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Fundamental Financial Accounting Concepts Fourth Edition by Edmonds, McNair, Milam, Olds PowerPoint ® presentation by J. Lawrence Bergin Chapter 7 Accounting for Accruals: Advanced Topics- Receivables and Payables Advanced topics include: Accounting for bad debts

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Fundamental financial accounting concepts fourth edition by edmonds mcnair milam olds l.jpg
Fundamental Financial Accounting ConceptsFourth EditionbyEdmonds, McNair, Milam, Olds

PowerPoint® presentation by

J. Lawrence Bergin


Chapter 7 l.jpg
Chapter 7

Accounting for Accruals:

Advanced Topics- Receivables and Payables


Advanced topics include l.jpg
Advanced topics include:

  • Accounting for bad debts

  • Accounting for interest-bearing notes and noninterest bearing (discounted) notes

  • Warranties

Want to

learn some

accounting?


Accounts and notes receivable l.jpg
Accounts and Notes Receivable

  • A/R are the expected future cash receipts of a company. They are typically small and are expected to be received within 30 days.

  • N/R are used when longer credit terms are necessary. The promissory note specifies the maturity date, the rate of interest, and other credit terms.


Value of receivables l.jpg
Value of Receivables

  • Receivables are reported at their face value less an allowance for accounts which are likely to be uncollectible.

  • The amount which is actually expected to be collectedis called the net realizable value (NRV).


Allowance method vs direct write off method l.jpg
Allowance Method vs. Direct Write-Off Method

  • GAAP requires that A/R be reported at NRV. (A/R minus Allowance)

  • This is done using a valuation allowance: An ALLOWANCE METHOD.

    • % of Sales (or “Income Statement”) approach.

    • Aging (or “Balance Sheet”) approach.

  • With the ALLOWANCE METHOD, an estimateof the amount that will NOT be collected is recorded in the same period that the sales revenue is recorded. Thus,

the MATCHING PRINCIPLE is being followed.


Allowance method vs direct write off method continued l.jpg
Allowance Method vs. Direct Write-Off Method (continued)

  • The DIRECT WRITE-OFF method violates GAAP because it does NOT follow the MATCHING principle.

  • With the Direct Write-off method, no estimate of bad debts is recorded at the time of the sale. Rather, only after a specific account is deemed “uncollectible” is a Bad Debt Expense recorded.

  • Since GAAP is only required if the amounts are MATERIAL (significant), if the amount of uncollectible A/R is immaterial the Direct Write-off method may be used.


Transaction analysis l.jpg
Transaction Analysis:

  • Assume the following selected events occurred at Cell-It. For each event:

    • Determine how the accounting equation was affected and fill in the horizontal model. (Assume GAAP must be followed.)

    • Determine the effect on the financial statements.

    • Record the event in t-accounts.


Transaction analysis9 l.jpg
Transaction Analysis:

The following selected events occurred at Cell-It during 2004.

1. Provided services to customers for $10,000 on

account.

2. Collected $7,000 on account receivables.

3. At year-end it was estimated that 2% of year’s

credit sales will never be collected.

4. Jane Doe’s $50 account was written-off as

“uncollectible”.

5A&B. $50 cash is unexpectedly received from

Jane Doe.


Record the five transactions in this horizontal statements model l.jpg
Record the five transactions in this horizontal statements model.

Balance Sheet Inc. Statement Cashflow

Assets = Liab.+ Stk. Equity

Cash+ A/Rec .- Allow. = A/P+C.Stk.+ R.E. Rev. - Exp. = N. I. OA,IA,FA

1

2

3

4

5A

5B

Bal.


Provided services to customers for 10 000 on account l.jpg
Provided services to customers for model.$10,000 on account.

Balance Sheet Inc. Statement Cashflow

Assets = Liab.+ Stk. Equity

Cash+ A/Rec .- Allow. = A/P+C.Stk.+ R.E. Rev. - Exp. = N. I. OA,IA,FA

1

2

3

4

5A

5B

Bal.


Provided services to customers for 10 000 on account12 l.jpg
Provided services to customers for model.$10,000 on account.

Balance Sheet Inc. Statement Cashflow

Assets = Liab.+ Stk. Equity

Cash+ A/Rec .- Allow. = A/P+C.Stk.+ R.E. Rev. - Exp. = N. I. OA,IA,FA

110000 10000 10000 10000 n.a.

2

3

4

5A

5B

Bal.


2 collected 7 000 from account receivable l.jpg
2. Collected $7,000 from account receivable. model.

Balance Sheet Inc. Statement Cashflow

Assets = Liab.+ Stk. Equity

Cash+ A/Rec .- Allow. = A/P+C.Stk.+ R.E. Rev. - Exp. = N. I. OA,IA,FA

110000 10000 10000 10000 n.a.

2

3

4

5A

5B

Bal.


2 collected 7 000 from account receivable14 l.jpg
2. Collected $7,000 from account receivable. model.

Balance Sheet Inc. Statement Cashflow

Assets = Liab.+ Stk. Equity

Cash+ A/Rec .- Allow. = A/P+C.Stk.+ R.E. Rev. - Exp. = N. I. OA,IA,FA

110000 10000 10000 10000 n.a.

27000 (7000) 7000 OA

3

4

5A

5B

Bal.


3 at year end it was estimated that 2 of the year s credit sales will not be collected l.jpg
3. At year-end it was estimated that 2% of the year’s credit sales will not be collected.

Balance Sheet Inc. Statement Cashflow

Assets = Liab.+ Stk. Equity

Cash+ A/Rec .- Allow. = A/P+C.Stk.+ R.E. Rev. - Exp. = N. I. OA,IA,FA

110000 10000 10000 10000 n.a.

2 7000 (7000) 7000 OA

3

4

5A

5B

Bal.

200 (200) 200 (200) n.a.

2% x $10,000 = $200


3 at year end it was estimated that 2 of the year s credit sales will not be collected16 l.jpg

Allowance for Doubtful Accounts credit sales will not be collected. is a CONTRA- ASSET account. This account balance is INCREASING by $200 causing TOTAL assets to decrease.

3. At year-end it was estimated that 2% of the year’s credit sales will not be collected.

Balance Sheet Inc. Statement Cashflow

Assets = Liab.+ Stk. Equity

Cash+ A/Rec .- Allow. = A/P+C.Stk.+ R.E. Rev. - Exp. = N. I. OA,IA,FA

110000 10000 10000 10000 n.a.

2 7000 (7000) 7000 OA

3

4

5A

5B

Bal.

200 (200) 200 (200) n.a.

2% x $10,000 = $200


4 jane doe s 50 account was written off as uncollectible l.jpg
4. Jane Doe’s $50 account was written-off credit sales will not be collected. as uncollectible.

Balance Sheet Inc. Statement Cashflow

Assets = Liab.+ Stk. Equity

Cash+ A/Rec .- Allow. = A/P+C.Stk.+ R.E. Rev. - Exp. = N. I. OA,IA,FA

1 10000 10000 10000 10000 n.a.

2 7000 (7000) 7000 OA

3

4

5A

5B

Bal.

200 (200) 200 (200) n.a.


4 jane doe s 50 account was written off as uncollectible18 l.jpg
4. Jane Doe’s $50 account was written-off credit sales will not be collected. as uncollectible.

Balance Sheet Inc. Statement Cashflow

Assets = Liab.+ Stk. Equity

Cash+ A/Rec .- Allow. = A/P+C.Stk.+ R.E. Rev. - Exp. = N. I. OA,IA,FA

1 10000 10000 10000 10000 n.a.

2 7000 (7000) 7000 OA

3

4

5A

5B

Bal.

200 (200) 200 (200) n.a.

(50) (50) NO EXPENSE!

Note: This is NOT the Direct Write-off method. Rather, it is a write-off under the ALLOWANCE Method.


Effect of transaction 4 on acct rec net realizable value l.jpg
Effect of Transaction 4 on credit sales will not be collected.Acct. Rec. Net Realizable Value

Before Event 4 After Event 4

A/R $ A/R $

Allow. Allow.

N.R.V. $ N.R.V. $

Acme Collection Agency


Effect of transaction 4 on acct rec net realizable value20 l.jpg
Effect of Transaction 4 on credit sales will not be collected.Acct. Rec. Net Realizable Value

Before Event 4 After Event 4

A/R $3,000

Allow. (200)

N.R.V. $2,800

The check is in the mail.

Acme Collection Agency


Effect of transaction 4 on acct rec net realizable value21 l.jpg
Effect of Transaction 4 on credit sales will not be collected.Acct. Rec. Net Realizable Value

Before Event 4 After Event 4

A/R $3,000 A/R $

Allow. (200) Allow.

N.R.V. $2,800 N.R.V. $

2,950

(150)

2,800


Effect of transaction 4 on acct rec net realizable value22 l.jpg
Effect of Transaction 4 on credit sales will not be collected.Acct. Rec. Net Realizable Value

Before Event 4 After Event 4

A/R $3,000 A/R $2,950

Allow. (200) Allow. (150)

N.R.V. $2,800N.R.V. $2,800

When using an ALLOWANCE method, the Net Realizable Value of accounts receivable does not change as a result of the write-off.


Slide23 l.jpg
Before recording Transaction #5: credit sales will not be collected.What happens when an account that has been written off later pays off his/her account?

  • Reinstate the account by recording an entry that undoes (reverses) the write-off:

    • increase (debit) Accounts Receivable

    • increase (credit) Allowance for Doubtful Accounts (a contra-asset)

  • Record the entry to show the cash collection and A/Rec. reduction:

    • increase (debit)Cash

    • decrease (credit) Accounts Receivable


5 50 cash was unexpectedly received from jane doe 5a reinstate 5b collect l.jpg
5. $50 cash was unexpectedly received from Jane Doe. ( credit sales will not be collected.5A=Reinstate, 5B=Collect)

Balance Sheet Inc. Statement Cashflow

Assets = Liab.+ Stk. Equity

Cash+ A/Rec .- Allow. = A/P+C.Stk.+ R.E. Rev. - Exp. = N. I. OA,IA,FA

1 10000 10000 10000 10000 n.a.

2 7000 (7000) 7000 OA

3

4

5A

5B

Bal.

200 (200) 200 (200) n.a.

(50) (50) NO EXPENSE!

50 50


5 50 cash was unexpectedly received from jane doe 5a reinstate 5b collect25 l.jpg
5. $50 cash was unexpectedly received from Jane Doe. ( credit sales will not be collected.5A=Reinstate, 5B=Collect)

Balance Sheet Inc. Statement Cashflow

Assets = Liab.+ Stk. Equity

Cash+ A/Rec .- Allow. = A/P+C.Stk.+ R.E. Rev. - Exp. = N. I. OA,IA,FA

1 10000 10000 10000 10000 n.a.

2 7000 (7000) 7000 OA

3

4

5A

5B

Bal.

200 (200) 200 (200) n.a.

(50) (50) NO EXPENSE!

50 50

50 (50) 50 OA


Calculate all ending balances l.jpg
Calculate all ending balances. credit sales will not be collected.

Balance Sheet Inc. Statement Cashflow

Assets = Liab.+ Stk. Equity

Cash+ A/Rec .- Allow. = A/P+C.Stk.+ R.E. Rev. - Exp. = N. I. OA,IA,FA

1 10000 10000 10000 10000 n.a.

2 7000 (7000) 7000 OA

3

4

5A

5B

Bal.

200 (200) 200 (200) n.a.

(50) (50) NO EXPENSE!

50 50

50 (50) 50 OA

7050 2950 200 9800 10000 200 9800 7050 bal.


What s the result after completing the horizontal model fill in below l.jpg
What’s credit sales will not be collected. the result?After completing the horizontal model fill in below.

How did the previous transactions affect the financial statements?

20X1

How much Bad Debt Expense should

appear on the income statement?….

What is the A/R: NRV at year end?……

How much A/R should be added to the

other current assets on the year-end

balance sheet?………………………….


Slide28 l.jpg
Final Account Balances credit sales will not be collected.Remember, the Bad Debt EXPENSE is accrued in the year of sale, NOT when the account is written off!

Balance Sheet Inc. Statement Cashflow

Assets = Liab.+ Stk. Equity

Cash+ A/Rec .- Allow. = A/P+C.Stk.+ R.E. Rev. - Exp. = N. I. OA,IA,FA

1 10000 10000 10000 10000 n.a.

2 7000 (7000) 7000 OA

3

4

5A

5B

Bal.

200 (200) 200 (200) n.a.

(50) (50) NO EXPENSE!

50 50

50 (50) 50 OA

7050 2950 200 9800 10000 200 9800 7050 bal.

MATCHING PRINCIPLE


What s the result after completing the horizontal model fill in below29 l.jpg
What’s credit sales will not be collected. the result?After completing the horizontal model fill in below.

How did the previous transactions affect the financial statements?

20X1

How much Bad Debt Expense should

appear on the income statement?….

What is the A/R: NRV at year end?……

How much A/R should be added to the

other current assets on the year-end

balance sheet?………………………….

$ 200


Final account balances net realizable value nrv acct rec allowance l.jpg
Final Account Balances credit sales will not be collected.Net Realizable Value (NRV) = Acct.Rec. - Allowance

Balance Sheet Inc. Statement Cashflow

Assets = Liab.+ Stk. Equity

Cash+ A/Rec .- Allow. = A/P+C.Stk.+ R.E. Rev. - Exp. = N. I. OA,IA,FA

1 10000 10000 10000 10000 n.a.

2 7000 (7000) 7000 OA

3

4

5A

5B

Bal.

200 (200) 200 (200) n.a.

(50) (50) NO EXPENSE!

50 50

50 (50) 50 OA

7050 2950200 9800 10000 200 9800 7050 bal.


What s the result after completing the horizontal model fill in below31 l.jpg
What’s credit sales will not be collected. the result?After completing the horizontal model fill in below.

How did the previous transactions affect the financial statements?

20X1

How much Bad Debt Expense should

appear on the income statement?….

What is the A/R: NRV at year end?……

How much A/R should be added to the

other current assets on the year-end

balance sheet?………………………….

$ 200

$ 2,750

$ 2,750


Slide32 l.jpg

Transactions Posted to T-accounts credit sales will not be collected.

Post the five transactions to these Ledger accounts.

Cash

Acct. Rec.

Allow. for D.A.

Service Revenue

Bad Debt Exp.

Retain. Earn.


Slide33 l.jpg

Transaction Posted to T-accounts credit sales will not be collected.

1. Provided services to customers for $10,000 which will be collected at a later date.

Cash

Acct. Rec.

Allow. for D.A.

Service Revenue

Bad Debt Exp.

Retain. Earn.


Slide34 l.jpg

Transaction Posted to T-accounts credit sales will not be collected.

1. Provided services to customers for $10,000 which will be collected at a later date.

Cash

Acct. Rec.

Allow. for D.A.

(1) 10,000

Service Revenue

Bad Debt Exp.

Retain. Earn.

10,000 (1)


Slide35 l.jpg

Transaction Posted to T-accounts credit sales will not be collected.

2. Collected $7,000 of the Accounts Receivables.

Cash

Acct. Rec.

Allow. for D.A.

(1) 10,000

Service Revenue

Bad Debt Exp.

Retain. Earn.

10,000 (1)


Slide36 l.jpg

Transaction Posted to T-accounts credit sales will not be collected.

2. Collected $7,000 of the Accounts Receivables.

Cash

Acct. Rec.

Allow. for D.A.

(1) 10,000

7,000 (2)

(2) 7,000

Service Revenue

Bad Debt Exp.

Retain. Earn.

10,000 (1)


Slide37 l.jpg

Transaction Posted to T-accounts credit sales will not be collected.

3. At Yr. end it was estimated that 2% of the year’s

credit sales will never be collected.

Cash

Acct. Rec.

Allow. for D.A.

(1) 10,000

7,000 (2)

(2) 7,000

Service Revenue

Bad Debt Exp.

Retain. Earn.

10,000 (1)


Slide38 l.jpg

Transaction Posted to T-accounts credit sales will not be collected.

3. At Yr. end it was estimated that 2% of the year’s

credit sales will never be collected.

Cash

Acct. Rec.

Allow. for D.A.

(1) 10,000

7,000 (2)

(2) 7,000

200 (3)

Service Revenue

Bad Debt Exp.

Retain. Earn.

10,000 (1)

(3) 200


Slide39 l.jpg

Transaction Posted to T-accounts credit sales will not be collected.

4. Jane Doe’s $50 account was written-off as uncollectible.

Cash

Acct. Rec.

Allow. for D.A.

(1) 10,000

7,000 (2)

200 (3)

(2) 7,000

Service Revenue

Bad Debt Exp.

Retain. Earn.

10,000 (1)

(3) 200


Slide40 l.jpg

Transaction Posted to T-accounts credit sales will not be collected.

4. Jane Doe’s $50 account was written-off as uncollectible.

Cash

Acct. Rec.

Allow. for D.A.

(1) 10,000

7,000 (2)

50 (4)

(4) 50

200 (3)

(2) 7,000

Service Revenue

Bad Debt Exp.

Retain. Earn.

10,000 (1)

(3) 200


Effect of transaction 4 on acct rec net realizable value41 l.jpg
Effect of Transaction 4 on credit sales will not be collected.Acct. Rec. Net Realizable Value

Before Event 4 After Event 4

A/R $3,000 A/R $2,950

Allow. (200) Allow. (150)

N.R.V. $2,800N.R.V. $2,800

Net realizable value of accounts receivable did not change as a result of the write-off.


Slide42 l.jpg

Transaction Posted to T-accounts credit sales will not be collected.

5a.Jane Doe’s account isreinstated.

Cash

Acct. Rec.

Allow. for D.A.

(1) 10,000

7,000 (2)

50 (4)

(4) 50

200 (3)

(2) 7,000

Service Revenue

Bad Debt Exp.

Retain. Earn.

10,000 (1)

(3) 200


Slide43 l.jpg

Transaction Posted to T-accounts credit sales will not be collected.

5a. Jane Doe’s account is reinstated.

Cash

Acct. Rec.

Allow. for D.A.

(1) 10,000

5a 50

7,000 (2)

50 (4)

(4) 50

200 (3)

50 (5a)

(2) 7,000

Service Revenue

Bad Debt Exp.

Retain. Earn.

10,000 (1)

(3) 200


Slide44 l.jpg

Transaction Posted to T-accounts credit sales will not be collected.

5b. Jane Doe’s account is collected.

Cash

Acct. Rec.

Allow. for D.A.

(1) 10,000

5a 50

7,000 (2)

50 (4)

(4) 50

200 (3)

50 (5a)

(2) 7,000

Service Revenue

Bad Debt Exp.

Retain. Earn.

10,000 (1)

(3) 200


Slide45 l.jpg

Transaction Posted to T-accounts credit sales will not be collected.

5b. Jane Doe’s account is collected.

Cash

Acct. Rec.

Allow. for D.A.

(1) 10,000

5a 50

7,000 (2)

50 (4)

50 (5b)

(4) 50

200 (3)

50 (5a)

(2) 7,000

5b 50

Service Revenue

Bad Debt Exp.

Retain. Earn.

10,000 (1)

(3) 200


Slide46 l.jpg

Transaction Posted to T-accounts credit sales will not be collected.

Closing entriesat the end of Year 1.

Cash

Acct. Rec.

Allow. for D.A.

(1) 10,000

5a 50

7,000 (2)

50 (4)

50 (5b)

(4) 50

200 (3)

50 (5a)

(2) 7,000

5b 50

Service Revenue

Bad Debt Exp.

Retain. Earn.

10,000 (1)

(3) 200


Slide47 l.jpg

Transaction Posted to T-accounts credit sales will not be collected.

Closing entries at the end of Year 1.

Cash

Acct. Rec.

Allow. for D.A.

(1) 10,000

5a 50

7,000 (2)

50 (4)

50 (5b)

(4) 50

200 (3)

50 (5a)

(2) 7,000

5b 50

Service Revenue

Bad Debt Exp.

Retain. Earn.

10,000 (1)

(c) 10,000

(3) 200

200 (c)

(c) 20010,000 (c)


Slide48 l.jpg

Transaction Posted to T-accounts credit sales will not be collected.

Balances of all accounts after Year 1 closings.

Cash

Acct. Rec.

Allow. for D.A.

(1) 10,000

5a 50

bal 2,950

7,000 (2)

50 (4)

50 (5b)

(4) 50

200 (3)

50 (5a)

200 bal.

(2) 7,000

5b 50

bal. 7,050

Service Revenue

Bad Debt Exp.

Retain. Earn.

10,000 (1)

(c) 10,000

0 bal

(3) 200

200 (c)

bal. 0

(c) 200 10,000 (c)

9,800 bal.


Summary accounting for bad debts l.jpg
Summary: credit sales will not be collected. Accounting for Bad Debts

  • Allowance method

    • GAAP

    • Required if company has a significant amount of bad debts.

    • Matches bad debt expense (on the income statement) with the sale.

    • Requires an adjusting journal entry before closing the books.


Summary accounting for bad debts50 l.jpg
Summary: credit sales will not be collected. Accounting for Bad Debts

  • Direct Write-off method

    • Violates GAAP (Matching)

    • No estimates of bad debts are made, so no allowance account is used.

    • Used by small businesses with few account receivables or large business with few collection problems.

    • No entry until time specific account is deemed “bad” (uncollectible).


Direct write off method for accounting for bad debts l.jpg
Direct Write-off Method credit sales will not be collected. for Accounting for Bad Debts

  • Direct Write-off method

Entry to write off J. Jones’ $100 account:

Bad Debt Expense 100

Acct. Rec.-Jones 100

Cash+Acct.Rec. = A/P +C. Stk.+Ret.E. Rev.- Exp. = N.I. Cashflow


Direct write off method for accounting for bad debts52 l.jpg
Direct Write-off Method credit sales will not be collected. for Accounting for Bad Debts

  • Direct Write-off method

Entry to write off J. Jones’ $100 account:

Bad Debt Expense 100

Acct. Rec.-Jones 100

Cash+Acct.Rec. = A/P +C. Stk.+Ret.E. Rev.- Exp. = N.I. Cashflow

(100) (100) +100 (100) n.a.


Accrued liabilities warranty costs l.jpg
Accrued Liabilities: Warranty Costs credit sales will not be collected.

  • Why give warranties?

  • When should expense be recognized?

We will

repair or

replace this

item...

Warranty


Warranties when to expense general principle l.jpg
Warranties…When to “expense”? credit sales will not be collected. General Principle

  • According to GAAP, the entire

    estimated warranty expense must

    be recorded in the period the sale

    is made, NOT in the period when

    the actual warranty cost is paid.

    (Matching principle is being followed.)

  • A warranty liability is recorded along with the expense. This liability is REDUCED whenever cash is paid to service a product still under warranty.


Transaction analysis55 l.jpg
Transaction Analysis credit sales will not be collected.

  • The following selected warranty related events occurred at Cell-It.

    For each event:

    • Determine how the financial statements are affected and fill in the horizontal model.

    • Record each event directly in LEDGER accounts.


Transaction analysis56 l.jpg
Transaction Analysis credit sales will not be collected.

  • The following selected events occurred at Cell-It. (Perpetual inventory method is used.)

    1. On 1/1/04 sold merchandise for $5,000 cash that

    had originally cost $4,000. These goods were

    sold with a two-year warranty.

    2. Estimated that $100 of warranty cost will be

    incurred over the next two years on the goods

    sold in #1.

    3. During 2005 a customer returned for repair, goods

    still under warranty. The cost of the repair was $30

    cash.


Slide57 l.jpg

1a. Sold credit sales will not be collected.(on 1/1/04 with 2 yr. warranty) for $5,000 cash,1b. merchandise that originally cost $4,000. (perpetual inventory method is used.)

C=CofGS,W=War.exp.

Balance Sheet

Assets = Liab.+ Stk. Equity Inc. State. Cashflow

Cash+ A/R + M.Inv. = W/P+C.Stk.+ R.E. Rev. - Exp. = N. I. OA,IA,FA

1a

1b

5000 5000 5000 5000 5000 OA

(4000) (4000) C 4000 (4000) n.a.


Before recording transaction 2 warranties when to expense l.jpg
Before recording Transaction #2: credit sales will not be collected.Warranties…When to “expense”

  • According to GAAP, the entire

    estimated warranty expense must

    be recorded in the period the sale

    is made, NOT in the period when

    the actual warranty cost is paid.

    (Matching principle is being followed.)

  • A warranty liability is recorded along with the expense. This liability is REDUCED whenever cash is paid to service a product still under warranty.


Slide59 l.jpg
2. Estimated that $100 of warranty cost will be credit sales will not be collected. incurred over the next two years on the goods sold in #1.

C=CofGS,W=War.exp.

Balance Sheet

Assets = Liab.+ Stk. Equity Inc. State. Cashflow

Cash+ A/R + M.Inv. = W/P+C.Stk.+ R.E. Rev. - Exp. = N. I. OA,IA,FA

1a

1b

5000 5000 5000 5000 5000 OA

(4000) (4000) C 4000 (4000) n.a.

2 100 (100) w 100 (100) n.a.


Slide60 l.jpg
3. During 2005 a customer returned for repair credit sales will not be collected. goods still under warranty. The cost of the repair was $30 cash.

C=CofGS,W=War.exp.

Balance Sheet

Assets = Liab.+ Stk. Equity Inc. State. Cashflow

Cash+ A/R + M.Inv. = W/P+C.Stk.+ R.E. Rev. - Exp. = N. I. OA,IA,FA

1a

1b

5000 5000 5000 5000 5000 OA

(4000) (4000) C 4000 (4000) n.a.

2 100 (100) w 100 (100) n.a.

3 (30) (30) n.a. n.a. n.a. n.a. (30) OA


Summary questions l.jpg
SUMMARY QUESTIONS credit sales will not be collected.

C=CofGS,W=War.exp.

Balance Sheet

Assets = Liab.+ Stk. Equity Inc. State. Cashflow

Cash+ A/R + M.Inv. = W/P+C.Stk.+ R.E. Rev. - Exp. = N. I. OA,IA,FA

1a

1b

5000 5000 5000 5000 5000 OA

(4000) (4000) C 4000 (4000) n.a.

2 100 (100) w 100 (100) n.a.

3. (30) (30) n.a. n.a. n.a. n.a. (30) OA

Questions: 20042005

1. Warranty Expense for the year:

2. Warranty liability on year-end bal. sheet:

3. Cash outflow related to warranty work:

$100


Summary questions62 l.jpg
SUMMARY QUESTIONS credit sales will not be collected.

C=CofGS,W=War.exp.

Balance Sheet

Assets = Liab.+ Stk. Equity Inc. State. Cashflow

Cash+ A/R + M.Inv. = W/P+C.Stk.+ R.E. Rev. - Exp. = N. I. OA,IA,FA

1a

1b

5000 5000 5000 5000 5000 OA

(4000) (4000) C 4000 (4000) n.a.

2 100 (100) w 100 (100) n.a.

3. (30) (30) n.a. n.a. n.a. n.a. (30) OA

Questions: 20042005

1. Warranty Expense for the year:

2. Warranty liability on year-end bal. sheet:

3. Cash outflow related to warranty work:

$100

$100


Summary questions63 l.jpg
SUMMARY QUESTIONS credit sales will not be collected.

C=CofGS,W=War.exp.

Balance Sheet

Assets = Liab.+ Stk. Equity Inc. State. Cashflow

Cash+ A/R + M.Inv. = W/P+C.Stk.+ R.E. Rev. - Exp. = N. I. OA,IA,FA

1a

1b

5000 5000 5000 5000 5000 OA

(4000) (4000) C 4000 (4000) n.a.

2 100 (100) w 100 (100) n.a.

3. (30) (30) n.a. n.a. n.a. n.a. (30) OA

Questions: 20042005

1. Warranty Expense for the year:

2. Warranty liability on year-end bal. sheet:

3. Cash outflow related to warranty work:

$100

$100

$ 0


Summary questions64 l.jpg
SUMMARY QUESTIONS credit sales will not be collected.

C=CofGS,W=War.exp.

Balance Sheet

Assets = Liab.+ Stk. Equity Inc. State. Cashflow

Cash+ A/R + M.Inv. = W/P+C.Stk.+ R.E. Rev. - Exp. = N. I. OA,IA,FA

1a

1b

5000 5000 5000 5000 5000 OA

(4000) (4000) C 4000 (4000) n.a.

2 100 (100) w 100 (100) n.a.

3. (30) (30) n.a. n.a. n.a. n.a. (30) OA

Questions: 20042005

1. Warranty Expense for the year:

2. Warranty liability on year-end bal. sheet:

3. Cash outflow related to warranty work:

$100

$100

$ 0

$ 0


Summary questions65 l.jpg
SUMMARY QUESTIONS credit sales will not be collected.

C=CofGS,W=War.exp.

Balance Sheet

Assets = Liab.+ Stk. Equity Inc. State. Cashflow

Cash+ A/R + M.Inv. = W/P+C.Stk.+ R.E. Rev. - Exp. = N. I. OA,IA,FA

1a

1b

5000 5000 5000 5000 5000 OA

(4000) (4000) C 4000 (4000) n.a.

2 100 (100) w 100 (100) n.a.

3. (30) (30) n.a. n.a. n.a. n.a. (30) OA

70 balance

Questions: 20042005

1. Warranty Expense for the year:

2. Warranty liability on year-end bal. sheet:

3. Cash outflow related to warranty work:

$100

$100

$ 0

$ 0

$ 70


Summary questions66 l.jpg
SUMMARY QUESTIONS credit sales will not be collected.

C=CofGS,W=War.exp.

Balance Sheet

Assets = Liab.+ Stk. Equity Inc. State. Cashflow

Cash+ A/R + M.Inv. = W/P+C.Stk.+ R.E. Rev. - Exp. = N. I. OA,IA,FA

1a

1b

5000 5000 5000 5000 5000 OA

(4000) (4000) C 4000 (4000) n.a.

2 100 (100) w 100 (100) n.a.

3. (30) (30) n.a. n.a. n.a. n.a. (30) OA

70 balance

Questions: 20042005

1. Warranty Expense for the year:

2. Warranty liability on year-end bal. sheet:

3. Cash outflow related to warranty work:

$100

$100

$ 0

$ 0

$ 70

($30)OA


Slide67 l.jpg

Transactions Posted to T-accounts credit sales will not be collected.

1. In 2004, sold for $5000 cash (1A), units costing $4000 (1B).

2. During 2004,estimated $100 warranty cost over two years.

3. During2005,paid $30 cash to repair units sold in 2004.

Warranty

Cash

Payable

Sales

Bal. X

30 (3)

(3) 30

100 (2)

5,000 (1A)

(1A) 5,000

Inventory

Cost of Goods Sold

(1B) 4,000

Bal. X

4,000 (1B)

Entries (not shown here) to close Sales, Cost of Goods Sold, and Warranty Expense to Retained Earnings would have been made at the end of 2004.

Warranty

Expense

(2) 100


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Notes Payable: Transaction Analysis credit sales will not be collected.

  • Assume the following selected events occurred at Cell-It. For each event:

    • Determine how the financial statements are affected and fill in the horizontal statements model.

    • Record the event in the Journal and Post to the Ledger.


Notes payable transaction analysis69 l.jpg
Notes Payable: Transaction Analysis credit sales will not be collected.

Assume the following events occurred at Cell-It.

1. On Oct. 1, 2004 Cell-It borrowed $8,000 cash by issuing a note payable with a one-year term and an 8% stated interest rate. All interest will be paid at maturity. This is an “interest bearing” note.

2.On Oct. 1, 2004 Cell-It issued an $8,000 face value, discounted note payable with a one-year term and an 8% stated discount rate. This is called a “Discounted” or “Non-interest bearing” note.

3. On Dec. 31, 2004 recorded interest related to the 8% interest-bearing note issued on Oct. 1st (see #1).

4. On Dec. 31, 2004 recorded interest related to the 8% discounted (non-interest bearing) note issued on Oct. 1st (see #2).

5. On Sept. 30, 2005 repaid the 8% non-discounted note payable (#1), plus all interest.

6. On Sept. 30, 2005 repaid the 8% discounted note payable (#2).


Slide70 l.jpg

T credit sales will not be collected.1: On Oct. 1, 2004 Cell-it borrowed $8,000 at 8% for 1 year on an interest bearing note. All interest to be paid at maturity.

Balance Sheet

Assets = Liabilities + Equity Inc. State. Cashflow

Cash = I/P + N/P(1) + N/P(2) - Disc.+C.Stk+R.E. Rev.- Exp.= N. I. OA,IA,FA

1

8000 8000 8000 FA


Slide71 l.jpg

T credit sales will not be collected.2: On Oct. 1, 2004 Cell-it issued an $8,000 face value, one year note payable discounted at 8%. (A noninterest bearing note.)

Balance Sheet

Assets = Liabilities + Equity Inc. State. Cashflow

Cash = I/P + N/P(1) + N/P(2) - Disc.+C.Stk+R.E. Rev.- Exp.= N. I. OA,IA,FA

1

8000 8000 8000 FA

2 7360 8000 640 7360 FA

The interest is INCLUDED in the Note Payable. The interest must be subtracted to calculate the amount of cash the borrower receives on the issue date.

Note Payable $8000

Interest ($8000 x .08 x 12/12) (640)

Cash to borrower $7360

Since no time has past, the $640 is NOT an EXPENSE yet.


Slide72 l.jpg

T credit sales will not be collected.2: On Oct. 1, 2004 Cell-it issued an $8,000 face value, one year note payable discounted at 8%. (A noninterest bearing note.)

Balance Sheet

Assets = Liabilities + Equity Inc. State. Cashflow

Cash = I/P + N/P(1) + N/P(2) - Disc.+C.Stk+R.E. Rev.- Exp.= N. I. OA,IA,FA

1

8000 8000 8000 FA

2 7360 8000 640 7360 FA

Discount on Note Payable is a contra liability account.

Its balance is SUBTRACTED from the Note Payable account to obtain the total liability for the Note.

Note Payable 8000

Less: Discount on N/P (640)

Total Note Liability 7360


Slide73 l.jpg
T credit sales will not be collected.3: On Dec. 31, 2004 recorded interest related to the note in #1.Oct. 1-Dec. 31 = 3 mo. (8000 x .08 x 3/12=160)

Balance Sheet

Assets = Liabilities + Equity Inc. State. Cashflow

Cash = I/P + N/P(1) + N/P(2) - Disc.+C.Stk+R.E. Rev.- Exp.= N. I. OA,IA,FA

1

8000 8000 8000 FA

2 7360 8000 640 7360 FA

3 160 (160) 160 (160) n.a.


T4 on dec 31 2004 recorded interest related to the discounted noninterest bearing note in 2 l.jpg
T4 credit sales will not be collected.: On Dec. 31, 2004 recorded interest related to the discounted (noninterest bearing) note in #2.

Balance Sheet

Assets = Liabilities + Equity Inc. State. Cashflow

Cash = I/P + N/P(1) + N/P(2) - Disc.+C.Stk+R.E. Rev.- Exp.= N. I. OA,IA,FA

1

8000 8000 8000 FA

2 7360 8000 640 7360 FA

3 160 (160) 160 (160) n.a.

4 (160) (160) 160 (160) n.a.


Slide75 l.jpg

T5 credit sales will not be collected.: On Sept. 30, 2005 repaid the 8% note from Transaction #1 and all its interest.a= accrue the remaining interest. b= payment.(Jan. 1-Sept. 30 = 9 mo. (8000 x .08 x 9/12= $480)

Balance Sheet

Assets = Liabilities + Equity Inc. State. Cashflow

Cash = I/P + N/P(1) + N/P(2) - Disc.+C.Stk+R.E. Rev.- Exp.= N. I. OA,IA,FA

1

8000 8000 8000 FA

2 7360 8000 640 7360 FA

3 160 (160) 160 (160) n.a.

4 (160) (160) 160 (160) n.a.

5a 480 (480) 480 (480) n.a

b (8640) (640) (8000) (8000) FA

(640) OA


Slide76 l.jpg
T6 credit sales will not be collected.: On Sept. 30, 2005 repaid the 8% discounted note payable from Trans. #2. a= accrue the remaining interest. b= payment.

Balance Sheet

Assets = Liabilities + Equity Inc. State. Cashflow

Cash = I/P + N/P(1) + N/P(2) - Disc.+C.Stk+R.E. Rev.- Exp.= N. I. OA,IA,FA

1

8000 8000 8000 FA

2 7360 8000 640 7360 FA

3 160 (160) 160 (160) n.a.

4 (160) (160) 160 (160) n.a.

5a 480 (480) 480 (480) n.a

b (8640) (640) (8000) (8000) FA

(640) OA

6a (480) (480) 480 (480) n.a.

b (8000) (8000) (7360) FA

(640) OA


Comparison of journal entries for interest bearing and discounted notes l.jpg
Comparison of Journal Entries for Interest Bearing and Discounted Notes

Contra-liabilities are increased by debiting.



Transaction analysis79 l.jpg
Transaction Analysis: Discounted Notes

Which loan was the better deal for Cell-It?

Calculate the EFFECTIVE INTEREST % of each.

Interest bearing note:

Eff. Int. %= $ Annual Interest ÷ Cash Rec’d.

= $640 ÷ $8,000

=8.0%

Non-Interest bearing note (Discounted note):

Eff. Int. %= $ Annual Interest ÷ Cash Rec’d.

= $640 ÷ $7,360

=8.7%

Effect on Financial Statements

Inc. State. State. of Ch. in Eq CashFlow

1. No effect No effect +8,000 FA

2. No effect No effect +7,360 FA

3. +Int. Exp, so - N.I. Decr. R/E, so Dec. Eq, n.a.

4. +Int. Exp, so - N.I. Decr. R/E, so Dec. Eq. n.a.

5. +Int. Exp, so - N.I. Decr. R/E, so Dec. Eq. -8000FA,-640 OA

With note #2 Cell-It only received $7,360 from the lender, but still had to pay $640 interest for the year. That’s why the effective interest rate is higher for Note #2.

Note #1 (Interest bearing) is a “better deal” in this case.


Financial statement analysis l.jpg
Financial Statement Analysis Discounted Notes

  • Accounts Receivable Turnover

Sales

=

$ Accounts Receivable*

Accts/Rec. Turnover

Often the AVERAGE Accts. Rec. is used as the denominator.

Beginning Accts/Rec. + Ending Accts/Rec.

2

Ave. A/R =

This ratio is a measure of how quickly receivables are collected.


Accounts receivable ratios l.jpg
Accounts Receivable Ratios Discounted Notes

Accts. Rec. Turnover: (A measure of how fast receivables are collected. Higher is better.)

Sales $50,000

Accounts. Receiv. $5,000

=

= 10.0 times

Average Days to collect A/R: (How many days go by between a credit sale and the time it is collected?)

365 365

Accts. Rec. Turnover 10.0

=

= 36.5 days

Generally, lower means better.


Chapter 782 l.jpg
Chapter 7 Discounted Notes

The End


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