Intermediate
Accounting
Prepared by
Coby Harmon
University of California, Santa Barbara
7-1
7
Cash and Receivables
Intermediate Accounting
14th Edition
Kieso, Weygandt, and Warfield
7-2
Learning Objectives
7-3
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 and valuation of notes
receivable.
7.
Explain the fair value option.
8.
Explain accounting issues related to disposition of accounts and notes
receivable.
9.
Describe how to report and analyze receivables.
Cash and Receivables
Cash
What is cash?
Reporting cash
Summary of
cash-related
items
Accounts
Receivable
Notes
Receivable
Recognition of
accounts
receivable
Recognition of
notes
receivable
Valuation of
accounts
receivable
Valuation of
notes
receivable
Special
Issues
Fair value
option
Disposition of
accounts and
notes
receivable
Presentation
and analysis
7-4
What is Cash?
Cash
7-5

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.
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.
7-6
LO 2 Indicate how to report cash and related items.
Reporting Cash
Restricted Cash
Companies segregate restricted cash from “regular” cash.
Examples, restricted for:
(1) plant expansion, (2) retirement of long-term debt,
and (3) compensating balances.
Illustration 7-1
7-7
LO 2
Reporting Cash
Bank Overdrafts
Company writes a check for more than the amount in its
cash account.
7-8

Generally reported as a current liability.

Offset against other cash accounts only when accounts
are with the same bank.
LO 2 Indicate how to report cash and related items.
Summary of Cash-Related Items
Illustration 7-2
7-9
LO 2
Accounts Receivable
Receivables - Claims held against customers and
others for money, goods, or services.
7-10
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.
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.).
7-11
LO 3 Define receivables and identify the different types of receivables.
Accounts Receivable
Nontrade Receivables
Illustration 7-3
7-12
LO 3 Define receivables and identify the different types of receivables.
Recognition of Accounts Receivables
Trade Discounts

7-13
Reductions from the list
price

Not recognized in the
accounting records

Customers are billed net of
discounts
10 %
Discount for
new Retail
Store
Customers
LO 4 Explain accounting issues related to recognition of accounts receivable.
Recognition of Accounts Receivables
Cash Discounts
7-14

Inducements for prompt
payment

Gross Method vs. Net
Method
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
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
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
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
7-18
1,960
2,000
1,960
40
LO 4 Explain accounting issues related to recognition of accounts receivable.
Recognition of Accounts Receivables
Non-Recognition of Interest Element
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.
7-19
LO 4 Explain accounting issues related to recognition of accounts receivable.
Recognition of Accounts Receivables
How are these accounts presented on the Balance Sheet?
Accounts Receivable
Allowance for
Doubtful Accounts
Beg.
500
25
Beg.
End.
500
25
End.
7-20
LO 4 Explain accounting issues related to recognition of accounts receivable.
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
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.
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
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.
Accounts Receivable
Journal entry for credit sale of $100?
Accounts receivable
Sales
Accounts Receivable
100
100
Allowance for
Doubtful Accounts
Beg.
500
25
Beg.
End.
500
25
End.
7-23
LO 4 Explain accounting issues related to recognition of accounts receivable.
Accounts Receivable
Journal entry for credit sale of $100?
Accounts receivable
Sales
Accounts Receivable
Beg.
500
Sale
100
End.
600
7-24
100
100
Allowance for
Doubtful Accounts
25
Beg.
25
End.
LO 4 Explain accounting issues related to recognition of accounts receivable.
Accounts Receivable
Collected of $333 on account?
Cash
333
Accounts receivable
Accounts Receivable
Beg.
500
Sale
100
End.
600
7-25
333
Allowance for
Doubtful Accounts
25
Beg.
25
End.
LO 4 Explain accounting issues related to recognition of accounts receivable.
Accounts Receivable
Collected of $333 on account?
Cash
333
Accounts receivable
Accounts Receivable
Beg.
500
Sale
100
End.
267
7-26
333
333
Allowance for
Doubtful Accounts
25
Beg.
25
End.
Coll.
LO 4 Explain accounting issues related to recognition of accounts receivable.
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
7-27
333
15
Allowance for
Doubtful Accounts
25
Beg.
25
End.
Coll.
LO 4 Explain accounting issues related to recognition of accounts receivable.
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
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.
Accounts Receivable
Write-off of uncollectible accounts for $10?
Allowance for Doubtful accounts
Accounts receivable
Accounts Receivable
Beg.
500
Sale
100
End.
267
7-29
333
Coll.
10
10
Allowance for
Doubtful Accounts
25
Beg.
15
Est.
40
End.
LO 4 Explain accounting issues related to recognition of accounts receivable.
Accounts Receivable
Write-off of uncollectible accounts for $10?
Allowance for Doubtful accounts
10
Accounts receivable
Accounts Receivable
Beg.
500
Sale
100
End.
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.
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
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
Uncollectible Accounts Receivable
An uncollectible account receivable is a loss of revenue that
requires, through proper entry in the accounts,
7-32

a decrease in the asset accounts receivable and

a related decrease in income and stockholders’ equity.
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 deficient:
Losses are Estimated:
No matching.
Percentage-of-sales.
Receivable not stated at
cash realizable value.
Percentage-of-receivables.
Not GAAP when material
in amount.
7-33
Allowance Method
GAAP requires when
material in amount.
LO 5 Explain accounting issues related to valuation of accounts receivable.
Valuation of Accounts Receivable
Illustration 7-6
Emphasis on
the Income
Statement
relationships
Emphasis on
the Balance
Sheet
relationships
7-34
LO 5 Explain accounting issues related to valuation of accounts receivable.
Valuation of Accounts Receivable
Percentage-of-Sales Approach

Percentage based upon past experience and
anticipate credit policy.
7-35

Achieves proper matching of costs with revenues.

Existing balance in Allowance account not considered.
LO 5 Explain accounting issues related to valuation of accounts receivable.
Valuation of Accounts Receivable
Illustration: Gonzalez Company estimates from past experience
that about 1% of credit sales become uncollectible. If net credit
sales are $800,000 in 2012, it records bad debt expense as follows.
Bad Debt Expense
Allowance for Doubtful Accounts
8,000
8,000
Illustration 7-7
7-36
LO 5
Valuation of Accounts Receivable
Percentage-of-Receivables Approach

Not matching.

Reports receivables at realizable value.
Companies may apply this method using
7-37

one composite rate, or

an aging schedule using different rates.
LO 5 Explain accounting issues related to valuation of accounts receivable.
Valuation of Accounts Receivable
Illustration 7-8
Accounts Receivable
Aging Schedule
What entry
would Wilson
make assuming
that no balance
existed in the
allowance
account?
Bad Debt Expense
Allowance for Doubtful Accounts
7-38
37,650
37,650
LO 5 Explain accounting issues related to valuation of accounts receivable.
Valuation of Accounts Receivable
Illustration 7-8
Accounts Receivable
Aging Schedule
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
7-39
36,850
36,850
LO 5 Explain accounting issues related to valuation of accounts receivable.
Valuation of 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.
7-40
LO 5 Explain accounting issues related to valuation of accounts receivable.
Valuation of 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
7,500
7,500
($800,000 – $50,000) x 1% = $7,500
7-41
LO 5
Valuation of 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
6,000
6,000
($160,000 x 5%) – $2,000) = $6,000
7-42
LO 5
Valuation of Accounts Receivable
Illustration: 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:
Allowance for Doubtful Accounts
1,000
Accounts Receivable
1,000
Assume that on July 1, Randall Co. pays the $1,000 amount that
Brown had written off on March 1. These are the entries:
7-43
Accounts Receivable
Allowance for Doubtful Accounts
1,000
Cash
Accounts Receivable
1,000
1,000
1,000
LO 5
Recognition of Notes Receivable
Notes Receivable
Supported by a formal promissory note.
7-44

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).
LO 6 Explain accounting issues related to recognition of notes receivable.
Recognition of Notes Receivable
Generally originate from:
7-45

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).
LO 6 Explain accounting issues related to recognition of notes receivable.
Recognition of Notes Receivable
7-46
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%
$10,000 Principal
0
$1,000
1,000
1
2
1,000 Interest
3
4
n=3
7-47
LO 6 Explain accounting issues related to recognition of notes receivable.
Note Issued at Face Value
PV of Interest
$1,000
x
Interest Received
7-48
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
7-49
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
$10,000
Date
Account Title
Jan. yr. 1 Notes receivable
Debit
10,000
Cash
Dec. yr. 1 Cash
Interest revenue
7-50
Credit
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 Principal
0
$0
$0
1
2
$0 Interest
3
4
n=3
7-51
LO 6 Explain accounting issues related to recognition of notes receivable.
Zero-Interest-Bearing Note
PV of Principal
$10,000
Principal
7-52
x
.77218
Factor
=
$7,721.80
Present Value
LO 6 Explain accounting issues related to recognition of notes receivable.
Zero-Interest-Bearing Note
Illustration 7-12
7-53
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
Account Title
Jan. yr. 1
Dec. yr. 1
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%)
7-54
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%
$10,000 Principal
0
$1,000
1,000
1
2
1,000 Interest
3
4
n=3
7-55
LO 6 Explain accounting issues related to recognition of notes receivable.
Interest-Bearing Note
PV of Interest
$1,000
x
Interest Received
7-56
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
7-57
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 7-14
Notes Receivable
Discount on Notes Receivable
Cash
7-58
10,000
480
9,520
LO 6 Explain accounting issues related to recognition of notes receivable.
Interest-Bearing Note
Illustration 7-15
7-59
LO 6 Explain accounting issues related to recognition of notes receivable.
Interest-Bearing Note
Journal Entries for Interest-Bearing Note
Date
Account Title
Beg. yr. 1
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%)
7-60
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.
7-61
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 fiveyear 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
7-62
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.
►
7-63
Fair Value Option. Companies have the option to use fair
value as the basis of measurement in the financial
statements.
LO 7 Explain the fair value option.
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, 2012, to use the fair value option for these
receivables. This is the first valuation of these recently acquired
receivables. At December 31, 2012, 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
7-64
190,000
LO 7 Explain the fair value option.
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
7-65
LO 8 Explain accounting issues related to disposition
of accounts and notes receivable.
Disposition of Accounts and Notes Receivable
Secured Borrowing
Illustration: March 1, 2012, 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.
7-66
LO 8 Explain accounting issues related to disposition
of accounts and notes receivable.
Secured Borrowing - Illustration
Illustration 7-16
7-67
LO 8
Secured Borrowing - Exercise
E7-13: On April 1, 2012, Prince Company assigns $500,000 of its
accounts receivable to the Third National Bank as collateral for a $300,000
loan due July 1, 2012. 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:
7-68
a)
Prepare the April 1, 2012, 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, 2012, through
June 30, 2012.
c)
On July 1, 2012, Prince paid Third National all that was due from the
loan it secured on April 1, 2012.
LO 8 Explain accounting issues related to disposition
of accounts and notes receivable.
Secured Borrowing - Exercise
Exercise 7-13 continued
Date
(a)
Account Title
Cash
Finance Charge
Debit
Credit
290,000
10,000
Notes Payable
300,000
($500,000 x 2% = $10,000)
(b)
Cash
350,000
Accounts Receivable
(c)
Notes Payable
Interest Expense
Cash
350,000
300,000
7,500
307,500
(10% x $300,000 x 3/12 = $7,500)
7-69
LO 8
Sales of Receivables
Factors are finance companies or banks that buy receivables
from businesses for a fee.
Illustration 7-17
7-70
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
7-71

Seller guarantees payment to purchaser

Financial components approach used to record transfer
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 7-18
7-72
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 7-19
Net Proceeds
Computation
Illustration 7-20
Loss on Sale Computation
7-73
LO 8
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.
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Cash
Due from Factor
Loss on Sale of Receivables
Accounts (Notes) Receivable
Recourse Liability
460,000
25,000
21,000
Accounts Receivable
Due to Crest Textiles
Financing Revenue
Cash
500,000
500,000
6,000
25,000
15,000
460,000
LO 8 Explain accounting issues related to disposition
of accounts and notes receivable.
Secured Borrowing versus Sale
Illustration 7-22
The FASB
concluded that a
sale occurs only if
the seller surrenders
control of the
receivables to the
buyer.
Three conditions
must be met.
7-75
LO 8 Explain accounting issues related to disposition
of accounts and notes receivable.
Presentation and Analysis
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.
7-76
LO 9 Describe how to report and analyze receivables.
Presentation and Analysis
Analysis of Receivables
Illustration 7-24
This Ratio used to:
7-77

Assess the liquidity of the receivables.

Measure the number of times, on average, a company
collects receivables during the period.
LO 9 Describe how to report and analyze receivables.
APPENDIX
7A
CASH CONTROLS
Management faces two problems in accounting for cash
transactions:
1. Establish proper controls to prevent any unauthorized
transactions by officers or employees.
2. Provide information necessary to properly manage cash
on hand and cash transactions.
7-78
LO 10 Explain common techniques employed to control cash.
APPENDIX
7A
CASH CONTROLS
Using Bank Accounts
To obtain desired control objectives, a company can vary the
number and location of banks and the types of accounts.
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
General checking account

Collection float.

Lockbox accounts

Imprest bank accounts
LO 10 Explain common techniques employed to control cash.
APPENDIX
7A
CASH CONTROLS
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.
7-80
LO 10 Explain common techniques employed to control cash.
APPENDIX
7A
CASH CONTROLS
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
7-81
2
173
LO 10 Explain common techniques employed to control cash.
APPENDIX
7A
CASH CONTROLS
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
50
Petty cash
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50
LO 10 Explain common techniques employed to control cash.
APPENDIX
7A
CASH CONTROLS
Physical Protection of Cash Balances
Company should
7-83

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.
APPENDIX
7A
CASH CONTROLS
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.
7-84
LO 10 Explain common techniques employed to control cash.
APPENDIX
7A
CASH CONTROLS
Reconciliation of Bank Balances
7-85
Illustration 7A-1
Bank Reconciliation
Form and Content
LO 10 Explain common techniques employed to control cash.
APPENDIX
7-86
7A
CASH CONTROLS
LO 10
APPENDIX
7A
CASH CONTROLS
Illustration 7A-2
7-87
APPENDIX
7A
CASH CONTROLS
Illustration: Journalize the adjusting entries at November 30 on
the books of Nugget Mining Company.
Nov. 30
Cash
542
Office expense
Accounts receivable
7-88
18
220
Accounts payable
180
Interest revenue
600
LO 10 Explain common techniques employed to control cash.
APPENDIX
7A
CASH CONTROLS
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.
7-89
LO 10 Explain common techniques employed to control cash.
APPENDIX
7B
IMPAIRMENT OF RECEIVABLES
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.
7-90
LO 11 Describe the accounting for a loan impairment.
APPENDIX
7B
IMPAIRMENT OF RECEIVABLES
Impairment Measurement and Reporting
Impairment loss is calculated as the difference between
7-91

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.
LO 11 Describe the accounting for a loan impairment.
APPENDIX
7B
IMPAIRMENT OF RECEIVABLES
Illustration: At December 31, 2011, 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-1
7-92
LO 11 Describe the accounting for a loan impairment.
APPENDIX
7B
IMPAIRMENT OF RECEIVABLES
Illustration: Computation of Impairment Loss
Illustration 7B-2
Recording Impairment Losses
Bad Debt Expense
12,437
Allowance for Doubtful Accounts
7-93
12,437
LO 11 Describe the accounting for a loan impairment.
RELEVANT FACTS
7-94

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. One difference is that, in general, IFRS
classifies bank overdrafts as cash.

Like GAAP, cash and receivables are generally reported in the
current assets section of the balance sheet under IFRS. However,
companies may report cash and receivables as the last items in
current assets under IFRS.

IFRS requires that loans and receivables be accounted for at
amortized cost, adjusted for allowances for doubtful accounts.
RELEVANT FACTS
7-95

Although IFRS implies that receivables with different characteristics
should be reported separately, there is no standard that mandates
this segregation.

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 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.
IFRS SELF-TEST QUESTION
Under IFRS, receivables are to be reported on the balance sheet at:
a. amortized cost.
b. amortized cost adjusted for estimated loss provisions.
c.
historical cost.
d. replacement cost.
7-96
IFRS SELF-TEST QUESTION
Which of the following statements is false?
a. Receivables include equity securities purchased by the
company.
b. Receivables include credit card receivables.
c.
Receivables include amounts owed by employees as result of
company loans to employees.
d. Receivables include amounts resulting from transactions with
customers.
7-97
IFRS SELF-TEST QUESTION
Under IFRS:
a. the entry to record estimated uncollected accounts is the same
as GAAP.
b. loans and receivables should only be tested for impairment as a
group.
c.
it is always acceptable to use the direct write-off method.
d. all financial instruments are recorded at fair value.
7-98
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7-99