2. Accounting for Receivables
Chapter 8
Accounting for Receivables
Financial Accounting, IFRS Edition
Weygandt Kimmel Kieso

3. Study Objectives Identify the different types of receivables.
Explain how companies recognize accounts receivable.
Distinguish between the methods and bases companies use to value accounts receivable.
Describe the entries to record the disposition of accounts receivable.
Compute the maturity date of and interest on notes receivable.
Explain how companies recognize notes receivable.
Describe how companies value notes receivable.
Describe the entries to record the disposition of notes receivable.
Explain the statement presentation and analysis of receivables.

4. Accounting for Receivables Statement Presentation and Analysis
Types of Receivables
Accounts Receivable
Notes Receivable
Statement Presentation and Analysis
Accounts receivable
Notes receivable
Other receivables
Recognizing accounts receivable
Valuing accounts receivable
Disposing of accounts receivable
Determining maturity date
Computing interest
Recognizing notes receivable
Valuing notes receivable
Disposing of notes receivable
Presentation
Analysis

5. Claims for which formal instruments of credit are issued
Types of Receivables
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.
Claims for which formal instruments of credit are issued
as proof of debt.
“Nontrade” (interest, loans to officers, advances to employees, and income taxes refundable).
Accounts Receivable
Notes Receivable
Other Receivables
SO 1 Identify the different types of receivables.

6. Accounts Receivable Three accounting issues:
Recognizing accounts receivable.
Valuing accounts receivable.
Disposing of accounts receivable.
Recognizing Accounts Receivable
The following exercise was illustrated in Chapter 5. For simplicity, inventory and cost of goods sold have been omitted.
SO 1 Identify the different types of receivables.

7. Recognizing Accounts Receivable
Illustration: Assume that Jordache Co. on July 1, 2011, sells merchandise on account to Polo Company for $1,000 terms 2/10, n/30. Prepare the journal entry to record this transaction on the books of Jordache Co.
Jul. 1
Accounts receivable 1,000
Sales 1,000
SO 2 Explain how companies recognize accounts receivable.

8. Recognizing Accounts Receivable
Illustration: On July 5, Polo returns merchandise worth $100 to Jordache Co.
Jul. 5
Sales returns and allowances 100
Accounts receivable 100
Illustration: On July 11, Jordache receives payment from
Polo Company for the balance due.
Jul. 11
Cash 882
Sales discounts ($900 x .02) 18
Accounts receivable 900
SO 2 Explain how companies recognize accounts receivable.

9. Accounts Receivable Valuing Accounts Receivables
Reported as an asset on the statement of financial position.
Reported at the amount the company thinks they will be able to collect.
Sales on account raise the possibility of accounts not being collected.
Valuation can be difficult because an unknown amount of receivables will become uncollectible.
SO 3 Distinguish between the methods and bases companies use to value accounts receivable.

10. Valuing Accounts Receivable
Methods of Accounting for Uncollectible Accounts
Direct Write-Off
Theoretically undesirable:
no matching.
receivable not stated at net realizable value.
not acceptable for financial reporting.
Allowance Method
Losses are estimated:
better matching.
receivable stated at net realizable value.
required by IFRS.
SO 3 Distinguish between the methods and bases companies use to value accounts receivable.

11. Valuing Accounts Receivable
Direct Write-Off Method for Uncollectible Accounts
Under the direct write-off method, when a company determines a particular account to be uncollectible, it charges the loss to Bad Debts Expense. Assume, for example, that on December 12 Warden Co. writes off as uncollectible M. E. Doran’s $200 balance. The entry is:
Dec. 12
Bad debt expense 200
Accounts receivable 200
SO 3 Distinguish between the methods and bases companies use to value accounts receivable.

12. Valuing Accounts Receivable
Allowance Method for Uncollectible Accounts
Companies estimate uncollectible accounts receivable.
To record estimated uncollectibles:
Bad Debts Expense xxx
Allowance for Doubtful Accounts xxx
To write off uncollectible accounts:
Allowance for Doubtful Accounts xxx
Accounts Receivable xxx
SO 3 Distinguish between the methods and bases companies use to value accounts receivable.

13. Valuing Accounts Receivable
Recording Estimated Uncollectibles: Assume that Hampson Furniture has credit sales of $1,200,000 in Of this amount, $200,000 remains uncollected at December 31. The credit manager estimates that $12,000 of these sales will be uncollectible. The adjusting entry to record the estimated uncollectibles is:
Dec. 31
Bad debt expense 12,000
Allowance for doubtful accounts 12,000
SO 3 Distinguish between the methods and bases companies use to value accounts receivable.

14. Valuing Accounts Receivable
Illustration 8-2
Presentation of allowance for doubtful accounts
SO 3 Distinguish between the methods and bases companies use to value accounts receivable.

15. Valuing Accounts Receivable
Recording the Write-Off of an Uncollectible Account:
The financial vice-president of Hampson Furniture authorizes a write-off of the $500 balance owed by R.A.Ware
on March 1, The entry to record the write-off is:
Mar. 1
Allowance for doubtful accounts 500
Accounts receivable 500
Illustration 8-3
SO 3 Distinguish between the methods and bases companies use to value accounts receivable.

16. Valuing Accounts Receivable
Recording the Write-Off of an Uncollectible Account:
The write-off affects only statement of financial position accounts.
Illustration 8-3
Illustration 8-4
SO 3 Distinguish between the methods and bases companies use to value accounts receivable.

17. Valuing Accounts Receivable
Recovery of an Uncollectible Account: On July 1, R. A. Ware pays the $500 amount that Hampson had written off on March 1. These are the entries:
Jul. 1
Accounts receivable 500
Allowance for doubtful accounts 500
Jul. 1
Cash 500
Accounts receivable 500
SO 3 Distinguish between the methods and bases companies use to value accounts receivable.

18. Valuing Accounts Receivable
Bases Used for Allowance Method
Illustration 8-5
SO 3 Distinguish between the methods and bases companies use to value accounts receivable.

19. Valuing Accounts Receivable
Percentage-of-Sales
Illustration: Assume that Gonzalez Company elects to use
the percentage-of-sales basis. It concludes that 1% of net credit sales will become uncollectible. If net credit sales for 2011 are $800,000, the adjusting entry is: *
Dec. 31
Bad debts expense 8,000
Allowance for doubtful accounts 8,000
* $800,000 x 1%
SO 3 Distinguish between the methods and bases companies use to value accounts receivable.

20. Valuing Accounts Receivable
Percentage-of-Sales
Emphasizes the matching of expenses with revenues.
When the company makes the adjusting entry, it disregards the existing balance in Allowance for Doubtful Accounts.
Illustration 8-6
SO 3 Distinguish between the methods and bases companies use to value accounts receivable.

21. Valuing Accounts Receivable
Percentage-of-Receivables
Illustration 8-7
Aging schedule
SO 3 Distinguish between the methods and bases companies use to value accounts receivable.

22. Valuing Accounts Receivable
Percentage-of-Receivables
Illustration: If the trial balance shows Allowance for Doubtful Accounts with a credit balance of $528, the company will make the following adjusting entry. *
Dec. 31
Bad debts expense 1,700
Allowance for doubtful accounts 1,700
* $2,
SO 3 Distinguish between the methods and bases companies use to value accounts receivable.

23. Valuing Accounts Receivable
Percentage-of-Receivables
Illustration 8-8
Occasionally the allowance account will have a debit balance prior to adjustment.
SO 3 Distinguish between the methods and bases companies use to value accounts receivable.

24. Valuing Accounts Receivable
Summary
Percentage of Sales approach:
Focus on “Bad debt expense” estimate, existing balance in the allowance account is ignored for journal entry.
Method achieves a matching of expense and revenues.
Percentage of Receivables approach:
Accurate valuation of receivables on the statement of financial position.
Method may also be applied using an aging schedule.
Balance in allowance account considered for journal entry.
SO 3 Distinguish between the methods and bases companies use to value accounts receivable.

25. p. 356 When Investors Ignore Warning Signs
Q: When would it be appropriate for a company to lower its allowance for doubtful accounts as a percentage of its receivables?
A: It could do so if the company’s collection experience had improved, or was expected to improve, and therefore the company expected lower defaults as a percentage of receivable
Answer on notes page

26. Accounts Receivable Disposing of Accounts Receivable
Companies sell receivables for two major reasons.
Receivables may be the only reasonable source of cash.
Billing and collection are often time-consuming and costly.
SO 4 Describe the entries to record the disposition of accounts receivable.

27. Disposing of Accounts Receivable
Sale of Receivables
Factor
Buys receivables from businesses and then collects the payments directly from the customers.
Typically charges a commission to the company that is selling the receivables.
Fee ranges from 1-3% of the amount of receivables purchased.
SO 4 Describe the entries to record the disposition of accounts receivable.

28. Disposing of Accounts Receivable
Illustration: Assume that Hendredon Furniture factors
$600,000 of receivables to Federal Factors. Federal Factors assesses a service charge of 2% of the amount of receivables sold. The journal entry to record the sale by Hendredon Furniture is as follows.
($600,000 x 2% = $12,000)
Cash 588,000
Service charge expense 12,000
Accounts receivable 600,000
SO 4 Describe the entries to record the disposition of accounts receivable.

29. p. 357 How Does a Credit Card Work?
Q: Assume that PPR prepares a bank reconciliation at the end of each month. If some credit card sales have not been processed by the bank, how should PPR treat these transactions on its bank reconciliation?
A: PPR would treat the credit card receipts as deposits in transit. It has already recorded the receipts as cash. Its bank will increase PPR’s cash account when it receives the receipts.
Answer on notes page

30. Disposing of Accounts Receivable
Credit Card Sales
Retailer considers credit card sales the same as cash sales.
Retailer must pay card issuer a fee of 2 to 4% for processing the transactions.
Retailer records sale in a similar manner as checks deposited from cash sale.
SO 4 Describe the entries to record the disposition of accounts receivable.

31. Credit Card Sales
Illustration: Anita Ferreri purchases $1,000 of compact discs for her restaurant from Karen Kerr Music Co., using her Visa First Bank Card. First Bank charges a service fee of 3%. The entry to record this transaction by Karen Kerr Music is as follows.
Cash 970
Service charge expense 30
Sales 1,000
SO 4 Describe the entries to record the disposition of accounts receivable.

32. Notes Receivable
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:
when individuals and companies lend or borrow money,
when amount of transaction and credit period exceed normal limits, or
in settlement of accounts receivable.
SO 5 Compute the maturity date of and interest on notes receivable.

33. Notes Receivable
To the Payee, the promissory note is a note receivable.
To the Maker, the promissory note is a note payable.
Illustration 8-10
SO 5 Compute the maturity date of and interest on notes receivable.

34. Notes Receivable Determining the Maturity Date
Note expressed in terms of
Months
Days
Illustration 8-12
SO 5 Compute the maturity date of and interest on notes receivable.

35. Notes Receivable Determining the Maturity Date
Illustration 8-13
Illustration 8-14
SO 5 Compute the maturity date of and interest on notes receivable.

36. Notes Receivable Recognizing Notes Receivable
Illustration: Calhoun Company wrote $1,000, two-month, 12% promissory note to settle an open account, Wilma Company makes the following entry for the receipt of the note.
Notes receivable 1,000
Accounts receivable 1,000
SO 6 Explain how companies recognize notes receivable.

37. Notes Receivable 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.
SO 7 Describe how companies value notes receivable.

38. Notes Receivable Disposing of Notes Receivable
Notes may be held to their maturity date.
Maker may default and payee must make an adjustment to the account.
Holder speeds up conversion to cash by selling the note receivable.
SO 8 Describe the entries to record the disposition of notes receivable.

39. Notes Receivable Disposing of Notes Receivable
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.
A dishonored note receivable is no longer negotiable.
SO 8 Describe the entries to record the disposition of notes receivable.

40. Notes Receivable Honor of Notes Receivables
Illustration: Betty Co. lends Wayne Higley Inc. $10,000 on June 1, accepting a five-month, 9% interest-bearing note. Assuming that Betty Co. presents the note to Wayne Higley Inc. on the maturity date, Betty Co.’s entry to record the collection is:
Nov. 1
Cash 10,375
Notes receivable 10,000
Interest revenue 375
SO 8 Describe the entries to record the disposition of notes receivable.

41. Notes Receivable Honor of Notes Receivables
Illustration: If Betty Co. prepares financial statements as of September 30, it must accrue interest. Betty Co. would make an adjusting entry as follows.
Sept. 30
Interest receivable 300
Interest revenue 300
SO 8 Describe the entries to record the disposition of notes receivable.

42. Notes Receivable Honor of Notes Receivables
Illustration: The entry by Betty Co. to record the honoring of the Wayne Higley Inc. note on November 1 is:
Nov. 1
Cash 10,375
Notes receivable 10,000
Interest receivable 300
Interest revenue 75
SO 8 Describe the entries to record the disposition of notes receivable.

43. Notes Receivable Dishonor of Notes Receivables
Illustration: Wayne Higley Inc. on November 1 indicates that it cannot pay at the present time. If Betty Co. does expect eventual collection, it would make the following entry at the time the note is dishonored (assuming no previous accrual of interest).
Nov. 1
Accounts receivable 10,375
Notes receivable 10,000
Interest revenue 375
SO 8 Describe the entries to record the disposition of notes receivable.

44. Statement Presentation and Analysis
Identify in the statement of financial position or in the notes each major type of receivable.
Report short-term receivables appear in current assets.
Report both gross amount of receivables and allowance for doubtful account.
Report bad debts expense and service charge expense as selling expenses.
Report interest revenue under “Other” in the nonoperating section.
F/P
I/S
SO 9 Explain the statement presentation and analysis of receivables.

45. Statement Presentation and Analysis
Illustration 8-15
This Ratio used to:
Assess the liquidity of the receivables.
Measure the number of times, on average, a company collects receivables during the period.
SO 9 Explain the statement presentation and analysis of receivables.

46. Statement Presentation and Analysis
Illustration 8-16
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 9 Explain the statement presentation and analysis of receivables.

47. Understanding U.S. GAAP Key Differences Accounting for Receivables
IFRS has four specifically defined categories for financial assets, which include loans and receivables. GAAP does not designate a similar category for loans and receivables.
GAAP and IFRS account for bad debts in a similar fashion. Both account for short-term receivables at amortized cost, adjusted for allowances for doubtful accounts.

48. Understanding U.S. GAAP Key Differences Accounting for Receivables
Like the IASB, the FASB has worked to implement fair value measurement for all financial instruments, but both Boards have faced bitter opposition from various factions. As a consequence, the Boards have adopted a piecemeal approach; the first step is disclosure of fair value information in the notes. The second step is the fair value option, which permits, but does not require, companies to record some types of financial instruments at fair value in the financial statements. Both Boards have indicated that they believe all financial instruments should be recorded and reported at fair value.

49. Understanding U.S. GAAP Key Differences Accounting for Receivables
IFRS and GAAP differ in the criteria used to derecognize (generally through a sale or factoring) a receivable. IFRS is a combination of an approach focused on risks and rewards and loss of control. GAAP uses loss of control as the primary criterion. In addition, IFRS permits partial derecognition; GAAP does not.
IFRS specifies a two-step process for determining the impairment of receivables for a period. This process starts by identifying individual impairments of specific receivables and then estimating impairments of groups of receivables. GAAP does not specify a similar approach.

50. Understanding U.S. GAAP Looking to the Future
Accounting for Receivables
Looking to the Future
Both the IASB and the FASB 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. The fair value option for recording financial instruments, such as receivables, is an important step in moving closer to fair value recording. However, we hope that this is only an intermediate step and that the Boards continue to work toward the adoption of comprehensive fair value accounting for financial instruments. In their current deliberations regarding accounting for financial instruments, it appears that IASB wants amortized costs for receivables, but GAAP is tending toward fair value.

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