1. Chapter 7-1

2. Chapter 7-2 C H A P T E R 7 CASH AND RECEIVABLES Intermediate Accounting 13th Edition Kieso, Weygandt, and Warfield

3. Chapter 7-3 1.Identify items considered cash. 2.Indicate how to report cash and related items. 3.Define receivables and identify the different types of receivables. 4.Explain accounting issues related to recognition of accounts receivable. 5.Explain accounting issues related to valuation of accounts receivable. 6.Explain accounting issues related to recognition of notes receivable. 7.Explain accounting issues related to valuation of notes receivable. 8.Explain accounting issues related to disposition of accounts and notes receivable. 9.Describe how to report and analyze receivables. Learning Objectives

4. Chapter 7-4 What is cash? Reporting cash Summary of cash- related items CashReceivables Recognition of accounts receivable Valuation of accounts receivable Recognition of notes receivable Valuation of notes receivable Disposition of accounts and notes receivable Presentation and analysis Cash and Receivables

5. Chapter 7-5 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, cashier’s checks, personal checks, bank drafts and savings accounts. What is Cash? LO 1 Identify items considered cash. Cash

6. Chapter 7-6 Short-term, highly liquid investments that are both Reporting Cash LO 2 Indicate how to report cash and related items. Cash Equivalents (a)readily convertible to cash, and (b)so near their maturity that they present insignificant risk of changes in interest rates. Examples: Treasury bills, Commercial paper, and Money market funds.

7. Chapter 7-7 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. Reporting Cash LO 2 Indicate how to report cash and related items. Restricted Cash Illustration 7-1

8. Chapter 7-8 When a company writes a check for more than the amount in its cash account. Reporting Cash LO 2 Indicate how to report cash and related items. Bank Overdrafts 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.

9. Chapter 7-9 Summary of Cash-Related Items LO 2 Indicate how to report cash and related items. Illustration 7-2

10. Chapter 7-10 ReceivablesReceivables LO 3 Define receivables and identify the different types of receivables. Written promises to pay a sum of money on a specified future date. Claims held against customers and others for money, goods, or services. Oral promises of the purchaser to pay for goods and services sold. Accounts Receivable Notes Receivable

11. Chapter 7-11 Nontrade Receivables 1.Advances to officers and employees. 2.Advances to subsidiaries. 3.Deposits to cover potential damages or losses. 4.Deposits as a guarantee of performance or payment. 5.Dividends and interest receivable. 6.Claims against: a)Insurance companies for casualties sustained. b)Defendants under suit. c)Governmental bodies for tax refunds. d)Common carriers for damaged or lost goods. e)Creditors for returned, damaged, or lost goods. f)Customers for returnable items (crates, containers, etc.). ReceivablesReceivables LO 3 Define receivables and identify the different types of receivables.

12. Chapter 7-12 Nontrade Receivables ReceivablesReceivables LO 3 Define receivables and identify the different types of receivables. Illustration 7-3

13. Chapter 7-13 Recognition of Accounts Receivables LO 4 Explain accounting issues related to recognition of accounts receivable. Trade Discounts Reductions from the list price Not recognized in the accounting records Customers are billed net of discounts Trade Discounts Reductions from the list price Not recognized in the accounting records Customers are billed net of discounts 10 % Discount for new Retail Store Customers

14. Chapter 7-14 Recognition of Accounts Receivables LO 4 Explain accounting issues related to recognition of accounts receivable. Cash Discounts Inducements for prompt payment Gross Method vs. Net Method Cash Discounts Inducements for prompt payment Gross Method vs. Net Method Payment terms are 2/10, n/30

15. Chapter 7-15 Recognition of Accounts Receivables LO 4 Explain accounting issues related to recognition of accounts receivable. Cash Discounts (Sales Discounts) Illustration 7-4

16. Chapter 7-16 E7-5: E7-5: On June 3, Bolton Company sold to Arquette Company merchandise having a sale price of $2,000 with terms of 2/10, n/60, f.o.b. shipping point. On June 12, the company received a check for the balance due from Arquette Company. Prepare the journal entries on Bolton Company books to record the sale assuming Bolton records sales using the gross method. Sales 2,000 Accounts receivable 2,000June 3 Recognition of Accounts Receivables LO 4 Explain accounting issues related to recognition of accounts receivable. Cash ($2,000 x 98%) 1,960 Sales discounts 40 Accounts receivable 2,000 June 12

17. Chapter 7-17 E7-5: E7-5: On June 3, Bolton Company sold to Arquette Company merchandise having a sale price of $2,000 with terms of 2/10, n/60, f.o.b. shipping point. On June 12, the company received a check for the balance due from Arquette Company. Prepare the journal entries on Bolton Company books to record the sale assuming Bolton records sales using the net method. Sales 1,960 Accounts receivable 1,960June 3 Recognition of Accounts Receivables LO 4 Explain accounting issues related to recognition of accounts receivable. Cash ($2,000 x 98%) 1,960 Accounts receivable 1,960 June 12

18. Chapter 7-18 E7-5: E7-5: On June 3, Bolton Company sold to Arquette Company merchandise having a sale price of $2,000 with terms of 2/10, n/60, f.o.b. shipping point. Prepare the journal entries on Bolton Company books to record the sale assuming Bolton records sales using the net method, and Arquette did not remit payment until July 29. Sales 1,960 Accounts receivable 1,960June 3 Recognition of Accounts Receivables LO 4 Explain accounting issues related to recognition of accounts receivable. Cash 2,000 Accounts receivable 1,960 Sales Discounts Forfeited40 June 12

19. Chapter 7-19 A company should measure receivables in terms of their present value. The profession specifically excludes from present value considerations “receivables arising from transactions with customers in the normal course of business which are due in customary trade terms not exceeding approximately one year.” Nonrecognition of Interest Element LO 4 Explain accounting issues related to recognition of accounts receivable. Recognition of Accounts Receivables

20. Chapter 7-20 How are these accounts presented on the Balance Sheet? Accounts Receivable Allowance for Doubtful Accounts Beg. 500 25 Beg. End. 500 25 End. Accounting for Accounts Receivable LO 4 Explain accounting issues related to recognition of accounts receivable.

21. Chapter 7-21 LO 4 Explain accounting issues related to recognition of accounts receivable. Accounting for Accounts Receivable

22. Chapter 7-22 LO 4 Explain accounting issues related to recognition of accounts receivable. Accounting for Accounts Receivable

23. Chapter 7-23 Journal entry for credit sale of $100? Accounts receivable100 Sales 100 Journal entry for credit sale of $100? Accounts receivable100 Sales 100 Accounts Receivable Allowance for Doubtful Accounts Beg. 500 25 Beg. End. 500 25 End. Accounting for Accounts Receivable LO 4 Explain accounting issues related to recognition of accounts receivable.

24. Chapter 7-24 Journal entry for credit sale of $100? Accounts receivable100 Sales 100 Journal entry for credit sale of $100? Accounts receivable100 Sales 100 Accounts Receivable Allowance for Doubtful Accounts Beg. 500 25 Beg. End. 600 25 End. Sale 100 Accounting for Accounts Receivable LO 4 Explain accounting issues related to recognition of accounts receivable.

25. Chapter 7-25 Collected of $333 on account? Cash333 Accounts receivable333 Collected of $333 on account? Cash333 Accounts receivable333 Accounts Receivable Allowance for Doubtful Accounts Beg. 500 25 Beg. End. 600 25 End. Sale 100 Accounting for Accounts Receivable LO 4 Explain accounting issues related to recognition of accounts receivable.

26. Chapter 7-26 Collected of $333 on account? Cash333 Accounts receivable333 Collected of $333 on account? Cash333 Accounts receivable333 Accounts Receivable Allowance for Doubtful Accounts Beg. 500 25 Beg. End. 267 25 End. Sale 100333 Coll. Accounting for Accounts Receivable LO 4 Explain accounting issues related to recognition of accounts receivable.

27. Chapter 7-27 Adjustment of $15 for estimated Bad-Debts? Bad debt expense15 Allowance for Doubtful Accounts15 Adjustment of $15 for estimated Bad-Debts? Bad debt expense15 Allowance for Doubtful Accounts15 Accounts Receivable Allowance for Doubtful Accounts Beg. 500 25 Beg. End. 267 25 End. Sale 100333 Coll. Accounting for Accounts Receivable LO 4 Explain accounting issues related to recognition of accounts receivable.

28. Chapter 7-28 Adjustment of $15 for estimated Bad-Debts? Bad debt expense15 Allowance for Doubtful Accounts15 Adjustment of $15 for estimated Bad-Debts? Bad debt expense15 Allowance for Doubtful Accounts15 Accounts Receivable Allowance for Doubtful Accounts Beg. 500 25 Beg. End. 267 40 End. Sale 100333 Coll. 15 Est. Accounting for Accounts Receivable LO 4 Explain accounting issues related to recognition of accounts receivable.

29. Chapter 7-29 Write-off of uncollectible accounts for $10? Allowance for Doubtful accounts10 Accounts receivable10 Write-off of uncollectible accounts for $10? Allowance for Doubtful accounts10 Accounts receivable10 Accounts Receivable Allowance for Doubtful Accounts Beg. 500 25 Beg. End. 267 40 End. Sale 100333 Coll. 15 Est. Accounting for Accounts Receivable LO 4 Explain accounting issues related to recognition of accounts receivable.

30. Chapter 7-30 Write-off of uncollectible accounts for $10? Allowance for Doubtful accounts10 Accounts receivable10 Write-off of uncollectible accounts for $10? Allowance for Doubtful accounts10 Accounts receivable10 Accounts Receivable Allowance for Doubtful Accounts Beg. 500 25 Beg. End. 257 30 End. Sale 100333 Coll. 15 Est. W/O 10 10 W/O Accounting for Accounts Receivable LO 4 Explain accounting issues related to recognition of accounts receivable.

31. Chapter 7-31 LO 4 Explain accounting issues related to recognition of accounts receivable. Accounting for Accounts Receivable

32. Chapter 7-32 Valuation of Accounts Receivable LO 5 Explain accounting issues related to valuation of accounts receivable. Reporting Receivables Classification Valuation (net realizable value) Uncollectible Accounts Receivable Sales on account raise the possibility of accounts not being collected.

33. Chapter 7-33 LO 5 Explain accounting issues related to valuation of accounts receivable. Valuation of Accounts Receivable An uncollectible account receivable is a loss of revenue that requires, through proper entry in the accounts,  a decrease in the asset accounts receivable and  a related decrease in income and stockholders’ equity. Uncollectible Accounts Receivable

34. Chapter 7-34 LO 5 Explain accounting issues related to valuation of accounts receivable. Allowance Method Losses are Estimated: Percentage-of-sales Percentage-of- receivables GAAP Methods of Accounting for Uncollectible Accounts Direct Write-Off Theoretically undesirable: No matching Receivable not stated at net realizable value Not GAAP Valuation of Accounts Receivable

35. Chapter 7-35 Uncollectible Accounts Receivable LO 5 Explain accounting issues related to valuation of accounts receivable. Income Statement Approach Balance Sheet Approach

36. Chapter 7-36 Uncollectible Accounts Receivable LO 5 Explain accounting issues related to valuation of accounts receivable. Percentage-of-Sales Approach - matches costs with revenues because it relates the charge to the period in which a company records the sale. Appropriate if there is a fairly stable relationship between previous years’ credit sales and bad debts.

37. Chapter 7-37 Uncollectible Accounts Receivable LO 5 Explain accounting issues related to valuation of accounts receivable. Illustration: Chad Shumway Corp. estimates from past experience that about 2 percent of credit sales become uncollectible. If Chad Shumway has credit sales of $400,000 in 2010, it records bad debt expense as follows. Bad Debt Expense 8,000 Allowance for Doubtful Accounts 8,000 Percentage-of-Sales Approach

38. Chapter 7-38 Uncollectible Accounts Receivable LO 5 Explain accounting issues related to valuation of accounts receivable. Percentage-of-Receivables Approach  not matching.  reports receivables at net realizable value. Companies may apply this method using  one composite rate, or  an aging schedule of accounts receivable.

39. Chapter 7-39 Uncollectible Accounts Receivable LO 5 Explain accounting issues related to valuation of accounts receivable. Bad Debt Expense 37,650 Allowance for Doubtful Accounts 37,650 What entry would Wilson make assuming that no balance existed in the allowance account?

40. Chapter 7-40 Uncollectible Accounts Receivable LO 5 Explain accounting issues related to valuation of accounts receivable. Bad Debt Expense ($37,650 – $800) 36,850 Allowance for Doubtful Accounts 36,850 What entry would Wilson make assuming the allowance account had a credit balance of $800 before adjustment?

41. Chapter 7-41 Uncollectible Accounts Receivable LO 5 Explain accounting issues related to valuation of accounts receivable. E7-7 (Recording Bad Debts) Sandel Company reports the following financial information before adjustments. Instructions: Prepare the journal entry to record bad debt expense assuming Sandel Company estimates bad debts at (a) 1% of net sales and (b) 5% of accounts receivable.

42. Chapter 7-42 Uncollectible Accounts Receivable LO 5 E7-7 (Recording Bad Debts) Sandel Company reports the following financial information before adjustments. Instructions: Prepare the journal entry assuming Sandel estimates bad debts at (a) 1% of net sales. Bad Debt Expense7,500 Allowance for Doubtful Accounts7,500 ($800,000 – $50,000) x 1% = $7,500 LO 5

43. Chapter 7-43 Uncollectible Accounts Receivable LO 5 E7-7 (Recording Bad Debts) Sandel Company reports the following financial information before adjustments. Instructions: Prepare the journal entry assuming Sandel estimates bad debts at (b) 5% of accounts receivable. Bad Debt Expense6,000 Allowance for Doubtful Accounts6,000 ($160,000 x 5%) – $2,000) = $6,000 LO 5

44. Chapter 7-44 Percentage of Sales approach: Summary Bad debt expense estimate is related to a nominal account (Sales), any balance in the allowance account is ignored. Achieves a proper matching of cost and revenues. Uncollectible Accounts Receivable Percentage of Receivables approach: Results in a more accurate valuation of receivables on the balance sheet. Method may also be applied using an aging schedule. LO 5 Explain accounting issues related to valuation of accounts receivable.

45. Chapter 7-45 Supported by a formal promissory note. Recognition of Notes Receivable LO 6 Explain accounting issues related to recognition of notes receivable. Notes Receivable A negotiable instrument Maker signs in favor of a Payee Interest-bearing (has a stated rate of interest) OR Zero-interest-bearing (interest included in face amount)

46. Chapter 7-46 Recognition of Notes Receivable LO 6 Explain accounting issues related to recognition of notes receivable. Generally originate from: Customers who need to extend payment period of an outstanding receivable High-risk or new customers Loans to employees and subsidiaries Sales of property, plant, and equipment Lending transactions (the majority of notes)

47. Chapter 7-47 LO 6 Explain accounting issues related to recognition of notes receivable. Recognition of Notes Receivable Short-TermLong-Term Record at Face Value, less allowance Record at Present Value of cash expected to be collected Interest Rates Stated rate = Market rate Stated rate > Market rate Stated rate < Market rate Note Issued at Face Value Premium Discount

48. Chapter 7-48 Illustration: Bigelow Corp. lends Scandinavian Imports $10,000 in exchange for a $10,000, three-year note bearing interest at 10 percent annually. The market rate of interest for a note of similar risk is also 10 percent. How does Bigelow record the receipt of the note? Note Issued at Face Value LO 6 Explain accounting issues related to recognition of notes receivable. 0123 1,0001,000 Interest$1,000 $10,000 Principal 4 i = 10% n = 3

49. Chapter 7-49 $1,000 x 2.48685 = $2,487 Interest ReceivedFactorPresent Value Note Issued at Face Value PV of Interest LO 6 Explain accounting issues related to recognition of notes receivable.

50. Chapter 7-50 $10,000 x.75132 = $7,513 PrincipalFactorPresent Value Note Issued at Face Value PV of Principal LO 6 Explain accounting issues related to recognition of notes receivable.

51. Chapter 7-51 SummaryPresent value of interest $ 2,487 Present value of principal 7,513 Note current market value $10,000 Note Issued at Face Value LO 6 Explain accounting issues related to recognition of notes receivable. Notes receivable 10,000 Cash 10,000 Cash 1,000 Interest revenue1,000

52. Chapter 7-52 Illustration: Jeremiah Company receives a three-year, $10,000 zero-interest-bearing note. The market rate of interest for a note of similar risk is 9 percent. How does Jeremiah record the receipt of the note? Zero-Interest-Bearing Note LO 6 Explain accounting issues related to recognition of notes receivable. 0133 $0 $0 Interest$0 $10,000 Principal 4 i = 9% n = 3

53. Chapter 7-53 $10,000 x.77218 = $7,721.80 PrincipalFactorPresent Value Zero-Interest-Bearing Note PV of Principal LO 6 Explain accounting issues related to recognition of notes receivable.

54. Chapter 7-54 LO 6 Explain accounting issues related to recognition of notes receivable. Zero-Interest-Bearing Note Illustration 7-11

55. Chapter 7-55 Journal Entries for Zero-Interest-Bearing note Present value of Principal $7,721.80 LO 6 Explain accounting issues related to recognition of notes receivable. Zero-Interest-Bearing Note

56. Chapter 7-56 Illustration: Morgan Corp. makes a loan to Marie Co. and receives in exchange a three-year, $10,000 note bearing interest at 10 percent annually. The market rate of interest for a note of similar risk is 12 percent. How does Morgan record the receipt of the note? Interest-Bearing Note LO 6 Explain accounting issues related to recognition of notes receivable. 0123 1,0001,000 Interest$1,000 $10,000 Principal 4 i = 12% n = 3

57. Chapter 7-57 $1,000 x 2.40183 = $2,402 Interest ReceivedFactorPresent Value Interest-Bearing Note PV of Interest LO 6 Explain accounting issues related to recognition of notes receivable.

58. Chapter 7-58 $10,000 x.71178 = $7,118 PrincipalFactorPresent Value Interest-Bearing Note PV of Principal LO 6 Explain accounting issues related to recognition of notes receivable.

59. Chapter 7-59 Illustration: How does Morgan record the receipt of the note? Interest-Bearing Note LO 6 Explain accounting issues related to recognition of notes receivable. Illustration 7-13 Notes Receivable 10,000 Discount on Notes Receivable 480 Cash 9,520

60. Chapter 7-60 LO 6 Explain accounting issues related to recognition of notes receivable. Interest-Bearing Note Illustration 7-14

61. Chapter 7-61 Journal Entries for Interest-Bearing Note LO 6 Explain accounting issues related to recognition of notes receivable. Interest-Bearing Note Cash 1,000 Discount on notes receivable142 Interest revenue1,142

62. Chapter 7-62 Recognition of Notes Receivable Notes Received for Property, Goods, or Services LO 6 Explain accounting issues related to recognition of notes receivable. In a bargained transaction entered into at arm’s length, the stated interest rate is presumed to be fair unless: 1.No interest rate is stated, or 2.Stated interest rate is unreasonable, or 3.Face amount of the note is materially different from the current cash sales price.

63. Chapter 7-63 Recognition of Notes Receivable LO 6 Explain accounting issues related to recognition of notes receivable. Illustration: Oasis Development Co. sold a corner lot to Rusty Pelican as a restaurant site. Oasis accepted in exchange a five-year note having a maturity value of $35,247 and no stated interest rate. The land originally cost Oasis $14,000. At the date of sale the land had a fair market value of $20,000. Oasis uses the fair market value of the land, $20,000, as the present value of the note. Oasis therefore records the sale as: Notes Receivable 35,247 Discount on Notes Receivable 15,247 Land 14,000 Gain on Sale of Land 6,000 ($35,247 - $20,000) = $15,247

64. Chapter 7-64 Valuation of Notes Receivable LO 7 Explain accounting issues related to valuation of notes receivable. Short-Term reported at Net Realizable Value (same as accounting for accounts receivable). Long-Term - FASB requires companies disclose not only their cost but also their fair value in the notes to the financial statements.  Fair Value Option. Companies have the option to use fair value as the basis of measurement in the financial statements.

65. Chapter 7-65 Valuation of Notes Receivable LO 7 Explain accounting issues related to valuation of notes receivable. Illustration (recording fair value option): Assume that Escobar Company has notes receivable that have a fair value of $810,000 and a carrying amount of $620,000. Escobar decides on December 31, 2010, to use the fair value option for these receivables. This is the first valuation of these recently acquired receivables. At December 31, 2010, Escobar makes an adjusting entry to record the increase in value of Notes Receivable and to record the unrealized holding gain, as follows. Notes Receivable 190,000 Unrealized Holding Gain or Loss—Income 190,000

66. Chapter 7-66 Disposition of Accounts and Notes Receivable LO 8 Explain accounting issues related to disposition of accounts and notes receivable. Owner may transfer accounts or notes receivables to another company for cash. Reasons: Competition. Sell receivables because money is tight. Billing / collection are time-consuming and costly. Transfer accomplished by: 1. Secured borrowing 2. Sale of receivables

67. Chapter 7-67 Disposition of Accounts and Notes Receivable LO 8 Explain accounting issues related to disposition of accounts and notes receivable. Secured Borrowing Illustration: March 1, 2010, Howat Mills, Inc. provides (assigns) $700,000 of its accounts receivable to Citizens Bank as collateral for a $500,000 note. Howat Mills continues to collect the accounts receivable; the account debtors are not notified of the arrangement. Citizens Bank assesses a finance charge of 1 percent of the accounts receivable and interest on the note of 12 percent. Howat Mills makes monthly payments to the bank for all cash it collects on the receivables. See Illustration 7-15.

68. Chapter 7-68 LO 8 Explain accounting issues related to disposition of accounts and notes receivable. Illustration 7-15 Secured Borrowing - Illustration

69. Chapter 7-69 E7-13: On April 1, 2010, Prince Company assigns $500,000 of its accounts receivable to the Third National Bank as collateral for a $300,000 loan due July 1, 2010. The assignment agreement calls for Prince Company to continue to collect the receivables. Third National Bank assesses a finance charge of 2% of the accounts receivable, and interest on the loan is 10% (a realistic rate of interest for a note of this type). Secured Borrowing - Exercise LO 8 Explain accounting issues related to disposition of accounts and notes receivable. Instructions: a)Prepare the April 1, 2010, journal entry for Prince Company. b)Prepare the journal entry for Prince’s collection of $350,000 of the accounts receivable during the period from April 1, 2010, through June 30, 2010. c)On July 1, 2010, Prince paid Third National all that was due from the loan it secured on April 1, 2010.

70. Chapter 7-70 Exercise 7-13 continued Secured Borrowing - Exercise LO 8 Explain accounting issues related to disposition of accounts and notes receivable.

71. Chapter 7-71 Factors are finance companies or banks that buy receivables from businesses for a fee. Sales of Receivables Illustration 7-16 LO 8 Explain accounting issues related to disposition of accounts and notes receivable.

72. Chapter 7-72 Sale Without Recourse Purchaser assumes risk of collection Transfer is outright sale of receivable Seller records loss on sale Seller use Due from Factor (receivable) account to cover discounts, returns, and allowances Sales of Receivables Sale With Recourse Seller guarantees payment to purchaser Financial components approach used to record transfer LO 8 Explain accounting issues related to disposition of accounts and notes receivable.

73. Chapter 7-73 Sales of Receivables LO 8 Explain accounting issues related to disposition of accounts and notes receivable. Illustration: Crest Textiles, Inc. factors $500,000 of accounts receivable with Commercial Factors, Inc., on a without recourse basis. Commercial Factors assesses a finance charge of 3 percent of the amount of accounts receivable and retains an amount equal to 5 percent of the accounts receivable (for probable adjustments). Crest Textiles and Commercial Factors make the following journal entries for the receivables transferred without recourse. Illustration 7-17

74. Chapter 7-74 Illustration: Assume Crest Textiles sold the receivables on a with recourse basis. Crest Textiles determines that this recourse obligation has a fair value of $6,000. To determine the loss on the sale of the receivables, Crest Textiles computes the net proceeds from the sale as follows. Sales of Receivables LO 8 Explain accounting issues related to disposition of accounts and notes receivable. Illustration 7-19 Loss on Sale Computation Illustration 7-18 Net Proceeds Computation

75. Chapter 7-75 Illustration: Prepare the journal entries for both Crest Textiles and Commercial Factors for the receivables sold with recourse. Sales of Receivables LO 8 Explain accounting issues related to disposition of accounts and notes receivable. Cash 460,000 Due from Factor 25,000 Loss on Sale of Receivables 21,000 Accounts (Notes) Receivable 500,000 Recourse Liability 6,000 Accounts Receivable 500,000 Due to Crest Textiles 25,000 Financing Revenue 15,000 Cash 460,000 Commercial Factors, Inc. Crest Textiles, Inc.

76. Chapter 7-76 The FASB concluded that a sale occurs only if the seller surrenders control of the receivables to the buyer. Three conditions must be met. Secured Borrowing versus Sale Illustration 7-21 LO 8 Explain accounting issues related to disposition of accounts and notes receivable.

77. Chapter 7-77 General rule in classifying receivables are: 1.Segregate the different types of receivables that a company possesses, if material. 2.Appropriately offset the valuation accounts against the proper receivable accounts. 3.Determine that receivables classified in the current assets section will be converted into cash within the year or the operating cycle, whichever is longer. 4.Disclose any loss contingencies that exist on the receivables. 5.Disclose any receivables designated or pledged as collateral. 6.Disclose all significant concentrations of credit risk arising from receivables. Presentation and Analysis LO 9 Describe how to report and analyze receivables.

78. Chapter 7-78 Analysis of Receivables Presentation and Analysis This Ratio used to: Assess the liquidity of the receivables. Measure the number of times, on average, a company collects receivables during the period. Illustration 7-23 LO 9 Describe how to report and analyze receivables.

79. Chapter 7-79  The accounting and reporting related to cash is essentially the same under both iGAAP and U.S. GAAP.  The basic accounting and reporting issues related to recognition and measurement of receivables are essentially the same between iGAAP and U.S. GAAP.  Although iGAAP implies that receivables with different characteristics should be reported separately, there is no standard that mandates this segregation.

80. Chapter 7-80  The FASB, the IASB have adopted a piecemeal approach in which disclosure of fair value information in the notes is the first step. The second step is the fair value option.  iGAAP and U.S. GAAP standards on the fair value option are similar but not identical.  iGAAP and U.S. GAAP differ in the criteria used to derecognize a receivable.

81. Chapter 7-81 LO 10 Explain common techniques employed to control cash. Management faces two problems in accounting for cash transactions: 1.establish proper controls to prevent any unauthorized transactions by officers or employees, and 2.provide information necessary to properly manage cash on hand and cash transactions.

82. Chapter 7-82 LO 10 Explain common techniques employed to control cash. To obtain desired control objectives, a company can vary the number and location of banks and the types of accounts.  General checking account  Collection float.  Lockbox accounts  Imprest bank accounts Using Bank Accounts

83. Chapter 7-83 LO 10 Explain common techniques employed to control cash. To pay small amounts for miscellaneous expenses. The Imprest Petty Cash System Steps: 1.Record $300 transfer of funds to petty cash: Petty Cash 300 Cash 300 2.The petty cash custodian obtains signed receipts from each individual to whom he or she pays cash

84. Chapter 7-84 Steps: LO 10 Explain common techniques employed to control cash. The Imprest Petty Cash System Office Supplies Expense 42 Postage Expense 53 Entertainment Expense 76 Cash Over and Short 2 Cash 173 3.Custodian receives a company check to replenish the fund.

85. Chapter 7-85 Steps: LO 10 Explain common techniques employed to control cash. The Imprest Petty Cash System Cash 50 Petty cash 50 4.If the company decides that the amount of cash in the petty cash fund is excessive by $50, it lowers the fund balance as follows.

86. Chapter 7-86 LO 10 Explain common techniques employed to control cash. Physical Protection of Cash Balances Company should  Minimize the cash on hand.  Only have on hand petty cash and current day’s receipts  Keep funds in a vault, safe, or locked cash drawer.  Transmit each day’s receipts to the bank as soon as practicable.  Periodically prove (reconcile) the balance shown in the general ledger.

87. Chapter 7-87 LO 10 Explain common techniques employed to control cash. Reconciliation of Bank Balances Schedule explaining any differences between the bank’s and the company’s records of cash. Reconciling Items: 1. Deposits in transit. 2. Outstanding checks. 3. Bank charges and credits. 4. Bank or Depositor errors. Time Lags

88. Chapter 7-88 LO 10 Explain common techniques employed to control cash. Reconciliation of Bank Balances Illustration 7A-1 Bank Reconciliation Form and Content

89. Chapter 7-89 LO 10 Explain common techniques employed to control cash. Reconciliation of Bank Balances

90. Chapter 7-90 LO 10 Explain common techniques employed to control cash. Illustration 7A-2

91. Chapter 7-91 Cash542Nov. 30 Office expense 18 Accounts receivable220 Accounts payable180 Interest revenue600 Illustration: Illustration: Journalize the adjusting entries at November 30 on the books of Nugget Mining Company. LO 10 Explain common techniques employed to control cash.

92. Chapter 7-92 The reconciling item in a bank reconciliation that will result in an adjusting entry by the depositor is: a. outstanding checks. b. deposit in transit. c. a bank error. d. bank service charges. Review Question LO 10 Explain common techniques employed to control cash.

93. Chapter 7-93 LO 11 Describe the accounting for a loan impairment. Companies evaluate their receivables to determine their ultimate collectibility. Allowance method is appropriate when: probable that an asset has been impaired and amount of the loss can be reasonably estimated. Long-term receivables such as loans that are identified as impaired, companies perform an additional impairment evaluation.

94. Chapter 7-94 LO 11 Describe the accounting for a loan impairment. Background - Background - Example: Subprime loan crisis. From 2000 to 2005 home prices appreciated at rapid rate. Low interest rates also encouraged speculation, as many believed that home prices would continue to increase. Speculators intended to sell the house in a short period. Many adjustable-rate debt with short-term low teaser rates that would adjust to higher market rates after two or three years. Many lending institutions gave loans to individuals whose financial condition would make it difficult for them to make the payments over the life of the loan. These loans, often referred to as subprime loans.

95. Chapter 7-95 LO 11 Describe the accounting for a loan impairment. Background - Background - Example: Subprime loan crisis. Subprime lending was a little over $50 billion in 2000 and had increased almost ten times by 2005. Illustration 7B-1

96. Chapter 7-96 LO 11 Describe the accounting for a loan impairment. Background - Background - Example: Subprime loan crisis. Beyond the subprime loans was the practice of securitization. Illustration 7B-2

97. Chapter 7-97 LO 11 Describe the accounting for a loan impairment. Impairment Measurement and Reporting Impairment loss is calculated as the difference between  the investment in the loan (generally the principal plus accrued interest) and  the expected future cash flows discounted at the loan’s historical effective interest rate.

98. Chapter 7-98 LO 11 Describe the accounting for a loan impairment. Illustration: At December 31, 2009, Ogden Bank recorded an investment of $100,000 in a loan to Carl King. The loan has an historical effective-interest rate of 10 percent, the principal is due in full at maturity in three years, and interest is due annually. The loan officer performs a review of the loan’s expected future cash flow and utilizes the present value method for measuring the required impairment loss. Illustration 7B-3

99. Chapter 7-99 LO 11 Describe the accounting for a loan impairment. Illustration: Computation of Impairment Loss Illustration 7B-4 Recording Impairment Losses Bad Debt Expense 12,437 Allowance for Doubtful Accounts 12,437

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