AC300.01: Unit 9 Seminar January 11, 2012 School of Business and Management.

transcript

AC300.01: Unit 9 Seminar January 11, 2012

School of Business and Management

Agenda

• Welcome

• Seminar Rules

• C7-4 Receivables Issues (Page 365)

Questions

Seminar Rules by Greg Rose

1. If I type *BREAK* everybody quit typing, OK? Type “OK” if you get this one!

2. When asking questions, please RAISE YOUR HAND (TYPE //). Otherwise you might interrupt a stream of dialogue.

3. Please do NOT start side conversations.

4. Do not interject “I agree” or “good point” because this clutters the seminar. We assume you agree and think the point is good!

5. Don`t worry about typos. Be clear as you can and refrain

from smileys and slang – use proper English.

• Assignments Grading

• Late Policy

• Seminar procedures and Polling

• Questions

C7-4 Receivables Issues

AICPA Adapted Magrath Company has an operating cycle of less than one year and provides credit terms for all of its customers. On April 3, 2010, the company factored, without recourse, some of its accounts receivable.

• On August 1, 2010, Magrath sold special order merchandise and received an interest-bearing note due April 30, 2011.

• Magrath uses the allowance method to account for uncollectible accounts. During 2010, some accounts were written off as uncollectible, and other accounts previously written off as uncollectible were collected.

• Required:

1. Explain how Magrath should account for and report the accounts receivable factored on April 3, 2010. Why is this accounting treatment appropriate?

When a company factors its accounts receivable, it sells individual accounts to a financial institution

(called a factor).

When a company factors its accounts receivable, it sells individual accounts to a financial institution

(called a factor).

Factoring

Farber Corporation sells $80,000 of accounts receivable to a factor, receives 90% of the value of

the factored accounts, and is charged a 15% commission based on the gross amount of factored

accounts receivable.

Farber Corporation sells $80,000 of accounts receivable to a factor, receives 90% of the value of

the factored accounts, and is charged a 15% commission based on the gross amount of factored

accounts receivable.

Cash 60,000Receivables from Factor 8,000Factoring Expense 12,000

Accounts Receivable80,000

($80,000 ($80,000 ×× .90) .90) –– $12,000 $12,000($80,000 ($80,000 ×× .90) .90) –– $12,000 $12,000

$80,000 $80,000 ×× 0.10 0.10$80,000 $80,000 ×× 0.10 0.10

$80,000 $80,000 ×× 0.15 0.15$80,000 $80,000 ×× 0.15 0.15

Factoring

• Required:

• 2. Explain how Magrath should report the effects of the interest-bearing note on its income statement for the year ended December 31, 2010 and its December 31, 2010 balance sheet.

A note receivable is an unconditional written agreement to collect a certain sum of money

on a specific date.

A note receivable is an unconditional written agreement to collect a certain sum of money

on a specific date.

Notes Receivable

Notes receivable generally have two attributes that are not found

in accounts receivable.

Notes receivable generally have two attributes that are not found

in accounts receivable.

Notes Receivable

1. They are negotiable instruments, which means that they are legally transferable among parities and may be used to satisfy debts by the holders of these instruments.

2. They usually involve interest, requiring the separation of the receivable into its principal and interest components.

Notes Receivable

Interest-BearingInterest-Bearing

Received a $5,000, 60-day, 12% note on October 1, 2010:

Notes Receivable 5,000Sales5,000Received maturity value on December 1, 2010:

Cash 5,100Notes Receivable5,000Interest Revenue100

Notes Receivable

$5,000 $5,000 ×× 0.12 0.12 ×× 60/360 60/360$5,000 $5,000 ×× 0.12 0.12 ×× 60/360 60/360

• Required:

4. What are the two basic approaches to estimating uncollectible accounts under the allowance method?

What is the rationale for each approach?

Estimated Bad Debts Method

Bad debts can be estimated based on

sales or on accounts receivable.

Bad debts can be estimated based on

sales or on accounts receivable.

1. Relationship to sales (income statement approach): Percentage of sales Percentage of net credit sales

2. Relationship to accounts receivable (balance sheet approach): Percentage of outstanding accounts receivable Aging of accounts receivable

Percentage of SalesPercentage of Sales

If a company’s net credit sales during the year were $525,000 and bad debts have historically amounted to 2% of net credit

sales, what is the required year-end adjusting entry?

If a company’s net credit sales during the year were $525,000 and bad debts have historically amounted to 2% of net credit

sales, what is the required year-end adjusting entry?

Bad Debt Expense 10,500Allowance for Doubtful Accounts10,500

$525,000 $525,000 ×× 0.02 0.02$525,000 $525,000 ×× 0.02 0.02

Percentage of Outstanding Accounts Receivable

If a company has determined that historically there has been a 4% relationship between actual bad debts and the year-end accounts receivable balance ($475,000), what would be the

required year-end adjusting entry?

Allowance for Doubtful Accounts

4,500 (current balance)

$475,000 x 0.04 = $19,000$475,000 x 0.04 = $19,000$475,000 x 0.04 = $19,000$475,000 x 0.04 = $19,000

Percentage of Outstanding Accounts

Receivable

19,000 (required ending balance)

Receivable

14,500 (required adjustment)

Percentage of Outstanding Accounts Receivable

Bad Debt Expense 14,500Allowance for Doubtful Accounts 14,500

Aging of Accounts Receivable

1. Review the unpaid invoices in each customer’s account.

2. Classify the invoice amounts according to the length of time the invoice has been outstanding.

3. Multiply the total amount in each age group by the applicable estimated uncollectible percentage.

4. Make a journal entry to bring the balance in Allowance for Doubtful Accounts to the amount calculated in Step 3.

× 2× 8× 15× 30× 50

%Under 60 days $ 53,50060–120 days 34,500121–240 days 3,600241–360 days 15,700Over 1 year 14,500

$121,800

Estimated Percentage

Uncollectible

Estimated Amounts

Uncollectible

= $ 1,070

= 2,760

= 4,710

= 7,250

$16,330

If the firm has a current $1,350 debit balance, the required adjusting entry would be:

1,350 (current balance) 17,680 (required adjustment)

16,330 (required ending balance)

Bad Debt Expense 17,680Allowance for Doubtful Accounts17,680

If the firm has a current $1,350 debit balance, the required adjusting entry would be:

$16,330 + $1,350$16,330 + $1,350$16,330 + $1,350$16,330 + $1,350

Writing Off Uncollectibles

Accounts Receivable

175,000

A customer’s account totaling $1,000 is determined to be uncollectible.

Allowance for Doubtful Accounts 1,000Accounts Receivable 1,000

Net realizable value = $166,250

Net Realizable Value

Accounts receivable

Less: Allowance for doubtful accounts

Net realizable value

Before

Write-off Write-offAfter

Write-off

$175,000

(8,750)

$166,250

$(1,000)

$174,000

(7,750)

$166,250

• Required:

• 3. Explain how Magrath should account for the collection of the accounts previously written off as uncollectible.

Collection of an Account Previously Written Off

Later, a payment for $300 is received from the account that was written off in the previous slide.

Accounts Receivable 300Allowance for Doubtful Accounts 300

Cash 300Accounts Receivable 300

Questions

Thank you for attending this seminar.

Cash is the lifeblood for companies, and infusions are coming more frequently from nontraditional sources. According to a recent Federal Reserve Payments Study, noncash payments grew by 4.6% over the previous three years and had a total value of $75.8 trillion.

Of these noncash payments, more than two-thirds were made electronically, with debit cards being the most frequently used electronic payment type.

Show Me the Money!

Debit and credit cards are used most frequently. The automated clearing house (ACH) is an

electronic network that provides for the interbank clearing of electronic payments.

ACH payments currently represent 91% of the value of all electronic payments.

Show Me the Money!

Direct deposit of payroll and social security Electronic payments of bills

– Mortgages– Utility bills– Insurance premiums

The conversion of checks by businesses

Automated Clearing House (ACH)

ACH payments include:

Number and Value of Noncash Payments

Accounts receivable conversion (ARC)– Paper checks received at the bank lockbox are

converted into automated clearing house debits and then the check is destroyed.

– ARC payments are about one-third cheaper than paper checks.

– Float time is cut in half. Check Clearing for the 21st Century Act (Check

21)– Gives legal status to substitute checks– Allows merchants to scan and transmit checks

to the bank

Electronic Banking

Cash is the resource on hand to meet planned payments and

emergency situations.

Excluded from Cash

• Coins and currency• Checking accounts• Savings accounts• Negotiable checks• Bank drafts

Included in Cash

• Certificates of deposit• Bank overdrafts• Postdated checks• Travel advances• Postage stamps

Cash equivalents are short-term, highly liquid investments that are readily convertible into

known amounts of cash and so near their maturity that there is little risk of changes in value because of changes in interest rates.

Cash Equivalents

Cash Management

• The person opening the mail or the salesperson using the cash register should count the receipts immediately.

• All cash receipts are recorded daily in the accounting records.

• All receipts are deposited daily in the company’s bank account.

Control Over ReceiptsControl Over Receipts

Make all payments by check or electronic payment (except petty cash items) so that a record exists for every company expenditure.

Authorize and sign all checks only after an expenditure is verified and approved.

Periodically reconcile the cash balance in the bank statement with the company’s accounting records.

Control Over PaymentsControl Over Payments

Cash Management

AC300.01: Unit 9 Seminar January 11, 2012 School of Business and Management.

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