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INTERMEDIATE team for success
Intermediate
F I F T E E N T H E D I T I O N
Intermediate
ACCOUNTING
Accounting
Accounting
Prepared by
Prepared by
Coby Harmon Prepared by
Coby Harmon
University of California Santa Barbara Coby Harmon
University of California, Santa Barbara
Westmont University of California, Santa Barbara
College
7-1 Westmont College
PREVIEW OF CHAPTER 7
Intermediate Accounting
15th Edition
Kieso Weygandt Warfield
7-2
7 Cash and Receivables
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
7-3
Cash
What is Cash?
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.
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
7-5
Cash
Reporting Cash
Cash Equivalents
Short-term, highly liquid investments that are both
Restricted Cash
Companies segregate restricted cash from “regular” cash.
Examples, restricted for:
(1) plant expansion, (2) retirement of long-term debt, and (3)
compensating balances.
Illustration 7-1
7-7 LO 2
Reporting Cash
Bank Overdrafts
Company writes a check for more than the amount in its
cash account.
Generally reported as a current liability.
Offset against other cash accounts only when
accounts are with the same bank.
7-9 LO 2
7 Cash and Receivables
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
7-10
Accounts Receivable
Accounts
Accounts Notes
Notes
Receivable
Receivable Receivable
Receivable
Nontrade Receivables
1. Advances to officers and employees.
2. Advances to subsidiaries.
Nontrade Receivables
Illustration 7-3
Receivables Balance
Sheet Presentations
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
7-14
Recognition of Accounts Receivables
Trade Discounts
Reductions from the list
price. 10 %
Not recognized in the Discount for
accounting records. new Retail
Store
Customers are billed net Customers
of discounts.
Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
ABC Corporation
Balance Sheet (partial)
Current Assets:
Cash $ 330
Accounts receivable 500
Less: Allowance for doubtful accounts (25) 475
Inventory 812
Prepaid expense 40
Total current assets 1,657
Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
Sale 100
Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
Sale 100
Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
Sale 100 333 Coll.
Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
Sale 100 333 Coll.
Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
Sale 100 333 Coll. 15 Est.
Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
Sale 100 333 Coll. 15 Est.
Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
Sale 100 333 Coll. 15 Est.
10 W/O W/O 10
ABC Corporation
Balance Sheet (partial)
Current Assets:
Cash $ 330
Accounts receivable, net of $30 allowance 227
Merchandise inventory 812
Prepaid expense 40
Total current assets 1,409
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
7-34
Accounts Receivable
The
The percentage-of-sales
percentage-of-sales basisbasis The
The percentage-of-receivables
percentage-of-receivables
results
results in
in aa better
better matching
matching of
of basis
basis produces
produces the
the better
better estimate
estimate of
of
expenses
expenses withwith revenues
revenues net
net realizable
realizable value
value
Percentage-of-Sales Approach
Percentage based upon past experience and anticipate
credit policy.
Achieves better matching of expenses with revenues.
Any balance in Allowance for Doubtful Accounts is
ignored.
Illustration 7-7
7-40 LO 5
Valuation of Accounts Receivable
Percentage-of-Receivables Approach
Not matching.
Reports estimate of receivables at realizable value.
Illustration 7-8
Accounts Receivable
Aging Schedule
What entry
would Wilson
make assuming
that the
allowance
account had a
zero balance?
Illustration 7-8
Accounts Receivable
Aging Schedule
What entry
would Wilson
make assuming
the allowance
account had a
credit balance
of $800 before
adjustment?
7-45 LO 5
Valuation of Accounts Receivable
7-46 LO 5
Write-Off of Uncollectible Accounts
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 1,000
Allowance for Doubtful Accounts 1,000
Cash 1,000
Accounts Receivable 1,000
7-47 LO 5
7 Cash and Receivables
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
7-48
Notes Receivable
Short-Term Long-Term
Record at Record at
Face Value, Present Value
less allowance of cash expected to
be collected
7-51 LO 6
Note Issued at Face Value
i = 10%
$10,000 Principal
0 1 2 3 4
n=3
LO 6 Explain accounting issues related to recognition
7-52 and valuation of notes receivable.
Note Issued at Face Value
PV of Interest
PV of Principal
i = 9%
$10,000 Principal
$0 $0 $0 Interest
0 1 2 3 4
n=3
PV of Principal
Prepare the
journal entry to
record the receipt
of the note.
Prepare the
journal entry to
record interest
revenue at the
end of the first
year.
i = 12%
$10,000 Principal
0 1 2 3 4
n=3
PV of Interest
PV of Principal
Cash 1,000
Discount on Notes Receivable 142
Interest Revenue 1,142
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
7-70
Special Issues
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
7-74
Disposition of Accounts and Notes Receivable
Secured Borrowing
Illustration: March 1, 2014, 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.
7-77 LO 8
Secured Borrowing
Illustration: On April 1, 2014, Prince Company assigns $500,000 of its
accounts receivable to the Third National Bank as collateral for a $300,000
loan due July 1, 2014. 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).
Instructions:
a) Prepare the April 1, 2014, 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, 2014, through
June 30, 2014.
c) On July 1, 2014, Prince paid Third National all that was due from the
loan it secured on April 1, 2014.
a) Cash 290,000
Finance Charge ($500,000 x 2%) 10,000
Notes Payable 300,000
b) Cash 350,000
Accounts Receivable 350,000
Sales of Receivables
Sale Without Recourse
Purchaser assumes risk of collection.
Transfer is outright sale of receivable.
Seller records loss on sale.
7-81 LO 8
Sales of Receivables
Illustration 7-19
Net Proceeds
Computation
Illustration 7-20
Loss on Sale
Computation
7-83 LO 8
Sales of Receivables
Illustration: Prepare the journal entries for both Crest Textiles and
Commercial Factors for the receivables sold with recourse.
7-85 LO 8
7 Cash and Receivables
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
7-86
Presentation and Analysis
Presentation of Receivables
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.
Analysis of Receivables
Accounts Receivable Turnover Ratio:
Use to evaluate the liquidity of accounts receivable.
Measures the number of times, on average, a company
collects receivables during the period.
Illustration 7-24
Steps:
1. Record $300 transfer of funds to petty cash:
Cash 50
Petty cash 50
2. Outstanding checks.
Time Lags
3. Bank charges and credits.
7-97 LO 10
APPENDIX 7A CASH CONTROLS
Illustration 7A-2
Question
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.
Floyd Norris, noted financial writer for the New Translation: The U.S. has caused a financial
York Times, recently wrote in his blog that he crisis as a result of poor lending practices,
attended a conference to discuss the financial and many financial institutions are fighting to
crisis in subprime lending. He highlighted, and survive.
provided “translations” of, some of the statements • “I’m glad that this time we did not cause it.”
he heard at that conference: Translation: Other countries realized they
• “There is a problem of misaligned had caused financial crises in the past but
incentives.” were not to blame for the current U.S.
Translation: Many parties in the financial situation.
lending process were complicit in not performing • “What you see is what you get. If you don’t
due diligence on loans because there were lots of see it, it will get you.”
fees to be had if the loans were made, good Translation: A large number of financial
loans or bad. institutions have to take losses on assets that
• “It is pretty clear that there was a are not reported on their balance sheet. Their
failure in some key assumptions that were continuing interest in some of the loans that
supporting our analytics and our models.” they supposedly sold is now coming back to
Translation: The rating agencies that them and they will have to report losses.
evaluated the risk level of these securities made Source: Floyd Norris blog,
many miscalculations. Some structured finance http://www.norris.blogs.nytimes.com/
products that were given superior ratings are no
(accessed June 2008).
longer worth much.
• “The plumbing of the U.S. economy
has been deeply damaged. It is a long window of
7-105vulnerability.” LO 11
RELEVANT FACTS - Similarities
The accounting and reporting related to cash is essentially the same
under both IFRS and GAAP. In addition, the definition used for cash
equivalents is the same.
Like GAAP, cash and receivables are generally reported in the current
assets section of the balance sheet under IFRS.
Similar to GAAP, IFRS requires that loans and receivables be accounted
for at amortized cost, adjusted for allowances for doubtful accounts.
7-109 LO 12
IFRS SELF-TEST QUESTION
Under IFRS, receivables are to be reported on the balance sheet at:
a. amortized cost.
b. amortized cost adjusted for estimated loss provisions.
c. historical cost.
d. replacement cost.
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7-113