ACCT 215 Autumn 2013 Review from Peter s Slides Incentives Bonuses Managerial bonuses are often linked to net income Pay for Performance May have incentives to make net income look higher or lower Taxes Taxes reduce net income If managers want the company to pay less in taxes they may have incentives to make net income look lower Net Sales Credit Card discount Credit cards allow customers to make purchases but pay later The credit card company charges a fee for the service they provide Contra account Credit card discount is used Trade discounts Represent a reduction in the listed price of a product or service Enter into the calculation of GROSS sales Typically noted but they do NOT require an adjusting journal entry No contra account is used Sales discount represents a reduction in the amount a credit customer has to pay if the customer pays by a specific date E g 2 10 n 30 Contra account Sales Discount is used Sales returns allowances Returns are products returned by customers Allowances are post sale adjustments to the original price Contra account Sales Returns is used Net Receivables Accounts receivable We report accounts receivable at its net realizable value which is the amount of cash the firm expects to collect Two methods for dealing with uncollectible accounts a Specific write off method rare b Allowance method common Allowance for bad debts allowance method Two methods used to estimate uncollectible accounts a Percent of credit sales b Aging of accounts receivable Contra A R account used to reduce A R to its net realizable value Value of uncollectible accounts debited to Bad Debt Expense Journal entries associated with the allowance method a Recording the period s estimate of uncollectible accounts b Writing off specific accounts when they go bad c Collecting a previously written off account Recovery 1 ACCT 215 Autumn 2013 SALES RETURNS Data Recovery Services DRS specializes in data recovery from crashed hard drives The price charged varies on the extent of damage and the amount of data being recovered DRS offers a 20 discount to students and faculty at educational institutions Consider the following transactions during the month of June June 10 June 12 June 13 June 16 June 19 June 20 June 30 Rashid s hard drive crashes and he sends it to DRS After initial evaluation DRS e mails Rashid to let him know that full data recovery will cost 2 000 Rashid informs DRS that he would like them to recover the data that he is a student at UCLA qualifying him for a 20 educational discount and reducing the cost by 400 2 000 X 20 DRS performs the work and claims to be successful in recovering all the data DRS asks Rashid to pay within 30 days of today s date offering a 3 discount for payment within 10 days What Rashid receives the hard drive he notices that DRS did not successfully recover all data Approximately 25 of the data has not been recovered and he informs DRS DRS reduces the amount Rashid owes by 25 Rashid pays the amount owed Required 1 Record the necessary transactions for DRS on each date 2 Calculate the net sales 3 Show how net sales would be presented in the income statement 4 Calculate net sales if Rashid had paid his bill on June 25 2 ACCT 215 Autumn 2013 ALLOWANCE FOR BAD DEBTS Facial cosmetics provides plastic surgery primarily to hide the appearance of the appearance of unwanted scars and other blemishes During 2010 the company provides services of 400 000 on account Of this amount 50 000 remains uncollected at the end of the year An aging schedule as of December 31 2010 is provided below Age Group Not yet due 0 30 days past due 31 60 days past due More than 60 days past due Total Amount Receivable 30 000 10 000 7 000 3 000 50 000 Estimated Uncollectible 2 5 10 20 Required 1 Calculate the allowance for uncollectible accounts 2 Record the December 31 2010 adjusting entry assuming the balances of the allowance account before adjusting entries is 300 debit 3 On April 3 2011 a customer s account balance of 400 is written off as uncollectible Record the write off 4 On July 17 2011 the customer whose account was written off in Requirement 3 unexpectedly pays 100 of the amount but does not expect to pay any additional amounts Record the cash collection 3 ACCT 215 Autumn 2013 SALES RETURNS Requirement 1 June 10 Debit Credit No entry June 12 No entry June 13 No entry June 16 Accounts Receivable Service Revenue Provide services of 2 000 on account with a 20 discount 1 600 1 600 June 19 No entry June 20 Sales Allowances Returns Accounts Receivable Sales allowance for services on account 400 400 June 30 Cash 1 200 Accounts Receivable Receive cash on account 1 200 Requirement 2 Total Service Revenues Less Sales Allowances Returns Net Sales 1 600 400 1 200 4 ACCT 215 Autumn 2013 Requirement 3 Data Recovery Services Partial Income Statement Total Service Revenues Less Sales Allowances Returns 1 600 400 Net Sales 1 200 Requirement 4 June 25 Cash Sales Discount Accounts Receivable Receive cash on account with 3 sales discount 1 164 36 1 200 Sales discount 1 200 x 3 Total Service Revenues Less Sales Allowances Returns Sales Discount Net Sales 1 600 400 36 1 164 5 ACCT 215 Autumn 2013 ALLOWANCE FOR BAD DEBTS Requirement 1 Age group Not yet due 0 30 days past due 31 60 days past due More than 60 days past due Total Requirement 2 December 31 2010 Bad Debt Expense Allowance for Bad Debts Estimate future bad debts 2 400 300 2 700 Amount receivable 30 000 10 000 7 000 3 000 50 000 Estimated percent uncollectible 2 5 10 20 Debit 2 700 Estimated amount uncollectible 600 500 700 600 2 400 Credit 2 700 Requirement 3 April 3 2011 Allowance for Bad Debts Accounts Receivable Write off actual bad debts 400 400 Requirement 4 July 17 2011 Accounts Receivable 100 Allowance for Bad Debts Re establish portion of account previously written off July 17 2011 Cash Accounts Receivable Receive cash on account 100 100 100 6