ch08 PPT

Slide
8-1
Chapter 8
Accounting for
Receivables
Financial Accounting,
Seventh Edition
Slide
8-2
Study
Study Objectives
Objectives
1. Identify the different types of receivables.
2. Explain how companies recognize accounts receivable.
3. Distinguish between the methods and bases companies use to
value accounts receivable.
4. Describe the entries to record the disposition of accounts
receivable.
5. Compute the maturity date of and interest on notes receivable.
6. Explain how companies recognize notes receivable.
7. Describe how companies value notes receivable.
8. Describe the entries to record the disposition of notes receivable.
9. Explain the statement presentation and analysis of receivables.
Slide
8-3
Accounting
Accounting for
for Receivables
Receivables
Statement
Types of Accounts
Notes Receivable Presentation and
Receivables Receivable Analysis
Accounts Recognizing Determining Presentation

receivable accounts maturity date Analysis
Notes receivable receivable Computing
Valuing accounts interest
Other
receivables receivable Recognizing
notes receivable
Disposing of
accounts Valuing notes
receivable receivable
Disposing of
notes receivable
Slide
8-4
Types
Types of
of Receivables
Receivables
Amounts due from individuals and other companies that

are expected to be collected in cash.
Amounts owed by Claims for which “Nontrade”

customers that formal (interest, loans to
result from the instruments of officers, advances
sale of goods and credit are issued to employees, and
services. income taxes
as proof of debt.
refundable).
Accounts
Accounts Notes
Notes Other
Other
Receivable
Receivable Receivable
Receivable Receivables
Receivables
Slide
8-5
SO 1 Identify the different types of receivables.
Accounts
Accounts Receivable
Receivable
Three accounting issues:

1. Recognizing accounts receivable.
2. Valuing accounts receivable.
3. Disposing of accounts receivable.
Recognizing Accounts Receivable

The following exercise was illustrated in Chapter 5. For
simplicity, inventory and cost of goods sold have been
omitted.
Slide
8-6
SO 1 Identify the different types of receivables.
Recognizing
Recognizing Accounts
Accounts Receivable
Receivable
Illustration: Assume that Jordache Co. on July 1, 2010, sells
merchandise on account to Polo Company for $1,000 terms
2/10, n/30. Prepare the journal entry to record this
transaction on the books of Jordache Co.
Jul. 1 Accounts receivable 1,000

Sales 1,000
Slide
8-7
SO 2 Explain how companies recognize accounts receivable.
Recognizing
Recognizing Accounts
Accounts Receivable
Receivable
Illustration: On July 5, Polo returns merchandise worth $100
to Jordache Co.
Jul. 5 Sales returns and allowances 100

Accounts receivable 100
Illustration: On July 11, Jordache receives payment from

Polo Company for the balance due.
Jul. 11 Cash 882

Sales discounts ($900 x .02) 18
Slide
8-8
SO 2 Explain how companies recognize accounts receivable.
Accounts
Accounts Receivable
Receivable
Valuing Accounts Receivables

Are reported as a current asset on the balance sheet.
Are reported at the amount the company thinks they

will be able to collect.
Sales on account raise the possibility of accounts not

being collected.
Valuation can be difficult because an unknown amount

of receivables will become uncollectible.
Slide SO 3 Distinguish between the methods and bases

8-9 companies use to value accounts receivable.
Valuing
Valuing Accounts
Accounts Receivable
Receivable
Methods of Accounting for Uncollectible Accounts
Direct Write-Off Allowance Method

Theoretically undesirable: Losses are estimated:
no matching. better matching.
receivable not stated at receivable stated at net
net realizable value. realizable value.
not acceptable for required by GAAP.
financial reporting.

Presentation
Presentation of
of Accounts
Accounts Receivable
Receivable
Assets
Current Assets:
Cash $ 346
Less: Allowance for doubtful accounts 25 475
Merchandise inventory 812
Prepaid expenses 40
Total current assets 1,673

Presentation
Presentation of
of Accounts
Accounts Receivable
Receivable
Assets
Current Assets:
Cash $ 346
Accounts receivable, net of $25 allowance
for doubtful accounts 475
Merchandise inventory 812
Prepaid expenses 40
Total current assets 1,673

Valuing
Valuing Accounts
Accounts Receivable
Receivable
Allowance Method for Uncollectible Accounts

1. Companies estimate uncollectible accounts
receivable.
2. To record estimated uncollectibles:

Bad Debts Expense xxx
Allowance for Doubtful Accounts xxx
3. To write off uncollectible accounts:

Allowance for Doubtful Accounts xxx
Accounts Receivable xxx
Valuing
Valuing Accounts
Accounts Receivable
Receivable
Recording Estimated Uncollectibles: Assume that Hampson
Furniture has credit sales of $1,200,000 in 2011. Of this
amount, $200,000 remains uncollected at December 31. The
credit manager estimates that $12,000 of these sales will be
uncollectible. The adjusting entry to record the estimated
uncollectibles is:
Dec. 31 Bad debt expense 12,000

Allowance for doubtful accounts 12,000

Valuing
Valuing Accounts
Accounts Receivable
Receivable
Illustration 8-2
Presentation of allowance for doubtful accounts

Valuing
Valuing Accounts
Accounts Receivable
Receivable
Recording the Write-Off of an Uncollectible Account:
Assume that the financial vice-president of Hampson Furniture
authorizes a write-off of the $500 balance owed by R.A.Ware
on March 1, 2012.The entry to record the write-off is:
Mar. 1 Allowance for doubtful accounts 500

Illustration 8-3

Valuing
Valuing Accounts
Accounts Receivable
Receivable
Recording the Write-Off of an Uncollectible Account:
The write-off affects only balance sheet accounts.
Illustration 8-3
Illustration 8-4

Valuing
Valuing Accounts
Accounts Receivable
Receivable
Recovery of an Uncollectible Account: Assume that on July
1, R. A. Ware pays the $500 amount that Hampson had written
off on March 1. These are the entries:
Jul. 1 Accounts receivable 500

Allowance for doubtful accounts 500
Jul. 1 Cash 500


Valuing
Valuing Accounts
Accounts Receivable
Receivable
Bases Used for Allowance Method

Illustration 8-5

Valuing
Valuing Accounts
Accounts Receivable
Receivable
Percentage-of-Sales
Illustration: Assume that Gonzalez Company elects to use
the percentage-of-sales basis. It concludes that 1% of net
credit sales will become uncollectible. If net credit sales for
2011 are $800,000, the adjusting entry is:
Dec. 31 Bad debts expense 8,000 *

* $800,000 x 1%

Valuing
Valuing Accounts
Accounts Receivable
Receivable
Percentage-of-Sales
Emphasizes the matching of expenses with revenues.
When the company makes the adjusting entry, it
disregards the existing balance in Allowance for Doubtful
Accounts.
Illustration 8-6

Valuing
Valuing Accounts
Accounts Receivable
Receivable
Percentage-of-Receivables
Illustration 8-7
Aging schedule

Valuing
Valuing Accounts
Accounts Receivable
Receivable
Illustration: If the trial balance shows Allowance for
Doubtful Accounts with a credit balance of $528, the company
will make the following adjusting entry.
Dec. 31 Bad debts expense 1,700 *

* $2,228 - 528

Valuing
Valuing Accounts
Accounts Receivable
Receivable
Illustration 8-8
Occasionally the allowance account will have a debit

balance prior to adjustment.

Valuing
Valuing Accounts
Accounts Receivable
Receivable
Summary
Percentage of Sales approach:
Focus on “Bad debt expense” estimate, existing
balance in the allowance account is ignored.
Method achieves a matching of expense and revenues.
Percentage of Receivables approach:

Accurate valuation of receivables on the balance sheet.
Method may also be applied using an aging schedule.
Existing balance in allowance account considered.
Slide
8-26
Accounts
Accounts Receivable
Receivable
Disposing of Accounts Receivable
Companies sell receivables for two major

reasons.
1. Receivables may be the only reasonable source of
cash.
2. Billing and collection are often time-consuming and
costly.
Slide
8-27
SO 4 Describe the entries to record the disposition of accounts receivable.
Disposing
Disposing of
of Accounts
Accounts Receivable
Receivable
Sale of Receivables
A factor buys receivables from businesses and then
collects the payments directly from the customers.
Typically the factor charges a commission to the

company that is selling the receivables.
The fee ranges from 1-3% of the amount of receivables

purchased.
Slide
8-28
Disposing
Disposing of
of Accounts
Accounts Receivable
Receivable
Illustration: Assume that Hendredon Furniture factors
$600,000 of receivables to Federal Factors. Federal Factors
assesses a service charge of 2% of the amount of receivables
sold. The journal entry to record the sale by Hendredon
Furniture is as follows.
($600,000 x 2% = $12,000)
Cash 588,000
Service charge expense 12,000
Accounts receivable 600,000
Slide
8-29
Slide
8-30
Disposing
Disposing of
of Accounts
Accounts Receivable
Receivable
Credit Card Sales
Retailer considers credit card sales the same as cash

sales.
Retailer must pay card issuer a fee of 2 to 4% for
processing the transactions.
Retailer records the sale in a similar manner as
checks deposited from cash sale.
Slide
8-31
Credit
Credit Card
Card Sales
Sales
Illustration: Anita Ferreri purchases $1,000 of compact
discs for her restaurant from Karen Kerr Music Co., using her
Visa First Bank Card. First Bank charges a service fee of 3%.
The entry to record this transaction by Karen Kerr Music is
as follows.
Cash 970
Service charge expense 30
Sales 1,000
Slide
8-32
Notes
Notes Receivable
Receivable
Companies may grant credit in exchange for a

promissory note. A promissory note is a written
promise to pay a specified amount of money on
demand or at a definite time.
Promissory notes may be used:
1. when individuals and companies lend or borrow
money,
2. when amount of transaction and credit period
exceed normal limits, or
3. in settlement of accounts receivable.
Slide
8-33
SO 5 Compute the maturity date of and interest on notes receivable.
Notes
Notes Receivable
Receivable
To the Payee, the promissory note is a note receivable.
To the Maker, the promissory note is a note payable.
Illustration 8-10
Slide
8-34
Notes
Notes Receivable
Receivable
Determining the Maturity Date

Note expressed in terms of
Months Illustration 8-12
Days
Slide
8-35
Notes
Notes Receivable
Receivable
Determining the Maturity Date

Illustration 8-13
Illustration 8-14
Slide
8-36
Notes
Notes Receivable
Receivable
Recognizing Notes Receivable
Illustration: Assuming that Calhoun Company wrote $1,000,

two-month, 12% promissory note to settle an open account,
Wilma Company makes the following entry for the receipt of
the note.
Notes receivable 1,000

Accounts receivable 1,000
Slide
8-37
SO 6 Explain how companies recognize notes receivable.
Notes
Notes Receivable
Receivable
Valuing Notes Receivable

Like accounts receivable, companies report short-
term notes receivable at their cash (net) realizable
value.
Estimation of cash realizable value and bad debts

expense are done similarly to accounts receivable.
Allowance for Doubtful Accounts is used.
Slide
8-38
SO 7 Describe how companies value notes receivable.
Notes
Notes Receivable
Receivable
Disposing of Notes Receivable

1. Notes may be held to their maturity date.
2. Maker may default and payee must make an

adjustment to the account.
3. Holder speeds up conversion to cash by selling

the note receivable.
Slide
8-39
SO 8 Describe the entries to record the disposition of notes receivable.
Notes
Notes Receivable
Receivable
Disposing of Notes Receivable

Honor of Notes Receivable
A note is honored when its maker pays it in full at its
maturity date.
Dishonor of Notes Receivable

A dishonored note is not paid in full at maturity.
A dishonored note receivable is no longer negotiable.
Slide
8-40
Notes
Notes Receivable
Receivable
Honor of Notes Receivables
Illustration: Assume that Betty Co. lends Wayne Higley Inc.
$10,000 on June 1, accepting a five-month, 9% interest-
bearing note. Assuming that Betty Co. presents the note to
Wayne Higley Inc. on the maturity date, Betty Co.’s entry to
record the collection is:
Nov. 1 Cash 10,375

Interest revenue 375
Slide
8-41
Notes
Notes Receivable
Receivable
Illustration: If Betty Co. prepares financial statements as of
September 30, it must accrue interest. Betty Co. would make
an adjusting entry to record 4 months’ interest.
Sept. 30 Interest receivable 300

Slide
8-42
Notes
Notes Receivable
Receivable
Illustration: The entry by Betty Co. to record the honoring of
the Wayne Higley Inc. note on November 1 is:
Nov. 1 Cash 10,375

Interest receivable 300
Interest revenue 75
Slide
8-43
Notes
Notes Receivable
Receivable
Dishonor of Notes Receivables
Illustration: Assume that Wayne Higley Inc. on November 1
indicates that it cannot pay at the present time. If Betty Co.
does expect eventual collection, it would make the following
entry at the time the note is dishonored (assuming no previous
accrual of interest).
Nov. 1 Accounts receivable 10,375

Slide
8-44
Statement
Statement Presentation
Presentation and
and Analysis
Analysis
Presentation
Identify in the balance sheet or in the notes each
major type of receivable.
B/S Report short-term receivables as current assets.
Report both gross amount of receivables and

allowance for doubtful account.
Report bad debts expense and service charge expense

as selling expenses.
I/S
Report interest revenue under “Other revenues and
gains.”
Slide
8-45
SO 9 Explain the statement presentation and analysis of receivables.
Statement
Presentation and
and Analysis
Analysis
Analysis
Illustration 8-15
This Ratio used to:

Assess the liquidity of the receivables.
Measure the number of times, on average, a company
collects receivables during the period.
Slide
8-46
Statement
Presentation and
and Analysis
Analysis
Analysis
Illustration 8-16
Variant of the accounts receivable turnover ratio is average

collection period in terms of days.
Used to assess effectiveness of credit and collection
policies.
Collection period should not exceed credit term period.
Slide
8-47
Should You Be Carrying Plastic?
 According to data from the U.S. Census Bureau, there were 159
million credit cardholders in the United States in 2000 and 173
million in 2006; that number is projected to grow to 181 million
Americans by 2010.
 In 2006, the U.S. Census Bureau determined that there were
nearly 1.5 billion credit cards in use in the U.S. A stack of all those
credit cards would reach more than 70 miles into space—and be
almost as tall as 13 Mount Everests.
Slide
8-48
 In a recent year, Americans charged more than $1 trillion in
purchases with their credit cards. That was more than they spent
in cash.
 Credit card defaults—the failure to make a payment on a debt by
the due date—sprouted in February 2009 to a 20-year-high.
 74% of monthly college spending is with cash and debit cards. Only
7% is with credit cards.
 The average college graduate has nearly $20,000 in debt; average
credit card debt has increased 47% between 1989 and 2004 for
25- to 34-year-olds and 11% for 18- to 24-year-olds. Nearly one in
five 18-to 24-year-olds is in “debt hardship,” up from 12% in 1989.
 Foreclosure filings nationwide soared 30% in January 2009 over
the same month in the previous year. Nevada, California, and
Florida had the highest foreclosure rates. One in every 440 U.S.
Slide
8-49
homes received a foreclosure filing in February 2009.
Slide
8-50
Should you cut up your credit card(s)?
YES: Americans are carrying huge personal debt burdens.

Credit cards encourage unnecessary, spontaneous
expenditures. The interest rates on credit cards are
extremely high, which causes debt problems to escalate
exponentially.
NO: Credit cards are a necessity for transactions in

today’s economy. In fact, many transactions are difficult or
impossible to carry out without a credit card. People should
learn to use credit cards responsibly.
Slide
8-51
Copyright
Copyright
“Copyright © 2010 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted
in Section 117 of the 1976 United States Copyright Act
without the express written permission of the copyright owner
is unlawful. Request for further information should be
addressed to the Permissions Department, John Wiley & Sons,
Inc. The purchaser may make back-up copies for his/her own
use only and not for distribution or resale. The Publisher
assumes no responsibility for errors, omissions, or damages,
caused by the use of these programs or from the use of the
information contained herein.”
Slide
8-52

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Slide

Accounts Recognizing Determining Presentation

Amounts due from individuals and other companies that

Amounts owed by Claims for which “Nontrade”

Three accounting issues:

Recognizing Accounts Receivable

Jul. 1 Accounts receivable 1,000

Jul. 5 Sales returns and allowances 100

Illustration: On July 11, Jordache receives payment from

Jul. 11 Cash 882

Valuing Accounts Receivables

Are reported at the amount the company thinks they

Sales on account raise the possibility of accounts not

Valuation can be difficult because an unknown amount

Slide SO 3 Distinguish between the methods and bases

Methods of Accounting for Uncollectible Accounts

Direct Write-Off Allowance Method

Slide SO 3 Distinguish between the methods and bases

Slide SO 3 Distinguish between the methods and bases

Slide SO 3 Distinguish between the methods and bases

Allowance Method for Uncollectible Accounts

2. To record estimated uncollectibles:

3. To write off uncollectible accounts:

Dec. 31 Bad debt expense 12,000

Slide SO 3 Distinguish between the methods and bases

Slide SO 3 Distinguish between the methods and bases

Mar. 1 Allowance for doubtful accounts 500

Slide SO 3 Distinguish between the methods and bases

Slide SO 3 Distinguish between the methods and bases

Jul. 1 Accounts receivable 500

Jul. 1 Cash 500

Slide SO 3 Distinguish between the methods and bases

Bases Used for Allowance Method

Slide SO 3 Distinguish between the methods and bases

Dec. 31 Bad debts expense 8,000 *

Slide SO 3 Distinguish between the methods and bases

Slide SO 3 Distinguish between the methods and bases

Slide SO 3 Distinguish between the methods and bases

Dec. 31 Bad debts expense 1,700 *

Slide SO 3 Distinguish between the methods and bases

Occasionally the allowance account will have a debit

Slide SO 3 Distinguish between the methods and bases

Percentage of Receivables approach:

Disposing of Accounts Receivable

Companies sell receivables for two major

Typically the factor charges a commission to the

The fee ranges from 1-3% of the amount of receivables

Credit Card Sales

Retailer considers credit card sales the same as cash

Companies may grant credit in exchange for a

Determining the Maturity Date

Determining the Maturity Date

Recognizing Notes Receivable

Illustration: Assuming that Calhoun Company wrote $1,000,

Notes receivable 1,000

Valuing Notes Receivable

Estimation of cash realizable value and bad debts

Allowance for Doubtful Accounts is used.

Disposing of Notes Receivable

2. Maker may default and payee must make an

3. Holder speeds up conversion to cash by selling

Disposing of Notes Receivable

Dishonor of Notes Receivable