Presentation is loading. Please wait.

Presentation is loading. Please wait.

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.

Similar presentations


Presentation on theme: "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."— Presentation transcript:

1 Wacky Warning Labels (from 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

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

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

5 Nontrade Receivables 1.Advances to officers and employees. 2.Advances to subsidiaries. 3.Deposits to cover potential damages or losses. 4.Deposits as a guarantee of performance or payment. 5.Dividends and interest receivable. 6.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.). Not Accounts Receivable

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

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

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, /17Accounts receivable42,000 Sales42,000 11/26Cash41,160 Sales discounts 840 Accounts receivable42,000

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, /17Accounts receivable42,000 Sales42,000 12/15Cash42,000 Accounts receivable42,000

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, /17Accounts receivable41,160 Sales41,160 11/26Cash41,160 Accounts receivable41,160

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, /17Accounts receivable41,160 Sales41,160 12/15Cash42,000 Accounts receivable41,160 Interest income 840

13 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. Non-Recognition of Interest

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

15

16

17 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. Uncollectible A/R

18 Allowance Method Losses are Estimated: Percentage-of-sales. Percentage-of-receivables. GAAP requires when material in amount. 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. Direct Write-Off vs. Allowance Method

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

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. Percentage of Sales Approach

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) 16,000 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 expense35,000 Allowance for bad debts35,000

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. Percentage-of-Receivables Approach

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) 16,000 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 expense29,000 Allowance for bad debts29,000 (45,000 – 16,000)

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

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 GroupAmount% Uncollectible 0-60 days$430,000 4% days 98,00015% days 60,00025% Over 120 days 55,00040% 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 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 accounts78,600 Allowance for uncollectible accounts68,000 Accounts receivable68,000

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 GroupAmount% Uncollectible 0-60 days$430,000 4% days 98,00015% days 60,00025% Over 120 days 55,00040% 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 GroupAmount% UncollectibleAllowance 0-60 days$430,000 4%$17, days 98,00015% 14, days 60,00025% 15,000 Over 120 days 55,00040% 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 debts4,300

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 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 Expense7,500 Allowance for Doubtful Accounts7,500 ($800,000 – $50,000) x 1% = $7,500 Example 2a

31 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 Expense6,000 Allowance for Doubtful Accounts6,000 [($160,000 x 5%) – $2,000] = $6,000 Example 2b

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?

33 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 Accounts1,000 Accounts Receivable1,000 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 Receivable1,000 Allowance for Doubtful Accounts 1,000 Cash 1,000 Accounts Receivable1,000 LO 5 Reversal of Write-Off


Download ppt "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."

Similar presentations


Ads by Google