CHAPTER 7 Cash and Receivables ……..…………………………………………………………... Cash  readily available  free from contractual restrictions  restricted cash: current or long-term  Would a bank accept it for deposit?

Petty cash account Cash Separate Disclosure Other Assets Liabilities Bank overdraftAdvances to subsidiariesCertificates of deposit

Minimum cash balance Cash Separate Disclosure Other Assets Liabilities Money market funds

RECEIVABLES Current Receivables  trade receivables  accounts receivable  notes receivable  nontrade receivables  tax refunds, advances, etc. Noncurrent Receivables  classified as long-term assets Reported at net realizable value Estimate: - uncollectible - sales returns

Trade Discounts  a reduction in catalog price  usually stated as a percentage  record the sale at the discounted amount  no one pays full price! Sales Discounts  a discount for prompt payment  Gross Method vs. Net Method (cf. Illustration 7-4) 2/10, n/30

Uncollectible Accounts Receivable  not an acceptable method  violation of the matching principle  failure to report net realizable value Direct Method To write-off an account as uncollectible: Bad Debts Expense540 Accounts Receivable540

Allowance Method To write-off accounts as uncollectible: Sales 0 90,000 A/R 7,700 90,00087,000 Allow for DA 500 Bad Debt Exp 0 To record bad debts expense for the year:

Allowance Method – Percentage of Sales Sales 0 90,000 A/R 7,700 90,00087, Bad Debt Exp 0 To record bad debts expense for the year: Allow for DA  Bad Debts = % of credit sales  $900 = 1% x $90,000

Allowance Method – Percentage of Receivables Sales 0 90,000 A/R 7,700 90,00087, Bad Debt Exp 0 To record bad debts expense for the year: Allow for DA  Allowance for DA = % of A/R 9,740  $487 = 5% x $9,740

NOTES RECEIVABLE Notes Issued at Face Value  Bigelow Corp sells merchandise to customer for a 3-year, $5,000 note bearing interest at 10% annually. Market rate for a similar note is 10%. PeriodsRatePVAnnuityFVAD?

To record receipt of the note: To record the interest received:

Noninterest-bearing Notes  Bigelow Corp sells merchandise to customer for a 3-year, $5,000 noninterest-bearing note. Market rate for a similar note is 10%. PeriodsRatePVAnnuityFVAD?

To record receipt of the note: To record the interest earned: Date Cash Received Int Rev. (10%) Discount Amortized Carrying Amount 7/1/03 3,757 7/1/04 7/1/05

Interest-bearing Notes  Bigelow Corp sells merchandise to customer for a 3-year, $5,000, 6% note. Interest on the note will be paid semiannually. The market rate for a similar note is 10%. PeriodsRatePVAnnuityFVAD?

To record receipt of the note: To record the first interest payment received: Date Cash Received Int Rev. (5% semi) Discount Amortized Carrying Amount 7/1/03 4,492 1/1/04 7/1/04

Notes Received for Property  Bigelow Corp sells an office building for a 5-year, $225,000 note bearing interest at 2% annually. Information on the building: Original cost$230,000 Accumulated deprec69,000 Appraisal value194,000 PeriodsRatePVAnnuityFVAD?

To record sale of building: Cost230,000 Accum depr69,000 PV194,000 FV225,000

DISPOSITION OF ACCOUNTS RECEIVABLE Secured Borrowing  A/R are used as collateral when borrowing money  Notes or loans payable are recorded as usual  A/R remain on the books of the company  no special entry when they become collateral  collection of A/R recorded as usual  collections are remitted to the lender

Sale of Receivables  Factoring: sale of receivables to a bank  Securitization: sales of a share in a pool of assets that include receivables Sale without Recourse Cash460,000 Due from Factor25,000 Loss on Sale of Receiv15,000 A/R500,000

Sale with Recourse Cash460,000 Due from Factor25,000 Loss on Sale of Receiv21,000 A/R500,000 Recourse Liability6,000 Proceeds retained by the factor for possible discounts, returns, and allowances. The estimated value of the recourse obligation.

PRESENTATION AND ANALYSIS - RECEIVABLES Presentation  Separate current from noncurrent  Report net realizable value  Disclose receivables pledged as collateral Analysis A/R Turnover Net Sales Average Net Trade Receivables =

PETTY CASH SYSTEM Receipt Petty Cash500 Cash500 Fund Established Expenses Paid No entry Office Exp130 Auto Exp215 Misc Exp130 Cash475 Receipt Fund Reimbursed

BANK RECONCILIATIONS Balance per bank$13, Add: Deposits in Transit Oct. 31, 20062, Less: Checks Outstanding #5164$ # # , Adjusted balance per bank$14, Balance per books$14, Less: Bank service charge 7.50 Adjusted balance per books$14,418.03