1. Chapter 7 CASH AND RECEIVABLES Continued Sommers – ACCT 3311
Acct Class 24
Chapter 7 CASH AND RECEIVABLES Continued Sommers – ACCT 3311
Chapter 1: Environment and Theoretical Structure of Financial Accounting.

2. 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).

3. Notes 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).

4. Note Receivable Journal Entries
On June 30, 2011, the Esquire Company sold some merchandise to a customer for $30,000. In payment, Esquire agreed to accept a 6% note requiring the payment of interest and principal on March 31, The 6% rate is appropriate in this situation. Prepare the journal entry to record the sale of merchandise (omit any entry that might be required for the cost of the goods sold). June 30, 2011

5. Note Receivable Journal Entries
On June 30, 2011, the Esquire Company sold some merchandise to a customer for $30,000. In payment, Esquire agreed to accept a 6% note requiring the payment of interest and principal on March 31, The 6% rate is appropriate in this situation. Prepare the journal entry at December 31, December 31, 2011

6. Note Receivable Journal Entries
On June 30, 2011, the Esquire Company sold some merchandise to a customer for $30,000. In payment, Esquire agreed to accept a 6% note requiring the payment of interest and principal on March 31, The 6% rate is appropriate in this situation. Prepare the journal entry at March 31, March 31, 2012

7. Interest-bearing 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 1 2 3 4
n = 3
FV=10,000, pmt=1,000, n=3, i=12% => PV=9,520

8. Interest-bearing Note
Illustration: How does Morgan record the receipt of the note?

9. Interest-bearing Note
Illustration 7-15

10. Interest-bearing Note
Journal Entries for Interest-Bearing Note
Cash 1,000
Discount on notes receivable 142
Interest revenue 1,142

11. Discussion Question Q7-15 What is “imputed interest”?
In what situations is it necessary to impute an interest rate for notes receivable?

12. Discussion Question
Q7-15 Continued – What are the considerations in imputing an appropriate rate?

13. Non-Interest Bearing Note
On April 30, 2011, the Rangers Company sold some merchandise to a customer for $40,000. Rangers agreed to accept a payment of $40,000 on April 30, A 6% interest rate is appropriate in this situation. Prepare the journal entry to record the sale of merchandise (omit any entry that might be required for the cost of the goods sold).

14. Non-Interest Bearing Note
On April 30, 2011, the Rangers Company sold some merchandise to a customer for $40,000. Rangers agreed to accept a payment of $40,000 on April 30, A 6% interest rate is appropriate in this situation. Prepare the amortization schedule.
Cash
Interest
Amort
Balance
4/30/2011
29,890
4/30/2012
4/30/2013
4/30/2014
4/30/2015
4/30/2016

15. Non-Interest Bearing Note
On April 30, 2011, the Rangers Company sold some merchandise to a customer for $40,000. Rangers agreed to accept a payment of $40,000 on April 30, A 6% interest rate is appropriate in this situation. Prepare the journal entry at December 31, 2011.
Cash
Interest
Amort
Balance
4/30/2011
29,890
4/30/2012 -
1,793
31,683
4/30/2013
1,901
33,584
4/30/2014
2,015
35,599
4/30/2015
2,136
37,735
4/30/2016
2,265
40,000

16. Non-Interest Bearing Note
On April 30, 2011, the Rangers Company sold some merchandise to a customer for $40,000. Rangers agreed to accept a payment of $40,000 on April 30, A 6% interest rate is appropriate in this situation. Prepare the journal entry at December 31, 2012.
Cash
Interest
Amort
Balance
4/30/2011
29,890
4/30/2012 -
1,793
31,683
4/30/2013
1,901
33,584
4/30/2014
2,015
35,599
4/30/2015
2,136
37,735
4/30/2016
2,265
40,000

17. Non-Interest Bearing Note
On April 30, 2011, the Rangers Company sold some merchandise to a customer for $40,000. Rangers agreed to accept a payment of $40,000 on April 30, A 6% interest rate is appropriate in this situation. What is the balance of the note at December 31, 2012?
Cash
Interest
Amort
Balance
4/30/2011
29,890
4/30/2012 -
1,793
31,683
4/30/2013
1,901
33,584
4/30/2014
2,015
35,599
4/30/2015
2,136
37,735
4/30/2016
2,265
40,000

18. Non-Interest Bearing Note
On April 30, 2011, the Rangers Company sold some merchandise to a customer for $40,000. Rangers agreed to accept a payment of $40,000 on April 30, A 6% interest rate is appropriate in this situation. Prepare the journal entry at April 30, April 30, 2016
Cash
Interest
Amort
Balance
4/30/2011
29,890
4/30/2012 -
1,793
31,683
4/30/2015
2,136
37,735
4/30/2016
2,265
40,000

19. 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:
No interest rate is stated, or
Stated interest rate is unreasonable, or
Face amount of the note is materially different from the current cash sales price.

20. Notes Receivable Example
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:

21. Discussion Question
Q7-16 What is the fair value option? Where do companies that elect the fair value option report unrealized holding gains and losses?

22. Valuation of Notes 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. Adjustments to value go through net income.

23. Disposition of Receivables
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:
Secured borrowing
Sale of receivables

24. Disposition of Receivables
Secured borrowing
Now
Cash XXX
Payable XXX
Get cash sooner, have A/R and payable on books
Later
A/R XXX
Sale of Receivables
Now
Cash XXX
A/R XXX
Get cash sooner, but have nothing else on books
Later
Nothing

25. Secured borrowing vs. Sale
The FASB concluded that a sale occurs only if the seller surrenders control of the receivables to the buyer.
Three conditions must be met.

26. Sale of Receivables
Factors are finance companies or banks that buy receivables from businesses for a fee.
Illustration 7-17

27. Sale of Receivables Sale Without Recourse Sale With Recourse
Purchaser assumes risk of collection
Transfer is outright sale of receivable
Seller records loss on sale
Seller uses 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

28. Presentation of Receivables
Segregate the different types of receivables that a company possesses, if material.
Appropriately offset the valuation accounts against the proper receivable accounts.
Determine that receivables classified in the current assets section will be converted into cash within the year or the operating cycle, whichever is longer.
Disclose any loss contingencies that exist on the receivables.
Disclose any receivables designated or pledged as collateral.
Disclose the nature of credit risk inherent in the receivables.

29. Discussion Question
Q7-21 What is the accounts receivable turnover ratio, and what type of information does it provide?

30. A/R Turnover Ratio This Ratio used to:
Assess the liquidity of the receivables.
Measure the number of times, on average, a company collects receivables during the period.

31. IFRS RELEVANT FACTS - Similarities
The accounting and reporting related to cash is essentially the same under both IFRS and GAAP. In addition, the definition used for cash equivalents is the same.
Like GAAP, cash and receivables are generally reported in the current assets section of the balance sheet under IFRS.
Similar to GAAP, IFRS requires that loans and receivables be accounted for at amortized cost, adjusted for allowances for doubtful accounts.

32. IFRS RELEVANT FACTS - Differences
Under IFRS, companies may report cash and receivables as the last items in current assets under IFRS. Under GAAP, these items are reported in order of liquidity.
While IFRS implies that receivables with different characteristics should be reported separately, there is no standard that mandates this segregation. GAAP has explicit guidance in the area.
The fair value option is similar under GAAP and IFRS but not identical. The international standard related to the fair value option is subject to certain qualifying criteria not in the U.S. standard. In addition, there is some difference in the financial instruments covered.

33. IFRS RELEVANT FACTS - Differences
Under IFRS, bank overdrafts are generally reported as cash. Under GAAP, such balances are reported as liabilities.
IFRS and GAAP differ in the criteria used to account for transfers of receivables. IFRS is a combination of an approach focused on risks and rewards and loss of control. GAAP uses loss of control as the primary criterion. In addition, IFRS generally permits partial transfers; GAAP does not.

34. Receivables Journal Entries
Weldon Corporation’s fiscal year ends December 31. The following is a list of transactions involving receivables that occurred during 2011: 3/17 Accounts receivable of $1,700 were written off as uncollectible. The company uses the allowance method. 3/30 Loaned an officer of the company $20,000 and received a note requiring principal and interest at 7% to be paid on March 30, /30 Sold merchandise to the Blankenship Company for $12,000. Terms of the sale are 2/10, n/30. Weldon uses the gross method to account for cash discounts. 7/8 The Blankenship Company paid its account in full. 8/31 Sold stock in a nonpublic company with a book value of $5,000 and accepted a $6,000 non-interest-bearing note with a discount rate of 8%. The $6,000 payment is due on February 28, The stock has no ready market value. 12/31 Bad debt expense is estimated to be 2% of credit sales for the year. Credit sales for 2011 were $700,000. Prepare all journal entries.

35. Receivables Journal Entries
3/17 Accounts receivable of $1,700 were written off as uncollectible. The company uses the allowance method.
3/30 Loaned an officer of the company $20,000 and received a note requiring principal and interest at 7% to be paid on March 30, 2012.

36. Receivables Journal Entries
6/30 Sold merchandise to the Blankenship Company for $12,000. Terms of the sale are 2/10, n/30. Weldon uses the gross method to account for cash discounts.
7/8 The Blankenship Company paid its account in full.

37. Receivables Journal Entries
8/31 Sold stock in a nonpublic company with a book value of $5,000 and accepted a $6,000 non-interest-bearing note with a discount rate of 8%. The $6,000 payment is due on February 28, The stock has no ready market value.
12/31 Bad debt expense is estimated to be 2% of credit sales for the year. Credit sales for 2011 were $700,000.

38. Receivables Journal Entries
Adjusting Entries: