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Receivables

Receivables. By Rachelle Agatha, CPA, MBA. Slides by Rachelle Agatha, CPA, with excerpts from Warren, Reeve, Duchac. 0. Objectives:. Describe the common classifications of receivables. Describe the nature of and the accounting for uncollectible receivables.

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Receivables

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  1. Receivables

    By Rachelle Agatha, CPA, MBA Slides by Rachelle Agatha, CPA, with excerpts from Warren, Reeve, Duchac
  2. 0 Objectives: Describe the common classifications of receivables. Describe the nature of and the accounting for uncollectible receivables. Describe the direct write-off method of accounting for uncollectible receivables.
  3. 0 Objective Describe the allowance method of accounting for uncollectible receivables. Compare the direct write-off and allowance methods of accounting for uncollectible accounts.
  4. 0 Objectives: Describe the nature, characteristics, and accounting for notes receivables. Describe the reporting of receivables on the balance sheet.
  5. 0 Objective 1 Describe the common classifications of receivables.
  6. 0 Classification of Receivables The term receivables includes all money claims against other entities, including people, business firms, and other organizations.
  7. 0 Accounts Receivable Accounts receivableare normally expected to be collected within a relatively short period, such as 30 or 60 days.
  8. 0 Notes Receivable Notes receivableare amounts that customers owe for which a formal, written instrument of credit has been issued.
  9. 0 Other Receivables Other receivablesexpected to be collected within one year are classified as current assets. If collection is expected beyond one year, these receivables are classified as noncurrent assets and reported under the caption Investments.
  10. 0 Objective 2 Describe the nature of and the accounting for uncollectible receivables.
  11. 0 Companies often sell their receivables to other companies. This transaction is called factoring the receivables, and the buyer of the receivables is called a factor.
  12. 0 Uncollectible Receivables There are two methods of accounting for receivables that appear to be uncollectible: the direct write offmethodand the allowance method.
  13. 0 The direct write offmethodrecords bad debt expense only when an account is judged to be worthless. The allowance method records bad debt expense by estimating uncollectible accounts at the end of the accounting period.
  14. 0 Objective 3 Describe the direct write-off method of accounting for uncollectible receivables.
  15. 0 Direct Write-Off Method On May 10, a $4,200 accounts receivable from D. L. Ross has been determined to be uncollectible. May 10 Bad Debt Expense 4 200 00 Accounts Receivable—D. L. Ross 4 200 00
  16. 0 The amount written off is later collected on November 21. Nov. 21 Accounts Receivable—D. L. Ross 4 200 00 Bad Debt Expense 4 200 00 21 Cash 4 200 00 Accounts Receivable—D. L. Ross 4 200 00
  17. 0 Journalize the following transactions using the direct write-off method of accounting for uncollectible receivables. July 9 Received $1,200 from Jay Burke and wrote off the remainder owed of $3,900 as uncollectible. Oct. 11 Reinstated the account of Jay Burke and received $3,900 cash in full payment.
  18. 0 July 9 Cash 1,200 Bad Debt Expense 3,900 Accounts Receivable—Jay Burke 5,100 Oct. 11 Accounts Receivable—Jay Burke 3,900 Bad Debt Expense 3,900 11 Cash 3,900 Accounts Receivable—Jay Burke 3,900
  19. 0 Objective 4 Describe the allowance method of accounting for uncollectible receivables.
  20. 0 Allowance Method On December 31, ExTone Company estimates that a total of $40,000 of the $1,000,000 balance in her company’s Accounts Receivable will eventually be uncollectible. Dec. 31 Bad Debt Expense 40 000 00 Allowance for Doubtful Accounts 40 000 00 Uncollectible accounts estimate.
  21. 0 Net Realizable Value The net amount that is expected to be collected, $960,000 ($1,000,000 – $40,000), is called the net realizable value (NRV). The adjusting entry reduces receivables to the NRV and matches uncollectible expenses with revenues.
  22. 0 On January 21, John Parker’s account totaling $6,000 is written off because it is uncollectible. Jan. 21 Allowance for Doubtful Accounts 6 000 00 Accounts Receivable—John Parker 6 000 00 To write off the uncollectible account.
  23. 0
  24. 0 During 2008, ExTone Company writes off $36,750 of uncollectible accounts, including the $6,000 account of John Parker. After posting all entries to write-off uncollectible amounts, the Allowance for Doubtful Accounts will have a credit balance of $3,250 ($40,000 – $36,750).
  25. 0 ALLOWANCE FOR DOUBTFUL ACCOUNTS { Jan. 1, 2008 Bal. 40,000 Total accounts written off $36,750 Jan. 21 6,000 Feb. 2 3,900 “ “ “ “ Dec. 31 Unadjusted bal 3,250
  26. 0 If ExTone Company had written off $44,100 in accounts receivable during 2008, the Allowance for Doubtful Accounts would have a debit balance of $4,100.
  27. 0 ALLOWANCE FOR DOUBTFUL ACCOUNTS { Jan. 1, 2008 Bal. 40,000 Total accounts written off $44,100 Jan. 21 6,000 Feb. 2 3,900 “ “ “ “ Dec. 31 Unadjusted bal 4,100
  28. 0 Collecting a Written-Off Account 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.
  29. 0 Entry 1: Reinstate the account. June 10 Accounts Receivable—Nancy Smith 5 000 00 Allowance for Doubtful Accounts 5 000 00 To reinstate the account written off on Jan. 21.
  30. 0 Entry 2: Record collection of cash. June 10 Cash 5 000 00 Accounts Receivable—Nancy Smith 5 000 00 Collection of written-off account.
  31. 0 Journalize the following transactions using the allowance method of accounting for uncollectible receivables. July 9 Received $1,200 from Jay Burke and wrote off the remainder owed of $3,900 as uncollectible. Oct. 11 Reinstated the account of Jay Burke and received $3,900 cash in full payment.
  32. 0 July 9 Cash 1,200 Allowance for Doubtful Accounts 3,900 Accounts Receivable—Jay Burke 5,100 Oct. 11 Accounts Receivable—Jay Burke 3,900 Allowance for Doubtful Accounts 3,900 11 Cash 3,900 Accounts Receivable—Jay Burke 3,900
  33. 0 Estimating Uncollectibles The allowance method uses two ways to estimate the amount debited to Bad Debt Expense. Estimate based on a percentage of sales. (Income statement method) Estimate based on analysis of receivables. (Balance Sheet Method)
  34. If credit sales for the period are $3,000,000 and it is estimated that 1½ % will be uncollectible, the Bad DebtExpenseis debited for $45,000 ($3,000,000 x .015). This approach disregards the balance in the allowance account before the adjustment. 0 Estimate Based on a Percentage of Sales
  35. 0 After this adjusting entry is posted, Allowance for Doubtful Accounts will have a balance of $48,250. Dec. 31 Bad Debt Expense 45 000 00 Allowance for Doubtful Accounts 45 000 00 Uncollectible accounts ($3,000,000 x 0.015 = $45,000).
  36. 0 BAD DEBT EXPENSE Dec. 31 Adj entry 45,000 Dec. 31 Adjusted bal. 45,000 ALLOWANCE FOR DOUBTFUL ACCOUNTS { Jan. 1, 2008 Bal. 40,000 Total accounts written off $36,750 Jan. 1 6,000 Feb. 2 3,900 “ “ Dec. 31 Unadjusted bal 3,250 Dec. 31 Adj. entry 45,000 Dec. 31 Adjusted bal. 48,250 Income statement method calculates the adjustment
  37. 0 At the end of the current year, Accounts Receivable has a balance of $800,000; Allowance for Doubtful Accounts has a credit balance of $7,500; and net sales for the year total $3,500,000. Bad debt expense is estimated at ½ of 1% of net sales. Determine (a) the amount of the adjusting entry for uncollectible accounts; (b) the adjusted balances of Accounts Receivable, Allowance for Doubtful Accounts, and Bad Debt Expense; and (c) the net realizable value of accounts receivable.
  38. Adjusted Balance Accounts Receivable $800,000 Allowance for Doubtful Accounts ($7,500 + $17,500) 25,000 Bad Debt Expense 17,500 0 Adjusting entry (a) $17,500 ($3,500,000 x .005 ( ½ of 1%) ) Balances (b) NRV (c) $775,000 ($800,000 – $25,000)
  39. 0 Estimating Uncollectibles Based on Analysis of Receivables The longer an account receivable is outstanding, the less likely that it will be collected. Basing the estimate of uncollectible accounts on how long specific amounts have been outstanding is called aging the receivables.
  40. 0 Aging of Accounts Receivables
  41. 0 Estimate of Uncollectible Accounts
  42. 0 Collection Rates by Number of Months Past Due
  43. 0 Estimate Based on Analysis of Receivables If it is estimated that $3,390 of the receivables will be uncollectible and the Allowance forUncollectibleAccountscurrently has a balance of $510, theBad DebtExpensemust be debited for $2,880 ($3,390 – $510).
  44. 0 Estimate Based on Analysis of Receivables Aug. 31 Bad Debt Expense 2 880 00 Allowance for Doubtful Accounts 2 880 00 Uncollectible accounts ($3,390 – $510).
  45. 0 BAD DEBT EXPENSE Aug. 31 Adj. entry 2,880 Aug. 31 Adj. bal. 2,880 ALLOWANCE FOR DOUBTFUL ACCOUNTS Aug. 31 Unadj. bal. 510 Aug. 31 Adj. entry 2,880 Aug. 31 Adj. bal. 3,390 Balance sheet method finds the ending balance and adjust to that
  46. 0 If the unadjusted balance of Allowance forUncollectibleAccounts had been a debit balance of $300, the amount of the adjustment would have been $3,690 ($3,390 + $300).
  47. 0 BAD DEBT EXPENSE Aug. 31 Adj. entry 3,690 Aug. 31 Adj. bal. 3,690 ALLOWANCE FOR DOUBTFUL ACCOUNTS Aug. 31 Adj. entry 3,690 Aug. 31 Adj. bal. 3,390 Aug. 31 Unadj. bal. 300
  48. 0 At the end of the current year, Accounts Receivable has a balance of $800,000; Allowance for Doubtful Accounts has a credit balance of $7,500; and net sales for the year total $3,500,000. Using the aging method, the balance of Allowance for Doubtful Accounts is estimated as $30,000. Determine (a) the amount of the adjusting entry for uncollectible accounts; (b) the adjusted balances of Accounts Receivable, Allowance for Doubtful Accounts, and Bad Debt Expense, and (c) the net realizable value of accounts receivable.
  49. Adjusted Balance Accounts Receivable $800,000 Allowance for Doubtful Accounts 30,000 Bad Debt Expense 22,500 0 $22,500 ($30,000 – $7,500) $770,000 ($800,000 – $30,000)
  50. 0 Objective 5 Compare the direct write-off and allowance methods of accounting for uncollectible accounts
  51. 0 Comparing Direct-Write-Off and Allowance Methods Direct Write-Off Method Allowance Method W/O Acct W/O Acct Recvd partial pmt w/o rest Recvd partial pmt w/o rest Recvd pmt of previously w/o acct Recvd pmt of previously w/o acct W/O Acct W/O Acct Co Used the % of credit sales and estuncoll exp 51 Co Used the % of credit sales and estuncoll exp
  52. Amount of bad debt expense recorded Allowance account Primary users 0 Comparing the Direct Write-Off and Allowance Methods Direct Write-Off Method When the actual accounts receivable are determined to be uncollectible No allowance account is used Small companies and companies with relatively few receivables
  53. Amount of bad debt expense recorded Allowance account Primary users 0 Comparing the Direct Write-Off and Allowance Methods Allowance Method Using estimate based on either (1) a percentage of sales or (2) analysis of receivables. The allowance account is used Large companies and those with a large amount of receivables
  54. 0 Objective 6 Describe the nature, characteristics, and accounting for notes receivable.
  55. 0 Characteristics of Notes Receivable A note receivable, or promissory note, is a written document containing a promise to pay: a specific amount of money (face amount) on demand or at a definite time to an individual or a business (payee), or to the bearer or holder of the note.
  56. 0 Characteristics of Notes Receivable The one making the promise is called the maker. The date a note is to be paid is called the due date or maturity date.
  57. 2,500.00 $_____________ March 16 08 Fresno, California______________20___ ________________ _AFTER DATE _______ PROMISE TO PAY TO We Ninety days Judson Company THE ORDER OF ____________________________________________ Two thousand five hundred 00/100--------------------------- _________________________________________________DOLLARS City National Bank PAYABLE AT ______________________________________________ Maker VALUE RECEIVED WITH INTEREST AT ____ 10% NO. _______ DUE___________________ 14 June 14, 2008 H. B. Lane TREASURER, WILLIARD COMPANY 0 Payee
  58. 0 What is the due date of a 90-day note dated March 16? Total days in note 90 days Number of days in March 31 Issue date of note March 16 Remaining days in March –15 days 75 days Number of days in April –30 days 45 days Number of days in May –31 days Residual days in June 14 days Answer: June 14
  59. 0 Accounting for Notes Receivable Received a $6,000, 12%, 30-day note dated November 21, 2008 in settlement of the account of W. A Bunn Co. Nov. 21 Notes Rec.—W. A. Bunn Co. 6 000 00 Accts. Rec.—W. A Bunn Co. 6 000 00 Received 30-day, 12% note dated November 21, 2008.
  60. 0 On December 21, when the note matures, the firm receives $6060 from W. A. Bunn Company ($6,000 plus $60 interest). Dec. 21 Cash 6 060 00 Notes Rec.—W. A. Bunn Co. 6 000 00 Interest Revenue* 60 00 Received principal and interest on matured note. *$6,000 x 12% x 30/360 = $60
  61. 0 If W. A. Bunn Company fails to pay the note on the due date, it is considered a dishonorednote receivable. The note and interest are transferred to the customer’s account. Dec. 21 Accts Rec.—W. A. Bunn Co. 6 060 00 Notes Rec.—W. A. Bunn Co. 6 000 00 Interest Revenue 60 00 Recorded dishonored note, plus interest.
  62. 0 A 90-day, 12% note dated December 1, 2008, is received from Crawford Company to settle its account, which has a balance of $4,000. 2008 Dec. 1 Notes Rec.—Crawford Co. 4 000 00 Accts. Rec.—Crawford Co. 4 000 00 Accepted note in settlement of account.
  63. 0 Assuming that the accounting period ends on December 31, an adjusting entry is required to record the accrued interest of $40 ($4,000 x 0.12 x 30/360). 2008 Dec. 31 Interest Receivable 40 00 Interest Revenue 40 00 Accrued interest ($4,000 x 12% x 30/360).
  64. ($4,000 x 12% x 30/360). 0 On March 1, 2009, $4,120 is received for the note ($4,000) and interest ($120). 2009 Mar. 1 Cash 4 120 00 Notes Rec.—Crawford Co. 4 000 00 Interest Receivable 40 00 Interest Revenue 80 00 Collected note and accrued interest.
  65. 0 Same Day Surgery Center received a 120-day, 6% note for $40,000, dated March 14 from a patient on account. Determine the due date of the note. Determine the maturity value of the note. Journalize the entry to record the receipt of the payment of the note at maturity.
  66. July 12 determined as follows: March 17 days (31 – 14) April 30 days May 31 days June 30 days July 12 days Total 120 days $40,800 [$40,000 + ($40,000 x 6% x 120/360)] 0 Cash 40,800 Notes Receivable 40,000 Interest Revenue 800
  67. 0 Objective 7 Describe the reporting of receivables on the balance sheet.
  68. Receivables on Balance Sheet
  69. Accounts Receivable Turnover Net sales Avgaccounts receivable = 0 Accounts Receivable Turnover The accounts receivable turnover measures how frequently during the year the accounts receivable are being converted to cash.
  70. 2005 2004 2003 Net sales $19,364 $17,383 --- Accounts receivable 2,703 2,475 $2,199 Avgaccounts receivable 2,589 2,337 * * * [($2,475 + $2,199)/2] $17,383 $2,337 Accounts Receivable Turnover (2004) = Accounts Receivable Turnover (2004) 7.4 = 0 Federal Express Corporation
  71. 2005 2004 2003 Net sales $19,364 $17,383 --- Accounts receivable 2,703 2,475 $2,199 Avg accounts receivable* 2,589 2,337 * [($2,703 + $2,475)/2] $19,364 $2,589 Accounts Receivable Turnover (2005) = Accounts Receivable Turnover (2005) 7.5 = 0 Federal Express Corporation
  72. Number of Days’ Sales in Receivables = Average Accounts receivable Average daily sales 0 Number of Days’ Sales in Receivables Use: To assess the efficiency in collecting receivables and in the management of credit.
  73. 2005 2004 2003 Net sales $19,364 $17,383 Accounts receivable 2,703 2,475 $2,199 Average accounts receivable 2,589 2,337 Average daily sales 53.147.6 --- * * [($2,475 + $2,199)/2] ** ($17,383/365) * $2,337 47.6 Number of Days’ Sales in Receivables (2004) = ** Number of Days’ Sales in Receivables (2004) 49.1 = 0 Federal Express Corporation * [($2,703 + $2,475)/2]
  74. 2005 2004 2003 Net sales $19,364 $17,383 Accounts receivable 2,703 2,475 $2,199 Average accounts receivable 2,589 2,337 Average daily sales 53.147.6 --- * * [($2,703+ $2,475)/2] ** ($19,364/365) * $2,589 53.1 Number of Days’ Sales in Receivables (2005) = ** Number of Days’ Sales in Receivables (2005) 48.8 = 0 Federal Express Corporation
  75. Summary Classification of Receivables Uncollectible A/R Direct Write-Off Method Allowance Method Notes Receivable
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