Chapter
8-1
Reporting and
Analyzing Receivables
Chapter
8-2
Financial Accounting, Fifth Edition
Study Objectives
1.
Identify the different types of receivables.
2.
Explain how accounts receivable are recognized in the accounts.
3.
Describe the methods used to account for bad debts.
4.
Compute the interest on notes receivable.
5.
Describe the entries to record the disposition of notes
receivable.
6.
Explain the statement presentation of receivables.
7.
Describe the principles of sound accounts receivable management.
8.
Identify ratios to analyze a company’s receivables.
9.
Describe methods to accelerate the receipt of cash from
receivables.
Chapter
8-3
Reporting and Analyzing Receivables
Types of
Receivables
Accounts
Receivable
Notes
Receivable
Accounts
receivable
Recognizing
accounts
receivable
Determining
maturity date
Notes
receivable
Other
receivables
Valuing
accounts
receivable
Computing
interest
Recognizing
notes
receivable
Valuing notes
receivable
Disposing of
notes
receivable
Chapter
8-4
Statement
Presentation of
Receivables
Balance
sheet and
notes
Income
statement
Managing
Receivables
Extending
credit
Establishing
a payment
period
Monitoring
collections
Evaluating
liquidity of
receivables
Accelerating
cash receipts
Types of Receivables
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.
Chapter
8-5
Claims for which
formal
instruments of
credit are issued
as proof of debt.
“Nontrade”
(interest, loans to
officers, advances
to employees, and
income taxes
refundable).
SO 1 Identify the different types of receivables.
Accounts Receivable
Two accounting issues:
1. Recognizing accounts receivable.
2. Valuing accounts receivable.
Recognizing Accounts Receivable
A service organization records a receivable when it
provides service on account. A merchandiser
records accounts receivable at the point of sale of
merchandise on account.
Chapter
8-6
SO 2 Explain how accounts receivable are recognized in the accounts.
Accounts Receivable
Illustration: Assume that you use your JCPenney Company
credit card to purchase clothing with a sales price of $300.
Assuming that you owe $300 at the end of the month, and
JCPenney charges 1.5% per month on the balance due.
Prepare the entry to record the sale and the adjusting
entry to record interest revenue.
Chapter
8-7
SO 2 Explain how companies recognize accounts receivable.
Accounts Receivable
Valuing Accounts Receivables
Classification
Valuation (net realizable value)
Uncollectible Accounts Receivable
Sales on account raise the possibility of accounts
not being collected
Chapter
8-8
SO 3 Describe the methods used to account for bad debts.
Valuing Accounts Receivable
Methods of Accounting for Uncollectible Accounts
Direct Write-Off
Theoretically undesirable:
no matching.
receivable not stated at
net realizable value.
not acceptable for
financial reporting.
Chapter
8-9
Allowance Method
Losses are estimated:
better matching.
receivable stated at net
realizable value.
required by GAAP.
SO 3 Describe the methods used to account for bad debts.
Accounting for A/R and Bad Debts
How are these accounts presented on the
Balance Sheet?
Accounts Receivable
Allowance for
Doubtful Accounts
Beg.
500
25
Beg.
End.
500
25
End.
Chapter
8-10
Assets
Current Assets:
Cash
Accounts receivable
Less allowance for doubtful accounts
Inventory
Prepaids
Total current assets
Fixed Assets:
Office equipment
Furniture & fixtures
Less: Accumulated depreciation
Total fixed assets
Total Assets
Chapter
8-11
$ 346
500
25
475
812
_ 40
1,673
5,679
6,600
(3,735)
8,544
$10,217
Assets
Current Assets:
Cash
Accounts receivable, net of $25 allowance
for doubtful accounts
Inventory
Prepaids
Total current assets
Fixed Assets:
Office equipment
Furniture & fixtures
Less: Accumulated depreciation
Total fixed assets
Total Assets
Chapter
8-12
$ 346
475
812
_ 40
1,673
5,679
6,600
(3,735)
8,544
$10,217
Accounting for A/R and Bad Debts
Journal entry for credit sale of $100?
Accounts receivable
100
Sales
Accounts Receivable
100
Allowance for
Doubtful Accounts
Beg.
500
25
Beg.
End.
500
25
End.
Chapter
8-13
Accounting for A/R and Bad Debts
Journal entry for credit sale of $100?
Accounts receivable
100
Sales
Accounts Receivable
Beg.
500
Sale
100
End.
600
Chapter
8-14
100
Allowance for
Doubtful Accounts
25
Beg.
25
End.
Accounting for A/R and Bad Debts
Collected of $333 on account?
Cash
Accounts receivable
Accounts Receivable
Beg.
500
Sale
100
End.
600
Chapter
8-15
333
333
Allowance for
Doubtful Accounts
25
Beg.
25
End.
Accounting for A/R and Bad Debts
Collected of $333 on account?
Cash
Accounts receivable
Accounts Receivable
Beg.
500
Sale
100
End.
267
Chapter
8-16
333
333
333
Allowance for
Doubtful Accounts
25
Beg.
25
End.
Coll.
Accounting for A/R and Bad Debts
Adjustment of $15 for estimated Bad-Debts?
Bad debt expense
15
Allowance for Doubtful Accounts
Accounts Receivable
Beg.
500
Sale
100
End.
267
Chapter
8-17
333
15
Allowance for
Doubtful Accounts
25
Beg.
25
End.
Coll.
Accounting for A/R and Bad Debts
Adjustment of $15 for estimated Bad-Debts?
Bad debt expense
15
Allowance for Doubtful Accounts
Accounts Receivable
Beg.
500
Sale
100
End.
267
Chapter
8-18
333
Coll.
15
Allowance for
Doubtful Accounts
25
Beg.
15
Est.
40
End.
Accounting for A/R and Bad Debts
Write-off of uncollectible accounts for $10?
Allowance for Doubtful accounts
10
Accounts receivable
Accounts Receivable
Beg.
500
Sale
100
End.
267
Chapter
8-19
333
Coll.
10
Allowance for
Doubtful Accounts
25
Beg.
15
Est.
40
End.
Accounting for A/R and Bad Debts
Write-off of uncollectible accounts for $10?
Allowance for Doubtful accounts
10
Accounts receivable
Accounts Receivable
Beg.
500
Sale
100
End.
Chapter
8-20
257
333
Coll.
10
W/O
10
Allowance for
Doubtful Accounts
W/O
25
Beg.
15
Est.
30
End.
10
Assets
Current Assets:
Cash
Accounts receivable, net of $30 allowance
for doubtful accounts
Inventory
Prepaids
Total current assets
Fixed Assets:
Office equipment
Furniture & fixtures
Less: Accumulated depreciation
Total fixed assets
Total Assets
Chapter
8-21
$ 346
227
812
_ 40
1,673
5,679
6,600
(3,735)
8,544
$10,217
Valuing Accounts Receivable
Direct Write-off Method for Uncollectible Accounts
Illustration: Assume, for example, that Warden Co.
writes off M. E. Doran’s $200 balance as uncollectible
on December 12. Warden’s entry is:
Chapter
8-22
SO 3 Describe the methods used to account for bad debts.
Valuation of Accounts Receivable
Methods of Accounting for Uncollectible Accounts
Direct Write-Off
Theoretically undesirable:
No matching
Receivable not stated at
net realizable value
Not GAAP
Chapter
8-23
Allowance Method
Losses are Estimated:
Percentage-of-sales
Percentage-ofreceivables
GAAP
LO 5 Explain accounting issues related to valuation of accounts receivable.
Uncollectible Accounts Receivable
Income
Statement
Approach
Balance
Sheet
Approach
Chapter
8-24
LO 5 Explain accounting issues related to valuation of accounts receivable.
Uncollectible Accounts Receivable
Percentage-of-Sales Approach - matches costs with
revenues because it relates the charge to the period in
which a company records the sale.
Appropriate if there is a fairly stable relationship
between previous years’ credit sales and bad debts.
Chapter
8-25
LO 5 Explain accounting issues related to valuation of accounts receivable.
Uncollectible Accounts Receivable
Percentage-of-Sales Approach
Illustration: Chad Shumway Corp.
estimates from past experience that
about 2 percent of credit sales become uncollectible. If
Chad Shumway has credit sales of $400,000 in 2010, it
records bad debt expense as follows.
Chapter
8-26
LO 5 Explain accounting issues related to valuation of accounts receivable.
Uncollectible Accounts Receivable
Percentage-of-Receivables Approach
 not matching.
 reports receivables at net realizable value.
Companies may apply this method using
 one composite rate, or
 an aging schedule of accounts receivable.
Chapter
8-27
LO 5 Explain accounting issues related to valuation of accounts receivable.
Uncollectible Accounts Receivable
What entry
would Wilson
make assuming
that no balance
existed in the
allowance
account?
Chapter
8-28
LO 5 Explain accounting issues related to valuation of accounts receivable.
Uncollectible Accounts Receivable
What entry
would Wilson
make assuming
the allowance
account had a
credit balance
of $800 before
adjustment?
Chapter
8-29
LO 5 Explain accounting issues related to valuation of accounts receivable.
Uncollectible Accounts Receivable
E7-7 (Recording Bad Debts) Sandel Company reports the
following financial information before adjustments.
Instructions: Prepare the journal entry to record bad debt
expense assuming Sandel Company estimates bad debts at
(a) 1% of net sales and (b) 5% of accounts receivable.
Chapter
8-30
LO 5 Explain accounting issues related to valuation of accounts receivable.
Uncollectible Accounts Receivable
E7-7 (Recording Bad Debts) Sandel Company reports the
following financial information before adjustments.
Instructions: Prepare the journal entry assuming Sandel
estimates bad debts at (a) 1% of net sales.
Chapter
8-31
LO 5
Uncollectible Accounts Receivable
E7-7 (Recording Bad Debts) Sandel Company reports the
following financial information before adjustments.
Instructions: Prepare the journal entry assuming Sandel
estimates bad debts at (b) 5% of accounts receivable.
Chapter
8-32
LO 5
Uncollectible Accounts Receivable
Summary
Percentage of Sales approach:
Bad debt expense estimate is related to a nominal account
(Sales), any balance in the allowance account is ignored.
Achieves a proper matching of cost and revenues.
Percentage of Receivables approach:
Results in a more accurate valuation of receivables on the
balance sheet.
Method may also be applied using an aging schedule.
Chapter
8-33
LO 5 Explain accounting issues related to valuation of accounts receivable.
Valuing Accounts Receivable
Illustration: Assume that Hampson Furniture has
credit sales of $1,200,000 in 2010, of which $200,000
remains uncollected at December 31. The credit
manager estimates that $12,000 of these sales will
prove uncollectible.
Dec. 31
Chapter
8-34
SO 3 Describe the methods used to account for bad debts.
Valuing Accounts Receivable
Illustration 8-3
Presentation of allowance
for doubtful accounts
Chapter
8-35
SO 3 Describe the methods used to account for bad debts.
Valuing Accounts Receivable
Recording Write-off of an Uncollectible Account
Illustration: Assume that the vice-president of finance
of Hampson Furniture on March 1, 2011, authorizes a writeoff of the $500 balance owed by R. A. Ware. The entry to
record the write-off is:
Mar. 1
Illustration 8-4
Chapter
8-36
SO 3 Describe the methods used to account for bad debts.
Valuing Accounts Receivable
Recovery of an Uncollectible Account
Illustration: Assume that on July 1, R. A. Ware pays the
$500 amount that Hampson Furniture had written off on
March 1. Hampson makes these entries:
Jul. 1
1
Chapter
8-37
SO 3 Describe the methods used to account for bad debts.
Valuing Accounts Receivable
Estimating the Allowance
Under the percentage of
receivables basis,
management establishes a
percentage relationship
between the amount of
receivables and expected
losses from uncollectible
accounts.
Chapter
8-38
SO 3 Describe the methods used to account for bad debts.
Valuing Accounts Receivable
Under percentage of receivables basis, management establishes a
percentage relationship between the amount of receivables and
expected losses from uncollectible accounts.
Illustration 8-6
Chapter
8-39
SO 3 Describe the methods used to account for bad debts.
Valuing Accounts Receivable
Estimating the Allowance
Illustration: Assume the unadjusted trial balance shows
Allowance for Doubtful Accounts with a credit balance of
$528. Prepare the adjusting entry assuming $2,228 is the
estimate of uncollectible receivables from the aging
schedule.
Dec. 31
Illustration 8-7
Bad debts accounts
after posting
Chapter
8-40
Valuing Accounts Receivable
Illustration 8-8
Note disclosure of accounts receivable
Chapter
8-41
SO 3 Describe the methods used to account for bad debts.
Notes 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
8-42
Notes Receivable
To the Payee, the promissory note is a note receivable.
To the Maker, the promissory note is a note payable.
Illustration 8-9
Chapter
8-43
Notes Receivable
Determining the Maturity Date
Note expressed in terms of
Months
Days
Computing Interest
Chapter
8-44
Illustration 8-10
SO 4 Compute the interest on notes receivable.
Notes Receivable
Computing Interest
When counting days, omit the date the note is
issued, but include the due date.
Illustration 8-11
Chapter
8-45
SO 4 Compute the interest on notes receivable.
Notes Receivable
Recognizing Notes Receivable
Illustration: Assuming that Brent Company wrote a
$1,000, two-month, 8% promissory note dated May
1, to settle an open account. Prepare entry would
Wilma Company makes for the receipt of the note.
May 1
Chapter
8-46
SO 4 Compute the interest on notes receivable.
Notes Receivable
Valuing Notes Receivable
Like accounts receivable, companies report shortterm 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
8-47
SO 4 Compute the interest on notes receivable.
Notes Receivable
Disposing of Notes 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
8-48
SO 5 Describe the entries to record the disposition of notes receivable.
Notes Receivable
Disposing of Notes Receivable
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.
Dishonored note receivable is no longer negotiable.
Chapter
8-49
SO 5 Describe the entries to record the disposition of notes receivable.
Notes Receivable
Honor of Notes Receivable
Illustration: Assume that Wolder Co. lends Higley Inc.
$10,000 on June 1, accepting a five-month, 9% interest
note. If Wolder presents the note to Higley Inc. on
November 1, the maturity date, Wolder’s entry to record
the collection is:
Nov. 1
Chapter
8-50
SO 5 Describe the entries to record the disposition of notes receivable.
Notes Receivable
Accrual of Interest
Illustration: Suppose instead that Wolder Co. prepares
financial statements as of September 30. Prepare the
adjusting entry by Wolder is for four months ending
Sept. 30.
Sept. 30
Interest receivable
Interest revenue
300
300
($10,000 x 9% x 4/12 = $ 300)
Chapter
8-51
SO 5 Describe the entries to record the disposition of notes receivable.
Notes Receivable
Honor of Notes Receivable
Illustration: Prepare the entry Wolder’s would make to
record the honoring of the Higley note on November 1.
Nov. 1
Cash
Notes receivable
Interest receivable
Interest revenue
Chapter
8-52
10,375
10,000
300
75
SO 5 Describe the entries to record the disposition of notes receivable.
Financial Statement Presentation
Illustration 8-12
Balance sheet presentation
of receivables
Chapter
8-53
SO 6 Explain the statement presentation of receivables.
Financial Statement Presentation
Chapter
8-54
SO 9 Describe methods to accelerate the receipt of cash from receivables.
Financial Statement Presentation
Evaluating Liquidity of Receivables
Illustration 8-14
Chapter
8-55
SO 8 Identify ratios to analyze a company’s receivables.
Financial Statement Presentation
Evaluating Liquidity of Receivables
Accounts Receivable Turnover is used to:
Assess the liquidity of the receivables.
Measure the number of times, on average, a company
collects receivables during the period.
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.
Chapter
8-56
SO 8 Identify ratios to analyze a company’s receivables.
Financial Statement Presentation
Accelerating Cash Receipts
Three reasons for the sale of receivables:
1. Size.
2. Companies may sell receivables because they may
be the only reasonable source of cash.
3. Billing and collection are often time-consuming and
costly.
Chapter
8-57
SO 9 Describe methods to accelerate the receipt of cash from receivables.
Financial Statement Presentation
National Credit Card Sales
Three parties involved when credit cards are used.
1. credit card issuer,
2. retailer, and
3. customer.
The retailer pays the credit card issuer a fee of 2%
to 4% of the invoice price for its services.
Chapter
8-58
SO 9 Describe methods to accelerate the receipt of cash from receivables.
Financial Statement Presentation
National Credit Card Sales
Illustration: Morgan Marie purchases $1,000 of compact
discs for her restaurant from Sondgeroth Music Co., and
she charges this amount on her Visa First Bank Card. The
service fee that First Bank charges Sondgeroth Music is 3%.
Chapter
8-59
SO 9 Describe methods to accelerate the receipt of cash from receivables.
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Chapter
8-60