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Midterm

MGT220H5 Study Guide - Midterm Guide: Effective Interest Rate, Gross Profit, Accounts Receivable


Department
Management
Course Code
MGT220H5
Professor
Randolph Christopher Small
Study Guide
Midterm

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Accounts Receivable: Recording Cash Discounts
Two methods: gross method and net method
Gross method records discounts when customers pay within discount period
o Sales Discounts are deducted from sales on the income statement
o Most common method
Net method records accounts receivable net of the discount; discounts forfeited by
customers are recorded when not taken
o Preferred method but rarely used
o Sales Discounts Theoretically Forfeited is recorded as Other revenue if
customer does not take the discount
Example of Gross Method
$10,000 sales on credit (terms 2/10, n/30)
Dr. Accounts Receivable 10,000
Cr. Sales Revenue 10,000
Customer pays account within discount period
Dr. Cash 9,800
Dr. Sales Discounts 200
Cr. Accounts Receivable 10,000
Example of Net Method
$10,000 sales on credit (terms 2/10, n/30)
Dr. Accounts Receivable 9,800
Cr. Sales Revenue 9,800
Customer pays account after discount period
Dr. Cash 10,000
Cr. Sales Discounts Forfeited 200
Cr. Accounts Receivable 9,800
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Allowance Procedure Only
Uses past collection experience to estimate uncollectible accounts
Focus is to report accounts receivable at net realizable value
o Does not focus on matching bad debt expense to sales
Any existing balance in Allowance for Doubtful Accounts is used to calculate the
current year’s bad debt expense
Can use: Percentage-of-receivables or
aged receivable analysis
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Mix of Procedures
Initial use of percentage-of-sales approach is based on the relationship between
sales and bad debts
Matches the estimated cost of bad debts to sales generated in the same accounting
period
Any existing balance in the balance sheet account (Allowance for Doubtful Accounts) is
initially
ignored when calculating the current period’s bad debts expense
Receivables are also reviewed at year-end to ensure that balance is appropriate, and
adjustment to Allowance for Doubtful Accounts is made
Mix of Procedures: Example
Dockrill Corp. reports the following balances for its first year of operations (2014):
Net credit sales: $400,000
The company estimates bad debts at 2% of net credit sales
Determine estimated bad debts expense for 2014
Balance Sheet Presentation
Short-term accounts receivable are shown at their net realizable value as follows:
Accounts Receivable $ xxx
Less: Allowance for Doubtful Accounts xxx
Net Realizable Value $ xxx
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