CHAPTER 10
RECEIVABLES
Related Assignment Materials
1.
2.
3.
4.
5.
6.
7.
Quick Studies
10-1, 10-2, 10-3
Describe accounts
receivable and how they
occur and are recorded.
10-4, 10-5, 10-6,
Apply the allowance
10-7, 10-8, 10-9
method to account for
uncollectible accounts
receivable.
10-6, 10-7, 10-8,
Estimate uncollectible
accounts receivable based 10-9
on sales and accounts
receivable.
Apply the direct write-off 10-10
method to account for
uncollectible accounts
receivable.
Describe and record a short- 10-11, 10-12, 1013
term note receivable and
calculate its maturity date
and interest.
10-14, 10-15
*Appendix 10A-Explain
how receivables can be
converted to cash before
maturity.
*Appendix 10B-Calculate 10-16
accounts receivable
turnover and days’ sales
uncollected to analyze
liquidity.
Exercises
10-1, 10-6
Problems
10-1A, 10-4A, 10-5A.
10-1B, 10-4B, 10-5B.
10-2, 10-3, 10-4, 10-2A, 10-3A, 10-4A, 10-5A, 10-6A.
10-5, 10-6, 10-5 10-2B, 10-3B, 10-4B, 10-5B, 10-6B.
10-4, 10-5, 10-6, 10-2A, 10-3A, 10-4A, 10-5A, 10-6A,
10-8, 10-9, 10-10, 10-7A, 10-8A, 10-9A.
10-11
10-2B, 10-3B, 10-4B, 10-5B, 10-6B,
10-7B, 10-8B, 10-9B.
10-11
10-7, 10-12, 1013, 10-14
10-10A, 10-11A, 10-12A.
10-10B, 10-11B, 10-12B.
10-15, 10-16
10-13A, 10-14A.
10-13B, 10-14B.
10-17
Note: Analytical & Review Problems may be assigned to students for additional enrichment.
Fundamental Accounting Principles, 12th Canadian edition
Copyright © 2007 McGraw-Hill Ryerson Limited. All rights reserved.
10-1
Instructor’s Notes
Chapter Outline
I. Accounts Receivable—an amount due from customers for credit sales. A
separate account receivable is maintained for each customer in a
supplementary Accounts Receivable Ledger. The General Ledger continues to
show a single (total) Accounts Receivable.
A. Recognizing Accounts Receivable:
1. From direct company sales on credit—debit Accounts
Receivable for the full amount of the sale.
2. Non-bank credit cards (such as
Sears of Home Depot) require the retailer to send a copy of
the credit card sales receipts to a credit card company and wait
for payment—debit Accounts Receivable for the full sales
amount. When payment is received, debit Cash for amount
received, debit Credit Card Expense for the amount of the fee
and credit Accounts Receivable for the full amount of the sale.
Cost of Goods Sold is recorded as required.
B. Valuing Accounts Receivable—There are two methods used to
account for receivables that customers do not pay:
1. Allowance method—at the end of each accounting period,
bad debts expense is estimated and recorded.
a) Entry: debit Bad Debt Expense, credit a contraasset account called the Allowance for Doubtful
Accounts.
b) Method satisfies matching principle—expense is
charged in period of related sale.
c) Accounts Receivable are reported at their
estimated realizable value (A/Rec less the allowance
account).
d) Entry to write-off an uncollectible: debit
Allowance for Doubtful Accounts, credit Accounts
Receivable.
e) Writing off an uncollectible does not change the
estimated realizable value of Accounts Receivable.
2. Direct Write-off Method - This method does not satisfy
GAAP. Journal entry is a debit to Bad Debts Expense and a
credit to the customer account. The entry would be reversed
in the event that a collection is made.
Note: The write-off entry varies by method. When a written-off
account is recovered, first reinstate the account by reversing the
original write-off entry and second, record collection on reinstated
account
.
Copyright © 2007 McGraw-Hill Ryerson Limited. All rights reserved.
10-2
Fundamental Accounting Principles, 12th Canadian edition
Instructor’s Notes
Chapter Outline
C. Estimating Bad Debts Expense—two methods:
a) Percent of sales method (uses income statement
relationships)—bad debts expense is calculated as a
percentage of credit sales. ). Stress here that an
income statement account t (sales or net credit sales)
is being used in order to get the desired balance in
another income statement account (bad debts
expense).
2. Accounts Receivable methods (uses balance sheet
relationships)—desired credit balance in Allowance for
Doubtful Accounts is calculated:
a) As a percentage of outstanding receivables
(simplified approach). Stress here that a balance sheet
account t (accounts receivable) is being used in order
to get the desired balance in another balance sheet
account (allowance for doubtful accounts).
b) By aging of accounts receivable. Same
relationship is used, accounts receivable balance leads
us to the desired balance in allowance account.
D. Direct write-off method—accounts for bad debts from an
uncollectible account receivable at the time it is determined to be
uncollectible.
1. Entry to write-off an uncollectible: debit Bad Debt
Expense, credit Accounts Receivable.
2. This method violates matching principle—frequently
results in expense being charged in period different from
revenue.
3. Materiality principle permits use of this method when bad
debts expenses are very small in relation to other financial
statement items such as sales and net income.
II.
Short –Term Notes Receivable—(promissory note) is a written
promise to pay a specified amount of money (principal) either on demand or at
a definite future date. Usually interest bearing.
Promissory notes are notes payable to the maker of the note and notes
receivable to the payee of the note. Notes receivable are generally preferred
by creditors over accounts receivable.
Calculations required:
1. Maturity date
2. Interest ( Principal of note X Interest Rate X Term of
note/365 days)
B. Receipt of a note—debit Notes Receivable for principal or face
amount of note. Credit will vary; depends on reason note is received.
C. End-of-period interest adjustment—record accrued interest by
debiting Interest Receivable and crediting Interest Earned.
D. Honouring note or receipt of note payments—debit Cash for
Fundamental Accounting Principles, 12th Canadian edition
Copyright © 2007 McGraw-Hill Ryerson Limited. All rights reserved.
10-3
Instructor’s Notes
Chapter Outline
maturity value (face + interest), credit Note Receivable for face
amount and credit Interest Earned for the interest amount.
F. Dishonoured note—debit Accounts Receivable for maturity value,
credit Note Receivable for face amount and credit Interest Earned
for the interest amount. If account receivable remains uncollected,
will be written-off.
Note: Interest is earned and realized even though collectibility is in question.
(If deemed uncollectible, the receivable and interest earned would be written
off to Allowance for Doubtful Accounts.)
III.
Appendix 10A Converting Receivables to Cash before Maturity—
reasons for this include the need for cash or a desire to not be involved in
collection activities.
A. Selling Accounts Receivable—buyer, called a factor, charges the
seller a factoring fee and then collects the receivables as they come
due.
B. Pledging Accounts Receivable as security for a loan
1. Borrower retains ownership of the receivables.
2. If borrower defaults the lender will be paid from receipts
of collections on accounts receivable.
3. The pledge should be disclosed in financial statement
footnotes.
C. Discounting Notes Receivable—selling collection rights to bank
or financial institution.
1. With recourse—if the original maker of note defaults, the
original payee must pay.
a) A company that discounts the note with recourse
has a contingent liability (an obligation to make a
future payment if and only if an uncertain future event
actually occurs) if maker defaults.
2. Without recourse there is no contingent liability. Bank
assumes the risk of a bad debt loss.
D. Full-Disclosure—is principle that requires that financial
statements (including notes) report all relevant information about the
operations and financial position of a company.
IV.
Appendix 10 B Using the Information
The longer receivables are outstanding, the less likely the collection will be.
Monitoring receivables is critical to timely collection.
A. Accounts receivable turnover measures both quality and liquidity
of receivables. Calculated as:
Net sales/Average accounts receivable
Days sales uncollected indicates how much time is likely to
pass before we receive cash receipts from credit sales equal to
the current amount of accounts receivable. Calculated as:
(Accounts Receivable/Net Sales) X 365
Copyright © 2007 McGraw-Hill Ryerson Limited. All rights reserved.
10-4
Fundamental Accounting Principles, 12th Canadian edition
Alternate Demo Problem Chapter Ten
At the end of the year, the M. I. Wright Company showed the following
selected account balances:
Sales (all on credit) ............................................................................$300,000
Accounts Receivable ......................................................................... 800,000
Allowance for Doubtful Accounts.....................................................
38,000
Required:
1.
Assume the company estimates that 1% of all credit sales will not be
collected.
A. Prepare the proper journal entry to recognize the expense
involved.
B. Present the balances in Accounts Receivable and Allowance for
Doubtful Accounts as they would appear on the Balance Sheet. Also
show the net realizable Accounts Receivable.
2.
Assume the company estimates that 5% of its accounts receivable
will never be collected.
A. Prepare the proper journal entry to recognize the expense
involved.
B. Present the balances in Accounts Receivable and Allowance for
Doubtful Accounts as they would appear on the Balance Sheet. Also
show the net realizable Accounts Receivable.
3.
Under assumptions 1 and 2 above, give the proper journal entries for
the following events.
June 3
John Shifty, who owes us $500, informs us that
he is broke and cannot pay. We believe him.
Nov. 9
We learn that John Shifty has won the lottery and he
pays his account balance.
Fundamental Accounting Principles, 12th Canadian edition
Copyright © 2007 McGraw-Hill Ryerson Limited. All rights reserved.
10-5
Solution: Alternate Demo Problem Chapter Ten
1A.
Bad Debts Expense ..........................................
Allowance for Doubtful Accounts..............
($ 300,000 X 1 %)
1B.
Accounts Receivable .......................................$800,000
Less: Allowance for Doubtful Accounts ........ 41,000
Estimated Realizable A/R ................................$759,000
2A.
Bad Debts Expense ..........................................
Allowance for Doubtful Accounts..............
($ 800,000 X 5 % less $38,000)
3,000
3,000
2,000
2,000
2B.
Accounts Receivable .......................................$800,000
Less: Allowance for Doubtful Accounts ........ 40,000
Estimated Realizable A/R ...............................$760,000
3.
Both assumptions 1 and 2 above represent the allowance method of
accounting for uncollectibles. The only difference is in the approach
to estimating uncollectibles. Therefore the entries to write-off and
show subsequent reinstatement would be the same in 1 and 2.
June 3
Nov. 9
Nov. 9
Allowance for Doubtful Accounts.............
Accounts Receivable/John Shifty........
500
Accounts Receivable/John Shifty.............
Allowance for Doubtful Accounts........
500
Cash .............................................................
Accounts Receivable/John Shifty........
500
500
500
500
Note: There would be a closing entry for the Bad Debts Expense since it is
an expense account just like any other expense account. There would be
no closing entry for the Allowance for Doubtful Accounts since it is not a
temporary account. It is a contra-asset account, contra to Accounts
Receivable.
Copyright © 2007 McGraw-Hill Ryerson Limited. All rights reserved.
10-6
Fundamental Accounting Principles, 12th Canadian edition