1. Chapter 7 Receivables and Investments Copyright © 2009 South-Western, a part of Cengage Learning. Financial Accounting: The Impact on Decision Makers 6/e by Gary A. Porter and Curtis L. Norton

2. Apple’s Consolidated Balance Sheets (Partial) ASSETS (in millions) September 30, September 24, 2006 2005 Current assets: Cash and cash equivalents $6,392 $3,491 Short-term investments 3,718 4,770 Accounts receivable, less allowances of $52 and $46 1,252 895 Inventories 270 165 Deferred tax assets 607 331 Other current assets 2,270 648 Total current assets $14,509 $10,300 higher

3. 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 Highly liquid

4. 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

5. Apple’s Consolidated Balance Sheets (Partial) (amounts in millions)2006 2005 Accounts receivables, less allowances of $52 and $46, respectively $1,253 $895 Net Realizable Value Estimated Uncollectible Accounts

6. Credit Sales  Slows inflow of cash  Risk of uncollectible accounts Trade Credit Retail Customer Receivables Terms: 2/10, net 30 Sales Invoice LO2

7. 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

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

9. 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...

10. 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

11. 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

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

13. 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 2002 $1,250,000$ 26,400 2003 1,340,000 29,350 2004 1,200,000 23,100 2005 1,650,000 32,150 2006 2,120,000 42,700 $7,560,000$153,700

14. 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 interest @ 6% due upon investment maturity. Example:

15. Percentage of Net Credit Sales Method Develop bad debt percentage: $153,700 $7,560,000 use 2% = 0.02033

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

17. 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

18. 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

19. 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.

20. 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

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

22. 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

23. Baker Corporation promises to pay HighTec, Inc. $15,000 plus 12% annual interest on March 13, 2008. Date: December 13, 2007 Signed:_________ Interest-Bearing Promissory Note Baker Corporation Maturity Date Principal Interest LO3

24. Interest-Bearing Promissory Note Maker Gives a Note to Payee

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

26. Interest-Bearing Promissory Note Adjusting entry to record interest: Interest Receivable90 Interest Revenue 90* *Interest = $15,000 × 12% × 18/360

27. 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

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

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

30. 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

31. 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

32. Investment in a CD October 2, purchase $100,000, 6%, 120-day CD: Short-Term Investment 100,000 Cash 100,000 To record the purchase of short-term CD

33. 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

34. 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

35. 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

36. Investment in Bonds  Bonds of other companies  Intent and ability to hold until maturity $100,000, 9% bond due 2019

37. Investment in Bonds On 1/1/08, Atlantic buys:  $100,000, 10% bonds @ face value  Bonds mature in ten years  Interest payable semiannually Example: Record the purchase of the bonds and receipt of the first interest payment

38. Recording Bond Purchase Investment in Bonds 100,000 Cash100,000 To record purchase of ABC bonds. $100,000, 10% bond due 2017

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

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

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

42. Investment in Stocks On February 1, 2008, 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

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

44. 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

45. 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

46. End of Chapter 7