Course Name: Intermediate

Accounting II
Lecturer: Ahmed Yazin
Faculty Of: Business Admiration
Department of: Accounting
Semester : 5
 Course Outline
• CHAPTER 1: Cash and Receivables
• Chapter 2: Valuation Of Inventories: Cost Basis
Approach
• Chapter 3: Inventories: Additional Valuation
Issues
• Chapter 4: Acquisition And Disposition Of
Property, Plant, And Equipment
• Chapter 5: Depreciation, Impairments,
And Depletion
 What is Cash?
• Cash, the most liquid of assets, is the
standard medium of exchange and the
basis for measuring and accounting for
all other items.
• Companies generally classify cash as a
current asset.
• Cash consists of coin, currency, and
available funds on deposit at the bank.
 Reporting Cash
1)Cash Equivalents
Short-term, highly liquid investments that
are both
a)readily convertible to cash, and
b)so near their maturity that they present
insignificant risk of changes in interest
rates.
Examples: Treasury bills, Commercial
paper, and Money market funds.
 Continue……….
2)Restricted Cash
• Petty cash, payroll, and dividend funds are
examples of cash set aside for a particular purpose.
In most situations, these fund balances are not
material. Therefore, companies do not segregate
them from cash in the financial statements.
• Companies segregate restricted cash from “regular”
cash
Examples, restricted for:
1. Plant expansion, and
2. Retirement of long-term debt.
 Continue……….
3)Bank Overdrafts
Company writes a check for more than the
amount in its cash account.
Generally reported as a current
liability.
Offset against other cash accounts only
when accounts are with the same bank.
Accounts Receivable
Receivables - Claims held against customers
and others for money, goods, or services.

Oral promises of the Written promises to pay a

purchaser to pay for goods sum of money on a specified
and services sold. future date.

Accounts
Accounts Notes
Notes
Receivable
Receivable Receivable
Receivable
Recognition of Accounts
Receivables
Cash Discounts
 Inducements for
prompt payment
 Gross Method vs. Net Payment
Method terms are
2/10, n/30
Recognition of Accounts
Receivables
Cash Discounts (Sales Discounts)
Illustration 7-4
Recognition of Accounts Receivables
E7-5: On June 3, Al Nour Company sold to Star Company
merchandise having a sale price of $2,000 with terms of 2/10,
n/60, f.o.b. shipping point. On June 12, the company received a
check for the balance due from Star Company. Prepare the
journal entries on Al Nour Company books to record the sale
assuming Al Nour records sales using both the Gross method
and Net Method.
June 3 Accounts receivable 2,000
Sales

June 12 2,000
Cash ($2,000 x 98%) 1,960
Sales discounts 40
Accounts receivable 2,000
 Net Method

June 3 Accounts receivable 1,960

Sales

1,960
June 12 Cash ($2,000 x 98%) 1,960
Accounts receivable 1,960
Valuation of Accounts Receivable
• Reporting of receivables involves
1) classification and
2) valuation on the balance sheet.
• Classification involves determining the length of
time each receivable will be outstanding.
• Companies value and report short-term receivables
at net realizable value—the net amount they expect
to receive in cash.
• Determining net realizable value requires estimating
uncollectible receivables.
Valuation of Accounts Receivable
Uncollectible Accounts Receivable
An uncollectible account receivable is a loss of
revenue that requires, through proper entry in the
accounts,
 a decrease in the asset accounts receivable and
 a related decrease in income and stockholders’
equity.
 Valuation of Accounts Receivable
Two Methods are used in Accounting for
Uncollectible Accounts

The Direct Write-Off Method The Allowance Method

 Direct Write-Off Method for
Uncollectible Accounts
• Under the direct write-off method, when a
company determines a particular account to be
uncollectible, it charges the loss to Bad Debt
Expense.
• Assume, for example, that on December 10 Cruz
Co. writes off as uncollectible Yusado’s $8,000
balance. The entry is:
December 10
Bad Debt expense ………. 8,000
Accounts Receivable …………….. 8,000
 Allowance Method for
Uncollectible Accounts
• The allowance method of accounting for bad debts
involves estimating uncollectible accounts at the
end of each period.
• This ensures that companies state receivables on the
balance sheet at their net realizable value.
• Net realizable value is the net amount the
company expects to receive in cash.
Continue……….
• This method has three essential features:
1) Companies estimate uncollectible accounts receivable.
They match this estimated expense against revenues in
the same accounting period in which they record the
revenues.
2) Companies debit estimated uncollectible to Bad Debt
Expense and credit them to Allowance for Doubtful
Accounts (a contra-asset account) through an adjusting
entry at the end of each period.
3) When companies write off a specific account, they debit
actual uncollectible to Allowance for Doubtful Accounts
and credit that amount to Accounts Receivable.
 Example: Recording Estimated
Uncollectible.
• To illustrate the allowance method, assume that
Brown Furniture has credit sales of $1,800,000 in
2012. Of this amount, $150,000 remains
uncollected at December 31.
• The credit manager estimates that $10,000 of these
sales will be uncollectible.
• The adjusting entry to record the estimated
uncollectible is:
December 31
Bad debt expense ………. 10,000
Allowance for doubtful accounts ….. 10,000
 Recording the Write-Off of an
Uncollectible Account.
• When companies have exhausted all means of
collecting a past-due account and collection appears
impossible, the company should write off the
account.
• To illustrate a receivables write-off, assume that the
financial vice president of Brown Furniture
authorizes a write-off of the $1,000 balance owed
by Randall Co. on March 1, 2013. The entry to
record the write-off is:
March 1 2013
Allowance for doubtful accounts…. 1,000
Accounts Receivable ………….….. 1,000
 Recovery of an uncollectible Account
• Occasionally, a company collects from a customer
after it has written off the account as uncollectible.
• The company makes two entries to record the recovery
of a bad debt:
1) It reverses the entry made in writing off the account.
This reinstates the customer’s account.
2) It journalizes the collection in the usual manner.
• To illustrate, assume that on July 1, Randall Co. pays
the $1,000 amount that Brown had written off on
March 1.
• These are the entries:
Continue……….

July 1
Accounts Receivable …. 1,000
Allowance for doubtful accounts ….….. 1,000

Cash…….…. 1,000
Accounts Receivable….….. 1,000
Exercise: Recording Bad Debts
• At the end of 2012, Sorter Company has accounts
receivable of $900,000 and an allowance for doubtful
accounts of $40,000.
• On January 16, 2013, Sorter Company determined that
its receivable from Ordonez Company of $8,000 will not
be collected, and management authorized its write-off.
Instructions
a) Prepare the journal entry for Sorter Company to write
off the Ordonez receivable.
b) What is the net realizable value of Sorter Company’s
accounts receivable before the write-off of the
Ordonez receivable?
c) What is the net realizable value of Sorter Company’s
accounts receivable after the write-off of the Ordonez
receivable?
Valuation of Accounts Receivable
Illustration 7-6

Emphasis
Emphasison on
the
theIncome
Income
Statement
Statement
relationships
relationships

Emphasis
Emphasison on
the
theBalance
Balance
Sheet
Sheet
relationships
relationships
Valuation of Accounts Receivable

Percentage-of-Sales Approach
 Percentage based upon past experience and
anticipate credit policy.
 Achieves proper matching of costs with revenues.
 Existing balance in Allowance account not
considered.
Valuation of Accounts Receivable
Illustration: Hormud Company estimates from past experience
that about 1% of credit sales become uncollectible.

If net credit sales are $800,000 in 2012, it records bad debt

expense as follows.

Bad Debt Expense 8,000

Allowance for Doubtful Accounts 8,000
Illustration 7-7
Valuation of Accounts Receivable
Percentage-of-Receivables Approach
 Not matching.
 Reports receivables at realizable value.

Companies may apply this method using

 one composite rate, or
 an aging schedule using different rates.
 Illustration 7-8
Accounts Receivable
Aging Schedule

What entry
would Wilson
make assuming
that no balance
existed in the
allowance
account?

Bad Debt Expense 37,650

Allowance for Doubtful Accounts 37,650
Example (Recording Bad Debts):
Star Company reports the following financial information
before adjustments.

Instructions: Prepare the journal entry to record bad debt

expense assuming Star Company estimates bad debts at
(a) 1% of net sales and
(b) 5% of accounts receivable.
 Solution
a) 1% of Net Sales
Bad Debt Expense………………… 7,500
Allowance for Doubtful Accounts…….. 7,500
($800,000 – $50,000) x 1% = $7,500
b) 5% of accounts receivable.
Bad Debt Expense ………………. 6,000
Allowance for Doubtful Accounts ….. 6,000
($160,000 x 5%) – $2,000) = $6,000
NOTES RECEIVABLE
• A note receivable is supported by a formal promissory
note, a written promise to pay a certain sum of money at
a specific future date.

• Maker signs in favor of a Payee.

Interest-bearing (has a stated rate of interest) OR

Zero-interest-bearing (interest included in face amount).

 Note Issued at Face Value
Illustration: Bigelow Corp. lends Scandinavian Imports
$10,000 in exchange for a $10,000, three-year note bearing
interest at 10 percent annually. The market rate of interest for a
note of similar risk is also 10 percent. How does Bigelow record
the receipt of the note?
i = 10%
$10,000 Principal

$1,000 1,000 1,000 Interest

0 1 2 3 4
n=3