Lesson 3 - Cash Receivables CH 07

CHAPTER 7
Cash and Receivables

LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Indicate how to report cash 4. Explain accounting issues
and related items. related to recognition and
valuation of notes receivable.
2. Define receivables and
explain accounting issues 5. Explain additional accounting
related to their recognition. issues related to accounts and
notes receivables.
3. Explain accounting issues
related to valuation of
accounts receivable.
7-1
Cash
Cash
 Most liquid asset.
 Standard medium of exchange.
 Basis for measuring and accounting for all other items.
 Current asset.
 Examples: Coin, currency, available funds on deposit at

the bank, money orders, certified checks, cashier’s checks,
personal checks, bank drafts and savings accounts.
7-2 LO 1
Cash
Reporting Cash
Cash Equivalents
Short-term, highly liquid investments that are both
a) readily convertible to cash, and

b) so near their maturity that they present insignificant
risk of changes in value.
Examples: Government bonds, commercial paper, and

money market funds
7-3 LO 1
Reporting Cash
Restricted Cash
Companies segregate restricted cash from “regular” cash.
Examples, restricted for:

(1) plant expansion, (2) retirement of long-term debt, and
(3) compensating balances.
7-4 LO 1
Reporting Cash
Restricted Cash
Restricted cash - Petty cash, payroll, and dividend funds are examples of
cash set aside for a particular purpose. In most situations, these fund balances
are not material. Therefore, companies do not segregate them from cash in the
financial statements. When material in amount, companies segregate restricted
cash from “regular” cash for reporting purposes.
Compensating balances - that portion of any demand deposit

maintained by a company which constitutes support for existing borrowing
arrangements of the company with a lending institution
7-5 LO 1
Reporting Cash
Bank Overdrafts
Company writes a check for more than the amount in its
cash account.
 Generally reported as a current liability.
 Included as a component of cash if such overdrafts are

repayable on demand and are an integral part of a
company’s cash management (such as the common
practice of establishing off setting arrangements against
other accounts at the same bank).
7-6 LO 1
ILLUSTRATION 7.2
Classification of Cash-Related Items
7-7 LO 1
Define Receivables and explain Accounting
Issues Related To Their Recognition
Receivables - Claims held against customers and

others for money, goods, or services.
Oral promises of the Written promises to pay a

purchaser to pay for goods certain sum of money on a
and services sold. specified future date.
Accounts Notes
Receivable Receivable
7-8 LO 2
Receivables
Non-Trade Receivables
1. Advances to officers and employees.
2. Advances to subsidiaries.
3. Deposits paid to cover potential damages or losses.
4. Deposits paid as a guarantee of performance or payment.
5. Dividends and interest receivable.
6. Claims against: Insurance companies for casualties sustained;

defendants under suit; governmental bodies for tax refunds;
common carriers for damaged or lost goods; creditors for returned,
damaged, or lost goods; customers for returnable items (crates,
containers, etc.).
7-9 LO 2
Receivables
ILLUSTRATION 7.3
Receivables Statement of Financial
Position Sheet Presentations
7-10 LO 2
Recognition of Accounts Receivables
 Accounts receivable generally arise as part of a

revenue arrangement.
 The revenue recognition principle indicates that a

company should recognize revenue when it satisfies
its performance obligation by transferring the good or
service to the customer.
7-11 LO 2
Lululemon Athletica, Inc. (CAN) sells a yoga outfit to

Jennifer Burian for $100 on account, the yoga outfit is
transferred when Jennifer obtains control of this outfit.
When this change in control occurs, Lululemon should
recognize an account receivable and sales revenue.
Lululemon makes the following entry:
Accounts Receivable 100

Sales Revenue 100
7-12 LO 2
Some key indicators that Lululemon has transferred and

that Jennifer has obtained control of the yoga outfit.
1. Lululemon has the right to payment from the customer.
2. Lululemon has passed legal title to the customer.
3. Lululemon has transferred physical possession of the

goods.
4. Lululemon no longer has significant risks and rewards of

ownership of the goods.
5. Jennifer has accepted the asset.
7-13 LO 2
Receivables
Measurement of the Transaction Price

The transaction price is the amount of consideration that a
company expects to receive from a customer in exchange
for transferring goods or services.
Variable Consideration
In some cases, the price of a good or service is dependent
on future events. These future events often include such
items as discounts, returns and allowances, rebates, and
performance bonuses.
7-14 LO 2
Trade Discounts
Use to:
 Avoid frequent changes in 10 %
catalogs. Discount for
new Retail
 Alter prices for different
Store
quantities purchased.
Customers
 Hide the true invoice price
from competitors.
7-15 LO 2
Cash Discounts (Sales Discounts)

 Offered to induce prompt
payment.
 Terms such as 2/10,

n/30, 2/10, E.O.M., or net
Payment
30, E.O.M. terms are
 Gross Method vs. Net 2/10, n/30
Method.
7-16 LO 2
Cash Discounts (Sales Discounts)
ILLUSTRATION 7.5
Entries under Gross and Net Methods
7-17 LO 2
Sales Returns and Allowances

 Sales Returns and Allowances is a contra revenue
account to Sales Revenue.
 Allowance for Sales Returns and Allowances is a contra

asset account to Accounts Receivable.
 The use of both Sales Returns and Allowances, and

Allowance for Sales Return and Allowances accounts is
helpful to identify potential problems associated with
inferior merchandise, inefficiencies in filling orders, or
delivery or shipment mistakes.
7-18 LO 2
On January 4, 2019, Max sells $5,000 of hurricane glass to Oliver

on account. Max records the sale on account as follows.
Accounts Receivable 5,000

Sales Revenue 5,000
7-19 LO 2
On January 16, 2019, Max grants an allowance of $300 to Oliver

because some of the hurricane glass is defective. The entry to
record this transaction is as follows.
Sales Returns and Allowances 300

7-20 LO 2
On January 31, 2019, before preparing financial statements, Max

estimates that an additional $100 in sales returns and allowances
will result from the sale to Oliver on January 4, 2019. An adjusting
entry to record this additional allowance is as follows.
Sales Returns and Allowances 100

Allowance for Sales Returns and Allowances 100
7-21 LO 2
Time Value of Money

 Theoretically, any revenue after the period of sale is interest
revenue.
 Companies ignore interest revenue related to accounts

receivable because the amount of the discount is not
usually material in relation to the net income for the period.
 The profession specifically excludes from present value

considerations “receivables arising from transactions with
customers in the normal course of business which are due
in customary trade terms not exceeding approximately one
year.”
7-22 LO 2
Accounts Receivable
How are these accounts presented on the Statement of

Financial Position?
Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
End. 500 25 End.
7-23 LO 2
Accounts Receivable
Brown Furniture
Statement of Financial Position (partial)
Current Assets:
Cash $ 330
Accounts receivable 500
Less: Allowance for doubtful accounts (25) 475
Inventory 812
Prepaid expense 40
Total current assets 1,657
7-24 LO 2
Accounts Receivable
Alternate
Brown Furniture Presentation
Current Assets:
Cash $ 330
Accounts receivable, net of $25 allowance 475
Inventory 812
Prepaid expense 40
7-25 LO 2
Accounts Receivable
Journal entry for credit sale of $100?
Sales Revenue 100
Allowance for
Beg. 500 25 Beg.
End. 500 25 End.
7-26 LO 2
Accounts Receivable
Journal entry for credit sale of $100?
Sales Revenue 100
Allowance for
Beg. 500 25 Beg.
Sale 100
End. 600 25 End.
7-27 LO 2
Accounts Receivable
Collected $333 on account?
Cash 333
Allowance for
Beg. 500 25 Beg.
Sale 100
End. 600 25 End.
7-28 LO 2
Accounts Receivable
Collected $333 on account?
Cash 333
Allowance for
Beg. 500 25 Beg.
Sale 100 333 Coll.
End. 267 25 End.
7-29 LO 2
Accounts Receivable
Adjustment of $15 for estimated bad debts?
Bad Debt Expense 15
Allowance for Doubtful Accounts 15
Allowance for
Beg. 500 25 Beg.
Sale 100 333 Coll.
End. 267 25 End.
7-30 LO 2
Accounts Receivable
Adjustment of $15 for estimated bad debts?
Bad Debt Expense 15
Allowance for Doubtful Accounts 15
Allowance for
Beg. 500 25 Beg.
Sale 100 333 Coll. 15 Est.
End. 267 40 End.
7-31 LO 2
Accounts Receivable
Write-off of uncollectible accounts for $10?
Allowance for Doubtful accounts 10
Allowance for
Beg. 500 25 Beg.
End. 267 40 End.
7-32 LO 2
Accounts Receivable
Write-off of uncollectible accounts for $10?
Allowance for Doubtful accounts 10
Allowance for
Beg. 500 25 Beg.
10 W/O W/O 10
End. 257 30 End.
7-33 LO 2
Accounts Receivable
Brown Furniture
Current Assets:
Cash $ 330
Accounts receivable, net of $30 allowance 227
Inventory 812
Prepaid expense 40
7-34 LO 2
Valuation of
Accounts Receivable
Uncollectible Accounts Receivable

 Record credit losses as debits to Bad Debt Expense (or
Uncollectible Accounts Expense).
 Normal and necessary risk of doing business on credit.
 Two methods to account for uncollectible accounts:

1) Direct write-off method
2) Allowance method
7-35 LO 3
Valuation of Accounts Receivable
Methods of Accounting for Uncollectible Accounts
Direct Write-Off Method Allowance Method

Theoretically deficient: Losses are estimated:
 Fails to record expenses as  Percentage-of-sales.
incurred.  Percentage-of-receivables.
 Receivable not stated at  IFRS requires when bad
cash realizable value. debts are material in
 Not appropriate when amount.
amount uncollectible is
material.
7-36 LO 3
Direct Write-Off Method for Uncollectible Accounts

When a company determines a particular account to be
uncollectible, it charges the loss to Bad Debt Expense.
Assume, for example, that on December 10 Cruz Ltd. writes off
as uncollectible Yusado’s NT$8,000,000 balance. The entry is:
Bad Debt Expense 8,000,000

Accounts Receivable (Yusado) 8,000,000
7-37 LO 3
Allowance Method for Uncollectible Accounts

 Involves estimating uncollectible accounts at the end
of each period.
 Ensures that companies state receivables on the
statement of financial position at their cash realizable
value.
 Companies estimate uncollectible accounts and cash
realizable value using information about past and
current events as well as forecasts of future
collectibility.
7-38 LO 3
Recording Estimated Uncollectibles

Illustration: Assume that Brown Furniture in 2019, its first year
of operations, has credit sales of £1,800,000. Of this amount,
£150,000 remains uncollected at December 31. The credit
manager estimates that £10,000 of these sales will be
uncollectible. The adjusting entry to record the estimated
uncollectibles (assuming a zero balance in the allowance
account) is:
Bad Debt Expense 10,000

Allowance for Doubtful Accounts 10,000
7-39 LO 3
Recording Estimated Uncollectibles
ILLUSTRATION 7.5
Presentation of Allowance for Doubtful Accounts
The amount of £140,000 represents the cash realizable value of

the accounts receivable at the statement date.
7-40 LO 3
Recording the Write-Off of an Uncollectible

Account
 When companies have exhausted all means of
collecting a past-due account and collection appears
impossible, the company should write off the account.
 In the credit card industry, for example, it is standard
practice to write off accounts that are 210 days past
due.
7-41 LO 3
Write-Off of an Uncollectible Account
Illustration: The financial vice president of Brown Furniture

authorizes a write-off of the £1,000 balance owed by Randall plc on
March 1. The entry to record the write-off is:

Assume that on July 1, Randall plc pays the £1,000 amount that
Brown had written off on March 1. These are the entries:
Cash 1,000
7-42 LO 3
Estimating the Allowance

Percentage-of-Receivables Approach
 Reports estimate of receivables at cash realizable value.
Companies may apply this method using

 one composite rate, or
 an aging schedule using different rates.
7-43 LO 3
Estimating the Allowance using Aging
Schedule
7-44 LO 3
What entry
would Wilson
make assuming
that the
allowance
account had a
zero balance?

7-45 LO 3
What entry
would Wilson
make assuming
the allowance
account had a
credit balance
of €800 before
adjustment?
Bad Debt Expense (€26,610 – €800) 25,810

7-46 LO 3
Example : Estimating the Allowance
Illustration: Duncan SA reports the following financial information

before adjustments.
Instructions: Prepare the journal entry to record Bad Debt

Expense assuming Duncan Company estimates bad debts at
(a) 5% of accounts receivable and (b) 5% of accounts
receivable but Allowance for Doubtful Accounts had a $1,500
debit balance.
7-47 LO 3
before adjustments.
Instructions: Prepare the journal entry to record Bad Debt

Expense assuming Duncan Company estimates bad debts at
(a) 5% of accounts receivable.
€100,000 x 5% = €5,000 - €2,000 = €3,000
7-48 LO 3
before adjustments.
Instructions: Prepare the journal entry to record Bad Debt Expense

assuming Duncan Company estimates bad debts at (b) 5% of
accounts receivable but the Allowance had a $1,500 debit balance.
€100,000 x 5% = €5,000 + €1,500 = €6,500
7-49 LO 3
Explain accounting issues related to recognition
and valuation of notes receivable.
Notes Receivable
Supported by a formal promissory note.
 Written promise to pay a certain sum of money at a
specific future date.
 A negotiable instrument.
 Maker signs in favor of a Payee.
 Interest-bearing (has a stated rate of interest) OR
 Zero-interest-bearing (interest included in face

amount).
7-50 LO 4
Notes Receivable
Generally originate from:

 Customers who need to extend payment period of an
outstanding receivable.
 High-risk or new customers.
 Loans to employees and subsidiaries.
 Sales of property, plant, and equipment.
 Lending transactions (the majority of notes).
7-51 LO 4
Recognition of Notes Receivable
Short-Term Long-Term
Record at
Record at
Present Value
Face Value,
of cash expected
less allowance
to be collected
Interest Rates Note Issued at

Stated rate = Market rate Face Value
Stated rate > Market rate Premium
Stated rate < Market rate Discount
7-52 LO 4
Note Issued at Face Value
Illustration: Bigelow SA lends Scandinavian Imports €10,000 in

exchange for a €10,000, three-year note bearing interest at 10
percent annually. The market rate of interest for a note of similar
risk is also 10 percent. How does Bigelow record the receipt of
the note?
i = 10%
€10,000 Principal
PV-OA €1,000 €1,000 €1,000 Interest
0 1 2 3 4
n=3
ILLUSTRATION 7.7
Time Diagram for Note Issued at Face Value
7-53 LO 4
TABLE 6.4 PRESENT VALUE OF AN ORDINARY ANNUITY OF 1
PV of Interest
€1,000 x 2.48685 = €2,487

Interest Received Factor Present Value
7-54 LO 4
TABLE 6.2 PRESENT VALUE OF 1
PV of Principal
€10,000 x .75132 = €7,513

Principal Factor Present Value
7-55 LO 4
Summary Present value of interest € 2,487

Present value of principal 7,513
Note current market value €10,000
Journal Entries
Jan. yr. 1 Notes Receivable 10,000

Cash 10,000
Dec. yr. 1 Cash 1,000

Interest Revenue 1,000
7-56 LO 4
Zero-Interest-Bearing Notes
Illustration: Jeremiah Company receives a three-year, $10,000

zero-interest-bearing note. The market rate of interest for a note
of similar risk is 9 percent. How does Jeremiah record the
receipt of the note?
i = 9%
$10,000 Principal
PV-0A $0 $0 $0 Interest
0 1 2 3 4
n=3
ILLUSTRATION 7.9
Time Diagram for Zero-
Interest-Bearing Note
7-57 LO 4
PV of Principal
$10,000 x .77218 = $7,721.80

7-58 LO 4
ILLUSTRATION 7.10
Discount Amortization Schedule—
Effective-Interest Method
7-59 LO 4
Prepare the journal entry to record the receipt of the note.
Notes Receivable 7,721.80

Cash 7,721.80
7-60 LO 4
Record interest revenue at the end of the first year.
Notes Receivable 694.96

Interest Revenue ($7,721.80 x 9%) 694.96
7-61 LO 4
Interest-Bearing Notes
Illustration: Morgan Group makes a loan to Marie Co. and

receives in exchange a three-year, €10,000 note bearing interest
at 10 percent annually. The market rate of interest for a note of
similar risk is 12 percent. Prepare the journal entry to record the
receipt of the note?
i = 12%
€10,000 Principal
PV-0A €1,000 €1,000 €1,000 Interest
0 1 2 3 4
n=3
7-62 LO 4
TABLE 6.4 PRESENT VALUE OF AN ORDINARY ANNUITY OF 1
PV of Interest
€1,000 x 2.40183 = €2,402

Interest Received Factor Present Value
7-63 LO 4
PV of Principal
€10,000 x .71178 = €7,118

7-64 LO 4
Illustration: Record the receipt of the note?
Notes Receivable 9,520

Cash 9,520
7-65 LO 4
ILLUSTRATION 7.13
Discount Amortization Schedule—
Effective-Interest Method
7-66 LO 4
Record interest revenue at the end of the first year.
Cash 1,000
Notes Receivable 142
Interest Revenue 1,142
7-67 LO 4
Other Issues Related
to Receivables
Derecognition of Receivables
1. When the receivable no longer has any value; that is,
the contractual rights to the cash flows of the
receivable no longer exist.
2. When a company transfers (e.g., sells) a receivable to
another company, thereby transferring the risks and
rewards of ownership to this other company.
7-68 LO 5
Transfer of Receivables
Various reasons for transfer of receivables to another party
 Accelerate the receipt of cash.
 Competition.
 Sell receivables because money is tight.
 Billing / collection are time-consuming and costly.
Transfer of receivables for cash happens in two ways:
1. Sales of receivables.
2. Secured borrowing.
7-69 LO 5
Sales of Receivables
ILLUSTRATION 7.14
Basic Procedures in Factoring
Factors are finance companies or banks that buy receivables

from businesses for a fee.
7-70 LO 5
Sale without Guarantee

 Purchaser assumes risk of collection and absorbs any
credit losses.
 Transfer is outright sale of receivable.
 Seller records loss on sale.
 Seller uses a Due from Factor (receivable) account to

cover probable sales discounts, sales returns, and
sales allowances.
7-71 LO 5
Sale without Guarantee
Crest Textiles factors €500,000 of accounts receivable with

Commercial Factors on a non-guarantee basis. Commercial Factors
assesses a finance charge of 3 percent of the amount of accounts
receivable and retains an amount equal to 5 percent of the accounts
receivable (for probable adjustments). Crest Textiles and Commercial
Factors make the following journal entries for the receivables
transferred without guarantee.
7-72 LO 5
Sale with Guarantee

 Seller guarantees payment to purchaser.
 Transfer is considered a borrowing—sometimes referred

to as a failed sale.
Assume Crest Textiles sold the receivables on a

with guarantee basis.
7-73 LO 5
Secured Borrowing
Using receivables as collateral in a borrowing transaction.
On March 1, 2019, Meng Mills assigns $700,000 of its accounts

receivable to Sino Bank as collateral for a $500,000 note. Meng
Mills continues to collect the accounts receivable; the account
debtors are not notified of the arrangement. Sino Bank assesses a
finance charge of 1 percent of the accounts receivable and interest
on the note of 12 percent. Meng Mills makes monthly payments to
the bank for all cash it collects on the receivables.
7-74 LO 5
7-75
Secured Borrowing
Illustration: On April 1, 2019, Prince Company assigns $500,000 of its
accounts receivable to the Hibernia Bank as collateral for a $300,000 loan
due July 1, 2019. The assignment agreement calls for Prince Company to
continue to collect the receivables. Hibernia Bank assesses a finance
charge of 2% of the accounts receivable, and interest on the loan is 10% (a
realistic rate of interest for a note of this type).
Instructions:
a) Prepare the April 1, 2019, journal entry for Prince Company.
b) Prepare the journal entry for Prince’s collection of $350,000 of the
accounts receivable during the period from April 1, 2019, through
June 30, 2019.
c) On July 1, 2019, Prince paid Hibernia all that was due from the loan it
secured on April 1, 2019.
7-76 LO 5
Secured Borrowing
Instructions:
a) Prepare the April 1, 2019, journal entry for Prince Company.
b) Prepare the journal entry for Prince’s collection of $350,000.
c) On July 1, 2019, Prince paid Hibernia all that was due from the loan it
secured on April 1, 2019.
a) Cash 290,000
Finance Charge ($500,000 x 2%) 10,000
Notes Payable 300,000
b) Cash 350,000
c) Notes Payable 300,000

Interest Expense (10% x $300,000 x 3/12) 7,500
Cash 307,500
7-77 LO 5
Summary of Transfers
7-78 LO 5
Presentation and Analysis
General rules in classifying receivables are:
1. Segregate and report carrying amounts of different categories of
receivables.
2. Indicate receivables classified as current and non-current in the
statement of financial position.
3. Appropriately offset the valuation accounts for receivables that are
impaired, including a discussion of individual and collectively
determined impairments.
4. Disclose the fair value of receivables in such a way that permits it to
be compared with its carrying amount.
5. Disclose information to assess the credit risk inherent in the
receivables.
6. Disclose any receivables pledged as collateral.
7. Disclose all significant concentrations of credit risk arising from
receivables.
7-79 LO 5
Analysis of Receivables
Louis Vuitton reported 2015 net sales of €35,664 million, its
beginning and ending accounts receivable balances were €2,274
million an €2,521 million, respectively. The computation of its
accounts receivable turnover is as follows.
7-80 LO 5
Analysis of Receivables
This Ratio used to:
 Assess the liquidity of the receivables.
 Measure the number of times, on average, a company

collects receivables during the period.
7-81 LO 5
APPENDIX 7A Cash Controls
LEARNING OBJECTIVE 6
Explain common techniques employed to control cash.
Management faces two problems in accounting for cash

transactions:
1. Establish proper controls to prevent any unauthorized

transactions by officers or employees.
2. Provide information necessary to properly manage cash on

hand and cash transactions.
7-82 LO 6
Using Bank Accounts
To obtain desired control objectives, a company can vary the

number and location of banks and the types of accounts.
► General checking account
► Collection float
► Lockbox accounts
► Imprest bank accounts
7-83 LO 6
The Imprest Petty Cash System
Used to pay small amounts for miscellaneous expenses.

Steps:
1. Record the transfer of $300 to petty cash:
Petty Cash 300

Cash 300
2. Petty cash custodian obtains signed receipts from each

individual to whom he or she pays cash.
7-84 LO 6
Steps:
3. Custodian receives a company check to replenish the

fund.
Supplies Expense 42
Postage Expense 53
Miscellaneous Expense 76
Cash Over and Short 2
Cash 173
7-85 LO 6
Steps:
4. If the company decides that the amount of cash in the

petty cash fund is excessive by $50, it lowers the fund
balance as follows.
Cash 50
Petty cash 50
7-86 LO 6
Physical Protection of Cash Balances
Company should
 Minimize the cash on hand.
 Only have on hand petty cash and current day’s receipts.
 Keep funds in a vault, safe, or locked cash drawer.
 Transmit each day’s receipts to the bank as soon as
practicable.
 Periodically prove the balance shown in the general ledger.
7-87 LO 6
Reconciliation of Bank Balances
Schedule explaining any differences between the bank’s

and the company’s records of cash.
Reconciling Items:
1. Deposits in transit.
2. Outstanding checks.
3. Bank charges Time Lags

4. Bank credits.
5. Bank or depositor errors.
7-88 LO 6
Reconciliation of Bank Balances
7-89 LO 6

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Lesson 3 - Cash Receivables CH 07

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CHAPTER 7

Cash and Receivables

 Standard medium of exchange.

 Basis for measuring and accounting for all other items.

 Examples: Coin, currency, available funds on deposit at

Short-term, highly liquid investments that are both

a) readily convertible to cash, and

Examples: Government bonds, commercial paper, and

Examples, restricted for:

Compensating balances - that portion of any demand deposit

 Included as a component of cash if such overdrafts are

Receivables - Claims held against customers and

Oral promises of the Written promises to pay a

3. Deposits paid to cover potential damages or losses.

4. Deposits paid as a guarantee of performance or payment.

5. Dividends and interest receivable.

6. Claims against: Insurance companies for casualties sustained;

 Accounts receivable generally arise as part of a

 The revenue recognition principle indicates that a

Lululemon Athletica, Inc. (CAN) sells a yoga outfit to

Accounts Receivable 100

Some key indicators that Lululemon has transferred and

2. Lululemon has passed legal title to the customer.

3. Lululemon has transferred physical possession of the

4. Lululemon no longer has significant risks and rewards of

5. Jennifer has accepted the asset.

Measurement of the Transaction Price

Cash Discounts (Sales Discounts)

 Terms such as 2/10,

Sales Returns and Allowances

 Allowance for Sales Returns and Allowances is a contra

 The use of both Sales Returns and Allowances, and

On January 4, 2019, Max sells $5,000 of hurricane glass to Oliver

Accounts Receivable 5,000

On January 16, 2019, Max grants an allowance of $300 to Oliver

Sales Returns and Allowances 300

On January 31, 2019, before preparing ﬁnancial statements, Max

Sales Returns and Allowances 100

Time Value of Money

 Companies ignore interest revenue related to accounts

 The profession specifically excludes from present value

How are these accounts presented on the Statement of

End. 500 25 End.

End. 500 25 End.

End. 600 25 End.

End. 600 25 End.

End. 267 25 End.

End. 267 25 End.

End. 267 40 End.

End. 267 40 End.

End. 257 30 End.

Uncollectible Accounts Receivable

 Normal and necessary risk of doing business on credit.

 Two methods to account for uncollectible accounts:

Methods of Accounting for Uncollectible Accounts

Direct Write-Off Method Allowance Method

Direct Write-Off Method for Uncollectible Accounts

Bad Debt Expense 8,000,000

Allowance Method for Uncollectible Accounts

Recording Estimated Uncollectibles

Bad Debt Expense 10,000

The amount of £140,000 represents the cash realizable value of

Recording the Write-Off of an Uncollectible