Chapter 09 Full Page

Presented byPresented byDaniel D. Ross, CPAUC Davis Extension

Chapter 9-1

Chapter Chapter 99Chapter Chapter 99

Accounting For Accounting For ReceivablesReceivables

Financial Accounting Sixth Edition

Chapter 9-2

Financial Accounting, Sixth Edition

Study ObjectivesStudy Objectives1. Identify the different types of receivables.2. Explain how companies recognize accounts receivable.p p g3. Distinguish between the methods and bases companies use to

value accounts receivable.4 D ib th t i t d th di iti f t 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

Chapter 9-3

p p yreceivables.

Accounting for ReceivablesAccounting for Receivables

Types of Types of ReceivablesReceivables

Accounts Accounts ReceivableReceivable

Notes Notes ReceivableReceivable

Statement Statement Presentation Presentation and Analysisand Analysis

Accounts Accounts receivablereceivableN tN t

PresentationPresentationAnalysisAnalysis

Determining Determining maturity datematurity dateComputingComputing

Recognizing Recognizing accounts accounts receivablereceivableNotes Notes

receivablereceivableOther Other receivablesreceivables

Computing Computing interestinterestRecognizing Recognizing notes notes

receivablereceivableValuing Valuing accounts accounts receivablereceivablereceivablesreceivables

receivablereceivableValuing notes Valuing notes receivablereceivable

receivablereceivableDisposing of Disposing of accounts accounts receivablereceivable

Chapter 9-4

Disposing of Disposing of notes notes receivablereceivable

Types of ReceivablesTypes of Receivables

Amounts due from individuals and other companies that are expected to be collected in cashare expected to be collected in cash.

Amounts owed by Claims for which “Nontrade” Amounts owed by customers that result from the

Claims for which formal

instruments of

Nontrade (interest, loans to officers, advances t l d sale of goods and

services.credit are issuedas proof of debt.

to employees, and income taxes refundable).

Accounts Accounts ReceivableReceivableAccounts Accounts ReceivableReceivable



Other Other ReceivablesReceivables

Other Other ReceivablesReceivables

Chapter 9-5 SO 1 Identify the different types of receivables.SO 1 Identify the different types of receivables.

Accounts ReceivableAccounts Receivable

Three accounting issues:1. Recognizing accounts receivable.2 Valuing accounts receivable2. Valuing accounts receivable.3. Disposing of accounts receivable.

The following exercise was illustrated in Chapter 5 Recognizing Accounts Receivable

The following exercise was illustrated in Chapter 5. For simplicity, inventory and cost of goods sold have been omitted.

Chapter 9-6 SO 1 Identify the different types of receivables.SO 1 Identify the different types of receivables.

Recognizing Accounts ReceivableRecognizing Accounts ReceivableIllustration:Illustration: Presented are transactions related to Wheeler Company.p y

1. On December 3,Wheeler Company sold $500,000 of merchandise to Hashmi Co., terms 2/10, n/30, FOB hi i i shipping point.

2. On December 8, Hashmi Co. was granted an allowance of $27 000 for merchandise purchased on December 3$27,000 for merchandise purchased on December 3.

3. On December 13,Wheeler Company received the balance due from Hashmi Co due from Hashmi Co.

Instructions: Prepare the journal entries to record these transactions on the books of Wheeler Company using a

Chapter 9-7

p y gperpetual inventory system.

SO 2 Explain how companies recognize accounts receivable.SO 2 Explain how companies recognize accounts receivable.

Recognizing Accounts ReceivableRecognizing Accounts Receivable

Illustration:Illustration: Prepare the journal entries for Wheeler Co.

1. On December 3, Wheeler Company sold $500,000 of merchandise to Hashmi Co., terms 2/10, n/30, FOB shipping point shipping point.

Accounts receivable 500 000Dec 3 Accounts receivable 500,000Dec. 3Sales 500,000

Chapter 9-8 SO 2 Explain how companies recognize accounts receivable.SO 2 Explain how companies recognize accounts receivable.



2. On December 8, Hashmi Co. was granted an allowance of $27,000 for merchandise purchased on December 3on December 3.

Sales returns and allowances 27 000Dec 8 Sales returns and allowances 27,000Dec. 8Accounts receivable 27,000

Chapter 9-9 SO 2 Explain how companies recognize accounts receivable.SO 2 Explain how companies recognize accounts receivable.



3. On December 13, Wheeler Company received the balance due from Hashmi Co.

Cash 463,540Dec. 13Sales discounts 9 460 **

***

Accounts receivable 473,000Sales discounts 9,460 **

*

** [($500,000 – $27,000) X 2%]

* ($500,000 – $27,000)

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*** ($473,000 – $9,460)

SO 2 Explain how companies recognize accounts receivable.SO 2 Explain how companies recognize accounts receivable.

Accounts ReceivableAccounts Receivable

Valuing Accounts ReceivablesClassification

Valuation (net realizable value)Valuation (net realizable value)

Uncollectible Accounts Receivable

Sales on account raise the possibility of accounts not being collected

Chapter 9-11

SO 3 Distinguish between the methods and bases SO 3 Distinguish between the methods and bases companies use to value accounts receivable.companies use to value accounts receivable.

Valuing Accounts ReceivableValuing Accounts Receivable

Methods of Accounting for Uncollectible Accounts

Allowance MethodAllowance MethodDirect WriteDirect Write--OffOff Allowance MethodAllowance MethodLosses are estimated:

better matching.

D WD W ffffTheoretically undesirable:

no matching. greceivable stated at net realizable value.

i d b GAAP

receivable not stated at net realizable value.not acceptable for required by GAAP.not acceptable for financial reporting.

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Presentation of Accounts ReceivablePresentation of Accounts Receivable

AssetsAssetsCurrent Assets:Current Assets:

CashCash $ 346$ 346Accounts receivableAccounts receivable 500500Accounts receivableAccounts receivable 500500Less: Allowance for doubtful accountsLess: Allowance for doubtful accounts 2525 475475Inventory Inventory 812812yyPrepaidsPrepaids 4040

Total current assetsTotal current assets 1,6731,673

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Presentation of Accounts ReceivablePresentation of Accounts Receivable

AssetsAssetsCurrent Assets:Current Assets:

CashCash $ 346$ 346Accounts receivable net of $25 allowanceAccounts receivable net of $25 allowanceAccounts receivable, net of $25 allowanceAccounts receivable, net of $25 allowance

for doubtful accountsfor doubtful accounts 475475Inventory Inventory 812812yyPrepaidsPrepaids 4040

Total current assetsTotal current assets 1,6731,673

Chapter 9-14



Allowance Method for Uncollectible Accounts

1. Companies estimate uncollectible accounts receivable.

2. To record estimated uncollectibles, companies debit Bad Debts Expense and credit Allowance for Doubtful Accounts (a contra-asset account).

3. When companies write off specific uncollectible p paccounts, they debit Allowance for Doubtful Accounts and credit Accounts Receivable.

Chapter 9-15



E9E9--66 On December 31, 2008, Jarnigan Co. estimated that 2% of its net sales of $400 000 will become that 2% of its net sales of $400,000 will become uncollectible. The company recorded this amount as an addition to Allowance for Doubtful Accounts. On May 11, f f y ,2009, Jarnigan Co. determined that Terry Frye’s account was uncollectible and wrote off $1,100. On June 12, 2009, Frye paid the amount previously written off.

Instructions

Prepare the journal entries on December 31, 2008, May 11, 2009, and June 12, 2009.

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E9E9--66 Prepare the journal entries on December 31, 2008, May 11 2009 and June 12 2009May 11, 2009, and June 12, 2009.

December 31 ($400,000 x 2% = 8,000)

Bad debt expense 8,000Allowance for doubtful accounts 8,000

Chapter 9-17



E9E9--66 Prepare the journal entries on December 31, 2008, May 11 2009 and June 12 2009May 11, 2009, and June 12, 2009.

All f d b f l 1 100May 11 (write-off)

Allowance for doubtful accounts 1,100Accounts receivable 1,100

Accounts receivable 1,100June 12 (recovery)

Allowance for doubtful accounts 1 100 Allowance for doubtful accounts 1,100

Cash 1,100Accounts receivable 1 100

Chapter 9-18


Accounts receivable 1,100


Bases Used for Allowance MethodIllustration 9-5

Chapter 9-19



Example DataExample DataCredit salesCredit sales $500,000$500,000

Estimated % of credit sales uncollectibleEstimated % of credit sales uncollectible 1.25% 1.25%

Accounts receivable balance Accounts receivable balance $72,500$72,500

Estimated % of A/R uncollectible Estimated % of A/R uncollectible 8%8%Estimated % of A/R uncollectible Estimated % of A/R uncollectible 8%8%

Allowance for Doubtful Accounts:Allowance for Doubtful Accounts:Case 1Case 1 $150 (credit balance)$150 (credit balance)Case 1Case 1 $150 (credit balance)$150 (credit balance)Case 2Case 2 $150 (debit balance)$150 (debit balance)

Chapter 9-20



Percentage of Sales

Credit salesCredit sales $500,000$500,000

Esti t d t ll tiblEsti t d t ll tibl 1 25% 1 25%Estimated percentage uncollectibleEstimated percentage uncollectible x 1.25%x 1.25%

Estimated uncollectibleEstimated uncollectible $ 6,250$ 6,250

======================================================================================================

What should the ending balance be for the allowance What should the ending balance be for the allowance account? account? ---- Case 1 and Case 2Case 1 and Case 2

Chapter 9-21



C 1 C 2Percentage of Sales

Actual balance (credit) (150) 150Case 1 Case 2

Estimated uncollectible (6,250) (6,250)Ending balance (6,400) (6,100)

Journal entry:

Allowance for doubtful accounts 6,250Bad debt expense 6,250

Chapter 9-22



Percentage of Receivables

Accounts receivableAccounts receivable $ 72,500$ 72,500Estimated percentage uncollectibleEstimated percentage uncollectible x 8%x 8%Estimated percentage uncollectibleEstimated percentage uncollectible x 8%x 8%Desired balance for allowanceDesired balance for allowance $ 5,800$ 5,800======================================================================================================What should the ending balance be for the allowance What should the ending balance be for the allowance

account? account? ---- Case 1Case 1 and and Case 2Case 2account? account? Case 1Case 1 and and Case 2Case 2

Chapter 9-23





Desired balance (5,800) (5,800)Adjustment (5,650) (5,950)j ( , ) ( , )

Journal entry – Case 1:


Chapter 9-24





Desired balance (5,800) (5,800)Adjustment (5,650) (5,950)j ( , ) ( , )

Journal entry – Case 2:


Chapter 9-25



When estimating losses using Percentage of Receivables companies often prepare an aging Receivables, companies often prepare an aging schedule which classifies customer balances by the length of time they have been unpaid.

Illustration 9-7

Chapter 9-26



SummaryPercentage of Sales approach:

Focus on “Bad debt expense” estimate, any balance in the allowance account is ignored.

Method achieves a matching of cost and revenues.

Percentage of Receivables approach:Accurate valuation of receivables on the balance sheet Accurate valuation of receivables on the balance sheet.

Method may also be applied using an aging schedule.

Chapter 9-27


Disposing of Accounts ReceivableDisposing of Accounts Receivable

Companies sell receivables for two major Companies sell receivables for two major reasons.

1 Receivables may be the only reasonable source 1. Receivables may be the only reasonable source of cash.

2 Billi d ll ti ft ti i 2. Billing and collection are often time-consuming and costly.

Chapter 9-28 SO 4 Describe the entries to record the disposition of accounts receivable.SO 4 Describe the entries to record the disposition of accounts receivable.


Sale of Receivables f b bl f b d h A factor buys receivables from businesses and then

collects the payments directly from the customers.



E9E9--77 (a) On March 3, Cornwell Appliances sells $680 000 of its receivables to Marsh Factors Inc Marsh $680,000 of its receivables to Marsh Factors Inc. Marsh Factors assesses a finance charge of 3% of the amount of receivables sold. Prepare the entry on Cornwell p yAppliances’ books to record the sale of the receivables.

($680,000 x 3% = $20,400)

Cash 659,600S i h x s 20 400

($ , $ , )

Accounts receivable 680,000Service charge expense 20,400



Credit Card SalesRetailer 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 in similar manner as checks deposited from cash sale.



E9E9--77 (b) On May 10, Dale Company sold merchandise for $3 500 and accepted the customer’s America Bank $3,500 and accepted the customer s America Bank MasterCard. America Bank charges a 4% service charge for credit card sales. Prepare the entry on Dale f p yCompany’s books to record the sale of merchandise.

($3,500 x 4% = $140)

Cash 3,360S i h x s 140

($ , $ )

Sales 3,500Service charge expense 140


Notes ReceivableNotes Receivable

Companies may grant credit in exchange for a i t A i t i itt promissory note. A promissory note is a written

promise to pay a specified amount of money on demand or at a definite time. demand or at a definite time. Promissory notes may be used:

1 when individuals and companies lend or 1. when individuals and companies lend or borrow money,

2. when amount of transaction and credit . m fperiod exceed normal limits, or

3. in settlement of accounts receivable.

Chapter 9-33 SO 5 Compute the maturity date of and interest on notes receivable.SO 5 Compute the maturity date of and interest on notes receivable.


To the Payee, the promissory note is a note receivable.T th M k th i t i t blTo the Maker, the promissory note is a note payable.

Illustration 9-10



Determining the Maturity DateNote expressed in terms of

MonthsDays

Computing InterestIllustration 9-13


Recognizing Notes ReceivableRecognizing Notes Receivable

E9E9--1010 Orosco Supply Co. has the following transactions related to notes receivable during the last 2 months of 2008related to notes receivable during the last 2 months of 2008.Nov. 1 Loaned $15,000 cash to Sally Givens on a 1-year, 10% note.Dec. 11 Sold goods to John Countryman, Inc., receiving a $6,750, 90-day, 8% note.Dec. 16 Received a $4,000, 6-month, 9% note in exchange for Bob Reber’s outstanding accounts receivable.Dec 31 Accrued interest revenue n all n tes receivableDec. 31 Accrued interest revenue on all notes receivable.Instructions(a) Journalize the transactions for Orosco Supply Co

Chapter 9-36 SO 6 Explain how companies recognize notes receivable.SO 6 Explain how companies recognize notes receivable.

(a) Journalize the transactions for Orosco Supply Co.


E9E9--10 10 Nov. 1 Loaned $15,000 cash to Sally Givens on a 1-year 10% note Dec 11 Sold goods to John Countryman 1 year, 10% note. Dec. 11 Sold goods to John Countryman, Inc., receiving a $6,750, 90-day, 8% note. Dec. 16 Received a $4,000, 6-month, 9% note in exchange for Bob Reber’s outstanding accounts receivable.

Notes receivable 15,000Nov. 1Cash 15,000

Notes receivable 6,750Dec. 11Sales 6,750

Notes receivable 4,000Dec. 16

Chapter 9-37

Accounts receivable 4,000SO 6 Explain how companies recognize notes receivable.SO 6 Explain how companies recognize notes receivable.


E9E9--10 10 Dec. 31 Accrued interest revenue on all notes receivablereceivable.

Amount Rate TimeGivens note: 15 000$ x 10% x 2 / 12 = 250$Givens note: 15,000$ x 10% x 2 / 12 250$ Countryman note: 6,750 x 8% x 20 / 360 = 30 Reber note: 4,000 x 9% x 15 / 360 = 15

Total accrued interest 295$

Interest receivable 295Dec. 31

Total accrued interest 295$

Interest revenue 295

Chapter 9-38 SO 6 Explain how companies recognize notes receivable.SO 6 Explain how companies recognize notes receivable.


Valuing Notes ReceivableLike accounts receivable, companies report short-term notes receivable at their cash (net) realizable value.

Estimation of cash realizable value and bad debts Estimation of cash realizable value and bad debts expense are done similarly to accounts receivable.

Allowance for Doubtful Accounts is usedAllowance for Doubtful Accounts is used.

Chapter 9-39 SO 7 Describe how companies value notes receivable.SO 7 Describe how companies value notes receivable.


Disposing of Notes Receivable

1. Notes may be held to their maturity date.

2 M k d f lt d t k 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.

Chapter 9-40 SO 8 Describe the entries to record the disposition of notes receivable.SO 8 Describe the entries to record the disposition of notes receivable.


Disposing of Notes Receivable

Honor of Notes ReceivableA note is honored when its maker pays it in full A note is honored when its maker pays it in full at its maturity date.

Dishonor of Notes ReceivableA dishonored note is not paid in full at maturity. p yDishonored note receivable is no longer negotiable.



E9E9--1313 On May 2, Kleinsorge Company lends $7,600 to Everhart Inc issuing a 6-month 9% note At the maturity Everhart, Inc., issuing a 6 month, 9% note. At the maturity date, November 2, Everhart indicates that it cannot pay.Instructions(a) Prepare the entry to record the issuance of the note.(b) Prepare the entry to record the dishonor of the note, (b) Prepare the entry to record the dishonor of the note, assuming that Kleinsorge Company expects collection will occur.(c) Prepare the entry to record the dishonor of the note, assuming that Kleinsorge Company does not expect collection in the future

Chapter 9-42

collection in the future.

SO 8 Describe the entries to record the disposition of notes receivable.SO 8 Describe the entries to record the disposition of notes receivable.


E9E9--1313 (a) Prepare the entry to record the issuance of the note (b) Prepare the entry to record the dishonor of the note. (b) Prepare the entry to record the dishonor of the note, assuming that Kleinsorge Company expects collection will occur.

Cash 7 600Notes receivable 7,600(a)

Cash 7,600

A ts i bl 7 942(b) Interest = $7,600 x 9% x 6/12 = $342

Notes receivable 7,600Accounts receivable 7,942

I t t 342Chapter

9-43 SO 8 Describe the entries to record the disposition of notes receivable.SO 8 Describe the entries to record the disposition of notes receivable.

Interest revenue 342


E9E9--1313 (c) Prepare the entry to record the dishonor of the note assuming that Kleinsorge Company does not the note, assuming that Kleinsorge Company does not expect collection in the future.

All f d b f l 7 600( )Notes receivable 7,600

Allowance for doubtful accounts 7,600(c)

When there is no hope of collection the note holder would When there is no hope of collection, the note holder would write off the face value of the note. No interest revenue would be recorded because collection will not occur.


Statement Presentation and AnalysisStatement Presentation and Analysis

PresentationIdentify in the balance sheet or in the notes, each major type of receivable.

Report short-term receivables as current assets.

Report both gross amount of receivables and ll f d b f l

B/S

allowance for doubtful account.

Report bad debts expense and service charge lli expense as selling expenses.

Report interest revenue under “Other revenues d i s ”

I/S

Chapter 9-45 SO 9 Explain the statement presentation and analysis of receivables.SO 9 Explain the statement presentation and analysis of receivables.

and gains.”


Analysis of Receivables

20.3 times

This Ratio used to:Assess the liquidity of the receivables.q yMeasure the number of times, on average, a company collects receivables during the period.

Chapter 9-46 SO 9 Explain the statement presentation and analysis of receivables.SO 9 Explain the statement presentation and analysis of receivables.


Analysis of Receivables

20.3 times, or every 18 days (365 / 20.3)

Variant of the accounts receivable turnover ratio is average collection period in terms of days.

Used to assess effectiveness of credit and collection policies. C ll ti i d h ld t d dit t i d

Chapter 9-47

Collection period should not exceed credit term period.

SO 9 Explain the statement presentation and analysis of receivables.SO 9 Explain the statement presentation and analysis of receivables.

All About YouAll About You

Protecting Yourself from Identity TheftProtecting Yourself from Identity TheftIndividuals need to evaluate their personalcredit positions using the same thought processesused by business people.

Credit card companies aggressively market their cards with images of glamour and happiness. But there isn’t much glamour in paying an 18% to 21% interest rate and there is very little happiness to be interest rate, and there is very little happiness to be found in filing for personal bankruptcy.

Chapter 9-48


Protecting Yourself from Identity TheftProtecting Yourself from Identity TheftSome Facts:

About 70% of undergraduates at 4-year colleges carry at least one credit card in their own name. The average monthly debt on a college student’s charge

t di t st d is l s t $2 000account, according to one study, is close to $2,000.Americans charged $1 trillion in purchases with credit cards That was more than they spent in cashcards. That was more than they spent in cash.Significant increases in consumer bankruptcy filings occurred in every region of the country. There were

Chapter 9-49

2,043,535 new filings in 2005, up 31.6% from in 2004.


Chart shows the major causes of personal financial problemsproblems.

Chapter 9-50

Source: Debt Solutions of America, www.becomedebtfree.com (accessed May 2006).


What Do You Think?What Do You Think?Should you cut up your credit card(s)?

YES: Americans are carrying huge personal debt y g g pburdens. Credit cards encourage unnecessary, spontaneous expenditures. The interest rates on credit cards are extremely high, which causes debt problems r r r m y g , w u pr mto escalate exponentially.

NO: Credit cards are a necessity for transactions in NO: Credit cards are a necessity for transactions in today’s economy. In fact, many transactions are difficult or impossible to carry out without a credit card People should learn to use credit cards

Chapter 9-51

card. People should learn to use credit cards responsibly.

CopyrightCopyright

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Chapter 9-52

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