Ifrs Edition: Prepared by Coby Harmon University of California, Santa Barbara Westmont College

WILEY
IFRS EDITION
Prepared by
Coby Harmon
University of California, Santa Barbara
8-1
Westmont College
PREVIEW OF CHAPTER 8
Financial Accounting
IFRS 3rd Edition
Weygandt ● Kimmel ● Kieso
8-2
CHAPTER
8 Accounting for
Receivables
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Identify the different types of receivables.
2. Explain how companies recognize accounts receivable.
3. Distinguish between the methods and bases companies use to value
accounts receivable.
4. Describe the entries to record the disposition of accounts receivable.
5. Compute the maturity date of and interest on notes receivable.
6. Explain how companies recognize notes receivable.
7. Describe how companies value notes receivable.
8. Describe the entries to record the disposition of notes receivable.
9. Explain the statement presentation and analysis of receivables.
8-3
Learning Objective 1
Types of Receivables Identify the different types
of receivables.
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 of for amount to be loans to officers,
goods and services. received. Also called advances to
trade receivables. employees, and
income taxes
refundable.
Accounts Notes Other
Receivable Receivable Receivables
8-4 LO 1
TYPES OF RECEIVABLES
Amounts due from individuals and companies that are

expected to be collected in cash.
Illustration 8-1
Receivables as a percentage of assets
8-5 LO 1
TYPES OF RECEIVABLES
Question
Receivables are frequently classified as:
a. accounts receivable, company receivables, and other

receivables.
b. accounts receivable, notes receivable, and employee

receivables.
c. accounts receivable and general receivables.
d. accounts receivable, notes receivable, and other

receivables.
8-6 LO 1
Accounts Receivable
Learning
Objective 2
Recognizing Accounts Receivable Explain how
companies recognize
 Service organization records a
receivable when it performs service on account.
 Merchandiser records accounts receivable at the
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.
8-7 LO 2
Recognizing Accounts Receivable
Illustration: Assume that Hennes & Mauritz (SWE) Co. on July

1, 2017, sells merchandise on account to Polo Company for
$1,000 terms 2/10, n/30. Prepare the journal entry to record this
transaction on the books of Hennes & Mauritz.
Jul. 1 Accounts Receivable 1,000
Sales Revenue
1,000
8-8 LO 2
Illustration: On July 5, Polo returns merchandise worth $100 to

Hennes & Mauritz.
Jul. 5 Sales Returns and Allowances 100

Accounts Receivable
100
Illustration: On July 11, Hennes & Mauritz receives payment from

Polo Company for the balance due.
Jul. 11 Cash ($900 - $18) 882

Sales Discounts ($900 x .02) 18
Accounts Receivable
900
8-9 LO 2
Illustration: Some retailers issue their own credit cards.

Assume that you use your JCPenney Company credit card to
purchase clothing with a sales price of $300.
Accounts Receivable 300
Sales Revenue
300
Assume that you owe $300 at the end of the month, and
JCPenney charges 1.5% per month on the balance due.
Accounts Receivable 4.50
Interest Revenue
4.50
8-10 LO 2
> DO IT!
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—Bates 50,000

Sales Revenue 50,000
4 Sales Returns and Allowances 2,000

Accounts Receivable—Bates 2,000
16 Cash (€48,000 - €1,440) 46,560

Sales Discounts (€48,000 x .03) 1,440
Accounts Receivable—Bates 48,000
8-11 LO 2
Valuing Accounts Receivable
Distinguish between the
 Current asset. methods and bases
companies use to value
 Valuation (net realizable value).
Uncollectible Accounts Receivable

 Sales on account raise the possibility of accounts not
being collected.
 Seller records losses that result from extending credit
as Bad Debt Expense.
8-12 LO 3
Valuing Accounts Receivable
Methods of Accounting for Uncollectible Accounts
Direct Write-Off Allowance Method

Theoretically undesirable: Losses are estimated:
 No matching.  Better matching.
 Receivable not stated at  Receivable stated at cash
amount expect to be (net) realizable value.
received.  Required by IFRS.
 Not acceptable for financial
reporting.
8-13 LO 3
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.
8-14 LO 3
Accounts Receivable
ABC Corporation
Statement of Financial Position (partial)
Current Assets:
Supplies € 40
Inventory 812
Accounts receivable 500
Less: Allowance for doubtful accounts (25) 475
Cash 330
Total current assets 1,657
8-15 LO 3
Accounts Receivable
Alternate
ABC Corporation Presentation
Current Assets:
Supplies € 40
Inventory 812
Accounts receivable, net of €25 allowance 475
Cash 330
8-16 LO 3
Accounts Receivable
Journal entry for credit sale of €100.

Sales 100
Allowance for
Beg. 500 25 Beg.
End. 500 25 End.
8-17 LO 3
Accounts Receivable
Journal entry for credit sale of €100.

Sales 100
Allowance for
Beg. 500 25 Beg.
Sale 100
End. 600 25 End.
8-18 LO 3
Accounts Receivable
Collected €333 on account.

Cash 333
Allowance for
Beg. 500 25 Beg.
Sale 100
End. 600 25 End.
8-19 LO 3
Accounts Receivable
Collected €333 on account.

Cash 333
Allowance for
Beg. 500 25 Beg.
Sale 100 333 Coll.
End. 267 25 End.
8-20 LO 3
Accounts Receivable
Adjustment of €15 for estimated bad debts.

Bad Debt Expense 15
Allowance for Doubtful Accounts 15
Allowance for
Beg. 500 25 Beg.
Sale 100 333 Coll.
End. 267 25 End.
8-21 LO 3
Accounts Receivable
Adjustment of €15 for estimated bad debts.

Bad Debt Expense 15
Allowance for
Beg. 500 25 Beg.
Sale 100 333 Coll. 15 Est.
End. 267 40 End.
8-22 LO 3
Accounts Receivable
Write-off of uncollectible accounts for €10.

Allowance for
Beg. 500 25 Beg.
End. 267 40 End.
8-23 LO 3
Accounts Receivable
Write-off of uncollectible accounts for €10.

Allowance for
Beg. 500 25 Beg.
10 W/O W/O 10
End. 257 30 End.
8-24 LO 3
Accounts Receivable
ABC Corporation
Current Assets:
Supplies € 40
Inventory 812
Accounts receivable 257
Less: Allowance for doubtful accounts (30) 227
Cash 330
8-25 LO 3
DIRECT WRITE-OFF METHOD FOR
UNCOLLECTIBLE ACCOUNTS
Illustration: Assume that Warden Ltd. writes off M. E. Doran’s

HK$1,600 balance as uncollectible on December 12.
Warden’s entry is:
Bad Debt Expense 1,600
Accounts Receivable—M. E. Doran 1,600
Theoretically undesirable:
 No matching.
 Receivable not stated at cash realizable value.
 Not acceptable for financial reporting.
8-26 LO 3
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.
8-27 LO 3
ALLOWANCE METHOD
RECORDING ESTIMATED UNCOLLECTIBLES

Illustration: Hampson Furniture has credit sales of
€1,200,000 in 2017, of which €200,000 remains uncollected at
December 31. The credit manager estimates that €12,000 of
these sales will prove uncollectible.
Dec. 31 Bad Debt Expense 12,000

Allowance for Doubtful Accounts 12,000
8-28 LO 3
Allowance Method for Uncollectibles
Illustration 8-3
Presentation of allowance for doubtful accounts
8-29 LO 3
WRITE-OFF OF AN UNCOLLECTIBLE ACCOUNT

Illustration: The vice-president of finance of Hampson Furniture
on March 1, 2018, authorizes a write-off of the €500 balance
owed by R. A. Ware. The entry to record the write-off is:
Mar. 1 Allowance for Doubtful Accounts 500

Accounts Receivable—R. A. Ware 500
Illustration 8-4
General ledger balances after write-off
8-30 LO 3
WRITE-OFF OF AN UNCOLLECTIBLE ACCOUNT

Illustration: The vice-president of finance of Hampson Furniture
on March 1, 2018, authorizes a write-off of the €500 balance
owed by R. A. Ware. The entry to record the write-off is:
Mar. 1 Allowance for Doubtful Accounts 500

Illustration 8-5
8-31 Cash realizable value comparison LO 3
RECOVERY OF AN UNCOLLECTIBLE ACCOUNT

Illustration: On July 1, R. A. Ware pays the €500 amount that
Hampson Furniture had written off on March 1. Hampson makes
these entries:
July 1 Accounts Receivable—R. A. Ware 500

1 Cash 500
8-32 LO 3
Illustration 8-6
ESTIMATING THE ALLOWANCE Comparison of bases for
estimating uncollectibles
Emphasis on Income Statement Emphasis on Statement of

Relationships Financial Position Relationships
8-33 LO 3
ESTIMATING THE ALLOWANCE

Illustration 8-6
Management estimates
what percentage of credit
sales will be uncollectible.
This percentage is based
on past experience and
anticipated credit policy.
Emphasis on Income Statement

Relationships
8-34 LO 3
Percentage-of-Sales
Illustration: Assume that Gonzalez SA elects to use the
percentage-of-sales basis. It concludes that 1% of net credit sales
will become uncollectible. If net credit sales for 2017 are
€800,000, the adjusting entry is:
Dec. 31 Bad Debt Expense 8,000 *

Allowance for Doubtful Accounts
8,000
* €800,000 x 1%
8-35 LO 3
Percentage-of-Sales
 Emphasizes matching of expenses with revenues.
 Adjusting entry to record bad debts disregards the existing
balance in Allowance for Doubtful Accounts.
Illustration 8-7
Bad debt accounts after posting
8-36 LO 3
ESTIMATING THE ALLOWANCE

Illustration 8-6
Management establishes a
percentage relationship
between the amount of
receivables and expected
losses from uncollectible
accounts.
Emphasis on Statement of
Financial Position Relationships
8-37 LO 3
Aging the accounts receivable - customer balances are

classified by the length of time they have been unpaid. Illustration 8-8
Aging schedule
8-38
Percentage-of-Receivables (₩ in thousands)
Illustration: Assume 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.
Dec. 31 Bad Debt Expense 1,700

Illustration 8-9
Bad debt accounts
after posting
8-39 LO 3
> DO IT!
Brule Co. has been in business five years. The ledger at the end of
the current year shows:
Accounts Receivable $30,000 Dr.
Sales Revenue $180,000 Cr.
Allowance for Doubtful Accounts $2,000 Dr.
Bad debts are estimated to be 10% of receivables. Prepare the entry
to adjust Allowance for Doubtful Accounts.
Solution:
Bad Debt Expense 5,000 *

* [(0.1 x $30,000) + $2,000]

8-40 LO 3
Question
Which of the following approaches for bad debts is best
described as a statement of financial position method?
a. Percentage-of-receivables basis.
b. Direct write-off method.
c. Percentage-of-sales basis.
d. Both percentage-of-receivables basis and direct

write-off method.
8-41 LO 3
Disposing of Accounts Receivables
Describe the entries to
SALE OF RECEIVABLES record the disposition of
 Finance company or bank.
 Buys receivables from businesses and then collects
the payments directly from the customers.
 Typically charges a commission to the company that is
selling the receivables.
 Fee ranges from 1% to 3% of the receivables
purchased.
8-42 LO 4
SALE OF RECEIVABLES
Illustration: Assume that Tsai Furniture factors NT$600,000 of

receivables to Federal Factors. Federal Factors assesses a
service charge of 2% of the amount of receivables sold. The
journal entry to record the sale by Tsai Furniture is as follows.
(NT$600,000 x 2% = NT$12,000)
Cash 588,000
Service Charge Expense 12,000
Accounts Receivable
600,000
8-43 LO 4
Disposing of Accounts Receivables
CREDIT CARD SALES

 Retailer pays card issuer a fee of 2 to 6% of the invoice
price for its services.
 Recorded the 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.
8-44 LO 4
CREDIT CARD SALES
Illustration: Lee Co. purchases NT$6,000 of music downloads

for its restaurant from Yang Music Co., using a Visa First Bank
Card. First Bank charges a service fee of 3%. The entry to
record this transaction by Yang Music is as follows.
Cash 5,820
Service Charge Expense 180
Sales Revenue
6,000
8-45 LO 4
> DO IT!
Mehl Wholesalers NV needs to raise €120,000 in cash to safely

cover next Friday’s employee payroll. Mehl has reached its debt
ceiling. Mehl’s balance of outstanding receivables totals €750,000.
Mehl decides to factor €125,000 of its receivables on September 7,
2017, to alleviate this cash crunch. Record the entry that Mehl
would make when it raises the needed cash. (Assume a 1% service
charge.)
Solution
Cash 123,750
Service Charge Expense 1,250
*
Accounts Receivable 125,000
* (1% x €125,000)
8-46 LO 4
Notes Receivable
Learning
Objective 5
Companies may grant credit in exchange Compute the maturity
date of and interest on
for a promissory note. A promissory note notes receivable.
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.
8-47 LO 5
Notes Receivable
To the payee, the promissory note is a note receivable.

To the maker, the promissory note is a note payable.
Illustration 8-11
8-48 Promissory note LO 5
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
8-49 LO 5
Computing Interest
Illustration 8-14
Formula for computing interest
When counting days, omit the date the note is issued, but
include the due date.
Illustration 8-15
Computation of interest
8-50 LO 5
Notes Receivable
Question
One of the following statements about promissory notes is
incorrect. The incorrect statement is:
a. The party making the promise to pay is called the

maker.
b. The party to whom payment is to be made is called

the payee.
c. A promissory note is not a negotiable instrument.
d. A promissory note is often required from high-risk

customers.
8-51 LO 5
Recognizing Notes Receivable
Learning
Illustration: Calhoun Company wrote a ₤1,000, Objective 6
Explain how
two-month, 12% promissory note dated May 1, companies recognize
notes receivable.
to settle an open account. Prepare entry would
Wilma Company makes for the receipt of the note.
May 1 Notes Receivable 1,000

Accounts Receivable—Calhoun plc 1,000
8-52 LO 6
Valuing Notes Receivable
Learning
Objective 7
 Report short-term notes receivable at Describe how
companies value
their cash (net) realizable value. notes receivable.
 Estimation of cash realizable value and recording

bad debt expense and related allowance are similar
to accounts receivable.
 Allowance for Doubtful Accounts is used.
8-53 LO 7
Disposing of Notes Receivable
Learning
Objective 8
1. Notes may be held to their maturity date. Describe the entries to
record the disposition
2. Maker may default and payee must make of notes receivable.
an adjustment to the account.
3. Holder speeds up conversion to cash by selling the note

receivable.
8-54 LO 8
Disposing of Notes Receivable
HONOR OF NOTES RECEIVABLE

A note is honored when its maker pays it in full at its
maturity date.
DISHONOR OF NOTES RECEIVABLE

A dishonored note is not paid in full at maturity.
Dishonored note receivable is no longer negotiable.
8-55 LO 8
HONOR OF NOTES RECEIVABLE
Illustration: Wolder Co. lends Higley Inc. €10,000 on June 1,

accepting a five-month, 9% interest note. If Wolder presents
the note to Higley Inc. on November 1, the maturity date,
Wolder’s entry to record the collection is:
Nov. 1 Cash 10,375

Notes Receivable 10,000
Interest Revenue 375
(€10,000 x 9% x 5/12 = €375)
8-56 LO 8
ACCRUAL OF INTEREST RECEIVABLE
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. Illustration 8-16
Timeline of interest earned
Sept. 30 Interest Receivable 300

(€10,000 x 9% x 4/12 = € 300)
8-57 LO 8
ACCRUAL OF INTEREST RECEIVABLE
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% × 1/12) 75
8-58 LO 8
DISHONOR OF NOTES RECEIVABLE
Illustration: Assume that Higley Co. on November 1 indicates

that it cannot pay at the present time. If Wolder Co. does expect
eventual collection, it would make the following entry at the time
the note is dishonored (assuming no previous accrual of interest).
Nov. 1 Accounts Receivable 10,375

8-59 LO 8
> DO IT!
Gambit Stores accepts from Leonard SpA a €3,400, 90-day, 6%

note dated May 10 in settlement of Leonard’s overdue open
account. The note matures on August 8. What entry does Gambit
make at the maturity date, assuming Leonard pays the note and
interest in full at that time?
Solution
Interest payable at maturity date = €3,400 × 6% × 90/360 = €51
Cash 3,451
Interest Revenue 51
8-60 LO 8
Statement Presentation and Analysis
Learning
Presentation Objective 9
Explain the statement
presentation and
analysis of receivables.
 Identify in the statement of financial
position or in the notes each major type of receivable.
SFP  Report short-term receivables as current assets.
 Report both gross amount of receivables and allowance for

doubtful account.
 Report bad debt expense and service charge expense as

selling expenses.
IS  Report interest revenue under “Other income and
expense.”
8-61 LO 9
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8-62

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WILEY

Amounts due from individuals and companies that are

Amounts customers Written promise Nontrade receivables

Amounts due from individuals and companies that are

a. accounts receivable, company receivables, and other

b. accounts receivable, notes receivable, and employee

c. accounts receivable and general receivables.

d. accounts receivable, notes receivable, and other

Illustration: Assume that Hennes & Mauritz (SWE) Co. on July

Illustration: On July 5, Polo returns merchandise worth $100 to

Jul. 5 Sales Returns and Allowances 100

Illustration: On July 11, Hennes & Mauritz receives payment from

Jul. 11 Cash ($900 - $18) 882

Illustration: Some retailers issue their own credit cards.

On May 1, Wilton sold merchandise on account to Bates for €50,000

May 1 Accounts Receivable—Bates 50,000

4 Sales Returns and Allowances 2,000

16 Cash (€48,000 - €1,440) 46,560

Uncollectible Accounts Receivable

Methods of Accounting for Uncollectible Accounts

Direct Write-Off Allowance Method

How are these accounts presented on the Statement of

End. 500 25 End.

Journal entry for credit sale of €100.

End. 500 25 End.

Journal entry for credit sale of €100.

End. 600 25 End.

Collected €333 on account.

End. 600 25 End.

Collected €333 on account.

End. 267 25 End.

Adjustment of €15 for estimated bad debts.

End. 267 25 End.

Adjustment of €15 for estimated bad debts.

End. 267 40 End.

Write-off of uncollectible accounts for €10.

End. 267 40 End.

Write-off of uncollectible accounts for €10.

End. 257 30 End.

Illustration: Assume that Warden Ltd. writes off M. E. Doran’s

1. Companies estimate uncollectible accounts receivable.

2. Debit Bad Debt Expense and credit Allowance for

3. Companies debit Allowance for Doubtful Accounts

RECORDING ESTIMATED UNCOLLECTIBLES

Dec. 31 Bad Debt Expense 12,000

WRITE-OFF OF AN UNCOLLECTIBLE ACCOUNT

Mar. 1 Allowance for Doubtful Accounts 500

WRITE-OFF OF AN UNCOLLECTIBLE ACCOUNT

Mar. 1 Allowance for Doubtful Accounts 500

RECOVERY OF AN UNCOLLECTIBLE ACCOUNT

July 1 Accounts Receivable—R. A. Ware 500

Emphasis on Income Statement Emphasis on Statement of

ESTIMATING THE ALLOWANCE

Emphasis on Income Statement

Dec. 31 Bad Debt Expense 8,000 *

ESTIMATING THE ALLOWANCE

Aging the accounts receivable - customer balances are

Illustration: Assume the unadjusted trial balance shows Allowance

Dec. 31 Bad Debt Expense 1,700