Chapter
7-1
CHAPTER
7
CASH AND RECEIVABLES
Intermediate Accounting
13th Edition
Kieso, Weygandt, and Warfield
Chapter
7-2
Learning Objectives
1.
Identify items considered cash.
2.
Indicate how to report cash and related items.
3.
Define receivables and identify the different types of receivables.
4.
Explain accounting issues related to recognition of accounts
receivable.
5.
Explain accounting issues related to valuation of accounts
receivable.
6.
Explain accounting issues related to recognition of notes receivable.
7.
Explain accounting issues related to valuation of notes receivable.
8.
Explain accounting issues related to disposition of accounts and
notes receivable.
9.
Describe how to report and analyze receivables.
Chapter
7-3
Cash and Receivables
Cash
What is cash?
Receivables
Reporting cash
Recognition of accounts
receivable
Summary of cashrelated items
Valuation of accounts
receivable
Recognition of notes
receivable
Valuation of notes
receivable
Disposition of accounts
and notes receivable
Chapter
7-4
Presentation and
analysis
What is Cash?
Cash
Most liquid asset
Standard medium of exchange
Basis for measuring and accounting for all items
Current asset
Examples: coin, currency, available funds on deposit
at the bank, money orders, certified checks,
cashier’s checks, personal checks, bank drafts and
savings accounts.
Chapter
7-5
LO 1 Identify items considered cash.
Reporting Cash
Cash Equivalents
Short-term, highly liquid investments that are both
(a) readily convertible to cash, and
(b) so near their maturity that they present
insignificant risk of changes in interest rates.
Examples: Treasury bills, Commercial paper, and Money
market funds.
Chapter
7-6
LO 2 Indicate how to report cash and related items.
Reporting Cash
Restricted Cash
Companies segregate restricted cash from “regular”
cash for reporting purposes.
Examples, restricted for:
(1) plant expansion, (2) retirement of long-term debt,
and (3) compensating balances.
Illustration 7-1
Chapter
7-7
LO 2 Indicate how to report cash and related items.
Reporting Cash
Bank Overdrafts
When a company writes a check for more than the
amount in its cash account.
Generally reported as a current liability.
Offset against cash account only when available cash
is present in another account in the same bank on
which the overdraft occurred.
Chapter
7-8
LO 2 Indicate how to report cash and related items.
Summary of Cash-Related Items
Illustration 7-2
Chapter
7-9
LO 2 Indicate how to report cash and related items.
Receivables
Claims held against customers and others
money, goods, or services.
Chapter
7-10
for
Oral promises of the
purchaser to pay for
goods and services sold.
Written promises to pay
a sum of money on a
specified future date.
Accounts
Receivable
Notes
Receivable
LO 3 Define receivables and identify the different types of receivables.
Receivables
Nontrade Receivables
1.
2.
3.
4.
5.
6.
Advances to officers and employees.
Advances to subsidiaries.
Deposits to cover potential damages or losses.
Deposits as a guarantee of performance or payment.
Dividends and interest receivable.
Claims against:
a)
b)
c)
d)
e)
f)
Chapter
7-11
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.).
LO 3 Define receivables and identify the different types of receivables.
Receivables
Nontrade Receivables
Illustration 7-3
Chapter
7-12
LO 3 Define receivables and identify the different types of receivables.
Recognition of Accounts Receivables
Trade Discounts
Reductions from the list
price
Not recognized in the
accounting records
Customers are billed net
of discounts
Chapter
7-13
10 %
Discount
for new
Retail
Store
Customers
LO 4 Explain accounting issues related to recognition of accounts receivable.
Recognition of Accounts Receivables
Cash Discounts
Inducements for prompt
payment
Gross Method vs.
Net Method
Chapter
7-14
Payment
terms are
2/10, n/30
LO 4 Explain accounting issues related to recognition of accounts receivable.
Recognition of Accounts Receivables
Cash Discounts (Sales Discounts)
Illustration 7-4
Chapter
7-15
LO 4 Explain accounting issues related to recognition of accounts receivable.
Recognition of Accounts Receivables
E7-5: On June 3, Bolton Company sold to Arquette Company
merchandise having a sale price of $2,000 with terms of 2/10,
n/60, f.o.b. shipping point. On June 12, the company received a
check for the balance due from Arquette Company. Prepare the
journal entries on Bolton Company books to record the sale
assuming Bolton records sales using the gross method.
June 3
Accounts receivable
2,000
Sales
June 12
Cash ($2,000 x 98%)
Sales discounts
Accounts receivable
Chapter
7-16
2,000
1,960
40
2,000
LO 4 Explain accounting issues related to recognition of accounts receivable.
Recognition of Accounts Receivables
E7-5: On June 3, Bolton Company sold to Arquette Company
merchandise having a sale price of $2,000 with terms of 2/10,
n/60, f.o.b. shipping point. On June 12, the company received a
check for the balance due from Arquette Company. Prepare the
journal entries on Bolton Company books to record the sale
assuming Bolton records sales using the net method.
June 3
Accounts receivable
1,960
Sales
June 12
Cash ($2,000 x 98%)
Accounts receivable
Chapter
7-17
1,960
1,960
1,960
LO 4 Explain accounting issues related to recognition of accounts receivable.
Recognition of Accounts Receivables
E7-5: On June 3, Bolton Company sold to Arquette Company
merchandise having a sale price of $2,000 with terms of 2/10,
n/60, f.o.b. shipping point. Prepare the journal entries on Bolton
Company books to record the sale assuming Bolton records sales
using the net method, and Arquette did not remit payment until
July 29.
June 3
Accounts receivable
1,960
Sales
June 12
Cash
Accounts receivable
Sales Discounts Forfeited
Chapter
7-18
1,960
2,000
1,960
40
LO 4 Explain accounting issues related to recognition of accounts receivable.
Recognition of Accounts Receivables
Nonrecognition of Interest Element
A company should measure receivables in terms of
their present value.
The profession specifically excludes from present
value considerations “receivables arising from
transactions with customers in the normal course
of business which are due in customary trade terms
not exceeding approximately one year.”
Chapter
7-19
LO 4 Explain accounting issues related to recognition of accounts receivable.
Accounting for Accounts Receivable
How are these accounts presented on the Balance
Sheet?
Accounts Receivable
Allowance for
Doubtful Accounts
Beg.
500
25
Beg.
End.
500
25
End.
Chapter
7-20
LO 4 Explain accounting issues related to recognition of accounts receivable.
Accounting for Accounts Receivable
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
Chapter
7-21
$
500
(25)
346
475
812
40
1,673
$
5,679
6,600
(3,735)
8,544
10,217
LO 4 Explain accounting issues related to recognition of accounts receivable.
Accounting for Accounts Receivable
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
Chapter
7-22
$
$
346
475
812
40
1,673
5,679
6,600
(3,735)
8,544
10,217
LO 4 Explain accounting issues related to recognition of accounts receivable.
Accounting for Accounts Receivable
Journal entry for credit sale of $100?
Accounts receivable
100
Sales
Accounts Receivable
100
Allowance for
Doubtful Accounts
Beg.
500
25
Beg.
End.
500
25
End.
Chapter
7-23
LO 4 Explain accounting issues related to recognition of accounts receivable.
Accounting for Accounts Receivable
Journal entry for credit sale of $100?
Accounts receivable
100
Sales
Accounts Receivable
Beg.
500
Sale
100
End.
600
Chapter
7-24
100
Allowance for
Doubtful Accounts
25
Beg.
25
End.
LO 4 Explain accounting issues related to recognition of accounts receivable.
Accounting for Accounts Receivable
Collected of $333 on account?
Cash
Accounts receivable
Accounts Receivable
Beg.
500
Sale
100
End.
600
Chapter
7-25
333
333
Allowance for
Doubtful Accounts
25
Beg.
25
End.
LO 4 Explain accounting issues related to recognition of accounts receivable.
Accounting for Accounts Receivable
Collected of $333 on account?
Cash
Accounts receivable
Accounts Receivable
Beg.
500
Sale
100
End.
267
Chapter
7-26
333
333
333
Allowance for
Doubtful Accounts
25
Beg.
25
End.
Coll.
LO 4 Explain accounting issues related to recognition of accounts receivable.
Accounting for Accounts Receivable
Adjustment of $15 for estimated Bad-Debts?
Bad debt expense
15
Allowance for Doubtful Accounts
Accounts Receivable
Beg.
500
Sale
100
End.
267
Chapter
7-27
333
15
Allowance for
Doubtful Accounts
25
Beg.
25
End.
Coll.
LO 4 Explain accounting issues related to recognition of accounts receivable.
Accounting for Accounts Receivable
Adjustment of $15 for estimated Bad-Debts?
Bad debt expense
15
Allowance for Doubtful Accounts
Accounts Receivable
Beg.
500
Sale
100
End.
267
Chapter
7-28
333
Coll.
15
Allowance for
Doubtful Accounts
25
Beg.
15
Est.
40
End.
LO 4 Explain accounting issues related to recognition of accounts receivable.
Accounting for Accounts Receivable
Write-off of uncollectible accounts for $10?
Allowance for Doubtful accounts
10
Accounts receivable
Accounts Receivable
Beg.
500
Sale
100
End.
267
Chapter
7-29
333
Coll.
10
Allowance for
Doubtful Accounts
25
Beg.
15
Est.
40
End.
LO 4 Explain accounting issues related to recognition of accounts receivable.
Accounting for Accounts Receivable
Write-off of uncollectible accounts for $10?
Allowance for Doubtful accounts
10
Accounts receivable
Accounts Receivable
Beg.
500
Sale
100
End.
Chapter
7-30
257
333
Coll.
10
W/O
10
Allowance for
Doubtful Accounts
W/O
25
Beg.
15
Est.
30
End.
10
LO 4 Explain accounting issues related to recognition of accounts receivable.
Accounting for Accounts Receivable
Assets
Current Assets:
Cash
Accounts receivable, net of $30 allowance
Inventory
Prepaids
Total current assets
Fixed Assets:
Office equipment
Furniture & fixtures
Less: Accumulated depreciation
Total fixed assets
Total Assets
Chapter
7-31
$
$
13
227
812
40
1,092
5,679
6,600
(3,735)
8,544
9,636
LO 4 Explain accounting issues related to recognition of accounts receivable.
Valuation of Accounts Receivable
Reporting Receivables
Classification
Valuation (net realizable value)
Uncollectible Accounts Receivable
Sales on account raise the possibility of accounts
not being collected.
Chapter
7-32
LO 5 Explain accounting issues related to valuation of accounts receivable.
Valuation of Accounts Receivable
Uncollectible Accounts Receivable
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.
Chapter
7-33
LO 5 Explain accounting issues related to valuation of accounts receivable.
Valuation of Accounts Receivable
Methods of Accounting for Uncollectible Accounts
Direct Write-Off
Theoretically undesirable:
No matching
Receivable not stated at
net realizable value
Not GAAP
Chapter
7-34
Allowance Method
Losses are Estimated:
Percentage-of-sales
Percentage-ofreceivables
GAAP
LO 5 Explain accounting issues related to valuation of accounts receivable.
Uncollectible Accounts Receivable
Income
Statement
Approach
Balance
Sheet
Approach
Chapter
7-35
LO 5 Explain accounting issues related to valuation of accounts receivable.
Uncollectible Accounts Receivable
Percentage-of-Sales Approach - matches costs with
revenues because it relates the charge to the period in
which a company records the sale.
Appropriate if there is a fairly stable relationship
between previous years’ credit sales and bad debts.
Chapter
7-36
LO 5 Explain accounting issues related to valuation of accounts receivable.
Uncollectible Accounts Receivable
Percentage-of-Sales Approach
Illustration: Chad Shumway Corp.
estimates from past experience that
about 2 percent of credit sales become uncollectible. If
Chad Shumway has credit sales of $400,000 in 2010, it
records bad debt expense as follows.
Bad Debt Expense
Allowance for Doubtful Accounts
Chapter
7-37
8,000
8,000
LO 5 Explain accounting issues related to valuation of accounts receivable.
Uncollectible Accounts Receivable
Percentage-of-Receivables Approach
 not matching.
 reports receivables at net realizable value.
Companies may apply this method using
 one composite rate, or
 an aging schedule of accounts receivable.
Chapter
7-38
LO 5 Explain accounting issues related to valuation of accounts receivable.
Uncollectible Accounts Receivable
What entry
would Wilson
make assuming
that no balance
existed in the
allowance
account?
Bad Debt Expense
Allowance for Doubtful Accounts
Chapter
7-39
37,650
37,650
LO 5 Explain accounting issues related to valuation of accounts receivable.
Uncollectible Accounts Receivable
What entry
would Wilson
make assuming
the allowance
account had a
credit balance
of $800 before
adjustment?
Bad Debt Expense ($37,650 – $800)
Allowance for Doubtful Accounts
Chapter
7-40
36,850
36,850
LO 5 Explain accounting issues related to valuation of accounts receivable.
Uncollectible Accounts Receivable
E7-7 (Recording Bad Debts) Sandel Company reports the
following financial information before adjustments.
Instructions: Prepare the journal entry to record bad debt
expense assuming Sandel Company estimates bad debts at
(a) 1% of net sales and (b) 5% of accounts receivable.
Chapter
7-41
LO 5 Explain accounting issues related to valuation of accounts receivable.
Uncollectible Accounts Receivable
E7-7 (Recording Bad Debts) Sandel Company reports the
following financial information before adjustments.
Instructions: Prepare the journal entry assuming Sandel
estimates bad debts at (a) 1% of net sales.
Bad Debt Expense
Allowance for Doubtful Accounts
Chapter
7-42
7,500
7,500
($800,000 – $50,000) x 1% = $7,500
LO 5
Uncollectible Accounts Receivable
E7-7 (Recording Bad Debts) Sandel Company reports the
following financial information before adjustments.
Instructions: Prepare the journal entry assuming Sandel
estimates bad debts at (b) 5% of accounts receivable.
Bad Debt Expense
Allowance for Doubtful Accounts
Chapter
7-43
6,000
6,000
($160,000 x 5%) – $2,000) = $6,000
LO 5
Uncollectible Accounts Receivable
Summary
Percentage of Sales approach:
Bad debt expense estimate is related to a nominal account
(Sales), any balance in the allowance account is ignored.
Achieves a proper matching of cost and revenues.
Percentage of Receivables approach:
Results in a more accurate valuation of receivables on the
balance sheet.
Method may also be applied using an aging schedule.
Chapter
7-44
LO 5 Explain accounting issues related to valuation of accounts receivable.
Recognition of Notes Receivable
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)
Chapter
7-45
LO 6 Explain accounting issues related to recognition of notes receivable.
Recognition of 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)
Chapter
7-46
LO 6 Explain accounting issues related to recognition of notes receivable.
Recognition of Notes Receivable
Chapter
7-47
Short-Term
Long-Term
Record at
Face Value,
less allowance
Record at
Present Value
of cash expected
to be collected
Interest Rates
Note Issued at
Stated rate = Market rate
Face Value
Stated rate > Market rate
Premium
Stated rate < Market rate
Discount
LO 6 Explain accounting issues related to recognition of notes receivable.
Note Issued at Face Value
Illustration: Bigelow Corp. lends Scandinavian Imports
$10,000 in exchange for a $10,000, three-year note bearing
interest at 10 percent annually. The market rate of interest
for a note of similar risk is also 10 percent. How does Bigelow
record the receipt of the note?
i = 10%
0
$10,000
Principal
Interest
$1,000
1,000
1,000
1
2
3
4
n=3
Chapter
7-48
LO 6 Explain accounting issues related to recognition of notes receivable.
Note Issued at Face Value
PV of Interest
$1,000
x
Interest Received
Chapter
7-49
2.48685
Factor
=
$2,487
Present Value
LO 6 Explain accounting issues related to recognition of notes receivable.
Note Issued at Face Value
PV of Principal
$10,000
Principal
Chapter
7-50
x
.75132
Factor
=
$7,513
Present Value
LO 6 Explain accounting issues related to recognition of notes receivable.
Note Issued at Face Value
Summary
Present value of interest
$ 2,487
Present value of principal
7,513
Note current market value
Date
Account Title
Jan. yr. 1 Notes receivable
Debit
Interest revenue
Chapter
7-51
Credit
10,000
Cash
Dec. yr. 1 Cash
$10,000
10,000
1,000
1,000
LO 6 Explain accounting issues related to recognition of notes receivable.
Zero-Interest-Bearing Note
Illustration: Jeremiah Company receives a three-year,
$10,000 zero-interest-bearing note. The market rate of
interest for a note of similar risk is 9 percent. How does
Jeremiah record the receipt of the note?
i = 9%
$10,000
0
$0
$0
$0
1
3
3
Principal
Interest
4
n=3
Chapter
7-52
LO 6 Explain accounting issues related to recognition of notes receivable.
Zero-Interest-Bearing Note
PV of Principal
$10,000
Principal
Chapter
7-53
x
.77218
Factor
=
$7,721.80
Present Value
LO 6 Explain accounting issues related to recognition of notes receivable.
Zero-Interest-Bearing Note
Illustration 7-11
Chapter
7-54
LO 6 Explain accounting issues related to recognition of notes receivable.
Zero-Interest-Bearing Note
Journal Entries for Zero-Interest-Bearing note
Present value of Principal
Date
Jan. yr. 1
Dec. yr. 1
Account Title
Notes receivable
$7,721.80
Debit
Credit
10,000.00
Discount on notes receivable
2,278.20
Cash
7,721.80
Discount on notes receivable
Interest revenue
694.96
694.96
($7,721.80 x 9%)
Chapter
7-55
LO 6 Explain accounting issues related to recognition of notes receivable.
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%
0
$10,000
Principal
Interest
$1,000
1,000
1,000
1
2
3
4
n=3
Chapter
7-56
LO 6 Explain accounting issues related to recognition of notes receivable.
Interest-Bearing Note
PV of Interest
$1,000
x
Interest Received
Chapter
7-57
2.40183
Factor
=
$2,402
Present Value
LO 6 Explain accounting issues related to recognition of notes receivable.
Interest-Bearing Note
PV of Principal
$10,000
Principal
Chapter
7-58
x
.71178
Factor
=
$7,118
Present Value
LO 6 Explain accounting issues related to recognition of notes receivable.
Interest-Bearing Note
Illustration: How does Morgan record the receipt of the
note?
Illustration 7-13
Notes Receivable
Discount on Notes Receivable
Cash
Chapter
7-59
10,000
480
9,520
LO 6 Explain accounting issues related to recognition of notes receivable.
Interest-Bearing Note
Illustration 7-14
Chapter
7-60
LO 6 Explain accounting issues related to recognition of notes receivable.
Interest-Bearing Note
Journal Entries for Interest-Bearing Note
Date
Beg. yr. 1
Account Title
Notes receivable
Debit
10,000
Discount on notes receivable
480
Cash
End. yr. 1
Cash
Discount on notes receivable
Interest revenue
Credit
9,520
1,000
142
1,142
($9,520 x 12%)
Chapter
7-61
LO 6 Explain accounting issues related to recognition of notes receivable.
Recognition of Notes Receivable
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.
Chapter
7-62
LO 6 Explain accounting issues related to recognition of notes receivable.
Recognition of Notes Receivable
Illustration: 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:
($35,247 - $20,000) = $15,247
Notes Receivable
Discount on Notes Receivable
Land
Gain on Sale of Land
Chapter
7-63
35,247
15,247
14,000
6,000
LO 6 Explain accounting issues related to recognition of notes receivable.
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.

Chapter
7-64
Fair Value Option. Companies have the option to use
fair value as the basis of measurement in the
financial statements.
LO 7 Explain accounting issues related to valuation of notes receivable.
Valuation of Notes Receivable
Illustration (recording fair value option): Assume that
Escobar Company has notes receivable that have a fair value
of $810,000 and a carrying amount of $620,000. Escobar
decides on December 31, 2010, to use the fair value option
for these receivables. This is the first valuation of these
recently acquired receivables. At December 31, 2010,
Escobar makes an adjusting entry to record the increase in
value of Notes Receivable and to record the unrealized
holding gain, as follows.
Notes Receivable
190,000
Unrealized Holding Gain or Loss—Income
Chapter
7-65
190,000
LO 7 Explain accounting issues related to valuation of notes receivable.
Disposition of Accounts and Notes Receivable
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
Chapter
7-66
LO 8 Explain accounting issues related to disposition
of accounts and notes receivable.
Disposition of Accounts and Notes Receivable
Secured Borrowing
Illustration: March 1, 2010, Howat Mills, Inc. provides
(assigns) $700,000 of its accounts receivable to Citizens
Bank as collateral for a $500,000 note. Howat Mills
continues to collect the accounts receivable; the account
debtors are not notified of the arrangement. Citizens Bank
assesses a finance charge of 1 percent of the accounts
receivable and interest on the note of 12 percent. Howat
Mills makes monthly payments to the bank for all cash it
collects on the receivables. See Illustration 7-15.
Chapter
7-67
LO 8 Explain accounting issues related to disposition
of accounts and notes receivable.
Secured Borrowing - Illustration
Illustration 7-15
Chapter
7-68
LO 8 Explain accounting issues related to disposition
of accounts and notes receivable.
Secured Borrowing - Exercise
E7-13: On April 1, 2010, Prince Company assigns $500,000 of its
accounts receivable to the Third National Bank as collateral for a
$300,000 loan due July 1, 2010. The assignment agreement calls for
Prince Company to continue to collect the receivables. Third National
Bank assesses a finance charge of 2% of the accounts receivable, and
interest on the loan is 10% (a realistic rate of interest for a note of
this type).
Instructions:
a)
Prepare the April 1, 2010, journal entry for Prince Company.
b) Prepare the journal entry for Prince’s collection of $350,000 of
the accounts receivable during the period from April 1, 2010,
through June 30, 2010.
c)
Chapter
7-69
On July 1, 2010, Prince paid Third National all that was due from
the loan it secured on April 1, 2010.
LO 8 Explain accounting issues related to disposition
of accounts and notes receivable.
Secured Borrowing - Exercise
Exercise 7-13 continued
Account Title
Date
(a)
Debit
Credit
290,000
Cash
Finance Charge
10,000
300,000
Notes Payable
($500,000 x 2% = $10,000)
(b)
350,000
Cash
350,000
Accounts Receivable
(c)
Notes Payable
300,000
Interest Expense
7,500
307,500
Cash
(10% x $300,000 x 3/12 = $7,500)
Chapter
7-70
LO 8 Explain accounting issues related to disposition
of accounts and notes receivable.
Sales of Receivables
Factors are finance companies or banks that buy receivables
from businesses for a fee.
Illustration 7-16
Chapter
7-71
LO 8 Explain accounting issues related to disposition
of accounts and notes receivable.
Sales of Receivables
Sale Without Recourse
Purchaser assumes risk of collection
Transfer is outright sale of receivable
Seller records loss on sale
Seller use 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
Chapter
7-72
LO 8 Explain accounting issues related to disposition
of accounts and notes receivable.
Sales of Receivables
Illustration: Crest Textiles, Inc. factors $500,000 of accounts
receivable with Commercial Factors, Inc., on a without recourse
basis. Commercial Factors assesses a finance charge of 3
percent of the amount of accounts receivable and retains an
amount equal to 5 percent of the accounts receivable (for
probable adjustments). Crest Textiles and Commercial Factors
make the following journal entries for the receivables
transferred without recourse.
Illustration 7-17
Chapter
7-73
LO 8 Explain accounting issues related to disposition
of accounts and notes receivable.
Sales of Receivables
Illustration: Assume Crest Textiles sold the receivables on a
with recourse basis. Crest Textiles determines that this
recourse obligation has a fair value of $6,000. To determine the
loss on the sale of the receivables, Crest Textiles computes
the net proceeds from the sale as follows.
Illustration 7-18
Net Proceeds
Computation
Illustration 7-19
Loss on Sale Computation
Chapter
7-74
LO 8 Explain accounting issues related to disposition
of accounts and notes receivable.
Sales of Receivables
Illustration: Prepare the journal entries for both Crest
Textiles and Commercial Factors for the receivables sold with
recourse.
Crest
Textiles,
Inc.
Commercial
Factors,
Inc.
Chapter
7-75
Cash
460,000
Due from Factor
25,000
Loss on Sale of Receivables
21,000
Accounts (Notes) Receivable
500,000
Recourse Liability
6,000
Accounts Receivable
Due to Crest Textiles
Financing Revenue
Cash
500,000
25,000
15,000
460,000
LO 8 Explain accounting issues related to disposition
of accounts and notes receivable.
Secured Borrowing versus Sale
The FASB
concluded that a
sale occurs only if
the seller
surrenders control
of the receivables
to the buyer.
Illustration 7-21
Three conditions
must be met.
Chapter
7-76
LO 8 Explain accounting issues related to disposition
of accounts and notes receivable.
Presentation and Analysis
General rule in classifying receivables are:
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 all significant concentrations of credit risk arising
from receivables.
Chapter
7-77
LO 9 Describe how to report and analyze receivables.
Presentation and Analysis
Analysis of Receivables
Illustration 7-23
This Ratio used to:
Assess the liquidity of the receivables.
Measure the number of times, on average, a company
collects receivables during the period.
Chapter
7-78
LO 9 Describe how to report and analyze receivables.

The accounting and reporting related to cash is essentially the
same under both iGAAP and U.S. GAAP.

The basic accounting and reporting issues related to recognition
and measurement of receivables are essentially the same
between iGAAP and U.S. GAAP.

Although iGAAP implies that receivables with different
characteristics should be reported separately, there is no
standard that mandates this segregation.
Chapter
7-79

The FASB, the IASB have adopted a piecemeal approach in
which disclosure of fair value information in the notes is the
first step. The second step is the fair value option.

iGAAP and U.S. GAAP standards on the fair value option are
similar but not identical.

iGAAP and U.S. GAAP differ in the criteria used to derecognize
a receivable.
Chapter
7-80
Management faces two problems in accounting for cash
transactions:
1. establish proper controls to prevent any unauthorized
transactions by officers or employees, and
2. provide information necessary to properly manage cash
on hand and cash transactions.
Chapter
7-81
LO 10 Explain common techniques employed to control cash.
Using Bank Accounts
To obtain desired control objectives, a company can vary the
number and location of banks and the types of accounts.
 General checking account
 Collection float.
 Lockbox accounts
 Imprest bank accounts
Chapter
7-82
LO 10 Explain common techniques employed to control cash.
The Imprest Petty Cash System
To pay small amounts for miscellaneous expenses.
Steps:
1. Record $300 transfer of funds to petty cash:
Petty Cash
Cash
300
300
2. The petty cash custodian obtains signed receipts from
each individual to whom he or she pays cash
Chapter
7-83
LO 10 Explain common techniques employed to control cash.
The Imprest Petty Cash System
Steps:
3. Custodian receives a company check to replenish the
fund.
Office Supplies Expense
42
Postage Expense
53
Entertainment Expense
76
Cash Over and Short
Cash
Chapter
7-84
2
173
LO 10 Explain common techniques employed to control cash.
The Imprest Petty Cash System
Steps:
4. If the company decides that the amount of cash in the
petty cash fund is excessive by $50, it lowers the fund
balance as follows.
Cash
Petty cash
Chapter
7-85
50
50
LO 10 Explain common techniques employed to control cash.
Physical Protection of Cash Balances
Company should
Chapter
7-86

Minimize the cash on hand.

Only have on hand petty cash and current day’s receipts

Keep funds in a vault, safe, or locked cash drawer.

Transmit each day’s receipts to the bank as soon as
practicable.

Periodically prove (reconcile) the balance shown in the
general ledger.
LO 10 Explain common techniques employed to control cash.
Reconciliation of Bank Balances
Schedule explaining any differences between the
bank’s and the company’s records of cash.
Reconciling Items:
1. Deposits in transit.
2. Outstanding checks.
3. Bank charges and credits.
Time Lags
4. Bank or Depositor errors.
Chapter
7-87
LO 10 Explain common techniques employed to control cash.
Reconciliation of Bank Balances
Chapter
7-88
Illustration 7A-1
Bank Reconciliation Form
and Content
LO 10 Explain common techniques employed to control cash.
Reconciliation of Bank Balances
Chapter
7-89
LO 10 Explain common techniques employed to control cash.
Illustration 7A-2
Chapter
7-90
LO 10 Explain common techniques employed to control cash.
Illustration: Journalize the adjusting entries at November 30
on the books of Nugget Mining Company.
Nov. 30
Cash
542
Office expense
Accounts receivable
Chapter
7-91
18
220
Accounts payable
180
Interest revenue
600
LO 10 Explain common techniques employed to control cash.
Review Question
The reconciling item in a bank reconciliation that will
result in an adjusting entry by the depositor is:
a. outstanding checks.
b. deposit in transit.
c. a bank error.
d. bank service charges.
Chapter
7-92
LO 10 Explain common techniques employed to control cash.
Companies evaluate their receivables to determine their
ultimate collectibility.
Allowance method is appropriate when:
 probable that an asset has been impaired and
 amount of the loss can be reasonably estimated.
Long-term receivables such as loans that are identified
as impaired, companies perform an additional impairment
evaluation.
Chapter
7-93
LO 11 Describe the accounting for a loan impairment.
Background -
Example: Subprime loan crisis.

From 2000 to 2005 home prices appreciated at rapid rate.

Low interest rates also encouraged speculation, as many
believed that home prices would continue to increase.

Speculators intended to sell the house in a short period.

Many adjustable-rate debt with short-term low teaser rates
that would adjust to higher market rates after two or three
years.

Many lending institutions gave loans to individuals whose
financial condition would make it difficult for them to make
the payments over the life of the loan. These loans, often
referred to as subprime loans.
Chapter
7-94
LO 11 Describe the accounting for a loan impairment.
Background -
Example: Subprime loan crisis.
Illustration 7B-1
Subprime lending was a
little over $50 billion in
2000 and had increased
almost ten times by 2005.
Chapter
7-95
LO 11 Describe the accounting for a loan impairment.
Background -
Example: Subprime loan crisis.
Illustration 7B-2
Beyond the
subprime loans
was the
practice of
securitization.
Chapter
7-96
LO 11 Describe the accounting for a loan impairment.
Impairment Measurement and Reporting
Impairment loss is calculated as the difference between
 the investment in the loan (generally the principal
plus accrued interest) and
 the expected future cash flows discounted at the
loan’s historical effective interest rate.
Chapter
7-97
LO 11 Describe the accounting for a loan impairment.
Illustration: At December 31, 2009, Ogden Bank recorded an
investment of $100,000 in a loan to Carl King. The loan has an
historical effective-interest rate of 10 percent, the principal is
due in full at maturity in three years, and interest is due annually.
The loan officer performs a review of the loan’s expected future
cash flow and utilizes the present value method for measuring the
required impairment loss.
Illustration 7B-3
Chapter
7-98
LO 11 Describe the accounting for a loan impairment.
Illustration: Computation of Impairment Loss
Illustration 7B-4
Recording Impairment Losses
Bad Debt Expense
12,437
Allowance for Doubtful Accounts
Chapter
7-99
12,437
LO 11 Describe the accounting for a loan impairment.
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Chapter
7-100