Z00010000120144008ch08 - Accounting for Receivables

8/9/2019 Z00010000120144008ch08 - Accounting for Receivables

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Chapter 8

Accounting for

ReceivablesLearning Objectives

After studying this chapter, you should be able to:

1. Identif the different tpes of receivables.

2. !"plain ho# co$panies recogni%e accounts receivable.

&. 'istinguish bet#een the $ethods and bases co$panies use to value

accounts receivable.

(. 'escribe the entries to record the disposition of accounts receivable.

). Co$pute the $aturit date of and interest on notes receivable.*. !"plain ho# co$panies recogni%e notes receivable.

+. 'escribe ho# co$panies value notes receivable.

8. 'escribe the entries to record the disposition of notes receivable.

,. !"plain the state$ent presentation and analsis of receivables.


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Preview of Chapter 8

Financial Accounting

IFRS Second Edition

Weygandt Kimmel Kieso


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

Amounts owed by

customers thatresult from the sale

of goods and

services.

AccountsAccounts

ReceivableReceivable

AccountsAccounts


LO 1 Identif the different tpes of receivables.

Written promise (as

evidenced by aformal instrument)

for amounts to be

received.

Nontrade (interest

loans to officersadvances to

employees and

income taxes

refundable).

otesotes


otesotes

ReceivableReceivableOtherOther

ReceivablesReceivables

OtherOther

ReceivablesReceivables

pes of Receivables


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

LO 1 Identif the different tpes of receivables.

Illustration 8-1

pes of Receivables


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hree accounting issues/1. Recogni%ing accounts receivable.

2. 0aluing accounts receivable.

&. 'isposingof accounts receivable.

LO 2 !"plain ho# co$panies recogni%e accounts receivable.

ervice organi%ation! records a receivable when it

provides service on account. erchandiser! records accounts receivable at the point of

sale of merchandise on account.

Recogni%ing Accounts Receivable

Accounts Receivable


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Illustration/ Assume that "ennes # $aurit% (&W') on uly *+, sells merchandise on account to -olo ompany for /+++

terms *0+ n01+. -repare the 2ournal entry to record this

transaction on the boo3s of "ennes # $aurit%.

Accounts receivable +++ul.

&ales revenue +++

Accounts Receivable



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Illustration/ 4n uly 5 -olo returns merchandise worth /++ to"ennes # $aurit% (&W').

&ales returns and allowances ++ul. 5

Accounts receivable ++

4n uly "ennes # $aurit% receives payment from -olo

ompany for the balance due.

ash 66*ul.

&ales discounts (/7++ x .+*) 6

Accounts receivable 7++

Accounts Receivable



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8nterest receivable ,.5+

Illustration/ &ome retailers issue their own credit cards. Assumethat you use your -enney (9&A) credit card to purchase

clothing with a sales price of /1++.

Accounts receivable 1++

&ales revenue 1++

Assuming that you owe /1++ at the end of the month and

-enney charges .5: per month on the balance due

Accounts receivable ,.5+

Accounts Receivable



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otal ta4e/ 51.) $illion

AAO6 O7 A 7RA'

;asanee was the accounts receivable cler3 for a large non!profit foundation that providedperformance and exhibition space for the performing and visual arts. "er responsibilities

included activities normally assigned to an accounts receivable cler3 such as recordingrevenues from various sources that included donations facility rental fees tic3et revenue andbar receipts. "owever she was also responsible for handling all cash and chec3s from the timethey were received until the time she deposited them as well as preparing the ban3reconciliation. ;asanee too3 advantage of her situation by falsifying ban3 deposits and ban3reconciliations so that she could steal cash from the bar receipts. &ince nobody else logged thedonations or matched the donation receipts to pledges prior to ;asanee receiving them she was

able to offset the cash that was stolen against donations that she received but didn


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0aluing Accounts Receivable urrent asset.

>aluation (net reali%able value).

ncollectible Accounts Receivable

&ales on account raise the possibility of accounts not

being collected.

&eller records losses that result from extending credit

as 9ad 'ebt !"pense.

LO & 'istinguish bet#een the $ethods and basesco$panies use to value accounts receivable.

Accounts Receivable


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Allo#ance ethodAllo#ance ethod

Losses are esti$ated/

=etter matching.

?eceivable stated at cash

reali%able value. ?e@uired by 8?&.

ethods of Accounting for ncollectible Accounts

'irect :rite-Off'irect :rite-Off

heoreticall undesirable/

No matching.

?eceivable not stated at

cash reali%able value. Not acceptable for financial

reporting.

Accounts Receivable

LO & 'istinguish bet#een the $ethods and basesco$panies use to value accounts receivable.


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"ow are these accounts presented on the &tatement ofinancial -ositionB

Accounts ReceivableAllo#ance for

'oubtful Accounts

9eg. )33 2) 9eg.

!nd. )33 2) !nd.

Accounts Receivable


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Accounts Receivable


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Allo#ance for'oubtful Accounts

9eg. )33 2) 9eg.

!nd. )33 2) !nd.

Accounts Receivable

;ournal entr for credit sale of 5133osition Relationships


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Illustration 8-8

Aging the accounts receivable! customer balances are

classified by the length of time they have been unpaid.

Accounts Receivable

LO &


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Illustration/ Assume the unad2usted trial balance shows Allowance

for Coubtful Accounts with a credit balance of /5*6. -repare the

ad2usting entry assuming /***6 is the estimate of uncollectible

receivables from the aging schedule.

=ad debts expense I++Cec. 1

Allowance for doubtful accounts I++

Illustration 8-,9ad debts accountsafter posting

!sti$ating the Allo#ance

Accounts Receivable

LO &


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=rule o. has been in business five years. ;he ledger at the end ofthe current year showsF

Accounts ?eceivable /1++++ Cr.

&ales ?evenue /6++++ r.

Allowance for Coubtful Accounts /*+++ Cr.

=ad debts are estimated to be +: of receivables. -repare the entry

to ad2ust Allowance for Coubtful Accounts.

LO &

olution/

=ad debts expense 5+++

Allowance for doubtful accounts 5+++

JK(+. x /1++++) L /*+++M

J


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Co$panies sell receivables for t#o $ajor reasons.

. ?eceivables may be the only reasonable source of

cash.

*. =illing and collection are often time!consuming and

costly.

LO ( 'escribe the entries to record the disposition of accounts receivable.

'isposing of Accounts Receivable

Accounts Receivable


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8-&, LO ( 'escribe the entries to record the disposition of accounts receivable.

7actor

inance company or ban3.

=uys receivables from businesses and then collects thepayments directly from the customers.

;ypically charges a commission to the company that is

selling the receivables.

ee ranges from !1: of the receivables purchased.

ale of Receivables

Accounts Receivable


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Illustration/ Assume that ;sai urniture factors

N;/E+++++ of receivables to ederal actors. ederal actors

assesses a service charge of *: of the amount of receivables

sold. ;he 2ournal entry to record the sale by ;sai urniture is as

follows.

LO ( 'escribe the entries to record the disposition of accounts receivable.

Accounts receivable E+++++

ash 566+++

&ervice charge expense *+++

@5*33333 " 2B 512333D

Accounts Receivable


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8-(1 LO ( 'escribe the entries to record the disposition of accounts receivable.

?ecorded the same as cash sales.

?etailer pays card issuer a fee of * to E: for processing

the transactions.

Accounts Receivable

Credit Card ales


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8-(2 LO ( 'escribe the entries to record the disposition of accounts receivable.

Illustration/ ee o. purchases N;/E+++ of music downloadsfor its restaurant from Oang $usic o. using a >isa irst =an3

ard. irst =an3 charges a service fee of 1:. ;he entry to

record this transaction by Oang $usic is as follows.

&ales revenue E+++

ash 56*+

&ervice charge expense 6+

Accounts Receivable


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ompanies may grant credit in exchange for a promissory

note. A pro$issor noteis a written promise to pay a

specified amount of money on demand or at a definite time.

-romissory notes may be used

. when individuals and companies lend or borrow money

*. when amount of transaction and credit period exceed

normal limits or

1. in settlement of accounts receivable.

otes Receivable


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Illustration 8-11

;o the -ayee the promissory note is a note receivable. ;o the

$a3er the promissory note is a note payable.

otes Receivable


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8-(* LO ) Co$pute the $aturit date of and interest on notes receivable.

Note expressed in terms of

$onths

Cays

Co$puting InterestIllustration 8-1(

'eter$ining the aturit 'ate

otes Receivable


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:hen counting das o$itthe date the note is issued

but includethe due date.

Illustration 8-1)

Co$puting Interest

otes Receivable

LO ) Co$pute the $aturit date of and interest on notes receivable.


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Illustration/ alhoun ompany wrote a P+++ two!month

*: promissory note dated $ay to settle an open account.

-repare entry would Wilma ompany ma3es for the receipt of

the note.

Notes receivable +++

Accounts receivable +++

Recogni%ing otes Receivable

otes Receivable

LO * !"plain ho# co$panies recogni%e notes receivable.

$ay


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0aluing otes Receivable ?eport short!term notes receivable at their cash @netD

reali%able value.

'stimation of cash reali%able value and bad debtsexpense are done similarly to accounts receivable.

Allowance for Coubtful Accounts is used.

otes Receivable

LO + 'escribe ho# co$panies value notes receivable.


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'isposing of otes Receivable

LO 8 'escribe the entries to record the disposition of notes receivable.

. Notes may be held to their maturity date.

*. $a3er may default and payee must ma3e an

ad2ustment to the account.

1. "older speeds up conversion to cash by selling the

note receivable.

otes Receivable


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Eonor of otes Receivable

LO 8 'escribe the entries to record the disposition of notes receivable.

$a3er pays it in full at its maturity date.

'ishonor of otes Receivable

Not paid in full at maturity.

No longer negotiable.

otes Receivable

'isposing of otes Receivable


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Illustration/ Wolder o. lends "igley o. G++++ on une

accepting a five!month 7: interest note. 8f Wolder presents the

note to "igley o. on November the maturity date Wolder


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8-)( LO 8 'escribe the entries to record the disposition of notes receivable.

8nterest receivable 1++&ept.

8nterest revenue 1++

(G++++ x 7: x ,0* Q G 1++)

Illustration 8-1*

otes Receivable

Accrual of Interest ReceivableIllustration/ &uppose instead that Wolder o. prepares financial

statements as of &eptember 1+. ;he ad2usting entry by Wolder is

for four months ending &ept. 1+.


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8-)) LO 8 'escribe the entries to record the disposition of notes receivable.

ash +1I5Nov. Notes receivable ++++

8nterest receivable 1++

8nterest revenue I5

otes Receivable

Accrual of Interest ReceivableIllustration/ -repare the entry Wolder


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8-)* LO 8 'escribe the entries to record the disposition of notes receivable.

Accounts receivable +1I5Nov.

Notes receivable ++++

8nterest revenue 1I5

otes Receivable

'ishonor of otes ReceivableIllustration/ Assume that "igley o. on November indicates

that it cannot pay at the present time. 8f Wolder o. does expect

eventual collection it would ma3e the following entry at the time

the note is dishonored (assuming no previous accrual ofinterest).


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>resentation 8dentify in the statement of financial position or in the notes

each ma2or type of receivable.

?eport short!term receivables as current assets.

?eport both gross amount of receivables and allowance for

doubtful account.

?eport bad debt expense and service charge expense as

selling expenses.

?eport interest revenue under 4ther income and

expense.

7>

I

tate$ent >resentation and Analsis

LO , !"plain the state$ent presentation and analsis of receivables.


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Analsis

Illustration 8-1+



Illustration/ 8n a recent year enovo Hroup ("N) had net sales

of /,7+ million for the year. 8t had a beginning accounts

receivable (net) balance of /6Emillion and an ending accounts

receivable (net) balance of /I*6 million. Assuming that enovo


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Analsis

Illustration 8-18



Illustration/ >ariant of the accounts receivable turnover ratio is

average collection period in terms of days.Illustration 8-1+

51(,31 F58*1 G 5+28

2 18.8 ti$es

&*) das F 1,.( das18.8 ti$es


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He >oints ?eceivables are generally reported in the current assets section of

the statement of financial position (balance sheet) under HAA- and

8?&. "owever companies that use HAA- report receivables in the

current assets section generally after cash based on li@uidity. 8?&

often does not use li@uidity as a basis for placement in the current

assets section. As a result receivables are often reported after

inventory and other current assets except for cash.

HAA- and 8?& account for bad debts in a similar fashion. =oth

account for short!term receivables at amorti%ed cost ad2usted forallowances for doubtful accounts.

Another >erspective


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He >oints i3e the 8A&= the A&= has wor3ed to implement fair value

measurement for all financial instruments but both =oards have

faced bitter opposition from various factions. As a conse@uence the

=oards have adopted a piecemeal approachR the first step is

disclosure of fair value information in the notes. ;he second step is

the fair value option which permits but does not re@uire companies

to record some types of financial instruments at fair value in the

financial statements.

=oth =oards have indicated that they believe all financial instrumentsshould be recorded and reported at fair value.

?ecently the A&= and 8A&= completed a pro2ect on how to

measure fair value. ;he pro2ect however was silent on when to

report fair value.

Another >erspective


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He >oints 8?& and HAA- differ in the criteria used to derecogni%e (generally

through a sale or factoring) a receivable. 8?& uses a combination

approach focused on ris3s and rewards and loss of control. HAA-

uses loss of control as the primary criterion. 8n addition 8?&

permits partial derecognitionR HAA- does not.

8?& specifies a two!step process for determining the impairment of

receivables for a period. ;his process starts by identifying individual

impairments of specific receivables and then estimating impairments

of groups of receivables. HAA- does not specify a similar approach.

Another >erspective


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Loo4ing to the 7uture=oth the 8A&= and the A&= 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.

;hat said in 8?& 7 which was issued in *++7 the 8A&= 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 amorti%ed cost if certain criteria are met. A proposal by the A&=

would re@uire that nearly all financial instruments including loans and

receivables be accounted for at fair value. 8t has been suggested that8?& 7 will li3ely be changed or replaced as the A&= and 8A&=

continue to deliberate the best treatment for financial instruments.

Another >erspective


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9nder HAA- receivables are reported on the balance sheet atF

a) amorti%ed cost.

b) amorti%ed cost ad2usted for estimated loss provisions.

c) historical cost.

d) replacement cost.

AA> elf-est Juestions

Another >erspective


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Which of the following statements is falseB

a) ?eceivables include e@uity securities purchased by the

company.

b) ?eceivables include credit card receivables.

c) ?eceivables include amounts owed by employees as a result

of company loans to employees.

d) ?eceivables include amounts resulting from transactions with

customers.


Another >erspective


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8n recording a factoring transactionF

a) 8?& focuses on loss of control.

b) HAA- focuses on loss of control and ris3s and rewards.

c) 8?& and HAA- allow partial derecognition.

d) 8?& allows partial derecognition


Another >erspective

C i ht


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Z00010000120144008ch08 - Accounting for Receivables

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