Receivables

Chapter

Chapter 7-1

Receivables
Claims held against customers and others for money, goods, or services. Oral promises of the purchaser to pay for goods and services sold. Written promises to pay a sum of money on a specified future date.

Accounts Receivable

Notes Receivable

Chapter 7-2

Receivables
Nontrade Receivables
Examples:
1.

Advances to officers and employees.

2. Advances to subsidiaries.

3. Deposits to cover potential damages or losses.

4. Deposits as a guarantee of performance or payment. 5. Dividends and interest receivable.

Chapter 7-3

Valuation of Accounts Receivable

Reporting Accounts Receivable
Valuation (net realizable value) Accounts Receivable less estimate of uncollectable amount Sales on account raise the possibility of accounts not being collected

Chapter 7-4

Recognition of Accounts Receivables

Trade Discounts
Reductions from the list price
Not recognized in the accounting records Customers are billed net of discounts

10 % Discount for new Retail Store Customers

Chapter 7-5

Recognition of Accounts Receivables

Cash Discounts
Inducements for prompt payment

Gross Method vs. Net Method

Payment terms are 2/10, n/30

Chapter 7-6

Recognition of Accounts Receivables

Example: On June 3, Benedict Corp. sold to Chester Inc.,
merchandise having a sale price of $5,000 with terms of 2/10,n/60, f.o.b. shipping point. On June 12, Benedict received a check for the balance due from Chester. Prepare required journal entries assuming Benedict records the sale at gross. Gross Method June 3 June 12

Chapter 7-7

Recognition of Accounts Receivables

Example: On June 3, Benedict Corp. sold to Chester Inc.,
merchandise having a sale price of $5,000 with terms of 2/10,n/60, f.o.b. shipping point. On June 12, Benedict received a check for the balance due from Chester. Prepare required journal entries assuming Benedict records the sale at net. Net Method June 3 June 12

Chapter 7-8

Recognition of Accounts Receivables

Example: On June 3, Benedict Corp. sold to Chester Inc.,
merchandise having a sale price of $5,000 with terms of 2/10,n/60, f.o.b. shipping point. On June 29, Benedict received a check for the balance due from Chester. Prepare required journal entries assuming Benedict records the sale at net. Net Method June 3 June 29

Chapter 7-9

Estimate of Uncollectible Accounts

Methods of Accounting for Uncollectible Accounts Direct Write-Off Theoretically undesirable: no matching receivable not stated at net realizable value Allowance Method Losses are Estimated: Percentage-of-sales Percentage-ofreceivables

Chapter 7-10

Estimate of Uncollectible Accounts

Percentage of Sales
Focus on Matching Sales --- Bad Debt Expense
Income Statement Approach

Percentage of Receivables
Focus on Net Realizable Value

Balance Sheet Approach

Receivables - Allowance for Bad Debt

Chapter 7-11

Uncollectible Accounts Receivable

Percentage-of-Receivables Approach not matching. reports receivables at net realizable value. Companies may apply this method using
one composite rate, or an aging schedule of accounts receivable.

Chapter 7-12

Estimate of Uncollectible Accounts

Example Data Accounts receivable balance Estimated % of A/R not collected $72,500 8%

Allowance for Doubtful Accounts: Case 1 $150 (credit balance) Case 2 $150 (debit balance)

Chapter 7-13

Estimate of Uncollectible Accounts

Percentage of Receivables Accounts receivable $ 72,500

Estimated percentage
Desired balance

x
$

8%
5,800

===================================================

What should the ending balance be for the allowance account? -- Case 1 and Case 2

Chapter 7-14

Estimate of Uncollectible Accounts

Percentage of Receivables Case 1 Actual balance (credit) Desired balance Adjustment to = desired balance Journal entry Case 1: (150) Case 2

Chapter 7-15

Estimate of Uncollectible Accounts

Percentage of Receivables Case 1 Actual balance (credit) Desired balance Adjustment to = desired balance Journal entry Case 2: (150) (5,800) (5,650) Case 2 150

Chapter 7-16

Estimate of Uncollectible Accounts

Summary
Record the receivable amount: Initially valued at the exchange price

Net versus Gross method if cash discounts

Estimate the Uncollectable amount: Percentage of Sales approach Percentage of Receivables approach
Chapter 7-17

Write-Off Accounts Receivable

Write-off of uncollectible accounts for $10? Allowance for Doubtful accounts 10 Accounts receivable

10

Accounts Receivable Beg. 500

Allowance for Doubtful Accounts 25 Beg.

Chapter 7-18

Write-Off Accounts Receivable

Recovery of previously written off accounts for $10?

Chapter 7-19

Estimate of Uncollectible Accounts

For similar exercises see E 7-7 & E7- 8

P7- 2

Chapter 7-20

Recognition of Notes Receivable

Notes Receivable
Supported by a formal promissory note.
A negotiable instrument Maker signs in favor of a Payee

Interest-bearing (has a stated rate of interest) OR

Noninterest-bearing (interest included in face amount)

Chapter 7-21

Recognition of Notes Receivable

Short-Term Record at Face Value, less allowance
Interest Rates Stated rate = Market rate Stated rate > Market rate Stated rate < Market rate
Chapter 7-22

Long-Term Record at Present Value of cash expected to be collected

Note Issued at Face Value Premium Discount

Note Issued at Face Value

Exercise Balance Bar Co. lends Bio Foods $100,000 in exchange for a $100,000, 5-year note bearing interest at 8 percent annually. The market rate of interest for a note of similar risk is also 8 percent. How does Balance Bar record the receipt of the note?

0
Chapter 7-23

Note Issued at Face Value

P.V. of Note= P.V. of Principal + P.V. of Interest:
Interest= Payment *[PV of OA Factor i=8%, n=5]

Principal= Principal *[PV of $1 Factor i=8%, n=5]

Chapter 7-24

Note Issued at Face Value

Journal Entries: Record issuance of note receivable:

Record Interest revenue at end of years 1 through 5

Chapter 7-25

Zero-Interest-Bearing Note
Exercise Balance Bar Co. receives a 5-year, $100,000 zero-interest-bearing note. The market rate of interest for a note of similar risk is 6 percent. How does Balance Bar record the receipt of the note?

$100,000 $0 0 0 0 0

0
Chapter 7-26

Zero-Interest-Bearing Note
Amortization Schedule Non-Interest-Bearing Note
6% Interest Revenue Carrying Amount of Note $ 74,726

Cash Received Date of issue End of yr. 1 End of yr. 2 End of yr. 3 End of yr. 4 End of yr. 5

Discount Amortized

5,340 5,660 25,274

5,340 5,660 25,274

94,340 100,000

Chapter 7-27

Zero-Interest-Bearing Note
Journal Entries for Non-Interest-Bearing note Record issuance of note receivable:

Record Interest revenue at end of year 1

Chapter 7-28

Interest-Bearing Note
Exercise Balance Bar Co. made a loan to Bio Foods and received in exchange a 5-year, $100,000 note bearing interest 10 percent. The market rate of interest for a note of similar risk is 8 percent. How does Balance Bar record the receipt of the note? Present value of Principle:
$100,000 (PVF5, 8%) = $100,000 x .68058 = $ 68,058 39,927

Present value of Interest:

$10,000 (PVF5, 8%) = $10,000 x 3.99271 =

Present value of note

Chapter 7-29

$ 107,985

Interest-Bearing Note
Amortization Schedule Interest-Bearing Note
8% Interest Revenue $ 8,639 8,530 8,412 8,285 8,148 42,014 Carrying Amount of Note $ 107,985 106,624 105,154 103,566 101,851 100,000

Cash Received Date of issue End of yr. 1 End of yr. 2 End of yr. 3 End of yr. 4 End of yr. 5 10,000 10,000 10,000 10,000 10,000 50,000

Premium Amortized $ (1,361) (1,470) (1,588) (1,715) (1,851) (7,985)

Chapter 7-30

Interest-Bearing Note
Journal Entries for Interest-Bearing Note
Date Account Title Premium on notes receivable Cash Dec. yr. 1 Cash Premium on notes receivable Interest revenue ($107,985 x 8%) 10,000 1,361 8,639 Debit 100,000 7,985 107,985 Credit Jan. yr. 1 Notes receivable

Chapter 7-31

Notes Receivable Exercise

For similar exercise see BE 7-7

Chapter 7-32

Presentation and Analysis

General rule in classifying receivables are:
1. 2. 3.

Segregate the different types of receivables that a company possesses, if material. Appropriately offset the valuation accounts against the proper receivable accounts. Determine that receivables classified in the current assets section will be converted into cash within the year or the operating cycle, whichever is longer. Disclose any loss contingencies that exist on the receivables. Disclose any receivables designated or pledged as collateral.

4. 5.

6.

Disclose all significant concentrations of credit risk arising from receivables.

Chapter 7-33