Identify the different types of receivables s t u d y

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  • ACC 291
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Survey of Accounting
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Chapter 3 / Exercise E3-10
Survey of Accounting
Warren
Expert Verified
Identify the different types of receivables. S T U D Y O B J E C T I V E 1 E T H I C S N O T E Companies report receiv- ables from employees separately in the financial statements. The reason: Sometimes those assets are not the result of an ”arm’s- length” transaction. ACCOUNTS RECEIVABLE Three accounting issues associated with accounts receivable are: 1. Recognizing accounts receivable. 2. Valuing accounts receivable. 3. Disposing of accounts receivable. JWCL165_c08_356-395.qxd 8/4/09 7:21 PM Page 358
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Chapter 3 / Exercise E3-10
Survey of Accounting
Warren
Expert Verified
Recognizing Accounts Receivable Recognizing accounts receivable is relatively straightforward. In Chapter 5 we saw how the sale of merchandise affects accounts receivable.To review, assume that Jordache Co. on July 1, 2010, sells merchandise on account to Polo Company for $1,000 terms 2/10, n/30. On July 5, Polo returns mer- chandise worth $100 to Jordache Co. On July 11, Jordache receives payment from Polo Company for the balance due.The journal entries to record these transactions on the books of Jordache Co. are as follows. Accounts Receivable 359 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. July 1 Accounts Receivable—Polo Company 1,000 Sales 1,000 (To record sales on account) July 5 Sales Returns and Allowances 100 Accounts Receivable—Polo Company 100 (To record merchandise returned) July 11 Cash ($900 $18) 882 Sales Discounts ($900 .02) 18 Accounts Receivable—Polo Company 900 (To record collection of accounts receivable) The opportunity to receive a cash discount usually occurs when a manufacturer sells to a wholesaler or a wholesaler sells to a retailer.The selling company gives a discount in these situations either to encourage prompt payment or for competitive reasons. Retailers rarely grant cash discounts to customers. In fact, when you use a retailer’s credit card ( Sears , for example), instead of giving a dis- count, the retailer charges interest on the balance due if not paid within a specified period (usually 25–30 days). To illustrate, assume that you use your JCPenney credit card to pur- chase clothing with a sales price of $300. JC Penney will make the follow- ing entry at the date of sale. Accounts Receivable 300 Sales 300 (To record sale of merchandise) JCPenney will send you a monthly statement of this transaction and any others that have occurred during the month. If you do not pay in full within 30 days, JCPenney adds an interest (financing) charge to the balance due. Although inter- est rates vary by region and over time, a common rate for retailers is 18% per year (1.5% per month). 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 1.5%) is as follows. Accounts Receivable 4.50 Interest Revenue 4.50 (To record interest on amount due)

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