Financial and Managerial Accounting, 9th Edition
7-1
CHAPTER 7
ACCOUNTING FOR RECEIVABLES
Related Assignment Materials
Student Learning Objectives
Questions
Quick
Studies*
Exercises*
Problems*
AA, BTN, DA
Conceptual objectives:
C1. Describe accounts receivable and
how they occur and are recorded.
1
7-1
7-1, 7-2, 7-3
7-1, 7-4
AA 7-3, BTN 7-3,
BTN 7-5
and the recording of its existence.
C3. Explain how receivables can be
converted to cash before maturity.
7-20
7-22
7-5, GL 7-1
Analytical objectives:
A1 Compute accounts receivable
turnover and use it to help assess
financial condition.
7-21
7-17, 7-23
AA 7-1, AA 7-2,
AA 7-3
Procedural objectives:
P1. Apply the direct write-off method
to accounts receivable.
2, 3
7-2, 7-3, 7-4,
7-5
7-4
SP
7-7, 7-16,
7-20
7-7, 7-8,
7-4, SP,
ES
BTN 7-2, BTN 7-4
BTN 7-2, BTN 7-3,
BTN 7-4
*See additional information on next page that pertains to these quick studies, exercises, and problems.
SP refers to the Serial Problem
AA refers to Accounting Analysis
Note Terminology
1:34
Maturity Dates
1:47
Interest Computation
1:45
Recording Notes Receivable – From Credit Sales
0:25
Recording Notes Receivable – From Past Due Accounts Receivable
1:02
C3
Explain how receivables can be converted to cash before maturity.
Pledging Receivables
1:02
Financial and Managerial Accounting, 9th Edition
Additional Information on Related Assignment Material
See Chapter 1 of the Instructor’s Resource Manual for more information on materials for this text available in
Connect.
Connect
Available on the instructor’s course-specific website, Connect:
• All numerical Quick Studies, all Exercises and Problems Set A.
Hints/Guided Examples
Please note that the Guided Examples are labeled as “Hints” in Connect assignments. The animated PowerPoints without
Need-to-Know Videos
LO
Need–to-Know
Title
Time
C1
7-1
Credit Card Sales
2:07
P1
7-2
Entries under Direct Write-Off Method
1:08
P2
7-3
Entries under Allowance Method
1:51
P3
7-4
Estimating Bad Debts
6:34
7-5
Honoring and Dishonoring Notes
2:46
Transactions; Estimating Bad Debts
Req. 1
5:44
Req. 2
2:17
Concept Overview Videos
LO
Title
Time
C1
Describe accounts receivable and how they occur and are recorded.
Accounts Receivable Ledger
2:35
Sales on Bank Credit Cards
1:47
Sales on Bank Credit Cards – Journal Entry
0:42
Financial and Managerial Accounting, 9th Edition
7-3
A1
Compute accounts receivable turnover and use it to help assess financial condition.
Accounts Receivable Turnover
0:33
Accounts Receivable Turnover — Illustration
1:40
P1
Apply the direct write-off method to accounts receivable.
Direct Write-Off Method – Writing Off Bad Debts
1:38
Direct Write-Off Method — Recovering a Bad Debt
1:17
Using the Direct Write-Off Method
0:31
P2
Apply the allowance method to accounts receivable.
Allowance Method – Recording Bad Debts Expense
1:32
Allowance Method – Recording Bad Debts – Illustration
2:12
Allowance Method – Writing Off Bad Debts
1:23
Allowance Method – Recovering a Bad Debt
1:15
P3
Estimate uncollectibles based on sales and accounts receivable.
Est. Bad Debts – Percent of Sales Method
1:53
Est. Bad Debts – A/R Method
1:37
Est. Bad Debts – A/R Method – Percent of Receivables Method
1:07
Est. Bad Debts – A/R Method – Aging of Receivables Method
1:59
Est. Bad Debts – A/R Method – Debit Balance
1:12
P4
Record the honoring and dishonoring of a note and adjustments for interest.
Valuing and Settling Notes—Recording an Honored Note
1:14
Valuing and Settling Notes—Recording a Dishonored Note
1:22
Recording End-of-Period Adjusting Entry
1:16
Synopsis of Chapter Revisions
NEW opener—Credit Karma and entrepreneurial assignment.
Removed coverage of store credit cards as nearly all are now managed by banks and accounted for as bank credit cards.
New Analytics Insight on predicting bad debts.
Excel demos to compute maturity dates.
Financial and Managerial Accounting, 9th Edition
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Chapter Outline
I. Valuing Accounts Receivable—Amounts due from customers for credit sales. They occur when a
customer uses credit cards and when a company gives credit directly to customers.
A. Sales on Credit
1. Increase (debit) Accounts Receivable for the full amount of the sale and increase (credit) Sales.
a. The General Ledger continues to keep a single (total) Accounts Receivable Account. (control
B. Sales on Bank Credit Cards
1. Credit card sales (Examples: Visa, Mastercard, or American Express).
a. Advantages: (1) eliminates the company’s need to evaluate each customer’s credit standing
II. Direct Write-Off Method—accounts of customers who do not pay are uncollectible accounts,
commonly called bad debts. Two methods are used to account for uncollectible accounts:
1. direct write-off method
2. allowance method
A. Recording and Writing Off Bad Debts: record loss when it is determined to be uncollectible. Debit
III. Allowance Method—matches the estimated loss from uncollectibles against the sales they helped
produce.
1. Use estimated losses because when a sale occurs, we do not know which customers will not
pay.
Financial and Managerial Accounting, 9th Edition
b. Reports accounts receivable on the balance sheet at the estimated amount to be collected.
A. Recording Bad Debts Expense: at end of each accounting period, bad debts expense is estimated
and recorded with an adjusting entry.
B. Writing off Bad Debt:
1. When specific accounts become uncollectible, they are written off against the Allowance for
D. Recovering a Bad Debt—if an amount that was written off is later collected, two entries are made.
1. The first entry reverses the write-off and reinstates the customer’s account.
2. The second entry records the collection of the reinstated account.
IV. Estimating Bad Debts—two methods:
A. Percent of sales method or income statement method—assumes that a percent of credit sales for
the period is uncollectible. Bad debts expense is computed as a percentage of sales for the period.
(% x sales = Bad Debt Expense)
B. Percent of accounts receivables method, a balance sheet method—assumes that a percent of a
company’s receivables is uncollectible. Desired credit balance in Allowance for Doubtful
Accounts is computed: (% x AR = Desired balance in Allowance for Doubtful Accounts).
Estimated balance for allowance account obtained as:
necessary to bring allowance account to a credit balance equivalent to the estimated
uncollectibles.
V. Notes Receivable—Promissory note that is a written promise to pay a specified amount (principal)
usually with interest, either on demand or on a stated future date. Promissory notes are notes payable to
the maker (person promising to pay) and notes receivable to the payee (person to be paid). Interest is the
charge for using money until the due date.
A. Computing Maturity and Interest
1. Maturity date is the date the note must be repaid.
Financial and Managerial Accounting, 9th Edition
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B. Recording Notes Receivable—debit Notes Receivable for principal or face amount of note. Credit
will vary; depends on reason note is received. Interest is not recorded until earned.
C. Valuing and Settling Notes
1. Recording an Honored Note—debit Cash for maturity value (face value and interest), credit Note
Receivable for face value and credit Interest Revenue for the interest amount.
D. Disposal of Receivables—Companies can convert receivables to cash before they are due. Reasons
for this include the need for cash or do not want to be involved in collection activities.
1. Selling Receivables
a. Buyer, called a factor, charges the seller a factoring fee and then collects the receivables as
E. Pledging Receivables
1. Company borrows money by pledging its receivables as security.
2. Borrower retains ownership of the receivables.
VI. Decision Analysis—Accounts Receivable Turnover
A. Measures both the quality (likeliness of collecting) and liquidity (speed of collection) of accounts
receivable,
Financial and Managerial Accounting, 9th Edition
7-7
Chapter 7 Alternate Demonstration Problem
At the end of the year, the M. I. Wright Company showed the following
selected account balances:
Sales (all on credit) ………………………………………………………………….$300,000
Required:
1. Assume the company estimates that 1% of all credit sales will not be
collected.
2. Assume the company estimates that 5% of its accounts receivable
will never be collected.
3. Under assumptions 1 and 2 above, give the proper journal entries for
the following events.
Financial and Managerial Accounting, 9th Edition
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Chapter 7 Solution: Alternate Demonstration Problem
1a. Bad Debts Expense …………………………………… 3,000
Allowance for Doubtful Accounts ………….. 3,000
($ 300,000 X 1 %)
2b. Accounts Receivable …………………………………$800,000
Less: Allowance for Doubtful Accounts …….. 40,000
Estimated Realizable A/R ………………………….$760,000
3. Both assumptions 1 and 2 above represent the allowance method of
accounting for uncollectibles. The only difference is in the approach
June 3 Allowance for Doubtful Accounts …………. 500
Accounts Receivable, John Shifty……. 500