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2. 2 Chapter 8 REPORTING AND ANALYZING RECEIVABLES

3. 3 Chapter 8 Reporting and Analyzing Receivables After studying Chapter 8, you should be able to : Identify the different types of receivables. Explain how accounts receivable are recognized in the accounts. Describe the methods used to account for bad debts. Compute the interest on notes receivable. Describe the entries to record the disposition of notes receivable.

4. 4 Amounts due from individuals and other companies-expected to be collected in cash Three major classes of receivables Accounts Receivable - amounts owed by customers on account, expected to be collected within 30-60 days Notes Receivable - claims for which formal instruments of credit are issued Other Receivables - non-trade receivables, for example, interest receivable and advances to employees TYPES OF RECEIVABLES 11 1

5. 5 Accounts Receivable... Amounts owed by customers on account. Result from the sale of goods/services. Expected to be collected within 30-60 days. Most significant type of claim held by company. Often called trade receivables.

6. 6 RECOGNIZING ACCOUNTS RECEIVABLE When a business sells merchandise to a customer on credit, Accounts Receivable is debited (increased) and Sales is credited (increased). July 1 Accounts Receivable – Polo Company 1,000 Sales 1,000

7. 7 RECOGNIZING ACCOUNTS RECEIVABLE When a business sells merchandise to a customer on credit, Accounts Receivable is debited and Sales is credited. When a business receives returned merchandise previously sold to a customer on credit, Sales Returns and Allowances is debited and Accounts Receivable is credited (decreased). July 5 Sales Returns and Allowances 100 Accounts Receivable – Polo Company 100

8. 8 Receivables are valued at the net amount expected to be received in cash Excludes amounts that the company estimates it will not be able to collect (net realizable value) Credit losses Recorded as Bad Debts Expense Considered a normal and necessary risk of doing business ACCOUNTING FOR BAD DEBTS 11 3

9. 9 2 Methods for Accounting for Uncollectible Accounts The Direct Write-off Method The Allowance Method

10. 10 Direct Write-Off Method Bad debt losses are not estimated. No allowance account is used. Accounts are written off when determined uncollectible as follows: Bad Debts Expense 200 Accounts Receivable--M. E. Doran 200 Not acceptable for financial reporting purposes.

11. 11  Allowance method Required when bad debts are deemed to be material in amount  Uncollectible accounts are estimated At the end of each period THE ALLOWANCE METHOD

12. 12 Estimated uncollectibles are debited to Bad Debts Expense and credited to Allowance for Doubtful Accounts at the end of each period. THE ALLOWANCE METHOD Dec. 31 Bad Debts Expense12,000 Allowance for Doubtful Accounts 12,000

13. Presentation of Allowance for Doubtful Accounts

14. Actual uncollectibles are debited to Allowance for Doubtful Accounts and credited to Accounts Receivable at the time the specific account is written off. THE ALLOWANCE METHOD Mar. 1 Allowance for Doubtful Accounts 500 Accounts Receivable - R. A. Ware 500 General Ledger Balances after Write-off

15. When there is recovery of an account that has been written off: reverse the entry made to write off the account and... Recovery of Uncollectible Accounts July 1 Accounts Receivable – R. A. Ware 500 Allowance for Doubtful Accounts 500 Record the collection in the usual manner. July 1 Cash 500 Accounts Receivable 500

16. Percentage of Receivables... Management establishes a percentage relationship between the amount of receivables and the expected losses from uncollectible accounts. 2% of $600,000(credit sales) = $12,000

17. 17 Aging of Accounts Receivable The analysis of customer balances by the length of time they have been unpaid. The longer a debt is outstanding the less likely it is to be paid.

18. AGING SCHEDULE The older the accounts, the less likely to be paid

19. 19 PERCENTAGE OF RECEIVABLES BASIS If the trial balance shows Allowance for Doubtful Accounts with a credit balance of $528, an adjusting entry for $1,700 ($2,228 - $528) is necessary.

20. PERCENTAGE OF RECEIVABLES BASIS If the trial balance shows Allowance for Doubtful Accounts with a credit balance of $528, an adjusting entry for $1,700 ($2,228 - $528) is necessary. Dec. 1 Bad Debts Expense 1,700 Allowance for Doubtful Accounts 1,700

21. Notes Receivable... Credit which is extended by use of a formal instrument.

22. 22 Credit instrument normally requires: payment of interest extends for time periods of 60-90 days or longer. Give the holder a stronger legal claim than the other receivables. Can be sold to another party. Notes Receivable...

23. 23 Notes Receivable... Are often accepted from customers who need to extend payment of an account receivable. Are often required from high-risk customers.

24. The basic formula for computing interest on an interest-bearing note is: The interest rate specified on the note is an annual rate of interest. FORMULA FOR COMPUTING INTEREST Face Value of Note Annual Interest Rate Time in Terms of One Year Interest X X = 11 4 Illustration 8-11 COMPUTATION OF INTEREST

25. 25 Review On 1/1/07, Oscar Co. gave a $10,000, four month, 9% note payable to Dina Inc. At the maturity date, how much will Dina Inc. collect from Oscar Co.? a. $10,000. b. $10,900. c. $10,225. d. $10,300. $10,000 x.09 x 120/360

26. HONOR OF NOTES RECEIVABLE A note is honored when it is paid in full at its maturity date. 10,375 10,000 375

27. HONOR OF NOTES RECEIVABLE If Wolder Co. prepares prepares financial statements as of September 30, interest for 4 months, or $300, would be accrued. 300

28. 28  Companies frequently sell their receivables to another company to shorten their cash-to-cash cycle  Reasons for selling receivables Size of receivables, large amounts of cash are tied up Receivables may be the only reasonable source of cash Billing and collecting are time consuming and costly ACCELERATING CASH RECEIPTS 11 9

29. SALE OF RECEIVABLES TO A FACTOR Hendrendon Furniture factors $600,000 of receivables to Federal Factors, Inc. Federal Factors assesses a service charge of 2% of the amount of receivables sold. Cash 588,000 Service Charge Expense (2% x $600,000) 12,000 Accounts Receivable 600,000

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