Chapter 9-1 ACCOUNTING FOR RECEIVABLES Accounting Principles, Eighth Edition CHAPTER 9

Chapter 9-2 Amounts due from individuals and other companies that are expected to be collected in cash. Amounts owed by customers that result from the sale of goods and services. Accounts Receivable Types of Receivables LO 1 Identify the different types of receivables. Claims for which formal instruments of credit are issued as proof of debt. “Nontrade” (interest, loans to officers, advances to employees, and income taxes refundable). Notes Receivable Other Receivables

Chapter 9-3 Three accounting issues: 1.Recognizing accounts receivable. 2.Valuing accounts receivable. 3.Disposing of accounts receivable. Accounts Receivable LO 1 Identify the different types of receivables. The following exercise was illustrated in Chapter 5. For simplicity, inventory and cost of goods sold have been omitted. Recognizing Accounts Receivable

Chapter 9-4 E5-5 E5-5 Presented are transactions related to Wheeler Company. 1.On December 3,Wheeler Company sold $500,000 of merchandise to Hashmi Co., terms 2/10, n/30, FOB shipping point. 2.On December 8, Hashmi Co. was granted an allowance of $27,000 for merchandise purchased on December 3. 3.On December 13,Wheeler Company received the balance due from Hashmi Co. Instructions: Prepare the journal entries to record these transactions on the books of Wheeler Company using a perpetual inventory system. Recognizing Accounts Receivable LO 2 Explain how companies recognize accounts receivable.

Chapter 9-5 E5-5 E5-5 Prepare the journal entries for Wheeler Company. 1.On December 3, Wheeler Company sold $500,000 of merchandise to Hashmi Co., terms 2/10, n/30, FOB shipping point. Dec. 3 LO 2 Explain how companies recognize accounts receivable. Recognizing Accounts Receivable

Chapter 9-6 E5-5 E5-5 Prepare the journal entries for Wheeler Company. 2. On December 8, Hashmi Co. was granted an allowance of $27,000 for merchandise purchased on December 3. Dec. 8 LO 2 Explain how companies recognize accounts receivable. Recognizing Accounts Receivable

Chapter 9-7 E5-5 E5-5 Prepare the journal entries for Wheeler Company. 3. On December 13, Wheeler Company received the balance due from Hashmi Co. Dec. 13 ** [($500,000 – $27,000) X 2%] ** * ($500,000 – $27,000) * *** *** ($473,000 – $9,460) LO 2 Explain how companies recognize accounts receivable. Recognizing Accounts Receivable

Chapter 9-8 Valuing Accounts Receivables A/R reported as a current asset on the balance sheet. Are reported at the amount the company thinks they will be able to collect and excludes amounts that the company estimates it will not be able to collect. Sales on account raise the possibility of accounts not being collected. Valuation can be difficult because an unknown amount of receivables will become uncollectible. LO 3 Distinguish between the methods and bases companies use to value accounts receivable. Accounts Receivable

Chapter 9-9 Aging of Accounts Receivable

Chapter 9-10 Allowance Method Losses are estimated: better matching. receivable stated at net realizable value. required by GAAP. Methods of Accounting for Uncollectible Accounts Direct Write-Off Theoretically undesirable: Bad debt losses are not anticipated.. no matching. receivable not stated at net realizable value. not acceptable for financial reporting. Valuing Accounts Receivable LO 3 Distinguish between the methods and bases companies use to value accounts receivable.

Chapter 9-11 Assets Current Assets: Cash $ 346 Accounts receivable500 Less: Allowance for doubtful accounts ( 25) 475 Merchandise inventory 812 Prepaid expenses40 Total current assets1,673 Total current assets1,673 LO 3 Distinguish between the methods and bases companies use to value accounts receivable. Presentation of Accounts Receivable contra asset

Chapter 9-12 Valuing Accounts Receivable 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 accounts, they debit Allowance for Doubtful Accounts and credit Accounts Receivable. LO 3 Distinguish between the methods and bases companies use to value accounts receivable. BDExpADA A/R

Chapter 9-13

Chapter 9-14 Aging of Accounts Receivable

Chapter 9-15 E9-6 E9-6 On December 31, 2008, Jarnigan Co. estimated 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, 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, Valuing Accounts Receivable LO 3 Distinguish between the methods and bases companies use to value accounts receivable.

Chapter 9-16 E9-6 E9-6 On December 31, 2008, Jarnigan Co. estimated that 2% of its net sales of $400,000 will become uncollectible. December 31 ($400,000 x 2% = 8,000) Valuing Accounts Receivable LO 3 Distinguish between the methods and bases companies use to value accounts receivable.

Chapter 9-17 E9-6 E9-6 On May 11, 2009, Jarnigan Co. determined that Terry Frye’s account was uncollectible and wrote off $1,100. Valuing Accounts Receivable LO 3 Distinguish between the methods and bases companies use to value accounts receivable. May 11 (write-off) This entry gets rid of the estimated loss (ADA) And also gets rid of the A/R (we no longer see it as an asset)

Chapter 9-18 E9-6 E9-6 On June 12, 2009, Frye paid the amount previously written off. June 12 (recovery) Valuing Accounts Receivable LO 3 Distinguish between the methods and bases companies use to value accounts receivable.

Chapter 9-19 Two Bases Used for Allowance Method LO 3 Distinguish between the methods and bases companies use to value accounts receivable. Valuing Accounts Receivable Illustration 9-5

Chapter 9-20 Percentage of Sales approach: Summary 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. Method may also be applied using an aging schedule. LO 3 Distinguish between the methods and bases companies use to value accounts receivable. Valuing Accounts Receivable

Chapter 9-21 Example Data Credit sales $500,000 Estimated % of credit sales uncollectible1.25% Accounts receivable balance $72,500 Estimated % of A/R not collected 8% Unadjusted balance in Allowance for Doubtful Accounts: Case 1$150 (credit balance) Case 2 $150 (debit balance) LO 3 Distinguish between the methods and bases companies use to value accounts receivable. Valuing Accounts Receivable

Chapter 9-22 Credit sales$500,000 Estimated percentage uncollectible 1.25% Estimated bad debt expense$ 6,250 LO 3 Distinguish between the methods and bases companies use to value accounts receivable. Valuing Accounts Receivable Percentage of Sales – disregards the existing balance in Allowance for Doubtful Accounts Journal entry: Bad debt expense 6,250 Allowance for doubtful accounts 6,250

Chapter 9-23 Accounts receivable$ 72,500 Estimated percentage uncollectiblex 8% Required balance in allowance account$ 5,800 =================================================== LO 3 Distinguish between the methods and bases companies use to value accounts receivable. Valuing Accounts Receivable Percentage of Receivables Journal entry: Bad debt expense 6,250 Allowance for doubtful accounts 6,250

Chapter 9-24 When estimating losses using Percentage of Receivables, companies often prepare an aging schedule, which classifies customer balances by the length of time they have been unpaid. LO 3 Distinguish between the methods and bases companies use to value accounts receivable. Valuing Accounts Receivable

Chapter 9-25 Disposing of A/R

Chapter 9-26 Companies sell their receivables for two major reasons. 1. Receivables may be the only reasonable source of cash. 2. Billing and collection are often time-consuming and costly. LO 4 Describe the entries to record the disposition of accounts receivable. Disposing of Accounts Receivable

Chapter 9-27 LO 4 Describe the entries to record the disposition of accounts receivable. Disposing of Accounts Receivable Sale of Receivables A factor buys receivables from businesses and then collects the payments directly from the customers. Typically the factor charges a commission/fee to the company that is selling the receivables. The commission/fee ranges from 1-10% of the amount of receivables purchased.

Chapter 9-28 Source: How Factoring Works BUSINESS BUSINESS’ Customer Business

Chapter 9-29 E9-7 E9-7 (a) On March 3, Cornwell Appliances sells $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 Appliances’ books to record the sale of the receivables. LO 4 Describe the entries to record the disposition of accounts receivable. Disposing of Accounts Receivable ($680,000 x 3% = $20,400)

Chapter 9-30 LO 4 Describe the entries to record the disposition of accounts receivable. Disposing of Accounts Receivable Credit Card Sales Why do some businesses prefer Credit cards over A/R? avoid the paperwork of issuing credit… the bank does it cash is received quickly from the credit card issuer

Chapter 9-31 LO 4 Describe the entries to record the disposition of accounts receivable. Disposing of Accounts Receivable Credit Card Sales How they work: Three parties 1. credit card issuer 2. retailer 3. customer

Chapter 9-32 LO 4 Describe the entries to record the disposition of accounts receivable. Disposing of Accounts Receivable Credit Card Sales Retailer 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 the sale in a similar manner as checks deposited from cash sale.

Chapter 9-33 E9-7 E9-7 (b) On May 10, Dale Company sold merchandise for $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 Company’s books to record the sale of merchandise. LO 4 Describe the entries to record the disposition of accounts receivable. Disposing of Accounts Receivable ($3,500 x 4% = $140)

Chapter 9-34 LO 5 Compute the maturity date of and interest on notes receivable. Notes Receivable Companies may grant credit in exchange for a promissory note. A promissory note is a written promise to pay a specified amount of money on demand or at a definite time. Promissory notes may be used: 1. when individuals and companies lend or borrow money, 2. when amount of transaction and credit period exceed normal limits, or 3. in settlement of accounts receivable.

Chapter 9-35 LO 5 Compute the maturity date of and interest on notes receivable. Notes Receivable To the Payee, the promissory note is a note receivable. To the Maker, the promissory note is a note payable. Illustration 9-10

Chapter 9-36 Determining the Maturity Date LO 5 Compute the maturity date of and interest on notes receivable. Notes Receivable Note is expressed in terms of Months or Days Computing Interest $4,000, 6-month, 9% note Compute the Interest for the following note…?

Chapter 9-37 LO 6 Explain how companies recognize notes receivable. Recognizing Notes Receivable E9-10 E9-10 Orosco Supply Co. has the following transactions related to notes receivable during the last 2 months of 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 on all notes receivable. Instructions (a) Journalize the transactions for Orosco Supply Co.

Chapter 9-38 E9-10 E9-10 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. Nov. 1 Dec. 11 Dec. 16 Recognizing Notes Receivable LO 6 Explain how companies recognize notes receivable.

Chapter 9-39 E9-10 E9-10 Dec. 31 Accrued interest revenue on all notes receivable. Interest revenue250 Interest receivable -Givens 250Dec. 31 Recognizing Notes Receivable LO 6 Explain how companies recognize notes receivable.

Chapter 9-40 Valuing Notes Receivable LO 7 Describe how companies value notes receivable. Notes Receivable Like accounts receivable, companies report short- term notes receivable at their cash (net) realizable value. Estimation of cash realizable value and bad debts expense are done similarly to accounts receivable. Allowance for Doubtful Accounts is used.

Chapter 9-41 Disposing of Notes Receivable LO 8 Describe the entries to record the disposition of notes receivable. Notes Receivable 1. Notes may be held to their maturity date. 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 9-42 Presentation LO 9 Explain the statement presentation and analysis of receivables. Statement Presentation and Analysis Identify 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 allowance for doubtful account. Report bad debts expense and service charge expense as selling expenses. Report interest revenue under “Other revenues and gains.” B/S I/S