Ch.7 Investments & Receivables

Part I Investments (FYI only)

Types of Investments Investment in treasury bills Investment in a CD Investment in other companies’ bonds Investment in other companies’ stocks

Investment in a CD Example: On October 2, Apple invests $100,000 in a 120-day CD. Principal plus interest @ 6% due upon investment maturity. Purchase of investment: Short-Term Investments—CD 100,000 Cash 100,000 LO1

Investment in a CD Interest Receivable 1,500 Interest Revenue 1,500 Year-end adjusting entry: Interest Receivable 1,500 Interest Revenue 1,500 Interest (I) = Principal (P) × Rate (R) × Time (T) $1,500 = $100,000 × 6% × 90/360 October – 29 days November – 30 days December – 31 days 90 days

Investment in a CD *Interest earned in January: Upon investment maturity: Cash 102,000 Short-Term Investments—CD 100,000 Interest Receivable 1,500 Interest Revenue* 500 *Interest earned in January: $100,000 × 6% × 30/360 = $500

Reasons Companies Invest in Other Companies’ stocks Short-term cash excesses Long-term investing for future cash needs Exert influence over investee Obtain control of investee

Accounting for Common-Stock Investments No significant influence 0% 20% Fair Value Method Significant influence 50% Equity Method Control 100% Consolidated Financial Statements Our focus in Appendix

Part II Receivables

Credit Sales An effort to increase sales Slows inflow of cash Risk of uncollectible accounts LO2

Apple’s Consolidated Balance Sheets (Partial) (amounts in millions) 2004 2003 Accounts receivables, less allowances of $47 and $49, respectively $774 $766 Net Realizable Value Estimated Uncollectible Accounts

Two accounting methods for bad debts Direct write-off method Allowance method

Direct Write-off Method Future period charged with expense of bad debt write-off Period of sale 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 28 29 30 31 27 Journal entry to record write-off in period determined to be uncollectible: Bad Debts Expense XXX Accounts Receivable—Dexter XXX

Allowance Method (acceptable under GAAP) Period of sale Estimated bad debt expense (and allowance account) recorded in the same period 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 28 29 30 31 27

Accounting for Bad Debts: Allowance Method Journal entry to record estimated bad debt expense in period of sale: Bad Debts Expense 6,000 Allowance for Doubtful Accounts 6,000 I estimate...

Balance Sheet Presentation – Allowance Method Roberts Corp. Partial Balance Sheet Accounts receivable $250,000 Less: Allowance for doubtful accounts 6,000 Net accounts receivable $244,000 6

Accounting for Bad Debts: Allowance Method Journal entry to record bad debt write-off of customer John’s account for $320 in period determined uncollectible: Allowance for Doubtful Accounts 320 Accounts Receivable—Dexter 320 Bankrupt

Approaches to Allowance Method % of Net Credit Sales % of Accounts Receivable Aging Method Income Statement Approach Balance Sheet Approach

Percentage of Net Credit Sales Method Example: 2007 Net credit sales $2,340,000 (given) Bad debt percentage 2% Bad debts expense $ 46,800 Journal entry: Bad Debts Expense 46,800 Allowance for Doubtful Accounts 46,800 4

Aging Method Estimated Percent Estimated Amount Category Amount Uncollectible Uncollectible Current $ 85,600 1% $ 856 Past due: 1–30 days 31,200 4% 1,248 31–60 days 24,500 10% 2,450 61–90 days 18,000 30% 5,400 90+ days 9,200 50% 4,600 Totals $168,500 $14,554

Aging Method Assume the Allowance for Doubtful Accounts has a beginning credit balance of $1,230: Credit balance required in allowance account after adjustment $14,554 Less: Credit balance in allowance account before adjustment 1,230 Amount for bad debt expense entry $13,324

Aging Method Assume the Allowance for Doubtful Accounts has a beginning credit balance of $1,230: Journal entry: Bad Debts Expense 13,324 Allowance for Doubtful Accounts 13,324 To record estimated bad debts.

Aging Method The net realizable value of accounts receivable would be determined as follows: Accounts receivable $168,500 Less: Allowance for doubtful accounts 14,554 Net realizable value $153,946

Part III Notes receivables

Interest-Bearing Promissory Note Principal On Dec. 13, 2006, High Tech Company sold merchandise inventory to Baker Corporation in exchange for a $15,000,12% promissory note which matures on March 13, 2007. Date: December 13, 2007 Signed:_________ Interest Maturity Date Baker Corporation LO4 14

Interest-Bearing Promissory Note Journal entry to record the receipt of the note on December 13: Notes Receivable 15,000 Sales Revenue 15,000

Interest-Bearing Promissory Note Adjusting entry to record interest: Interest Receivable 90 Interest Revenue 90* *Interest = $15,000 × 12% × 18/360

Interest-Bearing Promissory Note Journal entry to record the collection of the note on March 13, 2008: Cash 15,450 Notes Receivable 15,000 Interest Revenue 360* Interest Receivable 90 *15,000 × 12% × 72/360