Kế toán, kiểm toán - Cash and receivables

PREVIEW OF CHAPTERIntermediate AccountingIFRS 2nd EditionKieso, Weygandt, and Warfield 7Identify items considered cash.Indicate how to report cash and related items.Define receivables and identify the different types of receivables.Explain accounting issues related to recognition of accounts receivable.Explain accounting issues related to valuation of accounts receivable.Explain accounting issues related to recognition of notes receivable.Explain accounting issues related to valuation of notes receivable.Understand special topics related to receivables.Describe how to report and analyze receivables.After studying this chapter, you should be able to:Cash and Receivables7LEARNING OBJECTIVESA financial asset—also a financial instrument. Financial Instrument - Any contract that gives rise to a financial asset of one entity and a financial liability or equity interest of another entity.ILLUSTRATION 7-1 Types of AssetsWhat is Cash?CASHLO 1What is Cash?Most liquid asset.Standard medium of exchange. Basis for measuring and accounting for all other items.Current asset.Examples: Coin, currency, available funds on deposit at the bank, money orders, certified checks, cashier’s checks, personal checks, bank drafts and savings accounts.CASHLO 1Identify items considered cash.Indicate how to report cash and related items.Define receivables and identify the different types of receivables.Explain accounting issues related to recognition of accounts receivable.Explain accounting issues related to valuation of accounts receivable.Explain accounting issues related to recognition of notes receivable.Explain accounting issues related to valuation of notes receivable.Understand special topics related to receivables.Describe how to report and analyze receivables.After studying this chapter, you should be able to:Cash and Receivables7LEARNING OBJECTIVESCash EquivalentsShort-term, highly liquid investments that are bothreadily convertible to cash, and so near their maturity that they present insignificant risk of changes in value.Examples: Treasury bills, commercial paper, and money market funds.Reporting CashCASHLO 2Companies segregate restricted cash from “regular” cash.Examples, restricted for:(1) plant expansion, (2) retirement of long-term debt, and (3) compensating balances.Reporting CashRestricted CashILLUSTRATION 7-2Disclosure of Restricted CashLO 2Reporting CashBank OverdraftsCompany writes a check for more than the amount in its cash account.Generally reported as a current liability.Offset against other cash accounts only when accounts are with the same bank.LO 2Summary of Cash-Related ItemsILLUSTRATION 7-3LO 2Identify items considered cash.Indicate how to report cash and related items.Define receivables and identify the different types of receivables.Explain accounting issues related to recognition of accounts receivable.Explain accounting issues related to valuation of accounts receivable.Explain accounting issues related to recognition of notes receivable.Explain accounting issues related to valuation of notes receivable.Understand special topics related to receivables.Describe how to report and analyze receivables.After studying this chapter, you should be able to:Cash and Receivables7LEARNING OBJECTIVESACCOUNTS RECEIVABLEWritten promises to pay a certain sum of money on a specified future date.Receivables - Claims held against customers and others for money, goods, or services.Oral promises of the purchaser to pay for goods and services sold.Accounts ReceivableNotes ReceivableLO 3Non-Trade ReceivablesAdvances to officers and employees.Advances to subsidiaries.Deposits paid to cover potential damages or losses.Deposits paid as a guarantee of performance or payment.Dividends and interest receivable.Claims against: Insurance companies for casualties sustained; defendants under suit; governmental bodies for tax refunds; common carriers for damaged or lost goods; creditors for returned, damaged, or lost goods; customers for returnable items (crates, containers, etc.).ACCOUNTS RECEIVABLELO 3ILLUSTRATION 7-4Receivables Statement of Financial PositionSheet PresentationsNon-Trade ReceivablesLO 3Identify items considered cash.Indicate how to report cash and related items.Define receivables and identify the different types of receivables.Explain accounting issues related to recognition of accounts receivable.Explain accounting issues related to valuation of accounts receivable.Explain accounting issues related to recognition of notes receivable.Explain accounting issues related to valuation of notes receivable.Understand special topics related to receivables.Describe how to report and analyze receivables.After studying this chapter, you should be able to:Cash and Receivables7LEARNING OBJECTIVESRecognition of Accounts ReceivableUse to:Avoid frequent changes in catalogs.Alter prices for different quantities purchased.Hide the true invoice price from competitors.10 % Discount for new Retail Store CustomersTrade DiscountsLO 4Recognition of Accounts ReceivableOffered to induce prompt payment.Terms such as 2/10, n/30, 2/10, E.O.M., or net 30, E.O.M.Gross Method vs. Net Method.Cash Discounts (Sales Discounts)Payment terms are 2/10, n/30LO 4Cash Discounts (Sales Discounts)ILLUSTRATION 7-5Entries under Grossand Net MethodsLO 4Illustration: On June 3, Bolton Company sold to Arquette Company merchandise having a sale price of £2,000 with terms of 2/10, n/60. On June 12, the company received a check for the balance due from Arquette Company. Prepare the journal entries on Bolton Company books to record the sale assuming Bolton records sales using the gross method.Sales Revenue 2,000Accounts Receivable 2,000June 3Recognition of Accounts ReceivableCash (£2,000 x 98%) 1,960Sales Discounts 40 Accounts Receivable 2,000June 12LO 4Illustration: On June 3, Bolton Company sold to Arquette Company merchandise having a sale price of £2,000 with terms of 2/10, n/60. On June 12, the company received a check for the balance due from Arquette Company. Prepare the journal entries on Bolton Company books to record the sale assuming Bolton records sales using the net method.Sales Revenue 1,960Accounts Receivable 1,960June 3Recognition of Accounts ReceivableCash (£2,000 x 98%) 1,960 Accounts Receivable 1,960June 12LO 4Illustration: On June 3, Bolton Company sold to Arquette Company merchandise having a sale price of £2,000 with terms of 2/10, n/60, f.o.b. shipping point. Prepare the journal entries on Bolton Company books to record the sale assuming Bolton records sales using the net method, and Arquette did not remit payment until July 29.Sales Revenue 1,960Accounts Receivable 1,960June 3Recognition of Accounts ReceivableCash 2,000 Accounts Receivable 1,960 Sales Discounts Forfeited 40June 12LO 4A company should measure receivables in terms of their present value.Non-Recognition of Interest ElementIn practice, companies ignore interest revenue related to accounts receivable because, for current assets, the amount of the discount is not usually material in relation to the net income for the period.Recognition of Accounts ReceivableLO 4How are these accounts presented on the Statement of Financial Position?Accounts ReceivableAllowance for Doubtful AccountsBeg. 500 25 Beg. End. 500 25 End. ACCOUNTS RECEIVABLELO 4ACCOUNTS RECEIVABLELO 4ACCOUNTS RECEIVABLELO 4Accounts ReceivableAllowance for Doubtful AccountsBeg. 500 25 Beg. End. 500 25 End. Journal entry for credit sale of $100? Accounts Receivable 100 Sales Revenue 100ACCOUNTS RECEIVABLELO 4Allowance for Doubtful AccountsBeg. 500 25 Beg. End. 600 25 End. Journal entry for credit sale of $100? Accounts Receivable 100 Sales Revenue 100Sale 100Accounts ReceivableACCOUNTS RECEIVABLELO 4Allowance for Doubtful AccountsBeg. 500 25 Beg. End. 600 25 End. Sale 100Collected $333 on account? Cash 333 Accounts Receivable 333Accounts ReceivableACCOUNTS RECEIVABLELO 4Allowance for Doubtful AccountsBeg. 500 25 Beg. End. 267 25 End. Sale 100Collected $333 on account? Cash 333 Accounts Receivable 333333 Coll. Accounts ReceivableACCOUNTS RECEIVABLELO 4Allowance for Doubtful AccountsBeg. 500 25 Beg. End. 267 25 End. Sale 100333 Coll. Adjustment of $15 for estimated bad debts? Bad Debt Expense 15 Allowance for Doubtful Accounts 15Accounts ReceivableACCOUNTS RECEIVABLELO 4Allowance for Doubtful AccountsBeg. 500 25 Beg. End. 267 40 End. Sale 100333 Coll. Adjustment of $15 for estimated bad debts? Bad Debt Expense 15 Allowance for Doubtful Accounts 15 15 Est. Accounts ReceivableACCOUNTS RECEIVABLELO 4Allowance for Doubtful AccountsBeg. 500 25 Beg. End. 267 40 End. Sale 100333 Coll. 15 Est. Write-off of uncollectible accounts for $10? Allowance for Doubtful accounts 10 Accounts Receivable 10Accounts ReceivableACCOUNTS RECEIVABLELO 4Allowance for Doubtful AccountsBeg. 500 25 Beg. End. 257 30 End. Sale 100333 Coll. 15 Est. Write-off of uncollectible accounts for $10? Allowance for Doubtful accounts 10 Accounts Receivable 10W/O 10 10 W/O Accounts ReceivableACCOUNTS RECEIVABLELO 4ACCOUNTS RECEIVABLELO 4Identify items considered cash.Indicate how to report cash and related items.Define receivables and identify the different types of receivables.Explain accounting issues related to recognition of accounts receivable.Explain accounting issues related to valuation of accounts receivable.Explain accounting issues related to recognition of notes receivable.Explain accounting issues related to valuation of notes receivable.Understand special topics related to receivables.Describe how to report and analyze receivables.After studying this chapter, you should be able to:Cash and Receivables7LEARNING OBJECTIVESReporting of receivables involves classification and valuation on the statement of financial position. Classification involves determining the length of time each receivable will be outstanding.Value and report short-term receivables at cash realizable value.Valuation of Accounts ReceivableACCOUNTS RECEIVABLELO 5Valuation of Accounts ReceivableRecord credit losses as debits to Bad Debt Expense (or Uncollectible Accounts Expense).Normal and necessary risk of doing business on credit.Two methods to account for uncollectible accounts: Direct write-off method Allowance methodUncollectible Accounts ReceivableLO 5Allowance MethodLosses are estimated:Percentage-of-sales.Percentage-of-receivables.IFRS requires when bad debts are material in amount.Methods of Accounting for Uncollectible AccountsDirect Write-OffTheoretically deficient:No matching.Receivable not stated at cash realizable value.Not appropriate when amount uncollectible is material.Valuation of Accounts ReceivableLO 5Allowance MethodThe percentage-of-sales basis results in a better matching of expenses with revenuesThe percentage-of-receivablesbasis produces the better estimate of cash realizable valueILLUSTRATION 7-7Comparison of Bases forEstimating UncollectiblesLO 5Percentage-of-Sales Approach Percentage based upon past experience and anticipate credit policy.Achieves better matching of cost and revenues. Any balance in Allowance for Doubtful Accounts is ignored.Method frequently referred to as the income statement approach.Allowance MethodLO 5Illustration: Gonzalez Company estimates that about 1% of net credit sales will become uncollectible. If net credit sales are R$800,000 for the year, it records bad debt expense as follows.Bad Debt Expense (1% x R$800,000) 8,000 Allowance for Doubtful Accounts 8,000ILLUSTRATION 7-8Percentage-of-Sales ApproachLO 5Percentage-of-Receivables Approach Not matching.Estimate of the receivables’ realizable value.Companies may apply this method using one composite rate, oran aging schedule using different rates.Allowance MethodLO 5Bad Debt Expense 37,650 Allowance for Doubtful Accounts 37,650What entry would Wilson make assuming that the allowance account had a zero balance?ILLUSTRATION 7-9Accounts Receivable Aging SchedulePercentage-of-Receivables ApproachLO 5Bad Debt Expense (€37,650 – €800) 36,850 Allowance for Doubtful Accounts 36,850What entry would Wilson make assuming the allowance account had a credit balance of €800 before adjustment?ILLUSTRATION 7-9Accounts Receivable Aging SchedulePercentage-of-Receivables ApproachLO 5Illustration: Sandel Company reports the following financial information before adjustments.Instructions: Prepare the journal entry to record bad debt expense assuming Sandel Company estimates bad debts at (a) 1% of net sales and (b) 5% of accounts receivable.Allowance MethodLO 5Bad Debt Expense 7,500 Allowance for Doubtful Accounts 7,500(€800,000 – €50,000) x 1% = €7,500Illustration: Sandel Company reports the following financial information before adjustments.Instructions: Prepare the journal entry assuming Sandel estimates bad debts at (b) 1% of net sales.Allowance MethodLO 5Instructions: Prepare the journal entry assuming Sandel estimates bad debts at (b) 5% of accounts receivable.Bad Debt Expense 6,000 Allowance for Doubtful Accounts 6,000(€160,000 x 5%) – €2,000) = €6,000Illustration: Sandel Company reports the following financial information before adjustments.Allowance MethodLO 5Illustration: The financial vice president of Brown Furniture authorizes a write-off of the £1,000 balance owed by Randall Co. on March 1. The entry to record the write-off is:Allowance for Doubtful Accounts 1,000 Accounts Receivable 1,000Assume that on July 1, Randall Co. pays the £1,000 amount that Brown had written off on March 1. These are the entries:Accounts Receivable 1,000 Allowance for Doubtful Accounts 1,000Cash 1,000 Accounts Receivable 1,000Write-Off of Uncollectible AccountsLO 5Companies assess their receivables for impairment each reporting period. Possible loss events are:Significant financial problems of the customer.Payment defaults.Renegotiation of terms of the receivable due to financial difficulty of the customer.Decrease in estimated future cash flows from a group of receivables since initial recognition, although the decrease cannot yet be identified with individual assets in the group.Impairment Evaluation ProcessLO 5A receivable is considered impaired when a loss event indicates a negative impact on the estimated future cash flows to be received from the customer. The IASB requires that the impairment assessment should be performed as follows.Receivables that are individually significant should be considered for impairment separately. Any receivable individually assessed that is not considered impaired should be included with a group of assets with similar credit-risk characteristics and collectively assessed for impairment.Any receivables not individually assessed should be collectively assessed for impairment.Impairment Evaluation ProcessLO 5Illustration: Hector Company has the following receivables classified into individually significant and all other receivables.Hector determines that Yaan’s receivable is impaired by €15,000, and Blanchard’s receivable is totally impaired. Both Randon’s and Fernando’s receivables are not considered impaired. Hector also determines that a composite rate of 2% is appropriate to measure impairment on all other receivables.Impairment Evaluation ProcessLO 5The total impairment is computed as follows.ILLUSTRATION 7-10Impairment Evaluation ProcessLO 5Identify items considered cash.Indicate how to report cash and related items.Define receivables and identify the different types of receivables.Explain accounting issues related to recognition of accounts receivable.Explain accounting issues related to valuation of accounts receivable.Explain accounting issues related to recognition of notes receivable.Explain accounting issues related to valuation of notes receivable.Understand special topics related to receivables.Describe how to report and analyze receivables.After studying this chapter, you should be able to:Cash and Receivables7LEARNING OBJECTIVESSupported by a formal promissory note.A negotiable instrument.Maker signs in favor of a Payee.Interest-bearing (has a stated rate of interest) ORZero-interest-bearing (interest included in face amount).NOTES RECEIVABLELO 6Generally originate from:Customers who need to extend payment period of an outstanding receivable. High-risk or new customers.Loans to employees and subsidiaries.Sales of property, plant, and equipment.Lending transactions (the majority of notes).NOTES RECEIVABLELO 6Short-TermLong-TermRecord at Face Value, less allowanceRecord at Present Value of cash expected to be collectedInterest RatesStated rate = Market rateStated rate > Market rateStated rate < Market rate Note Issued atFace ValuePremiumDiscount Recognition of Notes ReceivableLO 6Illustration: Bigelow Corp. lends Scandinavian Imports €10,000 in exchange for a €10,000, three-year note bearing interest at 10 percent annually. The market rate of interest for a note of similar risk is also 10 percent. How does Bigelow record the receipt of the note? Note Issued at Face Value01231,0001,000 Interest€1,000€10,000 Principal4i = 10%n = 3PV-OAILLUSTRATION 7-11Time Diagram for Note Issued at Face ValueLO 6€1,000 x 2.48685 = €2,487Interest ReceivedFactorPresent ValueNote Issued at Face ValuePV of InterestLO 6€10,000 x .75132 = €7,513PrincipalFactorPresent ValueNote Issued at Face ValuePV of PrincipalLO 6SummaryPresent value of interest € 2,487Present value of principal 7,513 Note current market value €10,000 Note Issued at Face ValueNotes Receivable 10,000 Cash 10,000Cash 1,000 Interest Revenue 1,000Jan. yr. 1 Dec. yr. 1 Journal EntriesLO 6Illustration: Jeremiah Company receives a three-year, $10,000 zero-interest-bearing note. The market rate of interest for a note of similar risk is 9 percent. How does Jeremiah record the receipt of the note? Zero-Interest-Bearing Notes0123 $0 $0 Interest$0$10,000 Principal4i = 9%n = 3PV-0AILLUSTRATION 7-13Time Diagram for Zero-Interest-Bearing NoteLO 6$10,000 x .77218 = $7,721.80PrincipalFactorPresent ValueZero-Interest-Bearing NotesPV of PrincipalLO 6Zero-Interest-Bearing NotesILLUSTRATION 7-14Discount Amortization Schedule—Effective-Interest MethodLO 6Zero-Interest-Bearing NotesILLUSTRATION 7-14Discount Amortization Schedule—Effective-Interest MethodPrepare the journal entry to record the receipt of the note.Notes Receivable 7,721.80 Cash 7,721.80LO 6Zero-Interest-Bearing NotesILLUSTRATION 7-14Discount Amortization Schedule—Effective-Interest MethodRecord interest revenue at the end of the first year.Notes Receivable 694.96 Interest Revenue ($7,721.80 x 9%) 694.96LO 6Illustration: Morgan Corp. makes a loan to Marie Co. and receives in exchange a three-year, €10,000 note bearing interest at 10 percent annually. The market rate of interest for a note of similar risk is 12 percent. Prepare the journal entry to record the receipt of the note? Interest-Bearing Notes01231,0001,000 Interest€1,000€10,000 Principal4i = 12%n = 3PV-0ALO 6€1,000 x 2.40183 = €2,402Interest ReceivedFactorPresent ValueInterest-Bearing NotesPV of InterestLO 6€10,000 x .71178 = €7,118PrincipalFactorPresent ValueInterest-Bearing NotesPV of PrincipalLO 6Illustration: Record the receipt of the note? Interest-Bearing NotesNotes Receivable 9,520 Cash 9,520ILLUSTRATION 7-16Computation of PresentValue—Effective RateDifferent from Stated RateLO 6Interest-Bearing NotesILLUSTRATION 7-17Discount Amortization Schedule—Effective-Interest MethodLO 6Interest-Bearing NotesILLUSTRATION 7-17Discount Amortization Schedule—Effective-Interest MethodRecord interest revenue at the end of the first year.Cash 1,000Notes Receivable 142 Interest Revenue 1,142LO 6Notes ReceivableNotes Received for Property, Goods, or ServicesIn a bargained transaction entered into at arm’s length, the stated interest rate is presumed to be fair unless:No interest rate is stated, orStated interest rate is unreasonable, orFace amount of the note is materially different from the current cash sales price or from the current market value of the debt instrument.LO 6Notes for Property, Goods, or ServicesIllustration: Oasis Development Co. sold a corner lot to Rusty Pelican as a restaurant site. Oasis accepted in exchange a five-year note having a maturity value of £35,247 and no stated interest rate. The land originally cost Oasis £14,000. At the date of sale the land had a fair market value of £20,000. Oasis uses the fair market value of the land, £20,000, as the present value of the note. Oasis therefore records the sale as:Notes Receivable 20,000 Land 14,000 Gain on Sale of Land (£20,000 - £14,000) 6,000LO 6Identify items considered cash.Indicate how to report cash and related items.Define receivables and identify the different types of receivables.Explain accounting issues related to recognition of accounts receivable.Explain accounting issues related to valuation of accounts receivable.Explain accounting issues related to recognition of notes receivable.Explain accounting issues related to valuation of notes receivable.Understand special topics related to receivables.Describe how to report and analyze receivables.After studying this chapter, you should be able to:Cash and Receivables7LEARNING OBJECTIVESShort-Term reporting parallels that for trade accounts receivable.Long-TermValue may change over time as a discount or premium is amortized.ImpairmentTests often done on an individual assessment basis. Losses measured as the difference between the carrying value of the receivable and the present value of the estimated future cash flows discounted at the original effective-interest rate.Valuation of Notes ReceivableLO 7Illustration: Tesco Inc. has a note receivable with a carrying amount of €200,000. The debtor, Morganese Company, has indicated that it is experiencing financial difficulty. Tesco decides that Morganese’s note receivable is therefore impaired. Tesco computes the present value of the future cash flows discounted at its original effective-interest rate to be €175,000. The computation of the loss on impairment is as follows.Valuation of Notes ReceivableLO 7The entry to record the impairment loss is as follows.The computation of the loss on impairment is as follows. Bad Debt Expense 25,000 Allowance for Doubtful Accounts 25,000Valuation of Notes ReceivableLO 7Identify items considered cash.Indicate how to report cash and related items.Define receivables and identify the different types of receivables.Explain accounting issues related to recognition of accounts receivable.Explain accounting issues related to valuation of accounts receivable.Explain accounting issues related to recognition of notes receivable.Explain accounting issues related to valuation of notes receivable.Understand special topics related to receivables.Describe how to report and analyze receivables.After studying this chapter, you should be able to:Cash and Receivables7LEARNING OBJECTIVESSPECIAL ISSUESCompanies have the option to record fair value in their accounts for most financial assets and liabilities, including receivables.If companies choose the fair value optionReceivables are recorded at fair value.Unrealized holding gains or losses reported as part of net income.Company reports the receivable at fair value each reporting date. Fair Value OptionLO 8Companies may elect to use the fair value option at the time the receivable is originally recognized or when some event triggers a new basis of accounting. Must continue to use fair value measurement for that receivable until the company no longer owns this receivable. If not elected at date of recognition, company may not use the fair value option on that specific receivable.Fair Value OptionSPECIAL ISSUESLO 8Recording Fair Value OptionIllustration: Escobar Company has notes receivable that have a fair value of R$810,000 and a carrying amount of R$620,000. Escobar decides on December 31, of the current year, to use the fair value option for these receivables. This is the first valuation of these recently acquired receivables. At December 31, Escobar makes an adjusting entry to record the increase in value of Notes Receivable and to record the unrealized holding gain, as follows.Notes Receivable 190,000 Unrealized Holding Gain or Loss—Income 190,000LO 8Transfer (e.g., sell) receivables to another company for cash.Reasons:Accelerate the receipt of cash.Competition.Sell receivables because money is tight.Billing / collection are time-consuming and costly.Transfer accomplished by:Secured borrowingSale of receivablesDerecognition of ReceivablesSPECIAL ISSUESLO 8Secured BorrowingIllustration: On March 1, 2015, Meng Mills, Inc. provides (assigns) NT$700,000 of its accounts receivable to Sino Bank as collateral for a NT$500,000 note. Meng Mills continues to collect the accounts receivable; the account debtors are not notified of the arrangement. Sino Bank assesses a finance charge of 1 percent of the accounts receivable and interest on the note of 12 percent. Meng Mills makes monthly payments to the bank for all cash it collects on the receivables. Using receivables as collateral in a borrowing transaction.Derecognition of ReceivablesLO 8Secured BorrowingILLUSTRATION 7-18Entries for Transfer ofReceivables—Secured BorrowingLO 8ILLUSTRATION 7-18Entries for Transfer of Receivables—Secured BorrowingLO 8Illustration: On April 1, 2015, Prince Company assigns $500,000 of itsaccounts receivable to the Hibernia Bank as collateral for a $300,000 loan due July 1, 2015. The assignment agreement calls for Prince Company to continue to collect the receivables. Hibernia Bank assesses a finance charge of 2% of the accounts receivable, and interest on the loan is 10% (a realistic rate of interest for a note of this type).Secured BorrowingInstructions:Prepare the April 1, 2015, journal entry for Prince Company.Prepare the journal entry for Prince’s collection of $350,000 of the accounts receivable during the period from April 1, 2015, through June 30, 2015.On July 1, 2015, Prince paid Hibernia all that was due from the loan it secured on April 1, 2015. LO 8Instructions:Prepare the April 1, 2015, journal entry for Prince Company.Prepare the journal entry for Prince’s collection of $350,000.On July 1, 2015, Prince paid Hibernia all that was due from the loan it secured on April 1, 2015. Secured BorrowingCash 290,000Finance Charge ($500,000 x 2%) 10,000 Notes Payable 300,000a)Cash 350,000 Accounts Receivable 350,000b)Notes Payable 300,000Interest Expense (10% x $300,000 x 3/12) 7,500 Cash 307,500c)LO 8Factors are finance companies or banks that buy receivables from businesses for a fee.Sales of ReceivablesILLUSTRATION 7-19Basic Procedures inFactoringSale without GuaranteePurchaser assumes risk of collection. Transfer is outright sale of receivable.Seller records loss on sale.Seller uses a Due from Factor (receivable) account to cover discounts, returns, and allowances.Sales of ReceivablesLO 8Sale without GuaranteeIllustration: Crest Textiles, Inc. factors €500,000 of accounts receivable with Commercial Factors, Inc., on a non-guarantee basis. Commercial Factors assesses a finance charge of 3 percent of the amount of accounts receivable and retains an amount equal to 5 percent of the accounts receivable (for probable adjustments). Crest Textiles and Commercial Factors make the following journal entries for the receivables transferred without guarantee.ILLUSTRATION 7-20Entries for Sale of Receivables without GuaranteeLO 8Sale with GuaranteeSeller guarantees payment to purchaser. Transfer is considered a borrowing—sometimes referred to as a failed sale.Assume Crest Textiles sold the receivables on a with guarantee basis. Sales of ReceivablesILLUSTRATION 7-21Sale with GuaranteeLO 8Summary of TransfersILLUSTRATION 7-22Accounting for Transfersof ReceivablesLO 8Identify items considered cash.Indicate how to report cash and related items.Define receivables and identify the different types of receivables.Explain accounting issues related to recognition of accounts receivable.Explain accounting issues related to valuation of accounts receivable.Explain accounting issues related to recognition of notes receivable.Explain accounting issues related to valuation of notes receivable.Understand special topics related to receivables.Describe how to report and analyze receivables.After studying this chapter, you should be able to:Cash and Receivables7LEARNING OBJECTIVESGeneral rules in classifying receivables are:Segregate and report carrying amounts of different categories of receivables. Indicate receivables classified as current and non-current in the statement of financial position.Appropriately offset the valuation accounts for receivables that are impaired, including a discussion of individual and collectively determined impairments.Disclose the fair value of receivables in such a way that permits it to be compared with its carrying amount.Disclose information to assess the credit risk inherent in the receivables.Disclose any receivables pledged as collateral.Disclose all significant concentrations of credit risk arising from receivables.Presentation and AnalysisLO 9Analysis of ReceivablesThis Ratio used to:Assess the liquidity of the receivables.Measure the number of times, on average, a company collects receivables during the period.Presentation and AnalysisILLUSTRATION 7-24Computation of AccountsReceivable TurnoverLO 9CASH AND RECEIVABLESIFRS and U.S. GAAP are very similar in accounting for cash and receivables. For example, the definition of cash and cash equivalents is similar, and both IFRS and U.S. GAAP have a fair value option. In the wake of the international credit crisis, the Boards are working together to improve the accounting for loan impairments.GLOBAL ACCOUNTING INSIGHTSRelevant FactsFollowing are the key similarities and differences between U.S. GAAP and IFRS related to cash and receivables. SimilaritiesThe accounting and reporting related to cash is essentially the same under both U.S. GAAP and IFRS. In addition, the definition used for cash equivalents is the same. Cash and receivables are generally reported in the current assets section of the balance sheet under U.S. GAAP, similar to IFRS. U.S. GAAP requires that loans and receivables be accounted for at amortized cost, adjusted for allowances for doubtful accounts, similar to IFRS.GLOBAL ACCOUNTING INSIGHTSRelevant FactsDifferencesUnder U.S. GAAP, cash and receivables are reported in order of liquidity. Under IFRS, companies may report cash and receivables as the last items in current assets. U.S. GAAP has explicit guidance concerning how receivables with different characteristics should be reported separately. There is no IFRS that mandates this segregation. The fair value option is similar under U.S. GAAP and IFRS but not identical. The international standard related to the fair value option is subject to certain qualifying criteria not in the U.S. standard. In addition, there is some difference in the financial instruments covered.GLOBAL ACCOUNTING INSIGHTSRelevant FactsDifferencesUnder U.S. GAAP, overdrafts are reported as liabilities. Under IFRS, bank overdrafts are generally reported as cash if such overdrafts are repayable upon demand and are an integral part of a company’s cash management (offsetting arrangements against other accounts at the same bank). U.S. GAAP and IFRS differ in the criteria used to account for transfers of receivables. U.S. GAAP uses loss of control as the primary criterion. IFRS is a combination of an approach focused on risks and rewards and loss of control. In addition, U.S. GAAP does not permit partial transfers; IFRS generally does.GLOBAL ACCOUNTING INSIGHTSAbout the NumbersIn the accounting for loans and receivables, IFRS permits the reversal of impairment losses, with the reversal limited to the asset’s amortized cost before the impairment. To illustrate, Zirbel Company has a loan receivable with a carrying value of $10,000 at December 31, 2014. On January 2, 2015, the borrower declares bankruptcy, and Zirbel estimates that it will collect only one-half of the loan balance. Zirbel makes the following entry to record the impairment. Impairment Loss 5,000 Loan Receivable 5,000GLOBAL ACCOUNTING INSIGHTSAbout the NumbersOn January 10, 2016, Zirbel learns that the customer has emerged from bankruptcy. Zirbel now estimates that all but $1,000 will be repaid on the loan. Under IFRS, Zirbel records this reversal as follows. Loan Receivable 4,000 Recovery of Impairment Loss 4,000Zirbel reports the recovery in 2016 income. Under U.S. GAAP, reversal of an impairment is not permitted. Rather, the balance on the loan after the impairment becomes the new basis for the loan.GLOBAL ACCOUNTING INSIGHTSOn the HorizonBoth the IASB and the FASB have indicated that they believe that financial statements would be more transparent and understandable if companies recorded and reported all financial instruments at fair value. The fair value option for recording financial instruments such as receivables is an important step in moving closer to fair value recording. Finally, the IASB is working on a new impairment model, which will be more forward-looking when evaluating financial instruments for impairment. The FASB is working on a similar impairment model. The final standards adopted, however, may not be fully converged in terms of the implementation details.GLOBAL ACCOUNTING INSIGHTSManagement faces two problems in accounting for cash transactions: Establish proper controls to prevent any unauthorized transactions by officers or employees. Provide information necessary to properly manage cash on hand and cash transactions.LO 10 Explain common techniques employed to control cash.APPENDIX 7ACASH CONTROLSTo obtain desired control objectives, a company can vary the number and location of banks and the types of accounts.General checking accountCollection float Lockbox accountsImprest bank accountsUSING BANK ACCOUNTSLO 10Used to pay small amounts for miscellaneous expenses.Steps:Record the transfer of $300 to petty cash:Petty Cash 300 Cash 300Petty cash custodian obtains signed receipts from each individual to whom he or she pays cash.THE IMPREST PETTY CASH SYSTEMLO 10Steps:Supplies Expense 42Postage Expense 53Miscellaneous Expense 76Cash Over and Short 2 Cash 173Custodian receives a company check to replenish the fund.THE IMPREST PETTY CASH SYSTEMLO 10Steps:Cash 50 Petty cash 50If the company decides that the amount of cash in the petty cash fund is excessive by $50, it lowers the fund balance as follows.THE IMPREST PETTY CASH SYSTEMLO 10Company shouldMinimize the cash on hand.Only have on hand petty cash and current day’s receipts.Keep funds in a vault, safe, or locked cash drawer. Transmit each day’s receipts to the bank as soon as practicable.Periodically prove the balance shown in the general ledger.PHYSICAL PROTECTION OF CASH BALANCESLO 10Schedule explaining any differences between the bank’s and the company’s records of cash.Reconciling Items:Deposits in transit.Outstanding checks.Bank chargesBank credits.Bank or depositor errors.Time LagsRECONCILIATION OF BANK BALANCESLO 10ILLUSTRATION 7A-1Bank Reconciliation Form and ContentRECONCILIATION OF BANK BALANCESLO 10RECONCILIATION OF BANK BALANCESTo illustrate, Nugget Mining Company’s books show a cash balance at the Melbourne Bank on November 30, 2015, of $20,502. The bank statement covering the month of November shows an ending balance of $22,190. An examination of Nugget’s accounting records and November bank statement identified the following reconciling items.A deposit of $3,680 that Nugget mailed November 30 does not appear on the bank statement.Checks written in November but not charged to the November bank statement are: Check #7327 $ 150 #7348 4,820 #7349 31Nugget has not yet recorded the $600 of interest collected by the bank November 20 on Sequoia Co. bonds held by the bank for Nugget.Bank service charges of $18 are not yet recorded on Nugget’s books.The bank returned one of Nugget’s customer’s checks for $220 with the bank statement, marked “NSF.” The bank deducted $220 from Nugget’s account.Nugget discovered that it incorrectly recorded check #7322, written in November for $131 in payment of an account payable, as $311.A check for Nugent Oil Co. in the amount of $175 that the bank incorrectly charged to Nugget accompanied the statement.LO 10ILLUSTRATION 7A-2Sample Bank ReconciliationRECONCILIATION OF BANK BALANCESLO 10Cash 600 Interest Revenue 600(To record interest on Sequoia Co. bonds, collected by bank)Cash 180 Accounts Payable 180(To correct error in recording amount of check #7322)Office Expense (bank charges) 18 Cash 18(To record bank service charges for November)Accounts Receivable 220 Cash 220(To record customer’s check returned NSF)Journalize the required adjusting entries at November 30.RECONCILIATION OF BANK BALANCESLO 10The reconciling item in a bank reconciliation that will result in an adjusting entry by the depositor is:outstanding checks.deposit in transit.a bank error.bank service charges.QuestionRECONCILIATION OF BANK BALANCESLO 10LO 11 Describe the accounting for a loan impairment.Companies assess their receivables for impairment each reporting period. Examples of possible loss events are:Significant financial problems of the customer.Payment defaults.Renegotiation of terms of the receivable. In this appendix, we discuss impairments based on the individual assessment approach for long-term receivables.APPENDIX 7BIMPAIRMENTS OF RECEIVABLESImpairment loss is calculated as the difference between:the carrying amount (generally the principal plus accrued interest) andthe expected future cash flows discounted at the loan’s historical effective-interest rate.In estimating future cash flows, the creditor should use reasonable and supportable assumptions and projections.IMPAIREMENT MEASUREMENT AND REPORTINGLO 11Illustration: At December 31, 2014, Ogden Bank recorded an investment of €100,000 in a loan to Carl King. The loan has an historical effective-interest rate of 10 percent, the principal is due in full at maturity in three years, and interest is due annually. The loan officer performs a review of the loan’s expected future cash flow and utilizes the present value method for measuring the required impairment loss. ILLUSTRATION 7B-1Impaired Loan Cash FlowsImpairment Loss ExampleLO 11Illustration: Computation of Impairment LossJournal entry to record the lossBad Debt Expense 12,434 Allowance for Doubtful Accounts 12,434Recording Impairment LossesILLUSTRATION 7B-2Computation ofImpairment LossLO 11Illustration: Assume that in the year following the impairment recorded by Ogden, Carl King has worked his way out of financial difficulty. Ogden now expects to receive all payments on the loan according to the original loan terms. Based on this new information, the present value of the expected payments is €100,000. Thus, Ogden makes the following entry to reverse the previously recorded impairment.Allowance for Doubtful Accounts 12,434 Bad Debt Expense 12,434Recovery of Impairment LossLO 11Copyright © 2014 John Wiley & Sons, Inc. 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