Slide

8-1

Chapter

Accounting for
Receivables
Financial Accounting, IFRS Edition
Weygandt Kimmel Kieso
Slide
8-2

Study
Study Objectives
Objectives

Slide
8-3

1.

Identify the different types of receivables.

2.

Explain how companies recognize accounts receivable.

3.

Distinguish between the methods and bases companies use to

value accounts receivable.

4.

Describe the entries to record the disposition of accounts

receivable.

5.

Compute the maturity date of and interest on notes receivable.

6.

Explain how companies recognize notes receivable.

7.

Describe how companies value notes receivable.

8.

Describe the entries to record the disposition of notes receivable.

9.

Explain the statement presentation and analysis of receivables.

Accounting
Accounting for
for Receivables
Receivables

Types of
Receivables
Accounts
receivable
Notes receivable
Other
receivables

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8-4

Accounts
Receivable
Recognizing
accounts
receivable
Valuing accounts
receivable
Disposing of
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

Types
Types of
of Receivables
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.

Claims for which

formal instruments
of credit are issued
as proof of debt.

Nontrade (interest,
loans to officers,
advances to
employees, and
income taxes
refundable).

Accounts
Accounts
Receivable
Receivable

Notes
Notes
Receivable
Receivable

Other
Other
Receivables
Receivables

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8-5

SO 1 Identify the different types of receivables.

Accounts
Accounts Receivable
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.
Slide
8-6

SO 1 Identify the different types of receivables.

Recognizing
Recognizing Accounts
Accounts Receivable
Receivable
Illustration: Assume that Jordache Co. on July 1, 2011, 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 Jordache Co.
Jul. 1

Accounts receivable
Sales

Slide
8-7

1,000
1,000

SO 2 Explain how companies recognize accounts receivable.

Recognizing
Recognizing Accounts
Accounts Receivable
Receivable
Illustration: On July 5, Polo returns merchandise worth $100 to
Jordache Co.
Jul. 5

Sales returns and allowances

100

Accounts receivable

100

Illustration: On July 11, Jordache receives payment from

Polo Company for the balance due.
Jul. 11

Cash

882

Sales discounts ($900 x .02)

Accounts receivable
Slide
8-8

18
900

SO 2 Explain how companies recognize accounts receivable.

Accounts
Accounts Receivable
Receivable
Valuing Accounts Receivables
Reported as an asset on the statement of financial
position.
Reported at the amount the company thinks they will be
able to collect.
Sales on account raise the possibility of accounts not
being collected.
Valuation can be difficult because an unknown amount
of receivables will become uncollectible.
Slide
8-9

SO 3 Distinguish between the methods and bases

companies use to value accounts receivable.

Valuing
Valuing Accounts
Accounts Receivable
Receivable
Methods of Accounting for Uncollectible Accounts

Direct Write-Off

Allowance Method

Theoretically undesirable:

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8-10

Losses are estimated:

no matching.

better matching.

receivable not stated at net

realizable value.

receivable stated at net

realizable value.

not acceptable for financial

reporting.

required by IFRS.

SO 3 Distinguish between the methods and bases

companies use to value accounts receivable.

Valuing
Valuing Accounts
Accounts Receivable
Receivable
Direct Write-Off Method for Uncollectible Accounts
Under the direct write-off method, when a company determines
a particular account to be uncollectible, it charges the loss to Bad
Debts Expense. Assume, for example, that on December 12
Warden Co. writes off as uncollectible M. E. Dorans $200 balance.
The entry is:
Dec. 12

Bad debt expense

Accounts receivable

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8-11

200
200

SO 3 Distinguish between the methods and bases

companies use to value accounts receivable.

Valuing
Valuing Accounts
Accounts Receivable
Receivable
Allowance Method for Uncollectible Accounts
1. Companies estimate uncollectible accounts receivable.
2. To record estimated uncollectibles:
Bad Debts Expense

xxx

Allowance for Doubtful Accounts

xxx

3. To write off uncollectible accounts:

Allowance for Doubtful Accounts
Accounts Receivable

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8-12

xxx
xxx

SO 3 Distinguish between the methods and bases

companies use to value accounts receivable.

Valuing
Valuing Accounts
Accounts Receivable
Receivable
Recording Estimated Uncollectibles: Assume that Hampson
Furniture has credit sales of $1,200,000 in 2011. Of this amount,
$200,000 remains uncollected at December 31. The credit
manager estimates that $12,000 of these sales will be
uncollectible. The adjusting entry to record the estimated
uncollectibles is:
Dec. 31

Bad debt expense

12,000

Allowance for doubtful accounts

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8-13

12,000

SO 3 Distinguish between the methods and bases

companies use to value accounts receivable.

Valuing
Valuing Accounts
Accounts Receivable
Receivable
Illustration 8-2
Presentation of allowance for doubtful accounts

Slide
8-14

SO 3 Distinguish between the methods and bases

companies use to value accounts receivable.

Valuing
Valuing Accounts
Accounts Receivable
Receivable
Recording the Write-Off of an Uncollectible Account:
The financial vice-president of Hampson Furniture authorizes a
write-off of the $500 balance owed by R.A.Ware
on March 1, 2012. The entry to record the write-off is:
Mar. 1

Allowance for doubtful accounts

Accounts receivable

500
500
Illustration 8-3

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8-15

SO 3 Distinguish between the methods and bases

companies use to value accounts receivable.

Valuing
Valuing Accounts
Accounts Receivable
Receivable
Recording the Write-Off of an Uncollectible Account:
The write-off affects only statement of financial position accounts.
Illustration 8-3

Illustration 8-4

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8-16

SO 3 Distinguish between the methods and bases

companies use to value accounts receivable.

Valuing
Valuing Accounts
Accounts Receivable
Receivable
Recovery of an Uncollectible Account: On July 1, R. A. Ware
pays the $500 amount that Hampson had written off on March 1.
These are the entries:
Jul. 1

Accounts receivable

500

Allowance for doubtful accounts

Jul. 1

Cash

500

Accounts receivable

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8-17

500

500

SO 3 Distinguish between the methods and bases

companies use to value accounts receivable.

Valuing
Valuing Accounts
Accounts Receivable
Receivable
Bases Used for Allowance Method
Illustration 8-5

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8-18

SO 3 Distinguish between the methods and bases

companies use to value accounts receivable.

Valuing
Valuing Accounts
Accounts Receivable
Receivable
Percentage-of-Sales
Illustration: Assume that Gonzalez Company elects to use
the percentage-of-sales basis. It concludes that 1% of net credit
sales will become uncollectible. If net credit sales for 2011 are
$800,000, the adjusting entry is:
Dec. 31

Bad debts expense

Allowance for doubtful accounts

8,000 *
8,000

* $800,000 x 1%
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8-19

SO 3 Distinguish between the methods and bases

companies use to value accounts receivable.

Valuing
Valuing Accounts
Accounts Receivable
Receivable
Percentage-of-Sales
Emphasizes the matching of expenses with revenues.
When the company makes the adjusting entry, it disregards
the existing balance in Allowance for Doubtful Accounts.
Illustration 8-6

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8-20

SO 3 Distinguish between the methods and bases

companies use to value accounts receivable.

Valuing
Valuing Accounts
Accounts Receivable
Receivable
Percentage-of-Receivables
Illustration 8-7
Aging schedule

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8-21

SO 3 Distinguish between the methods and bases

companies use to value accounts receivable.

Valuing
Valuing Accounts
Accounts Receivable
Receivable
Percentage-of-Receivables
Illustration: If the trial balance shows Allowance for Doubtful
Accounts with a credit balance of $528, the company will make the
following adjusting entry.
Dec. 31

Bad debts expense

Allowance for doubtful accounts

1,700 *
1,700

* $2,228 - 528
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8-22

SO 3 Distinguish between the methods and bases

companies use to value accounts receivable.

Valuing
Valuing Accounts
Accounts Receivable
Receivable
Percentage-of-Receivables
Illustration 8-8

Occasionally the allowance account will have a debit balance

prior to adjustment.

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8-23

SO 3 Distinguish between the methods and bases

companies use to value accounts receivable.

Valuing
Valuing Accounts
Accounts Receivable
Receivable
Summary
Percentage of Sales approach:
Focus on Bad debt expense estimate, existing balance
in the allowance account is ignored for journal entry.
Method achieves a matching of expense and revenues.

Percentage of Receivables approach:

Accurate valuation of receivables on the statement of
financial position.
Method may also be applied using an aging schedule.
Balance in allowance account considered for journal entry.
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8-24

SO 3 Distinguish between the methods and bases

companies use to value accounts receivable.

E8-3. The ledger of Hixson Company at the end of the current year shows
Accounts Receivable $120,000, Sales $840,000, and Sales Returns and
Allowances $30,000.
Instructions
(a)If Hixson uses the direct write-off method to account for uncollectible
accounts, journalize the adjusting entry at December 31, assuming Hixson
determines that Fells $1,400 balance is uncollectible.
(b) If Allowance for Doubtful Accounts has a credit balance of $2,100 in
the trial balance, journalize the adjusting entry at December 31, assuming
bad debits are expected to be (1) 1% of net sales, and (2) 10% of accounts
receivable.
(c) If Allowance for Doubtful Accounts has a debit balance of $200 in the
trial balance, journalize the adjusting entry at December 31, assuming bad
debts are expected to be (1) 0.75% of net sales and (2) 6% of accounts
receivable.

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8-25

Slide
8-26

Answer on notes page

Accounts
Accounts Receivable
Receivable
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.

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8-27

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

Disposing
Disposing of
of Accounts
Accounts Receivable
Receivable
Sale of Receivables
Factor
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 1-3% of the amount of receivables
purchased.

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8-28

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

Disposing
Disposing of
of Accounts
Accounts Receivable
Receivable
Illustration: Assume that Hendredon Furniture factors
$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 Hendredon Furniture
is as follows.
($600,000 x 2% = $12,000)
Cash
Service charge expense
Accounts receivable

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8-29

588,000
12,000
600,000

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

E8-7. Presented below are two independent situations.

a.On March 3, Pusan Appliances sells $680,000,000 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 Pusan Appliances books
to record the sale of the receivables.

b.On May 10, Taejeon Company sold merchandise for $3,500,000 and
accepted the customers America Bank MasterCard. America Bank charges
a 4% service charge for credit card sales. Prepare the entry on Taejeon
Companys books to record the sales of merchandise.

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8-30

Disposing
Disposing of
of Accounts
Accounts Receivable
Receivable
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 sale in a similar manner as checks
deposited from cash sale.

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8-32

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

Credit
Credit Card
Card Sales
Sales
Illustration: Anita Ferreri purchases $1,000 of compact discs
for her restaurant from Karen Kerr Music Co., using her Visa
First Bank Card. First Bank charges a service fee of 3%. The
entry to record this transaction by Karen Kerr Music is as follows.
Cash
Service charge expense
Sales

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8-33

970
30
1,000

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

Notes
Notes Receivable
Receivable
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.

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8-34

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

Notes
Notes Receivable
Receivable
To the Payee, the promissory note is a note receivable.
To the Maker, the promissory note is a note payable.
Illustration 8-10

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8-35

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

Notes
Notes Receivable
Receivable
Determining the Maturity Date
Note expressed in terms of
Months

Illustration 8-12

Days

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8-36

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

Notes
Notes Receivable
Receivable
Determining the Maturity Date
Illustration 8-13

Illustration 8-14

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8-37

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

Notes
Notes Receivable
Receivable
Recognizing Notes Receivable
Illustration: Calhoun Company wrote $1,000, two-month, 12%
promissory note to settle an open account, Wilma Company
makes the following entry for the receipt of the note.

Notes receivable

1,000

Accounts receivable

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8-38

1,000

SO 6 Explain how companies recognize notes receivable.

Notes
Notes Receivable
Receivable
Valuing Notes Receivable
Like accounts receivable, companies report short-term
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.

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8-39

SO 7 Describe how companies value notes receivable.

Notes
Notes Receivable
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.

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8-40

SO 8 Describe the entries to record the disposition of notes receivable.

Notes
Notes Receivable
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.
A dishonored note receivable is no longer negotiable.

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8-41

SO 8 Describe the entries to record the disposition of notes receivable.

Notes
Notes Receivable
Receivable
Honor of Notes Receivables
Illustration: Betty Co. lends Wayne Higley Inc. $10,000 on June
1, accepting a five-month, 9% interest-bearing note. Assuming
that Betty Co. presents the note to Wayne Higley Inc. on the
maturity date, Betty Co.s entry to record the collection is:
Nov. 1

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8-42

Cash

10,375

Notes receivable

10,000

Interest revenue

375

SO 8 Describe the entries to record the disposition of notes receivable.

Notes
Notes Receivable
Receivable
Honor of Notes Receivables
Illustration: If Betty Co. prepares financial statements as of
September 30, it must accrue interest. Betty Co. would make an
adjusting entry as follows.
Sept. 30

Interest receivable
Interest revenue

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8-43

300
300

SO 8 Describe the entries to record the disposition of notes receivable.

Notes
Notes Receivable
Receivable
Honor of Notes Receivables
Illustration: The entry by Betty Co. to record the honoring of the
Wayne Higley Inc. note on November 1 is:
Nov. 1

Cash
Notes receivable
Interest receivable
Interest revenue

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8-44

10,375
10,000
300
75

SO 8 Describe the entries to record the disposition of notes receivable.

Notes
Notes Receivable
Receivable
Dishonor of Notes Receivables
Illustration: Wayne Higley Inc. on November 1 indicates that it
cannot pay at the present time. If Betty 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

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8-45

Accounts receivable

10,375

Notes receivable

10,000

Interest revenue

375

SO 8 Describe the entries to record the disposition of notes receivable.

E8-12. Singletary Company had the following select transactions.

Apr. 1, 2011
July 1, 2011
Dec. 31, 2011
Apr. 1, 2012
Apr. 1, 2012

Accepted Wilson Companys 1-year, 12% note in

settlement of a $20,000 account receivable.
Loaned $25,000 cash to Richard Dent on a 9-month, 10%
note.
Accrued interest on all notes receivable.
Received principal plus interest on the Wilson note.
Richard Dent dishonored its note; Singletary expects it
will eventually collect.

Instructions
Prepare journal entries to record the transactions. Singletary prepares
adjusting entries once a year on December 31.

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8-46

Statement
Statement Presentation
Presentation and
and Analysis
Analysis
Presentation
Identify in the statement of financial position or in the
notes each major type of receivable.

F/P

Report short-term receivables appear in current assets.

Report both gross amount of receivables and allowance
for doubtful account.

I/S

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8-47

Report bad debts expense and service charge expense

as selling expenses.
Report interest revenue under Other in the
nonoperating section.
SO 9 Explain the statement presentation and analysis of receivables.

Statement
Statement Presentation
Presentation and
and Analysis
Analysis
Analysis
Illustration 8-15

This Ratio used to:

Assess the liquidity of the receivables.
Measure the number of times, on average, a company
collects receivables during the period.
Slide
8-48

SO 9 Explain the statement presentation and analysis of receivables.

Statement
Statement Presentation
Presentation and
and Analysis
Analysis
Analysis
Illustration 8-16

Average collection period in terms of days.

Used to assess effectiveness of credit and collection
policies.
Collection period should not exceed credit term period.

Slide
8-49

SO 9 Explain the statement presentation and analysis of receivables.

P8-6A. Mendosa Company closes its books monthly. On September 30, selected ledger account
balances are:
Notes Receivable
$33,000
Interest Receivable
170
Notes Receivable include the following.
Date

Maker

Face

Term

Interest

Aug. 16

Chang Inc.

$8,000

60 days

8%

Aug. 25

Hughey Co.

9,000

60 days

10%

Sept. 30

Skinner Corp.

16,000

6 months

9%

Interest is computed using a 360-day year. During October, the following transactions were
completed.
Oct. 7
Made sales of $6,900 on Mendosa credit cards.
12
Made sales of $900 on MasterCard credit cards. The credit card service charge is 3%.
15
Added $460 to Mendosa customer balance for finance charges on unpaid balances.
15
Received payment in full from Chang Inc. on the amount due.
24
Received notice that the Hughey note has been dishonored. (Assume that Hughey is
expected to pay in the future.)
Instructions
(a)Journalize the October transactions and the October 31 adjusting entry for accrued interest
receivable.
(b)Enter the balances at October 1 in the receivable accounts. Post the entries to all of the
receivable accounts.
(c)Show the statement of financial position presentation of the receivable accounts at October 31.
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8-50

Understanding
Understanding U.S.
U.S. GAAP
GAAP
Key Differences

Accounting for Receivables

IFRS has four specifically defined categories for financial

assets, which include loans and receivables. GAAP does not
designate a similar category for loans and receivables.
GAAP and IFRS account for bad debts in a similar fashion.
Both account for short-term receivables at amortized cost,
adjusted for allowances for doubtful accounts.

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8-51

Understanding
Understanding U.S.
U.S. GAAP
GAAP
Key Differences

Accounting for Receivables

Like the IASB, the FASB has worked to implement fair value
measurement for all financial instruments, but both Boards
have faced bitter opposition from various factions. As a
consequence, the Boards have adopted a piecemeal
approach; the first step is disclosure of fair value
information in the notes. The second step is the fair value
option, which permits, but does not require, companies to
record some types of financial instruments at fair value in
the financial statements. Both Boards have indicated that
they believe all financial instruments should be recorded
and reported at fair value.
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8-52

Understanding
Understanding U.S.
U.S. GAAP
GAAP
Key Differences

Accounting for Receivables

IFRS and GAAP differ in the criteria used to derecognize

(generally through a sale or factoring) a receivable. IFRS is a
combination of an approach focused on risks and rewards
and loss of control. GAAP uses loss of control as the
primary criterion. In addition, IFRS permits partial
derecognition; GAAP does not.
IFRS specifies a two-step process for determining the
impairment of receivables for a period. This process starts
by identifying individual impairments of specific receivables
and then estimating impairments of groups of receivables.
GAAP does not specify a similar approach.
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8-53

Understanding
Understanding U.S.
U.S. GAAP
GAAP
Looking to the Future

Accounting for
Receivables

Both the IASB and the FASB have indicated that they believe that
financial statements would be more transparent and
understandable if companies recorded and reported all financial
instruments at fair value. The fair value option for recording
financial instruments, such as receivables, is an important step in
moving closer to fair value recording. However, we hope that this is
only an intermediate step and that the Boards continue to work
toward the adoption of comprehensive fair value accounting for
financial instruments. In their current deliberations regarding
accounting for financial instruments, it appears that IASB wants
amortized costs for receivables, but GAAP is tending toward fair
value.
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Copyright
Copyright
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