Accounting Principle Kieso 8e - Ch09

CHAPTER 9
Receivables Management and Accounting

Accounting Principles, Eighth Edition
Chapter 9-1
Study Objectives
1. 2. 3. 4. 5. 6. 7. 8. 9.
Chapter 9-2
Identify the different types of receivables. Explain how companies recognize accounts receivable. Distinguish between the methods and bases companies use to value accounts receivable. Describe the entries to record the disposition of accounts receivable. Compute the maturity date of and interest on notes receivable. Explain how companies recognize notes receivable. Describe how companies value notes receivable. Describe the entries to record the disposition of notes receivable. Explain the statement presentation and analysis of receivables.
Accounting for Receivables
Types of Receivables
Accounts receivable Notes receivable Other receivables
Accounts Receivable
Recognizing accounts receivable Valuing accounts receivable
Notes Receivable
Determining maturity date Computing interest Recognizing notes receivable Valuing notes receivable Disposing of notes receivable
Statement Presentation and Analysis

Presentation
Analysis
Disposing of accounts receivable

Chapter 9-3
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
Chapter 9-4
Claims for which formal instruments of credit are issued as proof of debt. Notes Receivable
Nontrade (interest, loans to officers, advances to employees, and income taxes refundable).
Other Receivables
LO 1 Identify the different types of receivables.
Accounts Receivable
Three accounting issues:
1. Recognizing accounts receivable.

2. Valuing accounts receivable. 3. Disposing of accounts receivable. Recognizing Accounts Receivable
The following exercise was illustrated in Chapter 5. For simplicity, inventory and cost of goods sold have been omitted.
Chapter 9-5
LO 1 Identify the different types of receivables.
Recognizing Accounts Receivable

E5-5 Presented are transactions related to Wheeler Company. 1. On December 3,Wheeler Company sold $500,000 of merchandise to Hashmi Co., terms 2/10, n/30, FOB shipping point. 2. On December 8, Hashmi Co. was granted an allowance of $27,000 for merchandise purchased on December 3. 3. On December 13,Wheeler Company received the balance due from Hashmi Co.
Instructions: Prepare the journal entries to record these transactions on the books of Wheeler Company using a perpetual inventory system.
Chapter 9-6
LO 2 Explain how companies recognize accounts receivable.

E5-5 Prepare the journal entries for Wheeler Company . 1. On December 3, Wheeler Company sold $500,000 of merchandise to Hashmi Co., terms 2/10, n/30, FOB shipping point. Dec. 3 Accounts receivable Sales 500,000 500,000
Chapter 9-7

E5-5 Prepare the journal entries for Wheeler Company. 2. On December 8, Hashmi Co. was granted an allowance of $27,000 for merchandise purchased on December 3. Dec. 8 Sales returns and allowances Accounts receivable 27,000 27,000
Chapter 9-8

E5-5 Prepare the journal entries for Wheeler Company . 3. On December 13, Wheeler Company received the balance due from Hashmi Co. Dec. 13 Cash Sales discounts Accounts receivable
* ($500,000 $27,000)
463,540 *** 9,460 ** 473,000 *
** [($500,000 $27,000) X 2%] *** ($473,000 $9,460)

Chapter 9-9
Accounts Receivable
Valuing Accounts Receivables
Classification Valuation (net realizable value)
Uncollectible Accounts Receivable

Sales on account raise the possibility of accounts not being collected
Chapter 9-10
LO 3 Distinguish between the methods and bases companies use to value accounts receivable.
Valuing Accounts Receivable

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.
Allowance Method
Losses are estimated: better matching. receivable stated at net realizable value. required by GAAP.
Chapter 9-11
Presentation of Accounts Receivable

Assets Current Assets: Cash Accounts receivable Less: Allowance for doubtful accounts Inventory Prepaids Total current assets
$ 346
500 25 475 812 40 1,673
Chapter 9-12
Presentation of Accounts Receivable

Assets Current Assets: Cash Accounts receivable, net of $25 allowance for doubtful accounts Inventory Prepaids Total current assets
$ 346
475 812 40 1,673
Chapter 9-13

Allowance Method for Uncollectible Accounts
1. Companies estimate uncollectible accounts receivable. 2. To record estimated uncollectibles, companies debit Bad Debts Expense and credit Allowance for Doubtful Accounts (a contra-asset account). 3. When companies write off specific uncollectible accounts, they debit Allowance for Doubtful Accounts and credit Accounts Receivable.
Chapter 9-14

E9-6 On December 31, 2008, Jarnigan Co. estimated that 2% of its net sales of $400,000 will become uncollectible. The company recorded this amount as an addition to Allowance for Doubtful Accounts. On May 11, 2009, Jarnigan Co. determined that Terry Fryes account was uncollectible and wrote off $1,100. On June 12, 2009, Frye paid the amount previously written off. Instructions
Prepare the journal entries on December 31, 2008, May 11, 2009, and June 12, 2009.
Chapter 9-15

E9-6 Prepare the journal entries on December 31, 2008, May 11, 2009, and June 12, 2009. December 31
($400,000 x 2% = 8,000)
Bad debt expense Allowance for doubtful accounts
8,000 8,000
Chapter 9-16

E9-6 Prepare the journal entries on December 31, 2008, May 11, 2009, and June 12, 2009. May 11 (write-off) Allowance for doubtful accounts Accounts receivable June 12 (recovery) Accounts receivable Allowance for doubtful accounts Cash Accounts receivable
Chapter 9-17
1,100
1,100
1,100 1,100
1,100 1,100

Bases Used for Allowance Method
Illustration 9-5
Chapter 9-18

Example Data Credit sales Estimated % of credit sales not collected Accounts receivable balance Estimated % of A/R not collected Allowance for Doubtful Accounts: Case I $150 (credit balance) $500,000 1.25% $72,500 8%
Case 2
Chapter 9-19
$150 (debit balance)


Percentage of Sales
Charge sales
Estimated percentage Estimated uncollectible
$500,000
x $ 1.25% 6,250
===================================================
What should the ending balance be for the allowance account? -- Case 1 and Case 2
Chapter 9-20

Percentage of Sales Actual balance (credit) Estimated uncollectible
Case 1
(150) (6,250)
Case 2
150 (6,250)
Ending balance
Journal entry: Bad debt expense
(6,400)
(6,100)
6,250 6,250
Allowance for doubtful accounts

Chapter 9-21

Percentage of Receivables Accounts receivable $ 72,500
Estimated percentage
Desired balance for allowance
x
$
8%
5,800
===================================================
What should the ending balance be for the allowance account? -- Case 1 and Case 2
Chapter 9-22

Percentage of Receivables Case 1 Actual balance (credit) Desired balance Adjustment Journal entry Case 1: Bad debt expense Allowance for doubtful accounts
Chapter 9-23
Case 2 150 (5,800) (5,950)
(150) (5,800) (5,650)
5,650 5,650

Percentage of Receivables Case 1 Actual balance (credit) Desired balance Adjustment Journal entry Case 2: Bad debt expense Allowance for doubtful accounts
Chapter 9-24
Case 2 150 (5,800) (5,950)
(150) (5,800) (5,650)
5,950 5,950

When estimating losses using Percentage of Receivables, companies often prepare an aging schedule which classifies customer balances by the length of time they have been unpaid.
Illustration 9-7
Chapter 9-25

Summary
Percentage of Sales approach:
Focus on Bad debt expense estimate, any balance in the allowance account is ignored.
Method achieves a matching of cost and revenues.
Percentage of Receivables approach:

Accurate valuation of receivables on the balance sheet. Method may also be applied using an aging schedule.
Chapter 9-26
Disposing of Accounts Receivable

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.
Chapter 9-27
LO 4 Describe the entries to record the disposition of accounts receivable.

Sale of Receivables
A factor buys receivables from businesses and then collects the payments directly from the customers.
Chapter 9-28

E9-7 (a) On March 3, Cornwell Appliances sells $680,000 of its receivables to Marsh Factors Inc. Marsh Factors assesses a finance charge of 3% of the amount of receivables sold. Prepare the entry on Cornwell Appliances books to record the sale of the receivables.
($680,000 x 3% = $20,400)
Cash 659,600
Service charge expense

Accounts receivable
Chapter 9-29
20,400
680,000

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 in similar manner as checks deposited from cash sale.
Chapter 9-30

E9-7 (b) On May 10, Dale Company sold merchandise for $3,800 and accepted the customers America Bank MasterCard. America Bank charges a 4% service charge for credit card sales. Prepare the entry on Dale Companys books to record the sale of merchandise.
($3,800 x 4% = $152)
Cash 3,648
Service charge expense

Sales
Chapter 9-31
152
3,800
Notes Receivable
Companies may grant credit in exchange for a promissory note. A promissory note is a written promise to pay a specified amount of money on demand or at a definite time. Promissory notes may be used:
1. when individuals and companies lend or borrow money,
2. when amount of transaction and credit
period exceed normal limits, or
3. in settlement of accounts receivable.

Chapter 9-32
LO 5 Compute the maturity date of and interest on notes receivable.
Notes Receivable
To the Payee, the promissory note is a note receivable. To the Maker, the promissory note is a note payable.
Illustration 9-10
Chapter 9-33
Notes Receivable
Determining the Maturity Date
Note expressed in terms of Months Days
Computing Interest
Illustration 9-13
Chapter 9-34
Recognizing Notes Receivable

E9-10 Orosco Supply Co. has the following transactions related to notes receivable during the last 2 months of 2008.
Nov. 1 Loaned $15,000 cash to Sally Givens on a 1-year, 10% note.

Dec. 11 Sold goods to John Countryman, Inc., receiving a $6,750, 90-day, 8% note. Dec. 16 Received a $4,000, 6-month, 9% note in exchange for Bob Rebers outstanding accounts receivable. Dec. 31 Accrued interest revenue on all notes receivable. Instructions (a) Journalize the transactions for Orosco Supply Co.
Chapter 9-35
LO 6 Explain how companies recognize notes receivable.

E9-10 Nov. 1 Loaned $15,000 cash to Sally Givens on a 1-year, 10% note. Dec. 11 Sold goods to John Countryman, Inc., receiving a $6,750, 90-day, 8% note. Dec. 16 Received a $4,000, 6-month, 9% note in exchange for Bob Rebers outstanding accounts receivable.
Nov. 1
Notes receivable
15,000
15,000 6,750
Cash Dec. 11 Notes receivable
Sales
Dec. 16 Notes receivable Accounts receivable
Chapter 9-36
6,750
4,000 4,000

E9-10 Dec. 31 Accrued interest revenue on all notes receivable.
Givens note: Countryman note: Reber note: Amount $ 15,000 6,750 4,000 Rate x 10% x x 8% x x 9% x Time 2 / 12 = 20 / 360 = 15 / 360 = $ 250 30 15 $ 295
Total accrued interest
Dec. 31 Interest receivable
295
Interest revenue
295
Chapter 9-37
Notes Receivable
Valuing Notes Receivable
Like accounts receivable, companies report shortterm 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.
Chapter 9-38
LO 7 Describe how companies value notes receivable.
Notes Receivable
Disposing of Notes Receivable
1. Notes may be held to their maturity date.
2. Maker may default and payee must make an
adjustment to the account.
3. Holder speeds up conversion to cash by selling the note receivable.
Chapter 9-39
LO 8 Describe the entries to record the disposition of notes receivable.
Notes Receivable
Disposing of Notes Receivable
Honor of Notes Receivable A note is honored when its maker pays it in full at its maturity date. Dishonor of Notes Receivable
A dishonored note is not paid in full at maturity. Dishonored note receivable is no longer negotiable.
Chapter 9-40
Notes Receivable
E9-13 On May 2, Kleinsorge Company lends $7,600 to Everhart, Inc., issuing a 6-month, 9% note. At the maturity date, November 2, Everhart indicates that it cannot pay. Instructions (a) Prepare the entry to record the issuance of the note.
(b) Prepare the entry to record the dishonor of the note, assuming that Kleinsorge Company expects collection will occur. (c) Prepare the entry to record the dishonor of the note, assuming that Kleinsorge Company does not expect collection in the future.
Chapter 9-41
Notes Receivable
E9-13 (a) Prepare the entry to record the issuance of the note. (b) Prepare the entry to record the dishonor of the note, assuming that Kleinsorge Company expects collection will occur.
(a) (b)
Notes receivable Cash
7,600 7,600
Interest = $7,600 x 9% x 6/12 = $342
Accounts receivable
Notes receivable Interest revenue
Chapter 9-42
7,942
7,600 342
Notes Receivable
E9-13 (c) Prepare the entry to record the dishonor of the note, assuming that Kleinsorge Company does not expect collection in the future.
(c)
Allowance for doubtful accounts Notes receivable
7,600 7,600
When there is no hope of collection, the note holder would write off the face value of the note. No interest revenue would be recorded because collection will not occur.
Chapter 9-43

Presentation
Identify in the balance sheet or in the notes, each major type of receivable.
B/S Report short-term receivables as current assets. Report both gross amount of receivables and allowance for doubtful account. Report bad debts expense and service charge expense as selling expenses. Report interest revenue under Other revenues and gains.
LO 9 Explain the statement presentation and analysis of receivables.
I/S
Chapter 9-44

Analysis of Receivables
20.3 times This Ratio used to:

Assess the liquidity of the receivables.
Measure the number of times, on average, a company collects receivables during the period.
Chapter 9-45

Analysis of Receivables
20.3 times, or every 18 days (365 / 20.3)
Variant of the accounts receivable turnover ratio is average collection period in terms of days.
Used to assess effectiveness of credit and collection policies.
Collection period should not exceed credit term period.

Chapter 9-46
Copyright
Copyright 2008 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.
Chapter 9-47

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CHAPTER 9

Receivables Management and Accounting

Accounting for Receivables

Statement Presentation and Analysis

Disposing of accounts receivable

LO 1 Identify the different types of receivables.

1. Recognizing accounts receivable.

LO 1 Identify the different types of receivables.

Recognizing Accounts Receivable

LO 2 Explain how companies recognize accounts receivable.

Recognizing Accounts Receivable

LO 2 Explain how companies recognize accounts receivable.

Recognizing Accounts Receivable

LO 2 Explain how companies recognize accounts receivable.

Recognizing Accounts Receivable

463,540 *** 9,460 ** 473,000 *

** [($500,000 $27,000) X 2%] *** ($473,000 $9,460)

LO 2 Explain how companies recognize accounts receivable.

Uncollectible Accounts Receivable

Valuing Accounts Receivable

Presentation of Accounts Receivable

Presentation of Accounts Receivable

Valuing Accounts Receivable

Valuing Accounts Receivable

Valuing Accounts Receivable

Bad debt expense Allowance for doubtful accounts

Valuing Accounts Receivable

Valuing Accounts Receivable

Valuing Accounts Receivable

$150 (debit balance)

Valuing Accounts Receivable

Valuing Accounts Receivable

Allowance for doubtful accounts

Valuing Accounts Receivable

Valuing Accounts Receivable

Case 2 150 (5,800) (5,950)

(150) (5,800) (5,650)

Valuing Accounts Receivable

Case 2 150 (5,800) (5,950)

(150) (5,800) (5,650)

Valuing Accounts Receivable

Valuing Accounts Receivable

Method achieves a matching of cost and revenues.

Percentage of Receivables approach:

Disposing of Accounts Receivable

2. Billing and collection are often time-consuming

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

Disposing of Accounts Receivable

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

Disposing of Accounts Receivable

Service charge expense

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

Disposing of Accounts Receivable

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

Disposing of Accounts Receivable

Service charge expense

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

period exceed normal limits, or

3. in settlement of accounts receivable.

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

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

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

463,540 * 9,460 473,000 *

[($500,000 $27,000) X 2%] * ($473,000 $9,460)