CH 07

Intermediate Accounting
Seventeenth Edition
Kieso ● Weygandt ● Warfield
Chapter 7
Cash and Receivables
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Learning Objectives
After studying this chapter, you should be able to:
1. Indicate how to report cash and related items.
2. Define receivables and explain accounting issues related to
their recognition.
3. Explain accounting issues related to valuation of accounts
receivable.
4. Explain accounting issues related to recognition and
valuation of notes receivable.
5. Explain additional accounting issues related to accounts
and notes receivable.
Copyright ©2019 John Wiley & Sons, Inc. 2
Preview of Chapter 7
Cash and Receivables
Cash
• Reporting cash
• Summary of cash-related items
Receivables
• Recognition of accounts receivable
• Measurement
• Variable consideration

Valuation of Accounts Receivable
• Direct write-off method

• Allowance method
Notes Receivable
• Recognition of notes receivable
• Valuation of notes receivable

Other Issues
• Fair value option

• Disposition of accounts and notes receivable
• Presentation and analysis

Learning Objective 1
Indicate How to Report Cash and
Related Items
LO 1 Copyright ©2019 John Wiley & Sons, Inc. 6

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

Cash
Reporting Cash
Cash Equivalents
Short-term, highly liquid investments that are both
(a) readily convertible to cash, and
(b) so near their maturity that they present
insignificant risk of changes in value.
Examples: Treasury bills, Commercial paper, and Money
market funds.

Reporting Cash
Restricted Cash
Companies segregate restricted cash from “regular” cash.
Examples, restricted for:
(1) plant expansion, (2) retirement of long-term debt, and
(3) compensating balances.

Reporting Cash
Bank Overdrafts
Company writes a check for more than the amount in its
cash account.
• Reported as a current liability
• Offset against other cash accounts only when
accounts are with the same bank

Summary of Cash-Related Items
Classification of Cash-Related Items
Item Classification Comment
Cash Cash If unrestricted, report as cash.
If restricted, identify and classify
as current and noncurrent assets.
Petty cash and change funds Cash Report as cash.
Short-term paper Cash equivalents Investments with maturity of less

than 3 months, often combined
with cash.
Short-term paper Temporary investments Investments with maturity of 3 to
12 months.
Postdated checks and lOU's Receivables Assumed to be collectible.

Summary of Cash-Related Items
Classification of Cash-Related Items (continued)
Item Classification Comment
Travel advances Receivables Assumed to be collected from
employees or deducted from
their salaries.
Postage on hand (as stamps Prepaid expenses May also be classified as office
or in postage meters) supplies inventory.
Bank overdrafts Current liability If right of offset exists, reduce
cash.
Compensating balances Cash separately Classify as current or noncurrent

classified as a deposit in the balance sheet. Disclose
maintained as separately in notes details of the
compensating balance arrangement.

Define Receivables and Explain
Accounting Issues Related to Their
Recognition

Receivables
Claims held against customers and others for money,
goods, or services.
Classified in the balance sheet as:
• Current or noncurrent
• Trade or nontrade
 Accounts receivable
 Notes receivable

Nontrade Receivables
1. Advances to officers and employees.
2. Advances to subsidiaries.
3. Deposits paid to cover potential damages or losses.
4. Deposits paid as a guarantee of performance or
payment.
5. Dividends and interest receivable.
6. 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.).
Nontrade Receivables
Receivables Balance Sheet Presentations

Recognition of Accounts Receivables
• Accounts receivable generally arise as part of a
revenue arrangement
• Revenue recognition principle indicates that a
company should recognize revenue when it satisfies
its performance obligation by transferring the good or
service to the customer.

Illustration
If Lululemon sells a yoga outfit to Jennifer Burian for $100 on
account, the yoga outfit is transferred when Jennifer obtains
control of this outfit. When this change in control occurs,
Lululemon should recognize an account receivable and sales
revenue. Lululemon makes the following entry:
Accounts Receivable 100

Sales Revenue 100

Key indicators control has been transferred
1. Lululemon has the right to payment from the
customer.
2. Lululemon has passed legal title to the customer.
3. Lululemon has transferred physical possession of the
goods.
4. Lululemon no longer has significant risks and
rewards of ownership of the goods.
5. Jennifer has accepted the asset.
Receivables
Measurement of the Transaction Price
The transaction price is the amount of consideration that
a company expects to receive from a customer in
exchange for transferring goods or services.
Variable Consideration
In some cases the price of a good or service is dependent
on future events. These future events often include such
items as discounts, returns and allowances, rebates, and
performance bonuses.

Trade Discounts
• Reductions from the list
price
• Not recognized in the
accounting records
• Customers are billed net
of discounts

Cash Discounts (Sales Discounts)
• Offered to induce prompt
payment
• Presented in terms
 2/10, n/30
 2/10, E.O.M.
 net 30, E.O.M.
• Gross Method vs. Net
Method


Gross Method
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.
June 3 Accounts Receivable 2,000
Sales Revenue 2,000
June 12 Cash ($2,000 × 98%) 1,960

Sales Discounts 40
Accounts Receivable 2,000
Net Method

n/60, f.o.b. shipping point. On June 12, the company received a
Sales Revenue 1,960
June 12 Cash ($2,000 × 98%) 1,960


Net Method, payment made on July 29

n/60, f.o.b. shipping point. On July 29, the company received a
Sales 1,960
July 29 Cash 2,000

Sales Discounts Forfeited 40
Sales Returns and Allowances
• Contra revenue account to Sales Revenue
• Allowance for Sales Returns and Allowances is a
contra asset account to Accounts Receivable
• Use of both Sales Returns and Allowances, and
Allowance for Sales Return and Allowances accounts
is helpful to identify potential problems associated
with inferior merchandise, inefficiencies in filling
orders, or delivery or shipment mistakes

Illustration
Assume on January 4, 2020, Max sells $5,000 of hurricane glass to
Oliver on account. Max records the sale on account as follows.
Sales Revenue 5,000
On January 16, 2020, Max grants an allowance of $300 to Oliver

because some of the hurricane glass is defective. The entry to
record this transaction is as follows.
Sales Returns and Allowances 300

Illustration (continued)
On January 31, 2020, before preparing financial statements, Max
estimates that an additional $100 in sales returns and allowances
will result from the sale to Oliver on January 4, 2020. An adjusting
entry to record this additional allowance is as follows.
Sales Returns and Allowances 100

Allowance for Sales Returns and Allowances 100

Time Value of Money
• Theoretically, any revenue after the period of sale is
interest revenue
• Companies ignore interest revenue related to accounts
receivable because amount of discount is not usually
material in relation to net income for the period
• Profession specifically excludes from present value
considerations “receivables arising from transactions with
customers in the normal course of business which are due
in customary trade terms not exceeding approximately one
year”
Time Value of Money
A company should measure receivables in terms of their
present value.
In practice, companies ignore interest revenue related to
accounts receivable because the discount is not usually
material in relation to the net income for the period.

Explain Accounting Issues Related to

Accounts Receivable
How are these accounts presented on the Balance Sheet?
Allowance for
Accounts Doubtful
Blank Receivable Blank Accounts Blank
Beg. 500 25 Beg.
End 500 25 End

Accounts Receivable
ABC Corporation Balance Sheet (partial)
Current Assets:
Cash $ 330
Accounts receivable $500
Less: Allowance for doubtful accounts (25) 475
Inventory 812
Prepaid expense 40
Total current assets 1,657

Accounts Receivable
Alternate Presentation
ABC Corporation Balance Sheet (partial)
Current Assets:
Cash $ 330
Accounts receivable, net of $25 allowance 475
Inventory 812
Prepaid expense 40

Accounts Receivable
Journal entry for credit sale of $100
Accounts Receivable 100 Blank
Sales Blank 100
Allowance for
Accounts Doubtful
Beg. 500 25 Beg.
Sale 100
End 600 25 End

Accounts Receivable
Collect $333 on account
Cash 333 Blank
Accounts Receivable Blank 333
Allowance for
Accounts Doubtful
Beg. 500 333 Collect 25 Beg.
Sale 100
End 267 25 End

Accounts Receivable
Adjustment of $15 for estimated bad debts
Bad Debts Expense 15 Blank
Allowance for Doubtful Accounts Blank 15
Allowance for
Accounts Doubtful
Sale 100 15 Exp.
End 267 40 End

Accounts Receivable
Write-off of uncollectible accounts of $10
Allowance for Doubtful Accounts 10 Blank
Accounts Receivable Blank 10
Allowance for
Accounts Doubtful
Sale 100 10 W/O 10 15 Exp.
End 257 30 End

Accounts Receivable
Write-off ABC Corporation Balance Sheet (partial)
Current Assets:
Cash $ 330
Accounts receivable, net of S30 allowance 227
Merchandise Inventory 812
Prepaid expense 40

• Record 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:
1. Direct write-off method
2. Allowance method

Methods of Accounting for Uncollectible Accounts
Direct Write-Off Allowance Method

• Theoretically deficient • Losses are estimated
• No matching • Percentage-of-sales
• Receivable not stated at • Percentage-of-
cash realizable value receivables
• Not GAAP when material • GAAP requires when
in amount material in amount

Direct Write-Off Method for Uncollectible Accounts
When a company determines a particular account to be

uncollectible, it charges the loss to Bad Debt Expense.
Assume, for example, that on December 10 Cruz Co. writes off
as uncollectible Yusado’s $8,000 balance. The entry is:
Bad Debt Expense 8,000

Accounts Receivable (Yusado) 8,000

Allowance Method for Uncollectible Accounts
• Involves estimating uncollectible accounts at end of

each period
• Ensures that companies state receivables on balance
sheet at net realizable value
• Companies estimate uncollectible accounts and net
realizable value using information about past and
current events as well as forecasts of future
collectibility

Allowance Method for Uncollectibles
Recording Estimated Uncollectibles
Illustration: Assume that Brown Furniture in 2020, its first

year of operations, has credit sales of $1,800,000. Of this
amount, $150,000 remains uncollected at December 31. The
credit manager estimates that $10,000 of these sales will be
uncollectible. The adjusting entry to record the estimated
uncollectibles (assuming a zero balance in the allowance
account) is:
Allowance for Doubtful Accounts 10,000

Presentation of Allowance for Doubtful Accounts
The amount of $140,000 represents the net realizable value

of the accounts receivable at the statement date.

Recording the Write-Off of an Uncollectible Account
• When companies have exhausted all means of

collecting a past-due account and collection appears
impossible, the company should write off the account
• In the credit card industry, for example, it is standard
practice to write off accounts that are 210 days past
due.

Recording the Write-Off of an Uncollectible Account
Illustration: 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:

Assume that on July 1, Randall Co. pays the $1,000 amount
that Brown had written off on March 1. These are the entries:

Cash 1,000

Estimating the Allowance
Percentage-of-Receivables Approach
• Reports estimate of receivables at realizable value
• Companies may apply this method using
 one composite rate, or
 an aging schedule using different rates


What entry
would Wilson
make assuming
that the
allowance
account had a
zero balance?

What entry
would Wilson
make assuming
the allowance
account had a
credit balance of
$800 before
adjustment?
Bad Debt Expense ($26,610 – $800) 25,810

Illustration
Duncan Company reports the following financial information before
adjustments. Dr. Cr.
Accounts Receivable $100,000
Allowance for Doubtful Accounts $ 2,000
Sales Revenue (all on credit) 900,000
Sales Returns and Allowances 50,000
Instructions: Prepare the journal entry to record Bad Debt Expense

assuming Duncan Company estimates bad debts at (a) 5% of accounts
receivable and (b) 5% of accounts receivable but Allowance for Doubtful
Accounts had a $1,500 debit balance.

Illustration Dr. Cr.

assuming Duncan Company estimates bad debts at (a) 5% of accounts
receivable.
$100,000 × 5% = $5,000 − $2,000 = $3,000

Illustration Dr. Cr.

assuming Duncan Company estimates bad debts at (b) 5% of accounts
receivable but the Allowance had a $1,500 debit balance.
$100,000 × 5% = $5,000 + $1,500 = $6,500

Explain Accounting Issues Related to
Recognition and Valuation of Notes
Receivable

Notes Receivable
Supported by a formal promissory note
• Written promise to pay a certain sum of money at a

specific future date
• A negotiable instrument
• Maker signs in favor of a payee
• Interest-bearing (has a stated rate of interest) or
• Zero-interest-bearing (interest included in face
amount)

Notes Receivable
Generally 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 (majority of notes)

Recognition of Notes Receivable
Short-Term
Record at Face Value, less allowance
Long-Term
Record at Present Value of cash expected to be collected

Note Issued at Face Value
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?

Present Value of Interest
Table 6-4 Present Value of an Ordinary Annuity of 1
$1,000 x 2.48685 = $2,487

Interest Received Factor Present Value

Present Value of Principal
Table 6-2 Present Value of 1
$10,000 x .75132 = $7,513

Principal Factor Present Value

Summary
Present value of interest $ 2,487
Present value of principal 7,513
Present value of the note $10,000
Journal Entries
Jan. yr. 1 Notes Receivable 10,000

Cash 10,000
Dec. yr. 1 Cash 1,000

Interest Revenue 1,000
Zero-Interest-Bearing 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?

$10,000 x .77218 = $7,721.80


Amortization Schedule

Journal Entry
Prepare the
journal entry
to record the
receipt of the
note.
Notes Receivable 10,000.00

Cash 7,721.80
Discount on Notes Receivable 2,278.20
Journal Entry
Prepare the
journal entry to
record interest
revenue at the
end of the first
year.
Discount on Notes Receivable 694.96

Interest Revenue ($7,721.80 × 9%) 694.96

Interest-Bearing 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. Prepare the journal entry
to record the receipt of the note?

Present Value of Interest
Table 6-4 Present Value of an Ordinary Annuity of 1
$1,000 x 2.40183= $2,402

Interest Received Factor Present Value

$10,000 x .71178 = $7,118


Computation of Present Value
Illustration: Record the receipt of the note?

Notes Receivable 10,000
Discount on Notes Receivable 480
Cash 9,520
Discount Amortization Schedule

Journal Entry
Prepare the
journal entry to
record interest
revenue at the
end of the first
year.
Cash 1,000
Discount on Notes Receivable 142
Recognition of Notes Receivable
Notes Received for Property, Goods, or Services
In a bargained transaction entered into at arm’s length,

the stated interest rate is presumed to be fair unless:
1. No interest rate is stated, or
2. Stated interest rate is unreasonable, or
3. Face amount of the note is materially different from
the current cash sales price.

Notes Received for Property, Goods, or
Services
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
Discount on Notes Receivable 15,247
Land 14,000
Gain on Disposal of Land 6,000
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.

Explain Additional Accounting Issues
Related to Accounts and Notes
Receivable

Fair Value Option
• Companies have the option to use fair value as the
basis of measurement in the financial statements
• If companies choose the fair value option,
 Receivables 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 Option
• Companies may elect at the time the financial
instrument is
 originally recognized or
 when some event triggers a new basis of
accounting
• Must continue to use fair value measurement for the
specific instrument until company no longer owns the
instrument
• If not elected at date of recognition, company may
never use fair value option on that specific
instrument.
Recording Fair Value Option
Illustration: 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, 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.

Unrealized Holding Gain or Loss—Income 190,000

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 and collection are time-consuming and costly
Transfer accomplished by:
1. Secured borrowing.
2. Sale of receivables.
Sales of Receivables
Factors are finance companies or banks that buy receivables from

businesses for a fee.
Sale Without Recourse
• Purchaser assumes risk of collection

• Transfer is outright sale of receivable
• Seller records loss on sale
Sale With Recourse

• Seller guarantees payment to purchaser
• Financial components approach used to record
transfer

Entries for Sale of Receivables without Recourse
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.

Net Proceeds Computation
Illustration: 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 computes the net proceeds
from the sale as follows.

Loss on Sale Computation
Illustration: Net proceeds are cash or other assets received in a
sale less any liabilities incurred. Crest Textiles then computes the
loss as shown.

Entries for Sale of Receivables with Recourse
Illustration: Prepare the journal entries for both Crest Textiles and
Commercial Factors for the receivables sold with recourse.
Crest Cash 460,000
Textiles, Due from Factor 25,000
Inc.
Loss on Sale of Receivables 21,000
Accounts (Notes) Receivable 500,000
Recourse Liability 6,000
Commercial Accounts Receivable 500,000

Factors, Inc. Due to Customer (Crest Textiles) 25,000
Cash 460,000
Secured Borrowing
Illustration: March 1, 2020, 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.

Secured Borrowing
Entries for
Transfer of
Receivables

Secured Borrowing - Illustration
On April 1, 2020, Rasheed Company assigns $400,000 of its
accounts receivable to the Third National Bank as collateral
for a $200,000 loan due July 1, 2020. The assignment
agreement calls for Rasheed 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).

Instructions:
a. Prepare the April 1, 2020, journal entry for Rasheed
Company.
Cash 192,000
Finance Charge ($400,000 × 2%) 8,000
Notes Payable 200,000

Instructions:
b. Prepare the journal entry for Rasheed’s collection of
$350,000 of the accounts receivable during the period
from April 1, 2020, through June 30, 2020.
Cash 350,000

Instructions:
c. On July 1, 2020, Rasheed paid Third National all that was
due from the loan it secured on April 1, 2020. Prepare the
journal entry to record this payment.
Notes Payable 200,000

Interest Expense (10% x $200,000 × 3/12) 5,000
Cash 205,000

Secured Borrowing versus Sale
The FASB concluded
that a sale occurs
only if the seller
surrenders control
of the receivables to
the buyer.
Three conditions
must be met.

Presentation and Analysis
Presentation of Receivables
1. Segregate the different types of receivables that a company
possesses, if material.
2. Appropriately offset the valuation accounts against the proper
receivable accounts.
3. Determine that receivables classified in the current assets
section will be converted into cash within the year or the
operating cycle, whichever is longer.
4. Disclose any loss contingencies that exist on the receivables.
5. Disclose any receivables designated or pledged as collateral.
6. Disclose the nature of credit risk inherent in the receivables.

Presentation and Analysis
Analysis of Receivables
Accounts Receivable Turnover
• Use to evaluate liquidity of accounts receivable
• Measures number of times, on average, a company
collects receivables during the period
Average Days to Collect Receivables
• General rule is that the average collection period
should not greatly exceed the credit term period

Accounts Receivable Turnover
Illustration
Best Buy reported 2017 net sales of $39,403 million, its
beginning and ending accounts receivable balances were
$1,347 million and $1,162 million, respectively. Illustration
shows the computation of its accounts receivable turnover.

Explain Common Techniques Employed
to Control Cash

Appendix 7A: Cash Controls
Management faces two problems in accounting for cash
transactions:
1. Establish proper controls to prevent any
unauthorized transactions by officers or employees.
2. Provide information necessary to properly manage
cash on hand and cash transactions.

Using Bank Accounts
To obtain desired control objectives, a company can vary
the number and location of banks and the types of
accounts.
• Collection float
• Lockbox accounts
• General checking account
• Imprest bank accounts

The Imprest Petty Cash System
To pay small amounts for miscellaneous expenses.
Steps:
1. Record $300 transfer of funds to petty cash:
Petty Cash 300
Cash 300
2. The petty cash custodian obtains signed receipts from

each individual to whom he or she pays cash.

Steps:
3. Custodian receives a company check to replenish the
fund.
Supplies Expense 42
Postage Expense 53
Miscellaneous Expense 76
Cash Over and Short 2
Cash 173

Steps:
4. If the company decides that the amount of cash in the
petty cash fund is excessive by $50, it lowers the fund
balance as follows.
Cash 50
Petty Cash 50

Physical Protection of Cash Balances
Company should
• Minimize 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) balance shown in
general ledger
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.
3. Bank charges and credits.
4. Bank or depositor errors.

Bank Reconciliation Form

Illustration: Nugget Mining Company’s books show a cash balance at the
Denver National Bank on November 30, 2020, 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.
1. A deposit of $3,680 that Nugget mailed November 30 does not
appear on the bank statement.
2. Checks written in November but not charged to the November bank
statement are:
Check #7327 $ 150
#7348 4,820
#7349 31

Continued
3. Nugget has not yet recorded the $600 of interest collected by the
bank November 20 on Sequoia Co. bonds held by the bank for
Nugget.
4. Bank service charges of $18 are not yet recorded on Nugget’s books.
5. The bank returned one of Nugget’s customer’s checks for $220 with
the bank statement, marked “NSF.” The bank treated this bad check as
a disbursement.
6. Nugget discovered that it incorrectly recorded check #7322, written in
November for $131 in payment of an account payable, as $311.
7. A check for Nugent Oil Co. in the amount of $175 that the bank
incorrectly charged to Nugget accompanied the statement.
Bank Reconciliation

Journal Entries
Journalize the adjusting entry on the books of Nugget Mining
Company at November 30.
Cash 542
Office Expense (Bank Charges) 18
Accounts Payable 180
Interest Revenue 600

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.

Review Question Answer
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.

Describe the Estimation of the
Allowance Based on Expected Cash
Flows

Appendix 7B: Collectibility Assessment
Based on Expected Cash Flows
Measurement of Collectibility
The allowance for doubtful accounts and related bad debt
expense on a loan or note receivable can be estimated as
the difference between the investment in the loan
(generally the principal plus accrued interest or amortized
cost) and the expected future cash flows discounted at
the loan’s historical effective-interest rate.

Illustration
At December 31, 2019, 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 flows and utilizes the
present value method for measuring the collectibility of the loan.
Unfortunately, King is experiencing financial difficulty and thinks he
will have a difficult time making full payment. The next illustration
shows the cash flow schedule prepared by the loan officer.

Analysis of Loan
As indicated, this loan is impaired. The expected cash flows of

$115,000 are less than the contractual cash flows, including
principal and interest, of $130,000.

Computation of Impairment Loss
The amount of the impairment to be recorded equals the
difference between the recorded investment of $100,000 and the
present value of the expected cash flows.
Ogden Bank must measure the loss at a present-value amount, not

at an undiscounted amount, when it records the loss.
Appendix 7B: Collectibility Assessment
Based on Expected Cash Flows
Recording Bad Debts
Ogden Bank (the creditor) recognizes an impairment $12,434 by
debiting Bad Debt Expense for the expected loss. At the same time,
it reduces the overall value of the receivable by crediting Allowance
for Doubtful Accounts. The journal entry to record the loss is
therefore as follows.
Carl King (the debtor) makes no entry because he still legally owes
$100,000.
Compare the Accounting Procedures
for Cash and Receivables Under GAAP
and IFRS

IFRS Insights
Relevant Facts – Similarities
• The accounting and reporting related to cash is essentially the same
under both IFRS and GAAP. In addition, the definition used for cash
equivalents is the same.
• Like GAAP, cash and receivables are generally reported in the current
assets section of the balance sheet under IFRS.
• Like GAAP, for trade and other accounts receivable without a significant
financing component, an allowance for uncollectible accounts should
be recorded to result in receivables reported at net realizable value.
The estimation approach used is similar to that under GAAP.
• Similar to GAAP, IFRS requires that loans and receivables be accounted
for at amortized cost, adjusted for allowances for doubtful accounts.

IFRS Insights
Relevant Facts – Differences
• Under IFRS, companies may report cash and receivables as the last
items in current assets under IFRS. Under GAAP, these items are
reported in order of liquidity.
• While IFRS implies that receivables with different characteristics should
be reported separately, there is no standard that mandates this
segregation. GAAP has explicit guidance in the area.
• The fair value option is similar under 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.

IFRS Insights
• Unlike GAAP, IFRS has a different approach to estimating uncollectible
accounts on receivables with a significant financing component (e.g.,
notes receivable). For long-term receivables that have not experienced
a deterioration in credit quality after origination, uncollectible accounts
are estimated based on expected losses over the next 12 months. For
long-term receivables that experience a credit quality decline,
uncollectible accounts are estimated based on lifetime expected losses
(which is the model used under GAAP for all receivables).

IFRS Insights
• Under IFRS, bank overdrafts are generally reported as cash. Under
GAAP, such balances are reported as liabilities.
• IFRS and GAAP differ in the criteria used to account for transfers of
receivables. IFRS is a combination of an approach focused on risks and
rewards and loss of control. GAAP uses loss of control as the primary
criterion. In addition, IFRS generally permits partial transfers; GAAP
does not.

IFRS Insights
On The Horizons
Both 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. That said, in
IFRS 9 the IASB created a split model, where some financial instruments are
recorded at fair value but other financial assets, such as loans and
receivables, can be accounted for at amortized cost if certain criteria are
met. While the FASB has adopted a similar approach to classifications, there
remain differences in the accounting for impairments on financial
instruments with a significant financing component (just about all notes
receivable). As indicated, the IASB approach estimates uncollectible accounts
over shorter future periods, compared to the FASB model. Most believe that
both Boards’ approaches to estimating uncollectible accounts represent
improvements and address the weakness in previous bad debt accounting
that was highlighted by the financial crisis. Time will tell if one model or the
other provides more useful information to investors and creditors.

Copyright
Copyright © 2019 John Wiley & Sons, Inc.
All rights reserved. Reproduction or translation of this work beyond that permitted in
Section 117 of the 1976 United States 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.

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Intermediate Accounting

Kieso ● Weygandt ● Warfield

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• Direct write-off method

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• Fair value option

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Short-term paper Cash equivalents Investments with maturity of less

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Compensating balances Cash separately Classify as current or noncurrent

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Accounts Receivable 100

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On June 3, Bolton Company sold to Arquette Company

June 12 Cash ($2,000 × 98%) 1,960

On June 3, Bolton Company sold to Arquette Company

June 12 Cash ($2,000 × 98%) 1,960

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On June 3, Bolton Company sold to Arquette Company

July 29 Cash 2,000

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On January 16, 2020, Max grants an allowance of $300 to Oliver

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Sales Returns and Allowances 100

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End 500 25 End

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Allowance for Doubtful Accounts Blank 15

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Accounts Receivable Blank 10

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Direct Write-Off Allowance Method

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When a company determines a particular account to be

Bad Debt Expense 8,000

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