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510chapter7fall2009afterclass1152009

510chapter7fall2009afterclass1152009 - Chapter 7 Cash and...

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Chapter 7: Cash and Chapter 7: Cash and Receivables Receivables    
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What’s Important What is cash and how is it reported? Recognition of accounts receivable Valuation of accounts receivable Recognition of notes receivable Valuation of notes receivable Disposition of notes/accounts receivable Reconciliation of bank balances
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Exercise Balance Bar Co. madea loan to Bio Foods and received in exchange a 5-year, $100,000 note bearing interest 8 percent. Themarket rate of interest for a noteof similar risk is 10 percent. How does BalanceBar record the receipt of thenote? Interest-Bearing Note Present valueof principal: $100,000 (PVF 5, 10% ) = $100,000 x .62092 = $ 62,092 Present valueof Interest: $8,000 (PVF 5, 10% ) = $8,000 x 3.79079 = 30,326 Present valueof note $ 92,418
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Amortization Schedule Interest-Bearing Note 10% Carrying Cash Interest Discount Amount Received Revenue Amortized of Note Date of issue 92,418 $ End of yr. 1 8,000 9,242 $ 1,242 $ 93,660 End of yr. 2 8,000 9,366 1,366 95,026 End of yr. 3 8,000 9,503 1,503 96,529 End of yr. 4 8,000 9,653 1,653 98,182 End of yr. 5 8,000 9,818 1,818 100,000 40,000 47,582 7,582 Interest-Bearing Note
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E7-18 On July 1, 2010, Rentoul madetwo sales. Rentoul recently had to pay 8% interest for money that it borrowed from British National Bank. Thecustomers in thesetwo transactions havecredit ratings that requirethem to borrow money at 12% interest. Record thetwo journal entries that should berecorded by Rentoul Inc. for thesales transactions below that took placeon July 1, 2010. 1. It sold land having a fair market valueof $900,000 in exchangefor a 4 year non interest bearing promissory notein thefaceamount of $1,416,163 Theland is carried on Rentoul’s books at a cost of $590,000. 1. It rendered services in exchangefor a 3%, 8 year promissory notehaving a facevalueof $400,000 (interest payableannually).
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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. Saleof receivables
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Conditions 1.   Aretransferred assets isolated from transferor? and 2. Does transferee haveright to pledgeor sell assets? and 3. Has transferor divested itself of control through repurchase agreement?
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