CHAPTER 7

CASH AND RECEIVABLES

Intermediate Accounting
IFRS Edition
Kieso, Weygandt, and Warfield

7-1
 Accounts Receivable

Receivables are claims held against customers and

others for money, goods, or services.

Oral promises of the Written promises to pay a

purchaser to pay for goods sum of money on a
and services sold. specified future date.

Accounts Notes
Receivable Receivable

7-2 LO 3 Define receivables and identify the different types of receivables.

 Accounts Receivable

Recognition of Accounts Receivable

Trade Discounts
Reductions from the list
10 %
price
Discount
Not recognized in the for new
accounting records Retail
Customers are billed net of Store
discounts Customers

7-3 LO 4 Explain accounting issues related to recognition of accounts receivable.

 Accounts Receivable

Recognition of Accounts Receivable

Cash Discounts
(Sales Discounts)
Inducements for prompt
payment Payment terms
are 2/10, n/30
Gross Method vs.
Net Method

7-4 LO 4 Explain accounting issues related to recognition of accounts receivable.

 Accounts Receivable
Illustration 7-5
Cash Discounts (Sales Discounts) Entries under Gross and
Net Methods of Recording
Cash (Sales) Discounts

7-5 LO 4 Explain accounting issues related to recognition of accounts receivable.

 Accounts Receivable

E7-5: On June 3, Bolton Company sold to Arquette Company

merchandise having a sale price of £2,000 with terms of 2/10, n/60,
f.o.b. shipping point. On June 12, the company received a check for
the balance due from Arquette Company. Prepare the journal entries
on Bolton Company books to record the sale assuming Bolton records
sales using the gross method.

June 3 Accounts receivable 2,000

Sales 2,000

June 12 Cash 1,960

Sales discounts (£2,000 x 2%) 40
Accounts receivable 2,000

7-6 LO 4 Explain accounting issues related to recognition of accounts receivable.

 Accounts Receivable

E7-5: On June 3, Bolton Company sold to Arquette Company

merchandise having a sale price of £2,000 with terms of 2/10, n/60,
f.o.b. shipping point. On June 12, the company received a check for
the balance due from Arquette Company. Prepare the journal entries
on Bolton Company books to record the sale assuming Bolton records
sales using the net method.

June 3 Accounts receivable 1,960

Sales 1,960

June 12 Cash (£2,000 x 98%) 1,960

Accounts receivable 1,960

7-7 LO 4 Explain accounting issues related to recognition of accounts receivable.

 Accounts Receivable

E7-5: On June 3, Bolton Company sold to Arquette Company

merchandise having a sale price of £2,000 with terms of 2/10, n/60,
f.o.b. shipping point. Prepare the journal entries on Bolton Company
books to record the sale assuming Bolton records sales using the net
method, and Arquette did not remit payment until July 29.

June 3 Accounts receivable 1,960

Sales 1,960

July 29 Cash 2,000

Accounts receivable 1,960
Sales discounts forfeited 40

7-8 LO 4 Explain accounting issues related to recognition of accounts receivable.

 Accounts Receivable

How are these accounts presented on the

Statement of Financial Position?

Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.

End. 500 25 End.

7-9 LO 4 Explain accounting issues related to recognition of accounts receivable.

 Accounts Receivable

ABC Corporation
Statement of Financial Position (partial)
Current Assets:
Merchandise inventory $ 812
Prepaid expense 40
Accounts receivable 500
Less: Allowance for doubtful accounts (25) 475
Cash 330
Total current assets 1,657

7-10 LO 4 Explain accounting issues related to recognition of accounts receivable.

 Accounts Receivable

ABC Corporation
Statement of Financial Position (partial)
Current Assets:
Merchandise inventory $ 812
Prepaid expense 40
Accounts receivable, net of $25 allowance 475
Cash 330
Total current assets 1,657

7-11 LO 4 Explain accounting issues related to recognition of accounts receivable.

 Accounts Receivable
Journal entry for credit sale of $100?
Accounts receivable 100
Sales 100

Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.

End. 500 25 End.

7-12 LO 4 Explain accounting issues related to recognition of accounts receivable.

 Accounts Receivable
Journal entry for credit sale of $100?
Accounts receivable 100
Sales 100

Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
Sale 100

End. 600 25 End.

7-13 LO 4 Explain accounting issues related to recognition of accounts receivable.

 Accounts Receivable
Collected of $333 on account?
Cash 333
Accounts receivable 333

Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
Sale 100

End. 600 25 End.

7-14 LO 4 Explain accounting issues related to recognition of accounts receivable.

 Accounts Receivable
Collected of $333 on account?
Cash 333
Accounts receivable 333

Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
Sale 100 333 Coll.

End. 267 25 End.

7-15 LO 4 Explain accounting issues related to recognition of accounts receivable.

 Accounts Receivable
Adjustment of $15 for estimated Bad-Debts?
Bad debt expense 15
Allowance for Doubtful Accounts 15

Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
Sale 100 333 Coll.

End. 267 25 End.

7-16 LO 4 Explain accounting issues related to recognition of accounts receivable.

 Accounts Receivable
Adjustment of $15 for estimated Bad-Debts?
Bad debt expense 15
Allowance for Doubtful Accounts 15

Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
Sale 100 333 Coll. 15 Est.

End. 267 40 End.

7-17 LO 4 Explain accounting issues related to recognition of accounts receivable.

 Accounts Receivable
Write-off of uncollectible accounts for $10?
Allowance for Doubtful accounts 10
Accounts receivable 10

Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
Sale 100 333 Coll. 15 Est.

End. 267 40 End.

7-18 LO 4 Explain accounting issues related to recognition of accounts receivable.

 Accounts Receivable
Write-off of uncollectible accounts for $10?
Allowance for Doubtful accounts 10
Accounts receivable 10

Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
Sale 100 333 Coll. 15 Est.
10 W/O W/O 10

End. 257 30 End.

7-19 LO 4 Explain accounting issues related to recognition of accounts receivable.

 Accounts Receivable

ABC Corporation
Statement of Financial Position (partial)
Current Assets:
Merchandise inventory $ 812
Prepaid expense 40
Accounts receivable, net of $30 allowance 227
Cash 330
Total current assets 1,409

7-20 LO 4 Explain accounting issues related to recognition of accounts receivable.

 Valuation of Accounts Receivable

Methods of Accounting for Uncollectible Accounts

Direct Write-Off Allowance Method

Theoretically undesirable: Losses are Estimated:
No matching Percentage-of-sales
Receivable not stated at Percentage-of-receivables
cash realizable value IFRS requires when
Not IFRS when material in material in amount
amount

7-21 LO 5 Explain accounting issues related to valuation of accounts receivable.

 Uncollectible Accounts Receivable
Illustration 7-7

Emphasis on
the Income
Statement

Emphasis on
the Statement
of Financial
Position

7-22 LO 5 Explain accounting issues related to valuation of accounts receivable.

 Uncollectible Accounts Receivable

Percentage-of-Sales Approach

Illustration: Gonzalez Company estimates from past experience

that about 1% of credit sales become uncollectible. If net credit
sales are $800,000 in 2011, it records bad debt expense as follows.

Bad Debt Expense 8,000

Allowance for Doubtful Accounts 8,000

Illustration 7-8

7-23 LO 5
 Uncollectible Accounts Receivable

Percentage-of-Sales Approach

Percentage based upon past experience and anticipate

credit policy.

Achieves proper matching of costs with revenues.

Existing balance in Allowance account not considered.

7-24 LO 5 Explain accounting issues related to valuation of accounts receivable.

 Uncollectible Accounts Receivable

Percentage-of-Receivables Approach
Not matching.
Reports receivables at cash realizable value.

Companies may apply this method using

► one composite rate, or

► an aging schedule using different rates.

7-25 LO 5 Explain accounting issues related to valuation of accounts receivable.

 Uncollectible Accounts Receivable

Illustration 7-9
Accounts Receivable
Aging Schedule

What entry
would Wilson
make assuming
that no balance
existed in the
allowance
account?

Bad Debt Expense 37,650

Allowance for Doubtful Accounts 37,650

7-26 LO 5 Explain accounting issues related to valuation of accounts receivable.

 Uncollectible Accounts Receivable

Illustration 7-9
Accounts Receivable
Aging Schedule

What entry
would Wilson
make assuming
the allowance
account had a
credit balance
of $800 before
adjustment?

Bad Debt Expense ($37,650 – $800) 36,850

Allowance for Doubtful Accounts 36,850

7-27 LO 5 Explain accounting issues related to valuation of accounts receivable.

 Uncollectible Accounts Receivable

E7-7 (Recording Bad Debts): Sandel Company reports the

following financial information before adjustments.

Instructions: Prepare the journal entry to record bad debt

expense assuming Sandel Company estimates bad debts at
(a) 1% of net sales and (b) 5% of accounts receivable.

7-28 LO 5 Explain accounting issues related to valuation of accounts receivable.

 Uncollectible Accounts Receivable

E7-7 (Recording Bad Debts): Sandel Company reports the

following financial information before adjustments.

Instructions: Prepare the journal entry to record bad debt

expense assuming Sandel Company estimates bad debts at
(a) 1% of net sales. (€800,000 – €50,000) x 1% = €7,500

Bad Debt Expense 7,500

Allowance for Doubtful Accounts 7,500

7-29 LO 5 Explain accounting issues related to valuation of accounts receivable.

 Uncollectible Accounts Receivable

E7-7 (Recording Bad Debts): Sandel Company reports the

following financial information before adjustments.

Instructions: Prepare the journal entry to record bad debt

expense assuming Sandel Company estimates bad debts at
(b) 5% of accounts receivable. (€160,000 x 5%) – €2,000) = €6,000

Bad Debt Expense 6,000

Allowance for Doubtful Accounts 6,000

7-30 LO 5 Explain accounting issues related to valuation of accounts receivable.

 Accounts Receivable

Impairment Evaluation Process

Companies assess their receivables for impairment each reporting period.
Possible loss events are:

1. Significant financial problems of the customer.

2. Payment defaults.

3. Renegotiation of terms of the receivable due to financial difficulty of the

customer.

4. Decrease in estimated future cash flows from a group of receivables

since initial recognition, although the decrease cannot yet be identified
with individual assets in the group.

7-31 LO 5 Explain accounting issues related to valuation of accounts receivable.

 Accounts Receivable

Impairment Evaluation Process

A receivable is considered impaired when a loss event indicates a negative
impact on the estimated future cash flows to be received from the customer.
The IASB requires that the impairment assessment should be performed as
follows.

Receivables that are individually significant should be considered for

impairment separately.

Any receivable individually assessed that is not considered impaired should

be included with a group of assets with similar credit-risk characteristics
and collectively assessed for impairment.

7-32 LO 5
 Accounts Receivable

Illustration: Hector Company has the following receivables classified into

individually significant and all other receivables.

Hector determines that Yaan’s receivable is impaired by $15,000, and

Blanchard’s receivable is totally impaired.
Both Randon’s and Fernando’s receivables are not considered impaired.
Hector also determines that a composite rate of 2% is appropriate to
measure impairment on all other receivables.
7-33 LO 5
 Accounts Receivable

The total impairment is computed as follows.

Illustration 7-10

7-34 LO 5 Explain accounting issues related to valuation of accounts receivable.