8/8/2017 Receivables | Accounting

20th December 2015 Receivables

Kieso:-Chapter 7:
Short Notes and solution to problems.
Receivables

Receivables: are claims held against customers and others for money, goods or
services. Two types of receivables are:

1. Current receivables: which are collected within a year.

2. Non current receivables: are those which do not fall into the category non current.

Trade receivables: are amounts owed by customers for goods sold and services
rendered as part of normal business operations. It's sub classified into
(a) Accounts receivable (b) Notes receivables

a)Accounts receivables: are local promises of the purchaser to pay for goods and
services sold. Collectible within 30 to 60 days.

b)Notes receivables: are written promises to pay a certain sum of money on a specified
future date. They may arise from sales, financing or other transactions. Notes may be
short or long term.

Non trade receivables: arise from a variety of transactions and can be written promises
either to pay or to deliver. Some examples of non trade receivables are:
1. Advances to officers and employees.
2. Advances to subsidiaries
3. Dividend receivable
4. Interest receivable

Trade discount: The price based on list or catalog price may be subject to a trade or
quantity discount. Such discount is called trade discount.

For example: If your text book has a list price of Tk. 90.00 and publishers sells it to a
book store for list price less a 30 percent trade discount, the receivable recorded by the
publisher is Tk 63.00 per textbook.

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Cash discount ( Sales discount): are offered as an inducement for prompt payment.
They are communicated in terms that read, for example, 2/10, n/30, meaning 2 percent if
paid within 10 days, gross amount due in 30 days.

2/10, EOM meaning, 2 percent if paid within 10 days of the end of the month.

Recognition of Accounts Receivable:

Gmoss Method Net Method
01. Slaes of Tk. 10,000
term 2/no, n/30:
Accounts receivable ................ 98000
Accounts Receivable ...........
Sales .... .................... 98000
10,000
Sales
...........................10,000 Cash .........................................
02. Payment of Tk. 4000 received 3920
within Accounts receivable .........
discount period: 3920
Cash ....................................
3920 Acc./Receivable ....................... 120
Sales discounts ................... 80 Sales discount forfeited ... 120
Accounts Receivable ......
Cash ..........................................
4000
6000
03. Payment of Tk. 6000 received
A/c Receivable .............
after
6000
discount period:
Cash ....................................
6000
Accounts receivable......
6000

Valuation of Accounts Receivable:

Short term receivables: are valued and reported at net realizable value. The net amount
expected to be received in cash. Net realizable value requires estimation of both
uncollectible receivables and any returns or allowances to be granted.
Two procedures are used to record uncollectible accounts:

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01. Direct Write Off method: Here no entry is made until a specific account has
definitely been established as uncollectible. The loss is recorded by the following entry:

Bad debt Expense Dr

Accounts Receivable Cr

02. Allowances Method: An estimation is made of the expected uncollectible accounts

from all sales made on account or from the total of outstanding receivables. The
estimated amount is entered as expense and an allowance is created to cover the
expense. It is recorded in the period of sale.

Allowance for doubtful Account Dr

Accounts receivable Cr

Recognition of Notes Receivables:

Notes receivables are supported by a formal promissory note, a written promise to pay a
certain sum of money at a specific future date. Notes are classified as:

01. Interest bearing : which has a stated interest rate.

02. Zero interest bearing: it includes interest as part of their face amount instead of
stating it explicitly.

Stated interest rate: referred to as the face rate or the coupon rate, the rate contracted
as part of the note. e. g. 20,000 taka notes receivables signed @ 12%.

Effective interest rate: referred to as the market rate or the effective yield, which is used
to determine the value of the note. That is the discount rate used to calculate present
value.

Imputed interest: is the interest attributed to a situation which is void of a stated interest
factor. The circumstances when a interest rate is imputed for notes receivable are:
1. no interest rate is stated.
2. stated interest is unreasonable
3. when stated rate and market rate is different
4. the prevailing interest is the appropriate interest to be imputed.

Recourse: is the right of a transferee (purchaser) of receivables to receive payment from

the transferer (seller) of those receivables for:

1. failure of the debtors to pay when due.

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2. the effects of prepayments

3. adjustments resulting from defects in the eligibility of the
transferred receivables.

Sale without Recourse:

(Board question 2009) - Kieso ; E7- 17.

ABC Crop factors Tk 300,000 of accounts receivable with XYZ Finance Corporation on a
without recourse basis of July 1, 2007. The receivables recorded are trasferred to XYZ
Finance, which will receive the collections. XYZ Finance assesses a finance change of
1% of the amount of accounts receivable and retains an amount equal to 4% of accounts
receivables to cover sales discounts, returns and allowances. The transaction is to be
recorded as a sale.
Required:

i) Prepare the Journal Entry on July 1, 2007 for ABC Corporation to record
the sale of receivables without recourse. (3)
ii) Prepare the Journal entry on July 1, 2007, for XYZ Finance Corporation
to record the purchase of receivable without recourse. (3)

Solution:
i) Cash Dr 285,000
Due from factors Dr 12,000
Loss on Sale of receivables Dr 3,000
Accounts receivable Cr 300,000

( 300,000 x 4% = 12,000)
( 300,000 x 1% = 3000)
ii) Accounts receivables Dr 300,000
Due to ABC corporation Cr 12,000
Financing revenue Cr 3,000
Cash Cr 285,000

( XYZ Finance Corporation purchases receivables without recourse)

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Sale with Recourse:The seller guarantees payment to the purchaser in the event where
the debtor fails to pay.

Transfer of receivables with Recourse:

Kieso: E7- 16\

Whitney Houston Corporation factors Tk 175,000 of accounts receivable with Kathleen
Battle Financing Inc. On a with recourse basis. Kathleen Battle Finaancing will collect the
receivables.
The receivables recorded are transferred to Kathleen Battle Financing on August 15,
2003. Kathleen assesses a financing charge of 2% of the amount of accounts receivable
and also reserves an amount equal to 4% of accounts receivable to cover probable
adjustments.
Instructions:
a) What conditions must be met for a transfer of receivables with recourse
to be accounted for as a sale?
b) Assume the conditions are met from Part a. Prepare the journal entry on
August 15, 2003. for Whitney Huston to record the sale of receivable
assuming the recourse obligation has a fair value of Tk 2000.

Solution:
a) To be recorded as a sale, all of the following conditions should be met:
i) The transferred asset has been isolated from the transferer.
ii) The transferees have obtained the right to pledge or to exchange the transferred
asset.
iii) The transferer does not maintain any kind of control over transferred asset.

b) i) Computation of net proceeds:

Cash received (175,000 x 94%) 164,500
Due from factor (175,000 x 4 %) 7,000 171,500
Less: Recourse Obligation 2000
Net Proceeds 169,500

ii) Computation of gain or loss:

Carrying value 175,000
Less: Net proceeds 169,500
5500

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Journal Entry:
Cash Dr 164,500
Due from factors Dr 7,000
Loss on sale of Receivable Dr 5,500
Recourse liability Cr 2,000
Accounts Receivable Cr 175,000

E-7 20 ( Transfer of receivables )

Presented below are the information for Jones Company:
01. Beginning of the year Accounts receivable balance was Tk 15,000
02. Net sales for the year were Tk. 185,000, ( Credit sales were Tk 100,000 of the total
sales.) Jones does not offer cash discounts.
03. Collections on accounts receivable during the year were tk 70,000
Instructions:
a. Prepare journal entries to record the items noted above.
b. Compute Jones accounts receivable turnover ratio for the year.
c) Use the turnover ratio computed in (b) to analyze Jones liquidity. The
turnover ratio last year was 13.65.

Solution:
a) Cash Dr 85,000
Accounts Receivable Dr 100,000
Sales Cr 185,000
Cash Dr 70,000
Accounts receivable Cr 70,000

b) Accounts Receivable Turnover:

Sales / Average
Accounts Receivables
= Accounts receivable
Turnover

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[https://www.blogger.com/blogger.g?blogID=4298928610489865175]
185,000/(15,000+40,000)
2
= 6.7 times or 365/6.17 or 59 days

c) Jones company's turnover ratio has declined. That is, relative to sales, their
receivables are being collected at a slower rate - 6.17 < 13.65 or 59 days to collect
versus 27 days in prior year.
This could be a bad trend for future liquidity, if customers continue to pay slowly. Jones
may want to consider offering cash discount for early payment.

Kieso: E7- 21

Jones is planning to factor some accounts receivable at he end of the year. Accounts
totaling Tk. 25,000 will be transferred to Credit Factors, inc. with recourse. Credit factors
will retain 5% of the balances and assesses a finance charge of 4%. The fair value of the
recourse obligation is Tk 1200
Instruction:
a. Prepare the journal entry to record the sale of receivables
b. Compute Jones Accounts Receivable turnover ratio for the year,
assuming the receivables are sold, and discuss how factoring of
receivable affects turnover

Solution:
a) Cash [25,000 x (1-.09) 22,750
Due factor 1,250
Loss on sale of accounts receivables 2,200
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25,000
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Recourse [https://www.blogger.com/blogger.g?blogID=4298928610489865175]
Obligation
1,200
Where:
Loss on sale of accounts receivable is computed as follows:
25,000 x .04 = 1000+

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= 1200
2,200

(b) Accounts receivable Turnover:

185,000/(15,000+20000)
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=10. 57 Times or about 35 days.
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20,000
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With the factoring transaction Jones Company's turnover ratio did decline from 59 days to
35 days but by factoring, a loss has occurred on receivable. Which increase cost of
capital, or reduces profit.

Q.1.What is the theore cal jus ca on of the allowance method as contrasted with the direct write-o
method of accoun ng for bad debts?
Q.2.What is imputed interest? In what situa ons is it necessary to impute an interest rate for notes
receivable? What are the considera ons in impu ng an appropriate interest rate?
Q.3.When is the nancial components approach to recording the transfers of receivables used? When
should a transfer of receivables be recorded as a sale?
Q4.What is the accounts receivable turnover ratio, and what type of information does it provide?
Q5.What is the normal procedure for handling the collection of accounts receivable previously
written off using the direct write-off method? The allowance method?

Problems:
P7-6 (Journalize Various Accounts Receivable Transactions) The balance sheet of
Starsky
Company at December 31, 2012, includes the following.

Notes receivable $ 36,000

Accounts receivable 182,100
Less: Allowance for doubtful accounts 17,300 200,800

Transactions in 2012 include the following.

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1. Accounts receivable of $138,000, were collected including accounts of $60,000 on

which 2% sales discounts were allowed.
2. $5,300 was received in payment of an account which was written off the books as
worthless in 2012.
3. Customer accounts of $17,500 were written off during the year.
4. At year-end, Allowance for Doubtful Accounts was estimated to need a balance of
$20,000. This estimate is based on an analysis of aged accounts receivable.

Instructions
Prepare all journal entries necessary to reflect the transactions above.

Solution:

1. Cash...................................... Dr. 136,800

Sales Discount.................... Dr. 1200
Accounts Receivable........................ Cr. 138,000

2. Accounts Receivable......... Dr. 5300

Allowance for Doubtful Accounts........ Cr. 5300

Cash..................................... Dr. 5300

Accounts Receivable...... Cr. 5300

3. Allowance for Doubtful Account Dr. 17,500

Accounts Receivable.......................... Cr.17, 500

4. Bad Debt Expense*............... Dr. 14,900

Allowance for Doubtful Accounts.... Cr. 14,900
*($17,300 + $5,300 $17,500 = $5,100;
$20,000 $5,100 = $14,900)

P7-7 (Assigned
Assigned Accounts ReceivableJournal Entries) Salen Company finances some
of its current operations by assigning accounts receivable to a finance company. On July
1, 2012, it assigned
assigned, under guarantee, specific accounts amounting to $150,000. The
finance company advanced to Salen 80% of the accounts assigned (20% of the total to
be withheld until the finance company has made its full recovery), less a finance charge
of % of the total accounts assigned
assigned.
On July 31, Salen Company received a statement that the finance company had
collected $80,000 of these accounts and had made an additional charge of % of the

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total accounts outstanding as of July 31. This charge is to be deducted at the time of the
first remittance due Salen Company from the finance company. (Hint: Make entries at this
time.) On August 31, 2012, Salen Company received a second statement from the
finance company, together with a check for the amount due. The statement indicated that
the finance company had collected an additional $50,000 and had made a further charge
of % of the balance outstanding as of August 31.
Instructions:
Make all entries on the books of Salen Company that are involved in the transactions
above.
(AICPA adapted)

Solution:

July 01

1. Cash......................................... Dr. 112,500

Financing Charge (0.005 x 150,000) Dr. 750
Notes Payable (150,000 x 80%) Cr. 120,000

July 31

2. Notes Payable............................... Dr. 80,000

Accounts Receivable.............. Cr. 80,000

Finance Charge............................. Dr. 350

Financing Charge Payable*.............. Cr. 350

(*$ 150,000 80,000 x .005%)

August 31

3. Notes Payable............................. Dr. 40,000

Cash*.......................................... Dr. 9500
Financing Charge........................ Dr. 100
Financing Charge Payable.......... Dr. 350
Accounts Receivable..................... Cr. 50,000

*Total cash collection........................................................ $50,000

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Less: Finance charge payable (from previous entry)............. (350)

Finance charge (current month)
[(.005 X ($150,000 $80,000 $50,000)]............................... (100)
Note payable (balance) ($120,000 $80,000)....................... (40,000)
Cash collected......................................................................$9,550

Posted 20th December 2015 by Waterlily

Labels: Intermediate Accounting, Kieso, Receivables, solution

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