ch07 - CHAPTER 7 CASH AND RECEIVABLES (Appendix A excluded)...

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Unformatted text preview: CHAPTER 7 CASH AND RECEIVABLES (Appendix A excluded) Intermediate Accounting I Prof. Volkan Muslu Chapter 7 -1 What is Cash? Cash S tandard m diumof e e xchange Basis for m asuring and accounting for all ite s e m Exam s: coin, curre availablefunds on de ple ncy, posit at thebank, m y orde ce one rs, rtifie che cashie che pe d cks, r’s cks, rsonal che bank cks, drafts and savings accounts. Chapter 7 -2 LO 1 Identify items considered cash. Reporting Cash Cash Equivalents S hort-te , highly liquid inve e that areboth rm stm nts (a) re adily conve rtibleto cash, and (b) so ne the m ar ir aturity that the pre nt insignificant risk of y se change in inte st rate s re s. Exam s: Treasury bills, Com e paper, and Money marke funds ple m rcial t (auction ratefunds). Chapter 7 -3 LO 2 Indicate how to report cash and related items. Reporting Cash Bank Overdrafts Whe a com n pany write a che for m than theam s ck ore ount in its cash account. Ge rally re ne porte as a curre liability. d nt Offse against cash account only whe availablecash is pre nt in t n se anothe account in thesam bank on which theove r e rdraft occurre d. Chapter 7 -4 LO 2 Indicate how to report cash and related items. Summary of Cash-Related Items Illustration 7-2 Chapter 7 -5 LO 2 Indicate how to report cash and related items. Receivables C s he against custom rs and othe for m y, goods, or laim ld e rs one se s. rvice Oral prom s of thepurchase to ise r pay for goods and se s sold rvice (a fe m w onths). Writte prom s to pay a sumof n ise m y on a spe d futuredate one cifie . Accounts Accounts Receivable Receivable Chapter 7 -6 Notes Notes Receivable Receivable LO 3 Define receivables and identify the different types of receivables. Account Receivables Nontrade Receivables 1. 2. 3. 4. 5. 6. Advance to office and e ploye s. s rs m e Advance to subsidiarie s s. De posits to cove pote r ntial dam s or losse age s. De posits as a guarante of pe e rform anceor paym nt. e Divide and inte st re ivable nds re ce . C s against: laim a) b) c) d) e) f) Chapter 7 -7 I nsurancecom panie for casualtie sustaine s s d. De ndants unde suit. fe r Gove e bodie for tax re rnm ntal s funds. Com on carrie for dam d or lost goods. m rs age Cre ditors for re turne dam d, or lost goods. d, age Custom rs for re e turnableite s (crate containe e m s, rs, tc.). LO 3 Define receivables and identify the different types of receivables. Account Receivables Nontrade Receivables Illustration 7-3 Chapter 7 -8 LO 3 Define receivables and identify the different types of receivables. Recognition of Accounts Receivables Trade Discounts Re ductions fromthelist price Not re cognize in theaccounting d re cords C ustom rs arebille ne of discounts e dt 10 % Discount for new Retail Store Customers Chapter 7 -9 LO 4 Explain accounting issues related to recognition of accounts receivable. Recognition of Accounts Receivables Cash Discounts I nduce e for prom paym nt m nts pt e Gross Me Gross thod vs. Me thod Me Ne t Paym nt te s e rm are2/10, n/30 Chapter 7-10 LO 4 Explain accounting issues related to recognition of accounts receivable. Recognition of Accounts Receivables Cash Discounts (Sales Discounts) Illustration 7-4 Chapter 7-11 LO 4 Explain accounting issues related to recognition of accounts receivable. Recognition of Accounts Receivables E7-5: On June3, Bolton Com pany sold to Arque Com tte pany m rchandisehaving a e salepriceof $2,000 with te s of 2/10, n/60, f.o.b. shipping point. On June12, the rm com pany re ive a che for thebalanceduefromArque C pany. Pre ce d ck tte om parethe journal e s on Bolton Com ntrie pany books to re thesaleassum Bolton re cord ing cords sale using thegross method. s June3 Accounts re ivable ce Ss ale 2,000 2,000 1,960 40 2,000 June12 C ($2,000 x 98%) ash S s discounts ale Accounts re ivable ce Chapter 7-12 LO 4 Explain accounting issues related to recognition of accounts receivable. Recognition of Accounts Receivables E7-5: On June3, Bolton Com pany sold to Arque Com tte pany m rchandisehaving a e salepriceof $2,000 with te s of 2/10, n/60, f.o.b. shipping point. On June12, the rm com pany re ive a che for thebalanceduefromArque C pany. Pre ce d ck tte om parethe journal e s on Bolton Com ntrie pany books to re thesaleassum Bolton re cord ing cords sale using thenet method. s June3 Accounts re ivable ce Ss ale 1,960 1,960 1,960 1,960 June12 C ($2,000 x 98%) ash Accounts re ivable ce Chapter 7-13 LO 4 Explain accounting issues related to recognition of accounts receivable. Recognition of Accounts Receivables E7-5: On June3, Bolton Com pany sold to Arque Com tte pany m rchandisehaving a e salepriceof $2,000 with te s of 2/10, n/60, f.o.b. shipping point. Pre rm parethejournal e s on Bolton C pany books to re thesaleassum Bolton re ntrie om cord ing cords sale using s t henet method, and Arque did not re it paym nt until July 29. tte m e June3 Accounts re ivable ce Ss ale 1,960 1,960 2,000 1,960 40 June12 C ash Accounts re ivable ce S s Discounts Forfe d ale ite Chapter 7-14 LO 4 Explain accounting issues related to recognition of accounts receivable. Recognition of Accounts Receivables Nonrecognition of Interest Element A com pany should m asurere ivable in te s of the pre nt value e ce s rm ir se . Theprofe ssion spe cifically e xclude frompre nt valueconside s se rations “re ivable arising fromtransactions with custom rs in thenorm ce s e al course of busine which areduein custom tradete s not e e ss ary rm xce ding approxim ly oneye ate ar.” Chapter 7-15 LO 4 Explain accounting issues related to recognition of accounts receivable. Accounting for Accounts Receivable Accounting How arethe accounts pre nte on theBalanceS e se se d he t? Accounts Receivable Beg. 500 Allowance for Doubtful Accounts 25 Beg. End. Chapter 7-16 500 25 End. LO 4 Explain accounting issues related to recognition of accounts receivable. Accounting for Accounts Receivable Assets Current Assets: Cash Accounts receivable Less: Allowance for doubtful accounts Inventory Prepaids Total current assets Fixed Assets: Office equipment Furniture & fixtures Less: Accumulated depreciation Total fixed assets Total Assets Chapter 7-17 $ 500 (25) 346 475 812 40 1,673 5,679 6,600 (3,735) 8,544 10,217 $ LO 4 Explain accounting issues related to recognition of accounts receivable. Accounting for Accounts Receivable Assets Current Assets: Cash Accounts receivable, net of $25 allowance Inventory Prepaids Total current assets Fixed Assets: Office equipment Furniture & fixtures Less: Accumulated depreciation Total fixed assets Total Assets $ 346 475 812 40 1,673 5,679 6,600 (3,735) 8,544 10,217 $ Chapter 7-18 LO 4 Explain accounting issues related to recognition of accounts receivable. Accounting for Accounts Receivable Accounting Journal e for cre saleof $100? ntry dit Accounts re ivable ce Ss ale Accounts Receivable Beg. 500 100 100 Allowance for Doubtful Accounts 25 Beg. End. Chapter 7-19 500 25 End. LO 4 Explain accounting issues related to recognition of accounts receivable. Accounting for Accounts Receivable Journal e for cre saleof $100? ntry dit Accounts re ivable ce Ss ale Accounts Receivable Beg. Sale 500 100 100 100 Allowance for Doubtful Accounts 25 Beg. End. Chapter 7-20 600 25 End. LO 4 Explain accounting issues related to recognition of accounts receivable. Accounting for Accounts Receivable C cte of $333 on account? olle d C ash Accounts re ivable ce Accounts Receivable Beg. Sale 500 100 333 333 Allowance for Doubtful Accounts 25 Beg. End. Chapter 7-21 600 25 End. LO 4 Explain accounting issues related to recognition of accounts receivable. Accounting for Accounts Receivable Accounting C cte of $333 on account? olle d C ash Accounts re ivable ce Accounts Receivable Beg. Sale 500 100 333 Coll. 333 333 Allowance for Doubtful Accounts 25 Beg. End. Chapter 7-22 267 25 End. LO 4 Explain accounting issues related to recognition of accounts receivable. Accounting for Accounts Receivable Accounting Adjustm nt of $15 for e ate Bad-De e stim d bts? Bad de e nse Bad bt xpe Allowancefor Doubtful Accounts Accounts Receivable Beg. Sale 500 100 333 Coll. 15 15 Allowance for Doubtful Accounts 25 Beg. End. Chapter 7-23 267 25 End. LO 4 Explain accounting issues related to recognition of accounts receivable. Accounting for Accounts Receivable Accounting Adjustm nt of $15 for e ate Bad-De e stim d bts? Bad de e nse bt xpe Allowancefor Doubtful Accounts Accounts Receivable Beg. Sale 500 100 333 Coll. 15 15 Allowance for Doubtful Accounts 25 15 Beg. Est. End. Chapter 7-24 267 40 End. LO 4 Explain accounting issues related to recognition of accounts receivable. Accounting for Accounts Receivable Accounting Write of uncolle -off ctibleaccounts for $10? Allowancefor Doubtful accounts Accounts re ivable ce Accounts Receivable Beg. Sale 500 100 333 Coll. 10 10 Allowance for Doubtful Accounts 25 15 Beg. Est. End. Chapter 7-25 267 40 End. LO 4 Explain accounting issues related to recognition of accounts receivable. Accounting for Accounts Receivable Accounting Write of uncolle -off ctibleaccounts for $10? Write Allowancefor Doubtful accounts Allowance Accounts re ivable ce Accounts Receivable Beg. Sale 500 100 333 10 End. Chapter 7-26 10 10 Allowance for Doubtful Accounts 25 Beg. Est. 15 W/O 10 30 End. Coll. W/O 257 LO 4 Explain accounting issues related to recognition of accounts receivable. Accounting for Accounts Receivable Assets Current Assets: Cash Accounts receivable, net of $30 allowance Inventory Prepaids Total current assets Fixed Assets: Office equipment Furniture & fixtures Less: Accumulated depreciation Total fixed assets Total Assets $ 13 227 812 40 1,092 5,679 6,600 (3,735) 8,544 9,636 $ Chapter 7-27 LO 4 Explain accounting issues related to recognition of accounts receivable. Valuation of Accounts Receivable Reporting Receivables C lassification Valuation (ne re t alizablevalue ) Uncollectible Accounts Receivable S s on account raisethepossibility of accounts not be ale ing colle d. cte Chapter 7-28 LO 5 Explain accounting issues related to valuation of accounts receivable. Valuation of Accounts Receivable Uncollectible Accounts Receivable An uncolle ctibleaccount re ivableis a loss of re nuethat re ce ve quire s a de asein theasse accounts re ivableand cre t ce a re d de asein incom and stockholde e late cre e rs’ quity. Chapter 7-29 LO 5 Explain accounting issues related to valuation of accounts receivable. Valuation of Accounts Receivable Methods of Accounting for Uncollectible Accounts Direct Write-Off The tically unde ore sirable : No m atching Re ivablenot state at ne ce d t re alizablevalue Not GAAP Allowance Method Losse areEstim d: s ate Pe ntage rce -of-sale s Pe ntage rce -of-re ivable ce s GAAP Chapter 7-30 LO 5 Explain accounting issues related to valuation of accounts receivable. Uncollectible Accounts Receivable Income Statement Approach Balance Sheet Approach Chapter 7-31 LO 5 Explain accounting issues related to valuation of accounts receivable. Uncollectible Accounts Receivable Percentage-of-Sales Approach - m atche costs with re nue s ve s be causeit re s thechargeto thepe in which a com late riod pany re cords the sale . Appropriateif the is a fairly stablere re lationship be e pre twe n vious ye ars’ cre sale and bad de dit s bts. Chapter 7-32 LO 5 Explain accounting issues related to valuation of accounts receivable. Uncollectible Accounts Receivable Percentage-of-Sales Approach Illustration: C S way C had hum orp. e ate frompast stim s e rie that xpe nce about 2 pe nt of cre sale be e rce dit s com uncolle ctible I f C S way has cre sale of $400,000 in 2010, it re . had hum dit s cords bad de e nseas follows. bt xpe Bad De Expe bt nse Allowancefor Doubtful Accounts 8,000 8,000 Chapter 7-33 LO 5 Explain accounting issues related to valuation of accounts receivable. Uncollectible Accounts Receivable Percentage-of-Receivables Approach not m atching. re ports re ivable at ne re ce s t alizablevalue . C panie m apply this m thod using om s ay e onecom positerate or , an aging sche of accounts re ivable dule ce . Chapter 7-34 LO 5 Explain accounting issues related to valuation of accounts receivable. Uncollectible Accounts Receivable What e would ntry Wilson m ake assum that no ing balance e d in the xiste allowanceaccount? Bad De Expe bt nse Allowancefor Doubtful Accounts Chapter 7-35 37,650 37,650 LO 5 Explain accounting issues related to valuation of accounts receivable. Uncollectible Accounts Receivable What e would ntry Wilson m ake assum the ing allowanceaccount had a cre balance dit of $800 be fore adjustm nt ? e Bad De Expe ($37,650 – $800) bt nse Allowancefor Doubtful Accounts Chapter 7-36 36,850 36,850 LO 5 Explain accounting issues related to valuation of accounts receivable. Uncollectible Accounts Receivable E7-7 (Recording Bad Debts) S l C pany re ande om ports thefollowing f inancial inform ation be adjustm nts. fore e Instructions: Pre parethejournal e to re bad de e nseassum ntry cord bt xpe ing S l C pany e ate bad de at ande om stim s bts (a) 1%of ne sale and (b) 5%of accounts re ivable t s ce . Chapter 7-37 LO 5 Explain accounting issues related to valuation of accounts receivable. Uncollectible Accounts Receivable E7-7 (Recording Bad Debts) S l C pany re ande om ports thefollowing f inancial inform ation be adjustm nts. fore e Instructions: Pre parethejournal e assum S l e ate bad de at ntry ing ande stim s bts (a) 1% of net sales. Bad De Expe bt nse Allowancefor Doubtful Accounts Chapter 7-38 7,500 7,500 LO 5 ($800,000 – $50,000) x 1%= $7,500 Uncollectible Accounts Receivable E7-7 (Recording Bad Debts) S l C pany re ande om ports thefollowing f inancial inform ation be adjustm nts. fore e Instructions: Pre parethejournal e assum S l e ate bad de at ntry ing ande stim s bts (b) 5% of accounts receivable. Bad De Expe bt nse Allowancefor Doubtful Accounts Chapter 7-39 6,000 6,000 LO 5 ($160,000 x 5% – $2,000) = $6,000 ) Uncollectible Accounts Receivable Summary Percentage of Sales approach: Bad de e nsee ateis re d to a nom account (S s), any balance bt xpe stim late inal ale in theallowanceaccount is ignore d. Achie s a prope m ve r atching of cost and re nue ve s. Percentage of Receivables approach: Re sults in a m accuratevaluation of re ivable on thebalanceshe t. ore ce s e Me thod m also beapplie using an aging sche . ay d dule Chapter 7-40 LO 5 Explain accounting issues related to valuation of accounts receivable. LO Recognition of Notes Receivable Notes Receivable S upporte by a form prom d al issory note . Make signs in favor of a Paye r e I nte st-be re aring (has a state rateof inte st) OR d re Ze ro-inte st-be re aring (inte st include in faceam re d ount) Chapter 7-41 LO 6 Explain accounting issues related to recognition of notes receivable. Recognition of Notes Receivable Generally originate from: C ustom rs who ne d to e nd paym nt pe of an outstanding e e xte e riod re ivable ce High-risk or ne custom rs w e Loans to e ploye s and subsidiarie m e s S s of prope plant, and e ale rty, quipm nt e Le nding transactions (them ajority of note s) Chapter 7-42 LO 6 Explain accounting issues related to recognition of notes receivable. Recognition of Notes Receivable Short-Term Record at Face Value, less allowance Long-Term Record at Present Value of cash expected to be collected NoteI ssue at d FaceValue Pre ium m Discount I nte st Rate re s S d rate= Marke rate tate t S d rate> Marke rate tate t S d rate< Marke rate tate t Chapter 7-43 LO 6 Explain accounting issues related to recognition of notes receivable. Agenda Present Value What is the current value of a single future payment? Future Value What is the future value of a single current payment? Annuity What is the current value of a series of future equal What payments? payments? Chapter 7-44 A dollar now is not equal to a dollar tomorrow Interest = Discount rate = r = 10% Time 0 $1.00 Time 1 ? A dollar today can be invested and so it can yield a value greater than a dollar tomorrow Chapter 7-45 Single payment Time 0 $1.00 Interest = 10% Time 0 $0.91 Time 1 $1.00 Time 1 $1.10 Future value of $ 1.00 today = $1.00 (1+10%) = $1.10 at the end of one year Present value of $1.00 one year from now = $1.00/(1.10) = $0.91 Chapter 7-46 Single payment T=0 $1.00 T=1 $1.10 T=2 $1.21 $0.83 $0.91 $1.00 Future value of $1.00 two years from now = $1.00*(1+10%)*(1+10%) = $1.00*(1.10) = $1.21 Present value of $1.00 to be received two years from now Chapter 7-47 Annuity Annuity is a stream of fixed-dollar payments made at Annuity regular intervals of time. It is divided into two: regular 1) 2) Perpetuity: If the stream of fixed payments carry on Perpetuity: indefinitely. indefinitely. Finite annuity: If the stream of fixed payments begin Finite and end at a specific time. and $1 $1 $1 $1 0 Chapter 7-48 1 2 3 4 …. Perpetuity Perpetuity is a stream of indefinite fixed-dollar Perpetuity payments made at regular intervals of time payments $1 $1 $1 $1 0 1 2 3 4 …. Present Value at time 0 = 1/(1+10%) + 1/(1+10%)2 + 1/(1+10%)3 + 1/(1+10%)4 + …. Hard (or impossible) to calculate? Chapter 7-49 Perpetuity formulas 1 1 111 Sum of infinite series : ∑ n = e.g ., + + + ... = 1 k −1 248 n =1 k 1 1 1 = = (1 + r ) n (1 + r ) − 1 r n =1 A perpetuity is a constant amount PV of a perpetuity : ∑ received at the end of each period. ∞ ∞ Chapter 7-50 Present value of a perpetuity This annuity goes to infinity (We will never This stop receiving one dollar payments every year) year) $1 $1 $1 $1 0 1 2 3 4 …. Present Value at time 0 = 1/10% = $ 10 Perpetuity is impractical and rare in real life. Generally annuity payments are made for a finite period. Chapter 7-51 Present value of a finite annuity This annuity does not go to infinity (We will This not stop receiving one dollar payments). stop $1 $1 $1 $1 $0 0 1 2 3 4 5 $0 6 Present Value at time 0 = ? Chapter 7-52 Present value of a finite annuity First Method: Calculate the present values of First single payments separately and sum them up. single $1 $1 $1 $1 $0 0 1 2 3 4 5 $0 6 Present Value at time 0 = = 1/(1+10%) + 1/(1+10%)2 + 1/(1+10%)3 + 1/(1+10%)4 = 0.91 + 0.83 + 0.75 + 0.68 Chapter 7-53 = $ 3.17 Present value of a finite annuity Second Method: Subtract present values of two perpetuities. Subtract Second $1 0 is equal to 1 2 $1 3 $1 4 $1 $0 5 $0 6 minus Chapter 7-54 Present value of a finite annuity Second Method: Subtract present values of two perpetual Second annuities. annuities. $1 0 is equal to Present Value = 1/10% = $10 minus Value at period 0 = (10)/(1+10%)4 = $6.83 Chapter 7-55 $1 2 3 $1 4 $1 $0 $0 6 5 1 Value at period 4 = 1/10% = $10 0 1 2 3 4 5 6 Present value of a finite annuity Second Method: Subtract present values of two perpetual annuities Subtract Second $1 0 is equal to PV = $10 1 2 $1 3 $1 4 $1 $0 5 $0 6 minus PV = $6.83 Chapter 7-56 PV of the finite annuity = 10 - 6.83 = $3.17 Summary X=payment, r=Discount rate, t= time period PV = X /(1+r) t t X X t FV = X * (1+r)t X’s … PV of perpetuity = X/r X’s 0000 Chapter 7-57 PV of finite annuity = X/r – (X/r)*(1/(1+r))t Note Issued at Face Value Note Illustration: Bige C le S low orp. nds candinavian Im ports $10,000 in e xchange f or a $10,000, thre -ye notebe e ar aring inte st at 10 pe nt annually. Them t re rce arke rateof inte st for a noteof sim risk is also 10 pe nt. How doe Bige re ilar rce s low re there ipt of thenote cord ce ? i = 10% $10,000 Principal $1,000 1,000 1,000 Interest 0 Chapter 7-58 1 n=3 2 3 4 LO 6 Explain accounting issues related to recognition of notes receivable. Note Issued at Face Value PV of interest= 1,000/1.1 + 1,000 / 1.12 + 1,000 / 1.13 = 909.1+ 826.4 + 751.3 909.1+ = 2,487 2,487 PV of principal = 10,000 / 1.13 = 7,513 7,513 Total PV = 2,487 + 7,513 = 10,000 Total (same as the face value) (same Chapter 7-59 Note Issued at Face Value Dat e J an. yr . 1 Account Tit le Note re ivable s ce C ash Debit 10,000 10,000 1,000 I nte st re nue re ve 1,000 Credit Dec. yr . 1 C ash Chapter 7-60 LO 6 Explain accounting issues related to recognition of notes receivable. Zero-Interest-Bearing Note Zero-Interest-Bearing Illustration: Je m C pany re ive a thre -ye $10,000 ze re iah om ce s e ar, ro-inte stre be aring note Them t rateof inte st for a noteof sim risk is 9 pe nt. . arke re ilar rce How doe Je m re there ipt of thenote s re iah cord ce ? i = 9% $10,000 Principal $0 $0 $0 Interest 0 1 n=3 3 3 4 Chapter 7-61 LO 6 Explain accounting issues related to recognition of notes receivable. Zero-Interest-Bearing Note Journal Entries for Zero-Interest-Bearing note Pre nt valueof Principal se $7,721.80 Dat e J an. yr . 1 Account Tit le Not es r eceivable Discount on not es r eceivable Cash Debit 10,000.00 Credit 2,278.20 7,721.80 Dec. yr . 1 Discount on not es r eceivable I nt er est r evenue ( $ 7,721.80 x 9%) 694.96 694.96 Chapter 7-62 LO 6 Explain accounting issues related to recognition of notes receivable. Zero-Interest-Bearing Note Illustration 7-11 Chapter 7-63 LO 6 Explain accounting issues related to recognition of notes receivable. Interest-Bearing Note Interest-Bearing Illustration: Morgan C m s a loan to MarieC and re ive in e orp. ake o. ce s xchange a t hre -ye $10,000 notebe e ar, aring inte st at 10 pe nt annually. Them t rate re rce arke of inte st for a noteof sim risk is 12 pe nt. How doe Morgan re the re ilar rce s cord re ipt of thenote ce ? i = 12% $10,000 Principal $1,000 1,000 1,000 Interest 0 Chapter 7-64 1 n=3 2 3 4 LO 6 Explain accounting issues related to recognition of notes receivable. Interest-Bearing Note PV of interest= 1,000/1.12 + 1,000 / 1.122 + 1,000 / 1.123 = 892.9+ 797.2 + 711.8 892.9+ = 2,402 2,402 PV of principal = 10,000 / 1.123 = 7,118 7,118 Total PV = 2,402 + 7,118 = 9,520 Total (how much Morgan will receive; less than the face value) (how Chapter 7-65 Interest-Bearing Note Interest-Bearing Illustration: How doe Morgan re there ipt of thenote s cord ce ? Note Re ivable s ce Discount on Note Re ivable s ce C ash 10,000 480 9,520 Chapter 7-66 LO 6 Explain accounting issues related to recognition of notes receivable. Interest-Bearing Note Illustration 7-14 Chapter 7-67 LO 6 Explain accounting issues related to recognition of notes receivable. Interest-Bearing Note Journal Entries for Interest-Bearing Note Dat e Beg. yr . 1 Account Tit le Not es r eceivable Discount on not es r eceivable Cash End. yr . 1 Debit 10,000 480 9,520 Credit Cash Discount on note re ivable s ce I nte st re nue re ve ($ 9,520 x 12%) 1,000 142 1,142 Chapter 7-68 LO 6 Explain accounting issues related to recognition of notes receivable. Recognition of Notes Receivable Notes Received for Property, Goods, or Services I n a bargaine transaction e re into at arm le d nte d ’s ngth, thestate inte st rate d re is pre e to befair unle sum d ss: 1. No inte st rateis state or re d, 2. S d inte st rateis unre tate re asonable or , 3. Faceam ount of thenoteis m rially diffe nt fromthecurre cash ate re nt sale price s . Chapter 7-69 LO 6 Explain accounting issues related to recognition of notes receivable. Recognition of Notes Receivable Illustration: Oasis De lopm nt Co. sold a corne lot to Rusty Pe ve e r lican as a re staurant site Oasis acce d in e . pte xchangea five ar notehaving a m -ye aturity valueof $35,247 and no state inte st rate Theland originally cost Oasis d re . $14,000. At thedateof saletheland had a fair m t valueof $20,000. Oasis arke use thefair m t valueof theland, $20,000, as thepre nt valueof thenote s arke se . Oasis the forere re cords thesaleas: ($35,247 - $20,000) = $15,247 Note Re ivable s ce Discount on Note Re ivable s ce Land Gain on S of Land ale Chapter 7-70 35,247 15,247 14,000 6,000 LO 6 Explain accounting issues related to recognition of notes receivable. Valuation of Notes Receivable Short-Term re porte at Ne Re d t alizableValue(sam as accounting e f or accounts re ivable ce ). Long-Term - FAS re B quire com s panie disclosenot only the cost s ir but also the fair valuein thenote to thefinancial state e ir s m nts. Fair ValueOption. C panie havetheoption to usefair valueas the om s basis of m asure e in thefinancial state e e m nt m nts. Chapter 7-71 LO 7 Explain accounting issues related to valuation of notes receivable. Valuation of Notes Receivable Illustration (recording fair value option): Assum that Escobar e C pany has note re ivablethat havea fair valueof $810,000 and a carrying om s ce am ount of $620,000. Escobar de s on De m r 31, 2010, to usethefair cide ce be value option f or the re ivable This is thefirst valuation of the re ntly se ce s. se ce acquire re ivable At De m r 31, 2010, Escobar m s an adjusting e d ce s. ce be ake ntry t o re theincre in valueof Note Re ivableand to re theunre d cord ase s ce cord alize holding gain, as follows. Note Re ivable s ce Unre d Holding Gain or Loss—I ncom alize e Chapter 7-72 190,000 190,000 LO 7 Explain accounting issues related to valuation of notes receivable. 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. S cure borrowing ed 2. S of re ivable ale ce s Chapter 7-73 LO 8 Explain accounting issues related to disposition LO of accounts and notes receivable. of Disposition of Accounts and Notes Receivable Secured Borrowing Illustration: March 1, 2010, Howat Mills, I nc. provide (assigns) $700,000 of s its accounts re ivableto C ns Bank as collate for a $500,000 note Howat ce itize ral . Mills continue to colle theaccounts re ivable theaccount de s ct ce ; btors arenot notifie of thearrange e C ns Bank asse s a financechargeof 1 pe nt d m nt. itize sse rce of theaccounts re ivableand inte st on thenoteof 12 pe nt. Howat Mills ce re rce m sm ake onthly paym nts to thebank for all cash it colle on there ivable S e e cts ce s. e I llustration 7-15. Chapter 7-74 LO 8 Explain accounting issues related to disposition LO of accounts and notes receivable. of Secured Borrowing - Illustration Illustration 7-15 Chapter 7-75 LO 8 Explain accounting issues related to disposition LO of accounts and notes receivable. of Secured Borrowing - Exercise E7-13: On April 1, 2010, PrinceC pany assigns $500,000 of its om accounts re ivableto a Bank as collate for a $300,000 loan dueJuly 1, 2010. The ce ral assignm nt agre m nt calls for PrinceC pany to continueto colle there ivable TheBank e ee om ct ce s. asse s a financechargeof 2%of theaccounts re ivable and inte st on theloan is 10% sse ce , re . Instructions: a) b) c) Pre paretheApril 1, 2010, journal e for PrinceC pany. ntry om Pre parethejournal e for Prince colle ntry ’s ction of $350,000 of theaccounts re ivable ce during thepe fromApril 1, 2010, through June30, 2010. riod On July 1, 2010, Princepaid theBank all that was duefromtheloan it se d on cure April 1, 2010. Chapter 7-76 LO 8 Explain accounting issues related to disposition LO of accounts and notes receivable. of Secured Borrowing - Exercise Exercise 7-13 continued Dat e (a) Cash Finance Char ge N ot es Payable ( $ 500,000 x 2% = $ 10,000) (b) Cash Account s Receivable ( c) Not es Payable I nt er est Ex pense Cash ( 10% x $ 300,000 x 3/ 12 = $ 7,500) Chapter 7-77 Account Tit le Debit 2 90,000 10,000 Credit 3 00,000 3 50,000 3 50,000 3 00,000 7 ,500 3 07,500 LO 8 Explain accounting issues related to disposition LO of accounts and notes receivable. of Sales of Receivables Factors arefinancecom panie or banks that buy re ivable frombusine s for s ce s sse a fe . e Illustration 7-16 Chapter 7-78 LO 8 Explain accounting issues related to disposition LO of accounts and notes receivable. of Sales of Receivables Sale Without Recourse Purchase assum s risk of colle r e ction Transfe is outright saleof re ivable r ce S lle re e r cords loss on sale S lle useDuefromFactor (re ivable account to cove discounts, er ce ) r re turns, and allowance s Sale With Recourse S lle guarante s paym nt to purchase er e e r Financial com nts approach use to re transfe pone d cord r Chapter 7-79 LO 8 Explain accounting issues related to disposition LO of accounts and notes receivable. of Sales of Receivables Illustration: Cre Te s, Inc. factors $500,000 of accounts re ivablewith st xtile ce C m rcial Factors, Inc., on a without recourse basis. C m rcial Factors om e om e asse s a financechargeof 3 pe nt of theam sse rce ount of accounts re ivableand ce re tains an am ount e qual to 5 pe nt of theaccounts re ivable(for probable rce ce adjustm nts). C st Te s and C m rcial Factors m thefollowing journal e re xtile om e ake e s for there ivable transfe d without re ntrie ce s rre course . (duefromfactor for discounts, re turns) Illustration 7-17 Chapter 7-80 LO 8 Explain accounting issues related to disposition LO of accounts and notes receivable. of Sales of Receivables Illustration: Assum Cre Te s sold there ivable on a with recourse e st xtile ce s basis. C st Te s de rm s that this re re xtile te ine courseobligation has a fair valueof $6,000. To de rm theloss on thesaleof there ivable Cre Te s com s te ine ce s, st xtile pute thene proce ds fromthesaleas follows. t e Illustration 7-18 Ne Proce ds t e C putation om Illustration 7-19 Loss on S C putation ale om Chapter 7-81 LO 8 Explain accounting issues related to disposition LO of accounts and notes receivable. of Sales of Receivables Illustration: Pre parethejournal e s for both C st Te s and C m rcial ntrie re xtile om e Factors for there ivable sold with recourse. ce s Crest Textiles, Inc. C ash DuefromFactor Loss on S of Re ivable ale ce s Accounts (Note Re ivable s) ce Re courseLiability Accounts Re ivable ce Dueto C st Te s re xtile Financing Re nue ve C ash 460,000 25,000 21,000 500,000 6,000 500,000 25,000 15,000 460,000 Commercial Factors, Inc. Chapter 7-82 LO 8 Explain accounting issues related to disposition LO of accounts and notes receivable. of Secured Borrowing versus 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. Illustration 7-21 Chapter 7-83 LO 8 Explain accounting issues related to disposition LO of accounts and notes receivable. of Presentation and Analysis General rule in classifying receivables are: 1. S gre thediffe nt type of re ivable that a com e gate re s ce s pany posse s, if m rial. sse ate 2. Appropriate offse thevaluation accounts against theprope re ivable ly t r ce accounts. 3. De rm that re ivable classifie in thecurre asse se te ine ce s d nt ts ction will be conve d into cash within theye or theope rte ar rating cycle whiche r is longe , ve r. 4. Discloseany loss continge s that e on there ivable ncie xist ce s. 5. Discloseany re ivable de ce s signate or ple d as collate d dge ral. 6. Discloseall significant conce ntrations of cre risk arising fromre ivable dit ce s. Chapter 7-84 LO 9 Describe how to report and analyze receivables. Theaccounting and re porting re d to cash is e ntially thesam unde both late sse e r iGAAP and U.S GAAP. . Thebasic accounting and re porting issue re d to re s late cognition and m asure e of e m nt re ivable aree ntially thesam be e iGAAP and U.S GAAP. ce s sse e twe n . Although iGAAP im s that re ivable with diffe nt characte plie ce s re ristics should be re porte se d parate the is no standard that m ly, re andate this se gation. s gre Chapter 7-85 TheFAS theI AS haveadopte a pie m al approach in which disclosureof fair B, B d ce e valueinform ation in thenote is thefirst ste These s p. cond ste is thefair value p option. iGAAP and U.S GAAP standards on thefair valueoption aresim but not . ilar ide ntical. iGAAP and U.S GAAP diffe in thecrite use to de cognizea re ivable . r ria d re ce . Chapter 7-86 C panie e om s valuatethe re ivable to de rm the ultim colle ir ce s te ine ir ate ctibility. Allowancem thod is appropriatewhe e n: probablethat an asse has be n im t e paire and d am ount of theloss can bere asonably e ate stim d. Long-te re ivable such as loans that areide rm ce s ntifie as im d paire d, com panie pe s rforman additional im pairm nt e e valuation. Chapter 7-87 LO 11 Describe the accounting for a loan impairment. Background - Example: Background S ubprim loan crisis. e From2000 to 2005 hom price appre d at rapid rate e s ciate . Low inte st rate also e re s ncourage spe d culation, as m be ve that hom price any lie d e s would continueto incre . ase S culators inte d to se thehousein a short pe pe nde ll riod. Many adjustable -ratede with short-te low te r rate that would adjust to bt rm ase s highe m t rate afte two or thre ye r arke sr e ars. Many le nding institutions gaveloans to individuals whosefinancial condition would m it difficult for the to m thepaym nts ove thelifeof theloan. ake m ake e r The loans, ofte re rre to as subprime loans. se n fe d Chapter 7-88 LO 11 Describe the accounting for a loan impairment. Background - Example: Background S ubprim loan crisis. e Illustration 7B-1 S ubprim le e nding was a littleove r $50 billion in 2000 and had incre d alm te tim s by 2005. ase ost n e Chapter 7-89 LO 11 Describe the accounting for a loan impairment. Background - Example: Background Be yond the subprim loans was e t hepracticeof securitization. S ubprim loan crisis. e Illustration 7B-2 Chapter 7-90 LO 11 Describe the accounting for a loan impairment. Impairment Measurement and Reporting Impairment loss is calculate as thediffe ncebe e d re twe n theinve e in theloan (ge rally theprincipal plus accrue stm nt ne d inte st) and re thee cte futurecash flows discounte at theloan’s historical xpe d d e ctiveinte st rate ffe re . Chapter 7-91 LO 11 Describe the accounting for a loan impairment. Illustration: At De m r 31, 2009, Ogde Bank re ce be n corde an inve e of $100,000 d stm nt in a loan to C King. Theloan has an historical e ctive re rateof 10 pe nt, the arl ffe -inte st rce principal is duein full at m aturity in thre ye and inte st is dueannually. Theloan e ars, re office pe r rform a re w of theloan’s e cte futurecash flow and utilize thepre nt s vie xpe d s se valuem thod for m asuring there e e quire im d pairm nt loss. e Illustration 7B-3 Chapter 7-92 LO 11 Describe the accounting for a loan impairment. Illustration: C putation of I m om pairm nt Loss e Illustration 7B-4 Recording Impairment Losses Bad De Expe bt nse Allowancefor Doubtful Accounts Chapter 7-93 12,437 12,437 LO 11 Describe the accounting for a loan impairment. ...
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