1. CHAPTER 8 RECEIVABLES

2. Learning Objective 1 Describe the common classes of receivables.

3. Classification of Receivables Accounts Receivable Credit granted to customers Notes Receivable Credit granted through a promissory note Other Receivables Resulting from loans to officers or employees Turn to page D-5 of the NIKE, INC. Annual Report

6. A/R vs N/R 3 things distinguish a Note Receivable from an Account Receivable: 1. Notes are typically for a longer period of time 2. Notes typically require a formal written agreement stating due date and interest rate 3. Notes typically involve interest paid

7. Describe the accounting for uncollectible receivables. Learning Objective 2

8. Uncollectible Receivables No matter what, some customers will not pay what they owe you. When this happens, your business will incur an expense. Uncollectible accounts expense Bad debts expense Doubtful accounts expense

9. Indications of None Payment When does an account become uncollectible? 1.Past due 2.No response from customer 3.Customer files bankruptcy 4.Customer closes business 5.Company cannot locate customer One option is to turn the account over to a collection agency. This can be very costly.

10. Learning Objective 3 Describe the allowance method of accounting for uncollectible receivables.

11. Allowance Method This is the preferred method of write-off of bad debt. Record bad debt expense by estimating uncollectible accounts. 1.Estimate the accounts that will not be collected and to record expense before customers actually fail to pay. 2.Recognize expense in the same period that revenue was recorded.

12. Example ecember 31estimates that a total of $30,000 of the $200,000 balance of their accounts receivable will eventually be uncollectible. The specific customer accounts cannot be decreased, so a contra account, Allowance for Doubtful Accounts, is credited.

13. The Allowance Method The net amount that is expected to be collected, $170,000 ($200,000 - $30,000) is called the net realizable value of the receivables. The adjusting entry reduces receivables to the NRV and matches uncollectible expenses with revenues.

14. Suppose you identify a customer? On January 21, John Parker’s account of $6,000 is written off because it is uncollectible. Note that the allowance account credited earlier is debited at the write-off, not Bad Debt Expense.

15. What happens if a customer pays his debt? Receipt of cash entry Reinstatement entry

16. Let’s Practice! Demonstration Problem: Kids-At-Play toy store.

17. Estimating Uncollectibles Using the allowance method requires an estimate of uncollectible accounts at the end of the period. Estimate is based: Past experience Industry averages Forecasts of the future Two Methods used: Percentage of sales method Analysis of receivables method

18. Percentage of Sales Method Read “Business Connection” on page 365. Basis for the method is the amount of this year’s net sales that will not be collected. If ExTone Company’s credit sales for the period are $3,000,000 and it is estimated that 3/4% will be uncollectible, Bad Debt Expense is debited for $22,500 ($3,000,000 x.0075).

19. Now look at the T Accounts

20. Example A/R 800,000 Allowance for DA 7,500 Sales 3,500,000 Bad Debt Exp 17,500

21. Assumption: The longer an A/R 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. Analysis of Receivables Method or AGING

22. Aging is applied as follows: 1.the due date of each A/R is determined 2.the number of days each account is past due is determined. (# of days between due date of account & date of analysis.) 3.each account is placed in an aged class according to its days past due. (see next slide for classes.) 4.the totals for each aged class are determined. 5.the total of each aged class is multiplied by an estimated percentage of uncollectible accounts for that class. 6.the estimated total of uncollectible accounts is determined as the sum of the uncollectible accounts for each aged class.

23. Aging Classes Not Past Due 1-30 days late 31-60 days late 61-90 days late 91-180 days late 181-365 days late Over 365 days late

24. Summary of the AGING Method Refer to exhibit 1 on page 367 of text book

25. Example of days past due Dated August 29, due in 30 days Due date = September 28 Aug 29-31 = 2 days days in Sept 30 – 2 = 28 due date September 28 Calculate # of days late as of December 31 2 days past due in Sept 31 days past due in Oct 30 days past due in Nov 31 days past due in Dec The account is 94 days past due

26. A/R 800,000 Allowance for DA 7,500 22,500 Sales 3,500,000 Bad Debt Exp 22,500 Ex 8-7, 8-8 page 286 & problem 8-2A page 393