Receivables and ShortTerm Investments
Chapter 5
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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
Learning Objective 1
Account for short-term
investments.
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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
Short-Term Investments
 Investments that a company plans
to hold for one year or less.
 Held-to-maturity
securities
 Trading investments
 Available-for-sale investments
(Held-to-maturity and available-for-sale
securities could also be long-term.)
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Held-to-Maturity Investments
Investor expects to hold until
maturity date
They earn interest revenue for
the investor
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Trading Investments
Oracle Corporation purchases Ford Motor
Company stock on May 18, paying
$100,000, with the intention of selling the
stock within a few months.
Date
General Journal
Accounts and Explanations
PR
May 18 Short-term investment
Cash
Purchased investment
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Debit
Credit
100,000
100,000
Short-Term Investments
On May 27, Oracle receives a cash
dividend of $4,000 from Ford.
Date
General Journal
Accounts and Explanations
PR
May 27 Cash
Dividend revenue
Received cash dividend
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Debit
Credit
4,000
4,000
Short-Term Investments
Oracle fiscal year ends on May 31, and
the investment in Ford has a current
market value of $102,000 on this date.
Date
General Journal
Accounts and Explanations
PR
May 31 Short-Term Investment
Unrealized Gain on Investments
Adjusted investment to market
value
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Debit
Credit
2,000
2,000
Short-Term Investments
Short-Term Investments
Cost
100,000
Adjustment to
market value
2,000
Balance
102,000
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Reporting on the Balance Sheet
and the Income Statement
Balance Sheet
Current Assets:
$XXX
Cash
XXX
Short-term investments at market value 102,000
Accounts receivable
XXX
Income Statement
Revenues
$ XXX
Expenses
XXX
Other revenues, gains, and (losses):
Interest revenue
XXX
Dividend revenue
4,000
Unrealized gain on investment
2,000
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Accounts and Notes Receivable
Monetary claims against others
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Accounts Receivable
GENERAL LEDGER
Accounts Receivable
Bal. 9,000
ACCOUNTS RECEIVABLE
SUBSIDIARY RECORD
Aston
Bal. 5,000
Harris
Bal. 1,000
Salazar
Bal. 3,000
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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
Learning Objective 2
Apply internal controls to
receivables.
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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
Establishing Internal Control
Over Accounts Receivable
Separation of duties
Control over mail receipts
Approval for write-off
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Learning Objective 3
Use the allowance method for
uncollectible receivables.
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The Allowance Method
Records collection losses on
the basis of estimates, not
waiting to see which customers
will not pay
Allowance for Uncollectible
Accounts = contra account to
Accounts Receivable
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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
The Allowance Method
Balance Sheet (partial)
Accounts receivable
$10,000
Less: Allowance for uncollectible accounts
– 900
Accounts receivable, net
$ 9,100
Income Statement (partial)
Expenses:
Bad Debt expense
$ 2,000
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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
Methods for Estimating
Uncollectibles
 Percent-of-sales
 Uncollectible-account
expense =
percentage of revenue
 Aging-of-Receivables
 Analyze individual receivables
from customers based on how
long they have been outstanding
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Percent-of-Sales
December 31, 20x5
Accounts Receivable
Bal. 28,350
Allowance for
Uncollectible Accounts
Bal. 730
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Percent-of-Sales
The credit department estimates that
uncollectible-account expense is 3% of
total revenues, which were $110,000 for
20x5.
Date
General Journal
Accounts and Explanations
PR
Dec 31 Bad Debt Expense
Allowance for Uncollectible
Accounts
Recorded expense for the year
($110,000 × 0.03)
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Debit
Credit
3,300
3,300
Percent-of-Sales
December 31, 20x5
After Adjustment
Accounts Receivable
Bal. 2,8350
Allowance for
Uncollectible Accounts
730
3,300
4,030
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Aging-of-Receivables
Accounts before the year-end adjustment:
December 31, 20x5
Accounts Receivable
Bal. 2,835
Allowance for
Uncollectible Accounts
120
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Aging-of-Receivables
Days
Overdue
$1,555
6
Allowance for
Uncollectible
Accounts
$93
31-60 days
750
10
75
61-90 days
311
20
62
90 + days
219
79
173
1-30 days
Accounts
Receivable
Estimated %
Uncollectible
$2,835
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$403
Aging-of-Receivables
Adjusting Entry
Date
General Journal
Accounts and Explanations
PR
Dec 31 Bad Debt Expense
Allowance for Uncollectible
Accounts
Accounts
afterfor
thetheyear-end
Recorded expense
year
($403-120)
Debit
Credit
283
283
adjustment:
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Aging-of-Receivables
Accounts after the year-end adjustment:
December 31, 20x5
Accounts Receivable
Bal. 2,835
Allowance for
Uncollectible Accounts
120
Adj. 283
403
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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
Writing Off
Uncollectible Accounts
Suppose that early in 20x6, the
credit department determines
that the company cannot collect
from two customers. These
accounts must be written off.
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Writing Off
Uncollectible Accounts
General Journal
Date
Accounts and Explanations
PR
Allowance for Uncollectible
Accounts
Debit
Credit
400
Accounts Receivable – Customer #
161
Accounts Receivable – Customer #
239
Wrote off uncollectible receivables
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Comparing the Methods
Allowance Method
Percent-of-Sales
Aging-of-Receivables
Adjusts Allowance for
Uncollectible Accounts
Adjusts Allowance for
Uncollectible Accounts
BY
TO
Amount of
BAD DEBT EXPENSE
Amount of
UNCOLLECTIBLE
RECEIVABLES
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Direct Write-Off Method
An account is written off only when it is
decided that a specific customer’s
receivable is uncollectible.
General Journal
Date
Jan 2
Accounts and Explanations
PR
Bad Debt Expense
Accounts Receivable-Jones
Wrote off a bad account
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Debit
Credit
2,000
2,000
Direct Write-Off Method
This method is defective for two reasons
1. Since no allowance for uncollectibles
is established, assets are overstated
on the balance sheet.
2. It causes a poor matching of
uncollectible-account expense against
revenue and overstates net income.
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Learning Objective 4
Account for notes receivable.
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Notes Receivable
Principal amount - amount
borrowed by the debtor
Maker – pays payee the
maturity value
Maturity value – principal plus
interest
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Notes Receivable
Interest period starts
PROMISSORY NOTE
$1,000
Amount
Principal
August 31, 20x5
For value received, I promise to pay to the order of
Continental bank
Chicago, Illinois
One thousand and no/100……………………Dollars
on February 28, 20x6
plus interest at the annual rate of 9 percent
Interest period ends
on the maturity date
Maker (Debtor)
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Payee
(creditor)
Interest
rate
Accounting for Notes
Receivable
Continental Bank entry is as follows:
Date
20x5
General Journal
Accounts and Explanations
PR
Aug 31 Note Receivable
Cash
Made a loan
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Debit
Credit
1,000
1,000
Accounting for Notes Receivable
Interest = Principal × Rate × Time
$1,000 × 9% × 4/12 = $30
Date
20x5
General Journal
Accounts and Explanations
PR
Dec 31 Interest Receivable
Interest Revenue
Accrued interest revenue
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Debit
Credit
30
30
Accounting for Notes
Receivable
The bank collects the note on
February 28, 20x6.
General Journal
Date
20x6
Accounts and Explanations
PR
Feb 28 Cash
Note Receivable
Debit
Credit
1,045
1,000
Interest Receivable
30
Interest Revenue
15
Collected note at maturity
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How to Speed Up Cash Flow
Credit card or bankcard sales
Selling receivables
Discounting notes receivable
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How to Speed Up Cash Flow
Recording a credit card or
bankcard sale
Date
General Journal
Accounts and Explanations
PR
Cash
Financing Expense
Sales Revenue
To record a credit card sale of
$100,000 and a 3% financing fee
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Debit
Credit
97,000
3,000
100,000
How to Speed Up Cash Flow
Recording the sale of receivables
Date
General Journal
Accounts and Explanations
PR
Cash
Financing Expense
Trade Accounts Receivable
Sold accounts receivable
©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
Debit
Credit
95,000
5,000
100,000
How to Speed Up Cash Flow
Discounting notes receivable
 Credit Notes Receivable instead of
Trade or Accounts Receivable.
 If maker of note fails to pay the
maturity value to the new payee,
the original payee must pay the
bank the amount due.
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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
Learning Objective 5
Use day’s sales in receivables
and the acid-test ratio to
evaluate financial position.
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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
Days’ Sales in Receivables
One day’s sales = Net sales ÷ 365 days
$10,860 ÷ 365 = $29.75 per day
Days’ sales in average accounts receivable =
Average net accounts receivable ÷ One day’s sales
[(2,534 + 2,432) ÷ 2] ÷ 29.75 = 83 days
 A smaller number indicates a quick
conversion to cash.
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Acid-Test Ratio
 A stringent test of liquidity
 Measures entity’s ability to pay its
current liabilities immediately
(Cash + Short-term investments + Net current
receivables) ÷ Total current liabilities
(4,449 + 1,438 + 2,432) ÷ 3,916 = 2.12
 This ratio value is extremely high and
indicates great liquidity for this company.
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Reporting on the
Statement of Cash Flows
Receivables bring in cash when
the business collects from
customers.
Reported as operating activities
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End of Chapter 5
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