Receivables: Prepared By: C. Douglas Cloud Professor Emeritus of Accounting Pepperdine University

Receivables
Chapter 9
Prepared by: C. Douglas Cloud

Professor Emeritus of Accounting
Pepperdine University
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Learning Objectives
1. Describe the common classes of receivables.

2. Describe the accounting for uncollectible receivables.
3. Describe the direct write-off method of accounting
for uncollectible receivables.
4. Describe the allowance method of accounting for
uncollectible receivables.
5. Compare the direct write-off and allowance methods
of accounting for uncollectible accounts.
Learning Objectives
6. Describe the accounting for notes receivable.
Learning Objectives
7. Describe the reporting of receivables on the balance
sheet.
Learning Objectives
sheet.
8. Describe and illustrate the use of accounts receivable
turnover and number of days’ sales in receivables to
evaluate a company’s efficiency in collecting its
receivables.
Learning Objective 1
LO 1
Classification of Receivables
 Accounts receivable are normally expected to be
collected within a relatively short period, such as
30 or 60 days.
LO 1
 Notes receivable are amounts that customers owe
for which a formal, written instrument of credit
has been issued.
LO 1
 Other receivables expected to be collected within
one year are classified as current assets. If
collection is expected beyond one year, these
receivables are classified as noncurrent assets and
reported under the caption Investments.
Examples of other receivables include:
 Interest receivable
 Taxes receivable
 Receivables from officers or employees
Describe the common classes of receivables.

Describe the accounting for uncollectible
receivables.
LO 2
Uncollectible Receivables
Companies often sell their receivables to other

companies. This is called factoring the receivables,
and the buyer of the receivables is called a factor.
LO 2
Regardless of how careful a company is in

granting credit, some credit sales will be
uncollectible. The operating expense recorded
from uncollectible receivables is called bad debt
expense, uncollectible accounts expense, or
doubtful accounts expense.
LO 2
 Some indications that an account may be
uncollectible include the following:
 The receivable is past due.
 The customer does not respond to the company’s
attempts to collect.
 The customer files for bankruptcy.
 The customer closes its business.
 The company cannot locate the customer.
LO 2
The direct write-off method of accounting for

uncollectible receivables records bad debt expense
only when an account is determined to be
worthless. The allowance method records bad debt
expense by estimating uncollectible accounts at the
end of the accounting period.

2. Describe the accounting for uncollectible
receivables.
3. Describe the direct write-off method of
accounting for uncollectible receivables.
LO 3
Direct Write-Off Method
On May 10, a $4,200 account receivable from D. L.

Ross has been determined to be uncollectible.
LO 3
Direct Write-Off Method
The account written off on May 10 is later collected

on November 21.
Reinstatement
entry
Receipt of
cash entry
EE 9-1

2. Describe the accounting for uncollectible
receivables.
3. Describe the direct write-off method of accounting
for uncollectible receivables.
LO 4
The Allowance Method
On December 31, ExTone Company estimates that a

total of $30,000 of the $200,000 balance of their
accounts receivable will eventually be uncollectible.
The specific customer accounts

cannot be decreased, so a contra
account, Allowance for Doubtful
Accounts, is credited.
LO 4
The net amount that is expected to be collected,

$170,000 ($200,000 – $30,000), is called the net
realizable value (NRV) of the receivables. The
adjusting entry reduces receivables to the NRV
and matches uncollectible expenses with revenues.
LO 4
On January 21, John Parker’s account of $6,000 is

written off because it is uncollectible.
Note that the allowance

account credited earlier is
debited at the write-off, not
Bad Debt Expense.
LO 4
LO 4
During 2012, ExTone Company writes off $26,750 of

uncollectible accounts, including the $6,000 account of
John Parker. After posting all entries to write off
uncollectible amounts, Allowance for Doubtful
Accounts will have a credit balance of $3,250 ($30,000
– $26,750).
LO 4
If ExTone Company had written off $32,100 in

accounts receivable during 2012, Allowance for
Doubtful Accounts would have a debit balance of
$2,100.
LO 4
Nancy Smith’s account of $5,000, which was written

off on April 2, is later collected on June 10. Two
entries are needed: one to reinstate Nancy Smith’s
account and a second to record receipt of the cash.
Reinstatement
entry
Receipt of
cash entry
EE 9-2
LO 4
Estimating Uncollectibles
The allowance method requires an estimate of

uncollectible accounts at the end of the period.
Two methods are used to estimate the amount
debited to Bad Debt Expense.
 Percent of sales method
 Analysis of receivables method
LO 4
Percent of Sales Method
If ExTone Company’s credit sales for the period

are $3,000,000 and it is estimated that 3/4% will be
uncollectible, Bad Debt Expense is debited for
$22,500 ($3,000,000 x .0075). This approach
disregards the balance of $3,250 in the allowance
account before the adjustment.
LO 4
After the following adjusting entry on December 31 is

posted, Allowance for Doubtful Accounts will have a
balance of $25,750 ($3,250 + $22,500).
LO 4
EE 9-3
LO 4
Analysis of Receivables Method
The longer an account receivable is outstanding,

the less likely it is that it will be collected. Basing
the estimate of uncollectible accounts on how long
specific amounts have been outstanding is called
aging the receivables.
LO 4
The analysis of receivables method is applied as
follows:
 Step 1: The due date of each account receivable
is determined.
 Step 2: The number of days each account is past
due is determined.
 Step 3: Each account is placed in an aged class
according to its days past due.
 Step 4: The totals for each aged class are
determined.
LO 4

 Step 5: The total for each aged class is multiplied by
an estimated percentage of uncollectible accounts
for that class.
 Step 6: The estimated total of uncollectible
accounts is determined as the sum of the
uncollectible accounts for each aged class.
LO 4
The preceding steps are summarized in an aging

schedule, and this overall process is called aging
the receivables.
LO 4
LO 4
The estimate based on the age of receivables is

compared to the balance in the allowance account
to determine the amount of the adjusting entry.
LO 4
ExTone Company has an unadjusted credit balance of

$3,250 in Allowance for Doubtful Accounts. In Exhibit
1, the estimated uncollectible accounts totaled $26,490.
The amount to be added to the allowance account is
$23,240 ($26,490 – $3,250). The adjusting entry is as
follows:
LO 4
After the preceding adjusting entry is posted to the

ledger, ExTone Company’s Allowance for Doubtful
Accounts will have an adjusted balance of $26,490.
This is the amount that was determined by aging the
accounts.
Same amount as the estimated amount

determined by the aging process.
LO 4

If ExTone Company’s unadjusted balance of the
allowance account had been a debit balance of $2,100,
the amount of the adjustment would have been $28,590
($26,490 + $2,100).
LO 4

The Commercial
Collection Agency
Section of the
Commercial Law
League of America
reported these
collection rates by
number of months
past due.
EE 9-4
LO 4
Comparing Estimation Methods

2. Describe the accounting for uncollectible receivables.
3. Describe the direct write-off method of accounting for
5. Compare the direct write-off and allowance methods
of accounting for uncollectible accounts.
LO 5
LO 5
Comparing Methods
The primary differences between the direct write-

off and allowance methods are summarized below.
LO 6
Characteristics of Notes Receivable

A note receivable, or promissory note, is a written
document containing a promise to pay.
Characteristics of a promissory note are as
follows:
 The maker is the party making the promise to pay.
 The payee is the party to whom the note is payable.
 The face amount is the amount the note is written for
on its face.
(continued)
LO 6
Characteristics of Notes Receivable

 The issuance date is the date a note is issued.
 The due date or maturity date is the date the note is to
be paid.
 The term of a note is the amount of time between the
issuance and due dates.
 The interest rate is the rate of interest that must be
paid on the face amount for the term of the note.
LO 6
Notes Receivable
LO 6
Notes Receivable
The maturity value is the amount that must be

paid at the due date of the note, which is the sum
of the face amount and the interest.
LO 6
Due Date of a 90-day Note
What is the due date of a 90-day note dated March 16?

 Days in March 31
 Minus issuance date of note 16
 Days remaining in March 15
 Add days in April 30
90
 Add days in May 31 days
 Add days in June
(due date of June 14) 14
 Term of note 90 days
LO 6
Alternate Approach
Total days in note 90 days

 Number of days in March 31
 Issue date of note, March 16 (16)
 Remaining days in March days 15
 Number of days in April 30

 Number of days in May days 31
 Residual days in June (14) days
Answer: June 14
LO 6
Due Date of a 90-day Note
LO 6
Accounting for Notes Receivable
Received a $6,000, 12%, 30-day note dated

November 21, 2012, in settlement of the account of
W. A. Bunn Company.
LO 6
On December 21, when the note matures, the firm

receives $6,060 from W. A. Bunn Company ($6,000
face amount plus $60 interest).
LO 6
If W. A. Bunn Company fails to pay the note on the

due date, it is considered a dishonored note receivable.
The note and interest are transferred back to the
customer’s account receivable.
LO 6
A 90-day, 12% note dated December 1, 2012, is
received from Crawford Company to settle its
account, which has a balance of $4,000.
LO 6
Assuming that the accounting period ends on

December 31, an adjusting entry is required to record
the accrued interest of $40 ($4,000 x 0.12 x 30/360).
LO 6
On March 1, 2013, $4,120 is received for the note

($4,000) and interest ($120).
EE 9-5

7. Describe the reporting of receivables on the
balance sheet.
LO 7
Reporting Receivables on the Balance Sheet

sheet.
8. Describe and illustrate the use of accounts receivable
turnover and number of days’ sales in receivables to
evaluate a company’s efficiency in collecting its
receivables.
LO 8
Accounts Receivable Turnover
The accounts receivable turnover measures how

frequently during the year the accounts receivable
are being converted to cash.
Accounts
Net Sales
Receivable =
Turnover Average Accounts
Receivable
LO 8
Accounts Receivable Turnover
LO 8
Number of Days Sales in Receivables
The number of days’ sales in receivables is an

estimate of the length of time the accounts
receivable have been outstanding.
Number of Days’ Average Accounts Receivable

Sales in =
Receivables Average Daily Sales
LO 8
Number of Days Sales in Receivables
EE 9-6
(continued)
EE 9-6
Receivables
The End
Prepared by: C. Douglas Cloud

Professor Emeritus of Accounting
Pepperdine University

Receivables: Prepared By: C. Douglas Cloud Professor Emeritus of Accounting Pepperdine University

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Receivables

Prepared by: C. Douglas Cloud

1. Describe the common classes of receivables.

1. Describe the common classes of receivables.

Describe the common classes of receivables.

Companies often sell their receivables to other

Regardless of how careful a company is in

The direct write-off method of accounting for

1. Describe the common classes of receivables.

On May 10, a $4,200 account receivable from D. L.

The account written off on May 10 is later collected

1. Describe the common classes of receivables.

On December 31, ExTone Company estimates that a

The specific customer accounts

The net amount that is expected to be collected,

On January 21, John Parker’s account of $6,000 is

Note that the allowance

During 2012, ExTone Company writes off $26,750 of

If ExTone Company had written off $32,100 in

Nancy Smith’s account of $5,000, which was written

The allowance method requires an estimate of

If ExTone Company’s credit sales for the period

After the following adjusting entry on December 31 is

The longer an account receivable is outstanding,

Analysis of Receivables Method

The preceding steps are summarized in an aging

Analysis of Receivables Method

The estimate based on the age of receivables is

ExTone Company has an unadjusted credit balance of

After the preceding adjusting entry is posted to the

Same amount as the estimated amount

Analysis of Receivables Method

Analysis of Receivables Method

1. Describe the common classes of receivables.

The primary differences between the direct write-

6. Describe the accounting for notes receivable.

Characteristics of Notes Receivable

Characteristics of Notes Receivable

The maturity value is the amount that must be

What is the due date of a 90-day note dated March 16?

Total days in note 90 days

 Number of days in April 30

Due Date of a 90-day Note

Received a $6,000, 12%, 30-day note dated

On December 21, when the note matures, the firm

If W. A. Bunn Company fails to pay the note on the

Assuming that the accounting period ends on

On March 1, 2013, $4,120 is received for the note

6. Describe the accounting for notes receivable.

Reporting Receivables on the Balance Sheet

6. Describe the accounting for notes receivable.

The accounts receivable turnover measures how

Number of Days Sales in Receivables

The number of days’ sales in receivables is an

Number of Days’ Average Accounts Receivable

Number of Days Sales in Receivables

Prepared by: C. Douglas Cloud

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