ASSIGNMENT OF ACCOUNTS RECEIVABLE
(continued)
In Santa Teresa’s December 31, 2016, balance sheet, the receivables and
note payable would be reported together as follows:
T7-13 (continued)
7-22 Intermediate Accounting, 8/e
ACCOUNTS RECEIVABLE FACTORED WITHOUT RECOURSE
The buyer assumes the risk of uncollectibility when accounts
receivable are factored without recourse. The seller accounts
for the transaction as a sale.
In December 2016, the Santa Teresa Glass Company factored accounts
receivable that had a book value of $600,000 to Factor Bank. The transfer
was made without recourse. Under this arrangement, Santa Teresa
transfers the $600,000 of receivables to Factor, and Factor immediately
remits to Santa Teresa cash equal to 90% of the factored amount (90% x
$600,000 = $540,000). Factor retains the remaining 10% to cover its
Illustration 7-17
T7–14
ACCOUNTS RECEIVABLE FACTORED WITH RECOURSE —
SALE CONDITIONS MET
If certain conditions are met, factoring with recourse is
accounted for as a sale of the receivables; otherwise, it is
accounted for as a borrowing.
If accounted for as a sale, the only difference in accounting
In Illustration 7-17, assuming that the fair value of the recourse
obligation is estimated to be $5,000, the transfer is accounted for as
follows:
Illustration 7-18
T7–15
7-24 Intermediate Accounting, 8/e
DISCOUNTING A NOTE RECEIVABLE
The transfer of a note receivable to a financial institution is
called discounting. Similar to accounts receivable, if certain
conditions are met, the transfer is accounted for as a sale;
otherwise as a borrowing.
On December 31, 2016, the Stridewell Wholesale Shoe Company sold
land in exchange for a nine-month, 10% note. The note requires the
payment of $200,000 plus interest on September 30, 2017. The
company’s fiscal year-end is December 31. The 10% rate properly
reflects the time value of money for this type of note. On March 31,
2017, Stridewell discounted the note at the Bank of the East. The Bank’s
discount rate is 12%.
Because the note has been outstanding for three months before being
discounted at the bank, Stridewell first records the interest that has
accrued prior to being discounted:
Illustration 7-19
T7–16
DISCOUNTING A NOTE RECEIVABLE
(continued)
Discounted Note Treated as a Sale
Cash (proceeds determined above) ……………………. 202,100
T7-16 (continued)
7-26 Intermediate Accounting, 8/e
Do Transferors Typically Prefer Sales or
Secured-Borrowing Treatment? Sales!
Does the
Accounting
Approach:
Transfer of
Receivables
Accounted for as a:
Why Sales Approach is
Preferred by the
Transferor:
Sale
Secured
Borrowing
Derecognize A/R,
reducing assets?
Yes
No
Sale approach produces
lower total assets and
higher return on assets
(ROA)
leverage (debt/equity)
Recognize gain on
Sale approach can produce
transfer.
Where is cash
received shown in
May be in
operating
Always in
financing
Sale approach can produce
higher cash flow from
Illustration 7-21
When Can a Transfer be Treated as a Sale?
Key – the transferor must have surrendered control of the
receivables, which occurs if and only if:
A.
The transferred assets have been isolated from the
transferor—beyond the reach of the transferor and its
creditors.
T7–18
7-28 Intermediate Accounting, 8/e
FINANCING WITH RECEIVABLES – A SUMMARY
Financing with Receivables
Is the arrangement a transfer
of specific receivables or
Pledging
Does the transfer meet the three
conditions for treatment as a sale?
No
Record as a Sale:
Record as a secured borrowing:
Disclose arrangement in debt
Illustration 7-23
INTERNATIONAL FINANCIAL REPORTING STANDARDS
Transfers of Receivables. The international and U.S. guidance often lead to
similar accounting. Both seek to determine whether an arrangement should be treated
as a secured borrowing or a sale, and, having concluded which approach is
appropriate, both account for the approaches in a similar fashion. Also, the recent
change in U.S. GAAP that eliminated the concept of QSPEs is a step towards
convergence with IFRS, and is likely to reduce the proportion of U.S. securitizations
that qualify for sale accounting.
Where IFRS and U.S. GAAP most differ is in the conceptual basis for their choice
of accounting approaches and in the decision process they require to determine which
approach to use. Under IFRS:
1. If the company transfers substantially all of the risks and rewards of
ownership, the transfer is treated as a sale.
T 7-20
7-30 Intermediate Accounting, 8/e
DECISION MAKERS’ PERSPECTIVE
➢ A company’s investment in receivables is influenced by
several variables, including the level of sales, the nature of the
product or service sold, and credit and collection policies.
➢ Management must evaluate the costs and benefits of any
change in credit and collection policies.
➢ The two ratios designed to monitor receivables are:
the receivables turnover ratio, and
Receivables turnover ratio = Net sales
Average accounts receivable (net)
Average collection period = 365
Receivables turnover ratio
T7–21
BANK RECONCILIATION —
RECONCILING ITEMS
Step 1: Adjustments to Bank Balance:
1. Add deposits outstanding. These represent cash received by the company and
debited to cash that have not been deposited in the bank by the bank statement
Step 2: Adjustments to Book Balance:
1. Add collections made by the bank on the company’s behalf and other increases
in cash that the company is unaware of until the bank statement is received.
Illustration 7–A1
T7–22
7-32 Intermediate Accounting, 8/e
BANK RECONCILIATION
The Hawthorne Manufacturing Company maintains a general checking
account at the First Pacific Bank. First Pacific provides a bank statement
and canceled checks once a month. The cutoff date is the last day of the
month. The bank statement for the month of May is summarized as
follows:
Balance, May 1, 2016 $32,120
The company’s general ledger cash account has a balance of $35,276 at
the end of May. A review of the company records and the bank statement
reveals the following:
1. Cash receipts not yet deposited totaled $2,965.
2. A deposit of $1,020 was made on May 31 that was not credited to
Illustration 7A-2
BANK RECONCILIATION
(continued)
Step 1: Bank Balance to Corrected Balance
Balance per bank statement $34,680
Add: Deposits outstanding 3,985 *
Step 2: Book Balance to Corrected Balance
Balance per books $35,276
Add: Note collected by bank 1,120
Deduct:
Cash ……………………………………………………………… 1,120
Miscellaneous expense (bank service charges) ……….. 80
T7-23 (continued)
7-34 Intermediate Accounting, 8/e
PETTY CASH
On May 1, 2016, the Hawthorne Manufacturing Company established a
$200 petty cash fund. John Ringo is designated as the petty cash
custodian. The fund will be replenished at the end of each month. On
May 1, 2016, a check is written for $200 made out to John Ringo, petty
cash custodian. During the month of May, John paid bills totaling $160
summarized as follows:
Postage $ 40
Office supplies 35
Illustration 7A-3
When the petty cash fund is established
May 1, 2016
Petty Cash ……………………………………………….. 200
When the petty cash fund is reimbursed
May 31, 2016
Postage expense ……………………………………….. 40
T7-24