Wiley - Chapter 7: Cash and Receivables
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Transcript of Wiley - Chapter 7: Cash and Receivables
Chapter 7-1
ReceivablesReceivablesReceivablesReceivables
ChapteChapter r
77
Chapter 7-2
ReceivablesReceivablesReceivablesReceivables
Written promises to pay a sum of money on a specified future date.
Claims held against customers and others
for money, goods, or services.
Oral promises of the purchaser to pay for goods and services
sold.Accounts Accounts
ReceivableReceivableAccounts Accounts
ReceivableReceivableNotes Notes
ReceivableReceivableNotes Notes
ReceivableReceivable
Chapter 7-3
Examples:
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.
ReceivablesReceivablesReceivablesReceivables
Chapter 7-4
Valuation of Accounts ReceivableValuation of Accounts ReceivableValuation of Accounts ReceivableValuation of Accounts Receivable
Reporting Accounts Receivable
Valuation (net realizable value)
Accounts Receivable less estimate of uncollectable amount
Sales on account raise the possibility of accounts not being collected
Chapter 7-5
Recognition of Accounts ReceivablesRecognition of Accounts ReceivablesRecognition of Accounts ReceivablesRecognition of Accounts Receivables
Trade DiscountsTrade Discounts
Reductions from the list price
Not recognized in the accounting records
Customers are billed net of discounts
Trade DiscountsTrade Discounts
Reductions from the list price
Not recognized in the accounting records
Customers are billed net of discounts
10 % Discount for new Retail Store
Customers
Chapter 7-6
Recognition of Accounts ReceivablesRecognition of Accounts ReceivablesRecognition of Accounts ReceivablesRecognition of Accounts Receivables
Cash DiscountsCash Discounts
Inducements for Inducements for prompt paymentprompt payment
Gross Method vs. Gross Method vs. Net MethodNet Method
Cash DiscountsCash Discounts
Inducements for Inducements for prompt paymentprompt payment
Gross Method vs. Gross Method vs. Net MethodNet Method Payment
terms are 2/10, n/30
Chapter 7-7
Example:Example: On June 3, Benedict Corp. sold to Chester On June 3, Benedict Corp. sold to Chester Inc., merchandise having a sale price of $5,000 with Inc., merchandise having a sale price of $5,000 with terms of 2/10,n/60, f.o.b. shipping point. On June 12, terms of 2/10,n/60, f.o.b. shipping point. On June 12, Benedict received a check for the balance due from Benedict received a check for the balance due from Chester. Prepare required journal entries assuming Chester. Prepare required journal entries assuming Benedict records the sale at Benedict records the sale at grossgross..
June 3
Recognition of Accounts ReceivablesRecognition of Accounts ReceivablesRecognition of Accounts ReceivablesRecognition of Accounts Receivables
June 12
Gross Method
Chapter 7-8
Example:Example: On June 3, Benedict Corp. sold to Chester On June 3, Benedict Corp. sold to Chester Inc., merchandise having a sale price of $5,000 with Inc., merchandise having a sale price of $5,000 with terms of 2/10,n/60, f.o.b. shipping point. On June 12, terms of 2/10,n/60, f.o.b. shipping point. On June 12, Benedict received a check for the balance due from Benedict received a check for the balance due from Chester. Prepare required journal entries assuming Chester. Prepare required journal entries assuming Benedict records the sale at Benedict records the sale at netnet..
June 3
Recognition of Accounts ReceivablesRecognition of Accounts ReceivablesRecognition of Accounts ReceivablesRecognition of Accounts Receivables
June 12
Net Method
Chapter 7-9
Example:Example: On June 3, Benedict Corp. sold to Chester On June 3, Benedict Corp. sold to Chester Inc., merchandise having a sale price of $5,000 with Inc., merchandise having a sale price of $5,000 with terms of 2/10,n/60, f.o.b. shipping point. On terms of 2/10,n/60, f.o.b. shipping point. On June 29June 29, , Benedict received a check for the balance due from Benedict received a check for the balance due from Chester. Prepare required journal entries assuming Chester. Prepare required journal entries assuming Benedict records the sale at Benedict records the sale at netnet..
June 3
Recognition of Accounts ReceivablesRecognition of Accounts ReceivablesRecognition of Accounts ReceivablesRecognition of Accounts Receivables
June 29
Net Method
Chapter 7-10
Estimate of Uncollectible AccountsEstimate of Uncollectible AccountsEstimate of Uncollectible AccountsEstimate of Uncollectible Accounts
Allowance MethodAllowance MethodLosses are Estimated:
Percentage-of-salesPercentage-of-receivables
Methods of Accounting for Uncollectible Accounts
Direct Write-OffDirect Write-OffTheoretically
undesirable:no matchingreceivable not stated at net realizable value
Chapter 7-11
Income Stateme
nt Approach
Income Stateme
nt Approach
Balance Sheet
Approach
Balance Sheet
Approach
Percentage of SalesPercentage of Sales
Focus on Matching
Sales --- Bad Debt Expense
Percentage of ReceivablesPercentage of Receivables
Focus on Net Realizable Value
Receivables - Allowance for Bad Debt
Estimate of Uncollectible AccountsEstimate of Uncollectible AccountsEstimate of Uncollectible AccountsEstimate of Uncollectible Accounts
Chapter 7-12
Uncollectible Accounts ReceivableUncollectible Accounts ReceivableUncollectible Accounts ReceivableUncollectible Accounts Receivable
Percentage-of-Receivables Approach
not matching.
reports receivables at net realizable value.
Companies may apply this method using
one composite rate, or
an aging schedule of accounts receivable.
Chapter 7-13
Example DataExample Data
Accounts receivable balanceAccounts receivable balance $72,500 $72,500
Estimated % of A/R not collectedEstimated % of A/R not collected 8% 8%
Allowance for Doubtful Accounts:Allowance for Doubtful Accounts:
Case 1Case 1 $150 (credit balance)$150 (credit balance)
Case 2Case 2 $150 (debit balance)$150 (debit balance)
Example DataExample Data
Accounts receivable balanceAccounts receivable balance $72,500 $72,500
Estimated % of A/R not collectedEstimated % of A/R not collected 8% 8%
Allowance for Doubtful Accounts:Allowance for Doubtful Accounts:
Case 1Case 1 $150 (credit balance)$150 (credit balance)
Case 2Case 2 $150 (debit balance)$150 (debit balance)
Estimate of Uncollectible AccountsEstimate of Uncollectible AccountsEstimate of Uncollectible AccountsEstimate of Uncollectible Accounts
Chapter 7-14
Estimate of Uncollectible AccountsEstimate of Uncollectible AccountsEstimate of Uncollectible AccountsEstimate of Uncollectible Accounts
Accounts receivableAccounts receivable $ 72,500$ 72,500
Estimated percentageEstimated percentage x 8%x 8%
Desired balanceDesired balance $ 5,800$ 5,800
======================================================================================================
What should the ending balance be for the What should the ending balance be for the allowance account? -- allowance account? -- Case 1Case 1 and and Case 2Case 2
Accounts receivableAccounts receivable $ 72,500$ 72,500
Estimated percentageEstimated percentage x 8%x 8%
Desired balanceDesired balance $ 5,800$ 5,800
======================================================================================================
What should the ending balance be for the What should the ending balance be for the allowance account? -- allowance account? -- Case 1Case 1 and and Case 2Case 2
Percentage of Receivables
Chapter 7-15
Estimate of Uncollectible AccountsEstimate of Uncollectible AccountsEstimate of Uncollectible AccountsEstimate of Uncollectible Accounts
Actual balance (credit) (150)
Desired balanceAdjustment to = desired balanceJournal entry – Case 1:
Case 1 Case 2
Percentage of Receivables
Chapter 7-16
Estimate of Uncollectible AccountsEstimate of Uncollectible AccountsEstimate of Uncollectible AccountsEstimate of Uncollectible Accounts
Actual balance (credit) (150) 150
Desired balance
(5,800)
Adjustment to = desired balance
(5,650)
Journal entry – Case 2:
Case 1 Case 2
Percentage of Receivables
Chapter 7-17
Summary
Estimate of Uncollectible AccountsEstimate of Uncollectible AccountsEstimate of Uncollectible AccountsEstimate of Uncollectible Accounts
Record the receivable amount:
Initially valued at the exchange price
Net versus Gross method if cash discounts
Estimate the Uncollectable amount:
Percentage of Sales approach
Percentage of Receivables approach
Chapter 7-18
Write-off of uncollectible accounts for $10?Write-off of uncollectible accounts for $10?
Allowance for Doubtful accountsAllowance for Doubtful accounts 1010
Accounts receivableAccounts receivable 1010
Write-off of uncollectible accounts for $10?Write-off of uncollectible accounts for $10?
Allowance for Doubtful accountsAllowance for Doubtful accounts 1010
Accounts receivableAccounts receivable 1010
Accounts ReceivableAllowance for
Doubtful Accounts
Beg. 500 25 Beg.
Write-Off Accounts ReceivableWrite-Off Accounts ReceivableWrite-Off Accounts ReceivableWrite-Off Accounts Receivable
Chapter 7-19
Recovery of previously written off accounts for $10?Recovery of previously written off accounts for $10?Recovery of previously written off accounts for $10?Recovery of previously written off accounts for $10?
Write-Off Accounts ReceivableWrite-Off Accounts ReceivableWrite-Off Accounts ReceivableWrite-Off Accounts Receivable
Chapter 7-20
Estimate of Uncollectible AccountsEstimate of Uncollectible AccountsEstimate of Uncollectible AccountsEstimate of Uncollectible Accounts
For similar exercises see E 7-7 & E7- 8
P7- 2
Chapter 7-21
Supported by a formal promissory note.
Recognition of Notes ReceivableRecognition of Notes ReceivableRecognition of Notes ReceivableRecognition of Notes Receivable
Notes Receivable
A negotiable instrument
Maker signs in favor of a Payee
Interest-bearing (has a stated rate of interest) OR
Noninterest-bearing (interest included in face amount)
Chapter 7-22
Recognition of Notes ReceivableRecognition of Notes ReceivableRecognition of Notes ReceivableRecognition of Notes Receivable
Short-Term Long-Term
Record at Face Value,
less allowance
Record at Present Value
of cash expected to be collected
Interest Rates
Stated rate = Market rate
Stated rate > Market rate
Stated rate < Market rate
Note Issued at
Face Value
Premium
Discount
Chapter 7-23
Exercise Balance Bar Co. lends Bio Foods $100,000 in exchange for a $100,000, 5-year note bearing interest at 8 percent annually. The market rate of interest for a note of similar risk is also 8 percent. How does Balance Bar record the receipt of the note?
Note Issued at Face ValueNote Issued at Face ValueNote Issued at Face ValueNote Issued at Face Value
0 1 2 3 4 5 6
Chapter 7-24
Interest= Payment *[PV of OA Factor i=8%, n=5]
Note Issued at Face ValueNote Issued at Face ValueNote Issued at Face ValueNote Issued at Face Value
Principal= Principal *[PV of $1 Factor i=8%, n=5]
P.V. of Note= P.V. of Principal + P.V. of Interest:
Chapter 7-25
Journal Entries:Journal Entries:Journal Entries:Journal Entries:
Note Issued at Face ValueNote Issued at Face ValueNote Issued at Face ValueNote Issued at Face Value
Record issuance of note receivable:
Record Interest revenue at end of years 1 through 5
Chapter 7-26
Exercise Balance Bar Co. receives a 5-year, $100,000 zero-interest-bearing note. The market rate of interest for a note of similar risk is 6 percent. How does Balance Bar record the receipt of the note?
Zero-Interest-Bearing NoteZero-Interest-Bearing NoteZero-Interest-Bearing NoteZero-Interest-Bearing Note
0 1 2 3 4 5 6
0 0 0$0 0
$100,000
Chapter 7-27
Amortization ScheduleNon-Interest-Bearing Note
6% CarryingCash Interest Discount Amount
Received Revenue Amortized of NoteDate of issue 74,726$ End of yr. 1End of yr. 2End of yr. 3End of yr. 4 - 5,340 5,340 94,340 End of yr. 5 - 5,660 5,660 100,000
- 25,274 25,274
Zero-Interest-Bearing NoteZero-Interest-Bearing NoteZero-Interest-Bearing NoteZero-Interest-Bearing Note
Chapter 7-28
Journal Entries for Non-Interest-Bearing noteJournal Entries for Non-Interest-Bearing noteJournal Entries for Non-Interest-Bearing noteJournal Entries for Non-Interest-Bearing note
Zero-Interest-Bearing NoteZero-Interest-Bearing NoteZero-Interest-Bearing NoteZero-Interest-Bearing Note
Record issuance of note receivable:
Record Interest revenue at end of year 1
Chapter 7-29
Exercise Balance Bar Co. made a loan to Bio Foods and received in exchange a 5-year, $100,000 note bearing interest 10 percent. The market rate of interest for a note of similar risk is 8 percent. How does Balance Bar record the receipt of the note?
Interest-Bearing NoteInterest-Bearing NoteInterest-Bearing NoteInterest-Bearing Note
Present value of Principle:
$100,000 (PVF5, 8%) = $100,000 x .68058 =
$ 68,058
Present value of Interest:
$10,000 (PVF5, 8%) = $10,000 x 3.99271 =
39,927
Present value of note
$ 107,985
Chapter 7-30
Amortization ScheduleInterest-Bearing Note
8% CarryingCash Interest Premium Amount
Received Revenue Amortized of NoteDate of issue 107,985$ End of yr. 1 10,000 8,639$ (1,361)$ 106,624 End of yr. 2 10,000 8,530 (1,470) 105,154 End of yr. 3 10,000 8,412 (1,588) 103,566 End of yr. 4 10,000 8,285 (1,715) 101,851 End of yr. 5 10,000 8,148 (1,851) 100,000
50,000 42,014 (7,985)
Interest-Bearing NoteInterest-Bearing NoteInterest-Bearing NoteInterest-Bearing Note
Chapter 7-31
Journal Entries for Interest-Bearing Note
Date Account Title Debit Credit
J an. yr. 1 Notes receivable 100,000
Premium on notes receivable 7,985
Cash 107,985
Dec. yr. 1 Cash 10,000
Premium on notes receivable 1,361
I nterest revenue 8,639
($107,985 x 8%)
Interest-Bearing NoteInterest-Bearing NoteInterest-Bearing NoteInterest-Bearing Note
Chapter 7-32
Notes Receivable ExerciseNotes Receivable ExerciseNotes Receivable ExerciseNotes Receivable Exercise
For similar exercise see BE 7-7
Chapter 7-33
General rule in classifying receivables are:1. Segregate the different types of receivables that a
company possesses, if material.
2. Appropriately offset the valuation accounts against the proper receivable accounts.
3. Determine that receivables classified in the current assets section will be converted into cash within the year or the operating cycle, whichever is longer.
4. Disclose any loss contingencies that exist on the receivables.
5. Disclose any receivables designated or pledged as collateral.
6. Disclose all significant concentrations of credit risk arising from receivables.
Presentation and AnalysisPresentation and AnalysisPresentation and AnalysisPresentation and Analysis