1. Chapter 7
Cash and Receivables
ACCT-3030

2. 1. Cash Few problems Petty cash (Appendix 7A)
easy valuation and classification
requires significant controls (Appendix 7A)
Petty cash (Appendix 7A)
Bank reconciliations (Appendix 7A)
BE 7-15
Restrictions on cash
disclosure
presentation
compensating balances
Cash equivalents
highly liquid investments
3 months or less maturity
ACCT-3030

3. 1. Cash
Illustration 7-2
ACCT-3030

4. 2. Accounts and Notes Receivable
Receivables
claims held against customers and others for money, goods, or services
A/R – oral promises to pay
N/R – written promises to pay
a negotiable instrument
Trade vs. Nontrade receivables
trade – customers
nontrade – officers, stockholders, affiliates, deposits
ACCT-3030

5. 3. A/R – Bad Debts Bad debts Two methods of accounting
uncollectible accounts receivable
Two methods of accounting
direct write-off method (not GAAP)
does not apply matching
allowance method (GAAP)
correctly applies matching
reflects proper YE carrying value of A/R
ACCT-3030

6. 3. A/R – Bad Debts Direct write-off method
expense recorded when account deemed uncollectible
easy to apply
entry
Bad Debts Expense X
Accounts Receivable X
ACCT-3030

7. 3. A/R – Bad Debts Allowance method requires YE adjusting entry
can be based on
percentage of sales
or percentage of receivables
accounts in the entries are same with either method
the methods only affect the amounts for the entries
ACCT-3030

8. 3. A/R – Bad Debts Allowance method YE adjusting entry
Bad Debts Expense X
Allowance for Uncollectibles X
entry to write off specific A/R
Allowance for Uncollectibles X
Accounts Receivable X
entry does not create an expense
entry does not change net receivables
ACCT-3030

9. 3. A/R – Bad Debts Examples Collection of previously written-off A/R
BE 7-4
BE 7-5
Collection of previously written-off A/R
reinstate account balance
record collection as normal
ACCT-3030

10. 4. Other Valuation Allowances
Discounts
YE adjustment needed to estimate amount of outstanding transactions with possible discounts or returns
e.g., entry for estimated returns
Sales Returns and Allowances X
Allowance for Returned Merchandise X
ACCT-3030

11. 4. Other Valuation Allowances
Discounts
trade
reduction off list price used to determine sales price
not recognized in books
cash
discount for prompt payment
e.g., 2/10, n/30
can be accounted for by gross or net methods
ACCT-3030

12. 4. Other Valuation Allowances
Example – cash disc net and gross methods
Make all entries under: (a) gross method
(b) net method
Date
Oct. 1
Sell $1,000 of merchandise to customer, 2/10, n/30
Oct. 7
Customer returns $100 of merchandise
Oct. 10
Customer pays in full
Assume Oct. 10 payment did not occur
Oct. 27
ACCT-3030

13. 5. Pledging, Assigning, & Factoring A/R
Reasons
obtain cash now rather than wait for collection
obtain relief from burden of carrying receivables
Can be accomplished by
secured borrowing
pledge receivables as collateral for a loan
sale of receivables
with recourse (seller still has risks of collection)
without recourse (purchaser assumes risks)
ACCT-3030

14. 5. Pledging, Assigning, & Factoring A/R
Secured borrowing on receivables
A borrowing type arrangement
can be general receivables pledged as collateral for loan (all receivables or certain dollar amount)
can be specific receivables pledged as collateral for loan (then must identify receivables pledged)
Company continues to collect A/R
Bank usually
charges a finance charge against receivables
charges interest on the loan
ACCT-3030

15. 5. Pledging, Assigning, & Factoring A/R
Example – Secured Borrowing
You pledge all your receivables as collateral for a bank loan. The balance of A/R is $75,000 and bank loan amount is $50,000. The bank charges a 1% fee on the receivables and interest on the loan is 10%.
Record the entries for this transaction.
ACCT-3030

16. 5. Pledging, Assigning, & Factoring A/R
Date
Accounts
Dr.
Cr.
1/1/year 1
Cash
49,250
Interest Expense (75,000 x .01)
750
Notes Payable
50,000
You collect $45,000 of A/R on 3/31/year 1
3/31/year 1
45,000
A/R
45,00
ACCT-3030

17. 5. Pledging, Assigning, & Factoring A/R
Date
Accounts
Dr.
Cr.
You remit collections to bank plus interest on loan.
3/31/year 1
Interest Expense (50,000 x .1 x 1/4)
1,250
Notes Payable
45,000
Cash
46,250
You collect remainder of A/R on 6/30/year 1
6/30/year 1
30,000
A/R
ACCT-3030

18. 5. Pledging, Assigning, & Factoring A/R
Date
Accounts
Dr.
Cr.
You pay remainder of loan to bank plus interest on loan.
6/30/year 1
Interest Expense (5,000 x .1 x 1/4)
125
Notes Payable
5,000
Cash
5,125
ACCT-3030

19. 5. Pledging, Assigning, & Factoring A/R
Selling (factoring) receivables
usually for all receivables
usually continuous arrangement
fee usually 1% - 3%
usually a holdback (for returns and allowances)
Factoring without recourse
a sale and record loss
Factoring with recourse
a sale, but follows financial components approach
must assign a liability to the recourse provision to compute the loss
ACCT-3030

20. 5. Pledging, Assigning, & Factoring A/R
Example
A company factors its A/R balance of $40,000 with a factoring fee of 2% and a 10% holdback.
Record the entries if the transaction is
(a) without recourse (b) with recourse
ACCT-3030

21. 5. Pledging, Assigning, & Factoring A/R
(a) without recourse
Accounts
Dr.
Cr.
Cash
35,200
Receivable from Factor (40,000 x .1)
4,000
Loss on Sale of A/R (40,000 x .02)
800
A/R
40,000
ACCT-3030

22. 5. Pledging, Assigning, & Factoring A/R
(b) with recourse; assume the recourse obligation has a fair valued of $2,000 Compute net proceeds: Cash received $35,200 Add: Holdback 4,000 $39,200 Less: Recourse obligation 2,000 Net Proceeds $37,200 Compute Loss on Sale: BV of A/R $40,000 Net Proceeds 37,200 Loss on Sale $ 2,800
ACCT-3030

23. 5. Pledging, Assigning, & Factoring A/R
(b) With recourse
Accounts
Dr.
Cr.
Cash
35,200
Due From Factor
4,000
Loss on Sale of A/R
2,800
A/R
40,000
Recourse Liability
2,000
ACCT-3030

24. 6. Notes Receivable Recognition of N/R Notes can be received for
short-term N/R
recorded at face value
long-term N/R
recorded at PV of future cash flows
Notes can be received for
loaning money
selling goods or services
Notes can have a stated interest rate or no interest rate
Stated interest rate on N/R can be
equal to market rate, greater than market rate, or less than market rate
ACCT-3030

25. 6. Notes Receivable Interest-bearing notes
Example You received a $1,000, two year, 6% note receivable in exchange for merchandise. Make entries to record this transactions if the market interest rate is:
(a) 6%
(b) 8%
ACCT-3030

26. 6. Notes Receivable
(a) market interest rate is 6% PV of 2 year, 6%, $1,000 note discounted at 6% = 1,000 (n=2, i=6, PMT=60, FV=1000, CPT PVA-ord) PV of interest payments PVA-ord(2, 6%) = 60 x = 110 PV of principle payment PV = 1,000 x = 890 1,000
ACCT-3030

27. 6. Notes Receivable (a) market interest rate is 6% Date Accounts Dr.
Cr.
1/1/year 1
Notes Receivable
1,000
Sales
12/31/year 1
Cash 60
Interest Revenue
12/31/year2
ACCT-3030

28. 6. Notes Receivable
market interest rate is 8% PV of 2 year, 6%, $1,000 note discounted at 8% = 964
(n=2, i=8, PMT=60, FV=1000, CPT PVA-ord)
PV of interest payments PVA-ord(2, 8%) = 60 x = PV of principle payment PV = 1,000 x = 857
964
ACCT-3030

29. 6. Notes Receivable Date Accounts Dr. Cr. 1/1/year 1 Notes Receivable
1,000
Discount on N/R 36
Sales
964
12/31/year 1
Cash 60 17
Interest Revenue (964 x .08) 77
12/31/year 2 19
Interest Revenue ( = 981; 981 x .08 = 79) 79
ACCT-3030

30. 6. Notes Receivable Non-interest-bearing note
zero percent interest is unreasonable
must impute interest rate
use imputed rate to amortize note
Also
interest rate in arm’s length transaction is considered reasonable unless
zero interest rate
clearly unreasonable interest rate
face amount of note significantly differs from cash sales price
ACCT-3030

31. 6. Notes Receivable
Example You accept a $12,500, three year, non- interest-bearing note for the sale of merchandise. The merchandise has a cash price of $10,000.
ACCT-3030

32. 6. Notes Receivable Example N = 3 i = ? PV = $10,000
FV = $12, i = 7.7%
ACCT-3030

33. 6. Notes Receivable Date Accounts Dr. Cr. Notes Receivable 12,500
1/1/year 1
Notes Receivable
12,500
Discount on N/R
2,500
Sales
10,000
12/31/year 1
770
Interest Revenue ( =10000; x .077 = 770)
12/31/year 2
829
Interest Revenue (2500 – 770 = 1730;
=10770; x .077 = 829)
12/31/year 3
901*
Interest Revenue (1730 – 829 = 901;
=11599; x .077 ≈ 901)
Cash
6. Notes Receivable
* = rounded
ACCT-3030

34. 7. Fair Value Option
FASB allows financial instruments to be valued at fair value
If company chooses fair value option
adjust notes to FV at year-end
unrealized holding gains or losses included in net income
Once elected must always continue to be used
ACCT-3030