Professional Documents
Culture Documents
AACSB Tags
Exercises (cont.)
AACSB Tags
71
72
73
74
75
76
77
78
79
710
711
712
713
714
715
716
717
718
719
720
Reflective thinking
Reflective thinking
Reflective thinking
Reflective thinking, Communications
Diversity, Reflective thinking
Reflective thinking
Reflective thinking
Reflective thinking
Reflective thinking, Communications
Reflective thinking
Diversity, Reflective thinking
Reflective thinking
Reflective thinking
Diversity, Reflective thinking
Reflective thinking, Communications
Reflective thinking
Reflective thinking
Reflective thinking
Reflective thinking, Communications
Diversity, Reflective thinking
73
74
75
76
77
78
79
710
711
712
713
714
715
716
717
718
719
720
721
722
723
724
725
726
727
728
729
730
731
Communications
Analytic
Analytic
Analytic
Analytic
Analytic
Communications
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Reflective thinking
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Brief Exercises
71
72
73
74
75
76
77
78
79
710
711
712
713
714
715
716
717
Reflective thinking
Reflective thinking
Reflective thinking
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Reflective thinking
Analytic
Analytic
Analytic
Exercises
71
72
Analytic
Analytic
CPA/CMA cont.
AACSB Tags
CPA/CMA
1
2
3
4
5
6
7
8
9
10
1
2
Analytic
Analytic
Reflective thinking
Analytic
Analytic
Analytic
Analytic
Diversity, Analytic
Diversity, Reflective thinking
Diversity, Reflective thinking
Reflective thinking
Analytic
The McGraw-Hill Companies, Inc., 2013
71
Analytic
Problems
71
72
73
74
75
76
77
78
79
710
711
712
713
714
715
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Diversity, Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Management must document the companys internal controls and assess their
adequacy. The auditors must provide an opinion on managements assessment. The
Public Company Accounting Oversight Boards Auditing Standard No. 5, which
supersedes Auditing Standard No. 2, further requires the auditor to express its own
opinion on whether the company has maintained effective internal control over
financial reporting.
Question 74
Yes, IFRS and U.S. GAAP differ in how bank overdrafts are treated. Under IFRS,
overdrafts can be offset against other cash accounts. Under U.S. GAAP, overdrafts
must be treated as liabilities.
Solutions Manual, Vol.1, Chapter 7
Trade discounts are reductions below a list price and are used to establish a final
price for a transaction. The reduced price is the starting point for initial valuation of
the transaction. A cash discount is a reduction, not in the selling price of a good or
service, but in the amount to be paid by a credit customer if the receivable is paid
within a specified period of time.
Question 77
The gross method of accounting for cash discounts considers discounts not taken
as part of sales revenue. The net method considers discounts not taken as interest
revenue, because they are viewed as compensation to the seller for allowing the buyer
to defer payment.
Question 78
When returns are material and a company can make reasonable estimates of
future returns, an allowance for sales returns is established. At a financial reporting
date, this provides an estimate of the amount of future returns for prior sales, and
involves a debit to sales returns and a credit to allowance for sales returns for the
estimated amount. Allowance for sales returns is a contra account to accounts
receivable. When returns actually occur in the future reporting period, the allowance
for sales returns is debited.
Question 79
Even when specific customer accounts havent been proven uncollectible by the
end of the reporting period, bad debt expense properly should be matched with sales
revenue on the income statement for that period. Likewise, since its not expected that
all accounts receivable will be collected, the balance sheet should report only the
expected net realizable value of that asset. So, to record the bad debt expense and the
related reduction of accounts receivable when the amount hasnt been determined, an
estimate is needed. In an adjusting entry, we record bad debt expense and reduce
accounts receivable for an estimate of the amount that eventually will prove
uncollectible.
If uncollectible accounts are immaterial or not anticipated, or its not possible to
reliably estimate uncollectible accounts, an allowance for uncollectible accounts is not
appropriate. In these few cases, any bad debts that do arise simply are written off as
bad debt expense at the time they prove uncollectible.
The income statement approach to estimating bad debts determines bad debt
expense directly by relating uncollectible amounts to credit sales. The balance sheet
approach to estimating future bad debts indirectly determines bad debt expense by
estimating the net realizable value for accounts receivable that exist at the end of the
period. In other words, the allowance for uncollectible accounts at the end of the
period is estimated and then bad debt expense is determined by adjusting the
allowance account to reflect net realizable value.
Question 711
U.S. GAAP focuses on whether control of assets has shifted from the transferor
to the transferee. In contrast, IFRS focuses on whether the company has transferred
substantially all of the risks and rewards of ownership, as well as whether the
company has transferred control. Under IFRS:
1. If the company transfers substantially all of the risks and rewards of
ownership, the transfer is treated as a sale.
2. If the company retains substantially all of the risks and rewards of
ownership, the transfer is treated as a secured borrowing.
3. If neither conditions 1 or 2 hold, the company accounts for the transaction
as a sale if it has transferred control, and as a secured borrowing if it has
retained control.
When a note is discounted, a financial institution, usually a bank, accepts the note
and gives the seller cash equal to the maturity value of the note reduced by a discount.
The discount is computed by applying a discount rate to the maturity value and
represents the financing fee the bank charges for the transaction.
The four-step process used to account for a discounted note receivable is as
follows:
1. Accrue any interest revenue earned since the last payment date (or date of the
note).
2. Compute the maturity value.
3. Subtract the discount the bank requires (discount rate times maturity value
times the remaining length of time from date of discounting to maturity date)
from the maturity value to compute the proceeds to be received from the bank
(maturity value less discount).
4. Compute the difference between the proceeds and the book value of the note
and related interest receivable. The treatment of the difference will depend on
whether the discounting is accounted for as a sale or as a loan. If its a sale,
the difference is recorded as a loss or gain on the sale; if its a loan, the
difference is viewed as interest expense or interest revenue.
Question 716
The items necessary to adjust the bank balance might include deposits
outstanding (including undeposited cash), outstanding checks, and any bank errors
discovered during the reconciliation process. The items necessary to adjust the book
balance might include collections made by the bank on the companys behalf, service
and other charges made by the bank, NSF (nonsufficient funds) check charges, and
any company errors discovered during the reconciliation process.
No. Under both U.S. GAAP and IFRS, a company can recognize in net income
the recovery of impairment losses of accounts and notes receivable.
BRIEF EXERCISES
Brief Exercise 71
The company could improve its internal control procedure for cash receipts by
segregating the duties of recordkeeping and the handling of cash. Jim Seymour,
responsible for recordkeeping, should not also be responsible for depositing customer
checks.
Brief Exercise 72
Under IFRS the cash balance would be $245,000, because they could offset the
two accounts. Under U.S. GAAP the balance would be $250,000, because they could
not offset the two accounts.
Brief Exercise 73
All of these items would be included as cash and cash equivalents except the U.S.
Treasury bills, which would be included in the current asset section of the balance
sheet as short-term investments.
Brief Exercise 74
Income before tax in 2014 will be reduced by $2,500, the amount of the cash
discounts.
$25,000 x 10 = $250,000 x 1% = $2,500
Brief Exercise 75
Income before tax in 2013 will be reduced by $2,500, the anticipated amount of
cash discounts.
$25,000 x 10 = $250,000 x 1% = $2,500
Brief Exercise 76
Estimated returns = $10,600,000 x 8% = $848,000
Less: Actual returns
(720,000)
Remaining estimated returns
$128,000
Sales returns.................................................................... 128,000
...........................................Allowance for sales returns
...........................................................................128,000
Inventoryestimated returns ........................................ 76,800
...........................................Cost of goods sold ($128,000 x 60%)
.............................................................................76,800
Brief Exercise 77
Singletary cannot combine the two types of receivables under U.S. GAAP, as the
director is a related party. Under IFRS a combined presentation would be
allowed.
Brief Exercise 78
(1) Bad debt expense = $1,500,000 x 2% = $30,000
(2) Allowance for uncollectible accounts:
Beginning balance
$25,000
Add: Bad debt expense
30,000
Deduct: Write-offs
(16,000)
Ending balance
$39,000
Brief Exercise 79
(1)Allowance for uncollectible accounts:
Beginning balance
$ 25,000
Deduct: Write-offs
(16,000)
Required allowance
(33,400)*
Bad debt expense
$24,400
(2) Required allowance = $334,000** x 10% = $33,400*
Accounts receivable:
Beginning balance
Add: Credit sales
Deduct: Cash collections
Write-offs
Ending balance
$ 300,000
1,500,000
(1,450,000)
(16,000)
$ 334,000**
$30,000
40,000
(38,000)
$32,000
$8,200,000
(7,950,000)
(32,000)*
(2,000,000)
$1,782,000
$ 85,000
8,000
(100,000)
$ (7,000)
85,000
7,000
8,000
Face amount
Interest to maturity ($30,000 x 6% x 3/12)
Maturity value
Discount ($30,450 x 8% x 2/12)
Cash proceeds
365 = 68 days
5.33
EXERCISES
Exercise 71
Requirement 1
Cash and cash equivalents includes:
a. Balance in checking account
Balance in savings account
b. Undeposited customer checks
c. Currency and coins on hand
f. U.S. treasury bills with 2-month maturity
Total
$13,500
22,100
5,200
580
15,000
$56,380
Requirement 2
d. The $400,000 savings account will be used for future plant expansion and
therefore should be classified as a noncurrent asset, either in other assets or
investments.
e. The $20,000 in the checking account is a compensating balance for a longterm loan and should be classified as a noncurrent asset, either in other
assets or investments.
f. The $20,000 in 7-month treasury bills should be classified as a current asset
along with other temporary investments.
Exercise 72
Requirement 1
Cash and cash equivalents includes:
Cash in bankchecking account
U.S. treasury bills
Cash on hand
Undeposited customer checks
Total
The McGraw-Hill Companies, Inc., 2013
714
$22,500
5,000
1,350
1,840
$30,690
Requirement 2
The $10,000 in 6-month treasury bills should be classified as a current asset
along with other temporary investments.
Exercise 73
The FASB Accounting Standards Codification represents the single source of
authoritative U.S. generally accepted accounting principles. The specific citation for
each of the following items is:
1. Accounts receivables from related parties should be shown separately from
trade receivables: FASB ACS 21010S991: Balance SheetOverallSEC
MaterialsGeneral. Also appears under ACS 310104513: Receivables
OverallOther Presentation MattersReceivables from Officers, Employees or
Affiliates, and under ASC 85010502: "Related Party DisclosuresOverall
Disclosure"
2. Definition of Cash Equivalents: FASB ACS 3051020: Cash and Cash
EquivalentsOverallGlossary.
3. Notes exchanged for cash are valued at the cash proceeds: FASB ACS 31010
302: ReceivablesOverallInitial MeasurementNotes Exchanged for
Cash.
4. The two conditions that must be met to accrue a loss on an account
receivable: FASB ASC 31010358: "ReceivablesOverallSubsequent
Measurement."
Exercise 74
Requirement 1: U.S. GAAP
Current Assets:
Cash
$175,000
Current Liabilities:
Bank overdrafts
$ 15,000
Requirement 2: IFRS
The McGraw-Hill Companies, Inc., 2013
716
Current Assets:
Cash
$160,000
Exercise 75
Requirement 1
Sales price = 100 units x $600 = $60,000 x 70% = $42,000
November 17, 2013
Accounts receivable........................................................
..................................................................Sales revenue
.............................................................................42,000
November 26, 2013
Cash (98% x $42,000)........................................................
Sales discounts (2% x $42,000).........................................
........................................................Accounts receivable
.............................................................................42,000
42,000
41,160
840
Requirement 2
November 17, 2013
Accounts receivable........................................................
..................................................................Sales revenue
.............................................................................42,000
December 15, 2013
Cash................................................................................
........................................................Accounts receivable
.............................................................................42,000
42,000
42,000
Exercise 75 (concluded)
Requirement 3
Requirement 1, using the net method:
November 17, 2013
Accounts receivable........................................................ 41,160
.............................................................Sales revenue (98% x $42,000)
.............................................................................41,160
November 26, 2013
Cash................................................................................
........................................................Accounts receivable
.............................................................................41,160
41,160
42,000
Exercise 76
Requirement 1
Sales price = 1,000 units x $50 = $50,000
July 15, 2013
Accounts receivable........................................................
..................................................................Sales revenue
.............................................................................50,000
The McGraw-Hill Companies, Inc., 2013
718
50,000
49,000
1,000
Requirement 2
July 15, 2013
Accounts receivable........................................................
..................................................................Sales revenue
.............................................................................50,000
Aug. 15, 2013
Cash................................................................................
........................................................Accounts receivable
.............................................................................50,000
50,000
50,000
Exercise 77
Requirement 1
July 15, 2013
Accounts receivable........................................................ 49,000
.............................................................Sales revenue (98% x $50,000)
.............................................................................49,000
July 23, 2013
Cash................................................................................
........................................................Accounts receivable
.............................................................................49,000
49,000
Requirement 2
July 15, 2013
Accounts receivable........................................................ 49,000
.............................................................Sales revenue (98% x $50,000)
.............................................................................49,000
August 15, 2013
Cash................................................................................
50,000
........................................................Accounts receivable
.............................................................................49,000
...............................................................Interest revenue
...............................................................................1,000
Exercise 78
Requirement 1
Estimated returns = 4% x $11,500,000 =
Less: Actual returns
Remaining estimated returns
$460,000
(450,000)
$10,000
Exercise 78 (continued)
Requirement 2
Beginning balance in allowance account
Add: Year-end estimate
Less: Actual returns
Ending balance in allowance account
$300,000
460,000
(450,000)
$310,000
Exercise 79
Requirement 1
The specific citation that specifies these disclosure policies is FASB ACS 3101050
9: ReceivablesOverallDisclosureAccounting Policies for Credit Losses and
Doubtful Accounts.
Requirement 2
FASB ACS 31010509 reads as follows:
In addition to disclosures required by this Subsection and Subtopic 450-20, an entity
shall disclose a description of the accounting policies and methodology the entity used
to estimate its allowance for loan losses, allowance for doubtful accounts, and any
liability for off-balance-sheet credit losses and related charges for loan, trade
receivable or other credit losses in the notes to the financial statements. Such a
description shall identify the factors that influenced managements judgment (for
example, historical losses and existing economic conditions) and may also include
discussion of risk elements relevant to particular categories of financial instruments.
Exercise 710
Requirement 1
Bad debt expense = $67,500 (1.5% x $4,500,000)
Requirement 2
Allowance for uncollectible accounts
Balance, beginning of year
Add: Bad debt expense for 2013 (1.5% x $4,500,000)
Less: End-of-year balance
The McGraw-Hill Companies, Inc., 2013
722
$42,000
67,500
(40,000)
Intermediate Accounting, 7/e
$69,500
Requirement 3
$69,500 the amount of accounts receivable written off.
Exercise 711
Requirement 1
To record the write-off of receivables:
Allowance for uncollectible accounts.............................
........................................................Accounts receivable
.............................................................................21,000
21,000
1,200
Cash................................................................................
........................................................Accounts receivable
...............................................................................1,200
1,200
$32,000
(21,000)
1,200
12,200
(62,500)
$50,300
50,300
Requirement 2
Current assets:
Solutions Manual, Vol.1, Chapter 7
$562,500
Exercise 712
Using the direct write-off method, bad debt expense is equal to actual write-offs.
Collections of previously written-off receivables are recorded as revenue.
Allowance for uncollectible accounts:
Balance, beginning of year
Deduct: Receivables written off
Add: Collection of receivables previously written off
Less: End of year balance
Bad debt expense for the year 2013
$17,280
(17,100)
2,200
(22,410)
$20,030
Exercise 713
($ in millions)
Allowance for uncollectible accounts:
Allowance
$15.8
12.7
(16.3)
$ 12.2*
15.8
12.7
writeoffs
16.3
$ 1,057.4
($1,041.6 + 15.8)
14,880.2
(12.2)
(1,178.6)
($1,162.3 + 16.3)
Cash collections
$14,746.8
Gross A/R
1,057.4
14,880.2
12.2
collections
1,178.6
Exercise 714
Requirement 1
June 30, 2013
Note receivable...............................................................
..................................................................Sales revenue
.............................................................................30,000
30,000
Exercise 715
Requirement 1
June 30, 2013
30,000
Exercise 716
Requirement 1
Book value of stock
Plus gain on sale of stock
= Note receivable
Interest reported for the year
$16,000
6,000
$22,000
$ 2,200
=
10% rate
$ 22,000
Intermediate Accounting, 7/e
Requirement 2
To record sale of stock in exchange for note receivable:
January 1, 2013
Note receivable...............................................................
.....................................................................Investments
.............................................................................16,000
............................................Gain on sale of investments
...............................................................................6,000
22,000
Exercise 717
Cash (difference)............................................................... 439,200
Finance charge expense (1.8% x $600,000)........................ 10,800
.................................Liabilityfinancing arrangement
...........................................................................450,000
Exercise 718
Cash (90% x $60,000)........................................................
Loss on sale of receivables (to balance)............................
Receivable from factor ($5,000 fair value [2% x $60,000])
...................................Accounts receivable (balance sold)
.............................................................................60,000
54,000
2,200
3,800
Exercise 719
Cash ([90% 2%] x $60,000)..............................................
Loss on sale of receivables (to balance)............................
Receivable from factor ($5,000 fair value).........................
...........................................................Recourse liability
...............................................................................3,000
...................................Accounts receivable (balance sold)
.............................................................................60,000
Solutions Manual, Vol.1, Chapter 7
52,800
5,200
5,000
Exercise 720
Mountain High retains significant risks and rewards and therefore must treat the
transfer as a secured borrowing. The accounts receivable stay on the balance sheet of
Mountain High, and they must record a liability.
Cash ([90% 2%] x $60,000)..............................................
Finance charge expense (2% x $60,000)............................
..........................................................................Liability
.............................................................................54,000
52,800
1,200
Exercise 721
Step 1: Accrue interest earned.
February 28, 2013
Interest receivable...........................................................
250
.................................................Interest revenue ($15,000 x 10% x 2/12)
..................................................................................250
Step 2: Add interest to maturity to calculate maturity value.
Step 3: Deduct discount to calculate cash proceeds.
$15,000
750
15,750
(630)
$15,120
Face amount
Interest to maturity ($15,000 x 10% x 6/12)
Maturity value
Discount ($15,750 x 12% x 4/12)
Cash proceeds
Step 4: Record a loss for the difference between the cash proceeds and the
notes book value.
February 28, 2013
Cash (proceeds determined above)........................................
Loss on sale of note receivable (difference)......................
...........................................Note receivable (face amount)
.............................................................................15,000
.........Interest receivable (accrued interest determined above)
..................................................................................250
The McGraw-Hill Companies, Inc., 2013
728
15,120
130
Exercise 722
List A
c 1. Internal control
j
2. Trade discount
g 3. Cash equivalents
h 4. Allowance for uncollectibles
i
5. Cash discount
l
6. Balance sheet approach
d 7. Income statement approach
k 8. Net method
a 9. Compensating balance
m 10. Discounting
b 11. Gross method
e 12. Direct write-off method
f
13. Factoring
List B
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
Restriction on cash.
Cash discount not taken is sales revenue.
Includes separation of duties.
Bad debt expense a % of credit sales.
Recognizes bad debts as they occur.
Sale of receivables to a financial institution.
Include highly liquid investments.
Estimate of bad debts.
Reduction in amount paid by credit customer.
Reduction below list price.
Cash discount not taken is interest revenue.
Bad debt expense determined by estimating realizable
value.
m. Sale of note receivable to a financial institution.
Exercise 723
Requirement 1
March 17, 2013
Allowance for uncollectible accounts.............................
........................................................Accounts receivable
...............................................................................1,700
March 30, 2013
Note receivable...............................................................
................................................................................Cash
.............................................................................20,000
1,700
20,000
$20,000
1,400
21,400
(1,427)
$19,973
Face amount
Interest to maturity ($20,000 x 7%)
Maturity value
Discount ($21,400 x 8% x 10/12)
Cash proceeds
19,973
260
12,000
11,760
240
14,000
Requirement 2
To accrue interest earned on note receivable:
December 31, 2013
Discount on note receivable............................................
160
...................................................Interest revenue ($6,000 x 8% x 4/12)
..................................................................................160
Exercise 724
Second quarter:
Receivables turnover =
Average collection
period
Third quarter:
Receivables turnover =
Average collection
period
$19,953
$11,260
= 1.772 times
91 = 51.35 days
1.772
$16,428
= 1.43 times
$11,453.5
91 = 63.64 days
1.43
Exercise 725
Average collection period
= 365 50 = 7.3
= $2,555,000
Exercise 726
To establish the petty cash fund:
October 2, 2013
Petty Cash..........................................................
200
200
76
48
20
19
163
Exercise 727
September 30, 2013
To replenish the petty cash fund
Delivery expense................................................
16
Office supplies expense.....................................
19
Receivable from employee................................
25
Postage expense.................................................
32
....................................Cash (checking account)
92
$23,820
(2,340)
1,890
(38)
$23,332
$23,332
2,340
(1,890)
$23,782
$23,820
(38)
$23,782
Requirement 1
$38,018
6,300
(8,420)
270
$36,168
$38,918
1,800
(30)
(1,200)
(3,320)
$36,168
Requirement 2
To correct error in recording cash receipt from credit customer:
Cash.................................................................... 1,800
...........................................Accounts receivable
1,800
4,550
Note: Each of the adjustments to the book balance required journal entries.
None of the adjustments to the bank balance require entries.
Exercise 730
Solutions Manual, Vol.1, Chapter 7
ANALYSIS
Previous Value:
$ 1,200,000
12,000,000
$13,200,000
New Value:
Interest
$1 million
Principal
$11 million
Present value of the receivable
x
x
1.73554 * =$1,735,540
0.82645 ** =9,090,950
(10,826,490)
Loss:
2,373,510
* present value of an ordinary annuity of $1: n = 2, i =10% (from Table 4)
** present value of $1: n = 2, i =10% (from Table 2)
JOURNAL ENTRIES
January 1, 2013
Loss on troubled debt restructuring (to balance)..........
2,373,510
.............Accrued interest receivable (account balance)
......................................................................1,200,000
......................................Note receivable ($12,000,000 10,826,490)
......................................................1,173,510
December 31, 2013
Cash (required by new agreement)..............................
1,000,000
Note receivable (to balance).......................................
82,649
......................................................Interest revenue (10% x $10,826,490)
......................................................................................
1,082,649
December 31, 2014
Cash (required by new agreement)..............................
1,000,000
Note receivable (to balance).........................................
90,861
......................................................Interest revenue (10% x [$10,826,490 + 82,649])
......................................................................................
1,090,861*
Cash (required by new agreement)..............................
11,000,000
.............................................Note receivable (balance)
...................................................................................... 11,000,000
* rounded to amortize the note to $11,000,000 (per schedule below)
The McGraw-Hill Companies, Inc., 2013
736
1
2
1,000,000
1,000,000
2,000,000
Effective
Increase in
Interest
Balance
10% x Outstanding Balance Discount Reduction
.10 (10,826,490) = 1,082,649
.10 (10,909,139) = 1,090,861*
2,173,510
82,649
90,861
173,510
Outstanding
Balance
10,826,490
10,909,139
11,000,000
* rounded
Exercise 731
ANALYSIS
Previous Value:
$ 24,000
240,000
$264,000
New Value:
(226,997)
$ 37,003
JOURNAL ENTRIES
January 1, 2013
Loss on troubled debt restructuring (to balance)..........
37,003
....................................Accrued interest receivable (10% x $240,000)
...........................................................................24,000
...........................................Note receivable ($240,000 226,997)
...................................................................
13,003
December 31, 2013
Note receivable (to balance).........................................
......................................................Interest revenue (10% x $226,997)
......................................................................................
22,700
22,700
274,665
1
2
0
0
Effective
Interest
10% x Outstanding Balance
.10 (226,997) = 22,700
.10 (249,697) = 24,968*
47,668
Increase in
Outstanding
Balance
Balance
Discount Reduction
22,700
24,968
47,668
226,997
249,697
274,665
* rounded
1. /a.CMA
Allowance
for uncollectible
accounts, beginning balance
CPA
REVIEW
QUESTIONS
Add: Bad debt expense (2% x $9,000,000)
Less: Write-offs
CPA Exam
Questions
Allowance for uncollectible accounts, ending balance
2. a. Accounts receivable, beginning balance
Add: Credit sales
Less: Write-offs
Less: Accounts receivable, ending balance
Cash collections
$260,000
180,000
(325,000)
$115,000
$ 600
3,200
(200)
(500)
$3,100
$ 650,000
2,700,000
(75,000)
(40,000)
(2,150,000)
$1,085,000
5. c. The key phrase is "without recourse" which means that Gar Co. has
transferred the collection risk to Ross Bank. Ross does not have any
recourse against Gar Co. if the accounts are not collected. Thus, Gar
has sold the accounts receivable to Ross Bank and has also transferred
the risk associated with collection.
Required
Uncollectible
Amount
Balance
1%
$120,000
$1,200
2%
$ 90,000
1,800
6%
$100,000
6,000
$9,000
$45,000
(16,000)
$29,000
PROBLEMS
78,600
68,000
Requirement 2
Bad debt expense ...........................................................
.................Allowance for uncollectible accounts (below)
...............................................................................4,300
4,300
Amount
$430,000
98,000
60,000
55,000
$643,000
Percent
Uncollectible
4%
15%
25%
40%
Estimated
Allowance
$17,200
14,700
15,000
22,000
$68,900
Problem 71 (concluded)
$54,000
78,600
(68,000)
64,600
68,900
$ 4,300
Requirement 3
Bad debt expense for 2013:
Monthly accruals
Year-end adjustment
Total
$78,600
4,300
$82,900
Balance sheet:
Current assets:
Accounts receivable, net of $68,900
allowance for uncollectible accounts
$574,100
Problem 72
Requirement 1
(a)
Accounts receivable analysis ($ in thousands):
Balance, beginning of year ($580,640 + 6,590)
Add: Credit sales
Less: Cash collections
Less: Balance end of year ($504,944 + 5,042)
Accounts receivable written off during year
$ 587,230
2,158,755
(2,230,065)
(509,986)
$
5,934
(b)
Allowance for uncollectible accounts analysis ($ in thousands):
Solutions Manual, Vol.1, Chapter 7
Beginning balance
Less: Write-offs (from above)
Less: Year-end balance
Bad debt expense for the current year
$6,590
(5,934)
(5,042)
$4,386
(c)
$4,386 of bad debt expense divided by $2,158,755 in credit sales
equals .2% (.002).
Requirement 2
(a) ($ in thousands)
Current year
Previous year
$509,986
$587,230
Current assets:
Receivables
(b) ($ in thousands)
Problem 73
Requirement 1
2011
2010
($ in thousands)
$39,098
421
$39,519
$23,963
488
$24,451
Requirement 2
($ in thousands)
The answers to this question require an analysis of both gross accounts receivable
and the allowance for uncollectible accounts for 2011. First of all, 2011 sales of
$369,571 plus the increase in receivables reported in the statement of cash flows
indicates cash received from customers of $354,436 ($369,571 15,135).
The activity in gross accounts receivable would be:
Gross Accounts Receivable
__________________________________________
The McGraw-Hill Companies, Inc., 2013
746
($ in thousands)
Beg. Bal.
Sales
24,451
369,571
End. Bal.
354,436
Collections
67
Write-offs
_________________
39,519
67
67
Problem 73 (continued)
488
Beg. Bal.
Write-offs 67
0
Bad Debt Expense
_________________
421
End. Bal.
Cirrus recognized zero bad debt expense during 2011.
Problem 74
Requirement 1
To record accounts receivable written off during the year 2013:
Allowance for uncollectible accounts.............................
........................................................Accounts receivable
.............................................................................35,000
35,000
3,000
Cash................................................................................
........................................................Accounts receivable
...............................................................................3,000
3,000
Requirement 2
(a)
December 31, 2013
Bad debt expense (3% x $1,750,000).................................
The McGraw-Hill Companies, Inc., 2013
748
52,500
Intermediate Accounting, 7/e
36,700
Problem 74 (continued)
$ 462,000
1,750,000
(35,000)
(1,830,000)
$ 347,000
$30,000
3,000
(35,000)
(2,000) debit balance
34,700
$36,700
(c)
December 31, 2013
Bad debt expense............................................................
.................Allowance for uncollectible accounts (below)
.............................................................................37,047
37,047
Required allowance:
Age Group
060 days
6190 days
91120 days
Over 120 days
Totals
Amount
$225,550
69,400
34,700
17,350
$347,000
Percent
Uncollectible
4%
15%
25%
40%
Estimated
Allowance
$ 9,022
10,410
8,675
6,940
$35,047
Problem 74 (concluded)
Year-end allowance
$30,000
3,000
(35,000)
(2,000) debit balance
35,047
$37,047
(a)
$347,000
[(2,000) + 52,500]
= $296,500
(b)
$347,000
34,700
= $312,300
(c)
$347,000
35,047
= $311,953
Problem 75
Requirement 1
($ in thousands)
2009
$837,010
20,991
$858,001
2008
$758,200
23,314
$781,514
Requirement 2
($ in thousands)
$8,915
1,500
(8,863)
$1,552
Requirement 3
($ in thousands)
$12,128
3,155
(14,399)
$ 884
Gross sales for the year equal net sales of $6,149,800 + estimated sales returns of
$884 = $6,150,684 thousand.
Requirement 4
($ in thousands)
Accounts receivable analysis:
Balance, beginning of year
Add: Credit sales
Less: Bad debt write-offs
Less: Actual sales returns
Less: Balance end of year
Cash collections
$ 781,514
6,150,684
(1,552)
(3,155)
(858,001)
$6,069,490
Problem 76
Requirement 1
Total face value of notes = $300,000 + 150,000 + 200,000 =
Balance sheet carrying value =
Difference is the remaining discount on note 3
$650,000
645,000
$ 5,000
Requirement 2
Total accrued interest receivable
Less: Interest accrued on note 1:
$300,000 x 10% x 4/12 =
$16,000
(10,000)
$ 6,000
$10,000
6,000
5,000
Intermediate Accounting, 7/e
$21,000
Problem 77
Requirement 1
Alternative a:
To record the borrowing of $500,000 and signing of a note payable:
July 1, 2013
Cash................................................................................ 500,000
...................................................................Note payable
...........................................................................500,000
Alternative b:
To record the transfer of receivables:
July 1, 2013
Cash ($550,000 x 98%)....................................................... 539,000
Loss on transfer of receivables (2% x $550,000)............... 11,000
........................................................Accounts receivable
...........................................................................550,000
Requirement 2
Alternative a:
July, 2013
Cash (80% x $780,000)....................................................... 624,000
........................................................Accounts receivable
...........................................................................624,000
July 31, 2013
Interest expense ($500,000 x 12% x 1/12)............................
5,000
Note payable................................................................... 500,000
................................................................................Cash
...........................................................................505,000
Problem 77 (concluded)
Alternative b:
$550 of accounts receivable are now held by the bank, and presumably the bank
has collected .8 x $550 = $440 during July. Lonergan still holds accounts receivable
of ($780 550 = $230), so should have collected .8 x $230 = $184 during July.
July 31, 2013
Cash [80% x ($780,000 550,000)]...................................... 184,000
........................................................Accounts receivable
...........................................................................184,000
Requirement 3
Alternative a.
Alternative b.
Problem 78
Cash (90% x $800,000)....................................................... 720,000
Loss on sale of receivables (to balance)............................ 52,000
Receivable from factor ($60,000 fair value [4% x $800,000]) 28,000
...................................Accounts receivable (balance sold)
...........................................................................800,000
Problem 79
WALKEN COMPANY
Balance Sheet
December 31, 2013
Current Assets
Casha
Accounts receivable (net)b
35,000
60,000
Walken would net the 40,000 and (5000) cash balances, yielding a balance of
35,000.
b
The receivables factored with Dependable dont qualify for sales treatment, as
substantially all risks and rewards of ownership are retained by Walken.
Problem 710
Requirement 1
February 28, 2013
Note receivable...............................................................
..................................................................Sales revenue
.............................................................................10,000
March 31, 2013
Note receivable (face amount)...........................................
Solutions Manual, Vol.1, Chapter 7
10,000
8,000
7,000
$6,860
140
5,000
3,200
49,500
500
$10,000
583
10,583
(317)
$10,266
10,266
67
Face amount
Interest to maturity ($10,000 x 10% x 7/12)
Maturity value
Discount ($10,583 x 12% x 3/12)
Cash proceeds
Requirement 2
To accrue nine months interest on the Maddox Co. note receivable:
Discount .........................................................................
600
...................................................Interest revenue ($8,000 x 10% x 9/12)
..................................................................................600
Requirement 3
Income
increase (decrease)
$10,000
7,200
7,000
(140)
(5,000)
3,200
(500)
333
(67)
600
$22,626
Date
February 28
March 31
April 3
April 11
April 17
April 17
April 30
June 30
June 30
December 31
Total effect
Problem 711
Note
Note Face
Value
Date of
Note
Interest
Rate
Date
Discounted
Discount
Rate
Proceeds
Received
$50,000
3-31-11
8%
6-30-11
10%
$50,350 (1)
50,000
3-31-11
8%
9-30-11
10%
51,675 (2)
50,000
3-31-11
8%
9-30-11
12%
51,410 (3)
80,000
6-30-11
6%
10-31-11
10%
81,027 (4)
80,000
6-30-11
6%
10-31-11
12%
80,752 (5)
80,000
6-30-11
6%
11-30-11
10%
81,713 (6)
(1)
$50,000
3,000
53,000
(2,650)
$50,350
Face amount
Interest to maturity ($50,000 x 8% x 9/12)
Maturity value
Discount ($53,000 x 10% x 6/12)
Cash proceeds
$50,000
3,000
53,000
(1,325)
$51,675
Face amount
Interest to maturity ($50,000 x 8% x 9/12)
Maturity value
Discount ($53,000 x 10% x 3/12)
Cash proceeds
(2)
(3)
$50,000
3,000
53,000
(1,590)
$51,410
Face amount
Interest to maturity ($50,000 x 8% x 9/12)
Maturity value
Discount ($53,000 x 12% x 3/12)
Cash proceeds
$80,000
2,400
82,400
(1,373)
$81,027
Face amount
Interest to maturity ($80,000 x 6% x 6/12)
Maturity value
Discount ($82,400 x 10% x 2/12)
Cash proceeds
$80,000
2,400
82,400
(1,648)
$80,752
Face amount
Interest to maturity ($80,000 x 6% x 6/12)
Maturity value
Discount ($82,400 x 12% x 2/12)
Cash proceeds
$80,000
2,400
82,400
(687)
$81,713
Face amount
Interest to maturity ($80,000 x 6% x 6/12)
Maturity value
Discount ($82,400 x 10% x 1/12)
Cash proceeds
(4)
(5)
(6)
Problem 712
Requirement 1
In addition to sales revenue of $1,340,000, the 2014 income statement will
include (1) interest revenue, (2) bad debts expense, and (3) loss on sale of note
receivable.
Interest revenue
$200,000 note: $200,000 x 6% x 3/12 =
$60,000 note:
$ 60,000 x 8%(1) x 10/12 =
Total interest revenue
$3,000
4,000
$7,000
$800 represents interest for two months (November and December of 2013) or
$400 per month. Annual interest is $400 x 12 = $4,800.
$4,800 $60,000 = 8% interest rate.
Bad debt expense
Analysis of accounts receivable
Beginning accounts receivable ($218,000 + 24,000)
Add: Credit sales
Less: Cash collections
Less: Write-offs
Ending accounts receivable
$ 242,000
1,340,000
(1,280,000)
(22,000)
$ 280,000
$24,000
?
(22,000)
$28,000
(2)
Face amount
Interest to maturity ($200,000 x 6%)
Maturity value
Discount ($212,000 x 8% x 3/12)
Cash proceeds
Requirement 2
Accounts receivable, net of $28,000 in allowance for
uncollectible accounts
$252,000
Requirement 3
Accounts receivable turnover ratio:
$1,340,000
------------$235,000(3)
= 5.7 times
(3)
Problem 713
Requirement 1
(875.00)
85.00
$13,542.87
$14,632.12
575.00
(1,320.25)
(18.00)
450.00
14.00
$14,632.12
575.00
(875.00)
(1,320.25)
$13,011.87
$13,542.87
18.00
(450.00)
(14.00)
(85.00)
$13,011.87
Requirement 2
To correct error in recording cash disbursement for rent:
The McGraw-Hill Companies, Inc., 2013
764
Cash....................................................................
18
......................................................Rent expense
18
549
Requirement 3
Checking account balance
Petty cash
U.S. treasury bills
Total cash and cash equivalents
$13,011.87
200.00
5,000.00
$18,211.87
Problem 714
Requirement 1
Step 1:
$3,851
2,150 (1)
(1,300)
(831) (2)
$3,870
$4,422
(90)
(22)
(440)
$3,870
(1) Receipts
Less: December receipts deposited:
Bank deposits
$43,000
Less: Deposit error
(1,300)
Less: Prior months
deposits outstanding
(1,200)
Deposits outstanding, Dec. 31
$42,650
$41,853
90
40,500
$ 2,150
(41,313)
630
201
$ 831
Requirement 2
Solutions Manual, Vol.1, Chapter 7
552
Problem 715
Requirement 1
($ in millions)
Land..............................................................................................
Loss on debt restructuring............................................................
.............................................................................Note receivable
...........................................................Accrued interest receivable
16
6
20
2
Requirement 2
ANALYSIS
Previous Value:
Accrued 2012 interest (10% x $20,000,000)
Principal
Carrying amount of the receivable
New Value:
Interest
$1 million
3,169,870
Principal
$15 million
10,245,150
Present value of the receivable
Loss:
8,584,980
$ 2,000,000
20,000,000
$22,000,000
x
3.16987 *
0.68301 **
(13,415,020)
$
January 1, 2013
Loss on troubled debt restructuring (to balance)............... 8,584,980
.........................................Accrued interest receivable (10% x $20,000,000)
...........................................................................2,000,000
...........................................Note receivable ($20,000,000 13,415,020)
...........................................................................6,584,980
December 31, 2013
Cash (required by new agreement)
1,000,000
Note receivable (to balance)....
341,502
...........................................................Interest revenue (10% x $13,415,020)
........................................................................................... 1,341,502
1
2
3
4
Effective
Interest
10% x Outstanding Balance
1,000,000
13,756,522
1,000,000
14,132,174
1,000,000
14,545,391
1,000,000
15,000,000
4,000,000
Increase in
Balance
Discount Reduction
Outstanding
Balance
.10 (13,415,020) =
1,341,502
13,415,020
341,502
.10 (13,756,522) =
1,375,652
375,652
.10 (14,132,174) =
1,413,217
413,217
.10 (14,545,391) =
1,454,609*
454,609
5,584,980
1,584,980
* rounded
Previous Value:
Accrued interest (10% x $20,000,000)
Principal
Carrying amount of the receivable
New Value:
$27,775,000 x 0.68301 * =
Loss:
$ 2,000,000
20,000,000
$22,000,000
(18,970,603)
$ 3,029,397
January 1, 2013
Loss on troubled debt restructuring (to balance)............... 3,029,397
.........................................Accrued interest receivable (10% x $20,000,000)
...........................................................................2,000,000
...........................................Note receivable ($20,000,000 18,970,603)
..........................................................1,029,397
December 31, 2013
Note receivable (to balance)..
1,897,060
...........................................................Interest revenue (10% x $18,970,603)
........................................................................................... 1,897,060
December 31, 2014
Note receivable (to balance)....
2,086,766
.................................................Interest revenue (10% x [$18,970,603 + 1,897,060])
........................................................................................... 2,086,766
December 31, 2015
Note receivable (to balance)...
2,295,443
.......................................................Interest revenue (10% x balance [see schedule])
........................................................................................... 2,295,443
December 31, 2016
Note receivable (to balance)....
2,525,128
.......................................................Interest revenue (10% x balance [see schedule])
........................................................................................... 2,525,128*
Solutions Manual, Vol.1, Chapter 7
18,970,603
1
0
20,867,663
2
0
22,954,429
3
0
25,249,872
4
0
27,775,000
Effective
Increase in
Interest
Balance
10% x Outstanding Balance Discount Reduction
Outstanding
Balance
.10 (18,970,603)
1,897,060
1,897,060
.10 (20,867,663)
2,086,766
2,086,766
.10 (22,954,429)
2,295,443
2,295,443
.10 (25,249,872)
2,525,128*
2,525,128
8,804,397
8,804,397
* rounded
CASES
Judgment Case 71
Requirement 1
To account for the accounts receivable factored on April 1, 2013, Magrath should
decrease accounts receivable by the amount of accounts receivable factored, increase
cash by the amount received from the factor, and record a loss equal to the difference.
The loss should be reported in the income statement. Factoring of accounts receivable
without recourse is equivalent to a sale.
Requirement 2
Magrath should account for the collection of the accounts previously written off
as uncollectible as follows:
Increase both accounts receivable and the allowance for uncollectible accounts.
Increase cash and decrease accounts receivable.
Requirement 3
One approach estimates uncollectible accounts based on credit sales. This
approach focuses on income determination by attempting to match uncollectible
accounts expense with the revenues generated.
The other approach estimates uncollectible accounts based on the balance in
receivables or on an aging of receivables. The approach focuses on asset valuation by
attempting to report receivables at net realizable value.
Communication Case 72
Suggested Grading Concepts and Grading Scheme:
Content (70%)
_______ 40 Explains the difference between the allowance method and the
direct write-off method.
______ Direct write-off is more objective.
______ Direct write-off has potential to violate the matching
principle.
_______ 15 Even if uncollectibles are fairly stable, when significant
variations do occur, profit will be overstated in one period
The McGraw-Hill Companies, Inc., 2013
776
Judgment Case 73
Requirement 1
a. Hogan should account for the sales discounts at the date of sale using the net
method by recording accounts receivable and sales revenue at the amount of
sales less the sales discounts available.
Revenues should be recorded at the cash equivalent price at the date of sale.
Under the net method, the sale is recorded at an amount that represents the
cash equivalent price at the date of exchange (sale).
b. There is no effect on Hogans sales revenues when customers do not take the
sales discounts. Hogans net income is increased by the amount of interest
earned when customers do not take the sales discounts.
Requirement 2
Trade discounts are neither recorded in the accounts nor reported in the financial
statements. Therefore, the amount recorded as sales revenues and accounts receivable
is net of trade discounts and represents the cash equivalent price of the asset sold.
Requirement 3
To account for the accounts receivable factored on August 1, 2013, Hogan should
decrease accounts receivable by the amount of the accounts receivable factored,
increase cash by the amount received from the factor, and record a loss. Factoring of
accounts receivable without recourse is equivalent to a sale. The difference between
the cash received and the carrying amount of the receivables is a loss.
Requirement 4
Hogan should report the face amount of the interest-bearing notes receivable and
the related interest receivable for the period from October 1 through December 31 on
its balance sheet as current assets. Both assets are due on September 30, 2014, which
is less than one year from the date of the balance sheet.
Hogan should report interest revenue from the notes receivable on its income
statement for the year ended December 31, 2013. Interest revenue is equal to the
amount accrued on the notes receivable at the appropriate interest rate.
Interest revenue is realized with the passage of time. Accordingly, interest
revenue should be accounted for as an element of income over the life of the notes
receivable.
31 Acquisition
40,139 charged to cost and expense
Deductions 31,237
_________________
12,742 End. Bal.
c.
Sales returns (a contra-revenue account)...................................... 40,139
.....................................................................Sales returns reserve
...........................................................................................40,139
This journal entry reduces revenue for $40,139 of estimated sales returns
and increases the reserve by that amount. Note: They refer to this as
amount charged to cost and expense, but it actually is an amount charged
to a contra-revenue account which has the same effect on income as an
expense.
Sales returns reserve..................................................................... 31,237
......................................................................Accounts receivable
...........................................................................................31,237
This journal entry recognizes that returns of $31,237 occurred during the
period, reducing both the sales returns reserve and accounts receivable.
d. In the operations section of the statement of cash flows, $40,139 is added back
to net income because it is an amount that reduces net income (by being
subtracted from revenue) but does not in itself use any cash. The $31,237
reduction in accounts receivable is included in the overall change in
receivables of ($102,297).
Requirement 3
a.
Sales Returns Reserve
__________________________________________
12,742 Beg. bal.
27,521 charged to cost and expense (from Antar)
Deductions assumed to be 0
_________________
40,263 End. bal.
b.
Sales Returns Reserve
__________________________________________
40,263 Beg. bal.
Recovery (from Antar) 22,259
Deductions assumed to be 0
_________________
18,004 End. bal.
c.
Sales returns reserve..................................................................... 22,259
............................Recovery of sales returns (increasing revenue)
22,259
This journal entry increases revenue by $22,259, the amount by which the
sales returns reserve is being reduced.
Ethics Case 75
Requirement 1
Required allowance
Revised allowance
Increase in income before taxes of proposed change
$180,000
135,000
$ 45,000
Requirement 2
Discussion should include these elements.
Ethical Dilemma:
You, as the assistant controller, have a responsibility to follow GAAP and make a
reasonably accurate estimate of the net realizable value of receivables. Is your
responsibility to fairly present Stanton Industries financial statements to external
users greater than your obligation to improve the financial position of your employer?
Alternative actions and consequences include:
1. Refuse to comply with the controllers request to change the aging category of the
large account.
Positive consequences:
a. Preservation of your honesty and integrity.
b. Fair presentation of the net realizable value of receivables.
Negative consequences:
a. Possible loss of your job.
b. Lower net income for Stanton Industries.
c. A devalued stock price for Stanton Industries.
2. Comply with the controller's suggestion to report the allowance for uncollectible
accounts at $135,000.
Positive consequences:
Solutions Manual, Vol.1, Chapter 7
Case 75 (concluded)
Judgment Case 76
1. A weakness is created by the fact that John need only submit a list of accounts and
amounts to be charged to replenish the petty cash fund. The supporting
documentation for the petty cash disbursements also should be submitted with
Johns list and reviewed by someone else. Surprise counts of the fund also should
be made to ensure that the fund is being maintained on an imprest basis, that is, to
ensure that cash and/or receipts equal $200 at all times.
2. The internal control system for disbursements does not contain sufficient
separation of duties. Dean Leiser approves the vouchers, signs the checks,
maintains the disbursement records, and reconciles the bank account. There should
be at least one other person involved in these activities to ensure accuracy and to
safeguard cash from expropriation.
3. The internal control system for receipts does not contain sufficient separation of
duties. Fran Jones has physical control of the deposits and also maintains the
subsidiary ledger for accounts receivable. These duties should be separated. In
addition, the company should require that customers pay their bills via check and
that cash not be used.
Integrating Case 78
McLaughlin's underestimation of bad debts is treated as a change in accounting
estimate. Changes in estimates are accounted for prospectively. When a company
revises a previous estimate, prior financial statements are not restated. Instead, the
company merely incorporates the new estimate in any related accounting
determinations from then on. In this case, bad debt expense for 2014 will be higher
than it would have been had not the underestimation occurred. A disclosure note
should describe the effect of a change in estimate on income before extraordinary
items, net income, and related per share amounts for 2014.
Analysis Case 79
Requirement 1
These methods can be described by one of two basic arrangements:
1. A secured borrowing, or
2. A sale of receivables.
When a company chooses between a borrowing and a sale, the critical element is
the extent to which it (the transferor) is willing to surrender control over the assets
transferred. Specifically, the transferor is determined to have surrendered control over
the receivables if and only if three sale conditions are met.
Secured borrowings usually take the form of an assignment of receivables. An
assignment of receivables is a promise by the borrower (the owner of the receivables)
that any failure to repay debt owed to the lender in accordance with the debt
agreement will cause the proceeds from collecting the receivables to go directly
toward repayment of the debt. This arrangement is no different from the use of a
building as collateral for a mortgage loan. The assignor (borrower) assigns the
assignee (lender) the rights to specific receivables as collateral for a loan. A variation
of assigning specific receivables is when trade receivables in general rather than
specific receivables are pledged as collateral. The responsibility of collection of the
receivables remains solely with the company. This variation is referred to as a
pledging of accounts receivable.
Two popular arrangements used for the sale of receivables are factoring and
securitization. A factor is a financial institution that buys receivables for cash, handles
the billing and collection of the receivables, and charges a fee for this service.
Actually, credit cards like VISA and Mastercard are forms of factoring arrangements.
The seller relinquishes all rights to the future cash receipts in exchange for cash from
the buyer (the factor).
Another popular arrangement used to sell receivables is a securitization. In a
typical accounts receivable securitization, the company creates a Special Purpose
Solutions Manual, Vol.1, Chapter 7
Entity (SPE), usually a trust or a subsidiary. The SPE buys a pool of trade
receivables, credit card receivables, or loans from the company, and then sells related
securities, for example bonds or commercial paper, that are backed (collateralized) by
the receivables.
Similar to accounts receivable, a note receivable can be used to obtain immediate
cash from a financial institution either by pledging the note as collateral for a loan or
by selling the note. The transfer of a note is referred to as discounting.
Case 79 (concluded)
Requirement 2
In an assignment of specific receivables, usually the amount borrowed is less
than the amount of receivables assigned. The difference provides some protection for
the lender to allow for possible uncollectible accounts. Also, the assignee (transferee)
usually charges the assignor an up-front finance charge in addition to stated interest on
the collateralized loan. The borrower, assignor, records the loan liability, the finance
fee expense, and the cash borrowed.
No special accounting treatment is needed for an assignment of receivables in
general, and the arrangement is simply described in a disclosure note.
The specific accounting treatment for the sale of receivables using factoring and
securitization arrangements depends on the amount of risk the factor assumes, in
particular whether it buys the receivables without recourse or with recourse.
When a company sells accounts receivable without recourse, the buyer assumes
the risk of uncollectibility. This means the buyer has no recourse to the seller if
customers dont pay the receivables. In that case, the seller simply accounts for the
transaction as a sale of an asset. The buyer charges a fee for providing this service,
usually a percentage of the book value of receivables. Because the fee reduces the
proceeds the seller receives from selling the asset, the seller records a loss on sale of
assets. The typical factoring arrangement is made without recourse.
When a company sells accounts receivable with recourse, the seller retains the
risk of uncollectibility. In effect, the seller guarantees that the buyer will be paid even
if some receivables prove to be uncollectible. Even if receivables are sold with
recourse, as long as the three conditions for sale treatment are met, the transferor
would still account for the transfer as a sale. The only difference would be the
additional requirement that the transferor record the estimated fair value of the
recourse obligation as a liability. The recourse obligation is the estimated amount that
the transferor will have to pay the transferee as a reimbursement for uncollectible
receivables.
When a company sells accounts receivable without recourse, the buyer assumes
the risk of uncollectibility. This means the buyer cannot pursue collection from the
seller (has no recourse) if customers dont pay the receivables.
Requirement 2
FASB ASC 86010405: Transfers and ServicingOverallDerecognition
Criteria for a Sale of Financial Assets.
The transferor is determined to have surrendered control over the receivables if
and only if all of the following conditions are met:
a. The transferred assets have been isolated from the transferorput presumptively
beyond the reach of the transferor and its creditorseven in bankruptcy or other
receivership.
b. Each transferee has the right to pledge or exchange the assets it received.
c. The transferor does not maintain effective control over the transferred assets
through either (1) an agreement that the transferor repurchase or redeem them
before their maturity or (2) the ability to cause the transferee to return specific
assets.
(These criteria were included in Statement of Financial Accounting Standards
No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" subsequently modified by SFAS No. 166, Accounting
for Transfers of Financial Assets, an amendment of FASB Statement No. 140. (The
above conditions can be found in paragraph 9 of the standard.)
Requirement 3
Cash (90% x $400,000)....................................................... 360,000
Loss on sale of receivables (to balance)............................ 31,000
Receivable from factor ($25,000 fair value [4% x $400,000]) 9,000
...................................Accounts receivable (balance sold)
...........................................................................400,000
Requirement 4
FASB ACS 860104024: Transfers and ServicingOverallDerecognition
Effective Control Through Both a Right and an Obligation (previously paragraph 47
of SFAS No. 140) lists the following conditions:
a. The assets to be repurchased or redeemed are the same or substantially the same
as those transferred.
b. The transferor is able to repurchase or redeem them on substantially the agreed
terms, even in the event of default by the transferee.
c. The agreement is to repurchase or redeem them before maturity, at a fixed or
determinable price.
d. The agreement is entered into concurrently with the transfer.
Average collection
period
3,627
205.95
= 17.61 times
365
= 20.73 days
17.61
Smithfield
12,202.7 = 18.33 times
665.55
365
18.33
= 19.91 days
The receivable turnover ratios are in a close range with one another. This is not
surprising since the companies operate in the same industry, selling similar products
with similar terms and customers.
The McGraw-Hill Companies, Inc., 2013
790
Requirement 2
The objective of this requirement is to motivate students to obtain hands-on
familiarity with actual annual reports and to apply the techniques learned in the
chapter. You may wish to provide students with multiple copies of the same annual
reports and compare responses. Another approach is to divide the class into teams
who evaluate reports from a group perspective.
Net receivables
Add: Allowance
Gross receivables
2011
$6,493
96
$6,589
2010
$5,837
115
$5,952
using the amortized cost method less impairment losses, if any. The purchases
and sales of financial assets are accounted for as of the transaction date.
This approach is consistent with U.S. GAAP. The receivables are recorded initially at
their fair value (their value when the sales transaction occurs). If they are discounted
for the time value of money, the amount of any discount is amortized to interest
revenue over the life of the receivable. And, an allowance for bad debts is set up to
account for uncollectible accounts (per note 24, they call that allowance a valuation
allowance), which they refer to as impairment losses in the footnote.
Requirement 2
Valuation Allowance for Trade Accounts Receivable
__________________________________________
89
Beg. Bal.
14 bad debt expense
write-offs 15
currency translation adj. 1
reclassification 4
_________________
83
End. Bal.
Requirement 3
AF has bank overdrafts of 129 as of March 31, 2011. Under IFRS, those overdrafts
would be netted against AFs total cash and cash equivalents of 3,717 if the
overdrafts are payable on demand and are part of the AFs normal cash management
process. Instead, the overdrafts are shown as a current liability, consistent with U.S.
GAAP and suggesting that the overdrafts dont meet IFRSs requirements for netting
against the cash balance.