Post on 30-Apr-2018
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
Chapter 8
Reporting andInterpreting Receivables,Bad Debt Expense, andInterest Revenue
8-2
Accounts Receivable
Accounts Receivable
Amounts owed by other companies
or persons for cash, goods, or
services.
Open accounts owed to the
business by trade customers.
8-3
Notes Receivable
A note receivable is a written contractestablishing the terms by which a
company will receive amounts it is owed.
Companies may convert accounts
receivable balances to notes for customers
who are having difficulty paying their receivables.
8-4
$1,200 January 5, 2008
Sixty days after date I promise to pay tothe order of
Skechers U.S.A., Inc.
One thousand two hundred --------------------------------- Dollars
Payable at
First National Bank
Value received with interest at per annumNo. Due
Jones Athletic Company
8563 March 6, 2008
8%
Alan Jones
Notes Receivable
Due Date
Interest Rate
TermPayee
Principal
8-5
Learning Objective 1
Describe the tradeoffs of
extending credit.
8-6
Extending credit is likely to increasesales, but not without costs:
Increased wage costs to manage receivables
Bad debtscosts
Delayed receiptof cash
Businesses extend credit togenerate additional sales and to
meet the terms offered by competitors.
Pros and Cons of Extending Credit
8-7
Learning Objective 2
Estimate and report the effects of uncollectible
accounts.
8-8
Accounts Receivableand Bad Debts
Bad debts result from credit customers who will not pay the business the amountthey owe, regardless of collection efforts.
8-9
Revenues 10,000$ Revenues 0Cost of goods sold 6,000 Cost of goods sold 0Bad debt expense 0 Bad debt expense 1,000 Net income 4,000$ Net income (1,000)$
Year 1(Credit Sale Occurs)
Year 2(Bad Debt discovered)
Bad debts are likely to be discovered inperiods after the credit sale.
If bad debts are not reported until discovered,income is distorted in the periods of sale aswell as in the period of bad debt discovery.
Accounts Receivableand Bad Debts
8-10
Bad Debt Expense
Sales Revenue
Record in same accounting period.
Matching Principle
The Allowance Method of Accounting for Bad Debts
8-11
Most businesses record an estimate ofthe bad debt expense with an adjusting
entry at the end of the accounting period.
The Allowance Method of Accounting for Bad Debts
8-12
Debit CreditAccounts
Record EstimatedBad Debt Expense
For the year ended December 31, 2005, Skechers U.S.A., Inc., estimated itsbad debt expense to be $2,882,000.
Prepare the adjusting entry.
8-13
Debit CreditBad Debt Expense (+E, -SE) 2,882,000
Allowance for Doubtful Accounts (+xA, -A) 2,882,000
Accounts
Bad Debt Expense is normally classified as a selling expense and is closed at year-end.
Contra asset account
Record EstimatedBad Debt Expense
For the year ended December 31, 2005, Skechers U.S.A., Inc., estimated itsbad debt expense to be $2,882,000.
Prepare the adjusting entry.
8-14
Allowance for Doubtful Accounts
Accounts ReceivableLess: Allowance for Doubtful AccountsNet Accounts Receivable
Amount the businessexpects to collect.
Balance Sheet Disclosure
8-15
Remove (Write Off) Specific Customer Balances
When it is clear that a specific customer’s account receivable will be uncollectible, the
amount should be removed from the Accounts Receivable account and charged
to the Allowance for Doubtful Accounts.
8-16
Remove (Write Off) Specific Customer Balances
Skechers’ total write-offs for2005 were $1,729,000.
Prepare a summary journalentry for these write-offs.
Debit CreditAccounts
8-17
Debit CreditAllowance for Doubtful Accounts (-xA) 1,729,000
Accounts Receivable (-A) 1,729,000
Accounts
Remove (Write Off) Specific Customer Balances
Skechers’ total write-offs for2005 were $1,729,000.
Prepare a summary journalentry for these write-offs.
8-18
Assume that before the write-off, Skechers’ Accounts Receivable balance was $56,000,000 and the Allowance for
Doubtful Accountsbalance was $6,043,000.
Let’s see what effect the total write-offs of $1,729,000 had on these accounts.
Remove (Write Off) Specific Customer Balances
8-19
Before Write-Off
After Write-Off
Accounts Receivable 56,000,000$ 54,271,000$ Less: Allow. for Doubtful Accts. 6,043,000 4,314,000 Net Accounts Receivable 49,957,000$ 49,957,000$
Notice that the total write-offs of $1,729,000 did not change the net accounts receivable value nor did it
affect any income statement accounts.
Remove (Write Off) Specific Customer Balances
8-20
Estimating Bad Debts
Aging of Accounts Receivable
????
Focus is on determining the desired balance in the Allowance for Doubtful
Accounts on the balance sheet.
8-21
Aging Schedule
Each customer’s account is aged by separating the total amount owed by each customer into
aging categories based on the number of days that have passed since uncollected amounts
were first recorded in the account.
Let’s look on the next slide to see an aging of accounts receivable for Skechers (all amounts
in thousands).
8-22
Number of Days Unpaid
CustomerTotal A/R Balance 0-30 30-60 60-90 Over 90
Adam's Sports 648$ 405$ 198$ 45$ Backyard Shoe 2,345 2,345$
Other Customers 138,803 96,255 18,458 19,605 4,485 Total 141,796$ 96,660$ 18,656$ 19,650$ 6,830$ % UncollectibleEstimatedUncoll. Amount
Next, based on past experience, the business estimates the percentage of uncollectible
accounts in each time category.
(in thousands)
Aging Schedule
8-23
Number of Days Unpaid
CustomerTotal A/R Balance 0-30 30-60 60-90 Over 90
Adam's Sports 648$ 405$ 198$ 45$ Backyard Shoe 2,345 2,345$
Other Customers 138,803 96,255 18,458 19,605 4,485 Total 141,796$ 96,660$ 18,656$ 19,650$ 6,830$ % Uncollectible 1% 4% 14% 40%EstimatedUncoll. AmountNow we will multiply these percentages
by the appropriate column totals.
(in thousands)
Aging Schedule
8-24
Number of Days Unpaid
CustomerTotal A/R Balance 0-30 30-60 60-90 Over 90
Adam's Sports 648$ 405$ 198$ 45$ Backyard Shoe 2,345 2,345$
Other Customers 138,803 96,255 18,458 19,605 4,485 Total 141,796$ 96,660$ 18,656$ 19,650$ 6,830$ % Uncollectible 1% 4% 14% 40%EstimatedUncoll. Amount 7,196$ 967$ 746$ 2,751$ 2,732$
The column totals are then added to arrive at the total estimate of
uncollectible accounts of $7,196.
(in thousands)
Aging Schedule
8-25
Number of Days Unpaid
CustomerTotal A/R Balance 0-30 30-60 60-90 Over 90
Adam's Sports 648$ 405$ 198$ 45$ Backyard Shoe 2,345 2,345$
Other Customers 138,803 96,255 18,458 19,605 4,485 Total 141,796$ 96,660$ 18,656$ 19,650$ 6,830$ % Uncollectible 1% 4% 14% 40%EstimatedUncoll. Amount 7,196$ 967$ 746$ 2,751$ 2,732$
Aging of Accounts Receivable
Record the year-end adjusting entry assuming that the Allowance for
Doubtful Accounts currently has a $4,314,000 credit balance.
(in thousands)
8-26
After posting, the Allowance
account would look like this . . .
7,196,000$ Desired Balance- 4,314,000 Credit Balance
2,882,000$ Adjusting Entry
Debit CreditBad Debt Expense (+E, -SE) 2,882,000
Allowance for Doubtful Accounts (+xA, -A) 2,882,000
Accounts
Aging of Accounts Receivable
8-27
Notice that the balance after adjustment is equal to the estimate of
$7,196,000 based on the aging analysis performed earlier.
6,043,000 Beg. Bal.Write-offs 1,729,000
4,314,000 Unadj. Bal.2,882,000 AJE7,196,000 Adj. Bal.
Allowance for Doubtful Accounts
Aging of Accounts Receivable
8-28
Collections of accounts previously written off require that the original write-off entry be reversed
before the cash collection is recorded.Let’s record the entry that Skechers would make if
$50,000 is collected that had previously been written off.
Debit CreditAccounts Receivable (+A) 50,000
Allowance for Doubtful Accounts (+xA) 50,000
Cash (+A) 50,000 Accounts Receivable (-A) 50,000
Accounts
Other Issues – Account Recoveries
8-29
Learning Objective 3
Compute and report interest on notes
receivable.
8-30
Notes Receivable andInterest Revenue
Accounting for notes receivableAccounting for notes receivableis similar to accounting foris similar to accounting for
accounts receivable except for interest.accounts receivable except for interest.
Accounts receivable do notcharge interest until they
become overdue, but notesreceivable start charging
interest the day they are created.
8-31
Calculating Interest
Even for maturities less than 1 year, the rate is annualized.
Number of months out of twelvethat interest period covers.
8-32
Reporting Interest onNotes Receivable
11/01/07 12/31/07 10/31/08
Recordnote
receivableAccrueinterest
Record interestand principal
received
On November 1, 2007, Skechers loaned $100,000 cash and accepted a $100,000 one-year, 12
percent note. Skechers will receive the principal and all interest earned on October 31, 2008.
2007 Interest 2008 Interest
8-33
Recording Notes Receivable
Debit CreditNote Receivable (+A) 100,000
Cash (-A) 100,000
Accounts
On November 1, to record the note:
On November 1, 2007, Skechers loaned $100,000 cash and accepted a $100,000 one-year, 12
percent note. Skechers will receive the principal and all interest earned on October 31, 2008.
8-34
$ 100,000 × 12% × 2/12 = $ 2,000 Interest revenue is $1,000 per month.
Accruing Interest Earned
On November 1, 2007, Skechers loaned $100,000 cash and accepted a $100,000 one-year, 12
percent note. Skechers will receive the principal and all interest earned on October 31, 2008.
8-35
Debit CreditInterest Receivable (+A) 2,000
Interest Revenue (+R, +SE) 2,000
Accounts
On December 31, to accrue $ 2,000 interest receivable:
Accruing Interest Earned
On November 1, 2007, Skechers loaned $100,000 cash and accepted a $100,000 one-year, 12
percent note. Skechers will receive the principal and all interest earned on October 31, 2008.
8-36
Debit CreditCash (+A) 112,000
Interest Revenue (+R, +SE) 10,000 Interest Receivable (-A) 2,000 Note receivable (-A) 100,000
Accounts
On October 31, to record $112,000 cash received:
On November 1, 2007, Skechers loaned $100,000 cash and accepted a $100,000 one-year, 12
percent note. Skechers will receive the principal and all interest earned on October 31, 2008.
Recording Interest Receivedand Principal at Maturity
8-37
Accounting for Uncollectible Notes
When the collection ofWhen the collection of a note receivable is in doubt, a note receivable is in doubt,a company should record ana company should record an
allowance for doubtful accountsallowance for doubtful accounts against notes receivable just against notes receivable just
as is done with accountsas is done with accountsreceivable.receivable.
8-38
Learning Objective 4
Compute and interpret the
receivables turnover ratio.
8-39
Skechers reported 2005 net credit sales of $1,006,000,000.December 31, 2005, receivables were $134,600,000 and
December 31, 2004, receivables were $120,400,000.
Net Credit Sales RevenueAverage Net Trade Receivables
Receivables Turnover
Ratio=
Receivables Turnover Analysis
8-40
= 7.9 times
$1,006,000,000($134,600,000 + $120,400,000) ÷ 2
=
Boeing Deere & Co. Skechers11.1 6.1 7.9
2005 Receivables Turnover Comparisons
Net Credit Sales RevenueAverage Net Trade Receivables
Receivables Turnover
Ratio=
This ratio measures how many times average receivables are recorded and collected for the year.
Receivables Turnover Analysis
8-41
This ratio tells us the average number of daysit takes a company to collect its receivables.
365 DaysReceivables Turnover Ratio
Days to Collect =
365 Days7.9
Days to Collect = = 46.2 Days
Boeing Deere & Co. Skechers32.9 59.8 46.2
2005 Days-to-Collect Comparisons
Receivables Turnover Analysis
8-42
When a company desires to quickly convert receivables into cash, the receivables can be sold to a financing company or bank (called
factoring).
Factoring Receivables
8-43
Credit Card Sales
Companies accept credit cards to:1. To increase sales.2. To avoid providing credit
directly to customers.3. To avoid losses due to bad
checks.4. To receive payment quicker.
When credit card sales are made, a fee is paid to the credit card company for the service it provides.
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
Chapter 8Supplement
Percentage of Credit Sales Method
8-45
Percentage of Credit Sales
Bad debt percentage is based on actual uncollectible accounts
from prior years’ credit sales.
Focus is on determining the amount to record on the income statement as
Bad Debt Expense.
8-46
Net Credit Sales % Estimated Uncollectible
Amount of Journal Entry
Percentage of Credit Sales
8-47
In the current year Skechers had credit sales of $1,152,800,000. Past
experience indicates that bad debts are one-fourth of one percent (.25%) of sales.
What is the estimate of bad debt expense for the year?
$1,152,800,000 × .0025 = $2,882,000
Let’s prepare the adjusting entry.
Percentage of Credit Sales
8-48
Debit CreditBad Debt Expense (+E, -SE) 2,882,000
Allowance for Doubtful Accounts (+xA, -A) 2,882,000
Accounts
Percentage of Credit Sales
8-49
No journal entries are made until a bad debt is discovered. The following journal entry is made to
record $1,000 of bad debt expense when a customer account is determined to be uncollectible.
Direct Write-Off Method
Debit CreditBad Debt Expense (+E, -SE) 1,000
Accounts Receivable (-A) 1,000
Accounts
Acceptable for tax purposes,but unacceptable under generally accepted accounting principles.
8-50
End of Chapter 8