Chapter 7: Cash and Receivables Flashcards
Journalizing gross method of Accounts Receivable
Record Accounts receivable at total price without discount
When payment is received within discount period:
Debit: Sales Discounts (contra-account, deduction from sales to arrive at net sales)
Journalizing Factoring Sale with Recourse
Debit Cash Received
Debit Due from Factor (proceeds retained to cover potential allowances)
Debit losses on sale (carrying value less net proceeds)
Credit Accounts Receivable (full Amount)
Credit Recourse Liability
Net Proceeds = Cash received + due from factor - less recourse liability
Journalizing factoring sale without recourse
Debit Cash (cash received)
Debit Due from Factor
Debit Loss on sale of receivables
Credit Accounts receivable (full Amount)
Due from Factor account
Reported as a receivable (Debit up, credit down)
Proceeds retained by the factor to cover probably sales discounts, returns and allowances.
Factor side: recorded as due to customer
Recording fair value option
Must make an adjusting entry so that the notes reflect fair value and it is recognized in unrealized holdings
Gain
Debit Notes Receivable
Credit Unrealized holding gain or loss (income)
Loss:
Debit Unrealized holding gain or loss
Credit notes receivable
Fair Value Option
Can start using when financial instrument is acquired OR when an event triggers a change, not randomly.
Companies now have the option to record fair value in their accounts for more financial instruments - including receivables.
Unrealized gains and losses are included as part of net income.
If company elects to use the fair value option it must continue to use it as long as the company owns the financial instrument
Unrealized holding gain or loss
Net change in fair value of a receivable from one period to another (EXCLUSIVE of interest revenue)
Note for property goods or services when face value does NOT equal fair value
DIDN’T UNDERSTAND
Debit Notes receivable (note maturity value)
Credit discount on N/R (Note value - fair value)
Credit Asset (historical price)
Credit Gain on disposal of asset (fair value - historical price)
Carrying Amount (note receivable) on financial statements
Note Receivable
Discount on note receivable
Note + Discount = carrying amount
Note - Premium = carrying amount
Notes Receivable on Balance sheet
Reported at present value of cash they expect to collect.
Difference between interest rate and market rate is recorded as a discount or a premium, amortized over the life of the note.
Also consider allowance for doubtful accounts
Must disclose fair value in the notes
Imputed Interest Rate
DIDN’T UNDERSTAND
Journaling Interest received on note issued at discount
Effective interest method: Debit Cash (interest payment received) Debit Discount on note received (amortized amount) Credit interest revenue (total)
Premium on note receivable
Present value > face value
Premium amortized across life of note to REDUCE annual interest revenue
Effective interest method
DIDN’T UNDERSTAND
Method of amortizing discount (or premium) of notes receivable
Journalizing notes receivable when effective rate of interest > stated rate
When present value of principle + present value of interest > face value of note
Debit Notes Receivable
Credit Discount on Notes Receivable
Credit Cash
Discount on note receivable then amortized into interest payments
Jounalizing Notes Receivable: zero interest bearing notes
Debit Notes Receivable (face value)
Credit Discount on N/R (difference)
Credit Cash
Amortizing discount:
Debit Discount on notes receivable
Credit interest revenue
Discount on notes receivable
Contra asset account
Debit decrease, credit increase
Implicit interest rate
On zero-interest bearing notes
Future Value - present value = interest amount
then amortized over life of the note
Interest bearing vs zero interest bearing notes
Interest bearing - include a stated rate of interest
Zero interest bearing- includes the interest as part of the face amount:
- Present value = cash paid to user
- Future value = face value
- Interest = difference
Journaling notes issued at face value
Purchase:
Debit Notes Receivable (total amount paid)
Credit Cash (total amount paid)
Recognizing Interest:
Debit Cash
Credit Interest Revenue
Present Value of a note issued
Present value of Principle + Present value of Interest = Present value of note
Face value less present value = interest
Notes Receivable
Negotiable instrument from a maker to a payee
may be sold or transferred
considered liquid even if long term because can be converted to cash by a sale
Allowance method for uncollectable accounts on financial statements
Receivables shown at net amount expected to be collected
Accounts Receivable
Less allowance for doubtful accounts
Some risk that this can be used to manage earnings (high estimate in good periods balanced against low estimates in bad periods)
Aging schedule
Used to determine allowance for doubtful accounts (bad debt expense)
Control device to identify delinquent accounts
classifies customer balances by the length of time they have gone unpaid (ex: 1-30 days, 31-60, 61-90, 90+_