Acct 230 1st Edition Lecture 17 Outline of Last Lecture I Recognition of Accounts Receivable II Valuation of Accounts Receivable Outline of Current Lecture III Notes Receivable Current Lecture IV Notes Receivable a Apply the procedure to account for notes receivable including interest calculation i Notes receivable are similar to accounts receivable but are more formal credit arrangements evidenced by a written debt instrument or note ii Notes receivables are classified as either Current or Noncurrent depending on the expected collection date iii If the time to maturity is longer than one year the note receivable is a long term asset b Interest Calculation i Many of the same issues we discussed concerning accounts receivable apply also to notes receivable One issue that applies to notes receivable but not accounts receivable is interest c Collection of Notes Receivables i We record the collection of notes receivable the same way as a collection of accounts receivable except we record interest earned as interest revenue in the income statement ii August 1 2012 the maturity date Justin repays the note and interest in full as promised Kimzey will record the following entry These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute d Accrued Interest i It happens that notes are issued in one year and the maturity date occurs in the following year ii What if Justin issued the previous six month note to Kimzey on November 1 2012 instead of February 1 2012 iii 10 000 face value and 600 interest on the six month note are not due until May 1 2013 iv The length of the note and interest rate remain the same the total interest charged to Justin remains the same v Kimzey will record interest revenue for two months of the six month note and four months in the next year vi Remember interest is earned as time goes by so Kimzey earns two months interest 200 in 2012 even though it won t collect it until 2013 On May 1 2013 the maturity date It records the collection of the note receivable and interest receivable as well as the revenue related to four months interest earned in 2013 e Calculating Interest Revenue over Time for Kimzey Medical Clinic i On May 1 2013 Kimzey has received the note receivable recorded on November 1 2012 and the interest receivable recorded on December 31 2012 and has eliminated their balances The remaining four months interest occurs in 2013 and it recognizes as revenue then Interest receivable from its six month 10 000 12 note is 100 per month 10 000 x 12 x 1 12 f Calculate key ratios investors use to monitor a company s effectiveness in managing receivables i The amount of a company s accounts receivable is influenced by a variety of factors including the level of sales the nature of the product or service sold and credit and collection policies ii More liberal credit policies allowing customers a longer time to pay or offering cash discounts for early payment often are initiated with the specific objective of increasing sales volume iii Management s choice of credit and collection policies results in tradeoffs iv Investors creditors and financial analysts can gain important insights by monitoring a company s investment in receivables v Two important ratios that help in understanding the company s effectiveness in managing receivables are the vi receivables turnover ratio and the average collection period g Receivables Turnover Ratio i It shows the number of times during a year that theaverage accounts receivable balance is collected ii The average collection period is another way to express the same measure It shows the approximate number of days the average accounts receivable balance is outstanding iii Net credit sales are 400 000 for the year and the average accounts receivable balance is 40 000 We could say the turnover ratio is 10 or average receivables were collected 10 times during the year If the turnover is 10 times a year 365 days then the average balance is collected every 36 5 days V Percentage of Credit Sales Method a Estimate uncollectible accounts using the percentage of credit sales method i We estimate uncollectible accounts based on a percentage ofaccounts receivable at the end of the period This method is the percentage of receivables method or the balance sheet method because we base the estimate of bad debts on a balance sheet account accounts receivable ii As an alternative we can estimate uncollectible accounts based on the percentage of credit sales for the year aptly referred to as the percentage of credit sales method or the income statement method because we base the estimate of bad debts on an income statement account credit sales In this appendix we consider the percentageof credit sales method b Adjusting for Estimates of Uncollectible Accounts i ii c Financial Statement Effects of Estimating Uncollectible Accounts i