CHAPTER 9 RECEIVABLES AND PAYABLES Objective 1 Types

CHAPTER 9 RECEIVABLES AND PAYABLES

Objective 1 Types of Receivables 2

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

Accounts receivable (외상매출금), resulting from the sales of goods or services, are normally expected to be collected within a relatively short period, such as 30 or 60 days.

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

Other receivables includes non-trade receivables such as interest receivable, loans receivable, income taxes refundable and so forth.

Objective 2 Recognizing and Valuing Accounts Receivable 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 (대손상각 비), or doubtful accounts expense.

The direct write-off method (직접차감법) records bad debt expense only when an account is judged to be worthless. The direct write-off method has two deficiencies. First, it fails to match the uncollectible expense against the revenue in the year of sale. Second, accounts receivable is shown at gross amount, resulting in overstatement of assets.

The allowance method (충당금설정법) records bad debt expense by estimating uncollectible accounts at the end of the accounting period. Receivables are valued at Net Realizable Value (순 실현가능가치). Uncollectible Accounts Expense ( 대손상각비) is matched with the revenue in the year of sale. The Allowance for Uncollectible Accounts (대손 충당금) is a contra asset account (자산차감계정).

Example 9 -1 Direct Write-Off Method Merchandise of $1, 000 was sold to Wren Company on July 6, 20× 1. Its account was considered uncollectible on February 7, 20× 2. Make the necessary journal entry to record the write-off of accounts receivable from Wren Company. The journal entry on February 7 is: February 7 Uncollectible Accounts Expense 1, 000 Accounts Receivable - Wren Company 1, 000

Example 9 -2 Allowance Method Canine Corporation’s accounts receivable balance is $50, 000 at the end of an accounting period. It is estimated that $2, 000 of the customer balances will be uncollectible. Make an appropriate journal entry to record the uncollectible accounts expense at the end of the accounting period; and determine at which amount the accounts receivable will be reported in the statement of financial position for Canine Corporation. The journal entry is: Uncollectible Accounts Expense 2, 000 Allowance for Uncollectible Accounts 2, 000 The year-end statement of financial position shows the estimated net realizable value ($48, 000) of the accounts receivable: Accounts Receivable $50, 000 Less：Allowance for Uncollectible Accounts 2, 000 $48, 000

Objective 3 Methods of Computing Provision for Uncollectible Accounts 13

Estimating Uncollectibles Alternative ways can be used to estimate the amount debited to Uncollectible Accounts Expense. 1. Percent of credit sales method. 2. Percent of accounts receivable method 3. Aging method

Percent of Sales Method (매출액비례법 ) This is an income statement approach to estimating uncollectible accounts expense. The expense is computed by multiplying the current year’s net credit sales (순외상매출 액) by a flat uncollectible rate (단일대손율). The method emphasizes the matching (대응) between Uncollectible Accounts Expense and Credit Sales. Therefore, the current balance in the Allowance for Uncollectible Accounts does not affect Uncollectible Accounts Expense.

Example 9 -3 Percent of Credit Sales Method Credit sales for Grouse Company in 20× 1 amount to $220, 000. The anticipated uncollectible accounts expense is 1 percent of credit sales. The allowance for uncollectible accounts currently has a credit balance of $1, 200 before the adjusting entry at the end of the period. Make a proper adjusting journal entry to record uncollectible accounts expense assuming that Grouse Company uses the percent of credit sales method. The journal entry is： Uncollectible Accounts Expense Allowance for Uncollectible Accounts 2, 200

Percent of Receivable Method (채권잔액비례법) This is the statement of financial position approach to estimating allowance for uncollectible accounts. The allowance is computed by multiplying the receivable balance (채권잔액) at the end of a period by a flat uncollectible rate (단일대손율). The method emphasizes the measurement of receivable at Net Realizable Value. Therefore, the balance in the Allowance for Uncollectible Accounts is taken into account to record the adjusting entry for Uncolletible Accounts Expense.

Example 9 -4 Percent of Accounts Receivable Method At the end of December 20× 1, Canary Company’s Accounts Receivable has a balance of $50, 000 and Allowance for Uncollectible Accounts has a credit balance of $500. It is estimated that $2, 000 of the customer balances will be uncollectible. Make a proper adjusting journal entry to record uncollectible accounts expense assuming that Canary Company uses the percent of accounts receivable method. Also, show the accounts receivable will be reported in the statement of financial position prepared on December 31, 20× 1. Additional provision needed in this case is $1, 500($2, 000－$500). The journal entry is： Uncollectible Accounts Expense 1, 500 Allowance for Uncollectible Accounts 1, 500 The year-end statement of financial position shows the estimated net realizable value of the accounts receivable: Accounts Receivable $50, 000 Less：Allowance for Uncollectible Accounts 2, 000 $48, 000

Aging Method (연령분석법) The longer an account receivable is overdue, the more likely it is that it fails to be collected. Basing the estimate of uncollectible accounts on how long specific amounts have been outstanding is called aging method. The aging method is also a balance sheet approach since it breaks down the gross receivables into different age groups and applies different uncollectible rates across the age groups.

Example 9 -5 Aging Method A breakdown of accounts receivable for Canary Company at December 31, 20× 1 by age groups is shown below with the desired balance of allowance for uncollectible accounts for each group and the aggregate. Age of Accounts receivable 1 -30 days 31 -60 days 61 -90 days Over 90 days Year-End Gross Accounts Receivable Balance $12, 000 28, 000 2, 000 $50, 000 Uncollectible Percentage 1% 3% 5% 12% Amount Needed in Allowance Account at Year’s End $120 840 400 240 $1, 600 The allowance for uncollectible accounts has a credit balance of $1, 200 before adjusting entry is made on December 31, 20× 1. Make an appropriate adjusting journal entry to record uncollectible accounts expense assuming that Canary Company uses the aging method. The year-end journal entry is: Uncollectible Accounts Expense 400 Allowance for Uncollectible Accounts 400

Example 9 -6 Abnormal Balance for Allowance for Uncollectible Accounts Assume the same information as in Example 9 -5 except that the allowance account has a debit balance of $1, 200. Make an appropriate adjusting journal entry to record uncollectible accounts expense assuming that Canary Company uses the aging method. The journal entry is: Uncollectible Accounts Expense 2, 800 Allowance for Uncollectible Accounts 2, 800 After this entry, the allowance account will have the desired balance of $1, 600.

Objective 4 Writing off Customers’ Accounts 22

Write-off of a Specific Account �When it is obvious that a customer is no longer able to pay the amount due, the specific account should be written off. �The journal entry is: � Allowance for Uncollectible Accounts* xxx � Accounts Receivable xxx �* Be careful not to debit Uncollectible Accounts Expense.

Objective 5 Recovery of Written-off Receivables 24

Recovery of Written-off Receivables A full or partial recovery of a previously written-off accounts should be recorded in two steps. First, reverse the write-off journal entry. Second, record the collection of accounts receivable. 1) Accounts Receivable xxx Allowance for Uncollectible Accounts xxx 2) Cash xxx Accounts Receivable xxx

Example 9 -8 Recovery of Written-off Receivable Referring to Example 9 -7, assume that Frigate Company paid Albatross Company $600. Make appropriate journal entries to record the recovery of the previously written off account from Frigate Company. The journal entries are: Accounts Receivable - Frigate Company 600 Allowance for Uncollectible Accounts Cash 600 Accounts Receivable - Frigate Company 600

Objective 6 Notes Receivable 27

Exhibit Promissory Note

Interest on Notes Receivable Interest is usually computed on the basis of a 360 -day year (12 months× 30 days per month). The following formula is used: Interest＝Principal × Interest Rate × Time The principal(원금) is the face value(액면가액) of the note. The interest rate (이자율) is the annual rate(연리) earned on the note. The time is the fraction of the year that the note is held. For example, if a $1, 000, 12 percent, 90 -day note is issued, then the interest is: $1, 000× 12%× 90/360＝$30

Example 9 -9 Notes Receivable Cardinal Company has an accounts receivable of $1, 000 from Blue Jay Company. Cardinal Company receives a 90 day, 12 percent note in settlement of the accounts receivable. Make journal entries for Cardinal Company to record the receipt of a promissory note in settlement of accounts receivable, and to record the collection of cash at the maturity date of the promissory note. Journal entry to record the receipt of a promissory note in settlement of account receivable is: Notes Receivable 1, 000 Accounts Receivable 1, 000 The interest is not recorded until it is due 90 days later. When the note receivable is collected at maturity, interest income will become a part of the journal entry as follows: Cash 1, 030 Notes Receivable 1, 000 Interest Income 30* * $1, 000× 12%× 90/360＝$30

Characteristics of Notes Receivable A note receivable, or promissory note, is a written document containing a promise to pay: • The maker is the party making the 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. The due date or maturity date is the date the note is to be paid. 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.

Objective 7 Discounting a Note Receivable 32

Discounting a Note Receivable (받을어음의 할인) The holder of a note may expedite cash receipt from the note by transferring it to a bank prior to maturity. This is referred to as ‘discounting a note receivable. ’ The proceeds received by the holder at the time the note is discounted is equal to the maturity value less the bank discount. They are calculated as follows: • Maturity Value (만기가액)＝Face Value ＋Interest Income • Bank Discount (은행할인액)＝Maturity Value × Discount Rate × Discount Period • Net Proceeds (현금수령액)＝Maturity Value－Bank Discount

Example 9 -10 Discounting a Note Receivable (1) Cardinal Company holds a $1, 000, 120 day, 12 percent note dated September 6. It is discounted at 16 percent on October 6. The interest on the note is: $1, 000× 12%× 120/360＝$40 The maturity value is: $1, 000＋$40＝$1, 040 At the time Cardinal Company discounted the note, the company had already held it for 30 days. Hence, the discount period will be 90 days. The bank discount is: $1, 040× 16%× 90/360＝$41. 60 Therefore, the cash proceeds received by Cardinal Company are: $1, 040. 00－$41. 60＝$998. 40 The journal entry to record the discounting of the note receivable is: Cash 998. 40 Interest Expense 1. 60 Notes Receivable 1, 000. 00

Example 9 -11 Discounting a Note Receivable (2) Assume the same information as in Example 9 -10 except that the discount period is 30 rather than 90 days. The interest on the note and the maturity value are the same as before. The bank discount charge is： $1, 040× 16%× 30/360＝$13. 87 The net proceeds become： $1, 040. 00－$13. 87＝$1, 026. 13 The entry to record the discounting of the note is now： Cash 1, 026. 13 Notes Receivable 1, 000. 00 Interest Income 26. 13

Note Maturity Figure 9 -1 Obtained Discounting Note Receivable Interest-earning period Interest-paying period Note Obtained Discounted Maturity

Objective 8 Notes Payable 37

A note payable (지급어음) may be issued either to make a purchase, settle an account payable, or borrow from the bank. Accounting for notes payable is similar to that of notes receivable except that notes payable are liabilities.

Example 9 -12 Notes Payable Goldfinch Company purchased a machine by issuing a 6%, $5, 000 promissory note which matures in six months. The journal entry to record the purchase of the machine and the issuance of the promissory note is: Machinery 5, 000 Notes Payable 5, 000

Example 9 -13 Replacement of Accounts Payable with Notes Payable Aspen Company owes an account payable of $6, 000 to a supplier. Aspen Company does not have sufficient cash to pay the account payable when it becomes due. In settlement of the account payable, Aspen Company issued a 90 day promissory note which pays 12 percent annual interest. Make journal entries for Aspen Company to record the settlement of accounts payable by issuing a promissory note, and to record the settlement the promissory note at the maturity date. The journal entry for the company is: Accounts Payable 6, 000 Notes Payable 6, 000 At the maturity date, the journal entry is: Notes Payable 6, 000 Interest Expense 180* Cash 6, 180 * $6, 000× 12%× 90/360＝$180

Borrowing at a Discount (할인차입) A note payable is typically issued to the bank when money is borrowed. Often, the bank immediately deducts the interest on the loan from the face value of the note. The borrower receives the net proceeds. The term “borrowing at a discount (할인차입) or “discounting a note payable” refers to the case where interest is paid in advance.

Two Ways to Pay Interests Journal Entries Alternative ways of interest payments Date of Borrowing Cash Interest paid in advance 9, 700 Interest Expense 300 Notes Payable Cash Interest paid at maturity Notes Payable 10, 000 Cash 10, 000 Notes Payable Maturity Date 10, 000 Notes Payable 10, 000 Interest Expense 300 Cash 10, 300

Example 9 -14 Borrowing on a Discounted Note Phlox Company borrows $10, 000 for 60 days at 18 percent from a bank. The loan is made on a discount basis, where interest of $200($10, 000× 12%× 60/360) is deducted in advance. Make journal entries for Phlox Company to record the borrowing of money on a discounted note, and to record settlement of the promissory note at the maturity date. The journal entry is: Cash 9, 800 Interest Expense 200 Notes Payable 10, 000 At the maturity date, the entry is: Notes Payable 10, 000 Cash 10, 000

Accounting Terminologies in Chapter 9 accounts receivable aging method allowance for uncollectible accounts allowance method annual rate balance sheet approach bank discount borrowing at a discount direct write-off method discounting notes receivable face value income statement approach 외상매출금 연령분석법 대손충당금 충당금설정법 연리 대차대조표접근법 은행할인액 할인차입 직접차감법 받을어음의 할인 액면가액 손익계산서접근법

Accounting Terminologies in Chapter 9 interest rate market rate of interest maturity value net credit sales net realizable value non-trade receivables 이자율 시장이자율 만기가액 순외상매출액 순실현가능가치 비매출채권 notes payable notes receivable on account open account percent of receivables method 어음상의채무(지급어음) 받을어음 외상, 신용 신용계정, 외상계정 채권잔액비례법

Accounting Terminologies in Chapter 9 percent of sales method 매출액비례법 principal priority lien proceeds promissory note provision receivables stated rate of interest trade receivables uncollectible accounts expense write-off 원금 선수위담보 현금수령액 약속어음 비용반영 수취채권 표시이자율 매출채권 대손상각비 제거

Chapter 9 �The end