Presented by

Daniel D. Ross, CPA

UC Davis Extension

Chapter
9-1
 Chapter 9

Accounting For
Receivables

Financial Accounting,
Accounting Sixth Edition
Chapter
9-2
 Study Objectives
1. Identify the different types of receivables.
2. p
Explain how companies
p recognize
g accounts receivable.
3. Distinguish between the methods and bases companies use to
value accounts receivable.
4
4. Describe
D ib th
the entries
t i tto record
d th
the di
disposition
iti off accounts
t
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. p
Explain the statement presentation
p and analysis
y of
receivables.
Chapter
9-3
 Accounting for Receivables

Statement
Types of Accounts Notes
Presentation
Receivables Receivable Receivable
and Analysis

Accounts Recognizing Determining Presentation

receivable accounts maturity date Analysis
N t
Notes receivable Computing
receivable Valuing interest
Other accounts Recognizing
receivables receivable notes
receivable
Disposing of
accounts Valuing notes
receivable receivable
Disposing of
notes
Chapter
9-4 receivable
 Types of Receivables

Amounts due from individuals and other companies that

are expected to be collected in cash.
cash

Amounts owed by Claims for which “Nontrade”

Nontrade
customers that formal (interest, loans to
result from the instruments of officers, advances
sale of goods and credit are issued t employees,
to l andd
services. income taxes
as proof of debt.
refundable).

Accounts Notes Other

Receivable Receivable Receivables

Chapter
9-5 SO 1 Identify the different types of receivables.
 Accounts Receivable

Three accounting issues:

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

Recognizing Accounts Receivable

The following exercise was illustrated in Chapter 5.
5
For simplicity, inventory and cost of goods sold have
been omitted.
Chapter
9-6 SO 1 Identify the different types of receivables.
 Recognizing Accounts Receivable
Illustration: Presented are transactions related to Wheeler
Company.
p y
1. On December 3,Wheeler Company sold $500,000 of
merchandise to Hashmi Co., terms 2/10, n/30, FOB
shipping
hi i point.
i
2. On December 8, Hashmi Co. was granted an allowance of
$27 000 for merchandise purchased on December 3
$27,000 3.
3. On December 13,Wheeler Company received the balance
due from Hashmi Co.
Co
Instructions: Prepare the journal entries to record these
p y using
transactions on the books of Wheeler Company ga
perpetual inventory system.
Chapter
9-7 SO 2 Explain how companies recognize accounts receivable.
 Recognizing Accounts Receivable
Illustration: Prepare the journal entries for Wheeler Co.
1. On December 3, Wheeler Company sold $500,000 of
merchandise to Hashmi Co., terms 2/10, n/30, FOB
shipping point.
point

Dec 3
Dec. Accounts receivable 500 000
500,000
Sales 500,000

Chapter
9-8 SO 2 Explain how companies recognize accounts receivable.
 Recognizing Accounts Receivable
Illustration: Prepare the journal entries for Wheeler Co.
2. On December 8, Hashmi Co. was granted an
allowance of $27,000 for merchandise purchased
on December 3.
3

Dec 8 Sales returns and allowances

Dec. 27,000
27 000
Accounts receivable 27,000

Chapter
9-9 SO 2 Explain how companies recognize accounts receivable.
 Recognizing Accounts Receivable
Illustration: Prepare the journal entries for Wheeler Co.
3. On December 13, Wheeler Company received the
balance due from Hashmi Co.

Dec. 13 Cash 463,540 ***

Sales discounts 9,460
9 460 **
Accounts receivable 473,000 *

* ($500,000 – $27,000)
** [($500,000 – $27,000) X 2%]
*** ($473,000 – $9,460)
Chapter
9-10 SO 2 Explain how companies recognize accounts receivable.
 Accounts Receivable

Valuing Accounts Receivables

Classification
Valuation (net realizable value)
Uncollectible Accounts Receivable
Sales on account raise the possibility of accounts
not being collected

Chapter SO 3 Distinguish between the methods and bases

9-11
companies use to value accounts receivable.
 Valuing Accounts Receivable

Methods of Accounting for Uncollectible Accounts

Direct Write-
D Write
W -Off
ff Allowance Method
Theoretically undesirable: Losses are estimated:
no matching. better matching.g
receivable not stated at receivable stated at net
net realizable value. realizable value.
not acceptable for required
i d by
b GAAP
GAAP.
financial reporting.

Chapter SO 3 Distinguish between the methods and bases

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

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

Chapter SO 3 Distinguish between the methods and bases

9-13
companies use to value accounts receivable.
 Presentation of Accounts Receivable

Assets
Current Assets:
Cash $ 346
Accounts receivable
receivable, net of $25 allowance
for doubtful accounts 475
Inventoryy 812
Prepaids 40
Total current assets 1,673

Chapter SO 3 Distinguish between the methods and bases

9-14
companies use to value accounts receivable.
 Valuing Accounts 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).

p
3. When companies write off specific
p uncollectible
accounts, they debit Allowance for Doubtful
Accounts and credit Accounts Receivable.

Chapter SO 3 Distinguish between the methods and bases

9-15
companies use to value accounts receivable.
 Valuing Accounts Receivable
E9-6 On December 31, 2008, Jarnigan Co. estimated
E9-
that 2% of its net sales of $400
$400,000
000 will become
uncollectible. The company recorded this amount as an
addition to Allowance f
for Doubtful
f Accounts. On May y 11,,
2009, Jarnigan Co. determined that Terry Frye’s account
was uncollectible and wrote off $1,100. On June 12, 2009,
Frye paid the amount previously written off.
Instructions
Prepare the journal entries on December 31, 2008, May
11, 2009, and June 12, 2009.

Chapter SO 3 Distinguish between the methods and bases

9-16
companies use to value accounts receivable.
 Valuing Accounts Receivable
E9-6 Prepare the journal entries on December 31, 2008,
E9-
May 11
11, 2009
2009, and June 12
12, 2009
2009.

December 31 ($400,000 x 2% = 8,000)

Bad debt expense 8,000

Allowance for doubtful accounts 8,000

Chapter SO 3 Distinguish between the methods and bases

9-17
companies use to value accounts receivable.
 Valuing Accounts Receivable
E9-6 Prepare the journal entries on December 31, 2008,
E9-
May 11
11, 2009
2009, and June 12
12, 2009
2009.

May 11 (write-off)
All
Allowance f
for d
doubtful
b f l accounts 1 100
1,100
Accounts receivable 1,100

June 12 (recovery)
Accounts receivable 1,100
Allowance for doubtful accounts 1 100
1,100
Cash 1,100
Accounts receivable 1 100
1,100
Chapter SO 3 Distinguish between the methods and bases
9-18
companies use to value accounts receivable.
 Valuing Accounts Receivable

Bases Used for Allowance Method

Illustration 9-5

Chapter SO 3 Distinguish between the methods and bases

9-19
companies use to value accounts receivable.
 Valuing Accounts Receivable

Example Data
Credit sales $500,000
Estimated % of credit sales uncollectible 1.25%
Accounts receivable balance $72,500
Estimated % of A/R uncollectible 8%
Allowance for Doubtful Accounts:
Case 1 $150 (credit balance)
Case 2 $150 (debit balance)

Chapter SO 3 Distinguish between the methods and bases

9-20
companies use to value accounts receivable.
 Valuing Accounts Receivable

Percentage of Sales

Credit sales $500,000

Esti t d percentage
Estimated t uncollectible
ll tibl x 1 25%
1.25%
Estimated uncollectible $ 6,250
===================================================
What should the ending balance be for the allowance
account? -- Case 1 and Case 2

Chapter SO 3 Distinguish between the methods and bases

9-21
companies use to value accounts receivable.
 Valuing Accounts Receivable

Percentage of Sales
C
Case 1 C
Case 2
Actual balance (credit) (150) 150
Estimated uncollectible (6,250) (6,250)
Ending balance (6,400) (6,100)

Journal entry:

Bad debt expense 6,250

Allowance for doubtful accounts 6,250

Chapter SO 3 Distinguish between the methods and bases

9-22
companies use to value accounts receivable.
 Valuing Accounts Receivable

Percentage of Receivables

Accounts receivable $ 72,500

Estimated percentage uncollectible x 8%
Desired balance for allowance $ 5,800
===================================================
What should the ending balance be for the allowance
account? -- Case 1 and Case 2

Chapter SO 3 Distinguish between the methods and bases

9-23
companies use to value accounts receivable.
 Valuing Accounts Receivable

Percentage of Receivables
Case 1 Case 2
Actual balance (credit) (150) 150
Desired balance (5,800) (5,800)
Adjustment
j ((5,650)
, ) ((5,950)
, )

Journal entry – Case 1:

Bad debt expense 5,650

Allowance for doubtful accounts 5,650

Chapter SO 3 Distinguish between the methods and bases

9-24
companies use to value accounts receivable.
 Valuing Accounts Receivable

Percentage of Receivables
Case 1 Case 2
Actual balance (credit) (150) 150
Desired balance (5,800) (5,800)
Adjustment
j ((5,650)
, ) ((5,950)
, )

Journal entry – Case 2:

Bad debt expense 5,950

Allowance for doubtful accounts 5,950

Chapter SO 3 Distinguish between the methods and bases

9-25
companies use to value accounts receivable.
 Valuing Accounts Receivable
When estimating losses using Percentage of
Receivables companies often prepare an aging
Receivables,
schedule which classifies customer balances by the
length of time they have been unpaid.
Illustration 9-7

Chapter SO 3 Distinguish between the methods and bases

9-26
companies use to value accounts receivable.
 Valuing Accounts Receivable

Summary
Percentage of Sales approach:
Focus on “Bad debt expense” estimate, any 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.
sheet
Method may also be applied using an aging schedule.

Chapter SO 3 Distinguish between the methods and bases

9-27
companies use to value accounts receivable.
 Disposing of Accounts Receivable

Companies sell receivables for two major

reasons.
1 Receivables may be the only reasonable source
1.
of cash.
2 Billing
2. Billi and
d collection
ll ti are often
ft titime-consuming
i
and costly.

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

Sale of Receivables
A factor
f b
buys receivables
bl f from b
businesses and
d then
h
collects the payments directly from the customers.

Chapter
9-29 SO 4 Describe the entries to record the disposition of accounts receivable.
 Disposing of Accounts Receivable
E9-7 (a) On March 3, Cornwell Appliances sells
E9-
$680 000 of its receivables to Marsh Factors Inc.
$680,000 Inc Marsh
Factors assesses a finance charge of 3% of the amount of
receivables sold. Prepare
p the entry
y on Cornwell
Appliances’ books to record the sale of the receivables.
($680,000
($ , x 3% = $
$20,400)
, )

Cash 659,600
S
Service
i charge
h expense
x s 20 400
20,400
Accounts receivable 680,000

Chapter
9-30 SO 4 Describe the entries to record the disposition of accounts receivable.
 Disposing of Accounts 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 in similar manner as checks
deposited from cash sale.

Chapter
9-31 SO 4 Describe the entries to record the disposition of accounts receivable.
 Disposing of Accounts Receivable
E9-7 (b) On May 10, Dale Company sold merchandise for
E9-
$3 500 and accepted the customer’s
$3,500 customer s America Bank
MasterCard. America Bank charges a 4% service charge
for credit card sales. Prepare
f p the entry
y on Dale
Company’s books to record the sale of merchandise.
($3,500
($ , x 4% = $
$140))

Cash 3,360
S
Service
i charge
h expense
x s 140
Sales 3,500

Chapter
9-32 SO 4 Describe the entries to record the disposition of accounts receivable.
 Notes Receivable

Companies may grant credit in exchange for a

promissory
i note.
t A promissory
i note
t isi a written
itt
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
1.
borrow money,
2.. when amount
m of
f transaction and credit
period exceed normal limits, or
3. in settlement of accounts receivable.

Chapter
9-33 SO 5 Compute the maturity date of and interest on notes receivable.
 Notes Receivable
To the Payee, the promissory note is a note receivable.
T the
To th Maker,
M k the
th promissory
i note
t is
i a note
t payable.
bl
Illustration 9-10

Chapter
9-34 SO 5 Compute the maturity date of and interest on notes receivable.
 Notes Receivable

Determining the Maturity Date

Note expressed in terms of
Months
Days

Computing Interest
Illustration 9-13

Chapter
9-35 SO 5 Compute the maturity date of and interest on notes receivable.
 Recognizing Notes Receivable
E9-10 Orosco Supply Co. has the following transactions
E9-
related to notes receivable during the last 2 months of 2008.
2008
Nov. 1 Loaned $15,000 cash to Sally Givens on a 1-year, 10%
note.
Dec. 11 Sold goods to John Countryman, Inc., receiving a
$6,750, 90-day, 8% note.
Dec. 16 Received a $4,000, 6-month, 9% note in exchange for
Bob Reber’s outstanding accounts receivable.
Dec 31 Accrued interest revenue on
Dec. n all n
notes
tes receivable
receivable.
Instructions
(a) Journalize the transactions for Orosco Supply Co.
Co
Chapter
9-36 SO 6 Explain how companies recognize notes receivable.
 Recognizing Notes Receivable
E9-10 Nov. 1 Loaned $15,000 cash to Sally Givens on a
E9-
11-year
year, 10% note
note. Dec.
Dec 11 Sold goods to John Countryman,
Countryman
Inc., receiving a $6,750, 90-day, 8% note. Dec. 16
Received a $4,000, 6-month, 9% note in exchange for Bob
Reber’s outstanding accounts receivable.

Nov. 1 Notes receivable 15,000

Cash 15,000
Dec. 11 Notes receivable 6,750
Sales 6,750
Dec. 16 Notes receivable 4,000
Accounts receivable 4,000
Chapter
9-37 SO 6 Explain how companies recognize notes receivable.
 Recognizing Notes Receivable
E9-10 Dec. 31 Accrued interest revenue on all notes
E9-
receivable.
receivable
Amount Rate Time
Givens note: $ 15,000
15 000 x 10% x 2 / 12 = $ 250
Countryman note: 6,750 x 8% x 20 / 360 = 30
Reber note: 4,000 x 9% x 15 / 360 = 15
Total accrued interest $ 295

Dec. 31 Interest receivable 295

Interest revenue 295

Chapter
9-38 SO 6 Explain how companies recognize notes receivable.
 Notes 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.

used

Chapter
9-39 SO 7 Describe how companies value notes receivable.
 Notes Receivable

Disposing of Notes Receivable

1. Notes may be held to their maturity date.

2 Maker
2. M k may default
d f lt and
d payee mustt make
k an
adjustment to the account.

3. Holder speeds up conversion to cash by selling

the note receivable.

Chapter
9-40 SO 8 Describe the entries to record the disposition of notes receivable.
 Notes 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 p
paid in full at maturity.
y
Dishonored note receivable is no longer negotiable.

Chapter
9-41 SO 8 Describe the entries to record the disposition of notes receivable.
 Notes Receivable
E9-13 On May 2, Kleinsorge Company lends $7,600 to
E9-
Everhart Inc.,
Everhart, Inc issuing a 6-month
6 month, 9% note.
note At the maturity
date, November 2, Everhart indicates that it cannot pay.
Instructions
(a) Prepare the entry to record the issuance of the note.
(b) Prepare the entry to record the dishonor of the note,
assuming that Kleinsorge Company expects collection will
occur.
(c) Prepare the entry to record the dishonor of the note,
assuming that Kleinsorge Company does not expect
collection in the future.
future
Chapter
9-42 SO 8 Describe the entries to record the disposition of notes receivable.
 Notes Receivable
E9-13 (a) Prepare the entry to record the issuance of
E9-
the note.
note (b) Prepare the entry to record the dishonor of
the note, assuming that Kleinsorge Company expects
collection will occur.

(a) Notes receivable 7,600

Cash 7 600
7,600
(b) Interest = $7,600 x 9% x 6/12 = $342
A
Accounts
ts receivable
i bl 7 942
7,942
Notes receivable 7,600
I t
Interest
t revenue 342
Chapter
9-43 SO 8 Describe the entries to record the disposition of notes receivable.
 Notes Receivable
E9-13 (c) Prepare the entry to record the dishonor of
E9-
the note,
note assuming that Kleinsorge Company does not
expect collection in the future.

( )
(c) All
Allowance f
for d
doubtful
b f l accounts 7 600
7,600
Notes receivable 7,600

When there is no hope of collection

collection, the note holder would
write off the face value of the note. No interest revenue
would be recorded because collection will not occur.

Chapter
9-44 SO 8 Describe the entries to record the disposition of notes receivable.
 Statement Presentation and 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
ll for
f d doubtful
b f l account.
Report bad debts expense and service charge
expense as selling
lli expenses.
I/S
Report interest revenue under “Other revenues
and
d gains.”
i s”
Chapter
9-45 SO 9 Explain the statement presentation and analysis of receivables.
 Statement Presentation and Analysis

Analysis of Receivables

20.3 times

This Ratio used to:

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

Chapter
9-46 SO 9 Explain the statement presentation and analysis of receivables.
 Statement Presentation and Analysis

Analysis of Receivables

20.3 times, or every

18 days (365 / 20.3)

Variant of the accounts receivable turnover ratio is

average collection period in terms of days.
Used to assess effectiveness of credit and collection
policies.
C ll ti period
Collection i d should
h ld nott exceed
d credit
dit tterm period.
i d
Chapter
9-47 SO 9 Explain the statement presentation and analysis of receivables.
 All About You

Protecting Yourself from Identity Theft

Individuals need to evaluate their personal
credit positions using the same thought processes
used by business people.
Credit card companies aggressively market their
cards with images of glamour and happiness. But
there isn’t much glamour in paying an 18% to 21%
interest rate,
rate and there is very little happiness to be
found in filing for personal bankruptcy.

Chapter
9-48
 All About You

Protecting Yourself from Identity Theft

Some Facts:
About 70% of undergraduates at 4-year colleges carry
at least one credit card in their own name.
The average monthly debt on a college student’s charge
account,
t according
di tto one st
study,
d is close
l s tto $2
$2,000.
000
Americans charged $1 trillion in purchases with credit
cards That was more than they spent in cash
cards. cash.
Significant increases in consumer bankruptcy filings
occurred in every region of the country. There were
2,043,535 new filings in 2005, up 31.6% from in 2004.
Chapter
9-49
 All About You
Chart shows the major causes of personal financial
problems.
problems

Chapter
Source: Debt Solutions of America, www.becomedebtfree.com
9-50 (accessed May 2006).
 All About You

What Do You Think?

Should you cut up your credit card(s)?
YES: Americans are carrying
y g huge
g personal
p debt
burdens. Credit cards encourage unnecessary,
spontaneous expenditures. The interest rates on credit
cards
r arer extremely
r m y high,
g ,w which causes
u debt pr
problems
m
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
card.
responsibly.
Chapter
9-51
 Copyright

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itt d
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y
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.”

Chapter
9-52