A/R AND DOUBTFULL ACCOUNTS Chapter 9 pages 421-441

1
A/R AND DOUBTFULL ACCOUNTS Chapter 9 pages
421-441

• What occurs when companies sell on credit?
• ?

2
Why do companies sell on credit?

• ADVANTAGES

• DISADVANTAGES

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Alternatives to Creditp.431-434

• Credit Card sales (be careful)
• Factoring (not the math kind!)
• Securitization (not G.W. Bush kind of security)

4
Direct Write-off method (p.424)

• When a debt is determined to be uncollectible,
  the loss is charged to a ___________________
• Example after 8 months, it is determined that
  your customer Dogbreath is not going to pay you?
  ________
• These companies value all outstanding A/R at its
  ____ _______ and only recognize an uncollectible
  account expense when the A/R proves
  uncollectible.
• Not GAAP acceptable

5
Allowance for doubtful Accounts

• Every time a business sells goods or services on
  credit, a portion of those sales will likely be
  uncollectible. That is the bill for the goods or
  services will not be paid. The loss of the A/R
  asset is an expense. The account is a
  contra-asset (anti-asset) termed__________________
  __________

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VALUING ACCOUNTS
RECEIVABLE

• To ensure that receivables are not ___________ on
  the balance sheet, they are stated at their net
  realizable value.
• ____________________ is the net amount expected
  to be received in cash and excludes amounts that
  the company estimates it _______ be able to
  collect.

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Allowance Method p. 425

• example stores like the Brick and Future Shop
  sell merchandise on credit. From past
  experience, the store knows that a small
  percentage of their A/R will be uncollectible.
  This uncollectible value is historically 2 of
  sales and is considered part of the cost of doing
  business. Journal entry for the uncollectible
  A/R on monthly sales of 150,000
• ? What does this entry do to the Income Stmt?

8
THE BRICK Balance Sheet (partial)

• Current assets
• Cash 14,800
• Accounts receivable 150,000
• Less Allowance for doubtful accounts 3,000
  147,000

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Write-off of uncollectibles p. 425

• When A/R from a specific customer is determined
  to be uncollectible, it is no longer an asset and
  should be written off or ____________________.
• Example When Eatons declared bankruptcy, an
  A/R from Eatons valued at 20,000 becomes
  uncollectible.

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Recovery of a write-off / bad debt p. 427(we can
always hope)

• Occasionally a receivable written off as
  worthless will later be collected or partially
  collected.
• Example Following liquidation of all assets, the
  trustee of Eatons pays 50 cents on the dollar to
  the unsecured creditors. (you get 50 of your
  A/R)

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BASES USED FOR THE ALLOWANCE METHOD p. 427

• 1. Percentage of sales
• Expected bad debt losses are determined by
  applying a ________________of the current period.
• This basis better matches _________
  _______________

• 2. Percentage of receivables
• Expected bad debt losses are determined by
  applying a _________________
• The ______ age of AR the larger the percent!

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Adjusting the Allowance for doubtful accounts at
period end (p. 429)

• If the balance in the allowance for doubtful
  accounts proves to be less than the actual
  uncollectible A/R then the balance in the
  allowance account must be increased
• Example Brick booked 3000 bad debt expense for
  non-collectable AR for Q1 however, more A/R is
  aging due to the poor economy, and bad debt
  expense must be adjusted