To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Chapter Reporting and Analyzing Receivables QUESTIONS When customers use credit cards, the selling companies can avoid having to directly evaluate the credit standing of its customers They also avoid the risk of bad debts and often are paid cash from the credit card company more quickly than if customers were granted credit directly Moreover, they hope to increase sales, and net income, from the added convenience to buyers Revenues and expenses usually are not matched under the direct write-off method because the revenues recorded from the uncollectible accounts often appear on the income statement of one period while the bad debts expenses of those revenues appear on the income statement of a later period when the account(s) is known to be uncollectible The accounting principle of materiality suggests that the requirements of accounting standards can be ignored if their effect on the financial statements is unimportant to their users’ business decisions Writing off a bad debt against the Allowance account does not reduce the estimated realizable value of a company’s accounts receivable because the write-off reduces the balances of both Accounts Receivable and the Allowance for Doubtful Accounts by equal amounts This means the difference between them (called estimated realizable value) remains the same The adjusted balances of Bad Debts Expense and Allowance for Doubtful Accounts are virtually never equal because the expense amount reflects only the events of the current period, and the allowance is the accumulated result of events over a number of prior periods The only way that they could be equal would be if write-offs during the prior period exactly equaled the beginning balance of the Allowance account Creditors prefer notes receivable to accounts receivable because the notes can be more easily converted into cash before they are due by discounting (or selling) them to a financial institution Also, a note represents a clear written acknowledgment by the debtor of both the debt and its amount and terms Best Buy does not mention uncollectible accounts in its notes to its financial statements, and does not list its receivables as ―net‖ of any allowance for uncollectibles, probably because uncollectible accounts are immaterial Circuit City uses the allowance method to account for doubtful accounts as evidenced by the receivables being reduced by an allowance on the balance sheet The realizable value of accounts receivable as of February 28, 2005, is its net amount of $172,995,000 Apple’s gross accounts receivable at September 25, 2004 are ($ millions) $774 + $47 = $821 Apple believes that the percent of accounts receivable that are uncollectible is $47/$821 = 5.7% ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 387 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com QUICK STUDIES Quick Study 7-1 (15 minutes) Cash 19,000 Credit Card Expense* 1,000 Sales 20,000 To record credit card sales less fees *$20,000 x 5% Cost of Goods Sold 15,000 Merchandise Inventory 15,000 To record cost of sales Accounts Receivable—Credit Card Cos 4,800 Credit Card Expense* 200 Sales 5,000 To record credit card sales less fees *$5,000 x 4% Cost of Goods Sold 3,000 Merchandise Inventory 3,000 To record cost of sales days later Cash 4,800 Accounts Receivable—Credit Card Cos 4,800 To record cash receipts Quick Study 7-2 (15 minutes) Oct 31 Allowance for Doubtful Accounts Accounts Receivable—C Green 800 800 To write off account Dec Accounts Receivable—C Green* Allowance for Doubtful Accounts 300 300 To reinstate a written off account *If there is a strong belief that the remaining $500 will be collected soon, then the full $800 balance can be reinstated Cash Accounts Receivable—C Greem 300 300 To record payment on a receivable ©McGraw-Hill Companies, 2008 388 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Quick Study 7-3 (15 minutes) Dec 31 Bad Debts Expense Allowance for Doubtful Accounts 885 885 To record estimate of uncollectibles Desired balance in allowance = $99,000 x 1.5%= $1,485 cr Adjustment required = $1,485 - $600 cr = $885 Desired balance in allowance = $1,485 (part 1) Adjustment required = $1,485 cr + $300 dr = $1,785 Quick Study 7-4 (10 minutes) Dec 31 Bad Debts Expense 1,400 Allowance for Doubtful Accounts 1,400 To record estimate of uncollectibles ($280,000 x 0.5%) Quick Study 7-5 (15 minutes) Aug Notes Receivable—R Albany Accounts Receivable—R Albany 6,000 6,000 To record receipt of note on account Oct 31 Maturity date Cash Notes Receivable—R Albany Interest Revenue 6,180 6,000 180 To record cash received on note plus interest ($6,000 x 12% x 90/360) ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 389 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Quick Study 7-6 (15 minutes) Dec 31 Interest Receivable Interest Revenue 50 50 To record the year-end adjustment for interest earned ($10,000 x 6% x 30/360) Jan 15 Maturity date Cash Interest Receivable Interest Revenue Notes Receivable 10,075 50 25 10,000 To record cash received on note plus interest Quick Study 7-7 (10 minutes) Accounts receivable turnover = Net sales Average accounts receivable $854,200 ($153,400 + $138,500) / = 5.9 times Interpretation: An accounts receivable turnover of 5.9 implies that the company’s average accounts receivable balance is converted into cash 5.9 times per year The 5.9 turnover is about 21% lower than the average turnover of 7.5 for its competitors The company needs to identify the cause of this poor performance and rectify the situation to at least compete at the average level ©McGraw-Hill Companies, 2008 390 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com EXERCISES Exercise 7-1 (20 minutes) Apr Cash 8,064 Credit Card Expense* 336 Sales 8,400 To record credit card sales less 4% fee *($8,400 x 04) Cost of Goods Sold 6,000 Merchandise Inventory 6,000 To record cost of sales 12 Accounts Receivable—Continental 5,460 Credit Card Expense* 140 Sales 5,600 To record credit card sales less 2.5% fee *($5,600 x 025) 12 Cost of Goods Sold 3,500 Merchandise Inventory 3,500 To record cost of sales 20 Cash 5,460 Accounts Receivable—Continental 5,460 To record cash received on credit sales less fees Exercise 7-2 (25 minutes) Part GENERAL LEDGER Accounts Receivable Nov 4,615 Nov 21 209 10 1,350 13 832 30 2,713 Bal 9,301 Sales Nov 10 13 30 4,615 1,350 832 2,713 Sales Returns and Allowances Nov 21 209 ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 391 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 7-2 (concluded) Part 1—continued ACCOUNTS RECEIVABLE LEDGER Nov 30 Bal Ski Shop 4,615 2,713 7,328 Welcome Enterprises Nov 10 1,350 Zia Natara Nov 13 832 Nov 21 Bal 209 623 Part Morales Company Schedule of Accounts Receivable November 30, 2008 Ski Shop Welcome Enterprises Zia Natara Total $7,328 1,350 623 $9,301 Comparison: The total of the Schedule of Accounts Receivable ($9,301) is proved with the balance of the Accounts Receivable controlling T-account from Part ($9,301) Exercise 7-3 (20 minutes) Dec 31 Bad Debts Expense 4,875 Allowance for Doubtful Accounts 4,875 To record estimated bad debts expense (.005 x $975,000) Feb Allowance for Doubtful Accounts Accounts Receivable—P Park 580 580 To write off an account June Accounts Receivable—P Park Allowance for Doubtful Accounts 580 580 To reinstate an account June Cash Accounts Receivable—P Park 580 580 To record cash received on account ©McGraw-Hill Companies, 2008 392 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 7-4 (15 minutes) a Dec 31 Bad Debts Expense* 685 Allowance for Doubtful Accounts 685 To record estimated bad debts expense * Unadjusted balance Estimated balance ($55,000 x 02) Required adjustment = $ 415 = 1,100 = $ 685 credit credit credit b Dec 31 Bad Debts Expense** 1,391 Allowance for Doubtful Accounts 1,391 To record estimated bad debts expense ** Unadjusted balance Estimated balance ($55,000 x 02) Required adjustment = $ 291 = 1,100 = $1,391 debit credit credit Exercise 7-5 (20 minutes) July Accounts Receivable 7,245 Sales 7,245 To record sales on credit Cost of Goods Sold 5,000 Merchandise Inventory 5,000 To record cost of sales Cash 19,200 Factoring Fee Expense* 800 Accounts Receivable 20,000 To record sale of receivable *($20,000 x 04) 17 Cash 5,859 Accounts Receivable 5,859 To record cash received on account 27 Cash 10,000 Notes Payable 10,000 To record cash from a loan Note to Financial Statements Accounts receivable in the amount of $12,500 are pledged as security for a $10,000 note payable to Main Bank ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 393 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 7-6 (15 minutes) Nov Notes Receivable—K White Accounts Receivable—K White 6,000 6,000 To record receipt of note on account Dec 31 Interest Receivable Interest Revenue 80 80 To record interest earned [$6,000 x 08 x 60/360] Apr 30 Cash Notes Receivable—K White Interest Revenue Interest Receivable 6,240 6,000 160 80 To record cash received on note plus interest earned [$6,000 x 08 x 120/360] Exercise 7-7 (20 minutes) Mar 21 Notes Receivable—T Jackson 9,500 Accounts Receivable—T Jackson 9,500 To record receipt of note on account Sept 17 Accounts Receivable—T Jackson 9,880 Interest Revenue Notes Receivable—T Jackson 380 9,500 To record note dishonored plus interest earned [$9,500 x 08 x 180/360 = $380] Dec 31 Allowance for Doubtful Accounts 9,880 Accounts Receivable—T Jackson 9,880 To write off an account ©McGraw-Hill Companies, 2008 394 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 7-8 (25 minutes) 2007 Dec 13 Notes Receivable—M Lee 9,500 Accounts Receivable—M Lee 9,500 To record receipt of note on account 31 Interest Receivable Interest Revenue 38 38 To record interest earned [$9,500 x 08 x 18/360] 2008 Feb 11 Cash 9,627 Interest Revenue Interest Receivable Notes Receivable—M Lee 89* 38 9,500 To record cash received on note plus interest [$9,500 x 08 x (60-18)/360=$89 rounded] Mar Notes Receivable—Tomas Co 5,000 Accounts Receivable-Tomas Co 5,000 To record receipt of note on account 17 Notes Receivable—H Cheng 2,000 Accounts Receivable—H Cheng 2,000 To record receipt of note on account Apr 16 Accounts Receivable—H Cheng 2,015 Interest Revenue Notes Receivable—H Cheng 15 2,000 To record receivable for dishonored note plus interest [$2,000 x 09 x 30/360] May Allowance for Doubtful Accounts 2,015 Accounts Receivable—H Cheng 2,015 To write off account June Cash 5,125 Interest Revenue Notes Receivable—Tomas Co 125 5,000 To record cash received on note with interest [$5,000 x 10 x 90/360] ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 395 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 7-9 (15 minutes) Year 2007 accounts receivable turnover: $336,000 ($41,400 + $34,800)/2 = 8.8 times Year 2008 accounts receivable turnover: $405,000 ($44,800 + $41,400)/2 = 9.4 times Analysis: Raheem Company turned over its accounts receivable 0.6 (9.4 – 8.8) times more in 2008 than in 2007 This may indicate that the company has tightened its credit policy or has improved its collection efforts Also, relative to competitors’ turnover of 7, Raheem is performing better than average ©McGraw-Hill Companies, 2008 396 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 7-2B (35 minutes) 2007 a Accounts Receivable Sales 685,320 685,320 To record sales on account Cost of Goods Sold 500,000 Merchandise Inventory 500,000 To record cost of sales b Cash Accounts Receivable 482,300 482,300 To record cash received on account c Allowance for Doubtful Accounts Accounts Receivable 9,350 9,350 To record write-off of accounts d Bad Debts Expense Allowance for Doubtful Accounts To record estimated bad debts 11,287 11,287 * *Beginning receivables Credit sales Collections Write-offs Ending receivables Percent uncollectible Required ending allowance Unadjusted balance Adjustment to the allowance $ 685,320 (482,300) (9,350) 193,670 x 1.0% 1,937** Cr 9,350 Dr $ 11,287 Cr ** Rounded to nearest dollar ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 405 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 7-2B (Concluded) 2008 e Accounts Receivable Sales 870,200 870,200 To record sales on account Cost of Goods Sold 650,000 Merchandise Inventory 650,000 To record cost of sales f Cash Accounts Receivable 990,800 990,800 To record cash received on account g Allowance for Doubtful Accounts Accounts Receivable 11,090 11,090 To record write-off of accounts h Bad Debts Expense Allowance for Doubtful Accounts To record estimated bad debts 9,773 9,773 * *Beginning receivables Credit sales Collections Write-offs Ending receivables Percent uncollectible Required ending allowance Unadjusted balance Beginning (credit) $ 1,937 Write-offs (debit) 11,090 Adjustment to the allowance $ 193,670 870,200 (990,800) (11,090) 61,980 x 1.0% 620 Cr $ 9,153 Dr 9,773 Cr ©McGraw-Hill Companies, 2008 406 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 7-3B (35 minutes) Part a Expense is 2.5% of credit sales Dec 31 Bad Debts Expense 33,550 Allowance for Doubtful Accounts 33,550 To record estimated bad debts [$1,342,000 x 025] b Expense is 1.5% of total sales Dec 31 Bad Debts Expense Allowance for Doubtful Accts 35,505 35,505 To record estimated bad debts [($1,025,000 + $1,342,000) x 015] c Allowance is 6% of accounts receivable Dec 31 Bad Debts Expense 27,000 Allowance for Doubtful Accounts To record estimated bad debts.* * Estimated balance ($575,000 x 6%) Unadjusted balance $ 34,500 credit 7,500 credit Required adjustment $ 27,000 credit 27,000 Part Current assets Accounts receivable Less allowance for doubtful accounts $575,000 (41,050)* Or: Accounts receivable (net of $41,050* uncollectible accounts) * Adjustment to the allowance $33,550 Unadjusted allowance balance 7,500 Adjusted balance $41,050 $533,950 $533,950 credit credit credit Part Current assets Accounts receivable Less allowance for doubtful accounts Or: Accounts receivable (net of $34,500** uncollectible accounts) $575,000 (34,500)** $540,500 $540,500 ** See computations in Part 1c ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 407 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 7-4B (35 minutes) Part Calculation of the estimated balance of the allowance Not due: $396,400 x 020 = $ 7,928 to 30: 277,800 x 040 = 11,112 31 to 60: 48,000 x 085 = 4,080 61 to 90: 6,600 x 390 = 2,574 Over 90: 2,800 x 820 = 2,296 $27,990 Part Dec 31 Bad Debts Expense 31,390 Allowance for Doubtful Accounts To record estimated bad debts * 31,390 * Unadjusted balance $ 3,400 debit Estimated balance 27,990 credit Required adjustment $31,390 credit Part Writing off the account receivable in 2009 will not directly affect Year 2009 net income The entry to write off an account involves a debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable, both of which are balance sheet accounts Net income is affected only by the annual recognition of the estimated bad debts expense, which is journalized as an adjusting entry Net income for Year 2008 (the year of the original sale) included an estimated expense for write-offs such as this one ©McGraw-Hill Companies, 2008 408 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 7-5B (75 minutes) Part 2007 Nov Notes Receivable—S Julian Accounts Receivable—S Julian 4,800 4,800 To record note received on account Dec 31 Interest Receivable Interest Revenue 64 64 To record interest earned [$4,800 x 08 x 60/360] 2008 Jan 30 Cash Interest Revenue* Interest Receivable Notes Receivable—S Julian 4,896 32 64 4,800 To record cash received on note with interest *[$4,800 x 08 x 30/360] Feb 28 Notes Receivable—King Co 12,600 Accounts Receivable—King Co 12,600 To record note received on account Mar Notes Receivable—M Shelley Accounts Receivable—M Shelley 6,200 6,200 To record note received on account 30 Accounts Receivable—King Co 12,684 Interest Revenue Notes Receivable—King Co 84 12,600 To record receivable for dishonored note plus interest [$12,600 x 08 x 30/360] Apr 30 Cash Interest Revenue Notes Receivable—M Shelley 6,324 124 6,200 To record cash received on note plus interest ($6,200 x 12 x 60/360 = $124 rounded) ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 409 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 7-5B (Concluded) June 15 Notes Receivable—R Solon Accounts Receivable—R Solon 2,000 2,000 To record note received on account June 21 Notes Receivable—J Felton Accounts Receivable—J Felton 9,500 9,500 To record note received on account Aug 14 Cash Interest Revenue* Notes Receivable—R Solon 2,027 27 2,000 To record cash received on note plus interest *[$2,000 x 08 x 60/360] rounded to nearest dollar Sept 19 Cash Interest Revenue* Notes Receivable—J Felton 9,714 214 9,500 To record cash received on note plus interest *[$9,500 x 09 x 90/360] rounded to nearest dollar Nov 30 Allowance for Doubtful Accounts 12,684 Accounts Receivable—King Co 12,684 To record write-off of accounts Part Analysis Component: When a business pledges its receivables as security for a loan and the loan is still outstanding at period-end, the business must disclose this information in notes to its financial statements This is a requirement because the business has committed a portion of its assets to cover a specific portion of its liabilities, which means that if the business dishonors its obligations under the loan, the creditor can claim the amount of receivables identified in the pledge as collateral to cover the loan This arrangement must be disclosed to satisfy the full-disclosure principle ©McGraw-Hill Companies, 2008 410 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com SERIAL PROBLEM — SP Serial Problem — SP 7, Success Systems (50 minutes) a Bad debts expense is recorded as 1% of total revenues: $52,195 x 01 = $521.95 which is $522 rounded to nearest dollar 2008 Mar 31 Bad Debts Expense Allowance for Doubtful Accounts 522 522 To record estimated bad debts b Bad debts expense is recorded as 2% of accounts receivable: $24,400 x 02 = $488 c 2008 Mar 31 Bad Debts Expense Allowance for Doubtful Accounts 488 488 To record estimated bad debts Allowance Balance as of 3/31/08 $488 Cr Less: Account written off (100) Dr Allowance Balance as of 6/30/08 $388 Cr (before adjustment) Required Balance: $26,500 x 02 = $530 Required Adjustment: $530 - $388 = $142 2008 June 30 Bad Debts Expense Allowance for Doubtful Accounts 142 142 To record estimated bad debts Many small business owners use the direct write-off method of recording bad debts expense The direct method is a simple and straightforward method of accounting for bad debts expense It can also be justified if the amounts are immaterial However, when the amounts are material, the direct write-off method can result in accounts receivable overstatements, bad debts expense understatements, and net income overstatements The method required per GAAP is the allowance method, which will result in the best matching of a period’s expenses to revenues ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 411 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Reporting in Action — BTN 7-1 Best Buy’s receivables at February 26, 2005, are $375,000,000 Accounts receivable turnover for fiscal 2004 ($ millions) $27,433 ($343 + $375)/2 = 76.4 times Average collection period = 365/ Turnover = 365 / 76.4 = 4.8 days This time period is so short because Best Buy does not generally sell items on credit Customers use cash or credit cards to pay for their merchandise It is not likely that all customers pay in about days It is more likely that credit customers pay in about 30 to 60 days Since there are so few of them, however, the average is very short This is because the numerator includes all sales (cash and credit) and the denominator includes only credit sales Liquid assets as a percent of current liabilities ($ millions) Feb 26, 2005: $470 + $2,878 + $375 $4,959 = 75.1% Feb 28, 2004: $245 + $2,355 + $343 $4,501 = 65.4% Comments: Current liabilities are obligations that are due to be paid or liquidated within one year or one operating cycle of the business, whichever is longer Typically, cash provided from the operations of the business during the year along with the existing liquid assets are used to satisfy these obligations Looking solely at Best Buy’s ability to satisfy current obligations using cash, investment, and receivables assets, the company is in a better position at February 25, 2005, as compared to February 28, 2004 Best Buy may have some trouble satisfying its current liabilities with these liquid assets As a benchmark it is preferable to have about 100% in liquid assets to cover current liabilities Note to Best Buy’s consolidated financial statements reports its significant accounting policies It reports that: ―Cash primarily consists of cash on hand and bank deposits Cash equivalents primarily consist of money market accounts and other highly liquid investments with an original maturity of three months or less when purchased.‖ Solution depends on the financial statement information obtained ©McGraw-Hill Companies, 2008 412 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Comparative Analysis — BTN 7-2 Accounts Receivable Turnover ($ millions) Best Buy (Current Year): $27,433 ($343 + $375)/2 = 76.4 times Best Buy (Prior Year): $24,548 ($312 + $343)/2 = 75.0 times Circuit City (Current Year): $10,472 ($173 + $171)/2 = 60.9 times Circuit City (Prior Year): $9,857 ($140 + $171)/2 = 63.4 times Average Collection Period (or ―Average Days’ Sales Uncollected‖) Best Buy (Current Year): 365 days / 76.4 times = 4.8 days Best Buy (Prior Year): 365 days / 75.0 times = 4.9 days Circuit City (Current Year): 365 days / 60.9 times = 6.0 days Circuit City (Prior Year): 365 days / 63.4 times = 5.8 days These time periods are so short because neither company sells merchandise on credit very often Receivables are a small percent of current assets and credit sales are a small percent of total sales Both companies appear efficient in collecting accounts receivable, but Best Buy collects them 1.2 days more quickly in the current year and 0.9 days more quickly in the prior year These differences are not likely material, however ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 413 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ethics Challenge — BTN 7-3 If the estimate for bad debts is reduced then less Bad Debts Expense will be recognized on the income statement resulting in a higher net income It also means that a lower allowance will be shown on the balance sheet, which will result in a higher realizable value for receivables and, therefore, a larger amount of current liquid assets Accounting procedures often allow for alternate methods or require the use of estimates Therefore, managers have some leeway in their application of accounting procedures In this case it seems reasonable to doubt the motivation behind the manager’s recommendation for a lower bad debts expense There does not appear to be any economic justification for the change in estimate aside from the self-interest of the manager An informed owner or an effective board of directors will be aware of alternate accounting methods and how estimates can affect the financial statements The owner or board should review the reasonableness of the manager’s and accountant’s estimate for bad debts expense Also, if the company is audited, the auditors will review this estimate for reasonableness ©McGraw-Hill Companies, 2008 414 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Communicating in Practice — BTN 7-4 TO: Sid Omar FROM: (Your Name) DATE: _ SUBJECT: Difference Between Bad Debts Expense and Allowance For Doubtful Accounts In accounting for credit sales and bad debts, we report sales revenue in the period the sales are made, even though some credit sales not result in collections until the following period Of course, some credit sales eventually prove to be uncollectible The fact that some accounts will become uncollectible is what gives rise to bad debts expense and the allowance for doubtful accounts DETERMINING BAD DEBTS EXPENSE Bad debts expense represents the estimated amount of the year's sales that will become uncollectible The reported amount of bad debts expense is determined at the end of the accounting period by multiplying an estimated percent times the annual sales for the period This year's bad debts expense of $59,000 is calculated as 2% of the annual sales of $2,950,000 DETERMINING ALLOWANCE FOR DOUBTFUL ACCOUNTS The Allowance for Doubtful Accounts unadjusted balance at the end of the year is the cumulative result of recording bad debts expense and writing off specific accounts receivable in all past years The recognition of bad debts expense at the end of each year has the effect of increasing the Allowance for Doubtful Accounts balance However, when specific accounts receivable are written off, they decrease the Allowance for Doubtful Accounts balance Prior to this year's bad debts expense calculation, the cumulative total of writing off specific accounts was $16,000 greater than the cumulative total of the past years' bad debts expenses Therefore, you could say that Allowance for Doubtful Accounts had an "abnormal" balance of $16,000 Then, when this year's bad debts expense of $59,000 is added to Allowance for Doubtful Accounts, the result is an ending balance of $43,000 Sid, I hope this clarifies the matter for you If you have further questions, please call me ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 415 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Taking It to the Net — BTN 7-5 At December 31, 2004, eBay’s ($ thousands) net accounts receivable were $240,856, and at December 31, 2003, its net accounts receivable were $255,871 (These amounts not reconcile to gross accounts receivable less allowances shown below This is due to an additional allowance account used by the company.) December 31, ($ thousands) 2004 Gross accounts receivable $319,489 Allowance for doubtful accounts 67,853 % of uncollectible accounts 21.2% December 31, 2003 $273,940 43,194 15.8% These percentages seem high compared to other companies, but eBay’s operations are all on-line, and the risk of fraudulent transactions may be higher than other companies eBay’s prior experience has led them to estimate this high amount of uncollectible accounts Teamwork in Action — BTN 7-6 Instructor note: Computations for the aging schedule are in the Problem 7-4A solution The check figure for total estimated uncollectibles is $41,650 Adjusting entry Dec 31 Bad Debts Expense 27,150 Allowance for Doubtful Accounts To record estimated bad debts.* * Req allowance balance Unadjusted balance $41,650 credit 14,500 credit Adj to the allowance $27,150 credit 27,150 December 31, 2008, Balance Sheet Presentation Accounts Receivable $1,220,000* Less Allowance for Doubtful Accounts 41,650 1,178,350** * Total of each age category ** Net Realizable Accounts Receivable ©McGraw-Hill Companies, 2008 416 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com BusinessWeek Activity — BTN 7-7 The main reason is that small business owners sell their products and fill orders, but not pay much attention to the receivables They haven’t invested any money in an updated collection system One thing Frischer recommends is charging interest That way, the small business’s receivable will move up the list of who the customer will pay In addition, the interest can be used as leverage – the company can offer to deduct the interest if the customer pays Frischer also recommends calling, rather than writing the customer; getting a sales contract; and doing credit checks Entrepreneurial Decision — BTN 7-8 Computation of added annual net income or loss a Added Monthly Net Income or Loss under Plan A Increased sales $250,000 Cost of sales (135,500) Credit card fees ($250,000 x 4.75%) (11,875) Recordkeeping and shipping ($250,000 x 6%) (15,000) Lost Gross Profit on store sales ($35,000 x 25%) (8,750) Net income (loss) $ 78,875 b Added Monthly Net Income or Loss under Plan B Increased sales $500,000 Cost of sales (375,000) Recordkeeping and shipping ($500,000 x 4%) (20,000) Uncollectible accounts ($500,000 x 6.2%) (31,000) Net income (loss) $ 74,000 ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 417 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Entrepreneurial Decision — BTN 7-8 continued Plan (A) provides a slightly higher income, so if Torres-Winter can only pursue one plan now, based purely on the financial aspect, she should choose Plan (A) Plan (A) might expand her product into new markets, and may continue to increase sales over time However, this is a new distribution method for her, and she may lack the expertise to it well She will need to further assess whether the benefit of additional expansion of on-line sales over time will be less than the cost of lost regular store sales Taking credit cards for these on-line sales reduces her risk of uncollectible accounts The credit card company takes the risk of the customer not paying Plan (B) is a way to expand her sales, possibly into more states This is an expansion of a distribution method she is familiar with She does run some risk of having new stores as customers While she may understand her current customers, she will need to closely monitor her new customers to make sure that the uncollectible accounts not rise beyond acceptable levels Hitting the Road — BTN 7-9 Telephone calls to VISA and American Express are the source of information for this solution VISA reports that the average transaction fee it charges merchants is 3% American Express has a range, depending on volume of business and average price of merchandise sold, which ranges from 2.95% to 4.5% Some merchants often choose not to accept certain cards because the credit card fees are higher than others In the case of VISA, compared to American Express, a merchant might have to pay as much as 1.5% more on its American Express transactions This can be a major part of its net profit margin, especially for businesses such as grocery and hardware stores ©McGraw-Hill Companies, 2008 418 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Global Decision — BTN 7-10 Dixons does not have any accounts called ―accounts receivable‖ or ―receivables‖ on its balance sheet There is an account under current assets called ―Debtors – falling due within one year.‖ This account is its version of the accounts receivable account Calling it ―Debtors‖ makes sense, as these customers owe Dixons on account, and these accounts have debit balances (The accounts payable are called ―Creditors‖ because they are creditors of Dixons, and those accounts payable have credit balances.) Most U.S investors might prefer the presentation in Best Buy’s and Circuit City’s financials It is more familiar to them However, there is no inherent reason that one presentation is better than another—other than familiarity ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 419 ... when purchased.‖ Solution depends on the financial statement information obtained ©McGraw-Hill Companies, 2008 412 Financial Accounting, 4th Edition To download more slides, ebook, solutions and... plus interest ($6,000 x 12% x 90/360) ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 389 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com... compete at the average level ©McGraw-Hill Companies, 2008 390 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com