2 Classification of Receivables 1Classification of ReceivablesThe term receivables includes all money claims against other entities, including people, business firms, and other organizations.
3 Classification of Receivables 1Classification of ReceivablesAccounts receivable are normally expected to be collected within a relatively short period, such as 30 or 60 days.
4 Classification of Receivables 1Classification of ReceivablesNotes receivable are amounts that customers owe for which a formal, written instrument of credit has been issued.
5 Classification of Receivables 1Classification of ReceivablesOther receivables expected to be collected within one year are classified as current assets.
6 Classification of Receivables 1Classification of ReceivablesIf collection is expected beyond one year, these receivables are classified as noncurrent assets and reported under the caption Investments.
7 2FactoringCompanies often sell their receivables to other companies. This transaction is called factoring the receivables, and the buyer of the receivables is called a factor.
8 Uncollectible Receivables 2Uncollectible ReceivablesRegardless 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, or doubtful accounts expense.
9 Uncollectible Receivables 2Uncollectible ReceivablesThe direct write off method records bad debt expense only when an account is judged to be worthless. The allowance method records bad debt expense by estimating uncollectible accounts at the end of the accounting period.
10 3Describe the direct write-off method of accounting for uncollectible receivables.8-14
11 Uncollectible Receivables 3Uncollectible ReceivablesOn May 10, a $4,200 accounts receivable from D. L. Ross has been determined to be uncollectible.
12 Uncollectible Receivables 3Uncollectible ReceivablesThe amount written off is later collected on November 21.Reinstatement EntryReceipt of Cash Entry
13 4Describe the allowance method of accounting for uncollectible receivables.8-19
14 Uncollectible Receivables 4Uncollectible ReceivablesOn December 31, ExTone Company estimates that a total of $30,000 of the $200,000 balance of their Accounts Receivable will eventually be uncollectible.
15 Uncollectible Receivables 4Uncollectible ReceivablesThe net amount that is expected to be collected, $170,000 ($200,000 – $30,000), is called the net realizable value (NRV). The adjusting entry reduces receivables to the NRV and matches uncollectible expenses with revenues.
16 Write-Offs to the Allowance Account 4Write-Offs to the Allowance AccountOn January 21, John Parker’s account totaling $6,000 is written off because it is uncollectible.
18 Allowance Method Example 4Allowance Method ExampleDuring 2010, ExTone Company writes off $26,750 of uncollectible accounts, including the $6,000 account of John Parker. After posting all entries to write-off uncollectible amounts, Allowance for Doubtful Accounts will have a credit balance of $3,250 ($30,000 – $26,750).
19 Allowance Method Example 4Allowance Method Example
20 Allowance Method Example 4Allowance Method ExampleIf ExTone Company had written off $32,100 in accounts receivable during 2010, Allowance for Doubtful Accounts would have a debit balance of $2,100.
21 Allowance Method Example 4Allowance Method ExampleNancy Smith’s account of $5,000 which was written off on April 2 is later collected on June 10. Two entries are needed: one to reinstate Nancy Smith’s account and a second to record receipt of the cash.
22 Allowance Method Example 4Allowance Method ExampleReinstatement EntryReceipt of Cash Entry
23 Estimating Uncollectibles 4Estimating UncollectiblesThe allowance method uses two ways to estimate the amount debited to Bad Debt Expense.Percent of sales method.Analysis of receivables method.
24 Percent of Sales Method 4Percent of Sales MethodIf credit sales for the period are $3,000,000 and it is estimated that ¾% will be uncollectible, Bad Debt Expense is debited for $22,500 ($3,000,000 × .0075). This approach disregards the balance of $3,250 in the allowance account before the adjustment.
25 Percent of Sales Method 4Percent of Sales MethodAfter the following adjusting entry on December 31 is posted, Allowance for Doubtful Accounts will have a balance of $25,750 ($3,250 + $22,500).
26 Percent of Sales Method 4Percent of Sales Method
27 4Aging of ReceivablesThe longer an account receivable is outstanding, the less likely it is that it will be collected. Basing the estimate of uncollectible accounts on how long specific amounts have been outstanding is called aging the receivables.
28 4Aging of Receivables Schedule December 31, 2010Exhibit 1
29 Percent of Sales Method 4Percent of Sales MethodThe estimate based on receivables is compared to the balance in the allowance account to determine the amount of the adjusting entry.
30 Percent of Sales Method 4Percent of Sales MethodExTone has an unadjusted credit balance of $3,250 in Allowance for Doubtful Accounts. In Exhibit 1 the estimated uncollectible accounts totaled $26,490.
31 Percent of Sales Method 4Percent of Sales MethodThe amount to be added to the allowance account is $23,240 ($26,490 – $3,250). The adjusting entry is as follows:
32 Percent of Sales Method 4Percent of Sales Method
33 4The Commercial Collection Agency Section of the Commercial Law League of America reported the following collection rates by number of months past due:
34 Percent of Sales Method 4Percent of Sales MethodIf the unadjusted balance of the allowance account had been a debit balance of $2,100, the amount of the adjustment would have been $28,590.
35 4Exhibit 2Differences Between Estimation Methods
36 5Compare the direct write-off method and allowance method of accounting for uncollectible accounts.8-48
37 5 Comparing Direct Write-Off and Allowance Methods Exhibit 3 (continued)
38 5 Comparing Direct Write-Off and Allowance Methods (continued) Exhibit 3Direct Write-Off Method Allowance Method
40 Describe the accounting for notes receivable. 6Describe the accounting for notes receivable.8-52
41 Characteristics of Notes Receivable 6Characteristics of Notes ReceivableA 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.(continued)
42 Characteristics of Notes Receivable (continued) 6Characteristics of Notes Receivable (continued)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.
44 Accounting for Notes Receivable 6Accounting for Notes ReceivableReceived a $6,000, 12%, 30-day note dated November 21, 2010 in settlement of the account of W. A. Bunn Co.
45 Accounting for Notes Receivable 6Accounting for Notes ReceivableOn December 21, when the note matures, the firm receives $6,060 from W. A. Bunn Company ($6,000 plus $60 interest).
46 Accounting for Notes Receivable 6Accounting for Notes ReceivableIf 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.
47 Accounting for Notes Receivable 6Accounting for Notes ReceivableA 90-day, 12% note dated December 1, 2010, is received from Crawford Company to settle its account, which has a balance of $4,000.
48 Accounting for Notes Receivable 6Accounting for Notes ReceivableAssuming that the accounting period ends on December 31, an adjusting entry is required to record the accrued interest of $40 ($4,000 × 0.12 × 30/360).
49 Accounting for Notes Receivable 6Accounting for Notes ReceivableOn March 1, 2011, $4,120 is received for the note ($4,000) and interest ($120).