(Chpter 8) Reporting and Analyzing Receivables PDF

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These are notes & Hw solutions from Casey Potts from Fall2020 @ Georgia State University. Don’t forget to rate your professors at https://www.ratemyprofessors.com/...

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These are notes & Hw solutions from Casey Potts from Fall2020 @ Georgia State University. Don’t forget to rate your professors at https://www.ratemyprofessors.com/ ❖ Chapter 8 HW

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These are notes & Hw solutions from Casey Potts from Fall2020 @ Georgia State University. Don’t forget to rate your professors at https://www.ratemyprofessors.com/

These are notes & Hw solutions from Casey Potts from Fall2020 @ Georgia State University. Don’t forget to rate your professors at https://www.ratemyprofessors.com/

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3. 4. On March 3, Ivanhoe Company sold $705,000 of its receivables to Western Factors Inc. Western Factors Inc. assesses a service charge of 5% of the amount of receivables sold. P  repare the entry

on Ivanhoe Company’ books to record the sale of the receivables. (Credit account titles are automatically indented when an amount is entered. Do not indent manually.)

5. On July 4, Blossom's Restaurant accepted a Visa card for a $700 dinner bill. Visa charges a 2%

service fee. Prepare the entry on Blossom’s books related to the transaction. (Credit account

These are notes & Hw solutions from Casey Potts from Fall2020 @ Georgia State University. Don’t forget to rate your professors at https://www.ratemyprofessors.com/ titles are automatically indented when an amount is entered. Do not indent manually.)

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❖ Powerpoint Notes ➢ Learning Objective 1 ■ Explain How Companies Recognize Accounts Receivable ■ Types of Receivables

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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 ● Seller may offer a discount to encourage early payment ● Buyer might return goods found to be unacceptable ◆ Sales returns reduce receivables ● Recognizing Accounts Receivable ● Illustration ◆ Assume that Jordache Co. on July 1, 2022, 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 Jordache Co.

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Recognizing Returns on Account Illustration ◆ On July 5, Polo returns merchandise worth $100 to Jordache Co.

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Recognizing Discounts on Receivables Illustration ● On July 11, Jordache receives payment from Polo Company for the balance due.

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Credit Card Receivables Illustration

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Interest on Credit Card Receivables Illustration ● If you still owe the $300 from the June 15 transaction at the end of the month, J C Penney charges interest of 1.5% per month on the balance due. J C Penney makes an adjusting entry to record interest revenue on June 30 as follows.

➢ Learning Objective 2 ■ Describe How Companies Value Accounts Receivable and Record Their Disposition ■ Accounts Receivable ■ Valuation and Reporting ● Reporting accounts receivable ◆ Current asset ● Valuing accounts receivable ● Net realizable value ◆ Sales on account raise possibility of accounts not being collected ➢ Resulting in uncollectible accounts receivable ➢ Seller records losses that result from extending credit as Bad Debt Expense ■ Accounting for Uncollectible Accounts ■ Methods ● Direct Write-Off Method ◆ No matching ◆ Receivable not stated at net realizable value ◆ Not acceptable for financial reporting ● Allowance Method ◆ Better matching ◆ Receivable stated at net realizable value ◆ Required by G A A P

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Accounts Receivable Reporting Illustration ● How are these accounts presented on the Balance Sheet?

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lustration Solution #1 ● ABC Corporation Balance Sheet (partial)

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Accounts Receivable Transactions ● Sales on Account Credit sale of $100

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Collections on Account Collection of $333 on account

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Estimate Doubtful Accounts Adjustment of $15 for estimated bad debts

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Write-Off Uncollectible Accounts ● Write-off of uncollectible accounts of $10

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Accounts Receivable Reporting on the Balance Sheet

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ABC Corporation Balance Sheet (partial)

Direct Write-Off Method for Uncollectibles ● Illustration ● Assume that Warden Co. writes off M. E. Doran’s $200 balance as uncollectible on December 12. Warden’s entry is:

● Not acceptable for financial reporting. Allowance Method for Uncollectible Accounts ● Companies estimate uncollectible accounts receivable ● Debit Bad Debt Expense ● Credit Allowance for Doubtful Accounts, a contra-asset account Companies write off uncollectible accounts receivable at the time the specific account becomes uncollectible ● Debit Allowance for Doubtful Accounts ● Credit Accounts Receivable Recording Estimates Uncollectible Accounts Receivable Illustration ● Hampson Furniture has credit sales of $1,200,000 in 2022, of which $200,000 remains uncollected at December 31. The credit manager estimates that $12,000 of these sales will prove uncollectible.

Reporting Receivables Under the Allowance Method Illustration

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Write-Off of Uncollectibles Using the Allowance Method ● Illustration ● On March 1, 2023, Hampson Furniture writes-off $500 owed by R. A. Ware. The entry to record the write-off is:

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Recovery of an Uncollectible Account Using the Allowance Method Illustration ● On July 1, R. A. Ware pays the $500 amount that Hampson Furniture had written off on March 1. Hampson makes these entries:

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Methods of Estimating the Allowance ● Percentage-of-Receivables Basis ● Management establishes a percentage relationship between amount of receivables and expected losses from uncollectible accounts ● Bad debt expense to be recorded

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◆ Difference between required balance and existing balance in allowance account Estimating the Allowance Using an Aging

Estimating the Allowance Using an Aging Illustration with a Credit Balance ● 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.

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Illustration with a Debit Balance ◆ Illustration: Assume 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.

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Disposing of Accounts Receivables Selling to a Factor ● Sale of Receivables to a Factor ● A factor can be a finance company or bank ● Factors buys receivables from businesses and then collect payments directly from customers ◆ Typically charges a commission to company that is selling receivables ◆ Fee ranges from 1% to 3% of receivables purchased Sale of Receivables to a Factor Illustration ● Assume that Hendredon Furniture factors $600,000 of receivables to Federal Factors. Federal Factors assesses a service charge of 2% of the amount of receivables sold. The journal entry to record the sale by Hendredon Furniture is as follows.

National Credit Card Sales ● Retailer pays card issuer a fee of 2 to 4% of the invoice price for its services. ● Recorded the same as cash sales ● Advantages to retailer: ◆ Issuer does credit investigation of customer ◆ Issuer maintains customer accounts ◆ Issuer undertakes collection and absorbs losses ◆ Receives cash more quickly National Credit Card Sales Illustration ● Anita Ferreri purchases $1,000 of sound equipment for her restaurant from Karen Kerr Music Co., using her Visa First Bank Card. First Bank charges a service fee of 3%. The entry to record this transaction by Karen Kerr Music on March 22, 2022, is as follows.

These are notes & Hw solutions from Casey Potts from Fall2020 @ Georgia State University. Don’t forget to rate your professors at https://www.ratemyprofessors.com/ ➢ Learning Objective 3 ■ Explain How Companies Recognize, Value, and Dispose of Notes Receivable ■ The Nature of Notes Receivable ● Companies may grant credit in exchange for a promissory note. ● Promissory note is a written promise to pay a specified amount of money on demand or at a definite time ● Promissory notes may be used ◆ when individuals and companies lend or borrow money, ◆ when amount of transaction and credit period exceed normal limits, or ◆ in settlement of accounts receivable. ■ Notes Receivable Illustration ● To the payee, the promissory note is a note receivable. ● To the maker, the promissory note is a note payable.

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Determining the Maturity Date ● Maturity date of a promissory note may be stated in one of three ways: ◆ On demand. ◆ On a stated date. ◆ At the end of a stated period of time. ● Note terms are expressed in ◆ Months ◆ Days Computing Interest ● Face Value of Note × Annual Interest Rate × Time in Terms of One Year = Interest ● When counting days, omit date note is issued, but include due date

Recording Notes Receivable

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Illustration ● Calhoun Company wrote a $1,000, two-month, 12% promissory note dated May 1, to settle an open account. Prepare the entry that Wilma Company makes for the receipt of the note.

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Valuing Notes Receivable ● Report short-term notes receivable at their cash (net) realizable value ● Estimation of cash realizable value and recording bad debt expense and related allowance are similar to accounts receivable Disposing of Notes Receivable ● Notes may be held to their maturity date ● Maker may default and payee must make an adjustment to the account ● Holder speeds up conversion to cash by selling the note receivable Honoring and Dishonoring Notes ● Honor of note receivable ◆ Occurs when its maker pays it in full at its maturity date ◆ Dishonor of notes receivable ● A note that is not paid in full at maturity ◆ Dishonored notes receivable are no longer negotiable Honor of Notes Receivable ● Illustration ◆ Wolder Co. lends Higley Inc. $10,000 on June 1, accepting a five-month, 9% interest note. If Wolder presents the note to Higley Inc. on November 1, the maturity date, Wolder’s entry to record the collection is:

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Accrual of Interest Receivable Illustration ● Suppose instead that Wolder Co. prepares financial statements as of September 30. The adjusting entry by Wolder is for four months ending Sept. 30.

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Collection of a Note and Interest Illustration ● Prepare the entry Wolder’s would make to record the honoring of the Higley note on November 1.

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Dishonor of Notes Receivable ● Illustration With Expected Collection ◆ Assume that Higley Co. on November 1 indicates that it cannot pay at the present time. If it does expect eventual collection, Wolder Co. would make the following entry at the time the note is dishonored (assuming no previous accrual of interest).:

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Illustration With No Expected Collection ◆ If instead on November 1 there is no hope of collection, the note holder would write off the face value of the note by making the following entry at the time the note is dishonored (assuming no previous accrual of interest).: ➢ Learning Objective 4 ■ If instead on November 1 there is no hope of collection, the note holder would write off the face value of the note by making the following entry at the time the note is dishonored (assuming no previous accrual of interest).: ■ Financial Statement Presentation of Receivables

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Managing Receivables ● Managing accounts receivable involves five steps: 1. Determine to whom to extend credit. 2. Establish a payment period. 3. Monitor collections. 4. Evaluate the liquidity of receivables. 5. Accelerate cash receipts from receivables when necessary. Extending Credit ● If credit policy is too tight, a company will lose sales ● If credit policy is too loose, a company may sell to customers who will pay either very late or not at all ● It is important to ◆ check references on potential new customers ◆ check financial health of continuing customers Establishing a Payment Period for Receivables ● Companies should determine a required payment period ● Must communicate that policy to their customers ● Payment period should be consistent with that of competitors Monitoring Collections of Receivables ● Companies should prepare an accounts receivable aging schedule at least monthly ◆ Helps managers estimate timing of future cash inflows ◆ Provides information about collection experience of company and identifies problem accounts ● Significant concentrations of credit risk must be discussed in notes to financial statements Evaluating Liquidity of Receivables ● Accounts receivable turnover

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◆ Helps to assess liquidity of receivables ◆ Measures the number of times, on average, a company collects receivables during the period ● Average collection period ◆ Helps to assess the effectiveness of credit and collection policies ◆ Should not exceed credit term period Evaluating Liquidity of Receivables Illustration

Accelerating Cash Receipts ● Three reasons receivables are sold ◆ Size ◆ Companies may sell receivables because they may be the only reasonable source of cash ◆ Billing and collection are often time-consuming and costly The Flow of Managing Receivables

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❖ Wiley Plus Flash Glossary ➢ Accounts receivable ■ Amounts customers owe on account ➢ Accounts receivable turnover ■ A measure of the liquidity of accounts receivable, computed by dividing net credit sales by average net accounts receivable. ➢ Aging the accounts receivable ■ A schedule of customer balances classified by the length of time they have been unpaid ➢ Allowance method ■ A method of accounting for bad debts that involves estimating uncollectible accounts at the end of each period ➢ Average collection period ■ The average amount of time that a receivable is outstanding, calculated by dividing 365 days by the accounts receivable turnover ➢ Bad Debt Expense ■ An expense account to record losses from extending credit ➢ Cash (net) realizable value ■ The net amount a company expects to receive in cash from receivables ➢ Concentration of credit risk ■ The threat of nonpayment from a single large customer or class of customers that could adversely affect the financial health of the company ➢ Direct write-off method

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A method of accounting for bad debts that involves charging receivable balances to Bad Debt Expense at the time receivables from a particular company are determined to be uncollectible Dishonored (defaulted) note ■ A note that is not paid in full at maturity Factor ■ A finance company or bank that buys receivables from businesses for a fee and then collects the payments directly from the customers Maker ■ The party in a promissory note who is making the promise to pay Notes receivable ■ Written promise (as evidenced by a formal instrument) for amounts to be received Other receivables ■ Nontrade receivables that generally do not result from the operations of the business such as interest receivable and income taxes refundable Payee ■ The party to whom payment of a promissory note is to be made Percentage-of-receivables basis ■ A method of estimating the amount of bad debt expense whereby management establishes a percentage relationship between the amount of receivables and the expected losses from uncollectible accounts Promissory note ■ A written promise to pay a specified amount of money on demand or at a definite time Receivables ■ Amounts due from individuals and companies that are expected to be collected in cash Trade receivables ■ Notes and accounts receivable that result from sales transactions....