CH 08

Financial Accounting
IFRS 4th Edition

Weygandt ● Kimmel ● Kieso
Chapter 8
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 & Sons, Inc. 2
Learning Objective 1
Explain How Companies Recognize
Accounts Receivable

Recognition of Accounts Receivables (1 of 2)
• The term receivables refers to amounts due from
individuals and companies
• Receivables are claims that are expected to be
collected in cash
• Management of receivables is a very important
activity for any company that sells goods or services
on credit
• Receivables are important because they represent
one of a company’s most liquid assets

Recognition of Accounts Receivables (2 of 2)
Amounts due from individuals and companies that are expected to
be collected in cash.
Receivables as a Company
Company Percentage of Total Assets
Adidas (DEU) 16%
Hyundai (KOR) 5
Samsung (KOR) 13
Nestlé (CHE) 41
China Mobile Limited (HKG) 2

Types of Receivables (1 of 2)
Amounts due from individuals and companies that are expected to
be collected in cash.
Amounts customers Written promise Nontrade receivables

owe on account that (formal instrument) such as interest,
result from the sale for amount to be loans to officers,
of goods and received. Normally advances to
services. requires the employees, and
collection of income taxes
interest. refundable.
Accounts Notes Other
Receivable Receivable Receivables

Recognizing Accounts Receivable (1 of 5)
• Service organization records a receivable when it
performs service on account
• Merchandiser records accounts receivable at point of
sale of merchandise on account
• Seller may offer a discount to encourage early
payment
• Buyer might return goods found to be unacceptable
 Sales returns reduce receivables

Illustration: Assume that Zhang Ltd. on July 1, 2020, sells
merchandise on account to Li Stores for ¥1,000, terms 2/10,
n/30 (amounts in thousands). On July 5, Li returns
merchandise with a sales price of ¥100 to Zhang. Prepare the
journal entries to record these transactions.
Jul. 1 Accounts Receivable 1,000
Sales Revenue 1,000
Jul. 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.
Jul. 11 Cash (¥900 − ¥18) 882

Sales Discounts (¥900 x .02) 18

Illustration: 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.
Jun. 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

Do It! 1: Recognizing Accounts
Receivable (1 of 3)
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. (Ignore cost of goods sold
entries.)
May 1 Accounts Receivable 50,000

Sales Revenue 50,000

Receivable (2 of 3)
entries.)
May 4 Sales Returns and Allowances 2,000

Accounts Receivable 2,000

Receivable (3 of 3)
entries.)
May 16 Cash (£48,000 − £1,440) 46,560

Sales Discounts (£48,000 × .03) 1,440

Describe How Companies Value
Accounts Receivable and Record Their
Disposition

Valuation of Accounts Receivable
Valuing Accounts Receivable
• Current asset
• Valuation (net realizable value)
Uncollectible Accounts Receivable
• Sales on account raise possibility of accounts not
being collected
• Seller records losses that result from extending
credit as Bad Debt Expense

Accounting for Uncollectible Accounts
Direct Write-Off Method
• No matching of expenses with revenues
• Receivable not stated at net realizable value
• Not acceptable for financial reporting purposes
Allowance Method
• Better matching of expenses with revenues
• Receivable stated at cash (net) realizable value
• Required for financial reporting purposes

How are these accounts presented on the Balance Sheet?
Allowance for
Accounts Receivable Doubtful Accounts
Bal. 200,000 12,000 Bal.
Bal. Bal.
Copyright ©2019 John Wiley & Son, Inc. 18

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
LO 2 Copyright ©2019 John Wiley & Son, Inc. 19

Alternate
Presentation
Hampson Furniture
Current Assets
Supplies € 25,000
Inventory 310,000
Accounts receivable, net of €12,000 allowance 188,000
Cash 14,800

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 Supplies
Current Assets
Prepaid expense € 40
Inventory 812
Accounts receivable €257
Less: Allowance for doubtful accounts 30 227
Cash 330

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 as follows.
Bad Debt Expense 1,600
Unless bad debt losses are insignificant, the direct write-off

method is not acceptable for financial reporting purposes.

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.

Allowance Method for Uncollectibles
(1 of 5)
Recording Estimated Uncollectibles

Illustration: Hampson Furniture has credit sales of €1,200,000
in 2020, of which €200,000 remains uncollected at December
31. The credit manager estimates that €12,000 of these sales
will be uncollectible.
Dec. 31 Bad Debt Expense 12,000
Allowance for Doubtful Accounts 12,000

(2 of 5)
Hampson Furniture
Current Assets Blank Blank
Supplies Blank € 25,000

Inventory Blank 310,000
Accounts receivable €200,000 188,000
Allowance for doubtful accounts 12,000 Blank
Cash Blank 14,800

Total current assets Blank €537,800

(3 of 5)
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.
Mar. 1 Allowance for Doubtful Accounts 500
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

(4 of 5)
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 the
following entries.
July 1 Accounts Receivable 500
July 1 Cash 500

Estimating the Allowance (1 of 4)
Frequently, companies estimate the allowance as a
percentage of the outstanding receivables.
Percentage-of-Receivables Basis
• Management establishes a percentage relationship
between amount of receivables and expected losses
from uncollectible accounts
• Amount of bad debt expense that should be recorded
is difference between required balance and existing
balance in allowance account

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: 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: Assume 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.
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

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.
Bad Debt Expense 5,000*

* [(10% × $30,000) + $2,000]

Disposing of Accounts Receivables (1 of 2)
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% to 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 12,000
(NT$600,000 × 2% = NT$12,000)

National Credit Card Sales
• Retailer pays card issuer a fee of 2 to 4% of invoice
price
• Recorded same as cash sales
• Advantages to retailer:
 Issuer does credit investigation of customer
 Issuer maintains customer accounts
 Issuer undertakes collection and absorbs losses
 Receives cash more quickly
National Credit Card Sales
Illustration: Ling Lee purchases NT$6,000 of paper products
for her restaurant from Wu Supplies using her Visa First Bank
Card. First Bank charges a service fee of 3%. The entry to
record this transaction by Wu Supplies on March 22, 2020, is
as follows.
Cash 5,820
Service Charge Expense 180
Sales Revenue 6,000
(NT$6,000 × 3% = NT$180)

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.)
Cash 123,750
Service Charge Expense 1,250
(€125,000 × 1% = €1,250)
Explain How Companies Recognize,
Value, and Dispose of Notes Receivable

Notes Receivable (1 of 2)
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 (2 of 2)
To the payee, the promissory note is a note receivable.
To the maker, the promissory note is a note payable.

Determining the Maturity Date
Maturity date of a promissory note may be stated in one
of three ways:
1. On demand.
2. On a stated date.
3. At the end of a stated period of time.
Note terms are expressed in:
• Months
• Days

Computing Interest
Face Value of Note × Annual Interest Rate × Time in
Terms of One Year = Interest
When counting days, omit date note is issued, but
include due date
Terms of Note Interest Computation

Face x Rate x Time = Interest
₺ 730, 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

Recognizing Notes Receivable
Illustration: Calhoun plc 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 recording bad
debt expense and related allowance are similar to
accounts receivable

Disposing of Notes Receivable (1 of 2)
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 (2 of 2)
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% x 5/12) 375

Accrual of Interest Receivable (1 of 2)
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 (€10,000 × 9% x 4/12) 300

Interest Revenue 300

Accrual of Interest Receivable (2 of 2)
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
Interest Revenue (€10,000 × 9% x 1/12) 75

Dishonor of Notes Receivable (1 of 2)
Illustration: Assume that Higley Co. on November 1 indicates
that it cannot pay at the present time. If it does expect
eventual collection, Wolder Co. 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

Dishonor of Notes Receivable (2 of 2)
Illustration: If instead on November 1 there is no hope of
collection, the note holder would write off the face value of the
note by making the following entry at the time the note is
dishonored (assuming no previous accrual of interest).
Nov. 1 Allowance for Doubtful Accounts 10,000


DO IT! 3: Recognizing Notes Receivable (1 of 3)
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

Describe the Statement Presentation
and Analysis of Receivables

Presentation and Analysis
Presentation
Statement of Financial Position
• Identify on statement or in the notes each major type
of receivable
• Report short-term receivables as current assets
• Report both gross amount of receivables and
allowance for doubtful account

Presentation and Analysis
Presentation
Income Statement
• Report bad debt expense and service charge expense
in operating expenses section
• Report interest revenue under “Other income and
expense” in non-operating section

Analysis
Illustration: Cisco Lenovo Group (CHN) (which reported in U.S.
dollars) had net sales of $38,707 million for the year. It had a
beginning accounts receivable (net) balance of $2,885 million
and an ending accounts receivable (net) balance of $3,171
million. Assuming that Lenovo’s sales were all on credit, its
accounts receivable turnover is computed as follows.
Net Credit Average Net Accounts Receivable

÷ =
Sales Accounts Receivable Turnover
$2,885 + $3,171
$38,707 ÷ = 12.8 times
2

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

÷ =
Sales Accounts Receivable Turnover
$2,885 + $3,171
$38,707 ÷ = 12.8 times
2
Days in Accounts Receivable Average Collection

÷ =
Year Turnover Period in Days
365 days ÷ 12.8 times = 28.5 days

DO IT! 4: Analysis of Receivables
Illustration: In 2020, Nadal Racquets 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 €35,988. Compute
ILLUSTRATION 9.21
Nadal’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

Compare the Accounting for
Receivables Under I F R S and U.S.
GAAP

A Look at U.S. G A A P (1 of 3)
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 G A A P and I F R S.
• Both I F R S and G A A P often use the term impairment to
indicate that a receivable or a percentage of receivables may
not be collected.
• The F A S B and I A S B 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.

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

Looking to the Future
Both the I A S B and the F A S B 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.

Copyright
Copyright © 2019 John Wiley & Sons, Inc.
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Financial Accounting

IFRS 4th Edition

Copyright ©2019 John Wiley & Sons, Inc. 3

Copyright ©2019 John Wiley & Sons, Inc. 4

Copyright ©2019 John Wiley & Sons, Inc. 5

Amounts customers Written promise Nontrade receivables

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Jul. 11 Cash (¥900 − ¥18) 882

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Jun. 1 Accounts Receivable 300

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June 30 Accounts Receivable 4.50

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May 1 Accounts Receivable 50,000

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May 4 Sales Returns and Allowances 2,000

Copyright ©2019 John Wiley & Sons, Inc. 13

May 16 Cash (£48,000 − £1,440) 46,560

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LO 2 Copyright ©2019 John Wiley & Son, Inc. 19

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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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Unless bad debt losses are insignificant, the direct write-off

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Recording Estimated Uncollectibles

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Supplies Blank € 25,000

Cash Blank 14,800

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Illustration: The financial vice president of Hampson Furniture

Accounts Receivable Allowance for Doubtful Accounts

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Recovery of an Uncollectible Account

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Bad Debt Expense Allowance for Doubtful Accounts

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Bad Debt Expense Allowance for Doubtful Accounts

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Bad Debt Expense 5,000*

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LO 2 Copyright ©2019 John Wiley & Son, Inc. 37

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