Chapter 11 Accounting for Receivables. 11-1 Percentage of Sales Method Balance of Selected Accounts...

Chapter 11Chapter 11Accounting for Accounting for

ReceivablesReceivables

11-1 Percentage of Sales Method11-1 Percentage of Sales MethodBalance of Selected Accounts at Year-EndBalance of Selected Accounts at Year-End

(Before Adjustment)(Before Adjustment)

Accounts ReceivableAccounts Receivable

45,60045,600

Allowance for Doubtful Allowance for Doubtful AccountsAccounts

150150

SalesSales

150,000150,000

Based on past experience, it is estimated that 2% of net sales will become uncollectible. ($150,000 X .02) = $3,000.Based on past experience, it is estimated that 2% of net sales will become uncollectible. ($150,000 X .02) = $3,000.

ADJUSTING ENTRY TO RECORD BAD DEBTS EXPENSEADJUSTING ENTRY TO RECORD BAD DEBTS EXPENSE

Bad Debts ExpenseBad Debts Expense 3,0003,000

Allowance for Doubtful AccountsAllowance for Doubtful Accounts 3,0003,000

SalesSales

150,000150,000


1501503,0003,000

3,1503,150


45,60045,600

Balance of Selected Accounts at Year-EndBalance of Selected Accounts at Year-End(After Adjustment)(After Adjustment)

EMPHASIS ON INCOME EMPHASIS ON INCOME STATEMENT RELATIONSHIPSSTATEMENT RELATIONSHIPSSALESSALES

$150,000$150,000

BAD DEBTS BAD DEBTS EXPENSEEXPENSE

$3,000$3,000

11-2 Percentage of Receivables Method11-2 Percentage of Receivables MethodBalance of Selected Accounts at Year-EndBalance of Selected Accounts at Year-End

(Before Adjustment)(Before Adjustment)


45,60045,600


150150

SalesSales

150,000150,000

AGING SCHEDULEAGING SCHEDULE

CustomerCustomer TotalTotalNot Yet Not Yet

DueDue

Number of Days Past DueNumber of Days Past Due

1-301-30 31-6031-60 61-9061-90Over Over 9090

R. AlbertR. Albert $500$500 $300$300 $100$100 $100$100

G. ConnerG. Conner 600600 $600$600

S. Davis S. Davis 300300 200200 $100$100

B. GordonB. Gordon 900900 500500 400400

T. HaigT. Haig 800800 500500 300300

OthersOthers 42,50042,500 27,80027,800 7,5007,500 2,5002,500 2,7002,700 2,0002,000

$45,60$45,6000

$28,90$28,9000

$8,000$8,000 $3,100$3,100 $3,200$3,200 $2,400$2,400

Estimated Percentage Estimated Percentage UncollectibleUncollectible

2%2% 4%4% 10%10% 20%20% 40%40%

Total Estimated Bad Total Estimated Bad DebtDebt

$2,808$2,808 $578$578 $320$320 $310$310 $640$640 $960$960NoteNote::

Required balance in Allowance account per aging scheduleRequired balance in Allowance account per aging schedule $2,808$2,808

Credit balance in Allowance accountCredit balance in Allowance account 150150

Adjusting entry amountAdjusting entry amount $2,658$2,658

11-2 Percentage of Receivables Method 11-2 Percentage of Receivables Method (continued)(continued)

ADJUSTING ENTRY TO RECORD BAD DEBTS ADJUSTING ENTRY TO RECORD BAD DEBTS EXPENSEEXPENSE

Bad Debts ExpenseBad Debts Expense 2,6582,658


SalesSales

150,000150,000


1501502,6582,658

2,8082,808


45,60045,600

Balance of Selected Accounts at Year-EndBalance of Selected Accounts at Year-End(After Adjustment)(After Adjustment)

EMPHASIS ON BALANCE EMPHASIS ON BALANCE

SHEET RELATIONSHIPSSHEET RELATIONSHIPS

ACCOUNTS ACCOUNTS RECEIVABLERECEIVABLE

$45,600$45,600

ALLOWANCE FOR ALLOWANCE FOR DOUBTFUL DOUBTFUL ACCOUNTSACCOUNTS

$2,808$2,808

11-3 Percentage of Sales vs. Percentage of 11-3 Percentage of Sales vs. Percentage of Receivables MethodsReceivables Methods

PERCENTAGE OF SALES METHODPERCENTAGE OF SALES METHOD PERCENTAGE OF RECEIVABLES PERCENTAGE OF RECEIVABLES METHODMETHOD

ADJUSTING ENTRYADJUSTING ENTRY

Bad Debts ExpenseBad Debts Expense 3,0003,000 Bad Debts ExpenseBad Debts Expense 2,6582,658

Doubtful AccountsDoubtful Accounts 3,0003,000 Allowance for Doubtful Allowance for Doubtful AccountsAccounts

2,6582,658


1501502,6582,658

2,8082,808


1501503,0003,000

3,1503,150

Amount Determined Amount Determined From Net SalesFrom Net Sales

Balance of Amount Balance of Amount Determined From Determined From Aging ScheduleAging Schedule

If the Allowance account had a $150 debit balance before adjustments, the adjusting entry using the percentage of sales If the Allowance account had a $150 debit balance before adjustments, the adjusting entry using the percentage of sales method would not change. If the percentage of receivables method is used, the adjusting entry would have to take into method would not change. If the percentage of receivables method is used, the adjusting entry would have to take into consideration the debit balance in the Allowance account by adding the debit balance to the required Allowance account consideration the debit balance in the Allowance account by adding the debit balance to the required Allowance account balance obtained from the aging schedule.balance obtained from the aging schedule.


1501502,6582,658

2,8082,808


1501503,0003,000

3,1503,150

ADJUSTING ENTRYADJUSTING ENTRY

Bad Debts ExpenseBad Debts Expense 3,0003,000 Bad Debts ExpenseBad Debts Expense 2,9582,958


3,0003,000 Allowance for Doubtful Allowance for Doubtful AccountsAccounts ($150 + $2,808 = $2,958)($150 + $2,808 = $2,958)

2,9582,958

11-4 Sales of Receivables11-4 Sales of Receivables

1. SALE OF RECEIVABLES TO A FACTOR1. SALE OF RECEIVABLES TO A FACTOR

EXAMPLEEXAMPLE::

A company sells $800,000 of its receivables to a finance A company sells $800,000 of its receivables to a finance company that charges a fee of 2%company that charges a fee of 2%

CashCash 784,000784,000

Service Charge ExpenseService Charge Expense 16,00016,000

Accounts Accounts ReceivableReceivable

800,000800,000

2. NATIONAL CREDIT CARD SALES2. NATIONAL CREDIT CARD SALES

EXAMPLEEXAMPLE::

A customer purchases goods for $500 using a VISA card. A customer purchases goods for $500 using a VISA card. The retailer deposits the credit sales receipts in the bank The retailer deposits the credit sales receipts in the bank and the bank charges a 3% fee.and the bank charges a 3% fee.

CashCash 485485

Service Charge ExpenseService Charge Expense 1515

Accounts Accounts ReceivableReceivable

500500

11-5 Maturity Date of Note11-5 Maturity Date of Note

DAYSDAYS

August 11August 11 60 Days60 Days October 10October 10

Aug. (31-Aug. (31-11)11)SeptemberSeptemberOctoberOctober

2020303010106060

March 4March 4 90 Days90 Days June 2June 2

Mar. (31-4)Mar. (31-4)AprilAprilMayMayJuneJune

272730303131

229090

May 14May 14 120 Days120 Days September 11September 11

May (31-May (31-14)14)JuneJuneJulyJulyAugustAugustSeptemberSeptember

17173030313131311111

120120

DATE OF NOTEDATE OF NOTE TERMS OF NOTE STATED TERMS OF NOTE STATED ININ MATURITY DATEMATURITY DATE

MONTHSMONTHS

July 1July 1 3 Months3 Months October 1October 1

February 28February 28 4 Months4 Months June 30June 30

September 15September 15 2 Months2 Months November 15November 15

11-6 Disposition of Notes Receivable11-6 Disposition of Notes Receivable

1. NOTE IS HONORED1. NOTE IS HONORED

A $20,000, 8%, 3-month note is collected at maturity.A $20,000, 8%, 3-month note is collected at maturity.

CashCash 20,40020,400

Notes ReceivableNotes Receivable 20,00020,000

Interest RevenueInterest Revenue

($20,000 X .08 X 3/12) = $400($20,000 X .08 X 3/12) = $400400400

2. NOTE IS DISHONORED2. NOTE IS DISHONORED

A $20,000, 8%, 3-month note is dishonored at maturity.A $20,000, 8%, 3-month note is dishonored at maturity.

Entry if collection is ultimately expected.Entry if collection is ultimately expected.

Accounts ReceivableAccounts Receivable 20,40020,400


Interest RevenueInterest Revenue 400400

Entry if collection is not anticipated.Entry if collection is not anticipated.



11-7 Interest Bearing Notes11-7 Interest Bearing Notes

October 1, 2003October 1, 2003

Four months after the above date, I agree to pay Four months after the above date, I agree to pay $10,000 to City National Bank with interest at $10,000 to City National Bank with interest at the rate of 9% per annum.the rate of 9% per annum.

Ed Ryon CompanyEd Ryon Company

Oct. Oct. 11

CashCash 10,0010,0000

Notes PayableNotes Payable 10,0010,0000

Recording cash received from noteRecording cash received from note

Dec. Dec. 3131

Interest ExpenseInterest Expense 225225

Interest Interest PayablePayable

225225

$10,000 X 9% X 3/12 = $10,000 X 9% X 3/12 = $225$225

Recording three months interest expenseRecording three months interest expense

Financial Statements at December 31Financial Statements at December 31

Income StatementIncome Statement Interest expenseInterest expense 225225

Balance SheetBalance Sheet Notes payableNotes payable Interest PayableInterest Payable

10,00010,000225225

10,22510,225

Feb. 1Feb. 1 Notes PayableNotes Payable 10,00010,000

Interest ExpenseInterest Expense 7575

Interest PayableInterest Payable 225225

CashCash 10,30010,300

$10,000 X 9% X 1/12 = $75$10,000 X 9% X 1/12 = $75

Recording the interest expense and payment of Recording the interest expense and payment of note and interestnote and interest

Chapter 11 Accounting for Receivables. 11-1 Percentage of Sales Method Balance of Selected Accounts...

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