Financial accounting 3e IFRS edtion willey chapter 08

WILEY

IFRS EDITION
Prepared by
Coby Harmon
University of California, Santa Barbara
8-1
Westmont College


PREVIEW OF CHAPTER 8

Financial Accounting
IFRS 3rd Edition
Weygandt ● Kimmel ● Kieso
8-2


CHAPTER

8

Accounting for
Receivables

LEARNING OBJECTIVES
After studying this chapter, you should be able to:
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.
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9. Explain the statement presentation and analysis of receivables.


Types of Receivables

Learning Objective 1
Identify the different types
of receivables.

Amounts due from individuals and companies that are
expected to be collected in cash.

Amounts customers
owe on account that
result from the sale of
goods and services.

Accounts
Receivable

8-4

Written promise

(formal instrument)
for amount to be
received. Also called
trade receivables.

Notes
Receivable

Nontrade receivables
such as interest,
loans to officers,
advances to
employees, and
income taxes
refundable.

Other
Receivables

LO 1


TYPES OF RECEIVABLES
Amounts due from individuals and companies that are
expected to be collected in cash.

Illustration 8-1
Receivables as a percentage of assets

8-5

LO 1


TYPES OF RECEIVABLES
Question
Receivables are frequently classified as:
a. accounts receivable, company receivables, and other
receivables.
b. accounts receivable, notes receivable, and employee
receivables.
c. accounts receivable and general receivables.
d. accounts receivable, notes receivable, and other
receivables.
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LO 1


Accounts Receivable
Recognizing Accounts Receivable
Service

Learning
Objective 2
Explain how
companies recognize
accounts receivable.

organization records a

receivable when it performs service on account.

Merchandiser

records accounts receivable at the point of
sale of merchandise on account.

Seller

may offer a discount to encourage early payment.

Buyer

might return goods found to be unacceptable.

►Sales

8-7

returns reduce receivables.

LO 2


Recognizing Accounts Receivable
Illustration: Assume that Hennes & Mauritz (SWE) Co. on July
1, 2017, 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 Hennes & Mauritz.
Jul. 1

Accounts Receivable

1,000

Sales Revenue
1,000

8-8

LO 2


Recognizing Accounts Receivable
Illustration: On July 5, Polo returns merchandise worth $100 to
Hennes & Mauritz.
Jul. 5

Sales Returns and Allowances

100

Accounts Receivable
100
Illustration: On July 11, Hennes & Mauritz receives payment from
Polo Company for the balance due.
Jul. 11

Cash ($900 - $18)

882

Sales Discounts ($900 x .02)

18

Accounts Receivable
900
8-9

LO 2


Recognizing Accounts Receivable
Illustration: Some retailers issue their own credit cards.
Assume that you use your JCPenney Company credit card to
purchase clothing with a sales price of $300.
Accounts Receivable

300

Sales Revenue
300
Assume that you owe $300 at the end of the month, and
JCPenney charges 1.5% per month on the balance due.
Accounts Receivable

4.50

Interest Revenue

4.50
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LO 2


ANATOMY OF A FRAUD
Tasanee was the accounts receivable clerk for a large non-profit foundation that provided
performance and exhibition space for the performing and visual arts. Her responsibilities included
activities normally assigned to an accounts receivable clerk, such as recording revenues from
various sources that included donations, facility rental fees, ticket revenue, and bar receipts.
However, she was also responsible for handling all cash and checks from the time they were
received until the time she deposited them, as well as preparing the bank reconciliation. Tasanee
took advantage of her situation by falsifying bank deposits and bank reconciliations so that she
could steal cash from the bar receipts. Since nobody else logged the donations or matched the
donation receipts to pledges prior to Tasanee receiving them, she was able to offset the cash that
was stolen against donations that she received but didn’t record. Her crime was made easier by
the fact that her boss, the company’s controller, only did a very superficial review of the bank
reconciliation and thus didn’t notice that some numbers had been cut out from other documents
and taped onto the bank reconciliation.

Total take: $1.5 million
The Missing Controls
Segregation of duties. The foundation should not have allowed an accounts receivable clerk,
whose job was to record receivables, to also handle cash, record cash, make deposits, and
especially prepare the bank reconciliation.
Independent internal verification. The controller was supposed to perform a thorough review
of the bank reconciliation. Because he did not, he was terminated from his position.
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LO 2


DO IT!

>

On May 1, Wilton sold merchandise on account to Bates for €50,000
terms 3/15, net 45. On May 4, Bates returns merchandise with a sales
price of €2,000. On May 16, Wilton receives payment from Bates for the
balance due. Prepare journal entries to record the May transactions on
Wilton’s books. (Ignore cost of goods sold entries.)
May 1

4

16

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Accounts Receivable—Bates
Revenue
Sales Returns and Allowances
Receivable—Bates
Cash (€48,000 - €1,440)
Sales Discounts (€48,000 x .03)
Receivable—Bates

50,000
Sales

2,000
50,000
Accounts
46,560
2,000
1,440
Accounts
LO 2


Valuing Accounts Receivable
Learning Objective 3
Current

asset.

Valuation

(net realizable value).

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

Uncollectible Accounts Receivable
Sales

on account raise the possibility of accounts not

being collected.
Seller

records losses that result from extending credit
as Bad Debt Expense.

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LO 3


Valuing Accounts Receivable
Methods of Accounting for Uncollectible Accounts

Direct Write-Off
Theoretically undesirable:
No

matching.

Receivable

not stated at
amount expect to be
received.

Not

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Allowance Method
Losses are estimated:


Better matching.



Receivable stated at cash
(net) realizable value.



Required by IFRS.

acceptable for financial
reporting.
LO 3


Accounts Receivable
How are these accounts presented on the Statement of
Financial Position?

Accounts Receivable

8-15

Allowance for
Doubtful Accounts

Beg.

500

25

Beg.

End.

500

25

End.
LO 3


Accounts Receivable

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LO 3


Accounts Receivable
Alternate
Presentation

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LO 3


Accounts Receivable
Journal entry for credit sale of €100.
Accounts Receivable

100
Sales

Accounts Receivable

8-18

100

Allowance for
Doubtful Accounts

Beg.

500

25

Beg.

End.

500

25

End.
LO 3


Accounts Receivable
Journal entry for credit sale of €100.
Accounts Receivable

100
Sales

Accounts Receivable

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Beg.

500

Sale

100

End.

600

100

Allowance for
Doubtful Accounts
25

Beg.

25

End.
LO 3


Accounts Receivable
Collected €333 on account.
Cash
Receivable

Accounts Receivable

8-20

Beg.

500

Sale

100

End.

600

333
Accounts
333

Allowance for
Doubtful Accounts
25

Beg.

25

End.
LO 3


Accounts Receivable
Collected €333 on account.
Cash

333
Accounts
333

Receivable

Accounts Receivable

8-21

Beg.

500

Sale

100

End.

267

333

Allowance for
Doubtful Accounts
25

Beg.

25

End.

Coll.

LO 3


Accounts Receivable
Adjustment of €15 for estimated bad debts.
Bad Debt Expense

Allowance for
15

Doubtful Accounts

Accounts Receivable

8-22

Beg.

500

Sale

100

End.

267

333

15

Allowance for
Doubtful Accounts
25

Beg.

25

End.

Coll.

LO 3


Accounts Receivable
Adjustment of €15 for estimated bad debts.
Bad Debt Expense

Allowance for
15

Doubtful Accounts

Accounts Receivable

8-23

Beg.

500

Sale

100

End.

267

333

15

Coll.

Allowance for
Doubtful Accounts
25

Beg.

15

Est.

40

End.
LO 3


Accounts Receivable
Write-off of uncollectible accounts for €10.
Allowance for Doubtful Accounts

Accounts
10

Receivable

Accounts Receivable

8-24

Beg.

500

Sale

100

End.

267

10

333

Coll.

Allowance for
Doubtful Accounts
25

Beg.

15

Est.

40

End.
LO 3


Accounts Receivable
Write-off of uncollectible accounts for €10.
Allowance for Doubtful Accounts

Accounts
10

Receivable

Accounts Receivable
Beg.

500

Sale

100

End.
8-25

257

10

333

Coll.

10

W/O

Allowance for
Doubtful Accounts

W/O

25

Beg.

15

Est.

30

End.

10

LO 3