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Receivables

Learn about the common classes of receivables, the accounting for uncollectible receivables, and the reporting of receivables on the balance sheet.

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Receivables

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  1. 8 Receivables Student Version

  2. 1 Describe the common classes of receivables. 8-2

  3. 1 Classification of Receivables Accounts receivable are normally expected to be collected within a relatively short period, such as 30 or 60 days.

  4. 1 Classification of Receivables Notes receivable are amounts that customers owe for which a formal, written instrument of credit has been issued.

  5. 1 Classification of Receivables Other receivables expected to be collected within one year are classified as current assets.

  6. 1 Classification of Receivables If collection is expected beyond one year, these receivables are classified as noncurrent assets and reported under the caption Investments.

  7. 2 Describe the accounting for uncollectible receivables. 8-7

  8. 2 Uncollectible Receivables Regardless of how careful a company is in granting credit, some credit sales will be uncollectible. The operating expense account is called bad debt expense, uncollectible accounts expense, or doubtful accounts expense.

  9. 3 Describe the direct write-off method of accounting for uncollectible receivables. 8-9

  10. 3 Uncollectible Receivables On May 10, a $4,200 accounts receivable from D. L. Ross has been determined to be uncollectible.

  11. Reinstatement Entry Receipt of Cash Entry 3 Uncollectible Receivables The amount written off is later collected on November 21.

  12. 4 Describe the allowance method of accounting for uncollectible receivables. 8-12

  13. 4 Uncollectible Receivables On December 31, ExTone Company estimates that a total of $30,000 of the $200,000 balance of their Accounts Receivable will eventually be uncollectible.

  14. 4 Write-Offs to the Allowance Account On January 21, John Parker’s account totaling $6,000 is written off because it is uncollectible.

  15. 4 Allowance Method Example During 2010, ExTone Company writes off $26,750 of uncollectible accounts, including the $6,000 account of John Parker. After posting all entries to write-off uncollectible amounts, Allowance for Doubtful Accounts will have a credit balance of $3,250 ($30,000 – $26,750).

  16. 4 Allowance Method Example

  17. 4 Allowance Method Example If ExTone Company had written off $32,100 in accounts receivable during 2010, Allowance for Doubtful Accounts would have a debit balance of $2,100.

  18. 4 Allowance Method Example 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.

  19. Reinstatement Entry Receipt of Cash Entry 4 Allowance Method Example

  20. If credit sales for the period are $3,000,000 and it is estimated that ¾% will be uncollectible, Bad DebtExpense is debited for $22,500 ($3,000,000 × .0075). This approach disregards the balance of $3,250 in the allowance account before the adjustment. 4 Percent of Sales Method

  21. 4 Percent of Sales Method After the following adjusting entry on December 31 is posted, Allowance for Doubtful Accounts will have a balance of $25,750 ($3,250 + $22,500).

  22. 4 Percent of Sales Method

  23. 5 Compare the direct write-off method and allowance method of accounting for uncollectible accounts. 8-23

  24. Exhibit 3 5 Comparing Direct Write-Off and Allowance Methods (continued)

  25. Exhibit 3 5 Comparing Direct Write-Off and Allowance Methods(continued) Direct Write-Off Method Allowance Method

  26. 5

  27. 6 Describe the accounting for notes receivable. 8-27

  28. Exhibit 4 6 Promissory Note

  29. 6 Accounting for Notes Receivable Received a $6,000, 12%, 30-day note dated November 21, 2010 in settlement of the account of W. A. Bunn Co.

  30. 6 Accounting for Notes Receivable On December 21, when the note matures, the firm receives $6,060 from W. A. Bunn Company ($6,000 plus $60 interest).

  31. 6 Accounting for Notes Receivable If W. A. Bunn Company fails to pay the note on the due date, it is considered a dishonored note receivable. The note and interest are transferred to the customer’s account.

  32. 6 Accounting for Notes Receivable A 90-day, 12% note dated December 1, 2010, is received from Crawford Company to settle its account, which has a balance of $4,000.

  33. 6 Accounting for Notes Receivable Assuming that the accounting period ends on December 31, an adjusting entry is required to record the accrued interest of $40 ($4,000 × 0.12 × 30/360).

  34. 6 Accounting for Notes Receivable On March 1, 2011, $4,120 is received for the note ($4,000) and interest ($120).

  35. 7 Describe the reporting of receivables on the balance sheet. 8-35

  36. 7

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