Chapter 09 – Accounting for Receivables
Chapter 9
Accounting for Receivables
QUESTIONS
1. When customers use credit cards, the selling companies can avoid having to directly
evaluate the credit standing of their customers. They also avoid the risk of bad debts and
often are paid cash from the credit card company more quickly than if customers were
granted credit directly. Moreover, they hope to increase sales, and net income, from the
added convenience to buyers.
2. Revenues and expenses usually are not matched under the direct write-off method because
the revenues recorded from the uncollectible accounts often appear on the income statement
of one period while the bad debts expenses of those revenues appear on the income
statement of a later period when the account(s) is known to be uncollectible.
3. The accounting constraint of materiality suggests that the requirements of accounting
standards can be ignored if their effect on the financial statements is unimportant to their
users’ business decisions.
4. Creditors prefer notes receivable to accounts receivable because the notes can be more
easily converted into cash before they are due by discounting (or selling) them to a financial
institution. Also, a note represents a clear written acknowledgment by the debtor of both the
debt and its amount and terms.
5. Writing off a bad debt against the Allowance account does not reduce the estimated
realizable value of a company’s accounts receivable because the write-off reduces the
balances of both Accounts Receivable and the Allowance for Doubtful Accounts by equal
amounts. This means the difference between them (called estimated realizable value)
remains the same.
6. The adjusted balances of Bad Debts Expense and Allowance for Doubtful Accounts are
virtually never equal because the expense amount reflects only the events of the current
period, and the allowance is the accumulated result of events over a number of prior periods.
The only way that they could be equal would be if write-offs during the prior period exactly
equaled the beginning balance of the Allowance account.
7. Apple lists its accounts receivable as “Accounts receivables, less allowances of $99 and $98,
respectively” ($ in millions) on its balance sheet. This means that Apple’s allowance is $99
million as of September 28, 2013, and $98 million as of September 29, 2012.
8. Google uses the allowance method to account for doubtful accounts as evidenced by the
receivables being reduced by an allowance of $631 million on the December 31, 2013,
balance sheet. The realizable value of accounts receivable as of December 31, 2013, is its
net amount of $8,882 million.
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Chapter 09 – Accounting for Receivables
9. Samsung’s lists its accounts receivable as “Trade and other receivables.” Samsung reports
accounts receivable (in KRW millions) of ₩27,875,934.
10. Samsung lists its accounts receivable as “Trade and other receivables” in current assets.
There is no allowance listed on the face of the balance sheet. Students might follow up and
see that in its Note 10 – Trade and other receivables, Samsung reports using the allowance
method and has an allowance of ₩287,721 (₩267,675 million for trade receivables and
₩20,046 for non-trade receivables) at December 31, 2013. Per Note 10, Samsung also reports
that it has noncurrent accounts receivable of ₩60,181 million (₩36,024 million for trade
receivables and ₩24,157 for non-trade receivables) at December 31, 2013, which is reported
in noncurrent assets.
QUICK STUDIES
Quick Study 9-1 (15 minutes)
1. Cash………………………………………………………………….. 19,000
Credit Card Expense*………………………………………….. 1,000
Sales…………………………………………………………….. 20,000
To record credit card sales less fees.
*$20,000 x 5%
Cost of Goods Sold…………………………………………….. 15,000
Merchandise Inventory………………………………….. 15,000
To record cost of sales.
2. Accounts Receivable—Credit Card Cos……………….. 4,800
Credit Card Expense*………………………………………….. 200
Sales…………………………………………………………….. 5,000
To record credit card sales less fees.
*$5,000 x 4%
Cost of Goods Sold…………………………………………….. 3,000
Merchandise Inventory………………………………….. 3,000
To record cost of sales.
5 days later
Cash………………………………………………………………….. 4,800
Accounts Receivable—Credit Card Cos………….. 4,800
To record cash receipts.
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Chapter 09 – Accounting for Receivables
Quick Study 9-2 (10 minutes)
Oct. 1 Bad Debts Expense…………………………………………….50,000
Accounts Receivable—P. Moore……………………. 50,000
To write off an account.
Quick Study 9-3 (10 minutes)
Oct. 30 Accounts Receivable—P.Moore…………………………..50,000
Bad Debts Expense………………………………………. 50,000
To reinstate an account previously written off.
Oct. 30 Cash………………………………………………………………….50,000
Accounts Receivable— P. Moore…………………… 50,000
To record cash received on account.
Quick Study 9-4 (15 minutes)
1. direct write-off method
2. allowance method
3. allowance method
4. direct write-off method
5. direct write-off method
6. allowance method
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Chapter 09 – Accounting for Receivables
Quick Study 9-5 (15 minutes)
1.
Jan. 31 Allowance for Doubtful Accounts……………………… 800
Accounts Receivable—C. Green………………….. 800
To write off account.
2.
Mar. 9 Accounts Receivable—C. Green*………………………. 300
Allowance for Doubtful Accounts………………… 300
To reinstate a written off account.
*If there is a strong belief that the remaining $500 will be
collected soon, then the full $800 balance can be reinstated.
9 Cash………………………………………………………………. 300
Accounts Receivable—C. Green………………….. 300
To record payment on a receivable.
Quick Study 9-6 (15 minutes)
1.
Dec. 31 Bad Debts Expense……………………………………….. 885
Allowance for Doubtful Accounts……………… 885
To record estimate of uncollectibles.
Desired balance in allowance = $99,000 x 1.5%= $1,485 cr.
Adjustment required = $1,485 – $600 cr. = $885
2. Desired balance in allowance = $1,485 (part 1)
Adjustment required = $1,485 cr. + $300 dr. = $1,785
Quick Study 9-7 (15 minutes)
Dec. 31 Bad Debts Expense……………………………………….. 1,400
Allowance for Doubtful Accounts……………… 1,400
To record estimate of uncollectibles
($280,000 x 0.5%).
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Chapter 09 – Accounting for Receivables
Quick Study 9-8 (15 minutes)
1. Maturity date is October 31, which is computed as follows:
Days in August……………………………………………………… 31
Minus the date of the note……………………………………… 2
Days remaining in August……………………………………… 29
Add days in September………………………………………….. 30
Add days in October to equal 90 days (October 31)…. 31
Period of the note in days………………………………………. 90
2.
Aug. 2 Notes Receivable—R. Albany…………………….. 6,000
Accounts Receivable—R. Albany………….. 6,000
To record receipt of note on account.
Quick Study 9-9 (10 minutes)
Oct. 31 Cash………………………………………………………… 6,180
Notes Receivable—R. Albany……………….. 6,000
Interest Revenue………………………………….. 180
To record cash received on note plus
interest ($6,000 x 12% x 90/360).
Quick Study 9-10 (15 minutes)
Dec. 31 Interest Receivable……………………………………. 50
Interest Revenue………………………………….. 50
To record the year-end adjustment for
interest earned ($10,000 x 6% x 30/360).
Maturity date
Jan. 15 Cash………………………………………………………… 10,075
Interest Receivable………………………………. 50
Interest Revenue………………………………….. 25
Notes Receivable…………………………………. 10,000
To record cash received on note plus interest.
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Chapter 09 – Accounting for Receivables
Quick Study 9-11 (10 minutes)
May 1 Cash…………………………………………………………….121,875
Factoring Fee Expense*……………………………….. 3,125
Accounts Receivable………………………………. 125,000
To record sale of receivable.
*($125,000 x 0.025)
Quick Study 9-12 (10 minutes)
Accounts receivable turnover =
=
= 5.9 times
Interpretation: An accounts receivable turnover of 5.9 implies that the
company’s average accounts receivable balance is converted into cash
5.9 times per year. The 5.9 turnover is about 21% lower than the average
turnover of 7.5 for its competitors. The company needs to identify the
cause of this poor performance and rectify the situation to at least
compete at the average level.
Quick Study 9-13 (10 minutes)
a. Both U.S. GAAP and IFRS have similar asset criteria that apply to
recognition of receivables. Further, receivables that arise from
revenue-generating activities are subject to broadly similar criteria for
U.S. GAAP and IFRS. Specifically, both refer to the realization principle
and an earnings process. However, while these criteria are broadly
similar, differences do exist, and they arise mainly from
industry-specific guidance under U.S. GAAP, which is very limited under
IFRS.
a
b. Both U.S. GAAP and IFRS require receivables to be reported net of
estimated uncollectibles. Further, both systems require that the expense
for estimated uncollectibles be recorded in the same period when
revenues from those receivables are recorded. This means that in the
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Net sales
Average accounts receivable
$861,105
($153,400 + $138,500) / 2
Chapter 09 – Accounting for Receivables
case of accounts receivable, both U.S. GAAP and IFRS require the
allowance method for uncollectibles (unless immaterial).
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Chapter 09 – Accounting for Receivables
EXERCISES
Exercise 9-1 (25 minutes)
Part 1
GENERAL LEDGER
Accounts Receivable Sales
Sales Returns and
Allowances
Nov. 5 4,615 Nov. 21 209 Nov. 5 4,615 Nov. 21 209
10 1,350 10 1,350
13 832 13 832
30 2,713 30 2,713
Bal. 9,301
ACCOUNTS RECEIVABLE LEDGER
Ski Shop Welcome Enterprises Zia Natara
Nov. 5 4,615 Nov. 10 1,350 Nov. 13 832 Nov. 21 209
30 2,713
Bal. 7,328 Bal. 623
Part 2
Vail Company
Schedule of Accounts Receivable
November 30, 2015
Ski Shop……………………………………………………………………. $7,328
Welcome Enterprises………………………………………………….. 1,350
Zia Natara………………………………………………………………….. 623
Total
…………………………………………………………………………..
$9,301
Comparison: The total of the Schedule of Accounts Receivable ($9,301) is
proved with the balance of the Accounts Receivable controlling T-account
from Part 1 ($9,301).
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Chapter 09 – Accounting for Receivables
Exercise 9-2 (20 minutes)
Apr. 8 Cash…………………………………………………………….. 8,064
Credit Card Expense*…………………………………….. 336
Sales………………………………………………………. 8,400
To record credit card sales less 4% fee.
*($8,400 x .04)
8 Cost of Goods Sold……………………………………….. 6,000
Merchandise Inventory…………………………….. 6,000
To record cost of sales.
12 Accounts Receivable—Continental………………… 5,460
Credit Card Expense*…………………………………….. 140
Sales………………………………………………………. 5,600
To record credit card sales less 2.5% fee.
*($5,600 x .025)
12 Cost of Goods Sold……………………………………….. 3,500
Merchandise Inventory…………………………….. 3,500
To record cost of sales.
20 Cash…………………………………………………………….. 5,460
Accounts Receivable—Continental…………….. 5,460
To record cash received on credit sales less fees.
Exercise 9-3 (20 minutes)
March 11 Bad Debts Expense…………………………………………….45,000
Accounts Receivable—Lester Co…………………… 45,000
To write off an account.
March 29 Accounts Receivable—Lester Co………………………..45,000
Bad Debts Expense………………………………………. 45,000
To reinstate an account previously written off.
March 29 Cash………………………………………………………………….45,000
Accounts Receivable—Lester Co…………………… 45,000
To record cash received on account.
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Chapter 09 – Accounting for Receivables
Exercise 9-4 (20 minutes)
Dec. 31 Bad Debts Expense……………………………………………. 4,875
Allowance for Doubtful Accounts………………….. 4,875
To record estimated bad debts expense
(.005 x $975,000).
Feb. 1 Allowance for Doubtful Accounts……………………….. 580
Accounts Receivable—P. Park………………………. 580
To write off an account.
June 5 Accounts Receivable—P. Park……………………………. 580
Allowance for Doubtful Accounts…………………… 580
To reinstate an account.
June 5 Cash…………………………………………………………………. 580
Accounts Receivable—P. Park………………………. 580
To record cash received on account.
Exercise 9-5 (15 minutes)
a.
Dec. 31 Bad Debts Expense……………………………………………. 685
Allowance for Doubtful Accounts*…………………. 685
To record estimated bad debts expense.
*Unadjusted balance = $ 415 credit
Estimated balance ($55,000 x .02) = 1,100 credit
Required adjustment = $ 685 credit
b.
Dec. 31 Bad Debts Expense…………………………………………….1,391
Allowance for Doubtful Accounts**…………………. 1,391
To record estimated bad debts expense.
** Unadjusted balance = $ 291 debit
Estimated balance ($55,000 x .02) = 1,100 credit
Required adjustment = $1,391 credit
Exercise 9-6 (30 minutes)
a. Computation of the estimated balance of the allowance for uncollectibles:
Not due: $396,000 x 0.01 = $ 3,960
1 to 30: 90,000 x 0.02 = 1,800
31 to 60: 36,000 x 0.05 = 1,800
61 to 90: 18,000 x 0.07 = 1,260
Over 90: 30,000 x 0.10 = 3,000
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Chapter 09 – Accounting for Receivables
$11,820 credit
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Chapter 09 – Accounting for Receivables
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