Accounting principles 8th weygars kieso kimmel chapter 09

Chapter
9-1


CHAPTER 9

ACCOUNTING FOR
RECEIVABLES
Accounting Principles, Eighth Edition
Chapter
9-2


Study
Study Objectives
Objectives
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.

Chapter
9-3

Accounting
Accounting for
for Receivables
Receivables

Types of
Receivables

Accounts
Receivable

Notes
Receivable

Accounts
receivable
Notes
receivable
Other
receivables

Recognizing
accounts
receivable
Valuing
accounts
receivable
Disposing of
accounts
receivable

Determining
maturity date
Computing
interest
Recognizing
notes receivable
Valuing notes
receivable
Disposing of
notes receivable

Chapter
9-4

Statement
Presentation
and Analysis
Presentation
Analysis


Types
Types of
of Receivables
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.

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).

Accounts
Accounts
Receivable
Receivable

Notes
Notes
Receivable
Receivable

Other
Other
Receivables

Receivables

Chapter
9-5

LO 1 Identify the different types of receivables.


Accounts
Accounts Receivable
Receivable
Three accounting issues:
1. Recognizing accounts receivable.
2. Valuing accounts receivable.
3. Disposing of accounts receivable.
Recognizing Accounts Receivable
The following exercise was illustrated in Chapter 5.
For simplicity, inventory and cost of goods sold have
been omitted.
Chapter
9-6

LO 1 Identify the different types of receivables.


Recognizing
Recognizing Accounts
Accounts Receivable
Receivable
E5-5 Presented are transactions related to Wheeler Company.

1. On December 3,Wheeler Company sold $500,000 of
merchandise to Hashmi Co., terms 2/10, n/30, FOB shipping
point.
2. On December 8, Hashmi Co. was granted an allowance of
$27,000 for merchandise purchased on December 3.
3. On December 13,Wheeler Company received the balance
due from Hashmi Co.
Instructions: Prepare the journal entries to record these
transactions on the books of Wheeler Company using a
perpetual inventory system.
Chapter
9-7

LO 2 Explain how companies recognize accounts receivable.


Recognizing
Recognizing Accounts
Accounts Receivable
Receivable
E5-5 Prepare the journal entries for Wheeler Company .
1. On December 3, Wheeler Company sold $500,000 of
merchandise to Hashmi Co., terms 2/10, n/30, FOB
shipping point.
Dec. 3

Chapter
9-8

Accounts receivable

Sales

500,000
500,000

LO 2 Explain how companies recognize accounts receivable.


Recognizing
Recognizing Accounts
Accounts Receivable
Receivable
E5-5 Prepare the journal entries for Wheeler Company.
2. On December 8, Hashmi Co. was granted an
allowance of $27,000 for merchandise purchased
on December 3.
Dec. 8 Sales returns and allowances
Accounts receivable

Chapter
9-9

27,000
27,000

LO 2 Explain how companies recognize accounts receivable.


Recognizing
Recognizing Accounts

Accounts Receivable
Receivable
E5-5 Prepare the journal entries for Wheeler Company .
3. On December 13, Wheeler Company received the
balance due from Hashmi Co.
Dec. 13 Cash

463,540 ***

Sales discounts
Accounts receivable
*

9,460 **
473,000 *

($500,000 – $27,000)

** [($500,000 – $27,000) X 2%]
*** ($473,000 – $9,460)
Chapter
9-10

LO 2 Explain how companies recognize accounts receivable.


Accounts
Accounts Receivable
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.
Chapter
9-11

LO 3 Distinguish between the methods and bases
companies use to value accounts receivable.


Valuing
Valuing Accounts
Accounts Receivable
Receivable
Methods of Accounting for Uncollectible Accounts
Direct Write-Off
Theoretically undesirable:
no matching.
receivable not stated at
net realizable value.
not acceptable for
financial reporting.

Chapter
9-12

Allowance Method

Losses are estimated:
better matching.
receivable stated at net
realizable value.
required by GAAP.

LO 3 Distinguish between the methods and bases
companies use to value accounts receivable.


Presentation
Presentation of
of Accounts
Accounts Receivable
Receivable
Assets
Current Assets:
Cash
Accounts receivable
Less: Allowance for doubtful accounts
Merchandise inventory
Prepaid expenses
Total current assets

Chapter
9-13

$ 346
500
25

475
812
40
1,673

LO 3 Distinguish between the methods and bases
companies use to value accounts receivable.


Presentation
Presentation of
of Accounts
Accounts Receivable
Receivable
Assets
Current Assets:
Cash
Accounts receivable, net of $25 allowance
for doubtful accounts
Merchandise inventory
Prepaid expenses
Total current assets

Chapter
9-14

$ 346
475
812
40
1,673

LO 3 Distinguish between the methods and bases
companies use to value accounts receivable.


Valuing
Valuing Accounts
Accounts Receivable
Receivable
Allowance Method for Uncollectible Accounts
1. Companies estimate uncollectible accounts
receivable.
2. To record estimated uncollectibles, companies
debit Bad Debts Expense and credit Allowance for
Doubtful Accounts (a contra-asset account).
3. When companies write off specific uncollectible
accounts, they debit Allowance for Doubtful
Accounts and credit Accounts Receivable.
Chapter
9-15

LO 3 Distinguish between the methods and bases
companies use to value accounts receivable.

Valuing
Valuing Accounts
Accounts Receivable
Receivable
E9-6 On December 31, 2008, Jarnigan Co. estimated
that 2% of its net sales of $400,000 will become
uncollectible. The company recorded this amount as an
addition to Allowance for Doubtful Accounts. On May 11,
2009, Jarnigan Co. determined that Terry Frye’s account
was uncollectible and wrote off $1,100. On June 12, 2009,
Frye paid the amount previously written off.
Instructions
Prepare the journal entries on December 31, 2008, May
11, 2009, and June 12, 2009.
Chapter
9-16

LO 3 Distinguish between the methods and bases
companies use to value accounts receivable.


Valuing
Valuing Accounts
Accounts Receivable
Receivable
E9-6 Prepare the journal entries on December 31, 2008,
May 11, 2009, and June 12, 2009.
December 31

($400,000 x 2% = 8,000)

Bad debt expense

8,000

Allowance for doubtful accounts

Chapter
9-17

8,000

LO 3 Distinguish between the methods and bases
companies use to value accounts receivable.


Valuing
Valuing Accounts
Accounts Receivable
Receivable
E9-6 Prepare the journal entries on December 31, 2008,
May 11, 2009, and June 12, 2009.
May 11 (write-off)
Allowance for doubtful accounts
Accounts receivable
June 12 (recovery)
Accounts receivable
Allowance for doubtful accounts
Cash
Accounts receivable

Chapter
9-18

1,100

1,100

1,100
1,100
1,100

1,100

LO 3 Distinguish between the methods and bases
companies use to value accounts receivable.


Valuing
Valuing Accounts
Accounts Receivable
Receivable
Bases Used for Allowance Method

Chapter
9-19

Illustration 9-5

LO 3 Distinguish between the methods and bases
companies use to value accounts receivable.

Valuing
Valuing Accounts
Accounts Receivable
Receivable
Example Data
Credit sales

$500,000

Estimated % of credit sales uncollectible 1.25%
Accounts receivable balance

$72,500

Estimated % of A/R not collected

8%

Unadjusted balance in Allowance for Doubtful Accounts:

Chapter
9-20

Case 1

$150 (credit balance)

Case 2

$150 (debit balance)
LO 3 Distinguish between the methods and bases
companies use to value accounts receivable.


Valuing
Valuing Accounts
Accounts Receivable
Receivable
Percentage of Sales – disregards the existing
balance in Allowance for Doubtful Accounts

Credit sales

$500,000

Estimated percentage uncollectible
Estimated bad debt expense
Journal entry:

1.25%
$

Bad debt expense
6,250
Allowance for doubtful accounts
Chapter
9-21

6,250

6,250

LO 3 Distinguish between the methods and bases
companies use to value accounts receivable.


Valuing
Valuing Accounts
Accounts Receivable
Receivable
Percentage of Sales
Case 1

Case 2

Actual balance (credit)

(150)

150

Estimated uncollectible

(6,250)

(6,250)

Ending balance

(6,400)

(6,100)

The Allowance for Doubtful Accounts has an ending
balance of $6,400 in Case 1 and $6,100 in Case 2.

Chapter
9-22

LO 3 Distinguish between the methods and bases
companies use to value accounts receivable.


Valuing
Valuing Accounts
Accounts Receivable
Receivable
Percentage of Receivables

Accounts receivable

$ 72,500

Estimated percentage uncollectible

x

8%

Required balance in allowance account

$

5,800

===================================================
What will be the amount of the adjusting entry?

Chapter
9-23

LO 3 Distinguish between the methods and bases
companies use to value accounts receivable.


Valuing
Valuing Accounts
Accounts Receivable
Receivable
Percentage of Receivables
Actual balance (credit)

Case 1

Case 2

(150)

150

Desired balance

(5,800)

(5,800)

Adjustment

(5,650)

(5,950)

Journal entry – Case 1:
Bad debt expense

5,650

Allowance for doubtful accounts
Chapter
9-24

5,650

LO 3 Distinguish between the methods and bases
companies use to value accounts receivable.


Valuing

Valuing Accounts
Accounts Receivable
Receivable
Percentage of Receivables
Actual balance (credit)

Case 1

Case 2

(150)

150

Desired balance

(5,800)

(5,800)

Adjustment

(5,650)

(5,950)

Journal entry – Case 2:
Bad debt expense

5,950

Allowance for doubtful accounts
Chapter
9-25

5,950

LO 3 Distinguish between the methods and bases
companies use to value accounts receivable.