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Unformatted text preview: Chapter 9 Chapter 9 Chapter Chapter Accounting For Short Term Investment & Receivables Chapter 9- 1 Balance Sheet Presentation Balance Sheet Presentation Short-Term Investments Also called marketable securities, are securities held by a company that are (1) readily marketable and (2) intended to be converted into cash within the next year or operating cycle, whichever is longer. Investments that do not meet both criteria are classified as longterm investments. Chapter 9-2 Balance Sheet Presentation Balance Sheet Presentation Realized and Unrealized Gain or Loss Nonoperating items related to investments (reported in the income statement). Illustration 13-10 Chapter 9- 3 Balance Sheet Presentation Balance Sheet Presentation Realized and Unrealized Gain or Loss Unrealized gain or loss on available­for­sale securities are reported as a separate component of stockholders’ equity. Illustration 13-11 Chapter 9- 4 Balance Sheet Presentation Balance Sheet Presentation Classified Balance Sheet Chapter 9- 5 Illustration 13-12 Accounting for Receivables Accounting for Receivables Types Types of Receivables Receivables Accounts Accounts Receivable Receivable Notes Notes Receivable Receivable Accounts Accounts receivable receivable Notes Notes receivable receivable Other Other receivables receivables Recognizing Recognizing accounts receivable receivable Valuing Valuing accounts receivable receivable Disposing of Disposing accounts receivable receivable Determining Determining maturity date maturity Computing Computing interest interest Recognizing Recognizing notes receivable receivable Valuing notes Valuing receivable receivable Disposing of Disposing notes receivable receivable Chapter 9- 6 Statement Statement Presentation and Analysis and Presentation Analysis Types of Receivables Types of Receivables Amounts due from individuals and other companies that are expected to be collected in cash. Amounts owed by customers that result from the sale of goods and services. Claims for which formal instruments of credit are issued as proof of debt. “Nontrade” (interest, loans to officers, advances to employees, and income taxes refundable). Accounts Accounts Accounts Accounts Receivable Receivable Receivable Receivable Notes Notes Notes Notes Receivable Receivable Receivable Receivable Other Other Other Other Receivables Receivables Receivables Receivables Chapter 9-7 SO 1 Identify the different types of receivables. Accounts Receivable Accounts Receivable Three accounting issues: 1. Recognizing accounts receivable. 2. Valuing accounts receivable. 3. Disposing of accounts receivable. Recognizing Accounts Receivable The following exercise was illustrated in Chapter 5. For simplicity, inventory and cost of goods sold have been omitted. Chapter 9-8 SO 1 Identify the different types of receivables. Recognizing Accounts Receivable Recognizing Accounts Receivable Illustration: Presented are transactions related to Wheeler Company. 1. On December 3,Wheeler Company sold $500,000 of merchandise to Hashmi Co., terms 2/10, n/30, FOB shipping point. 2. On December 8, Hashmi Co. was granted an allowance of $27,000 for merchandise purchased on December 3. 3. On December 13,Wheeler Company received the balance due from Hashmi Co. Instructions: Prepare the journal entries to record these transactions on the books of Wheeler Company using a perpetual inventory system. Chapter 9- 9 SO 2 Explain how companies recognize accounts receivable. Recognizing Accounts Receivable Recognizing Accounts Receivable Illustration: Prepare the journal entries for Wheeler Co. 1. On December 3, Wheeler Company sold $500,000 of merchandise to Hashmi Co., terms 2/10, n/30, FOB shipping point. Dec. 3 Chapter 9-10 Accounts receivable Sales 500,000 500,000 SO 2 Explain how companies recognize accounts receivable. Recognizing Accounts Receivable Recognizing Accounts Receivable Illustration: Prepare the journal entries for Wheeler Co. 2. On December 8, Hashmi Co. was granted an allowance of $27,000 for merchandise purchased on December 3. Dec. 8 Chapter 9-11 Sales returns and allowances Accounts receivable 27,000 27,000 SO 2 Explain how companies recognize accounts receivable. Recognizing Accounts Receivable Recognizing Accounts Receivable Illustration: Prepare the journal entries for Wheeler Co. 3. On December 13, Wheeler Company received the balance due from Hashmi Co. Dec. 13 Cash 463,540 *** Sales discounts Accounts receivable * 9,460 ** 473,000 * ($500,000 – $27,000) ** [($500,000 – $27,000) X 2%] *** ($473,000 – $9,460) Chapter 9-12 SO 2 Explain how companies recognize accounts receivable. Accounts Receivable Accounts Receivable Valuing Accounts Receivables Classification Valuation (net realizable value) Uncollectible Accounts Receivable Sales on account raise the possibility of accounts not being collected Chapter 9-13 SO 3 Distinguish between the methods and bases SO companies use to value accounts receivable. companies Valuing Accounts Receivable Valuing Accounts Receivable Methods of Accounting for Uncollectible Accounts Direct Write-Off Theoretically undesirable: no matching. receivable not stated at net realizable value. not acceptable for financial reporting. Chapter 9-14 Allowance Method Losses are estimated: better matching. receivable stated at net realizable value. required by GAAP. SO 3 Distinguish between the methods and bases SO companies use to value accounts receivable. companies Presentation of Accounts Receivable Presentation of Accounts Receivable Assets Current Assets: Cash Accounts receivable Less: Allowance for doubtful accounts Less: Inventory Inventory Prepaids Total current assets Total Chapter 9-15 $ 346 346 500 25 475 812 40 1,673 SO 3 Distinguish between the methods and bases SO companies use to value accounts receivable. companies Presentation of Accounts Receivable Presentation of Accounts Receivable Assets Current Assets: Cash Accounts receivable, net of $25 allowance for doubtful accounts for Inventory Inventory Prepaids Total current assets Total Chapter 9-16 $ 346 346 475 812 40 1,673 SO 3 Distinguish between the methods and bases SO companies use to value accounts receivable. companies Valuing Accounts Receivable Valuing Accounts Receivable Allowance Method for Uncollectible Accounts 1. Companies estimate uncollectible accounts receivable. 2. To record estimated uncollectibles, companies debit Bad Debts Expense and credit Allowance for Doubtful Accounts (a contra­ asset account). 3. When companies write off specific uncollectible accounts, they debit Allowance for Doubtful Accounts and credit Accounts Receivable. Chapter 9-17 SO 3 Distinguish between the methods and bases SO companies use to value accounts receivable. companies Valuing Accounts Receivable Valuing Accounts Receivable E9-6 On December 31, 2008, Jarnigan Co. estimated that 2% of its net sales of $400,000 will become uncollectible. The company recorded this amount as an addition to Allowance for Doubtful Accounts. On May 11, 2009, Jarnigan Co. determined that Terry Frye’s account was uncollectible and wrote off $1,100. On June 12, 2009, Frye paid the amount previously written off. Instructions Prepare the journal entries on December 31, 2008, May 11, 2009, and June 12, 2009. Chapter 9-18 SO 3 Distinguish between the methods and bases SO companies use to value accounts receivable. companies Valuing Accounts Receivable Valuing Accounts Receivable E9-6 Prepare the journal entries on December 31, 2008, May 11, 2009, and June 12, 2009. December 31 ($400,000 x 2% = 8,000) Bad debt expense 8,000 Allowance for doubtful accounts 8,000 Chapter 9-19 SO 3 Distinguish between the methods and bases SO companies use to value accounts receivable. companies Valuing Accounts Receivable Valuing Accounts Receivable E9-6 Prepare the journal entries on December 31, 2008, May 11, 2009, and June 12, 2009. May 11 (write-off) Allowance for doubtful accounts Accounts receivable 1,100 June 12 (recovery) Accounts receivable Allowance for doubtful accounts1,100 1,100 Cash Accounts receivable Chapter 9-20 1,100 1,100 1,100 SO 3 Distinguish between the methods and bases SO companies use to value accounts receivable. companies Valuing Accounts Receivable Valuing Accounts Receivable Bases Used for Allowance Method Illustration 9­5 Chapter 9-21 SO 3 Distinguish between the methods and bases SO companies use to value accounts receivable. companies Valuing Accounts Receivable Valuing Accounts Receivable Example Data Credit sales $500,000 Estimated % of credit sales uncollectible 1.25% Accounts receivable balance Estimated % of A/R uncollectible 8% $72,500 Allowance for Doubtful Accounts: Case 1 Case 2 Chapter 9-22 $150 (credit balance) $150 (debit balance) SO 3 Distinguish between the methods and bases SO companies use to value accounts receivable. companies Valuing Accounts Receivable Valuing Accounts Receivable Percentage of Sales Credit sales $500,000 Estimated percentage uncollectible Estimated uncollectible x 1.25% $ 6,250 ================================================== = What should the ending balance be for the allowance account? ­­ Case 1 and Case 2 Chapter 9-23 SO 3 Distinguish between the methods and bases SO companies use to value accounts receivable. companies Valuing Accounts Receivable Valuing Accounts Receivable Percentage of Sales Case 1 Case 2 Actual balance (credit) (150) 150 Estimated uncollectible (6,250) (6,250) Ending balance (6,400) (6,100) Journal entry: Bad debt expense Allowance for doubtful accounts Chapter 9-24 6,250 6,250 SO 3 Distinguish between the methods and bases SO companies use to value accounts receivable. companies Valuing Accounts Receivable Valuing Accounts Receivable Percentage of Receivables Accounts receivable $ 72,500 Estimated percentage uncollectible x 8% Desired balance for allowance $ 5,800 ================================================== = What should the ending balance be for the allowance account? ­­ Case 1 and Case 2 Chapter 9-25 SO 3 Distinguish between the methods and bases SO companies use to value accounts receivable. companies Valuing Accounts Receivable Valuing Accounts Receivable Percentage of Receivables Case 1 Actual balance (credit) Case 2 (150) 150 Desired balance (5,800) (5,800) Adjustment (5,650) (5,950) Journal entry – Case 1: Bad debt expense Allowance for doubtful accounts Chapter 9-26 5,650 5,650 SO 3 Distinguish between the methods and bases companies use to value accounts receivable. companies Valuing Accounts Receivable Valuing Accounts Receivable Percentage of Receivables Case 1 Actual balance (credit) Case 2 (150) 150 Desired balance (5,800) (5,800) Adjustment (5,650) (5,950) Journal entry – Case 2: Bad debt expense Allowance for doubtful accounts Chapter 9-27 5,950 5,950 SO 3 Distinguish between the methods and bases SO companies use to value accounts receivable. companies Valuing Accounts Receivable Valuing Accounts Receivable When estimating losses using Percentage of Receivables, companies often prepare an aging schedule which classifies customer balances by the length of time they have been unpaid. Illustration 9­7 Chapter 9-28 SO 3 Distinguish between the methods and bases SO companies use to value accounts receivable. companies Valuing Accounts Receivable Valuing Accounts Receivable Summary Percentage of Sales approach: Focus on “Bad debt expense” estimate, any balance in the allowance account is ignored. Method achieves a matching of cost and revenues. Percentage of Receivables approach: Accurate valuation of receivables on the balance sheet. Method may also be applied using an aging schedule. Chapter 9-29 SO 3 Distinguish between the methods and bases SO companies use to value accounts receivable. companies Disposing of Accounts Receivable Disposing of Accounts Receivable Companies sell receivables for two major reasons. 1. Receivables may be the only reasonable source of cash. 2. Billing and collection are often time­consuming and costly. Chapter 9-30 SO 4 Describe the entries to record the disposition of accounts receivable. Disposing of Accounts Receivable Disposing of Accounts Receivable Sale of Receivables A factor buys receivables from businesses and then collects the payments directly from the customers. Chapter 9-31 SO 4 Describe the entries to record the disposition of accounts receivable. Disposing of Accounts Receivable Disposing of Accounts Receivable E9-7 (a) On March 3, Cornwell Appliances sells $680,000 of its receivables to Marsh Factors Inc. Marsh Factors assesses a finance charge of 3% of the amount of receivables sold. Prepare the entry on Cornwell Appliances’ books to record the sale of the receivables. ($680,000 x 3% = $20,400) Cash Service charge expense Accounts receivable Chapter 9-32 659,600 20,400 680,000 SO 4 Describe the entries to record the disposition of accounts receivable. Disposing of Accounts Receivable Disposing of Accounts Receivable Credit Card Sales Retailer considers credit card sales the same as cash sales. Retailer must pay card issuer a fee of 2 to 4% for processing the transactions. Retailer records in similar manner as checks deposited from cash sale. Chapter 9-33 SO 4 Describe the entries to record the disposition of accounts receivable. Disposing of Accounts Receivable Disposing of Accounts Receivable E9-7 (b) On May 10, Dale Company sold merchandise for $3,500 and accepted the customer’s America Bank MasterCard. America Bank charges a 4% service charge for credit card sales. Prepare the entry on Dale Company’s books to record the sale of merchandise. ($3,500 x 4% = $140) Cash Service charge expense Sales Chapter 9-34 3,360 140 3,500 SO 4 Describe the entries to record the disposition of accounts receivable. Notes Receivable Notes Receivable Companies may grant credit in exchange for a promissory note. A promissory note is a written promise to pay a specified amount of money on demand or at a definite time. Promissory notes may be used: 1. when individuals and companies lend or borrow money, 2. when amount of transaction and credit period exceed normal limits, or 3. in settlement of accounts receivable. Chapter 9-35 SO 5 Compute the maturity date of and interest on notes receivable. Notes Receivable Notes Receivable To the Payee, the promissory note is a note receivable. To the Maker, the promissory note is a note payable. Illustration 9­10 Chapter 9-36 SO 5 Compute the maturity date of and interest on notes receivable. Notes Receivable Notes Receivable Determining the Maturity Date Note expressed in terms of Months Days Computing Interest Chapter 9-37 Illustration 9­13 SO 5 Compute the maturity date of and interest on notes receivable. Recognizing Notes Receivable Recognizing Notes Receivable E9-10 Orosco Supply Co. has the following transactions related to notes receivable during the last 2 months of 2008. Nov. 1 Loaned $15,000 cash to Sally Givens on a 1­year, 10% note. Dec. 11 Sold goods to John Countryman, Inc., receiving a $6,750, 90­day, 8% note. Dec. 16 Received a $4,000, 6­month, 9% note in exchange for Bob Reber’s outstanding accounts receivable. Dec. 31 Accrued interest revenue on all notes receivable. Instructions (a) Journalize the transactions for Orosco Supply Co. Chapter 9-38 SO 6 Explain how companies recognize notes receivable. Recognizing Notes Receivable Recognizing Notes Receivable E9-10 Nov. 1 Loaned $15,000 cash to Sally Givens on a 1­year, 10% note. E9-10 Dec. 11 Sold goods to John Countryman, Inc., receiving a $6,750, 90­day, 8% note. Dec. 16 Received a $4,000, 6­month, 9% note in exchange for Bob Reber’s outstanding accounts receivable. Nov. 1 Notes receivable Dec. 11 Cash Notes receivable 15,000 6,750 Sales Dec. 16 Chapter 9-39 15,000 6,750 Notes receivable Accounts receivable 4,000 4,000 SO 6 Explain how companies recognize notes receivable. Recognizing Notes Receivable Recognizing Notes Receivable Recognizing E9-10 Dec. 31 Accrued interest revenue on all notes receivable. E9-10 Givens note: Countryman note: Reber note: Amount $ 15,000 6,750 4,000 Rate x 10% x x 8% x x 9% x Time 2 / 12 = 20 / 360 = 15 / 360 = Total accrued interest Dec. 31 Interest receivable Interest revenue Chapter 9-40 $ 250 30 15 $ 295 295 295 SO 6 Explain how companies recognize notes receivable. Notes Receivable Notes Receivable Valuing Notes Receivable Like accounts receivable, companies report short­term notes receivable at their cash (net) realizable value. Estimation of cash realizable value and bad debts expense are done similarly to accounts receivable. Allowance for Doubtful Accounts is used. Chapter 9-41 SO 7 Describe how companies value notes receivable. Notes Receivable Notes Receivable Disposing of Notes Receivable 1. Notes may be held to their maturity date. 2. Maker may default and payee must make an adjustment to the account. 3. Holder speeds up conversion to cash by selling the note receivable. Chapter 9-42 SO 8 Describe the entries to record the disposition of notes receivable. Notes Receivable Notes Receivable Disposing of Notes Receivable Honor of Notes Receivable A note is honored when its maker pays it in full at its maturity date. Dishonor of Notes Receivable A dishonored note is not paid in full at maturity. Dishonored note receivable is no longer negotiable. Chapter 9-43 SO 8 Describe the entries to record the disposition of notes receivable. Notes Receivable Notes Receivable E9-13 On May 2, Mega Sdn Bhd lends $7,600 to ABC Sdn Bhd, issuing a 6­ month, 9% note. At the maturity date, November 2, ABC indicates that it cannot pay. Instructions (a) Prepare the entry to record the issuance of the note. (b) Prepare the entry to record the dishonor of the note, assuming that Mega Sdn Bhd expects collection will occur. (c) Prepare the entry to record the dishonor of the note, assuming that Mega Sdn Bhd does not expect collection in the future. Chapter 9-44 SO 8 Describe the entries to record the disposition of notes receivable. Notes Receivable Notes Receivable E9-13 (a) Prepare the entry to record the issuance of the note. (b) Prepare the entry to record the dishonor of the note, assuming that Mega Sdn Bhd expects collection will occur. (a) Notes receivable 7,600 Cash (b) 7,600 Interest = $7,600 x 9% x 6/12 = $342 Accounts receivable 7,942 Notes receivable Interest revenue Chapter 9-45 7,600 342 SO 8 Describe the entries to record the disposition of notes receivable. Notes Receivable Notes Receivable E9-13 (c) Prepare the entry to record the dishonor of the note, assuming that Mega Sdn Bhd does not expect collection in the future. (c) Allowance for doubtful accounts Notes receivable 7,600 7,600 When there is no hope of collection, the note holder would write off the face value of the note. No interest revenue would be recorded because collection will not occur. Chapter 9-46 SO 8 Describe the entries to record the disposition of notes receivable. Statement Presentation and Analysis Statement Presentation and Analysis Presentation Identify in the balance sheet or in the notes, each major type of receivable. B/S Report short­term receivables as current assets. Report both gross amount of receivables and allowance for doubtful account. I/S Chapter 9-47 Report bad debts expense and service charge expense as selling expenses. Report interest revenue under “Other revenues and gains.” SO 9 Explain the statement presentation and analysis of receivables. Statement Presentation and Analysis Statement Presentation and Analysis Analysis of Receivables 20.3 times This Ratio used to: Assess the liquidity of the receivables. Measure the number of times, on average, a company collects receivables during the period. Chapter 9-48 SO 9 Explain the statement presentation and analysis of receivables. Statement Presentation and Analysis Statement Presentation and Analysis Analysis of Receivables 20.3 times, or every 18 days (365 / 20.3) Variant of the accounts receivable turnover ratio is average collection period in terms of days. Used to assess effectiveness of credit and collection policies. (for the above eg, it means generally the company takes 18 days to collect the debts) Collection period should not exceed credit term period. Chapter 9-49 SO 9 Explain the statement presentation and analysis of receivables. ...
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