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Chapter
8
Accounting for
Receivables
Financial Accounting, IFRS Edition
Weygandt Kimmel Kieso
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Study Objectives
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1.
Identify the different types of receivables.
2.
Explain how companies recognize accounts receivable.
3.
Distinguish between the methods and bases companies use to
value accounts receivable.
4.
Describe the entries to record the disposition of accounts
receivable.
5.
Compute the maturity date of and interest on notes receivable.
6.
Explain how companies recognize notes receivable.
7.
Describe how companies value notes receivable.
8.
Describe the entries to record the disposition of notes receivable.
9.
Explain the statement presentation and analysis of receivables.
Accounting for Receivables
Types of
Receivables
Accounts
receivable
Accounts
Receivable
Notes receivable
Recognizing
accounts
receivable
Other
receivables
Valuing accounts
receivable
Disposing of
accounts
receivable
Notes Receivable
Determining
maturity date
Computing
interest
Recognizing
notes receivable
Valuing notes
receivable
Disposing of notes
receivable
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Statement
Presentation and
Analysis
Presentation
Analysis
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.
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).
Accounts
Receivable
Notes
Receivable
Other
Receivables
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SO 1 Identify the different types of receivables.
Accounts Receivable
Three accounting issues:
1. Recognizing accounts receivable.
2. Valuing accounts receivable.
3. Disposing of accounts receivable.
Recognizing Accounts Receivable
The following exercise was illustrated in Chapter 5. For
simplicity, inventory and cost of goods sold have been
omitted.
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SO 1 Identify the different types of receivables.
Recognizing Accounts Receivable
Illustration: Assume that Jordache Co. on July 1, 2011, sells
merchandise on account to Polo Company for $1,000 terms 2/10,
n/30. Prepare the journal entry to record this transaction on the
books of Jordache Co.
Jul. 1
Accounts receivable
Sales
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1,000
1,000
SO 2 Explain how companies recognize accounts receivable.
Recognizing Accounts Receivable
Illustration: On July 5, Polo returns merchandise worth $100 to
Jordache Co.
Jul. 5
Sales returns and allowances
100
Accounts receivable
100
Illustration: On July 11, Jordache receives payment from
Polo Company for the balance due.
Jul. 11
Cash
882
Sales discounts ($900 x .02)
Accounts receivable
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18
900
SO 2 Explain how companies recognize accounts receivable.
Accounts Receivable
Valuing Accounts Receivables
Reported as an asset on the statement of financial
position.
Reported at the amount the company thinks they will be
able to collect.
Sales on account raise the possibility of accounts not
being collected.
Valuation can be difficult because an unknown amount
of receivables will become uncollectible.
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SO 3 Distinguish between the methods and bases
companies use to value accounts receivable.
Valuing Accounts Receivable
Methods of Accounting for Uncollectible Accounts
Direct Write-Off
Allowance Method
Theoretically undesirable:
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Losses are estimated:
no matching.
better matching.
receivable not stated at net
realizable value.
receivable stated at net
realizable value.
not acceptable for financial
reporting.
required by IFRS.
SO 3 Distinguish between the methods and bases
companies use to value accounts receivable.
Valuing Accounts Receivable
Direct Write-Off Method for Uncollectible Accounts
Under the direct write-off method, when a company determines
a particular account to be uncollectible, it charges the loss to Bad
Debts Expense. Assume, for example, that on December 12
Warden Co. writes off as uncollectible M. E. Doran’s $200 balance.
The entry is:
Dec. 12
Bad debt expense
Accounts receivable
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200
200
SO 3 Distinguish between the methods and bases
companies use to value accounts receivable.
Valuing Accounts Receivable
Allowance Method for Uncollectible Accounts
1. Companies estimate uncollectible accounts receivable.
2. To record estimated uncollectibles:
Bad Debts Expense
xxx
Allowance for Doubtful Accounts
xxx
3. To write off uncollectible accounts:
Allowance for Doubtful Accounts
Accounts Receivable
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xxx
xxx
SO 3 Distinguish between the methods and bases
companies use to value accounts receivable.
Valuing Accounts Receivable
Recording Estimated Uncollectibles: Assume that Hampson
Furniture has credit sales of $1,200,000 in 2011. Of this amount,
$200,000 remains uncollected at December 31. The credit
manager estimates that $12,000 of these sales will be
uncollectible. The adjusting entry to record the estimated
uncollectibles is:
Dec. 31
Bad debt expense
12,000
Allowance for doubtful accounts
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12,000
SO 3 Distinguish between the methods and bases
companies use to value accounts receivable.
Valuing Accounts Receivable
Illustration 8-2
Presentation of allowance for doubtful accounts
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SO 3 Distinguish between the methods and bases
companies use to value accounts receivable.
Valuing Accounts Receivable
Recording the Write-Off of an Uncollectible Account:
The financial vice-president of Hampson Furniture authorizes a
write-off of the $500 balance owed by R.A.Ware
on March 1, 2012. The entry to record the write-off is:
Mar. 1
Allowance for doubtful accounts
Accounts receivable
500
500
Illustration 8-3
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SO 3 Distinguish between the methods and bases
companies use to value accounts receivable.
Valuing Accounts Receivable
Recording the Write-Off of an Uncollectible Account:
The write-off affects only statement of financial position accounts.
Illustration 8-3
Illustration 8-4
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SO 3 Distinguish between the methods and bases
companies use to value accounts receivable.
Valuing Accounts Receivable
Recovery of an Uncollectible Account: On July 1, R. A. Ware
pays the $500 amount that Hampson had written off on March 1.
These are the entries:
Jul. 1
Accounts receivable
500
Allowance for doubtful accounts
Jul. 1
Cash
500
Accounts receivable
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500
500
SO 3 Distinguish between the methods and bases
companies use to value accounts receivable.
Valuing Accounts Receivable
Bases Used for Allowance Method
Illustration 8-5
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SO 3 Distinguish between the methods and bases
companies use to value accounts receivable.
Valuing Accounts Receivable
Percentage-of-Sales
Illustration: Assume that Gonzalez Company elects to use
the percentage-of-sales basis. It concludes that 1% of net credit
sales will become uncollectible. If net credit sales for 2011 are
$800,000, the adjusting entry is:
Dec. 31
Bad debts expense
Allowance for doubtful accounts
8,000 *
8,000
* $800,000 x 1%
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SO 3 Distinguish between the methods and bases
companies use to value accounts receivable.
Valuing Accounts Receivable
Percentage-of-Sales
Emphasizes the matching of expenses with revenues.
When the company makes the adjusting entry, it disregards
the existing balance in Allowance for Doubtful Accounts.
Illustration 8-6
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SO 3 Distinguish between the methods and bases
companies use to value accounts receivable.
Valuing Accounts Receivable
Percentage-of-Receivables
Illustration 8-7
Aging schedule
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SO 3 Distinguish between the methods and bases
companies use to value accounts receivable.
Valuing Accounts Receivable
Percentage-of-Receivables
Illustration: If the trial balance shows Allowance for Doubtful
Accounts with a credit balance of $528, the company will make the
following adjusting entry.
Dec. 31
Bad debts expense
Allowance for doubtful accounts
1,700 *
1,700
* $2,228 - 528
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SO 3 Distinguish between the methods and bases
companies use to value accounts receivable.
Valuing Accounts Receivable
Percentage-of-Receivables
Illustration 8-8
Occasionally the allowance account will have a debit balance
prior to adjustment.
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SO 3 Distinguish between the methods and bases
companies use to value accounts receivable.
Valuing Accounts Receivable
Summary
Percentage of Sales approach:
Focus on “Bad debt expense” estimate, existing balance
in the allowance account is ignored for journal entry.
Method achieves a matching of expense and revenues.
Percentage of Receivables approach:
Accurate valuation of receivables on the statement of
financial position.
Method may also be applied using an aging schedule.
Balance in allowance account considered for journal entry.
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SO 3 Distinguish between the methods and bases
companies use to value accounts receivable.
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Answer on notes page
Accounts Receivable
Disposing of Accounts Receivable
Companies sell receivables for two major reasons.
1. Receivables may be the only reasonable source of cash.
2. Billing and collection are often time-consuming and costly.
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SO 4 Describe the entries to record the disposition of accounts receivable.
Disposing of Accounts Receivable
Sale of Receivables
Factor
 Buys receivables from businesses and then collects
the payments directly from the customers.
 Typically charges a commission to the company that is
selling the receivables.
 Fee ranges from 1-3% of the amount of receivables
purchased.
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SO 4 Describe the entries to record the disposition of accounts receivable.
Disposing of Accounts Receivable
Illustration: Assume that Hendredon Furniture factors
$600,000 of receivables to Federal Factors. Federal Factors
assesses a service charge of 2% of the amount of receivables
sold. The journal entry to record the sale by Hendredon Furniture
is as follows.
Cash
Service charge expense
Accounts receivable
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($600,000 x 2% = $12,000)
588,000
12,000
600,000
SO 4 Describe the entries to record the disposition of accounts receivable.
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Answer on notes page
Disposing of Accounts Receivable
Credit Card Sales
Retailer considers credit card sales the same as cash
sales.
Retailer must pay card issuer a fee of 2 to 4% for
processing the transactions.
Retailer records sale in a similar manner as checks
deposited from cash sale.
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SO 4 Describe the entries to record the disposition of accounts receivable.
Credit Card Sales
Illustration: Anita Ferreri purchases $1,000 of compact discs
for her restaurant from Karen Kerr Music Co., using her Visa
First Bank Card. First Bank charges a service fee of 3%. The
entry to record this transaction by Karen Kerr Music is as follows.
Cash
Service charge expense
Sales
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970
30
1,000
SO 4 Describe the entries to record the disposition of accounts receivable.
Notes Receivable
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.
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SO 5 Compute the maturity date of and interest on notes receivable.
Notes Receivable
To the Payee, the promissory note is a note receivable.
To the Maker, the promissory note is a note payable.
Illustration 8-10
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SO 5 Compute the maturity date of and interest on notes receivable.
Notes Receivable
Determining the Maturity Date
Note expressed in terms of
Months
Illustration 8-12
Days
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SO 5 Compute the maturity date of and interest on notes receivable.
Notes Receivable
Determining the Maturity Date
Illustration 8-13
Illustration 8-14
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SO 5 Compute the maturity date of and interest on notes receivable.
Notes Receivable
Recognizing Notes Receivable
Illustration: Calhoun Company wrote $1,000, two-month, 12%
promissory note to settle an open account, Wilma Company
makes the following entry for the receipt of the note.
Notes receivable
1,000
Accounts receivable
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1,000
SO 6 Explain how companies recognize notes receivable.
Notes Receivable
Valuing Notes Receivable
Like accounts receivable, companies report short-term
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.
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SO 7 Describe how companies value 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.
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SO 8 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.
A dishonored note receivable is no longer negotiable.
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SO 8 Describe the entries to record the disposition of notes receivable.
Notes Receivable
Honor of Notes Receivables
Illustration: Betty Co. lends Wayne Higley Inc. $10,000 on June
1, accepting a five-month, 9% interest-bearing note. Assuming
that Betty Co. presents the note to Wayne Higley Inc. on the
maturity date, Betty Co.’s entry to record the collection is:
Nov. 1
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Cash
10,375
Notes receivable
10,000
Interest revenue
375
SO 8 Describe the entries to record the disposition of notes receivable.
Notes Receivable
Honor of Notes Receivables
Illustration: If Betty Co. prepares financial statements as of
September 30, it must accrue interest. Betty Co. would make an
adjusting entry as follows.
Sept. 30
Interest receivable
Interest revenue
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300
300
SO 8 Describe the entries to record the disposition of notes receivable.
Notes Receivable
Honor of Notes Receivables
Illustration: The entry by Betty Co. to record the honoring of the
Wayne Higley Inc. note on November 1 is:
Nov. 1
Cash
Notes receivable
Interest receivable
Interest revenue
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10,375
10,000
300
75
SO 8 Describe the entries to record the disposition of notes receivable.
Notes Receivable
Dishonor of Notes Receivables
Illustration: Wayne Higley Inc. on November 1 indicates that it
cannot pay at the present time. If Betty Co. does expect eventual
collection, it would make the following entry at the time the note is
dishonored (assuming no previous accrual of interest).
Nov. 1
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Accounts receivable
10,375
Notes receivable
10,000
Interest revenue
375
SO 8 Describe the entries to record the disposition of notes receivable.
Statement Presentation and Analysis
Presentation
Identify in the statement of financial position or in the
notes each major type of receivable.
F/P
Report short-term receivables appear in current assets.
Report both gross amount of receivables and allowance
for doubtful account.
Report bad debts expense and service charge expense
as selling expenses.
I/S
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Report interest revenue under “Other” in the
nonoperating section.
SO 9 Explain the statement presentation and analysis of receivables.
Statement Presentation and Analysis
Analysis
Illustration 8-15
This Ratio used to:
Assess the liquidity of the receivables.
Measure the number of times, on average, a company
collects receivables during the period.
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SO 9 Explain the statement presentation and analysis of receivables.
Statement Presentation and Analysis
Analysis
Illustration 8-16
Average collection period in terms of days.
Used to assess effectiveness of credit and collection
policies.
Collection period should not exceed credit term period.
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SO 9 Explain the statement presentation and analysis of receivables.
Understanding U.S. GAAP
Key Differences
Accounting for Receivables
IFRS has four specifically defined categories for financial
assets, which include loans and receivables. GAAP does not
designate a similar category for loans and receivables.
GAAP and IFRS account for bad debts in a similar fashion.
Both account for short-term receivables at amortized cost,
adjusted for allowances for doubtful accounts.
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Understanding U.S. GAAP
Key Differences
Accounting for Receivables
Like the IASB, the FASB has worked to implement fair value
measurement for all financial instruments, but both Boards
have faced bitter opposition from various factions. As a
consequence, the Boards have adopted a piecemeal
approach; the first step is disclosure of fair value
information in the notes. The second step is the fair value
option, which permits, but does not require, companies to
record some types of financial instruments at fair value in
the financial statements. Both Boards have indicated that
they believe all financial instruments should be recorded
and reported at fair value.
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Understanding U.S. GAAP
Key Differences
Accounting for Receivables
IFRS and GAAP differ in the criteria used to derecognize
(generally through a sale or factoring) a receivable. IFRS is a
combination of an approach focused on risks and rewards
and loss of control. GAAP uses loss of control as the
primary criterion. In addition, IFRS permits partial
derecognition; GAAP does not.
IFRS specifies a two-step process for determining the
impairment of receivables for a period. This process starts
by identifying individual impairments of specific receivables
and then estimating impairments of groups of receivables.
GAAP does not specify a similar approach.
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Understanding U.S. GAAP
Looking to the Future
Accounting for
Receivables
Both the IASB and the FASB have indicated that they believe that
financial statements would be more transparent and
understandable if companies recorded and reported all financial
instruments at fair value. The fair value option for recording
financial instruments, such as receivables, is an important step in
moving closer to fair value recording. However, we hope that this is
only an intermediate step and that the Boards continue to work
toward the adoption of comprehensive fair value accounting for
financial instruments. In their current deliberations regarding
accounting for financial instruments, it appears that IASB wants
amortized costs for receivables, but GAAP is tending toward fair
value.
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Copyright
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