RECEVABLES AND PAYABLES

CHAPTER 9

RECEVABLES AND PAYABLES

Principles of Accounting

Soon Suk Yoon • Hyo Jin Kim

PowerPoint Presentation by:

Soon Suk Yoon, Professor, Western Illinois University

Hyo Jin Kim, Assistant Professor, Jeonju University 2016

Types of receivables

1

The term receivables ( 수취채 권 ) includes all money claims against other entities, including people, business firms, and other

organizations.

Accounts receivable ( 외상매출금 ), resulting from the sales of goods or services, are normally expected to

be collected within a relatively

short period, such as 30 or 60 days.

Notes receivable ( 받을어음 ) are amounts that customers owe for which a formal, written instrument

of credit has been issued.

Other receivables includes non-trade receivables such as interest receiv- able, loans receivable, income taxes

refundable and so forth.

Recognizing and valuing ac- counts receivable

2

Regardless of how careful a company is in granting credit, some credit sales will be uncollectible. The operating ex-

pense account is called bad debt ex- pense, uncollectible accounts expense ( 대손상각비 ), or doubtful accounts ex-

pense.

The direct write-off method ( 직접차감법 ) records bad debt expense only when an ac-

count is judged to be worthless.

The direct write-off method has two defi- ciencies. First, it fails to match the uncol- lectible expense against the revenue in the year of sale. Second, accounts receivable is

shown at gross amount, resulting in over-

statement of assets.

The allowance method ( 충당금설정법 ) records bad debt expense by estimating uncollectible ac-

counts at the end of the accounting period.

Receivables are valued at Net Realizable Value ( 순실현가능가치 ). Uncollectible Accounts Ex-

pense ( 대손상각비 ) is matched with the rev- enue in the year of sale.

The Allowance for Uncollectible Accounts ( 대손 충당금 ) is a contra asset account ( 자산차감계

정 ).

Direct Write-Off Method

Merchandise of $1,000 was sold to Frank Nader on July 6, 20

×1. His account was considered uncollectible on February 7, 20×2. The journal entry on February 7 is ：

Feb. 7 Uncollectible Accounts Expense 1,000

Accounts Receivable - F. Nader 1,000

Example 9-1

Allowance Method

Canine Corporation’s accounts receivable balance is $50,000 at the end of an accounting period. It is estimated that $2, 000 of the customer balances will be uncollectible.

The journal entry is ：

Uncollectible Accounts Expense 2,000

Allowance for Uncollectible Accounts 2,000

The year-end balance sheet shows the estimated net realizabl e value of the accounts receivable ：

Accounts Receivable $50,000

Less ： Allowance for Uncollectible Accounts 2,000 $48,000

Example 9-2

Methods of Computing Provi- sion for Uncollectible Ac-

counts

3

Estimating Uncollectibles

Alternative ways can be used to estimate the amount debited to Uncollectible Ac- counts Expense.

1. Percent of sales method.

2. Percent of accounts receivable method

3. Aging method

This is an income statement approach to estimating un- collectible accounts expense. The expense is computed by multiplying the current year’s net credit sales ( 순외상매

출액 ) by a flat uncollectible rate ( 단일대손율 ).

The method emphasizes the matching ( 대응 ) between Uncollectible Accounts Expense and Credit Sales. There-

fore, the current balance in the Allowance for Uncol- lectible Accounts does not affect Uncollectible Accounts

Expense.

Percent of Sales Method ( 매출액비례

법 )

Percent of Sales Method

Credit sales for 20×1 are $220,000. The anticipated bad debt expense is 1 percent of credit sales. The allowance account c urrently has a credit balance of $1,200. The journal entry is

：

Uncollectible Accounts Expense 2,200

Allowance for Uncollectible Accounts 2,200

Example 9-3

This is the statement of financial position approach to estimating allowance for uncollectible accounts.

The allowance is computed by multiplying the re- ceivable balance ( 채권잔액 ) at the end of a period

by a flat uncollectible rate ( 단일대손율 ).

The method emphasizes the measurement of receiv- able at Net Realizable Value. Therefore, the balance

in the Allowance for Uncollectible Accounts is taken into account to record the adjusting entry for

Uncolletible Accounts Expense.

Percent of Accounts Receivable Method

( 채권잔액비례법 )

Percent of Accounts Receivable Method

At the end of December 20x1, the Accounts Receivable has a bal ance of $50,000 and the Allowance for Uncollectible Accounts h as a credit balance of $500. It is estimated that $2,000 of the cus tomer balances will be uncollectible.

The journal entry is ：

Uncollectible Accounts Expense 1,500

Allowance for Uncollectible Accounts 1,500

The year-end balance sheet shows the estimated net realizable v alue of the accounts receivable ：

Accounts Receivable $50,000

Less ： Allowance for Uncollectible Accounts 2,000 $48,000

Example 9-4

Aging Method ( 연령분석법 )

The longer an account receivable is overdue, the more likely it is that it fails to be collected. Basing the estimate of uncollectible accounts on how long specific amounts have been outstanding is called ag-

ing method.

The aging method is also a balance sheet approach since it breaks down the gross receivables into dif- ferent age groups and applies different uncollectible

rates across the age groups.

Aging Method

A break down of accounts receivable by age groups is shown below with desired bala nce of allowance for uncollectible accounts for each group and the aggregate.

Since the amount needed in the allowance account is $1,600 based upon an analysis o f year-end receivables, an adjusting entry is needed to bring the current allowance ac count balance up to that amount. The amount of the adjusting entry is therefore equa l to the difference between the current amount and the amount needed according to t he aging schedule. If the allowance account has a credit balance of $1,200, the year-en d journal entry is ：

Uncollectible Accounts Expense 400 Allowance for Uncollectible Accounts 400

Example 9-5

Age of Accounts receivable Year-End Gross Accounts Receivable

Balance

Uncollectible Percentage

Amount Needed in Allowance Account

at Year’s End

1-30 days $12,000 1% $120

31-60 days 28,000 3% 840

61-90 days 8,000 5% 400

Over 90 days 2,000 12% 240

$50,000 $1,600

Abnormal Balance for Allowance for Uncollectible Accounts

Assume the same information as in Example 9-5 except that the allowanc e account has a debit balance of $1,200. The journal entry is ：

Uncollectible Accounts Expense 2,800

Allowance for Uncollectible Accounts 2,800 *

* $1,600 + $1,200＝ $2,800

After this entry, the allowance account will have the desired balance of

$1,600.

Example 9-6

WRITING OFF CUS-

TOMERS’ACCOUNTS

4

Write-off of a Specific Account

When it is obvious that a customer is no longer able to pay the amount due, the specific account should be writ- ten off.

The journal entry is:

Allowance for Uncollectible Accounts* xxx Accounts Receivable xxx

*

Write-off of Receivable

Jack Butler owes the company $1,000. His account is dee med worthless. The entry is ：

Allowance for Uncollectible Accounts 1,000 Accounts Receivable 1,000

Example 9-7

RECOVERY OF

WRITTEN-OFF RECEIVABLES

5

Recovery of Written-off Receivables

A full or partial recovery of a previously written-off accoun ts should be recorded in two steps.

First, reverse the write-off journal entry. Second, record th e collection of accounts receivable.

1) Accounts Receivable xxx

Allowance for Uncollectible Accounts xxx

2) Cash xxx

Accounts Receivable xxx

Recovery of Written-off Receivable

Referring to Example 9-7, assume that Butler agrees to pay bac k only $600.

The journal entries are ：

Accounts Receivable- Frigate Company 600 Allowance for Uncollectible Accounts 600 Cash 600

Accounts Receivable- Frigate Company 600

Example 9-8

PROMISSORY NOTES

6

Characteristics of Notes Receivable

(continued)

• The maker is the party making the promise to pay.

A note receivable, or promissory note, is a written document containing a promise to pay:

• The payee is the party to whom the note is payable.

• The face amount is the amount the note is written for on its face.

• The issuance date is the date a note is issued.

Characteristics of Notes Receivable (continued)

• The term of the note is the amount of time be- tween the issuance and due dates.

• The interest rate is that rate of interest that

must be paid on the face amount for the term of the note.

• The due date or maturity date is the date the

note is to be paid.

Promissory Note

Exhibit

Interest on Notes Receivable

Interest is usually computed on the basis of a 360-day year (12 months×30 days per month). The following formula is used ：

Interest ＝ Principal × Interest Rate × Time

The principal( 원금 ) is the face value( 액면가액 ) of the note.

The interest rate ( 이자율 ) is the annual rate( 연리 ) earned on the note. The time is the fraction of the year that the note is held. For example, if a $1,000, 12 percent, 90-day note is issued, then the interest is: $1,000×12%×90/360 ＝ $30

Notes Receivable

Cardinal Company has an accounts receivable of $1,000 from Blue Jay Company. Cardinal Company receives a 90-day, 12 percent note in settl ement of the accounts receivable. Her journal entry is ：

Notes Receivable 1,000

Accounts Receivable 1,000

Interest is not recorded until it is due 90 days later. At that time, interes t income will become part of the journal entry as follows ：

Cash 1,030

Notes Receivable 1,000 Interest Income 30^*

* $1,000×12%×90/360 ＝ $30

Example 9-9

DISCOUNTING A NOTE RECEIVABLE

7

Discounting a Note Receivable ( 받을어음의 할인 )

The holder of a note may expedite cash receipt from the note by transferring it to a bank prior to maturity. This is referred to as ‘discounting a note receivable.’

The proceeds received by the holder at the time the note is dis counted is equal to the maturity value less the bank discount.

They are calculated as follows:

• Maturity Value ( 만기가액 ) ＝ Face Value ＋ Interest Income

• Bank Discount ( 은행할인액 ) ＝ Maturity Value

× Discount Rate × Discount Period

• Cash Proceeds ( 현금수령액 ) ＝ Maturity Value － Bank Dis- count

Discounting a Note Receivable (1)

Cardinal Company holds a $1,000, 120 day, 12 percent note dated September 6.

It is discounted at 16 percent on October 6. The interest on the note is ： $1,000×12%×120/360 ＝ $40

The maturity value is ：

$1,000 ＋ $40 ＝ $1,040

At the time Mr. Neil discounted the note, he had already held it for 30days. Hen ce, the discount period will be 90days. The bank discount is ：

$1,040×16%×90/360 ＝ $41.60 Therefore, the net proceeds received by Mr. Neil are ： $1,040.00 － $41.60 ＝ $998.40 The journal entry to record the discounting of the note ：

Cash 998.40

Interest Expense 1.60

Notes Receivable 1,000.00

Example 9-10

Discounting a Note Receivable (2)

Assume the same information as in Example 9-10 except that the discount per iod is 30 days rather than 90 days.

The interest on the note and the maturity value are the same as before. The ba nk discount is ：

$1,040×16%×30/360 ＝ $13.87 The net proceeds become ：

$1,040.00 － $13.87 ＝ $1,026.13

The entry to record the discounting of the note is now ： Cash 1,026.13

Notes Receivable 1,000.00 Interest Income 26.13

Example 9-11

Discounting Note Receivable

Figure 9-1

Interest-earning period Interest-paying period

Note Note Maturity

Obtained Discounted

NOTES PAYABLE

8

A note payable ( 지급어음 ) may be issued either to make a purchase, settle an account

payable, or borrow from the bank. Ac-

counting for notes payable is similar to that of notes receivable except that notes

payable are liabilities.

Notes Payable

Goldfinch Company purchased a machine by issuing a 6%, $5,0 00 promissory note which matures in six months. The journal en try to record the purchase of the machine and the issuance of th e promissory note is:

Machinery 5,000

Notes Payable 5,000

Example 9-12

Replacement of Accounts Payable with Notes Payable

Aspen Company owes an account payable of $6,000 to a supplier. Aspen C ompany does not have sufficient cash to pay the account payable when it b ecomes due. In settlement of the account payable, Aspen Company issued a 90 day promissory note which pays 12 percent annual interest. Make journ al entries for Aspen Company to record the settlement of accounts payable by issuing a promissory note, and to record the settlement the promissory note at the maturity date. The journal entry for the company is:

Accounts Payable 6,000

Notes Payable 6,000

At the maturity date, the entry is ：

Notes Payable 6,000 Interest Expense 180^*

Cash 6,180

* $6,000×12%×90/360 ＝ $180

Example 9-13

Borrowing at a Discount ( 할인차 입 )

A note payable is typically issued to the bank when money is borrowed. Often, the bank imme-

diately deducts the interest on the loan from the face value of the note. The borrower receives the net proceeds. The term “borrowing at a discount

( 할인차입 ) or “discounting a note payable”

refers to the case where interest is paid in ad- vance.

Two Ways to Pay Interests

Alternative ways of interest payments

Journal Entries

Date of Borrowing Maturity Date

Pay interest in advance

Cash 9,700 Notes Payable 10,000

Interest Expense 300 Cash 10,000 Notes Payable 10,000

Pay interest at the maturity date

Cash 10,000 Notes Payable 10,000 Notes Payable 10,000 Interest Expense 300

Cash 10,300

Borrowing on a Discounted Note

Phlox Company borrows $10,000 for 60 days at 18 percent from a bank. T he loan is made on a discount basis, where interest of $200($10,000×12%×6 0/360) is deducted in advance. Make journal entries for Phlox Company to record the borrowing of money on a discounted note, and to record settlem ent of the promissory note at the maturity date. The journal entry is ：

Cash 9,800

Interest Expense 200

Notes Payable 10,000 At the maturity date, the entry is ：

Notes Payable 10,000

Cash 10,000

Example 9-14

Accounting Terminologies in Chapter 9

accounts receivable 외상매출금

aging method 연령분석법

allowance for uncollectible accounts 대손충당금

allowance method 충당금설정법

annual rate 연리

balance sheet approach 대차대조표접근법

bank discount 은행할인액

borrowing at a discount 할인차입

direct write-off method 직접차감법

discounting notes receivable 받을어음의 할인

face value 액면가액

income statement approach 손익계산서접근법

Accounting Terminologies in Chapter 9

interest rate 이자율

market rate of interest 시장이자율

maturity value 만기가액

net credit sales 순외상매출액

net realizable value 순실현가능가치

non-trade receivables 비매출채권

notes payable 어음상의채무 ( 지급어음 )

notes receivable 받을어음

on account 외상 , 신용

open account 신용계정 , 외상계정

percent of receivables

method 채권잔액비례법

Accounting Terminologies in Chapter 9

percent of sales method 매출액비례법

principal 원금

priority lien 선수위담보

proceeds 현금수령액

promissory note 약속어음

provision 비용반영

receivables 수취채권

stated rate of interest 표시이자율

trade receivables 매출채권

uncollectible accounts expense 대손상각비

write-off 제거