Chapter 7 Receivables and Investments

Copyright © 2009 South-Western, a part of Cengage Learning.

Financial Accounting: The Impact on Decision Makers 6/e by

Gary A. Porter and Curtis L. Norton

Apple’s Consolidated Balance Sheets (Partial)

ASSETS (in millions) September 30, September 24, 2006 2005

Current assets:Cash and cash equivalents $6,392 $3,491Short-term investments 3,718 4,770Accounts receivable, less allowances of $52 and $46 1,252 895Inventories 270 165Deferred tax assets 607 331Other current assets 2,270 648

Total current assets $14,509 $10,300

higher

higher

Apple’s Consolidated Balance Sheets (Partial)

ASSETS (in millions)

Current assets:Cash and cash equivalentsShort-term investmentsAccounts receivableInventoriesDeferred tax assetsOther current assets

Total current assets

Lessliquid

Highlyliquid

Apple Corporation Sample Accounts Receivable

Subsidiary Ledger Total Due

Acme $ 10,000

Baxter 50,000

Jones 15,000

Martin 20,000

Smith 5,000 $100,000 Gross Accounts

ReceivableLO1

Apple’s Consolidated Balance Sheets (Partial)

(amounts in millions) 2006 2005

Accounts receivables,

less allowances of $52 and $46, respectively $1,253 $895

Net Realizable

Value

Estimat

ed

Unco

llecti

ble

Accounts

Credit Sales

Slows inflow of cash Risk of uncollectible accounts

Trade Credit

Retail Customer Receivables

Terms: 2/10, net 30

Sales Invoice

LO2

Accounting for Bad Debts:Direct Write-off Method

Journal entry to record write-off in period determinedto be uncollectible:

Bad Debts Expense XXX

Accounts Receivable—Dexter XXX

Period of sale Future period chargedwith expense of bad debtwrite-off

Accounting for Bad Debts: Allowance Method

Period of saleEstimated bad debt expense (and allowance account) recorded in the same period

Accounting for Bad Debts:Allowance Method

Journal entry to record estimated bad debtexpense in period of sale:

Bad Debts Expense XXX

Allowance for Doubtful Accounts XXX

I estimate...

Roberts Corp.Partial Balance Sheet

Accounts receivable $250,000Less: Allowance for doubtful accounts 6,000Net accounts receivable $244,000

Balance Sheet Presentation – Allowance Method

Accounting for Bad Debts:Allowance Method

Journal entry to record bad debt write-off inperiod determined uncollectible:

Allowance for Doubtful Accounts XXX

Accounts Receivable—Dexter XXX

Bankrupt

Approaches to Allowance Method

% of Net Credit Sales

% of Accounts Receivable Aging Method

Income Statement Approach

Balance Sheet

Approach

Example:

Percentage of Net Credit Sales Method

Assume prior years’ net credit sales and bad debtexpense is as follows:

Year Net Credit Sales Bad Debts2002 $1,250,000 $ 26,4002003 1,340,000 29,3502004 1,200,000 23,1002005 1,650,000 32,1502006 2,120,000 42,700

$7,560,000 $153,700

Investment in a CD

Purchase of investment:

Short-Term Investments—CD 100,000

Cash 100,000

On October 2, Apple invests $100,000 in a 120-day CD. Principal plus interest @ 6% due upon investment maturity.

Example:

Example:

Percentage of Net Credit Sales Method

Develop bad debt percentage:

$153,700$7,560,000

use 2%= 0.02033

Percentage of Net Credit Sales Method

2007 Net credit sales $2,340,000 (given)

Bad debt percentage 2%

Bad debts expense $ 46,800

Example:

Journal entry:

Bad Debts Expense 46,800

Allowance for Doubtful Accounts 46,800

Aging Method

Estimated Percent Estimated AmountCategory Amount Uncollectible Uncollectible Current $ 85,600 1% $ 856Past due: 1–30 days 31,200 4% 1,248 31–60 days 24,500 10% 2,450 61–90 days 18,000 30% 5,400 90+ days 9,200 50% 4,600 Totals $168,500 $14,554

Aging Method

Assume the Allowance for Doubtful Accounts has a beginning credit balance of $1,230:

Credit balance required in allowance account after adjustment $14,554

Less: Credit balance in allowance account before adjustment 1,230

Amount for bad debt expense entry $13,324

Aging Method

Assume the Allowance for Doubtful Accounts has a beginning credit balance of $1,230:

Journal entry:

Bad Debts Expense 13,324

Allowance for Doubtful Accounts 13,324

To record estimated bad debts.

Aging Method

The net realizable value of accounts receivable would be determined as follows:

Accounts receivable $168,500

Less: Allowance for doubtful accounts 14,554

Net realizable value $153,946

Accounts Receivable Turnover

Net Credit Sales

Average Accounts Receivable

Indicates how quickly a company is collecting (i.e.,

turning over) its receivables

LO2

Accounts Receivable Turnover Too fast may mean:

credit policies too stringent; may be losing sales

Too slow may mean:

credit department not operating effectively; dissatisfied customers

Baker Corporation promises to pay HighTec, Inc. $15,000 plus 12% annual interest on March 13, 2008.

Date: December 13, 2007

Signed:_________

Interest-Bearing Promissory Note

Baker Corporation

MaturityDate

Principal

Interest

LO3

Interest-Bearing Promissory Note

Maker Gives a Note to

Payee

Receipt of Interest-Bearing Promissory Note

Journal entry to record the receipt of the note

on December 13:

Notes Receivable 15,000

Sales Revenue 15,000

Interest-Bearing Promissory Note

Adjusting entry to record interest:

Interest Receivable 90

Interest Revenue 90*

*Interest = $15,000 × 12% × 18/360

Interest-Bearing Promissory Note

Journal entry to record the collection of the note on March 13, 2008:

Cash 15,450

Notes Receivable 15,000

Interest Revenue 360*

Interest Receivable 90

*15,000 × 12% × 72/360

Accelerating the Cash Inflow from Sales

Credit card sales Discounting notes receivable

LO4

Credit Card Sales

Competitive necessity Credit card company:

• Charges fee• Assumes risk of nonpayment

Discounting Notes Receivable

Sell note prior to maturity date for cash Receive less than face value (i.e.,

discounted amount) Can be sold with or without recourse

Reasons Companies Invest in Other Companies

Short-term cash excesses

Long-term investing for future cash needs

Exert influence over investee

Obtain control of investee

LO5

Investment in a CD

October 2, purchase $100,000, 6%, 120-day CD:

Short-Term Investment 100,000 Cash 100,000

To record the purchase of short-term CD

Year-end adjusting entry:Interest Receivable 1,500

Interest Revenue 1,500

Investment in a CD

Interest (I) = Principal (P) × Rate (R) × Time (T) $1,500 = $100,000 × 6% × 90*/360

*October – 29 days November – 30 days December – 31 days

90 days

Upon investment maturity:

Cash 102,000Short-Term Investments—CD 100,000Interest Receivable 1,500Interest Revenue* 500

Investment in a CD

*Interest earned in January:

$100,000 × 6% × 30/360 = $500

Accounting for Common-Stock Investments

No significantinfluence

0% 20%

FairValue

Method

Significantinfluence

50%

EquityMethod

Control

100%

ConsolidatedFinancial

Statements

Ourfocus

in Appendix

Investment in Bonds

Bonds of other companies Intent and ability to hold until maturity

$100,000, 9% bond due 2019

Investment in Bonds

On 1/1/08, Atlantic buys: $100,000, 10% bonds @ face value Bonds mature in ten years Interest payable semiannually

Example:

Record the purchase of the bonds and receipt of the first interest payment

Recording Bond Purchase

Investment in Bonds 100,000Cash100,000

To record purchase of ABC bonds.

$100,000, 10% bond due 2017

Recording Receipt of Interest Payment

Cash ($100,000 × 10% × 1/2) 5,000 Interest Income 5,000

To record interest income on ABC bonds.

Recording Bond Sale

Cash 99,000Loss on Sale of Bonds 1,000 Investment in Bonds 100,000

To record sale of ABC bonds.

Investment in Stocks

Stocks of other companies Recorded at cost, including any

brokerage fees, commissions or other fees paid to acquire the shares

Investment in Stocks

On February 1, 2008, Dexter Corp. pays $50,000 for shares of Stuart common stock plus $1,000 commissions : Investment in Stuart Common Stock 51,000 Cash 51,000

Example:

Record the purchase of common stock

Recording Receipt of Dividends

Dexter receives $500 cash dividends from Stuart common stock:

Cash 500Dividend Income 500

To record the receipt of dividends

Sale of Investment in Stocks

Sale of Investment in Stuart common stock for

$53,000:

Cash 53,000

Investment in Stuart

Common Stock 51,000

Gain on Sale of Stock 2,000

To record the sale of Stuart common stock

Operating Activities Net income xxx Increase in accounts receivable – Decrease in accounts receivable + Increase in notes receivable – Decrease in notes receivable +Investing Activities Purchases of held-to-maturity and available-for-sale securities – Sales/maturities of held-to-maturity and available-for-sale securities +Financing Activities

Liquid Assets and the Statement of Cash Flows – Indirect Method

LO6

End of Chapter 7