RECEIVABLES

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CHAPTER 8

• RECEIVABLES

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Learning Objective 1

• Describe the common classes of receivables.

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Classification of Receivables

• Accounts Receivable
• Credit granted to customers
• Notes Receivable
• Credit granted through a promissory note
• Other Receivables
• Resulting from loans to officers or employees
• Turn to page D-5 of the NIKE, INC. Annual Report

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A/R vs N/R

• 3 things distinguish a Note Receivable from an
  Account Receivable
• 1. Notes are typically for a longer period of
  time
• 2. Notes typically require a formal written
  agreement stating due date and interest rate
• 3. Notes typically involve interest paid

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Learning Objective 2

• Describe the accounting for uncollectible
  receivables.

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Uncollectible Receivables

• No matter what, some customers will not pay what
  they owe you.
• When this happens, your business will incur an
  expense.
• Uncollectible accounts expense
• Bad debts expense
• Doubtful accounts expense

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Indications of None Payment

• When does an account become uncollectible?
• Past due
• No response from customer
• Customer files bankruptcy
• Customer closes business
• Company cannot locate customer
• One option is to turn the account over to a
  collection agency. This can be very costly.

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Learning Objective 3

• Describe the allowance method of accounting for
  uncollectible receivables.

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Allowance Method

• This is the preferred method of write-off of bad
  debt.
• Record bad debt expense by estimating
  uncollectible accounts.
• Estimate the accounts that will not be collected
  and to record expense before customers actually
  fail to pay.
• Recognize expense in the same period that revenue
  was recorded.

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Example

• ecember 31estimates that a total of 30,000 of
  the 200,000 balance of their accounts receivable
  will eventually be uncollectible.

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.
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The Allowance Method

• The net amount that is expected to be collected,
  170,000 (200,000 - 30,000) is called the net
  realizable value of the receivables. The
  adjusting entry reduces receivables to the NRV
  and matches uncollectible expenses with revenues.

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Suppose you identify a customer?

• On January 21, John Parkers account of 6,000 is
  written off because it is uncollectible.

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What happens if a customer pays his debt?
Reinstatement entry
Receipt of cash entry
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Lets Practice!
Demonstration Problem Kids-At-Play toy store.
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Estimating Uncollectibles

• Using the allowance method requires an estimate
  of uncollectible accounts at the end of the
  period.
• Estimate is based
• Past experience
• Industry averages
• Forecasts of the future
• Two Methods used
• Percentage of sales method
• Analysis of receivables method

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Percentage of Sales Method

• Read Business Connection on page 365.
• Basis for the method is the amount of this years
  net sales that will not be collected.

If ExTone Companys credit sales for the period
are 3,000,000 and it is estimated that 3/4 will
be uncollectible, Bad Debt Expense is debited for
22,500 (3,000,000 x .0075).
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Now look at the T Accounts
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Example
Allowance for DA 7,500
Sales 3,500,000
A/R 800,000
Bad Debt Exp 17,500
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Analysis of Receivables Method or AGING

• Assumption
• The longer an A/R 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.

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Aging is applied as follows

• the due date of each A/R is determined
• the number of days each account is past due is
  determined. ( of days between due date of
  account date of analysis.)
• each account is placed in an aged class according
  to its days past due. (see next slide for
  classes.)
• the totals for each aged class are determined.
• the total of each aged class is multiplied by an
  estimated percentage of uncollectible accounts
  for that class.
• the estimated total of uncollectible accounts is
  determined as the sum of the uncollectible
  accounts for each aged class.

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Aging Classes

• Not Past Due
• 1-30 days late
• 31-60 days late
• 61-90 days late
• 91-180 days late
• 181-365 days late
• Over 365 days late

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Summary of the AGING Method
Refer to exhibit 1 on page 367 of text book
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Example of days past due

• Dated August 29, due in 30 days
• Due date September 28
• Aug 29-31 2 days
• days in Sept 30 2 28
• due date September 28
• Calculate of days late as of December 31
• 2 days past due in Sept
• 31 days past due in Oct
• 30 days past due in Nov
• 31 days past due in Dec
• The account is 94 days past due

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A/R 800,000
Bad Debt Exp 22,500
Allowance for DA 7,500
22,500
Sales 3,500,000
Ex 8-7, 8-8 page 286 problem 8-2A page 393
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