Please Find Assignment In Comment Section. Need Exercise A &B and C Attached text book Exercise A: Page 429 (Bottom of the page). Do parts A & B.

Please Find Assignment In Comment Section. Need Exercise A &B and C

Attached text book

Exercise A: Page 429 (Bottom of the page). Do parts A & B.

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Need Exercise A &B and C 

Attached text book 

Exercise A: Page 429 (Bottom of the page).  Do parts A & B. 

. Exercise A The accounts of Stackhouse Company as of 2010 December 31, show Accounts Receivable, USD 190,000; Allowance for Uncollectible Accounts, USD 950 (credit balance); Sales, USD 920,000; and Sales Returns and Allowances, USD 12,000. Prepare journal entries to adjust for possible uncollectible accounts under each of the following assumptions: 

.  a. Uncollectible accounts are estimated at 1 per cent of net sales.  

. b. The allowance is to be increased to 3 per cent of accounts receivable.  

Annual Report Analysis C: Page 435 (towards the bottom of the page). I’ve also copied and pasted it here for you so that it’s easier to find. Where it asks for written statement, the expectation is no more than three sentences.  Here it is for you:

Annual report analysis C Visit the Internet site:  https://investors.coca-colacompany.com/financial-information/financial-results (Links to an external site.)

OR:  http://www.cocacola.com, (Links to an external site.) click on menu (top left hand corner), investors, financial info, financial results, FY2020 Fiscal year ended Annual Report

Locate the most recent (use 2020) annual reports of The Coca-Cola Company. Calculate accounts receivable turnover and the number of days’ sales in accounts receivable and prepare a written comment on the results. https://resources.saylor.org/wwwresources/archived/site/wp-content/uploads/2012/10/Accounting-Principles-Vol.-1.pdf

. http://www.cocacola.com 

. Locate the most recent annual reports of The Coca-Cola Company. Calculate accounts receivable turnover and the number of days’ sales in accounts receivable and prepare a written comment on the results. 

.  

Accounting Principles:
A Business Perspective

First Global Text Edition, Volume 1
Financial Accounting

James Don Edwards, PhD, D.H.C.
J.M. Tull Professor Emeritus of Accounting

Terry College of Business
University of Georgia

Roger H. Hermanson, PhD
Regents Professor Emeritus of Accounting

Ernst & Young-J. W. Holloway Memorial Professor Emeritus
Georgia State University

Funding for the first Global Text edition was provided by

Endeavour International Corporation, Houston, Texas, USA.

The Global Text Project is funded by the Jacobs Foundation, Zurich, Switzerland.

This book is licensed under a Creative Commons Attribution 3.0 License

This book is licensed under a Creative Commons Attribution 3.0 License

9. Receivables and payables
Learning objectives

After studying this chapter, you should be able to:

• Account for uncollectible accounts receivable under the allowance method.

• Record credit card sales and collections.

• Define liabilities, current liabilities, and long-term liabilities.

• Define and account for clearly determinable, estimated, and contingent liabilities.

• Account for notes receivable and payable, including calculation of interest.

• Account for borrowing money using an interest-bearing note versus a non interest-bearing note.

• Analyze and use the financial results—accounts receivable turnover and the number of days’ sales in accounts

receivable.

A career in litigation support
What is litigation support? It does not mean working in an attorney’s office. It involves assisting legal counsel in

attempting to gain favorable verdicts in a court of law. Persons involved in litigation support generally work for a

public accounting firm, a consulting firm, or as a sole proprietor or in partnership with others. An experienced

litigation support person can expect to earn an income well into six figures.

Litigation support in a broad sense encompasses fraud auditing, valuation analysis, investigative accounting,

and forensic accounting. The practice of litigation support involves assisting legal counsel in such things as product

liability disputes, shareholder disputes, contract breaches, and major losses reported by entities. These

investigations require the accountant to gather and evaluate evidence to assess the integrity and dollar amounts

surrounding the aforementioned situations.

The accountant can be, and often is, requested to serve as an expert witness in a court of law. This experience

requires knowledge of accounting and auditing in addition to possessing good communication skills, appropriate

credentials, relevant experience, and critical information that could result in successful resolution of the issue.

What kind of person pursues litigation support as a career? It takes a very special individual. The person must

be part accountant, part auditor, part lawyer, and part skilled businessperson. An undergraduate accounting

degree, an MBA, and a law degree would be the perfect educational background needed for such a career. Many

universities offer a combined MBA/JD program. Such a program fulfills the graduate needs of the litigation support

person.

In addition to the degree, work experience in the business sector is essential. A career in public accounting,

industry, or with a government agency would serve as valuable experience in pursuing a career in litigation support.

Accounting Principles: A Business Perspective 396 A Global Text

9. Receivables and payables

Much of the growth of business in recent years is due to the immense expansion of credit. Managers of

companies have learned that by granting customers the privilege of charging their purchases, sales and profits

increase. Using credit is not only a convenient way to make purchases but also the only way many people can own

high-priced items such as automobiles.

This chapter discusses receivables and payables. For a company, a receivable is any sum of money due to be

paid to that company from any party for any reason. Similarly, a payable describes any sum of money to be paid by

that company to any party for any reason.

Primarily, receivables arise from the sale of goods and services. The two types of receivables are accounts

receivable, which companies offer for short-term credit with no interest charge; and notes receivable, which

companies sometimes extend for both short-and long-term credit with an interest charge. We pay particular

attention to accounting for uncollectible accounts receivable.

Like their customers, companies use credit, which they show as accounts payable or notes payable. Accounts

payable normally result from the purchase of goods or services and do not carry an interest charge. Short-term

notes payable carry an interest charge and may arise from the same transactions as accounts payable, but they can

also result from borrowing money from a bank or other institution. Chapter 4 identified accounts payable and

short-term notes payable as current liabilities. A company also incurs other current liabilities, including payables

such as sales tax payable, estimated product warranty payable, and certain liabilities that are contingent on the

occurrence of future events. Long-term notes payable usually result from borrowing money from a bank or other

institution to finance the acquisition of plant assets. As you study this chapter and learn how important credit is to

our economy, you will realize that credit in some form will probably always be with us.

Accounts receivable
In Chapter 3, you learned that most companies use the accrual basis of accounting since it better reflects the

actual results of the operations of a business. Under the accrual basis, a merchandising company that extends credit

records revenue when it makes a sale because at this time it has earned and realized the revenue. The company has

earned the revenue because it has completed the seller’s part of the sales contract by delivering the goods. The

company has realized the revenue because it has received the customer’s promise to pay in exchange for the goods.

This promise to pay by the customer is an account receivable to the seller. Accounts receivable are amounts that

customers owe a company for goods sold and services rendered on account. Frequently, these receivables resulting

from credit sales of goods and services are called trade receivables.

When a company sells goods on account, customers do not sign formal, written promises to pay, but they agree

to abide by the company’s customary credit terms. However, customers may sign a sales invoice to acknowledge

purchase of goods. Payment terms for sales on account typically run from 30 to 60 days. Companies usually do not

charge interest on amounts owed, except on some past-due amounts.

Because customers do not always keep their promises to pay, companies must provide for these uncollectible

accounts in their records. Companies use two methods for handling uncollectible accounts. The allowance method

provides in advance for uncollectible accounts. The direct write-off method recognizes bad accounts as an expense

at the point when judged to be uncollectible and is the required method for federal income tax purposes. However,

since the allowance method represents the accrual basis of accounting and is the accepted method to record

397

This book is licensed under a Creative Commons Attribution 3.0 License

uncollectible accounts for financial accounting purposes, we only discuss and illustrate the allowance method in

this text.

Even though companies carefully screen credit customers, they cannot eliminate all uncollectible accounts.

Companies expect some of their accounts to become uncollectible, but they do not know which ones. The matching

principle requires deducting expenses incurred in producing revenues from those revenues during the accounting

period. The allowance method of recording uncollectible accounts adheres to this principle by recognizing the

uncollectible accounts expense in advance of identifying specific accounts as being uncollectible. The required entry

has some similarity to the depreciation entry in Chapter 3 because it debits an expense and credits an allowance

(contra asset). The purpose of the entry is to make the income statement fairly present the proper expense and the

balance sheet fairly present the asset. Uncollectible accounts expense (also called doubtful accounts expense

or bad debts expense) is an operating expense that a business incurs when it sells on credit. We classify

uncollectible accounts expense as a selling expense because it results from credit sales. Other accountants might

classify it as an administrative expense because the credit department has an important role in setting credit terms.

To adhere to the matching principle, companies must match the uncollectible accounts expense against the

revenues it generates. Thus, an uncollectible account arising from a sale made in 2010 is a 2010 expense even

though this treatment requires the use of estimates. Estimates are necessary because the company sometimes

cannot determine until 2008 or later which 2010 customer accounts will become uncollectible.

Recording the uncollectible accounts adjustment A company that estimates uncollectible accounts

makes an adjusting entry at the end of each accounting period. It debits Uncollectible Accounts Expense, thus

recording the operating expense in the proper period. The credit is to an account called Allowance for Uncollectible

Accounts.

As a contra account to the Accounts Receivable account, the Allowance for Uncollectible Accounts (also

called Allowance for doubtful accounts or Allowance for bad debts) reduces accounts receivable to their net

realizable value. Net realizable value is the amount the company expects to collect from accounts receivable.

When the firm makes the uncollectible accounts adjusting entry, it does not know which specific accounts will

become uncollectible. Thus, the company cannot enter credits in either the Accounts Receivable control account or

the customers’ accounts receivable subsidiary ledger accounts. If only one or the other were credited, the Accounts

Receivable control account balance would not agree with the total of the balances in the accounts receivable

subsidiary ledger. Without crediting the Accounts Receivable control account, the allowance account lets the

company show that some of its accounts receivable are probably uncollectible.

To illustrate the adjusting entry for uncollectible accounts, assume a company has USD 100,000 of accounts

receivable and estimates its uncollectible accounts expense for a given year at USD 4,000. The required year-end

adjusting entry is:

Dec. 31 Uncollectible Accounts Expense (-SE) 4,000
Allowance for Uncollectible Accounts (-A) 4,000
To record estimated uncollectible accounts.

The debit to Uncollectible Accounts Expense brings about a matching of expenses and revenues on the income

statement; uncollectible accounts expense is matched against the revenues of the accounting period. The credit to

Allowance for Uncollectible Accounts reduces accounts receivable to their net realizable value on the balance sheet.

Accounting Principles: A Business Perspective 398 A Global Text

9. Receivables and payables

When the books are closed, the firm closes Uncollectible Accounts Expense to Income Summary. It reports the

allowance on the balance sheet as a deduction from accounts receivable as follows:

Brice Company
Balance Sheet

2010 December 31
Current assets
Cash $21,200
Accounts receivable $ 100,000
Less: Allowance for uncollectible accounts 4,000 96,000

Estimating uncollectible accounts Accountants use two basic methods to estimate uncollectible accounts

for a period. The first method—percentage-of-sales method—focuses on the income statement and the relationship

of uncollectible accounts to sales. The second method—percentage-of-receivables method—focuses on the balance

sheet and the relationship of the allowance for uncollectible accounts to accounts receivable.

Percentage-of-sales method The percentage-of-sales method estimates uncollectible accounts from the

credit sales of a given period. In theory, the method is based on a percentage of prior years’ actual uncollectible

accounts to prior years’ credit sales. When cash sales are small or make up a fairly constant percentage of total

sales, firms base the calculation on total net sales. Since at least one of these conditions is usually met, companies

commonly use total net sales rather than credit sales. The formula to determine the amount of the entry is:

Amount of journal entry for uncollectible accounts – Net sales (total or credit) x Percentage estimated as

uncollectible

To illustrate, assume that Rankin Company’s uncollectible accounts from 2008 sales were 1.1 per cent of total

net sales. A similar calculation for 2009 showed an uncollectible account percentage of 0.9 per cent. The average

for the two years is 1 per cent [(1.1 +0.9)/2]. Rankin does not expect 2010 to differ from the previous two years.

Total net sales for 2010 were USD 500,000; receivables at year-end were USD 100,000; and the Allowance for

Uncollectible Accounts had a zero balance. Rankin would make the following adjusting entry for 2010:

Dec. 31 Uncollectible Accounts Expense (-SE) 5,000
Allowance for Uncollectible Accounts (-A) 5,000
To record estimated uncollectible accounts
($500,000 X 0.01).

Using T-accounts, Rankin would show:

Uncollectible Accounts Expense Allowance for Uncollectible Accounts
Dec. 31 Bal. before
Adjustment 5,000 adjustment -0-

Dec. 31
Adjustment 5,000
Bal. after
adjustment 5,000

Rankin reports Uncollectible Accounts Expense on the income statement. It reports the accounts receivable less

the allowance among current assets in the balance sheet as follows:

Accounts receivable $ 100,000
Less: Allowance for uncollectible accounts 5,000 $ 95,000
Or Rankin’s balance sheet could show:
Accounts receivable (less estimated
uncollectible accounts, $5,000) $95,000

On the income statement, Rankin would match the uncollectible accounts expense against sales revenues in the

period. We would classify this expense as a selling expense since it is a normal consequence of selling on credit.

399

This book is licensed under a Creative Commons Attribution 3.0 License

The Allowance for Uncollectible Accounts account usually has either a debit or credit balance before the year-

end adjustment. Under the percentage-of-sales method, the company ignores any existing balance in the allowance

when calculating the amount of the year-end adjustment (except that the allowance account must have a credit

balance after adjustment).

For example, assume Rankin’s allowance account had a USD 300 credit balance before adjustment. The

adjusting entry would still be for USD 5,000. However, the balance sheet would show USD 100,000 accounts

receivable less a USD 5,300 allowance for uncollectible accounts, resulting in net receivables of USD 94,700. On the

income statement, Uncollectible Accounts Expense would still be 1 per cent of total net sales, or USD 5,000.

In applying the percentage-of-sales method, companies annually review the percentage of uncollectible accounts

that resulted from the previous year’s sales. If the percentage rate is still valid, the company makes no change.

However, if the situation has changed significantly, the company increases or decreases the percentage rate to

reflect the changed condition. For example, in periods of recession and high unemployment, a firm may increase

the percentage rate to reflect the customers’ decreased ability to pay. However, if the company adopts a more

stringent credit policy, it may have to decrease the percentage rate because the company would expect fewer

uncollectible accounts.

Percentage-of-receivables method The percentage-of-receivables method estimates uncollectible

accounts by determining the desired size of the Allowance for Uncollectible Accounts. Rankin would multiply the

ending balance in Accounts Receivable by a rate (or rates) based on its uncollectible accounts experience. In the

percentage-of-receivables method, the company may use either an overall rate or a different rate for each age

category of receivables.

To calculate the amount of the entry for uncollectible accounts under the percentage-of-receivables method

using an overall rate, Rankin would use:

Amount of entry for uncollectible accounts – (Accounts receivable ending balance x percentage estimated as

uncollectible) – Existing credit balance in allowance for uncollectible accounts or existing debit balance in

allowance for uncollectible accounts

Using the same information as before, Rankin makes an estimate of uncollectible accounts at the end of 2010.

The balance of accounts receivable is USD 100,000, and the allowance account has no balance. If Rankin estimates

that 6 per cent of the receivables will be uncollectible, the adjusting entry would be:

Dec. 31 Uncollectible Accounts Expense (-SE) 6,000
Allowance for Uncollectible Accounts (-A) 6,000
To record estimated uncollectible accounts
($100,000 X 0.06).

Using T-accounts, Rankin would show:

Uncollectible Accounts Expense Allowance for Uncollectible Accounts
Dec. 31 Bal. before
Adjustment 6,000 Adjustment -0-

Dec. 31
Adjustment 6,000
Bal. after
Adjustment 6,000

If Rankin had a USD 300 credit balance in the allowance account before adjustment, the entry would be the

same, except that the amount of the entry would be USD 5,700. The difference in amounts arises because

Accounting Principles: A Business Perspective 400 A Global Text

9. Receivables and payables

management wants the allowance account to contain a credit balance equal to 6 per cent of the outstanding

receivables when presenting the two accounts on the balance sheet. The calculation of the necessary adjustment is

[(USD 100,000 X 0.06)-USD 300] = USD 5,700. Thus, under the percentage-of-receivables method, firms consider

any existing balance in the allowance account when adjusting for uncollectible accounts. Using T-accounts, Rankin

would show:

Uncollectible Accounts Expense Allowance for Uncollectible Accounts
Dec. 31 Bal. before
Adjustment 5,700 Adjustment 300

Dec. 31
Adjustment 5,700
Bal. after
Adjustment 6,000

ALLEN COMPANY
Accounts Receivable Aging Schedule

2010 December 31

Customer

Accounts
Receivable
Balance

Not Yet
Due

Days Past Due

1-30 31-60 61-90
Over
90

X $ 5,000 $ 5,000
Y 14,000 $ 12,000 $2,000
Z 400 $200 200
All others 808,600 $ 560,000 240,000 2,000 600 6,000

$ 828,000 $ 560,000 $252,000 $4,000 $800 $11,200

Percentage estimated
as uncollectible
Estimated amount
uncollectible

1% 5% 10% 25% 50%

$ 24,400 $ 5,600 $ 12,600 $ 400 $200 $ 5,600

Exhibit 77: Accounts receivable aging schedule

As another example, suppose that Rankin had a USD 300 debit balance in the allowance account before

adjustment. Then, a credit of USD 6,300 would be necessary to get the balance to the required USD 6,000 credit

balance. The calculation of the necessary adjustment is [(USD 100,000 X 0.06) + USD 300] = USD 6,300. Using T-

accounts, Rankin would show:

Uncollectible Accounts Expense Allowance for Uncollectible Accounts
Dec. 31 Bal. before Dec. 31
Adjustment 6,300 Adjustment 300 Adjustment 6,300

Bal. after
Adjustment 6,000

No matter what the pre-adjustment allowance account balance is, when

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