8-‹#›

Accounting for
Chapter 8 Receivables
Learning Objectives
After studying this chapter, you should be able to:

1. Identify the different types of receivables.

2. Explain how companies recognize accounts receivable.
3. Distinguish between the methods and bases companies use to value
accounts receivable.

8-‹#›
 Preview of Chapter 8

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Financial Accounting
IFRS Second Edition
Weygandt Kimmel Kieso
8-‹#›
 Types of Receivables

Amounts due from individuals and other companies that are

expected to be collected in cash.

/
Amounts owed by Written promise (as “Nontrade” (interest,
customers that evidenced by a loans to officers,
result from the sale formal instrument) advances to
of goods and for amounts to be employees, and
services. received. income taxes
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Accounts Notes Other
Receivable Receivable Receivables
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8-‹#› LO 1 Identify the different types of receivables.

no ore, kolaisuat-trade receivable
 Types of Receivables

Amounts due from individuals and other companies that are

expected to be collected in cash.

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Illustration 8-1

8-‹#› LO 1 Identify the different types of receivables.

 Accounts Receivable

Accounting issues: Completed provide

Gos

-
1. Recognizing accounts receivable. -> Thi

2. Valuing accounts receivable.

Recognizing Accounts Receivable

● Service organization - records a receivable when it
provides service on account.
● Merchandiser - records accounts receivable at the point
of sale of merchandise on account.

8-‹#› LO 2 Explain how companies recognize accounts receivable.

 Accounts Receivable

Illustration: Assume that Hennes & Mauritz (SWE) on July 1,

2014, sells merchandise on account to Polo Company for $1,000
terms 2/10, n/30. Prepare the journal entry to record this
transaction on the books of Hennes & Mauritz.

/** 1181,000
Jul. 1

per

8-‹#› LO 2 Explain how companies recognize accounts receivable.

 Accounts Receivable

Illustration: On July 5, Polo returns merchandise worth $100 to

Hennes & Mauritz (SWE).

Jul. 5

On July 11, Hennes & Mauritz receives payment from Polo

Company for the balance due.

Jul. 11

8-‹#› LO 2 Explain how companies recognize accounts receivable.

 Accounts Receivable

Valuing Accounts Receivable

● Current asset. ->
SOFPosition

● Valuation (net realizable value).

=net AR:
AR -
Allowance for doutful ace

LO 3 Distinguish between the methods and bases

8-‹#›
companies use to value accounts receivable.
 Accounts Receivable

Valuing Accounts Receivable

Uncollectible Accounts Receivable

● Sales on account raise the possibility of accounts not being

collected.

● Seller records losses that result from extending credit as

Bad Debt Expense.
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LO 3 Distinguish between the methods and bases

8-‹#›
companies use to value accounts receivable.
 Accounts Receivable

Methods of Accounting for Uncollectible Accounts

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Direct Write-Off Allowance Method

●
Theoretically undesirable:
No matching.
Loading… Losses are estimated:
Better matching.
●

● Receivable not stated at ● Receivable stated at cash

cash realizable value. realizable value.
● Not acceptable for financial ● Required by IFRS.
reporting.

LO 3 Distinguish between the methods and bases

8-‹#›
companies use to value accounts receivable.
 Accounts Receivable

Direct Write-off Method for Uncollectible Accounts

• No estimation of uncollectibles at the end of period
• When a company determines a particular account to be
uncollectible, it charges the loss to Bad debt expense.
• Bad debt expense will show only actual losses from
uncollectibles
• Companies record Bad debt expense in a period different
from the period in which they record revenue
• Company will report Accounts receivable at its gross
amount rather than amount it actually expect to receive

8-‹#› LO 3
 Accounts Receivable

Direct Write-off Method for Uncollectible Accounts

• No estimation of uncollectibles at the end of period
• When a company determines a particular account to be uncollectible,
it charges the loss to Bad debt expense.

Illustration: Hampson Furniture has credit sales of €1,200,000 in

2014, of which €200,000 remains uncollected at December 31. The
financial vice-president of Hampson Furniture authorizes a write-off of
the €500 balance owed by R. A. Ware on March 1, 2015.

8-‹#› LO 3
 Accounts Receivable

Direct Write-off Method for Uncollectible Accounts

Theoretically undesirable:
● No matching.
8-‹#›
● Not acceptable for financial reporting. LO 3
 Accounts Receivable

Allowance Method for Uncollectible Accounts

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di this year no xoi laby?
bair hang

1. Companies estimate uncollectible accounts -> Per vio 2023

Exp-
receivable at the end of each period

2. Debit Bad Debt Expense and credit Allowance for

Doubtful Accounts (a contra-asset account).
Cui di pony

3. Companies debit Allowance for Doubtful

Accounts and credit Accounts Receivable at the
time the specific account is written off as
uncollectible.

LO 3 Distinguish between the methods and bases

8-‹#›
companies use to value accounts receivable.
 Accounts Receivable

Illustration: Hampson Furniture has credit sales of

€1,200,000 in 2014, of which €200,000 remains uncollected at
December 31. The credit manager estimates that €12,000 of
these sales will prove uncollectible.

Dec. 31

LO 3 Distinguish between the methods and bases

8-‹#›
companies use to value accounts receivable.
 Accounts Receivable

LO 3 Distinguish between the methods and bases

8-‹#›
companies use to value accounts receivable.
 Accounts Receivable

Recording Write-Off of an Uncollectible Account

Illustration: The financial vice-president of Hampson Furniture
authorizes a write-off of the €500 balance owed by R. A. Ware on
March 1, 2015. The entry to record the write-off is:

Mar. 1

Illustration 8-4

LO 3 Distinguish between the methods and bases

8-‹#›
companies use to value accounts receivable.
 Accounts Receivable

Recovery of an Uncollectible Account

Illustration: On July 1, R. A. Ware pays the €500 amount that
Hampson had written off on March 1. Hampson makes these
entries:

July 1

LO 3 Distinguish between the methods and bases

8-‹#›
companies use to value accounts receivable.
 Accounts Receivable

Estimating the Allowance (2p2)

Illustration 8-6
Theophan doah
tram the tho i. Receivable

Emphasis on Income Statement Emphasis on Statement of Financial

Relationships Position Relationships

LO 3 Distinguish between the methods and bases

8-‹#›
companies use to value accounts receivable.
 Accounts Receivable
Estimate bad debt %
= sale x% ofuncollectable
of

Estimating the Allowance 2000

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=

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Management estimates
what percentage of credit
sales will be uncollectible.
This percentage is based
on past experience and
anticipated credit policy.

Emphasis on Income Statement

Relationships

LO 3 Distinguish between the methods and bases

8-‹#›
companies use to value accounts receivable.
 Accounts Receivable

Percentage-of-Sales
Illustration: Assume that Gonzalez Company elects to use
the percentage-of-sales basis. It concludes that 1% of net credit
sales will become uncollectible. If net credit sales for 2014 are
€800,000, the adjusting entry is:

pareone) are
Dec. 31

LO 3 Distinguish between the methods and bases

8-‹#›
companies use to value accounts receivable.
 Accounts Receivable

Percentage-of-Sales
● Emphasizes matching of expenses with revenues.

● Adjusting entry to record bad debts disregards the existing

balance in Allowance for Doubtful Accounts.

Illustration 8-7

LO 3 Distinguish between the methods and bases

8-‹#›
companies use to value accounts receivable.
 Accounts Receivable

Estimating the Allowance

Illustration 8-6

Management establishes a
percentage relationship
between the amount of
receivables and expected
losses from uncollectible
accounts.

Emphasis on Statement of Financial

Position Relationships

LO 3 Distinguish between the methods and bases

8-‹#›
companies use to value accounts receivable.
 Accounts Receivable
= Percentage ofAR
Aging the accounts receivable - customer balances are
classified by the length of time they have been unpaid.
Illustration 8-8

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8-‹#›
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 Accounts Receivable
Estimating the Allowance
Illustration: Assume the unadjusted trial balance shows Allowance
for Doubtful Accounts with a credit balance of $528. Prepare the
adjusting entry assuming $2,228 is the estimate of uncollectible
receivables from the aging schedule.

Dec. 31

8-‹#›
LO 3
 Accounts Receivable
P8-2A: Information related to Hamilton Company for 2014 is summarized below.
Total credit sales £2,500,000
Accounts receivable at December 31 970,000
Bad debts written off 66,000
(a) What amount of bad debt expense will Hamilton Company report if it uses
the direct write-off method of accounting for bad debts?

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8-‹#›
LO 3
AAccounts
may?
prong
Receivable
P8-2A: Information related to Hamilton Company for 2014 is summarized below.
Total credit sales £2,500,000
Accounts receivable at December 31 970,000
Bad debts written off 66,000
(b) Assume that Hamilton Company estimates its bad debt expense to be 3%
of credit sales. What amount of bad debt expense will Hamilton record if it has
an Allowance for Doubtful Accounts credit balance of £4,000?

8-‹#›
LO 3
 Accounts Receivable
P8-2A: Information related to Hamilton Company for 2014 is summarized below.
Total credit sales £2,500,000
Accounts receivable at December 31 970,000
Bad debts written off 66,000
(c) Assume that Hamilton Company estimates its bad debt expense based on
7% of accounts receivable. What amount of bad debt expense will Hamilton simee
-
record if it has an Allowance for Doubtful Accounts credit balance of £4,000?
Loading…
Total bad debt 970,000 x7% 67,900
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8-‹#›
LO 3
 Accounts Receivable
P8-2A: Information related to Hamilton Company for 2014 is summarized below.
Total credit sales £2,500,000
Accounts receivable at December 31 970,000
Bad debts written off 66,000
(d) Assume that Hamilton Company estimates its bad debt expense based on
7% of accounts receivable. What amount of bad debt expense will Hamilton

p
record if it has an Allowance for Doubtful Accounts debit balance of £4,000?

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to

8-‹#›
low/a LO 3
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8-‹#›
 Lecture 6 handout
Example 1: FIFO – Lin electronics

Jan 1: beginning inventory - 10 units at $100 Sep 10: sell 55 units for $200
Apr 15: purchase 20 units at $110 Nov 27: purchase 40 units at $130
Aug 24: purchase 30 units at $120

Purchases Sales Balances

Date Details Total Unit Total Unit Total
Qty Unit cost Qty Qty
cost cost cost cost cost

Example 2: FIFO – Tinker Bell Company

Jan 1: Beginning inventory – 8,000 units at $11 Nov 8: Purchase 5,000 units at $13
June 19: Purchase 13,000 units at $12 Dec 12: sell 1,000 units for $20
Sep 10: Sell 11,000 units for $20

Purchases Sales Balances

Date Details Total Unit Total Unit Total
Qty Unit cost Qty Qty
cost cost cost cost cost
Example 3: WAC – Lin Electronics
Jan 1: beginning inventory - 10 units at $100 Sep 10: sell 55 units for $200
Apr 15: purchase 20 units at $110 Nov 27: purchase 40 units at $130
Aug 24: purchase 30 units at $120

Purchases Sales Balances

Date Details Total Unit Total Unit Total
Qty Unit cost Qty Qty
cost cost cost cost cost

Example 4: WAC – Tinker Bell Company

Jan 1: Beginning inventory – 8,000 units at $11 Nov 8: Purchase 5,000 units at $13
June 19: Purchase 13,000 units at $12 Dec 12: sell 1,000 units for $20
Sep 10: Sell 11,000 units for $20

Purchases Sales Balances

Date Details Total Unit Total Unit Total
Qty Unit cost Qty Qty
cost cost cost cost cost
Example 3: WAC – Lin Electronics
Jan 1: beginning inventory - 10 units at $100 Sep 10: sell 55 units for $200
Apr 15: purchase 20 units at $110 Nov 27: purchase 40 units at $130
Aug 24: purchase 30 units at $120

Purchases Sales Balances

Date Details Total Unit Total Unit Total
Qty Unit cost Qty Qty
cost cost cost cost cost

Example 4: WAC – Tinker Bell Company

Jan 1: Beginning inventory – 8,000 units at $11 Nov 8: Purchase 5,000 units at $13
June 19: Purchase 13,000 units at $12 Dec 12: sell 1,000 units for $20
Sep 10: Sell 11,000 units for $20

Purchases Sales Balances

Date Details Total Unit Total Unit Total
Qty Unit cost Qty Qty
cost cost cost cost cost