Page 395 - Accounting Principles (A Business Perspective)

9. Receivables and payables

• Contingent liabilities are those for which the existence, and usually the amount, are uncertain because these
liabilities depend (or are contingent) on some future event occurring or not occurring. An example is a liability

arising from a lawsuit.
• A promissory note is an unconditional written promise by a borrower (maker) to pay the lender (payee) or
someone else who legally acquired the note a certain sum of money on demand or at a definite time.
• Interest is the fee charged for the use of money through time.
Interest=Principal×Rateof interest×Time.
• Companies sometimes need short-term financing. Short-term financing may be secured by issuing interest-
bearing notes or by issuing non interest-bearing notes.

• An interest-bearing note specifies the interest rate that will be charged on the principal borrowed.
• A non interest-bearing note does not have a stated interest rate applied to the face value of the note.
• Calculate accounts receivable turnover by dividing net credit sales, or net sales, by average net accounts
receivable.
• Calculate the number of days' sales in accounts receivable (or average collection period) by dividing the
number of days in the year by the accounts receivable turnover.
• Together, these ratios show the liquidity of accounts receivable and give some indication of their quality.
Generally, the higher the accounts receivable turnover, the better; and the shorter the average collection
period, the better.

Demonstration problem
Demonstration problem A a. Prepare the journal entries for the following transactions:
As of the end of 2010, Post Company estimates its uncollectible accounts expense to be 1 per cent of sales. Sales
in 2010 were USD 1,125,000.

On 2011 January 15, the company decided that the account for John Nunn in the amount of USD 750 was
uncollectible.
On 2011 February 12, John Nunn's check for USD 750 arrived.
b. Prepare the journal entries in the records of Lyle Company for the following:
On 2010 June 15, Lyle Company received a USD 22,500, 90-day, 12 per cent note dated 2010 June 15, from
Stone Company in payment of its account.
Assume that Stone Company did not pay the note at maturity. Lyle Company decided that the note was
uncollectible.
Demonstration problem B a. Prepare the entries on the books of Cromwell Company assuming the company

borrowed USD 10,000 at 7 per cent from First National Bank and signed a 60-day non interest-bearing note
payable on 2009 December 1, accrued interest on 2009 December 31, and paid the debt on the maturity date.
b. Prepare the entries on the books of Cromwell Company assuming it purchased equipment from Jones
Company for USD 5,000 and signed a 30-day, 9 per cent interest-bearing note payable on 2010 February 24.
Cromwell paid the note on its maturity date.

Solution to demonstration problem
Solution to demonstration problem A
a.

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