Chapter 9-1 CHAPTER ACCOUNTING FOR RECEIVABLES Accounting Principles, Eighth Edition Chapter 9-2 Study Study Objectives Objectives Identify the different types of receivables Explain how companies recognize accounts receivable Distinguish between the methods and bases companies use to value accounts receivable Describe the entries to record the disposition of accounts receivable Compute the maturity date of and interest on notes receivable Explain how companies recognize notes receivable Describe how companies value notes receivable Describe the entries to record the disposition of notes receivable Explain the statement presentation and analysis of receivables Chapter 9-3 Accounting Accounting for for Receivables Receivables Types of Receivables Accounts Receivable Notes Receivable Accounts receivable Notes receivable Other receivables Recognizing accounts receivable Valuing accounts receivable Disposing of accounts receivable Determining maturity date Computing interest Recognizing notes receivable Valuing notes receivable Disposing of notes receivable Chapter 9-4 Statement Presentation and Analysis Presentation Analysis Types Types of of Receivables Receivables Amounts due from individuals and other companies that are expected to be collected in cash Amounts owed by customers that result from the sale of goods and services Claims for which formal instruments of credit are issued as proof of debt “Nontrade” (interest, loans to officers, advances to employees, and income taxes refundable) Accounts Accounts Receivable Receivable Notes Notes Receivable Receivable Other Other Receivables Receivables Chapter 9-5 LO Identify the different types of receivables Accounts Accounts Receivable Receivable Three accounting issues: Recognizing accounts receivable Valuing accounts receivable Disposing of accounts receivable Recognizing Accounts Receivable The following exercise was illustrated in Chapter For simplicity, inventory and cost of goods sold have been omitted Chapter 9-6 LO Identify the different types of receivables Recognizing Recognizing Accounts Accounts Receivable Receivable E5-5 Presented are transactions related to Wheeler Company On December 3,Wheeler Company sold $500,000 of merchandise to Hashmi Co., terms 2/10, n/30, FOB shipping point On December 8, Hashmi Co was granted an allowance of $27,000 for merchandise purchased on December 3 On December 13,Wheeler Company received the balance due from Hashmi Co Instructions: Prepare the journal entries to record these transactions on the books of Wheeler Company using a perpetual inventory system Chapter 9-7 LO Explain how companies recognize accounts receivable Recognizing Recognizing Accounts Accounts Receivable Receivable E5-5 Prepare the journal entries for Wheeler Company On December 3, Wheeler Company sold $500,000 of merchandise to Hashmi Co., terms 2/10, n/30, FOB shipping point Dec Chapter 9-8 Accounts receivable Sales 500,000 500,000 LO Explain how companies recognize accounts receivable Recognizing Recognizing Accounts Accounts Receivable Receivable E5-5 Prepare the journal entries for Wheeler Company On December 8, Hashmi Co was granted an allowance of $27,000 for merchandise purchased on December Dec Sales returns and allowances Accounts receivable Chapter 9-9 27,000 27,000 LO Explain how companies recognize accounts receivable Recognizing Recognizing Accounts Accounts Receivable Receivable E5-5 Prepare the journal entries for Wheeler Company On December 13, Wheeler Company received the balance due from Hashmi Co Dec 13 Cash 463,540 *** Sales discounts Accounts receivable * 9,460 ** 473,000 * ($500,000 – $27,000) ** [($500,000 – $27,000) X 2%] *** ($473,000 – $9,460) Chapter 9-10 LO Explain how companies recognize accounts receivable Notes Notes Receivable Receivable To the Payee, the promissory note is a note receivable To the Maker, the promissory note is a note payable Illustration 9-10 Chapter 9-34 LO Compute the maturity date of and interest on notes receivable Notes Notes Receivable Receivable Determining the Maturity Date Note expressed in terms of Months Days Computing Interest Chapter 9-35 Illustration 9-13 LO Compute the maturity date of and interest on notes receivable Recognizing Recognizing Notes Notes Receivable Receivable E9-10 Orosco Supply Co has the following transactions related to notes receivable during the last months of 2008 Nov 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 for Bob Reber’s outstanding accounts receivable Dec 31 Accrued interest revenue on all notes receivable Instructions (a) Journalize the transactions for Orosco Supply Co Chapter 9-36 LO Explain how companies recognize notes receivable Recognizing Recognizing Notes Notes Receivable Receivable E9-10 Nov 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 for Bob Reber’s outstanding accounts receivable Nov Notes receivable Cash Dec 11 Notes receivable 15,000 15,000 6,750 Sales Dec 16 Notes receivable Accounts receivable Chapter 9-37 6,750 4,000 4,000 LO Explain how companies recognize notes receivable Recognizing Recognizing Notes Notes Receivable Receivable E9-10 Dec 31 Accrued interest revenue on all notes receivable Dec 31 Interest receivable Interest revenue Chapter 9-38 295 295 LO Explain how companies recognize notes receivable Notes Notes Receivable Receivable Valuing Notes Receivable Like accounts receivable, companies report shortterm notes receivable at their cash (net) realizable value Estimation of cash realizable value and bad debts expense are done similarly to accounts receivable Allowance for Doubtful Accounts is used Chapter 9-39 LO Describe how companies value notes receivable Notes Notes Receivable Receivable Disposing of Notes Receivable Notes may be held to their maturity date Maker may default and payee must make an adjustment to the account Holder speeds up conversion to cash by selling the note receivable Chapter 9-40 LO Describe the entries to record the disposition of notes receivable Notes Notes Receivable Receivable Disposing of Notes Receivable Honor of 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 A dishonored note receivable is no longer negotiable Chapter 9-41 LO Describe the entries to record the disposition of notes receivable Notes Notes Receivable Receivable E9-13 On May 2, Kleinsorge Company lends $7,600 to Everhart, Inc., issuing a 6-month, 9% note At the maturity date, 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 will occur (c) Prepare the entry to record the dishonor of the note, assuming that Kleinsorge Company does not expect collection in the future Chapter 9-42 LO Describe the entries to record the disposition of notes receivable Notes Notes Receivable Receivable E9-13 (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 will occur (a) Notes receivable 7,600 Cash (b) Interest = $7,600 x 9% x 6/12 = $342 Accounts receivable Chapter 9-43 7,600 7,942 Notes receivable 7,600 Interest revenue 342 LO Describe the entries to record the disposition of notes receivable Notes Notes Receivable Receivable E9-13 (c) Prepare the entry to record the dishonor of the note, assuming that Kleinsorge Company does not expect collection in the future (c) Allowance for doubtful accounts Notes receivable 7,600 7,600 When there is no hope of collection, the note holder would write off the face value of the note No interest revenue would be recorded because collection will not occur Chapter 9-44 LO Describe the entries to record the disposition of notes receivable Statement Statement Presentation Presentation and and Analysis Analysis Presentation Identify in the balance sheet or in the notes, each major type of receivable B/S Report short-term receivables as current assets Report both gross amount of receivables and allowance for doubtful account I/S Chapter 9-45 Report bad debts expense and service charge expense as selling expenses Report interest revenue under “Other revenues and gains.” LO Explain the statement presentation and analysis of receivables Statement Statement Presentation Presentation and and Analysis Analysis Analysis of Receivables Illustration 9-15 This Ratio used to: Assess the liquidity of the receivables Measure the number of times, on average, a company collects receivables during the period Chapter 9-46 LO Explain the statement presentation and analysis of receivables Statement Statement Presentation Presentation and and Analysis Analysis Analysis of Receivables Illustration 9-16 Variant of the accounts receivable turnover ratio is average collection period in terms of days Used to assess effectiveness of credit and collection policies Collection period should not exceed credit term period Chapter 9-47 LO Explain the statement presentation and analysis of receivables Copyright Copyright “Copyright © 2008 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc The purchaser may make back-up copies for his/her own use only and not for distribution or resale The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.” Chapter 9-48 .. .CHAPTER ACCOUNTING FOR RECEIVABLES Accounting Principles, Eighth Edition Chapter 9-2 Study Study Objectives Objectives Identify the... disposition of notes receivable Explain the statement presentation and analysis of receivables Chapter 9-3 Accounting Accounting for for Receivables Receivables Types of Receivables Accounts Receivable... written off Instructions Prepare the journal entries on December 31, 2008, May 11, 2 009, and June 12, 2 009 Chapter 9-16 LO Distinguish between the methods and bases companies use to value accounts