CHAPTER
7
Cash
 readily available
 free from contractual restrictions
 restricted cash: current or long-term
 Would a bank accept it for deposit?

Petty cash account
Bank overdraft
Advances to subsidiaries
Certificates of deposit

Minimum cash balance
Money market funds

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
A/R
7,700
90,000 87,000
Allow for DA
500
To write-off accounts as uncollectible:
To record bad debts expense for the year:

Allowance Method – Percentage of Sales
Sales
0
90,000
Bad Debt Exp
0
 Bad Debts = % of credit sales
 $900 = 1% x $90,000
A/R
7,700
90,000 87,000
960
Allow for DA
500
960
To record bad debts expense for the year:

Allowance Method – Percentage of Receivables
Sales
0
90,000
 Allowance for DA = % of A/R

Bad Debt Exp
0
$487 = 5% x $9,740
A/R
7,700
90,000 87,000
960
9,740
Allow for DA
500
960
To record bad debts expense for the year:

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
7/1/03
7/1/04
7/1/05
Cash
Received
Int Rev.
(10%)
Discount
Amortized
Carrying
Amount
3,757
To record the interest earned:

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
7/1/03
1/1/04
7/1/04
Cash
Received
Int Rev.
(5% semi)
Discount
Amortized
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
Accumulated deprec
Appraisal value
$230,000
69,000
194,000
Periods Rate PV Annuity FV AD?

To record sale of building:
Cost 230,000
Accum depr 69,000
PV 194,000
FV 225,000

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 460,000
Due from Factor 25,000
Loss on Sale of Receiv 15,000
A/R 500,000

Sale with Recourse
Cash 460,000
Due from Factor 25,000
Loss on Sale of Receiv 21,000
A/R 500,000
Recourse Liability 6,000
Proceeds retained by the factor for possible discounts, returns, and allowances.
The estimated value of the recourse obligation.

Presentation
 Separate current from noncurrent
 Report net realizable value
 Disclose receivables pledged as collateral
Analysis
A/R
Turnover
=
Net Sales
Average Net Trade Receivables

Fund Established
Petty Cash 500
Cash 500
Expenses Paid
Receipt
No entry
Fund Reimbursed
Office Exp 130
Auto Exp 215
Misc Exp 130
Cash 475
Receipt
Receipt

Balance per bank
Add: Deposits in Transit
Oct. 31, 2006
Less: Checks Outstanding
#5164
#5170
#5171
Adjusted balance per bank
$13,417.20
2,013.00
$ 220.00
35.50
756.67
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