receivables

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ReceivablesReceivables

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The term receivables includes all money claims against other

entities, including people, business firms, and other

organizations.

9-1Classification of Receivables


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Accounts receivable are normally expected to be

collected within a relatively short period, such as 30 or 60 days.

9-1Accounts Receivable


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Notes receivable are amounts that customers owe for which a formal,

written instrument of credit has been issued.

9-1Notes Receivable


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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.

9-1Other Receivables


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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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There are two methods of accounting for receivables that appear to be uncollectible: the direct write off method and the

allowance method.

9-2Uncollectible Receivables


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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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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.

9-3Direct 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

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9-3

Example Exercise 9-1

Journalize the following transactions using the direct write-off method of accounting for uncollectible receivables.

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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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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.

9-4Allowance 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 and matches

uncollectible expenses with revenues.

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.

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


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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).

9-4


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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


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If ExTone Company had written off $44,100 in accounts

receivable during 2008, the Allowance for Doubtful

Accounts would have a debit balance of $4,100.

9-4


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ALLOWANCE FOR DOUBTFUL ACCOUNTSJan. 1, 2008 Bal.

40,000Jan. 21 6,000Feb. 2 3,900{

Total accounts

written off $44,100


4,100

“ “

“ “

9-4


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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.

9-4Collecting a Written-Off Account


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June 10 Accounts Receivable—Nancy Smith 5 000 00

To reinstate the account written off on Jan. 21.

Allowance for Doubtful Accounts 5 000 00

Entry 1: Reinstate the account.

9-4


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June 10 Cash 5 000 00

Collection of written-off account.

Accounts Receivable—Nancy Smith 5 000 00

Entry 2: Record collection of cash.

9-4


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9-4


Journalize the following transactions using the allowance method of accounting for uncollectible receivables.

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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.

2. Estimate based on analysis of 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 a Percentage of Sales

If credit sales for the period are $3,000,000 and it is estimated that 1½ %

will be uncollectible, the Bad Debt Expense is debited for $45,000

($3,000,000 x .015). This approach disregards the balance in the allowance

account before the adjustment.


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After this adjusting entry is posted, Allowance for Doubtful Accounts will

have a balance of $48,250.

Dec. 31 Bad Debt Expense 45 000 00


Uncollectible accounts

($3,000,000 x 0.015 =

$45,000).

9-4


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ALLOWANCE FOR DOUBTFUL ACCOUNTSJan. 1, 2008 Bal. 40,000

Jan. 21

6,000Feb. 2

3,900

{Total

accounts written off $36,750


3,250Dec. 31 Adj. entry

45,000Dec. 31 Adjusted bal.

48,250

“ “

9-4

BAD DEBT EXPENSEDec. 31 Adj entry 45,000Dec. 31 Adjusted bal. 45,000


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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. 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. 37


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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.

9-4Estimating Uncollectibles Based on Analysis of Receivables


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9-4Aging of Accounts Receivables


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9-4Estimate of Uncollectible Accounts


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9-4Estimate Based on Analysis of Receivables

If 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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9-4Estimate Based on Analysis of Receivables

Aug. 31 Bad Debt Expense 2 880 00


Uncollectible accounts

($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


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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).

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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


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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 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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9-5Comparing Direct-Write-Off and Allowance Methods

Direct Write-Off Method Allowance Method


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Comparing the Direct Write-Off and Allowance Methods

Direct Write-Off Method

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When the actual accounts receivable are determined to be uncollectible

No allowance account is used

Amount of bad debt expense recorded

Allowance account

Primary users Small companies and companies with relatively few receivables

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Comparing the Direct Write-Off and Allowance Methods

Allowance Method

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Using estimate based on either (1) a percentage of sales or (2) analysis of receivables.The allowance account is used

Amount of bad debt expense recorded

Allowance account

Primary users Large companies and those with a large amount of receivables


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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 Notes Receivable 9-6


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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.

9-6Characteristics of Notes Receivable


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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

MakerMakerMakerMaker

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PayeePayeePayeePayee


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Total days in note 90 daysNumber of days in March 31Issue date of note March 16Remaining days in March –15 days

75 daysNumber of days in April –30 days

45 daysNumber of days in May –31 daysResidual days in June 14 days

Answer: June 14

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What is the due date of a 90-day note dated March 16?


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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.

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*$6,000 x 12% x 30/360 = $60


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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 customer’s account.

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Dec. 21 Accts Rec.—W. A. Bunn Co. 6 060 00

Notes Rec.—W. A. Bunn Co. 6 000 00

Interest Revenue 60 00

Recorded dishonored

note, plus interest.


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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.

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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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Dec. 31 Interest Receivable 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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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


($4,000 x 12% x 30/360).

Collected note and accrued interest.


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9-6


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

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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.


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AssetsCurrent assets:

Cash $119,500Notes receivable 250,000Accounts receivable $445,000

Less allowance for doubtful accounts 15,000 430,000

Interest receivable 14,500Merchandise inventory 714,000

Crabtree Co.Balance Sheet

December 31, 2008

9-7Receivables on Balance Sheet

Receivables (including the allowance account) are highlighted

receivables

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