Transcript Accounting 19e

Chapter 8 Receivables
Learning Objectives
1. Classification of Receivables
2. Internal Control of Receivables
3. Uncollectible Receivables
4. Uncollectibles – Allowance Method
5. Uncollectibles – Direct Write-Off Method
6. Characteristics of Notes Receivable
7. Accounting for Notes Receivable
8. Balance Sheet Presentation
9. Financial Analysis and Interpretation
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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 – interest receivable, taxes
receivable, and receivables from officers or
employees.
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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.
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Journal Entries – Direct Write-Off Method
Date
Description
Debit Credit
420
May. 10 Uncollectible Accts. Expense
Accts. Receivable - D. L. Ross
420
Write off uncollectible account of $420
Nov. 21 Accts. Receivable - D. L. Ross
Uncollectible Accts. Expense
420
Cash
420
Accts. Receivable - D. L. Ross
420
420
Reinstate and collect prior account written off.
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Accounting for Uncollectible Accounts Receivable
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.
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Journal Entries – Allowance Method
Date
Description
Debit Credit
4,000
Dec. 31 Uncollectible Accts. Expense
Allowance for Doubtful Acct.
4,000
Estimated a total of $4,000 will be uncollectible.
Jan. 21 Allowance for Doubtful Accts.
Accts. Receivable - J. Parker
610
610
Write off uncollectible account of $610.
June 10 Accts. Receivable - J. Parker
Allowance for Doubtful Accts.
Cash
Accts. Receivable - J. Parker
610
610
610
610
Reinstate and collect prior account written off.
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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.
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 is $510, the Uncollectible
Accounts Expense is $2,880 ($3,390 – $510).
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Accounts Receivable Aging and Uncollectibles
Customer
365
Balance
Ashby & Co.
B. T. Barr
Brock Co.
$ 150
610
470
Saxon Woods
Co.
Total
Not
Past
Due
Days Past Due
1-30
31-60
61-90
91-180
over
181-365
$ 150
$ 350
$260
$ 470
160
$86,300
160
$75,000 $4,000 $3,100 $1,900 $1,200
$800
$300
50%
80%
Uncollectibles
PERCENT
2%
5%
10%
20%
30%
Uncollectible percentages based on
experience and industry averages.
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Accounts Receivable Aging and Uncollectibles
Customer
365
Balance
Ashby & Co.
B. T. Barr
Brock Co.
$ 150
610
470
Saxon Woods
Co.
Total
Not
Past
Due
Days Past Due
1-30
31-60
61-90
over
91-180 181-365
$ 150
$ 350
$260
$ 470
160
$86,300
160
$75,000 $4,000 $3,100 $1,900 $1,200
$800
$300
50%
80%
Uncollectibles
PERCENT
AMOUNT
2%
$3,390 = $1,500
5%
10%
$200
$310
20%
$380
30%
$360
$400
$240
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Year-End Adjustment for Uncollectibles
General Ledger
Accounts Receivable
A 86,300
Allowance for Doubtful Accts.
510
A
Balance Sheet
Accounts receivable
Less allowance for
doubtful accounts
$86,300
3,390
Net accounts receivable 82,910
A Balances before adjustment
Uncollectible Accts. Expense
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Year-End Adjustment for Uncollectibles
General Ledger
Accounts Receivable
A 86,300
Allowance for Doubtful Accts.
510 A
2,880 B
Balance Sheet
Accounts receivable
Less allowance for
doubtful accounts
$86,300
3,390
Net accounts receivable 82,910
A Balances before adjustment
Uncollectible Accts. Expense
B
B Year-end adjustment
$3,390 - $510 = $2,880
2,880
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Year-End Adjustment for Uncollectibles
General Ledger
Accounts Receivable
A 86,300
Allowance for Doubtful Accts.
510 A
2,880 B
3,390
C
Uncollectible Accts. Expense
B
Balance Sheet
Accounts receivable
Less allowance for
doubtful accounts
$86,300
3,390 C
Net accounts receivable 82,910
A Balances before adjustment
B Year-end adjustment
$3,390 - $510 = $2,880
2,880
C Balance after adjustment
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Characteristics of 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
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Calculating Interest and Maturity Value
We received a $2,500, 10%, 90-day note dated March 16, 2003.
Interest Calculation
Principal x Rate x Time = Interest
$2,500 x 10% x 90 /360 = $62.50
Maturity Value Calculation
Principal + Interest = Maturity Value
$2,500 + $62.50 = $2,562.50
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Accounting for Notes Receivable
Date
Description
Debit Credit
6,000
Nov. 21 Notes Receivable
Accts. Receivable - Bunn Co.
6,000
Received a $6,000,30-day, 12% note.
Dec. 21 Cash
Notes Receivable
Interest Revenue
6,060
6,000
60
Collected amount due on note dated November 21.
Principal + Interest = Maturity Value
$6,000 +
($6,000 x 12% x 30 / 360) = $6,060
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Understanding the 360-Day Year

In commercial transactions it is traditional
to use a 360-day year.

The historic rationale for this procedure
was ease of calculation which made sense
before the computer and calculator age.

Why does this practice continue when
most small calculators and desktop
computers can present complex interest
calculations in a few seconds?
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Another Look at the 360-Day Year
1. Assume a $100,000 note dated June 1 for 90 days
at an interest rate of 12 percent. The textbook
calculation is as follows:
$100,000 x (12 / 100) x (90 /360) = $3,000.00
2. A more precise calculation is as follows:
$100,000 x (12 / 100) x (90 /365) = $2,958.90
3. When large sums are involved, the 360-day method
(known as ordinary interest or banker’s rule)
yields significantly more interest to the lender. It is
used by banks and commercial organizations.
4. The second method (known as exact interest) is
used by the federal government and the Federal
Reserve System.
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Crabtree Co.
Balance Sheet
December 31, 2003
Assets
Current assets:
Cash
Notes receivable
Accounts receivable
Less allowance for
doubtful accounts
Interest receivable
$119,500
250,000
$445,000
15,000
430,000
14,500
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Solvency Measures — The Short-Term Creditor
Accounts Receivable Turnover
Net sales on account
Accounts receivable (net):
Beginning of year
End of year
Total
Average
2003
2002
$1,498,000 $1,200,000
$ 120,000 $ 140,000
115,500
120,000
$ 235,000 $ 260,000
$ 117,500 $ 130,000
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Solvency Measures — The Short-Term Creditor
Accounts Receivable Turnover
Net sales on account
Accounts receivable (net):
Beginning of year
End of year
Total
Average
Accts. receivable turnover
2003
2002
$1,498,000 $1,200,000
$ 120,000 $ 140,000
115,500
120,000
$ 235,000 $ 260,000
$ 117,500 $ 130,000
12.7 times 9.2 times
Use: To assess the efficiency in collecting
receivables and in the management of credit
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Solvency Measures — The Short-Term Creditor
Number of Days’ Sales in Receivables
Net sales on account
Accounts receivable (net):
Beginning of year
End of year
Total
Average
2003
2002
$1,498,000 $1,200,000
$ 120,000 $ 140,000
115,500
120,000
$ 235,000 $ 260,000
$ 117,500 $ 130,000
Use: To assess the efficiency in collecting
receivables and in the management of credit
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Solvency Measures — The Short-Term Creditor
Number of Days’ Sales in Receivables
Net sales on account
Accounts receivable (net):
Beginning of year
End of year
Total
Average
Average collection period
2003
2002
$1,498,000 $1,200,000
$ 120,000 $ 140,000
115,500
120,000
$ 235,000 $ 260,000
$ 117,500 $ 130,000
28 days
36 days
Use: To assess the efficiency in collecting
receivables and in the management of credit
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Appendix
Discounting notes receivable
•
•
•
•
April 8, A 90-day, 12%, $1800 note receivable
May 3, discount at a bank, 14%.
Maturity day: July 7
Computer:
–
–
–
–
Maturity value: 1800+(1800*12*90/360)=1854
Discount: 1854*14%*65/360=46.87
Interest: 54-46.87=7.13
Protest fee: $12
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Notes receivable discount
Sales
company
Purchase
company
Bank
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The end of Chapter 8
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HOME WORK
READING:
1. Illustrative problem
2. Self- examination questions
3. Multiple choice
Writing:
1. Exercise: 8-13; 8-14
2. Problem : 8-1B
Discussion: compute the cash flow
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