Wiley - Chapter 7: Cash And Receivables 5d2y5e
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Receivables
Chapter
7
Chapter 7-1
Receivables Claims held against customers and others for money, goods, or services.
Chapter 7-2
Oral promises of the purchaser to pay for goods and services sold.
Written promises to pay a sum of money on a specified future date.
s Receivable
Notes Receivable
Receivables Nontrade Receivables Examples: 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.
Chapter 7-3
Valuation of s Receivable Reporting s Receivable Valuation (net realizable value) s Receivable less estimate of uncollectable amount Sales on raise the possibility of s not being collected
Chapter 7-4
Recognition of s Receivables Trade Discounts Reductions from the list price Not recognized in the ing records Customers are billed net of discounts
Chapter 7-5
10 % Discount for new Retail Store Customers
Recognition of s Receivables Cash Discounts Inducements for prompt payment
Gross Method vs. Net Method
Chapter 7-6
Payment are 2/10, n/30
Recognition of s Receivables Example: On June 3, Benedict Corp. sold to Chester Inc.,
merchandise having a sale price of $5,000 with of 2/10,n/60, f.o.b. shipping point. On June 12, Benedict received a check for the balance due from Chester. Prepare required journal entries assuming Benedict records the sale at gross. Gross Method June 3 June 12
Chapter 7-7
Recognition of s Receivables Example: On June 3, Benedict Corp. sold to Chester Inc.,
merchandise having a sale price of $5,000 with of 2/10,n/60, f.o.b. shipping point. On June 12, Benedict received a check for the balance due from Chester. Prepare required journal entries assuming Benedict records the sale at net. Net Method June 3 June 12
Chapter 7-8
Recognition of s Receivables Example: On June 3, Benedict Corp. sold to Chester Inc.,
merchandise having a sale price of $5,000 with of 2/10,n/60, f.o.b. shipping point. On June 29, Benedict received a check for the balance due from Chester. Prepare required journal entries assuming Benedict records the sale at net. Net Method June 3 June 29
Chapter 7-9
Estimate of Uncollectible s Methods of ing for Uncollectible s Direct Write-Off Theoretically undesirable: no matching receivable not stated at net realizable value
Chapter 7-10
Allowance Method Losses are Estimated: Percentage-of-sales Percentage-ofreceivables
Estimate of Uncollectible s Percentage of Sales Focus on Matching
Income Statement Approach
Sales --- Bad Debt Expense
Percentage of Receivables Focus on Net Realizable Value
Receivables - Allowance for Bad Debt Chapter 7-11
Balance Sheet Approach
Uncollectible s Receivable Percentage-of-Receivables Approach not matching. reports receivables at net realizable value. Companies may apply this method using one composite rate, or an aging schedule of s receivable.
Chapter 7-12
Estimate of Uncollectible s Example Data s receivable balance Estimated % of A/R not collected
$72,500 8%
Allowance for Doubtful s: Case 1 $150 (credit balance) Case 2 $150 (debit balance)
Chapter 7-13
Estimate of Uncollectible s Percentage of Receivables s receivable
$ 72,500
Estimated percentage
x
8%
Desired balance
$
5,800
===================================================
What should the ending balance be for the allowance ? -- Case 1 and Case 2
Chapter 7-14
Estimate of Uncollectible s Percentage of Receivables Case 1 Actual balance (credit) Desired balance Adjustment to = desired balance Journal entry – Case 1:
Chapter 7-15
(150)
Case 2
Estimate of Uncollectible s Percentage of Receivables Actual balance (credit)
Case 1
Case 2
(150)
150
Desired balance
(5,800)
Adjustment to = desired balance
(5,650)
Journal entry – Case 2:
Chapter 7-16
Estimate of Uncollectible s Summary Record the receivable amount: Initially valued at the exchange price
Net versus Gross method if cash discounts Estimate the Uncollectable amount: Percentage of Sales approach Percentage of Receivables approach Chapter 7-17
Write-Off s Receivable Write-off of uncollectible s for $10? Allowance for Doubtful s 10 s receivable
s Receivable Beg.
Chapter 7-18
500
10
Allowance for Doubtful s 25
Beg.
Write-Off s Receivable Recovery of previously written off s for $10?
Chapter 7-19
Estimate of Uncollectible s
For similar exercises see E 7-7 & E7- 8
P7- 2
Chapter 7-20
Recognition of Notes Receivable Notes Receivable ed by a formal promissory note. A negotiable instrument Maker signs in favor of a Payee
Interest-bearing (has a stated rate of interest) OR Noninterest-bearing (interest included in face amount)
Chapter 7-21
Recognition of Notes Receivable
Chapter 7-22
Short-Term
Long-Term
Record at Face Value, less allowance
Record at Present Value of cash expected to be collected
Interest Rates
Note Issued at
Stated rate = Market rate
Face Value
Stated rate > Market rate
Stated rate < Market rate
Discount
Note Issued at Face Value Exercise Balance Bar Co. lends Bio Foods $100,000 in exchange for a $100,000, 5-year note bearing interest at 8 percent annually. The market rate of interest for a note of similar risk is also 8 percent. How does Balance Bar record the receipt of the note?
0 Chapter 7-23
1
2
3
4
5
6
Note Issued at Face Value P.V. of Note= P.V. of Principal + P.V. of Interest: Interest= Payment *[PV of OA Factor i=8%, n=5]
Principal= Principal *[PV of $1 Factor i=8%, n=5]
Chapter 7-24
Note Issued at Face Value Journal Entries: Record issuance of note receivable:
Record Interest revenue at end of years 1 through 5
Chapter 7-25
Zero-Interest-Bearing Note Exercise Balance Bar Co. receives a 5-year, $100,000 zero-interest-bearing note. The market rate of interest for a note of similar risk is 6 percent. How does Balance Bar record the receipt of the note?
$100,000
0 Chapter 7-26
$0
0
0
0
0
1
2
3
4
5
6
Zero-Interest-Bearing Note Amortization Schedule Non-Interest-Bearing Note
Cash Received Date of issue End of yr. 1 End of yr. 2 End of yr. 3 End of yr. 4 End of yr. 5
Chapter 7-27
-
6% Interest Revenue
5,340 5,660 25,274
Discount Amortized
5,340 5,660 25,274
Carrying Amount of Note $ 74,726
94,340 100,000
Zero-Interest-Bearing Note Journal Entries for Non-Interest-Bearing note Record issuance of note receivable:
Record Interest revenue at end of year 1
Chapter 7-28
Interest-Bearing Note Exercise Balance Bar Co. made a loan to Bio Foods and received in exchange a 5-year, $100,000 note bearing interest 10 percent. The market rate of interest for a note of similar risk is 8 percent. How does Balance Bar record the receipt of the note? Present value of Principle: $100,000 (PVF5, 8%) = $100,000 x .68058 =
$ 68,058
Present value of Interest: $10,000 (PVF5, 8%) = $10,000 x 3.99271 =
Present value of note Chapter 7-29
39,927
$ 107,985
Interest-Bearing Note Amortization Schedule Interest-Bearing Note
Cash Received Date of issue End of yr. 1 End of yr. 2 End of yr. 3 End of yr. 4 End of yr. 5
Chapter 7-30
10,000 10,000 10,000 10,000 10,000 50,000
8% Interest Revenue $
8,639 8,530 8,412 8,285 8,148 42,014
Amortized $
(1,361) (1,470) (1,588) (1,715) (1,851) (7,985)
Carrying Amount of Note $ 107,985 106,624 105,154 103,566 101,851 100,000
Interest-Bearing Note Journal Entries for Interest-Bearing Note Date
Title
Jan. yr. 1 Notes receivable on notes receivable
Debit 100,000 7,985
Cash Dec. yr. 1 Cash
107,985 10,000
on notes receivable
1,361
Interest revenue
8,639
($107,985 x 8%)
Chapter 7-31
Credit
Notes Receivable Exercise
For similar exercise see BE 7-7
Chapter 7-32
Presentation and Analysis General rule in classifying receivables are:
Chapter 7-33
1.
Segregate the different types of receivables that a company possesses, if material.
2.
Appropriately offset the valuation s against the proper receivable s.
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 all significant concentrations of credit risk arising from receivables.
Chapter
7
Chapter 7-1
Receivables Claims held against customers and others for money, goods, or services.
Chapter 7-2
Oral promises of the purchaser to pay for goods and services sold.
Written promises to pay a sum of money on a specified future date.
s Receivable
Notes Receivable
Receivables Nontrade Receivables Examples: 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.
Chapter 7-3
Valuation of s Receivable Reporting s Receivable Valuation (net realizable value) s Receivable less estimate of uncollectable amount Sales on raise the possibility of s not being collected
Chapter 7-4
Recognition of s Receivables Trade Discounts Reductions from the list price Not recognized in the ing records Customers are billed net of discounts
Chapter 7-5
10 % Discount for new Retail Store Customers
Recognition of s Receivables Cash Discounts Inducements for prompt payment
Gross Method vs. Net Method
Chapter 7-6
Payment are 2/10, n/30
Recognition of s Receivables Example: On June 3, Benedict Corp. sold to Chester Inc.,
merchandise having a sale price of $5,000 with of 2/10,n/60, f.o.b. shipping point. On June 12, Benedict received a check for the balance due from Chester. Prepare required journal entries assuming Benedict records the sale at gross. Gross Method June 3 June 12
Chapter 7-7
Recognition of s Receivables Example: On June 3, Benedict Corp. sold to Chester Inc.,
merchandise having a sale price of $5,000 with of 2/10,n/60, f.o.b. shipping point. On June 12, Benedict received a check for the balance due from Chester. Prepare required journal entries assuming Benedict records the sale at net. Net Method June 3 June 12
Chapter 7-8
Recognition of s Receivables Example: On June 3, Benedict Corp. sold to Chester Inc.,
merchandise having a sale price of $5,000 with of 2/10,n/60, f.o.b. shipping point. On June 29, Benedict received a check for the balance due from Chester. Prepare required journal entries assuming Benedict records the sale at net. Net Method June 3 June 29
Chapter 7-9
Estimate of Uncollectible s Methods of ing for Uncollectible s Direct Write-Off Theoretically undesirable: no matching receivable not stated at net realizable value
Chapter 7-10
Allowance Method Losses are Estimated: Percentage-of-sales Percentage-ofreceivables
Estimate of Uncollectible s Percentage of Sales Focus on Matching
Income Statement Approach
Sales --- Bad Debt Expense
Percentage of Receivables Focus on Net Realizable Value
Receivables - Allowance for Bad Debt Chapter 7-11
Balance Sheet Approach
Uncollectible s Receivable Percentage-of-Receivables Approach not matching. reports receivables at net realizable value. Companies may apply this method using one composite rate, or an aging schedule of s receivable.
Chapter 7-12
Estimate of Uncollectible s Example Data s receivable balance Estimated % of A/R not collected
$72,500 8%
Allowance for Doubtful s: Case 1 $150 (credit balance) Case 2 $150 (debit balance)
Chapter 7-13
Estimate of Uncollectible s Percentage of Receivables s receivable
$ 72,500
Estimated percentage
x
8%
Desired balance
$
5,800
===================================================
What should the ending balance be for the allowance ? -- Case 1 and Case 2
Chapter 7-14
Estimate of Uncollectible s Percentage of Receivables Case 1 Actual balance (credit) Desired balance Adjustment to = desired balance Journal entry – Case 1:
Chapter 7-15
(150)
Case 2
Estimate of Uncollectible s Percentage of Receivables Actual balance (credit)
Case 1
Case 2
(150)
150
Desired balance
(5,800)
Adjustment to = desired balance
(5,650)
Journal entry – Case 2:
Chapter 7-16
Estimate of Uncollectible s Summary Record the receivable amount: Initially valued at the exchange price
Net versus Gross method if cash discounts Estimate the Uncollectable amount: Percentage of Sales approach Percentage of Receivables approach Chapter 7-17
Write-Off s Receivable Write-off of uncollectible s for $10? Allowance for Doubtful s 10 s receivable
s Receivable Beg.
Chapter 7-18
500
10
Allowance for Doubtful s 25
Beg.
Write-Off s Receivable Recovery of previously written off s for $10?
Chapter 7-19
Estimate of Uncollectible s
For similar exercises see E 7-7 & E7- 8
P7- 2
Chapter 7-20
Recognition of Notes Receivable Notes Receivable ed by a formal promissory note. A negotiable instrument Maker signs in favor of a Payee
Interest-bearing (has a stated rate of interest) OR Noninterest-bearing (interest included in face amount)
Chapter 7-21
Recognition of Notes Receivable
Chapter 7-22
Short-Term
Long-Term
Record at Face Value, less allowance
Record at Present Value of cash expected to be collected
Interest Rates
Note Issued at
Stated rate = Market rate
Face Value
Stated rate > Market rate
Stated rate < Market rate
Discount
Note Issued at Face Value Exercise Balance Bar Co. lends Bio Foods $100,000 in exchange for a $100,000, 5-year note bearing interest at 8 percent annually. The market rate of interest for a note of similar risk is also 8 percent. How does Balance Bar record the receipt of the note?
0 Chapter 7-23
1
2
3
4
5
6
Note Issued at Face Value P.V. of Note= P.V. of Principal + P.V. of Interest: Interest= Payment *[PV of OA Factor i=8%, n=5]
Principal= Principal *[PV of $1 Factor i=8%, n=5]
Chapter 7-24
Note Issued at Face Value Journal Entries: Record issuance of note receivable:
Record Interest revenue at end of years 1 through 5
Chapter 7-25
Zero-Interest-Bearing Note Exercise Balance Bar Co. receives a 5-year, $100,000 zero-interest-bearing note. The market rate of interest for a note of similar risk is 6 percent. How does Balance Bar record the receipt of the note?
$100,000
0 Chapter 7-26
$0
0
0
0
0
1
2
3
4
5
6
Zero-Interest-Bearing Note Amortization Schedule Non-Interest-Bearing Note
Cash Received Date of issue End of yr. 1 End of yr. 2 End of yr. 3 End of yr. 4 End of yr. 5
Chapter 7-27
-
6% Interest Revenue
5,340 5,660 25,274
Discount Amortized
5,340 5,660 25,274
Carrying Amount of Note $ 74,726
94,340 100,000
Zero-Interest-Bearing Note Journal Entries for Non-Interest-Bearing note Record issuance of note receivable:
Record Interest revenue at end of year 1
Chapter 7-28
Interest-Bearing Note Exercise Balance Bar Co. made a loan to Bio Foods and received in exchange a 5-year, $100,000 note bearing interest 10 percent. The market rate of interest for a note of similar risk is 8 percent. How does Balance Bar record the receipt of the note? Present value of Principle: $100,000 (PVF5, 8%) = $100,000 x .68058 =
$ 68,058
Present value of Interest: $10,000 (PVF5, 8%) = $10,000 x 3.99271 =
Present value of note Chapter 7-29
39,927
$ 107,985
Interest-Bearing Note Amortization Schedule Interest-Bearing Note
Cash Received Date of issue End of yr. 1 End of yr. 2 End of yr. 3 End of yr. 4 End of yr. 5
Chapter 7-30
10,000 10,000 10,000 10,000 10,000 50,000
8% Interest Revenue $
8,639 8,530 8,412 8,285 8,148 42,014
Amortized $
(1,361) (1,470) (1,588) (1,715) (1,851) (7,985)
Carrying Amount of Note $ 107,985 106,624 105,154 103,566 101,851 100,000
Interest-Bearing Note Journal Entries for Interest-Bearing Note Date
Title
Jan. yr. 1 Notes receivable on notes receivable
Debit 100,000 7,985
Cash Dec. yr. 1 Cash
107,985 10,000
on notes receivable
1,361
Interest revenue
8,639
($107,985 x 8%)
Chapter 7-31
Credit
Notes Receivable Exercise
For similar exercise see BE 7-7
Chapter 7-32
Presentation and Analysis General rule in classifying receivables are:
Chapter 7-33
1.
Segregate the different types of receivables that a company possesses, if material.
2.
Appropriately offset the valuation s against the proper receivable s.
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 all significant concentrations of credit risk arising from receivables.
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