Chapter 8
Receivables
Receivables: All money claims against other entities, including
people, business firms, and other organizations.
Current vs. Non-current receivables:
o Accounts receivable:
o Notes receivable:
Credit sales and accounts receivable
Selling on credit causes two main problems.
Regardless of how careful a company is in granting credit, some
credit sales will be uncollectible.
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o Expense for some credit sales uncollectible is called
.
How to value A/R: A/R is valued at their net realizable value
(i.e., net amount expected to be collected).
ACCOUNTING FOR BAD DEBTS
Direct write-off method vs. Allowance method
1. Direct write-off method: No journal entry is made until a
specific account has definitely been established as uncollectible.
Exercise: K-Max sold merchandise of $500 to Jason Clark on
account on December 22, 2024. On January 5, 2025, K-Max
determined that Jason Clark would not pay the $500 he owes. K-
Max would make the following entries on December 22, 2024 and
January 5, 2025.
o This method is not used because it violates the
: It does not match expense (i.e., bad debts) associated with
sales with period in which sales were made.
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2. Allowance method
o This method estimates bad debts before they occur and
matches estimated bad debts to the period in which the credit
sale is made.
o Report estimated bad debt expense on the income statement,
and increase allowance for doubtful accounts.
(Adjusting) Journal entry to record estimated bad debt expense
in period of sale:
Exercise: On December 31, ExTone Company estimates that a
total of $30,000 of the $200,000 balance of their A/R will be
uncollectible.
o Allowance for doubtful accounts is a
which the gross accounts receivable to
its net realizable value (= NRV).
o Where is the normal balance for allowance for doubtful
accounts?
o NRV = Gross accounts receivable (i.e., face value of A/R) –
allowance for doubtful accounts.
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Accounts Receivable (gross): $ XXX
Less: Allowance for doubtful accounts ($ XX)
Net Realizable Value: $ XX
MICROSOFT CORPORATION
BALANCE SHEET (Partial)
(In millions)
201
June 30 2014 3
Accounts receivable,
net of allowance for doubtful accounts of $301 19,544 17,486
and $336
Writing off uncollectibles: When a specific account has
definitely been uncollectible, need to reduce both allowance for
doubtful accounts and accounts receivable.
Journal entry to write-off bad debt in period determined
uncollectible:
Collection of A/R previously written off: When a payment is
received from the account that was previously written off, first,
we need to reverse the previous entry for the write-off of
uncollectibles, then record the cash receipt.
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Exercise: Journalize the following transactions using the
allowance method of accounting for uncollectible receivables.
July 9 Received $1,200 from Jay Burke and wrote off the
remainder owed of $3,900 as uncollectible.
Oct. 11 Reinstated the account of Jay Burke and received
$3,900 cash in full payment.
How to Estimate Uncollectible Accounts Receivable
1. Percentage-of-sales (income statement) approach:
o Uncollectible A/R is estimated based on credit sales.
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Example: Assume that based on past experience, 2% of credit
sales are uncollectible and credit sales for the current period total
$100,000. Entry to record bad debt expense is:
2. Percentage-of-receivables (balance sheet) approach:
o Step 1: Based on the balance of Accounts receivable at the
end of the period, we calculate the best estimate of how much
will not be collected. This becomes the target balance in
allowance for doubtful accounts.
o Step 2: Compare the target balance with the original (=
existing) balance in allowance for doubtful accounts and
recognize the difference between two numbers as bad debt
expense in the journal entry.
Example: A company has a current $1,350 credit balance for
‘allowance for doubtful accounts’ before updating the allowance
account. At the end of accounting period, the best estimate of
amounts uncollectible based on A/R is $17,680. How much is the
amount for bad debt expense recognized at the end of accounting
period?
Exercises I: Duncan Company reports the following financial information before
adjustments.
Dr. Cr.
Accounts Receivable $100,000
Allowance for Doubtful Accounts $2,000
Sales (all on credit) 850,000
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Prepare the journal entry to record Bad Debt Expense when
Duncan Company estimates bad debts at (a) 1% of net sales and
(b) 5% of accounts receivable.
Exercises II: Duncan Company reports the following financial information before
adjustments
Dr. Cr.
Accounts Receivable $90,000
Allowance for Doubtful Accounts $1,750
Sales (all on credit) $680,000
Prepare the journal entry to record Bad Debt Expense when the
Company estimates bad debts at 4% of accounts receivable.
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Example: The following aging schedule categorizes accounts
receivable by the length of time outstanding. Each age grouping
has a different likelihood of being uncollectible. The longer an
account receivable is outstanding, the less likely it is that it will be
collected.
Schedule of Accounts Receivable by Age
December 31, 2024
Accounts Estimated Estimated
Receivable Percent Amount
Category Balance Uncollectible Uncollectible
Current 85,600 1%
Past due:
1 - 30 days 31,200 4%
31 - 60 days 24,500 10%
61 - 90 days 18,000 30%
Over 90 days 9,200 50%
Totals 168,500
Case 1: First, assume that no balance existed in the Allowance for
Doubtful Accounts before updating the Allowance account.
Prepare an adjusting entry to update allowance for doubtful
accounts and recognize bad debts expense (done at end of period):
On the balance sheet, Accounts Receivable would be reported as
follows:
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Case 2: Now assume that Allowance for Doubtful Accounts has a
credit balance of $1,230 before updating Allowance account.
On the balance sheet, A/R would be reported as follows:
NOTES RECEIVABLE
Promissory note: A written promise to pay a specific amount
at a specific time in the future, usually with interest.
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o Maker (i.e., borrower), who is the party making a promise to
pay, has a note payable and interest expense.
o Payee (i.e., lender), who is the party to whom the note is
payable, has a note receivable and interest revenue.
o Face amount is the (borrowed) amount the note is written
for on its face.
o Issuance date is the date a note is issued.
o Maturity date (or due date) is the date the note is to be paid.
o Term of the note is the amount of time between the issuance
and due dates.
o Annual interest rate is explicitly stated on note.
o On maturity date, the payee receives the principal plus the
interest.
Exercise: Interest-Bearing Promissory Note
Baker Corporation promises to pay HIGH-TEC company $10,000
plus 12% annual interest on January 31, 2015.
Date: November 1, 2014
Signed: Baker Corporation
1. What is the journal entry by HIGH-TEC on November 1, 2014
which is the issuance date?
2. Should HIGT-TEC make any journal entry on December 31,
which is the fiscal year-end?
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* How to compute interest?
Interest = Principal × Annual interest rate × Time
When computing interest for one year, “Time” equals 1.
When the computation period is less than one year, then
“Time” is a fraction: For example, if we needed to compute
interest for 2 months, “Time” would be 2/12.
3. What entry would HIGH-TEC make on the maturity date?
Companies often sell their receivables to bank or finance
company. This transaction is called the
receivables, and the buyer of the receivables is called a
.
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