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Receivables

Chapter 7. Receivables. Electronic Presentation by Douglas Cloud Pepperdine University. Learning Goals. 1. Describe the common classifications of receivables. 2. Summarize and provide examples of internal control procedures that apply to receivables.

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Receivables

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  1. Chapter 7 Receivables Electronic Presentationby Douglas Cloud Pepperdine University

  2. Learning Goals 1. Describe the common classifications of receivables. 2. Summarize and provide examples of internal control procedures that apply to receivables. 3. Describe the nature of and the accounting for uncollectible receivables. 4. Describe the allowance method of accounting for uncollectible receivables. After studying this chapter, you should be able to: Continued

  3. Learning Goals 5. Describe the direct write-off method of accounting for uncollectible receivables. 6. Describe the nature, characteristics, and accounting for notes receivable. 7. Describe the reporting of receivables on the balance sheet. 8. Describe the principles of managing receivables. Continued

  4. Learning Goals 9. Compute and interpret the accounts receivable turnover and the number of days’ sales in receivables.

  5. Learning Goal 1 Describe the common classifications of receivables.

  6. When merchandise or services are sold on credit, an accounts receivable is established.

  7. Most accounts receivable are expected to be collected in 30 to 60 days; so, they are current assets.

  8. Dec. 13, 2005 I promise to pay__________________________________ ____________________________________________ at an interest rate of _____% within ______ days. ________________________ Douglas Cloud One Thousand Dollars and no/100 6 90 T. Wood Notes receivable are amounts that customers owe for which a formal, written instrument of credit has been issued.

  9. Notes and accounts receivable that result from sales transactions are sometimes called trade receivables.

  10. Learning Goal 2 Summarize and provide examples of internal control procedures that apply to receivables.

  11. Learning Goal 3 Describe the nature of and the accounting for uncollectible receivables.

  12. Often when a company issues its own credit card, it sells its receivables to other companies. This is called factoring and the buyer is called the factor.

  13. Regardless of the care used in granting credit and the collection procedure used, normally a part of the credit sales will not be collectible.

  14. The two methods of accounting for receivables that appear to be uncollectible are the allowance method and the direct-write-off method.

  15. Learning Goal 4 Describe the allowance method of accounting for uncollectible receivables.

  16. Richards Company, a new company with a fiscal period ending on December 31, ends the year with $1,000,000 in the Accounts Receivable account. Based on careful study, Richards estimates that $40,000 of the $1,000,000 will eventually be uncollectible. A year-end adjusting entry is needed:

  17. Dec. 31 Uncollectible Accounts Expense 40,000 Allowance for Doubtful Accounts 40,000 Also called Bad Debts Expense or Doubtful Accounts Expense A contra account to Accounts Receivable Because specific customer accounts cannot be identified at this time, the allowance account is used.

  18. $1,000,000 - 40,000 $ 960,000 Subtracting the balance of the allowance account from the receivables balance provides the net realizable value—which is the amount Richards expects to collect.

  19. Write-Offs to the Allowance Account On January 21 John Parker, one of Richards Company’s receivables, files for bankruptcy. Thus, his account of $6,000 is deemed uncollectible. The following entry is required: Jan. 21 Allowance for Doubtful Accounts 6,000 Accounts Receivable—J. Parker 6,000

  20. Collecting a Written-Off Account John Parker won the state lottery, so he is paying all of his bankruptcy debts. On June 10, Richards Co. receive a check for $6,000. June 10 Accounts Receivable—J. Parker 6,000 Allowance for Doubtful Accts. 6,000 10 Cash 6,000 Accounts Receivable—J. Parker 6,000

  21. 37,000 Estimating Uncollectibles Estimate Based on Sales It is estimated that 1% of the $3 million in credit sales will become uncollectible. Allowance for Doubtful Accounts Bal. 7,000 30,000 Dec. 31 Uncollectible Accounts Expense 30,000 Allowance for Doubtful Accounts 30,000

  22. Estimating Uncollectibles Estimate Based on Analysis of Receivables The process of determining how long a receivable has been outstanding and attaching a percentage to that time period is referred to as aging the receivables.

  23. Estimating Uncollectibles Estimate Based on Analysis of Receivables The longer an account has been outstanding, the less like the receivable will be collected.

  24. 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 J. Zimmer Co. 160 160 Total $86,300 $75,000 $4,000 $3,100 $1,900 $1,200 $800 $300 Total accounts receivable shown by age.

  25. 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 J. Zimmer 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.

  26. 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 J. Zimmer 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

  27. 3,390 Estimating Uncollectibles Estimate Based on Analysis of Receivables By aging, it is estimated that $3,390 of the credit sales will become uncollectible. Allowance for Doubtful Accounts Bal. 510 2,880 Dec. 31 Uncollectible Accounts Expense 2,880 Allowance for Doubtful Accounts 2,880

  28. Estimating Uncollectibles Estimate Based on Analysis of Receivables Notice that when the estimation is based on accounts receivable, the calculated amount is the desired ending balance in the allowance account.

  29. Learning Goal 5 Describe the direct write-off method of accounting for uncollectible receivables.

  30. While the allowance method is preferred, there are situations where the cash basis is acceptable.

  31. What type of situations?

  32. The direct write-off method is acceptable when it is impossible to accurately estimate the uncollectibles.

  33. It is also acceptable when a business sells most of its goods or services for cash. The amount of uncollectibles is small.

  34. D. L. Ross owes Hankin Company $4,200. All efforts to collect have failed, so on May 10 Hankin decides the account is uncollectible. May 10 Uncollectible Accounts Expense 4,200 Accounts Receivable—D. L. Ross 4,200 Note that the direct write-off-method debits the expense account at the time of the write-off.

  35. This entry “reinstates” the debt. On November 21, Hankin receives a check for $4,200 from D. L. Ross. Nov. 21 Accounts Receivable—D. L. Ross 4,200 Uncollectible Accounts Expense 4,200 21 Cash 4,200 Accounts Receivable—D. L. Ross 4,200

  36. Learning Goal 6 Describe the nature, characteristics, and accounting for notes receivable.

  37. Notes Receivable Payee 2,500.00 $_____________ March 16 05 Fresno, California______________20___ Ninety days ________________ _AFTER DATE _______ PROMISE TO PAY TO We THE ORDER OF ____________________________________________ Judson Company Due Date Two thousand five hundred 00/100--------------------------- _________________________________________________DOLLARS Maker City National Bank PAYABLE AT ______________________________________________ VALUE RECEIVED WITH INTEREST AT ____ 10% NO. _______ DUE___________________ 14 June 14, 2005 H. B. Lane TREASURER, WILLIARD COMPANY

  38. 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) • by a specific person (maker) • on a specific date or upon demand • plus interest at a specific percentage of the principal (face) amount per year

  39. Principal + Interest = Maturity Value $6,000 + $60 = $6,060 Received a $6,000, 12%, 30-day note dated November 21, 2005 from W. A. Bunn in settlement of a past-due account. Interest Calculation Principal x Rate x Time = Interest $6,000 x 12% x 30/360 = $60 Maturity Value Calculation

  40. When the note is received. Nov. 21 Notes Receivable—W. A. Bunn 6,000 Accounts Receivable—W. A. Bunn 6,000 At maturity date. Dec. 21 Cash 6,060 Notes Receivable—W. A. Bunn 6,000 Interest Revenue 60

  41. Dec. 13, 2005 I promise to pay__________________________________ ____________________________________________ at an interest rate of _____% within ______ days. ________________________ Douglas Cloud One Thousand Dollars and no/100 6 90 T. Wood If a note matures in a later fiscal period, the company holding the note makes an adjusting entry for accrued interest.

  42. 2005 Dec. 1 Notes Receivable—Crawford Co. 4,000 Accounts Receivable— Crawford Co. 4,000 2006 Mar. 1 Cash 4,120 Notes Receivable 4,000 Interest Receivable 40 Interest Revenue 80 $4,000 x .12 x 30/360 Crawford Company uses a 90-day, 12% note, dated December 1, 2005, to settle its account, which has a balance of $4,000. Dec. 31 Interest Receivable 40 Interest Revenue 40

  43. Learning Goal 7 Describe the reporting of receivables on the balance sheet.

  44. ASSETS Sept. 30, 2001 (in thousands) Current assets: Cash and cash equivalents $113,237 Marketable securities 107,312 Accounts receivable, net of allowance of $4,590 90,425 Inventories 221,253 Prepaid expenses and other current assets 61,698 Total current assets $593,925 Starbucks’

  45. Learning Goal 8 Describe the principles of managing accounts receivable.

  46. Screening Customers Screening customers involves assessing which customers should be granted credit. In addition to analyzing the buyer’s application and documents, the seller usually requires an independent credit report… …and often will contact the buyer’s bank and other credit references. Dun & Bradstreet provides credit ratings for many business customers.

  47. Determining Credit Terms Once a seller has decided to grant credit to a buyer, the seller must determine credit terms for the sale.

  48. Determining Credit Terms This includes determining a credit limit which is based on the credit worthiness of the customer.

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