c7 - 1 learning objectives power notes 1.classification of receivables 2.internal control of...
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C7 - 1
Learning Objectives
Power Notes
1. Classification of Receivables2. Internal Control of Receivables3. Uncollectible Receivables4. Uncollectibles – Allowance Method5. Uncollectibles – Direct Write-Off Method6. Characteristics of Notes Receivable7. Accounting for Notes Receivable8. Balance Sheet Presentation9. Financial Analysis and Interpretation
Chapter F7
C7
Receivables Receivables
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• Receivables – Classification and Control• Uncollectibles – Direct Write-Off Method• Uncollectibles –Allowance Method• Accounting for Notes Receivable• Balance Sheet Presentation• Accounts Receivable Turnover• Number of Days’ Sales in Receivables
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Power NotesChapter F7
Receivables Receivables
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Classification of ReceivablesClassification of Receivables
Accounts Receivable – used for selling merchandise or services on credit, and normally expected to be collected in a relatively short period.
Notes Receivable – used to grant credit on the basis of a formal instrument of credit, called a promissory note.
Other Receivables – interest receivable, taxes receivable, and receivables from officers or employees.
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Accounting for Uncollectible Accounts ReceivableAccounting for Uncollectible Accounts Receivable
• This method is not consistent with the matching principle.
• Accounts that prove to be uncollectible are written off in the year they become worthless.
• Uncollectible Accounts Expense is debited and Accounts Receivable is credited for each such transaction.
The Direct Write-Off Method The Direct Write-Off Method
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Calculating Interest and Maturity ValueCalculating Interest and Maturity Value
Interest CalculationInterest Calculation
We received a $2,500, 10%, 90-day note dated March 16, 2000.
Principal x Rate x Time = Interest
$2,500 x 10% x 90 /360 = $62.50
Principal + Interest = Maturity Value
$2,500 + $62.50 = $2,562.50
Maturity Value CalculationMaturity Value Calculation
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Journal Entries – Direct Write-Off MethodJournal Entries – Direct Write-Off Method
DateDate DescriptionDescription DebitDebit CreditCredit
Uncollectible Accts. Expense 420Accts. Receivable - D. L. Ross 420
Accts. Receivable - D. L. Ross 420 Uncollectible Accts. Expense 420
Cash 420Accts. Receivable - D. L. Ross 420
Write off uncollectible account of $420
Reinstate and collect prior account written off.
May. 10
Nov. 21
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Accounting for Uncollectible Accounts ReceivableAccounting for Uncollectible Accounts Receivable
• This method is consistent with the matching principle.
• Management makes an estimate each year of the portion of accounts receivable that may not be collectible.
• Uncollectible Accounts Expense is debited and Allowance for Doubtful Accounts is credited.
• Actual accounts that prove to be uncollectible are debited to Allowance for Doubtful Accounts and credited to Accounts Receivable.
The Allowance Method The Allowance Method
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Journal Entries – Allowance MethodJournal Entries – Allowance Method
DateDate DescriptionDescription DebitDebit CreditCredit
Uncollectible Accts. Expense 4,000Allowance for Doubtful Acct. 4,000
Allowance for Doubtful Accts. 610Accts. Receivable - J. Parker 610
Accts. Receivable - J. Parker 610Allowance for Doubtful Accts. 610
Cash 610Accts. Receivable - J. Parker 610
Estimated a total of $4,000 will be uncollectible.
Write off uncollectible account of $610.
Reinstate and collect prior account written off.
Dec. 31
Jan. 21
Jun. 10
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Estimating Uncollectible Accounts ExpenseEstimating Uncollectible Accounts Expense
1. Estimate based on a percentage of sales.
If credit sales for the period are $300,000 and it is estimated that 1% will be uncollectible, the Uncollectible Accounts Expense Uncollectible Accounts Expense is $3,000.
2. Estimate based on analysis of receivables.
If it is estimated that $3,390 of the receivables will be uncollectible and the Allowance for Uncollectible Accounts is $510, the Uncollectible Uncollectible Accounts Expense Accounts Expense is $2,880 ($3,390 – $510).
The allowance method uses two ways to estimate the amount debited to Uncollectible Accounts ExpenseUncollectible Accounts Expense.
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Accounts Receivable Aging and UncollectiblesAccounts Receivable Aging and Uncollectibles
Days Past Dueover
Customer Balance Past Due 1-30 31-60 61-90 91-180 181-365 365
Ashby & Co. $ 150 $ 150B. T. Barr 610 $ 350 $260Brock Co. 470 $ 470
J. Zimmer Co. 160 160
Total $86,300 $75,000 $4,000 $3,100 $1,900 $1,200 $800 $300
Total accounts receivable shown by age.
Not
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Accounts Receivable Aging and UncollectiblesAccounts Receivable Aging and Uncollectibles
2%2% 5%5% 10%10% 20%20% 30%30% 50%50% 80% 80%
Uncollectibles
PERCENT
Days Past Dueover
Customer Balance Past Due 1-30 31-60 61-90 91-180 181-365 365
Ashby & Co. $ 150 $ 150B. T. Barr 610 $ 350 $260Brock Co. 470 $ 470
J. Zimmer Co. 160 160
Total $86,300 $75,000 $4,000 $3,100 $1,900 $1,200 $800 $300
Uncollectible percentages based on experience and industry averages.
Not
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Accounts Receivable Aging and UncollectiblesAccounts Receivable Aging and Uncollectibles
2%2% 5%5% 10%10% 20%20% 30%30% 50%50% 80% 80%
Uncollectibles
PERCENT
AMOUNT
Days Past Dueover
Customer Balance Past Due 1-30 31-60 61-90 91-180 181-365 365
Ashby & Co. $ 150 $ 150B. T. Barr 610 $ 350 $260Brock Co. 470 $ 470
J. Zimmer Co. 160 160
Total $86,300 $75,000 $4,000 $3,100 $1,900 $1,200 $800 $300
$3,390 =$3,390 = $1,500$1,500 $200$200 $310$310 $380$380 $360$360 $400$400 $240 $240
Not
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Year-End Adjustment for UncollectiblesYear-End Adjustment for Uncollectibles
General Ledger
Accounts Receivable
86,300AA
Allowance for Doubtful Accts.
510
Uncollectible Accts. Expense
Accounts receivable $86,300Less allowance for doubtful accounts 3,390
Net accounts receivable 82,910
Balance Sheet
Balances before adjustment
AA
AA
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Year-End Adjustment for UncollectiblesYear-End Adjustment for Uncollectibles
General Ledger
Accounts Receivable
86,300AA
Allowance for Doubtful Accts.
510
Uncollectible Accts. Expense
2,880
Accounts receivable $86,300Less allowance for doubtful accounts 3,390
Net accounts receivable 82,910
Balance Sheet
Balances before adjustment2,880
AA
BB
BB
Year-end adjustment $3,390 - $510 = $2,880
AA
BB
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Year-End Adjustment for UncollectiblesYear-End Adjustment for Uncollectibles
General Ledger
Accounts Receivable
86,300AA
Allowance for Doubtful Accts.
510
Uncollectible Accts. Expense
2,880
Accounts receivable $86,300Less allowance for doubtful accounts 3,390
Net accounts receivable 82,910
Balance Sheet
Balances before adjustment2,880
AA
BB
BB
3,390 CC
Year-end adjustment $3,390 - $510 = $2,880
Balance after adjustment
AA
BB
CC
CC
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a specific amount of money (principal)
to a specific person or company (payee)
at a specific place
on a specific date or upon demand
plus interest at a specific percentage of the principal (face) amount per year
Characteristics of Notes ReceivableCharacteristics of Notes Receivable
A promissory note is a written document containing a promise to pay:
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Accounting for Notes ReceivableAccounting for Notes Receivable
DateDate DescriptionDescription DebitDebit CreditCredit
Collected amount due on note dated November 21.
Nov. 21
Dec. 21
Notes Receivable 6,000Accts. Receivable - Bunn Co. 6,000
Cash 6,060Notes Receivable 6,000Interest Revenue 60
Principal + Interest = Maturity Value$6,000 + ($6,000 x 12% x 30 / 360) = $6,060
Received a $6,000,30-day, 12% note.
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In commercial transactions it is traditional to use a 360-day year.
The historic rationale for this procedure was ease of calculation which made sense before the computer and calculator age.
Why does this practice continue when most small calculators and desktop computers can present complex interest calculations in a few seconds?
Understanding the 360-Day YearUnderstanding the 360-Day Year
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Another Look at the 360-Day YearAnother Look at the 360-Day Year
1. Assume a $100,000 note dated June 1 for 90 days at an interest rate of 12 percent. The textbook calculation is as follows:
$100,000 x (12 / 100) x (90 /360) = $3,000.00$100,000 x (12 / 100) x (90 /360) = $3,000.00
2. A more precise calculation is as follows:
$100,000 x (12 / 100) x (90 /365) = $2,958.90$100,000 x (12 / 100) x (90 /365) = $2,958.90
3. When large sums are involved the 360-day method (known as ordinary interest or banker’s rule) yields significantly more interest to the lender. It is used by banks and commercial organizations.
4. The second method (known as exact interest) is used by the federal government and the Federal Reserve System.
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Assets
Current assets:
Cash $119,500
Notes receivable 250,000
Accounts receivable $445,000
Less allowance for
doubtful accounts 15,000 430,000
Interest receivable 14,500
Crabtree Co.Balance Sheet
December 31, 20--
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Solvency Measures — The Short-Term CreditorSolvency Measures — The Short-Term Creditor
Accounts Receivable TurnoverAccounts Receivable TurnoverAccounts Receivable TurnoverAccounts Receivable Turnover
Use: To assess the efficiency in collecting receivables and in the management of credit.
Use: To assess the efficiency in collecting receivables and in the management of credit.
2000 1999Net sales on account $1,498,000 $1,200,000Accounts receivable (net):
Beginning of year $ 120,000 $ 140,000End of year 115,500 120,000Total $ 235,000 $ 260,000
Average $ 117,500 $ 130,000
Accts. receivable turnoverAccts. receivable turnover 12.7 times12.7 times 9.2 times9.2 times
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Solvency Measures — The Short-Term CreditorSolvency Measures — The Short-Term Creditor
Number of Days’ Sales in ReceivablesNumber of Days’ Sales in Receivables Number of Days’ Sales in ReceivablesNumber of Days’ Sales in Receivables
Use: To assess the efficiency in collecting receivables and in the management of credit.
Use: To assess the efficiency in collecting receivables and in the management of credit.
2000 1999Net sales on account $1,498,000 $1,200,000Accounts receivable (net):
Beginning of year $ 120,000 $ 140,000End of year 115,500 120,000Total $ 235,000 $ 260,000
Average $ 117,500 $ 130,000
Average collection periodAverage collection period 28 days28 days 36 days36 days