1. Chapter 8 Receivables Accounting, 21st Edition Warren Reeve Fess
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PowerPoint Presentation by Douglas Cloud Professor Emeritus of Accounting Pepperdine University

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3. After studying this chapter, you should be able to:
Objectives
1. List the common classifications of receivables.
2. Summarize and provide examples of internal control procedures that apply to receivables.
3. Describe the nature of and the accounting for uncollectible receivables.
4. Journalize the entries for the allowance method of accounting for uncollectibles, and estimate uncollectible receivables based on sales and on an analysis of receivables.
After studying this chapter, you should be able to:

4. Objectives
5. Journalize the entries for the direct write-off of uncollectible receivables.
6. Describe the nature and characteristics of promissory notes.
7. Journalize the entries for notes receivable transactions.
8. Prepare the Current Assets presentation of receivables on the balance sheet.
9. Compute and interpret the accounts receivable turnover and the number of days’ sales in receivables.

5. 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—include interest receivable, taxes receivable, and receivables from officers and employees.

6. Separating the Receivable Functions
Customer
Credit
Info.
Credit Approval
Collections
Sales
Acctg. Info
Goods or services
Invoice
Acctg.
Info.
Accounting

7. Uncollectible Receivables
Companies often sell their receivables to other companies. This transaction is called factoring the receivables, and the buyer of the receivables is called a factor.

8. Uncollectible Receivables
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.

9. The Allowance Method
On December 31, Cynthia Richards estimates that a total of $4,000 of the $105,000 balance in her company’s Accounts Receivable will eventually be uncollectible.
Adjusting Entry
Dec. 31 Uncollectible Accounts Expense
Allowance for Doubtful Accounts

10. The Allowance Method
The net amount that is expected to be collected, $101,000 ($105,000 – $4,000), is called the net realizable value (NRV).
The adjusting entry reduces receivables to the NRV and matches uncollectible expenses with revenues.

11. Allowance for Doubtful Accounts
The Allowance Method
Adjusting Entry
The adjusting entry fills the bucket.
Allowance for Doubtful Accounts

12. Allowance for DOUBTFUL accounts
The Allowance Method
Writing off accounts empties the bucket.
Allowance for DOUBTFUL accounts

13. The Allowance Method
Jan. 21 Allowance for Doubtful Accounts
Accounts Receivable—John Parker
To write off the uncollectible account.
On January 21, John Parker’s account totaling $610 is considered to be uncollectible.

14. On June 10, the written-off account is collected.
The Allowance Method
Jun. 10 Accounts Receivable—John Parker
Allowance for Doubtful Accounts
To reinstate the account written off on Jan. 21.
On June 10, the written-off account is collected.
An entry is made to reinstate John Parker’s account.

15. A second entry is made to record receipt of the cash.
The Allowance Method
Jun. 10 Cash
Accounts Receivable—John Parker
To record collection on account.
A second entry is made to record receipt of the cash.

16. Estimating Uncollectible Accounts Expense
The Allowance Method
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.

17. Based on a Percentage of Sales
The Allowance Method
Adjusting Entry
Dec. 31 Uncollectible Accounts Expense
Allowance for Doubtful Accounts
Based on a Percentage of Sales

18. Estimating Uncollectible Accounts Expense
The Allowance Method
Estimating Uncollectible Accounts Expense
The allowance method uses two ways to estimate the amount debited to Uncollectible Accounts Expense.
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 currently has a balance of $510, the Uncollectible Accounts Expense must be debited for $2,880 ($3,390 – $510).

19. Based on an Analysis of Receivables
The Allowance Method
Adjusting Entry
Dec. 31 Uncollectible Accounts Expense
Allowance for Doubtful Accounts
Based on an Analysis of Receivables

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

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

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

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

24. 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.

25. The Direct Write-Off Method
May 10 Uncollectible Accounts Expense
Accounts Receivable—D. L. Ross
To write off an uncollectible account.
On May 10, D. L. Ross’ account was determined to be uncollectible. The $420 balance is written off the books.

26. The Direct Write-Off Method
Nov. 1 Accounts Receivable—D. L. Ross
Uncollectible Accounts Expense
To reinstate account written off on May 10.
1st Entry
In November, D. L. Ross remits a check for $420 in payment of his account.

27. A second entry is needed to record receipt of the cash.
The Direct Write-Off Method
Nov. 1 Cash
Accounts Receivable—D. L. Ross
To record collection on account.
2nd Entry
A second entry is needed to record receipt of the cash.

28. Notes Receivable Payee Maker H. B. Lane $_____________ 2,500.00
Fresno, California______________20___
March
________________ _AFTER DATE _______ PROMISE TO PAY TO
Ninety days We
THE ORDER OF ____________________________________________
Judson Company
Two thousand five hundred 00/
_________________________________________________DOLLARS
Maker
PAYABLE AT ______________________________________________
City National Bank
VALUE RECEIVED WITH INTEREST AT ____
10%
NO. _______ DUE___________________
June 14, 2006
H. B. Lane
TREASURER, WILLIARD COMPANY

29. 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

30. Let’s determine the due date for a 90-day note dated March 16.
Notes Receivable
Let’s determine the due date for a 90-day note dated March 16.
The date a note is to be paid is called the due date. It is also referred to as the maturity date.

31. Notes Receivable Answer: June 14 Total days in note 90 days
Number of days in March 31
Issue date of note March 16
Remaining days in March –15 days
75 days
Number of days in April –30 days
45 days
Number of days in May –31 days
Residual days in June 14 days
Answer: June 14

32. Notes Receivable
The amount that is due at the maturity or due date is called the maturity value.

33. Notes Receivable
Received a $6,000, 12%, 30-day note dated November 21, 2006 in settlement of the account of W. A Bunn Co.

34. Principal x Rate x Time = Interest Maturity Value Calculation
Notes Receivable
Interest Calculation
Principal x Rate x Time = Interest
$6,000 x 12% x 30/360 = $60.00
Maturity Value Calculation
Principal + Interest = Maturity Value
$6,000 + $60.00 = $6,060.00

35. Accounting for Notes Receivable
Nov. 21 Notes Receivable
Sales
Received 30-day, 12% note dated November 21, 2006.
A $6, day, 12% note dated November 21 is received from W. A Bunn Company in exchange for merchandise.

36. Accounting for Notes Receivable
Dec. 21 Cash
Notes Receivable
Interest Revenue
Received principal and interest on matured note.
On December 21, when the note matures, the firm receives $6060 from W. A. Bunn Company ($6,000 plus $60 interest).

37. Accounting for Notes Receivable
Dec. 21 Accounts Receivable—Bunn Co
Notes Receivable
Interest Revenue
To record dishonored note and interest.
If W. A. Bunn Company fails to pay the note on the due date, it is considered a dishonored note receivable. The note and interest are transferred to the customer’s account.

38. Accounting for Notes Receivable
Dec. 1 Notes Receivable
Accounts Receivable—Crawford
Company
Received note in settlement of account.
A 90-day, 12% note dated December 1, 2006, is received from Crawford Company to settle its account, which has a balance of $4,000.

39. Accounting for Notes Receivable
Dec. 31 Interest Receivable
Interest Revenue
Adjusting entry for accrued interest.
Assuming that the accounting period ends on December 31, an adjusting entry is required to record the accrued interest of $40 ($4,000 x 0.12 x 30/360).

40. Accounting for Notes Receivable
Mar Cash
Notes Receivable
Interest Receivable
Interest Revenue
$4,000 x 0.12 x 60/360
Received payment on note and interest.
On March 1, 2004, $4,120 is received for the note ($4,000) and interest ($120).

41. Receivables on the Balance Sheet

42. Crabtree Co. Balance Sheet December 31, 2006
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
Merchandise inventory 714,000
Highlighted items are receivables

43. Financial Analysis and Interpretation
Accounts Receivable Turnover
Net sales
Average accounts receivable

44. Accounts Receivable Turnover
Net sales on account $36,000,000 $32,500,000
Accounts receivable (net):
Beginning of year $ 1,080,000 $1,050,000
End of year 1,220,000 1,080,000
Total $2,300,000 $2,130,000
Average $1,150,000 $1,115,000
Accounts receivable turnover times times
$36,000,000
$1,150,000
$32,500,000
$1,115,000
Use: To assess the efficiency in collecting receivables and in the management of credit.

45. Number of Days’ Sales in Receivables
Accounts receivable, end of year
Average daily sales
Accounts receivable, end of year
Average daily sales on account
$1,220,000
($36,000,000 ÷ 365 days)
=12.4 days
Use: To assess the efficiency in collecting receivables and in the management of credit.

46. Chapter 8
The End