CH 07

Intermediate Accounting
Volume 1 Twelfth Canadian Edition

Kieso ● Weygandt ● Warfield ● Wiecek ● McConomy
Prepared by Ilene M Gilborn MCE, FCPA (FCMA)
Chapter 7
Cash and Receivables

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Chapter 7: Cash and Receivables (1 of 2)
After studying this chapter, you should be able to:
1. Understand cash and accounts receivable from a business perspective.
2. Define financial assets, and identify items that are considered cash and
cash equivalents and how they are reported.
3. Define receivables, and identify the different types of receivables from
an accounting perspective.
4. Account for and explain the accounting issues related to the recognition
and measurement of accounts receivable.
5. Account for and explain the accounting issues related to the
impairment in value of accounts receivable.
Copyright ©2019 John Wiley & Sons, Canada, Ltd. 2

Chapter 7: Cash and Receivables (2 of 2)
After studying this chapter, you should be able to:
6. Account for and explain the accounting issues related to the
recognition and measurement of notes and loans receivable.
7. Account for and explain the basic accounting issues related to the
derecognition of receivables.
8. Explain how receivables and loans are reported and analyzed.
9. Identify differences in accounting between IFRS and ASPE, and
what changes are expected in the near future.
After studying Appendix 7A, you should be able to:

10. Explain common techniques for controlling cash.

Presentation,
Understanding Cash Receivables- Disclosure, and
and Accounts Cash Recognition Recognition and Analysis of IFRS/ASPE Appendix 7A-Cash
Receivable and Measurement Measurement Receivables Comparison Controls
• How do • What is cash? • Definition and types • Presentation • A comparison • Management
Companies • Reporting cash • Recognition and and disclosure of IFRS and and control of
manage and • Summary of measurement of • Analysis ASPE cash
control cash? cash-related accounts receivable • Looking • Using bank
• What types of items • Impairment of ahead accounts
companies have accounts receivable • The imprest
extensive • Recognition and petty cash
accounts measurement of system
receivable? short-term notes • Physical
• What are the and loans receivable protection of
types of accounts • Recognition and cash balances
receivable? measurement of • Recognition of
• How do long-term notes and bank balances
companies loans receivable
manage accounts • Derecognition of
receivable? receivables

Understanding Cash and Accounts
Receivable
Key issues relating to management and control of cash
include:
• Minimizing “idle” cash
• Cash flow budgets
• Internal controls, including regular bank reconciliations
Key issues relating to management and control of accounts
receivable include:
• Collectibility
• Credit policies
• Monitoring accounts receivable levels
• Discounts
LO 1 Copyright ©2019 John Wiley & Sons, Canada, Ltd. 5
Financial Asset
“Any asset that is:
i. Cash;
ii. A contractual right to receive cash or another financial
asset from another party;
iii. A contractual right to exchange financial instruments
with another party under conditions that are
potentially favourable to the entity; or
iv. An equity instrument of another entity.”
CPA Canada Handbook, Part II, Section 3856

What is Cash? (1 of 2)
Cash is considered to be a current asset if it is readily
available to pay current obligations and is free of
restrictions.
• Consists of coins, currency, available funds on deposit
at the bank, and petty cash
• Also includes money orders, certified cheques, cashier’s
cheques, personal cheques, bank drafts, and usually
savings accounts

What is Cash? (2 of 2)
• Money-market funds and certificates of deposit are
cash equivalents
• Post-dated cheques and travel advances are not
classified as cash

Reporting of Cash
Some categories of cash need special attention with
respect to reporting:
Restricted cash—
• Petty cash, special payroll, dividend bank accounts
• If the restricted cash balance is material, it must be
segregated from regular cash for reporting purposes
• Classified as current or non-current assets depending
on date of availability or expected disbursement

Restricted Cash
Restricted cash—
• Compensating balances:
o minimum cash balances maintained by a corporation
in support of existing borrowings
o not available for use by the corporation, but the bank
can use the restricted cash
• Legally restricted balances must be reported separately
o Current or long-term assets; or note disclosure
o See Air Canada 2019 Annual report Restricted Cash
on Page 109 and corresponding note on Page 119
Note 2P)
Foreign Currencies
• Amount held in foreign currencies is reported in
Canadian dollars on the date of the statement
• The exchange rate on the date of the statement of
financial position is used to translate foreign currencies
into Canadian dollars
• If restrictions exist on the foreign funds, those funds are
reported as restricted

Bank Overdrafts
• Overdrafts occur when cheques are written in excess of
the cash account balance
• Overdrafts are reported as current liabilities (often
reported as accounts payable)
• In general, bank overdrafts should not be offset against
the Cash account
• However, bank overdrafts may be offset against
available cash in another account if both accounts are
at the same bank

Cash Equivalents
• Defined as “short-term, highly liquid investments that are readily
convertible to known amounts of cash and which are subject to
an insignificant risk of changes in value.”
• Original maturity is generally three months or less
• Typical examples: treasury bills, money-market funds,
commercial paper
• ASPE excludes equity securities
• Under IFRS, some equity instruments can be classified as cash
equivalents (for example, preferred shares acquired within a
short time of their maturity date)
• Cash equivalents are reported at fair value
Accounts Receivable (1 of 2)
In general, Accounts Receivable are claims that a company has
against customers and others, usually for specific cash
receipts in the future.
• Current (short-term) and non-current (long-term)
• Trade receivables are amounts owed by customers as a
result of sales from ordinary operations.
o Accounts receivable (verbal promise to pay, normally within
30 to 60 days)
o Notes receivable (written promises with specified terms,
example: interest rate and due date)

Accounts Receivable (2 of 2)
• Non-trade receivables include the following:
1. Advances to employees or other officers
2. Delayed payment terms from a purchaser
3. Receivables from the government (e.g. GST recoverable, income
tax receivable)
4. Dividends and interest receivable
5. Amounts owing by insurance companies
• Loans receivable; notes receivable
• Investments in government debt, corporate bonds, convertible
debt, and commercial paper are not receivables, because they
are held for trade.
Accounts Receivable—Recognition and
Measurement Standards
1. Recognize an accounts receivable when the entity
becomes a party to the contractual provisions of the
financial instrument
2. Recognize the receivable at the fair market value, subject
to discounts and the interest element
3. Adjust receivables to amortized cost

Accounts Receivable-Recognition
Recognize an accounts receivable when the entity becomes a
party to the contractual provisions of the financial
instrument.
• When one of the parties to the transaction has performed
as per the agreement between the two parties
• Similar to the way revenue is recognized (Chapter 6)
• When a sale is recognized, cash is received or an accounts
receivable is recognized

Accounts Receivable: Measurement
Measure the receivable initially at its fair value.
• Trade discounts—net amount
• Cash (or Sales) discounts: 2/10, net/30
• Sales returns and price allowances—after the fact
• Time allowed to settle the account—generally ignored
Adjust receivables to amortized cost.
• Receivables with an interest component

AR terms
• Cash Discounts are recorded as a contra account to sales
called Sales Discounts, which reduces sales to a net
amount and are used to:
 increase sales; encourage early payment by customers;
increase the likelihood of collections of accounts
receivable
2 / 10, n / 30
Percentage # of Days Otherwise, Full Amount is
Discount Discount is Full amount Due in this # of
Available Days
19
© McGraw-Hill Ryerson Beechy Intermediate Accounting Third Edition
Impairment of Accounts Receivable
• Recognize the impact of impairment or uncollectibility
• Loans and receivables are impaired if there is “significant
adverse change” in expected configuration of cash flows
(that is timing or amount)
• Impaired trade accounts receivable are called bad debts or
uncollectible accounts.
• Under IFRS, the loss allowance is based on lifetime
expected credit losses
• Ensuring that a reasonable estimate is made of the amount
of the accounts receivable that is unlikely to be collected

Estimating Uncollectible Accounts (1 of 4)
See ICI
• Short-term receivables are reported at their net realizable

value (NRV)
• Requires estimating the accounts or the amounts that are
expected to be uncollectible
• Adjustments to the allowance account on the statement of
financial position also impact the income statement
through bad debts expense
• Methods for estimating the allowance
o The allowance method
o The percentage-of-receivables method
o The percentage-of-sales method
Allowance Approach
• Management analyzes accounts receivable at the end of
every month and estimates the uncollectible accounts
• Allowance account is adjusted to the correct balance
• Balance already in the Allowance account must be
considered
• Bad Debt Expense is adjusted to balance the entry

Percentage-of-Receivables Approach
• Using past experience, management estimates the
percentage of outstanding receivables that will be
uncollectible—aging schedule
• Allowance account is correct / adjusted at period end
• Balance already in the Allowance account must be
considered
• Offset is recorded as bad debt expense
• Does not focus on matching bad debt expense to sales

Percentage-of-sales Approach
• At month end, management estimate the bad debt expense
as a percentage of current month’s sales
• Matches the estimated cost of bad debts to sales
generated in the same accounting period
• Existing balance in the Allowance for Doubtful Accounts is
initially ignored; Accounts Receivable will not reflect net
realizable value
• At year end, receivables have to be analyzed to ensure the
balance in the Allowance account is correct.
Accounts Receivable Aging Schedule
Wilson & Co. Aging Schedule
Age (number of days accounts are outstanding)

Customer Name Balance Under 61 – 90 91 – 120 Over
Dec. 31 61 days days days 120 days
Atlantic Stainless Steel Corp. $ 9,800 $ 7,000 $ 2,800
Brockville Steel Company 34,000 34,000
Cambridge Sheet & Tube Co. 4,500 $ 4,500
Eastern Iron Works Ltd. 7,200 6,000 $ 1,200
Other individual customers 491,500 413,000 15,200 12,800 50,500
$547,000 $460,000 $18,000 $14,000 $55,000

Allowance Method (1 of 4)
Example 7.3: Prepare an analysis to estimate uncollectible amounts for
Wilson & Co.
Estimate of
Percentage Estimated Uncollectible
Age Amount to Be Uncollectible Accounts
Under 61 days old $460,000 4% $18,400
61–90 days old 18,000 15% 2,700
91–120 days old 14,000 20% 2,800
Over 120 days 55,000 25% 13,750
Year-end balance of
Allowance for
Doubtful Accounts
Year-end balance of Year-end balance of
Allowance for
Doubtful Accounts
$37,650
should equal this
amount Allowance for Doubtful should equal this
amount
Accounts should equal this

amount

Balance Sheet Presentation
Example 7.4(a): Show how Wilson & Co. would reflect the
estimated uncollectible amount on its statement of
financial position using the allowance method.
Wilson & Co.
Statement of Financial Position
December 31
Current assets
Accounts receivable $547,000
Less: Allowance for doubtful accounts 37,650
$509,350

Journal Entry-Credit Balance
Example 7.4(b): Assume the allowance account already
had a credit balance of $18,800 before adjustment. What
journal entry would Wilson & Co. prepare?
blank
Description Debit Credit
Bad Debts Expense 18,850
Allowance for Doubtful Accounts 18,850
($37,650 − $18,800 = $18,850)

Journal Entry-Debit Balance
Example 7.4(b): Assume the allowance account already
had a debit balance of $200 before adjustment. What
journal entry would Wilson & Co. prepare?
blank
($37,650 + $200 = $37,850)

Combining Methods (1 of 2)
Percentage of Sales Approach
Example 7.5(a): Dockrill Corp. estimates 2% of every
months net credit sales will be uncollectible. What journal
entries would be required during the year if net credit
sales are $400,000 annually?
blank
2% × $400,000 = $8,000

Combining Methods (2 of 2)
Percentage of Sales Approach
Example 7.6: Management estimates the uncollectible
accounts at year end are $9,900. What journal entry
should Dockrill make if the balance in the Allowance for
Doubtful Accounts is $7,500 before adjustment?
blank
($9,900 − $7,500 = $2,400)

Allowance Method: Writing Off
Accounts Receivable
• When a specific customer’s account is determined to be uncollectible,
the following entry is made:
blank
Allowance for Doubtful Accounts x,xxx
Accounts Receivable x,xxx
• If payment is received after write-off of account, the account is

reinstated and payment is recorded:
blank
Allowance for Doubtful Accounts x,xxx
Cash x,xxx

Direct Write-off Method
• Record bad debt expense only when a specific account is
determined to be uncollectible:
blank
Bad Debts Expense x,xxx
• No allowance account is used

• If amounts are collected for accounts previously written off:
blank
Cash x,xxx
Uncollectible Accounts Recovered x,xxx

Recognition of Short-Term Notes
Receivable
• Notes receivable differ from accounts receivable as they are
supported by a promissory note (with specific terms)
• All notes contain some interest element and maturity date
—short term notes mature within one year
• Notes are either:
o Interest bearing
• Have a stated rate of interest or
o Zero-interest bearing (or non-interest bearing)
• Interest amount is the difference between the amount
borrowed and the face amount
Interest Bearing Short-Term Notes
Receivable (see in-class illustration)
Example 7.7: On March 14 an accounts receivable of $1,000 is
exchanged for a 6%, six-month note. What journal entries would
Prime Corporation make to record the substitution and payment
of the note?
14-Mar Notes Receivable 1,000
Accounts Receivable 1,000
14-Sep Cash 1,030
Notes Receivable 1,000
Interest Income 30
($1,000 × 6% × 6 6over
 12)
 $1,000  6%  
 12 

Non-Interest Bearing Short-Term Notes
Receivable (see in-class illustration)
Example 7.8: On February 23 a $5,000, nine-month non-interest
bearing note is issued; 8% is the implied interest rate.

23-Feb Notes Receivable 4,717
Cash 4,717
23-Nov Cash 5,000
Interest Income 283
($4,717 × 8% × 9 9over
 12)
 $4,717  8%  
 12 

Long-term Notes and Loans
Receivable (1 of 11)
• Long-term notes and loans receivable are recognized
at fair value – that is, the PRESENT VALUE of the future
cash flows
• Face rate: stated interest rate
• Effective interest rate: PV discount rate
o If interest rate = market rate, fair value = face value
o If interest rate < or > market rate, loan issued at a
discount or premium, amount of which should be
amortized over the term of the notes
o IFRS requires effective interest method of amortization;
ASPE does not specify
Interest-bearing notes issued at face value
Example 7.9: Assume that Bigelow Corp. lends
Scandinavian Imports $10,000 in exchange for a $10,000,
three-year note bearing interest at 10% payable
annually. The market rate of interest for a note of similar
risk is also 10%.

Long-term Notes and Loans Receivable
(3 of 11)

Example 7.9:
Face value of the note $10,000
Present value of the lump sum principal:
$10,000 (PV*3,10%) = $10,000(0.75132) (Table A-2) $7,513
Present value of the ordinary interest annuity:
$1,000 (PVOA 3,10%) = $1,000(2.48685) (Table A-4) 2,487
Present value of the note 10,000
Difference $0 double underline
$ 0
*Present value(PV) factors found in Tables A.1 to A.5

Example 7.9:
blank
Journal entry to record
Cash 10,000
the issue, and also to (Issuance of the
record annual interest note)
Cash 1,000
Interest Income 1,000
($10,000 × 10%)

(5 of 11)
Notes issued at zero-interest bearing

Jeremiah Company receives a three-year, $10,000, zero-
interest-bearing note, and the present value is known to
be $7,721.80.
PV of note = $10,000 × PV factor
Determine implicit
$ 7,721.80 = $10,000 × PV factor
interest rate:
PV factor = 0.77218, where n = 3
interest rate (i) = 9%
Interest component: $10,000 − $7,721.80 = $2,278.20

(6 of 11)

Example 7.11 Record journal entry for first year using effective
interest method for amortization.
Interest income = $7,721.80 × 9% = $694.96
blank
Notes Receivable 694.96
Interest Income 694.96
Plus: amortization for Year 1 = 694.96

Balance, Notes Receivable, beginning = $7,721.80
Balance, Notes Receivable, ending = $8,416.96
Example 7.12 Compare straight-line and effective interest methods, Years 1 and 2
Straight-line Straight-line
Effective Effective
interest interest
Date Description Debit Credit Debit Credit
Year 1 Notes Receivable 759.40 694.96
Interest Income 759.40 694.96
Year 2 Notes Receivable 759.40 757.51
Interest Income 759.40 757.51
$2,278.20
Straight line =  $759.40 (all three years)
3
Effective interest = $7,721.80 × 9% = $694.96 (year 1)
($7,721.80 + 694.96) × 9% = $757.51 (year 2)
(8 of 11)
Interest-bearing notes at a discount

Assume that Morgan Corp. makes a loan to Marie Co. and
receives in exchange a $10,000, three-year note bearing
interest at 10% annually. The market rate of interest for a note
of similar risk is 12%.
Face value of the note $10,000
Present value of the lump sum principal:
($10,000, PV for 3 years @ 12%) $7,118
Present value of the interest annuity:
($10,000 x 10%, PVA for 3 years @12%) 2,402 9,520
Difference $480 double underline
$ 480

Interest-bearing notes at a discount: Effective Interest
$10,000 note at 10% for 3 years; market rate is higher at 12%
Present value: $9,520; Discount: $480
Interest Receivable: $10,000 x 10% = $1,000
First year amortization: $9,520 x 12% = $1,142
Interest and Amortization:
Cash 9,520
Date Issued: Cash 1,000
Notes Receivable 142

Interest-bearing notes at a discount: Straight-line
$10,000 note at 10% for 3 years; market rate is higher at 12%
Present value: $9,520; Discount: $480
 $480 
Straight-line interest:   + $1,000 = $1,160
 3 
Date Issued: Notes Receivable 9,520
Cash 9,520
Interest and
Amortization: Cash 1,000
Notes Receivable 160

(11 of 11)
Interest-bearing notes at a premium

• Stated rate of interest is higher than the effective rate
of interest: note is issued at a premium
• PV of the note at issuance will be higher than the face
value
• Note is recorded at the higher value
• Excess is amortized by crediting Notes Receivable and
debiting interest income

Notes for Property, Goods, or Services
• The issue is determining the selling price
• Depends on the market rate
o Known, use it to determine PV of future cash flows discounted
at the market rate
o Unknown
• Use the fair value of the property, goods and services to
estimate the value
• Use an imputed (estimated) interest rate
• Required to record effective interest income and amortize the
discount

Derecognition of a Receivable
• The holder of accounts or notes receivable may transfer
them to another company for cash
• The transfer may be:
o A secured borrowing--Holder retains ownership of
receivables; the receivables are used as collateral;
o A sale of receivables--Holder transfers ownership of
receivables in a sale
• Factoring: transfer major risks and rewards
o Securitization: interests in financial assets are sold to a third
party

Secured Borrowing
• Account for receivable (now collateralized) same way as
before secured borrowing:
o Collect accounts receivable
o Record sales returns and sales discounts
o Absorb bad debts expense
• Account for new liability (example: note payable):

o Record a finance charge (if applicable)
o Record interest expense on note payable
• Receivables are not derecognized

Sale of Receivables
Factoring—purchaser buys the receivables for a fee and
then collects directly from the customer
• Usually involves only one other company
• Purchaser assumes risk of collection and absorbs any losses
(without recourse)
• Seller does not service the receivables--derecognition
• Seller credits accounts receivable for face value
• Seller records Gain or Loss on Sale of Receivables
• With recourse, purchaser does not have the risk of collection
—not treated as a sale (IFRS 9)

Securitization
Securitization—interest in financial assets are sold to a
third party
• transfer receivables through securities (debt and equity)
• Backed by a pool of financial assets
• Many investors are involved
• Seller continues to service the receivables
• Under IFRS, seller must continue to recognize the
receivables
• Significant disclosures

Underlying Principles
• Is it a sale or is it secured borrowing?
o Sale of receivables: derecognition
o Secured borrowing: no derecognition, additional liability
• Criteria for determining classification:

o Substantially all the risks and rewards have been transferred
(IFRS)
o Transferee controls if and when the assets can be sold to a
third party (ASPE)

Loan secured by AR
• A transfer of accounts receivable can be
recorded as a sale or a borrowing
• Sale: the accounts receivable come off the
books of the selling company, and a financing
fee is recognized. These types of transactions
are also known as factoring and securitization
• Borrowing: the accounts receivable are used as
security for the loan and left on the books of the
borrower company. The proceeds received
from the lender is recorded as a loan until the
amount is repaid
54
© McGraw-Hill Ryerson Beechy Intermediate Accounting Third Edition
Borrowing versus Sale Treatment: IFRS 9

Accounting for Transfers of
Receivables: ASPE

Presentation of Trade Accounts and
Notes Receivable (1 of 2)
Reporting and disclosures required by IFRS
• Segregate types of receivables
• If > one year, report amount and maturity date
• Separate current from non-current receivables
• Use an allowance account to record impairments (IFRS also
requires a reconciliation of changes in the allowance account
during the accounting period)
• Income statement disclosure of interest income, impairment
losses and any reversal of such losses
Requirements under ASPE are less stringent
Presentation of Trade Accounts and
Notes Receivable (2 of 2)
Reporting and disclosures required by I FRS
• Detailed disclosures about
o securitization or transfer of receivables, whether derecognized or
not
o Risk exposure
o Credit risk with loans and receivables
o Fair value information about loans and receivable
Far less about risk exposure and fair values under A SPE

Analysis
Net Sales  Revenue
Accounts Receivable Turnover =
Average Trade Receivable Net 
The above equation given is erroneous. It should be:

Net credit sales (or net credit revenue)
Average net accounts receivable
• measures the number of times, on average, receivables are
collected during the period
• Provides information about the quality of the receivables
• Shows how successfully the company collects its
outstanding receivables
• Compare with prior periods, industry standards, the
company’s credit terms, or internal targets
Comparison
IFRS ASPE
Cash and cash equivalents Allows preferred shares acquired Does not allow equities to
close to maturity date be considered cash
Recognition and Requires use of the effective interest Can use either the effective
measurement of receivable method for recognizing interest interest method or the
income and amortization straight- line method
Derecognition Considers whether substantial risks Considers who has control
and rewards of ownership have been of the asset
transferred
Disclosures Requires detailed quantitative and Requires basic disclosures
qualitative disclosures
Looking Ahead: IASB and FASB are working to simplify aspects of the
accounting for and reporting of financial instruments, including a new
model for impairments
Copyright
Copyright © 2019 John Wiley & Sons, Canada, Ltd.
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Intermediate Accounting

Volume 1 Twelfth Canadian Edition

Cash and Receivables

Copyright ©2019 John Wiley & Sons, Canada, Ltd. 2

After studying Appendix 7A, you should be able to:

Copyright ©2019 John Wiley & Sons, Canada, Ltd. 3

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• Short-term receivables are reported at their net realizable

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Age (number of days accounts are outstanding)

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Accounts should equal this

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• If payment is received after write-off of account, the account is

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• No allowance account is used

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Description Debit Credit

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Interest-bearing notes issued at face value

*Present value(PV) factors found in Tables A.1 to A.5

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Notes issued at zero-interest bearing

Interest component: $10,000 − $7,721.80 = $2,278.20

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Notes issued at zero-interest bearing

Plus: amortization for Year 1 = 694.96

Interest-bearing notes at a discount

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Notes Receivable 142

Notes Receivable 160

Interest-bearing notes at a premium

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• Account for new liability (example: note payable):

• Receivables are not derecognized

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