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9
Receivables
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After studying this chapter, you should
be able to:
1. Describe the common classifications
of receivables.
2. Describe the nature of and the
accounting for uncollectible
receivables.
3. Describe the direct write-off method
of accounting for uncollectible
receivables.
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After studying this chapter, you should
be able to:
4. Describe the allowance method of
accounting for uncollectible
receivables.
5. Compare the direct write-off and
allowance methods of accounting for
uncollectible accounts.
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After studying this chapter, you should
be able to:
6. Describe the nature, characteristics,
and accounting for notes receivables.
7. Describe the reporting of receivables
on the balance sheet.
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Objective 1
9-1
Describe the
common
classifications of
receivables.
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Classification of Receivables
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9-1
The term receivables includes
all money claims against other
entities, including people,
business firms, and other
organizations.
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Accounts Receivable
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9-1
Accounts receivable are
normally expected to be
collected within a
relatively short period,
such as 30 or 60 days.
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Notes Receivable
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9-1
Notes receivable are
amounts that customers
owe for which a formal,
written instrument of
credit has been issued.
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Other Receivables
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9-1
Other receivables expected to be
collected within one year are
classified as current assets. If
collection is expected beyond one
year, these receivables are classified
as noncurrent assets and reported
under the caption Investments.
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Objective 2
9-2
Describe the nature of
and the accounting for
uncollectible
receivables.
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9-2
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.
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Uncollectible Receivables
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9-2
There are two methods of
accounting for receivables that
appear to be uncollectible: the
direct write off method and the
allowance method.
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9-2
The direct write off method records
bad debt expense only when an
account is judged to be worthless.
The allowance method records bad
debt expense by estimating
uncollectible accounts at the end of
the accounting period.
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Objective 3
9-3
Describe the direct writeoff method of accounting
for uncollectible
receivables.
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Direct Write-Off Method
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9-3
On May 10, a Rp4,200,000 accounts
receivable from D. L. Rosana has
been determined to be uncollectible.
May 10 Bad Debt Expense
Accounts Receivable—D. L. Ross
4 200 000
4 200 000
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9-3
The amount written off is later
collected on November 21.
Nov. 21 Accounts Receivable—D. L. Rosana
Bad Debt Expense
21 Cash
Accounts Receivable—D. L. Rosana
4 200 000
4 200 000
4 200 000
4 200 000
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9-3
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Example Exercise 9-1
Journalize the following transactions using the
direct write-off method of accounting for
uncollectible receivables.
July
9 Received Rp1,200,000 from Jaya Basuki
and wrote off the remainder owed
of Rp3,900,000 as uncollectible.
Oct. 11 Reinstated the account of Jaya Basuki
and received Rp3,900,000 cash in full
payment.
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9-3
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Follow My Example 9-1
July 9 Cash
1,200,000
Bad Debt Expense
3,900,000
Accounts Receivable—Jaya Basuki
5,100,000
Oct. 11 Accounts Receivable—Jaya Basuki
Bad Debt Expense
3,900,000
3,900,000
11 Cash
3,900,000
Accounts Receivable—Jaya Basuki
3,900,000
For Practice: PE 9-1A, PE 9-1B
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Objective 4
9-4
Describe the allowance
method of accounting for
uncollectible receivables.
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Allowance Method
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9-4
On December 31, IndoToner Company estimates that
a total of Rp40,000,000 of the Rp1,000,000,000
balance in her company’s Accounts Receivable will
eventually be uncollectible.
Dec. 31 Bad Debt Expense
Allowance for Doubtful Accounts
40 000 000
40 000 000
Uncollectible accounts
estimate.
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Net Realizable Value
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9-4
The net amount that is expected to be
collected, Rp960,000,000
(Rp1,000,000,000 – Rp40,000,000), is
called the net realizable value (NRV).
The adjusting entry reduces receivables to
the NRV and matches uncollectible
expenses with revenues.
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9-4
On January 21, Johan Pariang’s account totaling
Rp6,000,000 is written off because it is
uncollectible.
Jan. 21 Allowance for Doubtful Accounts
Accounts Receivable— Johan Pariang
6 000 000
6 000 000
To write off the uncollectible
account.
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9-4
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9-4
During 2008, IndoToner Company
writes off Rp36,750,000 of uncollectible
accounts, including the Rp6,000,000
account of Johan Pariang. After posting
all entries to write-off uncollectible
amounts, the Allowance for Doubtful
Accounts will have a credit balance of
Rp3,250,000 (Rp40,000,000 –
Rp36,750,000).
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9-4
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Jan. 1, 2008 Bal.
40,000,000
Total accounts
Jan. 21 6,000,000
written off
Rp36,750,000 Feb. 2 3,900,000
“
“
“
“
Dec. 31 Unadjusted bal 3,250,000
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9-4
If IndoToner Company had
written off Rp44,100,000 in
accounts receivable during
2008, the Allowance for
Doubtful Accounts would have
a debit balance of Rp4,100,000.
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9-4
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Jan. 1, 2008 Bal.
40,000,000
Total accounts
Jan. 21 6,000,000
written off
Feb. 2 3,900,000
Rp44,100,000
“
“
“
“
Dec. 31 Unadjusted bal 4,100,000
{
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Collecting a Written-Off Account
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9-4
Nani Siregar account of Rp5,000,000 which
was written off on April 2 is later collected on
June 10. Two entries are needed: one to
reinstate Nani Siregar account and a second to
record receipt of the cash.
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9-4
Entry 1: Reinstate the account.
June 10 Accounts Receivable—Nani Siregar
Allowance for Doubtful Accounts
To reinstate the account
written off on Jan. 21.
5 000 000
5 000 000
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9-4
Entry 2: Record collection of cash.
June 10 Cash
Accounts Receivable—Nani Siregar
Collection of written-off
account.
5 000 000
5 000 000
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9-4
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Example Exercise 9-2
Journalize the following transactions using the
allowance method of accounting for
uncollectible receivables.
July
9 Received Rp1,200,000 from Jaya Basuki
and wrote off the remainder owed
of Rp3,900,00 as uncollectible.
Oct. 11 Reinstated the account of Jaya Basuki
and received Rp3,900,000 cash in full
payment.
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9-4
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Follow My Example 9-2
July 9 Cash
1,200,000
Allowance for Doubtful Accounts
3,900,000
Accounts Receivable—Jaya Basuki
5,100,000
Oct. 11 Accounts Receivable—Jaya Basuki
Allowance for Doubtful Accounts
3,900,000
3,900,000
11 Cash
3,900,000
Accounts Receivable—Jaya Basuki
3,900,000
For Practice: PE 9-2A, PE 9-2B
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Estimating Uncollectibles
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9-4
The allowance method uses two ways
to estimate the amount debited to Bad
Debt Expense.
1. Estimate based on a percentage
of sales.
2. Estimate based on analysis of
receivables.
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9-4
Estimate Based on a Percentage
of Sales
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If credit sales for the period are
Rp3,000,000,000 and it is estimated that
1½ % will be uncollectible, the Bad Debt
Expense is debited for Rp45,000,000
(Rp3,000,000,000 x .015). This
approach disregards the balance in the
allowance account before the adjustment.
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9-4
After this adjusting entry is posted,
Allowance for Doubtful Accounts will
have a balance of Rp48,250,000.
Dec. 31 Bad Debt Expense
Allowance for Doubtful Accounts
Uncollectible accounts
(Rp3,000,000,000 x 0.015
= Rp45,000,000).
45 000 000
45 000 000
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Dec. 31 Adj entry
Dec. 31 Adjusted bal.
9-4
BAD DEBT EXPENSE
45,000,000
45,000,000
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Jan. 1, 2008 Bal. 40,000,000
Total accounts
Jan. 21 6,000,000
written off
Feb. 2 3,900,000
Rp36,750,000
“
“
Dec. 31 Unadjusted bal 3,250,000
Dec. 31 Adj. entry
45,000,000
Dec. 31 Adjusted bal.
48,250,000
{
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9-4
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Example Exercise 9-3
At the end of the current year, Accounts Receivable has a
balance of Rp800,000,000; Allowance for Doubtful
Accounts has a credit balance of Rp7,500,000; and net
sales for the year total Rp3,500,000,000. Bad debt
expense is estimated at ½ of 1% of net sales.
Determine (a) the amount of the adjusting entry for
uncollectible accounts; (b) the adjusted balances of
Accounts Receivable, Allowance for Doubtful
Accounts, and Bad Debt Expense; and (c) the net
realizable value of accounts receivable.
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9-4
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Follow My Example 9-3
(a)
Rp17,500,000 (Rp3,500,000,000 x .005)
Adjusted Balance
(b) Accounts Receivable
Rp800,000,000
Allowance for Doubtful Accounts
(Rp7,500,000 + Rp17,500,000)
25,000,000
Bad Debt Expense
17,500,000
(c) Rp775,000,000 (Rp800,000,000 – Rp25,000,000)
For Practice: PE 9-3A, PE 9-3B
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Estimating Uncollectibles Based
on Analysis of Receivables
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9-4
The longer an account receivable is
outstanding, the less likely that it will be
collected. Basing the estimate of
uncollectible accounts on how long specific
amounts have been outstanding is called
aging the receivables.
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Aging of Accounts
Receivables
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A
Customer
1 Aslan
2 B.T.Barus
3 Bambang
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22 Subang Jati
23 Total
B
Balance
Rp 150,000
610,000
470,000
C
Not
Past
Due
D
E
F
G
H
I
181-365
Over
365
9-4
Days Past Due
1-30
31-60
Rp150,000
61-90
91-180
Rp470,000
1
2
3
160,000
Rp86,300,000 Rp75,000,000
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22
Rp300,000 23
Rp350,000
Rp4,000,000
Rp3,100,000
Rp1,900,000
160,000
Rp1,200,000
Rp260,000
Rp800,00
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Estimate of
Uncollectible Accounts
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A
1
2
3
4
5
6
7
8
Age Interval
Not past due
1-30 days past due
31-60 days past due
61-90 days past due
91-180 days past due
181-365 days past due
Over 365 days past due
Total
B
Balance
Rp75,000,000
4,000,000
3,100,000
1,900,000
1,200,000
800,000
300,000
Rp86,300,000
C
9-4
D
Estimated
Uncollectible Accounts
Percent
Amount
2%
Rp1,500,000
5
200,000
10
310,000
20
380,000
30
360,000
50
400,000
80
240,000
Rp3,390,000
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Collection Rates by Number of
Months Past Due
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9-4
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Estimate Based on Analysis of
Receivables
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9-4
If it is estimated that Rp3,390,000 of
the receivables will be uncollectible
and the Allowance for Uncollectible
Accounts currently has a balance of
Rp510,000, the Bad Debt Expense
must be debited for Rp2,880,000
(Rp3,390,000 – Rp510,000).
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Estimate Based on Analysis of
Receivables
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Aug. 31 Bad Debt Expense
Allowance for Doubtful Accounts
Uncollectible accounts
(Rp3,390,000 – Rp510,00).
9-4
2 880 000
2 880 000
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Aug. 31 Adj. entry
Aug. 31 Adj. bal.
9-4
BAD DEBT EXPENSE
2,880,000
2,880,000
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Aug. 31 Unadj. bal. 510,000
Aug. 31 Adj. entry 2,880,000
Aug. 31 Adj. bal. 3,390,000
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9-4
If the unadjusted balance of Allowance for
Uncollectible Accounts had been a debit
balance of Rp300,000, the amount of the
adjustment would have been Rp3,690,000
(Rp3,390,000 + Rp300,000).
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Aug. 31 Adj. entry
Aug. 31 Adj. bal.
9-4
BAD DEBT EXPENSE
3,690,000
3,690,000
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Aug. 31 Unadj. bal. 300,000 Aug. 31 Adj. entry 3,690,000
Aug. 31 Adj. bal.
3,390,000
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9-4
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Example Exercise 9-4
At the end of the current year, Accounts Receivable has a
balance of Rp800,000,000; Allowance for Doubtful
Accounts has a credit balance of Rp7,500,000; and net
sales for the year total Rp3,500,000,000. Using the aging
method, the balance of Allowance for Doubtful Accounts
is estimated as Rp30,000,000.
Determine (a) the amount of the adjusting entry for
uncollectible accounts; (b) the adjusted balances of
Accounts Receivable, Allowance for Doubtful Accounts,
and Bad Debt Expense, and (c) the net realizable value of
accounts receivable.
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9-4
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Follow My Example 9-4
Rp22,500,000 (Rp30,000,000 – Rp7,500,000)
Adjusted Balance
(b) Accounts Receivable
Rp800,000,000
Allowance for Doubtful Accounts
30,000,000
Bad Debt Expense
22,500,000
(a)
(c) Rp770,000,000 (Rp800,000,000 – Rp30,000,000)
For Practice: PE 9-4A, PE 9-4B
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Objective 5
9-5
Compare the direct writeoff and allowance methods
of accounting for
uncollectible accounts
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Comparing Direct-Write-Off
and Allowance Methods
Allowance Method
Direct Write-Off Method
Mar.1 Bad Debt Expense
Accounts Receivable - C.Yanuar
Apr.12 Cash
Bad Debt Expense
Accounts Receivable - Karina Budiman
June.22 Accounts Receivable - C.Yanuar
Bad Debt Expense
22 Cash
Accounts Receivable - C.Yanuar
Sept.22 Bad Debt Expense
Accounts Receivable - Jason Bimasakti
Accounts Receivable - Santoso Budiman
Accounts Receivable - Sari Nuriah
Accounts Receivable - Sandy Nurmila
Accounts Receivable - Amir Wicaksana
Dec.31 No Entry
9-5
3,650,000
3,650,000
2,250,000
3,250,000
Allowance for Doubtfull Accounts
Accounts Receivable - C.Yanuar
Cash
Allowance for Doubtfull Accounts
5,500,000 Accounts Receivable - Karina Budiman
3,650,000
3,650,000
2,250,000
3,250,000
5,500,000
Accounts Receivable - C.Yanuar
Allowance for Doubtfull Accounts
3,650,000
3,650,000
Cash
Accounts Receivable - C.Yanuar
3,650,000
3,650,000
Allowance for Doubtfull Accounts
Accounts Receivable - Jason Bimasakti
Accounts Receivable - Santoso Budiman
Accounts Receivable - Sari Nuriah
Accounts Receivable - Sandy Nurmila
Accounts Receivable - Amir Wicaksana
6,445,000
1,100,000
2,220,000
775,000
1,360,000
990,000
3,650,000
3,650,000
6,445,000
3,650,000
3,650,000
1,100,000
2,220,000
775,000
1,360,000
990,000
42,500,000
Bad Debt Expense
42,500,000
Allowance for Doubtful Accounts
Uncollectible accounts estimate.
(Rp3,400,000,000 x 0.0125 = Rp42,500,000)
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Comparing the Direct Write-Off and
Allowance Methods
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9-5
Direct Write-Off Method
Amount of bad debt
expense recorded
When the actual accounts
receivable are determined
to be uncollectible
Allowance account
No allowance account is
used
Primary users
Small companies and
companies with relatively
few receivables
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Comparing the Direct Write-Off and
Allowance Methods
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9-5
Allowance Method
Amount of bad debt
expense recorded
Allowance account
Primary users
Using estimate based on
either (1) a percentage of
sales or (2) analysis of
receivables.
The allowance account is
used
Large companies and those
with a large amount of
receivables
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Objective 6
9-6
Describe the nature,
characteristics, and
accounting for notes
receivable.
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Characteristics of Notes Receivable
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9-6
A note receivable, or promissory note, is
a written document containing a promise
to pay:
• a specific amount of money (face
amount)
• on demand or at a definite time
• to an individual or a business (payee),
or to the bearer or holder of the note.
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Characteristics of Notes Receivable
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9-6
The one making the promise is
called the maker. The date a
note is to be paid is called the
due date or maturity date.
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9-6
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2,500.00
$_____________
Payee
Fresno, California______________20___
March 16
08
Ninety days
________________
_AFTER DATE _______
We PROMISE TO PAY TO
THE ORDER OF ____________________________________________
Judson Company
Two
thousand five hundred 00/100--------------------------_________________________________________________DOLLARS
City National Bank
PAYABLE AT ______________________________________________
Maker
VALUE RECEIVED WITH INTEREST AT ____
10%
NO. _______
DUE___________________
14
June 14, 2008
H. B. Lane
TREASURER, WILLIARD COMPANY
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9-6
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What is the due date of a 90-day note dated March 16?
Total days in note
Number of days in March
Issue date of note
Remaining days in March
Number of days in April
Number of days in May
Residual days in June
90 days
31
March 16
–15 days
75 days
–30 days
45 days
–31 days
14 days
Answer: June 14
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9-6
Accounting for Notes Receivable
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Received a Rp6,000,000, 12%, 30-day note
dated November 21, 2008 in settlement of
the account of W. A Barito Co.
Nov. 21 Notes Rec.—W. A. Barito Co.
Accts. Rec.—W. A Barito Co.
6 000 000
6 000 000
Received 30-day, 12%
note dated November 21,
2008.
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9-6
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On December 21, when the note matures, the firm
receives Rp6,060,000 from W. A. Barito Company
(Rp6,000,000 plus Rp60,000 interest).
Dec. 21 Cash
6 060 000
Notes Rec.—W. A. Barito Co.
Interest Revenue*
Received principal and
6 000 000
60 000
interest on matured note.
*Rp6,000,000 x 12% x 30/360 = Rp60,000
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9-6
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If W. A. Bunn Company fails to pay the note on
the due date, it is considered a dishonored note
receivable. The note and interest are
transferred to the customer’s account.
Dec. 21 Accts Rec.—W. A. Barito Co.
Notes Rec.—W. A. Barito Co.
Interest Revenue
Recorded dishonored
6 060 000
6 000 000
60 000
note, plus interest.
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9-6
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A 90-day, 12% note dated December 1, 2008, is
received from PT Cemara to settle its account, which
has a balance of Rp4,000,000.
2008
Dec. 1 Notes Rec.—PT Cemara
Accts. Rec.— PT Cemara
Accepted note in
settlement of account.
4 000 000
4 000 000
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9-6
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Assuming that the accounting period ends
on December 31, an adjusting entry is
required to record the accrued interest of
Rp40,000 (Rp4,000,000 x 0.12 x 30/360).
2008
Dec. 31 Interest Receivable
Interest Revenue
40 000
40 000
Accrued interest
(Rp4,000,000 x 12% x
30/360).
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9-6
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On March 1, 2009, Rp4,120,000 is received for the
note (Rp4,000,000) and interest (Rp120,000).
2009
Mar. 1 Cash
4 120 000
Notes Rec.— PT Cemara
Interest Receivable
Interest Revenue
Collected note and
accrued interest.
(Rp4,000,000 x 12% x
30/360).
4 000 000
40 000
80 000
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9-6
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Example Exercise 9-5
RS Palmerah Indah received a 120-day, 6% note for
Rp40,000,000, dated March 14 from a patient on
account.
a. Determine the due date of the note.
b. Determine the maturity value of the note.
c. Journalize the entry to record the receipt
of the payment of the note at maturity.
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9-6
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Follow My Example 9-5
a.
July 12 determined as follows:
March
April
May
June
July
Total
b.
17 days (31 – 14)
30 days
31 days
30 days
12 days
120 days
Rp40,800,000 [Rp40,000,000 + (Rp40,000,000 x 6% x 120/360)]
c. Cash
40,800,000
Notes Receivable
Interest Revenue
For Practice: PE 9-5A, PE 9-5B
40,000,000
800,000
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Objective 7
9-7
Describe the reporting
of receivables on the
balance sheet.
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Receivables on Balance Sheet
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9-7
Indotronics Co.
Balance Sheet
December 31, 2008
Assets
Current assets:
Cash
Notes receivable
Accounts receivable
Less allowance for
doubtful accounts
Interest receivable
Merchandise inventory
Rp119,500,000
250,000,000
Rp445,000,000
15,000,000
430,000,000
14,500,000
714,000,000
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Receivables (including the allowance account) are highlighted
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Accounts Receivable Turnover
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9-7
The accounts receivable turnover measures
how frequently during the year the accounts
receivable are being converted to cash.
Net sales
Accounts Receivable =
Average accounts receivable
Turnover
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9-7
Federal Express Corporation
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2005
2004
2003
Net sales
Accounts receivable
Average accounts
receivable
*
Rp19,364,000 Rp17,383,000
--2,703,000
2,475,000 Rp2,199,000
2,589,000
2,337,000
*
[(Rp2,475,000 +
Rp2,199,00)/2]
Rp17,383,000
Accounts Receivable
= Rp2,337,000
Turnover (2004)
Accounts Receivable = 7.4
Turnover (2004)
70
70
71
Federal Express Corporation
Click to edit Master title style
2005
2004
Net sales
Rp19,364,000 Rp17,383,000
Accounts receivable
2,703,000
2,475,000
Average accounts receivable 2,589,000
2,337,000
9-7
2003
--Rp2,199,000
*
*
[(Rp2,703,000 +
Rp2,475,000)/2]
Rp19,364,000
Accounts Receivable
= Rp2,589,000
Turnover (2005)
Accounts Receivable = 7.5
Turnover (2005)
71
71
72
Number of Days’ Sales in Receivables
Click to edit Master title style
9-7
Use: To assess the efficiency in
collecting receivables and in
the management of credit.
Average Accounts receivable
Number of Days’
=
Average daily sales
Sales in Receivables
72
72
73
9-7
Federal Express Corporation
Click to edit Master title style
2005
2004
Net sales
Rp19,364,000
Accounts receivable
2,703,000
Average accounts receivable 2,589,000
Average daily sales
53.1
Rp17,383,000
2,475,000
2,337,000
47.6 *
2003
--Rp2,199,000
**
*
[(Rp2,475,000 +
Rp2,119,000)/2]
Number of Days’ Sales in
Receivables (2004)
** (Rp17,383,000/365)
Rp2,337,000
=
47.6
Number of Days’ Sales = 49.1
in Receivables (2004)
73
73
74
Federal Express Corporation
Click to edit Master title style
2005
2004
9-7
2003
Net sales
Rp19,364,000 Rp17,383,000
--- ----Accounts receivable
2,703,000
2,475,000 Rp2,199,000
Average accounts receivable 2,589,000
2,337,000
Average daily sales
53.1
47.6
*
**
*
[(Rp2,703,000+
Rp2,475,000)/2]
Number of Days’ Sales in
Receivables (2005)
** (Rp19,364,000/365)
Rp2,589,000
=
53.1
Number of Days’ Sales = 48.8
in Receivables (2005)
74
74