chapter 7 665
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Chapter 7
Cash And Receivables
Cash
What is cash?
Reporting cash.
Summary of cash-related items.
What is Cash?
Most liuid asset.
Standard medium of e!change.
"asis for measuring and accounting for all items.
Current asset.
#!amples$ coin% currency% available funds on deposit
at the ban&% money orders% certified chec&s% cashier's
chec&s% personal chec&s% ban& drafts and savings
accounts.
Reporting Cash$
(hree issues are related to cash reuire special
attention$
). Cash euivalents.
*. Restricted cash.
+. "an& overdraft.
Cash #uivalents$ Short-term% highly liuid investments that are both
). Readily convertible to cash% and
*. So near their maturity that they present insignificant
ris& of changes in interest rates.
#!amples$ (reasury bills% Commercial paper% and
Money mar&et funds.
Restricted Cash$
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Companies segregate restricted cash from ,regular
cash for reporting purposes.
#!amples% restricted for$
). lant e!pansion%*. Retirement of long-term debt% and
+. Compensating balances$ the minimum cash balance
in chec&ing or saving accounts that the ban&
reuires the customers to maintain.
"an& /verdrafts$
/ccurs 0hen a company 0rites a chec& for more than
the amount in its cash account. 1enerally reported as a current liability.
/ffset against cash account only 0hen available cash is
present in another account in the same ban& on 0hich
the overdraft occurred.
Summary of Cash-Related 2tems$
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etty Cash 3und$ 4sed to pay small amounts.
(he operation of the fund% often called an imprest
system% involves$
). #stablishing the petty cash fund.
*. Ma&ing payments from the petty cash fund% and
+. Replenishing the petty cash fund.
Accounting entries are reuired 0hen$
). the fund is established%
*. the fund is replenished% and
+. the amount of the fund is changed.
#!ample$
5incolnville Company uses an imprest petty cash
system. (he fund 0as established on March ) 0ith a balance
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of 6). 8uring March the follo0ing petty cash receipts
0ere found in the petty cash bo!.
(he fund 0as replenished on March )9 0hen the fund
contained 6+ in cash. /n March *% the amount in the fund
0as increased to 6)9.
2nstructions$ :ournali;e the entries in March that
pertain to the operation of the petty cash fund.
Solution$
8ate Account (itle and #!planation 8r. Cr.
Mar. ) etty Cash
Cash
(o establish the petty cash fund.
)
)
Mar. )9 ostage #!pense
3reight-/ut
Miscellaneous #!pense
(ravel #!pense
Cash /ver and Short
Cash
(o replenish the petty cash
fund.
+otice$ (otal e!penses remaining cash in the fund
should eual the original amount of the fund.). Cash shortage occurs 0hen total e!penses
remaining cash in the fund is less than the original
amount of the fund. Cash shortage is debited to the
Cash /ver and Short account 0hen replenishing the
fund.
*. Cash overage occurs 0hen total e!penses
remaining cash in the fund is more than the originalamount of the fund. Cash overage is credited to the
Cash /ver and Short account 0hen replenishing the
fund.
4se of a "an&$
(he use of a ban& minimi;es the amount of currency
that must be &ept on hand and therefore contributes
significantly to good internal control over cash.
A chec& is a 0ritten order signed by the depositor
directing the ban& to pay a specified sum of money to adesignated recipient. (he three parties to a chec& are
as follo0s$
a. (he ma&er @or dra0er 0ho issues the chec&.
b. (he ban& @or payer on 0hich the chec& is
dra0n.
c. (he payee to 0hom the chec& is payable.
A ban& statement sho0s$a. chec&s paid and other debits charged against
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the account%
b. deposits and other credits made to the account%
and
c. the account balance after each day's
transactions.
A ban& debit memoranda is usually included 0ith the
ban& statement to indicate charges against the
depositor's account such as a ban& service charge% cost
of printing chec&s% and 0hen a previously deposited
customer's chec& ,bounces because of insufficient
funds @>S3 chec&.
A ban& credit memoranda sho0s such items as the
collection of a note receivable for the depositor by the
ban&% or interest earned on deposits in the ban&.
Reconciling the "an& Account$
A reconciliation of a ban& account is necessary because
the balance per ban& and balance per boo&s are seldom
in agreement. (he lac& of agreement may be the result
of time lags and errors.
2n reconciling the ban& statement% it is customary to
reconcile the balance per boo&s @the cash balance in the
ledger and the balance per ban& @the cash balance
according to the ban& statement to their adBusted
@corrected cash balances. (he reconciliation schedule
consists of t0o sections.
(he steps in preparing a ban& reconciliation are$
a. 8etermine deposits in transit.b. 8etermine outstanding chec&s.
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c. >ote any errors discovered.
d. (race ban& memoranda to the records.
#ach reconciling item used in determining the adBusted
cash balance per boo&s should be recorded by thedepositor @reuires a Bournal entry to correct the cash
balance in the ledger.
Reconciliation rocedures$
8eposit in (ransit >otes collected by ban&
- /utstanding Chec&s - Service charges
- "an& #rrors - "oo& #rrors
C/RR#C( "A5A>C# C/RR#C( "A5A>C#
#!ample$
(he follo0ing information pertains to 3amily Dideo
Company.
). Cash balance per ban&% :uly +)% 67%*E+.
*. Cash balance per boo&s% :uly +)% 67%*F=.
+. :uly ban& service charge not recorded by the depositor
6*F.=. 8eposits in transit% :uly +)% 6)%9.
9. "an& collected 6
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b :ournali;e the adBusting entries at :uly +) on the boo&s
of 3amily Dideo Company.
Solution$
a
3amily Dideo
"an& Reconciliation Statement
3or :uly% *)
Cash balance per ban& statement 67%*FF
Add$ 8eposit in transit )%9
5ess$ /utstanding chec&s @9
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When the above entries are posted to the cash account
in the ledger$
5edger
Cash
"alance 7%*F=
:uly +)
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*. >otes Receivable$ Written promises to pay a sum of
money on a specified future date.
>on-(rade Receivable$ arise from a variety of
transactions such as$
). 2nterest and dividends receivable%
*. Advances to employees.
Recognition of Accounts Receivables$
2n most receivable transactions% the amount to be
recogni;ed is the e!change price @amount due from the
debtor. (0o elements that must be considered in measuring
receivables are$
@a the availability of discounts @trade and cash
discounts% and
@b the length of time bet0een the sale and the
payment due date @the interest factor.
(rade 8iscounts Reductions from the list price.
>ot recogni;ed in the accounting records.
Customers are billed net of discounts.
Cash 8iscounts
Companies offer cash discounts @sales discounts to
induce prompt payment @for e!ample% ,*G)% nG+.
(here are t0o methods for recogni;ing @recording
accounts receivable$
). (he gross method% and
*. (he net method.
#!ample @)$
(ransaction$
). Sales of 6)%% terms ,*G)% nG+.
*. Collection of amount due 0ithin discount period.
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1ross Method$
8ate Account (itle and #!planation 8r. Cr.
@) Accounts Receivable
Sales
(o record sales on account
terms *G)% nG+.
)%
)%
@* Cash
Sales 8iscount
Accounts Receivable
(o record collection of credit
sales 0ithin the discount period.
et Method$
8ate Account (itle and #!planation 8r. Cr.
@) Accounts Receivable
Sales
(o record sales on account
terms *G)% nG+ at net.
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>et Method$
8ate Account (itle and #!planation 8r. Cr.
Cash
Accounts Receivable
Sales 8iscount 3orfeited
(o record collection of credit
sales after the discount period.
)%
on-recognition of 2nterest #lement
ideally% a company should measure receivables in terms
of their present value. (hat is% the discounted value of
the cash to be received in the future.
(he profession specifically e!cludes from present value
considerations ,receivables arising from transactions0ith customers in the normal course of business 0hich
are due in customary trade terms not e!ceeding
appro!imately one year.
Recognition of >otes Receivable$
1enerally originate from$
Customers 0ho need to e!tend payment period
of an outstanding receivable
High-ris& or ne0 customers.
5oans to employees.
Sales of property% plant% and euipment.
5ending transactions @the maBority of notes
2n terms of interest% notes receivable are classified to$
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). 2nterest-bearing notes$ 0hich have a stated rate of
interest.
*. >on-interest-bearing notes @or ;ero-interest bearing
notes$ include the interest as part of their face
amount instead of stating it e!plicitly.
>otes receivable are considered fairly liuid% even if
long-term% because they may be easily converted to
cash.
Short-term notes are generally recorded at face value
@less allo0ances because the interest implicit in thematurity value is immaterial.
>otes maturing in + months or less are considered cash
euivalents and are not subBect to premium or discount
amorti;ation.
5ong-term notes receivable should be recorded and
reported at the present value of the cash e!pected to becollected.
When the interest stated on an interest-bearing note is
eual to the effective @mar&et rate of interest% the note
sells at face value.
When the interest stated on an interest-bearing note is
less than the mar&et rate of interest% the note sells at adiscount.
When the interest stated on an interest-bearing note is
grater than the mar&et rate of interest% the note sells at
a premium.
(he discount% or premium is recorded% and then
amorti;ed over the life of the note to appro!imate theeffective interest rate.
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>ote 2ssued at 3ace Dalue$#!ample$
"igelo0 Corp. lends Scandinavian 2mports 6)% in
e!change for a 6)%% three-year note bearing interest at
)I annually. (he mar&et rate of interest for a note of
similar ris& is also )I. Ho0 does "igelo0 record the
receipt of the note?
Solution$
D of 2nterest @resent value of ordinary annuity$
D-/An%i J A @D3-/An%i
Where$
D-/An%i J resent value of an ordinary annuity of 6)
invested for n periods at 2 interest rate.
A$ the annuity @the annual interest.
D3-/An%i J resent value factor of an ordinary
annuity of 6) invested for n periods at 2
interest rate @this factor is e!tracted from
the present value of an ordinary annuity
table.
D-/A +% )I J 6)% ! *.=FEF9 J 6*%=F7
2nterest 3actor resent
Received Dalue
D of rincipal @resent Dalue of the 3ace Dalue of >ote
D J 3D @D3n%i
Where$
D$ resent value.
3D$ 3uture value.
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D3$ resent value factor of a single amount of 6)
invested for n periods at 2 interest rate.
D+% )I J 6)% ! .79)+* J 67%9)+
rincipal 3actor resent value
Summaryresent value of interest 6 *%=F7
resent value of principal 7%9)+
>ote current mar&et value @resent value 6)%
(he receipt of the note receivable is recorded by
"igelo0 as follo0s$
8ate Account (itle and #!planation 8r. Cr.
:an. Kr ) >otes Receivable
Cash
(o record the receipt of a note
receivable for a loan to
Scandinavian 2mports.
)%
)%
#ach year% "igelo0 0ould record interest revenue on
the note receivable as follo0s$
8ate Account (itle and #!planation 8r. Cr.
8ec. Kr ) Cash 2nterest Revenue
(o record interest revenue on
the note receivable.
)% )%
>ote >ot 2ssued at 3ace Dalue$Lero-2nterest-"earing >ote @>on-interest-"earing >ote$
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>otes receivable are sometimes issued 0ith ;ero
interest rate stated or at a stated rate that is
unreasonable.
2n such instances the present value of the note is
measured by the cash proceeds to the borro0er or fair
value of the property% goods% or services rendered.
(he difference bet0een the face amount of the note and
the cash proceeds or fair value of the property
represents the total amount of interest during the life of
the note.
#!ample$
:eremiah Company receives a three-year% 6)% ;ero-
interest-bearing note. (he mar&et rate of interest for a note
of similar ris& is ote
D+%
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:eremiah Company records the receipt of the note
receivable as follo0s$8ate Account (itle and #!planation 8r. Cr.
:an.
Kr )
>otes Receivable
Cash
8iscount on >otes Receivable
(o record the receipt of a ;ero-
interest note receivable.
)%
7%7*).F
*%*7F.*
:eremiah Company records interest revenue on the
note at the end of each of the three years as follo0s$
8ate Account (itle and #!planation 8r. Cr.
8ec. Kr ) 8iscount on >otes Receivable
2nterest Revenue
(o record interest revenue on
the note receivable.
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8ec. Kr + 8iscount on >otes Receivable
2nterest Revenue
F*9.7+
F*9.7+
(he discount on notes receivable account over the three
years appears as follo0s$
8iscount on >otes Receivable#nd Kr ) 6Eote$#!ample$
Morgan Corp. ma&es a loan to Marie Co. and receives
in e!change a three-year% 6)% note bearing interest at
)I annually. (he mar&et rate of interest for a note of
similar ris& is )*I.
Reuired$). Compute the present value of the note receivable.
*. Compute the discount on notes receivable.
+. repare a Bournal entry to record the receipt of the
note receivable.
=. repare a schedule of note discount amorti;ation
using the effective interest method.
9. repare Bournal entries to record the amorti;ation of
the discount on notes receivable.
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Solution$
D of 2nterest @resent value of ordinary annuity$
D-/A+% )*I J 6)% ! *.=)F+ J 6*%=*
2nterest 3actor resent value
Received
D of rincipal @resent value of the 3ace Dalue of the >ote
D+% )*I J 6)% ! .7))7F J 67%))F
rincipal 3actor resent value
resent Dalue of the >ote J resent value of interest
present value of rincipal
J 6*%=* 67%))F J 6
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(he receipt of the note is recorded as sho0n belo0$
8ate Account (itle and #!planation 8r. Cr.
:an.Kr ) >otes Receivable Cash
8iscount on >otes Receivable
(o record the receipt of a +-year%
)I note receivable.
)% otes receivable
)%
)=*
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2nterest revenue
(o record interest revenue and
amorti;ation of discount on notes
receivable.
)%)=*
#nd
Kr *
Cash
8iscount on >otes receivable
2nterest revenue
(o record interest revenue and
amorti;ation of discount on notes
receivable.
)%
)9ote ayable
2nterest #!pense
Cash
(o record ayment of the balance
of the note payable plus interest to
the ban&.
EE%
EE
EE%EE
Sales of Receivables$ When accounts and notes receivable are factored
@sold% the factoring arrangement can be 0ith recourse
or 0ithout recourse.
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2f receivables are factored on a 0ith recourse basis% the
seller guarantees payment to the factor in the event the
debtor does not ma&e payment.
When a factor buys receivables 0ithout recourse% the
factor assumes the ris& of collectibility and absorbs any
credit losses.
We 0ill only focus on the case of sale of receivable on a
0ithout recourse basis.
Sale of Receivable Without Recourse$
urchaser assumes ris& of collection.
(ransfer is outright sale of receivables.
Seller records loss on sale.
Seller use 8ue from 3actor @receivable account to
cover discounts% returns% and allo0ances.
#!ample$
Crest (e!tiles% 2nc. factors 69% of accounts
receivable 0ith Commercial 3actors% 2nc.% on a 0ithout
recourse basis. (he receivable records are transferred to
Commercial 3actors% 2nc.% 0hich 0ill receive the
collections. Commercial 3actors assesses a finance charge
of +I of the amount of accounts receivable and retains anamount eual to 9I of the accounts receivable @for
probable adBustments.
2nstructions$ repare the Bournal entry on the records
of Crest (e!tiles% 2nc.% to record the sale of
receivable.
Solution$
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5oss on sale of receivable @the finance charge
J 69% O +I J 6)9%
8ue 3rom 3actor J 69% O 9I J 6*9%
Cash collected from sale of receivable J 69%
@6)9% 6*9% J 6=E%
(he :ournal entry on the records of Crest (e!tiles% 2nc.%
to record the sale of receivable is sho0n belo0$
8ate Account (itle and #!planation 8r. Cr.
Cash
8ue 3rom 3actor
5oss on Sale of Receivable
Accounts Receivable
=E%
*9%
)9% 9%
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