Chapter 8 example #25178

Bad Debts Expense Bad Debts Expense is a temporary (i.e., nominal) account and is closed at the end of the fiscal period, while Accounts Receivable, Allowance for Doubtful Accounts, and Cash are permanent (i.e., real) accounts. They remain open at the end of the fiscal period with the year-end ending balance becoming the next year's beginning balance.

A note receivable

Allowance for Doubtful Accounts 100 Accounts Receivable 100

Allowing customers to settle their accounts by issuing notes

Contact references provided by the customer, such as banks and other suppliers

Accounts receivable - ending balance in the allowance for doubtful accounts

Provide the customer a lengthy payment period

At the point of sale of the merchandise on account.

Accounts receivable x %

Face value plus 92 days of interest

when the party making the note is a high risk creditor.

Allowance for Doubtful Accounts is shown as a deduction from Accounts Receivable on the balance sheet.

Determining who gets credit and who does not get credit Managing accounts receivable involves five steps. These include (1) determining to whom to extend credit, (2) establish a payment period, (3) monitor collections, (4) evaluate the liquidity of receivables, and (5) accelerate cash receipts from receivables when necessary. The one that is considered the most critical is deciding on who gets credit and who doesn't.

A promissory note is not a negotiable instrument.

$28,000 After the write-offs are recorded (but before the year-end adjusting entry), Allowance for Doubtful Accounts will have a debit balance of $4,000 ($21,000 credit beginning balance combined with a $25,000 debit for the write-offs). Using the percentage of receivables basis, the balance in the allowance account needs to be a credit balance of $24,000 (i.e., $300,000 x 8%). In order to have an ending balance of $24,000, a credit entry of $28,000 must be made to Allowance for Doubtful Accounts. Thus, the amount of the adjusting entry must be $28,000.

Accounts receivable + notes receivable (from customer)

Accounts Receivable; Allowance for Doubtful Accounts

Determining the recipient The five basic issues in accounting for notes receivable are 1) determining the maturity date, 2) computing interest, 3)recognizing notes receivable, 4) valuing notes receivable, and 5) disposing of notes receivable.

A debit to Notes Receivable for $4,000 and a credit to Accounts Receivable for $4,000

The retailer receives more cash when customers use national credit cards than when customers pay with cash instead of credit cards.

Debit to Accounts Receivable for $21,700 The journal entry will decrease Notes Receivable for the value of the note, recognize interest revenue for the term of the note, and increase the Accounts Receivable account for the total owed by the maker including principal and interest. The journal entry is: Debit: Accounts Receivable 21,700 Credit: Notes Receivable 21,000 Credit: Interest Revenue 700 (i.e., $21,000 x 10% x 120/360 = $700)

Cross-indexing journal-entries with the postings to the ledger

Two credits and one debit

a debit to Notes Receivable for $4,000 and a credit to Accounts Receivable for $4,000.

Credit balance of $21,000 The ending balance required in the allowance account (i.e., Allowance for Doubtful Accounts) needs to be equal to 7% times $300,000, or $21,000.

Debit Cash for $20,400, credit Notes Receivable for $20,000, and credit Interest Revenue for $400 When Schmidt receives payment, it will increase cash, reduce the notes receivable account, and recognize interest earned for the term of the note. If the note is described in terms of days (e.g., 90-day note), count the number of days of accrued interest. If the note is described in terms of months (e.g., 3-month note), count the number of months of accrued interest. When days are used, use 360 as the number of days in a given year—this is an old rule of thumb that simplifies the math and earns more interest for the creditor. Interest = $20,000 × 8% × 90/360 = $400. Total cash received = $20,000 + 400 = $20,400.

Writing off receivables

Debit to Cash for $6,650 The fee is 5% times $7,000, or $350. Kensington will receive the difference between the face amount of the receivables and the fee, or $6,650. The journal entry includes a debit to cash for $6,650, a debit to Service Charge Expense for $350, and credit to sales for $7,000.

selling accounts receivable at a discount to another party.