chapter 7, slide #1 ch.7 investments & receivables
TRANSCRIPT
Chapter 7, Slide #1
Ch.7Investments &
Receivables
Chapter 7, Slide #2
Part IInvestments(FYI only)
Chapter 7, Slide #3
Types of Investments
• Investment in treasury bills
• Investment in a CD
• Investment in other companies’ bonds
• Investment in other companies’ stocks
Investment in a CD
Purchase of investment:
Short-Term Investments—CD 100,000
Cash 100,000
On October 2, Apple invests $100,000 in a 120-day CD. Principal plus interest @ 6% due upon investment maturity.
Example:
LO1
Year-end adjusting entry:
Interest Receivable 1,500 Interest Revenue 1,500
Investment in a CD
Interest (I) = Principal (P) × Rate (R) × Time (T)$1,500 = $100,000 × 6% × 90/360
October – 29 daysNovember – 30 daysDecember – 31 days
90 days
Upon investment maturity:
Cash 102,000Short-Term Investments—CD
100,000Interest Receivable 1,500Interest Revenue* 500
Investment in a CD
*Interest earned in January:
$100,000 × 6% × 30/360 = $500
Chapter 7, Slide #7
Reasons Companies Invest in Other Companies’ stocks
Short-term cash excesses
Long-term investing for future cash needs
Exert influence over investee
Obtain control of investee
Chapter 7, Slide #8
Accounting for Common-Stock Investments
No significantinfluence
0% 20%
FairValue
Method
Significantinfluence
50%
EquityMethod
Control
100%
ConsolidatedFinancial
Statements
Ourfocus
in Appendix
Chapter 7, Slide #9
Part IIReceivables
Chapter 7, Slide #10
Credit Sales
An effort to increase sales Slows inflow of cash Risk of uncollectible accounts
LO2
Chapter 7, Slide #11
Apple’s Consolidated Balance Sheets (Partial)
(amounts in millions) 2004 2003
Accounts receivables, less allowances of $47 and $49, respectively $774 $766
Net Realizable
Value
Estimat
ed
Unco
llecti
ble
Accounts
Chapter 7, Slide #12
Two accounting methods for bad debts
• Direct write-off method
• Allowance method
Chapter 7, Slide #13
Direct Write-off Method
Journal entry to record write-off in period determinedto be uncollectible:
Bad Debts Expense XXX
Accounts Receivable—Dexter XXX
Period of sale Future period chargedwith expense of bad debtwrite-off
1 2 3
4 5 6 7 8 9 10
11 12 13 14 15 16 17
18 19 20 21 22 23 24
25 26 28 29 30 3127
1 2 3
4 5 6 7 8 9 10
11 12 13 14 15 16 17
18 19 20 21 22 23 24
25 26 28 29 30 3127
Chapter 7, Slide #14
Allowance Method(acceptable under GAAP)
Period of saleEstimated bad debt expense (and allowance account) recorded in the same period
1 2 3
4 5 6 7 8 9 10
11 12 13 14 15 16 17
18 19 20 21 22 23 24
25 26 28 29 30 3127
Chapter 7, Slide #15
Accounting for Bad Debts:Allowance Method
Journal entry to record estimated bad debtexpense in period of sale:
Bad Debts Expense 6,000
Allowance for Doubtful Accounts 6,000
I estimate...
Chapter 7, Slide #16
Roberts Corp.Partial Balance Sheet
Accounts receivable $250,000Less: Allowance for doubtful accounts 6,000
Net accounts receivable $244,000
Balance Sheet Presentation – Allowance Method
Chapter 7, Slide #17
Accounting for Bad Debts:Allowance Method
Journal entry to record bad debt write-off of customer John’s account for $320 in
period determined uncollectible:
Allowance for Doubtful Accounts 320
Accounts Receivable—Dexter 320
Bankrupt
Chapter 7, Slide #18
Approaches to Allowance Method
% of Net Credit Sales
% of Accounts Receivable – Aging Method
Income Statement Approach
Balance Sheet
Approach
Chapter 7, Slide #19
Percentage of Net Credit Sales Method
2007 Net credit sales $2,340,000 (given)
Bad debt percentage 2%
Bad debts expense $ 46,800
Example:
Journal entry:
Bad Debts Expense 46,800
Allowance for Doubtful Accounts 46,800
Aging Method
Estimated Percent Estimated Amount
Category Amount Uncollectible Uncollectible Current $ 85,600 1% $ 856Past due: 1–30 days 31,200 4% 1,248 31–60 days 24,500 10% 2,450 61–90 days 18,000 30% 5,400 90+ days 9,200 50% 4,600 Totals $168,500 $14,554
Chapter 7, Slide #21
Aging Method
Assume the Allowance for Doubtful Accounts has a beginning credit balance of $1,230:
Credit balance required in allowance account after adjustment $14,554
Less: Credit balance in allowance account before adjustment 1,230
Amount for bad debt expense entry $13,324
Chapter 7, Slide #22
Aging Method
Assume the Allowance for Doubtful Accounts has a beginning credit balance of $1,230:
Journal entry:
Bad Debts Expense 13,324
Allowance for Doubtful Accounts 13,324
To record estimated bad debts.
Chapter 7, Slide #23
Aging Method
The net realizable value of accounts receivable would be determined as follows:
Accounts receivable $168,500
Less: Allowance for doubtful accounts 14,554
Net realizable value $153,946
Chapter 7, Slide #24
Part IIINotes receivables
Chapter 7, Slide #25
On Dec. 13, 2006, High Tech Company sold merchandise inventory to Baker Corporation in exchange for a $15,000,12% promissory note which matures on March 13, 2007.
Date: December 13, 2007
Signed:_________
Interest-Bearing Promissory Note
Baker Corporation
MaturityDate
Principal
Interest
LO4
Chapter 7, Slide #26
Interest-Bearing Promissory Note
Journal entry to record the receipt of the note
on December 13:
Notes Receivable 15,000
Sales Revenue 15,000
Chapter 7, Slide #27
Interest-Bearing Promissory Note
Adjusting entry to record interest:
Interest Receivable 90
Interest Revenue 90*
*Interest = $15,000 × 12% × 18/360
Chapter 7, Slide #28
Interest-BearingPromissory Note
Journal entry to record the collection of the note on March 13, 2008:
Cash 15,450
Notes Receivable 15,000
Interest Revenue 360*
Interest Receivable 90
*15,000 × 12% × 72/360