Cash

1
Cash

• Introductions to Chapter Seven

2
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
3
RECEIVABLES
Receivables
4
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.

5
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

6
Sales Return

• Gross Method
• Debit Sales Returns 500
• Credit Accounts Rec. 500
• Net Method
• Debit Sales Returns 485
• Credit Accounts Rec. 485

7
Freight

• Gross and Net
• Debit Freight-Out 25
• Credit Cash 25

8
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

9
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

10
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.

11
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.

12
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

13
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.

14
Computation- 680,000-30,000650,000 650,000 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

15
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

16
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 accounts
• After 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 charge
• Third 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

17
100,000 of specific accounts receivable are
assigned for an 80,000 loanFinance charge is
1/2 of 1 of assigned accounts

• Entry on Barkers 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

18
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 Banks Books
• Debit Notes Receivable 80,000
• Credit Cash 79,500
• Credit Finance Income 500

19
After two months70,000 of cash collectedSales
returns totaled 5,000Sales discounts of 800
were acknowledged

• Entry on Barkers Books
• Debit Cash 70,000
• Debit Sales Returns 5,000
• Debit Sales Discounts 800
• Credit A/R Assigned 75,800
• Entry on Heartland Banks Books
• None

20
Beginning of Third MonthCash of 71,000
remitted 70,000 for loan payment and 1,000 for
finance charge

• Entry on Barkers Books
• Debit Notes Payable 70,000
• Debit Finance Expense 1,000
• Credit Cash 71,000
• Entry on Heartland Banks Books
• Debit Cash 71,000
• Credit Notes Receivable 70,000
• Credit Finance Income 1,000

21
Third Month2,000 of accounts deemed
uncollectibleBalance of specific accounts
receivable are collected

• Entry on Barkers Books
• Debit Cash 22,200
• Debit Allowance for U/A 2,000
• Credit A/R Assigned 24,200
• No entry on Heartland Banks Books

22
End of Third MonthLoan is satisfied and 300 of
finance charge paid

• Entry on Barkers Books
• Debit Notes Payable 10,000
• Debit Finance Expense 300
• Credit Cash 10,300
• Entry on Heartland Banks Books
• Debit Cash 10,300
• Credit Notes Receivable 10,000
• Credit Finance Income 300

23
Factoring of Accounts Receivable
Transfer with RECOURSE
Transfer withOUT RECOURSE
Does It meet three conditions 1. Transferor
surrenders benefits 2. Transferors obligation
can be reasonably estimated 3. Transferee cannot
require repurchase
Record as Sale
Yes
No
Record as Sale
Record as Borrowing
With Sale Reduce Receivables, Record Loss
(Rarely Gain)
With Borrowing Record Liability, Record
Interest Expense
24
Look at example on Page 5of your notes.
25
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

26
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

27
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

28
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

29
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

30
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

31
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)

32
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

33
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)

34
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

35
Factoring-with recourse-borrowing continued.

• Final Settlement
• Debit Cash 200
• Credit Rec. from Factor 200