1 After studying this chapter, you should be able to: 9 – Receivables Objective 2 - Describe the nature of and the accounting for uncollectible receivables Objective 3 - Describe the direct write-off method of accounting for uncollectible receivables. Objective 4 - Describe the allowance method of accounting for uncollectible receivables. Objective 6 - Describe the nature, characteristics, and accounting for notes receivables. Objective 1 - Describe the common classifications of receivables. Objective 7 - Describe the reporting of receivables on the balance sheet.

2 Describe the common classifications of receivables. Objective The term receivables includes all money claims against other entities, including people, business firms, and other organizations. Accounts receivable are normally expected to be collected within a relatively short period, such as 30 or 60 days. Notes receivable are amounts that customers owe for which a formal, written instrument of credit has been issued. 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.

3 Describe the nature of and the accounting for uncollectible receivables. Objective 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. There are two methods of accounting for receivables that appear to be uncollectible: The direct write off method records bad debt 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. Uncollectible Receivables

4 Describe the direct write-off method of accounting for uncollectible receivables. Objective May 10 Bad Debt Expense Accounts Receivable—D. L. Ross On May 10, a $4,200 accounts receivable from D. L. Ross has been determined to be uncollectible. Direct Write-Off Method

5 The amount written off is later collected on November 21. Nov. 21 Accounts Receivable—D. L. Ross Bad Debt Expense Cash Accounts Receivable—D. L. Ross

6 Describe the allowance method of accounting for uncollectible receivables. Objective On December 31, ExTone Company estimates that a total of $40,000 of the $1,000,000 balance in her company’s Accounts Receivable will eventually be uncollectible. Dec. 31 Bad Debt Expense Allowance for Doubtful Accounts Uncollectible accounts estimate. Allowance Method

7 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 9-4 Net Realizable Value

8 Jan. 21Allowance for Doubtful Accounts Accounts Receivable—John Parker To write off the uncollectible account. 9-4 On January 21, John Parker’s account totaling $6,000 is written off because it is uncollectible.

9 ALLOWANCE FOR DOUBTFUL ACCOUNTS Jan. 1, 2008 Bal.40,000 Jan. 216,000 Feb. 23,900 { Total accounts written off $36,750 Dec. 31 Unadjusted bal3,250 “ “ 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).

10 John Parker’s account of $6,000 which was written off on Jan 21is later collected on June 10. Two entries are needed: one to reinstate John Parker’s account and a second to record receipt of the cash. 9-4 Collecting a Written-Off Account

11 June10Cash Collection of written-off account. Accounts Receivable—John Parker Entry 2: Record collection of cash. June10Accounts Receivable—John Parker To reinstate the account written off on Jan. 21. Allowance for Doubtful Accounts Entry 1: Reinstate the account. 9-4

Example Exercise 9-2 Journalize the following transactions using the allowance method of accounting for uncollectible receivables. July9Received $1,200 from Jay Burke and wroteoff the remainder owed of $3,900 as uncollectible. Oct. 11Reinstated the account of Jay Burke and received $3,900 cash in full payment.

13 1.Estimate based on a percentage of sales. A straight percentage calculation of sales 2.Estimate 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. The allowance method uses two ways to estimate the amount debited to Bad Debt Expense. 9-4 Estimating Uncollectibles

Aging of Accounts Receivables

Estimate Based on Analysis of Receivables If, based on analysis of receivables, 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).

16 BAD DEBT EXPENSE Aug. 31 Adj. entry2,880 Aug. 31 Adj. bal.2,880 ALLOWANCE FOR DOUBTFUL ACCOUNTS Aug. 31 Unadj. bal.510 Aug. 31 Adj. entry2,880 Aug. 31 Adj. bal.3, Estimate Based on Analysis of Receivables Aug. 31 Bad Debt Expense Allowance for Doubtful Accounts Uncollectible accounts ($3,390 – $510).

17 BAD DEBT EXPENSE Aug. 31 Adj. entry3,690 Aug. 31 Adj. bal.3,690 ALLOWANCE FOR DOUBTFUL ACCOUNTS Aug. 31 Adj. entry3,690 Aug. 31 Adj. bal.3,390 Aug. 31 Unadj. bal.300 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). 9-4

Example Exercise 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 new balance of Accounts Receivable, Allowance for Doubtful Accounts, and Bad Debt Expense, and (c) the net realizable value of accounts receivable.

19 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. A note receivable, or promissory note, is a written document containing a promise to pay: Characteristics of, and accounting for Notes Receivable 9-6 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. Objective 6

20 $_____________ Fresno, California______________20___ March ________________ _AFTER DATE _______ PROMISE TO PAY TO Ninety days We THE ORDER OF ____________________________________________ Judson Company _________________________________________________DOLLARS Two thousand five hundred 00/ PAYABLE AT ______________________________________________ City National Bank VALUE RECEIVED WITH INTEREST AT ____ 10% 2, NO. _______ DUE___________________ 14 June 14, 2008 TREASURER, WILLIARD COMPANY H. B. Lane 9-6 What is the due date of the above note?

21 Received a $6,000, 12%, 30-day note dated November 21, 2008 in settlement of the account of W. A Bunn Co. Accounting for Notes Receivable 9-6 Nov. 21Notes Rec.—W. A. Bunn Co Accts. Rec.—W. A Bunn Co Received 30-day, 12% note dated November 21, 2008.

22 On December 21, when the note matures, the firm receives $6060 from W. A. Bunn Company ($6,000 plus $60 interest). Dec. 21Cash Notes Rec.—W. A. Bunn Co Interest Revenue*60 00 Received principal and interest on matured note. 9-6 *$6,000 x 12% x 30/360 = $60

23 A 90-day, 12% note dated December 1, 2008, is received from Crawford Company to settle its account, which has a balance of $4, Dec. 1Notes Rec.—Crawford Co Accts. Rec.—Crawford Co Accepted note in settlement of account. 2008

Dec. 31Interest Receivable Interest Revenue40 00 Accrued interest ($4,000 x 12% x 30/360) 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).

Mar. 1Cash Notes Rec.—Crawford Co On March 1, 2009, $4,120 is received for the note ($4,000) and interest ($120). Interest Receivable40 00 Interest Revenue80 00 ($4,000 x 12% x 30/360). Collected note and accrued interest.

26 Describe the reporting of receivables on the balance sheet. Objective Assets Current assets: Cash$119,500 Notes receivable250,000 Accounts receivable$445,000 Less allowance for doubtful accounts 15,000430,000 Interest receivable14,500 Merchandise inventory714,000 Crabtree Co. Balance Sheet December 31, 2008 Receivables (including the allowance account) are highlighted

Accounts Receivable Turnover The accounts receivable turnover measures how frequently during the year the accounts receivable are being converted to cash. Accounts Receivable Turnover Net sales Average accounts receivable =

Federal Express Corporation Accounts Receivable Turnover (2004) $17,383 $2,337 = Accounts Receivable Turnover (2004) = 7.4 * [($2,475 + $2,199)/2] Net sales $19,364$17, Accounts receivable2,7032,475$2,199 Average accounts receivable2,5892,337 * *

Federal Express Corporation Accounts Receivable Turnover (2005) $19,364 $2,589 = Accounts Receivable Turnover (2005) = Net sales $19,364$17, Accounts receivable2,7032,475$2,199 Average accounts receivable2,5892,337 * * [($2,703 + $2,475)/2]

30 Use:To assess the efficiency in collecting receivables and in the management of credit. 9-7 Number of Days’ Sales in Receivables Average Accounts receivable Average daily sales Number of Days’ Sales in Receivables =

Federal Express Corporation Number of Days’ Sales in Receivables (2004) $2, = Number of Days’ Sales in Receivables (2004) = Net sales $19,364$17,383 Accounts receivable2,7032,475$2,199 Average accounts receivable2,5892,337 Average daily sales * [($2,475 + $2,119)/2] * * ** ($17,383/365) ** ---

Federal Express Corporation Number of Days’ Sales in Receivables (2005) $2, = Number of Days’ Sales in Receivables (2005) = 48.8 * [($2,703+ $2,475)/2] * ($19,364/365) ** Net sales $19,364$17,383 Accounts receivable2,7032,475$2,199 Average accounts receivable2,5892,337 Average daily sales * ** ---