8
Receivables
1
Classification of Receivables
The term receivables includes
all money claims against other
entities, including people,
business firms, and other
organizations.
8-2
1
Classification of Receivables
Accounts receivable are
normally expected to be
collected within a
relatively short period,
such as 30 or 60 days.
8-3
1
Classification of Receivables
Notes receivable are amounts
that customers owe for which
a formal, written instrument
of credit has been issued.
8-4
1
Classification of Receivables
Other receivables expected to
be collected within one year
are classified as current
assets.
8-5
1
Classification of Receivables
If collection is expected beyond
one year, these receivables are
classified as noncurrent assets
and reported under the caption
Investments.
8-6
2
Factoring
Companies often sell their
receivables to other companies.
This transaction is called
factoring the receivables, and the
buyer of the receivables is called
a factor.
8-7
2
Uncollectible Receivables
Regardless of how careful a company is
in granting credit, some credit sales will
be uncollectible. The operating expense
account is called bad debt expense,
uncollectible accounts expense, or
doubtful accounts expense.
8-8
2
Uncollectible Receivables
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.
8-9
3
Describe the direct writeoff method of accounting
for uncollectible
receivables.
8-14
8-10
3
Uncollectible Receivables
On May 10, a $4,200 accounts receivable
from D. L. Ross has been determined to be
uncollectible.
8-11
3
Uncollectible Receivables
The amount written off is later collected
on November 21.
Reinstatement Entry
8-12
Receipt of Cash
Entry
4
Describe the allowance
method of accounting for
uncollectible receivables.
8-19
8-13
4
Uncollectible Receivables
On December 31, ExTone Company estimates
that a total of $30,000 of the $200,000 balance of
their Accounts Receivable will eventually be
uncollectible.
8-14
4
Uncollectible Receivables
The net amount that is expected to be
collected, $170,000 ($200,000 –
$30,000), is called the net realizable
value (NRV). The adjusting entry
reduces receivables to the NRV and
matches uncollectible expenses with
revenues.
8-15
4
Write-Offs to the
Allowance Account
On January 21, John Parker’s account totaling
$6,000 is written off because it is uncollectible.
8-16
4
8-17
4
Allowance Method Example
During 2010, ExTone Company writes off
$26,750 of uncollectible accounts, including
the $6,000 account of John Parker. After
posting all entries to write-off uncollectible
amounts, Allowance for Doubtful Accounts
will have a credit balance of $3,250
($30,000 – $26,750).
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4
Allowance Method Example
8-19
4
Allowance Method Example
If ExTone Company had written off
$32,100 in accounts receivable during
2010, Allowance for Doubtful Accounts
would have a debit balance of $2,100.
8-20
4
Allowance Method Example
Nancy Smith’s account of $5,000
which was written off on April 2 is
later collected on June 10. Two
entries are needed: one to reinstate
Nancy Smith’s account and a
second to record receipt of the cash.
8-21
4
Allowance Method Example
Reinstatement Entry
Receipt of Cash
Entry
8-22
4
Estimating Uncollectibles
The allowance method uses two
ways to estimate the amount
debited to Bad Debt Expense.
1. Percent of sales method.
2. Analysis of receivables
method.
8-23
4
Percent of Sales Method
If credit sales for the period are
$3,000,000 and it is estimated that
¾% will be uncollectible, Bad Debt
Expense is debited for $22,500
($3,000,000 × .0075). This approach
disregards the balance of $3,250 in
the allowance account before the
adjustment.
8-24
4
Percent of Sales Method
After the following adjusting entry on
December 31 is posted, Allowance for
Doubtful Accounts will have a balance of
$25,750 ($3,250 + $22,500).
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4
Percent of Sales Method
8-26
4
Aging of Receivables
The longer an account receivable is
outstanding, the less likely it is that it
will be collected. Basing the estimate of
uncollectible accounts on how long
specific amounts have been outstanding
is called aging the receivables.
8-27
4
Exhibit 1
8-28
Aging of Receivables Schedule
December 31, 2010
4
Percent of Sales Method
The estimate based on receivables
is compared to the balance in the
allowance account to determine the
amount of the adjusting entry.
8-29
4
Percent of Sales Method
ExTone has an unadjusted credit
balance of $3,250 in Allowance
for Doubtful Accounts. In Exhibit
1 the estimated uncollectible
accounts totaled $26,490.
8-30
4
Percent of Sales Method
The amount to be added to the allowance
account is $23,240 ($26,490 – $3,250). The
adjusting entry is as follows:
8-31
4
Percent of Sales Method
8-32
4
The Commercial Collection Agency
Section of the Commercial Law League of
America reported the following collection
rates by number of months past due:
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4
Percent of Sales Method
If the unadjusted balance of the allowance account
had been a debit balance of $2,100, the amount of
the adjustment would have been $28,590.
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4
Exhibit 2
8-35
Differences Between Estimation Methods
5
Compare the direct writeoff method and allowance
method of accounting for
uncollectible accounts.
8-48
8-36
5
Exhibit 3
Comparing Direct Write-Off
and Allowance Methods
(continued)
8-37
5
Exhibit 3
Comparing Direct Write-Off and
Allowance Methods (continued)
Direct Write-Off Method
8-38
Allowance Method
5
8-39
6
Describe the accounting
for notes receivable.
8-52
8-40
6
Characteristics of
Notes Receivable
A note receivable, or promissory note, is a
written document containing a promise to pay:
• The maker is the party making the promise to pay.
• The payee is the party to whom the note is
•
•
payable.
The face amount is the amount the note is written
for on its face.
The issuance date is the date a note is issued.
8-41
(continued)
6
•
•
•
8-42
Characteristics of Notes
Receivable (continued)
The due date or maturity date is the date the note
is to be paid.
The term of the note is the amount of time between
the issuance and due dates.
The interest rate is that rate of interest that must be
paid on the face amount for the term of the note.
6
Exhibit 4
8-43
Promissory Note
6
Accounting for Notes
Receivable
Received a $6,000, 12%, 30-day note dated
November 21, 2010 in settlement of the
account of W. A. Bunn Co.
8-44
6
Accounting for Notes
Receivable
On December 21, when the note matures, the
firm receives $6,060 from W. A. Bunn
Company ($6,000 plus $60 interest).
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6
Accounting for Notes
Receivable
If W. A. Bunn Company fails to pay the note
on the due date, it is considered a dishonored
note receivable. The note and interest are
transferred to the customer’s account.
8-46
6
Accounting for Notes
Receivable
A 90-day, 12% note dated December 1, 2010, is
received from Crawford Company to settle its
account, which has a balance of $4,000.
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6
Accounting for Notes
Receivable
Assuming that the accounting period ends on
December 31, an adjusting entry is required to
record the accrued interest of $40 ($4,000 ×
0.12 × 30/360).
8-48
6
Accounting for Notes
Receivable
On March 1, 2011, $4,120 is received for the
note ($4,000) and interest ($120).
8-49