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Receivables

Receivables. Chapter 9. Receivables. Monetary Claims Arise from selling goods and services on credit and lending money Two major types Accounts Receivable – current asset Notes Receivable – current or long-term asset depending on when the note matures. Objective 1.

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Receivables

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  1. Receivables Chapter 9

  2. Receivables • Monetary Claims • Arise from selling goods and services on credit and lending money • Two major types • Accounts Receivable – current asset • Notes Receivable – current or long-term asset depending on when the note matures

  3. Objective 1 Design internal controls for receivables

  4. Internal Controls & Receivables • Separation of cash-handling and cash- accounting duties • Establish credit department • Evaluates customers for credit worthiness • Pursues collection from customers

  5. Receivables & Accounting Issues • Balance Sheet should report receivables at the amount the company expects to collect (net realizable value) • Income Statement should report the expense associated with the failure to collect (uncollectible accounts expense)

  6. Objective 3 Understand the direct write-off method for uncollectibles

  7. Direct Write-Off Nov 9 Accounts Receivable 5,000 Sales 5,000 Record sale on account

  8. Direct Write-Off Method Apr 30 Uncollectible Accounts Expense 5,000 Accounts Receivable 5,000 To write off a bad debt

  9. Direct Write-Off Method Nov 9 Dec 31 End of Fiscal Year Apr 30 Sale Recorded Expense Recorded It violates the matching principle!

  10. Objective 2 Use the allowance method to account for uncollectibles

  11. Allowance Method Nov 9 Dec 31 End of Fiscal Year Apr 30 Prepare adjusting entry based on estimates

  12. Operating expense Contra-asset account Allowance Method Dec 31 Uncollectible Accounts Expense Allowance for Uncollectible Accounts To estimate bad debts for period

  13. Allowance Method Gross amount Accounts Receivable – reported on balance sheet at its “net realizable value” Accounts Receivable $750,000 Allowance for Doubtful Accounts (3,500) $746,500 Estimated uncollectible Expected to be collected

  14. Estimating Uncollectibles • Two Methods • Percent of Sales – Income Statement Approach • Aging of Accounts Receivable – Balance Sheet Approach

  15. Percent of Sales Method Bad debts expense = Net Credit Sales x Bad Debt %

  16. S9-3 Dec 31Uncollectible accounts expense 7,000 Allowance for uncollectible accounts 7,000 Expense = (350,000 x .02) = 7,000

  17. S9-3 Allowance for Uncollectible Accounts Accounts Receivable 40,000 Bal -0- 7,000 Bal 7,000 Balance Sheet (partial): Accounts receivable $40,000 Less: Allowance for uncollectible accounts (7,000) Accounts receivable, net $33,000

  18. Aging of Accounts Receivable Method • Accounts receivables are grouped according to age • Each age group has a different likelihood of being uncollectible (the older the receivable, the less likely it will be collected) • Add uncollectible amounts together to compute desired balance in the Allowance for Uncollectible Accounts

  19. E9-17 Desired balance in Allowance for Uncollectible Accounts $11,500

  20. E9-17 Allowance for Uncollectible Accounts Accounts Receivable 300,000 Bal 8,900 2,600 Bal 11,500 Dec 31Uncollectible accounts expense 2,600 Allowance for uncollectible accounts 2,600

  21. E9-17 Allowance for Uncollectible Accounts Accounts Receivable 300,000 Bal 8,900 2,600 Bal 11,500 Balance Sheet (partial): Accounts receivable $300,000 Less: Allowance for uncollectible accounts (11,500) Accounts receivable, net $288,500

  22. Writing Off Uncollectible AccountsS9-7 Jan 19 Allowance for Uncollectible Accounts 600 Accounts Receivable - Lance Emmert 600 To write off an account

  23. Writing Off Uncollectible AccountsS9-7 Dec 31 Accounts Receivable-Lance Emmert 600 Allowance for Uncollectible Accounts 600 To re-instate an account already written off 31 Cash 600 Accounts Receivable-Lance Emmert 600 To record collection on account

  24. Credit Card, Bankcard, Debit-Card Sales

  25. S9-8 Account Receivable-American Express 9,800 Credit-Card Discount Expense 200 Sales Revenue 10,000 Cash 7,880 Bankcard Discount Expense 120 Sales Revenue 8,000

  26. Objective 4 Account for note receivable

  27. Notes Receivable • A note is a written promise to pay a specific amount at a specific future date • Interest - price paid by a borrower for using a lender’s money

  28. Notes Receivable Interest starts PROMISSORY NOTE ______________ _____________ Amount Date For value received, I promise to pay to the order of First National Bank __________________________________ Dollars on ______________________________ plus interest at the annual rate of 12%. ________________________ Oct. 4, 2007 $10,000.00 Payee Principal Ten thousand and no/100--------------------- January 2, 2008 Maker Maturity Date Interest Rate Jeanette Sims

  29. Maturity Value Principal + Interest due at maturity

  30. Identifying Maturity Date • Stated in terms of months • Stated in terms of days

  31. Determine the Maturity Date Number of days on note 60 Days in October 31 Date of note 4 Days outstanding in October 27 Days remaining on note 33 Days in November 30 December due date 3

  32. If the note is expressed in days, base a year on 360 days. If the note is expressed in months, base a year on 12 months Computing Interest Interest = Principal x Interest Rate x Time

  33. S9-9 Note 1: $50,000 x 10% x 3/12 = $1,250 Note 2: $10,000 x 9% x 60/360 = $150 Note 3: $15,000 x 12% x 75/360 = $375 Note 4: $100,000 x 8% x 6/12 = $4,000

  34. Accounting for Notes ReceivableS9-10 Number of days on note 90 Days in May 31 Date of note 6 Days outstanding in May 25 Days remaining on note 65 Days in June 30 35 Days in July 31 Due date in August 4 May 6 Note Receivable-B Milam 100,000 Cash 100,000 Aug 4 Cash Interest Revenue 2,500 Note Receivable-B Milam 100,000

  35. Accruing Interest Revenue Date of Note, Aug 1, 2008 End of Fiscal Year, Dec 31, 2008 Maturity Date, Aug 1, 2009 Prepare adjusting entry to record interest earned in 2008

  36. E9-8 • 2008 • Feb 12 Bankcard Discount Expense 2,000 • Cash 98,000 • Sales 100,000 • Aug 1 Notes Receivable – J Porter 20,000 • Cash 20,000 • Dec 31 Interest Receivable 1,000 • Interest Revenue 1,000 • (20,000 x .12 x 5/12)

  37. E9-8 • 2009 • Aug 1 Cash 22,400 • Interest Receivable 1,000 • Interest Revenue 1,400 • Note Receivable – J Porter 20,000 Interest revenue = 20,000 x .12 x 7/12

  38. Dishonored Notes Receivable • Accounts Receivable 10,100 • Interest Revenue 100 • Note Receivable 10,000

  39. Objective 5 Report receivables on the balance sheet

  40. Reporting Receivables Two approaches: Accounts receivable $5,000 Less: Allowance for uncollectible accounts (500) Accounts receivable, net $4,500 Or Accounts receivable, net of allowancefor uncollectible accounts of $500 $4,500

  41. Objective 6 Use the acid-test ratio and days’ sales in receivables to evaluate a company

  42. Acid-Test Ratio • Also called the “quick ratio” • Stringent measure of liquidity • Measures entity’s ability to pay its current liabilities immediately (Cash + Short-term investments + Net current receivables) ÷ Total current liabilities

  43. E9-23 (a) (Cash + Short-term investments + Net current receivables) ÷ Total current liabilities For 2008: (10,000 + 11,000 + 68,000) ÷ 107,000 = .83 For 2009: (3,000 + 23,000 + 53,000) ÷ 104,000 = .76

  44. Days’ Sales in Receivables • Also called “collection period” • How many days does it take to collect the average level of receivables?

  45. Days’ Sales in Receivables One day’s sales = Net sales ÷ 365 days Days’ sales in average accounts receivable = Average net accounts receivable ÷ One day’s sales

  46. E9-24 One day’s sales = 600,060 ÷ 365 days = $1,644 Days’ sales in average accounts receivable = ((42,800 + 38,200)/2) ÷ 1,644 = 40,500 / 1,644 = 24.6 days

  47. End of Chapter 9

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