Receivables

Notes Receivable

Notes receivable are written promises for amounts to be received, usually involving interest. They are a common way for companies to lend money or extend credit to customers.

• Definition: A note receivable is a formal, written promise to receive a specific amount of money at a future date, often with interest.

• Journal Entry for Issuance: When a company issues a note receivable, it records the principal amount as a debit to Notes Receivable and a credit to Cash or Accounts Receivable.

• Interest Calculation: Interest earned on a note is calculated using the formula: where Time is in months.

• Example: If Granger Corporation issues a three-month, note receivable, the interest earned after three months is:

• Journal Entry for Interest Earned: Debit Interest Receivable $200

• .

Uncollectible Accounts (Bad Debts)

Estimating and Reporting Uncollectible

Companies must estimate the amount of accounts receivable that may not be collected, known as bad debts. This is done using the allowance method.

• Allowance Method: This method matches estimated bad debts expense to the period in which the related sales occur.

• Journal Entry for Bad Debts: Debit Bad Debt Expense, Credit Allowance for Bad Debts.

• Net Realizable Value (NRV): The value of accounts receivable expected to be collected.

• Example Table:

• Steps to Estimate Bad Debts:

  1. Calculate Bad Debt Expense (BDE): Credit sales × Estimated uncollectible %

  2. Update Allowance for Bad Debts

  3. Calculate NRV: Accounts Receivable – Allowance for Bad Debts

Stockholders' Equity

Issuance of Stock

Corporations raise capital by issuing shares of stock, which can be common or preferred. Each type has different rights and characteristics.

• Common Stock: Represents ownership in a corporation, with voting rights and potential for dividends.

• Preferred Stock: Has priority over common stock for dividends and assets in liquidation, but usually no voting rights.

• Journal Entry for Issuance: Debit Cash, Credit Common Stock and/or Preferred Stock at par value, Credit Paid-in Capital in Excess of Par for any amount received above par.

• Example Table:

• Dividends: Preferred stockholders receive dividends before common stockholders. Dividends are declared and paid based on shares outstanding and dividend rate.

Property, Plant, and Equipment (PP&E)

Depreciation and Disposal

Depreciation allocates the cost of tangible assets over their useful lives. When assets are sold or disposed of, companies must record the transaction and any gain or loss.

• Straight-Line Depreciation: Allocates equal expense each year.

• Book Value: The asset's cost minus accumulated depreciation.

• Journal Entry for Sale: Debit Cash (amount received), Debit Accumulated Depreciation, Credit Asset (original cost), record any gain or loss.

• Example: If fixtures costing $20,000 with $4,000 accumulated depreciation are sold for $8,000: Book Value = $20,000 - $4,000 = $16,000 Gain/Loss = $8,000 (cash received) - $16,000 (book value) = -$8,000 (loss)

Dividends

Declaration and Payment

Corporations distribute profits to shareholders in the form of dividends. The process involves declaration, recording, and payment.

• Declaration Date: The date the board of directors announces the dividend.

• Payment Date: The date the dividend is paid to shareholders.

• Journal Entry for Declaration: Debit Retained Earnings, Credit Dividends Payable.

• Example Table:

• Total Dividends: $27,500 + $5,750 = $33,250

• Journal Entry: Debit Retained Earnings $33,250, Credit Dividends Payable $33,250

Additional info: Some explanations and examples have been expanded for clarity and completeness based on standard Financial Accounting curriculum.