Learning Objectives

1. Power Notes Chapter8 Receivables 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 Learning Objectives C8

2. Power Notes Chapter8 Receivables Slide # Power Note Topics • 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 • 3 • 4 • 6 • 15 • 20 • 21 • 23 Note: To select a topic, type the slide # and press Enter.

3. Classification 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.

4. Accounting for Uncollectible Accounts Receivable The Direct Write-Off Method • 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 Expenseis debited and Accounts Receivableis credited for each such transaction.

5. Journal Entries – Direct Write-Off Method Date Description Debit Credit May. 10 Uncollectible Accts. Expense 420 Accts. Receivable - D. L. Ross 420 Accts. Receivable - D. L. Ross 420 Uncollectible Accts. Expense 420 Cash 420 Accts. Receivable - D. L. Ross 420 Write off uncollectible account of $420 Nov. 21 Reinstate and collect prior account written off.

6. Accounting for Uncollectible Accounts Receivable The Allowance Method • This method is consistent with the matching principle. • Management makes an estimate each year of the portion of accounts receivable that may not be collectible. • Uncollectible Accounts Expenseis debited and Allowance for Doubtful Accountsis credited. • Actual accounts that prove to be uncollectible are debited to Allowance for Doubtful Accountsand credited to Accounts Receivable.

7. Journal Entries – Allowance Method Date Description Debit Credit Dec. 31 Uncollectible Accts. Expense 4,000 Allowance for Doubtful Acct. 4,000 Allowance for Doubtful Accts. 610 Accts. Receivable - J. Parker 610 Accts. Receivable - J. Parker 610 Allowance for Doubtful Accts. 610 Cash 610 Accts. Receivable - J. Parker 610 Estimated a total of $4,000 will be uncollectible. Jan. 21 Write off uncollectible account of $610. June 10 Reinstate and collect prior account written off.

8. Estimating Uncollectible Accounts Expense The allowance method uses two ways to estimate the amount debited to Uncollectible Accounts Expense. 1. Estimate based on a percentage of sales. If credit sales for the period are $300,000 and it is estimated that 1% will be uncollectible, the 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 Accounts Expenseis $2,880 ($3,390 – $510).

9. Accounts Receivable Aging and Uncollectibles Not Days Past Due Past over Customer Balance Due 1-30 31-60 61-90 91-180 181-365 365 Ashby & Co. $ 150 $ 150 B. T. Barr 610 $ 350 $260 Brock Co. 470 $ 470 Saxon Woods Co. 160 160 Total $86,300 $75,000 $4,000 $3,100 $1,900 $1,200 $800 $300 Total accounts receivable shown by age.

10. Accounts Receivable Aging and Uncollectibles Not Days Past Due Past over Customer Balance Due 1-30 31-60 61-90 91-180 181-365 365 Ashby & Co. $ 150 $ 150 B. T. Barr 610 $ 350 $260 Brock Co. 470 $ 470 Saxon Woods Co. 160 160 Total $86,300 $75,000 $4,000 $3,100 $1,900 $1,200 $800 $300 Uncollectibles 2% 5% 10% 20% 30% 50% 80% PERCENT Uncollectible percentages based on experience and industry averages.

11. Accounts Receivable Aging and Uncollectibles Not Days Past Due Past over Customer Balance Due 1-30 31-60 61-90 91-180 181-365 365 Ashby & Co. $ 150 $ 150 B. T. Barr 610 $ 350 $260 Brock Co. 470 $ 470 Saxon Woods Co. 160 160 Total $86,300 $75,000 $4,000 $3,100 $1,900 $1,200 $800 $300 Uncollectibles 2% 5% 10% 20% 30% 50% 80% PERCENT $3,390 = $1,500 $200 $310 $380 $360 $400 $240 AMOUNT

12. A A A Year-End Adjustment for Uncollectibles General Ledger Balance Sheet Accounts Receivable Accounts receivable $86,300 Less allowance for doubtful accounts 3,390 Net accounts receivable 82,910 86,300 Allowance for Doubtful Accts. 510 Balances before adjustment Uncollectible Accts. Expense

13. A A B A B B Year-End Adjustment for Uncollectibles General Ledger Balance Sheet Accounts Receivable Accounts receivable $86,300 Less allowance for doubtful accounts 3,390 Net accounts receivable 82,910 86,300 Allowance for Doubtful Accts. 510 2,880 Balances before adjustment Year-end adjustment $3,390 - $510 = $2,880 Uncollectible Accts. Expense 2,880

14. A C A B A C B B C Year-End Adjustment for Uncollectibles General Ledger Balance Sheet Accounts Receivable Accounts receivable $86,300 Less allowance for doubtful accounts 3,390 Net accounts receivable 82,910 86,300 Allowance for Doubtful Accts. 510 2,880 Balances before adjustment 3,390 Year-end adjustment $3,390 - $510 = $2,880 Uncollectible Accts. Expense 2,880 Balance after adjustment

15. Characteristics of Notes Receivable A promissory note is a written document containing a promise to pay: • a specific amount of money (principal) • to a specific person or company (payee) • at a specific place • on a specific date or upon demand • plus interest at a specific percentage of the principal (face) amount per year

16. Calculating Interest and Maturity Value We received a $2,500, 10%, 90-day note dated March 16, 2003. 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 Interest Calculation Maturity Value Calculation

17. Accounting for Notes Receivable Date Description Debit Credit Nov. 21 Notes Receivable 6,000 Accts. Receivable - Bunn Co. 6,000 Cash 6,060 Notes Receivable 6,000 Interest Revenue 60 Principal + Interest = Maturity Value $6,000 + ($6,000 x 12% x 30 / 360) = $6,060 Received a $6,000,30-day, 12% note. Dec. 21 Collected amount due on note dated November 21.

18. Understanding the 360-Day Year • 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?

19. Another 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 2. A more precise calculation is as follows: $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.

20. Crabtree Co.Balance SheetDecember 31, 2003 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

21. Solvency Measures — The Short-Term Creditor Accounts Receivable Turnover 2003 2002 Net sales on account $1,498,000 $1,200,000 Accounts receivable (net): Beginning of year $ 120,000 $ 140,000 End of year 115,500 120,000 Total $ 235,000 $ 260,000 Average $ 117,500 $ 130,000

22. Solvency Measures — The Short-Term Creditor Accounts Receivable Turnover 2003 2002 Net sales on account $1,498,000 $1,200,000 Accounts receivable (net): Beginning of year $ 120,000 $ 140,000 End of year 115,500 120,000 Total $ 235,000 $ 260,000 Average $ 117,500 $ 130,000 Accts. receivable turnover 12.7 times 9.2 times Use: To assess the efficiency in collecting receivables and in the management of credit

23. Solvency Measures — The Short-Term Creditor Number of Days’ Sales in Receivables 2003 2002 Net sales on account $1,498,000 $1,200,000 Accounts receivable (net): Beginning of year $ 120,000 $ 140,000 End of year 115,500 120,000 Total $ 235,000 $ 260,000 Average $ 117,500 $ 130,000 Use: To assess the efficiency in collecting receivables and in the management of credit

24. Solvency Measures — The Short-Term Creditor Number of Days’ Sales in Receivables 2003 2002 Net sales on account $1,498,000 $1,200,000 Accounts receivable (net): Beginning of year $ 120,000 $ 140,000 End of year 115,500 120,000 Total $ 235,000 $ 260,000 Average $ 117,500 $ 130,000 Average collection period 28 days 36 days Use: To assess the efficiency in collecting receivables and in the management of credit

25. Note: To see the topic slide, type 2 and press Enter. Power Notes Chapter8 Receivables This is the last slide in Chapter 8.