Chapter 7

Chapter 7 - CHAPTER 7 - RECEIVABLES + Cash /\...

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Unformatted text preview: CHAPTER 7 - RECEIVABLES + Cash /\ 1.Recogni1'ion of accounts receivable ) 2.Valua1'ion of accounts receivable _ 3.Recognifion of notes receivable 4.Valua‘iion of notes receivable 5.Disposi’rion of accounts and notes receivable 6. Presen’rafion and analysis 0 Claims held agains’r cusfomers and o’rhers for money, goods, or services. c Accounl's Receivable — Oral promises of The purchaser To (we; E ngay for goods and services sold. NoTes Receivable — Wrifi'en promises To pay a sum of money on specified fu‘rure daTe. o Non—Trade Receivables — Examples: i. Advances To officers and employees ii. Advances To Subsidiaries Q}: a iii. Deposi’rs To cover pofen‘fial damages or losses / \i’a‘i‘fi‘ iv. Deposits as a guaran’ree of performance or paymen’r V. Dividends and inferesl' receivable Tomi (6C firw’ 3 Q, 1. Recognifion of Accoun’rs Receivable ‘ a. Trade DiscounTs vs. Cash Discounfs J a ‘ Trade Discoun’rs Q’Q l o Reduc‘rions from The lis’r price / 3 0 NOT recognized in The accounfing records - Cusl‘omers are billed ne’r of discounl's ou-A-------"‘""“‘—-r-~ cigch 9:5? w 1.0 :2? “he CHAPTER 7 - RECEIVABLES 1 m 3% i <1 , Egg; Cash DiSCOUm's - Wm ejmgixg o InducemenTs for prompT paymenT - Gross MeThod vs. NeT MeThod Sales DiscounTs Examgle #1 WebsTer sells $40,000 worTh of merchandise on 9/18/2010 wiTh Terms 3/10, n/ 30. The cosT 01" The merchandise To WebsTer is $32,000. WebsTer receives paymenT for $25,000 worTh of The merchandise on 9/ 23/ 2010 and The balance owed on 10/15/2010. WebsTer's fiscal year—end is SepTember 30. Record all journal enTries using (a) The gross meThod and (b) The neT meThod. Whig} we W W CHAPTER 7 - RECEIVABLES . ,3 ail/‘3”fi if x/ffi’“ f .17» ff; 2.x"-/*. :7 1/3 "x- s 1w? =- ( \(r'fl/ ‘\ Lr‘ ){+::j\m£ . d,“ c- *1! Lil}; {3 GO -' 5’ I ‘ 2 a \ " O ' i \J 151, FTECEC} X,Q§;:5—{€Q /“‘\ . _ , F..- v a = Z I Him" {CS/y?) CQ‘S'A Mi J— G’i’§"'z€.Y’ (ENE/mug. 54:51,: . 1%,606 saws “A b. 2. CHAPTER 7 - RECEIVA BLES Non-recogniTion of InTeresT ElemenT A company should measure receivables in Terms of Their presenT value. In pracTice, companies ignore inTeresT revenue relaTed To accounTs receivable because The amounT of The discounT is noT usually maTerial. ValuaTion of AccounTs Receivable ~31" ReporTing Receivables x- iyoj x 5.49)} . ClassificaTion w W ' VGanTion (neT realizable value) UncollecTible AccounTs Receivable - Sales on accounT raise The possibiliTy of accounTs noT being collecTed CHAPTER 7 - RECEIVABLES MeThods of AccounTing for UncollecTible AccounTs - DirecT WriTe—off Me’rhod - TheoreTically undesirable: /\ o No maTching $1}? o Receivable noT sTaTed aT neT realizable value 0 Allowance MeThod - wriTe—offs are es-TimaTed: o PercenTage of Sales — emphasizes maTching (Bad debT Expense is maTched To Sales) — Income STaTemenT Approach 5 aciiv 3i”? 333/ l J \, c @d- 3916;? {KWT’EQ r ‘ "mi-‘9‘? 3?: -m mam» ERZiOL‘xJ‘Qor:/1Ctfiv “T5731 0 PercenTage of Receivable - emphasizes neT realizable value (Receivables less Allowance for Doubeul AccounTs) - Balance SheeT Approach AccounTs Receivable Example AKC, Inc. provides The following daTa as of December 31, 2010: ToTal neT sales $ 500,000 CrediT sales 350,000 A/R aT 12/31/2010 75000" ADA GT 12/31/2010 1,500* (debiT) *Balance in accounT before adjusTmenT Prepare The adjusTing journal enTry under The following scenarios. Give The NRV of AccounTs Receivable in each siTuaTion. 3W CHAPTER 7 - RECEIVABLES a. Bad Debt Expense is 1.5% of credi’r sales q? X» 0015 :2 "go «x? ', : fl ‘< é“ * , if“ t”: N“ .fl. A 3" PR \1 W Lee; A???» iffififi“ 1 52 .I” \ 3’ Egg f”? “"" m); b. Uncollec’rible accounts are 4% of Aceoun’rs Receivable ;OL\ '>< 75600 = 33000 CHAPTER 7 - RECEIVABLES c. The aging schedule shows The following: ‘ §~l ,0 :fi, 09 0—30 days $65,000 x 0.5% f 73% . 30-60 days 5,000 X 5.0% = (1 gig 60-90 days 3,000*( 50.0%: lfjsjlfl >90dm$ 2900%800%25000 “W "Wham-é Inc. owes AGI $12,500. Lockley filed for bonkrupTcy, so AGI concluded They would noT ever called any of The receivable. WriTe 01‘1c The receivable. 09%“ @5500 All 332 d. AGI subsequenle collecTed $7,000 from Lockley in SepTember 2011 when The company came ouT of bonkrupTcy. Record The collecTion. Al 32 “7 (300:2. TQcfiQ fl 4:" *‘9’ r3 ago-«fig?! » : ‘W'M w Q; 3 mg has: gee; '15:? tart-5mm 1,311“ C3 Wit CHAPTER 7 - RECEIVABLES Summary PercenTage of Sales Approach 1 “:ma no, 0 Bad debT expense esTimaTe is relaTed To a nominal account (Sales), any balance in The allowance account is ignored. 0 Therefore, The method achieves a proper maTching of cosT and revenues. PercenTage of Receivables Approach « @940,ng o ResulTs in a more accuraTe valuation of receivables on The balance sheeT. - MeThod may also be applied using an aging schedule. 3. RecogniTion of Notes Receivable - SupporTed by a formal promissory noTe o A negotiable insTrumenT 2V0 Maker signs in favor of a Payee o InTeresT-bearing (has a sTaTed raTe of interesT) OR o NoninTeresT-bearing (inTeresT included in face amounT) PROMISSORY NOTE $100,000 Date: April 1, 2010 Six months after date, for value received, I, we (and each of us) promise to pay to Unlimited Chocolate Corp. on order One Hundred Thousand Dollars with interest from April 1, 2010 at the rate of Q percent, per annum payable annually. Principal payable and interest payable at October 1, 2010. It is agreed that if this note is not paid when due or declared due hereunder, the entire principal and accrued interest thereon shall draw interest at the rate of _1_S percent per annum, and that failure to make any payment of principal or interest when due or any default under any encumbrance or agreement securing this note shall cause the whole note to become due at once, or the interest to be counted as principal, at the option of the holder of the note. The makers and endorsers hereof severally waive presentment for payment, protest, notice of non-payment and of protest, and agree to any extension of time of payment and partial payments before, at 0r after maturity, and if this note or interest thereon is not paid when due, or suit is brought, agree to pay all reasonable costs of collection, including attorney fees. Due: October 1, 2010 No. 13; This note is secured by: ___n e Berger Con action located at 105 Palm Street, Honolulu, HI. CHAPTER 7 - RECEIVABLES NoTes receivable generally originaTe from: - CusTomers who need To exTend The paymenT period of an ouTsTanding receivable o High—risk or new cusTomers 0 Loans To employees and subsidiaries 0 Sales of properTy, planT, and equipmenT 0 Lending TransacTions (The majoriTy of noTes) CurrenT vs. Non-CurrenT ClassificaTion ShorT-Term (currenT asseT) are recorded aT face value less allowance. Long—Term (InvesTmenTs) are recorded presenT value of cash expecTed To be collecTed. Par vs. Premium vs. DiscounT Par: STaTed InTeresT raTe = MarkeT InTeresT RaTe Premium: STaTed InTeresT RaTe > MarkeT InTeresT RaTe DiscounT: STaTed InTeresT RaTe < MarkeT InTeresT RaTe InTeresT—Bearing NoTe Receivable Example PreTTy Days, Inc. buys a delivery Truck for $100,000. The sTore gives Ford MoTor Company a Twoayear noTe ThaT bears inTeresT aT-10% (10% is considered a markeT raTe of inTeresT). The Truck casT Ford $80,000. Record The journal enTries for Ford-aT The sale daTe, end of The firsT year, and end of The second year assuming (a) The inTeresT is paid annually and (b) The inTeresT is accrued aT The end of The firsT year. ' CHAPTER 7 — RECEIVABLES ! 10 "’ g—rT We??? arrrereg+ CHAPTER 7 - RECEIVABLES T" Tessa-imam. Non—InTeresT Bearing NoTe Receivable Example #1 Busy Bee EquipmenT Company (BBEC) sold a prinTing press To Tiger Tales, Inc. Tiger Tales was unable To pay cash immediaTely, so BBEC agreed To Take back doggyqu non- inTeresT bearing noTe in exchange. The face amounT of The noTe is $500,000, and The impliciT inTeresT raTe is 8% Med quarTerly. The (2051' of The prinTing press To BBEC is $390,000. Required: Record all necessary journal enTries for BBEC. noneoeeoo: a \fl mks firmly ‘ Ca ea fl . ' , W fllfil‘a ,_ $230414 may? ECO; eehafig “3% g: Ci 2, . j P'} rrfi a r . 2Q g (a. s-..»,«,_.,,~—,_ r‘\ k E“? I g a, ‘1 no » »’< a,» . .gl xiLy W Ufim’pcuix’ - 5 I! 3 l Pv==ecmaocmgceaseefixomhaofi . . y Emma \xmoe on? 10:3 of: QLW‘MA’Eaarxi r L? T”? {Bascoors T T ’ ’ v - i. {'1- lJ/‘TT , _ 1o g g 11 sci-K: - 5h rm r c “x ,4 M - My xmgf “ f “‘- 1’ 2.: X 3 LA ,; - ,m-A-wfiw I ‘ 3er " kw" “k ufi, . Ac -- ' m i €22 CHAPTER 7 - RECEIVABLES 12 CHAPTER 7 - RECEIVABLES Non-Inferes’r Bearing NoTe Receivable Example #2 John Deere sold a combine (forming equipmem‘) To Thomson Organic Farming En’rerprises (TOFE) on Jul): 1, 2005. TOFE was unable To pay The full purchase price in cash, so John Deere agreed To Take back a non—inieres’r bearing no’re. The face amounT of The no’re is $200,000 and is payable in four equal quarTerly ins’rallmenl's beginning uly_1, 2005. Cihflihfi; 3W; Comparable no’res bear inTeres’r al' 12% compounded quar’rerly. The combine c051“ John Deere approxima‘rely $150,000 To manufacture. Required: Record all journal en’rries for John Deere. 13 CHAPTER 7 ~ RECEIVABLES 92%;}?fi 7/1 jazz; @5343 =3 F i I) r L\ 2L2“); 01/%O/0€5 “ Liagflfig ! fl. Q (9)70 Qgflm I.” k !w i“ C: r‘ffir m it/ I IS“; Q?! I mm"! Ego 00C) {iifljfigf‘ ' CHAPTER 7 - RECEIVABLES 15 CHAPTER 7 - RECEIVABLES Non-InTeresT Bearing NoTe Receivable Example #3 Omega-T sells equipmenT To Omicron Inc. and Takes back a 2— year non-inTeresT—bearing noTe. The noTe has a face value of $120,000 and is payable in equal quarTerly insTallmenTs, wiTh The firsT insTallmenT due one quarTer from The daTe of sale. Comparable noTes have a sTaTed inTeresT raTe of 12% compounded quarTerIy. The equipmenT originally cosT Omega- T $280,000 and has a currenT book value of $110,000. Record The enTry for The sale on Omega-T's books and prepare The amorTizaTion schedule for The noTe receivable. Record The journal enTries for The firsT quarTer. 16 CHAPTER 7 - RECEIVABLES 17 CHAPTER 7 - RECEIVABLES 4. Valuation of Notes Receivable o Short—Term reported at Net Realizable Value (same as accounting for accounts receivable). — decay a. a‘igwflmg o Long-Term note is impaired when collecting all amounts due (both principal and interest) will likely not occur. ' Accounting for impairments discussed in Appendix 14A. 5. DisPosition of Accounts and Notes Receivable 1» Owner may transfer accounts or notes receivables to another company for cash. - Reasons: 0 Competition. 0 Sell receivables because money is tight. 0 Billing / collection are time-consuming and costly. Sales without Recourse - Purchaser assumes risk of collection 0 Transfer is outright sale of receivable - Seller records loss on sale o Seller use Due from Factor (receivable) account to cover discounts, returns, and allowances Sales with Recourse 0 Seller guarantees payment to purchaser C Financial component a proach u5ed.to record grapsfer Arm .2- in??? H gr 1‘ raw. -1 “’ ' «a n "-V'" '- ' ” i- {ll} l‘. - e. ‘. .‘r. 5‘ a)?” 'V/a t ‘ gang r" ".3 i amafifin .uzz “175:3 “‘ll4'x-‘;,r-' é a; w ,m The FASB concluded that a sale occurs only if the seller surrenders control of the receivables to the buyer. Three conditions must be met: 1) transferred assets are isolated 18 CHAPTER 7 - RECEIVABLES (gelled . from The Transferor, 2) The Transferee has The righ’r To pledge or sell The asseTs, and 3) The Transferor does noT mainTain conTrol Through a repurchase agreemenT. 6. PresenTaTion and Analysis General rule in classifying receivables are: a. SegregaTe The different Types of receivables ThaT a company possesses, if maTerial. b. AppropriaTely offseT The valuaTipniaccounTs againsT Proper receivabie accounfs. eio dammit-T” g c. DeTermine ThaT receivables classified in The currenT asseTs secTion will be converTed inTo cash wiThin The year or The op'eraTing cycle, whichever is longer. d. Disclose any loss conTingencies ThaT exisT on The receivables. e. Disclose any receivables designaTed or pledged as coHaTeral f. Disclose all significanT concenTraTions of crediT risk arising from receivables. ExTra pracTice problems Sales Discounts Example #2 ACCO sells $50,000 worth of merchandise of June 15, 2005 with terms of 2/10, 11/30. The inventory cost ACCO $37,500. The customer, Maritime Reality, pays for $40,000 of the merchandise on June 24th, and for the balance it owes on July 5th. ACCO’s fiscal year-end is June 30th. Record all journal entries using (a) the gross method and (b) the net method. - 19 :Xsibfiw’ I .: 2r : CHAPTER 7 - RECEIVABLES Sales Discount Example #2 Solution Gross Method 6/ I 5 A/R 50,000 Sales Revenue 50,000 CGS 37,500 Inventory 37,500 6/24 Cash 39,200 Sales Discounts 800 AR 40,000 7/5 Cash 10,000 A/R 10,000 Net Method 6/ 1 5 ' AIR 49,000 Sales Revenue 49,000 CGS 37,500 Inventory 37,500 6/24 Cash 39,200 A/R 39,200 6/25 A/R 200 Financing Income 200 7/5 Cash 10,000 A/R 10,000 20 CHAPTER 7 - RECEIVA BLES Accounts Receivable Example #2 AGI, inc. had the following data for 2006: Net sales $1,200,000 A/R at 12/31/2006 250,000 Allowance — D/A — 12/31/06 _ 2,100 (CR) Prepare the adjusting journal entry under the following scenarios. Give the NRV of Accounts Receivable in each situation. a. Bad Debt Expense is 2% of Net Sales. b. Uncollectible accounts, are 10% cf accounts receivable c. The aging schedule is: $200,000 030 days 5% 30,000 31-60 days 20% 20,000 >60 days 70% 21 CHAPTER 7 -.- RECEIVABLES Solution a. Journal Entry: Bad Debt Exp. 24,000 ADA 24,000 NRV of A/R AfR 250,000 - ADA (26,100 1 NRV 223,900 b. Journal Entry: Bad Debt Exp. 22,900 ADA 22,900 NRV of AIR A/R 250,000 ADA (25,000! NRV 225,000 c. Journal Entry: Bad Debt Exp. 27,900 ADA 27,900 NRV of A/R A/R 250,000 ADA £30,000! NRV 220 000 Non-Interest Bearing Note Receivable Example Rainbow Inc. sells an automatic paint machine to Happy Days for a 90- day non-interest bearing note of $60,000. The cost of the machine to Rainbow is $40,000, and the implicit interest rate is 24%. Assume Rainbow records all adjustments monthly. Required: record all journal entries at sales date and at the end of each month 22 CHAPTER 7 - RECEIVABLES Solution Want the present value of a single sum => N=3, CR=24%/ 12 = 2%, so Factor = 0.94232 PV = 60,000 * 0.94232 = 56,539 Discount on N/R = Face Amount — PV = 60,000 — 56,539 : 3,461 N/R 60,000 Sales Revenue 56,539 Discount on N/R 3,461 CGS 40,000 Inventory 40,000 Next, prepare an amortization schedule (2% CR) Cash Discount Book Value Rec’d Revenue Amortization Of Note ——— 56.539 _ 1,131 1,131 57,670 _ 1,153 1,153 58,823 EOM3 1,177 1,177 60,000 At Pay-Off (60,000) 0 Record any necessary journal entries at the end of the first month. Discount on N/R 1,131 Interest Revenue 1,13 1 Record any necessary journal entries at the end of the second month. Discount on N/R 1,153 Interest Revenue 1,153 Record any necessary journal entries at the end of the third month. Discount on N/R 1,177 Interest Revenue 1,177 23 CHAPTER 7 - RECEIVABLES Cash 60,000 N/R 60,000 Remember To: _ 1. Read The Tebeook acTively before each class or oTherwise read afTer each lecTure. Make a lisT of quesTions To ask in class. 2. AfTer class, do These problems: ' a. in—class problems from These noTes, b. The Wiley Plus recommended assignmenTs, and c. The exTra exercises posTed on Moodie. 3. Prepare for The nexT quiz — To be announced in class. 4. Keep up wiTh These assignmenTs each week, and Try noT To fall behind. 24 ...
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This note was uploaded on 02/27/2012 for the course ECON 2035 taught by Professor Stahl during the Fall '08 term at LSU.

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Chapter 7 - CHAPTER 7 - RECEIVABLES + Cash /\...

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