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ACIS+2115+Chapter+8+Lecture+Fall+2009

ACIS+2115+Chapter+8+Lecture+Fall+2009 - ACIS 2115 Chapter 8...

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ACIS 2115 - Chapter 8 Reporting and Interpreting Receivables, Bad Debt Expense, and Interest Revenue
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Accounts Receivable Accounts Receivable (also called Trade Receivables) Amounts owed to a business by its customers. Customers can be individuals or other businesses.
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Learning Objective 1 Describe the tradeoffs of extending credit.
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Extending credit is likely to increase sales, but not without costs: Increased wage costs to manage receivables Bad debts costs Delayed receipt of cash Businesses extend credit to generate additional sales and to meet the terms offered by competitors. Pros and Cons of Extending Credit
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Learning Objective 2 Estimate and report the effects of uncollectible accounts.
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Accounts Receivable and Bad Debts Bad debts result from credit customers who do not pay the business the amount they owe, regardless of collection efforts.
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Bad debts are likely to be discovered in periods after the credit sale. If bad debts are not reported until discovered, income is distorted in the periods of sale as well as in the period of bad debt discovery. Accounts Receivable and Bad Debts
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Revenues 10,000 $ Cost of goods sold 6,000 Bad debt expense 0 Net income 4,000 $ Year 1 (Credit Sale Occurs) Accounts Receivable and Bad Debts Assume customers purchase goods on account in Year 1. In year 2, the company discovers that a customer will not pay $1,000. Revenues 0 Cost of goods sold 0 Bad debt expense 1,000 Net income (1,000) $ Year 2 (Bad Debt discovered) If the bad debt is recorded in year 2, income for years 1 and 2 is distorted and the bad debt expense is not matched with the revenue.
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Bad Debt Expense Sales Revenue Record in same accounting period. Matching Principle The Allowance Method of Accounting for Bad Debts
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Most businesses record an estimate of the bad debt expense with an adjusting entry at the end of the accounting period. The Allowance Method of Accounting for Bad Debts
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Debit Credit Bad Debt Expense 100,000 Allowance for Doubtful Accounts 100,000 Accounts Contra asset account Record Estimated Bad Debt Expense For the year ended December 31, 2007, Hokie Corp. estimated its bad debt expense to be $100,000. Prepare the adjusting entry.
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Allowance for Doubtful Accounts Accounts Receivable Less: Allowance for Doubtful Accounts Net Accounts Receivable Amount the business expects to collect. Also called “net realizable value”. Balance Sheet Disclosure
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Microsoft Corporation Balance Sheets (In millions) June 30, 2008 June 30, 2007 (Audited) Assets Current assets: Cash and cash equivalents 10,339 $ 6,111 $ Short-term investments (including securities pledged as collateral of $2,491 and $2,356) 13,323 17,300 Total cash, cash equivalents, and short-term investments 23,662 23,411 Accounts receivable, net of allowance for doubtful accounts of $153 and $117 13,589 11,338 Inventories 985 1,127 Deferred income taxes 2,017 1,899 Other 2,989 2,393 Total current assets 43,242 40,168 Partial Balance Sheet for Microsoft Corporation
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Remove (Write Off) Specific Customer Balances When it is clear that a specific customer’s account receivable will be uncollectible, the amount should be removed from the Accounts Receivable account and charged to the Allowance for Doubtful Accounts.
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