7-1 Accounts Receivable LO 3 Define receivables and identify the different types of receivables....

Accounts ReceivableAccounts ReceivableAccounts ReceivableAccounts Receivable

LO 3 Define receivables and identify the different types of receivables.LO 3 Define receivables and identify the different types of receivables.

Written promises to pay a sum of money on a

specified future date.

Receivables are claims held against customers and others for money, goods, or services.

Oral promises of the purchaser to pay for goods

and services sold.

Accounts Accounts ReceivableReceivableAccounts Accounts

ReceivableReceivableNotes Notes

ReceivableReceivable

Non-trade Receivables

1. Advances to officers and employees.

2. Advances to subsidiaries.

3. Deposits to cover potential damages or losses.

4. Deposits as a guarantee of performance or payment.

5. Dividends and interest receivable.

6. Claims against:

a) Insurance companies for casualties sustained.

b) Defendants under suit.

c) Governmental bodies for tax refunds.

d) Common carriers for damaged or lost goods.

e) Creditors for returned, damaged, or lost goods.

f) Customers for returnable items (crates, containers, etc.).

Non-trade Receivables

Illustration 7-4Receivables Statementof Financial PositionPresentations

LO 4 Explain accounting issues related to recognition of accounts receivable.LO 4 Explain accounting issues related to recognition of accounts receivable.

Trade DiscountsTrade Discounts

Reductions from the list price

Not recognized in the accounting records

Customers are billed net of discounts

Trade DiscountsTrade Discounts

Reductions from the list price

Not recognized in the accounting records

Customers are billed net of discounts

10 % Discount for new Retail Store

Customers

Recognition of Accounts Receivable

Cash DiscountsCash Discounts(Sales Discounts)(Sales Discounts)

Inducements for prompt Inducements for prompt paymentpayment

Gross Method vs. Net Gross Method vs. Net MethodMethod

Cash DiscountsCash Discounts(Sales Discounts)(Sales Discounts)

Inducements for prompt Inducements for prompt paymentpayment

Gross Method vs. Net Gross Method vs. Net MethodMethod

Payment terms are 2/10, n/30

Recognition of Accounts Receivable

Cash Discounts (Sales Discounts)Illustration 7-5Entries under Gross andNet Methods of RecordingCash (Sales) Discounts

E7-5:E7-5: On June 3, Bolton Company sold to Arquette Company merchandise having a sale price of £2,000 with terms of 2/10, n/60, f.o.b. shipping point. On June 12, the company received a check for the balance due from Arquette Company. Prepare the journal entries on Bolton Company books to record the sale assuming Bolton records sales using the gross method.

Accounts receivable 2,000June 3

Cash 1,960

Sales discounts (£2,000 x 2%) 40

Accounts receivable 2,000

June 12

Cash (£2,000 x 98%) 1,960

June 12

E7-5:E7-5: On June 3, Bolton Company sold to Arquette Company merchandise having a sale price of £2,000 with terms of 2/10, n/60, f.o.b. shipping point. On June 12, the company received a check for the balance due from Arquette Company. Prepare the journal entries on Bolton Company books to record the sale assuming Bolton records sales using the net method.

E7-5:E7-5: On June 3, Bolton Company sold to Arquette Company merchandise having a sale price of £2,000 with terms of 2/10, n/60, f.o.b. shipping point. Prepare the journal entries on Bolton Company books to record the sale assuming Bolton records sales using the net method, and Arquette did not remit payment until July 29.

Cash 2,000

Sales discounts forfeited 40

June 12

A company should measure receivables in terms of their present value.

Non-Recognition of Interest Element

In practice, companies ignore interest revenue related to accounts receivable because, for current assets, the amount of the discount is not usually material in relation to the net income for the period.

How are these accounts presented on the Statement of How are these accounts presented on the Statement of

Financial Position?Financial Position?

Accounts ReceivableAllowance for

Doubtful Accounts

Beg. 500 25 Beg.

End. 500 25 End.

7-12 LO 4 Explain accounting issues related to recognition of accounts receivable.LO 4 Explain accounting issues related to recognition of accounts receivable.

Current Assets:

Merchandise inventory 812$

Prepaid expense 40

Accounts receivable 500

Less: Allowance for doubtful accounts (25) 475

Cash 330

Total current assets 1,657

Statement of Financial Position (partial)

ABC Corporation

Current Assets:

Prepaid expense 40

Accounts receivable, net of $25 allowance 475

Cash 330

ABC Corporation

Journal entry for credit sale of $100?Journal entry for credit sale of $100?

Accounts receivableAccounts receivable 100100

SalesSales 100 100

Doubtful Accounts

Beg. 500 25 Beg.

End. 500 25 End.

Doubtful Accounts

Beg. 500 25 Beg.

End. 600 25 End.

Sale 100

Journal entry for credit sale of $100?Journal entry for credit sale of $100?

SalesSales 100 100

Collected of $333 on account?Collected of $333 on account?

CashCash 333333

Doubtful Accounts

Beg. 500 25 Beg.

End. 600 25 End.

Sale 100

Collected of $333 on account?Collected of $333 on account?

CashCash 333333

Doubtful Accounts

Beg. 500 25 Beg.

End. 267 25 End.

Sale 100 333 Coll.

Adjustment of $15 for estimated Bad-Debts?Adjustment of $15 for estimated Bad-Debts?

Bad debt expenseBad debt expense 1515

Allowance for Doubtful AccountsAllowance for Doubtful Accounts 1515

Doubtful Accounts

Beg. 500 25 Beg.

End. 267 25 End.

Sale 100 333 Coll.

Adjustment of $15 for estimated Bad-Debts?Adjustment of $15 for estimated Bad-Debts?

Bad debt expenseBad debt expense 1515

Allowance for Doubtful AccountsAllowance for Doubtful Accounts 1515

Doubtful Accounts

Beg. 500 25 Beg.

End. 267 40 End.

Sale 100 333 Coll.

15 Est.

Write-off of uncollectible accounts for $10?Write-off of uncollectible accounts for $10?

Allowance for Doubtful accountsAllowance for Doubtful accounts 1010

Doubtful Accounts

Beg. 500 25 Beg.

End. 267 40 End.

Sale 100 333 Coll.

15 Est.

Write-off of uncollectible accounts for $10? Write-off of uncollectible accounts for $10?

Allowance for Doubtful accountsAllowance for Doubtful accounts 1010

Doubtful Accounts

Beg. 500 25 Beg.

End. 257 30 End.

Sale 100 333 Coll.

15 Est. W/O 10 10 W/O

Current Assets:

Prepaid expense 40

Accounts receivable, net of $30 allowance 227

Cash 330

ABC Corporation

LO 5 Explain accounting issues related to valuation of accounts receivable.LO 5 Explain accounting issues related to valuation of accounts receivable.

Valuation of Accounts Receivables

Classification

Valuation (cash realizable value)

Uncollectible Accounts Receivable

Sales on account raise the possibility of accounts

not being collected.

7-24 LO 5 Explain accounting issues related to valuation of accounts receivable.LO 5 Explain accounting issues related to valuation of accounts receivable.

Valuation of Accounts ReceivableValuation of Accounts ReceivableValuation of Accounts ReceivableValuation of Accounts Receivable

An uncollectible account receivable is a loss of revenue that requires,

a decrease in the asset accounts receivable and

a related decrease in income and shareholders’ equity.

Uncollectible Accounts Receivable

7-25 LO 5 Explain accounting issues related to valuation of accounts receivable.LO 5 Explain accounting issues related to valuation of accounts receivable.

Allowance MethodAllowance Method

Losses are Estimated:

Percentage-of-sales

Percentage-of-receivables

IFRS requires when material in amount

Methods of Accounting for Uncollectible Accounts

Direct Write-OffDirect Write-Off

Theoretically undesirable:

No matching

Receivable not stated at cash realizable value

Not IFRS when material in amount

Valuation of Accounts ReceivableValuation of Accounts ReceivableValuation of Accounts ReceivableValuation of Accounts Receivable

Uncollectible Accounts ReceivableUncollectible Accounts ReceivableUncollectible Accounts ReceivableUncollectible Accounts Receivable

Emphasis on the Income Statement

Emphasis on the Statement of Financial

Position

Emphasis on the Statement of Financial

Position

Illustration 7-7

Percentage-of-Sales Approach

Percentage based upon past experience and anticipate

credit policy.

Achieves proper matching of costs with revenues.

Existing balance in Allowance account not considered.

LO 5LO 5

Illustration: Gonzalez Company estimates from past experience that about 1% of credit sales become uncollectible. If net credit sales are $800,000 in 2011, it records bad debt expense as follows.

Bad Debt Expense 8,000

Allowance for Doubtful Accounts 8,000

Percentage-of-Sales Approach

Illustration 7-8

Percentage-of-Receivables Approach

Not matching.

Reports receivables at cash realizable value.

Companies may apply this method using

► one composite rate, or

► an aging schedule using different rates.

What entry would Wilson

make assuming that no balanceexisted in the

allowance account?

Illustration 7-9Accounts Receivable Aging Schedule

Bad Debt Expense ($37,650 – $800) 36,850

What entry would Wilson

make assuming the allowance account had a credit balance of $800 before adjustment?

Illustration 7-9Accounts Receivable Aging Schedule

E7-7 (Recording Bad Debts): Sandel Company reports the following financial information before adjustments.

Instructions: Prepare the journal entry to record bad debt expense assuming Sandel Company estimates bad debts at(a) 1% of net sales and (b) 5% of accounts receivable.

Instructions: Prepare the journal entry to record bad debt expense assuming Sandel Company estimates bad debts at(a) 1% of net sales.

Allowance for Doubtful Accounts7,500

(€800,000 – €50,000) x 1% = €7,500

Instructions: Prepare the journal entry to record bad debt expense assuming Sandel Company estimates bad debts at(b) 5% of accounts receivable.

Allowance for Doubtful Accounts6,000

(€160,000 x 5%) – €2,000) = €6,000

Recovery of Uncollectible AccountsRecovery of Uncollectible AccountsRecovery of Uncollectible AccountsRecovery of Uncollectible Accounts

LO 5LO 5

Illustration: Assume that the financial vice president of Brown Furniture authorizes a write-off of the $1,000 balance owed by Randall Co. on March 1, 2012. The entry to record the write-off is:

Accounts Receivable1,000

Assume that on July 1, Randall Co. pays the $1,000 amount that Brown had written off on March 1. These are the entries:

Accounts Receivable 1,000Allowance for Doubtful Accounts

Cash 1,000Accounts Receivable

Impairment Evaluation Process

Companies assess their receivables for impairment each reporting period.

Possible loss events are:

1. Significant financial problems of the customer.

2. Payment defaults.

3. Renegotiation of terms of the receivable due to financial difficulty of the

customer.

4. Decrease in estimated future cash flows from a group of receivables

since initial recognition, although the decrease cannot yet be identified

with individual assets in the group.

LO 5LO 5

Impairment Evaluation Process

A receivable is considered impaired when a loss event indicates a negative

impact on the estimated future cash flows to be received from the customer.

The IASB requires that the impairment assessment should be performed as

follows.

1. Receivables that are individually significant should be considered for

impairment separately.

2. Any receivable individually assessed that is not considered impaired

should be included with a group of assets with similar credit-risk

characteristics and collectively assessed for impairment.

3. Any receivables not individually assessed should be collectively

assessed for impairment.

LO 5LO 5

Illustration: Hector Company has the following receivables classified into

individually significant and all other receivables.

Hector determines that Yaan’s receivable is impaired by $15,000, and

Blanchard’s receivable is totally impaired. Both Randon’s and Fernando’s

receivables are not considered impaired. Hector also determines that a

composite rate of 2% is appropriate to measure impairment on all other

receivables.

7-1 Accounts Receivable LO 3 Define receivables and identify the different types of receivables....

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