ACTG 2010 - 2013W - Week 10 (Ch.7 - part 1)

ACTG 2010 - 2013W - Week 10 (Ch.7 - part 1) - Intro to...

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Intro. to Financial Accounting II ACTG 2010 S Winter 2013 Week 10
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Lyryx Lab Assignment #4 Was due yesterday at 11:59pm See statistics as at 4:03pm yesterday 24 students had 95/95 marks 2
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Today’s Agenda Chapter 6 – finish up with AFDA Chapter 7 – inventory (1 st half of material) Practice case – “Re-engineering” from CMD 3
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Review Bad Debts Expense 3 ways to record bad debts expense: Direct writeoff method Set up “allowance for doubtful accounts” (“AFDA”) based on: Ending A/R balance Credit sales in the year
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Review Bad Debts – Direct Writeoff Remove A/R once you know you can’t collect it Example: suppose that out of the $1M of sales this year, we find out next year that $15,000 won’t be collected How do we record this and when?
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Review Bad Debts – Direct Writeoff Record this next year! DR Bad debts expense $15K CR A/R $15K Is this a good “way” of accounting for it? Why or why not?
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Review Bad Debts – Direct Writeoff NOT a good way Sales of $1M recorded this year, expense of $15K recorded next year = no matching Better approach = set up AFDA
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Review Bad Debts – AFDA AFDA – an “estimate” of current year activity that will not be collected in future Contra-asset account (with A/R) Recorded in the current year: DR. Bad debts expense (expenses ) CR. Allowance for doubtful accounts (A/R ) Therefore, expense is matched to revenue
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Review Bad Debts – AFDA How is the amount determined? 2 ways: As a % of the ending A/R balance As a % of credit sales in the year Example: the company’s ending A/R balance is $500K and 5% is estimated to be uncollectible; history also shows that about 2% of the company’s credit sales become uncollectible
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Review AFDA - % of A/R Example: the company’s ending A/R balance is $500K and 5% is estimated to be uncollectible; the company also estimates that about 2% of its credit sales become uncollectible % of A/R method = 5% x $500K = $25K DR Bad debts expense $25K CR AFDA $25K
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Review AFDA - % of Credit Sales
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