7-1 prepared by coby harmon university of california, santa barbara intermediate accounting

7-1

Prepared by Coby Harmon

University of California, Santa Barbara

Intermediate Accounting

7-2

Intermediate Accounting

14th Edition

7 Cash and Receivables

Kieso, Weygandt, and Warfield

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.

Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives

7-4

What is cash?

Reporting cash

Summary of cash-related items

CashSpecial Issues

Recognition of notes receivable

Valuation of notes receivable

Cash and ReceivablesCash and ReceivablesCash and ReceivablesCash and Receivables

Accounts Receivable

Notes Receivable

Recognition of accounts receivable

Valuation of accounts receivable

Fair value option

Disposition of accounts and notes receivable

Presentation and analysis

7-5

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.

What is Cash?What is Cash?What is Cash?What is Cash?

LO 1 Identify items considered cash.

Cash

7-6

Short-term, highly liquid investments that are both

Reporting CashReporting CashReporting CashReporting Cash

LO 2 Indicate how to report cash and related items.

Cash Equivalents

(a) readily convertible to cash, and

(b) so near their maturity that they present insignificant risk of changes in interest rates.

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

7-7

Companies segregate restricted cash from “regular” cash.

Examples, restricted for:

(1) plant expansion, (2) retirement of long-term debt,

and (3) compensating balances.


LO 2

Restricted Cash

Illustration 7-1

7-8

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


LO 2 Indicate how to report cash and related items.

Bank Overdrafts

Generally reported as a current liability.

Offset against other cash accounts only when accounts

are with the same bank.

7-9

Summary of Cash-Related ItemsSummary of Cash-Related ItemsSummary of Cash-Related ItemsSummary of Cash-Related Items

LO 2

Illustration 7-2

7-10

Accounts ReceivableAccounts ReceivableAccounts ReceivableAccounts Receivable

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

Written promises to pay a sum of money on a

specified future date.

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

Oral promises of the purchaser to pay for goods

and services sold.

Accounts Accounts ReceivableReceivableAccounts Accounts

ReceivableReceivableNotes Notes

ReceivableReceivableNotes Notes

ReceivableReceivable

7-11

Nontrade 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: 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

Nontrade Receivables



Illustration 7-3

7-13

Recognition of Accounts ReceivablesRecognition of Accounts ReceivablesRecognition of Accounts ReceivablesRecognition of Accounts Receivables

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

Reductions from the list

price

Not recognized in the

accounting records

Customers are billed net of

discounts

10 %

Discount for

new Retail

Store

Customers

Trade Discounts

7-14



Inducements for prompt

payment

Gross Method vs. Net

Method

Cash Discounts

Payment terms are 2/10, n/30

7-15



Cash Discounts (Sales Discounts)Illustration 7-4

7-16

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.

Sales

2,000

Accounts receivable 2,000June 3



Cash ($2,000 x 98%) 1,960

Sales discounts 40

Accounts receivable 2,000

June 12

7-17



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.

Sales

1,960




Cash ($2,000 x 98%) 1,960


June 12

7-18



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.

Sales

1,960




Cash 2,000


Sales Discounts Forfeited 40

June 12

7-19

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

Non-Recognition of Interest Element


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


7-20

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

Accounts ReceivableAllowance for

Doubtful Accounts

Beg. 500 25 Beg.

End. 500 25 End.



7-21 LO 4 Explain accounting issues related to recognition of accounts receivable.

Current Assets:

Cash 346$

Accounts receivable 500

Less: Allowance for doubtful accounts (25) 475

Inventory 812

Prepaids 40

Total current assets 1,673

Fixed Assets:

Office equipment 5,679

Furniture & fixtures 6,600

Less: Accumulated depreciation (3,735)

Total fixed assets 8,544 Total Assets 10,217$

Assets



Current Assets:

Cash 346$

Accounts receivable, net of $25 allowance 475

Inventory 812

Prepaids 40


Fixed Assets:





Assets


7-23

Journal entry for credit sale of $100?Journal entry for credit sale of $100?

Accounts receivableAccounts receivable 100100

SalesSales 100 100


Doubtful Accounts

Beg. 500 25 Beg.

End. 500 25 End.



7-24


Doubtful Accounts

Beg. 500 25 Beg.

End. 600 25 End.

Sale 100



Journal entry for credit sale of $100?Journal entry for credit sale of $100?


SalesSales 100 100

7-25

Collected of $333 on account?Collected of $333 on account?

CashCash 333333



Doubtful Accounts

Beg. 500 25 Beg.

End. 600 25 End.

Sale 100



7-26

Collected of $333 on account?Collected of $333 on account?

CashCash 333333



Doubtful Accounts

Beg. 500 25 Beg.

End. 267 25 End.

Sale 100 333 Coll.



7-27

Adjustment of $15 for estimated Bad-Debts?Adjustment of $15 for estimated Bad-Debts?

Bad debt expenseBad debt expense 1515

Allowance for Doubtful AccountsAllowance for Doubtful Accounts 1515


Doubtful Accounts

Beg. 500 25 Beg.

End. 267 25 End.

Sale 100 333 Coll.



7-28

Adjustment of $15 for estimated Bad-Debts?Adjustment of $15 for estimated Bad-Debts?

Bad debt expenseBad debt expense 1515

Allowance for Doubtful AccountsAllowance for Doubtful Accounts 1515


Doubtful Accounts

Beg. 500 25 Beg.

End. 267 40 End.

Sale 100 333 Coll.

15 Est.



7-29

Write-off of uncollectible accounts for $10?Write-off of uncollectible accounts for $10?

Allowance for Doubtful accountsAllowance for Doubtful accounts 1010



Doubtful Accounts

Beg. 500 25 Beg.

End. 267 40 End.

Sale 100 333 Coll.

15 Est.



7-30

Write-off of uncollectible accounts for $10? Write-off of uncollectible accounts for $10?

Allowance for Doubtful accountsAllowance for Doubtful accounts 1010



Doubtful Accounts

Beg. 500 25 Beg.

End. 257 30 End.

Sale 100 333 Coll.

15 Est. W/O 10 10 W/O




Current Assets:

Cash 13$

Accounts receivable, net of $30 allowance 227

Inventory 812

Prepaids 40


Fixed Assets:





Assets


7-32 LO 5 Explain accounting issues related to valuation of accounts receivable.

Valuation of Accounts ReceivableValuation of Accounts ReceivableValuation of Accounts ReceivableValuation of Accounts Receivable

An uncollectible account receivable is a loss of revenue that

requires, through proper entry in the accounts,

a decrease in the asset accounts receivable and

a related decrease in income and stockholders’ equity.

Uncollectible Accounts Receivable


Allowance MethodAllowance Method

Losses are Estimated:

Percentage-of-sales.

Percentage-of-receivables.

GAAP requires when material in amount.

Methods of Accounting for Uncollectible Accounts

Direct Write-OffDirect Write-Off

Theoretically deficient:

No matching.

Receivable not stated at cash realizable value.

Not GAAP when material in amount.



Emphasis on the Income Statement

relationships

Emphasis on the Income Statement

relationships

Emphasis on the Balance

Sheet relationships

Emphasis on the Balance

Sheet relationships

Illustration 7-6



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.


7-36 LO 5

Illustration: Gonzalez Company estimates from past experience

that about 1% of credit sales become uncollectible. If net credit

sales are $800,000 in 2012, it records bad debt expense as

follows.Bad Debt Expense 8,000

Allowance for Doubtful Accounts 8,000

Illustration 7-7



Percentage-of-Receivables Approach

Not matching.

Reports receivables at realizable value.

Companies may apply this method using

one composite rate, or

an aging schedule using different rates.



Bad Debt Expense 37,650


What entry would Wilson

make assuming that no balanceexisted in the

allowance account?

Illustration 7-8Accounts Receivable Aging Schedule



Bad Debt Expense ($37,650 – $800) 36,850


What entry would Wilson

make assuming the allowance account had a credit balance of $800 before

adjustment?

Illustration 7-8Accounts Receivable Aging Schedule


7-40


LO 5 Explain accounting issues related to valuation of accounts receivable.

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.

7-41


LO 5LO 5


Instructions: Prepare the journal entry assuming Sandel

estimates bad debts at (a) 1% of net sales.


Allowance for Doubtful Accounts 7,500($800,000 – $50,000) x 1% = $7,500

LO 5

7-42


LO 5LO 5


Instructions: Prepare the journal entry assuming Sandel

estimates bad debts at (b) 5% of accounts receivable.


Allowance for Doubtful Accounts 6,000($160,000 x 5%) – $2,000) = $6,000

LO 5

7-43

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:


Accounts Receivable1,000

Assume that on July 1, Randall Co. pays the $1,000 amount that Brown had written off on March 1. These are the entries:

Accounts Receivable 1,000Allowance for Doubtful Accounts

1,000

Cash 1,000Accounts Receivable

1,000


LO 5

7-44

Supported by a formal promissory note.

Recognition of Notes ReceivableRecognition of Notes ReceivableRecognition of Notes ReceivableRecognition of Notes Receivable

LO 6 Explain accounting issues related to recognition of notes receivable.

Notes Receivable

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).

7-45



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.

Lending transactions (the majority of notes).

7-46 LO 6 Explain accounting issues related to recognition of notes receivable.


Short-Term Long-Term

Record at Face Value,

less allowance

Record at Present Value

of cash expected to be collected

Interest Rates

Stated rate = Market rate

Stated rate > Market rate

Stated rate < Market rate

Note Issued at

Face Value

Premium

Discount

7-47

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 ValueNote Issued at Face ValueNote Issued at Face ValueNote Issued at Face Value


0 1 2 3

1,000 1,000 Interest$1,000

$10,000 Principal

4

i = 10%

n = 3

7-48

$1,000 x 2.48685 = $2,487

Interest Received Factor Present Value


PV of Interest


7-49

$10,000 x .75132 = $7,513

Principal Factor Present Value


PV of Principal


7-50

Summary Present value of interest $ 2,487

Present value of principal 7,513

Note current market value $10,000

Date Account Title Debit Credit

J an. yr. 1

Dec. yr. 1



Notes receivable 10,000

Cash 10,000

Cash 1,000

Interest revenue1,000

7-51

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?

Zero-Interest-Bearing NoteZero-Interest-Bearing NoteZero-Interest-Bearing NoteZero-Interest-Bearing Note


0 1 2 3

$0 $0 Interest$0

$10,000 Principal

4

i = 9%

n = 3

7-52

$10,000 x .77218 = $7,721.80



PV of Principal




Illustration 7-12

7-54

Journal Entries for Zero-Interest-Bearing note

Present value of Principal $7,721.80


Jan. yr. 1 Notes receivable 10,000.00

Discount on notes receivable 2,278.20

Cash 7,721.80

Dec. yr. 1 Discount on notes receivable 694.96

Interest revenue 694.96

($7,721.80 x 9%)



7-55

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?

Interest-Bearing NoteInterest-Bearing NoteInterest-Bearing NoteInterest-Bearing Note


0 1 2 3

1,000 1,000 Interest$1,000

$10,000 Principal

4

i = 12%

n = 3

7-56

$1,000 x 2.40183 = $2,402

Interest Received Factor Present Value


PV of Interest


7-57

$10,000 x .71178 = $7,118



PV of Principal


7-58

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



Illustration 7-14

Notes Receivable 10,000

Discount on Notes Receivable

480

Cash

9,520



Illustration 7-15

7-60

Journal Entries for Interest-Bearing Note


Beg. yr. 1 Notes receivable 10,000

Discount on notes receivable 480

Cash 9,520

End. yr. 1

($9,520 x 12%)



Cash 1,000

Discount on notes receivable 142

Interest revenue1,142

7-61


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.

7-62



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:

Notes Receivable 35,247Discount on Notes Receivable

15,247Land

14,000Gain on Sale of Land

6,000

($35,247 - $20,000) = $15,247

7-63

Valuation of Notes ReceivableValuation of Notes ReceivableValuation of Notes ReceivableValuation of Notes Receivable

LO 7 Explain the fair value option.

Short-Term reported at Net Realizable Value (same as

accounting for accounts receivable).

Long-Term - FASB requires companies disclose not only

their cost but also their fair value in the notes to the

financial statements.

► Fair Value Option. Companies have the option to use

fair value as the basis of measurement in the financial

statements.

7-64

Valuation of Notes ReceivableValuation of Notes ReceivableValuation of Notes ReceivableValuation of Notes Receivable

LO 7 Explain the fair value option.

Illustration (recording fair value option): Assume that

Escobar Company has notes receivable that have a fair value of

$810,000 and a carrying amount of $620,000. Escobar decides

on December 31, 2012, to use the fair value option for these

receivables. This is the first valuation of these recently acquired

receivables. At December 31, 2012, Escobar makes an

adjusting entry to record the increase in value of Notes

Receivable and to record the unrealized holding gain, as follows.

Notes Receivable 190,000

Unrealized Holding Gain or Loss—Income 190,000

7-65

Disposition of Accounts and Notes ReceivableDisposition of Accounts and Notes ReceivableDisposition of Accounts and Notes ReceivableDisposition of Accounts and Notes Receivable

Owner may transfer accounts or notes receivables to another company for cash.

Reasons:

Competition.

Sell receivables because money is tight.

Billing / collection are time-consuming and costly.

Transfer accomplished by:

1. Secured borrowing

2. Sale of receivables

LO 8 Explain accounting issues related to disposition of accounts and notes receivable.

7-66

Disposition of Accounts and Notes ReceivableDisposition of Accounts and Notes ReceivableDisposition of Accounts and Notes ReceivableDisposition of Accounts and Notes Receivable

Secured Borrowing

Illustration: March 1, 2012, Howat Mills, Inc. provides

(assigns) $700,000 of its accounts receivable to Citizens Bank

as collateral for a $500,000 note. Howat Mills continues to

collect the accounts receivable; the account debtors are not

notified of the arrangement. Citizens Bank assesses a finance

charge of 1 percent of the accounts receivable and interest on

the note of 12 percent. Howat Mills makes monthly payments to

the bank for all cash it collects on the receivables.


7-67 LO 8

Secured Borrowing - IllustrationSecured Borrowing - IllustrationSecured Borrowing - IllustrationSecured Borrowing - Illustration

Illustration 7-16

7-68

E7-13: On April 1, 2012, Prince Company assigns $500,000 of its

accounts receivable to the Third National Bank as collateral for a $300,000

loan due July 1, 2012. The assignment agreement calls for Prince Company

to continue to collect the receivables. Third National Bank assesses a

finance charge of 2% of the accounts receivable, and interest on the loan is

10% (a realistic rate of interest for a note of this type).

Secured Borrowing - ExerciseSecured Borrowing - ExerciseSecured Borrowing - ExerciseSecured Borrowing - Exercise

Instructions:

a) Prepare the April 1, 2012, journal entry for Prince Company.

b) Prepare the journal entry for Prince’s collection of $350,000 of the accounts receivable during the period from April 1, 2012, through June 30, 2012.

c) On July 1, 2012, Prince paid Third National all that was due from the loan it secured on April 1, 2012.


7-69

Exercise 7-13 continued


(a) Cash 290,000

Finance Charge 10,000

Notes Payable 300,000

($500,000 x 2% = $10,000)

(b) Cash 350,000

Accounts Receivable 350,000

(c) Notes Payable 300,000

Interest Expense 7,500

Cash 307,500

(10% x $300,000 x 3/12 = $7,500)

Secured Borrowing - ExerciseSecured Borrowing - ExerciseSecured Borrowing - ExerciseSecured Borrowing - Exercise

LO 8

7-70

Factors are finance companies or banks that buy receivables from businesses for a fee.

Sales of ReceivablesSales of ReceivablesSales of ReceivablesSales of Receivables

Illustration 7-17


7-71

Sale Without Recourse

Purchaser assumes risk of collection

Transfer is outright sale of receivable

Seller records loss on sale

Seller use Due from Factor (receivable) account to cover discounts, returns, and allowances


Sale With Recourse Seller guarantees payment to purchaser

Financial components approach used to record transfer


7-72


Illustration: Crest Textiles, Inc. factors $500,000 of accounts

receivable with Commercial Factors, Inc., on a without recourse

basis. Commercial Factors assesses a finance charge of 3 percent of

the amount of accounts receivable and retains an amount equal to 5

percent of the accounts receivable (for probable adjustments). Crest

Textiles and Commercial Factors make the following journal entries

for the receivables transferred without recourse.

Illustration 7-18


7-73

Illustration: Assume Crest Textiles sold the receivables on a with

recourse basis. Crest Textiles determines that this recourse

obligation has a fair value of $6,000. To determine the loss on the

sale of the receivables, Crest Textiles computes

the net proceeds from the sale as follows.


Illustration 7-20Loss on Sale Computation

Illustration 7-19Net ProceedsComputation

LO 8

7-74

Illustration: Prepare the journal entries for both Crest Textiles and

Commercial Factors for the receivables sold with recourse.


Cash 460,000 Due from Factor 25,000 Loss on Sale of Receivables 21,000

Accounts (Notes) Receivable 500,000

Recourse Liability 6,000Accounts Receivable 500,000

Due to Crest Textiles 25,000

Financing Revenue 15,000

Cash 460,000

Commercial Factors, Inc.

Crest Textiles, Inc.


7-75

The FASB

concluded that a

sale occurs only if

the seller surrenders

control of the

receivables to the

buyer.

Three conditions

must be met.

Secured Borrowing versus SaleSecured Borrowing versus SaleSecured Borrowing versus SaleSecured Borrowing versus Sale

Illustration 7-22


7-76

1. Segregate the different types of receivables that a company

possesses, if material.

2. Appropriately offset the valuation accounts against the proper

receivable accounts.

3. Determine that receivables classified in the current assets

section will be converted into cash within the year or the

operating cycle, whichever is longer.

4. Disclose any loss contingencies that exist on the receivables.

5. Disclose any receivables designated or pledged as collateral.

6. Disclose the nature of credit risk inherent in the receivables.

Presentation and AnalysisPresentation and AnalysisPresentation and AnalysisPresentation and Analysis

LO 9 Describe how to report and analyze receivables.

Presentation of Receivables

7-77

Analysis of Receivables

Presentation and AnalysisPresentation and AnalysisPresentation and AnalysisPresentation and Analysis

This Ratio used to:

Assess the liquidity of the receivables.

Measure the number of times, on average, a company

collects receivables during the period.

Illustration 7-24

LO 9 Describe how to report and analyze receivables.

7-78 LO 10 Explain common techniques employed to control cash.

Management faces two problems in accounting for cash transactions:

1. Establish proper controls to prevent any unauthorized transactions by officers or employees.

2. Provide information necessary to properly manage cash on hand and cash transactions.

APPENDIXAPPENDIX 7A CASH CONTROLS


To obtain desired control objectives, a company can vary the number and location of banks and the types of accounts.

General checking account

Collection float.

Lockbox accounts

Imprest bank accounts

Using Bank Accounts



To pay small amounts for miscellaneous expenses.

The Imprest Petty Cash System

Steps:

1. Record $300 transfer of funds to petty cash:

Petty Cash 300

Cash 300

2. The petty cash custodian obtains signed receipts from each individual to whom he or she pays cash.


7-81

Steps:

LO 10 Explain common techniques employed to control cash.


Office Supplies Expense 42

Postage Expense 53

Entertainment Expense 76

Cash Over and Short 2

Cash 173

3. Custodian receives a company check to replenish the fund.


7-82

Steps:



Cash 50

Petty cash 50

4. If the company decides that the amount of cash in the petty cash fund is excessive by $50, it lowers the fund balance as follows.



Physical Protection of Cash Balances

Company should

Minimize the cash on hand.

Only have on hand petty cash and current day’s receipts.

Keep funds in a vault, safe, or locked cash drawer.

Transmit each day’s receipts to the bank as soon as practicable.

Periodically prove (reconcile) the balance shown in the general ledger.



Reconciliation of Bank Balances

Schedule explaining any differences between the bank’s and the company’s records of cash.

Reconciling Items:

1. Deposits in transit.

2. Outstanding checks.

3. Bank charges and credits.

4. Bank or Depositor errors.

Time Lags



Reconciliation of Bank Balances Illustration 7A-1Bank Reconciliation Form and Content


7-86 LO 10


7-87

Illustration 7A-2


7-88

Cash 542Nov. 30

Office expense 18

Accounts receivable 220

Accounts payable

180Interest revenue

600

Illustration: Journalize the adjusting entries at November 30 on the books of Nugget Mining Company.



7-89

The reconciling item in a bank reconciliation that will result

in an adjusting entry by the depositor is:

a. outstanding checks.

b. deposit in transit.

c. a bank error.

d. bank service charges.

Review Question



7-90

APPENDIXAPPENDIX 7B IMPAIRMENT OF RECEIVABLES

LO 11 Describe the accounting for a loan impairment.

Companies evaluate their receivables to determine their ultimate collectibility.

Allowance method is appropriate when:

probable that an asset has been impaired and

amount of the loss can be reasonably estimated.

Long-term receivables such as loans that are identified as impaired, companies perform an additional impairment evaluation.

7-91 LO 11 Describe the accounting for a loan impairment.

Impairment Measurement and Reporting

Impairment loss is calculated as the difference between

the investment in the loan (generally the principal plus

accrued interest) and

the expected future cash flows discounted at the loan’s

historical effective interest rate.



Illustration: At December 31, 2011, Ogden Bank recorded an

investment of $100,000 in a loan to Carl King. The loan has an

historical effective-interest rate of 10 percent, the principal is due in full

at maturity in three years, and interest is due annually. The loan officer

performs a review of the loan’s expected future cash flow and utilizes

the present value method for measuring the required impairment loss.

Illustration 7B-1



Illustration: Computation of Impairment LossIllustration 7B-2

Recording Impairment Losses




7-94

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CopyrightCopyrightCopyrightCopyright

7-1 prepared by coby harmon university of california, santa barbara intermediate accounting

Documents

cash accounts

cash slide

reporting cash summary

regular cash

restricted cash illustration

receivable presentation

savings accounts

accounting issues