Chapter 9-1 Chapter Accounting for Receivables Chapter 9-2 Accounting Principles, Ninth Edition 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 Other receivables Chapter 9-4 Accounts Receivable Recognizing accounts receivable Valuing accounts receivable Disposing of accounts receivable Notes Receivable Determining maturity date Computing interest Recognizing notes receivable Valuing notes receivable Disposing of notes receivable 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 SO 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 SO Identify the different types of receivables Recognizing Recognizing Accounts Accounts Receivable Receivable Illustration: Assume that Jordache Co on July 1, 2010, 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 Accounts receivable Sales Chapter 9-7 1,000 1,000 SO Explain how companies recognize accounts receivable Recognizing Recognizing Accounts Accounts Receivable Receivable Illustration: On July 5, Polo returns merchandise worth $100 to Jordache Co Jul 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) Accounts receivable Chapter 9-8 18 900 SO Explain how companies recognize accounts receivable Accounts Accounts Receivable Receivable Valuing Accounts Receivables Are reported as a current asset on the balance sheet Are reported at the amount the company thinks they will be able to collect Sales on account raise the possibility of accounts not being collected Valuation can be difficult because an unknown amount of receivables will become uncollectible Chapter 9-9 SO Distinguish between the methods and bases companies use to value accounts receivable Valuing Valuing Accounts Accounts Receivable Receivable Methods of Accounting for Uncollectible Accounts Direct Write-Off Theoretically undesirable: no matching receivable not stated at net realizable value not acceptable for financial reporting Chapter 9-10 Allowance Method Losses are estimated: better matching receivable stated at net realizable value required by GAAP SO Distinguish between the methods and bases companies use to value accounts receivable Notes Notes Receivable 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: when individuals and companies lend or borrow money, when amount of transaction and credit period exceed normal limits, or in settlement of accounts receivable Chapter 9-30 SO Compute the maturity date of and interest on notes 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 9-31 SO 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 9-32 Illustration 9-13 SO Compute the maturity date of and interest on notes receivable Recognizing Recognizing Notes Notes Receivable Receivable Illustration: Assuming that Calhoun Company wrote $1,000, two-month, 12% promissory note to settle an open account, Wilma Company makes the following entry for the receipt of the note Notes receivable Accounts receivable Chapter 9-33 1,000 1,000 SO 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 9-34 SO 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 9-35 SO 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 9-36 SO Describe the entries to record the disposition of notes receivable Notes Notes Receivable Receivable Honor of Notes Receivables Illustration: Assume that Betty Co lends Wayne Higley Inc $10,000 on June 1, accepting a five-month, 9% interestbearing note Assuming that Betty Co presents the note to Wayne Higley Inc on the maturity date, Betty Co.’s entry to record the collection is: Nov Chapter 9-37 Cash 10,375 Notes receivable 10,000 Interest revenue 375 SO Describe the entries to record the disposition of notes receivable Notes Notes Receivable Receivable Honor of Notes Receivables Illustration: If Betty Co prepares financial statements as of September 30, it must accrue interest Betty Co would make an adjusting entry to record months’ interest Sept 30 Interest receivable Interest revenue Chapter 9-38 300 300 SO Describe the entries to record the disposition of notes receivable Notes Notes Receivable Receivable Honor of Notes Receivables Illustration: The entry by Betty Co to record the honoring of the Wayne Higley Inc note on November is: Nov Cash Notes receivable Interest receivable Interest revenue Chapter 9-39 10,375 10,000 300 75 SO Describe the entries to record the disposition of notes receivable Notes Notes Receivable Receivable Dishonor of Notes Receivables Illustration: Assume that Wayne Higley Inc on November indicates that it cannot pay at the present time If Betty Co does expect eventual collection, it would make the following entry at the time the note is dishonored (assuming no previous accrual of interest) Nov Chapter 9-40 Accounts receivable 10,375 Notes receivable 10,000 Interest revenue 375 SO 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 9-41 Report bad debts expense and service charge expense as selling expenses Report interest revenue under “Other revenues and gains.” SO 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 9-42 SO 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 9-43 SO Explain the statement presentation and analysis of receivables Copyright Copyright “Copyright © 2009 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 9-44 .. .Chapter Accounting for Receivables Chapter 9-2 Accounting Principles, Ninth Edition Study Study Objectives Objectives Identify... analysis of receivables Chapter 9-3 Accounting Accounting for for Receivables Receivables Types of Receivables Accounts receivable Notes receivable Other receivables Chapter 9-4 Accounts Receivable... Receivable Other Other Receivables Receivables Chapter 9-5 SO Identify the different types of receivables Accounts Accounts Receivable Receivable Three accounting issues: Recognizing accounts receivable