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CHAPTER 8

REPORTING & ANALYZING RECEIVABLES


LO 1 EXPLAIN HOW COMPANIES RECOGNIZE ACCOUNTS RECEIVABLE
Receivables refers to amounts due from individuals and companies and are
expected to be collected in cash.
TYPES OF RECEIVABLES
1. Accounts receivable
a. Amounts customers owe on account
b. Result from sale of goods and services on credit
c. Companies generally expect to be collect accounts receivable within
__30-60_ days.
2. Notes receivable
a. A _Written_ promise (as evidenced by a formal instrument) for amounts
to be received.
b. Normally requires the collection of __Interest__ and extends the time
period to 60-90 days or longer.
3. Other receivables
a. Interest receivable, Loan to company officers, Advances to employees,
Income taxes refundable
RECOGNIZING ACCOUNTS RECEIVABLE
Service organizations record a receivable when its performs a service on account. A
merchandiser records accounts receivable at the point of sale of merchandise on
account (journal entries covered in CH 5).
LO 2 DESCRIBE HOW COMPANIES VALUE ACCOUNTS RECEIVABLE
Determining the amount to report on the balance sheet is sometimes difficult
because some receivables will become _Uncollectable___.
The seller records the losses that result from extending credit as Bad Debt Expense.
Bad Debt Expense is an __Operating__ expense because such losses are a normal
and necessary risk of doing business on a credit basis.
ACCOUNTING FOR UNCOLLECTIBLE ACCOUNTS
Allowance Method for Uncollectible Accounts
The allowance method of accounting for bad debts involves __Estimating__
uncollectible accounts at the end of each period. It ensures receivables are stated
at their cash (net) realizable value on the balance sheet. (The net amount a
company __Expects_ to receive in cash from receivables).
Three features of the allowance method:
1. Companies estimate uncollectible accounts receivable and match them
against revenues in the same accounting period in which the revenues are
recorded.
2. Estimated uncollectibles are recorded as an increase (debit) to Bad Debt
Expense and an increase (credit) to Allowance for Doubtful Accounts. -- A
contra account to Accounts Receivable..

Hewes ACC 255 notes 8-1

3. At the time a specific account becomes uncollectible, companies debit


Allowance for Doubtful Accounts and credit Accounts Receivable.
ESTIMATING THE ALLOWANCE
There are two primary methods used to estimate the amount of uncollectible
accounts. With either method, the result of the calculation represents the
___Required ending __ balance in the Allowance for Doubtful Accounts account.
1. Percentage-of-receivables method - establishes a percentage relationship
between the amount of receivables and expected losses from uncollectible
accounts.
Example: A company has a total Accounts Receivable balance of $200,000
and management estimates that 5% of their accounts receivable will become
uncollectible. The ending balance in Allowance for Doubtful Accounts is
$10,000 ($200,000 * 5%).
2. Aging of Accounts Receivables Method - A schedule, based on the length of
time the receivable is unpaid, is used to determine the overall estimate. The
longer the receivable is outstanding the greater likelihood that it will be
uncollectible.
Example Aging Schedule:
As of April 30, 2016, All Sports Company has the following aging schedule of
accounts receivable.
Accounts
Receivable
Current Accounts

$80,000

Estimated
%
Uncollectibl
1%

1-30 days past

$25,000

5%

Estimated
Uncollectible
Amount $800
$1,250

due
31-60 days past

$7,000

10%

$700

due
61-90 days past

$1,500

20%

$300

$750

40%

$300

due 90 days past


Over
due
Totals

$114,250

$3,350**

** The total Estimated Uncollectible Accounts represents the required balance in the
Allowance for Doubtful Accounts on the balance sheet date.
RECORDING ESTIMATED UNCOLLECTIBLES
At the end of the accounting period, an _Adjusting__ entry is made to record the
estimated uncollectible amount.
The purpose of the adjusting entry is twofold:
1. Needed to bring the Allowance for Doubtful Accounts account to the
_____Correct_ ending balance. The ending balance is determined using either

Hewes ACC 255 notes 8-2

the percentage-of-receivables basis or the aging of accounts receivable


method.
2. Used to record ___Bad Debt Expanse___.
Example: As of April 1, 2016, All Sports Company had a credit balance of $2,475 in
Allowance for Doubtful Accounts.
Based on the Aging Schedule above, the ending balance in the Allowance for
Doubtful Account must be $3,350 on April 31st.
Allowance for Doubtful Accounts
4/1 $2,475
4/31 $875
4/31 $3,350
The adjusting entry required at the end of April would be:
Bad Debt Expanse $875
Allowance for doubtful accounts $875
BALANCE SHEET PRESENTATON - Allowance for Doubtful Accounts
All Sports Company
Balance Sheet (partial)
April 30, 2016
Assets
Current Assets
Cash
Accounts Receivable
Less: Allowance for
Doubtful Accounts
Inventory
Prepaid Insurance
Total Current Assets

$55,000
114,250
(3,350)

110,900

cash
(net)
realizabl
e value

80,000
12,500
$258,40
0

RECORDING THE WRITE-OFF OF AN UNCOLLECTIBLE ACCOUNT


When a company determines that a specific account is uncollectible, the company
will write-off (close) the account.
Assume, All Sports Company, after an extensive effort to try and collect $650 from
their customer, Jordan Merritt, determined the account was uncollectible and needs
to be written off. To record the write-off the following journal entry is used:

Hewes ACC 255 notes 8-3

Allowance for doubtful accounts 650


Accounts receivable (s.merritt) 650
Note: A debit to Bad Debt Expense is __Not____ made because the company has
already recognized the expense when it made the adjusting entry for estimated bad
debts.
ADDITIONAL EXAMPLE
When making the adjusting entry, you must also consider the write-offs that
occurred during period.
Assume that Designs West has a beginning balance in Allowance for Doubtful
Accounts of $1,325 for the month of October. On October 31, 2016, the following
events occurred related to accounts receivable.
1. The company determined that the $350 accounts receivable balance from
customer Mary White was uncollectible and should be written-off. Prepare
the journal entry to record the write-off.
2. After recording the write-off, the following aging schedule of accounts
receivable is provided. Prepare the month-end adjusting journal entry for bad
debts using the allowance method, using the percentage of receivables basis
from the aging schedule.
Accounts
Receivable
Current Accounts

$60,000

Estimated
%
Uncollecti
1%

1-30 days past

$31,000

5%

Estimated
Uncollectible
Amount 600
1,550

due
31-60 days past

$9,000

10%

900

due days past


61-90

$2,500

20%

500

$950

40%

380

due
Over 90 days
past due
Totals

$103,450

3,930

1. Journal entry to record write-off


Allowance for doubtful accounts
Account receivable

2. Month-end adjusting entry for bad debts

350
350

1,325-350+x= 3930

Hewes ACC 255 notes 8-4

Allowance for Doubtful Accounts


10/1 1,325
10/31
350
350
10/31 2,955
10/31 3,930
Bad Debt expanse
Allowances for doubtful Accounts

2,955
2,955

LO 3 EXPLAIN HOW COMPANIES RECOGNIZE, VALUE, AND DISPOSE OF


NOTES RECEIVABLE
PROMISSORY NOTE - a written promise to pay a specified amount of money on
demand or at a definite time. May be used (1) when Individuals or companies
borrow or lend money, (2) when the amount of the transaction and credit period
exceeds normal limits, and (3) in the settlement of accounts receivable.
The party making the promise to pay is called the maker and from their perspective
the promissory note is known as Notes Payable. The party to whom payment is to
be made is called the payee and from their perspective the promissory note is
known as Notes Receivable.
COMPUTING INTEREST
Formula used to compute interest:

Compute total interest on the following promissory note:


$80,000, 3-month, 12% promissory note for $80,000
80,000*12%*3/12=$2,400
RECOGNIZING NOTES RECEIVABLE
The notes receivable is recorded at __Face Value____. No interest revenue is
reported when the company accepts the note.
Examples:
On June 1, 2016, All Sports Company received a 9-month, 10% promissory note for
$15,000 for a loan made to XYZ Company.
Date

Accounts

Debit

6/1

Notes Receivable

15,000

Credit

Hewes ACC 255 notes 8-5

Cash

15,000

On July 1, 2016, All Sports Company received a $1,000, 2-month, 8% promissory


note from their customer Wyatt Black, to settle an open account.
Date Accounts
Debit
Credit
7/1

Notes Receivable

1,000

Accounts receivable

1,000

VALUING NOTES RECEIVABLE - Companies report short-term notes receivable at


their cash (net) realizable value. The allowance account is Allowance for Doubtful
Accounts and valuing a note receivable is the same as valuing accounts receivable.
DISPOSING OF NOTES RECEIVABLE
Honor of Notes Receivable -- A note is honored when its makers pays in full at its
maturity date. The amount due at maturity is the face value of the note __Plus_
interest for the length of time specified on the note.
Example:
On July 1, 2016, All Sports Company received a $2,000, 3-month, 12% promissory
note from their customer, Megan Green, to settle an open accounts receivable
balance.
On October 1, 2016, All Sports Company received payment in full for the note and
interest from Megan Green.
Record (1) receipt of the note and (2) receipt of payment.
Date
7/1

Accounts

Debit

Notes Receivable

2,000

Accounts Receivable
10/1

Cash

Credit
2,000

2,060
Notes Receivable
Interest Receivable

2,000
60

$2,000*12%*3/12
Accrual of interest revenue
If financial statements are prepared prior to the time payment is received for the
note and interest, an adjusting journal entry is needed to accrue interest revenue.
The adjusting entry is used to record the Interest Revenue earned (but cash has yet
to be received.)

Hewes ACC 255 notes 8-6

Record the following transactions for All Sports Company.


1. Oct. 1, 2016 - All Sports Company received a 5-month, 6%
promissory note for $20,000 for a loan made to Cruz Company.
Date

Accounts

Debit

10/1

Notes Receivable

20,000

Cash

Credit
20,000

2. Dec. 31 2016 made the year-end adjustment for the accrued


interest on the note from Cruz Company.

300
Date

Accounts

12/31

Interest Receivable

$200
Debit

Credit

300

Interest revenue

300

20,000*6%*3/12
3. Mar. 1, 2017 received payment in full for the note and interest.
Date

Accounts

Debit

3/1

Cash

20,500
Interest Receivable
Notes receivable
Interest Revenue

Credit
300
20,000
200

20,000*6%*2/12
LO 4 DESCRIBE THE STATEMENT PRESENTATION OF RECEIVABLES AND THE
PRINCIPLES OF RECEIVABLES MANAGEMENT
Balance Sheet
Companies should identify in the balance sheet or in the notes to the financial
statements each of the major types of receivables. Short-term receivables are
reported in the current assets section of the balance sheet. Balance sheet
presentation of allowance for doubtful accounts shown above.
Income Statement
Hewes ACC 255 notes 8-7

Companies report bad debt expense in the operating expenses section. Interest
revenue is shown under Other Revenues and Gains or Other Revenues and
Expenses in the non-operating section.
MANAGING RECEIVABLES
Managing accounts receivables involves the following steps:
1. Determine to whom to extend credit
2. Establishing a payment period
3. Monitoring collections
4. Evaluating liquidity of receivables tracking the relationship between sales,
accounts receivable, and cash collections is important. If sales increase, then
accounts receivable are also expected to increase, but a disproportionate
increase could signal trouble.
RATIOS USED TO EVALUATE LIQUIDITY OF RECEIVABLES
ACCOUNTS RECEIVABLE TURNOVER measures the number of __Times____, on

average, a company collects receivables during the period.


Formula

Net Credit Sales


Average Net Receivable

(Net= ACCOUNTS RECEIEABLE- ALLOWENCE FOR DOUBTFUL


ACCOUNTS)
AVERAGE COLLECTION PERIOD measures the average amount of time that a

receivable is outstanding.

365
Formula

Accounts receivable
turnover

Team Activity
Eddy Corporation had net credit sales during the year of $800,000 and cost of
goods sold of $500,000. The balance is receivables at the beginning of the year
was $100,000 and at the end of the year was $150,000. What was the accounts
receivable turnover and average collection period in days?
Accounts receivable turnover
800,000/((100,000+150,000)/2)=6.4 times

Hewes ACC 255 notes 8-8

Average collection period

365/6.4=57 days.

Hewes ACC 255 notes 8-9

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