Learning objectives
LO5
Describe accounting for receivables and uncollectible
amounts.
LO6
Explain how returns and discounts are accounted for.
LO7
Account for long-term receivables including when there is
no interest specified.
LO8
Understand how managers can use accounting estimates
to create hidden reserves to manage earnings.
LO9
Use information about accounts receivable to analyze and
interpret financial statements.
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LO5
Receivables
• Amounts owing to an entity
• Usually result from selling on credit
▫ Accounts receivable
• Current asset
▫ If due within one year
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LO5
Other Receivables
• Due from shareholders
• Tax refunds
• Owing from investments
▫ Dividends
▫ Interest
• Proceeds due on sale of asset
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LO5
Uncollectible Receivables
• Possible losses is a cost of credit sales
• Must record the expense of the uncollectible
amount
• Must reduce the asset
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LO5
Valuing Receivables
• Valued at net realizable value (NRV)
• Factors affecting value
▫ Non payment of accounts (bad debts)
▫ Refunds to dissatisfied customers
▫ Early payment discount
• Must make accounting estimates
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LO5
Uncollectible Receivables
1. Direct Write-off Method
• Dr. Bad Debt Expense/Cr. AR
2. Allowance Method
• Estimates must be made
• Percentage-of-receivables method
• Percentage-of-credit-sales method
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Percentage-of-Receivables
LO5
•
•
•
•
Estimate by reviewing balances
Accounts receivable aging schedule
Adjust allowance to match estimate
Balance sheet approach
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LO5
Percentage-of-Credit-Sales
• Based on estimate of annual credit sales
• Income statement approach
• Consistently high or low — adjust %
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Writing off Receivables
LO5
• Specific account deemed uncollectible
▫
▫
▫
▫
Reduce accounts receivable (Cr)
Reduce allowance (Dr)
No effect on net receivables balance
No effect on income statement until adjusting
entry is made
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