Brief Exercise 9: Presented Below Are Three Receivables Tran

Brief Exercise 9 1presented Below Are Three Receivables Transactions

Presented below are three receivables transactions. Indicate whether these receivables are reported as accounts receivable, notes receivable, or other receivables on a balance sheet. (a) Sold merchandise on account for $64,000 to a customer. (b) Received a promissory note of $57,000 for services performed. (c) Advanced $10,000 to an employee.

Sample Paper For Above instruction

Receivables represent amounts due to a business from individuals or other entities, and their classification on the balance sheet depends on the nature and maturity of the receivables. In evaluating the three transactions, it is important to understand the distinctions among accounts receivable, notes receivable, and other receivables.

In the first transaction, the company sold merchandise on account for $64,000 to a customer. This transaction is classified as an account receivable because it results from a sale made on credit, with an expectation of collection within the ordinary operating cycle, typically within 30 to 60 days. Accounts receivable are current assets and are the most common form of receivables reported on the balance sheet.

The second transaction involves receiving a promissory note of $57,000 for services performed. This note receivable has a formal written promise to pay at a specified future date, possibly with interest. Because of its formal documentation and fixed maturity date, this receivable is classified as a notes receivable. Notes receivable are also current assets if they mature within one year or within the operating cycle; if not, they are classified as long-term assets.

In the third transaction, the company advanced $10,000 to an employee. Typically, advances made to employees are considered other receivables because they are not related to normal sales or formalized promissory notes but are short-term advances or loans. They are usually classified as other receivables on the balance sheet unless they are expected to be collected within the normal operating cycle, in which case they may also be classified as current receivables.

In summary, the classifications are as follows:

  • (a) Sold merchandise on account: Accounts receivable
  • (b) Received a promissory note: Notes receivable
  • (c) Advanced to an employee: Other receivables

Understanding these classifications aids in proper financial statement presentation and liquidity analysis, ensuring that stakeholders have a clear view of the company's receivables and their expected cash inflows.

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