Chapter 9-1

ACCOUNTING FOR ACCOUNTING FOR RECEIVABLESRECEIVABLES

Accounting Principles, Eighth Edition

CHAPTERCHAPTER 99CHAPTERCHAPTER 99

Chapter 9-2 LO 4 Describe the entries to record the disposition of accounts LO 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

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

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

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

Chapter 9-3

E9-7E9-7 (a) On March 3, Corn Co. 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 Corns’ books to record the sale of the receivables.

LO 4 Describe the entries to record the disposition of accounts LO 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

Accounts receivable

680,000

Cash 659,600

Service charge expense 20,400

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

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

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 the sale in a similar manner as checks deposited from cash sale.

Chapter 9-5

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.

LO 4 Describe the entries to record the disposition of accounts LO 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

Sales

3,500

Cash 3,360

Service charge expense 140

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

See Do it page 395-396See Do it page 395-396

Chapter 9-6 LO 5 Compute the maturity date of and interest on notes LO 5 Compute the maturity date of and interest on notes

receivable.receivable.

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 9-7 LO 5 Compute the maturity date of and interest on notes LO 5 Compute the maturity date of and interest on notes

receivable.receivable.

Notes ReceivableNotes ReceivableNotes ReceivableNotes Receivable

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

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

Illustration 9-10

Chapter 9-8

Determining the Maturity Date

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

Notes ReceivableNotes ReceivableNotes ReceivableNotes Receivable

Note expressed in terms of

Months

Days

Computing Interest Illustration 9-13

Chapter 9-9 LO 6 Explain how companies recognize notes receivable.LO 6 Explain how companies recognize notes receivable.

Recognizing Notes ReceivableRecognizing Notes ReceivableRecognizing Notes ReceivableRecognizing Notes Receivable

E9-10E9-10 Orosco Supply Co. has the following transactions related to notes receivable during the last 2 months of 2008.

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.

Dec. 31 Accrued interest revenue on all notes receivable.

Instructions

(a) Journalize the transactions for Orosco Supply Co.

Chapter 9-10

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 Inc., receiving a $6,750, 90-day, 8% note. Dec. 16 Received a $4,000, 6-month, 9% note in exchange for Bob ‘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

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

Chapter 9-11

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

Interest revenue

295

Interest receivable 295Dec. 31

Am ount Rate T im eG ivens note: 15,000$ x 10% x 60 / 360 = 250$ Countrym an note: 6,750 x 8% x 20 / 360 = 30 Reber note: 4,000 x 9% x 15 / 360 = 15

T otal accrued interest 295$

Recognizing Notes ReceivableRecognizing Notes ReceivableRecognizing Notes ReceivableRecognizing Notes Receivable

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

Chapter 9-12

Valuing Notes Receivable

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

Notes ReceivableNotes ReceivableNotes ReceivableNotes 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 9-13

Disposing of Notes Receivable

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

Notes ReceivableNotes ReceivableNotes ReceivableNotes 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 9-14

Honor of Notes Receivable

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

Notes ReceivableNotes ReceivableNotes ReceivableNotes 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.

A dishonored note receivable is no longer negotiable.

Disposing of Notes Receivable