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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
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.
7-4
Summary of Cash-Related ItemsSummary of Cash-Related ItemsSummary of Cash-Related ItemsSummary of Cash-Related Items
LO 2
Illustration 7-2
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
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.
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
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
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
7-10
E7-5: On June 3, Bolton Company sold to Arquette Company
merchandise having a sale price of $2,000 with terms of 2/10, n/60,
f.o.b. shipping point. Prepare the journal entries on Bolton Company
books to record the sale assuming Bolton records sales using the net
method, and Arquette did not remit payment until July 29.
Sales
1,960
Accounts receivable 1,960June 3
Recognition of Accounts ReceivablesRecognition of Accounts ReceivablesRecognition of Accounts ReceivablesRecognition of Accounts Receivables
LO 4 Explain accounting issues related to recognition of accounts receivable.
Cash 2,000
Accounts receivable 1,960
Sales Discounts Forfeited 40
June 12
7-11
How are these accounts presented on the Balance Sheet?How are these accounts presented on the Balance Sheet?
Accounts ReceivableAllowance for
Doubtful Accounts
Beg. 500 25 Beg.
End. 500 25 End.
Recognition of Accounts ReceivablesRecognition of Accounts ReceivablesRecognition of Accounts ReceivablesRecognition of Accounts Receivables
LO 4 Explain accounting issues related to recognition of accounts receivable.
7-12 LO 4 Explain accounting issues related to recognition of accounts receivable.
Current Assets:
Cash 346$
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
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
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.
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
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
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
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
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).
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
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
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
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.
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
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
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
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.
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.
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.
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
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.
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.
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
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
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