Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter 15 Accounts Receivable and Uncollectibles

15-2 Learning Objective 1 Describe accounts receivable and how they occur and are recorded. On July 16, Barton Co. sells $950 of merchandise on credit to Webster Co. and $1,000 of merchandise on account to Matrix, Inc. Both sales were sold on credit and include a debit to Accounts Receivable and a credit to Sales. Also notice that the specific customer is noted in the transaction so we can make the proper entry in the customer’s Accounts Receivable subsidiary ledger. LO1

15-3 Sales on Credit On July 31, Barton Co. collects $500 from Webster Co. and $800 from Matrix, Inc. on account. When cash is collected on accounts, we debit Cash and credit Accounts Receivable. Notice that the specific customer is noted in the transaction so we can make the proper entry in the customer’s Accounts Receivable subsidiary ledger. LO1

15-4  With bank credit cards, the seller deposits the credit card sales receipt in the bank just like it deposits a customer’s check.  The bank increases the balance in the company’s checking account.  The company usually pays a fee of 1% to 5% for the service. Accounting for Third-Party Credit Card Sales LO1

15-5 Accounting for Third-Party Credit Card Sales On July 16, 2010, Barton Co. has a bank credit card sale of $500 to a customer. The bank charges a processing fee of 2%. The cash is received immediately. Barton would credit Sales for the entire amount of the sale of $500. However, Barton will debit Cash for $490, which represents how much cash it will collect from the bank. The difference of $10 is the two percent fee that Barton must pay for allowing customers to use the third-party credit card. The $10 would be debited to Credit Card Expense. LO1

15-6 On July 16, 2010, Barton Co. has a bank credit card sale of $500 to a customer. The bank charges a processing fee of 2%. Barton remits the credit card sale to the credit card company and waits for the payment that is received on July 28. Accounting for Third-Party Credit Card Sales On the date of the sale, Barton would credit Sales for the entire amount of the sale of $500. However, Barton will debit Accounts Receivable for $490, which represents how much cash it will ultimately collect from the bank. The difference of $10 is the two percent fee that Barton must pay for allowing customers to use the third-party credit card. The $10 would be debited to Credit Card Expense. On the collection date, Barton would debit Cash and credit Accounts Receivable for $490. LO1

15-7 Learning Objective 2 Apply the direct write-off method to account for accounts receivable. On August 4, Barton determines it cannot collect $350 from Martin, Inc., a credit customer. Direct Write-Off Method Barton would debit Bad Debts Expense and credit Accounts Receivable for $350. Notice that the specific customer is noted in the transaction so we can make the proper entry in the customer’s Accounts Receivable subsidiary ledger. LO2

15-8 Learning Objective 3 Apply the allowance method to account for accounts receivable. At the end of its first year of operations, Barton Co. estimates that $3,000 of its accounts receivable will prove uncollectible. The total accounts receivable balance at December 31, 2010 is $278,000. Contra-asset account Recording Bad Debts Expense LO3

15-9 Recording Bad Debts Expense Assuming no beginning balance, after posting this entry, the Allowance for Doubtful Accounts would have a $3,000 credit balance. Now on the balance sheet, the Allowance for Doubtful Accounts is subtracted from the Accounts Receivable balance. The reported value of $275,000 is called realizable value. It is the amount of Accounts Receivable that we actually think we will collect. LO3

15-10 Writing Off a Bad Debt Barton determines that Martin’s $300 account is uncollectible. Now assume that Martin sends Barton payment of $300 after Barton made the write-off entry. LO3

15-11 Barton has credit sales of $1,400,000 in Management estimates 0.5% of credit sales will eventually prove uncollectible. What is Bad Debts Expense for 2010? Learning Objective 4 Estimate uncollectibles using the percent of sales method. Percent of Sales Method Bad debts expense is computed as follows: LO4

15-12 Barton has $100,000 in accounts receivable and a $900 credit balance in Allowance for Doubtful Accounts on December 31, Past experience suggests that 4% of receivables are uncollectible. What is Barton’s Bad Debts Expense for 2010? Barton has $100,000 in accounts receivable and a $900 credit balance in Allowance for Doubtful Accounts on December 31, Past experience suggests that 4% of receivables are uncollectible. What is Barton’s Bad Debts Expense for 2010? Learning Objective 5 Estimate uncollectibles using the percent of accounts receivable method. Percent of Accounts Receivable Method LO5

15-13  Each receivable is grouped by how long it is past its due date.  For each age group, we determine the appropriate uncollectible percentage.  For each age group, we determine the appropriate uncollectible percentage.  For each age group, we calculate a separate allowance amount. Learning Objective 6 Estimate uncollectibles using the aging of accounts receivable method.  Total the uncollectible amounts. LO6

15-14 Learning Objective 7 Compute accounts receivable turnover and use it to help assess financial condition. This ratio provides useful information for evaluating how efficient management has been in granting credit to produce revenue. Net sales Average accounts receivable Net sales Average accounts receivable This ratio measures how often, on average, receivables are received and collected during the period. LO7

15-15 End of Chapter 15