1. Power Notes Chapter F7 Receivables Learning Objectives
1. Classification of Receivables
2. Internal Control of Receivables
3. Uncollectible Receivables
4. Uncollectibles – Allowance Method
5. Uncollectibles – Direct Write-Off Method
6. Characteristics of Notes Receivable
7. Accounting for Notes Receivable
8. Balance Sheet Presentation
9. Financial Analysis and Interpretation C7

2. Power Notes Chapter F7 Receivables Slide # Power Note Topics 24 6 15 20 21 22
Receivables – Classification and Control
Uncollectibles – Direct Write-Off Method
Uncollectibles –Allowance Method
Accounting for Notes Receivable
Balance Sheet Presentation
Accounts Receivable Turnover
Number of Days’ Sales in Receivables
Note: To select a topic, type the slide # and press Enter.

3. Classification of Receivables
Accounts Receivable – used for selling merchandise or services on credit, and normally expected to be collected in a relatively short period.
Notes Receivable – used to grant credit on the basis of a formal instrument of credit, called a promissory note.
Other Receivables – interest receivable, taxes receivable, and receivables from officers or employees.

4. Accounting for Uncollectible Accounts Receivable
The Direct Write-Off Method
This method is not consistent with the matching principle.
Accounts that prove to be uncollectible are written off in the year they become worthless.
Uncollectible Accounts Expense is debited and Accounts Receivable is credited for each such transaction.

5. Journal Entries – Direct Write-Off Method
Date Description Debit Credit
May. 10
Uncollectible Accts. Expense 420
Accts. Receivable - D. L. Ross 420
Accts. Receivable - D. L. Ross 420
Uncollectible Accts. Expense 420
Cash 420
Accts. Receivable - D. L. Ross 420
Write off uncollectible account of $420
Nov. 21
Reinstate and collect prior account written off.

6. Accounting for Uncollectible Accounts Receivable
The Allowance Method
This method is consistent with the matching principle.
Management makes an estimate each year of the portion of accounts receivable that may not be collectible.
Uncollectible Accounts Expense is debited and Allowance for Doubtful Accounts is credited.
Actual accounts that prove to be uncollectible are debited to Allowance for Doubtful Accounts and credited to Accounts Receivable.

7. Journal Entries – Allowance Method
Date Description Debit Credit
Dec. 31
Uncollectible Accts. Expense 4,000
Allowance for Doubtful Acct. 4,000
Allowance for Doubtful Accts. 610
Accts. Receivable - J. Parker 610
Accts. Receivable - J. Parker 610
Allowance for Doubtful Accts. 610
Cash 610
Estimated a total of $4,000 will be uncollectible.
Jan. 21
Write off uncollectible account of $610.
Jun. 10
Reinstate and collect prior account written off.

8. Estimating Uncollectible Accounts Expense
The allowance method uses two ways to estimate the amount debited to Uncollectible Accounts Expense.
1. Estimate based on a percentage of sales.
If credit sales for the period are $300,000 and it is estimated that 1% will be uncollectible, the Uncollectible Accounts Expense is $3,000.
2. Estimate based on analysis of receivables.
If it is estimated that $3,390 of the receivables will be uncollectible and the Allowance for Uncollectible Accounts is $510, the Uncollectible Accounts Expense is $2,880 ($3,390 – $510).

9. Accounts Receivable Aging and Uncollectibles
Days Past Due
over
Customer Balance Past Due
Ashby & Co. $ $ 150
B. T. Barr $ 350 $260
Brock Co. 470 $ 470
J. Zimmer Co
Total $86,300 $75,000 $4,000 $3,100 $1,900 $1,200 $800 $300
Not
Total accounts receivable shown by age.

10. Accounts Receivable Aging and Uncollectibles
Days Past Due
over
Customer Balance Past Due
Ashby & Co. $ $ 150
B. T. Barr $ 350 $260
Brock Co. 470 $ 470
J. Zimmer Co
Total $86,300 $75,000 $4,000 $3,100 $1,900 $1,200 $800 $300
Not
Uncollectibles
PERCENT
2% 5% 10% 20% 30% 50% 80%
Uncollectible percentages based on experience and industry averages.

11. Accounts Receivable Aging and Uncollectibles
Days Past Due
over
Customer Balance Past Due
Ashby & Co. $ $ 150
B. T. Barr $ 350 $260
Brock Co. 470 $ 470
J. Zimmer Co
Total $86,300 $75,000 $4,000 $3,100 $1,900 $1,200 $800 $300
Not
Uncollectibles
PERCENT
2% 5% 10% 20% 30% 50% 80%
AMOUNT
$3,390 = $1,500 $200 $310 $380 $360 $400 $240

12. Year-End Adjustment for Uncollectibles
General Ledger
Balance Sheet
Accounts Receivable
Accounts receivable $86,300
Less allowance for
doubtful accounts 3,390
Net accounts receivable 82,910 A
86,300
Allowance for Doubtful Accts.
510 A A
Balances before adjustment
Uncollectible Accts. Expense

13. Year-End Adjustment for Uncollectibles
General Ledger
Balance Sheet
Accounts Receivable
Accounts receivable $86,300
Less allowance for
doubtful accounts 3,390
Net accounts receivable 82,910 A
86,300
Allowance for Doubtful Accts.
510 A
2,880 B A
Balances before adjustment
Year-end adjustment
$3,390 - $510 = $2,880 B
Uncollectible Accts. Expense B
2,880

14. Year-End Adjustment for Uncollectibles
General Ledger
Balance Sheet
Accounts Receivable
Accounts receivable $86,300
Less allowance for
doubtful accounts 3,390
Net accounts receivable 82,910 A
86,300 C
Allowance for Doubtful Accts.
510 A
2,880 B A
Balances before adjustment
3,390 C
Year-end adjustment
$3,390 - $510 = $2,880 B
Uncollectible Accts. Expense B
2,880 C
Balance after adjustment

15. Characteristics of Notes Receivable
A promissory note is a written document containing a promise to pay:
a specific amount of money (principal)
to a specific person or company (payee)
at a specific place
on a specific date or upon demand
plus interest at a specific percentage of the principal (face) amount per year

16. Calculating Interest and Maturity Value
We received a $2,500, 10%, 90-day note dated March 16, 2000.
Interest Calculation
Principal x Rate x Time = Interest
$2,500 x 10% x 90 /360 = $62.50
Principal + Interest = Maturity Value
$2,500 + $62.50 = $2,562.50
Maturity Value Calculation

17. Accounting for Notes Receivable
Date Description Debit Credit
Nov. 21
Notes Receivable 6,000
Accts. Receivable - Bunn Co. 6,000
Cash 6,060
Notes Receivable 6,000
Interest Revenue 60
Principal + Interest = Maturity Value
$6, ($6,000 x 12% x 30 / 360) = $6,060
Received a $6,000,30-day, 12% note.
Dec. 21
Collected amount due on note dated November 21.

18. Understanding the 360-Day Year
In commercial transactions it is traditional to use a 360-day year.
The historic rationale for this procedure was ease of calculation which made sense before the computer and calculator age.
Why does this practice continue when most small calculators and desktop computers can present complex interest calculations in a few seconds?

19. Another Look at the 360-Day Year
1. Assume a $100,000 note dated June 1 for 90 days at an interest rate of 12 percent. The textbook calculation is as follows:
$100,000 x (12 / 100) x (90 /360) = $3,000.00
2. A more precise calculation is as follows:
$100,000 x (12 / 100) x (90 /365) = $2,958.90
3. When large sums are involved the 360-day method (known as ordinary interest or banker’s rule) yields significantly more interest to the lender. It is used by banks and commercial organizations.
4. The second method (known as exact interest) is used by the federal government and the Federal Reserve System.

20. Crabtree Co. Balance Sheet December 31, 20--
Assets
Current assets:
Cash $119,500
Notes receivable 250,000
Accounts receivable $445,000
Less allowance for
doubtful accounts 15, ,000
Interest receivable 14,500

21. Solvency Measures — The Short-Term Creditor
Accounts Receivable Turnover
Net sales on account $1,498,000 $1,200,000
Accounts receivable (net):
Beginning of year $ 120,000 $ 140,000
End of year 115, ,000
Total $ 235,000 $ 260,000
Average $ 117,500 $ 130,000
Accts. receivable turnover 12.7 times 9.2 times
Use: To assess the efficiency in collecting receivables and in the management of credit.

22. Solvency Measures — The Short-Term Creditor
Number of Days’ Sales in Receivables
Net sales on account $1,498,000 $1,200,000
Accounts receivable (net):
Beginning of year $ 120,000 $ 140,000
End of year 115, ,000
Total $ 235,000 $ 260,000
Average $ 117,500 $ 130,000
Average collection period 28 days 36 days
Use: To assess the efficiency in collecting receivables and in the management of credit.

23. Power Notes This is the last slide in Chapter F7. Chapter F7
Receivables
This is the last slide in Chapter F7.
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