Финансовый учет. Ридер

Helpful Hint In this context, material means significant or important to financial statement users.

A = L + SE

12,000 Exp

12,000

Cash Flows no effect

The allowance method of accounting for bad debts involves estimating uncollectible accounts at the end of each period. This provides better matching of expenses with revenues on the income statement. It also ensures that receivables are stated at their cash (net) realizable value on the balance sheet. Cash (net) realizable value is the net amount a company expects to receive in cash from receivables. It excludes amounts that the company estimates it will not collect. Estimated uncollectible receivables therefore reduce receivables on the balance sheet through use of the allowance method.

Companies must use the allowance method for financial reporting purposes when bad debts are material in amount. It has three essential features:

1.Companies estimate uncollectible accounts receivable and match them against revenues in the same accounting period in which the revenues are recorded.

2.Companies record estimated uncollectibles as an increase (a debit) to Bad Debts Expense and an increase (a credit) to Allowance for Doubtful Accounts through an adjusting entry at the end of each period. Allowance for Doubtful Accounts is a contra account to Accounts Receivable.

3.Companies debit actual uncollectibles to Allowance for Doubtful Accounts and credit them to Accounts Receivable at the time the specific account is written off as uncollectible.

RECORDING ESTIMATED UNCOLLECTIBLES. To illustrate the allowance method, assume that Hampson Furniture has credit sales of $1,200,000 in 2012, of which $200,000 remains uncollected at December 31. The credit manager estimates that $12,000 of these sales will prove uncollectible. The adjusting entry to record the estimated uncollectibles increases (debits) Bad Debts Expense and increases (credits) Allowance for Doubtful Accounts, as follows.

Companies report Bad Debts Expense in the income statement as an operating expense (usually as a selling expense). Thus, Hampson matches the estimated uncollectibles with sales in 2012 because the expense is recorded in the same year the company makes the sales.

Allowance for Doubtful Accounts shows the estimated amount of claims on customers that companies expect will become uncollectible in the future. Companies use a contra account instead of a direct credit to Accounts Receivable because they do not know which customers will not pay. The credit balance in the allowance account will absorb the specific write-offs when they occur. The company deducts the allowance account from Accounts Receivable in the current assets section of the balance sheet, as shown in Illustration 8-3.

Illustration 8-4 General ledger balances after write-off

A = L + SE

500500

Cash Flows no effect

A = L + SE

500500

Cash Flows

500

Helpful Hint Like the write-off, a recovery does not involve the income statement.

To illustrate, assume that on July 1, R. A. Ware pays the $500 amount that Hampson Furniture had written off on March 1. Hampson makes these entries:

Note that the recovery of a bad debt, like the write-off of a bad debt, affects only balance sheet accounts. The net effect of the two entries is an increase in Cash and an increase in Allowance for Doubtful Accounts for $500. Accounts Receivable and the Allowance for Doubtful Accounts both increase in entry (1) for two reasons: First, the company made an error in judgment when it wrote off the account receivable. Second, R. A. Ware did pay, and therefore the Accounts Receivable account should show this reinstatement and collection for possible future credit purposes.

ESTIMATING THE ALLOWANCE. For Hampson Furniture in Illustration 8-3, the amount of the expected uncollectibles was given. However, in “real life,” companies must estimate the amount of expected uncollectible accounts if they use the allowance method. Frequently they 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. For example, suppose Steffen Company has an ending balance in Accounts Receivable of $200,000, and an unadjusted credit balance in the Allowance for Doubtful Accounts of $1,500. If it estimates that 5% of its accounts receivable will eventually be uncollectible, then it should report a balance in the Allowance for Doubtful Accounts of $10,000 (.05 $200,000). This would require a debit to Bad Debts Expense and a credit to Allowance for Doubtful Accounts of $8,500.

To more accurately estimate the ending balance in the allowance account, a company often prepares a schedule, called aging the accounts receivable, in which customer balances are classified by the length of time they have been unpaid.

After the company arranges the accounts by age, it determines the expected bad debts losses by applying percentages, based on past experience, to the totals of each category. The longer a receivable is past due, the less likely it is to be collected. As a result, the estimated percentage of uncollectible debts increases as the number of days past due increases. Illustration 8-6 shows an aging schedule for Dart Company. Note the increasing uncollectible percentages from 2% to 40%.

Total estimated uncollectible accounts for Dart Company ($2,228) represent the existing customer claims expected to become uncollectible in the future. Thus, this amount represents the required balance in Allowance for Doubtful Accounts at the balance sheet date. Accordingly, the amount of the bad debts expense adjusting entry is the difference between the required balance and the existing balance in the allowance account. The existing, unadjusted balance in the Allowance for Doubtful Accounts is the net result of the beginning balance (a normal credit balance) less the write-offs of specific accounts during the year (debits to the allowance account).

For example, if the unadjusted trial balance shows Allowance for Doubtful Accounts with a credit balance of $528, then an adjusting entry for $1,700 ($2,228 $528) is necessary:

A = L + SE

1,700 Exp

1,700

Cash Flows no effect

Illustration 8-7 Bad debts accounts after posting

Illustration 8-8 Note disclosure of accounts receivable

The following note regarding accounts receivable comes from the annual report of healthcare company McKesson Corp.

McKESSON CORP.

Notes to the Financial Statements

The allowances are primarily for uncollectible accounts and sales returns.

Brule Corporation has been in business for 5 years. The ledger 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 the Allowance for Doubtful Accounts.

Solution

Brule should make the following entry to bring the debit balance in the Allowance for Doubtful Accounts up to a normal, credit balance of $3,000 (.1 $30,000):

BAD DEBTS EXPENSE

Action Plan

•Report receivables at their cash (net) realizable value—that is, the amount the company expects to collect in cash.

•Estimate the amount the company does not expect to collect.

•Consider the existing balance in the allowance account when using the percentage of receivables basis.

Notes receivable give the holder a stronger legal claim to assets than do accounts receivable. Like accounts receivable, notes receivable can be readily sold

Illustration 8-9

Promissory note

Helpful Hint Who are the two key parties to a note? What entry does each party make when the note is issued?

Answer:

1.The maker, Brent Company, credits Notes Payable.

2.The payee, Wilma Company, debits Notes Receivable.

Helpful Hint The maturity date of a 60-day note dated July 17 is determined as follows:

to another party. Promissory notes are negotiable instruments (as are checks), which means that, when sold, the seller can transfer them to another party by endorsement.

Companies frequently accept notes receivable from customers who need to extend the payment of an outstanding account receivable, and they often require them from high-risk customers. In some industries (e.g., the pleasure and sport boat industry), all credit sales are supported by notes. The majority of notes, however, originate from lending transactions.

There are three basic issues in accounting for notes receivable:

1.Recognizing notes receivable.

2.Valuing notes receivable.

3.Disposing of notes receivable.

We will look at each of these issues, but first we need to consider an issue that did not apply to accounts receivable: computing interest.

DETERMINING THE MATURITY DATE

The maturity date of a promissory note may be stated in one of three ways:

(1) on demand, (2) on a stated date, and (3) at the end of a stated period of time.

When it is stated to be at the end of a period of time, the parties to the note will need to determine the maturity date.

When the life of a note is expressed in terms of months, you find the date when it matures by counting the months from the date of issue. For example, the maturity date of a three-month note dated May 1 is August 1. A note drawn on the last day of a month matures on the last day of a subsequent month. That is, a July 31 note due in two months matures on September 30.

When the due date is stated in terms of days, you need to count the exact number of days to determine the maturity date. In counting, omit the date the note is issued but include the due date.

study objective 4

Compute the interest on notes receivable.

Illustration 8-10 Formula for computing interest

COMPUTING INTEREST

Illustration 8-10 gives the basic formula for computing interest on an interestbearing note.

Illustration 8-11

Computation of interest

The interest rate specified on the note is an annual rate of interest. The time factor in the computation expresses the fraction of a year that the note is outstanding. When the maturity date is stated in days, the time factor is frequently the number of days divided by 360. When counting days, omit the date the note is issued but include the due date. When the due date is stated in months, the time factor is the number of months divided by 12. Illustration 8-11 shows computation of interest for various time periods.

study objective 5

Describe the entries to record the disposition of notes receivable.

Helpful Hint How many days of interest should be accrued at September 30 for a 90-day note issued on August 16? Answer: 45 days (15 days in August plus 30 days in September).

A = L + SE

Notes may be held to their maturity date, at which time the face value plus accrued interest is due. In some situations, the maker of the note defaults, and the payee must make an appropriate adjustment. In other situations, similar to accounts receivable, the holder of the note speeds up the conversion to cash by selling the receivables as described later in this chapter.

Honor of Notes Receivable

A note is honored when its maker pays in full at its maturity date. For each interest-bearing note, the amount due at maturity is the face value of the note plus interest for the length of time specified on the note.

To illustrate, assume that Wolder Co. lends Higley Inc. $10,000 on June 1, accepting a five-month, 9% interest note. In this situation, interest is $375 ($10,000 9% 125 ). The amount due, the maturity value, is $10,375 ($10,000 $375). To obtain payment, Wolder (the payee) must present the note either to Higley Inc. (the maker) or to the maker’s agent, such as a bank. If Wolder presents the note to Higley Inc. on November 1, the maturity date, Wolder’s entry to record the collection is:

Gambit Stores accepts from Leonard Co. a $3,400, 90-day, 6% note dated May 10 in settlement of Leonard’s overdue open account. The note matures on August 8. What entry does Gambit make at the maturity date, assuming Leonard pays the note and interest in full at that time?

Solution

The interest payable at maturity date is $51, computed as follows.

Face Rate Time Interest

(To record collection of Leonard note and interest)

NOTES RECEIVABLE

Action Plan

•Determine whether interest was accrued.

•Compute the accrued interest.

•Prepare the entry for payment of the note and the interest. The entry to record interest at maturity in this solution assumes that no interest has been previously accrued on this note.

Financial Statement

Presentation of Receivables

Companies should identify in the balance sheet or in the notes to the financial statements each of the major types of receivables. Short-term receivables are reported in the current assets section of the balance sheet, below short-term investments. Short-term investments appear before short-term receivables because these investments are nearer to cash. Companies report both the gross amount of receivables and the allowance for doubtful accounts.

study objective 6

Explain the statement presentation of receivables.