Receivables Chapter 8 Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-1.
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Transcript of Receivables Chapter 8 Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall8-1.
What Is a Receivable?
• Accounts receivable
• Notes receivable
• Other receivables
A receivable is a right to receive cash in the future from a current transaction.
• Also referred to as a trade receivable
• Results from sales of goods or performance of services on account
• Collection period normally = 30 to 60 days
8-2
What Is a Receivable?
• Accounts receivable
• Notes receivable
• Other receivables
A receivable is a right to receive cash in the future from a current transaction.
• Also called a promissory note
• Written promise that a customer will pay principal and interest
• Collection period longer than A/R
Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall 8-3
Notes Receivable
• More formal than accounts receivable• Usually longer in term
– Debtor promises to pay by maturity date– Maturity date–date the debt must be
completely paid off
• Current assets if due within one year or less
• Long-term assets if due beyond one year• Promissory note
– Written document signed by both parties 4
What Is a Receivable?
• Accounts receivable
• Notes receivable
• Other receivables
A receivable is a right to receive cash in the future from a current transaction.
• Category includes dividends, taxes, and interest receivables
• Can be current or long-term
Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall 8-5
Recording Sales on Credit
• Selling “on account” will create an A/R• Suppose that, on August 8, Smart Touch
Learning performs $5,000 in services to Brown on account, and sells $10,000 of inventory on account to Smith.
Date Accounts and Explanation Debit Credit
Prepare both journal entries.
Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall 8-6
Recording Sales on Credit• Selling “on account” will create an A/R• Suppose that, on August 8, Smart Touch
Learning performs $5,000 in services to Brown on account, and sells $10,000 of inventory on account to Smith. Ignore COGS.
Date Accounts and Explanation Debit Credit
Aug 8 Accounts receivable - Brown 5,000 Service revenue 5,000
Accounts receivable - Smith 10,000 Sales revenue 10,000
8-7
A L + E
Accounts = Service Rev.Receivable
Sales Rev
Using an A/R Subsidiary Ledger
A “control account” will reflect the total of all the individual subsidiary accounts.
Bal. 15,000 Accounts Receivable
Control Account
Bal. 5,000 A/R - Brown
Subsidiary Ledger
Bal. 10,000 A/R - Smith
Subsidiary Ledger
Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall 8-8
Recording Credit Card and Debit Card Sales
• Recorded the same as Cash sales.• A fee is usually charged by the card
company.– The net cash received is reduced by
the fee.
• 2 Methods are allowed:– Net Method– Gross Method
Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall 8-9
Net Method
• Record the card company fee at the time of the sale.
• Only the net amount of cash is recorded.
Date Accounts and Explanation Debit Credit
Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall 8-10
Net MethodAugust 15—Smart Touch Learning sells merchandise inventory to a customer for $3,000. The customer pays with “plastic.” The card company assesses a 4% fee. Ignore COGS.
Date Accounts and Explanation Debit Credit
Aug 15 Cash 2,880 Credit Card Expense 120 Sales Revenue 3,000 To record credit card sales, net of fee.
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A L + E
Cash = Sales Rev.
C Card Exp
Gross Method
• Record the full sale on the sale date.• Record the credit card fee as a separate entry
when the cash is deposited by the third party.
Date Accounts and Explanation Debit Credit
Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall 8-12
Gross MethodAugust 15—Smart Touch Learning sells merchandise inventory to a customer for $3,000. The customer pays with “plastic.” The card company assesses a 4% fee. Ignore COGS.
Date Accounts and Explanation Debit Credit
Aug 15 Cash 3,000 Sales Revenue 3,000 To record credit card sales at gross.
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A L + E
Cash = Sales Rev.
Gross MethodAugust 31—The third party credit card company assesses a 4% fee on the original sale.
Date Accounts and Explanation Debit Credit
Aug 31 Credit Card Expense 120 Cash 120 To record credit card fee.
8-14
A L + E
Cash = C Card Exp
Accounting for Uncollectibles (Bad Debts)
• Selling on credit:– BENEFIT–Increase sales by selling to a wider
range of customers
• Two methods to account for uncollectible accounts:– Allowance method– Direct write-off method
15
How do we record uncollectible accounts using the Direct Method?
• Fact: Not all customers will pay what they owe.
• Accounting Reality: We have to take these “bad” receivables off the books and record a corresponding Bad Debt Expense.
Under the Direct Method, the bad debt expense is
recorded as soon as a receivable is
deemed uncollectible.(Not GAAP)
Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall 8-16
Direct Method
August 9—Smart Touch Learning determines that it will not be able to collect $200 from Dan King for a May 5 sale.
Date Accounts and Explanation Debit Credit
Aug 9 Bad Debts Expense 200 Accounts Receivable - King 200 To write off uncollectible account.
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A L + E
Acct Rec. = Bad debt Exp.
Recovery of Previously Written Off A/R
September 10—King pays the $200 previously written off as uncollectible.
Date Accounts and Explanation Debit Credit
Sep 10 Accounts Receivable - King 200 Bad Debts Expense 200 To reinstate previously written off A/R.
Sep 10 Cash 200 Accounts Receivable - King 200 To record cash collection.
8-18
• Reverse the earlier write-off• Record the receipt of the payment
How do we record uncollectible accounts using the Allowance Method?
• Based on the Matching Principle
• Estimate future uncollectible accounts now, instead of waiting until they actually go bad.
• Exploit knowledge that the older A/R accounts are, the less likely that they will be collected.
%8-19
How do we record uncollectible accounts using the Allowance Method?
• At the end of each period, record the Bad Debts Expense and put the credit in Allowance for Bad Debts.– The Allowance for Bad Debts
account is a Contra-Asset
• As actual accounts become uncollectible, charge them against the Allowance account.
%8-20
Using the Allowance MethodDecember 31—Smart Touch Learning estimates that $80 of its $4,400 A/R are uncollectible.
Date Accounts and Explanation Debit Credit
Dec 31 Bad Debts Expense 80 Allowance for Bad Debts 80 Recorded bad debts expense.
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A L + E
Allowance = Bad debt Exp.
for Bad Debt
Using the Allowance MethodThe Contra-Asset account will be shown as
reduction of Accounts Receivable.
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Writing Off an Uncollectible Account
• When an account become uncollectible, it is written off.
• The bad account is charged against the Allowance Account.
Date Accounts and Explanation Debit Credit
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Writing Off an Uncollectible AccountJanuary 10, 2016—Smart Touch Learning determines that it will not collect $25 from customer Shawn Callahan.
Date Accounts and Explanation Debit Credit
Jan 10 Allowance for Bad Debts 25 Accounts Receivable - Callahan 25
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A L + E
Allowance =for Bad DebtAcct Rec.
Before AfterAR 4,400 4375
Less Allowance (80) (55)4,320 4,320
Recovery of Previously Written Off A/R
March 4—Smart Touch Learning receives $25 from Callahan to cover the written off account.
Date Accounts and Explanation Debit Credit
Mar 4 Accounts Receivable - Callahan 25 Allowance for Bad Debts 25 To reinstate previously written off A/R.
Mar 4 Cash 25 Accounts Receivable - Callahan 25 To record collection of cash.
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• Reverse the earlier write-off• Record the receipt of the payment
How Do We Estimate the Allowance Account?
• Three methods are available– Percent-of-Sales– Percent-of-Receivables– Aging-of Receivables
Percent-of-Sales Method:
Bad Debt Expense = Net Credit Sales * Bad Debt %
Estimate Bad Debts as a percent of outstanding credit sales at year-end
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$600 = $60,000 x 1%
How Do We Estimate the Allowance Account?
Percent-of-Receivables Method:Step 1:
Target Balance = Ending A/R * Bad Debt %
Step 2:
Target Balance -
Existing credit balance of Allowance for Bad Debts
Determine the target balance for Allowance for Bad Debts
Determine Bad Debts Expense by evaluating the Allowance account
Bad Debts Expense =
8-27
How Do We Estimate the Allowance Account?
Aging-of-Receivables MethodStep 1:
Target Balance = Σ (Each Age Group * Bad Debt %)
Step 2:
Bad Debts Exp. =
Target Balance -Existing credit balance of Allowance for Bad Debts
Determine the target balance for Allowance for Bad Debts based on account age
Determine Bad Debts Expense by evaluating the Allowance account
Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall 8-28
Smart Touch Learning’s unadjusted credit balance in
the allowance account is $55(80 – 25).
Per the previous computation, the desired balance is $185.
Smart Touch Learning’s unadjusted credit balance in
the allowance account is $55(80 – 25).
Per the previous computation, the desired balance is $185.
80 25 130
185
Allowance for Bad Debts
Using the Aging-of-Receivables Method
Date Accounts and Explanation Debit Credit
Dec 31 Bad Debts Expense 130 Allowance for Bad Debts 130 To record bad debts expense.
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A L + E
Allowance = Bad Debt
for Bad Debt Exp
Accounting for Notes Receivable
• Record the note on the date the loan is made.
• Periodically accrue interest revenue and record interest receipts.
• Record collection of note principal.
Notes are evidenced by a signed
document called a Promissory Note.
Must include certain components.
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Recording a Note ReceivableSeptember 30—Smart Touch Learning loaned $1,000 to Lauren Holland for 1 year @ 6%.
Date Accounts and Explanation Debit Credit
Sep 30 Notes Receivable - Holland 1,000 Cash 1,000 Accepted a note from Holland
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A L + E
Note Rec. =Cash
Recording Interest
Interest is recorded based on the amount of time that has passed.
• Interest rates are always annual.• Time is always a fraction of a year.
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Computing Interest(examples)
• By the year
• By the month
• By the day
37
360 days used in this example to simplify
calculations
Recording a Note ReceivableDecember 31—The $1,000 loan to Lauren Holland is not yet due, but interest must be accrued at the rate of 6%.
Date Accounts and Explanation Debit Credit
Dec 31 Interest Receivable 15 Interest Revenue 15 Accrued interest revenue.
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A L + E
Int. Rec. = Int. Rev
Recording Dishonored Notes Receivable
• When the maker of the note does not pay, it is dishonored.
• Often the dishonored note AND the unpaid interest are transferred to an A/R.
• Later, the A/R can be written off.
Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall
If a unit has many notes receivable,
such as a financing division, it can also set up a Loan Loss Reserve similar to Allowance for Bad
Debts.
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Use the acid-test ratio, accounts receivable
turnover ratio, and days’ sales in receivables to
evaluate business performance(Liquidity)
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Acid-Test (or Quick) Ratio
Compute the Acid-Test Ratio for Green Mountain Coffee Roasters
©2014 Pearson Education, Inc. publishing as Prentice Hall
Acid-Test Ratio
= Cash +Short-Term
Investments +
Net Current Receivables
/Total Current Liabilities
8-42
Acid-Test (or Quick) Ratio
Compute the Acid-Test Ratio for Green Mountain Coffee Roasters
Acid-Test Ratio
= Cash +Short-Term
Investments +
Net Current Receivables
/Total Current Liabilities
Acid-Test Ratio
= ($12,989 + $ 27,523 + $310,321) / $ 471,374
= $350,833 / 471,374$ = 0.74
8-43
Accounts Receivable Turnover Ratio
Assuming that credit sales this year were $2,650,899, compute the Accounts Receivable
Turnover Ratio for Green Mountain Coffee Roasters
A/R Turnover Ratio
= Net Credit Sales ÷Average Net
A/R
8-47
Accounts Receivable Turnover Ratio
Assuming that credit sales this year were $2,650,899, compute the Accounts Receivable
Turnover Ratio for Green Mountain Coffee Roasters.
A/R Turnover Ratio
= $ 2,650,899 ÷ [($310,321 + $172,200) ÷ 2]
= 2,650,899$ ÷ $241,261 = 10.99
8-48
A/R Turnover Ratio
= Net Credit Sales ÷Average Net
A/R
Eastman Chemical A/R Turnover = $9,350 / 863 = 10.83