ch09 accounting for receivables

8/10/2019 ch09 Accounting for Receivables

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Chapter9-1

Chapter

9

Accounting forReceivables

Accounting Principles, Ninth Edition


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Chapter9-2

1. Identify the different types of receivables.2. Explain how companies recognize accounts receivable.

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

4. Describe the entries to record the disposition of accountsreceivable.

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 Objectives


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Chapter9-3

Types of

Receivables

Accountsreceivable

Notes receivable

Other

receivables

Accounts

ReceivableNotes Receivable

Statement

Presentation and

Analysis

PresentationAnalysis

Determiningmaturity date

Computing

interest

Recognizing

notes receivable

Valuing notesreceivable

Disposing of notes

receivable

Recognizingaccounts

receivable

Valuing accounts

receivable

Disposing of

accountsreceivable

Accounting for Receivables


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Chapter9-4

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

Amounts owed bycustomers thatresult from the

sale of goods andservices.

AccountsReceivable

Types of Receivables

SO 1 Identify the different types of receivables.

Claims for whichformal

instruments ofcredit are issuedas proof of debt.

Nontrade(interest, loans toofficers, advancesto employees, and

income taxes

refundable).Notes

ReceivableOther

Receivables


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Chapter9-5

Three accounting issues:1. Recognizingaccounts receivable.

2. Valuingaccounts receivable.

3. Disposing ofaccounts receivable.

Accounts Receivable

SO 1 Identify the different types of receivables.

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

Recognizing Accounts Receivable


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Chapter9-6

Illustration: Assume that Jordache Co. on July 1, 2010, sellsmerchandise on account to Polo Company for $1,000 terms2/10, n/30. Prepare the journal entry to record thistransaction on the books of Jordache Co.

Accounts receivable 1,000Jul. 1

Sales 1,000

SO 2 Explain how companies recognize accounts receivable.



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Chapter9-7

Illustration: On July 5, Polo returns merchandise worth $100to Jordache Co.

Sales returns and allowances 100Jul. 5

Accounts receivable 100

SO 2 Explain how companies recognize accounts receivable.


Illustration: On July 11, Jordache receives payment fromPolo Company for the balance due.

Cash 882Jul. 11

Sales discounts ($900 x .02) 18



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Chapter9-8

Valuing Accounts ReceivablesAre reported as a current asset on the balancesheet.

Are reported at the amount the company thinksthey will be able to collect.

Sales on account raise the possibility of accounts

not being collected.Valuation can be difficult because an unknownamount of receivables will become uncollectible.

SO 3 Distinguish between the methods and basescompanies use to value accounts receivable.

Accounts Receivable


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Chapter9-9

Allowance Method

Losses are estimated:better matching.

receivable stated at netrealizable value.

required by GAAP.

Methods of Accounting for Uncollectible Accounts

Direct Write-Off

Theoretically undesirable:no matching.

receivable not stated atnet realizable value.

not acceptable forfinancial reporting.

Valuing Accounts Receivable



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Chapter9-10

AssetsCurrent Assets:

Cash $ 346


Less: Allowance for doubtful accounts 25 475Merchandise inventory 812

Prepaid expenses 40

Total current assets 1,673


Presentation of Accounts Receivable


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Chapter9-11

AssetsCurrent Assets:

Cash $ 346

Accounts receivable, net of $25 allowance

for doubtful accounts 475Merchandise inventory 812

Prepaid expenses 40

Total current assets 1,673


Presentation of Accounts Receivable


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Chapter9-12


Allowance Method for Uncollectible Accounts

1. Companies estimateuncollectible accountsreceivable.

2. To record estimated uncollectibles, companiesdebit Bad Debts Expense and credit Allowance forDoubtful Accounts (a contra-asset account).

3. When companies write off specific uncollectibleaccounts, they debit Allowance for DoubtfulAccounts and credit Accounts Receivable.



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Chapter9-13



Recording Estimated Uncollectibles: Assume that HampsonFurniture has credit sales of $1,200,000 in 2010. Of thisamount, $200,000 remains uncollected at December 31. Thecredit manager estimates that $12,000 of these sales will be

uncollectible. The adjusting entry to record the estimateduncollectibles is:

Bad debt expense 12,000Dec. 31

Allowance for doubtful accounts 12,000


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Chapter9-14



Illustration 9-2

Presentation of allowance for doubtful accounts


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Chapter9-15



Recording the Write-Off of an Uncollectible Account:Assume that the financial vice-president of Hampson Furnitureauthorizes a write-off of the $500 balance owed by R.A.Wareon March 1, 2011.The entry to record the write-off is:

Allowance for doubtful accounts 500Mar. 1


Illustration 9-3


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Chapter9-16




Recovery of an Uncollectible Account: Assume that on July1, R. A. Ware pays the $500 amount that Hampson had writtenoff on March 1.These are the entries:

Accounts receivable 500Jul. 1

Allowance for doubtful accounts 500

Cash 500Jul. 1


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Chapter9-17

Bases Used for Allowance Method



Illustration 9-5


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Chapter9-18

Illustration: Assume that Gonzalez Company elects to usethe percentage-of-sales basis. It concludes that 1% of netcredit sales will become uncollectible. If net credit sales for

2010 are $800,000, the adjusting entry is:



Bad debts expense 8,000Dec. 31


Percentage-of-Sales

*$800,000 x 1%

*


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Chapter9-19

Emphasizes the matching of expenses with revenues.

When the company makes the adjusting entry, itdisregards the existing balance in Allowance for DoubtfulAccounts.



Percentage-of-Sales

Illustration 9-6


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Chapter9-20 SO 3 Distinguish between the methods and basescompanies use to value accounts receivable.


Percentage-of-Receivables Illustration 9-7Aging schedule


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Chapter9-21

Illustration: If the trial balance shows Allowance forDoubtful Accounts with a credit balance of $528, the companywill make the following adjusting entry.



Bad debts expense 1,700Dec. 31


Percentage-of-Receivables

*$2,228 - 528

*


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Chapter9-22

Occasionally the allowance account will have a debitbalance prior to adjustment.



Illustration 9-8

Percentage-of-Receivables


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Chapter9-23

Percentage of Sales approach:Summary

Focus on Bad debt expense estimate, existing

balance in the allowance account is ignored.Method achieves a matching of cost and revenues.

Percentage of Receivablesapproach:

Accurate valuation of receivables on the balance sheet.

Method may also be applied using an aging schedule.

Existing balance in allowance account considered.




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Chapter9-24

Companies sell receivables for two majorreasons.

1. Receivables may be the only reasonable source

of cash.

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

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

Disposing of Accounts Receivable


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Chapter9-25 SO 4 Describe the entries to record the disposition of accounts receivable.


Sale of ReceivablesA factorbuys receivables from businesses and thencollects the payments directly from the customers.

Typically the factor charges a commission to thecompany that is selling the receivables.

The fee ranges from 1-3% of the amount ofreceivables purchased.


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Chapter9-26

Illustration: Assume that Hendredon Furniture factors$600,000 of receivables to Federal Factors. Federal Factorsassesses a service charge of 2% of the amount of receivablessold. The journal entry to record the sale by HendredonFurniture is as follows.

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


Accounts receivable 600,000

Cash 588,000

Service charge expense 12,000

($600,000 x 2% = $12,000)


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Credit Card SalesRetailer considers credit card sales the same as cashsales.

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

Retailer records the sale in a similar manner aschecks deposited from cash sale.


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Illustration: Anita Ferreri purchases $1,000 of compactdiscs for her restaurant from Karen Kerr Music Co., usingher Visa First Bank Card. First Bank charges a service fee of3%. The entry to record this transaction by Karen KerrMusic is as follows.

Sales 1,000

Cash 970

Service charge expense 30


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Chapter

9-29 SO 5 Compute the maturity date of and interest on notes receivable.

Notes Receivable

Companies may grant credit in exchange for apromissory note. A promissory noteis a writtenpromise to pay a specified amount of money ondemand 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 creditperiod exceed normal limits, or

3. in settlement of accounts receivable.


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Chapter

9-30 SO 5 Compute the maturity date of and interest on notes receivable.

Notes Receivable

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

Illustration 9-10


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Chapter

9-31

Determining the Maturity Date

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

Notes Receivable

Note expressed in terms of

Months

Days

Computing InterestIllustration 9-13


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Chapter

9-32 SO 6 Explain how companies recognize notes receivable.

Recognizing Notes Receivable

Illustration: Assuming that Calhoun Company wrote $1,000,two-month, 12% promissory note to settle an open account,Wilma Company makes the following entry for the receipt ofthe note.

Notes receivable 1,000

Accounts receivable 1,000


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Chapter

9-33

Valuing Notes Receivable

SO 7 Describe how companies value notes receivable.

Notes Receivable

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

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

Allowance for Doubtful Accounts is used.


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Chapter

9-34

Disposing of Notes Receivable

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

Notes Receivable

1. Notes may be held to their maturity date.

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

3. Holder speeds up conversion to cash by sellingthe note receivable.


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Chapter

9-35

Honor of Notes Receivable


Notes Receivable

A note is honoredwhen its maker pays it in fullat its maturity date.

Dishonor of Notes Receivable

A dishonorednote is not paid in full at maturity.A dishonored note receivable is no longernegotiable.

Disposing of Notes Receivable


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Chapter

9-36

Notes Receivable


Illustration: Assume that Betty Co. lends Wayne Higley Inc.$10,000 on June 1, accepting a five-month, 9% interest-bearing note. Assuming that Betty Co. presents the note to

Wayne Higley Inc. on the maturity date, Betty Co.s entry torecord the collection is:

Cash 10,375Nov. 1


Honor of Notes Receivables

Interest revenue 375


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Chapter

9-37

Notes Receivable


Illustration: If Betty Co. prepares financial statements as ofSeptember 30, it must accrue interest. Betty Co. would makean adjusting entry to record 4 months interest.

Interest receivable 300Sept. 30




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Chapter

9-38

Notes Receivable


Illustration: The entry by Betty Co. to record the honoringof the Wayne Higley Inc. note on November 1 is:

Cash 10,375Nov. 1Notes receivable 10,000


Interest receivable 300

Interest revenue 75


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Chapter

9-39

Illustration: Assume that Wayne Higley Inc. on November 1indicates that it cannot pay at the present time. If Betty Co.does expect eventual collection, it would make the following

entry at the time the note is dishonored (assuming no previousaccrual of interest).

Notes Receivable


Accounts receivable 10,375Nov. 1


Dishonor of Notes Receivables



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Chapter

9-40

Presentation

SO 9 Explain the statement presentation and analysis of receivables.

Statement Presentation and Analysis

Identify in the balance sheet or in the notes eachmajor type of receivable.

Report short-term receivables as current assets.

Report both gross amount of receivables andallowance for doubtful account.

Report bad debts expense and service charge

expense as selling expenses.

Report interest revenue under Other revenuesand gains.

B/S

I/S


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Chapter

9-41

Analysis of Receivables

This Ratio used to:

Assess the liquidity of the receivables.Measure the number of times, on average, a companycollects receivables during the period.

SO 9 Explain the statement presentation and analysis of receivables.

Statement Presentation and Analysis

Illustration 9-15


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Chapter

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ch09 accounting for receivables

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