View
237
Download
2
Tags:
Embed Size (px)
Citation preview
7-3
1. Identify items considered cash.
2. Indicate how to report cash and related items.
3. Define receivables and identify the different types of receivables.
4. Explain accounting issues related to recognition of accounts receivable.
5. Explain accounting issues related to valuation of accounts receivable.
6. Explain accounting issues related to recognition and valuation of notes
receivable.
7. Explain the fair value option.
8. Explain accounting issues related to disposition of accounts and notes
receivable.
9. Describe how to report and analyze receivables.
Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives
7-4
What is cash?
Reporting cash
Summary of cash-related items
CashSpecial Issues
Recognition of notes receivable
Valuation of notes receivable
Cash and ReceivablesCash and ReceivablesCash and ReceivablesCash and Receivables
Accounts Receivable
Notes Receivable
Recognition of accounts receivable
Valuation of accounts receivable
Fair value option
Disposition of accounts and notes receivable
Presentation and analysis
7-5
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
7-6
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.
7-7
Companies segregate restricted cash from “regular” cash.
Examples, restricted for:
(1) plant expansion, (2) retirement of long-term debt,
and (3) compensating balances.
Reporting CashReporting CashReporting CashReporting Cash
LO 2
Restricted Cash
Illustration 7-1
7-8
Company writes a check for more than the amount in its cash account.
Reporting CashReporting CashReporting CashReporting Cash
LO 2 Indicate how to report cash and related items.
Bank Overdrafts
Generally reported as a current liability.
Offset against other cash accounts only when accounts
are with the same bank.
7-9
Summary of Cash-Related ItemsSummary of Cash-Related ItemsSummary of Cash-Related ItemsSummary of Cash-Related Items
LO 2
Illustration 7-2
7-10
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
7-11
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.
7-12
Nontrade Receivables
Accounts ReceivableAccounts ReceivableAccounts ReceivableAccounts Receivable
LO 3 Define receivables and identify the different types of receivables.
Illustration 7-3
7-13
Recognition of Accounts ReceivablesRecognition of Accounts ReceivablesRecognition of Accounts ReceivablesRecognition of Accounts Receivables
LO 4 Explain accounting issues related to recognition of accounts receivable.
Reductions from the list
price
Not recognized in the
accounting records
Customers are billed net of
discounts
10 %
Discount for
new Retail
Store
Customers
Trade Discounts
7-14
Recognition of Accounts ReceivablesRecognition of Accounts ReceivablesRecognition of Accounts ReceivablesRecognition of Accounts Receivables
LO 4 Explain accounting issues related to recognition of accounts receivable.
Inducements for prompt
payment
Gross Method vs. Net
Method
Cash Discounts
Payment terms are 2/10, n/30
7-15
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
7-16
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
7-17
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
7-18
E7-5: On June 3, Bolton Company sold to Arquette Company
merchandise having a sale price of $2,000 with terms of 2/10, n/60,
f.o.b. shipping point. Prepare the journal entries on Bolton Company
books to record the sale assuming Bolton records sales using the net
method, and Arquette did not remit payment until July 29.
Sales
1,960
Accounts receivable 1,960June 3
Recognition of Accounts ReceivablesRecognition of Accounts ReceivablesRecognition of Accounts ReceivablesRecognition of Accounts Receivables
LO 4 Explain accounting issues related to recognition of accounts receivable.
Cash 2,000
Accounts receivable 1,960
Sales Discounts Forfeited 40
June 12
7-19
A company should measure receivables in terms of their present value.
Non-Recognition of Interest Element
LO 4 Explain accounting issues related to recognition of accounts receivable.
In practice, companies ignore interest revenue related to accounts receivable because, for current assets, the amount of the discount is not usually material in relation to the net income for the period.
Recognition of Accounts ReceivablesRecognition of Accounts ReceivablesRecognition of Accounts ReceivablesRecognition of Accounts Receivables
7-20
How are these accounts presented on the Balance Sheet?How are these accounts presented on the Balance Sheet?
Accounts ReceivableAllowance for
Doubtful Accounts
Beg. 500 25 Beg.
End. 500 25 End.
Recognition of Accounts ReceivablesRecognition of Accounts ReceivablesRecognition of Accounts ReceivablesRecognition of Accounts Receivables
LO 4 Explain accounting issues related to recognition of accounts receivable.
7-21 LO 4 Explain accounting issues related to recognition of accounts receivable.
Current Assets:
Cash 346$
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
7-22 LO 4 Explain accounting issues related to recognition of accounts receivable.
Current Assets:
Cash 346$
Accounts receivable, net of $25 allowance 475
Inventory 812
Prepaids 40
Total current assets 1,673
Fixed Assets:
Office equipment 5,679
Furniture & fixtures 6,600
Less: Accumulated depreciation (3,735)
Total fixed assets 8,544 Total Assets 10,217$
Assets
Accounts ReceivableAccounts ReceivableAccounts ReceivableAccounts Receivable
7-23
Journal entry for credit sale of $100?Journal entry for credit sale of $100?
Accounts receivableAccounts receivable 100100
SalesSales 100 100
Accounts ReceivableAllowance for
Doubtful Accounts
Beg. 500 25 Beg.
End. 500 25 End.
Accounts ReceivableAccounts ReceivableAccounts ReceivableAccounts Receivable
LO 4 Explain accounting issues related to recognition of accounts receivable.
7-24
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
7-25
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. 600 25 End.
Sale 100
Accounts ReceivableAccounts ReceivableAccounts ReceivableAccounts Receivable
LO 4 Explain accounting issues related to recognition of accounts receivable.
7-26
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.
7-27
Adjustment of $15 for estimated Bad-Debts?Adjustment of $15 for estimated Bad-Debts?
Bad debt expenseBad debt expense 1515
Allowance for Doubtful AccountsAllowance for Doubtful Accounts 1515
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.
7-28
Adjustment of $15 for estimated Bad-Debts?Adjustment of $15 for estimated Bad-Debts?
Bad debt expenseBad debt expense 1515
Allowance for Doubtful AccountsAllowance for Doubtful Accounts 1515
Accounts ReceivableAllowance for
Doubtful Accounts
Beg. 500 25 Beg.
End. 267 40 End.
Sale 100 333 Coll.
15 Est.
Accounts ReceivableAccounts ReceivableAccounts ReceivableAccounts Receivable
LO 4 Explain accounting issues related to recognition of accounts receivable.
7-29
Write-off of uncollectible accounts for $10?Write-off of uncollectible accounts for $10?
Allowance for Doubtful accountsAllowance for Doubtful accounts 1010
Accounts receivableAccounts receivable 1010
Accounts ReceivableAllowance for
Doubtful Accounts
Beg. 500 25 Beg.
End. 267 40 End.
Sale 100 333 Coll.
15 Est.
Accounts ReceivableAccounts ReceivableAccounts ReceivableAccounts Receivable
LO 4 Explain accounting issues related to recognition of accounts receivable.
7-30
Write-off of uncollectible accounts for $10? Write-off of uncollectible accounts for $10?
Allowance for Doubtful accountsAllowance for Doubtful accounts 1010
Accounts receivableAccounts receivable 1010
Accounts ReceivableAllowance for
Doubtful Accounts
Beg. 500 25 Beg.
End. 257 30 End.
Sale 100 333 Coll.
15 Est. W/O 10 10 W/O
Accounts ReceivableAccounts ReceivableAccounts ReceivableAccounts Receivable
LO 4 Explain accounting issues related to recognition of accounts receivable.
7-31 LO 4 Explain accounting issues related to recognition of accounts receivable.
Current Assets:
Cash 13$
Accounts receivable, net of $30 allowance 227
Inventory 812
Prepaids 40
Total current assets 1,092
Fixed Assets:
Office equipment 5,679
Furniture & fixtures 6,600
Less: Accumulated depreciation (3,735)
Total fixed assets 8,544 Total Assets 9,636$
Assets
Accounts ReceivableAccounts ReceivableAccounts ReceivableAccounts Receivable
7-32 LO 5 Explain accounting issues related to valuation of accounts receivable.
Valuation of Accounts ReceivableValuation of Accounts ReceivableValuation of Accounts ReceivableValuation of Accounts Receivable
An uncollectible account receivable is a loss of revenue that
requires, through proper entry in the accounts,
a decrease in the asset accounts receivable and
a related decrease in income and stockholders’ equity.
Uncollectible Accounts Receivable
7-33 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
7-34 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
7-35 LO 5 Explain accounting issues related to valuation of accounts receivable.
Percentage-of-Sales Approach
Percentage based upon past experience and
anticipate credit policy.
Achieves proper matching of costs with revenues.
Existing balance in Allowance account not considered.
Valuation of Accounts ReceivableValuation of Accounts ReceivableValuation of Accounts ReceivableValuation of Accounts Receivable
7-36 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
7-37 LO 5 Explain accounting issues related to valuation of accounts receivable.
Percentage-of-Receivables Approach
Not matching.
Reports receivables at realizable value.
Companies may apply this method using
one composite rate, or
an aging schedule using different rates.
Valuation of Accounts ReceivableValuation of Accounts ReceivableValuation of Accounts ReceivableValuation of Accounts Receivable
7-38 LO 5 Explain accounting issues related to valuation of accounts receivable.
Bad Debt Expense 37,650
Allowance for Doubtful Accounts 37,650
What entry would Wilson
make assuming that no balanceexisted in the
allowance account?
Illustration 7-8Accounts Receivable Aging Schedule
Valuation of Accounts ReceivableValuation of Accounts ReceivableValuation of Accounts ReceivableValuation of Accounts Receivable
7-39 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
7-40
Valuation of Accounts ReceivableValuation of Accounts ReceivableValuation of Accounts ReceivableValuation of Accounts Receivable
LO 5 Explain accounting issues related to valuation of accounts receivable.
E7-7 (Recording Bad Debts): Sandel Company reports the following financial information before adjustments.
Instructions: Prepare the journal entry to record bad debt
expense assuming Sandel Company estimates bad debts at
(a) 1% of net sales and (b) 5% of accounts receivable.
7-41
Valuation of Accounts ReceivableValuation of Accounts ReceivableValuation of Accounts ReceivableValuation of Accounts Receivable
LO 5LO 5
E7-7 (Recording Bad Debts): Sandel Company reports the following financial information before adjustments.
Instructions: Prepare the journal entry assuming Sandel
estimates bad debts at (a) 1% of net sales.
Bad Debt Expense 7,500
Allowance for Doubtful Accounts 7,500($800,000 – $50,000) x 1% = $7,500
LO 5
7-42
Valuation of Accounts ReceivableValuation of Accounts ReceivableValuation of Accounts ReceivableValuation of Accounts Receivable
LO 5LO 5
E7-7 (Recording Bad Debts): Sandel Company reports the following financial information before adjustments.
Instructions: Prepare the journal entry assuming Sandel
estimates bad debts at (b) 5% of accounts receivable.
Bad Debt Expense 6,000
Allowance for Doubtful Accounts 6,000($160,000 x 5%) – $2,000) = $6,000
LO 5
7-43
Illustration: Assume that the financial vice president of Brown Furniture authorizes a write-off of the $1,000 balance owed by Randall Co. on March 1, 2012. The entry to record the write-off is:
Allowance for Doubtful Accounts 1,000
Accounts Receivable1,000
Assume that on July 1, Randall Co. pays the $1,000 amount that Brown had written off on March 1. These are the entries:
Accounts Receivable 1,000Allowance for Doubtful Accounts
1,000
Cash 1,000Accounts Receivable
1,000
Valuation of Accounts ReceivableValuation of Accounts ReceivableValuation of Accounts ReceivableValuation of Accounts Receivable
LO 5
7-44
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).
7-45
Recognition of Notes ReceivableRecognition of Notes ReceivableRecognition of Notes ReceivableRecognition of Notes Receivable
LO 6 Explain accounting issues related to recognition of notes receivable.
Generally originate from:
Customers who need to extend payment period of
an outstanding receivable.
High-risk or new customers.
Loans to employees and subsidiaries.
Sales of property, plant, and equipment.
Lending transactions (the majority of notes).
7-46 LO 6 Explain accounting issues related to recognition of notes receivable.
Recognition of Notes ReceivableRecognition of Notes ReceivableRecognition of Notes ReceivableRecognition of Notes Receivable
Short-Term Long-Term
Record at Face Value,
less allowance
Record at Present Value
of cash expected to be collected
Interest Rates
Stated rate = Market rate
Stated rate > Market rate
Stated rate < Market rate
Note Issued at
Face Value
Premium
Discount
7-47
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
7-48
$1,000 x 2.48685 = $2,487
Interest Received Factor Present Value
Note Issued at Face ValueNote Issued at Face ValueNote Issued at Face ValueNote Issued at Face Value
PV of Interest
LO 6 Explain accounting issues related to recognition of notes receivable.
7-49
$10,000 x .75132 = $7,513
Principal Factor Present Value
Note Issued at Face ValueNote Issued at Face ValueNote Issued at Face ValueNote Issued at Face Value
PV of Principal
LO 6 Explain accounting issues related to recognition of notes receivable.
7-50
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
7-51
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
7-52
$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.
7-53 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
7-54
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
7-55
Illustration: Morgan Corp. makes a loan to Marie Co. and receives in exchange a three-year, $10,000 note bearing interest at 10 percent annually. The market rate of interest for a note of similar risk is 12 percent. How does Morgan record the receipt of the note?
Interest-Bearing NoteInterest-Bearing NoteInterest-Bearing NoteInterest-Bearing Note
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 = 12%
n = 3
7-56
$1,000 x 2.40183 = $2,402
Interest Received Factor Present Value
Interest-Bearing NoteInterest-Bearing NoteInterest-Bearing NoteInterest-Bearing Note
PV of Interest
LO 6 Explain accounting issues related to recognition of notes receivable.
7-57
$10,000 x .71178 = $7,118
Principal Factor Present Value
Interest-Bearing NoteInterest-Bearing NoteInterest-Bearing NoteInterest-Bearing Note
PV of Principal
LO 6 Explain accounting issues related to recognition of notes receivable.
7-58
Illustration: How does Morgan record the receipt of the note?
Interest-Bearing NoteInterest-Bearing NoteInterest-Bearing NoteInterest-Bearing Note
LO 6 Explain accounting issues related to recognition of notes receivable.
Illustration 7-14
Notes Receivable 10,000
Discount on Notes Receivable
480
Cash
9,520
7-59 LO 6 Explain accounting issues related to recognition of notes receivable.
Interest-Bearing NoteInterest-Bearing NoteInterest-Bearing NoteInterest-Bearing Note
Illustration 7-15
7-60
Journal Entries for Interest-Bearing Note
Date Account Title Debit Credit
Beg. yr. 1 Notes receivable 10,000
Discount on notes receivable 480
Cash 9,520
End. yr. 1
($9,520 x 12%)
LO 6 Explain accounting issues related to recognition of notes receivable.
Interest-Bearing NoteInterest-Bearing NoteInterest-Bearing NoteInterest-Bearing Note
Cash 1,000
Discount on notes receivable 142
Interest revenue1,142
7-61
Recognition of Notes ReceivableRecognition of Notes ReceivableRecognition of Notes ReceivableRecognition of Notes Receivable
Notes Received for Property, Goods, or Services
LO 6 Explain accounting issues related to recognition of notes receivable.
In a bargained transaction entered into at arm’s length, the
stated interest rate is presumed to be fair unless:
1. No interest rate is stated, or
2. Stated interest rate is unreasonable, or
3. Face amount of the note is materially different from the
current cash sales price.
7-62
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
7-63
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.
7-64
Valuation of Notes ReceivableValuation of Notes ReceivableValuation of Notes ReceivableValuation of Notes Receivable
LO 7 Explain the fair value option.
Illustration (recording fair value option): Assume that
Escobar Company has notes receivable that have a fair value of
$810,000 and a carrying amount of $620,000. Escobar decides
on December 31, 2012, to use the fair value option for these
receivables. This is the first valuation of these recently acquired
receivables. At December 31, 2012, Escobar makes an
adjusting entry to record the increase in value of Notes
Receivable and to record the unrealized holding gain, as follows.
Notes Receivable 190,000
Unrealized Holding Gain or Loss—Income 190,000
7-65
Disposition of Accounts and Notes ReceivableDisposition of Accounts and Notes ReceivableDisposition of Accounts and Notes ReceivableDisposition of Accounts and Notes Receivable
Owner may transfer accounts or notes receivables to another company for cash.
Reasons:
Competition.
Sell receivables because money is tight.
Billing / collection are time-consuming and costly.
Transfer accomplished by:
1. Secured borrowing
2. Sale of receivables
LO 8 Explain accounting issues related to disposition of accounts and notes receivable.
7-66
Disposition of Accounts and Notes ReceivableDisposition of Accounts and Notes ReceivableDisposition of Accounts and Notes ReceivableDisposition of Accounts and Notes Receivable
Secured Borrowing
Illustration: March 1, 2012, Howat Mills, Inc. provides
(assigns) $700,000 of its accounts receivable to Citizens Bank
as collateral for a $500,000 note. Howat Mills continues to
collect the accounts receivable; the account debtors are not
notified of the arrangement. Citizens Bank assesses a finance
charge of 1 percent of the accounts receivable and interest on
the note of 12 percent. Howat Mills makes monthly payments to
the bank for all cash it collects on the receivables.
LO 8 Explain accounting issues related to disposition of accounts and notes receivable.
7-67 LO 8
Secured Borrowing - IllustrationSecured Borrowing - IllustrationSecured Borrowing - IllustrationSecured Borrowing - Illustration
Illustration 7-16
7-68
E7-13: On April 1, 2012, Prince Company assigns $500,000 of its
accounts receivable to the Third National Bank as collateral for a $300,000
loan due July 1, 2012. The assignment agreement calls for Prince Company
to continue to collect the receivables. Third National Bank assesses a
finance charge of 2% of the accounts receivable, and interest on the loan is
10% (a realistic rate of interest for a note of this type).
Secured Borrowing - ExerciseSecured Borrowing - ExerciseSecured Borrowing - ExerciseSecured Borrowing - Exercise
Instructions:
a) Prepare the April 1, 2012, journal entry for Prince Company.
b) Prepare the journal entry for Prince’s collection of $350,000 of the accounts receivable during the period from April 1, 2012, through June 30, 2012.
c) On July 1, 2012, Prince paid Third National all that was due from the loan it secured on April 1, 2012.
LO 8 Explain accounting issues related to disposition of accounts and notes receivable.
7-69
Exercise 7-13 continued
Date Account Title Debit Credit
(a) Cash 290,000
Finance Charge 10,000
Notes Payable 300,000
($500,000 x 2% = $10,000)
(b) Cash 350,000
Accounts Receivable 350,000
(c) Notes Payable 300,000
Interest Expense 7,500
Cash 307,500
(10% x $300,000 x 3/12 = $7,500)
Secured Borrowing - ExerciseSecured Borrowing - ExerciseSecured Borrowing - ExerciseSecured Borrowing - Exercise
LO 8
7-70
Factors are finance companies or banks that buy receivables from businesses for a fee.
Sales of ReceivablesSales of ReceivablesSales of ReceivablesSales of Receivables
Illustration 7-17
LO 8 Explain accounting issues related to disposition of accounts and notes receivable.
7-71
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.
7-72
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.
7-73
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
7-74
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.
7-75
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.
7-76
1. Segregate the different types of receivables that a company
possesses, if material.
2. Appropriately offset the valuation accounts against the proper
receivable accounts.
3. Determine that receivables classified in the current assets
section will be converted into cash within the year or the
operating cycle, whichever is longer.
4. Disclose any loss contingencies that exist on the receivables.
5. Disclose any receivables designated or pledged as collateral.
6. Disclose the nature of credit risk inherent in the receivables.
Presentation and AnalysisPresentation and AnalysisPresentation and AnalysisPresentation and Analysis
LO 9 Describe how to report and analyze receivables.
Presentation of Receivables
7-77
Analysis of Receivables
Presentation and AnalysisPresentation and AnalysisPresentation and AnalysisPresentation and Analysis
This Ratio used to:
Assess the liquidity of the receivables.
Measure the number of times, on average, a company
collects receivables during the period.
Illustration 7-24
LO 9 Describe how to report and analyze receivables.
7-78 LO 10 Explain common techniques employed to control cash.
Management faces two problems in accounting for cash transactions:
1. Establish proper controls to prevent any unauthorized transactions by officers or employees.
2. Provide information necessary to properly manage cash on hand and cash transactions.
APPENDIXAPPENDIX 7A CASH CONTROLS
7-79 LO 10 Explain common techniques employed to control cash.
To obtain desired control objectives, a company can vary the number and location of banks and the types of accounts.
General checking account
Collection float.
Lockbox accounts
Imprest bank accounts
Using Bank Accounts
APPENDIXAPPENDIX 7A CASH CONTROLS
7-80 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
7-81
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
7-82
Steps:
LO 10 Explain common techniques employed to control cash.
The Imprest Petty Cash System
Cash 50
Petty cash 50
4. If the company decides that the amount of cash in the petty cash fund is excessive by $50, it lowers the fund balance as follows.
APPENDIXAPPENDIX 7A CASH CONTROLS
7-83 LO 10 Explain common techniques employed to control cash.
Physical Protection of Cash Balances
Company should
Minimize the cash on hand.
Only have on hand petty cash and current day’s receipts.
Keep funds in a vault, safe, or locked cash drawer.
Transmit each day’s receipts to the bank as soon as practicable.
Periodically prove (reconcile) the balance shown in the general ledger.
APPENDIXAPPENDIX 7A CASH CONTROLS
7-84 LO 10 Explain common techniques employed to control cash.
Reconciliation of Bank Balances
Schedule explaining any differences between the bank’s and the company’s records of cash.
Reconciling Items:
1. Deposits in transit.
2. Outstanding checks.
3. Bank charges and credits.
4. Bank or Depositor errors.
Time Lags
APPENDIXAPPENDIX 7A CASH CONTROLS
7-85 LO 10 Explain common techniques employed to control cash.
Reconciliation of Bank Balances Illustration 7A-1Bank Reconciliation Form and Content
APPENDIXAPPENDIX 7A CASH CONTROLS
7-88
Cash 542Nov. 30
Office expense 18
Accounts receivable 220
Accounts payable
180Interest revenue
600
Illustration: Journalize the adjusting entries at November 30 on the books of Nugget Mining Company.
LO 10 Explain common techniques employed to control cash.
APPENDIXAPPENDIX 7A CASH CONTROLS
7-89
The reconciling item in a bank reconciliation that will result
in an adjusting entry by the depositor is:
a. outstanding checks.
b. deposit in transit.
c. a bank error.
d. bank service charges.
Review Question
LO 10 Explain common techniques employed to control cash.
APPENDIXAPPENDIX 7A CASH CONTROLS
7-90
APPENDIXAPPENDIX 7B IMPAIRMENT OF RECEIVABLES
LO 11 Describe the accounting for a loan impairment.
Companies evaluate their receivables to determine their ultimate collectibility.
Allowance method is appropriate when:
probable that an asset has been impaired and
amount of the loss can be reasonably estimated.
Long-term receivables such as loans that are identified as impaired, companies perform an additional impairment evaluation.
7-91 LO 11 Describe the accounting for a loan impairment.
Impairment Measurement and Reporting
Impairment loss is calculated as the difference between
the investment in the loan (generally the principal plus
accrued interest) and
the expected future cash flows discounted at the loan’s
historical effective interest rate.
APPENDIXAPPENDIX 7B IMPAIRMENT OF RECEIVABLES
7-92 LO 11 Describe the accounting for a loan impairment.
Illustration: At December 31, 2011, Ogden Bank recorded an
investment of $100,000 in a loan to Carl King. The loan has an
historical effective-interest rate of 10 percent, the principal is due in full
at maturity in three years, and interest is due annually. The loan officer
performs a review of the loan’s expected future cash flow and utilizes
the present value method for measuring the required impairment loss.
Illustration 7B-1
APPENDIXAPPENDIX 7B IMPAIRMENT OF RECEIVABLES
7-93 LO 11 Describe the accounting for a loan impairment.
Illustration: Computation of Impairment LossIllustration 7B-2
Recording Impairment Losses
Bad Debt Expense 12,437
Allowance for Doubtful Accounts 12,437
APPENDIXAPPENDIX 7B IMPAIRMENT OF RECEIVABLES
7-94
Copyright © 2011 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted in
Section 117 of the 1976 United States Copyright Act without the
express written permission of the copyright owner is unlawful.
Request for further information should be addressed to the
Permissions Department, John Wiley & Sons, Inc. The purchaser
may make back-up copies for his/her own use only and not for
distribution or resale. The Publisher assumes no responsibility for
errors, omissions, or damages, caused by the use of these
programs or from the use of the information contained herein.
CopyrightCopyrightCopyrightCopyright