Chapter 6 - Libby, Libby & Short - Financial Accounting

A customer was billed $2,000 on December 8, 2015 with terms of 2/10, n/30. The customer paid the bill on December 17, 2015. What journal entry would be recorded on December 17, 2015 and would there be any effect on net sales as a result of that transaction?

The entry on December 17th would recognize the sales discount of 2% off of the $2,000 invoice price since the bill was paid within 10 days of the invoice date. The entry would include a debit to the asset, cash (+A) for $1,960, a debit to the contra revenue account, sales discounts (+XR, -R, -SE) for $40, and then a credit to the asset, accounts receivable (-A) for $2,000. There would be a reduction in net sales due to the December 17th entry by $40 for the increase in sales discounts which is a contra revenue and is deducted to derive net sales.

A company accepts a Visa credit card for a sale of $150; the credit card company charges a 1% fee to the retailer. What journal entry would be recorded for the sale and what is the effect on net sales as a result of the transaction?

The entry would include a debit to the asset, cash (+A) for $148.50, a debit to the contra revenue, credit card discounts (+XR, -R, -SE) for $1.50 and a credit to a revenue account, sales revenue (+R, +SE) for $150. The effect on net sales would be an increase of $148.50 because sales revenue increases $150 but a contra revenue, credit card discounts for $1.50 would be deducted to calculate net sales.

In reconciling the company's book balance, what are the typical items that would be added during the reconciliation and which would be deducted?

Typically, any direct deposits noted on the bank statement made by customers, collections of notes receivable made directly to the bank, and any interest earned on the account would be added to the book balance. Deductions would include direct deductions/payments noted on the bank statement and service fees charged by the bank. Errors made by the company could be either added to or deducted from the book balance during the reconciliation depending on whether the error understated or overstated cash, respectively.

Under the percentage of net credit sales method, Ajax Company estimates bad debts to be 2.0% of net credit sales. Net credit sales for the year equal $40,000,000. What would be the adjusting entry at the end of the year for bad debts expense?

Bad debts expense under the percentage of net credit sales method would equal $800,000 ($40,000,000 X 2.0%). The adjusting journal entry would involve a debit to bad debts expense (+E, -SE) and a credit to the allowance for doubtful accounts (+XA, -A). The effect of this adjustment is to increase an expense which comes back to the balance sheet as a decrease in stockholders' equity and an increase to a "contra asset" which decreases total assets.

A customer purchased and received $5,000 of goods on credit from Discount Paper Supply on September 1. The customer received the bill on September 13 and mailed a $5,000 check on September 30. Discount Paper Supply received the check on October 4. On which of the dates should Discount Paper Supply record sales revenue?

Discount Paper Supply should record revenue when the goods are provided to the customer which would be September 1. Revenue is earned when the goods/services are provided to the customer, there is persuasive evidence of an arrangement for customer payment (invoice), the price is fixed or determinable, and collection of the receivable is reasonably assured.

The CHS Company has provided the following information: Accounts receivable written-off as uncollectible during the year amounted to $11,500. The accounts receivable balance at the beginning of the year was $150,000. The accounts receivable balance at the end of the year was $210,000. The allowance for doubtful accounts balance at the beginning of the year was $14,000. The allowance for doubtful accounts balance at the end of the year "after" the recording of bad debt expense was $12,900. Credit sales during the year totaled $900,000. How much was CHS Company's bad debt expense?

In order to "back into" the amount of bad debts expense, it is important to recognize what the adjusting journal entry for recording bad debts expense entails; it requires a debit to the expense, bad debts expense, and a credit to the contra asset, allowance for doubtful accounts. So if we set up a T-account for the allowance for doubtful accounts with the beginning balance of $14,000 on the credit side and then at the bottom show the ending credit balance after adjustment for bad debts of $12,900 we can then analyze the debits and credits that occurred during the year. The allowance account is debited when accounts are written off and since $11,500 was written off as uncollectible the $14,000 beginning balance would have decreased to $2,500 credit balance before adjusting for bad debts at the end of year. Since the ending balance in the allowance account was $12,900 after adjustment, the bad debts expense must be $10,400 ($12,900 minus $2,500) which would have been the credit to the account for the bad debts adjustment at the end of the year.

The CHS Company has provided the following information: Accounts receivable written-off as uncollectible during the year amounted to $11,500. The accounts receivable balance at the beginning of the year was $150,000. The accounts receivable balance at the end of the year was $210,000. The allowance for doubtful accounts balance at the beginning of the year was $14,000. The allowance for doubtful accounts balance at the end of the year "after" the recording of bad debt expense was $12,900. Credit sales during the year totaled $900,000. How much cash was received from collections of accounts receivable?

In order to determine cash collections from accounts receivable, we have to focus on the T-account for accounts receivable; this asset increases on the debit side when we sell on credit and then decreases by a credit when customer accounts are written off as uncollectible and when cash is collected. The beginning debit balance in accounts receivable was $150,000 and the ending debit balance was $210,000. The balance would have increased by $900,000 for the amount of credit sales ($150,000 plus $900,000) to $1,050,000 but then it would have decreased when the account was credited for the amounts written off $11,500 ($1,050,000 minus $11,500) which equals $1,038,500; since the ending balance is $210,000, we would deduct that amount from the $1,038,500 ($1,038,500 minus $210,000) to compute the cash collected which equals $828,500. An alternate calculation would be to take the credit sales of $900,000 (debit to accounts receivable) minus the increase in accounts receivable $60,000 (ending balance $210,000 minus beginning balance $150,00) to get $840,000. We would then subtract the accounts written off as uncollectible $11,500 from the $840,000 to get cash collected $828,500. Remember when accounts receivable increases by $60,000 it represents the portion of credit sales not collected!

Flyer Company has provided the following information "prior" to any year-end bad debt adjustment: Cash sales $150,000 Credit sales, net $450,000 Selling and administrative expenses $110,000 Sales returns and allowances $30,000 Gross profit $490,000 Accounts receivable $110,000 Sales discounts $14,000 Allowance for doubtful accounts "credit" balance $1,200 Flyer estimates bad debt expense assuming that 1.5% of credit sales have historically been uncollectible. What is the balance in the allowance for doubtful accounts "after" bad debt expense is recorded?

In this case, Flyer is using the percentage of net credit sales so when the $450,000 of net credit sales is multiplied by the 1.5% estimated portion that is uncollectible, bad debts expense equals $6,750 ($450,000 X 1.5%); this method estimates the bad debts expense for the period. Since there is already a credit balance of $1,200 in the allowance for doubtful accounts, when we credit the allowance account for $6,750 (estimated bad debts expense), the credit balance increases to $7,950 ($1,200 plus $6,750). The balance in the allowance for doubtful accounts after the adjustment for bad debts expense is $7,950.

Goods shipped by Latimer Company were shipped to a customer in December 27, 2013 with terms of FOB destination. The customer received the goods on January 4, 2014. Would Latimer include this sale in the 2013 income statement and if so, why?

Latimer would not include this in sales revenue for 2013 because the shipping terms of FOB destination means that Latimer still owns the inventory and has risk of loss during shipping until the goods reach the customer (destination). This sale will be recorded for 2014; if the terms were FOB shipping point (Latimer) it would be recorded in 2013 sales.

The Conner Company's August 31, 2014 cash balance on its books "after" adjustment was $90,000. As of August 31, outstanding checks total $44,000 and deposits in transit total $30,000. How much was Conner's August 31, 2014 reconciled bank statement balance?

Since the reconciled balance on Conner Company's books equals $90,000, that means that the reconciled bank statement balance must also be $90,000.

The cash records and the bank statement of Frankel Company showed the following at the end of February 2014: Outstanding checks as of the "beginning" of February 2014, $8,000; checks written by Frankel Company according to its books during February 2014, $50,000; and checks cleared by the bank during February 2014, $54,000. How much were the outstanding checks at the end of February 2014?

The "beginning" outstanding checks (end of January/beginning of February) equaled $8,000. During the month of February, the bank statement showed $54,000 cleared or cashed while the company's books showed Frankel only writing out $50,000 in February. Therefore, the outstanding checks would have decreased by $4,000 to $4,000 outstanding at the end of February (beginning outstanding checks, $8,000 minus the decrease in outstanding checks, $4,000 equals the remaining outstanding checks, $4,000).

The Roscoe Company's March 31, 2014 bank statement balance showed $70,000. As of March 31, 2014, outstanding checks total $22,000 and deposits in transit total $15,000. How much was Roscoe's March 31, 2014 cash balance after adjustments on the company's books?

The adjusted company's book balance has to equal the adjusted bank statement balance once the reconciliation is completed. The two most common adjustments to the bank statement are to deduct outstanding checks and add deposits in transit. To compute the reconciled bank statement balance, we start with the $70,000 bank statement balance, deduct the $22,000 of outstanding checks and add the $15,000 of deposits in transit which equals $63,000 as the adjusted bank statement balance which must also equal the adjusted book balance.

Dillon Company uses the allowance method to account for bad debts. What would be the entry to write off a customer account for $1,000? What effect does this write off have on the balance sheet and the income statement?

The journal entry for the write off of a customer account would be a debit to the contra asset, allowance for doubtful accounts (-XA, +A) and a credit to the asset, accounts receivable (-A) for $1,000 each. There is no effect for this transaction on either the balance sheet or the income statement because the write off simply has the effect of offsetting a decrease in a contra asset with a decrease in an asset; therefore, total assets stay the same and no other element on the balance sheet or income statement is affected.

What would be the journal entry to record a return of $500 by a credit customer who had not yet paid the bill? What is the effect on net sales of the entry?

The journal entry to record a customer return before they pay the bill will involve a debit to a contra revenue account, sales returns and allowances (+XR, -R, -SE) for $500 and then a credit to the asset, accounts receivable (-A) for $500. When you debit the contra revenue, sales returns and allowances, it reduces net sales. Net sales is a computed amount which takes sales revenue minus the contra revenue accounts of sales returns and allowances, sales discounts and credit card discounts.

When using the allowance method for accounting for bad debts, accounts receivable is reported on the balance sheet at the expected net realizable value (net of the allowance for doubtful accounts). When a particular receivable from a customer ultimately is determined to be uncollectible and is written off, the recording of this entry will have what effect on the financial statements?

The write off of a customer account under the allowance method of accounting for bad debts NEVER has any effect on the financial statements as the reduction in the contra asset, allowance for doubtful accounts is offset by the reduction in the asset, accounts receivable so total assets is unaffected and no other element on the financial statements is affected.

Newark Company provided the following information: Cash sales $450,000 Credit sales $1,350,000 Selling and administrative expenses $330,000 Sales returns and allowances $90,000 Gross profit, $1,360,000 Increase in accounts receivable $55,000 Bad debt expense $33,000 Sales discounts $43,000 Net income What is the effect of collections from customers on cash flow from operating activities using the "indirect" method?

Under the "indirect" method net income would be adjusted for the change in accounts receivable as a type 3 adjustment. Since accounts receivable increased, the $55,000 increase would be deducted from net income of $1,030,00 (since the increase in accounts receivable means that $55,000 of reported sales were not collected yet); so the effect on operating cash flows would be $975,000 cash inflow.

Flyer Company has provided the following information "prior" to any year-end bad debt adjustment: Cash sales $150,000 Credit sales, net $450,000 Selling and administrative expenses $110,000 Sales returns and allowances $30,000 Gross profit $490,000 Accounts receivable $110,000 Sales discounts $14,000 Allowance for doubtful accounts "credit" balance $1,200 Flyer prepares an aging of accounts receivable and the result shows that 5% of accounts receivable is estimated to be uncollectible. How much is bad debt expense?

Under the aging of accounts receivable method, the estimate equals the desired ending balance in the allowance for doubtful accounts so 5% of $110,000 equals $5,500. Since there is already a credit balance in the allowance for doubtful accounts of $1,200, the difference between the desired new balance and the existing balance would require an adjustment of $4,300 for bad debts expense ($5,500 minus $1,200).

When credit terms for a sale are 2/15, n/40, the customer saves by paying the invoice early. What percent (rounded to one decimal place) would this savings amount to on an "annual" basis? If the customer can borrow money from a bank at 10% annual interest if they do not have cash on hand to pay the bill within the discount period, would it be advantageous for them to borrow money to pay the invoice within 15 days?

We can calculate the annualized percentage by taking the discount rate, 2% divided by the percentage that the customer will pay 98% (complement of the discount rate) and then multiplying that percentage by the fraction of 365 days in the year divided by the 25 days which is the difference between the 40 days in the credit period and the 15 days in the discount period. So 2/98 X 365/25 = 29.8%. Yes, it would be advantageous to pay the bill within the 15 day discount period because the annualized savings from taking the discount is 29.8% and they are only paying the bank 10.0% so "net" savings would be 19.8%.