Wk_6_-_Ch_9_&_10_&_App_E[1] - CHAPTER 9...

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Unformatted text preview: CHAPTER 9 ACCOUNTING FOR RECEIVABLES STUDY OBJECTIVES After studying this chapter, you should understand: Types of receivables Recognition of A/R Valuation of A/R Disposition Valuation of A/R of N/R Maturity & Interest Disposition of N/ of N/R R Recognition F/S Presentation & Analysis of N/R 1 STUDY OBJECTIVE 1 TYPES OF RECEIVABLES Receivables are amounts due from individuals and other companies. There are three major classes of receivables: A/R Owed by customers on account, from credit sales, due in 30-60 days. N/R Other Claims supported by a Loans to company formal credit instrument. officers, employee Due in 60-90 days, with advances, refundable interest. income taxes. 2 PRIMARY ACCOUNTING ISSUES Recognition Valuation Disposition 3 STUDY OBJECTIVE 2 RECOGNIZING A/R A classic general journal sequence for credit sales. Date July 1 Sales (sales on account) Description A/R—Polo Company Debit 1000 Credit 1000 July 5 Sales returns & allowances A/R—Polo Company (merchandise returned) 100 100 July 11 Cash Sales Discounts A/R—Polo Company (collection of A/R) 882 18 900 4 STUDY OBJECTIVE 3 VALUATION OF A/R • Receivables are current assets on the balance sheet • They are stated at net realizable value, the amount expected to be received in cash. • Uncollectible A/R are accounted for using two methods Direct Write-Off Method Allowance Method 5 DIRECT WRITE-OFF METHOD • No entries are made for bad debts until an account is determined to be uncollectible at which time the loss is charged to bad debts expense. • Bad debt expense shows only actual losses. • Not acceptable for financial reporting purposes unless losses are insignificant. Operating expense on the income statement 6 Bad debts expense DIRECT WRITE-OFF METHOD General Journal Date Account Titles Dec. 12 Bad Debts Expense Accounts Receivable – M.E. Doran Debit 200 Credit 200 Warden Co. writes off M. E. Doran’s $200 balance as uncollectible on December 12. When this method is used, Bad Debts Expense will show only actual losses from uncollectibles. 7 ALLOWANCE METHOD • The allowance method is required when bad debts are material. • Uncollectible accounts are estimated • The expense is matched against sales in the same accounting period. Uncollectible accounts expense = bad debts expense 8 ALLOWANCE METHOD RECORDING ESTIMATED UNCOLLECTIBLES General Journal Date Dec. 31 Account Titles Bad Debts Expense Allowance for Doubtful Accounts Debit 12,000 Credit 12,000 Estimated uncollectibles are debited to Bad Debts Expense and credited to Allowance for Doubtful Accounts at the end of each period. 9 ALLOWANCE METHOD RECORDING A WRITE-OFF General Journal Date Mar. 1 Account Titles Allowance for Doubtful Accounts Accounts Receivable - R. A. Ware Debit 500 Credit 500 Actual uncollectibles are debited to Allowance for Doubtful Accounts and credited to Accounts Receivable at the time the specific account is written off. 10 ALLOWANCE METHOD RECORDING A RECOVERY To recover an account that has been written off: 1 reverse the write-off entry. General Journal Date Account Titles Debit Credit July 1 Accounts Receivable – R. A. Ware Allowance for Doubtful Accounts 2 record the collection in the usual manner. General Journal 500 500 Date Account Titles Debit Credit July 1 Cash Accounts Receivable 500 500 11 ALLOWANCE METHOD BASIS FOR ESTIMATING UNCOLLECTIBLES Two methods of estimating uncollectible accounts comply with GAAP. Percentage of Sales Percentage of Receivables Emphasis on Income Statement Relationships Emphasis on Balance Sheet Relationships Uses aging schedule 12 ALLOWANCE METHOD PERECENTAGE OF SALES BASIS General Journal Date Dec. 1 Account Titles Bad Debts Expense Allowance for Doubtful Accounts Debit 8,000 Credit 8,000 If net credit sales for the year are $800,000, the estimated bad debts expense is $8,000 (1% X $800,000). 13 ALLOWANCE METHOD PERECENTAGE OF RECEIVABLES BASIS • Bad debt expense based on % of the ending balance in A/R. • The adjusting entry is the difference between the required balance and the existing balance in the allowance account. • Estimates NRV of receivables. • Aging Schedules 14 Aging Schedule (Used in Computing Estimated Bad Debts) Total estimated bad debts for Dart Company ($2,228) represent the amount of existing customer claims expected to become uncollectible in the future. This amount represents the required balance in Allowance for Doubtful Accounts at the balance sheet date. The amount of the bad debt adjusting entry is the difference between the required balance and the existing balance in the 15 allowance account. ALLOWANCE METHOD PERECENTAGE OF RECEIVABLES BASIS If the trial balance shows Allowance for Doubtful Accounts (which should have a balance of $2,228 based on our calculations) with a credit balance of $528, an adjusting entry for $,1,700 ($2,228 - $528) is necessary. General Journal Date Dec. 1 Account Titles Bad Debts Expense Allowance for Doubtful Accounts Debit 1,700 Credit 1,700 16 17 REVIEW QUESTION Which of the following approaches for bad debts is referred to as a balance sheet method? A. Percentage of receivables method B. Direct write-off method C. Percentage of sales method D. Both a and b Answer: (A) Percentage of receivables method. 18 STUDY OBJECTIVE 4 DISPOSING OF A/R Two ways to dispose of A/R Factoring Credit card sales 19 DISPOSING OF A/R FACTORING (SALE) OF RECEIVABLES A factor is a finance company that buys A/R from companies, then collects payments directly from the customers. General Journal Date Account Titles Debit Credit Cash Service Charge Expense (2% x $600,000) Accounts Receivable 588,000 12,000 600,000 Henderson Furniture factors $600,000 of receivables to Federal Factors, Inc. Federal Factors assesses a 2% service charge. 20 CREDIT CARD SALES Three parties are involved with credit card sales: Credit card issuer Retailer Customer The retailer pays the credit card issuer a fee of 2-6% of the invoice price. Sales from Visa, MasterCard, and Discover are treated differently than American Express & Diners Club 21 VISA, MASTERCARD, & DISCOVER • Considered cash sales by the retailer. • Upon receipt of credit card sales slips from a retailer, the bank adds the amount to the seller’s bank balance. General Journal Date Account Titles Debit Credit Cash Service Charge Expense Sales 970 30 1,000 Barbara Hardy purchases CD’s for her restaurant from Ty Parker Music Co. for $1,000 using her VISA First Bank Card. First Bank charges a 3% fee. 22 AMERICAN EXPRESS & DINERS CLUB • • Considered credit sales by the retailer. Conversion into cash does not occur until the companies remits the net amount to the seller. General Journal Date Account Titles Accounts Receivable – American Express Service Charge Expense Sales Debit 285 15 Credit 300 23 PROMISSORY NOTES • A promissory note is a written promise to pay a specified amount of money on demand or at a definite time. The party making the promise is the maker. The party to receive payment is the payee. • • 24 STUDY OBJECTIVE 5 MATURITY & INTEREST – NOTES RECEIVABLE • When the life of the note is expressed in terms of days, you need to count the days. • In counting, the date of issue is omitted but the due date is included. • Example: The maturity date of a 60-day note dated July 17 is: Term of note July (31-17) August Maturity date: 60 days -14 days -31days September 15 25 COMPUTING INTEREST The formula for computing interest on an interest-bearing note is: Face Value of Note X X Time in Terms of One Year = Interest 26 COMPUTATION OF INTEREST $ 730 $1,000 $2,000 X X X 18% 15% 12% X X X 120/365 6/12 1/1 = = = $ 43.20 $ 75.00 $240.00 The interest rate specified is the annual rate. 27 REVIEW QUESTION Compute the missing amount below: Face Value 15,000 Annual Interest Rate 9% Time 120 days Total Interest ? I=PxRxT (face value = principal) 15,000 x .09 x 120/365 I = $443.84 28 STUDY OBJECTIVE 6 RECOGNIZING NOTES RECEIVABLE Notes receivable are recorded at FACE VALUE General Journal Date May 1 Account Titles Notes Receivable Accounts Receivable – Brent Company Debit 1,000 1,000 Credit Wilma Company receives a $1,000, 2-month, 12% promissory note from Brent Company to settle an open account. 29 STUDY OBJECTIVE 7 VALUATION OF NOTES RECEIVABLE • N/R are recorded at face value. • Allowance for Doubtful Accounts used to record estimated uncollectible accounts. • N/R reported on the balance sheet at net realizable value. Gross N/R – Allowance = Net Realizable Value 30 STUDY OBJECTIVE 8 DISPOSING OF NOTES RECEIVABLE HONORED NOTE A note is honored when it is paid in full at its maturity date. For an interest-bearing note, the maturity amount is the face value plus interest. Date Nov 1 Cash Notes Receivable Interest Revenue (collection of Higley, Inc. note) Betty Co. lends Higley Inc. $10,000 on June 1, accepting a 5-month, 9% interest-bearing note. Betty collects the maturity value of the note from Higley on Nov 1. Account Titles Debit 10,375 10,000 375 Credit 31 ACCRUING INTEREST -HONORED NOTE RECEIVABLE Date Sept 30 Account Titles Interest Receivable ($10,000 x 9% x 4/12) Interest Revenue (accrue 4 month’s interest on Higley, Inc. note) Debit 300 300 Credit If Betty Co. prepares financial statements on September 30, interest for 4 months, would be accrued (Jun, Jul, Aug, Sep). Interest receivable is a current asset 32 ACCRUING INTEREST -HONORED NOTE RECEIVABLE Date Nov 1 Cash Notes Receivable Interest Receivable Interest Revenue (collection of note at maturity) Account Titles Debit 10,375 10,000 300 75 Credit When interest has been accrued, it is necessary to credit Interest Receivable at maturity. 33 DISHONOR OF NOTE RECEIVABLE Date Nov 1 Account Titles A/R—Higley, Inc. Notes Receivable Interest Revenue (record dishonor of Higley note) A dishonored note is a note that is not paid in full at maturity. Since the payee still has a claim against the maker of the note, the balance in Notes Receivable is usually transferred to Accounts Receivable. Debit 10,375 10,000 375 Credit NOTE: This scenario assumes the note will eventually be collected. 34 DISHONOR OF NOTE RECEIVABLE Date Nov 1 Account Titles Allowance for doubtful accounts Notes Receivable (record dishonor of Higley note) If there is no hope of collection, The face value eliminated, and the allowance is debited. Also, no interest would be accrued. Debit 10,000 10,000 Credit 35 36 Chapter 10 Plant Assets 37 CHAPTER 10 PLANT ASSETS STUDY OBJECTIVES After studying this chapter, you should understand: The cost of plant assets The concept of depreciation Depreciation methods Revising periodic Depletion of depreciation natural resources Expenditures during Intangible useful life assets Disposal of Reporting & analysis plant assets 38 STUDY OBJECTIVE 1 THE COST OF PLANT ASSETS • Plant assets are recorded at cost (cost principle). • Cost includes all expenditures necessary to acquire the asset and make it ready for use. • An asset’s cost includes purchase price, freight costs, and installation costs. Plant asset categories: Land Land improvements Buildings Equipment 39 COST OF LAND Costs debited to land account Purchase price Closing costs, broker commissions, accrued taxes, assumed liens, etc. Other costs necessary to make land ready for use. Land Cash price of property Net removal cost of warehouse Attorney’s fee Real estate broker’s commission Cost of land $ 100,000 6,000 1,000 8,000 $ 115,000 40 COST OF LAND IMPROVEMENTS Land improvements are structural additions made to land, such as: Lighting 1 parking lots, 2 fencing, 3 lighting 4 sprinklers, etc. Parking Lot 41 COST OF BUILDINGS The cost of a building depends on whether it is purchased or constructed. Purchased Purchase price Closing costs Brokers commissions Liens assumed Constructed Contract price Architects fees Permits & excavation Interest 42 COST OF EQUIPMENT Purchase price Sales tax Freight charges Transit insurance Assembly Installation Testing Other ongoing expenses are expensed as incurred 43 COST OF MACHINERY & JOURNAL ENTRY Entry to record the cost of machinery & related expenditures: Factory Machinery Cash 54,500 54,500 44 COST OF TRUCK & JOURNAL ENTRY Delivery Truck Cash price $ 22,000 Sales taxes 1,320 Painting and lettering 500 Cost of delivery truck $ 23,820 The company also paid an $80 license fee, which is expensed. Account Titles and Explanation Delivery Truck License Expense Prepaid Insurance Cash (To record purchase of delivery truck and related expenditures) Debit 23,820 80 1600 25,500 45 Credit REVIEW QUESTION COST OF EQUIPMENT Erin Danielle Co. purchased equipment and incurred these costs: 1. Cash price $24,000 2. Sales taxes 1,200 3. Insurance during transit 200 4. Installation and testing 400 What amount should be recorded as the cost of this equipment? Answer $25,800 46 STUDY OBJECTIVE 2 THE CONCEPT OF DEPRECIATION The allocation of an asset’s cost to expense over its useful life. Matches expenses with revenues. Does not result in an accumulation of cash to replace the asset. Land is not depreciated. Factors affecting depreciation Cost Salvage value Useful life 47 STUDY OBJECTIVE 3 DEPRECIATION METHODS Let’s use the data below in the following examples. The truck was purchased on January 1, 2006. 48 STRAIGHT-LINE METHOD • Depreciation is the same for each year of the asset’s useful life. • It is measured solely by the passage of time. • Cost of asset - salvage value = depreciable cost 49 STRAIGHT-LINE METHOD The formula for computing annual depreciation expense is: Depreciable Cost / Useful Life (in years) = Depreciation Expense Cost Salvage Value Depreciable Cost $13,000 Depreciable Cost - $1,000 Useful Life (in Years) = $12,000 Annual Depreciation Expense $12,000 ÷ 5 = $2,400 50 UNITS OF ACTIVITY • Useful life is expressed in terms of the total units of production expected. • Total activity is a rough estimate. • If productivity varies significantly from one period to another, this method is best at matching of expenses with revenues. 51 UNITS OF ACTIVITY To use the units-of-activity method, apply the formula below: Depreciable Cost Total Units of Activity Depreciable Cost per Unit $12,000 Depreciable Cost per Unit ÷ 100,000 miles = $0.12 Units of Activity during the Year Annual Depreciation Expense $0.12 x 15,000 miles = $1,800 52 DECLINING BALANCE Produces a decreasing annual depreciation expense over the asset’s useful life. Constant depreciation rate applied to a declining book value. Salvage value ignored in computing depreciation expense. Higher depreciation in early years is matched with higher benefits received in these years. Book Value Beg of Year x DB Rate = Annual Depreciation Expense 53 DECLINING BALANCE Formula for the double declining-balance method. DDB rate is 2X the straight-line rate. DB Rate Annual Depreciation Expense Book Value $13,000 x 40% = $5,200 54 STUDY OBJECTIVE 4 REVISING PERIODIC DEPRECIATION This is a change in accounting estimate. No correction of previously recorded depreciation expense. Depreciation expense for current and future is revised. Remaining depreciable cost New annual Depreciation expense 55 Remaining Useful life = REVISING PERIODIC DEPRECIATION On 1/1/06, Barb’s Florists started depreciating a truck that cost $13,000 using a five-year straight line method. On 1/1/09, they decide to extend the useful life of the truck by one year. After three years of depreciation the book value is $5,800 ($13,000 - $7,200). The new annual depreciation is $1,600, calculated as follows: Book value, 1/1/09 Less: Salvage value Depreciable cost Remaining useful life Revised annual depreciation ($4,800 ÷ 3) $ 5,800 1,000 $ 4,800 3 years (2009-2011) $ 1,600 56 STUDY OBJECTIVE 5 EXPENDITURES DURING USEFUL LIFE REVENUE EXPENDITURES Ordinary repairs and maintenance Immaterial in amount No effect on useful life of asset Expensed immediately CAPITAL EXPENDITURES Additions and Improvements to assets Material in amount Extend asset’s useful life 57 STUDY OBJECTIVE 6 PLANT ASSET DISPOSALS Asset Retirements Fully depreciated—no gain or loss Not fully depreciated—loss on retirement recorded Asset Sales Proceeds - Book Value = Gain or loss 58 GAIN ON DISPOSAL On July 1, 2006, Wright Company sells office furniture for $16,000 cash. Original cost was $60,000. Accumulated depreciation 12-31-05 is $41,000. Depreciation for the first 6 months of 2006 is $8,000. STEP 1 Record depreciation expense up to date of sale Depreciation Expense Accumulated Depreciation 8,000 8,00059 GAIN ON DISPOSAL STEP 2 Compute gain on disposal STEP 3 Record entry Cash Accumulated Depr-Office Furniture Office Furniture Gain on Disposal 16,000 49,000 60,000 5,000 60 LOSS ON DISPOSAL Assume Wright sells the office furniture for $9,000. The entry to record the sale and loss is: Cash Accumulated Depr-Office Furniture Loss on Disposal Office Furniture 9,000 49,000 2,000 60,000 61 STUDY OBJECTIVE 7 NATURAL RESOURCES • Standing timber and underground deposits of oil, gas, and minerals. • Distinguishing characteristics: 1 They are physically extracted in operations. 2 They are replaceable only by an act of nature. 62 DEPLETION Allocation of the cost of natural resources to expense in a rational and systematic manner over the resource’s useful life. Depletion expense is a function of units extracted during the period. Very similar to units of activity method 63 DEPLETION FORMULA Total Cost minus Salvage Value Total Estimated Units Depletion Cost per Unit Depletion Cost per Unit Number of Units Extracted and Sold Annual Depletion Expense Very similar to units of activity method 64 COMPUTING AND RECORDING DEPLETION The Lane Coal Company invests $5 million in a mine estimated to have 10 million tons of coal and no salvage value. In the first year, 800,000 tons of coal are extracted and sold. $5,000,000 ÷ 10,000,000 = $.50 depletion cost per ton $.50 X 800,000 = $400,000 depletion expense Depletion Expense 400,000 400,000 65 Accumulated Depletion FINANCIAL STATEMENT PRESENTATION Accumulated depletion is a CONTRA ASSET Similar to accumulated depreciation. Lane Coal Company Balance Sheet (partial) Coal mine $5,000,000 Less: Accumulated depletion 400,000 $4,600,000 66 STUDY OBJECTIVE 8 INTANGIBLE ASSETS • Rights, privileges, and competitive advantages that result from the ownership of long lived assets that do not possess physical substance. • Intangibles may arise from government grants, acquisition of another business, and private monopolistic arrangements. 67 ACCOUNTING FOR INTANGIBLE ASSETS TYPES OF INTANGIBLES Patents Copyrights Trademarks Franchises Goodwill 68 PATENTS • Exclusive right to manufacture, sell, or control an invention for 20 years from the date of grant. • Initial cost is the cash or cash equivalent price paid. • Legal costs incurred in successfully defending a patent are added to patent account and amortized. • Amortization period is shorter of legal/useful life. 69 REVIEW QUESTION PATENTS National Labs purchases a patent at a cost of $60,000. If the useful life of the patent is 8 years, What is the annual amortization expense? $60,000 / 8 = $7,500 Patent Expense Patents 7,500 7,500 70 COPYRIGHTS Exclusive right to reproduce & sell and artistic or Published work Good for life of creator + 70 years. 71 TRADEMARKS & TRADENAMES • Word, phrase, jingle, or symbol that ID’s a particular enterprise or product. • If purchased, the cost is the purchase price. • If developed by a company, cost includes attorney’s fees, registration fees, design costs and successful legal defense fees. 72 FRANCHISES & LICENSES A contractual agreement whereby a FRANCHISOR grants a FRANCHISE the right to sell a product, provide a service, or use certain trademarks or tradenames in a certain geographical area. 73 GOODWILL • Excess of cost over the fair market value of the net assets acquired. • Not amortized. • Periodically reviewed for value impairment. 74 R&D COSTS • Expenditures incurred to develop new products and processes. • These costs are not intangible costs, but are usually recorded as an expense when incurred. 75 STUDY OBJECTIVE 9 PRESENTATION & ANALYSIS OWENS-ILLINOIS, INC. Balance Sheet - Partial (In millions of dollars) Property, plant, and equipment Timberlands, at cost, less accumulated depletion $ Buildings and equipment, at cost $ 2,207.1 Less: Accumulated depreciation 1,229.0 Total property, plant, and equipment Intangibles Patents Total 95.4 978.1 $ 1,073.5 410.0 $ 1,483.5 76 77 Subsidiary Ledgers & Special Journals 78 79 Special Journals 80 Each day the transactions are posted to the subsidiary ledgers. Posting to the General Ledger may be made on a monthly basis. Placing a check mark in the reference column indicates that posting to the subsidiary ledger account 81 has been accomplished. 82 May 1 7 10 12 17 22 Stockholders invest $5,000 in the business. Cash sales of merchandise total $1,900 (cost, $1,240). A check for $10,388 is received from Abbot Sisters in payment of invoice No. 101 for $10,600 less a 2% discount. Cash sales of merchandise total $2,600 (cost, $1,690). A check for $11,123 is received from Babson Co. in payment of invoice No. 102 for $11,350 less a 2% discount. Cash is received by signing a note for $6,000. 83 84 85 ...
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This note was uploaded on 02/19/2011 for the course ACC 363 taught by Professor Rossi during the Fall '08 term at University of Phoenix.

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