Accounting Priciples Part 2x

Compiled By Nut Khorn, -Page 1-

COURSE SYLLABUS FOR Accounting Principles (Part II)

By Nut Khorn (Course Facilitator) For BBA students

This course aims to introduce to the students the financial accounting and it real practices in making decisions in the normal operations in the business. The financial accounting provides the external user such as investors, creditors, and so on; that is, the investors need to know the financial statements of the company information, especially, financial reporting (annual reports) to making decisions whether or not they will invest for their resources such as cash and other assets or financial assets.

II. COURSE OBJECTIVES

The objectives of the course are to enable the student to: 1. Apply the financial technique in preparing the financial statement of

the Service Company and Merchandising Company. 2. Apply for the preparing the CLOSING ENTRIES process of the

Merchandising Company. 3. Apply for the Accounts Receivable and the Method the writeoff of

about it. 4. Apply for the method using the Merchandise inventories.

III. COURSE CONTENT The following chapters will be discussed in this course:

Chapter 1: accounting for merchandising businesses

LEARNING OBJECTIVES: Upon completion of this chapter, students will be able to:

1. Identify the differences between service and merchandising companies. 2. Explain the recording of purchases under a perpetual inventory system. 3. Explain the recording of sales revenues under a perpetual inventory

system. 4. Explain the steps in the accounting cycle for a merchandising company. 5. Distinguish between a multiple-step and a single-step income statement. 6. Explain the computation and importance of gross profit. 7. Determine cost of goods sold under a periodic system.

I: COURSE DESCRIPTION


TIME FRAME: Week 1

Chapter 2: Receivables


1. Identify the different types of receivable. 2. Explain how accounts receivable are recognized in the accounts. 3. Distinguish between the methods and bases used to value accounts

receivable 4. Describe the entries to record the disposition of accounts receivable. 5. Compute the maturity date of, and interest on, note receivable. 6. Explain how notes receivable are recognized in the accounts. 7. Describe the entries to record the disposition of the notes receivable. 8. Explain the statement presentation of receivable.

TIME FRAME: Week 2

Chapter 3: Payables LEARNING OBJECTIVES: Upon completion of this chapter, students will be able to:

1. Explain a current liability and identify the major types of current liabilities

2. Describe the accounting for notes payable. 3. Explain the accounting for other current liabilities. 4. Describe the accounting and disclosure requirement for contingent

liabilities.

TIME FRAME: Week 3

Chapter 4: Inventories


1. Describe the steps in determining inventories quantities. 2. Explain the basis of accounting for inventories and describe the

inventory cost flow methods. 3. Explain the financial statement and tax affects of each of the inventory

cost flow methods. 4. List the essential accounting features of a perpetual inventory system.

TIME FRAME: Week 4

IV. LEARNING RESOURCES: Required textbook


Jan R Williams, Susan F. Haka, and Mark S. Bettner Financial & Managerial Accounting , (2005), The 13rd Edition, Mc GRAW-HILL. (USA).

Reference: 1. WEYGRANT. KIESO. KELL.1996.

Accounting Principles. Fourth Edition, Wiley (USA) 2. Kermit D. Larson. Contributed Author

Barbara Chiappetta . 1996 Fundamental Accounting Principles.

3. NEEDLES. ANDERSON. CALDWELL Financial & Managerial Accounting A Corporate Approach Fourth Edition 1996

4. Jam R. Williams, Susan F. Haka, and Mark S. Bettner. ( 2005). Financial & and Managerial Accounting 13 Edition, McGra-Hill (USA).

5. Ministry of Economy and Finance. 2003. The Cambodian Accounting Standards (CAS). Cambodia.

6. Ministry of Economy and Finance, National Accounting Council .2006. Financial Reporting Template for Small and Medium Sized Enterprises.

Internet Web for these Courses:

www.wiley.com/college/weygandt (Accounting Principles, Financial Accounting, Hospital Accounting, and Managerial Accounting) www.mhhe.com/williams_basis14e www.mhhe.com/wild

Note: When you research the entire web above you should enter the STUDENT CENTER OR STUDENT

COMPONION.

V. Course requirement Student must have basic knowledge of Business mathematics, business, and Accounting Principles.

VI. Evaluation of the student performance Course assessment: Attendance and participation. 10 % Home work. 30% Assignment................... 20% Mid-term Exam 20% Final Examination .. 20%

Total: .. 100%


VII. COURSE DURATION The duration of this course will take approximately one month and one week or forty-eight (48) hours to complete. Formal class room lectures/ discussion lasting 15 hours will be conducted once a week.

VIII: EVALUATION OF STUDENT PERFORMANCE Beside formal classroom lectures and theoretical discussions, the students will also be introduced to class Self-study questions, questions, exercises, problems, and case-study and discussion that will provide them with a more comprehensive learning package in this course. It is expected that formal class discussions will provide the conceptual and knowledge-oriented learning, while the class exercises and case study will provide students the experiential, development and sharpening of their managerial skills. Through this process, students can become more involved in the learning process. It is therefore essential that students participate actively in class discussions and during the Q & A group case study presentations. The class exercises and case study are generally action oriented in that individuals or groups of students investigate a situation, develop conclusions, and/or recommendations, and present their ideas/views to their class colleagues.

Work Requirement for a Accounting Principles Major under Mr. Nut Khorn I will apply the international standard when I teach all accounting courses

I will require that you do all the assigned work before class:

Read your textbook (slide presentation is not complete) Read the power point materials Do the assignments Prepare for all examinations. Internet research work.

To perform well in my courses, you need to spend about a minimum of 15 hours per week for this class. If you do not want to make this commitment, then do not take my courses.

You should be present in all my classes. If you do not show up for my lectures, I will consider you as absent (no need to give excuses).

If you fail any of my courses (I hope you wont), you must retake a new written examination plus an oral examination to prove that you know the subjects.

HOME WORK AND ASSIGNMENT

Students MUST COMPLY STRICTLY with the following instructions in writing their Home Work, Individual Assignments, Group Case-study and Group Case-Study Presentation. 1. The student(s) is expected to do his/her own research in order to write up individual assignments and home work.


2. All Individual Assignments/Home work and Group Case-Study MUST be type written on A-4 sized paper with adequate margins. You should include a TITLE PAGE and a LIST OF CONTENTS. 3. Use headings and sub-headings to organize your report, including supporting material(s) as attachments. 4. All reference books/published materials you refer to should be properly referenced (arrange in this order: name of author(s), year, and title of the book, publisher, and the country the book was published) and this must be included in a bibliography at the end of the assignment. 5. Use text referencing when you cite somebody elses work from your references. Citation may mean direct quoting, or paraphrasing, or summarizing, or simply to make a statement of that author's view of finding. An example of text referencing: Beamer and Varner (2001), suggested that culture is not something we are born with, but rather it is learned. 6. Number all pages sequentially and securely staple and/or bind all sheets together. Chapter 1: accounting for merchandising businesses Assignment:

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Home Work P1-2; P1-3; P1-14; P1-15

Chapter 2: Receivables Assignment: 1 ehtuGVI)anCaRkumhunlk;TMnijeGayGtifiCnedayCMBak;? etIGkyl; ya:gNa ? sresry:agehac eGay)an 20bnat; Home Work P2-7; P2-10 Chapter 3: Payables Home Work P3-5; P3-6 Chapter 4 Inventories Home Work P4-4; P4-5


CHAPTER. 1 ACCOUNTING FOR MERCHANDISING BUSINESSES

STUDY OBJECTIVE

After studying this chapter, you should be able to:

8. Identify the differences between service and merchandising companies. 9. Explain the recording of purchases under a perpetual inventory system. 10. Explain the recording of sales revenues under a perpetual inventory

system. 11. Explain the steps in the accounting cycle for a merchandising company. 12. Distinguish between a multiple-step and a single-step income statement. 13. Explain the computation and importance of gross profit. 14. Determine cost of goods sold under a periodic system.


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1 Cambodian Accounting Standards : CAS 2: Inventories


I. MANAGEMENT ISSUES IN MERCHANDISING BUSINESSES

Up to this point you have studied business and accounting issue related to the simplest type of business- the service business. Service business, such as advertising agencies and law firms, perform services for fees or commissions. Merchandising business, on the other hand, earn income by buying and selling products or merchandise. These companies, whether wholesale or retail, use the same basic accounting methods as do service companies, but the buying and selling of merchandise adds to the complexity of the process.

Cash Flow Management

The Operating Cycle of Merchandising Concerns

Purchases

Cash Merchandise inventory

Sales for Cash

Sales on Credit

Accounts Receivable

Collection of Cash


Profitability Management Profitability management is a complex activity that includes setting appropriate prices on merchandise, purchasing merchandise at favorable price and terms, and maintaining acceptable levels of expenses.

Choice of Inventory System Under the periodic inventory system, the inventory on hand is counted periodically, usually at the end of the accounting period. No detailed records of the actual inventory on hand are maintained during the accounting period. Under the perpetual inventory system, continuous records are kept of the quantity and, usually, the cost of individual items as they are bought and sold.

Control of Merchandising Operations The principal transactions of merchandising businesses, which involve buying and selling, are covered by asset accounts-Cash, Accounts Receivable, and Merchandise Inventory-that are vulnerable to theft and embezzlement.

II. MANAGEMENT ISSUES IN MERCHANDISING BUSINESSES

Service companies, as illustrated thus far in this book, requires only a simple income statement. For those companies, as shown in Figure 2, net income represents the difference between revenues and expenses. But merchandising companies, because they buy and sell merchandise inventory require a more complex income statement. The income


statement for a merchandiser has four major parts: (1) net sales, (2) cost of goods sold, (3) operating expenses, and (4) income taxes.

The Components of Income Statements for Service and Merchandising Companies

Service Business Fees earned $XXX Operating expenses XXX Net income $XXX

Merchandising Business Sales $XXX Cost of Goods Sold XXX Gross Profit $ XXX Operating Expenses XXX Net Income $XXX

Net Sales The first major part of the merchandising income statement is net sales, or often simply sales. Net sales consist of the gross proceeds from sales of merchandise, or gross sales, less sales returns and allowances. Gross sales consist of total cash sales and total credit sales occurring during an accounting period. Cost of Goods Sold The Second part of the merchandising income statement is cost of goods sold, or often simply cost of sales, which is the amount a merchant paid for the merchandise sold during an accounting period. Gross Margin The percentage of gross margin is computed by dividing the dollar amount of gross margin by net sales. Operating Expenses The third major area of the merchandising income statement consists of operating expenses, which are the expenses other than cost of goods sold that are incurred in running a business. The latter cost is often called freight out expense or delivery expense. Careful planning and control of operating expenses can improve a companys profitability. Income Before Income Taxes Income before income taxes is also referred to as operating income or income from operations because it represents the income from a companys normal, or main, business. Income Taxes Current federal income tax rates for corporations can vary from 15 percent to 38 percent depending on the amount of income before income taxes and other factors.


Net Income Net income, the final figure or bottom line of the income statement, is what remains after operating expenses and income taxes are deducted from gross margin. Both management and investors often use net income to measure whether a business has been operating successfully during the past accounting period.

III. Inventory Systems

As we have seen, merchandising inventory is a key factor in determining the cost of goods sold. Consequently, every merchandiser needs a useful and reliable system for determining both the quality and the cost of the goods on hand. The two basic systems of accounting for the number of items in the merchandise inventory are the periodic inventory system and the perpetual inventory system.

Periodic Method A method of determining the cost of merchandise sold and the amount of merchandise on hand. Under this method, the inventory records do not show the amount available for sale or the amount sold during the period.

Perpetual Method Under this method, each purchase and sale of merchandise is recorded in the inventory and the cost of merchandise sold accounts. The amount of merchandise available for sale and the amount sold are continuously disclosed in the inventory records.

Features: 1. Purchases increase Merchandise Inventory. 2. Freight costs, Purchase Returns and Allowances and Purchase

Discounts are included in Merchandise Inventory. 3. Cost of Goods Sold is increased and Merchandise Inventory is decreased

for each sale. 4. Physical count done to verify Merchandise Inventory balance.

The perpetual inventory system provides a continuous record of Merchandise Inventory and Cost of Goods Sold.

IV. MERCHANDISING TRANSACTIOS

Merchandising transactions can be divided into the two broad categories of sale transactions and the purchases transactions. The ways in which these transactions are recorded differ somewhat under the periodic and the perpetual inventory systems.

SALES TERMS

2/10, n/30 2% discount if paid within 10 days, otherwise net amount due within 30 days. Freight Costs


Terms FOB shipping point - seller places goods Free On Board the carrier, and

buyer pays freight costs. FOB destination - seller places the goods Free On Board to the buyers

place of business, and seller pays freight costs.

Freight costs incurred by the seller on outgoing merchandise are an operating expense to the seller (Freight-out or Delivery Expense).

Who Pays the Cost Shipping Term Where Title Passes of Transportation

FOB shipping point at origin Buyer FOB destination at destination Seller

Periodic Method Features:

1. Purchases of merchandise increase Purchases. 2. Ending Inventory determined by physical count. 3. Calculation of Cost of Goods Sold:

Beginning inventory $ 100,000 Add: Purchases, net 800,000 Goods available for sale 900,000 Less: Ending inventory 125,000 Cost of goods sold $ 775,000

Separate accounts used to record purchases, freight costs, returns, and discounts.

Company does not maintain a running account of changes in inventory. Ending inventory determined by physical count.

Calculation of Cost of Goods Sold


Information related to Chevalier Co. is presented below. Prepare the journal entry to record the transaction under a periodic inventory system.

1. On April 5, purchased merchandise from Paris Company for $22,000 terms 2/10, net/30, FOB shipping point.

Dr Cr April 5. Purchases $22,000 A/P.. $22,000 (Terms, 2/10, n/30, from Paris Company)

2. On April 6, paid freight costs of $600 on merchandise purchased from Paris. April 6. Freight-in . $600 Cash $600

3. On April 8, returned damaged merchandise to Paris Company and was granted a $4,000 allowance.

April 8. A/P $4,000 Purchases Returns and Allowance. $4,000

4. On April 15, paid the amount due to Paris Company in full. Remember the return of $4,000 of merchandise. April 15. A/P .. $18,000 Purchases Discounts ... $360 Cash . $17,640 ($22,000 - $4,000 = $18,000x 0.02 = $360)


5. On April 16, Chevalier Co. sold $500,000 of merchandise to Hashmi Co., terms 2/10, n/30, FOB shipping point. Cost of merchandise sold was $350,000.

April 16. A/R.. $500,000 Sales .. $500,000 (Terms, 2/10, n/30, to Hashmi Co.,)

6. On April 20, Chevalier Co. accepted for full credit the return of $1,000 of merchandise sold to Hashmi Co., on April 16, the cost of which was $500.

April 20. A/R. $1,000 Sales Returns and Allowance.. $1,000

7. On April 22, Chevalier Co. received payment in full of the account from Hashmi Co.,, less the return of April 20.

April 22. Cash $489,020 Sales Discounts ..$9,980 A/R. $ 499,000

Perpetual Method Summarizing the Transactions above:

Dr Cr5-Apr Merchandise Inv 22,000.00$

A/P 22,000.00$ (Terms, 2/10,n/30,From Paris Company)

6-Apr Merchandise Inv 600.00$ Cash 600.00$

8-Apr A/P 4,000.00$ Merchandise Inv 4,000.00$

15-Apr A/P 18,000.00$ Merchandise Inv 360.00$ Cash 17,640.00$

16-Apr A/R 500,000.00$ Sales 500,000.00$

Cost of Goods Sold 350,000.00$ Merchandise Inv 350,000.00$

(Terms, 2/10,n/30,To Hashmi Co.,) 20-Apr A/R 1,000.00$

Sales Returns and Allowance 1,000.00$ Merchandise Inv 500.00$

Cost of Goods Sold 500.00$

22-Apr Cash 489,020.00$ Sales Discounts 9,980.00$ A/R 499,000.00$


V. Forms of Financial Statements Multiple-Step Income Statement Shows several steps in determining net income. Two steps relate to principal operating activities. Distinguishes between operating and non-operating activities.

Your formula:

=+ LossIncomeNetLossesGainsERGAAP

/)(


Find Cost of Goods Sold

Single-Step Income Statement

Subtract total expenses from total revenues Two reasons for using the single-step format:

1) Company does not realize any type of profit until total revenues exceed total expenses.

2) Format is simpler and easier to read.


Your Formulas

ensesngnonoperatiensesoperatingofitGrossincomeNetorensesoperatingofitGrossoperationsfromIncomeincomeNet

COGSSalesNetofitGrossInvEndingInFreightPurchasesNetInvBeginningCOGSOr

brainyourinthemrememberpleasestatementincomeinshownisaboveformulasInvEndingsalesforavailablegoodsofCostCOGSsoldgoodsofCost

PurchasedGoodsofCostInvBeginningsalesforavailablegoodsofCostInFreightPurchasesNetPurchasedGoodsofCost

AllowanceandreturnsPurchasesDiscountsPurchasesPurchasesPurchasesNetAllowaanceAndturnsSalesDiscountsSalesSalesSalesNet

expexpPrexpPr)()7

Pr)6

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Classified Balance Sheet


Problems Chapter 1. Accounting for Merchandising Businesses

P1-1. Calculate net sales and gross profit in each of the following situations: a b c d

Sales $125,00

0 $505,000 $33,700 $256,700 Sales discounts $3,200 $13,500 $300 $4,000 Sales returns and allowances $19,000 $3,000 $6,000 $600 Cost of goods sold $67,600 $352,700 $22,300 $123,900

P1-2. A company purchased merchandise that cost $165,000 during the year that just ended. Determine the companys cost of good sold in each of the following four situations:

a) There was no beginning or ending inventories. b) There was a beginning inventory of $35,000 and no ending inventory. c) There was a $30,000 beginning inventory and a 42,000 ending

inventory. d) There was no beginning inventory but there was a $ 21,000 ending

inventory.

P1-3.The following information appeared in a companys income statement:

Sales $300,000 Sale returns $15,000 Sales discounts $4,500 Beginning inventory $25,000 Purchases $180,000 Purchases returns and allowances $6,000 Purchases discounts $3,600 Freight- In $11,000 Gross profit from sales $105,000 Net income $55,000

Required: Calculate the (a) total operating expenses, (b) cost of goods sold, and (c) ending inventory.

P1-4. The following accounts and balance are taken from the year end adjusted trial balance of the Vintage Shop, a single proprietorship. Use the information in these columns to complete the requirements.


Debit Credit Merchandise inventory $28,000 Sales $425,000 Sales returns and allowances $16,500 Sales discounts $4,000

Purchases $240,00

0 Purchases returns and allowances $18,000 Purchases discounts $2,000 Transportation -in $6,000 Selling expenses $35,000 General and administrative expenses $95,000

The count of the ending inventory shows that its cost is $37,000. Required:

a. Calculate the companys net sales for the year. b. Calculate the companys cost of purchased for the year. c. Calculate the companys cost of goods sold for the year. d. Prepare a multiple- step income statement for the year that lists net sales,

cost of goods sold, gross profit, the operating expenses, and net income.

P1-5.Record each of the following transactions, assuming the periodic inventory system is used.

Aug.2 Purchased merchandise on credit from Gear Company, invoice dated August 1, terms n/10, FOB shipping point, $2,300.

3 Received bill from State Shipping Company for transportation costs on August 2 shipment, invoice dated August 1, terms n/30, $210.

7 Returned damaged merchandise received from Gear Company on August2 for credit, $360.

10 Paid in full the amount due to Gear Company for the purchase of August 2, part of which was returned on August 7.

P1-6. Record the transaction in P1-5. above, assuming the perpetual inventory system is used.

P1-7. Record each of the following transactions, assuming the periodic inventory system is used: August 4. Sold merchandise on credit to Kwai Corporation, terms n/30, FOB destination, $1,200. August 5. Paid transportation costs for sale of August 4, $110.


August 9. Merchandise sold on August 4 was accepted back from Kwai Corporation for full credit and returned to the merchandise inventory, $350. September 4. Received payment in full from Kwai Corporation for merchandise sold on August 4, less the return on August 9.

P1-8. Record the transactions in P1-7. using the perpetual inventory system, assuming that the merchandise sold on August 4 cost $720 and the merchandise returned on August 9 cost $210.

P1-9. On April 15, the Sural company sold merchandise to Astor Corporation for $1,500 on terms 2/10, n/30. Record the entries in both Surals and Astors records for (1) the sales, (2) a return of merchandise on April 20 of $300, and (3) payment in full on April 25. Assuming both companies use the periodic inventory system.

P1-10. a. If beginning inventory is $10,000, purchases total $85,000, and ending inventory is $12,700, how much is cost of goods sold? b. If beginning inventory is $23,000, purchases total $119,000, and cost of goods sold is $127,000, how much is ending inventory?

P1-11. Auto Max Used Cars purchased inventory costing $100,000 and sold 70% of the automobiles for $120,000. All purchases were on account. Sales were for note receivable, with Auto Max collecting 20% up front. 1) Journalize theses two transactions for Auto Max, which uses the perpetual inventory system. 2) For these transactions, show what Auto Max will report inventory, revenues, and expenses on its financial statements. Report gross profit on the appropriate statement.

P1-12. Information related to Pagnucci Co. is presented below. 1. On April 5, purchased merchandise from Steff Company for $20,000,terms 2/10, net/30,FOB shipping point. 2. On April 6 paid freight costs of $700 on merchandise purchased from Bryant. 3. On April 7, purchased equipment on account for $29,000. 4. On April 8, returned damaged merchandise to Steff Company and was granted a $3,000 credit for returned merchandise. 5. On April 15 paid the amount due to Steff Company in full. Instructions (a) Prepare the journal entries to record these transactions on the books of Pagnucci Co. under a perpetual inventory system. (b) Assume that Pagnucci Co. paid the balance due to Steff Company on May 4 instead of April 15. Prepare the journal entry to record this payment.

P1-13. On September 1, Jiggs Office Supply had an inventory of 40 calculators at a cost of $18 each.The company uses a perpetual inventory system. During September, the following transactions occurred. Sept. 6 Purchased 70 calculators at $20 each from Billy Jack Co. for cash.

9. Paid freight of $68 on calculators purchased from Billy Jack Co.


10. Returned 2 calculators to Billy Jack Co. for $40 credit because they did not meetspecifications.

12. Sold 40 calculators costing $18 for $34 each to Kerry Book Store, terms n/30.

14. Granted credit of $34 to Kerry Book Store for the return of one calculator that was not ordered.

20. Sold 30 calculators costing $21 (including freight) for $35 each to Sayers Card Shop, terms n/30.

Instructions Journalize the September transactions.

P1-14. In its income statement for the year ended December 31, 2008, Duthie Company reported the following condensed data. Administrative expenses..$304,000 Selling expenses $ 343,000 Cost of goods sold 902,000 Loss on sale of equipment... 7,000 Interest expense. 49,000 Net sales. 1,620,000 Interest revenue 20,000

Instructions (a) Prepare a multiple-step income statement. (b) Prepare a single-step income statement.

P1-15. Presented below is financial information for two different companies.

Viet Naise Company Company

Sales . $210,000. (d) Sales returns.. (a) .. $ 5,000 Net sales 200,000 95,000 Cost of goods sold 120,000 . (e) Gross profit (b). 42,000 Operating expenses . 50,000. (f) Net income (c) . 20,000 Instructions Determine the missing amounts. P1-16: Prepare journal entries to record the following merchandising transactions of Garcia Company, which applies the perpetual inventory system. (Hint: It will help to identify each receivable and payable; for example, record the purchase on August 1 in Accounts PayableWeir Co.) Aug. 1 Purchased merchandise from Weir Company for $25,000 under

credit terms of 1/10, n/45, FOB shipping point. 2 Paid $300 for freight charges on the purchase of August 1.

4 Sold merchandise to Cassidy Corp. for $3,800 under credit terms of 2/10, n/60, FOB shipping point. The merchandise had cost $1,700.


6 Purchased merchandise from Lesh Corporation for $6,000 under credit terms of 2/15,n/30. FOB destination.

7 Received a $1,200 credit memorandum for the return of defective merchandise purchased on August 6.

8 Sold merchandise that cost $500 for $900 cash. 9 Paid the balance due to Weir Co. within the discount period.

11 Sold merchandise that cost $1,000 to Terrapin Co. for $3,100 under credit terms 2/10,n/30. FOB shipping point.

14 Received the balance due from Cassidy Co. for the August 4 sale within the discount period.

15 Paid $250 shipping charges on the August 11 sale to Terrapin Co. and added the amount to their bill.

16 Issued a $200 credit memorandum to Terrapin Co. for defective merchandise.

21 Received Terrapin Cos cash payment for the amount due from the August 11 purchase.

30 Paid Lesh Co. the amount due from the August 6 purchase. P1-17: Newman Hardware Store completed the following merchandising transactions in the month of May. At the beginning of May, the ledger of Newman showed Cash of $5,000 and Common Stock of $5,000. May 1 Purchased merchandise on account from Jerrys Wholesale Supply

$4,200, terms 2/10, n/30. 2 Sold merchandise on account $2,100, terms 1/10, n/30.The cost of

the merchandise sold was $1,300. 5 Received credit from Jerrys Wholesale Supply for merchandise

returned $300. 9 Received collections in full, less discounts, from customers billed

on sales of $2,100 on May 2. 10 Paid Jerrys Wholesale Supply in full, less discount. 11 Purchased supplies for cash $400. 12 Purchased merchandise for cash $1,400. 15 Received refund for poor quality merchandise from supplier on

cash purchase $150. 17 Purchased merchandise from Cosmo Distributors $1,300, FOB

shipping point, terms 2/10, n/30. 19 Paid freight on May 17 purchase $130. 24 Sold merchandise for cash $3,200.The merchandise sold had a

cost of $2,000. 25 Purchased merchandise from Costanza, Inc. $550, FOB

destination, terms 2/10, n/30. 27 Paid Cosmo Distributors in full, less discount. 29 Made refunds to cash customers for defective merchandise $60.

The returned merchandise had a scrap value of $10. 31 Sold merchandise on account $900, terms n/30.The cost of the

merchandise sold was $560. Newman Hardwares chart of accounts includes the following: No. 101 Cash, No. 112 Accounts Receivable, No. 120 Merchandise Inventory, No. 126 Supplies, No. 201 Accounts Payable,No. 311, Common Stock No. 401 Sales, No. 412 Sales Returns and Allowances, No. 414 Sales Discounts, No. 505 Cost of Goods Sold.


Instructions (a) Journalize the transactions using a perpetual inventory system. (b) Enter the beginning cash and common stock balances and post the transactions. (Use J1 for the journal reference.) (c) Prepare an income statement through gross profit for the month of May 2008.

[Answer: (c) Gross profit $2,269]

P1-18: Pauls Book Warehouse distributes hardcover books to retail stores and extends credit terms of 2/10, n/30 to all of its customers.At the end of May, Pauls inventory consisted of 300 books purchased at $1,800. During the month of June the following merchandising transactions occurred. June 1 Purchased 200 books on account for $6 each from Logan

Publishers, FOB destination, terms 2/10, n/30.The appropriate party also made cash payment of $50 for the freight on this date.

3 Sold 240 books on account to Reading Rainbow for $10 each (cost, $6 each)

6 Received $120 credit for 20 books returned to Atkinson Publishers.

9 Paid Logan Publishers in full, less discount. 15 Received payment in full from Reading Rainbow. 17 Sold 180 books on account to Cheap Books for $10 each

(cost, $6 each). 20 Purchased 250 books on account for $6 each from Phantom

Publishers, FOB destination, terms 2/15, n/30. The appropriate party also made cash payment of $50 for the freight on this date.

24 Received payment in full from Cheap Books. 26 Paid Phantom Publishers in full, less discount. 28 Sold 130 books on account to Willow Bookstore for $10 each

(cost, $6 each). 30 Granted Willow Bookstore $120 credit for 12 books returned

costing $72.

Pauls Book Warehouses chart of accounts includes the following: No. 101 Cash, No. 112 Accounts Receivable, No. 120 Merchandise Inventory, No. 201 Accounts Payable, No. 401 Sales, No. 412 Sales Returns and Allowances, No. 414 Sales Discounts, No. 505 Cost of Goods Sold. Instructions Journalize the transactions for the month of June for Pauls Book Warehouse using a perpetual inventory system. P1-19: Below is a series of cost of goods sold sections for companies A, B, C, and D. A B C D Beginning Inventory $200 $100 $500 (J) Purchases 2,000 1,100 (g) $11,200 Purchases returns and Allowances 50 (d) 150 (k) Net Purchases (a) 1,060 3,100 10,500 Freight-in 70 (E) (H) 610 Cost of goods purchased (b) 1,120 3,250 (l)


Cost of goods available for sales 2,220 1,120 (i) 12,200 Ending Inventory 300 (f) 700 1,200 Cost of goods sold (c) 1,090 3,050 11,000

Instructions Fill in the lettered blanks to complete the cost of goods sold sections. P1-20: On January 1, 2008, Rachael Runde Corporation had merchandise inventory of $35,000. At December 31, 2008, Rachael Runde had the following account balances.

Freight-in .$ 6,000 Purchases.. 360,000 Purchase discounts 8,000 Purchase returns and allowances... 3,000 Sales 600,000 Sales discounts 7,000 Sales returns and allowances. 12,000

At December 31, 2008, Rachael Runde determines that its ending inventory is $41,000. Instructions (a) Compute Rachael Rundes 2008 gross profit. (b) Compute Rachael Rundes 2008 operating expenses if net income is $120,000 and there are no nonoperating activities. P1-21:

The end of the Chapter 1.


CHAPTER. 2 ACCOUNTING FOR RECEIVABLES

STUDY OBJECTIVE

After studying this chapter, you should be able to:

1 Classification of Receivables 2. Internal Control of Receivables 3. Uncollectible Receivables 4. Uncollectibles Allowance Method 5. Uncollectibles Direct Write-Off Method 6. Characteristics of Notes Receivable 7. Accounting for Notes Receivable 8. Balance Sheet Presentation 9. Financial Analysis and Interpretation


In the normal course of events, accounts receivable are collected in cash and removed from the books. However, as credit, sales and receivables have grown in size and significance, the normal course of events has changed. There are several reasons for the sale of receivables. First, for competitive reasons, sellers (retailers, wholesalers, and manufacturers) often must provide financing to purchases of their goods2. Goods and services are normally bought and sold on credit where payment is made or received at a letter date then the delivery of the goods or provision of the service. The important event for the business is the date of the purchase or the sale and not the receipt or payment of the cash3.

I. Classification of Receivables 4 Accounts Receivable used for selling merchandise or services on credit,

and normally expected to be collected in a relatively short period. 4 Notes Receivable used to grant credit on the basis of a formal instrument

of credit, called a promissory note. 4 Other Receivables interest receivable, taxes receivable, and receivables

from officers or employees.

Note: Accounting for Sales Revenues

Assume on March 15, $1,000 of merchandise is sold on account. The terms of the agreement are 2/10, n/30. The firm uses the gross method for record sales on account.

Entry on date of sale:

Dr Accounts Receivable 1,000 Cr Sales.1,000

If paid within the discount period:

Dr Cash 980 Dr Sales Discounts 20 Cr Accounts Receivable 1,000

If not paid within the discount period:

Dr Cash 1,000 Cr Accounts Receivable 1,000

II. Accounting for Bad Debts

Occur when customers do not pay for items or services purchased on credit.

Bad debts are uncollectible accounts receivable.

2 Weygandt, Kieso, and Kell, (1996), Accounting Principles , pp. 336.

3 BPP Professional Education, (2006), CAT , pp.152.


Bad Debt Expense is reported as a selling or general and administrative expense.

Accounts receivable are reported on the balance sheet at their net realizable value.

III. Accounting for Uncollectible Accounts Receivable Two methods are used in accounting for uncollectible accounts: (1) the the direct write-off method and (2) allowance method. Each of these methods is explained in the following sections.

1) Direct Write off Method

This method is not consistent with the matching principle. Accounts that prove to be uncollectible are written off in the year they

become worthless. Uncollectible Accounts Expense is debited and Accounts Receivable is

credited for each such transaction. Under the direct write-off method, bad debt losses are not estimated and no allowance account is used.

Journal Entries Direct Write off Method May.10

Dr Uncollectible Accts. Expense 420 Cr Accts. Receivable - D. L. Ross 420

Write off uncollectible Account of $ 420. Nov.21

Dr Accts. Receivable - D. L. Ross 420 Cr Uncollectible Accts. Expense 420

Dr Cash 420 Cr Accts. Receivable - D. L. Ross 420 Reinstate and collect prior account written off.

2) The Allowance Method (Required by GAAP)

1. This method is consistent with the matching principle. 2. Management makes an estimate each year of the portion of

accounts receivable that may not be collectible. (Adjusting Entry at the end of each period) Uncollectible Accounts Expense is debited and Allowance for Doubtful Accounts is credited.

3. Actual accounts that prove to be uncollectible are debited to Allowance for Doubtful Accounts and credited to Accounts Receivable. (Write-off) When all means of collecting a past-due account have been exhausted and collection appears impossible, the account should be written off. To prevent premature write offs, each write off


should be formally approved in writing by authorized management personnel.

Dec. 31 Dr Uncollectible Accts. Expense 4,000

Cr Allowance for Doubtful Acct. 4,000

Estimated a total of $4,000 will be uncollectible. Jan 21. Dr Allowance for Doubtful Accts. 610 Cr Accts. Receivable - J. Parker 610 Write off uncollectible account of $160. June 10. Dr Accts. Receivable - J. Parker 610 Cr Allowance for Doubtful Accts. 610 Dr Cash 610 Cr Accts. Receivable - J. Parker 610 Reinstate and collect prior account write off.

In the Partial Balance sheet.

Current Assets: Cash..$14,800 Accounts Receivable.$200,000 Less: Allowance for Doubtful accounts. 12,000..188,000 Merchandise Inventory310,000 Prepaid Expense.25,000 Total Current Assets$537,800 Note: Net A/R..$188,000

Note: There are three methods of the Allowance Method Percentage of credit sales Percentage of accounts receivable Aging receivables

Percentage of Credit Sales Management establishes a percentage relationship between the amount of credit sale and expected loss for uncollectible accounts.

The ABC Company had credit sales of $100,000. The current accounts receivable balance is $30,500. The allowance for doubtful accounts balance is $350. Historically, 2 percent of the credit sales are not collected.

Dr Bad Debt Expense 2,000 Cr Allowance for Doubtful Accounts 2,000

To record estimated uncollectible accounts for the year.

Percentage of Accounts Receivable


Management establishes a percentage relationship between the amount of receivable and the expected loss for uncollectible accounts.

The XYZ Company had credit sales of $693,000. The current accounts receivable balance is $50,000. The allowance account balance is a credit of $600. Historically, 3 percent of accounts receivable are not collectible.

Bal: 600.00$

Adjusting: 900.00$ Bal: 1,500.00$

We compute: $50,000x0.03

Allowance for Doutfual Accounts

Dr Bad Debt Expense $900 Cr Allowance for Doubtful Accounts $900 To record estimated uncollectible accounts for the year. ($50,000*0.03) - $600= $900)

Aging Receivable

The analysis of customer balance by the length of time they have been unpaid.

The ABC Company had credit sales of $100,000. The current accounts receivable balance is $47,550. The allowance for doubtful accounts balance is credit of $620.The firm ages the accounts to determine the expected uncollectibles. Remember, because receivables are involved, the amount derived from aging provides the desired balance of the allowance account.

Compiled By Nut Khorn,


Dr Dab Debt Expense

Cr Allowance for Doubtful Accounts To record estimated uncollectible accounts for the year

Credit Card SalesRetailer considers credit card sales the same as

Retailer must pay card issuer a fee of 2transactions.

Retailer records the sale in a similar manner as checks deposited from cash sale.

Approximately 1 billion credit cards were established to be in use recentlymore than three credit cards for every man, woman ,and chiin this country. A common type of credit card is a national credit card such as VISA, MasterCard, and American Expressinvolved when nation credit cards are used in making retail sales: credit card issuer, who is independent of the retailer, (3) the customer.

Note: Visa is the largest retail electronic payment network in the world, connecting 16,600 financial institutions and more than 1.6 billion cards to more

-Page 30-

Bal: 620.00$

Adjusting: 2,250.00$ Bal: 2,870.00$


Dab Debt Expense $2,250

Allowance for Doubtful Accounts $2,250To record estimated uncollectible accounts for the year

Credit Card Sales Retailer considers credit card sales the same as cash sales.

Retailer must pay card issuer a fee of 2 to 4% for processing the transactions. Retailer records the sale in a similar manner as checks deposited from cash sale.

Approximately 1 billion credit cards were established to be in use more than three credit cards for every man, woman ,and chi

in this country. A common type of credit card is a national credit card VISA, MasterCard, and American Express. Three parties are

involved when nation credit cards are used in making retail sales: credit card issuer, who is independent of the retailer, (2) the retailer, and

the customer. Visa is the largest retail electronic payment network in the world,

connecting 16,600 financial institutions and more than 1.6 billion cards to more

$2,250

to 4% for processing the

Retailer records the sale in a similar manner as checks deposited

Approximately 1 billion credit cards were established to be in use more than three credit cards for every man, woman ,and child

in this country. A common type of credit card is a national credit card . Three parties are

involved when nation credit cards are used in making retail sales: (1) the the retailer, and

Visa is the largest retail electronic payment network in the world, connecting 16,600 financial institutions and more than 1.6 billion cards to more


than 29 million merchants and 1 million ATMs worldwide, according to a company statement.4

VISA and MasterCard Sales: Sales resulting from the use of VISA and MasterCard are considered cash sales by the retailers. The cards are issued by banks. Examples: On May 10, Dale Company sold merchandise for $3,500 and accepted the customers America Bank MasterCard. America Bank charges a 4% service charge for credit card sales. Prepare the entry on Dale Companys books to record the sale of merchandise.

Cash $3,360 Service Charge Expense.. 140 Sales ..$3,500 ($3,500x 0.04 = $140)

IV. Characteristics of Notes Receivable A promissory note is a written document containing a promise to pay:

4 a specific amount of money (principal) 4 to a specific person or company (payee) 4 at a specific place 4 on a specific date or upon demand 4 plus interest at a specific percentage of the principal (face) amount per

year

4 THE CAMBODIA DAILY, BUSINESS, Friday, August 29, 2008.page 29.


Calculating Interest and We received a $2,500, 10%, 90

-Page 32-

Calculating Interest and Maturity Value We received a $2,500, 10%, 90-day note dated March 16, 2003. day note dated March 16, 2003.


ILLUSTRATIVE ACCOUNTING ENTRIES OF NOTE RECEIVABEL The accounting entries for promissory notes receivable fall into four groups: (1) recording receipt of a note, (2) recording collection of a note, (3) recording dishonored note, and (4) recording adjusting entries.

(1) Recording receipt of a note, Assume that on June 1 a 12 percent, 30-day note is received from a customer, J.Halsted, in settlement of an existing accounts receivable of $4,000. The entry for this transaction is as follows:

June 1. Note Receivable .$4,000 A/R.$4,000

(Received 12 percent, 30-day note in payment of account of J. Halsted)

(2) Recording collection of a note

Jul1. Cash...$4,040 Note Receivable .$4,000 Interest Revenue 40 (Collected 12 percent, 30-day note form J. Halsted)

(3) Recording dishonored note A dishonored note is a note that is not paid in full at maturity.

Jul1. A/R...$4,040 Note Receivable .$4,000 Interest Revenue 40 (Collected 12 percent, 30-day note dishonored by J. Halsted)

(4) Recording adjusting entries.

Examples Mikes Stores had the following select transactions. Apr. 1, 2008 Accepted Otis Companys 1-year, 12% note in settlement

of a $30,000 accounts receivable. July 1, 2008 Loaned $50,000 cash to Dan Hampton on a 9-month, 10%

note. Dec. 31, 2008 Accrued interest on all notes receivable. Apr. 1, 2009 Received principal plus interest on the Otis note. Apr. 1, 2009 Dan Hampton dishonored its note; Mikes expects it will

eventually collect. Instructions Prepare journal entries to record the transactions. Mikes Stores prepares adjusting entries once a year on December 31.

Solution


Apr 1,08 Note Receivable 30,000.00$ A/R 30,000.00$

( Accepted 1-year,12%, note from Otis Com)

1-Jul-08 Note Receivable 50,000.00$ Cash 50,000.00$

( Loaned to Dan Hampton, 9-month, 10%, note)

Dec31,08 Interest Receivable 2,700.00$ Interest Revenue 2,700.00$ ( 9-month for Otis Com)

Interest Receivable 2,500.00$ Interest Revenue 2,500.00$ ( 6-month for Dan Hampton)

April 1,09 Cash 33,600.00$ Note Receivable 30,000.00$ Interest Receivable 2,700.00$ Interest Revenue 900.00$ ( Collected in cash from Otis Com, 3-month)

1-Apr-09 A/R 53,750.00$ Note Receivable 50,000.00$ Interest Receivable 2,500.00$ Interest Revenue 1,250.00$ ( Dishonored note by Dan Hampton, 3 month)

End of Chapter 2


Problems on Chapter2 Accounts and Note Receivable

P2-1) At the end of October, Mafa Company management estimates the uncollectible accounts expense (=Bad debts expense) to be 1 percent of net sales of $2,770,000. Give the entry to record the uncollectible accounts expense, assuming that the Allowance for Uncollectible Accounts (= Allowance for Doubtful Accounts) has a debit balance of $14,000.

P2-2) An aging analysis on June 30 of the accounts receivable of Texbar Corporation indicates uncollectible accounts of $43,000. Give the entry to record uncollectible accounts expense under each of the following independent assumptions: (a) Allowance for Uncollectible Accounts has a credit balance of $9,000 before adjustment, and (b) Allowance of Uncollectible Accounts had a debit balance of $7,000 before adjustment.

P2-3) At the end of the year, Marin Enterprises estimates the uncollectible accounts expense to be 0.7 percent of net sale of $10,100,000. The current credit balance of Allowance for Uncollectible Accounts is $17,200. Give the general journal entry to record the uncollectible accounts expense. What is the balance of Allowance for Uncollectible Accounts after this adjustment?

P2-4) Accounts Receivable of Herera Company shows a debit balance of $104,000 at the end of the year. An aging analysis of the individual accounts indicates estimated uncollectible accounts to be $6,700. Give the general journal entry to record the collectible accounts expense under each of the following independent assumptions: (a) Allowance for Uncollectible Accounts has a credit balance of $800 before adjustment and (b) Allowance for Uncollectible Accounts has a debit balance of $800 before adjustment.

P2-5) During its first year of operations, Wendy Company had credit sales of $3,000,000, of which $600,000 remained uncollected at year-end. The credit manager estimates that $40,000 of these receivable will become uncollectible. (a) Prepare the journal entry to record the estimated uncollectibles. (b) Prepare current assets section of the balance for Wendy Company, assuming that in additional to receivables it has cash of $90,000, merchandise inventory of $130,000, and prepaid expenses of $13,000.

P2-6) Alex Co. elects to use the percentage of sales basis in 2009 to record the bad debts expense and concludes that 2% of net credit sales will become uncollectible. Sales are $700,000 for 2009, sales returns and allowances are $50,000, and the allowance for doubtful accounts has a credit balance of $12,000. Prepare the adjusting entry to record the bad debts expense in 2009.

P2-7) Massey Co. uses the percentage of accounts receivable basis to record bad debts expense, and concludes that 1% of accounts receivable will become


uncollectible. Accounts Receivable are $500,000 at the end of the year, and the allowance for doubtful accounts has a credit balance of $3,000. (a) Prepare the adjusting journal entry to record bad debt expense for the year. (b) If the allowances for doubtful accounts a debit balance of $800 instead of credit balance of $3,000, determine the amount to report for bad debt expense.

P2-8) On December 31, 2008, Lisa Ceja Co. estimates that 2% of its net sales of $300,000 will become uncollectible and records this amount as an addition to Allowance for Doubtful Accounts. On May 11, 2009, Lisa Ceja Co. determined that Robert Worthys account was uncollectible and wrote off $900. On June 12, 2009, Worthy paid the amount previously written off. Prepare the journal entries on December 31, 2008, May 11, 2009, and June 12, 2009.

P2-9) Presented below is an aging schedule for Boitano Company. Number of Days Past Due

Customer Total Not Yet Due 1-31 31-60 61-90

Over 90

Aber $20,00

0 $9,00

0 $11,00

0 Bohr 30,000 $30,000

Case 50,000 15,000 5,000 $30,00

0

Datz 38,000 $38,00

0

Others 120,00

0 92,000 15,00

0 13,000

258,000 137,000

29,000 24,000 30,000 38,000

Estimated Percentage 3% 6% 12% 24% 50%

Uncollectible

$34,930 $4,110

$1,740 $2,880 $7,200

$19,000

Total Estimated Bad Debts

At December 31, 2008, the adjusted balance in Allowance for Doubtful Accounts is a credit of $9,000. Instructions:

a) Journalize and post the adjusting entry for bad debts at December 31, 2008.

(b) Journalize and post to the allowance account the following events and transactions in the year 2009.

(1) March 1, a $1,900 customer balance originating in 2008 is judged uncollectible.

(2) May 1, a check for $1,900 is received from the customer whose account was written off as uncollectible on March 1.


(c) Journalize the adjusting entry for bad debts on December 31, 2009. Assume that the unadjusted balance in Allowance for Doubtful Accounts is a debit of $2,000, and the aging schedule indicates that total estimated bad debts will be $42,300.

P2-10) At December 31, 2008. Trisha Underwood Imports reported the following information on its balance sheet: Accounts receivable ........................... $1,000,000 Less: Allowance for Doubtful accounts 60,000 During the first quarter of 2009, the company had the following transactions related to receivable. 1. Sales on account .......................................................... $2,600,000 2. Sales returns and allowances........................................ 40,000 3. Collections of accounts receivables............................. 2,300,000 4. Write off of accounts receivable deemed uncollectible ..... 80,000 5. Recovery bad debts previously written of as uncollectible....... 25,000 Instructions:

(a) Prepare the journal entries to record each of five transactions. Assume that no cash discounts were taken on the collections of accounts receivable.

(b) Enter the January 1, 2009, balance in Accounts Receivable and Allowance for Doubtful Accounts, post the entries to the two accounts (use T accounts), and determine the balances.

(c) Prepare the journal entry to record bad debts expense for the first quarter of 2009, assuming that an aging of accounts receivable indicates that estimated bad debts are $70,000.

P2-11) On January 1, 2009, Comeneci Company had Accounts Receivable $54,200 and Allowance for Doubtful Accounts $4,700. Comeneci Company prepares financial statements annually. During the year the following selected transactions occurred. Jan. 5 Sold $6,000 of merchandise to Garth Brooks Company, terms n/30. Feb. 2 Accepted a $6,000, 4-month, 12% promissory note from Garth Brooks

Company for balance due. Feb.12 Sold $7,200 of merchandise to Gage Company and accepted Gags

$7,200 a two-month, 10% note for the balance due. Feb. 26 Sold $5,000 of merchandise to Mathias Co. terms n/10. Apr. 5 Accepted a $5,000, 3-month, 8% note from Mathias Co. for balance

due. Apr. 12 Collected Gage Company note in full. June. 2 Collected Garth Brooks Company note in full. July. 5 Mathias Co. dishonored its note of April 5. It is expected that

Mathias will eventually pay the amount owed. July 15 Sold $3,000 of merchandise to Tritt Inc. and accepted Tritts $3,000,

3-month,12% note for the amount due. Oct. 15 The Tritt Inc. note was dishonored. Tritt Inc. is bankrupt, and there is

no hope of future settlement. Instructions: Journalize the transactions.

P2-12) Determine the interest on the following notes. a. $22,800 at 10 percent for 90days


b. $16,000 at 12 percent for 10 months c. $18,000 at 9 percent for 3 years d. $30,000 at 15 percent for 120 months e. $10,800 at 6 percent for 60 days

P2-13) Prepare general journal entries to record the following transactions. Jan. 16- Sold merchandise to Brighton Corporation on account for $36,000,

terms n/30. Feb.15- Accepted a $36,000, 10 percent, 90-days note from Brighton Corporation in lieu of payment of account.

May 16- Brighton Corporation dishonored the note. June 15- Received payment in full from Brighton Corporation, including interest at 10 percent from the date the note was dishonored.


Chapter 3: Current Liabilities

Current liabilities Are obligations due within one year or within the companys

normal operating cycle if it is longer than one year Fall into one of two categories:

Liabilities of known amount Liabilities whose amount must be estimated

Accounts payable are amounts owed for products or services purchased on account.

Accounts Payable are the counterpart of accounts receivable. Accounts payable arise when a company purchases goods, supplies, or services on credit. They are recorded at the amount expected to be paid to eliminate the obligation5.

May1. Bowden Co. purchased merchandise on account from Coker Co., $10,000, terms 2/10, n/30.

Dr Mdse. Inventory $10,000 Cr Accts. Payable 10,000

Convert from Accounts Payable to Note Payable May 31. Bowden Co. issued a 60-day, 12% note for $10,000 to Coker Co. on account.

May 31. Dr Account Payable $10,000 Cr Note Payable 10,000

Notes Payable Obligations in the form of written promissory notes are recorded as notes payable. Notes payable are often used instead of accounts payable. Doing so gives the lender written documentation of the obligation in case legal remedies are needed to collect the debt. Notes payable usually require the borrow to pay interest and frequently are issued to meet short-term financing needs6.

June 30. Bowden Co. paid the amount due. Interest: $10,000x12%x60/360= $200

Dr Note Payable $10,000 Cr Interest Expense 200 Cr Cash 10,200

Sales Tax Payable As consumers, we are well aware that many of the products we purchase at retail store are subject to sales taxes. The tax is expressed as a stated percentage of the sales price. The retailer (selling company) collects the

5 Chasteen, Flaherty, and O connor, (1998), Intermediate Accounting ,pp.214

6 Weygandt, Kieso, and Kell,(1996), Accounting Principles ,pp. 453.


tax from the customer when the sale occurs, and periodically (usually monthly) remits the collections to the states department of revenue. Under most of state sales tax laws, the amount of the sale and the amount of the sales tax collected must be rung up separately on the cash register. The cash registers readings are then used to credit Sales and Sales Taxes Payable. For example, assuming that the March 25 cash register readings for Cooley Grocery show sales of $10,000 and sales taxes of $600 (sales tax rate of 6%), the entry is7: Mar. 25 Dr Cash .$10,6000 Cr Sales10,000 Cr Sales Taxes Payable 600

(To record daily sales and sales taxes)

Current Liabilities must be estimated Estimated warranty payable

Arises when a company warranties its product Is recorded in the same period that the business recognizes sales revenue Is estimated because the exact amount of warranty expense cannot be known with certainty. Assume that Black & Decker made sales of $200,000,000 subject to product warranties. If Black & Decker estimates that 3% of the products it sells this year will require repair or replacement, the company would estimate warranty expense of $6,000,000 ($200,000,000 x .03) for the period and make the following entry:

Dr Warranty Expense 6,000,000 Cr Estimated Warranty Payable 6,000,000

To accrue warranty expense

End of Chapter 3

7 Weygandt, Kieso, and Kell,(1996), Accounting Principles ,pp.453-454.


Problems on Chapter 3: Current Liabilities

P3-1: Indiana Jones Company had the following selected transactions: Feb. 1 Sings a $50,000 6-month 9% -interest-bearing note payable to

CityBank receiving $50,000 in cash. Feb 10 Cash register sales total $43,200 which includes an 8% sales tax. Feb 28 The following adjustment data are developed:

1. Interest expense of $375 has been occurred on the note. 2. Some sales were made under warranty. Of the units sold under

warranty, 350 are expected to become defective. Repair costs are estimated to be $40 per unit.

Instructions: Journalize the February transactions. P3-2: Grandy Auto Supply does not segregate sales and sales taxes at the time of sale. The register total for March 16 is $9,975. All sales are subject to a 5% sales tax. Compute sales taxes payable and make the entry sales taxes payable and sales. P3-3: On December 1, Irma Company introduces a new product that includes a one-year warranty on parts. In December 1,000 units are sold. Management believes that 4% of the units will be defective and the average warranty costs will be $60 per unit. Prepare adjusting entry at December 31 to accrue the estimated warranty cost. P3-4: Cairo Company borrows $50,000 from First Bank on a 6-month, $50,000, 12% notes. Instructions:

a) Prepare the entry on June 1. b) Prepare the adjusting entry on June 30.

P3-5: In providing accounting services to small business, you encounter the following situations pertaining to cash sales:

1. Nash Company rings up sales and sales tax separately on its cash register. On April 10, the register totals are sales $25,000 and sales taxes $1,500.

2. Pontiac Company does not segregate sales and sales taxes. Its register total for April 15 is $13,780, which includes a 6% sales tax.

P3-6: On January 1, 2009, the ledger of Calcutta Company contains the following liability accounts. Accounts Payable $42,500 Sales Taxes Payable .. 5,600 During January the following selected transactions occurred: Jan.1 Borrowed $15,000 in cash from Milland Bank on a 4-month, 12%,

$15,000 note. Jan. 5 sold merchandise for cash totaling $7,800 which includes 4% sales

taxes. Jan. 20 Sold 500 units of a new product on credit at $52 per unit, plus 4%

sales tax. This new product is subject to a 1-year warranty. Jan.25 Sold merchandise for cash totaling $11,440, which includes 4% sales

taxes. Instructions:


a) Journalize the January transactions. b) Journalize the adjusting entries at January 31 for (1) the outstanding

note payable (2) estimated warranty liabilities, assuming warranty costs are expected to equal 8% of sales of the new product.

P3-7: The following are selected transactions of Zimmer Company. Zimmer prepares financial statements quarterly. Jan. 2 Purchased merchandise on account from Alicea company, $18,000,

terms 2/10, n/30. Feb 1 Issued a 10%, 2-month, $18,000 note to Alicea in payment of account. Mar.31 Accrued interest for 2 months on Alicea note. Apr. 1 Paid face value and interest on Alicea note. July.1 Purchased equipment from Vincent Equipment paying $11,000 in

cash and singing a 10%, 3-month, $24,000 note. Setp.30 Accrued interest for 3 months on Vincent note. Oct.1 Paid face value and interest on Vincent note. Dec 1 Borrowed $10,000 from the Otago Bank by issuing a 3-month, 12%

interest bearing note with a face value of $10,000. Dec.31 Recognized interest expense for 1 month on Otago Bank note. Instructions:

(a) Prepare journal entries for the above transactions and events. (b) Post to the accounts, Notes Payable, Interest Payable, and Interest

Expense. (c) Show the balance sheet presentation on note payable at December

31. (d) What is total interest expense for the year?


Chapter 4: Inventories

Study Objectives After studying this chapter, you should be able to:

1. Describe the steps in determining inventory quantities. 2. Explain the basis of accounting for inventories and describe

the inventory cost flow methods. 3. Explain the financial statements and tax affects of each of the

inventory cost flow methods. 4. List the essential accounting features of a perpetual inventory

system.

Why is Inventory Control Important?


Inventory is a significant asset and for many companies the largest asset.

Inventory is central to the main activity of merchandising and manufacturing companies.

Mistakes in determining inventory cost can cause critical errors in financial statements.

Inventory must be protected from external risks (such as fire and theft) and internal fraud by employees.

Assigning Costs to Inventory

Merchandising and Inventory 4 Merchandising involves selling inventory. 4 Inventory is usually an important asset. 4 Inventory must be accounted for periodically or perpetually. 4 Traditional periodic method is often being replaced by perpetual

inventory accounting.

Advantages of Using Perpetual Inventory 4 Continuous determination of inventory value 4 Continuous determination of gross profit 4 Affordable with computers, scanners, and bar codes on most products 4 Perpetual inventory accounting provides management controls. 4 Managers know which items are selling fastest and the profit margin on

those items. 4 Perpetual systems maintain a running record to show the inventory on

hand at all times.

Periodic Inventory Periodic systems do not keep a continuous record of inventory on hand.

Inventory Costing There are three methods of the Cost Flow Methods

1. First-in, First -out (FIFO).

Inventory affects . . .

Balance Sheet

Income Statement

The matching principle requires the matching of the cost of the merchandise sold with the sales revenue.


2. Last-in, First- out (LIFO). 3. Average Cost.

Example:

To illustrate the three methods under the periodic and perpetual inventory system, the following data for the month of June will be used. Inventory data, June 30

Data 5-1: (for periodic Inventory System only)

XYZ COMPANY Explanation Units Unit Cost Total Cost

June 1 Inventory 50 $1.00 $506 Purchase 50 $1.10 55

13 Purchase 150 $1.20 18020 Purchase 100 $1.30 13025 Purchase 150 $1.40 210

Goods Available for Sales 500 $625Sales 280On hand June 30 220

Date

Data 5-2: ( for Perpetual Inventory System only)

XYZ COMPANY Explanation Units Unit Cost Total Cost

June 1 Inventory 50 $1.00 $506 Purchase 50 $1.10 55

10 Sale 7013 Purchase 150 $1.20 18020 Purchase 100 $1.30 13025 Purchase 150 $1.40 21030 Sale 21030 Inventory 220

Date

Periodic Inventory System

We can use the formula as follow:

COGS = Goods Available for Sales Ending Inventory 1) FIFO:


The FIFO method assumes that the earliest goods purchased are the first to be sold. FIFO often parallels the actual physical flow of merchandise because it generally is good business practice to sell the oldest units first. Under the FIFO method, therefore, the cost of the earliest goods purchased are the first to be recognized as cost of goods sold.

Use the Date 5-1:

Step 1. Step 2. Ending Inventory Cost of Goods Sold

Date Units Unit Cost Total Cost25-Jun 150 1.40$ 210.00$ Cost of Goods Available for Sales 625.00$ 20-Jun 70 1.30$ 91.00$ Less: Ending Inventory 301.00$ Total 220 301.00$ Cost of Goods Sold 324.00$

2) LIFO: The LIFO method assumes that the latest goods purchased are the first to be sold. LIFO seldom coincides with the actual physical flow of inventory. Under the LIFO method, therefore, the costs of the latest goods purchased are the first to be recognized as cost of goods sold.

Step 1. Step 2. Ending Inventory Cost of Goods Sold

Date Units Unit Cost Total Cost1-Jun 50 1.00$ 50.00$ Cost of Goods Available for Sales 625.00$ 6-Jun 50 1.10$ 55.00$ Less: Ending Inventory 249.00$

13-Jun 120 1.20$ 144.00$ Cost of Goods Sold 376.00$ Total 220 249.00$

3) Average Cost: The average cost method assumes that the goods of available for sales are homogeneous. Under this method, the allocation of the cost of goods available for sale is made on the basis of the weighted average unit cost incurred.

Formula:

25.1$500625$

cos

==

= unittaveragesaleforavailableunits

saleforavailabegoodsofCost


Ending Inventory :220 units@ $1.25 = 275.00$ Cost of Goods Available for Sales 625.00$ Less: Ending Inventory 275.00$ Cost of Goods Sold 350.00$

Perpetual Inventory System

Use the D5-2:

FIFO

Units Unit Cost Total Cost Units

Unit Cost Total Cost Units

Unit Cost Total Cost

1-Jun 50 1.00$ 50.00$ 6-Jun 50 1.10$ 55.00$ 50 1.00$ 50.00$

50 1.10$ 55.00$ 10-Jun 50 1.00$ 50.00$

20 1.10$ 22.00$ 30 1.10$ 33.00$

13-Jun 150 1.20$ 180.00$ 30 1.10$ 33.00$ 150 1.20$ 180.00$

20-Jun 100 1.30$ 130.00$ 30 1.10$ 33.00$ 150 1.20$ 180.00$ 100 1.30$ 130.00$

25-Jun 150 1.40$ 210.00$ 30 1.10$ 33.00$ 150 1.20$ 180.00$ 100 1.30$ 130.00$ 150 1.40$ 210.00$

30-Jun 30 1.10$ 33.00$ 150 1.20$ 180.00$ 70 1.30$ 91.00$

30 1.30$ 39.00$ 150 1.40$ 210.00$ 324.00$ 301.00$

Date

Purchased Sold Balance

Cost of Goods sold Ending Inv

LIFO:





1-Jun 50 1.00$ 50.00$ 6-Jun 50 1.10$ 55.00$ 50 1.00$ 50.00$

50 1.10$ 55.00$ 10-Jun 50 1.10$ 55.00$

20 1.00$ 20.00$ 30 1.00$ 30.00$

13-Jun 150 1.20$ 180.00$ 30 1.00$ 30.00$ 150 1.20$ 180.00$

20-Jun 100 1.30$ 130.00$ 30 1.00$ 30.00$ 150 1.20$ 180.00$ 100 1.30$ 130.00$

25-Jun 150 1.40$ 210.00$ 30 1.00$ 30.00$ 150 1.20$ 180.00$ 100 1.30$ 130.00$ 150 1.40$ 210.00$

30-Jun 150 1.40$ 210.00$ 60 1.30$ 78.00$ 30 1.00$ 30.00$

150 1.20$ 180.00$ 363.00$ 40 1.30$ 52.00$

COGS 262.00$ ENDING INV

Date


AVERAGE COST :





1-Jun 50 1.00$ 50.00$ 6-Jun 50 1.10$ 55.00$ 100 1.05$ 105.00$

10-Jun 70 1.05$ 73.50$ 30 1.05$ 31.50$

13-Jun 150 1.20$ 180.00$ 180 1.18$ 211.50$

20-Jun 100 1.30$ 130.00$ 280 1.22$ 341.50$

25-Jun 150 1.40$ 210.00$ 430 1.28$ 551.50$

30-Jun 210 1.28$ 269.34$ 220 1.28$ 282.16$

342.84$ COGS 282.16$

ENDING INV

Date


EFFECTS ON THE FINANCIAL STATEMENTS

Each of the three methods of inventory pricing is acceptable for use in published financial statements. The factors that should be consider in choosing an inventory method are the affects of each method on financial statements, income taxes, and management decisions.

FIFO LIFO Average Cost FIFO LIFO Average CostSales 11,500.00$ 11,500.00$ 11,500.00$ 11,500.00$ 11,500.00$ 11,500.00$ COGS 324.00$ 376.00$ 350.00$ 324.00$ 363.00$ 342.00$ Gross Profit 11,176.00$ 11,124.00$ 11,150.00$ 11,176.00$ 11,137.00$ 11,158.00$ Operating Expense 2,000.00$ 2,000.00$ 2,000.00$ 2,000.00$ 2,000.00$ 2,000.00$ Income before income taxes 9,176.00$ 9,124.00$ 9,150.00$ 9,176.00$ 9,137.00$ 9,158.00$ Income tax expense (30%) 30% 2,752.80$ 2,737.20$ 2,745.00$ 2,752.80$ 2,741.10$ 2,747.40$ Net Income 6,423.20$ 6,386.80$ 6,405.00$ 6,423.20$ 6,395.90$ 6,410.60$

Periodic Inventory System Perpetual Inventory System


The 600 largest Companies in the U.S.

The Internal Revenue Service has developed several rules for valuing inventories for federal income tax purpose. Many accountants believe that the use of the FIFO and average-cost methods in periods of rising prices causes the businesses to report more than their true profit, resulting in the payment of excess income taxes.

When prices are rising LIFO produces the lowest income and lowest income tax.

The Income Tax and Advantage of LIFO During periods of inflation, LIFOs income is the lowest. The most attractive feature of LIFO is reduced income tax payments.

ACCOUNTING PRINCIPLES: CONSISTENCY The business should use the same accounting methods and procedures from one period to the next. A company may change inventory methods, but it must disclose the effects of the change on net income.

ACCOUNTING PRINCIPLES: DISCLOSURE The financial statements should report enough information to enable an outsider to make knowledgeable decisions about the company.

APPLY THE LOWER-OF-COST-OR-MARKET RULE TO INVENTORY.

An asset is reported at the lower of its historical cost or market (replacement) value.

If the replacement cost falls below its historical cost, the business must write down the value of its inventory.

Example Cost of inventory: $3,000


Market value at balance sheet date: $2,200 What is the journal entry?

December 31 Cost of Goods Sold. $ 800 Inventory. $ 800 ($3,000 - $2,200= $800) Write down inventory to LCM

End of Chapter 5

Problems Chapter 4: Inventories

P4-1 Save-Mart Center began operations on July 1. It uses a perpetual inventory system. During July the company had the following purchases and sales: Purchases

Date Units Unit Cost Sale Units 1-Jul 5 $90 6-Jul 3

11-Jul 4 $99 14-Jul 3 21-Jul 3 $106 27-Jul 4

Instructions

(a) Determine the ending inventory under a perpetual inventory system using (1) FIFO, (2) Average Cost, and (3) LIFO. (b) Which costing method produces the highest ending inventory valuation? P4-2 The Family Home Appliance Mart begins operations on May 1. It uses a perpetual inventory system. During May the company had the following purchases and sales for its Model 25 Sureshot camera. Purchases

Date Units Unit Cost Sale Units

1-May 7 $150 4-May 5 8-May 8 $170

12-May 5 15-May 5 $180 20-May 4 25-May 3

Instructions


(a) Determine the ending inventory under a perpetual inventory system using (1) FIFO, (2) Average Cost, and (3) LIFO. (b) Which costing method produces (1) the highest ending inventory valuation and (2) the lowest ending inventory valuations?

P4-3 In its first month of operations, Filandia Company made three purchases of merchandise in the following sequence: (1) 300 units at $6, (2) 400 units at $7, and (3) 300 units at $8. Assuming there are 400 units on hand, compute the cost the ending inventory under the (1) FIFO, (2) LIFO, and (3) Average Cost. Filandia uses a perpetual and periodic inventory system.

P4-4 The table summarizes the beginning inventory, purchases, and sales of Psi Companys single product during January.

Beginning Inventory and Purchases

Date Units Cost Total Sales Units

Jan. 1 Inventory 1,400 $19 $26,600 4 Sale 300 8 Purchase 600 $20 $12,000

10 Sale 1,30

0 12 Purchase 900 $21 $18,900 15 Sale 150 18 Purchase 500 $22 $11,000 24 Purchase 800 $23 $18,400

31 Sale 1,35

0 Total 4,200 $86,900

3,100

REQUIRED 1. Assuming that the company uses the periodic inventory system, compute the cost that should be assigned to ending inventory and to cost of goods sold using (a) the average-cost method, (b) the FIFO method, and (c) LIFO method.

2. Assuming that the company uses the perpetual inventory system, compute the cost that should be assigned to ending inventory and to cost of goods sold using (a) the average-cost method, (b) the FIFO method, and (c) LIFO method.

P4-5 Palaggi Company merchandises a single product called Compak. The following data represent beginning inventory and purchases of Compak during the past year: January 1 inventory, 68,000 units at $11.00; February purchases, 80,000 units at $12.00; March purchases, 160,000 units at $12.40; May purchases, 120,000 units at $12.60; July purchases, 200,000 units at $12.80;


September purchases, 160,000 units at $12.60; and November purchases, 60,000 unit s at $13.00. Sale of Compak totaled 786,000 units at $20 per unit. Selling and administrative expenses totaled $5,102,000 for the year, and Palaggi Company uses a periodic inventory system. REQUIRED. 1. Prepare a schedule to compute the cost of goods available

for sale. 2. Prepare an income statement under each of the following

assumptions: (a) costs are assigned to inventory using the average-cost method; (b) costs are assigned to inventory using the FIFO method; and (c) costs are assigned to inventory using the LIFO method.

P4-6) Use the Intel Corporation data, which is listed below, to answer the following questions.

October 1 Beginning inventory ........................ 5 units @ $160 8 Purchase ........................................... 4 units @ 160 15 Purchase ........................................... 11 units @ 170 26 Purchase ........................................... 5 units @ 180

The physical count of inventory at October 31 indicates that 8 units are on hand, and there are no consignment goods.

Required:

1.Compute ending inventory and cost of goods sold, using each of the following methods ( periodic Inventory system):

a. Weighted-average cost

b. First-in, first-out

c. Last-in, first-out

2. Which method produces the highest cost of goods sold? Which method produces the lowest cost of goods sold? What causes the difference in cost of goods sold?

P4-7) Now lets assume that Gerald D. Engelhard Company and has the same inventory, purchases, and sales data for the month of March as shown earlier: Inventory, March1 200 Units@$4.00 = $800 Purchases: March 10500 units@$4.50 = $2,250 March 20 400 units@$4.75 = $1,900 March 30 300 units@$5.00 = $1,500 Sales: March 15.500 Units March 25 400 Units The physical count on March31 shows 500 units on hand. Instructions:


1) Under the perpetual inventory system, determine the cost of inventory on hand at March 31, and the cost of goods sold for March under the (a) First-In, First- Out (FIFO), (b) Last-In, First-Out( LIFO), and weighted average cost.

2) Under the periodic inventory system, determine the cost of inventory on hand at March 31, and the cost of goods sold for March under the (a) First-In, First- Out (FIFO), (b) Last-In, First-Out( LIFO), and weighted average cost.

3) Prepare an income statement in March31, 2008 if: Sale revenues $10,000 Operating expenses. 3,000 Taxes Rate.35%

4) Please give your recommendation about your calculation for each method.

End of Chapter 4


Chapter Glossary

Acid-test ratio Ratio used to assess a company's ability to settle its current

debts with its most liquid assets; defined as quick assets (cash,

short

current liabilities.

Cash discount Reduction in the price of merchandise granted by a seller to a

buyer when payment is made within the discount period.

Cost of goods

available for sale

Beginning inventory plus net purchases.

Cost of goods

sold

Cost of inventory sold to customers during a period; also called

cost of sales

Credit

memorandum

Notification that the sender has credited the recipient's account

in the

Credit period Time period that can pass before a customer's payment is due.

Credit terms Description of the amounts and timing of payments that a buyer

agrees to make in the future.

Debit

memorandum

Notification that the sender has debited the recipient's account in

the sender's records.

Discount period Time period in which a cash discount is available and the buyer

can make a reduced payment.

EOM Abbreviation for

credit transactions.

FOB Abbreviation for

goods passes to the buyer;

means the buyer pays shipping costs and accepts ownership of

goods when the seller transfers goods to carrier;

means the seller pays shipping costs and buyer accepts

-Page 55-

Chapter Glossary (Chapter 01)

Ratio used to assess a company's ability to settle its current


short-term investments, and current receivables) divided by

current liabilities.

Reduction in the price of merchandise granted by a seller to a


Beginning inventory plus net purchases.


cost of sales.


in the sender's records.

Time period that can pass before a customer's payment is due.

Description of the amounts and timing of payments that a buyer

agrees to make in the future.


the sender's records.

Time period in which a cash discount is available and the buyer

can make a reduced payment.

Abbreviation for end of month; used to describe credit terms for

credit transactions.

Abbreviation for free on board; the point when ownership of

goods passes to the buyer; FOB shipping point (or factory)


goods when the seller transfers goods to carrier;


Ratio used to assess a company's ability to settle its current


investments, and current receivables) divided by

Reduction in the price of merchandise granted by a seller to a




Time period that can pass before a customer's payment is due.

Description of the amounts and timing of payments that a buyer


Time period in which a cash discount is available and the buyer

used to describe credit terms for

; the point when ownership of

(or factory)


goods when the seller transfers goods to carrier; FOB destination



ownership of goods at the buyer's place of business.

General and

administrative

expenses

Expenses that support the operating activities of a business.

Gross margin (See

Gross margin

ratio

Gross margin (net sales minus cost of goods sold) divided by net

sales; also called

Gross method Method of recording purchases at the full invoice price without

deducting any cash discounts.

Gross profit Net sales minus cost of goods sold; also called

Inventory Goods a company owns and expe

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