Chapter 8 Receivables Student Version These slides should be viewed using the presentation mode (left click your mouse on the icon).

Describe the common classes of receivables. Learning Objective 1 Describe the common classes of receivables.

Classification of Receivables LO 1 Classification of Receivables Accounts receivable are normally expected to be collected within a relatively short period, such as 30 or 60 days. Notes receivable are amounts that customers owe for which a formal, written instrument of credit has been issued.

Classification of Receivables LO 1 Classification of Receivables 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. Examples of other receivables include: Interest receivable Taxes receivable Receivables from officers or employees

Describe the accounting for uncollectible receivables. Learning Objective 2 Describe the accounting for uncollectible receivables.

Uncollectible Receivables LO 2 Uncollectible Receivables Companies often sell their receivables to other companies. This is called factoring the receivables, and the buyer of the receivables is called a factor.

Uncollectible Receivables LO 2 Uncollectible Receivables Regardless of how careful a company is in granting credit, some credit sales will be uncollectible. The operating expense recorded from uncollectible receivables is called bad debt expense, uncollectible accounts expense, or doubtful accounts expense.

Uncollectible Receivables LO 2 Uncollectible Receivables The direct write-off method of accounting for uncollectible receivables records bad debt expense only when an account is determined to be worthless. The allowance method records bad debt expense by estimating uncollectible accounts at the end of the accounting period.

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

Direct Write-Off Method LO 3 Direct Write-Off Method On May 10, a $4,200 account receivable from D. L. Ross has been determined to be uncollectible.

Direct Write-Off Method LO 3 Direct Write-Off Method The account written off on May 10 is later collected on November 21. Reinstatement entry Receipt of cash entry

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

LO 4 The Allowance Method On December 31, ExTone Company estimates that a total of $30,000 of the $200,000 balance of their accounts receivable will eventually be uncollectible. The specific customer accounts cannot be decreased, so a contra account, Allowance for Doubtful Accounts, is credited.

LO 4 The Allowance Method The net amount that is expected to be collected, $170,000 ($200,000 – $30,000), is called the net realizable value (NRV) of the receivables. The adjusting entry reduces receivables to the NRV and matches uncollectible expenses with revenues.

LO 4 The Allowance Method On January 21, John Parker’s account of $6,000 is written off because it is uncollectible. Note that the allowance account credited earlier is debited at the write-off, not Bad Debt Expense.

LO 4 The Allowance Method During 2012, 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).

LO 4 The Allowance Method If ExTone Company had written off $32,100 in accounts receivable during 2012, Allowance for Doubtful Accounts would have a debit balance of $2,100.

LO 4 The Allowance Method 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. Reinstatement entry Receipt of cash entry

Estimating Uncollectibles LO 4 Estimating Uncollectibles The allowance method requires an estimate of uncollectible accounts at the end of the period. Two methods are used to estimate the amount debited to Bad Debt Expense: Percent of sales method Analysis of receivables method

Percent of Sales Method LO 4 Percent of Sales Method If ExTone Company’s credit sales for the period are $3,000,000 and it is estimated that 3/4% will be uncollectible, Bad Debt Expense is debited for $22,500 ($3,000,000 x .0075). This approach disregards the balance of $3,250 in the allowance account before the adjustment.

Percent of Sales Method LO 4 Percent of Sales Method After the following adjusting entry on December 31 is posted, Allowance for Doubtful Accounts will have a balance of $25,750 ($3,250 + $22,500).

Analysis of Receivables Method LO 4 Analysis of Receivables Method The 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.

Analysis of Receivables Method LO 4 Analysis of Receivables Method ExTone Company has an unadjusted credit balance of $3,250 in Allowance for Doubtful Accounts. The estimated uncollectible accounts totaled $26,490. The amount to be added to the allowance account is $23,240 ($26,490 – $3,250). The adjusting entry is as follows:

Analysis of Receivables Method LO 4 Analysis of Receivables Method After the preceding adjusting entry is posted to the ledger, ExTone Company’s Allowance for Doubtful Accounts will have an adjusted balance of $26,490. This is the amount that was determined by aging the accounts.

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

LO 5 Comparing Methods The primary differences between the direct write-off and allowance methods are summarized below.

Describe the accounting for notes receivable. Learning Objective 6 Describe the accounting for notes receivable.

Characteristics of Notes Receivable LO 6 Characteristics of Notes Receivable A note receivable, or promissory note, is a written document containing a promise to pay. Characteristics of a promissory note are: 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. (continued)

Characteristics of Notes Receivable LO 6 Characteristics of Notes Receivable The issuance date is the date a note is issued. The due date or maturity date is the date the note is to be paid. The term of a note is the amount of time between the issuance and due dates. The interest rate is the rate of interest that must be paid on the face amount for the term of the note.

LO 6 Notes Receivable The maturity value is the amount that must be paid at the due date of the note, which is the sum of the face amount and the interest.

Accounting for Notes Receivable LO 6 Accounting for Notes Receivable Received a $6,000, 12%, 30-day note dated November 21, 2012, in settlement of the account of W. A. Bunn Company.

Accounting for Notes Receivable LO 6 Accounting for Notes Receivable On December 21, when the note matures, the firm receives $6,060 from W. A. Bunn Company ($6,000 face amount plus $60 interest).

Accounting for Notes Receivable LO 6 Accounting for Notes Receivable 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 back to the customer’s account receivable.

Accounting for Notes Receivable LO 6 Accounting for Notes Receivable A 90-day, 12% note dated December 1, 2012, is received from Crawford Company to settle its account, which has a balance of $4,000.

Accounting for Notes Receivable LO 6 Accounting for Notes Receivable 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).

Accounting for Notes Receivable LO 6 Accounting for Notes Receivable On March 1, 2013, $4,120 is received for the note ($4,000) and interest ($120).

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

Reporting Receivables on the Balance Sheet LO 7 Reporting Receivables on the Balance Sheet

Learning Objective 8 Describe and illustrate the use of accounts receivable turnover and number of days’ sales in receivables to evaluate a company’s efficiency in collecting its receivables.

Accounts Receivable Turnover LO 8 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 Average Accounts Receivable =

Number of Days Sales in Receivables LO 8 Number of Days Sales in Receivables The number of days’ sales in receivables is an estimate of the length of time the accounts receivable have been outstanding. Number of Days’ Sales in Receivables Average Accounts Receivable Average Daily Sales =

Receivables The End