20-F filing with the SEC, at the following URL:
Then prepare to discuss the following questions about the company, based on what is reported therein:
1. What is accounts receivable, and what other names does this asset go by ?
2. In general, how do accounts receivable differ from notes receivable?
3. What is a contra account, and why is it used?
What contra accounts are associated with Pearsonâ€™s trade receivables (see Note 22 on page F-51)? Further:
a. What types of activities are captured in each of these contra accounts?
b. Describe factors that managers might consider when deciding how to estimate the balance in each of these accounts.
c. Two commonly used approaches for estimating uncollectible accounts receivable are the percentage-of-sales procedure and the aging-of-accounts procedure. Briefly describe
these two approaches, and indicate which one you believe results in the most accurate estimate of net accounts receivable
5. Discuss the risks that managers must consider with respect to accounts receivable and credit
6. Note 22 reports the balance in Pearsonâ€™s provision for bad and doubtful debts (its trade
receivables) and reports the account activity (â€œmovementsâ€) during the years 2012 and 2011.
Note that Pearson refers to this contra account as a â€œprovision,â€ which is IFRS terminology.
Under US GAAP, such an account typically is referred to as an â€œallowance, while the term
â€œprovisionâ€ is used to describe a current period income statement charge, such as bad debt
expense or income tax expense.
a. Use the information in Note 22 to complete a T-account that shows the activity in
Pearsonâ€™s provision for bad and doubtful debts during 2012. Explain, in your own words,
the line items that reconcile the change in the account during 2012.
b. Prepare the journal entries that Pearson recorded during 2012 to capture (1) bad and
doubtful debts expense for the year, and (2) the write-off of accounts receivable during
the year. For each account in your journal entries, indicate whether the account is a
balance sheet account or an income statement account.
7. Note 22 reports that the balance in Pearsonâ€™s provision for sales returns was Â£351 million at
December 31, 2011 and Â£187 million at December 31, 2012. Under US GAAP, this contra
account is typically referred to as an â€œAllowanceâ€ and reflects the companyâ€™s anticipated sales
a. Complete the T-account that shows the activity in the provision for sales returns account
during 2012. Assume that Pearson estimated returns relating to 2012 Sales to be Â£62
million. In reconciling the change in the account, two types of journal entries are
required, one to record the estimated amount of sales returns for the year and another to
record the amount of actual book returns.
b. Prepare the journal entries that Pearson recorded during 2012 to capture (1) the 2012
estimated sales returns, and (2) the amount of actual book returns during 2012. In your
answer, note whether each account in the entries is a balance sheet account or an
income statement account.
c. In which income statement line item does the amount of Pearsonâ€™s 2012 estimated sales
8. Create A T-account for total or gross trade receivables (i.e., before deducting the provision for
bad and doubtful debts and the provision for sales returns). Analyze the change in the T-account
between December 31, 2011 and December 31, 2012. (Hint: Your solutions to questions 6 and 7
will be useful here.) Assume that all sales in 2012 were on account. You may also assume that
there were no changes to the account due to business combinations or foreign exchange rate
changes. Prepare the journal entries to capture the sales on account and accounts receivable
collection activity in this account during 2012.
9. Analysts typically evaluate the time it takes for a company to collect its average accounts
receivable balance. One common measure, accounts receivable turnover, is computed as Net
credit sales, divided by the Average gross accounts receivable. This ratio indicates how many
times per period receivables â€œturn overâ€ (i.e., are collected. Similarly, this ratio leads to another
measure, average collection period in days, which is computed as 365, divided Accounts
Use the table below to compute the average collection period for Pearson during 2012 and 2011.
Assume that all sales are on credit and that Pearsonâ€™s total (gross) trade receivables balance on
December 31, 2010 was Â£1,111 million.
Credit sales, net
Average gross trade receivables
Accounts receivable turnover
Average collection period
10. Referring to the table you completed in question 9., above:
a. Comment on the trend you observe.
b. Provide possible reasons for any change in the average collection period from 2011 to 2012.
c. Suppose, at the end of 2012, you discovered that Pearsonâ€™s average collection period was materially longer than one of its chief competitors. What action steps might you recommend Pearson consider to reduce its collection period? What risks are involved in taking these steps?