Recording and Adjusting Receivables. KUMC: We support your infinite possibilities!

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1 Recording and Adjusting Receivables KUMC: We support your infinite possibilities!

2 Ditzler Company, a construction supply company, uses the allowance method of accounting for uncollectible accounts receivable. Selected transactions completed by Ditzler Company are as follows:

3 Feb 1- Sold merchandise on account to Ames Co., $8,000. The cost of the merchandise sold was $4,500. Feb 1 Accounts Receivable Ames Co. 8, Sales 8, Cost of Merchandise Sold 4, Merchandise Inventory 4, Note: The merchandise is sold on account. This means Accounts Receivable. The customer did not pay for the merchandise.

4 Mar 15 - Accepted a 60-day, 12 % note for $8,000 from Ames Co. on account Mar 15 Notes Receivable Ames Co. 8, Accounts Receivable Ames Co. 8, Note: Remember, only the note is recorded here. The interest is not recorded until DUE in 60 days. Also, this is the Accounts Receivable for Feb 1. Thus, it is no longer Accounts Receivable. The Accounts Receivable needs to be adjusted to zero and the Notes Receivable needs to be recorded.

5 Apr 9 Wrote off a $2,500 account from Dorset Co. as uncollectable Apr 9 Allowance for Doubtful Accounts 2, Accounts Receivable Dorset Co. 2, Note: The words wrote off mean a bad debt. The company will not receive this money.

6 Apr 21 Loaned $7,500 cash to Jill Klein, receiving a 90-day, 14 % note. Apr 21 Notes Receivable Jill Klein 7, Cash 7, Note: This transaction is a Note Receivable.

7 May 14 Received the interest due from Ames Co. and a new 90-day, 14 % note as a renewal of the loan. (Record both the debit and the credit to the notes receivable account) May 14 Notes receivable Ames Co. 8, Cash Notes Receivable Ames Co. 8, Interest Revenue Note: This note replaces the note signed on Mar 15. The interest of 12% is due and needs to be recorded. The 12% interest would be $160. The $8,000 note is multiplied by 12% (.12). But the $960 answer is the interest for a year. You only need 2 months for the answer. So, divide the $960 by 12 (to get 1 month) and then multiply by 2. [($8,000 X.12) = $960/12 =$80 X 2 = $160]. The new 90 day note has interest of 14% which will be computed and recorded in 90 days.

8 June 13 Reinstated the account of Dorset Co., written off on April 9, and received $2,500 in full payment. June 13 Accounts Receivable Dorset Co. 2, Allowance for Doubtful Accounts 2, Cash 2, Accounts Receivable Dorset Co. 2, Note: The bad debt that was recorded on Apr 9 is no longer bad. So you first need to reverse the journal entry made on Apr 9 and then record the payment. This keeps the books correct.

9 July 20 Jill Klein dishonored her note. July 20 Accounts Receivable Jill Klein Notes Receivable Jill Klein 7, Interest Revenue Note: When a note is not paid on time it is dishonored and no longer is a note. So the interest for the note is computed and recorded as an Accounts Receivable, In case you forgot how to figure the interest on a note, the interest on Jill s 90-day note would be computed as follows: The 14% interest would be $ The $7,500 note is multiplied by 14% (.14). But the $1050 answer is the interest for a full year. You only need 3 months for the answer. So, divide the $1050 by 12 (to get 1 month) and then multiply by 3. [($8,000 X.14) = $1050/12 =$87.50 X 3 = $262.50].

10 Aug 12 Received from Ames Co. the amount due on its note of May 14. Aug 12 Cash Notes receivable Ames Co. 8, Interest Revenue Note: Do you remember how to figure the interest now? If not, go back to slides for July 20 and/or May 14 for review.

11 Aug 19 Received from Jill Klein the amount owed on the dishonored note, plus interest for 30 days at 15%, computed on the maturity value of the note. Aug 19 Cash Accounts Receivable Jill Klein 7, Interest Revenue ($7, * 15% * 30/360) Note: Did you get the correct interest for this one? If not, review the previous interest computations. Remember, practice makes perfect.

12 Dec 16 Accepted a 60-day, 12 % note for $12,000 from Global Company on account. Dec 16 Notes Receivable Global Company 12, Accounts Receivable Global Company 12, Note: Did you remember to record just the note and not the interest? Why do you not record the interest at this time?

13 Dec 31 It is estimated that 3% of the credit sales of $1,375,000 for the year ended December 31 st will be uncollectible. Dec 31 Bad Debt Expense 41, Allowance for Doubtful Accounts Uncollectable accounts estimate ($1,375,000 * 3%) 41, Note: Uncollectible receivable amounts are only computed on credit sales. Cash sales (if there are any) are subtracted before multiplying by the % rate. Did you remember to change your 3% to.03?

14 Feb 1 Accounts Receivable Ames Co. 8, Sales 8, Cost of Merchandise Sold 4, Merchandise Inventory 4, Mar 15 Notes Receivable Ames Co. 8, Accounts Receivable Ames Co. 8, Apr 9 Allowance for Doubtful Accounts 2, Accounts Receivable Dorset Co. 2, Apr 21 Notes Receivable Jill Klein 7, Cash 7, May 14 Notes receivable Ames Co. 8, Cash Notes Receivable Ames Co. 8, Interest Revenue June 13 Accounts Receivable Dorset Co. 2, Allowance for Doubtful Accounts 2, Cash 2, Accounts Receivable Dorset Co. 2, July 20 Accounts Receivable Jill Klein Notes Receivable Jill Klein 7, Interest Revenue Aug 12 Cash Notes receivable Ames Co. 8, Interest Revenue Aug 19 Cash Accounts Receivable Jill Klein 7, Interest Revenue ($7, * 15% * 30/360) Dec 16 Notes Receivable Global Company 12, Accounts Receivable Global Company 12, Dec 31 Bad Debt Expense 41, Allowance for Doubtful Accounts 41, Uncollectable accounts estimate ($1,375,000 * 3%)

15 Journalize the adjusting entry to record the accrued interest on December 31 on the Global Company note. Dec 31 Interest Receivable Interest Revenue Accrued interest ($12,000 * 12% * 15/360)

16 Math Center Services Live Tutoring: Q&A and Project Review Services: Students may submit projects (KU122, MM255 and MM207) and questions 24 hours a day 7 days a week. Tutors will respond to questions. to: Math Center Home:

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