Chapter 9

Receivables

1

Describe the common classes of receivables.

Objective 1

2

The term receivables includes all money claims against other entities, including people, business firms, and other organizations.

3

Accounts receivable are normally expected to be collected within a relatively short period, such as 30 or 60 days.

4

Notes receivable are amounts that customers owe for which a formal, written instrument of credit has been issued.

5

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.

6

Describe the accounting for uncollectible receivables.

Objective 2

7

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.

8

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.

9

Describe the direct write-off method of accounting for uncollectible receivables.

Objective 3

10

On May 10, a $4,200 accounts receivable from D. L. Ross has been determined to be uncollectible.

11

The amount written off is later collected on November 21.

Reinstatement Entry

Receipt of Cash Entry

12

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 Receivable—Jay Burke… 5,100

Oct. 11 Accounts Receivable—Jay Burke……….. 3,900

Bad Debt Expense………………........ 3,900

11 Cash…………………………………………… 3,900

Accounts Receivable—Jay Burke… 3,900

14

Describe the allowance method of accounting for uncollectible receivables.

Objective 4

15

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.

16

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.

17

Write-Offs to the Allowance Account

On January 21, John Parker’s account totaling $6,000 is written off because it is uncollectible.

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19

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).

20

Nancy Smith’s 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 Smith’s account and a second to record receipt of the cash.

21

Reinstatement Entry

Receipt of Cash Entry

22

Example Exercise 9-2

Allowance MethodJournalize 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 Receivable—Jay Burke……. 5,100

11 Cash……………………………………………. 3,900Accounts Receivable—Jay Burke…….. 3,900

Oct. 11 Accounts Receivable—Jay Burke………... 3,900

Allowance for Doubtful Accounts…….. 3,900

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Estimating Uncollectibles

2. Analysis of receivables method.

The allowance method uses two ways to estimate the amount debited to Bad Debt Expense.1. Percent of sales method.

25

Percent of Sales Method

If credit sales for the period are $3,000,000 and it is estimated that ¾% will be uncollectible, Bad Debt Expense is debited for $22,500 ($3,000,000 × .0075). This approach disregards the balance of $3,250 in the allowance account before the adjustment.

26

Example Exercise 9-3

Percent of Sales MethodAt 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.

27

Example Exercise 9-3 (continued)

(a) $17,500 ($3,500,000 × .005)Adjusted Balance

(b) Accounts Receivable…………………. $800,000Allowance for Doubtful Accounts ($7,500 + $17,500)…………………… 25,000Bad Debt Expense……………………... 17,500

(c) $775,000 ($800,000 – $25,000)

28

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.

29

Aging of Receivables Schedule December 31, 2010

Exhibit 1

30

Compare the direct write-off method and allowance method of accounting for uncollectible accounts.

Objective 5

31

Comparing Direct Write-Off and Allowance Methods

(continued)

Exhibit 3

32

Direct Write-Off Method Allowance Method

Comparing Direct Write-Off and Allowance Methods (continued)Exhibit 3

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34

Describe the accounting for notes receivable.

Objective 6

35

Characteristics of Notes Receivable

(continued)

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

A note receivable, or promissory note, is a written document containing a 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.

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Characteristics of Notes Receivable (continued)

• 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.

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

37

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.

38

On December 21, when the note matures, the firm receives $6,060 from W. A. Bunn Company ($6,000 plus $60 interest).

39

Example Exercise 9-5

Same Day Surgery Center received a 120-day, 6% note for $40,000, dated March 14 from a patient on account.

a. Determine the due date of the note.b. Determine the maturity value of the note.c. Journalize the entry to record the receipt of the payment

of the note at maturity.

Note Receivable

40

Example Exercise 9-5 (continued)

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

March 17 days (31 – 14)April 30 daysMay 31 daysJune 30 daysJuly 12 days Total 120 days

b. $40,800 [$40,000 + ($40,000 × 6% × 120/360)]

c. Cash………………………………………........ 40,800Notes Receivable……………………..40,000Interest Revenue……………………...800

41

Describe the reporting of receivables on the balance sheet.

Objective 7

42

Number of Days’ Sales in Receivables

Average Accounts ReceivableAverage Daily Sales

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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44

P9-2B

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P9-2B

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Prob. 9–2B1.

Customer Due Date Number of Days Past DueAAA Sports & Flies June 14, 2009 200 days (16 + 31 + 31 + 30 + 31 + 30 + 31)Blackmon Flies Aug. 30, 2009 123 days (1 + 30 + 31 + 30 + 31)Charlie’s Fish Co. Sept. 30, 2009 92 days (31 + 30 + 31)Firehole Sports Oct. 17, 2009 75 days (14 + 30 + 31)Green River Sports Nov. 7, 2009 54 days (23 + 31)Smith River Co. Nov. 28, 2009 33 days (2 + 31)Wintson Company Dec. 1, 2009 30 daysWolfe Bug Sports Jan. 6, 2010 Not past due

A B C D E F G H

1 Aging of Receivables Schedule

2 December 31, 2009 3 Days Past Due

4 Customer Balance Not Past

Due 1–30 31–60 61–90 91–120 Over 120

5 Alder Fishery 15,000 15,000 6 Brown Trout 5,500 5,500

30 Zug Bug Sports 2,900 2,900

31 Subtotals 850,000 422,450 247,250 103,850 33,300 25,000 18,150 32 AAA Sports & Flies 2,850 2,850 33 Blackmon Flies 1,200 1,200 34 Charlie’s Fish Co. 1,800 1,800 35 Firehole Sports 600 600 36 Green River Sports 950 950 37 Smith River Co. 2,200 2,200 38 Wintson Company 2,250 2,250 39 Wolfe Bug Sports 6,550 6,550

40 Totals 868,400 429,000 249,500 107,000 33,900 26,800 22,200 41 Percent uncollectible 2% 5% 10% 25% 45% 90%

42 Estimate of uncollectible accounts 72,270 8,580 12,475 10,700 8,475 12,060 19,980

4. Bad Debt Expense ......................................................... 73,640 Allowance for Doubtful Accounts ........................... 73,640 Uncollectible accounts estimate. ($72,270 + $1,370)