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CHAPTER Cash and Receivables ……..…………………………………………………………... Cash readily available free from contractual restrictions restricted cash: current or long-term Would a bank accept it for deposit? 7 Petty cash account Bank overdraft Advances to subsidiaries Certificates of deposit Minimum cash balance Money market funds RECEIVABLES Current Receivables trade receivables accounts receivable notes receivable nontrade receivables tax refunds, advances, etc. Noncurrent Receivables classified as long-term assets Reported at net realizable value Estimate: - uncollectible - sales returns Trade Discounts a reduction in catalog price usually stated as a percentage record the sale at the discounted amount no one pays full price! Sales Discounts a discount for prompt payment Gross Method vs. Net Method (cf. Illustration 7-4) Uncollectible Accounts Receivable Direct Method To write-off an account as uncollectible: Bad Debts Expense Accounts Receivable 540 not an acceptable method violation of the matching principle failure to report net realizable value 540 Allowance Method Sales 0 90,000 Bad Debt Exp 0 To write-off accounts as uncollectible: To record bad debts expense for the year: A/R 7,700 90,000 87,000 Allow for DA 500 Allowance Method – Percentage of Sales Sales 0 90,000 Bad Debt Exp 0 A/R 7,700 90,000 87,000 960 Bad Debts = % of credit sales $900 = 1% x $90,000 To record bad debts expense for the year: Allow for DA 960 500 Allowance Method – Percentage of Receivables Sales 0 90,000 Bad Debt Exp 0 A/R 7,700 90,000 87,000 960 Allowance for DA = % of A/R $487 = 5% x $9,740 To record bad debts expense for the year: 9,740 Allow for DA 960 500 NOTES RECEIVABLE Notes Issued at Face Value Bigelow Corp sells merchandise to customer for a 3-year, $5,000 note bearing interest at 10% annually. Market rate for a similar note is 10%. Periods Rate PV Annuity FV AD? To record receipt of the note: To record the interest received: Noninterest-bearing Notes Bigelow Corp sells merchandise to customer for a 3-year, $5,000 noninterest-bearing note. Market rate for a similar note is 10%. Periods Rate PV Annuity FV AD? To record receipt of the note: Date Cash Received Int Rev. (10%) 7/1/03 7/1/04 7/1/05 To record the interest earned: Discount Amortized Carrying Amount 3,757 Interest-bearing Notes Bigelow Corp sells merchandise to customer for a 3-year, $5,000, 6% note. Interest on the note will be paid semiannually. The market rate for a similar note is 10%. Periods Rate PV Annuity FV AD? To record receipt of the note: Date Cash Received Int Rev. (5% semi) Discount Amortized 7/1/03 1/1/04 7/1/04 To record the first interest payment received: Carrying Amount 4,492 Notes Received for Property Bigelow Corp sells an office building for a 5-year, $225,000 note bearing interest at 2% annually. Information on the building: Original cost $230,000 Accumulated deprec 69,000 Appraisal value 194,000 Periods Rate PV Annuity FV AD? To record sale of building: Cost 230,000 Accum depr 69,000 PV FV 194,000 225,000 DISPOSITION OF ACCOUNTS RECEIVABLE Secured Borrowing A/R are used as collateral when borrowing money Notes or loans payable are recorded as usual A/R remain on the books of the company no special entry when they become collateral collection of A/R recorded as usual collections are remitted to the lender Sale of Receivables Factoring: sale of receivables to a bank Securitization: sales of a share in a pool of assets that include receivables Sale without Recourse Cash Due from Factor Loss on Sale of Receiv A/R 460,000 25,000 15,000 500,000 Sale with Recourse Cash Due from Factor Loss on Sale of Receiv A/R Recourse Liability Proceeds retained by the factor for possible discounts, returns, and allowances. 460,000 25,000 21,000 500,000 6,000 The estimated value of the recourse obligation. PRESENTATION AND ANALYSIS - RECEIVABLES Presentation Separate current from noncurrent Report net realizable value Disclose receivables pledged as collateral Analysis A/R Turnover = Net Sales Average Net Trade Receivables PETTY CASH SYSTEM Fund Established Petty Cash 500 Cash 500 Expenses Paid No entry Fund Reimbursed Office Exp 130 Auto Exp 215 Misc Exp 130 Cash 475 Receipt Receipt Receipt Receipt Receipt Receipt BANK RECONCILIATIONS Balance per bank Add: Deposits in Transit Oct. 31, 2006 Less: Checks Outstanding #5164 $ 220.00 #5170 35.50 #5171 756.67 Adjusted balance per bank $13,417.20 1,012.17 $14,418.03 Balance per books Less: Bank service charge Adjusted balance per books $14,425.53 7.50 $14,418.03 2,013.00