CH 07

Chapter
7-1
CHAPTER 7
CASH AND RECEIVABLES
Intermediate Accounting
13th Edition
Kieso, Weygandt, and Warfield
Chapter
7-2
Learning
Learning Objectives
Objectives
1. Identify items considered cash.
2. Indicate how to report cash and related items.
3. Define receivables and identify the different types of receivables.
4. Explain accounting issues related to recognition of accounts
receivable.
5. Explain accounting issues related to valuation of accounts
receivable.
6. Explain accounting issues related to recognition of notes receivable.
7. Explain accounting issues related to valuation of notes receivable.
8. Explain accounting issues related to disposition of accounts and
notes receivable.
9. Describe how to report and analyze receivables.
Chapter
7-3
Cash
Cash and
and Receivables
Receivables
Cash Receivables
What is cash? Recognition of accounts

Reporting cash receivable
Summary of cash- Valuation of accounts
receivable
related items
Recognition of notes
receivable
Valuation of notes
receivable
Disposition of accounts
and notes receivable
Presentation and
analysis
Chapter
7-4
What
What is
is Cash?
Cash?
Cash
Most liquid asset
Standard medium of exchange
Basis for measuring and accounting for all items
Current asset
Examples: coin, currency, available funds on deposit
at the bank, money orders, certified checks,
cashier’s checks, personal checks, bank drafts and
savings accounts.
Chapter
7-5 LO 1 Identify items considered cash.
Reporting
Reporting Cash
Cash
Cash Equivalents
Short-term, highly liquid investments that are both
(a) readily convertible to cash, and

(b) so near their maturity that they present
insignificant risk of changes in interest rates.
Examples: Treasury bills, Commercial paper, and Money

market funds.
Chapter
7-6 LO 2 Indicate how to report cash and related items.
Reporting
Reporting Cash
Cash
Restricted Cash
Companies segregate restricted cash from “regular”
cash for reporting purposes.
Examples, restricted for:
(1) plant expansion, (2) retirement of long-term debt,
and (3) compensating balances.
Illustration 7-1
Chapter
Reporting
Reporting Cash
Cash
Bank Overdrafts
When a company writes a check for more than the
amount in its cash account.
Generally reported as a current liability.
Offset against cash account only when available cash

is present in another account in the same bank on
which the overdraft occurred.
Chapter
Summary
Summary of
of Cash-Related
Cash-Related Items
Items
Illustration 7-2
Chapter
Receivables
Receivables
Claims held against customers and others for

money, goods, or services.
Oral promises of the Written promises to pay

purchaser to pay for a sum of money on a
goods and services sold. specified future date.
Accounts
Accounts Notes
Notes
Receivable
Receivable Receivable
Receivable
Chapter
7-10 LO 3 Define receivables and identify the different types of receivables.
Receivables
Receivables
Nontrade Receivables
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.
6. Claims against:
a) Insurance companies for casualties sustained.
b) Defendants under suit.
c) Governmental bodies for tax refunds.
d) Common carriers for damaged or lost goods.
e) Creditors for returned, damaged, or lost goods.
f) Customers for returnable items (crates, containers, etc.).
Chapter
Receivables
Receivables
Nontrade Receivables
Illustration 7-3
Chapter
Recognition
Recognition of
of Accounts
Accounts Receivables
Receivables
Trade
Trade Discounts
Discounts
Reductions
Reductions from
from the
the list
list
price
price
Not
Not recognized
recognized in
in the
the 10 %
accounting
accounting records
records Discount
Customers for new
Customers are
are billed
billed net
net
of Retail
of discounts
discounts
Store
Customers
Chapter
7-13 LO 4 Explain accounting issues related to recognition of accounts receivable.
Recognition
Recognition of
of Accounts
Receivables
Cash
Cash Discounts
Discounts
Inducements
Inducements for
for prompt
prompt
payment
payment
Gross
Gross Method
Method vs.
vs.
Net Payment
Net Method
Method
terms are
2/10, n/30
Chapter
Recognition
Recognition of
of Accounts
Receivables
Cash Discounts (Sales Discounts)

Illustration 7-4
Chapter
Recognition
Recognition of
of Accounts
Receivables
E7-5: On June 3, Bolton Company sold to Arquette Company
merchandise having a sale price of $2,000 with terms of 2/10,
n/60, f.o.b. shipping point. On June 12, the company received a
check for the balance due from Arquette Company. Prepare the
journal entries on Bolton Company books to record the sale
assuming Bolton records sales using the gross method.
June 3 Accounts receivable 2,000

Sales 2,000
June 12 Cash ($2,000 x 98%) 1,960

Sales discounts 40
Accounts receivable 2,000
Chapter
Recognition
Recognition of
of Accounts
Receivables
n/60, f.o.b. shipping point. On June 12, the company received a
check for the balance due from Arquette Company. Prepare the
journal entries on Bolton Company books to record the sale
assuming Bolton records sales using the net method.

Sales 1,960
June 12 Cash ($2,000 x 98%) 1,960

Chapter
Recognition
Recognition of
of Accounts
Receivables
n/60, f.o.b. shipping point. Prepare the journal entries on Bolton
Company books to record the sale assuming Bolton records sales
using the net method, and Arquette did not remit payment until
July 29.

Sales 1,960
June 12 Cash 2,000

Sales Discounts Forfeited 40
Chapter
Recognition
Recognition of
of Accounts
Receivables
Nonrecognition of Interest Element

A company should measure receivables in terms of
their present value.
The profession specifically excludes from present

value considerations “receivables arising from
transactions with customers in the normal course
of business which are due in customary trade terms
not exceeding approximately one year.”
Chapter
Accounting
Accounting for
for Accounts
Accounts Receivable
Receivable
How
How are
are these
these accounts
accounts presented
presented on
on the
the Balance
Balance
Sheet?
Sheet?
Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
End. 500 25 End.

Chapter
Accounting
Accounting for
for Accounts
Accounts Receivable
Receivable
Assets
Current Assets:
Cash $ 346
Accounts receivable 500
Less: Allowance for doubtful accounts (25) 475
Inventory 812
Prepaids 40
Total current assets 1,673
Fixed Assets:
Office equipment 5,679
Furniture & fixtures 6,600
Less: Accumulated depreciation (3,735)
Total fixed assets 8,544
Total Assets $ 10,217
Chapter
Accounting
Accounting for
for Accounts
Accounts Receivable
Receivable
Assets
Current Assets:
Cash $ 346
Accounts receivable, net of $25 allowance 475
Inventory 812
Prepaids 40
Fixed Assets:
Chapter
Accounting
Accounting for
for Accounts
Accounts Receivable
Receivable
Journal
Journal entry
entry for
for credit
credit sale
sale of
of $100?
$100?
Accounts
Accounts receivable
receivable 100
100
Sales
Sales 100
100
Allowance for
Beg. 500 25 Beg.
End. 500 25 End.

Chapter
Accounting
Accounting for
for Accounts
Accounts Receivable
Receivable
Journal
Journal entry
entry for
for credit
credit sale
sale of
of $100?
$100?
Accounts
Accounts receivable
receivable 100
100
Sales
Sales 100
100
Allowance for
Beg. 500 25 Beg.
Sale 100
End. 600 25 End.

Chapter
Accounting
Accounting for
for Accounts
Accounts Receivable
Receivable
Collected
Collected of
of $333
$333 on
on account?
account?
Cash
Cash 333
333
Accounts
Accounts receivable
receivable 333
333
Allowance for
Beg. 500 25 Beg.
Sale 100
End. 600 25 End.

Chapter
Accounting
Accounting for
for Accounts
Accounts Receivable
Receivable
Collected
Collected of
of $333
$333 on
on account?
account?
Cash
Cash 333
333
Accounts
Accounts receivable
receivable 333
333
Allowance for
Beg. 500 25 Beg.
Sale 100 333 Coll.
End. 267 25 End.

Chapter
Accounting
Accounting for
for Accounts
Accounts Receivable
Receivable
Adjustment
Adjustment ofof $15
$15 for
for estimated
estimated Bad-Debts?
Bad-Debts?
Bad
Bad debt
debt expense
expense 15
15
Allowance
Allowance for
for Doubtful
Doubtful Accounts
Accounts 15
15
Allowance for
Beg. 500 25 Beg.
Sale 100 333 Coll.
End. 267 25 End.

Chapter
Accounting
Accounting for
for Accounts
Accounts Receivable
Receivable
Adjustment
Adjustment ofof $15
$15 for
for estimated
estimated Bad-Debts?
Bad-Debts?
Bad
Bad debt
debt expense
expense 15
15
Allowance
Allowance for
for Doubtful
Doubtful Accounts
Accounts 15
15
Allowance for
Beg. 500 25 Beg.
Sale 100 333 Coll. 15 Est.
End. 267 40 End.

Chapter
Accounting
Accounting for
for Accounts
Accounts Receivable
Receivable
Write-off
Write-off of
of uncollectible
uncollectible accounts
accounts for
for $10?
$10?
Allowance
Allowance for
for Doubtful
Doubtful accounts
accounts 10
10
Accounts
Accounts receivable
receivable 10
10
Allowance for
Beg. 500 25 Beg.
End. 267 40 End.

Chapter
Accounting
Accounting for
for Accounts
Accounts Receivable
Receivable
Write-off
Write-off of
of uncollectible
uncollectible accounts
accounts for
for $10?
$10?
Allowance
Allowance for
for Doubtful
Doubtful accounts
accounts 10
10
Accounts
Accounts receivable
receivable 10
10
Allowance for
Beg. 500 25 Beg.
10 W/O W/O 10
End. 257 30 End.

Chapter
Accounting
Accounting for
for Accounts
Accounts Receivable
Receivable
Assets
Current Assets:
Cash $ 13
Accounts receivable, net of $30 allowance 227
Inventory 812
Prepaids 40
Fixed Assets:
Chapter
Valuation
Valuation of
of Accounts
Accounts Receivable
Receivable
Reporting Receivables
Classification
Valuation (net realizable value)
Uncollectible Accounts Receivable

Sales on account raise the possibility of accounts
not being collected.
Chapter
7-32 LO 5 Explain accounting issues related to valuation of accounts receivable.
Valuation
Valuation of
of Accounts
Accounts Receivable
Receivable
Uncollectible Accounts Receivable

An uncollectible account receivable is a loss of revenue that
requires, through proper entry in the accounts,
 a decrease in the asset accounts receivable and
 a related decrease in income and stockholders’ equity.
Chapter
Valuation
Valuation of
of Accounts
Accounts Receivable
Receivable
Methods of Accounting for Uncollectible Accounts
Direct Write-Off Allowance Method

Theoretically undesirable: Losses are Estimated:
No matching Percentage-of-sales
Receivable not stated at Percentage-of-
net realizable value receivables
Not GAAP GAAP
Chapter
Uncollectible
Uncollectible Accounts
Accounts Receivable
Receivable
Income
Income
Statement
Statement
Approach
Approach
Balance
Balance
Sheet
Sheet
Approach
Approach
Chapter
Uncollectible
Accounts Receivable
Receivable
Percentage-of-Sales Approach - matches costs with

revenues because it relates the charge to the period in
which a company records the sale.
Appropriate if there is a fairly stable relationship

between previous years’ credit sales and bad debts.
Chapter
Uncollectible
Accounts Receivable
Receivable
Percentage-of-Sales Approach
Illustration: Chad Shumway Corp.

estimates from past experience that
about 2 percent of credit sales become uncollectible. If
Chad Shumway has credit sales of $400,000 in 2010, it
records bad debt expense as follows.
Bad Debt Expense 8,000

Allowance for Doubtful Accounts 8,000
Chapter
Uncollectible
Accounts Receivable
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 accounts receivable.
Chapter
Uncollectible
Accounts Receivable
Receivable
What entry
would Wilson
make assuming
that no balance
existed in the
allowance
account?

Chapter
Uncollectible
Accounts Receivable
Receivable
What entry
would Wilson
make assuming
the allowance
account had a
credit balance
of $800 before
adjustment?
Bad Debt Expense ($37,650 – $800) 36,850

Chapter
Uncollectible
Accounts Receivable
Receivable
E7-7 (Recording Bad Debts) Sandel Company reports the

following financial information before adjustments.
Instructions: Prepare the journal entry to record bad debt

expense assuming Sandel Company estimates bad debts at
(a) 1% of net sales and (b) 5% of accounts receivable.
Chapter
Uncollectible
Accounts Receivable
Receivable

Instructions: Prepare the journal entry assuming Sandel

estimates bad debts at (a) 1% of net sales.

($800,000 – $50,000) x 1% = $7,500
Chapter
7-42 LO 5
Uncollectible
Accounts Receivable
Receivable

Instructions: Prepare the journal entry assuming Sandel

estimates bad debts at (b) 5% of accounts receivable.

($160,000 x 5%) – $2,000) = $6,000
Chapter
7-43 LO 5
Uncollectible
Accounts Receivable
Receivable
Summary
Percentage of Sales approach:
Bad debt expense estimate is related to a nominal account
(Sales), any balance in the allowance account is ignored.
Achieves a proper matching of cost and revenues.
Percentage of Receivables approach:

Results in a more accurate valuation of receivables on the
balance sheet.
Method may also be applied using an aging schedule.
Chapter
Recognition
Recognition of
of Notes
Notes Receivable
Receivable
Notes Receivable
Supported by a formal promissory note.
A negotiable instrument
Maker signs in favor of a Payee
Interest-bearing (has a stated rate of interest) OR
Zero-interest-bearing (interest included in face amount)
Chapter
7-45 LO 6 Explain accounting issues related to recognition of notes receivable.
Recognition
Recognition of
of Notes
Notes Receivable
Receivable
Generally originate from:

Customers who need to extend payment period
of an outstanding receivable
High-risk or new customers
Loans to employees and subsidiaries
Sales of property, plant, and equipment
Lending transactions (the majority of notes)
Chapter
Recognition
Recognition of
of Notes
Notes Receivable
Receivable
Short-Term Long-Term
Record at Record at
Face Value, Present Value
less allowance of cash expected
to be collected
Interest Rates Note Issued at

Stated rate = Market rate Face Value
Stated rate > Market rate Premium
Stated rate < Market rate Discount
Chapter
Note
Note Issued
Issued at
at Face
Face Value
Value
Illustration: Bigelow Corp. lends Scandinavian Imports

$10,000 in exchange for a $10,000, three-year note bearing
interest at 10 percent annually. The market rate of interest
for a note of similar risk is also 10 percent. How does Bigelow
record the receipt of the note?
i = 10%
$10,000 Principal
$1,000 1,000 1,000 Interest
0 1 2 3 4
n=3
Chapter
Note
Note Issued
Issued at
at Face
Face Value
Value
PV of Interest
$1,000 x 2.48685 = $2,487

Interest Received Factor Present Value
Chapter
Note
Note Issued
Issued at
at Face
Face Value
Value
PV of Principal
$10,000 x .75132 = $7,513

Principal Factor Present Value
Chapter
Note
Note Issued
Issued at
at Face
Face Value
Value
Summary Present value of interest $ 2,487
Present value of principal 7,513
Note current market value $10,000
Date Account Title Debit Credit

Jan. yr. 1 Notes receivable 10,000
Cash 10,000
Dec. yr. 1 Cash 1,000

Interest revenue 1,000
Chapter
Zero-Interest-Bearing
Zero-Interest-Bearing Note
Note
Illustration: Jeremiah Company receives a three-year,
$10,000 zero-interest-bearing note. The market rate of
interest for a note of similar risk is 9 percent. How does
Jeremiah record the receipt of the note?
i = 9%
$10,000 Principal
$0 $0 $0 Interest
0 1 3 3 4
n=3
Chapter
Note
PV of Principal
$10,000 x .77218 = $7,721.80

Chapter
Note
Illustration 7-11
Chapter
Note
Journal Entries for Zero-Interest-Bearing note
Present value of Principal $7,721.80

Jan. yr. 1 Notes receivable 10,000.00
Discount on notes receivable 2,278.20
Cash 7,721.80
Dec. yr. 1 Discount on notes receivable 694.96

Interest revenue 694.96
($7,721.80 x 9%)
Chapter
Interest-Bearing
Interest-Bearing Note
Note
Illustration: Morgan Corp. makes a loan to Marie Co. and
receives in exchange a three-year, $10,000 note bearing
interest at 10 percent annually. The market rate of interest
for a note of similar risk is 12 percent. How does Morgan
record the receipt of the note?
i = 12%
$10,000 Principal
$1,000 1,000 1,000 Interest
0 1 2 3 4
n=3
Chapter
Interest-Bearing
Note
PV of Interest
$1,000 x 2.40183 = $2,402

Interest Received Factor Present Value
Chapter
Interest-Bearing
Note
PV of Principal
$10,000 x .71178 = $7,118

Chapter
Interest-Bearing
Note
Illustration: How does Morgan record the receipt of the
note? Illustration 7-13
Notes Receivable 10,000

Discount on Notes Receivable 480
Cash 9,520
Chapter
Interest-Bearing
Note
Illustration 7-14
Chapter
Interest-Bearing
Note
Journal Entries for Interest-Bearing Note

Beg. yr. 1 Notes receivable 10,000
Discount on notes receivable 480
Cash 9,520
End. yr. 1 Cash 1,000

Discount on notes receivable 142
Interest revenue 1,142
($9,520 x 12%)
Chapter
Recognition
Recognition of
of Notes
Notes Receivable
Receivable
Notes Received for Property, Goods, or Services
In a bargained transaction entered into at arm’s length, the

stated interest rate is presumed to be fair unless:
1. No interest rate is stated, or
2. Stated interest rate is unreasonable, or
3. Face amount of the note is materially different from

the current cash sales price.
Chapter
Recognition
Recognition of
of Notes
Notes Receivable
Receivable
Illustration: Oasis Development Co. sold a corner lot to Rusty
Pelican as a restaurant site. Oasis accepted in exchange a
five-year note having a maturity value of $35,247 and no
stated interest rate. The land originally cost Oasis $14,000.
At the date of sale the land had a fair market value of
$20,000. Oasis uses the fair market value of the land,
$20,000, as the present value of the note. Oasis therefore
records the sale as: ($35,247 - $20,000) = $15,247

Discount on Notes Receivable 15,247
Land 14,000
Gain on Sale of Land 6,000
Chapter
Valuation
Valuation of
of Notes
Notes Receivable
Receivable
Short-Term reported at Net Realizable Value (same

as accounting for accounts receivable).
Long-Term - FASB requires companies disclose not

only their cost but also their fair value in the notes
to the financial statements.
 Fair Value Option. Companies have the option to use

fair value as the basis of measurement in the
financial statements.
Chapter
7-64 LO 7 Explain accounting issues related to valuation of notes receivable.
Valuation
Valuation of
of Notes
Notes Receivable
Receivable
Illustration (recording fair value option): Assume that
Escobar Company has notes receivable that have a fair value
of $810,000 and a carrying amount of $620,000. Escobar
decides on December 31, 2010, to use the fair value option
for these receivables. This is the first valuation of these
recently acquired receivables. At December 31, 2010,
Escobar makes an adjusting entry to record the increase in
value of Notes Receivable and to record the unrealized
holding gain, as follows.

Unrealized Holding Gain or Loss—Income 190,000
Chapter
7-65 LO 7 Explain accounting issues related to valuation of notes receivable.
Disposition
Disposition of
of Accounts
Accounts and
and Notes
Notes Receivable
Receivable
Owner may transfer accounts or notes receivables

to another company for cash.
Reasons:
Competition.
Sell receivables because money is tight.
Billing / collection are time-consuming and costly.
Transfer accomplished by:

1. Secured borrowing
2. Sale of receivables
Chapter LO 8 Explain accounting issues related to disposition
7-66
of accounts and notes receivable.
Disposition
Disposition of
of Accounts
Accounts and
and Notes
Notes Receivable
Receivable
Secured Borrowing
Illustration: March 1, 2010, Howat Mills, Inc. provides
(assigns) $700,000 of its accounts receivable to Citizens
Bank as collateral for a $500,000 note. Howat Mills continues
to collect the accounts receivable; the account debtors are
not notified of the arrangement. Citizens Bank assesses a
finance charge of 1 percent of the accounts receivable and
interest on the note of 12 percent. Howat Mills makes
monthly payments to the bank for all cash it collects on the
receivables. See Illustration 7-15.

7-67
Secured
Secured Borrowing
Borrowing -- Illustration
Illustration
Illustration 7-15

7-68
Secured
Secured Borrowing
Borrowing -- Exercise
Exercise
E7-13: On April 1, 2010, Prince Company assigns $500,000 of its
accounts receivable to the Third National Bank as collateral for a
$300,000 loan due July 1, 2010. The assignment agreement calls for
Prince Company to continue to collect the receivables. Third National
Bank assesses a finance charge of 2% of the accounts receivable, and
interest on the loan is 10% (a realistic rate of interest for a note of
this type).
Instructions:
a) Prepare the April 1, 2010, journal entry for Prince Company.
b) Prepare the journal entry for Prince’s collection of $350,000 of
the accounts receivable during the period from April 1, 2010,
through June 30, 2010.
c) On July 1, 2010, Prince paid Third National all that was due from
the loan it secured on April 1, 2010.
7-69
Secured
Secured Borrowing
Borrowing -- Exercise
Exercise
Exercise 7-13 continued

(a) Cash 290,000
Finance Charge 10,000
Notes Payable 300,000
($500,000 x 2% = $10,000)
(b) Cash 350,000

Accounts Receivable 350,000
(c) Notes Payable 300,000

Interest Expense 7,500
Cash 307,500
(10% x $300,000 x 3/12 = $7,500)
7-70
Sales
Sales of
of Receivables
Receivables
Factors are finance companies or banks that buy receivables
from businesses for a fee.
Illustration 7-16

7-71
Sales
Sales of
of Receivables
Receivables
Sale Without Recourse
Purchaser assumes risk of collection
Transfer is outright sale of receivable
Seller records loss on sale
Seller use Due from Factor (receivable) account to
cover discounts, returns, and allowances
Sale With Recourse

Seller guarantees payment to purchaser
Financial components approach used to record transfer

7-72
Sales
Sales of
of Receivables
Receivables
Illustration: Crest Textiles, Inc. factors $500,000 of accounts

receivable with Commercial Factors, Inc., on a without recourse
basis. Commercial Factors assesses a finance charge of 3
percent of the amount of accounts receivable and retains an
amount equal to 5 percent of the accounts receivable (for
probable adjustments). Crest Textiles and Commercial Factors
make the following journal entries for the receivables
transferred without recourse.
Illustration 7-17

7-73
Sales
Sales of
of Receivables
Receivables
Illustration: Assume Crest Textiles sold the receivables on a

with recourse basis. Crest Textiles determines that this
recourse obligation has a fair value of $6,000. To determine the
loss on the sale of the receivables, Crest Textiles computes
the net proceeds from the sale as follows.
Illustration 7-18
Net Proceeds
Computation
Illustration 7-19
Loss on Sale Computation

7-74
Sales
Sales of
of Receivables
Receivables
Illustration: Prepare the journal entries for both Crest

Textiles and Commercial Factors for the receivables sold with
recourse.
Crest Cash 460,000

Textiles, Due from Factor 25,000
Inc. Loss on Sale of Receivables 21,000
Accounts (Notes) Receivable 500,000
Recourse Liability 6,000
Commercial Accounts Receivable 500,000

Factors, Due to Crest Textiles 25,000
Inc. Financing Revenue 15,000
Cash 460,000

7-75
Secured
Secured Borrowing
Borrowing versus
versus Sale
Sale
Illustration 7-21
The FASB
concluded that a
sale occurs only if
the seller
surrenders control
of the receivables
to the buyer.
Three conditions
must be met.

7-76
Presentation
Presentation and
and Analysis
Analysis
General rule in classifying receivables are:
1. Segregate the different types of receivables that a company
possesses, if material.
2. Appropriately offset the valuation accounts against the
proper receivable accounts.
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
7-77 LO 9 Describe how to report and analyze receivables.
Presentation
Presentation and
and Analysis
Analysis
Analysis of Receivables
Illustration 7-23
This Ratio used to:

Assess the liquidity of the receivables.
Measure the number of times, on average, a company
collects receivables during the period.
Chapter
7-78 LO 9 Describe how to report and analyze receivables.
 The accounting and reporting related to cash is essentially the
same under both iGAAP and U.S. GAAP.
 The basic accounting and reporting issues related to recognition
and measurement of receivables are essentially the same
between iGAAP and U.S. GAAP.
 Although iGAAP implies that receivables with different
characteristics should be reported separately, there is no
standard that mandates this segregation.
Chapter
7-79
 The FASB, the IASB have adopted a piecemeal approach in
which disclosure of fair value information in the notes is the
first step. The second step is the fair value option.
 iGAAP and U.S. GAAP standards on the fair value option are
similar but not identical.
 iGAAP and U.S. GAAP differ in the criteria used to derecognize
a receivable.
Chapter
7-80
Management faces two problems in accounting for cash
transactions:
1. establish proper controls to prevent any unauthorized

transactions by officers or employees, and
2. provide information necessary to properly manage cash

on hand and cash transactions.
Chapter
7-81 LO 10 Explain common techniques employed to control cash.
Using Bank Accounts
To obtain desired control objectives, a company can vary the
number and location of banks and the types of accounts.
 General checking account
 Collection float.
 Lockbox accounts
 Imprest bank accounts
Chapter
The Imprest Petty Cash System
To pay small amounts for miscellaneous expenses.
Steps:
1. Record $300 transfer of funds to petty cash:
Petty Cash 300

Cash 300
2. The petty cash custodian obtains signed receipts from

each individual to whom he or she pays cash
Chapter
Steps:
3. Custodian receives a company check to replenish the

fund.
Office Supplies Expense 42
Postage Expense 53
Entertainment Expense 76
Cash Over and Short 2
Cash 173
Chapter
Steps:
4. If the company decides that the amount of cash in the

petty cash fund is excessive by $50, it lowers the fund
balance as follows.
Cash 50
Petty cash 50
Chapter
Physical Protection of Cash Balances
Company should
 Minimize the cash on hand.
 Only have on hand petty cash and current day’s receipts
 Keep funds in a vault, safe, or locked cash drawer.
 Transmit each day’s receipts to the bank as soon as
practicable.
 Periodically prove (reconcile) the balance shown in the
general ledger.
Chapter
Reconciliation of Bank Balances
Schedule explaining any differences between the
bank’s and the company’s records of cash.
Reconciling Items:
1. Deposits in transit.
2. Outstanding checks.
Time Lags
3. Bank charges and credits.
4. Bank or Depositor errors.
Chapter
Reconciliation of Bank Balances Illustration 7A-1
Bank Reconciliation Form
and Content
Chapter
Reconciliation of Bank Balances
Chapter
Illustration 7A-2
Chapter
Illustration: Journalize the adjusting entries at November 30
on the books of Nugget Mining Company.
Nov. 30 Cash 542

Office expense 18
Accounts receivable 220
Accounts payable 180
Interest revenue 600
Chapter
Review Question
The reconciling item in a bank reconciliation that will
result in an adjusting entry by the depositor is:
a. outstanding checks.
b. deposit in transit.
c. a bank error.
d. bank service charges.
Chapter
Companies evaluate their receivables to determine their
ultimate collectibility.
Allowance method is appropriate when:

 probable that an asset has been impaired and
 amount of the loss can be reasonably estimated.
Long-term receivables such as loans that are identified

as impaired, companies perform an additional impairment
evaluation.
Chapter
7-93 LO 11 Describe the accounting for a loan impairment.
Background - Example: Subprime loan crisis.
 From 2000 to 2005 home prices appreciated at rapid rate.

 Low interest rates also encouraged speculation, as many
believed that home prices would continue to increase.
 Speculators intended to sell the house in a short period.
 Many adjustable-rate debt with short-term low teaser rates
that would adjust to higher market rates after two or three
years.
 Many lending institutions gave loans to individuals whose
financial condition would make it difficult for them to make
the payments over the life of the loan. These loans, often
referred to as subprime loans.
Chapter
Background - Example: Subprime loan crisis. Illustration 7B-1
Subprime lending was a

little over $50 billion in
2000 and had increased
almost ten times by 2005.
Chapter
Background - Example: Subprime loan crisis.
Illustration 7B-2
Beyond the
subprime loans
was the
practice of
securitization.
Chapter
Impairment Measurement and Reporting
Impairment loss is calculated as the difference between
 the investment in the loan (generally the principal
plus accrued interest) and
 the expected future cash flows discounted at the
loan’s historical effective interest rate.
Chapter
Illustration: At December 31, 2009, Ogden Bank recorded an
investment of $100,000 in a loan to Carl King. The loan has an
historical effective-interest rate of 10 percent, the principal is
due in full at maturity in three years, and interest is due annually.
The loan officer performs a review of the loan’s expected future
cash flow and utilizes the present value method for measuring the
required impairment loss.
Illustration 7B-3
Chapter
Illustration: Computation of Impairment Loss
Illustration 7B-4
Recording Impairment Losses

Chapter
Copyright
Copyright
Copyright © 2009 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted
in Section 117 of the 1976 United States Copyright Act
without the express written permission of the copyright owner
is unlawful. Request for further information should be
addressed to the Permissions Department, John Wiley & Sons,
Inc. The purchaser may make back-up copies for his/her own
use only and not for distribution or resale. The Publisher
assumes no responsibility for errors, omissions, or damages,
caused by the use of these programs or from the use of the
information contained herein.
Chapter
7-100

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Chapter

CASH AND RECEIVABLES

What is cash? Recognition of accounts

(a) readily convertible to cash, and

Examples: Treasury bills, Commercial paper, and Money

Offset against cash account only when available cash

Claims held against customers and others for

Oral promises of the Written promises to pay

Cash Discounts (Sales Discounts)

June 3 Accounts receivable 2,000

June 12 Cash ($2,000 x 98%) 1,960

June 3 Accounts receivable 1,960

June 12 Cash ($2,000 x 98%) 1,960

June 3 Accounts receivable 1,960

June 12 Cash 2,000

Nonrecognition of Interest Element

The profession specifically excludes from present

End. 500 25 End.

End. 500 25 End.

End. 600 25 End.

End. 600 25 End.

End. 267 25 End.

End. 267 25 End.

End. 267 40 End.

End. 267 40 End.

End. 257 30 End.

Uncollectible Accounts Receivable

Uncollectible Accounts Receivable

 a related decrease in income and stockholders’ equity.

Methods of Accounting for Uncollectible Accounts

Direct Write-Off Allowance Method

Percentage-of-Sales Approach - matches costs with

Appropriate if there is a fairly stable relationship

Illustration: Chad Shumway Corp.

Bad Debt Expense 8,000

Companies may apply this method using

 an aging schedule of accounts receivable.

Bad Debt Expense 37,650

Bad Debt Expense ($37,650 – $800) 36,850

E7-7 (Recording Bad Debts) Sandel Company reports the

Instructions: Prepare the journal entry to record bad debt

E7-7 (Recording Bad Debts) Sandel Company reports the

Instructions: Prepare the journal entry assuming Sandel

Bad Debt Expense 7,500

E7-7 (Recording Bad Debts) Sandel Company reports the

Instructions: Prepare the journal entry assuming Sandel

Bad Debt Expense 6,000

Percentage of Receivables approach:

Maker signs in favor of a Payee

Interest-bearing (has a stated rate of interest) OR

Zero-interest-bearing (interest included in face amount)

Generally originate from:

Interest Rates Note Issued at

Illustration: Bigelow Corp. lends Scandinavian Imports

$1,000 1,000 1,000 Interest

$1,000 x 2.48685 = $2,487

$10,000 x .75132 = $7,513

Note current market value $10,000

Date Account Title Debit Credit

Dec. yr. 1 Cash 1,000

$10,000 x .77218 = $7,721.80

Present value of Principal $7,721.80