Chapter 9 Receivables 1

Describe the common classes of receivables. Objective 1 2

The term receivables includes all money claims against other entities, including people, business firms, and other organizations. 3

Accounts receivable are normally expected to be collected within a relatively short period, such as 30 or 60 days. 4

Notes receivable are amounts that customers owe for which a formal, written instrument of credit has been issued. 5

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. 6

Describe the accounting for uncollectible receivables. Objective 2 7

Regardless of how careful a company is in granting credit, some credit sales will be uncollectible. The operating expense account is called bad debt expense, uncollectible accounts expense, or doubtful accounts expense. 8

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. 9

Describe the direct write-off method of accounting for uncollectible receivables. Objective 3 10

On May 10, a $4,200 accounts receivable from D. L. Ross has been determined to be uncollectible. 11

The amount written off is later collected on November 21. Reinstatement EntryReceipt of Cash Entry 12

Example Exercise 9-1 Direct Write-off Method Journalize the following transactions using the direct write-off method of accounting for uncollectible receivables. July9Received $1,200 from Jay Burke and wrote off the remainder owed of $3,900 as uncollectible. Oct. 11Reinstated the account of Jay Burke and received $3,900 cash in full payment. 13

Example Exercise 9-1 (continued) July 9Cash…………………………………………..1,200 Bad Debt Expense……………………….....3,900 Accounts Receivable—Jay Burke…5,100 Oct. 11Accounts Receivable—Jay Burke………..3,900 Bad Debt Expense……………… ,900 11Cash……………………………………………3,900 Accounts Receivable—Jay Burke…3,900 14

Describe the allowance method of accounting for uncollectible receivables. Objective 4 15

On December 31, ExTone Company estimates that a total of $30,000 of the $200,000 balance of their Accounts Receivable will eventually be uncollectible. 16

The net amount that is expected to be collected, $170,000 ($200,000 – $30,000), is called the net realizable value (NRV). The adjusting entry reduces receivables to the NRV and matches uncollectible expenses with revenues. 17

Write-Offs to the Allowance Account On January 21, John Parker’s account totaling $6,000 is written off because it is uncollectible. 18

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During 2010, ExTone Company writes off $26,750 of uncollectible accounts, including the $6,000 account of John Parker. After posting all entries to write- off uncollectible amounts, Allowance for Doubtful Accounts will have a credit balance of $3,250 ($30,000 – $26,750). 20

Nancy Smith’s account of $5,000 which was written off on April 2 is later collected on June 10. Two entries are needed: one to reinstate Nancy Smith’s account and a second to record receipt of the cash. 21

Reinstatement EntryReceipt of Cash Entry 22

Example Exercise 9-2 Allowance Method Journalize the following transactions using the allowance method of accounting for uncollectible receivables. July9Received $1,200 from Jay Burke and wrote off the remainder owed of $3,900 as uncollectible. Oct. 11Reinstated the account of Jay Burke and received $3,900 cash in full payment. 23

Example Exercise 9-2 (continued) July 9Cash……………………………………………1,200 Allowance for Doubtful Accounts………..3,900 Accounts Receivable—Jay Burke…….5,100 11Cash…………………………………………….3,900 Accounts Receivable—Jay Burke……..3,900 Oct. 11Accounts Receivable—Jay Burke………...3,900 Allowance for Doubtful Accounts……..3,900 24

Estimating Uncollectibles 2.Analysis of receivables method. The allowance method uses two ways to estimate the amount debited to Bad Debt Expense. 1.Percent of sales method. 25

Percent of Sales Method If credit sales for the period are $3,000,000 and it is estimated that ¾ % will be uncollectible, Bad Debt Expense is debited for $22,500 ($3,000,000 ×.0075). This approach disregards the balance of $3,250 in the allowance account before the adjustment. 26

Example Exercise 9-3 Percent of Sales Method 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. Bad debt expense is estimated at ½ of 1% of net sales. Determine (a) the amount of the adjusting entry for uncollectible accounts; (b) the adjusted balances of Accounts Receivable, Allowance for Doubtful Accounts, and Bad Debt Expense; and (c) the net realizable value of accounts receivable. 27

Example Exercise 9-3 (continued) (a)$17,500 ($3,500,000 ×.005) Adjusted Balance (b)Accounts Receivable………………….$800,000 Allowance for Doubtful Accounts ($7,500 + $17,500)……………………25,000 Bad Debt Expense……………………...17,500 (c)$775,000 ($800,000 – $25,000) 28

Aging of Receivables The longer an account receivable is outstanding, the less likely it is that it will be collected. Basing the estimate of uncollectible accounts on how long specific amounts have been outstanding is called aging the receivables. 29

Aging of Receivables Schedule December 31, 2010 Exhibit 1 30

Compare the direct write-off method and allowance method of accounting for uncollectible accounts. Objective 5 31

Comparing Direct Write-Off and Allowance Methods (continued) Exhibit 3 32

Direct Write-Off Method Allowance Method Comparing Direct Write-Off and Allowance Methods (continued) Exhibit 3 33

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Describe the accounting for notes receivable. Objective 6 35

Characteristics of Notes Receivable (continued) The maker is the party making the promise to pay. A note receivable, or promissory note, is a written document containing a promise to pay: The payee is the party to whom the note is payable. The face amount is the amount the note is written for on its face. The issuance date is the date a note is issued. 36

Characteristics of Notes Receivable (continued) The term of the note is the amount of time between the issuance and due dates. The interest rate is that rate of interest that must be paid on the face amount for the term of the note. The due date or maturity date is the date the note is to be paid. 37

Accounting for Notes Receivable Received a $6,000, 12%, 30-day note dated November 21, 2010 in settlement of the account of W. A. Bunn Co. 38

On December 21, when the note matures, the firm receives $6,060 from W. A. Bunn Company ($6,000 plus $60 interest). 39

Example Exercise 9-5 Same Day Surgery Center received a 120-day, 6% note for $40,000, dated March 14 from a patient on account. a.Determine the due date of the note. b.Determine the maturity value of the note. c.Journalize the entry to record the receipt of the payment of the note at maturity. Note Receivable 40

Example Exercise 9-5 (continued) a. The due date of the note is July 12, determined as follows: March17 days (31 – 14) April30 days May31 days June30 days July12 days Total 120 days b.$40,800 [$40,000 + ($40,000 × 6% × 120/360)] c.Cash……………………………………… ,800 Notes Receivable……………………..40,000 Interest Revenue……………………

Describe the reporting of receivables on the balance sheet. Objective 7 42

Number of Days’ Sales in Receivables Average Accounts Receivable Average Daily Sales Number of Days’ Sales in Receivables = The number of days’ sales in receivables is an estimate of the length of time the accounts receivable have been outstanding. 43

44 P9-2B

45 P9-2B

46 Prob. 9–2B 1. CustomerDue DateNumber of Days Past Due AAA Sports & FliesJune 14, days ( ) Blackmon Flies Aug. 30, days ( ) Charlie’s Fish Co.Sept. 30, days ( ) Firehole SportsOct. 17, days ( ) Green River SportsNov. 7, days ( ) Smith River Co.Nov. 28, days (2 + 31) Wintson CompanyDec. 1, days Wolfe Bug SportsJan. 6, 2010Not past due