Chapter 9 Cash and Receivables ACCT-30301. 1. Cash Few problems ◦ easy valuation and...
-
Upload
rebecca-rogers -
Category
Documents
-
view
221 -
download
3
Transcript of Chapter 9 Cash and Receivables ACCT-30301. 1. Cash Few problems ◦ easy valuation and...
Chapter 9
Cash and Receivables
ACCT-3030 1
1. Cash Few problems
◦ easy valuation and classification◦ requires significant controls (Appendix 7A)
Petty cash (Appendix 7A) Bank reconciliations (Appendix 7A)
◦ BE 7-15 Restrictions on cash
◦ disclosure◦ presentation◦ compensating balances
Cash equivalents◦ highly liquid investments◦ 3 months or less maturity
ACCT-3030 2
1. Cash
ACCT-3030 3
Illustration 7-2
2. Accounts and Notes Receivable
Receivables◦claims held against customers and others for
money, goods, or servicesA/R – oral promises to payN/R – written promises to pay
◦a negotiable instrumentTrade vs. Nontrade receivables
◦ trade – customers◦nontrade – officers, stockholders, affiliates,
depositsACCT-3030 4
3. A/R – Bad DebtsBad debts
◦uncollectible accounts receivableTwo methods of accounting
◦direct write-off method (not GAAP) does not apply matching
◦allowance method (GAAP) correctly applies matching reflects proper YE carrying value of A/R
ACCT-3030 5
3. A/R – Bad DebtsDirect write-off method
◦expense recorded when account deemed uncollectible
◦easy to apply◦entry
Bad Debts Expense X Accounts Receivable X
ACCT-3030 6
3. A/R – Bad DebtsAllowance method
◦requires YE adjusting entry◦can be based on
percentage of sales or percentage of receivables
◦accounts in the entries are same with either method the methods only affect the amounts for
the entriesACCT-3030 7
3. A/R – Bad DebtsAllowance method
◦ YE adjusting entry
Bad Debts Expense X Allowance for Uncollectibles X
◦ entry to write off specific A/R
Allowance for Uncollectibles X Accounts Receivable X
entry does not create an expense entry does not change net receivables
ACCT-3030 8
3. A/R – Bad DebtsExamples
◦BE 7-4◦BE 7-5
Collection of previously written-off A/R◦reinstate account balance◦record collection as normal
ACCT-3030 9
4. Other Valuation AllowancesDiscounts
◦YE adjustment needed to estimate amount of outstanding transactions with possible discounts or returns
◦e.g., entry for estimated returns
Sales Returns and AllowancesX Allowance for Returned Merchandise X
ACCT-3030 10
4. Other Valuation AllowancesDiscounts
◦trade reduction off list price used to determine
sales price not recognized in books
◦cash discount for prompt payment e.g., 2/10, n/30 can be accounted for by gross or net
methods ACCT-3030 11
4. Other Valuation AllowancesExample – cash disc net and gross
methodsMake all entries under: (a) gross method
(b) net method
ACCT-3030 12
Date
Oct. 1 Sell $1,000 of merchandise to customer, 2/10, n/30
Oct. 7 Customer returns $100 of merchandise
Oct. 10 Customer pays in full
Assume Oct. 10 payment did not occur
Oct. 27 Customer pays in full
5. Pledging, Assigning, & Factoring A/RReasons
◦obtain cash now rather than wait for collection◦obtain relief from burden of carrying
receivablesCan be accomplished by
◦secured borrowing pledge receivables as collateral for a loan
◦sale of receivables with recourse (seller still has risks of collection) without recourse (purchaser assumes risks)
ACCT-3030 13
5. Pledging, Assigning, & Factoring A/RSecured borrowing on receivablesA borrowing type arrangement
◦can be general receivables pledged as collateral for loan (all receivables or certain dollar amount)
◦can be specific receivables pledged as collateral for loan (then must identify receivables pledged)
Company continues to collect A/RBank usually
◦charges a finance charge against receivables◦charges interest on the loan
ACCT-3030 14
5. Pledging, Assigning, & Factoring A/RExample – Secured Borrowing
◦You pledge all your receivables as collateral for a bank loan. The balance of A/R is $75,000 and bank loan amount is $50,000. The bank charges a 1% fee on the receivables and interest on the loan is 10%.
Record the entries for this transaction.
ACCT-3030 15
5. Pledging, Assigning, & Factoring A/R
ACCT-3030 16
Date Accounts Dr. Cr.
1/1/year 1 Cash 49,250
Interest Expense (75,000 x .01) 750
Notes Payable 50,000
You collect $45,000 of A/R on 3/31/year 1
3/31/year 1
Cash 45,000
A/R 45,00
5. Pledging, Assigning, & Factoring A/R
ACCT-3030 17
Date Accounts Dr. Cr.
You remit collections to bank plus interest on loan.
3/31/year 1
Interest Expense (50,000 x .1 x 1/4) 1,250
Notes Payable 45,000
Cash 46,250
You collect remainder of A/R on 6/30/year 1
6/30/year 1
Cash 30,000
A/R 30,000
5. Pledging, Assigning, & Factoring A/R
ACCT-3030 18
Date Accounts Dr. Cr.
You pay remainder of loan to bank plus interest on loan.
6/30/year 1
Interest Expense (5,000 x .1 x 1/4) 125
Notes Payable 5,000
Cash 5,125
5. Pledging, Assigning, & Factoring A/RSelling (factoring) receivables
◦ usually for all receivables◦ usually continuous arrangement◦ fee usually 1% - 3%◦ usually a holdback (for returns and allowances)
Factoring without recourse◦ a sale and record loss
Factoring with recourse◦ a sale, but follows financial components approach◦ must assign a liability to the recourse provision to
compute the lossACCT-3030 19
5. Pledging, Assigning, & Factoring A/RExample
◦A company factors its A/R balance of $40,000 with a factoring fee of 2% and a 10% holdback.
Record the entries if the transaction is(a) without recourse(b) with recourse
ACCT-3030 20
5. Pledging, Assigning, & Factoring A/R(a) without recourse
ACCT-3030 21
Accounts Dr. Cr.
Cash 35,200
Receivable from Factor (40,000 x .1) 4,000
Loss on Sale of A/R (40,000 x .02) 800
A/R 40,000
5. Pledging, Assigning, & Factoring A/R(b) with recourse; assume the recourse obligation has a fair valued of $2,000Compute net proceeds: Cash received $35,200 Add: Holdback 4,000 $39,200 Less: Recourse obligation 2,000
Net Proceeds $37,200
Compute Loss on Sale: BV of A/R $40,000 Net Proceeds 37,200 Loss on Sale $ 2,800
ACCT-3030 22
5. Pledging, Assigning, & Factoring A/R(b) With recourse
ACCT-3030 23
Accounts Dr. Cr.
Cash 35,200
Due From Factor 4,000
Loss on Sale of A/R 2,800
A/R 40,000
Recourse Liability 2,000
6. Notes Receivable Recognition of N/R
◦ short-term N/R recorded at face value
◦ long-term N/R recorded at PV of future cash flows
Notes can be received for◦ loaning money
◦ selling goods or services
Notes can have a stated interest rate or no interest rate◦ Stated interest rate on N/R can be
equal to market rate, greater than market rate, or less than market rate
ACCT-3030 24
6. Notes ReceivableInterest-bearing notes
ExampleYou received a $1,000, two year, 6% note receivable in exchange for merchandise.
Make entries to record this transactions if the market interest rate is:
(a) 6%
(b) 8%ACCT-3030 25
6. Notes Receivable(a) market interest rate is 6%
PV of 2 year, 6%, $1,000 note discounted at 6% =
1,000 (n=2, i=6, PMT=60, FV=1000, CPT PVA-ord)
PV of interest payments
PVA-ord(2, 6%) = 60 x 1.83339 = 110
PV of principle paymentPV = 1,000 x .89000 = 890
1,000ACCT-3030 26
6. Notes Receivable(a) market interest rate is 6%
ACCT-3030 27
Date Accounts Dr. Cr.
1/1/year 1
Notes Receivable 1,000
Sales 1,000
12/31/year 1
Cash 60
Interest Revenue 60
12/31/year2
Cash 60
Interest Revenue 60
12/31/year2
Cash 1,000
Notes Receivable 1,000
6. Notes Receivable(b) market interest rate is 8%
PV of 2 year, 6%, $1,000 note discounted at 8% = 964
(n=2, i=8, PMT=60, FV=1000, CPT PVA-ord)
PV of interest payments
PVA-ord(2, 8%) = 60 x 1.78326 = 107
PV of principle paymentPV = 1,000 x .85734 = 857
964ACCT-3030 28
6. Notes Receivable
ACCT-3030 29
Date Accounts Dr. Cr.
1/1/year 1
Notes Receivable 1,000
Discount on N/R 36
Sales 964
12/31/year 1
Cash 60
Discount on N/R 17
Interest Revenue (964 x .08) 77
12/31/year 2
Cash 60
Discount on N/R 19
Interest Revenue (964 + 17 = 981; 981 x .08 = 79)
79
12/31/year 2
Cash 1,000
Notes Receivable 1,000
6. Notes ReceivableNon-interest-bearing note
◦zero percent interest is unreasonable◦must impute interest rate◦use imputed rate to amortize note◦Also
interest rate in arm’s length transaction is considered reasonable unless zero interest rate clearly unreasonable interest rate face amount of note significantly differs from cash
sales priceACCT-3030 30
6. Notes ReceivableExampleYou accept a $12,500, three year, non-interest-bearing note for the sale of merchandise. The merchandise has a cash price of $10,000.
ACCT-3030 31
6. Notes ReceivableExampleN = 3i = ?PV = $10,000FV = $12,500
i = 7.7%
ACCT-3030 32
6. Notes Receivable
ACCT-3030 33
Date Accounts Dr. Cr.
1/1/year 1 Notes Receivable 12,500
Discount on N/R 2,500
Sales 10,000
12/31/year 1
Discount on N/R 770
Interest Revenue (12500-2500=10000; 10000 x .077 = 770)
770
12/31/year 2
Discount on N/R 829
Interest Revenue (2500 – 770 = 1730; 12500-1730 =10770; 10770 x .077 = 829)
829
12/31/year 3
Discount on N/R 901*
Interest Revenue (1730 – 829 = 901; 12500-901=11599; 11599x .077 ≈ 901)
901*
12/31/year 3
Cash 12,500
Notes Receivable 12,500
* = rounded
7. Fair Value OptionFASB allows financial instruments
to be valued at fair valueIf company chooses fair value
option◦adjust notes to FV at year-end◦unrealized holding gains or losses
included in net incomeOnce elected must always
continue to be usedACCT-3030 34