Accounting Principles Thirteenth Edition Weygandt Kimmel Kieso Chapter

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Accounting Principles Thirteenth Edition Weygandt Kimmel Kieso Chapter 9 Accounting for Receivables Prepared by

Accounting Principles Thirteenth Edition Weygandt Kimmel Kieso Chapter 9 Accounting for Receivables Prepared by Coby Harmon University of California, Santa Barbara Westmont College

Accounting for Receivables Preview Types of Receivables Accounts Receivable • Accounts receivable • Notes

Accounting for Receivables Preview Types of Receivables Accounts Receivable • Accounts receivable • Notes receivable • Other receivables • Recognizing accounts receivable • Valuing accounts receivable • Disposing of accounts receivable Notes Receivable • Determining maturity date • Computing interest • Recognizing notes receivable • Valuing notes receivable • Disposing of notes receivable Copyright © 2018 John Wiley & Son, Inc. Statement Presentation and Analysis • Presentation • Analysis 2

Chapter Outline Learning Objectives LO 1 Explain how companies recognize accounts receivable. LO 2

Chapter Outline Learning Objectives LO 1 Explain how companies recognize accounts receivable. LO 2 Describe how companies value accounts receivable and record their disposition. LO 3 Explain how companies recognize, value, and dispose of notes receivable. LO 4 Describe the statement presentation and analysis of receivables. Copyright © 2018 John Wiley & Son, Inc. 3

Recognition of Accounts Receivable Amounts due from individuals and companies that are expected to

Recognition of Accounts Receivable Amounts due from individuals and companies that are expected to be collected in cash. Amounts customers owe on account that result from the sale of goods and services. Accounts Receivable LO 1 Written promise for amounts to be received. Normally requires the collection of interest. Notes Receivable Nontrade receivables such as interest, loans to officers, advances to employees, and income taxes. Other Receivables Copyright © 2018 John Wiley & Son, Inc. 4

Recognition of Accounts Receivable Amounts due from individuals and companies that are expected to

Recognition of Accounts Receivable Amounts due from individuals and companies that are expected to be collected in cash. Receivables as a Percentage of Total Assets Company Ford Motor Company General Electric Minnesota Mining and Manufacturing Company (3 M) Du. Pont Co. Intel Corporation LO 1 ILLUSTRATION 9. 1 Receivables as a percentage of assets Copyright © 2018 John Wiley & Son, Inc. 43. 2% 41. 5 12. 7 11. 7 3. 9 5

Recognizing Accounts Receivable • Service organizations record a receivable when it performs service on

Recognizing Accounts Receivable • Service organizations record a receivable when it performs service on account • Merchandisers record accounts receivable at point of sale of merchandise on account • Companies report receivables from employees separately in financial statements LO 1 Copyright © 2018 John Wiley & Son, Inc. 6

Recognizing Accounts Receivable Illustration: Assume that Jordache Co. on July 1, 2020, sells merchandise

Recognizing Accounts Receivable Illustration: Assume that Jordache Co. on July 1, 2020, sells merchandise on account to Polo Company for $1, 000, terms 2/10, n/30. On July 5, Polo returns merchandise with a sales price of $100 to Jordache Co. Prepare the journal entries to record these transactions. July 1 July 5 LO 1 Accounts Receivable Sales Revenue Sales Returns and Allowances Accounts Receivable Copyright © 2018 John Wiley & Son, Inc. 1, 000 100 7

Recognizing Accounts Receivable Illustration: On July 11, Jordache receives payment from Polo Company for

Recognizing Accounts Receivable Illustration: On July 11, Jordache receives payment from Polo Company for the balance due. Prepare the journal entire to record this transaction. July 11 Cash ($900 − $18) Sales Discounts ($900 ×. 02) Accounts Receivable LO 1 Copyright © 2018 John Wiley & Son, Inc. 882 18 900 8

Recognizing Accounts Receivable Some retailers issue their own credit cards. When you use a

Recognizing Accounts Receivable Some retailers issue their own credit cards. When you use a retailer’s credit card (JCPenney, for example), the retailer charges interest on the balance due if not paid within a specified period (usually 25– 30 days). Illustration: Assume you use your JCPenney credit card to purchase clothing with a sales price of $300 on June 1, 2020. The entry is recorded as follows. June 1 Accounts Receivable Sales Revenue LO 1 Copyright © 2018 John Wiley & Son, Inc. 300 9

Recognizing Accounts Receivable Illustration: Assuming that you owe $300 at the end of the

Recognizing Accounts Receivable Illustration: Assuming that you owe $300 at the end of the month and JCPenney charges 1. 5% per month on the balance due, the adjusting entry that JCPenney makes to record interest revenue of $4. 50 ($300 × 1. 5%) on June 30 is as follows. June 30 LO 1 Accounts Receivable Interest Revenue Copyright © 2018 John Wiley & Son, Inc. 4. 50 10

ANATOMY OF A FRAUD Tasanee was the accounts receivable clerk for a large non-profit

ANATOMY OF A FRAUD Tasanee was the accounts receivable clerk for a large non-profit foundation that provided performance and exhibition space for the performing and visual arts. Her responsibilities included activities normally assigned to an accounts receivable clerk, such as recording revenues from various sources that included donations, facility rental fees, ticket revenue, and bar receipts. However, she was also responsible for handling all cash and checks from the time they were received until the time she deposited them, as well as preparing the bank reconciliation. Tasanee took advantage of her situation by falsifying bank deposits and bank reconciliations so that she could steal cash from the bar receipts. Since nobody else logged the donations or matched the donation receipts to pledges prior to Tasanee receiving them, she was able to offset the cash that was stolen against donations that she received but didn’t record. Her crime was made easier by the fact that her boss, the company’s controller, only did a very superficial review of the bank reconciliation and thus didn’t notice that some numbers had been cut out from other documents and taped onto the bank reconciliation. Total take: $1. 5 million THE MISSING CONTROL Segregation of duties. The foundation should not have allowed an accounts receivable clerk, whose job was to record receivables, to also handle cash, record cash, make deposits, and especially prepare the bank reconciliation. Independent internal verification. The controller was supposed to perform a thorough review of the bank reconciliation. Because he did not, he was terminated from his position. LO 1 Copyright © 2018 John Wiley & Son, Inc. 11

DO IT! 1 Recognizing Receivables On May 1, Wilton sold merchandise on account to

DO IT! 1 Recognizing Receivables On May 1, Wilton sold merchandise on account to Bates for $50, 000, terms 3/15, net 45. On May 4, Bates returns merchandise with a sales price of $2, 000. On May 16, Wilton receives payment from Bates for the balance due. Prepare journal entries to record the May transactions on Wilton’s books. May 1 May 4 May 16 LO 1 Accounts Receivable Sales Revenue 50, 000 Sales Returns and Allowances Accounts Receivable 2, 000 Cash ($48, 000 − $1, 440) Sales Discounts ($48, 000 ×. 03) Accounts Receivable 46, 560 1, 440 Copyright © 2018 John Wiley & Son, Inc. 2, 000 48, 000 12

Valuation and Disposition of Accounts Receivable Valuing Accounts Receivables • Current asset • Valuation

Valuation and Disposition of Accounts Receivable Valuing Accounts Receivables • Current asset • Valuation (cash realizable value) Uncollectible Accounts Receivable • Sales on account raise the possibility of accounts not being collected • Companies record credit losses as debits to Bad Debt Expense LO 2 Copyright © 2018 John Wiley & Son, Inc. 13

Valuing Accounts Receivable Methods of Accounting for Uncollectible Accounts Direct Write-Off Theoretically undesirable: LO

Valuing Accounts Receivable Methods of Accounting for Uncollectible Accounts Direct Write-Off Theoretically undesirable: LO 2 Allowance Method Losses are estimated: u No matching u Better matching u Receivable not stated at cash realizable value u Receivable stated at cash realizable value u Not acceptable for financial reporting u Required by GAAP Copyright © 2018 John Wiley & Son, Inc. 14

Valuing Accounts Receivable How are these accounts presented on the Balance Sheet? Accounts Receivable

Valuing Accounts Receivable How are these accounts presented on the Balance Sheet? Accounts Receivable Bal. 500 Allowance for Doubtful Accounts 25 Bal. LO 2 Bal. Copyright © 2018 John Wiley & Son, Inc. 15

Valuing Accounts Receivable ABC Corporation Balance Sheet (partial) Current Assets Cash Accounts receivable Allowance

Valuing Accounts Receivable ABC Corporation Balance Sheet (partial) Current Assets Cash Accounts receivable Allowance for doubtful accounts Inventory Prepaid expense Total current assets LO 2 Copyright © 2018 John Wiley & Son, Inc. $ 330 $500 25 475 812 40 $1, 657 16

Valuing Accounts Receivable ABC Corporation Balance Sheet (partial) Current Assets Cash Accounts receivable, net

Valuing Accounts Receivable ABC Corporation Balance Sheet (partial) Current Assets Cash Accounts receivable, net of $25 allowance Inventory Prepaid expense Total current assets LO 2 Copyright © 2018 John Wiley & Son, Inc. Alternate Presentation $ 330 475 812 40 $1, 657 17

Valuing Accounts Receivable Journal entry for credit sale of $100 Accounts Receivable Sales Revenue

Valuing Accounts Receivable Journal entry for credit sale of $100 Accounts Receivable Sales Revenue Accounts Receivable Bal. 500 Sale 100 Bal. LO 2 100 Allowance for Doubtful Accounts 25 600 25 Copyright © 2018 John Wiley & Son, Inc. Bal. 18

Valuing Accounts Receivable Collect $333 on account? Cash Accounts Receivable Bal. 500 Sale 100

Valuing Accounts Receivable Collect $333 on account? Cash Accounts Receivable Bal. 500 Sale 100 333 Coll. Bal. LO 2 333 Allowance for Doubtful Accounts 25 267 25 Copyright © 2018 John Wiley & Son, Inc. Bal. 19

Valuing Accounts Receivable Adjustment of $15 for estimated bad debts? Bad Debt Expense 15

Valuing Accounts Receivable Adjustment of $15 for estimated bad debts? Bad Debt Expense 15 Allowance for Doubtful Accounts Receivable Bal. 500 Sale 100 333 Coll. Bal. LO 2 15 Allowance for Doubtful Accounts 25 Bal. 15 Exp. 267 40 Copyright © 2018 John Wiley & Son, Inc. Bal. 20

Valuing Accounts Receivable Write-off of uncollectible accounts of $10? Allowance for Doubtful Accounts Receivable

Valuing Accounts Receivable Write-off of uncollectible accounts of $10? Allowance for Doubtful Accounts Receivable Bal. 500 Sale 100 333 Coll. 10 w/o Bal. 257 LO 2 10 10 Allowance for Doubtful Accounts 25 Bal. 15 Exp. w/o 10 30 Bal. Copyright © 2018 John Wiley & Son, Inc. 21

Valuing Accounts Receivable ABC Corporation Balance Sheet (partial) Current Assets Cash Accounts receivable, net

Valuing Accounts Receivable ABC Corporation Balance Sheet (partial) Current Assets Cash Accounts receivable, net of $30 allowance Inventory Prepaid expense Total current assets LO 2 Copyright © 2018 John Wiley & Son, Inc. $ 330 227 812 40 $1, 409 22

Direct Write-Off Method For Uncollectible Accounts Illustration: Assume that Warden Co. writes off M.

Direct Write-Off Method For Uncollectible Accounts Illustration: Assume that Warden Co. writes off M. E. Doran’s $200 balance as uncollectible on December 12. Warden’s entry is: Dec. 12 Bad Debt Expense Accounts Receivable 200 Theoretically undesirable: • No matching • Receivable not stated at cash realizable value • Not acceptable for financial reporting LO 2 Copyright © 2018 John Wiley & Son, Inc. 23

Allowance Method For Uncollectible Accounts 1. Companies estimate uncollectible accounts receivable. 2. Debit Bad

Allowance Method For Uncollectible Accounts 1. Companies estimate uncollectible accounts receivable. 2. Debit Bad Debt Expense and credit Allowance for Doubtful Accounts (a contra-asset account). 3. Companies debit Allowance for Doubtful Accounts and credit Accounts Receivable at the time the specific account is written off as uncollectible. LO 2 Copyright © 2018 John Wiley & Son, Inc. 24

Recording Estimated Uncollectibles Illustration: Hampson Furniture has credit sales of $1, 200, 000 in

Recording Estimated Uncollectibles Illustration: Hampson Furniture has credit sales of $1, 200, 000 in 2020. Of this amount, $200, 000 of receivables remains uncollected at December 31. The credit manager estimates that $12, 000 of these receivables will be uncollectible. The adjusting entry to record estimated uncollectibles is as follows. Bad Debt Expense 12, 000 Allowance for Doubtful Accounts LO 2 Copyright © 2018 John Wiley & Son, Inc. 12, 000 25

Recording Estimated Uncollectibles Hampson Furniture Balance Sheet (partial) Current Assets Cash Accounts receivable Allowance

Recording Estimated Uncollectibles Hampson Furniture Balance Sheet (partial) Current Assets Cash Accounts receivable Allowance for doubtful accounts Inventory Supplies Total current assets $200, 000 12, 000 $ 14, 800 188, 000 310, 000 25, 000 $537, 800 ILLUSTRATION 9. 3 Presentation of allowance for doubtful accounts LO 2 Copyright © 2018 John Wiley & Son, Inc. 26

Recording the Write-Off of Uncollectible Accounts Illustration: The financial vice president of Hampson Furniture

Recording the Write-Off of Uncollectible Accounts Illustration: The financial vice president of Hampson Furniture authorizes a write-off of the $500 balance owed by R. A. Ware on March 1, 2021. The entry to record the write-off is as follows. Allowance for Doubtful Accounts Receivable Jan. 1 Bal. 200, 000 Mar. 1 Bal. 199, 500 LO 2 ILLUSTRATION 9. 4 Balances after write-off 500 Allowance for Doubtful Accounts 500 Mar. 1 500 Jan. 1 Bal. 12, 000 Mar. 1 Bal. 11, 500 Copyright © 2018 John Wiley & Son, Inc. 27

Recovery of an Uncollectible Account Illustration: On July 1, R. A. Ware pays the

Recovery of an Uncollectible Account Illustration: On July 1, R. A. Ware pays the $500 amount that Hampson had written off on March 1. Hampson makes these entries. Accounts Receivable 500 Allowance for Doubtful Accounts Cash 500 Accounts Receivable LO 2 500 Copyright © 2018 John Wiley & Son, Inc. 500 28

Estimating the Allowance ILLUSTRATION 9. 6 Nike’s allowance method disclosure Nike, Inc. Notes to

Estimating the Allowance ILLUSTRATION 9. 6 Nike’s allowance method disclosure Nike, Inc. Notes to the Financial Statements Allowance for Uncollectible Accounts Receivable We make ongoing estimates relating to the ability to collect our accounts receivable and maintain an allowance for estimated losses resulting from the inability of our customers to make required payments. In determining the amount of the allowance, we consider our historical level of credit losses and make judgments about the creditworthiness of significant customers based on ongoing credit evaluations. Since we cannot predict future changes in the financial stability of our customers, actual future losses from uncollectible accounts may differ from our estimates. LO 2 Copyright © 2018 John Wiley & Son, Inc. 29

Estimating the Allowance Frequently, companies estimate the allowance as a percentage of the outstanding

Estimating the Allowance Frequently, companies estimate the allowance as a percentage of the outstanding receivables. Under the percentage-of-receivables basis, management establishes a percentage relationship between the amount of receivables and expected losses from uncollectible accounts. LO 2 Copyright © 2018 John Wiley & Son, Inc. 30

Estimating the Allowance ILLUSTRATION 9. 7 Accounts Receivable Aging Schedule Customer T. E. Adert

Estimating the Allowance ILLUSTRATION 9. 7 Accounts Receivable Aging Schedule Customer T. E. Adert R. C. Bortz B. A. Carl O. L. Diker T. O. Ebbet Others Estimated % uncollectible Total estimated uncollectible LO 2 Not yet Due Number of Days Past Due Total 600 300 450 700 500 600 36, 950 26, 200 $39, 600 $27, 000 250 5, 200 $5, 700 300 2, 450 $3, 000 1, 600 $2, 000 300 1, 500 $1, 900 2% 4% 10% 20% 40% $540 $228 $300 $400 $760 $2, 228 1 -30 31 -60 300 Copyright © 2018 John Wiley & Son, Inc. 61 -90 Over 90 200 100 200 31

Estimating the Allowance Illustration: Assume the unadjusted trial balance shows Allowance for Doubtful Accounts

Estimating the Allowance Illustration: Assume the unadjusted trial balance shows Allowance for Doubtful Accounts with a credit balance of $528. Prepare the adjusting entry assuming $2, 228 is the estimate of uncollectible receivables from the aging schedule. Bad Debt Expense 1, 700 Allowance for Doubtful Accounts Bad Debt Expense Dec. 31 Adj. 1, 700 LO 2 ILLUSTRATION 9. 8 Bad debt accounts after posting 1, 700 Allowance for Doubtful Accounts Dec. 31 Bal. 528 Dec. 31 Adj. 1, 700 Dec. 31 Bal. 2, 228 Copyright © 2018 John Wiley & Son, Inc. 32

Estimating the Allowance Illustration: Assume now the unadjusted trial balance shows Allowance for Doubtful

Estimating the Allowance Illustration: Assume now the unadjusted trial balance shows Allowance for Doubtful Accounts with a debit balance of $500. Prepare the adjusting entry assuming $2, 228 is the estimate of uncollectible receivables from the aging schedule. Bad Debt Expense 2, 728 Allowance for Doubtful Accounts Bad Debt Expense Dec. 31 Adj. 2, 728 LO 2 ILLUSTRATION 9. 9 Bad debt accounts after posting 2, 728 Allowance for Doubtful Accounts Dec. 31 Bal. Copyright © 2018 John Wiley & Son, Inc. 500 Dec. 31 Adj. Dec. 31 Bal. 2, 728 2, 228 33

DO IT! 2 a Bad Debt Expense Brule Corporation has been in business for

DO IT! 2 a Bad Debt Expense Brule Corporation has been in business for 5 years. The unadjusted trial balance at the end of the current year shows Accounts Receivable $30, 000, Sales Revenue $180, 000, and Allowance for Doubtful Accounts with a debit balance of $2, 000. Brule estimates bad debts to be 10% of accounts receivable. Prepare the entry necessary to adjust Allowance for Doubtful Accounts. Bad Debt Expense Allowance for Doubtful Accounts 5, 000 [(0. 1 x $30, 000) + $2, 000] LO 2 Copyright © 2018 John Wiley & Son, Inc. 34

Disposing of Accounts Receivable Companies sell receivables for two major reasons. 1. Receivables may

Disposing of Accounts Receivable Companies sell receivables for two major reasons. 1. Receivables may be the only reasonable source of cash. 2. Billing and collection are often time-consuming and costly. LO 2 Copyright © 2018 John Wiley & Son, Inc. 35

Disposing of Accounts Receivable Sale of Receivables to a Factor • Finance company or

Disposing of Accounts Receivable Sale of Receivables to a Factor • Finance company or bank • Buys receivables from businesses and then collects payments directly from customers • Typically charges a commission to company that is selling receivables • Fee ranges from 1 -3% of receivables purchased LO 2 Copyright © 2018 John Wiley & Son, Inc. 36

Sale of Receivables to a Factor Illustration: Assume that Hendredon Furniture factors $600, 000

Sale of Receivables to a Factor Illustration: Assume that Hendredon Furniture factors $600, 000 of receivables to Federal Factors assesses a service charge of 2% of the amount of receivables sold. The journal entry to record the sale by Hendredon Furniture is as follows. Cash 588, 000 Service Charge Expense (2% × $600, 000) 12, 000 Accounts Receivable 600, 000 LO 2 Copyright © 2018 John Wiley & Son, Inc. 37

Disposing of Accounts Receivable National Credit Card Sales • Recorded same as cash sales

Disposing of Accounts Receivable National Credit Card Sales • Recorded same as cash sales • Retailer pays card issuer a fee of 2 to 4% for processing the transactions LO 2 Copyright © 2018 John Wiley & Son, Inc. 38

Accounting for Credit Card Sales Illustration: Anita Ferreri purchases $1, 000 of compact discs

Accounting for Credit Card Sales Illustration: Anita Ferreri purchases $1, 000 of compact discs for her restaurant from Karen Kerr Music Co. , using her Visa First Bank Card. First Bank charges a service fee of 3%. The entry to record this transaction by Karen Kerr Music is as follows. Cash Service Charge Expense Sales Revenue LO 2 Copyright © 2018 John Wiley & Son, Inc. 970 30 1, 000 39

DO IT! 2 b Factoring Peter M. Kell Wholesalers Co. needs to raise $120,

DO IT! 2 b Factoring Peter M. Kell Wholesalers Co. needs to raise $120, 000 in cash to safely cover next Friday’s employee payroll. Kell has reached its debt ceiling. Kell’s present balance of outstanding receivables totals $750, 000. Kell decides to factor $125, 000 of its receivables on September 7, 2020, to alleviate this cash crunch. Record the entry that Kell would make when it raises the needed cash. (Assume a 1% service charge. ) Assuming that Kell Co. factors $125, 000 of its accounts receivable at a 1% service charge, it would make this entry: Cash 123, 750 Service Charge Expense (1% × $125, 000) 1, 250 Accounts Receivable 125, 000 LO 2 Copyright © 2018 John Wiley & Son, Inc. 40

Notes Receivable Companies may grant credit in exchange for a promissory note. A promissory

Notes Receivable Companies may grant credit in exchange for a promissory note. A promissory note is a written promise to pay a specified amount of money on demand or at a definite time. Promissory notes may be used 1. when individuals and companies lend or borrow money, 2. when amount of transaction and credit period exceed normal limits, or 3. in settlement of accounts receivable. LO 3 Copyright © 2018 John Wiley & Son, Inc. 41

Notes Receivable To the Payee, the promissory note is a note receivable. To the

Notes Receivable To the Payee, the promissory note is a note receivable. To the Maker, the promissory note is a note payable. LO 3 ILLUSTRATION 9. 12 Promissory note Copyright © 2018 John Wiley & Son, Inc. 42

Notes Receivable Determining the Maturity Date • On demand • At the end of

Notes Receivable Determining the Maturity Date • On demand • At the end of a stated period of time • On a stated date Computing Interest Face Value of Note LO 3 x Annual Interest Rate ILLUSTRATION 9. 15 Formula for computing interest x Time in Terms of One Year Copyright © 2018 John Wiley & Son, Inc. = Interest 43

Notes Receivable Computing Interest When counting days, omit the date the note is issued,

Notes Receivable Computing Interest When counting days, omit the date the note is issued, but include the due date. Terms of Note $ 750, 12%, 120 days $1, 000, 9%, 6 months $2, 000, 6%, 1 year Interest Computation Face x Rate x Time = $ 730 x 12% x 120/360 = $1, 000 x 9% x 6/12 = $2, 000 x 6% x 1/1 = Interest $ 29. 20 $ 45. 00 $120. 00 ILLUSTRATION 9. 16 Computation of interest LO 3 Copyright © 2018 John Wiley & Son, Inc. 44

Recognizing Notes Receivable Illustration: Calhoun Company wrote a $1, 000, two-month, 12% promissory note

Recognizing Notes Receivable Illustration: Calhoun Company wrote a $1, 000, two-month, 12% promissory note dated May 1, to settle an open account. Prepare entry would Wilma Company makes for the receipt of the note. May 1 LO 3 Notes Receivable Accounts Receivable Copyright © 2018 John Wiley & Son, Inc. 1, 000 45

Valuing Notes Receivable • Report short-term notes receivable at their cash (net) realizable value

Valuing Notes Receivable • Report short-term notes receivable at their cash (net) realizable value • Estimation of cash realizable value and bad debt expense are done similarly to accounts receivable • Allowance for Doubtful Accounts is used LO 3 Copyright © 2018 John Wiley & Son, Inc. 46

Disposing of Notes Receivable 1. Notes may be held to their maturity date. 2.

Disposing of Notes Receivable 1. Notes may be held to their maturity date. 2. Maker may default and payee must make an adjustment to the account. 3. Holder speeds up conversion to cash by selling the note receivable. LO 3 Copyright © 2018 John Wiley & Son, Inc. 47

Disposing of Notes Receivable Honor of Notes Receivable • Maker pays it in full

Disposing of Notes Receivable Honor of Notes Receivable • Maker pays it in full at its maturity date Dishonor of Notes Receivable • Not paid in full at maturity • No longer negotiable LO 3 Copyright © 2018 John Wiley & Son, Inc. 48

Honor of Notes Receivable Illustration: Wolder Co. lends Higley Co. $10, 000 on June

Honor of Notes Receivable Illustration: Wolder Co. lends Higley Co. $10, 000 on June 1, accepting a five-month, 9% interest note. To obtain payment, Wolder (the payee) must present the note either to Higley Co. (the maker) or to the maker’s agent, such as a bank. If Wolder presents the note to Higley Co. on November 1, the maturity date, Wolder’s entry to record the collection is as follows. Nov. 1 LO 3 Cash 10, 375 Notes Receivable Interest Revenue ($10, 000 × 9% × 5/12) Copyright © 2018 John Wiley & Son, Inc. 10, 000 375 49

Accrual of Interest Receivable Illustration: Suppose instead that Wolder Co. prepares financial statements as

Accrual of Interest Receivable Illustration: Suppose instead that Wolder Co. prepares financial statements as of September 30. The adjusting entry by Wolder is for four months ending Sept. 30 Interest Receivable 300 Interest Revenue ($10, 000 × 9% × 4/12) LO 3 ILLUSTRATION 9. 17 Timeline of interest earned Copyright © 2018 John Wiley & Son, Inc. 300 50

Accrual of Interest Receivable Illustration: Prepare the entry Wolder’s would make to record the

Accrual of Interest Receivable Illustration: Prepare the entry Wolder’s would make to record the honoring of the Higley note on November 1. Nov. 1 Cash 10, 375 Notes Receivable Interest Revenue ($10, 000 × 9% × 1/12) LO 3 Copyright © 2018 John Wiley & Son, Inc. 10, 000 300 75 51

Dishonor of Notes Receivable Illustration: Assume that Higley Co. on November 1 indicates that

Dishonor of Notes Receivable Illustration: Assume that Higley Co. on November 1 indicates that it cannot pay at the present time. If Wolder Co. does expect eventual collection, it would make the following entry at the time the note is dishonored (assuming no previous accrual of interest). Nov. 1 Accounts Receivable Notes Receivable Interest Revenue LO 3 Copyright © 2018 John Wiley & Son, Inc. 10, 375 10, 000 375 52

DO IT! 3 Recognizing Notes Receivable Gambit Stores accepts from Leonard Co. a $3,

DO IT! 3 Recognizing Notes Receivable Gambit Stores accepts from Leonard Co. a $3, 400, 90 -day, 6% note dated May 10 in settlement of Leonard’s overdue account. (a) What is the maturity date of the note? (b) What is the interest payable at the maturity date? (c) What entry does Gambit make at the maturity date, assuming Leonard pays the note and interest in full at that time? a. The maturity date is August 8, computed as follows: Term of note: May (31 -10) June July Maturity date: August LO 3 21 30 31 90 days 82 8 Copyright © 2018 John Wiley & Son, Inc. 53

DO IT! 3 Recognizing Notes Receivable Gambit Stores accepts from Leonard Co. a $3,

DO IT! 3 Recognizing Notes Receivable Gambit Stores accepts from Leonard Co. a $3, 400, 90 -day, 6% note dated May 10 in settlement of Leonard’s overdue account. (a) What is the maturity date of the note? (b) What is the interest payable at the maturity date? (c) What entry does Gambit make at the maturity date, assuming Leonard pays the note and interest in full at that time? b. The interest payable at the maturity date is $51, computed as: LO 3 Face x $3, 400 x Rate x 6% x Time = Interest 90/360 = $51. 00 Copyright © 2018 John Wiley & Son, Inc. 54

DO IT! 3 Recognizing Notes Receivable Gambit Stores accepts from Leonard Co. a $3,

DO IT! 3 Recognizing Notes Receivable Gambit Stores accepts from Leonard Co. a $3, 400, 90 -day, 6% note dated May 10 in settlement of Leonard’s overdue account. (a) What is the maturity date of the note? (b) What is the interest payable at the maturity date? (c) What entry does Gambit make at the maturity date, assuming Leonard pays the note and interest in full at that time? c. Gambit Stores records this entry at the maturity date: Cash Notes Receivable Interest Revenue LO 3 Copyright © 2018 John Wiley & Son, Inc. 3, 451 3, 400 51 55

Presentation and Analysis Presentation B/S I/S LO 4 • Identify in the balance sheet

Presentation and Analysis Presentation B/S I/S LO 4 • Identify in the balance sheet or in the notes each major type of receivable • Report short-term receivables as current assets • Report both gross amount of receivables and allowance for doubtful account • Report bad debt expense and service charge expense as selling expenses • Report interest revenue under “Other revenues and gains” Copyright © 2018 John Wiley & Son, Inc. 56

Presentation ILLUSTRATION 9. 18 Deere & Company Balance Sheet (partial) (in millions) Receivables from

Presentation ILLUSTRATION 9. 18 Deere & Company Balance Sheet (partial) (in millions) Receivables from unconsolidated subsidiaries Trade accounts and notes receivable Financing receivables Restricted financing receivables Other receivables Total receivables Less: Allowance for doubtful trade receivables Net receivables LO 4 Copyright © 2018 John Wiley & Son, Inc. $ 30 3, 278 27, 583 4, 616 1, 500 37, 007 175 $36, 832 57

Analysis Illustration: Cisco Systems had net sales of $37, 750 million for the year.

Analysis Illustration: Cisco Systems had net sales of $37, 750 million for the year. It had a beginning accounts receivable (net) balance of $5, 157 million and an ending accounts receivable (net) balance of $5, 344 million. Assuming that Cisco’s sales were all on credit, its accounts receivable turnover is computed as follows. Net Credit ÷ Sales $37, 750 ÷ Average Net Accounts Receivable $5, 157 + $5, 344 2 Accounts Receivable = Turnover = 7. 2 times ILLUSTRATION 9. 21 Accounts receivable turnover and computation LO 4 Copyright © 2018 John Wiley & Son, Inc. 58

Analysis Illustration: A variant of the accounts receivable turnover ratio is average collection period

Analysis Illustration: A variant of the accounts receivable turnover ratio is average collection period in terms of days. ILLUSTRATION 9. 21 Net Credit ÷ Sales $37, 750 Days in Year 365 days ÷ ÷ ÷ Average Net Accounts Receivable $5, 157 + $5, 344 2 Accounts Receivable Turnover 7. 2 times Accounts Receivable = Turnover = 7. 2 times Average Collection Period in Days = 51 days = ILLUSTRATION 9. 22 LO 4 Copyright © 2018 John Wiley & Son, Inc. 59

DO IT! 4 Analysis of Receivables Illustration: In 2020, Phil Mickelson Company has net

DO IT! 4 Analysis of Receivables Illustration: In 2020, Phil Mickelson Company has net credit sales of $923, 795 for the year. It had a beginning accounts receivable (net) ILLUSTRATION balance of $38, 275 and an ending accounts receivable (net) balance of 9. 21 $35, 988. Compute the company’s (a) accounts receivable turnover and (b) average collection period in days. Net Credit Sales ÷ Average Net Accounts Receivable = Accounts Receivable Turnover $923, 795 ÷ $38, 275 + $35, 988 2 = 24. 9 times Accounts Receivable Turnover = Average Collection Period in Days 24. 9 times = 14. 7 days Days in Year ÷ 365 days LO 4 ÷ Copyright © 2018 John Wiley & Son, Inc. 60

A Look at IFRS Key Points Similarities • The recording of receivables, recognition of

A Look at IFRS Key Points Similarities • The recording of receivables, recognition of sales returns and allowances and sales discounts, and the allowance method to record bad debts are the same between GAAP and IFRS. • Both IFRS and GAAP often use the term impairment to indicate that a receivable or a percentage of receivables may not be collected. • The FASB and IASB have worked to implement fair value measurement (the amount they currently could be sold for) for financial instruments, such as receivables. Both Boards have faced bitter opposition from various factions. LO 5 Copyright © 2018 John Wiley & Son, Inc. 61

A Look at IFRS Key Points Differences • Although IFRS implies that receivables with

A Look at IFRS Key Points Differences • Although IFRS implies that receivables with different characteristics should be reported separately, there is no standard that mandates this segregation. • IFRS and GAAP differ in the criteria used to determine how to record a factoring transaction. IFRS uses a combination approach focused on risks and rewards and loss of control. GAAP uses loss of control as the primary criterion. In addition, IFRS permits partial derecognition of receivables; GAAP does not. LO 5 Copyright © 2018 John Wiley & Son, Inc. 62

A Look at IFRS Looking to the Future The question of recording fair values

A Look at IFRS Looking to the Future The question of recording fair values for financial instruments will continue to be an important issue to resolve as the Boards work toward convergence. Both the IASB and the FASB have indicated that they believe that financial statements would be more transparent and understandable if companies recorded and reported all financial instruments at fair value. That said, in IFRS 9, which was issued in 2009, the IASB created a split model, where some financial instruments are recorded at fair value, but other financial assets, such as loans and receivables, can be accounted for at amortized cost if certain criteria are met. Critics say that this can result in two companies with identical securities accounting for those securities in different ways. A proposal by the FASB would require that practically all equity instruments be reported at fair value, and that debt instruments may or may not be reported at fair value depending on whether certain criteria are met. LO 5 Copyright © 2018 John Wiley & Son, Inc. 63

Copyright © 2018 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation

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