Financial & Managerial Accounting

Information for Decisions

Seventh Edition

Chapter 7
Accounting for
Receivables

© McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No
reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.
 Learning Objectives (1 of 2)
CONCEPTUAL
C1 Describe accounts receivable and how they
occur and are recorded.
C2 Describe a note receivable, the computation of
its maturity date, and the recording of its
existence.
C3 Explain how receivables can be converted to
cash before maturity.
ANALYTICAL
A1 Compute accounts receivable turnover and
use it to help assess financial condition.

© McGraw-Hill Education. 7-2

 Learning Objectives (2 of 2)
PROCEDURAL
P1 Apply the direct write-off method to accounts
receivable.
P2 Apply the allowance method to accounts
receivable.
P3 Estimate uncollectibles based on sales and
accounts receivable.
P4 Record the honoring and dishonoring of a
note and adjustments for interest

© McGraw-Hill Education. 7-3

Learning Objective C1: Describe
accounts receivable and how they
occur and are recorded.

© McGraw-Hill Education. 7-4

 Exhibit 7.1 Valuing Accounts
Receivable (1 of 2)
Learning Objective C1: Describe accounts receivable and how
they occur and are recorded.

This graph shows recent dollar amounts of

receivables and their percent of total assets for four
well-known companies.
© McGraw-Hill Education. 7-5
 Exhibit 7.1 Valuing Accounts
Receivable (2 of 2)
Learning Objective C1: Describe accounts receivable and how
they occur and are recorded.

• A company must also maintain a separate

account for each customer that tracks how
much that customer purchases, has already
paid, and still owes.

© McGraw-Hill Education. 7-6

 Sales on Credit (1 of 2)
Learning Objective C1: Describe accounts receivable and how
they occur and are recorded.

On July 1, TechCom had a credit sale of $950 to CompStore

and a collection of $720 from RDA Electronics from a prior
credit sale.

We omit the entry to Dr. Cost of Sales and Cr.

Merchandise Inventory to focus on sales and
receivables.
© McGraw-Hill Education. 7-7
 Sales on Credit (2 of 2)
Learning Objective C1: Describe accounts receivable and how
they occur and are recorded.

Exhibit 7.4

© McGraw-Hill Education. 7-8

 Sales on Store Credit Card
Learning Objective C1: Describe accounts receivable and how
they occur and are recorded.

On November 1, TechCom recorded sales on their

own credit card in the amount of $1,000.
On December 31, TechCom recorded an adjusting
entry for the interest earned at the rate of 1.5%
per month on seller credit card.

© McGraw-Hill Education. 7-9

 Sales on Bank Credit Card
Learning Objective C1: Describe accounts receivable and how
they occur and are recorded.

On July 15, TechCom has $100 of credit card sales with a

4% fee, and its $96 cash is received immediately on deposit.

We omit the entry to Dr. Cost of Sales and Cr.

Merchandise Inventory to focus on credit card
expense.
© McGraw-Hill Education. 7-10
 Sales on Installment
Learning Objective C1: Describe accounts receivable and how
they occur and are recorded.

Amounts owed by customers from credit sales for

which payment is required in periodic amounts over
an extended time period. The customer is usually
charged interest.

© McGraw-Hill Education. 7-11

 NEED-TO-KNOW 7-1 (1 of 2)
Learning Objective C1: Describe accounts receivable and how
they occur and are recorded.

• A small retailer allows customers to use two

different credit cards in charging purchases. The
AA Bank Card assesses a 5% service charge for
credit card sales.
• The VIZA Card assesses a 3% charge on sales for
using its card. This retailer also has its own store
credit card. As of January 31 month-end, the
retailer earned $75 in net interest revenue on its
own card.

© McGraw-Hill Education. 7-12

 NEED-TO-KNOW 7-1 (2 of 2)
Learning Objective C1: Describe accounts receivable and how
they occur and are recorded.

Prepare journal entries to record the following selected

credit card transactions for the retailer. (The retailer
uses the perpetual inventory system for recording
sales.)

Sold merchandise for $1,000 (that had cost $600) and

Jan. 2
accepted the customer’s AA Bank Card.

Sold merchandise for $400 (that had cost $300) and

Jan. 6
accepted the customer’s VIZA Card.

Recognized the $75 interest revenue earned on its store

Jan. 31
credit card for January.

© McGraw-Hill Education. 7-13

 NEED-TO-KNOW 7-1 SOLUTION
(1 of 4)
Learning Objective C1: Describe accounts receivable and how
they occur and are recorded.

A small retailer allows customers to use two different credit

cards in charging purchases. The AA Bank Card receives an
immediate credit to its account when it deposits sales
receipts. AA Bank assesses a 5% service charge for credit
card sales. The second credit card that the retailer accepts is
the VIZA Card. The retailer sends its accumulated receipts to
VIZA on a weekly basis and is paid by VIZA about a week
later. VIZA assesses a 3% charge on sales for using its card.
Prepare journal entries to record the following selected credit
card transactions for the retailer. (The retailer uses the
perpetual inventory system for recording sales.)

© McGraw-Hill Education. 7-14

 NEED-TO-KNOW 7-1 SOLUTION
(2 of 4)
Learning Objective C1: Describe accounts receivable and how
they occur and are recorded.
Sold merchandise for $1,000 (that had cost $600) and accepted
Jan. 2 the customer’s AA Bank Card. The AA receipts are immediately
deposited in the retailer’s bank account.

© McGraw-Hill Education. 7-15

 NEED-TO-KNOW 7-1 SOLUTION
(3 of 4)
Learning Objective C1: Describe accounts receivable and how
they occur and are recorded.

A small retailer allows customers to use two different

credit cards in charging purchases. The AA Bank Card
receives an immediate credit to its account when it
deposits sales receipts. AA Bank assesses a 5% service
charge for credit card sales. The second credit card that
the retailer accepts is the VIZA Card. The retailer sends
its accumulated receipts to VIZA on a weekly basis and
is paid by VIZA about a week later. VIZA assesses a
3% charge on sales for using its card. Prepare journal
entries to record the following selected credit card
transactions for the retailer. (The retailer uses the
perpetual inventory system for recording sales.)
© McGraw-Hill Education. 7-16
 NEED-TO-KNOW 7-1 SOLUTION
(4 of 4)
Learning Objective C1: Describe accounts receivable and how
they occur and are recorded.
Jan. 6 Sold merchandise for $400 (that had cost $300) and accepted the
customer’s VIZA Card.
Jan. 31 Recognized the $75 interest revenue earned on its store credit card for
January.

© McGraw-Hill Education. 7-17

Learning Objective P1: Apply the
direct write-off method to accounts
receivable.

© McGraw-Hill Education. 7-18

 Direct Write-Off Method
Learning Objective P1: Apply the direct write-off method to
accounts receivable.

• Some customers may not pay their account.

Uncollectible amounts are referred to as bad
debts.
• There are two methods of accounting for bad
debts:
– Direct Write-Off Method
– Allowance Method

© McGraw-Hill Education. 7-19

Direct Write-Off Method - Recording
and Writing Off Bad Debts
Learning Objective P1: Apply the direct write-off method to accounts
receivable.

TechCom determines on January 23 that it cannot collect

$520 owed to it by its customer J. Kent.

Notice that the specific customer is noted in the

transaction so we can make the proper entry in the
customer’s Accounts Receivable subsidiary ledger.

© McGraw-Hill Education. 7-20

Direct Write-Off Method – Recovering
a Bad Debt
Learning Objective P1: Apply the direct write-off method to accounts
receivable.

On March 11, J. Kent was able to make full payment

to TechCom for the amount previously written-off.

© McGraw-Hill Education. 7-21

 Matching versus Materiality
Learning Objective P1: Apply the direct write-off method to
accounts receivable.

• Expense recognition principle requires expenses

to be reported in the same accounting period as
the sales they helped produce.
• Materiality constraint states that an amount can
be ignored if its effect on the financial statements
is unimportant to users’ business decisions.
• The direct write-off method usually does not best
match sales and expenses.

© McGraw-Hill Education. 7-22

 NEED-TO-KNOW 7-2
Learning Objective P1: Apply the direct write-off method to accounts
receivable.

A retailer applies the direct write-off method in

accounting for uncollectible accounts. Prepare journal
entries to record the following selected transactions.
The retailer determines that it cannot collect $400 of its accounts
Feb. 14
receivable from a customer named ZZZ Company.
ZZZ Company unexpectedly pays its account in full to the retailer,
Apr. 1
which then records its recovery of this bad debt.

© McGraw-Hill Education. 7-23

Learning Objective P2: Apply the
allowance method to accounts
receivable.

© McGraw-Hill Education. 7-24

 Allowance Method
Learning Objective P2: Apply the allowance method to accounts
receivable.

At the end of each period, estimate total bad

debts expected to be realized from that period’s
sales.
Two advantages to the allowance method:
1. It records estimated bad debts expense in the
period when the related sales are recorded.
2. It reports accounts receivable on the balance
sheet at the estimated amount of cash to be
collected.

© McGraw-Hill Education. 7-25

Allowance Method - Recording Bad
Debts Expense
Learning Objective P2: Apply the allowance method to accounts
receivable.

TechCom had credit sales of $300,000 during its first

year of operations. At the end of the first year, $20,000
of credit sales remained uncollected. Based on the
experience of similar businesses, TechCom estimated
that $1,500 of its accounts receivable would be
uncollectible.

© McGraw-Hill Education. 7-26

 Exhibits 7.6 & 7.7 Balance Sheet
Presentation
Learning Objective P2: Apply the allowance method to accounts
receivable.

TechCom had credit sales of $300,000 during its first

year of operations. At the end of the first year,
$20,000 of credit sales remained uncollected. Based on
the experience of similar businesses, TechCom
estimated that $1,500 of its accounts receivable would
be uncollectible.

© McGraw-Hill Education. 7-27

Allowance Method – Writing Off a Bad
Debt
Learning Objective P2: Apply the allowance method to accounts
receivable.

TechCom has determined that J. Kent’s $520

account is uncollectible.

© McGraw-Hill Education. 7-28

 Exhibit 7.8 Writing Off a Bad Debt
Learning Objective P2: Apply the allowance method to accounts
receivable.

The write-off does not affect the realizable value of

accounts receivable.
Before After Write-
Write-Off Off
Accounts receivable…………………………………………… $ 20,000 $ 19,480
Less allowance for doubtful accounts………………. 1,500 980
Realizable value of accounts receivable……………. $ 18,500 $ 18,500

© McGraw-Hill Education. 7-29

Allowance Method - Recovering a Bad
Debt
Learning Objective P2: Apply the allowance method to accounts
receivable.

To help restore credit standing, a customer

sometimes pays all or part of the amount owed on
an account even after it has been written off.
On March 11, Kent pays in full his $520 account
previously written off.

© McGraw-Hill Education. 7-30

 NEED-TO-KNOW 7-3
Learning Objective P2: Apply the allowance method to accounts
receivable.

A retailer applies the allowance method in

accounting for uncollectible accounts. Prepare
journal entries to record its following selected
transactions.
The retailer estimates $3,000 of its accounts receivable
12/31/20X1
are uncollectible.
The retailer determines that it cannot collect $400 of its
2/14/20X2 accounts receivable from a customer named ZZZ
Company.

ZZZ Company unexpectedly pays its account in full to

4/1/20X2 the retailer, which then records its recovery of this bad
debt.

© McGraw-Hill Education. 7-31

 NEED-TO-KNOW 7-3 SOLUTION
(1 of 2)
Learning Objective P2: Apply the allowance method to accounts
receivable.

A retailer applies the allowance method in accounting for

uncollectible accounts. Prepare journal entries to record
its following selected transactions.
The retailer estimates $3,000 of its accounts receivable
12/31/20X1
are uncollectible.
The retailer determines that it cannot collect $400 of its
2/14/20X2 accounts receivable from a customer named ZZZ
Company.

ZZZ Company unexpectedly pays its account in full to

4/1/20X2 the retailer, which then records its recovery of this bad
debt.

© McGraw-Hill Education. 7-32

 NEED-TO-KNOW 7-3 SOLUTION
(2 of 2)
Learning Objective P2: Apply the allowance method to accounts
receivable.

© McGraw-Hill Education. 7-33

Learning Objective P3: Estimate
uncollectibles based on sales and
accounts receivable.

© McGraw-Hill Education. 7-34

 Estimating Bad Debts Expense
Learning Objective P3: Estimate uncollectibles based on sales and
accounts receivable.

Two Methods
1. Percent of Sales Method
2. Accounts Receivable Methods
– Percent of Accounts Receivable
– Aging of Accounts Receivable

© McGraw-Hill Education. 7-35

 Percent of Sales Method (1 of 3)
Learning Objective P3: Estimate uncollectibles based on sales and
accounts receivable.

Bad debts expense is computed as follows:

Current Period Sales × Bad Debt % = Estimated
Bad Debts Expense

© McGraw-Hill Education. 7-36

 Percent of Sales Method (2 of 3)
Learning Objective P3: Estimate uncollectibles based on sales and
accounts receivable.

Musicland has credit sales of $400,000 in 2017. It

is estimated that 0.6% of credit sales will eventually
prove uncollectible.
Let’s look at recording Bad Debts Expense for 2017.
$ 400,000
 0.6%
 $ 2,400

Musicland’s accountant computes estimated Bad

Debts Expense of $2,400.
© McGraw-Hill Education. 7-37
 Percent of Sales Method (3 of 3)
Learning Objective P3: Estimate uncollectibles based on sales and
accounts receivable.

© McGraw-Hill Education. 7-38

 Percent of Receivables Method
Learning Objective P3: Estimate uncollectibles based on sales and
accounts receivable.

Compute the estimate of the Allowance for

Doubtful Accounts.
Year-end Accounts Receivable × Bad Debt %
Bad Debts Expense is computed as:
Total Estimated Bad Debts Expense – Previous
Balance in Allowance Account = Current Bad
Debts Expense

© McGraw-Hill Education. 7-39

Exhibit 7.10 Percent of Receivables
Method (1 of 2)
Learning Objective P3: Estimate uncollectibles based on sales and
accounts receivable.

Musicland has $50,000 in accounts receivable and a $200

credit balance in Allowance for Doubtful Accounts on
December 31, 2017. Past experience suggests that 5% of
receivables are uncollectible.
Desired balance in Allowance for Doubtful
Accounts.
$ 50,000
 5.00%
 $ 2,500
© McGraw-Hill Education. 7-40
Exhibit 7.10 Percent of Receivables
Method (2 of 2)
Learning Objective P3: Estimate uncollectibles based on sales and
accounts receivable.

© McGraw-Hill Education. 7-41

Aging of Receivables Method (1 of 6)
Learning Objective P3: Estimate uncollectibles based on sales and
accounts receivable.

• Classify each receivable by how long it is past

due.
• Each age group is multiplied by its estimated
bad debts percentage.
• Estimated bad debts for each group are
totaled.

© McGraw-Hill Education. 7-42

Aging of Accounts Receivable (2 of 6)
Learning Objective P3: Estimate uncollectibles based on sales and accounts
receivable.

Exhibit 7.11

© McGraw-Hill Education. 7-43

Aging of Accounts Receivable (3 of 6)
Learning Objective P3: Estimate uncollectibles based on sales and
accounts receivable.

Step 1: Determine what current balance equals:

$200 credit.
Step 2: Determine what the account balance
should be: $2,270.
Step 3: Make adjusting entry to get from step 1
to step 2: $2,270 - 200 = $2,070.

© McGraw-Hill Education. 7-44

Aging of Accounts Receivable (4 of 6)
Learning Objective P3: Estimate uncollectibles based on sales and
accounts receivable.

© McGraw-Hill Education. 7-45

Aging of Accounts Receivable (5 of 6)
Learning Objective P3: Estimate uncollectibles based on sales and
accounts receivable.

Step 1: Determine what current balance equals:

$500 debit.
Step 2: Determine what the account balance
should be: $2,270.
Step 3: Make adjusting entry to get from step 1 to
step 2: $2,270 + 200 = $2,770.

© McGraw-Hill Education. 7-46

Aging of Accounts Receivable (6 of 6)
Learning Objective P3: Estimate uncollectibles based on sales and
accounts receivable.

© McGraw-Hill Education. 7-47

Exhibit 7.13 Summary of Methods
Learning Objective P3: Estimate uncollectibles based on sales and
accounts receivable.

© McGraw-Hill Education. 7-48

 NEED-TO-KNOW 7-4 (1 of 3)
Learning Objective P3: Estimate uncollectibles based on sales and accounts
receivable.

At its December 31 year-end, a company estimates uncollectible

accounts using the allowance method. It prepared the following
aging of receivables analysis.

Days
Days Past Days Past Days Past
Days Past Past
Total Due: 1 to Due: 31 to Due: 61 to
Due: 0 Due:
30 60 90
Over 90

Accounts receivable $2,600 $2,000 $300 $80 $100 $120

Percent uncollectible 1% 2% 5% 7% 10%

© McGraw-Hill Education. 7-49

 NEED-TO-KNOW 7-4 (2 of 3)
Learning Objective P3: Estimate uncollectibles based on sales and accounts
receivable.

1. (a) Estimate the balance of the Allowance for

Doubtful Accounts using the aging of accounts
receivable method. (b) Prepare the adjusting entry to
record Bad Debts Expense using the estimate from
part a. Assume the unadjusted balance in the
Allowance for Doubtful Accounts is a $10 debit.

© McGraw-Hill Education. 7-50

 NEED-TO-KNOW 7-4 (3 of 3)
Learning Objective P3: Estimate uncollectibles based on sales and accounts
receivable.

Adjusting entries: 3-step process:

Step 1) Determine what the account balance
equals.
Step 2) Determine what the account balance
SHOULD equal.
Step 3) Make an adjusting entry to get from
Step 1 to Step 2.

© McGraw-Hill Education. 7-51

 NEED-TO-KNOW 7-4 SOLUTION
(1 of 8)
Learning Objective P3: Estimate uncollectibles based on sales and accounts
receivable.

Days Past Days Past Days Past Days Past

Days Past
Total Due: 1 to Due: 31 to Due: 61 to Due: Over
Due: 0
30 60 90 90
Accounts receivable $2,600 $2,000 $300 $80 $100 $120
Percent uncollectible 1% 2% 5% 7% 10%
Uncollectible amount $49 $20 $6 $4 $7 $12

Step 1: Determine what the current account balance equals.

When the estimate is based on receivables (Balance Sheet
Approach) the account is the Balance sheet portion of the
adjusting entry, Allowance for Doubtful Accounts. The
existing balance is a debit of $10.

© McGraw-Hill Education. 7-52

 NEED-TO-KNOW 7-4 SOLUTION
(2 of 8)
Learning Objective P3: Estimate uncollectibles based on sales and
accounts receivable.

Step 2: Determine what the current account balance

SHOULD BE.
The balance should equal the amount calculated, $49.
Step 3: Make an adjusting entry to get from step 1 to
step 2.

© McGraw-Hill Education. 7-53

 NEED-TO-KNOW 7-4 SOLUTION
(3 of 8)
Learning Objective P3: Estimate uncollectibles based on sales and
accounts receivable.

2. (a) Estimate the balance of the Allowance for Doubtful

Accounts assuming the company uses 2% of total
accounts receivable to estimate uncollectibles, instead
of the aging of receivables method in number 1. (b)
Prepare the adjusting entry to record Bad Debts
Expense using the estimate from part a. Assume the
unadjusted balance in the Allowance for Doubtful
Accounts is a $4 credit.
Step 1: Determine what the current account balance
equals.

© McGraw-Hill Education. 7-54

 NEED-TO-KNOW 7-4 SOLUTION
(4 of 8)
Learning Objective P3: Estimate uncollectibles based on sales and accounts
receivable.

When the estimate is based on receivables, the

Balance Sheet Approach, the account is the Balance
sheet portion of the adjusting entry, Allowance for
Doubtful Accounts. The existing balance is a credit
of $4.

© McGraw-Hill Education. 7-55

 NEED-TO-KNOW 7-4 SOLUTION
(5 of 8)
Learning Objective P3: Estimate uncollectibles based on sales and accounts
receivable.

Step 2: Determine what the current account balance

SHOULD BE.
The balance should be 2% of Accounts Receivable.
$2,600 × .02 = $52.
Step 3: Make an adjusting entry to get from step 1 to
step 2.

© McGraw-Hill Education. 7-56

 NEED-TO-KNOW 7-4 SOLUTION
(6 of 8)
Learning Objective P3: Estimate uncollectibles based on sales and
accounts receivable.

3. a) Estimate the balance of the uncollectibles

assuming the company uses 0.5% of annual
credit sales (annual credit sales were $10,000).
(b) Prepare the adjusting entry to record Bad
Debts Expense using the estimate from part a.
Assume the unadjusted balance in the Allowance
for Doubtful Accounts is a $2 credit.

© McGraw-Hill Education. 7-57

 NEED-TO-KNOW 7-4 SOLUTION
(7 of 8)
Learning Objective P3: Estimate uncollectibles based on sales and
accounts receivable.

Step 1: Determine what the current account balance

equals.
When the estimate is based on sales, the Income
Statement Approach, the account is the Income
Statement portion of the adjusting entry, Bad Debts
Expense. The existing balance in the expense account is
always $0, as it is closed every period.

© McGraw-Hill Education. 7-58

 NEED-TO-KNOW 7-4 SOLUTION
(8 of 8)
Learning Objective P3: Estimate uncollectibles based on sales and accounts
receivable.

Step 2: Determine what the current account

balance SHOULD BE.
The balance should be .5% of net credit sales.
$10,000 × .005 = $50.
Step 3: Make an adjusting entry to get from step 1
to step 2.

© McGraw-Hill Education. 7-59

Learning Objective C2: Describe
a note receivable, the computation
of its maturity date, and the
recording of its existence.

© McGraw-Hill Education. 7-60

 Exhibit 7.14 Notes Receivable
Learning Objective C2: Describe a note receivable, the computation
of its maturity date, and the recording of its existence.

A promissory note is a written promise to pay a specified

amount of money, usually with interest, either on demand or
at a stated future date.

© McGraw-Hill Education. 7-61

Exhibit 7.15 Computing Maturity and
Interest
Learning Objective C2: Describe a note receivable, the computation
of its maturity date, and the recording of its existence.

The maturity date of a note is the day the note (principal

and interest) must be repaid.
On July 10, TechCom received a $1,000, 90-day, 12%
promissory note as a result of a sale to Julia Browne.

The note is due and payable on October 8.

© McGraw-Hill Education. 7-62
 Interest Computation
Learning Objective C2: Describe a note receivable, the computation
of its maturity date, and the recording of its existence.

Principal of the note × Annual interest rate × Time

expressed in fraction of year = Interest
Annual interest rate  Even for maturities less
than one year, the rate is annualized.
Time expressed in fraction of year  If the note is
expressed in days, base a year on 360 days using
the “banker’s rule.”

90
$1,000  12%   $1,000  0.12  0.25  $30
360

© McGraw-Hill Education. 7-63

Recording Notes Receivable (1 of 2)
Learning Objective C2: Describe a note receivable, the computation
of its maturity date, and the recording of its existence.

Notes receivable are usually recorded in a single

Notes Receivable account to simplify recordkeeping.
The original notes are kept on file, including
information on the maker, rate of interest, and due
date.
To illustrate the recording for the receipt of a note,
we use the $1,000, 90-day, 12% promissory note
from Julia Browne to TechCom. TechCom received
this note at the time of a product sale to Julia
Browne.

© McGraw-Hill Education. 7-64

Recording Notes Receivable (2 of 2)
Learning Objective C2: Describe a note receivable, the computation
of its maturity date, and the recording of its existence.

*We omit the entry to Dr. Cost of sales and Cr.

Merchandise Inventory to focus on sales and
receivables.

© McGraw-Hill Education. 7-65

 Learning Objective P4: Record
the honoring and dishonoring of a
note and adjustments for interest.

© McGraw-Hill Education. 7-66

 Recording an Honored Note
Learning Objective P4: Record the honoring and dishonoring of a note
and adjustments for interest.

The principal and interest of a note are due on its

maturity date.
J. Cook has a $600, 15%, 60-day note receivable
due to TechCom on December 4.

© McGraw-Hill Education. 7-67

 Recording a Dishonored Note
Learning Objective P4: Record the honoring and dishonoring of a
note and adjustments for interest.

The act of dishonoring a note does not relieve

the maker of the obligation to repay the
principal and interest due.
J. Cook has a $600, 15%, 60-day note
receivable due to TechCom on December 4.

© McGraw-Hill Education. 7-68

 Recording End-of-Period Interest
Adjustments (1 of 3)
Learning Objective P4: Record the honoring and dishonoring of a
note and adjustments for interest.

On December 16, TechCom accepts a $3,000, 60-day,

12% note from a customer in granting an extension on a
past-due account. When TechCom’s accounting period
ends on December 31, $15 of interest has accrued on
the note.
$3,000 × 12% × 15/360 = $15

© McGraw-Hill Education. 7-69

 Recording End-of-Period Interest
Adjustments (2 of 3)
Learning Objective P4: Record the honoring and dishonoring of a
note and adjustments for interest.

Recording collection on note at maturity.

© McGraw-Hill Education. 7-70

 Recording End-of-Period Interest
Adjustments (3 of 3)
Learning Objective P4: Record the honoring and dishonoring of a
note and adjustments for interest.

$3,000 × 12% × 60/360 = $60

© McGraw-Hill Education. 7-71

 NEED-TO-KNOW 7-5 (1 of 3)
Learning Objective P4: Record the honoring and dishonoring of a
note and adjustments for interest.

a. AA Company purchases $1,400 of merchandise from

ZZ on December 16, 20X1. ZZ accepts AA’s $1,400,
90-day, 12% note as payment. ZZ’s accounting
period ends on December 31, and it does not make
reversing entries. Prepare entries for ZZ on
December 16, 20X1, and December 31, 20X1.
b. Using the information in part a, prepare ZZ’s March
16, 20X2, entry if AA dishonors the note.
c. Instead of the facts in part b, prepare ZZ’s March 16,
20X2, entry if AA honors the note

© McGraw-Hill Education. 7-72

 NEED-TO-KNOW 7-5 (2 of 3)
Learning Objective P4: Record the honoring and dishonoring of a
note and adjustments for interest.

© McGraw-Hill Education. 7-73

 NEED-TO-KNOW 7-5 (3 of 3)
Learning Objective P4: Record the honoring and dishonoring of a
note and adjustments for interest.

d. Assume the facts in part b above (AA dishonors the

note). Then, on March 31, ZZ decides to write off the
receivable from AA Company. Prepare that write-off
entry assuming that ZZ uses the allowance method.

© McGraw-Hill Education. 7-74

Learning Objective C3: Explain
how receivables can be converted
to cash before maturity.

© McGraw-Hill Education. 7-75

 Disposal of Receivables
Learning Objective C3: Explain how receivables can be converted to
cash before maturity.

Companies can convert receivables to cash

before they are due.
• Selling Receivables
• Pledging Receivables

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 Learning Objective A1:
Compute accounts receivable
turnover and use it to help assess
financial condition.

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Accounts Receivable Turnover (1 of 2)
Learning Objective A1: Compute accounts receivable turnover and
use it to help assess financial condition.

This ratio provides useful information for evaluating

how efficient management has been in granting
credit to produce revenue.
Accounts receivable Net sales

turnover Average accounts receivable, net

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Accounts Receivable Turnover (2 of 2)
Learning Objective A1: Compute accounts receivable turnover and
use it to help assess financial condition.

Exhibit 7.19
Company Figure ($ millions) 2015 2014 2013 2012
IBM Net sales…………………………………………. $81,741 $92,793 $98,367 $102,874
  Average accounts receivable, net…… $8,712 $9,778 $10,566 $10,923
  Accounts receivable turnover….. 9.4 9.5 9.3 9.4
Oracle Net sales…………………………………………. $38,226 $38,275 $37,180 $37,121
  Average accounts receivable, net…… $5,618 $6,068 $6,213 $6,503
  Accounts receivable turnover….. 6.8 6.3 6.0 5.7

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 End of Presentation

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