Chapter_7_Cash_And_Receivables_Course_Notes

Chapter_7_Cash_And_Receivables_Course_Notes - CHAPTER 7...

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CHAPTER 7 – RECEIVABLES 1. Recognition of accounts receivable 2. Valuation of accounts receivable 3. Recognition of notes receivable 4. Valuation of notes receivable 5. Disposition of accounts and notes receivable 6. Presentation and analysis Claims held against customers and others for money, goods, or services. Accounts Receivable – Oral promises of the purchaser to pay for goods and   services sold. Notes Receivable – Written promises to pay a sum of money on specified   future date. Non-trade Receivables – Examples: i. Advances to officers and employees ii. Advances to Subsidiaries iii. Deposits to cover potential damages or losses iv. Deposits as a guarantee of performance or payment v. Dividends and interest receivable 1. Recognition of Accounts Receivable a. Trade Discounts vs. Cash Discounts Trade Discounts Reductions from the list price Not recognized in the accounting records Customers are billed net of discounts
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CHAPTER 7 – RECEIVABLES Cash Discounts Inducements for prompt payment Gross Method vs. Net Method Sales Discounts Example #1 Webster sells $40,000 worth of merchandise on 9/18/2010 with terms 3/10,   n/30.  The cost of the merchandise to Webster is $32,000.  Webster receives   payment for $25,000 worth of the merchandise on 9/23/2010 and the balance   owed on 10/15/2010.  Webster’s fiscal year-end is September 30.  Record all   journal entries using (a) the gross method and (b) the net method.
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CHAPTER 7 – RECEIVABLES b. Non-recognition of Interest Element A company should measure receivables in terms of their present value. In practice, companies ignore interest revenue related to accounts   receivable because the amount of the discount is  not usually material . 2. Valuation of Accounts Receivable Reporting Receivables Classification Valuation (net realizable value) Uncollectible Accounts Receivable Sales on account raise the possibility of accounts not being collected  Methods of Accounting for Uncollectible Accounts Direct Write-off Method – theoretically undesirable: o No matching o Receivable not stated at net realizable value Allowance Method – write-offs are estimated: o Percentage of Sales – emphasizes matching (Bad debt Expense is   matched to Sales) – Income Statement Approach o Percentage of Receivable – emphasizes net realizable value   (Receivables less Allowance for Doubtful Accounts) – Balance Sheet   Approach Accounts Receivable Example AK C, Inc. provides the following data as of December 31, 2010: Total net sales $ 500,000
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CHAPTER 7 – RECEIVABLES Credit sales    350,000 A/R at 12/31/2010      75,000* ADA at 12/31/2010        1,500* (debit) *Balance in account before adjustment Prepare the adjusting journal entry under the following scenarios.  Give the NRV
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