1. By Rachelle Agatha, CPA, MBA
Receivables
By Rachelle Agatha, CPA, MBA
Slides by Rachelle Agatha, CPA,
with excerpts from Warren, Reeve, Duchac

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

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

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

5. Describe the common classifications of receivables.
Objective 1
Describe the common classifications of receivables.

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

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

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

9. Other 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.

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

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

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

15. 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
Accounts Receivable—D. L. Ross

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

17. Journalize the following transactions using the direct write-off method of accounting for uncollectible receivables.
July 9 Received $1,200 from Jay Burke and wrote off the remainder owed of $3,900 as uncollectible.
Oct. 11 Reinstated the account of Jay Burke and received $3,900 cash in full payment.

18. July 9 Cash 1,200
Bad Debt Expense 3,900
Accounts Receivable—Jay Burke 5,100
Oct. 11 Accounts Receivable—Jay Burke 3,900
Bad Debt Expense 3,900
11 Cash 3,900
Accounts Receivable—Jay Burke 3,900

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

20. 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.
Dec Bad Debt Expense
Allowance for Doubtful Accounts
Uncollectible accounts estimate.

21. Net Realizable Value
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.

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

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. { ALLOWANCE FOR DOUBTFUL ACCOUNTS Jan. 1, 2008 Bal. 40,000
ALLOWANCE FOR DOUBTFUL ACCOUNTS {
Jan. 1, 2008 Bal. 40,000
Total accounts written off $36,750
Jan. 21 6,000
Feb ,900
“ “
Dec. 31 Unadjusted bal 3,250

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. { ALLOWANCE FOR DOUBTFUL ACCOUNTS Jan. 1, 2008 Bal. 40,000
ALLOWANCE FOR DOUBTFUL ACCOUNTS {
Jan. 1, 2008 Bal. 40,000
Total accounts written off $44,100
Jan. 21 6,000
Feb ,900
“ “
Dec. 31 Unadjusted bal 4,100

28. Collecting a Written-Off Account
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.

29. Entry 1: Reinstate the account.
Entry 1: Reinstate the account.
June 10 Accounts Receivable—Nancy Smith
Allowance for Doubtful Accounts
To reinstate the account written off on Jan. 21.

30. Entry 2: Record collection of cash.
Entry 2: Record collection of cash.
June 10 Cash
Accounts Receivable—Nancy Smith
Collection of written-off account.

31. Journalize the following transactions using the allowance method of accounting for uncollectible receivables.
July 9 Received $1,200 from Jay Burke and wrote off the remainder owed of $3,900 as uncollectible.
Oct. 11 Reinstated the account of Jay Burke and received $3,900 cash in full payment.

32. July 9 Cash 1,200
Allowance for Doubtful Accounts 3,900
Accounts Receivable—Jay Burke 5,100
Oct. 11 Accounts Receivable—Jay Burke 3,900
Allowance for Doubtful Accounts 3,900
11 Cash 3,900
Accounts Receivable—Jay Burke 3,900

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

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

36. { BAD DEBT EXPENSE Dec. 31 Adj entry 45,000
BAD DEBT EXPENSE
Dec. 31 Adj entry 45,000
Dec. 31 Adjusted bal. 45,000
ALLOWANCE FOR DOUBTFUL ACCOUNTS {
Jan. 1, 2008 Bal. 40,000
Total accounts written off $36,750
Jan ,000
Feb. 2 3,900
“ “
Dec. 31 Unadjusted bal 3,250
Dec. 31 Adj. entry 45,000
Dec. 31 Adjusted bal. 48,250
Income statement method calculates the adjustment

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

39. Estimating Uncollectibles Based on 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.

40. Aging of Accounts Receivables

41. Estimate of Uncollectible Accounts

42. Collection Rates by Number of Months Past Due

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

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

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

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. $22,500 ($30,000 – $7,500)
Adjusted Balance
Accounts Receivable $800,000
Allowance for Doubtful Accounts 30,000
Bad Debt Expense 22,500
$770,000 ($800,000 – $30,000)

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

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

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

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

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

55. a specific amount of money (face amount)
Characteristics of Notes Receivable
A note receivable, or promissory note, is a written document containing a promise 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.

56. Characteristics of Notes Receivable
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.

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

58. What is the due date of a 90-day note dated March 16?
What is the due date of a 90-day note dated March 16?
Total days in note days
Number of days in March 31
Issue date of note March 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 June 14 days
Answer: June 14

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

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

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. 21 Accts Rec.—W. A. Bunn Co
Notes Rec.—W. A. Bunn Co
Interest Revenue 60 00
Recorded dishonored note, plus interest.

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.
2008
Dec. 1 Notes Rec.—Crawford Co
Accts. Rec.—Crawford Co
Accepted note in settlement of account.

63. 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).
2008
Dec. 31 Interest Receivable
Interest Revenue 40 00
Accrued interest ($4,000 x 12% x 30/360).

64. On March 1, 2009, $4,120 is received for the note ($4,000) and interest ($120).
2009
Mar. 1 Cash
Notes Rec.—Crawford Co
Interest Receivable 40 00
Interest Revenue 80 00
($4,000 x 12% x 30/360).
Collected note and accrued interest.

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

66. July 12 determined as follows:
July 12 determined as follows:
March 17 days (31 – 14)
April 30 days
May 31 days
June 30 days
July 12 days
Total days
$40,800 [$40,000 + ($40,000 x 6% x 120/360)]
Cash 40,800
Notes Receivable 40,000
Interest Revenue 800

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

68. Receivables on Balance Sheet

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

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

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

73. Federal Express Corporation
Federal Express Corporation
Net sales $19, $17,383
Accounts receivable 2, , $2,199
Average accounts receivable 2,589 2,337
Average daily sales *
[($2,475 + $2,199)/2] **
($17,383/365)
--- *
[($2,703 + $2,475)/2]
Number of Days’ Sales in Receivables (2004)
$2,337
47.6 =
Number of Days’ Sales in Receivables (2004) =
49.1

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

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