Chapter 7Chapter 7

Cash and ReceivablesCash and Receivables

CashCash

Includes coin, currency, checking and Includes coin, currency, checking and saving a/c, money order, cashier’s check, saving a/c, money order, cashier’s check, personal check, petty cashpersonal check, petty cash

excludes postdated check, I.O.U., excludes postdated check, I.O.U., advances to employees, postage stamps, advances to employees, postage stamps, restricted cash (compensating balances restricted cash (compensating balances against borrowing)against borrowing)

Cash equivalent : temporary investment Cash equivalent : temporary investment (money market fund, CD, etc.)(money market fund, CD, etc.)

Imprest Petty Cash SystemImprest Petty Cash System

Establishing the petty cash fund:Establishing the petty cash fund:

Petty Cash Fund ......... $300Petty Cash Fund ......... $300

Cash ........................... $300Cash ........................... $300 no entries when petty cash is usedno entries when petty cash is used Reimbursements of the petty cash fund:Reimbursements of the petty cash fund:

Office Expenses ........... $183Office Expenses ........... $183

Cash Over and Short ......... 2Cash Over and Short ......... 2

Cash ............................... $185Cash ............................... $185

Bank Reconciliations--Corrected Bank Reconciliations--Corrected Cash Balances ApproachCash Balances Approach

Balance per bank statement 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 BalanceCorrected Balance

Balance per booksBalance 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 BalanceCorrected Balance

Accounts Receivables--Accounts Receivables--Recognition IssuesRecognition Issues

Amount to be recordedAmount 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 methodgross method : A/R, Sales are recorded at : A/R, Sales are recorded at gross amount, discounts taken are debited to gross amount, discounts taken are debited to the Sales Discounts account.the Sales Discounts account.

net methodnet method: A/R, Sales are recorded at net : A/R, Sales are recorded at net amount, discounts amount, discounts not takennot taken are credited to are credited to Sales Discounts Forfeited (a revenue) Sales Discounts Forfeited (a revenue)

Cash Discounts-- Journal Entries Cash Discounts-- Journal Entries Gross MethodGross Method

At time of sale (term: 2/10, n/30)At time of sale (term: 2/10, n/30)Accounts Receivable..........$1,000Accounts Receivable..........$1,000

Sales.........................................$1,000Sales.........................................$1,000

CuCustomer paid within 10 daysstomer paid within 10 daysCash.......................................$980Cash.......................................$980

Sales (Cash) Discounts.......... 20Sales (Cash) Discounts.......... 20

Accounts Receivable................$1,000 Accounts Receivable................$1,000

CustomerCustomer paid beyond 10 days: paid beyond 10 days:

Cash.....................................$1,000Cash.....................................$1,000

Accounts Receivable................$1,000Accounts Receivable................$1,000

Cash Discounts-- Journal Entries Cash Discounts-- Journal Entries Net MethodNet Method

At time of sale (term: 2/10, n/30)At time of sale (term: 2/10, n/30)Accounts Receivable..........$980Accounts Receivable..........$980

Sales.........................................$980Sales.........................................$980

CuCustomer paid within 10 daysstomer paid within 10 daysCash.......................................$980Cash.......................................$980

Accounts Receivable................$980 Accounts Receivable................$980

CustomerCustomer paid beyond 10 days: paid beyond 10 days:

Cash.....................................$1,000Cash.....................................$1,000

Accounts Receivable................$980Accounts Receivable................$980

Sales Discounts Forfeited........ 20Sales Discounts Forfeited........ 20

Accounts Receivable-Valuation Accounts Receivable-Valuation IssuesIssues

A/R are valued at net realizable value A/R are valued at net realizable value (after subtracting allowance for bad (after subtracting allowance for bad debts, sales returns & collection fees)debts, sales returns & collection fees)

Methods of treating uncollectible a/c:Methods of treating uncollectible a/c:• Direct write-off method (non-GAAP; tax)Direct write-off method (non-GAAP; tax)– Recognized when actually becomes badRecognized when actually becomes bad

• Allowance method (GAAP)Allowance method (GAAP)– Estimated in the period of sale (matching)Estimated in the period of sale (matching)

Estimating Bad Debt ExpenseEstimating Bad Debt Expense

I/S Approach (Percentage-of-Sales)I/S Approach (Percentage-of-Sales)• Bad debt expense = net credit sales x %Bad debt expense = net credit sales x %

B/S Approach (Percentage-of-Receivables)B/S Approach (Percentage-of-Receivables)• Bad debt expense Bad debt expense

= Required ending balance in the Allowance = Required ending balance in the Allowance account (ending A/R x %)account (ending A/R x %)

- existing balance in the Allowance- existing balance in the Allowance

account before adjusting account before adjusting

Notes Receivable--Recognition Notes Receivable--Recognition Issues (Measurement)Issues (Measurement)

N/R are recorded at present value (PV), N/R are recorded at present value (PV), determined by discounting the face amount determined by discounting the face amount of the note and all the future interest using of the note and all the future interest using an effective (market) rate.an effective (market) rate.

PV of zero or unreasonable interest- PV of zero or unreasonable interest- bearing notes should be measured at bearing notes should be measured at • FMV of cash, property, or services exchanged FMV of cash, property, or services exchanged

oror• PV determined by using an imputed rate PV determined by using an imputed rate

Net Carrying Amount of A NoteNet Carrying Amount of A Note

Discount or premium on N/R Discount or premium on N/R is the difference between PV and the faceis the difference between PV and the face

amount of the note at issuance, and should amount of the note at issuance, and should

be be amortized amortized using effective interest method using effective interest method Net carrying amount of a noteNet carrying amount of a note

is the amount reported on B/S, equals to theis the amount reported on B/S, equals to the

face amount less the unamortized discount face amount less the unamortized discount

or plus the unamortized premiumor plus the unamortized premium

Effective Interest Method of Effective Interest Method of Amortization--An ExampleAmortization--An Example

A 10%, 3-year, $10,000 N/R discounted at 12%A 10%, 3-year, $10,000 N/R discounted at 12%

$10,000 x 0.71178 = $7,118$10,000 x 0.71178 = $7,118

$1,000 x 2.40183 = $1,000 x 2.40183 = $2,402$2,402 PV = $9,521 PV = $9,521

Amortization ScheduleAmortization Schedule

Cash Effective Annual Unamortized CarryingCash Effective Annual Unamortized Carrying

Yr Interest Interest Amortization Discount AmountYr Interest Interest Amortization Discount Amount

0 $480 $9,5200 $480 $9,520

1 $1,000 $1,142 $142 338 9,6621 $1,000 $1,142 $142 338 9,662

2 1,000 1,159 159 179 9,8212 1,000 1,159 159 179 9,821

3 1,000 1,179 179 0 10,0003 1,000 1,179 179 0 10,000

Receivables--Disposition IssuesReceivables--Disposition Issues

Assignment (Pledging) of A/R as collateralAssignment (Pledging) of A/R as collateral

General--all A/R assigned, no finance chargeGeneral--all A/R assigned, no finance charge

Specific -- assignor pays a finance chargeSpecific -- assignor pays a finance charge Sale (Factoring) of A/R or N/RSale (Factoring) of A/R or N/R

Without recourse-- outright sale in form & Without recourse-- outright sale in form & substance, a loss on sale is recognizedsubstance, a loss on sale is recognized

With recourse-- recognized as a With recourse-- recognized as a sale sale ifif

allall three conditions are met; three conditions are met;

otherwise, treated as a borrowingotherwise, treated as a borrowing

Transfers of Receivables with Transfers of Receivables with RecourseRecourse

A transfer will be recognized as a sale if A transfer will be recognized as a sale if all three conditions are met:all three conditions are met:• Transferred assets isolated from transferorTransferred assets isolated from transferor• Transferee has right to pledge or sell Transferee has right to pledge or sell

assetsassets• Transferor does not maintain control Transferor does not maintain control

through repurchase agreementthrough repurchase agreement Otherwise, the transfer is a borrowingOtherwise, the transfer is a borrowing

Recorded as A SaleRecorded as A Sale

If there is continuing involvement: use If there is continuing involvement: use financial component approachfinancial component approach• Reduce receivablesReduce receivables• Recognize other assets obtained or other Recognize other assets obtained or other

liabilities incurred (e.g., servicing rights, liabilities incurred (e.g., servicing rights, repurchase rights, recourse liabilities etc.)repurchase rights, recourse liabilities etc.)

• Record gain or lossRecord gain or loss If no continuing involvementIf no continuing involvement• Reduce receivablesReduce receivables• Recognize gain or lossRecognize gain or loss

Assignment of A/R-- Journal Assignment of A/R-- Journal Entries Entries

For AssignorFor AssignorCash...............................$970Cash...............................$970

Finance Charges................30Finance Charges................30

N/P.....................................$1,000N/P.....................................$1,000 For AssigneeFor Assignee

N/R………………...…..$1,000 N/R………………...…..$1,000

Finance Revenue 30Finance Revenue 30

Cash………………………..970 Cash………………………..970

Sale of A/R or N/R --Journal Sale of A/R or N/R --Journal Entries for TransferorEntries for Transferor

Without Recourse Without Recourse Cash...................................................$900Cash...................................................$900

Due from Factor.................................... 70Due from Factor.................................... 70

Loss on Sale of A/R (or N/R).................30Loss on Sale of A/R (or N/R).................30

A/R (or N/R).......................................$1,000A/R (or N/R).......................................$1,000 With Recourse treated as a borrowingWith Recourse treated as a borrowing

Cash ...................................................$900Cash ...................................................$900

Due from Factor......................................70Due from Factor......................................70

Discount on Transferred A/R (or N/R).. ..30Discount on Transferred A/R (or N/R).. ..30

Liabilities on Transferred A/R (or N/R) $1,000Liabilities on Transferred A/R (or N/R) $1,000

Sale With Recourse - continuing Sale With Recourse - continuing involvement involvement Cash...................................................$900Cash...................................................$900

Due from Factor.................................... 70Due from Factor.................................... 70

Loss on Sale of A/R (or N/R)..............…40Loss on Sale of A/R (or N/R)..............…40

A/R (or N/R).......................................$1,000A/R (or N/R).......................................$1,000

Recourse liability……………………… 10Recourse liability……………………… 10