Lesson 5 notes
Revenues
Complicating Revenue Transactions
Definition: The amount of inflowing assets from the
sale of goods or services to customers. This amount is
usually reflected in the sales price charged to the
customer.
1. The providing of sales or cash discounts to credit
customers that make early payments on account.
2. The acceptance of merchandise returns from
customers.
Timing: Revenues are to be recognized and recorded
in the period in which they are earned and not
necessarily when cash is received from a customer.
Revenues are typically earned when the goods sold have
been delivered to the customer or services to be
provided have been rendered.
3. The uncollectibility of customer accounts
receivable.
4. The acceptance of payment by credit cards.
1.
2.
Example of Sales (Cash) Discount
A company sells merchandise costing $600 to a customer on account
for $1,000 with terms of 2/10, N/30.
2/10, N/30 means that the customer may take a 2% discount off all
or any portion of the sales price paid within 10 days of the sale. Any
portion of the price not paid within the 10 day discount period is due
within the next 20 days (30 days from date of sale) in full.
Entries if not paid within the discount period:
At date of sale:
Accounts Receivable
1000
Sales Revenue
Cost of Goods Sold
600
Inventory
At date of collection:
Cash
Accounts Receivable
1,000
If a penalty of interest is charged to a credit customer for
payments received after 30 days, then the entry to record
receipt of that interest would be.
Cash
Interest Revenue
1000
XXX
XX
XX
600
1,000
3.
4.
Entries if the customer pays within 10 days
taking the $20 discount:
Calculation of the discount available under
terms of 2/10, N/30:
$1,000
X
2%
=
At date of sale:
$20 Discount Available
Accounts Receivable
Sales Revenue
Cost of Goods Sold
Inventory
This discount is equivalent to a 36% annualized interest
rate as shown below:
$980
Date of
Sale
$20 Discount Available
10th Day
36% X $1,000 X 20/360 days =
Interest
Prinicipal
Time Period
Rate
Amount
in Annual Terms
1000
600
1000
600
At date of collection
$1,000
Cash
Sales Discounts
Accounts Receivable
30th
Day
$20 Interest for 20 days
980
20
1,000
"Sales Discounts" is a contra-revenue account.
5.
6.
5-1
A contra-revenue account is a reduction of
revenue account.
Sales Revenues
Decrease
Increase
+
Sales Discounts
Increase
Decrease
+
DR
+
Assets
Liabilities
Owners' Equity:
Capital Stock
Retained Earnings
Revenues
Expenses
Dividends
Sales Discounts
Income Statement Presentation:
CR
Sales Revenues
+
Less: Sales Discounts
+
+
+
+
+
+
$ 1,000
Net Sales Revenues
(
20)
$ 980
_
7.
8.
Example of Merchandise Returns
"Sales Returns and Allowances"
is a contra-revenue account
A company sells 10 bikes which cost $100 each, to a customer on account at a
price of $150 each. Two days later the customer returns one bike for credit on
his account because he decides he only needs 9 bikes.
Income Statement Presentation:
Entry at the date of sale:
1,500
Accounts Receivable
Sales Revenues
Cost of Goods Sold
Inventory
Sales Revenues
Less: Sales Discounts
Sales Returns and Allowances
Net Sales Revenues
Less: Cost of Goods Sold
Gross Margin (Profit)
(9 Bikes x $50 profit/bike)
1,500
1,000
1,000
Entry at the date of return:
150
Sales Returns and Allowances
Accounts Receivable
Inventory
Cost of Goods Sold
150
100
$ 1,500
0
(150)
$ 1,350
(900)
$ 450
100
9.
10.
What would be the sales price at:
Gross Margin = Markup
Net Sales price per unit
Cost of goods sold per unit
Gross Margin or Markup per unit
$ 150
100
$ 50
After the customer return of one unit, the net number of
units sold were nine (9).
50
100
=
200 % markup on cost?
$100 + ($100 X 200%) = $300
Gross Margin before return
Gross Margin after return
Cost of return
Gross Margin or Markup as a % of Cost:
=
$100 + ($100 X 100%) = $200
What was the cost of the company's return policy which
allowed for the return of the one unit?
Total Gross Margin or Markup on Sale:
9 × $ 50 per unit = $ 450
450
900
100 % markup on cost?
50%
$ 500
(450)
$ 50
Was it worth it to lose $50 to gain a satisfied customer?
11.
12.
5-2
What if the returned merchandise has no resale value and must
be disposed of?
Sales Revenues
Less: Sales Discounts
Sales Returns and Allowances
Net Sales Revenues
(9 x $150)
Less: Cost of Goods Sold (10 x $100)
Gross Margin
Entry at the date of sale:
Accounts Receivable
Sales Revenues
Cost of Goods Sold
Inventory
1,500
1,000
1,500
1,000
$ 1,500
0
( 150)
$ 1,350
(1,000)
$ 350
The cost of a generous return policy:
Entry at the date of return:
Sales Returns and Allowances
Accounts Receivable
Inventory
Cost of Goods Sold
150
0
Gross margin before return of
merchandise (inventory)
Gross margin after return of
resalable inventory
Gross margin after return of
unusable inventory
150
0
Simply exclude the inventory inflow portion of the entry.
What is the effect of such a return on gross margin?
$ 500
$ 450
$
350
13.
14.
Accounting for Uncollectible Accounts Receivable
What kind of account is Sales Returns and Allowances?
Contra-Revenue
Overview
- - Sales on account are common
- Risk of sales on account
- Some go bad - true cost of doing business
- Credit department
- Credit policies
- Credit policy may actually change sales strategy
- Tougher policies result in lower sales but fewer uncollectibles
- Liberal policies result in higher sales but more uncollectibles
Is it a Real or Nominal Account?
Nominal
Why are we using Sales-Returns and Allowances, a
contra revenue account, rather than debiting Sales
Revenues directly?
Better information for management
15.
General Ledger
Accounts Receivable
1/1/X1 xxx
xxx
a.
xxx
xxx
b.
xxx
xxx
d.
xxx
xxx
f.
p.
xxx
xxx
r.
xxx
1/31/X1 5,000
Total of all subsidiary
ledger accounts must
equal general ledger
balance of $5,000
16.
Accounts Receivable
Subsidiary Ledger
c.
i.
k.
q.
Example: Jones' Wholesale Candy, Inc. started business in January,
M. Jones - Receivable
1/1/X1
xxx
d.
xxx
p.
xxx
1/31/X1
400
S. Longley - Receivable
xxx
1/1/X1
a.
xxx xxx
i.
1/31/X1
900
J. Moss - Receivable
c.
1/1/X1
xxx xxx
f.
xxx xxx
k.
r.
xxx
1/31/X1 1,900
B. Oster - Receivable
1/1/X1
xxx
xxx xxx
q.
.b
1/31/X1 1,800
20X4.
Prepare journal entries for the following summarized transactions
for the year 'X4.
Jones' 20X4 total sales revenues amounted to $120,000, of which
20% were cash sales and the remainder were sales made on account.
The cost of merchandise sold amounted to $70,000.
17.
Cash (20% x $120,000)
Accounts Receivable
Sales Revenue
24,000
96,000
Cost of Goods Sold
Inventory
70,000
120,000
70,000
18.
5-3
Accounts Receivable
1/1/X4
- 20X4 collections of accounts receivable amounted to $85,000.
Cash
Accounts Receivable
85,000
0
96,000
11,000
12/31/X4
85,000
At 12/31/X4, based on a review of the A/R subsidiary ledger, assume
none of the $11,000 of the receivables is known to be uncollectible.
However, in the following year it is discovered that a $920 account
is hopelessly uncollectible. The following entry would logically
be made in 20X5:
85,000
Determine the 12/31/X4 balance of accounts receivable before any
adjustment for uncollectible accounts.
Accounts Receivable
0
96,000
85,000
12/31/X4 11,000
Bad Debt Expense
Accounts Receivable
1/1/X4
920
920
What accounting principle would be violated with such an entry?
The Matching Principle
19.
20.
Prepare an adjusting entry at 12/31/X4 assuming Jones' best guess
at the time is that 10% of the 12/31/X4 balance of A/R will
ultimately prove to be uncollectible.
Accounts Receivable
0
96,000 85,000
12/31/X4 11,000
How can the matching principle be complied with
under the circumstances?
1/1/X4
Estimation at 12/31/X4
10% x $11,000 = $1,100
The Allowance Method uses estimation of uncollectible
A/R to reflect Bad Debt Expense in the proper period
and is required under GAAP.
Bad Debt Expense
Allowance for Uncollectable
Accounts Receivable
1,100
1,100
This account used to reflect the amount of estimated uncollectible
A/R, is called the "Allowance or Reserve for Uncollectible
Accounts Receivable" and is a contra-asset account.
21.
22.
Balance Sheet
The next year...
Assume the following summarized transactions took place
in the second year of operations, 20X5, and prepare journal
entries to record them.
- 20X5 total sales revenues amounted to $210,000, of
which 70% were made on account and the remainder for
cash. Assume that the cost of goods sold amounted to
60% of total sales revenues.
Current Assets:
Accounts Receivable
11,000
Less: Allowance for
Uncollectible A/R
(1,100)
Net Realizable Value
9,900
General Ledger:
Allowance for Uncollectible A/R
Accounts Receivable
(Contra Asset)
0
1/1/X4
1/1/X4
0
1,100 Adjusting Entry
96,000 85,000
12/31/X4 11,000
1,100
12/31/X4
Subsidiary Ledger
(Total of all individual customer accounts)
$11,000
23.
Cash (30% X $210,000)
A/R
Sales Revenue
63,000
147,000
Cost of Goods Sold (60% X $210,000)
Inventory
126,000
210,000
126,000
24.
5-4
- Collections in 20X5 of the $11,000 12/31/X4 balance totaled $10,080 (all
but $920 from Bob's Candy Store was collected) and collections of
$117,600 of sales made on account in 20X5.
Cash
Accounts Receivable
Cash
Accounts Receivable
Effect of writeoff on the general ledger.
Allowance for Uncollectible A/R
180
10,080
117,600
117,600
12/31/X4
- The unpaid $920 receivable was from Bob's Candy Store and was
determined to be hopelessly uncollectible and was written off the books.
Allowance for Uncollectible A/R
Accounts Receivable
1,100
920
Writeoff of Bob's Acct.
10,080
Accounts Receivable
Balance before writeoff
920
12/31/X5
920
11,000
147,000
30,320
12/31/X4
Overestimation of
Uncollectible A/R
12/31/x4
10,080
117,600
920
Writeoff of Bob's Acct.
29,400
What is the effect of this writeoff entry on the Balance Sheet?
- Zero effect on the Balance Sheet
Why is the Allowance for Uncollectible A/R debited rather than Bad
Debt Expense when an account is written off?
25.
Balance Sheet
Accounts Receivable
Less: Allowance for
Uncollectible Receivables
Before
Writeoff
$ 30,320
(1,100)
$ 29,220
26.
Allowance for Uncollectible A/R
1,100
12/31/X4
adjustment
for estimated
uncollectibles
in 20X4
After
Writeoff
$ 29,400
1,100
Writeoffs
during 20X5
of 20X4 actual
uncollectibles
(180)
$ 29,220
There is no change in the net assets arising from the writeoff
of an uncollectible A/R. The writeoff simply cleans the books
of the bad A/R from Bob's Candy Store.
920
180
12/31/X4
Balance
12/31/X5
Balance before any
adjustment for
estimated
uncollectibles in 20X5
OVERESTIMATED
20X4 Uncollectibles
27.
28.
12/31/X5 Adjustment:
Bad Debt Expense
2,172
Allowance for Uncollectible A/R
2,172
Allowance for Uncollectible A/R
12/31/X4
1,100
Writeoffs 920
12/31/X5
180
Pre-adjusted
balance
How should this prior year overestimation of uncollectible A/R be
corrected?
- Compensate for the prior year error in estimation in the
current year. If overstated bad debt expense in 20X4 by $180,
then understate it by $180 in 20X5.
Prepare the appropriate adjusting entry by Jones at 12/31/X5
bad debt expense if Jones' best guess at this time of future for
uncollectible A/R is 8% of the balance of A/R.
8% x $29,400 = $2,352
If compensating for prior year overstatement of expense, then this
year's expense should be $2,172 ($2,352 - 180).
2,172
12/31/X5
Adjustment
2,352
12/31/X5
(8% x $29,400) Final Balance
29.
30.
5-5
What would the 12/31/X5 adjusting entry have been if the allowance
account had actually had a debit balance before adjustment,
meaning that the writeoffs must have totaled $1,280 rather than
$920, and therefore the 20X4 estimate would have been
underestimated rather than overestimated?
Alternative approach to estimating uncollectible
accounts receivable.
Aging of Accounts Receivable: (Using different %'s
for aged categories)
Est. % Uncollect.
Allowance for Uncollectible A/R
1,100
12/31/X4
Writeoffs
1,280
Underestimated 180
12/31/X5
?
Adjustment
2,352 (8% x 29,400)
Bad Debt Expense
Allowance for Uncollectible A/R
2,532
Current:
Past Due:
0 - 30 days
30-60 days
60-90 days
90 + days
2,532
Bad Debt Expense should be overstated in 20X5 to compensate for
the $180 understatement in 20X4.
$ 15,000
5%
8,000
3,000
2,000
1,400
29,400
8%
10%
15%
20%
$750
Amount
640
300
300
280
2,270
31.
32.
Credit Card Sales
Allowance for Uncollectible A/R
1,100 12/31/X4
Writeoffs 1,280
Underestimated 180
?
Adjustment
2,270 12/31/X5
Bad Debt Expense ($2,270 + 180)
Allowance for Uncollectible A/R
2,450
Customer agrees to
pay charges from
card use.
Credit card issued upon
credit approval.
2,450
33.
34.
Credit Card Sales
Credit Card Sales
VISSA
VISSA
Member
Member
Credit Check
Bank credits
restaurant's account.
Bank charges
fee to restaurant.
Customer's Bank
Customer's Bank
35.
Restaurant's Bank
36.
5-6
Credit Card Sales
Credit Card Sales
VISSA
VISSA
Member
Member
Customer pays
charges.
Electronic transfer of
funds to cover the amount
charged on credit card.
Restaurant's Bank
Customer's Bank
Customer's Bank
37.
38.
Credit Card Sales
Example: A company sells merchandise costing $1,000 to a
customer for $2,000. The customer pays by providing a
VISA card which is electronically processed at that time.
The company has agreed to pay a 4% fee on all VISA sales
for the right to accept VISA cards as payment.
Entries at the date of sale:
Cash
Credit Card Expense
Sales Revenues
Cost of Goods Sold
Inventory
1,920
80
1,000
Restaurant's Bank
2,000
1,000
39.
5-7
Lesson 5 problems/answers
Problem #20
On April 3, 20X7, Smith, Inc. sold merchandise to Taylor
Stores for $100,000 with terms 2/10, n/30. On April 13, Taylor paid
one half of the obligation to Smith, paying $49,000 net of the
discount. On May 2, Taylor paid $34,000 on account and
returned $16,000 of merchandise, claiming that it did not meet
contract terms for which Smith agreed to give full credit on
her account. Assume this returned inventory can be resold.
Problem #20
b. Assuming the returned inventory had not met Taylor's
specifications and was a custom order that could not be resold,
record the May 2 transaction and determine Smith's gross
margin on this sale to Taylor and the resulting % markup on cost
realized.
c. Why is it important to have separate accounts for Sales Returns
and Allowances and Sales Discounts? Wouldn't it be much easier to
directly reduce the Sales Revenue account for these adjustments?
a. Record the necessary journal entries on Smith's books for the
April 3, April 13, and May 2 transactions. Assume the cost of
merchandise to Smith, Inc. is 70 percent of its selling price.
Determine Smith's ultimate gross margin on this sale to Taylor
and the % markup on cost realized.
40.
41.
The answer
Problem #20
a. 4/3/X7
4/13/X7
5/2/X7
The answer
Accounts Receivable
Sales Revenue
Cost of Goods Sold
Inventory (70% x $100,000)
100,000
70,000
49,000
1,000
Cash
Sales Discount (2% x $50,000)
Accounts Receivable
34,000
Cash
Accounts Receivable
Sales Returns and Allowances
Accounts Receivable
Inventory (70%X16,000)
Cost of Goods Sold
16,000
11,200
Problem #20
100,000
Calculation of Gross Margin:
70,000
Sales Revenue
Less: Sales Discounts
Sales Returns & Allowances
Net Sales Revenues
Less: Cost of Goods Sold
Gross Margin
% Markup on cost ($24,200 / $58,800)
50,000
34,000
16,000
$100,000
<1,000>
<16,000>
83,000
<58,800>
$24,200
41% rounded
11,200
42.
43.
The answer
Problem #20
Entry if inventory was not resalable:
b. 7/20/X7
Cash
Sales Return & Allowances
Accounts Receivable
The answer
Problem #20
34,000
16,000
50,000
c.
* No entry to record inventory receipt.
Calculation of Gross Margin:
Sales Revenue
Less: Sales Discounts
Sales Returns & Allowances
Net Sales Revenues
Less: Cost of Goods Sold
Gross Margin
% Markup on cost ($13,000 / $70,000)
$100,000
<1,000>
<16,000>
83,200
<70,000>
$13,000
19% rounded
44.
5-8
It would be an easy and accurate representation
of the economic effect of these transactions to
simply debit sales revenues. However,
the use of these contra revenue accounts quickly
distinguishes information useful to management.
45.
The answer
Problem #21
Problem #21
On 1/1X4 the following account balances exist for the Zero Corporation:
Accounts Receivable
Allowance for Uncollectible
Accounts Receivable
a.
DR (CR)
$246,000
Net Realizable Value of Accounts Receivable, 1/1/X4:
Accounts Receivable
Less: Allowance for
Uncollectible A/R
(8,400)
Respond to the following:
a. What kind of account is the "Allowance for Uncollectible Accounts Receivable"
account? What does the account represent? Calculate the net realizable value of
1/1/X4 accounts receivable for Zero.
b.
b. Record the following summarized transactions for Zero Corp. for the year 20X4:
- Sales on account ammounted to $700,000. The markup on inventory cost is 100%.
- Collections on accounts receivable totaled $680,000.
- Writeoffs of uncollectible accounts receivable amounted to $6,800.
c.
"Allowance for Uncollectible Accounts Receivable" is a contra asset
account that represents management's estimate of the total uncollectible
accounts receivable at that time.
Prepare the proper 12/31/X4 adjusting entry for Zero Corp. if management estimates
that 3% of the 12/31/X4 balance of accounts receivable will prove to be uncollectible.
Accounts Receivable
Sales Revenue
Cost of Goods Sold
Inventory
700,000
Cash
680,000
350,000
Accounts Receivable
Allowance for Uncollectible A/R
Accounts Receivable
6,800
$246,000
(8,400)
$237,600
700,000
350,000
680,000
6,800
46.
47.
The answer
Problem #22
Problem #21
1/1/X4
12/31/X4
Given the following information as of 12/31/X4, before any adjusting entry for
20X4 uncollectible accounts expense:
DR(CR)
Sales Revenues
<760,000>
Sales Discounts
3,700
Accounts Receivable
85,000
Allowance for Uncollectible Accounts Receivable
<700>
Accounts Receivable
Balance 246,000
680,000
700,000
6,800
Balance 259,200
Allowance for Uncollectible Accounts Receivable
8,400 1/1/X4
Balance
6,800
1,600 12/31/X4 Balance before adjustment
6,176
7,776
a. Prepare the 12/31/X4 adjusting entry if an aging of accounts receivable is
available and the estimate of uncollectible receivables is as noted below:
Adjustment
Days Past Due
A/R
% Est. Uncollectible
Current
1 - 30
30 - 60
60 - 90
90 - 120
over 120
$40,000
25,000
8,000
5,000
4,000
3,000
$85,000
3%
5%
10%
15%
20%
50%
12/31/X4 Balance after adjustment
Estimate of Uncollectible A/R at 12/31/X4:
.03 x 259,200 = $7,776
Adjusting Entry:
Bad Debt Expense
Allow for Uncollectible A/R
6,176
6,176
48.
49.
The answer
Problem #22
Problem #22
a.
b. What would the adjusting entry required in a. above have been if
there had been a debit balance of $700 in the Allowance for
Uncollectible Accounts Receivable Account before the adjustment
rather than a credit balance?
c. Determine the net realizable value of accounts receivable after
adjustment at 12/31/X4.
d. Prepare the 20X5 entry to write off a $500 account receivable from
Mary Jones that was determined to be hopelessly uncollectible.
Estimated Uncollected Accounts Receivable:
$40,000 x .03 =
$1,200
25,000 x .05 =
1,250
8,000 x .10 =
800
5,000 x .15 =
750
4,000 x .20 =
800
3,000 x .50 =
1,500
$6,300
Allowance for Uncollectible A/R
Actual Writeoffs
e. If, subsequent to the Mary Jones writeoff, the company
unexpectedly receives a check from Mary for $500 as payment in
full on her account, what journal entries would be required?
XX
XX
700 Prior Year Overestimation
Adjustment
5,600
6,300
12/31/X4 Balance
Adjusting Entry:
Bad Debt Expense
Allowance for Uncollectible A/R
50.
Prior Year Estimate
5,600
5,600
51.
5-9
The answer
Problem #22
Bad Debt Expense
Allowance for Uncollectible A/R
c.
d.
e
Problem #23
Allowance for Uncollectible A/R
XX
Prior Year Estimate
Actual Writeoffs
XX
Prior Year
700
7,000
Underestimation
Adjustment
6,300
12/31/X4
Ending Balance
b.
Identify which of the following statements are true:
A. The " Allowance for Uncollectible Accounts Receivable"
account will always have a credit balance at year end following
any adjustment for uncollectible accounts receivable.
B. The "Allowance for Uncollectible Accounts Receivable"
account balance must be closed to retained earnings at the end
of an accounting period.
7,000
7,000
Net Realizable Value of Accounts Receivable:
Accounts Receivable
Less: Allowance for Uncollectible A/R
$85,000
<6,300>
$78,700
Allowance for Uncollectible A/R
Accounts Receivable
500
. Receivable
Accounts
Allowance for Uncollectible A/R
500
Cash
500
C. Management's estimate of Uncollectible Accounts
Receivable at year end will always equal the amount of
"Bad Debt Expense" for the year.
500
D. The matching principle requires that "Bad Debt Expense" be
accounted for on an estimated basis rather than when
uncollectibility of an account receivable is actually determined.
500
500
Accounts Receivable
53.
52.
Problem #24
China Lilly Restaurant accepts VISA credit cards and
processes customer payments made with the card
electronically at the time of the sale. China Lilly is
charged a 3% fee on any amount paid through the card.
The answer
Problem #23
A. True.
B. False.
a. Record the journal entry for a $100 customer charge.
C. False.
D. True.
b. What amount would Lilly actually have to charge the
customer if she wished to net $100 after the credit card
cost?
54.
55.
The answer
Problem #24
a.
b.
Cash
Credit Card Expense
Sales Revenue
97
3
100
X = Amount to be charged to net $100 cash
X . 97% = $100
X = 100 /.97
X = $103.09
56.
5-10