Accounting Principle Kieso 8e_Ch09

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Chapter9-1

ReceivablesManagement and

Accounting

Accounting Principles, Eighth Edition

CHAPTER 9



Chapter9-2

1. Identify the different types of receivables.

2. Explain how companies recognize accounts receivable.

3. Distinguish between the methods and bases companies useto 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 ofreceivables.

Study Objectives



Chapter9-3

Types of

Receivables

Accountsreceivable

Notesreceivable

Other

receivables

Accounts

Receivable

Notes

Receivable

Statement

Presentation

and Analysis

Presentation

Analysis

Determiningmaturity date

Computinginterest

Recognizing

notesreceivable

Valuing notesreceivable

Disposing ofnotes

receivable

Accounting for Receivables

Recognizingaccountsreceivable

Valuingaccounts

receivableDisposing ofaccountsreceivable



Chapter9-4

Amounts due from individuals and other companies thatare expected to be collected in cash.

Amounts owed bycustomers thatresult from the

sale of goods andservices.

AccountsReceivable

Types of Receivables

LO 1 Identify the different types of receivables.

Claims for whichformal

instruments ofcredit are issuedas proof of debt.

“Nontrade”(interest, loans toofficers, advancesto employees, and

income taxes

refundable).Notes

ReceivableOther

Receivables



Chapter9-5

Three accounting issues:1. Recognizing accounts receivable.

2. Valuing accounts receivable.

3. Disposing of accounts receivable.

Accounts Receivable

LO 1 Identify the different types of receivables.

The following exercise was illustrated in Chapter 5.For simplicity, inventory and cost of goods sold havebeen omitted.

Recognizing Accounts Receivable



Chapter9-6

E5-5 Presented are transactions related to Wheeler Company.1. On December 3,Wheeler Company sold $500,000 of

merchandise to Hashmi Co., terms 2/10, n/30, FOB shippingpoint.

2. On December 8, Hashmi Co. was granted an allowance of$27,000 for merchandise purchased on December 3.

3. On December 13,Wheeler Company received the balancedue from Hashmi Co.

Instructions: Prepare the journal entries to record thesetransactions on the books of Wheeler Company using aperpetual inventory system.


LO 2 Explain how companies recognize accounts receivable.



Chapter9-7

E5-5 Prepare the journal entries for Wheeler Company .1. On December 3, Wheeler Company sold $500,000 of

merchandise to Hashmi Co., terms 2/10, n/30, FOBshipping point.

Accounts receivable 500,000Dec. 3

Sales 500,000





Chapter9-8

E5-5 Prepare the journal entries for Wheeler Company.2. On December 8, Hashmi Co. was granted an

allowance of $27,000 for merchandise purchasedon December 3.

Sales returns and allowances 27,000Dec. 8

Accounts receivable 27,000





Chapter9-9

E5-5 Prepare the journal entries for Wheeler Company .3. On December 13, Wheeler Company received the

balance due from Hashmi Co.

Cash 463,540Dec. 13


Sales discounts 9,460

** [($500,000 – $27,000) X 2%]

**

* ($500,000 – $27,000)

*

***

*** ($473,000 – $9,460)





Chapter9-10

Valuing Accounts ReceivablesClassification

Valuation (net realizable value)

Uncollectible Accounts Receivable

Sales on account raise the possibility of accountsnot being collected

LO 3 Distinguish between the methods and bases companies use to value accounts receivable.

Accounts Receivable



Chapter9-11

Allowance Method

Losses are estimated:better matching.

receivable stated at netrealizable value.

required by GAAP.

Methods of Accounting for Uncollectible Accounts

Direct Write-Off

Theoretically undesirable:no matching.

receivable not stated atnet realizable value.

not acceptable forfinancial reporting.

Valuing Accounts Receivable




Chapter9-12

AssetsCurrent Assets:

Cash $ 346

Accounts receivable 500

Less: Allowance for doubtful accounts 25 475Inventory 812

Prepaids 40

Total current assets 1,673


Presentation of Accounts Receivable



Chapter9-13

AssetsCurrent Assets:

Cash $ 346

Accounts receivable, net of $25 allowance

for doubtful accounts 475Inventory 812

Prepaids 40

Total current assets 1,673


Presentation of Accounts Receivable



Chapter9-14


Allowance Method for Uncollectible Accounts

1. Companies estimate uncollectible accountsreceivable.

2. To record estimated uncollectibles, companiesdebit Bad Debts Expense and credit Allowance forDoubtful Accounts (a contra-asset account).

3. When companies write off specific uncollectibleaccounts, they debit Allowance for DoubtfulAccounts and credit Accounts Receivable.




Chapter9-15

E9-6 On December 31, 2008, Jarnigan Co. estimatedthat 2% of its net sales of $400,000 will becomeuncollectible. The company recorded this amount as anaddition to Allowance for Doubtful Accounts. On May 11,

2009, Jarnigan Co. determined that Terry Frye’s accountwas uncollectible and wrote off $1,100. On June 12, 2009,Frye paid the amount previously written off.

InstructionsPrepare the journal entries on December 31, 2008, May11, 2009, and June 12, 2009.





Chapter9-16

E9-6 Prepare the journal entries on December 31, 2008,May 11, 2009, and June 12, 2009.

Bad debt expense 8,000

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

Allowance for doubtful accounts 8,000





Chapter9-17

E9-6 Prepare the journal entries on December 31, 2008,May 11, 2009, and June 12, 2009.

Accounts receivable 1,100June 12 (recovery)




Cash 1,100Accounts receivable 1,100


May 11 (write-off)




Chapter9-18

Bases Used for Allowance Method



Illustration 9-5



Chapter9-19

Example Data

Credit sales $500,000

Estimated % of credit sales not collected 1.25%

Accounts receivable balance $72,500

Estimated % of A/R not collected 8%

Allowance for Doubtful Accounts:

Case I $150 (credit balance)Case 2 $150 (debit balance)





Chapter9-20

Charge sales $500,000

Estimated percentage x 1.25%

Estimated uncollectible $ 6,250

===================================================

What should the ending balance be for the allowanceaccount? -- Case 1 and Case 2



Percentage of Sales



Chapter9-21

Actual balance (credit) (150) 150

Estimated uncollectible (6,250) (6,250)Ending balance (6,400) (6,100)

Journal entry:

Case 1 Case 2Percentage of Sales







Chapter9-22

Accounts receivable $ 72,500

Estimated percentage x 8%

Desired balance for allowance $ 5,800

===================================================

What should the ending balance be for the allowance

account? -- Case 1 and Case 2



Percentage of Receivables



Chapter9-23


Desired balance (5,800) (5,800)Adjustment (5,650) (5,950)

Journal entry – Case 1:

Case 1 Case 2Percentage of Receivables







Chapter9-24


Desired balance (5,800) (5,800)Adjustment (5,650) (5,950)

Journal entry – Case 2:



Case 1 Case 2Percentage of Receivables





Chapter9-25

When estimating losses using Percentage ofReceivables, companies often prepare an agingschedule which classifies customer balances by thelength of time they have been unpaid.



Illustration 9-7



Chapter9-26

Percentage of Sales approach:Summary

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.

Method may also be applied using an aging schedule.





Chapter9-27

Companies sell receivables for two majorreasons.

1. Receivables may be the only reasonable source

of cash.

2. Billing and collection are often time-consumingand costly.

LO 4 Describe the entries to record the disposition of accounts receivable.

Disposing of Accounts Receivable



Chapter9-28 LO 4 Describe the entries to record the disposition of accounts receivable.


Sale of ReceivablesA factor buys receivables from businesses and thencollects the payments directly from the customers.



Chapter9-29

E9-7 (a) On March 3, Cornwell Appliances sells$680,000 of its receivables to Marsh Factors Inc. MarshFactors assesses a finance charge of 3% of the amount ofreceivables sold. Prepare the entry on Cornwell

Appliances’ books to record the sale of the receivables.




Cash 659,600

Service charge expense 20,400

($680,000 x 3% = $20,400)



Chapter9-30 LO 4 Describe the entries to record the disposition of accounts receivable.


Credit Card SalesRetailer considers credit card sales the same ascash sales .

Retailer must pay card issuer a fee of 2 to4% for processing the transactions.

Retailer records in similar manner as checksdeposited from cash sale.



Chapter9-31

E9-7 (b) On May 10, Dale Company sold merchandise for$3,800 and accepted the customer’s America BankMasterCard. America Bank charges a 4% service chargefor credit card sales. Prepare the entry on Dale

Company’s books to record the sale of merchandise.



Sales 3,800

Cash 3,648

Service charge expense 152

($3,800 x 4% = $152)



Chapter9-32 LO 5 Compute the maturity date of and interest on notes receivable.

Notes Receivable

Companies may grant credit in exchange for apromissory note. A promissory note is a writtenpromise to pay a specified amount of money ondemand 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 creditperiod exceed normal limits, or

3. in settlement of accounts receivable.



Chapter9-33 LO 5 Compute the maturity date of and interest on notes receivable.

Notes Receivable

To the Payee, the promissory note is a note receivable.To the Maker, the promissory note is a note payable.

Illustration 9-10



Chapter9-34

Determining the Maturity Date

LO 5 Compute the maturity date of and interest on notes receivable.

Notes Receivable

Note expressed in terms of

Months

Days

Computing InterestIllustration 9-13



Chapter9-35 LO 6 Explain how companies recognize notes receivable.

Recognizing Notes Receivable

E9-10 Orosco Supply Co. has the following transactionsrelated to notes receivable during the last 2 months of 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 forBob Reber’s outstanding accounts receivable.

Dec. 31 Accrued interest revenue on all notes receivable.

Instructions

(a) Journalize the transactions for Orosco Supply Co.



Chapter9-36

E9-10 Nov. 1 Loaned $15,000 cash to Sally Givens on a1-year, 10% note. Dec. 11 Sold goods to John Countryman,Inc., receiving a $6,750, 90-day, 8% note. Dec. 16Received a $4,000, 6-month, 9% note in exchange for BobReber’s outstanding accounts receivable.

Cash 15,000

Notes receivable 15,000Nov. 1

Sales 6,750

Notes receivable 6,750Dec. 11


Notes receivable 4,000Dec. 16


LO 6 Explain how companies recognize notes receivable.



Chapter9-37

E9-10 Dec. 31 Accrued interest revenue on all notesreceivable.

Interest revenue 295

Interest receivable 295Dec. 31

Amount Rate Time

Givens note: 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$


LO 6 Explain how companies recognize notes receivable.



Chapter9-38

Valuing Notes Receivable

LO 7 Describe how companies value notes receivable.

Notes Receivable

Like accounts receivable, companies report short-term notes receivable at their cash (net)

realizable value.Estimation of cash realizable value and bad debtsexpense are done similarly to accounts receivable.

Allowance for Doubtful Accounts is used.



Chapter9-39

Disposing of Notes Receivable

LO 8 Describe the entries to record the disposition of notes receivable.

Notes Receivable

1. Notes may be held to their maturity date.

2. Maker may default and payee must make anadjustment to the account.

3. Holder speeds up conversion to cash by sellingthe note receivable.



Chapter9-40

Honor of Notes Receivable


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.Dishonored note receivable is no longer negotiable.

Disposing of Notes Receivable



Chapter9-41

Notes Receivable

E9-13 On May 2, Kleinsorge Company lends $7,600 toEverhart, Inc., issuing a 6-month, 9% note. At the maturitydate, 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 willoccur.

(c) Prepare the entry to record the dishonor of the note,assuming that Kleinsorge Company does not expectcollection in the future.




Chapter9-43

Notes Receivable

E9-13 (c) Prepare the entry to record the dishonor ofthe note, assuming that Kleinsorge Company does notexpect collection in the future.


Notes receivable 7,600

Allowance for doubtful accounts 7,600(c)

When there is no hope of collection, the note holder wouldwrite off the face value of the note. No interest revenuewould be recorded because collection will not occur.



Chapter9-44

Presentation

LO 9 Explain the statement presentation and analysis of receivables.

Statement Presentation and Analysis

Identify in the balance sheet or in the notes,each major type of receivable.

Report short-term receivables as current assets.

Report both gross amount of receivables andallowance for doubtful account.

Report bad debts expense and service charge

expense as selling expenses.

Report interest revenue under “Other revenuesand gains.”

B/S

I/S



Chapter9-45

Analysis of Receivables

This Ratio used to:

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



20.3 times



Chapter9-46

Analysis of Receivables

Variant of the accounts receivable turnover ratio isaverage collection period in terms of days.

Used to assess effectiveness of credit and collectionpolicies.

Collection period should not exceed credit term period.



20.3 times, or every18 days (365 / 20.3)



Chapter

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Accounting Principle Kieso 8e_Ch09

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