Beruflich Dokumente
Kultur Dokumente
Administrative
– Go over Midterm
– DQ Multiple Deliverables due Monday Feb
21st (will be posted today)
• Cash Equivalents
– Grouped together with cash
– reported as the most liquid current asset on the balance sheet
• Restricted Cash
– Disclosed separately
– If relates terms of LT liability classify as LT
• Bank Overdrafts
– US GAAP: Disclosed as a current liability unless there are other
positive-balance cash accounts at the same bank that it can be
netted against
– IFRS: Included in cash and cash equivalents if repayable on
demand and form a part of an entity’s cash management
Controls and Cash
Questions
• Why are internal controls over cash so important?
• What is the purpose of controls over cash?
Hierarchy of matching
Exceptions:
1. Sales with buyback agreements – No Sale
2. Trade loading and channel stuffing – No Sale
3. Sales when right of return exists (high rates that are not
reliably estimable) –Specific criteria to be met
Revenue Recognition at Point of Sale
If paid within discount period January 10, If paid inside discount period on January 10,
2006: 2006:
Dr. Cash 980 Dr. Cash 980
Cr. A/R Dr. Sales Discounts 20
980 Cr. A/R 1,000
If paid outside discount period on 1/15/06: If paid outside discount period on 1/15/06:
January 15, 2006: January 15, 2006:
Dr. Cash 1,000 Dr. Cash 1,000
Cr. A/R 980 Cr. A/R 1,000
Cr. Sales Discounts Forfeited 20
Valuation of Accounts Receivable
What is the journal entry to record bad debt expense for 2006
Allowance Examples (cntd.)
4. Percent of Receivables Now assume Crawford estimates
their Allowance using an A/R aging. Prior collections history is
used to estimate the percentage of each category that is
uncollectible.
Age Balance % bad
0-30 days 1,200,000 x 0.75% = 9,000
31-60 days 500,000 x 8.00% = 40,000
61+ days 200,000 x 20.00% = 40,000
89,000
What is the adjusting journal entry at year end?
Allowance Examples (cntd.)
July 31:
Dr. Cash 880
Dr. Allowance for doubtful accounts 120
Cr. A/R 1,000
August 2:
Dr. Interest Expense 50
Dr. Note Payable 1,000
Cr. Cash 1,050
Sale of Receivables – the Basics
Dr. Cash
Dr. Due from Factor
Dr. Loss on sale of A/R
Cr. A/R
Dr. Cash
Dr. Loss
Cr. Due from Factor
What if instead, W Factor informed H Software on Aug 2 that it was able to collect all of
the AR? What would be the journal entry?
Dr. Cash
Cr. Due from Factor
Transfer of Receivables: Sale With Recourse
To help overcome a cash shortage, H Software factored $1,000 of receivables to W
Factor on July 1, 2006. W Factor withheld $100 pending collectability, and charged
H Software $40. The remaining $860 was forwarded to H Software on July 1. W
Factor collected on the A/R, but had recourse in case of bad debts. H Software
estimated that $150 of the receivables would ultimately be uncollectible. On August
2nd, W Factor informed H Software that $120 of the accounts were uncollectible, and
H Software sent W Factor the appropriate recourse payment.
Dr. Cash
Dr. Due from Factor
Dr. Loss on Sale of A/R (plug)
Cr. A/R
Cr. Recourse Liability
What if W Factor informed H Software that $220 of the accounts were uncollectible?
Transfer of Receivables: Dawson Example
On January 1, 2006, Dawson Associates is considering outsourcing the collection of its
accounts receivable. The following factoring options are available to Dawson.
Speedy Finance, Inc. Under the terms of the agreement, Speedy Finance would pay
Dawson 98% of the gross amount of the transferred receivables and Dawson would be
responsible to pay Speedy Finance for any uncollectible accounts. Dawson estimates its
recourse liability would be $60,000. Speedy Finance will collect the receivables and will
have the right to pledge or sell the receivables to another party.
Strapped Solutions, Inc. Under the terms of the agreement, Strapped Solutions would
pay Dawson 96.5% of the gross amount of Dawson’s receivables without recourse.
Strapped Solutions will collect the receivables and will have the right to pledge or sell
the receivables to another party.
The following information is available from Dawson’s Balance Sheet at Dec. 31, 2005:
Accounts Receivable $5,000,000
Allowance for doubtful accounts 80,000
Transfer of Receivables: Dawson Example
Prepare the journal entry that Dawson would record on January
1, 2006 if it decides to enter into the agreement with Speedy
Finance.
Transfer of Receivables: Dawson Example
Notes Receivable
Questions:
1) What is the true value of the transaction (i.e, revenue)?
2) Is the loan really at 0% interest?
Long-Term Notes Receivable: The
Basics
• To ensure this happens, need to consider interest rates.
• Interest rates: Stated vs. market
– Stated rate = effective (market rate) note issued at face value
– Stated rate < market rate note issued at a discount.
– Stated rate > market rate note issued at a premium.
– The discount or premium is amortized to interest revenue by the effective
interest method.
• Record interest revenue each period using the effective interest
method.
– Yields steady market rate of interest on net investment in note receivable
(i.e., note receivable + premium/discount)
Notes Receivable:
Stated Rate = Market Rate
On December 31, 2007, Nemo, Inc. finished consultation
services and accepted in exchange a promissory note with a face
value of $600,000, a due date of December 31, 2010, and a stated
rate of 6%, with interest receivable at the end of each year. The
note is considered to have a market rate of interest of 6%.
Periods (n) 3% 6% 9%
Periods (n) 3% 6% 9%
Journal entries
Notes Receivable:
Stated Rate < Market Rate
On December 31, 2007, Nemo, Inc. finished consultation
services and accepted in exchange a promissory note with a face
value of $600,000, a due date of December 31, 2010, and a stated
rate of 3%, with interest receivable at the end of each year. The
note is considered to have a market rate of interest of 6%.
Steps:
1. Determine issue price on notes receivable
at implicit rate of interest
2. The discount is amortized to interest
revenue by the effective interest method
Notes Receivable – Non-Interest Bearing
Implicitly, how much interest revenue will Mouse receive over the
2 year period of the note?
Carrying
Date Int Rev Disc. Amor. Amt NR
1/1/2006 7,972
12/31/2006 957 957 8,929
12/31/2007 1,071 1,071 10,000
2,028
Notes Receivable – Non-Interest Bearing
January 1, 2006:
Journal Entry
Loss on troubled debt restructuring 8,867,670
Accrued interest receivable 3,000,000
Note receivable ($30,000,000-24,132,330) 5,867,670
Presentation & Disclosure of
Receivables
Rules:
• Segregate different types of receivables if material
• Offset valuation accounts against gross balance
• Ensure all receivables are really current
• Disclose any loss contingencies on the receivables
• Disclose amounts pledged as collateral
• Disclose significant concentrations of credit risk
Analysis of Receivables
Ratios used
AR Turnover = Net Sales/Average net Trade AR