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Chapter 4 Financial Accounting IFRS edition

The document outlines the accounting for receivables, including identifying types of receivables, recognizing, valuing, and disposing of accounts and notes receivable. It discusses methods such as the allowance method and direct write-off method for uncollectible accounts, as well as entries for transactions involving sales on account and factors. Additionally, the document includes instructions on how to compute maturity dates and interest on notes receivable, as well as the proper journal entries for different scenarios.

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Slide 8-1
Slide 8-2 Chapter 8 Accounting for Accounting for Receivables Receivables Financial Accounting, IFRS Edition Weygandt Kimmel Kieso
Slide 8-3 1. Identify the different types of receivables. 2. Explain how companies recognize accounts receivable. 3. Distinguish between the methods and bases companies use 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. 6. Explain how companies recognize notes receivable. 7. Describe how companies value notes receivable. 8. Describe the entries to record the disposition of notes receivable. 9. Explain the statement presentation and analysis of receivables. Study Objectives Study Objectives
Slide 8-4 Types of Types of Receivables Receivables Accounts Accounts receivable receivable Notes receivable Notes receivable Other Other receivables receivables Accounts Accounts Receivable Receivable Notes Receivable Notes Receivable Statement Statement Presentation and Presentation and Analysis Analysis Presentation Presentation Analysis Analysis Determining Determining maturity date maturity date Computing Computing interest interest Recognizing Recognizing notes receivable notes receivable Valuing notes Valuing notes receivable receivable Disposing of Disposing of notes receivable notes receivable Recognizing Recognizing accounts accounts receivable receivable Valuing accounts Valuing accounts receivable receivable Disposing of Disposing of accounts accounts receivable receivable Accounting for Receivables Accounting for Receivables
Slide 8-5 Amounts due from individuals and other companies that are expected to be collected in cash. Amounts owed by customers that result from the sale of goods and services. Accounts Accounts Receivable Receivable Types of Receivables Types of Receivables SO 1 Identify the different types of receivables. SO 1 Identify the different types of receivables. Claims for which formal instruments of credit are issued as proof of debt. “Nontrade” (interest, loans to officers, advances to employees, and income taxes refundable). Notes Notes Receivable Receivable Other Other Receivables Receivables
Slide 8-6 Three accounting issues: 1. Recognizing accounts receivable. 2. Valuing accounts receivable. 3. Disposing of accounts receivable. Accounts Receivable Accounts Receivable SO 1 Identify the different types of receivables. SO 1 Identify the different types of receivables. The following exercise was illustrated in Chapter 5. For simplicity, inventory and cost of goods sold have been omitted. Recognizing Accounts Receivable
Slide 8-7 Illustration: Assume that Jordache Co. on July 1, 2011, sells merchandise on account to Polo Company for $1,000 terms 2/10, n/30. Prepare the journal entry to record this transaction on the books of Jordache Co. Accounts receivable 1,000 Jul. 1 Sales 1,000 SO 2 Explain how companies recognize accounts receivable. SO 2 Explain how companies recognize accounts receivable. Recognizing Accounts Receivable Recognizing Accounts Receivable
Slide 8-8 Illustration: On July 5, Polo returns merchandise worth $100 to Jordache Co. Sales returns and allowances 100 Jul. 5 Accounts receivable 100 SO 2 Explain how companies recognize accounts receivable. SO 2 Explain how companies recognize accounts receivable. Recognizing Accounts Receivable Recognizing Accounts Receivable Illustration: On July 11, Jordache receives payment from Polo Company for the balance due. Cash 882 Jul. 11 Sales discounts ($900 x .02) 18 Accounts receivable 900
Slide 8-9 Valuing Accounts Receivables Reported as an asset on the statement of financial position. Reported at the amount the company thinks they will be able to collect. Sales on account raise the possibility of accounts not being collected. Valuation can be difficult because an unknown amount of receivables will become uncollectible. SO 3 Distinguish between the methods and bases SO 3 Distinguish between the methods and bases companies use to value accounts receivable. companies use to value accounts receivable. Accounts Receivable Accounts Receivable
Slide 8-10 Allowance Method Allowance Method Losses are estimated: better matching. receivable stated at net realizable value. required by IFRS. Methods of Accounting for Uncollectible Accounts Direct Write-Off Direct Write-Off Theoretically undesirable: no matching. receivable not stated at net realizable value. not acceptable for financial reporting. Valuing Accounts Receivable Valuing Accounts Receivable SO 3 Distinguish between the methods and bases SO 3 Distinguish between the methods and bases companies use to value accounts receivable. companies use to value accounts receivable.
Slide 8-11 Valuing Accounts Receivable Valuing Accounts Receivable SO 3 Distinguish between the methods and bases SO 3 Distinguish between the methods and bases companies use to value accounts receivable. companies use to value accounts receivable. Under the direct write-off method, when a company determines a particular account to be uncollectible, it charges the loss to Bad Debts Expense. Assume, for example, that on December 12 Warden Co. writes off as uncollectible M. E. Doran’s $200 balance. The entry is: Bad debt expense 200 Dec. 12 Accounts receivable 200 Direct Write-Off Method for Uncollectible Accounts
Slide 8-12 Valuing Accounts Receivable Valuing Accounts Receivable Allowance Method for Uncollectible Accounts 1. Companies estimate uncollectible accounts receivable. 2. To record estimated uncollectibles: Bad Debts Expense xxx Allowance for Doubtful Accounts xxx 3. To write off uncollectible accounts: Allowance for Doubtful Accounts xxx Accounts Receivable xxx SO 3 Distinguish between the methods and bases SO 3 Distinguish between the methods and bases companies use to value accounts receivable. companies use to value accounts receivable.
Slide 8-13 Valuing Accounts Receivable Valuing Accounts Receivable SO 3 Distinguish between the methods and bases SO 3 Distinguish between the methods and bases companies use to value accounts receivable. companies use to value accounts receivable. Recording Estimated Uncollectibles: Assume that Hampson Furniture has credit sales of $1,200,000 in 2011. Of this amount, $200,000 remains uncollected at December 31. The credit manager estimates that $12,000 of these sales will be uncollectible. The adjusting entry to record the estimated uncollectibles is: Bad debt expense 12,000 Dec. 31 Allowance for doubtful accounts 12,000
Slide 8-14 Valuing Accounts Receivable Valuing Accounts Receivable SO 3 Distinguish between the methods and bases SO 3 Distinguish between the methods and bases companies use to value accounts receivable. companies use to value accounts receivable. Illustration 8-2 Presentation of allowance for doubtful accounts
Slide 8-15 Valuing Accounts Receivable Valuing Accounts Receivable SO 3 Distinguish between the methods and bases SO 3 Distinguish between the methods and bases companies use to value accounts receivable. companies use to value accounts receivable. Recording the Write-Off of an Uncollectible Account: The financial vice-president of Hampson Furniture authorizes a write-off of the $500 balance owed by R.A.Ware on March 1, 2012. The entry to record the write-off is: Allowance for doubtful accounts 500 Mar. 1 Accounts receivable 500 Illustration 8-3
Slide 8-16 Valuing Accounts Receivable Valuing Accounts Receivable SO 3 Distinguish between the methods and bases SO 3 Distinguish between the methods and bases companies use to value accounts receivable. companies use to value accounts receivable. Recording the Write-Off of an Uncollectible Account: The write-off affects only statement of financial position accounts. Illustration 8-3 Illustration 8-4
Slide 8-17 Accounts receivable 500 Valuing Accounts Receivable Valuing Accounts Receivable SO 3 Distinguish between the methods and bases SO 3 Distinguish between the methods and bases companies use to value accounts receivable. companies use to value accounts receivable. Recovery of an Uncollectible Account: On July 1, R. A. Ware pays the $500 amount that Hampson had written off on March 1. These are the entries: Accounts receivable 500 Jul. 1 Allowance for doubtful accounts 500 Cash 500 Jul. 1
Slide 8-18 Bases Used for Allowance Method SO 3 Distinguish between the methods and bases SO 3 Distinguish between the methods and bases companies use to value accounts receivable. companies use to value accounts receivable. Valuing Accounts Receivable Valuing Accounts Receivable Illustration 8-5
Slide 8-19 Illustration: Assume that Gonzalez Company elects to use the percentage-of-sales basis. It concludes that 1% of net credit sales will become uncollectible. If net credit sales for 2011 are $800,000, the adjusting entry is: SO 3 Distinguish between the methods and bases SO 3 Distinguish between the methods and bases companies use to value accounts receivable. companies use to value accounts receivable. Valuing Accounts Receivable Valuing Accounts Receivable Bad debts expense 8,000 Dec. 31 Allowance for doubtful accounts 8,000 Percentage-of-Sales * $800,000 x 1% *
Slide 8-20 Emphasizes the matching of expenses with revenues. When the company makes the adjusting entry, it disregards the existing balance in Allowance for Doubtful Accounts. SO 3 Distinguish between the methods and bases SO 3 Distinguish between the methods and bases companies use to value accounts receivable. companies use to value accounts receivable. Valuing Accounts Receivable Valuing Accounts Receivable Percentage-of-Sales Illustration 8-6
Slide 8-21 SO 3 Distinguish between the methods and bases SO 3 Distinguish between the methods and bases companies use to value accounts receivable. companies use to value accounts receivable. Valuing Accounts Receivable Valuing Accounts Receivable Percentage-of-Receivables Illustration 8-7 Aging schedule
Slide 8-22 Illustration: If the trial balance shows Allowance for Doubtful Accounts with a credit balance of $528, the company will make the following adjusting entry. SO 3 Distinguish between the methods and bases SO 3 Distinguish between the methods and bases companies use to value accounts receivable. companies use to value accounts receivable. Valuing Accounts Receivable Valuing Accounts Receivable Bad debts expense 1,700 Dec. 31 Allowance for doubtful accounts 1,700 Percentage-of-Receivables * $2,228 - 528 *
Slide 8-23 Occasionally the allowance account will have a debit balance prior to adjustment. SO 3 Distinguish between the methods and bases SO 3 Distinguish between the methods and bases companies use to value accounts receivable. companies use to value accounts receivable. Valuing Accounts Receivable Valuing Accounts Receivable Illustration 8-8 Percentage-of-Receivables
Slide 8-24 SO 3 Distinguish between the methods and bases SO 3 Distinguish between the methods and bases companies use to value accounts receivable. companies use to value accounts receivable. Percentage of Sales approach: Summary Focus on “Bad debt expense” estimate, existing balance in the allowance account is ignored for journal entry. Method achieves a matching of expense and revenues. Percentage of Receivables approach: Accurate valuation of receivables on the statement of financial position. Method may also be applied using an aging schedule. Balance in allowance account considered for journal entry. Valuing Accounts Receivable Valuing Accounts Receivable
Slide 8-25 Answer on notes page
Slide 8-26 Companies sell receivables for two major reasons. 1. Receivables may be the only reasonable source of cash. 2. Billing and collection are often time-consuming and costly. SO 4 Describe the entries to record the disposition of accounts receivable. SO 4 Describe the entries to record the disposition of accounts receivable. Accounts Receivable Accounts Receivable Disposing of Accounts Receivable
Slide 8-27 SO 4 Describe the entries to record the disposition of accounts receivable. SO 4 Describe the entries to record the disposition of accounts receivable. Disposing of Accounts Receivable Disposing of Accounts Receivable Sale of Receivables Factor  Buys receivables from businesses and then collects the payments directly from the customers.  Typically charges a commission to the company that is selling the receivables.  Fee ranges from 1-3% of the amount of receivables purchased.
Slide 8-28 Illustration: Illustration: A Assume that Hendredon Furniture factors $600,000 of receivables to Federal Factors. Federal Factors assesses a service charge of 2% of the amount of receivables sold. The journal entry to record the sale by Hendredon Furniture is as follows. SO 4 Describe the entries to record the disposition of accounts receivable. SO 4 Describe the entries to record the disposition of accounts receivable. Disposing of Accounts Receivable Disposing of Accounts Receivable Accounts receivable 600,000 Cash 588,000 Service charge expense 12,000 ($600,000 x 2% = $12,000)
Slide 8-29 Answer on notes page
Slide 8-30 SO 4 Describe the entries to record the disposition of accounts receivable. SO 4 Describe the entries to record the disposition of accounts receivable. Disposing of Accounts Receivable Disposing of Accounts Receivable Credit Card Sales Retailer considers credit card sales the same as cash sales. Retailer must pay card issuer a fee of 2 to 4% for processing the transactions. Retailer records sale in a similar manner as checks deposited from cash sale.
Slide 8-31 SO 4 Describe the entries to record the disposition of accounts receivable. SO 4 Describe the entries to record the disposition of accounts receivable. Credit Card Sales Credit Card Sales Illustration: Illustration: Anita Ferreri purchases $1,000 of compact discs for her restaurant from Karen Kerr Music Co., using her Visa First Bank Card. First Bank charges a service fee of 3%. The entry to record this transaction by Karen Kerr Music is as follows. Sales 1,000 Cash 970 Service charge expense 30
Slide 8-32 SO 5 Compute the maturity date of and interest on notes receivable. SO 5 Compute the maturity date of and interest on notes receivable. Notes Receivable Notes Receivable A promissory note is a written promise to pay a specified amount of money on demand or at a definite time. Promissory notes may be used: 1. when individuals and companies lend or borrow money, 2. when amount of transaction and credit period exceed normal limits, or 3. in settlement of accounts receivable.
Slide 8-33 SO 5 Compute the maturity date of and interest on notes receivable. SO 5 Compute the maturity date of and interest on notes receivable. Notes Receivable Notes Receivable To the Payee, the promissory note is a note receivable. To the Maker, the promissory note is a note payable. Illustration 8-10
Slide 8-34 Determining the Maturity Date SO 5 Compute the maturity date of and interest on notes receivable. SO 5 Compute the maturity date of and interest on notes receivable. Notes Receivable Notes Receivable Note expressed in terms of Months Days Illustration 8-12
Slide 8-35 Illustration 8-14 Determining the Maturity Date Illustration 8-13 SO 5 Compute the maturity date of and interest on notes receivable. SO 5 Compute the maturity date of and interest on notes receivable. Notes Receivable Notes Receivable
Slide 8-36 SO 6 Explain how companies recognize notes receivable. SO 6 Explain how companies recognize notes receivable. Illustration: Illustration: Calhoun Company wrote $1,000, two-month, 12% promissory note to settle an open account, Wilma Company makes the following entry for the receipt of the note. Notes receivable 1,000 Accounts receivable 1,000 Recognizing Notes Receivable Notes Receivable Notes Receivable
Slide 8-37 Valuing Notes Receivable SO 7 Describe how companies value notes receivable. SO 7 Describe how companies value notes receivable. Notes Receivable Notes Receivable Like accounts receivable, companies report short-term notes receivable at their cash (net) realizable value. Estimation of cash realizable value and bad debts expense are done similarly to accounts receivable. Allowance for Doubtful Accounts is used.
Slide 8-38 Disposing of Notes Receivable SO 8 Describe the entries to record the disposition of notes receivable. SO 8 Describe the entries to record the disposition of notes receivable. Notes Receivable Notes Receivable 1. Notes may be held to their maturity date. 2. Maker may default and payee must make an adjustment to the account. 3. Holder speeds up conversion to cash by selling the note receivable.
Slide 8-39 Honor of Notes Receivable SO 8 Describe the entries to record the disposition of notes receivable. SO 8 Describe the entries to record the disposition of notes receivable. Notes Receivable Notes Receivable A note is honored when its maker pays it in full at its maturity date. Dishonor of Notes Receivable A dishonored note is not paid in full at maturity. A dishonored note receivable is no longer negotiable. Disposing of Notes Receivable
Slide 8-40 Notes Receivable Notes Receivable SO 8 Describe the entries to record the disposition of notes receivable. SO 8 Describe the entries to record the disposition of notes receivable. Illustration: Betty Co. lends Wayne Higley Inc. $10,000 on June 1, accepting a five-month, 9% interest-bearing note. Assuming that Betty Co. presents the note to Wayne Higley Inc. on the maturity date, Betty Co.’s entry to record the collection is: Cash 10,375 Nov. 1 Notes receivable 10,000 Honor of Notes Receivables Interest revenue 375
Slide 8-41 Notes Receivable Notes Receivable SO 8 Describe the entries to record the disposition of notes receivable. SO 8 Describe the entries to record the disposition of notes receivable. Illustration: If Betty Co. prepares financial statements as of September 30, it must accrue interest. Betty Co. would make an adjusting entry as follows. Interest receivable 300 Sept. 30 Interest revenue 300 Honor of Notes Receivables
Slide 8-42 Notes Receivable Notes Receivable SO 8 Describe the entries to record the disposition of notes receivable. SO 8 Describe the entries to record the disposition of notes receivable. Illustration: The entry by Betty Co. to record the honoring of the Wayne Higley Inc. note on November 1 is: Cash 10,375 Nov. 1 Notes receivable 10,000 Honor of Notes Receivables Interest receivable 300 Interest revenue 75
Slide 8-43 Illustration: Wayne Higley Inc. on November 1 indicates that it cannot pay at the present time. If Betty Co. does expect eventual collection, it would make the following entry at the time the note is dishonored (assuming no previous accrual of interest). Notes Receivable Notes Receivable SO 8 Describe the entries to record the disposition of notes receivable. SO 8 Describe the entries to record the disposition of notes receivable. Accounts receivable 10,375 Nov. 1 Notes receivable 10,000 Dishonor of Notes Receivables Interest revenue 375
Slide 8-44 Presentation SO 9 Explain the statement presentation and analysis of receivables. SO 9 Explain the statement presentation and analysis of receivables. Statement Presentation and Analysis Statement Presentation and Analysis Identify in the statement of financial position or in the notes each major type of receivable. Report short-term receivables appear in current assets. Report both gross amount of receivables and allowance for doubtful account. Report bad debts expense and service charge expense as selling expenses. Report interest revenue under “Other” in the nonoperating section. F/P I/S
Slide 8-45 Analysis This Ratio used to: Assess the liquidity of the receivables. Measure the number of times, on average, a company collects receivables during the period. SO 9 Explain the statement presentation and analysis of receivables. SO 9 Explain the statement presentation and analysis of receivables. Statement Presentation and Analysis Statement Presentation and Analysis Illustration 8-15
Slide 8-46 Average collection period in terms of days. Used to assess effectiveness of credit and collection policies. Collection period should not exceed credit term period. SO 9 Explain the statement presentation and analysis of receivables. SO 9 Explain the statement presentation and analysis of receivables. Statement Presentation and Analysis Statement Presentation and Analysis Analysis Illustration 8-16
Slide 8-47 IFRS has four specifically defined categories for financial assets, which include loans and receivables. GAAP does not designate a similar category for loans and receivables. GAAP and IFRS account for bad debts in a similar fashion. Both account for short-term receivables at amortized cost, adjusted for allowances for doubtful accounts. Understanding U.S. GAAP Understanding U.S. GAAP Key Differences Key Differences Accounting for Receivables
Slide 8-48 Like the IASB, the FASB has worked to implement fair value measurement for all financial instruments, but both Boards have faced bitter opposition from various factions. As a consequence, the Boards have adopted a piecemeal approach; the first step is disclosure of fair value information in the notes. The second step is the fair value option, which permits, but does not require, companies to record some types of financial instruments at fair value in the financial statements. Both Boards have indicated that they believe all financial instruments should be recorded and reported at fair value. Understanding U.S. GAAP Understanding U.S. GAAP Key Differences Key Differences Accounting for Receivables
Slide 8-49 IFRS and GAAP differ in the criteria used to derecognize (generally through a sale or factoring) a receivable. IFRS is a combination of an approach focused on risks and rewards and loss of control. GAAP uses loss of control as the primary criterion. In addition, IFRS permits partial derecognition; GAAP does not. IFRS specifies a two-step process for determining the impairment of receivables for a period. This process starts by identifying individual impairments of specific receivables and then estimating impairments of groups of receivables. GAAP does not specify a similar approach. Understanding U.S. GAAP Understanding U.S. GAAP Key Differences Key Differences Accounting for Receivables
Slide 8-50 Looking to the Future Looking to the Future Understanding U.S. GAAP Understanding U.S. GAAP Both the IASB and the FASB have indicated that they believe that financial statements would be more transparent and understandable if companies recorded and reported all financial instruments at fair value. The fair value option for recording financial instruments, such as receivables, is an important step in moving closer to fair value recording. However, we hope that this is only an intermediate step and that the Boards continue to work toward the adoption of comprehensive fair value accounting for financial instruments. In their current deliberations regarding accounting for financial instruments, it appears that IASB wants amortized costs for receivables, but GAAP is tending toward fair value. Accounting for Receivables
Slide 8-51 “Copyright © 2011 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission 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 Copyright

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Chapter 4 Financial Accounting IFRS edition

  • 1.
  • 2.
    Slide 8-2 Chapter 8 Accounting for Accountingfor Receivables Receivables Financial Accounting, IFRS Edition Weygandt Kimmel Kieso
  • 3.
    Slide 8-3 1. Identify thedifferent types of receivables. 2. Explain how companies recognize accounts receivable. 3. Distinguish between the methods and bases companies use 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. 6. Explain how companies recognize notes receivable. 7. Describe how companies value notes receivable. 8. Describe the entries to record the disposition of notes receivable. 9. Explain the statement presentation and analysis of receivables. Study Objectives Study Objectives
  • 4.
    Slide 8-4 Types of Types of Receivables Receivables Accounts Accounts receivable receivable Notesreceivable Notes receivable Other Other receivables receivables Accounts Accounts Receivable Receivable Notes Receivable Notes Receivable Statement Statement Presentation and Presentation and Analysis Analysis Presentation Presentation Analysis Analysis Determining Determining maturity date maturity date Computing Computing interest interest Recognizing Recognizing notes receivable notes receivable Valuing notes Valuing notes receivable receivable Disposing of Disposing of notes receivable notes receivable Recognizing Recognizing accounts accounts receivable receivable Valuing accounts Valuing accounts receivable receivable Disposing of Disposing of accounts accounts receivable receivable Accounting for Receivables Accounting for Receivables
  • 5.
    Slide 8-5 Amounts due fromindividuals and other companies that are expected to be collected in cash. Amounts owed by customers that result from the sale of goods and services. Accounts Accounts Receivable Receivable Types of Receivables Types of Receivables SO 1 Identify the different types of receivables. SO 1 Identify the different types of receivables. Claims for which formal instruments of credit are issued as proof of debt. “Nontrade” (interest, loans to officers, advances to employees, and income taxes refundable). Notes Notes Receivable Receivable Other Other Receivables Receivables
  • 6.
    Slide 8-6 Three accounting issues: 1.Recognizing accounts receivable. 2. Valuing accounts receivable. 3. Disposing of accounts receivable. Accounts Receivable Accounts Receivable SO 1 Identify the different types of receivables. SO 1 Identify the different types of receivables. The following exercise was illustrated in Chapter 5. For simplicity, inventory and cost of goods sold have been omitted. Recognizing Accounts Receivable
  • 7.
    Slide 8-7 Illustration: Assume thatJordache Co. on July 1, 2011, sells merchandise on account to Polo Company for $1,000 terms 2/10, n/30. Prepare the journal entry to record this transaction on the books of Jordache Co. Accounts receivable 1,000 Jul. 1 Sales 1,000 SO 2 Explain how companies recognize accounts receivable. SO 2 Explain how companies recognize accounts receivable. Recognizing Accounts Receivable Recognizing Accounts Receivable
  • 8.
    Slide 8-8 Illustration: On July5, Polo returns merchandise worth $100 to Jordache Co. Sales returns and allowances 100 Jul. 5 Accounts receivable 100 SO 2 Explain how companies recognize accounts receivable. SO 2 Explain how companies recognize accounts receivable. Recognizing Accounts Receivable Recognizing Accounts Receivable Illustration: On July 11, Jordache receives payment from Polo Company for the balance due. Cash 882 Jul. 11 Sales discounts ($900 x .02) 18 Accounts receivable 900
  • 9.
    Slide 8-9 Valuing Accounts Receivables Reportedas an asset on the statement of financial position. Reported at the amount the company thinks they will be able to collect. Sales on account raise the possibility of accounts not being collected. Valuation can be difficult because an unknown amount of receivables will become uncollectible. SO 3 Distinguish between the methods and bases SO 3 Distinguish between the methods and bases companies use to value accounts receivable. companies use to value accounts receivable. Accounts Receivable Accounts Receivable
  • 10.
    Slide 8-10 Allowance Method Allowance Method Lossesare estimated: better matching. receivable stated at net realizable value. required by IFRS. Methods of Accounting for Uncollectible Accounts Direct Write-Off Direct Write-Off Theoretically undesirable: no matching. receivable not stated at net realizable value. not acceptable for financial reporting. Valuing Accounts Receivable Valuing Accounts Receivable SO 3 Distinguish between the methods and bases SO 3 Distinguish between the methods and bases companies use to value accounts receivable. companies use to value accounts receivable.
  • 11.
    Slide 8-11 Valuing Accounts Receivable ValuingAccounts Receivable SO 3 Distinguish between the methods and bases SO 3 Distinguish between the methods and bases companies use to value accounts receivable. companies use to value accounts receivable. Under the direct write-off method, when a company determines a particular account to be uncollectible, it charges the loss to Bad Debts Expense. Assume, for example, that on December 12 Warden Co. writes off as uncollectible M. E. Doran’s $200 balance. The entry is: Bad debt expense 200 Dec. 12 Accounts receivable 200 Direct Write-Off Method for Uncollectible Accounts
  • 12.
    Slide 8-12 Valuing Accounts Receivable ValuingAccounts Receivable Allowance Method for Uncollectible Accounts 1. Companies estimate uncollectible accounts receivable. 2. To record estimated uncollectibles: Bad Debts Expense xxx Allowance for Doubtful Accounts xxx 3. To write off uncollectible accounts: Allowance for Doubtful Accounts xxx Accounts Receivable xxx SO 3 Distinguish between the methods and bases SO 3 Distinguish between the methods and bases companies use to value accounts receivable. companies use to value accounts receivable.
  • 13.
    Slide 8-13 Valuing Accounts Receivable ValuingAccounts Receivable SO 3 Distinguish between the methods and bases SO 3 Distinguish between the methods and bases companies use to value accounts receivable. companies use to value accounts receivable. Recording Estimated Uncollectibles: Assume that Hampson Furniture has credit sales of $1,200,000 in 2011. Of this amount, $200,000 remains uncollected at December 31. The credit manager estimates that $12,000 of these sales will be uncollectible. The adjusting entry to record the estimated uncollectibles is: Bad debt expense 12,000 Dec. 31 Allowance for doubtful accounts 12,000
  • 14.
    Slide 8-14 Valuing Accounts Receivable ValuingAccounts Receivable SO 3 Distinguish between the methods and bases SO 3 Distinguish between the methods and bases companies use to value accounts receivable. companies use to value accounts receivable. Illustration 8-2 Presentation of allowance for doubtful accounts
  • 15.
    Slide 8-15 Valuing Accounts Receivable ValuingAccounts Receivable SO 3 Distinguish between the methods and bases SO 3 Distinguish between the methods and bases companies use to value accounts receivable. companies use to value accounts receivable. Recording the Write-Off of an Uncollectible Account: The financial vice-president of Hampson Furniture authorizes a write-off of the $500 balance owed by R.A.Ware on March 1, 2012. The entry to record the write-off is: Allowance for doubtful accounts 500 Mar. 1 Accounts receivable 500 Illustration 8-3
  • 16.
    Slide 8-16 Valuing Accounts Receivable ValuingAccounts Receivable SO 3 Distinguish between the methods and bases SO 3 Distinguish between the methods and bases companies use to value accounts receivable. companies use to value accounts receivable. Recording the Write-Off of an Uncollectible Account: The write-off affects only statement of financial position accounts. Illustration 8-3 Illustration 8-4
  • 17.
    Slide 8-17 Accounts receivable 500 Valuing AccountsReceivable Valuing Accounts Receivable SO 3 Distinguish between the methods and bases SO 3 Distinguish between the methods and bases companies use to value accounts receivable. companies use to value accounts receivable. Recovery of an Uncollectible Account: On July 1, R. A. Ware pays the $500 amount that Hampson had written off on March 1. These are the entries: Accounts receivable 500 Jul. 1 Allowance for doubtful accounts 500 Cash 500 Jul. 1
  • 18.
    Slide 8-18 Bases Used forAllowance Method SO 3 Distinguish between the methods and bases SO 3 Distinguish between the methods and bases companies use to value accounts receivable. companies use to value accounts receivable. Valuing Accounts Receivable Valuing Accounts Receivable Illustration 8-5
  • 19.
    Slide 8-19 Illustration: Assume thatGonzalez Company elects to use the percentage-of-sales basis. It concludes that 1% of net credit sales will become uncollectible. If net credit sales for 2011 are $800,000, the adjusting entry is: SO 3 Distinguish between the methods and bases SO 3 Distinguish between the methods and bases companies use to value accounts receivable. companies use to value accounts receivable. Valuing Accounts Receivable Valuing Accounts Receivable Bad debts expense 8,000 Dec. 31 Allowance for doubtful accounts 8,000 Percentage-of-Sales * $800,000 x 1% *
  • 20.
    Slide 8-20 Emphasizes the matchingof expenses with revenues. When the company makes the adjusting entry, it disregards the existing balance in Allowance for Doubtful Accounts. SO 3 Distinguish between the methods and bases SO 3 Distinguish between the methods and bases companies use to value accounts receivable. companies use to value accounts receivable. Valuing Accounts Receivable Valuing Accounts Receivable Percentage-of-Sales Illustration 8-6
  • 21.
    Slide 8-21 SO 3 Distinguishbetween the methods and bases SO 3 Distinguish between the methods and bases companies use to value accounts receivable. companies use to value accounts receivable. Valuing Accounts Receivable Valuing Accounts Receivable Percentage-of-Receivables Illustration 8-7 Aging schedule
  • 22.
    Slide 8-22 Illustration: If thetrial balance shows Allowance for Doubtful Accounts with a credit balance of $528, the company will make the following adjusting entry. SO 3 Distinguish between the methods and bases SO 3 Distinguish between the methods and bases companies use to value accounts receivable. companies use to value accounts receivable. Valuing Accounts Receivable Valuing Accounts Receivable Bad debts expense 1,700 Dec. 31 Allowance for doubtful accounts 1,700 Percentage-of-Receivables * $2,228 - 528 *
  • 23.
    Slide 8-23 Occasionally the allowanceaccount will have a debit balance prior to adjustment. SO 3 Distinguish between the methods and bases SO 3 Distinguish between the methods and bases companies use to value accounts receivable. companies use to value accounts receivable. Valuing Accounts Receivable Valuing Accounts Receivable Illustration 8-8 Percentage-of-Receivables
  • 24.
    Slide 8-24 SO 3 Distinguishbetween the methods and bases SO 3 Distinguish between the methods and bases companies use to value accounts receivable. companies use to value accounts receivable. Percentage of Sales approach: Summary Focus on “Bad debt expense” estimate, existing balance in the allowance account is ignored for journal entry. Method achieves a matching of expense and revenues. Percentage of Receivables approach: Accurate valuation of receivables on the statement of financial position. Method may also be applied using an aging schedule. Balance in allowance account considered for journal entry. Valuing Accounts Receivable Valuing Accounts Receivable
  • 25.
  • 26.
    Slide 8-26 Companies sell receivablesfor two major reasons. 1. Receivables may be the only reasonable source of cash. 2. Billing and collection are often time-consuming and costly. SO 4 Describe the entries to record the disposition of accounts receivable. SO 4 Describe the entries to record the disposition of accounts receivable. Accounts Receivable Accounts Receivable Disposing of Accounts Receivable
  • 27.
    Slide 8-27 SO 4 Describethe entries to record the disposition of accounts receivable. SO 4 Describe the entries to record the disposition of accounts receivable. Disposing of Accounts Receivable Disposing of Accounts Receivable Sale of Receivables Factor  Buys receivables from businesses and then collects the payments directly from the customers.  Typically charges a commission to the company that is selling the receivables.  Fee ranges from 1-3% of the amount of receivables purchased.
  • 28.
    Slide 8-28 Illustration: Illustration: A Assume thatHendredon Furniture factors $600,000 of receivables to Federal Factors. Federal Factors assesses a service charge of 2% of the amount of receivables sold. The journal entry to record the sale by Hendredon Furniture is as follows. SO 4 Describe the entries to record the disposition of accounts receivable. SO 4 Describe the entries to record the disposition of accounts receivable. Disposing of Accounts Receivable Disposing of Accounts Receivable Accounts receivable 600,000 Cash 588,000 Service charge expense 12,000 ($600,000 x 2% = $12,000)
  • 29.
  • 30.
    Slide 8-30 SO 4 Describethe entries to record the disposition of accounts receivable. SO 4 Describe the entries to record the disposition of accounts receivable. Disposing of Accounts Receivable Disposing of Accounts Receivable Credit Card Sales Retailer considers credit card sales the same as cash sales. Retailer must pay card issuer a fee of 2 to 4% for processing the transactions. Retailer records sale in a similar manner as checks deposited from cash sale.
  • 31.
    Slide 8-31 SO 4 Describethe entries to record the disposition of accounts receivable. SO 4 Describe the entries to record the disposition of accounts receivable. Credit Card Sales Credit Card Sales Illustration: Illustration: Anita Ferreri purchases $1,000 of compact discs for her restaurant from Karen Kerr Music Co., using her Visa First Bank Card. First Bank charges a service fee of 3%. The entry to record this transaction by Karen Kerr Music is as follows. Sales 1,000 Cash 970 Service charge expense 30
  • 32.
    Slide 8-32 SO 5 Computethe maturity date of and interest on notes receivable. SO 5 Compute the maturity date of and interest on notes receivable. Notes Receivable Notes Receivable A promissory note is a written promise to pay a specified amount of money on demand or at a definite time. Promissory notes may be used: 1. when individuals and companies lend or borrow money, 2. when amount of transaction and credit period exceed normal limits, or 3. in settlement of accounts receivable.
  • 33.
    Slide 8-33 SO 5 Computethe maturity date of and interest on notes receivable. SO 5 Compute the maturity date of and interest on notes receivable. Notes Receivable Notes Receivable To the Payee, the promissory note is a note receivable. To the Maker, the promissory note is a note payable. Illustration 8-10
  • 34.
    Slide 8-34 Determining the MaturityDate SO 5 Compute the maturity date of and interest on notes receivable. SO 5 Compute the maturity date of and interest on notes receivable. Notes Receivable Notes Receivable Note expressed in terms of Months Days Illustration 8-12
  • 35.
    Slide 8-35 Illustration 8-14 Determining theMaturity Date Illustration 8-13 SO 5 Compute the maturity date of and interest on notes receivable. SO 5 Compute the maturity date of and interest on notes receivable. Notes Receivable Notes Receivable
  • 36.
    Slide 8-36 SO 6 Explainhow companies recognize notes receivable. SO 6 Explain how companies recognize notes receivable. Illustration: Illustration: Calhoun Company wrote $1,000, two-month, 12% promissory note to settle an open account, Wilma Company makes the following entry for the receipt of the note. Notes receivable 1,000 Accounts receivable 1,000 Recognizing Notes Receivable Notes Receivable Notes Receivable
  • 37.
    Slide 8-37 Valuing Notes Receivable SO7 Describe how companies value notes receivable. SO 7 Describe how companies value notes receivable. Notes Receivable Notes Receivable Like accounts receivable, companies report short-term notes receivable at their cash (net) realizable value. Estimation of cash realizable value and bad debts expense are done similarly to accounts receivable. Allowance for Doubtful Accounts is used.
  • 38.
    Slide 8-38 Disposing of NotesReceivable SO 8 Describe the entries to record the disposition of notes receivable. SO 8 Describe the entries to record the disposition of notes receivable. Notes Receivable Notes Receivable 1. Notes may be held to their maturity date. 2. Maker may default and payee must make an adjustment to the account. 3. Holder speeds up conversion to cash by selling the note receivable.
  • 39.
    Slide 8-39 Honor of NotesReceivable SO 8 Describe the entries to record the disposition of notes receivable. SO 8 Describe the entries to record the disposition of notes receivable. Notes Receivable Notes Receivable A note is honored when its maker pays it in full at its maturity date. Dishonor of Notes Receivable A dishonored note is not paid in full at maturity. A dishonored note receivable is no longer negotiable. Disposing of Notes Receivable
  • 40.
    Slide 8-40 Notes Receivable Notes Receivable SO8 Describe the entries to record the disposition of notes receivable. SO 8 Describe the entries to record the disposition of notes receivable. Illustration: Betty Co. lends Wayne Higley Inc. $10,000 on June 1, accepting a five-month, 9% interest-bearing note. Assuming that Betty Co. presents the note to Wayne Higley Inc. on the maturity date, Betty Co.’s entry to record the collection is: Cash 10,375 Nov. 1 Notes receivable 10,000 Honor of Notes Receivables Interest revenue 375
  • 41.
    Slide 8-41 Notes Receivable Notes Receivable SO8 Describe the entries to record the disposition of notes receivable. SO 8 Describe the entries to record the disposition of notes receivable. Illustration: If Betty Co. prepares financial statements as of September 30, it must accrue interest. Betty Co. would make an adjusting entry as follows. Interest receivable 300 Sept. 30 Interest revenue 300 Honor of Notes Receivables
  • 42.
    Slide 8-42 Notes Receivable Notes Receivable SO8 Describe the entries to record the disposition of notes receivable. SO 8 Describe the entries to record the disposition of notes receivable. Illustration: The entry by Betty Co. to record the honoring of the Wayne Higley Inc. note on November 1 is: Cash 10,375 Nov. 1 Notes receivable 10,000 Honor of Notes Receivables Interest receivable 300 Interest revenue 75
  • 43.
    Slide 8-43 Illustration: Wayne HigleyInc. on November 1 indicates that it cannot pay at the present time. If Betty Co. does expect eventual collection, it would make the following entry at the time the note is dishonored (assuming no previous accrual of interest). Notes Receivable Notes Receivable SO 8 Describe the entries to record the disposition of notes receivable. SO 8 Describe the entries to record the disposition of notes receivable. Accounts receivable 10,375 Nov. 1 Notes receivable 10,000 Dishonor of Notes Receivables Interest revenue 375
  • 44.
    Slide 8-44 Presentation SO 9 Explainthe statement presentation and analysis of receivables. SO 9 Explain the statement presentation and analysis of receivables. Statement Presentation and Analysis Statement Presentation and Analysis Identify in the statement of financial position or in the notes each major type of receivable. Report short-term receivables appear in current assets. Report both gross amount of receivables and allowance for doubtful account. Report bad debts expense and service charge expense as selling expenses. Report interest revenue under “Other” in the nonoperating section. F/P I/S
  • 45.
    Slide 8-45 Analysis This Ratio usedto: Assess the liquidity of the receivables. Measure the number of times, on average, a company collects receivables during the period. SO 9 Explain the statement presentation and analysis of receivables. SO 9 Explain the statement presentation and analysis of receivables. Statement Presentation and Analysis Statement Presentation and Analysis Illustration 8-15
  • 46.
    Slide 8-46 Average collection periodin terms of days. Used to assess effectiveness of credit and collection policies. Collection period should not exceed credit term period. SO 9 Explain the statement presentation and analysis of receivables. SO 9 Explain the statement presentation and analysis of receivables. Statement Presentation and Analysis Statement Presentation and Analysis Analysis Illustration 8-16
  • 47.
    Slide 8-47 IFRS has fourspecifically defined categories for financial assets, which include loans and receivables. GAAP does not designate a similar category for loans and receivables. GAAP and IFRS account for bad debts in a similar fashion. Both account for short-term receivables at amortized cost, adjusted for allowances for doubtful accounts. Understanding U.S. GAAP Understanding U.S. GAAP Key Differences Key Differences Accounting for Receivables
  • 48.
    Slide 8-48 Like the IASB,the FASB has worked to implement fair value measurement for all financial instruments, but both Boards have faced bitter opposition from various factions. As a consequence, the Boards have adopted a piecemeal approach; the first step is disclosure of fair value information in the notes. The second step is the fair value option, which permits, but does not require, companies to record some types of financial instruments at fair value in the financial statements. Both Boards have indicated that they believe all financial instruments should be recorded and reported at fair value. Understanding U.S. GAAP Understanding U.S. GAAP Key Differences Key Differences Accounting for Receivables
  • 49.
    Slide 8-49 IFRS and GAAPdiffer in the criteria used to derecognize (generally through a sale or factoring) a receivable. IFRS is a combination of an approach focused on risks and rewards and loss of control. GAAP uses loss of control as the primary criterion. In addition, IFRS permits partial derecognition; GAAP does not. IFRS specifies a two-step process for determining the impairment of receivables for a period. This process starts by identifying individual impairments of specific receivables and then estimating impairments of groups of receivables. GAAP does not specify a similar approach. Understanding U.S. GAAP Understanding U.S. GAAP Key Differences Key Differences Accounting for Receivables
  • 50.
    Slide 8-50 Looking to theFuture Looking to the Future Understanding U.S. GAAP Understanding U.S. GAAP Both the IASB and the FASB have indicated that they believe that financial statements would be more transparent and understandable if companies recorded and reported all financial instruments at fair value. The fair value option for recording financial instruments, such as receivables, is an important step in moving closer to fair value recording. However, we hope that this is only an intermediate step and that the Boards continue to work toward the adoption of comprehensive fair value accounting for financial instruments. In their current deliberations regarding accounting for financial instruments, it appears that IASB wants amortized costs for receivables, but GAAP is tending toward fair value. Accounting for Receivables
  • 51.
    Slide 8-51 “Copyright © 2011John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission 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 Copyright

Editor's Notes

  • #25 p. 356 When Investors Ignore Warning Signs Q: When would it be appropriate for a company to lower its allowance for doubtful accounts as a percentage of its receivables? A: It could do so if the company’s collection experience had improved, or was expected to improve, and therefore the company expected lower defaults as a percentage of receivable
  • #29 p. 357 How Does a Credit Card Work? Q: Assume that PPR prepares a bank reconciliation at the end of each month. If some credit card sales have not been processed by the bank, how should PPR treat these transactions on its bank reconciliation? A: PPR would treat the credit card receipts as deposits in transit. It has already recorded the receipts as cash. Its bank will increase PPR’s cash account when it receives the receipts.