chapter 9-1. chapter 9-2 chapter 9 accounting for receivables accounting principles, ninth edition

Chapter 9-1

Chapter 9-2

Chapter 9

Accounting for Receivables

Accounting Principles, Ninth Edition

Chapter 9-3

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 9-4

Types of Types of

ReceivablesReceivables

Types of Types of

ReceivablesReceivables

Accounts Accounts receivablereceivable

Notes receivableNotes receivable

Other Other receivablesreceivables

Accounts Accounts

ReceivableReceivable

Accounts Accounts

ReceivableReceivableNotes ReceivableNotes ReceivableNotes ReceivableNotes Receivable

Statement Statement Presentation and Presentation and

AnalysisAnalysis

Statement Statement Presentation and Presentation and

AnalysisAnalysis

PresentationPresentation

AnalysisAnalysis

Determining Determining maturity datematurity date

Computing Computing interestinterest

Recognizing Recognizing notes receivablenotes receivable

Valuing notes Valuing notes receivablereceivable

Disposing of Disposing of notes receivablenotes receivable

Recognizing Recognizing accounts accounts receivablereceivable

Valuing accounts Valuing accounts receivablereceivable

Disposing of Disposing of accounts accounts receivablereceivable

Accounting for ReceivablesAccounting for ReceivablesAccounting for ReceivablesAccounting for Receivables

Chapter 9-5

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 9-6

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 9-7

Illustration: Assume that Jordache Co. on July 1, 2010, sells merchandise on account to Polo Company for $1,000 terms 2/10, n/30. Prepare the journal entry to record this transaction on the books of Jordache Co.

Accounts receivable 1,000Jul. 1

Sales1,000

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

Recognizing Accounts ReceivableRecognizing Accounts ReceivableRecognizing Accounts ReceivableRecognizing Accounts Receivable

Chapter 9-8

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

Sales returns and allowances 100Jul. 5

Accounts receivable100

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

Recognizing Accounts ReceivableRecognizing Accounts ReceivableRecognizing Accounts ReceivableRecognizing Accounts Receivable

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

Cash 882Jul. 11

Sales discounts ($900 x .02) 18


Chapter 9-9

Valuing Accounts Receivables

Are reported as a current asset on the balance sheet.

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

Sales on account raise the possibility of accounts not being collected.

Valuation can be difficult because an unknown amount of receivables will become uncollectible.

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.

Accounts ReceivableAccounts ReceivableAccounts ReceivableAccounts Receivable

Chapter 9-10

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.

Valuing Accounts ReceivableValuing Accounts ReceivableValuing Accounts ReceivableValuing Accounts Receivable



Chapter 9-11

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

Merchandise inventory Merchandise inventory 812 812

Prepaid expensesPrepaid expenses 4040

Total current assetsTotal current assets 1,6731,673



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

Chapter 9-12

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

Merchandise inventory Merchandise inventory 812 812

Prepaid expensesPrepaid expenses 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


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 9-14




Recording Estimated Uncollectibles: Assume that Hampson Furniture has credit sales of $1,200,000 in 2010. Of this amount, $200,000 remains uncollected at December 31. The credit manager estimates that $12,000 of these sales will be uncollectible. The adjusting entry to record the estimated uncollectibles is:

Bad debt expense 12,000Dec. 31 Allowance for doubtful accounts

12,000

Chapter 9-15




Illustration 9-2Presentation of allowance for doubtful accounts

Chapter 9-16




Recording the Write-Off of an Uncollectible Account:Assume that the financial vice-president of Hampson Furniture authorizes 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

Chapter 9-17

Accounts receivable 500




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

Accounts receivable 500Jul. 1

Allowance for doubtful accounts 500

Cash 500Jul. 1

Chapter 9-18

Bases Used for Allowance Method




Illustration 9-5

Chapter 9-19

Illustration: Assume that Gonzalez Company elects to usethe percentage-of-sales basis. It concludes that 1% of net credit sales will become uncollectible. If net credit sales for 2010 are $800,000, the adjusting entry is:




Bad debts expense 8,000Dec. 31 Allowance for doubtful accounts

8,000

Percentage-of-Sales

* $800,000 x 1%

*

Chapter 9-20

Emphasizes the matching of expenses with revenues.

When the company makes the adjusting entry, it disregards the existing balance in Allowance for Doubtful Accounts.




Percentage-of-Sales

Illustration 9-6

Chapter 9-21




Percentage-of-ReceivablesIllustration 9-7Aging schedule

Chapter 9-22

Illustration: If the trial balance shows Allowance for Doubtful Accounts with a credit balance of $528, the company will make the following adjusting entry.




Bad debts expense 1,700Dec. 31 Allowance for doubtful accounts

1,700

Percentage-of-Receivables

* $2,228 - 528

*

Chapter 9-23

Occasionally the allowance account will have a debit balance prior to adjustment.




Illustration 9-8

Percentage-of-Receivables

Chapter 9-24

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

Method may also be applied using an aging schedule.

Existing balance in allowance account considered.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.


Chapter 9-25

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 9-26 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.

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 9-27

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

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


Accounts receivable

600,000

Cash 588,000

Service charge expense 12,000

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




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.




Illustration: Illustration: Anita Ferreri purchases $1,000 of compact discs for her restaurant from Karen Kerr Music Co., using her Visa First Bank Card. First Bank charges a service fee of 3%. The entry to record this transaction by Karen Kerr Music is as follows.

Sales

1,000

Cash 970

Service charge expense 30

Chapter 9-30 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 9-31 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 9-32

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 9-33 SO 6 Explain how companies recognize notes receivable.SO 6 Explain how companies recognize notes receivable.

Recognizing Notes ReceivableRecognizing Notes ReceivableRecognizing Notes ReceivableRecognizing Notes Receivable

Illustration: 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 of the note.

Notes receivable 1,000

Accounts receivable 1,000

Chapter 9-34

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 9-35

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 9-36

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.

A dishonored note receivable is no longer negotiable.

Disposing of Notes Receivable

Chapter 9-37



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 to record the collection is:

Cash 10,375Nov. 1


Honor of Notes Receivables

Interest revenue 375

Chapter 9-38



Illustration: If Betty Co. prepares financial statements as of September 30, it must accrue interest. Betty Co. would make an adjusting entry to record 4 months’ interest.

Interest receivable 300Sept. 30



Chapter 9-39



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

Cash 10,375Nov. 1



Interest receivable 300

Interest revenue 75

Chapter 9-40

Illustration: Assume that Wayne Higley Inc. on November 1 indicates 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 previous accrual of interest).



Accounts receivable 10,375Nov. 1


Dishonor of Notes Receivables


Chapter 9-41

Presentation

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

Statement Presentation and AnalysisStatement Presentation and AnalysisStatement Presentation and AnalysisStatement Presentation and Analysis

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 9-42

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.



Illustration 9-15

Chapter 9-43

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.



Illustration 9-16

Analysis of Receivables

Chapter 9-44

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