Chapter 9

1. Chapter 9 Accounting for Receivables

2. Recognizing an A/R Time of Sale A/R – Polo Company Sales Return of Merchandise Sales Return/Allowances A/R – Polo Company Paid Within Discount Period Cash Sales Discounts A/R – Polo Company

3. Interest on a Credit Card A/R – Joseph Davis Interest Revenue (To record Interest on Amount Due)

4. Valuing Accounts Receivable Some credit sales will become uncollectable. This presents a problem when reporting an exact amount on the balance sheet. In 2011, nearly 40% of customers defaulted on their loans. WHY?

5. Direct Write Off Method • When a company can determines a particular account cannot be collected. • We use a new expense account, BAD DEBTS EXPENSE Bad Debts Expense A/R – C. Andersen (To record write-off of account, C. Andersen)

6. Problem • The Direct Write Off Method does not match the sale made in another period. • If Bad Debts are extensive, than this method is not acceptable for accounting purposes. WHY?

7. Allowance Method for Uncollectible Accounts • GAAP requires the allowance method for financial purposes when bad debts are material in amount. This method has three essential features • Estimate uncollectible accounts in the same time period as the sales. • The entry goes to “Allowance for Bad Debts Expense”, a contra-sales account • When a specific account is identified, the entry is debit to “Allowance for Bad Debts Expense”.

8. Two Methods for Uncollectible Accounts • Percentage of Sales – Management estimates what percentage to use from past experience. • Example, XYZ Company has sales of $800,000, they estimate that 1% will become uncollectible. • The Entry is: Bad Debts Expense 8,000 Allowance for Doubtful Accounts 8,000 (To record 1% of sales as uncollectible)

9. Method 2 • Percentage of Receivables • Company prepares an aging schedule which lists are receivable and how many days they are over due. • You will need to take into consideration the amount in the Allowance for Doubtful Accounts** • Lets look at Page 405

10. Let’s Try Together • Page 424 (Monday) • E9-3

11. Disposing of A/R • Companies can sell their accounts receivables to other companies, banks, finance companies. • These companies will charge a service fee to take care of your accounts receivable or credit card sales. • WHY???

12. Example • Cain Furniture Company sells $600,000 of their credit or A/R to Federal Factors. Federal Factors charge a 2% charge of the amount sold. • Entry Cash $588,000 Service Charge Expense $ 12,000 A/R $600,000 (To Record the Sale of Accounts Receivable Accounts)

13. Credit Card Sales • Companies like Master Card, Visa, American Express charge a fee to the stores to use their cards (that is why many companies come out with their own cards: JC Penney, Sear, etc) • Example: Linda Umulisa purchases $1000 of compact discs for her restaurant using the company VISA Card. VISA charges a 3% service charge – This is an entry for Hassatou Music Company that sold the CD’s. Cash $970 Service Charge Expense $30 Sales $1000

14. Let’s Try • Page 424 • E9-7 and E9-8 • Page 426 9-1A

15. Notes • Companies often give a promissory note to another company for goods purchased. • Look at Example on Page 409 • Notice the important information on a note

16. Recognizing the Note • When the note is accepted Notes Receivable A/R-Keith Company (Acceptance of a 12% note)

17. How to Compute Interest on a Note • Damarco Co. gives Evan Inc. a $3,400, 90 day, 12% notes dated May 10. • What is the maturity date of the note. May (31-10) 21 days June 30 July 31 (Need 8 more days) Maturity date is August 8

18. What is the Interest Collected? • Accounting frequently uses 360 days as a base but depends on the company • Formula is Face x Rate x Time = Interest 3,400 x 12% x 90/360 = $102 interest on note

19. Entry to Record Note Collection Cash $3,502 Notes Receivable $3,400 Interest Revenue $102 (To record collection of Damarco’s Note)

20. Complication • What if you had to do the financial statements before the note was paid. Let’s say 30 days into the note period • First compute the interest for 30 days using the same formula Face x Rate x Time $3400 x 12% x 30/360 = $34.00 has accrued

21. Entry Interest Receivable 34.00 Interest Revenue 34.00 (To Record 30 days interest on Damarco Note) ------------------------------------------------------ When the note is paid Cash 3,502 Notes Receivable 3400 Interest Receivable 34 Interest Revenue 68

22. Dishonored Note • When a note is not paid it goes back to A/R, but with the interest included • Example for the Damarco note to Evan • He owed $3400 and $102 interest Accounts Receivable 3502 Notes Receivable 3400 Interest Revenue 102

23. Let’s Try • Page 425 • E9-10 • E9-13 (a, b)

24. Ratio • Accounts Receivable Turnover Ratio Net Credit Card Sales/Beg +End =Turnover 2 • Average Collection Period Days in Year/ A/R Turnover Ratio = Avg. Days of collection

25. What Is It??? • James Company net sales of $29,462 million for the year. The beginning A/R was $3,303 million and ending A/R of $3,989. Compute • Accounts Receivable Turnover • Average Collection in Days

26. Almost Done • Go to Page 417 for everything we’ve learned

27. More Practice • P9-3A – Page 426 • P9-6A – Page 428

28. Test Practice • Methods of determining uncollectible accounts. • New accounts in this chapter • Journal entries for uncollectible accounts. (all methods) • Journal entry for account previously written off. • Compute interest on notes receivable. • Determine maturity date on notes receivable. • Compute aging of AR. • Compute ratios