Transcript 7 Cash and Receivables CHAPTER

CHAPTER
Cash
and
Receivables
……..…………………………………………………………...
Cash
 readily available
 free from contractual restrictions

restricted cash: current or long-term
 Would a bank accept it for deposit?
7
Petty cash account
Bank overdraft
Advances to subsidiaries
Certificates of deposit
Minimum cash balance
Money market funds
RECEIVABLES
Current Receivables
 trade receivables

accounts receivable

notes receivable
 nontrade receivables

tax refunds, advances, etc.
Noncurrent Receivables
 classified as long-term assets
Reported at
net realizable
value
Estimate:
- uncollectible
- sales returns
Trade Discounts
 a reduction in catalog price
 usually stated as a percentage
 record the sale at the discounted amount

no one pays full price!
Sales Discounts
 a discount for prompt payment
 Gross Method vs. Net Method
(cf. Illustration 7-4)
Uncollectible Accounts Receivable
Direct Method
To write-off an account as uncollectible:
Bad Debts Expense
Accounts Receivable
540
 not an acceptable method
 violation of the matching principle
 failure to report net realizable value
540
Allowance Method
Sales
0
90,000
Bad Debt Exp
0
To write-off accounts as uncollectible:
To record bad debts expense for the year:
A/R
7,700
90,000 87,000
Allow for DA
500
Allowance Method – Percentage of Sales
Sales
0
90,000
Bad Debt Exp
0
A/R
7,700
90,000 87,000
960
 Bad Debts = % of credit sales

$900 = 1% x $90,000
To record bad debts expense for the year:
Allow for DA
960
500
Allowance Method – Percentage of Receivables
Sales
0
90,000
Bad Debt Exp
0
A/R
7,700
90,000 87,000
960
 Allowance for DA = % of A/R

$487 = 5% x $9,740
To record bad debts expense for the year:
9,740
Allow for DA
960
500
NOTES RECEIVABLE
Notes Issued at Face Value
 Bigelow Corp sells merchandise to customer for a
3-year, $5,000 note bearing interest at 10%
annually. Market rate for a similar note is 10%.
Periods
Rate
PV
Annuity
FV
AD?
To record receipt of the note:
To record the interest received:
Noninterest-bearing Notes
 Bigelow Corp sells merchandise to customer for a
3-year, $5,000 noninterest-bearing note. Market
rate for a similar note is 10%.
Periods
Rate
PV
Annuity
FV
AD?
To record receipt of the note:
Date
Cash
Received
Int Rev.
(10%)
7/1/03
7/1/04
7/1/05
To record the interest earned:
Discount
Amortized
Carrying
Amount
3,757
Interest-bearing Notes
 Bigelow Corp sells merchandise to customer for a
3-year, $5,000, 6% note. Interest on the note will
be paid semiannually. The market rate for a similar
note is 10%.
Periods
Rate
PV
Annuity
FV
AD?
To record receipt of the note:
Date
Cash
Received
Int Rev.
(5% semi)
Discount
Amortized
7/1/03
1/1/04
7/1/04
To record the first interest payment received:
Carrying
Amount
4,492
Notes Received for Property
 Bigelow Corp sells an office building for a 5-year,
$225,000 note bearing interest at 2% annually.
Information on the building:
Original cost
$230,000
Accumulated deprec
69,000
Appraisal value
194,000
Periods
Rate
PV
Annuity
FV
AD?
To record sale of building:
Cost
230,000
Accum depr 69,000
PV
FV
194,000
225,000
DISPOSITION OF ACCOUNTS RECEIVABLE
Secured Borrowing
 A/R are used as collateral when borrowing money
 Notes or loans payable are recorded as usual
 A/R remain on the books of the company

no special entry when they become collateral

collection of A/R recorded as usual

collections are remitted to the lender
Sale of Receivables
 Factoring: sale of receivables to a bank
 Securitization: sales of a share in a pool of assets
that include receivables
Sale without Recourse
Cash
Due from Factor
Loss on Sale of Receiv
A/R
460,000
25,000
15,000
500,000
Sale with Recourse
Cash
Due from Factor
Loss on Sale of Receiv
A/R
Recourse Liability
Proceeds retained by the
factor for possible discounts,
returns, and allowances.
460,000
25,000
21,000
500,000
6,000
The estimated value of
the recourse obligation.
PRESENTATION AND ANALYSIS - RECEIVABLES
Presentation
 Separate current from noncurrent
 Report net realizable value
 Disclose receivables pledged as collateral
Analysis
A/R
Turnover
=
Net Sales
Average Net Trade Receivables
PETTY CASH SYSTEM
Fund Established
Petty Cash 500
Cash
500
Expenses Paid
No entry
Fund Reimbursed
Office Exp 130
Auto Exp 215
Misc Exp 130
Cash
475
Receipt
Receipt
Receipt
Receipt
Receipt
Receipt
BANK RECONCILIATIONS
Balance per bank
Add: Deposits in Transit
Oct. 31, 2006
Less: Checks Outstanding
#5164
$ 220.00
#5170
35.50
#5171
756.67
Adjusted balance per bank
$13,417.20
1,012.17
$14,418.03
Balance per books
Less: Bank service charge
Adjusted balance per books
$14,425.53
7.50
$14,418.03
2,013.00