Intermediate Accounting

IFRS Edition
Kieso, Weygandt, Warfield
Fourth Edition

Chapter 7
Cash and Receivables
Prepared by
Coby Harmon
University of California, Santa Barbara
Westmont College

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Learning Objectives
After studying this chapter, you should be able to:
LO 1 Indicate how to report cash and related items.
LO 2 Define receivables and explain accounting issues related
to their recognition.
LO 3 Explain accounting issues related to valuation of
accounts receivable.
LO 4 Explain accounting issues related to recognition and
valuation of notes receivable.
LO 5 Explain additional accounting issues related to accounts
and notes receivables.

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PREVIEW OF CHAPTER 7

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 Learning Objective 4
Explain accounting issues related to
recognition and valuation of notes
receivable.

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Notes Receivable (1 of 2)
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).

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Notes Receivable (2 of 2)
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).

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Recognition of Notes Receivable

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Note Issued at Face Value
Illustration: Bigelow SA 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?

ILLUSTRATION 7.7

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Computation of the Present Value of
the Note

ILLUSTRATION 7.8
The present value of the note equals its face value because the
market (effective) and stated rates of interest are the same.

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Journal Entries to Record Receipt of
Note and Interest
Journal entry to record receipt of note:

Note Receivable 10,000

Cash 10,000

Journal entry to recognize interest revenue each year:

Cash 1,000
Interest Revenue 1,000

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Zero-Interest-Bearing Notes
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. The implicit rate that equates the total
cash to be received $10,000 at maturity to the present value of the
future cash flows is $7,721.80.

ILLUSTRATION 7.9

Jeremiah records the note for the present value of $7,721.80 as

follows:
Note Receivable 7,721.80
Cash 7,721.80

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Discount Amortization Schedule—
Effective-Interest Method (1 of 2)

ILLUSTRATION 7.10

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 Journal Entry to Record Interest
Revenue—Year 1

ILLUSTRATION 7.10

Jeremy records interest revenue at the end of the first year using the
effective-interest method as follows.
Notes Receivable 694.96
Interest Revenue ($7,721.80 x .09) 694.96

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Interest-Bearing Notes
Illustration: Morgan Group 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. Prepare the journal entry to record the receipt
of the note?

ILLUSTRATION 7.11

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Journal Entry to Record Receipt of Note

ILLUSTRATION 7.12

Morgan exchanged the note at a discount. Morgan records the

present value of the note as follows.

Notes Receivable 9,520

Cash 9,520

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Discount Amortization Schedule—
Effective-Interest Method (2 of 2)

ILLUSTRATION 7.13

Morgan records receipt of the annual interest and amortization of

the discount for the years year as follows.
Cash 1,000
Notes Receivable 142
Interest Revenue 1,142
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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
o current cash sales price or
o from the current market value of the debt instrument.

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Notes for Property, Goods, or Services
Example
Illustration: 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:
Notes Receivable 20,000
Land 14,000
Gain on Sale of Land ($20,000 − $14,000) 6,000

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Valuation of Notes Receivable
• Companies record and report short-term notes receivable
at their cash realizable value.
• Computations and estimations involved in valuing short-
term notes receivable and in recording bad debt expense
and the related allowance exactly parallel that for trade
accounts receivable.

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Copyright
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