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Chapter
7
Intermediate Accounting 12th Edition Kieso, Weygandt, and Warfield
Chapter 7-1
Learning Objectives
1. 2. 3. 4. 5. 6. 7. 8. 9.
Chapter 7-2
Identify items considered as cash. Indicate how to report cash and related items. Define receivables and identify the different types of receivables. Explain accounting issues related to recognition of accounts receivable. Explain accounting issues related to valuation of accounts receivable. Explain accounting issues related to recognition of notes receivable. Explain accounting issues related to valuation of notes receivable. Explain accounting issues related to disposition of accounts and notes receivable. Describe how to report and analyze receivables.
Cash
What is cash? Management and control of cash Reporting cash Summary of cashrelated items
Receivables
Recognition of accounts receivable Valuation of accounts receivable Recognition of notes receivable Valuation of notes receivable Disposition of accounts and notes receivable
Chapter 7-3
What is Cash?
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, cashiers checks, personal checks, bank drafts and savings accounts.
Chapter 7-4
Chapter 7-5
Reporting Cash
Restricted Cash
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.
Illustration 7-1
Chapter 7-6
Reporting Cash
Bank Overdrafts
When a company writes a check for more than the amount in its cash account.
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 7-7
Reporting Cash
Cash Equivalents
Short-term, highly liquid investments that are both
(a) readily convertible to cash, and (b) so near their maturity that they present
Chapter 7-8
Receivables
Claims held against customers and others money, goods, or services. Oral promises of the purchaser to pay for goods and services sold. for
Accounts Receivable
Notes Receivable
Chapter 7-9
Receivables
Nontrade Receivables
Examples:
1.
2. Advances to subsidiaries.
Chapter 7-10
Chapter 7-11
Chapter 7-12
Chapter 7-14
Chapter 7-16
End.
Chapter 7-17
500
25
End.
Assets Current Assets: Cash Accounts receivable Less allowance for doubtful accounts Inventory Prepaids Total current assets Fixed Assets: Office equipment Furniture & fixtures Less: Accumulated depreciation Total fixed assets Total Assets $ 346 500 25 475 812 _ 40 1,673 5,679 6,600 (3,735) 8,544 $10,217
Chapter 7-18
Assets Current Assets: Cash Accounts receivable, net of $25 allowance for doubtful accounts Inventory Prepaids Total current assets Fixed Assets: Office equipment Furniture & fixtures Less: Accumulated depreciation Total fixed assets Total Assets $ 346 475 812 _ 40 1,673 5,679 6,600 (3,735) 8,544 $10,217
Chapter 7-19
100
End.
Chapter 7-20
500
25
End.
100
End.
Chapter 7-21
600
25
End.
End.
Chapter 7-22
600
25
End.
End.
Chapter 7-23
267
25
End.
15
End.
Chapter 7-24
267
25
End.
15
End.
Chapter 7-25
267
40
End.
10
End.
Chapter 7-26
267
40
End.
10
10
End.
Chapter 7-27
W/O
W/O
10
30 End.
257
Assets Current Assets: Cash Accounts receivable, net of $30 allowance for doubtful accounts Inventory Prepaids Total current assets Fixed Assets: Office equipment Furniture & fixtures Less: Accumulated depreciation Total fixed assets Total Assets $ 346 227 812 _ 40 1,673 5,679 6,600 (3,735) 8,544 $10,217
Chapter 7-28
Chapter 7-29
Chapter 7-30
Percentage of Receivables
Net Realizable Value
$72,500
8%
Allowance for Doubtful Accounts: Case I $150 (credit balance) Case 2 $150 (debit balance)
Chapter 7-32
Estimated percentage
Estimated expense
x
$
1.25%
6,250
===================================================
What should the ending balance be for the allowance account? -- Case 1 and Case 2
Chapter 7-33
Case 1
(150) (6,250)
Case 2
150 (6,250)
Ending balance
Journal entry:
Bad debt expense
(6,400)
(6,100)
6,250
6,250
Estimated percentage
Desired balance
x
$
8%
5,800
===================================================
What should the ending balance be for the allowance account? -- Case 1 and Case 2
Chapter 7-35
5,650 5,650
5,950 5,950
Chapter 7-39
Chapter 7-40
0
Chapter 7-42
PV of Interest
10% 0.90900 3.79079 6.14457 7.60608 8.51356 12% 0.89286 3.60478 5.65022 6.81086 7.46944
6%
$8,000
Interest
Chapter 7-43
3.99271
Factor
$31,942
Present Value
PV of Principal
10% 0.90909 0.62092 0.38554 0.23939 0.14864 12% 0.89286 0.56743 0.32197 0.18270 0.10367
6%
$100,000
Principal
Chapter 7-44
.68058
Factor
$68,058
Present Value
$100,000
Credit 100,000
8,000
Chapter 7-45
Zero-Interest-Bearing Note
Exercise Balance Bar Co. receives a 5-year, $100,000 zero-interest-bearing note. The market rate of interest for a note of similar risk is 6 percent. How does Balance Bar record the receipt of the note? Present value of Principle: $100,000 (PVF5, 6%) = $100,000 x .74726 = $74,726
$100,000 $0 0 0 0 0
0
Chapter 7-46
Zero-Interest-Bearing Note
Amortization Schedule Non-Interest-Bearing Note
6% Interest Revenue $ 4,484 4,753 5,038 5,340 5,660 25,274 Carrying Amount of Note $ 74,726 79,210 83,962 89,000 94,340 100,000
Cash Received Date of issue End of yr. 1 End of yr. 2 End of yr. 3 End of yr. 4 End of yr. 5 -
Chapter 7-47
Zero-Interest-Bearing Note
Journal Entries for Non-Interest-Bearing note Present value of Principal
Date Jan. yr. 1 Account Title Notes receivable Discount on notes receivable Cash Dec. yr. 1 Disount on notes receivable Interest revenue ($74,726 x 6%) 4,484 4,484 Debit 100,000 25,274 74,726
$74,726
Credit
Chapter 7-48
Interest-Bearing Note
Exercise Balance Bar Co. made a loan to Bio Foods and received in exchange a 5-year, $100,000 note bearing interest 8 percent. The market rate of interest for a note of similar risk is 10 percent. How does Balance Bar record the receipt of the note? Present value of Principle:
$100,000 (PVF5, 10%) = $100,000 x .62092 = $ 62,092 30,326
$ 92,418
Interest-Bearing Note
Amortization Schedule Interest-Bearing Note
10% Interest Revenue $ 9,242 9,366 9,503 9,653 9,818 47,582 Carrying Amount of Note $ 92,418 93,660 95,026 96,529 98,182 100,000
Cash Received Date of issue End of yr. 1 End of yr. 2 End of yr. 3 End of yr. 4 End of yr. 5 8,000 8,000 8,000 8,000 8,000 40,000
Chapter 7-50
Interest-Bearing Note
Journal Entries for Interest-Bearing Note
Date Jan. yr. 1 Account Title Notes receivable Discount on notes receivable Cash Dec. yr. 1 Cash Disount on notes receivable Interest revenue ($92,418 x 10%) 8,000 1,242 9,242 Debit 100,000 7,582 92,418 Credit
Chapter 7-51
Chapter 7-52
(b) Prepare the journal entry for Rasheeds collection of $350,000 of the accounts receivable during the period from April 1, 2007, through June 30, 2007.
(c) On July 1, 2007, Rasheed paid Third National all that was due from the loan it secured on April 1, 2004.
Chapter 7-54
Account Title
Credit
200,000
Sales of Receivables
Factors are finance companies or banks that buy receivables from businesses for a fee.
Illustration 7-16
Chapter 7-56
Sales of Receivables
Sale Without Recourse
Purchaser assumes risk of collection
Chapter 7-58
Segregate the different types of receivables that a company possesses, if material. Appropriately offset the valuation accounts against the proper receivable accounts. Determine that receivables classified in the current assets section will be converted into cash within the year or the operating cycle, whichever is longer. Disclose any loss contingencies that exist on the receivables. Disclose any receivables designated or pledged as collateral.
4. 5.
6.
Chapter 7-59
Copyright
Copyright 2006 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.
Chapter 7-61