Excerpt from: What the heck is work anyway?
by Alexander Kjuerulf
Rather than try to come up with the most correct definition of work, i.e. one that
would make sense in an economical, sociological and psychological
perspective, I’d rather try to find a definition of work or rather a view of work,
that promotes happiness at work in most normal kinds of work.
This immediately eliminates some definitions:
• If work is simply that you do because you have to, then happiness at work is
almost impossible by definition.
• If work is only what you do for money, it eliminates all volunteer work.
• If work is only what you do for a purpose, then all aspects of your job that
are not productive are no longer work.
I’m not claiming to have the answer yet, but as I see it here are some elements
of a definition if work that is conducive to happiness:
• Work is something you choose to do. You may not have a choice of whether
or not to work but you have choice in what work you do.
• Work is something you’re valued for. Either someone pays you for your
work or someone takes the time and resources to organize your work.
• Work is an activity where you make a positive difference for someone else.
Quick sharing from PwC report
They are arguing for students familiar with data analytics,
but also…
• Business leaders often lament skill gaps, and we believe
demand will continue to exceed the supply of candidates
who have an analytical mindset, technical skills, and a
foundation for leadership. So while skills in data analytics
will be desired, we believe broader business acumen,
global awareness, relationship skills, and leadership
abilities will be just as coveted. This broad base will
equip students to not only solve challenges, but also to
frame these issues in a broader context, so they can ask
the right questions—the ones that lead to root causes
and solutions.
Quick sharing from PwC report
They are arguing for students familiar with data analytics,
but also…
• Business leaders often lament skill gaps, and we believe
demand will continue to exceed the supply of candidates
who have an analytical mindset, technical skills, and a
foundation for leadership. So while skills in data analytics
will be desired, we believe broader business acumen,
global awareness, relationship skills, and leadership
abilities will be just as coveted. This broad base will
equip students to not only solve challenges, but also to
frame these issues in a broader context, so they can ask
the right questions—the ones that lead to root causes
and solutions.
Quick sharing from PwC report
They are arguing for students familiar with data analytics,
but also…
• Business leaders often lament skill gaps, and we believe
demand will continue to exceed the supply of candidates
who have an analytical mindset, technical skills, and a
foundation for leadership. So while skills in data analytics
will be desired, we believe broader business acumen,
global awareness, relationship skills, and leadership
abilities will be just as coveted. This broad base will
equip students to not only solve challenges, but also to
frame these issues in a broader context, so they can ask
the right questions—the ones that lead to root causes
and solutions.
CHAPTER 7
CASH AND RECEIVABLES
CONTINUED
Sommers – ACCT 3311
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).
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).
Note Receivable Journal Entries
On June 30, 2011, the Esquire Company sold some
merchandise to a customer for $30,000. In payment,
Esquire agreed to accept a 6% note requiring the payment
of interest and principal on March 31, 2012. The 6% rate is
appropriate in this situation.
Prepare the journal entry to record the sale of merchandise
(omit any entry that might be required for the cost of the
goods sold).
June 30, 2011
Note receivable
Sales revenue
30,000
30,000
Note Receivable Journal Entries
On June 30, 2011, the Esquire Company sold some
merchandise to a customer for $30,000. In payment,
Esquire agreed to accept a 6% note requiring the payment
of interest and principal on March 31, 2012. The 6% rate is
appropriate in this situation.
Prepare the journal entry at December 31, 2011.
December 31, 2011
Interest receivable
Interest revenue
($30,000 x 6% x 6/12) = 900
900
900
Note Receivable Journal Entries
On June 30, 2011, the Esquire Company sold some
merchandise to a customer for $30,000. In payment,
Esquire agreed to accept a 6% note requiring the payment
of interest and principal on March 31, 2012. The 6% rate is
appropriate in this situation.
Prepare the journal entry at March 31, 2012.
March 31, 2012
Cash
Interest revenue
Interest receivable
Note receivable
($30,000 x 6% x 3/12) = 450
31,350
450
900
30,000
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
$1,000
0
1,000
1
2
1,000 Interest
3
4
n=3
FV=10,000, pmt=1,000, n=3, i=12%
=>
PV=9,520
Interest-bearing Note
Illustration: How does Morgan record the receipt of the note?
Notes Receivable
Discount on Notes Receivable
Cash
10,000
480
9,520
Interest-bearing Note
Illustration 7-15
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
($9,520 x 12%)
Credit
9,520
1,000
142
1,142
Discussion Question
Q7-15 What is “imputed interest”?
Imputed interest is the interest ascribed or attributed to a
situation or circumstance which is void of a stated or otherwise
appropriate interest factor. Imputed interest is the result of a
process of interest rate estimation called imputation.
In what situations is it necessary to impute an interest rate for
notes receivable?
An interest rate is imputed for notes receivable when (1) no
interest rate is stated for the transaction, or (2) the stated
interest rate is unreasonable, or (3) the stated face amount of
the note is materially different from the current cash price for the
same or similar items or from the current market value of the
debt instrument.
Discussion Question
Q7-15 Continued – What are the considerations in imputing
an appropriate rate?
In imputing an appropriate interest rate, consideration
should be given to the prevailing interest rates for similar
instruments of issuers with similar credit ratings, the
collateral, and restrictive covenants.
Non-Interest Bearing Note
On April 30, 2011, the Rangers Company sold some
merchandise to a customer for $40,000. Rangers agreed to
accept a payment of $40,000 on April 30, 2016. A 6% interest
rate is appropriate in this situation.
Prepare the journal entry to record the sale of merchandise (omit
any entry that might be required for the cost of the goods sold).
FV=40,000, pmt=0, n=5, i=6%
=>
PV=29,890
April 30, 2011
Note receivable
40,000
Discount on note receivable
10,110
Sales revenue
29,890
Non-Interest Bearing Note
On April 30, 2011, the Rangers Company sold some
merchandise to a customer for $40,000. Rangers agreed to
accept a payment of $40,000 on April 30, 2016. A 6% interest
rate is appropriate in this situation.
Prepare the amortization schedule.
Cash
4/30/2011
4/30/2012
4/30/2013
4/30/2014
4/30/2015
4/30/2016
Interest
Amort
Balance
29,890
Non-Interest Bearing Note
On April 30, 2011, the Rangers Company sold some
merchandise to a customer for $40,000. Rangers agreed to
accept a payment of $40,000 on April 30, 2016. A 6% interest
rate is appropriate in this situation.
Prepare the amortization schedule.
Cash
4/30/2011
4/30/2012
4/30/2013
4/30/2014
4/30/2015
4/30/2016
Interest
-
1,793
Amort
1,793
Balance
29,890
31,683
Non-Interest Bearing Note
On April 30, 2011, the Rangers Company sold some
merchandise to a customer for $40,000. Rangers agreed to
accept a payment of $40,000 on April 30, 2016. A 6% interest
rate is appropriate in this situation.
Prepare the amortization schedule.
Cash
4/30/2011
4/30/2012
4/30/2013
4/30/2014
4/30/2015
4/30/2016
Interest
-
1,793
1,901
Amort
1,793
1,901
Balance
29,890
31,683
33,584
Non-Interest Bearing Note
On April 30, 2011, the Rangers Company sold some
merchandise to a customer for $40,000. Rangers agreed to
accept a payment of $40,000 on April 30, 2016. A 6% interest
rate is appropriate in this situation.
Prepare the amortization schedule.
Cash
4/30/2011
4/30/2012
4/30/2013
4/30/2014
4/30/2015
4/30/2016
Interest
-
1,793
1,901
2,015
2,136
2,265
Amort
1,793
1,901
2,015
2,136
2,265
Balance
29,890
31,683
33,584
35,599
37,735
40,000
Non-Interest Bearing Note
On April 30, 2011, the Rangers Company sold some
merchandise to a customer for $40,000. Rangers agreed to
accept a payment of $40,000 on April 30, 2016. A 6% interest
rate is appropriate in this situation.
Prepare the journal entry at December 31, 2011.
December 31, 2011
Discount on note receivable
Interest revenue
(1,793 X 8/12)
Cash
4/30/2011
4/30/2012
4/30/2013
4/30/2014
1,195
1,195
Interest
-
1,793
1,901
2,015
Amort
1,793
1,901
2,015
Balance
29,890
31,683
33,584
35,599
Non-Interest Bearing Note
On April 30, 2011, the Rangers Company sold some
merchandise to a customer for $40,000. Rangers agreed to
accept a payment of $40,000 on April 30, 2016. A 6% interest
rate is appropriate in this situation.
Prepare the journal entry at December 31, 2012.
December 31, 2012
Discount on note receivable
Interest revenue
(1,793 X 4/12) + (1,901 X 8/12)
Cash
4/30/2011
4/30/2012
4/30/2013
4/30/2014
Interest
-
1,793
1,901
2,015
1,865
1,865
Amort
1,793
1,901
2,015
Balance
29,890
31,683
33,584
35,599
Non-Interest Bearing Note
On April 30, 2011, the Rangers Company sold some
merchandise to a customer for $40,000. Rangers agreed to
accept a payment of $40,000 on April 30, 2016. A 6% interest
rate is appropriate in this situation.
What is the balance of the note at December 31, 2012?
31,683 + (1,901 X 8/12) = 32,950
Cash
4/30/2011
4/30/2012
4/30/2013
4/30/2014
Interest
-
1,793
1,901
2,015
Amort
1,793
1,901
2,015
Balance
29,890
31,683
33,584
35,599
Non-Interest Bearing Note
On April 30, 2011, the Rangers Company sold some
merchandise to a customer for $40,000. Rangers agreed to
accept a payment of $40,000 on April 30, 2016. A 6% interest
rate is appropriate in this situation.
Prepare the journal entry at April 30, 2016.
April 30, 2016
Discount on note receivable
755
Interest revenue
755
(2,265 X 4/12)
Cash
40,000
Note receivable
40,000
Cash
4/30/2011
4/30/2012
4/30/2015
4/30/2016
Interest
-
1,793
2,136
2,265
Amort
1,793
2,136
2,265
Balance
29,890
31,683
37,735
40,000
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.
Notes Receivable Example
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
35,247
15,247
14,000
6,000
Discussion Question
Q7-16 What is the fair value option? Where do companies
that elect the fair value option report unrealized holding
gains and losses?
The fair value option gives companies the option of using
fair value as the measurement basis for financial
instruments. The Board believes that fair value
measurement for financial instruments provides more
relevant and understandable information than historical
cost. If companies choose the fair value option, the
receivables are recorded at fair value, with unrealized
gains or losses reported as part of net income.
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.
►
Fair Value Option. Companies have the option to use fair
value as the basis of measurement in the financial
statements. Adjustments to value go through net income.
Disposition of Receivables
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
Disposition of Receivables
Secured borrowing
• Now
Cash
XXX
Payable
XXX
Get cash sooner, have A/R
and payable on books
Sale of Receivables
• Now
Cash
XXX
A/R
XXX
Get cash sooner, but have
nothing else on books
• Later
Cash
XXX
A/R
Payable
XXX
Cash
• Later
Nothing
XXX
XXX
Secured borrowing vs. Sale
The FASB
concluded that a
sale occurs only if
the seller surrenders
control of the
receivables to the
buyer.
Three conditions
must be met.
Sale of Receivables
Factors are finance companies or banks that buy receivables
from businesses for a fee.
Illustration 7-17
Sale of Receivables
Sale Without Recourse

Purchaser assumes risk of collection

Transfer is outright sale of receivable

Seller records loss on sale

Seller uses 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
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.
Discussion Question
Q7-21 What is the accounts receivable turnover ratio, and
what type of information does it provide?
The accounts receivable turnover ratio is computed by
dividing net sales by average net receivables outstanding
during the year. This ratio is used to assess the liquidity of
the receivables. It measures the number of times, on
average, receivables are collected during the period. It
provides some indication of the quality of the receivables
and how successful the company is in collecting its
outstanding receivables.
A/R Turnover Ratio
This Ratio used to:

Assess the liquidity of the receivables.

Measure the number of times, on average, a company
collects receivables during the period.
IFRS
RELEVANT FACTS - Similarities

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.

Like GAAP, cash and receivables are generally reported in the current
assets section of the balance sheet under IFRS.

Similar to GAAP, IFRS requires that loans and receivables be accounted
for at amortized cost, adjusted for allowances for doubtful accounts.
IFRS
RELEVANT FACTS - Differences

Under IFRS, companies may report cash and receivables as the last
items in current assets under IFRS. Under GAAP, these items are
reported in order of liquidity.

While IFRS implies that receivables with different characteristics should
be reported separately, there is no standard that mandates this
segregation. GAAP has explicit guidance in the area.

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
RELEVANT FACTS - Differences

Under IFRS, bank overdrafts are generally reported as cash. Under
GAAP, such balances are reported as liabilities.

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.
Receivables Journal Entries
Weldon Corporation’s fiscal year ends December 31. The following is a list
of transactions involving receivables that occurred during 2011:
3/17 Accounts receivable of $1,700 were written off as uncollectible. The
company uses the allowance method.
3/30 Loaned an officer of the company $20,000 and received a note
requiring principal and interest at 7% to be paid on March 30, 2012.
6/30 Sold merchandise to the Blankenship Company for $12,000. Terms
of the sale are 2/10, n/30. Weldon uses the gross method to account
for cash discounts.
7/8 The Blankenship Company paid its account in full.
8/31 Sold stock in a nonpublic company with a book value of $5,000 and
accepted a $6,000 non-interest-bearing note with a discount rate of
8%. The $6,000 payment is due on February 28, 2012. The stock
has no ready market value.
12/31 Bad debt expense is estimated to be 2% of credit sales for the year.
Credit sales for 2011 were $700,000.
Prepare all journal entries.
Receivables Journal Entries
3/17
Accounts receivable of $1,700 were written off as uncollectible.
The company uses the allowance method.
• Allowance for uncollectible accounts
1,700
Accounts receivable
1,700
3/30
Loaned an officer of the company $20,000 and received a note
requiring principal and interest at 7% to be paid on March 30,
2012.
• Note receivable
20,000
Cash
20,000
Receivables Journal Entries
6/30
Sold merchandise to the Blankenship Company for $12,000.
Terms of the sale are 2/10, n/30. Weldon uses the gross
method to account for cash discounts.
• Accounts receivable
12,000
Sales revenue
12,000
7/8
The Blankenship Company paid its account in full.
• Cash ($12,000 x 98%)
11,760
Sales discounts ($12,000 x 2%)
240
Accounts receivable
12,000
Receivables Journal Entries
8/31
Sold stock in a nonpublic company with a book value of $5,000
and accepted a $6,000 non-interest-bearing note with a
discount rate of 8%. The $6,000 payment is due on February
28, 2012. The stock has no ready market value.
• Notes receivable (face amount)
6,000
Discount on note receivable
227
Investments (book value)
5,000
Gain on sale of investments (difference)
773
PV(FV=6,000, pmt=0, n=6/12, i=8%) = 5,773
12/31 Bad debt expense is estimated to be 2% of credit sales for the
year. Credit sales for 2011 were $700,000.
• Bad debt expense ($700,000 x 2%)
14,000
Allowance for uncollectible accounts
14,000
Receivables Journal Entries
Adjusting Entries:
To accrue interest earned on note receivable from loan to officer.
• Interest receivable
1,050
Interest revenue ($20,000 x 7% x 9/12)
1,050
To accrue interest earned on note receivable from sale of stock.
• Discount on note receivable
154
Interest revenue ($5,773 x 8% x 4/12)
154