AFM101 Chapter Notes - Chapter 7: Book Value

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lilacmouse857

10 Jun 2018

School

University of Waterloo

Department

Accounting & Financial Management

Course

AFM101

Professor

Donna Psutka

For unlimited access to Textbook Notes, a Class+ subscription is required.

AFSA Education

 Bad debts will likely increase as well  customers will likely default on

their payments (write-off of trade receivables).

- SUBSIDIARY LEDGER: Separate accounts for each of the retailers and wholesalers.

o Detailed amounts of trade receivables on the Statement of Financial Position.

- Allowance Method = Bases bad debt expense on an estimate of uncollectible accounts.

- 2 primary step in applying this method:

1. Estimating and recording bad debt expense.

2. Writing off specific accounts determined to be uncollectible during the period.

Various transactions that affected the Allowance for Doubtful Accounts:

1. Recording Bad Debt Expense Estimates.

Definitions:

(a) Bad Debt Expense = expense associated with estimated uncollectible trade

receivables.

 Some companies include this Expense in the General & Admin. Expense on

the Statement of Earnings.

 Bad Debt Expense decreases Net Earnings & Shareholders’ Equity.

(b) Allowance for Doubtful Accounts = a contra-asset account containing the

estimated uncollectible trade receivables.

 Ending Balance = Beginning Balance + Bad Debt Expenses – Write-offs

JOURNAL ENTRY:

 DR: Bad debt expense (E)

 CR: Allowance for doubtful accounts (contra-asset) (XA)

2. Impaired Receivables – Writing Off Specific Uncollectible Accounts.

 This will occur once it is determined that a customer will not pay its debts

(example: due to bankruptcy); receivable is considered IMPAIRED.

 Does NOT affect the Statement of Earnings accounts. The estimated Bad Debt

Expense was already recorded with an adjusting entry in the period of sale. The entry

did not change carrying amount of trade receivables  decrease in assets account

(TR) was offset by an equal decrease in the contra-asset account (AfDA).

JOURNAL ENTRY:

 DR: Allowance for doubtful accounts (XA)

 CR: Trade receivables (A)

3. Recovery of Accounts Previously Written Off.

 When customer makes payment on an account previously written off, the initial

journal entry to write off the account is REVERSED for the amount that is collected.

Another journal entry is made to record the collection of cash.

 Note: net effect on the amount of Trade Receivables is zero.

JOURNAL ENTRY:

 DR: Trade receivables (A)

 CR: Allowance for doubtful accounts (XA)

 DR: Cash (A)

 CR: Trade receivables (A)

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AFM101 Full Course Notes

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Bad debts will likely increase as well customers will likely default on their payments (write-off of trade receivables). Subsidiary ledger: separate accounts for each of the retailers and wholesalers: detailed amounts of trade receivables on the statement of financial position. Allowance method = bases bad debt expense on an estimate of uncollectible accounts. 2 primary step in applying this method: estimating and recording bad debt expense, writing off specific accounts determined to be uncollectible during the period. Various transactions that affected the allowance for doubtful accounts: recording bad debt expense estimates. Definitions: (a) bad debt expense = expense associated with estimated uncollectible trade receivables. Some companies include this expense in the general & admin. Bad debt expense decreases net earnings & shareholders" equity. (b) allowance for doubtful accounts = a contra-asset account containing the estimated uncollectible trade receivables. Ending balance = beginning balance + bad debt expenses write-offs.

Related Questions

15. At December 31, the stockholdersâ equity of Smith Companywas as follow:
Common stock, $5 par value: 1,100,000 shares issued
and 1,000,000 shares outstanding $5,500,000
Additional paid-in capital 1,400,000
Retained earnings 1,500,000
Treasury stock, (100,000 shares) (700,000)
Total stockholdersâ equity $7,700,000
The book value per share of common stock is
a. $7.00
b. $7.20
c. $8.40
d. $7.70

16. The fraud triangle applies to
a. U.S companies but not international companies.
b. international companies but not U.S. companies.
c. U.S. and Canadian companies but not other internationalcompanies.
d. U.S and international companies.

17.. Lewis Company gathered the following reconcilinginformation in preparing its April bank reconciliation:
Cash balance per books, 4/30 $19,800
Deposits in transit 2,700
Notes receivable and interest collected by bank 6,600
Bank charge for check printing 150
Outstanding checks 13,500
NSF check 1,260
The adjusted cash balance per books on April 30 is
a. $12,930.
b. $14,190.
c. $23,730.
d. $24,990.

18. An aging of a company's accounts receivable indicates that$14,000 are estimated to be uncollectible. If Allowance forDoubtful Accounts has a $1,100 credit balance, the adjustment torecord bad debts for the period will require a
a. debit to Bad Debt Expense for $14,000.
b. debit to Allowance for Doubtful Accounts for $12,900.
c. debit to Bad Debt Expense for $12,900.
d. credit to Allowance for Doubtful Accounts for $14,000.

19. Stockton Company uses the percentage of sales method forrecording bad debt expense. For the year, cash sales are $600,000and credit sales are $2,700,000. Management estimates that 1% isthe sales percentage to use. What adjusting entry will StocktonCompany make to record the bad debt expense?
a. Bad Debt Expense 33,000
Allowance for Doubtful Accounts 33,000
b. Bad Debt Expense 27,000
Allowance for Doubtful Accounts 27,000
c. Bad Debt Expense 27,000
Accounts Receivable 27,000
d. Bad Debt Expense 33,000
Accounts Receivable 33,000

20. Depreciation is a process of
a. asset devaluation.
b. cost accumulation.
c. cost allocation.
d. asset valuation.

21. On September 1, Joe's Painting Service borrows $150,000 fromNational Bank on a 4-month, $150,000, 6% note. The entry by Joe'sPainting Service to record payment of the note and accrued intereston January 1 is
a. Notes Payable 153,000
Cash 153,000
b. Notes Payable 150,000
Interest Payable 3,000
Cash 153,000
c. Notes Payable 150,000
Interest Payable 9,000
Cash 159,000
d. Notes Payable 150,000
Interest Expense 3,000
Cash 153,000

22. All of the following are intangible assets except
a. copyrights.
b. goodwill.
c. patents.
d. research and development costs.

23. If a corporation hasonly one class of stock, it is referred to as
a. classless stock.
b. preferred stock.
c. solitary stock.
d. common stock.

lilacjellyfish551

Jan. 19.	Reinstated the account of Arlene Gurley, which had been written off in the preceding year as uncollectible. Journalize the receipt of $2,120 cash in full payment of Arleneâs account.
Apr. 3.	Wrote off the $12,150 balance owed by Premier GS Co., which is bankrupt.
July 16.	Received 30% of the $21,800 balance owed by Hayden Co., a bankrupt business, and wrote off the remainder as uncollectible.
Nov. 23.	Reinstated the account of Harry Carr, which had been written off two years earlier as uncollectible. Recorded the receipt of $3,455 cash in full payment.
Dec. 31.	Wrote off the following accounts as uncollectible (compound entry): Cavey Co., $9,135 ; Fogle Co., $2,715 ; Lake Furniture, $ 6,975 ; Melinda Shryer, $1,970.
Dec. 31.	Based on an analysis of the $1,074,100 of accounts receivable, it was estimated that $46,700 will be uncollectible. Journalize the adjusting entry.

Required:

1. Record the January 1 credit balance of $44,500 in a T account presented below in requirement 2b for Allowance for Doubtful Accounts.

2. a. Journalize the transactions. If an amount box does not require an entry, leave it blank. Note: For the December 31 adjusting entry, assume the $1,074,100 balance in accounts receivable reflects the adjustments made during the year.

Jan. 19-reinstate	Accounts Receivable-Arlene Gurley
	Allowance for Doubtful Accounts
Jan. 19-collection	Cash
	Accounts Receivable-Arlene Gurley
Apr. 3	Allowance for Doubtful Accounts
	Accounts Receivable-Premier GS Co.
July 16	Cash
	Allowance for Doubtful Accounts
	Accounts Receivable-Hayden Co.
Nov. 23-reinstate	Accounts Receivable-Harry Carr
	Allowance for Doubtful Accounts
Nov. 23-collection	Cash
	Accounts Receivable-Harry Carr
Dec. 31-write-off	Allowance for Doubtful Accounts
	Accounts Receivable-Cavey Co.
	Accounts Receivable-Fogle Co.
	Accounts Receivable-Lake Furniture
	Accounts Payable-Melinda Shryer
Dec. 31-adjusting	Bad Debt Expense
	Allowance for Doubtful Accounts

Feedback

Set up T accounts.
Recall that under the allowance method, the entry to write off an account debits Allowance for Doubtful Accounts and credits Accounts Receivable.
In such cases where an account receivable that has been written off is later collected, the account is reinstated by an entry that reverses the write-off entry. Then record the receipt of cash as payment for the account.
The amount of bad debt expense is affected by the balance in the allowance account.

Learning Objective 4.

2. b. Post each entry that affects the following T accounts and determine the new balances:

Allowance for Doubtful Accounts
Apr. 3		Jan. 1 Balance
July 16		Jan. 19
Dec. 31		Nov. 23
		Dec. 31 Unadjusted Balance
		Dec. 31 Adjusting Entry
		Dec. 31 Adjusted Balance

Bad Debt Expense

Feedback

Learning Objective 4.

3. Determine the expected net realizable value of the accounts receivable as of December 31 (after all of the adjustments and the adjusting entry).
$

4. Assuming that instead of basing the provision for uncollectible accounts on an analysis of receivables, the adjusting entry on December 31 had been based on an estimated expense of Â½ of 1% of the sales of $6,630,000 for the year, determine the following:

a. Bad debt expense for the year.
$

b. Balance in the allowance account after the adjustment of December 31.
$

c. Expected net realizable value of the accounts receivable as of December 31 (after all of the adjustments and the adjusting entry).
$

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scarletfly649

You have just been hired as the accountant for Fan-Tastic Sports Gear Inc., a wholesaler of sporting goods and apparel. The previous accountant left abruptly, and an accounting intern has been drafting the journal entries since January.

You are examining the accounting records before finalizing the journal entries for the first quarter. Below are some accounts receivable transactions that you are reviewing

. PAGE 11

JOURNAL

DATE DESCRIPTION POST. REF. DEBIT CREDIT

1 Jan. 17 Sales 9,800.00 2 Bad Debt Expense 9,800.00 3 18 Bad Debt Expense 9,800.00 4 Accounts Receivable-CJâs Sports Corp. 9,800.00 5 21 Cash 10,600.00 6 Bad Debt Expense 2,300.00 7 Accounts Receivable-Four Seasons Sportswear Co. 12,900.00 8 Feb. 15 Accounts Receivable-Healthy Running Inc. 3,000.00 9 Bad Debt Expense 500.00 10 Sales 3,500.00 11 Mar. 4 Accounts Receivable-Four Seasons Sportswear Co. 2,300.00 12 Bad Debt Expense 2,300.00 13 4 Cash 2,300.00 14 Bad Debt Expense 2,300.00 15 13 Cash 5,540.00 16 Accounts Receivable-Barbâs Best Gear 5,540.00 17 31 Bad Debt Expense 20,770.00 18 Accounts Receivable-Healthy Running Inc. 5,150.00 19 Accounts Receivable-The Locker Room 4,100.00 20 Accounts Receivable-CJâs Sports Corp. 2,780.00 21 Accounts Receivable-Get Your Gear Inc. 7,050.00 22 Accounts Receivable-Ready-2-Go 1,690.00 Assume that Fan-Tastic Sports Gear Inc. will be using the allowance method this year. Select any items(s) from the list below that should be added to the existing chart of accounts. Check all that apply. Balance of Aging Accounts Estimate for Uncollectible Accounts Allowance for Doubtful Accounts Net Realizable Value of Receivables Total Credit Sales 2. Finalize the journal entries shown on the Fan-Tastic Sports Gear Inc. panel and make any necessary changes. Refer to the Chart of Accounts for the exact wording of account titles. You may also use any items from the list above, if needed. PAGE 11 JOURNAL DATE DESCRIPTION POST. REF. DEBIT CREDIT 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 X Final Questions Fan-Tastic Sports Gear Inc. recorded $3,100,000 of sales last year and projects sales to increase by $360,000 in the current year. Last year, 90% of sales were on account, with over 400 customer accounts. Bad debt expense was $26,187. 1. Assume that Fan-Tastic Sports Gear Inc. used the allowance method last year, and the allowance account at the end of the year had a debit balance of $2,240. The company estimated uncollectible accounts expense using the percent of credit sales method and expected 0.65% of credit sales to be uncollectible. What is the amount of the adjusting entry to provide for doubtful accounts on December 31? Round all calculations to the nearest dollar. 2. How much higher (lower) would Fan-Tastic Sports Gear Inc.âs net income have been under the allowance method assumption in (1) above than under the direct write-off method? (Enter â0â if there is no change.) by 3. Using the allowance method, the net realizable value of the receivables would appear on which financial statement? CHART OF ACCOUNTS Fan-Tastic Sports Gear Inc. General Ledger ASSETS 110 Cash 111 Petty Cash 121 Accounts Receivable-Healthy Running Inc. 122 Accounts Receivable-The Locker Room 123 Accounts Receivable-CJâs Sports Corp. 124 Accounts Receivable-Get Your Gear Inc. 125 Accounts Receivable-Four Seasons Sportswear Co. 126 Accounts Receivable-Ready-2-Go 127 Accounts Receivable-Barbâs Best Gear 131 Interest Receivable 132 Notes Receivable 141 Merchandise Inventory 145 Office Supplies 151 Prepaid Insurance 181 Land 193 Office Equipment 194 Accumulated Depreciation-Office Equipment LIABILITIES 210 Accounts Payable 211 Salaries Payable 213 Sales Tax Payable 214 Interest Payable 215 Notes Payable EQUITY 311 Common Stock 340 Retained Earnings 351 Dividends 390 Income Summary

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AFM101 Chapter Notes - Chapter 7: Book Value

AFM101 Full Course Notes

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