CHAPTER 9
ACCOUNTING FOR RECEIVABLES
LEARNING OBJECTIVES
1. EXPLAIN HOW COMPANIES RECOGNIZE ACCOUNTS
RECEIVABLE.
2. DESCRIBE HOW COMPANIES VALUE ACCOUNTS
RECEIVABLE AND RECORD THEIR DISPOSITION.
CHAPTER REVIEW
Types of Receivables
1. (L.O. 1) Receivables are claims that are expected to be collected in cash. Receivables are
usually classified as: (a) accounts receivable, (b) notes receivable, and (c) other receivables.
2. Accounts receivable are amounts customers owe on account. Notes receivable are a written
Recognizing Accounts Receivable
3. 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:
Valuing Accounts Receivable
5. (L.O. 2) Companies record credit losses as debits to Bad Debt Expense (or Uncollectible
Accounts Expense). Such losses are considered to be a normal and necessary risk of doing
business. Two methods are used in accounting for uncollectible accounts: (a) the direct write-off
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.
a. No entries are made for bad debts until an account is determined to be uncollectible at which
time the loss is charged to Bad Debt Expense.
Percentage-of-Sales Basis
10. Under the percentage–of-sales basis,
a. Management establishes a percentage relationship between the amount of credit sales and
expected losses from uncollectible accounts.
Percentage-of-Receivables Basis
11. Under the percentage-of-receivables basis,
a. The balance in the allowance account is derived from an analysis of individual customer
accounts. The analysis is often called aging the accounts receivable.
b. The amount of the adjusting entry is the difference between the required balance and the
existing balance in the allowance account.
c. This basis produces the better estimate of cash realizable value of the accounts receivable.
Disposing Accounts Receivable
12. In order to accelerate the receipt of cash from receivables, owners frequently (1) sell to a factor
such as a finance company or bank, or (2) make credit card sales.
13. A factor buys receivables from businesses for a fee and then collects the payments directly from
the customers. The entry for a sale to a factor is:
Notes Receivable
15. A promissory note is a written promise to pay a specified amount of money on demand or at a
definite time. The party making the promise is called the maker; the party to whom payment is made
is called the payee.
Recognizing Notes Receivable
18. (L.O. 3) Entries for notes receivable are required when the note is received and at maturity. To
illustrate, assume that on June 1, 2017, Raider Company receives a $2,000, 3-month, 12% note
receivable from Paul Revere in settlement of an open account. The entry is:
Valuing Notes Receivable
19. (L.O. 4) 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
Statement Presentation and Analysis
21. In the balance sheet, short-term receivables are reported within the current assets section below
short-term investments. Both the gross amount of receivables and the allowance for doubtful
accounts should be reported. In a multiple-step income statement, Bad Debt Expense and
Service Charge Expense are reported as selling expenses in the operating expenses section.
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:
a. Accounts receivable are amounts customers owe on account.
Companies generally expect to collect these receivables within
30 to 60 days.
B. Recognizing Accounts Receivable.
1. Accounts receivable are recognized when merchandise is sold on account,
as explained in Chapter 5.
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.
a. Credit losses are a normal and necessary risk of doing business on
a credit basis. Credit losses may be recognized under the allowance
method or by the direct write-off method.
3. Occasionally, a company collects from a customer after it has written off
the account as uncollectible. The company
a. Reverses the entry made in writing off the account to reinstate the
customer’s account.
4. Two bases are used to determine the amount of the expected uncollectibles:
a. Under the percentage-of-sales basis, management estimates what
percentage of credit sales will be uncollectible. This percentage is
based on past experience and anticipated credit policy, and is applied
either to total credit sales or net credit sales of the current year.
b. Under the percentage-of-receivables basis, management estimates
what percentage of receivables will result in losses from uncollectible
accounts. The company prepares an aging schedule, in which it classi-
fies customer balances by the length of time they have been unpaid.
(1) This method normally results in the better approximation of cash
realizable value (balance sheet viewpoint).
5. The direct write-off method may be used for financial reporting purposes
only when bad debts are insignificant. Under this method:
a. Bad debt losses are not estimated and an allowance account is not
used.
9-8 Copyright © 2015 John Wiley & Sons, Inc. Weygandt, Accounting Principles, 12/e, Instructor’s Manual (For Instructor Use Only)
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.
1. In the normal course of events, companies collect accounts receivable in
cash and remove receivables from the books.
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.
4. A credit card sale occurs when a company accepts national credit cards,
such as Visa, Mastercard, and American Express.
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
issued your Visa card to Nordstrom’s bank account.
If Nordstrom prepares a bank reconciliation monthly and some credit card sales
have not been processed by the bank, how should Nordstrom treat these
transactions on its reconciliation?
Answer: Nordstrom would treat the credit card receipts as deposits in transit. It
E. Notes Receivable.
1. A promissory note is a written promise to pay a specified amount of money
on demand or at a definite time. Notes receivable give the payee a stronger
legal claim to assets than accounts receivable. Promissory notes may
be used:
a. When individuals and companies lend or borrow money.
b. When the amount of the transaction and the credit period exceed
normal limits.
c. In settlement of accounts receivable.
2. Determining the maturity date. When the life of a note is expressed in
terms of months, you find the date when it matures by counting the months
3. Computing interest. The formula for computing interest is face value of
note times annual interest rate times time in terms of one year. For a
4. Recognizing notes receivable occurs when the note is received. The
company records the note receivable at its face value by debiting Notes
Receivable and crediting Accounts Receivable.
5. Valuing short-term notes receivable involves reporting notes receivable at
their cash (net) realizable value.
a. The notes receivable allowance account is Allowance for Doubtful
Accounts.
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
F. Statement Presentation and Analysis.
1. Companies should identify in the balance sheet or in the notes to the
financial statements each of the major types of receivables.
3. In a multiple-step income statement, companies report bad debt ex-
pense and service charge expense as selling expenses in the operating
expenses section. Interest revenue appears under “Other revenues and
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
A Look at IFRS
The basic accounting and reporting issues related to recognition, measurement,
and disposition of receivables are essentially the same between IFRS and
GAAP.
KEY POINTS
Similarities
• The recording of receivables, recognition of sales returns and allowances and
sales discounts, and the allowance method to record bad debts are the same
between IFRS and GAAP.
Differences
• Although IFRS implies that receivables with different characteristics should be
reported separately, there is no standard that mandates this segregation.
• IFRS and GAAP differ in the criteria use to determine how to record a factoring
Looking to the Future
The question of recording fair values for financial instruments will continue to be
an important issue to resolve as the Boards work toward convergence. Both the
20 MINUTE QUIZ
Circle the correct answer.
True/False
1. Receivables are classified as accounts, notes, or other.
True False
2. Financing charges added to a customer’s credit card balance with a retailer are recorded
as a debit to Accounts Receivable and a credit to Interest Revenue.
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.
If there is a credit balance in the allowance account of $2,000 prior to adjustment, the
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
6. The maturity date of a 60-day note dated December 1 is January 31.
True False
7. The interest due at maturity of a two-month, 8%, $800 note is computed by multiplying
$800 X .08 X 2/12.
True False
8. The maturity value of a $5,000 note is $5,300. If $180 of the interest has been accrued
prior to maturity, the entry to record the honoring of the note at maturity should include
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,
2014. The interest revenue to be recognized on December 31, 2014, is $9,000.
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
accounts will be 2% of sales. If Allowance for Doubtful Accounts has a credit balance of
$1,000 prior to adjustment, its balance after adjustment will be a credit of
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
a. Bad Debt Expense and a credit to Accounts Receivable.
b. Bad Debt Expense and a credit to Allowance for Doubtful Accounts.
c. Allowance for Doubtful Accounts and a credit to Bad Debt Expense.
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
charge. The entry to record the sale should not include a
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
a. a debit to Allowance for Doubtful Accounts.
b. only a credit to Notes Receivable.
c. a credit to Notes Receivable and Interest Revenue.
d. a credit to Notes Receivable and Interest Receivable.
ANSWERS TO QUIZ
True/False
1. True 6. False
2. True 7. True
Multiple Choice
1. c.