Professional Documents
Culture Documents
Technical Knowledge
• To be able to distinguish between trade receivables and nontrade receivables
• To know the classification and presentation of receivables.
• To know the initial and subsequent measurement of accounts receivable.
• To identify the adjustments necessary in determining the net realizable value of
accounts receivable.
• The understand the gross method and net method of recording credit sales.
• To know the accounting for doubtful accounts, worthless accounts written-off
and recoveries of accounts written-off.
• To identify the methods of estimating doubtful accounts expense.
• To determine the doubtful accounts expense and the allowance for doubtful accounts
under aging, percentage of accounts receivable and percentage of sales
method.
• To understand the concept and nature of notes receivable.
• To know the accounting for interest-bearing and noninterest-bearing note receivable.
A. Definition
Receivables are financial assets that represent a contractual right to received cash or another
financial asset from another entity.
For retailers or manufacturers, receivables are classified into trade and nontrade receivables.
Trade receivables refer to claims arising from sale of merchandise or services in the ordinary
course of business. This include accounts receivable and notes receivable.
Nontrade receivables represents claims arising from sources other than sale of merchandise
or services in the ordinary course of business.
Trade and nontrade receivables expected to be realized in cash within the normal operating cycle
or one year, whichever is longer, are classified as current assets, otherwise, classified as
noncurrent assets.
7. Accrued income such as dividend receivable, interest income, rent income, etc.
are usually classified as current assets.
8. Claims receivable such as claims from common carriers for losses or damages, claims
for rebates and tax refund, insurance claims, are normally classifies as current assets.
For short-term receivables, the fair value is equal to the face value or original invoice amount.
For long-term receivables that are interest-bearing, the fair value is equal to the face value.
However, for long-term receivables that are non-interest bearing, the fair value is equal to the
present value of all future cash flows discounted using the prevailing market rate of interest for
similar receivables. Thus, long-term interest bearing notes receivable shall be measured at face
value and long-term noninterest bearing notes receivable shall be measured at present value.
The initial amount recognized for accounts receivable shall be reduced by adjustments which in
the ordinary course of business will reduce the amount recoverable from the customer.
This is based on the established basic principle that "assets shall not be carried at above their
recoverable amount".
Accordingly, in estimating the net realizable value of trade accounts receivable, the following
deductions are made:
The term FOB shipping point means that the ownership of the goods purchased is vested in the
buyer upon shipment thereof. Thus the buyer pay for the freight or transportation charge from
the point of shipment to the point of destination.
The term "freight collect" means that the freight charge on the goods shipped is not yet paid. Thus
the common carrier shall collect the same from the buyer. Thus, under this, the freight charge is
actually paid by the buyer.
The term "freight prepaid" means that the freight charge on the goods shipped is already paid by
the seller.
Sometimes, the goods are sold "FOB destination" but shipped "freight collect" with the
understanding that the buyer will pay for the freight charge and deduct the same when the
remittance is made by him.
Example:
An entity has a $100,000 accounts receivable at the end of accounting period. The terms are
are 2/10, n/30, FOB destination and freight collect. The customer paid freight charged of $5,000.
Cash 93,000
Sales discount 2,000
Allowance for freight charge 5,000
Accounts receivable
For example, an amount of $50,000 of the total accounts receivable at year-end represents selling
price of goods that will probably be returned. The journal entry to recognized the probable return is:
H. Sales Discount
Entities usually offer cash discounts to credit customers. A cash discount is a reduction from an
invoice price by reason of prompt payment.
A cash discount is known as sales discount on the part of the seller and purchase discount on the
part of the buyer. A cash discount may be expressed as 5/10, n/30. This means that the customer
is entitled to a 5% discount if payment made in 10 days from the invoice date, and no discount
if fails to pay but the invoice must be paid within 30 days from period of invoice.
Cash 95,000
Sales discount 5,000
Accounts receivable
Cash 100,000
Accounts receivable
Cash 95,000
Accounts receivable
Cash 100,000
Accounts receivable
Sales discount forfeited
For example, of the accounts receivable of $1,000,000 at the end of the period, it is reliably
estimated that discounts to be taken will amount to $50,000.
Note: The adjustment may be reversed at the beginning of the next period in order that discounts
can then be charged normally to sales discount account.
Allowance Method
The allowance method requires recognition of a bad debt loss if the accounts are doubtful for
collection. The journal entry to recognize the doubtful accounts is:
Doubtful accounts xx
Allowance for doubtful accounts
If the doubtful accounts are subsequently found to be worthless or uncollectible, the accounts are
written off as follows:
Accounts receivable xx
Allowance for doubtful accounts
Cash xx
Accounts receivable
No entry is necessary
Cash 30,000
Accounts receivable
L. Methods of Estimating Doubtful Accounts
Illustration:
The following data are summarized in aging the accounts receivable at the end of
the period:
Experience
Balance rate
The allowance for doubtful account ahs a credit balance of $10,000 before adjustment,
therefore the doubtful accounts expense is determined as follows:
Required allowance
Less: Allowance balance before adjustment
Doubtful accounts expense
The balance of accounts receivable is $2,000,000 and the credit balance in the
allowance for doubtful accounts is $10,000. Doubtful accounts are estimated at 3%
of accounts receivable.
Adjusting entry:
Doubtful accounts 50,000
Allowance for doubtful accounts
3. Percent of sales
The amount of sales for the year is multiplied by a certain rate to get the doubtful
accounts expense. The rate maybe applied on credit sales or total sales.
It is estimated that doubtful accounts is 1% of net sales, therefore the entry is:
Doubtful accounts xx
Allowance for doubtful accounts
When the allowance is excessive, there is a corollary problem when the discrepancy is more
than the debit balance in the doubtful accounts expense.
Illustration
Adjustment:
Therefore, on December 31, before adjustment, the allowance for doubtful accounts
balance is debit, $20,000.
If on December 31, the required allowance is $40,000 the adjustment should be:
Required allowance
Debit balance of allowance
Doubtful accounts expense
O. Notes Receivable
Notes receivable are claims supported by formal promises to pay usually in the form of notes.
Simply stated, a promissory note is a written contract in which the one person, known as the
maker, promises to pay another person, known as the payee a definite sum of money.
P. Dishonored Notes
When a promissory note matures and is not paid, it is dais to be dishonored:
Accounts receivable xx
Notes receivable
Interest income
Interest bearing long-term notes are measured at face value which is actually the present value
upon issuance.
Noninterest-bearing long-term notes are measured at present value which is the discounted value
of the future cash flows using effective interest rate.
Subsequent to the initial recognition, long-term notes receivable shall be measured at amortized
cost using the effective interest method.
The amortized cost is the amount at which the note receivable is measured initially:
An entity owned a tract of land costing $800,000 and sold the land for $1,000,000. The entity
received a 3-year note for $1,000,000 plus interest of 12% compounded annually.
Note: The selling price of $1,000,000 is reasonably assumed to be the present value of
the note because the note is interest bearing.
Face value
Interest (first year)
Total
Rate
Interest (second year)
Cash 1,404,928
Notes receivable
Accrued interest receivable
Interest income
Face value
Interest accrued
First year 120,000
Second year 134,400
Total
Interest third year (1,254,400 x 12%)
Cash received
An entity manufactures and sell machinery. On January 1, 2017, the entity sold
machinery costing $280,000 for $400,000.
The buyer signed a noninterest bearing note for $400,000, payable in four equal
installments every December 31. The cash sale price of the machinery is $350,000.
Cash 100,000
Notes receivable
Note
Year receivable Fraction
On January 1, 2017, an entity sold an equipment with a cost of $250,000 for $400,000.
The buyer paid a down payment of $100,000 and signed a noninterest bearing note for
$300,000 payable in equal annual installment of $100,000 every December 31.
The prevailing interest rate for a note of this type is 10%. The present value of an
annuity of 1 for three periods at 10% is 2.4869.
Computation:
Cash 100,000
Notes receivable 300,000
Equipment
Gain on sale of equipment
Unearned interest income
Cash 100,000
Note receivable
Annual Interest
Date Collection Income Principal
Jan. 1, 2017
Dec. 31, 2017 100000 24,869 75,131
Dec. 31, 2018 100000 17,356 82,644
Dec. 31, 2019 100000 9,085 90,915
On January 1, 2017, an entity sold equipment costing $600,000 with accumulated depreciation
of $250,000. The entity received consideration of $100,000 cash and a $400,000 noninterest
bearing note due on January 1, 2020.
The prevailing rate of interest for a note of this type is 10%. The present value of 1 at 10% for 3
years is 0.7513.
Face of note
Present value of note (400,000 x 0.7513)
Unearned interest income
PV of note
Cash received
Sales price
Carrying amount f equipment (600,000-250,000)
Gain on sale
Interest Unearned
Date Income Interest
able value of
written-off
r doubtful accounts
ntage of sales
ng note receivable.
sh or another
receivables.
n the ordinary
merchandise
al operating cycle
mployees. If
damages, claims
s current assets.
rom overpayment,
alances are
er customers'
unts receivable
r value of the
oice amount.
ace value.
equal to the
of interest for
easured at face
resent value.
mount. However,
, meaning the
ments which in
at above their
he following
is vested in the
charge from
already paid by
he terms are
arged of $5,000.
100,000
5,000
100,000
t some customers
tion in the amount
represents selling
e probable return is:
50,000
duction from an
e discount on the
that the customer
nd no discount
100,000
100,000
100,000
95,000
100,000
95,000
5,000
estimates for
nce shall be made.
t is reliably
50,000
r that discounts
e doubtful for
xx
xx
xx
xx
30,000
30,000
30,000
t the end of
Required
allowance
5,000
6,000
8,000
7,000
5,000
9,000
10,000
50,000
fore adjustment,
50,000
10,000
40,000
40,000
imated at 3%
60,000
10,000
50,000
50,000
he doubtful
50,000
in the income
xx
xx
ancy is more
30,000
20,000
20,000
10,000
30,000
50,000
50,000
btful accounts
60,000
40,000
20,000
60,000
orm of notes.
n to another,
re time a sum
nown as the
xx
xx
present value
e present value
discounted value
ed at amortized
800,000
200,000
120,000
134,400
1,000,000
120,000
1,120,000
12%
134,400
1,000,000
254,400
150,528
1,000,000
254,400
1,254,400
150,528
1,404,928
y is $350,000.
400,000
350,000
50,000
350,000
280,000
70,000
350,000
50,000
1,000,000
20,000
Interest
Income
20,000
15,000
10,000
5,000
50,000
00 for $400,000.
value of an
300,000
248,690
51,310
248,690
100,000
348,690
250,000
98,690
250,000
98,690
51,310
100,000
24,869
Present
value
248,690
173,559
90,915
0
ccumulated depreciation
a $400,000 noninterest
300,520
100,000
400,520
350,000
50,520
600,000
50,520
99,480
30,052
Present
Value
300,520
330,572
363,629
400,000
33,057
36,371
400,000
7 LEARNING CHECK
1. Define receivables.
financial assets that represent a contractual right to received cash or another
2. Explain the classification and presentation of receivables in the statement
of financial position.
Accounts receivable = current assets
Notes receivable = current assets if collectible within 1 year
receivable collected in 1 year = current assets
Advances to affiliates = long term investment
Advances to supplier = current assets
Subscription receivable = current assets if collectible within 1 year
Creditors' accounts with debit balances = current assets
Special deposit on contract = noncurrent assets
Accrued income = current assets
Claims receivable = current assets
4. Give the proforma entry under the allowance method for each of the following:
a. Doubtful accounts
Doubtful accounts xx
Allowance for doubtful accounts
b. Accounts receivable proved to be worthless
Allowance for doubtful accounts xx
Accounts receivable
c. Recovery of accounts previously written-off
Step 1 : Recharge the customer's account
Accounts receivable xx
Allowance for doubtful accounts
Step 2: Record the collection
Cash xx
Accounts receivable
4 Give the proforma entry under the direct-write off method for each of the
following:
a. Doubtful accounts
No journal
b. Accounts receivable proved to be worthless
Bad debts XX
Accounts receivable
c. Recovery of accounts previously written-off
Accounts receivable XX
Bad debts
Cash XX
Accounts receivable
5 Explain the presentation of doubtful accounts in the income statement.
Where the allowance is inadequate or excessive, the correction is to be reported in the incom
6 What are the three methods of estimating doubtful accounts?
Aging of receivable or statement of financial position approach
Percent of accounts receivable
Percent of sales
7 When is an account past due?
Depend of the aggrement
8 What does a debit balance in the allowance for doubtful accounts indicate?
Uncollectible receivable
9 Define notes receivable.
claims supported by formal promises to pay usually in the form of notes.
10 What is a negotiable promissory note?
unconditional promise in writing by one person to another,
11 Explain the treatment of dishonored notes receivable.
causing the creditor to write off the recorded revenue as bad debt
12 What is the meaning of "present value" of notes receivable.
is the sum of all future cash flows discounted sing the prevailing market rate of interest for
similar notes
uncollectible accounts at the end of the year
xx
xx
xx
xx
XX
XX
XX
be reported in the income statement either as an addition to or subtraction from doubtful accounts expense.
2. Nontrade receivables are classified as current assets only if they are reasonably
expected to be realized in cash
a. Advances to supplier
b. Advances to affiliates
c. Advances to employees
d. Dividend receivable
a. Face value.
b. Discounted value.
c. Maturity value.
d. Net realizable value.
5. Which method of recording bad debts loss is consistent with accrual accounting?
a. Allowance method
b. Direct write off method
c. Percent of sales method
d. Percent of accounts receivable method
6. The advantage of relating company's bad debt experience to its accounts receivable
is that this approach
8. When allowance method of recognizing bad debts expense is used, the entries at
the time of collection of an account previously written off would
a. When added to the total accounts written off during the year is the desired
credit balance of the allowance for doubtful accounts at year-end.
b. Is the amount of doubtful accounts expense for the year.
c. Is the amount that should be added to the beginning allowance for doubtful
accounts to get the doubtful accounts expense for the year.
d. Is the amount of desired credit balance of the allowance for doubtful accounts
to be reported at year-end.
a. Current assets.
b. Noncurrent assets.
c. Either as current or noncurrent depending on the expectation of realizing them
within one year or over one year.
d. Partly current and partly noncurrent.
Problem 7-2
On December 31, 2018, the "Receivables" account of Kim Company shows a debit balance of
$2,000,000. The allowance for doubtful accounts shows a credit balance of $50,000.
Subsidiary details show the following:
Required:
a. Prepare one compound entry to reclassify the receivables account.
b. Compute the amount to be presented as "trade and other receivables" under current
assets.
c. Indicate the classification and presentation of the other items excluded from "trade
and other receivables".
Problem 7-3
The following data were taken from the records of Inter Company for the year ended
December 31, 2018:
Required:
Prepare the appropriate adjusting entry to provide for doubtful accounts under each of the
following independent assumptions:
a. Main Company experience indicates that 75% of all sales are credit sales and that an
average 2% of credit sales may prove uncollectible.
b. One percent of gross sales may prove uncollectible.
c. An analysis of the aging of trade receivables indicates that accounts receivable in the
amount of $80,000 may prove uncollectible.
d. The company policy is to maintain an allowance for doubtful accounts equal to 10% of the
outstanding accounts receivable.
Problem 7-5
On January 1, 2018, Lambert Company showed the following balances:
Required:
a. Prepare all indicated entries pertaining to accounts receivable.
b. Prepare the adjustment for doubtful accounts on December 31, 2018 if the company uses
the percentage of accounts receivable method?
c. What is the net realizable value of accounts receivable on December 31, 2018?
Problem 7-6
The balances of selected accounts taken from the January 1, 2018 statement of financial
position of Ness Company were as follows:
The following summary transactions affecting accounts receivable occurred during the
current year:
Required:
Determine the balance of accounts receivable on December 31, 2018.
Problem 7-7
Moore Company reported the following account balances on January 1, 2018:
Accounts receivable $ 1,500,000
Allowance for doubtful accounts 90,000
During 2018, Moore Company recorded credit sales of $9,000,000 and interim provision for
doubtful accounts at 2% of credit sales. Accounts of $100,000 were written off during the year
but accounts of $20,000 were subsequently recovered.
The balance of accounts receivable on December 31, 2018 amounted to $2,000,000 and aged as
follows:
Estimated
Classification Balance Uncollectible
Based on the review of collectability of the account balances, additional receivables of $40,000
under the classification "more than one year" are to be written off on December 31, 2018.
Required:
1. Required allowance for doubtful accounts on December 31, 2018.
2. Doubtful accounts expense for 2018.
3. Adjusting entry to correct the recorded doubtful accounts.
4. Net realizable value on December 31, 2018.
Problem 7-8
Gaze Company sells directly to customers. On January 1, 2018, the balance of accounts
receivable was $250,000 while allowance for doubtful accounts was a credit of $20,000. The
following data are available since 2005:
Required:
1. What is the percentage to be used in computing the allowance for doubtful accounts 2%
on December 31, 2018?
2. How much is the provision for doubtful accounts for 2018? 60,000
3. What is the ledger balance of accounts receivable on December 31, 2018? 325,000
4. What is the ledger balance of the allowance for doubtful accounts after necessary doubtfull account ex
adjustments on December 31, 2018? Allowance for
Problem 7-9
From inception of operations in 2014, Suisse Company carried no allowance for doubtful
accounts. Uncollectible receivables were expensed as written-off and recoveries were
credited to income as collected. On March 1, 2018 after the 2017 financial statements were
issued, management recognized that Suisse company's accounting policy with respect to
doubtful accounts was not correct, and determined that an allowance for doubtful accounts
was necessary. A policy was established to maintain an allowance for doubtful accounts
based on historical bad debts loss percentage applied to year-end accounts receivable. The
historical bad debts loss percentage is to be recomputed each year based on all available
past years up to maximum of five years. Information for five years is as follow:
Accounts
Year Credit Sales Written-off Recoveries
Account receivable balances were $1,250,000 and $2,000,000 at December 31, 2017 and
December 31, 2018 respectively.
3. Net realizable va
ar 31 december
allowance for doubtf
Net realizable value
775,000 B Trade accounts receivable 775,000 CA
100,000 total return and advance (50,000) CL
300,000 725,000 CA-CL
Trade notes receivable 100,000
(30,000) Installment receivable, normally due 1 to 2 300,000
150,000 Advance payments for purchase of merchan 150,000
Claim from insurance company 15,000
(20,000) Subscriptions receivable due in 60 days 300,000
400,000 Accrued interest receivable 10,000
15,000 Trade and other receivables 1,600,000
300,000
10,000 c advance to subsidiary or noncurrent assets are open assets are classified as long term investme
###
150,000
$ 200,000
1. What is the percentage to be used in computing the allowance for doubtful accounts
credit sales
2018 3,000,000 $ 40,000 5,000 35,000 1% 60,000
1,076,000
1,174,000
1,474,000
2,965,000
ccount expense 60,000
nce for doubtful accounts $ 60,000
1. Journal entry to set up the allowance for doubtful accounts as of January 1, 2018.
60,000
20,000
40,000
1,500,000
60,000
1,440,000