7–17–1 Chapter 7 Cash and Receivables. 7–27–2 Copyright © Cengage Learning. All rights...
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Transcript of 7–17–1 Chapter 7 Cash and Receivables. 7–27–2 Copyright © Cengage Learning. All rights...
7–2Copyright © Cengage Learning. All rights reserved.
Managing Cash at Nike
Poised to become a $20 billion company by the end of the decade
Cash provided by operations = $1.8 billion in fiscal 2007
Effective use of supply-chain management system
Click to explore financial news on Nike.
As you study this chapter, consider the issues involved with collection of accounts receivable and protecting cash.
© Royalty Free PhotoDisc/ Getty Images
7–3Copyright © Cengage Learning. All rights reserved.
LO1: Managing Cash and Receivables
1. Cash needs
2. Credit policies
3. Level of accounts receivable
4. Financing receivables
5. Ethical estimates of credit losses
© Royalty Free PhotoDisc/ Getty Images
7–4Copyright © Cengage Learning. All rights reserved.
Cash Considerations
Consists of: Currency and coins on
hand
Most liquid of all assets Central to operating
cycle
Checks and money orders from customers
Deposits in checking and savings accounts
Cash may include a compensating balance—a minimum amount required
by a bank for a credit-granting agreement.
© Royalty Free PhotoDisc/ Getty Images
7–5Copyright © Cengage Learning. All rights reserved.
Seasonal Cash Needs
Cycles of business activities require different levels of cash needs
Cash inflows Cash outflows
Borrowing Investing
Plan for these cash activities:
7–7Copyright © Cengage Learning. All rights reserved.
Accounts Receivable (A/R)
Short-term financial assets Result from extending credit to an individual or a business, also called trade credit
Retailers like Sears, Lowe’s, and JCPenney
offer credit terms to customers
Wholesalers and manufacturers also
provide credit terms to their customers for
purchases © Royalty Free PhotoDisc/ Getty Images
7–8Copyright © Cengage Learning. All rights reserved.
Credit Policies
The credit department: Examines the financial resources and debts of the
credit applicant Asks for personal references Gets credit rating from credit bureaus Determines the extent to which the company can
grant credit, if any
To increase the likelihood of selling to customers who will pay on time, companies develop control procedures and
maintain a credit department
7–9Copyright © Cengage Learning. All rights reserved.
Evaluating the Level of Accounts Receivable
How many times, on average, does a company turn its receivables into
cash during an accounting period?
How long, on average, does it take a company to collect its accounts receivables?
Receivable Turnover Days’ Sales Uncollected
7–10Copyright © Cengage Learning. All rights reserved.
Receivable Turnover
Reflects the relative size of a company’s accounts receivable and the success of its credit and
collection policies
Receivable Turnover = Net Sales
Average Net Accounts Receivable
$16,325.9
($2,494.7 + $2,382.9) ÷ 2
Nike’s ReceivableTurnover for 2007
(Amounts in Millions)
=
= 6.7 times
7–11Copyright © Cengage Learning. All rights reserved.
Nike’s Days’ Sales Uncollected =
Days’ Sales Uncollected
Days’ Sales Uncollected =
365 days
Receivable Turnover
365 days
6.7
= 54.5 days
To interpret a company’s ratios, take into consideration the industry in which it operates
7–13Copyright © Cengage Learning. All rights reserved.
Financing Receivables
Money tied up in receivables is something that many companies seek to avoid
Companies may use one or more of these methods so that they can receive cash faster:
Set up a separate finance company
Borrow money and pledge A/R
In case of default on loan, A/R (collateral) can be taken and converted to cash to satisfy the loan
FactorA/R
Sale or transfer of A/R; the buyer may bear risk of collection (factoring without recourse) or the seller may bear risk of collection (factoring with recourse)
Ford Ford Motor Credit CompanyGM General Motors Acceptance Corp. Sears Sears Roebuck Acceptance Corp.
7–15Copyright © Cengage Learning. All rights reserved.
Factoring Details
Reports a contingent liability (a potential debt that can develop if customers don’t pay receivables)
What does the seller of receivables with recourse report in financials?
Typically 2% of total A/R for sales with recourse; Higher fee for sales without recourse
What fees are charged?
7–16Copyright © Cengage Learning. All rights reserved.
Discounting
The sale of promissory notes held as notes receivable
Company XHolds $20,000 note from
Company Z; Note will pay $1,200 in interest If Company X pays,
bank will receive $21,200 and realize a $2,000 profit
If Company X defaults, Company X is liable for the note
Company X should disclose the contingent liability (in the amount of note plus interest) in notes to its financial statements
BankBuys the note for
$19,200
7–17Copyright © Cengage Learning. All rights reserved.
Estimating Uncollectibles
There will always be customers who do not pay their accounts, called uncollectible accounts, or bad debts
Match these expenses of selling on credit to the revenues they help generate
Estimate the uncollectible expense in the fiscal year in which
the sales are made
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7–18Copyright © Cengage Learning. All rights reserved.
Estimating Uncollectibles and Ethics
Because estimations are involved, earnings may be easily manipulated…
earnings are understated.
If the amount of losses from uncollectible accounts
are overstated,
earnings are overstated. If the amount of losses
from uncollectible accounts are understated,
7–19Copyright © Cengage Learning. All rights reserved.
Discussion: Ethics in the World
WorldCom increased revenues and hid losses by continuing to bill customers for service for years after the customers had stopped paying.
Q. What impact do you think WorldCom’s actions had on Accounts Receivable and Sales?
7–20Copyright © Cengage Learning. All rights reserved.
Stop & Review
Q. What is a compensating balance?
A. A minimum amount kept on account required by a bank in accordance with a credit granting agreement.
7–21Copyright © Cengage Learning. All rights reserved.
Stop & Review
Q. If you owned a snow cone business with kiosks operating on three boardwalks along the New Jersey shore, what seasonal cash needs might you anticipate?
A. Cash inflows and outflows might be greatest in the summer months, while the fall and winter months will not yield much cash, nor will much be required for operations.
7–22Copyright © Cengage Learning. All rights reserved.
Stop & Review
Q. Does the buyer or seller bear the risk of collection if receivables are sold with recourse?
A. The seller bears the risk of collection because the buyer may return to the seller for payment if customers do not pay on their accounts.
7–23Copyright © Cengage Learning. All rights reserved.
Stop & Apply
Q. Slippery Elm Homeopathic Drug Store has net sales of $85,355. The year began with Accounts Receivable of $15,385 and ended with $19,358. What is the company’s receivable turnover?
A. $85,355
($19,358 + $15,385) ÷ 2
= 4.9 times
7–24Copyright © Cengage Learning. All rights reserved.
Stop & Review
Q. How might a company use uncollectible estimates to manipulate earnings?
A. If the company underestimated uncollectibles, it would overstate earnings. If the company wanted to minimize earnings, it could overestimate uncollectibles for the period.
7–25Copyright © Cengage Learning. All rights reserved.
LO2: Cash Equivalents
Investments like time deposits or certificates of deposit (CDs) that have a term of 90 days or less
Nike’s Annual ReportCash and equivalents represent cash and short-term, highly liquid investments with maturities of three months or less at date of purchase. The carrying amounts reflected in the consolidated balance sheet for cash and equivalents approximate fair value.
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7–26Copyright © Cengage Learning. All rights reserved.
Cash Control: Imprest Systems
Established at a fixed amount
Reimbursed periodically, based on documented expenditures
Total cash and receipts must equal the original amount
One person should be made responsible for the accuracy and security of the fund
Petty Cash Fund
© Royalty Free C Squared Studios/ Getty Images
7–27Copyright © Cengage Learning. All rights reserved.
Cash Control: Electronic Funds Transfer (EFT)
Method of conducting business transactions in which funds are transferred electronically
from one bank to another bank
Wal-Mart makes 75% of its
payments to suppliers using
EFT
Electronic Banking
ATM transactionsDebit and credit card purchases
Online bill-pay
7–28Copyright © Cengage Learning. All rights reserved.
Cash Control: Bank Reconciliations
The bank statement is reconciled to the company’s Cash account to account for any difference between
the two balances
Outstanding checksDeposits in transit Errors
Service chargesNSF (nonsufficient funds)
checks Miscellaneous debits or creditsInterest incomeErrors
What items might appear in the company’s records that do not appear on the
bank statement?
What items might appear on the bank statement
that do not appear in the company’s records?
7–29Copyright © Cengage Learning. All rights reserved.
Terry Services Company Bank Reconciliation
August 31, 2010 Balance per bank, August 31 $1,735.35 Balance per books, August 31 $1,207.95
Add deposit of August 31 in transit 138.00
Illustration: Bank Reconciliation
1. A $138.00 deposit was mailed to the bank on August 31 and has not been recorded by the bank.
7–30Copyright © Cengage Learning. All rights reserved.
Terry Services Company Bank Reconciliation
August 31, 2010 Balance per bank, August 31 $1,735.53 Add deposit of August 31 in transit 138.00 Balance per books, August 31 $1,207.95
Less outstanding checks: No. 551 $75.00 No. 576 20.34 No. 578 250.00 No. 579 185.00 No. 580 65.25 595.59
Bank Reconciliation (cont’d)
2. Five checks issued in August or earlier have not been paid by the bank.
7–31Copyright © Cengage Learning. All rights reserved.
Bank Reconciliation (cont’d)
Terry Services Company Bank Reconciliation
August 31, 2010 Balance per bank, August 31 $1,735.53 Add deposit of August 31 in transit 138.00 Less outstanding checks: No. 551 $75.00 No. 576 20.34 No. 578 250.00 No. 579 185.00 No. 580 65.25 595.59 Balance per books, August 31 $1,207.95
3. A deposit on August 6 was incorrectly recorded in the company’s books as $165.00. The bank correctly recorded the deposit as $150.00.
Less: Overstatement of deposit of October 6 $ 15.00
7–32Copyright © Cengage Learning. All rights reserved.
Bank Reconciliation (cont’d)
Terry Service Company Bank Reconciliation
August 31, 2010 Balance per bank, August 31 $1,735.53 Add deposit of August 31 in transit 138.00 Less outstanding checks: No. 551 $75.00 No. 576 20.34 No. 578 250.00 No. 579 185.00 No. 580 65.25 595.59 Balance per books, August 31 $1,207.95 Less: Overstatement of deposit of August 6 $ 15.00
4. A credit memorandum was enclosed with the bank statement showing a note had been collected in the amount of $140.00 along with interest of $10.00. A debit memorandum was enclosed for the $2.50 collection fee.
Add: Note receivable collected by bank $140.00 Interest income on note 10.00 Collection fee 2.50
7–33Copyright © Cengage Learning. All rights reserved.
Terry Services Company Bank Reconciliation
August 31, 2010 Balance per bank, August 31 $1,735.53 Add deposit of August 31 in transit 138.00 Less outstanding checks: No. 551 $75.00 No. 576 20.34 No. 578 250.00 No. 579 185.00 No. 580 65.25 595.59 Balance per books, August 31 $1,207.95 Add: Note receivable collected by bank $140.00 Interest income on note 10.00 Less: Overstatement of deposit of August 6 $ 15.00 Collection fee 2.50
NSF check of Austin Chase 64.07
Bank Reconciliation (cont’d)
5. An NSF check was returned with the statement for $64.07. The NSF check from Austin Chase was not reflected in the company’s books.
7–34Copyright © Cengage Learning. All rights reserved.
Service charge 6.25
Terry Service Company Bank Reconciliation
August 31, 2010 Balance per bank, August 31 $1,735.53 Add deposit of August 31 in transit 138.00 Less outstanding checks: No. 551 $75.00 No. 576 20.34 No. 578 250.00 No. 579 185.00 No. 580 65.25 595.59 Balance per books, August 31 $1,207.95 Add: Note receivable collected by bank $140.00 Interest income on note 10.00 Less: Overstatement of deposit of August 6 $ 15.00 Collection fee 2.50 NSF check of Austin Chase 64.07
Bank Reconciliation (cont’d)
6. A debit memorandum for the monthly $6.25 service charge was enclosed with the bank statement.
7–35Copyright © Cengage Learning. All rights reserved.
Terry Services Company Bank Reconciliation
August 31, 2010 Balance per bank, August 31 $1,735.53 Add deposit of August 31 in transit 138.00 Less outstanding checks: No. 551 $75.00 No. 576 20.34 No. 578 250.00 No. 579 185.00 No. 580 65.25 595.59 Balance per books $1,207.95 Add: Note receivable collected by bank $140.00 Interest income on note 10.00 Less: Overstatement of deposit of August 6 $ 15.00 Collection fee 2.50 NSF check of Austin Chase 64.07 Service charge 6.25
Interest income 7.81
Bank Reconciliation (cont’d)
7. Interest earned by the company on its average balance was $7.81.
7–36Copyright © Cengage Learning. All rights reserved.
Bank Reconciliation (cont’d)
After all items have been listed on the reconciliation, total the columns. The adjusted bank balance should equal the adjusted book balance.
Terry Services Company Bank Reconciliation
August 31, 2010 Balance per bank, August 31 $1,735.53 Add deposit of August 31 in transit 138.00 $1,873.53 Less outstanding checks: No. 551 $75.00 No. 576 20.34 No. 578 250.00 No. 579 185.00 No. 580 65.25 595.59 Adjusted bank balance, August 31,2010 $1,277.94 Balance per books $1,207.95 Add: Note receivable collected by bank $140.00 Interest income on note 10.00 Interest income 7.81 157.81 $1,365.75 Less: Overstatement of deposit of August 6 $ 15.00 Collection fee 2.50 NSF check of Austin Chase 64.07 Service charge 6.25 $87.82 Adjusted bank balance, August 31,2010 $1,277.94
7–37Copyright © Cengage Learning. All rights reserved.
Stop & Review
Q. What are cash equivalents?
A. Investments like time deposits or CDs that have a term of 90 days or less.
7–38Copyright © Cengage Learning. All rights reserved.
Stop & Review
Q. Why are electronic funds transfers considered to be a form of cash control?
A. Because no money actually changes hands, there is less likelihood of theft or error.
7–39Copyright © Cengage Learning. All rights reserved.
Stop & Review
Q. What types of items will be added to the balance per books when performing a bank reconciliation?
A. Deposits in transit
7–40Copyright © Cengage Learning. All rights reserved.
Stop & Review
Q. What types of items will be deducted from the balance per books when performing a bank reconciliation?
A. Charges and fees like service charges, check charges, and NSF checks
7–41Copyright © Cengage Learning. All rights reserved.
LO3: Direct Charge-Off Methodfor uncollectibles
Recognize a loss at the time it is determined that an account is uncollectible
Date Uncollectible Accounts Expense XXX
Accounts Receivable XXX
Tax law requires use of this method when computing taxable income
Most companies do not use this method for financial reporting purposes because it does not conform to GAAP.
7–42Copyright © Cengage Learning. All rights reserved.
The Allowance Method
Losses from bad debts are matched against the sales they help generate
At the time of sale, management cannot identify which customers will not pay
To observe the matching rule, losses from uncollectible accounts must be estimated
The estimate becomes an expense in the fiscal year in which the sales are made
7–43Copyright © Cengage Learning. All rights reserved.
Alternate Account Names
Allowance for Uncollectible Accounts
Uncollectible Accounts Expense
Allowance for Doubtful Accounts
Allowance for Bad Debts
Reserve for Bad Debts (not used in modern practice)
Bad Debts Expense
© Royalty Free C Squared Studios/ Getty Images
7–44Copyright © Cengage Learning. All rights reserved.
Estimating Uncollectible Accounts
• Estimated loss should be: Realistic Based on objective information Based on past experience Based on current economic conditions
Two commonly used methods for
estimating loss
1. Percentage of net sales method
2. Accounts receivable aging method
7–45Copyright © Cengage Learning. All rights reserved.
Percentage of Net Sales Method
How much of this year’s net sales will not be collected?
The answer determines the amount of uncollectible accounts expense for the year
The amount is actually based on the company’s historic losses
© Royalty Free C Squared Studios/ Getty Images
7–46Copyright © Cengage Learning. All rights reserved.
Dec. 31, 2012: Account balances: Sales, $322,500; Sales Returns and Allowances, $20,000; Sales Discounts, $2,500; Allowance for Uncollectible Accounts, $1,800. Management estimates that uncollectible accounts will average about 2 percent of net sales.
$6,000 $2,500)– $20,000– ($322,500 x .02 expense accounts bleUncollecti
Allowance for Uncollectible Accounts
Dec. 31 1,800
Dec. 31 adj. 6,000
Dec. 31 bal. 7,800
Percentage of Net Sales Method
After the above entry is posted, Allowance for
Uncollectible Accounts will have a credit balance of
$7,800
Dec. 31 Uncollectible Accounts Expense 6,000 Allowance for Uncollectible Accounts 6,000 To record the uncollectible accounts
expense at 2 percent of $300,000 net sales
7–47Copyright © Cengage Learning. All rights reserved.
Accounts Receivable Aging Method
How much of the ending balance of accounts receivable will not be collected?
The ending balance of Allowance for Uncollectible Accounts is determined directly through an analysis of accounts receivable
The difference between the amount determined to be uncollectible and the actual balance of Allowance for Uncollectible Accounts is the expense for the period.
7–48
Notice that the estimated percentage uncollectible increases as accounts become further past due.
Analysis of Accounts Receivable by Age
The total past due for each category is multiplied by the estimated percentage uncollectible
The sum of the totals for each category is the estimated balance of Allowance for Uncollectible Accounts
7–49Copyright © Cengage Learning. All rights reserved.
Accounts Receivable Aging Method (Case 1)
Dec. 31, 2010: Management has estimated that $4,918 of Accounts Receivable are uncollectible. Allowance for Uncollectible Accounts has a credit balance of $1,600.
Allowance for Uncollectible Accounts
A credit adjustment of $3,318 will bring the account to its target balance
Dec. 31 1,600Dec. 31 adj. 3,318
Dec. 31 bal. 4,918
The target balance for the account is $4,918
Dec. 31 Uncollectible Accounts Expense 3,318 Allowance for Uncollectible Accounts 3,318 To bring the allowance for uncollectible
accounts to the level of estimated losses
7–50Copyright © Cengage Learning. All rights reserved.
Accounts Receivable Aging Method (Case 2)
Dec. 31, 20x6: Management has estimated that $4,918 of Accounts Receivable are uncollectible. Allowance for Uncollectible Accounts has a debit balance of $1,600.
Allowance for Uncollectible Accounts
A credit adjustment of $6,518 will bring the account to its target balance
Dec. 31 1,600Dec. 31 adj. 6,518
Dec. 31 bal. 4,918
The target balance for the account is $4,918
Dec. 31 Uncollectible Accounts Expense 6,518 Allowance for Uncollectible Accounts 6,518 To bring the allowance for uncollectible
accounts to the level of estimated losses
7–52Copyright © Cengage Learning. All rights reserved.
Estimates Differ from Write-Offs?
Accounts receivable written off during a period will rarely equal the estimated uncollectible amount
Shows a credit balance when the total of
accounts written off is less than the estimated uncollectible amount
Shows a debit balance when the total of
accounts written off is greater than the
estimated uncollectible amount
Allowance for Uncollectible Accounts
7–53Copyright © Cengage Learning. All rights reserved.
Writing Off an Uncollectible Account
When it becomes clear an account will not be collected, the amount should be written off to Allowance for Uncollectible Accounts
The uncollectible amount was already accounted for as an expense when the allowance was established
7–54
Jan. 15 Allowance for Uncollectible Accounts 500 Accounts Receivable 500 To write off receivable from TV GO as uncollectible
because of his bankruptcy
Bal. 4,418
Dec. 31 4,918
Writing Off an Uncollectible Account
Jan. 15, 2011: TV GO, who owes Gomez Company $500, is declared bankrupt by federal court.
Allowance for Uncollectible Accounts
Net realizable value of A/RBefore write-off $88,800 – $4,918 = $83,882
Jan. 15 500
The write-off does not affect the estimated net realizable value of accounts receivable
Accounts Receivable
Dec. 31 88,800
Jan. 15 500
Bal. 88,300
After write-off $88,300 – $4,418 = $83,882
7–55Copyright © Cengage Learning. All rights reserved.
Stop & Review
Q. Why do most companies use the allowance method instead of the direct write-off method to account for uncollectible accounts?
A. The direct write-off method does not conform to the matching rule and therefore does not adhere to GAAP. The allowance method matches losses from bad debts against the sales they helped produce.
7–56Copyright © Cengage Learning. All rights reserved.
Stop & Review
Q. Where does the Allowance for Uncollectible Accounts account appear in the financial statements?
A. On the balance sheet as a contra account to Accounts Receivable.
7–57Copyright © Cengage Learning. All rights reserved.
Stop & Apply
Q. Write Brothers Office Supplies had the following account balances at year end: Sales $620,000; Sales Returns and Allowances $35,000; Sales Discounts, $2,000; Allowance for Uncollectible Accounts, $2,400. Uncollectible accounts is estimated at 3 percent of net sales. What amount will be debited to Uncollectible Accounts Expense if the company uses the percentage of net sales method?
A. .03 x ($620,000 - $35,000 - $2,000) = $17,490
7–58Copyright © Cengage Learning. All rights reserved.
Stop & Apply
Q. Management estimates that $2,707 of Accounts Receivable are uncollectible. Allowance for Uncollectible Accounts has a credit balance of $1,200. If the company uses the aging method, what journal entry should be prepared?
A. $2,707 – $1,200 = $1,507
Dec. 31 Uncollectible Accounts Expense 1,507 Allowance for Uncollectible Accounts 1,507 To bring the allowance for uncollectible
accounts to the level of estimated losses
7–59Copyright © Cengage Learning. All rights reserved.
LO4: Making and Paying Notes
A promissory note is an unconditional promise to pay a definite sum of money on demand at a future date
MakerPerson or company that
signs the note and promises to pay the
amount
PayeeEntity to whom
payment is to be made
All promissory notes that the payee holds that are due in less than one year are categorized as notes receivable in the current
assets section of the balance sheet
All promissory notes that the maker holds that are due in less than one year are categorized as
notes payable in the current liability section of the balance
sheet
7–61Copyright © Cengage Learning. All rights reserved.
Key Components of Promissory Notes
Total proceeds of a note at maturity date (face value plus interest)
Maturity Value
Cost of borrowing money or the return for lending money, usually stated on an annual basis
Interest and Interest Rate
Length of time in days between the note’s issue date and its maturity date
Duration
Date on which the note must be paidMaturity Date
7–62Copyright © Cengage Learning. All rights reserved.
Maturity Date
Ways in which maturity date may be stated: Due “November 14, 2010”
Due “three months after November 14, 2010”
Due “90 days after November 14, 2010”
Exclude the date of the note when computing the maturity date:A note dated May 20 and due in 90 days would be due on August 18, determined as follows:
Days remaining in May (31 – 20) 11Days in June 30Days in July 31Days in August 18
Total days 90
7–63Copyright © Cengage Learning. All rights reserved.
Duration of a Note
Why is duration of a note important?
Interest is calculated on this basis
If maturity date is stated as a specific number of days from date of note… duration is easy to
calculate. Duration is the same as number of days.
If maturity date is stated as a specific date… number of days must be
calculated.
7–64Copyright © Cengage Learning. All rights reserved.
Interest and Interest Rate
Amount of interest is based on:
PrincipalRate of interestLoan’s length of time
What is the interest on a 90-day, 8 percent, $1,000 note?
Principal x Rate of Interest x Time = Interest
$1,000 x .08 x 90/365 = $19.73
© Royalty Free PhotoDisc/ Getty Images
7–65Copyright © Cengage Learning. All rights reserved.
Maturity Value
Total proceeds of loan
90-day 8 percent
$1,000 loan proceeds
= Principal + Interest
= $1,000 + ($1,000 × 8/100 × 90/365)
= $1,000.00 + $19.73
= $1,019.73
The maturity value of a non-interest-bearing note is the principal amount. In this case, the principal includes an
implied interest cost
7–66Copyright © Cengage Learning. All rights reserved.
Accrued Interest
A promissory note received in one accounting period may not be due until a later period
Accrue the interest applicable to the note at the end of the accounting period
$1,000 note, 90-day, 8 percent note was received on Aug. 31. The fiscal year ends on Sept. 30.
30 days interest, or $6.58 ($1,000 × 8/100 × 30/365 = $6.58), is earned in the fiscal year that ends on Sept. 30
© Royalty-Free/Corbis
7–67Copyright © Cengage Learning. All rights reserved.
Dishonored Notes
When the maker of a note does not pay at maturity, the note is said to be a dishonored note.
The holder, or payee, of the note should make an entry to transfer the amount due to an accounts receivable from the debtor. © Royalty Free PhotoDisc/ Getty Images
7–68Copyright © Cengage Learning. All rights reserved.
Stop & Apply
Q. On January 1, 20x6, Blake Company receives a 90-day, 9 percent, $5,000 note. The company prepares financial statements monthly. What is the maturity date of the note?
A. April 1 Days remaining in January (31 – 1) 30 Days in February 28 Days in March 31 Days in April 1
Total days 90
7–69Copyright © Cengage Learning. All rights reserved.
Stop & Apply
Q. If Cheep Company extends a 90-day, $1,000 note, at 9 percent, what total proceeds will the company receive?
A. $1,000 + ($1,000 x .09 x 90/365 = $1,000.00 + $22.19 = $1,022.19
7–70Copyright © Cengage Learning. All rights reserved.
Chapter Review Problem
JPG Company sells merchandise on account to its customers. During the year ended December 31, the company had net sales of $800,000. At the end of the year, it had Accounts Receivable of $220,000 and a debit balance in Allowance for Uncollectible Accounts of $3,100. In the past, approximately 2.0 percent of net sales have been uncollectible. Also, an aging analysis of accounts receivable reveals that $12,000 in accounts receivable appears to be uncollectible.
Required: Compute Uncollectible Accounts Expense, anddetermine the ending balance of Allowance for UncollectibleAccounts and the amount of Accounts Receivable, Net, under (a) the percentage of net sales method and (b) the accounts receivable aging method.
7–71Copyright © Cengage Learning. All rights reserved.
Chapter Review Problem (Solution)
(a) Percentage of net sales method: Uncollectible Accounts Expense = 2.0 percent × $800,000 = $16,000Allowance for Uncollectible Accounts = $16,000 – $3,100 = $12,900Accounts Receivable, Net = $220,000 – $12,900 = $207,100
(b) Accounts receivable aging method: Uncollectible Accounts Expense = $3,100 + $12,000 = $15,100Allowance for Uncollectible Accounts = $12,000Accounts Receivable, Net = $220,000 – $12,000 = $208,000