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Receivables

9. Receivables. Describe the common classes of receivables. 1. Describe the accounting for uncollectible receivables. 2. Describe the direct write-off method of accounting for uncollectible receivables. 3. Learning Objective 1. Receivables. 3-1.

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Receivables

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  1. 9 Receivables

  2. Describe the common classes of receivables. 1 Describe the accounting for uncollectible receivables. 2 Describe the direct write-off method of accounting for uncollectible receivables. 3 Learning Objective 1 Receivables 3-1 After studying this chapter, you should be able to: Insert Chapter Objectives Describe the nature of the adjusting process. 9-2 9-2

  3. Compare the direct write-off and allowance methods of accounting for uncollectible accounts. 5 Describe the accounting for notes receivable. 6 Describe the reporting of receivables on the balance sheet. 7 Describe the allowance method of accounting for uncollectible receivables. 4 Receivables (continued) 9-3

  4. 1 Describe the common classes of receivables. 9-4

  5. 1 The term receivables includes all money claims against other entities, including people, business firms, and other organizations.

  6. 1 Accounts receivable are normally expected to be collected within a relatively short period, such as 30 or 60 days.

  7. 1 Notes receivable are amounts that customers owe for which a formal, written instrument of credit has been issued.

  8. 1 Other receivables expected to be collected within one year are classified as current assets. If collection is expected beyond one year, these receivables are classified as noncurrent assets and reported under the caption Investments.

  9. 2 Describe the accounting for uncollectible receivables. 9-9

  10. 2 Factoring Companies often sell their receivables to other companies. This transaction is called factoring the receivables, and the buyer of the receivables is called a factor.

  11. 2 Regardless of how careful a company is in granting credit, some credit sales will be uncollectible. The operating expense account is called bad debt expense, uncollectible accounts expense, or doubtful accounts expense.

  12. 2 The direct write offmethod records bad debt expense only when an account is judged to be worthless. The allowance method records bad debt expense by estimating uncollectible accounts at the end of the accounting period.

  13. 3 Describe the direct write-off method of accounting for uncollectible receivables. 9-13

  14. 3 On May 10, a $4,200 accounts receivable from D. L. Ross has been determined to be uncollectible.

  15. Reinstatement Entry Receipt of Cash Entry 3 The amount written off is later collected on November 21.

  16. 3 Example Exercise 9-1 Direct Write-off Method Journalize the following transactions using the direct write-off method of accounting for uncollectible receivables. July 9 Received $1,200 from Jay Burke and wrote off the remainder owed of $3,900 as uncollectible. Oct. 11 Reinstated the account of Jay Burke and received $3,900 cash in full payment. 9-16

  17. For Practice: PE 9-1A, PE 9-1B Follow My Example 9-1 3 Example Exercise 9-1 (continued) July 9 Cash………………………………………….. 1,200 Bad Debt Expense………………………..... 3,900 Accounts Receivable—Jay Burke… 5,100 Oct. 11 Accounts Receivable—Jay Burke……….. 3,900 Bad Debt Expense………………........ 3,900 11 Cash…………………………………………… 3,900 Accounts Receivable—Jay Burke… 3,900 9-17

  18. 4 Describe the allowance method of accounting for uncollectible receivables. 9-18

  19. 4 On December 31, ExTone Company estimates that a total of $30,000 of the $200,000 balance of their Accounts Receivable will eventually be uncollectible.

  20. 4 The net amount that is expected to be collected, $170,000 ($200,000 – $30,000), is called the net realizable value (NRV). The adjusting entry reduces receivables to the NRV and matches uncollectible expenses with revenues.

  21. 4 Write-Offs to the Allowance Account On January 21, John Parker’s account totaling $6,000 is written off because it is uncollectible.

  22. 4

  23. 4 During 2010, ExTone Company writes off $26,750 of uncollectible accounts, including the $6,000 account of John Parker. After posting all entries to write-off uncollectible amounts, Allowance for Doubtful Accounts will have a credit balance of $3,250 ($30,000 – $26,750).

  24. 4

  25. 4 If ExTone Company had written off $32,100 in accounts receivable during 2010, Allowance for Doubtful Accounts would have a debit balance of $2,100.

  26. 4 Nancy Smith’s account of $5,000 which was written off on April 2 is later collected on June 10. Two entries are needed: one to reinstate Nancy Smith’s account and a second to record receipt of the cash.

  27. Reinstatement Entry Receipt of Cash Entry 4

  28. 4 Example Exercise 9-2 Allowance Method Journalize the following transactions using the allowance method of accounting for uncollectible receivables. July 9 Received $1,200 from Jay Burke and wrote off the remainder owed of $3,900 as uncollectible. Oct. 11 Reinstated the account of Jay Burke and received $3,900 cash in full payment. 9-28

  29. For Practice: PE 9-2A, PE 9-2B Follow My Example 9-2 4 Example Exercise 9-2 (continued) July 9 Cash…………………………………………… 1,200 Allowance for Doubtful Accounts……….. 3,900 Accounts Receivable—Jay Burke……. 5,100 Oct. 11 Accounts Receivable—Jay Burke………... 3,900 Allowance for Doubtful Accounts…….. 3,900 11 Cash……………………………………………. 3,900 Accounts Receivable—Jay Burke…….. 3,900 9-29

  30. 4 Estimating Uncollectibles The allowance method uses two ways to estimate the amount debited to Bad Debt Expense. • Percent of sales method. • Analysis of receivables method.

  31. If credit sales for the period are $3,000,000 and it is estimated that ¾% will be uncollectible, Bad DebtExpense is debited for $22,500 ($3,000,000 × .0075). This approach disregards the balance of $3,250 in the allowance account before the adjustment. 4 Percent of Sales Method

  32. 4 Percent of Sales Method After the following adjusting entry on December 31 is posted, Allowance for Doubtful Accounts will have a balance of $25,750 ($3,250 + $22,500).

  33. 4 Percent of Sales Method

  34. 4 Example Exercise 9-3 Percent of Sales Method At the end of the current year, Accounts Receivable has a balance of $800,000; Allowance for Doubtful Accounts has a credit balance of $7,500; and net sales for the year total $3,500,000. Bad debt expense is estimated at ½ of 1% of net sales. Determine (a) the amount of the adjusting entry for uncollectible accounts; (b) the adjusted balances of Accounts Receivable, Allowance for Doubtful Accounts, and Bad Debt Expense; and (c) the net realizable value of accounts receivable. 9-34

  35. Adjusted Balance • Accounts Receivable…………………. $800,000 • Allowance for Doubtful Accounts • ($7,500 + $17,500)…………………… 25,000 • Bad Debt Expense……………………... 17,500 Follow My Example 9-3 4 Example Exercise 9-3 (continued) • $17,500 ($3,500,000 × .005) • $775,000 ($800,000 – $25,000) For Practice: PE 9-3A, PE 9-3B 9-35

  36. 4 Aging of Receivables The longer an account receivable is outstanding, the less likely it is that it will be collected. Basing the estimate of uncollectible accounts on how long specific amounts have been outstanding is called aging the receivables.

  37. Exhibit 1 4 Aging of Receivables Schedule December 31, 2010

  38. 4 Percent of Sales Method The estimate based on receivables is compared to the balance in the allowance account to determine the amount of the adjusting entry.

  39. 4 Percent of Sales Method ExTone has an unadjusted credit balance of $3,250 in Allowance for Doubtful Accounts. In Exhibit 1 the estimated uncollectible accounts totaled $26,490.

  40. 4 Percent of Sales Method The amount to be added to the allowance account is $23,240 ($26,490 – $3,250). The adjusting entry is as follows:

  41. 4 Percent of Sales Method

  42. 4 The Commercial Collection Agency Section of the Commercial Law League of America reported the following collection rates by number of months past due:

  43. 4 Percent of Sales Method If the unadjusted balance of the allowance account had been a debit balance of $2,100, the amount of the adjustment would have been $28,590. Aug. 31 Adjusting entry Aug. 31 Adjusted balance

  44. 4 Example Exercise 9-4 Analysis of Receivable Method At the end of the current year, Accounts Receivable has a balance of $800,000; Allowance for Doubtful Accounts has a credit balance of $7,500; and net sales for the year total $3,500,000. Using the aging method, the balance of Allowance for Doubtful Accounts is estimated as $30,000. Determine (a) the amount of the adjusting entry for uncollectible accounts; (b) the adjusted balances of Accounts Receivable, Allowance for Doubtful Accounts, and Bad Debt Expense, and (c) the net realizable value of accounts receivable. 9-44

  45. Adjusted Balance • Accounts Receivable…………………. $800,000 • Allowance for Doubtful Accounts….. 30,000 • Bad Debt Expense…………………….. 22,500 For Practice: PE 9-4A, PE 9-4B Follow My Example 9-4 4 Example Exercise 9-4 (continued) • $22,500 ($30,000 – $7,500) • $770,000 ($800,000 – $30,000) 9-45

  46. Exhibit 2 4 Differences Between Estimation Methods

  47. 5 Compare the direct write-off method and allowance method of accounting for uncollectible accounts. 9-47

  48. Exhibit 3 5 Comparing Direct Write-Off and Allowance Methods (continued)

  49. Exhibit 3 5 Comparing Direct Write-Off and Allowance Methods(continued) Direct Write-Off Method Allowance Method

  50. 5

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