Chapter 9-1

Chapter 9-2 Chapter 9 Accounting for Receivables Accounting Principles, Ninth Edition

Chapter Identify the different types of receivables Explain how companies recognize accounts receivable Distinguish between the methods and bases companies use to value accounts receivable Describe the entries to record the disposition of accounts receivable Compute the maturity date of and interest on notes receivable Explain how companies recognize notes receivable Describe how companies value notes receivable Describe the entries to record the disposition of notes receivable Explain the statement presentation and analysis of receivables. Study Objectives

Chapter 9-4 Types of Receivables Accounts receivable Notes receivable Other receivables Accounts Receivable Notes Receivable Statement Presentation and Analysis PresentationAnalysis Determining maturity date Computing interest Recognizing notes receivable Valuing notes receivable Disposing of notes receivable Recognizing accounts receivable Valuing accounts receivable Disposing of accounts receivable Accounting for Receivables

Chapter 9-5 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 SO 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 9-6 Three accounting issues: 1.Recognizing accounts receivable. 2.Valuing accounts receivable. 3.Disposing of accounts receivable. Accounts Receivable SO 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 9-7 Illustration: Assume that Jordache Co. on July 1, 2010, sells merchandise on account to Polo Company for $1,000 terms 2/10, n/30. Prepare the journal entry to record this transaction on the books of Jordache Co. Accounts receivable1,000Jul. 1 Sales1,000 SO 2 Explain how companies recognize accounts receivable. Recognizing Accounts Receivable

Chapter 9-8 Illustration: On July 5, Polo returns merchandise worth $100 to Jordache Co. Sales returns and allowances100Jul. 5 Accounts receivable100 SO 2 Explain how companies recognize accounts receivable. Recognizing Accounts Receivable Illustration: On July 11, Jordache receives payment from Polo Company for the balance due. Cash882Jul. 11 Sales discounts ($900 x.02) 18 Accounts receivable900

Chapter 9-9 Valuing Accounts Receivables Are reported as a current asset on the balance sheet. Are reported at the amount the company thinks they will 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. SO 3 Distinguish between the methods and bases companies use to value accounts receivable. 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: no matching. receivable not stated at net realizable value. not acceptable for financial reporting. Valuing Accounts Receivable SO 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 Merchandise inventory 812 Prepaid expenses40 Total current assets1,673 Total current assets1,673 SO 3 Distinguish between the methods and bases companies use to value accounts receivable. Presentation of Accounts Receivable

Chapter 9-12 Assets Current Assets: Cash $ 346 Accounts receivable, net of $25 allowance for doubtful accounts 475 for doubtful accounts 475 Merchandise inventory 812 Prepaid expenses40 Total current assets1,673 Total current assets1,673 SO 3 Distinguish between the methods and bases companies use to value accounts receivable. Presentation of Accounts Receivable

Chapter 9-13 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. SO 3 Distinguish between the methods and bases companies use to value accounts receivable.

Chapter 9-14 Valuing Accounts Receivable SO 3 Distinguish between the methods and bases companies use to value accounts receivable. Recording Estimated Uncollectibles: Assume that Hampson Furniture has credit sales of $1,200,000 in Of this amount, $200,000 remains uncollected at December 31. The credit manager estimates that $12,000 of these sales will be uncollectible. The adjusting entry to record the estimated uncollectibles is: Bad debt expense12,000Dec. 31 Allowance for doubtful accounts12,000

Chapter 9-15 Valuing Accounts Receivable SO 3 Distinguish between the methods and bases companies use to value accounts receivable. Illustration 9-2 Presentation of allowance for doubtful accounts

Chapter 9-16 Valuing Accounts Receivable SO 3 Distinguish between the methods and bases companies use to value accounts receivable. Recording the Write-Off of an Uncollectible Account: Assume that the financial vice-president of Hampson Furniture authorizes a write-off of the $500 balance owed by R.A.Ware on March 1, 2011.The entry to record the write-off is: Allowance for doubtful accounts 500Mar. 1 Accounts receivable500 Illustration 9-3

Chapter 9-17 Accounts receivable 500 Valuing Accounts Receivable SO 3 Distinguish between the methods and bases companies use to value accounts receivable. Recovery of an Uncollectible Account: Assume that on July 1, R. A. Ware pays the $500 amount that Hampson had written off on March 1.These are the entries: Accounts receivable 500Jul. 1 Allowance for doubtful accounts 500 Cash 500Jul. 1

Chapter 9-18 Bases Used for Allowance Method SO 3 Distinguish between the methods and bases companies use to value accounts receivable. Valuing Accounts Receivable Illustration 9-5

Chapter 9-19 Illustration: Assume that Gonzalez Company elects to use the percentage-of-sales basis. It concludes that 1% of net credit sales will become uncollectible. If net credit sales for 2010 are $800,000, the adjusting entry is: SO 3 Distinguish between the methods and bases companies use to value accounts receivable. Valuing Accounts Receivable Bad debts expense 8,000Dec. 31 Allowance for doubtful accounts 8,000 Percentage-of-Sales * $800,000 x 1% *

Chapter 9-20 Emphasizes the matching of expenses with revenues. When the company makes the adjusting entry, it disregards the existing balance in Allowance for Doubtful Accounts. SO 3 Distinguish between the methods and bases companies use to value accounts receivable. Valuing Accounts Receivable Percentage-of-Sales Illustration 9-6

Chapter 9-21 SO 3 Distinguish between the methods and bases companies use to value accounts receivable. Valuing Accounts Receivable Percentage-of-Receivables Illustration 9-7 Aging schedule

Chapter 9-22 Illustration: If the trial balance shows Allowance for Doubtful Accounts with a credit balance of $528, the company will make the following adjusting entry. SO 3 Distinguish between the methods and bases companies use to value accounts receivable. Valuing Accounts Receivable Bad debts expense 1,700Dec. 31 Allowance for doubtful accounts 1,700 Percentage-of-Receivables * $2, *

Chapter 9-23 Occasionally the allowance account will have a debit balance prior to adjustment. SO 3 Distinguish between the methods and bases companies use to value accounts receivable. Valuing Accounts Receivable Illustration 9-8 Percentage-of-Receivables

Chapter 9-24 Percentage of Sales approach: Summary Focus on “Bad debt expense” estimate, existing 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. Existing balance in allowance account considered. SO 3 Distinguish between the methods and bases companies use to value accounts receivable. Valuing Accounts Receivable

Chapter 9-25 Companies sell 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. SO 4 Describe the entries to record the disposition of accounts receivable. Disposing of Accounts Receivable

Chapter 9-26 SO 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 to the company that is selling the receivables. The fee ranges from 1-3% of the amount of receivables purchased.

Chapter 9-27 Illustration: A Illustration: Assume that Hendredon Furniture factors $600,000 of receivables to Federal Factors. Federal Factors assesses a service charge of 2% of the amount of receivables sold. The journal entry to record the sale by Hendredon Furniture is as follows. SO 4 Describe the entries to record the disposition of accounts receivable. Disposing of Accounts Receivable Accounts receivable 600,000 Cash 588,000 Service charge expense 12,000 ($600,000 x 2% = $12,000)

Chapter 9-28 SO 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 9-29 SO 4 Describe the entries to record the disposition of accounts receivable. Disposing of Accounts Receivable Illustration: Illustration: Anita Ferreri purchases $1,000 of compact discs for her restaurant from Karen Kerr Music Co., using her Visa First Bank Card. First Bank charges a service fee of 3%. The entry to record this transaction by Karen Kerr Music is as follows. Sales 1,000 Cash 970 Service charge expense 30

Chapter 9-30 SO 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 9-31 SO 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 9-32 Determining the Maturity Date SO 5 Compute the maturity date of and interest on notes receivable. Notes Receivable Note expressed in terms of Months Days Computing Interest Illustration 9-13

Chapter 9-33 SO 6 Explain how companies recognize notes receivable. Recognizing Notes Receivable Illustration: Illustration: Assuming that Calhoun Company wrote $1,000, two-month, 12% promissory note to settle an open account, Wilma Company makes the following entry for the receipt of the note. Notes receivable 1,000 Accounts receivable 1,000

Chapter 9-34 Valuing Notes Receivable SO 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 9-35 Disposing of Notes Receivable SO 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 9-36 Honor of Notes Receivable SO 8 Describe the entries to record the disposition of notes receivable. Notes Receivable A note is honored when its maker pays it in full at its maturity date. Dishonor of Notes Receivable A dishonored note is not paid in full at maturity. A dishonored note receivable is no longer negotiable. Disposing of Notes Receivable

Chapter 9-37 Notes Receivable SO 8 Describe the entries to record the disposition of notes receivable. Illustration: Assume that Betty Co. lends Wayne Higley Inc. $10,000 on June 1, accepting a five-month, 9% interest- bearing note. Assuming that Betty Co. presents the note to Wayne Higley Inc. on the maturity date, Betty Co.’s entry to record the collection is: Cash 10,375Nov. 1 Notes receivable 10,000 Honor of Notes Receivables Interest revenue 375

Chapter 9-38 Notes Receivable SO 8 Describe the entries to record the disposition of notes receivable. Illustration: If Betty Co. prepares financial statements as of September 30, it must accrue interest. Betty Co. would make an adjusting entry to record 4 months’ interest. Interest receivable300Sept. 30 Interest revenue 300 Honor of Notes Receivables

Chapter 9-39 Notes Receivable SO 8 Describe the entries to record the disposition of notes receivable. Illustration: The entry by Betty Co. to record the honoring of the Wayne Higley Inc. note on November 1 is: Cash10,375Nov. 1 Notes receivable 10,000 Honor of Notes Receivables Interest receivable 300 Interest revenue 75

Chapter 9-40 Illustration: Assume that Wayne Higley Inc. on November 1 indicates that it cannot pay at the present time. If Betty Co. does expect eventual collection, it would make the following entry at the time the note is dishonored (assuming no previous accrual of interest). Notes Receivable SO 8 Describe the entries to record the disposition of notes receivable. Accounts receivable10,375Nov. 1 Notes receivable 10,000 Dishonor of Notes Receivables Interest revenue 375

Chapter 9-41 Presentation SO 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

Chapter 9-42 Analysis of Receivables This Ratio used to: Assess the liquidity of the receivables. Measure the number of times, on average, a company collects receivables during the period. SO 9 Explain the statement presentation and analysis of receivables. Statement Presentation and Analysis Illustration 9-15

Chapter 9-43 Variant of the accounts receivable turnover ratio is average collection period in terms of days. Used to assess effectiveness of credit and collection policies. Collection period should not exceed credit term period. SO 9 Explain the statement presentation and analysis of receivables. Statement Presentation and Analysis Illustration 9-16 Analysis of Receivables

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