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CPA, MBA BY RACHELLE AGATHA, CPA, MBA Receivables Slides by Rachelle Agatha, CPA, with excerpts from Warren, Reeve, Duchac.

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Presentation on theme: "CPA, MBA BY RACHELLE AGATHA, CPA, MBA Receivables Slides by Rachelle Agatha, CPA, with excerpts from Warren, Reeve, Duchac."— Presentation transcript:

1 CPA, MBA BY RACHELLE AGATHA, CPA, MBA Receivables Slides by Rachelle Agatha, CPA, with excerpts from Warren, Reeve, Duchac

2 2 1. Describe the common classifications of receivables. 2. Describe the nature of and the accounting for uncollectible receivables. 3. Describe the direct write-off method of accounting for uncollectible receivables. Objectives:

3 3 4. Describe the allowance method of accounting for uncollectible receivables. 5. Compare the direct write-off and allowance methods of accounting for uncollectible accounts. Objective

4 4 6. Describe the nature, characteristics, and accounting for notes receivables. 7. Describe the reporting of receivables on the balance sheet. Objectives:

5 5 Describe the common classifications of receivables. Objective 1

6 6 The term receivables includes all money claims against other entities, including people, business firms, and other organizations. Classification of Receivables

7 7 Accounts receivable are normally expected to be collected within a relatively short period, such as 30 or 60 days. Accounts Receivable

8 8 Notes receivable are amounts that customers owe for which a formal, written instrument of credit has been issued. Notes Receivable

9 9 Other receivables expected to be collected within one year are classified as current assets. If collection is expected beyond one year, these receivables are classified as noncurrent assets and reported under the caption Investments. Other Receivables

10 10 Describe the nature of and the accounting for uncollectible receivables. Objective 2

11 11 Companies often sell their receivables to other companies. This transaction is called factoring the receivables, and the buyer of the receivables is called a factor.

12 12 There are two methods of accounting for receivables that appear to be uncollectible: the direct write off method and the allowance method. Uncollectible Receivables

13 13  The 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.

14 14 Describe the direct write-off method of accounting for uncollectible receivables. Objective 3

15 15 May 10 Bad Debt Expense 4 200 00 Accounts Receivable—D. L. Ross 4 200 00 On May 10, a $4,200 accounts receivable from D. L. Ross has been determined to be uncollectible. Direct Write-Off Method

16 16 The amount written off is later collected on November 21. Nov. 21 Accounts Receivable—D. L. Ross 4 200 00 Bad Debt Expense 4 200 00 21Cash 4 200 00 Accounts Receivable—D. L. Ross 4 200 00

17 17 Journalize the following transactions using the direct write-off method of accounting for uncollectible receivables. July9Received $1,200 from Jay Burke and wrote off the remainder owed of $3,900 as uncollectible. Oct. 11Reinstated the account of Jay Burke and received $3,900 cash in full payment.

18 18 July 9Cash1,200 Bad Debt Expense3,900 Accounts Receivable—Jay Burke5,100 Oct.11Accounts Receivable—Jay Burke3,900 Bad Debt Expense3,900 11Cash3,900 Accounts Receivable—Jay Burke3,900

19 19 Describe the allowance method of accounting for uncollectible receivables. Objective 4

20 20 On December 31, ExTone Company estimates that a total of $40,000 of the $1,000,000 balance in her company’s Accounts Receivable will eventually be uncollectible. Dec. 31 Bad Debt Expense 40 000 00 Allowance for Doubtful Accounts 40 000 00 Uncollectible accounts estimate. Allowance Method

21 21 The net amount that is expected to be collected, $960,000 ($1,000,000 – $40,000), is called the net realizable value (NRV). The adjusting entry reduces receivables to the NRV and matches uncollectible expenses with revenues. Net Realizable Value

22 22 Jan. 21Allowance for Doubtful Accounts 6 000 00 Accounts Receivable—John Parker 6 000 00 To write off the uncollectible account. On January 21, John Parker’s account totaling $6,000 is written off because it is uncollectible.

23 23

24 24 During 2008, ExTone Company writes off $36,750 of uncollectible accounts, including the $6,000 account of John Parker. After posting all entries to write-off uncollectible amounts, the Allowance for Doubtful Accounts will have a credit balance of $3,250 ($40,000 – $36,750).

25 25 ALLOWANCE FOR DOUBTFUL ACCOUNTS Jan. 1, 2008 Bal.40,000 Jan. 216,000 Feb. 23,900 { Total accounts written off $36,750 Dec. 31 Unadjusted bal3,250 “ “

26 26 If ExTone Company had written off $44,100 in accounts receivable during 2008, the Allowance for Doubtful Accounts would have a debit balance of $4,100.

27 27 ALLOWANCE FOR DOUBTFUL ACCOUNTS Jan. 1, 2008 Bal.40,000 Jan. 216,000 Feb. 23,900 { Total accounts written off $44,100 Dec. 31 Unadjusted bal4,100 “ “

28 28 Nancy 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. Collecting a Written-Off Account

29 29 June10Accounts Receivable—Nancy Smith 5 000 00 To reinstate the account written off on Jan. 21. Allowance for Doubtful Accounts 5 000 00 Entry 1: Reinstate the account.

30 30 June10Cash 5 000 00 Collection of written-off account. Accounts Receivable—Nancy Smith 5 000 00 Entry 2: Record collection of cash.

31 31 Journalize the following transactions using the allowance method of accounting for uncollectible receivables. July9Received $1,200 from Jay Burke and wrote off the remainder owed of $3,900 as uncollectible. Oct. 11Reinstated the account of Jay Burke and received $3,900 cash in full payment.

32 32 July 9Cash1,200 Allowance for Doubtful Accounts3,900 Accounts Receivable—Jay Burke5,100 Oct.11Accounts Receivable—Jay Burke3,900 Allowance for Doubtful Accounts3,900 11Cash3,900 Accounts Receivable—Jay Burke3,900

33 33 1.Estimate based on a percentage of sales. (Income statement method) 2.Estimate based on analysis of receivables. (Balance Sheet Method) The allowance method uses two ways to estimate the amount debited to Bad Debt Expense. Estimating Uncollectibles

34 34 Estimate Based on a Percentage of Sales If credit sales for the period are $3,000,000 and it is estimated that 1½ % will be uncollectible, the Bad Debt Expense is debited for $45,000 ($3,000,000 x.015). This approach disregards the balance in the allowance account before the adjustment.

35 35 After this adjusting entry is posted, Allowance for Doubtful Accounts will have a balance of $48,250. Dec. 31 Bad Debt Expense 45 000 00 Allowance for Doubtful Accounts 45 000 00 Uncollectible accounts ($3,000,000 x 0.015 = $45,000).

36 36 ALLOWANCE FOR DOUBTFUL ACCOUNTS Jan. 1, 2008 Bal.40,000 Jan. 1 6,000 Feb. 23,900 { Total accounts written off $36,750 Dec. 31 Unadjusted bal3,250 Dec. 31 Adj. entry45,000 Dec. 31 Adjusted bal.48,250 “ “ BAD DEBT EXPENSE Dec. 31 Adj entry45,000 Dec. 31 Adjusted bal.45,000 Income statement method calculates the adjustment

37 37 At the end of the current year, Accounts Receivable has a balance of $800,000; Allowance for Doubtful Accounts has a credit balance of $7,500; and net sales for the year total $3,500,000. Bad debt expense is estimated at ½ of 1% of net sales. Determine (a) the amount of the adjusting entry for uncollectible accounts; (b) the adjusted balances of Accounts Receivable, Allowance for Doubtful Accounts, and Bad Debt Expense; and (c) the net realizable value of accounts receivable.

38 38 (a) $17,500 ($3,500,000 x.005 ( ½ of 1%) ) Adjusted Balance (b)Accounts Receivable$800,000 Allowance for Doubtful Accounts ($7,500 + $17,500)25,000 Bad Debt Expense17,500 (c)$775,000 ($800,000 – $25,000) Adjusting entry (a) Balances (b) NRV (c)

39 39 The longer an account receivable is outstanding, the less likely that it will be collected. Basing the estimate of uncollectible accounts on how long specific amounts have been outstanding is called aging the receivables. Estimating Uncollectibles Based on Analysis of Receivables

40 40 Aging of Accounts Receivables

41 41 Estimate of Uncollectible Accounts

42 42 Collection Rates by Number of Months Past Due

43 43 Estimate Based on Analysis of Receivables If it is estimated that $3,390 of the receivables will be uncollectible and the Allowance for Uncollectible Accounts currently has a balance of $510, the Bad Debt Expense must be debited for $2,880 ($3,390 – $510).

44 44 Estimate Based on Analysis of Receivables Aug. 31 Bad Debt Expense 2 880 00 Allowance for Doubtful Accounts 2 880 00 Uncollectible accounts ($3,390 – $510).

45 45 BAD DEBT EXPENSE Aug. 31 Adj. entry2,880 Aug. 31 Adj. bal.2,880 ALLOWANCE FOR DOUBTFUL ACCOUNTS Aug. 31 Unadj. bal.510 Aug. 31 Adj. entry2,880 Aug. 31 Adj. bal.3,390 Balance sheet method finds the ending balance and adjust to that

46 46 If the unadjusted balance of Allowance for Uncollectible Accounts had been a debit balance of $300, the amount of the adjustment would have been $3,690 ($3,390 + $300).

47 47 BAD DEBT EXPENSE Aug. 31 Adj. entry3,690 Aug. 31 Adj. bal.3,690 ALLOWANCE FOR DOUBTFUL ACCOUNTS Aug. 31 Adj. entry3,690 Aug. 31 Adj. bal.3,390 Aug. 31 Unadj. bal.300

48 48 At the end of the current year, Accounts Receivable has a balance of $800,000; Allowance for Doubtful Accounts has a credit balance of $7,500; and net sales for the year total $3,500,000. Using the aging method, the balance of Allowance for Doubtful Accounts is estimated as $30,000. Determine (a) the amount of the adjusting entry for uncollectible accounts; (b) the adjusted balances of Accounts Receivable, Allowance for Doubtful Accounts, and Bad Debt Expense, and (c) the net realizable value of accounts receivable.

49 49 (a) $22,500 ($30,000 – $7,500) Adjusted Balance (b)Accounts Receivable$800,000 Allowance for Doubtful Accounts30,000 Bad Debt Expense22,500 (c)$770,000 ($800,000 – $30,000)

50 50 Compare the direct write-off and allowance methods of accounting for uncollectible accounts Objective 5

51 51 Comparing Direct-Write-Off and Allowance Methods Direct Write-Off MethodAllowance Method W/O Acct Recvd partial pmt w/o rest Recvd pmt of previously w/o acct W/O Acct Co Used the % of credit sales and est uncoll exp

52 52 Comparing the Direct Write-Off and Allowance Methods Direct Write-Off Method When the actual accounts receivable are determined to be uncollectible No allowance account is used Amount of bad debt expense recorded Allowance account Primary users Small companies and companies with relatively few receivables

53 53 Comparing the Direct Write-Off and Allowance Methods Allowance Method Using estimate based on either (1) a percentage of sales or (2) analysis of receivables. The allowance account is used Amount of bad debt expense recorded Allowance account Primary users Large companies and those with a large amount of receivables

54 54 Describe the nature, characteristics, and accounting for notes receivable. Objective 6

55 55 a specific amount of money (face amount) on demand or at a definite time to an individual or a business (payee), or to the bearer or holder of the note. A note receivable, or promissory note, is a written document containing a promise to pay: Characteristics of Notes Receivable

56 56 The one making the promise is called the maker. The date a note is to be paid is called the due date or maturity date. Characteristics of Notes Receivable

57 57 $_____________ Fresno, California______________20___ March 16 08 ________________ _AFTER DATE _______ PROMISE TO PAY TO Ninety days We THE ORDER OF ____________________________________________ Judson Company _________________________________________________DOLLARS Two thousand five hundred 00/100--------------------------- PAYABLE AT ______________________________________________ City National Bank VALUE RECEIVED WITH INTEREST AT ____ 10% 2,500.00 NO. _______ DUE___________________ 14 June 14, 2008 TREASURER, WILLIARD COMPANY H. B. Lane MakerMaker PayeePayee

58 58 Total days in note 90 days Number of days in March31 Issue date of noteMarch 16 Remaining days in March–15 days 75 days Number of days in April–30 days 45 days Number of days in May–31 days Residual days in June14 days Answer: June 14 What is the due date of a 90-day note dated March 16?

59 59 Received a $6,000, 12%, 30-day note dated November 21, 2008 in settlement of the account of W. A Bunn Co. Accounting for Notes Receivable Nov. 21Notes Rec.—W. A. Bunn Co. 6 000 00 Accts. Rec.—W. A Bunn Co. 6 000 00 Received 30-day, 12% note dated November 21, 2008.

60 60 On December 21, when the note matures, the firm receives $6060 from W. A. Bunn Company ($6,000 plus $60 interest). Dec. 21Cash 6 060 00 Notes Rec.—W. A. Bunn Co.6 000 00 Interest Revenue*60 00 Received principal and interest on matured note. *$6,000 x 12% x 30/360 = $60

61 61 If 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. Dec. 21Accts Rec.—W. A. Bunn Co. 6 060 00 Notes Rec.—W. A. Bunn Co.6 000 00 Interest Revenue60 00 Recorded dishonored note, plus interest.

62 62 A 90-day, 12% note dated December 1, 2008, is received from Crawford Company to settle its account, which has a balance of $4,000. Dec. 1Notes Rec.—Crawford Co. 4 000 00 Accts. Rec.—Crawford Co.4 000 00 Accepted note in settlement of account. 2008

63 63 Dec. 31Interest Receivable 40 00 Interest Revenue40 00 Accrued interest ($4,000 x 12% x 30/360). 2008 Assuming that the accounting period ends on December 31, an adjusting entry is required to record the accrued interest of $40 ($4,000 x 0.12 x 30/360).

64 64 Mar. 1Cash 4 120 00 Notes Rec.—Crawford Co.4 000 00 2009 On March 1, 2009, $4,120 is received for the note ($4,000) and interest ($120). Interest Receivable40 00 Interest Revenue80 00 ($4,000 x 12% x 30/360). Collected note and accrued interest.

65 65 Same Day Surgery Center received a 120-day, 6% note for $40,000, dated March 14 from a patient on account. a.Determine the due date of the note. b.Determine the maturity value of the note. c.Journalize the entry to record the receipt of the payment of the note at maturity.

66 66 b.$40,800 [$40,000 + ($40,000 x 6% x 120/360)] c.Cash40,800 Notes Receivable40,000 Interest Revenue800 a. July 12 determined as follows: March17 days (31 – 14) April30 days May31 days June30 days July12 days Total 120 days

67 67 Describe the reporting of receivables on the balance sheet. Objective 7

68 Receivables on Balance Sheet

69 69 Accounts Receivable Turnover The accounts receivable turnover measures how frequently during the year the accounts receivable are being converted to cash. Accounts Receivable Turnover Net sales Avg accounts receivable =

70 70 Federal Express Corporation Accounts Receivable Turnover (2004) $17,383 $2,337 = Accounts Receivable Turnover (2004) = 7.4 * [($2,475 + $2,199)/2] 2005 2004 2003 Net sales $19,364 $17,383 --- Accounts receivable 2,703 2,475 $2,199 Avg accounts receivable 2,589 2,337 * *

71 71 Federal Express Corporation Accounts Receivable Turnover (2005) $19,364 $2,589 = Accounts Receivable Turnover (2005) = 7.5 20052004 2003 Net sales $19,364 $17,383--- Accounts receivable2,703 2,475 $2,199 Avg accounts receivable* 2,589 2,337 *[($2,703 + $2,475)/2]

72 72 Use:To assess the efficiency in collecting receivables and in the management of credit. Number of Days’ Sales in Receivables Average Accounts receivable Average daily sales Number of Days’ Sales in Receivables =

73 73 Federal Express Corporation Number of Days’ Sales in Receivables (2004) $2,337 47.6 = Number of Days’ Sales in Receivables (2004) = 49.1 2005 2004 2003 Net sales $19,364 $17,383 Accounts receivable2,703 2,475 $2,199 Average accounts receivable2,5892,337 Average daily sales53.147.6 * [($2,475 + $2,199)/2] * * ** ($17,383/365)** --- [($2,703 + $2,475)/2] *

74 74 Federal Express Corporation Number of Days’ Sales in Receivables (2005) $2,589 53.1 = Number of Days’ Sales in Receivables (2005) = 48.8 * [($2,703+ $2,475)/2] * ($19,364/365) ** 2005 2004 2003 Net sales $19,364$17,383 Accounts receivable2,7032,475 $2,199 Average accounts receivable2,5892,337 Average daily sales53.147.6 * ** ---

75 Summary  Classification of Receivables  Uncollectible A/R  Direct Write-Off Method  Allowance Method  Notes Receivable


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