Chapter 6 – Time Value of MoneyChapter 7 CASH AND RECEIVABLES Sommers – ACCT 3311Reporting CashAccounts ReceivableAccounts ReceivableTrade DiscountsCash (Sales) DiscountsBig Customers Are Slow to Pay – WSJ Jun 7, 2012Sales and Trade DiscountsSales and Trade DiscountsSales and Trade DiscountsSales and Trade DiscountsNon-Recognition of InterestRecognition of A/RRecognition of A/RRecognition of A/RUncollectible A/RDirect Write-Off vs. Allowance MethodPercentage of Sales vs. ReceivablesPercentage of Sales ApproachExample 1aPercentage-of-Receivables ApproachExample 1bA/R Aging AdjustmentBad Debt ProblemBad Debt ProblemBad Debt ProblemBad Debt ProblemBad Debt ProblemExample 2aExample 2bEffect of Write-OffsReversal of Write-OffChapter 6 – Time Value of Money•Tell me what you did for partial credit–PV–FV–Pmt–n–i•Learn to use the calculator (Hint: efficiency!!)–Calculators – See syllabus for acceptable models and also refer to the “tutorials” linked to on the websiteCHAPTER 7CASH AND RECEIVABLESSommers – ACCT 3311Company writes a check for more than the amount in its cash account.Bank OverdraftsGenerally reported as a current liability.Offset against other cash accounts only when accounts are with the same bank.Reporting CashWritten promises to pay a sum of money on a specified future date.Receivables - Claims held against customers and others for money, goods, or services.Oral promises of the purchaser to pay for goods and services sold.Accounts ReceivableAccounts ReceivableNotes ReceivableNotes ReceivableAccounts ReceivableNontrade Receivables1. Advances to officers and employees.2. Advances to subsidiaries.3. Deposits to cover potential damages or losses.4. Deposits as a guarantee of performance or payment.5. Dividends and interest receivable.6. Claims against: Insurance companies for casualties sustained; defendants under suit; governmental bodies for tax refunds; common carriers for damaged or lost goods; creditors for returned, damaged, or lost goods; customers for returnable items (crates, containers, etc.).Accounts ReceivableReductions from the list priceNot recognized in the accounting recordsCustomers are billed net of discountsTrade DiscountsInducements for prompt paymentGross Method vs. Net MethodPayment terms are 2/10, n/30Cash (Sales) DiscountsBig Customers Are Slow to Pay – WSJ Jun 7, 2012Sales and Trade DiscountsTracy Company, a manufacturer of air conditioners, sold 100 units to Thomas Company on November 17, 2011. The units have a list price of $600 each, but Thomas was given a 30% trade discount. The terms of the sale were 2/10, n/30.Assume the gross method of accounting for cash discounts is used.Prepare the journal entries to record the sale on November 17 (ignore cost of goods) and collection on November 26, 2011.11/1711/26Sales and Trade DiscountsTracy Company, a manufacturer of air conditioners, sold 100 units to Thomas Company on November 17, 2011. The units have a list price of $600 each, but Thomas was given a 30% trade discount. The terms of the sale were 2/10, n/30.Assume the gross method of accounting for cash discounts is used.Prepare the journal entries to record the sale on November 17 (ignore cost of goods) and collection on December 15, 2011.11/1712/15Sales and Trade DiscountsTracy Company, a manufacturer of air conditioners, sold 100 units to Thomas Company on November 17, 2011. The units have a list price of $600 each, but Thomas was given a 30% trade discount. The terms of the sale were 2/10, n/30.Assume the net method of accounting for cash discounts is used.Prepare the journal entries to record the sale on November 17 (ignore cost of goods) and collection on November 26, 2011.11/1711/26Sales and Trade DiscountsTracy Company, a manufacturer of air conditioners, sold 100 units to Thomas Company on November 17, 2011. The units have a list price of $600 each, but Thomas was given a 30% trade discount. The terms of the sale were 2/10, n/30.Assume the net method of accounting for cash discounts is used.Prepare the journal entries to record the sale on November 17 (ignore cost of goods) and collection on December 15, 2011.11/1712/15A company should measure receivables in terms of their present value.In practice, companies ignore interest revenue related to accounts receivable because, for current assets, the amount of the discount is not usually material in relation to the net income for the period.Non-Recognition of InterestHow are these accounts presented on the Balance Sheet?Accounts ReceivableAllowance for Doubtful AccountsBeg. 500 25 Beg. End. 500 25 End. Recognition of A/RRecognition of A/RRecognition of A/RAn uncollectible account receivable is a loss of revenue that requires, through proper entry in the accounts, a decrease in the asset accounts receivable and a related decrease in income and stockholders’ equity.Uncollectible A/RAllowance MethodLosses are Estimated:Percentage-of-sales.Percentage-of-receivables.GAAP requires when material in amount.Methods of Accounting for Uncollectible AccountsDirect Write-OffTheoretically deficient:No matching.Receivable not stated at cash realizable value.Not GAAP when material in amount.Direct Write-Off vs. Allowance MethodEmphasis on the Income Statement relationshipsEmphasis on the Income Statement relationshipsEmphasis on the Balance Sheet relationshipsEmphasis on the Balance Sheet relationshipsPercentage of Sales vs. ReceivablesPercentage-of-Sales Approach Percentage based upon past experience and anticipate credit policy.Achieves proper matching of costs with revenues. Existing balance in Allowance account not considered.Percentage of Sales ApproachExample 1aWest Company had the following account balances at December 31, 2009, before recording bad debt expense for the year:•Accounts receivable $ 900,000•Allowance for bad debts (credit balance) 16,000•Credit sales for 2009 1,750,000West uses the following method of estimating bad debts for 2009:•Based on 2% of credit sales.What amount should West charge to bad debt expense at the end of 2009 under Percentage of Sales (income statement) method?Percentage-of-Receivables Approach Not matching.Reports receivables at realizable value.Companies may apply this method using one composite rate, oran aging schedule using different rates.Percentage-of-Receivables ApproachExample 1bWest Company had the following account balances at