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UnderstandingCashandReceivables Chapter6 IntermediateAccounting12thEditionKieso Weygandt andWarfield PreparedbyCobyHarmon UniversityofCalifornia SantaBarbara Identifyitemsconsideredascash Indicatehowtoreportcashandrelateditems Definereceivablesandidentifythedifferenttypesofreceivables Explainaccountingissuesrelatedtorecognitionofaccountsreceivable Explainaccountingissuesrelatedtovaluationofaccountsreceivable Explainaccountingissuesrelatedtorecognitionofnotesreceivable Explainaccountingissuesrelatedtovaluationofnotesreceivable Explainaccountingissuesrelatedtodispositionofaccountsandnotesreceivable Describehowtoreportandanalyzereceivables LearningObjectives CashandReceivables Whatiscash ManagementandcontrolofcashReportingcashSummaryofcash relateditems Cash Receivables RecognitionofaccountsreceivableValuationofaccountsreceivableRecognitionofnotesreceivableValuationofnotesreceivableDispositionofaccountsandnotesreceivablePresentationandanalysis MostliquidassetStandardmediumofexchangeBasisformeasuringandaccountingforallitemsCurrentassetExamples coin currency availablefundsondepositatthebank moneyorders certifiedchecks cashier schecks personalchecks bankdraftsandsavingsaccounts WhatisCash LO1Identifyitemsconsideredascash Cash 1 toestablishpropercontrolstopreventanyunauthorizedtransactions and 2 toprovideinformationnecessarytothepropermanagementofcashonhandandcashtransactions Companiesneedeffectiveinternalcontrolovercash ManagementandControlofCash LO1Identifyitemsconsideredascash Managementfacestwoproblems Companiessegregaterestrictedcashfrom regular cashforreportingpurposes Examples restrictedfor 1 plantexpansion 2 retirementoflong termdebt and 3 compensatingbalances ReportingCash LO2Indicatehowtoreportcashandrelateditems RestrictedCash Illustration7 1 Whenacompanywritesacheckformorethantheamountinitscashaccount ReportingCash LO2Indicatehowtoreportcashandrelateditems BankOverdrafts Generallyreportedasacurrentliability Offsetagainstcashaccountonlywhenavailablecashispresentinanotheraccountinthesamebankonwhichtheoverdraftoccurred Short term highlyliquidinvestmentsthatareboth ReportingCash LO2Indicatehowtoreportcashandrelateditems CashEquivalents readilyconvertibletocash andsoneartheirmaturitythattheypresentinsignificantriskofchangesininterestrates Examples Treasurybills Commercialpaper andMoneymarketfunds Receivables LO3Definereceivablesandidentifythedifferenttypesofreceivables Writtenpromisestopayasumofmoneyonaspecifiedfuturedate Claimsheldagainstcustomersandothersformoney goods orservices Oralpromisesofthepurchasertopayforgoodsandservicessold AccountsReceivable NotesReceivable Examples NontradeReceivables Advancestoofficersandemployees Advancestosubsidiaries Depositstocoverpotentialdamagesorlosses Depositsasaguaranteeofperformanceorpayment Dividendsandinterestreceivable Receivables LO3Definereceivablesandidentifythedifferenttypesofreceivables RecognitionofAccountsReceivables LO4Explainaccountingissuesrelatedtorecognitionofaccountsreceivable TradeDiscountsReductionsfromthelistpriceNotrecognizedintheaccountingrecordsCustomersarebillednetofdiscounts 10 DiscountfornewRetailStoreCustomers RecognitionofAccountsReceivables LO4Explainaccountingissuesrelatedtorecognitionofaccountsreceivable CashDiscountsInducementsforpromptpaymentGrossMethodvs NetMethod Paymenttermsare2 10 n 30 Example OnJune3 BenedictCorp soldtoChesterInc merchandisehavingasalepriceof 5 000withtermsof2 10 n 60 f o b shippingpoint OnJune12 BenedictreceivedacheckforthebalanceduefromChester PreparerequiredjournalentriesassumingBenedictrecordsthesaleatgross Sales5 000 Accountsreceivable5 000 June3 RecognitionofAccountsReceivables LO4Explainaccountingissuesrelatedtorecognitionofaccountsreceivable Cash 5 000 x98 4 900Salesdiscounts100Accountsreceivable5 000 June12 GrossMethod Example OnJune3 BenedictCorp soldtoChesterInc merchandisehavingasalepriceof 5 000withtermsof2 10 n 60 f o b shippingpoint OnJune12 BenedictreceivedacheckforthebalanceduefromChester PreparerequiredjournalentriesassumingBenedictrecordsthesaleatnet Sales4 900 Accountsreceivable4 900 June3 RecognitionofAccountsReceivables LO4Explainaccountingissuesrelatedtorecognitionofaccountsreceivable Accountsreceivable4 900 Cash4 900 June12 NetMethod Example OnJune3 BenedictCorp soldtoChesterInc merchandisehavingasalepriceof 5 000withtermsof2 10 n 60 f o b shippingpoint OnJune29 BenedictreceivedacheckforthebalanceduefromChester PreparerequiredjournalentriesassumingBenedictrecordsthesaleatnet Sales4 900 Accountsreceivable4 900 June3 RecognitionofAccountsReceivables LO4Explainaccountingissuesrelatedtorecognitionofaccountsreceivable Accountsreceivable4 900 Cash5 000 June29 Salesdiscountsforfeited100 NetMethod Acompanyshouldmeasurereceivablesintermsoftheirpresentvalue Inpractice companiesignoreinterestrevenuerelatedtoaccountsreceivablebecausetheamountofthediscountisnotusuallymaterial NonrecognitionofInterestElement LO4Explainaccountingissuesrelatedtorecognitionofaccountsreceivable RecognitionofAccountsReceivables HowaretheseaccountspresentedontheBalanceSheet AccountsReceivable AllowanceforDoubtfulAccounts Beg 500 25Beg End 500 25End AccountingforAccountsReceivable LO4Explainaccountingissuesrelatedtorecognitionofaccountsreceivable AssetsCurrentAssets Cash 346Accountsreceivable500Lessallowancefordoubtfulaccounts25475Inventory812Prepaids 40Totalcurrentassets1 673FixedAssets Officeequipment5 679Furniture fixtures6 600Less Accumulateddepreciation 3 735 Totalfixedassets8 544TotalAssets 10 217 LO4Explainaccountingissuesrelatedtorecognitionofaccountsreceivable AssetsCurrentAssets Cash 346Accountsreceivable netof 25allowancefordoubtfulaccounts475Inventory812Prepaids 40Totalcurrentassets1 673FixedAssets Officeequipment5 679Furniture fixtures6 600Less Accumulateddepreciation 3 735 Totalfixedassets8 544TotalAssets 10 217 LO4Explainaccountingissuesrelatedtorecognitionofaccountsreceivable Journalentryforcreditsaleof 100 Accountsreceivable100Sales100 AccountsReceivable AllowanceforDoubtfulAccounts Beg 500 25Beg End 500 25End AccountingforAccountsReceivable LO4Explainaccountingissuesrelatedtorecognitionofaccountsreceivable Journalentryforcreditsaleof 100 Accountsreceivable100Sales100 AccountsReceivable AllowanceforDoubtfulAccounts Beg 500 25Beg End 600 25End Sale100 AccountingforAccountsReceivable LO4Explainaccountingissuesrelatedtorecognitionofaccountsreceivable Collectedof 333onaccount Cash333Accountsreceivable333 AccountsReceivable AllowanceforDoubtfulAccounts Beg 500 25Beg End 600 25End Sale100 AccountingforAccountsReceivable LO4Explainaccountingissuesrelatedtorecognitionofaccountsreceivable Collectedof 333onaccount Cash333Accountsreceivable333 AccountsReceivable AllowanceforDoubtfulAccounts Beg 500 25Beg End 267 25End Sale100 333Coll AccountingforAccountsReceivable LO4Explainaccountingissuesrelatedtorecognitionofaccountsreceivable Adjustmentof 15forestimatedBad Debts Baddebtexpense15AllowanceforDoubtfulAccounts15 AccountsReceivable AllowanceforDoubtfulAccounts Beg 500 25Beg End 267 25End Sale100 333Coll AccountingforAccountsReceivable LO4Explainaccountingissuesrelatedtorecognitionofaccountsreceivable Adjustmentof 15forestimatedBad Debts Baddebtexpense15AllowanceforDoubtfulAccounts15 AccountsReceivable AllowanceforDoubtfulAccounts Beg 500 25Beg End 267 40End Sale100 333Coll 15Est AccountingforAccountsReceivable LO4Explainaccountingissuesrelatedtorecognitionofaccountsreceivable Write offofuncollectibleaccountsfor 10 AllowanceforDoubtfulaccounts10Accountsreceivable10 AccountsReceivable AllowanceforDoubtfulAccounts Beg 500 25Beg End 267 40End Sale100 333Coll 15Est AccountingforAccountsReceivable LO4Explainaccountingissuesrelatedtorecognitionofaccountsreceivable Write offofuncollectibleaccountsfor 10 AllowanceforDoubtfulaccounts10Accountsreceivable10 AccountsReceivable AllowanceforDoubtfulAccounts Beg 500 25Beg End 257 30End Sale100 333Coll 15Est W O10 10W O AccountingforAccountsReceivable LO4Explainaccountingissuesrelatedtorecognitionofaccountsreceivable AssetsCurrentAssets Cash 346Accountsreceivable netof 30allowancefordoubtfulaccounts227Inventory812Prepaids 40Totalcurrentassets1 673FixedAssets Officeequipment5 679Furniture fixtures6 600Less Accumulateddepreciation 3 735 Totalfixedassets8 544TotalAssets 10 217 LO4Explainaccountingissuesrelatedtorecognitionofaccountsreceivable ValuationofAccountsReceivable LO5Explainaccountingissuesrelatedtovaluationofaccountsreceivable ReportingReceivables ClassificationValuation netrealizablevalue UncollectibleAccountsReceivableSalesonaccountraisethepossibilityofaccountsnotbeingcollected UncollectibleAccountsReceivable LO5Explainaccountingissuesrelatedtovaluationofaccountsreceivable AllowanceMethodLossesareEstimated Percentage of salesPercentage of receivables MethodsofAccountingforUncollectibleAccounts DirectWrite OffTheoreticallyundesirable nomatchingreceivablenotstatedatnetrealizablevalue IncomeStatementApproach BalanceSheetApproach PercentageofSalesMatchingSales BadDebtExpense PercentageofReceivablesNetRealizableValueReceivables AllowanceforBadDebt UncollectibleAccountsReceivable LO5Explainaccountingissuesrelatedtovaluationofaccountsreceivable ExampleDataCreditsales 500 000Estimated ofcreditsalesnotcollected1 25 Accountsreceivablebalance 72 500Estimated ofA Rnotcollected8 AllowanceforDoubtfulAccounts CaseI 150 creditbalance Case2 150 debitbalance UncollectibleAccountsReceivable LO5Explainaccountingissuesrelatedtovaluationofaccountsreceivable Chargesales 500 000Estimatedpercentagex1 25 Estimatedexpense 6 250 Whatshouldtheendingbalancebefortheallowanceaccount Case1andCase2 UncollectibleAccountsReceivable PercentageofSalesMethod LO5Explainaccountingissuesrelatedtovaluationofaccountsreceivable UncollectibleAccountsReceivable Actualbalance credit 150 150 Adjustment 6 250 6 250 Endingbalance 6 400 6 100 Journalentry Allowancefordoubtfulaccounts6 250 Baddebtexpense6 250 Case1 Case2 PercentageofSales LO5Explainaccountingissuesrelatedtovaluationofaccountsreceivable UncollectibleAccountsReceivable Accountsreceivable 72 500Estimatedpercentagex8 Desiredbalance 5 800 Whatshouldtheendingbalancebefortheallowanceaccount Case1andCase2 PercentageofReceivables LO5Explainaccountingissuesrelatedtovaluationofaccountsreceivable UncollectibleAccountsReceivable Actualbalance credit 150 150 Desiredbalance 5 800 5 800 Adjustment 5 650 5 950 Journalentry Case1 Allowancefordoubtfulaccounts5 650 Baddebtexpense5 650 Case1 Case2 PercentageofReceivables LO5Explainaccountingissuesrelatedtovaluationofaccountsreceivable UncollectibleAccountsReceivable Actualbalance credit 150 150 Desiredbalance 5 800 5 800 Adjustment 5 650 5 950 Journalentry Case2 Allowancefordoubtfulaccounts5 950 Baddebtexpense5 950 Case1 Case2 PercentageofReceivables LO5Explainaccountingissuesrelatedtovaluationofaccountsreceivable PercentageofSalesapproach Summary Baddebtexpenseestimateisrelatedtoanominalaccount Sales anybalanceintheallowanceaccountisignored Therefore themethodachievesapropermatchingofcostandrevenues UncollectibleAccountsReceivable PercentageofReceivablesapproach Resultsinamoreaccuratevaluationofreceivablesonthebalancesheet Methodmayalsobeappliedusinganagingschedule LO5Explainaccountingissuesrelatedtovaluationofaccountsreceivable Supportedbyaformalpromissorynote RecognitionofNotesReceivable LO6Explainaccountingissuesrelatedtorecognitionofnotesreceivable NotesReceivable AnegotiableinstrumentMakersignsinfavorofaPayeeInterest bearing hasastatedrateofinterest ORNoninterest bearing interestincludedinfaceamount RecognitionofNotesReceivable LO6Explainaccountingissuesrelatedtorecognitionofnotesreceivable Generallyoriginatefrom CustomerswhoneedtoextendthepaymentperiodofanoutstandingreceivableHigh riskornewcustomersLoanstoemployeesandsubsidiariesSalesofproperty plant andequipmentLendingtransactions themajorityofnotes LO6Explainaccountingissuesrelatedtorecognitionofnotesreceivable RecognitionofNotesReceivable Short Term Long Term RecordatFaceValue lessallowance RecordatPresentValueofcashexpectedtobecollected InterestRatesStatedrate MarketrateStatedrate MarketrateStatedrate Marketrate NoteIssuedatFaceValuePremiumDiscount ExerciseBalanceBarCo lendsBioFoods 100 000inexchangefora 100 000 5 yearnotebearinginterestat8percentannually Themarketrateofinterestforanoteofsimilarriskisalso8percent HowdoesBalanceBarrecordthereceiptofthenote NoteIssuedatFaceValue LO6Explainaccountingissuesrelatedtorecognitionofnotesreceivable 0 1 2 3 4 5 6 8 000 8 000 8 000 8 000 8 000 100 000 Table6 4 8 000 x3 99271 31 942 Interest Factor PresentValue PVofInterest NoteIssuedatFaceValue LO6Explainaccountingissuesrelatedtorecognitionofnotesreceivable Table6 2 100 000 x 68058 68 058 Principal Factor PresentValue PVofPrincipal NoteIssuedatFaceValue LO6Explainaccountingissuesrelatedtorecognitionofnotesreceivable Summary PresentvalueofInterest 31 942PresentvalueofPrincipal68 058Bondcurrentmarketvalue 100 000 NoteIssuedatFaceValue LO6Explainaccountingissuesrelatedtorecognitionofnotesreceivable ExerciseBalanceBarCo receivesa5 year 100 000zero interest bearingnote Themarketrateofinterestforanoteofsimilarriskis6percent HowdoesBalanceBarrecordthereceiptofthenote Zero Interest BearingNote LO6Explainaccountingissuesrelatedtorecognitionofnotesreceivable 0 1 2 3 4 5 6 0 0 0 0 0 100 000 PresentvalueofPrinciple 100 000 PVF5 6 100 000 x 74726 74 726 AmortizationScheduleNon Interest BearingNote LO6Explainaccountingissuesrelatedtorecognitionofnotesreceivable Zero Interest BearingNote JournalEntriesforNon Interest Bearingnote PresentvalueofPrincipal 74 726 LO6Explainaccountingissuesrelatedtorecognitionofnotesreceivable Zero Interest BearingNote ExerciseBalanceBarCo madealoantoBioFoodsandreceivedinexchangea5 year 100 000notebearinginterest8percent Themarketrateofinterestforanoteofsimilarriskis10percent HowdoesBalanceBarrecordthereceiptofthenote Interest BearingNote LO6Explainaccountingissuesrelatedtorecognitionofnotesreceivable PresentvalueofPrinciple 100 000 PVF5 10 100 000 x 62092 62 092PresentvalueofInterest 8 000 PVF5 10 8 000 x3 79079 30 326Presentvalueofnote 92 418 AmortizationScheduleInterest BearingNote LO6Explainaccountingissuesrelatedtorecognitionofnotesreceivable Interest BearingNote JournalEntriesforInterest BearingNote LO6Explainaccountingissuesrelatedtorecognitionofnotesreceivable Interest BearingNote ValuationofNotesReceivable LO7Explainaccountingissuesrelatedtovaluationofnotesreceivable Short TermreportedatNetRealizableValue sameasaccountingforaccountsreceivable Long Termnoteisimpairedwhencollectingallamountsdue bothprincipalandinterest willlikelynotoccur AccountingforimpairmentsdiscussedinAppendix14A DispositionofAccountsandNotesReceivable LO8Explainaccountingissuesrelatedtodispositionofaccountsandnotesreceivable Ownermaytransferaccountsornotesreceivablestoanothercompanyforcash Reasons Competition Sellreceivablesbecausemoneyistight Billing collectionaretime consumingandcostly Transferaccomplishedby SecuredborrowingSaleofreceivables E7 13OnApril1 2007 RasheedCompanyassigns 400 000ofitsaccountsreceivabletotheThirdNationalBankascollateralfora 200 000loandueJuly1 2007 TheassignmentagreementcallsforRasheedCompanytocontinuetocollectthereceivables ThirdNationalBankassessesafinancechargeof2 oftheaccountsreceivable andinterestontheloanis10 arealisticrateofinterestforanoteofthistype SecuredBorrowing Exercise LO8Explainaccountingissuesrelatedtodispositionofaccountsandnotesreceivable Instructions a PreparetheApril1 2007 journalentryforRasheedCompany b PreparethejournalentryforRasheed scollectionof 350 000oftheaccountsreceivableduringtheperiodfromApril1 2007 throughJune30 2007 c OnJuly1 2007 RasheedpaidThirdNationalallthatwasduefromtheloanitsecuredonApril1 2007 Exercise7 13continued LO8Explainaccountingissuesrelatedtodispositionofaccountsandnotesreceivable SecuredBorrowing Exercise Factorsarefinancecompaniesorbanksthatbuyreceivablesfrombusinessesforafee LO8Explainaccountingissuesrelatedtodispositionofaccountsandnotesreceivable SalesofReceivables Illustration7 16 SaleWithoutRecourse PurchaserassumesriskofcollectionTransferisoutrightsaleofreceivableSellerrecordslossonsaleSelleruseDuefromFactor receivable accounttocoverdiscounts returns andallowances LO8