REPORTING AND ANALYZING RECEIVABLES Part 1 – Accounts Receivable Part 2 – Notes Receivable Part 3 – Other Receivables
Accounting for Receivables
Types of Receivables
Accounts Receivable •
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Accounts receivable Notes receivable Other receivables
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Recognizing accounts receivable Valuing accounts receivable Disposing of accounts receivable
Notes Receivable •
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Determining maturity date Computing interest Recognizing notes receivable Disposing of notes receivable
Statement Presentation Analysis
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Presentation Analysis
Accounting for Receivables
Types of Receivables
Accounts Receivable •
•
• •
Accounts receivable Notes receivable Other receivables
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Recognizing accounts receivable Valuing accounts receivable Disposing of accounts receivable
Notes Receivable •
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Determining maturity date Computing interest Recognizing notes receivable Disposing of notes receivable
Statement Presentation Analysis
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Presentation Analysis
Receiva Re ceivables bles Defin Defined ed • Amounts due from individuals and companiescompanies- expected
to be collected in cash; • Assets that represent contractual rights to receive cash
or other asset from another entity. • Frequently classified as: • Accounts receivable • Notes receivable • Other receivables
Learning Objectives (Accounts Receivable) 1. 2. 3. 4.
Identify the proper presentation of receivables as either current or noncurrent assets; Know the timing of recognition and measurement of trade receivables; Differentiate gross method from net method of recording sales; Know the accounting for doubtful accounts, worthless accounts written off and recoveries of accounts written off.
Accounts Receivable... • Amounts owed by customers on account. • Result from the sale of goods/services in the
ordinary course of business. business . Classified as a s current assets when they are • Classified expected to be realized in cash within the normal operating cycle or one year, whichever is longer. • Supported by informal or oral promises to pay. • Often called trade receivables.
Valuing Accounts Receivable • A/R that do not
have a significant financing component are measured initially at their transaction price in accordance with PFRS 15. After initial recognition, accounts receivable shall be measured at amortized cost (net realizable value). • Generally, trade receivable may not be discounted if it is due within 1 year. • Under
FOB Shipping point, ownership is transferred to the buyer upon shipment. Therefore, sales and accounts receivable are recognized on shipment date.
Valuing Accounts Receivable (con’t.) • Under
FOB Destination, ownership is transferred only upon receipt of goods by the buyer. Therefore, sales and accounts receivable are recognized only when the buyer receives delivery of the goods.
• The allowance method of recognizing bad debts on
accounts receivable is used for financing reporting purposes.
Valuing Accounts Receivable (con’t.) • Doubtful accounts may be estimated using:
Percentage of credit sales b. Percentage of receivables c. Aging of receivables • The amount computed under the percentage of credit sales method is the doubtful accounts expense for the period. • The amount computed under the percentage of receivables and aging methods is the required balance of the allowance account. a.
Accounts Receivable... Are recorded when service is provided or at point of sale of merchandise on account. Accounts Receivable 1,000 Sales
1,000
Cash (Net) Realizable Value • Is the net
amount expected to be collected in
cash. • Excludes amounts the company estimates it will
not collect.
Keeps Receivables from Being Overstated on the Balance Sheet.
Accounting for Cash Discounts (GAAP) Gross Method
Net Method
• Accounts receivable and
•
Accounts receivable and Sales are initially recorded at amounts net of cash discounts.
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Cash discounts NOT taken by the buyer are credited to the “Sales Discounts Forfeited” account and included as part of “Other Income”.
•
Cash discounts taken by the buyer ARE NOT ACCOUNTED FOR.
Sales are initially recorded at gross amount of the invoice. • Cash discounts are
recorded only when they are taken by the buyer.
Illustrative Problem An entity sells inventory with a list price of P10,000 on account under credit terms of 20%, 10%, 2/10, n/30. Journalize the entry using both the gross and net method for the following: 1.
Sale on account
2.
Collection is made within the discount period
3.
Collection is made beyond the discount period
2 Methods of Accounting for Uncollectible Accounts • The Direct Write-off Method • The Allowance Method
Direct Write-off Method • Bad debt losses are not estimated. • No allowance account is used. • Accounts are written off when determined uncollectible as
follows: Bad Debts Expense Accounts Receivable- Santos
200 200
Bad debt expense will show only actual losses. Accounts receivable will be reported at gross amount.
Allowance Method • Uncollectible accounts receivable are estimated and
matched against sales in the same accounting period in which the sales occurred. • Uncollectible accounts receivable may be estimated
using: • Percentage of sales • Aging of accounts receivable
Uncollectible Accounts Expense... Is an expense to record estimated uncollectible receivables.
Keeps Expenses from Being Understated on the Income Statement.
Recording Estimated Uncollectibles Hampton Furniture has credit sales of P1,200,000, of which P200,000 remains uncollected. The credit manager estimates P12,000 will prove uncollectible. Uncollectible Accounts Expense 12,000 Allowance for Uncollectible Accounts
12,000
Recording Estimated Uncollectibles Uncollectible Accounts Expense 12,000 Allowance for Uncollectible Accounts Accounts Receivable Jan 1 Bal 200,000
12,000
Allowance for Uncollectible Accounts Jan 1 Bal 12,000
Cash (Net) Realizable Value... • Is the net amount expected to be collected in cash. • Excludes amounts the company estimates it will not
collect.
Keeps Receivables from Being Overstated on the Balance Sheet.
HAMPTON FURNITURE Balance Sheet (partial) Current assets Cash
$ 14,800
Accounts receivable
$200,000
Less: Allowance for uncollectible accounts
Cash (net) Realizable Value
12,000
188,000
Write-off of an Uncollectible Account The vice president of finance authorizes a write-off of P500 owed by R.A.Ware. Allowance for Uncollectible Accounts Accounts Receivable-Ware
500 500
Write-off of an Uncollectible Account Allowance for Uncollectible Accounts Accounts Receivable-Ware
Accounts Receivable Jan 1 Bal 200,000
Mar 1 Bal 199,500
Mar 1 500
500 500 Allowance for Uncollectible Accounts
Mar 1 500
Jan 1 Bal 12,000
Mar 1 Bal 11,500
Aging of Accounts Receivable The analysis of customer balances by the length of time they have been unpaid. The longer a debt is outstanding the less likely it is to be paid.
Aging of Accounts Receivable • Uncollectible Accounts is computed as the difference
between the required balance of the allowance for uncollectible accounts and the unadjusted carrying amount – similar to the percentage of receivables.
Illustrative Problem (Based on Days Outstanding) MCL Co. has the following information: Days outstanding 0 – 60
Receivable balances
% Uncollectible
P120,000
1%
61 – 120
90,000
2%
Over 120
100,000
6%
Total Accounts Receivable
P 310,000
During the year, MCL wrote-off P7,000 receivables and recovered P4,000 that had been written-off in prior years. The allowance for doubtful accounts has a beginning balance of P2,000. Required: Compute the doubtful accounts expense and net realizable value of accounts receivable.
Days Outstanding
Receivable balances
0 -60
P 120,000
1%
P 1,200
90,000
2%
1,800
100,000
6%
6,000
61 - 120 Over 120 Totals
% Uncollectible
P 310,000
P 9,000
Allowance for Doubtful Accounts Write-offs 7,000
Required allowance
2,000 – beg. bal. 4,000 – recoveries 10,000 – DAE (squeeze)
End. Bal. 9,000
Illustrative Problem (Based on Days Past Due) MCL Co. sells to wholesalers on terms 2/15, n/30. An analysis of MCL Co.’s trade receivable balances at Dec. 31, 20xx revealed the following: Age in days Receivable balances 0 - 15 P100,000 16 – 30 60,000 31 – 60 50,000 61 – 90 40,000 91 – 120 30,000 121 – 150 20,000 MCL Co. uses the aging of receivables method. The estimated percentages of collectability based on past experience are shown below: Accounts which are overdue for <31 days 97% Accounts which are overdue 31 – 60 days 90% Accounts which are overdue 61 – 90 days 85%
Illustrative Problem (Based on Days Past Due con’t.) Accounts which are overdue 91 – 120 days 65% Accounts which are overdue for over 120 days 40% The allowance for doubtful accounts has a balance of P8,000 as of Jan. 1, 20xx. No write-offs or recoveries were made during the year. Required: Compute: (a) balance of allowance for doubtful accounts (b) doubtful accounts expense
Days Past Due
Receivable Balance
% Uncollectible
Current
160,000
0
-
1 – 30 days
50,000
3%
1,500
31 – 60
40,000
10%
4,000
61 - 90
30,000
15%
4,500
91 - 120
20,000
35%
7,000
Total
Doubtful Accounts Expense = 17,000 – 8,000
Required Allowance
17,000
Abnormal Balances in Accounts •
If abnormal balance occurs, adjustment is needed to eliminate it prior to the preparation of financial statements.
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Credit balance in customers’ accounts should be presented as part of current liabilities and should NOT be offset against receivables.
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Example:
ABC Co. has an outstanding receivable of P10,000 from Customer X. Subsequently, X remits P16,000 to ABC as payment for an existing receivable and the excess as advance payment for future delivery of goods. Entry to record receipt of payment:
Entry to eliminate credit balance in X’s account:
Cash on Hand
Accounts Receivable – X
16,000
Accounts Receivable – x
16,000
6,000
Advances from Customers (non-trade payable)
6,000
Disposing of Accounts Receivable • Reasons why companies sell their receivables:
1.
They may be the only reasonable source of cash;
2.
Billing and collection are often time-consuming and costly.
Sale of Receivables
• A common sale of receivables is a sale to a
factor.
• Factor is a
finance company or bank that buys receivables from businesses and then collects the payments directly from the customers.
• Factor charges a commission to the company that is selling
the receivables.
2 Types of Accounts Receivable Factoring With Recourse •
In a with-recourse arrangement, if the customer does not pay the factor, the transferor must pay the factor the amount due on the account.
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The rules for transfer of receivables with recourse vary by jurisdiction; therefore, transfers with recourse may or may not qualify for sale treatment.
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If the factoring with recourse arrangement qualifies as a sale, the recourse liability is treated as reduction of the proceeds received in the transfer.
Without Recourse •
Factor assumes the risk of loss from noncollection. Thus, once a factoring arrangement is completed, the entity has no further involvement with the receivables, unless the customer decides to return the merchandise. In its simplistic form, the receivables are sold and the difference between the cash received and the carrying value of the receivables is recognized as a gain or loss.
Illustrative Problem Cabal Furniture factors P6,000,000 of receivables to Singh Factors that charges 3% of the amount of receivables sold. Entry to record sale by Cabal Furniture: Cash 5,820,000 Service Charge Expense 180,000 Accounts Receivable 6,000,000 Note: If the company often sells receivables, it records service charge expense otherwise, it may just report it as “Other Expenses and Losses”.
Illustrative Problem (2) Thirsty Corp., on July 1, year 1, enters into an agreement with Rich Company (the factor) to sell a group of its receivables without recourse. A total face value of $200,000 of accounts receivable are involved. The factor charges 20% interest computed on the weighted-average time to maturity of the receivables of thirtysix days plus a 3% fee. The entries required by the transferor are as follows: Cash Interest expense (or prepaid) (200,000 × .20 × 36/365) Factoring fee (200,000 × .03) Accounts receivable
190,055 3,945 6,000 200,000
The interest expense and factor’s fee can be combined into a $9,945 loss on the sale of receivables.
Pledging of Accounts Receivable • is short-term
borrowing from financial institutions where the loan is secured by accounts receivable. The lender may physically take the accounts receivable but typically has recourse to the borrower; also called discounting of accounts receivable.
• Account receivable financing can be allowed
preferably against charge or hypothecation of receivables whereby the lenders is vested with the right to collect or recover the Receivables either in the normal course of business or in the event of default by the borrower.
Credit Card A common type of credit card is a national credit card such as: •
Visa
•
Master Card
• American
Express.
Credit Card Three parties are involved when national credit cards are used in making retail sales: • the credit card issuer • the retailer • the customer
Bank Credit Card • Sales resulting from the use of VISA and MasterCard
are considered cash sales by the retailer. • Upon receipt of credit card sales slips from a retailer,
the bank immediately adds the amount to the seller's bank balance.
Advantages of Credit Cards to the Retailer
Impairment of Accounts Receivable •
Accounts Receivable considered uncollectible are deemed to be “impaired”.
•
Impairment assessment:
1.
Individually significant accounts receivable should be considered for impairment separately and if impaired, the impairment loss is recognized.
2.
Accounts receivable not individually significant should be collectively assessed for impairment.
3.
Accounts receivable not considered impaired should be included with other accounts receivable with similar credit-risk characteristics and collectively assessed for impairment.
Notes Receivable... Represents claims for which formal instruments of credit are issued as evidence of debt. 2015
Learning Objectives (Notes Receivable) 1. 2. 3. 4.
5.
State the initial and subsequent measurement of note receivables; Account for noninterest bearing and interest bearing note receivable; Learn how to compute for present value factors and how to properly apply them; Be able to prepare amortization table; Compute for the effective interest rate.
Notes Receivable... •
A claim supported by a formal promise to pay a certain sum of money at a specific future date.
• Result from sale of goods and services on account
that extends payment period of the said account. •
Often called trade receivable.
• Give holder a stronger legal claim to assets than
accounts receivable. • Are negotiable instruments and may be transferred
to another party by endorsement.
Notes Receivable...
Credit instrument normally requires: • payment of interest • extends for time periods of 60-90 days or longer.
Notes Receivable... • Are often accepted from customers who need
to extend payment of an account receivable. • Are often required
customers.
from high-risk
Types of Notes Receivable Interest Bearing
Noninterest Bearing
• Notes that have stated
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Notes that do not have a stated interest rate because they include interest element as part of the face amount.
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Face amount pertained here represents an unspecified principal and an unspecified interest . Present value computation is needed to separate the interest element from the principal element.
interest rate on the face of the note.
Initial Measurement of Notes Receivable • Initially at present value which is the sum of all
future cash flows discounted using the prevailing market rate of interest for similar notes.
• Prevailing market rate is the • Short-term
same effective interest rate.
notes receivable shall be measured at face value.
• Long-term
receivables that bears a reasonable interest rate are recorded at face value – present value upon issuance.
• Long-term
receivable that bears no interest; at present value which is the discounted value of the future cash flows using the effective interest rate.
Subsequent Measurement Subsequent to initial recognition, long-term notes receivable shall be measured at amortized cost using the effective interest method.
Amortized Cost The amount at which the note receivable is measured initially: minus principal repayment Plus or minus cumulative amortization of any difference between the initial carrying amount and the principal maturity amount. Minus reduction for impairment or uncollectibility. • •
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Notes Receivable • The life of a note may be expressed in months or days. • When the life of a note is expressed in terms of months,
the due date is found by counting the months from the date of issue. • When the due date is stated in terms of days, count the
exact number of days to determine the maturity date. • In counting, the date the note is issued is omitted but the due date is included. • Dishonored notes should be removed from the notes receivable account and transferred to accounts receivable.
Notes Receivable Valuation • are recorded at face value. • are reported at cash (net)
realizable value. • are honored when paid in full at maturity. • are dishonored when not paid in full at maturity.
Notes Receivable... • Interest revenue is recorded when the note is paid. • If interim financial statements are prepared,
interest on notes receivable is accrued.
• Each type of receivables should be identified in
the balance sheet or in the notes to the financial statements. • Short-term receivables are reported in the current asset section of the balance sheet below short-term investments. • The gross amount of receivables and the allowance for doubtful accounts should be reported.
Illustrative Problem on Interest Bearing Note ABC Co. owns a farm land costing P2,000,000 and was sold for P3,000,000. The firm received a 3-year note for P3,000,000 plus 6% interest compounded annually. Year 1: Notes receivable 3,000,000 Land 2,000,000 Gain on sale of land 1,000,000 Accrued interest receivable Interest Income
180,000 180,000
Other Receivables Nontrade including: • interest receivable • loans to company officers • advances to employees • income taxes refundable
