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Chapter 8 Receivables. 1. Classification of Receivables 2. Internal Control of Receivables 3. Uncollectible Receivables 4. Uncollectibles – Allowance Method 5. Uncollectibles – Direct Write-Off Method 6. Characteristics of Notes Receivable 7. Accounting for Notes Receivable

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Chapter 8 receivables
Chapter 8 Receivables

1. Classification of Receivables

2. Internal Control of Receivables

3. Uncollectible Receivables

4. Uncollectibles – Allowance Method

5. Uncollectibles – Direct Write-Off Method

6. Characteristics of Notes Receivable

7. Accounting for Notes Receivable

8. Balance Sheet Presentation

9. Financial Analysis and Interpretation

Learning Objectives


Chapter 8 receivables

Classification of Receivables

  • Accounts Receivable – used for selling merchandise or services on credit, and normally expected to be collected in a relatively short period.

  • Notes Receivable – used to grant credit on the basis of a formal instrument of credit, called a promissory note.

  • Other Receivables – interest receivable, taxes receivable, and receivables from officers or employees.


Chapter 8 receivables

Accounting for Uncollectible Accounts Receivable

The Direct Write-Off Method

  • This method is not consistent with the matching principle.

  • Accounts that prove to be uncollectible are written off in the year they become worthless.

  • Uncollectible Accounts Expenseis debited and Accounts Receivableis credited for each such transaction.


Chapter 8 receivables

Journal Entries – Direct Write-Off Method

Date Description Debit Credit

May. 10

Uncollectible Accts. Expense 420

Accts. Receivable - D. L. Ross 420

Accts. Receivable - D. L. Ross 420

Uncollectible Accts. Expense 420

Cash 420

Accts. Receivable - D. L. Ross 420

Write off uncollectible account of $420

Nov. 21

Reinstate and collect prior account written off.


Chapter 8 receivables

Accounting for Uncollectible Accounts Receivable

The Allowance Method

  • This method is consistent with the matching principle.

  • Management makes an estimate each year of the portion of accounts receivable that may not be collectible.

  • Uncollectible Accounts Expenseis debited and Allowance for Doubtful Accountsis credited.

  • Actual accounts that prove to be uncollectible are debited to Allowance for Doubtful Accountsand credited to Accounts Receivable.


Chapter 8 receivables

Journal Entries – Allowance Method

Date Description Debit Credit

Dec. 31

Uncollectible Accts. Expense 4,000

Allowance for Doubtful Acct. 4,000

Allowance for Doubtful Accts. 610

Accts. Receivable - J. Parker 610

Accts. Receivable - J. Parker 610

Allowance for Doubtful Accts. 610

Cash 610

Accts. Receivable - J. Parker 610

Estimated a total of $4,000 will be uncollectible.

Jan. 21

Write off uncollectible account of $610.

June 10

Reinstate and collect prior account written off.


Chapter 8 receivables

Estimating Uncollectible Accounts Expense

The allowance method uses two ways to estimate the amount debited to Uncollectible Accounts Expense.

1.Estimate based on a percentage of sales.

If credit sales for the period are $300,000 and it is estimated that 1% will be uncollectible, the Uncollectible Accounts Expense is $3,000.

2.Estimate based on analysis of receivables.

If it is estimated that $3,390 of the receivables will be uncollectible and the Allowance for Uncollectible Accounts is $510, the Uncollectible Accounts Expenseis $2,880 ($3,390 – $510).


Chapter 8 receivables

Accounts Receivable Aging and Uncollectibles

Not Days Past Due

Past over

Customer Balance Due 1-30 31-60 61-90 91-180 181-365 365

Ashby & Co. $ 150 $ 150

B. T. Barr 610 $ 350 $260

Brock Co. 470 $ 470

Saxon Woods

Co. 160 160

Total $86,300 $75,000 $4,000 $3,100 $1,900 $1,200 $800 $300

Uncollectibles

2% 5% 10% 20% 30% 50% 80%

PERCENT

Uncollectible percentages based on experience and industry averages.


Chapter 8 receivables

Accounts Receivable Aging and Uncollectibles

Not Days Past Due

Past over

Customer Balance Due 1-30 31-60 61-90 91-180 181-365 365

Ashby & Co. $ 150 $ 150

B. T. Barr 610 $ 350 $260

Brock Co. 470 $ 470

Saxon Woods

Co. 160 160

Total $86,300 $75,000 $4,000 $3,100 $1,900 $1,200 $800 $300

Uncollectibles

2% 5% 10% 20% 30% 50% 80%

PERCENT

$3,390 = $1,500 $200 $310 $380 $360 $400 $240

AMOUNT


Chapter 8 receivables

A

A

A

Year-End Adjustment for Uncollectibles

General Ledger

Balance Sheet

Accounts Receivable

Accounts receivable $86,300

Less allowance for

doubtful accounts 3,390

Net accounts receivable 82,910

86,300

Allowance for Doubtful Accts.

510

Balances before adjustment

Uncollectible Accts. Expense


Chapter 8 receivables

A

A

B

A

B

B

Year-End Adjustment for Uncollectibles

General Ledger

Balance Sheet

Accounts Receivable

Accounts receivable $86,300

Less allowance for

doubtful accounts 3,390

Net accounts receivable 82,910

86,300

Allowance for Doubtful Accts.

510

2,880

Balances before adjustment

Year-end adjustment

$3,390 - $510 = $2,880

Uncollectible Accts. Expense

2,880


Chapter 8 receivables

A

C

A

B

A

C

B

B

C

Year-End Adjustment for Uncollectibles

General Ledger

Balance Sheet

Accounts Receivable

Accounts receivable $86,300

Less allowance for

doubtful accounts 3,390

Net accounts receivable 82,910

86,300

Allowance for Doubtful Accts.

510

2,880

Balances before adjustment

3,390

Year-end adjustment

$3,390 - $510 = $2,880

Uncollectible Accts. Expense

2,880

Balance after adjustment


Chapter 8 receivables

Characteristics of Notes Receivable

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

  • a specific amount of money (principal)

  • to a specific person or company (payee)

  • at a specific place

  • on a specific date or upon demand

  • plus interest at a specific percentage of the principal (face) amount per year


Chapter 8 receivables

Calculating Interest and Maturity Value

We received a $2,500, 10%, 90-day note dated March 16, 2003.

Principal x Rate x Time = Interest

$2,500 x 10% x 90 /360 = $62.50

Principal + Interest = Maturity Value

$2,500 + $62.50 = $2,562.50

Interest Calculation

Maturity Value Calculation


Chapter 8 receivables

Accounting for Notes Receivable

Date Description Debit Credit

Nov. 21

Notes Receivable 6,000

Accts. Receivable - Bunn Co. 6,000

Cash 6,060

Notes Receivable 6,000

Interest Revenue 60

Principal + Interest = Maturity Value

$6,000 + ($6,000 x 12% x 30 / 360) = $6,060

Received a $6,000,30-day, 12% note.

Dec. 21

Collected amount due on note dated November 21.


Chapter 8 receivables

Understanding the 360-Day Year

  • In commercial transactions it is traditional to use a 360-day year.

  • The historic rationale for this procedure was ease of calculation which made sense before the computer and calculator age.

  • Why does this practice continue when most small calculators and desktop computers can present complex interest calculations in a few seconds?


Chapter 8 receivables

Another Look at the 360-Day Year

1. Assume a $100,000 note dated June 1 for 90 days at an interest rate of 12 percent. The textbook calculation is as follows:

$100,000 x (12 / 100) x (90 /360) = $3,000.00

2. A more precise calculation is as follows:

$100,000 x (12 / 100) x (90 /365) = $2,958.90

3. When large sums are involved, the 360-day method (known as ordinary interest or banker’s rule)

yields significantly more interest to the lender. It is used by banks and commercial organizations.

4. The second method (known as exact interest) is used by the federal government and the Federal Reserve System.


Crabtree co balance sheet december 31 2003
Crabtree Co.Balance SheetDecember 31, 2003

Assets

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


Chapter 8 receivables

Solvency Measures — The Short-Term Creditor

Accounts Receivable Turnover

2003 2002

Net sales on account $1,498,000 $1,200,000

Accounts receivable (net):

Beginning of year $ 120,000 $ 140,000

End of year 115,500 120,000

Total $ 235,000 $ 260,000

Average $ 117,500 $ 130,000


Chapter 8 receivables

Solvency Measures — The Short-Term Creditor

Accounts Receivable Turnover

2003 2002

Net sales on account $1,498,000 $1,200,000

Accounts receivable (net):

Beginning of year $ 120,000 $ 140,000

End of year 115,500 120,000

Total $ 235,000 $ 260,000

Average $ 117,500 $ 130,000

Accts. receivable turnover 12.7 times 9.2 times

Use: To assess the efficiency in collecting receivables and in the management of credit


Chapter 8 receivables

Solvency Measures — The Short-Term Creditor

Number of Days’ Sales in Receivables

2003 2002

Net sales on account $1,498,000 $1,200,000

Accounts receivable (net):

Beginning of year $ 120,000 $ 140,000

End of year 115,500 120,000

Total $ 235,000 $ 260,000

Average $ 117,500 $ 130,000

Use: To assess the efficiency in collecting receivables and in the management of credit


Chapter 8 receivables

Solvency Measures — The Short-Term Creditor

Number of Days’ Sales in Receivables

2003 2002

Net sales on account $1,498,000 $1,200,000

Accounts receivable (net):

Beginning of year $ 120,000 $ 140,000

End of year 115,500 120,000

Total $ 235,000 $ 260,000

Average $ 117,500 $ 130,000

Average collection period 28 days 36 days

Use: To assess the efficiency in collecting receivables and in the management of credit


Appendix discounting notes receivable
AppendixDiscounting notes receivable

  • April 8, A 90-day, 12%, $1800 note receivable

  • May 3, discount at a bank, 14%.

  • Maturity day: July 7

  • Computer:

    • Maturity value: 1800+(1800*12*90/360)=1854

    • Discount: 1854*14%*65/360=46.87

    • Interest: 54-46.87=7.13

    • Protest fee: $12


Notes receivable discount
Notes receivable discount

Sales

company

Purchase

company

Bank



Home work
HOME WORK

READING:

  • Illustrative problem

  • Self- examination questions

  • Multiple choice

    Writing:

  • Exercise: 8-13; 8-14

  • Problem : 8-1B

    Discussion: compute the cash flow