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Receivables Chapter 9 Receivables Monetary Claims Arise from selling goods and services on credit and lending money Two major types Accounts Receivable Notes Receivable Accounts Receivable Arise from sales or service revenues Should be converted to cash within normal receivable terms

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Receivables

Chapter 9


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Receivables

  • Monetary Claims

  • Arise from selling goods and services on credit and lending money

  • Two major types

    • Accounts Receivable

    • Notes Receivable


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Accounts Receivable

  • Arise from sales or service revenues

  • Should be converted to cash within normal receivable terms


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Direct Write-Off Method

On August 12, 2000, Cayman Company sold $580 of merchandise on credit to Benson Brothers.

On February 1, 2001, Cayman Company determines it cannot collect the $580 from Benson Brothers


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Allowance Method

The goal of the allowance method is twofold:

  • To record the expense of extending credit with revenues in the same accounting period, yielding a more accurate income statement.

  • To report accounts receivable on the balance sheet at the amount you expect to collect from customers.


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Estimating Bad Debts Expense

Two Methods

  • Percent of Sales Method

  • Aging of Accounts Receivable Method


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Percent of Sales Method

Bad debts expense is computed as follows:


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Percent of Sales MethodExample

Baxter Company has credit sales of $700,000 in 2004. Baxter estimates 0.5% of credit sales are uncollectible.

What is Uncollectible Accounts Expense for 2004?


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Aging of Accounts Receivable Method

  • Year-end Accounts Receivable is broken down into age classifications.

  • Each age grouping has a different likelihood of being uncollectible.

  • Compute a separate allowance for each age grouping.



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Writing Off a Bad Debt

With the allowance method, when an account is determined to be uncollectible, the debit goes to Allowance for Doubtful Accounts.

Assume that on Feb. 1, Baxter Company deems a $580 account receivable from Benson Brothers to be uncollectible.


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Recovery of a Bad Debt

Subsequent collections require that the original write-off entry be reversed before the cash collection is recorded. Assume that on June 5, Benson Brothers pays the amount owed.


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Credit Card Sales Example

TechCom has a bank credit card sale of $100 to a customer. The bank charges a processing fee of 4%. The cash is received immediately.


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Credit Card and Bankcard Sales

How would TechCom record a $100 non-bank credit card sale with a 2% service charge?


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Notes Receivable

A note is a written promise to pay a specific amount at a specific future date.


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Identifying a Note’sMaturity Date

  • When the period is given in days…

  • the maturity date is determined by counting the days from the date of issue.

  • The date the note was issued is omitted.

  • The maturity date is counted.



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End-of-Period Adjustments

  • When a note receivable is outstanding at the end of an accounting period, the company must prepare an adjusting entry to accrue interest income.


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Reporting Receivables

  • Some companies report a single amount for its current receivables in the body of the balance sheet.

  • They use a note to the financial statements to give more details.


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