1 Apple Corporation Sample Accounts Receivable Subsidiary Ledger Total DueAcme $ 10,000Baxter ,000Jones ,000Martin ,000Smith ,000$100,000Gross AccountsReceivableLO1
2 Credit Sales Slows inflow of cash Risk of uncollectible accounts Terms: 2/10,net 30Sales InvoiceTrade CreditRetail CustomerReceivables
3 Accounting for Bad Debts: Direct Write-off Method Future period chargedwith expense of bad debtwrite-offPeriod of saleJournal entry to record write-off in period determinedto be uncollectible:Bad Debts Expense XXXAccounts Receivable—Dexter XXX
4 Accounting for Bad Debts: Allowance Method Period of saleEstimated bad debt expense (and allowance account) recorded in the same period
5 Accounting for Bad Debts: Allowance Method I estimate...Accounting for Bad Debts: Allowance MethodJournal entry to record estimated bad debtexpense in period of sale:Bad Debts Expense XXXAllowance for Doubtful Accounts XXX
7 Accounting for Bad Debts: Allowance Method BankruptAccounting for Bad Debts: Allowance MethodJournal entry to record bad debt write-off inperiod determined uncollectible:Allowance for Doubtful Accounts XXXAccounts Receivable—Dexter XXX
8 Approaches to the Allowance Method % of Net Credit Sales% of Accounts ReceivableAging MethodIncome Statement ApproachBalance Sheet Approach
9 Percentage of Net Credit Sales Method Example:Assume prior years’ net credit sales and bad debtexpense is as follows:Year Net Credit Sales Bad Debts$1,250,000 $ 26,400,340, ,350,200, ,100,650, ,150,120, ,700$7,560,000 $153,7003
10 Percentage of Net Credit Sales Method Example:2012 Net credit sales $2,340,000 (given)Bad debt % ($153,700/$7,560,000) %Bad debts expense $ ,800Journal entry:Bad Debts Expense ,800Allowance for Doubtful Accounts ,8004
11 Percentage of Accounts Receivable Method Example:Assume prior years’ ending Accounts Receivable andbad debts is as follows:December 31Year Accounts Receivable Bad Debts$ 650,000 $ 5,250, ,230, ,950, ,450, ,450$4,038,000 $32,3303
12 Percentage of Accounts Receivable Method Example:$32,330 / $4,038,000 = 0.8% ratio of bad debts to the ending accounts receivableDecember 31, 2012 Accounts Receivable $865,000× 0.8%Credit balance required in Allowanceaccount after adjustment $6,9204
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 $ 6,920Less: Credit balance in allowance account before adjustment ,100Amount for bad debt expense entry $ 4,820
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 ,820Allowance for Doubtful Accounts ,820To record estimated bad debts.
15 Percentage of Accounts Receivable Method The net realizable value of accounts receivable would be determined as follows:Accounts receivable $xxx,xxxLess: Allowance for doubtful account ,920Net realizable value $xxx,xxx
16 Aging Method Estimated Percent Estimated Amount Category Amount Uncollectible UncollectibleCurrent $ 85, % $Past due:1–30 days , % ,24831–60 days , % ,45061–90 days , % ,40090+ days , % ,600Totals $168, $14,554
17 Aging MethodAssume the Allowance for Doubtful Accounts has a beginning credit balance of $1,230:Credit balance required in allowance account after adjustment $14,554Less: Credit balance in allowance account before adjustment (1,230)Amount for bad debt expense entry $13,324
18 Aging MethodAssume the Allowance for Doubtful Accounts has a beginning credit balance of $1,230:Journal entry:Bad Debts Expense ,324Allowance for Doubtful Accounts ,324To record estimated bad debts.
19 Aging MethodThe net realizable value of accounts receivable would be determined as follows:Accounts receivable $xxx,xxxLess: Allowance for doubtful account 14,554Net realizable value $xxx,xxx
20 Accounts Receivable Turnover Net Credit SalesAverage Accounts ReceivableIndicates how quickly a company is collecting (i.e., turning over) its receivablesLO2
21 Accounts Receivable Turnover Too fast may mean:credit policies toostringent; may belosing salesToo slow may mean:credit departmentnot operatingeffectively;dissatisfied customers
22 Interest-Bearing Promissory Note PrincipalBaker Corporation promises to pay HighTec, Inc. $15,000 plus 12% annual interest on March 13, 2013.Date: December 13, 2012Signed:_________InterestMaturityDateBaker CorporationLO314
29 Discounting Notes Receivable Sell note prior to maturity date for cashReceive less than face value (i.e., discounted amount)Can be sold with or without recourse
30 Reasons Companies Invest in Other Companies Short-term cash excessesLong-term investing for future cash needsExert influence over investeeObtain control of investeeLO5
31 Investment in a CD Short-Term Investments—CD 100,000 Cash 100,000 Example:On October 2, 2012, Creston invests $100,000 of excess cash in a 120-day CD. Principal plus 6% due upon investment maturity.Purchase of investment:Short-Term Investments—CD ,000Cash ,000
32 Investment in a CD Year-end adjusting entry: Interest Receivable 1,500 Interest Revenue ,500Interest (I) = Principal (P) × Rate (R) × Time (T)$1, = $100, × 6% × 90*/360*October = 29 daysNovember = 30 daysDecember = 31 days90 days
33 Investment in a CD Upon investment maturity: Cash 102,000 Short-Term Investments—CD ,000Interest Receivable ,500Interest Revenue**Interest earned in January:$100,000 × 6% × 30/360 = $500
34 Accounting for Common-Stock Investments Control100%ConsolidatedFinancialStatementsNo significantinfluence0%FairValueMethodSignificantinfluence50%EquityMethod20%Ourfocusin Appendix
35 Investment in Bonds Bonds of other companies Intent and ability to hold until maturity$100,000, 10% bond due ten years
36 Investment in Bonds Example: On 1/1/12, Atlantic buys: $100,000, 10% face valueBonds mature in ten yearsInterest payable semiannuallyRecord the purchase of the bonds and receipt of the first interest payment
37 Recording Bond Purchase Investment in Bonds ,000Cash ,000To record purchase of ABC bonds.$100,000, 10% bond due 2022
38 Recording Receipt of Interest Payment 6/30/12Cash ($100,000 × 10% × 1/2) ,000Interest Income ,000To record interest income on ABC bonds.
39 Recording Bond Sale Cash 99,000 Loss on Sale of Bonds 1,000 7/1/12Cash 99,000Loss on Sale of Bonds 1,000Investment in Bonds ,000To record sale of ABC bonds.
40 Investment in Stocks Stocks of other companies Recorded at cost, including any brokerage fees, commissions or other fees paid to acquire the shares
41 Investment in StocksExample:On February 1, 2012, Dexter Corp. pays $50,000 for shares of Stuart common stock plus $1,000 commissions :Investment in StuartCommon Stock ,000Cash ,000Record the purchase of common stock
42 Recording Receipt of Dividends Dexter receives $500 cash dividends from Stuartcommon stock on March 31, 2012:CashDividend IncomeTo record the receipt of dividends
43 Sale of Investment in Stocks Sale of Investment in Stuart common stock onMay 20, 2012 for $53,000:Cash ,000Investment in StuartCommon Stock ,000Gain on Sale of Stock ,000To record the sale of Stuart common stock.
44 Liquid Assets and the Statement of Cash Flows – Indirect Method Operating ActivitiesNet income xxxIncrease in accounts receivable –Decrease in accounts receivableIncrease in notes receivable –Decrease in notes receivableInvesting ActivitiesPurchases of held-to-maturity andavailable-for-sale securities –Sales/maturities of held-to-maturity andavailable-for-sale securitiesFinancing ActivitiesLO6