Chapter 7

Cash and receivables

Cash
Cash equivalents
Investment < 3 months (Treasury bills, commercial
paper, money market funds, CD)

Restricted cash
Current or long-term assets
plant expansion, retirement of long-term debt
compensating balances

Bank overdraft
Write a check for more than in cash account
Current liability
Not offset against the cash account
2

Reconciliation of Bank Balance

Difference btwn bank and company
The goal is the correct balance
Adjust bank statement for
Deposit in transit, Outstanding checks, Bank or
errors

Adjust companys book (use journal entries)

Interest revenue, bank charge, bank credit,
company error

See page 379, example on page 380

3

 Finley, Inc.s checkbook balance on December 31, 2014

was $42,400. In addition, Finley held the following items
in its safe on December 31.
(1) A check for $900 from Peters, Inc. received December
30, 2014, which was not included in the checkbook
balance.
(2) An NSF check from Garner Company in the amount of
$1,800 that had been deposited at the bank, but was
returned for lack of sufficient funds on December 29. The
check was to be redeposited on January 3, 2015. The
original deposit has been included in the December 31
checkbook balance.
(3) Coin and currency on hand amounted to $2,900.
The proper amount to be reported on Finley's balance
sheet for cash at December 31, 2014 is 44,400
4

 $42,400 + $900 $1,800 + $2,900 =

$44,400

 In preparing its May 31, 2014 bank

reconciliation, Catt Co. has the following
information available:
Balance per bank statement, 5/31/14
$35,000
Deposit in transit, 5/31/14 5,400
Outstanding checks, 5/31/14 4,900
Note collected by bank in May 1,250
The correct balance of cash at May 31,
2014 is
6

*140. c $35,000 + $5,400 $4,900 = $35,500.

Receivables
Claims held against customers and others
for money, goods, or services.
A/R (accounts receivable)
N/R (note receivable)
Trade discount
Cash (sales) discount
2/10, n/30
8

Cash (sales) Discount- Gross method

Full amount for sales and A/R
Within discount period, sales discount at
payment
Reduces sales

After discount period, full amount

Example
Sales of $10,000, 2/10, n/30, on 7/1
If paid 7/5
If paid 7/31
10

Cash (sales) Discount- Gross method

Full amount for sales and A/R
Within discount period, sales discount at payment
Reduces sales

After discount period, full amount

Example
Sales of $10,000, 2/10, n/30
A/R
10,000
Sales
10,000
Payment within discount period
Cash
9,800
Sales Discount
200
A/R
10,000
Payment after discount period
Cash
10,000
A/R
10,000
11

Assets
Assets
Current
CurrentAssets:
Assets:
Cash
Cash
Accounts
Accountsreceivable,
receivable,net
netof
of$25
$25allowance
allowance
for
fordoubtful
doubtfulaccounts
accounts
Inventory
Inventory
Prepaids
Prepaids
Total
Totalcurrent
currentassets
assets
Fixed
FixedAssets:
Assets:
Office
Officeequipment
equipment
Furniture
Furniture&&fixtures
fixtures
Less:
Less:Accumulated
Accumulateddepreciation
depreciation
Total
Totalfixed
fixedassets
assets
Total
TotalAssets
Assets

$$ 346
346
475
475
812
812
__ 40
40
1,673
1,673
5,679
5,679
6,600
6,600
(3,735)
(3,735)
8,544
8,544
$10,217
$10,217

13

LO 4 Explain accounting issues related to recognition of accounts receivable.

Valuation of A/R
Net realizable value
The net amount of cash received

Allowance method
Estimate % of uncollectible account
Use contra account to reduce A/R
Debit Bad Expense
credit allowance for Doubtful Account

Report A/R at net realizable value

14

How to estimate uncollectible

A/R?
Two ways:
% of sale (I/S focus)
Estimate bad debts expense directly
For the current period

% of receivable (aging method) (B/S focus)

Estimate ending balance of allowance for doubtful
accounts
Aging schedule
Page 357
15

 A company performs the aging of ending

accounts receivable calculation and arrives at an
estimate for uncollectible accounts of $1,600. If
Allowance for Uncollectible Accounts has a debit
balance of $600 prior to the year-end
adjustment, for how much should the adjustment
be journalized?

[A] $11,000
[B] $2,200
[C] $1,600
[D] $600
16

 Using the % of accounts receivable (aging)

method, estimated uncollectible accounts are
$25,000. If the balance of the Allowance for
Uncollectible Accounts is $9,000 debit before
adjustment, what is the balance after
adjustment?

[A] $25,000
[B] $9,000
[C] $16,000
[D] $34,000
17

 Using the percentage of net sales method,

uncollectible accounts expense for the year is
estimated to be $27,000. If the balance of the
Allowance for Uncollectible Accounts is $9,000
credit before adjustment, what is the balance
after adjustment?

[A] $36,000
[B] $19,000
[C] $9,000
[D] $27,000
18

Impossible to collect anymore

Write-off an uncollectible account
Debit Allowance for Doubtful account
Credit A/R

Reduce A/R permanently

No change in net A/R
A/R 10,000, allowance 2,000, uncollectible
500
Before AR 10,000, allowance 2000
After AR 9,500, allowance 1500
19

Write off uncollectible accounts

Write off
Remove uncollectible amount from A/R
Debit Allowance and credit A/R
No change in net A/R
A/R 10,000, allowance 2,000, uncollectible 500
Before AR 10,000, allowance 2000
After AR 9,500, allowance 1500

Collect on write-off account

Debit A/R, credit Allowance
Debit cash, credit A/R
example
Collect 300 of the above 500
20

Recovery of uncollectible
account
Collect on write-off account
Debit A/R, credit Allowance
Debit cash, credit A/R
example
Collect 300 of the above 500

21

 Smithson Corporation had a 1/1/14 balance in the

Allowance for Doubtful Accounts of $20,000. During
2014, it wrote off $14,400 of accounts and collected
$4,200 on accounts previously written off. The
balance in Accounts Receivable was $400,000 at 1/1
and $480,000 at 12/31. At 12/31/14, Smithson
estimates that 5% of accounts receivable will prove to
be uncollectible. What is Bad Debt Expense for 2014?
a. $4,000. b.$14,200. c.
$18,400.
d. $24,000.

22

 Vasguez Corporation had a 1/1/14 balance in the

Allowance for Doubtful Accounts of $30,000.
During 2014, it wrote off $21,600 of accounts and
collected $6,300 on accounts previously written
off. The balance in Accounts Receivable was
$600,000 at 1/1 and $720,000 at 12/31. At
12/31/14, Vasguez estimates that 5% of accounts
receivable will prove to be uncollectible. What is
Bad Debt Expense for 2014?
a. $6,000. b.$21,300.
c. $27,600. d.
$36,000.
23

 Allowance
E7-9, E7-14 (3) (4)
P7-3, P7-6, P7-4

24

Notes Receivable

Issue promissory note for goods sold

Long-term
With interest
Collect cash later

27

Note receivable (N/R)

Seller or lender Issue note receivable
$100,000 with a term of 5 years at interest
of 5%
Seller (lender) receives
Principle at the end of 5 years
Interest revenue periodically
Earn interest by acting as a lender

28

How to record N/R?

Debit N/R
Credit cash or goods
PV of principle (single sum) plus
PV of periodic interest revenue (annuity)

Difference
Discount or premium
Depends on two interest rate
Effective market i
Face i stated on the note
30

Notes Receivable

Interest Rates

Note Issued at

Stated rate = Market rate

Face Value

Stated rate > Market rate

Premium

Stated rate < Market rate

Discount

32

Cash paid <=> N/R

At face
Cash = N/R

At discount:
Cash < N/R

At premium
Cash > N/R

33

Note issued at face value

Exercise Balance Bar Co. lends Bio Foods $100,000 in
exchange for a $100,000, 5-year note bearing interest
at 8 percent annually, payable at the end of year. 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?
$100,000

$8,000

8,000

8,000

8,000

8,000

6
34

LO 6 Explain accounting issues related to recognition of notes receivable.

 Receive a lump sum of $100,00 at the end

of 5 years
single sum

Receive interest income of 8,000 at the

end of every year
multiple sum
ordinary annuity

35

PV of Interest

Table 6-4
Number
of
Periods

4%

6%

1
5
10
15
20

0.96154
4.45183
8.11090
11.11839
13.59033

0.94340
4.21236
7.36009
9.71225
11.46992

$8,000
Interest

Discount Rate
8%
0.92593
3.99271
6.71008
8.55948
9.81815

3.99271
Factor

10%
0.90900
3.79079
6.14457
7.60608
8.51356

12%
0.89286
3.60478
5.65022
6.81086
7.46944

$31,942
Present Value
36

LO 6 Explain accounting issues related to recognition of notes receivable.

PV of Principal

Table 6-2
Number
of
Periods
1
5
10
15
20

4%
0.96154
0.82193
0.67556
0.55526
0.45639

$100,000
Principal

6%

Discount Rate
8%

0.94340
0.74726
0.55839
0.41727
0.31180

0.92593
0.68058
0.46319
0.31524
0.21455

.68058
Factor

10%
0.90909
0.62092
0.38554
0.23939
0.14864

12%
0.89286
0.56743
0.32197
0.18270
0.10367

$68,058
Present Value
37

LO 6 Explain accounting issues related to recognition of notes receivable.

Summary

Present value of Interest

$ 31,942

Present value of Principal

68,058

Bond current market value

Date
Jan. yr. 1

Account Title
Notes receivable

Debit

Cash
Interest revenue

Credit

100,000

Cash
Dec. yr. 1

$100,000

100,000
8,000
8,000

($100,000 x 8%)

38

LO 6 Explain accounting issues related to recognition of notes receivable.

Zero-interest-bearing note
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?
Present value of Principle:
$100,000 (PVF5, 6%) = $100,000 x .74726 = $74,726
$100,000

$0

6
39

Journal Entries for Non-Interest-Bearing note

Present value of Principal
Date
Jan. yr. 1

Dec. yr. 1

Account Title
Notes receivable

$74,726
Debit

Credit

100,000

Discount on notes receivable

25,274

Cash

74,726

Disount on notes receivable

Interest revenue

4,484
4,484

($74,726 x 6%)

40

Amortization Schedule
Non-Interest-Bearing Note

Cash
Received
Date of issue
End of yr. 1
End of yr. 2
End of yr. 3
End of yr. 4
End of yr. 5

6%
Interest
Revenue
$

4,484
4,753
5,038
5,340
5,660
25,274

Discount
Amortized
$

4,484
4,753
5,038
5,340
5,660
25,274

Carrying
Amount
of Note
$ 74,726
79,210
83,962
89,000
94,340
100,000

41

Interest bearing note

Exercise Balance Bar Co. made a loan to Bio Foods and
received in exchange a 5-year, $100,000 note bearing
interest 8 percent. The market rate of interest for a note
of similar risk is 10 percent. How does Balance Bar record
the receipt of the note?
Present value of Principle:
$100,000 (PVF5, 10%) = $100,000 x .62092 =

$ 62,092

Present value of Interest:

$8,000 (PVF5, 10%) = $8,000 x 3.79079 =

Present value of note

30,326

$ 92,418
42

Amortization Schedule
Interest-Bearing Note

Cash
Received
Date of issue
End of yr. 1
End of yr. 2
End of yr. 3
End of yr. 4
End of yr. 5

8,000
8,000
8,000
8,000
8,000
40,000

10%
Interest
Revenue
$

9,242
9,366
9,503
9,653
9,818
47,582

Discount
Amortized
$

1,242
1,366
1,503
1,653
1,818
7,582

Carrying
Amount
of Note
$ 92,418
93,660
95,026
96,529
98,182
100,000

43

Journal Entries for Interest-Bearing Note

Date
Jan. yr. 1

Account Title
Notes receivable

Debit
100,000

Discount on notes receivable

7,582

Cash
Dec. yr. 1

92,418

Cash

8,000

Disount on notes receivable

1,242

Interest revenue

Credit

9,242

($92,418 x 10%)

44

LO 6 Explain accounting issues related to recognition of notes receivable.

Notes received for property, goods,

or services
Measure the PV of the note by the Fair
Value of the property, goods, or services
If choose fair value method, any change
should be recorded as unrealized holding
gain or loss and pass through net income.
E 7-18

45

Disposition of A/R ad N/R

Transfer A/R or N/R for cash

Secured borrowing
Sale of receivables (to a factor )

Secured borrowing vs. sale

Transfer of title and control

46

Disposition of A/R ad N/R

Secured borrowing

A/R as collateral in borrowing (loan)

Company responsible for A/R
Bank assess finance charge

Treated as interest expense

A assigns $500,000 of its A/R to Bank B

as collateral for a $250,000 note.

Bank B assess 1% of A/R as finance charge

and interest on note is 12%
A continues collecting on A/R
47

Factoring (sale of A/R)

Sell A/R to Factors
Bank or finance company
Sale without recourse
Buyer assumes risk of collectibility

Sale with recourse

Seller assumes risk
guarantees payment to buyer if collection fails

Securitization
Sell a pool of assets, such as A/R, N/R,
Mortgages
48

Factoring
Sale without recourse
Buyer assumes risk of collectibility
Any charge is treated as loss on sale of A/R
Due from factor is % A/R reserved to cover
probable adjustment
JE
Debit cash, due from factor, loss
Credit A/R

49

 The main advantage of selling receivables

without recourse is that the purchaser
(rather than the seller) assumes the risk of
collectability and absorbs any losses.
The primary disadvantage is the seller
does not receive as much proceeds from
the factor as they would if receivables
were sold on a with recourse basis.
50

Factoring
Sale with recourse
Seller assumes risk
Include recourse provision
guarantees payment to buyer if collection fails
Recourse liability with a specific $ amount

JE
Debit cash received, due from factor, loss (plug)
Any finance charge is included in loss

Credit recourse liability, A/R

51

The biggest advantage of selling receivables

with recourse is that the purchaser should
assess a lower finance charge and pay a
higher amount for the receivables.
The major disadvantage of selling
receivables with recourse is that the seller
guarantees payment to the purchaser if the
debtor (customer) fails to pay. This also
requires the seller to record a recourse
liability.
52

Secured borrowing vs. sale

The sale occurs
transferred assets isolated from the transferor
transferees have right to pledge or sell asset
Transferors have no control over assets
through repurchase agreement

E7-14, 7-17

53

 In a secured borrowing a company uses

receivables as collateral in a borrowing
transaction. If the loan is not repaid when due,
the creditors can convert the collateral to cash
(i.e. collect the receivables).
With a sale of receivables, the company
recognizes a loss on the sale for the difference
between the net proceeds and the receivables
carrying value. A liability is always recorded in a
secured borrowing, but a sale of receivables only
involves a liability when the receivables are sold
with recourse.
54

1. Prepare journal entries for Mars Co. for:

(a) Accounts receivable in the amount of $1,000,000
were assigned to Utley Finance Co. by Mars as
security for a loan of $850,000. Utley charged a 3%
commission on the accounts; the interest rate on the
note is 12%.
(b) During the first month, Mars collected $400,000 on
assigned accounts after deducting $900 of discounts.
Mars wrote off a $1,060 assigned account.
(c) Mars paid to Utley the amount collected plus one
month's interest on the note.

55

a.
Cash:Dr 820k
Int ex: %of commission *A/R hoac loan :Dr 30k
N/P:Loan: Cr 850k
b. Cash:Dr 400k
Sale Dist:Dr 900
Allowance:Dr 1060
A/R:Cr
c. Int Exp:Dr (N/P*int rate) 8500=850k*12%/12
NP:Dr 400k
Cash:Cr

56

2. On May 1, Dexter, Inc. factored $1,200,000 of accounts receivable

with Quick Finance on a without recourse basis. Under the
arrangement, Dexter was to handle disputes concerning service, and
Quick Finance was to make the collections, handle the sales discounts,
and absorb the credit losses. Quick Finance assessed a finance
charge of 6% of the total accounts receivable factored and retained an
amount equal to 2% of the total receivables to cover sales discounts.
(a) Prepare the journal entry required on Dexter's books on May 1.
(b) Prepare the journal entry required on Quick Finances books on
May 1.
(c) Assume Dexter factors the $1,200,000 of accounts receivable with
Quick Finance on a with recourse basis instead. The recourse
provision has a fair value of $21,000. Prepare the journal entry required
on Dexters books on May 1.
(d) Explain the main advantage and disadvantage of selling
receivables (1) without recourse and (2) with recourse.
57

a. AR: 1200000(Cr)
Cash: 1104000
Due from factor(cover receivable): 24000
Loss on sale: 72000
b. AR
Due to
Cash
Int revenue
c. Loss:72000+21000
Liability: 210000

58