ACCT 201

REPORTING AND
ANALYZING
8
RECEIVABLES

8-1

Learning Objectives

After studying this chapter, you should be able to:

1. Identify the different types of receivables.

2. Explain how accounts receivable are recognized in the accounts.

3. Describe the methods used to account for bad debts.

4. Compute the interest on notes receivable.

5. Identify ratios to analyze a company’s receivables.

6. Describe methods to accelerate the receipt of cash from receivables.

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 Types of Receivables

Amounts due from individuals and companies that are

expected to be collected in cash.

Amounts customers Written promise Nontrade receivables

owe on account that (formal instrument) for such as interest, loans
result from the sale of amount to be to officers, advances
goods and services. received. Also called to employees, and
trade receivables. income taxes
refundable.

Accounts Notes Other

Receivable Receivable Receivables

8-3

Recognizing Accounts Receivable

Illustration: Assume that Jordache Co. on July 1, 2014, sells
merchandise on account to Polo Company for $1,000 terms 2/10,
n/30. Prepare the journal entry to record this transaction on the
books of Jordache Co.

Jul. 1 Accounts receivable 1,000

Sales revenue 1,000

8-4
 Recognizing Accounts Receivable
Illustration: On July 5, Polo returns merchandise worth $100 to
Jordache Co.

Jul. 5 Sales returns and allowances 100

Accounts receivable 100

Illustration: On July 11, Jordache receives payment from

Polo Company for the balance due.

Jul. 11 Cash 882

Sales discounts ($900 x .02) 18
Accounts receivable 900

8-5

Valuing Accounts Receivable

On the Balance Sheet, Accounts Receivables:

 are classified as current asset.

Uncollectible Accounts Receivable

 Sales on account raise the possibility of accounts not being
collected.

 Seller records losses that result from extending credit as Bad

Debts Expense.

 In conformity with the matching principle, bad debt expense

should be recorded in the same accounting period in which the
sales related to the uncollectible account were recorded.
8-6
 Valuing Accounts Receivable

Methods of Accounting for Uncollectible Accounts

Direct Write-Off Allowance Method

Theoretically undesirable: Losses are estimated:
 No matching.  Better matching.
 Receivable not stated at net  Receivable stated at net
realizable value. realizable value.
 Not acceptable for financial  Required by GAAP.
reporting.

8-7

Valuing Accounts Receivable

Direct Write-off Method for Uncollectible Accounts

Illustration: Assume that Warden Co. writes off M. E. Doran’s
$200 balance as uncollectible on December 12. Warden’s entry
is:
Bad debt expense 200

Accounts receivable 200

Theoretically undesirable:
 No matching.
 Receivable not stated at cash realizable value.
 Not acceptable for financial reporting.

8-8
 Valuing Accounts Receivable

Allowance Method for Uncollectible Accounts

1. Companies estimate uncollectible accounts
receivable.

2. Debit Bad Debts Expense and credit Allowance for

Doubtful Accounts (a contra-asset account).

3. Companies debit Allowance for Doubtful Accounts

and credit Accounts Receivable at the time the
specific account is written off as uncollectible.

4. If the account written off subsequently recovered and

collected, the journal entry mentioned in the previous
step is reversed and cash is recorded.
8-9

Valuing Accounts Receivable – Example 1

Recording Estimated Uncollectibles

Illustration: Hampson Furniture has credit sales of $1,200,000
in 2014, of which $200,000 remains uncollected at December 31.
The credit manager estimates that $12,000 of these sales will
prove uncollectible.

Dec. 31 Bad debt expense 12,000

Allowance for doubtful accounts 12,000

8-10
 Valuing Accounts Receivable – Example 1

Illustration 8-3
Presentation of allowance
for doubtful accounts

8-11

Valuing Accounts Receivable – Example 1

Recording Write-Off of an Uncollectible Account

Illustration: The vice-president of finance of Hampson Furniture on
March 1, 2015, authorizes a write-off of the $500 balance owed by
R. A. Ware. The entry to record the write-off is:

Mar. 1 Allowance for doubtful accounts 500

Accounts receivable 500
Illustration 8-4

8-12
 Valuing Accounts Receivable – Example 1

Recovery of an Uncollectible Account

Illustration: On July 1, R. A. Ware pays the $500 amount that
Hampson Furniture had written off on March 1. Hampson makes
these entries:

July 1 Accounts receivable 500

Allowance for doubtful accounts 500

1 Cash 500
Accounts receivable 500

8-13

Valuing Accounts Receivable – Example 2

Journal entry for credit sale of $100?
Accounts receivable 100
Sales 100

Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
Sale 100

End. 600 25 End.

8-14
 Valuing Accounts Receivable – Example 2
Collected $333 on account?
Cash 333
Accounts receivable 333

Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
Sale 100 333 Coll.

End. 267 25 End.

8-15

Valuing Accounts Receivable – Example 2

Adjustment of $15 for estimated bad debts?
Bad debt expense 15
Allowance for Doubtful Accounts 15

Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
Sale 100 333 Coll. 15 Est.

End. 267 40 End.

8-16
 Valuing Accounts Receivable – Example 2
Write-off of uncollectible accounts for $10?
Allowance for Doubtful accounts 10
Accounts receivable 10

Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
Sale 100 333 Coll. 15 Est.
10 W/O W/O 10

End. 257 30 End.

8-17

Valuing Accounts Receivable – Example 2

ABC Corporation
Balance Sheet (partial)
Current Assets:
Cash $ 330
Accounts receivable 257
Less: Allowance for doubtful accounts (30) 227
Inventory 812
Prepaid expense 40
Total current assets 1,409

8-18
 Valuing Accounts Receivable – Example 2
Alternate
ABC Corporation Presentation
Balance Sheet (partial)
Current Assets:
Cash $ 330
Accounts receivable, net of $30 allowance 227
Inventory 812
Prepaid expense 40
Total current assets 1,409

8-19

Valuing Accounts Receivable

Estimating the Allowance

Under the percentage of receivables basis, management

establishes a percentage relationship between the amount of
receivables and expected losses from uncollectible accounts.

Involves the direct computation of the desired balance in the

allowance for uncollectible accounts.

 Two approaches:
 Single Rate
 Aging of Receivables

8-20
 Estimating the Allowance
– Single Rate based on Receivables

(1) Compute the desired balance in the Allowance

for Uncollectible Accounts.
Bad Debt
Year-end Accounts Receivable ×
%
(2) Bad Debts Expense is computed as:

8-21

Estimating the Allowance

– Single Rate based on Receivables

On Dec. 31, 2006, MusicLand has $50,000 in Accounts

Receivable and a $200 credit balance in Allowance for
Uncollectible Accounts.
Past experience suggests that 5% of receivables are
uncollectible.
What is MusicLand’s Bad Debts Expense for 2006?

8-22
 Estimating the Allowance
– Single Rate based on Receivables

Desired balance in Allowance

for Uncollectible Accounts

$ 50,000
× 5.00%
= $ 2,500

GENERAL JOURNAL Page 95

Post
Date Description Ref. Debit Credit
Dec. 31 Bad Debts Expense 2,300
Allowance for
Uncollectible Accounts 2,300
8-23

Estimating the Allowance

– Aging of Receivables
Customer balances are classified by the length of time they have
been unpaid.
Illustration 8-7

8-24
 Estimating the Allowance
– Aging of Receivables
Estimating the Allowance
Illustration: Assume the unadjusted trial balance shows Allowance
for Doubtful Accounts with a credit balance of $528. Prepare the
adjusting entry assuming $2,228 is the estimate of uncollectible
receivables from the aging schedule.

Dec. 31 Bad debt expense 1,700

Allowance for doubtful accounts 1,700

Illustration 8-8
Bad debts accounts
after posting

8-25

Additional Example
Brule Co. has been in business five years. The unadjusted trial
balance at the end of the current year shows:
Accounts Receivable $30,000 Dr.
Sales Revenue $180,000 Cr.
Allowance for Doubtful Accounts $2,000 Dr.
Bad debts are estimated to be 10% of receivables. Prepare the entry
to adjust Allowance for Doubtful Accounts.

Solution
Bad debts expense 5,000
Allowance for doubtful accounts 5,000

* [(0.1 x $30,000) + $2,000]

8-26
 AccountsReceivable

Review Question
In 2014 the Golic Co. had net credit sales of $600,000. On January 1, 2014, the
Allowance for Doubtful Accounts had a credit balance of $15,000. During 2014,
$24,000 of uncollectible accounts receivable were written off. Past experience
indicates that the allowance should be 10% of the balance in receivables
(percentage-of-receivables basis). If the accounts receivable balance at
December 31 was $160,000 what is the required adjustment to the Allowance for
Doubtful Accounts at December 31, 2014?

a. $16,000.
b. $25,000.
c. $31,000.
d. $24,000.

8-27

AccountsReceivable

Review Question
The following information is related to December 31, 2013 balances.
Accounts receivable$2,100,000
Allowance for doubtful accounts (credit) (180,000)
Net (cash) realizable value $1,920,000

During 2014 sales on account were $580,000 and collections on account were
$344,000. Also during 2014 the company wrote off $32,000 in uncollectible
accounts. An analysis of outstanding receivable accounts at year end indicated
that bad debts should be estimated at $216,000. Bad debt expense for 2014 is
a. $ 68,000.
b. $ 36,000.
c. $216,000.
d. $ 4,000.

8-28
 AccountsReceivable

Review Question
Kinsler Company uses the percentage-of-receivables method for recording bad
debt expense. The Accounts Receivable balance is $200,000 and credit sales are
$1,000,000. Management estimates that 6% of accounts receivable will be
uncollectible. What adjusting entry will Kinsler Company make if the Allowance
for Doubtful Accounts has a credit balance of $2,000 before adjustment?
a. Bad Debt Expense 14,000
Allowance for Doubtful Accounts 14,000

b. Bad Debt Expense 12,000

Allowance for Doubtful Accounts 12,000

c. Bad Debt Expense 10,000

Allowance for Doubtful Accounts 10,000

d. Bad Debt Expense 8,000

Accounts Receivable 8,000

8-29

AccountsReceivable

Review Question

When an account is written off using the allowance

method, the
a. cash realizable value of total accounts
receivable will increase.
b. net accounts receivable will decrease.
c. allowance account will increase.
d. net accounts receivable will stay the same.

8-30
 Notes Receivable

Companies may grant credit in exchange for a promissory

note. A promissory note is a written promise to pay a
specified amount of money on demand 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 credit period exceed normal

limits, or

3. in settlement of accounts receivable.

8-31

Notes Receivable

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

To the maker, the promissory note is a note payable.

Illustration 8-10
8-32
 Notes Receivable

Determining the Maturity Date

Note expressed in terms of
 Months
 Days

Computing Interest
Illustration 8-11

8-33

Notes Receivable

Computing Interest
When counting days, omit the date the note is issued,
but include the due date.
Illustration 8-12

8-34
 Notes Receivable

Illustration: Wolder Co. lends Higley Inc. $10,000 on June 1,

accepting a five-month, 9% interest note. If Wolder presents the note
to Higley Inc. on November 1, the maturity date, Wolder’s entry to
record the collection is:

Nov. 1 Cash 10,375

Notes receivable 10,000
Interest revenue 375

($10,000 x 9% x 5/12 = $375)

8-35

Notes Receivable

Accrual of Interest Receivable

Illustration: Suppose instead that Wolder Co. prepares financial
statements as of September 30. The adjusting entry by Wolder is for
four months ending Sept. 30.

Illustration 8-13

Sept. 30 Interest receivable 300

Interest revenue 300

8-36
 Notes Receivable

Accrual of Interest
Illustration: Prepare the entry Wolder’s would make to record the
honoring of the Higley note on November 1.

Nov. 1 Cash 10,375

Notes receivable 10,000
Interest receivable 300
Interest revenue 75

($10,000 x 9% x 1/12 = $75)

8-37

Notes Receivable

Review Question
Nance Co. holds Gant Inc.’s $25,000, 120 day, 9% note. The entry
made by Nance Co. when the note is collected, assuming no interest
has previously been accrued is:
a. Cash 25,000
Notes Receivable 25,000
b. Accounts Receivable 25,750
Notes Receivable 25,000
Interest Revenue 750
c. Cash 25,750
Notes Receivable 25,000
Interest Revenue 750
d. Accounts Receivable 25,750
Notes Revenue 25,000
Interest Revenue 700
8-38
 Notes Receivable

Review Question
Young Company lends Dobson industries $40,000 on August 1, 2014,
accepting a 9-month, 12% interest note. If Young prepares it financial
statements as of December 31, 2014, what adjusting entry must it
make?
a. Interest Receivable 2,000
Interest Revenue 2,000
b. Accounts Receivable 2,000
Interest Receivable 2,000
c. Cash 2,000
Interest Revenue 2,000
d. Notes Receivable 2,000
Interest Revenue 2,000

8-39

Notes Receivable

Review Question
Young Company lends Dobson industries $40,000 on August 1, 2014, accepting a 9-month,
12% interest note. If Young accrued interest at its December 31, 2014 year-end, what entry
must it make to record the collection of the note and interest at its maturity date?
a. Cash 43,600
Notes Receivable 40,000
Interest Revenue 3,600
b. Cash 43,600
Notes Receivable 43,600
c. Notes Receivable 40,000
Interest Receivable 2,000
Interest Revenue 1,600
Cash 43,600
d. Cash 43,600
Notes Receivable 40,000
Interest Receivable 2,000
Interest Revenue 1,600

8-40
 Managing Receivables

Evaluating Liquidity of Receivables

Accounts Receivable Turnover:
 Assess the liquidity of the receivables.
 Measure the number of times, on average, a company
collects receivables during the period.

Average collection period:

 Used to assess effectiveness of credit and collection
policies.
 Collection period should not exceed credit term period.

8-41

Managing Receivables

Evaluating Liquidity of Data from Nike (in millions)

Receivables

Illustration 8-17
8-42
 Evaluating Liquidity of Receivables

Review Question
The financial statements of the Nelson
Manufacturing Company reports net sales of
$300,000 and accounts receivable of $50,000
and $30,000 at the beginning of the year and
end of year, respectively. What is the accounts
receivable turnover for Nelson?
a. 3.8 times
b. 6 times
c. 10.0 times
8-43
d. 7.5 times

Managing Receivables

Sale of Receivables to a Factor

A factor is a finance company or bank that buys receivables from
businesses for a fee and then collects the payments directly from the
customers.

Illustration: Assume that Hendredon Furniture factors $600,000 of

receivables to Federal Factors, Inc. Federal Factors assesses a
service charge of 2% of the amount of receivables sold.

Cash 588,000
Service charge expense 12,000
Accounts receivable 600,000

8-44
 Review Question

Gipson Furniture factors $500,000 of receivables to Kwik Factors, Inc.

Kwik Factors assesses a 3% service charge on the amount of
receivables sold. Gipson Furniture factors its receivables regularly with
Kwik Factors. What journal entry does Gipson make when factoring
these receivables?
a.Cash 485,000
Loss on Sale of Receivables 15,000
Accounts Receivable 500,000
b.Cash 485,000
Accounts Receivable 485,000
c.Cash 500,000
Accounts Receivable 485,000
Gain on Sale of Receivables 15,000
d.Cash 485,000
Service Charge Expense 15,000
Accounts Receivable 500,000
8-45