Fundamental_Accounting_Principles_Chap009

PowerPointAuthors:SusanCoomerGalbreath,Ph.D.,CPACharlesW.Caldwell,D.B.A.,CMAJonA.Booker,Ph.D.,CPA,CIACynthiaJ.Rooney,Ph.D.,CPAMcGraw-Hill/IrwinCopyright©2011byTheMcGraw-HillCompanies,Inc.Allrightsreserved.ACCOUNTINGFORRECEIVABLESChapter099-2ACCOUNTSRECEIVABLEC1Areceivableisanamountduefromanotherparty.Acompanymustalsomaintainaseparateaccountforeachcustomerthattrackshowmuchthatcustomerpurchases,hasalreadypaid,andstillowes.Thisgraphshowsrecentdollaramountsofreceivablesandtheirpercentoftotalassetsforfourwell-knowncompanies.9-3SALESONCREDITC1OnJuly1,TechComhadacreditsaleof$950toCompStoreandacollectionof$720fromRDAElectronicsfromapriorcreditsale.9-4SALESONCREDITC19-5CREDITCARDSALESAdvantagesofallowingcustomerstousecreditcards:Customers’creditisevaluatedbythecreditcardissuer.Therisksofextendingcreditaretransferredtothecreditcardissuer.Cashcollectionsarequicker.Salesincreasebyprovidingpurchaseoptionstothecustomer.C19-6CREDITCARDSALESC1OnJuly15th,TechComhas$100ofcreditcardsaleswitha4%fee,andits$96cashisreceivedimmediatelyondeposit.9-7CREDITCARDSALESC1IfinsteadTechCommustremitelectronicallythecreditcardsalesreceiptstothecreditcardcompanyandwaitforthe$96cashpayment,wewillmakethefirstentryonJuly15,andthesecondentryonJuly20,whenthecashisreceived.9-8Amountsowedbycustomersfromcreditsalesforwhichpaymentisrequiredinperiodicamountsoveranextendedtimeperiod.Thecustomerisusuallychargedinterest.C1FordMotorCompanyreportsmorethan$75billionininstallmentreceivables.INSTALLMENTACCOUNTSRECEIVABLE9-9VALUINGACCOUNTSRECEIVABLEP1Therearetwomethodsofaccountingforbaddebts:DirectWrite-OffMethodAllowanceMethodSomecustomersmaynotpaytheiraccount.Uncollectibleamountsarereferredtoasbaddebts.9-10DIRECTWRITE-OFFMETHODP1TechComdeterminesonJanuary23thatitcannotcollect$520owedtoitbyitscustomerJ.Kent.Noticethatthespecificcustomerisnotedinthetransactionsowecanmaketheproperentryinthecustomer’sAccountsReceivablesubsidiaryledger.9-11DIRECTWRITE-OFFMETHOD–RECOVERINGABADDEBTOnMarch11,J.KentwasabletomakefullpaymenttoTechComfortheamountpreviouslywritten-off.P19-12MATCHINGVS.MATERIALITYP1Thedirectwrite-offmethodusuallydoesnotbestmatchsalesandexpenses.Thematching(expenserecognition)principlerequiresexpensestobereportedinthesameaccountingperiodasthesalestheyhelpedproduce.Materialitystatesthatanamountcanbeignoredifitseffectonthefinancialstatementsisunimportanttousers’businessdecisions.9-13ALLOWANCEMETHODTwoadvantagestotheallowancemethod:1.Itrecordsestimatedbaddebtsexpenseintheperiodwhentherelatedsalesarerecorded.2.Itreportsaccountsreceivableonthebalancesheetattheestimatedamountofcashtobecollected.Attheendofeachperiod,estimatetotalbaddebtsexpectedtoberealizedfromthatperiod’ssales.P19-14RECORDINGBADDEBTSEXPENSETechComhadcreditsalesof$300,000duringitsfirstyearofoperations.Attheendofthefirstyear,$20,000ofcreditsalesremaineduncollected.Basedontheexperienceofsimilarbusinesses,TechComestimatedthat$1,500ofitsaccountsreceivablewouldbeuncollectible.P19-15BALANCESHEETPRESENTATIONTechComhadcreditsalesof$300,000duringitsfirstyearofoperations.Attheendofthefirstyear,$20,000ofcreditsalesremaineduncollected.Basedontheexperienceofsimilarbusinesses,TechComestimatedthat$1,500ofitsaccountsreceivablewouldbeuncollectible.P19-16WRITINGOFFABADDEBTTechComdecidesthatJ.Kent’s$520accountisuncollectible.P19-17WRITINGOFFABADDEBTThewrite-offdoesnotaffecttherealizablevalueofaccountsreceivable.P19-18RECOVERINGABADDEBTOnMarch11,Kentpaysinfullhis$520accountpreviouslywrittenoff.Tohelprestorecreditstanding,acustomersometimesvolunteerstopayallorpartoftheamountowedonanaccountevenafterithasbeenwrittenoff.P19-19ESTIMATINGBADDEBTSEXPENSETwoMethods1.PercentofSalesMethod2.AccountsReceivableMethodsPercentofAccountsReceivableAgingofAccountsReceivableP29-20PERCENTOFSALESMETHODBaddebtsexpenseiscomputedasfollows:CurrentPeriodSales×BadDebt%=EstimatedBadDebtsExpenseP29-21400,000$×0.6%=2,400$Musicland’saccountantcomputesestimatedBadDebtsExpenseof$2,400.PERCENTOFSALESMETHODP2Musiclandhascreditsalesof$400,000in2011.Itisestimatedthat0.6%ofcreditsaleswilleventuallyproveuncollectible.Let’slookatrecordingBadDebtsExpensefor2011.9-22PERCENTOFRECEIVABLESMETHOD1.ComputetheestimateoftheAllowanceforDoubtfulAccounts.2.BadDebtsExpenseiscomputedas:Year-endAccountsReceivable×BadDebt%TotalEstimatedBadDebtsExpense–PreviousBalanceinAllowanceAccount=CurrentBadDebtsExpenseP29-23P2Musiclandhas$50,000inaccountsreceivableanda$200creditbalanceinAllowanceforDoubtfulAccountsonDecember31,2011.Pastexperiencesuggeststhat5%ofreceivablesareuncollectible.50,000$×5.00%=2,500$DesiredbalanceinAllowanceforDoubtfulAccounts.PERCENTOFRECEIVABLESMETHOD9-24Eachagegroupismultipliedbyitsestimatedbaddebtspercentage.Estimatedbaddebtsforeachgrouparetotaled.AGINGOFRECEIVABLESMETHODP2Classifyeachreceivablebyhowlongitispastdue.9-25AGINGOFACCOUNTSRECEIVABLEP29-26Musiclandhasanunadjustedcreditbalanceintheallowanceaccountis$200.Weestimatedtheproperbalancetobe$2,270.2002,0702,270AllowanceforDoubtfulAccountsAGINGOFACCOUNTSRECEIVABLEP29-27SUMMARYOFMETHODSP29-28NOTESR