Chapter 2 Accounting Systems for Recording Business Transactions by lanyuehua

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									Transparency Master 8-1


 INTERNAL CONTROLS—RECEIVABLES
                     Separation of Duties
The following tasks should be separated (performed by two
different people):
       Task                               Reason
1. Accounting for              1. The accountant could steal
   receivables                    cash collected from custo-
   and collecting                 mers and hide the theft by
   receivables.                   modifying the accounting
                                  records.
2. Accounting for              2. The accountant might refrain
   receivables and                from writing off uncollectible
   granting credit.               accounts because that might
                                  point to poor judgment in
                                  granting credit.
3. Granting credit             3. A salesperson might over-
   and sales.                     look poor credit risks in an
                                  eagerness to get a sale (and
                                  commission).
4. Accounting for the          4. Employees would be unable
   accounts receivable            to check for errors by com-
   subsidiary ledger and          paring the total of the cus-
   the general ledger.            tomer accounts in the subsi-
                                  diary ledger to the balance
                                  of accounts receivable in the
                                  general ledger.
In summary, the operations of selling, credit approval, collec-
tion of accounts receivable, and accounting for accounts re-
ceivable should be performed by different people.
Transparency Master 8-2



               WRITING EXERCISE
Hartwick's of New England is a small custom
clothier, specializing in men's and women's ca-
reer apparel. A customer may apply for an ac-
count at Hartwick's by filling out a brief credit
application and leaving it with a sales clerk. The
store's owner, Jason Hartwick, reviews these
applications and approves all new accounts.
Shirley Singleton is responsible for receiving
and processing accounts receivable. She opens
the mail, records all receipts in the appropriate
customer's account, and prepares the deposit
slip for the checks received. Mr. Hartwick actual-
ly makes the bank deposit in order to keep close
tabs on the cash coming into the business.
Whenever a customer has a question about his
or her account, the customer is referred to Mrs.
Singleton, because she is most familiar with the
customer accounts.
Are there any internal control weaknesses in the
assignment of responsibilities related to ac-
counts receivable? If so, please describe them.
Transparency Master 8-3


        JOURNAL ENTRIES FOR
      UNCOLLECTIBLE ACCOUNTS—
         ALLOWANCE METHOD
Blocker Company estimates its uncollectible accounts based on an
analysis of receivables. On December 31, a junior accountant pre-
pared the following aging schedule for the company's $88,000 in out-
standing receivables.
                                                       Estimated
                                             Uncollectible Accounts
       Age Interval                       Amount      %     Amount
Not due ............................................   $58,650     2%        $1,173
1–30 days past due ........................             13,220     4%           529
31–60 days past due ......................               8,930    20%         1,786
61–90 days past due ......................               4,000    30%         1,200
Over 90 days past due ...................                3,200    50%         1,600
                                                       $88,000               $6,288
The Allowance for Doubtful Accounts currently has a $210 debit bal-
ance.
1.   Prepare the adjusting entry to record the company's estimate of
     uncollectible accounts.
2.   Prepare the journal entry to write off the following accounts:
             T. Donaldson ..............................................       $ 700
             J. Kyle .........................................................    450
             D. Mize .........................................................  1,000
3.   Prepare the journal entry to record receipt of the $450 owed by J.
     Kyle.
4.   Write an answer to the following question: What circumstances
     would cause the Allowance for Doubtful Accounts to have a debit
     balance prior to adjustment?
Transparency Master 8-4


        JOURNAL ENTRIES FOR
      UNCOLLECTIBLE ACCOUNTS—
         ALLOWANCE METHOD
                                            Solution
1.   Prepare the adjusting entry to record the company's estimate of
     uncollectible accounts.

     Uncollectible Accounts Expense ..........................                       6,498
       Allowance for Doubtful Accounts ....................                                  6,498

2.   Prepare the journal entry to write off the following accounts:
     T. Donaldson, $700; J. Kyle, $450; D. Mize, $1,000

     Allowance for Doubtful Accounts .........................                       2,150
       Accounts Receivable—T. Donaldson................                                        700
       Accounts Receivable—J. Kyle...........................                                  450
       Accounts Receivable—D. Mize ..........................                                1,000

3.   Prepare the journal entry to record receipt of the $450 owed by J.
     Kyle.

     Accounts Receivable—J. Kyle ..............................                       450
      Allowance for Doubtful Accounts .....................                                   450
     Cash ........................................................................    450
      Accounts Receivable—J. Kyle...........................                                  450

4.   Write an answer to the following question: What circumstances
     would cause the Allowance for Doubtful Accounts to have a debit
     balance prior to adjustment?
     The actual amount of uncollectible accounts written off in the pri-
     or accounting period was greater than the estimate used to rec-
     ord the adjusting entry for bad debts.
Transparency Master 8-5



   JOURNAL ENTRIES FOR
UNCOLLECTIBLE ACCOUNTS—
 DIRECT WRITE-OFF METHOD
1. Richard Ellis purchased $500 in mer-
   chandise on account, terms n/30.

2. After 6 months, the Richard Ellis account
   was written off as uncollectible.

3. David Sans purchased $280 worth of
   merchandise on account, terms n/30.

4. Received notice that David Sans had filed
   for bankruptcy; therefore, his account
   was written off.

5. One year later, received $280 from David
   Sans as payment on his account.
Transparency Master 8-6



   JOURNAL ENTRIES FOR
UNCOLLECTIBLE ACCOUNTS—
 DIRECT WRITE-OFF METHOD
                                Solution
1. Richard Ellis purchased $500 in merchandise on account,
   terms n/30.
   Accounts Receivable—R. Ellis ......................                    500
      Sales .............................................................     500
2. After 6 months, the Richard Ellis account was written off
   as uncollectible.
   Uncollectible Accounts Expense................... 500
     Accounts Receivable—R. Ellis ..................     500
3. David Sans purchased $280 worth of merchandise on ac-
   count, terms n/30.
   Accounts Receivable—D. Sans .....................                     280
     Sales .............................................................     280
4. Received notice that David Sans had filed for bankruptcy;
   therefore, his account was written off.
   Uncollectible Accounts Expense................... 280
     Accounts Receivable—D. Sans .................       280
5. One year later, received $280 from David Sans as pay-
   ment on his account.
   Accounts Receivable—D. Sans .....................                      280
     Uncollectible Accounts Expense ..............                            280
   Cash ................................................................. 280
     Accounts Receivable—D. Sans .................                            280
Transparency Master 8-7



             PROMISSORY NOTES
Calculate the due date, interest, and maturi-
ty value for these promissory notes.

Note #1: $5,000, 90-day, 8% promissory note
         dated September 28

Note #2: $25,000, 180-day, 11% promissory
         note dated April 2
Transparency Master 8-8


                  PROMISSORY NOTES
                                   Solution
Note #1: $5,000, 90-day, 8% promissory note dated September 28
   Due Date:
      Term of the note .....................................................       90
      Days that pass in September:
         Number of days in Sept. ....................................         30
         Date on note ....................................................... 28    2
      Number of days left ................................................         88
      Days that pass in October .....................................              31
      Number of days left ................................................         57
      Days that pass in November ..................................                30
      Number of days left ................................................         27
      Due date is December 27
          Interest: $5,000  8%  90/360 = $100
          Maturity Value: $5,000 + $100 = $5,100

Note #2: $25,000, 180-day, 11% promissory note dated April 2
   Due Date:
      Term of the note .....................................................       180
      Days that pass in April:
         Number of days in April.....................................         30
         Date on note .......................................................  2    28
      Number of days left ................................................         152
      Days that pass in May ............................................            31
      Number of days left ................................................         121
      Days that pass in June ...........................................            30
      Number of days left ................................................          91
      Days that pass in July ............................................           31
      Number of days left ................................................          60
      Days that pass in August .......................................              31
      Number of days left ................................................          29
      Due date is September 29
          Interest: $25,000  11%  180/360 = $1,375
          Maturity Value: $25,000 + $1,375 = $26,375
Transparency Master 8-9



      BALANCE SHEET—LEDER
           HARDWARE
The following information was taken from the ac-
counting records of Leder Hardware on December 31.
Prepare the Current Assets section of Leder's balance
sheet as of December 31.
1. Leder Hardware has $42,000 in cash in its bank ac-
   counts. The company is required to keep a mini-
   mum of $10,000 cash in its checking account as a
   compensating balance on a line of credit.
2. Ledger Hardware has invested $7,000 in a money
   market fund.
3. Leder Hardware currently has notes receivable to-
   taling $28,000. The company's accounts receivable
   total $85,000; 2% of that amount will probably not
   be collected.
4. A total of $700 interest has accrued on notes that
   have not been collected.
5. Leder Hardware has $110,000 in inventory.
6. Leder Hardware owns office and store equipment
   costing $78,000.
Transparency Master 8-10



      BALANCE SHEET—LEDER
           HARDWARE
                                Solution
                             Leder Hardware
                           Partial Balance Sheet
                            December 31, 20–
Current Assets:

     Cash and cash equivalents ....                           $ 49,000 *
     Notes receivable......................                     28,000
     Accounts receivable ...............            $85,000
     Less allowance for doubtful
            accounts........................          1,700     83,300
     Interest receivable...................                        700
     Inventory ..................................              110,000
          Total current assets .........                      $271,000

*The $10,000 compensating balance requirement must be
disclosed in the notes to the financial statements.
Transparency Master 8-11



           DISCOUNTING A NOTE
               RECEIVABLE
Joy's TV and Electronics had a $5,000, 90-
day, 8% note dated September 14. This note
was discounted at 12% on September 24.


1. Calculate the cash proceeds from dis-
   counting the note.

2. Prepare the journal entry to record this
   event.
Transparency Master 8-12


                DISCOUNTING A NOTE
                    RECEIVABLE
                                        Solution
Discount a $5,000, 90-day, 8% note dated September 14 at 12% on
September 24.
1.   Calculate the cash proceeds from discounting the note.
     Step 1: Determine the interest on the note.
              Interest = $5,000  8%  90/360 = $100
     Step 2: Determine the maturity value of the note.
              Maturity Value = $5,000 + $100 = $5,100
     Step 3: Determine the discount the bank will charge.
              Because 10 days have passed since the note was
              signed, there are 80 days in the discount period.
              Discount = Maturity Value  Discount Rate  Time
              Discount = $5,100  12%  80/360 = $136
     Step 4: Calculate the cash proceeds.
              Cash Proceeds = Maturity Value – Discount
              Cash Proceeds = $5,100 – $136 = $4,964
2.   Prepare the journal entry to record this event.
     Sept. 24 Cash ...........................................................   4,964
              Interest Expense .......................................              36
                Notes Receivable ...................................                     5,000
The interest expense is the difference between the interest income
earned on the note and the interest expense (discount) paid to the
bank.
              Interest earned on the $5,000 note
                (90 days at 8%) ....................................... $100
              Less: Discount paid to the bank ..............             136
              Interest expense ........................................ $ 36

								
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