ch.5 short-term investments & receivables

Financial Accounting and Accounting Standards

Prepared byCoby HarmonUniversity of California, Santa BarbaraWestmont CollegeCopyright 2015 Pearson Education Inc. All rights reserved.

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Account for short-term investmentsLearning Objective

Copyright 2015 Pearson Education Inc. All rights reserved.

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LO 1ACCOUNT FOR SHORT-TERM INVESTMENTSReasons to Invest in Other CompaniesCompanies invest in debt or equity securities for at least two reasons:Have excess cashFor strategic reasons, such as obtaining the ability to influence another companyCopyright 2015 Pearson Education Inc. All rights reserved.

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LO 1Reasons to Invest in Other CompaniesTo be classified as a current asset, an investment must meet both of the following criteria:Must be liquid (easily convertible to cash); andInvestor must intend to either convert to cash within one year or current operating cycle, whichever is longer, or use it to pay a current liabilityOtherwise, the investment is classified as a long-term assetCopyright 2015 Pearson Education Inc. All rights reserved.

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Available-for-SaleHeld-to-MaturityLO 1Categories of Investments in Securities Debt (bonds, notes, etc.) or equity (stock) Expected to be sold within the near term through active tradingGenerate income or losses on a day-to-day basis through changes in their pricesReasons to Invest in Other CompaniesTradingCopyright 2015 Pearson Education Inc. All rights reserved.

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Held-to-MaturityLO 1Categories of Investments in Securities Held with intent of selling some time in the futureNot classified as either trading or held-to-maturityReasons to Invest in Other CompaniesTradingAvailable-for-SaleCopyright 2015 Pearson Education Inc. All rights reserved.

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Available-for-SaleLO 1Categories of Investments in Securities Debt securities (bonds, notes, or other instruments with established maturity dates) Investor has intent and ability to hold until they matureReasons to Invest in Other CompaniesTradingHeld-to-MaturityCopyright 2015 Pearson Education Inc. All rights reserved.

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LO 1Exhibit 5-1 | Categories of Investments in SecuritiesReasons to Invest in Other Companies


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LO 1Suppose that, on June 18, 2014, Apple, Inc., purchases 5,000 shares of Intel stock as a trading security. For simplicity, suppose that the Intel stock is Apple, Inc.s only short-term investment. Apple, Inc., buys the Intel stock during 2014 for $20 per share, paying $100,000 cash. Apple, Inc., records the purchase of the investment at cost:

AccountDebitCredit

Investment in Trading SecuritiesCash100,000100,000Purchase investmentJune 18Trading SecuritiesCopyright 2015 Pearson Education Inc. All rights reserved.

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LO 1Assume that, on June 30, Apple, Inc., receives a cash dividend of $4,000 from Intel. Apple, Inc., records the dividend revenue as:

AccountDebitCredit

CashDividend Revenue4,0004,000Received cash dividendJune 30Trading SecuritiesCopyright 2015 Pearson Education Inc. All rights reserved.

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If fair value has increasedIf fair value has decreased

Unrealized gainUnrealized lossUnrealized Gains and LossesTrading Securities

Trading securities are reported on the balance sheet at current fair (market) valueLO 1Copyright 2015 Pearson Education Inc. All rights reserved.

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10,000LO 1Unrealized Gains and Losses. Apple, Inc.s 2014 fiscal year ends on September 27. On this date, the fair market value of Intels stock is $110,000. Apple, Inc., adjusts the investment in Intel securities to its current fair value with the following journal entry:

AccountDebitCredit

Investment in Trading SecuritiesUnrealized Gain on Trading Securities10,00010,000Adjusted investment to fair value

Investment in Trading SecuritiesUnrealized Gain on Trading Securities (other income)

100,000

110,00010,000Copyright 2015 Pearson Education Inc. All rights reserved.

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10,000LO 1Unrealized Gains and Losses. On September 26, 2015, the end of Apple, Inc.s fiscal year, the fair value of Intel stock is $105,000. In preparation for its 2015 balance sheet, Apple, Inc., makes the following adjusting entry:

AccountDebitCredit

Unrealized Loss on Trading SecuritiesInvestment in Trading Securities5,0005,000Adjusted investment to fair value

Investment in Trading SecuritiesUnrealized Loss on Trading Securities (other income)

100,000

105,0005,0005,000Copyright 2015 Pearson Education Inc. All rights reserved.

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Sales price > carrying amountSales price < carrying amount

Realized gainRealized lossRealized Gains and LossesTrading Securities

Occurs only when the investor sells an investmentLO 1Copyright 2015 Pearson Education Inc. All rights reserved.

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LO 1Realized Gains and Losses. Suppose Apple, Inc., sells its Intel stock on June 19, 2016 for $107,000. Apple, Inc., makes the following journal entry:

AccountDebitCredit

CashInvestment in Trading Securities107,000105,000Sale of investments at a gainGain on Sale of Trading Securities2,000Copyright 2015 Pearson Education Inc. All rights reserved.

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Same as Trading SecuritiesRecording initial purchase Recording dividend revenueAdjusting to fair valueDifferent from Trading SecuritiesUnrealized gains and losses reported as other comprehensive income (loss) for each period Accumulated and reported as accumulated other comprehensive income (loss) in stockholders equityAvailable-for-Sale SecuritiesLO 1Copyright 2015 Pearson Education Inc. All rights reserved.

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Reporting on the Balance Sheet and the Income StatementExhibit 5-2LO 1


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Reporting on the Balance Sheet and the Income StatementExhibit 5-2LO 1Copyright 2015 Pearson Education Inc. All rights reserved.

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LO 1Eastern Corporation, the investment banking company, often has extra cash to invest. Suppose Eastern buys 1,000 shares of Dream, Inc., stock at $57 per share. Assume Eastern expects to hold the Dream stock for one month and then sell it. The purchase occurs on December 15, 2014. At December 31, the market price of a share of Dream stock is $58 per share.Requirements1. What type of investment is this to Eastern? Give the reason for your answer.IllustrationTradingEastern intends to sell the stock within a short timeCopyright 2015 Pearson Education Inc. All rights reserved.

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TradingEastern intends to sell the stock within a short time

LO 1Illustration. 2. Record Easterns purchase of the Dream stock on December 15 and the adjustment to market value on December 31.

AccountDebitCredit

Investment in Trading SecuritiesCash57,00057,000Dec. 15Investment in Trading SecuritiesUnrealized Gain on Trading Securities1,0001,000Dec. 31(1,000 shares x $57)[(1,000 shares x $58) - $57,000]Copyright 2015 Pearson Education Inc. All rights reserved.

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Illustration. 3. Show how Eastern would report this investment on its balance sheet at December 31 and any gain or loss on its income statement for the year ended December 31, 2014.LO 4


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Illustration. 4. Suppose Eastern did not intend to treat the Dream stock as a trading security, but still intended to treat it as a short-term investment. How do your answers for parts 1-3 change?LO 4Requirements1. What type of investment is this to Eastern? Give the reason for your answer.Available-for-SaleFacts state it is not a trading securityCopyright 2015 Pearson Education Inc. All rights reserved.

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Available-for-SaleFacts state it is not a trading security

LO 1Illustration. 2. Record Easterns purchase of the Dream stock on December 15 and the adjustment to market value on December 31.

AccountDebitCredit

Investment in AFSSCash57,00057,000Dec. 15Investment in AFSS SecuritiesUnrealized Gain on AFSS (OCI)1,0001,000Dec. 31(1,000 shares x $57)[(1,000 shares x $58) - $57,000]Copyright 2015 Pearson Education Inc. All rights reserved.

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Illustration. 3. Show how Eastern would report this investment on its balance sheet at December 31 and any gain or loss on its income statement for the year ended December 31, 2014.LO 4


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Ethics and the Current RatioThere are several strategies for increasing the current ratioLaunch a major sales effortPay off some current liabilities before year-endReclassifying investments as current assets

LO 1Copyright 2015 Pearson Education Inc. All rights reserved.

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Apply GAAP for proper revenue recognitionLearning Objective


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LO 2APPLY GAAP FOR PROPER REVENUE RECOGNITIONRevenue RecognitionWhen performance obligation satisfiedGoods transferred or services provided to customerPrice is fixed or determinableCollection reasonably assuredRevenue is cash value of goods or services transferred Impacted by shipping terms and payment incentives offeredCopyright 2015 Pearson Education Inc. All rights reserved.

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LO 2Assume Apple, Inc., delivers a truckload of iPhones to an AT&T Wireless warehouse in Florida. On the truck are 30,000 iPhone 6s, each of which Apple, Inc., sells to AT&T Wireless for $100 on account. Apple, Inc., records the following:

AccountDebitCredit

Accounts ReceivableSales Revenue3,000,0003,000,000(30,000 x $100)APPLY GAAP FOR PROPER REVENUE RECOGNITIONCopyright 2015 Pearson Education Inc. All rights reserved.

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LO 2Shipping TermsFOB (free on board) shipping pointFOB (free on board) destinationShipping TermsAt the point when the goods leave the sellers shipping dockAt the point of delivery to the customerOwnership Changes Hands and Revenue RecognizedCopyright 2015 Pearson Education Inc. All rights reserved.

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LO 2Discounts offered for early paymentTypical incentive Sales Discounts2% discount if paid within 10 daysFull amount due in 30 days2/10, n/30Copyright 2015 Pearson Education Inc. All rights reserved.

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LO 2Discounts offered for early paymentTypical incentive 2/10, n/30If Apple, Inc. offered AT&T Wireless terms of 2/10, n/30 and AT&T pays the invoice within 10 days, it is entitled to a $60,000 discount ($3,000,000 sale times 2%). The collection of this receivable is recorded as follows:

AccountDebitCredit

CashSales Discount2,940,00060,000Sales DiscountsAccounts Receivable3,000,000Copyright 2015 Pearson Education Inc. All rights reserved.

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LO 2Right to return unsatisfactory or damaged merchandise to the retailer for a refund or exchangeSuppose that of the 30,000 iPhones Apple, Inc., sells to AT&T Wireless, 100 are returned (or Apple, Inc., grants AT&T Wireless an allowance) because they are damaged in shipment. Apple, Inc., would record the following entry:

AccountDebitCredit

Sales Returns and AllowancesAccounts Receivable10,00010,000Sales Returns and AllowancesCopyright 2015 Pearson Education Inc. All rights reserved.

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Account for and control accounts receivableLearning Objective


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LO 3ACCOUNT FOR AND CONTROL ACCOUNTS RECEIVABLETypes of ReceivablesThird most liquid assetMonetary claims against othersAcquired mainly by:Selling goods and services (accounts receivable)Lending money (notes receivable)Copyright 2015 Pearson Education Inc. All rights reserved.

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LO 3ACCOUNT FOR AND CONTROL ACCOUNTS RECEIVABLEEntries to record receivables


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LO 3ACCOUNT FOR AND CONTROL ACCOUNTS RECEIVABLEAccounts ReceivableAmounts collectible from customers from the sale of goods and servicesSometimes called trade receivablesThe Accounts Receivable account serves as a control Summarizes total receivables from all customersSubsidiary ledger kept with a separate account for each customerCopyright 2015 Pearson Education Inc. All rights reserved.

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LO 3ACCOUNT FOR AND CONTROL ACCOUNTS RECEIVABLEAccounts Receivable

Bal.9,000Brown

Bal.5,000

FedEx

Bal.1,000

Moodys

Bal.3,000

GENERAL LEDGERACCOUNTS RECEIVABLE SUBSIDIARY LEDGER

Total $9,000Copyright 2015 Pearson Education Inc. All rights reserved.

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LO 3ACCOUNT FOR AND CONTROL ACCOUNTS RECEIVABLENotes ReceivableBorrower signs a written promise to pay the lender A definite sum plus interest At the maturity dateMay require the borrower to pledge securityCopyright 2015 Pearson Education Inc. All rights reserved.

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LO 3Other ReceivablesMiscellaneous category for all receivables other than accounts receivable and notes receivable ExamplesInterest receivableAdvances to employeesACCOUNT FOR AND CONTROL ACCOUNTS RECEIVABLECopyright 2015 Pearson Education Inc. All rights reserved.

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LO 3Internal Controls Over Cash Collections on AccountSeparate cash-handling and cash accounting dutiesBookkeeper shouldNot handle cashRecord amounts from remittance advicesSeparate employee should open incoming mail and make depositLockbox systemCopyright 2015 Pearson Education Inc. All rights reserved.

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LO 3

IssuesPlan of ActionWhat are the benefits and the costs ofextending credit to customers?BenefitIncrease in sales. CostRisk of not collecting.Run a credit check on prospectivecustomers.Extend credit only to creditworthy customers.Managing ReceivablesDesign the internal control system toseparate duties.Separate cash-handling and accounting duties to keep employees from stealing the cash collected from customers.Keep a close eye on customer paymenthabits. Send second and third statements to slow-paying customers, if necessary.Pursue collection from customers to maximize cash flow.Copyright 2015 Pearson Education Inc. All rights reserved.

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LO 3IssuesPlan of ActionMeasure and report receivables on the balance sheet at net realizable value, the amount you expectto collect. This is the appropriate amount to report for receivables.Report receivables at NRV:Balance sheet ReceivablesMeasure and report the expense associated with failure to collect receivables. This expense is calleduncollectible-account expense and is reported on the income statement.

Accounting for ReceivablesIssuesPlan of ActionMeasure and report receivables on the balance sheet at net realizable value, the amount you expect to collect. This is the appropriateamount to report for receivables.Measure and report the expense associated with failure to collect receivables. This expense is calleduncollectible-account expense and is reported on the income statement.Report receivables at NRV:Balance sheetReceivables$1,000Less: Allowance for uncollectibleaccounts(80)Receivables, net$ 920

Measure the expense of not collectingfrom customers:Income statementSales (or service) revenue$8,000Expenses:Uncollectible-account expense190Copyright 2015 Pearson Education Inc. All rights reserved.

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Evaluate collectibility using the allowance for uncollectible accountsLearning Objective


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LO 4EVALUATE COLLECTIBILITY USING THE ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTSBenefits of Selling on CreditCost of Selling on CreditCustomers can buy on credit, so sales and profits increaseCompany cannot collect from some customersRecorded as uncollectible-account expenseCopyright 2015 Pearson Education Inc. All rights reserved.

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LO 4Allowance MethodRecords collection losses based on companys collection experienceRecords Uncollectible-Account Expense (Income Statement)Sets up Allowance for Uncollectible AccountsContra-account to Accounts ReceivableAmount of receivables business expects to not collectCopyright 2015 Pearson Education Inc. All rights reserved.

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Allowance MethodLO 4Copyright 2015 Pearson Education Inc. All rights reserved.

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Allowance MethodAlternate PresentationLO 4Copyright 2015 Pearson Education Inc. All rights reserved.

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Percent-of-Sales MethodAging-of-Receivables Method

Income Statement ApproachBalance Sheet ApproachTwo basic ways to estimate uncollectibles:

LO 4Allowance MethodCopyright 2015 Pearson Education Inc. All rights reserved.

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Percent-of-Sales Method

Income Statement ApproachTwo basic ways to estimate uncollectibles:LO 4Allowance MethodEstimate % UncollectibleSales RevenueUncollectible- Account ExpenseX=Copyright 2015 Pearson Education Inc. All rights reserved.

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LO 4Percent-of-Sales. Assume it is September 29, 2012, and Apple, Inc.s accounts have these balances before the year-end adjustments (amounts in millions):

Accounts ReceivableAllowance for Uncollectible Accounts

11,028

10

Suppose Apple, Inc.s credit department estimates that uncollectible-account expense is 0.0005 (1/20 of 1%) of total revenues, which are $156,508 million. The entry that records uncollectible-account expense for the year also updates the allowance as follows (using Apple, Inc., figures).Copyright 2015 Pearson Education Inc. All rights reserved.

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LO 4Percent-of-Sales. Suppose Apple, Inc.s credit department estimates that uncollectible-account expense is 0.0005 (1/20 of 1%) of total revenues, which are $156,508 million. The entry that records uncollectible-account expense for the year also updates the allowance as follows (using Apple, Inc., figures).

AccountDebitCredit

Uncollectible-Account ExpenseAllowance for Uncollectible Accounts7878Sep. 29Uncollectible-Account Expense =$156,508 x .0005 = $78Copyright 2015 Pearson Education Inc. All rights reserved.

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LO 4Percent-of-Sales.


11,028

10

Adj78

Bal88

Net accounts receivable, $10,940

Uncollectible-Account Expense78

Employs the expense recognition (matching) conceptCopyright 2015 Pearson Education Inc. All rights reserved.

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Aging-of-Receivables Method

Balance SheetApproachTwo basic ways to estimate uncollectibles:LO 4Allowance MethodEstimate % UncollectibleAccountsReceivableAllowance for Uncollectible AccountsX=Copyright 2015 Pearson Education Inc. All rights reserved.

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LO 4Aging-of-Receivables. Assume it is September 29, 2012, and Apple, Inc.s receivables accounts show the following before the year-end adjustment (amounts in millions):


11,028

10

Apple, Inc.s accounts receivable aging schedule shows that the company will not collect $98.Copyright 2015 Pearson Education Inc. All rights reserved.

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LO 4

* Computations are rounded

Exhibit 5-3 | Aging Accounts Receivable of Apple, Inc.Aging-of-Receivables. Copyright 2015 Pearson Education Inc. All rights reserved.

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LO 4

AccountDebitCredit

Uncollectible-Account ExpenseAllowance for Uncollectible Accounts8888Sep. 29Allowance for Uncollectible Accounts$98 - $10 = $88Aging-of-Receivables. The aging method will bring the balance of the allowance account ($10) to the needed amount as determined by the aging schedule ($98). To update the allowance, Apple, Inc., would make the following adjusting entry at year-end:=Copyright 2015 Pearson Education Inc. All rights reserved.

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LO 4


11,028

10

Adj88

Bal98

Net accounts receivable, $10,930

Uncollectible-Account Expense88

Aging-of-Receivables. Copyright 2015 Pearson Education Inc. All rights reserved.

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LO 4

Accounts ReceivableRS9

Accounts Receivable, Net = $10,930Write Off Uncollectible Accounts. Assume that at the beginning of fiscal 2013, Apple, Inc., had these accounts receivable (amounts in millions):

Accounts ReceivableOther11,016

Allowance for Uncollectible Accounts98

Accounts ReceivableTM

Total Accounts Receivable = $11,0283Copyright 2015 Pearson Education Inc. All rights reserved.

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Write Off Uncollectible Accounts. Early in fiscal 2013, Apple, Inc.s credit department determines that Apple, Inc., cannot collect from RS. Apple, Inc., then writes off this receivable with the following entry:LO 4

AccountDebitCredit

Allowance for Uncollectible AccountsAccounts ReceivableRS99Jan. 31

+ 9- 9Copyright 2015 Pearson Education Inc. All rights reserved.

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Write Off Uncollectible Accounts. Early in fiscal 2013, Apple, Inc.s credit department determines that Apple, Inc., cannot collect from RS. Apple, Inc., then writes off this receivable with the following entry:LO 4

AccountDebitCredit

Allowance for Uncollectible AccountsAccounts ReceivableRS99Jan. 31

Accounts ReceivableRS


89

0Copyright 2015 Pearson Education Inc. All rights reserved.

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LO 4

Accounts ReceivableRS

Accounts Receivable, Net = $10,930Write Off Uncollectible Accounts. After the write-off, Apple, Inc.s accounts show these amounts:

Accounts ReceivableOther11,016


Accounts ReceivableTM

Total Accounts Receivable = $11,0199399

89Copyright 2015 Pearson Education Inc. All rights reserved.

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Impact of Write-OffLO 4


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LO 4Allowance MethodExhibit 5-4 | Comparing the Percent-of-Sales and Aging Methods for Estimating Uncollectible Accounts


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IllustrationLO 4On November 30, High Peaks Party Planners had a $34,000 balance in Accounts Receivable and a $3,000 credit balance in Allowance for Uncollectible Accounts. During December, High Peaks Party Planners made credit sales of $159,000. December collections on account were $130,000, and write-offs of uncollectible receivables totaled $2,700. Uncollectible-accounts expense is estimated as 1% of credit sales.RequirementsJournalize sales, collections, write-offs of uncollectibles, and uncollectible-account expense by the allowance method during December. Explanations are not required.Show how High Peaks Party Planners will report accounts receivable and net sales on its December 31 balance sheet and income statement for the month ended December 31.Copyright 2015 Pearson Education Inc. All rights reserved.

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Illustration. During December, High Peaks Party Planners made credit sales of $159,000. December collections on account were $130,000, and write-offs of uncollectible receivables totaled $2,700.LO 4

AccountDebitCredit

Accounts ReceivableSales Revenue159,000159,000DecCashAccounts Receivable130,000130,000Allowance for Uncollectible AccountsAccounts Receivable2,7002,700DecDecCopyright 2015 Pearson Education Inc. All rights reserved.

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Illustration. High Peaks made credit sales of $159,000. Uncollectible-accounts expense is estimated as 1% of credit sales.LO 4

AccountDebitCredit

Uncollectible-Account ExpenseAllowance for Uncollectible Accounts1,5901,590Dec

Accounts Receivable

Allowance for Uncollectible Accounts34,000

159,000Bal.60,300

2,700130,0002,7001,5903,000Bal.1,890Accounts Receivable, Net = $58,410


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Illustration. Show how High Peaks Party Planners will report accounts receivable and net sales on its December 31 balance sheet and income statement for the month ended December 31.LO 4


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LO 4Direct Write-Off MethodRecord expense when specific customers account proves to be uncollectibleNot GAAPNo allowance for uncollectiblesReceivables (assets) may be overstatedFails to recognize expense in same period in which sales revenue is earnedRequired method for federal income tax purposesCopyright 2015 Pearson Education Inc. All rights reserved.

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The journal entry to record the write off of the RS receivable using the direct write-off method is as follows:LO 4

AccountDebitCredit

Uncollectible-Account ExpenseAccounts ReceivableRS99Jan. 31Direct Write-Off MethodCopyright 2015 Pearson Education Inc. All rights reserved.

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LO 4Computing Cash Collections from Customers

AccountDebitCredit

Accounts ReceivableSales (or Service) Revenue1,8001,800

Accounts Receivable

Beginning balance200Sales on account1,800

Record revenue on accountCopyright 2015 Pearson Education Inc. All rights reserved.

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AccountDebitCredit

Allowance for Uncollectible AccountsAccounts Receivable100100

Accounts Receivable

Beginning balance200Write-off of uncollectible100Sales on account1,800

Write-off of uncollectible accountCopyright 2015 Pearson Education Inc. All rights reserved.

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AccountDebitCredit

CashAccounts Receivable1,5001,500

Accounts Receivable

Beginning balance200Write-off of uncollectible100Sales on account1,800Collections from customers1,500

Ending balance400Record collection on accountCopyright 2015 Pearson Education Inc. All rights reserved.

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Accounts Receivable

Beginning balance200Write-off of uncollectible100Sales on account1,800Collections from customers1,500

Ending balance400Receivables typically hold only five itemsCan solve for Collections from Customers when sales, write-offs, beginning and ending balances are knownCollections from customersCopyright 2015 Pearson Education Inc. All rights reserved.

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Account for notes receivableLearning Objective


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LO 5ACCOUNT FOR NOTES RECEIVABLETermsCreditorParty to whom money is owed; lenderDebtorParty that borrowed and owes money; maker, borrowerInterest

Cost of borrowing money; stated as annual percentage rateMaturity dateDate when debtor must pay noteMaturity valueSum of principal and interestPrincipalAmount borrowed by debtorTerm

Length of time from when note was signed to when payment must be madeClassified as current or long-termCopyright 2015 Pearson Education Inc. All rights reserved.

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LO 5ACCOUNT FOR NOTES RECEIVABLEExhibit 5-5 | Promissory NotePrincipal


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LO 5ACCOUNT FOR NOTES RECEIVABLEExhibit 5-5 | Promissory Note

Interest period starts


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LO 5ACCOUNT FOR NOTES RECEIVABLEExhibit 5-5 | Promissory NotePayee (Creditor)


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Maturity date


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Interest rate


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Maker (Debtor)


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LO 5Consider the promissory note in Exhibit 5-5. After Lauren Holland signs the note, Continental Bank gives her $1,000 cash. The bank makes the following entry to record the loan.

AccountDebitCreditAug 31

Notes ReceivableL.HollandCash1,0001,000Accounting for Notes ReceivableMade a loanCopyright 2015 Pearson Education Inc. All rights reserved.

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Principal x Interest Rate x Time = Amount of InterestLO 5Continental Bank earns interest revenue during September, October, November, and December. At December 31, 2014, the bank accrues 9% interest revenue for four months:

AccountDebitCreditDec 31

Interest ReceivableInterest Revenue3030Accounting for Notes ReceivableAccrued interest$1,000.094/12$30Calculation of Accrued Interest:Copyright 2015 Pearson Education Inc. All rights reserved.

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LO 5Continental Bank reports these amounts in its financial statements at December 31, 2014:Accounting for Notes Receivable


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LO 5The bank collects the note on February 28, 2015, and records the following:

AccountDebitCreditFeb 28

CashNotes ReceivableL.Holland1,0451,000Accounting for Notes Receivable

Interest Receivable30Interest Revenue15Interest Revenue for January and February = $1,000 x .09 x 2/12 = $15Copyright 2015 Pearson Education Inc. All rights reserved.

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LO 5InterestRates usually expressed as an annual percentFraction used for time periods less than an yearMonths/12Days/365Accounting for Notes ReceivableCopyright 2015 Pearson Education Inc. All rights reserved.

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Show how to speed up cash flow from receivablesLearning Objective


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LO 6Strategies to shorten credit cycle:Sales discountsInterest on past due customer accountsEffective credit and collection proceduresEmphasize credit card and bankcard salesSHOW HOW TO SPEED UP CASH FLOW FROM RECEIVABLESCopyright 2015 Pearson Education Inc. All rights reserved.

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LO 6Apple, Inc., sells a computer and peripheral devices for $5,000 at one of its stores, and the customer pays with a VISA card. VISA charges companies a 2% processing fee.

AccountDebitCredit

CashCredit Card Discount Expense4,900100Credit Card or Bankcard SalesCredit card fee =$5,000 x 2% = $100Sales Revenue5,000Copyright 2015 Pearson Education Inc. All rights reserved.

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LO 6Company sells receivables to a factorFactor pays discounted priceBenefits company with immediate receipt of cashExpensive and loss of control over collection processUsed by companies withWeak or insufficient credit historySignificant amount of debtSelling (Factoring) ReceivablesCopyright 2015 Pearson Education Inc. All rights reserved.

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LO 6To illustrate, suppose a company wishes to speed up cash flow and therefore sells $100,000 of accounts receivable, receiving cash of $95,000. The company would record the sale of the receivables:

AccountDebitCredit

CashFinancing Expense95,0005,000Accounts Receivable100,000Selling (Factoring) ReceivablesCopyright 2015 Pearson Education Inc. All rights reserved.

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Evaluate liquidity using two new ratiosLearning Objective


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LO 7Quick (Acid-Test) Ratio

Higher the ratio, the easier it is to pay current liabilitiesApple, Inc.s quick ratio is 1.04 $1.04 of quick assets to pay each $1 of current liabilitiesRatio value is considered excellent What constitutes an acceptable quick ratio depends on the industryCopyright 2015 Pearson Education Inc. All rights reserved.

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LO 7Days Sales in ReceivablesDays Sales in Receivables1. Average daily sales =Net sales365 days2. Days sales in receivables =Average net receivables *Average daily salesBeginning net receivables + Ending net receivables2* Average net receivables=Copyright 2015 Pearson Education Inc. All rights reserved.

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IllustrationLO 7Arcadia, Inc., reported the following at December 31, 2014, and 2013:


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Cash and Cash EquivalentsMarketable securitiesNet current receivables$6,000$22,000$56,000LO 7Total current liabilities++=$15,000 + $107,000.69Fairly weak

Compute Arcadias quick (acid-test) ratioCopyright 2015 Pearson Education Inc. All rights reserved.

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LO 7

Compute Arcadias days sales in receivables Copyright 2015 Pearson Education Inc. All rights reserved.

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LO 7Days Sales in Receivables1. Average daily sales =Net sales365 days2. Days sales in receivables =Average net receivables *Average daily salesIllustration==$728,000365 days=$1,995($56,000 + $70,000) / 2$1,995=31.6 days31.6 days sales in receivables is within an acceptable range relative to credit terms of net 30 days.Copyright 2015 Pearson Education Inc. All rights reserved.

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This work is protected by United States copyright law and is provided solely for the use of instructors in teaching their courses and assessing student learning. Dissemination or sale of any part of this work (including on the World Wide Web) will destroy the integrity of the work and is not permitted. The work and materials from it should never be made available to students except by instructors using the accompanying text in their classes. All recipients of this work are expected to abide by these restrictions and to honor the intended pedagogical purposes and the needs of other instructors who rely on these materials.

CopyrightCopyright 2015 Pearson Education Inc. All rights reserved.

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Sheet1BALANCE SHEET (Partial)Current assets:Investment in trading securities$ 58,000

INCOME STATEMENT (Partial)Other revenue and gains:Unrealized gain on trading securities$ 1,000

Sheet1BALANCE SHEET (Partial)Current assets:Investment in AFSS$ 58,000

Stockholders' equity:Accumulated OCI$ 1,000

STATEMENT OF COMPREHENSIVE INCOMEOther Comprehensive Income:Unrealized gain on Investment in AFFS$ 1,000

Sheet1ABC CorporationBalance Sheet (partial)Current Assets:Cash$ 330Accounts receivable500Less: Allowance for uncollectible accounts(25)475Inventory812Prepaid expense40Total current assets1,657

Sheet1ABC CorporationBalance Sheet (partial)Current Assets:Cash$ 330Accounts receivable, net of 25 allowance475Inventory812Prepaid expense40Total current assets1,657

Sheet1Partial Balance Sheet (Before Write Off)Current Assets:Accounts receivable11,028Less: Allowance for uncollectible accounts(98)Accounts receivable, net10,930Partial Balance Sheet (After Write Off)Current Assets:Accounts receivable11,019Less: Allowance for uncollectible accounts(89)Accounts receivable, net10,930

Sheet1Partial Balance Sheet (After Write Off)Current Assets:Accounts receivable11,019Less: Allowance for uncollectible accounts(89)Accounts receivable, net10,930Partial Balance Sheet (After Write Off)Current Assets:Accounts receivable11,010Less: Allowance for uncollectible accounts(80)Accounts receivable, net10,930

Sheet1BALANCE SHEET (Partial)Current assets:Accounts receivable$ 60,300Less: Allowance for uncollectible accounts(1,890)Accounts receivable, net58,410

INCOME STATEMENT (Partial)Net sales$ 159,000

ch.5 short-term investments & receivables

Documents

pearson education

equity securities

securities debt bonds

trading securitiescopyright

categories of investments

shortterm investment

trading securitiescash100

trading security