Bourne Incorporated reports a cash balance at the

Bourne Incorporated reports a cash balance at the end of the month of $2, 595. A comparison of the company's cash records with the monthly bank statement reveals several additional cash transactions: bank service fees ($84), an NSF check from a customer ($340), a customer’s note receivable collected by the bank ($1, 100), and interest earned ($34). Record the necessary entries to adjust the balance of cash. Chapter 05 Receivables and Sales Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc.

Participation Questions Chapter 5 ¡ If I complete all of the assignments for this class, I have a better chance of earning the grade I desire. l ¡ Based on the Wall Street Journal Article, what percentage of all cash holdings of public companies does Apple Computers hold? l ¡ True or False Accounts receivable is considered to be a more liquid asset than inventory. l ¡ 1%, 5%, 7. 5, or 10% or more Sales returns and sales allowances are expense accounts, so they do not reduce the revenue number shown on the income statement. l ¡ True or False How many methods are there for recording uncollectible A/R? l 1, 2, 3, or 4

Announcements ¡ Accounting Student Field Day – Friday November 11 l http: //www. ficpa. org/Public/catalog/eventdetails. aspx? course. ID=16 CFSFD 16 ¡ Assignments – Due 10/16/16 l Chapter 5 Homework (Connect) – unlimited attempts l Participation questions for Chapter 5(Webcourses) – 1 attempt ¡ Exam Review 1 - go into Calendar at the top of Webcourses, click on Scheduler, and then click on Exam 1 Review Appointment. From there you can reserve any of the available spots, which are 30 minutes for each review. ¡ Instructor Tutorial Videos (3 – 8 minutes) – Webcourses class materials for appropriate chapter. ¡ 3 points extra credit for completing Accounting Survey http: //ucf. qualtrics. com//SE/? SID=SV_25 Md 3 c 7 IYgs. Yt. FP I will send out the link via e-mail ¡

Wall Street journal - APPLE COMPUTERS CASH POSITION Apple's (AAPL +0. 33%) $213 billion cash pile accounts for more than 10 percent of the overall cash held by U. S. corporates, according to Moody's Investors Service. U. S. corporates held a total of $1. 68 trillion in cash as of June 30. The technology sector is the most cash-flush of all industries, with the top four cash kings -- Apple, Microsoft (MSFT +1. 01%), Google (GOOG +0. 11%), Cisco (CSCO +0. 34%)

Apple Balance Sheet (Partial)

Questions to be Answered Chapters 4 – 10 – dive deeper into each area of accounts to understand the associated accounting rules and the impact to the income statement and balance sheet. Chapter 5 – What is the relationship between Revenue and Accounts Receivable, and how might selling our products on credit (on account) impact our earnings (income statement)?

Chapter 5 Sales and Receivables ¡ Gross Sales Versus net sales l l l ¡ Valuation of Accounts Receivable l l ¡ Sales Returns Sales Allowances Sales Discounts Agings Uncollectible Accounts (write-offs) Notes Receivable

Part A Sales and Recognition of Accounts Receivable 5 -9

1. ) Gross Sales versus Net Sales ¡ ¡ ¡ • • Sales Discounts – reduction in the amount our customer pays on their A/R based on early payment of a sale previously recorded. Sales Allowances – reduction or partial refund of the sales price after the sale has been recorded. Sales Returns – customer returns a product after the sale has been recorded. o Reduce the customer’s account balance if the sale was on account or o Issue a cash refund if the sale was for cash. These accounts are only used after revenue has already been recognized. Contra Revenue Accounts • Companion Account? • Opposite Normal Balance https: //www. youtube. com/watch? v=Mks. U 56 yr. Kzs Cashmere Sweater 0: 00 – 1: 17

Apple Computers

LO 2 Calculate net revenues using discounts, returns, and allowances Sales Discount o Not a reduction in sales price before revenue is recognized. o It’s a discount to the amount paid (our A/R owed by customer), intended to provide incentive for quick payment. o The amount of the discount available to our customers and the available time period are communicated in short-hand terms such as 2/10, n/30. o “ 2/10” indicates the customer will receive a 2% discount if the amount owed is paid within 10 days. o ‘n/30, ” means that if the customer does not take the discount, full payment is due within 30 days. 5 -12

Steps used to calculate and record sales discounts: • When the payment is received for a previous credit sale, calculate if a sales discount is due based on ‘terms’ provided and calculate discount. • 2/10 net 30 equals a 2% discount on the gross sales number. • When recording the payment, • Debit cash for the amount received. • Debit Sales Discounts (contra account) for the amount of the discount. • Credit A/R for the gross amount owed to remove amount owed by customer. Sales Discount Example #1

Example #2 - First scenario, assume Dee pays us on March 10 th, which is within the 10 -day discount period: $400 sale – terms 2/10 n 30 5 -14

Example #2 First scenario, assume Dee pays on March 10 th, which is within the 10 -day discount period 5 -15

Example #2 - Second scenario, assume that Dee waits until March 31 to pay, which is not within the 10 -day discount period Notice that there is no indication in recording the transaction that the customer does not take the sales discount. This is the typical entry to record a cash collection on account when no sales discounts are involved. 5 -16

Sales Return Example - $400 sales is recognized Steps used to record sales returns: • When a customer returns an item, the full amount of the return is recorded in the following manner – • Debit Sales Returns (contra account) for the amount of the return. • Credit A/R for the full amount of the return to show that the customer no longer owes that money. Important - The amount in the GL revenue account is left unchanged and then customer returns product/service

Sales Allowance Example - $400 sale and $50 allowance Steps used to record sales allowances: • When a company issues a sales allowance after revenue has been earned and recorded, the full amount of the allowance is recorded in the following manner – • Debit Sales Allowance (contra account) for the amount of the allowance. • Credit A/R for the full amount of the allowance to show that the customer owes less money. Important - The amount of the GL revenue account is left unchanged

Sales Allowance Example On March 5, after Dee gets her teeth cleaned but before she pays, she notices that another local dentist is offering the same procedure for $350. Dee brings this to Dr. Link’s attention and because his policy is to match any competitor’s pricing, he offers to reduce Dee’s account balance by $50. Link’s Dental records the following sales allowance entry. 5 -19

Check-in Question #1 Based on the GL Account balances above, what are Net Sales: A. ) 1, 000; B. ) $1, 200, 000; $C. ) $800, 000; D. ) $1, 100, 000 Part B: Valuation of Accounts Receivable Are they all Collectible? What amount should be shown on the Balance Sheet? 5 -20

Receivables – Accounts and Notes ¡ Second most liquid asset – after cash Acquired mainly by: l l l Selling goods and services (accounts/trade receivable) Lending money via formal contracts (notes receivable) Other (loans to officers/employees) 21

Accounts Receivable ¡ ¡ 22 Amounts collectible from customers Balance in general ledger l Control account ¡ Summarizes total amount due from all customers ¡ Should be same amount as total of all subsidiary ledgers l Subsidiary ledger ¡ Separate account for each customer

Accounts Receivable - Amounts collectible from customers Subsidiary Ledgers Customer 1 General Ledger Control Account $3, 000 Accounts receivable $10, 000 Total $10, 000 Customer 2 $4, 800 Customer 3 $2, 200

Accounts Receivable Aging Process of reviewing 100% of amounts due us through the GL accounts receivable account. • Which customers (in the subsidiary ledgers) are paying on time, • Which customers are not paying us on time, and how far behind they are behind the due date. This analysis assists in estimating uncollectible amounts and in establishing credit guidelines. Example: Apple Computers – Accounts Receivable Aging (in thousands). Sales made on January 15 th to the following customers: Ed Zahn cuts the cheese - • Walmart $15, 000; Target $10, 000; and Costco $5, 000 1, 650 -year-old bottle of “Aged” wine 40 year old “Aged” Cheddar

January 31 st General Ledger Balances for Accounts Receivable/ Sales Accounts Receivable Aging

February 28 th General Ledger Balances for Accounts Receivable/ Sales Accounts Receivable Aging

March 31 st General Ledger Balances for Accounts Receivable/ Sales Accounts Receivable Aging

April 30 th General Ledger Balances for Accounts Receivable/ Sales Accounts Receivable Aging

Kramer – write-off (0 – 0: 51) http: //www. youtube. com/watch? v=XEL 65 gyw w. HQ&index=1&list=RDXEL 65 gyww. HQ ¡

Issue – How do you record A/R that is determined to be uncollectible? Select the METHOD for recording uncollectible A/R (ONLY TWO METHODS!) l Direct write-off method (Method #1) ¡ Non GAAP ¡ The amount of the write-off is known and occurs many months after revenue is earned, which is in opposition to the matching principle. l The Allowance method (Method #2) ¡ GAAP ¡ The amount of the write-off is estimated and occurs in the same period as the revenue is earned, which is in accordance to the matching principle.

How to Handle Uncollectible Accounts Step 1 - Select method for recording Uncollectible Receivables 1. ) Direct Write Off Method (Non-GAAP) Step 2 – how to estimate the amount of bad debt OR 2. ) Allowance Method (GAAP) Percentage of Sales Percentage of Accounts Receivable (aging)

METHOD 1 - Direct Write-Off Method ¡ ¡ Records expense when a specific account determined to be uncollectible (many months after revenue is earned) l Amount is KNOWN l Required for tax purposes (WHY? ? ? ) Inferior to Allowance method – not GAAP l Poor matching of uncollectible-account expense against revenue Example: After 9 months of attempting to collect $ from The UCF Bicycle Vending Machine Company, we believe that the $10, 000 is uncollectible. JOURNAL Date Accounts and explanation Bad Debt Expense Accounts Receivable Write off customer account Debit Credit 10, 000

METHOD 2 - Allowance Method The amount of the write-off is estimated based on the company’s collection experience and occurs in the same accounting period as the revenue is earned, which is in accordance to the matching principle. This process introduces two new accounts: Bad Debt Expense & Allowance for Uncollectible Accounts. 1. Bad Debt Expense – Represents the cost of estimated future bad debts charged to the current period on the Income Statement – Matching Principle. 2. ‘Allowance’ for Uncollectible Accounts is credited to set up ‘fund’ (although not a cash fund) the write-off that actually take place in the future. 1. Contra-asset (companion account is Accounts Receivable) 2. Net effect is to show amount of receivables that are expected to be collected 1. AKA “net realizable value” 33

Net Realizable Value Sample Balance Sheet #1 Current assets: Accounts receivable – Gross Less: Allowance for uncollectible accounts Accounts receivable, net $100, 000 (5, 000) $95, 000 Sample Balance Sheet #2 Current assets: Accounts receivable, less allowance of $5, 000 $95, 000 Balance Sheet – must show only amount that is collectible, which is net realizable value. Formula: Gross A/R – Allowance = Net Realizable Value (Net A/R)

Method #2 – Allowance Method Steps ¡ Steps 1. Sale is made on account 1. Debit A/R 2. Credit Revenue 2. Since we know that some portion of A/R will become uncollectible, we estimate an amount for Bad Debt Expense in the same period as the sale. 1. Debit Bad Debt Expense 2. The Allowance for Uncollectible Accounts (contra asset account) is credited for the same amount. 3. When actual amounts of due the company from a customer are deemed uncollectible 1. Debit Allowance for Uncollectible Amount in the amount of the write-off. 2. Credit A/R to remove this balance from the customers subsidiary account.

Method #2 – Example for Allowance Method Steps ¡ Steps 1. Sale - Company sells $100, 000 product (revenue) and agrees that customer will pay them at a later date (accounts receivable, AR). See transaction ‘a’ below. 2. Record Bad Debt Expense - In order to match expenses to revenue, the $2, 500 in estimated bad debt is expensed (debit) and the contra asset account is set up to reduce the amount reported for accounts receivable (Allowance for uncollectible accounts). See transaction ‘b’ below. 3. Write-off uncollectible amount - When actual amounts due company are deemed uncollectible (many months later) – for this example, $2, 500, the AR account is reduced and it is offset by the amount that was estimated to uncollectible in the allowance account. See transaction ‘c’ below.

Allowance Method – How do you Estimate (Calculate) the Uncollectible Amounts? Percent-of-sales • % is applied to EVERY $ of sales and added to allowance contra account. • % Based on Collection Experience Aging-of-receivables • Total allowance balance is based solely on A/R aging quality – age of receivables. • Based the Quality, the total Target Balance of Uncollectible is estimated. % of

Allowance Estimate Calculation #1 - Percent of Sales ¡ Allowance based on estimated Bad Debt Expense as a percent of sales. ¡ Calculated uncollectible amount is always added at full value to Allowance for Uncollectible Accounts. Steps: 1. Calculate the estimated bad debt expense (Sales * % estimated to be uncollectible. 2. Debit amount to Bad debt expense 3. Credit amount to the Allowance account. Example – September sales = $100, 000; 3% of sales are estimated to be uncollectible based on prior experience. Beginning balance in Allowance for Uncollectible Accounts = $2, 000. $2, 500 Written-off at the end of September. ¡

Percent-of-Sales Calculation Estimated % uncollectible credit/total sales Credit or Total Sales Bad Debt Expense JOURNAL Date Accounts and explanation Bad Debt Expense Allowance for uncollectible accounts Recorded uncollectible accounts expense Debit Credit 3, 000

Allowance ESTIMATE Calculation #2 - Aging-of -Receivables ¡ Allowance is based on estimated collectability (Quality) of the total amount contained in the Accounts Receivable account based on the age of each receivable. l Aging schedule ¡ TARGET BALANCE – the total amount calculated as uncollectible based on the A/R aging quality. The Target Balance becomes the Ending Balance in the Allowance for Uncollectible Accounts. The entry to the Allowance account needs to consider the beginning balance to ensure the target balance is achieved. ¡ Steps: 1. Calculate the target balance for the allowance account based on the A/R Aging and the estimated %’s of uncollectible amounts. 2. JE Bad Debt Expense to achieve target balance - Subtract the beginning balance in the allowance account from the target balance to estimate the debit to bad debt expense 3. Credit the same amount to the Allowance account.

Accounts Receivable Aging – Terms 2/10 n 30 No payments have been made for the following sales: 11/1/12 – $1, 000 sale to Jones Co. 1/1/13 - $2, 000 sale to Jones Co. 1/31/13 - $3, 000 sale to Jones Co. 2/2/13 - $4, 000 sale to Jones Co. 3/5/13 - $5, 000 sale to Jones Co. What is the likelihood of collecting the money as the date of the receivable “ages”? 42

Accounts Receivable - Aging (Cont. )

Age of Account Customer A 1 -30 days 31 -60 days $100 Over 90 days Total Balance $500 Customer B All others 61 -90 days $600 400 5, 000 1, 500 600 400 7, 500 $5, 100 $1, 900 $1, 100 $400 $8, 500 Est. percent uncollectible 1% 3% 8% 20% Allowance balance should be: $51 $57 $88 $80 Totals Allowance for Uncollectible Accounts $31 Balance before adjustment $245 Adjustment needed $276 44 Target balance (ending) equals aging schedule $276

Aging-of-Receivables JOURNAL Date Accounts and explanation Debit Bad Debt Expense Credit 245 Allowance for uncollectible accounts 245 Recorded uncollectible accounts expense Check-in #2 Which estimate calculation might provide a more exact estimate of bad debt? A. ) % of Sales, B. ) A/R Agings, C. ) Neither, D. ) Both are the same 45

Main Difference between % of sales and % of A/R aging % of Sales % of A/R Aging Record full amount of Estimate calculation to Allowance account Record amount to reach Target Balance considering the Beginning Balance in Allowance Account % of

Apple Balance Sheet (Partial)

Writing Off Uncollectible Accounts ¡ When our customers do not pay their invoices and we have extinguished our options available to us for collection, we must admit that the monies will not be collected and write off the balance owed to us. l Does not include and/or increase to Bad Debt Expense because that was already debited in the original transaction to set up the allowance account ¡ Steps: l Debit allowance for uncollectible accounts for amount of write-off l Credit A/R for amount of write-off

Writing Off Uncollectible Accounts (2 nd Example) JOURNAL Date Accounts and explanation Debit Allowance for Uncollectible Accounts Credit 900 Accounts Receivable 900 Write off customer account Allowance for Uncollectible Accounts $900 $3, 000 Bal. Accounts Receivable Bal. $50, 000 $49, 100 $900 No impact on Income Statement 49 $2, 100

Impact of Write-Off Balance Sheet – Before Write Off Current assets: Accounts receivable $50, 000 Less: Allowance for uncollectible accounts Accounts receivable, net (3, 000) $47, 000 Balance Sheet – After Write Off Current assets: Accounts receivable $49, 100 Less: Allowance for uncollectible accounts Accounts receivable, net (2, 100) $47, 000 50

OVERALL - What are we Doing? ? ¡ ESTIMATE UNCOLLECTIBLE AMOUNTS l ¡ Estimating how many of our customers will not pay us for the goods or services we provided to them. We want to estimate this amount and match it to the time frame of the revenue we earned (GAAP). WRITE OFF UNCOLLECTIBLE AMOUNTS l When our customers do not pay their invoices and we have extinguished our options available to us for collection, we must admit that the monies will not be collected and write off the balance owed to us. Meerkat 0: 00 – 0: 43 https: //www. youtube. com/watch? v=XECyt 6 u_r. SY

On September 30, Hilly Mountain Party Planners had a $30, 000 balance in Accounts Receivable During October, the store made credit sales of $161, 000. October collections on account were $137, 000. Uncollectible-account expense is estimated as 4% of revenue. Write-offs of uncollectible receivables totaled $2, 300. Journalize sales, collections, write-offs of uncollectibles, and bad debt expense for October JOURNAL Date Accounts and explanation Check-in #3 52 Debit Credit

On September 30, Hilly Mountain Party Planners had a $30, 000 balance in Accounts Receivable During October, the store made credit sales of $161, 000. October collections on account were $137, 000. Uncollectible-account expense is estimated as 4% of revenue. Write-offs of uncollectible receivables totaled $2, 300. Journalize sales, collections, write-offs of uncollectibles, and bad debt expense for October 53

JOURNAL Date Accounts and explanation Debit Oct Accounts Receivable 161, 000 Revenue Credit 161, 000 Cash 137, 000 Accounts Receivable 137, 000 Bad Debt Expense 6, 440 Allowance for Uncollectible Accounts Receivable 6, 440 2, 300 54

Percentage of AR Example On December 31, 2012, Darci’s travel has an accounts receivable balance of $250, 000. Allowance for Doubtful accounts has a credit balance of $9, 000 before the year-end adjustment. Estimate the allowance for doubtful accounts based on the percent of accounts receivable method. Use T accounts to show the ledger balances for all of these accounts after the year-end adjustment. 55

Example of Payment of AR after it has already been written off - $1, 000 ¡ Steps l Re-establish receivable by reversing write-off for amount received. l Debit cash for amount received. l Credit A/R for amount received

Notes Receivable ¡ ¡ More formal than accounts receivable Written promise to pay a sum at the maturity date l ¡ 57 Plus interest at stated rate Also called promissory notes

Notes Receivable ¡ ¡ 58 Can be current, long-term or both Terms Creditor Party to whom money is owed; Lender Debtor Party that borrowed and owes money; Maker, borrower Interest Cost of borrowing money; stated as annual percentage rate Maturity date Date when debtor must pay note Maturity value Sum of principal and interest Principal Amount borrowed by debtor Term Length of time from when note was signed to when payment must be made

Principal Date Interest Starts PROMISSORY NOTE $3, 000 Amount June 1, 2013 Date For value received, I promise to pay to the order of Principal Payee (Creditor) Second National Bank Three thousand no/100 s------------ Dollars Maturity Date -------On March 1, 2014 plus interest at the annual rate of 6 percent Patricia Alexander 59 Maker (Debtor)

Interest – for our examples, interest is paid at maturity. ¡ ¡ ¡ 60 Interest rates are usually expressed as an annual percentage rate (APR) For time periods less than a year, a fraction is applied to the APR l # months until loan due date/12 Often interest is computed based on days l Denominator would be days/365 ¡ Banks often use 360 days

6/1/14 $3, 000 note issued at 6% annual interest. Note (principal) and interest are all due 3/1/15. Prepare original and adjusting entry at year-end. Steps: 1. Record the original transaction. 2. Record the adjusting entry to recognize the interest due our organization 1. Debit Interest Receivable and Credit Interest Revenue.

6/1/14 $3, 000 note issued at 6% annual interest. Note (principal) and all interest are due 3/1/15. Prepare final journal entry at receipt of final payment. Steps: 1. Record payment at Maturity 1. Debit cash received. 2. Close out Note Receivable with a credit. 3. Recognize and record interest revenue from current period. 4. Close out Interest Receivable with a credit.

Accounting for Notes Receivable JOURNAL Date Accounts and explanation Debit Credit 2014 6 -1 Notes receivable 3, 000 Cash 12 -31 3, 000 Interest receivable 105 Interest revenue 105 2015 3 -1 Cash 3, 135 Notes receivable 3, 000 Interest receivable 105 Interest revenue 30 63

JOURNAL Date Accounts and explanation Debit Credit

Chapter 5 Practice Problems (Cont. ) Kelly's Jewelry reported the following amounts at the end of the year: total jewelry sales = $621, 000; sales discounts = $13, 100; sales returns = $39, 200; sales allowances = $19, 900. Compute net sales.

Chapter 5 Practice Problems (Cont. ) At the end of the year, Dahir Incorporated's balance of allowance for uncollectible accounts is $1, 400 (debit) before adjustment. The company estimates future uncollectible accounts to be $9, 900 (Target Balance) based on the A/R aging calculation. Please journalize this transaction. This journal entry will include a: A. ) Credit to Bad Debt Expense in the amount of $9, 900. B. ) Debit to Bad Debt Expense in the amount of $11, 300. C. ) Debit to Allowance for Uncollectible Account the amount of $11, 300. D. ) Credit to Allowance for Uncollectible Account the amount of $9, 900.

Chapter 5 Practice Problems (Cont. ) During 2016, its first year of operations, Pave Construction provides services on account of $145, 000. By the end of 2016, cash collections on these accounts total $95, 000. Pave estimates that 25% of the remaining uncollected accounts a the end of 2016 will be bad debts. Please journalize the estimate for bad debt expense. This journal entry will include a: A. ) Debit to Bad Debt Expense in the amount of $12, 500. B. ) Credit to Bad Debt Expense in the amount of $36, 250. C. ) Debit to Allowance for Uncollectible Account the amount of $12, 500. D. ) Credit to Allowance for Uncollectible Account the amount of $36, 250.

The Physical Therapy Center specializes in helping patients regain motor skills after serious accidents. The center has the following balances on December 31, 2016, before any adjustment: Accounts Receivable = $116, 000; Allowance for Uncollectible Accounts = $1, 200 (credit). The center estimates uncollectible accounts based on an aging of accounts receivable as shown below. Journal the estimate for Bad Debt Expense. This journal entry will include a: A. ) Debit to Bad Debt Expense in the amount of $49, 550. B. ) Credit to Bad Debt Expense in the amount of $50, 750. C. ) Debit to Allowance for Uncollectible Account the amount of $116, 000. D. ) Credit to Allowance for Uncollectible Account the amount of $48, 350.

Debit Balance in Allowance Account? January sales = $100, 000. Estimated bad debt = 1% of sales. End of January wrote off $1, 500 bad debt.

Chapter 5 Sales and Receivables ¡ Gross Sales Versus net sales l l l ¡ Valuation of Accounts Receivable l l ¡ Sales Returns Sales Allowances Sales Discounts Agings Uncollectible Accounts Notes Receivable

$1, 000 is deemed uncollectible after months of chasing a customer, which of the following is part of the JE under the allowance method to write this balance off? a. A debit to Bad Debt Expense b. credit to Allowance for Uncollectible Accounts. c. A debit to Accounts Receivable. d. A debit to Allowance for Uncollectible Accounts Using the aging-of-accounts receivable method to estimate uncollectibles, the Allowance for Uncollectible accounts has a debit balance of $2, 000. Target balance of uncollectible accounts is $10, 000, What is the amount of the bad debt expense to be reported on the income statement? a. $12, 000 b. $8, 000 c. $10, 000 d. $2, 000 When $ are originally recorded in the allowance for uncollectible accounts account based on the matching principle, the impact is shown as which of the following? a. Net income decreases and assets increase b. Net income increases and assets decrease c. Net income decreases and assets decrease d. No impact to either financial statement An increase to the sales allowance account, has what impact on the income statement? a. Net income decreases b. Net income increases c. No impact