CHAPTER 8
ACCOUNTING FOR RECEIVABLES
LEARNING OBJECTIVES
1. EXPLAIN HOW COMPANIES RECOGNIZE ACCOUNTS
RECEIVABLE.
2. DESCRIBE HOW COMPANIES VALUE ACCOUNTS
RECEIVABLE AND RECORD THEIR DISPOSITION.
3. EXPLAIN HOW COMPANIES RECOGNIZE NOTES
RECEIVABLE.
4. DESCRIBE HOW COMPANIES VALUE NOTES
RECEIVABLE, RECORD THEIR DISPOSITION, AND
PRESENT AND ANALYZE RECEIVABLES.
*5. COMPARE THE ACCOUNTING FOR RECEIVABLES
UNDER GAAP AND IFRS.
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.
Recognizing Accounts Receivable
3. When a business sells merchandise to a customer on credit, Accounts Receivable is debited and
Sales Revenue is credited.
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
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
7. The allowance method is required when bad debts are material in amount. Its essential features are:
a. Uncollectible accounts are estimated and the expense for the uncollectible accounts is
8. When there is a recovery of an account that has been written off as uncollectible, it is necessary to:
a. reverse the entry made when the account was written off, and
b. record the collection in the usual manner.
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
Disposing of 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.
14. Credit cards are frequently used by retailers because the retailer does not have to be concerned
with the customer’s credit history and the retailer can receive cash more quickly from the credit
card issuer. However, the credit card issuer usually receives a fee of from 2–6% of the invoice
price from the retailer.
Notes Receivable
15. (L.O. 3) 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. Entries for notes receivable are required when the note is received and at maturity. To illustrate,
assume that on June 1, 2014, 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
Compare the Accounting for Receivables under GAAP and IFRS
*23. (L.O. 5) The similarities and differences under GAAP and IFRS are:
a. Similarities
(1) The recording of receivables, recognition of sales allowances and discounts, and the
allowance method to record bad debts are the same under both GAAP and IFRS.
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.
2. Recognizing accounts receivable also occurs when a company sells mer-
chandise and a customer uses the company’s own credit card.
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.
3. Occasionally, a company collects from a customer after it has written off
the account as uncollectible. The company
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.
b. Bad debt losses are debited to Bad Debt Expense when they are
determined to be uncollectible.
D. Disposing of Accounts Receivable.
1. In the normal course of events, companies collect accounts receivable in
cash and remove receivables from the books.
4. A credit card sale occurs when a company accepts national credit cards,
such as Visa, Mastercard, and American Express.
a. A retailer’s acceptance of a national credit card is another form of
selling (factoring) the receivable.
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?
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.
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
4. Recognizing notes receivable occurs when the note is received. The
5. Valuing short-term notes receivable involves reporting notes receivable at
their cash (net) realizable value.
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.
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.
A Look at IFRS
The basic accounting and reporting issues related to recognition, measurement
and disposition are essentially the same between IFRS and GAAP.
KEY POINTS
SIMILARITIES
• The recording of receivables, recognition of sales allowances and discounts,
DIFFERENCES
• Although IFRS implies that receivables with different characteristics should
be reported separately, there is no standard that mandates this segregation.
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
IASB and the FASB have indicated that they believe that financial statements
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,
2017. The interest revenue to be recognized on December 31, 2017, 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
Multiple Choice