1 lo5 describe accounting for receivables and uncollectible amounts. lo6explain how returns and...

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LO5 Describe accounting for receivables and uncollectible amounts.

LO6 Explain how returns and discounts are accounted for.

LO7 Account for long-term receivables including when there is no interest specified.

LO8 Understand how managers can use accounting estimates to create hidden reserves to manage earnings.

LO9 Use information about accounts receivable to analyze and interpret financial statements.

Learning objectives

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Receivables

• Amounts owing to an entity• Usually result from selling on credit

▫ Accounts receivable• Current asset

▫ If due within one year

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Other Receivables

• Due from shareholders• Tax refunds• Owing from investments

▫Dividends▫Interest

• Proceeds due on sale of asset

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Uncollectible Receivables

• Possible losses is a cost of credit sales

• Must record the expense of the uncollectible amount• Must reduce the asset

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Valuing Receivables

• Valued at net realizable value (NRV)

• Factors affecting value▫Non payment of accounts (bad debts)▫Refunds to dissatisfied customers▫Early payment discount

• Must make accounting estimates

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Uncollectible Receivables

1. Direct Write-off Method• Dr. Bad Debt Expense/Cr. AR

2. Allowance Method• Estimates must be made• Percentage-of-receivables method• Percentage-of-credit-sales method

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Percentage-of-Receivables

• Estimate by reviewing balances • Accounts receivable aging schedule• Adjust allowance to match estimate• Balance sheet approach

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Percentage-of-Credit-Sales

• Based on estimate of annual credit sales• Income statement approach• Consistently high or low — adjust %

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Writing off Receivables

• Specific account deemed uncollectible▫Reduce accounts receivable (Cr)▫Reduce allowance (Dr)▫No effect on net receivables balance▫No effect on income statement until

adjusting entry is made

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