Chapter 7 Receivables Financial and Managerial Accounting 8
Chapter 7 Receivables Financial and Managerial Accounting 8 th Edition Warren Reeve Fess © Copyright 2004 South-Western, a division of Thomson Learning. All rights reserved. Task Force Image Gallery clip art included in this electroni presentation is used with the permission of NVTech Inc. 1
Objectives 1. List the common classifications of receivables. 2. Summarize and provide examples of internal control procedures that apply to receivables. 3. Describe the nature of and the accounting for uncollectible receivables. 4. Journalize the entries for the allowance method of accounting for uncollectibles, and estimate uncollectible receivables based on sales and on an analysis of receivables. 2
Objectives 5. Journalize the entries for the direct write-off of uncollectible receivables. 6. Describe the nature and characteristics of promissory notes. 7. Journalize the entries for notes receivable transactions. 8. Prepare the Current Assets presentation of receivables on the balance sheet. 9. Compute and interpret the accounts receivable turnover and the number of days’ sales in receivables. 3
Classification of Receivables ü Accounts Receivable—used for selling merchandise or services on credit, and normally expected to be collected in a relatively short period. ü Notes Receivable—used to grant credit on the basis of a formal instrument of credit, called a promissory note. ü Other Receivables—include interest receivable, taxes receivable, and receivables from officers and employees. 4
Separating the Receivable Functions Credit Approval Credit Info. Collections Goods or services Sales Acctg. Info. Invoice Acctg. Info Accounting 5
Uncollectible Receivables 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. 6
Uncollectible Receivables The Allowance Method § This method is consistent with the matching principle. § Management makes an estimate each year of the portion of accounts receivable that may not be collectible. § Uncollectible Accounts Expense is debited and Allowance for Doubtful Accounts is credited. § Actual accounts that prove to be uncollectible are debited to Allowance for Doubtful Accounts and credited to Accounts Receivable. 7
The Allowance Method On December 31, Cynthia Richards estimates that a total of $4, 000 of the $105, 000 balance in her company’s Accounts Receivable will eventually be uncollectible. Adjusting Entry Dec. 31 Uncollectible Accounts Expense Allowance for Doubtful Accounts 4 000 00 8
The Allowance Method The net amount that is expected to be collected, $101, 000 ($105, 000 – $4, 000), is called the net realizable value (NRV). The adjusting entry reduces receivables to the NRV and matches uncollectible expenses with revenues. 9
The Allowance Method The adjusting entry fills the bucket. Adjusting Entry Allowance for Doubtful Accounts 10
The Allowance Method e nc wa lo r UL Al fo TF s t UB un DO cco a Writing off accounts empties the bucket. 11
The Allowance Method Jan. 21 Allowance for Doubtful Accounts Receivable—John Parker 610 00 To write off the uncollectible account. On January 21, John Parker’s account totaling $610 is considered to be uncollectible. 12
The Allowance Method Jun. 10 Accounts Receivable—John Parker Allowance for Doubtful Accounts 610 00 To reinstate the account written off on Jan. 21. An to reinstate Onentry June is 10, made the written-off John Parker’s account is collected. 13
The Allowance Method Jun. 10 Cash 610 00 Accounts Receivable—John Parker 610 00 To record collection on account. A second entry is made to record receipt of the cash. 14
The Allowance Method Estimating Uncollectible Accounts Expense The allowance method uses two ways to estimate the amount debited to Uncollectible Accounts Expense. 1. Estimate based on a percentage of sales. If credit sales for the period are $300, 000 and it is estimated that 1% will be uncollectible, the Uncollectible Accounts Expense is $3, 000. 15
The Allowance Method Adjusting Entry Dec. 31 Uncollectible Accounts Expense 3 000 00 Allowance for Doubtful Accounts 3 000 00 Based on a Percentage of Sales 16
The Allowance Method Estimating Uncollectible Accounts Expense The allowance method uses two ways to estimate the amount debited to Uncollectible Accounts Expense. 2. Estimate 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 Uncollectible Accounts Expense must be debited for $2, 880 ($3, 390 – $510). 17
The Allowance Method Adjusting Entry Dec. 31 Uncollectible Accounts Expense Allowance for Doubtful Accounts 2 880 00 Based on an Analysis of Receivables 18
Accounts Receivable Aging and Uncollectibles Not Past Balance. Due Customer Days Past Due 1 -30 31 -60 61 -90 over 91 -180 181 -365 Ashby & Co. B. T. Barr Brock Co. $ 150 610 470 Saxon Woods 160 Total $86, 300 $ 150 $ 350 $260 $ 470 160 $75, 000$4, 000 $3, 100 $1, 900 $1, 200 $800 $300 Total accounts receivable shown by age. 19
Accounts Receivable Aging and Uncollectibles Not Past Balance. Due Customer Days Past Due 1 -30 31 -60 61 -90 over 91 -180 181 -365 Ashby & Co. B. T. Barr Brock Co. $ 150 610 470 Saxon Woods 160 Total $86, 300 $ 150 $ 350 $260 $ 470 160 $75, 000$4, 000 $3, 100 $1, 900 $1, 200 $800 $300 50% 80% Uncollectibles PERCENT 2% 5% 10% 20% 30% Uncollectible percentages based on experience and industry averages. 20
Accounts Receivable Aging and Uncollectibles Not Past Balance. Due Customer Days Past Due 1 -30 31 -60 61 -90 over 91 -180 181 -365 Ashby & Co. B. T. Barr Brock Co. $ 150 610 470 Saxon Woods 160 Total $86, 300 $ 150 $ 350 $260 $ 470 160 $75, 000$4, 000 $3, 100 $1, 900 $1, 200 $800 $300 50% 80% Uncollectibles PERCENT 2% AMOUNT $3, 390 = $1, 500 5% 10% $200 $310 20% $380 30% $360 $400 $240 21
Year-End Adjustment for Uncollectibles General Ledger Accounts Receivable A 86, 300 Allowance for Doubtful Accts. 510 A 2, 880 B 3, 390 C Uncollectible Accts. Expense B 2, 880 Balance Sheet Accounts receivable Less allowance for doubtful accounts $86, 300 Net realizable value $82, 910 A 3, 390 C Balances before adjustment B Year-end adjustment: $3, 390 – $510 = $2, 880 C Balance after adjustment 22
Accounting for Uncollectible Accounts Receivable The Direct Write-Off Method § § § This method is not consistent with the matching principle. Accounts that prove to be uncollectible are written off in the year they become worthless. Uncollectible Accounts Expense is debited and Accounts Receivable is credited for each such transaction. 23
The Direct Write-Off Method May 10 Uncollectible Accounts Expense 420 00 Accounts Receivable—D. L. Ross 420 00 To write off an uncollectible account. On May 10, D. L. Ross’ account was determined to be uncollectible. The $420 balance is written off the books. 24
The Direct Write-Off Method Nov. 1 Accounts Receivable—D. L. Ross 420 00 Uncollectible Accounts Expense 420 00 To reinstate account written off on May 10. 1 st Entry In November, D. L. Ross remits a check for $420 in payment of his account. 25
The Direct Write-Off Method Nov. 1 Cash 420 00 Accounts Receivable—D. L. Ross 420 00 To record collection on account. 2 nd Entry A second entry is needed to record receipt of the cash. 26
Notes Receivable 2, 500. 00 $_______ Payee Fresno, California_______20___ March 16 06 Ninety days ________ _AFTER DATE _______ We PROMISE TO PAY TO THE ORDER OF ______________________ Judson Company Two thousand five hundred 00/100 -------------_________________________DOLLARS City National Bank PAYABLE AT _______________________ VALUE RECEIVED WITH INTEREST AT ____ 10% Maker NO. _______ DUE__________ 14 June 14, 2006 H. B. Lane TREASURER, WILLIARD COMPANY 27
Notes Receivable A promissory note is a written document containing a promise to pay: ü a specific amount of money (principal) ü to a specific person or company (payee) ü at a specific place ü on a specific date or upon demand ü plus interest at a specific percentage of the principal (face) amount per year 28
Notes Receivable Let’s determine the due date for a 90 -day note dated March 16. The date a note is to be paid is called the due date. It is also referred to as the maturity date. 29
Notes Receivable Total days in note Number of days in March Issue date of note Remaining days in March Number of days in April Number of days in May Residual days in June 90 days 31 March 16 – 15 days 75 days – 30 days 45 days – 31 days 14 days Answer: June 14 30
Notes Receivable The amount that is due at the maturity or due date is called the maturity value. Received a $6, 000, 12%, 30 -day note dated November 21, 2006 in settlement of the account of W. A Bunn Co. 31
Notes Receivable Interest Calculation Principal x Rate x Time = Interest $6, 000 x 12% x 30/360 = $60. 00 Maturity Value Calculation Principal + Interest = Maturity Value $6, 000 + $60. 00 = $6, 060. 00 32
Accounting for Notes Receivable Nov. 21 Notes Receivable Sales 6 000 00 Received 30 -day, 12% note dated November 21, 2006. A $6, 000 30 -day, 12% note dated November 21 is received from W. A Bunn Company in exchange for merchandise. 33
Accounting for Notes Receivable Dec. 21 Cash 6 060 00 Notes Receivable 6 000 00 Interest Revenue Received principal and interest 60 00 on matured note. On December 21, when the note matures, the firm receives $6060 from W. A. Bunn Company ($6, 000 plus $60 interest). 34
Accounting for Notes Receivable Dec. 21 Accounts Receivable—Bunn Co. Notes Receivable Interest Revenue To record dishonored note and 6 060 00 6 000 00 60 00 interest. 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. 35
Accounting for Notes Receivable Dec. 1 Notes Receivable Accounts Receivable—Crawford Company Received note in settlement of 4 000 00 account. A 90 -day, 12% note dated December 1, 2006, is received from Crawford Company to settle its account, which has a balance of $4, 000. 36
Accounting for Notes Receivable Dec. 31 Interest Receivable 40 00 Interest Revenue 40 00 Adjusting entry for accrued interest. 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). 37
Accounting for Notes Receivable Mar. 1 Cash 4 120 00 Notes Receivable Interest Revenue Received payment on note and interest. 4 000 00 $4, 000 x 0. 12 x 60/360 40 00 80 00 On March 1, 2004, $4, 120 is received for the note ($4, 000) and interest ($120). 38
Crabtree Co. Balance Sheet December 31, 2006 Assets Current assets: Cash $119, 500 Notes receivable 250, 000 Accounts receivable$445, 000 Less allowance for doubtful accounts 15, 000 430, 000 Interest receivable 14, 500 Merchandise inventory 714, 000 Highlighted items are receivables 39
Financial Analysis and Interpretation Accounts Receivable Turnover Net sales Average accounts receivable 40
Accounts Receivable Turnover Net sales on account Accounts receivable (net): Beginning of year End of year Total Average Accounts receivable turnover Use: To assess the efficiency in collecting receivables and in the management of credit. 2006 2005 $36, 000 $32, 500, 000 $ 1, 080, 000 1, 220, 000 $2, 300, 000 $1, 150, 000 31. 3 times $1, 050, 000 1, 080, 000 $2, 130, 000 $1, 115, 000 29. 1 times $36, 000 $32, 500, 000 $1, 150, 000 $1, 115, 000 41
Number of Days’ Sales in Receivables Accounts receivable, end of year Average daily sales Accounts receivable, $1, 220, 000 end of year =12. 4 days Average daily sales on account ($36, 000 ÷ 365 days) Use: To assess the efficiency in collecting receivables and in the management of credit. The End 42
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