ACCT 001 Lecture Notes - Lecture 11: Accounts Receivable, Income Statement, Balance Sheet

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pearjellyfish736

23 Dec 2020

School

College of The Sequoias

Department

Accounting (ACCT)

Course

ACCT 001

Professor

skaff

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Document Summary

Relies on the historical relationship between credit sales and the amount of sales unlikely to be collected. E. g. past experience might be 2% bad debts/year. Percentage then multiplied by credit sales to estimate bad debts expense. Income statement approach easily overstates or understates the level of bad debts being recognised as economic and market conditions change. E. g. economic downturn may mean historic percentage of credit sales not collected may be understated: balance sheet approach. Based on the belief that the older the accounts receivable, the greater the probability that the amount will not be collected. Two forms of discounts differ in purpose and in the way they are recorded in accounting system. Where compatible with trade practices legislation, means of adjusting the actual price charged to a customer from standard list price". Usually, amount of reduction depends on category of customer or their normal volume of business.

Related Questions

True or False:

An advantage of FIFO is that it assigns the most recent costs to cost of goods sold, and does a better job of matching current costs with revenues on the income statement.

A properly designed internal control system is a key part of systems design, analysis, and performance.

An internal control system consists of the policies and procedures companies use to protect assets, ensure reliable accounting, promote efficient operations, and uphold company policies.

Technologically advanced accounting systems rarely need monitoring for errors because computers always process transactions correctly.

Separation of duties involves dividing responsibility for a transaction or a series of related transactions between two or more individuals or departments.

The Sarbanes-Oxley Act (SOX) requires managers and auditors of companies whose stock is traded on an exchange to document and certify the system of internal controls.

A receivable is an amount due from another party.

Credit sales are recorded by crediting Accounts Receivable.

The accounts receivable turnover indicates how often accounts receivable are received and collected during the period.

A high accounts receivable turnover in comparison with competitors suggests that the firm should tighten its credit policy.

The direct write-off method of accounting for bad debts records the loss from an uncollectible account receivable when it is determined to be uncollectible.

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Felbin Inc. is in the second quarter of its first year ofoperations, and it plans to use the allowance method to account forits receivables. The CFO of the company is evaluating threedifferent approaches to the allowance method, and the impact thateach may have on the company's financial statements. The CFOestimates sales for the year will be $4.75 million, with $4.5million on credit. The tax rate for Felbin is 30%. The CFO asks youto prepare an analysis of what the year-end journal entries mightlook like under three different assumptions. Based on youranalysis, the CFO will determine which one of the three independentapproaches to take when recording bad debts expense atyear-end.

Assumption 1: Income Statement Approach
Felbin uses the income statement approach and estimates 2% ofcredit sales will be uncollectible. In the event economicconditions worsen during the year, the CFO would revise hisuncollectible percentage to 3%.

Assumption 2: Balance Sheet Approach
Felbin uses the balance sheet approach with estimateduncollectibles of 2% of ending receivables. This will result in anestimated charge to bad debt expense of $84,200. The uncollectiblepercentage would be increased to 2.5% if economic conditionsworsen.

Assumption 3: Aging Approach
As an alternative to the basic balance sheet approach, the CFO hasdrafted an estimated aging schedule (shown below). If economicconditions worsen, the CFO believes a one percentage point increasein the uncollectible percentages would be appropriate.

Days Outstanding	A/R Amount	Estimated Percent Uncollectible	Estimated $ Uncollectible	Percent if Economy Worsens
Less than 30 days	1,750,000	1%	17,500	2%
30â60 days	1,395,000	3%	41,850	4%
61â120 days	820,000	5%	41,000	6%
Greater than 120 days	245,000	20%	49,000	21%
Total			149,350

Using the CFO's estimate of sales and accounts receivable forthe year, prepare the following proposed journal entries for theCFO to review:

A.) Assuming the Income Statement approach is used and economicconditions do not worsen, prepare the journal entry that would bemade for the year.

B.) Assuming the Income Statement approach is used and economicconditions worsen, provide the journal entry that would be made forthe year.

C.) Assuming the Balance Sheet approach is used and economicconditions worsen, provide the journal entry that would be made forthe year.

D.) Assume the aging method is used. What is the expected chargeto bad debt expense under the assumption that economic conditionsworsen?

2) On January 1, 2016, Happy Tubs sold a hot tub to Monica,receiving a two-year, noninterest-bearing note in exchange for ahot tub that normally sells for $8,000. The note is for an amountthat achieves an effective interest rate of 10% per year.

Required:

1. Prepare the journal entry to record the sale.
2. Prepare any adjusting entry necessary on December 31, 2016. 3.Prepare any adjusting entry necessary on December 31, 2017.

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Use the following information forquestions 1â3.

At May 1, 2008, Treeline Company had beginning inventoryconsisting of 200 units with a unit cost of $7. During May, thecompany purchased inventory as follows:

200 units at $7

300 units at $8

The company sold 500 units during the month for $12 per unit.Treeline uses the average cost method.

1. The average cost per unit for May is

2. The value ofTreelineâs inventory at May 31, 2008 is

3. Treelineâs gross profit for the month ofMay is

Pembrook Company had beginning inventory on May 1 of $12,000.During the month, the company made purchases of $30,000 butreturned $2,000 of goods because they were defective. At the end ofthe month, the inventory on hand was valued at $9,500.

Calculate cost of goods available for sale and cost of goodssold for the month.

5. Principles of an efficient and effectiveaccounting information system include all of the followingexcept

a. cost effectiveness.

b. flexibility.

c. useful output.

d. All of these options are principles.

6. Which of the following statements isincorrect?

a. A major consideration in developing an accountingsystem is cost effectiveness.

b. When an accounting system is designed, noconsideration needs to be given to the needs and knowledge of thevarious users.

c. The accounting system should be able toaccommodate a variety of users and changing information needs.

d. To be useful, information must be understandable,relevant, reliable, timely, and accurate.

7. All of the following are advantages ofusing subsidiary ledgers except they

a. eliminate errors in individual accounts.

b. free the general ledger of excessive details.

c. show, in a single account, transactions affectingone customer or one creditor.

d. make possible a division of labor.

8. Which of the following is notan advantage of a subsidiary ledger?

a. Shows transactions affecting one customer or onecreditor in a single account.

b. Helps locate errors in individual accounts.

c. Puts greater detail in the general ledger.

d. Makes possible a division of labor.

9. Credit sales of assets other thanmerchandise are recorded in the

a. cash payments journal.

b. cash receipts journal.

c. general journal.

d. sales journal.

10. When the totals of the sales journal are posted at the end of themonth, there will be credits to

a. Sales and Merchandise Inventory and debits toAccounts Receivable and Cost of Goods Sold.

b. Accounts Receivable and Cost of Goods Sold anddebits to Sales and Merchandise Inventory.

c. Sales and debits to each individual customeraccount.

d. the Sales account only, and no debits.

11. TheOther Accounts column of a multi-column journal is often referredto as the

a. Sundry Accounts column.

b. Controlling Account column.

c. Credit Account column.

d. Debit Account column.

12. Companies record credit purchases of equipment or supplies inthe

a. cash payments journal.

b. cash receipts journal.

c. general journal.

d. one-column purchases journal.

13. Inthe expanded purchases journal, debits are made in whichcolumns?

a. Accounts Payable, Merchandise Inventory, andOffice Supplies

b. Merchandise Inventory, Office Supplies, and StoreSupplies

c. Cash, Office Supplies, and Store Supplies

d. Accounts Payable, Cash, and MerchandiseInventory

14. Ifa customer takes a sales discount, an entry is made in the

a. cash receipts journal.

b. sales journal.

c. cash payments journal.

d. general journal.

15. Claimsfor which formal instruments of credit are issued as proof of thedebt are

a. accounts receivable.

b. interest receivable.

c. notes receivable.

d. other receivables.

16. Interestis usually associated with

a. accounts receivable.

b. notes receivable.

c. doubtful accounts.

d. bad debts.

17. Thereceivable that is usually evidenced by a formal instrument ofcredit is a(n)

a. trade receivable.

b. note receivable.

c. accounts receivable.

d. income tax receivable.

18. Which ofthe following receivables would not be classified as an"other receivable"?

a. Advance to an employee

b. Refundable income tax

c. Notes receivable

d. Interest receivable

19. Notes oraccounts receivables that result from sales transactions are oftencalled

a. sales receivables.

b. non-trade receivables.

c. trade receivables.

d. merchandise receivables.

20. LarsonCompany on July 15 sells merchandise on account to Stuart Co. for$1,000, terms 2/10, n/30. On July 20 Stuart Co. returns merchandiseworth $400 to Larson Company. On July 24 payment is received fromStuart Co. for the balance due. What is the amount of cashreceived?

a. $600

b. $588

c. $580

d. $1,000

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ACCT 001 Lecture Notes - Lecture 11: Accounts Receivable, Income Statement, Balance Sheet

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