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ACCT 201 ACCT 201 ACCT 201 1 Reporting and Analyzing Receivables and Investments UAA – ACCT 201 Principles of Financial Accounting Dr. Fred Barbee Chapter.

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Presentation on theme: "ACCT 201 ACCT 201 ACCT 201 1 Reporting and Analyzing Receivables and Investments UAA – ACCT 201 Principles of Financial Accounting Dr. Fred Barbee Chapter."— Presentation transcript:

1 ACCT 201 ACCT 201 ACCT 201 1 Reporting and Analyzing Receivables and Investments UAA – ACCT 201 Principles of Financial Accounting Dr. Fred Barbee Chapter 7

2 ACCT 201 ACCT 201 ACCT 201 Day #2

3 TopicLOReadHW Notes Receivable (Introduction) C2, P3, P4 301- 304 QS4, 5; E6 Converting Rec to Cash Before Maturity C3 304- 306 E5 Short-Term Investments C4, P5 306- 310 E9, E11 Decision AnalysisA1 310- 311 QS8, E12 Chapter 7 - Day 2 - Agenda No HW Due Today!

4 ACCT 201 ACCT 201 ACCT 201 Notes Receivable

5 ACCT 201 ACCT 201 ACCT 201 5 A note is a written promise to pay a specific amount at a specific future date. Notes Receivable

6 $1,000.00July 10, 2002 Ninety days TechCom Company, Los Angeles, CA One thousand and no/100 ---------------------------------Dollars First National Bank of Los Angeles, CA 42 12% Julia Browne after date I promise to pay to the order of Payable at Value received with interest at per annum No. Due Oct. 8, 2002 For TechCom. Term Exh. 7.14 Payee Maker Notes Receivable ACCT 201 ACCT 201 ACCT 201

7 $1,000.00July 10, 2002 Ninety days TechCom Company, Los Angeles, CA One thousand and no/100 ---------------------------------Dollars First National Bank of Los Angeles, CA 42 12% Julia Browne after date I promise to pay to the order of Payable at Value received with interest at per annum No. Due Oct. 8, 2002 For TechCom. Due Date Exh. 7.14 Principal Interest Rate Notes Receivable ACCT 201 ACCT 201 ACCT 201

8 If the note is expressed in days, base a year on 360 days. Even for maturities less than 1 year, the rate is annualized. Exh. 7.16 Interest Computation ACCT 201 ACCT 201 ACCT 201

9 9 Interest Computation On March 1, 2002, Smithson, Inc. purchased a copier for $9,000 from Machines, Inc. Smithson gave Machines, Inc. a 12% note due in 90 days in payment for the copier. How much interest will be paid to Machines, Inc. in 90 days?

10 Exh. 7.16 Interest Computation ACCT 201 ACCT 201 ACCT 201 $9,000X12%X90/360=$270

11 ACCT 201 ACCT 201 ACCT 201 11 End-of-Period Adjustments When a note receivable is outstanding at the end of an accounting period, the company must prepare an adjusting entry to accrue interest income.

12 ACCT 201 ACCT 201 ACCT 201 12 Converting Receivables to Cash Before Maturity Sell the accounts receivable to a financing company or bank (called factoring). Borrow money and pledge the receivables as security for the loan (called pledging).

13 ACCT 201 ACCT 201 ACCT 201 13 Full-Disclosure Principle Requires financial statements and notes to report all relevant information about the operations and financial position of a company. Potential tax assessments Guarantee of debts of others Outstanding lawsuits

14 ACCT 201 ACCT 201 ACCT 201 Short-Term Investments

15 ACCT 201 ACCT 201 ACCT 201 15 Short-Term Investments (Marketable Securities) Management intends to convert to cash within one year or the operating cycle whichever is longer. Are readily convertible to cash.

16 ACCT 201 ACCT 201 ACCT 201 16 Short-Term Investments... Debt Securities reflect creditor relationship (notes, bonds, etc.) Equity Securities reflect owner relationship (stock).

17 ACCT 201 ACCT 201 ACCT 201 Accounting for Short-Term Investments

18 ACCT 201 ACCT 201 ACCT 201 Accounting For Short-Term Investment Transactions Exercise 7-9

19 Prepare journal entries to record the following transactions involving the short-term investments of Morford Co., all of which occurred during year 2002. ACCT 201 ACCT 201 ACCT 201 Exercise 7-9

20 On February 15, paid $120,000 cash to purchase MRI’s 90-day short term debt securities (120,000 principal), which are dated February 15 and pay 8% interest (categorized as held-to-maturity securities). 2/15ST Investments-HTM120,000 Cash120,000 Purchased 90-day, 8% debt securities Short-Term Investments ACCT 201 ACCT 201 ACCT 201 a.

21 b. On March 22, purchased 700 shares of GRE Company stock at $27.50 per share plus a $150 brokerage fee. These shares are categorized as trading securities. 3/22ST Inv – Trading19,400 Cash19,400 Purchased 700 shares of stock @ $27.50 + $150 brokerage fee. Short-Term Investments ACCT 201 ACCT 201 ACCT 201

22 c. On May 1, received a check from MRI in payment of the principal and 90 days’ interest on the debt securities purchased in transaction a. 5/16Cash122,400 ST Inv – HTM120,000 Int Revenue2,400 Collected proceeds of debt security with interest of $120,000 x.08 x 90/360. Short-Term Investments ACCT 201 ACCT 201 ACCT 201

23 d. On August 1, paid $80,000 cash to purchase Flash Electronics’ 10% debt securities $80,000 principal), dated July 30, 2002, and maturing January 30, 2003 (categorized as available-for-sale securities). 8/01ST Investments – AFS80,000 Cash80,000 Purchased 6-month, 10% debt securities. Short-Term Investments ACCT 201 ACCT 201 ACCT 201

24 e. On September 1, received a $1.00 per share cash dividend on the GRE Company stock purchased in transaction b. 9/01Cash700 Dividend Revenue700 Received dividend on stock (700 x $1.00) Short-Term Investments ACCT 201 ACCT 201 ACCT 201

25 f. On October 8, sold 350 shares of GRE Co. stock for $34 per share, less a $140 brokerage fee. 10/08Cash11,760 ST Inv – Trading9,700 Gain on sale of ST Inv2,060 Sold 350 shares of stock. Short-Term Investments ACCT 201 ACCT 201 ACCT 201

26 g. On October 30, received a check from Flash Electronics for 90 days’ interest on the debt securities purchased in transaction d. 10/30Cash2,000 Interest Revenue2,000 Received cash interest payment ($80,000 x.10 x 90/360) Short-Term Investments ACCT 201 ACCT 201 ACCT 201

27 Valuing and reporting short- term investments

28 ACCT 201 ACCT 201 ACCT 201 28 Short-Term Investments... Held-To-Maturity Securities Trading Securities Available-For-Sale Securities

29 ACCT 201 ACCT 201 ACCT 201 29 Held-to-Maturity Securities Debt securities that management intends to hold to their maturity whose cash value is not needed until that date. Carried on the Balance Sheet at cost.

30 ACCT 201 ACCT 201 ACCT 201 30 Trading Securities Debt and equity securities that are bought and held principally for the purpose of being sold in the near term. Frequently bought and sold to generate profits on short-term changes in their prices.

31 ACCT 201 ACCT 201 ACCT 201 31 Trading Securities Entire portfolio of trading securities is reported at its market value with a “market adjustment” from the cost of the portfolio.

32 ACCT 201 ACCT 201 ACCT 201 32 Trading Securities Any unrealized gain (or loss) from a change in the market value of the portfolio of trading securities during a period is reported on the income statement.

33 ACCT 201 ACCT 201 ACCT 201 33 Available-for-Sale Securities Debt and equity securities not classified as trading or held-to- maturity securities.

34 ACCT 201 ACCT 201 ACCT 201 Accounting For Trading Securities Exercise 7-10

35 Focus Co. purchases short-term investments in trading securities at a cost of $66,000 on December 27, 2002. (This is the first and only purchase of such securities). At December 31, 2002, these securities had a market value of $72,000. ACCT 201 ACCT 201 ACCT 201

36 Let’s record the purchase. 12/27Short-Term Investments66,000 Cash66,000 Purchase of Trading Securities Trading Securities ACCT 201 ACCT 201 ACCT 201

37 12/27Market Adj – Trading6,000 Unrealized Gain – Inc.6,000 To reflect an unrealized gain in market values of trading securities. Trading Securities ACCT 201 ACCT 201 ACCT 201 1.Prepare the 12/31/02 year-end adjusting entry for the trading securities’ portfolio. (Year-end value = $72,000)

38 12/27Market Adj – Trading6,000 Unrealized Gain – Inc.6,000 To reflect an unrealized gain in market values of trading securities. Trading Securities ACCT 201 ACCT 201 ACCT 201 2.For each account in the entry for part 1, explain how it is reported in financial statements.

39 12/27Market Adj – Trading6,000 Unrealized Gain – Inc.6,000 To reflect an unrealized gain in market values of trading securities. Trading Securities ACCT 201 ACCT 201 ACCT 201 2.For each account in the entry for part 1, explain how it is reported in financial statements. An adjunct asset account in the Balance Sheet. It increases the balance of the ST Investments – Trading account to the securities market value of $72,000. Reported in the Other Revenues and Gains section of the Income Statement.

40 01/03Cash35,000 Gain on ST Investments2,000 ST Inv-Trading33,000 To record sale of trading securities. Trading Securities ACCT 201 ACCT 201 ACCT 201 3.Prepare the 01/03/03 entry when Focus sells one-half of these securities for $35,000

41 ACCT 201 ACCT 201 ACCT 201 Adjusting available-for- sale securities to market. Exercise 7-11

42 On 12/31/02, Quaker Company held the following ST investments in its portfolio of available-for-sale securities. Quaker had no ST investments in its prior accounting periods. Prepare the 12/31/02 adjusting entry to report these securities at market value. ACCT 201 ACCT 201 ACCT 201

43 CostMarket Valdez Corporation Bonds Payable $89,600$91,600 Transunion Corp. Notes Payable 70,60062,900 Lake Placid Company common stock 86,50083,100 $246,700$237,600 $246,700 - $237,600 = ($9,100)

44 01/03Unrealized Loss – Equity9,100 Mkt Adjustment - AFS9,100 To reflect unrealized loss Available-for-Sale Securities ACCT 201 ACCT 201 ACCT 201 Make the journal entry.

45 Held To Maturity Debt securities held to maturity. Cost. Trading Debt & Equity securities actively traded. Market value.* Available for Sale Debt & Equity securities not in the other two categories. Market value.** *Unrealized gains/losses reported on the income statement. **Unrealized gains/losses reported in the equity section of the balance sheet and in comprehensive income. Exh. 7.17 Short-Term Investments

46 ACCT 201 ACCT 201 ACCT 201 Chapter 7 Ratios

47 ACCT 201 ACCT 201 ACCT 201 47 Accounts Receivable Turnover This ratio provides useful information for evaluating how efficient management has been in granting credit to produce revenue. Net sales Average accounts receivable Net sales Average accounts receivable

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