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RECEIVABLES

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Title: RECEIVABLES


1
CHAPTER 8
  • RECEIVABLES

2
Learning Objective 1
  • Describe the common classes of receivables.

3
Classification of Receivables
  • Accounts Receivable
  • Credit granted to customers
  • Notes Receivable
  • Credit granted through a promissory note
  • Other Receivables
  • Resulting from loans to officers or employees
  • Turn to page D-5 of the NIKE, INC. Annual Report

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A/R vs N/R
  • 3 things distinguish a Note Receivable from an
    Account Receivable
  • 1. Notes are typically for a longer period of
    time
  • 2. Notes typically require a formal written
    agreement stating due date and interest rate
  • 3. Notes typically involve interest paid

7
Learning Objective 2
  • Describe the accounting for uncollectible
    receivables.

8
Uncollectible Receivables
  • No matter what, some customers will not pay what
    they owe you.
  • When this happens, your business will incur an
    expense.
  • Uncollectible accounts expense
  • Bad debts expense
  • Doubtful accounts expense

9
Indications of None Payment
  • When does an account become uncollectible?
  • Past due
  • No response from customer
  • Customer files bankruptcy
  • Customer closes business
  • Company cannot locate customer
  • One option is to turn the account over to a
    collection agency. This can be very costly.

10
Learning Objective 3
  • Describe the allowance method of accounting for
    uncollectible receivables.

11
Allowance Method
  • This is the preferred method of write-off of bad
    debt.
  • Record bad debt expense by estimating
    uncollectible accounts.
  • Estimate the accounts that will not be collected
    and to record expense before customers actually
    fail to pay.
  • Recognize expense in the same period that revenue
    was recorded.

12
Example
  • ecember 31estimates that a total of 30,000 of
    the 200,000 balance of their accounts receivable
    will eventually be uncollectible.

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.
13
The Allowance Method
  • The net amount that is expected to be collected,
    170,000 (200,000 - 30,000) is called the net
    realizable value of the receivables. The
    adjusting entry reduces receivables to the NRV
    and matches uncollectible expenses with revenues.

14
Suppose you identify a customer?
  • On January 21, John Parkers account of 6,000 is
    written off because it is uncollectible.

15
What happens if a customer pays his debt?
Reinstatement entry
Receipt of cash entry
16
Lets Practice!
Demonstration Problem Kids-At-Play toy store.
17
Estimating Uncollectibles
  • Using the allowance method requires an estimate
    of uncollectible accounts at the end of the
    period.
  • Estimate is based
  • Past experience
  • Industry averages
  • Forecasts of the future
  • Two Methods used
  • Percentage of sales method
  • Analysis of receivables method

18
Percentage of Sales Method
  • Read Business Connection on page 365.
  • Basis for the method is the amount of this years
    net sales that will not be collected.

If ExTone Companys credit sales for the period
are 3,000,000 and it is estimated that 3/4 will
be uncollectible, Bad Debt Expense is debited for
22,500 (3,000,000 x .0075).
19
Now look at the T Accounts
20
Example
Allowance for DA 7,500
Sales 3,500,000
A/R 800,000
Bad Debt Exp 17,500
21
Analysis of Receivables Method or AGING
  • Assumption
  • The longer an A/R is outstanding, the less likely
    that it will be collected.
  • Basing the estimate of uncollectible accounts on
    how long specific amounts have been outstanding
    is called AGING the receivables.

22
Aging is applied as follows
  • the due date of each A/R is determined
  • the number of days each account is past due is
    determined. ( of days between due date of
    account date of analysis.)
  • each account is placed in an aged class according
    to its days past due. (see next slide for
    classes.)
  • the totals for each aged class are determined.
  • the total of each aged class is multiplied by an
    estimated percentage of uncollectible accounts
    for that class.
  • the estimated total of uncollectible accounts is
    determined as the sum of the uncollectible
    accounts for each aged class.

23
Aging Classes
  • Not Past Due
  • 1-30 days late
  • 31-60 days late
  • 61-90 days late
  • 91-180 days late
  • 181-365 days late
  • Over 365 days late

24
Summary of the AGING Method
Refer to exhibit 1 on page 367 of text book
25
Example of days past due
  • Dated August 29, due in 30 days
  • Due date September 28
  • Aug 29-31 2 days
  • days in Sept 30 2 28
  • due date September 28
  • Calculate of days late as of December 31
  • 2 days past due in Sept
  • 31 days past due in Oct
  • 30 days past due in Nov
  • 31 days past due in Dec
  • The account is 94 days past due

26
A/R 800,000
Bad Debt Exp 22,500
Allowance for DA 7,500
22,500
Sales 3,500,000
Ex 8-7, 8-8 page 286 problem 8-2A page 393
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