The seller recognizes interest revenue when it adds

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The seller recognizes interest revenue when it adds financing charges. Assuming that you owe $300 at the end of the month, and JCPenney charges 1.5% per month on the balance due, the adjusting entry to record interest revenue of $4.50 ($300 H11003 1.5%) is as follows. Accounts Receivable 4.50 Interest Revenue 4.50 (To record interest on amount due) Interest revenue is often substantial for many retailers. Accounts Receivable 399 Explain how companies recognize accounts receivable. S T U D Y O B J E C T I V E 2 H E L P F U L H I N T These entries are the same as those described in Chapter 5. For sim- plicity, we have omitted inventory and cost of goods sold from this set of journal entries and from end-of-chapter material. E T H I C S N O T E In exchange for lower interest rates, some companies have eliminated the 25-day grace period before finance charges kick in. Be sure you read the fine print in any credit agreement you sign. Cash Flows no effect A OE L H11005 H11001 H11001 300 H11001 300 Rev Cash Flows no effect A OE L H11005 H11001 H11001 4.50 H11001 4.50 Rev PDF Watermark Remover DEMO : Purchase from to remove the watermark
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Valuing Accounts Receivable Once companies record receivables in the accounts, the next question is: How should they report receivables in the financial statements? Companies report accounts receivable on the balance sheet as an asset. But determining the amount to report is sometimes difficult because some receivables will become uncollectible. Each customer must satisfy the credit requirements of the seller before the credit sale is approved. Inevitably, though, some accounts receivable become un- collectible. For example, a customer may not be able to pay because of a decline in its sales revenue due to a downturn in the economy. Similarly, individuals may be laid off from their jobs or faced with unexpected hospital bills. Companies record credit losses as debits to Bad Debts Expense (or Uncollectible Accounts Expense). Such losses are a normal and necessary risk of doing business on a credit basis. Two methods are used in accounting for uncollectible accounts: (1) the direct write-off method and (2) the allowance method. The following sections explain these methods. DIRECT WRITE-OFF METHOD FOR UNCOLLECTIBLE ACCOUNTS Under the direct write-off method , when a company determines a particular account to be uncollectible, it charges the loss to Bad Debts Expense. Assume, for example, that on December 12 Warden Co. writes off as uncollectible M. E. Doran’s $200 balance.The entry is: Dec. 12 Bad Debts Expense 200 Accounts Receivable—M. E. Doran 200 (To record write-off of M. E. Doran account) Under this method, Bad Debts Expense will show only actual losses from un- collectibles.The company will report accounts receivable at its gross amount. Although this method is simple,its use can reduce the usefulness of both the in- come statement and balance sheet. Consider the following example. Assume that in 2010, Quick Buck Computer Company decided it could increase its revenues by offering computers to college students without requiring any money down and with no credit-approval process. On campuses across the country it distributed one
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