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After studying this chapter, you should be able to:9 – Receivables9 – Receivables
Objective 2 - Describe the nature of and the accounting for uncollectible receivables
Objective 3 - Describe the direct write-off method of accounting for uncollectible receivables.
Objective 4 - Describe the allowance method of accounting for uncollectible receivables.
Objective 6 - Describe the nature, characteristics, and accounting for notes receivables.
Objective 1 - Describe the common classifications of receivables.
Objective 7 - Describe the reporting of receivables on the balance sheet.
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Describe the common classifications of receivables.Objective 1Objective 1Objective 1Objective 1 9-1
The term receivables includes all money claims against other entities, including people, business firms, and other
organizations.
Accounts receivable are normally expected to be collected within a relatively short period, such as 30 or 60 days.
Notes receivable are amounts that customers owe for which a formal, written instrument of credit has been issued.
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.
3
Describe the nature of and the accounting for uncollectible receivables.
Objective 2Objective 2Objective 2Objective 2 9-2
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.
There are two methods of accounting for receivables that appear to be uncollectible: 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.
Uncollectible Receivables
4
Describe the direct write-off method of accounting for uncollectible receivables.
Objective 3Objective 3Objective 3Objective 39-3
May 10 Bad Debt Expense 4 200 00
Accounts Receivable—D. L. Ross 4 200 00
On May 10, a $4,200 accounts receivable from D. L. Ross has been
determined to be uncollectible.
Direct Write-Off Method
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The amount written off is later collected on November 21.
Nov. 21 Accounts Receivable—D. L. Ross 4 200 00
Bad Debt Expense 4 200 00
21 Cash 4 200 00
Accounts Receivable—D. L. Ross 4 200 00
9-3
6
Describe the allowance method of accounting for uncollectible receivables.
Objective Objective 44
Objective Objective 44
9-4
On December 31, ExTone Company estimates that a total of $40,000 of the $1,000,000 balance in her company’s
Accounts Receivable will eventually be uncollectible.
Dec. 31 Bad Debt Expense 40 000 00
Allowance for Doubtful Accounts 40 000 00Uncollectible accounts
estimate.
Allowance Method
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The net amount that is expected to be collected, $960,000 ($1,000,000 –
$40,000), is called the net realizable value (NRV). The adjusting entry reduces
receivables to the NRV
9-4Net Realizable Value
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Jan. 21 Allowance for Doubtful Accounts 6 000 00
Accounts Receivable—John Parker
6 000 00 To write off the uncollectible account.
9-4
On January 21, John Parker’s account totaling $6,000 is written off because it is uncollectible.
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ALLOWANCE FOR DOUBTFUL ACCOUNTSJan. 1, 2008 Bal.
40,000Jan. 21 6,000Feb. 2 3,900{
Total accounts
written off $36,750
Dec. 31 Unadjusted bal
3,250
“ “
“ “
9-4
During 2008, ExTone Company writes off $36,750 of uncollectible accounts, including the $6,000
account of John Parker. After posting all entries to write-off uncollectible amounts, the Allowance for
Doubtful Accounts will have a credit balance of $3,250 ($40,000 – $36,750).
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John Parker’s account of $6,000 which was written off on Jan 21is later collected on June 10. Two
entries are needed: one to reinstate John Parker’s account and a second
to record receipt of the cash.
9-4Collecting a Written-Off Account
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June 10 Cash 6 000 00
Collection of written-off account.
Accounts Receivable—John Parker 6 000 00
Entry 2: Record collection of cash.
June 10 Accounts Receivable—John Parker 6 000 00
To reinstate the account written off on Jan. 21.
Allowance for Doubtful Accounts 6 000 00
Entry 1: Reinstate the account. 9-4
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9-4
Example Exercise 9-2
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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1. Estimate based on a percentage of sales.• A straight percentage calculation of sales
2. Estimate based on analysis of receivables. The longer an account receivable 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.
The allowance method uses two ways to estimate the amount debited to Bad Debt Expense.
9-4Estimating Uncollectibles
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9-4Estimate Based on Analysis of Receivables
If, based on analysis of receivables, it is estimated that $3,390 of the receivables will be uncollectible and the
Allowance for Uncollectible Accounts currently has a balance of $510, the Bad Debt Expense must be debited
for $2,880 ($3,390 – $510).
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BAD DEBT EXPENSEAug. 31 Adj. entry 2,880Aug. 31 Adj. bal. 2,880
ALLOWANCE FOR DOUBTFUL ACCOUNTSAug. 31 Unadj. bal. 510Aug. 31 Adj. entry 2,880Aug. 31 Adj. bal. 3,390
9-4Estimate Based on Analysis of Receivables
Aug. 31 Bad Debt Expense 2 880 00
Allowance for Doubtful Accounts 2 880 00
Uncollectible accounts
($3,390 – $510).
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BAD DEBT EXPENSEAug. 31 Adj. entry 3,690Aug. 31 Adj. bal. 3,690
ALLOWANCE FOR DOUBTFUL ACCOUNTSAug. 31 Adj. entry 3,690Aug. 31 Adj. bal. 3,390
Aug. 31 Unadj. bal. 300
If the unadjusted balance of Allowance for Uncollectible Accounts had been a debit balance of $300, the amount of the
adjustment would have been $3,690 ($3,390 + $300).
9-4
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9-4
Example Exercise 9-4
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 $30,000.
Determine (a) the amount of the adjusting entry for uncollectible accounts; (b) the new balance of Accounts Receivable, Allowance for Doubtful Accounts, and Bad Debt Expense, and (c) the net realizable value of accounts receivable.
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• a specific amount of money (face amount)• on demand or at a definite time • to an individual or a business (payee), or
to the bearer or holder of the note.
A note receivable, or promissory note, is a written document containing a promise to pay:
Characteristics of, and accounting for Notes Receivable
9-6
The one making the promise is called the maker. The date a note is to be paid is called the due date or maturity date.
Objective 6Objective 6Objective 6Objective 6
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$_____________Fresno, California______________20___March 16 08
________________ _AFTER DATE _______ PROMISE TO PAY TO Ninety days We
THE ORDER OF ____________________________________________ Judson Company
_________________________________________________DOLLARSTwo thousand five hundred 00/100---------------------------PAYABLE AT ______________________________________________
City National Bank
VALUE RECEIVED WITH INTEREST AT ____10%
2,500.00
NO. _______ DUE___________________14 June 14, 2008
TREASURER, WILLIARD COMPANYH. B. Lane
9-6
What is the due date of the above note?
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Received a $6,000, 12%, 30-day note dated November 21, 2008 in settlement
of the account of W. A Bunn Co.
Accounting for Notes Receivable 9-6
Nov. 21 Notes Rec.—W. A. Bunn Co. 6 000 00
Accts. Rec.—W. A Bunn Co. 6 000 00
Received 30-day, 12%
note dated November 21,
2008.
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On December 21, when the note matures, the firm receives $6060 from W. A. Bunn Company
($6,000 plus $60 interest).
Dec. 21 Cash 6 060 00
Notes Rec.—W. A. Bunn Co. 6 000 00
Interest Revenue* 60 00
Received principal and
interest on matured note.
9-6
*$6,000 x 12% x 30/360 = $60
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A 90-day, 12% note dated December 1, 2008, is received from Crawford Company to settle its
account, which has a balance of $4,000.
9-6
Dec. 1 Notes Rec.—Crawford Co. 4 000 00
Accts. Rec.—Crawford Co. 4 000 00
Accepted note in
settlement of account.
2008
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9-6
Dec. 31 Interest Receivable 40 00
Interest Revenue 40 00
Accrued interest ($4,000 x 12% x 30/360).
2008
Assuming that the accounting period ends on December 31, an adjusting entry is
required to record the accrued interest of $40 ($4,000 x 0.12 x 30/360).
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9-6
Mar. 1 Cash 4 120 00
Notes Rec.—Crawford Co. 4 000 00
2009
On March 1, 2009, $4,120 is received for the note ($4,000) and interest ($120).
Interest Receivable 40 00
Interest Revenue 80 00
($4,000 x 12% x 30/360).
Collected note and accrued interest.
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Describe the reporting of receivables on the balance sheet.
Objective 7Objective 7Objective 7Objective 79-7
AssetsCurrent assets:
Cash $119,500Notes receivable 250,000Accounts receivable $445,000
Less allowance for doubtful accounts 15,000430,000
Interest receivable 14,500Merchandise inventory 714,000
Crabtree Co.Balance SheetDecember 31, 2008
Receivables (including the allowance account) are highlighted
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9-7Accounts Receivable Turnover
The accounts receivable turnover measures how frequently during the year the accounts
receivable are being converted to cash.
Accounts Receivable Turnover
Net sales
Average accounts receivable=
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9-7Federal Express Corporation
Accounts Receivable Turnover (2004)
$17,383
$2,337=
Accounts Receivable Turnover (2004)
= 7.4
*[($2,475 + $2,199)/2]
2005 2004 2003
Net sales $19,364 $17,383 --- Accounts receivable 2,703 2,475 $2,199Average accounts receivable 2,589 2,337
*
*
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9-7Federal Express Corporation
Accounts Receivable Turnover (2005)
$19,364
$2,589=
Accounts Receivable Turnover (2005)
= 7.5
2005 2004 2003
Net sales $19,364 $17,383 --- Accounts receivable 2,703 2,475 $2,199Average accounts receivable 2,589 2,337
*
*[($2,703 + $2,475)/2]
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Use: To assess the efficiency in collecting receivables and in the management of credit.
9-7Number of Days’ Sales in Receivables
Average Accounts receivable
Average daily salesNumber of Days’
Sales in Receivables=
31
9-7Federal Express Corporation
Number of Days’ Sales in Receivables (2004)
$2,337
47.6=
Number of Days’ Sales in Receivables (2004)
= 49.1
2005 2004 2003
Net sales $19,364$17,383
Accounts receivable 2,703 2,475$2,199
Average accounts receivable2,589 2,337
Average daily sales 53.1 47.6
* [($2,475 + $2,119)/2]*
*
**
($17,383/365)**
---
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9-7Federal Express Corporation
Number of Days’ Sales in Receivables (2005)
$2,589
53.1=
Number of Days’ Sales in Receivables (2005)
= 48.8
* [($2,703+ $2,475)/2]* ($19,364/365)**
2005 2004 2003
Net sales $19,364$17,383
Accounts receivable 2,703 2,475$2,199
Average accounts receivable2,589 2,337
Average daily sales 53.1 47.6
*
**
---