Financial Accounting: Chapter 8

accounts receivable:

amounts customers owe on account that result from the sale of goods and services

notes receivable:

written promise for amounts to be received

notes receivable normally requires the …

collection of interest 

other receivables: 

nontrade receivables such as interest, loans to officers, advances to employees, and income taxes 

how do companies recognize accounts receivable?

they are the amounts due from individuals and companies that are expected to be collected in cash

1st accounting issue: _____ accounts receivable

recognizing

2nd accounting issue: _____ accounts receivable

valuing

3rd accounting issue: _____ accounts receivable

disposing

service organization records a receivable when …

it performs service on account

merchandiser records accounts receivable at …

the point of sale of merchandise on account 

if you sell merchandise on the accounts, what does the journal entry look like?

accounts receivable

     sales revenue

if the person you sold the merchandise to returns it to you, what does the journal entry look like?

sales returns and allowances

accounts receivable

if you receive a payment for the balance due on the merchandise that you sold, what does the journal entry look like? 

cash

sales discounts

accounts receivable

in order to complete the three steps of receiving a payment, you must?

subtract the return from the total sold and count that as “accounts receivable” under the 3rd slot. then work backwards to get “cash” and “sales discount”

valuing accounts receivables: includes …

current asset & valuation (cash realization value) sometimes “Net Realizable Value”

uncollectible accounts receivable: sales on account raise …

the possibility of accounts not being collected

uncollectible accounts receivable: companies record …

credit losses as debts to Bad Debt Expense (or Uncollectible Accounts Expense)

methods of accounting for uncollectible accounts include two methods:

direct write-off & allowance method

direct write-off is theoretically …

undesirable

under “direct write-off” there is no matching and receivable …

not stated at cash realizable value

“direct write-off” is …

not acceptable for financial reporting under GAAP

under the “allowance method”, there is better matching and losses are …

estimated

the “allowance method” includes receivables …

stated at cash realizable value

the “allowance method” is …

required by GAAP

if a company writes off a balance as an uncollectible, what does the journal entry look like?

bad debt expense

accounts receivable

under allowance method, company management is required to …

estimate amount of losses each year and uncollectible account receivable

“allowance method” debits …

bad debt expense

“allowance method” credits …

allowance for doubtful accounts (a contra-asset account)

companies debit “allowance for doubtful accounts” and credit “accounts receivable” at a time the …

specific account is written off as uncollectible

if $12,000 of sales are uncollectible, the journal entry looks like …

bad debt expense.    12,000

     allowance for doubtful accounts.    12,000

cash realizable value is sometimes referred to as …

accounts receivable (net)

accounts receivable - allowance for doubtful accounts = 

cash realizable value

if a company authorizes a write-off of a $500 balance owed by another company, the journal entry looks like …

allowance for doubtful accounts 500

account receivable 500

a write-off affects …

balance sheet ONLY and not the income statement

the write-off of the account reduces both …

accounts receivable and allowance for doubtful accounts

since a write-off only decreases both accounts receivable and allowances for doubtful accounts, the cash realizable value in the balance sheet …

stays the same

recovery of an uncollectible account: if a company pays the $500 amount that was previously written off, the journal entry looks like …

accounts receivable. 500

allowance for doubtful accounts 500

cash. 500

accounts receivable 500

during the recovery of an uncollectible account, first you …

reinstate AR (accounts rec.) & ADA (allowance for doubtful acc.)

during the recovery of an uncollectible account, after the first step, you …

make collection entry (cash —> accounts rec.)

frequently, companies estimate the allowance as a …

percentage of the outstanding receivables

percentage-of-receivables basis: management establishes a percentage relationship between …

the amount of receivables and expected losses from uncollectible accounts 

to accurately estimate the ending balance in the allowance account, a company often prepares an …

aging schedule

if $2228 is the estimate of uncollectible receivables from the aging schedule, and the unadjusted trial balance shows allowance for doubtful accounts with a credit balance (right side) of $528, then the adjusted will be …

1,700 under both bad debt expense and allowance for doubtful accounts

now assume that the unadjusted trial balance shows allowance for doubtful accounts with a debit balance of 500 (left side) and 2228 as the estimate of uncollectible receivables …

the adjustment and bad debt expense/allowance for doubtful accounts will remain at $2228 since adjustment and balance are on the right side, and therefore unaffected by debit expenses

if 10% of a company’s accounts receivable are uncollectible with AR = 30000 Dr., SR = 180000 Cr., and ADA = 2000 Dr., then …

bad debt expense and ADA will be [(10% x 30,000) + 2000] = 5,000

companies sell receivables for 2 major reasons:

receivables may be the only reasonable source of cash

billing and collection are often time-consuming and costly

sale of receivables to a factor: finance a …

company or bank

sale of receivables to a factor: buys receivables from …

businesses and then collects the payments directly from the customers

sale of receivables to a factor: typically charges a fee to the …

company that is selling the receivables 

assume a company factors $600,000 of receivables to a Factor. that Factor then assesses a service charge of 2% of the amount of receivable sold, the journal entry looks like …

Cash 588,000

Service Charge Expense 12,000

Accounts Receivable 600,000

(600,000 × 2% = 12,000)

national credit card sales are recorded …

the same as cash sales

national credit care sales: retailers pays …

the credit card issuer a fee of 2-4% of the invoice for its services 

if someone purchases $1000 of compact discs for their restaurant from a company, using her Visa Bank Card (knowing the bank charges a service fee of 3%), the journal entry looks like …

Cash                                    970

Service Charge Expense     30

                       Sales Revenue          1,000

Assume that Nordstrom prepares a bank reconciliation at the end of each month. If some credit card sales have not been processed by the bank, how should Nordstrom treat these transactions on its bank reconciliation?

Nordstrom would treat the credit card receipts as deposits in transit. It has already recorded the receipts as cash. Its bank will increase Nordstrom's cash account when it receives the receipts.

If a company decides to factor $125,000 of its receivables to alleviate a cash crunch (1% service charge), the journal entry looks like …

Cash 123,750

Service Charge Expense (1% x 125,000) 1,250

Accounts Receivable 125,000

companies may grant credit in exchange for …

a promissory note

a promissory note is a written …

promise to pay a specific amount of money on demand or at a definite time

promissory notes may be used …

when individuals and companies lend/borrow money

when amount of transaction and credit period exceed normal limits, or in settlement of accounts receivable

with a promissory note, the maker debits ____ and credits _____

cash; notes payable

with a promissory note, the payee debits _______ and credits ______

notes receivable; cash

determining the maturity date/computing interest: the interest rate specified is …

the annual rate

determining the maturity rate …

on demand, at the end of a stated period of time, or on a stated date 

computing interest equation:

face value of note x annual interest rate x time in terms of one year = interest

interest is always stated as …

an annual amount

time in terms of one year: Period for Note often …

less than a year

notes receivable: when counting days …

omit the date the note is issues, but include the due date

in terms of “time in terms of one year“, the denominator in days is always …

360 days

if a company wrote a $1000, two-month, 12% promissory note dated May 1, to settle an open account, the journal entry looks like

notes receivable.    1,000

     accounts receivable.    1,000

(record note at “face value”)

you report short-term notes receivable at their …

cash (net) realizable value

valuing notes receivable: estimation of cash realizable value and bad debt expense are done …

similarly to accounts receivable

disposing of notes receivable: notes may be …

held to their maturity date

disposing of notes receivable: maker may default and payee …

must make an adjustment to their account

disposing of notes receivable: holder speeds up conversion to …

cash by selling the note receivable

disposing of notes receivable (honor of notes receivable): maker pays …

it in full at its maturity date 

disposing of notes receivable (dishonor of notes receivable):

not paid in full at maturity

no longer negotiable

if a company lends another company $10,000 and accepts a five-month, 9% interest note. if the lender company presents the note to the lendee, the maturity date, the journal entry looks like …

Cash 10,375 (maturity value)

Notes Receivable 10,000

Interest Revenue (10,000 × 9% x 5/12) 375

the adjusting entry on the financial statements is represented on the journal entry by …

interest receivable and interest revenue

entry for collection of note includes:

cash

notes receivable

interest receivable

interest revenue

entry for dishonor of note:

accounts receivable 10,375

notes receivable 10,000

interest revenue 375

if there is no hope of collection, the note holder would …

write off the face value of the note by debiting Allowance for Doubtful Accounts (no interest revenue would be recorded bc collection is not expected to occur)

what steps should banks have taken to ensure the accuracy of financial information provided on loan applications?

at a minimum, banks should have requested copies of recent income tax forms and contacted the supposed employer to verify income

if a company accepts a $3,400, 90-day, 6% note dated May 10 in settlement of another company’s overdue receivable, the maturity date would be …

Term of note:                                   90 days

May (31-10)                     21

June                                30

July                                  31            82

Maturity date: August                         8

if a company accepts a $3,400, 90-day, 6% note dated May 10 in settlement of another company’s overdue receivable, the interest to be received at the maturity date …

face x rate x time = interest

3400 × 6% x 90/360 = $51

if a company accepts a $3,400, 90-day, 6% note dated May 10 in settlement of another company’s overdue receivable, the entry that the company makes at the maturity date is …

cash 3451

notes receivable. 3400

interest receivable. 51

in balance sheet presentations, you report …

short-term receivables as current assets 

in balance sheet presentations, you report …

both gross amount of receivables and allowance for doubtful accounts

in the income statement presentation, you report bad …

debt expense and service charge expense as operating expenses

in the income statement presentation, you report interest revenue under …

“other revenues and gains”

accounts receivable turnover = …

average net accounts receivable / net credit sales 

average collection period in days …

days in year / accounts receivable turnover

which of the following statements is false under IFRS?

Receivables include equity securities purchased by the company

In recording a factoring transaction:

IFRS allows partial derecognition

Under IFRS:

the entry to record estimated uncollected accounts is the same as GAAP