Professional Documents
Culture Documents
Chapter 8
Reporting and Interpreting
Receivables, Bad Debt Expense,
and Interest Revenue
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Fred Phillips, Ph.D., CA
Learning Objective 1
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Learning Objective 2
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Record sales on
account
Bad debt
known
dr Accounts
Receivable
cr Sales Revenue
Balance Sheet
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Income Statement
Cash
Sales Revenue
Accounts Receivable
Inventory
Gross Profit
Jan. 31
Record sales on
account
dr Accounts
Receivable
cr Sales Revenue
Balance
Sheet
Balance
Sheet
Bad debt
known
Cash
Cash
Accounts
Accounts Receivable
Receivable
Less: Allowance for Doubtful
Inventory
Accounts
Accounts
Receivable, Net
Sales Revenue
Inventory
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Bad
Debt Expense
Jan. 31
Record sales on
account
dr Accounts Receivable
cr Sales Revenue
Balance
Sheet
Balance
Sheet
Cash
Cash
Accounts
Accounts Receivable
Receivable
Less: Allowance for Doubtful
Inventory
Accounts
Accounts
Receivable, Net
Inventory
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Bad debt
known
Allowance Method
The allowance method follows a two-step
process, described below:
1.Make an end-of-period adjustment to
record the estimated bad debts in the
period credit sales occur.
2.Remove (write off) specific customer
balances when they are known to be
uncollectible.
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2 Record
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2 Record
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2 Record
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Step
1
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Age Accounts
Receivable.
Step
2
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Step
3
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2 Record
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Summarize
Other Issues
Revising Estimates -- Bad debt estimates always differ
from the amounts that are later written off. If these
differences are material, companies are required to
revise their bad debt estimates for the current period.
Account Recoveries -- Collection of a previously written
off account is called a recovery and it is accounted for in
two parts. First, put the receivable back on the books by
recording the opposite of the write-off. Second, record
the collection of the account.
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Other Issues
Lets
Lets assume
assume that
that Skechers
Skechers collects
collects the
the $800
$800 from
from Fast
Fast Footwear
Footwear
that
that was
was previously
previously written
written off.
off. This
This recovery
recovery would
would be
be recorded
recorded
with
with the
the following
following journal
journal entries:
entries:
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Learning Objective 3
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Calculating Interest
Interest (I) = Principal (P) Interest Rate (R) Time (T)
The amount of the
note receivable
See if you can calculate the interest below using your calculator.
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Date
Date of
of Note
Note Receivable
Receivable
Annual
Annual Interest
Interest Rate
Rate
Amount
Amount of
of the
the Note
Note
Maturity
Maturity Date
Date of
of Note
Note
Year
Year End
End of
of Company
Company
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November
November 1,
1, 2009
2009
6%
6%
$100,000
$100,000
October
October 31,
31, 2010
2010
December
December 31,
31, 2009
2009
2 Record
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2 Record
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$5,000
Interest
Principal (P) Interest Rate (R) Time (T) = Interest (I)
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2 Record
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Learning Objective 4
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Days to
=
Collect
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365
Receivable Turnover Ratio
365
10
= 36.5 days
Comparison to Benchmarks
Credit Terms
When companies sell on account, they specify the length of credit
period (and any cash discounts for prompt payment). By comparing the
number of days to collect to the length of credit period, you can gain a
sense of whether customers are complying with the stated policy.
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Speeding Up Collections
Factoring Receivables
One way to speed up collections is to sell outstanding
accounts receivable to another company (called a
factor). Your company receives cash for the receivables
it sells to the factor (minus a factoring fee).
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Chapter 8
Supplement 8A
Direct Write-Off Method
The reason the method isnt considered GAAP is because it breaks the
conservatism concept by not reporting receivables realizable value the
method violates the matching principle by recording bad debt expense
in the period the customers account is determined to be bad.
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February 1, 2009
2 Record
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Chapter 8
Solved Exercises
M8-10, E8-7, E8-8, E8-9, C8-1, CP84
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Req. 2
Req. 3
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E8-8 Recording and Reporting Allowance for Doubtful Accounts Using the
Percentage of Credit Sales and Aging of Accounts Receivable Methods
Req. 1
Req. 2
Req. 3
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E8-8 Recording and Reporting Allowance for Doubtful Accounts Using the
Percentage of Credit Sales and Aging of Accounts Receivable Methods
Req. 4 The
The accounts
accounts related
related to
to the
the accounts
accounts receivable
receivable can
can be
be shown
shown
one
one of
of two
two ways
ways on
on the
the December
December 31,
31, 2010
2010 balance
balance sheet:
sheet:
OR
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Req. 1
a.
b.
c.
dr
dr
dr
dr
d.
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dr
25,000
25,000
500
900
Cash (+A)
cr Accounts receivable (-A)
900
500
500
900
900
500
Req. 2
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Required:
1.For items a j, analyze the amount and direction (or) of effects on specific financial
statement accounts and the overall accounting equation and prepare journal entries.
2.Show how the receivables related to these transactions would be reported in the
current assets section of a classified balance sheet.
3.Name the accounts related to Accounts Receivable and Notes Receivable that would
be reported on the income statement and indicate whether they would appear before, or
after, Income from Operations.
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Req. 3
Execusmart Consultants would report Bad Debt Expense above income
from Operations, and Interest Revenue below Income for Operations.
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C8-1 Comprehensive Exercise for Recording and Reporting Credit Sales and Bad
Debts Using the Aging of Accounts Receivable Method
Okay Optical, Inc. (OOI) began operations in January 2010 selling inexpensive sunglasses to large
retailers like Walgreens and other smaller stores. Assume the following transactions occurred
during its first six months of operations.
January 1 - Sold merchandise to Walgreens for $20,000; the cost of goods to OOI was $12,000.
February 12 - Received payment in full from Walgreens.
March 1 - Sold merchandise to Tonys Pharmacy on account for $3,000; the cost of goods to OOI
was $1,400.
April 1 - Sold merchandise to Travis Pharmaco on account for $8,000. The cost to OOI was $4,400.
May 1 - Sold merchandise to Anjuli Stores on account for $2,000; the cost to OOI was $1,200.
June 17 - Received $6,500 on account from Travis Pharmaco.
Required:
1.Complete an aged listing of customer accounts for the four months ended June 30.
2.Estimate the Allowance for Doubtful Accounts required at June 30, 2010, assuming the following
uncollectible rates: one month, 1 percent; two months, 5 percent; three months, 20 percent; more
than three months, 40 percent.
3.Show how OOI would report its accounts receivable on its June 30 balance sheet. What amounts
would be reported on an income statement prepared for the six-month period ended June 30, 2010?
4.Bonus Question: In July 2010, OOI collected the balance due from Tonys Pharmacy but
discovered that the balance due from Travis Pharmaco needed to be written off. Using this
information, determine how accurate OOI was in estimating the Allowance for Doubtful Accounts
needed for each of these two customers and in total.
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C8-1 Comprehensive Exercise for Recording and Reporting Credit Sales and Bad Debts
Using the Aging of Accounts Receivable Method
Req. 1
Req. 2
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C8-1 Comprehensive Exercise for Recording and Reporting Credit Sales and Bad Debts
Using the Aging of Accounts Receivable Method
Req. 3
OKAY OPTICAL, INC.
Partial Balance Sheet
At June 30, 2010
Accounts Receivable, Net of Allowance of $1,600
$30,000
19,000
14,000
1,600
$12,400
$4,900
C8-1 Comprehensive Exercise for Recording and Reporting Credit Sales and Bad Debts
Using the Aging of Accounts Receivable Method
Req. 4 OOI did not accurately estimate the precise amounts that would
be collected from each customer, yet the total estimate was
reasonably accurate at $1,600. OOI underestimated the amount
collectible from Tonys Pharmacy (40% of $3,000, or $1,200,
was estimated uncollectible where it later turned out to be
collectible in full). It overestimated the amount collectible from
Travis Pharmaco (20% of $1,500, or $300, was estimated
uncollectible where it later turned out to show that $1,500 was
uncollectible). Looking at Travis Pharmaco and Tonys
Pharmacy combined, the estimated bad debt for both
customers was $1,500, which is only $100 less than the amount
the company wrote off.
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End of Chapter 8