CH 07
CH 07
CH 07
7-1
CHAPTER 7
Intermediate Accounting
13th Edition
Kieso, Weygandt, and Warfield
Chapter
7-2
Learning
Learning Objectives
Objectives
1. Identify items considered cash.
2. Indicate how to report cash and related items.
3. Define receivables and identify the different types of receivables.
4. Explain accounting issues related to recognition of accounts
receivable.
5. Explain accounting issues related to valuation of accounts
receivable.
6. Explain accounting issues related to recognition of notes receivable.
7. Explain accounting issues related to valuation of notes receivable.
8. Explain accounting issues related to disposition of accounts and
notes receivable.
9. Describe how to report and analyze receivables.
Chapter
7-3
Cash
Cash and
and Receivables
Receivables
Cash Receivables
Cash
Most liquid asset
Standard medium of exchange
Basis for measuring and accounting for all 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.
Chapter
7-5 LO 1 Identify items considered cash.
Reporting
Reporting Cash
Cash
Cash Equivalents
Short-term, highly liquid investments that are both
Chapter
7-6 LO 2 Indicate how to report cash and related items.
Reporting
Reporting Cash
Cash
Restricted Cash
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.
Illustration 7-1
Chapter
7-7 LO 2 Indicate how to report cash and related items.
Reporting
Reporting Cash
Cash
Bank Overdrafts
When a company writes a check for more than the
amount in its cash account.
Generally reported as a current liability.
Chapter
7-8 LO 2 Indicate how to report cash and related items.
Summary
Summary of
of Cash-Related
Cash-Related Items
Items
Illustration 7-2
Chapter
7-9 LO 2 Indicate how to report cash and related items.
Receivables
Receivables
Accounts
Accounts Notes
Notes
Receivable
Receivable Receivable
Receivable
Chapter
7-10 LO 3 Define receivables and identify the different types of receivables.
Receivables
Receivables
Nontrade Receivables
1. Advances to officers and employees.
2. Advances to subsidiaries.
3. Deposits to cover potential damages or losses.
4. Deposits as a guarantee of performance or payment.
5. Dividends and interest receivable.
6. Claims against:
a) Insurance companies for casualties sustained.
b) Defendants under suit.
c) Governmental bodies for tax refunds.
d) Common carriers for damaged or lost goods.
e) Creditors for returned, damaged, or lost goods.
f) Customers for returnable items (crates, containers, etc.).
Chapter
7-11 LO 3 Define receivables and identify the different types of receivables.
Receivables
Receivables
Nontrade Receivables
Illustration 7-3
Chapter
7-12 LO 3 Define receivables and identify the different types of receivables.
Recognition
Recognition of
of Accounts
Accounts Receivables
Receivables
Trade
Trade Discounts
Discounts
Reductions
Reductions from
from the
the list
list
price
price
Not
Not recognized
recognized in
in the
the 10 %
accounting
accounting records
records Discount
Customers for new
Customers are
are billed
billed net
net
of Retail
of discounts
discounts
Store
Customers
Chapter
7-13 LO 4 Explain accounting issues related to recognition of accounts receivable.
Recognition
Recognition of
of Accounts
Accounts Receivables
Receivables
Cash
Cash Discounts
Discounts
Inducements
Inducements for
for prompt
prompt
payment
payment
Gross
Gross Method
Method vs.
vs.
Net Payment
Net Method
Method
terms are
2/10, n/30
Chapter
7-14 LO 4 Explain accounting issues related to recognition of accounts receivable.
Recognition
Recognition of
of Accounts
Accounts Receivables
Receivables
Chapter
7-15 LO 4 Explain accounting issues related to recognition of accounts receivable.
Recognition
Recognition of
of Accounts
Accounts Receivables
Receivables
E7-5: 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.
Chapter
7-17 LO 4 Explain accounting issues related to recognition of accounts receivable.
Recognition
Recognition of
of Accounts
Accounts Receivables
Receivables
E7-5: 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.
Chapter
7-19 LO 4 Explain accounting issues related to recognition of accounts receivable.
Accounting
Accounting for
for Accounts
Accounts Receivable
Receivable
How
How are
are these
these accounts
accounts presented
presented on
on the
the Balance
Balance
Sheet?
Sheet?
Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
Assets
Current Assets:
Cash $ 346
Accounts receivable 500
Less: Allowance for doubtful accounts (25) 475
Inventory 812
Prepaids 40
Total current assets 1,673
Fixed Assets:
Office equipment 5,679
Furniture & fixtures 6,600
Less: Accumulated depreciation (3,735)
Total fixed assets 8,544
Total Assets $ 10,217
Chapter
7-21 LO 4 Explain accounting issues related to recognition of accounts receivable.
Accounting
Accounting for
for Accounts
Accounts Receivable
Receivable
Assets
Current Assets:
Cash $ 346
Accounts receivable, net of $25 allowance 475
Inventory 812
Prepaids 40
Total current assets 1,673
Fixed Assets:
Office equipment 5,679
Furniture & fixtures 6,600
Less: Accumulated depreciation (3,735)
Total fixed assets 8,544
Total Assets $ 10,217
Chapter
7-22 LO 4 Explain accounting issues related to recognition of accounts receivable.
Accounting
Accounting for
for Accounts
Accounts Receivable
Receivable
Journal
Journal entry
entry for
for credit
credit sale
sale of
of $100?
$100?
Accounts
Accounts receivable
receivable 100
100
Sales
Sales 100
100
Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
Sale 100
Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
Sale 100
Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
Sale 100 333 Coll.
Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
Sale 100 333 Coll.
Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
Sale 100 333 Coll. 15 Est.
Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
Sale 100 333 Coll. 15 Est.
Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
Sale 100 333 Coll. 15 Est.
10 W/O W/O 10
Assets
Current Assets:
Cash $ 13
Accounts receivable, net of $30 allowance 227
Inventory 812
Prepaids 40
Total current assets 1,092
Fixed Assets:
Office equipment 5,679
Furniture & fixtures 6,600
Less: Accumulated depreciation (3,735)
Total fixed assets 8,544
Total Assets $ 9,636
Chapter
7-31 LO 4 Explain accounting issues related to recognition of accounts receivable.
Valuation
Valuation of
of Accounts
Accounts Receivable
Receivable
Reporting Receivables
Classification
Valuation (net realizable value)
Chapter
7-32 LO 5 Explain accounting issues related to valuation of accounts receivable.
Valuation
Valuation of
of Accounts
Accounts Receivable
Receivable
Chapter
7-33 LO 5 Explain accounting issues related to valuation of accounts receivable.
Valuation
Valuation of
of Accounts
Accounts Receivable
Receivable
Chapter
7-34 LO 5 Explain accounting issues related to valuation of accounts receivable.
Uncollectible
Uncollectible Accounts
Accounts Receivable
Receivable
Income
Income
Statement
Statement
Approach
Approach
Balance
Balance
Sheet
Sheet
Approach
Approach
Chapter
7-35 LO 5 Explain accounting issues related to valuation of accounts receivable.
Uncollectible
Uncollectible Accounts
Accounts Receivable
Receivable
Chapter
7-36 LO 5 Explain accounting issues related to valuation of accounts receivable.
Uncollectible
Uncollectible Accounts
Accounts Receivable
Receivable
Percentage-of-Sales Approach
Chapter
7-37 LO 5 Explain accounting issues related to valuation of accounts receivable.
Uncollectible
Uncollectible Accounts
Accounts Receivable
Receivable
Percentage-of-Receivables Approach
not matching.
reports receivables at net realizable value.
Chapter
7-38 LO 5 Explain accounting issues related to valuation of accounts receivable.
Uncollectible
Uncollectible Accounts
Accounts Receivable
Receivable
What entry
would Wilson
make assuming
that no balance
existed in the
allowance
account?
What entry
would Wilson
make assuming
the allowance
account had a
credit balance
of $800 before
adjustment?
Chapter
7-41 LO 5 Explain accounting issues related to valuation of accounts receivable.
Uncollectible
Uncollectible Accounts
Accounts Receivable
Receivable
Chapter
7-44 LO 5 Explain accounting issues related to valuation of accounts receivable.
Recognition
Recognition of
of Notes
Notes Receivable
Receivable
Notes Receivable
Supported by a formal promissory note.
A negotiable instrument
Chapter
7-45 LO 6 Explain accounting issues related to recognition of notes receivable.
Recognition
Recognition of
of Notes
Notes Receivable
Receivable
Chapter
7-46 LO 6 Explain accounting issues related to recognition of notes receivable.
Recognition
Recognition of
of Notes
Notes Receivable
Receivable
Short-Term Long-Term
Record at Record at
Face Value, Present Value
less allowance of cash expected
to be collected
0 1 2 3 4
n=3
Chapter
7-48 LO 6 Explain accounting issues related to recognition of notes receivable.
Note
Note Issued
Issued at
at Face
Face Value
Value
PV of Interest
PV of Principal
Chapter
7-51 LO 6 Explain accounting issues related to recognition of notes receivable.
Zero-Interest-Bearing
Zero-Interest-Bearing Note
Note
Illustration: 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?
i = 9%
$10,000 Principal
$0 $0 $0 Interest
0 1 3 3 4
n=3
Chapter
7-52 LO 6 Explain accounting issues related to recognition of notes receivable.
Zero-Interest-Bearing
Zero-Interest-Bearing Note
Note
PV of Principal
Chapter
7-54 LO 6 Explain accounting issues related to recognition of notes receivable.
Zero-Interest-Bearing
Zero-Interest-Bearing Note
Note
Journal Entries for Zero-Interest-Bearing note
Chapter
7-55 LO 6 Explain accounting issues related to recognition of notes receivable.
Interest-Bearing
Interest-Bearing Note
Note
Illustration: 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?
i = 12%
$10,000 Principal
0 1 2 3 4
n=3
Chapter
7-56 LO 6 Explain accounting issues related to recognition of notes receivable.
Interest-Bearing
Interest-Bearing Note
Note
PV of Interest
PV of Principal
Chapter
7-60 LO 6 Explain accounting issues related to recognition of notes receivable.
Interest-Bearing
Interest-Bearing Note
Note
Journal Entries for Interest-Bearing Note
Chapter
7-61 LO 6 Explain accounting issues related to recognition of notes receivable.
Recognition
Recognition of
of Notes
Notes Receivable
Receivable
Notes Received for Property, Goods, or Services
Chapter
7-62 LO 6 Explain accounting issues related to recognition of notes receivable.
Recognition
Recognition of
of Notes
Notes Receivable
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: ($35,247 - $20,000) = $15,247
Chapter
7-64 LO 7 Explain accounting issues related to valuation of notes receivable.
Valuation
Valuation of
of Notes
Notes Receivable
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.
Chapter
7-65 LO 7 Explain accounting issues related to valuation of notes receivable.
Disposition
Disposition of
of Accounts
Accounts and
and Notes
Notes Receivable
Receivable
Secured Borrowing
Illustration: 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.
Illustration 7-18
Net Proceeds
Computation
Illustration 7-19
Loss on Sale Computation
Chapter
7-77 LO 9 Describe how to report and analyze receivables.
Presentation
Presentation and
and Analysis
Analysis
Analysis of Receivables
Illustration 7-23
Chapter
7-78 LO 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.
Chapter
7-79
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.
Chapter
7-80
Management faces two problems in accounting for cash
transactions:
Chapter
7-81 LO 10 Explain common techniques employed to control cash.
Using Bank Accounts
To obtain desired control objectives, a company can vary the
number and location of banks and the types of accounts.
General checking account
Collection float.
Lockbox accounts
Chapter
7-82 LO 10 Explain common techniques employed to control cash.
The Imprest Petty Cash System
To pay small amounts for miscellaneous expenses.
Steps:
1. Record $300 transfer of funds to petty cash:
Chapter
7-83 LO 10 Explain common techniques employed to control cash.
The Imprest Petty Cash System
Steps:
Chapter
7-84 LO 10 Explain common techniques employed to control cash.
The Imprest Petty Cash System
Steps:
Cash 50
Petty cash 50
Chapter
7-85 LO 10 Explain common techniques employed to control cash.
Physical Protection of Cash Balances
Company should
Minimize 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 (reconcile) the balance shown in the
general ledger.
Chapter
7-86 LO 10 Explain common techniques employed to control cash.
Reconciliation of Bank Balances
Schedule explaining any differences between the
bank’s and the company’s records of cash.
Reconciling Items:
1. Deposits in transit.
2. Outstanding checks.
Time Lags
3. Bank charges and credits.
Chapter
7-87 LO 10 Explain common techniques employed to control cash.
Reconciliation of Bank Balances Illustration 7A-1
Bank Reconciliation Form
and Content
Chapter
7-88 LO 10 Explain common techniques employed to control cash.
Reconciliation of Bank Balances
Chapter
7-89 LO 10 Explain common techniques employed to control cash.
Illustration 7A-2
Chapter
7-90 LO 10 Explain common techniques employed to control cash.
Illustration: Journalize the adjusting entries at November 30
on the books of Nugget Mining Company.
Chapter
7-91 LO 10 Explain common techniques employed to control cash.
Review Question
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.
Chapter
7-92 LO 10 Explain common techniques employed to control cash.
Companies evaluate their receivables to determine their
ultimate collectibility.
Chapter
7-93 LO 11 Describe the accounting for a loan impairment.
Background - Example: Subprime loan crisis.
Chapter
7-95 LO 11 Describe the accounting for a loan impairment.
Background - Example: Subprime loan crisis.
Illustration 7B-2
Beyond the
subprime loans
was the
practice of
securitization.
Chapter
7-96 LO 11 Describe the accounting for a loan impairment.
Impairment Measurement and Reporting
Impairment 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.
Chapter
7-97 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-3
Chapter
7-98 LO 11 Describe the accounting for a loan impairment.
Illustration: Computation of Impairment Loss
Illustration 7B-4
Chapter
7-99 LO 11 Describe the accounting for a loan impairment.
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Chapter
7-100