cpa, mba by rachelle agatha, cpa, mba receivables slides by rachelle agatha, cpa, with excerpts from...
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BY R A C H E L L E A G AT H A , C PA , M B A
Receivables
Slides by Rachelle Agatha, CPA, with excerpts from Warren, Reeve, Duchac
2
1. Describe the common classifications of receivables.
2. Describe the nature of and the accounting for uncollectible receivables.
3. Describe the direct write-off method of accounting for uncollectible receivables.
Objectives:
3
4. Describe the allowance method of accounting for uncollectible receivables.
5. Compare the direct write-off and allowance methods of accounting for uncollectible accounts.
Objective
4
6. Describe the nature, characteristics, and accounting for notes receivables.
7. Describe the reporting of receivables on the balance sheet.
Objectives:
5
Describe the common
classifications of receivables.
Objective 1
Objective 1
6
The term receivables includes all money
claims against other entities, including
people, business firms, and other
organizations.
Classification of Receivables
7
Accounts receivable are
normally expected to be collected
within a relatively short period, such as 30 or 60 days.
Accounts Receivable
8
Notes receivable are amounts that
customers owe for which a formal,
written instrument of credit has been
issued.
Notes Receivable
9
Other receivables expected to be collected
within one year are classified as current assets.
If collection is expected beyond one year, these
receivables are classified as noncurrent assets and
reported under the caption Investments.
Other Receivables
10
Describe the nature of and
the accounting for uncollectible
receivables.
Objective 2
Objective 2
11
Companies often sell their receivables to other
companies. This transaction is called factoring the
receivables, and the buyer of the receivables is called a
factor.
12
There are two methods of accounting for receivables
that appear to be uncollectible: the direct write off method and the
allowance method.
Uncollectible Receivables
13
The direct write off method records bad debt expense only when an account is judged to be worthless.
The allowance method records bad debt expense by estimating uncollectible accounts at the end of the accounting period.
14
Describe the direct write-off
method of accounting for uncollectible receivables.
Objective 3
Objective 3
15
May 10 Bad Debt Expense 4 200 00 Accounts Receivable—D. L. Ross 4 200 00
On May 10, a $4,200 accounts receivable from D. L. Ross has been determined to be uncollectible.
Direct Write-Off Method
16
The amount written off is later collected on November 21.
Nov. 21 Accounts Receivable—D. L. Ross 4 200 00 Bad Debt Expense
4 200 00
21 Cash 4 200 00
Accounts Receivable—D. L. Ross 4 200 00
17
Journalize the following transactions using the direct write-off method of accounting for uncollectible receivables.
July9 Received $1,200 from Jay Burke and wrote off the remainder owed of $3,900 as uncollectible.
Oct. 11 Reinstated the account of Jay Burke and received $3,900 cash in full payment.
18
July 9 Cash 1,200Bad Debt Expense 3,900
Accounts Receivable—Jay Burke 5,100
Oct.11 Accounts Receivable—Jay Burke3,900Bad Debt Expense 3,900
11 Cash 3,900Accounts Receivable—Jay Burke 3,900
19
Describe the allowance method of accounting for
uncollectible receivables.
Objective 4
Objective 4
20
On December 31, ExTone Company estimates that a total of $40,000 of the $1,000,000 balance in her company’s Accounts Receivable will eventually be uncollectible.
Dec. 31 Bad Debt Expense 40 000 00 Allowance for Doubtful Accounts
40 000 00Uncollectible accounts estimate.
Allowance Method
21
The net amount that is expected to be collected, $960,000
($1,000,000 – $40,000), is called the net realizable value (NRV).
The adjusting entry reduces receivables to the NRV and
matches uncollectible expenses with revenues.
Net Realizable Value
22
Jan. 21 Allowance for Doubtful Accounts 6 000 00 Accounts Receivable—John Parker 6 000 00
To write off the uncollectible account.
On January 21, John Parker’s account totaling $6,000 is written off because it is uncollectible.
23
24
During 2008, ExTone Company writes off $36,750 of
uncollectible accounts, including the $6,000 account of John Parker. After posting all
entries to write-off uncollectible amounts, the Allowance for
Doubtful Accounts will have a credit balance of $3,250
($40,000 – $36,750).
25
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Jan. 1, 2008 Bal.
40,000Jan. 21
6,000Feb. 2
3,900{
Total accounts written off $36,750
Dec. 31 Unadjusted bal
3,250
“ “ “ “
26
If ExTone Company had written off $44,100 in accounts receivable
during 2008, the Allowance for
Doubtful Accounts would have a debit balance of $4,100.
27
ALLOWANCE FOR DOUBTFUL ACCOUNTS Jan. 1, 2008 Bal.
40,000Jan. 21
6,000Feb. 2
3,900{
Total accounts written off $44,100Dec. 31 Unadjusted bal
4,100
“ “ “ “
28
Nancy Smith’s account of $5,000 which was written off on April 2 is later collected
on June 10.
Two entries are needed: one to reinstate Nancy Smith’s
account and a second to record receipt of the cash.
Collecting a Written-Off Account
29
June 10 Accounts Receivable—Nancy Smith 5 000 00
To reinstate the account written off on Jan. 21.
Allowance for Doubtful Accounts 5 000 00
Entry 1: Reinstate the account.
30
June 10 Cash 5 000 00
Collection of written-off account.
Accounts Receivable—Nancy Smith 5 000 00
Entry 2: Record collection of cash.
31
Journalize the following transactions using the allowance method of accounting for uncollectible receivables.
July9 Received $1,200 from Jay Burke and wrote off the remainder owed of $3,900 as uncollectible.
Oct. 11 Reinstated the account of Jay Burke and received $3,900 cash in full payment.
32
July 9 Cash 1,200Allowance for Doubtful Accounts3,900
Accounts Receivable—Jay Burke 5,100
Oct.11 Accounts Receivable—Jay Burke3,900Allowance for Doubtful Accounts 3,900
11 Cash 3,900Accounts Receivable—Jay Burke 3,900
33
1. Estimate based on a percentage of sales. (Income statement method)
2. Estimate based on analysis of receivables. (Balance Sheet Method)
The allowance method uses two ways to estimate the amount debited to Bad Debt Expense.
Estimating Uncollectibles
34
Estimate Based on a Percentage of Sales
If credit sales for the period are $3,000,000 and it is estimated
that 1½ % will be uncollectible, the Bad Debt Expense is
debited for $45,000 ($3,000,000 x .015). This approach
disregards the balance in the allowance account before the
adjustment.
35
After this adjusting entry is posted, Allowance for Doubtful Accounts will have a balance of $48,250.
Dec. 31 Bad Debt Expense 45 000 00
Allowance for Doubtful Accounts 45 000 00Uncollectible accounts ($3,000,000 x 0.015 = $45,000).
36
ALLOWANCE FOR DOUBTFUL ACCOUNTS Jan. 1, 2008 Bal. 40,000
Jan. 1 6,000
Feb. 23,900
{Total accounts written off $36,750
Dec. 31 Unadjusted bal
3,250Dec. 31 Adj. entry
45,000Dec. 31 Adjusted bal.
48,250
“ “
BAD DEBT EXPENSEDec. 31 Adj entry45,000Dec. 31 Adjusted bal.45,000
Income statement method calculates the adjustment
37
At the end of the current year, Accounts Receivable has a balance of $800,000; Allowance for Doubtful Accounts has a credit balance of $7,500; and net sales for the year total $3,500,000. Bad debt expense is estimated at ½ of 1% of net sales.
Determine (a) the amount of the adjusting entry for uncollectible accounts; (b) the adjusted balances of Accounts Receivable, Allowance for Doubtful Accounts, and Bad Debt Expense; and (c) the net realizable value of accounts receivable.
38
(a) $17,500 ($3,500,000 x .005 ( ½ of 1%) )
Adjusted Balance(b)Accounts Receivable $800,000
Allowance for Doubtful Accounts ($7,500 + $17,500) 25,000Bad Debt Expense 17,500
(c) $775,000 ($800,000 – $25,000)
Adjusting entry (a)
Balances (b)
NRV (c)
39
The longer an account receivable is outstanding, the less likely that it
will be collected. Basing the estimate of uncollectible accounts on how long specific amounts have been outstanding is called aging
the receivables.
Estimating Uncollectibles Based on Analysis of Receivables
40
Aging of Accounts Receivables
41
Estimate of Uncollectible Accounts
42
Collection Rates by Number of Months Past Due
43
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 currently has a balance of $510, the Bad Debt Expense must be
debited for $2,880 ($3,390 – $510).
44
Estimate Based on Analysis of Receivables
Aug. 31 Bad Debt Expense 2 880 00
Allowance for Doubtful Accounts 2 880 00
Uncollectible accounts ($3,390 – $510).
45
BAD DEBT EXPENSEAug. 31 Adj. entry2,880Aug. 31 Adj. bal.2,880
ALLOWANCE FOR DOUBTFUL ACCOUNTSAug. 31 Unadj. bal.510Aug. 31 Adj. entry2,880Aug. 31 Adj. bal.3,390Balance sheet
method finds the ending balance and
adjust to that
46
If the unadjusted balance of Allowance for
Uncollectible Accounts had been a debit balance
of $300, the amount of the adjustment would have been $3,690 ($3,390 +
$300).
47
BAD DEBT EXPENSEAug. 31 Adj. entry3,690Aug. 31 Adj. bal.3,690
ALLOWANCE FOR DOUBTFUL ACCOUNTSAug. 31 Adj. entry3,690Aug. 31 Adj. bal.3,390
Aug. 31 Unadj. bal.300
48
At the end of the current year, Accounts Receivable has a balance of $800,000; Allowance for Doubtful Accounts has a credit balance of $7,500; and net sales for the year total $3,500,000. Using the aging method, the balance of Allowance for Doubtful Accounts is estimated as $30,000.
Determine (a) the amount of the adjusting entry for uncollectible accounts; (b) the adjusted balances of Accounts Receivable, Allowance for Doubtful Accounts, and Bad Debt Expense, and (c) the net realizable value of accounts receivable.
49
(a) $22,500 ($30,000 – $7,500)
Adjusted Balance(b)Accounts Receivable $800,000
Allowance for Doubtful Accounts 30,000Bad Debt Expense 22,500
(c) $770,000 ($800,000 – $30,000)
50
Compare the direct write-off and
allowance methods of accounting for
uncollectible accounts
Objective 5
Objective 5
51
51
Comparing Direct-Write-Off and Allowance Methods
Direct Write-Off Method
Allowance Method
W/O Acct W/O Acct
Recvd partial pmt w/o rest Recvd partial pmt w/o rest
Recvd pmt of previously w/o acct Recvd pmt of previously w/o acct
W/O Acct W/O Acct
Co Used the % of credit sales and est uncoll exp
Co Used the % of credit sales and est uncoll exp
52
Comparing the Direct Write-Off and Allowance Methods
Direct Write-Off Method
When the actual accounts receivable are determined to be uncollectibleNo allowance account is used
Amount of bad debt expense recorded
Allowance account
Primary usersSmall companies and companies with relatively few receivables
53
Comparing the Direct Write-Off and Allowance Methods
Allowance Method
Using estimate based on either (1) a percentage of sales or (2) analysis of receivables.The allowance account is used
Amount of bad debt expense recorded
Allowance account
Primary users Large companies and those with a large amount of receivables
54
Describe the nature,
characteristics, and accounting for
notes receivable.
Objective 6
Objective 6
55
• a specific amount of money (face amount)
• on demand or at a definite time • to an individual or a business
(payee), or to the bearer or holder of the note.
A note receivable, or promissory note, is a written document containing a promise to pay:
Characteristics of Notes Receivable
56
The one making the promise is called the
maker. The date a note is to be paid is called the due date or maturity
date.
Characteristics of Notes Receivable
57
$_____________Fresno, California______________20___March 16 08
________________ _AFTER DATE _______ PROMISE TO PAY TO Ninety days
We
THE ORDER OF ____________________________________________ Judson Company
_________________________________________________DOLLARSTwo thousand five hundred 00/100---------------------------
PAYABLE AT ______________________________________________City National Bank
VALUE RECEIVED WITH INTEREST AT ____ 10%
2,500.00
NO. _______ DUE___________________14 June 14, 2008
TREASURER, WILLIARD COMPANY
H. B. Lane
MakerMaker
PayeePayee
58
Total days in note 90 daysNumber of days in March 31Issue date of note March 16Remaining days in March –15 days
75 daysNumber of days in April –30 days
45 daysNumber of days in May –31 daysResidual days in June 14 days
Answer: June 14
What is the due date of a 90-day note dated March 16?
59
Received a $6,000, 12%, 30-day note dated November 21, 2008 in settlement of the account of W. A Bunn Co.
Accounting for Notes Receivable
Nov. 21 Notes Rec.—W. A. Bunn Co. 6 000 00 Accts. Rec.—W. A Bunn Co. 6 000 00
Received 30-day, 12% note dated November 21, 2008.
60
On December 21, when the note matures, the firm receives $6060 from W. A. Bunn Company ($6,000 plus $60 interest).
Dec. 21 Cash 6 060 00 Notes Rec.—W. A. Bunn Co. 6 000 00
Interest Revenue* 60 00
Received principal and
interest on matured
note.*$6,000 x 12% x 30/360 = $60
61
If W. A. Bunn Company fails to pay the note on the due date, it is considered a dishonored note receivable. The note and interest are transferred to the customer’s account.
Dec. 21 Accts Rec.—W. A. Bunn Co. 6 060 00 Notes Rec.—W. A. Bunn Co. 6 000 00
Interest Revenue 60 00
Recorded
dishonored note,
plus interest.
62
A 90-day, 12% note dated December 1, 2008, is received from Crawford Company to settle its account, which has a balance of $4,000.
Dec. 1 Notes Rec.—Crawford Co. 4 000 00 Accts. Rec.—Crawford Co. 4 000 00
Accepted note in settlement of account.
2008
63
Dec. 31 Interest Receivable 40 00 Interest Revenue 40 00
Accrued interest ($4,000 x 12% x 30/360).
2008
Assuming that the accounting period ends on December 31, an adjusting entry is required to record the accrued interest of $40 ($4,000 x 0.12 x 30/360).
64
Mar. 1 Cash 4 120 00 Notes Rec.—Crawford Co. 4 000 00
2009
On March 1, 2009, $4,120 is received for the note ($4,000) and interest ($120).
Interest Receivable 40 00
Interest Revenue 80 00
($4,000 x 12% x 30/360).
Collected note and accrued interest.
65
Same Day Surgery Center received a 120-day, 6% note for $40,000, dated March 14 from a patient on account.
a. Determine the due date of the note.
b. Determine the maturity value of the note.
c. Journalize the entry to record the receipt of the payment of the note at maturity.
66
b. $40,800 [$40,000 + ($40,000 x 6% x 120/360)]
c. Cash 40,800Notes Receivable 40,000Interest Revenue 800
a. July 12 determined as follows:
March 17 days (31 – 14)April 30 daysMay 31 daysJune 30 daysJuly 12 days Total 120 days
67
Describe the reporting of
receivables on the balance
sheet.
Objective 7
Objective 7
Receivables on Balance Sheet
69
Accounts Receivable Turnover
The accounts receivable turnover measures how frequently during the year the accounts receivable are being converted to cash.Accounts Receivable Turnover
Net sales Avg accounts receivable
=
70
Federal Express Corporation
Accounts Receivable Turnover (2004)
$17,383$2,337
=
Accounts Receivable Turnover (2004)
= 7.4
* [($2,475 + $2,199)/2]
2005 2004 2003Net sales $19,364 $17,383 ---
Accounts receivable 2,703 2,475 $2,199Avg accounts receivable 2,589 2,337
*
*
71
Federal Express Corporation
Accounts Receivable Turnover (2005)
$19,364$2,589
=
Accounts Receivable Turnover (2005)
= 7.5
2005 2004 2003
Net sales $19,364 $17,383 --- Accounts receivable 2,703 2,475 $2,199Avg accounts receivable* 2,589 2,337
* [($2,703 + $2,475)/2]
72
Use: To assess the efficiency in collecting receivables and in the management of credit.
Number of Days’ Sales in Receivables
Average Accounts receivableAverage daily sales
Number of Days’ Sales in Receivables
=
73
Federal Express Corporation
Number of Days’ Sales in Receivables (2004)
$2,337 47.6
=
Number of Days’ Sales in Receivables (2004)
= 49.1
2005 2004 2003
Net sales $19,364 $17,383
Accounts receivable 2,703 2,475 $2,199
Average accounts receivable2,589 2,337
Average daily sales 53.1 47.6
*
[($2,475 + $2,199)/2]
*
*
**
($17,383/365)**
---
[($2,703 + $2,475)/2]
*
74
Federal Express Corporation
Number of Days’ Sales in Receivables (2005)
$2,589 53.1
=
Number of Days’ Sales in Receivables (2005)
= 48.8
*
[($2,703+ $2,475)/2]*
($19,364/365)
**
2005 2004 2003 Net sales $19,364$17,383
Accounts receivable 2,7032,475
$2,199 Average accounts receivable
2,589 2,337Average daily sales 53.1 47.6
*
**
---
Summary
Classification of Receivables
Uncollectible A/R
Direct Write-Off Method
Allowance Method
Notes Receivable