Receivables

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					                    9 – Receivables
After studying this chapter, you should be able to:
Objective 1 - Describe the common classifications of receivables.
Objective 2 - Describe the nature of and the accounting for
uncollectible receivables
Objective 3 - Describe the direct write-off method of accounting
  for uncollectible receivables.
Objective 4 - Describe the allowance method of accounting for
uncollectible receivables.
Objective 6 - Describe the nature, characteristics, and
  accounting for notes receivables.
Objective 7 - Describe the reporting of receivables on the
balance sheet.
                                                              1
 Objective 1                                              9-1
 Describe the common classifications of receivables.
 The term receivables includes all money claims against other
     entities, including people, business firms, and other
                         organizations.
Accounts receivable are normally expected to be collected
within a relatively short period, such as 30 or 60 days.

Notes receivable are amounts that customers owe for which a
formal, written instrument of credit has been issued.
Other receivables expected to be collected within one year
are classified as current assets. If collection is expected
beyond one year, these receivables are classified as noncurrent
                                                            2
assets and reported under the caption Investments.
 Objective 2                                               9-2

     Describe the nature of and the accounting for
               uncollectible receivables.
  Companies often sell their receivables to other companies.
  This transaction is called factoring the receivables, and the
           buyer of the receivables is called a factor.

Uncollectible Receivables
There are two methods of accounting for receivables that
appear to be uncollectible: The direct write off method
records bad debt expense only when an account is judged
to be worthless. The allowance method records bad debt
expense by estimating uncollectible accounts at the end of
the accounting period.                                 3
Objective 3
                                                              9-3
   Describe the direct write-off method of
  accounting for uncollectible receivables.
Direct Write-Off Method
             On May 10, a $4,200 accounts
          receivable from D. L. Ross has been
             determined to be uncollectible.
    May 10 Bad Debt Expense                   4 200 00
             Accounts Receivable—D. L. Ross              4 200 00




                                                                4
                                                            9-3


          The amount written off is later
           collected on November 21.

Nov. 21 Accounts Receivable—D. L. Ross     4 200 00
          Bad Debt Expense                            4 200 00

    21 Cash                                4 200 00
          Accounts Receivable—D. L. Ross              4 200 00




                                                                 5
 Objective                                                               9-4
    4               Describe the allowance method of
                 accounting for uncollectible receivables.

  Allowance Method

On December 31, ExTone Company estimates that a total of
   $40,000 of the $1,000,000 balance in her company’s
  Accounts Receivable will eventually be uncollectible.


 Dec. 31 Bad Debt Expense                    40 000 00
           Allowance for Doubtful Accounts               40 000 00
                Uncollectible accounts
                estimate.
                                                                     6
Net Realizable Value                           9-4




  The net amount that is expected to be
    collected, $960,000 ($1,000,000 –
$40,000), is called the net realizable value
   (NRV). The adjusting entry reduces
          receivables to the NRV



                                                7
                                                                9-4


  On January 21, John Parker’s account totaling
  $6,000 is written off because it is uncollectible.

Jan. 21 Allowance for Doubtful Accounts       6 000 00
         Accounts Receivable—John Parker                 6 000 00
             To write off the uncollectible
             account.




                                                                    8
                                                             9-4

During 2008, ExTone Company writes off $36,750
  of uncollectible accounts, including the $6,000
account of John Parker. After posting all entries to
write-off uncollectible amounts, the Allowance for
 Doubtful Accounts will have a credit balance of
           $3,250 ($40,000 – $36,750).

            ALLOWANCE FOR DOUBTFUL ACCOUNTS
     Total                   Jan. 1, 2008 Bal.      40,000


         {
   accounts    Jan. 21 6,000
   written off Feb. 2  3,900
                   ―     ―
    $36,750
                   ―     ―
                             Dec. 31 Unadjusted bal 3,250

                                                             9
Collecting a Written-Off Account              9-4



         John Parker’s account of $6,000
        which was written off on Jan 21is
         later collected on June 10. Two
       entries are needed: one to reinstate
       John Parker’s account and a second
           to record receipt of the cash.




                                              10
          Entry 1: Reinstate the account.                  9-4

June 10 Accounts Receivable—John Parker    6 000 00
         Allowance for Doubtful Accounts              6 000 00
             To reinstate the account
             written off on Jan. 21.




        Entry 2: Record collection of cash.

June 10 Cash                               6 000 00
         Accounts Receivable—John Parker              6 000 00
             Collection of written-off
            account.

                                                             11
                                                     9-4

Example Exercise 9-2

   Journalize the following transactions using the
   allowance method of accounting for
   uncollectible receivables.
    July 9 Received $1,200 from Jay Burke
            and wrote off the remainder owed
            of $3,900 as uncollectible.
    Oct. 11 Reinstated the account of Jay Burke
            and received $3,900 cash in full
            payment.

                                                     12
Estimating Uncollectibles
                                                     9-4
  The allowance method uses two ways to estimate
  the amount debited to Bad Debt Expense.
   1. Estimate based on a percentage of sales.
      • A straight percentage calculation of sales
   2. Estimate based on analysis of receivables.
       The longer an account receivable 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.                13
Aging of Accounts Receivables
                                9-4




                                14
Estimate Based on Analysis of            9-4
Receivables


         If, based on analysis of
     receivables, it is estimated that
    $3,390 of the receivables will be
    uncollectible and the Allowance
      for Uncollectible Accounts
    currently has a balance of $510,
    the Bad Debt Expense must be
   debited for $2,880 ($3,390 – $510).
                                         15
Estimate Based on Analysis of Receivables
                                                                     9-4
    Aug. 31 Bad Debt Expense                   2 880 00
             Allowance for Doubtful Accounts              2 880 00
                 Uncollectible accounts
                 ($3,390 – $510).


                         BAD DEBT EXPENSE
          Aug. 31 Adj. entry 2,880
          Aug. 31 Adj. bal.  2,880


             ALLOWANCE FOR DOUBTFUL ACCOUNTS
                             Aug. 31 Unadj. bal.   510
                             Aug. 31 Adj. entry 2,880
                             Aug. 31 Adj. bal.   3,390

                                                                 16
 If the unadjusted balance of Allowance             9-4
for Uncollectible Accounts had been a
debit balance of $300, the amount of the
    adjustment would have been $3,690
             ($3,390 + $300).

                BAD DEBT EXPENSE
 Aug. 31 Adj. entry 3,690
 Aug. 31 Adj. bal.  3,690



    ALLOWANCE FOR DOUBTFUL ACCOUNTS
 Aug. 31 Unadj. bal. 300 Aug. 31 Adj. entry 3,690
                         Aug. 31 Adj. bal.  3,390


                                                      17
                                                               9-4

Example Exercise 9-4

  At the end of the current year, Accounts Receivable has a
  balance of $800,000; Allowance for Doubtful Accounts
  has a credit balance of $7,500; and net sales for the year
  total $3,500,000. Using the aging method, the balance of
  Allowance for Doubtful Accounts is estimated as $30,000.
  Determine (a) the amount of the adjusting entry for
  uncollectible accounts; (b) the new balance of Accounts
  Receivable, Allowance for Doubtful Accounts, and Bad
  Debt Expense, and (c) the net realizable value of accounts
  receivable.


                                                               18
 Objective 6                                   9-6

Characteristics of, and accounting for Notes Receivable
   A note receivable, or promissory note, is a
   written document containing a promise to pay:
   •   a specific amount of money (face amount)
   •   on demand or at a definite time
   •   to an individual or a business (payee), or to
       the bearer or holder of the note.
       The one making the promise is called the
        maker. The date a note is to be paid is
         called the due date or maturity date.       19
                                                             9-6

  2,500.00
$_____________
                         Fresno, California______________20___
                                            March 16        08
     Ninety days
 ________________ _AFTER DATE _______ PROMISE TO PAY TO
                                  We
                Judson Company
 THE ORDER OF ____________________________________________
 Two thousand five hundred 00/100---------------------------
 _________________________________________________DOLLARS
               City National Bank
 PAYABLE AT ______________________________________________
 VALUE RECEIVED WITH INTEREST AT ____10%
       14         June 14, 2008
 NO. _______ DUE___________________
                                        H. B. Lane
                           TREASURER, WILLIARD COMPANY


         What is the due date of the above note?
                                                             20
 Accounting for Notes Receivable                            9-6


       Received a $6,000, 12%, 30-day note
      dated November 21, 2008 in settlement
         of the account of W. A Bunn Co.
Nov. 21 Notes Rec.—W. A. Bunn Co.     6 000 00
         Accts. Rec.—W. A Bunn Co.               6 000 00
            Received 30-day, 12%
            note dated November 21,
            2008.



                                                            21
                                                                 9-6

   On December 21, when the note matures, the
 firm receives $6060 from W. A. Bunn Company
            ($6,000 plus $60 interest).

Dec. 21 Cash                               6 060 00
          Notes Rec.—W. A. Bunn Co.                   6 000 00
          Interest Revenue*                             60 00
               Received principal and
               interest on matured note.

     *$6,000 x 12% x 30/360 = $60

                                                                 22
                                                            9-6

 A 90-day, 12% note dated December 1, 2008, is
  received from Crawford Company to settle its
     account, which has a balance of $4,000.

2008
Dec. 1 Notes Rec.—Crawford Co.        4 000 00
         Accts. Rec.—Crawford Co.                4 000 00
             Accepted note in
             settlement of account.




                                                            23
                                                            9-6
       Assuming that the accounting period ends
        on December 31, an adjusting entry is
       required to record the accrued interest of
            $40 ($4,000 x 0.12 x 30/360).
2008
Dec. 31 Interest Receivable               40 00
           Interest Revenue                         40 00
               Accrued interest ($4,000
               x 12% x 30/360).




                                                            24
                                                               9-6

   On March 1, 2009, $4,120 is received for the
       note ($4,000) and interest ($120).
2009
Mar. 1 Cash                              4 120 00
        Notes Rec.—Crawford Co.                     4 000 00
        Interest Receivable                            40 00
        Interest Revenue                              80 00
            Collected note and
            accrued interest.


                         ($4,000 x 12% x 30/360).

                                                               25
Objective 7                 Describe the reporting of
                        receivables on the balance sheet.               9-7

   Crabtree Co.
   Balance Sheet
   December 31, 2008

                               Assets
    Current assets:
     Cash                                                   $119,500
     Notes receivable                                        250,000
     Accounts receivable                        $445,000
        Less allowance for
        doubtful accounts                          15,000 430,000
     Interest receivable                                   14,500
     Merchandise inventory                                714,000

       Receivables (including the allowance account) are highlighted
                                                                       26
Accounts Receivable Turnover                        9-7



The accounts receivable turnover measures
how frequently during the year the accounts
  receivable are being converted to cash.

Accounts Receivable =          Net sales
     Turnover         Average accounts receivable




                                                    27
Federal Express Corporation                                     9-7

                                   2005    2004         2003
Net sales                        $19,364 $17,383         ---
Accounts receivable                2,703   2,475       $2,199
Average accounts
                                                   *
 receivable                        2,589   2,337
      *[($2,475   + $2,199)/2]


       Accounts Receivable             $17,383
                           =
        Turnover (2004)                 $2,337

       Accounts Receivable = 7.4
        Turnover (2004)

                                                                28
Federal Express Corporation                                     9-7

                                   2005    2004         2003
Net sales                        $19,364 $17,383         ---
Accounts receivable                2,703   2,475       $2,199
Average accounts
                                           *
 receivable                        2,589       2,337
      *[($2,703   + $2,475)/2]


       Accounts Receivable             $19,364
                           =
        Turnover (2005)                 $2,589

       Accounts Receivable = 7.5
        Turnover (2005)

                                                                29
Number of Days’ Sales in Receivables                  9-7


      Use: To assess the efficiency in
           collecting receivables and in
           the management of credit.

   Number of Days’      Average Accounts receivable
                      =
  Sales in Receivables      Average daily sales




                                                      30
Federal Express Corporation                           9-7

                        2005    2004     2003
  Net sales           $19,364 $17,383     ---
  Accounts receivable   2,703 2,475 $2,199
  Average accounts
    receivable          2,589 2,337*
  Average daily sales    53.1    47.6 **
       *   [($2,475 + $2,119)/2]   ** ($17,383/365)



    Number of Days’ Sales   $2,337
                          =
    in Receivables (2004)    47.6

    Number of Days’ Sales = 49.1
    in Receivables (2004)
                                                      31
Federal Express Corporation                          9-7

                        2005    2004  2003
  Net sales           $19,364 $17,383 ---
  Accounts receivable   2,703 2,475 $2,199
  Average accounts
    receivable          2,589 * 2,337
  Average daily sales    53.1** 47.6
       *   [($2,703+ $2,475)/2]   ** ($19,364/365)


    Number of Days’ Sales   $2,589
                          =
    in Receivables (2005)    53.1

    Number of Days’ Sales = 48.8
    in Receivables (2005)
                                                     32

				
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