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MGT120H5 (39)
Lecture 5

lecture 5 - uncollectible receivables.docx

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Department
Management
Course
MGT120H5
Professor
Catherine Seguin
Semester
Winter

Description
Short term Investments and Receivables : Chapter 5 Learning Objective 1:Account for short term investments Short term investments: Marketable securities – are investments that a company plans to hold for one year or less  most liquid asset after cash e.g. Suppose that Celestica Inc. purchases McCain Foods Ltd. Shares on dec 18, paying 100,000 cash e.g. on dec 27, Celestica receives a cash dividend of $4000 from McCain Celestica fiscal year ends on dec 31, and investment in McCain has a current market value of 102,000 on this date. GAIN because the market value ($102,000) = greater than celestica’s investment cost Unrealized Gain: because Celestica has not yet sold the investment • Short term Investment 2000 Unrealized Gain on Investments 2000 If Celestica investment in McCain shares had decreased in value to 95000 Unrealized Loss: because Celestica has not yet sold the investment • Unrealized Loss on Investments 5000 Temporary Investments 5000 Balance Sheet: temporary assets are current assets Income Statement: temporary asset can either earn interest revenue or dividend revenue. All gains and losses are also reported on the income statement Learning Objective 2:Account for receivables Accounts and Notes Receivable rd Receivables are the 3 most liquid assets after cash and short term investments Results from selling g/s on credit and by lending money Accounts receivable are a current asset on the balance sheet Learning Objective 3:Apply internal controls to receivables Establishing internal control over collections Businesses that sell on credit receive most of their cash receipts by mail Some controls over accounts receivable are: a) Learning Objective 4: Use allowance method for uncollectible receivables Selling on credit creates both benefit and cost: Benefit: customers who cannot pay cash immediately can buy on credit, so company profits rise as sales increase Cost: company will be unable to collect from some credit customers Short term Investments and Receivables : Chapter 5 Uncollectible Account Expense Expense on income statement Must record expense in the period of sale. If not assets and earnings will be overstated The entry for the uncollectible account amount is an adjusting journal entry Can use the allowance method for estimating the uncollectible receivables The Allowance Method • Allowance method: records collection losses on basis of estimates, not waiting to see which customers will pay • Allowance for uncollectible accounts(allowance for doubtful accounts): is a contra account to accounts receivable • Jounral Entry: Dr Uncollectible-account expense CrAllowance for uncollectible a/c Accounting for UncollectibleAccounts • Allowance method : income statement approach and balance sheet approach • Direct write off method Percentage of Sales: computes uncollectible account expense as a percentage of revenue (income statement approach) (Account of UNCOLLECTIBLE ACCOUNT EXPENSE) Aging of receivables: (balance sheet approach) because it focuses on a/r  individuals receivables from specific customers are analyzed based on how long they have outstanding. Apercentage of accounts receivable could also be used (Amount of UNCOLLECTIBLE RECEIVABLES) Recovery of Uncollectible Accounts Previously Written Off 1. Reinstate the a/r 2. Record the collection of cash Combining the percentage of sales and aging methods For interim statements (monthly/quarterly), companies use the percentage of sales method b/c it is easiet to apply At the end of the year, companies use the aging method to ensure the a/r is reported at net realizable value Direct Write off Method: an account is written off only when it is decided that a specific customer’s receivable is uncollectible DR Uncollectible-Account Expense 3000 A/r – Smith Inc. 3000 Wrote off a bad account Short term Investments and Receivables : Chapter 5 Dir
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