CH 09

Accounting Principles
Thirteenth Edition
Weygandt Kimmel Kieso
Chapter 9
Accounting for Receivables

Prepared by
Coby Harmon
University of California, Santa Barbara
Westmont College
Chapter 9
Accounting for Receivables

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.
Copyright ©2019 John Wiley & Son, Inc. 3

Recognition of Accounts Receivable
Amounts due from individuals and companies that are
expected to be collected in cash.
Amounts Written promise for Nontrade receivables

customers owe on amounts to be such as interest,
account that result received. Normally loans to officers,
from the sale of requires the advances to
goods and services. collection of employees, and
interest. income taxes.
Accounts Notes Other
Receivable Receivable Receivables
LO 1 Copyright ©2019 John Wiley & Son, Inc. 4

Recognition of Accounts Receivable
Amounts due from individuals and companies that are
expected to be collected in cash.
Receivables as a
Percentage of
Company Total Assets
Ford Motor Company 43.2%
General Electric 41.5
Minnesota Mining and Manufacturing Company (3M) 12.7
DuPont Co. 11.7
Intel Corporation 3.9
ILLUSTRATION 9.1
Receivables as a percentage of assets
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

Illustration: Assume that Zhang Ltd. on July 1, 2020, sells
merchandise on account to Li Stores for ¥1,000, terms 2/10,
n/30. On July 5, Li returns merchandise with a sales price of
¥100 to Zhang. 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

Illustration: On July 11, Zhang receives payment from Li for
the balance due. Prepare the journal entry to record this
transaction.
July 11 Cash (¥900 − ¥18) 882
Sales Discounts (¥900 × .02) 18

Some retailers issue their own credit cards. When you use a
retailer’s credit card (IKEA, for example), the retailer charges
interest on the balance due if not paid within a specified
period (usually 25–30 days).
Illustration: Assume you use your IKEA credit card to purchase
clothing with a sales price of €300 on June 1, 2020. The entry
is recorded as follows.
June 1 Accounts Receivable 300
Sales Revenue 300

Illustration: Assuming that you owe €300 at the end of the
month and IKEA charges 1.5% per month on the balance due,
the adjusting entry that IKEA makes to record interest revenue
of €4.50 (€300 × 1.5%) on June 30 is as follows.
June 30 Accounts Receivable 4.50
Interest Revenue 4.50

ANATOMY OF A FRAUD
Tasanee was the accounts receivable clerk for a large non-profit foundation that provided
performance and exhibition space for the performing and visual arts. Her responsibilities included
activities normally assigned to an accounts receivable clerk, such as recording revenues from
various sources that included donations, facility rental fees, ticket revenue, and bar receipts.
However, she was also responsible for handling all cash and checks from the time they were
received until the time she deposited them, as well as preparing the bank reconciliation. Tasanee
took advantage of her situation by falsifying bank deposits and bank reconciliations so that she
could steal cash from the bar receipts. Since nobody else logged the donations or matched the
donation receipts to pledges prior to Tasanee receiving them, she was able to offset the cash that
was stolen against donations that she received but didn’t record. Her crime was made easier by the
fact that her boss, the company’s controller, only did a very superficial review of the bank
reconciliation and thus didn’t notice that some numbers had been cut out from other documents
and taped onto the bank reconciliation.
Total take: $1.5 million
THE MISSING CONTROL

Segregation of duties. The foundation should not have allowed an accounts receivable clerk, whose
job was to record receivables, to also handle cash, record cash, make deposits, and especially
prepare the bank reconciliation.
Independent internal verification. The controller was supposed to perform a thorough review of
the bank reconciliation. Because he did not, he was terminated from his position.

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 16, 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 16 Cash (£48,000 − £1,440) 46,560
Sales Discounts (£48,000 × .03) 1,440
Valuation and Disposition of Accounts
Receivable
Valuing Accounts Receivables
• Current asset
• Valuation (cash realizable value)
Uncollectible Accounts Receivable
• Sales on account raise the possibility of accounts not
being collected
• Companies record credit losses as debits to Bad Debt
Expense
Valuing Accounts Receivable
Methods of Accounting for Uncollectible Accounts
Direct Write-Off Allowance Method

Theoretically undesirable: Losses are estimated:
 No matching  Better matching
 Receivable not stated at  Receivable stated at cash
cash realizable value realizable value
 Not acceptable for  Required by GAAP
financial reporting

How are these accounts presented on the Balance Sheet?
Allowance for
Accounts Receivable Doubtful Accounts
Bal. 200,000 12,000 Bal.
Bal. Bal.

Hampson Furniture
Statement of Financial Position (partial)
Current Assets
Supplies € 25,000
Inventory 310,000
Accounts receivable €200,000
Less: Allowance for doubtful accounts 12,000 188,000
Cash 14,800
Total current assets €537,800

Alternate
Hampson Furniture Presentation
Statement of Financial Position (partial)

Journal entry for credit sale of €100
Sales Revenue 100
Allowance for
Bal. 500 25 Bal.
Sale 100
Bal. 600 25 Bal.

Collect €333 on account?
Cash 333
Allowance for
Bal. 500 25 Bal.
Sale 100 333 Coll.
Bal. 267 25 Bal.

Adjustment of €15 for estimated bad debts?
Bad Debt Expense 15
Allowance for Doubtful Accounts 15
Allowance for
Bal. 500 25 Bal.
Sale 100 333 Coll. 15 Exp.
Bal. 267 40 Bal.

Write-off of uncollectible accounts of €10?
Allowance for
Bal. 500 25 Bal.
Sale 100 333 Coll. 15 Exp.
10 w/o w/o 10
Bal. 257 30 Bal.

ABC Corporation
Balance Sheet (partial)
Current Assets
Cash € 330
Accounts receivable, net of $30 allowance 227
Inventory 812
Prepaid expense 40

Direct Write-Off Method For
Uncollectible Accounts
Illustration: Assume that Warden Co. writes off M. E. Doran’s
NT$1600 balance as uncollectible on December 12. Warden’s
entry is:
Dec. 12 Bad Debt Expense 1600
Theoretically undesirable:
• No matching
• Receivable not stated at cash realizable value
• Not acceptable for financial reporting
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.

Recording Estimated Uncollectibles
Illustration: Hampson Furniture has credit sales of €1,200,000
in 2020. 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 is as
follows.
Bad Debt Expense 12,000
Allowance for Doubtful Accounts 12,000

Recording Estimated Uncollectibles
Hampson Furniture
Current Assets
Supplies €25,000
Inventory 310,000
Accounts receivable €200,000
Allowance for doubtful accounts 12,000 188,000
Cash 14,800
ILLUSTRATION 9.3
Presentation of allowance for doubtful accounts

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, 2021. The entry to record the write-off is as
follows.
Accounts Receivable Allowance for Doubtful Accounts

Jan. 1 Bal. 200,000 Mar. 1 500 Mar. 1 500 Jan. 1 Bal. 12,000
Mar. 1 Bal. 199,500 Mar. 1 Bal. 11,500
ILLUSTRATION 9.4
LO 2 Balances after write-off Copyright ©2019 John Wiley & Son, Inc. 27
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.
Cash 500

Estimating the Allowance ILLUSTRATION 9.6
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.

Estimating the Allowance
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.

Estimating the Allowance ILLUSTRATION 9.7
Accounts Receivable Aging Schedule

Number of Days Past Due
Not yet
Customer Total Due 1-30 31-60 61-90 Over 90
T.E. Adert ¥ 600 ¥ 300 ¥ 200 ¥ 100
R.C. Bortz 300 ¥ 300
B.A. Carl 450 200 ¥ 250
O.L. Diker 700 500 200
T.O. Ebbet 600 300 300
Others 36,950 26,200 5,200 2,450 1,600 1,500
¥39,600 ¥27,000 ¥5,700 ¥3,000 ¥2,000 ¥1,900
Estimated %
uncollectible 2% 4% 10% 20% 40%
Total estimated
uncollectible ¥2,228 ¥540 ¥228 ¥300 ¥400 ¥760
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.
Bad Debt Expense Allowance for Doubtful Accounts
Dec. 31 Adj. 1,700 Dec.31 Bal. 528
Dec. 31 Adj. 1,700
Dec. 31 Bal. 2,228
ILLUSTRATION 9.8
Bad debt accounts after posting

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.
Bad Debt Expense Allowance for Doubtful Accounts

Dec. 31 Adj. 2,728 Dec. 31 Bal. 500
Dec. 31 Adj. 2,728
Dec. 31 Bal. 2,228
ILLUSTRATION 9.9
Bad debt accounts after posting
DO IT! 2a Bad Debt Expense
Brule Group has been in business for 5 years. The unadjusted
trial balance at the end of the current year shows Accounts
Receivable $30,000, Sales Revenue $180,000, and Allowance
for Doubtful Accounts with a debit balance of $2,000. Brule
estimates bad debts to be 10% of accounts receivable.
Prepare the entry necessary to adjust Allowance for Doubtful
Accounts.
[(0.1 x $30,000) + $2,000]

Disposing of Accounts Receivable
Companies sell receivables for two major reasons.
1. Receivables may be the only reasonable source of
cash.
2. Billing and collection are often time-consuming and
costly.

Sale of Receivables to a Factor
• Finance company or bank
• Buys receivables from businesses and then collects
payments directly from customers
• Typically charges a commission to company that is
selling receivables
• Fee ranges from 1-3% of receivables purchased

Sale of Receivables to a Factor
Illustration: Assume that Keelung Jewelry factors NT$600,000
of receivables to Federal Factors (amounts in thousands).
Federal Factors assesses a service charge of 2% of the amount
of receivables sold. The journal entry to record the sale by
Keelung Jewelry is as follows.
Cash 588,000
Service Charge Expense (2% × NT$600,000) 12,000

National Credit Card Sales
• Recorded same as cash sales
• Retailer pays card issuer a fee of 2 to 4% for
processing the transactions

Accounting for Credit Card Sales
Illustration: To illustrate, Ling Lee purchases NT$6,000 of
compact discs 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 is as follows.
Cash 970
Service Charge Expense 30
Sales Revenue 1,000

DO IT! 2b Factoring
Kell Wholesalers needs to raise €120,000 in cash to safely
cover next Friday’s employee payroll. Kell has reached its debt
ceiling. Kell’s present balance of outstanding receivables totals
€750,000. Kell decides to factor €125,000 of its receivables on
September 7, 2020, to alleviate this cash crunch. Record the
entry that Kell would make when it raises the needed cash.
(Assume a 1% service charge.) Assuming that Kell Co. factors
€125,000 of its accounts receivable at a 1% service charge, it
would make this entry:
Cash 123,750
Service Charge Expense (1% × €125,000) 1,250
Notes Receivable
Companies may grant credit in exchange for a promissory
note. A 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
1. when individuals and companies lend or borrow
money,
2. when amount of transaction and credit period
exceed normal limits, or
3. in settlement of accounts receivable.

Notes Receivable
To the Payee, the promissory note is a note receivable.
To the Maker, the promissory note is a note payable.
ILLUSTRATION 9.12
LO 3 Promissory note Copyright ©2019 John Wiley & Son, Inc. 42
Notes Receivable
Determining the Maturity Date
• On demand
• At the end of a stated period of time
• On a stated date
Computing Interest ILLUSTRATION 9.15
Formula for computing interest
Face Annual Time in

Value of x Interest x Terms of = Interest
Note Rate One Year

Notes Receivable
Computing Interest
When counting days, omit the date the note is issued,
but include the due date.
Terms of Note Interest Computation

Face x Rate x Time = Interest
₺ 750, 12%, 120 days ₺ 730 x 12% x 120/360 = ₺ 29.20
₺1,000, 9%, 6 months ₺1,000 x 9% x 6/12 = ₺ 45.00
₺2,000, 6%, 1 year ₺2,000 x 6% x 1/1 = ₺120.00
ILLUSTRATION 9.16
Computation of interest

Recognizing Notes Receivable
Illustration: Calhoun plc’s wrote a £1,000, two-month, 12%
promissory note dated May 1, to settle an open account.
Prepare an entry Wilma Ltd. would make for the receipt of the
note.
May 1 Notes Receivable 1,000

Valuing Notes Receivable
• Report short-term notes receivable at their cash (net)
realizable value
• Estimation of cash realizable value and bad debt
expense are done similarly to accounts receivable
• Allowance for Doubtful Accounts is used

Disposing of Notes Receivable
1. Notes may be held to their maturity date.
2. Maker may default and payee must make an
adjustment to the account.
3. Holder speeds up conversion to cash by selling the
note receivable.

Disposing of Notes Receivable
Honor of Notes Receivable
• Maker pays it in full at its maturity date
Dishonor of Notes Receivable
• Not paid in full at maturity
• No longer negotiable

Honor of Notes Receivable
Illustration: Wolder Co. lends Higley Co. €10,000 on June 1,
accepting a five-month, 9% interest note. To obtain payment,
Wolder (the payee) must present the note either to Higley Co.
(the maker) or to the maker’s agent, such as a bank. If Wolder
presents the note to Higley Co. on November 1, the maturity
date, Wolder’s entry to record the collection is as follows.
Nov. 1 Cash 10,375
Notes Receivable 10,000
Interest Revenue (€10,000 × 9% × 5/12) 375

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.
Sept. 30 Interest Receivable 300
ILLUSTRATION 9.17
Timeline of interest earned
Accrual of Interest Receivable
Illustration: Prepare the entry Wolder’s would make to record
the honoring of the Higley note on November 1.
Nov. 1 Cash 10,375
Interest Receivable 300

Dishonor of Notes Receivable
Illustration: Assume that Higley Co. on November 1 indicates
that it cannot pay at the present time. If Wolder Co. does
expect eventual collection, it would make the following entry
at the time the note is dishonored (assuming no previous
accrual of interest).
Nov. 1 Accounts Receivable 10,375
Interest Revenue 375

DO IT! 3 Recognizing Notes Receivable
Gambit Stores accepts from Leonard Co. a $3,400, 90-day, 6% note
dated May 10 in settlement of Leonard’s overdue account. (a) What is
the maturity date of the note? (b) What is the interest payable at the
maturity date? (c) What entry does Gambit make at the maturity
date, assuming Leonard pays the note and interest in full at that time?
a. The maturity date is August 8, computed as follows:
Term of note: 90 days

May (31-10) 21
June 30
July 31 82
Maturity date: August 8

b. The interest payable at the maturity date is $51, computed as:
Face x Rate x Time = Interest

$3,400 x 6% x 90/360 = $51.00

c. Gambit Stores records this entry at the maturity date:
Cash 3,451
Interest Revenue 51

Presentation and Analysis
Presentation
• Identify in the balance sheet or in the notes
each major type of receivable
B/S • Report short-term receivables as current assets
• Report both gross amount of receivables and
allowance for doubtful account
• Report bad debt expense and service charge
expense as selling expenses
I/S
• Report interest revenue under “Other revenues
and gains”
Presentation ILLUSTRATION 9.18
Deere & Company

(in millions)
Receivables
Receivables from unconsolidated subsidiaries $ 30
Trade accounts and notes receivable 3,278
Financing receivables 27,583
Restricted financing receivables 4,616
Other receivables 1,500
Total receivables 37,007
Less: Allowance for doubtful trade receivables 175
Net receivables $36,832

Analysis
Illustration: Cisco Systems had net sales of $37,750 million for
the year. It had a beginning accounts receivable (net) balance of
$5,157 million and an ending accounts receivable (net) balance
of $5,344 million. Assuming that Cisco’s sales were all on credit,
its accounts receivable turnover is computed as follows.
Net Credit Average Net Accounts Receivable

÷ =
Sales Accounts Receivable Turnover
$5,157 + $5,344
$37,750 ÷ = 7.2 times
2
ILLUSTRATION 9.21
Accounts receivable turnover and computation

Analysis
Illustration: A variant of the accounts receivable turnover ratio
is average collection period in terms of days.
ILLUSTRATION 9.21
Net Credit Average Net Accounts Receivable

÷ =
Sales Accounts Receivable Turnover
$5,157 + $5,344
$37,750 ÷ = 7.2 times
2
Days in Accounts Receivable Average Collection

÷ =
Year Turnover Period in Days
365 days ÷ 7.2 times = 51 days
ILLUSTRATION 9.22

DO IT! 4 Analysis of Receivables
Illustration: In 2020, Phil Mickelson Company has net credit sales of
€923,795 for the year. It had a beginning accounts receivable (net)
balance of €38,275 and an ending accounts receivable (net) balance of 9.21
ILLUSTRATION
€35,988. Compute the company’s (a) accounts receivable turnover and

(b) average collection period in days.
Net Credit Average Net Accounts Accounts Receivable
÷ =
Sales Receivable Turnover
€38,275 + €35,988
€923,795 ÷ = 24.9 times
2
Accounts Receivable Average Collection
Days in Year ÷ =
Turnover Period in Days
365 days ÷ 24.9 times = 14.7 days

A Look at U.S. GAAP
Key Points
Similarities
• The recording of receivables, recognition of sales returns and
allowances and sales discounts, and the allowance method to record
bad debts are the same between GAAP and IFRS.
• Both IFRS and GAAP often use the term impairment to indicate that
a receivable or a percentage of receivables may not be collected.
• The FASB and IASB have worked to implement fair value
measurement (the amount they currently could be sold for) for
financial instruments, such as receivables. Both Boards have faced
bitter opposition from various factions.

A Look at U.S. GAAP
Key Points
Differences
• Although IFRS implies that receivables with different characteristics
should be reported separately, there is no standard that mandates
this segregation.
• IFRS and GAAP differ in the criteria used to determine how to record
a factoring transaction. IFRS uses a combination approach focused
on risks and rewards and loss of control. GAAP uses loss of control as
the primary criterion. In addition, IFRS permits partial derecognition
of receivables; GAAP does not.

A Look at U.S. GAAP
Looking to the Future
The question of recording fair values for financial instruments will
continue to be an important issue to resolve as the Boards work toward
convergence. Both the IASB and the FASB have indicated that they
believe that financial statements would be more transparent and
understandable if companies recorded and reported all financial
instruments at fair value. That said, in IFRS 9, which was issued in 2009,
the IASB created a split model, where some financial instruments are
recorded at fair value, but other financial assets, such as loans and
receivables, can be accounted for at amortized cost if certain criteria are
met. Critics say that this can result in two companies with identical
securities accounting for those securities in different ways. A proposal by
the FASB would require that practically all equity instruments be reported
at fair value, and that debt instruments may or may not be reported at
fair value depending on whether certain criteria are met.

Copyright
Copyright © 2019 John Wiley & Sons, Inc.
All rights reserved. Reproduction or translation of this work beyond that permitted in
Section 117 of the 1976 United States Act without the express written permission of the
copyright owner is unlawful. Request for further information should be addressed to the
Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up
copies for his/her own use only and not for distribution or resale. The Publisher assumes
no responsibility for errors, omissions, or damages, caused by the use of these programs
or from the use of the information contained herein.
Copyright ©2019 John Wiley & Son, Inc. 64

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Accounting Principles

Accounting for Receivables

Accounting for Receivables

Copyright ©2019 John Wiley & Son, Inc. 3

Amounts Written promise for Nontrade receivables

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Total take: $1.5 million

THE MISSING CONTROL

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Direct Write-Off Allowance Method

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Statement of Financial Position (partial)

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Bal. 600 25 Bal.

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Bal. 267 25 Bal.

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Bal. 267 40 Bal.

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Accounts Receivable Allowance for Doubtful Accounts

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Accounts Receivable Aging Schedule

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Bad Debt Expense Allowance for Doubtful Accounts

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Face Annual Time in

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Terms of Note Interest Computation

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Term of note: 90 days

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Face x Rate x Time = Interest