Accounting Chapter 8 Homework Receivables Objective Describe The Reporting Receivables

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subject Authors Carl S. Warren, James M. Reeve, Jonathan Duchac

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Chapter 8 Receivables 157
SUGGESTED APPROACH
After the students have covered the material on how to determine the uncollectible values using both the
allowance method and the direct write-off method, it is helpful to summarize the differences between the
two. The allowance method is the preferred method and the only GAAP-approved method in most
written-off when it is determined that they cannot be collected. Thus, there is no need for either
Allowance for Doubtful Accounts or the associated adjusting entry at the end of the accounting period.
However, the direct write-off method does not comply with the matching principle and, therefore, is not
suitable for use in most cases.
OBJECTIVE 6
Describe the accounting for notes receivable.
SYNOPSIS
A note has advantages over an accounts receivable in that the note holder has a stronger legal claim.
When a business has a note, the debtor has usually signed the note and agreed to pay, with interest, the
amount due on a specific date. Exhibit 6 displays a promissory note, and Exhibit 7 demonstrates how to
determine the due date of the note. On the due date, the maker of the note must pay the maturity value to
the payee. A promissory note may be received by a business when a customer cannot pay his account
Key Terms and Definitions
Dishonored Note Receivable - A note that the maker fails to pay on the due date.
Maturity Value - The amount that is due at the maturity or due date of a note.
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(1) the due date of a note, (2) the interest on a note, and (3) the maturity value of a note. These objectives
can be covered effectively by demonstrating each calculation and asking your students to practice the
same technique through a group learning activity.
One advantage of a note receivable is that it represents a stronger legal claim than an accounts receivable.
Because the debt and repayment terms are acknowledged by the debtor’s signature, a note will hold up
better in court if disputed. Since notes are a stronger legal document, it is a good idea to ask a credit
customer to sign a note receivable (rather than allowing him or her to buy on an open account) if the
following conditions exist:
2. The purchase involves a large sum of money.
3. The customer is asking for a time extension on an account receivable.
DEMONSTRATION PROBLEMDetermining the Due Date of a Note
To determine the due date of a note, start with the number of days in the term of the note. Next, subtract
the number of days in each month that pass until you reach 30 or less. That number represents the due
date of the note.
Number of days left 39
Days that pass in June 30
Number of days left 9 9 < 31; therefore, the due date is July 9
Usually, the only aspect of this calculation that troubles students is determining the number of days that
pass in the month the note is signed. Remind students that interest is not charged on the date the note is
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payment on a note one day late without charging interest or a penalty may set a precedent that will make
it difficult to collect a note on time in the future.
DEMONSTRATION PROBLEMCalculating Interest and Maturity Value of a
Note
The formula for calculating interest is as follows:
Interest = Face Amount (or Principal) Rate Time
Because interest rates are stated in annual percentages, the formula must include a time period if a note is
outstanding for less than one year. The time period is stated either in terms of months (e.g., 9/12 for 9
You will also need to demonstrate the calculation of maturity value. The maturity value of a note is the
amount that is due to be paid on the maturity date. The formula is:
Maturity Value = Face Amount + Interest
The maturity value on the $10,000, 120-day, 12 percent note is calculated as follows:
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160 Chapter 8 Receivables
GROUP LEARNING ACTIVITYDetermining Due Date, Interest, and
Maturity Value of a Note
TM 8-5 provides information on two promissory notes. Divide the class into small groups and ask your
students to determine the due date, interest, and maturity value for each. TM 8-6 shows the solution to
this exercise.
Coverage of journalizing related to accounting for notes receivable transactions should begin with the
entries to record acceptance and collection of notes. A Demonstration Problem for that purpose follows.
Your students should find the entries to record the acceptance and collection of notes to be relatively
DEMONSTRATION PROBLEMJournal Entries for Notes Receivable
Transactions
Two reasons for accepting a note from a customer are (1) as a promise of payment on a credit purchase
and (2) to grant a time extension on an amount owed on an open account. In both cases, the customer’s
note is recorded in a notes receivable account.
Use the following transactions for Joy’s TV and Electronics to demonstrate journal entries for your class:
1. June 1: Sold a $2,000 big-screen TV to a customer. The customer was asked to sign a 120-
2. Sept. 29: Received payment on the $2,000, 120-day, 12 percent note.
3. Oct. 1: Granted a 60-day time extension to S. Greene, who owed $1,000 on account. Ms.
4. Nov. 30: Received payment on the $1,000, 60-day, 15 percent note from S. Greene.
Nov. 30 Cash………………………………….. 1,025
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5. Dec. 1: Granted a 90-day time extension to J. Smith, who owed $800 on an account. Mr. Smith
signed a 90-day, 15 percent note for the amount owed.
6. Dec. 31: Recorded interest earned on the note from J. Smith.
7. Mar 1: Received payment on the $800, 90-day, 15 percent note from J. Smith.
Mar. 1 Cash ………………………………… 1,030
Notes Receivable……………. 1,000
Interest Receivable………….. 10
Interest Revenue……………. 20
DEMONSTRATION PROBLEMDishonored Note
If the maker of a note fails to pay the note when it is due, the note has been dishonored. The total amount
due on the dishonored note is transferred back to the customer’s accounts receivable account. This places
a record of the dishonored note in the customer’s account, making it visible should the customer attempt
to purchase additional merchandise on credit.
On October 1, Joy’s TV and Electronics accepts a $1,500, 60 day, 10 percent note from R. Sams as a time
extension on an open account. The note is dishonored on its due date, November 30.
Entry to record acceptance of the note on October 1:
Oct. 1 Notes Receivable…………………….. 1,500
Accounts ReceivableR. Sams 1,500
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162 Chapter 8 Receivables
OBJECTIVE 7
Describe the reporting of receivables on the balance sheet.
SYNOPSIS
Receivables expected to be realized within a year are reported on the balance sheet as a current asset.
Assets are recorded in order of liquidity, beginning with cash. Some businesses report their receivables at
the net realizable value.
SUGGESTED APPROACH
GROUP LEARNING ACTIVITYCurrent Assets on the Balance Sheet
TM 8-7 shows information taken from the accounting records of Leder Hardware. Divide your class into
small groups and ask them to prepare the Current Assets section of the balance sheet. Emphasize that
current assets are normally presented in order of their liquidity on the balance sheet. TM 8-8 contains the
solution.
OBJECTIVE 8
Describe and illustrate the use of accounts receivable turnover and number of days’ sales in
receivables to evaluate a company’s efficiency in collecting its receivables.
SYNOPSIS
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Chapter 8 Receivables 163
Key Terms and Definitions
Accounts Receivable Turnover - The relationship between sales and accounts receivable,
computed by dividing the sales by the average net accounts receivable; measures how frequently
during the year the accounts receivable are being converted to cash.
Relevant Example Exercises and Exhibits
Example Exercise 8-6 Accounts Receivable Turnover and Number of Days’ Sales in Receivables
SUGGESTED APPROACH
The ratios to compute accounts receivable turnover and average days’ sales in receivables are used to
evaluate the efficiency in collecting receivables and managing credit. They provide a method to analyze
the accounting data related to receivables. A Lecture Aid for use in presenting this material follows.
LECTURE AIDFinancial Ratios Related to Receivables
Accounts receivable turnover measures the efficiency in collecting accounts receivable by comparing a
company’s average accounts receivable balance to sales. The formula is:
Accounts Receivable Sales
Turnover = Average Accounts Receivable
The ratio uses average accounts receivable instead of the ending balance of accounts receivable in order
to smooth out any seasonal fluctuations in receivables. In determining this average, it is ideal to average
accounts receivable at the end of each month for a year. However, in many cases, monthly data are not
available, so the beginning and end of the year accounts receivable data are averaged.
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164 Chapter 8 Receivables
The formula for number of days’ sales in receivables is as follows:
Number of Days’ Sales Accts. Receivable Balance, End of Year
in Receivables = Average Daily Sales
Ask your students to comment on this ratio if the company’s standard credit terms ask customers to pay in
30 days.
Assume that same business had $72,000 in accounts receivable on December 31 of the prior year. What
was the business’s accounts receivable turnover?
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Type Item Description LO(s) Difficulty
Time
Est
BUSPROG AICPA ACBSP - APC Bloom's EE Excel GL SMH FAI Service Real World Writing Ethics Internet Group
DQ 1 1 Easy 5 min. Analytic Measurement Receivables Reporting Knowledge
DQ 2 2 Easy 5 min. Analytic Measurement Receivables Reporting Knowledge
DQ 3 4 Easy 5 min. Analytic Measurement Receivables Reporting Knowledge
DQ 4 7 Easy 5 min. Analytic Measurement Receivables Reporting Knowledge
DQ 5 4 Easy 5 min. Analytic Measurement Receivables Reporting Knowledge
DQ 6 5 Easy 5 min. Analytic Measurement Receivables Reporting Knowledge
DQ 7 6 Easy 5 min. Analytic Measurement Receivables Reporting Knowledge
DQ 8 6 Easy 5 min. Analytic Measurement Receivables Reporting Knowledge
DQ 9 6 Easy 5 min. Analytic Measurement Receivables Reporting Application
DQ 10 6 Easy 5 min. Analytic Measurement Receivables Reporting Application
PE 1A Direct write-off method 3 Easy 5 min. Analytic Measurement Receivables Reporting Application x
PE 1B Direct write-off method 3 Easy 5 min. Analytic Measurement Receivables Reporting Application x
EX 1 Classifications of receivables 1 Easy 5 min. Analytic Measurement Receivables Reporting Application x x
EX 2 Nature of uncollectible accounts 2 Easy 10 min. Analytic Measurement Receivables Reporting Application x x x
EX 3 Entries for uncollectible accounts, using direct write-off method 3 Easy 10 min. Analytic Measurement Receivables Reporting Application x
EX 4 Entries for uncollectible accounts, using allowance method 4 Easy 10 min. Analytic Measurement Receivables Reporting Application x
EX 5 Entries to write off accounts receivable 3,4 Easy 10 min. Analytic Measurement Receivables Reporting Application
EX 6 Providing for doubtful accounts 4 Moderate 15 min. Analytic Measurement Receivables Reporting Application x
EX 7 Number of days past due 4 Easy 15 min. Analytic Measurement Receivables Reporting Application
EX 8 Aging of receivables schedule 4 Moderate 20 min. Analytic Measurement Receivables Reporting Application x x
EX 9 Estimating allowance for doubtful accoutns 4 Moderate 20 min. Analytic Measurement Receivables Reporting Application x x
EX 10 Adjustment for uncollectible accounts 4 Easy 5 min. Analytic Measurement Receivables Reporting Application x
EX 11 Estimating doutful accounts 4 Moderate 15 min. Analytic Measurement Receivables Reporting Application x
EX 12 Entry for uncollectible accounts 4 Easy 5 min. Analytic Measurement Receivables Reporting Application x
EX 13 Entries for bad debt expense under the direct write-off and allowance methods 5 Moderate 30 min. Analytic Measurement Receivables Reporting Application x x
EX 14 Entries for bad debt expense under the direct write-off and allowance methods 5 Moderate 30 min. Analytic Measurement Receivables Reporting Application x x x
EX 15 Effect of doubtful accounts on net income 5 Easy 10 min. Analytic Measurement Receivables Reporting Application
EX 16 Effect of doubtful accounts on net income 5 Moderate 15 min. Analytic Measurement Receivables Reporting Application
EX 17 Entries for bad debt expense under the direct write-off and allowance methods 5 Moderate 30 min. Analytic Measurement Receivables Reporting Application x
EX 18 Entries for bad debt expense under the direct write-off and allowance methods 5 Moderate 30 min. Analytic Measurement Receivables Reporting Application
EX 19 Determine due date and interest on notes 6 Easy 15 min. Analytic Measurement Receivables Reporting Application x x
PR 3B Comparing two methods of accounting for uncollectible receivables 3,4,5 Challenging 1 hour Analytic Measurement Receivables Reporting Application x
PR 4B Details of notes receivable and related entries 6 Moderate 30 min. Analytic Measurement Receivables Reporting Application x
PR 5B Notes receivable entries 6 Moderate 1 hour Analytic Measurement Receivables Reporting Application
PR 6B Sales and notes receivable transactions 6 Moderate 1 hour Analytic Measurement Receivables Reporting Application x
CP 1 Ethics and professional conduct in business 6 Easy 5 min. Ethics Industry Receivables Reporting Application x x
CP 2 Estimate uncollectible accounts 4 Moderate 30 min. Analytic Measurement Receivables Reporting Application x
CP 3 Accounts receivable turnover and days' sales in receivables 8 Challenging 30 min. Reflective Thinking Critical Thinking Receivables Reporting Application x x x
CP 4 Accounts receivable turnover and days' sales in receivables 8 Challenging 1 hour Reflective Thinking Critical Thinking Receivables Reporting Application x x x
CP 5 Accounts receivable turnover and days' sales in receivables 8 Moderate 30 min. Reflective Thinking Critical Thinking Receivables Reporting Application x x x
CP 6 Accounts receivable turnover 8 Challenging 1 hour Reflective Thinking Critical Thinking Receivables Reporting Application x x x
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