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9

Receivables

Principles of Accounting, 23e


Reeve Warren Duchac

Receivables
Learning

Objective 1

3-1

After studying this chapter, you should be able to:

Describe the common classes of


Insert Chapter Objectives
receivables.

accounting
for uncollectible
Describe
nature
of the
2 Describe thethe
receivables.
adjusting
process.
Describe the direct write-off method of

92

accounting for uncollectible receivables.

9-2

Receivables (continued)

93

Describe the allowance method of


accounting for uncollectible receivables.

Compare the direct write-off and


allowance methods of accounting for
uncollectible accounts.

Describe the accounting for notes


receivable.

Describe the reporting of receivables on


the balance sheet.

1
Describe the common
classes of receivables.

99-4
4

The term receivables includes


all money claims against other
entities, including people,
business firms, and other
organizations.
9-5

Accounts receivable are


normally expected to be
collected within a
relatively short period,
such as 30 or 60 days.
9-6

Notes receivable are amounts


that customers owe for which
a formal, written instrument
of credit has been issued.

9-7

Other receivables expected 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.
9-8

2
Describe the accounting
for uncollectible
receivables.

99-9
9

2
Factoring

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.
9-10

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.
9-11

The direct write off method records 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.
9-12

3
Describe the direct writeoff method of accounting
for uncollectible
receivables.

9-13
9-13

On May 10, a $4,200 accounts receivable


from D. L. Ross has been determined to be
uncollectible.

9-14

The amount written off is later collected


on November 21.

Reinstatement Entry
Receipt of Cash
Entry
9-15

3
Example Exercise 9-1
Direct Write-off Method
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.

9-16
9-16

Example Exercise 9-1 (continued)

Follow My Example 9-1


July 9 Cash..

1,200

Bad Debt Expense.....

3,900

Accounts ReceivableJay Burke


Oct. 11 Accounts ReceivableJay Burke..

5,100
3,900

Bad Debt Expense........


11 Cash
Accounts ReceivableJay Burke

3,900
3,900
3,900

For Practice: PE 9-1A, PE 9-1B


9-17
9-17

4
Describe the allowance
method of accounting for
uncollectible receivables.

9-18
9-18

4
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.

9-19

The net amount that is expected to be


collected, $170,000 ($200,000
$30,000), is called the net realizable
value (NRV). The adjusting entry
reduces receivables to the NRV and
matches uncollectible expenses with
revenues.
9-20

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

9-21

9-22

4
During 2010, ExTone Company writes
off $26,750 of uncollectible accounts,
including the $6,000 account of John
Parker. After posting all entries to writeoff uncollectible amounts, Allowance
for Doubtful Accounts will have a
credit balance of $3,250 ($30,000
$26,750).
9-23

9-24

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.

9-25

Nancy Smiths 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 Smiths account and a
second to record receipt of the
cash.
9-26

Reinstatement Entry
Receipt of Cash
Entry
9-27

4
Example Exercise 9-2
Allowance Method
Journalize the following transactions using the
allowance method of accounting for uncollectible
receivables.
July 9
Oct. 11

9-28
9-28

Received $1,200 from Jay Burke and


wrote off the remainder owed of $3,900 as
uncollectible.
Reinstated the account of Jay Burke
and received $3,900 cash in full
payment.

Example Exercise 9-2 (continued)

Follow My Example 9-2

July 9 Cash

1,200

Allowance for Doubtful Accounts..

3,900

Accounts ReceivableJay Burke.


Oct. 11 Accounts ReceivableJay Burke...

5,100
3,900

Allowance for Doubtful Accounts..


11 Cash. 3,900
Accounts ReceivableJay Burke..

3,900
3,900

For Practice: PE 9-2A, PE 9-2B


9-29
9-29

4
Estimating Uncollectibles

The allowance method uses two


ways to estimate the amount
debited to Bad Debt Expense.
1. Percent of sales method.
2. Analysis of receivables
method.

9-30

4
Percent of Sales Method

If credit sales for the period are


$3,000,000 and it is estimated that
% will be uncollectible, Bad Debt
Expense is debited for $22,500
($3,000,000 .0075). This approach
disregards the balance of $3,250 in
the allowance account before the
adjustment.
9-31

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).

9-32

4
Percent of Sales Method

9-33

4
Example Exercise 9-3
Percent of Sales Method
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 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.
9-34
9-34

Example Exercise 9-3 (continued)

Follow My Example 9-3

(a) $17,500 ($3,500,000 .005)


Adjusted Balance
(b) Accounts Receivable.
$800,000
Allowance for Doubtful Accounts
($7,500 + $17,500)
25,000
Bad Debt Expense...
17,500
(c) $775,000 ($800,000 $25,000)

For Practice: PE 9-3A, PE 9-3B


9-35
9-35

4
Aging of Receivables

The longer an account receivable is


outstanding, the less likely it is that it will be
collected. Basing the estimate of
uncollectible accounts on how long specific
amounts have been outstanding is called
aging the receivables.

9-36

4
Exhibit 1

9-37

Aging of Receivables Schedule


December 31, 2010

Percent of Sales Method

The estimate based on receivables


is compared to the balance in the
allowance account to determine the
amount of the adjusting entry.

9-38

Percent of Sales Method

ExTone has an unadjusted credit


balance of $3,250 in Allowance
for Doubtful Accounts. In Exhibit
1 the estimated uncollectible
accounts totaled $26,490.

9-39

4
Percent of Sales Method
The amount to be added to the allowance
account is $23,240 ($26,490 $3,250). The
adjusting entry is as follows:

9-40

4
Percent of Sales Method

9-41

4
The Commercial Collection Agency
Section of the Commercial Law League of
America reported the following collection
rates by number of months past due:

9-42

4
Percent of Sales Method
If the unadjusted balance of the allowance account
had been a debit balance of $2,100, the amount of
the adjustment would have been $28,590.

Aug. 31
Aug. 31

9-43

Adjusting entry
Adjusted balance

4
Example Exercise 9-4
Analysis of Receivable Method
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.

9-44
9-44

Example Exercise 9-4 (continued)

Follow My Example 9-4

(a) $22,500 ($30,000 $7,500)


Adjusted Balance
(b) Accounts Receivable.
$800,000
Allowance for Doubtful Accounts..
30,000
Bad Debt Expense..
22,500
(c) $770,000 ($800,000 $30,000)

For Practice: PE 9-4A, PE 9-4B


9-45
9-45

4
Exhibit 2

9-46

Differences Between Estimation Methods

5
Compare the direct writeoff method and allowance
method of accounting for
uncollectible accounts.

9-47
9-47

5
Exhibit 3

Comparing Direct Write-Off


and Allowance Methods

(continued)
9-48

5
Exhibit 3

Comparing Direct Write-Off and


Allowance Methods (continued)

Direct Write-Off Method

9-49

Allowance Method

9-50

6
Describe the accounting
for notes receivable.

9-51
9-51

Characteristics of
Notes Receivable
A note receivable, or promissory note, is a
written document containing a promise to pay:
The maker is the party making the promise to pay.

The payee is the party to whom the note is


payable.

The face amount is the amount the note is written

for on its face.


The issuance date is the date a note is issued.

9-52

(continued)

Characteristics of Notes
Receivable (continued)

The due date or maturity date is the date the note

is to be paid.
The term of the note is the amount of time between
the issuance and due dates.
The interest rate is that rate of interest that must be
paid on the face amount for the term of the note.

9-53

6
Exhibit 4

9-54

Promissory Note

6
What is the due date of a 90day note dated March 16?
Days in March
31 days
Minus issuance date of note
16
Days remaining in March
15 days
Add days in April
30
Add days in May
31
Add days in June (due date of
June 14)
14
Term of note90 days
9-55

6
An Alternate Approach
Total days in note
Number of days in March
Issue date of note
Remaining days in March
Number of days in April
Number of days in May
Residual days in June

90 days
31
March 16
15 days
75 days
30 days
45 days
31 days
14 days

Answer: June 14
9-56

9-57

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.

9-58

On December 21, when the note matures, the


firm receives $6,060 from W. A. Bunn
Company ($6,000 plus $60 interest).

9-59

6
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 customers account.

9-60

6
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.

9-61

6
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).

9-62

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

9-63

6
Example Exercise 9-5
Note Receivable
Same Day Surgery Center received a 120-day, 6%
note for $40,000, dated March 14 from a patient on
account.
a. Determine the due date of the note.
b. Determine the maturity value of the note.
c. Journalize the entry to record the receipt of the
payment of the note at maturity.

9-64
9-64

Example Exercise 9-5 (continued)


Follow My Example 9-5
a. The due date of the note is July 12, determined as follows:
March
April
May
June
July
Total

17 days (31 14)


30 days
31 days
30 days
12 days
120 days

b.

$40,800 [$40,000 + ($40,000 6% 120/360)]

c.

Cash........
Notes Receivable..
Interest Revenue...

40,800
40,000
800

For Practice: PE 9-5A, PE 9-5B


9-65
9-65

7
Describe the reporting of
receivables on the
balance sheet.

9-66
9-66

9-67

Accounts Receivable
Turnover
The accounts receivable turnover measures
how frequently during the year the accounts
receivable are being converted to cash.
Accounts Receivable
Turnover

9-68

Net sales
= Average Accounts Receivable

Federal Express Corporation


2006
2007

Net sales
Accounts receivable
Average accounts

2006

$22,527 $21,296
1,429
2,860
receivable
2,145

*[($2,860 + $2,703)/2]

Accounts
Receivable
Turnover
9-69

$21,296
=
$2,782

= 7.
7

2005

--$2,703
2,782

Federal Express Corporation


2007
2007

Net sales
Accounts receivable
Average accounts
+
$2,860)/2]

2006

$22,527 $21,296
1,429
2,860
receivable
2,145
*

*[($1,429

Accounts
Receivable
Turnover

$22,527
=
$2,145

= 10.
5

9-70

2005

--$2,703
2,782

Number of Days Sales


in Receivables
The number of days sales in receivables is an
estimate of the length of time the accounts
receivable have been outstanding.
Number of Days Sales Average Accounts Receivable
=
in Receivables
Average Daily Sales

9-71

Federal Express Corporation


2006
2007
Net sales
Average accounts receivable
Average daily sales

$22,527$21,296
2,145

2,782 *

*$21,296/365

61.7

$2,782
Number of Days
=
58.3
Sales in
Receivables
= 47.
7

9-72

2006

58.3

Federal Express Corporation


2007
2007
Net sales
Average accounts receivable
Average daily sales

$22,527$21,296
2,145 *

2,782

*$22,527/365

61.7

$2,145
Number of Days
=
61.7
Sales in
Receivables
= 34.
8

9-73

2006

58.3

9-74

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