Grade 12 Accounting

Textbook Questions:

pg 646, #12-6, 12-7, 12-8

Chapter 10 – Receivables
Receivables

• amount that another party owes, amount that can be received
• 2 most common types of receivables are accounts receivables and note receivables
• Accounts Receivable (aka trade receivables) – amount that another party owes a company from credit sales
• can arise when:
  • credit is directly given to the customer by the business or
  • when customers use credit cards that are issued by third parties
  • when companies directly give credits, they must:
    • maintain seperate accounts receivables for each customer
    • account for bad debts from credit sales

Valuing Accounts Receivable

• when credits are granted to customers, some customers may not pay the promised amount, and the accounts of these customers are called uncollectible accounts or bad debts
• the total amount of uncollectable accounts is an expense of selling on credit
• there are two methods of accounting for uncollectable accounts:
  • allowance method
  • direct write-off method

 Allowance Method

• the matching principle states that any bad debt expense should be matched and recorded in the same period as the sales it help produce
• allowence method matches the expected loss from the uncollectible accounts receivable of each period
• expected loss is an estimated amount

Accounting for Bad Debt

• an allowance is recorded for the expected loss by using the Allowance for Doubtful Accounts, which is a contra-asset account (contra-asset account is used because at the time of adjusting, the customers that will not pay are unknown
• Allowance for Doubtful Accounts – can be either debit or credit balance
• done at the end of the period
• realizable value – amount that can be collected from credit customers

Journal Entry for Adjusting for Bad Debt
Bad Debt Expense                                                                           xx

Allowance for doubtful accounts                                                                xx

Writing Off Bad Debt

• when accounts are identified as uncollectable, they have to be written off
•  the uncollectable accounts are removed from accounts receivable
• when writing off bad debt, the expense account is not debited because it has already been estimated and recorded

Journal Entry for Writing Off Bad Debt:

Allowance for Doubtful Accounts                                               XX

Accounts Receivable – NAME                                                                      XX

Recovery of a Bad Debt

• when a customer’s account is written off and the customer pays part or all of the amount owed after the account is written off, a bad debt has to be recovered

Journal Entry for Recovering Bad Debt:
Accounts Receivable – NAME                                                                      X

Allowance for Doubtful Accounts                                                                               X

Cash                                                                                                                      X

Accounts Receivable – NAME                                                                                      X
Percent of sales method

This method is also known as the “income statement method”. This method uses the Net Sales and experiences from previous cycles to estimate the amount of uncollectable accounts.

A company has credit sales of $200 000 in 2010. and based on experiences they assume that 0.5% of all sales are uncollectable.

Calculations: $200,000 x 0.005 = $1000

Dec 31 Bad Debt Expense ……………………………………… 1000
Allowance for doubtful accounts ………… 1000

Account Receivable Method
This method is also known as the “balance sheet method”. This method uses Accounts receivable and allowance for doubtful accounts to estimate bad debts. This method can be done in two different ways.

Method 1: using a percentage to estimate the total uncollectable account receivables

Method 2: Determine by using “aging” account receivable

Percent of Accounts Receivable Method
This method assumes that there will be a percentage of all outstanding accounts receivable that is uncollectable. Estimates are based on past experience (Ms. Cuttle will give this amount)

A company has $50,000 of outstanding accounts receivable on December 31. From past experience it suggests that 5% of the account receivable is uncollectable. Assume that the unadjusted balance in AFDA on December 31 is currently 500.

Calculation: $50,000 x 0.005 = 2,500

AFDA

2500 = 500 + ?
2000 = Bad debt expense

The adjusting entry
Dec 31 Bad debt expense …………………………………….. 2000
Allowance for doubtful accounts ………. 2000

After determining the adjusted balance in the AFDA the accounts receivable can now be adjusted with 2 different way.

The more common and easier to understand method:
Current Assets:
Accounts receivable ……………………………………………… X
Less: Allowance for doubtful accounts …………………….        Y Z

or

Current assets:
accounts receivable (net of Y estimated uncollectable accounts) … Z

Aging of Accounts Receivable Method
The aging of accounts receivable method looks at each accounts receivable and basically classify them depending on if its current (not due yet) or if its due which are usually in 30 days intervals. The longer it takes get the money from the customer the less likely the company will be paid.

Direct Write-Off Method
It records the debits lost from an accounts receivable that has been deemed uncollectable
Violates Matching Principle – because many times expenses are not matched with revenues (different periods)
Materiality principle allows this method when bad debts are much smaller in relation to other items

For example: Giggle Corp. specializes in the sale of giggles. Their client Mr. Fraser has been unhappy for some time so he purchased a giggle for $1000. He was so happy, he fled the country. As a result, Giggle Corp has deemed that his debt will not be collected. Journalize:
April 1           Bad Debt Expense                                                                     1000-
Accounts Receivable – Fraser                                    1000-
To write off bad debt

In summary, the journal entry to write off directly is
–      Debit: Bad Debt Expense
–      Credit: Accounts Receivable – (Name)

Notes Receivable
A note is a written promise to give an extension to the consumer with an interest for the time period. Creditors generally prefer it over accounts receivable. Promissory note is a written promise to pay a specific amount of money either on demand or at a definite future date.

The period of a note is sometimes expressed in months or years. When months are used, the note matures and is payable in the month of its maturity on the same day of the month as the original date.
Example: A three-month note dated July 10th, is payable on October 10th.

Interest Calculation
Interest = principal   x   annual interest rate   x   exact days/365 ( i = Prt )
Example: Calculate interest on a $1000, 12%, 90 days note
$1000 x 0.12 x 90/365 = $29.59

Receipt of Note
Date   Cash………….…………………………..……       xx
Notes Receivable……………………………..……              xx
Interest Revenue……………………………..……              xx

To record payment of the note.

End-of-period Interest Adjustment
Accrued interest is computed and recorded when notes receivables are outstanding at the end of an accounting period. This recognizes both the interest revenue when it is earned and the interest receivable owned by the note’s holder.

Date   Interest Receivables………….…………………………..……       xx
Interest Revenue…………………………………..……              xx
To record the issues of a note for extensions of a past due account.

Honoring a Note
Example: Note dated December 16th for $3000, interest rate: 12%, 60 days

Feb. 14 Cash………………………………………………….3059.18
Interest Revenue………………………………………..44.39
Interest Receivable……………………………………..14.79
Notes Receivable………………………………………..3000
Received payment of a note and its interest.

Dishonouring a Note
A note is dishonored when the customer does not pay the note at maturity.
Date Accounts Receivable…………………………………………….xx
Interest Revenue……………………………………………….xx
Notes Receivable……………………………………………….xx
To charge the account for John Smith for a dishonored note including interest.

here is part two of the beautiful quiz we have prepared

enjoy

http://www.quizyourfriends.com/take-quiz.php?id=1104181548533895&

here is the link to the first 5 questions of our little quiz, brought to you by sam & associates:

http://www.quizyourfriends.com/take-quiz.php?id=1104181318572220&

Important – the ratios (A/R turnover and Days Sales Uncollected) are on the test!

Questions

• pg 538, #2 to 6
• pg 551, #10-2B, 10-3B, 10-4B

Textbook Questions:

• pg 543, #10-8, 10-9
• pg 548, 10-8A
• pg 549, 10-9A

Textbook Questions

• pg 546, #10-3A, 10-4A

Samuel Tang & Hulland Bui

INTRO, OVERVIEW OF TOPIC

-CEO’s, the head, the big cheese, everybody knows of them, and everybody wants to be them.

-They are easily one of the highest paid positions within a company, often times, make at least 10 times what the President of the United States makes.

-Their pay cheques are often within the millions

-There is a CEO for every company that you can imagine

-Some CEO’s that you may know are, Steve Jobs (apple), Bill Gates (Microsoft), Warren Buffet (Berkshire Hathaway), Larry Page (Google), Mark Zuckerberg (facebook).

-These people usually have more money than they can even use, however many of them are philanthropists.

EXAMPLES OF CEO’S AND THEIR PAY, A SMALL COMPARISON

Well first of all, executives would be paid “an executive compensation” this basically means that their pay consists of many different things combined. Such as stock options, golden parachute, bonuses, etc.

-Ted Rogers, $21.5 million

-The President, $400,000

-Steve Jobs, $1

Why is this so low?

MAJOR DEVELOPMENTS/AFFECTS TO THE ACCOUNTING PROFESSION

You may be wondering why there is such a huge range, and why the CEO of Apple only makes $1 a year.

(Well, in reality, Steve Jobs doesn’t actually make $1, that’s just what it says on his job description)

How else would he get his money?

(Well, sometimes they would be paid in the form of shares and bonuses)

Before SFAS 123 and all of that jazz, companies didn’t need to write down any of the salary given in the form of shares.

In 2006 the FASB required companies to expense the value of the stock options given to employees. Before that, SFAS 123 required only to state that they used stock options in the foot note and to state a fair value, because stating the stock prices would have a “negative effect” on their actual stock prices.

They didn’t put it into full effect because the dot com boom relied heavily upon stock options that they gave to their employees, because they weren’t seen as that profitable or profitable yet. Also it gave incentive to work harder, as the results would directly affect you. Some companies took the initiative of starting to put in stock option expense in order to give themselves a good rep, in light of all the companies that were being exposed for accounting fraud.

So, the problems were that CEO’s would artificially pump up their stock prices to increase their gains (if they were planning on leaving sooner).

It wouldn’t show up on the income statements.

It has its advantages when it comes to taxes as well. Certified/official stock option is not taxed, when received the option grant, this is because the number is ever fluctuating. Non-qualified stock options however are taxed.

Options Backdating, so some would state the expense as the lowest day that the stock has closed within the month.

June 15, 2005 was when companies had to start expensing stock options, which solved only one of the major problems. It was the GAAP SFAS 123(R).

The Financial Accounting Standards board (FASB) pushed the new trendy rule called the SFAS-123.  What was this rule?  This rule made all companies post their stock options as expenses on their income statement.  As of a result of this, there were net income reductions and also this gave stockholders a better glimpse of everything.

Work Cited:

Pizzigati, S.(2008, September 16) Let’s get serious about CEO pay.

Retrieved March 22, 2011 from ourfuture.org

< http://www.ourfuture.org/blog-entry/2008093816/let-s-get-serious-about-ceo-pay>

Knowledge @ Horton, (2006, May 3) How new accounting rules are changing the way CEO’s are getting paid.

Retrieved March 22, 2011 for Knowledge @ Horton

< http://knowledge.wharton.upenn.edu/article.cfm?articleid=1465>

Financial Accounting Standards Board, Summary for interpretation No.44.

Retrieved March 22, 2011 from fasb.org

< http://www.fasb.org/summary/finsum44.shtml>

(2004, September 21) Bill Gates Quotes:  Wealth quotations – Master of Business, Online celebrities News, Reference and Society

Retrieved on April 6^th, 2011 from money.cnn.com

< http://money.cnn.com/2004/09/21/technology/gates_pay/index.htm >

Williams. R (2010, August 5) Are CEO salaries out of control?

Retrieved on April 6^th, 2011 from business.financialpost.com

< http://business.financialpost.com/2010/08/05/are-ceo-salaries-out-of-control/#comments >

Peterson. J (2010, April 22) Are CEO salary and compensation plans of control-YES

Retrieved on April 6^th, 2011 from www.usmoneytalk.com

< http://www.usmoneytalk.com/finance/are-ceo-salary-and-compensation-plans-out-of-control-yes-904/ >

“CEO pay greed soars out of control while workers earn less”

Retrieved on April 6^th, 2011 from http://www.fa-ir.org

< http://www.fa-ir.org/ai/wagegap.htm >

Definition

• INTERNATIONAL ACCOUNTING is the international aspects of
  accounting, such matters as accounting principles and reporting practices in
  different countries and their classification; patterns of accounting
  development; international and regional harmonization, foreign currency
  translation; foreign exchange risk; international comparisons of consolidation
  accounting and inflation accounting; accounting in developing countries;
  accounting in communist countries; performance evaluation of foreign
  subsidiaries.

What is international Accounting?

• The term implies bookkeeping across national boarders.
• Companies who have their headquarter in one country and
  subsidiaries in other countries need to incorporate the financial statements of
  their subsidiaries into the “principal” financial statement of the headquarter
  which is bookkeeping across national boarders.
• Another part is the process of transforming differing
  national accounting standards into international standards that already are or
  will be relevant for every firm in the world.

Overview of the Issue

• The criteria are gradually converging with international
  accounting standards, promoting international economic exchange and capital
  flows.
• The deepening of economic globalization, national
  standards with international standards has become increasingly important
  convergence.
• The world’s major capital markets are actively explored
  and strive to achieve the set of globally recognized accounting standards convergence.
• To this end, the International Federation of Accountants
  Organization study on the adoption and implementation of international
  standards challenges encountered in the process and results are analyzed in
  detail.
• Uniform accounting help to strengthen investor confidence
  in financial information, which prompted investors to invest abroad.

Major Development

• The most important driving force in the development of
  international accounting standards is the International Accounting Standards
  Committee (IASC), an independent private-sector body formed in 1973.
• The broad objective of the IASC is to further
  harmonization of accounting practices through the formulation of accounting
  standards and to promote their worldwide acceptance.
• Shows the typical development of all fields of inquiry;
  it began with observation and is progressing toward abstraction and model
  building.

2009 Timeline: The year in review

January

Satyam scandal rocks Indian profession

• India’s biggest ever corporate fraud erupts at Satyam
  Computer Services, shaking the corporate sector and audit profession. Satyam’s
  auditor, Price Waterhouse, is investigated and two partners
• S Gopalakrishnan and Srinivas Talluri are arrested. The
  scandal leads to questions over audit firm registration, firm and partner
  rotation rules and the method used to select the auditors of large
  corporations.

BDO joins China’s ‘Top Five’

• BDO International admits Shu Lun Pan Management Corp, one
  of China’s leading domestic firms, after it ends its affiliation with Horwath
  International. The addition makes BDO becomes the largest mid-tier professional
  services firm in China.

February

Madoff fraud leads to spate of lawsuits

• Several prominent audit firms are being targeted in
  lawsuits against feeder funds to the largest Ponzi scheme in US history.
  Investors that lost money placed in Bernard L Madoff Investments Securities
  begin a spate of class actions against hedge funds and their auditors for
  failing to detect the fraud.
• Firms being investigated include KPMG, Ernst & Young
  and PricewaterhouseCoopers.

“Those are big events and to us things like that shake
confidence in accounting firms and accounting standards, and probably even the
regulators themselves.” – Crowe Horwath International CEO Frank Arford on the
impact of the Madoff fraud and Lehman collapse

March

Deloitte, PwC put bid for BearingPoint practices

• Bankrupt consultancy BearingPoint US sells off practices
  as part of a global reorganisation plan. Deloitte agrees to acquire the assets
  of BearingPoint’s North American practice valued at $350 million. PwC signs an
  agreement to acquire a portion of the North American commercial services
  practice ($25 million). PwC Japan’s advisory firm reaches an agreement to
  acquire and integrate with BearingPoint’s Japanese consulting business.

Networks strengthen presence across China

• Three international mid-tier networks, BDO International,
  Grant Thornton International and RSM International, make significant inroads
  into the Chinese market by teaming up with large reputable Chinese firms. The
  consolidation rush by the nations’ largest accounting firms is in step with the
  Chinese government’s ambitious plans for the domestic accountancy profession.

Nally appointed PwC leader

• Dennis Nally (pictured) is appointed to replace
  Samuel Di Piazza as the global chairman of Pricewaterhouse-Coopers, the largest
  accounting network in the world. Nally was the senior partner and chairman of
  PwC’s US firm.

April

Revenue growth plummets in Italy

• The Italian profession takes a dive as the economic
  downturn strikes. Market growth of 3 percent is the worst result for Italian
  firms in the past five years. Only seven out of 29 firms surveyed achieve
  double-digit revenue growth, with some firms experiencing a decline in growth,
  including the second largest firm PricewaterhouseCoopers Italy.

BDO in Hong Kong merger

• BDO McCabe Lo merges with Shu Lun Pan Horwath Hong Kong
  CPA Limited, creating the fifth largest firm on the island. The combined entity
  to operate as BDO Limited.

May

China reaffirms ‘Big 10’ plans

• The Chinese Ministry of Finance publishes plans to
  develop 5 to 10 ‘super big’ domestic public accounting firms within the next
  decade to challenge the position of the Big Four firms in China. The proposal
  aims to create three different firm sizes ‘super big’, ‘big’ and ‘small to
  medium’.

June

KPMG and PwC face legal battles Down Under

• Australia’s two largest audit firms face huge lawsuits
  following corporate collapses. Investors in the MFS Premium Income Fund launched
  a A$746 million ($671 million) claim against KPMG for failure to detect
  unsecured loans. Centro, once the second-largest shopping centre construction
  company in Australia, launches a cross-claim application in a bid to drag PwC
  into an A$1 billion class action.

BDO International ruling a good sign

• Miami court clears BDO International of paying $352
  million in punitive damages and $170 million in compensatory damages awarded
  against its US member firm BDO Seidman in the Bankest case. The outcome is
  closely monitored by the accounting profession as it attempted to establish the
  legal line of control between network administration bodies and member firms.

“The biggest negative for me was the kneejerk reaction by
some to looking at chopping staff out almost immediately as their answer to the
crisis.” BDO International chief executive Jeremy Newman on reactions to the
downturn

July

McGladrey & Pullen threatens breakaway

• McGladrey & Pullen (M&P) issues a formal notice
  of intent to terminate its administrative services agreement with H&R
  Block, threatening its relationship with RSM McGladrey. The notice period is
  210 days. H&R Block, the owner of RSM McGladrey, says the move is not in
  the best interest of M&P’s partners, employees or clients. Combined,
  McGladrey & Pullen and RSM McGladrey are the fifth-largest firm in the US.

August

Price Waterhouse comes under fire

• Sunil Talati, a former president of the Institute of
  Chartered Accountants in India, says Price Waterhouse got off lightly and
  believes the firm should be held partly accountable for the actions of its
  partners in the Satyam scandal. Jailed Price Waterhouse auditors
• S Gopalakrishnan and Srinivas Talluri await trial.

September

Mid-tier network expands in key markets

• Crowe Horwath International accelerates its push into
  important emerging markets with the addition of Crowe Horwath RCS in Brazil,
  WanLongAsia in China and Crowe Horwath HK CPA in Hong Kong. These additions
  help Crowe Horwath maintain its position as the ninth largest network in the
  world.

E&Y reaches Akai settlement

• Ernst & Young (E&Y) Hong Kong settles with the
  liquidator of Chinese consumer electronics company Akai Holdings for an
  undisclosed sum and suspends one of its partners after finding some of the
  firm’s Akai audit work could no longer be relied on. E&Y faced allegations
  it was negligent in its auditing of Akai from 1997 to 1999.

“If I had to point to one thing from 2009 from an
accounting standpoint, the greatest challenge for the profession was the whole
issue of market value accounting and the impact of that on the downturn of the
economy.” – Grant Thornton International chief executive Ed Nusbaum

October

Canadian mid-tier firms play musical chairs

• Large Canadian firms reshuffle their global affiliations.
  The market’s seventh largest firm Meyers Norris Penny (MNP) joins the Praxity
  Global Alliance from Crowe Horwath International. The national association of
  firms Collins Barrow leaves Praxity to join Baker Tilly International. MNP
  sights benefits of the association model as one driver of the move. Crowe
  Horwath International is yet to reveal a new Canadian firm.

Kreston International on network trail

• Kreston International outlines plans to become an
  accountancy network during the next three years. Kreston will implement a
  globally co-ordinated quality control monitoring programme and provide firms
  the option to use a common brand name to sign off assurance reports, which
  would satisfy the International Federation of Accountants’ definition of a ‘network’.
  In this year’s world survey, Kreston International is the 12th largest network
  with fee income of $1.64 billion.

November

Parmalat settlement a step closer

• Deloitte Global and Deloitte US offer to pay $8.5 million
  and Grant Thornton International and Grant Thornton US offer $6.5 million to
  plaintiffs to settle the long-running Parmalat lawsuit. In September, a US
  judge dismissed claims against the networks – a victory for networks attempting
  to prove they do not control the actions of their member firms.

“From a network perspective, I would say that all these
discussions about the Deloitte or the Parmalat case were quite substantial
because it showed to what extent there is or there might be a general or
overall liability for the work that is done here or there, and we have to keep
and eagle eye on that.” – Nexia International chairman Norbert Neu on the
Parmalat ruling

December

Tenon and RSM Bentley Jennison tie the knot

• Tenon Group acquires RSM Bentley Jennison to create the
  seventh largest firm in the UK.
• RSM Tenon has 3,000 staff and generates annual fee income
  of £250 million ($409 million).
• This combination helps RSM International leapfrog Grant
  Thornton International as the sixth largest accounting network in terms of fee
  income.

US firms mend differences

• In other good news for RSM, US member firms RSM McGladrey
  and McGladrey & Pullen patch up their differences and agree to continue
  their alternative practice relationship.

Impact on the accounting profession

• It would be hard for Canadians to go to other countries
  to work because the accounting standard is different in other countries.
• It would be hard for accountants from other countries to
  come and work here.
• For example in China the balance sheet they are less a
  tool of profit and loss, but an inventory of assets available to a company.
• Also in a Chinese accounting standards do not include an
  accounting of the debts that a corporation holds.

Future Outlook

• In the fragile state of the current U.S. economy, there
  may be no more important matter than investor confidence.
• People will invest in the stock market because they are
  confident in making a return on investment, something that cannot be done
  unless there is quality assurance in the world of accounting.
• Bankers, lenders, and stock brokers all rely on the
  information that is produced by corporations in the form of financial
  statements is reliable and accurate.
• This is not possible, without sound accounting and
  enforcement from agencies such as the Securities and Exchange Commission and
  the Financial Accounting Standards Board.
• But a more recent development in the world of accounting
  pertains to the convergence and gaining popularity of international accounting
  standards.
• In Canada they might change the accounting standards.
• Also they might be new principle and certain principle
  would change.
• In the future it would be easier for Canadians to go to
  different countries and other accountant to come to Canada to work
• Also there will be more way to prevent future accounting
  frauds and financial risks.

Work Cited List

International Accounting Standards: Encyclopedia of
Business and Finance. (n.d.). eNotes Literature Study Guides, Lesson Plans, and
More. Retrieved March 30, 2011, from http://www.enotes.com/business-finance-encyclopedia/international-accounting-standards

Annotated Bibliography: The Future of International
Accounting Standards. (n.d.). Home.             Retrieved
March 18, 2011, from http://wikibin.org/articles/annotated-bibliography-the-future-of-international-accounting-standards.html

China Accounting Standards. (n.d.). Wikipedia the free
encyclopedia. Retrieved April 1, 2011, from
http://en.wikipedia.org/wiki/China_Accounting_Standards

Editorial, I. (n.d.). 2009 Timeline: The year in review.
VRL Financial News – Home. Retrieved March 12, 2011, from
http://www.vrl-financial-news.com/accounting/intl-accountingbulletin/issues/iab-2010/iab-461/2009-timeline-the-year-in-rev.aspx

Global Economic Turndown: The Future Accounting Outlook.
(n.d.). Financial Meltdown – Crisis Of Governance?. Retrieved March 18, 2011,
from     www.icap.org.pk/userfiles/file/safa2009/article-5.pdf

Hausarbeit – International Accounting – an Overview.
(n.d.). Scribd. Retrieved March 30, 2011, from
http://www.scribd.com/doc/6722096/Hausarbeit-International-Accounting-an-Overview