1. 7-1 Intermediate Accounting 14th Edition 7 Cash and Receivables Kieso, Weygandt, and Warfield

2. 7-2  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

3. 7-3 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.

4. 7-4 Summary of Cash-Related Items LO 2 Illustration 7-2

5. 7-5 Accounts Receivable LO 3 Define receivables and identify the different types of receivables. Written promises to pay a sum of money on a specified future date. Receivables - 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

6. 7-6 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: Insurance companies for casualties sustained; defendants under suit; governmental bodies for tax refunds; common carriers for damaged or lost goods; creditors for returned, damaged, or lost goods; customers for returnable items (crates, containers, etc.). Accounts Receivable LO 3 Define receivables and identify the different types of receivables.

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

8. 7-8 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

9. 7-9 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

10. 7-10 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

11. 7-11 How are these accounts presented on the Balance Sheet? Accounts Receivable Allowance for Doubtful Accounts Beg. 500 25 Beg. End. 500 25 End. Recognition of Accounts Receivables LO 4 Explain accounting issues related to recognition of accounts receivable.

12. 7-12 LO 4 Explain accounting issues related to recognition of accounts receivable. Accounts Receivable

13. 7-13 Accounts Receivable Allowance for Doubtful Accounts Beg. 500 25 Beg. End. 600 25 End. Sale 100 Accounts Receivable LO 4 Explain accounting issues related to recognition of accounts receivable. Journal entry for credit sale of $100? Accounts receivable100 Sales 100

14. 7-14 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. Accounts Receivable LO 4 Explain accounting issues related to recognition of accounts receivable.

15. 7-15 LO 5 Explain accounting issues related to valuation of accounts receivable. Allowance Method Losses are Estimated: Percentage-of-sales. Percentage-of-receivables. GAAP requires when material in amount. Methods of Accounting for Uncollectible Accounts Direct Write-Off Theoretically deficient: No matching. Receivable not stated at cash realizable value. Not GAAP when material in amount. Valuation of Accounts Receivable

16. 7-16 LO 5 Explain accounting issues related to valuation of accounts receivable. Emphasis on the Income Statement relationships Emphasis on the Balance Sheet relationships Illustration 7-6 Valuation of Accounts Receivable

17. 7-17 LO 5 Illustration: Gonzalez Company estimates from past experience that about 1% of credit sales become uncollectible. If net credit sales are $800,000 in 2012, it records bad debt expense as follows. Bad Debt Expense 8,000 Allowance for Doubtful Accounts 8,000 Illustration 7-7 Valuation of Accounts Receivable

18. 7-18 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? Illustration 7-8 Accounts Receivable Aging Schedule Valuation of Accounts Receivable

19. 7-19 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).

20. 7-20 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

21. 7-21 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

22. 7-22 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. 0123 $0 $0 Interest$0 $10,000 Principal 4 i = 9% n = 3

23. 7-23 $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.

24. 7-24 LO 6 Explain accounting issues related to recognition of notes receivable. Zero-Interest-Bearing Note Illustration 7-12

25. 7-25 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

26. 7-26 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

27. 7-27 Valuation of Notes Receivable LO 7 Explain the fair value option.  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.

28. 7-28 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.

29. 7-29 Sales of Receivables 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 7-18 LO 8 Explain accounting issues related to disposition of accounts and notes receivable.

30. 7-30 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 Illustration 7-20 Loss on Sale Computation Illustration 7-19 Net Proceeds Computation LO 8

31. 7-31 Illustration: Prepare the journal entries for both Crest Textiles and Commercial Factors for the receivables sold with recourse. Sales of Receivables 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. LO 8 Explain accounting issues related to disposition of accounts and notes receivable.

32. 7-32 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 7-22 LO 8 Explain accounting issues related to disposition of accounts and notes receivable.

33. 7-33 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. APPENDIX APPENDIX 7A CASH CONTROLS

34. 7-34 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. APPENDIX APPENDIX 7A CASH CONTROLS

35. 7-35 LO 10 Explain common techniques employed to control cash. Reconciliation of Bank Balances Illustration 7A-1 Bank Reconciliation Form and Content APPENDIX APPENDIX 7A CASH CONTROLS