1. Click to edit Master title style 1 1 1Receivables 8

2. 2 2 2 The term receivables includes all money claims against other entities, including people, business firms, and other organizations. 8-1 Classification of Receivables

3. Click to edit Master title style 3 3 3 Accounts receivable are normally expected to be collected within a relatively short period, such as 30 or 60 days. 8-1 Accounts Receivable

4. Click to edit Master title style 4 4 4 Notes receivable are amounts that customers owe for which a formal, written instrument of credit has been issued. 8-1 Notes Receivable

5. Click to edit Master title style 5 5 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. 8-1 Other Receivables

6. Click to edit Master title style 6 6 6 There are two methods of accounting for receivables that appear to be uncollectible: the direct write off method and the allowance method. 8-2 Uncollectible Receivables

7. Click to edit Master title style 7 7 7 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. 8-2

8. Click to edit Master title style 8 8 8 15 May 10 Bad Debt Expense 4 200 00 Accounts Receivable—D. L. Ross 4 200 00 On May 10, a $4,200 accounts receivable from D. L. Ross has been determined to be uncollectible. 8-3 Direct Write-Off Method

9. Click to edit Master title style 9 9 9 16 The amount written off is later collected on November 21. Nov. 21 Accounts Receivable—D. L. Ross 4 200 00 Bad Debt Expense 4 200 00 21Cash 4 200 00 Accounts Receivable—D. L. Ross 4 200 00 8-3

10. Click to edit Master title style 10 8-3 The direct write-off method is used by businesses that sell most of their goods or services for cash and accept only MasterCard or Visa, which are recorded as cash sales.

11. Click to edit Master title style 11 8-3 Example Exercise 8-1 Journalize the following transactions using the direct write-off method of accounting for uncollectible receivables. 18 July9Received $1,200 from Jay Burke and wroteoff the remainder owed of $3,900 as uncollectible. Oct. 11Reinstated the account of Jay Burke and received $3,900 cash in full payment.

12. Click to edit Master title style 12 Follow My Example 8-1 19 8-3 For Practice: PE 8-1A, PE 8-1B July 9Cash1,200 Bad Debt Expense3,900 Accounts Receivable—Jay Burke5,100 Oct.11Accounts Receivable—Jay Burke3,900 Bad Debt Expense3,900 11Cash3,900 Accounts Receivable—Jay Burke3,900

13. Click to edit Master title style 13 The allowance method is required by generally accepted accounting principles for companies with large accounts receivable. In contrast to the direct write-off method, the allowance method estimates the accounts receivable that will not be collected and records bad debt expense for this estimate at the end of each accounting period. 8-4

14. Click to edit Master title style 14 22 On December 31, ExTone Company estimates that a total of $40,000 of the $1,000,000 balance in her company’s Accounts Receivable will eventually be uncollectible. Dec. 31 Bad Debt Expense 40 000 00 Allowance for Doubtful Accounts 40 000 00 Uncollectible accounts estimate. 8-4 Allowance Method

15. Click to edit Master title style 15 The net amount that is expected to be collected, $960,000 ($1,000,000 – $40,000), is called the net realizable value (NRV). The adjusting entry reduces receivables to the NRV and matches uncollectible expenses with revenues. 8-4 Net Realizable Value

16. Click to edit Master title style 16 24 Jan. 21Allowance for Doubtful Accounts 6 000 00 Accounts Receivable—John Parker 6 000 00 To write off the uncollectible account. 8-4 On January 21, John Parker’s account totaling $6,000 is written off because it is uncollectible.

17. Click to edit Master title style 17 During 2008, ExTone Company writes off $36,750 of uncollectible accounts, including the $6,000 account of John Parker. After posting all entries to write-off uncollectible amounts, the Allowance for Doubtful Accounts will have a credit balance of $3,250 ($40,000 – $36,750). 8-4

18. Click to edit Master title style 18 27 ALLOWANCE FOR DOUBTFUL ACCOUNTS Jan. 1, 2008 Bal.40,000 Jan. 216,000 Feb. 23,900 { Total accounts written off $36,750 Dec. 31 Unadjusted bal3,250 “ “ 8-4

19. Click to edit Master title style 19 If ExTone Company had written off $44,100 in accounts receivable during 2008, the Allowance for Doubtful Accounts would have a debit balance of $4,100. 8-4

20. Click to edit Master title style 20 29 ALLOWANCE FOR DOUBTFUL ACCOUNTS Jan. 1, 2008 Bal.40,000 Jan. 216,000 Feb. 23,900 { Total accounts written off $44,100 Dec. 31 Unadjusted bal4,100 “ “ 8-4

21. Click to edit Master title style 21 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. 8-4 Collecting a Written-Off Account

22. Click to edit Master title style 22 31 June10Accounts Receivable—Nancy Smith 5 000 00 To reinstate the account written off on Jan. 21. Allowance for Doubtful Accounts 5 000 00 Entry 1: Reinstate the account. 8-4

23. Click to edit Master title style 23 32 June10Cash 5 000 00 Collection of written-off account. Accounts Receivable—Nancy Smith 5 000 00 Entry 2: Record collection of cash. 8-4

24. Click to edit Master title style 24 8-4 Example Exercise 8-2 Journalize the following transactions using the allowance method of accounting for uncollectible receivables. 33 July9Received $1,200 from Jay Burke and wroteoff the remainder owed of $3,900 as uncollectible. Oct. 11Reinstated the account of Jay Burke and received $3,900 cash in full payment.

25. Click to edit Master title style 25 Follow My Example 8-2 34 8-4 For Practice: PE 8-2A, PE 8-2B July 9Cash1,200 Allowance for Doubtful Accounts3,900 Accounts Receivable—Jay Burke5,100 Oct.11Accounts Receivable—Jay Burke3,900 Allowance for Doubtful Accounts3,900 11Cash3,900 Accounts Receivable—Jay Burke3,900

26. Click to edit Master title style 26 1.Estimate based on a percentage of sales. 2.Estimate based on analysis of the receivables. The allowance method uses two ways to estimate the amount debited to Bad Debt Expense. 8-4 Estimating Uncollectibles

27. Click to edit Master title style 27 8-4 Estimate Based on a Percentage of Sales If credit sales for the period are $3,000,000 and it is estimated that 1½ % will be uncollectible, the Bad Debt Expense is debited for $45,000 ($3,000,000 x.015). This approach disregards the balance in the allowance account before the adjustment.

28. Click to edit Master title style 28 37 After this adjusting entry is posted, Allowance for Doubtful Accounts will have a balance of $48,250. Dec. 31 Bad Debt Expense 45 000 00 Allowance for Doubtful Accounts 45 000 00 Uncollectible accounts ($3,000,000 x 0.015 = $45,000). 8-4

29. Click to edit Master title style 29 38 ALLOWANCE FOR DOUBTFUL ACCOUNTS Jan. 1, 2008 Bal.40,000 Jan. 216,000 Feb. 23,900 { Total accounts written off $36,750 Dec. 31 Unadjusted bal3,250 Dec. 31 Adj. entry45,000 Dec. 31 Adjusted bal.48,250 “ “ 8-4 BAD DEBT EXPENSE Dec. 31 Adj entry45,000 Dec. 31 Adjusted bal.45,000

30. Click to edit Master title style 30 8-4 Example Exercise 8-3 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. 39

31. Click to edit Master title style 31 Follow My Example 8-3 40 8-4 For Practice: PE 8-3A, PE 8-3B (a) $17,500 ($3,500,000 x.005) Adjusted Balance (b)Accounts Receivable$800,000 Allowance for Doubtful Accounts ($7,500 + $17,500)25,000 Bad Debt Expense17,500 (c)$775,000 ($800,000 – $25,000)

32. Click to edit Master title style 32 The longer an account receivable is outstanding, the less likely that it will be collected. Basing the estimate of uncollectible accounts on how long specific amounts have been outstanding is called aging the receivables. 8-4 Estimating Uncollectibles Based on Analysis of Receivables

33. Click to edit Master title style 33 42 8-4 Aging of Accounts Receivables

34. Click to edit Master title style 34 43 8-4 Estimate of Uncollectible Accounts

35. Click to edit Master title style 35 45 8-4 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 currently has a balance of $510, the Bad Debt Expense must be debited for $2,880 ($3,390 – $510).

36. Click to edit Master title style 36 46 8-4 Estimate Based on Analysis of Receivables Aug. 31 Bad Debt Expense 2 880 00 Allowance for Doubtful Accounts 2 880 00 Uncollectible accounts ($3,390 – $510).

37. Click to edit Master title style 37 47 8-4 BAD DEBT EXPENSE Aug. 31 Adj. entry2,880 Aug. 31 Adj. bal.2,880 ALLOWANCE FOR DOUBTFUL ACCOUNTS Aug. 31 Unadj. bal.510 Aug. 31 Adj. entry2,880 Aug. 31 Adj. bal.3,390

38. Click to edit Master title style 38 If the unadjusted balance of Allowance for Uncollectible Accounts had been a debit balance of $300, the amount of the adjustment would have been $3,690 ($3,390 + $300). 8-4

39. Click to edit Master title style 39 49 8-4 BAD DEBT EXPENSE Aug. 31 Adj. entry3,690 Aug. 31 Adj. bal.3,690 ALLOWANCE FOR DOUBTFUL ACCOUNTS Aug. 31 Adj. entry3,690 Aug. 31 Adj. bal.3,390 Aug. 31 Unadj. bal.300

40. Click to edit Master title style 40 8-4 Example Exercise 8-4 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. Using the aging method, the balance of Allowance for Doubtful Accounts is estimated as $30,000. 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. 50

41. Click to edit Master title style 41 Follow My Example 8-4 51 8-4 For Practice: PE 8-4A, PE 8-4B (a) $22,500 ($30,000 – $7,500) Adjusted Balance (b)Accounts Receivable$800,000 Allowance for Doubtful Accounts30,000 Bad Debt Expense22,500 (c)$770,000 ($800,000 – $30,000)

42. Click to edit Master title style 42 54 Comparing the Direct Write-Off and Allowance Methods Direct Write-Off Method 8-5 When the actual accounts receivable are determined to be uncollectible No allowance account is used Amount of bad debt expense recorded Allowance account Primary users Small companies and companies with relatively few receivables

43. Click to edit Master title style 43 55 Comparing the Direct Write-Off and Allowance Methods Allowance Method 8-5 Using estimate based on either (1) a percentage of sales or (2) analysis of receivables. The allowance account is used Amount of bad debt expense recorded Allowance account Primary users Large companies and those with a large amount of receivables