Transcript Reporting and Analyzing Receivables and Investments

Chapter
ACCT 201
ACCT 201
7
Reporting and Analyzing
Receivables and
Investments
ACCT 201
UAA – ACCT 201
Principles of Financial Accounting
Dr. Fred Barbee
1
ACCT 201
Day #1
ACCT 201
ACCT 201
Chapter 7 - Day 1 - Agenda
Topic
LO
Read
HW
Accounts Receivable
C1,
P1, P2
290301
QS2, 3;
E2, 3,
4; P1A
Notes Receivable
(Introduction)
C2,
P3, P4
301304
QS4, 5;
E6
HW #5: P6-4A Due Today
ACCT 201
Accounts Receivable . . .
ACCT 201
Accounts Receivable are . . .
Short-term, liquid assets that arise
from credit sales to customers.
ACCT 201
Are usually converted to cash within 10
to 60 days.
4
Exh.
7.1
Accounts Receivable for
Selected Companies
Abercrombie
& Fitch
$11.4 million
2.5%
Outboard
$104.9 million
Marine
12%
19%
Pfizer $3,864 million
32%
Skechers $46.8 million
0%
5%
10%
15%
20%
25%
As a percentage of total assets
30%
35%
ACCT 201
Accounts Receivable . . .
ACCT 201
There are three primary problems
associated with Receivables . . .
 Recognition
 Valuation
ACCT 201
 Disposition
6
Issue
ACCT 201
1
ACCT 201
Recognition
ACCT 201
Sales on Credit
On July 16, TechCom sells $950 of
merchandise on credit to CompStore.
GENERAL JOURNAL
Date
Description
Jul. 16 Accounts Receivable
Sales
PR
Page 1
Debit
950
Credit
950
Now, let’s post the Account Receivable
to CompStore’s individual
account in the subsidiary ledger.
Sales on Credit
GENERAL JOURNAL
Date
Description
Jul. 16 Accounts Receivable
Sales
PR
ü
Page 1
Debit
950
Credit
950
ACCOUNTS RECEIVABLE LEDGER
Account: CompStore
Date
July
Item
Balance
16 Sale
Number: 42
PR
ü
GJ1
Debit
950
Credit
Balance
Debit
Credit
2,000
2,950
Now, let’s post to the General Ledger
Accounts Receivable control account
Sales on Credit
GENERAL JOURNAL
Date
Description
Jul. 16 Accounts Receivable
Sales
PR
ü /115
Page 1
Debit
950
Credit
950
GENERAL LEDGER
Account:Accounts Receivable
Date
Item
Balance
July 16 Sale
PR
ü
GJ1
Debit
950
Number:115
Credit
Balance
Debit Credit
3,000
3,950
Sales on Credit
On July 16, TechCom receives $720 from
RDA Electronics for a prior credit sale.
GENERAL JOURNAL
Date
Description
Jul. 16 Cash
Accounts Receivable
PR
Page 1
Debit
720
Now, let’s post the entry
to RDA’s individual
account in the subsidiary ledger.
Credit
720
Sales on Credit
GENERAL JOURNAL
Date
Description
Jul. 16 Cash
Accounts Receivable
Page 1
PR
Debit
720
Credit
ü
720
ACCOUNTS RECEIVABLE LEDGER
Account: RDA Electronics
Date
July
Item
Balance
16 Sale
PR
ü
GJ1
Number: 43
Debit
Credit
720
Balance
Debit
Credit
1,000
280
Now, let’s post to the General Ledger
Accounts Receivable control account
Sales on Credit
GENERAL JOURNAL
Date
Description
Jul. 16 Cash
Accounts Receivable
Page 1
PR
Debit
720
Credit
ü /115
720
GENERAL LEDGER
Account:Accounts Receivable
Date
Item
Balance
July 16 Sale
16 Receipt
PR
ü
GJ1
GJ1
Debit
Number:115
Credit
950
720
Balance
Debit Credit
3,000
3,950
3,230
Schedule of Accounts Receivable
Account
Amount
RDA Electronics $
280
CompStore
2,950
Total
$ 3,230
A Schedule of Accounts
Receivable lists the
balances of individual
customers’ accounts
receivable.
GENERAL LEDGER
Account:Accounts Receivable
Date
Item
Balance
July 16 Sale
16 Receipt
PR
ü
GJ1
GJ1
Debit
Number:115
Credit
950
720
Balance
Debit Credit
3,000
3,950
3,230
ACCT 201
Credit Card Sales
ACCT 201
Advantages of allowing
customers to use credit cards:
Customers’ credit is
evaluated by the credit
card issuer.
ACCT 201
The risks of extending
credit are transferred to
the credit card issuer.
Sales increase by
providing purchase
options to the customer.
Cash collections
are speeded up.
15
Credit Card Sales
 With bank credit cards, the seller
deposits the credit card sales receipt
in the bank just like it deposits a
customer’s check.
 The bank increases the balance in the
company’s checking account.
 The company usually pays a fee of 2%
to 5% for the service.
ACCT 201
Credit Card Sales
ACCT 201
ACCT 201
TechCom has a bank credit card
sale of $100 to a customer. The
bank charges a processing fee
of 4%. The cash is received
immediately.
17
ACCT 201
Credit Card Sales
ACCT 201
Prepare the journal entry to record
the sale.
GENERAL JOURNAL
Date
Description
ACCT 201
Cash
Credit Card Expense
Sales
To record credit card sale
and fee ($100 × .04 = $4).
PR
Page 18
Debit
96
4
Credit
100
18
Issue
ACCT 201
2
ACCT 201
Valuation
ACCT 201
ACCT 201
Uncollectible Accounts
ACCT 201
Uncollectible accounts have
effects on two financial
statements . . .
Balance sheet, and
ACCT 201
Income statement
20
ACCT 201
Let’s . . .
ACCT 201
ACCT 201
At the Income Statement
ACCT 201
Income Statement
ACCT 201
Objective:
Derive a fair measurement of net income
Method:
ACCT 201
An adequate amount for bad debts
expense should be matched against
(deducted from) the sales revenue.
22
ACCT 201
Let’s . . .
ACCT 201
ACCT 201
At the Balance Sheet
ACCT 201
Balance Sheet
ACCT 201
Objective:
Properly value accounts receivable
Method:
ACCT 201
Adjust Accounts Receivable to
reflect the amounts expected to be
collected.
24
ACCT 201
Accounting For Uncollectible
Accounts
ACCT 201
There are two methods of accounting
for Uncollectible Accounts . . .
The direct write-off method; and
ACCT 201
The allowance method.
25
Method
ACCT 201
1
ACCT 201
Direct Write-Off
ACCT 201
Direct Write-Off Method
On January 23, TechCom determines it
cannot collect $520 from Jack Kent, a
credit customer.
GENERAL JOURNAL
Date
Description
Jan. 23 Bad Debts Expense
Accounts Receivable
ACCT 201
ACCT 201
PR
Page 18
Debit
520
Credit
520
ACCT 201
Direct Write-Off Method
If Jack Kent later pays the $520, the
previous entry is simply reversed and the
cash collection is recorded.
GENERAL JOURNAL
Date
Description
Accounts Receivable
Bad Debts Expense
Cash
PR
Page 18
Debit
520
Credit
520
520
Accounts Receivable
ACCT 201
ACCT 201
520
ACCT 201
Method
ACCT 201
2
ACCT 201
Allowance Method
ACCT 201
Allowance Method
At the end of each period, estimate total
bad debts expected to be realized from
that period’s sales.
GENERAL JOURNAL
Date
Description
Jun. 30 Bad Debts Expense
Allowance for
Doubtful Accounts
PR
Page 18
Debit
????
Credit
????
This is a contra-asset account.
ACCT 201
ACCT 201
ACCT 201
ACCT 201
Estimating Bad Debts Expense
ACCT 201
Percent of Sales Method
Accounts Receivable Methods
Percent of Accounts Receivable
ACCT 201
Aging of Accounts Receivable
Method
31
ACCT 201
ACCT 201
An Overview Using
T-Accounts
ACCT 201
Based on:
Allowance for
Doubtful
Accounts
Sales
or
xxx
Accts Rec
xxx
Estimate the
amount of
uncollectible
accounts.
Bad Debts
Expense
xxx
xxx
Then Credit the
Allowance account
And Debit the
Expense Account
Method
ACCT 201
1
ACCT 201
Percent of Sales
Method
ACCT 201
ACCT 201
Percent of Sales Method
ACCT 201
Bad debts expense is computed
as follows:
ACCT 201
Current Period Sales
× Bad Debt %
= Estimated Bad Debts Expense
35
ACCT 201
Percent of Sales Method
ACCT 201
MusicLand has credit sales of
$400,000 in 2002.
MusicLand estimates 6% of credit
sales are uncollectible.
ACCT 201
What is Bad Debts Expense for
2002?
36
Allowance Method
X
=
$400,000
0.06%
$2,400
MusicLand computes
estimated Bad Debts
Expense of $2,400
GENERAL JOURNAL
Date
Dec.
Description
31 Bad Debts Expense
Allowance for
Doubtful Accounts
ACCT 201
ACCT 201
PR
Page 95
Debit
2,400
Credit
2,400
ACCT 201
Method
ACCT 201
2
ACCT 201
Percent of Accounts
Receivable Method
ACCT 201
ACCT 201
Percent of Accounts
Receivable Method
ACCT 201
Compute the estimate of the
Allowance for Doubtful Accounts.
Year-End Accounts Receivable
x Bad Debt %
ACCT 201
39
ACCT 201
Percent of Accounts
Receivable Method
ACCT 201
Bad Debts Expense is computed as:
ACCT 201
Estimated Adjusted Balance in Allowance for
Doubtful Accounts
Unadjusted Year-End Balance in Allowance for
Doubtful Accounts
= Estimated Bad Debts Expense
-
40
ACCT 201
Percent of Accounts
Receivable
ACCT 201
ACCT 201
MusicLand has $50,000 in Accounts
Receivable and a $200 credit balance
in Allowance for Doubtful Accounts
on December 31, 2002.
Past experience suggests that 5% of
receivables are uncollectible.
What is MusicLand’s Bad Debt
Expense for 2002
41
% of Accounts Receivable
Desired balance in Allowance
for Doubtful Accounts.
X
=
$50,000
0.05%
$2,500
Allowance for
Doubtful Accounts
200
2,300
2,500
GENERAL JOURNAL
Date
Dec.
Description
31 Bad Debts Expense
Allowance for
Doubtful Accounts
PR
Page 95
Debit
2,300
Credit
2,300
ACCT 201
Aging of Accounts Receivable
Method
ACCT 201
 Compute a separate allowance
for each age grouping.
 Each age grouping has a
ACCT 201
different likelihood of being
uncollectible.
 Year-end Accounts Receivable is
broken down into age
classifications.
43
Aging of Accounts Receivable
MUSICLAND
Schedule of Accounts Receivable by Age
31-Dec-02
Accounts
Estimated
Receivable
Percent
Uncollectible
Days Past Due
Balance
Uncollectible
Amount


Not Yet Due
1 - 30 Days Past Due
31 - 60 Days Past Due
61 - 90 Days Past Due
Over 90 Days Past Due

$
$
37,000
6,500
3,500
1,900
1,000
49,900
2% $
5%
10%
25%
40%
$
740
325
350
475
400
2,290
Aging of Accounts Receivable
MusicLand’s unadjusted balance
in the allowance account is
$200. Per the previous
computation, the desired
balance is $2,290.
Allowance for
Doubtful Accounts
200
2,090
2,290
GENERAL JOURNAL
Date
Dec.
Description
31 Bad Debts Expense
Allowance for
Doubtful Accounts
PR
Page 95
Debit
2,090
Credit
2,090
Issue
ACCT 201
3
ACCT 201
Disposition
ACCT 201
Writing Off a Bad Debt
With the allowance method, when an account is
determined to be uncollectible, the debit is to
Allowance for Doubtful Accounts.
TechCom determines that Jack Kent’s
$520 account is uncollectible.
GENERAL JOURNAL
Date
Description
Jan. 23 Allowance for Doubtful Accounts
Accounts Receivable
PR
Page 18
Debit
520
Credit
520
Recovery of a Bad Debt
Subsequent collections require that the original
write-off entry be reversed before the cash
collection is recorded.
GENERAL JOURNAL
Date
Description
Mar. 11 Accounts Receivable
Allowance for
Doubtful Accounts
Mar.
11 Cash
PR
Page 18
Debit
520
Credit
520
520
Accounts Receivable
520
Exh.
7.13
% of Sales
Emphasis on
Matching
Sales
Bad
Debts
Exp.
Income
Statement
Focus
% of Receivables
Emphasis on
Realizable Value
Accts.
Rec.
All. for
Doubtful
Accts.
Balance
Sheet Focus
Aging of
Receivables
Emphasis on
Realizable Value
Accts.
Rec.
All. for
Doubtful
Accts.
Balance
Sheet Focus
ACCT 201
ACCT 201
Notes Receivable
ACCT 201
ACCT 201
Notes Receivable
ACCT 201
ACCT 201
A note is a
written
promise to
pay a specific
amount at a
specific future
date.
51
Exh.
7.14
Notes Receivable
$1,000.00
Term
Payee
Ninety days
July 10, 2002
after date I promise to pay to
the order of TechCom Company, Los Angeles, CA
One thousand and no/100 --------------------------------- Dollars
Payable at
First National Bank of Los Angeles, CA
Maker
Value received with interest at
12% per annum
No.
42
Due Oct. 8, 2002
Julia Browne
For TechCom.
ACCT 201
ACCT 201
ACCT 201
Exh.
7.14
Notes Receivable
$1,000.00
July 10, 2002
Ninety days
after date I promise to pay to
thePrincipal
order of TechCom Company, Los Angeles, CA
One thousand and no/100 --------------------------------- Dollars
Payable at
First National
InterestBank
Rateof Los Angeles, CA
Value received with interest at
No.
42
12%
Due Oct. 8, 2002
per annum
Julia Browne
For TechCom.
Due Date
ACCT 201
ACCT 201
ACCT 201
Exh.
7.16
Interest Computation
Principal
of the
note
×
Annual
interest
rate
Even for
maturities less
than 1 year,
the rate is
annualized.
ACCT 201
×
Time
expressed
in years
=
Interest
If the note is
expressed in
days, base a
year on 360
days.
ACCT 201
ACCT 201
ACCT 201
Interest Computation
ACCT 201
On March 1, 2002, Smithson, Inc.
purchased a copier for $9,000 from
Machines, Inc. Smithson gave
Machines, Inc. a 12% note due in 90
days in payment for the copier.
ACCT 201
How much interest will be paid to
Machines, Inc. in 90 days?
55
Exh.
7.16
Interest Computation
Principal
of the
note
×
$9,000
X
Annual
interest
rate
12%
ACCT 201
×
Time
expressed
in years
X
90/360
ACCT 201
=
Interest
=
ACCT 201
$270
ACCT 201
End-of-Period Adjustments
ACCT 201
ACCT 201
When a note receivable is
outstanding at the end of an
accounting period, the company
must prepare an adjusting entry
to accrue interest income.
57
ACCT 201
Converting Receivables to
Cash Before Maturity
ACCT 201
Sell the accounts receivable to a
financing company or bank (called
factoring).
ACCT 201
Borrow money and pledge the
receivables as security for the loan
(called pledging).
58
ACCT 201
Full-Disclosure Principle
ACCT 201
Requires financial statements and
notes to report all relevant
information about the operations and
financial position of a company.
ACCT 201
Potential tax assessments
Guarantee of debts of others
Outstanding lawsuits
59