Short-Term Investments &
Receivables
Pr. Zoubida SAMLAL
Learning Objective 1
Account for short-term investments
Account for short-term
investments
Accounting for Short-Term
Investments
•
•
•
•
Also called marketable securities
Held for one year or less
Most liquid asset other than cash
Placed into three categories:
Trading
Investments
Availablefor-Sale
Held-toMaturity
Trading Investments
• Held for short time and then sold
– Gain or loss recorded
Selling price > cost = Gain
Selling price < cost = Loss
• Dividend revenue may also be received
• At year-end, trading investments are adjusted
to equal their market value
– Results in an unrealized gain or loss
Unrealized Gains & Losses
• Difference between market price and cost of
investment at year-end
• Unrealized – investment has not been sold
Market price >
cost =
Unrealized gain
Market price <
cost =
Unrealized loss
Realized vs. Unrealized
Realized
• Investment sold to third
party
• Gain or loss = difference
between selling price
and cost
• Word “realized” usually
dropped from title
Unrealized
• Company still owns
investment
• Gain or loss = difference
between market value
and cost
• Word “unrealized” is
kept in account title
Entries to Adjust to Market
JOURNAL
Date
Accounts
Debit
Short-term investments
$$$
Unrealized gain on investments
Credit
$$$
Adjusted investment to market value (when greater than cost)
Unrealized loss on investments
Short-term investments
$$$
$$$
Adjusted investment to market value (when less than cost)
Reporting on Financial Statements
Balance Sheet
• Trading Investment
– Reported at current
market value
– Listed directly under
“cash” in the current
asset section
Income Statement
• Gains and losses
– From sales of
investments
• Investment revenue
– From dividends or
interest earned
• Unrealized gain or loss
– From entry to adjust to
market value
Exercise 1
Part of your job responsibilities as a finance manager is to invest in short term
trading investments.
1. On 1 dec . You bought 1000 shares of XYZ company at USD 10
2. On 15 dec. You received a cash dividend of USD 1 per share
3. On 31 dec the price of XYZ share dropped to USD 8 per share
4. On 31 dec you decided to sell off all your investment at USD 8 per share
a) Please post the account entries of each transaction
b) How transaction 3 is different from transaction 4
Solution 1
JOURNAL
Date
Accounts
Dec 1 Trading investment
Debit
Credit
$10,000
Cash
$10,000
a. Short term trading investment XYZ at
USD 10
Dec 15
Cash
Dividend revenue
b. Dividend distribution received in cash
USD 1 per share
$1000
$1000
Solution 1 ( con´t)
JOURNAL
Date
Accounts
Debit
Dec 31 Unrealized loss
Credit
$2,000
Trading investment
$2,000
c. Adjusting our short term
investment to the market value
of USD 8 per share
Dec 31 Cash
Loss from selling the investment
Trade Investment ( initial
purchase price)
d. Investment sold at loss of USD2
per share
$8000
$2000
$10000
Solution 1 ( con´t)
How transaction 3 is different from transaction 4
-> Our transaction n° 3 is a readjustment to our investment or what we call
mark to market our investment. --> Unrealized loss because the investment
is not yet sold.
-> Our transaction n° 4 is a sell off to our investment or selling at loss of 2USD
(selling price–purchasing price or USD 8 – USD 10) . --> here we have a
realized loss that we posted into our revenues account.
When Unrealized loss
JOURNAL
Date
12-31
Accounts
Unrealized loss
Trading Investments
Debit
What would be the
amount of the
Credit
unrealized loss?
_______
________
Compute the difference
between the cost and
market value.
When realized loss
JOURNAL
Date
Accounts
Debit
Cash
Your selling
price?
Gain on sale of
investments
Your loss=
Sell- buy
Credit
1-11
Trading Investments
Initial
purchase
When Unrealized Gain
JOURNAL
Date
Accounts
Trading Investments
Debit
Credit
Compute the
difference
between the
cost and
market value.
_______
Unrealized gain
What would be
the amount of the
unrealized gain?
________
When realized Gain
JOURNAL
Date
Accounts
Cash
Gain on sale of
investments
Trading Investments
Debit
Credit
Your selling
price?
Your gain =
Sell- buy
Initial
purchase
Learning Objective 2
Apply internal controls to receivables
Receivables
• Monetary claims against others
• Third most liquid asset
• Accounts Receivable
– Amounts owed by customers for selling goods or
services
• Notes Receivable
– Lending money to outsiders
– More formal than accounts receivable
Internal Control over Cash Collections
on Account
• Separate cash-handling from cash-accounting
duties
• Cash-handling
– One person receives customer checks and makes
deposits
• Cash-accounting
– Another person makes entries to customer
accounts
Accounting for Uncollectible Receivables
• Extending credit to customers
bears some risk
• Risk: Some customers do not
pay the amount owed
• Cost: Uncollectible accounts
Application exercise
Case
Perinity Inc. is a company that sells 50% of its product cash
while. 80% of its credit sales are paid on time
a.
b.
What is the total amount of account receivable if the sales revenues are USD 1
million?
How much uncollectible does it have?
Learning Objective 3
Use the allowance method for uncollectible
receivables
Allowance Method
• Amount of uncollectible accounts is estimated
• An expense is recorded as part of the
adjusting process
• A contra-asset is recorded that reduces
accounts receivable on the balance sheet
A contra-asset is always paired
with an asset and reduces
its balance
Entry to Record Uncollectible accounts
JOURNAL
Accounts
Uncollectible accounts expense
Allowance for uncollectible accounts
Debit
Credit
Goes on the
Income Statement
Goes on the
Balance Sheet
netted with a
A. receivable
Balance Sheet
Current assets:
Accounts receivable
$$,$$$
Less: Allowance for
Uncollectible Accounts ( $,$$$)
Accounts receivable, net $$,$$$
OR
Accounts receivable, net
$$,$$$
Methods to Estimate Uncollectibles
Percent-of-sales
• Expense is estimated
based on credit sales
• Income Statement
approach
Aging-of-receivables
• Accounts receivable
analyzed based on how
long outstanding
• Balance Sheet approach
APPLICATION EXERCISE
During the monthly closing of it’s A/R accounts, Perinity Inc posted its uncollected
received classified by their age.
The company has a beginning allowance balance of USD $7,400 . Is it sufficient or
should it adjust its allowance?
Age of Accounts
1 - 30 Days
31 - 60 Days
61 - 90 Days
Over 90 Days
sales
$
$
$
$
%uncollectible
0.5%
110,000
1%
60,000
60%
50,000
40%
15,000
Solution
Age of Accounts
Age
1 - 30 Days
31 - 60 Days
61 - 90 Days
Over 90 Days
sales
$
$
$
$
% Uncllected
uncollected
110,000
0.5%
$
550
60,000
1%
$
600
50,000
60%
$
30,000
15,000
40%
$
6,000
$37,150= Total Uncollected receivable
Solution
Aging Schedule
Balance in Allowance
Adjustment needed
$37,150
$7,400
Adjustment needed
= Aging schedule Balance
JOURNAL
Date
1231
Accounts
Debit
Uncollectible accounts expense
_______
Allowance for uncollectible accounts
Credit
______
Solution
Allowance for Uncollectible Accounts
$7,400
Adjusting entry
Balance before
adjustment
$29,750
$37,150
Balance per
aging
schedule
Uncollectible Accounts Methods
Percent-of-Sales
Adjust Allowance for
Uncollectible Accounts
BY
The Amount of
UNCOLLECTIBLE ACCOUNT
EXPENSE
Aging-of-Receivables
Adjust Allowance for
Uncollectible Accounts
TO
The Amount of
UNCOLLECTIBLE ACCOUNTS
RECEIVABLE
Writing Off a Specific Account
• The allowance is used to absorb specific accounts
that are determined to uncollectible
• When it’s determined a customer cannot pay, the
following entry is made:
JOURNAL
Date
Accounts
Allowance for uncollectible
accounts
Accounts receivable
Debit
Credit
$$$$
$$$$
Learning Objective 4
Account for notes receivable
Notes Receivable Terms
•
•
•
•
•
•
•
Creditor
Debtor
Interest
Maturity Date
Maturity Value
Principal
Term
Party to whom money is owed; lender
Party that owes money; borrower
Cost of borrowing money; percent
Date debtor must pay the note
Sum of principal and interest on note
Amount borrowed by debtor
Length of time money is borrowed
Accounting for Notes Receivable
• To record the receipt of a note receivable,
the following entry is made:
JOURNAL
Date
Accounts
Notes Receivable
Cash
Debit
Credit
$$,$$$
$$,$$$
Accounting for Notes Receivable
• Interest needs to be accrued on any note
receivable outstanding at year end:
JOURNAL
Date
Accounts
Interest receivable
Interest revenue
Interest is computed by the formula:
Principal x rate x time
Debit
Credit
$$,$$$
$$,$$$
Time = date note is
signed to end-of-year
ACCOUNTING FOR NOTES
RECEIVABLE
When payment is received on note, the following entry is made
JOURNAL
Date
Accounts
Debit
Credit
For maturity
value
Cash
Notes Receivable
Interest
receivable
Interest revenue
For principal
Zeroes out
adjustment
For remaining
interest earned
Credit and Bank Card Sales
• Credit Cards
– American Express and Discover
• Bank Cards
– VISA and MasterCard
• Both charge the retailer a fee
Learning Objective 5
Use two new ratios to evaluate a business
Days’ Sales in Receivables
• How long it takes a company to collect its
average amount of receivable
• Compute one day’s sales
Net Sales
365 Days
• Days’ sales in receivables
Average receivables
One Day’s Sales
Acid-Test Ratio
• Also called quick ratio which measures how
much your short term assets represents in terms
of short term liabilities
• A more stringent measure of a company’s
ability to pay its current liabilities
Cash + Short-term investments + net receivables
Total current liabilities
Which is better having a high acid ratio or
low acid ratio?