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Receivables

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9-5
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Objective
Objective 55
Compare the direct write-
off and allowance methods
of accounting for
uncollectible accounts
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9-5
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Comparing Direct-Write-Off
and Allowance Methods

Direct Write-Off Method Allowance Method

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9-5
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Comparing the Direct Write-Off and
Allowance Methods
Direct Write-Off Method

Amount of bad debt When the actual accounts

expense recorded receivable are determined
to be uncollectible

Allowance account No allowance account is

used
Primary users Small companies and
companies with relatively
few receivables
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9-5
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Comparing the Direct Write-Off and
Allowance Methods
Allowance Method

Amount of bad debt Using estimate based on

expense recorded either (1) a percentage of
sales or (2) analysis of
receivables.
Allowance account The allowance account is
used
Primary users Large companies and those
with a large amount of
receivables
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9-6
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Objective
Objective 66
Describe the nature,
characteristics, and
accounting for notes
receivable.
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9-6
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Characteristics of Notes Receivable

A note receivable, or promissory note, is

a written document containing a promise
to pay:
• a specific amount of money (face
amount)
• on demand or at a definite time
• to an individual or a business (payee),
or to the bearer or holder of the note.
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9-6
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Characteristics of Notes Receivable

The one making the promise is

called the maker. The date a
note is to be paid is called the
due date or maturity date.

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9-6
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2,500.00
$_____________ Payee
Payee
Fresno, California______________20___
March 16 08
Ninety days
________________ _AFTER DATE _______
We PROMISE TO PAY TO
Judson Company
THE ORDER OF ____________________________________________
Two thousand five hundred
_________________________________________________DOLLARS
00/100---------------------------
PAYABLE AT City National Bank
Maker
Maker
______________________________________________
VALUE RECEIVED WITH INTEREST AT 10% ____
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NO. _______ June 14, 2008
DUE___________________

H. B. Lane
TREASURER, WILLIARD COMPANY

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9-6
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What is the due date of a 90-day note dated March 16?
Total days in note 90 days
Number of days in March 31
Issue date of note March 16
Remaining days in March –15 days
75 days
Number of days in April –30 days
45 days
Number of days in May –31 days
Residual days in June 14 days

Answer: June 14

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Accounting for Notes Receivable 9-6

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Received a $6,000, 12%, 30-day note
dated November 21, 2008 in settlement
of the account of W. A Bunn Co.
Nov. 21 Notes Rec.—W. A. Bunn Co. 6 000 00
Accts. Rec.—W. A Bunn Co. 6 000 00
Received 30-day, 12%
note dated November 21,
2008.

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9-6
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On December 21, when the note matures, the
firm receives $6060 from W. A. Bunn Company
($6,000 plus $60 interest).

Dec. 21 Cash 6 060 00

Notes Rec.—W. A. Bunn Co. 6 000 00
Interest Revenue* 60 00
Received principal and
interest on matured note.

*$6,000 x 12% x 30/360 = $60 60

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9-6
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If W. A. Bunn Company fails to pay the note
on the due date, it is considered a dishonored
note receivable. The note and interest are
transferred to the customer’s account.
Dec. 21 Accts Rec.—W. A. Bunn Co. 6 060 00
Notes Rec.—W. A. Bunn Co. 6 000 00
Interest Revenue 60 00
Recorded dishonored
note, plus interest.
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9-6
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A 90-day, 12% note dated December 1, 2008, is
received from Crawford Company to settle its
account, which has a balance of $4,000.

2008
Dec. 1 Notes Rec.—Crawford Co. 4 000 00
Accts. Rec.—Crawford Co. 4 000 00
Accepted note in
settlement of account.

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Assuming that the accounting period ends
on December 31, an adjusting entry is
required to record the accrued interest of
$40 ($4,000 x 0.12 x 30/360).
2008
Dec. 31 Interest Receivable 40 00
Interest Revenue 40 00
Accrued interest ($4,000
x 12% x 30/360).

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9-6
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On March 1, 2009, $4,120 is received for the
note ($4,000) and interest ($120).
2009
Mar. 1 Cash 4 120 00
Notes Rec.—Crawford Co. 4 000 00
Interest Receivable 40 00
Interest Revenue 80 00
Collected note and
accrued interest.

($4,000 x 12% x 30/360). 64

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9-6

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Example Exercise 9-5

Same Day Surgery Center received a 120-day, 6%

note for $40,000, dated March 14 from a patient on
account.
a. Determine the due date of the note.
b. Determine the maturity value of the note.
c. Journalize the entry to record the receipt
of the payment of the note at maturity.

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9-6

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Follow My Example 9-5

a. July 12 determined as follows:

March 17 days (31 – 14)
April 30 days
May 31 days
June 30 days
July 12 days
Total 120 days
b. $40,800 [$40,000 + ($40,000 x 6% x 120/360)]
c. Cash 40,800
Notes Receivable 40,000
Interest Revenue 800
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For Practice: PE 9-5A, PE 9-5B
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9-7
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Objective
Objective 77
Describe the reporting
of receivables on the
balance sheet.

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Receivables on Balance Sheet 9-7

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Crabtree Co.
Balance Sheet
December 31, 2008
Assets
Current assets:
Cash $119,500
Notes receivable 250,000
Accounts receivable $445,000
Less allowance for
doubtful accounts 15,000430,000
Interest receivable 14,500
Merchandise inventory 714,000

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Receivables (including the allowance account) are highlighted
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Accounts Receivable Turnover 9-7

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The accounts receivable turnover measures
how frequently during the year the accounts
receivable are being converted to cash.

Accounts Receivable = Net sales

Turnover Average accounts receivable

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Federal Express Corporation 9-7

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2005 2004 2003
Net sales $19,364 $17,383 ---
Accounts receivable 2,703 2,475 $2,199
Average accounts receivable 2,589 2,337
*

*[($2,475 + $2,199)/2]

Accounts Receivable $17,383

=
Turnover (2004) $2,337

Accounts Receivable = 7.4

Turnover (2004) 70
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Federal Express Corporation 9-7

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2005 2004 2003
Net sales $19,364 $17,383 ---
Accounts receivable 2,703 2,475 $2,199
Average accounts receivable 2,589 2,337
*

*[($2,703 + $2,475)/2]

Accounts Receivable $19,364

=
Turnover (2005) $2,589

Accounts Receivable = 7.5

Turnover (2005) 71
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9-7
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Number of Days’ Sales in Receivables

Use: To assess the efficiency in

collecting receivables and in
the management of credit.

Number of Days’ Average Accounts receivable

=
Sales in Receivables Average daily sales

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9-7
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Federal Express Corporation

2005 2004 2003

Net sales $19,364$17,383 ---
Accounts receivable 2,703 2,475 $2,199

Average accounts receivable*

2,589
2,337 **

Average daily+sales
* [($2,475 $2,119)/2] 53.1 47.6
** ($17,383/365)

Number of Days’ Sales $2,337

=
in Receivables (2004) 47.6

Number of Days’ Sales = 49.1 73

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in Receivables (2004)
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9-7
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Federal Express Corporation

2005 2004 2003

Net sales $19,364$17,383 ---
Accounts receivable 2,703 2,475 $2,199

Average accounts receivable

*
2,589
2,337 **

Average daily sales 53.1 47.6

** [($2,703+ $2,475)/2] ** ($19,364/365)

Number of Days’ Sales $2,589

=
in Receivables (2005) 53.1

Number of Days’ Sales = 48.8 74

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in Receivables (2005)