Chapter 8: account receivable

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1 Chapter 8: account receivable Three accounting issues associated with accounts receivable are: 1. Recognizing accounts receivable 2. Valuing accounts receivable 3. Disposing of accounts receivable Recognizing accounts receivable a service organization records a receivable when it provides service on account. A merchandise records accounts receivable at the point of sale of merchandise on account. Valuing account receivable required if there is any ending balance in accounts receivable at the end of the period - 3 things to remember 1. Allowance method for uncollectible accounts Bad Debt Expense Dr. xx Allowance for Doubtful Accounts Cr. xx 2. Recording the write-off of an uncollectible accounts Allowance for Doubtful Accounts Accounts Receivable-(company) Dr. xx Cr. xx 3. Recovery of an uncollectible account Accounts Receivable-(company) Allowance for Doubtful Accounts Dr. xx Cr. Xx Accounts Receivable-(company) Dr. xx Cr. xx

2 Disposing of account receivable companies collect accounts receivable in cash and remove the receivables from the books. However, as a credit sales and receivable have grown in significance Notes Receivable Determining the maturity date expressed in term of month & date. Computing Interest = Disposing of notes receivable notes may be held to their maturity date, maker and payee must make an appropriate adjustment. The holder of the note speeds up the conversion to cash by selling the notes receivable - Honor of notes receivable maker pays in full at its maturity - Dishonor of notes receivable not paid in full at maturity and no longer negotiable. Write off the face value of the note by debiting allowance for doubtful accounts.

3 Chapter 9: Plant Assets, Natural Resources and Intangible Assets Plant Assets Disposal RETIREMENT OF PLANT ASSETS Accumulated Depreciation Equipment Equipment If a company retires a plant asset before it is fully depreciated, and no cash is received for scrap or residual value, a loss on disposal occurs. Accumulated Depreciation Equipment Loss and Disposal of Plant Assets Equipment SALE OF PLANT ASSETS GAIN ON SALE Depreciation Expense Accumulated Depreciation Equipment Accumulated Depreciation Equipment Equipment

4 Gain on Disposal of Plant Assets LOSS ON SALE Accumulated Depreciation Equipment Loss on Disposal of Plant Assets Equipment Extractable Natural Resources Total Cost minus Residual Value Total Estimated Units = Depletion Cost per Unit Depletion Cost per Unit Number of Units Extracted and Sold = Annual Depletion Expense Depletion Expense Accumulated Depletion Intangible Assets Amortization Expense Patents RESEARCH AND DEVELOPMENT COSTS Research Expense

5 Development Expense Development Costs Exchange of Plant Assets LOSS TREATMENT Equipment (new) Accumulated Depreciation Equipment Loss on Disposal of Plant Assets Equipment (old) GAIN TREATMENT Equipment (new) Accumulated Depreciation Equipment Equipment (old) Gain on Disposal of Plant Assets

6 Chapter 10: Liabilities Bond Issued a.) AT FACE VALUE (at 100) b.) AT A DISCOUNT (at<100 ; ex. 99,98,.etc.) Discount = 1% of face value (if at 99) Issued price = 99% of face value c.) AT A PREMIUM (at>100 ; ex. 101,102,.etc.) Discount = 2% of face value (if at 102) Issued price = 102% of face value JOURNAL ENTRY TO PREPARE AT ISSUED DATE Bonds Payable At Interest Payment Date (6 months after issued Date) a.) FOR MONDS ISSUED AT FACE VALUE Bond Interest Expense ( % x F.V. x 6/12)

7 b.) FOR BONDS ISSUED AT A DISCOUNT Bond Interest Expense (A+C) Bonds Payable (C) (6 months interest) (A) c.) FOR BONDS ISSUED AT A PREMIUM Bond Interest Expense (A-C) Bonds Payable (6 months) (A) At the End of Accounting Period (usually Dec.31) a.) FOR BONDS ISSUED AT FACE VALUE Bond Interest Expense Bond Interest Payable b.) FOR BONDS ISSUED AT A DISCOUNT Bond Interest Expense (A+C) Bonds Payable (C) Bond Interest Payable (A)

8 c.) FOR BONDS ISSUED AT A PREMIUM Bond Interest Expense (A-C) Bonds Payable (C) Bond Interest Payable (A) Redeeming the bonds At Maturity Date Bonds Payable Account has balance = Face Value Paid = Face Value NO GAIN / LOSS on bonds redemption Journal Entry Bonds Payable (Face Value) (Face Value) Before Maturity Date Journal Entry There may be GAIN / LOSS on bonds redemption Bonds Payable Loss on bonds redemption

9 LOSS = Paid > Carrying Value (Liability at date of redemption) Carrying Value = Issued Price Amortized Premium OR OR Carrying Value = Issued Price + Amortized Discount Journal Entry Bonds Payable (Carrying Value) ( Paid) Gain on Bonds Redemption GAIN = Paid < Carrying Value (Liability)

10 Special journal 1. Sales journal for merchandise sold on credit 2. Purchase journal for merchandise purchased on credit 3. receipts journal all receipts of cash 4. payments journal all payments of cash Other transactions are recorded in the general journal that is purchase & return of ordinary assets, purchase return of merchandise purchased on account and sales returns of merchandise sold on account Example Jan 3 purchased merchandise on account from wortham co. $ purchased supplies for cash 4 sold merchandise on account to milam $5250, invoice no.371, 1/10,n/30 5 returned $300 worth of damaged goods from wortham co. On jan 3 6 made cash sales for the week totaling $ purchased merchandise on account from noyes co. $ sold merchandise on account to conner $6400, invoice no.372, 1/10,n/30 13 paid in full wortham co. On account less a 2% discount 13 made cash sales for the week totaling $ purchased equipment on account from murphy co. $5500 The cost of all merchandise sold was 60% of the sales price

11 Sales journal Date Account debited Invoice no. Ref A/r (dr) Sales (cr) Cost of goods sold (dr) Inventory (cr) Jan 4 Milam co Connor corp $11650 $6990 (112,401) (505,120) Purchase journal Date Account credited Terms Ref Inventory (dr) A/p (cr) Jan 3 Wortham co Noyes co $14500 (120,201) General journal Date Account title Ref Debit Credit Jan 5 A/p inventory Equipment a/p

12 Case receipts journal Date Account credited Ref Sale dis. A/R Sales Other cr. Cost of good sold Inventory Jan6 Sales Sales Total $9410 $9410 $5646 (101) (414) (112) (401) (x) (505,120) payments journal Date Chk no Account debited Ref Other dr. A/p Inventory Jan4 Supplies Wortham co Total $80 $10000 $200 $9880 (x) (201) (120) (101)

13 Accounting for Ordinary Share Issues Chapter 11: Corporations ISSUING PAR VALUE ORDINARY SHARES FOR CASH Share Capital Ordinary Share Capital Ordinary Share Premium Ordinary ISSUING NO-PAR ORDINARY SHARES FOR CASH For example, assume that instead of 1 par value shares, Hydro-Slide, Inc. has 5 stated value no-par shares and company issues 5,000 shares at 8 per share for cash. 40,000 Share Capital Ordinary 25,000 Share Premium Ordinary 15,000 What happens when no-par shares do not have a stated value? It records the issuance of the 5,000 shares at 8 per share for cash as follows.

14 40,000 Share Capital Ordinary 40,000 ISSUING ORDINARY SHARES FOR SERVICES OR NON-CASH ASSETS Organization Expense Share Capital Ordinary Share Premium Ordinary Land Share Capital Original Share Premium Ordinary Accounting for Treasury Shares PURCHASE OF TREASURY SHARES Treasury DISPOSAL OF TREASURY SHARES SALE OF TREASURY SHARES ABOVE COST Treasury Shares

15 Share Premium Treasury SALE OF TREASURY SHARES BELOW COST Share Premium Treasury Treasury Shares Accounting for Preference Share Share Capital Preference Share Premium Preference

16 Chapter 12: Investments 1. Investment in bond (Debt Investments) 1. Purchase of bonds Debt Investments Dr xx 2. Receive interest on interest due Dr xx Interest Revenue(%FaceV.x6/12) 3. Record accrued interest at end of accounting period Interest Receivable Dr xx Interest Revenue 4. On receiving cash on accrued interest on the ext interest Dr xx Interest Receivable (last year s) Interest Revenue (present year) 5. Sale of bond (selling price) Dr xx Debt Investment (cost) Gain on sale of debt investment (#5 If loss, Debit lost on sale of debt investment) Cr xx Cr xx Cr xx Cr xx Cr xx Cr xx Cr xx

17 2. Investment in stock journal entries Transactions Cost Method Investors ownership interest 0-20% Equity Method Investors ownership interest 20-50% 1.Purchase Stock Share Investments Share Investments (purchase price) (purchase price) 2.Issuing Co. Report net income No entry Share Investments Revenue from share investment 3.Receive Dividend Revenue Share Investments 4.Sale of stock (selling price) (selling price) Share Investments (cost) Share Investments (cost) Gain on sale of share investments (#4 If loss, Debit lost on sale of debt investment) Type of securities 1.Trading securities - Cost less than Fair Value Fair Value Adjustment-Trading Unrealized gain-income - Cost more than Fair Value Unrealized loss-income Fair Value Adjustment-Trading Gain on sale of share investments Dr. xx Dr. xx Cr. xx Cr. xx

18 In St. of financial position fair value of trading securities is shown under current assets. Unrealized gain/loss is shown in the income statement under other income/other expense 3. Non-trading securities (Share only) - Cost less than Fair Value Fair Value Adjustment-Non-Trading Unrealized gain/loss-equity Dr. xx Cr. xx - Cost more than Fair Value Unrealized loss/gain-equity Dr. xx Fair Value Adjustment-Non-Trading Cr. xx

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