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ACCT1501 Chapter Notes - Chapter 8: Internal Control, Income Statement, General Ledger

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purplecattle577
24 May 2018
School
UNSW, UNSW Sydney
Department
Accounting
Course
ACCT1501
Professor
Yongdoek

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Accounts Receivable and Further Record-keeping
Contra Accounts: Recognize expense and related value changes to asset without changing the
control account
➢ Balances that are in the OPPOSITE direction to those of the traditional asset accounts
with which they are associated
➢ Accounts Receivable vs ADD
➢ Property Plant & Equipment (PPE) vs Accumulated Depreciation
➢ Intangibles vs Accumulated Amortization
➢ Inventory vs Provision for obsolescence
Bad Debt Expense:
1. Direct Write-off Method
➢ Write off AR – reduce value of AR
➢ Chances of collecting cash for all accounts is very high
➢ Small no. of credit sales, few customers
➢ Dr Bad Debt Expense
Cr AR
2. Allowance Method
➢ Debts may NOT be collected
➢ Recognising potential risk – part of internal control
➢ Large no. of credit sales, many customers
➢ Dr Bad Debt Expense
Cr ADD
Write off bad debts against the Allowance
➢ Dr ADD
Cr AR
Allowance for Doubtful Debts (ADD)
1. Income Statement Approach – percentage of sales method
➢ Bad debt and credit sales
➢ Dr Bad Debt Expense
Cr ADD
2. Balance Sheet Approach – Ageing of accounts method
➢ The older the account, the greater probability that it will not be collected
➢ Adjust ADD based on ageing analysis
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Document Summary

Contra accounts: recognize expense and related value changes to asset without changing the control account. Balances that are in the opposite direction to those of the traditional asset accounts with which they are associated. Property plant & equipment (ppe) vs accumulated depreciation. Write off ar reduce value of ar. Chances of collecting cash for all accounts is very high. Small no. of credit sales, few customers. Recognising potential risk part of internal control. Large no. of credit sales, many customers. Income statement approach percentage of sales method. Cr add: balance sheet approach ageing of accounts method. The older the account, the greater probability that it will not be collected. Trade discount: given by business for customers that are expected to purchase large volumes. Cash/settlement discount: offered if payment is made or given within a specified date from transaction. 10 no. of days in disct period. Cash inflows, cash sales, payments received from debtors.

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Related Questions

Problem 8-4A Here is information related to Splish Brothers Inc.for 2017. Total credit sales $1,580,000 Accounts receivable atDecember 31 790,000 Bad debts written off 39,500 (a) What amount ofbad debt expense will Splish Brothers Inc. report if it uses thedirect write-off method of accounting for bad debts? Bad debtsexpense $enter the bad debts expense in dollars assuming option a(b) Assume that Splish Brothers Inc. decides to estimate its baddebt expense based on 4% of accounts receivable. What amount of baddebt expense will the company record if Allowance for DoubtfulAccounts has a credit balance of $2,700? Bad debts expense $enterthe bad debts expense in dollars assuming option b (c) Assume thesame facts as in (b), except that there is a $1,000 debit balancein Allowance for Doubtful Accounts. What amount of bad debt expensewill Splish Brothers Inc. record? Bad debts expense $enter the baddebts expense in dollars assuming option c

Adham Sdn. Bhd. accounts for its uncollectible accounts usingthe allowance method. The company reported the following accountbalances at 31 December 2017.

RM

Accounts receivable

250,000

Less: Allowance for doubtful accounts

12,500

During the year 2017, the company had the following transactionsrelated to receivables.

RM

1.Credit sales

600,000

3.Collections of accounts receivable

680,000

4.Write-offs of accounts receivable

10,800

5.Recovery of bad debts previously written off

3,000

Required:

a) Journalise transactions 1 - 5 above.

b) Post the entries to the two accounts: Accounts receivable andAllowance for doubtful account.

c) Record the bad debt expense for 2017 (in T-account) undereach of the following independent assumptions:

i. The company estimates its bad debt expense based on 5% ofoutstanding account receivable balance.

ii. The company bad debt estimate is 1% of its credit sales.

d) What is the net realisable value of Accounts Receivable at 31December 2017 under assumption (i) above.

Solve for the adjusting entry:-

2018

Debit Balance Credit Balance

100000 Bank Account dr $300,318

110100 Accounts Receivable (Direct Posting Account) dr 94,670

110150 Allowance for Bad Debts cr 2,600

200600 Inventory-Operating Supplies dr 8,832

200900 Inventory-Raw Materials (Direct Post) dr 52,000

200910 Inventory-Finished Goods (Direct Post) dr 281,298

200920 Inventory-Trading Goods (Direct Post) dr 66,474

210000 Prepaid Insurance dr 3,000

212000 Prepaid Advertising dr 2,400

220110 Land (Direct Post) dr 528,000

220210 Production Machinery, Equip & Fixtures (Dir.Post) dr 915,000

220310 Accumulated Depreciation-Machinery (Direct Post) cr 408,000

300200 Accounts Payable (Direct Posting Account) cr 48,000

300700 Payables-Salaries and Wages cr 94,313

300800 Accrued Expenses cr 2,200

320000 Accrued Tax – Output cr 4,000

329000 Common Stock cr 1,010,000

329100 Additional Paid-in-Capital cr 52,870

330010 Retained Earnings (Direct Posting) cr 630,009

Payables-Salaries and Wages 94,313
Bank Account 94,313
to record payment of salaries and wages
Inventory-Trading Goods (Direct Post) 60,600
Inventory-Raw Materials (Direct Post) 40,900
Accounts Payable (Direct Posting Account) 100,000
Bank Account 1,500
to record acquisition of invemtory and payment of shipment
Accounts Receivable (Direct Posting Account) 22,500
Cost of Goods Sold 15,000
Sales Revenue 22,500
Inventory-Trading Goods (Direct Post) 15,000
to record the sale of accessories
Bank Account 24,000
Accounts Receivable (Direct Posting Account) 24,000
to record payment receipt from Northwest bikes
Accrued Expenses 2,200
Bank Account 2,200
to record payment of utilities
Advertising Expense 1,100
Prepaid Advertising 1,100
to record advertisiment expense
Inventory-Operating Supplies 380
Accounts Payable (Direct Posting Account) 380
to record receipt of Staples
Bank Account 21,825
Sales Discount 675
Accounts Receivable (Direct Posting Account) 22,500
to recors payment of windy city bikes
Accounts Payable (Direct Posting Account) 100,000
Bank Account 100,000
to record payment to Dallas Bike Basics
Deposits on Purchases 8,800
Bank Account 2,000
Accounts Payable (Direct Posting Account) 6,800
to record the purchase of barcoding
Accounts Payable (Direct Posting Account) 15,890
Bank Account 15,890
to record payment of Lightbulb Accesorry Kits
Accounts Receivable (Direct Posting Account) 128,000
Cost of Goods Sold 78,000
Sales Revenue 128,000
Inventory-Finished Goods (Direct Post) 78,000
to record sale to Rocky Mountain Bikes(Denver)
Inventory-Raw Materials (Direct Post) 75,600
Accounts Payable (Direct Posting Account) 75,600
to record purchase of raw material(Space Bike)
Allowance for Bad Debts 4,200
Accounts Receivable (Direct Posting Account) 4,200
to record Bad debt expense
Bank Account 90,000
Accounts Receivable (Direct Posting Account) 90,000
to record payment from Sillicon Valley Bikes
Accounts Payable (Direct Posting Account) 380
Bank Account 380
Accounts Receivable (Direct Posting Account) 2,977
Cost of Goods Sold 1,300
Sales Revenue 2,750
Accrued Tax- Input 227
Inventory-Trading Goods (Direct Post) 1,300
to record sale of inventory
Prepaid Advertising 9,000
Bank Account 9,000
to record payment for advertising
Bank Account 27,000
Cost of Goods Sold 17,000
Sales Revenue 27,000
Inventory-Finished Goods (Direct Post) 17,000
to record sale to Beantown Bikes
Accounts Payable (Direct Posting Account) 32,000
Bank Account 32,000
to record payment to Night Rider Aluminum
Accrued Tax – Output 3,000
Bank Account 3,000
to record payment sale tax
Prepaid Rent 4,000
Bank Account 4,000
to record prepaid rent
Accounts Payable (Direct Posting Account) 6,800
Bank Account 6,800
to record payment for barcoding system
Accounts Receivable (Direct Posting Account) 358,500
Cost of Goods Sold 250,000
Sales Revenue 358,500
Inventory-Trading Goods (Direct Post) 65,000
Inventory-Finished Goods (Direct Post) 185,000
to record sale to Big Apple Bikes

Adjustment information as of January 31, not already given in the original transaction(s):

1. Based on prior experience, GBI estimates that approximately 1.5 % of the credit sales from each month will become bad debt. GBI writes off bad debts as they occur and recognizes bad debt expense based on percentage of credit sales as an adjusting entry each month.

2. As a control measure, physical inventories are taken on a periodic basis alternating between the raw materials inventory, finished goods inventory and trading goods inventory. Physical inventory of the finished goods inventory was taken at the end of January. It was determined that the value of the finished goods merchandise on hand was $1,200.

3. GBI counted the office (operating) supplies on hand after the close of business on the last day of the month and determined the cost of the unused office supplies to be $1000.

4. Production Machinery, Equipment and Fixtures were placed in service on January 1, 2013, with no salvage value. The bar-code system has a 5-year life and no salvage value. GBI depreciates fixed assets on a straight-line basis and those assets placed in service in the first half of the months are depreciated for the entire month, while fixed assets placed in service during the last half of the month are not depreciated until the second month. Depreciation is rounded to the nearest dollar and assets are depreciated on a monthly basis (i.e. number of days in the month is not of consequence).

5. GBI used the Internet to review the monthly charges for utilities the business consumed during January. Based on the Internet report, the amount to be billed by the utilities company for January usage is the same as was billed for December.

6. Liability insurance for the six-month period ending on January 31 was paid last August on the first of the month. Liability insurance is assumed to be utilized uniformly over the six-month policy period.

7. GBI needs to recognize the wages expense for the month. Since all employees are paid salaries and no changes have been made, this amount is the same as the previous month salaries. (For purposes of this assignment, ignore manufacturing, office, and administrative payrolls and assume all wages expense is towards labor expense.