西方財務會計-Chapter6

1、Chapter 6Accounts Receivable And Notes Receivable1IntroductionIn addition to cash, cash equivalents, and short-term investments, the current (liquid ) assets of an entity include receivables that result from credit sales to customers. These receivables include (1) accounts receivables and (2) notes

2、receivable.2Accounts Receivable Accounts receivable are relatively liquid asset, usually converting into cash within a period of 30 to 60 days. Therefore, accounts receivable from customers are classified as current assts and are listed in the balance sheet immediately after cash and short-term inve

3、stments. 3Accounts ReceivableThree Important Concepts about A/R 1. Cash Discounts(Sales Discounts) 2. Sales Returns and Allowances 3. Bad Debts (Uncollectible Accounts) 4Uncollectible Accounts When a company grants credit to its customers, there usually are a few who do not pay what they promised. T

4、he accounts of such customers are called uncollectible accounts or bad debts. The bad debts amounts that cannot be collected is an expense of selling on credit. When the bad debt expense is recorded, a contra asset account Allowance for uncollectible accounts is established to report accounts receiv

5、able in the balance sheet at the amounts expected to be collected.5Uncollectible Accounts ReceivableWhen credit is extended, some amount of uncollectible receivables is generally inevitable.If uncollectible receivables are probable and can be estimated, an estimate should be made of the amount uncol

6、lectible and recorded in the period in which the revenue was produced (allowance method).We can also write off uncollectible accounts directly to an expense account if we dont want to maintain an allowance account for accounts receivable(direct writing off method)6Allowance MethodWhen we estimate th

7、e amount of our uncollectible receivables, we make the following adjusting entry:The Allowance for Doubtful Accounts is a contra account to Accounts Receivables.7Allowance Method As accounts become uncollectible, the following entry is made: The balance in the Allowance account reduces Accounts Rece

8、ivable on the Balance Sheet.8Allowance MethodIf an account previously written off proves to be collectible in a subsequent period, the following entries are made:9Estimating Bad DebtsCredit Sales MethodAccounts Receivable MethodAging of accounts receivable10Estimating Bad Debts:Credit Sales MethodTh

9、is method emphasizes the matching principle and is considered an income statement approach.An average percentage relationship between actual bad debt losses and net credit sales is determined based on historical information. And the percentage is applied to current period net credit sales to estimat

10、e bad debt expense for the year.11Credit Sales MethodExampleRenco, Inc.Estimate of Bad DebtsSales for 19X92,000,000$Cash sales during the period(250,000)Net credit sales1,750,000Bad debt percentage1.25%Bad debt expense21,875$ 12Credit Sales MethodExample13Accounts Receivable Method ExampleSingle Com

11、posite RateCrecore, Inc. determined that the balance in the Allowance for Doubtful Accounts should be 2.5% of Accounts Receivable. At year-end Accounts Receivable had a balance of $191,000, and the Allowance account had a credit balance of $1,250.Prepare the adjusting entry to record Bad Debt Expens

12、e.14Accounts Receivable Method Example15Accounts Receivable MethodExample16 The Way of Disposing Bad Debts Writing off uncollectible accounts(textbook) During the following year, the company will find that some of its accounts are not collectible. When all efforts to collect an account fail, the acc

13、ount is written off. If the company decides to write off Bakers $200 past-due account, Feb. 6 Allowance for Uncollectible Accounts 200 Accounts Receivable 200 17Notice :writing off a bad debt does not affect owners equity, nor does it change the net amount of accounts receivable. See page138If the e

14、stimate of doubtful accounts was a good one, most of the allowance account will be used up by the end of the next accounting period. The amount remaining in this account at the end of the year, whether a debit or a credit, is again adjusted to bring the account to the proper balance when a new estim

15、ate is made.18Collecting written-off accounts Occasionally an account that was written of is later collected. For example, Trammel Corporation collects a $80 account that was written of last year.Mar. 11 Accounts Receivable 80 Allowance for Uncollectible Accounts 80 To restore Palmers account previo

16、usly written off. 11 Cash 80 Accounts Receivable 80 Collected Palmers account.19Direct writing off methodDirect written-off methodto write off the actual bad debts _when an account is considered to be uncollectible, the following entry may be made: Bad Debts Expense # Accounts Receivable # To write

17、off somebodys account. _No adjusting entry to made at the end of the accounting period.20Notes Receivable A promissory note is a legal document signed by the maker, or borrower, promising to pay to the lender, or payee, the principal amount of the note plus interest at a stated rate. A note receivab

18、le is an promissory note.(see next slide) 21Notes ReceivableAn unconditional written promise. . . Made & signed by the maker (borrower). . .To pay the bearer or stated payee. . .A definite amount of money. . .22Notes ReceivableFrequently businesses accept notes from their customers in exchange for m

19、erchandise or for accounts receivable that the customer does not pay when due. The business may accept the note to accommodate the customer or to make the sale, which might be lost if cash payment were required.A note can be sold to a bank or other institution when the holder needs cash(discounting

20、). In this case, the payee endorses the note by signing it on the back (endorsement).23Accounting For Notes Receivable A note received from a customers is an asset because it becomes a claim against the buyers for the amount due. On Dec. 1 Beylor Company received a $6,000 60-day 9 percent note from

21、Miss Mendoza for services performed.Dec.1 Notes Receivable 6,000 Service Revenue 6,000 received 60-day 9percent note from Mendoza. 24Accounting For Notes Receivable At December 31, the end of the companys fiscal year, the interest earned to date on notes receivable should be accrued by an adjusting

22、entry as follows:Dec.31 Interest receivable 45 Interest revenue 45 to accrue interest for the month of December on Miss Mendoza note($6000*9%*1/12=$45)25Accounting For Notes Receivable Sixty days later when the note is collectedJan.30 Cash 6,090 Notes Receivable 6000 Interest Receivable 45 Interest

23、Revenue 45 26Simple Interest Note (example)On November 1, 19X5, Winn, Inc. loans $25,000 to Westward, Co. The note bears interest at 12% and is due on November 1, 19X6.Prepare the journal entry on November 1, 19X5, December 31, 19X5 (year-end) and November 1, 19X6.27Simple Interest Note (example)28S

24、imple Interest Note (example)$25,000 12% = $3,000 - $500 = $2,500 29Dishonored NotesA note that is not renewed or collected at maturity is dishonored.Interest continues to accrue on the maturity value of the note.If the note cannot be collected, the amount of the loss depends upon whether it has alr

25、eady been considered in the bad debt estimation.30Accounting For Notes Receivable: Dishonored Notes Sometimes when a note matures, the customer is unable or unwilling to pay the debt. At that time the note should be transferred from Notes Receivable to a special account for dishonored notes. 31Disho

26、nored NotesIf Mendoza does not pay her note when due, Jan.30 Accounts Receivable 6,090 Notes Receivable 6,000 Interest Revenue 45 Interest Receivable 45 to record note in default The interest revenue has been earned and is therefore recorded. 32Accounting For Notes Receivable: Dishonored Notes If, h

27、owever, the company is not successful in collecting the note, or if it collects only a part of the note, a loss is incurred. 33Dishonored NotesFor example, Beylor Company may turn the defaulted note over to a collection agency. If the agency collects the note and charges a fee of 40 percent of the a

28、mount collected,July 29 Cash 3,654 Loss on Defaulted Note 2,436 Accounts Receivable 6,090 Received proceeds of past-due note from collection agency. note:The loss may also be recorded as a collection expense.34Discounting Notes Receivable If a business needs cash and does not wish to hold its notes

29、to maturity, it can discount notes with a bank in exchange for cash. The bank buys the notes and holds them to maturity, earning interest on its investment. When a bank discounts a note receivable, it first calculates the maturity value of the note. Then, using its own discount rate, it calculates t

30、he amount of interest that it will charge for the note. The interest charge by the bank is calculated on the maturity value of the note and is deducted from the maturity value to arrive at the amount of proceeds, which the bank pays to the seller of the note.35Discounting Notes ReceivableNote is sol

31、d to a financial institution.Discount fee is the discount rate times the maturity value of the note for the time remaining to maturity.Maker of the note pays the financial institution at maturity.36Discounting Notes Receivable: (example) If Beylor discounts the Mendoza note immediately upon receivin

32、g it, and the bank charges a 10 percent discount rate, Maturity value $6,090.00Less: Discount 101.50Proceeds to seller $5,988.50 37Discounting Notes Receivable(example) Dec.1 Cash 5,988.50 Interest Expense 11.50 Notes Receivable 6,000discounted Mendoza note at 10 percent. Note:the Interest Expense r

33、epresents the cost of obtaining cash today, rather than waiting until the matures. The banks discount rate is higher than the interest rate that will be paid by the note; therefore, Baylor must make up the difference to the bank.38Discounting Notes Receivable: (example) If Beylor had waited 30 days

34、before discounting the note, then Maturity value $6,090.00 Less: Discount 50.75 Proceeds to seller $6,039.25 39Discounting Notes Receivable: (example)Dec.31 Cash 6,039.25 Notes Receivable 6,000 Interest Revenue 39.25 discounted Mendoza note at 10 percent 40Discounting Notes :(exercise for students)O

35、n May 30, Apex discounts a customers $25,000 note at the bank. The note was dated May 1 and matures in 90 days. The note bears interest at 12% and the bank charges a discount of 15% on the maturity value of the note.Prepare the journal entry to record the discounting of the note.41Discounting Notes:

36、 (answer)426.3-3 Selling Notes Receivable Creates Contingent Liabilities When a note is discounted with the bank, the seller of the note is liable to the bank for the proceeds on the notes if the maker does not pay. A contingent liability arising from discounting of notes must be disclosed in the financial statements. This is usually accomplished by means of a footnote indicating the amount of the discounted notes and explaining that there is a contingent