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0 9 Receivables 0 9-1 Classification of Receivables The term receivables includes all money claims against other entities, including people, business firms, and other organizations. 0 9-1 Accounts Receivable

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9

Receivables


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9-1

Classification of Receivables

The term receivables includes all money claims against other entities, including people, business firms, and other organizations.


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9-1

Accounts Receivable

Accounts receivable are normally expected to be collected within a relatively short period, such as 30 or 60 days.


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9-1

Notes Receivable

Notes receivable are amounts that customers owe for which a formal, written instrument of credit has been issued.


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9-1

Other Receivables

Other receivables expected to be collected within one year are classified as current assets. If collection is expected beyond one year, these receivables are classified as noncurrent assets and reported under the caption Investments.


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9-2

Companies often sell their receivables to other companies. This transaction is called factoring the receivables, and the buyer of the receivables is called a factor.


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9-2

Uncollectible Receivables

There are two methods of accounting for receivables that appear to be uncollectible: the direct write offmethod and the allowance method.


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9-2

The direct write offmethod records bad debt expense only when an account is judged to be worthless. The allowance method records bad debt expense by estimating uncollectible accounts at the end of the accounting period.


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9-3

Direct Write-Off Method

On May 10, a $4,200 accounts receivable from D. L. Ross has been determined to be uncollectible.

May 10 Bad Debt Expense 4 200 00

Accounts Receivable—D. L. Ross 4 200 00

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9-3

The amount written off is later collected on November 21.

Nov. 21 Accounts Receivable—D. L. Ross 4 200 00

Bad Debt Expense 4 200 00

21 Cash 4 200 00

Accounts Receivable—D. L. Ross 4 200 00

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Example Exercise 9-1

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9-3

Journalize the following transactions using the direct write-off method of accounting for uncollectible receivables.

July 9 Received $1,200 from Jay Burke and wrote off the remainder owed of $3,900 as uncollectible.

Oct. 11 Reinstated the account of Jay Burke and received $3,900 cash in full payment.

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9-4

Allowance Method

On December 31, ExTone Company estimates that a total of $40,000 of the $1,000,000 balance in her company’s Accounts Receivable will eventually be uncollectible.

Dec. 31 Bad Debt Expense 40 000 00

Allowance for Doubtful Accounts 40 000 00

Uncollectible accounts estimate.

20


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9-4

Net Realizable Value

The net amount that is expected to be collected, $960,000 ($1,000,000 – $40,000), is called the net realizable value (NRV). The adjusting entry reduces receivables to the NRV and matches uncollectible expenses with revenues.


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9-4

On January 21, John Parker’s account totaling $6,000 is written off because it is uncollectible.

Jan. 21 Allowance for Doubtful Accounts 6 000 00

Accounts Receivable—John Parker 6 000 00

To write off the uncollectible account.

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9-4

During 2008, ExTone Company writes off $36,750 of uncollectible accounts, including the $6,000 account of John Parker. After posting all entries to write-off uncollectible amounts, the Allowance for Doubtful Accounts will have a credit balance of $3,250 ($40,000 – $36,750).


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9-4

ALLOWANCE FOR DOUBTFUL ACCOUNTS

{

Jan. 1, 2008 Bal. 40,000

Total accounts written off $36,750

Jan. 21 6,000

Feb. 2 3,900

“ “

“ “

Dec. 31 Unadjusted bal 3,250

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9-4

If ExTone Company had written off $44,100 in accounts receivable during 2008, the Allowance for Doubtful Accounts would have a debit balance of $4,100.


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9-4

ALLOWANCE FOR DOUBTFUL ACCOUNTS

{

Jan. 1, 2008 Bal. 40,000

Total accounts written off $44,100

Jan. 21 6,000

Feb. 2 3,900

“ “

“ “

Dec. 31 Unadjusted bal 4,100

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9-4

Collecting a Written-Off Account

Nancy Smith’s account of $5,000 which was written off on April 2 is later collected on June 10. Two entries are needed: one to reinstate Nancy Smith’s account and a second to record receipt of the cash.


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9-4

Entry 1: Reinstate the account.

June 10 Accounts Receivable—Nancy Smith 5 000 00

Allowance for Doubtful Accounts 5 000 00

To reinstate the account written off on Jan. 21.

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9-4

Entry 2: Record collection of cash.

June 10 Cash 5 000 00

Accounts Receivable—Nancy Smith 5 000 00

Collection of written-off account.

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Example Exercise 9-2

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9-4

Journalize the following transactions using the allowance method of accounting for uncollectible receivables.

July 9 Received $1,200 from Jay Burke and wrote off the remainder owed of $3,900 as uncollectible.

Oct. 11 Reinstated the account of Jay Burke and received $3,900 cash in full payment.

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9-4

Estimating Uncollectibles

The allowance method uses two ways to estimate the amount debited to Bad Debt Expense.

  • Estimate based on a percentage of sales.

  • Estimate based on analysis of receivables.


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If credit sales for the period are $3,000,000 and it is estimated that 1½ % will be uncollectible, the Bad DebtExpenseis debited for $45,000 ($3,000,000 x .015). This approach disregards the balance in the allowance account before the adjustment.

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9-4

Estimate Based on a Percentage of Sales


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0 estimated that 1½ % will be uncollectible, the

9-4

After this adjusting entry is posted, Allowance for Doubtful Accounts will have a balance of $48,250.

Dec. 31 Bad Debt Expense 45 000 00

Allowance for Doubtful Accounts 45 000 00

Uncollectible accounts ($3,000,000 x 0.015 = $45,000).

35


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0 estimated that 1½ % will be uncollectible, the

9-4

BAD DEBT EXPENSE

Dec. 31 Adj entry 45,000

Dec. 31 Adjusted bal. 45,000

ALLOWANCE FOR DOUBTFUL ACCOUNTS

{

Jan. 1, 2008 Bal. 40,000

Total accounts written off $36,750

Jan. 21 6,000

Feb. 2 3,900

“ “

Dec. 31 Unadjusted bal 3,250

Dec. 31 Adj. entry 45,000

Dec. 31 Adjusted bal. 48,250

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Example Exercise 9-3 estimated that 1½ % will be uncollectible, the

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9-4

At the end of the current year, Accounts Receivable has a balance of $800,000; Allowance for Doubtful Accounts has a credit balance of $7,500; and net sales for the year total $3,500,000. Bad debt expense is estimated at ½ of 1% of net sales.

Determine (a) the amount of the adjusting entry for uncollectible accounts; (b) the adjusted balances of Accounts Receivable, Allowance for Doubtful Accounts, and Bad Debt Expense; and (c) the net realizable value of accounts receivable.

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0 estimated that 1½ % will be uncollectible, the

9-4

Estimating Uncollectibles Based on Analysis of Receivables

The longer an account receivable is outstanding, the less likely that it will be collected. Basing the estimate of uncollectible accounts on how long specific amounts have been outstanding is called aging the receivables.


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0 estimated that 1½ % will be uncollectible, the

9-4

Aging of Accounts Receivables

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0 estimated that 1½ % will be uncollectible, the

9-4

Estimate of Uncollectible Accounts

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0 estimated that 1½ % will be uncollectible, the

9-4

Estimate Based on Analysis of Receivables

If it is estimated that $3,390 of the receivables will be uncollectible and the Allowance forUncollectibleAccountscurrently has a balance of $510, theBad DebtExpensemust be debited for $2,880 ($3,390 – $510).

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0 estimated that 1½ % will be uncollectible, the

9-4

Estimate Based on Analysis of Receivables

Aug. 31 Bad Debt Expense 2 880 00

Allowance for Doubtful Accounts 2 880 00

Uncollectible accounts ($3,390 – $510).

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0 estimated that 1½ % will be uncollectible, the

9-4

BAD DEBT EXPENSE

Aug. 31 Adj. entry 2,880

Aug. 31 Adj. bal. 2,880

ALLOWANCE FOR DOUBTFUL ACCOUNTS

Aug. 31 Unadj. bal. 510

Aug. 31 Adj. entry 2,880

Aug. 31 Adj. bal. 3,390

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0 estimated that 1½ % will be uncollectible, the

9-4

If the unadjusted balance of Allowance forUncollectibleAccounts had been a debit balance of $300, the amount of the adjustment would have been $3,690 ($3,390 + $300).


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0 estimated that 1½ % will be uncollectible, the

9-4

BAD DEBT EXPENSE

Aug. 31 Adj. entry 3,690

Aug. 31 Adj. bal. 3,690

ALLOWANCE FOR DOUBTFUL ACCOUNTS

Aug. 31 Adj. entry 3,690

Aug. 31 Adj. bal. 3,390

Aug. 31 Unadj. bal. 300

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Example Exercise 9-4 estimated that 1½ % will be uncollectible, the

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9-4

At the end of the current year, Accounts Receivable has a balance of $800,000; Allowance for Doubtful Accounts has a credit balance of $7,500; and net sales for the year total $3,500,000. Using the aging method, the balance of Allowance for Doubtful Accounts is estimated as $30,000.

Determine (a) the amount of the adjusting entry for uncollectible accounts; (b) the adjusted balances of Accounts Receivable, Allowance for Doubtful Accounts, and Bad Debt Expense, and (c) the net realizable value of accounts receivable.

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0 estimated that 1½ % will be uncollectible, the

9-5

Comparing Direct-Write-Off and Allowance Methods

Direct Write-Off Method

Allowance Method

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Amount of bad debt expense recorded estimated that 1½ % will be uncollectible, the

Allowance account

Primary users

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9-5

Comparing the Direct Write-Off and Allowance Methods

Direct Write-Off Method

When the actual accounts receivable are determined to be uncollectible

No allowance account is used

Small companies and companies with relatively few receivables

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Amount of bad debt expense recorded estimated that 1½ % will be uncollectible, the

Allowance account

Primary users

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9-5

Comparing the Direct Write-Off and Allowance Methods

Allowance Method

Using estimate based on either (1) a percentage of sales or (2) analysis of receivables.

The allowance account is used

Large companies and those with a large amount of receivables


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0 estimated that 1½ % will be uncollectible, the

9-6

Characteristics of Notes Receivable

A note receivable, or promissory note, is a written document containing a promise to pay:

  • a specific amount of money (face amount)

  • on demand or at a definite time

  • to an individual or a business (payee), or to the bearer or holder of the note.


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0 estimated that 1½ % will be uncollectible, the

9-6

Characteristics of Notes Receivable

The one making the promise is called the maker. The date a note is to be paid is called the due date or maturity date.


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2,500.00 estimated that 1½ % will be uncollectible, the

$_____________

Fresno, California______________20___

March 16 08

Ninety days

________________ _AFTER DATE _______ PROMISE TO PAY TO

We

THE ORDER OF ____________________________________________

Judson Company

Two thousand five hundred 00/100---------------------------

_________________________________________________DOLLARS

Maker

City National Bank

PAYABLE AT ______________________________________________

VALUE RECEIVED WITH INTEREST AT ____

10%

NO. _______ DUE___________________

14 June 14, 2008

H. B. Lane

TREASURER, WILLIARD COMPANY

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9-6

Payee

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0 estimated that 1½ % will be uncollectible, the

9-6

What is the due date of a 90-day note dated March 16?

Total days in note 90 days

Number of days in March 31

Issue date of note March 16

Remaining days in March –15 days

75 days

Number of days in April –30 days

45 days

Number of days in May –31 days

Residual days in June 14 days

Answer: June 14

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9-6

Accounting for Notes Receivable

Received a $6,000, 12%, 30-day note dated November 21, 2008 in settlement of the account of W. A Bunn Co.

Nov. 21 Notes Rec.—W. A. Bunn Co. 6 000 00

Accts. Rec.—W. A Bunn Co. 6 000 00

Received 30-day, 12% note dated November 21, 2008.

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9-6

On December 21, when the note matures, the firm receives $6060 from W. A. Bunn Company ($6,000 plus $60 interest).

Dec. 21 Cash 6 060 00

Notes Rec.—W. A. Bunn Co. 6 000 00

Interest Revenue* 60 00

Received principal and interest on matured note.

60

*$6,000 x 12% x 30/360 = $60


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9-6

If W. A. Bunn Company fails to pay the note on the due date, it is considered a dishonorednote receivable. The note and interest are transferred to the customer’s account.

Dec. 21 Accts Rec.—W. A. Bunn Co. 6 060 00

Notes Rec.—W. A. Bunn Co. 6 000 00

Interest Revenue 60 00

Recorded dishonored note, plus interest.

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9-6

A 90-day, 12% note dated December 1, 2008, is received from Crawford Company to settle its account, which has a balance of $4,000.

2008

Dec. 1 Notes Rec.—Crawford Co. 4 000 00

Accts. Rec.—Crawford Co. 4 000 00

Accepted note in settlement of account.

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9-6

Assuming that the accounting period ends on December 31, an adjusting entry is required to record the accrued interest of $40 ($4,000 x 0.12 x 30/360).

2008

Dec. 31 Interest Receivable 40 00

Interest Revenue 40 00

Accrued interest ($4,000 x 12% x 30/360).

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($4,000 x 12% x 30/360). estimated that 1½ % will be uncollectible, the

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9-6

On March 1, 2009, $4,120 is received for the note ($4,000) and interest ($120).

2009

Mar. 1 Cash 4 120 00

Notes Rec.—Crawford Co. 4 000 00

Interest Receivable 40 00

Interest Revenue 80 00

Collected note and accrued interest.

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Example Exercise 9-5 estimated that 1½ % will be uncollectible, the

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9-6

Same Day Surgery Center received a 120-day, 6% note for $40,000, dated March 14 from a patient on account.

  • Determine the due date of the note.

  • Determine the maturity value of the note.

  • Journalize the entry to record the receipt of the payment of the note at maturity.

65


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Assets estimated that 1½ % will be uncollectible, the

Current assets:

Cash $119,500

Notes receivable 250,000

Accounts receivable $445,000

Less allowance for

doubtful accounts 15,000 430,000

Interest receivable 14,500

Merchandise inventory 714,000

Receivables (including the allowance account) are highlighted

0

Crabtree Co.Balance SheetDecember 31, 2008

9-7

Receivables on Balance Sheet

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