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Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
9-1
CHAPTER 9
ACCOUNTING FOR RECEIVABLES
Related Assignment Materials
Student Learning Objectives
Questions
Quick
Studies*
Exercises*
Problems*
Beyond the
Numbers
Conceptual objectives:
C1. Describe accounts receivable
and how they occur and are
recorded.
1, 9
9-1, 9-13
9-1, 9-2, 9-3
9-1, 9-4
9-5, 9-7,
9-8, 9-9
C2. Describe a note receivable, the
9-8
9-11
9-5, GL 9-1
C3. Explain how receivables can be
converted to cash before
maturity.
9-11
9-15
9-5, GL 9-1
Analytical objectives:
A1 Compute accounts receivable
turnover and use it to help
assess financial condition.
9-12
9-16
9-1, 9-2
Procedural objectives:
P2. Apply the allowance method to
accounts receivable.
5, 6, 7, 10
9-4, 9-5
9-9,
9-17
9-2, 9-3,
9-4, SP,
9-2, 9-3,
9-4, 9-6,
P3. Estimate uncollectibles based
9-6, 9-7
9-5, 9-6,
9-2, 9-3,
9-6
P4. Record the honoring and
dishonoring of a note and
adjustments for interest.
4
9-9, 9-10
9-12, 9-13,
9-14
9-5, GL 9-1
*See additional information on next page that pertains to these quick studies, exercises and problems.
SP refers to the Serial Problem
GL refers to the General Ledger Problems
ES refers to Excel Simulations
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
9-2
Additional Information on Related Assignment Material
Connect
Available on the instructor’s course-specific website) repeats all numerical Quick Studies, all Exercises
and Problems Set A. Connect also provides algorithmic versions for Quick Study, Exercises and
Problems. It allows instructors to monitor, promote, and assess student learning. It can be used in
practice, homework, or exam mode.
Connect Insight
The Serial Problem (SP) for Success Systems continues in this chapter.
General Ledger
Assignable within Connect, General Ledger (GL) problems offer students the ability to see how transactions post
from the general journal all the way through the financial statements. Critical thinking and analysis components are
added to each GL problem to ensure understanding of the entire process. GL problems are auto-graded and provide
instant feedback to the student.
Excel Simulations
Synopsis of Chapter Revisions
NEW opener—ReGreen and entrepreneurial assignment.
Updated data in Exhibit 9.1.
New section for sales using store credit cards.
Simplified section for sales using bank (third-party) credit cards to show only entries for cash received at point of
sale.
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
9-3
Chapter Outline
Notes
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)
B. Sales on Store Credit Card
1. Large retailers such as Home Depot sell on credit and
2. Journal entries are same as those for credit sales described
C. Sales on Bank Credit Card
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 (2) avoids
seller’s risk (3) seller receives cash sooner than when
they grant credit directly (4) more credit options
potentially increase sales.
b. Bank credit card sales: Cash received immediately on
deposit - results in debit to Cash for the amount of sale
less the credit card company charge, debit to Credit Card
Expense for this fee and credit to Sales for full invoice
amount.
c. Store credit card sales: Cash received some time after
deposit of sales receipt - results in debit to Accounts
D. Sales on Installment
Amounts owed by customers from credit sales where payment is
required in periodic amounts over an extended time period.
1. Customer is usually charged interest.
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
9-4
Chapter Outline
Notes
2. Classified as current or noncurrent assets depending on
length of repayment.
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:
A. Recording and Writing Off Bad Debts: record loss when it is
determined to be uncollectible. Debit Bad Debt Expense; credit
Accounts Receivable.
B. Recovering a Bad Debt: if a written off account is later
collected, results in a reversal of the write-off (see above) and
a normal collection of account entry.
C. Assessing Direct Write-Off Method:
1. Expense Recognition Applied to Bad Debts - usually not
best match of sales and expenses expense principle
III. Allowance Method - matches the estimated loss from
uncollectibles against the sales they helped produce.
A. Recording Bad Debts Expense: at end of each accounting
period, bad debts expense is estimated and recorded with an
adjusting entry.
B. Advantages of method:
1. Satisfies the matching principle because expense is
charged in the period of the corresponding sale.
2. Reports accounts receivable on balance sheet at the
estimated amount of cash to be collected.
3. To record estimate of bad debt expense, Debit Bad Debt
Expense, credit a contra-asset account called Allowance
for Doubtful Accounts.
C. Writing off a Bad Debt: debit Allowance for Doubtful
Accounts, credit Accounts Receivable.
1. Writing off an uncollectible does not change the
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
9-5
Chapter Outline
Notes
IV. Estimating Bad Debts Expense—two methods:
A. Percent of Sales Method (uses income statement relations to
estimate)—bad debts expense is computed as a percentage of
sales for the period. (% x sales = Bad Debt Expense)
B. Percent of Receivable Method (uses balance sheet relations to
estimate)—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:
1. As a percentage of outstanding receivables or
V. Notes Receivable— Promissory note that is a written promise to pay a
specified amount of money (principal) either on demand or on a stated
future date. Most notes are interest bearing. 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. Computations for Notes
2. Amount to be repaid is principal plus interest (maturity value).
4. Formula for computing annual interest:
Annual Time of note
Principal of x rate of x expressed in = Interest
note interest fraction of year
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
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
9-6
Chapter Outline
Notes
2. Recording a dishonored note—debit Accounts Receivable for
maturity value (face value + Interest), credit Note Receivable
for face amount and credit Interest Revenue for the interest
amount. If account receivable remains uncollected, it will be
written-off.
3. Recording End-of-Period Interest Adjustment—record
4. Collection entry if some interest was accrued requires a debit
VI. 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.
A. Selling Receivables
1. Buyer, called a factor, charges the seller a factoring fee and
then collects the receivables as they come due.
2. Entry: debit Cash (amount received), and Factoring Fee
Expense (amount charged) and credit Accounts Receivable
(amount sold).
B. Pledging Receivables
2. Borrower retains ownership of the receivables.
4. The pledge should be disclosed in financial statement
footnotes.
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
9-7
Chapter Outline
Notes
VII. Decision Analysis—Accounts Receivable Turnover
A. Measures both the quality (likeliness of collecting) and liquidity
(speed of collection) of accounts receivable,
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
9-8
VISUAL # 9-1
METHODS OF ACCOUNTING FOR BAD DEBTS
DIRECT WRITE-OFF METHOD
Accounts for bad debts from an uncollectible account
receivable at the time account is determined to be
uncollectible.
ALLOWANCE METHOD
At the end of each accounting period
bad debts expense is
estimated and recorded.
Year-end
No adjusting entry
Adjusting entry required:
Bad Debt Expense XXX
Allowance for Uncollectible Accounts XXX
(The amount is an estimate based on a percentage of sales or a
percentage of outstanding accounts receivable. If the estimate is based
When an account is
determined to be
uncollectible
Write-off entry required:
Bad Debts Expense XXX
Accounts Receivable/Customer XXX
(The amount is the balance of the uncollectible account.)
Write-off entry required:
Allowance for Uncollectible Accounts XXX
Accounts Receivable/Customer XXX
(The amount is the balance of the uncollectible account.)
When an account
previously written
off is recovered
1. Reinstate account by reversing write-off:
Accounts Receivable/Customer XXX
Bad Debts Expense XXX
(The amount is the account balance that was written off.)
2. Record collection on account normally:
Cash XXX
Accounts Receivable/Customer XXX
(The amount is the amount collected.)
1. Reinstate account by reversing write-off:
Accounts Receivable/Customer XXX
Allowance for Uncollectible Accounts XXX
(The amount is the account balance that was written off.)
2. Record collection on account normally:
Cash XXX
Accounts Receivable/Customer XXX
(The amount is the amount collected.)
Advantages:
• Does not require adjusting entry.
• Matches expense against related revenues.
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
9-9
VISUAL #9-2
PROMISSORY NOTE
(6) $2,000.00 April 15, 2017 (1)
Amount Date
(7)
Two thousand and no/100 -------------------Dollars
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
9-10
Chapter 9 Alternate Demonstration Problem
At the end of the year, the M. I. Wright Company showed the following
selected account balances:
Sales (all on credit) ............................................................................$300,000
Required:
1. Assume the company estimates that 1% of all credit sales will not be
collected.
a. Prepare the proper journal entry to recognize the expense
involved.
2. Assume the company estimates that 5% of its accounts receivable
will never be collected.
a. Prepare the proper journal entry to recognize the expense
involved.
Also show the net realizable Accounts Receivable.
3. Under assumptions 1 and 2 above, give the proper journal entries for
the following events.
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
9-11
Chapter 9 Solution: Alternate Demonstration Problem
1a. Bad Debts Expense .......................................... 3,000
Allowance for Doubtful Accounts .............. 3,000
($ 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
to estimating uncollectibles. Therefore the entries to write off and
show subsequent reinstatement would be the same in 1 and 2.
