Wey_AP_8e_Ch09_Revised

8/9/2019 Wey_AP_8e_Ch09_Revised

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Chapter

9-1


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Chapter

9-2

ACCOUNTING FORACCOUNTING FOR

RECEIVABLESRECEIVABLES

Accounting Principles, Eighth Edition

CHAPTERCHAPTER 99


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Chapter

9-3

1. Identify the different types of receivables.2. Explain how companies recognize accounts receivable.

3. Distinguish between the methods and bases companies useto value accounts receivable.

4. Describe the entries to record the disposition of accountsreceivable.

5. Compute the maturity date of and interest on notesreceivable.

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 ofreceivables.

Study ObjectivesStudy Objectives


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Chapter

9-4

Types ofTypes of

ReceivablesReceivables

AccountsAccounts

receivablereceivable

NotesNotes


OtherOther

receivablesreceivables

AccountsAccounts

ReceivableReceivable

NotesNotes

ReceivableReceivable

tatementtatement

PresentationPresentation

and Analysisand Analysis

PresentationPresentation

AnalysisAnalysis

DeterminingDetermining

maturity datematurity date

ComputingComputing

interestinterest

RecognizingRecognizing

notesnotesreceivablereceivable

Valuing notesValuing notes


Disposing ofDisposing of

notesnotes


Accounting forReceivablesAccounting forReceivables

RecognizingRecognizing

accountsaccounts


ValuingValuing

accountsaccounts

receivablereceivableDisposing ofDisposing of

accountsaccounts



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Chapter

9-5

Amounts due from individuals and other companies thatare expected to be collected in cash.

Amounts owed bycustomers thatresult from the

sale of goods andservices.

AccountsAccountsReceivableReceivable

AccountsAccountsReceivableReceivable

Typesof ReceivablesTypesof Receivables

LO 1 Identify the different typesof receivables.LO 1 Identify the different typesof receivables.

Claims for whichformalinstruments of

credit are issuedas proof of debt.

Nontrade(interest, loans to

officers, advancesto employees, and

income taxesrefundable).

NotesNotesReceivableReceivable

NotesNotesReceivableReceivable

OtherOtherReceivablesReceivables

OtherOtherReceivablesReceivables


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Chapter

9-6

Three accounting issues:

1. Recognizing accounts receivable.

2. Valuing accounts receivable.3. Disposingof accounts receivable.

Accounts ReceivableAccounts Receivable

LO1 Identify the different typesof receivables.LO1 Identify the different typesof receivables.

The following exercise was illustrated in Chapter 5.For simplicity, inventory and cost of goods sold havebeen omitted.

RecognizingAccounts Receivable


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Chapter

9-7

E5E5--55 Presented are transactions related to Wheeler Company.

1. On December 3,Wheeler Company sold $500,000 ofmerchandise to Hashmi Co., terms 2/10, n/30, FOB shippingpoint.

2. On December 8, Hashmi Co. was granted an allowance of$27,000 for merchandise purchased on December 3.

3. On December 13,Wheeler Company received the balancedue from Hashmi Co.

Instructions: Prepare the journal entries to record thesetransactions on the books of Wheeler Company using aperpetual inventory system.

RecognizingAccountsReceivableRecognizingAccountsReceivable

LO 2 Explain howcompaniesrecognize accountsreceivable.LO 2 Explain howcompaniesrecognize accountsreceivable.


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Chapter

9-8

E5E5--55 Prepare the journal entries for Wheeler Company .

1. On December 3, Wheeler Company sold $500,000 ofmerchandise to Hashmi Co., terms 2/10, n/30, FOB

shipping point.

Accounts receivable 500,000Dec.3

Sales 500,000

LO 2Explain howcompanies recognize accounts receivable.LO 2

Explain howcompanies recognize accounts receivable.



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Chapter

9-9

E5E5--55 Prepare the journal entries for Wheeler Company.

2.On December 8, Hashmi Co. was granted anallowance of $27,000 for merchandise purchased

on December 3.

Sales returns and allowances 27,000Dec. 8

Accounts receivable 27,000

LO2Explain howcompanies recognizeaccounts receivable.LO2

Explain howcompanies recognizeaccounts receivable.



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Chapter

9-10

E5E5--55 Prepare the journal entries for Wheeler Company .

3.On December 13, Wheeler Company received thebalance due from Hashmi Co.

Cash 463,540Dec.13


Sales discounts 9,460

** [($500,000 $27,000) X 2%]

**

* ($500,000 $27,000)

*

***

*** ($473,000 $9,460)

LO 2Explain howcompanies recognize accounts receivable.LO 2

Explain howcompanies recognize accounts receivable.



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Chapter

9-11

ValuingAccounts Receivables

Are reported as a current asset on the balancesheet.

Are reported at the amount the company thinksthey will be able to collect.

Sales on account raise the possibility of accounts

not being collected.Valuation can be difficult because an unknownamount of receivables will become uncollectible.

LO 3 Distinguish between themethods and basesLO 3 Distinguish between themethods and bases

companies use to value accounts receivable.companies use to value accounts receivable.

AccountsReceivableAccountsReceivable


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Chapter

9-12

Allowance MethodAllowance MethodLosses are estimated:

better matching.

receivable stated at netrealizable value.

required by GAAP.

MethodsofAccountingfor UncollectibleAccounts

Direct WriteDirect Write--OffOff

Theoretically undesirable:

no matching.

receivable not stated atnet realizable value.

not acceptable forfinancial reporting.

ValuingAccountsReceivableValuingAccountsReceivable

LO 3 Distinguishbetween themethods andbasesLO 3 Distinguishbetween themethods andbases

companies use to value accountsreceivable.companies use to value accountsreceivable.


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Chapter

9-13

AssetsAssets

CurrentAssets:CurrentAssets:

CashCash $ 346$ 346

AccountsreceivableAccountsreceivable500500

Less:AllowancefordoubtfulaccountsLess:Allowancefordoubtfulaccounts 2525 475475

Merchandise inventoryMerchandise inventory 812812

PrepaidexpensesPrepaidexpenses 4040

TotalcurrentassetsTotalcurrentassets 1,6731,673

LO3 Distinguishbetween themethodsandbasesLO3 Distinguishbetween themethodsandbases

companies use tovalueaccountsreceivable.companies use tovalueaccountsreceivable.

PresentationofAccountsReceivablePresentationofAccountsReceivable


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Chapter

9-14

AssetsAssets

CurrentAssets:CurrentAssets:

CashCash $ 346$ 346

Accountsreceivable,netof $2

5allowanceAccountsreceivable

,netof $2

5allowancefordoubtfulaccountsfordoubtfulaccounts 475475

Merchandise inventoryMerchandise inventory 812812

PrepaidexpensesPrepaidexpenses 4040

TotalcurrentassetsTotalcurrentassets 1,6731,673

LO3 Distinguishbetween themethodsandbasesLO3 Distinguishbetween themethodsandbases


PresentationofAccountsReceivablePresentationofAccountsReceivable


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Chapter

9-15


Allowance Methodfor UncollectibleAccounts

1. Companies estimate uncollectible accountsreceivable.

2. To record estimated uncollectibles, companiesdebit Bad Debts Expense and credit Allowance forDoubtful Accounts (a contra-asset account).

3. When companies write off specific uncollectibleaccounts, they debit Allowance for DoubtfulAccounts and credit Accounts Receivable.

LO 3 Distinguish between the methodsand basesLO 3 Distinguish between the methodsand bases

companies use to valueaccounts receivable.companies use to valueaccounts receivable.


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Chapter

9-16

E9E9--66 On December 31, 2008, Jarnigan Co. estimatedthat 2% of its net sales of $400,000 will becomeuncollectible. The company recorded this amount as anaddition to Allowance for Doubtful Accounts. On May 11,

2009, Jarnigan Co. determined that Terry Fryes accountwas uncollectible and wrote off $1,100. On June 12, 2009,Frye paid the amount previously written off.

I

nstructionsPrepare the journal entries on December 31, 2008, May11, 2009, and June 12, 2009.





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Chapter

9-17

E9E9--66 Prepare the journal entries on December 31, 2008,May 11, 2009, and June 12, 2009.

Bad debt expense 8,000

December31 ($400,000 x 2% = 8,000)

Allowance for doubtful accounts 8,000


LO3 Distinguishbetween the methods andbasesLO3 Distinguishbetween the methods andbases



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Chapter

9-18

E9E9--66 Prepare the journal entries on December 31, 2008,May 11, 2009, and June 12, 2009.

Accounts receivable 1,100June12 (recovery)




companies use tovalue accountsreceivable.companies use tovalue accountsreceivable.

Cash 1,100Accounts receivable 1,100


May11 (write-off)



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Chapter

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Bases UsedforAllowance Method

LO 3 Distinguish between themethodsand basesLO 3 Distinguish between themethodsand bases

companies use to valueaccountsreceivable.companies use to valueaccountsreceivable.


Illustration 9-5


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Chapter

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ExampleDataExampleData

Credit salesCredit sales $500,000$500,000

Estimated % of credit sales uncollectibleEstimated % of credit sales uncollectible 1.25%1.25%

Accounts receivable balanceAccounts receivable balance $72,500$72,500

Estimated % of A/R not collectedEstimated % of A/R not collected 8%8%

Unadjusted balance in Allowance for DoubtfulUnadjusted balance in Allowance for Doubtful

Accounts:Accounts:Case 1Case 1 $150 (credit balance)$150 (credit balance)

Case 2Case 2 $150 (debit balance)$150 (debit balance)





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Chapter

9-21

Credit salesCredit sales $500,000$500,000Estimated percentage uncollectibleEstimated percentage uncollectible 1.25%1.25%

Estimated bad debt expenseEstimated bad debt expense $ 6,250$ 6,250




Percentage of Sales disregards the existingbalance inAllowancefor DoubtfulAccounts

Journal entry:Bad debt expense 6,250



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Chapter

9-22

Actual balance (credit) (150) 150

Estimated uncollectible (6,250) (6,250)Ending balance (6,400) (6,100)

Case 1 Case 2

Percentageof Sales

LO 3 Distinguish between themethodsand basesLO 3 Distinguish between themethodsand bases

companies use to valueaccountsreceivable.companies use to valueaccountsreceivable.


The Allowance for Doubtful Accounts has an endingbalance of $6,400 in Case 1 and $6,100 in Case 2.


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Chapter

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Desired balance (5,800) (5,800)

Adjustment (5,650) (5,950)

Journalentry Case 1:

Case 1 Case 2

Percentageof Receivables

LO 3 Distinguishbetween themethodsandbasesLO 3 Distinguishbetween themethodsandbases


ValuingAccounts ReceivableValuingAccounts Receivable




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Chapter

9-25


Desired balance (5,800) (5,800)

Adjustment (5,650) (5,950)

Journalentry Case 2:



Case 1 Case 2

Percentageof Receivables





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Chapter

9-26

When estimating losses using PercentageofReceivables, companies often prepare an agingschedule, which classifies customer balances by thelength of time they have been unpaid.




Illustration 9-7


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Chapter

9-27

Percentageof Salesapproach:

Summary

Focus on Bad debt expense estimate, any balance in

the allowance account is ignored.Method achieves a matching of cost and revenues.

Percentageof Receivables approach:

Accurate valuation of receivables on the balance sheet.Method may also be applied using an aging schedule.

LO 3 Distinguishbetween the methodsandbasesLO 3 Distinguishbetween the methodsandbases




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Chapter

9-28

Companiessellreceivablesfor two majorreasons.

1. Receivables may be the only reasonable sourceof cash.

2. Billing and collection are often time-consumingand costly.

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

Disposing ofAccountsReceivableDisposing ofAccountsReceivable


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Chapter

9-29



Sale ofReceivables

Afactor buys receivables from businesses and thencollects the payments directly from the customers.

Typically the factor charges a commission to thecompany that is selling the receivables.

The fee ranges from 1-3% of the amount ofreceivables purchased.


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Chapter

9-30

E9E9--77 (a) On March 3, Cornwell Appliances sells$680,000 of its receivables to Marsh Factors Inc. MarshFactors assesses a finance charge of 3% of the amount ofreceivables sold. Prepare the entry on Cornwell

Appliances books to record the sale of the receivables.




Cash 659,600

Service charge expense 20,400

($680,000 x 3% = $20,400)


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Chapter

9-31 LO 4 Describe the entries to record the disposition of accounts receivable.LO 4 Describe the entries to record the disposition of accounts receivable.


CreditCardSales

Retailer considers credit card sales the same ascash sales.

Retailer must pay card issuer a fee of 2 to4% for processing the transactions.

Retailer records the sale in a similar manneras checks deposited from cash sale.


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Chapter

9-32

E9E9--77 (b) On May 10, Dale Company sold merchandise for$3,500 and accepted the customers America BankMasterCard. America Bank charges a 4% service chargefor credit card sales. Prepare the entry on Dale

Companys books to record the sale of merchandise.



Sales 3,500

Cash 3,360

Service charge expense 140

($3,500 x 4% = $140)


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Chapter

9-34 LO 5 Compute thematurity date of and interest on notes receivable.LO 5 Compute thematurity date of and interest on notes receivable.

NotesReceivableNotesReceivable

To the Payee, the promissory note is a note receivable.

To the Maker, the promissory note is a note payable.Illustration 9-10


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Chapter

9-35

Determining the MaturityDate

LO 5 Compute the maturity date ofand interest onnotesreceivable.LO 5 Compute the maturity date ofand interest onnotesreceivable.


Note expressed in terms of

Months

Days

ComputingInterest Illustration 9-13


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Chapter

9-36 LO 6 Explain how companies recognize notes receivable.LO 6 Explain how companies recognize notes receivable.

RecognizingNotesReceivableRecognizingNotesReceivable

E9E9--1010 Orosco Supply Co. has the following transactionsrelated to notes receivable during the last 2 months of 2008.

Nov.1 Loaned $15,000 cash to Sally Givens on a 1-year, 10%note.

Dec.11 Sold goods to John Countryman, Inc., receiving a$6,750, 90-day, 8% note.

Dec.16 Received a $4,000, 6-month, 9% note in exchange forBob Rebers outstanding accounts receivable.

Dec.31 Accrued interest revenue on all notes receivable.Instructions

(a) Journalize the transactions for Orosco Supply Co.


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Chapter

9-39

ValuingNotes Receivable

LO 7 Describe howcompaniesvaluenotes receivable.LO 7 Describe howcompaniesvaluenotes receivable.

Notes ReceivableNotes Receivable

Like accounts receivable, companies report short-term notes receivable at their cash (net)

realizablevalue.

Estimation of cash realizable value and bad debtsexpense are done similarly to accounts receivable.

Allowance for Doubtful Accounts is used.


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Chapter

9-40

DisposingofNotes Receivable

LO 8 Describe theentries to record the dispositionofnotes receivable.LO 8 Describe theentries to record the dispositionofnotes receivable.

Notes ReceivableNotes Receivable

1. Notes may be held to their maturity date.

2. Maker may default and payee must make anadjustment to the account.

3. Holder speeds up conversion to cash by sellingthe note receivable.


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Chapter

9-42


E9E9--1313 On May 2, Kleinsorge Company lends $7,600 toEverhart, Inc., issuing a 6-month, 9% note. At the maturitydate, November 2, Everhart indicates that it cannot pay.

Instructions

(a)Prepare the entry to record the issuance of the note.

(b)Prepare the entry to record the dishonor of the note,assuming that Kleinsorge Company expects collection willoccur.

(c)Prepare the entry to record the dishonor of the note,assuming that Kleinsorge Company does not expectcollection in the future.

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


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Chapter

9-43


E9E9--1313 (a)Prepare the entry to record the issuance ofthe note. (b)Prepare the entry to record the dishonor ofthe note, assuming that Kleinsorge Company expectscollection will occur.


Cash 7,600

Notes receivable 7,600(a)

Notes receivable 7,600Accounts receivable 7,942

(b)

Interest revenue 342

Interest = $7,600x9%x6/12 = $342


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Chapter

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E9E9--1313 (c)Prepare the entry to record the dishonor ofthe note, assuming that Kleinsorge Company does notexpect collection in the future.


Notes receivable 7,600

Allowance for doubtful accounts 7,600(c)

When there is no hope of collection, the note holder wouldwrite offthe face value of the note. No interest revenuewould be recorded because collection will not occur.


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Chapter

9-45

Presentation

LO9 Explain thestatement presentationandanalysisofreceivables.LO9 Explain thestatement presentationandanalysisofreceivables.

StatementPresentationandAnalysisStatementPresentationandAnalysis

Identify in the balance sheet or in the notes,each major type of receivable.

Report short-term receivables as current assets.Report both gross amount of receivables andallowance for doubtful account.

Report bad debts expense and service charge

expense as selling expenses.

Report interest revenue under Other revenuesand gains.

B/S

I/S


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Chapter

9-47

Analysisof Receivables

Variant of the accounts receivable turnover ratio isaveragecollectionperiod in terms of days.

Used to assess effectiveness of credit and collectionpolicies.

Collection period should not exceed credit term period.

LO9 Explain the statementpresentationandanalysisofreceivables.LO9 Explain the statementpresentationandanalysisofreceivables.

StatementPresentationandAnalysisStatementPresentationandAnalysis

Illustration 9-16


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Chapter

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Wey_AP_8e_Ch09_Revised

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