1. Apple Corporation Sample Accounts Receivable Subsidiary Ledger Total Due Acme $ 10,000 Baxter 50,000 Jones 15,000 Martin 20,000 Smith 5,000 $100,000 Gross Accounts Receivable LO1 © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

2. Credit Sales  Slows inflow of cash  Risk of uncollectible accounts Trade Credit Retail Customer Receivables Terms: 2/10, net 30 Sales Invoice © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

3. Accounting for Bad Debts: Direct Write-off Method Journal entry to record write-off in period determined to be uncollectible: Bad Debts Expense XXX Accounts Receivable—Dexter XXX Period of sale Future period charged with expense of bad debt write-off © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

4. Accounting for Bad Debts: Allowance Method Period of sale Estimated bad debt expense (and allowance account) recorded in the same period © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

5. Accounting for Bad Debts: Allowance Method Journal entry to record estimated bad debt expense in period of sale: Bad Debts Expense XXX Allowance for Doubtful Accounts XXX I estimate... © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

6. Partial Balance Sheet Accounts receivable $xxx,xxx Less: Allowance for doubtful accounts xxxx Net accounts receivable $XXX,XXX Balance Sheet Presentation – Allowance Method © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

7. Accounting for Bad Debts: Allowance Method Journal entry to record bad debt write-off in period determined uncollectible: Allowance for Doubtful Accounts XXX Accounts Receivable—Dexter XXX Bankrupt © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

8. Approaches to the Allowance Method % of Net Credit Sales % of Accounts Receivable Aging Method Income Statement Approach Balance Sheet Approach © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

9. Example: Percentage of Net Credit Sales Method Assume prior years’ net credit sales and bad debt expense is as follows: Year Net Credit Sales Bad Debts 2007 $1,250,000$ 26,400 2008 1,340,000 29,350 2009 1,200,000 23,100 2010 1,650,000 32,150 2011 2,120,000 42,700 $7,560,000$153,700 © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

10. Percentage of Net Credit Sales Method 2012 Net credit sales $2,340,000 (given) Bad debt % ($153,700/$7,560,000) 2% Bad debts expense $ 46,800 Example: Journal entry: Bad Debts Expense 46,800 Allowance for Doubtful Accounts 46,800 © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

11. Example: Percentage of Accounts Receivable Method Assume prior years’ ending Accounts Receivable and bad debts is as follows: December 31 Year Accounts Receivable Bad Debts 2007 $ 650,000$ 5,250 2008 785,000 6,230 2009 854,000 6,950 2010 824,000 6,450 2011 925,000 7,450 $4,038,000$32,330 © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

12. Percentage of Accounts Receivable Method $32,330 / $4,038,000 = 0.8% ratio of bad debts to the ending accounts receivable December 31, 2012 Accounts Receivable $865,000 × 0.8% Credit balance required in Allowance account after adjustment $6,920 Example: © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

13. Percentage of Accounts Receivable Method Assume the Allowance for Doubtful Accounts has a beginning credit balance of $2,100: Credit balance required in allowance account after adjustment $ 6,920 Less: Credit balance in allowance account before adjustment 2,100 Amount for bad debt expense entry $ 4,820 © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

14. Percentage of Accounts Receivable Method Assume the Allowance for Doubtful Accounts has a beginning credit balance of $2,100: Journal entry: Bad Debts Expense 4,820 Allowance for Doubtful Accounts 4,820 To record estimated bad debts. © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

15. Percentage of Accounts Receivable Method The net realizable value of accounts receivable would be determined as follows: Accounts receivable $xxx,xxx Less: Allowance for doubtful account 6,920 Net realizable value $xxx,xxx © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

16. Aging Method Estimated Percent Estimated Amount Category Amount Uncollectible Uncollectible Current $ 85,600 1% $ 856 Past due: 1–30 days 31,200 4% 1,248 31–60 days 24,500 10% 2,450 61–90 days 18,000 30% 5,400 90+ days 9,200 50% 4,600 Totals $168,500 $14,554 © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

17. Aging Method Assume the Allowance for Doubtful Accounts has a beginning credit balance of $1,230: Credit balance required in allowance account after adjustment $14,554 Less: Credit balance in allowance account before adjustment (1,230) Amount for bad debt expense entry $13,324 © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

18. Aging Method Assume the Allowance for Doubtful Accounts has a beginning credit balance of $1,230: Journal entry: Bad Debts Expense 13,324 Allowance for Doubtful Accounts 13,324 To record estimated bad debts. © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

19. Aging Method The net realizable value of accounts receivable would be determined as follows: Accounts receivable $xxx,xxx Less: Allowance for doubtful account 14,554 Net realizable value $xxx,xxx © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

20. Accounts Receivable Turnover Net Credit Sales Average Accounts Receivable Indicates how quickly a company is collecting (i.e., turning over) its receivables LO2 © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

21. Accounts Receivable Turnover  Too fast may mean: credit policies too stringent; may be losing sales  Too slow may mean: credit department not operating effectively; dissatisfied customers © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

22. Baker Corporation promises to pay HighTec, Inc. $15,000 plus 12% annual interest on March 13, 2013. Date: December 13, 2012 Signed :_________ Interest-Bearing Promissory Note Baker Corporation Maturity Date Principal Interest LO3 © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

23. Interest-Bearing Promissory Note Maker Gives a Note to Payee © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

24. Receipt of Interest-Bearing Promissory Note Journal entry to record the receipt of the note on December 13, 2012: Notes Receivable15,000 Sales Revenue15,000 © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

25. Interest-Bearing Promissory Note Adjusting entry to record interest on Dec. 31, 2012: Interest Receivable90 Interest Revenue 90* *Interest = $15,000 × 12% × 18/360 © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

26. Interest-Bearing Promissory Note Journal entry to record the collection of the note on March 13, 2013: Cash 15,450 Notes Receivable 15,000 Interest Revenue 360* Interest Receivable 90 *15,000 × 12% × 72/360 © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

27. Accelerating the Cash Inflow from Sales  Credit card sales  Discounting notes receivable LO4 © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

28. Credit Card Sales  Competitive necessity  Credit card company: Charges fee Assumes risk of nonpayment © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

29. Discounting Notes Receivable  Sell note prior to maturity date for cash  Receive less than face value (i.e., discounted amount)  Can be sold with or without recourse © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

30. Reasons Companies Invest in Other Companies  Short-term cash excesses  Long-term investing for future cash needs  Exert influence over investee  Obtain control of investee LO5 © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

31. Investment in a CD Purchase of investment: Short-Term Investments—CD 100,000 Cash 100,000 On October 2, 2012, Creston invests $100,000 of excess cash in a 120-day CD. Principal plus interest @ 6% due upon investment maturity. Example: © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

32. Year-end adjusting entry: Interest Receivable 1,500 Interest Revenue 1,500 Investment in a CD Interest (I) = Principal (P) × Rate (R) × Time (T) $1,500 = $100,000 × 6% × 90*/360 * October = 29 days November = 30 days December = 31 days 90 days © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

33. Upon investment maturity: Cash 102,000 Short-Term Investments—CD 100,000 Interest Receivable 1,500 Interest Revenue* 500 Investment in a CD * Interest earned in January: $100,000 × 6% × 30/360 = $500 © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

34. Accounting for Common-Stock Investments No significant influence 0% Fair Value Method Significant influence Equity Method Control 100% Consolidated Financial Statements Our focus in Appendix © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

35. Investment in Bonds  Bonds of other companies  Intent and ability to hold until maturity $100,000, 10% bond due ten years © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

36. Investment in Bonds On 1/1/12, Atlantic buys:  $100,000, 10% bonds @ face value  Bonds mature in ten years  Interest payable semiannually Example: Record the purchase of the bonds and receipt of the first interest payment © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

37. Recording Bond Purchase Investment in Bonds 100,000 Cash100,000 To record purchase of ABC bonds. $100,000, 10% bond due 2022 © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

38. Recording Receipt of Interest Payment 6/30/12 Cash ($100,000 × 10% × 1/2) 5,000 Interest Income 5,000 To record interest income on ABC bonds. © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

39. Recording Bond Sale 7/1/12 Cash99,000 Loss on Sale of Bonds 1,000 Investment in Bonds 100,000 To record sale of ABC bonds. © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

40. Investment in Stocks  Stocks of other companies  Recorded at cost, including any brokerage fees, commissions or other fees paid to acquire the shares © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

41. Investment in Stocks On February 1, 2012, Dexter Corp. pays $50,000 for shares of Stuart common stock plus $1,000 commissions : Investment in Stuart Common Stock 51,000 Cash 51,000 Example: Record the purchase of common stock © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

42. Recording Receipt of Dividends Dexter receives $500 cash dividends from Stuart common stock on March 31, 2012: Cash 500 Dividend Income 500 To record the receipt of dividends © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

43. Sale of Investment in Stocks Sale of Investment in Stuart common stock on May 20, 2012 for $53,000: Cash 53,000 Investment in Stuart Common Stock 51,000 Gain on Sale of Stock 2,000 To record the sale of Stuart common stock. © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

44. Operating Activities Net income xxx Increase in accounts receivable – Decrease in accounts receivable + Increase in notes receivable – Decrease in notes receivable + Investing Activities Purchases of held-to-maturity and available-for-sale securities – Sales/maturities of held-to-maturity and available-for-sale securities + Financing Activities Liquid Assets and the Statement of Cash Flows – Indirect Method LO6 © 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

45. End of Chapter 7