...The Harbor Company uses the allowance method in accounting for uncollectible accounts (bad debts). Harbor’s past experience indicates that 1% of a year’s net credit sales will eventually be uncollectible. Selected amounts at December 31, 2000, and December 31, 2001, appear below: | |12/31/00 |12/31/01 | |Net Credit Sales for the year |$500,000 |$600,000 | |Accounts Receivable balance at year end |90,000 |120,000 | |Allowance for Doubtful Accounts balance |5,000 |?? | Record the following events that occurred in 2001: a. July 17: Determined that the account of Irwin Toady for $1,400 is uncollectible. b. September 12: Determined that the account of Jeffrey Abernathy for $4,000 is uncollectible. c. October 10: Received a check for $800 as payment on account from Irwin Toady, whose account had previously been written off as uncollectible. He indicated the remainder of his account would be paid in November. We believe him. d. November 10: Received a check for $600 from Irwin Toady as payment on his account. e. Prepare the adjusting journal entry to record the bad debt expense provision for the year ended December 31, 2001. f. What is the balance of Allowance for Doubtful Accounts at Dec. 31, 2001? 1. The Anderson Company...
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...was 5.5%. In 2007 Tom made a $200 payment to Jamie. Later in 2007 Jamie granted Tom a second $10,000 loan under the same conditions as the first. On December 1, 2008 Tom agreed to sign two promissory notes for the loans. In 2010 the IRS disallowed Jamie’s nonbusiness bad debt deduction disputing that the entire sum of $40,000 was a gift from Jamie to Tom and a bona fide loan never existed. Facts: • The first loan of $30,000 occurred in 2006 while Tom was an unemployed salesman. • The second loan of $10,000 occurred in 2007 after Tom failed to maintain steady employment. • The debtor made one interest payment of $200 early in 2007 as a show of good faith. • Both promissory notes were signed on December 1st 2008. • The stated rate of interest was 3% which was below the market rate of 5.5% at the time. • Jamie filed for the nonbusiness bad debt deduction in 2010. • The loan had no due date. Issues: Jamie Douglas is seeking a nonbusiness bad debt deduction from her taxable income under IRC sec. 166.1. In order to claim this deduction she must have proof that the transaction was indeed debt and not a gift. To do this Jamie must show that she and Tom had a true debtor creditor relationship and that the debt has become worthless in the year she is claiming the loss. In court the IRS contended that a bona fide loan never existed because the nature of the transaction is more appropriately classified as a gift and that repayment was contingent upon Tom getting a job. Therefore...
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... CURRENT ISSUE ANALYSIS Banks’ bad loans down to 2.05% as of Sept By Prinz P. Magtulis (The Philippine Star) | Updated December 1, 2012 - 12:00am MANILA, Philippines - The non-performing loan (NPL) ratio of universal and commercial banks showed a slight improvement in the first three quarters of the year, the Bangko Sentral ng Pilipinas (BSP) reported yesterday. Big lenders’ NPL ratio improved to 2.05 percent as of September from 2.46 percent a year ago. It was also slightly better than the 2.08 percent in the first eight months of the year. Excluding bank loans among themselves, the ratio also improved to 2.15 percent from 2.46 percent a year ago and 2.08 percent as of August, data showed. NPL pertains to loans that remained unpaid 30 days after due date. The ratio reflects the proportion of NPL against banks’ total loan portfolio. A lower ratio indicates a healthy balance sheets for lenders allowing them to lend more to drive consumption and investment, which in turn, could boost economic growth. The “combined effect” of extending more loans and having some bad ones paid contributed to the industry’s better performance, the central bank said. Business ( Article MRec ), pagematch: 1, sectionmatch: 1 A total P3.410 trillion worth of loans were granted during the first nine months, up 12.91 percent from last year’s P3.020 trillion. The latest figure was also an improvement from P3.378 trillion as of August. This, even as bad loans dipped to 5.91 percent year-on-year...
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...Student Loans; Bad Debt Bad debt is borrowing money to pay for something that diminishes or drops in value over time. Student loans are one of the main reasons that place millions of Americans in financial debt and possibly financial crisis every year. Current student loans have grown by 91% in the last 10 years creating an oversupply of college educated student in the labor market. The government wanted to offer Americans accessibility to a higher education, offering loans at a fixed rate that with time went up affecting negatively college graduated students. This idea was sold as the “American Dream”, where people thought success was linked to going to college or university to later on have a white-collar job. According to economist Dusty...
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...Sometimes the answer is yes, and sometimes the answer is no. Let’s start with the basics: 1. In order to write off a bad debt, you must have proof that the transaction was indeed a debt and not a gift. The IRS considers “loans” to your minor children as gifts making the ensuing bad debt not deductible. So the answer to the first question is no. Related Stories Is It Time to Kill the Mortgage Interest Tax Deduction? What to Do if You Can’t Pay Your Taxes Don’t Lose Your Tax Refund Because of Your Spouse’s Debt 2. There are two types of bad debts: business (from operating your business) and non business. 3. The debt must arise from cash out of your pocket, or in the case of business, bad debts must have been included in income. 4. You must have a basis in the debt. In other words, the debt must arise from funds you parted with, not from something you expected to receive. For example, you cannot claim a bad debt deduction for court-ordered child support not paid to you by your former spouse. If you are a cash basis taxpayer (most individuals are), you pretty much cannot take a bad debt deduction for unpaid salaries, wages, rents and similar items. 5. The debt must be deemed completely worthless and reasonable steps must have been taken to collect on the debt. To determine if a debt can be written off, consumers should pretend they are sitting across from an auditor defending a deduction on the tax return. Proper defense involves having proper...
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...receive some cash from the proceeds from the sale of all the assets during the liquidation of Jones Company. Should you follow the instructions of the CEO? Why or why not? Provide specific details to support your opinion in your response. A company's accounts receivable are among its most important assets, representing sales that have not yet been paid for or converted to cash. In ordinary business, bad debts refer primarily to losses arising from transactions made on credit (accounts receivable) in the normal course of business. We, accountants, can account for bad debts in two ways: (a) The Direct Write-off Method where bad debts may be deducted against income at the time they have been definitely certain to be uncollectible or (b) the Allowance Method where a reserve for probable losses may be established over time, ordinarily at the close of the period. Regardless of what method the company is using, I will advise the CEO to show the true picture of the financial condition of the company. If the company is using the Allowance method and the Allowance for Bad Debts Account has enough balance to absorb the amount owes, writing off the whole amount has no impact on the current income. But, I will make a note on the Balance Sheet that Jones Company, a major client, went bankrupt that the collection...
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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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...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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...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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...Introduction Sutter Health is non-profit network that is made up by community-based health care providers based in Northern California. This network introduced an interface that was aimed at enhancing revenue collection of the facilities from the self pay patient. The System provides a broad range of health care services, including acute, sub¬-acute, long-term, home health and outpatient care, as well as physician delivery 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...
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...prelisting of cash receipts and deposits by the accounting manager. Error or fraud controlled-Controls the cash abstraction and the inappropriate recording of cash sales and receipts. 11A-2) There are multiple weakness found throughout. One in particular is the sales invoices, which are created and mailed before to supply of goods. An error that could possibly occur is the qualities of goods, which could be ordered wrong or not at all. So the sales could possibly be documented for goods not delivered until the next year. Another weakness is the internal control has receivables, which aren’t written off on the regular basis. This might results in an insufficient allowance for doubtful accounts, with a related understatement of bad debt expenses. If management is not observing...
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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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...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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...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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...Memorandum To: Ed Furticella From: Xu Huang Date: April 2, 2014 RE: Financial Shenanigans Assignments There are seven earnings manipulation techniques that companies may use to give investors the mistaken impression that its company is performing better than the underlying economic reality, include: recording revenue too soon; recording bogus revenue; boosting income using one-time or unsustainable activities; shifting current expenses to a later period; employing other techniques to hide expenses or losses; shifting current income to a later period and shifting future expenses to an earlier period. Recording Revenue Too Soon In order to shift revenue or gains in future-period to current period or to oversize bonuses and stock options, management may shift revenues or gains from future period to current period through recording revenue before completing any obligations under the contract; recording revenue far in excess of work completed on the contract; recording revenue before the buyer’s final acceptance of the product or recording revenue when the buyer’s payment remains uncertain or unnecessary. To mitigate the risk of such misrepresentation, investors should ware some warning signs of shenanigans: extended end date, sharp jump in accounts receivable, especially long-term and unbilled ones, using percentage-of-completion accounting or aggressive assumptions, inappropriately low discount rate, premature revenue recognition policy, Inappropriate use of mark-to-market...
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