Current ASSETS: Note and Account Receivable Chapter 7

PRIMARY ACCOUNTING ISSUES Recognition Valuation Disposition

Note Receivable ประเภท – แบ่งตามลักษณะของตราสาร ตั๋วสัญญาใช้เงิน ตั๋วแลกเงิน – แบ่งตามลักษณะดอกเบี้ย ระบุอัตราดอกเบี้ย ไม่ระบุอัตราดอกเบี้ย

A promissory note is a written promise to pay a specified amount of money on demand or at a definite time. The party making the promise is the maker. The party to receive payment is the payee. PROMISSORY NOTES

When the life of the note is expressed in terms of days, you need to count the days. In counting, the date of issue is omitted but the due date is included. Example: The maturity date of a 60-day note dated July 17 is: MATURITY & INTEREST – NOTES RECEIVABLE MATURITY & INTEREST – NOTES RECEIVABLE Term of note60 days July (31-17)-14 days August-31days Maturity date:September 15

The formula for computing interest on an interest-bearing note is: The interest rate specified on the note is an annual rate of interest. Face Value of Note Annual Interest Rate Time in Terms of One Year Interest X X = COMPUTING INTEREST

$ 730 X 18% X 120/360 = $ $1,000 X 15% X 6/12 = $ $2,000 X 12% X 1/1 = $ COMPUTATION OF INTEREST The interest rate specified is the annual rate.

DateAccount TitlesDebitCredit General Journal April 1 Notes Receivable 1,000 Sales 1,000 RECOGNIZING NOTES RECEIVABLE ขายสินค้าและได้รับตั๋วสัญญาใช้เงินเป็นการชำระหนี้จากผู้ซื้อ

Wilma Company receives a $1,000, 2-month, 12% promissory note from Brent Company to settle an open account. DateAccount TitlesDebitCredit General Journal May 1 Notes Receivable 1,000 Accounts Receivable – Brent Company 1,000 RECOGNIZING NOTES RECEIVABLE Notes receivable are recorded at FACE VALUE

N/R are recorded at face value. Allowance for Doubtful Accounts used to record estimated uncollectible accounts. N/R reported on the balance sheet at net realizable value. VALUATION OF NOTES RECEIVABLE Gross N/R – Allowance = Net Realizable Value

Betty Co. lends Higley Inc. $10,000 on June 1, accepting a 5-month, 9% interest-bearing note. Betty collects the maturity value of the note from Higley on Nov 1. STUDY OBJECTIVE 8 DISPOSING OF NOTES RECEIVABLE HONORED NOTE STUDY OBJECTIVE 8 DISPOSING OF NOTES RECEIVABLE HONORED NOTE A note is honored when it is paid in full at its maturity date. For an interest-bearing note, the maturity amount is the face value plus interest. DateAccount TitlesDebitCredit Nov 1Cash10,375 Notes Receivable10,000 Interest Revenue375 (collection of Higley, Inc. note)

If Betty Co. prepares financial statements on September 30, interest for 4 months, would be accrued. ACCRUING INTEREST -- HONORED NOTE RECEIVABLE ACCRUING INTEREST -- HONORED NOTE RECEIVABLE DateAccount TitlesDebitCredit Sept 30Interest Receivable ($10,000 x 9% x 4/12)300 Interest Revenue300 (accrue 4 month’s interest on Higley, Inc. note) Interest receivable is a current asset

When interest has been accrued, it is necessary to credit Interest Receivable at maturity. ACCRUING INTEREST -- HONORED NOTE RECEIVABLE ACCRUING INTEREST -- HONORED NOTE RECEIVABLE DateAccount TitlesDebitCredit Nov 1Cash10,375 Notes Receivable10,000 Interest Receivable300 Interest Revenue75 (collection of note at maturity)

A dishonored note is a note that is not paid in full at maturity. Since the payee still has a claim against the maker of the note, the balance in Notes Receivable is usually transferred to Accounts Receivable. DISHONOR OF NOTE RECEIVABLE DISHONOR OF NOTE RECEIVABLE DateAccount TitlesDebitCredit Nov 1A/R—Higley, Inc.10,375 Notes Receivable10,000 Interest Revenue375 (record dishonor of Higley note) NOTE: This scenario assumes the note will eventually be collected.

DateAccount TitlesDebitCredit Nov 1Allowance for doubtful accounts10,000 Notes Receivable10,000 (record dishonor of Higley note) DISHONOR OF NOTE RECEIVABLE DISHONOR OF NOTE RECEIVABLE If there is no hope of collection, The face value eliminated, and the allowance is debited. Also, no interest would be accrued.

เช็ครับลงวันที่ล่วงหน้า บันทึกบัญชีเป็นเช็คลงวันที่ล่วงหน้าหรือเป็นตั๋ว เงินรับหรือไม่บันทึกการรับเช็คจนกว่าเช็คครบ กำหนดขึ้นเงิน เมื่อรับเช็คลงวันที่ล่วงหน้าจากลูกหนี้หรือเมื่อ ขายสินค้า เดบิต เช็คลงวันที่ล่วงหน้า / ตั๋วเงินรับ xx เครดิต ลูกหนี้ / ขาย xx เมื่อเช็คครบกำหนด เดบิต ธนาคาร xx เครดิต เช็คลงวันที่ล่วงหน้า / ตั๋วเงินรับ xx

Receivables ลูกหนี้การค้า ( Account Receivables) ลูกหนี้อื่น (Others)

RECOGNIZING A/R DateDescriptionDebitCredit July 1A/R—Polo Company1000 Sales1000 (sales on account) July 5Sales returns & allowances100 A/R—Polo Company100 (merchandise returned) July 11Cash882 Sales Discounts18 A/R—Polo Company900 (collection of A/R) A classic general journal sequence for credit sales.

Receivables are current assets on the balance sheet They are stated at net realizable value, the amount expected to be received in cash. Uncollectible A/R are accounted for using two methods VALUATION OF A/R Direct Write-Off Method Allowance Method

No entries are made for bad debts until an account is determined to be uncollectible at which time the loss is charged to bad debts expense. Bad debt expense shows only actual losses. Not acceptable for financial reporting purposes unless losses are insignificant. DIRECT WRITE-OFF METHOD Bad debts expense Operating expense on the income statement

Warden Co. writes off M. E. Doran’s $200 balance as uncollectible on December 12. When this method is used, Bad Debts Expense will show only actual losses from uncollectibles. DateAccount TitlesDebitCredit General Journal Dec. 12 Bad Debts Expense 200 Accounts Receivable – M.E. Doran 200 DIRECT WRITE-OFF METHOD

The allowance method is required when bad debts are material. Uncollectible accounts are estimated The expense is matched against sales in the same accounting period. ALLOWANCE METHOD Uncollectible accounts expense = bad debts expense

Estimated uncollectibles are debited to Bad Debts Expense and credited to Allowance for Doubtful Accounts at the end of each period. DateAccount TitlesDebitCredit General Journal Dec. 31 Bad Debts Expense12,000 Allowance for Doubtful Accounts 12,000 ALLOWANCE METHOD RECORDING ESTIMATED UNCOLLECTIBLES ALLOWANCE METHOD RECORDING ESTIMATED UNCOLLECTIBLES

Actual uncollectibles are debited to Allowance for Doubtful Accounts and credited to Accounts Receivable at the time the specific account is written off. DateAccount TitlesDebitCredit General Journal Mar. 1 Allowance for Doubtful Accounts 500 Accounts Receivable - R. A. Ware 500 ALLOWANCE METHOD RECORDING A WRITE-OFF ALLOWANCE METHOD RECORDING A WRITE-OFF

To recover an account that has been written off: 1 reverse the write-off entry. DateAccount TitlesDebitCredit General Journal July 1 Accounts Receivable – R. A. Ware 500 Allowance for Doubtful Accounts 500 ALLOWANCE METHOD RECORDING A RECOVERY ALLOWANCE METHOD RECORDING A RECOVERY DateAccount TitlesDebitCredit General Journal July 1 Cash 500 Accounts Receivable record the collection in the usual manner.

Percentage of Sales Percentage of Receivables Emphasis on Income Statement Relationships Emphasis on Balance Sheet Relationships ALLOWANCE METHOD BASIS FOR ESTIMATING UNCOLLECTIBLES ALLOWANCE METHOD BASIS FOR ESTIMATING UNCOLLECTIBLES Two methods of estimating uncollectible accounts comply with GAAP. Uses aging schedule

Bad debt expense is based on a % of current credit sales estimated to be uncollectible, based on past experience. Matches expenses with revenues. No consideration given to existing balance in the allowance. ALLOWANCE METHOD PERECENTAGE OF SALES BASIS ALLOWANCE METHOD PERECENTAGE OF SALES BASIS Dec. 1 Bad Debts Expense 8,000 Allowance for Doubtful Accounts 8,000 If net credit sales for the year are $800,000, the estimated bad debts expense is $8,000 (1% X $800,000).

Bad debt expense based on % of the ending balance in A/R. The adjusting entry is the difference between the required balance and the existing balance in the allowance account. Estimates NRV of receivables. ALLOWANCE METHOD PERECENTAGE OF RECEIVABLES BASIS ALLOWANCE METHOD PERECENTAGE OF RECEIVABLES BASIS DateAccount TitlesDebitCredit General Journal Dec. 1 Bad Debts Expense 1,700 Allowance for Doubtful Accounts 1,700 If the trial balance shows Allowance for Doubtful Accounts with a credit balance of $528, an adjusting entry for $,1,700 ($2,228 - $528) is necessary.

STUDY OBJECTIVE 4 DISPOSING OF A/R STUDY OBJECTIVE 4 DISPOSING OF A/R Two ways to dispose of A/R Factoring Credit card sales

Henderson Furniture factors $600,000 of receivables to Federal Factors, Inc. Federal Factors assesses a 2% service charge. DateAccount TitlesDebitCredit General Journal Cash 588,000 Service Charge Expense (2% x $600,000) 12,000 Accounts Receivable 600,000 DISPOSING OF A/R FACTORING (SALE) OF RECEIVABLES DISPOSING OF A/R FACTORING (SALE) OF RECEIVABLES A factor is a finance company that buys A/R from companies, then collects payments directly from the customers.

Three parties are involved with credit card sales: The retailer pays the credit card issuer a fee of 2-6% of the invoice price. Sales from Visa, MasterCard, and Discover are treated differently than American Express & Diners Club Credit card issuerRetailerCustomer CREDIT CARD SALES

Considered cash sales by the retailer. Upon receipt of credit card sales slips from a retailer, the bank adds the amount to the seller’s bank balance. VISA, MASTERCARD, & DISCOVER DateAccount TitlesDebitCredit General Journal Cash 970 Service Charge Expense 30 Sales 1,000 Barbara Hardy purchases CD’s for her restaurant from Ty Parker Music Co. for $1,000 using her VISA First Bank Card. First Bank charges a 3% fee.

In the balance sheet, short-term receivables are reported in the current assets section below short-term investments. Report both the gross amount of receivables and the allowance for doubtful accounts. FINANCIAL STATEMENT PRESENTATION & ANALYSIS FINANCIAL STATEMENT PRESENTATION & ANALYSIS Accounts receivable$1,200,000 Less: allowance for doubtful accounts(48,000) Accounts receivable, net$1,152,000