Chapter 7 Cash, Temporary Investments, and Receivables
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1 Chapter 7 Cash, Temporary Investments, and Receivables Slide 1
2 Bank Reconciliation Steps In Accounting Records Add/subtract items recorded by the bank but not yet entered in the accounting records. In Bank Records Add/subtract items recorded in the accounting records but not yet entered in the bank records. Adjusted Cash Balance Slide 2
3 Temporary Investments Temporary investments are liquid securities I intend to sell within one year. Slide 3
4 Temporary Investments An exception to the historic cost principle used to value assets is the lower of cost or market rule applied to value temporary investments. Slide 4
5 Temporary Investments Prepare the necessary journal entry for Cars Ltd. to adjust the temporary investments to fair market value at December 31, 19X9. No. of Unit Total Fair Investment Shares Cost Cost Value Gloves, Inc. 1,000 $6 $6,000 $ 6,500 SportsWear 1, ,000 16,000 Slide 5
6 Temporary Investments No. of Unit Total Fair Gain or Investment Shares Cost Cost Value (Loss) Gloves, Inc. 1,000 $6 $6,000 $ 6,500 $ 500 SportsWear 1, ,000 16,000 (2,000) Net Unrealized Loss $ (1,500) Slide 6
7 Temporary Investments Date GENERAL JOURNAL Page 34 Description Post. Ref. Debit Credit Dec. 31 Allowance for Market Decline: Gloves, Inc. 500 Unrealized Loss 1,500 Allow ance for Market Decline: SportsW ear 2,000 Slide 7
8 Temporary Investments Date GENERAL JOURNAL Page 34 Description Post. Ref. Debit Credit Dec. 31 Allowance for Market Decline: Gloves, Inc. 500 Unrealized Loss 1,500 Allow ance for Market Decline: SportsW ear 2,000 The unrealized loss account will appear on the income statement. Slide 8
9 Temporary Investments Date GENERAL JOURNAL Page 34 Description Post. Ref. Debit Credit Dec. 31 Allow ance for Market Decline: Gloves, Inc. 500 Unrealized Loss 1,500 Allow ance for Market Decline: SportsWear 2,000 The allowance account is a contra asset account deducted from the cost basis of temporary investments on the balance sheet. Slide 9
10 Financial Reporting of Temporary Investments For each security held, is market value less than cost (or adjusted cost)? Yes Is this a temporary market decline? Yes No Include the security in the aggregate portfolio of temporary investments. No Market value for this security becomes the newly established cost basis and the loss is applied to current income. Is market value of portfolio below cost? No Yes Make sure allowance account has a zero balance. Adjust allowance account, reflecting the change in current income. Slide 10
11 Accounts Receivable Arise from the sale of services or products on credit Slide 11
12 Accounts Receivable On June 4, 19X9 ABC Company sold $3,000 of merchandise on credit to a customer. Prepare the journal entry. Date GENERAL JOURNAL Page 34 Description Post. Ref. Debit Credit Slide 12
13 Accounts Receivable On June 4, 19X9 ABC Company sold $3,000 of merchandise on credit to a customer. Prepare the journal entry. Date GENERAL JOURNAL Page 34 Description Post. Ref. Debit Credit June 4 Accounts Receivable 3,000 Sales 3,000 Slide 13
14 Accounts Receivable Even though cash was not received, the revenue is still considered earned at this point because the earnings process is assumed to be complete. Date GENERAL JOURNAL Page 34 Description Post. Ref. Debit Credit June 4 Accounts Receivable 3,000 Sales 3,000 Slide 14
15 Accounts Receivable On July 7, 19X9 ABC Company receives the $3,000 from the customer. Prepare the journal entry. Date GENERAL JOURNAL Page 34 Description Post. Ref. Debit Credit Slide 15
16 Accounts Receivable On July 7, 19X9 ABC Company receives the $3,000 from the customer. Prepare the journal entry. Date GENERAL JOURNAL Page 34 Description Post. Ref. Debit Credit July 7 Cash 3,000 Accounts Receivable 3,000 Slide 16
17 Management Issues Selling merchandise on credit helps to increase my sales, but it also delays the receipt of cash! Slide 17
18 Management Issues Maybe I can offer a discount to credit customers to entice them to pay sooner... Slide 18
19 Management Issues 3/15,net/30 Slide 19
20 Management Issues 3/15,net/30 Percentage of Discount # of Days Discount Is Available Otherwise, Net (or All) Is Due Net Amount Is Due in This # of Days Slide 20
21 Management Issues I wonder if this will be one of my credit customers who ends up not paying the balance owed to me? Slide 21
22 Net Realizable Value Pat's Place Balance Sheet December 31, 19X9 Assets Cash $ 100,000 Accounts receivable, net 25,000 Land 65,000 Total assets $ 190,000 Liabilities and Shareholders' Equity Liabilities Accounts Payable $ 95,000 Net realizable value is the amount Shareholders' Equity Share capital 70,000 expected to be Retained earnings 25,000 Total liabilities and shareholders' equity $ 190,000 collected. Slide 22
23 Doubtful Accounts An estimate of the expense relating to selling goods on credit should be recorded in the period when the revenue is earned. Matching Principle Slide 23
24 Doubtful Accounts The adjusting entry to record the estimate of uncollectible accounts is as follows: Date Bad Debt Expense GENERAL JOURNAL Page 34 Description Post. Ref. Debit Credit XXXX Allowance for Doubtful Accts. XXXX Slide 24
25 Doubtful Accounts Estimation Methods Percentage of Credit Sales Percentage of Accounts Receivable Slide 25
26 Percentage of Credit Sales Based on past history, I can determine the percentage of credit sales that I never collected. Slide 26
27 Percentage of Credit Sales Then, the amount of my adjusting entry could be determined as: Current Year Credit Sales Bad Debt% Estimated Bad Debt Expense Slide 27
28 Percentage of Credit Sales As of 12/31/X9 Tools-R-Us had total sales of $550,000, of which $75,000 were cash sales. Historically, Tools-R-Us has had a bad debt percentage of 1% based on credit sales. Prepare the 12/31/X9 entry for Tools-R-Us. Date GENERAL JOURNAL Page 34 Description Post. Ref. Debit Credit Slide 28
29 Percentage of Credit Sales As of 12/31/X9 Tools-R-Us had total sales of $550,000, of which $75,000 were cash sales. Historically, Tools-R-Us has had a bad debt percentage of 1% based on credit sales. Prepare the 12/31/X9 entry for Tools-R-Us. Date GENERAL JOURNAL Page 34 Description Post. Ref. Debit Credit Dec. 31 Bad Debt Expense 4,750 Allow ance for Doubtful Accts. 4,750 Contra asset account Slide 29
30 Percentage of Credit Sales As of 12/31/X9 Tools-R-Us had total sales of $550,000, of which $75,000 were cash sales. Historically, Tools-R-Us has had a bad debt percentage of 1% based on credit sales. Prepare the 12/31/X9 entry for Tools-R-Us. Date GENERAL JOURNAL Page 34 Description $550,000 Total Sales - 75,000 Cash Sales 475,000 Credit Sales.01 $ 4,750 Post. Ref. Debit Credit Dec. 31 Bad Debt Expense 4,750 Allow ance for Doubtful Accts. 4,750 Slide 30
31 Percentage of Credit Sales If Tools-R-Us had accounts receivable of $100,000 at 12/31/X9, what amount should be reported on the 12/31/X9 balance sheet? Slide 31
32 Percentage of Credit Sales If Tools-R-Us had accounts receivable of $100,000 at 12/31/X9, what amount should be reported on the 12/31/X9 balance sheet? Accounts receivable $ 100,000 Less allowance 4,750 Net realizable value $ 95,250 Slide 32
33 Percentage of Accounts Receivable Based on past history, I can determine the bad debt percentage for each accounts receivable age group. Slide 33
34 Percentage of Accounts Receivable Days Past Due A/R Balance Estimated Bad Debt % Current $ 45,000 1% 1-30 Days 15,000 3% Days 5,000 5% Over 60 Days 2,000 10% Total A/R $ 67,000 Slide 34
35 Percentage of Accounts Receivable Then, I can compute the estimated uncollectible amount for each category by: Aged Category Balance Bad Debt% Estimated Uncollectible Amt. Slide 35
36 Percentage of Accounts Receivable Days Past Due A/R Balance Estimated Bad Debt % Estimated Uncollectible Current $ 45,000 1% $ Days 15,000 3% Days 5,000 5% 250 Over 60 Days 2,000 10% 200 Total A/R $ 67,000 Total Est. Uncollectible $ 1,350 All f Slide 36
37 Percentage of Accounts Receivable The adjusting entry is made for the difference between (1) The total estimated uncollectible amount and (2) The balance before adjustment in the Allowance for Doubtful Accounts Slide 37
38 Percentage of Accounts Receivable Assume that the balance in the allowance for doubtful accounts is $350 (credit) before any adjustment is made. Determine the amount of the journal entry to record uncollectible accounts. Slide 38
39 Percentage of Accounts Receivable Days Past Due A/R Balance Estimated Bad Debt % Estimated Uncollectible Current $ 45,000 1% $ Days 15,000 3% Days 5,000 5% 250 Over 60 Days 2,000 10% 200 Total A/R $ 67,000 Let s look at the T-account. Desired Credit Balance $ 1,350 Allowance for Doubtful Accts. (350) Amount for Journal Entry $1,000 Slide 39
40 Percentage of Accounts Receivable ALLOWANCE FOR DOUBTFUL ACCTS $ 350 Before Adjustment 1,000 Adjusting Entry 1,350 After Adjustment $1,350 - $350 = $1,000 Slide 40
41 Write-off of Accounts Receivable Occasionally it will become apparent that a specific account receivable will not be collected. At this point, the specific account receivable should be written off: Date GENERAL JOURNAL Page 34 Description Allowance for Doubtful Accts. Post. Ref. Debit Credit XXXX Accounts Receivable XXXX Slide 41
42 Write-off of Accounts Receivable No effect on the income statement No effect on total assets No effect on net realizable value Date GENERAL JOURNAL Page 34 Description Allowance for Doubtful Accts. Post. Ref. Debit Credit XXXX Accounts Receivable XXXX Slide 42
43 Recovery of Accounts Receivable Written Off If an account that has been written off subsequently becomes collectible, simply reverse the write-off entry. Date Accounts Receivable GENERAL JOURNAL Page 34 Description Post. Ref. Debit Credit XXXX Allowance for Doubtful Accts. XXXX Slide 43
44 Analyzing Accounts Receivable Average receivable collection period = Average accounts receivable balance Total credit sales /365 days This ratio provides a rough measure of the length of time that a company s accounts receivable have been outstanding. Slide 44
45 End of Chapter 7 Slide 45
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