1. Wacky Warning Labels (from www.wackywarnings.com)
A warning on an electric drill made for carpenters’ cautions: “This product not intended for use as a dental drill”
The label on a bottle of drain cleaner warns: “If you do not understand, or cannot read, all directions, cautions and warnings, do not use this product”
A smoke detector warns: “Do not use the Silence Feature in emergency situations. It will not extinguish a fire.”
A cardboard car sunshield that keeps sun off the dashboard warns, “Do not drive with sunshield in place”
An “Aim-n-Flame” fireplace lighter cautions, “Do not use near fire, flame or sparks”
A label on a hand-held massager advises consumers not to use “while sleeping or unconscious”
A snowblower warns: “Do not use snowthrower on roof”

2. Chapter 7 CASH AND RECEIVABLES Sommers – ACCT 3311
Acct Class 24
Chapter 7 CASH AND RECEIVABLES Sommers – ACCT 3311
Chapter 1: Environment and Theoretical Structure of Financial Accounting.

3. Reporting Cash Bank Overdrafts
Company writes a check for more than the amount in its cash account.
Generally reported as a current liability.
Offset against other cash accounts only when accounts are with the same bank.

4. Accounts Receivable
Receivables - Claims held against customers and others for money, goods, or services.
Oral promises of the purchaser to pay for goods and services sold.
Written promises to pay a sum of money on a specified future date.
Accounts Receivable
Notes Receivable

5. Not Accounts Receivable
Nontrade Receivables
Advances to officers and employees.
Advances to subsidiaries.
Deposits to cover potential damages or losses.
Deposits as a guarantee of performance or payment.
Dividends and interest receivable.
Claims against: Insurance companies for casualties sustained; defendants under suit; governmental bodies for tax refunds; common carriers for damaged or lost goods; creditors for returned, damaged, or lost goods; customers for returnable items (crates, containers, etc.).

6. Trade Discounts Reductions from the list price
Not recognized in the accounting records
Customers are billed net of discounts

7. Cash (Sales) Discounts
Inducements for prompt payment
Gross Method vs. Net Method
Payment terms are 2/10, n/30

8. Big Customers Are Slow to Pay – WSJ Jun 7, 2012

9. Sales and Trade Discounts
Tracy Company, a manufacturer of air conditioners, sold 100 units to Thomas Company on November 17, The units have a list price of $600 each, but Thomas was given a 30% trade discount. The terms of the sale were 2/10, n/30. Assume the gross method of accounting for cash discounts is used. Prepare the journal entries to record the sale on November 17 (ignore cost of goods) and collection on November 26, /17 Accounts receivable 42,000 Sales 42,000 11/26 Cash 41,160 Sales discounts 840 Accounts receivable 42,000

10. Sales and Trade Discounts
Tracy Company, a manufacturer of air conditioners, sold 100 units to Thomas Company on November 17, The units have a list price of $600 each, but Thomas was given a 30% trade discount. The terms of the sale were 2/10, n/30. Assume the gross method of accounting for cash discounts is used. Prepare the journal entries to record the sale on November 17 (ignore cost of goods) and collection on December 15, /17 Accounts receivable 42,000 Sales 42,000 12/15 Cash 42,000 Accounts receivable 42,000

11. Sales and Trade Discounts
Tracy Company, a manufacturer of air conditioners, sold 100 units to Thomas Company on November 17, The units have a list price of $600 each, but Thomas was given a 30% trade discount. The terms of the sale were 2/10, n/30. Assume the net method of accounting for cash discounts is used. Prepare the journal entries to record the sale on November 17 (ignore cost of goods) and collection on November 26, /17 Accounts receivable 41,160 Sales 41,160 11/26 Cash 41,160 Accounts receivable 41,160

12. Sales and Trade Discounts
Tracy Company, a manufacturer of air conditioners, sold 100 units to Thomas Company on November 17, The units have a list price of $600 each, but Thomas was given a 30% trade discount. The terms of the sale were 2/10, n/30. Assume the net method of accounting for cash discounts is used. Prepare the journal entries to record the sale on November 17 (ignore cost of goods) and collection on December 15, /17 Accounts receivable 41,160 Sales 41,160 12/15 Cash 42,000 Accounts receivable 41,160 Interest income 840

13. Non-Recognition of Interest
A company should measure receivables in terms of their present value.
In practice, companies ignore interest revenue related to accounts receivable because, for current assets, the amount of the discount is not usually material in relation to the net income for the period.

14. Allowance for Doubtful Accounts
Recognition of A/R
How are these accounts presented on the Balance Sheet?
Allowance for Doubtful Accounts
Accounts Receivable
Beg
Beg.
End
End.

15. Recognition of A/R

16. Recognition of A/R

17. Uncollectible A/R
An uncollectible account receivable is a loss of revenue that requires, through proper entry in the accounts,
a decrease in the asset accounts receivable and
a related decrease in income and stockholders’ equity.

18. Direct Write-Off vs. Allowance Method
Methods of Accounting for Uncollectible Accounts
Direct Write-Off
Theoretically deficient:
No matching.
Receivable not stated at cash realizable value.
Not GAAP when material in amount.
Allowance Method
Losses are Estimated:
Percentage-of-sales.
Percentage-of-receivables.
GAAP requires when material in amount.

19. Percentage of Sales vs. Receivables
Emphasis on the Income Statement relationships
Emphasis on the Balance Sheet relationships

20. Percentage of Sales Approach
Percentage based upon past experience and anticipate credit policy.
Achieves proper matching of costs with revenues.
Existing balance in Allowance account not considered.

21. Example 1a
West Company had the following account balances at December 31, 2009, before recording bad debt expense for the year:
Accounts receivable $ 900,000
Allowance for bad debts (credit balance) ,000
Credit sales for ,750,000
West uses the following method of estimating bad debts for 2009:
Based on 2% of credit sales.
What amount should West charge to bad debt expense at the end of 2009 under Percentage of Sales (income statement) method?
$1,750,000 * 2% = $35,000
Bad debt expense 35,000
Allowance for bad debts 35,000

22. Percentage-of-Receivables Approach
Not matching.
Reports receivables at realizable value.
Companies may apply this method using
one composite rate, or
an aging schedule using different rates.

23. Example 1b
West Company had the following account balances at December 31, 2009, before recording bad debt expense for the year:
Accounts receivable $ 900,000
Allowance for bad debts (credit balance) ,000
Credit sales for ,750,000
West uses the following method of estimating bad debts for 2009:
Based on 5% of year-end accounts receivable.
What amount should West charge to bad debt expense at the end of 2009 under Percentage of Accounts Receivable (balance sheet) method?
$900,000 * 5% = $45,000 as ending ABD balance
Bad debt expense 29,000
Allowance for bad debts 29,000 (45,000 – 16,000)

24. A/R Aging Adjustment Bad Debt Expense 36,850
What entry would Wilson make assuming the allowance account had a credit balance of $800 before adjustment?
Bad Debt Expense 36,850
Allowance for Bad Debts ($37,650 – $800) 36,850

25. Bad Debt Problem
Swathmore Clothing Corporation grants its customers 30 days’ credit. The company uses the allowance method for its uncollectible accounts receivable. During the year, a monthly bad debt accrual is made by multiplying 3% times the amount of credit sales for the month. At the fiscal year-end of December 31, an aging of accounts receivable schedule is prepared and the allowance for uncollectible accounts is adjusted accordingly. At the end of 2010, accounts receivable were $574,000 and the allowance account had a credit balance of $54,000. Accounts receivable activity for 2011 was as follows: Beginning balance $ 574,000 Credit sales 2,620,000 Collections (2,483,000) Write-offs (68,000) Ending balance $ 643,000 The company’s controller prepared the following aging summary of year-end accounts receivable: Age Group Amount % Uncollectible 0-60 days $430,000 4% days 98,000 15% days 60,000 25% Over 120 days 55,000 40% Totals $643,000 Prepare a summary journal entry to record the monthly bad debt accrual and the write-offs during the year.

26. Bad Debt Problem Bad debt expense (3% x $2,620,000) 78,600
During the year, a monthly bad debt accrual is made by multiplying 3% times the amount of credit sales for the month. Accounts receivable activity for 2011 was as follows:
Beginning balance $ 574,000
Credit sales 2,620,000
Collections (2,483,000)
Write-offs (68,000)
Ending balance $ 643,000
Bad debt expense (3% x $2,620,000) 78,600
Allowance for uncollectible accounts 78,600
Allowance for uncollectible accounts 68,000
Accounts receivable 68,000

27. Bad Debt Problem
Swathmore Clothing Corporation grants its customers 30 days’ credit. The company uses the allowance method for its uncollectible accounts receivable. During the year, a monthly bad debt accrual is made by multiplying 3% times the amount of credit sales for the month. At the fiscal year-end of December 31, an aging of accounts receivable schedule is prepared and the allowance for uncollectible accounts is adjusted accordingly. At the end of 2010, accounts receivable were $574,000 and the allowance account had a credit balance of $54,000. Accounts receivable activity for 2011 was as follows: Beginning balance $ 574,000 Credit sales 2,620,000 Collections (2,483,000) Write-offs (68,000) Ending balance $ 643,000 The company’s controller prepared the following aging summary of year-end accounts receivable: Age Group Amount % Uncollectible 0-60 days $430,000 4% days 98,000 15% days 60,000 25% Over 120 days 55,000 40% Totals $643,000 Prepare the necessary year-end adjusting entry for bad debt expense.

28. Bad Debt Problem
Swathmore Clothing Corporation grants its customers 30 days’ credit. The company uses the allowance method for its uncollectible accounts receivable. At the fiscal year-end of December 31, an aging of accounts receivable schedule is prepared and the allowance for uncollectible accounts is adjusted accordingly. At the end of 2010, accounts receivable were $574,000 and the allowance account had a credit balance of $54,000. Age Group Amount % Uncollectible Allowance 0-60 days $430,000 4% $17, days 98,000 15% 14, days 60,000 25% 15,000 Over 120 days 55,000 40% 22,000 $68,900 ABD 54,000 78,600 68,000 ? Solve for Bad Debt Expense 68,900 Bad debt expense 4,300 Allowance for bad debts 4,300

29. Bad Debt Problem
What is total bad debt expense for 2011? Monthly accruals $78,600 Year-end adjustment 4,300 Total $82,900 How would accounts receivable appear in the 2011 balance sheet? Current assets: Accounts receivable, net of $68,900 allowance for uncollectible accounts $574,100

30. Example 2a
Sandel Company reports the following financial information before adjustments.
Prepare the journal entry to record bad debt expense assuming Sandel estimates bad debts at (a) 1% of net sales.
Bad Debt Expense 7,500
Allowance for Doubtful Accounts 7,500
($800,000 – $50,000) x 1% = $7,500

31. Example 2b
Sandel Company reports the following financial information before adjustments.
Prepare the journal entry to record bad debt expense assuming Sandel estimates bad debts at (b) 5% of accounts receivable.
Bad Debt Expense 6,000
Allowance for Doubtful Accounts 6,000
[($160,000 x 5%) – $2,000] = $6,000

32. Effect of Write-Offs
On May 6, Timberland wrote off a specific account receivable with balance of $2,500.
Assume that before the write-off entry, Timberland’s Accounts Receivable balance was $81,000,000 and the Allowance for Doubtful Accounts balance was $2,000,000. What effect did the write-off have? 50 50

33. Reversal of Write-Off
Assume that the financial vice president of Brown Furniture authorizes a write-off of the $1,000 balance owed by Randall Co. on March 1, The entry to record the write-off is:
Allowance for Doubtful Accounts 1,000
Accounts Receivable 1,000
Assume that on July 1, Randall Co. pays the $1,000 amount that Brown had written off on March 1. These are the entries:
Accounts Receivable 1,000
Allowance for Doubtful Accounts 1,000
Cash 1,000
Accounts Receivable 1,000
LO 5