C8 - 1 Learning Objectives Power Notes 1.Classification of Receivables 2.Internal Control of Receivables 3.Uncollectible Receivables 4.Uncollectibles – Allowance Method 5.Uncollectibles – Direct Write-Off Method 6.Characteristics of Notes Receivable 7.Accounting for Notes Receivable 8.Balance Sheet Presentation 9.Financial Analysis and Interpretation Chapter 8 C8 Receivables Receivables

C8 - 2 Receivables – Classification and Control Uncollectibles – Direct Write-Off Method Uncollectibles –Allowance Method Accounting for Notes Receivable Balance Sheet Presentation Accounts Receivable Turnover Number of Days’ Sales in Receivables Slide #Power Note Topics Note: To select a topic, type the slide # and press Enter. Power Notes Chapter 8 Receivables Receivables

C8 - 3 Classification of Receivables  Accounts Receivable – used for selling merchandise or services on credit, and normally expected to be collected in a relatively short period. 4 Notes Receivable – used to grant credit on the basis of a formal instrument of credit, called a promissory note. 4 Other Receivables – interest receivable, taxes receivable, and receivables from officers or employees.

C8 - 4 Accounting for Uncollectible Accounts Receivable This method is not consistent with the matching principle. Accounts that prove to be uncollectible are written off in the year they become worthless. Uncollectible Accounts Expense is debited and Accounts Receivable is credited for each such transaction. The Direct Write-Off Method The Direct Write-Off Method

C8 - 5 Journal Entries – Direct Write-Off Method DateDescriptionDebitCredit DateDescriptionDebitCredit Uncollectible Accts. Expense420 Accts. Receivable - D. L. Ross420 Uncollectible Accts. Expense 420 Cash420 Accts. Receivable - D. L. Ross 420 Write off uncollectible account of $420 Reinstate and collect prior account written off. May. 10 Nov. 21

C8 - 6 Accounting for Uncollectible Accounts Receivable This method is consistent with the matching principle. Management makes an estimate each year of the portion of accounts receivable that may not be collectible. Uncollectible Accounts Expense is debited and Allowance for Doubtful Accounts is credited. Actual accounts that prove to be uncollectible are debited to Allowance for Doubtful Accounts and credited to Accounts Receivable. The Allowance Method The Allowance Method

C8 - 7 Journal Entries – Allowance Method DateDescriptionDebitCredit DateDescriptionDebitCredit Uncollectible Accts. Expense4,000 Allowance for Doubtful Acct.4,000 Allowance for Doubtful Accts.610 Accts. Receivable - J. Parker610 Allowance for Doubtful Accts.610 Cash610 Accts. Receivable - J. Parker610 Estimated a total of $4,000 will be uncollectible. Write off uncollectible account of $610. Reinstate and collect prior account written off. Dec. 31 Jan. 21 June 10

C8 - 8 Estimating Uncollectible Accounts Expense 1.Estimate based on a percentage of sales. If credit sales for the period are $300,000 and it is estimated that 1% will be uncollectible, the Uncollectible Accounts Expense is $3, 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 is $510, the Uncollectible Accounts Expense is $2,880 ($3,390 – $510).. The allowance method uses two ways to estimate the amount debited to Uncollectible Accounts Expense.

C8 - 9 Accounts Receivable Aging and Uncollectibles Not Days Past Due Past over CustomerBalanceDue Ashby & Co.$ 150$ 150 B. T. Barr610$ 350$260 Brock Co.470$ 470 Saxon Woods Co Total$86,300$75,000$4,000$3,100$1,900$1,200$800$300 Total accounts receivable shown by age.

C Accounts Receivable Aging and Uncollectibles 2%5%10%20%30%50% 80% Uncollectibles PERCENT Not Days Past Due Past over CustomerBalanceDue Ashby & Co.$ 150$ 150 B. T. Barr610$ 350$260 Brock Co.470$ 470 Saxon Woods Co Total$86,300$75,000$4,000$3,100$1,900$1,200$800$300 Uncollectible percentages based on experience and industry averages.

C Accounts Receivable Aging and Uncollectibles 2%5%10%20%30%50% 80% Uncollectibles PERCENT AMOUNT Not Days Past Due Past over CustomerBalanceDue Ashby & Co.$ 150$ 150 B. T. Barr610$ 350$260 Brock Co.470$ 470 Saxon Woods Co Total$86,300$75,000$4,000$3,100$1,900$1,200$800$300 $3,390 =$1,500$200$310$380$360$400 $240

C Year-End Adjustment for Uncollectibles General Ledger Accounts Receivable 86,300A Allowance for Doubtful Accts. 510 Uncollectible Accts. Expense Accounts receivable$86,300 Less allowance for doubtful accounts3,390 Net accounts receivable82,910 Balance Sheet Balances before adjustmentA A

C Year-End Adjustment for Uncollectibles General Ledger Accounts Receivable 86,300A Allowance for Doubtful Accts. 510 Uncollectible Accts. Expense 2,880 Accounts receivable$86,300 Less allowance for doubtful accounts3,390 Net accounts receivable82,910 Balance Sheet Balances before adjustment 2,880A B B Year-end adjustment $3,390 - $510 = $2,880A B

C Year-End Adjustment for Uncollectibles General Ledger Accounts Receivable 86,300A Allowance for Doubtful Accts. 510 Uncollectible Accts. Expense 2,880 Accounts receivable$86,300 Less allowance for doubtful accounts3,390 Net accounts receivable82,910 Balance Sheet Balances before adjustment 2,880A B B 3,390 C Year-end adjustment $3,390 - $510 = $2,880 Balance after adjustmentA B C C

C a specific amount of money (principal) 4 to a specific person or company (payee) 4 at a specific place 4 on a specific date or upon demand 4 plus interest at a specific percentage of the principal (face) amount per year Characteristics of Notes Receivable A promissory note is a written document containing a promise to pay:

C Calculating Interest and Maturity Value Interest Calculation We received a $2,500, 10%, 90-day note dated March 16, Principal x Rate x Time = Interest $2,500 x 10% x 90 /360 = $62.50 Principal + Interest = Maturity Value $2,500 + $62.50 = $2, Maturity Value Calculation

C Accounting for Notes Receivable DateDescriptionDebitCredit DateDescriptionDebitCredit Collected amount due on note dated November 21. Nov. 21 Dec. 21 Notes Receivable6,000 Accts. Receivable - Bunn Co.6,000 Cash6,060 Notes Receivable6,000 Interest Revenue60 Principal + Interest = Maturity Value $6,000 + ($6,000 x 12% x 30 / 360) = $6,060 Received a $6,000,30-day, 12% note.

C In commercial transactions it is traditional to use a 360-day year. 4 The historic rationale for this procedure was ease of calculation which made sense before the computer and calculator age. 4 Why does this practice continue when most small calculators and desktop computers can present complex interest calculations in a few seconds? Understanding the 360-Day Year

C Another Look at the 360-Day Year 1.Assume a $100,000 note dated June 1 for 90 days at an interest rate of 12 percent. The textbook calculation is as follows: $100,000 x (12 / 100) x (90 /360) = $3, A more precise calculation is as follows: $100,000 x (12 / 100) x (90 /365) = $2, When large sums are involved, the 360-day method (known as ordinary interest or banker’s rule) yields significantly more interest to the lender. It is used by banks and commercial organizations. 4.The second method (known as exact interest) is used by the federal government and the Federal Reserve System.

C Assets Current assets: Cash$119,500 Notes receivable250,000 Accounts receivable$445,000 Less allowance for doubtful accounts15,000430,000 Interest receivable14,500 Crabtree Co. Balance Sheet December 31, 2003

C Solvency Measures — The Short-Term Creditor Accounts Receivable Turnover Net sales on account$1,498,000$1,200,000 Accounts receivable (net): Beginning of year$ 120,000$ 140,000 End of year 115,500120,000 Total$ 235,000$ 260,000 Average$ 117,500$ 130,000

C Solvency Measures — The Short-Term Creditor Accounts Receivable Turnover Use:To assess the efficiency in collecting receivables and in the management of credit Net sales on account$1,498,000$1,200,000 Accounts receivable (net): Beginning of year$ 120,000$ 140,000 End of year 115,500120,000 Total$ 235,000$ 260,000 Average$ 117,500$ 130,000 Accts. receivable turnover12.7 times9.2 times

C Solvency Measures — The Short-Term Creditor Number of Days’ Sales in Receivables Use:To assess the efficiency in collecting receivables and in the management of credit Net sales on account$1,498,000$1,200,000 Accounts receivable (net): Beginning of year$ 120,000$ 140,000 End of year 115,500120,000 Total$ 235,000$ 260,000 Average$ 117,500$ 130,000

C Solvency Measures — The Short-Term Creditor Number of Days’ Sales in Receivables Use:To assess the efficiency in collecting receivables and in the management of credit Net sales on account$1,498,000$1,200,000 Accounts receivable (net): Beginning of year$ 120,000$ 140,000 End of year 115,500120,000 Total$ 235,000$ 260,000 Average$ 117,500$ 130,000 Average collection period28 days36 days

C Note: To see the topic slide, type 2 and press Enter. This is the last slide in Chapter 8. Power Notes Receivables Receivables Chapter 8