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Chapter
Study Objectives
1. 2. 3. 4. Identify the different types of receivables. Explain how companies recognize accounts receivable. Distinguish between the methods and bases companies use to value accounts receivable. Describe the entries to record the disposition of accounts receivable.
5.
6. 7. 8. 9.
Slide 8-3
Types of Receivables
Accounts receivable
Accounts Receivable
Recognizing accounts receivable Valuing accounts receivable Disposing of accounts receivable
Notes Receivable
Notes receivable
Other receivables
Determining maturity date Computing interest Recognizing notes receivable Valuing notes receivable Disposing of notes receivable
Slide 8-4
Types of Receivables
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 Receivable
Slide 8-5
Claims for which formal instruments of credit are issued as proof of debt. Notes Receivable
Nontrade (interest, loans to officers, advances to employees, and income taxes refundable).
Other Receivables
Accounts Receivable
Three accounting issues:
1. Recognizing accounts receivable.
2. Valuing accounts receivable. 3. Disposing of accounts receivable.
Slide 8-7
Illustration: On July 11, Jordache receives payment from Polo Company for the balance due.
Jul. 11
Cash
Sales discounts ($900 x .02) Accounts receivable
882
18 900
Slide 8-8
Accounts Receivable
Valuing Accounts Receivables
Are reported as a current asset on the balance sheet. Are 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.
Slide 8-9
SO 3 Distinguish between the methods and bases companies use to value accounts receivable.
Direct Write-Off
Theoretically undesirable:
no matching. receivable not stated at net realizable value. not acceptable for financial reporting.
Allowance Method
Losses are estimated:
better matching. receivable stated at net realizable value. required by GAAP.
Slide 8-10
SO 3 Distinguish between the methods and bases companies use to value accounts receivable.
$ 346
500 25 475 812 40 1,673
Slide 8-11
SO 3 Distinguish between the methods and bases companies use to value accounts receivable.
$ 346
475 812 40 1,673
Slide 8-12
SO 3 Distinguish between the methods and bases companies use to value accounts receivable.
xxx xxx
SO 3 Distinguish between the methods and bases companies use to value accounts receivable.
Slide 8-14
SO 3 Distinguish between the methods and bases companies use to value accounts receivable.
Slide 8-15
SO 3 Distinguish between the methods and bases companies use to value accounts receivable.
Slide 8-16
SO 3 Distinguish between the methods and bases companies use to value accounts receivable.
Illustration 8-4
Slide 8-17
SO 3 Distinguish between the methods and bases companies use to value accounts receivable.
Slide 8-18
SO 3 Distinguish between the methods and bases companies use to value accounts receivable.
Slide 8-19
SO 3 Distinguish between the methods and bases companies use to value accounts receivable.
* $800,000 x 1%
Slide 8-20
SO 3 Distinguish between the methods and bases companies use to value accounts receivable.
Slide 8-21
SO 3 Distinguish between the methods and bases companies use to value accounts receivable.
Slide 8-22
SO 3 Distinguish between the methods and bases companies use to value accounts receivable.
1,700 *
1,700
* $2,228 - 528
Slide 8-23
SO 3 Distinguish between the methods and bases companies use to value accounts receivable.
Occasionally the allowance account will have a debit balance prior to adjustment.
Slide 8-24
SO 3 Distinguish between the methods and bases companies use to value accounts receivable.
SO 3 Distinguish between the methods and bases companies use to value accounts receivable.
Slide 8-26
Accounts Receivable
Disposing of Accounts Receivable
Companies sell receivables for two major reasons.
1. Receivables may be the only reasonable source of
cash.
costly.
Slide 8-27
Slide 8-28
Slide 8-29
Slide 8-30
Slide 8-31
Cash
Service charge expense Sales
970
30 1,000
Slide 8-32
Notes Receivable
Companies may grant credit in exchange for a promissory note. 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.
Notes Receivable
To the Payee, the promissory note is a note receivable.
Slide 8-34
Notes Receivable
Determining the Maturity Date
Note expressed in terms of
Months Days
Illustration 8-12
Slide 8-35
Notes Receivable
Determining the Maturity Date
Illustration 8-13
Illustration 8-14
Slide 8-36
Notes Receivable
Recognizing Notes Receivable
Illustration: Assuming that 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 Accounts receivable 1,000 1,000
Slide 8-37
Notes Receivable
Valuing Notes Receivable
Like accounts receivable, companies report shortterm 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
Notes Receivable
Disposing of Notes Receivable
1. Notes may be held to their maturity date.
2. Maker may default and payee must make an
Slide 8-39
Notes Receivable
Disposing of Notes Receivable
Honor of Notes Receivable
A note is honored when its maker pays it in full at its maturity date.
Slide 8-40
Notes Receivable
Honor of Notes Receivables
Illustration: Assume that Betty Co. lends Wayne Higley Inc. $10,000 on June 1, accepting a five-month, 9% interestbearing 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:
Nov. 1 Cash Notes receivable Interest revenue 10,375 10,000 375
Slide 8-41
Notes Receivable
Honor of Notes Receivables
Illustration: If Betty Co. prepares financial statements as of September 30, it must accrue interest. Betty Co. would make an adjusting entry to record 4 months interest. Sept. 30 Interest receivable
Interest revenue
300
300
Slide 8-42
Notes Receivable
Honor of Notes Receivables
Illustration: The entry by Betty Co. to record the honoring of the Wayne Higley Inc. note on November 1 is:
Nov. 1 Cash Notes receivable Interest receivable Interest revenue 10,375 10,000 300 75
Slide 8-43
Notes Receivable
Dishonor of Notes Receivables
Illustration: Assume that 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).
Nov. 1 Accounts receivable 10,375
Notes receivable
Interest revenue
10,000
375
Slide 8-44
B/S
Report short-term receivables as 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 revenues and gains.
SO 9 Explain the statement presentation and analysis of receivables.
I/S
Slide 8-45
Variant of the accounts receivable turnover ratio is average collection period in terms of days. Used to assess effectiveness of credit and collection policies. Collection period should not exceed credit term period.
Slide 8-47
According to data from the U.S. Census Bureau, there were 159 million credit cardholders in the United States in 2000 and 173 million in 2006; that number is projected to grow to 181 million Americans by 2010. In 2006, the U.S. Census Bureau determined that there were nearly 1.5 billion credit cards in use in the U.S. A stack of all those credit cards would reach more than 70 miles into space and be almost as tall as 13 Mount Everests.
Slide 8-48
In a recent year, Americans charged more than $1 trillion in purchases with their credit cards. That was more than they spent in cash. Credit card defaultsthe failure to make a payment on a debt by the due datesprouted in February 2009 to a 20-year-high. 74% of monthly college spending is with cash and debit cards. Only 7% is with credit cards. The average college graduate has nearly $20,000 in debt; average credit card debt has increased 47% between 1989 and 2004 for 25- to 34-year-olds and 11% for 18- to 24-year-olds. Nearly one in five 18-to 24-year-olds is in debt hardship, up from 12% in 1989. Foreclosure filings nationwide soared 30% in January 2009 over the same month in the previous year. Nevada, California, and Florida had the highest foreclosure rates. One in every 440 U.S. Slide homes received a foreclosure filing in February 2009.
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Slide 8-51
Copyright
Copyright 2010 John Wiley & Sons, Inc. All rights reserved.