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Transcript of Receivables and Investments COPYRIGHT © 2011 South-Western/Cengage Learning 7/e PowerPoint Author:...
Receivablesand Investments
COPYRIGHT © 2011 South-Western/Cengage Learning
7/e
PowerPoint Author: Catherine Lumbattis
7
Apple’s Consolidated Balance Sheets (Partial)
ASSETS (in millions) September 27, September 29, 2008 2007
Current assets:Cash and cash equivalents $11,875 $9,352Short-term investments 12,615 6,034Accounts receivable, less allowances of $47 each period 2,422 1,637Inventories 509 346Deferred tax assets 1,447 782Other current assets 5,822 3,805
Total current assets $34,690 $21,956
higher
higher
Apple’s Consolidated Balance Sheets (Partial)
ASSETS (in millions) Current assets:Cash and cash equivalentsShort-term investmentsAccounts receivableInventoriesDeferred tax assetsOther current assets
Total current assets
Lessliquid
Apple Corporation Sample Accounts Receivable
Subsidiary Ledger Total Due
Acme $ 10,000Baxter 50,000Jones 15,000Martin 20,000Smith 5,000
$100,000 Gross Accounts
ReceivableLO1
Apple’s Consolidated Balance Sheets (Partial)
September 27 September 29(amounts in millions) 2008 2007
Accounts receivables, less allowances of $47In each period $2,422 $1,637
Net Realizable
Value
Estimat
ed
Unco
llecti
ble
Accounts
Credit SalesSlows inflow of cashRisk of uncollectible accounts
Trade Credit
Retail Customer Receivables
Terms: 2/10, net 30
Sales Invoice
Accounting for Bad Debts:Direct Write-off Method
Journal entry to record write-off in period determinedto be uncollectible:
Bad Debts Expense XXXAccounts Receivable—Dexter XXX
Period of sale Future period chargedwith expense of bad debtwrite-off
Accounting for Bad Debts: Allowance Method
Period of saleEstimated bad debt expense (and allowance account) recorded in the same period
Accounting for Bad Debts:Allowance Method
Journal entry to record estimated bad debtexpense in period of sale:
Bad Debts Expense XXXAllowance for Doubtful Accounts XXX
I estimate...
Roberts Corp.Partial Balance Sheet
Accounts receivable $250,000Less: Allowance for doubtful accounts 6,000Net accounts receivable $244,000
Balance Sheet Presentation – Allowance Method
Accounting for Bad Debts:Allowance Method
Journal entry to record bad debt write-off inperiod determined uncollectible:
Allowance for Doubtful Accounts XXXAccounts Receivable—Dexter XXX
Bankrupt
Approaches tothe Allowance Method
% of Net Credit Sales
% of Accounts Receivable Aging Method
Income Statement Approach
Balance Sheet
Approach
Example:
Percentage of Net Credit Sales Method
Assume prior years’ net credit sales and bad debtexpense is as follows:
Year Net Credit Sales Bad Debts2004 $1,250,000 $ 26,4002005 1,340,000 29,3502006 1,200,000 23,1002007 1,650,000 32,1502008 2,120,000 42,700
$7,560,000 $153,700
Example:
Percentage of NetCredit Sales Method
Develop bad debt percentage:
$153,700$7,560,000
use 2%= 0.02033
Percentage of Accounts Receivable Method
$32,330 / $4,038,000 = 8% ratio of bad debts to the ending accounts receivable
December 31, 2010 Accounts Receivable $865,000
× 8% Credit balance required in Allowance account after adjustment $6,920
Example:
Example:
Percentage of Accounts Receivable Method
Assume prior years’ ending Accounts Receivable andbad debts is as follows: December 31Year Accounts Receivable Bad Debts2005 $ 650,000 $ 5,2502006 785,000 6,2302007 854,000 6,9502008 824,000 6,4502009 925,000 7,450
$4,038,000 $32,330
Percentage of Accounts Receivable Method
$32,330 / $4,038,000 = 8% ratio of bad debts to the ending accounts receivable
December 31, 2010 Accounts Receivable $865,000
× 8% Credit balance required in Allowance account after adjustment $6,920
Example:
Percentage of Accounts Receivable Method
Assume the Allowance for Doubtful Accounts has a beginning credit balance of $2,100:
Credit balance required in allowance account after adjustment $ 6,920 Less: Credit balance in allowance account before adjustment 2,100Amount for bad debt expense entry $ 4,820
Percentage of AccountsReceivable Method
Assume the Allowance for Doubtful Accounts has a beginning credit balance of $2,100:
Journal entry:Bad Debts Expense 4,820
Allowance for Doubtful Accounts 4,820To record estimated bad debts.
Percentage of AccountsReceivable Method
The net realizable value of accounts receivable would be determined as follows:
Accounts receivable $865,000Less: Allowance for doubtful account 6,920
Net realizable value $858,080
Aging Method Estimated Percent Estimated Amount
Category Amount Uncollectible Uncollectible Current $ 85,600 1% $ 856Past due: 1–30 days 31,200 4% 1,248 31–60 days 24,500 10% 2,450 61–90 days 18,000 30% 5,400 90+ days 9,200 50% 4,600 Totals $168,500 $14,554
Aging MethodAssume the Allowance for Doubtful Accounts has a beginning credit balance of $1,230:
Credit balance required in allowance account after adjustment $14,554 Less: Credit balance in allowance account before adjustment 1,230Amount for bad debt expense entry $13,324
Aging MethodAssume the Allowance for Doubtful Accounts has a beginning credit balance of $1,230:
Journal entry:Bad Debts Expense 13,324
Allowance for Doubtful Accounts 13,324To record estimated bad debts.
Aging MethodThe net realizable value of accounts receivable would be determined as follows:
Accounts receivable $168,500Less: Allowance for doubtful account 14,554
Net realizable value $153,946
Accounts Receivable Turnover
Net Credit SalesAverage Accounts Receivable
Indicates how quickly a company is collecting (i.e.,
turning over) its receivables
LO2
Accounts Receivable Turnover Too fast may mean: credit policies too stringent; may be losing sales
Too slow may mean: credit department not operating effectively; dissatisfied customers
Baker Corporation promises to pay HighTec, Inc. $15,000 plus 12% annual interest on March 13, 2011.
Date: December 13, 2010
Signed:_________
Interest-Bearing Promissory Note
Baker Corporation
MaturityDate
Principal
Interest
LO3
Receipt of Interest-Bearing Promissory Note
Journal entry to record the receipt of the noteon December 13:Notes Receivable 15,000
Sales Revenue 15,000
Interest-Bearing Promissory Note
Adjusting entry to record interest:Interest Receivable 90
Interest Revenue 90* *Interest = $15,000 × 12% × 18/360
Interest-Bearing Promissory Note
Journal entry to record the collection of the note on March 13, 2011:Cash 15,450
Notes Receivable 15,000Interest Revenue 360*
Interest Receivable 90*15,000 × 12% × 72/360
Credit Card Sales
Competitive necessityCredit card company:
• Charges fee• Assumes risk of nonpayment
Discounting Notes ReceivableSell note prior to maturity date for cashReceive less than face value (i.e.,
discounted amount)Can be sold with or without recourse
Reasons Companies Invest in Other Companies
Short-term cash excesses
Long-term investing for future cash needs
Exert influence over investee
Obtain control of investeeLO5
Investment in a CD
Purchase of investment: Short-Term Investments—CD 100,000
Cash 100,000
On October 2, Apple invests $100,000 in a 120-day CD. Principal plus interest @ 6% due upon investment maturity.
Example:
Year-end adjusting entry:Interest Receivable 1,500
Interest Revenue 1,500
Investment in a CD
Interest (I) = Principal (P) × Rate (R) × Time (T) $1,500 = $100,000 × 6% × 90*/360
*October – 29 days November – 30 days December – 31 days
90 days
Upon investment maturity:
Cash 102,000Short-Term Investments—CD 100,000Interest Receivable 1,500Interest Revenue* 500
Investment in a CD
*Interest earned in January:$100,000 × 6% × 30/360 = $500
Accounting for Common-Stock Investments
No significantinfluence
0%
FairValue
Method
Significantinfluence
EquityMethod
Ourfocus
in Appendix
Investment in BondsBonds of other companies Intent and ability to hold until maturity
$100,000, 10% bond due ten years
Investment in Bonds
On 1/1/10, Atlantic buys: $100,000, 10% bonds @ face value Bonds mature in ten years Interest payable semiannually
Example:
Record the purchase of the bonds and receipt of the first interest payment
Recording Bond Purchase
Investment in Bonds 100,000Cash100,000
To record purchase of ABC bonds.
$100,000, 10% bond due 2020
Recording Receipt of Interest Payment
Cash ($100,000 × 10% × 1/2) 5,000 Interest Income 5,000
To record interest income on ABC bonds.
Recording Bond Sale
Cash 99,000Loss on Sale of Bonds 1,000 Investment in Bonds 100,000
To record sale of ABC bonds.
Investment in Stocks
Stocks of other companiesRecorded at cost, including any
brokerage fees, commissions or other fees paid to acquire the shares
Investment in Stocks
On February 1, 2010, Dexter Corp. pays $50,000 for shares of Stuart common stock plus $1,000 commissions : Investment in Stuart Common Stock 51,000 Cash 51,000
Example:
Record the purchase of common stock
Recording Receipt of DividendsDexter receives $500 cash dividends from Stuart common stock:Cash 500
Dividend Income 500
To record the receipt of dividends
Sale of Investment in Stocks
Sale of Investment in Stuart common stock for$53,000:Cash 53,000 Investment in Stuart Common Stock 51,000 Gain on Sale of Stock 2,000 To record the sale of Stuart common stock.
Operating Activities Net income xxx Increase in accounts receivable – Decrease in accounts receivable + Increase in notes receivable – Decrease in notes receivable +Investing Activities Purchases of held-to-maturity and available-for-sale securities – Sales/maturities of held-to-maturity and available-for-sale securities +Financing Activities
Liquid Assets and the Statement of Cash Flows – Indirect Method
LO6