Transcript Slide 1

Chapter 6 – Time Value of Money
• Tell me what you did for partial credit
– PV
– FV
– Pmt
–n
–i
• Solve using
– Formulas – Have at it
– Tables – Bring your own copies
– Calculators – See syllabus for models and also refer
to the “tutorials” linked to on the website
CHAPTER 7
CASH AND RECEIVABLES
Sommers – Intermediate I
Reporting Cash
Bank Overdrafts
Company writes a check for more than the amount in its
cash account.

Generally reported as a current liability.

Offset against other cash accounts only when accounts
are with the same bank.
Accounts Receivable
Receivables - Claims held against customers and
others for money, goods, or services.
Oral promises of the
purchaser to pay for goods
and services sold.
Accounts Receivable
Written promises to pay a
sum of money on a
specified future date.
Notes Receivable
Accounts Receivable
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.
6. Claims against: Insurance companies for casualties sustained;
defendants under suit; governmental bodies for tax refunds; common
carriers for damaged or lost goods; creditors for returned, damaged,
or lost goods; customers for returnable items (crates, containers,
etc.).
Trade Discounts

Reductions from the list price

Not recognized in the accounting
records

Customers are billed net of discounts
Cash (Sales) Discounts
 Inducements
for
prompt payment
 Gross
Method
vs. Net Method
Payment
terms are
2/10, n/30
Big Customers Are Slow to Pay – WSJ Jun 7, 2012
Sales and Trade Discounts
Tracy Company, a manufacturer of air conditioners, sold 100 units to
Thomas Company on November 17, 2011. The units have a list price of
$600 each, but Thomas was given a 30% trade discount. The terms of
the sale were 2/10, n/30.
Assume the gross method of accounting for cash discounts is used.
Prepare the journal entries to record the sale on November 17 (ignore
cost of goods) and collection on November 26, 2011.
Sales and Trade Discounts
Tracy Company, a manufacturer of air conditioners, sold 100 units to
Thomas Company on November 17, 2011. The units have a list price of
$600 each, but Thomas was given a 30% trade discount. The terms of
the sale were 2/10, n/30.
Assume the gross method of accounting for cash discounts is used.
Prepare the journal entries to record the sale on November 17 (ignore
cost of goods) and collection on December 15, 2011.
Sales and Trade Discounts
Tracy Company, a manufacturer of air conditioners, sold 100 units to
Thomas Company on November 17, 2011. The units have a list price of
$600 each, but Thomas was given a 30% trade discount. The terms of
the sale were 2/10, n/30.
Assume the net method of accounting for cash discounts is used.
Prepare the journal entries to record the sale on November 17 (ignore
cost of goods) and collection on November 26, 2011.
Sales and Trade Discounts
Tracy Company, a manufacturer of air conditioners, sold 100 units to
Thomas Company on November 17, 2011. The units have a list price of
$600 each, but Thomas was given a 30% trade discount. The terms of
the sale were 2/10, n/30.
Assume the net method of accounting for cash discounts is used.
Prepare the journal entries to record the sale on November 17 (ignore
cost of goods) and collection on December 15, 2011.
Non-Recognition of Interest
A company should measure receivables in terms of
their present value.
In practice, companies ignore interest revenue related
to accounts receivable because, for current assets, the
amount of the discount is not usually material in
relation to the net income for the period.
Recognition of A/R
How are these accounts presented on the Balance Sheet?
Accounts Receivable
Allowance for
Doubtful Accounts
Beg.
500
25
Beg.
End.
500
25
End.
Recognition of A/R
Assets
Current Assets:
Cash
Accounts receivable
Less: Allowance for doubtful accounts
Inventory
Prepaids
Total current assets
Fixed Assets:
Office equipment
Furniture & fixtures
Less: Accumulated depreciation
Total fixed assets
Total Assets
$
500
(25)
346
475
812
40
1,673
$
5,679
6,600
(3,735)
8,544
10,217
Recognition of A/R
Assets
Current Assets:
Cash
Accounts receivable, net of $25 allowance
Inventory
Prepaids
Total current assets
Fixed Assets:
Office equipment
Furniture & fixtures
Less: Accumulated depreciation
Total fixed assets
Total Assets
$
$
346
475
812
40
1,673
5,679
6,600
(3,735)
8,544
10,217
Uncollectible A/R
An uncollectible account receivable is a loss of revenue
that requires, through proper entry in the accounts,

a decrease in the asset accounts receivable and

a related decrease in income and stockholders’
equity.
Direct Write-Off vs. Allowance Method
Methods of Accounting for Uncollectible Accounts
Direct Write-Off
Theoretically deficient:
Allowance Method
Losses are Estimated:
No matching.
Percentage-of-sales.
Receivable not stated at
cash realizable value.
Percentage-of-receivables.
Not GAAP when material
in amount.
GAAP requires when
material in amount.
Percentage of Sales vs. Receivables
Emphasis on
the Income
Statement
relationships
Emphasis on
the Balance
Sheet
relationships
Percentage of Sales Approach
Percentage-of-Sales Approach

Percentage based upon past experience and
anticipate credit policy.

Achieves proper matching of costs with revenues.

Existing balance in Allowance account not considered.
Example 1a
West Company had the following account balances at December 31,
2009, before recording bad debt expense for the year:
• Accounts receivable
$ 900,000
• Allowance for bad debts (credit balance)
16,000
• Credit sales for 2009
1,750,000
West uses the following method of estimating bad debts for 2009:
• Based on 2% of credit sales.
What amount should West charge to bad debt expense at the end of
2009 under Percentage of Sales (income statement) method?
Percentage-of-Receivables Approach
Percentage-of-Receivables Approach

Not matching.

Reports receivables at realizable value.
Companies may apply this method using

one composite rate, or

an aging schedule using different rates.
Example 1b
West Company had the following account balances at December 31,
2009, before recording bad debt expense for the year:
• Accounts receivable
$ 900,000
• Allowance for bad debts (credit balance)
16,000
• Credit sales for 2009
1,750,000
West uses the following method of estimating bad debts for 2009:
• Based on 5% of year-end accounts receivable.
What amount should West charge to bad debt expense at the end of
2009 under Percentage of Accounts Receivable (balance sheet)
method?
A/R Aging Adjustment
What entry
would Wilson
make assuming
the allowance
account had a
credit balance
of $800 before
adjustment?
Bad Debt Problem
Swathmore Clothing Corporation grants its customers 30 days’ credit. The company uses the
allowance method for its uncollectible accounts receivable. During the year, a monthly bad debt
accrual is made by multiplying 3% times the amount of credit sales for the month. At the fiscal yearend of December 31, an aging of accounts receivable schedule is prepared and the allowance for
uncollectible accounts is adjusted accordingly. At the end of 2010, accounts receivable were
$574,000 and the allowance account had a credit balance of $54,000. Accounts receivable activity
for 2011 was as follows:
Beginning balance
$ 574,000
Credit sales
2,620,000
Collections
(2,483,000)
Write-offs
(68,000)
Ending balance
$ 643,000
The company’s controller prepared the following aging summary of year-end accounts receivable:
Age Group
Amount
% Uncollectible
0-60 days
$430,000
4%
61-90 days
98,000
15%
91-120 days
60,000
25%
Over 120 days
55,000
40%
Totals
$643,000
Prepare a summary journal entry to record the monthly bad debt accrual and the write-offs during
the year.
Bad Debt Problem
During the year, a monthly bad debt accrual is made by multiplying 3% times the amount of
credit sales for the month. Accounts receivable activity for 2011 was as follows:
Beginning balance
$ 574,000
Credit sales
2,620,000
Collections
(2,483,000)
Write-offs
(68,000)
Ending balance
$ 643,000
Bad Debt Problem
Swathmore Clothing Corporation grants its customers 30 days’ credit. The company uses
the allowance method for its uncollectible accounts receivable. During the year, a monthly
bad debt accrual is made by multiplying 3% times the amount of credit sales for the month.
At the fiscal year-end of December 31, an aging of accounts receivable schedule is
prepared and the allowance for uncollectible accounts is adjusted accordingly. At the end of
2010, accounts receivable were $574,000 and the allowance account had a credit balance
of $54,000. Accounts receivable activity for 2011 was as follows:
Beginning balance
$ 574,000
Credit sales
2,620,000
Collections
(2,483,000)
Write-offs
(68,000)
Ending balance
$ 643,000
The company’s controller prepared the following aging summary of year-end accounts
receivable:
Age Group
Amount
% Uncollectible
0-60 days
$430,000
4%
61-90 days
98,000
15%
91-120 days
60,000
25%
Over 120 days
55,000
40%
Totals
$643,000
Prepare the necessary year-end adjusting entry for bad debt expense.
Bad Debt Problem
Swathmore Clothing Corporation grants its customers 30 days’ credit. The company uses
the allowance method for its uncollectible accounts receivable. At the fiscal year-end of
December 31, an aging of accounts receivable schedule is prepared and the allowance for
uncollectible accounts is adjusted accordingly. At the end of 2010, accounts receivable
were $574,000 and the allowance account had a credit balance of $54,000.
Age Group
Amount
% Uncollectible
Allowance
0-60 days
$430,000
4%
$17,200
61-90 days
98,000
15%
14,700
91-120 days
60,000
25%
15,000
Over 120 days
55,000
40%
22,000
$68,900
ABD
Bad Debt Problem
What is total bad debt expense for 2011?
How would accounts receivable appear in the 2011 balance sheet?
Example 2a
Sandel Company reports the following financial information
before adjustments.
Prepare the journal entry to record bad debt expense assuming
Sandel estimates bad debts at (a) 1% of net sales.
Example 2b
Sandel Company reports the following financial information
before adjustments.
Prepare the journal entry to record bad debt expense assuming
Sandel estimates bad debts at (b) 5% of accounts receivable.
Effect of Write-Offs
On May 6, Timberland wrote off a specific account receivable
with balance of $2,500.
Date
Description
May 6 Allowance for Doubtful Accounts
Accounts Receivable
Debit Credit
2,500
2,500
Assume that before the write-off entry, Timberland’s Accounts
Receivable balance was $81,000,000 and the Allowance for
Doubtful Accounts balance was $2,000,000. What effect did
the write-off have?
Before WriteOff
Accounts receivable
$ 81,000,000
Less: Allow. for doubtful accts.
2,000,000
Net realizable value
$ 79,000,000
After WriteOff
$ 80,997,500
1,997,500
$ 79,000,000
Reversal of Write-Off
Assume that the financial vice president of Brown Furniture
authorizes a write-off of the $1,000 balance owed by Randall Co. on
March 1, 2012. The entry to record the write-off is:
Assume that on July 1, Randall Co. pays the $1,000 amount that
Brown had written off on March 1. These are the entries:
LO 5
Notes Receivable
Supported by a formal promissory note.

A negotiable instrument.

Maker signs in favor of a Payee.

Interest-bearing (has a stated rate of interest) OR

Zero-interest-bearing (interest included in face amount).
Notes Receivable..
Generally originate from:

Customers who need to extend payment period of
an outstanding receivable.

High-risk or new customers.

Loans to employees and subsidiaries.

Sales of property, plant, and equipment.

Lending transactions (the majority of notes).
Note Receivable Journal Entries
On June 30, 2011, the Esquire Company sold some
merchandise to a customer for $30,000. In payment,
Esquire agreed to accept a 6% note requiring the payment
of interest and principal on March 31, 2012. The 6% rate is
appropriate in this situation.
Prepare the journal entry to record the sale of merchandise
(omit any entry that might be required for the cost of the
goods sold).
June 30, 2011
Note Receivable Journal Entries
On June 30, 2011, the Esquire Company sold some
merchandise to a customer for $30,000. In payment,
Esquire agreed to accept a 6% note requiring the payment
of interest and principal on March 31, 2012. The 6% rate is
appropriate in this situation.
Prepare the journal entry at December 31, 2011.
December 31, 2011
Note Receivable Journal Entries
On June 30, 2011, the Esquire Company sold some
merchandise to a customer for $30,000. In payment,
Esquire agreed to accept a 6% note requiring the payment
of interest and principal on March 31, 2012. The 6% rate is
appropriate in this situation.
Prepare the journal entry at March 31, 2012.
March 31, 2012
Interest-bearing Note
Illustration: Morgan Corp. makes a loan to Marie Co. and
receives in exchange a three-year, $10,000 note bearing interest
at 10 percent annually. The market rate of interest for a note of
similar risk is 12 percent. How does Morgan record the receipt of
the note?
i = 12%
$10,000 Principal
$1,000
0
1,000
1
2
1,000 Interest
3
4
n=3
FV=10,000, pmt=1,000, n=3, i=12%
=>
PV=9,520
Interest-bearing Note
Illustration: How does Morgan record the receipt of the note?
Interest-bearing Note
Illustration 7-15
Interest-bearing Note
Journal Entries for Interest-Bearing Note
Account Title
Date
Beg. yr. 1
Notes receivable
Discount on notes receivable
Cash
End. yr. 1
($9,520 x 12%)
Debit
Credit
10,000
480
9,520
Discussion Question
Q7-15 What is “imputed interest”?
In what situations is it necessary to impute an interest rate for
notes receivable?
Discussion Question
Q7-15 Continued – What are the considerations in imputing
an appropriate rate?
Non-Interest Bearing Note
On April 30, 2011, the Rangers Company sold some
merchandise to a customer for $40,000. Rangers agreed to
accept a payment of $40,000 on April 30, 2016. A 6% interest
rate is appropriate in this situation.
Prepare the journal entry to record the sale of merchandise (omit
any entry that might be required for the cost of the goods sold).
Non-Interest Bearing Note
On April 30, 2011, the Rangers Company sold some
merchandise to a customer for $40,000. Rangers agreed to
accept a payment of $40,000 on April 30, 2016. A 6% interest
rate is appropriate in this situation.
Prepare the amortization schedule.
Cash
4/30/2011
4/30/2012
4/30/2013
4/30/2014
4/30/2015
4/30/2016
Interest
Amort
Balance
29,890
Non-Interest Bearing Note
On April 30, 2011, the Rangers Company sold some
merchandise to a customer for $40,000. Rangers agreed to
accept a payment of $40,000 on April 30, 2016. A 6% interest
rate is appropriate in this situation.
Prepare the journal entry at December 31, 2011.
December 31, 2011
Cash
4/30/2011
4/30/2012
4/30/2013
4/30/2014
Interest
-
1,793
1,901
2,015
Amort
1,793
1,901
2,015
Balance
29,890
31,683
33,584
35,599
Non-Interest Bearing Note
On April 30, 2011, the Rangers Company sold some
merchandise to a customer for $40,000. Rangers agreed to
accept a payment of $40,000 on April 30, 2016. A 6% interest
rate is appropriate in this situation.
Prepare the journal entry at December 31, 2012.
December 31, 2012
Cash
4/30/2011
4/30/2012
4/30/2013
4/30/2014
Interest
-
1,793
1,901
2,015
Amort
1,793
1,901
2,015
Balance
29,890
31,683
33,584
35,599
Non-Interest Bearing Note
On April 30, 2011, the Rangers Company sold some
merchandise to a customer for $40,000. Rangers agreed to
accept a payment of $40,000 on April 30, 2016. A 6% interest
rate is appropriate in this situation.
What is the balance of the note at December 31, 2012?
Cash
4/30/2011
4/30/2012
4/30/2013
4/30/2014
Interest
-
1,793
1,901
2,015
Amort
1,793
1,901
2,015
Balance
29,890
31,683
33,584
35,599
Non-Interest Bearing Note
On April 30, 2011, the Rangers Company sold some
merchandise to a customer for $40,000. Rangers agreed to
accept a payment of $40,000 on April 30, 2016. A 6% interest
rate is appropriate in this situation.
Prepare the journal entry at April 30, 2016.
April 30, 2016
Cash
4/30/2011
4/30/2012
4/30/2015
4/30/2016
Interest
-
1,793
2,136
2,265
Amort
1,793
2,136
2,265
Balance
29,890
31,683
37,735
40,000
Notes Received for Property, Goods or Services
In a bargained transaction entered into at arm’s
length, the stated interest rate is presumed to be
fair unless:
1. No interest rate is stated, or
2. Stated interest rate is unreasonable, or
3. Face amount of the note is materially different
from the current cash sales price.
Notes Receivable Example
Oasis Development Co. sold a corner lot to Rusty Pelican as a
restaurant site. Oasis accepted in exchange a five-year note
having a maturity value of $35,247 and no stated interest rate.
The land originally cost Oasis $14,000. At the date of sale the land
had a fair market value of $20,000.
Oasis uses the fair market value of the land, $20,000, as the
present value of the note. Oasis therefore records the sale as:
Discussion Question
Q7-16 What is the fair value option? Where do companies
that elect the fair value option report unrealized holding
gains and losses?
Valuation of Notes Receivable

Short-Term reported at Net Realizable Value (same as
accounting for accounts receivable).

Long-Term - FASB requires companies disclose not only
their cost but also their fair value in the notes to the
financial statements.
►
Fair Value Option. Companies have the option to use fair
value as the basis of measurement in the financial
statements. Adjustments to value go through net income.
Disposition of Receivables
Owner may transfer accounts or notes receivables to
another company for cash.
Reasons:

Competition.

Sell receivables because money is tight.

Billing / collection are time-consuming and costly.
Transfer accomplished by:
1. Secured borrowing
2. Sale of receivables
Disposition of Receivables
Secured borrowing
• Now
Cash
XXX
Payable
XXX
Get cash sooner, have A/R
and payable on books
Sale of Receivables
• Now
Cash
XXX
A/R
XXX
Get cash sooner, but have
nothing else on books
• Later
Cash
XXX
A/R
Payable
XXX
Cash
• Later
Nothing
XXX
XXX
Secured borrowing vs. Sale
The FASB
concluded that a
sale occurs only if
the seller surrenders
control of the
receivables to the
buyer.
Three conditions
must be met.
Sale of Receivables
Factors are finance companies or banks that buy receivables
from businesses for a fee.
Illustration 7-17
Sale of Receivables
Sale Without Recourse

Purchaser assumes risk of collection

Transfer is outright sale of receivable

Seller records loss on sale

Seller uses Due from Factor (receivable) account to
cover discounts, returns, and allowances
Sale With Recourse

Seller guarantees payment to purchaser

Financial components approach used to record transfer
Presentation of Receivables
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 the nature of credit risk inherent in the receivables.
Discussion Question
Q7-21 What is the accounts receivable turnover ratio, and
what type of information does it provide?
A/R Turnover Ratio
This Ratio used to:

Assess the liquidity of the receivables.

Measure the number of times, on average, a company
collects receivables during the period.
IFRS
RELEVANT FACTS - Similarities

The accounting and reporting related to cash is essentially the same
under both IFRS and GAAP. In addition, the definition used for cash
equivalents is the same.

Like GAAP, cash and receivables are generally reported in the current
assets section of the balance sheet under IFRS.

Similar to GAAP, IFRS requires that loans and receivables be accounted
for at amortized cost, adjusted for allowances for doubtful accounts.
IFRS
RELEVANT FACTS - Differences

Under IFRS, companies may report cash and receivables as the last
items in current assets under IFRS. Under GAAP, these items are
reported in order of liquidity.

While IFRS implies that receivables with different characteristics should
be reported separately, there is no standard that mandates this
segregation. GAAP has explicit guidance in the area.

The fair value option is similar under GAAP and IFRS but not identical.
The international standard related to the fair value option is subject to
certain qualifying criteria not in the U.S. standard. In addition, there is
some difference in the financial instruments covered.
IFRS
RELEVANT FACTS - Differences

Under IFRS, bank overdrafts are generally reported as cash. Under
GAAP, such balances are reported as liabilities.

IFRS and GAAP differ in the criteria used to account for transfers of
receivables. IFRS is a combination of an approach focused on risks and
rewards and loss of control. GAAP uses loss of control as the primary
criterion. In addition, IFRS generally permits partial transfers; GAAP
does not.