cash and receivable

Chapter 7-1

Chapter 7-2

C H A P T E R C H A P T E R 77

CASH AND RECEIVABLESCASH AND RECEIVABLES

Intermediate Accounting13th Edition

Kieso, Weygandt, and Warfield

Chapter 7-3

1.1. Identify items considered cash.Identify items considered cash.

2.2. Indicate how to report cash and related items.Indicate how to report cash and related items.

3.3. Define receivables and identify the different types of receivables.Define receivables and identify the different types of receivables.

4.4. Explain accounting issues related to recognition of accounts Explain accounting issues related to recognition of accounts receivable.receivable.

5.5. Explain accounting issues related to valuation of accounts Explain accounting issues related to valuation of accounts receivable.receivable.

6.6. Explain accounting issues related to recognition of notes Explain accounting issues related to recognition of notes receivable.receivable.

7.7. Explain accounting issues related to valuation of notes Explain accounting issues related to valuation of notes receivable.receivable.

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

9.9. Describe how to report and analyze receivables.Describe how to report and analyze receivables.

Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives

Chapter 7-4

What is cash?What is cash?

Reporting cashReporting cash

Summary of cash-Summary of cash-related itemsrelated items

CashCash ReceivablesReceivables

Recognition of accounts Recognition of accounts receivablereceivable

Valuation of accounts Valuation of accounts receivablereceivable

Recognition of notes Recognition of notes receivablereceivable

Valuation of notes Valuation of notes receivablereceivable

Disposition of accounts Disposition of accounts and notes receivableand notes receivable

Presentation and Presentation and analysisanalysis

Cash and ReceivablesCash and ReceivablesCash and ReceivablesCash and Receivables

Chapter 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.LO 1 Identify items considered cash.

Cash

Chapter 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.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.

Chapter 7-7

Companies segregate restricted cash from “regular” cash for reporting purposes.

Examples, restricted for:

(1) plant expansion, (2) retirement of long-term debt, and (3) compensating balances.



Restricted Cash

Illustration 7-1

Chapter 7-8

When a company writes a check for more than the amount in its cash account.



Bank Overdrafts

Generally reported as a current liability.

Offset against cash account only when available cash is present in another account in the same bank on which the overdraft occurred.

Chapter 7-9

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


Illustration 7-2

Chapter 7-10

ReceivablesReceivablesReceivablesReceivables

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

Written promises to pay a sum of money on a specified future date.

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

Chapter 7-11

Nontrade Receivables1. 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:

a) Insurance companies for casualties sustained.b) Defendants under suit.c) Governmental bodies for tax refunds.d) Common carriers for damaged or lost goods.e) Creditors for returned, damaged, or lost goods.f) Customers for returnable items (crates, containers,

etc.).



Chapter 7-12

Nontrade Receivables



Illustration 7-3

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

Trade DiscountsTrade Discounts

Reductions from the list price

Not recognized in the accounting records

Customers are billed net of discounts

Trade DiscountsTrade Discounts

Reductions from the list price

Not recognized in the accounting records

Customers are billed net of discounts

10 % Discount for new Retail Store

Customers

Chapter 7-14



Cash DiscountsCash Discounts

Inducements for Inducements for prompt paymentprompt payment

Gross Method vs. Gross Method vs. Net MethodNet Method

Cash DiscountsCash Discounts

Inducements for Inducements for prompt paymentprompt payment

Gross Method vs. Gross Method vs. Net MethodNet Method Payment

terms are 2/10, n/30

Chapter 7-15



Cash Discounts (Sales Discounts) Illustration 7-

4

Chapter 7-16

E7-5: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



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

Sales discounts 40

Accounts receivable 2,000

June 12

Chapter 7-17

E7-5: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




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


June 12

Chapter 7-18

E7-5: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




Cash 2,000


Sales Discounts Forfeited 40

June 12

Chapter 7-19

A company should measure receivables in terms of their present value.

The profession specifically excludes from present value considerations “receivables arising from transactions with customers in the normal courseof business which are due in customary trade terms not exceeding approximately one year.”

Nonrecognition of Interest Element



Chapter 7-20

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

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

Accounts ReceivableAllowance for

Doubtful Accounts

Beg. 500 25 Beg.

End. 500 25 End.

Accounting for Accounts ReceivableAccounting for Accounts ReceivableAccounting for Accounts ReceivableAccounting for Accounts Receivable


Chapter 7-21 LO 4 Explain accounting issues related to recognition of accounts LO 4 Explain accounting issues related to recognition of accounts

receivable.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




Current Assets:

Cash 346$

Accounts receivable, net of $25 allowance 475

Inventory 812

Prepaids 40


Fixed Assets:





Assets


Chapter 7-23

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

Accounts receivableAccounts receivable 100100

SalesSales 100 100



SalesSales 100 100


Doubtful Accounts

Beg. 500 25 Beg.

End. 500 25 End.



Chapter 7-24



SalesSales 100 100



SalesSales 100 100


Doubtful Accounts

Beg. 500 25 Beg.

End. 600 25 End.

Sale 100



Chapter 7-25

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

CashCash 333333



CashCash 333333



Doubtful Accounts

Beg. 500 25 Beg.

End. 600 25 End.

Sale 100



Chapter 7-26


CashCash 333333



CashCash 333333



Doubtful Accounts

Beg. 500 25 Beg.

End. 267 25 End.

Sale 100 333 Coll.



Chapter 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





Doubtful Accounts

Beg. 500 25 Beg.

End. 267 25 End.

Sale 100 333 Coll.



Chapter 7-28








Doubtful Accounts

Beg. 500 25 Beg.

End. 267 40 End.

Sale 100 333 Coll.

15 Est.



Chapter 7-29

Write-off of uncollectible accounts for $10?Write-off of uncollectible accounts for $10?

Allowance for Doubtful accountsAllowance for Doubtful accounts 1010


Write-off of uncollectible accounts for $10?Write-off of uncollectible accounts for $10?




Doubtful Accounts

Beg. 500 25 Beg.

End. 267 40 End.

Sale 100 333 Coll.

15 Est.



Chapter 7-30

Write-off of uncollectible accounts for $10? Write-off of uncollectible accounts for $10?



Write-off of uncollectible accounts for $10? Write-off of uncollectible accounts for $10?




Doubtful Accounts

Beg. 500 25 Beg.

End. 257 30 End.

Sale 100 333 Coll.

15 Est. W/O 10 10 W/O





Current Assets:

Cash 13$

Accounts receivable, net of $30 allowance 227

Inventory 812

Prepaids 40


Fixed Assets:





Assets


Chapter 7-32

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

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

Reporting Receivables

Classification

Valuation (net realizable value)

Uncollectible Accounts Receivable

Sales on account raise the possibility of accounts not being collected.

Chapter 7-33 LO 5 Explain accounting issues related to valuation of accounts LO 5 Explain accounting issues related to valuation of accounts



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

Chapter 7-34 LO 5 Explain accounting issues related to valuation of accounts LO 5 Explain accounting issues related to valuation of accounts


Allowance MethodAllowance MethodLosses are Estimated:

Percentage-of-salesPercentage-of-receivablesGAAP

Methods of Accounting for Uncollectible Accounts

Direct Write-OffDirect Write-OffTheoretically undesirable:

No matchingReceivable not stated at net realizable valueNot GAAP


Chapter 7-35

Uncollectible Accounts ReceivableUncollectible Accounts ReceivableUncollectible Accounts ReceivableUncollectible Accounts Receivable


Income Statemen

t Approach

Income Statemen

t Approach

Balance Sheet

Approach

Balance Sheet

Approach

Chapter 7-36



Percentage-of-Sales Approach - matches costs with revenues because it relates the charge to the period in which a company records the sale.

Appropriate if there is a fairly stable relationship between previous years’ credit sales and bad debts.

Chapter 7-37



Illustration: Chad Shumway Corp. estimates from past experience that about 2 percent of credit sales become uncollectible. If Chad Shumway has credit sales of $400,000 in 2010, it records bad debt expense as follows.

Bad Debt Expense 8,000

Allowance for Doubtful Accounts 8,000

Percentage-of-Sales Approach

Chapter 7-38



Percentage-of-Receivables Approach

not matching.

reports receivables at net realizable value.

Companies may apply this method using

one composite rate, or

an aging schedule of accounts receivable.

Chapter 7-39





What entry would Wilson

make assuming that

no balanceexisted in the

allowance account?

Chapter 7-40



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


What entry would Wilson

make assuming the

allowance account had a credit balance

of $800 before

adjustment?

Chapter 7-41



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.

Chapter 7-42


LO 5LO 5


Instructions: Prepare the journal entry assuming Sandel estimates bad debts at (a) 1% of net sales.


Allowance for Doubtful Accounts 7,500($800,000 – $50,000) x 1% = $7,500

LO 5LO 5

Chapter 7-43


LO 5LO 5


Instructions: Prepare the journal entry assuming Sandel estimates bad debts at (b) 5% of accounts receivable.


Allowance for Doubtful Accounts 6,000($160,000 x 5%) – $2,000) = $6,000

LO 5LO 5

Chapter 7-44

Percentage of Sales approach:

Summary

Bad debt expense estimate is related to a nominal account (Sales), any balance in the allowance account is ignored.

Achieves a proper matching of cost and revenues.


Percentage of Receivables approach:

Results in a more accurate valuation of receivables on the balance sheet.

Method may also be applied using an aging schedule.


Chapter 7-45

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

Chapter 7-46



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)

Chapter 7-47 LO 6 Explain accounting issues related to recognition of notes LO 6 Explain accounting issues related to recognition of notes



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

Chapter 7-48

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


0 1 2 3

1,000 1,000 Interest$1,000

$10,000 Principal

4

i = 10%

n = 3

Chapter 7-49

$1,000 x 2.48685 = $2,487

Interest Received

Factor Present Value


PV of Interest


Chapter 7-50

$10,000 x .75132 = $7,513

Principal Factor Present Value


PV of Principal


Chapter 7-51

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



Notes receivable 10,000

Cash 10,000

Cash 1,000

Interest revenue1,000

Chapter 7-52

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


0 1 3 3

$0 $0 Interest$0

$10,000 Principal

4

i = 9%

n = 3

Chapter 7-53

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



PV of Principal





Illustration 7-11

Chapter 7-55

Journal Entries for Zero-Interest-Bearing note

Present value of Principal $7,721.80


J an. 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

I nterest revenue 694.96

($7,721.80 x 9%)



Chapter 7-56

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


0 1 2 3

1,000 1,000 Interest$1,000

$10,000 Principal

4

i = 12%

n = 3

Chapter 7-57

$1,000 x 2.40183 = $2,402

Interest Received

Factor Present Value


PV of Interest


Chapter 7-58

$10,000 x .71178 = $7,118



PV of Principal


Chapter 7-59

Illustration: How does Morgan record the receipt of the note?



Illustration 7-13

Notes Receivable 10,000Discount on Notes Receivable

480Cash

9,520




Illustration 7-14

Chapter 7-61

Journal Entries for Interest-Bearing Note


Beg. yr. 1 Notes receivable 10,000

Discount on notes receivable 480

Cash 9,520

End. yr. 1

($9,520 x 12%)



Cash 1,000

Discount on notes receivable 142

Interest revenue1,142

Chapter 7-62


Notes Received for Property, Goods, or Services


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.

Chapter 7-63



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

Chapter 7-64

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

LO 7 Explain accounting issues related to valuation of notes LO 7 Explain accounting issues related to valuation of notes receivable.receivable.

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.

Chapter 7-65

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

LO 7 Explain accounting issues related to valuation of notes LO 7 Explain accounting issues related to valuation of notes receivable.receivable.

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, 2010, to use the fair value option for these receivables. This is the first valuation of these recently acquired receivables. At December 31, 2010, 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

Chapter 7-66

Disposition of Accounts and Notes Disposition of Accounts and Notes ReceivableReceivable


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

Chapter 7-67




Secured Borrowing

Illustration: March 1, 2010, 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. See Illustration 7-15.

Chapter 7-68


Illustration 7-15

Secured Borrowing - IllustrationSecured Borrowing - IllustrationSecured Borrowing - IllustrationSecured Borrowing - Illustration

Chapter 7-69

E7-13: On April 1, 2010, Prince Company assigns $500,000 of itsaccounts receivable to the Third National Bank as collateral for a $300,000 loan due July 1, 2010. 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, 2010, 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, 2010, through June 30, 2010.

c) On July 1, 2010, Prince paid Third National all that was due from the loan it secured on April 1, 2010.

Chapter 7-70

Exercise 7-13 continued


(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

I nterest Expense 7,500

Cash 307,500

(10% x $300,000 x 3/ 12 = $7,500)

Secured Borrowing - ExerciseSecured Borrowing - ExerciseSecured Borrowing - ExerciseSecured Borrowing - Exercise


Chapter 7-71

Factors are finance companies or banks that buy receivables from businesses for a fee.

Sales of ReceivablesSales of ReceivablesSales of ReceivablesSales of Receivables

Illustration 7-16


Chapter 7-72

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


Sale With Recourse

Seller guarantees payment to purchaser

Financial components approach used to record transfer


Chapter 7-73



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 7-17

Chapter 7-74

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 computesthe net proceeds from the sale as follows.



Illustration 7-19Loss on Sale Computation

Illustration 7-18Net ProceedsComputation

Chapter 7-75

Illustration: Prepare the journal entries for both Crest Textiles and Commercial Factors for the receivables sold with recourse.



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.

Chapter 7-76

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 7-21


Chapter 7-77

General rule in classifying receivables are: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 all significant concentrations of credit risk arising from receivables.

Presentation and AnalysisPresentation and AnalysisPresentation and AnalysisPresentation and Analysis

LO 9 Describe how to report and analyze receivables.LO 9 Describe how to report and analyze receivables.

Chapter 7-78

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 7-23

LO 9 Describe how to report and analyze receivables.LO 9 Describe how to report and analyze receivables.

Chapter 7-79

The accounting and reporting related to cash is essentially the same under both iGAAP and U.S. GAAP.

The basic accounting and reporting issues related to recognition and measurement of receivables are essentially the same between iGAAP and U.S. GAAP.

Although iGAAP implies that receivables with different characteristics should be reported separately, there is no standard that mandates this segregation.

Chapter 7-80

The FASB, the IASB have adopted a piecemeal approach in which disclosure of fair value information in the notes is the first step. The second step is the fair value option.

iGAAP and U.S. GAAP standards on the fair value option are similar but not identical.

iGAAP and U.S. GAAP differ in the criteria used to derecognize a receivable.

Chapter 7-81 LO 10 Explain common techniques employed to control cash.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, and

2. provide information necessary to properly manage cash on hand and cash transactions.


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 AccountsUsing Bank Accounts


To pay small amounts for miscellaneous expenses.

The Imprest Petty Cash SystemThe 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

Chapter 7-84

Steps:

LO 10 Explain common techniques employed to control cash.LO 10 Explain common techniques employed to control cash.


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.

Chapter 7-85

Steps:



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.


Physical Protection of Cash BalancesPhysical 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.


Reconciliation of Bank BalancesReconciliation 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


Reconciliation of Bank BalancesReconciliation of Bank BalancesIllustration 7A-1Bank Reconciliation Formand Content


Reconciliation of Bank BalancesReconciliation of Bank Balances


Illustration 7A-2

Chapter 7-91

Cash 542Nov. 30

Office expense 18

Accounts receivable 220

Accounts payable

180Interest revenue

600

Illustration: Illustration: Journalize the adjusting entries at November 30 on the books of Nugget Mining Company.


Chapter 7-92

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 QuestionReview Question


Chapter 7-93 LO 11 Describe the accounting for a loan impairment.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.


Background - Background - Example: Subprime loan crisis.

From 2000 to 2005 home prices appreciated at rapid rate.

Low interest rates also encouraged speculation, as many believed that home prices would continue to increase.

Speculators intended to sell the house in a short period.

Many adjustable-rate debt with short-term low teaser rates that would adjust to higher market rates after two or three years.

Many lending institutions gave loans to individuals whose financial condition would make it difficult for them to make the payments over the life of the loan. These loans, often referred to as subprime loans.



Subprime lending was a little over $50 billion in 2000 and had increased almost ten times by 2005.

Illustration 7B-1



Beyond the subprime loans was the practice of securitization.

Illustration 7B-2


Impairment Measurement and Impairment Measurement and ReportingReporting

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.


Illustration: At December 31, 2009, 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-3


Illustration: Computation of Impairment Loss

Illustration 7B-4

Recording Impairment Losses



Chapter 7-100

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cash and receivable

Education

related itemssummary

cash account

available cash

analysisanalysis cash

regular cash

cash equivalents

restricted cash illustration

valuation of notes receivable