Chapter 7 665

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Chapter 7

Cash And Receivables

Cash

What is cash?

Reporting cash.

Summary of cash-related items.

What is Cash?

Most liuid asset.

Standard medium of e!change.

"asis for measuring and accounting for all items.

Current asset.

#!amples$ coin% currency% available funds on deposit

at the ban&% money orders% certified chec&s% cashier's

chec&s% personal chec&s% ban& drafts and savings

accounts.

Reporting Cash$

(hree issues are related to cash reuire special

attention$

). Cash euivalents.

*. Restricted cash.

+. "an& overdraft.

Cash #uivalents$ Short-term% highly liuid investments that are both

). Readily convertible to cash% and

*. So near their maturity that they present insignificant

ris& of changes in interest rates.

#!amples$ (reasury bills% Commercial paper% and

Money mar&et funds.

Restricted Cash$

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Companies segregate restricted cash from ,regular

cash for reporting purposes.

#!amples% restricted for$

). lant e!pansion%*. Retirement of long-term debt% and

+. Compensating balances$ the minimum cash balance

in chec&ing or saving accounts that the ban&

reuires the customers to maintain.

"an& /verdrafts$

/ccurs 0hen a company 0rites a chec& for more than

the amount in its cash account. 1enerally reported as a current liability.

/ffset against cash account only 0hen available cash is

present in another account in the same ban& on 0hich

the overdraft occurred.

Summary of Cash-Related 2tems$

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etty Cash 3und$ 4sed to pay small amounts.

(he operation of the fund% often called an imprest

system% involves$

). #stablishing the petty cash fund.

*. Ma&ing payments from the petty cash fund% and

+. Replenishing the petty cash fund.

Accounting entries are reuired 0hen$

). the fund is established%

*. the fund is replenished% and

+. the amount of the fund is changed.

#!ample$

5incolnville Company uses an imprest petty cash

system. (he fund 0as established on March ) 0ith a balance

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of 6). 8uring March the follo0ing petty cash receipts

0ere found in the petty cash bo!.

(he fund 0as replenished on March )9 0hen the fund

contained 6+ in cash. /n March *% the amount in the fund

0as increased to 6)9.

2nstructions$ :ournali;e the entries in March that

pertain to the operation of the petty cash fund.

Solution$

8ate Account (itle and #!planation 8r. Cr.

Mar. ) etty Cash

Cash

(o establish the petty cash fund.

)

)

Mar. )9 ostage #!pense

3reight-/ut

Miscellaneous #!pense

(ravel #!pense

Cash /ver and Short

Cash

(o replenish the petty cash

fund.

+otice$ (otal e!penses remaining cash in the fund

should eual the original amount of the fund.). Cash shortage occurs 0hen total e!penses

remaining cash in the fund is less than the original

amount of the fund. Cash shortage is debited to the

Cash /ver and Short account 0hen replenishing the

fund.

*. Cash overage occurs 0hen total e!penses

remaining cash in the fund is more than the originalamount of the fund. Cash overage is credited to the

Cash /ver and Short account 0hen replenishing the

fund.

4se of a "an&$

(he use of a ban& minimi;es the amount of currency

that must be &ept on hand and therefore contributes

significantly to good internal control over cash.

A chec& is a 0ritten order signed by the depositor

directing the ban& to pay a specified sum of money to adesignated recipient. (he three parties to a chec& are

as follo0s$

a. (he ma&er @or dra0er 0ho issues the chec&.

b. (he ban& @or payer on 0hich the chec& is

dra0n.

c. (he payee to 0hom the chec& is payable.

A ban& statement sho0s$a. chec&s paid and other debits charged against

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the account%

b. deposits and other credits made to the account%

and

c. the account balance after each day's

transactions.

A ban& debit memoranda is usually included 0ith the

ban& statement to indicate charges against the

depositor's account such as a ban& service charge% cost

of printing chec&s% and 0hen a previously deposited

customer's chec& ,bounces because of insufficient

funds @>S3 chec&.

A ban& credit memoranda sho0s such items as the

collection of a note receivable for the depositor by the

ban&% or interest earned on deposits in the ban&.

Reconciling the "an& Account$

A reconciliation of a ban& account is necessary because

the balance per ban& and balance per boo&s are seldom

in agreement. (he lac& of agreement may be the result

of time lags and errors.

2n reconciling the ban& statement% it is customary to

reconcile the balance per boo&s @the cash balance in the

ledger and the balance per ban& @the cash balance

according to the ban& statement to their adBusted

@corrected cash balances. (he reconciliation schedule

consists of t0o sections.

(he steps in preparing a ban& reconciliation are$

a. 8etermine deposits in transit.b. 8etermine outstanding chec&s.

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c. >ote any errors discovered.

d. (race ban& memoranda to the records.

#ach reconciling item used in determining the adBusted

cash balance per boo&s should be recorded by thedepositor @reuires a Bournal entry to correct the cash

balance in the ledger.

Reconciliation rocedures$

8eposit in (ransit >otes collected by ban&

- /utstanding Chec&s - Service charges

- "an& #rrors - "oo& #rrors

C/RR#C( "A5A>C# C/RR#C( "A5A>C#

#!ample$

(he follo0ing information pertains to 3amily Dideo

Company.

). Cash balance per ban&% :uly +)% 67%*E+.

*. Cash balance per boo&s% :uly +)% 67%*F=.

+. :uly ban& service charge not recorded by the depositor

6*F.=. 8eposits in transit% :uly +)% 6)%9.

9. "an& collected 6

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b :ournali;e the adBusting entries at :uly +) on the boo&s

of 3amily Dideo Company.

Solution$

a

3amily Dideo

"an& Reconciliation Statement

3or :uly% *)

Cash balance per ban& statement 67%*FF

Add$ 8eposit in transit )%9

5ess$ /utstanding chec&s @9

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When the above entries are posted to the cash account

in the ledger$

5edger

Cash

"alance 7%*F=

:uly +)

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*. >otes Receivable$ Written promises to pay a sum of

money on a specified future date.

>on-(rade Receivable$ arise from a variety of

transactions such as$

). 2nterest and dividends receivable%

*. Advances to employees.

Recognition of Accounts Receivables$

2n most receivable transactions% the amount to be

recogni;ed is the e!change price @amount due from the

debtor. (0o elements that must be considered in measuring

receivables are$

@a the availability of discounts @trade and cash

discounts% and

@b the length of time bet0een the sale and the

payment due date @the interest factor.

(rade 8iscounts Reductions from the list price.

>ot recogni;ed in the accounting records.

Customers are billed net of discounts.

Cash 8iscounts

Companies offer cash discounts @sales discounts to

induce prompt payment @for e!ample% ,*G)% nG+.

(here are t0o methods for recogni;ing @recording

accounts receivable$

). (he gross method% and

*. (he net method.

#!ample @)$

(ransaction$

). Sales of 6)%% terms ,*G)% nG+.

*. Collection of amount due 0ithin discount period.

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1ross Method$


@) Accounts Receivable

Sales

(o record sales on account

terms *G)% nG+.

)%

)%

@* Cash

Sales 8iscount

Accounts Receivable

(o record collection of credit

sales 0ithin the discount period.

et Method$


@) Accounts Receivable

Sales

(o record sales on account

terms *G)% nG+ at net.

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>et Method$


Cash

Accounts Receivable

Sales 8iscount 3orfeited

(o record collection of credit

sales after the discount period.

)%

on-recognition of 2nterest #lement

ideally% a company should measure receivables in terms

of their present value. (hat is% the discounted value of

the cash to be received in the future.

(he profession specifically e!cludes from present value

considerations ,receivables arising from transactions0ith customers in the normal course of business 0hich

are due in customary trade terms not e!ceeding

appro!imately one year.

Recognition of >otes Receivable$

1enerally originate from$

Customers 0ho need to e!tend payment period

of an outstanding receivable

High-ris& or ne0 customers.

5oans to employees.

Sales of property% plant% and euipment.

5ending transactions @the maBority of notes

2n terms of interest% notes receivable are classified to$

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). 2nterest-bearing notes$ 0hich have a stated rate of

interest.

*. >on-interest-bearing notes @or ;ero-interest bearing

notes$ include the interest as part of their face

amount instead of stating it e!plicitly.

>otes receivable are considered fairly liuid% even if

long-term% because they may be easily converted to

cash.

Short-term notes are generally recorded at face value

@less allo0ances because the interest implicit in thematurity value is immaterial.

>otes maturing in + months or less are considered cash

euivalents and are not subBect to premium or discount

amorti;ation.

5ong-term notes receivable should be recorded and

reported at the present value of the cash e!pected to becollected.

When the interest stated on an interest-bearing note is

eual to the effective @mar&et rate of interest% the note

sells at face value.


less than the mar&et rate of interest% the note sells at adiscount.


grater than the mar&et rate of interest% the note sells at

a premium.

(he discount% or premium is recorded% and then

amorti;ed over the life of the note to appro!imate theeffective interest rate.

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>ote 2ssued at 3ace Dalue$#!ample$

"igelo0 Corp. lends Scandinavian 2mports 6)% in

e!change for a 6)%% three-year note bearing interest at

)I annually. (he mar&et rate of interest for a note of

similar ris& is also )I. Ho0 does "igelo0 record the

receipt of the note?

Solution$

D of 2nterest @resent value of ordinary annuity$

D-/An%i J A @D3-/An%i

Where$

D-/An%i J resent value of an ordinary annuity of 6)

invested for n periods at 2 interest rate.

A$ the annuity @the annual interest.

D3-/An%i J resent value factor of an ordinary

annuity of 6) invested for n periods at 2

interest rate @this factor is e!tracted from

the present value of an ordinary annuity

table.

D-/A +% )I J 6)% ! *.=FEF9 J 6*%=F7

2nterest 3actor resent

Received Dalue

D of rincipal @resent Dalue of the 3ace Dalue of >ote

D J 3D @D3n%i

Where$

D$ resent value.

3D$ 3uture value.

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D3$ resent value factor of a single amount of 6)

invested for n periods at 2 interest rate.

D+% )I J 6)% ! .79)+* J 67%9)+

rincipal 3actor resent value

Summaryresent value of interest 6 *%=F7

resent value of principal 7%9)+

>ote current mar&et value @resent value 6)%

(he receipt of the note receivable is recorded by

"igelo0 as follo0s$


:an. Kr ) >otes Receivable

Cash

(o record the receipt of a note

receivable for a loan to

Scandinavian 2mports.

)%

)%

#ach year% "igelo0 0ould record interest revenue on

the note receivable as follo0s$


8ec. Kr ) Cash 2nterest Revenue

(o record interest revenue on

the note receivable.

)% )%

>ote >ot 2ssued at 3ace Dalue$Lero-2nterest-"earing >ote @>on-interest-"earing >ote$

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>otes receivable are sometimes issued 0ith ;ero

interest rate stated or at a stated rate that is

unreasonable.

2n such instances the present value of the note is

measured by the cash proceeds to the borro0er or fair

value of the property% goods% or services rendered.

(he difference bet0een the face amount of the note and

the cash proceeds or fair value of the property

represents the total amount of interest during the life of

the note.

#!ample$

:eremiah Company receives a three-year% 6)% ;ero-

interest-bearing note. (he mar&et rate of interest for a note

of similar ris& is ote

D+%

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:eremiah Company records the receipt of the note

receivable as follo0s$8ate Account (itle and #!planation 8r. Cr.

:an.

Kr )

>otes Receivable

Cash

8iscount on >otes Receivable

(o record the receipt of a ;ero-

interest note receivable.

)%

7%7*).F

*%*7F.*

:eremiah Company records interest revenue on the

note at the end of each of the three years as follo0s$


8ec. Kr ) 8iscount on >otes Receivable

2nterest Revenue

(o record interest revenue on

the note receivable.

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8ec. Kr + 8iscount on >otes Receivable

2nterest Revenue

F*9.7+

F*9.7+

(he discount on notes receivable account over the three

years appears as follo0s$

8iscount on >otes Receivable#nd Kr ) 6Eote$#!ample$

Morgan Corp. ma&es a loan to Marie Co. and receives

in e!change a three-year% 6)% note bearing interest at

)I annually. (he mar&et rate of interest for a note of

similar ris& is )*I.

Reuired$). Compute the present value of the note receivable.

*. Compute the discount on notes receivable.

+. repare a Bournal entry to record the receipt of the

note receivable.

=. repare a schedule of note discount amorti;ation

using the effective interest method.

9. repare Bournal entries to record the amorti;ation of

the discount on notes receivable.

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Solution$

D of 2nterest @resent value of ordinary annuity$

D-/A+% )*I J 6)% ! *.=)F+ J 6*%=*

2nterest 3actor resent value

Received

D of rincipal @resent value of the 3ace Dalue of the >ote

D+% )*I J 6)% ! .7))7F J 67%))F

rincipal 3actor resent value

resent Dalue of the >ote J resent value of interest

present value of rincipal

J 6*%=* 67%))F J 6

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(he receipt of the note is recorded as sho0n belo0$


:an.Kr ) >otes Receivable Cash

8iscount on >otes Receivable

(o record the receipt of a +-year%

)I note receivable.

)% otes receivable

)%

)=*

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2nterest revenue

(o record interest revenue and

amorti;ation of discount on notes

receivable.

)%)=*

#nd

Kr *

Cash

8iscount on >otes receivable

2nterest revenue

(o record interest revenue and

amorti;ation of discount on notes

receivable.

)%

)9ote ayable

2nterest #!pense

Cash

(o record ayment of the balance

of the note payable plus interest to

the ban&.

EE%

EE

EE%EE

Sales of Receivables$ When accounts and notes receivable are factored

@sold% the factoring arrangement can be 0ith recourse

or 0ithout recourse.

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2f receivables are factored on a 0ith recourse basis% the

seller guarantees payment to the factor in the event the

debtor does not ma&e payment.

When a factor buys receivables 0ithout recourse% the

factor assumes the ris& of collectibility and absorbs any

credit losses.

We 0ill only focus on the case of sale of receivable on a

0ithout recourse basis.

Sale of Receivable Without Recourse$

urchaser assumes ris& of collection.

(ransfer is outright sale of receivables.

Seller records loss on sale.

Seller use 8ue from 3actor @receivable account to

cover discounts% returns% and allo0ances.

#!ample$

Crest (e!tiles% 2nc. factors 69% of accounts

receivable 0ith Commercial 3actors% 2nc.% on a 0ithout

recourse basis. (he receivable records are transferred to

Commercial 3actors% 2nc.% 0hich 0ill receive the

collections. Commercial 3actors assesses a finance charge

of +I of the amount of accounts receivable and retains anamount eual to 9I of the accounts receivable @for

probable adBustments.

2nstructions$ repare the Bournal entry on the records

of Crest (e!tiles% 2nc.% to record the sale of

receivable.

Solution$

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5oss on sale of receivable @the finance charge

J 69% O +I J 6)9%

8ue 3rom 3actor J 69% O 9I J 6*9%

Cash collected from sale of receivable J 69%

@6)9% 6*9% J 6=E%

(he :ournal entry on the records of Crest (e!tiles% 2nc.%

to record the sale of receivable is sho0n belo0$


Cash

8ue 3rom 3actor

5oss on Sale of Receivable

Accounts Receivable

=E%

*9%

)9% 9%

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Chapter 7 665

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