Financial Accounting Chapter 8 Notes
Financial Accounting Chapter 8 Notes ACC-142
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This 5 page Class Notes was uploaded by bauer47 Notetaker on Wednesday March 2, 2016. The Class Notes belongs to ACC-142 at Iowa Central Community College taught by DawnA. Humburg in Fall 2015. Since its upload, it has received 33 views. For similar materials see Financial Accounting in Accounting at Iowa Central Community College.
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Date Created: 03/02/16
Financial Accounting Chapter 8 Receivables PLEASE MAKE A GOOD FAITH EFFORT TO COMPLETE THIS FOR THURSDAY’S CLASS (11/5/2015) 1) Common types of receivables a. Define a receivable > a monetary claim against a business or an individual (debtor) b. Give examples, define, and list when they are recorded > i. Accounts receivable > against customers; normal credit period is 3060 ii. Notes receivable > longterm; written (promissory note); interest is attached iii. Other receivables > dividends receivable (this account is debited when we own stock and the board of directors has declared the dividends aka date owed) c. Internal control over receivables: i. What procedures or policies would protect our receivables? Separate cash handling from cash accounting; credit department; keep records of how much they owe; credit score; set your credit terms ( 1/10, n/30) d. Sales on credit (on account): i. List the journal entry(ies) under the perpetual inventory system: DR A/R X CR Sales Rev X AND DR COGS X CR Merch. Inv. X ii. List the journal entry(ies) under the periodic inventory system: DR A/R X CR Sales Rev X (There is no entry for COGS) iii. How do we keep track of how much each debtor owes us? In the subsidiary ledger (A/R ledger); if we add all of the customers’ balances together, it should equal the balance in A/R (general ledger; A/R is called a control account) e. CR card and DR card sales: i. CR Card sale journal entry: Sold $10,000 of merchandise and accepted MasterCard as payment; cost is $2,500; merchant fee is 3% under the net method: DR Cash (10000 X .97) 9700 DR Credit Card Exp. (10000 X .03) 300 CR Sales Rev. 10000 AND DR COGS 2500 CR Merch. Inv. 2500 ii. CR Card sale journal entry: Sold $10,000 of merchandise and accepted MasterCard as payment; cost is $2,500; merchant fee is 3% under the gross method: DR Cash 10000 CR Sales Rev. 10000 AND DR COGS 2500 CR Merch. Inv. 2500 EOM billing for credit card fees: DR Credit Card Exp. (10000 X .03) 300 CR Cash 300 iii. DR Card sale journal entry: same as (i) and (ii) above; merchant fee may differ f. Factoring receivables > selling our receivables to a debt collector or a bank; the bank is responsible for collection g. Pledging of receivables > using our receivables as collateral or security for a loan; we are responsible for collection h. Why would a business factor or pledge their receivables? They need cash; SHOW ME THE MONEY 2) Accounting for uncollectibles (adjusting entry made at the end of the accounting period): a. Direct writeoff method > this method does not comply with GAAP i. Used by what type of companies? Small companies, LLP, private corporation (owned by family) ii. Under this method there is no estimating of what will be uncollectible; we simply DR Bad Debt Expense and CR A/R (customer name) when the account becomes uncollectible. (write off) iii. If, for example, the debtor wins the lottery after their account has been written off, we need to make 2 journal entries. 1. DR A/R Customer Name CR Bad Debt Exp. (Reinstating the A/R) DR Cash CR A/R Customer Name b. Allowance method > this method does comply with GAAP i. We have a new account that is used for this method: Allowance for Bad Debts; this account is classified as a(n) contra asset; normal balance is CR 1. On the BS, A/R will now be disclosed as follows: Accounts Receivable – ABD = net realizable value (NRV); just like Accumulated Depreciation; Equipment – Acc. Depr. = Book Value ii. Used by what type of companies? Public companies iii. Under this method, there is a(n) estimation of what will be uncollectible 1. Submethods or ways of utilizing the allowance method: a. Percent of sales example (IS method): sales are $100,000; historical percentage of uncollectibility is 5% (adjusting entry) DR Bad Debt Exp. 5000* CR ABD (+xA,A) 5000* *math > 100,000 X .05 b. Percent of receivables example (BS method): A/R is $25,000; ABD balance is $1,000 CR; historical percentage of uncollectibility is 10%. (adjusting entry) DR Bad Debt Exp. 1500* CR ABD 1500* *math > 25000 X .10 = $2500 is our estimate for the next accounting period (we want ABD to be CR $2500 after the entry) c. Aging of receivables example (BS method): A/R is $25,000; ABD balance is $1,000 CR; the aging schedule (see page 504) indicates an estimate of $2,000 (adjusting entry) DR Bad Debt Exp. 1000* CR ABD 1000* *math > estimate of 2000 – 1000 = 1000 **a, b, and c above are what type of journal entries? Adjusting Entries (purpose is to update our accounts before we prepare the adjusted trial balance and the financial statements) (ISREBS) iv. Other journal entries under the allowance method: 1. Customer’s account of $500 is written off: DR Allowance for Bad Debts (xA, +A) X CR A/R (A) X 2. After (1) above, assume the account is fully paid: DR A/R (+A) X CR ABD (+xA, A) X (Reinstatement of the account) DR Cash (+A) X CR A/R (A) X (Collection of cash on account) c. Recap of the Allowance for Bad Debts Account (ABD): i. Classified as a(n): contra asset with a normal CR balance ii. What will be on the DR side? Write offs () iii. What will be on the CR side? Reinstatements, adjusting entries (+) 3) Notes Receivable > similar to A/R except these are evidenced by a promissory note or contract a. The two parties to a note are: i. Maker (debtor); they owe; they initiate the transaction ii. Payee (creditor); receiving the cash b. Characteristics of a note: i. Amount borrowed is called the principle or face value; this is also the amount that interest is calculated upon ii. Interest is the fee for using someone else’s money for a period of time iii. The term of the note is called the time iv. This is usually stated in terms of one year: simple interest v. Maturity value is the sum of principle + interest; who receives this? Payee; maker pays maturity value c. Simple interest formula for a note: Principle X Interest Rate X Time /12*; * is usually stated in months, not days (PRT/12) d. What is the maturity date for a 120day note, dated April 1? i. April has 30 days; 301 = 29 days of accrued interest ii. May has 31 days = 29 + 31 = 60 days of accrued interest iii. June has 30 days = 60 + 30 = 90 days of accrued interest iv. 12090 = 30; July 30 is the maturity date or due date e. Journal entries: i. On November 1, we loaned $50,000 on a note that carries an interest rate of 15%; three month note; principal plus interest are due on the maturity date DR N/R (+CA) 50,000 CR Cash (CA) 50,000 1. On December 31, recorded the accrued interest on the note (adjusting entry; accrued revenue); we have earned interest and time has passed: DR Interest Receivable (+CA) 1250 CR Interest Revenue (+R, +SHE) 1250 ** **math > 50,000 x .15 x (2/12) = 1,250; we are the payee; which accounts will be closed after this entry? Interest revenue; interest receivable will not be closed because it is an asset (not part of REID) 2. On January 31 of the next year, we received the maturity value of the note: DR Cash (maturity value) 51875** CR N/R (principle) 50000 CR Interest Receivable (from 12/31 entry) 1250 CR Interest Revenue* 625 *math> 50000 x .15 x (1/12) = 625 ** [50000 + (50000 x .15 x 3/12)] = ii. On April 15, received a note on account from J. Doe for $10,000: DR N/R (+CA) 10,000 CR A/R (CA) 10,000 Why would this transaction happen? The customer can’t pay now, but if we have them sign a note, give them longer to pay, and charge a little interest iii. If we do not receive the maturity value from the maker on the due date, what journal entry should we make? DR ABD X CR Interest Revenue X CR N/R X What is this called? Write off, defaulting on the note, dishonoring the note 4) Ratio analysis for business performance: a. Acid test ratio > formula is: (cash + cash equivalents* + shortterm investments + net current receivables**)/ total current liabilities i. *CD’s, money market funds, etc. that will be converted into cash w/in 3 months ii. ** current receivables – ABD iii. How do you evaluate this ratio? Measures the company’s ability to pay current liabilities b. a/r turnover > formula is: net credit sales*/average net A/R** i. * sales – sales discounts – sales returns and allowances ii. ** [(BOY A/R – ABD) + (EOY A/R – ABD)]/2 iii. How do you evaluate this ratio? Number of times we collect the average receivables; we want this to be as high as possible c. Days’ sales in receivables > formula is: 365 days/ A/R turnover i. How do you evaluate this ratio? Tells us how many days on average it takes to collect our A/R; we want this to be low