2 accounting for_receivables

7-2
C H A P T E R 2
ACCOUNTING FOR RECEIVABLES
Intermediate Accounting
IFRS Edition
Kieso, Weygandt, and Warfield

7-3
1. Define receivables and identify the different types of receivables.
2. Explain accounting issues related to recognition of accounts receivable.
3. Explain accounting issues related to valuation of accounts receivable.
4. Explain accounting issues related to recognition of notes receivable.
5. Explain accounting issues related to valuation of notes receivable.
6. Understand special topics related to receivables.
7. Describe how to report and analyze receivables.
Learning Objectives

7-4
Recognition
Valuation
Impairment
evaluation process
Accounts
Receivable
Notes Receivable Special Issues
Recognition
Valuation
Fair value option
Derecognition of
receivables
Presentation and
analysis
Accounting for Receivables

7-5
Accounts Receivable
LO 3 Define receivables and identify the different types of receivables.
Written promises to pay a
sum of money on a
specified future date.
Receivables are claims held against customers and
others for money, goods, or services.
Oral promises of the
purchaser to pay for goods
and services sold.
Accounts
Receivable
Notes
Receivable

7-6
Non-trade Receivables
1. Advances to officers and employees.
2. Advances to subsidiaries.
3. Deposits to cover potential damages or losses.
4. Deposits as a guarantee of performance or payment.
5. Dividends and interest receivable.
6. Claims against:
a) Insurance companies for casualties sustained.
b) Defendants under suit.
c) Governmental bodies for tax refunds.
d) Common carriers for damaged or lost goods.
e) Creditors for returned, damaged, or lost goods.
f) Customers for returnable items (crates, containers, etc.).
Accounts Receivable

7-7
Non-trade Receivables
Accounts Receivable
Illustration 7-4
Receivables Statement
of Financial Position
Presentations

7-8
Accounts Receivable
LO 4 Explain accounting issues related to recognition of accounts receivable.
Trade Discounts
Reductions from the list
price
Not recognized in the
accounting records
Customers are billed net of
discounts
10 %
Discount
for new
Retail
Store
Customers
Recognition of Accounts Receivable

7-9
Accounts Receivable
Cash Discounts
(Sales Discounts)
Inducements for prompt
payment
Gross Method vs. Net
Method
Payment terms
are 2/10, n/30
Recognition of Accounts Receivable

7-10
Accounts Receivable
Cash Discounts (Sales Discounts) Illustration 7-5
Entries under Gross and
Net Methods of Recording
Cash (Sales) Discounts

7-11
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.
Sales 2,000
Accounts receivable 2,000June 3
Accounts Receivable
Cash 1,960
Sales discounts (£2,000 x 2%) 40
Accounts receivable 2,000
June 12

7-12
Sales 1,960
Accounts Receivable
Cash (£2,000 x 98%) 1,960
June 12
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.

7-13
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.
Sales 1,960
Accounts Receivable
Cash 2,000
Sales discounts forfeited 40
June 12

7-14
A company should measure receivables in terms of their
present value.
Non-Recognition of Interest Element
Accounts Receivable
In practice, companies ignore interest revenue related to
accounts receivable because, for current assets, the
amount of the discount is
not usually material in
relation to the net income
for the period.

7-15
How are these accounts presented on the Statement of
Financial Position?
Accounts Receivable
Allowance for
Doubtful Accounts
Beg. 500 25 Beg.
End. 500 25 End.
Accounts Receivable

7-16 LO 4 Explain accounting issues related to recognition of accounts receivable.
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
Statement of Financial Position (partial)
ABC Corporation
Accounts Receivable

Current Assets:
Prepaid expense 40
Accounts receivable, net of $25 allowance 475
Cash 330
ABC Corporation
Accounts Receivable

7-18
Journal entry for credit sale of $100?
Sales 100
Accounts Receivable
Allowance for
Doubtful Accounts
Beg. 500 25 Beg.
End. 500 25 End.
Accounts Receivable

7-19
Accounts Receivable
Allowance for
Doubtful Accounts
Beg. 500 25 Beg.
End. 600 25 End.
Sale 100
Accounts Receivable
Journal entry for credit sale of $100?
Sales 100

7-20
Collected of $333 on account?
Cash 333
Accounts Receivable
Allowance for
Doubtful Accounts
Beg. 500 25 Beg.
End. 600 25 End.
Sale 100
Accounts Receivable

7-21
Collected of $333 on account?
Cash 333
Accounts Receivable
Allowance for
Doubtful Accounts
Beg. 500 25 Beg.
End. 267 25 End.
Sale 100 333 Coll.
Accounts Receivable

7-22
Adjustment of $15 for estimated Bad-Debts?
Bad debt expense 15
Allowance for Doubtful Accounts 15
Accounts Receivable
Allowance for
Doubtful Accounts
Beg. 500 25 Beg.
End. 267 25 End.
Sale 100 333 Coll.
Accounts Receivable

7-23
Adjustment of $15 for estimated Bad-Debts?
Bad debt expense 15
Allowance for Doubtful Accounts 15
Accounts Receivable
Allowance for
Doubtful Accounts
Beg. 500 25 Beg.
End. 267 40 End.
Sale 100 333 Coll. 15 Est.
Accounts Receivable

7-24
Write-off of uncollectible accounts for $10?
Allowance for Doubtful accounts 10
Accounts Receivable
Allowance for
Doubtful Accounts
Beg. 500 25 Beg.
End. 267 40 End.
Accounts Receivable

7-25
Write-off of uncollectible accounts for $10?
Allowance for Doubtful accounts 10
Accounts Receivable
Allowance for
Doubtful Accounts
Beg. 500 25 Beg.
End. 257 30 End.
W/O 1010 W/O
Accounts Receivable

Current Assets:
Prepaid expense 40
Accounts receivable, net of $30 allowance 227
Cash 330
ABC Corporation
Accounts Receivable

7-27
Accounts Receivable
LO 5 Explain accounting issues related to valuation of accounts receivable.
Valuation of Accounts Receivables
Classification
Valuation (cash realizable value)
Uncollectible Accounts Receivable
Sales on account raise the possibility of accounts
not being collected.

7-28 LO 5 Explain accounting issues related to valuation of accounts receivable.
Valuation of Accounts Receivable
An uncollectible account receivable is a loss of revenue that
requires,
 a decrease in the asset accounts receivable and
 a related decrease in income and shareholders’ equity.

7-29 LO 5 Explain accounting issues related to valuation of accounts receivable.
Allowance Method
Losses are Estimated:
Percentage-of-sales
Percentage-of-receivables
IFRS requires when
material in amount
Methods of Accounting for Uncollectible Accounts
Direct Write-Off
Theoretically undesirable:
No matching
Receivable not stated at
cash realizable value
Not IFRS when material in
amount
Valuation of Accounts Receivable

7-30
Emphasis on
the Income
Statement
Emphasis on
the Statement
of Financial
Position
Illustration 7-7

7-31
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.

7-32
LO 5
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
Percentage-of-Sales Approach
Illustration 7-8

7-33
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.

7-34
What entry
would Wilson
make assuming
that no balance
existed in the
allowance
account?
Illustration 7-9
Accounts Receivable
Aging Schedule

7-35
Bad Debt Expense ($37,650 – $800) 36,850
What entry
would Wilson
make assuming
the allowance
account had a
credit balance
of $800 before
adjustment?
Illustration 7-9
Accounts Receivable
Aging Schedule

7-36
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.

7-37
(a) 1% of net sales.
(€800,000 – €50,000) x 1% = €7,500

7-38
(b) 5% of accounts receivable.
(€160,000 x 5%) – €2,000) = €6,000

7-39
Recovery of Uncollectible Accounts
LO 5
Illustration: Assume that the financial vice president of Brown
Furniture authorizes a write-off of the $1,000 balance owed by
Randall Co. on March 1, 2012. The entry to record the write-off is:
Accounts Receivable 1,000
Assume that on July 1, Randall Co. pays the $1,000 amount that
Brown had written off on March 1. These are the entries:
Cash 1,000

7-40 LO 8 Understand special topics related to receivables.
Company may transfer (e.g., sells) a receivables to another
company for cash.
Reasons:
Competition.
Sell receivables because money is tight.
Billing / collection are time-consuming and costly.
Transfer accomplished by:
1. Secured borrowing (Assignment)
2. Sale of receivables (Factoring)
Special Issues Related To Receivables
Derecognition of Receivables

7-41
Secured Borrowing (Assignment)
- Assigning/pledging accounts receivable means
using them as collateral for a loan or in a
borrowing transaction.
- Holder retains ownership.

7-42
 Trade debt may be assigned or pledged with a
banker to obtain funds to meet company’s cash
needs.
 Trade debts are used as collaterals to obtain the
financing.
 Risk of bad debts are not passed on to the
banker because it has the full recourse on the
company in the event that the trade debtors are
unable to settle their debts.

7-43
 Bill of exchange – trade debt financing
arrangements to acknowledge its liability.
 The trade debts are remained in the accounting
records and the cash received and the
corresponding bill payable should be recognized
in the accounts.

7-44
o Transferor records for note payable and finance charge.
No effect on accounting for accounts receivable.
o Transferor collects accounts receivable.
o Transferor records sales returns and sales discounts.
o Transferor absorbs bad debts expense.
o Transferor records interest expense on notes payable.
o Transferor pays on the note periodically from collections.
o Meanwhile, the banker will record for note receivables,
finance revenue, interest revenue and cash paid and
received.

7-45
Illustration: March 1, 2011, Howat Mills, Inc. provides (assigns)
$700,000 of its accounts receivable to Citizens Bank as collateral
for a $500,000 note. Howat Mills continues to collect the accounts
receivable; the account debtors are not notified of the arrangement.
Citizens Bank assesses a finance charge of 1 percent of the
accounts receivable and interest on the note of 12 percent. Howat
Mills makes monthly payments to the bank for all cash it collects on
the receivables.
LO 8 Understand special topics related to receivables.
Using receivables as collateral in a borrowing transaction.

7-46
Secured Borrowing - Illustration
LO 8Illustration 7-18

7-47
E7-14: On April 1, 2010, Prince Company assigns $500,000 of its
accounts receivable to the Hibernia Bank as collateral for a $300,000 loan
due July 1, 2010. The assignment agreement calls for Prince Company to
continue to collect the receivables. Hibernia Bank assesses a finance
charge of 2% of the accounts receivable, and interest on the loan is 10% (a
realistic rate of interest for a note of this type).
Secured Borrowing - Exercise
Instructions:
a) Prepare the April 1, 2010, journal entry for Prince Company.
b) Prepare the journal entry for Prince’s collection of $350,000 of the
accounts receivable during the period from April 1, 2010, through
June 30, 2010.
c) On July 1, 2010, Prince paid Hibernia all that was due from the loan it
secured on April 1, 2010. Prepare the entry to record this payment.

7-48
E7-14 continued
Date Account Title Debit Credit
(a) Cash 290,000
Finance Charge 10,000
Notes Payable 300,000
($500,000 x 2% = $10,000)
(b) Cash 350,000
(c) Notes Payable 300,000
Interest Expense 7,500
Cash 307,500
(10% x $300,000 x 3/12 = $7,500)
Secured Borrowing - Exercise

7-49
Example 3
On January 2012, Provo Mercantile Co. assigns
specific receivables totaling RM300,000 to Salem
Bank as collateral on a RM200,000, 12% note.
Salem assesses a 1% finance charge on assigned
receivables in addition to the interest on the note.
Provo is to make monthly payments to Salem with
cash collected on assigned receivables. The entry
should be as follows:

7-50
1/1/2012
DR Cash RM197,000
DR Finance charge RM3,000
CR Notes payable RM200,000
(to record the loan with Salem Bank)
The trade debts of RM300,000 still remains in Provo’s accounts.
Dr. Accounts receivable assigned RM300,000
Cr. Accounts receivable RM300,000
( to reclassify the assigned account receivable)

7-51
 In the banker’s book:
1/1/2012
DR Note Receivable 200,000
CR Finance revenue 3,000
CR Cash 197,000
(to record loan to Provo Co.)

7-52
31/1/2012
Collection of assigned accounts during January 2012 of
RM180,000 less cash discounts of RM1,000; Sales return in
January RM2,000
31/1/2012 RM RM
Cash 179,000
Cash Discounts 1,000
Sales return 2,000
Accounts Receivable Assigned 182,000
(to record collection in January)

7-53
1/2/2012
February 2012, Payment to Salem Bank on amount
owed plus interest on note payable
Journal entries-1/2/2012 RM
RM
DR Notes payable 179,000
DR Interest expense (200,000 x12%x1/12) 2,000
CR Cash 181,000
(To record loan repayment)

7-54
 In the banker’s book:
1/2/2012
DR Cash 181,000
CR Note receivable 179,000
CR Interest revenue 2,000
(to record receipts from Provo Co. and recognize interest
revenue)

7-55
28/2/2012
Collection of the remaining 118,000 of receivables assigned
RM
RM
DR Cash 118,000
CR Accounts Receivable 118,000
Assigned
(To record collection in February)

7-56
1/3/2012
Remittance of balance due to Salem Bank
RM RM
DR Notes payable(200,000-179,000) 21,000
DR Interest expense (21,000 x 12% x 1/12) 210
CR Cash 21,210
(to record loan repayment)

7-57
28/2/2012
Assuming Provo received RM21,000 from AR Assigned,
instead of RM118,000:
Dr. Cash 21,000
Cr. A/R assigned 21,000
(To record collection in February)

7-58
1/3/2012 Remitted the balance due to Salem Bank.
Dr. Notes Payable 21,000
Dr. Interest expense 210
Cr. Cash 21,210
(To record loan repayment)
The balance in Accounts Receivable Assigned is to be reclassified as
follows:
Dr. Accounts Receivable 97,000
Cr. Accounts Receivable 97,000
Assigned
(To reclassify remaining balance of AR assigned)

7-59
In the banker’s book:
1/3/2012
DR Cash 21,210
CR Notes receivable 21,000
CR Interest revenue 210
(to record receipts from Provo Co. and recognize interest
revenue)

7-60
Sales of Receivables (Factoring)
 Factoring accounts receivable means selling them. It is another
way of obtaining cash advances on trade debts.
 Factoring : transferring (selling) the AR to a factor (a company that
undertakes factoring)
 Differs from assignment of trade debts where the factoring company
administers the credit management (includes sales accounting
services, credit administration and control services and collection
services) for the company.
 Factoring can be with recourse (with guarantee) or without recourse
(without guarantee).
 Recourse (guarantee) refers to ultimate responsibility for payment.

7-61
Factors are finance companies or banks that buy receivables from
businesses for a fee.
Illustration 7-19

7-62
Sale without Guarantee (Recourse)
The legal title (the form) together with the risks and rewards
(the substance) of the trade debts pass to the factoring
company.
The difference between the net proceeds and the carrying
amount of the trade debts (if any) is recognized as a loss on
sale of trade debts in the income statement.

7-63 63
Factoring of receivables without
guarantee(recourse)
 Ownership, risks and gain will be transferred to the
factoring company.
 Control of receivables would be in the hand of
factoring company.
 Factoring company will charge the commission
based on the risks associated
 Factoring company normally pays 80% -90% of the
face value after considering the potential sales
return/allowance

7-64 64
Textiles Corporation factors RM500,000 of
accounts receivable with Cotton Bank Berhad on
a without recourse basis. The receivable records
are transferred to Cotton Bank Berhad, which will
receive the collections.
The Cotton Bank Berhad assesses a finance
charge of 3% of the amount of accounts
receivable & retain an amount equal to 5% of the
accounts receivable.
Example 1

7-65 65
Journal entries – Textiles Corp. (SELLER’S BOOK)
RM RM
DR Cash 460,000
DR Receivable from Bank-holdback 25,000
DR Finance charge 15,000
CR Accounts receivable 500,000
(To record the receivables sold without recourse)
Example 1

7-66 66
Journal entries – Cotton Bank Berhad (FACTOR’S
BOOK)
RM RM
DR Accounts receivable 500,000
CR Payable to Textiles 25,000
CR Financing revenue 15,000
CR Cash 460,000
(To record the receivables purchased without
recourse)
Example 1

7-67 67
Example 1- Receivables factoring
without recourse: Collection of AR
 Assume RM20,000 was uncollectible and there were
RM7,000 sales return and allowances, sales discount of
RM5,000.
 The remaining amount was collected by the bank.

7-68 68
Recording by Textiles (SELLER’S BOOK):
Bad debt expense 20,000
Sales discount 5,000
Sales Return and Allow. 7,000
Receivables from Bank 25,000
Cash 7,000
(to record sales adjustment and BD and pay for the
shortage)
Liability on transferred Recv. 500,000
(to close liability a/c and a/receivables collected)

7-69 69
Collection: Recording by Bank (FACTOR’S
BOOK)
Cash 468,000
Payable to Textiles 12,000
A/R 500,000
(to record collection from debtors)
Cash 13,000
(to record settlement of A/R factored)

7-70 70
Factoring of receivables with
guarantee(recourse)
 Debt factoring with recourse
 Immediate cash advances for certain % of the debt
factored provided by the factoring company.
 The factor company – acts as a collection agent.
 The seller has retained all the risk associated with
the trade receivable  full recourse.

7-71 71
Factoring of receivables with
guarantee(recourse)(cont.)
 Therefore, the trade receivables would be
retained on the BS as assets and the proceeds
received would be recognized as a liability.
 As when the trade debtors settled and the cash
was passed over to the factor, the trade
receivables and liability would be reduced.

7-72 72
Example:
Jacko Sdn Bhd had RM4,000,000 accounts
receivable. The A/R were sold to a bank on a
recourse factoring arrangement. The amount of
cash advance obtained was RM3,600,000 less a
factoring fee of RM60,000. Also finance interest is
calculated at 15% p.a.
Show the journal entry to record the recourse
factoring arrangement.
Factoring of receivables with recourse
(Example 1)

7-73 73
Journal entry – SELLER’S BOOK
RM RM
DR Cash 3,540,000
DR Factoring fee deferred 60,000
CR Liability on transferred AR 3,600,000
(to record receivables factored with recourse)
 Factoring fee will be amortized over the period
of the debt collection.
 Interest will be recognized as an expense until
the debts are collected and advance paid.
Factoring of receivables with recourse
(Example 1)

7-74 74
Receivables factoring with
recourse (Example 2)
Textiles Corporation factors RM500,000 of
accounts receivable with Cotton Bank Berhad on
a recourse basis.
The Cotton Bank Berhad assesses a finance
charge of 3% of the amount of accounts
receivable and retain an amount equal to 5% of
the accounts receivable.

7-75 75
Journal entries – Textiles Corp. (SELLER’S BOOK)
RM RM
DR Cash 460,000
DR Receivable from Bank-holdback (5%) 25,000
DR Finance charge (deferred) (3%) 15,000
CR Liability on transferred AR 500,000
Receivables factoring with recourse
(Example 2)

7-76 76
Journal entries – Cotton Bank Berhad (FACTOR’S
BOOK)
RM RM
DR Accounts receivable 500,000
CR Payable to Textiles 25,000
CR Financing revenue 15,000
CR Cash 460,000
Receivables factoring with recourse
(Example 2)

7-77 77
Example 2- Receivables factoring with
recourse: Collection of AR
 Assume RM20,000 was uncollectible and there
were RM7,000 sales return and allowances,
sales discount of RM5,000.
 The remaining amount was collected by the
bank.

7-78 78
Recording by Textiles Corp. (SELLER’S
BOOK):
Sales discount 5,000
Sales Return and Allow. 7,000
Receivables from Bank 25,000
Cash 7,000
(to record sales adjustment and BD and pay for the
shortage)
Liability on transferred Recv. 500,000
(to close liability a/c and a/receivables collected)

7-79 79
Recording by Bank (FACTOR’S BOOK)
Cash 468,000
Acct Receivable 480,000
(to record collection from debtors)
Cash 7,000
Acct Receivable 20,000
(to record settlement of A/R factored)

7-80
Sale with Guarantee
Sales of Receivables
Seller guarantees payment to purchaser.
Transfer is considered a borrowing—sometimes referred to
as a failed sale.
Assume Crest Textiles sold the receivables on a with guarantee basis.
Illustration 7-21

7-81
Determining whether receivables that are transferred can be derecognized and
accounted for as a sale is based on an evaluation of whether the seller has
transferred substantially all the risks and rewards of ownership of the financial asset.
Summary of Transfers
LO 8
Illustration 7-22

7-82
General rule in classifying receivables are:
1. Segregate and report carrying amounts of different categories of
receivables.
2. Indicate receivables classified as current and non-current in the
statement of financial position.
3. Appropriately offset the valuation accounts for receivables that are
impaired, including a discussion of individual and collectively determined
impairments.
4. Disclose the fair value of receivables in such a way that permits it to be
compared with its carrying amount.
5. Disclose information to assess the credit risk inherent in the receivables
by providing information on:
6. Disclose any receivables pledged as collateral.
7. Disclose all significant concentrations of credit risk arising from
receivables.
Presentation and Analysis
LO 9 Describe how to report and analyze receivables.

7-83
Analysis of Receivables
Presentation and Analysis
This Ratio used to:
Assess the liquidity of the receivables.
Measure the number of times, on average, a company
collects receivables during the period.
Illustration 7-24
LO 9 Describe how to report and analyze receivables.

7-84
Supported by a formal promissory note.
Notes Receivable
LO 6 Explain accounting issues related to recognition of notes receivable.
A promissory note is a written promise to pay a sum of
money on a specified date in the future.
A negotiable instrument.
Maker signs in favor of a Payee.
Interest-bearing (has a stated rate of interest) OR
Zero-interest-bearing (interest included in face
amount).

7-85
Notes Receivable
LO 6 Explain accounting issues related to recognition of notes receivable.
Generally originate from:
Customers who need to extend payment period of an
outstanding receivable.
High-risk or new customers.
Loans to employees and subsidiaries.
Sales of property, plant, and equipment.
Lending transactions (the majority of notes).

7-86 86
Notes Receivable
 The parties to a promissory note are:
1. The maker/borrower/customer - the party that
promises to repay the amount borrowed
2. The payee - the party that will receive the payment
– E.g. RM1,000, 60-day note, 12% interest p.a.
RM50,000, 6-month note, 10% interest p.a.

7-87 87
 Principal - the amount borrowed/ the face value/ the
stated amount of the note
 Maturity date - the date the note is to be repaid/due
 Term - the time period/life of the note (in days or
months)
 Interest - the amount charged on the borrower for
the use of the money borrowed
 Maturity value - the amount of cash to be repaid
including principal and interest on the maturity date
Terms used in Note Receivable

7-88 88
Due date
 The life of a note may be expressed in months or days.
 When the life of a note is expressed in terms of months,
the due date is found by counting the months from the
date of issue.
 When the due date is stated in terms of days, it is
necessary to count the exact number of days to
determine the maturity date.
 In counting the life of a note, the date the note is issued
is omitted but the due date is included.

7-90 90
Computing interest
 The formula for computing INTEREST is
PRT:
Principle (Face Value) x Rate (annual interest
rate) x Time (in Terms of one year)

7-91 91
Computing interest
365 = RM99
RM99
RM5099
RM5099

7-92 92
Entries to record notes receivables
 At the time a note is received, it is
recorded at face value with no interest
added.

7-93 93
 Notes receivable are reported at their cash (net)
realizable value
 A note is honored when it is paid in full at maturity
 Interest revenue is recorded when the note is paid.
However, if interim financial statements are
prepared, interest on notes receivable is accrued
and shown as interest revenue as it is earned.

7-94 94
Entries to record notesreceivables

7-95 95
 If a note is not paid in full at maturity, it is
called a dishonored note. If it can reasonably
be assumed that the amount due will
ultimately be collected, it is usually
transferred to an Account Receivable.

7-96 96

7-97 97
 Notes receivable are issued at face value
when the stated rate of interest is the
same as the effective (market) rate.
 If the stated rate is less than the effective
rate then a discount results.
 If the stated rate is greater than the
effective rate then a premium results.
 The discount or premium is amortized to
interest revenue by the effective interest
method.
Recognition of notes receivable

7-98 98
Financing with notes receivable (NR)
 Obtain cash immediately from NR – through
discounting
 Discounting: means selling the NR to bank
 Discounting NR: selling the NR before
maturity date at a discounted price.

7-99 99
Formula
Maturity value (MV) = Face value (FV) + interest
Interest = FV x Interest rate x time
Discount = MV x discount rate x no. of discount days/365
Proceeds = MV – Discount
Book value = FV + accrued interest
Gain/loss = proceeds – book value of notes
receivable

7-100 100
Financing/ Discounting of Notes
Receivable
•Two methods:
i. with recourse ii. Without recourse
• Discounting with recourse – bank act as
collecting agent BUT seller will pay in case of
default (create liability and retain NR in BS)
• Discounting without recourse – the seller has
no responsibility with regard to the notes, and
the note is removed from the balance sheet.
(all risks and rewards passed to the buyer)

7-101 101
Example
On 1/9/2012, ABC received a note receivable of RM5,000,
10%, 90 days from a customer. After 10 days, ABC
discounted the note to Bank DEF at the rate of 15%.
Calculation:
 MV = 5,000 + (5,000 x 0.1 x 90/365) = 5,123
 Discount = 5,123 x 0.15 x 80/365 = 168
 Proceeds = 5,123 – 168 = 4,955
 BV = 5,000 + (5,000 x 0.1 x 10/365) = 5,013.70
 Gain/(loss) = 4,955 – 5,013.70 = (58.70)

7-102 102
Journal entry on 1/9/2012- Receipts of
NR
 Sale (without recourse)
Dr. NR 5,000
Cr. AR/Cash 5,000
 Sale (with recourse)
Dr. NR 5,000
Cr. AR/Cash 5,000

7-103 103
Journal entry (10/9/12- Discounting of
NR)
Dr. Cash 4,955.00
Dr. Loss on
discounting 58.70
Cr. NR 5,000.00
Cr. Interest rev 13.70
Dr. Cash 4,955.00
Dr. Loss on
discounting 58.70
Cr. NR Discounted 5,000
Cr. Interest rev 13.70

7-104 104
Journal entry
30/11/12 – Collection of NR
If customer paid the note
receivable in a given time
No entry
if customer paid the note
receivable in a given time
Dr. NR Discounted 5,000
Cr. NR 5,000

7-105 105
If customers failed to pay on due
date.. (Dishonored NR)
 Sale
No entry
Dr. AR 5,148*
Cr. Cash 5,148
(* MV + Bank charge = 5123+25)
Dr. NR Discounted 5,000
Cr. NR 5,000
(assumption: there’s bank charge of
RM25)

7-106 106
Presentation in Balance Sheet
 Credit balance in the provision account is
NOT a liability.
 It is set off against the gross trade debtors
on presentation in the balance sheet.
 Note on the provision for doubtful debts is
illustrated as:

7-107 107
Presentation in the Statement of
Financial Position- Notes to statement
TRADE DEBTORS
RM
Trade debtors 78,544,306
Less: Provision for doubtful
debts
(3,156,409)
75,387,897

7-108 108
Presentation in the Statement of
Financial Position
OTHER RECEIVABLES
 Should be summarized in appropriately
titled accounts & reported separately in the
financial statements

7-109 109
Presentation in the Statement of FP
CURRENT ASSET
Trade receivables (at NRV) XXX
Other receivables (including S-term NR) XXX
NON-CURRENT ASSET
Note Receivables (Including L-Term NR) XXX

7-110 110
Ratio
 The ratio used to assess the liquidity of
receivables is the receivables turnover ratio.
 Receivables turnover ratio measures the
number of times, on average, receivables are
collected during the period.

7-111
► The accounting and reporting related to cash is essentially the
same under both IFRS and U.S. GAAP.
► The basic accounting and reporting issues related to recognition
and measurement of receivables are essentially the same between
IFRS and U.S. GAAP.
► Although IFRS implies that receivables with different characteristics
should be reported separately, there is no standard that mandates
this segregation. In addition, there is no specific standard related to
pledging, assignment, or factoring.

7-112
► Like the IASB, the FASB has worked to implement fair value
measurement for all financial instruments, but both Boards have
faced bitter opposition from various factions. As a consequence, the
Boards have adopted a piecemeal approach in which disclosure of
fair value information in the notes is the first step. The second step
is the fair value option, which permits companies to record fair
values in the financial statements. Both Boards have indicated that
they believe all financial instruments should be recorded and
reported at fair value.

7-113
Copyright © 2011 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted in
Section 117 of the 1976 United States Copyright Act without the
express written permission of the copyright owner is unlawful.
Request for further information should be addressed to the
Permissions Department, John Wiley & Sons, Inc. The purchaser
may make back-up copies for his/her own use only and not for
distribution or resale. The Publisher assumes no responsibility for
errors, omissions, or damages, caused by the use of these
programs or from the use of the information contained herein.
Copyright

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