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Cash
Introductions to Chapter Seven
The simple Bank Reconciliation Balance per books Add Interest or other
income Earned but not recorded
Add Book Errors Deducts service
charges Deduct NSF Checks Deduct Book Errors Correct Balance
Balance per bank statement
Add: Deposits in Transit
Add: Bank Errors Deduct Outstanding
Checks Deduct Bank Errors Correct Balance
See if you can complete Problem 7-15
RECEIVABLES
Receivables
Concerns with Receivables
All are recorded Proper distinction between current and
non-current receivables is made And most importantly that receivables
are stated at their NRV or Net Realizable Value.
Comparison of Gross vs. Net Again Gross Method
– Debit Accounts Receivable 4,000– Credit Sales 4,000
Net Method– Debit Accounts Receivable 3,880– Credit Sales 3,880
Sales Return
Gross Method– Debit Sales Returns 500– Credit Accounts Rec. 500
Net Method– Debit Sales Returns 485– Credit Accounts Rec.
485
Freight
Gross and Net
Debit Freight-Out 25 Credit Cash 25
Pay Within the Discount Period
Gross Method– Debit Cash 3,395– Debit Sales Discounts 105– Credit Accounts Rec. 3500
Net Method– Debit Cash 3,395– Credit Accounts Rec. 3,395
If Pay Late
Gross Method– Debit Cash 3,500– Credit Accounts Rec 3,500
Net Method– Debit Cash 3,500– Credit Accounts Rec. 3,395– Credit Cash Disc. Forfeited 105
Returns and Allowances If significant returns are expected, an
allowance may be needed. Record sale if
– Fixed Price– Not contingent on resale– Risk of damage with buyer– No obligations– Reasonable estimate of returns can be
made.
Bad Debts-Balance Sheet Approach Balance sheet approach only looks at
accounts receivable and the allowance account.
% given is multiplied by accounts receivable balance and should be the amount shown in the allowance account on the balance sheet.
The $ amount of the entry will generally be different than the amount computed above.
Computation 90,000 X.04= 3,600
The entry is:* Debit: Bad Debt Expense 5,350* Credit: Allowance for U/A
5,350 The Balance Sheet Presentation is:
* Accounts Receivable 90,000* Less: Allowance for U/A 3,600* Net Accounts Receivable 86,400
Bad Debts--Income Statement Approach With the income statement approach we
are looking at the amount which would appear as Uncollectible Accounts Expense or Bad Debt Expense
The amount of the entry is computed by taking some component of sales (credit, net) and multiplying it by the percentage given
The amount in the allowance account on the balance sheet will generally not equal the amount computed above.
Computation- 680,000-30,000=650,000650,000 X.01 = 6,500
The entry to adjust is:* Debit: Bad Debt Expense 6,500* Credit: Allowance for U/A 6,500
The Balance sheet Presentation is:* Accounts Receivable 90,000* Less: Allowance for U/A 4,750* Net Accounts Receivable 85,250
Assignment of Accounts Receivable Here accounts receivable are used as
collateral for a loan Under a general assignment, if
payment on the loan is not made, receivables held at that time will be collected to satisfy the lender
Under a specific assignment, the accounts receivable assigned are specifically collected and used to pay off the loan
Example of Specific Assignment* Facts:
$100,000 of specific accounts receivable are assigned for an $80,000 loan
Finance charge is 1/2 of 1% of assigned accountsAfter two months
* $70,000 of cash collected* Sales returns totaled $5,000* Sales discounts of $800 were acknowledged
Beginning of Third Month* Cash of $71,000 remitted; $70,000 for loan payment and $1,000
for finance chargeThird Month
* $2,000 of accounts deemed uncollectible* Balance of specific accounts receivable are collected
End of Third Month* Loan is satisfied and $300 of finance charge paid
$100,000 of specific accounts receivable are assigned for an $80,000 loanFinance charge is 1/2 of 1% of assigned accounts
Entry on Barker’s Books* Debit: Accounts Rec. Assigned100,000* Credit: Accounts Receivable100,000
* To segregate assigned accounts
* Debit: Cash 79,500* Debit: Finance Expense 500* Credit: Notes Payable 80,000
$100,000 of specific accounts receivable are assigned for an $80,000 loanFinance charge is 1/2 of 1% of assigned accounts
Entry on Heartland Bank’s Books* Debit: Notes Receivable 80,000* Credit: Cash
79,500* Credit: Finance Income
500
After two months$70,000 of cash collectedSales returns totaled $5,000Sales discounts of $800 were acknowledged
Entry on Barker’s Books* Debit: Cash 70,000* Debit: Sales Returns 5,000* Debit: Sales Discounts 800* Credit: A/R Assigned
75,800 Entry on Heartland Bank’s Books
* None
Beginning of Third MonthCash of $71,000 remitted; $70,000 for loan payment and $1,000 for finance charge
Entry on Barker’s Books* Debit: Notes Payable 70,000* Debit Finance Expense 1,000* Credit Cash 71,000
Entry on Heartland Bank’s Books* Debit: Cash 71,000* Credit: Notes Receivable 70,000* Credit: Finance Income 1,000
Third Month$2,000 of accounts deemed uncollectibleBalance of specific accounts receivable are collected
Entry on Barker’s Books* Debit Cash 22,200* Debit Allowance for U/A 2,000
* Credit A/R Assigned24,200
No entry on Heartland Bank’s Books
End of Third MonthLoan is satisfied and $300 of finance charge paid Entry on Barker’s Books
* Debit Notes Payable 10,000* Debit Finance Expense 300* Credit: Cash 10,300
Entry on Heartland Bank’s Books* Debit: Cash 10,300* Credit: Notes Receivable 10,000* Credit: Finance Income 300
Factoring of Accounts Receivable
Transfer withOUT
RECOURSE
Transfer with RECOURSEDoes It meet three conditions
1. Transferor surrenders benefits
2. Transferor’s obligation can be reasonably estimated
3. Transferee cannot require repurchaseRecord as
Sale
Yes NoRecord as
SaleRecord as Borrowing
With Sale: Reduce Receivables, Record Loss (Rarely Gain)
With Borrowing: Record Liability, Record Interest Expense
Look at example on Page 5of your notes.
Factoring Example
100,000 of receivables 3% finance charge if with recourse, 4%
finance charge if without--(estimated uncollectible accounts are $1,000)
5% reserve for sales returns, discounts etc if without recourse because the reserve does not cover uncollectibles. The reserve is set at 6% if with recourse
To Record the Factoring of Rec. Factored without recourse Dr: Cash 91,000 Dr: Receivable-factor 5,000 Dr: Loss on sale of Rec. 4,000 Cr: Accts. Rec. 100,000 Factored with recourse treated as a sale Dr: Cash 91,000 Dr: Receivable-Factor 6,000 Dr: Loss on Sale 3,000 Cr: Accts. Rec. 100,000 Dr: Bad Debt Expense 1,000 Cr: Allowance for Uncoll 1,000
To record First months discounts and returns Without Recourse Dr: Sales Discounts 1,000 Dr: Sales Returns 2,500 Cr: Receivable-factor 3,500 With Recourse treated as a sale Dr. Sales Discounts 1,000 Dr. Sales Returns 2,500 Cr. Receivable-factor 3,500
To Record Second Months Returns and acknowledge uncollectible accounts Without Recourse Dr: Sales Returns 800 Cr: Receivable from Factor 800 With Recourse treated as a sale Dr. Sales Returns 800 Dr. Allowance for Uncoll 1500 Cr. Receivable from Factor 2,300
Final Settlement
Without Recourse Dr. Cash 700 Cr. Rec. from Factor 700
With Recourse treated as a sale Dr. Cash 200 Cr. Rec from Factor 200
Factoring with recourse-borrowing
Initial Transaction Dr: Cash 91,000 Dr: Receivable-factor 6,000 Dr: Discount on N/P (Fact. AR) 3,000 Cr: N/P (Liability on Fact. AR)
100,000
Dr: Bad debt expense 1,000 Cr: Allow for Uncoll 1,000
Balance sheet
Current Assets Accounts Receivable 100,000 Less: Allowance ( 1,000) Receivable from Factor 6,000
Current Liabilities Notes Payable 100,000 Less Discount (3,000)
Factoring with recourse-Borrowing After First Month Dr: Sales Discounts 1,000 Dr: Sales Returns 2,500 Cr: Receivable-factor 3,500
Dr: Notes Payable 58,500 Cr: Accounts Rec. 58,500
Dr. Finance Expense 1,800 Cr. Discount on N/P 1,800
Balance sheet
Current Assets Accounts Receivable 41,500 Less: Allowance ( 1,000) Receivable from Factor 2,500
Current Liabilities Notes Payable 41,500 Less Discount (1,200)
Factoring with recourse-borrowing Entries for Second Month
– Debit Sales Returns 800– Debit Allowance 1,500– Credit Rec. from Factor 2,300– Here you may need additional adjustment for bad
debts
– Debit Notes Payable 41,500– Credit Accounts Receivable 41,500
– Debit Finance Expense 1,200– Credit Discount on N/P 1,200
Factoring-with recourse-borrowing continued. Final Settlement
– Debit Cash 200– Credit Rec. from Factor 200