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C. 6. hapter. Cash and Receivables. An electronic presentation by Douglas Cloud Pepperdine University. Objectives. 1. Understand the importance of cash management. 2. Prepare a bank reconciliation. 3. Discuss revenue recognition when the right of return exists. - PowerPoint PPT Presentation
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1
Cash and Cash and ReceivablesReceivablesCash and Cash and
ReceivablesReceivables
Chapter6
An electronic presentation by Douglas Cloud
Pepperdine University
An electronic presentation by Douglas Cloud
Pepperdine University
2
1. Understand the importance of cash management.
2. Prepare a bank reconciliation.3. Discuss revenue recognition when the right
of return exists.4. Understand the credit policies relates to
accounts receivable.5. Explain the gross and net methods to
account for cash discounts.
ObjectivesObjectives
ContinuedContinuedContinuedContinued
3
6. Estimate and record bad debts using a percentage of sales.
7. Estimate and record bad debts using an aging analysis.
8. Explain pledging, assignment, and factoring of accounts receivable.
9. Account for short-term notes receivable.
10. Prepare a proof of cash (Appendix)
ObjectivesObjectives
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CashCash
Cash is the resources on hand to meet planned
expenditures and emergency situations.
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CashCash
Cash
• Coins and currency• Checking accounts• Savings accounts• Negotiable checks• Bank drafts
Included in Cash Excluded from Cash
• Certificates of deposit• Bank overdrafts• Postdated checks• Travel advances• Postage stamps
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Cash EquivalentsCash Equivalents
Cash equivalents are short-term, highly liquid investments that are readily
convertible into known amounts of cash and near their maturity.
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Cash ManagementCash Management
Immediately count the receipts (by the person opening the mail or the sales person using the cash register).
Record daily all cash receipts in the accounting records.
Deposit daily all receipts in the company’s bank account.
Control Over ReceiptsControl Over Receipts
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Cash ManagementCash Management
Make all payments by check (except petty cash items) so that a record exists for every company expenditure.
Authorize and sign all checks only after an expenditure is verified and approved.
Periodically reconcile the cash balance in the bank statements with the company’s accounting records.
Control Over PaymentsControl Over Payments
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Petty CashPetty Cash
First: An employee is appointed petty
cash custodian.
First: An employee is appointed petty
cash custodian.
Petty Cash 500Cash 500
Petty Cash 500Cash 500
A journal entry is made to record the
establishment of the fund.
A journal entry is made to record the
establishment of the fund.
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Petty CashPetty Cash
Second: Petty cash vouchers are printed,
prenumbered, and given to the custodian of the fund.
Second: Petty cash vouchers are printed,
prenumbered, and given to the custodian of the fund.
At all times the total of the cash in the fund plus the amounts of expenditure
vouchers should be equal to $500 (in this case).
At all times the total of the cash in the fund plus the amounts of expenditure
vouchers should be equal to $500 (in this case).
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Petty CashPetty Cash
Third: When the amount of cash in the petty cash fund becomes low and/or at the end of accounting period,...
Third: When the amount of cash in the petty cash fund becomes low and/or at the end of accounting period,...
Assume that a count at the end of the month shows $67.54 remaining in the
petty cash fund.
Assume that a count at the end of the month shows $67.54 remaining in the
petty cash fund.
…the vouchers are sorted into expense categories and
the remaining cash is counted.
…the vouchers are sorted into expense categories and
the remaining cash is counted.
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Petty CashPetty Cash
The sorting of vouchers indicated the following costs were incurred during the month:
Office supplies $ 34.16Postage 178.00Transportation 132.14Miscellaneous 83.76Total expenses $428.06
The sorting of vouchers indicated the following costs were incurred during the month:
Office supplies $ 34.16Postage 178.00Transportation 132.14Miscellaneous 83.76Total expenses $428.06
The fund’s expected balance is $71.94 ($500.00 - The fund’s expected balance is $71.94 ($500.00 - $428.06). There is a shortage of $4.40 ($71.94 - $67.54).$428.06). There is a shortage of $4.40 ($71.94 - $67.54).
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Petty CashPetty Cash
The company records the actual expenses and the amount needed to replenish the fund.
Office Supplies Expense 34.16Postage Expense 178.00Transportation Expense 132.14Miscellaneous Expense 83.76Cash Short and Over 4.40
Cash 432.46
The company records the actual expenses and the amount needed to replenish the fund.
Office Supplies Expense 34.16Postage Expense 178.00Transportation Expense 132.14Miscellaneous Expense 83.76Cash Short and Over 4.40
Cash 432.46
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Bank ReconciliationBank Reconciliation
• Outstanding checks• Deposits in transit• Charges made by the
bank• Deposits made directly
by the bank• Errors
Causes of the difference between
the cash balance and the company’s bank statement balance.
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Bank ReconciliationBank Reconciliation
Cash balance
from bank statement
$7,218
Cash balance
from company records $6,925
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Cash balance from bank statement $7,218 Add: Receipts recorded on the company’s
records but not reported on the bankstatement. 629
$7,847
Bank ReconciliationBank Reconciliation
Deposits in transit and cash received but not yet deposited
totaled $629.
Deposits in transit and cash received but not yet deposited
totaled $629.
Cash balance from bank statement $7,218
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Cash balance from bank statement $7,218 Add: Receipts recorded on the company’s
records but not reported on the bankstatement. 629
$7,847
Bank ReconciliationBank Reconciliation
Outstanding checks totaled $516.
Outstanding checks totaled $516.
Cash balance from bank statement $7,218 Add: Receipts recorded on the company’s
records but not reported on the bankstatement. 629
$7,847 Deduct: Outstanding checks (516 )
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Cash balance from bank statement $7,218 Add: Receipts recorded on the company’s
records but not reported on the bankstatement. 629
$7,847 Deduct: Outstanding checks (516 )Adjusted Cash Balance $7,331
Bank ReconciliationBank Reconciliation
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Cash balance from company records $6,925
Bank ReconciliationBank Reconciliation
Cash balance from company records $6,925 Add: Notes receivable ($700) and interest
($15) collected by bank 715
Notes receivable totaling $700 and interest totaling $15 were
collected by the bank.
Notes receivable totaling $700 and interest totaling $15 were
collected by the bank.
Cash balance from company records $6,925 Add: Notes receivable ($700) and interest
($15) collected by bank 715 $7,640
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Bank ReconciliationBank Reconciliation
Cash balance from company records $6,925 Add: Notes receivable ($700) and interest
($15) collected by bank 715 $7,640
Bank service charge, $9.Bank service charge, $9.
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Cash balance from company records $6,925 Add: Notes receivable ($700) and interest
($15) collected by bank 715 $7,640
Deduct: Bank service charge (9 )
Bank ReconciliationBank Reconciliation
Bank service charge, $9.Bank service charge, $9.
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Cash balance from company records $6,925 Add: Notes receivable ($700) and interest
($15) collected by bank 715 $7,640
Deduct: Bank service charge (9 )
Bank ReconciliationBank Reconciliation
Customers’ checks were returned for lack of funds
(NSF check), $300.
Customers’ checks were returned for lack of funds
(NSF check), $300.
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Cash balance from company records $6,925 Add: Notes receivable ($700) and interest
($15) collected by bank 715 $7,640
Deduct: Bank service charge (9 )NSF checks (300 )
Bank ReconciliationBank Reconciliation
Customers’ checks were returned for lack of funds
(NSF check), $300.
Customers’ checks were returned for lack of funds
(NSF check), $300.
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Bank ReconciliationBank Reconciliation
Cash balance from company records $6,925 Add: Notes receivable ($700) and interest
($15) collected by bank 715 $7,640
Deduct: Bank service charge (9 )NSF checks (300 )
Adjusted Cash Balance $7,331
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Bank ReconciliationBank Reconciliation
Adjusted cash balance per
bank statement
$7,331
Adjusted cash balance per company records $7,331
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Bank ReconciliationBank Reconciliation
Journal Entries
Cash 715Notes Receivable (note collected) 700Interest Revenue (interest collected) 15
Miscellaneous Expense (bank service charge) 9Accounts Receivable (NSF check) 300
Cash 309
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ReceivablesReceivables
Those receivables expected to be collected or satisfied within one year
or the current operating cycle, whichever is longer, are classified as
current assets; the remainder are classified as noncurrent.
Those receivables expected to be collected or satisfied within one year
or the current operating cycle, whichever is longer, are classified as
current assets; the remainder are classified as noncurrent.
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ReceivablesReceivables
Trade ReceivablesTrade Receivables
Revenue Recognition
and Valuation• Normal circumstances
• Right of return
• Valuation
• Cash discounts• Sales returns and allowances
• Uncollectible accounts• Financing arrangements
Recording and Reporting Accounts
Receivable• Interest-bearing
• Non-interest-bearing
• Discounted
Recording and Reporting Notes
Receivable
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1. The sales price is fixed or determinable at the date of sale.
2. The buyer has paid or will pay the seller, and the obligation is not contingent upon the resale of the product.
3. The buyer’s obligation to the seller would not be changed by theft or damage to the product.
ReceivablesReceivables
Right of ReturnRight of Return
Each of the following criteria must be satisfied when the right of return exists in order to recognize revenue
at the time of sale.
Each of the following criteria must be satisfied when the right of return exists in order to recognize revenue
at the time of sale.
ContinuedContinuedContinuedContinued
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4. The buyer has an economic substance apart from the seller.
5. The seller does not have significant obligations for future performance to directly bring about resale of the product by the buyer.
6. The seller can reasonably estimate the amount of future returns.
ReceivablesReceivables
Right of ReturnRight of Return
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Accounts ReceivableAccounts Receivable
• Prenumbered sales invoices.
• Separation of the sales function from the cash collection responsibilities.
Internal Control Procedures for Accounts Receivable
Internal Control Procedures for Accounts Receivable
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Sales DiscountsSales Discounts
Alternative Methods of Accounting for Sales DiscountsAlternative Methods of Accounting for Sales Discounts
Gross Price Gross Price MethodMethod
Gross Price Gross Price MethodMethod
Net Price Net Price MethodMethod
Net Price Net Price MethodMethod
Sold $8,000 of merchandise to various customers on
December 4, 2004 with terms of 2/10, n/EOM
Sold $8,000 of merchandise to various customers on
December 4, 2004 with terms of 2/10, n/EOM
Accounts Receivable 8,000Sales 8,000
Accounts Receivable 7,840
Sales 7,840
$8,000 - ($8,000 x 0.02)
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Sales DiscountsSales Discounts
Alternative Methods of Accounting for Sales DiscountsAlternative Methods of Accounting for Sales Discounts
Gross Price Gross Price MethodMethod
Gross Price Gross Price MethodMethod
Net Price Net Price MethodMethod
Net Price Net Price MethodMethod
On December 13 received payment on goods originally
billed at $5,500.
On December 13 received payment on goods originally
billed at $5,500.
Cash 5,390Sales Disc. Taken 110
Accts. Receivable 5,500
Cash 5,390
Accts. Receivable 5,390
$5,500 - ($5,500 x 0.02)
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Sales DiscountsSales Discounts
Alternative Methods of Accounting for Sales DiscountsAlternative Methods of Accounting for Sales Discounts
Gross Price Gross Price MethodMethod
Gross Price Gross Price MethodMethod
Net Price Net Price MethodMethod
Net Price Net Price MethodMethod
Received payment on goods billed at $1,500 on December 30 (after the discount period).
Received payment on goods billed at $1,500 on December 30 (after the discount period).
Cash 1,500Accts. Receivable 1,500
Cash 1,500Accts. Receivable 1,470Sales Discounts Not Taken 30
$1,500 - ($1,500 x 0.02)
Classified as” Other Items” Classified as” Other Items” on the income statementon the income statement
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Sales DiscountsSales Discounts
Alternative Methods of Accounting for Sales DiscountsAlternative Methods of Accounting for Sales Discounts
Gross Price Gross Price MethodMethod
Gross Price Gross Price MethodMethod
Net Price Net Price MethodMethod
Net Price Net Price MethodMethod
No entry required Accounts Receivable 20Sales Discounts Not Taken 20
Year-end adjustment at the end of the period.
Year-end adjustment at the end of the period.
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Loss ContingenciesLoss Contingencies
1. Information available prior to the issuance of the financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements.
2. The amount of the loss can be reasonably estimated.
1. Information available prior to the issuance of the financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements.
2. The amount of the loss can be reasonably estimated.
FASB Statement No. 5 requires that estimated
losses from loss contingencies be accrued
against income and...
FASB Statement No. 5 requires that estimated
losses from loss contingencies be accrued
against income and...
… recorded as reductions in assets or as liabilities when both of
these conditions are met.
… recorded as reductions in assets or as liabilities when both of
these conditions are met.
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Estimated Bad Debts MethodEstimated Bad Debts Method
Bad debts can be estimated based on sales or on accounts
receivable.
Bad debts can be estimated based on sales or on accounts
receivable.
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1. Relationship to sales (income statement approach):
a. Percentage of salesb. Percentage of net credit sales
2. Relationship to accounts receivable (balance sheet approach):
a. Percentage of outstanding accounts receivable
b. Aging of accounts receivable
Estimated Bad Debts MethodEstimated Bad Debts Method
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Estimated Bad Debts MethodEstimated Bad Debts Method
Percentage of SalesPercentage of Sales
If a company’s net credit sales during the year were $525,000 and bad debts historically amount to 2% of net credit sales, what is the required adjusting entry?
If a company’s net credit sales during the year were $525,000 and bad debts historically amount to 2% of net credit sales, what is the required adjusting entry?
Bad Debt Expense 10,500Allowance for Doubtful Accounts 10,500
$525,000 x 0.02
40
Estimated Bad Debts MethodEstimated Bad Debts Method
Percentage of Outstanding Accounts Receivable
Percentage of Outstanding Accounts Receivable
Allowance for Doubtful Accounts
4,500 (current balance)
$475,000 x 0.04 = $19,000$475,000 x 0.04 = $19,000
If a company has determined that there has been a 4% relationship between actual bad debts and the year-end account receivable balance ($475,000),
what would be the required adjusting entry?
If a company has determined that there has been a 4% relationship between actual bad debts and the year-end account receivable balance ($475,000),
what would be the required adjusting entry?
41
Estimated Bad Debts MethodEstimated Bad Debts Method
Percentage of Outstanding Accounts Receivable
Percentage of Outstanding Accounts Receivable
Allowance for Doubtful Accounts
4,500 (current balance) 19,000 (required balance)14,500 (required adjustment)
If a company has determined that there has been a 4% relationship between actual bad debts and the year-end account receivable balance ($475,000),
what would be the required adjusting entry?
If a company has determined that there has been a 4% relationship between actual bad debts and the year-end account receivable balance ($475,000),
what would be the required adjusting entry?
42
Estimated Bad Debts MethodEstimated Bad Debts Method
Percentage of Outstanding Accounts Receivable
Percentage of Outstanding Accounts Receivable
If a company has determined that there has been a 4% relationship between actual bad debts and the year-end account receivable balance ($475,000),
what would be the required adjusting entry?
If a company has determined that there has been a 4% relationship between actual bad debts and the year-end account receivable balance ($475,000),
what would be the required adjusting entry?
Bad Debt Expense 14,500Allowance for Doubtful Accounts 14,500
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Aging of Accounts ReceivableAging of Accounts Receivable
1. Gather the unpaid invoices in each customer’s account.
2. Classify the invoice amounts according to the length of time the invoice has been outstanding.
3. Multiply the total amount in each age group by the applicable estimated uncollectible percentage.
4. Make a journal entry to bring the balance in Allowance for Doubtful Accounts to the amount calculated in Step 3.
Examine Exhibit 6-3 carefully.Examine Exhibit 6-3 carefully.
44
x 2%
x 8%
x 15%
x 30%
x 50%
Aging of Accounts ReceivableAging of Accounts Receivable
Under 60 days $ 53,500
60-120 days 34,500
121-240 days 3,600
241-360 days 15,700
Over 1 year 14,500
$121,800
Age
Estimated Percentage Uncollectible
Estimated Amounts
Uncollectible
= $ 1,070
= 2,760
= 540
= 4,710
= 7,250
$16,330
45
Bad Debt Expense 17,680Allowance for Doubtful Accounts 17,680
If the firm has a current $1,350 debit balance, the required adjusting entry would be--
If the firm has a current $1,350 debit balance, the required adjusting entry would be--
Aging of Accounts ReceivableAging of Accounts Receivable
$16,330 + $1,350
46
Writing Off UncollectiblesWriting Off Uncollectibles
Allowance for Doubtful Accounts
8,750
Accounts Receivable
175,000
Net realizable value = $166,250
A customer’s account totaling $850 is determined to be uncollectible.
A customer’s account totaling $850 is determined to be uncollectible.
Allowance for Doubtful Accounts 850Accounts Receivable 850
Net realizable value = $166,250
850
850
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Collection of an Account Previously Written Off
Collection of an Account Previously Written Off
Later, a payment for $850 is received from the account that was
written off in the previous slide.
Later, a payment for $850 is received from the account that was
written off in the previous slide.
Accounts Receivable 850Allowance for Doubtful Accounts 850
Cash 850Accounts Receivable 850
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Accounts Receivable Financing AgreementsAccounts Receivable
Financing Agreements
• Pledging
• Assigning
• Factoring
• Pledging
• Assigning
• Factoring
There are three basic forms of financing
agreements to obtain cash from accounts receivable.
There are three basic forms of financing
agreements to obtain cash from accounts receivable.
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Accounts Receivable Financing AgreementsAccounts Receivable
Financing Agreements
Retain Risks and Benefits of Ownership
Pledge
(Collateral for Loans)
Transfer Some Risks and Benefits of
Ownership
Assign
(Specific Receivables with Recourse)
Transfer Risks and Benefits of
Ownership
Factor
(Sale without Recourse)
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FactoringFactoring
1. The transferred assets have been isolated from the transferor.
2. The transferee obtains the right to exchange the transferred assets.
3. The transferor does not maintain effective control over the transferred assets through an agreement that entitles and obligates the transferor to repurchase the transferred assets before their maturity.
The FASB addressed these issues when it concluded in FASB Statement No. 140 that a transferor records the transfer of financial assets to the transferee as a sale when all of the following conditions are met:
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PledgingPledging
When a company pledges its accounts receivable, it is using
these accounts as collateral for a loan, and the servicing activities
remain its responsibility.
When a company pledges its accounts receivable, it is using
these accounts as collateral for a loan, and the servicing activities
remain its responsibility.
52
When a company assigns its accounts receivable to a
financial institution, it enters into a lending agreement with
the institution to receive cash on specific customer accounts.
When a company assigns its accounts receivable to a
financial institution, it enters into a lending agreement with
the institution to receive cash on specific customer accounts.
Assignment of Accounts ReceivableAssignment of Accounts Receivable
53
Assignment of Accounts ReceivableAssignment of Accounts Receivable
On December 1, 2004 the Trussel Company assigned $60,000 of its accounts to a finance company. The finance company advances 80% of the accounts receivable assigned
less a service charge of $500. It also charges an annual interest of 12% on any outstanding loan balance.
On December 1, 2004 the Trussel Company assigned $60,000 of its accounts to a finance company. The finance company advances 80% of the accounts receivable assigned
less a service charge of $500. It also charges an annual interest of 12% on any outstanding loan balance.
Cash 47,500Assignment Service Charge Expense 500
Notes Payable 48,000
($60,000 x 0.80) - $500
$60,000 x 0.80
Accounts Receivable Assigned 60,000Accounts Receivable 60,000
54
Notes Payable 10,000Interest Expense 480
Cash 10,480
Assignment of Accounts ReceivableAssignment of Accounts Receivable
On December 31, 2004 Trussel collects $10,000 on assigned accounts. This amount along with the 12%
interest for one month is paid to the finance company.
On December 31, 2004 Trussel collects $10,000 on assigned accounts. This amount along with the 12%
interest for one month is paid to the finance company.
Cash 10,000Accounts Receivable Assigned 10,000
$48,000 x 0.12 x 1/12
55
When a company factors its accounts receivable, it
sells individual accounts to a financial institution
(called a factor).
When a company factors its accounts receivable, it
sells individual accounts to a financial institution
(called a factor).
Factoring of Accounts ReceivableFactoring of Accounts Receivable
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Factor Corporation sells $80,000 of accounts receivable to a factor, receives 90% of the value of the factored accounts, and is charged a 15% commission based on
the gross amount of factored accounts receivable.
Factor Corporation sells $80,000 of accounts receivable to a factor, receives 90% of the value of the factored accounts, and is charged a 15% commission based on
the gross amount of factored accounts receivable.
FactoringFactoring
Cash 60,000Receivables from Factor 8,000Factoring Expense 12,000
Accounts Receivable 80,000
($80,000 x .90) - $12,000$80,000 x 0.10$80,000 x 0.15
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Notes ReceivableNotes Receivable
A note receivable is an unconditional written agreement to collect a certain sum of money
on a specific date.
A note receivable is an unconditional written agreement to collect a certain sum of money
on a specific date.
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Notes ReceivableNotes Receivable
Notes receivable generally have two attributes that are not found in
accounts receivable.
Notes receivable generally have two attributes that are not found in
accounts receivable.
59
1. They are negotiable instruments, which means that they are legally and readily transferable among parities and may be used to satisfy debts by the holders of these instruments.
2. They usually involve interest, requiring the separation of the receivables into its principal and interest components.
Notes ReceivableNotes Receivable
60
Notes ReceivableNotes Receivable
Interest-BearingInterest-Bearing
Received a $5,000, 60-day, 12% note on October 1, 2004.
Notes Receivable 5,000Sales 5,000
Received maturity value on December 1, 2004.
Cash 5,100Notes Receivable 5,000Interest Revenue 100
$5,000 x 0.12 x 60/360
61
Notes ReceivableNotes Receivable
Non-Interest-BearingNon-Interest-Bearing
Received a $5,100, 60-day, non-interest-bearing note on October 1, 2004.Notes Receivable 5,100
Interest Revenue 100Sales 5,000
Received maturity value on December 1, 2004.
Cash 5,100Notes Receivable 5,100
62
Notes Receivable DiscountedNotes Receivable Discounted
On August 1, 2004, the Kasper Corporation discounts a customer’s note at its bank at a 14% discount rate. The note was received from
the customer on August 1, is for 90 days, has a face value of $5,000, and
carries an interest rate of 12%.
On August 1, 2004, the Kasper Corporation discounts a customer’s note at its bank at a 14% discount rate. The note was received from
the customer on August 1, is for 90 days, has a face value of $5,000, and
carries an interest rate of 12%.
63
1. Face value of note $5,000.00
2. Interest to maturity($5,000 x 0.12 x 90/360) 150.00
3. Maturity value of note $5,150.00
4. Discount ($5,150 x 0.14 x 60/360) (120.17)
5. Proceeds $5,029.83
6. Accrued interest revenue: $50
7. Book value of note ($5,000 + $50) (5,050.00)
8. Loss from discounting of note $ (20.17)
Notes Receivable DiscountedNotes Receivable Discounted
64
Notes Receivable DiscountedNotes Receivable Discounted
October 30, 2004Notes Receivable Discounted 5,000.00
Notes Receivable 5,000.00
Cash 5029.83Loss from Discounting of Note 20.17
Notes Receivable Discounted 5,000.00Interest Receivable 50.00
August 31, 2004Interest Receivable 50.00
Interest Revenue 50.00
65
Notes Receivable DiscountedNotes Receivable Discounted
Assume instead that on November 3, 2004 the bank notified Kasper that the note had not been paid and also charged Kasper a $10 fee.
Assume instead that on November 3, 2004 the bank notified Kasper that the note had not been paid and also charged Kasper a $10 fee.
Notes Receivable Dishonored 5,160Notes Receivable Discounted 5,000
Notes Receivable 5,000Cash 5,160
66
Appendix: Proof of CashAppendix: Proof of Cash
1. The reconciliation of the bank balance and book balance for the previous month.
2. The reconciliation of the receipts recorded by the bank for the current month with the receipts recorded on the books.
3. The reconciliation of the payments recorded by the bank for the current month with the payments recorded on the books.
4. The reconciliation of the bank balance and book balance for the current month.
The proof of cash provides four separate
reconciliations.
The proof of cash provides four separate
reconciliations.
67
Chapter6
The EndThe EndThe EndThe End
68