1. AC300.01: Unit 9 Seminar January 11, 2012
School of Business and Management

2. Agenda
Welcome
Seminar Rules
C7-4 Receivables Issues (Page 365)
Questions

3. Seminar Rules by Greg Rose
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Assignments Grading
Late Policy
Seminar procedures and Polling
Questions

4. C7-4 Receivables Issues
AICPA Adapted Magrath Company has an operating cycle of less than one year and provides credit terms for all of its customers. On April 3, 2010, the company factored, without recourse, some of its accounts receivable.
On August 1, 2010, Magrath sold special order merchandise and received an interest-bearing note due April 30, 2011.
Magrath uses the allowance method to account for uncollectible accounts. During 2010, some accounts were written off as uncollectible, and other accounts previously written off as uncollectible were collected.

5. C7-4 Receivables Issues
Required:
1. Explain how Magrath should account for and report the accounts receivable factored on April 3, Why is this accounting treatment appropriate?

6. Factoring
When a company factors its accounts receivable, it sells individual accounts to a financial institution (called a factor).

7. Factoring
Farber Corporation sells $80,000 of accounts receivable to a factor, receives 90% of the value of the factored accounts, and is charged a 15% commission based on the gross amount of factored accounts receivable.
Cash 60,000
Receivables from Factor 8,000
Factoring Expense 12,000
Accounts Receivable 80,000
($80,000 × .90) – $12,000
$80,000 × 0.10
$80,000 × 0.15

8. C7-4 Receivables Issues
Required:
2. Explain how Magrath should report the effects of the interest-bearing note on its income statement for the year ended December 31, 2010 and its December 31, balance sheet.

9. Notes Receivable
A note receivable is an unconditional written agreement to collect a certain sum of money on a specific date.

10. Notes Receivable
Notes receivable generally have two attributes that are not found in accounts receivable.

11. Notes Receivable
They are negotiable instruments, which means that they are legally transferable among parities and may be used to satisfy debts by the holders of these instruments.
They usually involve interest, requiring the separation of the receivable into its principal and interest components.

12. Notes Receivable Interest-Bearing
Received a $5,000, 60-day, 12% note on October 1, 2010:
Notes Receivable 5,000
Sales 5,000
Received maturity value on December 1, 2010:
Cash 5,100
Notes Receivable 5,000
Interest Revenue 100
$5,000 × 0.12 × 60/360

13. What is the rationale for each approach?
C7-4 Receivables Issues
Required:
4. What are the two basic approaches to estimating uncollectible accounts under the allowance method?
What is the rationale for each approach?

14. Estimated Bad Debts Method
Bad debts can be estimated based on sales or on accounts receivable.

15. Estimated Bad Debts Method
Relationship to sales (income statement approach):
Percentage of sales
Percentage of net credit sales
Relationship to accounts receivable (balance sheet approach):
Percentage of outstanding accounts receivable
Aging of accounts receivable

16. Estimated Bad Debts Method
Percentage of Sales
If a company’s net credit sales during the year were $525,000 and bad debts have historically amounted to 2% of net credit sales, what is the required year-end adjusting entry?
Bad Debt Expense 10,500
Allowance for Doubtful Accounts 10,500
$525,000 × 0.02

17. Estimated Bad Debts Method
Percentage of Outstanding Accounts Receivable
If a company has determined that historically there has been a 4% relationship between actual bad debts and the year-end accounts receivable balance ($475,000), what would be the required year-end adjusting entry?
Allowance for Doubtful Accounts
4,500 (current balance)
$475,000 x 0.04 = $19,000

18. Estimated Bad Debts Method
Percentage of Outstanding Accounts Receivable
If a company has determined that historically there has been a 4% relationship between actual bad debts and the year-end accounts receivable balance ($475,000), what would be the required year-end adjusting entry?
Allowance for Doubtful Accounts
4,500 (current balance)
19,000 (required ending balance)

19. Estimated Bad Debts Method
Percentage of Outstanding Accounts Receivable
If a company has determined that historically there has been a 4% relationship between actual bad debts and the year-end accounts receivable balance ($475,000), what would be the required year-end adjusting entry?
Allowance for Doubtful Accounts
4,500 (current balance)
14,500 (required adjustment)

20. Estimated Bad Debts Method
Percentage of Outstanding Accounts Receivable
If a company has determined that historically there has been a 4% relationship between actual bad debts and the year-end accounts receivable balance ($475,000), what would be the required year-end adjusting entry?
Bad Debt Expense 14,500
Allowance for Doubtful Accounts 14,500

21. Aging of Accounts Receivable
Review the unpaid invoices in each customer’s account.
Classify the invoice amounts according to the length of time the invoice has been outstanding.
Multiply the total amount in each age group by the applicable estimated uncollectible percentage.
Make a journal entry to bring the balance in Allowance for Doubtful Accounts to the amount calculated in Step 3.

22. Aging of Accounts Receivable22
Aging of Accounts Receivable

23. Aging of Accounts Receivable
Age
Under 60 days $ 53,500
60–120 days 34,500
121–240 days 3,600
241–360 days 15,700
Over 1 year ,500
$121,800
× 2
× 8
× 15
× 30
× 50 %
= $ 1,070
= ,760 =
= ,710
= ,250
$16,330
Estimated
Percentage
Uncollectible
Estimated Amounts Uncollectible

24. Aging of Accounts Receivable
If the firm has a current $1,350 debit balance, the required adjusting entry would be:
Allowance for Doubtful Accounts
1,350 (current balance)
17,680 (required adjustment)
16,330 (required ending balance)

25. Aging of Accounts Receivable
If the firm has a current $1,350 debit balance, the required adjusting entry would be:
Bad Debt Expense 17,680
Allowance for Doubtful Accounts 17,680
$16,330 + $1,350

26. Writing Off Uncollectibles
Accounts Receivable
175,000
1,000
Allowance for Doubtful Accounts
8,750
Net realizable value = $166,250
Allowance for Doubtful Accounts 1,000
Accounts Receivable 1,000
A customer’s account totaling $1,000 is determined to be uncollectible.

27. Net Realizable Value Write-off $175,000 $(1,000) $174,000 Write-off27
Net Realizable Value
Write-off
Before
Write-off
After
Write-off
Accounts receivable
Less: Allowance for
doubtful accounts
Net realizable value
$175,000
(8,750)
$166,250
$(1,000)
1,000
$174,000
(7,750)
$166,250

28. C7-4 Receivables Issues
Required:
3. Explain how Magrath should account for the collection of the accounts previously written off as uncollectible.

29. Collection of an Account Previously Written Off
Later, a payment for $300 is received from the account that was written off in the previous slide.
Accounts Receivable 300
Allowance for Doubtful Accounts 300
Cash 300
Accounts Receivable 300

30. Thank you for attending this seminar.
Questions
Thank you for attending this seminar.

31. 31
Show Me the Money!
Cash is the lifeblood for companies, and infusions are coming more frequently from nontraditional sources. According to a recent Federal Reserve Payments Study, noncash payments grew by 4.6% over the previous three years and had a total value of $75.8 trillion.
Of these noncash payments, more than two-thirds were made electronically, with debit cards being the most frequently used electronic payment type.

32. Show Me the Money! Debit and credit cards are used most frequently.32
Show Me the Money!
Debit and credit cards are used most frequently.
The automated clearing house (ACH) is an electronic network that provides for the interbank clearing of electronic payments.
ACH payments currently represent 91% of the value of all electronic payments.

33. Automated Clearing House (ACH)33
Automated Clearing House (ACH)
ACH payments include:
Direct deposit of payroll and social security
Electronic payments of bills
Mortgages
Utility bills
Insurance premiums
The conversion of checks by businesses

34. Number and Value of Noncash Payments

35. Electronic Banking Accounts receivable conversion (ARC)35
Electronic Banking
Accounts receivable conversion (ARC)
Paper checks received at the bank lockbox are converted into automated clearing house debits and then the check is destroyed.
ARC payments are about one-third cheaper than paper checks.
Float time is cut in half.
Check Clearing for the 21st Century Act (Check 21)
Gives legal status to substitute checks
Allows merchants to scan and transmit checks to the bank

36. Cash
Cash is the resource on hand to meet planned payments and emergency situations.

37. Cash Cash Included in Cash Excluded from Cash Coins and currency
Checking accounts
Savings accounts
Negotiable checks
Bank drafts
Certificates of deposit
Bank overdrafts
Postdated checks
Travel advances
Postage stamps

38. Cash Equivalents
Cash equivalents are short-term, highly liquid investments that are readily convertible into known amounts of cash and so near their maturity that there is little risk of changes in value because of changes in interest rates.

39. All cash receipts are recorded daily in the accounting records.
Cash Management
Control Over Receipts
The person opening the mail or the salesperson using the cash register should count the receipts immediately.
All cash receipts are recorded daily in the accounting records.
All receipts are deposited daily in the company’s bank account.

40. Cash Management Control Over Payments
Make all payments by check or electronic payment (except petty cash items) so that a record exists for every company expenditure.
Authorize and sign all checks only after an expenditure is verified and approved.
Periodically reconcile the cash balance in the bank statement with the company’s accounting records.