Chapter 8 Accounting for Receivables 高立翰

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Chapter 8 Accounting for

Receivables

高立翰

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Study Objectives

1. Identify the different types of receivables.

2. Explain how companies recognize accounts receivable.

3. Distinguish between the methods and bases companies use to value accounts receivable.

4. Describe the entries to record the disposition of accounts receivable.

5. Compute the maturity date of and interest on notes receivable.

6. Explain how companies recognize notes receivable.

7. Describe how companies value notes receivable.

8. Describe the entries to record the disposition of notes receivable.

9. Explain the statement presentation and analysis of receivables.

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Types of Receivables

Accounts receivable

Notes receivable Other receivables

Accounts Receivable

Accounts

Receivable Notes ReceivableNotes Receivable Statement Presentation and

Analysis Statement Presentation and

Analysis

Presentation Analysis Recognizing

accounts receivable

Valuing accounts receivable

Disposing of accounts receivable

Accounting for Receivables

Determining maturity date Computing interest

Recognizing notes receivable

Valuing notes receivable

Disposing of notes

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Types of Receivables

Amounts due from individuals and other companies that are expected to be collected in cash.

Amounts owed by customers that result from the sale

of goods and services.

Accounts Receivable

Claims for which formal

instruments of credit are issued as proof of debt.

“Nontrade”

(interest, loans to officers, advances to employees, and

income taxes refundable).

Notes Receivable

Other Receivables

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Accounts Receivable

 Three accounting issues:

1. Recognizing accounts receivable.

2. Valuing accounts receivable.

3. Disposing of accounts receivable

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Recognizing Accounts Receivable

 Illustrations:

Assume that Jordache Co. on July 1, 2011, sells merchandise on account to Polo Company for $1,000 terms 2/10, n/30. Prepare the journal entry to record this transaction on the books of

Jordache Co.

On July 5, Polo returns merchandise worth $100 to Jordache Co.

On July 11, Jordache receives payment from Polo Company for the balance due.

Sales returns and allowances 100 Jul. 5

Accounts receivable 100

Cash 882

Jul. 11

Sales discounts ($900 x .02) 18

Accounts receivable 1,000

Jul. 1

Sales 1,000

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Valuing Accounts Receivables (1/2)

 How to report Accounts Receivable?

Reported as an asset on the statement of financial position.

Reported at the amount the company thinks they will be able to collect.

Sales on account raise the possibility of accounts not being collected.

Valuation can be difficult because an unknown amount of receivables will become uncollectible.

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Valuing Accounts Receivables (2/2)

Allowance Method Losses are estimated:

better matching.

receivable stated at net realizable value.

required by IFRS.

Methods of Accounting for Uncollectible Accounts

Direct Write-Off

Theoretically undesirable:

no matching.

receivable not stated at net realizable value.

not acceptable for financial reporting.

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Direct Write-Off Method

 Direct Write-Off Method (直接沖銷法) for

Uncollectible Accounts

Under the direct write-off method, when a

company determines a particular account to be uncollectible, it charges the loss to Bad Debts

Expense. Assume, for example, that on December 12 Warden Co. writes off as uncollectible M. E. Doran’s

$200 balance. The entry is:

Bad debt expense 200

Dec. 12

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Allowance Method

 Allowance Method (備抵法) for Uncollectible Accounts

1. Companies estimate uncollectible accounts receivable.

2. To record estimated uncollectibles:

Bad Debts Expense xxx

Allowance for Doubtful Accounts xxx 3. To write off uncollectible accounts:

Allowance for Doubtful Accounts xxx

Accounts Receivable xxx

 Illustration

Assume that Hampson Furniture has credit sales of $1,200,000 in 2011.

Of this amount, $200,000 remains uncollected at December 31. The credit manager estimates that $12,000 of these sales will be

uncollectible. The adjusting entry to record the estimated uncollectibles is

Bad debt expense 12,000

Dec. 31

Allowance for doubtful accounts 12,000

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Presentation of Allowance for Doubtful Accounts

Illustration 8-2

Presentation of allowance for doubtful accounts

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Recording the Write-offs (1/2)

 Illustration: Recording the Write-Off of an

Uncollectible Account

The financial vice-president of Hampson Furniture authorizes a write-off of the $500 balance owed by R.A.Ware on March 1, 2012. The entry to record the write-off is:

Allowance for doubtful accounts 500 Mar. 1

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Recording the Write-offs (2/2)

 The write-off affects only statement of

financial position accounts.

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Recovery of An Uncollectible Account

 Illustration

On July 1, R. A. Ware pays the $500 amount that

Hampson had written off on March 1. These are the entries:

Jul. 1

Allowance for doubtful accounts 500 Cash 500

Jul. 1

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Bases Used for Allowance Method

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Percentage-of-Sales

Assume that Gonzalez Company elects to use the percentage- of-sales basis. It concludes that 1% of net credit sales will

become uncollectible. If net credit sales for 2011 are $800,000, the adjusting entry is:

 Percentage-of-Sales (銷售百分比法)

Emphasizes the matching of expenses with revenues.

When the company makes the adjusting entry, it disregards the existing balance in Allowance for Doubtful Accounts. Illustration 8-6

Bad debts expense 8,000

Dec. 31

* $800,000 x 1%

*

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Percentage-of-Receivables (1/2)

 Percentage-of-Receivables (應收帳款百分比法)

 Aging Schedule (帳齡表)

Illustration 8-7 Aging schedule

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Percentage-of-Receivables (2/2)

 Illustration

If the trial balance shows Allowance for Doubtful Accounts with a credit balance of $528, the company will make the following adjusting entry.

Occasionally the allowance account will have a debit balance prior to adjustment.

Bad debts expense 1,700

Dec. 31

*

* $2,228 - 528

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Summary for Valuing Accounts Receivable

 Percentage of Sales approach:

Focus on “Bad debt expense” estimate, existing balance in the allowance account is ignored for journal entry

Method achieves a matching of expense and revenues.

 Percentage of Receivables approach:

Accurate valuation of receivables on the statement of financial position.

Method may also be applied using an aging schedule.

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Disposing of Accounts Receivable (1/2)

 Companies sell receivables for two major

reasons:

1. Receivables may be the only reasonable source of cash.

2. Billing and collection are often time-consuming and costly

 Sale of Receivables: Factor (承購/貼現)

Buys receivables from businesses and then collects the payments directly from the customers.

Typically charges a commission to the company that is selling the receivables.

Fee ranges from 1-3% of the amount of receivables purchased.

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Disposing of Accounts Receivable (2/2)

 Illustration

Assume that Hendredon Furniture factors $600,000 of receivables to Federal Factors. Federal Factors assesses a service charge of 2% of the amount of

receivables sold. The journal entry to record the sale by Hendredon Furniture is as follows.

Cash 588,000

Service charge expense 12,000

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Credit Card Sales

 Retailer considers credit card sales the same as cash sales.

Retailer must pay card issuer a fee of 2 to 4% for processing the transactions.

Retailer records sale in a similar manner as checks deposited from cash sale.

Anita Ferreri purchases $1,000 of compact discs for her

restaurant from Karen Kerr Music Co., using her Visa First

Bank Card. First Bank charges a service fee of 3%. The entry to record this transaction by Karen Kerr Music is as follows.

Sales 1,000

Cash 970

Service charge expense 30

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Notes Receivable (1/)

 A promissory note (本票) is a written promise

to pay a specified amount of money on

demand or at a definite time

 Promissory notes may be used:

when individuals and companies lend or borrow money,

when amount of transaction and credit period exceed normal limits, or

in settlement of accounts receivable.

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Notes Receivable (2/)

 To the Payee, the promissory note is a note

receivable.

 To the Maker, the promissory note is a note

payable.

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Determining the Maturity Date

 Note expressed in terms of

Months Days

 Computing interest

Terms of Note (Issued on 7/17) 60 days

July 18 – July 31 14 days

August 1 – August 31 31 days 45 days September 1 – September 15 15 days Maturity date: September 15

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Recognizing and Valuing Notes Receivable

 Illustration: Recognizing Notes Receivable

Calhoun Company wrote $1,000, two-month, 12%

promissory note to settle an open account, Wilma Company makes the following entry for the receipt of the note.

 Valuing Notes Receivable

Like accounts receivable, companies report short- term notes receivable at their cash (net) realizable value.

Estimation of cash realizable value and bad debts expense are done similarly to accounts receivable Allowance for Doubtful Accounts is used.

Notes receivable 1,000

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Disposing of Notes Receivable

 Conditions:

Notes may be held to their maturity date.

Maker may default and payee must make an adjustment to the account.

Holder speeds up conversion to cash by selling the note receivable.

 Honor of Notes Receivable (兌現)

A note is honored when its maker pays it in full at its maturity date.

Illustration: p.362

 Dishonor of Notes Receivable (未兌現)