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8/3/2019 Accounting Principle Kieso 8e_Ch09
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Chapter9-1
ReceivablesManagement and
Accounting
Accounting Principles, Eighth Edition
CHAPTER 9
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Chapter9-2
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 accounts
receivable.5. Compute the maturity date of and interest on notes
receivable.
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 Objectives
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Chapter9-3
Types of
Receivables
Accountsreceivable
Notesreceivable
Other
receivables
Accounts
Receivable
Notes
Receivable
Statement
Presentation
and Analysis
Presentation
Analysis
Determiningmaturity date
Computinginterest
Recognizing
notesreceivable
Valuing notesreceivable
Disposing ofnotes
receivable
Accounting for Receivables
Recognizingaccountsreceivable
Valuingaccounts
receivableDisposing ofaccountsreceivable
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Chapter9-4
Amounts due from individuals and other companies thatare expected to be collected in cash.
Amounts owed bycustomers thatresult from the
sale of goods andservices.
AccountsReceivable
Types of Receivables
LO 1 Identify the different types of receivables.
Claims for whichformal
instruments ofcredit are issuedas proof of debt.
“Nontrade”(interest, loans toofficers, advancesto employees, and
income taxes
refundable).Notes
ReceivableOther
Receivables
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Chapter9-5
Three accounting issues:1. Recognizing accounts receivable.
2. Valuing accounts receivable.
3. Disposing of accounts receivable.
Accounts Receivable
LO 1 Identify the different types of receivables.
The following exercise was illustrated in Chapter 5.For simplicity, inventory and cost of goods sold havebeen omitted.
Recognizing Accounts Receivable
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Chapter9-6
E5-5 Presented are transactions related to Wheeler Company.1. On December 3,Wheeler Company sold $500,000 of
merchandise 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.
Recognizing Accounts Receivable
LO 2 Explain how companies recognize accounts receivable.
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Chapter9-7
E5-5 Prepare the journal entries for Wheeler Company .1. On December 3, Wheeler Company sold $500,000 of
merchandise to Hashmi Co., terms 2/10, n/30, FOBshipping point.
Accounts receivable 500,000Dec. 3
Sales 500,000
LO 2 Explain how companies recognize accounts receivable.
Recognizing Accounts Receivable
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Chapter9-8
E5-5 Prepare the journal entries for Wheeler Company.2. On December 8, Hashmi Co. was granted an
allowance of $27,000 for merchandise purchasedon December 3.
Sales returns and allowances 27,000Dec. 8
Accounts receivable 27,000
LO 2 Explain how companies recognize accounts receivable.
Recognizing Accounts Receivable
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Chapter9-9
E5-5 Prepare the journal entries for Wheeler Company .3. On December 13, Wheeler Company received the
balance due from Hashmi Co.
Cash 463,540Dec. 13
Accounts receivable 473,000
Sales discounts 9,460
** [($500,000 – $27,000) X 2%]
**
* ($500,000 – $27,000)
*
***
*** ($473,000 – $9,460)
LO 2 Explain how companies recognize accounts receivable.
Recognizing Accounts Receivable
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Chapter9-10
Valuing Accounts ReceivablesClassification
Valuation (net realizable value)
Uncollectible Accounts Receivable
Sales on account raise the possibility of accountsnot being collected
LO 3 Distinguish between the methods and bases companies use to value accounts receivable.
Accounts Receivable
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Chapter9-11
Allowance Method
Losses are estimated:better matching.
receivable stated at netrealizable value.
required by GAAP.
Methods of Accounting for Uncollectible Accounts
Direct Write-Off
Theoretically undesirable:no matching.
receivable not stated atnet realizable value.
not acceptable forfinancial reporting.
Valuing Accounts Receivable
LO 3 Distinguish between the methods and bases companies use to value accounts receivable.
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Chapter9-12
AssetsCurrent Assets:
Cash $ 346
Accounts receivable 500
Less: Allowance for doubtful accounts 25 475Inventory 812
Prepaids 40
Total current assets 1,673
LO 3 Distinguish between the methods and bases companies use to value accounts receivable.
Presentation of Accounts Receivable
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Chapter9-13
AssetsCurrent Assets:
Cash $ 346
Accounts receivable, net of $25 allowance
for doubtful accounts 475Inventory 812
Prepaids 40
Total current assets 1,673
LO 3 Distinguish between the methods and bases companies use to value accounts receivable.
Presentation of Accounts Receivable
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Chapter9-14
Valuing Accounts Receivable
Allowance Method for Uncollectible Accounts
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 methods and bases companies use to value accounts receivable.
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Chapter9-15
E9-6 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 Frye’s accountwas uncollectible and wrote off $1,100. On June 12, 2009,Frye paid the amount previously written off.
InstructionsPrepare the journal entries on December 31, 2008, May11, 2009, and June 12, 2009.
Valuing Accounts Receivable
LO 3 Distinguish between the methods and bases companies use to value accounts receivable.
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Chapter9-16
E9-6 Prepare the journal entries on December 31, 2008,May 11, 2009, and June 12, 2009.
Bad debt expense 8,000
December 31 ($400,000 x 2% = 8,000)
Allowance for doubtful accounts 8,000
Valuing Accounts Receivable
LO 3 Distinguish between the methods and bases companies use to value accounts receivable.
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Chapter9-17
E9-6 Prepare the journal entries on December 31, 2008,May 11, 2009, and June 12, 2009.
Accounts receivable 1,100June 12 (recovery)
Allowance for doubtful accounts 1,100
Valuing Accounts Receivable
LO 3 Distinguish between the methods and bases companies use to value accounts receivable.
Cash 1,100Accounts receivable 1,100
Allowance for doubtful accounts 1,100
May 11 (write-off)
Accounts receivable 1,100
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Chapter9-18
Bases Used for Allowance Method
LO 3 Distinguish between the methods and bases companies use to value accounts receivable.
Valuing Accounts Receivable
Illustration 9-5
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Chapter9-19
Example Data
Credit sales $500,000
Estimated % of credit sales not collected 1.25%
Accounts receivable balance $72,500
Estimated % of A/R not collected 8%
Allowance for Doubtful Accounts:
Case I $150 (credit balance)Case 2 $150 (debit balance)
LO 3 Distinguish between the methods and bases companies use to value accounts receivable.
Valuing Accounts Receivable
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Chapter9-20
Charge sales $500,000
Estimated percentage x 1.25%
Estimated uncollectible $ 6,250
===================================================
What should the ending balance be for the allowanceaccount? -- Case 1 and Case 2
LO 3 Distinguish between the methods and bases companies use to value accounts receivable.
Valuing Accounts Receivable
Percentage of Sales
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Chapter9-21
Actual balance (credit) (150) 150
Estimated uncollectible (6,250) (6,250)Ending balance (6,400) (6,100)
Journal entry:
Case 1 Case 2Percentage of Sales
LO 3 Distinguish between the methods and bases companies use to value accounts receivable.
Valuing Accounts Receivable
Allowance for doubtful accounts 6,250
Bad debt expense 6,250
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Chapter9-22
Accounts receivable $ 72,500
Estimated percentage x 8%
Desired balance for allowance $ 5,800
===================================================
What should the ending balance be for the allowance
account? -- Case 1 and Case 2
LO 3 Distinguish between the methods and bases companies use to value accounts receivable.
Valuing Accounts Receivable
Percentage of Receivables
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Chapter9-23
Actual balance (credit) (150) 150
Desired balance (5,800) (5,800)Adjustment (5,650) (5,950)
Journal entry – Case 1:
Case 1 Case 2Percentage of Receivables
LO 3 Distinguish between the methods and bases companies use to value accounts receivable.
Valuing Accounts Receivable
Allowance for doubtful accounts 5,650
Bad debt expense 5,650
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Chapter9-24
Actual balance (credit) (150) 150
Desired balance (5,800) (5,800)Adjustment (5,650) (5,950)
Journal entry – Case 2:
Allowance for doubtful accounts 5,950
Bad debt expense 5,950
Case 1 Case 2Percentage of Receivables
LO 3 Distinguish between the methods and bases companies use to value accounts receivable.
Valuing Accounts Receivable
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Chapter9-25
When estimating losses using Percentage ofReceivables, companies often prepare an agingschedule which classifies customer balances by thelength of time they have been unpaid.
LO 3 Distinguish between the methods and bases companies use to value accounts receivable.
Valuing Accounts Receivable
Illustration 9-7
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Chapter9-26
Percentage of Sales approach:Summary
Focus on “Bad debt expense” estimate, any balance in
the allowance account is ignored.Method achieves a matching of cost and revenues.
Percentage of Receivables approach:
Accurate valuation of receivables on the balance sheet.
Method may also be applied using an aging schedule.
LO 3 Distinguish between the methods and bases companies use to value accounts receivable.
Valuing Accounts Receivable
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Chapter9-27
Companies sell receivables for two majorreasons.
1. Receivables may be the only reasonable source
of cash.
2. Billing and collection are often time-consumingand costly.
LO 4 Describe the entries to record the disposition of accounts receivable.
Disposing of Accounts Receivable
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Chapter9-28 LO 4 Describe the entries to record the disposition of accounts receivable.
Disposing of Accounts Receivable
Sale of ReceivablesA factor buys receivables from businesses and thencollects the payments directly from the customers.
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Chapter9-29
E9-7 (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.
LO 4 Describe the entries to record the disposition of accounts receivable.
Disposing of Accounts Receivable
Accounts receivable 680,000
Cash 659,600
Service charge expense 20,400
($680,000 x 3% = $20,400)
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Chapter9-30 LO 4 Describe the entries to record the disposition of accounts receivable.
Disposing of Accounts Receivable
Credit Card SalesRetailer considers credit card sales the same ascash sales .
Retailer must pay card issuer a fee of 2 to4% for processing the transactions.
Retailer records in similar manner as checksdeposited from cash sale.
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Chapter9-31
E9-7 (b) On May 10, Dale Company sold merchandise for$3,800 and accepted the customer’s America BankMasterCard. America Bank charges a 4% service chargefor credit card sales. Prepare the entry on Dale
Company’s books to record the sale of merchandise.
LO 4 Describe the entries to record the disposition of accounts receivable.
Disposing of Accounts Receivable
Sales 3,800
Cash 3,648
Service charge expense 152
($3,800 x 4% = $152)
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Chapter9-32 LO 5 Compute the maturity date of and interest on notes receivable.
Notes Receivable
Companies may grant credit in exchange for apromissory note. A promissory note is a writtenpromise to pay a specified amount of money ondemand or at a definite time.
Promissory notes may be used:1. when individuals and companies lend or
borrow money,
2. when amount of transaction and creditperiod exceed normal limits, or
3. in settlement of accounts receivable.
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Chapter9-33 LO 5 Compute the maturity date of and interest on notes receivable.
Notes Receivable
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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Chapter9-34
Determining the Maturity Date
LO 5 Compute the maturity date of and interest on notes receivable.
Notes Receivable
Note expressed in terms of
Months
Days
Computing InterestIllustration 9-13
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Chapter9-35 LO 6 Explain how companies recognize notes receivable.
Recognizing Notes Receivable
E9-10 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 Reber’s 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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Chapter9-36
E9-10 Nov. 1 Loaned $15,000 cash to Sally Givens on a1-year, 10% note. Dec. 11 Sold goods to John Countryman,Inc., receiving a $6,750, 90-day, 8% note. Dec. 16Received a $4,000, 6-month, 9% note in exchange for BobReber’s outstanding accounts receivable.
Cash 15,000
Notes receivable 15,000Nov. 1
Sales 6,750
Notes receivable 6,750Dec. 11
Accounts receivable 4,000
Notes receivable 4,000Dec. 16
Recognizing Notes Receivable
LO 6 Explain how companies recognize notes receivable.
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Chapter9-37
E9-10 Dec. 31 Accrued interest revenue on all notesreceivable.
Interest revenue 295
Interest receivable 295Dec. 31
Amount Rate Time
Givens note: 15,000$ x 10% x 2 / 12 = 250$
Countryman note: 6,750 x 8% x 20 / 360 = 30 Reber note: 4,000 x 9% x 15 / 360 = 15
Total accrued interest 295$
Recognizing Notes Receivable
LO 6 Explain how companies recognize notes receivable.
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Chapter9-38
Valuing Notes Receivable
LO 7 Describe how companies value notes receivable.
Notes Receivable
Like accounts receivable, companies report short-term notes receivable at their cash (net)
realizable value.Estimation of cash realizable value and bad debtsexpense are done similarly to accounts receivable.
Allowance for Doubtful Accounts is used.
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Chapter9-39
Disposing of Notes Receivable
LO 8 Describe the entries to record the disposition of notes receivable.
Notes 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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Chapter9-40
Honor of Notes Receivable
LO 8 Describe the entries to record the disposition of notes receivable.
Notes Receivable
A note is honored when its maker pays it in full
at its maturity date.
Dishonor of Notes Receivable
A dishonored note is not paid in full at maturity.Dishonored note receivable is no longer negotiable.
Disposing of Notes Receivable
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Chapter9-41
Notes Receivable
E9-13 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.
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Chapter9-43
Notes Receivable
E9-13 (c) Prepare the entry to record the dishonor ofthe note, assuming that Kleinsorge Company does notexpect collection in the future.
LO 8 Describe the entries to record the disposition of notes receivable.
Notes receivable 7,600
Allowance for doubtful accounts 7,600(c)
When there is no hope of collection, the note holder wouldwrite off the face value of the note. No interest revenuewould be recorded because collection will not occur.
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Chapter9-44
Presentation
LO 9 Explain the statement presentation and analysis of receivables.
Statement Presentation and Analysis
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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Chapter9-45
Analysis of Receivables
This Ratio used to:
Assess the liquidity of the receivables.Measure the number of times, on average, a companycollects receivables during the period.
LO 9 Explain the statement presentation and analysis of receivables.
Statement Presentation and Analysis
20.3 times
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Chapter9-46
Analysis of Receivables
Variant of the accounts receivable turnover ratio isaverage collection period in terms of days.
Used to assess effectiveness of credit and collectionpolicies.
Collection period should not exceed credit term period.
LO 9 Explain the statement presentation and analysis of receivables.
Statement Presentation and Analysis
20.3 times, or every18 days (365 / 20.3)
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Chapter
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