Chapter 8 Accounting for Receivables 高立翰

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1 Chapter 8 Accounting for Receivables 高立翰

2 Study Objectives 1. Identify the different types of receivables. 2. Explain how companies recognize accounts receivable. 3. Distinguish between the methods and bases companies use to value accounts receivable. 4. Describe the entries to record the disposition of accounts receivable. 5. Compute the maturity date of and interest on notes receivable. 6. Explain how companies recognize notes receivable. 7. Describe how companies value notes receivable. 8. Describe the entries to record the disposition of notes receivable. 9. Explain the statement presentation and analysis of receivables. 會 計 學 ( 一 ) 2

3 Accounting for Receivables Types of Receivables Accounts Receivable Notes Receivable Statement Presentation and Analysis 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 Presentation Analysis 會 計 學 ( 一 ) 3

4 Types of 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. Accounts Receivable Claims for which formal instruments of credit are issued as proof of debt. Notes Receivable Nontrade (interest, loans to officers, advances to employees, and income taxes refundable). Other Receivables 會 計 學 ( 一 ) 4

5 Accounts Receivable Three accounting issues: 1. Recognizing accounts receivable. 2. Valuing accounts receivable. 3. Disposing of accounts receivable 會 計 學 ( 一 ) 5

6 Recognizing Accounts Receivable Illustrations: Assume that Jordache Co. on July 1, 2011, 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. 1 Accounts receivable 1,000 Sales 1,000 Jul. 5 Jul. 11 On July 5, Polo returns merchandise worth $100 to Jordache Co. Sales returns and allowances 100 Accounts receivable 100 On July 11, Jordache receives payment from Polo Company for the balance due. Cash 882 Sales discounts ($900 x.02) Accounts receivable 會 計 學 ( 一 ) 6

7 Valuing Accounts Receivables (1/2) How to report Accounts Receivable? Reported as an asset on the statement of financial position. 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. 會 計 學 ( 一 ) 7

8 Valuing Accounts Receivables (2/2) 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. Allowance Method Losses are estimated: better matching. receivable stated at net realizable value. required by IFRS. 會 計 學 ( 一 ) 8

9 Direct Write-Off Method Direct Write-Off Method ( 直 接 沖 銷 法 ) for Uncollectible Accounts Under the direct write-off method, when a company determines a particular account to be uncollectible, it charges the loss to Bad Debts Expense. Assume, for example, that on December 12 Warden Co. writes off as uncollectible M. E. Doran s $200 balance. The entry is: Dec. 12 Bad debt expense 200 Accounts receivable 200 會 計 學 ( 一 ) 9

10 Allowance Method Allowance Method ( 備 抵 法 ) for Uncollectible Accounts 1. Companies estimate uncollectible accounts receivable. 2. To record estimated uncollectibles: Bad Debts Expense Allowance for Doubtful Accounts 3. To write off uncollectible accounts: Allowance for Doubtful Accounts Accounts Receivable Illustration Assume that Hampson Furniture has credit sales of $1,200,000 in Of this amount, $200,000 remains uncollected at December 31. The credit manager estimates that $12,000 of these sales will be uncollectible. The adjusting entry to record the estimated uncollectibles is xxx xxx xxx xxx Dec. 31 Bad debt expense 12,000 Allowance for doubtful accounts 12,000 會 計 學 ( 一 ) 10

11 Presentation of Allowance for Doubtful Accounts Illustration 8-2 Presentation of allowance for doubtful accounts 會 計 學 ( 一 ) 11

12 Recording the Write-offs (1/2) Illustration: Recording the Write-Off of an Uncollectible Account The financial vice-president of Hampson Furniture authorizes a write-off of the $500 balance owed by R.A.Ware on March 1, The entry to record the write-off is: Mar. 1 Allowance for doubtful accounts 500 Accounts receivable 500 Illustration 8-3 會 計 學 ( 一 ) 12

13 Recording the Write-offs (2/2) The write-off affects only statement of financial position accounts. Illustration 8-3 Illustration 8-4 會 計 學 ( 一 ) 13

14 Recovery of An Uncollectible Account Illustration On July 1, R. A. Ware pays the $500 amount that Hampson had written off on March 1. These are the entries: Jul. 1 Jul. 1 Accounts receivable 500 Allowance for doubtful accounts 500 Cash 500 Accounts receivable 500 會 計 學 ( 一 ) 14

15 Bases Used for Allowance Method Illustration 8-5 會 計 學 ( 一 ) 15

16 Illustration Dec. 31 Percentage-of-Sales Assume that Gonzalez Company elects to use the percentageof-sales basis. It concludes that 1% of net credit sales will become uncollectible. If net credit sales for 2011 are $800,000, the adjusting entry is: Bad debts expense 8,000 Allowance for doubtful accounts 8,000 * $800,000 x 1% Percentage-of-Sales ( 銷 售 百 分 比 法 ) Emphasizes the matching of expenses with revenues. When the company makes the adjusting entry, it disregards the existing balance in Allowance for Doubtful Accounts. * Illustration 8-6 會 計 學 ( 一 ) 16

17 Percentage-of-Receivables (1/2) Percentage-of-Receivables ( 應 收 帳 款 百 分 比 法 ) Aging Schedule ( 帳 齡 表 ) Illustration 8-7 Aging schedule 會 計 學 ( 一 ) 17

18 Percentage-of-Receivables (2/2) Illustration If the trial balance shows Allowance for Doubtful Accounts with a credit balance of $528, the company Dec. 31 will make the following adjusting entry. Bad debts expense 1,700 Allowance for doubtful accounts 1,700 * $2, * Illustration 8-8 Occasionally the allowance account will have a debit balance prior to adjustment. 會 計 學 ( 一 ) 18

19 Summary for Valuing Accounts Receivable Percentage of Sales approach: Focus on Bad debt expense estimate, existing balance in the allowance account is ignored for journal entry Method achieves a matching of expense and revenues. Percentage of Receivables approach: Accurate valuation of receivables on the statement of financial position. Method may also be applied using an aging schedule. Balance in allowance account considered for journal entry. 會 計 學 ( 一 ) 19

20 Disposing of Accounts Receivable (1/2) Companies sell receivables for two major reasons: 1. Receivables may be the only reasonable source of cash. 2. Billing and collection are often time-consuming and costly Sale of Receivables: Factor ( 承 購 / 貼 現 ) Buys receivables from businesses and then collects the payments directly from the customers. Typically charges a commission to the company that is selling the receivables. Fee ranges from 1-3% of the amount of receivables purchased. 會 計 學 ( 一 ) 20

21 Disposing of Accounts Receivable (2/2) Illustration Assume that Hendredon Furniture factors $600,000 of receivables to Federal Factors. Federal Factors assesses a service charge of 2% of the amount of receivables sold. The journal entry to record the sale by Hendredon Furniture is as follows. Cash 588,000 Service charge expense 12,000 Accounts receivable 600,000 ($600,000 x 2% = $12,000) 會 計 學 ( 一 ) 21

22 Credit Card Sales Retailer considers credit card sales the same as cash sales. Retailer must pay card issuer a fee of 2 to 4% for processing the transactions. Retailer records sale in a similar manner as checks deposited from cash sale. Illustration Anita Ferreri purchases $1,000 of compact discs for her restaurant from Karen Kerr Music Co., using her Visa First Bank Card. First Bank charges a service fee of 3%. The entry to record this transaction by Karen Kerr Music is as follows. Cash 970 Service charge expense 30 Sales 1,000 會 計 學 ( 一 ) 22

23 Notes Receivable (1/) A promissory note ( 本 票 ) 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. 會 計 學 ( 一 ) 23

24 Notes Receivable (2/) To the Payee, the promissory note is a note receivable. To the Maker, the promissory note is a note payable. Illustration 8-10 會 計 學 ( 一 ) 24

25 Determining the Maturity Date Note expressed in terms of Months Days Terms of Note (Issued on 7/17) 60 days July 18 July days August 1 August days 45 days September 1 September days Maturity date: September 15 Computing interest Illustration 8-13 Illustration 8-14 會 計 學 ( 一 ) 25

26 Recognizing and Valuing Notes Receivable Illustration: Recognizing Notes Receivable 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 1,000 Accounts receivable 1,000 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. 會 計 學 ( 一 ) 26

27 Disposing of Notes Receivable Conditions: 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. Honor of Notes Receivable ( 兌 現 ) A note is honored when its maker pays it in full at its maturity date. Illustration: p.362 Dishonor of Notes Receivable ( 未 兌 現 ) A dishonored note is not paid in full at maturity. A dishonored note receivable is no longer negotiable. Illustration: p. 363 會 計 學 ( 一 ) 27

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