Act 211,Chapter 5

Views:
 
Category: Entertainment
     
 

Presentation Description

No description available.

Comments

Presentation Transcript

Chapter 05 :

Chapter 05 Receivables and Sales McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Part A :

Part A Recognition of Accounts Receivable 5- 2

Recording of Credit Sales:

Recording of Credit Sales Link’s Dental charges $500 for teeth whitening. Dee Kay decides to take advantage of the service, has her teeth whitened on March 1, but doesn’t pay cash at the time of service. Dee promises to pay the $500 whitening fee to Link by March 31. Link’s Dental makes the following entry at the time of the whitening. 5- 3

Types of Receivables:

Amounts due from individuals and other companies that are expected to be collected in cash. Amounts owed to us by customers that result from the sale of goods and services. Accounts Receivable Types of Receivables SO 1 Identify the different types of receivables. Claims for which formal instruments of credit are issued as proof of debt . “Nontrade” (interest, loans to officers, advances to employees, and income taxes refundable). Notes Receivable Other Receivables

Financial Statement Presentation:

Financial Statement Presentation SO 6 Explain the statement presentation of receivables. Illustration 8-12 Balance sheet presentation of receivables

Credit Terms and Discounts:

Credit terms may permit buyer to claim a cash discount for prompt payment. Advantages: Purchaser saves money. Seller shortens the operating cycle. Purchase and Sales Discounts Credit Terms and Discounts Example: Credit terms of 2/10, n/30, is read “two-ten, net thirty.” 2% cash discount if payment is made within 10 days. Otherwise, net amount due within 30 days. SO 2 Explain the recording of purchases under a perpetual inventory system.

Credit Terms and Discounts:

Purchase and Sales Discounts - Terms Credit Terms and Discounts 2% discount if paid within 10 days, otherwise net amount due within 30 days. 1% discount if paid within first 10 days of next month. 2/10, n/30 1/10 EOM Net amount due within the first 10 days of the next month. n/10 EOM SO 2 Explain the recording of purchases under a perpetual inventory system.

Trade Discounts:

Trade Discounts Represent a reduction in the listed price of a product or service. Companies don’t recognize trade discounts directly when recording a transaction. Instead, they recognize trade discounts indirectly by recording the sale at the discounted price. Let’s go back to Link’s Dental, which typically charges $500 for teeth whitening. Dr. Link offers a 20% discount on teeth whitening to any of his regular patients. 5- 8

First scenario, Dr. Link receives Dee’s payment on March 10th, which is within the 10-day discount period:

First scenario, Dr. Link receives Dee’s payment on March 10th, which is within the 10-day discount period 5- 9

First scenario, assume Dee pays on March 10th, which is within the 10-day discount period:

First scenario, assume Dee pays on March 10th, which is within the 10-day discount period 5- 10

Second scenario, assume that Dee waits until March 31 to pay, which is not within the 10-day discount period:

Second scenario, assume that Dee waits until March 31 to pay, which is not within the 10-day discount period Link’s Dental records the following entry at the time he collects cash from Dee. Notice that there is no indication in recording the transaction that the customer does not take the sales discount. This is the typical entry to record a cash collection on account when no sales discounts are involved . 5- 11

Sales Return and Allowances:

Sales Return and Allowances Sales Allowances If a customer does not return a product, but the seller reduces the customer’s balance owed or provides at least a partial refund because of some deficiency in the company’s product or service, we call that a sales allowance Sales Return If a customer returns a product it is sales return. After a sales return, we reduce the customer’s account balance if the sale was on account or we issue a cash refund if the sale was for cash. 5- 12

Sales Return and Allowances:

Sales Return and Allowances On March 5, after Dee gets her teeth cleaned but before she pays, she notices that another local dentist is offering the same procedure for $350. Dee brings this to Dr. Link’s attention and because his policy is to match any competitor’s pricing, he offers to reduce Dee’s account balance by $50.Link’s Dental records the following sales allowance entry . 5- 13

PowerPoint Presentation:

i>clicker question

Part B:

Part B Valuation of Accounts Receivable 5- 15

LO3 Record an allowance for future uncollectible accounts :

LO3 Record an allowance for future uncollectible accounts The right to receive cash from a customer is a valuable resource for the company. This is why accounts receivable is an asset, reported in the company’s balance sheet. To be useful to decision makers, accounts receivable should be reported at the amount of cash the firm expects to collect, an amount known as net realizable value . Should companies sell goods and services to their customers on account, or should they accept only cash payment at the time of purchase? The downside of extending credit to customers is that not all customers will pay fully on their accounts The upside, allowing customers the ability to purchase on account and pay cash later boosts sales. 5- 16

Allowance Method:

Allowance Method Involves allowing for the possibility that some accounts will be uncollectible at some point in future. Uncollectible accounts have the effect of : reducing assets (accounts receivable) by an estimate of the amount we don’t expect to collect and increasing expenses (bad debt expense) to reflect the cost of offering credit to customers. 5- 17

Estimating Uncollectible Accounts:

Estimating Uncollectible Accounts Kimzey specializes in emergency outpatient care. It doesn’t verify the patient’s health insurance, It knows that a high proportion of fees for emergency care provided will not be collected. In 2012, Kimzey’s first year, it bills customers $50 million. By the end of the year, $20 million remains due from customers. Of this amount, it estimates that 30% is likely to be uncollected. Assuming Kimzey uses Percentage-of-receivables method ; the year-end adjusting entry to allow for these future uncollectible accounts is as follows: 5- 18

Bad Debt Expense:

Bad Debt Expense Equals the amount of the adjustment to the allowance for uncollectible accounts, representing the cost of estimated future bad debts charged to the current period. We include this expense in the same income statement as the credit sales with which these uncollectible accounts are associated. There is no cash outflow associated with bad debts. It is not possible to record actual future bad debts in the current period because we don’t know the future expense when preparing the current period’s financial statements. 5- 19

Partial Income Statement Showing Estimated Bad Debt Expense:

Partial Income Statement Showing Estimated Bad Debt Expense In the 2012 income statement, we reduce the $50 million of revenue from credit sales by $6 million for estimated future bad debts. 5- 20

Match Future Bad Debts with Current Credit Sales :

Match Future Bad Debts with Current Credit Sales After we adjust for future uncollectible accounts, the accounts receivable portion of Kimzey’s year-end balance sheet appears below: 5- 21

LO4 Apply the procedure to write off accounts receivable as uncollectible:

LO4 Apply the procedure to write off accounts receivable as uncollectible On February 23, 2013, Kimzey receives notice that one of its former patients, Bruce, has filed for bankruptcy. He believes it is unlikely Bruce will pay his account of $4,000. Remember, Kimzey previously allowed for the likelihood that some of its customers would not pay. Now it knows a specific customer will not pay, it can adjust the allowance and reduce the accounts receivable. Kimzey makes the following entry to write off an account 5- 22

Collection of Accounts previously Written Off:

Collection of Accounts previously Written Off Later in 2013, on September 8, Bruce’s bankruptcy proceedings are complete. Kimzey had expected to receive none of the $4,000 Bruce owed. After liquidating all assets, Bruce is able to pay each of his creditors 25% of the amount due them. Kimzey records the following two entries when there is a collection on an account that was previously written off. 5- 23

Balance of Kimzey’s Net Accounts Receivable :

Balance of Kimzey’s Net Accounts Receivable Total accounts written off by Kimzey during 2013 equaled $5 million but $ 1 million of this amount was collected by the end of the year. The timeline of events related to accounts receivable during 2012 and 2013 is this: (1) Accounts receivable total $20 million at the end of 2012. (2) Made an adjusting entry at the end of 2012 for estimated bad debts of $6 million. (3) Actual accounts wrote off as uncollectible in 2013 total $5 million. (4) Of the $5 million written off, $1 million later appears receivable. (4a) Received $1 million cash for the accounts re-established in (4). 5- 24

Estimating Uncollectible Accounts in the following year:

Estimating Uncollectible Accounts in the following year At the end of 2013, Kimzey must once again estimate uncollectible accounts and make a year-end adjusting entry. Suppose that in 2013 it bills customers for services $80 million, and $30 million are still receivable at the end of the year. Of $30 million receivable, it estimates 30% will not be collected. For what amount would it record the year-end adjusting entry for bad debts in 2013? The current balance of the allowance account is : 5- 25

Estimating Uncollectible Accounts in the following year:

Estimating Uncollectible Accounts in the following year Based on all available information at the end of 2013, Kimzey estimates that the allowance for uncollectible accounts should be $9 million. Allowance account needs to increase from its current balance of $2 million credit to the estimated ending balance of $9 million credit. It can accomplish this by adjusting the account for $7 million as follows: 5- 26

Estimating Uncollectible Accounts in the following year:

Estimating Uncollectible Accounts in the following year 5- 27

PowerPoint Presentation:

i>clicker question

PowerPoint Presentation:

i>clicker question

Valuing Accounts Receivable:

Under percentage of receivables basis , management often establishes a percentage relationship between the amount of receivables and expected losses from uncollectible accounts by “aging” the accounts. Valuing Accounts Receivable Illustration 8-6 SO 3 Describe the methods used to account for bad debts.

Valuing Accounts Receivable:

Illustration: Assume the unadjusted trial balance shows Allowance for Doubtful Accounts with a credit balance of $528. Prepare the adjusting entry assuming $2,228 is the estimate of uncollectible receivables from the aging schedule. Valuing Accounts Receivable Bad debts expense 1,700 Dec. 31 Allowance for doubtful accounts 1,700 Estimating the Allowance Illustration 8-7 Bad debts accounts after posting

PowerPoint Presentation:

i >clicker question

LO6 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts :

LO6 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts Suppose a company provides services for $10,000 on account in 2012, but makes no allowance for uncollectible accounts at the end of the year. On September 17, 2013, $2,000 is considered uncollectible. The company records the write-off as follows . Recording bad debt expense at the time we know the account to be uncollectible. The direct write-off method is used for tax purposes but is generally not permitted for financial reporting . Direct Write-Off Method 5- 34

Comparison of the Allowance Method and the Direct Write-off Method for Recording Uncollectible Accounts :

Comparison of the Allowance Method and the Direct Write-off Method for Recording Uncollectible Accounts Assume that by the end of 2012 we estimate $2,000 of accounts receivable won’t be collected. Also assume that our estimate of future bad debts turns out to be correct, and actual bad debts in 2013 total $2,000 . 5- 35

Part C:

Part C Notes Receivable 5- 36

LO7 Apply the procedure to account for notes receivable, including interest calculation:

LO7 Apply the procedure to account for notes receivable, including interest calculation Notes receivable are similar to accounts receivable but are more formal credit arrangements evidenced by a written debt instrument, or note. Notes receivables are classified as either Current or Noncurrent depending on the expected collection date. If the time to maturity is longer than one year, the note receivable is a long-term asset . 5- 37

Notes Receivable:

Illustration 8-9 Notes Receivable To the Maker , the promissory note is a note payable. To the Payee , the promissory note is a note receivable.

Notes Receivable:

Notes Receivable February 1, 2012, Kimzey Medical Clinic provides services of $10,000 to a patient, Justin Payne, who is not able to pay immediately. In place of payment, Justin offers Kimzey a six-month, 12% promissory note. An example of a typical note receivable is shown below. It records the note as follows. 5- 39

Interest Calculation:

Interest Calculation Many of the same issues we discussed concerning accounts receivable, apply also to notes receivable. One issue that applies to notes receivable but not accounts receivable is interest . Kimzey issued a six-month, 12% promissory note. It will charge Justin Payne one-half year of interest. Interest on its note receivable is calculated as follows. 5- 40

Collection of Notes Receivables:

Collection of Notes Receivables We record the collection of notes receivable the same way as a collection of accounts receivable, except we record interest earned as interest revenue in the income statement. August 1, 2012, the maturity date, Justin repays the note and interest in full as promised. Kimzey will record the following entry. 5- 41

Accrued Interest:

Accrued Interest It happens that notes are issued in one year and the maturity date occurs in the following year. What if Justin issued the previous six-month note to Kimzey on November 1, 2012 , instead of February 1, 2012? $10,000 face value and $600 interest on the six-month note are not due until May 1, 2013. The length of the note and interest rate remain the same, the total interest charged to Justin remains the same. Kimzey will record interest revenue for two months of the six-month note in 2012, and four months in the next year. 5- 42

PowerPoint Presentation:

Remember, interest is earned as time goes by, so Kimzey earns two months’ interest ($200) in 2012 even though it won’t collect it until 2013. On May 1, 2013, the maturity date, It records the collection of the note receivable and interest receivable as well as the revenue related to four months’ interest earned in 2013. Accrued Interest 5- 43

Calculating Interest Revenue over Time for Kimzey Medical Clinic :

Calculating Interest Revenue over Time for Kimzey Medical Clinic On May 1, 2013, Kimzey has received the note receivable recorded on November 1, 2012, and the interest receivable recorded on December 31, 2012, and has eliminated their balances. The remaining four months’ interest occurs in 2013 and it is recognized as revenue then. Interest receivable from its six-month, $10,000, 12% note is $100 per month (= $10,000 x 12% x 1/12). 5- 44

Notes Receivable:

Computing Interest SO 4 Compute the interest on notes receivable. Notes Receivable When a note’s interest is expressed in days, use 360 days in the year. When counting the days until a note is due, omit the date the note is issued . Illustration 8-11

PowerPoint Presentation:

i >clicker question

PowerPoint Presentation:

i >clicker question

LO8 Calculate key ratios investors use to monitor a company’s effectiveness in managing receivables:

LO8 Calculate key ratios investors use to monitor a company’s effectiveness in managing receivables The amount of a company’s accounts receivable is influenced by a variety of factors, including the level of sales, the nature of the product or service sold, and credit and collection policies. More liberal credit policies—allowing customers a longer time to pay or offering cash discounts for early payment—often are initiated with the specific objective of increasing sales volume. Management’s choice of credit and collection policies results in trade-offs. Investors, creditors, and financial analysts can gain important insights by monitoring a company’s investment in receivables. Two important ratios that help in understanding the company’s effectiveness in managing receivables are the receivables turnover ratio and the average collection period . 5- 49

Receivables Turnover Ratio:

Receivables Turnover Ratio It shows the number of times during a year that the average accounts receivable balance is collected. Receivables turnover ratio = Net Credit Sales Average accounts receivable Average collection period = 365 Days Receivables turnover ratio The average collection period is another way to express the same measure. It shows the approximate number of days the average accounts receivable balance is outstanding. 5- 50

Receivables Turnover Ratio:

Net credit sales are $400,000 for the year and the average accounts receivable balance is $40,000. We could say the turnover ratio is 10, or average receivables were collected 10 times during the year. If the turnover is 10 times a year (365 days), then the average balance is collected every 36.5 days. Receivables Turnover Ratio 5- 51

Appendix :

Appendix Percentage-of-Credit Sales Method 5- 52

LO9 Estimate uncollectible accounts using the percentage-of-credit sales method:

LO9 Estimate uncollectible accounts using the percentage-of-credit sales method Percentage-of-receivables method Based on the estimate of bad debts on a balance sheet amount—accounts receivable Balance sheet method Percentage-of-Credit-sales method Based on the estimate of bad debts on an income statement amount—credit sales Income statement method 5- 53

Adjusting for Estimates of Uncollectible Accounts :

Adjusting for Estimates of Uncollectible Accounts 5- 54

Financial Statement: Effects of Estimating Uncollectible Accounts :

Financial Statement: Effects of Estimating Uncollectible Accounts 5- 55

PowerPoint Presentation:

Good Luck on the Chapter 5 Homework!

authorStream Live Help