ACCOUNTING ACROSS THE ORGANIZATION
Assume you use a Visa card to purchase some new ties at Nordstrom. Visa acts
as the clearing agent for the transaction and transfers funds from the bank that
transactions on its reconciliation?
E. Notes Receivable.
1. A promissory note is a written promise to pay a specified amount of money
be used:
a. When individuals and companies lend or borrow money.
normal limits.
c. In settlement of accounts receivable.
2. Determining the maturity date. When the life of a note is expressed in
In counting, omit the date the note is issued but include the due date.
3. Computing interest. The formula for computing interest is face value of
4. Recognizing notes receivable occurs when the note is received. The
Receivable and crediting Accounts Receivable.
5. Valuing short-term notes receivable involves reporting notes receivable at
their cash (net) realizable value.
Accounts.
b. The estimations involved in determining cash realizable value and
similar.
6. Disposing of notes receivable involves the honoring (paying) or dishonoring
(not paying) of the note at maturity.
a. A note is honored when its maker pays it in full at its maturity date.
If interest has been accrued prior to maturity, Interest Receivable is
credited for the accrued interest at maturity.
b. A dishonored (defaulted) note is a note that is not paid in full at
maturity. The entry to record the dishonor of a note depends on
whether the payee expects eventual collection. If the debtor is
expected to pay, Accounts Receivable is debited for the face value
of the note plus accrued interest. If there is no hope of collection, the
payee would write off the face value of the note by debiting
Allowance for Doubtful Accounts.
F. Statement Presentation and Analysis.
2. Short-term receivables appear in the current assets section of the balance
allowance for doubtful accounts.
3. In a multiple-step income statement, companies report bad debt ex-
gains” in the nonoperating activities section.
4. Investors and managers evaluate accounts receivable for liquidity by
computing the accounts receivable turnover and an average collection
period.
a. The accounts receivable turnover is computed by dividing net credit
sales by the average net accounts receivable during the year. This
ratio measures the number of times, on average, the company
collects accounts receivable during the period.
b. The average collection period is computed by dividing the accounts
receivable turnover into 365 days. Companies frequently use the
average collection period to assess the effectiveness of a company’s
credit and collection policies.
A Look at IFRS
The basic accounting and reporting issues related to recognition and measurement
of receivables, such as the use of allowance accounts, how to record discounts,
use of the allowance method to account for bad debts, and factoring, are
essentially the same between IFRS and GAAP.
KEY POINTS
these allowances as provisions.
Although IFRS implies that receivables with different characteristics should
be reported separately, there is no standard that mandates this segregation.
The FASB and IASB have worked to implement fair value measurement (the
amount they currently could be sold for) for financial instruments. Both
receivables are impaired. First, a company should look at specific loans
and receivables to determine whether they are impaired. Then, the loans
and receivables as a group should be evaluated for impairment. GAAP
does not prescribe a similar two-tiered approach.
GAAP does not.
LOOKING TO THE FUTURE
some financial instruments are recorded at fair value, but other financial assets,
such as loans and receivables, can be accounted for at amortized cost if certain
criteria are met. Critics say that this can result in two companies with identical
securities accounting for those securities in different ways. A proposal by the
standard. In his opinion, it was extremely likely that it would be changed before
2015, the mandatory adoption date of the standard.
20 MINUTE QUIZ
Circle the correct answer.
True/False
True False
2. Financing charges added to a customer’s credit card balance with a retailer are recorded
True False
3. The allowance method for uncollectible accounts violates the expense recognition
principle.
True False
4. An aging schedule shows a required balance in Allowance for Doubtful Accounts of $8,600.
adjustment amount is $6,600.
True False
5. Sale of receivables to a factor may result in a debit to Service Charge Expense at the time
of sale.
True False
True False
7. The interest due at maturity of a two-month, 8%, $800 note is computed by multiplying
True False
8. The maturity value of a $5,000 note is $5,300. If $180 of the interest has been accrued
a credit to Interest Revenue for $120.
True False
9. The principal amount of a 9%, 3-year, note receivable is $300,000 and is dated January 1,
True False
10. Short-term receivables are reported in the balance sheet immediately below cash.
True False
Multiple Choice
1. The sale of merchandise by a company on its own credit card may result in a
a. debit to Service Charge Expense.
b. debit to Interest Expense.
c. credit to Interest Revenue.
d. credit to Cash.
2. A company has net credit sales of $600,000 for the year and it estimates that uncollectible
a. $12,000.
b. $13,000.
c. $11,000.
d. some other amount.
3. Under the allowance method, the entry to write-off an uncollectible account results in
a debit to
d. Allowance for Doubtful Accounts and a credit to Accounts Receivable.
4. A company sells $400,000 of accounts receivable to a factor for cash less a 2% service
a. debit to Interest Expense for $8,000.
b. debit to Cash for $392,000.
c. debit to Service Charge Expense for $8,000.
d. credit to Accounts Receivable for $400,000.
5. When an interest-bearing note is dishonored at maturity and ultimate collection is expected,
the entry for the dishonoring, assuming no previous accrual of interest should include
ANSWERS TO QUIZ
True/False
Multiple Choice