Kế toán, kiểm toán - Chương 07: Cash and receivables

C H A P T E R 7CASH AND RECEIVABLESIntermediate Accounting13th EditionKieso, Weygandt, and Warfield Identify 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.Explain accounting issues related to disposition of accounts and notes receivable.Describe how to report and analyze receivables.Learning ObjectivesWhat is cash?Reporting cashSummary of cash-related itemsCashReceivablesRecognition of accounts receivableValuation of accounts receivableRecognition of notes receivableValuation of notes receivableDisposition of accounts and notes receivablePresentation and analysisCash and ReceivablesMost liquid assetStandard medium of exchange Basis for measuring and accounting for all itemsCurrent assetExamples: coin, currency, available funds on deposit at the bank, money orders, certified checks, cashier’s checks, personal checks, bank drafts and savings accounts.What is Cash?LO 1 Identify items considered cash.CashShort-term, highly liquid investments that are bothReporting CashLO 2 Indicate how to report cash and related items.Cash Equivalentsreadily convertible to cash, and so near their maturity that they present insignificant risk of changes in interest rates.Examples: Treasury bills, Commercial paper, and Money market funds.Companies segregate restricted cash from “regular” cash for reporting purposes.Examples, restricted for: (1) plant expansion, (2) retirement of long-term debt, and (3) compensating balances.Reporting CashLO 2 Indicate how to report cash and related items.Restricted CashIllustration 7-1When a company writes a check for more than the amount in its cash account.Reporting CashLO 2 Indicate how to report cash and related items.Bank OverdraftsGenerally reported as a current liability.Offset against cash account only when available cash is present in another account in the same bank on which the overdraft occurred.Summary of Cash-Related ItemsLO 2 Indicate how to report cash and related items.Illustration 7-2ReceivablesLO 3 Define receivables and identify the different types of receivables.Written promises to pay a sum of money on a specified future date.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 ReceivableNontrade ReceivablesAdvances to officers and employees.Advances to subsidiaries.Deposits to cover potential damages or losses.Deposits 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.).ReceivablesLO 3 Define receivables and identify the different types of receivables.Nontrade ReceivablesReceivablesLO 3 Define receivables and identify the different types of receivables.Illustration 7-3Recognition of Accounts ReceivablesLO 4 Explain accounting issues related to recognition of accounts receivable.Trade DiscountsReductions from the list priceNot recognized in the accounting recordsCustomers are billed net of discounts10 % Discount for new Retail Store CustomersRecognition of Accounts ReceivablesLO 4 Explain accounting issues related to recognition of accounts receivable.Cash DiscountsInducements for prompt paymentGross Method vs. Net MethodPayment terms are 2/10, n/30Recognition of Accounts ReceivablesLO 4 Explain accounting issues related to recognition of accounts receivable.Cash Discounts (Sales Discounts)Illustration 7-4E7-5: 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. 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 2,000Accounts receivable 2,000June 3Recognition of Accounts ReceivablesLO 4 Explain accounting issues related to recognition of accounts receivable.Cash ($2,000 x 98%) 1,960Sales discounts 40 Accounts receivable 2,000June 12E7-5: 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. 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 1,960Accounts receivable 1,960June 3Recognition of Accounts ReceivablesLO 4 Explain accounting issues related to recognition of accounts receivable.Cash ($2,000 x 98%) 1,960 Accounts receivable 1,960June 12E7-5: 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 1,960Accounts receivable 1,960June 3Recognition of Accounts ReceivablesLO 4 Explain accounting issues related to recognition of accounts receivable.Cash 2,000 Accounts receivable 1,960 Sales Discounts Forfeited 40June 12A company should measure receivables in terms of their present value.The profession specifically excludes from present value considerations “receivables arising from transactions with customers in the normal courseof business which are due in customary trade terms not exceeding approximately one year.” Nonrecognition of Interest ElementLO 4 Explain accounting issues related to recognition of accounts receivable.Recognition of Accounts ReceivablesHow are these accounts presented on the Balance Sheet?Accounts ReceivableAllowance for Doubtful AccountsBeg. 500 25 Beg. End. 500 25 End. Accounting for Accounts ReceivableLO 4 Explain accounting issues related to recognition of accounts receivable.LO 4 Explain accounting issues related to recognition of accounts receivable.Accounting for Accounts ReceivableLO 4 Explain accounting issues related to recognition of accounts receivable.Accounting for Accounts ReceivableJournal entry for credit sale of $100? Accounts receivable 100 Sales 100Accounts ReceivableAllowance for Doubtful AccountsBeg. 500 25 Beg. End. 500 25 End. Accounting for Accounts ReceivableLO 4 Explain accounting issues related to recognition of accounts receivable.Journal entry for credit sale of $100? Accounts receivable 100 Sales 100Accounts ReceivableAllowance for Doubtful AccountsBeg. 500 25 Beg. End. 600 25 End. Sale 100Accounting for Accounts ReceivableLO 4 Explain accounting issues related to recognition of accounts receivable.Collected of $333 on account? Cash 333 Accounts receivable 333Accounts ReceivableAllowance for Doubtful AccountsBeg. 500 25 Beg. End. 600 25 End. Sale 100Accounting for Accounts ReceivableLO 4 Explain accounting issues related to recognition of accounts receivable.Collected of $333 on account? Cash 333 Accounts receivable 333Accounts ReceivableAllowance for Doubtful AccountsBeg. 500 25 Beg. End. 267 25 End. Sale 100333 Coll. Accounting for Accounts ReceivableLO 4 Explain accounting issues related to recognition of accounts receivable.Adjustment of $15 for estimated Bad-Debts? Bad debt expense 15 Allowance for Doubtful Accounts 15Accounts ReceivableAllowance for Doubtful AccountsBeg. 500 25 Beg. End. 267 25 End. Sale 100333 Coll. Accounting for Accounts ReceivableLO 4 Explain accounting issues related to recognition of accounts receivable.Adjustment of $15 for estimated Bad-Debts? Bad debt expense 15 Allowance for Doubtful Accounts 15Accounts ReceivableAllowance for Doubtful AccountsBeg. 500 25 Beg. End. 267 40 End. Sale 100333 Coll. 15 Est. Accounting for Accounts ReceivableLO 4 Explain accounting issues related to recognition of accounts receivable.Write-off of uncollectible accounts for $10? Allowance for Doubtful accounts 10 Accounts receivable 10Accounts ReceivableAllowance for Doubtful AccountsBeg. 500 25 Beg. End. 267 40 End. Sale 100333 Coll. 15 Est. Accounting for Accounts ReceivableLO 4 Explain accounting issues related to recognition of accounts receivable.Write-off of uncollectible accounts for $10? Allowance for Doubtful accounts 10 Accounts receivable 10Accounts ReceivableAllowance for Doubtful AccountsBeg. 500 25 Beg. End. 257 30 End. Sale 100333 Coll. 15 Est. W/O 10 10 W/O Accounting for Accounts ReceivableLO 4 Explain accounting issues related to recognition of accounts receivable.LO 4 Explain accounting issues related to recognition of accounts receivable.Accounting for Accounts ReceivableValuation of Accounts ReceivableLO 5 Explain accounting issues related to valuation of accounts receivable.Reporting ReceivablesClassificationValuation (net realizable value)Uncollectible Accounts ReceivableSales on account raise the possibility of accounts not being collected. LO 5 Explain accounting issues related to valuation of accounts receivable.Valuation of Accounts ReceivableAn uncollectible account receivable is a loss of revenue that requires, through proper entry in the accounts, a decrease in the asset accounts receivable and a related decrease in income and stockholders’ equity.Uncollectible Accounts ReceivableLO 5 Explain accounting issues related to valuation of accounts receivable.Allowance MethodLosses are Estimated:Percentage-of-salesPercentage-of-receivablesGAAPMethods of Accounting for Uncollectible AccountsDirect Write-OffTheoretically undesirable:No matchingReceivable not stated at net realizable valueNot GAAPValuation of Accounts ReceivableUncollectible Accounts ReceivableLO 5 Explain accounting issues related to valuation of accounts receivable.Income Statement ApproachBalance Sheet ApproachUncollectible Accounts ReceivableLO 5 Explain accounting issues related to valuation of accounts receivable.Percentage-of-Sales Approach - matches costs with revenues because it relates the charge to the period in which a company records the sale. Appropriate if there is a fairly stable relationship between previous years’ credit sales and bad debts.Uncollectible Accounts ReceivableLO 5 Explain accounting issues related to valuation of accounts receivable.Illustration: Chad Shumway Corp. estimates from past experience that about 2 percent of credit sales become uncollectible. If Chad Shumway has credit sales of $400,000 in 2010, it records bad debt expense as follows.Bad Debt Expense 8,000 Allowance for Doubtful Accounts 8,000Percentage-of-Sales ApproachUncollectible Accounts ReceivableLO 5 Explain accounting issues related to valuation of accounts receivable.Percentage-of-Receivables Approach not matching.reports receivables at net realizable value.Companies may apply this method using one composite rate, oran aging schedule of accounts receivable.Uncollectible Accounts ReceivableLO 5 Explain accounting issues related to valuation of accounts receivable.Bad Debt Expense 37,650 Allowance for Doubtful Accounts 37,650What entry would Wilson make assuming that no balanceexisted in the allowance account?Uncollectible Accounts ReceivableLO 5 Explain accounting issues related to valuation of accounts receivable.Bad 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?Uncollectible Accounts ReceivableLO 5 Explain accounting issues related to valuation of accounts receivable.E7-7 (Recording Bad Debts) 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.Uncollectible Accounts ReceivableLO 5E7-7 (Recording Bad Debts) Sandel Company reports the following financial information before adjustments.Instructions: Prepare the journal entry assuming Sandel estimates bad debts at (a) 1% of net sales.Bad Debt Expense 7,500 Allowance for Doubtful Accounts 7,500($800,000 – $50,000) x 1% = $7,500LO 5Uncollectible Accounts ReceivableLO 5E7-7 (Recording Bad Debts) Sandel Company reports the following financial information before adjustments.Instructions: 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) = $6,000LO 5Percentage of Sales approach:SummaryBad debt expense estimate is related to a nominal account (Sales), any balance in the allowance account is ignored. Achieves a proper matching of cost and revenues.Uncollectible Accounts ReceivablePercentage of Receivables approach:Results in a more accurate valuation of receivables on the balance sheet. Method may also be applied using an aging schedule. LO 5 Explain accounting issues related to valuation of accounts receivable.Supported by a formal promissory note.Recognition of Notes ReceivableLO 6 Explain accounting issues related to recognition of notes receivable.Notes ReceivableA negotiable instrumentMaker signs in favor of a PayeeInterest-bearing (has a stated rate of interest) ORZero-interest-bearing (interest included in face amount)Recognition of Notes ReceivableLO 6 Explain accounting issues related to recognition of notes receivable.Generally originate from:Customers who need to extend payment period of an outstanding receivable High-risk or new customersLoans to employees and subsidiariesSales of property, plant, and equipmentLending transactions (the majority of notes)LO 6 Explain accounting issues related to recognition of notes receivable.Recognition of Notes ReceivableShort-TermLong-TermRecord at Face Value,less allowanceRecord at Present Valueof cash expected to be collectedInterest RatesStated rate = Market rateStated rate > Market rateStated rate < Market rate Note Issued atFace ValuePremiumDiscount Illustration: 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 ValueLO 6 Explain accounting issues related to recognition of notes receivable.01231,0001,000 Interest$1,000$10,000 Principal4i = 10%n = 3$1,000 x 2.48685 = $2,487Interest ReceivedFactorPresent ValueNote Issued at Face ValuePV of InterestLO 6 Explain accounting issues related to recognition of notes receivable.$10,000 x .75132 = $7,513PrincipalFactorPresent ValueNote Issued at Face ValuePV of PrincipalLO 6 Explain accounting issues related to recognition of notes receivable.SummaryPresent value of interest $ 2,487Present value of principal 7,513 Note current market value $10,000 Note Issued at Face ValueLO 6 Explain accounting issues related to recognition of notes receivable.Notes receivable 10,000 Cash 10,000Cash 1,000 Interest revenue 1,000Illustration: 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 NoteLO 6 Explain accounting issues related to recognition of notes receivable.0133 $0 $0 Interest$0$10,000 Principal4i = 9%n = 3$10,000 x .77218 = $7,721.80PrincipalFactorPresent ValueZero-Interest-Bearing NotePV of PrincipalLO 6 Explain accounting issues related to recognition of notes receivable.LO 6 Explain accounting issues related to recognition of notes receivable.Zero-Interest-Bearing NoteIllustration 7-11Journal Entries for Zero-Interest-Bearing notePresent value of Principal $7,721.80 LO 6 Explain accounting issues related to recognition of notes receivable.Zero-Interest-Bearing NoteIllustration: 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. How does Morgan record the receipt of the note? Interest-Bearing NoteLO 6 Explain accounting issues related to recognition of notes receivable.01231,0001,000 Interest$1,000$10,000 Principal4i = 12%n = 3$1,000 x 2.40183 = $2,402Interest ReceivedFactorPresent ValueInterest-Bearing NotePV of InterestLO 6 Explain accounting issues related to recognition of notes receivable.$10,000 x .71178 = $7,118PrincipalFactorPresent ValueInterest-Bearing NotePV of PrincipalLO 6 Explain accounting issues related to recognition of notes receivable.Illustration: How does Morgan record the receipt of the note? Interest-Bearing NoteLO 6 Explain accounting issues related to recognition of notes receivable.Illustration 7-13Notes Receivable 10,000 Discount on Notes Receivable 480 Cash 9,520LO 6 Explain accounting issues related to recognition of notes receivable.Interest-Bearing NoteIllustration 7-14Journal Entries for Interest-Bearing NoteLO 6 Explain accounting issues related to recognition of notes receivable.Interest-Bearing NoteCash 1,000Discount on notes receivable 142 Interest revenue 1,142Recognition of Notes ReceivableNotes Received for Property, Goods, or ServicesLO 6 Explain accounting issues related to recognition of notes receivable.In 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.Recognition of Notes ReceivableLO 6 Explain accounting issues related to recognition of notes receivable.Illustration: 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 35,247 Discount on Notes Receivable 15,247 Land 14,000 Gain on Sale of Land 6,000($35,247 - $20,000) = $15,247Valuation of Notes ReceivableLO 7 Explain accounting issues related to valuation of notes receivable.Short-Term reported at Net Realizable Value (same as accounting for accounts receivable).Long-Term - FASB requires companies disclose not only their cost but also their fair value in the notes to the financial statements.Fair Value Option. Companies have the option to use fair value as the basis of measurement in the financial statements.Valuation of Notes ReceivableLO 7 Explain accounting issues related to valuation of notes receivable.Illustration (recording fair value option): Assume that Escobar Company has notes receivable that have a fair value of $810,000 and a carrying amount of $620,000. Escobar decides on December 31, 2010, to use the fair value option for these receivables. This is the first valuation of these recently acquired receivables. At December 31, 2010, 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 190,000Disposition of Accounts and Notes ReceivableLO 8 Explain accounting issues related to disposition of accounts and notes receivable.Owner may transfer accounts or notes receivables to another company for cash.Reasons:Competition.Sell receivables because money is tight.Billing / collection are time-consuming and costly.Transfer accomplished by:Secured borrowingSale of receivablesDisposition of Accounts and Notes ReceivableLO 8 Explain accounting issues related to disposition of accounts and notes receivable.Secured BorrowingIllustration: March 1, 2010, Howat Mills, Inc. provides (assigns) $700,000 of its accounts receivable to Citizens Bank as collateral for a $500,000 note. Howat Mills continues to collect the accounts receivable; the account debtors are not notified of the arrangement. Citizens Bank assesses a finance charge of 1 percent of the accounts receivable and interest on the note of 12 percent. Howat Mills makes monthly payments to the bank for all cash it collects on the receivables. See Illustration 7-15.LO 8 Explain accounting issues related to disposition of accounts and notes receivable.Illustration 7-15Secured Borrowing - IllustrationE7-13: On April 1, 2010, Prince Company assigns $500,000 of itsaccounts receivable to the Third National Bank as collateral for a $300,000 loan due July 1, 2010. The assignment agreement calls for Prince Company to continue to collect the receivables. Third National 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 Borrowing - ExerciseLO 8 Explain accounting issues related to disposition of accounts and notes receivable.Instructions:Prepare the April 1, 2010, 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, 2010, through June 30, 2010.On July 1, 2010, Prince paid Third National all that was due from the loan it secured on April 1, 2010. Exercise 7-13 continuedSecured Borrowing - ExerciseLO 8 Explain accounting issues related to disposition of accounts and notes receivable.Factors are finance companies or banks that buy receivables from businesses for a fee.Sales of ReceivablesIllustration 7-16LO 8 Explain accounting issues related to disposition of accounts and notes receivable.Sale Without RecoursePurchaser assumes risk of collection Transfer is outright sale of receivableSeller records loss on saleSeller use Due from Factor (receivable) account to cover discounts, returns, and allowancesSales of ReceivablesSale With RecourseSeller guarantees payment to purchaser Financial components approach used to record transferLO 8 Explain accounting issues related to disposition of accounts and notes receivable.Sales of ReceivablesLO 8 Explain accounting issues related to disposition of accounts and notes receivable.Illustration: Crest Textiles, Inc. factors $500,000 of accounts receivable with Commercial Factors, Inc., on a without recourse 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 recourse.Illustration 7-17Illustration: Assume Crest Textiles sold the receivables on a with recourse basis. Crest Textiles determines that this recourse obligation has a fair value of $6,000. To determine the loss on the sale of the receivables, Crest Textiles computesthe net proceeds from the sale as follows.Sales of ReceivablesLO 8 Explain accounting issues related to disposition of accounts and notes receivable.Illustration 7-19Loss on Sale ComputationIllustration 7-18Net ProceedsComputationIllustration: Prepare the journal entries for both Crest Textiles and Commercial Factors for the receivables sold with recourse.Sales of ReceivablesLO 8 Explain accounting issues related to disposition of accounts and notes receivable.Cash 460,000 Due from Factor 25,000 Loss on Sale of Receivables 21,000 Accounts (Notes) Receivable 500,000 Recourse Liability 6,000Accounts Receivable 500,000 Due to Crest Textiles 25,000 Financing Revenue 15,000 Cash 460,000Commercial Factors, Inc.Crest Textiles, Inc.The FASB concluded that a sale occurs only if the seller surrenders control of the receivables to the buyer. Three conditions must be met.Secured Borrowing versus SaleIllustration 7-21LO 8 Explain accounting issues related to disposition of accounts and notes receivable.General rule in classifying receivables are:Segregate the different types of receivables that a company possesses, if material.Appropriately offset the valuation accounts against the proper receivable accounts.Determine that receivables classified in the current assets section will be converted into cash within the year or the operating cycle, whichever is longer.Disclose any loss contingencies that exist on the receivables.Disclose any receivables designated or pledged as collateral.Disclose all significant concentrations of credit risk arising from receivables.Presentation and AnalysisLO 9 Describe how to report and analyze receivables.Analysis of ReceivablesPresentation and AnalysisThis Ratio used to:Assess the liquidity of the receivables.Measure the number of times, on average, a company collects receivables during the period.Illustration 7-23LO 9 Describe how to report and analyze receivables.The accounting and reporting related to cash is essentially the same under both iGAAP and U.S. GAAP.The basic accounting and reporting issues related to recognition and measurement of receivables are essentially the same between iGAAP and U.S. GAAP.Although iGAAP implies that receivables with different characteristics should be reported separately, there is no standard that mandates this segregation.The FASB, the IASB have adopted a piecemeal approach in which disclosure of fair value information in the notes is the first step. The second step is the fair value option.iGAAP and U.S. GAAP standards on the fair value option are similar but not identical.iGAAP and U.S. GAAP differ in the criteria used to derecognize a receivable.LO 10 Explain common techniques employed to control cash.Management faces two problems in accounting for cash transactions: establish proper controls to prevent any unauthorized transactions by officers or employees, and provide information necessary to properly manage cash on hand and cash transactions.LO 10 Explain common techniques employed to control cash.To 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 10 Explain common techniques employed to control cash.To pay small amounts for miscellaneous expenses.The Imprest Petty Cash SystemSteps:Record $300 transfer of funds to petty cash:Petty Cash 300 Cash 300The petty cash custodian obtains signed receipts from each individual to whom he or she pays cashSteps:LO 10 Explain common techniques employed to control cash.The Imprest Petty Cash SystemOffice Supplies Expense 42Postage Expense 53Entertainment Expense 76Cash Over and Short 2 Cash 173Custodian receives a company check to replenish the fund.Steps:LO 10 Explain common techniques employed to control cash.The Imprest Petty Cash SystemCash 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.LO 10 Explain common techniques employed to control cash.Physical Protection of Cash BalancesCompany shouldMinimize the cash on hand.Only have on hand petty cash and current day’s receiptsKeep funds in a vault, safe, or locked cash drawer. Transmit each day’s receipts to the bank as soon as practicable.Periodically prove (reconcile) the balance shown in the general ledger.LO 10 Explain common techniques employed to control cash.Reconciliation of Bank BalancesSchedule explaining any differences between the bank’s and the company’s records of cash.Reconciling Items:Deposits in transit.Outstanding checks.Bank charges and credits.Bank or Depositor errors.Time LagsLO 10 Explain common techniques employed to control cash.Reconciliation of Bank BalancesIllustration 7A-1Bank Reconciliation Formand ContentLO 10 Explain common techniques employed to control cash.Reconciliation of Bank BalancesLO 10 Explain common techniques employed to control cash.Illustration 7A-2Cash 542Nov. 30Office expense 18Accounts receivable 220Accounts payable 180Interest revenue 600Illustration: Journalize the adjusting entries at November 30 on the books of Nugget Mining Company.LO 10 Explain common techniques employed to control cash.The reconciling item in a bank reconciliation that will result in an adjusting entry by the depositor is:a. outstanding checks.b. deposit in transit.c. a bank error.d. bank service charges.Review QuestionLO 10 Explain common techniques employed to control cash.LO 11 Describe the accounting for a loan impairment.Companies evaluate their receivables to determine their ultimate collectibility. Allowance method is appropriate when:probable that an asset has been impaired and amount of the loss can be reasonably estimated.Long-term receivables such as loans that are identified as impaired, companies perform an additional impairment evaluation.LO 11 Describe the accounting for a loan impairment.Background - Example: Subprime loan crisis.From 2000 to 2005 home prices appreciated at rapid rate. Low interest rates also encouraged speculation, as many believed that home prices would continue to increase. Speculators intended to sell the house in a short period.Many adjustable-rate debt with short-term low teaser rates that would adjust to higher market rates after two or three years. Many lending institutions gave loans to individuals whose financial condition would make it difficult for them to make the payments over the life of the loan. These loans, often referred to as subprime loans.LO 11 Describe the accounting for a loan impairment.Background - Example: Subprime loan crisis.Subprime lending was a little over $50 billion in 2000 and had increased almost ten times by 2005.Illustration 7B-1LO 11 Describe the accounting for a loan impairment.Background - Example: Subprime loan crisis.Beyond the subprime loans was the practice of securitization.Illustration 7B-2LO 11 Describe the accounting for a loan impairment.Impairment Measurement and ReportingImpairment loss is calculated as the difference between the investment in the loan (generally the principal plus accrued interest) and the expected future cash flows discounted at the loan’s historical effective interest rate.LO 11 Describe the accounting for a loan impairment.Illustration: At December 31, 2009, 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-3LO 11 Describe the accounting for a loan impairment.Illustration: Computation of Impairment LossIllustration 7B-4Recording Impairment LossesBad Debt Expense 12,437 Allowance for Doubtful Accounts 12,437Copyright © 2009 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.Copyright