Accounting Principles

Fourteenth Edition
Weygandt Kimmel Mitchell

Chapter 9

Accounting for Receivables

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Copyright ©2021 John Wiley & Sons, Inc.

Chapter Outline
Learning Objectives
LO 1 Explain how companies recognize accounts receivable.
LO 2 Describe how companies value accounts receivable
and record their disposition.
LO 3 Explain how companies recognize, value, and dispose
of notes receivable.
LO 4 Describe the statement presentation and analysis of
receivables.

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Recognition of Accounts Receivable

LEARNING OBJECTIVE 1

Explain how companies recognize accounts receivable.

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Recognition of Accounts Receivable
Receivables as a Percentage of Total Assets

Company Receivables as a Percentage of

Total Assets
Ford Motor Company 25.6%
3M Company 10.7
General Electric (GE) 10.2
Intel Corporation 5.6
Dupont Inc. 5.5

ILLUSTRATION 9.1

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Recognizing Accounts Receivable
• Service organizations record a receivable when it
performs service on account
• Merchandisers record accounts receivable at point of
sale of merchandise on account
• Companies report receivables from employees
separately in financial statements

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Recognizing Accounts Receivable
July 1 and 5 Journal Entries
Assume that Patagonia on July 1, 2022, sells merchandise
on account to Urban Outfitters for $1,000, terms 2/10,
n/30. On July 5, Urban Outfitters returns merchandise
with a sales price of $100 to Patagonia. Prepare the
journal entries to record these transactions.
July 1 Accounts Receivable 1,000
Sales Revenue 1,000

July 5 Sales Returns and Allowances 100

Accounts Receivable 100

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Recognizing Accounts Receivable
July 11 Journal Entry
On July 11, Patagonia receives payment from Urban
Outfitters for the balance due. Prepare the journal entry
to record this transaction.

July 11 Cash ($900 − $18) 882

Sales Discounts ($900 × .02) 18
Accounts Receivable 900

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DO IT! 1: Recognizing Receivables
On May 1, Wilton sold merchandise on account to Bates for
$50,000, terms 3/15, net 45. On May 4, Bates returns merchandise
with a sales price of $2,000. On May 14, Wilton receives payment
from Bates for the balance due. Prepare journal entries to record
the May transactions on Wilton’s books.
May 1 Accounts Receivable 50,000
Sales Revenue 50,000
May 4 Sales Returns and Allowances 2,000
Accounts Receivable 2,000
May 14 Cash ($48,000 − $1,440) 46,560
Sales Discounts ($48,000 × .03) 1,440
Accounts Receivable 48,000
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Valuation and Disposition of Accounts Receivable

LEARNING OBJECTIVE 2
Describe how companies value accounts receivable ad
record their disposition.
Valuing Accounts Receivables
• Current asset
• Valuation: cash (net) realizable value
Uncollectible Accounts Receivable
• Sales on account raise the possibility of accounts not
being collected
• Companies record estimated future credit losses as
debits to Bad Debt Expense

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Valuing Accounts Receivable

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Direct Write-Off Method For
Uncollectible Accounts
Illustration: Assume that Warden Co. writes off as
uncollectible M. E. Doran’s $200 balance as on December 12.
Warden’s entry is:
Dec. 12 Bad Debt Expense 200
Accounts Receivable 200
Theoretically undesirable:
• No matching
• Receivable not stated at cash realizable value
• Not acceptable for financial reporting

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Effects of Direct Write-Off Method

ILLUSTRATION 9.2

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Allowance Method For Uncollectible
Accounts
1. Companies estimate uncollectible accounts
receivable.
2. Debit Bad Debt Expense and credit Allowance for
Doubtful Accounts (a contra-asset account).
3. Companies debit Allowance for Doubtful Accounts
and credit Accounts Receivable at the time the
specific account is written off as uncollectible.

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Recording Estimated Uncollectibles
Adjusting Entry
Illustration: Hampson Furniture has credit sales of $1,200,000
in 2022, its first year of operations. Of this amount, $200,000
of receivables remains uncollected at December 31. The
credit manager estimates that $12,000 of these receivables
will be uncollectible. The adjusting entry to record estimated
uncollectibles increases (debits) Bad Debt Expense and
increases (credits) Allowance for Doubtful Accounts as
follows.

Dec. 31 Bad Debt Expense 12,000

Allowance for Doubtful Accounts 12,000

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Presentation of Allowance for Doubtful
Accounts

ILLUSTRATION 9.3

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Recording the Write-Off of
Uncollectible Accounts
Illustration: The financial vice president of Hampson Furniture
authorizes a write-off of the $500 balance owed by R. A. Ware
on March 1, 2023. The entry to record the write-off is as
follows.
Mar. 1 Allowance for Doubtful Accounts 500
Accounts Receivable 500

ILLUSTRATION 9.4

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Recovery of an Uncollectible Account
Illustration: On July 1, 2023, R. A. Ware pays the $500
amount that Hampson had written off on March 1.
Hampson makes these entries.
July 1 Accounts Receivable 500
Allowance for Doubtful Accounts 500
July 1 Cash 500
Accounts Receivable 500

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Estimating the Allowance
Nike’s Allowance Method Disclosure
Nike, Inc.
Notes to the Financial Statements
Allowance for Uncollectible Accounts Receivable
We make ongoing estimates relating to the ability to collect our accounts
receivable and maintain an allowance for estimated losses resulting from the
inability of our customers to make required payments. In determining the
amount of the allowance, we consider our historical level of credit losses and
make judgments about the creditworthiness of significant customers based on
ongoing credit evaluations. Since we cannot predict future changes in the
financial stability of our customers, actual future losses from uncollectible
accounts may differ from our estimates.
ILLUSTRATION 9.6

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The journal entries for Allowance Method can be summarized as follows:
Date Account titles Debit Credit

1. Bad Debt Expense xx

xx
Allowance for Doubtful Accounts

(The adjusting entry to record estimated uncollectible)

2. Allowance for Doubtful Accounts xx

xx
Accounts Receivable

(to record the write-off of uncollectible)

3. Accounts Receivable xx

Allowance for Doubtful Accounts xx

(Recovery of an Uncollectible )
4. Cash xx

Accounts Receivable xx

(receive cash/ Recovery of an Uncollectible )

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Estimating the Allowance
Percentage-of-Receivables Basis
Frequently, companies estimate the allowance as a
percentage of the outstanding receivables.
Under the percentage-of-receivables basis, management
establishes a percentage relationship between the
amount of receivables and expected losses from
uncollectible accounts.

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Estimating the Allowance
Aging Schedule

ILLUSTRATION 9.7

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Estimating the Allowance
Adjusting Entry
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 Bad Debt Expense 1,700
Allowance for Doubtful Accounts 1,700

ILLUSTRATION 9.8
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Estimating the Allowance
Another Example of Adjusting Entry
Illustration: Assume now the unadjusted trial balance shows
Allowance for Doubtful Accounts with a debit balance of
$500. Prepare the adjusting entry assuming $2,228 is the
estimate of uncollectible receivables from the aging schedule.
Dec. 31 Bad Debt Expense 2,728
Allowance for Doubtful Accounts 2,728

ILLUSTRATION 9.9

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