Accounting II
Unit 3
Receivables
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Classification of Receivables p398
The term receivables includes
all money claims against other
entities, including people,
business firms, and other
organizations.
So Money Owed to Us!
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Accounts Receivable
Accounts receivable are
normally expected to be
collected within a
relatively short period,
such as 30 or 60 days.
This normally does not
include interest unless
payment is late.
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Notes Receivable
Notes receivable are amounts
that customers owe for which
a formal, written instrument
of credit has been issued.
Now, this normally does
include interest.
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Uncollectible Receivables p399
There are two methods of accounting for
receivables that appear to be
uncollectible: the direct write off
method and the allowance method.
In my opinion, one method is easier but
the other creates more accurate record
keeping.
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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.
So which one is the easier one and which
one is the more accurate record keeping
option?
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Example Exercise 9-1 (pg 400)
Journalize the following transactions using the
direct write-off method of accounting for
uncollectible receivables.
July 9 Received $1,200 from Jay Burke
and wrote off the remainder owed
of $3,900 as uncollectible.
Oct. 11 Reinstated the account of Jay Burke
and received $3,900 cash in full
payment.
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Example Exercise 9-1 (pg 400)
July 9 Cash
1,200
Bad Debt Expense
3,900
Accounts Receivable—Jay Burke
5,100
Oct. 11 Accounts Receivable—Jay Burke
Bad Debt Expense
3,900
3,900
11 Cash
3,900
Accounts Receivable—Jay Burke
3,900
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Example Exercise 9-2 (pg 403)
Journalize the following transactions using the
allowance method of accounting for
uncollectible receivables.
July 9 Received $1,200 from Jay Burke
and wrote off the remainder owed
of $3,900 as uncollectible.
Oct. 11 Reinstated the account of Jay Burke
and received $3,900 cash in full
payment.
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Example Exercise 9-2 (pg 403)
July 9 Cash
Allowance for Doubtful Accounts
Accounts Receivable—Jay Burke
1,200
3,900
Oct. 11 Accounts Receivable—Jay Burke
Allowance for Doubtful Accounts
3,900
11 Cash
Accounts Receivable—Jay Burke
3,900
5,100
3,900
3,900
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Wait, you said one was more
challenging?
• If we look back at the two practice
exercises that we just completed I see the
same number of journal entries (pages
400 and 403). We just used the account
Bad Debts Expense in one and Allowance
for Doubtful Accounts in the other. Hang
on, we are getting there – grin.
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Estimating Uncollectibles p403
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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First, a quick refresher.
• What is the normal balance of our Accounts
Receivable account? Debit or Credit?
• What is the normal balance of our Allowance
account? Debit or credit?
• Does this make sense? The Allowance Balance
would be subtracted from the A/R account.
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Example Exercise 9-3 p405
• This exercise uses the Sales Method.
• If we are going to base the amount that we don’t
believe we will collect on sales then we need to
keep adding to the allowance account for every
new sale, right?
I like to say that we ignore the prior balance in the
allowance account with the sales method.
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Example Exercise 9-3 (pg 405)
At the end of the current year, Accounts Receivable has a
balance of $800,000; Allowance for Doubtful Accounts
has a credit balance of $7,500; and net sales for the year
total $3,500,000. 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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Example Exercise 9-3 (pg 405)
(a)
$17,500 ($3,500,000 x .005)
(b) Accounts Receivable
Allowance for Doubtful Accounts
($7,500 + $17,500)
Bad Debt Expense
Adjusted Balance
$800,000
25,000
17,500
(c) $775,000 ($800,000 – $25,000)
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Estimating Uncollectibles Based
on Analysis of Receivables p405
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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Example Exercise 9-4 p407
• This exercise uses an analysis of our accounts
receivables.
• If we are going to base the amount that we don’t believe
we will collect on receivables then we need to match the
balance in the allowance account to the figure that we
recalculate every time we make this analysis, right?
I like to say that we have to consider the prior balance in
the allowance account with the receivables method.
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Example Exercise 9-4 (pg 407)
At the end of the current year, Accounts Receivable has a
balance of $800,000; Allowance for Doubtful Accounts
has a credit balance of $7,500; and net sales for the year
total $3,500,000. Using the aging method, the balance of
Allowance for Doubtful Accounts is estimated as $30,000.
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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Example Exercise 9-4 (pg 407)
(a)
$22,500 ($30,000 – $7,500) Keep in mind that
we only want a total of $30,000 in the account,
right? We already have the $7500 so we just need
to add the difference.
Adjusted Balance
(b) Accounts Receivable
Allowance for Doubtful Accounts
Bad Debt Expense
$800,000
30,000
22,500
(c) $770,000 ($800,000 – $30,000)
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Characteristics of Notes Receivable p410
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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Interest
on the Note
• How do we figure out the date it is due?
• Knuckle Trick…
• Don’t count the day the note is written but you
do count the day it is paid back. So no interest
on the day you get the money, but you have to
pay interest on the day you pay it back.
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Example Exercise 9-5 p 413
Same day Surgery Center Received a 120 day, 6% note for $40,000,
dated March 14 from a patient on account.
a. Determine the due date of the note.
b. Determine the maturity of the note.
c. Journalize the entry to record the receipt of the payment of the
note at maturity.
A. Let’s start with the knuckle trick, how many days in the month of March?
31?
So since we don’t count the day we get the note we can subtract 14 days
from the 31 days in the month, right?
From there we just keep adding months until we come up with 120 days.
Keep in mind that the due date never lands on the end of a month 
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Example Exercise 9-5
• a. What did you get? I came up with July
12th.
• March 17 days, April 30 days, May 31 days,
June 30 days and July 31 but that took me over.
So I added everything but July to get:
17 + 30 + 31 + 30 = 108
Then I subtracted the 108 from the number of
days that I needed: 120-108 = 12
Giving me July 12!
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Example Exercise 9-5 b.
• Maturity Value is the amount that is due at
maturity or the due date.
So we need the face of the note plus the interest in this
case.
Interest is Principle X Rate X Time (PRT)
$40,000 X 6% (.06) X 120/360 (divide by 360 and
multiple by 120).
Don’t forget to add that back to the face!!
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Part C, The JE
July 12 Cash
40,800
Note Receivable
40,000
Interest Revenue
800
The credit to the note wipes out that debt.
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Questions?
Does anyone have any questions?
Your textbook exercises for this week are:
PR 9-2A – complete PR 9-2B first
PR 9-5A – complete PR 9-5B first
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