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Question 7–1
Question 7–2
Internal control procedures involving accounting functions are intended to
Question 7–3
Management must document the company’s internal controls and assess their
Question 7–4
A compensating balance is an amount of cash a depositor (debtor) must leave on
deposit in an account at a bank (creditor) as security for a loan or a commitment to
lend. The classification and disclosure of a compensating balance depends on the
Chapter 7 Cash and Receivables
Questions for Review of Key Topics
7–2 Intermediate Accounting, 8/e
Answers to Questions (continued)
Question 7–5
Yes, IFRS and U.S. GAAP differ in how bank overdrafts are treated. Under
Question 7–6
Trade discounts are reductions below a list price and are used to establish a final
Question 7–7
The gross method of accounting for cash discounts considers discounts not taken
Question 7–8
Companies estimate sales returns and reduce revenue to account for them. If the
company has received cash from the customer, the company credits a refund liability
Question 7–9
Even when specific customer accounts haven’t been proven uncollectible by the
end of the reporting period, bad debt expense should properly be matched with sales
Answers to Questions (continued)
Question 7–10
The income statement approach to estimating bad debts determines bad debt
Question 7–11
Question 7–12
Question 7–13
The accounting treatment of receivables factored with recourse depends on
7–4 Intermediate Accounting, 8/e
Question 7–14
U.S. GAAP focuses on whether control of assets has shifted from the transferor
to the transferee. In contrast, IFRS focuses on whether the company has transferred
“substantially all of the risks and rewards of ownership,” as well as whether the
company has transferred control. Under IFRS:
1. If the company transfers substantially all of the risks and rewards of
ownership, the transfer is treated as a sale.
3. If neither conditions 1 or 2 hold, the company accounts for the transaction
Question 7–15
When a note is discounted, a financial institution, usually a bank, accepts the note
and gives the seller cash equal to the maturity value of the note reduced by a discount.
The discount is computed by applying a discount rate to the maturity value and
represents the financing fee the bank charges for the transaction.
The four-step process used to account for a discounted note receivable is as
follows:
1. Accrue any interest revenue earned since the last payment date (or date of the
note).
3. Subtract the discount the bank requires (discount rate times maturity value
4. Compute the difference between the proceeds and the book value of the note
and related interest receivable. The treatment of the difference will depend on
Answers to Questions (concluded)
Question 7–16
A company’s investment in receivables is influenced by several related variables,
Question 7–17
The items necessary to adjust the bank balance might include deposits
Question 7–18
A petty cash fund is established by transferring a specified amount of cash from
Question 7–19
When a creditor’s investment in a receivable becomes impaired, due to a troubled
debt restructuring or for any other reason, the receivable is remeasured based on the
Question 7–20
No. Under both U.S. GAAP and IFRS, a company can recognize in net income
the recovery of impairment losses of accounts and notes receivable.
7–6 Intermediate Accounting, 8/e
Brief Exercise 7–1
The company could improve its internal control procedure for cash receipts by
Brief Exercise 7–2
Under IFRS the cash balance would be $245,000, because they could offset the
Brief Exercise 7–3
All of these items would be included as cash and cash equivalents except the U.S.
Brief Exercise 7–4
Income before tax in 2017 will be reduced by $2,500, the amount of the cash
discounts.
Brief Exercise 7–5
Income before tax in 2016 will be reduced by $2,500, the anticipated amount of
cash discounts.
BRIEF EXERCISES
Brief Exercise 7–6
Estimated returns = $10,600,000 x 8% = $848,000
Brief Exercise 7–7
Estimated returns = $10,600,000 x 8% = $848,000
Brief Exercise 7–8
Singletary cannot combine the two types of receivables under U.S. GAAP, as the
director is a related party. Under IFRS a combined presentation would be allowed.
7–8 Intermediate Accounting, 8/e
Brief Exercise 7–9
(2) Allowance for uncollectible accounts:
Beginning balance $25,000
Brief Exercise 7–10
(1) Allowance for uncollectible accounts:
Beginning balance $ 25,000
Accounts receivable:
Beginning balance $ 300,000
Brief Exercise 7–11
Allowance for uncollectible accounts:
Beginning balance $30,000
Brief Exercise 7–12
Credit sales $8,200,000
Deduct: Cash collections (7,950,000)
Brief Exercise 7–13
2016 interest revenue:
Brief Exercise 7–14
Sales revenue = present value of the note receivable
7–10 Intermediate Accounting, 8/e
Brief Exercise 7–15
Assets decrease by $7,000:
Cash increases by $100,000 x 85% = $ 85,000
The journal entry to record the transaction is as follows:
Cash (85% x $100,000) ....................................................... 85,000
Brief Exercise 7–16
Logitech would account for the transfer as a secured borrowing. The receivables
Brief Exercise 7–17
Under IFRS Huling would treat this transaction as a secured borrowing, because
it retains substantially all of the risks and rewards of ownership. Under U.S. GAAP
Brief Exercise 7–18
$30,000 Face amount
450 Interest to maturity ($30,000 x 6% x 3/12)
Brief Exercise 7–19
Receivables turnover = $320,000 = 5.33 times
$60,000*
Brief Exercise 7–20
Balance per books $22,340
Add:
Error in recording cash receipt ($550 – 500) 50
7–12 Intermediate Accounting, 8/e
Brief Exercise 7–21
Balance per bank statement $47,582
Add:
Exercise 7–1
Requirement 1
Cash and cash equivalents includes:
a. Balance in checking account $13,500
Requirement 2
d. The $400,000 savings account will be used for future plant expansion and
EXERCISES
7–14 Intermediate Accounting, 8/e
Exercise 7–2
Requirement 1
Cash and cash equivalents includes:
Cash in bank—checking account $22,500
Requirement 2
The $10,000 in 6-month treasury bills should be classified as a current asset
Exercise 7–3
The FASB Accounting Standards Codification represents the single source of
authoritative U.S. generally accepted accounting principles. The specific citation for
each of the following items is:
1. Accounts receivables from related parties should be shown separately from
trade receivables: FASB ACS 210–10–S99–1: “Balance Sheet—Overall—SEC
2. Definition of Cash Equivalents: FASB ACS 305–10–20: “Cash and Cash
Equivalents—Overall—Glossary.”
3. Notes exchanged for cash are valued at the cash proceeds: FASB ACS 310–
4. The two conditions that must be met to accrue a loss on an account
Exercise 7–4
Requirement 1: U.S. GAAP
Current Assets:
Requirement 2: IFRS
Current Assets:
Exercise 7–5
Requirement 1
November 17, 2016
Accounts receivable ........................................................ 42,000
Requirement 2
November 17, 2016
Accounts receivable ........................................................ 42,000
7–18 Intermediate Accounting, 8/e
Exercise 7–5 (concluded)
Requirement 3
Requirement 1, using the net method:
November 17, 2016
Accounts receivable ........................................................ 41,160
November 26, 2016
Requirement 2, using the net method:
November 17, 2016
December 15, 2016
Cash ................................................................................. 42,000
Exercise 7–6
Requirement 1
July 15, 2016
July 23, 2016
Cash (98% x $50,000) ........................................................ 49,000
Requirement 2
July 15, 2016
Aug. 15, 2016
7–20 Intermediate Accounting, 8/e
Exercise 7–7
Requirement 1
July 15, 2016
July 23, 2016
Requirement 2
July 15, 2016
August 15, 2016
Cash ................................................................................. 50,000
