...The direct write off method is the practice of charging bad debts to expense in the period when individual invoices have been clearly identified as bad debts. The specific activity needed to write off an account receivable under the direct write off method with accounting software is to create a credit memo for the customer in question, which exactly offsets the amount of the bad debt. Creating the credit memo will involve a debit to a bad debt expense account and a credit to the accounts receivable account. The method does not involve a reduction in the amount of recorded sales, only the increase of the bad debt expense of the bad debt. This approach violates the matching principle under which all costs related to revenue are charged to expense in the same period in which you recognize the revenue, so that the financial results reveal the entire extent of a revenue-generating transaction in a single accounting period. The direct write off method delays the recognition of expenses related to a revenue-generating transaction, and so is considered an excessively aggressive accounting method, since it delays some expense recognition, making a reporting entity appear more profitable in the short term than it really is. For example, a company may recognize $1 million in sales in one period, and then wait three or four months to collect all of the related accounts receivable, before finally charging some items off to expense. This creates a lengthy delay between revenue...
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...systems. These services are provided through an integrated health care delivery approach which gives the System the ability to deliver a full range of health care products and services to the communities it serves. This network identified that traditional payment processing system had limitations that hindered the effective collecting of revenue. These limitations were associated with limited access to accurate information by the account representatives, ineffective performance measures and fragmented centers of service provision. The Sutter health program developed a system that comprised of solutions geared towards overcoming these limitations. This paper will discuss Sutter Health key problems and issues, solutions, results, accounting practices, alternative approach, informed opinion, and the conclusion. The California Sutter Health Approach Sutter Health is a non- for-profit community based healthcare and hospital system based in Sacramento, CA. Sutter Health faced several problems, but the key problem was, Souza and McCarty wrote an article, "From Bottom to Top: How One Provider Retooled its Collections," that provided data from research indicating how this healthcare system reputed to be on the list of the largest health care providers in Northern California maneuvered into implementing a whole new strategy on how to increase collections. When collecting payments from new patients, services provided, comes from the need to...
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...The far-reaching implications of a new revenue model Highlights Management should evaluate existing business practices under the new model, including how product or service offerings are bundled and priced, and begin assessing the need to negotiate revised contract terms. Industry-specific accounting guidance will be eliminated under the new model and “industry practice” will need to be re-evaluated. Estimates that are required to apply the new model will often require the use of greater judgment and may necessitate process or system changes. Companies should begin assessing the impact of the changes and the adequacy of their resources, systems, and processes to address the new requirements. on the future of revenue recognition Revenue, or the “top line,” is one of the most closely-monitored measures in financial statements. However, the accounting rules for revenue can be difficult to decipher. US revenue guidance today is a tangled web of special rules and exceptions created to address unique transactions, industries, and business models. The FASB and IASB are in the process of replacing this labyrinth of revenue guidance with a new global accounting standard that will apply a single set of principles to all revenue transactions, regardless of industry. Their proposed standard, issued in June 2010, received extensive feedback, which the boards have discussed at length during the first half of 2011. Now that they’ve completed their initial redeliberations and decided to...
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...AUDIT PROGRAM FOR ACCOUNTS RECEIVABLE Risks The accounts receivable listing or individual balances may be inaccurate Accounts receivable balances may not exist Accounts receivable may not be collectible Bad debts write-offs may not be valid Sales transactions may be processed in the wrong period Steps 1. Agree a detailed listing of accounts receivable to the summary Obtain a detailed listing of accounts receivable balances (aged by customer, if possible) and: a) trace totals to the comparative summary of accounts receivable balances; b) select reconciling items in order to obtain a moderate to low level of assurance that accuracy is achieved and i) trace these items to supporting documentation; and ii) determine whether the results of the client's investigations have been reviewed and approved by a responsible official; c) test, to an extent to obtain a moderate to low level of assurance, the mathematical accuracy of the detailed listing; and d) if appropriate, examine support for any significant adjustments made throughout the year in reconciling detailed accounts receivable records with the account(s) in the general ledger. 2. Positively confirm selected accounts receivable balances Select customers' account from the detail accounts receivable listing for positive confirmation in order to obtain a moderate to low level of assurance that the aforementioned audit objectives are achieved. Perform the following: a) send positive...
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...CHAPTER 9: Accounting for receivables ANSWERS TO QUESTIONS 1. Accounts receivable are amounts owed by customers on account. They result from the sale of goods and services in the normal course of business operations (i.e. in trade). Notes receivable represent claims that are evidenced by formal instruments of credit. 4. The essential features of the allowance method of accounting for impairment of receivables are: (1) Impaired accounts receivable are estimated and matched against revenue in the same accounting period in which the revenue occurred. (2) Estimated uncollectables are debited to Bad Debts Expense and credited to Allowance for Impairment through an adjusting entry at the end of each period. (3) Actual uncollectables are debited to Allowance for Impairment and credited to Accounts Receivable at the time the specific account is written off. 9. From its own credit cards, the Virgil Ltd may realise financing charges from customers who do not pay the balance due within a specified grace period. National credit cards offer the following advantages: (1) The credit card issuer makes the credit card investigation of the customer. (2) The issuer maintains individual customer accounts. (3) The issuer undertakes the collection process and absorbs any losses from uncollectable accounts. (4) The retailer receives cash more quickly from the credit card issuer than it would from individual...
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...Canterbury goes bankrupt, there is no chance of further repayment of debt. Issues 1. How is debt treated at bankruptcy? 2. What are the tax consequences of contributing capital to a corporation when the company goes bankrupt? 3. If a loan is structured with the intent to protect investment, what are the tax consequences when the company goes bankrupt? 4. If a loan is structured to protect employment, what are the tax consequences at the time of bankruptcy? 5. Which of the above scenarios is the best way to structure a transfer for tax purposes? Conclusions 1. Debt will become wholly worthless upon bankruptcy. 2. The $90,000 capital contribution may be deducted as a capital loss to the extent of gains from such sales or exchanges, plus the lesser of $3,000 and the excess of such losses over such gains. 3. A nonbusiness bad debt may be deducted as a short term capital loss $90,000 in the year the loan becomes worthless to the extent of short term capital gains, plus the lesser of $3,000 and the excess of such losses over such gains. 4. The $90,000 loan will be considered a business bad debt, and will be deductible as an ordinary loss in the taxable year it becomes worthless. 5. The best way to structure this transfer is as a loan to protect employment. Support If a corporation goes bankrupt, Reg. §1.166-2(c)(1) states that it is generally an indication of the worthlessness of at least part of a debt....
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...rhinoplasty patients. The charge, or list price, for Oncology patients will average $50,000. Cardiac patients will be charged an average of $40,000, and rhinoplasty, $25,000 per patient. However, those charges often are not the actual amount ultimately received. The amount the hospital receives depends on whether patients pay their own hospital bills or have health care insurance. Assume that private insurance companies pay the full charge or list price. However, Medicare and Medicaid have announced rates they will pay for the coming year as follows: Oncology patients $40,000, Cardiac patients, $30,000, Rhinoplasty $10,000. Self-pay patients are supposed to pay the full charge, but generally 25 percent of self-pay charges become a bad debt. Note that bad debts are treated as expense in health care. They may not be shown as a reduction lowering revenues. The full charge for self-pay patients is shown as revenue, and then the uncollectible amount is shown as an expense. No payment for charity care is ever received, and charity care is not shown as a revenue or expense. The...
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...rhinoplasty patients. The charge, or list price, for Oncology patients will average $50,000. Cardiac patients will be charged an average of $40,000, and rhinoplasty, $25,000 per patient. However, those charges often are not the actual amount ultimately received. The amount the hospital receives depends on whether patients pay their own hospital bills or have health care insurance. Assume that private insurance companies pay the full charge or list price. However, Medicare and Medicaid have announced rates they will pay for the coming year as follows: Oncology patients $40,000, Cardiac patients, $30,000, Rhinoplasty $10,000. Self-pay patients are supposed to pay the full charge, but generally 25 percent of self-pay charges become a bad debt. Note that bad debts are treated as expense in health care. They may not be shown as a reduction lowering revenues. The full charge for self-pay patients is shown as revenue, and then the uncollectible amount is shown as an expense. No payment for charity care is ever received, and charity care is not shown as a revenue or expense. The...
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...eleven months from a financial, marketing, operations, and hospital-wide perspective? From a financial and operational perspective, the hospital did not perform well in 1999 and 2000. Based on exhibit 5, there was a net loss each month beginning May 1999 and March 2000. On the other hand, from a marketing perspective, the hospital was successful in sending out referrals to individuals who have private-held insurance coverage. The large amount of Medicare customers prevented the hospital in meeting financial performance goals, in that this type of coverage includes subsidization. 3. What is your prognosis for the DHC next year assuming the 8% increase in average service charges and the reduction in bad debt expense occur, but nothing else? The two percent reduction in bad debt expense really isn’t enough savings to offset the eight percent increase in service charges. The company has already demonstrated poor financial performance over the past two years and shows a strong probability of losing...
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...SUMMARY OF BAD DEBT ACCOUNTING |DIRECT WRITE OFF |ALLOWANCE | |Write off in period deemed uncollectible |Estimate bad debts for each period’s sales (2 methods to estimate)| |No adjusting entry |Adjusting Entry: | | |Dr. Bad Debt Expense | | |Cr. Allowance for doubtful accounts | |Not good matching |Matches expenses to period of sale | |Accounts receivable on the Balance Sheet not at net realizable value|Accounts receivable on the Balance Sheet is at net realizable | |OK – if bad debts are immaterial |value | |Write-off Entry in period deemed uncollectible |Write off A/R against allowance when deemed uncollectible: | | |Dr. Allowance for doubtful | |Dr. Bad Debt Expense |Accounts...
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...Revenue is defined in the Framework for the Preparation and Presentation of Financial Statements (2008) as increase in economic benefits during the accounting period in the form of inflows or enhancements of assets or decrease of liabilities that result in increase in equity, other than those relating to contributions from equity participants. Revenue is measured at the fair value of the consideration received or receivable taking into account the amount of any trade discounts and volume rebates allowed by the entity. An entity usually determines the amount of revenue arising on a transaction by referring to the agreement between the entity and the buyer or user of the asset (Lam & Lau 2009). There have few types of revenue recognition such as from sale of goods, the rendering of services and interest, royalties and dividends. Whereas, some of factors need to be considered when determining when revenue should be recognized in measuring the income of a business enterprise (Lam & Lau 2009). First, the selling price to buyer is fixed or determinable when customer does not have the unilateral right to terminate or cancel the contract and received a cash refund. From the theory, revenue should not be recognized until the refund rights have expired or the specified future events have occurred. However, revenues can be recognized on a pro rata basis if assuming that the amount of refunds can be reliably estimated based on past experience and industry data (Bragg 2010). But, revenue...
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...eleven months from a financial, marketing, operations, and hospital-wide perspective? From a financial and operational perspective, the hospital did not perform well in 1999 and 2000. Based on exhibit 5, there was a net loss each month beginning May 1999 and March 2000. On the other hand, from a marketing perspective, the hospital was successful in sending out referrals to individuals who have private-held insurance coverage. The large amount of Medicare customers prevented the hospital in meeting financial performance goals, in that this type of coverage includes subsidization. 3. What is your prognosis for the DHC next year assuming the 8% increase in average service charges and the reduction in bad debt expense occur, but nothing else? The two percent reduction in bad debt expense really isn’t enough savings to offset the eight percent increase in service charges. The company has already demonstrated poor financial performance over the past two years and shows a strong probability of losing current customers to the new...
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...Incentives/Pressures - Pinnacle’s board is considering selling the Machine-Techdivision, and the president of the division is committed to making it profitable (Part I) - Pinnacle is in danger of violating its debt covenants, the current ratio has fallen from 2.19 to 1.75. (Part II) Opportunities - Pinnacle engages in a number of related party transactions. (Part I) - Realizable value issues exist with inventory and receivables (Part I and II) - There has been turnover in internal audit personnel (Part II) Attitudes/Rationalizations - Pinnacle has had disputes with the IRS (Part II). b. The company is in the engine manufacturing business, and has recently expanded into solar engines. The engine manufacturing business is competitive and increasingly outsourced. The solar business depends on developing technology. These characteristics are most likely to affect Inventory to a lesser extent , and accounts receivable fixed assets. and c. Pinnacle could overstate revenues in several ways. The auditor would especially focus on the Machine-Tech division because of the incentives identified in part a. d. There is a major change in perating expenses O and Income from operations this . If change was not expected, it could suggest revenue recognition fraud. The decline in bad debt expense and increase in depreciation expense, which are management estimates, could suggest the use of estimates to overstate income . e. Fraud Risk 1 2 3 4 5 6 7 8 9 10 11 Yes Yes Yes No Yes...
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... 16 Cash ($7,000 – $140) 6,860 Sales Discounts (2% X $7,000) 140 Accounts Receivable—Jackie Inc 7,000 (b) Jan. 10 Accounts Receivable—C. Bybee 9,000 Sales Revenue 9,000 Feb. 12 Cash 6,000 Accounts Receivable—C. Bybee 6,000 Mar. 10 Accounts Receivable—C. Bybee 60 Interest Revenue [2% X ($9,000 – $6,000)] 60 EXERCISE 8-4 (a) | Accounts Receivable | | Amount | | % | | Estimated Uncollectible | | | | | | | | | | 1–30 days31–60 days61–90 daysOver 90 days | | $65,000 17,600 8,500 7,000 | | 2.0 5.030.050.0 | | $1,300 880 2,550 3,500$8,230 | (b) Mar. 31 Bad Debt Expense 7,330 Allowance for Doubtful Accounts ($8,230 – $900) 7,330 EXERCISE 8-7 (a) Mar. 3 Cash ($620,000 – $18,600) 601,400 Service Charge Expense (3% X $620,000) 18,600 Accounts Receivable 620,000 (b) May 10 Cash ($3,500 – $175) 3,325 Service Charge Expense (5% X $3,500) 175 Sales Revenue 3,500 EXERCISE 8-10 (a) 2014 Nov. 1 Notes Receivable 15,000 Cash 15,000 Dec. 11 Notes Receivable 6,750 Sales Revenue 6,750 16 Notes Receivable 4,400 Accounts Receivable—Russo 4,400 31 Interest Receivable 277 ...
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...Accounting for Bad Debts The two methods for accounting for bad debts are the Direct Write-off method and the Allowance method. Direct write-off does not properly match, nor does it conform to conservatism, hence the method is not GAAP. It is, however, the method that must be used for income tax reporting. The Allowance method (is GAAP) does properly match expenses with revenues and is in conformity with conservatism and can be applied in two different, yet similar ways: Income statement method—relies on an estimate based on a percentage of net credit sales. The balance in the allowance account at the end of the period is not taken into consideration. The percentage of net credit sales is debited to Bad debt expense and credited to the Allowance for bad debts accounts, no matter the balance in the allowance account. (The Kimmel, et al. text does not present this method) Balance sheet method—relies on an estimate of uncollectible accounts made during an analysis of the Accounts receivable account. The balance in the Allowance account is taken into consideration and the adjusting entry brings the Allowance account up to the desired amount. If the allowance account has a debit balance, it is “overdrawn”. In other words, there have been more write-offs than planned. If the allowance account has a credit balance, it has a positive balance and has not been utilized as fully as was expected. Accounting for bad debts expense is done only at the end of the accounting...
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