Question

Please provide examples of the following:

Chapter 7

1) What makes up “cash and cash equivalents”

2) Journal entry to records sale of a product using the “gross method for accounting for cash discounts”.

3) Journal entry to record receipt of payment when using “gross method of accounting for cash discounts” when payment is within discount terms and also when payment is received after the discount term has expired

4) Journal entry for sales allowances

5) Know increases and decreases in Allowance for Sales Returns under the New Revenue Recognition rules

6) Bad Debts;

a) Estimating allowance for bad debts under both the percentage of sales and the percentage of assets method (ageing of receivables)

b) Determining the ending balance in both Accounts Receivable and Allowance for Doubtful Accounts when given beginning balance in the two accounts and activity for the year.

c) Same as (b) but for Bad Debt Expense

6) Bank Reconciliation – determining correct cash balance

a) Deposits in transit are added to bank statement balance

b) Outstanding checks are deducted from bank statement balance

c) Non-sufficient-fund (NSF) checks are deducted from general ledger balance, both for the amount of the check and any fee charged by the bank

d) Service charges by the bank on bank statement are deducted from general ledger balance

e) Collection by the bank of notes receivable and interest earned by a company that is reported on the bank statement are added to general ledger balance

f) Any errors by the company must be added to or deducted from general ledger balance

Answer 1

1. Although there is some leeway for judgment, common examples of cash and cash equivalents include bank accounts, money market funds, marketable securities, and Treasury bills.

2. Suppose Company A sells certain goods at a price of $4,400 with terms of payment of 2/10 n/20. These terms of payment mean two things. Firstly, the customer must pay within 20 days after sale or, in other words, they have right to postpone the payment up to the 20th day after sale. Secondly, if the payment is made within 10 days, the customer will also be entitled to a 2% cash discount. Since most customers would try to benefit from the cash discount, such a practice encourages customers to pay early.

Now let us try to journalize the sale which offers a cash discount.

Since at the time of sale it is not possible to know whether the customer will actually avail the discount, therefore Company A would choose either gross method or net method. Once it chooses one method it would have to record all sales according to that method.

Gross Method

According to gross method the company would initially record the sale at gross or full price of $4,400. The journal entry would be:

Accounts Receivable 4,400

Sales 4,400

Subsequently, if the customer pays within 10 days, he would be entitled to avail the cash discount. The journal entry to record payment would be:

Cash 4,312

Sales Discounts 88

Accounts Receivable 4,400

However, if the customer does not pay within 10 days, they would not be entitled to avail the cash discount and the journal entry to record the payment would be simple:

Cash 4,400

Accounts Receivable 4,400

4. The journal entry recorded by the company for the sales allowance is a debit of $1,000 to the sales allowance account and a credit to the accounts receivable account of $1,000. The sales allowance account is a contra account, since it offsets gross sales.

6. A bad debt is a monetary amount owed to a creditor that is unlikely to be paid and, or which the creditor is not willing to take action to collect because of various reasons, often due to the debtor not having the money to pay, for example due to a company going into liquidation or insolvency.