PREVIEW OF CHAPTER 3

Cash
What is Cash?
A financial asset—also a financial instrument.

Financial Instrument - Any contract that gives rise

to a financial asset of one entity and a financial
liability or equity interest of another entity.
ILLUSTRATION 3-1
Types of Assets
Cash
What is Cash?
 Most liquid asset.

 Standard medium of exchange.

 Basis for measuring and accounting for all other items.

 Current asset.

 Examples: Coin, currency, available funds on deposit at

the bank, money orders, certified checks, cashier’s
checks, personal checks, bank drafts and savings
accounts.
Cash
Reporting Cash
Cash Equivalents

Short-term, highly liquid investments that are both

a) readily convertible to cash, and

b) so near their maturity that they present
insignificant risk of changes in value.
Examples: Treasury bills, commercial paper, and
money market funds.
Reporting Cash
Restricted Cash
Companies segregate restricted cash from “regular” cash.

Examples, restricted for: (1) plant expansion, (2) retirement of

LTD, and (3) compensating balances.
LLUSTRATION 3-2: Disclosure of Restricted Cash
Reporting Cash
Bank Overdrafts
Company writes a check for more than the amount
in its cash account.
 Generally reported as a current liability.
 Offset against other cash accounts only when
accounts are with the same bank.
Summary of Cash Related Items ILLUSTRATION 3-3
Cash Controls
Management faces two problems in accounting for
cash transactions:

1. Establish proper controls to prevent any

unauthorized transactions by officers or
employees.

2. Provide information necessary to properly

manage cash on hand and cash transactions.
Using Bank Accounts
To obtain desired control objectives, a company can
vary the number and location of banks and the types
of accounts.
► General checking account.

► Collection float.

► Lockbox accounts.

► Imprest bank accounts.

The Imprest Petty Cash System
Used to pay small amounts for miscellaneous expenses.

Steps:
1. Record the transfer of $300 to petty cash:

Petty Cash 300

Cash 300

2. Petty cash custodian obtains signed receipts from each

individual to whom he or she pays cash.
The Imprest Petty Cash System
Steps:
3. Custodian receives a company check to replenish the fund.

Supplies Expense 42
Postage Expense 53
Miscellaneous Expense 76
Cash Over and Short 2
Cash 173
The Imprest Petty Cash System
Steps:
4. If the company decides that the amount of cash in the petty
cash fund is excessive by $50, it lowers the fund balance as
follows.

Cash 50
Petty cash 50
Physical Protection of Cash Balances
Company should
 Minimize the cash on hand.
 Only have on hand petty cash and current day’s
receipts.
 Keep funds in a vault, safe, or locked cash drawer.
 Transmit each day’s receipts to the bank as soon
as practicable.
 Periodically prove the balance shown in the general
ledger.
Reconciliation of Bank Balances
Schedule explaining any differences between the bank’s
and the company’s records of cash.
Reconciling Items:
1. Deposits in transit.

2. Outstanding checks.

3. Bank charges Time Lags

4. Bank credits.

5. Bank or depositor errors.

ILLUSTRATION 3A-1: Bank Reconciliation Form and Content
Reconciliation of Bank Balances
To illustrate, Nugget Mining Company’s books show a cash
balance at the Melbourne Bank on November 30, 2015, of
$20,502. The bank statement covering the month of
November shows an ending balance of $22,190. An
examination of Nugget’s accounting records and November
bank statement identified the following reconciling items.

1. A deposit of $3,680 that Nugget mailed November 30

does not appear on the bank statement.
2. Checks written in November but not charged to the
November bank statement are:
Check #7327 $ 150
#7348 4,820
#7349 31
 Cont’d
3. Nugget has not yet recorded the $600 of interest collected by
the bank November 20 on Sequoia Co. bonds held by the
bank for Nugget.
4. Bank service charges of $18 are not yet recorded on Nugget’s
books.
5. The bank returned one of Nugget’s customer’s checks for
$220 with the bank statement, marked “NSF.” The bank
deducted $220 from Nugget’s account.
6. Nugget discovered that it incorrectly recorded check #7322,
written in November for $131 in payment of an account
payable, as $311.
7. A check for Nugent Oil Co. in the amount of $175 that the
bank incorrectly charged to Nugget accompanied the
statement.
Solution
Reconciliation of Bank Balances
Journalize the required adjusting entries at November 30.
Cash 600
Interest Revenue 600
(To record interest on Sequoia Co. bonds, collected by bank)

Cash 180
Accounts Payable 180
(To correct error in recording amount of check #7322)

Office Expense (bank charges) 18

Cash 18
(To record bank service charges for November)

Accounts Receivable 220

Cash 220
(To record customer’s check returned NSF)
Reconciliation of Bank Balances
Question
The reconciling item in a bank reconciliation that
will result in an adjusting entry by the depositor is:
A. Outstanding Checks.
B. Deposit in Transit.
C. A Bank Error.
D. Bank Service Charges.
Receivables
Receivables - Claims held against customers and
others for money, goods, or services.

Oral promises of the Written promises to pay a

purchaser to pay for certain sum of money on
goods and services sold. a specified future date.

Accounts Notes
Receivable Receivable
Accounts Receivable
Non-Trade Receivables
1. Advances to officers and employees.
2. Advances to subsidiaries.
3. Deposits paid to cover potential damages or losses.
4. Deposits paid as a guarantee of performance or payment.
5. Dividends and interest receivable.
6. Claims against: Insurance companies for casualties
sustained; defendants under suit; governmental bodies for
tax refunds; common carriers for damaged or lost goods;
creditors for returned, damaged, or lost goods; customers
for returnable items (crates, containers, etc.).
Accounts Receivable
ILLUSTRATION 3-4: Receivables SoFP Sheet Presentations
Recognition of Accounts Receivable

Trade Discounts
Used to:

 Avoid frequent changes in 10 %

catalogs. Discount for
new Retail
 Alter prices for different
Store
quantities purchased.
Customers
 Hide the true invoice price
from competitors.
Recognition of Accounts Receivable

Cash Discounts (Sales Discounts)

 Offered to induce prompt
payment.

 Terms such as 2/10, n/30,

2/10, E.O.M., or net 30, Payment
E.O.M. terms are
2/10, n/30
 Gross Method vs. Net
Method.
Cash Discounts (Sales Discounts)
Recognition of Accounts Receivable
Illustration: On June 3, Bolton Company sold to Arquette
Company merchandise having a sale price of £2,000 with
terms of 2/10, n/60. On June 12, the company received a
check for the balance due from Arquette Company. Prepare
the journal entries on Bolton Company books to record the
sale assuming Bolton records sales using the gross method.

June 3 Accounts Receivable 2,000

Sales Revenue 2,000
June 12 Cash (£2,000 x 98%) 1,960
Sales Discounts 40
Accounts Receivable 2,000
Recognition of Accounts Receivable
Illustration: On June 3, Bolton Company sold to Arquette
Company merchandise having a sale price of £2,000 with
terms of 2/10, n/60. On June 12, the company received a
check for the balance due from Arquette Company. Prepare
the journal entries on Bolton Company books to record the
sale assuming Bolton records sales using the net method.

June 3 Accounts Receivable 1,960

Sales Revenue 1,960
June 12 Cash (£2,000 x 98%) 1,960
Accounts Receivable 1,960
Recognition of Accounts Receivable
Illustration: On June 3, Bolton Company sold to Arquette
Company merchandise having a sale price of £2,000 with
terms of 2/10, n/60, f.o.b. shipping point. Prepare the journal
entries on Bolton Company books to record the sale assuming
Bolton records sales using the net method, and Arquette did
not remit payment until July 29.

June 3 Accounts Receivable 1,960

Sales Revenue 1,960
July 29 Cash 2,000
Accounts Receivable 1,960
Sales Discounts Forfeited 40
Recognition of Accounts Receivable
Non-Recognition of Interest Element
A company should measure receivables in terms of their
present value.

In practice, companies ignore

interest revenue related to
accounts receivable because, for
current assets, the amount of
the discount is not usually
material in relation to the net
income for the period.
Accounts Receivable
How are these accounts presented on the Statement
of Financial Position?

Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.

End. 500 25 End.

Accounts Receivable

ABC Corporation
Statement of Financial Position (partial)
Current Assets:
Inventory $ 812
Prepaid expense 40
Accounts receivable 500
Less: Allowance for doubtful accounts (25) 475
Cash 330
Total current assets 1,657
Accounts Receivable
ABC Corporation
Statement of Financial Position (partial)
Current Assets:
Inventory $ 812
Prepaid expense 40
Accounts receivable, net of $25 allowance 475
Cash 330
Total current assets 1,657
Accounts Receivable
Journal entry for credit sale of $100?
Accounts Receivable 100
Sales Revenue 100

Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.

End. 500 25 End.

Accounts Receivable
Journal entry for credit sale of $100?
Accounts Receivable 100
Sales Revenue 100

Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
Sale 100

End. 600 25 End.

Accounts Receivable
Collected $333 on account?
Cash 333
Accounts Receivable 333

Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
Sale 100

End. 600 25 End.

Accounts Receivable
Collected $333 on account?
Cash 333
Accounts Receivable 333

Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
Sale 100 333 Coll.

End. 267 25 End.

Accounts Receivable
Adjustment of $15 for estimated bad debts?
Bad Debt Expense 15
Allowance for Doubtful Accounts 15

Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
Sale 100 333 Coll.

End. 267 25 End.

Accounts Receivable
Adjustment of $15 for estimated bad debts?
Bad Debt Expense 15
Allowance for Doubtful Accounts 15

Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
Sale 100 333 Coll. 15 Est.

End. 267 40 End.

Accounts Receivable
Write-off of uncollectible accounts for $10?
Allowance for Doubtful accounts 10
Accounts Receivable 10

Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
Sale 100 333 Coll. 15 Est.

End. 267 40 End.

Accounts Receivable
Write-off of uncollectible accounts for $10?
Allowance for Doubtful accounts 10
Accounts Receivable 10

Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
Sale 100 333 Coll. 15 Est.
10 W/O W/O 10

End. 257 30 End.

Accounts Receivable
ABC Corporation
Statement of Financial Position (partial)
Current Assets:
Inventory $ 812
Prepaid expense 40
Accounts receivable, net of $30 allowance 227
Cash 330
Total current assets 1,409
Accounts Receivable
Valuation of Accounts Receivable
 Reporting of receivables involves
1) Classification and
2) Valuation on the statement of financial
position.
 Classification involves determining the length of
time each receivable will be outstanding.
 Value and report short-term receivables at cash
realizable value.
Valuation of Accounts Receivable
Uncollectible Accounts Receivable
 Record credit losses as debits to Bad Debt
Expense (or Uncollectible Accounts Expense).
 Normal and necessary risk of doing business on
credit.
 Two methods to account for uncollectible
accounts:
1) Direct write-off method
2) Allowance method
Valuation of Accounts Receivable

Methods of Accounting for Uncollectible Accounts

Direct Write-Off Allowance Method

Theoretically deficient: Losses are estimated:
 No matching.  Percentage-of-sales.
 Receivable not stated at  Percentage-of-
cash realizable value. receivables.
 Not appropriate when  IFRS requires when bad
amount uncollectible is debts are material in
material. amount.
Direct Write-Off Method for Uncollectible Accounts
Allowance Method for Uncollectible Accounts
Cont’d
Cont’d
Recording Write-Off of Uncollectible Accounts
Illustration: The financial vice president of Brown Furniture
authorizes a write-off of the £1,000 balance owed by Randall
Co. on March 1. The entry to record the write-off is:

Allowance for Doubtful Accounts 1,000

Accounts Receivable 1,000

Recovery of an Uncollectible Account: Assume that on July 1,

Randall Co. pays the £1,000 amount that Brown had written off
on March 1. These are the entries:
Accounts Receivable 1,000
Allowance for Doubtful Accounts 1,000
Cash 1,000
Accounts Receivable 1,000
Allowance Method ILLUSTRATION 3-7
Comparison of Bases for
Estimating Uncollectibles

The percentage-of-sales basis The percentage-of-receivables

results in a better matching of basis produces the better
expenses with revenues estimate of cash realizable
value
Allowance Method

Percentage-of-Sales Approach
 Percentage based upon past experience and
anticipate credit policy.
 Achieves better matching of cost and revenues.
 Any balance in Allowance for Doubtful Accounts
is ignored.
 Method frequently referred to as the income
statement approach.
Percentage-of-Sales Approach
Illustration: Gonzalez Company estimates that about 1% of net
credit sales will become uncollectible. If net credit sales are
R$800,000 for the year, it records bad debt expense as follows.

Bad Debt Expense (1% x R$800,000) 8,000

Allowance for Doubtful Accounts 8,000

ILLUSTRATION 7-8
Allowance Method

Percentage-of-Receivables Approach
 Not matching.
 Estimate of the receivables’ realizable value.
Companies may apply this method using
 one composite rate, or
 an aging schedule using different rates.
Percentage-of-Receivables Approach
ILLUSTRATION 3-9
Accounts Receivable
Aging Schedule

What entry
would Wilson
make assuming
that the
allowance
account had a
zero balance?

Bad Debt Expense 37,650

Allowance for Doubtful Accounts 37,650
Percentage-of-Receivables Approach
ILLUSTRATION 3-9
Accounts Receivable
Aging Schedule

What entry
would Wilson
make assuming
the allowance
account had a
credit balance
of €800
before
adjustment?

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

Allowance for Doubtful Accounts 36,850
Allowance Method
Illustration: Sandel Company reports the following financial
information before adjustments.

Instructions: Prepare the journal entry to record bad

debt expense assuming Sandel Company estimates bad
debts at (a) 1% of net sales and (b) 5% of accounts
receivable.
Allowance Method
Illustration: Sandel Company reports the following financial
information before adjustments.

Instructions: Prepare the journal entry assuming Sandel

estimates bad debts at (a) 1% of net sales.
Bad Debt Expense 7,500
Allowance for Doubtful Accounts 7,500
(€800,000 – €50,000) x 1% = €7,500
Allowance Method
Illustration: Sandel Company reports the following financial
information before adjustments.

Instructions: Prepare the journal entry assuming Sandel

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

Bad Debt Expense 6,000

Allowance for Doubtful Accounts 6,000
(€160,000 x 5%) – €2,000) = €6,000
Impairment Evaluation Process
Companies assess their receivables for impairment each
reporting period. Possible loss events are:
1. Significant financial problems of the customer.

2. Payment defaults.
3. Renegotiation of terms of the receivable due to
financial difficulty of the customer.

4. Decrease in estimated future cash flows from a group

of receivables since initial recognition, although the
decrease cannot yet be identified with individual
assets in the group.
Impairment Evaluation Process
A receivable is considered impaired when a loss event indicates
a negative impact on the estimated future cash flows to be
received from the customer. The IASB requires that the
impairment assessment should be performed as follows.

1. Receivables that are individually significant should be

considered for impairment separately.

2. Any receivable individually assessed that is not considered

impaired should be included with a group of assets with
similar credit-risk characteristics and collectively
assessed for impairment.

3. Any receivables not individually assessed should be

collectively assessed for impairment.
Impairment Evaluation Process
Illustration: Hector Company has the following receivables
classified into individually significant and all other receivables.

Hector determines that Yaan’s receivable is impaired by

€15,000, and Blanchard’s receivable is totally impaired. Both
Randon’s and Fernando’s receivables are not considered
impaired. Hector also determines that a composite rate of 2% is
appropriate to measure impairment on all other receivables.
Impairment Evaluation Process
The total impairment is computed as follows.
ILLUSTRATION 3-10
Notes Receivable
Supported by a formal promissory note.
 A negotiable instrument.
 Maker signs in favor of a Payee.
 Interest-bearing (has a stated rate of interest)
OR
 Zero-interest-bearing (interest included in face
amount).
Notes Receivable
Generally originate from:
 Customers who need to extend payment period
of an outstanding receivable.
 High-risk or new customers.
 Loans to employees and subsidiaries.
 Sales of property, plant, and equipment.
 Lending transactions (the majority of notes).
Recognition of Notes Receivable

Short-Term Long-Term
Record at
Record at
Present Value
Face Value,
of cash expected
less allowance
to be collected

Interest Rates Note Issued at

Stated rate = Market rate Face Value

Stated rate > Market rate Premium

Stated rate < Market rate Discount

Note Issued at Face Value
Illustration: Bigelow Corp. lends Scandinavian Imports €10,000
in exchange for a €10,000, three-year note bearing interest at
10 percent annually. The market rate of interest for a note of
similar risk is also 10 percent. How does Bigelow record the
receipt of the note?

i = 10%
€10,000 Principal

PV-OA €1,000 1,000 1,000 Interest

0 1 2 3 4
n=3
ILLUSTRATION 3-11
Time Diagram for Note Issued at Face Value
Note Issued at Face Value
Summary Present value of interest € 2,487
Present value of principal 7,513
Note current market value €10,000

Journal Entries

Jan. yr. 1 Notes Receivable 10,000

Cash 10,000

Dec. yr. 1 Cash 1,000

Interest Revenue 1,000
Zero-Interest-Bearing Notes
Illustration: Jeremiah Company receives a three-year, $10,000
zero-interest-bearing note. The market rate of interest for a
note of similar risk is 9 percent. How does Jeremiah record the
receipt of the note?

i = 9%
$10,000 Principal

PV-0A $0 $0 $0 Interest

0 1 2 3 4
n=3

ILLUSTRATION 3-13
Time Diagram for Zero-Interest-Bearing Note
Zero-Interest-Bearing Notes

ILLUSTRATION 3-14
Discount Amortization Schedule—Effective-Interest Method
 ILLUSTRATION 3-14
Zero-Interest-Bearing Notes Discount Amortization
Schedule—Effective-
Interest Method

Prepare the journal entry to record the receipt of the note.

Notes Receivable 7,721.80
Cash 7,721.80
 ILLUSTRATION 3-14
Zero-Interest-Bearing Notes Discount Amortization
Schedule—Effective-
Interest Method

Record interest revenue at the end of the first year.

Notes Receivable 694.96
Interest Revenue ($7,721.80 x 9%) 694.96
Interest-Bearing Notes
Illustration: Morgan Corp. makes a loan to Marie Co. and
receives in exchange a three-year, €10,000 note bearing
interest at 10 percent annually. The market rate of interest for
a note of similar risk is 12 percent. Prepare the journal entry to
record the receipt of the note?

i = 12%
€10,000 Principal

PV-0A €1,000 1,000 1,000 Interest

0 1 2 3 4
n=3
Interest-Bearing Notes ILLUSTRATION 3-16
Computation of Present
Value—Effective Rate
Illustration: Record the receipt of the note? Different from Stated Rate

Notes Receivable 9,520

Cash 9,520
Interest-Bearing Notes

ILLUSTRATION 3-17
Discount Amortization
Schedule—Effective-
Interest Method
 ILLUSTRATION 3-17
Interest-Bearing Notes Discount Amortization
Schedule—Effective-Interest
Method

Record interest revenue at the end of the first year.

Cash 1,000
Notes Receivable 142
Interest Revenue 1,142
Notes Receivable
Notes Received for Property, Goods, or Services
In a bargained transaction entered into at arm’s length,
the stated interest rate is presumed to be fair unless:
1. No interest rate is stated, or
2. Stated interest rate is unreasonable, or
3. Face amount of the note is materially different from
the
 current cash sales price or
 from the current market value of the debt
instrument.
Notes for Property, Goods, or Services
Illustration: Oasis Development Co. sold a corner lot to Rusty
Pelican as a restaurant site. Oasis accepted in exchange a five-
year note having a maturity value of £35,247 and no stated
interest rate. The land originally cost Oasis £14,000. At the
date of sale the land had a fair market value of £20,000. Oasis
uses the fair market value of the land, £20,000, as the present
value of the note. Oasis therefore records the sale as:

Notes Receivable 20,000

Land 14,000
Gain on Sale of Land (£20,000 - £14,000) 6,000
Valuation of Notes Receivable
 Short-Term reporting parallels that for trade accounts
receivable.
 Long-Term
► Value may change over time as a discount or premium
is amortized.
► Impairment
● Tests often done on an individual assessment basis.
● Losses measured as the difference between the
carrying value of the receivable and the present
value of the estimated future cash flows discounted
at the original effective-interest rate.
Valuation of Notes Receivable
Illustration: Tesco Inc. has a note receivable with a carrying
amount of €200,000. The debtor, Morganese Company, has
indicated that it is experiencing financial difficulty. Tesco
decides that Morganese’s note receivable is therefore impaired.
Tesco computes the present value of the future cash flows
discounted at its original effective-interest rate to be
€175,000. The computation of the loss on impairment is as
follows.
Valuation of Notes Receivable
The computation of the loss on impairment is as follows.

The entry to record the impairment loss is as follows.

Bad Debt Expense 25,000

Allowance for Doubtful Accounts 25,000
Special Issues
Fair Value Option
 Companies have the option to record fair value in
their accounts for most financial assets and liabilities,
including receivables.
 If companies choose the fair value option

► Receivables are recorded at fair value.

► Unrealized holding gains or losses reported as

part of net income.

 Company reports the receivable at fair value each

reporting date.
Special Issues
Fair Value Option
 Companies may elect to use the fair value option at the
time the receivable is

► originally recognized or

► when some event triggers a new basis of accounting.

 Must continue to use fair value measurement for that

receivable until the company no longer owns this
receivable.

 If not elected at date of recognition, company may not

use the fair value option on that specific receivable.
Recording Fair Value Option
Illustration: Escobar Company has notes receivable that have a
fair value of R$810,000 and a carrying amount of R$620,000.
Escobar decides on December 31, of the current year, to use
the fair value option for these receivables. This is the first
valuation of these recently acquired receivables. At December
31, Escobar makes an adjusting entry to record the increase in
value of Notes Receivable and to record the unrealized holding
gain, as follows.

Notes Receivable 190,000

Unrealized Holding Gain or Loss—Income 190,000
Special Issues
Derecognition of Receivables
Transfer (e.g., sell) receivables to another company for cash.

Reasons:
 Accelerate the receipt of cash.
 Competition.
 Sell receivables because money is tight.
 Billing / collection are time-consuming and costly.
Transfer accomplished by:
1. Secured Borrowing
2. Sale of Receivables
Derecognition of Receivables
Secured Borrowing
Using receivables as collateral in a borrowing transaction.

Illustration: On March 1, 2015, Meng Mills, Inc. provides

(assigns) NT$700,000 of its accounts receivable to Sino
Bank as collateral for a NT$500,000 note. Meng Mills
continues to collect the accounts receivable; the account
debtors are not notified of the arrangement. Sino Bank
assesses a finance charge of 1 percent of the accounts
receivable and interest on the note of 12 percent. Meng
Mills makes monthly payments to the bank for all cash it
collects on the receivables.
ILLUSTRATION 3-18
Entries for Transfer of
Receivables—Secured
Borrowing
Secured Borrowing
Illustration: On April 1, 2015, Prince Company assigns $500,000
of its accounts receivable to the Hibernia Bank as collateral for
a $300,000 loan due July 1, 2015. The assignment agreement
calls for Prince Company to continue to collect the receivables.
Hibernia Bank assesses a finance charge of 2% of the accounts
receivable, and interest on the loan is 10% (a realistic rate of
interest for a note of this type).
Instructions:
a) Prepare the April 1, 2015, journal entry for Prince Company.
b) Prepare the journal entry for Prince’s collection of $350,000
of the accounts receivable during the period from April 1,
2015, through June 30, 2015.
c) On July 1, 2015, Prince paid Hibernia all that was due from the
loan it secured on April 1, 2015.
Secured Borrowing
Instructions:
a) Prepare the April 1, 2015, journal entry for Prince Company.
b) Prepare the journal entry for Prince’s collection of $350,000.
c) On July 1, 2015, Prince paid Hibernia all that was due from the
loan it secured on April 1, 2015.

a) Cash 290,000
Finance Charge ($500,000 x 2%) 10,000
Notes Payable 300,000
b) Cash 350,000
Accounts Receivable 350,000
c) Notes Payable 300,000
Interest Expense (10% x $300,000 x 3/12) 7,500
Cash 307,500
Sales of Receivables
Factors are finance companies or banks that ILLUSTRATION 3-19
Basic Procedures in
buy receivables from businesses for a fee. Factoring
Sales of Receivables

Sale without Guarantee

 Purchaser assumes risk of collection.
 Transfer is outright sale of receivable.
 Seller records loss on sale.
 Seller uses a Due from Factor (receivable)
account to cover discounts, returns, and
allowances.
Sale without Guarantee
Illustration: Crest Textiles, Inc. factors €500,000 of
accounts receivable with Commercial Factors, Inc., on a non-
guarantee basis. Commercial Factors assesses a finance charge
of 3 percent of the amount of accounts receivable and retains
an amount equal to 5 percent of the accounts receivable (for
probable adjustments). Crest Textiles and Commercial Factors
make the following journal entries for the receivables
transferred without guarantee.

ILLUSTRATION 3-20
Entries for Sale of Receivables without Guarantee
Sales of Receivables
Sale with Guarantee
 Seller guarantees payment to purchaser.
 Transfer is considered a borrowing—sometimes
referred to as a failed sale.
Assume Crest Textiles sold the receivables on
ILLUSTRATION 3-21
a with guarantee basis. Sale with Guarantee
 ILLUSTRATION 3-22
Summary of Transfers Accounting for Transfers
of Receivables
Presentation and Analysis
General rules in classifying receivables are:
1. Segregate and report carrying amounts of different
categories of receivables.
2. Indicate receivables classified as current and non-current in
the statement of financial position.
3. Appropriately offset the valuation accounts for receivables
that are impaired, including a discussion of individual and
collectively determined impairments.
4. Disclose the fair value of receivables in such a way that
permits it to be compared with its carrying amount.
5. Disclose information to assess the credit risk inherent in the
receivables.
6. Disclose any receivables pledged as collateral.
7. Disclose all significant concentrations of credit risk arising
from receivables.
Presentation and Analysis
ILLUSTRATION 3-24
Analysis of Receivables Computation of Accounts
Receivable Turnover

This Ratio used to:

 Assess the liquidity of the receivables.

 Measure the number of times, on average, a company
collects receivables during the period.
The End of Chapter 3
Thank You!!!