1. Copyright  2006 Pearson Education Canada Inc. 12-1

2. Copyright  2006 Pearson Education Canada Inc. 12-2 Outline  Receivables  Accounts Receivable and Bad Debts  Allowance Method  Percentage of Sales Method  Aging Method  Uncollectible Accounts  Payables  Current Liabilities and Long-Term Debt  Other Accounts  Corporation Accounting

3. Copyright  2006 Pearson Education Canada Inc. 12-3 Receivables  Trade Accounts Receivable  Notes Receivable  Other Accounts Receivable  Loans to employees  Refunds receivable  Interest receivable

4. Copyright  2006 Pearson Education Canada Inc. 12-4 Accounts Receivable and Bad Debts Conservatism - Provide for all possible losses Bad debts expense- Estimate of uncollectible accounts

5. Copyright  2006 Pearson Education Canada Inc. 12-5 Allowance Method Percentage of sales method Accounts receivable aging method

6. Copyright  2006 Pearson Education Canada Inc. 12-6 Percentage of Sales Method Focuses on the Income Statement and on determining what % of current sales will be uncollectible Sum of Historical Sales of last 3 years : $2,660,000 Actual uncollectible accounts: $53,200 2% x 1,400,000=$28,000 Bad debt expense 28,000 Allowance for doubtful accounts 28,000

7. Copyright  2006 Pearson Education Canada Inc. 12-7 Aging Method  Focuses on the Balance Sheet and on determining which percentage of accounts receivable will be uncollectible  Uses aging schedule as a basis to calculate the allowance adjustment  Records adjusting entry in a way that the balance of the allowance will reflect the amount shown on the aging schedule

8. Copyright  2006 Pearson Education Canada Inc. 12-8 Aging method Allowance for doubtful accounts Bad debts expense Balance 300 Adj. 442 Adj. 442 742 Bad debts expense 442 Allowance for doubtful accounts 442

9. Copyright  2006 Pearson Education Canada Inc. 12-9 Uncollectible Accounts WRITING OFF UNCOLLECTIBLE ACCOUNTS When there is evidence that an accounts receivable will not be collected, it is written off by debiting the Allowance for Doubtful Accounts and crediting Accounts Receivable Allowance for Doubtful Accounts 1,000 Accounts Receivable 1,000

10. Copyright  2006 Pearson Education Canada Inc. 12-10 Uncollectible Accounts Recovering an Accounts Receivable previously written-off 1. The write-off entry is reversed Accounts Receivable 500 Allowance for Doubtful Accounts 500 To reverse the write-off of $500 of Ralf Austin’s account 2. A second entry recording the collection of the Accounts Receivable is made Cash 500 Accounts Receivable 500 To record the collection of $500 of Ralf Austin’s account

11. Copyright  2006 Pearson Education Canada Inc. 12-11  Current Liabilities  Long-Term Debt  Other Accounts  Commitments and Contingent Liabilities PAYABLES

12. Copyright  2006 Pearson Education Canada Inc. 12-12 Current Liabilities Debts that are payable within one year  Accounts Payable  Accrued Liabilities  Unearned Revenue  Taxes Payable  Dividends Payable  Deferred Income Taxes  Short-term Notes Payable  Current Portion of Long-Term Debt

13. Copyright  2006 Pearson Education Canada Inc. 12-13 Long-Term Debt Portion of a firm’s debt that is payable more than one year in the future  Long-Term Notes Payable  Mortgages Payable  Bonds Payable  Long-Term Lease Obligations  Deferred Income Taxes

14. Copyright  2006 Pearson Education Canada Inc. 12-14 Other Accounts Deferred Income Taxes- Timing differences in reporting depreciation and other items for tax and reporting purposes Minority Interest- Value of combined company’s equity that belongs to those investors who own a minority share in the subsidiary company

15. Copyright  2006 Pearson Education Canada Inc. 12-15 Commitments and Contingencies Headings that usually appear between the liabilities and equity sections of the balance sheet Commitments - arise when a hospitality firm obligates itself for the payment of amounts based on contractual agreements (e.g, leases, loans) Contingencies- potential future liability whose existence and amount cannot be definitely established at the present time (lawsuits, tax examinations)

16. Copyright  2006 Pearson Education Canada Inc. 12-16 CORPORATION ACCOUNTING STOCKHOLDERS’ EQUITY OR SHAREHOLDERS’ EQUITY - Owners’ Equity in a corporation  Common Stock  Preferred Stock  Treasury Stock  Retained Earnings

17. Copyright  2006 Pearson Education Canada Inc. 12-17 Common Stock and Preferred Stock Common Stock  Ownership in the corporation  Authorized Shares  Issued Shares  Outstanding Shares Preferred Stock  Preferences upon earnings  Preferences upon liquidation  Authorized Shares  Issued Shares  Outstanding Shares

18. Copyright  2006 Pearson Education Canada Inc. 12-18 Common stock Authorized shares- Number of shares that a corporation can sell or issue based on its charter. Issued shares- Number of shares sold or issued by the corporation. Outstanding shares- Number of shares owned by the shareholders.

19. Copyright  2006 Pearson Education Canada Inc. 12-19 Stock Split Objective: bring about the reduction in the market price per share in order to encourage more investors to buy shares of the company What happens? Reduces the value of common stock and issues a proportionate number of additional shares

20. Copyright  2006 Pearson Education Canada Inc. 12-20 Treasury Stock When a corporation buys back its own outstanding stock  Reduces the number of shares outstanding  Increases earnings per share  It may be used for employee stock option plans  It might be used as an investment Treasury Stock 20,000 Cash 20,000 To record purchase of 10,000 shares of treasury stock at $2 per share

21. Copyright  2006 Pearson Education Canada Inc. 12-21 3 dividend dates Declaration date- Dividends are declared by corporation’s Board of Directors. Dr. Dividends or Retained earnings Cr. Dividends Payable Date of Record No entry required. The stockholders registered on the corporation’s stock records as of this date will receive the dividend. Payment date- Dividend checks are mailed to stockholders Dr. Dividends Payable Cr. Cash

22. Copyright  2006 Pearson Education Canada Inc. 12-22 Statement of Retained Earnings Shows changes affecting retained earnings during the accounting period Additions Net income Adjustments of prior period’s earnings Subtractions Net loss Declaration of dividends Treasury stock sold below cost Adjustments of prior period’s earnings