Compiled By Nut Khorn, -Page 1-

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1 I. Course Descriptions:... 3 II. COURSE OBJECTIVES... 3 III. COURSE CONTENT... 3 IV. LEARNING RESOURCES:... 4 V. Course requirement... 5 VI. Evaluation of the student performance... 5 VII. COURSE DURATION... 6 VIII: EVALUATION OF STUDENT PERFORMANCE... 6 Home work and assignment... 6 Course Outline for Accounting Principles ( part 2)... 7 Lesson Plan... 8 Notes: Financial statements... 9 Balance Sheet... 9 Income Statement... 9 Statement of Cash Flows... 9 Statement of Owner s Equity... 9 Conceptual Framework CHAPTER. 1 ACCOUNTING FOR MERCHANDISING BUSINESSES MANAGEMENT ISSUES IN MERCHANDISING BUSINESSES Cash Flow Management Profitability Management Choice of Inventory System Control of Merchandising Operations MANAGEMENT ISSUES IN MERCHANDISING BUSINESSES Net Sales Cost of Goods Sold Gross Margin Operating Expenses Income Before Income Taxes Income Taxes Net Income Inventory Systems Periodic Method Perpetual Method MERCHANDISING TRANSACTIOS Periodic Method Calculation of Cost of Goods Sold Perpetual Method V. Forms of Financial Statements Multiple-Step Income Statement Single-Step Income Statement Merchandising concern Income statement Depending on the GAAP Classified Balance Sheet Problems CHAPTER. 2 ACCOUNTING FOR RECEIVABLES I. Classification of Receivables II. Accounting for Bad Debts III. Accounting for Uncollectible Accounts Receivable ) Direct write off Method ) The Allowance Method (Required by GAAP) Note: There are three methods of the Allowance Method Compiled By Nut Khorn, -Page 1-

2 Percentage of credit sales Percentage of accounts receivable Percentage of Credit Sales Percentage of Accounts Receivable Aging Receivable Credit Card Sales IV. Characteristics of Notes Receivable ILLUSTRATIVE ACCOUNTING ENTRIES OF NOTE RECEIVABEL. 39 (1) Recording receipt of a note, (2) Recording collection of a note (3) Recording dishonored note (4) Recording adjusting entries Problems on Chapter Chapter 3: Current Liabilities Current liabilities Note Payable Sales Tax Payable Current Liabilities must be estimated Problems on Chapter 3: Current Liabilities Chapter 4: Inventories Why is Inventory Control Important? Assigning Costs to Inventory Merchandising and Inventory Advantages of Using Perpetual Inventory Periodic Inventory Inventory Costing Periodic Inventory System ) FIFO: ) LIFO: ) Average Cost: Perpetual Inventory System FIFO LIFO: AVERAGE COST: Effects on the financial statements Accounting principles: consistency ACCOUNTING PRINCIPLES: DISCLOSURE Apply the lower-of-cost-or-market rule to inventory Problems Chapter 4: Inventories Chapter 01: Glossary Chapter 02: Glossary Chapter 03: Glossary Chapter 04 :Glossary Figure 1 : Conceptual Framework Figure 2: Objectives Figure 3 : Merchandising Company Figure 4: COGS Compiled By Nut Khorn, -Page 2-

3 I. Course Descriptions: COURSE SYLLABUS FOR Accounting Principles (part 2) By Nut Khorn (Course Facilitator) For BBA students This course aims to introduce to the students the accounting principles and it real practices in making decisions in the normal operations in the business. The financial accounting provides the external user such as investors, creditors, and so on; that is, the investors need to know the financial statements of the company information, especially, financial reporting (annual reports) to making decisions whether or not they will invest for their resources such as cash and other assets or financial assets. II. COURSE OBJECTIVES The objectives of the course are to enable the student to: 1. Apply the financial technique in preparing the financial statement of the Service Company and Merchandising Company. 2. Apply for the preparing the CLOSING ENTRIES process of the Merchandising Company. 3. Apply for the Accounts Receivable and the Method the write off of about it. 4. Apply for the method using the Merchandise inventories. III. COURSE CONTENT The following chapters will be discussed in this course: Chapter 1: accounting for merchandising businesses LEARNING OBJECTIVES: Upon completion of this chapter, students will be able to: 1. Identify the differences between service and merchandising companies. 2. Explain the recording of purchases under a perpetual inventory system. 3. Explain the recording of sales revenues under a perpetual inventory system. 4. Explain the steps in the accounting cycle for a merchandising company. 5. Distinguish between a multiple-step and a single-step income statement. 6. Explain the computation and importance of gross profit. 7. Determine cost of goods sold under a periodic system. TIME FRAME: Week 1 Compiled By Nut Khorn, -Page 3-

4 Chapter 2: Receivables LEARNING OBJECTIVES: Upon completion of this chapter, students will be able to: 1. Identify the different types of receivable. 2. Explain how accounts receivable are recognized in the accounts. 3. Distinguish between the methods and bases used to value accounts receivable 4. Describe the entries to record the disposition of accounts receivable. 5. Compute the maturity date of, and interest on, note receivable. 6. Explain how notes receivable are recognized in the accounts. 7. Describe the entries to record the disposition of the notes receivable. 8. Explain the statement presentation of receivable. TIME FRAME: Week 2 Chapter 3: Current Liabilities LEARNING OBJECTIVES: Upon completion of this chapter, students will be able to: 1. Explain a current liability and identify the major types of current liabilities 2. Describe the accounting for notes payable. 3. Explain the accounting for other current liabilities. 4. Describe the accounting and disclosure requirement for contingent liabilities. TIME FRAME: Week 3 Chapter 4: Inventories LEARNING OBJECTIVES: Upon completion of this chapter, students will be able to: 1. Describe the steps in determining inventories quantities. 2. Explain the basis of accounting for inventories and describe the inventory cost flow methods. 3. Explain the financial statement and tax affects of each of the inventory cost flow methods. 4. List the essential accounting features of a perpetual inventory system. TIME FRAME: Week 4 IV. LEARNING RESOURCES: Required textbook Jan R Williams, Susan F. Haka, and Mark S. Bettner Financial & Managerial Accounting, (2005), The 13 rd Edition, Mc GRAW-HILL. (USA). Compiled By Nut Khorn, -Page 4-

5 Reference: 1. WEYGRANT. KIESO. KELL Accounting Principles. Fourth Edition, Wiley (USA) 2. Kermit D. Larson. Contributed Author Barbara Chiappetta Fundamental Accounting Principles. 3. NEEDLES. ANDERSON. CALDWELL Financial & Managerial Accounting A Corporate Approach Fourth Edition Jam R. Williams, Susan F. Haka, and Mark S. Bettner. ( 2005). Financial & and Managerial Accounting 13 Edition, McGra-Hill (USA). 5. Ministry of Economy and Finance The Cambodian Accounting Standards (CAS). Cambodia. 6. Ministry of Economy and Finance, National Accounting Council Financial Reporting Template for Small and Medium Sized Enterprises. Internet Web for these Courses: (Accounting Principles, Financial Accounting, Hospital Accounting, and Managerial Accounting) (note: williams_basis14e) Note: When you research the entire web above you should enter the STUDENT CENTER OR STUDENT COMPONION. V. Course requirement Student must have basic knowledge of Business mathematics, business, and Accounting Principles. VI. Evaluation of the student performance Course assessment: Attendance and participation. 10 % Home work. 30% Assignment... 20% Mid-term Exam 20% Final Examination.. 20% Total:.. 100% Compiled By Nut Khorn, -Page 5-

6 VII. COURSE DURATION The duration of this course will take approximately one month and one week or forty-eight (48) hours to complete. Formal class room lectures/ discussion lasting 15 hours will be conducted once a week. VIII: EVALUATION OF STUDENT PERFORMANCE Beside formal classroom lectures and theoretical discussions, the students will also be introduced to class Self-study questions, questions, exercises, problems, and case-study and discussion that will provide them with a more comprehensive learning package in this course. It is expected that formal class discussions will provide the conceptual and knowledge-oriented learning, while the class exercises and case study will provide students the experiential, development and sharpening of their managerial skills. Through this process, students can become more involved in the learning process. It is therefore essential that students participate actively in class discussions and during the Q & A group case study presentations. The class exercises and case study are generally action oriented in that individuals or groups of students investigate a situation, develop conclusions, and/or recommendations, and present their ideas/views to their class colleagues. Work Requirement for a Accounting Principles Major under Mr. Nut Khorn I will apply the international standard when I teach all accounting courses I will require that you do all the assigned work before class: Read your textbook (slide presentation is not complete) Read the power point materials Do the assignments Prepare for all examinations. Internet research work. To perform well in my courses, you need to spend about a minimum of 15 hours per week for this class. If you do not want to make this commitment, then do not take my courses. You should be present in all my classes. If you do not show up for my lectures, I will consider you as absent (no need to give excuses). If you fail any of my courses (I hope you won t), you must retake a new written examination plus an oral examination to prove that you know the subjects. Home work and assignment Students MUST COMPLY STRICTLY with the following instructions in writing their Home Work, Individual Assignments, Group Case-study and Group Case-Study Presentation. 1. The student(s) is expected to do his/her own research in order to write up individual assignments and home work. 2. All Individual Assignments/Home work and Group Case-Study MUST be type written on A-4 sized paper with adequate margins. You should include a TITLE PAGE and a LIST OF CONTENTS. Compiled By Nut Khorn, -Page 6-

7 3. Use headings and sub-headings to organize your report, including supporting material(s) as attachments. 4. All reference books/published materials you refer to should be properly referenced (arrange in this order: name of author(s), year, and title of the book, publisher, and the country the book was published) and this must be included in a bibliography at the end of the assignment. 5. Use text referencing when you cite somebody else s work from your references. Citation may mean direct quoting, or paraphrasing, or summarizing, or simply to make a statement of that author's view of finding. An example of text referencing: Beamer and Varner (2001), suggested that culture is not something we are born with, but rather it is learned. 6. Number all pages sequentially and securely staple and/or bind all sheets together. Date Chapter Topic Aug.30, 2010 Aug.30, 2010 Ch01 Benefit from financial Statements using Business Company and how to use it for decision making. Class Preparation and Home work Assignments Group Assignments (4 Students) Ch01 P1-2; P1-3; P1-14; P1-15 Home Work Home Work Home Work Teaching Weeks Course Outline for Accounting Principles ( part 2) Week 1 Ch 01 Week 2 Week 3 Week 4 Chapters Topics Due Dates Time Allowed Ch 02 Accounting for Merchandising Business Mid-Term Exam Final Exam September 3, hrs Compiled By Nut Khorn, -Page 7-

8 Week 01 Lesson Plan Date Chapter Main Contents Taught Hours Others Aug.30, Accounting for Merchandising Business Accounting Reviews Conceptual Frame works Accounting Cycles Problems and solutions 3 Compiled By Nut Khorn, -Page 8-

9 Notes: Financial statements The same financial statement sometime receives different titles. Balance Sheet =Statement of Financial Position =Statement of Financial Condition Income Statement =Statement of Income =Operating Statement =Statement of Operations =Statement of Operating Activities =Earnings Statement =Statement of Earnings =Profit and Loss (P&L) Statement Statement of Cash Flows =Statement of Cash Flow =Cash Flows Statement =Statement of Changes in Cash Position =Statement of Changes in Financial Position Statement of Owner s Equity =Statement of Changes in Owner s Equity = Statement of Changes in Owner s Capital =Statement of Shareholders' Equity* =Statement of Changes in Shareholders' Equity* = Statement of Changes in Capital Accounts* * Corporation only. Compiled By Nut Khorn, -Page 9-

10 Conceptual Framework Objectives To provide information: ❶ Useful for investor and creditor decisions. ❷That helps predict cash flows. ❸About economic resources, claims to resources and changes in resources and claims. Qualitative Characteristics Elements Recognition and Measurement Concepts Constraints Financial Statements Figure 1 : Conceptual Framework Compiled By Nut Khorn, -Page 10-

11 CHAPTER. 1 ACCOUNTING FOR MERCHANDISING BUSINESSES STUDY OBJECTIVE After studying this chapter, you should be able to: 8. Identify the differences between service and merchandising companies. 9. Explain the recording of purchases under a perpetual inventory system. 10. Explain the recording of sales revenues under a perpetual inventory system. 11. Explain the steps in the accounting cycle for a merchandising company. 12. Distinguish between a multiple-step and a single-step income statement. 13. Explain the computation and importance of gross profit. 14. Determine cost of goods sold under a periodic system. Compiled By Nut Khorn, -Page 11-

12 Figure 2: Objectives niymn½y 1 BaküxageRkamKW tuv)anerbienakñúgsþg;darenhedaymangtßn½ycak;lak;ducxagerkam ³ snñifi KWCaRTBüskmµEdl ³ k TuksMrab;lk;kñúgdMeNIrkarGaCIvkmµFmµta x sßitenakñúgdmenirkarplitsmrab;lk; b K mantmrg;cavtßuúfatuedim b smöar³pát;pág; edim,itukerbikñúgdmenirkarplitkmµ b kñúgkarpþl;esvakmµ. 1 Cambodian Accounting Standards : CAS 2: Inventories Compiled By Nut Khorn, -Page 12-

13 MANAGEMENT ISSUES IN MERCHANDISING BUSINESSES Up to this point you have studied business and accounting issue related to the simplest type of business- the service business. Service business, such as advertising agencies and law firms, perform services for fees or commissions. Merchandising business, on the other hand, earn income by buying and selling products or merchandise. These companies, whether wholesale or retail, use the same basic accounting methods as do service companies, but the buying and selling of merchandise adds to the complexity of the process. Cash Flow Management The Operating Cycle of Merchandising Concerns Purchases Cash Merchandise inventory Sales for Cash Collection of Cash Sales on Credit Accounts Receivable Compiled By Nut Khorn, -Page 13-

14 Figure 3 : Merchandising Company Profitability Management Profitability management is a complex activity that includes setting appropriate prices on merchandise, purchasing merchandise at favorable price and terms, and maintaining acceptable levels of expenses. Choice of Inventory System Under the periodic inventory system, the inventory on hand is counted periodically, usually at the end of the accounting period. No detailed records of the actual inventory on hand are maintained during the accounting period. Under the perpetual inventory system, continuous records are kept of the quantity and, usually, the cost of individual items as they are bought and sold. Control of Merchandising Operations The principal transactions of merchandising businesses, which involve buying and selling, are covered by asset accounts-cash, Accounts Receivable, and Merchandise Inventory-that are vulnerable to theft and embezzlement. MANAGEMENT ISSUES IN MERCHANDISING BUSINESSES Service companies, as illustrated thus far in this book, requires only a simple income statement. For those companies, as shown in Figure 2, net income represents the difference between revenues and expenses. But merchandising companies, because they buy and sell merchandise inventory require a more complex income statement. The income statement for a merchandiser has four major parts: (1) net sales, (2) cost of goods sold, (3) operating expenses, and (4) income taxes. Compiled By Nut Khorn, -Page 14-

15 The Components of Income Statements for Service and Merchandising Companies Service Business Fees earned Operating expenses Net income $XXX XXX $XXX Merchandising Business Sales Cost of Goods Sold Gross Profit $ Operating Expenses Net Income $XXX XXX XXX XXX $XXX Net Sales The first major part of the merchandising income statement is net sales, or often simply sales. Net sales consist of the gross proceeds from sales of merchandise, or gross sales, less sales returns and allowances. Gross sales consist of total cash sales and total credit sales occurring during an accounting period. Cost of Goods Sold The Second part of the merchandising income statement is cost of goods sold, or often simply cost of sales, which is the amount a merchant paid for the merchandise sold during an accounting period. Gross Margin The percentage of gross margin is computed by dividing the dollar amount of gross margin by net sales. Operating Expenses The third major area of the merchandising income statement consists of operating expenses, which are the expenses other than cost of goods sold that are incurred in running a business. The latter cost is often called freight out expense or delivery expense. Careful planning and control of operating expenses can improve a company s profitability. Income Before Income Taxes Income before income taxes is also referred to as operating income or income from operations because it represents the income from a company s normal, or main, business. Income Taxes Current federal income tax rates for corporations can vary from 15 percent to 38 percent depending on the amount of income before income taxes and other factors. Net Income Net income, the final figure or bottom line of the income statement, is what remains after operating expenses and income taxes are deducted from gross margin. Both management and investors often use net income to measure Compiled By Nut Khorn, -Page 15-

16 whether a business has been operating successfully during the past accounting period. Inventory Systems As we have seen, merchandising inventory is a key factor in determining the cost of goods sold. Consequently, every merchandiser needs a useful and reliable system for determining both the quality and the cost of the goods on hand. The two basic systems of accounting for the number of items in the merchandise inventory are the periodic inventory system and the perpetual inventory system. Periodic Method A method of determining the cost of merchandise sold and the amount of merchandise on hand. Under this method, the inventory records do not show the amount available for sale or the amount sold during the period. Perpetual Method Under this method, each purchase and sale of merchandise is recorded in the inventory and the cost of merchandise sold accounts. The amount of merchandise available for sale and the amount sold are continuously disclosed in the inventory records. Features: 1. Purchases increase Merchandise Inventory. 2. Freight costs, Purchase Returns and Allowances and Purchase Discounts are included in Merchandise Inventory. 3. Cost of Goods Sold is increased and Merchandise Inventory is decreased for each sale. 4. Physical count done to verify Merchandise Inventory balance. The perpetual inventory system provides a continuous record of Merchandise Inventory and Cost of Goods Sold. MERCHANDISING TRANSACTIOS Merchandising transactions can be divided into the two broad categories of sale transactions and the purchases transactions. The ways in which these transactions are recorded differ somewhat under the periodic and the perpetual inventory systems. SALES TERMS 2/10, n/30 2% discount if paid within 10 days, otherwise net amount due within 30 days. Freight Costs Terms FOB shipping point - seller places goods Free On Board the carrier, and buyer pays freight costs. FOB destination - seller places the goods Free On Board to the buyer s place of business, and seller pays freight costs. Compiled By Nut Khorn, -Page 16-

17 Freight costs incurred by the seller on outgoing merchandise are an operating expense to the seller (Freight-out or Delivery Expense). Who Pays the Cost? Shipping Term Where Title Passes of Transportation FOB shipping point at origin Buyer FOB destination at destination Seller Periodic Method Features: 1. Purchases of merchandise increase Purchases. 2. Ending Inventory determined by physical count. 3. Calculation of Cost of Goods Sold: Beginning inventory $ 100,000 Add: Purchases, net 800,000 Goods available for sale 900,000 Less: Ending inventory 125,000 Cost of goods sold $ 775,000 Separate accounts used to record purchases, freight costs, returns, and discounts. Company does not maintain a running account of changes in inventory. Ending inventory determined by physical count. Calculation of Cost of Goods Sold Figure 4: COGS Compiled By Nut Khorn, -Page 17-

18 Information related to Chevalier Co. is presented below. Prepare the journal entry to record the transaction under a periodic inventory system. 1. On April 5, purchased merchandise from Paris Company for $22,000 terms 2/10, net/30, FOB shipping point. Dr Cr April 5. Purchases $22,000 A/P.. $22,000 (Terms, 2/10, n/30, from Paris Company) 2. On April 6, paid freight costs of $600 on merchandise purchased from Paris. April 6. Freight-in. $600 Cash $ On April 8, returned damaged merchandise to Paris Company and was granted a $4,000 allowance. April 8. A/P $4,000 Purchases Returns and Allowance. $4, On April 15, paid the amount due to Paris Company in full. Remember the return of $4,000 of merchandise. April 15. A/P.. $18,000 Purchases Discounts... $360 Cash. $17,640 ($22,000 - $4,000 = $18,000x 0.02 = $360) 5. On April 16, Chevalier Co. sold $500,000 of merchandise to Hashmi Co., terms 2/10, n/30, and FOB shipping point. Cost of merchandise sold was $350,000. April 16. A/R.. $500,000 Sales.. $500,000 (Terms, 2/10, n/30, to Hashmi Co.,) 6. On April 20, Chevalier Co. accepted for full credit the return of $1,000 of merchandise sold to Hashmi Co., on April 16, the cost of which was $500. April 20. A/R. $1,000 Sales Returns and Allowance.. $1, On April 22, Chevalier Co. received payment in full of the account from Hashmi Co.,, less the return of April 20. April 22. Cash $489,020 Sales Discounts..$9,980 A/R. $ 499,000 Perpetual Method Summarizing the Transactions above: Compiled By Nut Khorn, -Page 18-

19 Dr Cr 5-Apr Merchandise Inv $ 22, A/P $ 22, (Terms, 2/10,n/30,From Paris Company) 6-Apr Merchandise Inv $ Cash $ Apr A/P $ 4, Merchandise Inv $ 4, Apr A/P $ 18, Merchandise Inv $ Cash $ 17, Apr A/R $ 500, Sales $ 500, Cost of Goods Sold $ 350, Merchandise Inv $ 350, (Terms, 2/10,n/30,To Hashmi Co.,) 20-Apr A/R $ 1, Sales Returns and Allowance $ 1, Merchandise Inv $ Cost of Goods Sold $ Apr Cash $ 489, Sales Discounts $ 9, A/R $ 499, V. Forms of Financial Statements Multiple-Step Income Statement Shows several steps in determining net income. Two steps relate to principal operating activities. Distinguishes between operating and non-operating activities. Compiled By Nut Khorn, -Page 19-

20 Compiled By Nut Khorn, -Page 20-

21 Single-Step Income Statement Subtract total expenses from total revenues Two reasons for using the single-step format: 1) Company does not realize any type of profit until total revenues exceed total expenses. 2) Format is simpler and easier to read. Compiled By Nut Khorn, -Page 21-

22 Merchandising concern Income statement Net sales* -Cost of goods sold (COGS) or Cost of sales** = Gross profit / Margin -Operating expenses =Earning before Interest and Taxes (EBIT) - Interest Expense = Earning before taxes - Income Taxes = Net income/ Loss Depending on the GAAP Revenues - Expenses + Gains - Losses = Net income/ Loss Your Formulas 1) Net Sales = Sales ( Sales Discounts+ Sales Returns And Allowaance) 2) Net Purchases= Purchases ( PurchasesDiscounts+ Purchasesreturns and Allowance) 3) Cost of Goods Purchased = Net Purchases+ 4) Cost of goods available for sales = Beginning Inv + Cost of Goods Purchased 5) Cost of goods sold ( COGS) = Cost of goods available for sales Ending Inv (5 formulasaboveis shownin income statement, please rememberthemin your brain) Or COGS = Beginning Inv + Net Purchases+ 6) Gross Pr ofit = Net Sales COGS 7) Net income( Income from operations) = Gross Pr ofit operatingexpenses or Net income Classified Balance Sheet Freight In Freight In = Gross Pr ofit operatingexpenses ± Ending Inv nonoperating expenses Compiled By Nut Khorn, -Page 22-

23 Problems P1-1. Calculate net sales and gross profit in each of the following situations: a b c d Sales $125,000 $505,000 $33,700 $256,700 Sales discounts $3,200 $13,500 $300 $4,000 Sales returns and allowances $19,000 $3,000 $6,000 $600 Cost of goods sold $67,600 $352,700 $22,300 $123,900 P1-2. A company purchased merchandise that cost $165,000 during the year that just ended. Determine the company s cost of good sold in each of the following four situations: a) There was no beginning or ending inventories. b) There was a beginning inventory of $35,000 and no ending inventory. c) There was a $30,000 beginning inventory and a 42,000 ending inventory. d) There was no beginning inventory but there was a 21,000 ending inventory. P1-3.The following information appeared in a company s income statement: Sales $300,000 Sale returns $15,000 Sales discounts $4,500 Beginning inventory $25,000 Purchases $180,000 Purchases returns and allowances $6,000 Purchases discounts $3,600 Freight- In $11,000 Gross profit from sales $105,000 Net income $55,000 Required: Calculate the (a) total operating expenses, (b) cost of goods sold, and (c) ending inventory. P1-4. The following accounts and balance are taken from the year end adjusted trial balance of the Vintage Shop, a single proprietorship. Use the information in these columns to complete the requirements. Debit Credit Merchandise inventory $28,000 Sales $425,000 Sales returns and allowances $16,500 Compiled By Nut Khorn, -Page 23-

24 Sales discounts $4,000 Purchases $240,000 Purchases returns and allowances $18,000 Purchases discounts $2,000 Transportation -in $6,000 Selling expenses $35,000 General and administrative expenses $95,000 The count of the ending inventory shows that its cost is $37,000. Required: a. Calculate the company s net sales for the year. b. Calculate the company s cost of purchased for the year. c. Calculate the company s cost of goods sold for the year. d. Prepare a multiple- step income statement for the year that lists net sales, cost of goods sold, gross profit, the operating expenses, and net income. P1-5.Record each of the following transactions, assuming the periodic inventory system is used. Aug.2 Purchased merchandise on credit from Gear Company, invoice dated August 1, terms n/10, FOB shipping point, $2, Received bill from State Shipping Company for transportation costs on August 2 shipment, invoice dated August 1, terms n/30, $ Returned damaged merchandise received from Gear Company on August2 for credit, $ Paid in full the amount due to Gear Company for the purchase of August 2, part of which was returned on August 7. P1-6. Record the transaction in P1-5. above, assuming the perpetual inventory system is used. P1-7. Record each of the following transactions, assuming the periodic inventory system is used: August 4. Sold merchandise on credit to Kwai Corporation, terms n/30, FOB destination, $1,200. August 5. Paid transportation costs for sale of August 4, $110. August 9. Merchandise sold on August 4 was accepted back from Kwai Corporation for full credit and returned to the merchandise inventory, $350. September 4. Received payment in full from Kwai Corporation for merchandise sold on August 4, less the return on August 9. P1-8. Record the transactions in P1-7. using the perpetual inventory system, assuming that the merchandise sold on August 4 cost $720 and the merchandise returned on August 9 cost $210. Compiled By Nut Khorn, -Page 24-

25 P1-9. On April 15, the Sural company sold merchandise to Astor Corporation for $1,500 on terms 2/10, n/30. Record the entries in both Sural s and Astor s records for (1) the sales, (2) a return of merchandise on April 20 of $300, and (3) payment in full on April 25. Assuming both companies use the periodic inventory system. P1-10. a. If beginning inventory is $10,000, purchases total $85,000, and ending inventory is $12,700, how much is cost of goods sold? b. If beginning inventory is $23,000, purchases total $119,000, and cost of goods sold is $127,000, how much is ending inventory? P1-11. Auto Max Used Cars purchased inventory costing $100,000 and sold 70% of the automobiles for $120,000. All purchases were on account. Sales were for note receivable, with Auto Max collecting 20% up front. 1) Journalize theses two transactions for Auto Max, which uses the perpetual inventory system. 2) For these transactions, show what Auto Max will report inventory, revenues, and expenses on its financial statements. Report gross profit on the appropriate statement. P1-12. Information related to Pagnucci Co. is presented below. 1. On April 5, purchased merchandise from Steff Company for $20,000,terms 2/10, net/30,fob shipping point. 2. On April 6 paid freight costs of $700 on merchandise purchased from Bryant. 3. On April 7, purchased equipment on account for $29, On April 8, returned damaged merchandise to Steff Company and was granted a $3,000 credit for returned merchandise. 5. On April 15 paid the amount due to Steff Company in full. Instructions (a) Prepare the journal entries to record these transactions on the books of Pagnucci Co. under a perpetual inventory system. (b) Assume that Pagnucci Co. paid the balance due to Steff Company on May 4 instead of April 15. Prepare the journal entry to record this payment. P1-13. On September 1, Jiggs Office Supply had an inventory of 40 calculators at a cost of $18 each.the company uses a perpetual inventory system. During September, the following transactions occurred. Sept. 6 Purchased 70 calculators at $20 each from Billy Jack Co. for cash. 9. Paid freight of $68 on calculators purchased from Billy Jack Co. 10. Returned 2 calculators to Billy Jack Co. for $40 credit because they did not meetspecifications. 12. Sold 40 calculators costing $18 for $34 each to Kerry Book Store, terms n/ Granted credit of $34 to Kerry Book Store for the return of one calculator that was not ordered. 20. Sold 30 calculators costing $21 (including freight) for $35 each to Sayer s Card Shop, terms n/30. Instructions Journalize the September transactions. Compiled By Nut Khorn, -Page 25-

26 P1-14. In its income statement for the year ended December 31, 2008, Duthie Company reported the following condensed data. Administrative expenses..$304,000 Selling expenses $ 343,000 Cost of goods sold 902,000 Loss on sale of equipment... 7,000 Interest expense. 49,000 Net sales. 1,620,000 Interest revenue 20,000 Instructions (a) Prepare a multiple-step income statement. (b) Prepare a single-step income statement. P1-15. Presented below is financial information for two different companies. Viet Naise Company Company Sales. $210,000. (d) Sales returns.. (a).. $ 5,000 Net sales 200,000 95,000 Cost of goods sold 120,000. (e) Gross profit (b). 42,000 Operating expenses. 50,000. (f) Net income (c). 20,000 Instructions Determine the missing amounts. P1-16: Prepare journal entries to record the following merchandising transactions of Garcia Company, which applies the perpetual inventory system. (Hint: It will help to identify each receivable and payable; for example, record the purchase on August 1 in Accounts Payable Weir Co.) Aug. 1 Purchased merchandise from Weir Company for $25,000 under credit terms of 1/10, n/45, FOB shipping point. 2 Paid $300 for freight charges on the purchase of August 1. 4 Sold merchandise to Cassidy Corp. for $3,800 under credit terms of 2/10, n/60, FOB shipping point. The merchandise had cost $1, Purchased merchandise from Lesh Corporation for $6,000 under credit terms of 2/15,n/30. FOB destination. 7 Received a $1,200 credit memorandum for the return of defective merchandise purchased on August 6. 8 Sold merchandise that cost $500 for $900 cash. 9 Paid the balance due to Weir Co. within the discount period. 11 Sold merchandise that cost $1,000 to Terrapin Co. for $3,100 under credit terms 2/10,n/30. FOB shipping point. 14 Received the balance due from Cassidy Co. for the August 4 sale within the discount period. Compiled By Nut Khorn, -Page 26-

27 15 Paid $250 shipping charges on the August 11 sale to Terrapin Co. and added the amount to their bill. 16 Issued a $200 credit memorandum to Terrapin Co. for defective merchandise. 21 Received Terrapin Co s cash payment for the amount due from the August 11 purchase. 30 Paid Lesh Co. the amount due from the August 6 purchase. P1-17: Newman Hardware Store completed the following merchandising transactions in the month of May. At the beginning of May, the ledger of Newman showed Cash of $5,000 and Common Stock of $5,000. May 1: Purchased merchandise on account from Jerry s Wholesale Supply $4,200, terms 2/10, n/ Sold merchandise on account $2,100, terms 1/10, n/30.the cost of the merchandise sold was $1, Received credit from Jerry s Wholesale Supply for merchandise returned $ Received collections in full, less discounts, from customers billed on sales of $2,100 on May Paid Jerry s Wholesale Supply in full, less discount. 11. Purchased supplies for cash $ Purchased merchandise for cash $1, Received refund for poor quality merchandise from supplier on cash purchase $ Purchased merchandise from Cosmo Distributors $1,300, FOB shipping point, terms 2/10, n/ Paid freight on May 17 purchase $ Sold merchandise for cash $3,200.The merchandise sold had a cost of $2, Purchased merchandise from Costanza, Inc. $550, FOB destination, terms 2/10, n/ Paid Cosmo Distributors in full, less discount. 29. Made refunds to cash customers for defective merchandise $60. The returned merchandise had a scrap value of $ Sold merchandise on account $900, terms n/30.the cost of the merchandise sold was $560. Newman Hardware s chart of accounts includes the following: No. 101 Cash, No. 112 Accounts Receivable, No. 120 Merchandise Inventory, No. 126 Supplies, No. 201 Accounts Payable,No. 311, Common Stock No. 401 Sales, No. 412 Sales Returns and Allowances, No. 414 Sales Discounts, No. 505 Cost of Goods Sold. Instructions (a) Journalize the transactions using a perpetual inventory system. (b) Enter the beginning cash and common stock balances and post the transactions. (Use J1 for the journal reference.) (c) Prepare an income statement through gross profit for the month of May [Answer: (c) Gross profit $2,269] Compiled By Nut Khorn, -Page 27-

28 P1-18: Paul s Book Warehouse distributes hardcover books to retail stores and extends credit terms of 2/10, n/30 to all of its customers. At the end of May, Paul s inventory consisted of 300 books purchased at $1,800. During the month of June the following merchandising transactions occurred. June 1. Purchased 200 books on account for $6 each from Logan Publishers, FOB destination, terms 2/10, n/30.the appropriate party also made cash payment of $50 for the freight on this date. 3. Sold 240 books on account to Reading Rainbow for $10 each (cost, $6 each) 6. Received $120 credit for 20 books returned to Atkinson Publishers. 9. Paid Logan Publishers in full, less discount. 15. Received payment in full from Reading Rainbow. 17 Purchased 250 books on account for $6 each from Phantom Publishers, FOB destination, terms 2/15, n/30. The appropriate party also made cash payment of $50 for the freight on this date. 24. Received payment in full from Cheap Books. 26. Paid Phantom Publishers in full, less discount. 28. Sold 130 books on account to Willow Bookstore for $10 each (cost, $6 each). 30. Granted Willow Bookstore $120 credit for 12 books returned costing $72. Paul s Book Warehouse s chart of accounts includes the following: No. 101 Cash, No. 112 Accounts Receivable, No. 120 Merchandise Inventory, No. 201 Accounts Payable, No. 401 Sales, No. 412 Sales Returns and Allowances, No. 414 Sales Discounts, No. 505 Cost of Goods Sold. Instructions Journalize the transactions for the month of June for Paul s Book Warehouse using a perpetual inventory system. P2-19 The following adjusted trial balance is prepared at month-end for Chips Company: CHIPS COMPANY Unadjusted Trial Balance February 28, 2005 Account title Debit Credit Cash $ 3,000 Merchandise inventory 16,000 Store supplies 1,000 Prepaid insurance 1,400 Store equipment 49,600 Accum. Depr. store equipment $ 8,600 Accounts payable 14,400 Common stock 5,000 Retained earnings 25,600 Dividends 2,800 Sales 117,600 Sales discounts 1,200 Compiled By Nut Khorn, -Page 28-

29 Sales returns and allowances 11,200 Cost of goods sold 54,000 Depreciation expense equip. Salaries expense 13,000 Insurance expense Rent expense 4,000 Store supplies expense Advertising expense 14,000 Totals $171,200 $171,200 Rent and salaries expenses are equally divided between selling activities and the general and administrative activities. Chips Company uses a perpetual inventory system. Required 1. Prepare a multiple-step income statement for fiscal year Prepare a single-step income statement for fiscal year P2-20 Malloy Company s adjusted trial balance on November 30, 2005, its fiscal year-end, follows: Debit Credit Merchandise inventory $ 38,000 Other assets 156,000 Liabilities $ 52,000 Common stock 20,000 Reatined earnings 51,600 Dividends 14,000 Sales 305,000 Sales discounts 4,100 Sales returns and allowances 15,200 Cost of goods sold 103,500 Sales salaries expense 32,500 Store supplies expense 11,700 Delivery expense 12,000 Office salaries expense 38,000 Office supplies expense 3,600 Totals $428,600 $428,600 On November 30, 2004, merchandise inventory amounted to $22,000. Supplementary records of merchandising activities for the year ended November 30, 2005, reveal the following itemized costs: Invoice cost of merchandise purchases $120,000 Purchase discounts received 1,700 Compiled By Nut Khorn, -Page 29-

30 Purchase returns and allowances 3,300 Costs of transportation-in 4,500 Required 1. Compute the company s net sales for the year. 2. Compute the company s total cost of merchandise purchased for the year. 3. Prepare a multiple-step income statement that includes separate categories for selling expenses and for general and administrative expenses. 4. Prepare a single-step income statement that lists these expense categories: cost of goods sold, selling expenses, and general and administrative expenses. P2-21) Prepare journal entries to record the following merchandising transactions of Florence s Tower Company, which applies the perpetual inventory system. (Hint: It will help to identify each receivable and payable; for example, record the purchase on June 1 in Accounts Payable Brenda Co.) June 1 Purchased merchandise from Brenda Company for $7,000 under credit terms of 1/15, n/30, FOB shipping point. 2 Sold merchandise to Ed Cris Co. for $850 under credit terms of 2/10, n/30, FOB shipping point. The merchandise had cost $ Paid $250 cash for freight charges on the purchase of July 1. 7 Sold merchandise that cost $2,300 for $5,600 cash. 9 Purchased merchandise from MaryMac Co. for $1,950 under credit terms of 2/15, n/60, FOB destination. 11 Received a $500 credit memorandum from the return of merchandise purchased on June 9 12 Received the balance due from Ed Cris Co. for the credit sale dated June 2, net of the discount. 16 Paid the balance due to Brenda Company within the discount period. 19 Sold merchandise that cost $420 to Truckin Co. for $840 under credit terms of 2/10, n/45, FOB shipping point. 20 Issued a $100 credit memorandum to Truckin Co. for an allowance on goods sold on June Received a debit memorandum from Truckin Co. for an error that overstated th total sales invoice by $ Paid MaryMac Co. the balance due after deducting the discount. 30 Received the balance due from Truckin Co. for the credit sale dated June19, net of discount. 30 Sold merchandise that cost $2,500 to Cosmo Co. for $6,000 under credit terms of 2/10, n/60, FOB shipping point. The end of the Chapter 1. Compiled By Nut Khorn, -Page 30-

31 CHAPTER. 2 ACCOUNTING FOR RECEIVABLES STUDY OBJECTIVE After studying this chapter, you should be able to: 1 Classification of Receivables 2. Internal Control of Receivables 3. Uncollectible Receivables 4. Uncollectibles Allowance Method 5. Uncollectibles Direct Write-Off Method 6. Characteristics of Notes Receivable 7. Accounting for Notes Receivable 8. Balance Sheet Presentation 9. Financial Analysis and Interpretation Compiled By Nut Khorn, -Page 31-

32 In the normal course of events, accounts receivable are collected in cash and removed from the books. However, as credit, sales and receivables have grown in size and significance, the normal course of events has changed. There are several reasons for the sale of receivables. First, for competitive reasons, sellers (retailers, wholesalers, and manufacturers) often must provide financing to purchases of their goods 2. Goods and services are normally bought and sold on credit where payment is made or received at a letter date then the delivery of the goods or provision of the service. The important event for the business is the date of the purchase or the sale and not the receipt or payment of the cash 3. I. Classification of Receivables Accounts Receivable used for selling merchandise or services on credit, and normally expected to be collected in a relatively short period. Notes Receivable used to grant credit on the basis of a formal instrument of credit, called a promissory note. Other Receivables interest receivable, taxes receivable, and receivables from officers or employees. Note: Accounting for Sales Revenues Assume on March 15, $1,000 of merchandise is sold on account. The terms of the agreement are 2/10, n/30. The firm uses the gross method for record sales on account. Entry on date of sale: Dr Accounts Receivable 1,000 Cr Sales.1,000 If paid within the discount period: Dr Cash 980 Cr Sales Discounts 20 Cr Accounts Receivable 1,000 If not paid within the discount period: Dr Cash 1,000 Cr Accounts Receivable 1,000 II. Accounting for Bad Debts Occur when customers do not pay for items or services purchased on credit. Bad debts are uncollectible accounts receivable. Bad Debt Expense is reported as a selling or general and administrative expense. 2 Weygandt, Kieso, and Kell, (1996), Accounting Principles, pp BPP Professional Education, (2006), CAT, pp.152. Compiled By Nut Khorn, -Page 32-

33 Accounts receivable are reported on the balance sheet at their net realizable value. III. Accounting for Uncollectible Accounts Receivable Two methods are used in accounting for uncollectible accounts: (1) the the direct write-off method and (2) allowance method. Each of these methods is explained in the following sections. 1) Direct write off Method This method is not consistent with the matching principle. Accounts that prove to be uncollectible are written off in the year they become worthless. Uncollectible Accounts Expense is debited and Accounts Receivable is credited for each such transaction. Under the direct write-off method, bad debt losses are not estimated and no allowance account is used. Journal Entries Direct Write off Method May.10 Dr Uncollectible Accts. Expense 420 Cr Accts. Receivable - D. L. Ross 420 Write off uncollectible Account of $ 420. Nov.21 Dr Accts. Receivable - D. L. Ross 420 Cr Uncollectible Accts. Expense 420 Dr Cash 420 Cr Accts. Receivable - D. L. Ross 420 Reinstate and collect prior account written off. 2) The Allowance Method (Required by GAAP) This method is consistent with the matching principle. 2. Management makes an estimate each year of the portion of accounts receivable that may not be collectible. (Adjusting Entry at the end of each period) Uncollectible Accounts Expense is debited and Allowance for Doubtful Accounts is credited. 3. Actual accounts that prove to be uncollectible are debited to Allowance for Doubtful Accounts and credited to Accounts Receivable. (Write-off) When all means of collecting a past-due account have been exhausted and collection appears impossible, the account should be written off. To prevent premature write offs, each write off should be formally approved in writing by authorized management personnel. Dec. 31 Dr Uncollectible Accts. Expense 4,000 Cr Allowance for Doubtful Acct. 4,000 Compiled By Nut Khorn, -Page 33-

34 Estimated a total of $4,000 will be uncollectible. Jan 21. Dr Allowance for Doubtful Accts. 610 Cr Accts. Receivable - J. Parker 610 Write off uncollectible account of $160. June 10. Dr Accts. Receivable - J. Parker 610 Cr Allowance for Doubtful Accts. 610 Dr Cash 610 Cr Accts. Receivable - J. Parker 610 Reinstate and collect prior account write off. In the Partial Balance sheet. Current Assets: Cash..$14,800 Accounts Receivable.$200,000 Less: Allowance for Doubtful accounts. 12, ,000 Merchandise Inventory 310,000 Prepaid Expense.25,000 Total Current Assets $537,800 Note: Net A/R..$188,000 Note: There are three methods of the Allowance Method Percentage of credit sales Percentage of accounts receivable Aging receivables Percentage of Credit Sales Management establishes a percentage relationship between the amount of credit sale and expected loss for uncollectible accounts. The ABC Company had credit sales of $100,000. The current accounts receivable balance is $30,500. The allowance for doubtful accounts balance is $350. Historically, 2 percent of the credit sales are not collected. Dr Bad Debt Expense 2,000 Cr Allowance for Doubtful Accounts 2,000 To record estimated uncollectible accounts for the year. Percentage of Accounts Receivable Management establishes a percentage relationship between the amount of receivable and the expected loss for uncollectible accounts. The XYZ Company had credit sales of $693,000. The current accounts receivable balance is $50,000. The allowance account balance is a credit of $600. Historically, 3 percent of accounts receivable are not collectible. Compiled By Nut Khorn, -Page 34-

35 Allowance for Doutfual Accounts Bal: $ Adjusting: $ Bal: $ 1, We compute: $50,000x0.03 Dr Bad Debt Expense $900 Cr Allowance for Doubtful Accounts $900 To record estimated uncollectible accounts for the year. ($50,000*0.03) - $600= $900) Aging Receivable The analysis of customer balance by the length of time they have been unpaid. The ABC Company had credit sales of $100,000. The current accounts receivable balance is $47,550. The allowance for doubtful accounts balance is credit of $620.The firm ages the accounts to determine the expected uncollectibles. Remember, because receivables are involved, the amount derived from aging provides the desired balance of the allowance account. Compiled By Nut Khorn, -Page 35-

36 Allowance for Doutfual Accounts Bal: $ Adjusting: $ 2, Bal: $ 2, Dr Dab Debt Expense $2,250 Cr Allowance for Doubtful Accounts $2,250 To record estimated uncollectible accounts for the year Credit Card Sales Retailer considers credit card sales the same as cash sales. Retailer must pay card issuer a fee of 2 to 4% for processing the transactions. Retailer records the sale in a similar manner as checks deposited from cash sale. Approximately 1 billion credit cards were established to be in use recently more than three credit cards for every man, woman,and child in this country. A common type of credit card is a national credit card such as VISA, MasterCard, and American Express. Three parties are involved when nation credit cards are used in making retail sales: (1) the credit card issuer, who is independent of the retailer, (2) the retailer, and (3) the customer. Note: Visa is the largest retail electronic payment network in the world, connecting 16,600 financial institutions and more than 1.6 billion cards to more Compiled By Nut Khorn, -Page 36-

37 than 29 million merchants and 1 million ATMs worldwide, according to a company statement. 4 VISA and MasterCard Sales: Sales resulting from the use of VISA and MasterCard are considered cash sales by the retailers. The cards are issued by banks. Examples: On May 10, Dale Company sold merchandise for $3,500 and accepted the customer s America Bank MasterCard. America Bank charges a 4% service charge for credit card sales. Prepare the entry on Dale Company s books to record the sale of merchandise. Cash $3,360 Service Charge Expense Sales..$3,500 ($3,500x 0.04 = $140) IV. Characteristics of Notes Receivable A promissory note is a written document containing a promise to pay: a specific amount of money (principal) to a specific person or company (payee) at a specific place on a specific date or upon demand plus interest at a specific percentage of the principal (face) amount per year 4 THE CAMBODIA DAILY, BUSINESS, Friday, August 29, 2008.page 29. Compiled By Nut Khorn, -Page 37-

38 Calculating Interest and Maturity Value We received a $2,500, 10%, 90-day note dated March 16, Compiled By Nut Khorn, -Page 38-

39 ILLUSTRATIVE ACCOUNTING ENTRIES OF NOTE RECEIVABEL The accounting entries for promissory notes receivable fall into four groups: (1) recording receipt of a note, (2) recording collection of a note, (3) recording dishonored note, and (4) recording adjusting entries. (1) Recording receipt of a note, Assume that on June 1 a 12 percent, 30-day note is received from a customer, J.Halsted, in settlement of an existing accounts receivable of $4,000. The entry for this transaction is as follows: June 1. Note Receivable.$4,000 A/R.$4,000 (Received 12 percent, 30-day note in payment of account of J. Halsted) (2) Recording collection of a note Jul1. Cash...$4,040 Note Receivable.$4,000 Interest Revenue 40 (Collected 12 percent, 30-day note form J. Halsted) (3) Recording dishonored note A dishonored note is a note that is not paid in full at maturity. Jul1. A/R...$4,040 Note Receivable.$4,000 Interest Revenue 40 (Collected 12 percent, 30-day note dishonored by J. Halsted) (4) Recording adjusting entries. Examples Mike s Stores had the following select transactions. Apr. 1, 2008 Accepted Otis Company s 1-year, 12% note in settlement of a $30,000 accounts receivable. July 1, 2008 Loaned $50,000 cash to Dan Hampton on a 9-month, 10% note. Dec. 31, 2008 Accrued interest on all notes receivable. Apr. 1, 2009 Received principal plus interest on the Otis note. Apr. 1, 2009 Dan Hampton dishonored its note; Mike s expects it will eventually collect. Instructions Prepare journal entries to record the transactions. Mike s Stores prepares adjusting entries once a year on December 31. Solution Compiled By Nut Khorn, -Page 39-

40 Apr 1,08 Note Receivable $ 30, A/R $ 30, ( Accepted 1-year,12%, note from Otis Com) 1-Jul-08 Note Receivable $ 50, Cash $ 50, ( Loaned to Dan Hampton, 9-month, 10%, note) Dec31,08 Interest Receivable $ 2, Interest Revenue $ 2, ( 9-month for Otis Com) Interest Receivable $ 2, Interest Revenue $ 2, ( 6-month for Dan Hampton) April 1,09 Cash $ 33, Note Receivable $ 30, Interest Receivable $ 2, Interest Revenue $ ( Collected in cash from Otis Com, 3-month) 1-Apr-09 A/R $ 53, Note Receivable $ 50, Interest Receivable $ 2, Interest Revenue $ 1, ( Dishonored note by Dan Hampton, 3 month) End of Chapter 2 Compiled By Nut Khorn, -Page 40-

41 Problems on Chapter2 Accounts and Note Receivable P2-1) At the end of October, Mafa Company management estimates the uncollectible accounts expense (=Bad debts expense) to be 1 percent of net sales of $2,770,000. Give the entry to record the uncollectible accounts expense, assuming that the Allowance for Uncollectible Accounts (= Allowance for Doubtful Accounts) has a debit balance of $14,000. P2-2) An aging analysis on June 30 of the accounts receivable of Texbar Corporation indicates uncollectible accounts of $43,000. Give the entry to record uncollectible accounts expense under each of the following independent assumptions: (a) Allowance for Uncollectible Accounts has a credit balance of $9,000 before adjustment, and (b) Allowance of Uncollectible Accounts had a debit balance of $7,000 before adjustment. P2-3) At the end of the year, Marin Enterprises estimates the uncollectible accounts expense to be 0.7 percent of net sale of $10,100,000. The current credit balance of Allowance for Uncollectible Accounts is $17,200. Give the general journal entry to record the uncollectible accounts expense. What is the balance of Allowance for Uncollectible Accounts after this adjustment? P2-4) Accounts Receivable of Herera Company shows a debit balance of $104,000 at the end of the year. An aging analysis of the individual accounts indicates estimated uncollectible accounts to be $6,700. Give the general journal entry to record the collectible accounts expense under each of the following independent assumptions: (a) Allowance for Uncollectible Accounts has a credit balance of $800 before adjustment and (b) Allowance for Uncollectible Accounts has a debit balance of $800 before adjustment. P2-5) During its first year of operations, Wendy Company had credit sales of $3,000,000, of which $600,000 remained uncollected at year-end. The credit manager estimates that $40,000 of these receivable will become uncollectible. (a) Prepare the journal entry to record the estimated uncollectibles. (b) Prepare current assets section of the balance for Wendy Company, assuming that in additional to receivables it has cash of $90,000, merchandise inventory of $130,000, and prepaid expenses of $13,000. P2-6) Alex Co. elects to use the percentage of sales basis in 2010 to record the bad debts expense and concludes that 2% of net credit sales will become uncollectible. Sales are $700,000 for 2010, sales returns and allowances are $50,000, and the allowance for doubtful accounts has a credit balance of $12,000. Prepare the adjusting entry to record the bad debts expense in P2-7) Massey Co. uses the percentage of accounts receivable basis to record bad debts expense, and concludes that 1% of accounts receivable will become uncollectible. Accounts Receivable are $500,000 at the end of the year, and the allowance for doubtful accounts has a credit balance of $3,000. (a) Prepare the adjusting journal entry to record bad debt expense for the year. (b) If the Compiled By Nut Khorn, -Page 41-

42 allowances for doubtful accounts a debit balance of $800 instead of credit balance of $3,000, determine the amount to report for bad debt expense. P2-8) On December 31, 2009, Lisa Ceja Co. estimates that 2% of its net sales of $300,000 will become uncollectible and records this amount as an addition to Allowance for Doubtful Accounts. On May 11, 2010, Lisa Ceja Co. determined that Robert Worthy s account was uncollectible and wrote off $900. On June 12, 2010, Worthy paid the amount previously written off. Prepare the journal entries on December 31, 2009, May 11, 2010, and June 12, P2-9) Presented below is an aging schedule for Boitano Company. Number of Days Past Due Not Yet Customer Total Due Over 90 Aber $20,000 $9,000 $11,000 Bohr 30,000 $30,000 Case 50,000 15,000 5,000 $30,000 Datz 38,000 $38,000 Others 120,000 92,000 15,000 13, , ,000 29,000 24,000 30,000 38,000 Estimated Percentage 3% 6% 12% 24% 50% Uncollectible Total Estimated Bad Debts $34,930 $4,110 $1,740 $2,880 $7,200 $19,000 At December 31, 2009, the adjusted balance in Allowance for Doubtful Accounts is a credit of $9,000. Journalize and post the adjusting entry for bad debts at December 31, (b) Journalize and post to the allowance account the following events and transactions in the year (1) March 1, a $1,900 customer balance originating in 2009 is judged uncollectible. (2) May 1, a check for $1,900 is received from the customer whose account was written off as uncollectible on March 1. (c) Journalize the adjusting entry for bad debts on December 31, Assume that the unadjusted balance in Allowance for Doubtful Accounts is a debit of $2,000, and the aging schedule indicates that total estimated bad debts will be $42,300. P2-10) At December 31, Trisha Underwood Imports reported the following information on its balance sheet: Accounts receivable... $1,000,000 Less: Allowance for Doubtful accounts 60,000 During the first quarter of 2010, the company had the following transactions related to receivable. 1. Sales on account... $2,600, Sales returns and allowances... 40, Collections of accounts receivables... 2,300,000 Compiled By Nut Khorn, -Page 42-

43 4. Write off of accounts receivable deemed uncollectible... 80, Recovery bad debts previously written of as uncollectible... 25,000 Instructions: (a) Prepare the journal entries to record each of five transactions. Assume that no cash discounts were taken on the collections of accounts receivable. (b) Enter the January 1, 2010, balance in Accounts Receivable and Allowance for Doubtful Accounts, post the entries to the two accounts (use T accounts), and determine the balances. (c) Prepare the journal entry to record bad debts expense for the first quarter of 2010, assuming that an aging of accounts receivable indicates that estimated bad debts are $70,000. P2-11) On January 1, 2010, Comeneci Company had Accounts Receivable $54,200 and Allowance for Doubtful Accounts $4,700. Comeneci Company prepares financial statements annually. During the year the following selected transactions occurred. Jan. 5 Sold $6,000 of merchandise to Garth Brooks Company, terms n/30. Feb. 2 Accepted a $6,000, 4-month, 12% promissory note from Garth Brooks Company for balance due. Feb.12 Sold $7,200 of merchandise to Gage Company and accepted Gag s $7,200 a two-month, 10% note for the balance due. Feb. 26 Sold $5,000 of merchandise to Mathias Co. terms n/10. Apr. 5 Accepted a $5,000, 3-month, 8% note from Mathias Co. for balance due. Apr. 12 Collected Gage Company note in full. June. 2 Collected Garth Brooks Company note in full. July. 5 Mathias Co. dishonored its note of April 5. It is expected that Mathias will eventually pay the amount owed. July 15 Sold $3,000 of merchandise to Tritt Inc. and accepted Tritt s $3,000, 3-month,12% note for the amount due. Oct. 15 The Tritt Inc. note was dishonored. Tritt Inc. is bankrupt, and there is no hope of future settlement. Instructions: Journalize the transactions. P2-12) Determine the interest on the following notes. a. $22,800 at 10 percent for 90days b. $16,000 at 12 percent for 60 days c. $18,000 at 9 percent for 30 days d. $30,000 at 15 percent for 120 days e. $10,800 at 6 percent for 60 days P2-13) Prepare general journal entries to record the following transactions. Jan. 16- Sold merchandise to Brighton Corporation on account for $36,000, terms n/30. Feb.15- Accepted a $36,000, 10 percent, 90-days note from Brighton Corporation in lieu of payment of account. May 16- Brighton Corporation dishonored the note. June 15- Received payment in full from Brighton Corporation, including interest at 10 percent from the date the note was dishonored. Compiled By Nut Khorn, -Page 43-

44 Chapter 3: Current Liabilities Current liabilities Are obligations due within one year or within the company s normal operating cycle if it is longer than one year Fall into one of two categories: Liabilities of known amount Liabilities whose amount must be estimated Accounts payable are amounts owed for products or services purchased on account. Accounts Payable are the counterpart of accounts receivable. Accounts payable arise when a company purchases goods, supplies, or services on credit. They are recorded at the amount expected to be paid to eliminate the obligation 5. May1. Bowden Co. purchased merchandise on account from Coker Co., $10,000, terms 2/10, n/30. Dr Mdse. Inventory $10,000 Cr Accts. Payable 10,000 Convert from Accounts Payable to Note Payable May 31. Bowden Co. issued a 60-day, 12% note for $10,000 to Coker Co. on account. May 31. Dr Account Payable $10,000 Cr Note Payable 10,000 Note Payable Obligations in the form of written promissory notes are recorded as notes payable. Notes payable are often used instead of accounts payable. Doing so gives the lender written documentation of the obligation in case legal remedies are needed to collect the debt. Notes payable usually require the borrow to pay interest and frequently are issued to meet short-term financing needs 6. June 30. Bowden Co. paid the amount due. Interest: $10,000x12%x60/360= $200 Dr Note Payable $10,000 Cr Interest Expense 200 Cr Cash 10,200 Sales Tax Payable As consumers, we are well aware that many of the products we purchase at retail store are subject to sales taxes. The tax is expressed as a stated percentage of the sales price. The retailer (selling company) collects the 5 Chasteen, Flaherty, and O connor, (1998), Intermediate Accounting,pp Weygandt, Kieso, and Kell,(1996), Accounting Principles,pp Compiled By Nut Khorn, -Page 44-

45 tax from the customer when the sale occurs, and periodically (usually monthly) remits the collections to the state s department of revenue. Under most of state sales tax laws, the amount of the sale and the amount of the sales tax collected must be rung up separately on the cash register. The cash registers readings are then used to credit Sales and Sales Taxes Payable. For example, assuming that the March 25 cash register readings for Cooley Grocery show sales of $10,000 and sales taxes of $600 (sales tax rate of 6%), the entry is 7 : Mar. 25 Dr Cash.$10,6000 Cr Sales 10,000 Cr Sales Taxes Payable 600 (To record daily sales and sales taxes) Current Liabilities must be estimated Estimated warranty payable Arises when a company warranties its product Is recorded in the same period that the business recognizes sales revenue Is estimated because the exact amount of warranty expense cannot be known with certainty. Assume that Black & Decker made sales of $200,000,000 subject to product warranties. If Black & Decker estimates that 3% of the products it sells this year will require repair or replacement, the company would estimate warranty expense of $6,000,000 ($200,000,000 x.03) for the period and make the following entry: Dr Warranty Expense 6,000,000 Cr Estimated Warranty Payable 6,000,000 To accrue warranty expense End of Chapter 3 7 Weygandt, Kieso, and Kell,(1996), Accounting Principles,pp Compiled By Nut Khorn, -Page 45-

46 Problems on Chapter 3: Current Liabilities P3-1: Indiana Jones Company had the following selected transactions: Feb. 1 Sings a $50,000 6-month 9% -interest-bearing note payable to CityBank receiving $50,000 in cash. Feb 10 Cash register sales total $43,200 which includes an 8% sales tax. Feb 28 The following adjustment data are developed: 1. Interest expense of $375 has been occurred on the note. 2. Some sales were made under warranty. Of the units sold under warranty, 350 are expected to become defective. Repair costs are estimated to be $40 per unit. Instructions: Journalize the February transactions. P3-2: Grandy Auto Supply does not segregate sales and sales taxes at the time of sale. The register total for March 16 is $9,975. All sales are subject to a 5% sales tax. Compute sales taxes payable and make the entry sales taxes payable and sales. P3-3: On December 1, Irma Company introduces a new product that includes a one-year warranty on parts. In December 1,000 units are sold. Management believes that 4% of the units will be defective and the average warranty costs will be $60 per unit. Prepare adjusting entry at December 31 to accrue the estimated warranty cost. P3-4: Cairo Company borrows $50,000 from First Bank on a 6-month, $50,000, 12% notes. Instructions: a) Prepare the entry on June 1. b) Prepare the adjusting entry on June 30. P3-5: In providing accounting services to small business, you encounter the following situations pertaining to cash sales: 1. Nash Company rings up sales and sales tax separately on its cash register. On April 10, the register totals are sales $25,000 and sales taxes $1, Pontiac Company does not segregate sales and sales taxes. Its register total for April 15 is $13,780, which includes a 6% sales tax. P3-6: On January 1, 2010, the ledger of Calcutta Company contains the following liability accounts. Accounts Payable $42,500 Sales Taxes Payable.. 5,600 During January the following selected transactions occurred: Jan.1 Borrowed $15,000 in cash from Milland Bank on a 4-month, 12%, Jan. 5 $15,000 note. Sold merchandise for cash totaling $7,800 which includes 4% sales taxes. Jan. 20 Sold 500 units of a new product on credit at $52 per unit, plus 4% sales tax. This new product is subject to a 1-year warranty. Jan.25 Sold merchandise for cash totaling $11,440, which includes 4% sales taxes. Instructions: a) Journalize the January transactions. Compiled By Nut Khorn, -Page 46-

47 b) Journalize the adjusting entries at January 31 for (1) the outstanding note payable (2) estimated warranty liabilities, assuming warranty costs are expected to equal 8% of sales of the new product. P3-7: The following are selected transactions of Zimmer Company. Zimmer prepares financial statements quarterly. Jan. 2 Purchased merchandise on account from Alicea Company, $18,000, terms 2/10, n/30. Feb 1 Issued a 10%, 2-month, $18,000 note to Alicea in payment of account. Mar.31 Accrued interest for 2 months on Alicea note. Apr. 1 Paid face value and interest on Alicea note. July.1 Purchased equipment from Vincent Equipment paying $11,000 in cash and singing a 10%, 3-month, $24,000 note. Setp.30 Accrued interest for 3 months on Vincent note. Oct.1 Paid face value and interest on Vincent note. Dec 1 borrowed $10,000 from the Otago Bank by issuing a 3-month, 12% interest bearing note with a face value of $10,000. Dec.31 Recognized interest expense for 1 month on Otago Bank note. Instructions: (a) Prepare journal entries for the above transactions and events. (b) Post to the accounts, Notes Payable, Interest Payable, and Interest Expense. (c) Show the balance sheet presentation on note payable at December 31. (d) What is total interest expense for the year? Compiled By Nut Khorn, -Page 47-

48 Chapter 4: Inventories Study Objectives After studying this chapter, you should be able to: 1. Describe the steps in determining inventory quantities. 2. Explain the basis of accounting for inventories and describe the inventory cost flow methods. 3. Explain the financial statements and tax affects of each of the inventory cost flow methods. 4. List the essential accounting features of a perpetual inventory system. Compiled By Nut Khorn, -Page 48-

49 Why is Inventory Control Important? Inventory is a significant asset and for many companies the largest asset. Inventory is central to the main activity of merchandising and manufacturing companies. Mistakes in determining inventory cost can cause critical errors in financial statements. Inventory must be protected from external risks (such as fire and theft) and internal fraud by employees. Assigning Costs to Inventory Inventory affects... Balance Sheet Income Statement The matching principle requires the matching of the cost of the merchandise sold with the sales revenue. Merchandising and Inventory Merchandising involves selling inventory. Inventory is usually an important asset. Inventory must be accounted for periodically or perpetually. Traditional periodic method is often being replaced by perpetual inventory accounting. Advantages of Using Perpetual Inventory Continuous determination of inventory value Continuous determination of gross profit Affordable with computers, scanners, and bar codes on most products Perpetual inventory accounting provides management controls. Managers know which items are selling fastest and the profit margin on those items. Perpetual systems maintain a running record to show the inventory on hand at all times. Periodic Inventory Periodic systems do not keep a continuous record of inventory on hand. Inventory Costing There are three methods of the Cost Flow Methods 1. First-in, First -out (FIFO). Compiled By Nut Khorn, -Page 49-

50 Example: 2. Last-in, First- out (LIFO). 3. Average Cost. To illustrate the three methods under the periodic and perpetual inventory system, the following data for the month of June will be used. Inventory data, June 30 Data 5-1: Date XYZ COMPANY Explanation Units Unit Cost Total Cost June 1 Inventory 50 $1.00 $50 6 Purchase 50 $ Purchase 150 $ Purchase 100 $ Purchase 150 $ Goods Available for Sales 500 $625 Sales 280 On hand June Data 5-2: Date XYZ COMPANY Explanation Units Unit Cost Total Cost June 1 Inventory 50 $1.00 $50 6 Purchase 50 $ Sale Purchase 150 $ Purchase 100 $ Purchase 150 $ Sale Inventory 220 Periodic Inventory System We can use the formula as follow: COGS = Goods Available for Sales Ending Inventory 1) FIFO: The FIFO method assumes that the earliest goods purchased are the first to be sold. FIFO often parallels the actual physical flow of merchandise because it generally is good business practice to sell the oldest units first. Under the FIFO Compiled By Nut Khorn, -Page 50-

51 method, therefore, the cost of the earliest goods purchased are the first to be recognized as cost of goods sold. Use the Date 5-1: Step 1. Step 2. Ending Inventory Cost of Goods Sold Date Units Unit Cost Total Cost 25-Jun 150 $ 1.40 $ Cost of Goods Available for Sales $ Jun 70 $ 1.30 $ Less: Ending Inventory $ Total 220 $ Cost of Goods Sold $ ) LIFO: The LIFO method assumes that the latest goods purchased are the first to be sold. LIFO seldom coincides with the actual physical flow of inventory. Under the LIFO method, therefore, the costs of the latest goods purchased are the first to be recognized as cost of goods sold. Step 1. Step 2. Ending Inventory Cost of Goods Sold Date Units Unit Cost Total Cost 1-Jun 50 $ 1.00 $ Cost of Goods Available for Sales $ Jun 50 $ 1.10 $ Less: Ending Inventory $ Jun 120 $ 1.20 $ Cost of Goods Sold $ Total 220 $ ) Average Cost: The average cost method assumes that the goods of available for sales are homogeneous. Under this method, the allocation of the cost of goods available for sale is made on the basis of the weighted average unit cost incurred. Formula: Cost of goods availabe for sale units available for sale $625 = = $ = average cost unit Ending Inventory :220 units@ $1.25 = $ Cost of Goods Available for Sales $ Less: Ending Inventory $ Cost of Goods Sold $ Perpetual Inventory System Compiled By Nut Khorn, -Page 51-

52 Use the D5-2: FIFO Purchased Sold Balance Unit Unit Unit Date Units Cost Total Cost Units Cost Total Cost Units Cost Total Cost 1-Jun 50 $ 1.00 $ Jun 50 $ 1.10 $ $ 1.00 $ $ 1.10 $ Jun 50 $ 1.00 $ $ 1.10 $ $ 1.10 $ Jun 150 $ 1.20 $ $ 1.10 $ $ 1.20 $ Jun 100 $ 1.30 $ $ 1.10 $ $ 1.20 $ $ 1.30 $ Jun 150 $ 1.40 $ $ 1.10 $ $ 1.20 $ $ 1.30 $ $ 1.40 $ Jun 30 $ 1.10 $ $ 1.20 $ $ 1.30 $ $ 1.30 $ $ 1.40 $ $ $ Cost of Goods sold Ending Inv LIFO: Compiled By Nut Khorn, -Page 52-

53 Purchased Sold Balance Unit Unit Unit Date Units Cost Total Cost Units Cost Total Cost Units Cost Total Cost 1-Jun 50 $ 1.00 $ Jun 50 $ 1.10 $ $ 1.00 $ $ 1.10 $ Jun 50 $ 1.10 $ $ 1.00 $ $ 1.00 $ Jun 150 $ 1.20 $ $ 1.00 $ $ 1.20 $ Jun 100 $ 1.30 $ $ 1.00 $ $ 1.20 $ $ 1.30 $ Jun 150 $ 1.40 $ $ 1.00 $ $ 1.20 $ $ 1.30 $ $ 1.40 $ Jun 150 $ 1.40 $ $ 1.30 $ $ 1.00 $ $ 1.20 $ $ $ 1.30 $ COGS $ ENDING INV AVERAGE COST: Compiled By Nut Khorn, -Page 53-

54 Purchased Sold Balance Unit Unit Unit Date Units Cost Total Cost Units Cost Total Cost Units Cost Total Cost 1-Jun 50 $ 1.00 $ Jun 50 $ 1.10 $ $ 1.05 $ Jun 70 $ 1.05 $ $ 1.05 $ Jun 150 $ 1.20 $ $ 1.18 $ Jun 100 $ 1.30 $ $ 1.22 $ Jun 150 $ 1.40 $ $ 1.28 $ Jun 210 $ 1.28 $ $ 1.28 $ $ COGS $ ENDING INV Effects on the financial statements Each of the three methods of inventory pricing is acceptable for use in published financial statements. The factors that should be consider in choosing an inventory method are the affects of each method on financial statements, income taxes, and management decisions. Periodic Inventory System Perpetual Inventory System FIFO LIFO Average Cost FIFO LIFO Average Cost Sales $ 11, $ 11, $ 11, $ 11, $ 11, $ 11, COGS $ $ $ $ $ $ Gross Profit $ 11, $ 11, $ 11, $ 11, $ 11, $ 11, Operating Expense $ 2, $ 2, $ 2, $ 2, $ 2, $ 2, Income before income taxes $ 9, $ 9, $ 9, $ 9, $ 9, $ 9, Income tax expense (30%) 30% $ 2, $ 2, $ 2, $ 2, $ 2, $ 2, Net Income $ 6, $ 6, $ 6, $ 6, $ 6, $ 6, Compiled By Nut Khorn, -Page 54-

55 The 600 largest Companies in the U.S. The Internal Revenue Service has developed several rules for valuing inventories for federal income tax purpose. Many accountants believe that the use of the FIFO and average-cost methods in periods of rising prices causes the businesses to report more than their true profit, resulting in the payment of excess income taxes. When prices are rising LIFO produces the lowest income and lowest income tax. The Income Tax and Advantage of LIFO During periods of inflation, LIFO s income is the lowest. The most attractive feature of LIFO is reduced income tax payments. Accounting principles: consistency The business should use the same accounting methods and procedures from one period to the next. A company may change inventory methods, but it must disclose the effects of the change on net income. ACCOUNTING PRINCIPLES: DISCLOSURE The financial statements should report enough information to enable an outsider to make knowledgeable decisions about the company. Apply the lower-of-cost-or-market rule to inventory. An asset is reported at the lower of its historical cost or market (replacement) value. If the replacement cost falls below its historical cost, the business must write down the value of its inventory. Example Cost of inventory: $3,000 Market value at balance sheet date: $2,200 What is the journal entry? Compiled By Nut Khorn, -Page 55-