1. 7-1 Receivables Chapter 7 Electronic Presentation by Douglas Cloud Pepperdine University

2. 7-2 1.Describe 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.Describe the allowance method of accounting for uncollectible receivables. Learning Goals After studying this chapter, you should be able to: ContinuedContinued

3. 7-3 5.Describe the direct write-off method of accounting for uncollectible receivables. 6.Describe the nature, characteristics, and accounting for notes receivable. 7.Describe the reporting of receivables on the balance sheet. 8.Describe the principles of managing receivables. Learning Goals ContinuedContinued

4. 7-4 9.Compute and interpret the accounts receivable turnover and the number of days’ sales in receivables. Learning Goals

5. 7-5 1 Learning Goal Describe the common classifications of receivables.

6. 7-6 When merchandise or services are sold on credit, an accounts receivable is established.

7. 7-7 Most accounts receivable are expected to be collected in 30 to 60 days; so, they are current assets.

8. 7-8 Notes receivable are amounts that customers owe for which a formal, written instrument of credit has been issued.

9. 7-9 Notes and accounts receivable that result from sales transactions are sometimes called trade receivables.

10. 7-10 Summarize and provide examples of internal control procedures that apply to receivables. 2 Learning Goal

11. 7-11

12. 7-12 Describe the nature of and the accounting for uncollectible receivables. 3 Learning Goal

13. 7-13 Often when a company issues its own credit card, it sells its receivables to other companies. This is called factoring and the buyer is called the factor.

14. 7-14 Regardless of the care used in granting credit and the collection procedure used, normally a part of the credit sales will not be collectible.

15. 7-15 The two methods of accounting for receivables that appear to be uncollectible are the allowance method and the direct-write-off method.

16. 7-16 Describe the allowance method of accounting for uncollectible receivables. 4 Learning Goal

17. 7-17 Richards Company, a new company with a fiscal period ending on December 31, ends the year with $1,000,000 in the Accounts Receivable account. Based on careful study, Richards estimates that $40,000 of the $1,000,000 will eventually be uncollectible. A year-end adjusting entry is needed:

18. 7-18 Dec. 31Uncollectible Accounts Expense40,000 Allowance for Doubtful Accounts40,000 Also called Bad Debts Expense or Doubtful Accounts Expense A contra account to Accounts Receivable Because specific customer accounts cannot be identified at this time, the allowance account is used.

19. 7-19 Subtracting the balance of the allowance account from the receivables balance provides the net realizable value—which is the amount Richards expects to collect. $1,000,000 - 40,000 $ 960,000

20. 7-20 Write-Offs to the Allowance Account On January 21 John Parker, one of Richards Company’s receivables, files for bankruptcy. Thus, his account of $6,000 is deemed uncollectible. The following entry is required: Jan. 21Allowance for Doubtful Accounts6,000 Accounts Receivable—J. Parker 6,000

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22. 7-22 Collecting a Written-Off Account John Parker won the state lottery, so he is paying all of his bankruptcy debts. On June 10, Richards Co. receive a check for $6,000. 10Cash6,000 Accounts Receivable—J. Parker 6,000 June 10Accounts Receivable—J. Parker6,000 Allowance for Doubtful Accts. 6,000

23. 7-23 Estimating Uncollectibles Estimate Based on Sales Allowance for Doubtful Accounts Bal. 7,000 It is estimated that 1% of the $3 million in credit sales will become uncollectible. Dec. 31Uncollectible Accounts Expense30,000 Allowance for Doubtful Accounts30,000 30,000 37,000

24. 7-24 Estimating Uncollectibles The process of determining how long a receivable has been outstanding and attaching a percentage to that time period is referred to as aging the receivables. Estimate Based on Analysis of Receivables

25. 7-25 Estimating Uncollectibles Estimate Based on Analysis of Receivables The longer an account has been outstanding, the less like the receivable will be collected.

26. 7-26 Accounts Receivable Aging and Uncollectibles Not Days Past Due Past over CustomerBalanceDue 1-30 31-6061-9091-180 181-365 365 Ashby & Co.$ 150$ 150 B. T. Barr610$ 350$260 Brock Co.470$ 470 J. Zimmer Co.160160 Total$86,300$75,000 $4,000$3,100 $1,900$1,200$800$300 Total accounts receivable shown by age.

27. 7-27 2%5%10%20%30%50% 80% Uncollectibles PERCENT Uncollectible percentages based on experience and industry averages. Not Days Past Due Past over CustomerBalanceDue 1-30 31-6061-9091-180 181-365 365 Ashby & Co.$ 150$ 150 B. T. Barr610$ 350$260 Brock Co.470$ 470 J. Zimmer Co.160160 Total$86,300$75,000 $4,000$3,100$1,900$1,200$800$300 Accounts Receivable Aging and Uncollectibles

28. 7-28 2%5%10%20%30%50% 80% Uncollectibles PERCENT AMOUNT $3,390 =$1,500$200$310$380$360$400 $240 Accounts Receivable Aging and Uncollectibles Not Days Past Due Past over CustomerBalanceDue 1-30 31-6061-9091-180 181-365 365 Ashby & Co.$ 150$ 150 B. T. Barr610$ 350$260 Brock Co.470$ 470 J. Zimmer Co.160160 Total$86,300$75,000 $4,000$3,100$1,900$1,200$800$300

29. 7-29 Estimating Uncollectibles Estimate Based on Analysis of Receivables Allowance for Doubtful Accounts Bal. 510 By aging, it is estimated that $3,390 of the credit sales will become uncollectible. Dec. 31Uncollectible Accounts Expense2,880 Allowance for Doubtful Accounts2,880 2,880 3,390

30. 7-30 Estimating Uncollectibles Estimate Based on Analysis of Receivables Notice that when the estimation is based on accounts receivable, the calculated amount is the desired ending balance in the allowance account.

31. 7-31 Describe the direct write-off method of accounting for uncollectible receivables. 5 Learning Goal

32. 7-32 While the allowance method is preferred, there are situations where the cash basis is acceptable.

33. 7-33 What type of situations?

34. 7-34 The direct write-off method is acceptable when it is impossible to accurately estimate the uncollectibles.

35. 7-35 It is also acceptable when a business sells most of its goods or services for cash. The amount of uncollectibles is small.

36. 7-36 D. L. Ross owes Hankin Company $4,200. All efforts to collect have failed, so on May 10 Hankin decides the account is uncollectible. May 10Uncollectible Accounts Expense4,200 Accounts Receivable—D. L. Ross4,200 Note that the direct write-off-method debits the expense account at the time of the write-off.

37. 7-37 On November 21, Hankin receives a check for $4,200 from D. L. Ross. Nov. 21Accounts Receivable—D. L. Ross4,200 Uncollectible Accounts Expense4,200 This entry “reinstates” the debt. 21Cash4,200 Accounts Receivable—D. L. Ross4,200

38. 7-38 Describe the nature, characteristics, and accounting for notes receivable. 6 Learning Goal

39. 7-39 Notes Receivable $_____________ Fresno, California______________20___ March 16 05 ________________ _AFTER DATE _______ PROMISE TO PAY TO Ninety days We THE ORDER OF ____________________________________________ Judson Company _________________________________________________DOLLARS Two thousand five hundred 00/100--------------------------- PAYABLE AT ______________________________________________ City National Bank VALUE RECEIVED WITH INTEREST AT ____ 10% 2,500.00 NO. _______ DUE___________________ 14 June 14, 2005 TREASURER, WILLIARD COMPANY H. B. Lane PayeePayee MakerMaker Due Date

40. 7-40  a specific amount of money (principal)  to a specific person or company (payee)  by a specific person (maker)  on a specific date or upon demand  plus interest at a specific percentage of the principal (face) amount per year  a specific amount of money (principal)  to a specific person or company (payee)  by a specific person (maker)  on a specific date or upon demand  plus interest at a specific percentage of the principal (face) amount per year A promissory note is a written document containing a promise to pay:

41. 7-41 Principal + Interest = Maturity Value $6,000 + $60 = $6,060 Principal x Rate x Time = Interest $6,000 x 12% x 30/360 = $60 Interest Calculation Received a $6,000, 12%, 30-day note dated November 21, 2005 from W. A. Bunn in settlement of a past-due account. Maturity Value Calculation

42. 7-42 Nov. 21Notes Receivable—W. A. Bunn6,000 Accounts Receivable—W. A. Bunn6,000 When the note is received. Dec. 21Cash6,060 Notes Receivable—W. A. Bunn6,000 Interest Revenue60 At maturity date.

43. 7-43 If a note matures in a later fiscal period, the company holding the note makes an adjusting entry for accrued interest.

44. 7-44 Crawford Company uses a 90-day, 12% note, dated December 1, 2005, to settle its account, which has a balance of $4,000. Dec. 31Interest Receivable40 Interest Revenue40 Dec. 1Notes Receivable—Crawford Co.4,000 Accounts Receivable— Crawford Co.4,000 2005 $4,000 x.12 x 30/360 Mar. 1Cash4,120 Notes Receivable4,000 Interest Receivable40 Interest Revenue80 2006

45. 7-45 Describe the reporting of receivables on the balance sheet. 7 Learning Goal

46. 7-46 Starbucks’ ASSETS Sept. 30, 2001 (in thousands) Current assets: Cash and cash equivalents$113,237 Marketable securities107,312 Accounts receivable, net of allowance of $4,59090,425 Inventories221,253 Prepaid expenses and other current assets 61,698 Total current assets$593,925

47. 7-47 Describe the principles of managing accounts receivable. 8 Learning Goal

48. 7-48 Screening Customers Screening customers involves assessing which customers should be granted credit. In addition to analyzing the buyer’s application and documents, the seller usually requires an independent credit report… …and often will contact the buyer’s bank and other credit references. Dun & Bradstreet provides credit ratings for many business customers.

49. 7-49 Determining Credit Terms Once a seller has decided to grant credit to a buyer, the seller must determine credit terms for the sale.

50. 7-50 Determining Credit Terms This includes determining a credit limit which is based on the credit worthiness of the customer.

51. 7-51 Monitoring Collections Sellers should monitor concentrations of credit risk in any one customer or class of customers.

52. 7-52 Compute and interpret the accounts receivable turnover and the number of days’ sales in receivables. 9 Learning Goal

53. 7-53 Accounts Receivable Turnover 20062005 Net sales on account$1,498,000$1,200,000 Accounts receivable (net): Beginning of year$ 120,000$ 140,000 End of year 115,500120,000 Total$ 235,000$ 260,000 Average$ 117,500$ 130,000 $1,498,000 $117,500 $1,200,000 $130,000 Net Sales Average accounts receivable Use:To assess the efficiency in collecting receivables and in the management of credit 12.7 9.2

54. 7-54 Number of Days’ Sales in Receivables 2006 Net sales on account$1,498,000 Accounts receivable (net): Beginning of year$ 120,000 End of year 115,500 Total$ 235,000 Average$ 117,500 Accounts receivable, end of year Average daily sales on account $115,500 ($1,498,000 ÷ 365 days) = 28 days Use:To assess the efficiency in collecting receivables and in the management of credit

55. 7-55 The End Chapter 7

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