1. Chapter 7 Cash and Receivables

2. Cash n Includes coin, currency, checking and saving a/c, money order, cashier’s check, personal check, petty cash n excludes postdated check, I.O.U., advances to employees, postage stamps, restricted cash (compensating balances against borrowing) n Cash equivalent : temporary investment (money market fund, CD, etc.)

3. Imprest Petty Cash System n Establishing the petty cash fund: Petty Cash Fund......... $300 Cash........................... $300 Cash........................... $300 n no entries when petty cash is used n Reimbursements of the petty cash fund: Office Expenses........... $183 Cash Over and Short......... 2 Cash............................... $185 Cash............................... $185

4. Bank Reconciliations--Corrected Cash Balances Approach Balance per bank statement + Deposits in transit, cash on hand + Deposits in transit, cash on hand - Outstanding checks - Outstanding checks +/- Bank’s errors +/- Bank’s errors Corrected Balance Balance per books + Bank’s credits not recorded in books + Bank’s credits not recorded in books - Bank’s debits not recorded in books - Bank’s debits not recorded in books +/- Errors in books +/- Errors in books Corrected Balance

5. Accounts Receivables-- Recognition Issues n Amount to be recorded net of trade discounts off list pricenet of trade discounts off list price treatment of cash discounts (sales discounts)treatment of cash discounts (sales discounts) gross method : A/R, Sales are recorded at gross amount, discounts taken are debited to the Sales Discounts account. net method: A/R, Sales are recorded at net amount, discounts not taken are credited to Sales Discounts Forfeited (a revenue)

6. Cash Discounts-- Journal Entries Gross Method At time of sale (term: 2/10, n/30) Accounts Receivable..........$1,000 Sales.........................................$1,000 Sales.........................................$1,000 Cu stomer paid within 10 days Cash.......................................$980 Sales (Cash) Discounts.......... 20 Accounts Receivable................$1,000 Accounts Receivable................$1,000 Customer paid beyond 10 days: Cash.....................................$1,000 Cash.....................................$1,000 Accounts Receivable................$1,000 Accounts Receivable................$1,000

7. Cash Discounts-- Journal Entries Net Method At time of sale (term: 2/10, n/30) Accounts Receivable..........$980 Sales.........................................$980 Sales.........................................$980 Cu stomer paid within 10 days Cash.......................................$980 Accounts Receivable................$980 Accounts Receivable................$980 Customer paid beyond 10 days: Cash.....................................$1,000 Cash.....................................$1,000 Accounts Receivable................$980 Accounts Receivable................$980 Sales Discounts Forfeited........ 20 Sales Discounts Forfeited........ 20

8. Accounts Receivable-Valuation Issues n A/R are valued at net realizable value (after subtracting allowance for bad debts, sales returns & collection fees) n Methods of treating uncollectible a/c: Direct write-off method (non-GAAP; tax)Direct write-off method (non-GAAP; tax) –Recognized when actually becomes bad Allowance method (GAAP)Allowance method (GAAP) –Estimated in the period of sale (matching)

9. Estimating Bad Debt Expense n I/S Approach (Percentage-of-Sales) Bad debt expense = net credit sales x %Bad debt expense = net credit sales x % n B/S Approach (Percentage-of-Receivables) Bad debt expenseBad debt expense = Required ending balance in the Allowance account (ending A/R x %) = Required ending balance in the Allowance account (ending A/R x %) - existing balance in the Allowance - existing balance in the Allowance account before adjusting account before adjusting

10. Notes Receivable--Recognition Issues (Measurement) n N/R are recorded at present value (PV), determined by discounting the face amount of the note and all the future interest using an effective (market) rate. n PV of zero or unreasonable interest- bearing notes should be measured at FMV of cash, property, or services exchanged or FMV of cash, property, or services exchanged or PV determined by using an imputed ratePV determined by using an imputed rate

11. Net Carrying Amount of A Note n Discount or premium on N/R is the difference between PV and the face amount of the note at issuance, and should be amortized using effective interest method n Net carrying amount of a note is the amount reported on B/S, equals to the face amount less the unamortized discount or plus the unamortized premium

12. Effective Interest Method of Amortization--An Example n A 10%, 3-year, $10,000 N/R discounted at 12% $10,000 x 0.71178 = $7,118 $1,000 x 2.40183 = $2,402 PV = $9,521 $1,000 x 2.40183 = $2,402 PV = $9,521 Amortization Schedule Amortization Schedule Cash Effective Annual Unamortized Carrying Cash Effective Annual Unamortized Carrying Yr Interest Interest Amortization Discount Amount 0 $480 $9,520 1 $1,000 $1,142 $142 338 9,662 2 1,000 1,159 159 179 9,821 3 1,000 1,179 179 0 10,000

13. Receivables--Disposition Issues n Assignment (Pledging) of A/R as collateral General--all A/R assigned, no finance charge Specific -- assignor pays a finance charge n Sale (Factoring) of A/R or N/R Without recourse-- outright sale in form & substance, a loss on sale is recognized With recourse-- recognized as a sale if all three conditions are met; all three conditions are met; otherwise, treated as a borrowing otherwise, treated as a borrowing

14. Transfers of Receivables with Recourse n A transfer will be recognized as a sale if all three conditions are met: Transferred assets isolated from transferorTransferred assets isolated from transferor Transferee has right to pledge or sell assetsTransferee has right to pledge or sell assets Transferor does not maintain control through repurchase agreementTransferor does not maintain control through repurchase agreement n Otherwise, the transfer is a borrowing

15. Recorded as A Sale n If there is continuing involvement: use financial component approach Reduce receivablesReduce receivables Recognize other assets obtained or other liabilities incurred (e.g., servicing rights, repurchase rights, recourse liabilities etc.)Recognize other assets obtained or other liabilities incurred (e.g., servicing rights, repurchase rights, recourse liabilities etc.) Record gain or lossRecord gain or loss n If no continuing involvement Reduce receivablesReduce receivables Recognize gain or lossRecognize gain or loss

16. Assignment of A/R-- Journal Entries n For Assignor Cash...............................$970 Finance Charges................30 N/P.....................................$1,000 N/P.....................................$1,000 n For Assignee N/R………………...…..$1,000 N/R………………...…..$1,000 Finance Revenue 30 Finance Revenue 30 Cash………………………..970 Cash………………………..970

17. Sale of A/R or N/R --Journal Entries for Transferor n Without Recourse Cash...................................................$900 Due from Factor.................................... 70 Loss on Sale of A/R (or N/R).................30 A/R (or N/R).......................................$1,000 A/R (or N/R).......................................$1,000 n With Recourse treated as a borrowing Cash...................................................$900 Due from Factor......................................70 Discount on Transferred A/R (or N/R)....30 Liabilities on Transferred A/R (or N/R) $1,000 Liabilities on Transferred A/R (or N/R) $1,000

18. n Sale With Recourse - continuing involvement Cash...................................................$900 Due from Factor.................................... 70 Loss on Sale of A/R (or N/R)..............…40 A/R (or N/R).......................................$1,000 A/R (or N/R).......................................$1,000 Recourse liability……………………… 10 Recourse liability……………………… 10