Chapter03-AccReceivable_edited.ppt

1,TOPIC,3PartII,ACCOUNTS/NOTESRECEIVABLE,2,LearningObjectives,1.Definereceivablesandidentifythedifferenttypesofreceivables.2.Explainaccountingissuesrelatedtorecognitionandvaluationofaccountsreceivable.3.AssignmentandFactoringofAccountsReceivables,3,LearningObjectives,4.Explainaccountingissuesrelatedtorecognitionandvaluationofnotesreceivable.5.Explainhowreceivablesarereportedandanalysed.,4,Section1:Definitionandtypesofreceivables,5,Receivable-Definition,Amountsduefromindividualsandcompanies.,6,Accountsreceivables,Receivableassociatedwiththenormaloperatingactivitiesofabusinesse.g.CreditsalesofgoodsSalesreturninJanuaryRM2,00031/1/05RMRMCash179,000CashDiscounts1,000Salesreturn2,000AccountsReceivableAssigned182,000(torecordcollectioninJanuary),44,Assignmentofreceivables,1/2/05February2005,PaymenttoSalemBankonamountowedplusinterestonnotepayableJournalentries-1/2/05RMRMDRNotespayable179,000DRInterestexpense2,000CRCash181,000(Torecordloanrepayment),45,Inthebankersbook:1/2/05DRCash181,000CRNotereceivable179,000CRInterestrevenue2,000(torecordreceiptsfromProvoCo.andrecognizeinterestrevenue),46,Assignmentofreceivables,28/2/05Collectionoftheremaining118,000ofreceivablesassignedRMRMDRCash118,000CRAccountsReceivable118,000Assigned(TorecordcollectioninFebruary),47,Assignmentofreceivables,1/3/05RemittanceofbalanceduetoSalemBankRMRMDRNotespayable21,000DRInterestexpense210CRCash21,210(torecordloanrepayment),48,Assignmentofreceivables,28/2/05AssumingProvoreceivedRM21,000fromARAssigned,insteadofRM118,000:Dr.Cash21,000Cr.A/Rassigned21,000(TorecordcollectioninFebruary),49,1/3/05RemittedthebalanceduetoSalemBank.Dr.NotesPayable21,000Dr.Interestexpense210Cr.Cash21,210(Torecordloanrepayment)ThebalanceinAccountsReceivableAssignedistobereclassifiedasfollows:Dr.AccountsReceivable97,000Cr.AccountsReceivable97,000Assigned(ToreclassifyremainingbalanceofARassigned),Assignmentofreceivables,50,Inthebankersbook:1/3/05DRCash21,210CRNotesreceivable21,000CRInterestrevenue210(torecordreceiptsfromProvoCo.andrecognizeinterestrevenue),51,Factoringofreceivables,Anotherwayofobtainingcashadvancesontradedebts.FACTORING:transferring(selling)theARtoafactor(acompanythatundertakesfactoring)Differsfromassignmentoftradedebtswherethefactoringcompanyadministersthecreditmanagement(includessalesaccountingservices,creditadministrationandcontrolservicesandcollectionservices)forthecompany.,52,Question:Howisfactoringrecorded?ArewegoingtoRECOGNIZEorDERECOGNIZEthesoldreceivables?,FRS139/Para17Derecognitionoffinancialassets(a)whenthecontractualrightstothecashflowsexpire.(b)whentherightsattachedtotheassethavenotexpired,insteadtheassethasbeentransferredtoanotherparty.,53,FRS139,Morecomplexsituation,adoptsastepbystepapproach:Whetherthereisatransferofthefinancialasset(“theassettransfertest”);andWhethersubstantiallyalltherisksandrewardsofownershipofthefinancialassethavebeentransferred(“theriskandrewardtest”).,54,FRS139,Generalprincipal:IfitpassesboththeassettransfertestandtheriskandrewardtestDERECOGNIZEIfitfailstheassettransfertestCONTINUETORECOGNIZEIfitpassestheassettransfertestbutfailstheriskandrewardstest,theentityneedstoconsiderwhethertheentityhasretainedcontrolovertheassetandifsowhatextentofitscontinuinginvolvementintheassetis-IfdonotretainedcontrolDERECOGNIZE-IfretainedcontrolCONTINUETORECOGNIZE,55,Factoringofreceivables,Twotypesofdebtfactoring:DebtfactoringwithrecourseDebtfactoringwithoutrecourse,56,RECOURSEreferstotheultimateresponsibilitytopayforthedebt(ifdefault).,57,Factoringofreceivableswithrecourse,DebtfactoringwithrecourseImmediatecashadvancesforcertain%ofthedebtfactoredprovidedbythefactoringcompany.Thefactorcompanyactsasacollectionagent.Thesellerhasretainedalltheriskassociatedwiththetradereceivablefullrecourse.,58,Factoringofreceivableswithrecourse(cont.),Therefore,thetradereceivableswouldberetainedontheBSasassetsandtheproceedsreceivedwouldberecognizedasaliability.Asandwhenthetradedebtorssettledandthecashwaspassedovertothefactor,thetradereceivablesandliabilitywouldbereduced.,59,Example:JackoSdnBhdhadRM4,000,000accountsreceivable.TheA/Rweresoldtoabankonarecoursefactoringarrangement.TheamountofcashadvanceobtainedwasRM3,600,000lessafactoringfeeofRM60,000.Alsofinanceinterestiscalculatedat15%p.a.Showthejournalentrytorecordtherecoursefactoringarrangement.,Factoringofreceivableswithrecourse(Example1),60,JournalentrySELLERSBOOKRMRMDRCash3,540,000DRFactoringfeedeferred60,000CRLiabilityontransferredAR3,600,000(torecordreceivablesfactoredwithrecourse)Factoringfeewillbeamortizedovertheperiodofthedebtcollection.Interestwillberecognizedasanexpenseuntilthedebtsarecollectedandadvancepaid.,Factoringofreceivableswithrecourse(Example1),61,Receivablesfactoringwithrecourse(Example2),TextilesCorporationfactorsRM500,000ofaccountsreceivablewithCottonBankBerhadonarecoursebasis.TheCottonBankBerhadassessesafinancechargeof3%oftheamountofaccountsreceivableandretainanamountequalto5%oftheaccountsreceivable.,62,JournalentriesTextilesCorp.(SELLERSBOOK)RMRMDRCash460,000DRReceivablefromBank-holdback(5%)25,000DRFinancecharge(deferred)(3%)15,000CRLiabilityontransferredAR500,000,Receivablesfactoringwithrecourse(Example2),63,JournalentriesCottonBankBerhad(FACTORSBOOK)RMRMDRAccountsreceivable500,000CRPayabletoTextiles25,000CRFinancingrevenue15,000CRCash460,000,Receivablesfactoringwithrecourse(Example2),64,Example2-Receivablesfactoringwithrecourse:CollectionofAR,AssumeRM20,000wasuncollectibleandtherewereRM7,000salesreturnandallowances,salesdiscountofRM5,000.Theremainingamountwascollectedbythebank.,65,RecordingbyTextilesCorp.(SELLERSBOOK):,Baddebtexpense20,000Salesdiscount5,000SalesReturnandAllow.7,000ReceivablesfromBank25,000Cash7,000(torecordsalesadjustmentandBDandpayfortheshortage)LiabilityontransferredRecv.500,000Accountsreceivable500,000(tocloseliabilitya/canda/receivablescollected),66,RecordingbyBank(FACTORSBOOK),Cash468,000PayabletoTextiles12,000AcctReceivable480,000(torecordcollectionfromdebtors)PayabletoTextiles13,000Cash7,000AcctReceivable20,000(torecordsettlementofA/Rfactored),67,Factoringofreceivableswithoutrecourse,DebtfactoringwithoutrecourseThelegaltitle(theform)togetherwiththerisksandrewards(thesubstance)ofthetradedebtspasstothefactoringcompany.Thedifferencebetweenthenetproceedsandthecarryingamountofthetradedebts(ifany)isrecognizedasalossonsaleoftradedebtsintheincomestatement.,68,Factoringofreceivableswithoutrecourse,Ownership,risksandgainwillbetransferredtothefactoringcompany.Controlofreceivableswouldbeinthehandoffactoringcompany.FactoringcompanywillchargethecommissionbasedontherisksassociatedFactoringcompanynormallypays80%-90%ofthefacevalueafterconsideringthepotentialsalesreturn/allowance,69,TextilesCorporationfactorsRM500,000ofaccountsreceivablewithCottonBankBerhadonawithoutrecoursebasis.ThereceivablerecordsaretransferredtoCottonBankBerhad,whichwillreceivethecollections.TheCottonBankBerhadassessesafinancechargeof3%oftheamountofaccountsreceivable&retainanamountequalto5%oftheaccountsreceivable.,Factoringofreceivableswithoutrecourse-Example1,70,JournalentriesTextilesCorp.(SELLERSBOOK)RMRMDRCash460,000DRReceivablefromBank-holdback25,000DRFinancecharge15,000CRAccountsreceivable500,000(Torecordthereceivablessoldwithoutrecourse),Factoringofreceivableswithoutrecourse-Example1,71,JournalentriesCottonBankBerhad(FACTORSBOOK)RMRMDRAccountsreceivable500,000CRPayabletoTextiles25,000CRFinancingrevenue15,000CRCash460,000(Torecordthereceivablespurchasedwithoutrecourse),Factoringofreceivableswithoutrecourse-Example1,72,Example1-Receivablesfactoringwithoutrecourse:CollectionofAR,AssumeRM20,000wasuncollectibleandtherewereRM7,000salesreturnandallowances,salesdiscountofRM5,000.Theremainingamountwascollectedbythebank.,73,RecordingbyTextiles(SELLERSBOOK):,Salesdiscount5,000SalesReturnandAllow.7,000Cash13,000Rec.fromBank25,000(torecordsalesadjustments),74,Collection:RecordingbyBank(FACTORSBOOK),Cash468,000Baddebtexpense20,000PayabletoTextiles12,000A/R500,000(torecordcollectionfromdebtors)PayabletoTextiles13,000Cash13,000(torecordsettlementofA/Rfactored),75,Section4:Notesreceivable,76,Introduction,ApromissorynoteisawrittenpromisetopayasumofmoneyonaspecifieddateinthefutureThepartiestoapromissorynoteare:Themaker/borrower/customer-thepartythatpromisestorepaytheamountborrowedThepayee-thepartythatwillreceivethepaymentE.g.RM1,000,60-daynote,12%interestp.a.RM50,000,6-monthnote,10%interestp.a.,77,Principal-theamountborrowed/thefacevalue/thestatedamountofthenoteMaturitydate-thedatethenoteistoberepaid/dueTerm-thetimeperiod/lifeofthenote(indaysormonths)Interest-theamountchargedontheborrowerfortheuseofthemoneyborrowedMaturityvalue-theamountofcashtoberepaidincludingprincipalandinterestonthematuritydate,TermsusedinNoteReceivable,78,Duedate,Thelifeofanotemaybeexpressedinmonthsordays.Whenthelifeofanoteisexpressedintermsofmonths,theduedateisfoundbycountingthemonthsfromthedateofissue.Whentheduedateisstatedintermsofdays,itisnecessarytocounttheexactnumberofdaystodeterminethematuritydate.Incountingthelifeofanote,thedatethenoteisissuedisomittedbuttheduedateisincluded.,79,Example,80,Computinginterest,TheformulaforcomputingINTERESTisPRT:Principle(FaceValue)xRate(annualinterestrate)xTime(inTermsofoneyear),81,Computinginterest,365,RM99,RM99,RM5099,RM5099,82,Entriestorecordnotesreceivables,Atthetimeanoteisreceived,itisrecordedatfacevaluewithnointerestadded.,83,Entriestorecordnotesreceivables,Notesreceivablearereportedattheircash(net)realizablevalueAnoteishonoredwhenitispaidinfullatmaturityInterestrevenueisrecordedwhenthenoteispaid.However,ifinterimfinancialstatementsareprepared,interestonnotesreceivableisaccruedandshownasinterestrevenueasitisearned.,84,Entriestorecordnotesreceivables,85,Entriestorecordnotesreceivables,Ifanoteisnotpaidinfullatmaturity,itiscalledadishonorednote.Ifitcanreasonablybeassumedthattheamountduewillultimatelybecollected,itisusuallytransferredtoanAccountReceivable.,86,Entriestorecordnotesreceivables,87,Notesreceivableareissuedatfacevaluewhenthestatedrateofinterestisthesameastheeffective(market)rate.Ifthestatedrateislessthantheeffectiveratethenadiscountresults.Ifthestatedrateisgreaterthantheeffectiveratethenapremiumresults.Thediscountorpremiumisamortizedtointerestrevenuebytheeffectiveinterestmethod.,Recognitionofnotesreceivable,88,Financingwithnotesreceivable(NR),ObtaincashimmediatelyfromNRthroughdiscountingDiscounting:meanssellingtheNRtobankDiscountingNR:sellingtheNRbeforematuritydateatadiscountedprice.,89,Formula,Maturityvalue(MV)=Facevalue(FV)+interestInterest=FVxInterestratextimeDiscount=MVxdiscountratexno.ofdiscountdays/365Proceeds=MVDiscountBookvalue=FV+accruedinterestGain/loss=proceedsbookvalueofnotesreceivable,90,Financing/DiscountingofNotesReceivable,Twomethods:i.withrecourseii.WithoutrecourseDiscountingwithrecoursebankactascollectingagentBUTsellerwillpayincaseofdefault(createliabilityandretainNRinBS)Discountingwithoutrecoursethesellerhasnoresponsibilitywithregardtothenotes,andthenoteisremovedfromthebalancesheet.(allrisksandrewardspassedtothebuyer),91,Example,On1/9/2004,ABCreceivedanotereceivableofRM5,000,10%,90daysfromacustomer.After10days,ABCdiscountedthenotetoBankDEFattherateof15%.Calculation:MV=5,000+(5,000 x0.1x90/365)=5,123Discount=5,123x0.15x80/365=168Proceeds=5,123168=4,955BV=5,000+(5,000 x0.1x10/365)=5,013.70Gain/(loss)=4,9555,013.70=(58.70),92,Journalentry1/9/04-ReceiptsofNR,Sale(withoutrecourse)Dr.NR5,000Cr.AR/Cash5,000,Sale(withrecourse)Dr.NR5,000Cr.AR/Cash5,000,93,Journalentry(10/9/04-DiscountingofNR),Sale(withoutrecourse)Dr.Cash4,955.00Dr.Lossondiscounting58.70Cr.NR5,000.00Cr.Interestrev13.70,Sale(withrecourse)Dr.Cash4,955.