1. 9 Receivables CHAPTER PowerPoint Slides to accompany
Fundamental Accounting Principles, 14ce
Prepared by
Joe Pidutti, Durham College
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Learning Objectives
Describe accounts receivable and how they occur and are recorded. (LO1)
Apply the allowance method to account for uncollectible accounts receivable. (LO2)
Estimate uncollectible accounts receivable using approaches based on sales and accounts receivable. (LO3)
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Learning Objectives
Describe and record a short-term note receivable and calculate its maturity date and interest. (LO4)
Explain how receivables can be converted to cash before maturity. (Appendix 9A) (LO5)
Calculate accounts receivable turnover and days’ sales uncollected to analyze liquidity. (Appendix 9B) (LO6)
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Accounts Receivable
Arise from credit sales to customers.
Often referred to as Trade Receivables.
Other receivables include interest receivable, rent receivable, tax refund receivable.
LO 1
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Accounts Receivable
Companies selling on account need to:
Maintain a separate account for each customer.
Account for bad debts.
LO 1
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Accounts Receivable
Example: TechCom has the following Accounts Receivable balances at June 30:
General Ledger A/R Subledger
Accounts Receivable RDA Electronics
bal. 3,000 bal. 1,000
CompStore
bal. 2,000
Total 3,000
Control account balances with total of subledger balances.
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LO 1

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Accounts Receivable
Example: Credit sale for $950.
Accounts Receivable- CompStore
Sales
General Ledger A/R Subledger
Accounts Receivable RDA Electronics
bal. 3,000 bal. 1,000
950
bal. 3, CompStore
bal. 2,000
bal. 2,950
Total 3,950
Control account balances with total of subledger balances.
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LO 1

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Accounts Receivable
Example: Collection of account Cash 720 Accounts Receivable-RDA 720
General Ledger A/R Subledger
Accounts Receivable RDA Electronics
bal. 3,000 bal. 1,
bal
bal. 3, CompStore
bal. 2,000
950
bal. 2,950
Total 3,230
Control account balances with total of subledger balances.
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LO 1

9. Valuing Accounts Receivable
Some customers who are granted credit do not pay what they promised.
The accounts of these customers are called uncollectible accounts or bad debts.
LO 1
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10. Valuing Accounts Receivable
Methods for accounting for uncollectible accounts:
Direct method (does not satisfy GAAP)
Allowance method (satisfies GAAP)
Income statement approach (percent of sales)
Balance sheet approach (calculates the required balance in Allowance for Doubtful Accounts (AFDA))
LO 2
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Allowance Method
The matching principle requires that bad debts expense be matched and reported in the same period as the sale that generated the receivable.
The allowance method satisfies the matching principle by matching expected bad debts losses (expenses) with revenues that produced the losses.
LO 2
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12. Recording Estimated Bad Debt Expense
Adjustments for bad debts are made at the end of the accounting period.
Adjustments use a contra-asset account called Allowance for Doubtful Accounts.
LO 2
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13. Recording Estimated Bad Debt Expense - Allowance Method
Example: The estimated bad debts for TechCom is $1,500. The period end entry to record bad debts is: Bad Debts Expense 1,500 Allowance for Doubtful Accounts 1,500 An allowance account is used since we do not know which accounts will be uncollectible.
LO 2
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14. Balance Sheet Presentation
Current assets:
Cash $10,000
Accounts Receivable $5,000
Less: Allowance for Doubtful Accounts 1, ,500
Merchandise Inventory ,000
Office Supplies
Prepaid Insurance
Total Current Assets $34,200
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15. Writing Off a Bad Debt - Allowance Method
Example: A specific customer’s account (Jack Kent) is considered uncollectible.
The entry to record the write-off is:
Allowance for Doubtful Accounts
Accounts Receivable - Jack Kent
Note that there is no expense recorded when the account is written off. The estimated expense was previously recorded.
LO 2
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16. General Ledger Balances
Bad Debts Expense ,500
Allowance for Doubtful Accounts ,500
To record estimated bad debts
Allowance for Doubtful Accounts
Accounts Receivable - Jack Kent
To write off an uncollectible account
Accounts Receivable Allow. For Doubtful Accts.
bal. 20, ,500
bal. 19, bal. 980
LO 2
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17. Realizable Value Before and After Write-off
Accounts Receivable Allow. For Doubtful Accts.
bal. 20, ,500
bal. 19, bal. 980
Before Write-off
After Write-off
Accounts Receivable
$20,000
$19,480
Less: Allowance for Doubtful Accounts
1,500
980
Est. Realizable Accounts Receivable
$18,500
LO 2
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18. Recovery of a Bad Debt- Allowance Method
Example: Jack Kent pays his account in full after the account had been written off. Entries are needed to record the reinstatement of the account and the subsequent collection.
The entries are:
Accounts Receivable-Jack Kent
Allowance for Doubtful Accounts
To reinstate customer’s account.
Cash
Accounts Receivable-Jack Kent
To record collection of account.
LO 2
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19. Estimating Bad Debts Expense
Acceptable Methods:
Percent of Sales Approach
Accounts Receivable Approach
LO 3
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20. Percent of Sales Approach
Also referred to as the Income Statement Approach.
Based on idea that a percentage of a company’s credit sales are uncollectible.
The primary focus is on matching bad debts expense with credit sales.
LO 3
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21. Percent of Sales Approach
Under this approach, bad debts expense is computed as follows:
Current Period Sales
x Estimated Bad Debt %
= Estimated Bad Debts Expense
LO 3
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22. Percent of Sales Approach
Example: MusicLand has credit sales of $400,000 and estimates 0.6% of those sales will not be collectible. Estimated Bad Debts Expense is calculated as $2,400 ($400,000 x .6%).
The period end adjusting entry would be:
Bad Debts Expense ,400
Allowance for Doubtful Accounts ,400
To record estimated bad debts
LO 3
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23. Percent of Accounts Receivable Approach
This method assumes that a percentage of Accounts Receivable is uncollectible.
Using this method, we compute the estimate of the Allowance for Doubtful Accounts as:
Year-end Accounts Receivable x Est. Bad Debt %
LO 3
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24. Percent of Accounts Receivable Approach
Bad Debts Expense is computed as:
Estimated adjusted balance in Allowance for Doubtful Accounts
- Unadjusted year-end balance in Allowance for Doubtful Accounts
= Estimated Bad Debts Expense
The objective for the entry is to make the Allowance account balance equal to the portion of outstanding Accounts Receivable estimated to be uncollectible.
LO 3
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25. Aging of Accounts Receivable Approach
Assumes that the older the Account Receivable the more likely is will become uncollectible.
Steps:
Group accounts based on how much time has passed since they were created.
Estimate rates of uncollectibility for each group.
Apply rate to each group to get the required balance for the Allowance account.
LO 3
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26. Aging of Accounts Receivable
Example: At December 31, the receivables for DeCor were classified as follows:
LO 3
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27. Aging of Accounts Receivable
Using estimated bad debt percentages, DeCor would calculate the estimated uncollectible amount as follows:
LO 3
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28. Aging of Accounts Receivable
DeCor’s unadjusted balance in the allowance account is a debit of $200. The previous computation shows the desired balance is $2,290.
Allowance for Doubtful Accounts
Unadj. bal. 200
Adj. bal. 2,290
LO 3
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29. Aging of Accounts Receivable
DeCor’s unadjusted balance in the allowance account is a debit of $200. The previous computation shows the desired balance is $2,290. Therefore, the adjusting entry is for:
$2, = $2,490.
Allowance for Doubtful Accounts
Unadj. bal. 200
Adj ,490
Adj. bal. 2,290
LO 3
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30. Aging of Accounts Receivable
DeCor’s unadjusted balance in the allowance account is a debit of $200. The previous computation shows the desired balance is $2,290. Therefore, the adjusting entry is for:
$2, = $2,490.
Allowance for Doubtful Accounts
Unadj. bal. 200
2,490
Adj. bal. 2,290
Bad Debts Expense ,490
Allowance for Doubtful Accounts ,490
To record estimated bad debts
LO 3
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31. Direct Write-off Method
Sometimes used as an alternative to the Allowance method when uncollectible accounts are not material.
The loss from an uncollectible account is recorded when it is determined to be uncollectible.
This method does not satisfy the principles of prudence and matching.
LO 3
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Prudence Concept
What is the prudence concept in accounting?
Ensure that assets and revenue in a business are not overstated and that liabilities and expenses are not understated.
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33. Writing Off a Bad Debt - Direct Write-off Method
Example: A specific customer’s account (Jack Kent) is considered uncollectible. The entry to record the write-off is:
Bad Debts Expense
Accounts Receivable—Jack Kent
LO 3
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Mini-Quiz
On October 29, 2014, TC Co. concluded that a customer's $4,400 account receivable was uncollectible and that the account should be written off. What effect will this write-off have on TC Co.’s 2014 net income and balance sheet totals assuming the allowance method is used to account for bad debts?   
A)Decrease in net income; no effect on total assets.  
B)No effect on net income or on total assets.  
C)Decrease in net income; decrease in total assets.  
D)Increase in net income; no effect on total assets.  
E)No effect on net income; decrease in total assets.
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Mini-Quiz
On October 29, 2014, TC Co. concluded that a customer's $4,400 account receivable was uncollectible and that the account should be written off. What effect will this write-off have on TC Co.’s 2014 net income and balance sheet totals assuming the allowance method is used to account for bad debts?   
A)Decrease in net income; no effect on total assets.  
B)No effect on net income or on total assets.  
C)Decrease in net income; decrease in total assets.  
D)Increase in net income; no effect on total assets.  
E)No effect on net income; decrease in total assets.
ADA 4,400
A/R ,400
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36. Short-Term Notes Receivable
Promissory Note A written promise to pay a specified amount of money either on demand or at a definite future date. Short-Term Note Receivable A promissory note that becomes due within 12 months or within the firm’s operating cycle.
LO 4
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37. Short-Term Notes Receivable
Usually interest bearing.
Interest rates are stated on an annual basis.
Interest is calculated as follows:
Principal of the note
Annual interest rate
Time expressed in years
Interest = X X
or I=Prt
LO 4
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38. Short-Term Notes Receivable
Example: TechCom receives a $1,000, 90-day, 6% promissory note at the time of a sale.
The entry to record the transaction would be:
Notes Receivable ,000
Sales ,000
LO 4
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39. Short-Term Notes Receivable
Example: On December 16, TechCom receives a $3,000, 60-day, 6% promissory note and $1,000 cash to settle a $4,000 past due account. The entry to record the transaction would be: Cash 1,000 Notes Receivable 3,000 Accounts Receivable 4,000
LO 4
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40. Short-Term Notes Receivable
On December 31, 15 days after the note is issued, an accrual for interest earned on the note is made. The entry to record the accrual would be: Interest Receivable 7.40 Interest Revenue 7.40 (3,000 x 6% x 15/365) On February 14, the 60-day note matures. The entry to record the honouring of the note would be: Cash 3, Interest Revenue Interest Receivable 7.40 Notes Receivable 3, (3,000 x 6% x 60/365)= 29.59
LO 4
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41. Short-Term Notes Receivable
Sometimes the maker of a note does not pay the note at maturity. This is known as dishonouring the note.
The payee should use every legitimate means to collect.
If the note was made to replace an AR then it should be removed from Notes Receivable and reinstated as an Account Receivable.
LO 4
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Review
Explain why the allowance method satisfies the generally accepted principles of prudence and matching.
The allowance method ensures that the asset, accounts receivable, and the reported net income are not overstated. In this way it accomplishes the requirements of the prudence principle.
The allowance method recognizes the bad debts expense in the same period in which the related credit sales were recognized. In this way it accomplishes the required matching of expenses with the period in which the revenue was recognized.
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Review
Explain how to record the receipt of a note receivable.
A note is recorded by entering the total amount borrowed (principal) as a debit to Notes Receivable and as a credit to the account representing the asset or service exchanged for the note.
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44. Converting Receivables to Cash Before Maturity- Appendix 9A
Receivables are sometimes converted into cash before maturity since:
Companies may need the cash.
Companies do not want to be involved in the collection activities.
LO 5
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45. Converting Receivables to Cash Before Maturity- Appendix 9A
Conversion of receivables into cash is accomplished by either:
Selling them to a factor
Pledging them as loan security.
LO 5
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Using the Information
Appendix 9B
The quality (likelihood of collection) and liquidity (speed of collection) of a company’s receivables may be assessed by calculating:
Accounts receivable turnover ratio
Days’ sales uncollected
LO 6
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Using the Information
Appendix 9B
Net Sales
Average accounts receivable
Accounts receivable turnover =
Days’ sales
Uncollected
Accounts receivable
Net sales
x 365 =
LO 6
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End of Chapter
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