Ch07 Cash and Receivables Hexana

Prepared by
Coby Harmon
University of California, Santa Barbara
Westmont College
7-1
Types of Receivables (1 of 2)
Amounts due from individuals and companies that are expected to
be collected in cash.
Amounts customers Written promise Nontrade receivables

owe on account that (formal instrument) such as interest,
result from the sale for amount to be loans to officers,
of goods and received. Normally advances to
services. requires the employees, and
collection of income taxes
interest. refundable.
Accounts Notes Other
Receivable Receivable Receivables
Copyright ©2019 John Wiley & Sons, Inc. 2

Recognizing Accounts Receivable (1 of 5)
• Service organization records a receivable when it
performs service on account
• Merchandiser records accounts receivable at point of
sale of merchandise on account
• Seller may offer a discount to encourage early
payment
• Buyer might return goods found to be unacceptable
 Sales returns reduce receivables

Illustration: Assume that Zhang Ltd. on July 1, 2020, sells
merchandise on account to Li Stores for ¥1,000, terms 2/10,
n/30 (amounts in thousands). On July 5, Li returns
merchandise with a sales price of ¥100 to Zhang. Prepare the
journal entries to record these transactions.
Jul. 1 Accounts Receivable 1,000
Sales Revenue 1,000
Jul. 5 Sales Returns and Allowances 100
Accounts Receivable 100

Illustration: On July 11, Zhang receives payment from Li for
the balance due. Prepare the journal entry to record this
transaction.
Jul. 11 Cash (¥900 − ¥18) 882

Sales Discounts (¥900 x .02) 18

Illustration: Some retailers issue their own credit cards. When
you use a retailer’s credit card (IKEA, for example), the retailer
charges interest on the balance due if not paid within a
specified period (usually 25–30 days).
Illustration: Assume you use your IKEA credit card to purchase
clothing with a sales price of €300 on June 1, 2020. The entry
is recorded as follows.
Jun. 1 Accounts Receivable 300

Sales Revenue 300

Illustration: Assuming that you owe €300 at the end of the
month and IKEA charges 1.5% per month on the balance due,
the adjusting entry that IKEA makes to record interest
revenue of €4.50 (€300 × 1.5%) on June 30 is as follows.
June 30 Accounts Receivable 4.50

Interest Revenue 4.50

Do It! 1: Recognizing Accounts
Receivable (1 of 3)
On May 1, Wilton sold merchandise on account to Bates for
£50,000, terms 3/15, net 45. On May 4, Bates returns merchandise
with a sales price of £2,000. On May 16, Wilton receives payment
from Bates for the balance due. Prepare journal entries to record
the May transactions on Wilton’s books. (Ignore cost of goods sold
entries.)
May 1 Accounts Receivable 50,000

Sales Revenue 50,000

Receivable (2 of 3)
entries.)
May 4 Sales Returns and Allowances 2,000

Accounts Receivable 2,000

Receivable (3 of 3)
entries.)
May 16 Cash (£48,000 − £1,440) 46,560

Sales Discounts (£48,000 × .03) 1,440

Learning Objective 2
Describe How Companies Value
Accounts Receivable and Record Their
Disposition

Piutang
Piutang tidak
tidak tertagih
tertagih
1. Dihapus scr langsung (DWO)
Piutang PT X Rp 500 juta tidak tertagih dan
dihapus langsung
31/12 bad debt expense 500
AR 500
PT X membayar piutang yg sudah dihapus
AR 500
Bad Debt Expense 500
Cash 500
AR 500
7-12
Piutang
Piutang tidak
tidak tertagih
tertagih
2. Cadangan piutang tak tetagih (AFDA)
Pembuatan cadangan piut tak tertagih (% sales, analisis umur piutang = 1500)
31/12 21 Bad debt expense 1500
Allowance for DA 1500
Piutang PT X Rp 500 juta tidak tertagih dan dihapus dengan menggunakan AFDA
AFDA 500
AR 500
AR 500
AFDA 500
Cash 500
AR 500
31/12/22 : sisa 1000
Estmasi : 4000
31/12 22 Bad debt expense 3000 A/R 30.000
Allowance for DA 3000 AFDA (3000)
7-13 27.000
Piutang
Piutang tidak
tidak tertagih
tertagih
2. Cadangan piutang tak tetagih (AFDA)
Pembuatan cadangan piut tak tertagih (% sales, analisis umur piutang = 1500)
31/12 21 Bad debt expense 1500
Allowance for DA 1500
Piutang PT X Rp 500 juta tidak tertagih dan dihapus dengan menggunakan AFDA
AFDA 4000
AR 4000
AR 500
AFDA 500
Cash 500
AR 500
31/12/22 : sisa (2500)
Estmasi : 4000
31/12 22 Bad debt expense 6500 A/R 30.000
Allowance for DA 6500 AFDA (6500)
7-14 23.500
Valuation of Accounts Receivable
Valuing Accounts Receivable
• Current asset
• Valuation (net realizable value)
Uncollectible Accounts Receivable
• Sales on account raise possibility of accounts not
being collected
• Seller records losses that result from extending
credit as Bad Debt Expense

Accounting for Uncollectible Accounts
Direct Write-Off Method
• No matching of expenses with revenues
• Receivable not stated at net realizable value
• Not acceptable for financial reporting purposes
Allowance Method
• Better matching of expenses with revenues
• Receivable stated at cash (net) realizable value
• Required for financial reporting purposes

How are these accounts presented on the Balance Sheet?
Allowance for
Accounts Receivable Doubtful Accounts
Bal. 200,000 12,000 Bal.
Bal. Bal.
Copyright ©2019 John Wiley & Son, Inc. 17

Hampson Furniture
Statement of Financial Position (partial)
Current Assets
Supplies € 25,000
Inventory 310,000
Accounts receivable €200,000
Less: Allowance for doubtful accounts 12,000 188,000
Cash 14,800
Total current assets €537,800
LO 2 Copyright ©2019 John Wiley & Son, Inc. 18

Alternate
Presentation
Hampson Furniture
Current Assets
Supplies € 25,000
Inventory 310,000
Accounts receivable, net of €12,000 allowance 188,000
Cash 14,800

Journal entry for credit sale of €100
Sales Revenue 100
Allowance for
Bal. 500 25 Bal.
Sale 100
Bal. 600 25 Bal.

Collect €333 on account?
Cash 333
Allowance for
Bal. 500 25 Bal.
Sale 100 333 Coll.
Bal. 267 25 Bal.

Adjustment of €15 for estimated bad debts?
Bad Debt Expense 15
Allowance for Doubtful Accounts 15
Allowance for
Bal. 500 25 Bal.
Sale 100 333 Coll. 15 Exp.
Bal. 267 40 Bal.

Write-off of uncollectible accounts of €10?
Allowance for
Bal. 500 25 Bal.
Sale 100 333 Coll. 15 Exp.
10 w/o w/o 10
Bal. 257 30 Bal.

ABC Supplies
Current Assets
Prepaid expense € 40
Inventory 812
Accounts receivable €257
Less: Allowance for doubtful accounts 30 227
Cash 330

Direct Write-Off Method for
Uncollectible Accounts
Illustration: Assume that Warden Co. writes off M. E. Doran’s
NT$1600 balance as uncollectible on December 12. Warden’s
entry is as follows.
Bad Debt Expense 1,600
Unless bad debt losses are insignificant, the direct write-off

method is not acceptable for financial reporting purposes.

Allowance Method for Uncollectible
Accounts
1. Companies estimate uncollectible accounts
receivable.
2. Debit Bad Debt Expense and credit Allowance for
Doubtful Accounts (a contra-asset account).
3. Companies debit Allowance for Doubtful Accounts
and credit Accounts Receivable at the time the
specific account is written off as uncollectible.

Allowance Method for Uncollectibles
(1 of 5)
Recording Estimated Uncollectibles

Illustration: Hampson Furniture has credit sales of €1,200,000
in 2020, of which €200,000 remains uncollected at December
31. The credit manager estimates that €12,000 of these sales
will be uncollectible.
Dec. 31 Bad Debt Expense 12,000
Allowance for Doubtful Accounts 12,000

(2 of 5)
Hampson Furniture
Current Assets Blank Blank
Supplies Blank € 25,000

Inventory Blank 310,000
Accounts receivable €200,000 188,000
Allowance for doubtful accounts 12,000 Blank
Cash Blank 14,800
Total current assets Blank €537,800

(3 of 5)
Illustration: The financial vice president of Hampson Furniture

authorizes a write-off of the €500 balance owed by R. A. Ware
on March 1, 2021. The entry to record the write-off is as
follows.
Mar. 1 Allowance for Doubtful Accounts 500
Accounts Receivable Allowance for Doubtful Accounts

Jan. 1 Bal. 200,000 Mar. 1 500 Mar. 1 500 Jan. 1 Bal. 12,000
Mar. 1 Bal. 199,500 Mar. 1 Bal. 11,500

(4 of 5)
Recovery of an Uncollectible Account

Illustration: On July 1, R. A. Ware pays the €500 amount that
Hampson had written off on March 1. Hampson makes the
following entries.
July 1 Accounts Receivable 500
July 1 Cash 500

Estimating the Allowance (1 of 4)
Frequently, companies estimate the allowance as a
percentage of the outstanding receivables.
Percentage-of-Receivables Basis
• Management establishes a percentage relationship
between amount of receivables and expected losses
from uncollectible accounts
• Amount of bad debt expense that should be recorded
is difference between required balance and existing
balance in allowance account

Accounts Receivable Aging Schedule
Number of Days Past Due
Not yet
Customer Total Due 1-30 31-60 61-90 Over 90
T.E. Adert ¥ 600 ¥ 300 ¥ 200 ¥ 100
R.C. Bortz 300 ¥ 300
B.A. Carl 450 200 ¥ 250
O.L. Diker 700 500 200
T.O. Ebbet 600 300 300
Others 36,950 26,200 5,200 2,450 1,600 1,500
¥39,600 ¥27,000 ¥5,700 ¥3,000 ¥2,000 ¥1,900
Estimated %
uncollectible 2% 4% 10% 20% 40%
Total estimated
uncollectible ¥2,228 ¥540 ¥228 ¥300 ¥400 ¥760
Illustration: The unadjusted trial balance shows Allowance
for Doubtful Accounts with a credit balance of ¥528. Prepare
the adjusting entry assuming ¥2,228 is the estimate of
uncollectible receivables from the aging schedule.
Bad Debt Expense Allowance for Doubtful Accounts

Dec. 31 Adj. 1,700 Dec.31 Bal. 528
Dec. 31 Adj. 1,700
Dec. 31 Bal. 2,228

Illustration: Assume the unadjusted trial balance shows
Allowance for Doubtful Accounts with a debit balance of
¥500. Prepare the adjusting entry assuming ¥2,228 is the
estimate of uncollectible receivables.
Bad Debt Expense Allowance for Doubtful Accounts

Dec. 31 Adj. 2,728 Dec. 31 Bal. 500
Dec. 31 Adj. 2,728
Dec. 31 Bal. 2,228

Do It! 2a: Bad Debt Expense
Brule Group has been in business for 5 years. The unadjusted
trial balance at the end of the current year shows Accounts
Receivable $30,000, Sales Revenue $180,000, and Allowance
for Doubtful Accounts with a debit balance of $2,000. Brule
estimates bad debts to be 10% of accounts receivable.
Prepare the entry necessary to adjust Allowance for Doubtful
Accounts.
Bad Debt Expense 5,000*

* [(10% × $30,000) + $2,000]

Disposing of Accounts Receivables (1 of 2)
Companies sell receivables for two major reasons.
1. Receivables may be the only reasonable source of
cash.
2. Billing and collection are often time-consuming and
costly.

Disposing of Accounts Receivables (2 of 3)
Sale of Receivables to a Factor
• Finance company or bank
• Buys receivables from businesses and then collects
payments directly from customers
• Typically charges a commission to company that is
selling receivables
• Fee ranges from 1% to 3% of receivables purchased

Sale of Receivables to a Factor
Illustration: Assume that Keelung Jewelry factors NT$600,000
of receivables to Federal Factors (amounts in thousands).
Federal Factors assesses a service charge of 2% of the
amount of receivables sold. The journal entry to record the
sale by Keelung Jewelry is as follows.
Cash 588,000
Service Charge Expense 12,000
(NT$600,000 × 2% = NT$12,000)

Derecognition of Receivables
Secured Borrowing
Using receivables as collateral in a borrowing transaction.
Illustration: On March 1, 2019, Meng Mills, Inc. provides (assigns)

NT$700,000 of its accounts receivable to Sino Bank as collateral for
a NT$500,000 note. Meng Mills continues to collect the accounts
receivable; the account debtors are not notified of the arrangement.
Sino Bank assesses a finance charge of 1 percent of the accounts
receivable and interest on the note of 12 percent. Meng Mills makes
monthly payments to the bank for all cash it collects on the
receivables.
7-39 LO 5
Secured Borrowing
Illustration: Pada tanggal 1 Maret 2019, Meng Mills, Inc.

menyerahkan NT$700.000 dari piutangnya kepada Sino Bank
sebagai jaminan untuk wesel NT$500.000. Meng Mills terus
menagih piutang; debitur rekening tidak diberitahu tentang
pengaturan. Sino Bank mengenakan beban keuangan sebesar 1 %
dari piutang dan bunga wesel sebesar 12 %. Meng Mills melakukan
pembayaran bulanan ke bank untuk semua uang tunai yang
dikumpulkan dari piutang.
7-40 LO 5
ILLUSTRATION 7.17
7-41 Entries for Transfer of Receivables—Secured Borrowing
Secured
Secured Borrowing
Borrowing
Illustration: On April 1, 2019, Prince Company assigns $500,000 of its
accounts receivable to the Hibernia Bank as collateral for a $300,000 loan
due July 1, 2019. The assignment agreement calls for Prince Company to
continue to collect the receivables. Hibernia 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) Prepare the April 1, 2019, journal entry for Prince Company.
b) Prepare the journal entry for Prince’s collection of $350,000 of the
accounts receivable during the period from April 1, 2019, through
June 30, 2019.
c) On July 1, 2019, Prince paid Hibernia all that was due from the loan it
secured on April 1, 2019.
7-42 LO 5
Secured
Secured Borrowing
Borrowing
Instructions:
b) Prepare the journal entry for Prince’s collection of $350,000.
a) Cash 290,000
Finance Charge ($500,000 x 2%) 10,000
Notes Payable 300,000
b) Cash 350,000
c) Notes Payable 300,000

Interest Expense (10% x $300,000 x 3/12) 7,500
Cash 307,500
7-43 LO 5
Summary of Transfers ILLUSTRATION 7.18
Accounting for Transfers
of Receivables
7-44 LO 5
Presentation and Analysis
General rules in classifying receivables are:
1. Segregate and report carrying amounts of different categories of
receivables.
2. Indicate receivables classified as current and non-current in the
statement of financial position.
3. Appropriately offset the valuation accounts for receivables that are
impaired, including a discussion of individual and collectively
determined impairments.
4. Disclose the fair value of receivables in such a way that permits it to
be compared with its carrying amount.
5. Disclose information to assess the credit risk inherent in the
receivables.
6. Disclose any receivables pledged as collateral.
7. Disclose all significant concentrations of credit risk arising from
receivables.
7-45 LO 5
Analysis of Receivables
Illustration: Louis Vuitton (LVMH Group) (FRA) reported 2015
net sales of €35,664 million, its beginning and ending accounts
receivable balances were €2,274 million an €2,521 million,
respectively. The computation of its accounts receivable turnover
is as follows.
ILLUSTRATION 7.20
Computation of Accounts Receivable Turnover
7-46 LO 5
Analysis of Receivables ILLUSTRATION 7.20

Computation of Accounts
Receivable Turnover
This Ratio used to:

 Assess the liquidity of the receivables.
 Measure the number of times, on average, a company
collects receivables during the period.
7-47 LO 5
Do It! 2b: Factoring
Kell Wholesalers needs to raise €120,000 in cash to safely
cover next Friday’s employee payroll. Kell has reached its debt
ceiling. Kell’s present balance of outstanding receivables totals
€750,000. Kell decides to factor €125,000 of its receivables on
September 7, 2020, to alleviate this cash crunch. Record the
entry that Kell would make when it raises the needed cash.
(Assume a 1% service charge.)
Cash 123,750
Service Charge Expense 1,250
(€125,000 × 1% = €1,250)
Learning Objective 3
Explain How Companies Recognize,
Value, and Dispose of Notes Receivable

Notes Receivable (1 of 2)
Companies may grant credit in exchange for a promissory
note. A promissory note is a written promise to pay a
specified amount of money on demand or at a definite
time.
Promissory notes may be used
1. when individuals and companies lend or borrow
money,
2. when amount of transaction and credit period
exceed normal limits, or
3. in settlement of accounts receivable.
Notes Receivable (2 of 2)
To the payee, the promissory note is a note receivable.
To the maker, the promissory note is a note payable.

Determining the Maturity Date
Maturity date of a promissory note may be stated in one
of three ways:
1. On demand.
2. On a stated date.
3. At the end of a stated period of time.
Note terms are expressed in:
• Months
• Days

Computing Interest
Face Value of Note × Annual Interest Rate × Time in
Terms of One Year = Interest
When counting days, omit date note is issued, but
include due date
Terms of Note Interest Computation
Face x Rate x Time = Interest
₺ 730, 12%, 120 days ₺ 730 x 12% x 120/360 = ₺ 29.20
₺1,000, 9%, 6 months ₺1,000 x 9% x 6/12 = ₺ 45.00
₺2,000, 6%, 1 year ₺2,000 x 6% x 1/1 = ₺120.00

Recognizing Notes Receivable
Illustration: Calhoun plc wrote a £1,000, two-month, 12%
promissory note dated May 1, to settle an open account.
Prepare an entry Wilma Ltd. would make for the receipt of the
note.
May 1 Notes Receivable 1,000


Valuing Notes Receivable
• Report short-term notes receivable at their cash (net)
realizable value
• Estimation of cash realizable value and recording bad
debt expense and related allowance are similar to
accounts receivable

Disposing of Notes Receivable (1 of 2)
1. Notes may be held to their maturity date
2. Maker may default and payee must make an
adjustment to the account
3. Holder speeds up conversion to cash by selling the
note receivable

Disposing of Notes Receivable (2 of 2)
Honor of Notes Receivable
• Maker pays it in full at its maturity date
Dishonor of Notes Receivable

• Not paid in full at maturity
• No longer negotiable

Honor of Notes Receivable
Illustration: Wolder Co. lends Higley Co. €10,000 on June 1,
accepting a five-month, 9% interest note. To obtain payment,
Wolder (the payee) must present the note either to Higley Co.
(the maker) or to the maker’s agent, such as a bank. If Wolder
presents the note to Higley Co. on November 1, the maturity
date, Wolder’s entry to record the collection is as follows.
Nov. 1 Cash 10,375

Notes Receivable 10,000
Interest Revenue (€10,000 × 9% x 5/12) 375

Accrual of Interest Receivable (1 of 2)
Illustration: Suppose instead that Wolder Co. prepares
financial statements as of September 30. The adjusting entry
by Wolder is for four months ending Sept. 30.
Sept. 30 Interest Receivable (€10,000 × 9% x 4/12) 300

Interest Revenue 300

Accrual of Interest Receivable (2 of 2)
Illustration: Prepare the entry Wolder’s would make to record
the honoring of the Higley note on November 1.
Nov. 1 Cash 10,375

Interest Receivable 300
Interest Revenue (€10,000 × 9% x 1/12) 75

Dishonor of Notes Receivable (1 of 2)
Illustration: Assume that Higley Co. on November 1 indicates
that it cannot pay at the present time. If it does expect
eventual collection, Wolder Co. would make the following
entry at the time the note is dishonored (assuming no previous
accrual of interest).
Nov. 1 Accounts Receivable 10,375


Dishonor of Notes Receivable (2 of 2)
Illustration: If instead on November 1 there is no hope of
collection, the note holder would write off the face value of the
note by making the following entry at the time the note is
dishonored (assuming no previous accrual of interest).
Nov. 1 Allowance for Doubtful Accounts 10,000


CHAPTER 7
Cash and Receivables
LEARNING
LEARNINGOBJECTIVES
OBJECTIVES
After studying this chapter, you should be able to:
1. Indicate how to report cash 4. Explain accounting issues
and related items. related to recognition and
2. Define receivables and explain valuation of notes receivable.
accounting issues related to 5. Explain additional accounting
their recognition. issues related to accounts and
3. Explain accounting issues notes receivables.
related to valuation of
accounts receivable.
7-63
PREVIEW OF CHAPTER 7
Intermediate Accounting
IFRS 3rd Edition
Kieso ● Weygandt ● Warfield
7-64
LEARNING OBJECTIVE 1
Cash Indicate how to report cash
and related items.
Cash
 Most liquid asset.
 Standard medium of exchange.
 Basis for measuring and accounting for all other 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.
7-65 LO 1
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 value.
Examples: Government bonds, commercial paper, and

money market funds
7-66 LO 1
Reporting
Reporting Cash
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 7.2
Disclosure of Restricted Cash
7-67 LO 1
Reporting
Reporting Cash
Cash
Bank Overdrafts
Company writes a check for more than the amount in its
cash account.
 Generally reported as a current liability.
 Included as a component of cash if such overdrafts are
repayable on demand and are an integral part of a
company’s cash management (such as the common
practice of establishing off setting arrangements against
other accounts at the same bank).
7-68 LO 1
ILLUSTRATION 7.2
Classification of Cash-Related Items
7-69 LO 1
Receivables
Receivables Define receivables and explain accounting
issues related to their recognition.
Receivables - Claims held against customers and

others for money, goods, or services.
Oral promises of the Written promises to pay a

purchaser to pay for goods certain sum of money on a
and services sold. specified future date.
Accounts
Accounts Notes
Notes
Receivable
Receivable Receivable
Receivable
7-70 LO 2
Receivables
Non-Trade 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.).
7-71 LO 2
Non-Trade
Non-Trade
Receivables
Receivables
ILLUSTRATION 7.3
Receivables Statement of Financial
Position Sheet Presentations
7-72 LO 2
Recognition
Recognition of
of Accounts
Accounts Receivables
Receivables
 Accounts receivable generally arise as part of a

revenue arrangement.
 The revenue recognition principle indicates that a
company should recognize revenue when it satisfies
its performance obligation by transferring the good or
service to the customer.
7-73 LO 2
Recognition
Recognition of
of Accounts
Receivables
For example, if Lululemon Athletica, Inc. (CAN) sells a

yoga outfit to Jennifer Burian for $100 on account, the
yoga outfit is transferred when Jennifer obtains control of
this outfit. When this change in control occurs, Lululemon
should recognize an account receivable and sales
revenue. Lululemon makes the following entry:

Sales Revenue 100
7-74 LO 2
Recognition
Recognition of
of Accounts
Receivables
Some key indicators that Lululemon has transferred and

that Jennifer has obtained control of the yoga outfit.
1. Lululemon has the right to payment from the customer.
2. Lululemon has passed legal title to the customer.
3. Lululemon has transferred physical possession of the
goods.
4. Lululemon no longer has significant risks and rewards of
ownership of the goods.
5. Jennifer has accepted the asset.
7-75 LO 2
Receivables
Measurement of the Transaction Price

The transaction price is the amount of consideration that a
company expects to receive from a customer in exchange
for transferring goods or services.
Variable Consideration
In some cases, the price of a good or service is dependent
on future events. These future events often include such
items as discounts, returns and allowances, rebates, and
performance bonuses.
7-76 LO 2
Variable
Consideration
Trade Discounts
Use to:
 Avoid frequent changes in 10 %
catalogs. Discount for
new Retail
 Alter prices for different
Store
quantities purchased.
Customers
 Hide the true invoice price
from competitors.
7-77 LO 2
Cash Discounts (Sales Discounts)

 Offered to induce prompt
payment.
 Terms such as 2/10, n/30,
2/10, E.O.M., or net 30,
Payment
E.O.M. terms are
 Gross Method vs. Net 2/10, n/30
Method.
7-78 LO 2
Cash
Cash Discounts
Discounts (Sales
(Sales Discounts)
Discounts)
ILLUSTRATION 7.5
Entries under Gross and Net Methods
7-79 LO 2
Receivables
Receivables Define receivables and explain accounting
issues related to their recognition.
Receivables - Claims held against customers and

others for money, goods, or services.
Oral promises of the Written promises to pay a

purchaser to pay for goods certain sum of money on a
and services sold. specified future date.
Accounts
Accounts Notes
Notes
Receivable
Receivable Receivable
Receivable
7-80 LO 2
Receivables
Measurement of the Transaction Price

The transaction price is the amount of consideration that a
company expects to receive from a customer in exchange
for transferring goods or services.
In some cases, the price of a good or service is dependent
on future events. These future events often include such
items as discounts, returns and allowances, rebates, and
performance bonuses.
7-81 LO 2
Sales Returns and Allowances

 Sales Returns and Allowances is a contra revenue
account to Sales Revenue.
 Allowance for Sales Returns and Allowances is a contra
asset account to Accounts Receivable.
 The use of both Sales Returns and Allowances, and
Allowance for Sales Return and Allowances accounts is
helpful to identify potential problems associated with
inferior merchandise, inefficiencies in filling orders, or
delivery or shipment mistakes.
7-82 LO 2
Sales
Sales Returns
Returns and
and Allowances
Allowances
Illustration: Assume that Max Glass sells hurricane glass to

Oliver Builders. As part of the sales agreement, Max includes a
provision that if Oliver is dissatisfied with the product, Max will
grant an allowance on the sales price or agree to take the product
back.
On January 4, 2019, Max sells $5,000 of hurricane glass to Oliver
on account. Max records the sale on account as follows.
Sales Revenue 5,000
7-83 LO 2
Sales
Sales Returns
Returns and
and Allowances
Allowances
Illustration: Assume that Max Glass sells hurricane glass to

Oliver Builders. As part of the sales agreement, Max includes a
provision that if Oliver is dissatisfied with the product, Max will
grant an allowance on the sales price or agree to take the product
back.
On January 16, 2019, Max grants an allowance of $300 to Oliver
because some of the hurricane glass is defective. The entry to
record this transaction is as follows.
Sales Returns and Allowances 300
Cash 4.700
Accounts Receivable 4.700
7-84 LO 2
Sales Returns and Allowances
On January 31, 2019, before preparing financial statements, Max

estimates that an additional $100 in sales returns and allowances
will result from the sale to Oliver on January 4, 2019. An adjusting
entry to record this additional allowance is as follows.
Sales Returns and Allowances 100

Allowance for Sales Returns and Allowances
100
7-85 LO 2
Tidak semua piutang dapat tertagih
Unk menentukan jml piutang yg tdk tertagih :

estimasi piutang tak tertagih:
1. % penjualan
2. Analisa umur piutang
Metode pencatatan piutang tak tertagih:

3. Penghapusan secara langsung (direct write
off Method)
4. Metode cadangan (Allowance method)
7-86
Time Value of Money

 Theoretically, any revenue after the period of sale is interest
revenue.
 Companies ignore interest revenue related to accounts
receivable because the amount of the discount is not
usually material in relation to the net income for the period.
 The profession specifically excludes from present value
considerations “receivables arising from transactions with
customers in the normal course of business which are due
in customary trade terms not exceeding approximately one
year.”
7-87 LO 2
Accounts Receivable
How are these accounts presented on the Statement of

Financial Position?
Allowance for
Beg. 500 25 Beg.
End. 500 25 End.
7-88 LO 2
Accounts Receivable
Brown Furniture
Current Assets:
Cash $ 330
Accounts receivable 500
Less: Allowance for doubtful accounts (25) 475
Inventory 812
Prepaid expense 40
Total current assets 1,657
7-89 LO 2
Accounts Receivable
Alternate
Brown Furniture Presentation
Current Assets:
Cash $ 330
Accounts receivable, net of $25 allowance 475
Inventory 812
Prepaid expense 40
7-90 LO 2
Accounts
Accounts Receivable
Receivable
Journal entry for credit sale of $100?
Sales Revenue 100
Allowance for
Beg. 500 25 Beg.
End. 500 25 End.
7-91 LO 2
Accounts
Accounts Receivable
Receivable
Journal entry for credit sale of $100?
Sales Revenue 100
Allowance for
Beg. 500 25 Beg.
Sale 100
End. 600 25 End.
7-92 LO 2
Accounts
Accounts Receivable
Receivable
Collected $333 on account?
Cash 333
Allowance for
Beg. 500 25 Beg.
Sale 100
End. 600 25 End.
7-93 LO 2
Accounts
Accounts Receivable
Receivable
Collected $333 on account?
Cash 333
Allowance for
Beg. 500 25 Beg.
Sale 100 333 Coll.
End. 267 25 End.
7-94 LO 2
Accounts Receivable
Adjustment of $15 for estimated bad debts?
Bad Debt Expense 15
Allowance for
Beg. 500 25 Beg.
Sale 100 333 Coll.
End. 267 25 End.
7-95 LO 2
Accounts Receivable
Adjustment of $15 for estimated bad debts?
Bad Debt Expense 15
Allowance for
Beg. 500 25 Beg.
Sale 100 333 Coll. 15 Est.
End. 267 40 End.
7-96 LO 2
Accounts Receivable
Write-off of uncollectible accounts for $10?
Allowance for Doubtful accounts 10
Allowance for
Beg. 500 25 Beg.
End. 267 40 End.
7-97 LO 2
Accounts Receivable
Write-off of uncollectible accounts for $10?
Allowance for Doubtful accounts 10
Allowance for
Beg. 500 25 Beg.
10 W/O W/O 10
End. 257 30 End.
7-98 LO 2
Accounts Receivable
Brown Furniture
Current Assets:
Cash $ 330
Accounts receivable, net of $30 allowance 227
Inventory 812
Prepaid expense 40
7-99 LO 2
Valuation of LEARNING OBJECTIVE 3
Accounts Explain accounting issues
related to valuation of
Receivable accounts receivable.
Uncollectible 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) Direct write-off method
2) Allowance method
7-100 LO 3
Valuation
Valuation of
of Accounts
Accounts Receivable
Receivable
Methods of Accounting for Uncollectible Accounts
Direct Write-Off Method Allowance Method

Theoretically deficient: Losses are estimated:
 Fails to record expenses as  Percentage-of-sales.
incurred.  Percentage-of-receivables.
 Receivable not stated at  IFRS requires when bad
cash realizable value. debts are material in
 Not appropriate when amount.
amount uncollectible is
material.
7-101 LO 3
Valuation
Valuation of
of Accounts
Accounts Receivable
Receivable
Direct Write-Off Method for Uncollectible

Accounts
When a company determines a particular account to be
uncollectible, it charges the loss to Bad Debt Expense.
Assume, for example, that on December 10 Cruz Ltd. writes o ff
as uncollectible Yusado’s NT$8,000,000 balance. The entry is:
Bad Debt Expense 8,000,000
Accounts Receivable (Yusado) 8,000,000
7-102 LO 3
Valuation
Valuation of
of Accounts
Accounts Receivable
Receivable
Allowance Method for Uncollectible Accounts

 Involves estimating uncollectible accounts at the end
of each period.
 Ensures that companies state receivables on the
statement of financial position at their cash realizable
value.
 Companies estimate uncollectible accounts and cash
realizable value using information about past and
current events as well as forecasts of future
collectibility.
7-103 LO 3
Allowance
Allowance Method
Method for
for Uncollectible
Uncollectible
Accounts
Accounts
Recording Estimated Uncollectibles
Illustration: Assume that Brown Furniture in 2019, its first
year of operations, has credit sales of £1,800,000. Of this
amount, £150,000 remains uncollected at December 31. The
credit manager estimates that £10,000 of these sales will be
uncollectible. The adjusting entry to record the estimated
uncollectibles (assuming a zero balance in the allowance
account) is:

7-104 LO 3
Recording
Recording Estimated
Estimated Uncollectibles
Uncollectibles
ILLUSTRATION 7.5
Presentation of Allowance for Doubtful Accounts
The amount of £140,000 represents the cash realizable value of

the accounts receivable at the statement date.
7-105 LO 3
Accounts
Recording the Write-Off of an Uncollectible
Account
 When companies have exhausted all means of
collecting a past-due account and collection appears
impossible, the company should write off the account.
 In the credit card industry, for example, it is standard
practice to write off accounts that are 210 days past
due.
7-106 LO 3
Write-Off
Write-Off of
of an
an Uncollectible
Uncollectible Account
Account
Illustration: The financial vice president of Brown Furniture

authorizes a write-off of the £1,000 balance owed by Randall plc on
March 1. The entry to record the write-off is:

Assume that on July 1, Randall plc pays the £1,000 amount that
Brown had written off on March 1. These are the entries:
Cash 1,000
7-107 LO 3
DWO M
BDE 10.000 AR 10.000
AR 10.000 BDE 10.000
Cash 10.000
AR 10.000
AM
BDE 100.000 AFDA 10.000 AR 10.000

AFDA 100.000 AR 10.000 AFDA 10.000
Cash 10.000
AR 10.000
7-108
Penjualan secara kredit Rp 100 juta, estimasi
piutang tak tertagih 1% dari penjualan
1% x 100 juta = 1 juta
Analisis umur piutang : semakin Panjang

periode pelunasan piutang maka semakin
besar estimasi piutang tak tertagih.
7-109
Accounts
Estimating the Allowance
Percentage-of-Receivables Approach
 Reports estimate of receivables at cash realizable value.
Companies may apply this method using

 one composite rate, or
 an aging schedule using different rates.
7-110 LO 3
Estimating
Estimating the
the Allowance
Allowance ILLUSTRATION 7.6
Accounts Receivable
Aging Schedule
7-111 LO 3
ILLUSTRATION 7.6
Accounts Receivable
Aging Schedule
What entry
would Wilson
make assuming
that the
allowance
account had a
zero balance?

7-112 LO 3
ILLUSTRATION 7.6
Accounts Receivable
Aging Schedule
What entry
would Wilson
make assuming
the allowance
account had a
credit balance
of €800 before
adjustment?
Bad Debt Expense (€26,610 – €800) 25,810

7-113 LO 3
Illustration: Duncan SA reports the following financial information

before adjustments.
Instructions: Prepare the journal entry to record Bad Debt

Expense assuming Duncan Company estimates bad debts at
(a) 5% of accounts receivable and (b) 5% of accounts
receivable but Allowance for Doubtful Accounts had a $1,500
debit balance.
7-114 LO 3

before adjustments.

Expense assuming Duncan Company estimates bad debts at
(a) 5% of accounts receivable.
€100,000 x 5% = €5,000 - €2,000 = €3,000
7-115 LO 3

before adjustments.

Expense assuming Duncan Company estimates bad debts at (b)
5% of accounts receivable but the Allowance had a $1,500 debit
balance.
€100,000 x 5% = €5,000 + €1,500 = €6,500
7-116 LO 3
 Penjualan scr kredit (AR dilunasi)
AR 100
SR 100
SRA 10
AR 10
Dilunasi (AR = 90)
Cash 90
AR 90
7-117
Penjualan scr kredit (ada Sebagian AR tidak
dilunasi : piutang tak tertagih/ bad debt) :
DWO
BDE 90
AR 90
AR 90
BDE 90
Cash 90
AR 90
7-118
Penjualan scr kredit (ada Sebagian AR tidak
dilunasi : piutang tak tertagih/ bad debt) :
ALL MTD (% sales, umur piutang)
BDE 90
AFDA 90
AFDA 10
AR 10
AR `10
AFDA 10
Cash 10
AR 10
7-119
Notes Receivable 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).
7-120 LO 4
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).
7-121 LO 4
Recognition of Notes Receivable
Short-Term Long-Term
Record at
Record at
Present Value
Face Value,
of cash expected
less allowance
to be collected
Interest Rates Note Issued at

Stated rate = Market rate Face Value
Stated rate > Market rate Premium
Stated rate < Market rate Discount
7-122 LO 4
Note
Note Issued
Issued at
at Face
Face Value
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?
i = 10%
€10,000 Principal
PV-OA €1,000 €1,000 €1,000 Interest
0 1 2 3 4
n=3
ILLUSTRATION 7.7
Time Diagram for Note Issued at Face Value
7-123 LO 4
Note
Note Issued
Issued at
at Face
Face Value
Value
TABLE 6.4 PRESENT VALUE OF AN ORDINARY ANNUITY OF 1
PV of Interest
€1,000 x 2.48685 = €2,487

Interest Received Factor Present Value
7-124 LO 4
Note
Note Issued
Issued at
at Face
Face Value
Value
TABLE 6.2 PRESENT VALUE OF 1
PV of Principal
€10,000 x .75132 = €7,513

Principal Factor Present Value
7-125 LO 4
Note
Note Issued
Issued at
at Face
Face Value
Value
Summary Present value of interest € 2,487

Present value of principal 7,513
Note current market value €10,000

Journal Entries
Jan. yr. 1 Notes Receivable 10,000

Cash 10,000
Dec. yr. 1 Cash 1,000

Interest Revenue 1,000
7-126 LO 4
Zero-Interest-Bearing
Zero-Interest-Bearing Notes
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. How does Jeremiah record the
i = 9%
$10,000 Principal
PV-0A $0 $0 $0 Interest
0 1 2 3 4
n=3
ILLUSTRATION 7.9
Time Diagram for Zero-
Interest-Bearing Note
7-127 LO 4
Notes
PV of Principal
$10,000 x .77218 = $7,721.80

7-128 LO 4
Notes
ILLUSTRATION 7.10
Discount Amortization Schedule—
Effective-Interest Method
7-129 LO 4
Notes ILLUSTRATION 7.10
Discount Amortization
Schedule—Effective-
Interest Method
Prepare the journal entry to record the receipt of the note.
Notes Receivable 7,721.80

Cash 7,721.80
7-130 LO 4
Discount Amortization
Schedule—Effective-
Interest Method
Record interest revenue at the end of the first year.
Notes Receivable 694.96

Interest Revenue ($7,721.80 x 9%) 694.96
7-131 LO 4
Interest-Bearing
Interest-Bearing Notes
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
i = 12%
€10,000 Principal
PV-0A €1,000 €1,000 €1,000 Interest
0 1 2 3 4
n=3
7-132 LO 4
Interest-Bearing
Notes
TABLE 6.4 PRESENT VALUE OF AN ORDINARY ANNUITY OF 1
PV of Interest
€1,000 x 2.40183 = €2,402

Interest Received Factor Present Value
7-133 LO 4
Interest-Bearing
Notes
PV of Principal
€10,000 x .71178 = €7,118

7-134 LO 4
Interest-Bearing
Notes
ILLUSTRATION 7.12
Computation of Present
Illustration: Record the receipt of the note? Value—Effective Rate
Different from Stated Rate

Cash 9,520
7-135 LO 4
Interest-Bearing
Notes
ILLUSTRATION 7.13
7-136 LO 4
Interest-Bearing
Record interest revenue at the end of the first year.

Cash 1,000
Notes Receivable 142
Interest Revenue 1,142
7-137 LO 4
Notes
Notes Receivable
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 or
 from the current market value of the debt instrument.
7-138 LO 4
Notes
Notes for
for Property,
Property, Goods,
Goods, or
or Services
Services
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:

Land 14,000
Gain on Sale of Land ($20,000 - $14,000) 6,000
7-139 LO 4
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.
7-140 LO 4
Other Issues Explain additional accounting
issues related to accounts and
Related to notes receivables.
Receivables
1. When the receivable no longer has any value; that is,
the contractual rights to the cash flows of the
receivable no longer exist.
2. When a company transfers (e.g., sells) a receivable to
another company, thereby transferring the risks and
rewards of ownership to this other company.
7-141 LO 5
Penjualan kredit Rp 200 juta, 12%/tahun, 3
bulan (dilunasi)
NR 200 juta
SR 200 Juta
Cash 206 Juta
NR 200 Juta
Int Rev 6 Juta (200 Jt x 12%x3/12)
7-142
bulan (tdk bisa dibayar, masih beroperasi)
AR 206 Juta
NR 200 Juta
Int Rev 6 Juta (200 Jt x 12%x3/12)
Cash 206 juta

AR 206 juta
7-143
bulan (tdk bisa dibayar, dilikuidasi)
AFDA 200 Juta

NR 200 Juta
7-144
Transfer of Receivables
Various reasons for transfer of receivables to another party
 Accelerate the receipt of cash.
 Competition.
 Sell receivables because money is tight.
 Billing / collection are time-consuming and costly.
Transfer of receivables for cash happens in two ways:
1. Sales of receivables.
2. Secured borrowing.
7-145 LO 5
Sales
Sales of
of Receivables
Receivables ILLUSTRATION 7.14
Basic Procedures in Factoring
Factors are finance companies or banks that buy receivables

from businesses for a fee.
7-146 LO 5
Sales of Receivables
Sale without Guarantee

 Purchaser assumes risk of collection and absorbs any
credit losses.
 Transfer is outright sale of receivable.
 Seller records loss on sale.
 Seller uses a Due from Factor (receivable) account to
cover probable sales discounts, sales returns, and
sales allowances.
7-147 LO 5
Sale
Sale without
without Guarantee
Guarantee
Illustration: Crest Textiles, Inc. factors €500,000 of accounts

receivable with Commercial Factors, Inc., on a non-guarantee 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 guarantee.
ILLUSTRATION 7.6
Entries for Sale of Receivables without Guarantee
7-148 LO 5
Sale
Sale without
without Guarantee
Guarantee
Illustration: Crest Textiles, Inc. mengalihkan €500.000 dari piutang

usaha kepada Commercial Factors, Inc., tanpa jaminan. Commercial
Factors mengenakan beban keuangan (bunga) sebesar 3 % dari
jumlah piutang dan menahan dana sebesar 5 % dari piutang (untuk
kemungkinan penyesuaian). Crest Textiles and Commercial Factors
membuat jurnal berikut untuk piutang yang dialihkan tanpa jaminan.
ILLUSTRATION 7.6
Entries for Sale of Receivables without Guarantee
7-149 LO 5
Sales of Receivables
Sale with Guarantee

 Seller guarantees payment to purchaser.
 Transfer is considered a borrowing—sometimes referred
to as a failed sale.
Assume Crest Textiles sold the receivables on a

ILLUSTRATION 7.16
with guarantee basis. Sale with Guarantee
7-150 LO 5
Secured Borrowing
Illustration: On March 1, 2019, Meng Mills, Inc. provides (assigns)

NT$700,000 of its accounts receivable to Sino Bank as collateral for
a NT$500,000 note. Meng Mills continues to collect the accounts
receivable; the account debtors are not notified of the arrangement.
Sino Bank assesses a finance charge of 1 percent of the accounts
receivable and interest on the note of 12 percent. Meng Mills makes
monthly payments to the bank for all cash it collects on the
receivables.
7-151 LO 5
Secured Borrowing
Illustration: Pada tanggal 1 Maret 2019, Meng Mills, Inc.

menyerahkan NT$700.000 dari piutangnya kepada Sino Bank
sebagai jaminan untuk wesel NT$500.000. Meng Mills terus
menagih piutang; debitur rekening tidak diberitahu tentang
pengaturan. Sino Bank mengenakan beban keuangan sebesar 1 %
dari piutang dan bunga wesel sebesar 12 %. Meng Mills melakukan
pembayaran bulanan ke bank untuk semua uang tunai yang
dikumpulkan dari piutang.
7-152 LO 5
ILLUSTRATION 7.17
7-153 Entries for Transfer of Receivables—Secured Borrowing
Secured
Secured Borrowing
Borrowing
Illustration: On April 1, 2019, Prince Company assigns $500,000 of its
accounts receivable to the Hibernia Bank as collateral for a $300,000 loan
due July 1, 2019. The assignment agreement calls for Prince Company to
continue to collect the receivables. Hibernia 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:
b) Prepare the journal entry for Prince’s collection of $350,000 of the
accounts receivable during the period from April 1, 2019, through
June 30, 2019.
7-154 LO 5
Secured
Secured Borrowing
Borrowing
Instructions:
b) Prepare the journal entry for Prince’s collection of $350,000.
a) Cash 290,000
Finance Charge ($500,000 x 2%) 10,000
Notes Payable 300,000
b) Cash 350,000
c) Notes Payable 300,000

Interest Expense (10% x $300,000 x 3/12) 7,500
Cash 307,500
7-155 LO 5
Summary of Transfers ILLUSTRATION 7.18
Accounting for Transfers
of Receivables
7-156 LO 5
General rules in classifying receivables are:
1. Segregate and report carrying amounts of different categories of
receivables.
2. Indicate receivables classified as current and non-current in the
statement of financial position.
3. Appropriately offset the valuation accounts for receivables that are
impaired, including a discussion of individual and collectively
determined impairments.
4. Disclose the fair value of receivables in such a way that permits it to
be compared with its carrying amount.
5. Disclose information to assess the credit risk inherent in the
receivables.
6. Disclose any receivables pledged as collateral.
7. Disclose all significant concentrations of credit risk arising from
receivables.
7-157 LO 5
Analysis of Receivables
Illustration: Louis Vuitton (LVMH Group) (FRA) reported 2015
net sales of €35,664 million, its beginning and ending accounts
receivable balances were €2,274 million an €2,521 million,
respectively. The computation of its accounts receivable turnover
is as follows.
ILLUSTRATION 7.20
Computation of Accounts Receivable Turnover
7-158 LO 5
Analysis of Receivables ILLUSTRATION 7.20

Computation of Accounts
Receivable Turnover
This Ratio used to:

 Assess the liquidity of the receivables.
 Measure the number of times, on average, a company
collects receivables during the period.
7-159 LO 5
APPENDIX 7A Cash Controls
Explain common techniques employed to control cash.
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.
7-160 LO 6
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
7-161 LO 6
The Imprest Petty Cash System
Used to pay small amounts for miscellaneous expenses.

Steps:
1. Record the transfer of $300 to petty cash:
Petty Cash 300

Cash 300
2. Petty cash custodian obtains signed receipts from each

individual to whom he or she pays cash.
7-162 LO 6
Steps:
3. Custodian receives a company check to replenish the

fund.
Supplies Expense 42
Postage Expense 53
Miscellaneous Expense 76
Cash Over and Short 2
Cash 173
7-163 LO 6
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 50
Petty cash 50
7-164 LO 6
Physical Protection of Cash Balances
Company should
 Minimize the cash on hand.
 Only have on hand petty cash and current day’s receipts.
 Keep funds in a vault, safe, or locked cash drawer.
 Transmit each day’s receipts to the bank as soon as
practicable.
 Periodically prove the balance shown in the general ledger.
7-165 LO 6
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 Time Lags
4. Bank credits.
5. Bank or depositor errors.
7-166 LO 6
Reconciliation of Bank Balances ILLUSTRATION 7A.1
Bank Reconciliation
Form and Content
7-167 LO 6
To illustrate, Nugget Mining Company’s books show a cash balance at the Melbourne Bank
on November 30, 2019, of $20,502. The bank statement covering the month of November
shows an ending balance of $22,190. An examination of Nugget’s accounting records and
November bank statement identified the following reconciling items.
1. A deposit of $3,680 that Nugget mailed November 30 does not appear on the bank
statement.
2. Checks written in November but not charged to the November bank statement are:
Check #7327 $ 150
#7348 4,820
#7349 31
3. Nugget has not yet recorded the $600 of interest collected by the bank November 20 on
Sequoia Co. bonds held by the bank for Nugget.
4. Bank service charges of $18 are not yet recorded on Nugget’s books.
5. The bank returned one of Nugget’s customer’s checks for $220 with the bank
statement, marked “NSF.” The bank deducted $220 from Nugget’s account.
6. Nugget discovered that it incorrectly recorded check #7322, written in November for
$131 in payment of an account payable, as $311.
7. A check for Nugent Oil Co. in the amount of $175 that the bank incorrectly charged to
Nugget accompanied the statement.
7-168 LO 6
ILLUSTRATION 7A.2
Sample Bank
Reconciliation
7-169 LO 6
Journalize the required adjusting entries at November 30.
Cash 600
(To record interest on Sequoia Co. bonds, collected by bank)
Cash 180
Accounts Payable 180
(To correct error in recording amount of check #7322)
Office Expense (bank charges) 18

Cash 18
(To record bank service charges for November)

Cash 220
(To record customer’s check returned NSF)
7-170 LO 6
GLOBAL ACCOUNTING INSIGHTS
Compare the accounting procedures for cash and receivables under IFRS and
U.S. GAAP.
The basic accounting and reporting issues related to recognition and

measurement of cash and receivables is similar between U.S. GAAP and
IFRS. For example, the definition of cash and cash equivalents as well as the
use of allowance accounts, how to record discounts, use of the allowance
method to account for bad debts, and factoring are similar for both IFRS and
U.S. GAAP. In the wake of the international credit crisis, the Boards worked
together to improve the accounting for loan impairments and securitizations.
7-171 LO 7
Relevant Facts
Following are the key similarities and differences between U.S. GAAP and
IFRS related to cash and receivables.
Similarities
• The accounting and reporting related to cash is essentially the same under
both U.S. GAAP and IFRS. In addition, the definition used for cash
equivalents is the same.
• Like IFRS, cash and receivables are generally reported in the current assets
section of the statement of financial position (balance sheet) under U.S.
GAAP.
7-172 LO 7
Relevant Facts
Following are the key similarities and differences between U.S. GAAP and
IFRS related to cash and receivables.
Similarities
• Like IFRS, for trade and other accounts receivable without a significant
financing component, an allowance for uncollectible accounts should be
recorded to result in receivables reported at cash (net) realizable value. The
estimation approach used is similar to that under IFRS.
• Similar to U.S. GAAP, IFRS requires that loans and receivables be
accounted for at amortized cost, adjusted for allowances for doubtful
accounts.
7-173 LO 7
Relevant Facts
Differences
• Under IFRS, companies may report cash and receivables as the last items
in current assets under IFRS. Under U.S. GAAP, these items are reported in
order of liquidity.
• While IFRS implies that receivables with different characteristics should be
reported separately, there is no standard that mandates this segregation.
U.S. GAAP has explicit guidance in the area.
7-174 LO 7
Relevant Facts
Differences
• Unlike U.S. GAAP, IFRS has a different approach to estimating
uncollectible accounts on receivables with a significant financing component
(e.g., notes receivable). For long-term receivables that have not
experienced a deterioration in credit quality after origination, uncollectible
accounts are estimated based on expected losses over the next 12 months.
For long-term receivables that experience a credit quality decline,
uncollectible accounts are estimated based on lifetime expected losses
(which is the model used under U.S. GAAP for all receivables).
• Under IFRS, bank overdrafts are generally reported as cash. Under U.S.
GAAP, such balances are reported as liabilities.
7-175 LO 7
Relevant Facts
Differences
• IFRS and U.S. 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. U.S. GAAP uses loss of control as the primary
criterion (see the About the Numbers discussion below). In addition, IFRS
generally permits partial transfers; U.S. GAAP does not.
7-176 LO 7
On the Horizon
Both the IASB and the FASB have indicated that they believe that financial
statements would be more transparent and understandable if companies
recorded and reported all financial instruments at fair value. With the recently
issued guidance on impairments by both boards, IFRS and U.S. GAAP are
now more closely aligned with earlier recognition of impairments. Most believe
that both Boards’ approaches to estimating uncollectible accounts represent
improvements and address the weakness in previous bad debt accounting that
was highlighted by the financial crisis. Time will tell if one model or the other
provides more useful information to investors and creditors.
7-177 LO 7
COPYRIGHT
Copyright © 2018 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted in
Section 117 of the 1976 United States Copyright Act without the
express written permission of the copyright owner is unlawful.
Request for further information should be addressed to the
Permissions Department, John Wiley & Sons, Inc. The purchaser
may make back-up copies for his/her own use only and not for
distribution or resale. The Publisher assumes no responsibility for
errors, omissions, or damages, caused by the use of these
programs or from the use of the information contained herein.
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Amounts customers Written promise Nontrade receivables

Copyright ©2019 John Wiley & Sons, Inc. 2

Copyright ©2019 John Wiley & Sons, Inc. 3

Copyright ©2019 John Wiley & Sons, Inc. 4

Jul. 11 Cash (¥900 − ¥18) 882

Copyright ©2019 John Wiley & Sons, Inc. 5

Jun. 1 Accounts Receivable 300

Copyright ©2019 John Wiley & Sons, Inc. 6

June 30 Accounts Receivable 4.50

Copyright ©2019 John Wiley & Sons, Inc. 7

May 1 Accounts Receivable 50,000

Copyright ©2019 John Wiley & Sons, Inc. 8

May 4 Sales Returns and Allowances 2,000

Copyright ©2019 John Wiley & Sons, Inc. 9

May 16 Cash (£48,000 − £1,440) 46,560

Copyright ©2019 John Wiley & Sons, Inc. 10

Copyright ©2019 John Wiley & Sons, Inc. 11

Copyright ©2019 John Wiley & Sons, Inc. 15

Copyright ©2019 John Wiley & Sons, Inc. 16

Copyright ©2019 John Wiley & Son, Inc. 17

LO 2 Copyright ©2019 John Wiley & Son, Inc. 18

LO 2 Copyright ©2019 John Wiley & Son, Inc. 19

Bal. 600 25 Bal.

LO 2 Copyright ©2019 John Wiley & Son, Inc. 20

Bal. 267 25 Bal.

LO 2 Copyright ©2019 John Wiley & Son, Inc. 21

Bal. 267 40 Bal.

LO 2 Copyright ©2019 John Wiley & Son, Inc. 22

LO 2 Copyright ©2019 John Wiley & Son, Inc. 23

LO 2 Copyright ©2019 John Wiley & Son, Inc. 24

Unless bad debt losses are insignificant, the direct write-off

Copyright ©2019 John Wiley & Sons, Inc. 25

Copyright ©2019 John Wiley & Sons, Inc. 26

Recording Estimated Uncollectibles

Copyright ©2019 John Wiley & Sons, Inc. 27

Current Assets Blank Blank

Supplies Blank € 25,000

Copyright ©2019 John Wiley & Sons, Inc. 28

Illustration: The financial vice president of Hampson Furniture

Accounts Receivable Allowance for Doubtful Accounts

Copyright ©2019 John Wiley & Son, Inc. 29

Recovery of an Uncollectible Account

Copyright ©2019 John Wiley & Sons, Inc. 30

Copyright ©2019 John Wiley & Sons, Inc. 31

Bad Debt Expense Allowance for Doubtful Accounts

Copyright ©2019 John Wiley & Sons, Inc. 33

Bad Debt Expense Allowance for Doubtful Accounts

Copyright ©2019 John Wiley & Sons, Inc. 34

Bad Debt Expense 5,000*

Copyright ©2019 John Wiley & Sons, Inc. 35

LO 2 Copyright ©2019 John Wiley & Son, Inc. 36

Copyright ©2019 John Wiley & Sons, Inc. 37

Copyright ©2019 John Wiley & Sons, Inc. 38

Illustration: On March 1, 2019, Meng Mills, Inc. provides (assigns)

Illustration: Pada tanggal 1 Maret 2019, Meng Mills, Inc.

c) Notes Payable 300,000

Analysis of Receivables ILLUSTRATION 7.20

This Ratio used to:

Copyright ©2019 John Wiley & Sons, Inc. 49

Copyright ©2019 John Wiley & Sons, Inc. 51

Copyright ©2019 John Wiley & Sons, Inc. 52

Copyright ©2019 John Wiley & Sons, Inc. 53

May 1 Notes Receivable 1,000