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John Wiley & Sons, Inc.
Financial Accounting, 4e
Weygandt, Kieso, & Kimmel
Prepared by
Gregory K. Lowry
Mercer University
Marianne Bradford
The University of Tennessee
CHAPTER 9
ACCOUNTING FOR RECEIVABLES
After studying this chapter, you should be able to:
1 Identify the different types of receivables.
2 Explain how accounts receivable are
recognized in the accounts.
3 Distinguish between the methods and bases
used to value accounts receivable.
4 Describe the entries to record the disposition of
accounts receivable.
5 Compute the maturity date of, and interest on,
notes receivable.
CHAPTER 9
ACCOUNTING FOR RECEIVABLES
6 Explain how notes receivable are recognized in
the accounts.
7 Describe how notes receivable are valued.
8 Describe the entries to record the disposition of
notes receivable.
9 Explain the statement presentation and analysis
of receivables.
After studying this chapter, you should be able to:
PREVIEW OF CHAPTER 9
ACCOUNTING FOR
RECEIVABLES
Statement
Presentation and
Analysis of
Receivables
Accounts
Receivable
 Types of
Receivables
Recognizing
accounts
receivable
Valuing accounts
receivable
Disposing of
accounts
receivable


Notes Receivable





Determining
maturity date
Computing
interest
Recognizing notes
receivable
Valuing notes
receivable
Disposing of notes
receivable
Presentation
Analysis



 The term receivables refers to amounts due from
individuals and other companies; they are
claims expected to be collected in cash.
 Three major classes of receivables are:
1 Accounts receivable are amounts owed
by customers on account.
2 Notes receivable are claims for which
formal instruments of credit are issued.
3 Other receivables include nontrade
receivables such as interest receivable and
advances to employees.
RECEIVABLES
The three primary accounting problems
associated with accounts receivable are:
1 Recognizing accounts receivable.
2 Valuing accounts receivable.
3 Disposing of accounts receivable.
ACCOUNTS RECEIVABLE
RECOGNIZING ACCOUNTS
RECEIVABLE
When a business sells merchandise to a customer on credit,
Accounts Receivable is debited and Sales is credited.
GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
July 1 Accounts Receivable
Sales
(To record sales on account)
1,000
1,000
RECOGNIZING ACCOUNTS
RECEIVABLE
When a business receives returned merchandise previously
sold to a customer on credit, Sales Returns and Allowances
is debited and Accounts Receivable is credited.
GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
July 5 Sales Returns and Allowances
Accounts Receivable
(To record merchandise returned)
100
100
RECOGNIZING ACCOUNTS
RECEIVABLE
When a business collects cash from a customer for
merchandise previously sold on credit during the discount
period, Cash and Sales Discounts are debited and Accounts
Receivable is credited.
GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
July 11 Cash
Sales Discounts
Accounts Receivable
(To record collection of accounts
receivable)
882
18
900
 To ensure that receivables are not overstated on the
balance sheet, they are stated at their cash realizable
value.
 Cash (net) realizable value is the net amount expected
to be received in cash and excludes amounts that the
company estimates it will not be able to collect.
 Credit losses are debited to Bad Debts
Expense and are considered a normal
and necessary risk of doing business.
 Two methods of accounting for uncollectible
accounts are the:
1 allowance method and
2 direct write-off method.
VALUING ACCOUNTS
RECEIVABLE
 The allowance method is required
when bad debts are deemed to be
material in amount.
 Uncollectible accounts are
estimated and matched against sales
in the same accounting period in
which the sales occurred.
THE ALLOWANCE METHOD
Estimated uncollectibles are debited to Bad Debts Expense
and credited to Allowance for Doubtful Accounts at the end
of each period.
RECORDING ESTIMATED
UNCOLLECTIBLES
GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
Dec. 31 Bad Debts Expense
Allowance for Doubtful Accounts
(To record estimate of
uncollectible accounts)
12,000
12,000
Actual uncollectibles are debited to Allowance for Doubtful
Accounts and credited to Accounts Receivable at the time
the specific account is written off.
RECORDING THE WRITE-OFF
OF AN UNCOLLECTIBLE
ACCOUNT
GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
Mar. 1 Allowance for Doubtful Accounts
Accounts Receivable — R. A. Ware
(Write-off of R. A. Ware account)
500
500
When there is recovery of an account that has been
written off: 1 reverse the entry made to write off the
account and...
RECOVERY OF AN
UNCOLLECTIBLE ACCOUNT
GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
July 1 Accounts Receivable — R. A. Ware
Allowance for Doubtful Accounts
(To reverse write-off of R. A. Ware
account)
500
500
GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
July 1 Cash
Accounts Receivable — R. A. Ware
(To record collection from R. A.
Ware)
500
500
2 record the collection in the usual
manner.
RECOVERY OF AN
UNCOLLECTIBLE ACCOUNT
 Companies use either of two methods
in the estimation of uncollectibles:
1 percentage of sales or
2 percentage of receivables.
 Both bases are in accordance with
GAAP; the choice is a
management decision.
BASES USED FOR THE
ALLOWANCE METHOD
Percentage of Sales Percentage of Receivables
Cash Realizable Value
Allowance
Accounts for
Receivable Doubtful
Accounts
Matching
Sales Bad Debts
Expense
Emphasis on Income Statement Emphasis on Balance Sheet
Relationships Relationships
ILLUSTRATION 9-5
COMPARISON OF BASES OF
ESTIMATING UNCOLLECTIBLES
PERCENTAGE OF
SALES BASIS
 In the percentage of sales basis, management
establishes a percentage relationship between
the amount of credit sales and expected losses
from uncollectible accounts.
 Expected bad debt losses are
determined by applying the
percentage to the sales base
of the current period.
 This basis better matches expenses
with revenues.
PERCENTAGE OF
SALES BASIS
If net credit sales for the year are $800,000, the estimated bad
debts expense is $8,000 (1% X $800,000).
GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
Dec. 31 Bad Debts Expense
Allowance for Doubtful Accounts
(To record estimated bad debts for
year)
8,000
8,000
 Under the percentage of receivables basis, the
balance in the allowance account is derived
from an analysis of individual customer
accounts often called aging the accounts
receivable.
 The amount of the adjusting entry is the
difference between the required balance and
the existing balance in the allowance account.
 This basis produces the better estimate
of cash realizable value of receivables.
PERCENTAGE OF
RECEIVABLES BASIS
PERCENTAGE OF
RECEIVABLES BASIS
If the trial balance shows Allowance for Doubtful Accounts
with a credit balance of $528, an adjusting entry for $1,700
($2,228 - $528) is necessary.
GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
Dec. 31 Bad Debts Expense
Allowance for Doubtful Accounts
(To record estimated bad debts for
year)
1,700
1,700
DIRECT WRITE-OFF METHOD
 Under the direct write-off method, bad debt losses
are not anticipated and no allowance account is
used.
 No entries are made for bad debts until an account is
determined to be uncollectible at which time the loss
is charged to Bad Debts Expense.
 No attempt is made to match bad debts to sales
revenues or to show cash realizable value of accounts
receivable on the balance sheet.
 Consequently, unless bad debt losses are
insignificant, this method is not acceptable for
financial reporting purposes.
DIRECT WRITE-OFF METHOD
Warden Co. writes off M. E. Doran’s $200 balance as
uncollectible on December 12. When this method is used,
Bad Debts Expense will show only actual losses from
uncollectibles.
GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
Dec. 12 Bad Debts Expense
Accounts Receivable — M. E. Doran
(To record write-off of M. E. Doran
account)
200
200
DISPOSING OF
ACCOUNTS RECEIVABLE
 To accelerate the receipt of cash from
receivables, owners frequently:
1 sell to a factor such as a finance
company or a bank and
2 make credit card sales
 A factor buys receivables
from businesses for a fee
and collects the payments
directly from customers.
SALE OF RECEIVABLES
Hendredon Furniture factors $600,000 of receivables to
Federal Factors, Inc. Federal Factors assesses a
service charge of 2% of the amount of receivables sold.
GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
July 31 Cash
Service Charge Expense (2% x $600,000)
Accounts Receivable
(To record the sale of accounts
receivable)
588,000
12,000
600,000
CREDIT CARD SALES
Credit cards are frequently used by retailers
who wish to avoid the paperwork of issuing
credit.
Retailers can receive cash more quickly from
the credit card issuer.
A credit card sale occurs when a company
accepts national credit cards, such as Visa,
MasterCard, Discover, American Express,
and Diners Club.
CREDIT CARD SALES
 Three parties involved when credit cards are
used in making retail sales are:
1 the credit card issuer,
2 the retailer, and
3 the customer.
 The retailer pays the credit card issuer
a fee of 2-6% of the invoice price for
its services.
 From an accounting standpoint, sales from Visa,
MasterCard, and Discover are treated differently
than sales from American Express and Diners
Club.
VISA, MASTERCARD,
AND DISCOVER SALES
Sales resulting from the use of VISA,
MasterCard, and Discover are considered
cash sales by the retailer.
These cards are issued by banks.
Upon receipt of credit card sales slips from a
retailer, the bank immediately
adds the amount to the
seller’s bank balance.
VISA, MASTERCARD,
AND DISCOVER SALES
GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
July 31 Cash
Service Charge Expense
Sales
(To record VISA credit card sales)
970
30
1,000
Lee Lenertz purchases a
number of compact discs for
her restaurant from Brieschke
Music Co. for $1,000 using her
VISA First Bank Card. The
service fee that First Bank
charges is 3%.
AMERICAN EXPRESS &
DINERS CLUB SALES
 Sales using American Express and
Diners Club cards are reported as
credit sales, not cash sales.
 Conversion into cash does not
occur until American
Express/Diners Club remits the net
amount to the seller.
AMERICAN EXPRESS
SALES
Four Seasons restaurant accepts
an American Express card for a
$300 bill. The service fee is 5%.
GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
July 31 Accounts Receivable — American Express
Service Charge Expense
Sales
(To record American Express
credit card sales)
285
15
300
NOTES RECEIVABLE
 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 the
maker.
 The party to whom
payment is made is
called the payee.
NOTES RECEIVABLE
 When the life of the note is expressed
in terms of months, the due date is
found by counting the months from
the date of issue
 Example: The maturity
date of a 3-month note
dated May 31 is August 31.
ILLUSTRATION 9-11
DETERMINING THE MATURITY DATE
Term of note 60
July 31 – 17 14
August 31 45
Maturity date, September 15
 When the life of the note is expressed in terms
of days, it is necessary to count the days.
 In counting days, the date of issue is omitted
but the due date is included.
 Example: The maturity date of a 60-day note
dated July 17 is:
The basic formula for computing
interest on an interest-bearing note is:
.
Face Value
of Note
Annual
Interest
Rate
Time
in Terms of
One Year
Interest
X X =
ILLUSTRATION 9-13
FORMULA FOR
COMPUTING INTEREST
The interest rate specified on the
note is an annual rate of interest
Helpful hint: The interest rate specified is the annual rate.
Terms of Note Interest Computation
Face X Rate X Time = Interest
$ 730, 18%, 120 days
$1,000, 15%, 6 months
$2,000, 12%, 1 year
$ 730 X 18% X 120/360 = $ 43.80
$1,000 X 15% X 6/12 = $ 75.00
$2,000 X 12% X 1/1 = $240.00
ILLUSTRATION 9-14
COMPUTATION OF INTEREST
RECOGNIZING NOTES
RECEIVABLE
Wilma Company receives a $1,000, 2-month, 12% promissory
note from Brent Company to settle an open account.
GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
May 1 Notes Receivable
Accounts Receivable — Brent Company
(To record acceptance of Brent
Company note)
1,000
1,000
VALUING NOTES
RECEIVABLE
 Like accounts receivable, short-term
notes receivable are reported at their
cash (net) realizable value.
 The notes receivable
allowance account is
Allowance for
Doubtful Accounts.
 A note is honored when it is paid in full at its maturity date.
 For each interest-bearing note, the amount due at maturity
is the face value of the note plus interest for the length of
time specified on the note.
 Betty Co. lends Higley Inc. $10,000 on June 1, accepting a
4-month, 9% interest-bearing note.
 Betty Co. collects the maturity value of the note from
Higley on October 1.
GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
Oct. 1 Cash
Notes Receivable
Interest Revenue
(To record collection of Higley Inc.
note)
10,300
10,000
300
HONOR OF
NOTES
RECEIVABLE
GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
Sept. 30 Interest Receivable
Interest Revenue
(To accrue four months' interest)
300
300
If Betty Co. prepares prepares financial statements as of
September 30, interest for 4 months, or $300, would be accrued.
HONOR OF
NOTES
RECEIVABLE
GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
Oct. 1 Cash
Notes Receivable
Interest Receivable
(To record collection of note at
maturity)
10,300
10,000
300
When interest has been accrued, it is necessary
to credit Interest Receivable at maturity.
HONOR OF
NOTES
RECEIVABLE
 A dishonored note is a note that is not paid in full at
maturity.
 A dishonored note receivable is no longer negotiable.
 Since the payee still has a claim against the maker of the
note, the balance in Notes Receivable is usually
transferred to Accounts Receivable.
GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
Oct. 1 Accounts Receivable
Notes Receivable
Interest Revenue
(To record the dishonor of the
note)
10,300
10,000
300
DISHONOR OF
NOTES RECEIVABLE
BALANCE SHEET PRESENTATION
OF RECEIVABLES
 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.
 The following shows the current asset presentation
of receivables for Kellogg Company at December
31.
KELLOGG COMPANY
Accounts receivable (in millions) $705.9
Less: Allowance for doubtful accounts 12.9
Net receivables $693.0
Net Credit Sales
Average Accounts
Receivable
Accounts Receivable
Turnover
÷ =
 The financial ratio used to assess the liquidity of
the receivables is the receivables turnover ratio
which measures the number of times, on average,
receivables are collected during the period.
 If Lands’ End had net credit sales of $1,355
million for the year and a beginning net accounts
receivable balance of $17.8 million and and
ending accounts receivable balance of 19.8 million
its accounts receivable turnover ratio is computed
as follows:
ILLUSTRATION 9-15
ACCOUNTS RECEIVABLE TURNOVER
RATIO AND COMPUTATION
$1,355 $17.8 + $19.8
2
72 times
÷ =
 The average collection period is a conversion of
the receivables turnover ratio that makes the
liquidity even more evident.
 Lands’ End turnover of 72 times is divided into
365 days as follows:
ILLUSTRATION 9-16
AVERAGE COLLECTION PERIOD FOR
RECEIVABLES FORMULA AND COMPUTATION
Days in Year
Accounts Receivable
Turnover
÷ =
Average Collection
Period in Days
365 days 5.1 days
÷ =
72 times
Copyright © 2003 John Wiley & Sons, Inc. All rights reserved. Reproduction or
translation of this work beyond that named in Section 117 of the 1976 United
States Copyright Act without the express written consent of the copyright owner is
unlawful. Request for further information should be addressed to the Permissions
Department, John Wiley & Sons, Inc. The purchaser may make back-up copies
for his/her own use only and not for distribution or resale. The Publisher assumes
no responsibility for errors, omissions, or damages, caused by the use of these
programs or from the use of the information contained herein.
COPYRIGHT
CHAPTER 9
ACCOUNTING FOR RECEIVABLES

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Chapter 09 ACCOUNTING FOR RECEIVABLES.ppt

  • 1. John Wiley & Sons, Inc. Financial Accounting, 4e Weygandt, Kieso, & Kimmel Prepared by Gregory K. Lowry Mercer University Marianne Bradford The University of Tennessee
  • 2. CHAPTER 9 ACCOUNTING FOR RECEIVABLES After studying this chapter, you should be able to: 1 Identify the different types of receivables. 2 Explain how accounts receivable are recognized in the accounts. 3 Distinguish between the methods and bases used to value accounts receivable. 4 Describe the entries to record the disposition of accounts receivable. 5 Compute the maturity date of, and interest on, notes receivable.
  • 3. CHAPTER 9 ACCOUNTING FOR RECEIVABLES 6 Explain how notes receivable are recognized in the accounts. 7 Describe how notes receivable are valued. 8 Describe the entries to record the disposition of notes receivable. 9 Explain the statement presentation and analysis of receivables. After studying this chapter, you should be able to:
  • 4. PREVIEW OF CHAPTER 9 ACCOUNTING FOR RECEIVABLES Statement Presentation and Analysis of Receivables Accounts Receivable  Types of Receivables Recognizing accounts receivable Valuing accounts receivable Disposing of accounts receivable   Notes Receivable      Determining maturity date Computing interest Recognizing notes receivable Valuing notes receivable Disposing of notes receivable Presentation Analysis   
  • 5.  The term receivables refers to amounts due from individuals and other companies; they are claims expected to be collected in cash.  Three major classes of receivables are: 1 Accounts receivable are amounts owed by customers on account. 2 Notes receivable are claims for which formal instruments of credit are issued. 3 Other receivables include nontrade receivables such as interest receivable and advances to employees. RECEIVABLES
  • 6. The three primary accounting problems associated with accounts receivable are: 1 Recognizing accounts receivable. 2 Valuing accounts receivable. 3 Disposing of accounts receivable. ACCOUNTS RECEIVABLE
  • 7. RECOGNIZING ACCOUNTS RECEIVABLE When a business sells merchandise to a customer on credit, Accounts Receivable is debited and Sales is credited. GENERAL JOURNAL Date Account Titles and Explanation Debit Credit July 1 Accounts Receivable Sales (To record sales on account) 1,000 1,000
  • 8. RECOGNIZING ACCOUNTS RECEIVABLE When a business receives returned merchandise previously sold to a customer on credit, Sales Returns and Allowances is debited and Accounts Receivable is credited. GENERAL JOURNAL Date Account Titles and Explanation Debit Credit July 5 Sales Returns and Allowances Accounts Receivable (To record merchandise returned) 100 100
  • 9. RECOGNIZING ACCOUNTS RECEIVABLE When a business collects cash from a customer for merchandise previously sold on credit during the discount period, Cash and Sales Discounts are debited and Accounts Receivable is credited. GENERAL JOURNAL Date Account Titles and Explanation Debit Credit July 11 Cash Sales Discounts Accounts Receivable (To record collection of accounts receivable) 882 18 900
  • 10.  To ensure that receivables are not overstated on the balance sheet, they are stated at their cash realizable value.  Cash (net) realizable value is the net amount expected to be received in cash and excludes amounts that the company estimates it will not be able to collect.  Credit losses are debited to Bad Debts Expense and are considered a normal and necessary risk of doing business.  Two methods of accounting for uncollectible accounts are the: 1 allowance method and 2 direct write-off method. VALUING ACCOUNTS RECEIVABLE
  • 11.  The allowance method is required when bad debts are deemed to be material in amount.  Uncollectible accounts are estimated and matched against sales in the same accounting period in which the sales occurred. THE ALLOWANCE METHOD
  • 12. Estimated uncollectibles are debited to Bad Debts Expense and credited to Allowance for Doubtful Accounts at the end of each period. RECORDING ESTIMATED UNCOLLECTIBLES GENERAL JOURNAL Date Account Titles and Explanation Debit Credit Dec. 31 Bad Debts Expense Allowance for Doubtful Accounts (To record estimate of uncollectible accounts) 12,000 12,000
  • 13. Actual uncollectibles are debited to Allowance for Doubtful Accounts and credited to Accounts Receivable at the time the specific account is written off. RECORDING THE WRITE-OFF OF AN UNCOLLECTIBLE ACCOUNT GENERAL JOURNAL Date Account Titles and Explanation Debit Credit Mar. 1 Allowance for Doubtful Accounts Accounts Receivable — R. A. Ware (Write-off of R. A. Ware account) 500 500
  • 14. When there is recovery of an account that has been written off: 1 reverse the entry made to write off the account and... RECOVERY OF AN UNCOLLECTIBLE ACCOUNT GENERAL JOURNAL Date Account Titles and Explanation Debit Credit July 1 Accounts Receivable — R. A. Ware Allowance for Doubtful Accounts (To reverse write-off of R. A. Ware account) 500 500
  • 15. GENERAL JOURNAL Date Account Titles and Explanation Debit Credit July 1 Cash Accounts Receivable — R. A. Ware (To record collection from R. A. Ware) 500 500 2 record the collection in the usual manner. RECOVERY OF AN UNCOLLECTIBLE ACCOUNT
  • 16.  Companies use either of two methods in the estimation of uncollectibles: 1 percentage of sales or 2 percentage of receivables.  Both bases are in accordance with GAAP; the choice is a management decision. BASES USED FOR THE ALLOWANCE METHOD
  • 17. Percentage of Sales Percentage of Receivables Cash Realizable Value Allowance Accounts for Receivable Doubtful Accounts Matching Sales Bad Debts Expense Emphasis on Income Statement Emphasis on Balance Sheet Relationships Relationships ILLUSTRATION 9-5 COMPARISON OF BASES OF ESTIMATING UNCOLLECTIBLES
  • 18. PERCENTAGE OF SALES BASIS  In the percentage of sales basis, management establishes a percentage relationship between the amount of credit sales and expected losses from uncollectible accounts.  Expected bad debt losses are determined by applying the percentage to the sales base of the current period.  This basis better matches expenses with revenues.
  • 19. PERCENTAGE OF SALES BASIS If net credit sales for the year are $800,000, the estimated bad debts expense is $8,000 (1% X $800,000). GENERAL JOURNAL Date Account Titles and Explanation Debit Credit Dec. 31 Bad Debts Expense Allowance for Doubtful Accounts (To record estimated bad debts for year) 8,000 8,000
  • 20.  Under the percentage of receivables basis, the balance in the allowance account is derived from an analysis of individual customer accounts often called aging the accounts receivable.  The amount of the adjusting entry is the difference between the required balance and the existing balance in the allowance account.  This basis produces the better estimate of cash realizable value of receivables. PERCENTAGE OF RECEIVABLES BASIS
  • 21. PERCENTAGE OF RECEIVABLES BASIS If the trial balance shows Allowance for Doubtful Accounts with a credit balance of $528, an adjusting entry for $1,700 ($2,228 - $528) is necessary. GENERAL JOURNAL Date Account Titles and Explanation Debit Credit Dec. 31 Bad Debts Expense Allowance for Doubtful Accounts (To record estimated bad debts for year) 1,700 1,700
  • 22. DIRECT WRITE-OFF METHOD  Under the direct write-off method, bad debt losses are not anticipated and no allowance account is used.  No entries are made for bad debts until an account is determined to be uncollectible at which time the loss is charged to Bad Debts Expense.  No attempt is made to match bad debts to sales revenues or to show cash realizable value of accounts receivable on the balance sheet.  Consequently, unless bad debt losses are insignificant, this method is not acceptable for financial reporting purposes.
  • 23. DIRECT WRITE-OFF METHOD Warden Co. writes off M. E. Doran’s $200 balance as uncollectible on December 12. When this method is used, Bad Debts Expense will show only actual losses from uncollectibles. GENERAL JOURNAL Date Account Titles and Explanation Debit Credit Dec. 12 Bad Debts Expense Accounts Receivable — M. E. Doran (To record write-off of M. E. Doran account) 200 200
  • 24. DISPOSING OF ACCOUNTS RECEIVABLE  To accelerate the receipt of cash from receivables, owners frequently: 1 sell to a factor such as a finance company or a bank and 2 make credit card sales  A factor buys receivables from businesses for a fee and collects the payments directly from customers.
  • 25. SALE OF RECEIVABLES Hendredon Furniture factors $600,000 of receivables to Federal Factors, Inc. Federal Factors assesses a service charge of 2% of the amount of receivables sold. GENERAL JOURNAL Date Account Titles and Explanation Debit Credit July 31 Cash Service Charge Expense (2% x $600,000) Accounts Receivable (To record the sale of accounts receivable) 588,000 12,000 600,000
  • 26. CREDIT CARD SALES Credit cards are frequently used by retailers who wish to avoid the paperwork of issuing credit. Retailers can receive cash more quickly from the credit card issuer. A credit card sale occurs when a company accepts national credit cards, such as Visa, MasterCard, Discover, American Express, and Diners Club.
  • 27. CREDIT CARD SALES  Three parties involved when credit cards are used in making retail sales are: 1 the credit card issuer, 2 the retailer, and 3 the customer.  The retailer pays the credit card issuer a fee of 2-6% of the invoice price for its services.  From an accounting standpoint, sales from Visa, MasterCard, and Discover are treated differently than sales from American Express and Diners Club.
  • 28. VISA, MASTERCARD, AND DISCOVER SALES Sales resulting from the use of VISA, MasterCard, and Discover are considered cash sales by the retailer. These cards are issued by banks. Upon receipt of credit card sales slips from a retailer, the bank immediately adds the amount to the seller’s bank balance.
  • 29. VISA, MASTERCARD, AND DISCOVER SALES GENERAL JOURNAL Date Account Titles and Explanation Debit Credit July 31 Cash Service Charge Expense Sales (To record VISA credit card sales) 970 30 1,000 Lee Lenertz purchases a number of compact discs for her restaurant from Brieschke Music Co. for $1,000 using her VISA First Bank Card. The service fee that First Bank charges is 3%.
  • 30. AMERICAN EXPRESS & DINERS CLUB SALES  Sales using American Express and Diners Club cards are reported as credit sales, not cash sales.  Conversion into cash does not occur until American Express/Diners Club remits the net amount to the seller.
  • 31. AMERICAN EXPRESS SALES Four Seasons restaurant accepts an American Express card for a $300 bill. The service fee is 5%. GENERAL JOURNAL Date Account Titles and Explanation Debit Credit July 31 Accounts Receivable — American Express Service Charge Expense Sales (To record American Express credit card sales) 285 15 300
  • 32. NOTES RECEIVABLE  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 the maker.  The party to whom payment is made is called the payee.
  • 33. NOTES RECEIVABLE  When the life of the note is expressed in terms of months, the due date is found by counting the months from the date of issue  Example: The maturity date of a 3-month note dated May 31 is August 31.
  • 34. ILLUSTRATION 9-11 DETERMINING THE MATURITY DATE Term of note 60 July 31 – 17 14 August 31 45 Maturity date, September 15  When the life of the note is expressed in terms of days, it is necessary to count the days.  In counting days, the date of issue is omitted but the due date is included.  Example: The maturity date of a 60-day note dated July 17 is:
  • 35. The basic formula for computing interest on an interest-bearing note is: . Face Value of Note Annual Interest Rate Time in Terms of One Year Interest X X = ILLUSTRATION 9-13 FORMULA FOR COMPUTING INTEREST The interest rate specified on the note is an annual rate of interest
  • 36. Helpful hint: The interest rate specified is the annual rate. Terms of Note Interest Computation Face X Rate X Time = Interest $ 730, 18%, 120 days $1,000, 15%, 6 months $2,000, 12%, 1 year $ 730 X 18% X 120/360 = $ 43.80 $1,000 X 15% X 6/12 = $ 75.00 $2,000 X 12% X 1/1 = $240.00 ILLUSTRATION 9-14 COMPUTATION OF INTEREST
  • 37. RECOGNIZING NOTES RECEIVABLE Wilma Company receives a $1,000, 2-month, 12% promissory note from Brent Company to settle an open account. GENERAL JOURNAL Date Account Titles and Explanation Debit Credit May 1 Notes Receivable Accounts Receivable — Brent Company (To record acceptance of Brent Company note) 1,000 1,000
  • 38. VALUING NOTES RECEIVABLE  Like accounts receivable, short-term notes receivable are reported at their cash (net) realizable value.  The notes receivable allowance account is Allowance for Doubtful Accounts.
  • 39.  A note is honored when it is paid in full at its maturity date.  For each interest-bearing note, the amount due at maturity is the face value of the note plus interest for the length of time specified on the note.  Betty Co. lends Higley Inc. $10,000 on June 1, accepting a 4-month, 9% interest-bearing note.  Betty Co. collects the maturity value of the note from Higley on October 1. GENERAL JOURNAL Date Account Titles and Explanation Debit Credit Oct. 1 Cash Notes Receivable Interest Revenue (To record collection of Higley Inc. note) 10,300 10,000 300 HONOR OF NOTES RECEIVABLE
  • 40. GENERAL JOURNAL Date Account Titles and Explanation Debit Credit Sept. 30 Interest Receivable Interest Revenue (To accrue four months' interest) 300 300 If Betty Co. prepares prepares financial statements as of September 30, interest for 4 months, or $300, would be accrued. HONOR OF NOTES RECEIVABLE
  • 41. GENERAL JOURNAL Date Account Titles and Explanation Debit Credit Oct. 1 Cash Notes Receivable Interest Receivable (To record collection of note at maturity) 10,300 10,000 300 When interest has been accrued, it is necessary to credit Interest Receivable at maturity. HONOR OF NOTES RECEIVABLE
  • 42.  A dishonored note is a note that is not paid in full at maturity.  A dishonored note receivable is no longer negotiable.  Since the payee still has a claim against the maker of the note, the balance in Notes Receivable is usually transferred to Accounts Receivable. GENERAL JOURNAL Date Account Titles and Explanation Debit Credit Oct. 1 Accounts Receivable Notes Receivable Interest Revenue (To record the dishonor of the note) 10,300 10,000 300 DISHONOR OF NOTES RECEIVABLE
  • 43. BALANCE SHEET PRESENTATION OF RECEIVABLES  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.  The following shows the current asset presentation of receivables for Kellogg Company at December 31. KELLOGG COMPANY Accounts receivable (in millions) $705.9 Less: Allowance for doubtful accounts 12.9 Net receivables $693.0
  • 44. Net Credit Sales Average Accounts Receivable Accounts Receivable Turnover ÷ =  The financial ratio used to assess the liquidity of the receivables is the receivables turnover ratio which measures the number of times, on average, receivables are collected during the period.  If Lands’ End had net credit sales of $1,355 million for the year and a beginning net accounts receivable balance of $17.8 million and and ending accounts receivable balance of 19.8 million its accounts receivable turnover ratio is computed as follows: ILLUSTRATION 9-15 ACCOUNTS RECEIVABLE TURNOVER RATIO AND COMPUTATION $1,355 $17.8 + $19.8 2 72 times ÷ =
  • 45.  The average collection period is a conversion of the receivables turnover ratio that makes the liquidity even more evident.  Lands’ End turnover of 72 times is divided into 365 days as follows: ILLUSTRATION 9-16 AVERAGE COLLECTION PERIOD FOR RECEIVABLES FORMULA AND COMPUTATION Days in Year Accounts Receivable Turnover ÷ = Average Collection Period in Days 365 days 5.1 days ÷ = 72 times
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