Cash

Introductions to Chapter Seven

The simple Bank Reconciliation Balance per books Add Interest or other

income Earned but not recorded

Add Book Errors Deducts service

charges Deduct NSF Checks Deduct Book Errors Correct Balance

Balance per bank statement

Add: Deposits in Transit

Add: Bank Errors Deduct Outstanding

Checks Deduct Bank Errors Correct Balance

See if you can complete Problem 7-15

RECEIVABLES

Receivables

Concerns with Receivables

All are recorded Proper distinction between current and

non-current receivables is made And most importantly that receivables

are stated at their NRV or Net Realizable Value.

Comparison of Gross vs. Net Again Gross Method

– Debit Accounts Receivable 4,000– Credit Sales 4,000

Net Method– Debit Accounts Receivable 3,880– Credit Sales 3,880

Sales Return

Gross Method– Debit Sales Returns 500– Credit Accounts Rec. 500

Net Method– Debit Sales Returns 485– Credit Accounts Rec.

485

Freight

Gross and Net

Debit Freight-Out 25 Credit Cash 25

Pay Within the Discount Period

Gross Method– Debit Cash 3,395– Debit Sales Discounts 105– Credit Accounts Rec. 3500

Net Method– Debit Cash 3,395– Credit Accounts Rec. 3,395

If Pay Late

Gross Method– Debit Cash 3,500– Credit Accounts Rec 3,500

Net Method– Debit Cash 3,500– Credit Accounts Rec. 3,395– Credit Cash Disc. Forfeited 105

Returns and Allowances If significant returns are expected, an

allowance may be needed. Record sale if

– Fixed Price– Not contingent on resale– Risk of damage with buyer– No obligations– Reasonable estimate of returns can be

made.

Bad Debts-Balance Sheet Approach Balance sheet approach only looks at

accounts receivable and the allowance account.

% given is multiplied by accounts receivable balance and should be the amount shown in the allowance account on the balance sheet.

The $ amount of the entry will generally be different than the amount computed above.

Computation 90,000 X.04= 3,600

The entry is:* Debit: Bad Debt Expense 5,350* Credit: Allowance for U/A

5,350 The Balance Sheet Presentation is:

* Accounts Receivable 90,000* Less: Allowance for U/A 3,600* Net Accounts Receivable 86,400

Bad Debts--Income Statement Approach With the income statement approach we

are looking at the amount which would appear as Uncollectible Accounts Expense or Bad Debt Expense

The amount of the entry is computed by taking some component of sales (credit, net) and multiplying it by the percentage given

The amount in the allowance account on the balance sheet will generally not equal the amount computed above.

Computation- 680,000-30,000=650,000650,000 X.01 = 6,500

The entry to adjust is:* Debit: Bad Debt Expense 6,500* Credit: Allowance for U/A 6,500

The Balance sheet Presentation is:* Accounts Receivable 90,000* Less: Allowance for U/A 4,750* Net Accounts Receivable 85,250

Assignment of Accounts Receivable Here accounts receivable are used as

collateral for a loan Under a general assignment, if

payment on the loan is not made, receivables held at that time will be collected to satisfy the lender

Under a specific assignment, the accounts receivable assigned are specifically collected and used to pay off the loan

Example of Specific Assignment* Facts:

$100,000 of specific accounts receivable are assigned for an $80,000 loan

Finance charge is 1/2 of 1% of assigned accountsAfter two months

* $70,000 of cash collected* Sales returns totaled $5,000* Sales discounts of $800 were acknowledged

Beginning of Third Month* Cash of $71,000 remitted; $70,000 for loan payment and $1,000

for finance chargeThird Month

* $2,000 of accounts deemed uncollectible* Balance of specific accounts receivable are collected

End of Third Month* Loan is satisfied and $300 of finance charge paid

$100,000 of specific accounts receivable are assigned for an $80,000 loanFinance charge is 1/2 of 1% of assigned accounts

Entry on Barker’s Books* Debit: Accounts Rec. Assigned100,000* Credit: Accounts Receivable100,000

* To segregate assigned accounts

* Debit: Cash 79,500* Debit: Finance Expense 500* Credit: Notes Payable 80,000

$100,000 of specific accounts receivable are assigned for an $80,000 loanFinance charge is 1/2 of 1% of assigned accounts

Entry on Heartland Bank’s Books* Debit: Notes Receivable 80,000* Credit: Cash

79,500* Credit: Finance Income

500

After two months$70,000 of cash collectedSales returns totaled $5,000Sales discounts of $800 were acknowledged

Entry on Barker’s Books* Debit: Cash 70,000* Debit: Sales Returns 5,000* Debit: Sales Discounts 800* Credit: A/R Assigned

75,800 Entry on Heartland Bank’s Books

* None

Beginning of Third MonthCash of $71,000 remitted; $70,000 for loan payment and $1,000 for finance charge

Entry on Barker’s Books* Debit: Notes Payable 70,000* Debit Finance Expense 1,000* Credit Cash 71,000

Entry on Heartland Bank’s Books* Debit: Cash 71,000* Credit: Notes Receivable 70,000* Credit: Finance Income 1,000

Third Month$2,000 of accounts deemed uncollectibleBalance of specific accounts receivable are collected

Entry on Barker’s Books* Debit Cash 22,200* Debit Allowance for U/A 2,000

* Credit A/R Assigned24,200

No entry on Heartland Bank’s Books

End of Third MonthLoan is satisfied and $300 of finance charge paid Entry on Barker’s Books

* Debit Notes Payable 10,000* Debit Finance Expense 300* Credit: Cash 10,300

Entry on Heartland Bank’s Books* Debit: Cash 10,300* Credit: Notes Receivable 10,000* Credit: Finance Income 300

Factoring of Accounts Receivable

Transfer withOUT

RECOURSE

Transfer with RECOURSEDoes It meet three conditions

1. Transferor surrenders benefits

2. Transferor’s obligation can be reasonably estimated

3. Transferee cannot require repurchaseRecord as

Sale

Yes NoRecord as

SaleRecord as Borrowing

With Sale: Reduce Receivables, Record Loss (Rarely Gain)

With Borrowing: Record Liability, Record Interest Expense

Look at example on Page 5of your notes.

Factoring Example

100,000 of receivables 3% finance charge if with recourse, 4%

finance charge if without--(estimated uncollectible accounts are $1,000)

5% reserve for sales returns, discounts etc if without recourse because the reserve does not cover uncollectibles. The reserve is set at 6% if with recourse

To Record the Factoring of Rec. Factored without recourse Dr: Cash 91,000 Dr: Receivable-factor 5,000 Dr: Loss on sale of Rec. 4,000 Cr: Accts. Rec. 100,000 Factored with recourse treated as a sale Dr: Cash 91,000 Dr: Receivable-Factor 6,000 Dr: Loss on Sale 3,000 Cr: Accts. Rec. 100,000 Dr: Bad Debt Expense 1,000 Cr: Allowance for Uncoll 1,000

To record First months discounts and returns Without Recourse Dr: Sales Discounts 1,000 Dr: Sales Returns 2,500 Cr: Receivable-factor 3,500 With Recourse treated as a sale Dr. Sales Discounts 1,000 Dr. Sales Returns 2,500 Cr. Receivable-factor 3,500

To Record Second Months Returns and acknowledge uncollectible accounts Without Recourse Dr: Sales Returns 800 Cr: Receivable from Factor 800 With Recourse treated as a sale Dr. Sales Returns 800 Dr. Allowance for Uncoll 1500 Cr. Receivable from Factor 2,300

Final Settlement

Without Recourse Dr. Cash 700 Cr. Rec. from Factor 700

With Recourse treated as a sale Dr. Cash 200 Cr. Rec from Factor 200

Factoring with recourse-borrowing

Initial Transaction Dr: Cash 91,000 Dr: Receivable-factor 6,000 Dr: Discount on N/P (Fact. AR) 3,000 Cr: N/P (Liability on Fact. AR)

100,000

Dr: Bad debt expense 1,000 Cr: Allow for Uncoll 1,000

Balance sheet

Current Assets Accounts Receivable 100,000 Less: Allowance ( 1,000) Receivable from Factor 6,000

Current Liabilities Notes Payable 100,000 Less Discount (3,000)

Factoring with recourse-Borrowing After First Month Dr: Sales Discounts 1,000 Dr: Sales Returns 2,500 Cr: Receivable-factor 3,500

Dr: Notes Payable 58,500 Cr: Accounts Rec. 58,500

Dr. Finance Expense 1,800 Cr. Discount on N/P 1,800

Balance sheet

Current Assets Accounts Receivable 41,500 Less: Allowance ( 1,000) Receivable from Factor 2,500

Current Liabilities Notes Payable 41,500 Less Discount (1,200)

Factoring with recourse-borrowing Entries for Second Month

– Debit Sales Returns 800– Debit Allowance 1,500– Credit Rec. from Factor 2,300– Here you may need additional adjustment for bad

debts

– Debit Notes Payable 41,500– Credit Accounts Receivable 41,500

– Debit Finance Expense 1,200– Credit Discount on N/P 1,200

Factoring-with recourse-borrowing continued. Final Settlement

– Debit Cash 200– Credit Rec. from Factor 200