Reference no: EM131268114
Understanding the Collection and Write-off Process
A major retailer has proprietary (in house) credit cards. Customers who wish to make purchases are encouraged to take out a credit card. The credit card will have the name of the retailer on the credit card and only the retailer will accept the credit card for purchases.
The cardholder cannot use this credit card at any other store other than the store on the credit card.
You could say this credit card is very much like an accounts receivable in the name of the customer, except the retailer has credit terms. If the balance is not paid in 30 days after the statement is sent out, the retailer will charge 1.5% monthly interest (18% per annum).
The retailer has policies in place to handle cash receipts. All collections are sent to a central processing center and none of the retailer’s employees handle the cash or checks received. Periodically, the external cash collections processor is audited. All audits to date suggest that the provider is properly handling the cash collections.
Statements are sent to customers monthly. If there are discrepancies, a separate department handles the disputes. Occasionally there is a problem with a sale posting to the wrong customer credit card or a lost payment, however, there are procedures in place to resolve the issues.
The standing policy of the company is that once an account has not had a payment on a balance owed for 270 days, the account is written off. Prior to write-off an in-house department phones the customer and tells that customer that the account is in arrears and should be paid. The calls become automated after the initial call.
A note taking system is employed which provides a way for both the live phone calls and automated phone calls to be recorded. Letters are also sent to the cardholders. One letter informs the cardholder that if payment is not promptly made, a collection agency will take over the account. Another letter informs the cardholder that the delinquent account will be reported to a credit agency and the cardholder’s credit rating may be affected. All the actions are recorded in the note taking system.
Monthly, the credit department prepares a listing of uncollectible accounts. This listing includes those accounts that have just become 270 days delinquent and should be written off. Also included is a listing of accounts that are not current.
The credit manage prepares a formal report that compares this month’s delinquent accounts to those of prior months and the same month of the prior year. Year to date reports are also made. These reports also include any changes in credit policies (easing of credit) or new sales promotions (zero payments/zero interest programs), etc.
At end of month, the credit manager meets with the controller to discuss the credit department. One topic always included in the meeting is the collectability of accounts receivable. The credit manager discusses the collection efforts and changes made in collection procedures. Formal notes are taken in this meeting and a copy of the minutes are retained by the accounting department.
Trouble in collections
Once accounts are written off, the in-house collection efforts cease. The credit manager has a friend who runs a collection agency. He asked for and received permission to place accounts with his friend’s agency. The agency retains a 10% finder’s fee for any collected accounts.
In a recent meeting, the controller noted that very few of these accounts placed with the collection agency are being paid. The controller is considering placement with another agency. The credit manager tells the controller that this is quite standard. After all, if they deemed they were uncollectible and wrote them off, why would they expect someone else to be able to collect?
The controller suspects something is amiss. The controller talks to friends who are also controllers and notes that often the collection rates from an outside agency are up to 25% of accounts placed…in other words, 25% of the written off accounts when placed with an outside agency get paid. The credit manager’s friend is reporting only a 5% collection rate.
1. From an internal control perspective, what do you think is bothering the controller? (Start with the 5 control activities. How are they covered now?
2. Currently, the collection agency does the collecting and remits 90% of the amount collected, retaining the 10%. Do you think there is a better way to handle this? Design a better system—using the narrative format (as in this problem). Include documents and any processing/IT controls you would add.
This is your chance to be creative. In designing systems, there are only opportunities. I encourage you to use what you have learned about accounting systems to apply the controls in this REAL LIFE case.
Significant improvements to their organization
: Consider a team in a typical college course and 2 a team in an organization that hopes to make significant improvements to their organization over the next two years.
|
Weighted-average accumulated expenditures
: Hanson Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were $1,872,000 on March 1, $1,236,000 on June 1, and $3,008,500 on December 31. Compute Hanson’s weighted-average accumulated ..
|
Journal entry to record its acquisition of perot systems
: In Fiscal 2010, Dell Inc. acquired Perot Systems for $3,878 million in cash. Perot's net assets acquired hand the following fair values at the acquisition date. Prepare Dell's journal entry to record its acquisition of Perot systems, as a merger.
|
Difficult presentations made easy
: Watch "Difficult Presentations Made Easy." Create a 10- to 15-slide Microsoft PowerPoint presentation that outlines techniques to improve your presentation skills
|
Understanding the collection and write-off process
: A major retailer has proprietary (in house) credit cards. Customers who wish to make purchases are encouraged to take out a credit card. The credit card will have the name of the retailer on the credit card and only the retailer will accept the credi..
|
Compute the break-even point in dollars and in units
: In the month of June, Jose Hebert’s Beauty Salon gave 3,900 haircuts, shampoos, and permanents at an average price of $ 30 . During the month, fixed costs were $ 16,600 and variable costs were 75% of sales. Determine the contribution margin in dollar..
|
Explain difference between relevant and irrelevant costs
: Explain the difference between relevant and irrelevant costs by using examples. Cover the topics: adding or dropping product lines, make or buy decisions, and sell or process further decisions.
|
Calculate the amount of interest expense that will appear
: On January 1, 2016, the Mason Manufacturing Company began construction of a building to be used as its office headquarters. The building was completed on September 30, 2017. Expenditures on the project were as follows: January 1, 2016 $ 1,180,000 Mar..
|
What is the estimated total audited value of the population
: Using mean-per-unit estimation, an auditor has taken a sample of 200 from a population's 40,000 items; that population has a book value of $200,000. She found that in her sample the average audited value was $4.20, while the average book value was $5..
|