Chapter

9-1
 Chapter 9
Accounting for
Receivables

Chapter
9-2 Accounting Principles, Ninth Edition
 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.

Chapter
9-3
 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

Chapter
9-4
 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

Chapter
9-5 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.
Chapter
9-6 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

Chapter
9-7 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
Accounts receivable
Chapter
900
9-8 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.
Chapter SO 3 Distinguish between the methods and bases
9-9
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.

Chapter SO 3 Distinguish between the methods and bases

9-10
companies use to value accounts receivable.
 Presentation
Presentation of
of Accounts
Accounts Receivable
Receivable

Assets
Current Assets:
Cash $ 346
Accounts receivable 500
Less: Allowance for doubtful accounts 25 475
Merchandise inventory 812
Prepaid expenses 40
Total current assets 1,673

Chapter SO 3 Distinguish between the methods and bases

9-11
companies use to value accounts receivable.
 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

Chapter SO 3 Distinguish between the methods and bases

9-12
companies use to value accounts receivable.
 Valuing
Valuing Accounts
Accounts Receivable
Receivable

Allowance Method for Uncollectible Accounts

1. Companies estimate uncollectible accounts
receivable.

2. To record estimated uncollectibles, companies

debit Bad Debts Expense and credit Allowance for
Doubtful Accounts (a contra-asset account).

3. When companies write off specific uncollectible

accounts, they debit Allowance for Doubtful
Accounts and credit Accounts Receivable.

Chapter SO 3 Distinguish between the methods and bases

9-13
companies use to value accounts receivable.
 Valuing
Valuing Accounts
Accounts Receivable
Receivable
Recording Estimated Uncollectibles: Assume that Hampson
Furniture has credit sales of $1,200,000 in 2010. 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

Chapter SO 3 Distinguish between the methods and bases

9-14
companies use to value accounts receivable.
 Valuing
Valuing Accounts
Accounts Receivable
Receivable
Illustration 9-2
Presentation of allowance for doubtful accounts

Chapter SO 3 Distinguish between the methods and bases

9-15
companies use to value accounts receivable.
 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, 2011.The entry to record the write-off is:

Mar. 1 Allowance for doubtful accounts 500

Accounts receivable
500
Illustration 9-3

Chapter SO 3 Distinguish between the methods and bases

9-16
companies use to value accounts receivable.
 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
Accounts receivable
500

Chapter SO 3 Distinguish between the methods and bases

9-17
companies use to value accounts receivable.
 Valuing
Valuing Accounts
Accounts Receivable
Receivable

Bases Used for Allowance Method

Illustration 9-5

Chapter SO 3 Distinguish between the methods and bases

9-18
companies use to value accounts receivable.
 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
2010 are $800,000, the adjusting entry is:

Dec. 31 Bad debts expense 8,000 *

Allowance for doubtful accounts
8,000

* $800,000 x 1%
Chapter SO 3 Distinguish between the methods and bases
9-19
companies use to value accounts receivable.
 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 9-6

Chapter SO 3 Distinguish between the methods and bases

9-20
companies use to value accounts receivable.
 Valuing
Valuing Accounts
Accounts Receivable
Receivable
Percentage-of-Receivables Illustration 9-7
Aging schedule

Chapter SO 3 Distinguish between the methods and bases

9-21
companies use to value accounts receivable.
 Valuing
Valuing Accounts
Accounts Receivable
Receivable
Percentage-of-Receivables
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 *

Allowance for doubtful accounts
1,700

* $2,228 - 528

Chapter SO 3 Distinguish between the methods and bases

9-22
companies use to value accounts receivable.
 Valuing
Valuing Accounts
Accounts Receivable
Receivable
Percentage-of-Receivables
Illustration 9-8

Occasionally the allowance account will have a debit

balance prior to adjustment.

Chapter SO 3 Distinguish between the methods and bases

9-23
companies use to value accounts receivable.
 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 cost 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.
Chapter SO 3 Distinguish between the methods and bases
9-24
companies use to value accounts receivable.
 Disposing
Disposing of
of Accounts
Accounts Receivable
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.

Chapter
9-25 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.

Chapter
9-26 SO 4 Describe the entries to record the disposition of accounts receivable.
 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

Chapter
9-27 SO 4 Describe the entries to record the disposition of accounts receivable.
 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.

Chapter
9-28 SO 4 Describe the entries to record the disposition of accounts receivable.
 Disposing
Disposing of
of Accounts
Accounts Receivable
Receivable
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

Chapter
9-29 SO 4 Describe the entries to record the disposition of accounts receivable.
 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.
Chapter
9-30 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 9-10

Chapter
9-31 SO 5 Compute the maturity date of and interest on notes receivable.
 Notes
Notes Receivable
Receivable
Determining the Maturity Date
Note expressed in terms of
Months
Days

Computing Interest Illustration 9-13

Chapter
9-32 SO 5 Compute the maturity date of and interest on notes receivable.
 Recognizing
Recognizing Notes
Notes Receivable
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

Chapter
9-33 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.

Chapter
9-34 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.

Chapter
9-35 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.
Chapter
9-36 SO 8 Describe the entries to record the disposition of notes receivable.
 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

Notes receivable 10,000
Interest revenue 375

Chapter
9-37 SO 8 Describe the entries to record the disposition of notes receivable.
 Notes
Notes Receivable
Receivable
Honor of Notes Receivables
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

Interest revenue 300

Chapter
9-38 SO 8 Describe the entries to record the disposition of notes receivable.
 Notes
Notes Receivable
Receivable
Honor of Notes Receivables
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

Notes receivable 10,000
Interest receivable 300
Interest revenue 75

Chapter
9-39 SO 8 Describe the entries to record the disposition of notes receivable.
 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

Notes receivable 10,000
Interest revenue 375

Chapter
9-40 SO 8 Describe the entries to record the disposition of notes receivable.
 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.”
Chapter
9-41 SO 9 Explain the statement presentation and analysis of receivables.
 Statement
Statement Presentation
Presentation and
and Analysis
Analysis

Analysis of Receivables
Illustration 9-15

This Ratio used to:

Assess the liquidity of the receivables.
Measure the number of times, on average, a company
collects receivables during the period.

Chapter
9-42 SO 9 Explain the statement presentation and analysis of receivables.
 Statement
Statement Presentation
Presentation and
and Analysis
Analysis

Analysis of Receivables
Illustration 9-16

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.
Chapter
9-43 SO 9 Explain the statement presentation and analysis of receivables.
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Chapter
9-44