CH 07

Intermediate Accounting
Prepared by Coby Harmon University of California, Santa Barbara

7-1
Cash and Receivables
Intermediate Accounting 14th Edition
Kieso, Weygandt, and Warfield

7-2
Learning Objectives
1. 2. Identify items considered cash. Indicate how to report cash and related items.
3.
4. 5. 6. 7. 8. 9.
7-3
Define receivables and identify the different types of receivables.

Explain accounting issues related to recognition of accounts receivable. Explain accounting issues related to valuation of accounts receivable. Explain accounting issues related to recognition and valuation of notes receivable. Explain the fair value option. Explain accounting issues related to disposition of accounts and notes receivable. Describe how to report and analyze receivables.
Cash and Receivables
Cash
What is cash? Reporting cash
Accounts Receivable
Recognition of accounts receivable Valuation of accounts receivable
Notes Receivable
Recognition of notes receivable Valuation of notes receivable
Special Issues
Fair value option
Summary of cash-related items
Disposition of accounts and notes receivable

Presentation and analysis
7-4
What is 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, cashiers checks, personal checks, bank drafts and savings accounts.
7-5
LO 1 Identify items considered cash.
Reporting 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.
7-6
LO 2 Indicate how to report cash and related items.
Reporting Cash
Restricted Cash
Companies segregate restricted cash from regular cash.
Examples, restricted for:
(1) plant expansion, (2) retirement of long-term debt, and (3) compensating balances.
Illustration 7-1
7-7
LO 2
Reporting Cash
Bank Overdrafts
Company writes a check for more than the amount in its cash account.
Generally reported as a current liability.
Offset against other cash accounts only when accounts are with the same bank.
7-8
LO 2 Indicate how to report cash and related items.
Summary of Cash-Related Items

Illustration 7-2
7-9
LO 2
Accounts Receivable
Receivables - Claims held against customers and others for money, goods, or services.
Oral promises of the purchaser to pay for goods and services sold.
Written promises to pay a sum of money on a specified future date.
Accounts Receivable
Notes Receivable
7-10
LO 3 Define receivables and identify the different types of receivables.
Accounts Receivable
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: 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.).
7-11
Accounts Receivable
Nontrade Receivables
Illustration 7-3
7-12
Recognition of Accounts Receivables

Trade Discounts
Reductions from the list price Not recognized in the accounting records Customers are billed net of discounts
10 % Discount for new Retail Store Customers
7-13
LO 4 Explain accounting issues related to recognition of accounts receivable.

Cash Discounts
Inducements for prompt payment Gross Method vs. Net Method
Payment terms are 2/10, n/30
7-14

Cash Discounts (Sales Discounts)
Illustration 7-4
7-15

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 Sales June 12 Cash ($2,000 x 98%) Sales discounts Accounts receivable
7-16
2,000 2,000 1,960 40 2,000

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 net method. June 3 Accounts receivable Sales June 12 Cash ($2,000 x 98%) Accounts receivable 1,960 1,960 1,960 1,960
7-17

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. 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.
June 3
Accounts receivable Sales
1,960 1,960 2,000 1,960 40
June 12
Cash Accounts receivable Sales Discounts Forfeited
7-18

Non-Recognition of Interest Element
A company should measure receivables in terms of their present value. In practice, companies ignore interest revenue related to accounts receivable because, for current assets, the amount of the discount is not usually material in relation to the net income for the period.
7-19

How are these accounts presented on the Balance Sheet?
Accounts Receivable Beg. 500
Allowance for Doubtful Accounts 25 Beg.
End.
7-20
500
25
End.
Accounts Receivable
Assets Current Assets: Cash Accounts receivable Less: Allowance for doubtful accounts Inventory Prepaids Total current assets Fixed Assets: Office equipment Furniture & fixtures Less: Accumulated depreciation Total fixed assets Total Assets $ 500 (25) 346 475 812 40 1,673 5,679 6,600 (3,735) 8,544 10,217
7-21
Accounts Receivable
Assets Current Assets: Cash Accounts receivable, net of $25 allowance Inventory Prepaids Total current assets Fixed Assets: Office equipment Furniture & fixtures Less: Accumulated depreciation Total fixed assets Total Assets $ 346 475 812 40 1,673 5,679 6,600 (3,735) 8,544 10,217
7-22
Accounts Receivable
Journal entry for credit sale of $100? Accounts receivable Sales 100 100
Accounts Receivable Beg. 500
End.
7-23
500
25
End.
Accounts Receivable
Journal entry for credit sale of $100? Accounts receivable Sales 100 100
Accounts Receivable Beg. Sale 500 100
End.
7-24
600
25
End.
Accounts Receivable
Collected of $333 on account? Cash Accounts receivable 333 333
Accounts Receivable Beg. Sale 500 100
End.
7-25
600
25
End.
Accounts Receivable
Collected of $333 on account? Cash Accounts receivable 333 333
Accounts Receivable Beg. Sale 500 100 333 Coll.
End.
7-26
267
25
End.
Accounts Receivable
Adjustment of $15 for estimated Bad-Debts? Bad debt expense Allowance for Doubtful Accounts 15 15
End.
7-27
267
25
End.
Accounts Receivable
Adjustment of $15 for estimated Bad-Debts? Bad debt expense Allowance for Doubtful Accounts 15 15
Allowance for Doubtful Accounts 25 15 Beg. Est.
End.
7-28
267
40
End.
Accounts Receivable
Write-off of uncollectible accounts for $10? Allowance for Doubtful accounts Accounts receivable 10 10
End.
7-29
267
40
End.
Accounts Receivable
Write-off of uncollectible accounts for $10? Allowance for Doubtful accounts Accounts receivable 10 10
10
End.
7-30
W/O
W/O
10
30 End.
257
Accounts Receivable
Assets Current Assets: Cash Accounts receivable, net of $30 allowance Inventory Prepaids Total current assets Fixed Assets: Office equipment Furniture & fixtures Less: Accumulated depreciation Total fixed assets Total Assets $ 13 227 812 40 1,092 5,679 6,600 (3,735) 8,544 9,636
7-31
Valuation of Accounts 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.
7-32
LO 5 Explain accounting issues related to valuation of accounts receivable.

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.
Allowance Method Losses are Estimated:

Percentage-of-sales. Percentage-of-receivables. GAAP requires when material in amount.
7-33

Illustration 7-6
Emphasis on the Income Statement relationships
Emphasis on the Balance Sheet relationships
7-34

Percentage-of-Sales Approach
Percentage based upon past experience and anticipate credit policy.
Achieves proper matching of costs with revenues.

Existing balance in Allowance account not considered.
7-35

Illustration: Gonzalez Company estimates from past experience that about 1% of credit sales become uncollectible. If net credit
sales are $800,000 in 2012, it records bad debt expense as follows.

Bad Debt Expense Allowance for Doubtful Accounts 8,000 8,000
Illustration 7-7
7-36
LO 5

Percentage-of-Receivables Approach

Not matching.
Reports receivables at realizable value.
Companies may apply this method using

one composite rate, or an aging schedule using different rates.
7-37

Illustration 7-8 Accounts Receivable Aging Schedule
What entry would Wilson make assuming that no balance existed in the allowance account?
Bad Debt Expense Allowance for Doubtful Accounts

7-38
37,650 37,650

Illustration 7-8 Accounts Receivable Aging Schedule
What entry would Wilson make assuming the allowance account had a credit balance of $800 before adjustment?
Bad Debt Expense ($37,650 $800) Allowance for Doubtful Accounts

7-39
36,850 36,850

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.
7-40

Instructions: Prepare the journal entry assuming Sandel estimates bad debts at (a) 1% of net sales.
($800,000 $50,000) x 1% = $7,500
7-41
7,500 7,500
LO 5

Instructions: Prepare the journal entry assuming Sandel estimates bad debts at (b) 5% of accounts receivable.
($160,000 x 5%) $2,000) = $6,000
7-42
6,000 6,000
LO 5

Illustration: Assume that the financial vice president of Brown Furniture authorizes a write-off of the $1,000 balance owed by Randall Co. on March 1, 2012. The entry to record the write-off is:
Allowance for Doubtful Accounts Accounts Receivable 1,000 1,000
Assume that on July 1, Randall Co. pays the $1,000 amount that Brown had written off on March 1. These are the entries:
Accounts Receivable Allowance for Doubtful Accounts Cash Accounts Receivable
7-43
1,000 1,000 1,000 1,000

LO 5
Recognition of Notes 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).
7-44
LO 6 Explain accounting issues related to recognition of 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).
7-45

Short-Term Record at Face Value, less allowance Long-Term Record at Present Value of cash expected to be collected
Note Issued at Face Value Premium Discount
Interest Rates Stated rate = Market rate Stated rate > Market rate Stated rate < Market rate
7-46
Note Issued at Face 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
1
n=3
7-47

PV of Interest
$1,000
2.48685
Factor
$2,487
Present Value
Interest Received
7-48

PV of Principal
$10,000
Principal
7-49
.75132
Factor
$7,513
Present Value

Summary Present value of interest Present value of principal $ 2,487 7,513
Note current market value
$10,000
Date Account Title Jan. yr. 1 Notes receivable
Debit 10,000
Credit
Cash
Dec. yr. 1 Cash
10,000
1,000 1,000
Interest revenue
7-50
Zero-Interest-Bearing 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
1
n=3
7-51
PV of Principal
$10,000
Principal
7-52
.77218
Factor
$7,721.80
Present Value
Illustration 7-12
7-53
Journal Entries for Zero-Interest-Bearing note Present value of Principal $7,721.80
Date Jan. yr. 1
Account Title Notes receivable Discount on notes receivable Cash
Debit 10,000.00
Credit
2,278.20 7,721.80
Dec. yr. 1
Discount on notes receivable Interest revenue ($7,721.80 x 9%)
694.96 694.96
7-54
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
n=3
7-55
PV of Interest
$1,000
2.40183
Factor
$2,402
Present Value
Interest Received
7-56
PV of Principal
$10,000
Principal
7-57
.71178
Factor
$7,118
Present Value
Illustration: How does Morgan record the receipt of the note?
Illustration 7-14
Notes Receivable Discount on Notes Receivable Cash

7-58
10,000
480 9,520
Illustration 7-15
7-59
Journal Entries for Interest-Bearing Note
Date Beg. yr. 1
Account Title Notes receivable Discount on notes receivable Cash
Debit 10,000
Credit 480 9,520
End. yr. 1
Cash Discount on notes receivable Interest revenue

($9,520 x 12%)
1,000 142 1,142
7-60

Notes Received for Property, Goods, or Services
In a bargained transaction entered into at arms 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.
7-61

Illustration: Oasis Development Co. sold a corner lot to Rusty Pelican as a restaurant site. Oasis accepted in exchange a fiveyear 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
Notes Receivable Discount on Notes Receivable Land Gain on Sale of Land

7-62
35,247 15,247 14,000 6,000
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.
7-63
LO 7 Explain the fair value option.
Valuation of Notes 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, 2012, to use the fair value option for these
receivables. This is the first valuation of these recently acquired receivables. At December 31, 2012, Escobar makes an
adjusting entry to record the increase in value of Notes Receivable and to record the unrealized holding gain, as follows. Notes Receivable 190,000 190,000
Unrealized Holding Gain or LossIncome
7-64
LO 7 Explain the fair value option.
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 / collection are time-consuming and costly.
Transfer accomplished by:

1. Secured borrowing 2. Sale of receivables
LO 8 Explain accounting issues related to disposition of accounts and notes receivable.
7-65
Disposition of Accounts and Notes Receivable

Secured Borrowing
Illustration: March 1, 2012, 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.
7-66
Secured Borrowing - Illustration

Illustration 7-16
7-67
LO 8
Secured Borrowing - Exercise

E7-13: On April 1, 2012, Prince Company assigns $500,000 of its accounts receivable to the Third National Bank as collateral for a $300,000 loan due July 1, 2012. 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) b) Prepare the April 1, 2012, journal entry for Prince Company. Prepare the journal entry for Princes collection of $350,000 of the accounts receivable during the period from April 1, 2012, through June 30, 2012. On July 1, 2012, Prince paid Third National all that was due from the loan it secured on April 1, 2012.
c)
7-68
Secured Borrowing - Exercise

Exercise 7-13 continued
Date (a) Cash Finance Charge Notes Payable ($500,000 x 2% = $10,000) (b) Cash Accounts Receivable (c) Notes Payable Interest Expense Cash (10% x $300,000 x 3/12 = $7,500)
7-69
Account Title
Debit 290,000 10,000
Credit
300,000
350,000 350,000 300,000 7,500 307,500
LO 8
Sales of Receivables
Factors are finance companies or banks that buy receivables from businesses for a fee.
Illustration 7-17
7-70
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

7-71
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 7-18
7-72
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 7-19 Net Proceeds Computation
Illustration 7-20 Loss on Sale Computation
7-73
LO 8
Illustration: Prepare the journal entries for both Crest Textiles and Commercial Factors for the receivables sold with recourse. Crest Textiles, Inc. Cash Due from Factor Loss on Sale of Receivables Accounts (Notes) Receivable Recourse Liability Accounts Receivable Due to Crest Textiles Financing Revenue Cash 460,000 25,000 21,000
500,000 6,000
500,000
Commercial Factors, Inc.
25,000 15,000 460,000
7-74
Secured Borrowing versus Sale

Illustration 7-22
The FASB concluded that a sale occurs only if the seller surrenders control of the receivables to the buyer.
Three conditions must be met.

7-75
Presentation and Analysis

Presentation of Receivables
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.
7-76
LO 9 Describe how to report and analyze receivables.
Presentation and Analysis

Analysis of Receivables
Illustration 7-24
This Ratio used to:

Assess the liquidity of the receivables. Measure the number of times, on average, a company collects receivables during the period.
7-77
LO 9 Describe how to report and analyze receivables.
APPENDIX
7A
CASH CONTROLS
Management faces two problems in accounting for cash transactions: 1. Establish proper controls to prevent any unauthorized transactions by officers or employees. 2. Provide information necessary to properly manage cash on hand and cash transactions.
7-78
LO 10 Explain common techniques employed to control cash.
APPENDIX
7A
CASH CONTROLS
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
7-79
APPENDIX
7A
CASH CONTROLS
The Imprest Petty Cash System

To pay small amounts for miscellaneous expenses.
Steps:
1. Record $300 transfer of funds to petty cash: Petty Cash Cash 300 300
2. The petty cash custodian obtains signed receipts from each individual to whom he or she pays cash.
7-80
APPENDIX
7A
CASH CONTROLS

Steps:
3. Custodian receives a company check to replenish the fund. Office Supplies Expense Postage Expense Entertainment Expense 42 53 76
Cash Over and Short

Cash
2
173
7-81
APPENDIX
7A
CASH CONTROLS

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 Petty cash 50 50
7-82
APPENDIX
7A
CASH CONTROLS
Physical Protection of Cash Balances

Company should

Minimize the cash on hand. Only have on hand petty cash and current days receipts. Keep funds in a vault, safe, or locked cash drawer. Transmit each days receipts to the bank as soon as practicable. Periodically prove (reconcile) the balance shown in the general ledger.
7-83
APPENDIX
7A
CASH CONTROLS
Reconciliation of Bank Balances

Schedule explaining any differences between the banks and the companys records of cash. Reconciling Items:
1. Deposits in transit. 2. Outstanding checks.
3. Bank charges and credits.

4. Bank or Depositor errors.
Time Lags
7-84
APPENDIX
7A
CASH CONTROLS
Reconciliation of Bank Balances
Illustration 7A-1 Bank Reconciliation Form and Content
7-85
APPENDIX
7A
CASH CONTROLS
7-86
LO 10
APPENDIX
7A
CASH CONTROLS
Illustration 7A-2
7-87
APPENDIX
7A
CASH CONTROLS
Illustration: Journalize the adjusting entries at November 30 on the books of Nugget Mining Company.
Nov. 30
Cash
Office expense Accounts receivable
542
18 220
Accounts payable
Interest revenue
180
600
7-88
APPENDIX
7A
CASH CONTROLS
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.
7-89
APPENDIX
7B
IMPAIRMENT OF RECEIVABLES
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.
7-90
LO 11 Describe the accounting for a loan impairment.
APPENDIX
7B
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 loans historical effective interest rate.
7-91
APPENDIX
7B
Illustration: At December 31, 2011, 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 loans expected future cash flow and utilizes the present value method for measuring the required impairment loss.
Illustration 7B-1
7-92
APPENDIX
7B
Illustration: Computation of Impairment Loss

Illustration 7B-2
Recording Impairment Losses Bad Debt Expense Allowance for Doubtful Accounts 12,437 12,437
7-93
RELEVANT FACTS
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. One difference is that, in general, IFRS classifies bank overdrafts as cash. Like GAAP, cash and receivables are generally reported in the current assets section of the balance sheet under IFRS. However, companies may report cash and receivables as the last items in current assets under IFRS. IFRS requires that loans and receivables be accounted for at amortized cost, adjusted for allowances for doubtful accounts.
7-94
RELEVANT FACTS
Although IFRS implies that receivables with different characteristics should be reported separately, there is no standard that mandates this segregation. 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. 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.
7-95
IFRS SELF-TEST QUESTION

Under IFRS, receivables are to be reported on the balance sheet at:
a. amortized cost. b. amortized cost adjusted for estimated loss provisions. c. historical cost.
d. replacement cost.
7-96

Which of the following statements is false?
a. Receivables include equity securities purchased by the company. b. Receivables include credit card receivables. c. Receivables include amounts owed by employees as result of company loans to employees.
d. Receivables include amounts resulting from transactions with customers.
7-97

Under IFRS:
a. the entry to record estimated uncollected accounts is the same as GAAP. b. loans and receivables should only be tested for impairment as a group. c. it is always acceptable to use the direct write-off method.
d. all financial instruments are recorded at fair value.
7-98
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7-99

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Intermediate Accounting

Prepared by Coby Harmon University of California, Santa Barbara

Cash and Receivables

Intermediate Accounting 14th Edition

Kieso, Weygandt, and Warfield

Define receivables and identify the different types of receivables.

Cash and Receivables

Summary of cash-related items

Disposition of accounts and notes receivable

Most liquid asset

LO 1 Identify items considered cash.

LO 2 Indicate how to report cash and related items.

Generally reported as a current liability.

LO 2 Indicate how to report cash and related items.

Summary of Cash-Related Items

Written promises to pay a sum of money on a specified future date.

LO 3 Define receivables and identify the different types of receivables.

LO 3 Define receivables and identify the different types of receivables.

LO 3 Define receivables and identify the different types of receivables.

Recognition of Accounts Receivables

10 % Discount for new Retail Store Customers

LO 4 Explain accounting issues related to recognition of accounts receivable.

Recognition of Accounts Receivables

Inducements for prompt payment Gross Method vs. Net Method

Payment terms are 2/10, n/30

LO 4 Explain accounting issues related to recognition of accounts receivable.

Recognition of Accounts Receivables

LO 4 Explain accounting issues related to recognition of accounts receivable.

Recognition of Accounts Receivables

2,000 2,000 1,960 40 2,000

LO 4 Explain accounting issues related to recognition of accounts receivable.

Recognition of Accounts Receivables

LO 4 Explain accounting issues related to recognition of accounts receivable.

Recognition of Accounts Receivables

Accounts receivable Sales

1,960 1,960 2,000 1,960 40

Cash Accounts receivable Sales Discounts Forfeited

LO 4 Explain accounting issues related to recognition of accounts receivable.

Recognition of Accounts Receivables

LO 4 Explain accounting issues related to recognition of accounts receivable.

Recognition of Accounts Receivables

Accounts Receivable Beg. 500

Allowance for Doubtful Accounts 25 Beg.

LO 4 Explain accounting issues related to recognition of accounts receivable.

LO 4 Explain accounting issues related to recognition of accounts receivable.

LO 4 Explain accounting issues related to recognition of accounts receivable.

Accounts Receivable Beg. 500

Allowance for Doubtful Accounts 25 Beg.

LO 4 Explain accounting issues related to recognition of accounts receivable.

Accounts Receivable Beg. Sale 500 100

Allowance for Doubtful Accounts 25 Beg.

LO 4 Explain accounting issues related to recognition of accounts receivable.

Accounts Receivable Beg. Sale 500 100

Allowance for Doubtful Accounts 25 Beg.

LO 4 Explain accounting issues related to recognition of accounts receivable.

Accounts Receivable Beg. Sale 500 100 333 Coll.

Allowance for Doubtful Accounts 25 Beg.

LO 4 Explain accounting issues related to recognition of accounts receivable.

Accounts Receivable Beg. Sale 500 100 333 Coll.

Allowance for Doubtful Accounts 25 Beg.

LO 4 Explain accounting issues related to recognition of accounts receivable.

Accounts Receivable Beg. Sale 500 100 333 Coll.