Receivables

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9
Receivables
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Learning Objective 1
Receivables
3-1
After studying this chapter, you should be able
to
Insert Chapter Objectives
Describe the nature of the adjusting process.
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Receivables (continued)
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Describe the common classes of receivables.
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The term receivables includes all money claims
against other entities, including people,
business firms, and other organizations.
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Accounts receivable are normally expected to be
collected within a relatively short period, such
as 30 or 60 days.
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Notes receivable are amounts that customers owe
for which a formal, written instrument of credit
has been issued.
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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 assets
and reported under the caption Investments.
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Describe the accounting for uncollectible
receivables.
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Factoring
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.
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Regardless of how careful a company is in
granting credit, some credit sales will be
uncollectible. The operating expense account is
called bad debt expense, uncollectible accounts
expense, or doubtful accounts expense.
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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.
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Describe the direct write-off method of
accounting for uncollectible receivables.
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On May 10, a 4,200 accounts receivable from D.
L. Ross has been determined to be uncollectible.
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The amount written off is later collected on
November 21.
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Example Exercise 9-1
Direct Write-off Method
Journalize the following transactions using the
direct write-off 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.
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Example Exercise 9-1 (continued)
July 9 Cash.. 1,200 Bad Debt
Expense..... 3,900 Accounts
ReceivableJay Burke 5,100
Oct. 11 Accounts ReceivableJay
Burke.. 3,900 Bad Debt Expense........
3,900 11 Cash 3,900 Account
s ReceivableJay Burke 3,900
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4
Describe the allowance method of accounting for
uncollectible receivables.
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On December 31, ExTone Company estimates that a
total of 30,000 of the 200,000 balance of their
Accounts Receivable will eventually be
uncollectible.
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The net amount that is expected to be collected,
170,000 (200,000 30,000), is called the net
realizable value (NRV). The adjusting entry
reduces receivables to the NRV and matches
uncollectible expenses with revenues.
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Write-Offs to the Allowance Account
On January 21, John Parkers account totaling
6,000 is written off because it is uncollectible.
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During 2010, ExTone Company writes off 26,750 of
uncollectible accounts, including the 6,000
account of John Parker. After posting all entries
to write-off uncollectible amounts, Allowance for
Doubtful Accounts will have a credit balance of
3,250 (30,000 26,750).
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If ExTone Company had written off 32,100 in
accounts receivable during 2010, Allowance for
Doubtful Accounts would have a debit balance of
2,100.
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Nancy Smiths account of 5,000 which was written
off on April 2 is later collected on June 10. Two
entries are needed one to reinstate Nancy
Smiths account and a second to record receipt of
the cash.
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Example Exercise 9-2
Allowance Method
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.
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Example Exercise 9-2 (continued)
July 9 Cash 1,200 Allowance
for Doubtful Accounts.. 3,900 Accounts
ReceivableJay Burke. 5,100
Oct. 11 Accounts ReceivableJay
Burke... 3,900 Allowance for Doubtful
Accounts.. 3,900
11 Cash. 3,900 Accounts
ReceivableJay Burke.. 3,900
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Estimating Uncollectibles
The allowance method uses two ways to estimate
the amount debited to Bad Debt Expense.

1. Percent of sales method.

1. Analysis of receivables method.

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Percent of Sales Method
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Percent of Sales Method
After the following adjusting entry on December
31 is posted, Allowance for Doubtful Accounts
will have a balance of 25,750 (3,250 22,500).
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Percent of Sales Method
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Example Exercise 9-3
Percent of Sales Method
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. Bad debt expense is estimated at ½ of
1 of net sales. Determine (a) the amount of the
adjusting entry for uncollectible accounts (b)
the adjusted balances of Accounts Receivable,
Allowance for Doubtful Accounts, and Bad Debt
Expense and (c) the net realizable value of
accounts receivable.
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Example Exercise 9-3 (continued)

1. 17,500 (3,500,000 .005)

1. 775,000 (800,000 25,000)

For Practice PE 9-3A, PE 9-3B
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Aging of Receivables
The longer an account receivable is outstanding,
the less likely it is that it will be collected.
Basing the estimate of uncollectible accounts on
how long specific amounts have been outstanding
is called aging the receivables.
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Aging of Receivables Schedule December 31, 2010
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Percent of Sales Method
The estimate based on receivables is compared to
the balance in the allowance account to determine
the amount of the adjusting entry.
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Percent of Sales Method
ExTone has an unadjusted credit balance of 3,250
in Allowance for Doubtful Accounts. In Exhibit 1
the estimated uncollectible accounts totaled
26,490.
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Percent of Sales Method
The amount to be added to the allowance account
is 23,240 (26,490 3,250). The adjusting
entry is as follows
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Percent of Sales Method
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The Commercial Collection Agency Section of the
Commercial Law League of America reported the
following collection rates by number of months
past due
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Percent of Sales Method
If the unadjusted balance of the allowance
account had been a debit balance of 2,100, the
amount of the adjustment would have been 28,590.
Aug. 31 Adjusting entry Aug. 31 Adjusted
balance
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Example Exercise 9-4
Analysis of Receivable Method
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 adjusted balances of Accounts Receivable,
Allowance for Doubtful Accounts, and Bad Debt
Expense, and (c) the net realizable value of
accounts receivable.
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Example Exercise 9-4 (continued)

1. 22,500 (30,000 7,500)

1. 770,000 (800,000 30,000)

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Differences Between Estimation Methods
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Compare the direct write-off method and allowance
method of accounting for uncollectible accounts.
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Comparing Direct Write-Off and Allowance Methods
(continued)
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Comparing Direct Write-Off and Allowance Methods
(continued)
Direct Write-Off Method

Allowance Method
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Describe the accounting for notes receivable.
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Characteristics of Notes Receivable
A note receivable, or promissory note, is a
written document containing a promise to pay

• The maker is the party making the promise to pay.

• The payee is the party to whom the note is
  payable.

• The face amount is the amount the note is
  written for on its face.

• The issuance date is the date a note is issued.

(continued)
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Characteristics of Notes Receivable (continued)

• The due date or maturity date is the date the
  note is to be paid.

• The term of the note is the amount of time
  between the issuance and due dates.
• The interest rate is that rate of interest that
  must be paid on the face amount for the term of
  the note.

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Promissory Note
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What is the due date of a 90-day note dated March
16?
Days in March 31 days
Minus issuance date of note 16
Days remaining in March 15 days
Add days in April 30
Add days in May 31
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An Alternate Approach
Total days in note 90 days Number of days in
March 31 Issue date of note March 16 Remaining
days in March 15 days 75 days Number of
days in April 30 days 45 days Number of
days in May 31 days Residual days in June 14
days
Answer June 14
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Accounting for Notes Receivable
Received a 6,000, 12, 30-day note dated
November 21, 2010 in settlement of the account of
W. A. Bunn Co.
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On December 21, when the note matures, the firm
receives 6,060 from W. A. Bunn Company (6,000
plus 60 interest).
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If W. A. Bunn Company fails to pay the note on
the due date, it is considered a dishonored note
receivable. The note and interest are transferred
to the customers account.
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A 90-day, 12 note dated December 1, 2010, is
received from Crawford Company to settle its
account, which has a balance of 4,000.
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Assuming that the accounting period ends on
December 31, an adjusting entry is required to
record the accrued interest of 40 (4,000 0.12
30/360).
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On March 1, 2011, 4,120 is received for the note
(4,000) and interest (120).
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Example Exercise 9-5
Note Receivable
Same Day Surgery Center received a 120-day, 6
note for 40,000, dated March 14 from a patient
on account.

1. Determine the due date of the note.
2. Determine the maturity value of the note.
3. Journalize the entry to record the receipt of the
   payment of the note at maturity.

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Example Exercise 9-5 (continued)

1. The due date of the note is July 12,
   determined as follows

March 17 days (31 14) April 30 days May 31
days June 30 days July 12 days Total
120 days

• Cash........ 40,800
• Notes Receivable.. 40,000
• Interest Revenue... 800

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Describe the reporting of receivables on the
balance sheet.
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Accounts Receivable Turnover
The accounts receivable turnover measures how
frequently during the year the accounts
receivable are being converted to cash.
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Federal Express Corporation2006
2007 2006 2005
Net sales 22,527 21,296 --- Accounts
receivable 1,429 2,860 2,703 Average accounts
receivable 2,145 2,782


(2,860 2,703)/2

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Federal Express Corporation2007
2007 2006 2005
Net sales 22,527 21,296 --- Accounts
receivable 1,429 2,860 2,703 Average accounts
receivable 2,145 2,782


(1,429 2,860)/2

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Number of Days Sales in Receivables
The number of days sales in receivables is an
estimate of the length of time the accounts
receivable have been outstanding.
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Federal Express Corporation2006
2007 2006
Net sales 22,527 21,296 Average
accounts receivable 2,145 2,782 Average
daily sales 61.7 58.3

21,296/365
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Federal Express Corporation2007
2007 2006
Net sales 22,527 21,296 Average
accounts receivable 2,145 2,782 Average
daily sales 61.7 58.3

22,527/365
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