Principles of Financial Accounting

Chapter 8 | Accounting for Receivables

1) Recognize accounts receivable and notes receivable

2) Value accounts receivable | 1) Direct Write-off Method and 2) Allowance Method.

3) Disposition of accounts receivable | Factoring and Credit Card Sales

4) Compute the maturity date of and interest on notes receivable.

5) Describe the entries to record the disposition of notes receivable.

6) Explain the statement presentation and analysis of receivables

 Credit Sale
Risk Associated with Receivables Un-collectability Bad Debt Expense
creates
[ Credit Risk ] (losses due to extending
credit)
RECEIVABLES
[Current Asset shown on SOFP]
Recognizing
Accounts Receivables
Valuing
3 Types Notes Receivables
Disposing
Other Receivables
Determining Maturity Date

Computing Interest

Presentation & Analysis

Prepared by: Saira Rizwan for LUMS Undergraduate Course- ACCT100


Practice Questions
Recognizing Accounts Receivable
1. Alnoor Law Associates provided legal services to
its clients Dora Limited worth of $5,000 on account.
Prepared by: Saira Rizwan for LUMS Undergraduate Course- ACCT100
Maturity date of and interest on Notes Receivable
3. The maturity value of a $90,000, 10%, 60-day note
receivable dated July 3 is:

Accounts Receivable 5,000 a) $90,000; b) $99,000; c) $105,000; d) $91,500

Service Revenue 5,000 Interest Income:
Recognizing Notes Receivable Annual: 10% of $90,000 = $9,000
60days (2month) = $9,000/12*2= $1,500
2. Jupitor Ltd. accepts a $1,000, 3-month, 6%
promissory note in settlement of an account with Mars Note Receivable: $90,000
Ltd. The entry to record this transaction will be: Maturity Value: $91,500

Notes Receivable 1,000 4. The maturity value and date of a $4,000, 11%, 35-days
Accounts Receivable 1,000 note receivable dated February 10th (assume 360 days in a
year) would be:
The entry made by Jupitor Ltd. when the note is collected Maturity value: $4,000 + 43 = $4,043

Cash 1,015 Maturity date: March 17th

Notes Receivable 1,000
Interest Revenue 15 360 days: 11% of $4,000 = $440
35days = $440/360*35 = $43
 Prepared by: Saira Rizwan for LUMS Undergraduate Course- ACCT100

Valuing Accounts Receivable

Methods for Recording Uncollectible Accounts / Bad debts – arising from credit sales

1) Direct Write-off Method 2) Allowance Method

 An account receivable is written-off directly to  ALLOWANCE for Doubtful Account is created

expense only after the account is determined to be
uncollectible.
 There is no ALLOWANCE / reserve Account
 Receivable not stated at amount expect to be
received.
 Not acceptable for financial reporting
 An estimate of the future amount of bad debt is
charged to a reserve/ allowance account
 Receivable stated at cash (net) realizable value.
 Required by IFRS | Prudence / Conservative approach

Illustration: Assume that KTML writes off Maria B. $1,600

balance as uncollectible on Dec. 12. KTML’s entry is:

Bad Debt Expense 1,600

Accounts Receivable—Maria B. 1,600
 Prepared by: Saira Rizwan for LUMS Undergraduate Course- ACCT100

Valuing Accounts Receivable | Methods of Accounting for Uncollectible Accounts

1.Management estimates Bad debts

2) Allowance Method
2. Bad Debt Expense (Dr.)
Follows 3 steps to
Allowance for Doubtful Accounts (Cr.)
account for bad debts
(a contra-asset account)
/ uncollectible
accounts
3. Allowance for Doubtful Accounts (Dr.)
Accounts Receivable (Cr.)
(at the time the specific account is written off as uncollectible).

establishes a %age
relationship between
Aging of
what percentage amount of
accounts
of credit sales will receivables and
receivable
be un-collectible expected losses from
uncollectible
accounts
 Prepared by: Saira Rizwan for LUMS Undergraduate Course- ACCT100

Practice Question: Allowance Method | Percentage-of-sales basis, write-off, recovery.

On December 31, 2018, Innovations Ltd. estimated that 2% of its net sales of €360,000 will become uncollectible. The
company recorded this amount as an addition to Allowance for Doubtful Accounts. On May 11, 2019, Innovations Ltd.
determined that the M/s Apricot Ltd.’s account was uncollectible and wrote off €1,100. On June 12, 2019, M/s Apricot
Ltd. paid the amount previously written off.
Instructions
Prepare the journal entries on December 31, 2018, May 11, 2019, and June 12, 2019.

December 31, 2016 June 12, 2017

Bad Debt Expense 7,200 Accounts Receivable— 1,100

(2% X €360,000) (Apricot Ltd.)
Allowance for Doubtful Accounts 7,200 Allowance for Doubtful Accounts 1,100

May 11, 2017 Cash 1,100

Accounts Receivable—
Allowance for Doubtful Accounts 1,100 (Apricot Ltd.) 1,100
Accounts Receivable –
Apricot Ltd. 1,100
 Prepared by: Saira Rizwan for LUMS Undergraduate Course- ACCT100

Practice Question: Direct Write-off and Allowance for Doubtful Accounts

Information related to Frozen Ltd. for 2019 is summarized below.
Total credit sales £2,500,000 Accounts receivable at December 31 970,000
Bad debts written off 66,000
a) What amount of bad debt expense will Frozen report if it uses the direct write-off method of accounting for bad debts?
a) £66,000
b) Assume that Frozen estimates its c) Assume that Frozen estimates its d) Assume the same facts as in (c),
bad debt expense to be 3% of credit bad debt expense based on 7% of except that there is a £3,000 debit
sales. What amount of bad debt accounts receivable. What amount of balance in Allowance for Doubtful
expense will Frozen record if it has an bad debt expense will Frozen record if Accounts. What amount of bad
Allowance for Doubtful Accounts it has an Allowance for Doubtful debt expense will Frozen record?
credit balance of £4,000? Accounts credit balance of £3,000?

b) £75,000 | (£2,500,000 X 3%) c) £64,900 [(£970,000 X 7%) – £3,000] d) £70,900 [(£970,000 X 7%) + £3,000]
Allowance for Doubtful Accounts Allowance for Doubtful Accounts Allowance for Doubtful Accounts

4,000 Bal. 3,000 Bal. Bal. 3,000

75,000 Bad Debts 64,900 Bad Debts 70,900 Bad Debts

79,000 67,900 (£970,000 X 7%) 67,900

 Practice Question: Ageing of Receivables
Q. An aging of a company's accounts receivable indicates
that $4,000 are estimated to be uncollectible. If
Allowance for Doubtful Accounts has a $1,200 credit
balance, the adjustment to record bad debts for the
period will require a
a) Debit to Bad Debts Expense for $4,000.
b) Debit to Allowance for Doubtful Accounts for $2,800.
c) Debit to Bad Debts Expense for $2,800.
d) Credit to Allowance for Doubtful Accounts for $4,000
Q. Using the percentage of receivables method for
recording bad debts expense, estimated uncollectible
accounts are $10,000. If the balance of the Allowance for
Doubtful Accounts is $2,000 debit before adjustment;
a) What is the amount of bad debt expense for the
period?
b) What is the balance of the Allowance for Doubtful
Accounts after adjustment ?

Allowance for Doubtful Accounts

Allowance for Doubtful Accounts
Bal. 2,000
1,200 Bal. 12,000 Bad Debts (a)
2,800 Bad Debts
10,000 Bal. (b)
4,000 Bal.

Prepared by: Saira Rizwan for LUMS Undergraduate Course- ACCT100

 Prepared by: Saira Rizwan for LUMS Undergraduate Course- ACCT100

Practice Question: Accounts Receivable

Use the following information for the next two questions.
12/31/20X7 12/31/20X8 Bal. 525,000 86,000 Cash
Accounts receivable $525,000 576,000 Sales 145,000 8,000 Allowance
Allowance (45,000) (54,000)
Cash realizable value $480,000 522,000 Bal. 576,000

During 20X8, sales on account were $145,000 and collections

on account were $86,000. Also during 20X8, the company Bad Debt
wrote off $8,000 in uncollectible accounts. An analysis of
outstanding receivable accounts at year end indicated that bad Allowance 17,000
debts should be estimated at $54,000.
Bal. 17,000
1. The change in the cash realizable value from the balance at
12/31/20X7 to 12/31/20X8 was a
a) $50,000 increase
b) $59,000 increase Allowance for Doubtful Accounts
c) $42,000 increase 45,000 Bal.
d) $51,000 increase A/Receivable 8,000
17,000 Bad Debts
2. Bad debts expense for 20X8 is
a) $17,000; b) $9,000; c) $54,000; d) $1,000. 54,000
 Prepared by: Saira Rizwan for LUMS Undergraduate Course- ACCT100

Course Book: P8-4B:

The following represents selected information taken from a company’s aging schedule to estimate uncollectible
accounts receivable at year-end.

Part b)
Bad Debt Expense 8,240
Allowance for D. Accounts 8,240
9,840 2,200 2,700 2,000 1,440 1,500 (9,840 Cr. – 1,600 Cr.)

a) Calculate the total estimated bad debts based on the given information. Part c)
b) Prepare the adjusting entry to record the bad debts using the allowance Allowance for D. Accounts 1,100
method and the aged uncollectible accounts receivable determined in (a). Accounts Receivable 1,100
Assume the current balance in Allowance for Doubtful Accounts is a
CHF1,600 credit.
c) Of the above accounts, 1,100 is determined to be specifically uncollectible. Part d)
Prepare the journal entry to write off the uncollectible accounts. Accounts Receivable 700
d) The company subsequently collects CHF700 on a specific account that had Allowance for D. Accounts 700
previously been determined to be uncollectible in (c). Prepare the journal
entry(ies) necessary to restore the account and record the cash collection.
Cash 700
Accounts Receivable 700
 Disposing of Accounts Receivables Credit Card Sales
Sale of Receivables – also called ‘factoring’ Credit card sales are considered cash sales.
Q. Assume that Habitat Furniture factors /sells $600,000 of Q. Blinka Retailers accepted €50,000 of Citibank Visa credit card
charges for merchandise sold on July 1. Citibank charges 4% for
receivables to Central Factors Ltd. The factoring company
its credit card use. The entry to record this transaction by
assesses a service charge of 2% of the amount of
Blinka Retailers will include a credit to Sales Revenue of
receivables sold. The journal entry to record the sale by €50,000 and a debit(s) to:
Habitat Furniture would be:
a) Cash €48,000 and Service Charge Expense € 2,000
Cash 588,000 b) Accounts Receivable €48,000 and Service Charge Expense €
Service Charge Expense 12,000 2,000
($600,000 x 2% = $12,000) c) Cash €50,000
Accounts Receivable 600,000 d) Accounts Receivable €50,000

Cash is debited €48,000 for the net amount received (€50,000 −

€2,000 for credit card use fee), and Service Charge Expense is
debited €2,000 for the 4% credit card use fee (€50,000 × 4%).

Prepared by: Saira Rizwan for LUMS Undergraduate Course- ACCT100

 July 5 Accounts Receivable 7,200
Practice Question Sales Revenue 7,200
ABC Ltd. closes its books monthly. On June 30, selected ledger 14 Cash (€1,300 – €39) 1,261
account balances are: Service Charge Expense 39
Notes Receivable €60,000 (€1,300 X 3%)
Interest Receivable 435 Sales Revenue 1,300
Notes Receivable include the following. 14 Accounts Receivable 510
Date Maker Face Value Term Interest Interest Revenue 510
May 16 Fulton Ltd. €12,000 60 days 9% 15 Cash 12,180
May 25 Ascot Co. 30,000 60 days 10% Notes Receivable 12,000
June 30 Trayer Corp. 18,000 6 months 12% Interest Receivable 135
During July, the following transactions were completed. (€12,000 X 9% X 45/360)
July 5 Made sales of €7,200 on ABC Ltd. credit cards. Interest Revenue 45
14 Made sales of €1,300 on Visa credit cards. The (€12,000 X 9% X 15/360)
credit card service charge is 3%.
24 Accounts Rec.—Ascot Co. 30,500
14 Added €510 to ABC Ltd. credit card customer
Notes Receivable 30,000
balances for finance charge on unpaid balances.
15 Received payment in full from Fulton Ltd. on Interest Receivable 300
(€30,000 X 10% X 36/360)
the amount due.
24 Received notice that the Ascot Co. note has Interest Revenue 200
been dishonored. (Assume that Ascot Co. is (€30,000 X 10% X 24/360
expected to pay in the future). 31 Interest Receivable 180
a) Journalize July transactions and the July 31 adjusting entry for (€18,000 X 12% X 1/12)
accrued interest receivable. (assume 360 days in a year) Interest Revenue 180
 Prepared by: Saira Rizwan for LUMS Undergraduate Course- ACCT100

Practice Question | Try It Yourself  Instructions

(b) Enter the balances at July 1 in the receivable
ABC Ltd. closes its books monthly. On June 30, selected
accounts. Post the entries to all of the receivable
ledger account balances are:
accounts.
Notes Receivable €60,000
Interest Receivable 435 Notes Receivable
Notes Receivable include the following.
Jul. 1 60,000 Jul. 15 12,000
Date Maker Face Term Interest 24 30,000
May 16 Fulton Ltd. €12,000 60 days 9%
May 25 Ascot Co. 30,000 60 days 10%
End. Bal. 18,000
June 30 Trayer Corp. 18,000 6 months 12%
Accounts Receivable
During July, the following transactions were completed.
Jul. 5 7,200
July 5 Made sales of €7,200 on ABC Ltd. credit
cards. 14 510
14 Made sales of €1,300 on Visa credit cards. The 24 30,500
credit card service charge is 3%.
14 Added €510 to ABC Ltd. credit card customer End. Bal. 38,210
balances for finance charge on unpaid Interest Receivable
balances. Jul. 1 435 Jul. 15 135
15 Received payment in full from Fulton Ltd. on
24 300
the amount due. (Adj.) 31 180
24 Received notice that the Ascot Co. note has
been dishonored. (Assume that Ascot Co. is
End. Bal. 180
expected to pay in the future.)
 Prepared by: Saira Rizwan for LUMS Undergraduate Course- ACCT100

Practice Question
ABC Ltd. closes its books monthly. On June 30, selected Instructions
ledger account balances are: (c) Show the statement of financial position presentation
Notes Receivable €60,000 of the receivable accounts at July 31
Interest Receivable 435
Notes Receivable include the following.

Date Maker Face Term Interest

May 16 Fulton Ltd. €12,000 60 days 9% Current assets
May 25 Ascot Co. 30,000 60 days 10% Notes receivable €18,000
June 30 Trayer Corp. 18,000 6 months 12%
Accounts receivable 38,210
During July, the following transactions were completed.
July 5 Made sales of €7,200 on ABC Ltd. credit Interest receivable 180
cards. Total receivables €56,390
14 Made sales of €1,300 on Visa credit cards. The
credit card service charge is 3%.
14 Added €510 to ABC Ltd. credit card customer
balances for finance charge on unpaid
balances.
15 Received payment in full from Fulton Ltd. on
the amount due.
24 Received notice that the Ascot Co. note has
been dishonored. (Assume that Ascot Co. is
expected to pay in the future.)
 Prepared by: Saira Rizwan for LUMS Undergraduate Course- ACCT100

Presentation & Analysis

Statement of Financial Position
Receivable Analysis

1) Accounts Receivable Turnover =

Net Sales / Avg. Receivables

 an efficiency ratio that measures how many

times a business can turn its accounts
receivable into cash during a period. OR

 measures how many times a business can

Accounts Receivable, net of €12,000 allowance 188,000 collect its average accounts
receivable during the year
Income Statement
 Report bad debt expense and service charge expense
2) Average Collection period in days =
as selling expenses.
Days in year / Accounts Receivable Turnover
 Report interest revenue under “Other income and
expense.”  Tells the average number of days between 1)
the dates that credit sales were made, and 2)
the dates that the money was received/
collected from the customers.
 Prepared by: Saira Rizwan for LUMS Undergraduate Course- ACCT100

Solution
Practice Question Part a)

At December 31, 2016, GT Corporation reported 1) Accounts Receivable 2,400,000

the following information on its statement of Service Revenue 2,400,000
financial position.

Accounts receivable €220,000 2) Sales Returns & Allowances 45,000

Less: Allowance for doubtful accounts 15,000 Accounts Receivable 45,000
During 2017, the company had the following
transactions related to receivables. 3) Cash 2,250,000
1. Sales on account €2,400,000 Accounts Receivable 2,250,000
2. Sales returns and allowances 45,000
3. Collections of accounts receivable 2,250,000
4. Write-offs of accounts receivable deemed 4) Allowance for doubtful accounts 10,600
uncollectible 10,600
5. Recovery of bad debts previously written off Accounts Receivable 10,600
as uncollectible 2,000
5) Accounts Receivable 2,000
Instructions
(a) Prepare the journal entries to record each of Allowance for doubtful accounts 2,000
these five transactions. Assume that no cash
discounts were taken on the collections of Cash 2,000
accounts receivable.` Accounts Receivable 2,000
 Prepared by: Saira Rizwan for LUMS Undergraduate Course- ACCT100

Practice Question Part b)

At December 31, 2016, GT Imports reported the
Accounts Receivable
following information on its statement of financial
position.
Bal. 220,000 2) 45,000
Accounts receivable €220,000 1) 2,400,000 3) 2,250,000
Less: Allowance for doubtful accounts 15,000
4) 10,600
During 2017, the company had the following 5) 2,000
transactions related to receivables.
1. Sales on account €2,400,000 End. Bal. 314,400
2. Sales returns and allowances 45,000
3. Collections of accounts receivable 2,250,000
4. Write-offs of accounts receivable deemed
uncollectible 10,600 Allowance for Doubtful Accounts
5. Recovery of bad debts previously written off
as uncollectible 2,000 Bal. 15,000
4) 10,600
Instructions 5) 2,000
b) Enter the January 1, 2017, balances in
Accounts Receivable and Allowance for
End. Bal. 6,400
Doubtful Accounts. Post the entries to the two
accounts (use T-accounts), and determine the
balances.
 Prepared by: Saira Rizwan for LUMS Undergraduate Course- ACCT100

Practice Question
At December 31, 2016, GT Imports reported the Part c)
following information on its statement of financial
Allowance for Doubtful Accounts
position.
Un-adj. Bal. 6,400
Accounts receivable €220,000
Less: Allowance for doubtful accounts 15,000 Adj. needed 15,000
During 2017, the company had the following
transactions related to receivables. End. Bal. 21,400
1. Sales on account €2,400,000
2. Sales returns and allowances 45,000
3. Collections of accounts receivable 2,250,000
4. Write-offs of accounts receivable deemed
uncollectible 10,600 The journal entry would therefore be as follows:
5. Recovery of bad debts previously written off Bad Debts 15,000
as uncollectible 2,000
Allowance for doubtful accounts 15,000
Instructions
c) Prepare the journal entry to record bad debt
expense for 2017, assuming that closing balance
of allowance for doubtful accounts is €21,400.
 Prepared by: Saira Rizwan for LUMS Undergraduate Course- ACCT100

Practice Question Try It Yourself 

Part d)
At December 31, 2016, GT Imports reported the
following information on its statement of financial
position. Accounts Receivable Turnover =
Net Sales / Avg. Receivables
Accounts receivable €220,000
Less: Allowance for doubtful accounts 15,000
= (€2,400,000 – €45,000) / [(€220,000 + €314,400) /2]
During 2017, the company had the following
transactions related to receivables. = €2,355,000 / €377,200
1. Sales on account €2,400,000
2. Sales returns and allowances 45,000 = 6.24 x
3. Collections of accounts receivable 2,250,000
4. Write-offs of accounts receivable deemed
uncollectible 10,600 Average Collection period in days =
5. Recovery of bad debts previously written off Days in year / Accounts Receivable Turnover
as uncollectible 2,000
= 365 / 6.24
Instructions
(d) Compute the accounts receivable turnover
and Avg. collection period in days for the year
= 58 days
2017.
Best of luck