1. Ch.7 Investments & Receivables

2. Part I Investments (FYI only)

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

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

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

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

7. 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

8. 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

9. Part II Receivables

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

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

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

13. 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

14. 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

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

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

17. 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
Bankrupt

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

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

20. Aging Method Estimated Percent Estimated Amount
Category Amount Uncollectible Uncollectible
Current $ 85, % $
Past due:
1–30 days , % ,248
31–60 days , % ,450
61–90 days , % ,400
90+ days , % ,600
Totals $168, $14,554

21. 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 ,230
Amount for bad debt expense entry $13,324

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

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

24. Part III Notes receivables

25. 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

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

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

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