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Chapter 8 Accounting for Receivables (應收款項會計) Instructor: Chih-Liang Julian Liu Department of Industrial and Business Management Chang Gung University Main Concept What’s Receivables? Valuation: Collection of Receivables Cash Accounting for Receivables Types of Accounts Notes Statement Presentation 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 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 refundable). 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 $300. 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 uncollectible. 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 (應收帳款減項) Cash Realizable Value of A/R (應收帳款淨變現價值) 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 accounts. 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 Accounts. Valuing Accounts Receivable Percentage-of-Receivables (應收帳款百分比法) Illustration 8-7 Aging schedule Valuing Accounts Receivable Percentage-of-Receivables 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 Percentage-of-Receivables 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 Summary 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 reasons. 1. Receivables may be the only reasonable source of cash. 2. Billing and collection are often time-consuming and costly. Sale of Receivables Customer Account Receivable Account Receivable Selling account receivable Factor Company (Bank) Cash 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 customers. 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 sales. 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 Months Days 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 note. 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 receivable. 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 Presentation 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. I/S Report interest revenue under “Other” in the nonoperating section. Statement Presentation and Analysis 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 Analysis Illustration 8-16 Average collection period in terms of days. Used to assess effectiveness of credit and collection policies. Collection period should not exceed credit term period.
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