Chapter 7 Accounting for Receivables

On August 21, Alix Company receives a $2,000, 60-day, 6% note from a customer as payment on her account. How much interest will be due on October 20, the due date?

$20

Maintains a separate AR for each customer

A supplementary record called the AR (subsidiary) Ledger

Current Assets based off AR and Allowance For Doubtful Accounts

AR less Allowance for Doubtful Accounts

On September 1, Horn Co. accepted a 60-day, 5% note in the amount of $3,000 from a customer. On the due date of the note, the customer dishonors the note and fails to pay. The journal entry that Horn would make on the due date would include debit to:

Accounts Receivable for $3,025

A company has $150,000 of credit sales during the year and estimates that $1,000 of its accounts receivable will be uncollectible. The adjusting entry will include a credit to:

Allowance for Doubtful Accounts

Maturity Value

Amt to be Repaid Maturity Value = Principal + Interest

Percent of Sales Method

Assumes that a % of credit sales for the period is uncollectible

Percent of AR Method

Assumes that a percent of a company's receivables is uncollectible

Normal Balance of Allowance For Doubtful Accounts

Contra asset: normal balance= credit

The general ledger continues to keep a single (total) AR account. aka...

Control Account- A control account appears in the general ledger and is supported by a subsidiary ledger.

Percent of Sales Method Equation

Current Period Sales x Bad Debt% = Estimated Bad Debt Expense

Maturity Date

Date note must be paid

Entry for Direct Write Off Method- Recovering a Bad Debt

Debit AR Credit Bad Debt Expense 2nd entry: Debit Cash Credit AR-customer name

2 Methods of Bad Debts

Direct Write-Off Method & Allowance Method

Equation for Accounts Receivable Turnover

Net Sales / Avg. Accounts Receivable

In August, Johns Co.'s account receivable balance was written off using the direct method. In November, Johns pays the balance in full. The journal entry to record the reinstatement of the account receivable must include a credit to the

bad debt expense account

Tricon Co. sells $10,000 of its accounts receivables and is charged a 5% factoring fee. It records this sale with a debit to:

cash for $9500

On November 1, Eli Co. received a $6,000, 60-day, 6% note from a customer as payment on his $6,000 overdue account. Eli's journal entry to record this transaction on November 1, would include a: (Check all that apply.)

credit to Accounts Receivable for $6,000. debit to Notes Receivable for $6,000.

On March 14, Ian Co. accepted a 180-day, 5% note in the amount of $1,000 from Ali Co., a customer. On the due date of the note, Ali dishonors the note. The journal entry that Ian would record on the due date would include a: (Check all that apply.)

credit to Notes Receivable for $1,000. credit to Interest Revenue for $25. debit to Accounts Receivable - Ali for $1,025.

Lina Co. uses the allowance method to account for bad debts. On January 28, Lina determines that a $200 balance from ZRT, Inc. is uncollectible and writes the balance off. The journal entry to write this balance off will include a: (Check all that apply.)

debit to Allowance for Doubtful Accounts. credit to Accounts Receivable - ZRT.

Companies sometimes convert receivables to cash before they are due. When a company sells its receivables, the buyer is called a (pledgor/factor). When a company uses receivables as security for a loan, it is called (pledging/factoring).

factor pledging

Avi Co. raises cash by borrowing $10,000 and pledging $12,000 accounts receivables as security for the loan. Avi will record a journal entry in the amount of the $10,000 note payable, and also record a (debit/credit/footnote)_____ to the financial statements, indicating that $12,000 of accounts receivables have been pledged.

footnote

Accounts receivable turnover is calculated using the following formula:

net sales/average accounts receivable, net

The expected proceeds from accounts receivable, determined by taking accounts receivable less the allowance for doubtful accounts, is called:

realizable value

Companies sometimes convert receivables to cash before they are due by selling them or using them as security for a loan. The reasons that a company may convert receivables before their due date include: (Check all that apply.)

the company does not want to deal with collecting receivables. the company needs cash.

Disposal of Receivables-Selling Receivables How do companies do it and what is the entry

-Buyer, called a factor, charges the seller a factoring fee and then collects the receivables as they come due -Entry: Debit Cash (amt received) Debit Factoring Fee Expense (amt charged) Credit AR (amt sold)

What is Disposable of Receivables and Why is it used?

-Companies can convert receivables to cash before they are due. -Reasons include the need for cash or not wanting to be involved in collection activities

Aging of AR Method

1. Classify each receivable by how long it's past due 2. Each age group is multiplied by its estimated bad debts percentage 3. Estimated bad debts for each group are totaled

Entry for Sales on Credit

Debit AR Credit Sales

Sales on Store Credit Card Entry (cash received some time after deposit of sales receipt) and Entry for when payment is received

Debit AR (for amt to be to be collected) Debit Credit Card Expense (for amt of fee) Credit Sales (full invoice amt) When payment received: Debit Cash & Credit AR

Entry for Recording a Dishonored Note

Debit AR (full amt + interest) Credit Notes Receivable (full amt) Credit Interest Revenue (interest)

Entry for End-of-Period Interest Adjustment

Debit Interest Receivable Credit Interest Revenue

Does Recording a Dishonored Note relieve the maker of the obligation to repay the principal and interest due?

No

On December 1, Christy Co. accepted a 60-day, 6%, $1,000 note due January 30. On December 31, the appropriate year-end adjusting entry was made. On January 30, the note was honored and paid in full. The entry to record receipt of payment on January 30 (assuming no reversing entry was made) would include a credit to: (Check all that apply.)

Notes Receivable for $1,000. Interest Revenue for $5. Interest Receivable for $5.

The two methods companies can use to convert receivables to cash before they are due includes selling them and pledging them.

true

What does the Ratio for Accounts Receivable Turnover do?

-Measures quality (likeliness of collecting) and liquidity (speed of collection) of accounts receivables -Measures how often, on avg, receivables are received and collected during a period -Evaluates how efficient management has been in granting credit to produce revenue

Pledging Receivables (5)

1. Company borrows $$ by pledging its receivables as security 2. Borrower (company) retains ownership of receivables 3. If borrower defaults (doesn't pay), lender has right to be paid from receipts on AR when collected 4. The pledge should be disclosed in financial statements footnotes 5. Loan is recorded as: Debit Cash Credit Notes Payable

2 Methods to Estimate Bad Debts Expense (And entries for all)

1. Percent Sales Method/Income Statement Approach 2. Balance Sheet Method-AR a. Percent of AR b. Aging of AR All Debit Bad Debt Expense Credit Allowance For Doubtful Accounts

Allowance Method

At end of each period, estimates total bad debts expected to be realized from that period's sales

On November 1, Alice Co. accepted a 90-day, 6%, $2,000 note due January 30. On December 31, the appropriate adjusting entry was made. On January 30 of the next year, the note was honored and paid in full. The entry to record receipt of payment on January 30 would include a credit to: (Check all that apply.)

Interest Revenue for $10. Notes Receivable for $2,000 Interest Receivable for $20.

Lion Company accepted a $15,000, 30-day, 6% note on December 16 from Diaz Co, granting a time extension on his past-due account receivable. The adjusting entry on December 31 for Lion Company would include a credit to:

Interest Revenue for $37.50.

Promissory Notes

Notes payable to the maker (person promising to pay) and Notes receivable to the payee (person to be paid)

When is the principle and interest of a note due?

On maturity date

Formula for Annual Interest

Principle x Annual Interest Rate x Time(fraction of year) = Annual Interest -if annual interest rate is > 1 year, pay rent every year -if annual interest rate is < 1 year, rate is annualized - if note is expressed in days, for time base a year on 360 days using "bankers rule"

Notes Receivable

Promissory note that is a written promise to pay a specified amount (principal) usually with interest, either on demand or on a stated future date

Woodstock Co. had $500 of credit cards sales. The net cash receipts were deposited immediately into Woodstock's bank account less a 2% fee. The entry to record this sales transaction would include a credit to:

Sales $500

Schedule of AR

Shows sum of individual accounts in subsidiary ledger = balance of AR account in general ledger

Entry for Recording Notes Receivable

Debit Notes Receivable (full amt excluding interest) Credit Sales (full amt excluding interest)

A company estimates that $1,000 of its accounts receivable is uncollectible at the end of the period and will make the following adjusting entry: (Check all that apply.)

Debit to Bad Debts Expense for $1,000 Credit to Allowance for Doubtful Accounts

Examples of credit card sales

Visa, Mastercard, American Express

The (aging/percent) of accounts receivable method uses several percentages, based on long an account is past due, to estimate the allowance.

aging

2 Advantages of Allowance Method

1. Records estimated bad debts expense in period when related sales are recorded. 2. Reports AR on the balance sheet at the estimated amount of cash to be collected

Advantages of Sales on Bank Credit Cards (4)

1. eliminates company's need to evaluate customer's credit standing 2. avoids seller's risk 3. seller receives cash sooner than when grant credit directly 4. more credit options potentially increase sales

Lani Co. uses the allowance method to account for bad debts. At the end of the year, their unadjusted trial balance shows an accounts receivable balance of $400,000; allowance for doubtful accounts balance of $400 (debit); and sales of $1,200,000. Based on history, Lani estimates that bad debts will be 1% of accounts receivable. The entry to record estimated bad debts will include a debit to Bad Debts Expense in the amount of:

4400

On January 1, JC Co. accepted a 60-day, 6%, note in the amount of $10,000 from a customer. On March 2, the due date of the note, the customer honors the note and pays in full. The journal entry that JC would make to record the receipt of payment of this note would include a debit to:

Cash in the amount of $10,100

Entry for Allowance Method- Recovering a Bad Debt

Debit AR-customer name Credit Allowance for Doubtful Accounts 2nd Entry: Debit Cash Credit AR-customer name

Entry for Allowance Method- Writing Off a Bad Debt

Debit Allowance for Doubtful Accounts Credit AR-customer name

Entry for Direct Write-Off Method-Recording and Writing Off Bad Debts

Debit Bad Debt Expense Credit AR-customer name

Entry for Allowance Method- Recording Bad Debts Expense

Debit Bad Debt Expense Credit Allowance For Doubtful Accounts

Sales on Bank Credit Card Entry (cash received immediately upon deposit)

Debit Cash (amt of sale less credit card company charge) Debit Credit Card Expense (amt of fee) Credit Sales (full invoice amt)

Entry for Notes Receivable in Acceptance of Past-Due ARWHen

Debit Cash (amt paid right then) Debit Notes Receivable (amt agreed will pay in future exclude interest) Credit AR-customer name (cash+notes receivable amts)

Entry for Notes Receivable Honored Note

Debit Cash (full amt + interest) Credit Notes Receivable (full amt) Credit Interest Revenue (interest)

Entry for Collection of Some Accrued Interest

Debit Cash (full amt received) Credit Interest Receivable (amt previously accrued) Credit Interest Revenue (amt earned since accrual date) Credit Notes Receivable (face amt of note)

Entry for Recording End-of-Period Interest Adjustment (recording accrued interest)

Debit Interest Receivable (amt of accrued interest earned) Credit Interest Revenue (amt of accrued interest earned)

What method violates Expense Recognition Principle?

Direct Write-Off Method

Kaiven Company accepted a $12,000, 60-day, 6% note on December 21 from Diaz Co, granting a time extension on his past-due account receivable. The adjusting entry on December 31 would include a debit to:

Interest Receivable for $20.

Interest

The charge for using money until the due date

Period of Note

Time from the note's date to its maturity date

Why is customer name put with AR in Direct Write Off Method for Bad Debts

To ensure proper entry is made in customer's AR subsidiary ledger

Percent of AR Method Equation

Total Estimated Bad Debts Expense - Previous Balance in Allowance Account = Current Bad Debt Expense THEN Year-end AR x bad debt% = Allowance for Doubtful Accounts

Bad Debts

Uncollectible amounts from when customers do not pay their account