CHAPTER 8
Receivables
Chapter Overview
The chapter begins with an overview of various types of receivables—both accounts receivable and notes
receivable. Internal controls over receivables, the duties of the credit department, and decision guidelines
for controlling, managing, and accounting for receivables are presented. The concept of uncollectibleaccount expense is introduced along with an explanation of the Allowance for uncollectible accounts, a
contra account related to Accounts receivable. Two methods for recording uncollectible accounts are
discussed: first the allowance method and, later in the chapter, the direct write-off method. The authors
explain the preference for the allowance method. Two methods for estimating uncollectible-account
expense are presented and illustrated: the percent-of-sales method and the aging-of-accounts method.
Entries are shown for recording the uncollectible-account expense each period and for writing off
uncollectible accounts. The direct write-off method is explained. Entries for recording recoveries on
accounts previously written off are illustrated. A brief discussion of credit-card sales, bankcard sales, and
debit-card sales concludes this part of the chapter. A mid-chapter summary problem allows students to
practice estimating and recording uncollectibles, as well as reporting receivables on the balance sheet.
Next, notes receivable are presented, including terms, calculations, and journal entries related to notes.
Accruing interest revenue at the end of the accounting period is illustrated. Students learn how to account
for a dishonored note. Different balance sheet presentations of notes and accounts receivable are shown.
The role that the acid-test ratio and days’ sales in receivables play in decision making is demonstrated.
Additional decision guidelines for receivables conclude the chapter. An end-of-chapter summary
problem reviews notes receivable calculations and entries. The appendix to Chapter 8 discusses
discounting notes receivable.
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Chapter 8: Teaching Outline
1) Explain the common types of receivables.
a)
Accounts Receivable (a.k.a. Trade Receivables)
i) Control Account
ii) Subsidiary Ledger
b) Notes Receivable
2) Describe the importance of internal controls over the collection of receivables.
a) Use of a Credit Department
b) Importance of Separation of Duties
3) Discuss the methods of accounting for uncollectible receivables.
a) The Allowance Method
i) Percent-of-Sales Method
ii) Aging-of-Accounts-Receivable Method
¾ Exhibit 8-1 Aging the Accounts Receivable of Greg’s Groovy Tunes
¾ Exhibit 8-2 Comparing the Percent-of-Sales and Aging Methods
b) The Direct Write-off Method
4) Explain the writing off of uncollectible accounts and the recovery of accounts previously written off.
a) Exhibit 8-3 Greg’s Groovy Tunes—Allowance Method
b) Exhibit 8-4 Greg’s Groovy Tunes—Direct Write-off Method
5) Discuss the reporting of receivables on the balance sheet.
6) Describe accounting for credit-card, bankcard, and debit-card sales.
7) Define the special terms used for notes receivable.
a) Promissory Note
b) Maker of the Note (debtor)
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c) Payee of the Note (creditor)
d) Principal
e) Interest
f) Interest Period
g) Interest Rate
h) Maturity Date
i)
Maturity Value
j)
Exhibit 8-5 A Promissory Note
k) Computing Interest on a Note Receivable
8) Depict the accounting required for a note receivable.
a)
Recording the Note
b) Accruing Interest Revenue
c) Payment on Maturity Date
d) Dishonored Note
e) Exhibit 8-6 Order Entry, Shipping, and Billing Working Together at Mars
9) Discuss how accounting information is used for decision making.
a) Exhibit 8-7 Greg’s Groovy Tunes Balance Sheet
b) Acid-Test (or Quick) Ratio
c) Days’ Sales in Receivables
10) Describe the discounting of a note receivable.
a) Exhibit 8A-1 Discounting (Selling) a Note Receivable
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Chapter 8: Summary Handout for Students
1. Types of receivables:
o Accounts receivable (a.k.a. Trade receivables)
o Notes receivable
2. Internal control over receivables:
o Credit department
o Separation of duties
ƒ
Cash-handling duties
ƒ
Cash-accounting duties
3. Accounting for uncollectible receivables:
o The allowance method is the preferred method because the related uncollectible accounts
expense is recorded in the same period of sale so the matching principle is met (debit
Uncollectible Account Expense, credit Allowance for Uncollectible Accounts).
ƒ
Percent-of-Sales Method (income statement approach)—amount calculated is the
amount for the journal entry
ƒ
Aging-of-Accounts-Receivable Method (balance sheet approach)—amount calculated
represents the desired balance for the allowance account. (The journal entry amount is
the difference between the correct balance and the unadjusted balance.)
o The Direct Write-off Method (debit Uncollectible Account Expense, credit Accounts Receivable)
4. Write off accounts identified as uncollectible.
o The Allowance Method
ƒ
Debit Allowance for Uncollectible Accounts, Credit Accounts Receivable
o The Direct Write-off Method
ƒ
No additional entry is necessary
5. Record the recovery of accounts previously written off.
o The Allowance Method
ƒ
Debit Cash, Credit Allowance for Uncollectible Accounts
o The Direct Write-off Method
ƒ
Debit Cash, Credit Uncollectible Accounts Expense
6. Reporting receivables on the balance sheet.
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o Show net of the allowance for uncollectible accounts (i.e., Accounts receivable minus the
allowance account) so amount reflects what the company expects to collect.
7. Recording credit-card sales, bankcard sales, and debit-card sales.
o Credit-card Sales: Debit Accounts Receivable and a Credit-card Discount Expense, Credit Sales
Revenue
o Bankcard Sales: Debit Cash and Bankcard Discount Expense, Credit Sales Revenue
o Debit-Card Sales: Treated as a Cash Sale
8. Notes receivable is evidenced by a promissory note.
o Record the receipt of the note.
o Accrue interest revenue at the end of the accounting period beginning on the day after the note
date.
o Interest = Principal × Interest rate × Time
o Record the collection of the note.
o Transfer dishonored notes to Accounts receivable.
o Discounting notes receivable is when cash is needed before the maturity date of the note.
ƒ
Record interest expense for the bank’s discount (or charge) on the note.
9. Use the acid-test (or quick) ratio and days’ sales in receivables to evaluate a company.
o
Acid-test = (Cash + Short-term investments + Net current receivables)/Total current
liabilities
o
Days’ sales in average accounts receivable = Average net accounts receivable/One
day’s sales
ƒ
One day’s sales = Net sales (or Total revenues)/365 days
10. Work sheets to print for in-class practice (bookmatch), as specified by your instructor.
11. Myaccountinglab.com homework algorithmic assignments:
o
E8-13; E8-14; E8-18; E8-19; E8-24; P8-25A; P8-26A; P8-28A; P8-29A; P8-31A. For
Appendix: P8A-2A; P8A-3B
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Lecture Outline Tips: Key Topics
Point out that bad debt titles can vary, such as uncollectible accounts and doubtful accounts. Bad debts
are based on CREDIT sales only. Cash sales are collected up front.
The allowance is a contra account, not a liability, and is reflected in the asset section of the balance sheet.
NET A/R is A/R minus the allowance account and reflects what the company expects to collect.
The difference between the direct write-off method and allowance method is the timing of expense
recognition. The allowance method expenses bad debt up front in the year of sale (the matching
principle), whereas the direct write-off method expenses bad debt when the account is deemed
uncollectible at a later date. (It is not matched to the related revenue.)
Two methods for recording bad debts under the allowance method are the % of sales and the aging of
accounts. The % of sales focuses on the expense amount (income statement approach) and the aging of
accounts focuses on the net A/R (balance sheet approach). When using the % of sales, the calculation
represents the journal entry amount. When using the aging of accounts, your calculation represents the
correct balance of the allowance account. The journal entry amount is the difference between the
unadjusted balance and the correct balance.
Under the allowance method, a write-off entry has no effect on income because the expense was
recognized up front in the year of sale. The write-off entry reduces the allowance and A/R by the same
amount, so NET A/R remains the same.
With credit card sales, the company collects cash from the card issuer up front, and the risk of collection
from the customer passes to the card issuer. The cost to the company of passing this risk is the credit card
fee, which is a recorded as an expense along with the sales revenue.
When computing interest on a note receivable, the interest rate is expressed annually and must be adjusted
to the appropriate time period (principal × rate × time). Day one is the day AFTER the note date.
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ASSIGNMENT GRID
Assignment
Topic(s)
Learning
Objective(s)
Short Exercises
S8-1
Different types of receivable
1
S8-2
Internal control over the collection of
receivables
2
S8-3
Applying the allowance method (percent-ofsales) to account for uncollectibles
3
S8-4
Applying the allowance method (percent-ofsales) to account for uncollectibles
3
S8-5
Applying the allowance method (aging-ofaccounts) to account for uncollectibles
3
S8-6
Applying the direct write-off method to
account for uncollectibles
4
S8-7
Collecting a receivable previously written off—
direct write-off method
4
S8-8
Reporting receivables and other accounts in
the financial statements
5
S8-9
Recording credit-card and bankcard sales
6
S8-10
Computing interest amounts on notes receivable 7
S8-11
Accounting for a note receivable
7
S8-12
Using the acid-test ratio and days’ sales in
receivables to evaluate an actual company
8
Exercises
E8-13
E8-14
E8-15
E8-16
E8-17
E8-18
E8-19
E8-20
E8-21
E8-22
E8-23
Common receivables term
1
Identifying and correcting internal control
weakness
2
Accounting for uncollectible accounts using the
allowance method and reporting receivables
on the balance sheet
3, 5
Accounting for uncollectible accounts using the
allowance method and reporting receivables
on the balance sheet
3, 5
Accounting for uncollectible accounts using the
direct write-off method and reporting receivables
on the balance sheet
4, 5
Accounting for uncollectible accounts using the
direct write-off method and reporting receivables
on the balance sheet
4, 5
Journalizing bankcard sales, note receivable
transactions, and accruing interest
6, 7
Computing note receivable amounts
7
Journalizing note receivable transactions
7
Journalizing note receivable transactions
7
Evaluating ratio data
8
Estimated
Time in
Minutes
Level of
Difficulty
5
Easy
5
Easy
5
Easy
5–10
Easy
10
Easy
10
Easy
5–10
Easy
10–15
5
10
5–10
Medium
Easy
Easy
Medium
10–15
Medium
10–15
Easy
10
Medium
15–30
Medium
15–20
Medium
10–15
Medium
10–20
Medium
10–15
15–25
10–15
10
15–20
Easy
Medium
Medium
Medium
Medium
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Problems (Group A)
P8-25A
P8-26A
P8-27A
P8-28A
P8-29A
P8-30A
P8-31A
P8-32A
Explaining common types of receivables and
designing internal controls for receivables
1, 2
Accounting for uncollectible accounts using
the allowance and direct write-off methods;
reporting receivables on the balance sheet
3, 4, 5
Accounting for uncollectible accounts using
the allowance method, and reporting receivables
on the balance sheet
3, 5
Accounting for uncollectible accounts using
the allowance method (% of sales), and
reporting receivables on the balance sheet
3, 5
Accounting for uncollectible accounts (aging
of accounts method), bankcard sales, notes
receivable, and accrued interest revenue
3, 6, 7
Accounting for notes receivable and
accruing interest
7
Accounting for notes receivable, dishonored
notes, and accrued interest revenue
7
Using ratio data to evaluate a company’s
financial position
8
Problems (Group B)
P8-33B
Explaining common types of receivables and
designing internal controls for receivables
1, 2
P8-34B
Accounting for uncollectible accounts using
the allowance and direct write-off methods;
reporting receivables on the balance sheet
3, 4, 5
P8-35B
Accounting for uncollectible accounts using
the allowance method, and reporting receivables
on the balance sheet
3, 5
P8-36B
Accounting for uncollectible accounts using
the allowance method (% of sales), and
reporting receivables on the balance sheet
3, 5
P8-37B
Accounting for uncollectible accounts (aging
of accounts method), bankcard sales, notes
receivable, and accrued interest revenue
3, 6, 7
P8-38B
Accounting for notes receivable and
accruing interest
7
P8-39B
Accounting for notes receivable, dishonored
notes, and accrued interest revenue
7
P8-40B
Using ratio data to evaluate a company’s
financial position
8
Continuing Exercise
E8-41
Accounting for uncollectible accounts using
the direct write-off method
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4
20–30
Easy
20–30
Medium
25–35
Medium
20–30
Medium
20–30
Medium
35–45
Medium
20–30
Medium
20–30
Medium
20–30
Easy
20–30
Medium
25–35
Medium
20–30
Medium
20–30
Medium
35–45
Medium
20–30
Medium
20–30
Medium
5
Easy
Continuing Problem
E8-42
Accounting for uncollectible accounts using
the allowance method (% of sales) and writing
off a specific customer’s account
3
Practice Set
P8-43
Recording transactions and posting to
T-accounts using the allowance method
10
Medium
60–75
Medium
30–40
Difficult
30–40
Difficult
5, 8
10–15
Medium
3
Decision Cases
Case 1
Evaluating bankcard sales for profitability
6
Case 2
Comparing the allowance and direct write-off
methods for uncollectibles
3, 4
Ethical Issue
Financial Statement Case
Analyzing accounts receivable and
uncollectibles
Team Project
Appendix Exercises
E8A-1
Journalizing notes receivable transactions
7
10–15
Medium
Problems
P8A-2
P8A-3
Journalizing notes receivable transactions
Journalizing notes receivable transactions
7
7
15–20
15–20
Medium
Medium
End of Chapter Exercises and Problems Available in Alternate Accounting Software
Programs:
Excel Templates: P8-29A; P8-30A; P8-31A
QuickBooks: P8-29A; P8-30A; P8-31A
Peachtree: P8-29A; P8-30A; P8-31A
General Ledger: P8-29A; P8-30A; P8-31A
Pre-Test Questions on MyAccountingLab: S8-1 (1), S8-2 (2), S8-3 (3), S8-6 (4), S8-8 (5), S8-9
(6), S8-11 (7), S8-12 (8). For Appendix: E8A-1.
Post-Test Questions on MyAccountingLab: P8-34B (3, 4, 5), P8-39B (7). For Appendix: P8A3B
Answer Key to Chapter 8 Quiz
1.
2.
3.
4.
5.
A
B
D
A
C
6. D
7. B
8. C
9. D
10. B
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Name
Date
Section
CHAPTER 8
TEN-MINUTE QUIZ
Circle the letter of the best response.
1.
The 12/31/09 balance sheet of Miller Company reported the following information:
Accounts receivable
$197,400
Allowance for uncollectible accounts
8,600
During 201X, a $520 account receivable from Alexis, Co., is written off. As a result,
A.
Miller’s net accounts receivable will equal $188,800.
B.
Miller will record a debit to Uncollectible account expense for $520.
C.
Miller’s net income will decrease by $520.
D.
Miller will record a credit to Allowance for uncollectible accounts of $520.
2.
Which of the following is not a reasonable internal control over receivables?
A.
The credit department should not be allowed to handle cash from customers.
B.
The person receiving cash should post the collections to accounts receivable records as
soon as the cash is received.
C.
Customers should have a credit check run before they are allowed to purchase on credit.
D.
All of the above are reasonable controls over receivables.
Table 8-1
On 12/31/1X, Zeb Company reported the following amounts and account balances (before adjustments):
Accounts receivable
Allowance for uncollectible accounts, credit
Net sales (all on credit)
$ 840,000
22,050
3,850,000
3.
Refer to Table 8-1. Zeb, Co., estimates that its Uncollectible-Account Expense is 2 ½% of net
sales. The Uncollectible-account expense for 201X should be
A.
$21,000.
C.
$118,300.
B.
$74,200.
D.
$96,250.
4.
Refer to Table 8-1. Zeb, Co., uses an aging schedule to estimate uncollectible accounts. The
aging of accounts receivable and the percentage of each category that is estimated to be
uncollectible is as follows:
Current
$455,000
2%
1–30 days past due
315,000
15%
Over 30 days past due
70,000
55%
The balance in the Allowance for uncollectible accounts after the adjustment should be
A.
$94,850.
C.
$72,800.
B.
$116,900.
D.
$169,050.
5.
On 7/7 a 5%, 90 day, $2,600 note receivable is accepted from a customer for the sale of farm
equipment. Which of the following is correct?
A.
B.
C.
Due Date
10/4
10/5
10/5
Maturity Value
$2,600.00
$2,730.00
$2,632.50
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6.
D.
10/6
$2,632.50
Suppose that Opticals, Co., uses the direct write-off method to record uncollectible-account
expense. Which of the following statements is (are) correct?
I.
II.
III.
IV.
A.
B.
C.
D.
The correct entry includes a debit to Allowance for uncollectible accounts.
The correct entry includes a debit to Uncollectible-account expense.
The correct entry includes a credit to Accounts receivable.
The correct entry includes a debit to Accounts receivable.
Only I is correct.
Only II is correct.
Both II and IV are correct.
Both II and III are correct.
7.
Which of the following statements related to receivables is false?
A.
On the balance sheet, accounts receivable are usually reported as total accounts
receivable minus the allowance for uncollectible accounts.
B.
A dishonored note receivable should be shown as a current liability.
C.
When a note receivable is not paid at maturity, the principal plus any interest due should
be charged back to the customer’s account receivable.
D.
Days sales in receivables measures the average collection period of the company’s
receivables.
8.
Jose Company began the month of May with a balance in Accounts receivable of $72,600.
During May the company reported cash sales of $50,000, credit sales on account of $328,000,
collections from customers on account of $301,400, and write-offs of $1,370. Bad-debt expense
for May was estimated to be 1% of credit sales. The balance in Accounts receivable at May 31
is
A.
B.
C.
D.
$147,830.
$99,200.
$97,830.
$94,550.
Table 8-2
Mink, Corp., reported the following selected data:
Accounts receivable (1/1)
$ 35,000
Accounts receivable (12/31)
28,000
Net sales
310,250
Cash (12/31)
27,500
Inventory (1/1)
Inventory (12/31)
Prepaid expenses (12/31)
Current liabilities (12/31)
9.
Refer to Table 8-2. Compute days’ sales in receivables.
A.
41 days
B.
11 days
C.
33 days
D.
37 days
10.
Refer to Table 8-2. Compute the acid-test ratio.
A.
1.31
B.
.57
C.
1.13
D.
1.27
$67,600
68,100
300
97,300
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