Chapter 07 - Slides

Chapter 07 - Slides - Chapter 7 Objectives Objectives Cash...

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Unformatted text preview: Chapter 7 Objectives Objectives Cash Cash and Receivables Professor Dennis Chambers ACC 301 Identify items considered cash Identif Indicate Indicate how cash and related items are reported Define Define receivables and identify the different types of receivables of receivables Explain Explain accounting issues related to recognition and valuation of accounts receivable Explain Explain accounting issues related to recognition and valuation of notes receivable Explain accounting issues related to disposition of Explain accounting issues related to disposition of accounts accounts and notes receivable Explain Explain how receivables are reported and analyzed analyzed 1 6/10/2008 ACC 301 2 6/10/2008 ACC 301 Items Included in Cash Balance Included in Cash Balance Cash Cash – coin – currency – bank deposits Cash Reporting Issues Reporting Issues Restricted Restricted cash – Cash set aside for a particular purpose – When material, reported separately as current or long or long-term asset (depending on restriction) asset (depending on restriction) – When a check is written for more than is in the account account – Should be classified as a current liability – short-term investments short– readily convertible to cash – maturity is very near so no interest rate risk is very near so no interest rate risk ACC 301 4 Bank Bank overdrafts Negotiable instruments Negotiable instruments – money orders – certified checks – cashier’s checks – personal checks 6/10/2008 ACC 301 3 Cash Cash equivalents 6/10/2008 Types Types of Receivables Trade Trade receivables – Amounts owed by customers for goods or services rendered – Examples: Accounts Accounts receivable Notes Notes receivable (resulting from trade) Recognition of Accounts Receivable--Issues e-Trade Trade discounts – Reductions in the list price for volume, special customers, etc. – Accounting effect? effect? We We record the sale and receivable at the discounted amount NonNon-trade receivables – – – – Interest receivable Dividends receivable receivable Notes receivable (non-trade) (nonAdvances of various kinds ACC 301 5 Cash (Sales) discounts (S di – Discounts used as inducement for prompt payment payment – e.g., “2/10 net 30” this this means…if you pay within 10 days you get a 2% discount and payment cannot be later than 30 days discount, and payment cannot be later than 30 days. 6/10/2008 ACC 301 6 6/10/2008 Accounting for Cash Discounts for Cash Discounts Gross Method Gross Method – Record revenue at gross amount of sale – When customer takes the discount takes the discount, record cash discounts – Cash discounts reduce gross sales revenue revenue 6/10/2008 ACC 301 Net Method Net Method – Record revenue at net amount (sales – discount) – When customer forfeits discount forfeits discount, record discounts not taken. – Report discounts forfeited as other revenue revenue 7 Recognition of Accounts Recognition of Accounts Receivable Receivable Gross Method Net Method Sales of $10,000, terms 2/10, n/30 Accounts receivable Sales 10000 10000 Accounts receivable Sales 9800 9800 Payment of $3,920 (98% of $4,000) received within discount period Cash Sales discount Accounts receivable 3920 80 4000 Cash Accounts receivable 3920 3920 Payment of $6,000 received after discount period Cash Accounts receivable receivable 6000 6000 Cash 6000 Sales discount forfeited discount f orfeited Accounts receivable 120 5880 8 6/10/2008 ACC 301 In In-Class Exercise #1 Exercise #1 Let’s pause to do In-Class Exercise Let pause to do In Class Exercise #1 #1 Valuation of Accounts Receivable of Accounts Receivable We report A/R at net realizable value We (NRV) – Create a “contra asset” account called “Allowance for Doubtful Accounts” – Offsets gross A/R with the amount we think won’t be paid Bad debt expense Allowance for doubtful accounts for doubtful accounts 200 Example of adjusting journal entry Example of adjusting journal entry 200 – We expense our estimate of the amount that will not be paid will not be paid 6/10/2008 ACC 301 9 6/10/2008 ACC 301 10 Methods of Estimating Bad Debt Expense Percentage of Sales Method Percenta – Called the “income statement” approach – Based on a percentage of credit sales – Offers better matching of revenue and expense Percentage of Sales Method of Sales Method Ajax Inc had $2 Ajax Inc. had $2,350,000 in credit in credit sales sales and estimates 1% of credit sales will be uncollectable sales will be uncollectable 2,350,000 2,350,000 x 0.01 = $23,500 Adj Adjusting entry: Bad debt expense 23,500 Allowance for doubtful accounts 23,500 6/10/2008 ACC 301 12 Percentage Percentage of Receivables Method – Called the “balance sheet” approach – Based on a percentage of gross accounts receivable on percentage of gross accounts receivable – Often different percentages are applied to different aged receivables— receivables—called an aging schedule Adjust the allowance account to achieve the desired – Adjust the allowance account to achieve the desired ending ending balance – Offers better estimate of net realizable value 6/10/2008 ACC 301 11 Percentage of Receivables Method Percentage of Receivables Method Percentage Estimated Allowance Days Account Outstanding Amount Amount Uncollectable Less than 15 days $ 456,189 2% $ 9,123.78 Between 16 and 30 days 78,269 10% 7,826.90 Between 31 and 60 days 15,723 20% 3,144.60 2,375 30% 712.50 Between 61 and 90 days Over 90 days 869 60% 521.40 $ 553,425 $ 21,329.18 M inus: current balance in allowance account 13,496.49 Adjustment needed: $ 7,832.69 Bad debt expense Allowance for doubtful accounts 7832.69 7832.69 21329.18 Writing Off Uncollectible Accounts Off Uncollectible Accounts When we determine that particular When we determine that a particular account account will not be collected Allowance for doubtful accounts 13496.49 – We write off the account and reduce the allowance allowance account Allowance for doubtful accounts Accounts receivable xxxxx xxxxx ?????? – Notice, no effect on the bad debt expense account 6/10/2008 ACC 301 13 6/10/2008 ACC 301 14 In-Class Exercise #2 Exercise #2 Let’s pause to do In-Class Exercise Let pause to do In Class Exercise #2 #2 6/10/2008 ACC 301 15 6/10/2008 ACC 301 16 Disposing of Receivables Disposing of Receivables Receivables can be converted to cash Receivables can be converted to cash in in a number of ways – Wait until the customer pays until the customer pays – Borrow on the balance and use the receivable as collateral receivable as collateral – Sell (factor) the receivables Usually sold at discount Usually sold at a discount Assignment of Accounts Receivable General assignment General – All A/R are pledged as security for a loan – Note payable is recorded with the assignment recorded in the notes recorded in the notes xxxxx xxxxx Cash Note payable payable Specific Specific assignment – Pledge specific A/R accounts as collateral specific A/R accounts as collateral – Borrower continues to collect A/R – Pay off the loan as the A/R is received ACC 301 18 6/10/2008 ACC 301 17 6/10/2008 Specific Assignment Example Assignment Example Facts: On 12/01, assign $60,000 of A/R for a loan Finance company advances 80% of the A/R less a finance charge of $500 company advances 80% of the A/R less finance charge of $500 Loan is subject to a 12% interest rate On 12/31, $10,000 is collected from customers On 12/31 the first loan payment is made Journal Entries: Recording the assignment: Cash Finance charge Notes Payable (60,000 x 80% = 48,000) Collect from customers: Cash A/R Pay lender: Interest Expense Note payable Note payable Cash (48,000 x .12/12 = 480) 6/10/2008 Selling Accounts Receivable Accounts Receivable Sale may be with or without Sale may be with or without “recourse” “recourse” Transfer without recourse Transfer without recourse – Purchaser assumes risk of non-payment non– Sale is recorded with a loss (because (b they are always sold at a discount) – Usually the factor (the buyer) holds th (th back a portion (e.g., 5%) for returns, discounts etc discounts, etc. 19 6/10/2008 ACC 301 20 47,500 500 48,000 10,000 10,000 480 10,000 10,480 ACC 301 Example of Sale Without Recourse Example of Sale Without Recourse Assume $100,000 of A/R subject to 3% Assume $100,000 of A/R subject to a 3% discount discount and 5% hold-back holdCash Due from factor Loss on sale on sale Accounts receivable 92,000 5,000 3,000 100,000 Sale With Recourse With Recourse Seller agrees to “make good” any Seller agrees to make good any unpaid unpaid receivables May treat as either sale or as May treat as either a sale or as borrowing borrowing – Three requirements for sale treatment Transferred Transferred assets “isolated” from transferor Transferee has right to pledge or sell assets Transferee has right to pledge or sell assets Transferor Transferor does not have right or obligation to buy back the assets Will Will eventually get the “due from factor” amount less any discounts, returns, etc. 6/10/2008 ACC 301 21 6/10/2008 ACC 301 22 Example of Sale With Recourse of Sale With Recourse Assume $100 Assume $100,000 of A/R subject to a of A/R subject to 3% 3% discount and 5% hold-back, holdestimated recourse is $2 estimated recourse is $2,000 Cash Due from factor Loss on sale on sale Accounts receivable Recourse liability 6/10/2008 ACC 301 In-Class Exercise #3 Exercise #3 Let’s pause to do In-Class Exercise Let pause to do In Class Exercise #3 #3 92,000 5,000 5,000 100,000 2,000 23 6/10/2008 ACC 301 24 Notes Receivable Recognition Notes Receivable - Recognition Lon Long-term notes receivable are recorded at net carrying value Interest Interest payments Principal Principal payments Notes Receivable Recognition Notes Receivable - Recognition Two Two interest rates matter here – the stated rate of interest – the market rate of interest this this is the rate of interest stated on the face of the note – Equal to the present value of cash flows from holding the note – Discount rate for calculating the present value is the market interest rate for that note If If the stated rate and the market rate are the same If If the stated rate and the market rate are different – Present value = stated face value of the note this is the rate of interest the market pays for loans of this this is the rate of interest the market pays for loans of this type type and risk We We recognize the note receivable on our books at its present value—sometimes this books at its present value sometimes this is is different than the stated face value of the note 6/10/2008 ACC 301 25 – Record at a discount if the stated rate < market rate – Record at a premium if the stated rate > market rate 6/10/2008 ACC 301 26 Notes Receivable Recognition Notes Receivable - Recognition Example: Example: – We sell land with a book value of $12,000 sell land with book value of $12 – We agree to take a 2-year, 15,000 note with a stated interest rate of 26%. – Current market rate for loans like this is 10% – $15,000 ?? – What about the time-value of money? about the time of money? – – – – – – – The The principal is due at the end of 2 years Interest payments are due at the end of each year. Interest payments are due at the end of each year. Accounting For Note Receivable For Note Receivable Sale of the Land Note Receivable Discount on N/R Discount on N/R Land Gain on sale of land Accounting for future loan payments Payment $ 900.00 $ 900.00 Interest 1,395.87 $ 1,445. 45 Amortization 495.87 $ 545 545.45 1,041.32 Discount 1,041.32 $ 545.45 Balance 13,958.68 We amortize 14,454.55 the discount 15 15, 000.00 15,000.00 $1,041.32 12,000.00 1,958.68 What What is the note receivable worth? We We find the present value of the note: n=2, i=10%, FV=$15,000 PV factor = 0.826446 (Table 2) n=2, i=10%, PMT=$900 (ordinary annuity) i=10% PMT=$900 (ordinary annuity) Annuity factor = 1.735537 (Table 4) PV of the note is: (15,000 x 0.826446)+(900 x 1.735537) = $13,959 The discount is 15,000 – 13,959 = $1,041 Gain on the sale of land is 13 Gain on the sale of land is 13,959 – 12,000 = $1,959 12 $1 27 6/10/2008 over the life of the loan 1st Interest Payment Cash Discount on N/R Interest Revenue 2nd Interest Payment Cash Discount on N/R Interest Revenue ACC 301 900.00 495.87 1,395.87 900.00 545.45 1,445.45 28 6/10/2008 ACC 301 In In-Class Exercise #4 Exercise #4 Let’s pause to do In-Class Exercise Let pause to do In Class Exercise #4 #4 6/10/2008 ACC 301 29 ...
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This note was uploaded on 01/20/2011 for the course ACC 301 taught by Professor Staff during the Fall '08 term at Kentucky.

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