1. 2 chapter 8 reporting and analyzing receivables
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Chapter 8
REPORTING AND REPORTING AND ANALYZING ANALYZING
RECEIVABLESRECEIVABLES
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Chapter 8Reporting and Analyzing
ReceivablesAfter studying Chapter 8, you should be able to:
Identify the different types of receivables. Explain how accounts receivable are recognized in
the accounts. Describe the methods used to account for bad
debts. Compute the interest on notes receivable. Describe the entries to record the disposition of
notes receivable.
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Amounts due from individuals and other companies-expected to be collected in cash
Three major classes of receivables Accounts Receivable - amounts owed by customers
on account, expected to be collected within 30-60 days
Notes Receivable - claims for which formal instruments of credit are issued
Other Receivables - non-trade receivables, for example, interest receivable and advances to employees
TYPES OF RECEIVABLES11 1
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Accounts Receivable...
Amounts owed by customers on account.
Result from the sale of goods/services. Expected to be collected within 30-60
days. Most significant type of claim held by
company. Often called trade receivables.
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RECOGNIZING ACCOUNTS RECEIVABLE
When a business sells merchandise to a customer on credit, Accounts Receivable is debited (increased) and Sales is credited (increased).
When a business sells merchandise to a customer on credit, Accounts Receivable is debited (increased) and Sales is credited (increased).
Date Account Titles Debit Credit
General Journal
July 1 Accounts Receivable – Polo Company 1,000Sales 1,000
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Date Account Titles Debit Credit
General Journal
RECOGNIZING ACCOUNTS RECEIVABLE
When a business sells merchandise to a customer on credit, Accounts Receivable is debited and Sales is credited. When a business sells merchandise to a customer on credit, Accounts Receivable is debited and Sales is credited.
When a business receives returned merchandise previously sold to a customer on credit, Sales Returns and Allowances is debited and Accounts Receivable is credited (decreased).
When a business receives returned merchandise previously sold to a customer on credit, Sales Returns and Allowances is debited and Accounts Receivable is credited (decreased).
July 5 Sales Returns and Allowances 100
Accounts Receivable – Polo Company 100
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Receivables are valued at the net amount expected to be received in cash
Excludes amounts that the company estimates it will not be able to collect (net realizable value)
Credit losses Recorded as Bad Debts Expense Considered a normal and necessary risk of doing
business
ACCOUNTING FOR BAD DEBTS
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2 Methods for Accounting for Uncollectible Accounts
The Direct Write-off Method
The Allowance Method
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Direct Write-Off Method
Bad debt losses are not estimated. No allowance account is used. Accounts are written off when determined
uncollectible as follows: Bad Debts Expense 200
Accounts Receivable--M. E. Doran 200
Not acceptable for financial reporting purposes.
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Allowance method Required when bad debts are deemed to be
material in amount Uncollectible accounts are estimated
At the end of each period
THE ALLOWANCE METHOD
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Estimated uncollectibles are debited to Bad Debts Expense and credited to Allowance for Doubtful Accounts at the end of each period.
Estimated uncollectibles are debited to Bad Debts Expense and credited to Allowance for Doubtful Accounts at the end of each period.
THE ALLOWANCE METHOD
Date Account Titles Debit Credit
General Journal
Dec. 31 Bad Debts Expense 12,000 Allowance for Doubtful Accounts 12,000
Presentation of Allowance for Doubtful Accounts
Actual uncollectibles are debited to Allowance for Doubtful Accounts and credited to Accounts Receivable at the time the specific account is written off.
Actual uncollectibles are debited to Allowance for Doubtful Accounts and credited to Accounts Receivable at the time the specific account is written off.
THE ALLOWANCE METHOD
Date Account Titles Debit Credit
General Journal
Mar. 1 Allowance for Doubtful Accounts 500 Accounts Receivable - R. A. Ware 500
General Ledger Balances after Write-off
When there is recovery of an account that has been written off: reverse the entry made to write off the account and...
When there is recovery of an account that has been written off: reverse the entry made to write off the account and...
Recovery of Uncollectible Accounts
Date Account Titles Debit Credit
General Journal
July 1 Accounts Receivable – R. A. Ware 500 Allowance for Doubtful Accounts 500
Record the collection in the usual manner.Record the collection in the usual manner.
Date Account Titles Debit Credit
General Journal
July 1 Cash 500 Accounts Receivable 500
Percentage of Receivables...
Management establishes a percentage relationship between the amount of receivables and the expected losses from uncollectible accounts.
2% of $600,000(credit sales) = $12,000
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Aging of Accounts Receivable
The analysis of customer balances by the length of time they have been unpaid. The longer a debt is outstanding the less likely it
is to be paid.
AGING SCHEDULE
The older the accounts, the less likely to be paid
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PERCENTAGE OF RECEIVABLES BASIS
If the trial balance shows Allowance for Doubtful Accounts with a credit balance of $528, an adjusting entry for $1,700 ($2,228 - $528) is necessary.
If the trial balance shows Allowance for Doubtful Accounts with a credit balance of $528, an adjusting entry for $1,700 ($2,228 - $528) is necessary.
PERCENTAGE OF RECEIVABLES BASIS
If the trial balance shows Allowance for Doubtful Accounts with a credit balance of $528, an adjusting entry for $1,700 ($2,228 - $528) is necessary.
If the trial balance shows Allowance for Doubtful Accounts with a credit balance of $528, an adjusting entry for $1,700 ($2,228 - $528) is necessary.
Date Account Titles Debit Credit
General Journal
Dec. 1 Bad Debts Expense 1,700 Allowance for Doubtful Accounts 1,700
Notes Receivable...
Credit which is extended by use of a formal instrument.
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Credit instrument normally requires: payment of interest extends for time periods of 60-90 days or
longer. Give the holder a stronger legal claim than
the other receivables. Can be sold to another party.
Notes Receivable...
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Notes Receivable...
Are often accepted from customers who need to extend payment of an account receivable.
Are often required from high-risk customers.
The basic formula for computing interest on an interest-bearing note is:
The interest rate specified on the note is an annual rate of interest.
FORMULA FOR COMPUTING INTEREST
Face Valueof Note
Annual Interest
Rate
Timein Terms of
One YearInterestX X =
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Illustration 8-11COMPUTATION OF INTEREST
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Review
On 1/1/07, Oscar Co. gave a $10,000, four month, 9% note payable to Dina Inc. At the maturity date, how much will Dina Inc. collect from Oscar Co.?
a. $10,000.b. $10,900.c. $10,225.d. $10,300.
$10,000 x .09 x 120/360
HONOR OF NOTESRECEIVABLE
A note is honored when it is paid in full at its maturity date. A note is honored when it is paid in full at its maturity date.
10,375 10,000 375
HONOR OF NOTESRECEIVABLE
If Wolder Co. prepares prepares financial statements as of September 30, interest for 4 months, or $300, would be accrued.
If Wolder Co. prepares prepares financial statements as of September 30, interest for 4 months, or $300, would be accrued.
300 300
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Companies frequently sell their receivables to another company to shorten their cash-to-cash cycle
Reasons for selling receivables
• Size of receivables, large amounts of cash are tied up
• Receivables may be the only reasonable source of cash
• Billing and collecting are time consuming and costly
ACCELERATING CASH RECEIPTS
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SALE OF RECEIVABLES TO A FACTOR
Hendrendon Furniture factors $600,000 of receivables to Federal Factors, Inc. Federal Factors assesses a service charge of 2% of the amount of receivables sold.
Hendrendon Furniture factors $600,000 of receivables to Federal Factors, Inc. Federal Factors assesses a service charge of 2% of the amount of receivables sold.
Date Account Titles Debit Credit
General Journal
Cash 588,000Service Charge Expense (2% x $600,000) 12,000 Accounts Receivable 600,000
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