1. 7-1 Prepared by Coby Harmon University of California, Santa Barbara Intermediate Accounting Prepared by Coby Harmon University of California, Santa Barbara Westmont College INTERMEDIATE ACCOUNTING F I F T E E N T H E D I T I O N Prepared by Coby Harmon University of California Santa Barbara Westmont College kieso weygandt warfield team for success

2. 7-2  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. Cash LO 1 Identify items considered cash. What is Cash?

3. 7-3 Short-term, highly liquid investments that are both Cash LO 2 Indicate how to report cash and related items. Cash Equivalents a)readily convertible to cash, and b)so near their maturity that they present insignificant risk of changes in value. Examples: Treasury bills, Commercial paper, and Money market funds. Reporting Cash

4. 7-4 Companies segregate restricted cash from “regular” cash. Examples, restricted for: (1) plant expansion, (2) retirement of long-term debt, and (3) compensating balances. Reporting Cash LO 2 Restricted Cash Illustration 7-1

5. 7-5 Company writes a check for more than the amount in its cash account. Reporting Cash LO 2 Indicate how to report cash and related items. Bank Overdrafts  Generally reported as a current liability.  Offset against other cash accounts only when accounts are with the same bank.

6. 7-6 Cash-Related Items LO 2 Illustration 7-2

7. 7-7 Exercise 1-a Cash includes the following: 1.Commercial savings account— First National Bank of Yojimbo600,000 1.Commercial checking account— First National Bank of Yojimbo900,000 2.Money market fund—Volonte 5,000,000 5.Petty cash 1,000 11.Commercial Paper (cash equivalent) 2,100,000 12.Currency and coin on hand 7,700 Cash reported on December 31, 2014, balance sheet$8,608,700

8. 7-8 Exercise 1-b 3.Travel advances (reimbursed by employee)* *If not reimbursed, charge to prepaid expense. should be reported as receivable—employee in the amount of $180,000. 4.Cash restricted in the amount of $1,500,000 for the retirement of long-term debt should be reported as a noncurrent asset identified as “Cash restricted for retirement of long-term debt.” 6.An IOU from Marianne Koch should be reported as an account receivable in the amount of $190,000.

9. 7-9 Exercise 1-b Continues 7.The bank overdraft of $110,000 should be reported as a current liability.****If cash is present in another account in the same bank on which the overdraft occurred, offsetting is required. 8.Certificates of deposits of $500,000 each should be classified as temporary investments. 9.Postdated check of $125,000 should be reported as an accounts receivable. 10.The compensating balance requirement does not affect the balance in cash. A note disclosure indicating the arrangement and the amounts involved should be described in the notes.

10. 7-10 Accounts Receivable LO 3 Define receivables and identify the different types of receivables. Written promises to pay a sum of money on a specified future date. Receivables - Claims held against customers and others for money, goods, or services. Oral promises of the purchaser to pay for goods and services sold. Accounts Receivable Notes Receivable

11. 7-11 Nontrade Receivables 1.Advances to officers and employees. 2.Advances to subsidiaries. 3.Deposits paid to cover potential damages or losses. 4.Deposits paid as a guarantee of performance or payment. 5.Dividends and interest receivable. 6.Claims against: Insurance companies for casualties sustained; defendants under suit; governmental bodies for tax refunds; common carriers for damaged or lost goods; creditors for returned, damaged, or lost goods; customers for returnable items (crates, containers, etc.). Accounts Receivable LO 3 Define receivables and identify the different types of receivables.

12. 7-12 Recognition of Accounts Receivables LO 4 Explain accounting issues related to recognition of accounts receivable.   Reductions from the list price.   Not recognized in the accounting records.   Customers are billed net of discounts. 10 % Discount for new Retail Store Customers Trade Discounts

13. 7-13 Recognition of Accounts Receivables LO 4 Explain accounting issues related to recognition of accounts receivable.   Offered to induce prompt payment.   Gross Method vs. Net Method. Cash Discounts (Sales Discounts) Payment terms are 2/10, n/30

14. 7-14 Recognition of Accounts Receivables LO 4 Explain accounting issues related to recognition of accounts receivable. Illustration 7-4 Cash Discounts (Sales Discounts)

15. 7-15 Exercise 5 (1)June 3Accounts Receivable—Chester3,000 Sales Revenue3,000 June 12Cash2,940 Sales Discounts ($3,000 X 2%)60 A/R—Chester3,000 (2)June 3Accounts Receivable—Chester2,940 Sales Revenue ($3,000 X 98%)2,940 June 12Cash2,940 Accounts Receivable—Chester2,940 (b)July 29Cash3,000 Accounts Receivable—Chester2,940 Sales Discounts Forfeited60 (Note to instructor: Sales discounts forfeited could have been recognized at the time the discount period lapsed. The company, however, would probably not record this forfeiture until final cash settlement.)

16. 7-16 Accounts Receivables LO 4 Explain accounting issues related to recognition of accounts receivable.

17. 7-17 Alternate Presentation Accounts Receivables LO 4 Explain accounting issues related to recognition of accounts receivable.

18. 7-18 LO 5 Explain accounting issues related to valuation of accounts receivable. Accounts Receivable  Reporting of receivables involves 1)classification and 2)valuation on the balance sheet.  Classification involves determining the length of time each receivable will be outstanding.  Value and report short-term receivables at net realizable value. Valuation of Accounts Receivable

19. 7-19 LO 5 Explain accounting issues related to valuation of accounts receivable. Valuation of Accounts Receivable  Record credit losses as debits to Bad Debt Expense (or Uncollectible Accounts Expense).  Normal and necessary risk of doing business on credit.  Two methods to account for uncollectible accounts: 1)the direct write-off method and 2)the allowance method. Uncollectible Accounts Receivable

20. 7-20 LO 5 Explain accounting issues related to valuation of accounts receivable. Allowance Method Losses are estimated:   Percentage-of-sales.   Percentage-of-receivables.   GAAP requires when material in amount. Methods of Accounting for Uncollectible Accounts Direct Write-Off Theoretically deficient:  No matching.  Receivable not stated at cash realizable value.  Not GAAP when material in amount. Valuation of Accounts Receivable

21. 7-21 LO 5 Explain accounting issues related to valuation of accounts receivable. Illustration 7-6 Valuation of Accounts Receivable The percentage-of-sales basis results in a better matching of expenses with revenues The percentage-of-receivables basis produces the better estimate of net realizable value The percentage-of-receivables basis produces the better estimate of net realizable value

22. 7-22 LO 5 Explain accounting issues related to valuation of accounts receivable. Percentage-of-Sales Approach  Percentage based upon past experience and anticipate credit policy.  Achieves better matching of expenses with revenues.  Any balance in Allowance for Doubtful Accounts is ignored. Valuation of Accounts Receivable

23. 7-23 LO 5 Explain accounting issues related to valuation of accounts receivable. Percentage-of-Receivables Approach  Not matching.  Reports estimate of receivables at realizable value. Companies may apply this method using  one composite rate, or  an aging schedule using different rates. Valuation of Accounts Receivable

24. 7-24 Exercise 7 (a)Bad Debt Expense8,500 Allowance for Doubtful Accounts8,500* *.01 X ($900,000 – $50,000) = $8,500 (b)Bad Debt Expense3,000 Allowance for Doubtful Accounts3,000* *Step 1:.05 X $100,000 = $5,000 (desired credit balance in allowance account) *Step 2:$5,000 – $2,000 = $3,000 (required credit entry to bring allowance account to $5,000 credit balance)

25. 7-25 Notes Receivable LO 6 Explain accounting issues related to recognition and valuation of notes receivable. Supported by a formal promissory note.  Written promise to pay a certain sum of money at a specific future date.  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).

26. 7-26 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 (majority of notes). LO 6 Explain accounting issues related to recognition and valuation of notes receivable.

27. 7-27 Recognition of Notes Receivable Short-TermLong-Term Record at Face Value, less allowance Record at Present Value of cash expected to be collected Interest Rates Stated rate = Market rate Stated rate > Market rate Stated rate < Market rate Note Issued at Face Value Premium Discount LO 6

28. 7-28 Exercise 12 7/1Accounts Receivable—Harding Co.7,840 Sales Revenue ($8,000 X 98%)7,840 7/5Cash [$9,000 X (1 –.09)]8,190 Loss on Sale of Receivables810 Accounts Receivable ($9,000 X 98%)8,820 Sales Discounts Forfeited180 (Note: It is possible that the company already recorded the Sales Discounts Forfeited. In this case, the credit to Accounts Receivable would be for $9,000. The same point applies to the next entry as well.)

29. 7-29 7/9Accounts Receivable180 Sales Discounts Forfeited ($9,000 X 2%)180 Cash5,640 Interest Expense ($6,000 X 6%)360 Notes Payable6,000 7/11Account Receivable—Harding Co160 Sales Discounts Forfeited160 ($8,000 X 2%) This entry may be made at the next time financial statements are prepared. Also, it may occur on 12/29 when Harding Company’s receivable is adjusted. 12/29Allowance for Doubtful Accounts7,200 Accounts Receivable—Harding Co.7,200 [$7,840 + $160 = $8,000; $8,000 – (10% X $8,000) = $7,200]

30. 7-30 Recognition of Notes 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. LO 6 Explain accounting issues related to recognition and valuation of notes receivable.

31. 7-31 Disposition of Accounts and Notes Receivable Owner may transfer accounts or notes receivables to another company for cash. Reasons:  Competition.  Sell receivables because money is tight.  Billing and collection are time-consuming and costly. Transfer accomplished by:  Secured borrowing.  Sale of receivables. LO 8 Explain accounting issues related to disposition of accounts and notes receivable.

32. 7-32 Sale Without Recourse  Purchaser assumes risk of collection.  Transfer is outright sale of receivable.  Seller records loss on sale. Sale With Recourse  Seller guarantees payment to purchaser.  Financial components approach used to record transfer. LO 8 Explain accounting issues related to disposition of accounts and notes receivable. Disposition of Accounts and Notes Receivable Sales of Receivables

33. 7-33 Factors are finance companies or banks that buy receivables from businesses for a fee. Sales of Receivables Illustration 7-17 LO 8

34. 7-34 Exercise 5-13 (a)Cash192,000 Interest Expense 8,000* Notes Payable200,000 *2% X $400,000 = $8,000 (b)Cash350,000 Accounts Receivable350,000 (c)Notes Payable200,000 Interest Expense5,000* Cash205,000 *10% X $200,000 X 3/12 = $5,000

35. 7-35 Exercise 15 Computation of net proceeds: Cash received$160,000 Less: Recourse liability 1,000 Net proceeds$159,000 Computation of gain or loss: Carrying value$200,000 Net proceeds159,000 Loss on sale of receivables$ 41,000 The following journal entry would be made: Cash160,000 Loss on Sale of Receivables41,000 Recourse Liability1,000 Accounts Receivable200,000

36. 7-36 Exercise 17 (a)July 1Cash283,500 Due from Factor12,000* Loss on Sale of Receivables4,500** Accounts Receivable300,000 **(4% X $300,000) = $12,000 **(1 1/2% X $300,000) = $4,500 (b)July 1Accounts Receivable300,000 Due to JFK Corp.12,000 Interest Revenue4,500 Cash283,500

37. 7-37 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 the nature of credit risk inherent in the receivables. Presentation and Analysis LO 9 Describe how to report and analyze receivables. Presentation of Receivables

38. 7-38 LO 10 Explain common techniques employed to control cash. 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 Using Bank Accounts APPENDIX APPENDIX 7A CASH CONTROLS

39. 7-39 LO 10 Explain common techniques employed to control cash. To pay small amounts for miscellaneous expenses. The Imprest Petty Cash System 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. APPENDIX APPENDIX 7A CASH CONTROLS

40. 7-40 LO 10 Explain common techniques employed to control cash. 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. 3. Bank charges and credits. 4. Bank or Depositor errors. Time Lags APPENDIX APPENDIX 7A CASH CONTROLS

41. 7-41 Exercise 22 1.April 1Petty Cash200 Cash200 2.April 10Freight-In (or Invertory)60 Supplies Expense25 Postage Expense33 Accounts Receivable—Emp17 Miscellaneous Expense36 Cash Over and Short2 Cash ($200 – $27)173 3.April 20Petty Cash100 Cash100

42. 7-42 Problem 2 1.Net sales1,200,000 Percentage 1 1/2% Bad debt expense$ 18,000 2.Accounts receivable1,750,000 Amounts estimated to be uncollectible (180,000) Net realizable value1,570,000 3.Allowance for doubtful accounts 1/1/1417,000 Establishment of accounts written off in prior years8,000 Customer accounts written off in 2014(30,000) Bad debt expense for 2014 ($2,400,000 X 3%) ( 72,000 Allowance for doubtful accounts 12/31/1467,000

43. 7-43 Problem 2 4.Bad debt expense for 2014 84,000 Customer accounts written off (24,000) Allowance for doubtful accounts balance 12/31/14 60,000 Accounts receivable, net of allowance 950,000 Allowance for doubtful accounts balance 12/31/14 60,000 Accounts receivable, before deducting allowance for doubtful accounts 1,010,000 5.Accounts receivable310,000 Percentage 3% Bad debt expense, before adjustment 9,300 Allowance for doubtful accounts (debit balance) 14,000 Bad debt expense, as adjusted 23,300

44. 7-44 Problem 6 -1-Cash136,800* Sales Discounts1,200 Accounts Receivable138,000 *[$138,000 – ($60,000 X 2%)] –2– Accounts Receivable5,300 Allowance for Doubtful Accounts5,300 Cash5,300 Accounts Receivable5,300 –3– Allowance for Doubtful Accounts17,500 Accounts Receivable17,500 –4– Bad Debt Expense14,900 Allowance for Doubtful Accounts14,900* *($17,300 + $5,300 – $17,500 = $5,100; $20,000 – $5,100 = $14,900)