ACCT Multimedia Smartbook Chap 9

● ● ● ● ● ACCT Multimedia/Smartbook Chap 9 Accounts receivable are amounts due from customers for credit sales. A subsidiary ledger lists amounts owed by each customer. Credit sales arise from at least two sources: ○ Sales on credit ○ Store credit card sales Sales on credit refers to a company’s granting credit directly to customers. Store credit card sales involve customers’ use of store credit cards. The supplementary record providing information on each customer is called the accounts receivable ledger. Sellers allow customers to use credit cards for all of the following reasons: ○ No need to decide who gets credit and how much ○ Avoid risk of loss if customer does not pay ○ Seller receives cash more quickly ○ Attract a wider variety of customers ● The direct write-off method charges Bad Debts Expense when accounts are written off as uncollectible. This method is acceptable only when the amount of bad debts expense is immaterial. Direct Write-Off Methods ---When someone pays back some of the debt---- ● The direct write-off method: ○ Is permitted if results are similar to the allowance method. ● Under the allowance method, bad debts expense is recorded with an adjustment at the end of each accounting period that debits the Bad Debts Expense account and credits the Allowance for Doubtful Accounts. The uncollectible accounts are later written off with a debit to the Allowance for Doubtful Accounts. ● ● ● The allowance method of accounting for bad debts has the following advantages over the direct write-off method including: ○ Matches bad debt expense with sales. (records estimated bad debts expense in the period when the related sales are recorded.) ○ Reports accounts receivable at estimated amount to be collected. (Reports accounts receivable on the balance sheet at the estimated amount of cash to be collected.) The allowance for doubtful accounts is a contra account. Realizable Value = Expected proceeds from converting an asset to cash. ● ● ● ● ● A note receivable is a written promise to pay a specified amount of money at a stated future date. The maturity date is the day the note (principal and interest) must be repaid. Interest rates are normally stated in annual terms. The amount of interest on the note is computed by expressing time as a fraction of one year and multiplying the note’s principal by this fraction and the annual interest rate. A note received is recorded at its principal amount by debiting the Notes Receivable account. The credit amount is to the asset, product, or service provided in return for the note. On July 18, Jerry Pope signed a note when he borrowed $1,200 at 12 percent for 30 days from Second National Bank. In this situation: Pope is the maker of the note. Maturity Date = Number of days after the note’s date Maturity is on the same day of the month as its original date. A 60-day, 11 percent, promissory note dated June 10 matures on: August 9 Principal of the note X Annual interest rate X Time expressed infraction of year = Interest Example: $1,000 X 12% X 90/360 = $1,000 X 0.12 X 0.25 = $30 ● 1 year = 360 days in accounting. ---Banker’s Rule ● The total interest that is due at maturity on a $1,500, 12 percent, 120-day note is $60 ● When a note is honored, the payee debits the money received and credits both Notes Receivable and Interest Revenue. Dishonored notes are credited to Notes Receivable and debited to Accounts Receivable (to the account of the maker in an attempt to collect), and Interest Revenue is recorded for interest earned for the time the note is held. ● Dishonored Note ○ Remove from Notes Receivable account ○ Classify as Accounts Receivable ● ● ● ● Receivables can be converted to cash before maturity in at least two ways. First, a company can sell accounts receivable to a factor, who charges a factoring fee. Second, a company can borrow money by signing a note payable that is secured by pledging the accounts receivable. The two most common receivables are accounts receivables and notes receivables. An accounts receivable ledger: ○ Records journal entries that affect accounts receivable. ○ Is a supplementary record to maintain an account for each customer. The pledging of receivables: ○ Enables a company to raise cash ○ Enables a company to retain ownership of its receivables ○ Does not transfer risk of bad debts to the lender ○ Should be disclosed in financial statements ● ● ● ● ● ● ● ● ● ● ● ● ● Zion Company sells merchandise on account to BRC, Inc. in the amount of $1,200. The entry to record this sale would include a: ○ Credit to Sales ○ Debit to Accounts Receivable Iron Company collects cash in full from a customer who purchased merchandise last month on credit. To record the receipt of cash, Iron Company should make the following entries in the general journal: ○ Debit to Cash ○ Credit to Accounts Receivable JD Co. had $1,000 of credit cards sales. The net cash receipts were deposited immediately into JD Company’s bank account less a 3% fee. The entry to record this sales transaction would include the following debit entries: ○ Cash for $970 ○ Credit Card Expense for $30 Accounts receivable ○ Amounts due from customers for credit sales Notes receivable ○ An asset consisting of a written promise to receive a definite sum of money on demand or on specific future dates Receivable ○ Amount due from another party True or False: The allowance method of accounting for bad debts records the loss from an uncollectible account receivable when it is determined to be uncollectible. No attempt is made to predict bad debts. An accounts receivable ledger is a supplementary record created to maintain a separate account for each customer. A company sells merchandise to a customer on credit. The journal entry to record this transaction would include a debit entry to the Accounts receivable account. To record a customer’s check in full payment for a sale that was made the prior month, the company should debit the Cash account. P. Jameson Co. sold $500 of merchandise on MasterCard credit sales. The net cash receipts from the sale are immediately deposited in the seller’s bank account. MasterCard charges a 4% fee. The journal entry to record this sales transaction would include a: ○ Credit to Sales for $500 ○ Debit to Credit Card Expense for $20 ○ Debit to Cash for $480 The direct write-off method of accounting for bad debts records the loss from an uncollectible account receivable when it is determined to be uncollectible. No attempt is made to predict bad debts expenses. The allowance method of accounting for bad debts matches the estimated loss from uncollectible accounts receivables against the sales they helped produce. ● ● ● ● ● ● ● ● ● ● ● ● On August 1, Harris Co. determines that it cannot collect $200 from its customer, L. Dash. Harris Co. uses the direct write-off method, so they will record the write-off of this account by debiting: Bad Debt Expense. On August 1, Hanes Co. determines that it cannot collect $150 from a customer. Hanes uses the direct write-off method. Hanes will record the write-off of this account by debiting: ○ Bad Debts Expense for $150. A. Stine Co. previously wrote off a $200 bad debt from Thorn Co. using the direct write-off method. On October 1, Stine unexpectedly received a check in the amount of $200 from Thorn Co. The entry to record this receipt of $200 will include a: ○ Debit to Cash ○ Credit to Bad Debts Expense In September, DK Company sells merchandise to Lions Company on credit. In October, Lions Company pays the balance in full. The entry to record the collection of cash by DK Company in October will include a credit to Accounts Receivable. Woodstock Co. had $500 of credit cards sales. The net cash receipts were deposited immediately into Woodstock’s bank account less a 2% fee. The entry to record this sales transaction would include a credit to: ○ Sales in the amount for $500 On February 15, Symth Co. determines that it cannot collect $500 owed by its customer, A. Winds. Symth records the loss using the direct write-off method. This entry to record the write-off on February 15 would include a: ○ Debit to Bad Debts Expense. ○ Credit to Accounts Receivable - A. Winds. The advantages of using the allowance method to account for bad debts include which of the following? ○ Reports accounts receivable balance at net realizable value ○ Matches expenses with related sales In August, Johns Co.’s account receivable was written off using the direct method. In November, Johns pays the balance in full. The journal entry to record the reinstatement of the account receivable must include a credit to the Bad Debts Expense account before recording a debit to the Cash account. J. Whitlock Co. had $1,000 of credit cards sales. The net cash receipts were deposited immediately into Whitlock’s bank account less a 5% fee. The entry to record this sales transaction would include a debit to: ○ Credit Card Expense in the amount of $50. In July, Lane Co. sells merchandise to Avery Co. on account. In August, Averay pays the balance in full. The entry that Lane will make to record the receipt of cash will include a credit to the Accounts Receivable account. The allowance for doubtful accounts is a contra asset account and has a normal credit balance. Tunes Company determines that a customer balance of $250 from Able Co. is uncollectible. Tunes uses the allowance method to account for bad debts. The entry to ● ● ● ● ● ● ● ● ● ● ● ● ● write off the uncollectible balance will include a debit to the Allowance for Doubtful Accounts. Finish Co. uses the allowance method to account for bad debts. At the end of 2010, Finish Co.’s unadjusted trial balance shows an accounts receivable balance of $30,000; allowance for doubtful accounts balance of $200 (credit); and sales of $600,000. Based on history, Finish estimates that bad debts will be 1% of sales. The entry to record estimated bad debts will include a debit to Bad Debts Expense in the amount of $6,000: ○ $600,000 x 1% = $6,000. The allowance for doubtful accounts is a contra asset account that equals: ○ Total uncollectible accounts. Leo Co. uses the allowance method to account for bad debts. At the end of 2010, Leo Co.’s accounts receivable balance is $25,000; allowance for doubtful accounts balance of $100 (credit); and sales of $500,000. Based on history, Leo estimates that bad debts will be 2% of accounts receivable. The entry to record estimated bad debts will include a debit to Bad Debts Expense in the amount of: $400 ○ $25,000 x 2% = $500 $500 - $100 = $400 The aging of accounts receivable method uses several percentages to estimate the allowance. Lina Co. uses the allowance method to account for bad debts. On January 28, Lina determines that a $200 balance from ZRT, Inc. is uncollectible and writes the balance off. The journal entry to write this balance off will include a: ○ Credit to Accounts Receivable - ZRT ○ Debit to Allowance for Doubtful Accounts Promissory note ○ Written promise to pay a specified amount of money. Principal ○ Amount that the signer agrees to pay back, not including interest. Interest ○ Charge from using money loaned from one entity to another. Maker ○ One who signed the note and promised to pay at maturity. Payee ○ The person to whom the note is payable. Maturity date ○ Day that the principal and interest must be paid. Yates Co. uses the allowance method to account for bad debts. At the end of the period, Yate’s unadjusted trial balance shows an accounts receivables balance of $10,000; allowance for doubtful accounts balance of $400 (credit); and sales of $500,000. Based on history, Yates estimates that bad debts will be 1% of sales. The entry to record estimated bad debts will include a debit to bad debts expense in the amount of: $5,000 ○ $500,000 x .01 = $5,000 Lani Co. uses the allowance method to account for bad debts. At the end of 2010, their unadjusted trial balance shows an accounts receivable balance of $400,000; allowance for doubtful accounts balance of $400 (debit); and sales of $1,200,000. Based on history, ● ● ● ● ● ● ● ● ● Lani estimates that bad debts will be 1% of accounts receivable. The entry to record estimated bad debts will include a debit to Bad Debts Expense in the amount of: $4,400 ○ $400,000 x 1% = 4,000 + 400 debit balance = $4,400. The aging of receivables method of estimating bad debts uses both past and current receivables information to estimate the allowance amount. Specifically, each receivable is classified by how long it is past its due date. A 60-day note is signed on February 15 (and it’s not leap year). The due date of the note is: April 16 ○ February 28th - February 15th = 13 days + 31 days for March = 44 days; 60 total days - 44 days = 16; therefore, April 16. Ana Co. uses the allowance method to account for bad debts. At the end of the period, Ana’s unadjusted trial balance shows an accounts receivable balance of $40,000; allowance for doubtful accounts balance of $300 (credit); and sales of $500,000. Based on history, Ana estimates that bad debts will be 2% of accounts receivable. The entry to record estimated bad debts will include a debit to bad debts expense in the amount of: $500 ○ $40,000 x 2% = 800 - 300 = $500 A 90-day note is signed on October 21. The due date of the note is: January 19 ○ 90 days = 31-21=10 days in October + 30 days in November + 31 days in December + 19 days in January. Always start with the number of days in the first month and subtract the date of the note. (October: 31-21 = 10). DonCo, Inc. sold merchandise on January 14, and accepted a 90-day, 5% promissory note in the amount of $5,000. On January 14, the entry to record this transaction would include a debit to: ○ Notes Receivable in the amount of $5,000 On January 1, Franz Co. accepted a 30-day, 6% note in the amount of $5,000 from Bria Co., a customer. On January 31, the due date of the note, Bria honors the note and pays in full. The journal entry that Franz would make to record payment of this note would include a: ○ Debit to Cash for $5,025 ○ Credit to Note Receivable for $5,000 ○ Credit to Interest Revenue for $25 Zino Company determines that a customer balance of $200, from Hollis Co. is uncollectible. Zino uses the allowance method to account for bad debts. The entry to write off the uncollectible balance will include a: ○ Debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable. On September 1, Horn Co. accepted a 60-day, 5% note in the amount of $3,000 from a customer. On the due date of the note, the customer dishonors the note and fails to pay. The journal entry that Horn would make on the due date would include debit to: ○ Accounts Receivable for $3,025 On November 1, Eli Co. received a $6,000, 60-day, 6% note from a customer as payment on his $6,000 account. Eli’s journal entry to record this transaction on November 1, would include a: ○ Credit to Accounts Receivable for $6,000 ● ● ● ● ● ● ● ● ○ Debit to Notes Receivable for $6,000 On January 1, JC Co. accepted a 60-day, 6% note in the amount of $10,000 from a customer. On March 2, the due date of the note, the customer honors the note and pays in full. The journal entry that JC would make to record the receipt of payment of this note would include a debit to: ○ Cash in the amount of $10,100 Kaiven Company accepted a $12,000, 60-day, 6% note on December 21 from Diaz Co, granting a time extension on his past-due account receivable. The adjusting entry on December 31 would include a debit to: ○ Interest Receivable for $20. On December 1, Christy Co. accepted a 60-day, 6%, $1,000 note due January 30. On December 31, the appropriate year-end adjusting entry was made. On January 30, the note was honored and paid in full. The entry to record receipt of payment on January 30 (assuming no reversing entry was made) would include a credit to: ○ Notes Receivable for $1,000 ○ Interest Receivable for $5 ○ Interest Revenue for $5 On March 14, Ian Co. accepted a 180-day, 5% note in the amount of $1,000 from Ali Co., a customer. On the due date of the note, Ali dishonors the note and fails to pay. The journal entry that Ian would record on the due date would include a: ○ Credit to Notes Receivable for $1,000 ○ Debit to Accounts Receivable - Ali for $1,025 ○ Credit to Interest Revenue for $25 Lion Company accepted a $15,000, 30-day, 6% note on December 16 from Diaz Co, granting a time extension on his past-due account receivable. The adjusting entry on December 31 for Lion Company would include a credit to: ○ Interest Revenue for $37.50 On November 1, Alice Co. accepted a 90-day, 6%, $2,000 note due January 30. On 12/31, the appropriate adjusting entry was made. On January 30, the note was honored and paid in full. The entry to record receipt of payment on January 30 would include a credit to: ○ Notes Receivable for $2,000 ○ Interest Receivable for $20 ○ Interest Revenue for $10 On September 1, Horn Co. ○ Accounts Receivable for $3,025 Companies sometimes convert receivables to cash before they are due by selling them or using them as security for a loan. The reasons that a company may convert receivables before their due date include: ○ To quickly generate cash ○ To reduce risk of nonpayment ● ● Companies convert receivables to cash before they are due if they need cash or do not want to deal with collecting receivables. This is usually done by (1) selling them or (2) using them as security for a loan (pledging them). On March 14, Zest Co. accepted a 120-day, 6% note in the amount of $5,000 from AZC Co., a customer. On the due date of the note… ○ Debit to Accounts Receivable - AZC for $5,100 CONNECT HW --------- -------------