Chapter Five

Accounting for
Receivables
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Define receivables.
2. Identify the different types of receivables.
3. Explain how companies recognize accounts receivable.
4. Distinguish between the methods and bases companies use
to value A/R.
5. Describe the entries to record the disposition of A/R.
6. Compute the maturity date of and interest on N/R.
7. Explain how companies recognize notes receivable.
8. Describe how companies value notes receivable.
9. Describe the entries to record the disposition of N/R.
5.1 Definition of Receivables
. The term receivables refers to amounts due
 from
individuals and companies. They are claims/ rights that
are expected to be collected in cash.
 The management of receivables is a very important
activity for any company that sells goods or services on
credit.
 Receivables are important because they represent one of
a company’s most liquid assets.
 For many companies, receivables are also one of the
largest assets.
 Cont’d

Amounts due from individuals and companies that are

expected to be collected in cash.

Illustration 8-1
Receivables as a Percentage of
Assets
 5.2 Types of Receivables
.
Classifications of Receivables

Amounts customers Written promise Nontrade receivables

owe on account (formal instrument) such as interest,
that result from the for amount to be loans to officers,
sale of goods and received. Also advances to
employees, and
services. called trade
income taxes
receivables.
Accounts Notes refundable.
Other
Receivable Receivable Receivables
 Cont’d
Question #7
Receivables are frequently classified as:
a. accounts receivable, company receivables, and other
receivables.
b. accounts receivable, notes receivable, and employee
receivables.
c. accounts receivable and general receivables.
d. accounts receivable, notes receivable, and other
receivables.
 5.3 Accounts Receivable
.
Recognizing Accounts Receivable

 Service organization records a receivable when it

performs service on account.
 Merchandiser records accounts receivable at the point
of sale of merchandise on account.
 Seller may offer a discount to encourage early
payment.
 Buyer might return goods found to be unacceptable.
► Sales returns reduce receivables.
Recognizing Accounts Receivable
Illustration: Assume that Hennes & Mauritz (SWE) Co. on
July 1, 2014, 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 Hennes & Mauritz.

Jul. 1 Accounts Receivable1,000

Sales Revenue 1,000
Recognizing Accounts Receivable
Illustration: On July 5, Polo returns merchandise worth $100
to Hennes & Mauritz.

Jul. 5 Sales Returns and Allowances 100

Accounts Receivable 100

Illustration: On July 11, Hennes & Mauritz receives payment

from Polo Company for the balance due.

Jul. 11 Cash ($900 - $18)882

Sales Discounts ($900 x .02) 18
Accounts Receivable 900
 > DO IT!
On May 1, Wilton sold merchandise on account to Bates for €50,000
terms 3/15, net 45. On May 4, Bates returns merchandise with a sales
price of €2,000. On May 16, Wilton receives payment from Bates for the
balance due. Prepare journal entries to record the May transactions on
Wilton’s books. (Ignore CGS Entries.)

May 1 Accounts Receivable—Bates 50,000

Sales Revenue 50,000

4 Sales Returns and Allowances 2,000

Accounts Receivable—Bates 2,000

16 Cash (€48,000 - €1,440) 46,560

Sales Discounts (€48,000 x .03) 1,440
Accounts Receivable—Bates 48,000
Valuing Accounts Receivable
 Current asset.
 Valuation (net realizable value).
Uncollectible Accounts Receivable
 Sales on account raise the possibility of accounts not
being collected.
 Seller records losses that result from extending credit as
Bad Debt Expense.
Valuing Accounts Receivable

Methods of Accounting for Uncollectible Accounts

Direct Write-Off Allowance Method

Theoretically undesirable: Losses are estimated:
 No matching.  Better matching.
 Receivable not stated at  Receivable stated at
amount expect to be cash (net) realizable
received. value.
 Not acceptable for  Required by IFRS.
financial reporting.
Direct Write-off Method for Uncollectible
Accounts
Illustration: Assume that Warden Ltd. writes off M. E. Doran’s
HK$1,600 balance as uncollectible on December 12.
Warden’s entry is:

Bad Debt Expense 1,600

1,600
Accounts Receivable—M. E. Doran

Theoretically undesirable:
 No matching.
 Receivable not stated at cash realizable value.
 Not acceptable for financial reporting.
Allowance Method for Uncollectible
Accounts
1. Companies estimate uncollectible accounts receivable.

2. Debit Bad Debt Expense and credit Allowance for

Doubtful Accounts (a contra-asset account).

3. Companies debit Allowance for Doubtful Accounts

and credit Accounts Receivable at the time the specific
account is written off as uncollectible.
Allowance Method
RECORDING ESTIMATED UNCOLLECTIBLES
Illustration: Hampson Furniture has credit sales of
€1,200,000 in 2017, of which €200,000 remains
uncollected at December 31. The credit manager
estimates that €12,000 of these sales will prove
uncollectible.

Dec. 31 Bad Debt Expense 12,000

12,000
Allowance for Doubtful Accounts
 Cont’d

Illustration 8-3
Presentation of Allowance for Doubtful Accounts
 Cont’d
WRITE-OFF AN UNCOLLECTIBLE ACCOUNT
Illustration: The vice-president of finance of Hampson Furniture on
March 1, 2018, authorizes a write-off of the €500 balance owed by R. A.
Ware. The entry to record the write-off is:

Mar. 1 Allowance for Doubtful Accounts 500

500
Accounts Receivable—R. A. Ware

Illustration 8-4
General Ledger Balances after Write-off
 Cont’d
WRITE-OFF AN UNCOLLECTIBLE ACCOUNT
Illustration: The vice-president of finance of Hampson Furniture on
March 1, 2018, authorizes a write-off of the €500 balance owed by R. A.
Ware. The entry to record the write-off is:

Mar. 1 Allowance for Doubtful Accounts 500

500
Accounts Receivable—R. A. Ware

Illustration 8-5
Cash Realizable Value Comparison
 Cont’d
RECOVERY OF AN UNCOLLECTIBLE
ACCOUNT
Illustration: On July 1, R.
A. Ware pays the €500 amount that
Hampson Furniture had written off on March 1. Hampson makes
these entries:

July 1 Accounts Receivable—R. A. Ware 500

500
Allowance for Doubtful Accounts

1 Cash 500
500
Accounts Receivable—R. A. Ware
 Cont’d
ESTIMATING THE
Illustration 8-6
Comparison of Bases for
ALLOWANCE Estimating Uncollectibles

Emphasis on Income Statement Emphasis on Statement of

Relationships Financial Position Relationships
 Cont’d
ESTIMATING THE Illustration 8-6

ALLOWANCE Management estimates

what percentage of
credit sales will be
uncollectible. This
percentage is based on
past experience and
anticipated credit
policy.
Emphasis on Income Statement
Relationships
 Cont’d
Percentage-of-Sales
Illustration: Assume that Gonzalez SA elects to use the
percentage-of-sales basis. It concludes that 1% of net credit
sales will become uncollectible. If net credit sales for 2017 are
€800,000, the adjusting entry is:

Dec. 31 Bad Debt Expense 8,000 *

Allowance for Doubtful Accounts 8,000

* €800,000 x 1%
 Cont’d
Percentage-of-Sales
 Emphasizes matching of expenses with revenues.

 Adjusting entry to record bad debts disregards the

existing balance in Allowance for Doubtful Accounts.

Illustration 8-7
Bad Debt Accounts after Posting
 Cont’d
ESTIMATING THE
ALLOWANCE Illustration 8-6

Management establishes
a percentage
relationship between the
amount of receivables
and expected losses
from uncollectible
accounts.
Emphasis on Statement of
Financial Position Relationships
 Cont’d
Aging the accounts receivable - customer balances are
classified by the length of time they have been unpaid.
Illustration 8-8 Aging schedule
 Cont’d
Percentage-of-Receivables (₩ in thousands)

Illustration: Assume the unadjusted trial balance shows Allowance for

Doubtful Accounts with a credit balance of ₩528. Prepare the
adjusting entry assuming ₩2,228 is the estimate of uncollectible
receivables from the aging schedule.

Dec. 31 Bad Debt Expense 1,700

Allowance for Doubtful Accounts 1,700

Illustration 8-9
Bad Debt
Accounts after
Posting
 > DO IT!
Brule Co. has been in business five years. The ledger at the
end of the current year shows:
Accounts Receivable $30,000 Dr.
Sales Revenue $180,000 Cr.
AFDA $2,000 Dr.
Bad debts are estimated to be 10% of receivables. Prepare the
entry to adjust Allowance for Doubtful Accounts.

Solution: *
Bad Debt Expense 5,000
Allowance for Doubtful Accounts 5,000

* [(0.1 x $30,000) + $2,000]

 Cont’d
Question #8
Which of the following approaches for bad debts is best
described as a statement of financial position method?
a. Percentage-of-receivables basis.
b. Direct write-off method.
c. Percentage-of-sales basis.
d. Both A & B.
 Cont’d
How are these accounts presented on the Statement of
Financial Position?

Allowance for
Accounts Receivable Doubtful Accounts

Beg. 500 25 Beg.

End. 500 25 End.

 Cont’d
ABC Corporation
Statement of Financial Position (partial)
Current Assets:
Supplies € 40
Inventory 812
Accounts receivable 500
Less: Allowance for doubtful accounts (25) 475
Cash 330
Total current assets 1,657
 Cont’d
Alternate
ABC Corporation Presentation
Statement of Financial Position (partial)

Current Assets:

Supplies € 40

Inventory 812
Accounts receivable, net of €25 allowance 475

Cash 330

Total current assets 1,657

 Cont’d
Journal entry for credit sale of €100.
Accounts Receivable 100
Sales 100

Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.

End. 500 25 End.

 Cont’d
Journal entry for credit sale of €100.
Accounts Receivable 100
Sales 100

Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
Sale 100

End. 600 25 End.

 Cont’d
Collected €333 on account.
Cash 333
Accounts Receivable 333

Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
Sale 100

End. 600 25 End.

 Cont’d
Collected €333 on account.
Cash 333
Accounts Receivable 333

Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
Sale 100 333 Coll.

End. 267 25 End.

 Cont’d
Adjustment of €15 for estimated bad debts.
Bad Debt Expense 15
Allowance for Doubtful Accounts 15

Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
Sale 100 333 Coll.

End. 267 25 End.

 Cont’d
Adjustment of €15 for estimated bad debts.
Bad Debt Expense 15
Allowance for Doubtful Accounts 15

Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
Sale 100 333 Coll. 15 Est.

End. 267 40 End.

 Cont’d
Write-off of uncollectible accounts for €10.
Allowance for Doubtful Accounts 10
Accounts Receivable 10

Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
Sale 100 333 Coll. 15 Est.

End. 267 40 End.

 Cont’d
Write-off of uncollectible accounts for €10.
Allowance for Doubtful Accounts 10
Accounts Receivable 10

Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
Sale 100 333 Coll. 15 Est.
10 W/O W/O 10

End. 257 30 End.

 Cont’d
ABC Corporation
Statement of Financial Position (partial)

Current Assets:

Supplies € 40

Inventory 812

Accounts receivable 257

Less: Allowance for doubtful accounts (30) 227

Cash 330

Total current assets 1,409

Disposing of Accounts Receivables
SALE OF RECEIVABLES
 Finance company or bank.
 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% to 3% of the receivables
purchased.
SALE OF RECEIVABLES
Illustration: Assume that Tsai Furniture factors NT$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 Tsai Furniture is as
follows.
(NT$600,000 x 2% = NT$12,000)

Cash 588,000
Service Charge Expense 12,000
Accounts Receivable 600,000
CREDIT CARD SALES
 Retailer pays card issuer a fee of 2 to 6% of the invoice
price for its services.
 Recorded the same as cash sales.
 Advantages to retailer:
► Issuer does credit investigation of customer.
► Issuer maintains customer accounts.
► Issuer undertakes collection and absorbs losses.
► Receives cash more quickly.
CREDIT CARD SALES
Illustration: Lee Co. purchases NT$6,000 of music downloads for
its restaurant from Yang Music Co., using a Visa First Bank Card.
First Bank charges a service fee of 3%. The entry to record this
transaction by Yang Music is as follows.

Cash 5,820
Service Charge Expense 180
Sales Revenue 6,000
 > DO IT!
Mehl Wholesalers NV needs to raise €120,000 in cash to safely
cover next Friday’s employee payroll. Mehl has reached its debt
ceiling. Mehl’s balance of outstanding receivables totals
€750,000. Mehl decides to factor €125,000 of its receivables on
September 7, 2017, to alleviate this cash crunch. Record the
entry that Mehl would make when it raises the needed cash.
(Assume a 1% service charge.)
Solution
Cash 123,750
Service Charge Expense 1,250
*
Accounts Receivable 125,000
* (1% x €125,000)
 5.4 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.
 Cont’d
To the payee, the promissory note is a note receivable.
To the maker, the promissory note is a note payable.
Illustration 8-11 Promissory
Note
Determining the Maturity Date
Maturity date of a promissory note may be stated in one of
three ways:
1. On demand.
2. On a stated date.
3. At the end of a stated period of time.

Note terms are expressed in:

 Months
 Days

When counting days, omit the date the note is issued, but
include the due date.
Computing Interest

Illustration 8-14
Formula for Computing Interest

Illustration 8-15
Computation of Interest
 Cont’d
Question #9
One of the following statements about promissory notes is
incorrect. The incorrect statement is:
a. The party making the promise to pay is called the maker.

b. The party to whom payment is to be made is called the

payee.

c. A promissory note is not a negotiable instrument.

d. A promissory note is often required from high-risk customers.

Recognizing Notes Receivable
Illustration: Calhoun Company wrote a ₤1,000, two-month,
12% promissory note dated May 1, to settle an open account.
Prepare entry would Wilma Company makes for the receipt of
the note.

May 1 Notes Receivable 1,000

Accounts Receivable—Calhoun Co. 1,000
Valuing Notes Receivable
 Report short-term notes receivable at their cash (net)
realizable value.
 Estimation of cash realizable value and recording bad
debt expense and related allowance are similar to
accounts receivable.
 Allowance for Doubtful Accounts is used.
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.
 Cont’d
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.
HONOR OF NOTES RECEIVABLE
Illustration: Wolder Co. lends Higley Inc. €10,000 on June 1,
accepting a five-month, 9% interest note. If Wolder presents
the note to Higley Inc. on November 1, the maturity date,
Wolder’s entry to record the collection is:

Nov. 1 Cash 10,375

Notes Receivable 10,000
Interest Revenue 375

(€10,000 x 9% x 5/12 = €375)

Accrual of Interest Receivable
Illustration: Suppose instead that Wolder Co. prepares financial
statements as of September 30. The adjusting entry by Wolder is for
four months ending Sept. 30. Illustration 8-16
Timeline of Interest
Earned

Sept. 30 Interest Receivable 300

Interest Revenue 300
(€10,000 x 9% x 4/12 = € 300)
 Cont’d
Illustration: Prepare the entry Wolder’s would make to
record the honoring of the Higley note on November 1.

Nov. 1 Cash 10,375

10,000
Notes Receivable
300
Interest Receivable
Interest Revenue (€10,000 × 9% × 1/12) 75
DISHONOR OF NOTES RECEIVABLE
Illustration: Assume that Higley Co. on November 1 indicates
that it cannot pay at the present time. If Wolder Co. does
expect eventual collection, it would make the following entry at
the time the note is dishonored (assuming no previous
accrual of interest).

Nov. 1 Accounts Receivable10,375

Notes Receivable 10,000
Interest Revenue 375
 > DO IT!
Gambit Stores accepts from Leonard Co. €3,400, 90-day, 6%
note dated May 10 in settlement of Leonard’s overdue open
account. The note matures on August 8. What entry does
Gambit make at the maturity date, assuming Leonard pays
the note and interest in full at that time?

Solution

Interest payable at maturity date = €3,400 × 6% × 90/360 = €51

Cash 3,451
Notes Receivable 3,400

Interest Revenue 51
The End of Chapter 5
Thank You!!!