Ch8_Accounting for Receivables by xusuqin


									 Chapter 8
 Accounting for Receivables
Instructor: Chih-Liang Julian Liu
Department of Industrial and Business Management
Chang Gung University
Main Concept
What’s Receivables?

                 Collection of

      Accounting for Receivables

 Types of     Accounts         Notes         Statement
Receivables   Receivable     Receivable
                                            and Analysis
Accounts      Recognizing    Determining      Presentation
receivable    accounts       maturity date    Analysis
Notes         receivable     Computing
receivable    Valuing        interest
Other         accounts       Recognizing
receivables   receivable     notes receivable
              Disposing of   Valuing notes
              accounts       receivable
                             Disposing of
                             notes receivable
Types of Receivables
 Receivables are claims (請求權) from individuals and other
   companies that are expected to be collected in cash.

 Amounts owed by         Claims for which        “Nontrade”
  customers that              formal          (interest, loans to
result from the sale     instruments of       officers, advances
   of goods and        credit (正式信用工具        to employees (代墊
     services.             ) are issued           員工款), and
                         as proof of debt.       income taxes
   Accounts                 Notes                Other
   Receivable             Receivable           Receivables
Accounts Receivable (應收帳款)
 Three accounting issues:
  1. Recognizing (認列) accounts receivable.
  2. Valuing (評價) accounts receivable.
  3. Disposing of (處分) accounts receivable.

Recognizing Accounts Receivable
 Recognizing Accounts Receivable

Illustration: Assume that Hennes & Mauritz (SWE)
on July 1, 2011, sells merchandise on account to
Polo Company for $1,000 terms 2/10, n/30.
Prepare the journal entry to record this transaction
on the books of Hennes & Mauritz .

Jul. 1 Accounts Receivable          1,000
            Sales                           1,000
Recognizing Accounts Receivable
Illustration: On July 5, Polo returns merchandise worth
$100 to Hennes & Mauritz.

 Jul. 5    Sales Returns and Allowances 100
               Accounts Receivable                    100

Illustration: On July 11, Hennes & Mauritz receives
payment from Polo Company for the balance due.

 Jul. 11    Cash                           882
            Sales Discounts ($900 x .02)    18
               Accounts Receivable                    900
Recognizing Accounts Receivable
Illustration: Assume that customers use their JCPenney
(USA) credit card to purchase clothing with a sales price of
        Accounts Receivable              300
            Sales                                     300

Illustration: Assuming that customer owes $300 at the end
of the month, and JCPenney charges 1.5% per month on the
balance due, the adjusting entry to record interest revenue?.

        Accounts Receivable       4.5
            Interest Revenue ($300 x 1.5%)      4.5
Valuing Accounts Receivable
  Reported as an asset on the statement of
  financial position.

  Reported at the amount the company thinks
  they will be able to collect.

  Sales on account raise the possibility of
  accounts not being collected.
Valuing Accounts Receivable
  Valuation can be difficult because an
  unknown amount of receivables will become

  Companies record credit losses as debits to
  Bad Debts Expense (or Uncollectible
  Accounts Expense; 壞帳費用)
 Valuing Accounts Receivable
    Methods of Accounting for Uncollectible Accounts

    Direct Write-Off            Allowance Method
     (直接沖銷法)                         (備抵法)
                              Losses are estimated:
A company determines a           better matching.
particular account to be
uncollectible, it charges        receivable stated at net
the actual loss to Bad           realizable value.
Debts Expense.                   required by IFRS.
 Valuing Accounts Receivable
Direct Write-Off Method for Uncollectible Accounts

Under the direct write-off method, a company charges the
actual losses to Bad Debts Expense. Assume, for example,
that on December 12 Warden Co. writes off as uncollectible
M. E. Doran’s $200 balance. The entry (分錄) is:

Dec. 12    Bad Debt Expense (I/S)        200
               Accounts Receivable                   200
 Valuing Accounts Receivable
Disadvantage of Direct Write-Off Method

            Reduce Usefulness

      Income                Statement of
     Statement           Financial Position
Valuing Accounts Receivable
Allowance Method for Uncollectible Accounts
1. Companies estimate uncollectible accounts receivable at
   the end of each period.

2. To record estimated uncollectible accounts receivable:

   Bad Debts Expense (壞帳費用)              xxx
    Allowance for Doubtful Accounts (備抵壞帳)           xxx

3. To write off (沖銷) uncollectible accounts:
    Allowance for Doubtful Accounts xxx
       Accounts Receivable                     xxx
Valuing Accounts Receivable
Recording Estimated Uncollectibles: Assume that
Hampson Furniture has credit sales of $1,200,000 in 2011.
Of this amount, $200,000 remains uncollected at December
31. The credit manager estimates that $12,000 of these
sales will be uncollectible. The adjusting entry to record the
estimated uncollectibles is:

Dec. 31   Bad Debt Expense (I/S)        12,000

               Allowance for Doubtful Accounts 12,000
Valuing Accounts Receivable
Illustration 8-2 Presentation of allowance for doubtful accounts

                            Contra account

                                  Cash Realizable Value of A/R
Valuing Accounts Receivable
Recording the Write-Off of an Uncollectible Account:
The financial vice-president of Hampson Furniture authorizes
a write-off of the $500 balance owed by R.A.Ware
on March 1, 2012. The entry to record the write-off is:

Mar. 1   Allowance for Doubtful Accounts       500
             Accounts Receivable                        500
                                               Illustration 8-3
Valuing Accounts Receivable
Recording the Write-Off of an Uncollectible Account:
The write-off affects only statement of financial position
                                                 Illustration 8-3

                                                Illustration 8-4
 Valuing Accounts Receivable
Recovery (回復) of an Uncollectible Account: On July 1,
R. A. Ware pays the $500 amount that Hampson had written
off on March 1. These are the entries:

Jul. 1 (To reverse write-off of R.A. account)
         Accounts Receivable                    500
             Allowance for Doubtful Accounts          500

Jul. 1 (To record collection from R.A.)
          Cash                                  500
              Accounts Receivable                     500
Valuing Accounts Receivable
Bases Used for Allowance Method in real life
                                    Illustration 8-5
 Valuing Accounts Receivable
Percentage-of-Sales (銷貨百分比法)
Illustration: Assume that Gonzalez Company elects to use
the percentage-of-sales basis. It concludes that 1% of net
credit sales (賒銷淨額) will become uncollectible. If net credit
sales for 2011 are $800,000, the adjusting entry is:

 Dec. 31    Bad Debts Expense ($800,000 x 1%) 8,000

               Allowance for Doubtful Accounts        8,000
Valuing Accounts Receivable
                                          Illustration 8-6

 Emphasizes the matching of expenses with revenues.
 When the company makes the adjusting entry, it
 disregards the existing balance in Allowance for Doubtful
Valuing Accounts Receivable
Percentage-of-Receivables (應收帳款百分比法)
                            Illustration 8-7
                            Aging schedule
  Valuing Accounts Receivable
  Illustration: If the trial balance shows Allowance for
  Doubtful Accounts with a credit balance of $528, the
  company will make the following adjusting entry.

Dec. 31   Bad Debts Expense                    1,700

             Allowance for Doubtful Accounts           1,700
Valuing Accounts Receivable
                                              Illustration 8-8

 Occasionally the allowance account will have a debit
 balance prior to adjustment.

   Bad Debts Expense                  2,728
          Allowance for Doubtful Accounts           2,728
    Debt balance (Allowance account)

       Bad Debts Expense         Allowance for
                               Doubtful Accounts

Dec. 31 Adj. 2,728         Bal. $528
                                       Dec. 31 Adj. 2,728

                                        Bal. 2,228
Valuing Accounts Receivable

 Percentage of Sales approach:
   Focus on “Bad debt expense” estimate, existing balance
   in the allowance account is ignored for journal entry.
   Method achieves a matching of expense and revenues.

 Percentage of Receivables approach:
   Accurate valuation of receivables on the statement of
   financial position.
   Method may also be applied using an aging schedule.
   Balance in allowance account considered for journal entry.
Disposing of Accounts Receivable
 Companies sell receivables for two major

1. Receivables may be the only reasonable
  source of cash.

2. Billing and collection are often time-consuming
  and costly.
          Sale of Receivables


Account Receivable                       Account Receivable

                 Selling account receivable

           Charges a commission fee (1-3%)
Disposing of Accounts Receivable
Sale of Receivables

Factor (應收帳款管理公司)

  Buys receivables from businesses and then
   collects the payments directly from the

  Typically charges a commission to the
   company that is selling the receivables.

  Fee ranges from 1-3% of the amount of
   receivables purchased.
Disposing of Accounts Receivable
Illustration: Assume that Hendredon Furniture factors
$600,000 of receivables to Federal Factors. Federal Factors
assesses a service charge of 2% of the amount of
receivables sold. The journal entry to record the sale by
Hendredon Furniture is as follows.

  Cash                                588,000
  Service Charge Expense (I/S)         12,000
       ($600,000 x 2% = $12,000)
        Accounts Receivable                        600,000
Disposing of Accounts Receivable

Credit Card Sales (信用卡銷貨): Visa, MasterCard,
American Express

Retailer considers credit card sales the same as cash
     Retailer must pay card issuer a fee of 2 to 6% of the
     invoice price for processing the transactions.
     Retailer records sale in a similar manner as checks
     deposited from cash sale.
Advantages of Credit Cards
Credit Card Sales
Illustration: Anita Ferreri purchases $1,000 of compact
discs for her restaurant from Karen Kerr Music Co., using
her Visa First Bank Card. First Bank charges a service fee
of 3%. The entry to record this transaction by Karen Kerr
Music is as follows.

   Cash                                  970
   Service Charge Expense                 30
       Sales                                       1,000
Notes Receivable
A promissory note (本票) is a written promise to
pay a specified amount of money on demand or at
a definite time.

Promissory notes may be used:
 1. when individuals and companies lend or
    borrow money,
 2. when amount of transaction and credit period
    exceed normal limits, or
 3. in settlement of accounts receivable.
   Notes Receivable
To the Payee (受款人), the promissory note is a note receivable.
To the Maker (開票人), the promissory note is a note payable.

                                          Illustration 8-10
Notes Receivable
Determining the Maturity Date (到期日)

 Note expressed in terms of
  In counting, omit the date the note is issued
     but include the due date (算尾不算頭).
Notes Receivable
Computing Interest
                     Illustration 8-13

                       Illustration 8-14
Recognizing Notes Receivable

Illustration: Calhoun Company wrote $1,000, two-month,
12% promissory note to settle an open account, Wilma
Company makes the following entry for the receipt of the

  Notes receivable                   1,000
      Accounts receivable                      1,000
Valuing Notes Receivable

Like accounts receivable, companies report
short-term notes receivable at their cash (net)
realizable value.

Estimation of cash realizable value and bad
debts expense are done similarly to accounts

Allowance for Doubtful Accounts is used.
Disposing of Notes Receivable

1. Notes may be held to their maturity date
   (face value plus accrued interest).

2. Maker may default and payee must make an
   adjustment to the account.

3. Holder speeds up conversion to cash by
   selling the note receivable.
Disposing of Notes Receivable
Honor of Notes Receivable (應收票據到期兌現 )

   A note is honored (兌現) when its maker pays
   it in full at its maturity date.

Dishonor of Notes Receivable (應收票據到期不兌現 )

A dishonored (不兌現) note is not paid in full at maturity.

A dishonored note receivable is no longer negotiable.
Disposing of Notes Receivable
Honor of Notes Receivables
Illustration: Betty Co. lends Wayne Higley Inc. $10,000 on
June 1, accepting a five-month, 9% interest-bearing note.
Assuming that Betty Co. presents the note to Wayne Higley
Inc. on the maturity date, Betty Co.’s entry to record the
collection is:
Nov. 1   Cash                         10,375
              Notes Receivable                  10,000
              Interest Revenue                     375
Disposing of Notes Receivable
Honor of Notes Receivables
Illustration: If Betty Co. prepares financial statements as of
September 30, it must accrue interest. Betty Co. would
make an adjusting entry as follows.

Sept. 30     Interest Receivable              300
                Interest Revenue                        300
Disposing of Notes Receivable
Honor of Notes Receivables
Illustration: The entry by Betty Co. to record the honoring of
the Wayne Higley Inc. note on November 1 is:

Nov. 1    Cash                          10,375
              Notes Receivable                    10,000
              Interest Receivable                    300
              Interest Revenue                        75
 Disposing of Notes Receivable
 Dishonor of Notes Receivables
 Illustration: Wayne Higley Inc. on November 1 indicates
 that it cannot pay at the present time. If Betty Co. does
 expect eventual collection, it would make the following entry
 at the time the note is dishonored (assuming no previous
 accrual of interest).

Nov. 1    Accounts receivable           10,375
                 Notes receivable                    10,000
                 Interest revenue                        375
  Statement Presentation and Analysis
            Identify in the statement of financial position or in the
            notes each major type of receivable.

F/P         Report short-term receivables appear in current assets.
            Report both gross amount of receivables and allowance
            for doubtful account.
            Report bad debts expense and service charge expense
            as selling expenses.
            Report interest revenue under “Other” in the
            nonoperating section.
Statement Presentation and Analysis
                                              Illustration 8-15

This Ratio used to:
   Assess the liquidity of the receivables.
   Measure the number of times, on average, a company
   collects receivables during the period.
Statement Presentation and Analysis
                                            Illustration 8-16

Average collection period in terms of days.
    Used to assess effectiveness of credit and collection
    Collection period should not exceed credit term

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