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CHAPTER 8
ACCOUNTING FOR RECEIVABLES
LEARNING 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 DISPOSI-
TION 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 ANALY-
SIS OF RECEIVABLES.
CHAPTER REVIEW
Types of Receivables
2. Accounts receivable are amounts customers owe on account. Notes receivable are a written
employees, and income taxes refundable.
Recognizing Accounts Receivable
3. (L.O. 2) When a business sells merchandise to a customer on credit, Accounts Receivable is
debited and Sales Revenue is credited.
4. If a payment is received by a customer within the discount period, the following entry is made:
Cash ........................................................................................ XXX
Sales Discounts ....................................................................... XXX
Accounts Receivable ......................................................... XXX
Valuing Accounts Receivable
5. (L.O. 3) Companies record credit losses as debits to Bad Debt Expense (or Uncollectible
method and (b) the allowance method.
Direct Write-off Method for Uncollectible Accounts
6. Under the direct write-off method, bad debt losses are not anticipated and no allowance account
is used.
statement or to show the cash realizable value of the accounts receivable in the balance sheet.
insignificant.
7. The allowance method is required when bad debts are material in amount. Its essential features are:
Doubtful Accounts through an adjusting entry at the end of each period.
8. When there is a recovery of an account that has been written off as uncollectible, it is necessary to:
a. reverse the entry made when the account was written off, and
b. record the collection in the usual manner.
9. There are two bases that are used to determine the amount of expected uncollectibles. One is the
percentage-of-sales basis, and the other is the percentage-of-receivables basis.
Percentage-of-Sales Basis
10. Under the percentage-of-sales basis,
expected losses from uncollectible accounts.
b. The expected bad debt losses are determined by applying the percentage to the sales base
of the current period.
Percentage-of-Receivables Basis
11. Under the percentage-of-receivables basis,
existing balance in the allowance account.
Disposing Accounts Receivable
12. (L.O. 4) In order to accelerate the receipt of cash from receivables, owners frequently (1) sell to
13. A factor buys receivables from businesses for a fee and then collects the payments directly from
Cash ......................................................................................... XXX
Service Charge Expense .......................................................... XXX
Accounts Receivable .......................................................... XXX
14. Credit cards are frequently used by retailers because the retailer does not have to be concerned
price from the retailer.
Notes Receivable
15. (L.O. 5) A promissory note is a written promise to pay a specified amount of money on demand
is made is called the payee.
16. When the life of a note is expressed in terms of months, the due date is found by counting the
17. The basic formula for computing interest on an interest bearing note is:
Face Value
of Note
X
Annual
Interest
Rate
X
Time
in Terms
of One
Year
=
Interest
Recognizing Notes Receivable
18. (L.O. 6) Entries for notes receivable are required when the note is received and at maturity. To
June 1 Notes Receivable ...................................................... 2,000
Accounts Receivable ........................................... 2,000
Valuing Notes Receivable
19. (L.O. 7) Like accounts receivable, short-term notes receivable are reported at their cash (net)
realizable value and an Allowance for Doubtful Accounts is used.
Disposing of Notes Receivable
accrued, the entry is:
Sept. 1 Cash ......................................................................... 2,060
Notes Receivable ................................................. 2,000
Interest Revenue ................................................. 60
Statement Presentation and Analysis
21. (L.O. 9) In the balance sheet, short-term receivables are reported within the current assets
22. The accounts receivable turnover is computed by dividing net credit sales (net sales less cash
sales) by the average net accounts receivable during the year. The average collection period, a
variant of the accounts receivable turnover, is computed by dividing the accounts receivable
turnover into 365 days. The average collection period should not greatly exceed the credit term
period.
LECTURE OUTLINE
A. Types of Receivables.
1. Receivables refer to amounts due from individuals and companies that
are expected to be collected in cash.
2. Receivables are classified as:
30 to 60 days.
b. Notes receivable are a written promise (as evidenced by a formal
instrument) for amounts to be received. A note normally requires the
collection of interest and extends for time periods of 60 to 90 days or
longer.
taxes refundable.
B. Recognizing Accounts Receivable.
1. Accounts receivable are recognized when merchandise is sold on account,
as explained in Chapter 5.
2. Recognizing accounts receivable also occurs when a company sells mer-
to Sales Revenue.
b. If customers fail to pay within a specified period (usually 30 days), the
seller adds interest. The interest is debited to Accounts Receivable and
credited to Interest Revenue.
C. Valuing Accounts Receivable.
1. Valuing receivables involves reporting receivables at their cash (net) real-
izable value. Cash (net) realizable value is the net amount expected to be
received in cash.
2. Uncollectible Accounts Receivable.
(1) Companies estimate uncollectible accounts receivable and match
this estimate expense against revenues in the same
accounting period in which they record the revenues.
(2) Companies debit estimated uncollectibles to Bad Debt Expense
and credit them to Allowance for Doubtful Accounts (a contra-
period.
(3) When companies write off a specific account, they debit actual
uncollectibles to Allowance for Doubtful Accounts and credit that
amount to Accounts Receivable.
3. Occasionally, a company collects from a customer after it has written off
the account as uncollectible. The company
customer’s account.
b. Journalizes the collection in the usual manner.
4. Two bases are used to determine the amount of the expected uncollectibles:
a. Under the percentage-of-sales basis, management estimates what
of expenses with revenues (income statement viewpoint).
(2) When the company makes the adjusting entry, it disregards the
existing balance in Allowance for Doubtful Accounts.
b. Under the percentage-of-receivables basis, management estimates
realizable value (balance sheet viewpoint).
(2) An aging schedule is used to determine the required balance in
the allowance account.
5. The direct write-off method may be used for financial reporting purposes
only when bad debts are insignificant. Under this method:
used.
b. Bad debt losses are debited to Bad Debt Expense when they are
determined to be uncollectible.
c. This method does not attempt to match bad debt expense with sales
revenues or to show accounts receivable in the balance sheet at the
amount the company actually expects to receive.
D. Disposing of Accounts Receivable.
cash, which shortens the cash-to-cash operating cycle.
3. A sale may be made to a factor which is a finance company or bank that
buys receivables from businesses and then collects the payments directly
from the customers.
selling (factoring) the receivable.
b. The retailer generally considers sales from the use of national credit
card sales as cash sales. The retailer must pay to the bank that
