C7 - 1 Learning Objectives Power Notes 1. Classification of Receivables 2. Internal Control of Receivables 3. Uncollectible Receivables 4. Uncollectibles – Allowance Method 5. Uncollectibles – Direct Write-Off Method 6. Characteristics of Notes Receivable 7. Accounting for Notes Receivable 8. Balance Sheet Presentation 9. Financial Analysis and Interpretation Chapter F7 C7 Receivables Receivables
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C7 - 1 Learning Objectives Power Notes 1.Classification of Receivables 2.Internal Control of Receivables 3.Uncollectible Receivables 4.Uncollectibles –
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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
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
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