Accounting for Receivables
Chapter 9
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Wild, Shaw, and Chiappetta
Fundamental Accounting Principles
22nd Edition
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09-C1: Accounts Receivable
2
9-3
Accounts Receivable
A receivable is an amount due from another party.
This graph shows recent
dollar amounts of
receivables and their
percent of total assets for
four well-known
companies.
A company must also maintain a separate account for
each customer that tracks how much that customer
purchases, has already paid, and still owes.
C1
3
9-4
Sales on Credit
On July 1, TechCom had a credit sale of $950 to
CompStore and a collection of $720 from RDA
Electronics from a prior credit sale.
C1
4
9-5
Sales on Credit
C1
5
9-6
Credit Card Sales
Advantages of allowing customers to use
credit cards:
Customers’
credit is
evaluated by
the credit card
issuer.
Sales increase by
providing purchase
options to the customer.
The risks of extending credit
are transferred to the credit
card issuer.
Cash collections
are quicker.
C1
6
9-7
Credit Card Sales
On July 15, TechCom has $100 of credit card
sales with a 4% fee, and its $96 cash is
received immediately on deposit.
C1
7
9-8
Credit Card Sales
If instead TechCom must remit electronically the credit card
sales receipts to the credit card company and wait for the $96
cash payment, we will make the first entry on July 15, and the
second entry on July 20, when the cash is received.
C1
8
9-9
Installment Accounts Receivable
Amounts owed by customers from credit sales for
which payment is required in periodic amounts over
an extended time period. The customer is usually
charged interest.
Ford Motor Company reports
more than $70 billion in
installment receivables.
C1
9
NEED-TO-KNOW
A small retailer allows customers to use two different credit cards in charging purchases. With the AA
Bank Card, the retailer receives an immediate credit to its account when it deposits sales receipts. AA
Bank assesses a 5% service charge for credit card sales. The second credit card that the retailer
accepts is the VIZA Card. The retailer sends its accumulated receipts to VIZA on a weekly basis and is
paid by VIZA about a week later. VIZA assesses a 3% charge on sales for using its card. Prepare
journal entries to record the following selected credit card transactions for the retailer. (The retailer
uses the perpetual inventory system for recording sales.)
Jan. 2
Jan. 6
Jan. 16
C1
Sold merchandise for $1,000 (that had cost $600) and accepted the
customer’s AA Bank Card. The AA receipts are immediately deposited in
the retailer’s bank account.
Sold merchandise for $400 (that had cost $300) and accepted the
customer’s VIZA Card.
Received VIZA’s check for the January 6 billing, less the service charge.
10
NEED-TO-KNOW
A small retailer allows customers to use two different credit cards in charging purchases. With the AA
Bank Card, the retailer receives an immediate credit to its account when it deposits sales receipts. AA
Bank assesses a 5% service charge for credit card sales. The second credit card that the retailer
accepts is the VIZA Card. The retailer sends its accumulated receipts to VIZA on a weekly basis and is
paid by VIZA about a week later. VIZA assesses a 3% charge on sales for using its card. Prepare
journal entries to record the following selected credit card transactions for the retailer. (The retailer
uses the perpetual inventory system for recording sales.)
Jan. 2
Date
Jan. 2
Jan. 2
C1
Sold merchandise for $1,000 (that had cost $600) and accepted the
customer’s AA Bank Card. The AA receipts are immediately deposited in
the retailer’s bank account.
General Journal
Cash
Credit card expense ($1,000 x .05)
Sales
Cost of goods sold
Merchandise inventory
Debit
950
50
Credit
1,000
600
600
11
NEED-TO-KNOW
A small retailer allows customers to use two different credit cards in charging purchases. With the AA
Bank Card, the retailer receives an immediate credit to its account when it deposits sales receipts. AA
Bank assesses a 5% service charge for credit card sales. The second credit card that the retailer
accepts is the VIZA Card. The retailer sends its accumulated receipts to VIZA on a weekly basis and is
paid by VIZA about a week later. VIZA assesses a 3% charge on sales for using its card. Prepare
journal entries to record the following selected credit card transactions for the retailer. (The retailer
uses the perpetual inventory system for recording sales.)
Jan. 6
Jan. 16
Date
Jan. 2
Jan. 2
Jan. 6
Jan. 6
Jan. 16
C1
Sold merchandise for $400 (that had cost $300) and accepted the
customer’s VIZA Card.
Received VIZA’s check for the January 6 billing, less the service charge.
General Journal
Cash
Credit card expense ($1,000 x .05)
Sales
Debit
950
50
Credit
1,000
Cost of goods sold
Merchandise inventory
600
Accounts Receivable - VIZA
Credit card expense ($400 x .03)
Sales
388
12
Cost of goods sold
Merchandise inventory
300
Cash
Accounts Receivable - VIZA
388
600
400
300
388
12
09-P1: Valuing Accounts
Receivable—Direct Write-Off
Method
13
9 - 14
Valuing Accounts Receivable
Some customers may not pay their account.
Uncollectible amounts are referred to as bad debts.
There are two methods of
accounting for bad debts:
•Direct Write-Off Method
•Allowance Method
P1
14
9 - 15
Direct Write-Off Method
TechCom determines on January 23 that it cannot
collect $520 owed to it by its customer J. Kent.
Notice that the specific customer is noted in the
transaction so we can make the proper entry in the
customer’s Accounts Receivable subsidiary ledger.
P1
15
9 - 16
Direct Write-Off Method –
Recovering a Bad Debt
On March 11, J. Kent was able to make full payment
to TechCom for the amount previously written-off.
P1
16
9 - 17
Matching vs. Materiality
The matching
(expense recognition)
principle requires
expenses to be
reported in the same
accounting period as
the sales they helped
produce.
Materiality states that
an amount can be
ignored if its effect on
the financial
statements is
unimportant to users’
business decisions.
The direct write-off method usually does not best
match sales and expenses.
P1
17
NEED-TO-KNOW
A retailer applies the direct write-off method in accounting for uncollectible accounts. Prepare journal
entries to record the following selected transactions.
Feb. 14
The retailer determines that it cannot collect $400 of its accounts receivable
from a customer named ZZZ Company.
Apr. 1
ZZZ Company unexpectedly pays its account in full to the retailer, which then
records its recovery of this bad debt.
Date
Feb. 14
Apr. 1
Apr. 1
P1
General Journal
Bad Debts Expense
Accounts Receivable - ZZZ Co.
Debit
400
Credit
400
Accounts Receivable - ZZZ Co.
Bad Debts Expense
400
Cash
Accounts Receivable - ZZZ Co.
400
400
400
18
09-P2: Valuing Accounts
Receivable—Allowance
Method
19
9 - 20
Allowance Method
At the end of each
period, estimate total bad
debts expected to be
realized from that
period’s sales.
1.
2.
P2
Two advantages to the allowance method:
It records estimated bad debts expense in the period
when the related sales are recorded.
It reports accounts receivable on the balance sheet
at the estimated amount of cash to be collected.
20
9 - 21
Recording Bad Debts Expense
TechCom had credit sales of $300,000 during its first year of
operations. At the end of the first year, $20,000 of credit
sales remained uncollected. Based on the experience of
similar businesses, TechCom estimated that $1,500 of its
accounts receivable would be uncollectible.
P2
21
9 - 22
Balance Sheet Presentation
TechCom had credit sales of $300,000 during its first year of operations. At the
end of the first year, $20,000 of credit sales remained uncollected. Based on the
experience of similar businesses, TechCom estimated that $1,500 of its
accounts receivable would be uncollectible.
P2
22
9 - 23
Writing Off a Bad Debt
TechCom has determined that J. Kent’s $520 account is
uncollectible.
P2
23
9 - 24
Writing Off a Bad Debt
The write-off does not affect the realizable
value of accounts receivable.
P2
24
9 - 25
Recovering a Bad Debt
To help restore credit standing, a customer sometimes
volunteers to pay all or part of the amount owed on an
account even after it has been written off.
On March 11, Kent pays in full his $520 account
previously written off.
P2
25
NEED-TO-KNOW
A retailer applies the allowance method in accounting for uncollectible accounts. Prepare journal
entries to record its following selected transactions.
12/31/20X1 The retailer estimates $3,000 of its accounts receivable are uncollectible.
P2
2/14/20X2
The retailer determines that it cannot collect $400 of its accounts receivable
from a customer named ZZZ Company.
4/1/20X2
ZZZ Company unexpectedly pays its account in full to the retailer, which then
records its recovery of this bad debt.
26
NEED-TO-KNOW
A retailer applies the allowance method in accounting for uncollectible accounts. Prepare journal
entries to record its following selected transactions.
12/31/20X1 The retailer estimates $3,000 of its accounts receivable are uncollectible.
2/14/20X2
The retailer determines that it cannot collect $400 of its accounts receivable
from a customer named ZZZ Company.
4/1/20X2
ZZZ Company unexpectedly pays its account in full to the retailer, which then
records its recovery of this bad debt.
Date
General Journal
12/31/20X1 Bad Debts Expense
Allowance for Doubtful Accounts
Credit
3,000
2/14/20X2 Allowance for Doubtful Accounts
Accounts Receivable - ZZZ Co.
400
4/1/20X2
Accounts Receivable - ZZZ Co.
Allowance for Doubtful Accounts
400
Cash
Accounts Receivable - ZZZ Co.
400
4/1/20X2
P2
Debit
3,000
400
400
400
27
9 - 28
Estimating Bad Debts Expense
Two Methods
1. Percent of Sales Method
2. Accounts Receivable Methods


P2
Percent of Accounts Receivable
Aging of Accounts Receivable
28
9 - 29
Percent of Sales Method
Bad debts expense is computed as follows:
Current Period Sales
×
Bad Debt %
= Estimated Bad Debts Expense
P2
29
9 - 30
Percent of Sales Method
Musicland has credit sales of $400,000 in 2015. It is estimated
that 0.6% of credit sales will eventually prove uncollectible.
Let’s look at recording Bad Debts Expense for 2015.
$
×
= $
P2
400,000
0.6%
2,400
Musicland’s accountant
computes estimated
Bad Debts Expense of
$2,400.
30
9 - 31
Accounts Receivables Method
1. Compute the estimate of the Allowance
for Doubtful Accounts.
Year-end Accounts Receivable x Bad Debt %
Bad Debts Expense is computed as:
Total Estimated Bad Debts Expense
– Previous Balance in Allowance Account
= Current Bad Debts Expense
P2
31
9 - 32
Percent of Receivables Method
Musicland has $50,000 in accounts receivable and a $200 credit
balance in Allowance for Doubtful Accounts on December 31, 2015.
Past experience suggests that 5% of receivables are uncollectible.
Desired balance in Allowance for
Doubtful Accounts.
$
×
= $
P2
50,000
5.00%
2,500
32
9 - 33
Aging of Receivables Method
Classify each receivable by how
long it is past due.
Each age group is multiplied by its
estimated bad debts percentage.
Estimated bad debts for each group
are totaled.
P2
33
9 - 34
Aging of Accounts Receivable
P2
34
9 - 35
Aging of Accounts Receivable
Musicland has an unadjusted
credit balance of $200 in the
allowance account.
We estimated the proper
balance to be $2,270.
P2
Allowance for Doubtful
Accounts
200
2,070
2,270
35
9 - 36
Summary of Methods
P2
36
NEED-TO-KNOW
At its December 31 year-end, a company estimates uncollectible accounts using the
allowance method. It prepared the following aging of receivables analysis.
Accounts receivable
Percent uncollectible
Total
$2,600
0
$2,000
1%
Days Past Due
1 to 30
31 to 60
61 to 90
$300
$80
$100
2%
5%
7%
Over 90
$120
10%
1. (a) Estimate the balance of the Allowance for Doubtful Accounts using the aging of
accounts receivable method. (b) Prepare the adjusting entry to record Bad Debts
Expense using the estimate from part a. Assume the unadjusted balance in the Allowance
for Doubtful Accounts is a $10 debit.
Date
Dec. 31
General Journal
Bad Debts Expense
Allowance for Doubtful Accounts
Debit
Income St.
Credit
Bal. Sheet
Adjusting entries: 3-step process:
Step 1) Determine what the account balance equals.
Step 2) Determine what the account balance SHOULD equal.
Step 3) Make an adjusting entry to get from Step 1 to Step 2.
P2
37
NEED-TO-KNOW
Accounts receivable
Percent uncollectible
Uncollectible amount
Total
$2,600
$49
0
$2,000
1%
$20
Days Past Due
1 to 30
31 to 60
61 to 90
$300
$80
$100
2%
5%
7%
$6
$4
$7
Over 90
$120
10%
$12
Step 1: Determine what the current account balance equals.
When the estimate is based on receivables (Balance Sheet Approach) the account is the
Balance sheet portion of the adjusting entry, Allowance for Doubtful Accounts. The existing
balance is a debit of $10.
Allowance for Doubtful Accounts
Unadjusted
10
Adjustment
59
Adjusted
49
Step 2: Determine what the current account balance SHOULD BE.
The balance should equal the amount calculated, $49.
Step 3: Make an adjusting entry to get from step 1 to step 2.
Date
Dec. 31
P2
General Journal
Bad Debts Expense
Allowance for Doubtful Accounts
Debit
59
Credit
59
38
NEED-TO-KNOW
2. (a) Estimate the balance of the Allowance for Doubtful Accounts assuming the
company uses 2% of total accounts receivable to estimate uncollectibles, instead of the
aging of receivables method in number 1. (b) Prepare the adjusting entry to record Bad
Debts Expense using the estimate from part a. Assume the unadjusted balance in the
Allowance for Doubtful Accounts is a $4 credit.
Step 1: Determine what the current account balance equals.
When the estimate is based on receivables, the Balance Sheet Approach, the account is
the Balance sheet portion of the adjusting entry, Allowance for Doubtful Accounts. The
existing balance is a credit of $4.
Allowance for Doubtful Accounts
Unadjusted
4
Adjustment
48
Adjusted
52
Step 2: Determine what the current account balance SHOULD BE.
The balance should be 2% of Accounts Receivable. $2,600 x .02 = $52.
Step 3: Make an adjusting entry to get from step 1 to step 2.
Date
Dec. 31
P2
General Journal
Bad Debts Expense
Allowance for Doubtful Accounts
Debit
48
Credit
48
39
NEED-TO-KNOW
3. a) Estimate the balance of the uncollectibles assuming the company uses 0.5% of
annual credit sales (annual credit sales were $10,000). (b) Prepare the adjusting entry to
record Bad Debts Expense using the estimate from part a. Assume the unadjusted
balance in the Allowance for Doubtful Accounts is a $2 credit.
Step 1: Determine what the current account balance equals.
When the estimate is based on sales, the Income Statement Approach, the account is the
Income Statement portion of the adjusting entry, Bad Debts Expense. The existing
balance in the expense account is always $0, as it is closed every period.
Unadjusted
Adjustment
Adjusted
Bad Debts Expense
0
50
50
Step 2: Determine what the current account balance SHOULD BE.
The balance should be .5% of net credit sales. $10,000 x .005 = $50.
Step 3: Make an adjusting entry to get from step 1 to step 2.
Date
Dec. 31
P2
General Journal
Bad Debts Expense
Allowance for Doubtful Accounts
Debit
50
Credit
50
40
09-C2: Notes Receivable
41
9 - 42
Notes Receivable
A promissory note is a written promise to pay a specified
amount of money, usually with interest, either on
demand or at a definite future date.
C2
42
9 - 43
Computing Maturity and Interest
The maturity date of a note is the day the note
(principal and interest) must be repaid.
On July 10, TechCom received a $1,000, 90-day, 12%
promissory note as a result of a sale to Julia Browne.
C2
The note is due and payable on October 8.
43
9 - 44
Interest Computation
Even for
maturities less
than one year,
the rate is
annualized.
C2
If the note is
expressed in
days, base a
year on 360
days using the
“banker’s rule.”
44
9 - 45
Recognizing Notes Receivable
Notes receivable are usually recorded in a single Notes
Receivable account to simplify recordkeeping. The original notes
are kept on file, including information on the maker, rate of
interest, and due date.
To illustrate the recording for the receipt of a note, we use the
$1,000, 90-day, 12% promissory note from Julia Browne to
TechCom. TechCom received this note at the time of a
product sale to Julia Browne.
C2
45
09-P3: Valuing and Settling
Notes
46
9 - 47
Recording an Honored Note
The principal
and interest of a
note are due on
its maturity date.
J. Cook has a $600, 15%, 60-day note receivable
due to TechCom on December 4.
P3
47
9 - 48
Recording a Dishonored Note
The act of dishonoring a note does not relieve
the maker of the obligation to repay the
principal and interest due.
J. Cook has a $600, 15%, 60-day note receivable
due to TechCom on December 4.
P3
48
9 - 49
Recording End-of-Period
Interest Adjustments
On December 16, TechCom accepts a $3,000,
60-day, 12% note from a customer in granting an
extension on a past-due account. When
TechCom’s accounting period ends on December
31, $15 of interest has accrued on the note.
$3,000 x 12% x 15/360 = $15
P3
49
9 - 50
Recording End-of-Period
Interest Adjustments
Days in December
Minus the date of the note
Day remaining in December
Days in January
Days in February
Period of the note in days
31
16
15
31
14
60
Recording collection on note at maturity.
P3
$3,000 x 12% x 60/360 = $60
50
NEED-TO-KNOW
a. AA Company purchases $1,400 of merchandise from ZZ on December 16, 20X1. ZZ
accepts AA’s $1,400, 90-day, 12% note as payment. ZZ’s accounting period ends on
December 31, and it does not make reversing entries. Prepare entries for ZZ on
December 16, 20X1, and December 31, 20X1.
b. Using the information in part a, prepare ZZ’s March 16, 20X2, entry if AA dishonors the note.
c. Instead of the facts in part b, prepare ZZ’s March 16, 20X2, entry if AA honors the note
Date
General Journal
12/16/20X1 Notes Receivable
Sales
12/31/20X1 Interest Receivable
Interest Revenue
P3
Debit
1,400
Credit
1,400
7
($1,400 x .12 x 15/360)
7
03/16/20X2 Accounts Receivable
Interest Receivable
Interest Revenue ($1,400 x .12 x 75/360)
Notes Receivable
1,442
03/16/20X2 Cash
Interest Receivable
Interest Revenue ($1,400 x .12 x 75/360)
Notes Receivable
1,442
7
35
1,400
7
35
1,400
51
09-C3: Disposal of Receivables
52
9 - 53
Disposal of Receivables
Companies can convert receivables to
cash before they are due.
Selling
Receivables
C3
Pledging
Receivables
53
9 - 54
Global View
Recognition of Receivables
Both U.S. GAAP and IFRS have similar asset criteria that apply to
recognition of receivables. Further, receivables that arise from revenuegenerating activities are subject to broadly similar criteria for U.S. GAAP
and IFRS.
Valuing of Receivables
Both U.S. GAAP and IFRS require that receivables be reported net of
estimated uncollectibles. Further, both systems require that the expense
for estimated uncollectibles be recorded in the same period when any
revenues from those receivables are recorded.
Disposition of Receivables
Both U.S. GAAP and IFRS apply broadly similar rules in recording
dispositions of receivables.
54
09-A1: Accounts Receivable
Turnover
55
9 - 56
Accounts Receivable Turnover
This ratio provides useful information for evaluating
how efficient management has been in granting
credit to produce revenue.
A1
56
9 - 57
End of Chapter 9
57