Chpt_07_1 - ACCT 201 ACCT 201 ACCT 201 C hapte r 7 Re...

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Unformatted text preview: ACCT 201 ACCT 201 ACCT 201 C hapte r 7 Re porting and Analyzing Re ivable and Inve tm nts ce s s e UAA ACCT 201 Principles of Financial Accounting Dr. Fred Barbee 1 ACCT 201 Day #1 ACCT 201 ACCT 201 Chapter 7 - Day 1 Agenda Read HW Topic LO Accounts Receivable C1, P1, P2 C2, P3, P4 290-301 QS2, 3; E2, 3, 4; P1A QS4, 5; E6 Notes Receivable (Introduction) 301-304 HW #5: P6-4A Due Today ACCT 201 ACCT 201 ACCT 201 AccountsRe ivable. . . ce Accounts Re ivableare. . . ce S hort-te , liquid asse that arisefromcre sale to rm ts dit s custom rs. e Areusually conve d to cash within 10 to 60 days. rte 4 AccountsRe ivablefor S le d ce e cte C panie om s $11.4 million Exh. 7.1 $104.9 million $3,864 million $46.8 million As a percentage of total assets ACCT 201 ACCT 201 ACCT 201 AccountsRe ivable. . . ce The arethre prim proble s associate with re e ary m d Re ivable . . . ce s Re cognition Valuation Disposition 6 I ssue ACCT 201 ACCT 201 ACCT 201 1 Recognition S son C dit ale re On July 16, TechCom sells $950 of merchandise on credit to CompStore. Now, let's post the Account Receivable to CompStore's individual account in the subsidiary ledger. S son C dit ale re Now, let's post to the General Ledger Accounts Receivable control account S son C dit ale re S son C dit ale re On July 16, TechCom receives $720 from RDA Electronics for a prior credit sale. Now, let's post the entry to RDA's individual account in the subsidiary ledger. S son C dit ale re Now, let's post to the General Ledger Accounts Receivable control account S son C dit ale re S duleof AccountsRe ivable che ce Account Amount RDA Electronics $ 280 CompStore 2,950 Total $ 3,230 A Schedule of Accounts Receivable lists the balances of individual customers' accounts receivable. ACCT 201 ACCT 201 ACCT 201 C dit C S s re ard ale Advantages of allowing customers to use credit cards: Customers' credit is evaluated by the credit card issuer. The risks of extending credit are transferred to the credit card issuer. Sales increase by providing purchase options to the customer. Cash collections are speeded up. 15 C dit C S s re ard ale With bank credit cards, the seller deposits the credit card sales receipt in the bank just like it deposits a customer's check. The bank increases the balance in the company's checking account. The company usually pays a fee of 2% to 5% for the service. ACCT 201 ACCT 201 ACCT 201 C dit C S s re ard ale Te omhas a bank cre card saleof $100 chC dit to a custom r. Thebank charge a proce e s ssing fe e of 4% Thecash is re ive im e ly. . ce d m diate 17 ACCT 201 ACCT 201 ACCT 201 C dit C S s re ard ale Pre parethejournal e to re thesale ntry cord . 18 I ssue ACCT 201 ACCT 201 ACCT 201 2 Valuation ACCT 201 ACCT 201 ACCT 201 Uncolle ctibleAccounts Uncolle ctibleaccounts havee cts on two ffe financial state e . . . m nts Balanceshe t, and e Incom state e e m nt 20 ACCT 201 ACCT 201 ACCT 201 Let's . . . At the Income Statement ACCT 201 ACCT 201 ACCT 201 Incom S m nt e tate e Obje : ctive De a fair m asure e of ne incom rive e m nt t e Me thod: An ade quateam ount for bad de e nseshould be bts xpe m atche against (de d ducte from thesale re nue d ) s ve . 22 ACCT 201 ACCT 201 ACCT 201 Let's . . . At the Balance Sheet ACCT 201 ACCT 201 ACCT 201 BalanceS e he t Obje : ctive Prope valueaccounts re ivable rly ce Me thod: Adjust Accounts Re ivableto re ct the ce fle am ounts e cte to becolle d. xpe d cte 24 ACCT 201 ACCT 201 ACCT 201 Accounting For Uncolle ctibleAccounts The aretwo m thods of accounting for re e Uncolle ctibleAccounts . . . Thedire write m thod; and ct -off e Theallowancem thod. e 25 Me thod ACCT 201 ACCT 201 ACCT 201 1 Direct Write-Off Direct Write-Off Method On January 23, TechCom determines it cannot collect $520 from Jack Kent, a credit customer. ACCT 201 ACCT 201 ACCT 201 Direct Write-Off Method If Jack Kent later pays the $520, the previous entry is simply reversed and the cash collection is recorded. ACCT 201 ACCT 201 ACCT 201 Me thod ACCT 201 ACCT 201 ACCT 201 2 Allowance Method Allowance Method At the end of each period, estimate total bad debts expected to be realized from that period's sales. This is a contra-asset account. ACCT 201 ACCT 201 ACCT 201 ACCT 201 ACCT 201 ACCT 201 Estim ating Bad De Expe bts nse Pe nt of S s Me rce ale thod AccountsRe ivableMe ce thods Pe nt of Accounts Re ivable rce ce Aging of Accounts Re ivableMe ce thod 31 ACCT 201 ACCT 201 ACCT 201 An Overview Using TAccounts Based on: Sales Allowance for Doubtful Accounts Estimate the amount of uncollectible accounts. xxx or xxx Accts Rec xxx Bad Debts Expense xxx Then Credit the Allowance account And Debit the Expense Account Me thod ACCT 201 ACCT 201 ACCT 201 1 Percent of Sales Method ACCT 201 ACCT 201 ACCT 201 Pe nt of S sMe rce ale thod Bad de e nseiscom d as follows: bts xpe pute 35 ACCT 201 ACCT 201 ACCT 201 Pe nt of S sMe rce ale thod MusicLand has cre sale of $400,000 in 2002. dit s MusicLand e ate 6%of cre sale are stim s dit s uncolle ctible . What is Bad De Expe for 2002? bts nse 36 Allowance Method $400,000 0.06% $2,400 X = MusicLand computes estimated Bad Debts Expense of $2,400 ACCT 201 ACCT 201 ACCT 201 ACCT 201 ACCT 201 ACCT 201 Me thod 2 Percent of Accounts Receivable Method ACCT 201 ACCT 201 ACCT 201 Pe nt of AccountsRe ivableMe rce ce thod C putethee ateof theAllowancefor om stim Doubtful Accounts. Ye ar-End Accounts Re ivablex Bad ce De % bt 39 ACCT 201 ACCT 201 ACCT 201 Pe nt of AccountsRe ivableMe rce ce thod Bad De Expe is com d as: bts nse pute 40 ACCT 201 ACCT 201 ACCT 201 Pe nt of AccountsRe ivable rce ce MusicLand has $50,000 in Accounts Re ivable ce and a $200 cre balancein Allowancefor dit Doubtful Accounts on De m r 31, 2002. ce be Past e rie sugge that 5%of re ivable are xpe nce sts ce s uncolle ctible . What is MusicLand's Bad De Expe for 2002 bt nse 41 % of Accounts Receivable Desired balance in Allowance for Doubtful Accounts. X = $50,000 0.05% $2,500 ACCT 201 ACCT 201 ACCT 201 Aging of AccountsRe ivableMe ce thod Compute a separate allowance for each age grouping. Each age grouping has a different likelihood of being uncollectible. Year-end Accounts Receivable is broken down into age classifications. 43 Aging of Accounts Receivable MUSICLAND Schedule of Accounts Receivable by Age 31-Dec-02 Accounts Estimated Receivable Percent Uncollectible Days Past Due Balance Uncollectible Amount Not Yet Due 1 - 30 Days Past Due 31 - 60 Days Past Due 61 - 90 Days Past Due Over 90 Days Past Due $ $ 37,000 6,500 3,500 1,900 1,000 49,900 2% $ 5% 10% 25% 40% $ 740 325 350 475 400 2,290 Aging of Accounts Receivable MusicLand's unadjusted balance in the allowance account is $200. Per the previous computation, the desired balance is $2,290. I ssue ACCT 201 ACCT 201 ACCT 201 3 Disposition Writing Off a Bad De bt With the allowance method, when an account is determined to be uncollectible, the debit is to Allowance for Doubtful Accounts. TechCom determines that Jack Kent's $520 account is uncollectible. Re ry of a Bad De cove bt Subsequent collections require that the original write-off entry be reversed before the cash collection is recorded. Exh. 7.13 % of Sales Emphasis on Matching Sales Bad Debts Exp. % of Receivables Emphasis on Realizable Value Accts. Rec. All. for Doubtful Accts. Aging of Receivables Emphasis on Realizable Value Accts. Rec. All. for Doubtful Accts. Income Statement Focus Balance Sheet Focus Balance Sheet Focus ACCT 201 ACCT 201 Notes Receivable ACCT 201 ACCT 201 ACCT 201 ACCT 201 Note Re ivable s ce A note is a written promise to pay a specific amount at a specific future date. 51 Notes Receivable $1,000.00 Term Payee July 10, 2002 Exh. 7.14 Ninety days after date I promise to pay to Dollars the order of TechCom Company, Los Angeles, CA One thousand and no/100 --------------------------------Payable at First National Bank of Los Angeles, CA Maker Value received with interest at per annum 12% No. Due Oct. 8, 2002 42 For TechCom. Julia Browne ACCT 201 ACCT 201 ACCT 201 Notes Receivable $1,000.00 Ninety days July 10, 2002 Exh. 7.14 after date I promise to pay to Dollars Principal the order of TechCom Company, Los Angeles, CA One thousand and no/100 --------------------------------Payable at First National Bank of Los Angeles, CA Interest Rate Value received with interest at per annum 12% No. Due Oct. 8, 2002 42 Due Date Julia Browne For TechCom. ACCT 201 ACCT 201 ACCT 201 Interest Computation Exh. 7.16 Even for maturities less than 1 year, the rate is annualized. If the note is expressed in days, base a year on 360 days. ACCT 201 ACCT 201 ACCT 201 ACCT 201 ACCT 201 ACCT 201 Inte st C putation re om On March 1, 2002, S ithson, I nc. purchase a m d copie for $9,000 fromMachine Inc. S ithson r s, m gaveMachine Inc. a 12%noteduein 90 days in s, paym nt for thecopie e r. How m inte st will bepaid to Machine I nc. uch re s, in 90 days? 55 Interest Computation Exh. 7.16 $9,000 X 12% X 90/360 = $270 ACCT 201 ACCT 201 ACCT 201 ACCT 201 ACCT 201 ACCT 201 End-of-Pe Adjustm nts riod e Whe a notere ivableisoutstanding at the n ce e of an accounting pe nd riod, thecom pany m pre an adjusting e to accrue ust pare ntry inte st incom . re e 57 ACCT 201 ACCT 201 ACCT 201 C rting Re ivable to C Be onve ce s ash fore Maturity S ll theaccounts re ivableto a financing e ce com pany or bank (calle factoring). d Borrow m y and ple there ivable as one dge ce s se curity for theloan (calle ple d dging). 58 ACCT 201 ACCT 201 ACCT 201 Full-DisclosurePrinciple Re quire financial state e and note to re s m nts s port all re vant inform le ation about theope rations and financial position of a com pany. Pote ntial tax asse e ssm nts Guarante of de of othe e bts rs Outstanding lawsuits 59 ...
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