Ch08

Chapter 8-1

Chapter 8-2

Reporting and Reporting and

Analyzing ReceivablesAnalyzing Receivables

Accounting, Third Edition

Chapter 8-3

1. Identify the different types of receivables.

2. Explain how accounts receivable are recognized in the accounts.

3. Describe the methods used to account for bad debts.

4. Compute the interest on notes receivable.

5. Describe the entries to record the disposition of notes receivable.

6. Explain the statement presentation of receivables.

7. Describe the principles of sound accounts receivable management.

8. Identify ratios to analyze a company’s receivables.

9. Describe methods to accelerate the receipt of cash from receivables.

Study ObjectivesStudy ObjectivesStudy ObjectivesStudy Objectives

Chapter 8-4

Types of Types of ReceivablesReceivables

Types of Types of ReceivablesReceivables

Accounts Accounts ReceivableReceivableAccounts Accounts

ReceivableReceivableNotes Notes

ReceivableReceivableNotes Notes

ReceivableReceivable

Statement Statement Presentation of Presentation of

ReceivablesReceivables

Statement Statement Presentation of Presentation of

ReceivablesReceivables

Managing Managing ReceivablesReceivables

Managing Managing ReceivablesReceivables

Reporting and Analyzing ReceivablesReporting and Analyzing ReceivablesReporting and Analyzing ReceivablesReporting and Analyzing Receivables

Accounts Accounts receivablereceivable

Notes Notes receivablereceivable

Other Other receivablesreceivables

Recognizing Recognizing accounts accounts receivablereceivable

Valuing Valuing accounts accounts receivablereceivable

Determining Determining maturity datematurity date

Computing Computing interestinterest

Recognizing Recognizing notes notes receivablereceivable

Valuing notes Valuing notes receivablereceivable

Disposing of Disposing of notes notes receivablereceivable

Balance Balance sheet and sheet and notesnotes

Income Income statementstatement

Extending Extending creditcredit

Establishing Establishing a payment a payment periodperiod

Monitoring Monitoring collectionscollections

Evaluating Evaluating liquidity of liquidity of receivablesreceivables

Accelerating Accelerating cash receiptscash receipts

Chapter 8-5

Amounts due from individuals and other companies that are expected to be collected in cash.

Amounts owed by customers

that result from the sale of goods and services.

Accounts Accounts ReceivableReceivableAccounts Accounts

ReceivableReceivable

Types of ReceivablesTypes of ReceivablesTypes of ReceivablesTypes of Receivables

SO 1 Identify the different types of receivables.SO 1 Identify the different types of receivables.

Claims for which formal

instruments of credit are

issuedas proof of debt.

“Nontrade” (interest, loans to officers, advances

to employees, and income taxes

refundable).

Notes Notes ReceivableReceivable

Notes Notes ReceivableReceivable

Other Other ReceivableReceivable

ss

Other Other ReceivableReceivable

ss

Chapter 8-6

Two accounting issues:

1. Recognizing accounts receivable.

2. Valuing accounts receivable.

Accounts ReceivableAccounts ReceivableAccounts ReceivableAccounts Receivable

SO 2 SO 2 Explain how accounts receivable are recognized in the accounts.

A service organization records a receivable when it provides service on account. A merchandiserrecords accounts receivable at the point of sale of merchandise on account.

Recognizing Accounts Receivable

Chapter 8-7

Illustration:Illustration: Assume that you use your JCPenney Company credit card to purchase clothing with a sales price of $300. Assuming that you owe $300 at the end of the month, and JCPenney charges 1.5% per month on the balance due. Prepare the entry to record the sale and the adjusting entry to record interest revenue.

Accounts receivable 300.00

Sales 300.00

SO 2 Explain how companies recognize accounts receivable.SO 2 Explain how companies recognize accounts receivable.

Accounts receivable 4.50

Interest revenue (300 x 1.5%) 4.50


Chapter 8-8

Valuing Accounts Receivables

Classification

Valuation (net realizable value)

Uncollectible Accounts Receivable

Sales on account raise the possibility of accounts not being collected


SO 3 Describe the methods used to account for bad debts.SO 3 Describe the methods used to account for bad debts.

Chapter 8-9

Allowance MethodAllowance MethodLosses are estimated:

better matching.receivable stated at net realizable value.required by GAAP.

Methods of Accounting for Uncollectible Accounts

Direct Write-OffDirect Write-OffTheoretically

undesirable:no matching.receivable not stated at net realizable value.not acceptable for financial reporting.

Valuing Accounts ReceivableValuing Accounts ReceivableValuing Accounts ReceivableValuing Accounts Receivable


Chapter 8-10

Illustration:Illustration: Assume, for example, that Warden Co. writes off M. E. Doran’s $200 balance as uncollectible on December 12. Warden’s entry is:

Bad debt expense 200

Accounts receivable 200


Direct Write-off Method for Uncollectible Accounts


Chapter 8-11


Allowance Method for Uncollectible Accounts

1. Companies estimate uncollectible accounts receivable.

2. To record estimated uncollectibles, companies debit Bad Debts Expense and credit Allowance for Doubtful Accounts (a contra-asset account).

3. When companies write off specific uncollectible accounts, they debit Allowance for Doubtful Accounts and credit Accounts Receivable.


Chapter 8-12

Illustration: Assume that Hampson Furniture has credit sales of $1,200,000 in 2010, of which $200,000 remains uncollected at December 31. The credit manager estimates that $12,000 of these sales will prove uncollectible.


Bad debts expense 12,000Dec. 31 Allowance for doubtful accounts

12,000


Chapter 8-13


Illustration 8-3Presentation of allowancefor doubtful accounts


Chapter 8-14

Illustration: Assume that the vice-president of financeof Hampson Furniture on March 1, 2011, authorizes a write-off of the $500 balance owed by R. A. Ware. The entry to record the write-off is:


Allowance for doubtful accounts 500Mar. 1

Accounts receivable500

Recording Write-off of an Uncollectible Account

Illustration 8-4


Chapter 8-15

Illustration: Assume that on July 1, R. A. Ware pays the $500 amount that Hampson Furniture had written off on March 1. Hampson makes these entries:


Accounts receivable 500Jul. 1

Allowance for doubtful accounts 500

Recovery of an Uncollectible Account

Cash 5001

Accounts receivable500


Chapter 8-16

Estimating the Allowance


Under the percentage of receivables basis, management establishes a percentage relationship between the amount of receivables and expected losses from uncollectible accounts.


Chapter 8-17

Under percentage of receivables basis, management establishes a percentage relationship between the amount of receivables and expected losses from uncollectible accounts.


Illustration 8-6


Chapter 8-18

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 debts expense 1,700Dec. 31 Allowance for doubtful accounts

1,700

Estimating the Allowance

Illustration 8-7 Bad debts accounts after posting

Chapter 8-19


Illustration 8-8 Note disclosure of accounts receivable


Chapter 8-20

Chapter 8-21

Notes ReceivableNotes ReceivableNotes ReceivableNotes 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.

Chapter 8-22

Illustration 8-9


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

To the Maker, the promissory note is a note payable.

Chapter 8-23

Determining the Maturity Date

SO 4 Compute the interest on notes receivable.SO 4 Compute the interest on notes receivable.


Note expressed in terms of

Months

Days

Computing InterestIllustration 8-

10

Chapter 8-24

Computing Interest



When counting days, omit the date the note is issued, but include the due date.

Illustration 8-11

Chapter 8-25

Recognizing Notes Receivable



Illustration: Assuming that Brent Company wrote a $1,000, two-month, 8% promissory note dated May 1, to settle an open account. Prepare entry would Wilma Company makes for the receipt of the note.

Notes receivable 1,000May 1

Accounts receivable 1,000

Chapter 8-26

Valuing Notes Receivable


Like accounts receivable, companies report short-term notes receivable at their cash (net) realizable value.

Estimation of cash realizable value and bad debts expense are done similarly to accounts receivable.

Allowance for Doubtful Accounts is used.


Chapter 8-27

Disposing of Notes Receivable

SO 5 Describe the entries to record the disposition of notes SO 5 Describe the entries to record the disposition of notes receivable.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.

Chapter 8-28

Honor of Notes Receivable



A note is honored when its maker pays it in full at its maturity date.

Dishonor of Notes Receivable

A dishonored note is not paid in full at maturity. Dishonored note receivable is no longer negotiable.

Disposing of Notes Receivable

Chapter 8-29

Illustration: Assume that Wolder Co. lends Higley Inc. $10,000 on June 1, accepting a five-month, 9% interest note. If Wolder presents the note to Higley Inc. on November 1, the maturity date, Wolder’s entry to record the collection is:




Cash 10,375Jun. 1

Notes receivable 10,000 Interest revenue

375($10,000 x 9% x 5/12 = $ 375)

Chapter 8-30

Illustration: Suppose instead that Wolder Co. prepares financial statements as of September 30. Prepare the adjusting entry by Wolder is for four months ending Sept. 30.

Accrual of Interest



Interest receivable 300Sept. 1 Interest revenue 300

($10,000 x 9% x 4/12 = $ 300)

Chapter 8-31

Illustration: Prepare the entry Wolder’s would make to record the honoring of the Higley note on November 1.




Cash 10,375Nov. 1

Notes receivable 10,000 Interest receivable

300 Interest revenue 75

Chapter 8-32

Financial Statement PresentationFinancial Statement PresentationFinancial Statement PresentationFinancial Statement Presentation

SO 6 Explain the statement presentation of receivables.SO 6 Explain the statement presentation of receivables.

Illustration 8-12 Balance sheet presentation of receivables

Chapter 8-33

Managing Receivables


SO 7 Describe the principles of sound accounts receivable SO 7 Describe the principles of sound accounts receivable management.management.

Managing accounts receivable involves five steps:

1. Determine to whom to extend credit.

2. Establish a payment period.

3. Monitor collections.

4. Evaluate the liquidity of receivables.

5. Accelerate cash receipts from receivables when necessary.

Chapter 8-34

Chapter 8-35

Evaluating Liquidity of Receivables

SO 8 Identify ratios to analyze a company’s receivables.SO 8 Identify ratios to analyze a company’s receivables.


Illustration 8-14

Chapter 8-36

Evaluating Liquidity of Receivables

Accounts Receivable Turnover is used to:

Assess the liquidity of the receivables.

Measure the number of times, on average, a company collects receivables during the period.

Variant of the accounts receivable turnover ratio is average collection period in terms of days.

Used to assess effectiveness of credit and collection policies.

Collection period should not exceed credit term period.

SO 8 Identify ratios to analyze a company’s receivables.SO 8 Identify ratios to analyze a company’s receivables.


Chapter 8-37

Accelerating Cash Receipts

Three reasons for the sale of receivables:

1. Size.

2. Companies may sell receivables because they may be the only reasonable source of cash.

3. Billing and collection are often time-consuming and costly.

SO 9 Describe methods to accelerate the receipt of cash from SO 9 Describe methods to accelerate the receipt of cash from receivables.receivables.


Chapter 8-38

National Credit Card Sales

Three parties involved when credit cards are used.

1. credit card issuer,

2. retailer, and

3. customer.



The retailer pays the credit card issuer a fee of 2% to 4% of the invoice price for its services.

Chapter 8-39

National Credit Card Sales

Illustration: Morgan Marie purchases $1,000 of compact discs for her restaurant from Sondgeroth Music Co., and she charges this amount on her Visa First Bank Card. The service fee that First Bank charges Sondgeroth Music is 3%.



Cash 970

Service charge expense 30

Sales1,000

Chapter 8-40

Sale of Receivables to a Factor

Illustration: Assume that Hendredon Furniture factors $600,000 of receivables to Federal Factors, Inc. Federal Factors assesses a service charge of 2% of the amount of receivables sold.



Cash 588,000

Service charge expense 12,000

Accounts receivable600,000

A factor is a finance company or bank that buys receivables from businesses for a fee and then collects the payments directly from the customers.

Chapter 8-41

Chapter 8-42 SO 9 Describe methods to accelerate the receipt of cash from SO 9 Describe methods to accelerate the receipt of cash from

receivables.receivables.


Chapter 8-43

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Ch08

Business

Transcript of Ch08