Cash & Receivables

Question 1

What are some examples of current assets?

Answer 1

Negotiable paper

Money market funds

Passbook savings accounts

Deposits held as compensating balances against borrowings which are not legally restricted

Time certificates of deposit with original maturities of three months or less

Question 2

What are exclusions from current assets?

Answer 2

Time certificates of deposit (CDs) with original maturities longer than three months

Legally restricted deposits held as compensating balances

Restricted cash (classified as current or noncurrent based on what it’s restricted for, segregated from unrestricted cash either way)

Overdrafts (NOT negative cash amounts, but current liabilities)

Certain deposits (restricted)

Postdated checks

IOUs

Postage

Question 3

What is the reason for periodic bank reconciliation?

Answer 3

Differences arise from items in books but not bank statements (or vice versa)

Errors

Certified and cashier’s checks

Question 4

In a bank reconciliation, how do you get from the bank amount to the true amount?

Answer 4

Add deposits on hand (with company)

Add cash on hand

Subtract outstanding checks

Question 5

In a bank reconciliation, how do you get from the book amount to the true amount?

Answer 5

Add/subtract for transactions with bank not yet recorded

Subtract bank fees

Subtract returned NSF checks

Question 6

What are the journal entries for bank reconciliation?

Answer 6

Only JEs from adjustments to book balance

JE for transactions with bank not yet recorded (varies)

Debit: Bank Fee
Credit: Cash

Debit: Special Receivable - NSF Check
Credit: Cash

Question 7

What are accounts receivable?

Answer 7

Claims arising from ordinary sales operations

Other claims should be reported separately

Question 8

How should accounts receivable be reported?

Answer 8

Net Realizable Value (net amount expected to be received in cash)

Question 9

How should discounts on A/Rs for prompt payment be recorded?

Answer 9

Record A/Rs net of discounts for prompt payment

If payment not prompt, record difference as interest revenue

If A/Rs recorded at gross, anticipate and deduct discounts at year-end

Question 10

How should trade and quantity discounts on A/Rs be recorded?

Answer 10

Record the actual consideration agreed upon

Apply multiple discounts successively, not cumulatively

Question 11

How should sales returns and allowances for A/Rs be recorded?

Answer 11

Future returns and allowances for outstanding A/Rs should be anticipated and recorded at the balance sheet date

Credit a separate allowance account for estimated amount

Question 12

How are freight charges for A/Rs recorded?

Answer 12

If freight is borne by seller, charged to expense account

If freight is borne by buyer, charge included in receivable

Question 13

What is the percentage-of-sales method for estimating uncollectible receivables?

Answer 13

Bad Debt Expense = % of Sales for the period

Previous year’s BDE not considered - this method is income-statement-oriented

Yet, amount charged to BDE should still be added to existing balance of Allowance for Uncollectible Receivables

Question 14

What is the percentage-of-outstanding-receivables method for estimating uncollectible receivables?

Answer 14

Total Bad Debt Expense = % of ending balance of gross A/Rs

Amount of BDE recognized is difference between existing balance and desired balance - this method is balance-sheet-oriented

Method can also involve “aging,” where different percentages are applied to differently aged A/Rs

Question 15

How do bad debt expense and accounts written off affect net income?

Answer 15

Recording BDE decreases net income, net A/Rs, current assets

Recording accounts written off has no effect

Reinstating bad A/Rs also have no effect, since they still predict uncollectibility from other A/Rs

Question 16

What JEs record bad debt expense and allowances for uncollectible receivables?

Answer 16

Debit: Bad Debt Expense
Credit: Allowance for Uncollectible Accounts (contra account to A/R)

As A/Rs are identified and written off…
Debit: Allowance for Uncollectible Accounts
Credit: A/R - John Doe

Question 17

What JEs record subsequent collections on written-off A/Rs?

Answer 17

Debit: A/R - John Doe
Credit: Allowance for Uncollectible Accounts

Debit: Cash
Credit: A/R - John Doe

Question 18

Why is the direct write-off method prohibited?

Answer 18

Does not match cost of sale with revenues

Question 19

Can sales for goods on consignment be included in A/Rs?

Answer 19

Not if the consignee has not yet sold them

Instead, they must be included in consignor’s inventory at cost, not in consignor’s A/R

Question 20

What is the Uncollectible Accounts Expense?

Answer 20

The same as Bad Debt Expense

Question 21

What are notes receivable?

Answer 21

Claims not arising from ordinary business sales

Usually result from:

• sale of property
• special arrangements for overdue A/Rs
• loans to stockholders, employees, and affiliates

Question 22

What is the difference between interest-bearing and noninterest-bearing notes receivable?

Answer 22

In noninterest-bearing notes receivable, the interest is included in the face amount, not an addition to it

Question 23

How are notes receivable valuated?

Answer 23

Usually at present value, discounted at market rate

If exchanged for cash, note’s PV is assumed to equal cash proceeds

Noninterest-bearing N/R and N/Rs with unrealistic interest rates are reported at either PV or FV of goods or services exchanged. Resultant discount or premium should be amortized with effective interest method.

Question 24

How are loan origination fees relevant to notes receivable?

Answer 24

Should be deferred and amortized (with interest method) over the life of the loan as an adjustment to interest income

Question 25

How can an impaired loan be measured?

Answer 25

Present Value method - PV of future cash flows, net of discounted disposal costs, discounted at effective interest rate

Market Price method - loan’s observable market price

Fair Value of Collateral method - self-explanatory; this method should be used if foreclosure is likely

Question 26

What is the difference between an annuity due and an ordinary annuity?

Answer 26

Annuity due - paid at beginning of period

Ordinary annuity - paid at end of period

Question 27

How is a note receivable valuated if made under customary trade terms and receivable within one year?

Answer 27

Generally the same as an A/R - not discounted, but recorded at face value

Question 28

What are four ways to convert receivables to cash?

Answer 28

• Discounting
• Assignment
• Factoring
• Pledging

Accounted for as sale if holder surrenders control of receivable; otherwise accounted for as secured borrowing with collateral

Question 29

What is discounting?

Answer 29

Selling a N/R to a third party (usually a bank) at a discount

Often done “with recourse” = seller is liable for note if debtor defaults - seller must disclose this as contingent liability (either footnote or contra-asset account to N/R)

To discount, seller must first calculate (1) interest accrued prior to discounting and (2) proceeds to be received from discounting

Question 30

How do you calculate the proceeds from a discounted note receivable?

Answer 30

Face Amount
\+ Interest at Maturity (not discounted)
= Maturity Value
- Discount (Maturity Value x Discount Rate x Remainder of Time)
= Proceeds

Question 31

What is the “Notes Receivable Discounted” account?

Answer 31

It represents N/Rs that are still held with recourse (a contingent liability)

Contra-asset account which equals the face value of the N/R (NOT the discount proceeds)

Question 32

What is assignment?

Answer 32

The rights to A/R are given to a financial institution in exchange for cash

Transfers A/R to special account, “Accounts Receivable Assigned”
-Cash received from institution recorded as a liability

Usually includes “with recourse” and “non-notification” clauses

Question 33

What does the non-notification clause mean?

Answer 33

The debtor is not notified of the assignment of A/Rs

Debtor payments forwarded from assignor to assignee

Question 34

What is factoring?

Answer 34

Selling A/R to the factor

Generally without recourse, factor generally handles billing and collection from debtor

Question 35

What is pledging?

Answer 35

Offering A/Rs as security for loans

Pledged A/Rs must be disclosed

Question 36

If an A/R is sold with recourse, should it be kept on the books?

Answer 36

Usually, yes

If (1) A/Rs are isolated from transferor,
(2) transferee is free to pledge/exchange A/Rs, and
(3) there is no repurchase agreement,
then remove from books

Primary issue is CONTROL

Question 37

If a receivable is to be paid in equal installments (part principal and part interest) over a series of periods, how do you calculate what the amount will be?

Answer 37

(Face amount of receivable) / (PV factor of ordinary annuity for n periods at stated rate) = Periodic Payment

Question 38

Are notes receivable recorded with their interest revenues included?

Answer 38

NO

Only noninterest-bearing notes will automatically have interest amounts included. All other notes have separate interest receivable (and interest revenue) accounts.