ch06 Fundamental of Financial Accounting by Edmonds (4th Edition)

Fundamental
Financial Accounting
Concepts
Fourth Edition
by
Edmonds, McNair, Milam, Olds
PowerPoint® presentation by
J. Lawrence Bergin
7- 2
Chapter 7
Accounting for Accruals:

Advanced Topics-
Receivables and Payables
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

7- 3
Advanced topics include:
■ Accounting for bad

debts
■ Accounting for
interest-bearing notes Want to
learn some
and noninterest accounting?
bearing (discounted)
notes
■ Warranties

7- 4
Accounts and Notes Receivable
■ A/R are the expected future

cash receipts of a company.
They are typically small and are
expected to be received within
30 days.
■ N/R are used when longer
credit terms are necessary.
The promissory note specifies
the maturity date, the rate of
interest, and other credit terms.
7- 5
Value of Receivables
■ Receivables are reported at

their face value less an
allowance for accounts
which are likely to be
uncollectible.
■ The amount which is
actually expected to be
collected is called the net
realizable value (NRV).

7- 6
Allowance Method vs. Direct

Write-Off Method
■ GAAP requires that A/R be reported at
NRV. (A/R minus Allowance)
■ This is done using a valuation allowance:
An ALLOWANCE METHOD.
❐ % of Sales (or “Income Statement”) approach.
❐ Aging (or “Balance Sheet”) approach.
■ With the ALLOWANCE METHOD, an
estimate of the amount that will NOT be
collected is recorded in the same period
that the sales revenue is recorded. Thus,
the MATCHING PRINCIPLE is being followed.
7- 7
Allowance Method vs. Direct

Write-Off Method (continued)
■ The DIRECT WRITE-OFF method violates
GAAP because it does NOT follow the
MATCHING principle.
■ With the Direct Write-off method, no estimate
of bad debts is recorded at the time of the
sale. Rather, only after a specific account is deemed
“uncollectible” is a Bad Debt Expense recorded.
■ Since GAAP is only required if the amounts are
MATERIAL (significant), if the amount of uncollectible
A/R is immaterial the Direct Write-off method may be
used.
7- 8
Transaction Analysis:
■ Assume the following selected events

occurred at Cell-It. For each event:
❐ Determine how the accounting equation
was affected and fill in the horizontal
model. (Assume GAAP must be followed.)
❐ Determine the effect on the financial
statements.
❐ Record the event in t-accounts.

7- 9
The following selected events occurred

at Cell-It during 2004.
1. Provided services to customers for $10,000 on
account.
2. Collected $7,000 on account receivables.
3. At year-end it was estimated that 2% of year’s
credit sales will never be collected.
4. Jane Doe’s $50 account was written-off as
“uncollectible”.
5A&B. $50 cash is unexpectedly received from
Jane Doe.
7- 10
Record the five transactions in this

horizontal statements model.
Balance Sheet Inc. Statement Cashflow
Assets = Liab.+ Stk. Equity
Cash+ A/Rec .- Allow. = A/P + C.Stk.+ R.E. Rev. - Exp. = N. I. OA,IA,FA
1
2
3
4
5A
5B
Bal.

7- 11
1. Provided services to customers for

$10,000 on account.
1
2
3
4
5A
5B
Bal.

7- 12
1. Provided services to customers for

$10,000 on account.
1 10000 10000 10000 10000 n.a.
2
3
4
5A
5B
Bal.

7- 13
2. Collected $7,000 from account receivable.

1 10000 10000 10000 10000 n.a.
2
3
4
5A
5B
Bal.

7- 14
2. Collected $7,000 from account receivable.

1 10000 10000 10000 10000 n.a.
2 7000 (7000) 7000 OA
3
4
5A
5B
Bal.

7- 15
3. At year-end it was estimated that 2% of

the year’s credit sales will not be collected.
1 10000 10000 10000 10000 n.a.
2 7000 (7000) 7000 OA
3 200 (200) 200 (200) n.a.
4
5A 2% x $10,000 = $200
5B
Bal.

7- 16
3. At year-endAllowance for Doubtfulthat

it was estimated Accounts
2% ofis
a CONTRA- ASSET account. This
the year’s credit sales
account will not
balance be collected.
is INCREASING by
$200 causing TOTAL assets to
decrease.
1 10000 10000 10000 10000 n.a.
2 7000 (7000) 7000 OA
3 200 (200) 200 (200) n.a.
4
5A 2% x $10,000 = $200
5B
Bal.

7- 17
4. Jane Doe’s $50 account was written-off
as uncollectible.
1 10000 10000 10000 10000 n.a.
2 7000 (7000) 7000 OA
3 200 (200) 200 (200) n.a.
4
5A
5B
Bal.

7- 18
4. Jane Doe’s $50 account was written-off
as uncollectible.
1 10000 10000 10000 10000 n.a.
2 7000 (7000) 7000 OA
3 200 (200) 200 (200) n.a.
4 (50) (50) NO EXPENSE!
5A
5B
Bal.
Note: This is NOT the Direct Write-off method. Rather, it is a
write-off under the ALLOWANCE Method.
7- 19
Effect of Transaction 4 on
Acct. Rec. Net Realizable Value
Before Event 4 After Event 4

A/R $ A/R $
Allow. Allow.
N.R.V. $ N.R.V. $
Acme Collection
Agency

7- 20

A/R $3,000
Allow. (200)
N.R.V. $2,800
The check is Acme Collection
in the mail. Agency

7- 21

A/R $3,000 A/R $2,950
Allow. (200) Allow. (150)
N.R.V. $2,800 N.R.V. $2,800

7- 22

A/R $3,000 A/R $2,950
N.R.V. $2,800 N.R.V. $2,800
When using an ALLOWANCE method, the

Net Realizable Value of accounts receivable
does not change as a result of the write-off.
7- 23
Before recording Transaction #5:
What happens when an account that has been
written off later pays off his/her account?
① Reinstate the account by recording an

entry that undoes (reverses) the write-off:
❐ increase (debit) Accounts Receivable
❐ increase (credit) Allowance for
Doubtful Accounts (a contra-asset)

② Record the entry to show the cash
collection and A/Rec. reduction:
❐ increase (debit) Cash
❐ decrease (credit) Accounts
Receivable

7- 24
5. $50 cash was unexpectedly received

from Jane Doe. (5A=Reinstate, 5B=Collect)
1 10000 10000 10000 10000 n.a.
2 7000 (7000) 7000 OA
3 200 (200) 200 (200) n.a.
4 (50) (50) NO EXPENSE!
5A 50 50
5B
Bal.

7- 25
5. $50 cash was unexpectedly received

from Jane Doe. (5A=Reinstate, 5B=Collect)
1 10000 10000 10000 10000 n.a.
2 7000 (7000) 7000 OA
3 200 (200) 200 (200) n.a.
4 (50) (50) NO EXPENSE!
5A 50 50
5B 50 (50) 50
OA
Bal.

7- 26
Calculate all ending balances.

1 10000 10000 10000 10000 n.a.
2 7000 (7000) 7000 OA
3 200 (200) 200 (200) n.a.
4 (50) (50) NO EXPENSE!
5A 50 50
5B 50 (50) 50
OA
Bal. 7050 2950 200 9800 10000 200 9800 7050 bal.

7- 27
What’s the result?

After completing the horizontal model fill in below.
How did the previous transactions affect the financial statements?

20X1
How much Bad Debt Expense should

appear on the income statement?….
What is the A/R: NRV at year end?……
How much A/R should be added to the

other current assets on the year-end
balance sheet?………………………….

7- 28
Final Account Balances
Remember, the Bad Debt EXPENSE is accrued in the
year of sale, NOT when the account is written off!
1 10000 10000 10000 10000 n.a.
2 7000 (7000) 7000 OA
3 200 (200) 200 (200) n.a.
4 (50) (50) NO EXPENSE!
5A 50 50
5B 50 (50) 50
OA
Bal. 7050 2950 200 9800 10000 200 9800 7050 bal.
MATCHING PRINCIPLE
7- 29


20X1

appear on the income statement?…. $ 200
What is the A/R: NRV at year end?……

balance sheet?………………………….

7- 30
Final Account Balances

Net Realizable Value (NRV) = Acct.Rec. - Allowance

1 10000 10000 10000 10000 n.a.
2 7000 (7000) 7000 OA
3 200 (200) 200 (200) n.a.
4 (50) (50) NO EXPENSE!
5A 50 50
5B 50 (50) 50
OA
Bal. 7050 2950 200 9800 10000 200 9800 7050 bal.

7- 31


20X1

appear on the income statement?…. $ 200
What is the A/R: NRV at year end?…… $ 2,750

balance sheet?…………………………. $ 2,750

7- 32
Transactions Posted to T-accounts
Post the five transactions to these Ledger accounts.
Cash Acct. Rec. Allow. for D.A.
Service Revenue Bad Debt Exp.

Retain. Earn.

7- 33
Transaction Posted to T-accounts
1. Provided services to customers for $10,000
which will be collected at a later date.

Retain. Earn.

7- 34
1. Provided services to customers for $10,000
which will be collected at a later date.

(1) 10,000

10,000 (1)
Retain. Earn.

7- 35
2. Collected $7,000 of the Accounts Receivables.

(1) 10,000

10,000 (1)
Retain. Earn.

7- 36
2. Collected $7,000 of the Accounts Receivables.

(1) 10,000 7,000 (2)
(2) 7,000

10,000 (1)
Retain. Earn.

7- 37
3. At Yr. end it was estimated that 2% of the year’s

(1) 10,000 7,000 (2)
(2) 7,000

10,000 (1)
Retain. Earn.

7- 38
3. At Yr. end it was estimated that 2% of the year’s

(2) 7,000 (1) 10,000 7,000 (2) 200 (3)

10,000 (1) (3) 200
Retain. Earn.

7- 39
uncollectible.

(1) 10,000 7,000 (2) 200 (3)
(2) 7,000

10,000 (1) (3) 200
Retain. Earn.

7- 40
uncollectible.

(1) 10,000 7,000 (2) (4) 50 200 (3)
(2) 7,000
50 (4)

10,000 (1) (3) 200
Retain. Earn.

7- 41

A/R $3,000 A/R $2,950
N.R.V. $2,800 N.R.V. $2,800
Net realizable value of accounts

receivable did not change as a result of
the write-off.
7- 42
5a. Jane Doe’s account is reinstated.

(1) 10,000 7,000 (2) (4) 50 200 (3)
(2) 7,000
50 (4)

10,000 (1) (3) 200
Retain. Earn.

7- 43
5a. Jane Doe’s account is reinstated.

(1) 10,000 7,000 (2) (4) 50 200 (3)
(2) 7,000
50 (4) 50 (5a)
5a 50

10,000 (1) (3) 200
Retain. Earn.

7- 44
5b. Jane Doe’s account is collected.

(1) 10,000 7,000 (2) (4) 50 200 (3)
(2) 7,000
50 (4) 50 (5a)
5a 50

10,000 (1) (3) 200
Retain. Earn.

7- 45
5b. Jane Doe’s account is collected.

(1) 10,000 7,000 (2) (4) 50 200 (3)
(2) 7,000
50 (4) 50 (5a)
5b 50 5a 50 50 (5b)

10,000 (1) (3) 200
Retain. Earn.

7- 46
Closing entries at the end of Year 1.

(1) 10,000 7,000 (2) (4) 50 200 (3)
(2) 7,000
50 (4) 50 (5a)
5b 50 5a 50 50 (5b)

10,000 (1) (3) 200
Retain. Earn.

7- 47
Closing entries at the end of Year 1.

(1) 10,000 7,000 (2) (4) 50 200 (3)
(2) 7,000
50 (4) 50 (5a)
5b 50 5a 50 50 (5b)

10,000 (1) (3) 200
Retain. Earn.
(c) 10,000 200 (c) (c) 200 10,000 (c)

7- 48
Balances of all accounts after Year 1 closings.

(1) 10,000 7,000 (2) (4) 50 200 (3)
(2) 7,000
50 (4) 50 (5a)
5b 50 5a 50 50 (5b)
200 bal.
bal. 7,050 bal 2,950

10,000 (1) (3) 200
Retain. Earn.
(c) 10,000 200 (c) (c) 200 10,000 (c)
0 bal bal. 0 9,800 bal.
7- 49
Summary:
Accounting for Bad Debts
■ Allowance method
❐ GAAP
❐ Required if company has a
significant amount of bad
debts.
❐ Matches bad debt expense
(on the income statement) with
the sale.
❐ Requires an adjusting journal
entry before closing the books.

7- 50
Summary:
■ Direct Write-off method
❐ Violates GAAP (Matching)
❐ No estimates of bad debts are made,
so no allowance account is used.
❐ Used by small businesses with few
account receivables or large
business with few collection problems.
❐ No entry until time specific account is
deemed “bad” (uncollectible).

7- 51
Direct Write-off Method for

Entry to write off J. Jones’ $100

account:
Cash+Acct.Rec. = A/P +C. Stk.+Ret.E. Rev.- Exp. = N.I. Cashflow

7- 52


account:
Bad Debt Expense 100
Acct. Rec.-Jones 100

7- 53


account:
Bad Debt Expense 100
Acct. Rec.-Jones 100

(100) (100) +100 (100) n.a.
7- 54
Accrued Liabilities: Warranty Costs
■ Why give warranties?

■ When should expense be recognized?
We will
repair or
replace this
item...
Warranty

7- 55
Warranties…When to “expense”?
General Principle
■ According to GAAP, the entire
estimated warranty expense must
be recorded in the period the sale
is made, NOT in the period when
the actual warranty cost is paid.
(Matching principle is being followed.)
■ A warranty liability is recorded along with the
expense. This liability is REDUCED whenever cash is
paid to service a product still under warranty.

7- 56
Transaction Analysis
■ The following selected warranty

related events occurred at Cell-It.
For each event:
❐ Determine how the financial statements
are affected and fill in the horizontal model.
❐ Record each event directly in LEDGER
accounts.

7- 57
Transaction Analysis
■ The following selected events occurred at Cell-It.

(Perpetual inventory method is used.)
1. On 1/1/04 sold merchandise for $5,000 cash that
had originally cost $4,000. These goods were
sold with a two-year warranty.
2. Estimated that $100 of warranty cost will be
incurred over the next two years on the goods
sold in #1.
3. During 2005 a customer returned for repair, goods
still under warranty. The cost of the repair was $30
cash.
7- 58
Horizontal Model Transaction Analysis
Balance Sheet C=CofGS,W=War.exp.

Assets = Liab.+ Stk. Equity Inc. State.
Cashflow
Cash+ A/R + M.Inv. = W/P+C.Stk.+ R.E. Rev. - Exp. = N. I. OA,IA,FA
1a

7- 59
1a. Sold (on 1/1/04 with 2 yr. warranty) for $5,000 cash,
1b. merchandise that originally cost $4,000.
(perpetual inventory method is used.)
Cashflow
5000 5000 5000 5000 5000 OA
1a (4000) (4000) C 4000 (4000) n.a.
1b

7- 60
Before recording Transaction #2:

Warranties…When to “expense”
■ According to GAAP, the entire
estimated warranty expense must
be recorded in the period the sale
is made, NOT in the period when
the actual warranty cost is paid.
(Matching principle is being followed.)
■ A warranty liability is recorded along with the
expense. This liability is REDUCED whenever cash is
paid to service a product still under warranty.

7- 61
2. Estimated that $100 of warranty cost will be
incurred over the next two years on the
goods sold in #1.
Cashflow
5000 5000 5000 5000 5000 OA
1a (4000) (4000) C 4000 (4000) n.a.
1b
2 100 (100) w 100 (100) n.a.

7- 62
3. During 2005 a customer returned for repair
goods still under warranty. The cost of the
repair was $30 cash.
Cashflow
5000 5000 5000 5000 5000 OA
1a (4000) (4000) C 4000 (4000) n.a.
1b
2 100 (100) w 100 (100) n.a.
3 (30) (30) n.a. n.a. n.a. n.a. (30) OA

7- 63
SUMMARY QUESTIONS

Cashflow
5000 5000 5000 5000 5000 OA
1a (4000) (4000) C 4000 (4000) n.a.
1b
2 100 (100) w 100 (100) n.a.
3. (30) (30) n.a. n.a. n.a. n.a. (30) OA
Questions: 2004 2005
1. Warranty Expense for the year: $100
2. Warranty liability on year-end bal. sheet:
3. Cash outflow related to warranty work:
7- 64
SUMMARY QUESTIONS

Cashflow
5000 5000 5000 5000 5000 OA
1a (4000) (4000) C 4000 (4000) n.a.
1b
2 100 (100) w 100 (100) n.a.
3. (30) (30) n.a. n.a. n.a. n.a. (30) OA
2. Warranty liability on year-end bal. sheet: $100
3. Cash outflow related to warranty work:
7- 65
SUMMARY QUESTIONS

Cashflow
5000 5000 5000 5000 5000 OA
1a (4000) (4000) C 4000 (4000) n.a.
1b
2 100 (100) w 100 (100) n.a.
3. (30) (30) n.a. n.a. n.a. n.a. (30) OA
3. Cash outflow related to warranty work: $ 0
7- 66
SUMMARY QUESTIONS

Cashflow
5000 5000 5000 5000 5000 OA
1a (4000) (4000) C 4000 (4000) n.a.
1b
2 100 (100) w 100 (100) n.a.
3. (30) (30) n.a. n.a. n.a. n.a. (30) OA
1. Warranty Expense for the year: $100 $ 0
7- 67
SUMMARY QUESTIONS

Cashflow
5000 5000 5000 5000 5000 OA
1a (4000) (4000) C 4000 (4000) n.a.
1b
2 100 (100) w 100 (100) n.a.
3. (30) (30) n.a. n.a. n.a. n.a. (30) OA
70 balance
2. Warranty liability on year-end bal. sheet: $100 $ 70
7- 68
SUMMARY QUESTIONS

Cashflow
5000 5000 5000 5000 5000 OA
1a (4000) (4000) C 4000 (4000) n.a.
1b
2 100 (100) w 100 (100) n.a.
3. (30) (30) n.a. n.a. n.a. n.a. (30) OA
70 balance
2. Warranty liability on year-end bal. sheet: $100 $ 70
3. Cash outflow related to warranty work: $ 0 ($30)OA
7- 69
Transactions Posted to T-accounts
1. In 2004, sold for $5000 cash (1A), units costing $4000 (1B).
2. During 2004, estimated $100 warranty cost over two years.
3. During 2005, paid $30 cash to repair units sold in 2004.
Warranty
Cash Payable Sales
Bal. X 30 (3) (3) 30 100 (2) 5,000 (1A)
(1A) 5,000
Inventory Cost of Goods Sold

Bal. X 4,000 (1B) (1B) 4,000
Entries (not shown here) to close Sales, Warranty

Expense
Cost of Goods Sold, and Warranty
(2) 100
Expense to Retained Earnings would
have been made at the end of 2004.
7- 70
Notes Payable: Transaction

Analysis
■Assume the following selected

events occurred at Cell-It. For
each event:
❐Determine how the financial statements
are affected and fill in the
horizontal statements model.
❐Record the event in the Journal and
Post to the Ledger.

7- 71
Notes Payable: Transaction

Analysis
Assume the following events occurred at Cell-It.
1. On Oct. 1, 2004 Cell-It borrowed $8,000 cash by issuing a note
payable with a one-year term and an 8% stated interest rate. All
interest will be paid at maturity. This is an “interest bearing” note.
2. On Oct. 1, 2004 Cell-It issued an $8,000 face value, discounted note
payable with a one-year term and an 8% stated discount rate. This
is called a “Discounted” or “Non-interest bearing” note.
3. On Dec. 31, 2004 recorded interest related to the 8% interest-
bearing note issued on Oct. 1st (see #1).
4. On Dec. 31, 2004 recorded interest related to the 8% discounted
(non-interest bearing) note issued on Oct. 1st (see #2).
5. On Sept. 30, 2005 repaid the 8% non-discounted note payable (#1),
plus all interest.
6. On Sept. 30, 2005 repaid the 8% discounted note payable (#2).
7- 72
Horizontal Model Transaction Analysis
Balance Sheet
Assets = Liabilities + Equity Inc. State. Cashflow
Cash = I/P + N/P(1) + N/P(2) - Disc.+C.Stk+R.E. Rev.- Exp.= N. I. OA,IA,FA
1

7- 73
T1: On Oct. 1, 2004 Cell-it borrowed $8,000
at 8% for 1 year on an interest bearing
note. All interest to be paid at maturity.
Balance Sheet
1 8000 8000 8000 FA

7- 74
T2: On Oct. 1, 2004 Cell-it issued an $8,000 face
value, one year note payable discounted at
8%. (A noninterest bearing note.)
Balance Sheet
1 8000 8000 8000 FA
2 7360 8000 640 7360 FA
The interest is INCLUDED in the Note Payable. The

interest must be subtracted to calculate the amount of
cash the borrower receives on the issue date.
Note Payable $8000
Interest ($8000 x .08 x 12/12) (640) Since no time
has past, the
Cash to borrower $7360 $640 is NOT an
EXPENSE yet.
7- 75
T2: On Oct. 1, 2004 Cell-it issued an $8,000 face
value, one year note payable discounted at
8%. (A noninterest bearing note.)
Balance Sheet
1 8000 8000 8000 FA
2 7360 8000 640 7360 FA
Discount on Note Payable is a contra liability account.

Its balance is SUBTRACTED from the Note Payable
account to obtain the total liability for the Note.
Note Payable 8000
Less: Discount on N/P (640)
Total Note Liability 7360

7- 76
T3: On Dec. 31, 2004 recorded interest
related to the note in #1.
Oct. 1-Dec. 31 = 3 mo. (8000 x .08 x 3/12=160)
Balance Sheet
1 8000 8000 8000 FA
2 7360 8000 640 7360 FA
3 160 (160) 160 (160) n.a.

7- 77
T4: On Dec. 31, 2004 recorded interest related to

the discounted (noninterest bearing) note in #2.
Balance Sheet
1 8000 8000 8000 FA
2 7360 8000 640 7360 FA
3 160 (160) 160 (160) n.a.
4 (160) (160) 160 (160) n.a.

7- 78
T5: On Sept. 30, 2005 repaid the 8% note from
Transaction #1 and all its interest.
a= accrue the remaining interest. b= payment.
(Jan. 1-Sept. 30 = 9 mo. (8000 x .08 x 9/12= $480)
Balance Sheet
1 8000 8000 8000 FA
2 7360 8000 640 7360 FA
3 160 (160) 160 (160) n.a.
4 (160) (160) 160 (160) n.a.
5a 480 (480) 480 (480) n.a
b (8640) (640) (8000) (8000) FA
(640)
OA

7- 79
T6: On Sept. 30, 2005 repaid the 8%
discounted note payable from Trans. #2.
a= accrue the remaining interest. b= payment.
Balance Sheet
1 8000 8000 8000 FA
2 7360 8000 640 7360 FA
3 160 (160) 160 (160) n.a.
4 (160) (160) 160 (160) n.a.
5a 480 (480) 480 (480) n.a
b (8640) (640) (8000) (8000) FA
(640)
OA
6a (480) (480) 480 (480) n.a.
b (8000) (8000) (7360) FA
(640) OA
7- 80
Comparison of Journal Entries for

Interest Bearing and Discounted Notes
Contra-liabilities are increased by debiting.
NOTE PAYABLE (Interest bearing) DISCOUNTED NOTE PAYABLE
Date Accounts Debit Credit Date Accounts Debit Credit
2004 2004
Oct. 1 Cash 8000 Oct. 1 Cash 7360
Note Payable 8000 Discount on Note Payable 640
Borrowed $8000 at 8% for one year Note Payable 8000
Borrowed $8000 discounted at 8% for one year
Dec. 31 Interest Expense 160 Dec. 31 Interest Expense 160

Interest Payable 160 Discont on Note Payable 160
Accrued 3 mo. interest (8000x.08x3/12) Amortized 3 mo. interest from Discount to Int. Exp.
2005 2005
Sept. 30 Interest Expense 480 Sept. 30 Interest Expense 480
Interest Payable 480 Discont on Note Payable 480
Accrued 9 mo. interest (8000x.08x9/12) Amortized 9 mo. interest from Discount to Int. Exp.
Sept. 30 Interest Payable 640 Sept. 30 Note Payable 8000

Note Payable 8000 Cash 8000
Cash 8640 Paid note (which already includes iall nterest)
Paid note and all interest
7- 81
Comparison of Ledger Accounts for
Interest Bearing and Discounted Notes
INTEREST BEARING NOTE PAYABLE
2004 Exp.
Cash Note Payable Interest Expense
Beg. Bal. X 10/01/04 8000 12/31/04 160
10/01/04 8000 9/30/05 8000 09/30/05 480
8640 9/30/05 0
2005 Exp.
Interest Payable
160 12/31/04
480 09/30/05
9/30/05 640
0
NON-INTEREST BEARING (DISCOUNTED) NOTE PAYABLE

2004 Exp.
Cash Note Payable Interest Expense
Beg. Bal. X 10/01/04 8000 12/31/04 160
10/01/04 7360 9/30/05 8000 09/30/05 480
8000 9/30/05 0
2005 Exp.
Discount on Note Pay.
160 12/31/04
480 09/30/05
9/30/05 640
0
7- 82
Which loan was the better deal for Cell-It?

Calculate the EFFECTIVE INTEREST % of each.
Interest bearing note:
Effect on Financial Statements
With note #2 Cell-It only
Eff. Int. %State.
Inc. = $ Annual Interest
received
State. ÷ $7,360
of Ch. Cash
in Eq Rec’d.
from the
CashFlow
1. = $640
No effect lender, but
÷ still
No effect had+8,000
$8,000 to payFA
2. No effect $640 interest for the
No effect year.FA
+7,360
= 8.0% That’s why theEq,
effective
3. +Int. Exp, so - N.I. Decr. R/E, so Dec. n.a.
Non-Interest
4. +Int. Exp, sobearing interest
note
- N.I. Decr. sorate
Dec.isEq.
(Discounted
R/E, higher for
note):n.a.
Note
5. +Int. Exp, so - N.I. Decr. R/E,#2.
so Dec. Eq. -8000FA,-640 OA
Eff. Int. % = $ Annual Interest ÷ Cash Rec’d.
Note #1 (Interest bearing) is
= $640 a “better÷deal” $7,360
in this case.
McGraw-Hill/Irwin = 8.7% © The McGraw-Hill Companies, Inc., 2003
7- 83
Financial Statement Analysis
■ Accounts Receivable Turnover

Sales
Accts/Rec. =
Turnover $ Accounts Receivable*
Often the AVERAGE Accts. Rec. is used as the denominator.
Beginning Accts/Rec. + Ending Accts/Rec.
Ave. A/R =
2
This ratio is a measure of how
quickly receivables are collected.

7- 84
Accounts Receivable Ratios

Accts. Rec. Turnover: (A measure of how fast
receivables are collected. Higher is better.)
Sales $50,000
= = 10.0 times
Accounts. Receiv. $ 5,000
Average Days to collect A/R: (How many days
go by between a credit sale and the time it is collected?)
365 365
Accts. Rec. Turnover = 10.0 = 36.5 days
Generally, lower means better.
7- 85
Chapter 7
The End

ch06 Fundamental of Financial Accounting by Edmonds (4th Edition)

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ch06 Fundamental of Financial Accounting by Edmonds (4th Edition)

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Fundamental

Accounting for Accruals:

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

Advanced topics include:

■ Accounting for bad

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

Accounts and Notes Receivable

■ A/R are the expected future

■ Receivables are reported at

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

Allowance Method vs. Direct

Allowance Method vs. Direct

■ Assume the following selected events

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

The following selected events occurred

Record the five transactions in this

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

1. Provided services to customers for

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

1. Provided services to customers for

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

2. Collected $7,000 from account receivable.

Balance Sheet Inc. Statement Cashflow

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

2. Collected $7,000 from account receivable.

Balance Sheet Inc. Statement Cashflow

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

3. At year-end it was estimated that 2% of

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

3. At year-endAllowance for Doubtfulthat

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

Before Event 4 After Event 4

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

Before Event 4 After Event 4

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

Before Event 4 After Event 4

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

Before Event 4 After Event 4

When using an ALLOWANCE method, the

① Reinstate the account by recording an

❐ increase (credit) Allowance for

Doubtful Accounts (a contra-asset)

❐ decrease (credit) Accounts

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

5. $50 cash was unexpectedly received

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

5. $50 cash was unexpectedly received

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

Calculate all ending balances.

Balance Sheet Inc. Statement Cashflow

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

What’s the result?

How did the previous transactions affect the financial statements?

How much Bad Debt Expense should

What is the A/R: NRV at year end?……

How much A/R should be added to the

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003

What’s the result?

How did the previous transactions affect the financial statements?

How much Bad Debt Expense should

What is the A/R: NRV at year end?……