Receivables Chapter 8 Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-1

Learning Objectives 1.Define and explain common types of receivables and journalize sales on credit, credit card sales, and debit card sales 2.Apply the direct write-off method for uncollectibles 3.Apply the allowance method for uncollectibles and estimate bad debts expense based on the percent-of- sales, percent-of-receivables, and aging-of-receivables methods Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-2

Learning Objectives 4.Account for notes receivable including computing interest and recording honored and dishonored notes 5.Use the acid-test ratio, accounts receivable turnover ratio, and days’ sales in receivables to evaluate business performance Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-3

Learning Objective 1 Define and explain common types of receivables and journalize sales on credit, credit card sales, and debit card sales Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-4

What Is a Receivable? Accounts receivableAccounts receivable Notes receivable Other receivables receivable A receivable is a right to receive cash in the future from a current transaction. trade receivableAlso referred to as a trade receivable Results from sales of goods or performance of services on account Collection period normally = 30 to 60 days Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-5

What Is a Receivable? Accounts receivable Notes receivableNotes receivable Other receivables receivable A receivable is a right to receive cash in the future from a current transaction. promissory noteAlso called a promissory note Written promise that a customer will pay principal and interest Collection period longer than A/R Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-6

What Is a Receivable? Accounts receivable Notes receivable Other receivablesOther receivables receivable A receivable is a right to receive cash in the future from a current transaction. Category includes dividends, taxes, and interest receivables Can be current or long- term Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-7

Recording Sales on Credit Selling “on account” will create an A/R Suppose that, on August 8, Smart Touch Learning performs $5,000 in services to Brown on account, and sells $10,000 of inventory on account to Smith. Prepare both journal entries. Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-8

Recording Sales on Credit Selling “on account” will create an A/R Suppose that, on August 8, Smart Touch Learning performs $5,000 in services to Brown on account, and sells $10,000 of inventory on account to Smith. Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-9

Recording Sales on Credit Selling “on account” will create an A/R Suppose that, on August 8, Smart Touch Learning performs $5,000 in services to Brown on account, and sells $10,000 of inventory on account to Smith. Ignore COGS. Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-10

Using an A/R Subsidiary Ledger A “control account” will reflect the total of all the individual subsidiary accounts. Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-11

Recording Credit Card and Debit Card Sales Recorded the same as Cash sales. A fee is usually charged by the card company. –The net cash received is reduced by the fee. 2 Methods are allowed: –Net Method –Gross Method Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-12

Net Method Record the card company fee at the time of the sale. Only the net amount of cash is recorded. Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-13

Net Method August 15—Smart Touch Learning sells merchandise inventory to a customer for $3,000. The customer pays with “plastic.” The card company assesses a 4% fee. Ignore COGS. Prepare the journal entry. Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-14

Net Method August 15—Smart Touch Learning sells merchandise inventory to a customer for $3,000. The customer pays with “plastic.” The card company assesses a 4% fee. Ignore COGS. Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-15

Gross Method Record the full sale on the sale date. Record the credit card fee as a separate entry when the cash is deposited by the third party. Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-16

Gross Method August 15—Smart Touch Learning sells merchandise inventory to a customer for $3,000. The customer pays with “plastic.” The card company assesses a 4% fee. Ignore COGS. Prepare the journal entry. Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-17

Gross Method August 15—Smart Touch Learning sells merchandise inventory to a customer for $3,000. The customer pays with “plastic.” The card company assesses a 4% fee. Ignore COGS. Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-18

Gross Method August 31—The third party credit card company assesses a 4% fee on the original sale. Prepare the journal entry. Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-19

Gross Method August 31—The third party credit card company assesses a 4% fee on the original sale. Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-20

Prepare the journal entry. Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-21

Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-22

Prepare the journal entry. Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-23

Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-24

Learning Objective 2 Apply the direct write-off method for uncollectibles Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-25

How do we record uncollectible accounts using the Direct Method? Fact: Not all customers will pay what they owe. Accounting Reality: We have to take these “bad” receivables off the books and record a corresponding Bad Debt Expense. Under the Direct Method, the bad debt expense is recorded as soon as a receivable is deemed uncollectible. Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-26

Direct Method August 9—Smart Touch Learning determines that it will not be able to collect $200 from Dan King for a May 5 sale. Prepare the journal entry. Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-27

Direct Method August 9—Smart Touch Learning determines that it will not be able to collect $200 from Dan King for a May 5 sale. Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-28

Recovery of Previously Written Off A/R Reverse the earlier write-off Record the receipt of the payment Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-29

Recovery of Previously Written Off A/R September 10—King pays the $200 previously written off as uncollectible. Prepare both journal entries. Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-30

Recovery of Previously Written Off A/R September 10—King pays the $200 previously written off as uncollectible. Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-31

Learning Objective 3 Apply the allowance method for uncollectibles and estimate bad debts expense based on the percent-of-sales, percent- of-receivables, and aging-of-receivables methods. Copyright©2014 Pearson Education, Inc. publishing as Prentice Hall8-32

How do we record uncollectible accounts using the Allowance Method? Based on the Matching Principle Estimate future uncollectible accounts now, instead of waiting until they actually go bad. Exploit knowledge that the older A/R accounts are, the less likely that they will be collected. % Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-33

How do we record uncollectible accounts using the Allowance Method? At the end of each period, record the Bad Debts Expense and put the credit in Allowance for Bad Debts. –The Allowance for Bad Debts account is a Contra-Asset As actual accounts become uncollectible, charge them against the Allowance account. % Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-34

Using the Allowance Method December 31—Smart Touch Learning estimates that $80 of its $4,400 A/R are uncollectible. Prepare the journal entry. Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-35

Using the Allowance Method December 31—Smart Touch Learning estimates that $80 of its $4,400 A/R are uncollectible. Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-36

Using the Allowance Method The Contra-Asset account will be shown as reduction of Accounts Receivable. Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-37

Writing Off an Uncollectible Account When an account become uncollectible, it is written off. The bad account is charged against the Allowance Account. Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-38

Writing Off an Uncollectible Account January 10, 2016—Smart Touch Learning determines that it will not collect $25 from customer Shawn Callahan. Prepare the journal entry. Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-39

Writing Off an Uncollectible Account January 10, 2016—Smart Touch Learning determines that it will not collect $25 from customer Shawn Callahan. Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-40

Recovery of Previously Written Off A/R Reverse the earlier write-off Record the receipt of the payment Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-41

Recovery of Previously Written Off A/R March 4—Smart Touch Learning receives $25 from Callahan to cover the written off account. Prepare both journal entries. Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-42

Recovery of Previously Written Off A/R March 4—Smart Touch Learning receives $25 from Callahan to cover the written off account. Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-43

How Do We Estimate the Allowance Account? Three methods are available –Percent-of-Sales –Percent-of-Receivables –Aging-of Receivables Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-44

How Do We Estimate the Allowance Account? Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-45

How Do We Estimate the Allowance Account? Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-46

Using the Aging-of-Receivables Method Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-47

Smart Touch Learning’s unadjusted credit balance in the allowance account is $55. Per the previous computation, the desired balance is $185. Smart Touch Learning’s unadjusted credit balance in the allowance account is $55. Per the previous computation, the desired balance is $185. Using the Aging-of-Receivables Method ? Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall Prepare the journal entry to adjust Allowance for Bad Debts. 8-48

Smart Touch Learning’s unadjusted credit balance in the allowance account is $55. Per the previous computation, the desired balance is $185. Smart Touch Learning’s unadjusted credit balance in the allowance account is $55. Per the previous computation, the desired balance is $185. Using the Aging-of-Receivables Method Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-49

Learning Objective 4 Account for notes receivable including computing interest and recording honored and dishonored notes Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-50

Accounting for Notes Receivable Record the note on the date the loan is made. Periodically accrue interest revenue and record interest receipts. Record collection of note principal. Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall Notes are evidenced by a signed document called a Promissory Note. Must include certain components. 8-51

Promissory Notes Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-52

Recording a Note Receivable September 30—Smart Touch Learning loaned $1,000 to Lauren Holland for 1 6%. Prepare the journal entry. Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-53

Recording a Note Receivable September 30—Smart Touch Learning loaned $1,000 to Lauren Holland for 1 6%. Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-54

Recording Interest Interest is recorded based on the amount of time that has passed. Interest rates are always annual. Time is always a fraction of a year. Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-55

Recording a Note Receivable December 31—The $1,000 loan to Lauren Holland is not yet due, but interest must be accrued at the rate of 6%. Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall Prepare the journal entry. 8-56

Recording a Note Receivable December 31—The $1,000 loan to Lauren Holland is not yet due, but interest must be accrued at the rate of 6%. Prepare the journal entry. Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall9-8

Recording a Note Receivable December 31—The $1,000 loan to Lauren Holland is not yet due, but interest must be accrued at the rate of 6%. Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-58

Recording Dishonored Notes Receivable dishonoredWhen the maker of the note does not pay, it is dishonored. dishonored note unpaid interestOften the dishonored note AND the unpaid interest are transferred to an A/R. Later, the A/R can be written off. Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall If a unit has many notes receivable, such as a financing division, it can also set up a Loan Loss Reserve similar to Allowance for Bad Debts. 8-59

Prepare the journal entry. Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-60

Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-61

Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall Prepare the journal entry. 8-62

Prepare the journal entry. ©Copyright 2014 Pearson Education, Inc. publishing as Prentice Hall8-63

Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-64

Learning Objective 5 Use the acid-test ratio, accounts receivable turnover ratio, and days’ sales in receivables to evaluate business performance Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-65

Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-66

Acid-Test (or Quick) Ratio Compute the Acid-Test Ratio for Green Mountain Coffee Roasters ©2014 Pearson Education, Inc. publishing as Prentice Hall8-67

Acid-Test (or Quick) Ratio Compute the Acid-Test Ratio for Green Mountain Coffee Roasters Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-68

Accounts Receivable Turnover Ratio Assuming that credit sales this year were $2,650,899, compute the Accounts Receivable Turnover Ratio for Green Mountain Coffee Roasters Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-69

Accounts Receivable Turnover Ratio Assuming that credit sales this year were $2,650,899, compute the Accounts Receivable Turnover Ratio for Green Mountain Coffee Roasters. Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-70

Days’ Sales in Receivables Compute the Days’ Sales in Receivables for Green Mountain Coffee Roasters Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-71

Days’ Sales in Receivables Compute the Days’ Sales in Receivables for Green Mountain Coffee Roasters Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-72

End of Chapter 8 Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-73