7/e
Receivables
and Investments
7
PowerPoint Author: Catherine Lumbattis
COPYRIGHT © 2011 South-Western/Cengage Learning
Apple’s Consolidated Balance Sheets
(Partial)
ASSETS (in millions)
Current assets:
Cash and cash equivalents
Short-term investments
Accounts receivable, less
allowances of $47 each period
Inventories
Deferred tax assets
Other current assets
Total current assets
September 27,
2008
$11,875
12,615
2,422
509
1,447
5,822
$34,690
September 29,
2007
$9,352
6,034
1,637
346
782
3,805
$21,956
Apple’s Consolidated Balance
Sheets (Partial)
ASSETS (in millions)
Current assets:
Cash and cash equivalents
Short-term investments
Accounts receivable
Inventories
Deferred tax assets
Other current assets
Total current assets
Less
liquid
Apple Corporation Sample
Accounts Receivable
Subsidiary Ledger
Acme
Baxter
Jones
Martin
Smith
Gross Accounts
Receivable
Total Due
$ 10,000
50,000
15,000
20,000
5,000
$100,000
LO1
Apple’s Consolidated Balance
Sheets (Partial)
(amounts in millions)
September 27 September 29
2008
2007
Accounts receivables,
less allowances of $47
In each period
$2,422
$1,637
Net
Realizable
Value
Credit Sales
 Slows inflow of cash
 Risk of uncollectible accounts
Trade Credit
Retail Customer
Receivables
Sales Invoice
Terms: 2/10,
net 30
Accounting for Bad Debts:
Direct Write-off Method
Period of sale
Future period charged
with expense of bad debt
write-off
Journal entry to record write-off in period determined
to be uncollectible:
Bad Debts Expense
XXX
Accounts Receivable—Dexter
XXX
Accounting for Bad Debts:
Allowance Method
bad debt
Period ofEstimated
sale
expense (and
allowance account)
recorded in the same
period
Accounting for
Bad Debts:
Allowance Method
I estimate...
Journal entry to record estimated bad debt
expense in period of sale:
Bad Debts Expense
Allowance for Doubtful Accounts
XXX
XXX
Balance Sheet Presentation –
Allowance Method
Roberts Corp.
Partial Balance Sheet
Accounts receivable
Less: Allowance for
doubtful accounts
Net accounts receivable
$250,000
6,000
$244,000
Accounting for
Bad Debts:
Allowance Method
Bankrupt
Journal entry to record bad debt write-off in
period determined uncollectible:
Allowance for Doubtful Accounts XXX
Accounts Receivable—Dexter
XXX
Approaches to
the Allowance Method
% of Net Credit Sales
Income
Statement
Approach
% of Accounts Receivable Balance
Aging Method
Sheet
Approach
Percentage of Net Credit
Sales Method
Example:
Assume prior years’ net credit sales and bad debt
expense is as follows:
Year
2004
2005
2006
2007
2008
Net Credit Sales
$1,250,000
1,340,000
1,200,000
1,650,000
2,120,000
$7,560,000
Bad Debts
$ 26,400
29,350
23,100
32,150
42,700
$153,700
Percentage of Net
Credit Sales Method
Example:
Develop bad debt percentage:
$153,700
= 0.02033
$7,560,000
use 2%
Percentage of Accounts
Receivable Method
Example:
$32,330 / $4,038,000 = 8% ratio of bad debts to the ending
accounts receivable
December 31, 2010 Accounts Receivable $865,000
× 8%
Credit balance required in Allowance
account after adjustment
$6,920
Percentage of Accounts
Receivable Method
Example:
Assume prior years’ ending Accounts Receivable and
bad debts is as follows:
December 31
Year
Accounts Receivable
Bad Debts
2005
$ 650,000
$ 5,250
2006
785,000
6,230
2007
854,000
6,950
2008
824,000
6,450
2009
925,000
7,450
$4,038,000
$32,330
Percentage of Accounts
Receivable Method
Example:
$32,330 / $4,038,000 = 8% ratio of bad debts to the ending
accounts receivable
December 31, 2010 Accounts Receivable $865,000
× 8%
Credit balance required in Allowance
account after adjustment
$6,920
Percentage of Accounts
Receivable Method
Assume the Allowance for Doubtful Accounts has a
beginning credit balance of $2,100:
Credit balance required in allowance
account after adjustment
Less: Credit balance in allowance
account before adjustment
Amount for bad debt expense entry
$ 6,920
2,100
$ 4,820
Percentage of Accounts
Receivable Method
Assume the Allowance for Doubtful Accounts
has a beginning credit balance of $2,100:
Journal entry:
Bad Debts Expense
4,820
Allowance for Doubtful Accounts
To record estimated bad debts.
4,820
Percentage of Accounts
Receivable Method
The net realizable value of accounts receivable
would be determined as follows:
Accounts receivable
$865,000
Less: Allowance for doubtful account
6,920
Net realizable value
$858,080
Aging Method
Estimated Percent Estimated Amount
Amount
Uncollectible
Uncollectible
$ 85,600
1%
$ 856
Category
Current
Past due:
1–30 days
31,200
31–60 days
24,500
61–90 days
18,000
90+ days
9,200
Totals
$168,500
4%
10%
30%
50%
1,248
2,450
5,400
4,600
$14,554
Aging Method
Assume the Allowance for Doubtful Accounts has a
beginning credit balance of $1,230:
Credit balance required in allowance
account after adjustment
Less: Credit balance in allowance
account before adjustment
Amount for bad debt expense entry
$14,554
1,230
$13,324
Aging Method
Assume the Allowance for Doubtful Accounts
has a beginning credit balance of $1,230:
Journal entry:
Bad Debts Expense
13,324
Allowance for Doubtful Accounts
13,324
To record estimated bad debts.
Aging Method
The net realizable value of accounts receivable
would be determined as follows:
Accounts receivable
$168,500
Less: Allowance for doubtful account 14,554
Net realizable value
$153,946
Accounts Receivable Turnover
Net Credit Sales
Average Accounts Receivable
Indicates how quickly a
company is collecting (i.e.,
turning over) its receivables
LO2
Accounts Receivable Turnover
 Too fast may mean:
credit policies too
stringent; may be
losing sales
 Too slow may mean:
credit department
not operating
effectively;
dissatisfied customers
Interest-Bearing Promissory Note
Principal
Baker Corporation promises to pay HighTec,
Inc. $15,000 plus 12% annual interest on
March 13, 2011.
Interest
Date: December 13, 2010
Signed:_________
Baker Corporation
Maturity
Date
LO3
Interest-Bearing
Promissory Note
Maker
Gives a
Note to
Payee
Receipt of Interest-Bearing
Promissory Note
Journal entry to record the receipt of the note
on December 13:
Notes Receivable
15,000
Sales Revenue
15,000
Interest-Bearing
Promissory Note
Adjusting entry to record interest:
Interest Receivable
90
Interest Revenue
*Interest = $15,000 × 12% × 18/360
90*
Interest-Bearing
Promissory Note
Journal entry to record the collection of the
note on March 13, 2011:
Cash
15,450
Notes Receivable
15,000
Interest Revenue
360*
Interest Receivable
90
*15,000 × 12% × 72/360
Accelerating the Cash
Inflow from Sales
 Credit card sales
 Discounting notes receivable
LO4
Credit Card Sales
 Competitive necessity
 Credit card company:
• Charges fee
• Assumes risk of nonpayment
Discounting Notes Receivable
 Sell note prior to maturity date for cash
 Receive less than face value (i.e.,
discounted amount)
 Can be sold with or without recourse
Reasons Companies Invest in
Other Companies
 Short-term cash excesses
 Long-term investing for future cash
needs
 Exert influence over investee
 Obtain control of investee
LO5
Investment in a CD
Example:
On October 2, Apple invests $100,000 in a 120day CD. Principal plus interest @ 6% due upon
investment maturity.
Purchase of investment:
Short-Term Investments—CD
Cash
100,000
100,000
Investment in a CD
Year-end adjusting entry:
Interest Receivable
1,500
Interest Revenue
1,500
Interest (I) = Principal (P) × Rate (R) × Time (T)
$1,500
= $100,000 × 6%
× 90*/360
*October – 29 days
November – 30 days
December – 31 days
90 days
Investment in a CD
Upon investment maturity:
Cash
102,000
Short-Term Investments—CD
100,000
Interest Receivable
1,500
Interest Revenue*
500
*Interest earned in January:
$100,000 × 6% × 30/360 = $500
Accounting for Common-Stock
Investments
Fair
Value
Method
Equity
Method
Consolidated
Financial
Statements
100%
0%
No significant
influence
Our
focus
in Appendix
Significant
influence
Control
Investment in Bonds
 Bonds of other companies
 Intent and ability to hold until maturity
$100,000, 10% bond due ten years
Investment in Bonds
Example:
On 1/1/10, Atlantic buys:
 $100,000, 10% bonds @ face value
 Bonds mature in ten years
 Interest payable semiannually
Record the purchase of the bonds and
receipt of the first interest payment
Recording Bond Purchase
Investment in Bonds
100,000
Cash
To record purchase of ABC bonds.
$100,000, 10% bond due 2020
100,000
Recording Receipt of
Interest Payment
Cash ($100,000 × 10% × 1/2)
Interest Income
5,000
To record interest income on ABC bonds.
5,000
Recording Bond Sale
Cash
Loss on Sale of Bonds
Investment in Bonds
To record sale of ABC bonds.
99,000
1,000
100,000
Investment in Stocks
 Stocks of other companies
 Recorded at cost, including any
brokerage fees, commissions or
other fees paid to acquire the shares
Investment in Stocks
Example:
On February 1, 2010, Dexter Corp. pays $50,000 for
shares of Stuart common stock plus $1,000
commissions :
Investment in Stuart
Common Stock
51,000
Cash
51,000
Record the purchase of common stock
Recording Receipt of Dividends
Dexter receives $500 cash dividends from Stuart
common stock:
Cash
500
Dividend Income
500
To record the receipt of dividends
Sale of Investment in Stocks
Sale of Investment in Stuart common stock for
$53,000:
Cash
53,000
Investment in Stuart
Common Stock
51,000
Gain on Sale of Stock
2,000
To record the sale of Stuart common stock.
Liquid Assets and the Statement of
Cash Flows – Indirect Method
Operating Activities
Net income
Increase in accounts receivable
Decrease in accounts receivable
Increase in notes receivable
Decrease in notes receivable
Investing Activities
Purchases of held-to-maturity and
available-for-sale securities
Sales/maturities of held-to-maturity and
available-for-sale securities
Financing Activities
xxx
–
+
–
+
–
+
LO6
End of Chapter 7