1 AC116 Accounting II Seminar 3 Jim Eads, CPA, MST, MSF Receivables

2 Receivables Receivables: all money claims against other entities, including people, business firms, and other organizations.

3 Receivables Account receivable: Short term, interest free trade credit extended to buyers of a firms products or services. Typically not evidenced by a formal loan agreement. Normally expected to be collected with a relatively short period, such as 30 or 60 days. Classified as a current asset.

4 Receivables A note receivable:  A written agreement to pay:  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.

5 Receivables Methods of accounting for receivables that are expected to be uncollectible: The direct write off method The allowance method

6 Receivables Direct write off method: records bad debt expense only when an account is judged to be worthless. Allowance method: records bad debt expense by estimating uncollectible accounts at the end of the accounting period. Required by GAAP.

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

8 Direct Write Off Method The amount written off is later collected on November 21. November 21: Accounts Receivable4,200 Bad Debt Expense4,200 Cash 4,200 Accounts Receivable4,200

9 Allowance Method 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. December 31: Bad Debt Expense $40,000 Allowance for Doubtful Accounts$40,000

10 Allowance Method 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.

11 Allowance Method On January 21, John Parker’s account totaling $6,000 is written off because it is uncollectible. January 21: Allowance for Doubtful Accounts6,000 Accounts Receivable—John Parker6,000

12 Allowance Method On April 4, John Parker pays the past due $6,000. April 4: Accounts Receivable – John Parker6,000 Allowance for Doubtful Accounts6,000 Cash6,000 Accounts Receivable – John Parker6,000

13 Allowance Methods Methods of estimating uncollectible amounts: 1. Percentage of sales 2. Analysis of receivables (AKA “Aging of receivables”)

14 Percentage of Sales Method Based on past dealings, the company has a pretty good idea of the percentage of sales that will not be collected. 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). Bad Debt Expense$45,000 Allowance for Bad Debt$45,000

15 Example Exercise 9-3 (page 405) 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.

16 Example Exercise 9-3 (page 405) (a) (a) $17,500 ($3,500,000 x.005) Adjusted Balance (b) Accounts Receivable$800,000 Allowance for Doubtful Accounts ($7,500 + $17,500)25,000 Bad Debt Expense17,500 (c) (c)$775,000 ($800,000 – $25,000)

17 Analysis of Receivables 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.

18 Analysis of Receivables

19 Analysis of Receivables

20 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 credit balance of $510, the Bad Debt Expense must be debited for $2,880 ($3,390 – $510). Bad Debt Expense$2,880 Allowance for Bad Debt$2,880

21 Example Exercise 9-4 (page 407) 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.

22 Example Exercise 9-4 (page 407) (a) (a)$22,500 ($30,000 - $7,500) Adjusted Balance (b) Accounts Receivable$800,000 Allowance for Doubtful Accounts 30,000 Bad Debt Expense22,500 (c) (c)$770,000 ($800,000 – $30,000)

23 Note Interest Rates Interest rates are stated as an annual rate. $10,000 12% note due in 90 days. $10,000 x 12% x 90/360 = $300 interest.

24 Accounts Receivable Turnover The accounts receivable turnover measures how frequently during the year the accounts receivable are being converted to cash. Net credit sales / Average Accounts Receivable Note: Use net sales if net credit sales is not available.

25 Questions?

26 One last thought…. Make sure you read through Chapter 10 before next week’s seminar.