Receivables

1
9
Receivables
2
0
After studying this chapter, you should be able
to

1. Describe the common classifications of
   receivables.

1. Describe the nature of and the accounting for
   uncollectible receivables.
2. Describe the direct write-off method of
   accounting for uncollectible receivables.

3
0
After studying this chapter, you should be able
to

1. Describe the allowance method of accounting for
   uncollectible receivables.

1. Compare the direct write-off and allowance
   methods of accounting for uncollectible accounts.

4
0
After studying this chapter, you should be able
to

1. Describe the nature, characteristics, and
   accounting for notes receivables.

1. Describe the reporting of receivables on the
   balance sheet.

5
0
9-1
Objective 1
Describe the common classifications of receivables
6
0
9-1
Classification of Receivables
The term receivables includes all money claims
against other entities, including people,
business firms, and other organizations.
7
0
9-1
Accounts Receivable
Accounts receivable are normally expected to be
collected within a relatively short period, such
as 30 or 60 days.
8
0
9-1
Notes Receivable
Notes receivable are amounts that customers owe
for which a formal, written instrument of credit
has been issued.
9
0
9-1
Other Receivables
Other receivables expected to be collected within
one year are classified as current assets. If
collection is expected beyond one year, these
receivables are classified as noncurrent assets
and reported under the caption Investments.
10
0
9-2
Objective 2
Describe the nature of and the accounting for
uncollectible receivables.
11
0
9-2
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.
12
0
9-2
Uncollectible Receivables
There are two methods of accounting for
receivables that appear to be uncollectible the
direct write off method and the allowance method.
13
0
9-2
The direct write off method records bad debts
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.
14
0
9-3
Objective 3
Describe the direct write-off method of
accounting for uncollectible receivables.
15
0
9-3
Direct Write-Off Method
On May 10, a 4,200 accounts receivable from D.
L. Ross has been determined to be uncollectible.
May 10 Bad Debt Expense 4 200 00
Accounts ReceivableD. L. Ross 4 200 00
15
16
0
9-3
The amount written off is later collected on
November 21.
Nov. 21 Accounts ReceivableD. L. Ross 4
200 00
Bad Debt Expense 4 200 00
21 Cash 4 200 00
Accounts ReceivableD. L. Ross 4 200 00
16
17
0
9-3
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.
17
18
0
9-3
July 9 Cash 1,200 Bad Debt Expense 3,900 Acc
ounts ReceivableJay Burke 5,100
Oct. 11 Accounts ReceivableJay
Burke 3,900 Bad Debt Expense 3,900
11 Cash 3,900 Accounts ReceivableJay
Burke 3,900
18
For Practice PE 9-1A, PE 9-1B
19
0
9-4
Objective 4
Describe the allowance method of accounting for
uncollectible receivables.
20
0
9-4
Allowance Method
On December 31, ExTone Company estimates that a
total of 40,000 of the 1,000,000 balance in her
companys Accounts Receivable will eventually be
uncollectible.
Dec. 31 Bad Debt Expense 40 000 00
Allowance for Doubtful Accounts 40 000 00
Uncollectible accounts estimate.
20
21
0
9-4
Net Realizable Value
The net amount that is expected to be collected,
960,000 (1,000,000 40,000), is called the
net realizable value (NRV). The adjusting entry
reduces receivables to the NRV and matches
uncollectible expenses with revenues.
22
0
9-4
On January 21, John Parkers account totaling
6,000 is written off because it is uncollectible.
Jan. 21 Allowance for Doubtful Accounts 6
000 00
Accounts ReceivableJohn Parker 6 000 00
To write off the uncollectible account.
22
23
0
9-4
23
24
0
9-4
During 2008, ExTone Company writes off 36,750 of
uncollectible accounts, including the 6,000
account of John Parker. After posting all
entries to write-off uncollectible amounts, the
Allowance for Doubtful Accounts will have a
credit balance of 3,250 (40,000 36,750).
25
0
9-4
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Jan. 1, 2008 Bal. 40,000

Total accounts written off 36,750
Jan. 21 6,000 Feb. 2 3,900

Dec. 31 Unadjusted bal 3,250
25
26
0
9-4
If ExTone Company had written off 44,100 in
accounts receivable during 2008, the Allowance
for Doubtful Accounts would have a debit balance
of 4,100.
27
0
9-4
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Jan. 1, 2008 Bal. 40,000

Total accounts written off 44,100
Jan. 21 6,000 Feb. 2 3,900


Dec. 31 Unadjusted bal 4,100
27
28
0
9-4
Collecting a Written-Off Account
Nancy Smiths 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
Smiths account and a second to record receipt of
the cash.
29
0
9-4
Entry 1 Reinstate the account.
June 10 Accounts ReceivableNancy Smith 5
000 00
Allowance for Doubtful Accounts 5 000 00
To reinstate the account written off on Jan. 21.
29
30
0
9-4
Entry 2 Record collection of cash.
June 10 Cash 5 000 00
Accounts ReceivableNancy Smith 5 000 00
Collection of written-off account.
30
31
0
9-4
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.
31
32
0
9-4
July 9 Cash 1,200 Allowance for Doubtful
Accounts 3,900 Accounts ReceivableJay
Burke 5,100
Oct. 11 Accounts ReceivableJay
Burke 3,900 Allowance for Doubtful
Accounts 3,900
11 Cash 3,900 Accounts ReceivableJay
Burke 3,900
32
For Practice PE 9-2A, PE 9-2B
33
0
9-4
Estimating Uncollectibles
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.

34
0
9-4
Estimate Based on a Percentage of Sales
35
0
9-4
After this adjusting entry is posted, Allowance
for Doubtful Accounts will have a balance of
48,250.
Dec. 31 Bad Debt Expense 45 000 00
Allowance for Doubtful Accounts 45 000 00
Uncollectible accounts (3,000,000 x 0.015
45,000).
35
36
0
9-4
BAD DEBT EXPENSE
Dec. 31 Adj entry 45,000 Dec. 31 Adjusted
bal. 45,000
ALLOWANCE FOR DOUBTFUL ACCOUNTS

Jan. 1, 2008 Bal. 40,000
Total accounts written off 36,750
Jan. 21 6,000 Feb. 2 3,900

Dec. 31 Unadjusted bal 3,250 Dec. 31 Adj.
entry 45,000 Dec. 31 Adjusted bal. 48,250
36
37
0
9-4
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.
37
38
0
9-4

1. 17,500 (3,500,000 x .005)

1. 775,000 (800,000 25,000)

38
For Practice PE 9-3A, PE 9-3B
39
0
9-4
Estimating Uncollectibles Based on Analysis of
Receivables
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.
40
0
9-4
Aging of Accounts Receivables
40
41
0
9-4
Estimate of Uncollectible Accounts
41
42
0
9-4
Collection Rates by Number of Months Past Due
42
43
0
9-4
Estimate Based on Analysis of Receivables
If it is estimated that 3,390 of the
receivables will be uncollectible and the
Allowance for Uncollectible Accounts currently
has a balance of 510, the Bad Debt Expense must
be debited for 2,880 (3,390 510).
43
44
0
9-4
Estimate Based on Analysis of Receivables
Aug. 31 Bad Debt Expense 2 880 00
Allowance for Doubtful Accounts 2 880 00
Uncollectible accounts (3,390 510).
44
45
0
9-4
BAD DEBT EXPENSE
Aug. 31 Adj. entry 2,880 Aug. 31 Adj. bal. 2,880
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Aug. 31 Unadj. bal. 510 Aug. 31 Adj.
entry 2,880 Aug. 31 Adj. bal. 3,390
45
46
0
9-4
If the unadjusted balance of Allowance for
Uncollectible Accounts had been a debit balance
of 300, the amount of the adjustment would have
been 3,690 (3,390 300).
47
0
9-4
BAD DEBT EXPENSE
Aug. 31 Adj. entry 3,690 Aug. 31 Adj. bal. 3,690
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Aug. 31 Adj. entry 3,690 Aug. 31 Adj. bal. 3,390
Aug. 31 Unadj. bal. 300
47
48
0
9-4
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.
48
49
0
9-4

1. 22,500 (30,000 7,500)

1. 770,000 (800,000 30,000)

49
For Practice PE 9-4A, PE 9-4B
50
0
9-5
Objective 5
Compare the direct write-off and allowance
methods of accounting for uncollectible accounts
51
0
9-5
Comparing Direct-Write-Off and Allowance Methods
Direct Write-Off Method
Allowance Method
51
52
0
9-5
Comparing the Direct Write-Off and Allowance
Methods
Direct Write-Off Method
When the actual accounts receivable are
determined to be uncollectible
No allowance account is used
Small companies and companies with relatively few
receivables
52
53
0
9-5
Comparing the Direct Write-Off and Allowance
Methods
Allowance Method
Using estimate based on either (1) a percentage
of sales or (2) analysis of receivables.
The allowance account is used
Large companies and those with a large amount of
receivables
54
0
9-6
Objective 6
Describe the nature, characteristics, and
accounting for notes receivable.
55
0
9-6
Characteristics of Notes Receivable
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.

56
0
9-6
Characteristics of Notes Receivable
The one making the promise is called the maker.
The date a note is to be paid is called the due
date or maturity date.
57
0
9-6
Payee
57
58
0
9-6
What is the due date of a 90-day note dated March
16?
Total days in note 90 days Number of days in
March 31 Issue date of note March 16 Remaining
days in March 15 days 75 days Number of
days in April 30 days 45 days Number of
days in May 31 days Residual days in June 14
days
Answer June 14
58
59
0
9-6
Accounting for Notes Receivable
Received a 6,000, 12, 30-day note dated
November 21, 2008 in settlement of the account of
W. A Bunn Co.
Nov. 21 Notes Rec.W. A. Bunn Co. 6 000 00
Accts. Rec.W. A Bunn Co. 6 000 00
Received 30-day, 12 note dated November 21,
2008.
59
60
0
9-6
On December 21, when the note matures, the firm
receives 6060 from W. A. Bunn Company (6,000
plus 60 interest).
Dec. 21 Cash 6 060 00
Notes Rec.W. A. Bunn Co. 6 000 00
Interest Revenue 60 00
Received principal and interest on matured note.
60
6,000 x 12 x 30/360 60
61
0
9-6
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 customers account.
Dec. 21 Accts Rec.W. A. Bunn Co. 6 060 00
Notes Rec.W. A. Bunn Co. 6 000 00
Interest Revenue 60 00
Recorded dishonored note, plus interest.
61
62
0
9-6
A 90-day, 12 note dated December 1, 2008, is
received from Crawford Company to settle its
account, which has a balance of 4,000.
2008
Dec. 1 Notes Rec.Crawford Co. 4 000 00
Accts. Rec.Crawford Co. 4 000 00
Accepted note in settlement of account.
62
63
0
9-6
Assuming that the accounting period ends on
December 31, an adjusting entry is required to
record the accrued interest of 40 (4,000 x 0.12
x 30/360).
2008
Dec. 31 Interest Receivable 40 00
Interest Revenue 40 00
Accrued interest (4,000 x 12 x 30/360).
63
64
0
9-6
On March 1, 2009, 4,120 is received for the note
(4,000) and interest (120).
2009
Mar. 1 Cash 4 120 00
Notes Rec.Crawford Co. 4 000 00
Interest Receivable 40 00
Interest Revenue 80 00
Collected note and accrued interest.

64
65
0
9-6
Same Day Surgery Center received a 120-day, 6
note for 40,000, dated March 14 from a patient
on account.

1. Determine the due date of the note.
2. Determine the maturity value of the note.
3. Journalize the entry to record the receipt of the
   payment of the note at maturity.

65
66
0
9-6

• Cash 40,800
• Notes Receivable 40,000
• Interest Revenue 800

66
For Practice PE 9-5A, PE 9-5B
67
0
9-7
Objective 7
Describe the reporting of receivables on the
balance sheet.
68
Crabtree Co.Balance SheetDecember 31, 2008
0
9-7
Receivables on Balance Sheet

• Assets
• Current assets
• Cash 119,500
• Notes receivable 250,000
• Accounts receivable 445,000
• Less allowance for
• doubtful accounts 15,000 430,000
• Interest receivable 14,500
• Merchandise inventory 714,000

68
69
0
9-7
Accounts Receivable Turnover
The accounts receivable turnover measures how
frequently during the year the accounts
receivable are being converted to cash.
69
70
0
9-7
Federal Express Corporation
70
71
0
9-7
Federal Express Corporation
71
72
0
9-7
Number of Days Sales in Receivables
Use To assess the efficiency in collecting
receivables and in the management of credit.
72
73
0
9-7
Federal Express Corporation
73
74
0
9-7
Federal Express Corporation
74