Receivables and Investments COPYRIGHT © 2011 South-Western/Cengage Learning 7/e PowerPoint Author: Catherine Lumbattis 7

Apple’s Consolidated Balance Sheets (Partial) ASSETS (in millions) September 27, September 29, Current assets: Cash and cash equivalents $11,875 $9,352 Short-term investments 12,615 6,034 Accounts receivable, less allowances of $47 each period 2,422 1,637 Inventories Deferred tax assets 1, Other current assets 5,822 3,805 Total current assets $34,690 $21,956 higher

Apple’s Consolidated Balance Sheets (Partial) ASSETS (in millions) Current assets: Cash and cash equivalents Short-term investments Accounts receivable Inventories Deferred tax assets Other current assets Total current assets Less liquid

Apple Corporation Sample Accounts Receivable Subsidiary Ledger Total Due Acme $ 10,000 Baxter 50,000 Jones 15,000 Martin 20,000 Smith 5,000 $100,000 Gross Accounts Receivable LO1

Apple’s Consolidated Balance Sheets (Partial) September 27 September 29 (amounts in millions) Accounts receivables, less allowances of $47 In each period $2,422 $1,637 Net Realizable Value Estimated Uncollectible Accounts

Credit Sales  Slows inflow of cash  Risk of uncollectible accounts Trade Credit Retail Customer Receivables Terms: 2/10, net 30 Sales Invoice

Accounting for Bad Debts: Direct Write-off Method Journal entry to record write-off in period determined to be uncollectible: Bad Debts Expense XXX Accounts Receivable—Dexter XXX Period of sale Future period charged with expense of bad debt write-off

Accounting for Bad Debts: Allowance Method Period of sale Estimated bad debt expense (and allowance account) recorded in the same period

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

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

Accounting for Bad Debts: Allowance Method Journal entry to record bad debt write-off in period determined uncollectible: Allowance for Doubtful Accounts XXX Accounts Receivable—Dexter XXX Bankrupt

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

Example: Percentage of Net Credit Sales Method Assume prior years’ net credit sales and bad debt expense is as follows: Year Net Credit Sales Bad Debts 2004 $1,250,000$ 26, ,340,000 29, ,200,000 23, ,650,000 32, ,120,000 42,700 $7,560,000$153,700

Example: Percentage of Net Credit Sales Method Develop bad debt percentage: $153,700 $7,560,000 use 2% =

Percentage of Accounts Receivable Method $32,330 / $4,038,000 = 8% ratio of bad debts to the ending accounts receivable December 31, 2010 Accounts Receivable $865,000 × 8% Credit balance required in Allowance account after adjustment $6,920 Example:

Percentage of Accounts Receivable Method Assume prior years’ ending Accounts Receivable and bad debts is as follows: December 31 Year Accounts Receivable Bad Debts 2005 $ 650,000$ 5, ,000 6, ,000 6, ,000 6, ,000 7,450 $4,038,000$32,330

Percentage of Accounts Receivable Method $32,330 / $4,038,000 = 8% ratio of bad debts to the ending accounts receivable December 31, 2010 Accounts Receivable $865,000 × 8% Credit balance required in Allowance account after adjustment $6,920 Example:

Percentage of Accounts Receivable Method Assume the Allowance for Doubtful Accounts has a beginning credit balance of $2,100: Credit balance required in allowance account after adjustment $ 6,920 Less: Credit balance in allowance account before adjustment 2,100 Amount for bad debt expense entry $ 4,820

Percentage of Accounts Receivable Method Assume the Allowance for Doubtful Accounts has a beginning credit balance of $2,100: Journal entry: Bad Debts Expense 4,820 Allowance for Doubtful Accounts 4,820 To record estimated bad debts.

Percentage of Accounts Receivable Method The net realizable value of accounts receivable would be determined as follows: Accounts receivable $865,000 Less: Allowance for doubtful account 6,920 Net realizable value $858,080

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, 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 account 14,554 Net realizable value $153,946

Accounts Receivable Turnover Net Credit Sales Average Accounts Receivable Indicates how quickly a company is collecting (i.e., turning over) its receivables LO2

Accounts Receivable Turnover  Too fast may mean: credit policies too stringent; may be losing sales  Too slow may mean: credit department not operating effectively; dissatisfied customers

Baker Corporation promises to pay HighTec, Inc. $15,000 plus 12% annual interest on March 13, Date: December 13, 2010 Signed :_________ Interest-Bearing Promissory Note Baker Corporation Maturity Date Principal Interest LO3

Interest-Bearing Promissory Note Maker Gives a Note to Payee

Receipt of Interest-Bearing Promissory Note Journal entry to record the receipt of the note on December 13: Notes Receivable15,000 Sales Revenue15,000

Interest-Bearing Promissory Note Adjusting entry to record interest: Interest Receivable90 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, 2011: Cash 15,450 Notes Receivable 15,000 Interest Revenue 360* Interest Receivable 90 *15,000 × 12% × 72/360

Accelerating the Cash Inflow from Sales  Credit card sales  Discounting notes receivable LO4

Credit Card Sales  Competitive necessity  Credit card company: Charges fee Assumes risk of nonpayment

Discounting Notes Receivable  Sell note prior to maturity date for cash  Receive less than face value (i.e., discounted amount)  Can be sold with or without recourse

Reasons Companies Invest in Other Companies  Short-term cash excesses  Long-term investing for future cash needs  Exert influence over investee  Obtain control of investee LO5

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

Year-end adjusting entry: Interest Receivable 1,500 Interest Revenue 1,500 Investment in a CD 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

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

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

Investment in Bonds  Bonds of other companies  Intent and ability to hold until maturity $100,000, 10% bond due ten years

Investment in Bonds On 1/1/10, Atlantic buys:  $100,000, 10% face value  Bonds mature in ten years  Interest payable semiannually Example: Record the purchase of the bonds and receipt of the first interest payment

Recording Bond Purchase Investment in Bonds 100,000 Cash100,000 To record purchase of ABC bonds. $100,000, 10% bond due 2020

Recording Receipt of Interest Payment Cash ($100,000 × 10% × 1/2) 5,000 Interest Income 5,000 To record interest income on ABC bonds.

Recording Bond Sale Cash99,000 Loss on Sale of Bonds 1,000 Investment in Bonds 100,000 To record sale of ABC bonds.

Investment in Stocks  Stocks of other companies  Recorded at cost, including any brokerage fees, commissions or other fees paid to acquire the shares

Investment in Stocks On February 1, 2010, Dexter Corp. pays $50,000 for shares of Stuart common stock plus $1,000 commissions : Investment in Stuart Common Stock 51,000 Cash 51,000 Example: Record the purchase of common stock

Recording Receipt of Dividends Dexter receives $500 cash dividends from Stuart common stock: Cash 500 Dividend Income 500 To record the receipt of dividends

Sale of Investment in Stocks Sale of Investment in Stuart common stock for $53,000: Cash 53,000 Investment in Stuart Common Stock 51,000 Gain on Sale of Stock 2,000 To record the sale of Stuart common stock.

Operating Activities Net income xxx Increase in accounts receivable – Decrease in accounts receivable + Increase in notes receivable – Decrease in notes receivable + Investing Activities Purchases of held-to-maturity and available-for-sale securities – Sales/maturities of held-to-maturity and available-for-sale securities + Financing Activities Liquid Assets and the Statement of Cash Flows – Indirect Method LO6

End of Chapter 7