Receivablesand Investments

COPYRIGHT © 2011 South-Western/Cengage Learning

7/e

PowerPoint Author: Catherine Lumbattis

7

Apple’s Consolidated Balance Sheets (Partial)

ASSETS (in millions) September 27, September 29, 2008 2007

Current assets:Cash and cash equivalents $11,875 $9,352Short-term investments 12,615 6,034Accounts receivable, less allowances of $47 each period 2,422 1,637Inventories 509 346Deferred tax assets 1,447 782Other current assets 5,822 3,805

Total current assets $34,690 $21,956

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

Apple Corporation Sample Accounts Receivable

Subsidiary Ledger Total Due

Acme $ 10,000Baxter 50,000Jones 15,000Martin 20,000Smith 5,000

$100,000 Gross Accounts

ReceivableLO1

Apple’s Consolidated Balance Sheets (Partial)

September 27 September 29(amounts in millions) 2008 2007

Accounts receivables, less allowances of $47In each period $2,422 $1,637

Net Realizable

Value

Estimat

ed

Unco

llecti

ble

Accounts

Credit SalesSlows inflow of cashRisk of uncollectible accounts

Trade Credit

Retail Customer Receivables

Terms: 2/10, net 30

Sales Invoice

Accounting for Bad Debts:Direct Write-off Method

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

Bad Debts Expense XXXAccounts 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 XXXAllowance 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 XXXAccounts Receivable—Dexter XXX

Bankrupt

Approaches tothe 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 Debts2004 $1,250,000 $ 26,4002005 1,340,000 29,3502006 1,200,000 23,1002007 1,650,000 32,1502008 2,120,000 42,700

$7,560,000 $153,700

Example:

Percentage of NetCredit Sales Method

Develop bad debt percentage:

$153,700$7,560,000

use 2%= 0.02033

Percentage of Accounts Receivable Method

$32,330 / $4,038,000 = 8% ratio of bad debts to the ending accounts receivable

December 31, 2010 Accounts Receivable $865,000

× 8% Credit balance required in Allowance account after adjustment $6,920

Example:

Example:

Percentage of Accounts Receivable Method

Assume prior years’ ending Accounts Receivable andbad debts is as follows: December 31Year Accounts Receivable Bad Debts2005 $ 650,000 $ 5,2502006 785,000 6,2302007 854,000 6,9502008 824,000 6,4502009 925,000 7,450

$4,038,000 $32,330

Percentage of Accounts Receivable Method

$32,330 / $4,038,000 = 8% ratio of bad debts to the ending accounts receivable

December 31, 2010 Accounts Receivable $865,000

× 8% Credit balance required in Allowance account after adjustment $6,920

Example:

Percentage of Accounts Receivable Method

Assume the Allowance for Doubtful Accounts has a beginning credit balance of $2,100:

Credit balance required in allowance account after adjustment $ 6,920 Less: Credit balance in allowance account before adjustment 2,100Amount for bad debt expense entry $ 4,820

Percentage of AccountsReceivable Method

Assume the Allowance for Doubtful Accounts has a beginning credit balance of $2,100:

Journal entry:Bad Debts Expense 4,820

Allowance for Doubtful Accounts 4,820To record estimated bad debts.

Percentage of AccountsReceivable Method

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

Accounts receivable $865,000Less: Allowance for doubtful account 6,920

Net realizable value $858,080

Aging Method Estimated Percent Estimated Amount

Category 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 MethodAssume 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 1,230Amount for bad debt expense entry $13,324

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

Journal entry:Bad Debts Expense 13,324

Allowance for Doubtful Accounts 13,324To record estimated bad debts.

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

Accounts receivable $168,500Less: Allowance for doubtful account 14,554

Net realizable value $153,946

Accounts Receivable Turnover

Net Credit SalesAverage 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, 2011.

Date: December 13, 2010

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 noteon 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, 2011:Cash 15,450

Notes Receivable 15,000Interest Revenue 360*

Interest Receivable 90*15,000 × 12% × 72/360

Accelerating the Cash Inflow from Sales

Credit card salesDiscounting notes receivable

LO4

Credit Card Sales

Competitive necessityCredit card company:

• Charges fee• Assumes risk of nonpayment

Discounting Notes ReceivableSell note prior to maturity date for cashReceive 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 investeeLO5

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:

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%

FairValue

Method

Significantinfluence

EquityMethod

Ourfocus

in Appendix

Investment in BondsBonds of other companies Intent and ability to hold until maturity

$100,000, 10% bond due ten years

Investment in Bonds

On 1/1/10, 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 2020

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 companiesRecorded at cost, including any

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

Investment in Stocks

On February 1, 2010, 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 DividendsDexter receives $500 cash dividends from Stuart common stock:Cash 500

Dividend 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