1. Accounting For Receivables Financial Accounting, Sixth Edition
Chapter 9
Accounting For Receivables
Financial Accounting, Sixth Edition

2. Study Objectives Identify the different types of receivables.
Explain how companies recognize accounts receivable.
Distinguish between the methods and bases companies use to value accounts receivable.
Describe the entries to record the disposition of accounts receivable.
Compute the maturity date of and interest on notes receivable.
Explain how companies recognize notes receivable.
Describe how companies value notes receivable.
Describe the entries to record the disposition of notes receivable.
Explain the statement presentation and analysis of receivables.
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?
Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).
Forward-looking Information
Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image).
Timeliness (no real time financial information)

3. Accounting for Receivables Statement Presentation and Analysis
Types of Receivables
Accounts Receivable
Notes Receivable
Statement Presentation and Analysis
Accounts receivable
Notes receivable
Other receivables
Recognizing accounts receivable
Valuing accounts receivable
Disposing of accounts receivable
Determining maturity date
Computing interest
Recognizing notes receivable
Valuing notes receivable
Disposing of notes receivable
Presentation
Analysis
Service Cost - Actuaries compute service cost as the present value of the new benefits earned by employees during the year. Future salary levels considered in calculation.
Interest on Liability - Interest accrues each year on the PBO just as it does on any discounted debt.
Actual Return on Plan Assets - Increase in pension funds from interest, dividends, and realized and unrealized changes in the fair market value of the plan assets.
Amortization of Unrecognized Prior Service Cost - The cost of providing retroactive benefits is allocated to pension expense in the future, specifically to the remaining service-years of the affected employees.
Gain or Loss - Volatility in pension expense can be caused by sudden and large changes in the market value of plan assets and by changes in the projected benefit obligation. Two items comprise the gain or loss:
difference between the actual return and the expected return on plan assets and,
amortization of the unrecognized net gain or loss from previous periods

4. Claims for which formal instruments of credit are issued
Types of Receivables
Amounts due from individuals and other companies that are expected to be collected in cash.
Amounts owed by customers that result from the sale of goods and services.
Claims for which formal instruments of credit are issued
as proof of debt.
“Nontrade” (interest, loans to officers, advances to employees, and income taxes refundable).
Accounts Receivable
Notes Receivable
Other Receivables
SO 1 Identify the different types of receivables.

5. Accounts Receivable Three accounting issues:
Recognizing accounts receivable.
Valuing accounts receivable.
Disposing of accounts receivable.
Recognizing Accounts Receivable
The following exercise was illustrated in Chapter 5. For simplicity, inventory and cost of goods sold have been omitted.
SO 1 Identify the different types of receivables.

6. Recognizing Accounts Receivable
Illustration: Presented are transactions related to Wheeler Company.
On December 3,Wheeler Company sold $500,000 of merchandise to Hashmi Co., terms 2/10, n/30, FOB shipping point.
On December 8, Hashmi Co. was granted an allowance of $27,000 for merchandise purchased on December 3.
On December 13,Wheeler Company received the balance due from Hashmi Co.
Instructions: Prepare the journal entries to record these transactions on the books of Wheeler Company using a perpetual inventory system.
SO 2 Explain how companies recognize accounts receivable.

7. Recognizing Accounts Receivable
Illustration: Prepare the journal entries for Wheeler Co.
1. On December 3, Wheeler Company sold $500,000 of merchandise to Hashmi Co., terms 2/10, n/30, FOB shipping point.
Dec. 3
Accounts receivable 500,000
Sales 500,000
SO 2 Explain how companies recognize accounts receivable.

8. Recognizing Accounts Receivable
Illustration: Prepare the journal entries for Wheeler Co.
2. On December 8, Hashmi Co. was granted an allowance of $27,000 for merchandise purchased on December 3.
Dec. 8
Sales returns and allowances 27,000
Accounts receivable 27,000
SO 2 Explain how companies recognize accounts receivable.

9. Recognizing Accounts Receivable
Illustration: Prepare the journal entries for Wheeler Co.
3. On December 13, Wheeler Company received the balance due from Hashmi Co.
Dec. 13
Cash 463,540
***
Sales discounts 9,460 **
Accounts receivable 473,000 *
* ($500,000 – $27,000)
** [($500,000 – $27,000) X 2%]
*** ($473,000 – $9,460)
SO 2 Explain how companies recognize accounts receivable.

10. Valuing Accounts Receivable
Valuing Accounts Receivables
Classification
Valuation (net realizable value)
Uncollectible Accounts Receivable
Sales on account raise the possibility of accounts not being collected
SO 3 Distinguish between the methods and bases companies use to value accounts receivable.

11. Valuing Accounts Receivable
Methods of Accounting for Uncollectible Accounts
Direct Write-Off
Theoretically undesirable:
no matching.
receivable not stated at net realizable value.
not acceptable for financial reporting.
Allowance Method
Losses are estimated:
better matching.
receivable stated at net realizable value.
required by GAAP.
SO 3 Distinguish between the methods and bases companies use to value accounts receivable.

12. Presentation of Accounts Receivable
Assets
Current Assets:
Cash $ 346
Accounts receivable 500
Less: Allowance for doubtful accounts
Inventory
Prepaids 40
Total current assets 1,673
SO 3 Distinguish between the methods and bases companies use to value accounts receivable.

13. Presentation of Accounts Receivable
Assets
Current Assets:
Cash $ 346
Accounts receivable, net of $25 allowance
for doubtful accounts
Inventory
Prepaids 40
Total current assets 1,673
SO 3 Distinguish between the methods and bases companies use to value accounts receivable.

14. Valuing Accounts Receivable
Allowance Method for Uncollectible Accounts
Companies estimate uncollectible accounts receivable.
To record estimated uncollectibles, companies debit Bad Debts Expense and credit Allowance for Doubtful Accounts (a contra-asset account).
When companies write off specific uncollectible accounts, they debit Allowance for Doubtful Accounts and credit Accounts Receivable.
SO 3 Distinguish between the methods and bases companies use to value accounts receivable.

15. Valuing Accounts Receivable
Bases Used for Allowance Method
Illustration 9-5
SO 3 Distinguish between the methods and bases companies use to value accounts receivable.

16. Valuing Accounts Receivable
Example Data
Credit sales $500,000
Estimated % of credit sales uncollectible 1.25%
Accounts receivable balance $72,500
Estimated % of A/R uncollectible %
Allowance for Doubtful Accounts:
Case 1 $150 (credit balance)
Case 2 $150 (debit balance)
SO 3 Distinguish between the methods and bases companies use to value accounts receivable.

17. Valuing Accounts Receivable
Percentage of Sales
Credit sales $500,000
Estimated percentage uncollectible x %
Estimated uncollectible $ 6,250
===================================================
What should the ending balance be for the allowance account? -- Case 1 and Case 2
SO 3 Distinguish between the methods and bases companies use to value accounts receivable.

18. Valuing Accounts Receivable
Percentage of Sales
Case 1
Case 2
Actual balance (credit)
(150)
150
Estimated uncollectible
(6,250)
(6,250)
Ending balance
(6,400)
(6,100)
Journal entry:
Bad debt expense 6,250
Allowance for doubtful accounts 6,250
SO 3 Distinguish between the methods and bases companies use to value accounts receivable.

19. Valuing Accounts Receivable
Percentage of Receivables
Accounts receivable $ 72,500
Estimated percentage uncollectible x %
Desired balance for allowance $ 5,800
===================================================
What should the ending balance be for the allowance account? -- Case 1 and Case 2
SO 3 Distinguish between the methods and bases companies use to value accounts receivable.

20. Valuing Accounts Receivable
Percentage of Receivables
Case 1
Case 2
Actual balance (credit)
(150)
150
Desired balance
(5,800)
(5,800)
Adjustment
(5,650)
(5,950)
Journal entry – Case 1:
Bad debt expense 5,650
Allowance for doubtful accounts 5,650
SO 3 Distinguish between the methods and bases companies use to value accounts receivable.

21. Valuing Accounts Receivable
Percentage of Receivables
Case 1
Case 2
Actual balance (credit)
(150)
150
Desired balance
(5,800)
(5,800)
Adjustment
(5,650)
(5,950)
Journal entry – Case 2:
Bad debt expense 5,950
Allowance for doubtful accounts 5,950
SO 3 Distinguish between the methods and bases companies use to value accounts receivable.

22. Valuing Accounts Receivable
When estimating losses using Percentage of Receivables, companies often prepare an aging schedule which classifies customer balances by the length of time they have been unpaid.
Illustration 9-7
SO 3 Distinguish between the methods and bases companies use to value accounts receivable.

23. Valuing Accounts Receivable
Summary
Percentage of Sales approach:
Focus on “Bad debt expense” estimate, any balance in the allowance account is ignored.
Method achieves a matching of cost and revenues.
Percentage of Receivables approach:
Accurate valuation of receivables on the balance sheet.
Method may also be applied using an aging schedule.
SO 3 Distinguish between the methods and bases companies use to value accounts receivable.

24. Valuing Accounts Receivable
E9-6 On December 31, 2008, Jarnigan Co. estimated that 2% of its net sales of $400,000 will become uncollectible. The company recorded this amount as an addition to Allowance for Doubtful Accounts. On May 11, 2009, Jarnigan Co. determined that Terry Frye’s account was uncollectible and wrote off $1,100. On June 12, 2009, Frye paid the amount previously written off.
Instructions
Prepare the journal entries on December 31, 2008, May 11, 2009, and June 12, 2009.
SO 3 Distinguish between the methods and bases companies use to value accounts receivable.

25. Valuing Accounts Receivable
E9-6 Prepare the journal entries on December 31, 2008, May 11, 2009, and June 12, 2009.
December 31 ($400,000 x 2% = 8,000)
Bad debt expense 8,000
Allowance for doubtful accounts 8,000
SO 3 Distinguish between the methods and bases companies use to value accounts receivable.

26. Valuing Accounts Receivable
E9-6 Prepare the journal entries on December 31, 2008, May 11, 2009, and June 12, 2009.
May 11 (write-off)
Allowance for doubtful accounts 1,100
Accounts receivable 1,100
June 12 (recovery)
Accounts receivable 1,100
Allowance for doubtful accounts 1,100
Cash 1,100
Accounts receivable 1,100
SO 3 Distinguish between the methods and bases companies use to value accounts receivable.

27. Disposing of Accounts Receivable
Companies sell receivables for two major reasons.
Receivables may be the only reasonable source of cash.
Billing and collection are often time-consuming and costly.
SO 4 Describe the entries to record the disposition of accounts receivable.

28. Disposing of Accounts Receivable
Sale of Receivables
A factor buys receivables from businesses and then collects the payments directly from the customers.
SO 4 Describe the entries to record the disposition of accounts receivable.

29. Disposing of Accounts Receivable
E9-7 (a) On March 3, Cornwell Appliances sells $680,000 of its receivables to Marsh Factors Inc. Marsh Factors assesses a finance charge of 3% of the amount of receivables sold. Prepare the entry on Cornwell Appliances’ books to record the sale of the receivables.
($680,000 x 3% = $20,400)
Cash 659,600
Service charge expense 20,400
Accounts receivable 680,000
SO 4 Describe the entries to record the disposition of accounts receivable.

30. Disposing of Accounts Receivable
Credit Card Sales
Retailer considers credit card sales the same as cash sales.
Retailer must pay card issuer a fee of 2 to 4% for processing the transactions.
Retailer records in similar manner as checks deposited from cash sale.
SO 4 Describe the entries to record the disposition of accounts receivable.

31. Disposing of Accounts Receivable
E9-7 (b) On May 10, Dale Company sold merchandise for $3,500 and accepted the customer’s America Bank MasterCard. America Bank charges a 4% service charge for credit card sales. Prepare the entry on Dale Company’s books to record the sale of merchandise.
($3,500 x 4% = $140)
Cash 3,360
Service charge expense 140
Sales 3,500
SO 4 Describe the entries to record the disposition of accounts receivable.

32. Notes Receivable
Companies may grant credit in exchange for a promissory note. A promissory note is a written promise to pay a specified amount of money on demand or at a definite time.
Promissory notes may be used:
when individuals and companies lend or borrow money,
when amount of transaction and credit period exceed normal limits, or
in settlement of accounts receivable.
SO 5 Compute the maturity date of and interest on notes receivable.

33. Notes Receivable
To the Payee, the promissory note is a note receivable.
To the Maker, the promissory note is a note payable.
Illustration 9-10
SO 5 Compute the maturity date of and interest on notes receivable.

34. Notes Receivable Determining the Maturity Date Computing Interest
Note expressed in terms of
Months
Days
Computing Interest
Illustration 9-13
SO 5 Compute the maturity date of and interest on notes receivable.

35. Recognizing Notes Receivable
E9-10 Nov. 1 Loaned $15,000 cash to Sally Givens on a 1-year, 10% note. Dec. 11 Sold goods to John Countryman, Inc., receiving a $6,750, 90-day, 8% note. Dec. 16 Received a $4,000, 6-month, 9% note in exchange for Bob Reber’s outstanding accounts receivable.
Nov. 1
Notes receivable 15,000
Cash 15,000
Dec. 11
Notes receivable 6,750
Sales 6,750
Dec. 16
Notes receivable 4,000
Accounts receivable 4,000
SO 6 Explain how companies recognize notes receivable.

36. Recognizing Notes Receivable
E9-10 Dec. 31 Accrued interest revenue on all notes receivable.
Dec. 31
Interest receivable 295
Interest revenue 295
SO 6 Explain how companies recognize notes receivable.

37. Notes Receivable Valuing Notes Receivable
Like accounts receivable, companies report short- term notes receivable at their cash (net) realizable value.
Estimation of cash realizable value and bad debts expense are done similarly to accounts receivable.
Allowance for Doubtful Accounts is used.
SO 7 Describe how companies value notes receivable.

38. Notes Receivable Disposing of Notes Receivable
Notes may be held to their maturity date.
Maker may default and payee must make an adjustment to the account.
Holder speeds up conversion to cash by selling the note receivable.
SO 8 Describe the entries to record the disposition of notes receivable.

39. Notes Receivable Disposing of Notes Receivable
Honor of Notes Receivable
A note is honored when its maker pays it in full at its maturity date.
Dishonor of Notes Receivable
A dishonored note is not paid in full at maturity. Dishonored note receivable is no longer negotiable.
SO 8 Describe the entries to record the disposition of notes receivable.

40. Notes Receivable
E9-13 On May 2, Kleinsorge Company lends $7,600 to Everhart, Inc., issuing a 6-month, 9% note. At the maturity date, November 2, Everhart indicates that it cannot pay.
Instructions
(a) Prepare the entry to record the issuance of the note.
(b) Prepare the entry to record the dishonor of the note, assuming that Kleinsorge Company expects collection will occur.
(c) Prepare the entry to record the dishonor of the note, assuming that Kleinsorge Company does not expect collection in the future.
SO 8 Describe the entries to record the disposition of notes receivable.

41. Notes Receivable (a) Notes receivable 7,600 Cash 7,600 (b)
E (a) Prepare the entry to record the issuance of the note. (b) Prepare the entry to record the dishonor of the note, assuming that Kleinsorge Company expects collection will occur.
(a)
Notes receivable 7,600
Cash 7,600
(b)
Interest = $7,600 x 9% x 6/12 = $342
Accounts receivable 7,942
Notes receivable 7,600
Interest revenue 342
SO 8 Describe the entries to record the disposition of notes receivable.

42. Notes Receivable (c) Allowance for doubtful accounts 7,600
E (c) Prepare the entry to record the dishonor of the note, assuming that Kleinsorge Company does not expect collection in the future.
(c)
Allowance for doubtful accounts 7,600
Notes receivable 7,600
When there is no hope of collection, the note holder would write off the face value of the note. No interest revenue would be recorded because collection will not occur.
SO 8 Describe the entries to record the disposition of notes receivable.

43. Statement Presentation and Analysis
Identify in the balance sheet or in the notes, each major type of receivable.
Report short-term receivables as current assets.
Report both gross amount of receivables and allowance for doubtful account.
Report bad debts expense and service charge expense as selling expenses.
Report interest revenue under “Other revenues and gains.”
B/S
I/S
SO 9 Explain the statement presentation and analysis of receivables.

44. Statement Presentation and Analysis
Analysis of Receivables
20.3 times
This Ratio used to:
Assess the liquidity of the receivables.
Measure the number of times, on average, a company collects receivables during the period.
SO 9 Explain the statement presentation and analysis of receivables.

45. Statement Presentation and Analysis
Analysis of Receivables
20.3 times, or every
18 days (365 / 20.3)
Variant of the accounts receivable turnover ratio is average collection period in terms of days.
Used to assess effectiveness of credit and collection policies.
Collection period should not exceed credit term period.
SO 9 Explain the statement presentation and analysis of receivables.

46. Protecting Yourself from Identity Theft
All About You
Protecting Yourself from Identity Theft
Individuals need to evaluate their personal
credit positions using the same thought processes
used by business people.
Credit card companies aggressively market their cards with images of glamour and happiness. But there isn’t much glamour in paying an 18% to 21% interest rate, and there is very little happiness to be found in filing for personal bankruptcy.

47. Protecting Yourself from Identity Theft
All About You
Protecting Yourself from Identity Theft
Some Facts:
About 70% of undergraduates at 4-year colleges carry at least one credit card in their own name.
The average monthly debt on a college student’s charge account, according to one study, is close to $2,000.
Americans charged $1 trillion in purchases with credit cards. That was more than they spent in cash.
Significant increases in consumer bankruptcy filings occurred in every region of the country. There were 2,043,535 new filings in 2005, up 31.6% from in 2004.

48. All About You
Chart shows the major causes of personal financial problems.
Source: Debt Solutions of America, (accessed May 2006).

49. All About You What Do You Think?
Should you cut up your credit card(s)?
YES: Americans are carrying huge personal debt burdens. Credit cards encourage unnecessary, spontaneous expenditures. The interest rates on credit cards are extremely high, which causes debt problems to escalate exponentially.
NO: Credit cards are a necessity for transactions in today’s economy. In fact, many transactions are difficult or impossible to carry out without a credit card. People should learn to use credit cards responsibly.

50. Copyright
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