Accounting Global 9th Edition

Horngren Solutions Manual

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 Chapter 8
Receivables

Chapter Overview

The chapter begins with an overview of various types of receivables – both accounts receivable and notes
receivable. Internal controls over receivables, the duties of the credit department, and Decision Guidelines
for controlling, managing, and accounting for receivables are presented. The concept of uncollectible-
account expense is introduced along with an explanation of the Allowance for Uncollectible Accounts, a
contra account related to Accounts Receivable. Two methods for recording uncollectible accounts are
discussed: first the allowance method and, later in the chapter, the direct write-off method. The authors
explain the preference for the allowance method. Two methods for estimating uncollectible-account
expense are presented and illustrated: the percent-of-sales method and the aging-of-accounts method.
Entries are shown for recording the uncollectible-account expense each period and for writing off
uncollectible accounts. The direct write-off method is explained. Entries for recording recoveries on
accounts previously written off are illustrated. A brief discussion of credit-card sales, bankcard sales, and
debit-card sales concludes this part of the chapter. A mid-chapter summary problem allows students to
practice estimating and recording uncollectibles, as well as reporting receivables on the balance sheet.

Next, notes receivable are presented, including terms, calculations, and journal entries related to notes.
Accruing interest revenue at the end of the accounting period is illustrated. Students learn how to account
for a dishonored note. Different balance sheet presentations of notes and accounts receivable are shown.
The role that the acid-test ratio and days’ sales in receivables play in decision making is demonstrated.
Additional Decision Guidelines for receivables conclude the chapter. An end-of-chapter summary
problem reviews notes receivable calculations and entries. The Appendix to Chapter 8 discusses
discounting notes receivable.

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 Chapter 8: Teaching Outline

1) Define and explain common types of receivables and review internal controls for receivables

a) Accounts Receivable or Trade Receivables

i) Control Account

ii) Subsidiary Account

b) Notes Receivable

c) Internal Control over Receivables

2) Use the allowance method to account for uncollectibles

a) Estimating Uncollectibles

b) Identifying and Writing Off Uncollectible Accounts

c) Recovery of Accounts Previously Written Off - Allowance Method

d) Exhibit 8-1 Aging the Accounts Receivable of Greg's Tunes

e) Exhibit 8-2 Comparing the Percent-of-Sales and Aging Methods

f) Exhibit 8-3 Greg's Tunes - Allowance Method

3) Understand the direct write-off method for uncollectibles

a) Recovery of Accounts Previously Written Off - Direct Write-Off Method

b) Exhibit 8-4 Greg's Tunes - Direct Write-Off Method

4) Journalize credit-card and debit-card sales

a) Credit-Card Sales

b) Debit-Card Sales

c) Credit-/Debit-Card Sales

5) Account for notes receivable

a) Promissory Note

b) Maker of the Note (debtor)

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 c) Payee of the Note (creditor)

d) Principal

e) Interest

f) Interest Period

g) Interest Rate

h) Maturity Date

i) Maturity Value

j) Identifying Maturity Date

k) Computing Interest on a Note

l) Accruing Interest Revenue

m) Dishonored Notes Receivable

n) Computers and Receivables

o) Exhibit 8-5 A Promissory Note

p) Exhibit 8-6 Order Entry, Shipping, and Billing Working Together at Mars

6) Report receivables on the balance sheet and evaluate a company using the acid-test ratio,
days’ sales in receivables, and the accounts receivable turnover ratio accounting for credit-card, debit-
card sales, and credit-/debit-card

a) Acid-Test (or Quick) Ratio

b) Day's Sales in Receivables

c) Accounts Receivable Turnover Ratio

d) Exhibit 8-7 Greg's Tunes Balance Sheet

7) Discount a note receivable see Appendix 8A

a) Exhibit 8a-1 Discounting (Selling) a Note Receivable

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 Chapter 8: Summary Handout for Students

1. Types of receivables:

o Accounts receivable or Trade receivables

o Notes receivable

2. Internal control over receivables

3. Accounting for uncollectible receivables

o The allowance method because it is the method preferred by GAAP and IFRS

▪ Percent-of-Sales Method

▪ Income statement approach

▪ Amount calculated is the amount for the journal entry

▪ Aging-of-Accounts-Receivable Method

▪ Balance sheet approach

▪ Amount calculated represents the desired balance for the allowance account

▪ difference between the correct balance and the unadjusted balance is the journal entry

o The Direct Write-off Method

▪ Debit Uncollectible Account Expense

▪ Credit Accounts Receivable

4. Write off accounts identified as uncollectible

o The Allowance Method

▪ Debit Allowance for Uncollectible Accounts

▪ Credit Accounts Receivable

o The Direct Write-off Method

▪ No additional entry is necessary

5. Record the recovery of accounts previously written off

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 o The Allowance Method

▪ Debit Cash

▪ Credit Allowance for Uncollectible Accounts

o The Direct Write-off Method

▪ Debit Cash

▪ Credit Uncollectible Accounts Expense

6. Recording credit-card sales, bankcard sales, and debit-card sales

o Credit-card Sales

▪ Debit Accounts Receivable

▪ Credit-card Discount Expense

▪ Credit Sales Revenue

o Debit-Card Sales

▪ Treated as a Cash Sale

o Credit-/Debit-Card Sales

▪ Debit Cash

▪ Debit Card Discount Expense

▪ Credit Sales Revenue

7. Notes receivable are evidenced by a promissory note

o Record the receipt of the note

o Identify maturity date

o Compute interest of the note

o Interest = Principal x Interest rate x Time

o Accrue interest revenue

o Record the collection of the note

o Transfer dishonored notes to Accounts receivable.

o Discounting notes receivable

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 ▪ See Exhibit 8A-1

o Use accounting information for decision making

▪ Acid-test = (Cash + Short-term investments + Net current receivables)/Total current

liabilities

▪ One day’s sales = Net sales (or Total revenues)/365 days

▪ Days’ sales in receivables = Average net accounts receivable/One day’s sales

▪ Accounts receivable turnover ratio= Net credit sales/ Average net accounts receivable

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 Lecture Outline Tips: Key Topics
Point out that bad debt titles can vary, such as uncollectible accounts and doubtful accounts. Bad debts are
based on credit sales only. Cash sales are collected up front.

The allowance is a contra account, not a liability, and is reflected in the asset section of the balance sheet.
net A/R is A/R minus the allowance account and reflects what the company expects to collect.

The difference between the direct write-off method and allowance method is the timing of expense
recognition. The allowance method expenses bad debt up front in the year of sale (the matching
principle), whereas the direct write-off method expenses bad debt when the account is deemed
uncollectible at a later date (it’s not matched to the related revenue).

Two methods for recording bad debts under the allowance method are the % of sales and the aging of
accounts. The % of sales focuses on the expense amount (income statement approach) and the aging of
accounts focuses on the net A/R (balance sheet approach). When using the % of sales, the calculation
represents the journal entry amount. When using the aging of accounts, your calculation represents the
correct balance of the allowance account. The journal entry amount is the difference between the
unadjusted balance and the correct balance.

Under the allowance method, a write-off entry has no effect on income because the expense was
recognized up front in the year of sale. The write-off entry reduces the allowance and A/R by the same
amount, so net A/R remains the same.

With credit card sales, the company collects cash from the card issuer up front, and the risk of collection
from the customer passes to the card issuer. The cost to the company of passing this risk is the credit card
fee, which is a recorded as an expense along with the sales revenue.

When computing interest on a note receivable, the interest rate is expressed annually and
must be adjusted to the appropriate time period (principal * rate * time). Day one is the
day after the note date.

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 Chapter 8 Assignment Grid
Learning Short Exercises Problems (Group A) Problems (Group B)
Objective Exercises Moderate Difficult Difficult
Easy
1 1, 2 13, 14 25 33
2 3, 4, 5 15, 16 26, 27, 28, 29 34, 35, 36, 37
3 6, 7 17, 18 26 34
4 8 19 29 37
5 9, 10 19, 20, 21, 22 29, 30, 31 37, 38, 39
6 11, 12 15, 16, 17, 18, 23, 24 26, 27, 28, 32 34, 35, 36, 40
7 8A-1 8A-2 8A-3

Other End of Chapter Materials:

Continuing Exercise E8-41
Continuing Problem P8-42
Practice Set
Decision Case 8-1
Decision Case 8-2
Ethical Issue 8-1
Fraud Case 8-1
Financial Statement Case 8-1
Team Project 8-1
Communication Activity 8-1

End of Chapter Exercises and Problems available utilizing Accounting software:

QuickBooks 10 E8-17, E8-22, P8-29A, P8-31A, E8-41, P8-42, P8-43
Peachtree 10 E8-17, E8-22, P8-29A, P8-31A
Excel in Practice E8-17, E8-22, P8-29A, P8-31A
General Ledger E8-16. E8-18, P8-26A, P8-28A, E8-41, P8-42, P8-43

Sample Homework Questions in MyAccountingLab:

E8-14, E8-16, E8-18, E8-19, E8-22, E8-24, P8-25A, P8-26A, P8-28A, P8-29A, P8-31A, P8A-2A Formatted: Portuguese (Brazil)

Pre-Test Questions in MyAccountingLab:

S8-2, S8-3, S8-6, S8-8, S8-9, S8-12, E8A-1

Post-Test Questions in MyAccountingLab:

P8-34B, P8-39B, P8A-3B

Exercise and/or Problems used in PowerPoint slides:

S8-1, S8-3, S8-5, S8-7, S8-8, S8-10, S8-11, S8-12

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Answer Key to Chapter 8 Quiz:

1. D 6. D
2. D 7. B
3. B 8. C
4. A 9. A
5. D 10.D

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Name Date Section

CHAPTER 8
TEN-MINUTE QUIZ

Circle the letter of the best response.

1. With good internal controls, the person who handles cash can also
A. account for cash payments.
B. account for cash receipts from customers.
C. issue credits to customers for sales returns.
D. do none of the above.

2. “Bad debts” are the same as

A. doubtful accounts.
B. uncollectible accounts.
C. neither of the above.
D. both A and B.

3. When recording credit- or debit-card sales using the net method,

A. cash received equals sales.
B. cash received equals sales minus the fee assessed by the card processing company.
C. cash received equals sales plus the fee assessed by the card processing company.
D. cash isn’t received by the seller until the customer pays his or her credit card statement.

4. Your company uses the allowance method to account for uncollectible receivables. At the
beginning of the year, Allowance for uncollectible accounts had a credit balance of $1,000. During
the year, you recorded Uncollectible account expense of $2,700 and wrote off bad receivables of
$2,100. What is your year-end balance in Allowance for uncollectible accounts?
A. $1,600
B. $4,800
C. $3,700
D. $600

5. Your ending balance of Accounts receivable is $19,500. Use the data in the preceding question to
compute the net realizable value of Accounts receivable at year-end.
A. $16,800
B. $19,500
C. $17,400
D. $17,900

6. What is wrong with the direct write-off method of accounting for uncollectibles?
A. The direct write-off method overstates assets on the balance sheet.
B. The direct write-off method does not match expenses against revenue very well.
C. The direct write-off method does not set up an allowance for uncollectibles.
D. All of the above are correct.

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7. At January 31, you have a $8,400 note receivable from a customer. Interest of 10% has accrued
for 10 months on the note. What will your financial statements report for this situation?
A. The balance sheet will report the note receivable of $8,400.
B. The balance sheet will report the note receivable of $8,400 and interest receivable of
$700.
C. Nothing, because you have not received the cash yet.
D. The income statement will report a note receivable of $8,400.

8. Return to the data in the preceding question. What will the income statement report for this
situation?
A. Nothing, because you have not received the cash yet
B. Note receivable of $8,400
C. Interest revenue of $700
D. Both B and C

9. At year-end, your company has Cash of $11,600, Accounts receivables of $48,900, Inventory of
$37,900, and Prepaid expenses totaling $5,100. Liabilities of $55,900 must be paid next year. What
is your acid-test ratio?
A. 1.08
B. 0.21
C. 1.76
D. Cannot be determined from the data given

10. Return to the data in the preceding question. A year ago, Accounts receivables stood at $67,400,
and Sales for the current year totaled $807,800. How many days did it take you to collect your
average level of receivables?
A. 49
B. 35
C. 29
D. 26

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