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Economics 710
Having communicated with professors teaching this class in Brown, I can audit the class and join TA sections:)

Text Book: Financial Accounting 13Edition
by Carl S. Warren, James M. Reeve, Jonathan Duchac
Cost: $65.68 Rent Kindle Edition From Amazon

Start Date: Sep 8, 2014

Week 1
Chapter 1: Introduction to Accounting and Business

Task completed: Learning Objectives 1-5
Exercises 8-12
Problem Series 5A

Chapter 2: Analyzing Transactions
Task completed: Learning Objectives 1-4
Exercises 4,6,7,8,9
Problem Series 1A
Time Spent: 5 Hours
Self-evaluation: A

Week 2
Chapter 3: The Adjusting Process
Ensure Revenues and Expenses are recorded with proper fiscal period.
Accrual basis of accounting: revenues are recognized when earned and expenses are recognized when incurred.

Week 9
Chapter 9 Receivable

Classification of Receivables

Accounts receivable: are normally collected within a short period, such as 30 or 60 days. They are classified on the balance sheet as a current asset.

Notes receivable: are amounts that customers owe for which a formal, written instrument of credit has been issued. If notes receivable are expected to be collected within a year, they are classified on the balance sheet as a current asset.
Notes and accounts receivable that result from sales transactions are sometimes called trade receivables.

Other receivables : interest receivable, taxes receivable, and receivables from officers or employees. Other receivables are normally reported separately on the balance sheet. If they are expected to be collected within one year, they are classified as current assets. If collection is expected beyond one year, they are classified as noncurrent assets and reported under the caption Investments.

Uncollectible Receivables

Companies may shift the risk of uncollectible receivables to other companies-only accept cash or credit card

Companies may also sell their receivables. This is often the case when a company issues its own credit card. For example, Macy’s and JCPenney issue their own credit cards.
Selling receivables is called factoring the receivables. The buyer of the receivables is called a factor. An advantage of factoring is that the company selling its receivables immediately receives cash for operating and other needs. Also, depending on the factoring agreement, some of the risk of uncollectible accounts is shifted to the factor.

The operating expense recorded from uncollectible receivables is called bad debt expense, uncollectible accounts expense, or doubtful accounts expense.

The two methods of accounting for uncollectible receivables are as follows:

1. The direct write-off method records bad debt expense only when an account is
   determined to be worthless.
2. The allowance method records bad debt expense by estimating uncollectible accounts
   at the end of the accounting period.(GAAP required)

Direct Write-off
e.g. a $4,200 account receivable has been
determined to be uncollectible:
Bad Debt Expense 4,200
Accounts Receivable—D. L. Ross 4,200

Assume that the D. L. Ross account of $4,200 written off
is later collected :
Accounts Receivable—D. L. Ross 4,200
Bad Debt Expense 4,200
Cash 4,200
Accounts Receivable—D. L. Ross 4,200

Allowance Method
e.g. Accounts receivable will be uncollectible:
Bad Debt Expense 30,000
Allowance for Doubtful Accounts 30,000
Uncollectible accounts estimate.

The preceding adjusting entry affects the income statement and balance sheet.
On the income statement, the $30,000 of Bad Debt Expense will be matched
against the related revenues of the period. On the balance sheet, the value of the
receivables is reduced to the amount that is expected to be collected or realized.
This amount, $170,000 ($200,000 – $30,000), is called the net realizable value of
the receivables.

e.g. John Parker’s account of $6,000 with ExTone Company is written off as follows:
Allowance for Doubtful Accounts 6,000
Accounts Receivable—John Parker 6,000

e.g. Collected later :
Accounts Receivable—Nancy Smith 5,000
Allowance for Doubtful Accounts 5,000
Cash 5,000
Accounts Receivable—Nancy Smith 5,000

Estimating Uncollectibles

1. Percent of sales method.
2. Analysis of receivables method.

Percent of sales method
e.g. Assume the following data for ExTone Company on December 31, 2014, before any adjustments:
Balance of Accounts Receivable $ 240,000
Balance of Allowance for Doubtful Accounts 3,250 (Cr.)
Total credit sales 3,000,000
Bad debt as a percent of credit sales ¾%

Bad Debt Expense of $22,500 is estimated as follows:
Bad Debt Expense = Credit Sales × Bad Debt as a Percent of Credit Sales
Bad Debt Expense = $3,000,000 × ¾% = $22,500
The adjusting entry for uncollectible accounts on December 31, 2014, is as follows:
Bad Debt Expense 22,500
Allowance for Doubtful Accounts 22,500
Uncollectible accounts estimate
($3,000,000 × ¾% = $22,500).
Allowance for Doubtful Accounts will have an adjusted balance of $25,750 ($3,250 + $22,500).

Under the percent of sales method, the amount of the adjusting entry is the amount
estimated for Bad Debt Expense. This estimate is credited to whatever the unadjusted
balance is for Allowance for Doubtful Accounts.

Analysis of receivables method.
Based on the assumption that the longer an account receivable is outstanding, the less likely that it
will be collected.
The preceding steps are summarized in an aging schedule, and this overall process
is called aging the receivables.

e.g. Comparing the estimate of $26,490 with the unadjusted balance of the allowance account determines the amount of the adjustment for Bad Debt Expense. The unadjusted balance of the allowance account is a credit balance of $3,250. The amount to be added to this balance is therefore $23,240 ($26,490 – $3,250). The adjusting entry is as follows:
Bad Debt Expense 23,240
Allowance for Doubtful Accounts 23,240

Under the analysis of receivables method, the amount of the adjusting entry is the amount that will yield an adjusted balance for Allowance for Doubtful Accounts equal to that estimated by the aging schedule.

Comparing Estimation methods
Under the percent of sales method, Bad Debt Expense is the focus of the estimation process. The percent of sales method places more emphasis on matching revenues and expenses and, thus, emphasizes the income statement. That is, the amount of the adjusting entry is based on the estimate of Bad Debt Expense for the period. Allowance for Doubtful Accounts is then credited for this amount.

Under the analysis of receivables method, Allowance for Doubtful Accounts is the focus of the estimation process. The analysis of receivables method places more emphasis on the net realizable value of the receivables and, thus, emphasizes the balance sheet. That is, the amount of the adjusting entry is the amount that will yield an adjusted balance for Allowance for Doubtful Accounts equal to that estimated by
the aging schedule. Bad Debt Expense is then debited for this amount.