Accounting principles 9e willey kieso chapter 09

Distinguish between the methods and bases companies use to value accounts receivable.. Accounts Receivable Notes ReceivableStatement Presentation and Analysis Statement Presentation an

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.

Explain the statement presentation and analysis of receivables.

Study Objectives

Study Objectives

Accounts Receivable Notes Receivable

Statement Presentation and

Analysis

Statement Presentation and

Analysis

Presentation Analysis

Determining maturity date Computing interest Recognizing notes receivable Valuing notes receivable Disposing of notes receivable

Recognizing accounts receivable Valuing accounts receivable

Disposing of accounts receivable

Accounting for Receivables Accounting for Receivables

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

Chapter

9-6

Three accounting issues:

Accounts Receivable

Accounts Receivable

SO 1 Identify the different types of receivables.

The following exercise was illustrated in Chapter 5 For simplicity, inventory and cost of goods sold have been omitted.

Recognizing Accounts Receivable

Illustration: Assume that Jordache Co on July 1, 2010, 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 Jordache Co

Jul 1

Recognizing Accounts Receivable

Recognizing Accounts Receivable

SO 2 Explain how companies recognize accounts receivable.

Recognizing Accounts Receivable

Recognizing Accounts Receivable

Illustration: On July 11, Jordache receives payment from

Polo Company for the balance due

Jul 11

Sales discounts ($900 x 02) 18

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

SO 3 Distinguish between the methods and bases

companies use to value accounts receivable.

Assets Current Assets:

Total current assets 1,673

Presentation of Accounts Receivable

Presentation of Accounts Receivable

Chapter

9-12

Assets Current Assets:

Accounts receivable, net of $25 allowance

Merchandise inventory 812

Total current assets 1,673

SO 3 Distinguish between the methods and bases

companies use to value accounts receivable.

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

Chapter

9-14

Valuing Accounts Receivable

Valuing Accounts Receivable

SO 3 Distinguish between the methods and bases

companies use to value accounts receivable.

Recording Estimated Uncollectibles: Assume that Hampson Furniture has credit sales of $1,200,000 in 2010 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

Valuing Accounts Receivable

Valuing Accounts Receivable

Illustration 9-2

Presentation of allowance for doubtful accounts

Chapter

9-16

Valuing Accounts Receivable

Valuing Accounts Receivable

SO 3 Distinguish between the methods and bases

companies use to value accounts receivable.

Recording the Write-Off of an Uncollectible Account:

Assume that the financial vice-president of Hampson Furniture authorizes a write-off of the $500 balance owed by R.A.Ware

on March 1, 2011.The entry to record the write-off is:

Allowance for doubtful accounts 500

Mar 1

Illustration 9-3

Accounts receivable 500

Valuing Accounts Receivable

Valuing Accounts Receivable

Recovery of an Uncollectible Account: Assume that on July

1, R A Ware pays the $500 amount that Hampson had written off on March 1.These are the entries:

Chapter

9-18

Bases Used for Allowance Method

SO 3 Distinguish between the methods and bases

companies use to value accounts receivable.

Valuing Accounts Receivable

Valuing Accounts Receivable

Illustration 9-5

Illustration: Assume that Gonzalez Company elects to use

the percentage-of-sales basis It concludes that 1% of net

credit sales will become uncollectible If net credit sales for

2010 are $800,000, the adjusting entry is:

Valuing Accounts Receivable

Valuing Accounts Receivable

Dec 31

Allowance for doubtful accounts 8,000

Percentage-of-Sales

*

Chapter

9-20

Emphasizes the matching of expenses with revenues

When the company makes the adjusting entry, it disregards the existing balance in Allowance for Doubtful Accounts

SO 3 Distinguish between the methods and bases

companies use to value accounts receivable.

Valuing Accounts Receivable

Valuing Accounts Receivable

Percentage-of-Sales

Illustration 9-6

Valuing Accounts Receivable

Valuing Accounts Receivable

Percentage-of-Receivables Illustration 9-7

Aging schedule

Chapter

9-22

Illustration: If the trial balance shows Allowance for

Doubtful Accounts with a credit balance of $528, the company will make the following adjusting entry

SO 3 Distinguish between the methods and bases

companies use to value accounts receivable.

Valuing Accounts Receivable

Valuing Accounts Receivable

Occasionally the allowance account will have a debit

balance prior to adjustment.

Valuing Accounts Receivable

Valuing Accounts Receivable

Illustration 9-8Percentage-of-Receivables

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

Existing balance in allowance account considered

SO 3 Distinguish between the methods and bases

companies use to value accounts receivable.

Valuing Accounts Receivable

Valuing Accounts Receivable

Companies sell receivables for two major

Disposing of Accounts Receivable

Disposing of Accounts Receivable

Chapter

9-26 SO 4 Describe the entries to record the disposition 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.

Illustration: Assume that Hendredon Furniture factorsA

$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

Disposing of Accounts Receivable

Disposing of Accounts Receivable

($600,000 x 2% = $12,000)

Chapter

9-28 SO 4 Describe the entries to record the disposition of accounts receivable.

Disposing of Accounts Receivable

Disposing of Accounts Receivable

Credit Card Sales

Retailer considers credit card sales the same as cash

sales

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.

Disposing of Accounts Receivable

Disposing of Accounts Receivable

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

Chapter

9-30 SO 5 Compute the maturity date of and interest on notes receivable.

Notes Receivable

Notes Receivable

Companies may grant credit in exchange for a

promissory note A promissory note 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

Notes Receivable

To the Payee , the promissory note is a note receivable.

To the Maker , the promissory note is a note payable.

Illustration 9-10

Chapter

9-32

Determining the Maturity Date

SO 5 Compute the maturity date of and interest on notes receivable.

Notes Receivable

Notes Receivable

Note expressed in terms of

Months Days

Recognizing Notes Receivable

Recognizing Notes Receivable

Illustration: Assuming that 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

Chapter

9-34

Valuing Notes Receivable

SO 7 Describe how companies value notes receivable.

Notes Receivable

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

Notes Receivable

Notes Receivable

1 Notes may be held to their maturity date.

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.

Chapter

9-36

Honor of Notes Receivable

SO 8 Describe the entries to record the disposition of notes receivable.

Notes Receivable

Notes Receivable

A note is honored when its maker pays it in full

at its maturity date.

Dishonor of Notes Receivable

A dishonored note is not paid in full at maturity

A dishonored note receivable is no longer

negotiable.

Disposing of Notes Receivable

Notes Receivable

Notes Receivable

Illustration: Assume that 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:

Chapter

9-38

Notes Receivable

Notes Receivable

SO 8 Describe the entries to record the disposition of notes receivable.

Illustration: If Betty Co prepares financial statements as of September 30, it must accrue interest Betty Co would make

an adjusting entry to record 4 months’ interest

Chapter

9-40

Illustration: Assume that 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)

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

Chapter

9-42

Analysis of Receivables

This Ratio used to:

Assess the liquidity of the receivables

Measure the number of times, on average, a company collects receivables during the period

SO 9 Explain the statement presentation and analysis of receivables.

Statement Presentation and Analysis

Statement Presentation and Analysis

Illustration 9-15

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

Analysis of Receivables

Chapter

9-44

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