Intermediate accounting volum 1 IFRS edition chapter 07

Recognition Valuation Impairment evaluation processCash Receivable Accounts Notes Receivable Special Issues Fair value option Derecognition of receivables Presentation and analysis Cash

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C H A P T E R 7

CASH AND RECEIVABLES

Intermediate Accounting

IFRS Edition Kieso, Weygandt, and Warfield

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1 Identify items considered cash.

2 Indicate how to report cash and related items.

3 Define receivables and identify the different types of receivables.

4 Explain accounting issues related to recognition of accounts receivable.

5 Explain accounting issues related to valuation of accounts receivable.

6 Explain accounting issues related to recognition of notes receivable.

7 Explain accounting issues related to valuation of notes receivable.

Learning Objectives

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Recognition Valuation Impairment evaluation process

Cash Receivable Accounts Notes Receivable Special Issues

Fair value option Derecognition of receivables

Presentation and analysis

Cash and Receivables

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A financial asset —also a financial instrument

Financial Instrument - Any contract that gives rise to a

financial asset of one entity and a financial liability or equity interest of another entity.

Cash

What is Cash?

Illustration 7-1 Types of Assets

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► Most liquid asset.

► Standard medium of exchange

► Basis for measuring and accounting for all other items.

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Short-term, highly liquid investments that are both

Cash

Reporting Cash

(a) readily convertible to cash, and

(b) so near their maturity that they present insignificant risk

of changes in interest rates.

Cash Equivalents

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When material in amount:

Segregate restricted cash from “regular” cash.

Current assets or non-current assets

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When a company writes a check for more than the amount in its cash account.

Cash

Bank Overdrafts

Generally reported as a current liability.

Offset against cash account only when available cash is present in another account in the same bank on which the overdraft occurred.

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Cash Cash

Illustration 7-3

Summary of Cash-Related Items

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Accounts Receivable

Written promises to pay a sum of money on a

specified future date.

others for money, goods, or services.

Oral promises of the purchaser to pay for goods

and services sold.

Accounts

Notes Receivable

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Non-trade Receivables

1 Advances to officers and employees

2 Advances to subsidiaries

3 Deposits to cover potential damages or losses

4 Deposits as a guarantee of performance or payment

5 Dividends and interest receivable

6 Claims against:

a) Insurance companies for casualties sustained.

b) Defendants under suit.

c) Governmental bodies for tax refunds.

d) Common carriers for damaged or lost goods.

e) Creditors for returned, damaged, or lost goods.

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10 % Discount for new Retail Store Customer

s

Recognition of Accounts Receivable

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Recognition of Accounts Receivable

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Cash Discounts (Sales Discounts) Illustration 7-5 Entries under Gross and

Net Methods of Recording Cash (Sales) Discounts

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E7-5: On June 3, Bolton Company sold to Arquette Company

merchandise having a sale price of £2,000 with terms of 2/10, n/60,

f.o.b shipping point On June 12, the company received a check for

the balance due from Arquette Company Prepare the journal entries

on Bolton Company books to record the sale assuming Bolton

records sales using the gross method

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June 12

f.o.b shipping point On June 12, the company received a check for

the balance due from Arquette Company Prepare the journal entries

on Bolton Company books to record the sale assuming Bolton

records sales using the net method

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f.o.b shipping point Prepare the journal entries on Bolton Company books to record the sale assuming Bolton records sales using the net method, and Arquette did not remit payment until July 29

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A company should measure receivables in terms of their present value.

Non-Recognition of Interest Element

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How are these accounts presented on the Statement of

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Journal entry for credit sale of $100?

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Accounts Receivable Doubtful Accounts Allowance for

Sale 100

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Adjustment of $15 for estimated Bad-Debts?

Bad debt expense 15

Allowance for Doubtful Accounts 15

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Adjustment of $15 for estimated Bad-Debts?

Bad debt expense 15

Allowance for Doubtful Accounts 15

Sale 100 333 Coll

15 Est

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Write-off of uncollectible accounts for $10?

Allowance for Doubtful accounts 10

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Write-off of uncollectible accounts for $10?

Allowance for Doubtful accounts 10

Accounts receivable 10

Sale 100 333 Coll

15 Est

W/O 10

10 W/O

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Valuation of Accounts Receivables

Classification Valuation (cash realizable value)

Uncollectible Accounts Receivable

Sales on account raise the possibility of accounts not being collected

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Valuation of Accounts Receivable

An uncollectible account receivable is a loss of revenue that

requires,

 a decrease in the asset accounts receivable and

 a related decrease in income and shareholders’ equity.

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Allowance Method

Losses are Estimated:

Percentage-of-sales Percentage-of-receivables IFRS requires when

Methods of Accounting for Uncollectible Accounts

Direct Write-Off

Theoretically undesirable:

No matching

Receivable not stated at

cash realizable value

Valuation of Accounts Receivable

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Emphasis on the Income Statement

Emphasis on the Statement

of Financial Position

Emphasis on the Statement

of Financial Position

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Percentage-of-Sales Approach

Percentage based upon past experience and anticipate credit policy.

Achieves proper matching of costs with revenues

Existing balance in Allowance account not considered.

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Uncollectible Accounts Receivable Uncollectible Accounts Receivable

Illustration: Gonzalez Company estimates from past experience that about 1% of credit sales become uncollectible If net credit

sales are $800,000 in 2011, it records bad debt expense as

follows

Allowance for Doubtful Accounts 8,000

Percentage-of-Sales Approach

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Percentage-of-Receivables Approach

Not matching.

Reports receivables at cash realizable value.

Companies may apply this method using

► one composite rate, or

► an aging schedule using different rates.

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What entry would Wilson make assuming that no balance existed in the allowance account?

Accounts Receivable Aging Schedule

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What entry would Wilson make assuming the allowance account had a credit balance

of $800 before adjustment?

Accounts Receivable Aging Schedule

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E7-7 (Recording Bad Debts): Sandel Company reports the

following financial information before adjustments.

Instructions: Prepare the journal entry to record bad debt

expense assuming Sandel Company estimates bad debts at

(a) 1% of net sales and (b) 5% of accounts receivable.

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(a) 1% of net sales. (€800,000 – €50,000) x 1% = €7,500

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(b) 5% of accounts receivable.

(€160,000 x 5%) – €2,000) = €6,000

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Recovery of Uncollectible Accounts

Illustration: Assume that the financial vice president of Brown

Furniture authorizes a write-off of the $1,000 balance owed by

Randall Co on March 1, 2012 The entry to record the write-off is:

Assume that on July 1, Randall Co pays the $1,000 amount that

Brown had written off on March 1 These are the entries:

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Impairment Evaluation Process

Companies assess their receivables for impairment each reporting period

Possible loss events are:

1 Significant financial problems of the customer.

2 Payment defaults.

3 Renegotiation of terms of the receivable due to financial difficulty of the

customer.

4 Decrease in estimated future cash flows from a group of receivables

since initial recognition, although the decrease cannot yet be identified with individual assets in the group.

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Impairment Evaluation Process

A receivable is considered impaired when a loss event indicates a negative

impact on the estimated future cash flows to be received from the customer The IASB requires that the impairment assessment should be performed as follows.

1 Receivables that are individually significant should be considered for

impairment separately

2 Any receivable individually assessed that is not considered impaired

should be included with a group of assets with similar credit-risk characteristics and collectively assessed for impairment.

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Illustration: Hector Company has the following receivables classified into

individually significant and all other receivables.

Hector determines that Yaan’s receivable is impaired by $15,000, and

Blanchard’s receivable is totally impaired Both Randon’s and Fernando’s

receivables are not considered impaired Hector also determines that a

composite rate of 2% is appropriate to measure impairment on all other

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The total impairment is computed as follows

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Supported by a formal promissory note

A negotiable instrument.

Maker signs in favor of a Payee.

Interest-bearing (has a stated rate of interest) OR Zero-interest-bearing (interest included in face amount).

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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.

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Recognition of Notes Receivable

Note Issued atFace ValuePremiumDiscount

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Illustration: Bigelow Corp lends Scandinavian Imports $10,000

in exchange for a $10,000, three-year note bearing interest at 10 percent annually The market rate of interest for a note of similar risk is also 10 percent How does Bigelow record the receipt of the note?

Note Issued at Face Value

$1,000 $1,000 Interest

$1,000

$10,000 Principal

i = 10%

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$1,000 x 2.48685 = $2,487

Interest Received Factor Present Value

PV of Interest

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PV of Principal

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Summary Present value of interest $ 2,487

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

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Illustration: Jeremiah Company receives a three-year, $10,000 zero-interest-bearing note The market rate of interest for a

note of similar risk is 9 percent How does Jeremiah record the receipt of the note?

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Zero-Interest-Bearing Note

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Journal Entries for Zero-Interest-Bearing note

Present value of Principal $7,721.80

Zero-Interest-Bearing Note

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Illustration: Morgan Corp makes a loan to Marie Co and

receives in exchange a three-year, $10,000 note bearing interest

at 10 percent annually The market rate of interest for a note of similar risk is 12 percent How does Morgan record the receipt of the note?

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Interest-Bearing Note

PV of Principal

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Illustration: How does Morgan record the receipt of the note?

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Interest-Bearing Note

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Journal Entries for Interest-Bearing Note

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Notes Received for Property, Goods, or Services

In a bargained transaction entered into at arm’s length, the

stated interest rate is presumed to be fair unless:

1 No interest rate is stated, or

2 Stated interest rate is unreasonable, or

3 Face amount of the note is materially different from the

current cash sales price.

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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:

(£35,247 - £20,000) = £15,247

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future cash flows discounted at the original

effective-Valuation of Notes Receivable

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Illustration: Tesco Inc has a note receivable with a carrying amount

of $200,000 The debtor, Morganese Company, has indicated that it is experiencing financial difficulty Tesco decides that Morganese’s note receivable is therefore impaired Tesco computes the present value of the future cash flows discounted at its original effective-interest rate to

be $175,000 The computation of the loss on impairment is as follows

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The entry to record the impairment loss is as follows

The computation of the loss on impairment is as follows

Allowance for Doubtful Accounts 25,000

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Special Issues Related To Receivables

Fair Value Option

Companies have the option to record fair value in their accounts for

most financial assets and liabilities, including receivables [6]

The IASB believes that fair value measurement for financial

instruments provides more relevant and understandable information

than historical cost because it reflects the current cash equivalent

value of financial instruments

[6] International Accounting Standard 39, Financial Instruments: Recognition and Measurement

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