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Ricotta Company has cash of $20,000, net accounts receivable of $60,000, and net sales of $500,000. Last year’s net accounts receivable were $40,000. Compute Ricotta’s receivable turnover and days’ sales uncollected.
SOLUTION
Cash Equivalents and Cash Control
Cash equivalents: Investments that have a term of 90 days or less when they are purchased.
Cash Control Methods Imprest SystemsBanking ServicesBank Reconciliations
Imprest system: A system for controlling small cash disbursements by establishing a fund at a fixed amount and periodically reimbursing the fund to the original balance. Example: petty cash fund (used as source of currency on hand).
Banking Services Safe depositories for cash and valuable documents Checking accounts Agents in a variety of transactions Electronic funds transfer (EFT): A method of conducting
business transactions that does not involve the actual transfer of cash.
Bank reconciliation: The process of accounting for the difference between the balance on a company’s bank statement and the balance in its Cash account.
At year end, Tipi Company had currency and coins in cash registers of $1,100, money orders from customers of $2,000, deposits in checking accounts of $12,000, U.S. Treasury bills due in 80 days of $50,000, certificates of deposit at the bank that mature in six months of $200,000, and U.S. Treasury bonds due in one year of $100,000. Calculate the amount of cash and cash equivalents that will be shown on the company’s year-end balance sheet.
SOLUTION Currency and coins $ 1,100 Money orders 2,000Checking accounts 12,000U.S. Treasury bills (due in 80 days) 50,000Cash and cash equivalents $65,100
The certificates of deposit and U.S. Treasury bonds mature in more than 90 days and thus are not cash equivalents.
Direct charge-off method: Recognize a loss at the time it is determined that an account is uncollectible by reducing Accounts Receivable and increasing Uncollectible Accounts Expense.
Allowance method: Losses from bad debts are matched against the sales they help to produce.
Edwards Corporation made most of its sales on credit during its first year of operation, 2011. At the end of the year, accounts receivable amountedto $200,000. On December 31, 2011, management reviewed the collectible status of the accounts receivable. Approximately $12,000 of the $200,000 of accounts receivable were estimated to be uncollectible. This adjusting entry would be made on December 31 of that year:
Disclosure of Uncollectible Accounts
Allowance for Uncollectible Accounts Appears on the balance sheet as a contra
account Deducted from accounts receivable. Reduces the accounts receivable to the
amount of cash estimated to be collectible (net realizable value)
Percentage of net sales method: How much of this year’s net sales will not be collected?
Accounts receivable aging method: How much of the ending balance of accounts receivable will not be collected? Aging of accounts receivable: The process of listing
each customer’s receivable account by due date. If account past due, there is a possibility that it will not be
paid. Possibility increases as the account extends further beyond
The following balances represent Robin Inc.’s ending figures for December 2013:Sales: $322,500; Sales Returns and Allowances: $20,000; Sales Discounts: $2,500; Allowances for Uncollectible Accounts: $1,800 (credit)
The following are Robin’s actual losses from uncollectible accounts for the pastthree years:Year Net Sales Losses from Percentage
Regardless of the method used to estimate uncollectible accounts, the total of accounts receivable written off in an accounting period will rarely equal the estimated uncollectible amount.
When it becomes clear that a specific account receivable will not be collected, the amount should be written off to Allowance for Uncollectible Accounts.
Rock Instruments, Inc., sells its merchandise on credit. In the company’s last fiscal year, which ended July 31, it had net sales of $7,000,000. At the end of the fiscal year, it had accounts receivable of $1,800,000 and a credit balance in Allowance for Uncollectible Accounts of $11,200. In the past, the company has been unable to collect on approximately 1 percent of its net sales. An aging analysis of accounts receivable has indicated that $80,000 of current receivables are uncollectible.
1. Calculate the amount of uncollectible accounts expense and use T accounts to determine the resulting balance of Allowance for Uncollectible Accounts under the percentage of net sales method and the accounts receivable aging method.
2. How would your answers change if Allowance for Uncollectible Accounts had a debit balance of $11,200 instead of a credit balance?
1. Percentage of net sales method: Accounts receivable aging method:
2. Under the percentage of net sales method, the amount of the expense is the same in (1) and (2), but the ending balance will be $58,800 ($70,000 – $11,200). Under the accounts receivable aging method, the ending balance is the same, but the amount of the expense will be $91,200 ($80,000 + $11,200).
Promissory note: An unconditional promise to pay a definite sum of money on demand or at a future date A payee (the entity to whom payment is to be made)
includes all the promissory notes it holds that are due in less than one year in notes receivable in the current assets section of its balance sheet.
A maker (the person or company that signs the note and thereby promises to pay) includes them in notes payable in the current liabilities section of its balance sheet.
A promissory note received in one accounting period may not be due until a later period.
Interest accrues on a note by a small amount each day of the note’s duration.
Principal × Rate of Interest × Time = Interest
Accrued Interest
EXAMPLE:Accrued Interest
A $1,000, 90-day, 8 percent note was received on August 31 and that the fiscal year ended on September 30. In this case, 30 days’ interest would be $6.58, calculated as follows: Principal ×Rate of Interest ×Time = Interest $1,000 × 8/100 × 30/365 = $6.58
The remainder of the interest income would be $13.15: $1,000 × 8/100 × 60/365 = $13.15 �
1. Maturity date is February 29, 2012, determined as follows:
Days remaining in December (31 – 1) 30
Days in January 31
Days in February 28
Days in March 1
Total days 90
2. Interest: $5,000 × 8/100 × 90/365 = $98.63 �3. Maturity value: $5,000.00 × $98.63 = $5,098.63 �4. An adjusting entry to accrue 30 days of interest income in the amount
of $32.88 ($5,000 × 8/100 × 30/365) would be needed to debit Interest Receivable and credit Interest Income.