Chapter 2 Cash and Receivables 第二章 现金及应收款 Background provided by m62 Visualcommunications, visit www.m62.net for more information

Part A Cash and Cash Equivalents In this part, we are going to learn: Cash Cash equivalents Background provided by m62 Visualcommunications, visit www.m62.net for more information

现金包括纸币、硬币、银行支票存款账户的余额以及可以存入这些账户的款项。 Cash Cash includes currency and coins, balances in checking accounts, and items acceptable for deposit in these accounts. 现金包括纸币、硬币、银行支票存款账户的余额以及可以存入这些账户的款项。 Simply, “cash”=money hold in hand + money in the bank Background provided by m62 Visualcommunications, visit www.m62.net for more information

现金等价物包括货币市场基金、国库券和商业票据等。 Cash Equivalents Cash Equivalents include money market funds, treasury bills, and commercial paper. 现金等价物包括货币市场基金、国库券和商业票据等。 The maturity date (到期日) for cash equivalents should be no longer than three months from the date of purchase. Background provided by m62 Visualcommunications, visit www.m62.net for more information

Part B Current Receivables 短期应收款 In this part, we are going to learn: The classification of “Receivables” Accounts receivable Notes receivable Background provided by m62 Visualcommunications, visit www.m62.net for more information

Receivables Receivables are a company’s claims to the future collection of cash, other assets or services. 应收款是企业在未来要求收取现金、其他资产或者服务的权利。 Trade receivables 商业应收款: resulting from the sale of goods or services. Exp. Accounts Receivable Receivables Background provided by m62 Visualcommunications, visit www.m62.net for more information Nontrade receivables 非商业应收款: not resulting from the sale of goods or services. Exp. Interest Receivable

Accounts receivable are coming from credit sale (赊销). Accounts receivable are supported by the customer’s credit and an invoice. Notes receivable are supported by the note and an invoice. Accounts receivable are classified as current assets, because their collection period (收款期) is usually less than one year. AR are recognized on the day when we deliver the goods/services. Background provided by m62 Visualcommunications, visit www.m62.net for more information

Initial Valuation of Accounts Receivable 应收账款的初始计量 Two parts will be discussed: Trade discounts Cash discounts Background provided by m62 Visualcommunications, visit www.m62.net for more information

商业折扣：公司为顾客提供的、从零售价中扣减一定百分比的折扣。(价格扣减) Trade Discounts Trade Discounts: a percentage reduction from the list price that companies offer to their customers. (price reduction) 商业折扣：公司为顾客提供的、从零售价中扣减一定百分比的折扣。(价格扣减) Trade discounts are often offered to those customers who purchase goods/services in large quantity. In accounting, we use “net price” to record AR and sales revenue. Net price=full price – trade discount Background provided by m62 Visualcommunications, visit www.m62.net for more information

Trade Discounts Exp. A company sells a machine at a price of $2,500, but sells it to a customer at list less a 10% discount. (credit sale) Net price=full price-trade discount=$2,500-$2500×10%=$2,250 Dr. Accounts Receivable 2,250 Cr. Sales Revenue 2,250 Background provided by m62 Visualcommunications, visit www.m62.net for more information

现金折扣：又称为销售折扣，它并不是对商品或劳务销售价格的减少，而是对赊购客户在特定的期间内付款而给予应付款金额的减少。(应付款的减少) Cash Discounts Cash Discounts: often called sales discounts, represent reductions not in the selling price of a good or service but in the amount to be paid by a credit customer if paid within a specified period of time. (reduction in payment) 现金折扣：又称为销售折扣，它并不是对商品或劳务销售价格的减少，而是对赊购客户在特定的期间内付款而给予应付款金额的减少。(应付款的减少) It is a discount intended to provide incentive for quick payment. (encourage customers to pay the cash as soon as possible) Background provided by m62 Visualcommunications, visit www.m62.net for more information

Exp. Our company offered cash discount: 2/10, n/30. Cash Discounts Exp. Our company offered cash discount: 2/10, n/30. 2/10, meaning a 2% discount if paid within 10 days. (10 days---discount period) n/30, meaning no discount if paid within 30 days. Two ways to record cash discounts: Gross method Net method Background provided by m62 Visualcommunications, visit www.m62.net for more information

How to use gross method: At first, use the full price to record accounts receivable. If the cash discount is realized (within discount period), then put the discount amount into “sales discount”. Background provided by m62 Visualcommunications, visit www.m62.net for more information

Example of gross method Our company’s credit terms are stated as 2/10, n/30. On Oct. 5, 2011, we sold merchandise at a price of $20,000. The customer paid 70% of its total price on Oct. 14 and the remaining balance of $6,000 on Nov. 4. Background provided by m62 Visualcommunications, visit www.m62.net for more information

Net method 净价法 How to use net method: At first, use the net price to record accounts receivable. If the cash discount is not realized (beyond discount period), then record the discount amount as “interest revenue”. Background provided by m62 Visualcommunications, visit www.m62.net for more information

Example of net method Our company’s credit terms are stated as 2/10, n/30. On Oct. 5, 2011, we sold merchandise at a price of $20,000. The customer paid 70% of its total price on Oct. 14 and the remaining balance of $6,000 on Nov. 4. Background provided by m62 Visualcommunications, visit www.m62.net for more information

Gross Method V.S. Net Method The gross method supposes all the cash discounts can not be taken. 总价法假设所有的现金折扣都不能被享受。 But if cash discount is taken, then put the discount amount into “sales discounts”. The net method supposes all the cash discounts can be taken. 净价法假设所有的现金折扣都可以被享受。 But if cash discount is not taken, then put the discount amount into “interest revenue”. Background provided by m62 Visualcommunications, visit www.m62.net for more information

Gross Method V.S. Net Method In America, most companies use the gross method because it’s easier than the net method. But in China, only the gross method is allowed to use. Background provided by m62 Visualcommunications, visit www.m62.net for more information

Comparing trade discounts & cash discounts Trade discounts are often offered to those customers who purchase goods/services in large quantity. Cash discounts are offered to those customers who pay the cash within the discount period. The purpose of trade discounts is to encourage large purchase. The purpose of cash discounts is to encourage quick payment. Background provided by m62 Visualcommunications, visit www.m62.net for more information

Comparing trade discounts & cash discounts Trade discounts are expressed as percentage reduction from price. (exp. 20% of trade discount) Cash discounts are expressed as terms of 2/10, n/30. Trade discounts only has one way to record: use the net price to record the accounts receivable and the revenue. Cash discounts has two ways to record: gross method & net method. Exercise: P85 E2-4 Background provided by m62 Visualcommunications, visit www.m62.net for more information

Uncollectible accounts receivable Uncollectible accounts receivable(无法收回的应收账款) or bad debts(坏账): receivables that some customers are either unable or unwilling to pay. The costs which arise from uncollectible accounts are bad debt expense(坏账损失). causes Background provided by m62 Visualcommunications, visit www.m62.net for more information Bad debts Bad debt expense

Uncollectible accounts receivable Two ways to record bad debts: Direct write-off method(直接转销法) Allowance method(备抵法) Two questions we need to focus on: When to use this method? How to use this method? Background provided by m62 Visualcommunications, visit www.m62.net for more information

Direct write-off method 直接转销法 When to use direct write-off method? If uncollectible accounts receivable are immaterial (amount of bad debts is small) Or if we can not reliably estimate 不能合理估计 the amount of uncollectible accounts receivable How to use direct write-off method? When accounts receivable actually become bad debts, just simply increase bad debt expense and decrease accounts receivable. 100% sure money can not be received Dr: bad debt expense Cr: accounts receivable Background provided by m62 Visualcommunications, visit www.m62.net for more information

Example of direct write-off method In 2011, one of our customers went bankrupt (破产), he was unable to pay the debt $10,000 (which were our company’s accounts receivable). Suppose $10,000 are immaterial amount for our company. Use direct write-off method Dr. Bad debt expense 10,000 Cr. Accounts receivable 10,000 Background provided by m62 Visualcommunications, visit www.m62.net for more information

When to use allowance method? If uncollectible accounts receivable are material amount (amount of bad debts is large) And if we can reliably estimate 能合理估计 the amount of uncollectible accounts receivable How to use allowance method? First estimate the amount of probable bad debts 估计可能发生坏账的金额 Put it into “allowance for uncollectible accounts” （坏账准备） Dr: bad debt expense Cr: allowance for UA Background provided by m62 Visualcommunications, visit www.m62.net for more information

Allowance for uncollectible accounts Allowance method Allowance for uncollectible accounts Also called “allowance for doubtful accounts” A contra account (备抵账户) to accounts receivable Allowance for uncollectible accounts Beginning Bal. Cr. Increase Dr. Decrease Background provided by m62 Visualcommunications, visit www.m62.net for more information Ending Bal.

Three events under allowance method: (备抵法下的“三个”会计事件) Estimate the amount of probable bad debts 估计可能发生坏账的金额 When accounts are deemed uncollectible 坏账真实发生 When previously written-off accounts are collected 之前的坏账重新收回 Background provided by m62 Visualcommunications, visit www.m62.net for more information

Estimate the amount of probable bad debts Three ways to estimate the amount of future bad debts: 三种估计坏账的方法 Income statement approach 利润表法 Balance sheet approach 资产负债表法 A combination of two approaches 两种方法的组合 Background provided by m62 Visualcommunications, visit www.m62.net for more information

Income statement approach 利润表法 How to use income statement approach? We estimate bad debt expense as a percentage of each period’s net credit sales. (按每期净赊销销售收入的百分比估计“坏账费用”) Bad debt expense=credit sales × P% Background provided by m62 Visualcommunications, visit www.m62.net for more information

Example of income statement approach P55 illustration 2-3 Bad debt expense=credit sales × P% In this case, Bad debt expense=$1,200,000 × 2%=$24,000 Dr. Bad debt expense 24,000 Cr. Allowance for uncollectible accounts 24,000 Accounts receivable $305,000 Less: Allowance for uncollectible accounts (24,000) Net accounts receivable (NRV of AR) $281,000 Background provided by m62 Visualcommunications, visit www.m62.net for more information It will be reported in the balance sheet.

Balance sheet approach 资产负债表法 How to use balance sheet approach? (two ways) We estimate uncollectible accounts as a percentage of the receivable balance. (按总应收账款余额的百分比估计坏账) Allowance for uncollectible accounts=the total AR × P% Or, applying different percentages to accounts receivable balances. (对不同应收账款余额应用不同的百分比) Allowance for uncollectible accounts=AR1 × P1%+AR2 × P2%+ AR3 × P3%+……+ ARn × Pn% AR1, AR2, AR3, …, ARn are different accounts receivable balances depending on the length of time outstanding. 按应收账款的账龄长短划分不同的余额 (exp. P56) Background provided by m62 Visualcommunications, visit www.m62.net for more information

Example of balance sheet approach Exp. P56 illustration 2-3A Accounts Receivable Aging Schedule 应收账款账龄分析表 Allowance for uncollectible accounts=AR1 × P1%+AR2 × P2%+ AR3 × P3%+……+ ARn × Pn% Allowance for uncollectible accounts=AR1 × P1%+AR2 × P2%+ AR3 × P3%+ AR4 × P4% =220,000×5%+50,000×10%+25,000×20%+10,000×45%=25,500 The longer the account receivable has been outstanding the more likely it will prove uncollectible. 应收账款拖欠的时间越长，越有可能成为坏账。（坏账提取比率应该越大） Background provided by m62 Visualcommunications, visit www.m62.net for more information

Example of balance sheet approach Exp. P56 illustration 2-3A Allowance for uncollectible accounts=$25,500 Dr. Bad debt expense 25,500 Cr. Allowance for uncollectible accounts 25,500 Here, $25,500 is the ending bal. for “allowance for uncollectible accounts” Allowance for uncollectible accounts First year of operations Background provided by m62 Visualcommunications, visit www.m62.net for more information Beginning Bal. 0 Cr. 25,500 Increase Dr. Decrease Ending Bal. 25,500

Example of balance sheet approach let’s suppose it was not the first year of operations. The beginning credit bal. for the allowance account was $4,000. Dr. Bad debt expense 21,500 Cr. Allowance for uncollectible accounts 21,500 Allowance for uncollectible accounts Beginning Bal. 4,000 Cr. 21,500 Increase Dr. Decrease Background provided by m62 Visualcommunications, visit www.m62.net for more information Ending Bal. 25,500

Example of balance sheet approach let’s suppose it was not the first year of operations. The beginning debit bal. for the allowance account was $4,000. Dr. Bad debt expense 29,500 Cr. Allowance for uncollectible accounts 29,500 Allowance for uncollectible accounts Beginning Bal. 4,000 Dr. Decrease Cr. 29,500 Increase Background provided by m62 Visualcommunications, visit www.m62.net for more information Ending Bal. 25,500

A combination of two approaches Some companies use a combination of two approaches. 有些公司使用两种方法的组合。 They use the income statement approach at the end of every month. But they use the balance sheet approach at the end of the year. Background provided by m62 Visualcommunications, visit www.m62.net for more information

A combination of two approaches Exp. Suppose 2011 is the first year of operation. During 2011, sales on credit are $1,200,000. The company anticipates that 2% of all credit sales will finally become uncollectible. Using income statement approach at the end of every month: Bad debt expense=S1×2%+S2×2%+...+S12×2%=(S1+ S2+…+ S12)×2%=SYear×2% Bad debt expense=$1,200,000×2%=24,000 Dr. Bad debt expense 24,000 Cr. Allowance for uncollectible accounts 24,000 Background provided by m62 Visualcommunications, visit www.m62.net for more information

A combination of two approaches Use balance sheet approach at the end of the year: Allowance for uncollectible accounts=AR1 × P1%+AR2 × P2%+ AR3 × P3%+……+ ARn × Pn% Allowance for uncollectible accounts=220,000×5%+50,000×10%+25,000×20%+10,000×45%=25,500 Age Group Amount P% 0-60 days 220,000 5% 61-90 days 50,000 10% 91-120 days 25,000 20% Over 120 days 10,000 45% Background provided by m62 Visualcommunications, visit www.m62.net for more information

A combination of two approaches Allowance for uncollectible accounts=220,000×5%+50,000×10%+25,000×20%+10,000×45%=25,500 (ending bal.) Suppose this year is the company’s first year, so beginning bal.=0. Allowance for uncollectible accounts Using income statement approach Beginning Bal. 0 Cr. 24,000 1,500 Background provided by m62 Visualcommunications, visit www.m62.net for more information Dr. Decrease Using balance sheet approach Ending Bal. 25,500

A combination of two approaches Dr. bad debt expense 1,500 Cr. Allowance for uncollectible accounts 1,500 Accounts receivable $305,000 Less: Allowance for uncollectible accounts IS (24,000) Allowance for uncollectible accounts BS (1,500) Net accounts receivable $279,500 Background provided by m62 Visualcommunications, visit www.m62.net for more information

When accounts are deemed uncollectible 坏账真实发生 If we are sure that part of accounts receivable will not be collected, then record it as a debit to allowance for uncollectible accounts and a credit to accounts receivable. 100% sure money can not be received (actually become bad debts) Dr: Allowance for UA Cr: Accounts receivable Exp. Assume that actual bad debts in 2012 are $25,000, (we are 100% sure that in 2012, $25,000 will not be received) Dr. Allowance for uncollectible accounts 25,000 Cr. Accounts receivable 25,000 Background provided by m62 Visualcommunications, visit www.m62.net for more information

When previously written-off accounts are collected 之前的坏账重新收回 Sometimes, accounts receivable that have become bad debts will be collected in part or in full. When this happens, the receivable and the allowance should be reinstated. 当坏账重新收回时，应收账款和坏账准备应该予以恢复。 Exp. Assume that the previous bad debts of $1,200 is collected this year. Dr. Accounts receivable 1,200 Cr. Allowance for uncollectible account 1,200 Dr. cash 1,200 Cr. Accounts receivable 1,200 Background provided by m62 Visualcommunications, visit www.m62.net for more information

Exercise P86 E2-9 P86 E2-8 P86 E2-11 Background provided by m62 Visualcommunications, visit www.m62.net for more information

Financing with receivables In this part, we are going to learn: Secured borrowing 担保借款 Sale of receivables 应收款的出售 Background provided by m62 Visualcommunications, visit www.m62.net for more information

担保借款：转让人以应收款为抵押 (collateral)向出让人贷款。 Secured borrowing Secured borrowing: the transferor (borrower) borrowed money from transferee (lender), with the receivables serving as collateral for the loan. 担保借款：转让人以应收款为抵押 (collateral)向出让人贷款。 The receivables belong to the transferor or transferee? The receivables still belong to the transferor. Background provided by m62 Visualcommunications, visit www.m62.net for more information

Example P65 illustration 2-5 Transferor (borrower): Santa Teresa Glass Transferee (lender): Finance Bank Dr. cash 490,700 Finance charge expense 财务费用 9,300 Cr. Liability-financing arrangement 500,000 负债-融资合同 Finance fee 融资费用: $620,000×1.5%=9,300 Loan: $500,000 Balance 余额: 500,000-9,300=490,700 Background provided by m62 Visualcommunications, visit www.m62.net for more information Notes payable/short-term borrowing 500,000 Signing a note Without signing a note

Example P65 illustration 2-5 Santa collected $400,000 of the receivables in Dec.: Dr. cash 400,000 Cr. Accounts receivable 400,000 Santa should use the $400,000 to repay the loan borrowing from Finance Bank. Dr. notes payable 400,000 Cr. Cash 400,000 During December, one-month of interest =$500,000×12%×1/12=$5,000 Dr. Interest expense 5,000 Cr. cash 5,000 Background provided by m62 Visualcommunications, visit www.m62.net for more information

Exercise P87 2-15 Transferor (borrower): High Five Surfboard Transferee (lender): Equitable Finance Corporation Dr. cash 439,200 Finance charge expense 10,800 Cr. Notes payable 450,000 Finance fee: $600,000×1.8%=10,800 Loan: $450,000 Balance: 450,000-10,800=439,200 Background provided by m62 Visualcommunications, visit www.m62.net for more information

Sale of receivables 应收款的出售 The transferor (seller) sells the receivables to transferee (buyer). Sale without recourse Sale of receivables Sale with recourse The receivables belong to transferee Background provided by m62 Visualcommunications, visit www.m62.net for more information

Sale without recourse 无追索权的销售 If the sale is made without recourse, the buyer can’t ask the seller for more money if customers don’t pay the receivables. debtor 债务人 Customer B Did not pay AR Sells AR Creditor 债权人 Background provided by m62 Visualcommunications, visit www.m62.net for more information Creditor 债权人 A C Can not ask to pay transferor transferee seller buyer Sale without recourse

Who takes the risk if customers don’t pay the receivables? A or C? Sale without recourse Who takes the risk if customers don’t pay the receivables? A or C? The transferee (buyer) takes the risk of uncollectibility when accounts receivable are sold without recourse. 当采用无追索权的方式销售应收账款时，买方应承担发生坏账的风险。 Background provided by m62 Visualcommunications, visit www.m62.net for more information

Sale without recourse If it is the sale without resource, the seller (transferor) will do three things: Removes accounts (or notes) receivable, and any allowance for bad debts associated with them 把应收账款（或应收票据）从账户中剔除，以及剔除与之相关的坏账准备 Recognizes at fair value any assets acquired or liabilities assumed by seller in the transaction 把从交易中获得资产或承担的负债以公允价值确认 Records the difference as a gain or loss 将差额确认为利得或者损失 Background provided by m62 Visualcommunications, visit www.m62.net for more information

Seller (transferor): Santa Teresa Glass Example Illustration 2-6 Seller (transferor): Santa Teresa Glass Buyer (transferee): Factor Bank AR=$600,000 Sale without recourse AR=$600,000 S F Background provided by m62 Visualcommunications, visit www.m62.net for more information buyer seller Cash + beneficial interest $540,000 Fair value - 4% fee $50,000-$24,000=$26,000 Will be paid now (cash) Will be paid in the future (receivable)

Example Removes accounts (or notes) receivable, and any allowance for bad debts associated with them Recognizes at fair value any assets acquired or liabilities assumed by seller in the transaction Records the difference as a gain or loss AR=$600,000 S F buyer seller Background provided by m62 Visualcommunications, visit www.m62.net for more information Cash + beneficial interest $540,000 Fair value - 4% fee $50,000-$24,000=$26,000 Will be paid now (cash) Will be paid in the future (receivable)

Receivable from factor 26,000 (other receivable) Example Dr. Cash 540,000 Receivable from factor 26,000 (other receivable) Loss on sale of receivables 34,000 Cr. Accounts receivable 600,000 Background provided by m62 Visualcommunications, visit www.m62.net for more information

Exercise P87 E2-16 Background provided by m62 Visualcommunications, visit www.m62.net for more information

Sale with recourse 有追索权的销售 If the sale is made with recourse, the buyer can ask the seller for more money if customers don’t pay the receivables. debtor 债务人 Customer B Did not pay AR Sells AR Creditor 债权人 Background provided by m62 Visualcommunications, visit www.m62.net for more information Creditor 债权人 A C Can ask to pay transferor transferee seller buyer Sale with recourse

Who takes the risk if customers don’t pay the receivables? A or C? Sale with recourse Who takes the risk if customers don’t pay the receivables? A or C? The transferor (seller) retains the risk of uncollectibility when accounts receivable are sold with recourse. 当采用有追索权的方式销售应收账款时，坏账的风险仍归卖方所有。 Background provided by m62 Visualcommunications, visit www.m62.net for more information

Sale with recourse If it is the sale with resource, the seller (transferor) will do four things: (the same as “sale without recourse”) The seller should record the estimated fair value of its recourse obligation as a liability.卖方需要估计追索义务的公允价值并将其确认为一项负债。 Background provided by m62 Visualcommunications, visit www.m62.net for more information

Estimated fair value of recourse obligation is $5,000. Example Illustration 2-7 Sale with recourse Estimated fair value of recourse obligation is $5,000. AR=$600,000 S F buyer seller Cash ($540,000) Background provided by m62 Visualcommunications, visit www.m62.net for more information Assets Receivable ($50,000-$24,000=$26,000) Liability Recourse liability ($5,000)

Receivable from factor 26,000 Loss on sale of receivables 39,000 Example Dr. Cash 540,000 Receivable from factor 26,000 Loss on sale of receivables 39,000 Cr. Accounts receivable 600,000 recourse liability 追索负债 5,000 Background provided by m62 Visualcommunications, visit www.m62.net for more information

If the buyer (Factor Bank) collects all of the receivables, Example Illustration 2-7 If the buyer (Factor Bank) collects all of the receivables, Dr. recourse liability 5,000 Cr. Loss on sale of receivables 5,000 Background provided by m62 Visualcommunications, visit www.m62.net for more information

Exercise P87 E2-17 Background provided by m62 Visualcommunications, visit www.m62.net for more information

Questions What are the differences between: “secured borrowing” and “sale of receivables”? Secured borrowing: transferor (borrower), transferee (lender) Sale: transferor (seller), transferee (buyer) Secured borrowing: receivable belongs to transferor Sale: receivable belongs to transferee Background provided by m62 Visualcommunications, visit www.m62.net for more information

Questions What are the differences between: “sale without recourse” and “sale with recourse”? Without recourse: the transferee (buyer) takes risk if customers don’t pay the receivables. With recourse: the transferor (seller) takes risk if customers don’t pay the receivables. Without recourse: three steps in accounting With recourse: four steps in accounting Background provided by m62 Visualcommunications, visit www.m62.net for more information

应收票据是债权人（出借人）和债务人（借款人）之间订立的正式的信贷协议。 Notes Receivable Notes receivable are formal credit arrangements between a creditor (lender) and a debtor (borrower). 应收票据是债权人（出借人）和债务人（借款人）之间订立的正式的信贷协议。 Short-term Notes Receivable: term of a note is no longer than one year. (t≤1) Notes Receivable Background provided by m62 Visualcommunications, visit www.m62.net for more information Long-term Notes Receivable: term of a note is longer than one year. (t>1)

Interest-Bearing Notes On maturity date, we should pay=face amount 面值 (principal 本金) + interest Interest = face amount × annual rate × (time period of the note/12) Background provided by m62 Visualcommunications, visit www.m62.net for more information

Two companies: Stridewell & Harmon. Example P60 illustration 2-4 Two companies: Stridewell & Harmon. Q1: Which one is creditor (lender)? Which one is debtor (borrower)? Stridewell is creditor. Harmon is debtor. Q2: Is it the short-term note or long-term note? Short-term note (6-month) Q3: How much is the interest? Interest=$700,000 × 12% × 6/12=$42,000 Background provided by m62 Visualcommunications, visit www.m62.net for more information

When Stridewell received the note on May 1, 2011: Example P60 illustration 2-4 When Stridewell received the note on May 1, 2011: Dr. Note receivable 700,000 Cr. Sales revenue 700,000 When Stridewell received cash on Nov. 1, 2011: Cash=$700,000+$42,000=$742,000 Dr. cash 742,000 Cr. Interest revenue 42,000 Note receivable 700,000 Background provided by m62 Visualcommunications, visit www.m62.net for more information

When Harmon signed the note on May 1, 2011: Dr. Inventory 700,000 Example P60 illustration 2-4 When Harmon signed the note on May 1, 2011: Dr. Inventory 700,000 Cr. Note payable 700,000 When Harmon paid cash on Nov. 1, 2011: Cash=$700,000+$42,000=$742,000 Dr. Note payable 700,000 Interest expense 42,000 Cr. Cash 742,000 Background provided by m62 Visualcommunications, visit www.m62.net for more information

If Stridewell received the note on August 1, 2011: Example P60 illustration 2-4 If Stridewell received the note on August 1, 2011: Dr. Note receivable 700,000 Cr. Sales revenue 700,000 On Dec. 31, 2011, Stridewell recorded the accrual interest: How much is the interest at the end of 2011: $700,000 × 6% × (5/12)=$35,000 Dr. Interest receivable 35,000 Cr. Interest revenue 35,000 Background provided by m62 Visualcommunications, visit www.m62.net for more information

When Stridewell received cash on Feb. 1, 2012: Dr. cash 742,000 Example P60 illustration 2-4 When Stridewell received cash on Feb. 1, 2012: Dr. cash 742,000 Cr. Note receivable 700,000 Interest receivable 35,000 Interest revenue 7,000 Background provided by m62 Visualcommunications, visit www.m62.net for more information

Exercise P86 E2-12 Background provided by m62 Visualcommunications, visit www.m62.net for more information

Transfers of notes receivable The transfer of a note receivable to a financial institution is called discounting. 将应收票据转让给金融机构的行为称为票据的贴现。 The financial institution will charge the seller a financing fee (融资费用) from this transaction. Background provided by m62 Visualcommunications, visit www.m62.net for more information

Transfers of notes receivable Five steps should be followed: Record the note receivable on the day when we received the note. 在收到票据当天确认“应收票据”。 Dr. note receivable Cr. Sales revenue On the discount date, accrue interest earned on the note receivable prior to its being discounted. 在贴现日，计提应收票据贴现前应收的利息。 Dr. interest receivable Cr. Interest revenue Background provided by m62 Visualcommunications, visit www.m62.net for more information

Transfers of notes receivable Five steps should be followed: Calculate the maturity value of the note. 计算票据的到期价值。 Maturity value=face amount + interest =face amount + face amount × interest rate × (time period of note/12) Deduct discount to calculate cash proceeds. 扣除贴现额以计算现金收入。 Cash proceeds=maturity value – discount (financing fee) =maturity value – maturity value × discount rate × (discount period/12) Background provided by m62 Visualcommunications, visit www.m62.net for more information

Transfers of notes receivable Five steps should be followed: On the discount date, remove “note receivable” and “interest receivable”, record “cash” received, then recognize the gain or loss. 在贴现日，剔除已记录的“应收票据”和“应收利息”，记录收到的“现金”，再确认利得或者损失。 Dr. Cash (or Loss) Cr. Note receivable Interest receivable Gain Background provided by m62 Visualcommunications, visit www.m62.net for more information

Example P69 Illustration 2-8 Record the note receivable on the day when we received the note. Dr. note receivable 200,000 Cr. Sales revenue 200,000 On the discount date, accrue interest earned on the note receivable prior to its being discounted. The accrued interest=$200,000 × 10% × (3/12)=$5,000 Dr. interest receivable 5,000 Cr. Interest revenue 5,000 Background provided by m62 Visualcommunications, visit www.m62.net for more information

Example Illustration 2-8 Calculate the maturity value of the note. Maturity value=face amount + interest =face amount + face amount × interest rate × (time period of note/12) =$200,000+$200,000 × 10% × (9/12) =$215,000 Background provided by m62 Visualcommunications, visit www.m62.net for more information

Example Illustration 2-8 Deduct discount to calculate cash proceeds. Cash proceeds=maturity value – discount (financing fee) =maturity value – maturity value × discount rate × (discount period/12) =$215,000 – $215,000 × 12% × (6/12) =$215,000 – $12,900 =$202,100 Background provided by m62 Visualcommunications, visit www.m62.net for more information

Example Dr. cash 202,100 loss 2,900 Cr. note receivable 200,000 interest receivable Face amount + 3-month’s interest Discounting (sell) NR Bank S Cash Dr. cash 202,100 loss 2,900 Cr. note receivable 200,000 interest receivable 5,000 Background provided by m62 Visualcommunications, visit www.m62.net for more information

Exercise On February 1, 2011, Steal Trucks sold a machine to Kansas Transports for $250,000, receiving a $50,000 down payment and a 12-month, 10% note for the balance. Principal and interest are due at maturity. On August 1, 2011, Steal Trucks discounted the note at the First South Bank at 12% interest. Prepare all required journal entries at August 1 to recognize interest revenue and the discounting of the note.  Background provided by m62 Visualcommunications, visit www.m62.net for more information

Exercise P88 E2-21 Background provided by m62 Visualcommunications, visit www.m62.net for more information

The end Background provided by m62 Visualcommunications, visit www.m62.net for more information