Intermediate accounting 15e kieso warfield chapter 07

INTERMEDIATE

Intermediate
ACCOUNTING
Intermediate
Accounting
Accounting
F I F T E E N T H

7-1

E D I T I O N

Prepared
by
Prepared
by
Coby Harmon
Prepared by
Coby Harmon
Coby Harmon
University
of California
Santa Barbara
University
of California,
Santa Barbara
University of California, Santa Barbara
Westmont
College
Westmont

College

kieso
weygandt
warfield
team for success


PREVIEW OF CHAPTER

7

Intermediate Accounting
15th Edition
Kieso Weygandt Warfield
7-2


7

Cash and Receivables

LEARNING
LEARNINGOBJECTIVES
OBJECTIVES
After studying this chapter, you should be able to:

7-3

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 and valuation of notes
receivable.

7.

Explain the fair value option.

8.

Explain accounting issues related to
disposition of accounts and notes
receivable.

9.

Describe how to report and analyze
receivables.


Cash
What is Cash?

7-4



Most liquid asset.



Standard medium of exchange.



Basis for measuring and accounting for all 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.
LO 1 Identify items considered cash.


7

Cash and Receivables

LEARNING
LEARNINGOBJECTIVES
OBJECTIVES
After studying this chapter, you should be able to:

7-5

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 and valuation of notes
receivable.

7.

Explain the fair value option.

8.

Explain accounting issues related to
disposition of accounts and notes
receivable.

9.

Describe how to report and analyze
receivables.


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: Treasury bills, Commercial paper, and Money
market funds.

7-6

LO 2 Indicate how to report cash and related items.


Reporting Cash
Restricted Cash
Companies segregate restricted cash from “regular” cash.

Examples, restricted for:
(1) plant expansion, (2) retirement of long-term debt, and
compensating balances.

(3)

Illustration 7-1

7-7

LO 2


Reporting Cash
Bank Overdrafts
Company writes a check for more than the amount in its
cash account.

7-8



Generally reported as a current liability.



Offset against other cash accounts only when
accounts are with the same bank.

LO 2 Indicate how to report cash and related items.

Cash-Related Items
Illustration 7-2

7-9

LO 2


7

Cash and Receivables

LEARNING
LEARNINGOBJECTIVES
OBJECTIVES
After studying this chapter, you should be able to:
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.

7-10

6.

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

7.

Explain the fair value option.

8.

Explain accounting issues related to
disposition of accounts and notes
receivable.

9.

Describe how to report and analyze
receivables.


Accounts Receivable
Receivables - Claims held against customers and
others for money, goods, or services.

7-11

Oral promises of the
purchaser to pay for goods
and services sold.

Written promises to pay a
sum of money on a
specified future date.

Accounts
Accounts
Receivable
Receivable

Notes
Notes
Receivable
Receivable

LO 3 Define receivables and identify the different types of receivables.


Accounts Receivable
Nontrade 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.).
7-12

LO 3 Define receivables and identify the different types of receivables.


Accounts Receivable
Nontrade Receivables

7-13

Illustration 7-3
Receivables Balance
Sheet Presentations

LO 3 Define receivables and identify the different types of receivables.

7

Cash and Receivables

LEARNING
LEARNINGOBJECTIVES
OBJECTIVES
After studying this chapter, you should be able to:
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.

7-14

6.

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

7.

Explain the fair value option.

8.

Explain accounting issues related to
disposition of accounts and notes
receivable.

9.

Describe how to report and analyze
receivables.


Recognition of Accounts Receivables
Trade Discounts



7-15

Reductions from the list
price.



Not recognized in the
accounting records.



Customers are billed net
of discounts.

10 %
Discount for
new Retail
Store
Customers

LO 4 Explain accounting issues related to recognition of accounts receivable.


Recognition of Accounts Receivables
Cash Discounts (Sales Discounts)

7-16



Offered to induce prompt
payment.



Gross Method vs. Net
Method.

Payment
terms are
2/10, n/30

LO 4 Explain accounting issues related to recognition of accounts receivable.


Recognition of Accounts Receivables
Cash Discounts (Sales Discounts)

7-17

Illustration 7-4

LO 4 Explain accounting issues related to recognition of accounts receivable.


Recognition of Accounts Receivables
Illustration: 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.
June 3

Accounts Receivable

2,000

Sales
June 12

Cash ($2,000 x 98%)
Sales Discounts
Accounts Receivable

7-18

2,000
1,960
40
2,000

LO 4 Explain accounting issues related to recognition of accounts receivable.


Recognition of Accounts Receivables
Illustration: 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 net method.
June 3

Accounts Receivable

1,960

Sales
June 12

Cash ($2,000 x 98%)
Accounts Receivable

7-19

1,960
1,960
1,960

LO 4 Explain accounting issues related to recognition of accounts receivable.


Recognition of Accounts Receivables
Illustration: 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. 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.

June 3

Accounts Receivable

1,960

Sales
June 12

Cash
Accounts Receivable
Sales Discounts Forfeited

7-20

1,960
2,000
1,960
40

LO 4 Explain accounting issues related to recognition of accounts receivable.


Recognition of Accounts Receivables
Non-Recognition of Interest Element
A company should measure receivables in terms of their
present value.

In practice, companies ignore
interest revenue related to accounts
receivable because the discount is
not
usually material in relation to the
net income for the period.

7-21

LO 4 Explain accounting issues related to recognition of accounts receivable.


Accounts Receivables
How are these accounts presented on the Balance Sheet?

Accounts Receivable

Allowance for
Doubtful Accounts

Beg.

500

25

Beg.

End.

500

25

End.

7-22

LO 4 Explain accounting issues related to recognition of accounts receivable.


Accounts Receivables

7-23

LO 4 Explain accounting issues related to recognition of accounts receivable.


Accounts Receivables
Alternate
Alternate
Presentation
Presentation

7-24

LO 4 Explain accounting issues related to recognition of accounts receivable.


Accounts Receivables

Journal entry for credit sale of $100?
Accounts Receivable
Sales

Accounts Receivable

100
100

Allowance for
Doubtful Accounts

Beg.

500

25

Beg.

End.

500

25

End.

7-25

LO 4 Explain accounting issues related to recognition of accounts receivable.