Chapter 9-1 Chapter 9 Accounting For Receivables Financial Accounting, Sixth Edition.

Chapter 9-1

Chapter Chapter 99Chapter Chapter 99

Accounting For Receivables

Accounting For Receivables

Financial Accounting, Sixth Edition

Chapter 9-2

1. Identify the different types of receivables.

2. Explain how companies recognize accounts receivable.

3. Distinguish between the methods and bases companies use to value accounts receivable.

4. Describe the entries to record the disposition of accounts receivable.

5. Compute the maturity date of and interest on notes receivable.

6. Explain how companies recognize notes receivable.

7. Describe how companies value notes receivable.

8. Describe the entries to record the disposition of notes receivable.

9. Explain the statement presentation and analysis of receivables.

Study ObjectivesStudy ObjectivesStudy ObjectivesStudy Objectives

Chapter 9-3

Types of Types of

ReceivablesReceivablesTypes of Types of

ReceivablesReceivables

Accounts Accounts receivablereceivable

Notes Notes receivablereceivable

Other Other receivablesreceivables

Accounts Accounts

ReceivableReceivableAccounts Accounts

ReceivableReceivableNotes Notes

ReceivableReceivableNotes Notes

ReceivableReceivable

Statement Statement

Presentation Presentation

and Analysisand Analysis

Statement Statement

Presentation Presentation

and Analysisand Analysis

PresentationPresentation

AnalysisAnalysis

Determining Determining maturity datematurity date

Computing Computing interestinterest

Recognizing Recognizing notes notes receivablereceivable

Valuing notes Valuing notes receivablereceivable

Disposing of Disposing of notes notes receivablereceivable

Accounting for ReceivablesAccounting for ReceivablesAccounting for ReceivablesAccounting for Receivables

Recognizing Recognizing accounts accounts receivablereceivable

Valuing Valuing accounts accounts receivablereceivable

Disposing of Disposing of accounts accounts receivablereceivable

Chapter 9-4

Amounts due from individuals and other companies that are expected to be collected in cash.

Amounts owed by customers

that result from the sale of goods and services.

Accounts Accounts ReceivableReceivableAccounts Accounts

ReceivableReceivable

Types of ReceivablesTypes of ReceivablesTypes of ReceivablesTypes of Receivables

SO 1 Identify the different types of receivables.SO 1 Identify the different types of receivables.

Claims for which formal

instruments of credit are

issuedas proof of debt.

“Nontrade” (interest, loans to officers, advances

to employees, and income taxes

refundable).

Notes Notes ReceivableReceivable

Notes Notes ReceivableReceivable

Other Other ReceivableReceivable

ss

Other Other ReceivableReceivable

ss

Chapter 9-5

Three accounting issues:

1. Recognizing accounts receivable.

2. Valuing accounts receivable.

3. Disposing of accounts receivable.

Accounts ReceivableAccounts ReceivableAccounts ReceivableAccounts Receivable

SO 1 Identify the different types of receivables.SO 1 Identify the different types of receivables.

The following exercise was illustrated in Chapter 5. For simplicity, inventory and cost of goods sold have been omitted.

Recognizing Accounts Receivable

Chapter 9-6

Illustration:Illustration: Presented are transactions related to Wheeler Company.

1. On December 3,Wheeler Company sold $500,000 of merchandise to Hashmi Co., terms 2/10, n/30, FOB shipping point.

2. On December 8, Hashmi Co. was granted an allowance of $27,000 for merchandise purchased on December 3.

3. On December 13,Wheeler Company received the balance due from Hashmi Co.

Instructions: Prepare the journal entries to record these transactions on the books of Wheeler Company using a perpetual inventory system.

Recognizing Accounts ReceivableRecognizing Accounts ReceivableRecognizing Accounts ReceivableRecognizing Accounts Receivable

SO 2 Explain how companies recognize accounts receivable.SO 2 Explain how companies recognize accounts receivable.

Chapter 9-7

Illustration:Illustration: Prepare the journal entries for Wheeler Co.

1. On December 3, Wheeler Company sold $500,000 of merchandise to Hashmi Co., terms 2/10, n/30, FOB shipping point.

Accounts receivable 500,000Dec. 3

Sales500,000



Chapter 9-8


2. On December 8, Hashmi Co. was granted an allowance of $27,000 for merchandise purchased on December 3.

Sales returns and allowances 27,000Dec. 8

Accounts receivable27,000



Chapter 9-9


3. On December 13, Wheeler Company received the balance due from Hashmi Co.

Cash 463,540Dec. 13


Sales discounts 9,460

** [($500,000 – $27,000) X 2%]

**

* ($500,000 – $27,000)

*

***

*** ($473,000 – $9,460)



Chapter 9-10

Valuing Accounts Receivables

Classification

Valuation (net realizable value)

Uncollectible Accounts Receivable

Sales on account raise the possibility of accounts not being collected

SO 3 Distinguish between the methods and SO 3 Distinguish between the methods and bases companies use to value accounts bases companies use to value accounts

receivable.receivable.

Valuing Accounts ReceivableValuing Accounts ReceivableValuing Accounts ReceivableValuing Accounts Receivable

Chapter 9-11

Allowance MethodAllowance MethodLosses are estimated:

better matching.receivable stated at net realizable value.required by GAAP.

Methods of Accounting for Uncollectible Accounts

Direct Write-OffDirect Write-OffTheoretically

undesirable:no matching.receivable not stated at net realizable value.not acceptable for financial reporting.




Chapter 9-12

AssetsAssets

Current Assets:Current Assets:

CashCash $ 346$ 346

Accounts receivableAccounts receivable 500500

Less: Allowance for doubtful accountsLess: Allowance for doubtful accounts 25 25 475 475

Inventory Inventory 812 812

PrepaidsPrepaids 4040

Total current assetsTotal current assets 1,6731,673



Presentation of Accounts ReceivablePresentation of Accounts ReceivablePresentation of Accounts ReceivablePresentation of Accounts Receivable

Chapter 9-13

AssetsAssets

Current Assets:Current Assets:

CashCash $ 346$ 346

Accounts receivable, net of $25 allowanceAccounts receivable, net of $25 allowance

for doubtful accountsfor doubtful accounts 475 475

Inventory Inventory 812 812

PrepaidsPrepaids 4040

Total current assetsTotal current assets 1,6731,673



Presentation of Accounts ReceivablePresentation of Accounts ReceivablePresentation of Accounts ReceivablePresentation of Accounts Receivable

Chapter 9-14


Allowance Method for Uncollectible Accounts

1. Companies estimate uncollectible accounts receivable.

2. To record estimated uncollectibles, companies debit Bad Debts Expense and credit Allowance for Doubtful Accounts (a contra-asset account).

3. When companies write off specific uncollectible accounts, they debit Allowance for Doubtful Accounts and credit Accounts Receivable.



Chapter 9-15

Bases Used for Allowance Method




Illustration 9-5

Chapter 9-16

Example DataExample Data

Credit salesCredit sales $500,000$500,000

Estimated % of credit sales uncollectibleEstimated % of credit sales uncollectible1.25% 1.25%

Accounts receivable balance Accounts receivable balance $72,500$72,500

Estimated % of A/R uncollectible Estimated % of A/R uncollectible 8% 8%

Allowance for Doubtful Accounts:Allowance for Doubtful Accounts:

Case 1Case 1 $150 (credit balance)$150 (credit balance)

Case 2Case 2 $150 (debit balance)$150 (debit balance)




Chapter 9-17

Credit salesCredit sales $500,000$500,000

Estimated percentage uncollectibleEstimated percentage uncollectible x 1.25%x 1.25%

Estimated uncollectibleEstimated uncollectible $ 6,250$ 6,250

======================================================================================================

What should the ending balance be for the allowance What should the ending balance be for the allowance account? -- Case 1 and Case 2account? -- Case 1 and Case 2




Percentage of Sales

Chapter 9-18

Actual balance (credit) (150) 150

Estimated uncollectible (6,250) (6,250)

Ending balance

(6,400) (6,100)

Journal entry:

Case 1 Case 2Percentage of

Sales




Allowance for doubtful accounts

6,250

Bad debt expense 6,250

Chapter 9-19

Accounts receivableAccounts receivable $ 72,500$ 72,500

Estimated percentage uncollectibleEstimated percentage uncollectible x 8%x 8%

Desired balance for allowanceDesired balance for allowance $ 5,800$ 5,800

======================================================================================================

What should the ending balance be for the allowance What should the ending balance be for the allowance account? -- account? -- Case 1Case 1 and and Case 2Case 2




Percentage of Receivables

Chapter 9-20


Desired balance

(5,800) (5,800)

Adjustment (5,650) (5,950)

Journal entry – Case 1:

Case 1 Case 2






5,650


Chapter 9-21


Desired balance

(5,800) (5,800)

Adjustment (5,650) (5,950)

Journal entry – Case 2:


5,950


Case 1 Case 2





Chapter 9-22

When estimating losses using Percentage of Receivables, companies often prepare an aging schedule which classifies customer balances by the length of time they have been unpaid.




Illustration 9-7

Chapter 9-23

Percentage of Sales approach:

Summary

Focus on “Bad debt expense” estimate, any balance in the allowance account is ignored.

Method achieves a matching of cost and revenues.

Percentage of Receivables approach:Accurate valuation of receivables on the balance sheet.

Method may also be applied using an aging schedule.




Chapter 9-24

E9-6E9-6 On December 31, 2008, Jarnigan Co. estimated that 2% of its net sales of $400,000 will become uncollectible. The company recorded this amount as an addition to Allowance for Doubtful Accounts. On May 11, 2009, Jarnigan Co. determined that Terry Frye’s account was uncollectible and wrote off $1,100. On June 12, 2009, Frye paid the amount previously written off.

Instructions

Prepare the journal entries on December 31, 2008, May 11, 2009, and June 12, 2009.




Chapter 9-25

E9-6E9-6 Prepare the journal entries on December 31, 2008, May 11, 2009, and June 12, 2009.


December 31 ($400,000 x 2% = 8,000)

Allowance for doubtful accounts 8,000




Chapter 9-26

E9-6E9-6 Prepare the journal entries on December 31, 2008, May 11, 2009, and June 12, 2009.

Accounts receivable 1,100June 12 (recovery)





Cash 1,100Accounts receivable

1,100


May 11 (write-off)


Chapter 9-27

Companies sell receivables for two major reasons.

1. Receivables may be the only reasonable source of cash.

2. Billing and collection are often time-consuming and costly.

SO 4 Describe the entries to record the disposition of accounts SO 4 Describe the entries to record the disposition of accounts receivable.receivable.

Disposing of Accounts ReceivableDisposing of Accounts ReceivableDisposing of Accounts ReceivableDisposing of Accounts Receivable

Chapter 9-28 SO 4 Describe the entries to record the disposition of accounts SO 4 Describe the entries to record the disposition of accounts



Sale of ReceivablesA factor buys receivables from businesses and then collects the payments directly from the customers.

Chapter 9-29

E9-7E9-7 (a) On March 3, Cornwell Appliances sells $680,000 of its receivables to Marsh Factors Inc. Marsh Factors assesses a finance charge of 3% of the amount of receivables sold. Prepare the entry on Cornwell Appliances’ books to record the sale of the receivables.



Accounts receivable

680,000

Cash 659,600

Service charge expense 20,400

($680,000 x 3% = $20,400)

Chapter 9-30 SO 4 Describe the entries to record the disposition of accounts SO 4 Describe the entries to record the disposition of accounts



Credit Card Sales

Retailer considers credit card sales the same as cash sales.

Retailer must pay card issuer a fee of 2 to 4% for processing the transactions.

Retailer records in similar manner as checks deposited from cash sale.

Chapter 9-31

E9-7E9-7 (b) On May 10, Dale Company sold merchandise for $3,500 and accepted the customer’s America Bank MasterCard. America Bank charges a 4% service charge for credit card sales. Prepare the entry on Dale Company’s books to record the sale of merchandise.



Sales

3,500

Cash 3,360

Service charge expense 140

($3,500 x 4% = $140)

Chapter 9-32 SO 5 Compute the maturity date of and interest on notes SO 5 Compute the maturity date of and interest on notes


Notes ReceivableNotes ReceivableNotes ReceivableNotes Receivable

Companies may grant credit in exchange for a promissory note. A promissory note is a written promise to pay a specified amount of money on demand or at a definite time.

Promissory notes may be used:

1. when individuals and companies lend or borrow money,

2. when amount of transaction and credit period exceed normal limits, or

3. in settlement of accounts receivable.

Chapter 9-33 SO 5 Compute the maturity date of and interest on notes SO 5 Compute the maturity date of and interest on notes



To the Payee, the promissory note is a note receivable.

To the Maker, the promissory note is a note payable.

Illustration 9-10

Chapter 9-34

Determining the Maturity Date

SO 5 Compute the maturity date of and interest on notes SO 5 Compute the maturity date of and interest on notes receivable.receivable.


Note expressed in terms of

Months

Days

Computing InterestIllustration 9-13

Chapter 9-35

E9-10 E9-10 Nov. 1 Loaned $15,000 cash to Sally Givens on a 1-year, 10% note. Dec. 11 Sold goods to John Countryman, Inc., receiving a $6,750, 90-day, 8% note. Dec. 16 Received a $4,000, 6-month, 9% note in exchange for Bob Reber’s outstanding accounts receivable.

Cash

15,000

Notes receivable 15,000Nov. 1

Sales

6,750

Notes receivable 6,750Dec. 11

Accounts receivable

4,000

Notes receivable 4,000Dec. 16

Recognizing Notes ReceivableRecognizing Notes ReceivableRecognizing Notes ReceivableRecognizing Notes Receivable

SO 6 Explain how companies recognize notes receivable.SO 6 Explain how companies recognize notes receivable.

Chapter 9-36

E9-10 E9-10 Dec. 31 Accrued interest revenue on all notes receivable.

Interest revenue

295

Interest receivable 295Dec. 31

Amount Rate TimeGivens note: 15,000$ x 10% x 2 / 12 = 250$ Countryman note: 6,750 x 8% x 20 / 360 = 30 Reber note: 4,000 x 9% x 15 / 360 = 15

Total accrued interest 295$

Recognizing Notes ReceivableRecognizing Notes ReceivableRecognizing Notes ReceivableRecognizing Notes Receivable

SO 6 Explain how companies recognize notes receivable.SO 6 Explain how companies recognize notes receivable.

Chapter 9-37

Valuing Notes Receivable

SO 7 Describe how companies value notes receivable.SO 7 Describe how companies value notes receivable.


Like accounts receivable, companies report short-term notes receivable at their cash (net) realizable value.

Estimation of cash realizable value and bad debts expense are done similarly to accounts receivable.

Allowance for Doubtful Accounts is used.

Chapter 9-38

Disposing of Notes Receivable

SO 8 Describe the entries to record the disposition of notes SO 8 Describe the entries to record the disposition of notes receivable.receivable.


1. Notes may be held to their maturity date.

2. Maker may default and payee must make an adjustment to the account.

3. Holder speeds up conversion to cash by selling the note receivable.

Chapter 9-39

Honor of Notes Receivable



A note is honored when its maker pays it in full at its maturity date.

Dishonor of Notes Receivable

A dishonored note is not paid in full at maturity. Dishonored note receivable is no longer negotiable.

Disposing of Notes Receivable

Chapter 9-40


E9-13E9-13 On May 2, Kleinsorge Company lends $7,600 to Everhart, Inc., issuing a 6-month, 9% note. At the maturity date, November 2, Everhart indicates that it cannot pay.

Instructions

(a) Prepare the entry to record the issuance of the note.

(b) Prepare the entry to record the dishonor of the note, assuming that Kleinsorge Company expects collection will occur.

(c) Prepare the entry to record the dishonor of the note, assuming that Kleinsorge Company does not expect collection in the future.


Chapter 9-41


E9-13E9-13 (a) Prepare the entry to record the issuance of the note. (b) Prepare the entry to record the dishonor of the note, assuming that Kleinsorge Company expects collection will occur.


Cash

7,600

Notes receivable 7,600(a)

Notes receivable

7,600

Accounts receivable 7,942

(b)

Interest revenue

342

Interest = $7,600 x 9% x 6/12 = $342

Chapter 9-42


E9-13E9-13 (c) Prepare the entry to record the dishonor of the note, assuming that Kleinsorge Company does not expect collection in the future.


Notes receivable

7,600

Allowance for doubtful accounts 7,600(c)

When there is no hope of collection, the note holder would write off the face value of the note. No interest revenue would be recorded because collection will not occur.

Chapter 9-43

Presentation

SO 9 Explain the statement presentation and analysis of SO 9 Explain the statement presentation and analysis of receivables.receivables.

Statement Presentation and Statement Presentation and AnalysisAnalysisStatement Presentation and Statement Presentation and AnalysisAnalysis

Identify in the balance sheet or in the notes, each major type of receivable.

Report short-term receivables as current assets.

Report both gross amount of receivables and allowance for doubtful account.

Report bad debts expense and service charge expense as selling expenses.

Report interest revenue under “Other revenues and gains.”

B/S

I/S

Chapter 9-44

Analysis of Receivables

This Ratio used to:

Assess the liquidity of the receivables.

Measure the number of times, on average, a company collects receivables during the period.



20.3 times

Chapter 9-45

Analysis of Receivables

Variant of the accounts receivable turnover ratio is average collection period in terms of days.

Used to assess effectiveness of credit and collection policies.

Collection period should not exceed credit term period.



20.3 times, or every 18 days (365 / 20.3)

Chapter 9-46

Individuals need to evaluate their personalcredit positions using the same thought processesused by business people.

Credit card companies aggressively market their cards with images of glamour and happiness. But there isn’t much glamour in paying an 18% to 21% interest rate, and there is very little happiness to be found in filing for personal bankruptcy.

All About YouAll About YouAll About YouAll About You

Protecting Yourself from Identity TheftProtecting Yourself from Identity Theft

Chapter 9-47

Some Facts:

About 70% of undergraduates at 4-year colleges carry at least one credit card in their own name.

The average monthly debt on a college student’s charge account, according to one study, is close to $2,000.

Americans charged $1 trillion in purchases with credit cards. That was more than they spent in cash.

Significant increases in consumer bankruptcy filings occurred in every region of the country. There were 2,043,535 new filings in 2005, up 31.6% from in 2004.


Protecting Yourself from Identity TheftProtecting Yourself from Identity Theft

Chapter 9-48


Chart shows the major causes of personal financial problems.

Source: Debt Solutions of America, www.becomedebtfree.com (accessed May 2006).

Chapter 9-49

What Do You Think?What Do You Think?

Should you cut up your credit card(s)?


YES: Americans are carrying huge personal debt burdens. Credit cards encourage unnecessary, spontaneous expenditures. The interest rates on credit cards are extremely high, which causes debt problems to escalate exponentially.

NO: Credit cards are a necessity for transactions in today’s economy. In fact, many transactions are difficult or impossible to carry out without a credit card. People should learn to use credit cards responsibly.

Chapter 9-50

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Chapter 9-1 Chapter 9 Accounting For Receivables Financial Accounting, Sixth Edition.

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