Receivables

Chapter Chapter 88ReceivablesReceivables

Accounting, 21st Edition

Warren Reeve Fess

PowerPoint Presentation by Douglas CloudProfessor Emeritus of AccountingPepperdine University

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1. List the common classifications of receivables.2. Summarize and provide examples of internal

control procedures that apply to receivables.3. Describe the nature of and the accounting for

uncollectible receivables.4. Journalize the entries for the allowance

method of accounting for uncollectibles, and estimate uncollectible receivables based on sales and on an analysis of receivables.

ObjectivesObjectivesObjectivesObjectives

After studying this After studying this chapter, you should chapter, you should

be able to:be able to:

After studying this After studying this chapter, you should chapter, you should

be able to:be able to:

5. Journalize the entries for the direct write-off of uncollectible receivables.

ObjectivesObjectivesObjectivesObjectives

6. Describe the nature and characteristics of promissory notes.

7. Journalize the entries for notes receivable transactions.

8. Prepare the Current Assets presentation of receivables on the balance sheet.

9. Compute and interpret the accounts receivable turnover and the number of days’ sales in receivables.

Classification of ReceivablesClassification of Receivables Accounts Receivable—used for selling

merchandise or services on credit, and normally expected to be collected in a relatively short period.

Notes Receivable—used to grant credit on the basis of a formal instrument of credit, called a promissory note.

Other Receivables—include interest receivable, taxes receivable, and receivables from officers and employees.

Acctg. Info

CollectionsCollections

Invoice

Acctg.Info.

AccountingAccounting

Goods or

services

SalesSales

Separating the Receivable FunctionsSeparating the Receivable FunctionsSeparating the Receivable FunctionsSeparating the Receivable Functions

CreditInfo.Credit Credit

ApprovalApproval

Uncollectible ReceivablesUncollectible Receivables Uncollectible ReceivablesUncollectible Receivables

Companies often sell their receivables to other

companies. This transaction is called

factoring the receivables, and the

buyer of the receivables is called a factor.

Companies often sell their receivables to other

companies. This transaction is called

factoring the receivables, and the

buyer of the receivables is called a factor.

Uncollectible ReceivablesUncollectible Receivables Uncollectible ReceivablesUncollectible Receivables

This method is consistent with the matching principle.

Management makes an estimate each year of the portion of accounts receivable that may not be collectible.

Uncollectible Accounts Expense is debited and Allowance for Doubtful Accounts is credited.

Actual accounts that prove to be uncollectible are debited to Allowance for Doubtful Accounts and credited to Accounts Receivable.

The Allowance Method The Allowance Method The Allowance Method The Allowance Method

The Allowance MethodThe Allowance Method The Allowance MethodThe Allowance Method

Dec. 31 Uncollectible Accounts Expense 4 000 00

Allowance for Doubtful Accounts 4 000 00

On December 31, Cynthia Richards estimates On December 31, Cynthia Richards estimates that a total of $4,000 of the $105,000 balance in that a total of $4,000 of the $105,000 balance in

her company’s her company’s Accounts ReceivableAccounts Receivable will eventually be uncollectible.

On December 31, Cynthia Richards estimates On December 31, Cynthia Richards estimates that a total of $4,000 of the $105,000 balance in that a total of $4,000 of the $105,000 balance in

her company’s her company’s Accounts ReceivableAccounts Receivable will eventually be uncollectible.

Adjusting Entry

The net amount that is expected to be collected,

$101,000 ($105,000 – $4,000), is called the net realizable value (NRV).

The net amount that is expected to be collected,

$101,000 ($105,000 – $4,000), is called the net realizable value (NRV).

The Allowance MethodThe Allowance Method The Allowance MethodThe Allowance Method

The adjusting entry The adjusting entry reduces receivables to reduces receivables to the NRV and matches the NRV and matches uncollectible expenses uncollectible expenses

with revenues.with revenues.

The adjusting entry The adjusting entry reduces receivables to reduces receivables to the NRV and matches the NRV and matches uncollectible expenses uncollectible expenses

with revenues.with revenues.

The The adjusting adjusting entry fills entry fills

the bucket.the bucket.

The The adjusting adjusting entry fills entry fills

the bucket.the bucket.

Adjusting

Entry

Allowance for

Doubtful Accounts


Writing off Writing off accounts accounts

empties the empties the bucket.bucket.

Writing off Writing off accounts accounts

empties the empties the bucket.bucket.

Allow

ance

for

DO

UB

TFUL

accounts


On January 21, John Parker’s account totaling $610 is considered to be

uncollectible.

On January 21, John Parker’s account totaling $610 is considered to be

uncollectible.

Jan. 21 Allowance for Doubtful Accounts 610 00

Accounts Receivable—John Parker 610 00

To write off the uncollectible account.


On June 10, the written-off account is collected.

On June 10, the written-off account is collected.

Jun. 10 Accounts Receivable—John Parker 610 00

To reinstate the account written off on Jan. 21.

An entry is made to reinstate John Parker’s account.

An entry is made to reinstate John Parker’s account.

Allowance for Doubtful Accounts 610 00


A second entry is made to record receipt of the cash.

A second entry is made to record receipt of the cash.

Jun. 10 Cash 610 00

Accounts Receivable—John Parker 610 00

To record collection on account.


Estimating Uncollectible Accounts ExpenseEstimating Uncollectible Accounts ExpenseEstimating Uncollectible Accounts ExpenseEstimating Uncollectible Accounts Expense

1. Estimate based on a percentage of sales.

If credit sales for the period are $300,000 and it is estimated that 1% will be uncollectible, the Uncollectible Accounts Expense is $3,000.

The allowance method uses two ways to estimate the amount debited to Uncollectible Accounts Expense.




Adjusting Entry

Based on a Percentage of SalesBased on a Percentage of SalesBased on a Percentage of SalesBased on a Percentage of Sales


Estimating Uncollectible Accounts ExpenseEstimating Uncollectible Accounts ExpenseEstimating Uncollectible Accounts ExpenseEstimating Uncollectible Accounts Expense

The allowance method uses two ways to estimate the amount debited to Uncollectible Accounts Expense.

2. Estimate based on analysis of receivables.

If it is estimated that $3,390 of the receivables will be uncollectible and the Allowance for Uncollectible Accounts currently has a balance of $510, the Uncollectible Accounts Expense must be debited for $2,880 ($3,390 – $510).




Adjusting Entry

Based on an Analysis of ReceivablesBased on an Analysis of ReceivablesBased on an Analysis of ReceivablesBased on an Analysis of Receivables


Accounts Receivable Aging and UncollectiblesAccounts Receivable Aging and Uncollectibles

Not Days Past DuePast over

Customer Balance Due 1-30 31-60 61-90 91-180 181-365 365

Ashby & Co. $ 150 $ 150B. T. Barr 610 $ 350 $260Brock Co. 470 $ 470

Saxon Woods 160 160

Total $86,300 $75,000 $4,000 $3,100 $1,900 $1,200 $800 $300

Total accounts receivable shown by age.

Total accounts receivable shown by age.

2%2% 5%5% 10%10% 20%20% 30%30% 50%50% 80% 80%

Uncollectibles

PERCENT

Uncollectible percentages based on experience and industry averages.





Saxon Woods 160 160

Total $86,300 $75,000 $4,000 $3,100 $1,900 $1,200 $800 $300

2%2% 5%5% 10%10% 20%20% 30%30% 50%50% 80% 80%

Uncollectibles

PERCENT

AMOUNT $3,390 =$3,390 = $1,500$1,500 $200$200 $310$310 $380$380 $360$360 $400$400 $240 $240





Saxon Woods 160 160

Total $86,300 $75,000 $4,000 $3,100 $1,900 $1,200 $800 $300

Year-End Adjustment for UncollectiblesYear-End Adjustment for UncollectiblesYear-End Adjustment for UncollectiblesYear-End Adjustment for Uncollectibles

General Ledger

Accounts Receivable

86,300AA

Allowance for Doubtful Accts.

510

Uncollectible Accts. Expense

Accounts receivable $86,300Less allowance for doubtful accounts 3,390

Net realizable value $82,910

Balance Sheet

AA

Balances before adjustmentAA

Year-end adjustment: $3,390 – $510 = $2,880

BB2,880BB

2,880 BB

Balance after adjustmentCC

3,390 CC

CC

Accounting for Uncollectible Accounts ReceivableAccounting for Uncollectible Accounts Receivable

This method is not consistent with the matching principle.

Accounts that prove to be uncollectible are written off in the year they become worthless.

Uncollectible Accounts Expense is debited and Accounts Receivable is credited for each such transaction.

The Direct Write-Off Method The Direct Write-Off Method

The Direct Write-Off Method The Direct Write-Off Method The Direct Write-Off Method The Direct Write-Off Method

On May 10, D. L. Ross’ account was On May 10, D. L. Ross’ account was determined to be uncollectible. The determined to be uncollectible. The

$420 balance is written off the books.$420 balance is written off the books.

On May 10, D. L. Ross’ account was On May 10, D. L. Ross’ account was determined to be uncollectible. The determined to be uncollectible. The

$420 balance is written off the books.$420 balance is written off the books.

May 10 Uncollectible Accounts Expense 420 00

Accounts Receivable—D. L. Ross 420 00

To write off an uncollectible account.

In November, D. L. Ross remits a check In November, D. L. Ross remits a check for $420 in payment of his account.for $420 in payment of his account.

In November, D. L. Ross remits a check In November, D. L. Ross remits a check for $420 in payment of his account.for $420 in payment of his account.

Nov. 1 Accounts Receivable—D. L. Ross 420 00

Uncollectible Accounts Expense 420 00

To reinstate account written off on May 10.


1st Entry

A second entry is needed to record A second entry is needed to record receipt of the cash.receipt of the cash.

A second entry is needed to record A second entry is needed to record receipt of the cash.receipt of the cash.

Nov. 1 Cash 420 00

Accounts Receivable—D. L. Ross 420 00

To record collection on account.


2nd Entry

Notes ReceivableNotes ReceivableNotes ReceivableNotes Receivable

$_____________Fresno, California______________20___March 16 06

________________ _AFTER DATE _______ PROMISE TO PAY TO Ninety days We

THE ORDER OF ____________________________________________ Judson Company

_________________________________________________DOLLARSTwo thousand five hundred 00/100---------------------------PAYABLE AT ______________________________________________

City National Bank

VALUE RECEIVED WITH INTEREST AT ____10%

2,500.00

NO. _______ DUE___________________14 June 14, 2006

TREASURER, WILLIARD COMPANYH. B. Lane

PayeePayeePayeePayee

MakerMakerMakerMaker

a specific amount of money (principal)

to a specific person or company (payee)

at a specific place

on a specific date or upon demand

plus interest at a specific percentage of the principal (face) amount per year

a specific amount of money (principal)

to a specific person or company (payee)

at a specific place

on a specific date or upon demand

plus interest at a specific percentage of the principal (face) amount per year

A promissory note is a written document containing a promise to pay:


The date a note is to be paid is called the due date. It is also

referred to as the maturity date.

The date a note is to be paid is called the due date. It is also

referred to as the maturity date.

Let’s determine the due date for a 90-day note dated March 16.

Let’s determine the due date for a 90-day note dated March 16.


Total days in note 90 daysNumber of days in March 31Issue date of note March 16Remaining days in March –15 days

75 daysNumber of days in April –30 days

45 daysNumber of days in May –31 daysResidual days in June 14 days

Answer: June 14Answer: June 14



The amount that is due at the maturity or due date is called

the maturity value.

The amount that is due at the maturity or due date is called

the maturity value.

Received a $6,000, 12%, 30-day note dated November 21, 2006 in settlement

of the account of W. A Bunn Co.

Received a $6,000, 12%, 30-day note dated November 21, 2006 in settlement

of the account of W. A Bunn Co.


Principal + Interest = Maturity Value

$6,000 + $60.00 = $6,060.00

Principal x Rate x Time = Interest

$6,000 x 12% x 30/360 = $60.00

Interest CalculationInterest Calculation

Maturity Value CalculationMaturity Value Calculation


Accounting for Notes ReceivableAccounting for Notes ReceivableAccounting for Notes ReceivableAccounting for Notes Receivable

A $6,000 30-day, 12% note dated A $6,000 30-day, 12% note dated November 21 is received from W. A Bunn November 21 is received from W. A Bunn

Company in exchange for merchandise.Company in exchange for merchandise.

A $6,000 30-day, 12% note dated A $6,000 30-day, 12% note dated November 21 is received from W. A Bunn November 21 is received from W. A Bunn

Company in exchange for merchandise.Company in exchange for merchandise.

Nov. 21 Notes Receivable 6 000 00

Sales 6 000 00

Received 30-day, 12% note

dated November 21, 2006.

On December 21, when the note matures, On December 21, when the note matures, the firm receives $6060 from W. A. Bunn the firm receives $6060 from W. A. Bunn

Company ($6,000 plus $60 interest).Company ($6,000 plus $60 interest).

On December 21, when the note matures, On December 21, when the note matures, the firm receives $6060 from W. A. Bunn the firm receives $6060 from W. A. Bunn

Company ($6,000 plus $60 interest).Company ($6,000 plus $60 interest).

Dec. 21 Cash 6 060 00

Notes Receivable 6 000 00

Received principal and interest

on matured note.

Interest Revenue 60 00


If W. A. Bunn Company fails to pay the note on If W. A. Bunn Company fails to pay the note on the due date, it is considered a the due date, it is considered a dishonored note dishonored note receivablereceivable. The note and interest are transferred . The note and interest are transferred

to the customer’s account.to the customer’s account.

If W. A. Bunn Company fails to pay the note on If W. A. Bunn Company fails to pay the note on the due date, it is considered a the due date, it is considered a dishonored note dishonored note receivablereceivable. The note and interest are transferred . The note and interest are transferred

to the customer’s account.to the customer’s account.

Dec. 21 Accounts Receivable—Bunn Co. 6 060 00


To record dishonored note and

interest.



A 90-day, 12% note dated December 1, 2006, is received from Crawford Company to settle its account, which has a balance of $4,000.

A 90-day, 12% note dated December 1, 2006, is received from Crawford Company to settle its account, which has a balance of $4,000.

Dec. 1 Notes Receivable 4 000 00

Accounts Receivable—Crawford

Company 4 000 00

Received note in settlement of

account.


Assuming that the accounting period ends on December 31, an adjusting entry is required to record the accrued interest

of $40 ($4,000 x 0.12 x 30/360).

Assuming that the accounting period ends on December 31, an adjusting entry is required to record the accrued interest

of $40 ($4,000 x 0.12 x 30/360).

Dec. 31 Interest Receivable 40 00

Interest Revenue 40 00 Adjusting entry for accrued

interest.


On March 1, 2004, $4,120 is received for On March 1, 2004, $4,120 is received for the note ($4,000) and interest ($120).the note ($4,000) and interest ($120).

On March 1, 2004, $4,120 is received for On March 1, 2004, $4,120 is received for the note ($4,000) and interest ($120).the note ($4,000) and interest ($120).

Mar. 1 Cash 4 120 00


Interest Receivable 40 00


Received payment on note and

interest.

$4,000 x $4,000 x 0.12 x 0.12 x 60/36060/360

$4,000 x $4,000 x 0.12 x 0.12 x 60/36060/360


Receivables on the

Balance Sheet

AssetsCurrent assets:

Cash $119,500Notes receivable 250,000Accounts receivable $445,000

Less allowance for doubtful accounts 15,000 430,000

Interest receivable 14,500Merchandise inventory 714,000

Crabtree Co. Balance SheetDecember 31, 2006

Highlighted items are receivables

Financial Analysis and Interpretation

Accounts Receivable TurnoverNet sales

Average accounts receivable

Accounts Receivable TurnoverAccounts Receivable TurnoverAccounts Receivable TurnoverAccounts Receivable Turnover

2006 2005Net sales on account $36,000,000 $32,500,000Accounts receivable (net):

Beginning of year $ 1,080,000 $1,050,000End of year 1,220,000 1,080,000Total $2,300,000 $2,130,000

Average $1,150,000 $1,115,000

Accounts receivable turnover 31.3 times 29.1 times

$36,000,000$1,150,000

$32,500,000$1,115,000

Use: To assess the efficiency in collecting receivables and in the management of credit.


Number of Days’ Sales in ReceivablesNumber of Days’ Sales in ReceivablesNumber of Days’ Sales in ReceivablesNumber of Days’ Sales in Receivables

Accounts receivable, end of year

Average daily sales on account$1,220,000

($36,000,000 ÷ 365 days)=12.4 days



Accounts receivable, end of year

Average daily sales

The EndThe End

Chapter 8Chapter 8

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