be only reasonable source of cash* 3. *billing and collecting are time consuming and costly*: often easier for retailer to sell the receivable to another party that have expertise in billing/collecting ex. master card

allowance method: essential features

1. estimate uncollectible account receivables and match against rev. in same period rev. recorded 2. record at end of period dr. bad debt expense cr. allowance for doubtful accounts 3. records at time specific account written off as uncollectible dr. allowance for doubtful accounts cr. accounts receivable

use promissory note when....

1. individuals/companies lend or borrow money 2. when amount of transaction and credit period exceed normal limits 3. in settlement of accounts receivable

notes receivables issues: disposing of notes receivable

3 parts: 1.honor of notes receivable 2.accrual of interest receivable 3.dishonor of notes receivable

ALL FOR ALLOWANCE METHOD

ALL FOR ALLOWANCE METHOD

ALLOWANCE METHOD OVER

ALLOWANCE METHOD OVER

estimating the allowance: aging the accounts

a table that classifies customer balances by the length of time they've been unpaid then the company applies percentages to each length category and percentages are higher the longer receivables have gone unpaid

estimated uncollectibles on balance sheet

accounts receivable (total) less: allowance for doubtful accounts (estimated uncollectible)

steps in managing accounts receivable: evaluate liquidity of receivables

accounts receivable turnover and average collection period

receivables

amount due from individuals and companies; claims that are expected to be collected in cash; one of companies most liquid and largest assets

average collection period

ave. amount of time that a receivable is outstanding; used to asses effectiveness of company's credit and collection policies 365/accounts receivable turnover

notes receivables issues: determining maturity date

can be stated as demand, on stated date, or at end of a stated period of time-->when period of time a maturity date is agreed upon if stated in months: count from month it's issued if stated in days: count exact days excluding day it was issued but including due date

accounts receivable: company credit cards

charge interest if you pay bill late dr. accounts receivable (interest amount) cr. interest revenue (interest amount)

steps in managing accounts receivable: accelerating cash receipts

companies can see their receivables to another company for cash-->to shorten cash operating cycle "time is money"; "bird in the hand is worth 2 in the bush" (getting cash now is better than later/never)

accounts receivable

customers owe on account; results from sale of goods or services; no written obligation

accounts receivable: merchandiser sells good entry

dr. accounts receivable cr. sales revenue

recording write off of uncollectible account

dr. allowance for doubtful accounts cr. accounts receivable- company's that didn't pay

to record estimated amount uncollectible

dr. bad debt expense cr. allowance for doubtful accounts

accounts receivable: discount entry

dr. cash (total-discount) dr. sales discount (discount) cr. accounts receivable (total originally due)

notes receivables issues: recognizing notes receivable

dr. notes receivable cr. accounts receivable- company paying note if company issued cash in exchange for note credit cash for amt. of loan instead of accounts receivable

notes receivables issues: computing interest

face value of note X annual interest rate X time in terms of one year (/12m or 360d)

allowance method

involves estimating uncollectible accounts at the end of each period; provides better matching of expenses w/ revenues on the income statement; ensures receivable are reported at their cash (net) realizable value on balance sheet *method we use*

steps in managing accounts receivable: establishing payment period

make it consistent with competitors

estimating the allowance: percentage of receivable basis

management establishes a percentage relationship between amount of receivables and expected losses from uncollectible accounts to use multiply by ending balance in accounts receivable to find amount uncollectible

steps in managing accounts receivable: extending credit

need to see who should be extended credit and who shouldn't; to reduce losses require customers to show payment history, have to pay cash on delivery etc.

cash (net) realizable value

net amount a company expects to receive in cash from receivables-->excludes amounts company expects it won't collect for accounts receivable it's *accounts receivable-allowance for doubtful accounts (uncollected receivables)*

other receivables

normally accounted for in separate items on balance sheet ex. interest receivables

direct write off method

not approved by GAAP charge loss to bad debt expense: dr. bad debt expense cr. accounts receivable reduces usefulness of balance sheet and income statement

Dishonor of notes receivable

note that's not paid in full at maturity; may need to renegotiation to make easier to pay but if there's no hope should write off face value of note

trade receivable

notes and accounts receivable that result from sales transactions

maker

party making promise to pay

payee

party to whom payment is made

steps in managing accounts receivable: monitoring collections

prepare accounts receivable aging schedule monthly so you can see problem accounts and make better budget helps find concentration of credit risk

accounts receivable turnover

ratio used to assess the liquidity of receivables; measures # of times on avg. company collects receivables during periods net credit sales/avg. net accounts receivable

estimating the allowance: amount of bad debt expense recorded in adjusting entry

required balance (balance that's expected uncollectible)-existing balance in allowance account (amt. left from last period) you add the existing balance to the required balance if the allowance account has a debit balance

national credit card sales

retailers accept national credit cards (visa, mastercard, etc.) cuz they'll have no bad debt and more sales but they pay a fee to the national credit card to use them entry: dr. cash dr. service charge expense cr. sales revenue

notes receivables issues: valuing notes receivable

same as for accounts receivable; report at cash (net) realizable value

factor/factoring

selling receivables to a factor which is a finance company/bank that buys receivables from businesses for a fee and then collects payments directly from the customer--charge commission entry: dr. cash dr. service charge expense cr. accounts receivable

allowance for doubtful accounts

shows estimate amount of claims on customers that companies expect will become uncollectible in the futre; contra accounts receivable account

uncollectible accounts receivable

some accounts receivable become uncollectible ex. individual gets laid off or business has huge loss in sales

concentration of credit risk

threat of nonpayment from a single large customer or class of customers that could adversely affect the financial health of company

accrual of interest receivable

to reflect interest earned but not received (if you prepare financial statement before note due) entry at date of financial statement: dr. interest receivable (amount up to this date) cr. interest revenue entry at date note due: dr. cash (total) cr. notes receivable (original amount of note) cr. interest receivable (interest from previous entry) cr. interest revenue (interest from previous until now)

honor of notes receivable

when maker pays in full by maturity date dr. cash cr. notes receivable cr. interest revenue

bad debt expense

where the losses that result from extending credit (receivable unpaid) are recorded-->this expense increased like crazy when home prices fell and people went into foreclosure and economy in general slowed

notes receivable

written promise for amounts to be received; normally include interest

promissory note

written promise to pay a specified amount of money on demand or at a definite time