Accounting principles 8th weygars kieso kimmel chapter 09

Accounts ReceivableNotes Receivable Notes Receivable Statement Presentation and Analysis Statement Presentation and Analysis Presentation Analysis Determining maturity date Computing int

ACCOUNTING FOR

RECEIVABLES

CHAPTER 9 CHAPTER 9 9

1 Identify the different types of receivables.

2 Explain how companies recognize accounts receivable.

3 Distinguish between the methods and bases companies use to

value accounts receivable.

4 Describe the entries to record the disposition of accounts

receivable.

5 Compute the maturity date of and interest on notes

receivable.

6 Explain how companies recognize notes receivable.

7 Describe how companies value notes receivable.

8 Describe the entries to record the disposition of notes

receivable.

Study Objectives

Study Objectives

Accounts Receivable

Notes Receivable

Notes Receivable

Statement Presentation and Analysis

Statement Presentation and Analysis

Presentation Analysis

Determining maturity date Computing interest Recognizing notes receivable Valuing notes receivable

Accounting for Receivables

Accounting for Receivables

Recognizing accounts receivable Valuing accounts receivable Disposing of

Amounts due from individuals and other companies that

are expected to be collected in cash

Amounts owed by

customers that

result from the

sale of goods and

services

Accounts Receivable

as proof of debt

“Nontrade”

(interest, loans to officers, advances

to employees, and income taxes refundable).

Notes Receivable

Notes Receivable Receivables Receivables Other Other

Three accounting issues:

1 Recognizing accounts receivable.

2 Valuing accounts receivable.

3 Disposing of accounts receivable.

E5-5 Presented are transactions related to Wheeler Company.

1 On December 3,Wheeler Company sold $500,000 of

merchandise to Hashmi Co., terms 2/10, n/30, FOB shipping point

2 On December 8, Hashmi Co was granted an allowance of

$27,000 for merchandise purchased on December 3.

3 On December 13,Wheeler Company received the balance

due from Hashmi Co

Instructions: Prepare the journal entries to record these

transactions on the books of Wheeler Company using a

Recognizing Accounts Receivable

Recognizing Accounts Receivable

E5-5 Prepare the journal entries for Wheeler Company

1 On December 3, Wheeler Company sold $500,000 of

merchandise to Hashmi Co., terms 2/10, n/30, FOB

shipping point

Dec 3

Recognizing Accounts Receivable

Recognizing Accounts Receivable

E5-5 Prepare the journal entries for Wheeler Company.

2 On December 8, Hashmi Co was granted an

allowance of $27,000 for merchandise purchased

on December 3

Sales returns and allowances 27,000

Dec 8

Recognizing Accounts Receivable

Recognizing Accounts Receivable

E5-5 Prepare the journal entries for Wheeler Company

3 On December 13, Wheeler Company received the

balance due from Hashmi Co

Recognizing Accounts Receivable

Recognizing Accounts Receivable

Valuing Accounts Receivables

Are reported as a current asset on the balance sheet

Are reported at the amount the company thinks they will be able to collect

Sales on account raise the possibility of accounts not being collected

Valuation can be difficult because an unknown amount of receivables will become uncollectible

Accounts Receivable

Accounts Receivable

receivable not stated at

net realizable value

not acceptable for

financial reporting

Valuing Accounts Receivable

Valuing Accounts Receivable

Assets Current Assets:

Total current assets 1,673

Presentation of Accounts Receivable

Presentation of Accounts Receivable

Assets Current Assets:

Accounts receivable, net of $25 allowance

Merchandise inventory 812

Total current assets 1,673

Presentation of Accounts Receivable

Presentation of Accounts Receivable

Valuing Accounts Receivable

Valuing Accounts Receivable

Allowance Method for Uncollectible Accounts

1 Companies estimate uncollectible accounts

receivable

2 To record estimated uncollectibles, companies

debit Bad Debts Expense and credit Allowance for Doubtful Accounts (a contra-asset account).

3 When companies write off specific uncollectible

accounts, they debit Allowance for Doubtful Accounts and credit Accounts Receivable.

E9-6 On December 31, 2008, Jarnigan Co estimated

that 2% of its net sales of $400,000 will become

uncollectible The company recorded this amount as an

addition to Allowance for Doubtful Accounts On May 11,

2009, Jarnigan Co determined that Terry Frye’s account was uncollectible and wrote off $1,100 On June 12, 2009, Frye paid the amount previously written off

Instructions

Prepare the journal entries on December 31, 2008, May

Valuing Accounts Receivable

Valuing Accounts Receivable

E9-6 Prepare the journal entries on December 31, 2008, May 11, 2009, and June 12, 2009.

December 31 ($400,000 x 2% = 8,000)

Valuing Accounts Receivable

Valuing Accounts Receivable

E9-6 Prepare the journal entries on December 31, 2008, May 11, 2009, and June 12, 2009.

June 12 (recovery)

Valuing Accounts Receivable

Valuing Accounts Receivable

May 11 (write-off)

Bases Used for Allowance Method

Valuing Accounts Receivable

Valuing Accounts Receivable

Illustration 9-5

Accounts receivable balance $72,500

Estimated % of A/R not collected 8%

Unadjusted balance in Allowance for Doubtful Accounts:

Case 2 $150 (debit balance)

Valuing Accounts Receivable

Valuing Accounts Receivable

Credit sales $500,000

Estimated percentage uncollectible 1.25%

Valuing Accounts Receivable

Valuing Accounts Receivable

Percentage of Sales – disregards the existing

balance in Allowance for Doubtful Accounts

Journal entry:

Bad debt expense 6,250

Actual balance (credit) (150) 150

Percentage of Sales

Valuing Accounts Receivable

Valuing Accounts Receivable

The Allowance for Doubtful Accounts has an ending

balance of $6,400 in Case 1 and $6,100 in Case 2

Accounts receivable $ 72,500

Estimated percentage uncollectible x 8%

Required balance in allowance account $ 5,800

===================================================

What will be the amount of the adjusting entry?

Valuing Accounts Receivable

Valuing Accounts Receivable

Percentage of Receivables

Actual balance (credit) (150) 150

Valuing Accounts Receivable

Valuing Accounts Receivable

Actual balance (credit) (150) 150

Journal entry – Case 2:

Percentage of Receivables

Valuing Accounts Receivable

Valuing Accounts Receivable

When estimating losses using Percentage of

Receivables, companies often prepare an aging

schedule , which classifies customer balances by the

length of time they have been unpaid

Valuing Accounts Receivable

Valuing Accounts Receivable

Illustration 9-7

Percentage of Sales approach:

Summary

Focus on “Bad debt expense” estimate, any balance in the allowance account is ignored

Method achieves a matching of cost and revenues.

Percentage of Receivables approach:

Accurate valuation of receivables on the balance sheet Method may also be applied using an aging schedule

Valuing Accounts Receivable

Valuing Accounts Receivable

Companies sell receivables for two major

Disposing of Accounts Receivable

Disposing of Accounts Receivable

Disposing of Accounts Receivable

Disposing of Accounts Receivable

Sale of Receivables

A factor buys receivables from businesses and then

collects the payments directly from the customers

Typically the factor charges a commission to the

company that is selling the receivables

The fee ranges from 1-3% of the amount of

receivables purchased

E9-7 (a) On March 3, Cornwell Appliances sells

$680,000 of its receivables to Marsh Factors Inc Marsh Factors assesses a finance charge of 3% of the amount of receivables sold Prepare the entry on Cornwell

Appliances’ books to record the sale of the receivables

Disposing of Accounts Receivable

Disposing of Accounts Receivable

($680,000 x 3% = $20,400)

Disposing of Accounts Receivable

Disposing of Accounts Receivable

Credit Card Sales

Retailer considers credit card sales the same as

Retailer must pay card issuer a fee of 2 to 4% for processing the transactions.

Retailer records the sale in a similar manner

as checks deposited from cash sale.

E9-7 (b) On May 10, Dale Company sold merchandise for

$3,500 and accepted the customer’s America Bank

MasterCard America Bank charges a 4% service charge for credit card sales Prepare the entry on Dale

Company’s books to record the sale of merchandise

Disposing of Accounts Receivable

Disposing of Accounts Receivable

($3,500 x 4% = $140)

Notes Receivable

Notes Receivable

Companies may grant credit in exchange for a

promise to pay a specified amount of money on

demand or at a definite time

Promissory notes may be used:

borrow money,

exceed normal limits, or

Notes Receivable

Notes Receivable

Illustration 9-10

Determining the Maturity Date

Notes Receivable

Notes Receivable

Note expressed in terms of

MonthsDays

Computing Interest Illustration 9-13

Recognizing Notes Receivable

Recognizing Notes Receivable

E9-10 Orosco Supply Co has the following transactions

related to notes receivable during the last 2 months of 2008.

Nov 1 Loaned $15,000 cash to Sally Givens on a 1-year, 10%

note.

Dec 11 Sold goods to John Countryman, Inc., receiving a

$6,750, 90-day, 8% note.

Dec 16 Received a $4,000, 6-month, 9% note in exchange for

Bob Reber’s outstanding accounts receivable.

Dec 31 Accrued interest revenue on all notes receivable.

Instructions

E9-10 Nov 1 Loaned $15,000 cash to Sally Givens on a

1-year, 10% note Dec 11 Sold goods to John Countryman, Inc., receiving a $6,750, 90-day, 8% note Dec 16

Received a $4,000, 6-month, 9% note in exchange for Bob Reber’s outstanding accounts receivable.

Recognizing Notes Receivable

Recognizing Notes Receivable

E9-10 Dec 31 Accrued interest revenue on all notes

receivable

Dec 31

Recognizing Notes Receivable

Recognizing Notes Receivable

Valuing Notes Receivable

Notes Receivable

Notes Receivable

Like accounts receivable, companies report

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

Notes Receivable

Notes Receivable

adjustment to the account

the note receivable

Honor of Notes Receivable

Notes Receivable

Notes Receivable

at its maturity date

Dishonor of Notes Receivable

A dishonored note receivable is no longer

Disposing of Notes Receivable

Notes Receivable

Notes Receivable

Everhart, Inc., issuing a 6-month, 9% note At the maturity date, November 2, Everhart indicates that it cannot pay.

Instructions

(a) Prepare the entry to record the issuance of the note.

(b) Prepare the entry to record the dishonor of the note,

assuming that Kleinsorge Company expects collection will

occur.

(c) Prepare the entry to record the dishonor of the note,

Notes Receivable

Notes Receivable

E9-13 (a) Prepare the entry to record the issuance of

the note (b) Prepare the entry to record the dishonor of

the note, assuming that Kleinsorge Company expects

collection will occur.

Notes Receivable

Notes Receivable

E9-13 (c) Prepare the entry to record the dishonor of

the note, assuming that Kleinsorge Company does not

expect collection in the future.

Allowance for doubtful accounts 7,600

(c)

When there is no hope of collection, the note holder would

write off the face value of the note No interest revenue

Statement Presentation and Analysis

Statement Presentation and Analysis

Identify in the balance sheet or in the notes, each major type of receivable

Report short-term receivables as 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 revenues

B/S

I/S

Analysis of Receivables

This Ratio used to:

Assess the liquidity of the receivables.

Measure the number of times, on average, a company

Statement Presentation and Analysis

Statement Presentation and Analysis

Illustration 9-15

Analysis of Receivables

Variant of the accounts receivable turnover ratio is

average collection period in terms of days

Used to assess effectiveness of credit and collection policies

Statement Presentation and Analysis

Statement Presentation and Analysis

Illustration 9-16

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