Chapter 5 - Lecture notes 5 PDF

Preview

Summary

Ch 5...

Description

Chapter 5 Outline (pages 214 - 241) Receivables and Sales PART A: Recognizing Accounts Receivable Revenue Recognition 1. Provide a good or service 2. Collection is probable (being realized or realizable) Accounts Receivables (A/R) (also called trade receivables)—arise from Credit Sales (providing a good or service and allowing the customer to pay later) also known as “sales on account.” Mow & Grow provides $500 of monthly lawn maintenance services for Customer A. Customer A does not pay at the time services are rendered. Accounts Receivable (A+) Lawn Maintenance Revenue (R+SE+)

500 500

Other Receivables—Nontrade receivables (less common) -tax refunds receivable -interest receivable -loans extended to others -Notes receivable (formal credit arrangement) Trade Discount—represents a reduction in price for products/services (for bulk purchases, etc.) Mow & Grow offers a 40% discount on their $500 monthly lawn maintenance service to new customers for the first month of service. Customer B takes advantage of the discount and gets her lawn maintained for January. Mow & Grow records the revenue at the reduced amount ($500 x (1-.40) = $300). Customer B does not pay at the time services are rendered. Accounts Receivable (A+) Lawn Maintenance Revenue (R+SE+)

300 300

Sales discounts (Contra Revenue)—reduces the amount the customer owes the company if paid within a specific time period; encourages early payment by the customer. 2/10, n30 Customer B is offered a sales discount of 2% if she pays her invoice within 10 days. Customer B pays the invoice within the 10 days.

Chapter 5

Spring 2018

Page 5-1

Cash (A+) Sales discount (XR+SE-) Accounts Receivable (A-)

294 6 300

Customer B has paid her account in full. By paying her invoice within 10 days she takes advantage of the sales discount, she saves $6, 2% of the invoice amount. ($300 x .02 = $6)

Effect on the Financial Statements Assets

Balance Sheet Liabilities

Cash +294 A/R -300

Stockholders’ Equity -6

Income Statement Rev. Expense Sales discount XR+6R-6

NI -6

Sales Returns and Allowances (Contra Revenue) Net Revenue or Net Sales Effect of the lawn maintenance and cash payment on the income statement: Lawn Maintenance Revenue Sales discount (contra revenue) Net Lawn Maintenance Revenue

-

Revenue (sometimes called “Gross sales” or “Sales”) Sales Returns and Allowances Sales discounts Net Sales

$300 6 $294 Revenue - contra revenues Net Revenue

If no contra revenue accounts are present “Sales” and “Net Sales” would be the same amount. (I.e., Sales – 0 = Net Sales.) Practice Kelly’s Jewelry reported the following amounts at the end of the year: Total jewelry sales $650,000; sales discounts = $15,000; accounts receivable = $50,000; sales returns = $40,000; sales allowances = $20,000; accumulated depreciation = $9,000. Determine net sales for Kelly’s Jewelry:

Chapter 5

Spring 2018

Page 5-2

End of Period Adjustment for Contra Revenues Illustration 5-3 (p. 222) Record an adjusting entry for estimated contra revenues for sales made during the period. PART B: Valuing Accounts Receivable Valuing A/R is important because sometimes credit sales are not collected. Net Realizable Value—the amount of cash the company expects to collect. Uncollectible accounts—(bad debts) customer accounts that the company no longer expects to collect. Accounting for Bad Debts Matching principle -match expense (bad debt expense) with the revenue (credit sale) earned this period Direct Write-Off Method -this method is not GAAP -does not do a good job of “matching” -Used for income tax purposes--IRS -Allowance Method—estimate bad debt—estimate the amount of the Accounts Receivable that will not be collected. Allowance for uncollectible accounts (“AUA”)—(Contra Asset “XA”) contra to accounts receivable A/R

Allowance for uncollectible accounts XX

XXXX

Reporting Accounts on the Financial Statements Assuming the company had Accounts receivable of $20,000 at the end of the period and an allowance for uncollectible accounts of $2,000 and bad debt expense of $1,800. Accounts Receivable, net shown on the balance sheet would be shown at its net realizable value of $18,000. Accounts Receivable (A) - Allowance for Uncollectible Accounts (XA) Accounts Receivable, net of allowance for uncollectible accounts (“net book value” or “net realizable value” or “Net A/R”)

$20,000 (2,000) $18,000

Bad Debt Expense shown on the Income Statement would be $1,800.

Chapter 5

Spring 2018

Page 5-3

Estimating Uncollectible Accounts An estimate of bad debts is made at the end of the accounting period to match the cost of credit sales (bad debt expense) with the revenue credit sales allowed the company to record during the period. The estimate is incorporated in the company’s books through an ADJUSTING ENTRY and the entry increases the allowance for uncollectible accounts and bad debt expense. Income Statement Balance Sheet An Allowance Method—Percent of Receivables Method -> (% of A/R we DON’T expect to collect) -

management estimates a percent of ending accounts receivable they expect to be uncollectible

Amount of A/R we don’t expect to collect thus making It a contra asset. Take % and multiple by receivables. -

the ending balance in the Allowance for Uncollectible Accounts (“AUA”) is determined based on the estimate (% of uncollectible accounts x ending balance of A/R).

-

record the adjusting entry to get the ending balance in the Allowance for uncollectible accounts (AUA) to be equal to the amount computed (% of uncollectible accounts x ending balance of A/R).

Bad debt expense only shows up once in an accounting period.

Chapter 5

Spring 2018

Page 5-4

Practice At the end of the year, D Company’s balance in the allowance for uncollectible accounts (AUA) was $500 (credit) before adjusting entries. The balance in Accounts Receivable is $30,000. The company estimates that 15% of the accounts will not be collected over the next year. Prepare the adjusting entry for the allowance for uncollectible accounts. $30,000*.15=$4,500 Amount to be uncollectible A/R

Allowance for uncollectible accounts 500

30,000 12/31

Bad Debt Expense (E+ -> SE-) AUA (XA+ -> A-)

4,000 4,000

Bad Debt Expense 4,000 adj

Allowance for uncollectible accounts 500

% of Receivables What should D report as bad debt expense on their 12/31 Income Statement?

4,000 adj 4,500

$4,000

(“Net” = something taken out) D would report net accounts receivable on their 12/31 Balance Sheet at: A/R – AUA = Net A/R ->

$30,000 - 4,500 = 25,500 A/R

Allowance for uncollectible accounts 4,500

30,000

Chapter 5

$25,500

Spring 2018

Page 5-5

More Practice Same facts as above except assume that at year end D Company’s balance in the uncollectible account was a $1,000 (debit)--instead of $500 (credit)--before adjusting entries. Prepare the adjusting entry for the allowance for uncollectible accounts. $30,000 * .15 = $4,500 Amount to be uncollectible A/R 30,000 12/31

Allowance for uncollectible accounts 1,000 5,500

Bad Debt Expense (E+ -> SE-) AUA (XA+ -> A-)

5,500

Bad Debt Expense 5,500 adj

Allowance for uncollectible accounts 1,000 5,500 adj 4,500

5,500

What should D report as bad debt expense on their 12/31 Income Statement?

$5,500

D would report net accounts receivable on their 12/31 Balance Sheet at:

$25,500

30,000 – 4,500 = 25,500 A/R

Allowance for uncollectible accounts

30,000

-

An Allowance Method--Aging of Accounts Receivable focus is on the Accounts Receivable account on the balance sheet older Accounts Receivable have an increased chance of being uncollectible determine the ending balance in the Allowance for Uncollectible Accounts based of the aging of Accounts Receivable record the adjusting entry to get the ending balance in the Allowance for Uncollectible Accounts to the appropriate amount. WATCH mhhe.com/4fa19 (1:36 minutes) Example: By the end of the year the D Company’s Account Receivable shows an ending balance of $30,000 aged as follows: Age Amount in A/R (days past due) 0 – 60 $22,000 61 – 120 5,000 121 – 180 2,000 More than 180 Should be 00 T ending balance 00 in allowance

Chapter 5

Spring 2018

Estimated % uncollectible 5% 30% 40% 90%

Estimated allowance $1,100 1,500 800 900 $4,300

Page 5-6

This is the percent of receivables

The ending balance in the Allowance for Uncollectible Accounts shows $500; however, based on the aging of Accounts Receivable it should be $4,300. A/R

Allowance for uncollectible accounts 500

30,000

3,800 adj. 4,300

The adjusting entry to record Bad Debt expense and update the Allowance for Uncollectible Accounts would need to be 3,800 to get the ending balance in the Allowance account to $4,300. Bad debt expense (E+SE-) Allowance for uncollectible accounts (XA+A-)

3,800 3,800

What should D report as bad debt expense on their 12/31 Income Statement?

$3,800

D would report net accounts receivable on their 12/31 Balance Sheet at: 30,000 – 4,300 = 25,700

$25,700

WRITING OFF AN ACCOUNT RECEIVABLE -Balance sheet accounts only (Asset accounts) These are the only two account that change when writing off an account.

Accounts receivable (A)

Bad debt is only recognized once. At the end.

Allowance for uncollectible accounts (XA) “goes down” NOTHING ELSE CHANGES

-Write off the account as soon as it goes “bad” -Net A/R does not change

Example:

Chapter 5

Spring 2018

Page 5-7

On January 2nd D Company discovers that customer E will not be able to pay the $400 it owes them from service provided last year. The company writes off E’s account on January 2nd. 1/2

Allowance for uncollectible accounts (XA-A+) Accounts Receivable (A-)

400 400

To write off Customer E’s A/R due to bankruptcy proceedings

A/R + 30,000

Allowance for uncollectible accounts + 4,500 400 (2/2) 4,100

400 (2/2)

29,600

Notice that before and after the write-off, the company still expects to collect the $25,500 of credit sales made last year. Before $30,000 $4,500 $25,500

Accounts Receivable Allowance for uncollectible accounts Net accounts receivable

Write off -400 -400

After 29,600 4,100 $25,500

Practice CCT finds out on May 10th that Customer W’s account receivable for $1,000 from services provided last year is uncollectible. Prior to writing-off Customer W’s A/R the allowance for uncollectible accounts had a credit (normal) balance of $8,300 and their A/R balance was $285,000. Record the effects of the write-off on May 10th. 5/10

AUA (XA- -> A+) A/R (A-)

1000 1000 A/R 285,000 1000 (5/10) 284,000

Allowance for uncollectible accounts 8,300 1000 (5/10) 7,300

What was CCT’s net A/R before the write-off and after the write off? Before Write off -1000 Accounts Receivable $285,000 Allowance for uncollectible accounts $8,300 -1000

Chapter 5

Spring 2018

After 284,000 7,300

Page 5-8

Net accounts receivable

$276,700

$276,700

Collection of Amounts Previously Written Off Later in the year Customer W is able to pay $300 of his previous $1,000 he owed the company. He pays the company $300. Re-establish the Accounts Receivable for the amount paid by partially reversing the write-off on May 10th as follows:

Accounts Receivable (A+) Allowance for uncollectible accounts (XA+A-)

300 300

To re-establish a portion of Customer W’s A/R previously written off

Then record customer W’s payment: Cash (A+) Accounts Receivable (A-)

300 300

PART C: NOTES RECEIVABLE

-

Formal arrangement Indicates amount (Face value or Principal) Due date Interest rate An asset to the lender (Note Receivable) Interest Calculation--revisited PxRxT where: P = Principal (FACE Value) is the amount borrowed R = Annual interest rate T = length of time the money was used this accounting period (fraction of year).

Example: The Company extends credit to Customer P for six months to offset the A/R Customer P owes the Company. The terms of the note are $10,000 due in six months at 12% interest. The date of the note is February 1, 20XD. The due date is August 1, 20XD. Record the note

Chapter 5

Spring 2018

Page 5-9

2/1/XD

Note Receivable (A+) 10,000 Accounts Receivable (A-) 10,000 Acceptance of a six month note at 12% interest to satisfy customer P’s account

The amount of interest to accrue over the six months = $10,000 x 12% x 6/12 = $600 PxRxT

Record the receipt of payment for the note 8/1/XD

Cash (A+) 10,600 Note Receivable (A-) Interest revenue (R+SE+) Collection of note receivable plus interest (10,000 x .12 x 6/12)

10,000 600

If the note’s term was for 12 months instead of six, we would have to record an adjusting entry for interest at the end of the year (December 31) prior to the note’s due date on January 31. 12/31/XD Interest Receivable (A+) Interest Revenue (R+SE+) Accrual of interest on note (10,000 x .12 x 11/12)

1,100 1,100

Then when the note is paid in January the company would record: 1/31/XE Cash (A+) 11,200 Note Receivable (A-) 10,000 Interest Receivable (A-) 1,100 Interest Revenue (R+SE+) 100 Collection of note receivable, interest receivable and interest revenue (10,000 x .12 x 1/12) Interest Revenue earned in 20XE is $100 (10,000 x .12 x 1/12).

Practice The company lent $5,000 on July 1, 20XA at 10% interest for 9 months. Determine interest revenue for 20XA.

5,000 x 0.1 x 6/12 =

Determine interest revenue for 20XB 5,000 x .01 x 3/12 =

$125.00

The company lent $9,000 on December 1, 20XA at 7% for 18 months.

Chapter 5

Spring 2018

Page 5-10

Determine interest revenue for 20XA.

9,000 x 0.07 x 1/12 =

$52.50

Determine interest revenue for 20XB 9,000 x 0.07 x 12/12 =

$630.00

Determine interest revenue for 20XC 9,000 x 0.07 x 5/12 =

$262.50

The company invested $300,000 on September 30, 20XA at 4% for 4 months. Determine interest revenue for 20XB.

300,000 x 0.04 x 4/12 =

$

______________________________________________________________________________ Receivables Analysis Receivable Turnover Ratio The receivables turnover ratio is a measure of the effectiveness of a company’s Credit Granting and Collection Activities. Receivables Turnover =

Net credit sales Average net trade accounts receivable

If you cannot determine net credit sales, use net sales as the numerator in the above equation. “Average” is calculated as follows: (last years ending balance + this years ending balance)/2 Average collection period= 365 days/Receivable turnover Average length of time it takes to collect A/R

Chapter 5

Spring 2018

Page 5-11

Chapter 5 Homework Submit your answers in CANVAS before it is due Use the following to answer questions 1 – 5 For the next few weeks AD Agency is offering a 10% trade discount when providing advertising services of $35,000 or more to its customers to encourage customers to buy in bulk. The Agency also offers 2/10, n30 on all credit sales. All credit sales are invoiced on the 28th of the month. The Agency provided the following services this month; amounts are shown before trade discounts have been deducted:  Designs a $35,000 $31,500 ad campaign for Customer A— on account— pays in 30 days  Designs a $27,000 ad campaign for Customer B— on account— pays within 10 days GREEN =  Designs a $45,000 $40,500 ad campaign for Customer C— on account— pays within 10 days REVENUE  Designs a $30,000 ad campaign for Customer D—received payment last month

#4 = Greens Added #5 = #4 – Contra Revenues = Net Sales

1.

$___31,500___What amount of revenue should the Agency record for the ad campaign for Customer A?

2.

$___40,500__What amount of revenue should the Agency record for the ad campaign for Customer C?

3.

$__39,690___Customer C pays within 10 days, how much will they pay?

4.

$__129,000__Determine the monthly sales for the Agency

5.

$___________Determine the Agency’s Net Sales for the month

Use the following to answer questions 6 – 7 MBC, Inc., reported the following amounts at the end of the year: Total sales Accounts receivable Sales allowances Sales returns Sales discounts Allowance for Uncollectible accounts

$878,500 44,700 300 8,900 12,000 3,600

6.

$___________Determine total contra revenues for the company

7.

$___________Determine net sales for the company

Chapter 5

Spring 2018

Page 5-12

Use the following to answer questions 8 – 11 The following information pertains to TR, Inc. for the month of December: Credit sales Accounts payable Accounts receivable Allowance for Uncollectible accounts Cash sales

$963,800 39,500 44,700 750 365,200

credit

TR uses the percent of receivables method and estimates it will not collect 4% of accounts receivable. 8.

$___1,788___Determine the ending balance for the Allowance for Uncollectible Accounts

9.

$___________Determine the appropriate amount to record for Bad Debt expense

10. $___________Assuming the Allowance for Uncollectible accounts had a $500 debit balance, determine the amount to record for Bad Debt expense

11. $___________After recording bad debt expense the Net Accounts Receivable is:

Use the following to answer questions 12 – 15 At December 31, JV Co reported accounts receivable of $89,600 and an allowance for uncollectible accounts of $1,270 (credit). An analysis of accounts receivable suggests that the allowance for uncollectible accounts should be 6% of accounts receivable.

12. $___________Estimate the amount of uncollectible receivables: 13. $___________When recording the adjusting entry for bad debt expense how much should Allowance for Uncollectible accounts be credited?

14. On January 10, a customer’s account balance of $1,000 is written off as uncollectible. Record the write-off.

15. $___________If Net Accounts receivable were $77,200 before the write-off, how much are Net Accounts receivable AFTER the write-off?

Use the following to answer questions 16 - 19 For each transaction indicate whether it should: A. increase, B. decrease, or C. no effect.

Chapter 5

Spring 2018

Page 5-13

Credit sales transaction cycle

Assets

Liabilities Stockholders’ e...