ACCT CH8
bad debt expense should be recorded in
the corresponding period of granting credit sales
bad debt expense
+- debit estimates
Recovery of an uncollectible account
(1) It reverses the entry made in writing off the account. This reinstates the customer's account. (2) It journalizes the collection in the usual manner. July 1 Accounts Receivable—R. A. Ware 500 Allowance for Doubtful Accounts 500 (To reverse write-off of R. A. Ware account) (2) 1 Cash 500 Accounts Receivable—R. A. Ware 500 (To record collection from R. A. Ware) Affects only balance sheets!! The net effect of the two entries is an increase in Cash and an increase in Allowance for Doubtful Accounts for $500
The maturity date of a promissory note may be stated in one of three ways:
(1) on demand, (2) on a stated date, and (3) at the end of a stated period of 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. are negotiable instruments (as are checks), which means that, when sold, the seller can transfer them to another party by endorsement.
how to record the transactions on Notes Receivables
1) on demand, (2) on a stated date, and (3) at the end of a stated period of time.
average collection period
365/accounts receivable turnover this means it takes the company ___days to collect its average recievables.
Allowance Method
A method of accounting for bad debts that involves estimating uncollectible accounts at the end of each period. Matching principle- match expenses w revenues in the same period. is completely estimated better matching of expenses and revenues ensures that receivables are stated at their cash (net) realizable value on the balance sheet. Cash (net) realizable value is the net amount a company expects to receive in cash from receivables. exlcudes the amount the companies will not collect
promissary note
A written promise to pay a specified amount of money on demand or at a definite time.
Net accounts receivable
Accounts Receivable gross- Allowance for Doubtful Accounts
Obama Company has identified that Bill Clinton's receivable account of $100 is uncollectible. What is the journal entry needed to write off the account under the allowance method?
Allowance for Doubtful Accounts 100 Accounts Receivable 100
If a company uses the allowance method for uncollectible accounts, then the entry to record $800 of estimated uncollectibles is
Bad Debts Expense 800 Allowance for Doubtful Accounts 800
at the time the specific account is written off as uncollectible....
Companies debit actual uncollectibles to Allowance for Doubtful Accounts and credit them to Accounts Receivable
what will the balance sheet look like
Current assets Cash $ 14,800 Accounts receivable $200,000 Less: Allowance for doubtful accounts 12,000 188,000 Inventory 310,000 Supplies 25,000 Total current assets $537,800 what does 188,000 represent?the expected cash realizable value of the accounts receivable at the statement date
To illustrate the allowance method, assume that Hampson Furniture has credit sales of $1,200,000 in 2017, of which $200,000 remains uncollected at December 31. The credit manager estimates that $12,000 of these sales will prove uncollectible ADJUST THE ENTRY
Dec. 31 Bad Debt Expense 12,000 Allowance for Doubtful Accounts 12,000 (To record estimate of uncollectible accounts)
Which one of the following statements is true? Bad Debts Expense and Allowance for Doubtful Accounts are both real accounts and neither are closed at the end of the fiscal period. Bad Debts Expense and Allowance for Doubtful Accounts are both nominal accounts and are closed at the end of the fiscal period. Bad Debts Expense is a nominal account and is closed at the end of the fiscal period, while Allowance for Doubtful Accounts is a real account and remains open at the end of the fiscal period. Bad Debts Expense is a real account and remains open at the end of the fiscal period, while Allowance for Doubtful Accounts is a nominal account and is closed at the end of the fiscal period.
EXPENSE ACCOUNTS CLOSE Bad Debts Expense is a nominal account and is closed at the end of the fiscal period, while Allowance for Doubtful Accounts is a real account and remains open at the end of the fiscal period
DEALER acronym LER
Liability Equity Revenue -+ Left :Increase Debit Right: Decrease credit
Michael Co. accepts a $4,000, 3-month, 12% promissory note in settlement of an account with Tani Co. The entry to record this transaction is
Notes Receivable 4,000 Sales 4,000
Trades Receivable
Notes and accounts receivable that result from sales transactions, credit sale of notes recievable as a subset of credit sales.
On May 2, Wainwright Company receives a $3,000, 4-month, 10% note from Fulton Company as a settlement of its accounts receivable. What entry will Wainwright Company make when it receives the note on May 2?
On the date Wainwright accepts the note, it is recorded at face amount. Interest is accrued only with the passage of time. Notes Receivable will be debited for $3,000 and Accounts Receivable will be credited for $3,000.
True or False: Companies do not close Allowance for Doubtful Accounts at the end of the fiscal year.
TRUE
Under the allowance method, a company debits every bad debt write-off to
The allowance account account and not to Bad Debt Expense
what do companies do when they do not know if a customer will 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, use a contra account instead of a direct credit to Accounts Receivable
reasons for the sales of recievables
The first is their size. In recent years, companies often have provided financing to purchasers of their goods. Many major companies have created companies that accept responsibility for accounts receivable financing (i.e., General Motors has General Motors Acceptance Corporation — GMAC, Ford has Ford Motor Credit Corp — FMCC). Second, receivables may be sold because they may be the only reasonable source of cash. A final reason for selling receivables is that billing and collection are often time-consuming and costly.
Schleis Co. holds Murphy Inc.'s $10,000, 120-day, 9% note. What is the entry to be made by Schleis Co. when the note is collected, assuming no interest has previously been accrued?
When Schleis receives payment, it will increase cash, reduce the notes receivable account, and recognize interest earned for the term of the note. Interest = $10,000 × 9% × 120/360 = $300. Total cash received = $10,000 + $300 = $10,300.
example of why something may be uncollectible
a corporate customer may not be able to pay because it experienced a sales decline due to an economic downturn Laid off unexpected hospital bills
promissory note
a written contract with a promise to pay a supplier a specific sum of money at a definite time
: What would the adjusting entry be when recording uncollectible accounts using the allowance method?
debit to bad debt expense credit to allowance for doubtful accoutns
natalie doesnt recieve the money months later, what does her account look like?
a/r credit 250 bde debit 250 wrote off increasing BDE
Which of the following is the debit effect of the journal entry to record the dishonor of a note receivable? a. Loss on Notes Receivable b. Allowance for Doubtful Accounts c. Bad Debts Expense d. Accounts Receivable
accts recievable
natalie teaches a group of middle schools students to make holiday cookies. Leaves w an invoice of $250
accts recievable dr 250 service rev credit 250 ++
Under direct write off ad 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.
if customer can pay u back, credit
allowance for doubtful accounts
contra asset account
allowance for doubtful accounts -/+ cr estimates
: When writing off an uncollectible account under the allowance method, ________ is debited, and ________ is credited at the end of the accounting period.
allowance for doubtful accounts, accounts receivable
Under allowance method, 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.
A merchandiser records accounts receivable
at the point of sale of merchandise on account
what do sellers call credit that has been lost due to uncollectibles?
bad debt expense
Companies record estimated uncollectibles as an increase (a debit) to _____ and an increase (a credit) to
bad debt expense 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.
Use of the direct write-off method can reduce the usefulness of both
balance sheet and income statement
why is determining the amount of recievables sometimes hard to report?
because sometimes they will be uncollectible
direct write-off method
beg A/R DEBIT bad debt expense write off receivables at end
under direct write off when is bad debt included
companies often record bad debt expense in a period different from the period in which they recorded the revenue. no attempt is made to match bad debt expense to sales revenue in the income statement. Nor does the company try to show accounts receivable in the balance sheet at the amount actually expected to be received. Consequently, unless a company expects bad debt losses to be insignificant, the direct write-off method is not acceptable for financial reporting purposes.
Recognizing Notes Receivable
debit Notes Receivable; credit Accounts Receivable The company records the note receivable at its face value, the value shown on the face of the note. 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.
if customer cannot pay u bak
debit allowance for doubtful accounts
when using the allowance method a firm should debit
debit estimated uncollectibles to Bad Debt Expense and credit them to Allowance for Doubtful accounts through an adjusting entry at the end of each accounting period.
A 90-day promissory note is issued on September 15. What is the note's maturity date?
december 14
Two methods are used in accounting for uncollectible accounts:
direct write-off allowance
direct write off method Nov-Jan
direct-write off= different periods Nov Rev and Profit up 250 Jan BDE up 250 and Profit down 250
DEALER acrynom DEA
dividend expense assets +- left- increase debit right- decrease credit
how to record the bad debt expense
estimated amount uncollectible-allowance for doubtful accts balance dr bad debt expense cr allowance for doubtful accts.
Interest=
face value x annual interest rate x fraction of the year
A common way to accelerate receivables collection is
factors: a finance company or bank that buys receivables from businesses for a fee and then collects the payments directly from the customers.
The collection of an account that had been previously written off under the allowance method of accounting for uncollectibles will affect income in the period it is collected.
false
a company that is allowing its customers to use national credit cards is
favoring its receivables
What do companies report bad debt expense as?
in the income statement as an operating expense (usually as a selling expense). matches the estimated uncollectibles with sales in 2017 because the expense is recorded in the same year the company makes the sales.
a note is honored 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.
Matching principle Nov-Jan
matching expenses with revenues in the same period Nov: revenue up BDE up . this is an estimation not an actual loss
accounts recievable
no interest, 30 days (N/30)--> Amount customer owe as a result of credit sale. typically collected between 30 and 60 days
Allowance for Doubtful Accounts is shown as a deduction from Accounts Receivable on the balance sheet.
okurrrr
ompanies report Bad Debt Expense in the income statement as an
operating expense
how do we estimate uncollectiable on newly generated a/r
principle amounts *estimated percentage uncollectible
how does the seller encourage early payment?
providing a discount
operating cycle =
selling period + collection period
companies report recievables from employees
seperately
Accounting Issue
some receivables will become uncollectible credit loss is a normal and necessary risk of doing business on a credit basis
susbsequent write off
specific uncollectible amounts when company found out customer A could not pay Balance Sheet: A/R gross less Allowance for Doubtful Accounts net A/R
what is the required balance
t the existing customer claims expected to become uncollectible in the future
he amount of bad debt expense that should be recorded in the adjusting entry is
the differnce between the required balance and the existing balance in the allowance account.
In a promissory note, the party making the promise to pay is called The party to whom payment is to be made is called the
the maker the payee
maker and payee
the maker or issuer) promises in writing to pay a determinate sum of money to the other (the payee), either at a fixed or determinable future time payee- party receiving the payment
Cash (net) realizable value
the net amount a company expects to receive in cash from receivables, excludes amounts that the company estimates it will not collect.
factoring
the process of setting accounts receivable to another party at a discount
A promissory note is more liquid than an account receivable.
true
When a note receivable is paid on time and no interest has been previously accrued, what will the journal entry to record the transaction contain?
two credits and one debit a debit to Cash, a credit to Notes Receivable and a credit to Interest Revenue.
notes recievable
typically collected between 60 and 90 days. are a written promise (as evidenced by a formal instrument) for amounts to be receive.. requires collection of interest
Under the allowance method, writing off a specifc account is written off, assets will be
unchanged
which is a better method for the income statement?
. 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. Companies must use the allowance method for financial reporting purposes when bad debts are material in amount.
recovery of a write off
1) It reverses the entry made in writing off the account. This reinstates the customer's account. (2) It journalizes the collection in the usual manner. ccounts Receivable—R. A. Ware 500 Allowance for Doubtful Accounts 500 (To reverse write-off of R. A. Ware account) (2) 1 Cash 500 Accounts Receivable—R. A. Ware 500 (To record collection from R. A. Ware)
Accounts Recievable Turnover
A measure of the liquidity of accounts receivable, computed by dividing net credit sales by average net accounts receivable. net credit sales(revenue)/ AVERAGE net recievables this means the company is able to collect its average recievables ______ times during an account period.
Direct Write-Off Method
A method of accounting for bad debts that involves charging receivable balances to Bad Debt Expense at the time receivables from a particular company are determined to be uncollectible. -reduce accounts receivable at the time of actual losses. -report accounts receivable at a gross amount for example if A/R is 50,000 and BDE is 1,000 record at 49,000 Under this method, 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. dr. bad debt expense cr. accounts receivable
Accts receivable t-account structure
beg balance collection estimates credit sale actual costs end bal
Accts receivable t-account structure accounting for allowance of doubtful accts
beg balance collection estimates credit sale actual loss given up collection end bal
Use of the direct write-off method can reduce the usefulness of
both the balance sheet and the income statement ex: Buck Computers: sold 1 million computers to college kids for $800 increasing their revenue by 800 million however, 40% of students did not pay off their loans therefore they had a huge credit loss
Notes receivable are reported in the current assets section of the balance sheet at
cash net value
A company may decide to sell their receivables to a factor if they need to
increase their cash balance
Other recievables
interest receivable, loans to company officers, advances to employes. income taxes refundable
. When a merchandiser sells goods
it increases accounts recievable (debit) and increases(credits) Sales Revenue
A service organization records a receivable when
it performs service on account
with the allowance method, companies estimate
uncollectible accounts receivable and match them against revenues in the same accounting period in which the revenues are recorded.