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7-1 Intermediate Accounting 14th Edition 7 Cash and Receivables Kieso, Weygandt, and Warfield

7-1 Intermediate Accounting 14th Edition 7 Cash and Receivables Kieso, Weygandt, and Warfield

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Page 1: 7-1 Intermediate Accounting 14th Edition 7 Cash and Receivables Kieso, Weygandt, and Warfield

7-1

Intermediate Accounting

14th Edition

7 Cash and Receivables

Kieso, Weygandt, and Warfield

Page 2: 7-1 Intermediate Accounting 14th Edition 7 Cash and Receivables Kieso, Weygandt, and Warfield

7-2

Most liquid asset

Standard medium of exchange

Basis for measuring and accounting for all items

Current asset

Examples: coin, currency, available funds on deposit at

the bank, money orders, certified checks, cashier’s checks,

personal checks, bank drafts and savings accounts.

What is Cash?What is Cash?What is Cash?What is Cash?

LO 1 Identify items considered cash.

Cash

Page 3: 7-1 Intermediate Accounting 14th Edition 7 Cash and Receivables Kieso, Weygandt, and Warfield

7-3

Short-term, highly liquid investments that are both

Reporting CashReporting CashReporting CashReporting Cash

LO 2 Indicate how to report cash and related items.

Cash Equivalents

(a) readily convertible to cash, and

(b) so near their maturity that they present insignificant risk of changes in interest rates.

Examples: Treasury bills, Commercial paper, and Money market funds.

Page 4: 7-1 Intermediate Accounting 14th Edition 7 Cash and Receivables Kieso, Weygandt, and Warfield

7-4

Summary of Cash-Related ItemsSummary of Cash-Related ItemsSummary of Cash-Related ItemsSummary of Cash-Related Items

LO 2

Illustration 7-2

Page 5: 7-1 Intermediate Accounting 14th Edition 7 Cash and Receivables Kieso, Weygandt, and Warfield

7-5

Accounts ReceivableAccounts ReceivableAccounts ReceivableAccounts Receivable

LO 3 Define receivables and identify the different types of receivables.

Written promises to pay a sum of money on a

specified future date.

Receivables - Claims held against customers and others for money, goods, or services.

Oral promises of the purchaser to pay for goods

and services sold.

Accounts Accounts ReceivableReceivableAccounts Accounts

ReceivableReceivableNotes Notes

ReceivableReceivableNotes Notes

ReceivableReceivable

Page 6: 7-1 Intermediate Accounting 14th Edition 7 Cash and Receivables Kieso, Weygandt, and Warfield

7-6

Nontrade Receivables

1. Advances to officers and employees.

2. Advances to subsidiaries.

3. Deposits to cover potential damages or losses.

4. Deposits as a guarantee of performance or payment.

5. Dividends and interest receivable.

6. Claims against: Insurance companies for casualties sustained;

defendants under suit; governmental bodies for tax refunds; common carriers for damaged or lost goods; creditors for returned, damaged, or lost goods; customers for returnable items (crates, containers, etc.).

Accounts ReceivableAccounts ReceivableAccounts ReceivableAccounts Receivable

LO 3 Define receivables and identify the different types of receivables.

Page 7: 7-1 Intermediate Accounting 14th Edition 7 Cash and Receivables Kieso, Weygandt, and Warfield

7-7

Recognition of Accounts ReceivablesRecognition of Accounts ReceivablesRecognition of Accounts ReceivablesRecognition of Accounts Receivables

LO 4 Explain accounting issues related to recognition of accounts receivable.

Cash Discounts (Sales Discounts)Illustration 7-4

Page 8: 7-1 Intermediate Accounting 14th Edition 7 Cash and Receivables Kieso, Weygandt, and Warfield

7-8

E7-5: On June 3, Bolton Company sold to Arquette Company

merchandise having a sale price of $2,000 with terms of 2/10, n/60,

f.o.b. shipping point. On June 12, the company received a check for

the balance due from Arquette Company. Prepare the journal entries

on Bolton Company books to record the sale assuming Bolton

records sales using the gross method.

Sales

2,000

Accounts receivable 2,000June 3

Recognition of Accounts ReceivablesRecognition of Accounts ReceivablesRecognition of Accounts ReceivablesRecognition of Accounts Receivables

LO 4 Explain accounting issues related to recognition of accounts receivable.

Cash ($2,000 x 98%) 1,960

Sales discounts 40

Accounts receivable 2,000

June 12

Page 9: 7-1 Intermediate Accounting 14th Edition 7 Cash and Receivables Kieso, Weygandt, and Warfield

7-9

E7-5: On June 3, Bolton Company sold to Arquette Company

merchandise having a sale price of $2,000 with terms of 2/10, n/60,

f.o.b. shipping point. On June 12, the company received a check for

the balance due from Arquette Company. Prepare the journal entries

on Bolton Company books to record the sale assuming Bolton

records sales using the net method.

Sales

1,960

Accounts receivable 1,960June 3

Recognition of Accounts ReceivablesRecognition of Accounts ReceivablesRecognition of Accounts ReceivablesRecognition of Accounts Receivables

LO 4 Explain accounting issues related to recognition of accounts receivable.

Cash ($2,000 x 98%) 1,960

Accounts receivable 1,960

June 12

Page 10: 7-1 Intermediate Accounting 14th Edition 7 Cash and Receivables Kieso, Weygandt, and Warfield

7-10

E7-5: On June 3, Bolton Company sold to Arquette Company

merchandise having a sale price of $2,000 with terms of 2/10, n/60,

f.o.b. shipping point. Prepare the journal entries on Bolton Company

books to record the sale assuming Bolton records sales using the net

method, and Arquette did not remit payment until July 29.

Sales

1,960

Accounts receivable 1,960June 3

Recognition of Accounts ReceivablesRecognition of Accounts ReceivablesRecognition of Accounts ReceivablesRecognition of Accounts Receivables

LO 4 Explain accounting issues related to recognition of accounts receivable.

Cash 2,000

Accounts receivable 1,960

Sales Discounts Forfeited 40

June 12

Page 11: 7-1 Intermediate Accounting 14th Edition 7 Cash and Receivables Kieso, Weygandt, and Warfield

7-11

How are these accounts presented on the Balance Sheet?How are these accounts presented on the Balance Sheet?

Accounts ReceivableAllowance for

Doubtful Accounts

Beg. 500 25 Beg.

End. 500 25 End.

Recognition of Accounts ReceivablesRecognition of Accounts ReceivablesRecognition of Accounts ReceivablesRecognition of Accounts Receivables

LO 4 Explain accounting issues related to recognition of accounts receivable.

Page 12: 7-1 Intermediate Accounting 14th Edition 7 Cash and Receivables Kieso, Weygandt, and Warfield

7-12 LO 4 Explain accounting issues related to recognition of accounts receivable.

Current Assets:

Cash 346$

Accounts receivable 500

Less: Allowance for doubtful accounts (25) 475

Inventory 812

Prepaids 40

Total current assets 1,673

Fixed Assets:

Office equipment 5,679

Furniture & fixtures 6,600

Less: Accumulated depreciation (3,735)

Total fixed assets 8,544 Total Assets 10,217$

Assets

Accounts ReceivableAccounts ReceivableAccounts ReceivableAccounts Receivable

Page 13: 7-1 Intermediate Accounting 14th Edition 7 Cash and Receivables Kieso, Weygandt, and Warfield

7-13

Accounts ReceivableAllowance for

Doubtful Accounts

Beg. 500 25 Beg.

End. 600 25 End.

Sale 100

Accounts ReceivableAccounts ReceivableAccounts ReceivableAccounts Receivable

LO 4 Explain accounting issues related to recognition of accounts receivable.

Journal entry for credit sale of $100?Journal entry for credit sale of $100?

Accounts receivableAccounts receivable 100100

SalesSales 100 100

Page 14: 7-1 Intermediate Accounting 14th Edition 7 Cash and Receivables Kieso, Weygandt, and Warfield

7-14

Collected of $333 on account?Collected of $333 on account?

CashCash 333333

Accounts receivableAccounts receivable 333333

Accounts ReceivableAllowance for

Doubtful Accounts

Beg. 500 25 Beg.

End. 267 25 End.

Sale 100 333 Coll.

Accounts ReceivableAccounts ReceivableAccounts ReceivableAccounts Receivable

LO 4 Explain accounting issues related to recognition of accounts receivable.

Page 15: 7-1 Intermediate Accounting 14th Edition 7 Cash and Receivables Kieso, Weygandt, and Warfield

7-15 LO 5 Explain accounting issues related to valuation of accounts receivable.

Allowance MethodAllowance Method

Losses are Estimated:

Percentage-of-sales.

Percentage-of-receivables.

GAAP requires when material in amount.

Methods of Accounting for Uncollectible Accounts

Direct Write-OffDirect Write-Off

Theoretically deficient:

No matching.

Receivable not stated at cash realizable value.

Not GAAP when material in amount.

Valuation of Accounts ReceivableValuation of Accounts ReceivableValuation of Accounts ReceivableValuation of Accounts Receivable

Page 16: 7-1 Intermediate Accounting 14th Edition 7 Cash and Receivables Kieso, Weygandt, and Warfield

7-16 LO 5 Explain accounting issues related to valuation of accounts receivable.

Emphasis on the Income Statement

relationships

Emphasis on the Income Statement

relationships

Emphasis on the Balance

Sheet relationships

Emphasis on the Balance

Sheet relationships

Illustration 7-6

Valuation of Accounts ReceivableValuation of Accounts ReceivableValuation of Accounts ReceivableValuation of Accounts Receivable

Page 17: 7-1 Intermediate Accounting 14th Edition 7 Cash and Receivables Kieso, Weygandt, and Warfield

7-17 LO 5

Illustration: Gonzalez Company estimates from past experience

that about 1% of credit sales become uncollectible. If net credit

sales are $800,000 in 2012, it records bad debt expense as

follows.Bad Debt Expense 8,000

Allowance for Doubtful Accounts 8,000

Illustration 7-7

Valuation of Accounts ReceivableValuation of Accounts ReceivableValuation of Accounts ReceivableValuation of Accounts Receivable

Page 18: 7-1 Intermediate Accounting 14th Edition 7 Cash and Receivables Kieso, Weygandt, and Warfield

7-18 LO 5 Explain accounting issues related to valuation of accounts receivable.

Bad Debt Expense ($37,650 – $800) 36,850

Allowance for Doubtful Accounts 36,850

What entry would Wilson

make assuming the allowance account had a credit balance of $800 before

adjustment?

Illustration 7-8Accounts Receivable Aging Schedule

Valuation of Accounts ReceivableValuation of Accounts ReceivableValuation of Accounts ReceivableValuation of Accounts Receivable

Page 19: 7-1 Intermediate Accounting 14th Edition 7 Cash and Receivables Kieso, Weygandt, and Warfield

7-19

Supported by a formal promissory note.

Recognition of Notes ReceivableRecognition of Notes ReceivableRecognition of Notes ReceivableRecognition of Notes Receivable

LO 6 Explain accounting issues related to recognition of notes receivable.

Notes Receivable

A negotiable instrument.

Maker signs in favor of a Payee.

Interest-bearing (has a stated rate of interest) OR

Zero-interest-bearing (interest included in face amount).

Page 20: 7-1 Intermediate Accounting 14th Edition 7 Cash and Receivables Kieso, Weygandt, and Warfield

7-20

Illustration: Bigelow Corp. lends Scandinavian Imports $10,000 in exchange for a $10,000, three-year note bearing interest at 10 percent annually. The market rate of interest for a note of similar risk is also 10 percent. How does Bigelow record the receipt of the note?

Note Issued at Face ValueNote Issued at Face ValueNote Issued at Face ValueNote Issued at Face Value

LO 6 Explain accounting issues related to recognition of notes receivable.

0 1 2 3

1,000 1,000 Interest$1,000

$10,000 Principal

4

i = 10%

n = 3

Page 21: 7-1 Intermediate Accounting 14th Edition 7 Cash and Receivables Kieso, Weygandt, and Warfield

7-21

Summary Present value of interest $ 2,487

Present value of principal 7,513

Note current market value $10,000

Date Account Title Debit Credit

J an. yr. 1

Dec. yr. 1

Note Issued at Face ValueNote Issued at Face ValueNote Issued at Face ValueNote Issued at Face Value

LO 6 Explain accounting issues related to recognition of notes receivable.

Notes receivable 10,000

Cash 10,000

Cash 1,000

Interest revenue1,000

Page 22: 7-1 Intermediate Accounting 14th Edition 7 Cash and Receivables Kieso, Weygandt, and Warfield

7-22

Illustration: Jeremiah Company receives a three-year, $10,000 zero-interest-bearing note. The market rate of interest for a note of similar risk is 9 percent. How does Jeremiah record the receipt of the note?

Zero-Interest-Bearing NoteZero-Interest-Bearing NoteZero-Interest-Bearing NoteZero-Interest-Bearing Note

LO 6 Explain accounting issues related to recognition of notes receivable.

0 1 2 3

$0 $0 Interest$0

$10,000 Principal

4

i = 9%

n = 3

Page 23: 7-1 Intermediate Accounting 14th Edition 7 Cash and Receivables Kieso, Weygandt, and Warfield

7-23

$10,000 x .77218 = $7,721.80

Principal Factor Present Value

Zero-Interest-Bearing NoteZero-Interest-Bearing NoteZero-Interest-Bearing NoteZero-Interest-Bearing Note

PV of Principal

LO 6 Explain accounting issues related to recognition of notes receivable.

Page 24: 7-1 Intermediate Accounting 14th Edition 7 Cash and Receivables Kieso, Weygandt, and Warfield

7-24 LO 6 Explain accounting issues related to recognition of notes receivable.

Zero-Interest-Bearing NoteZero-Interest-Bearing NoteZero-Interest-Bearing NoteZero-Interest-Bearing Note

Illustration 7-12

Page 25: 7-1 Intermediate Accounting 14th Edition 7 Cash and Receivables Kieso, Weygandt, and Warfield

7-25

Journal Entries for Zero-Interest-Bearing note

Present value of Principal $7,721.80

Date Account Title Debit Credit

Jan. yr. 1 Notes receivable 10,000.00

Discount on notes receivable 2,278.20

Cash 7,721.80

Dec. yr. 1 Discount on notes receivable 694.96

Interest revenue 694.96

($7,721.80 x 9%)

LO 6 Explain accounting issues related to recognition of notes receivable.

Zero-Interest-Bearing NoteZero-Interest-Bearing NoteZero-Interest-Bearing NoteZero-Interest-Bearing Note

Page 26: 7-1 Intermediate Accounting 14th Edition 7 Cash and Receivables Kieso, Weygandt, and Warfield

7-26

Recognition of Notes ReceivableRecognition of Notes ReceivableRecognition of Notes ReceivableRecognition of Notes Receivable

LO 6 Explain accounting issues related to recognition of notes receivable.

Illustration: Oasis Development Co. sold a corner lot to Rusty Pelican as a restaurant site. Oasis accepted in exchange a five-year note having a maturity value of $35,247 and no stated interest rate. The land originally cost Oasis $14,000. At the date of sale the land had a fair market value of $20,000. Oasis uses the fair market value of the land, $20,000, as the present value of the note. Oasis therefore records the sale as:

Notes Receivable 35,247Discount on Notes Receivable

15,247Land

14,000Gain on Sale of Land

6,000

($35,247 - $20,000) = $15,247

Page 27: 7-1 Intermediate Accounting 14th Edition 7 Cash and Receivables Kieso, Weygandt, and Warfield

7-27

Valuation of Notes ReceivableValuation of Notes ReceivableValuation of Notes ReceivableValuation of Notes Receivable

LO 7 Explain the fair value option.

Short-Term reported at Net Realizable Value (same as

accounting for accounts receivable).

Long-Term - FASB requires companies disclose not only

their cost but also their fair value in the notes to the

financial statements.

► Fair Value Option. Companies have the option to use

fair value as the basis of measurement in the financial

statements.

Page 28: 7-1 Intermediate Accounting 14th Edition 7 Cash and Receivables Kieso, Weygandt, and Warfield

7-28

Sale Without Recourse

Purchaser assumes risk of collection

Transfer is outright sale of receivable

Seller records loss on sale

Seller use Due from Factor (receivable) account to cover discounts, returns, and allowances

Sales of ReceivablesSales of ReceivablesSales of ReceivablesSales of Receivables

Sale With Recourse Seller guarantees payment to purchaser

Financial components approach used to record transfer

LO 8 Explain accounting issues related to disposition of accounts and notes receivable.

Page 29: 7-1 Intermediate Accounting 14th Edition 7 Cash and Receivables Kieso, Weygandt, and Warfield

7-29

Sales of ReceivablesSales of ReceivablesSales of ReceivablesSales of Receivables

Illustration: Crest Textiles, Inc. factors $500,000 of accounts

receivable with Commercial Factors, Inc., on a without recourse

basis. Commercial Factors assesses a finance charge of 3 percent of

the amount of accounts receivable and retains an amount equal to 5

percent of the accounts receivable (for probable adjustments). Crest

Textiles and Commercial Factors make the following journal entries

for the receivables transferred without recourse.

Illustration 7-18

LO 8 Explain accounting issues related to disposition of accounts and notes receivable.

Page 30: 7-1 Intermediate Accounting 14th Edition 7 Cash and Receivables Kieso, Weygandt, and Warfield

7-30

Illustration: Assume Crest Textiles sold the receivables on a with

recourse basis. Crest Textiles determines that this recourse

obligation has a fair value of $6,000. To determine the loss on the

sale of the receivables, Crest Textiles computes

the net proceeds from the sale as follows.

Sales of ReceivablesSales of ReceivablesSales of ReceivablesSales of Receivables

Illustration 7-20Loss on Sale Computation

Illustration 7-19Net ProceedsComputation

LO 8

Page 31: 7-1 Intermediate Accounting 14th Edition 7 Cash and Receivables Kieso, Weygandt, and Warfield

7-31

Illustration: Prepare the journal entries for both Crest Textiles and

Commercial Factors for the receivables sold with recourse.

Sales of ReceivablesSales of ReceivablesSales of ReceivablesSales of Receivables

Cash 460,000 Due from Factor 25,000 Loss on Sale of Receivables 21,000

Accounts (Notes) Receivable 500,000

Recourse Liability 6,000Accounts Receivable 500,000

Due to Crest Textiles 25,000

Financing Revenue 15,000

Cash 460,000

Commercial Factors, Inc.

Crest Textiles, Inc.

LO 8 Explain accounting issues related to disposition of accounts and notes receivable.

Page 32: 7-1 Intermediate Accounting 14th Edition 7 Cash and Receivables Kieso, Weygandt, and Warfield

7-32

The FASB

concluded that a

sale occurs only if

the seller surrenders

control of the

receivables to the

buyer.

Three conditions

must be met.

Secured Borrowing versus SaleSecured Borrowing versus SaleSecured Borrowing versus SaleSecured Borrowing versus Sale

Illustration 7-22

LO 8 Explain accounting issues related to disposition of accounts and notes receivable.

Page 33: 7-1 Intermediate Accounting 14th Edition 7 Cash and Receivables Kieso, Weygandt, and Warfield

7-33 LO 10 Explain common techniques employed to control cash.

To pay small amounts for miscellaneous expenses.

The Imprest Petty Cash System

Steps:

1. Record $300 transfer of funds to petty cash:

Petty Cash 300

Cash 300

2. The petty cash custodian obtains signed receipts from each individual to whom he or she pays cash.

APPENDIXAPPENDIX 7A CASH CONTROLS

Page 34: 7-1 Intermediate Accounting 14th Edition 7 Cash and Receivables Kieso, Weygandt, and Warfield

7-34

Steps:

LO 10 Explain common techniques employed to control cash.

The Imprest Petty Cash System

Office Supplies Expense 42

Postage Expense 53

Entertainment Expense 76

Cash Over and Short 2

Cash 173

3. Custodian receives a company check to replenish the fund.

APPENDIXAPPENDIX 7A CASH CONTROLS

Page 35: 7-1 Intermediate Accounting 14th Edition 7 Cash and Receivables Kieso, Weygandt, and Warfield

7-35 LO 10 Explain common techniques employed to control cash.

Reconciliation of Bank Balances Illustration 7A-1Bank Reconciliation Form and Content

APPENDIXAPPENDIX 7A CASH CONTROLS