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Chapter 8 - REPORTING AND ANALYZING INVENTORY
LO 1: Explain how companies recognize accounts receivable.
RECEIVABLES
“Amounts due from individuals and companies that are expected to be collected in cash.”
- Accounts Receivable: Amounts customers owe on account that result from the sale of goods and services. Companies generally expect to collect accounts receivable within 30 to 60 days.
- Notes Receivable: Written promise (formal instrument) for amount to be received. Also called trade receivables. They include interest and extend for time periods of 60 to 90 days or longer.
- Other Receivables : Nontrade receivables such as interest, loans to officers, advances to employees, and income taxes refundable.
Service organization records a receivable when it performs service ON ACCOUNT. Merchandiser records accounts receivable at the point of sale of merchandise ON ACCOUNT.
***Below are examples of journal entries that would be made with accounts receivables.
Many of these journal entries were explained in Chapter 5.
Example: Prepare journal entries to record the following transactions entered into by the Castagno Company :
Nov. 1 Sold merchandise on account to Mercer, Inc., for $18,000, terms 2/10, n/30. Nov. 5 Mercer, Inc., returned merchandise worth $1,000. Nov. 9 Received payment in full from Mercer, Inc.
Date Debit Credit Accounts Receivable- Mercer, Inc. Nov. 1 18, Sales Revenue 18,
Sales Returns and Allowances Nov. 5 1, Accounts Receivable- Mercer, Inc. 1,
Cash Nov. 9 16, Sales Discounts ($17,000 x 0.02) 340 Accounts Receivable- Mercer, Inc. 17,
*****Remember: 2/10, n/30 means that the buyer (Mercer) will get a 2% discount**
on the selling price if they pay Castagno within 10 days, otherwise the full
amount is due in 30 days with no discount.
Example: On November 15, it was determined that Mr. Sanders account of $3,000 would be uncollectible. On December 20, after Mr. Sanders account was written off he paid Company M $3,000 in full. On December 31, Company M estimated that $10,000 of their remaining credit sales will prove uncollectible.
a) Prepare the journal entries for November 15, December 20, and December 31 under the direct write- off method.
Date Debit Credit Bad Debt Expense Nov. 15 3 , Accounts Receivable- Mr. Sanders 3 ,
Accounts Receivable- Mr. Sanders Dec. 20 3 , Bad Debt Expense 1,
Cash Dec. 20 3,00 0 Accounts Receivable- Mr. Sanders 3,
NO JOURNAL ENTRY Dec. 31
b) Prepare the journal entries for November 15, December 20, and December 31 under the allowance method.
Date Debit Credit Allowance for Doubtful Accounts Nov. 15 3, Accounts Receivable- Mr. Sanders 3,
Accounts Receivable- Mr. Sanders Dec. 20 3, Allowance for Doubtful Accounts 1,
Cash Dec. 20 3, Accounts Receivable- Mr. Sanders 3,
Bad Debt Expense Dec. 31 10, Allowance for Doubtful Accounts 10,
PRESENTATION OF ACCOUNTS RECIEVABLE ON THE BALANCE SHEET UNDER THE ALLOWANCE METHOD
Cash (Net) Realizable Value = Accounts Receivable – Allowance for Doubtful Accounts For Hampson Furniture, of the $200,000 in Accounts Receivable, they only expect to collect $188,000. They do not expect to collect $12,000.
Ex: 2 Smith Inc. estimates that 1% of their $100,000 accounts receivable balance as of December
31 will be uncollectible. What Journal entry would be made on December 31 if the beginning
balance for the Allowance for Doubtful Accounts was a $600 DEBIT balance?
Bad Debt Expense 1,600 $1,000 (END) + $600 (BEG) Allowance for Doubtful Accounts 1,600 $1,000 (END) + $600 (BEG)
Allowance for Doubtful Accounts
2. Balance Sheet Approach (Aging the Accounts Receivables Method)
Ending Balance of Allowance for Doubtful Accounts
*If Allowance for Doubtful Accounts had an unadjusted $500 credit balance then…..
Ending Balance – Beginning Balance = Adjustment
Bad Debt Expense 1, Allowance for Doubtful Accounts 1,
*The amount of the adjusting entry is the amount that will yield an adjusted balance for
Allowance for Doubtful Accounts equal to that estimated by the aging schedule. In this case the
adjusted entry which CREDITS Allowance for Doubtful Accounts by $1,320 leads to the ending
adjusted balance of the Allowance for Doubtful Accounts to have a CREDIT balance of $1,820.
BEG: $
End: $1,000 0.01 X $100,000^ = $1,
$1,600 $1,000 (END) + $600 (BEG) = $1,
Totals Not Yet Due 1-30 days Past Due 31-60 days Past Due 61-90 days Past Due 90 + Days Past Due John Smith $2,000 $1,000 $1, Sue $3,000 $1,000 $1,000 $1, Jim $10,000 $5,000 $2,000 $1,000 $2, Total Recievables $15,000 $6,000 $2,000 $3,000 $2,000 $2, Percent Uncollectible 2% 5% 10% 25% 40%
ESTIMATED UNCOLLECTIBLE $1,820.00 $120 $100 $300 $500 $
Aging of Recievables Method
DISPOSING OF ACCOUNTS RECEIVABLE Sale of Receivables to a Factor
A factor is a finance company or bank. o Buys receivables from businesses and then collects the payments directly from the customers. o Typically charges a commission to the company that is selling the receivables. o Fee ranges from 1% to 3% of the receivables purchased.
Ex : Assume that Hendredon Furniture factors $600,000 of receivables to Federal Factors on Nov. 15. 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:
Date Debit Credit Cash Nov. 15 588, Service Charge Expense ($600,000 x 2%) 12, Accounts Receivable 600,
National Credit Card Sales (Customers that use Visa, Mastercard, or other credit card)
A retailer’s acceptance of a national credit card is another form of selling (factoring) the recievables by the retailer. o Retailer pays card issuer a fee of 2 to 4% of the invoice price for its services. o Recorded the same as cash sales.
o Advantages to retailer : Issuer does credit investigation of customer. Issuer maintains customer accounts. Issuer undertakes collection and absorbs losses. Receives cash more quickly.
Ex : Chef Louie purchases $2,000 worth of food and ingredients for his restaurant from Frank’s Fresh Market store, and he charges this amount on his MasterCard. The service fee that MasterCard charges Frank’s Fresh Market is 4%. Frank’s Fresh Market would record this transaction on March 28 as follows:
Date Debit Credit Cash Mar. 28 1, Service Charge Expense ($2,000 x 4%) 80 Sales Revenue 2,
Term of Note: amount of time between the issuance and due dates. (About 122 days—Time between June 20, 20XX and October 20, 20XX)
Interest Computation:
Time in Terms of One Year Days: # of days ÷ 360 Months: # of months ÷ 12 Years: # of years ÷ 1
Ex: The total interest for a $1,000, 90-day, and 10% note would be computed as follows:
$1,000 X 10% X (90/360) = $
Current Example: 122 day note between Ron and Cam.
$1,000 x 10% x (122/360) = $33.89 Interest
8. Maturity Value: Amount that must be paid at the due date of the note. It is the sum of the
face amount and interest. In our example Ron has to pay Cam $1,033.89 ($1,000 Face Amount
+ $33.89 Interest) when note is due on October 20, 2017.
Another Note Example with Terms
Journal Entries for Notes Receivable
1. Recognizing Notes Receivable (Tropical Breeze-Payee point of view) Tropical Breeze Inc. received a $2,000, 90-day, 10% promissory note from Paradise Sand to settle their overdue open account. 2. Recording an Honored Note (Tropical Breeze-Payee point of view) After 90 days, Tropical Breeze Inc. receives $2,050 from Paradise Sand ($2,000 to repay the note and $50 in interest.) **Interest = (2,000 x 10% x (90/360))= $
- Recording a Dishonored Note (Tropical Breeze-Payee point of view)** After 90 days, Paradise Sand is unable and refuses to pay Tropical Breeze Inc. $2,050 ($2,000 to repay the note and $50 in interest.) 4. Recording End-of-Period Interest Adjustment (Tropical Breeze-Payee point of view) If Tropical Breeze Inc. receives a $2,000, 90-day, 10% promissory note from Paradise Sand on December 1, then on December 31 Tropical Breeze Inc. would need to recognize 30 days of interest.
$2,000 X 10% X (30/360) = $16.
