CHAPTER 7
Cash and Receivables
ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)
Topics
Questions
Brief
Exercises
Exercises
Problems
Concepts
for Analysis
1.
Accounting for cash.
1, 2, 3,
4, 22
1
1, 2
1
2.
Accounting for
accounts receivable,
bad debts, other
allowances.
5, 6, 7, 8, 9,
10, 11, 12,
13, 14, 15,
16, 20
2, 3, 4, 5
3, 4, 5, 6,
7, 8, 9, 10,
11, 12, 14
2, 3, 4,
5, 6
1, 2, 3, 4,
9, 10, 11
3.
Accounting for notes
receivable.
14, 15
6, 7
18, 19
8, 9, 10
5, 6, 7, 8
factoring of accounts
receivable.
11, 12
15, 16, 17,
5.
Analysis of
receivables.
20, 21
1
Petty cash and bank
reconciliations.
14, 15, 16
22, 23,
24, 25
12, 13, 14
Loan impairments
24, 25
26, 27
ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)
Learning Objectives
Questions
Brief
Exercises
Exercises
Problems
Concepts
for
Analysis
1. Identify items considered
cash.
1
1
1, 2
2. Indicate how to report cash
and related items.
2, 3, 4
1
identify the different types of
receivables.
3, 4
6
related to valuation of
accounts receivable.
7, 8, 9, 10,
11, 12, 13,
14
4, 5
7, 8, 9, 10,
11, 12, 14
2, 3, 4, 5,
6
CA7-1,
CA7-3,
6. Explain accounting issues
related to recognition and
valuation of notes
receivable.
15
6, 7
18, 19
8, 9, 10
CA7-2,
CA7-4,
CA7-6,
CA7–
7,CA7-8,
7. Explain the fair value option.
16
19
8. Explain accounting issues
related to disposition of
accounts and notes
receivable.
17, 18, 19
8, 9, 10,
11, 12
12, 13, 14,
15, 16, 17,
21
7, 11
CA7-2,
CA7-5
9. Describe how to report and
analyze receivables.
20, 21, 22
20
11
employed
to control cash.
14, 15, 16
22, 23, 24,
25
12, 13, 14
ASSIGNMENT CHARACTERISTICS TABLE
Item
Description
Level of
Difficulty
Time
(minutes)
E7-1
Determining cash balance.
Moderate
10–15
E7-2
Determining cash balance.
Moderate
10–15
E7-3
Financial statement presentation of receivables.
Simple
10–15
E7-4
Determining ending accounts receivable.
Simple
10–15
E7-5
Recording sales gross and net.
Simple
15–20
Recording sales transactions.
Moderate
Recording bad debts.
Moderate
10–15
E7-8
Recording bad debts.
Simple
E7-9
Computing bad debts and preparing journal entries.
Simple
Bad-debt reporting.
10–12
E7–11
Bad debts—aging.
Simple
E7–12
Journalizing various receivable transactions.
Simple
15–20
E7–13
Assigning accounts receivable.
Simple
10–15
E7–14
Journalizing various receivable transactions.
Simple
15–18
E7–15
Transfer of receivables with recourse.
Simple
10–15
E7–16
Transfer of receivables with recourse.
Moderate
15–20
E7–17
Transfer of receivables without recourse.
Simple
10–15
Note transactions at unrealistic interest rates.
Simple
10–15
Notes receivable with unrealistic interest rate.
Moderate
20–25
Analysis of receivables.
Moderate
10–15
E7–21
Transfer of receivables.
Moderate
10–15
Petty cash.
Simple
10–15
Bank reconciliation and adjusting entries.
Moderate
15–20
Bank reconciliation and adjusting entries.
Simple
15–20
Impairments
Moderate
15–25
Impairments
Moderate
15–25
P7-1
Determine proper cash balance.
Simple
20–25
P7-2
Bad-debt reporting.
Moderate
20–25
P7-3
Bad-debt reporting—aging.
Moderate
20–30
P7-4
Bad-debt reporting.
Moderate
25–35
P7-5
Bad-debt reporting.
Moderate
20–30
P7-6
Journalize various accounts receivable transactions.
Moderate
25–35
P7-7
Assigned accounts receivable—journal entries.
Moderate
25–30
P7-8
Notes receivable with realistic interest rate.
30–35
P7-9
Notes receivable journal entries.
Moderate
30–35
P7–10
Comprehensive receivables problem.
40–50
P7–11
Income effects of receivables transactions.
Moderate
20–25
Petty cash, bank reconciliation.
Moderate
20–25
Bank reconciliation and adjusting entries.
Moderate
20–30
ASSIGNMENT CHARACTERISTICS TABLE (Continued)
Item
Description
Level of
Difficulty
Time
(minutes)
CA7-1
Bad-debt accounting.
Simple
10–15
CA7-2
Various receivable accounting issues.
Simple
15–20
CA7-3
Bad-debt reporting issues.
Moderate
25–30
CA7-4
Basic note and accounts receivable transactions.
Moderate
25–30
Sale of notes receivable.
Moderate
20–25
CA7-6
Zero-interest-bearing note receivable.
Moderate
20–30
CA7-8
Accounting for zero-interest-bearing note.
25–30
CA7-9
Receivables management.
Moderate
25–30
SOLUTIONS TO CODIFICATION EXERCISES
CE7-1
From the Master Glossary
(a) Consistent with common usage, cash includes not only currency on hand but demand deposits
with banks or other financial institutions. Cash also includes other kinds of accounts that have the
general characteristics of demand deposits in that the customer may deposit additional funds at
(b) Securitization is the process by which financial assets are transformed into securities.
(c) Recourse is the right of a transferee of receivables to receive payment from the transferor of those
receivables for any of the following:
CE7-2
According to FASB ASC 450–20–05 (Accruals of Loss Contingencies Do Not Provide Financial Protection)
05–8 Accrual of a loss related to a contingency does not create or set aside funds to lessen the
possible financial impact of a loss. Confusion exists between accounting accruals (sometimes
referred to as accounting reserves) and the reserving or setting aside of specific assets to be
05–9 An entity may choose to maintain or have access to sufficient liquid assets to replace or repair
lost or damaged property or to pay claims in case a loss occurs. Alternatively, it may transfer
the risk to others by purchasing insurance. The accounting standards set forth in this Subtopic
CE7-3
According to FASB ASC 860-10-05 (Overview and Background)
> Types of Transfers
05–6 Transfers of financial assets take many forms. This guidance provides an overview of the fol–
lowing types of transfers discussed in this Topic:
a. Securitizations
05–14 Factoring arrangements are a means of discounting accounts receivable on a nonrecourse,
notification basis. Accounts receivable are sold outright, usually to a transferee (the factor) that
05–15 In a transfer of receivables with recourse, the transferor provides the transferee with full or
limited recourse. The transferor is obligated under the terms of the recourse provision to make
05–16 Securities lending transactions are initiated by broker-dealers and other financial institutions
that need specific securities to cover a short sale or a customer’s failure to deliver securities
05–19 Government securities dealers, banks, other financial institutions, and corporate investors com-
monly use repurchase agreements to obtain or use short-term funds. Under those agreements,
the transferor (repo party) transfers a security to a transferee (repo counterparty or reverse
05–22 In certain industries, a typical customer’s borrowing needs often exceed its bank’s legal lending
limits. To accommodate the customer, the bank may participate the loan to other banks (that is,
transfer under a participation agreement a portion of the customer’s loan to one or more
participating banks).
CE7-3 (Continued)
>> Banker’s Acceptances
05–24 Banker’s acceptances provide a way for a bank to finance a customer’s purchase of goods
from a vendor for periods usually not exceeding six months. Under an agreement between the
CE7-4
According to FASB ASC 210-20–45
> Right of Setoff Criteria
45-1 A right of setoff exists when all of the following conditions are met:
a. Each of two parties owes the other determinable amounts.
45-2 A debtor having a valid right of setoff may offset the related asset and liability and report the
net amount.
45-3 If the parties meet the criteria specified in paragraph 210-20–45-1, specifying currency or interest
45-4 If a party does not intend to set off even though the ability to set off exists, an offsetting presen–
tation in the statement of financial position is not representationally faithful.
ANSWERS TO QUESTIONS
1. Cash normally consists of coins and currency on hand, bank deposits, and various kinds of orders
for cash such as bank checks, money orders, travelers’ checks, demand bills of exchange, bank
drafts, and cashiers’ checks. Balances on deposit in banks which are subject to immediate with-
2. (a) Cash (h) Investments, possibly other assets.
(b) Trading securities. (i) Cash.
(c) Temporary investments. (j) Trading securities.
3. A compensating balance is that portion of any demand deposit maintained by a corporation which
constitutes support for existing borrowing arrangements of a corporation with a lending institution.
4. Restricted cash for debt redemption would be reported in the long-term asset section, probably in
the investments section. Another alternative is the other assets section. Given that the debt is long
term, the restricted cash should also be reported as long term.
5. The seller normally uses trade discounts to avoid frequent changes in its catalogs, to quote different
prices for different quantities purchased, and to hide the true invoice price from competitors. Trade
Questions Chapter 7 (Continued)
6. Two methods of recording accounts receivable are:
1. Record receivables and sales gross.
2. Record receivables and sales net.
The net method is desirable from a theoretical standpoint because it values the receivable at its
7. The basic problems that relate to the valuation of receivables are (1) the determination of the face
value of the receivable, (2) the probability of future collection of the receivable, and (3) the length
of time the receivable will be outstanding. The determination of the face value of the receivable is a
function of the trade discount, cash discount, and certain allowance accounts such as the Allowance
for Sales Returns and Allowances.
8. The theoretical superiority of the allowance method over the direct write-off method of accounting
for bad debts is two-fold. First, since revenue is considered to be recognized at the point of sale on
the assumption that the resulting receivables are valid liquid assets merely awaiting collection, peri–
9. The percentage–of-sales method. Under this method Bad Debt Expense is debited and Allowance
for Doubtful Accounts is credited with a percentage of the current year’s credit or total sales. The
rate is determined by reference to the relationship between prior years’ credit or total sales and
actual bad debts arising therefrom. Consideration should also be given to changes in credit policy
and current economic conditions. Although the rate should theoretically be based on and applied to
credit sales, the use of total sales is acceptable if the ratio of credit sales to total sales does not
vary significantly from year to year.
The percentage–of-sales method of providing for estimated uncollectible receivables is intended to
Questions Chapter 7 (Continued)
The aging method. With this method each year’s debit to the expense account and credit to the
allowance account are determined by an evaluation of the collectibility of open accounts
receivable at the close of the year. An analysis of the accounts according to their due dates is the
usual procedure. For each of the age categories established in the analysis, average percentage
rates may be developed on the basis of past experience and applied to the accounts in the
respective age categories. This method may also utilize individual analysis for some accounts,
especially those that are considerably past due, in arriving at estimated uncollectible receivables.
On the basis of the foregoing analysis the balance in the valuation account is then adjusted to the
amount estimated to be uncollectible.
10. A major part of accounting is the measurement of financial data. Changes in values should be
recognized as soon as they are measurable in objective terms in order for accounting to provide
useful information on a periodic basis.
The very existence of accounts receivable is based on the decision that a credit sale is an objec–
11. Because estimation of the allowance account balance requires judgment, management could
either over-estimate or under-estimate the amount of uncollectible accounts depending on whether
a higher or lower earnings number is desired. For example, Sun Trust bank (referred to in the
12. The receivable due from Bernstein Company should be written off to an appropriately named loss
account and reported in the income statement as part of income from operations. Note that the
profession specifically excludes write-offs of receivables from being extraordinary. In this case,
Questions Chapter 7 (Continued)
13. If the direct write-off method is used, the only alternative is to debit Cash and credit a revenue
account entitled Uncollectible Amounts Recovered. If the allowance method is used, then the
accountant would debit Accounts Receivable and credit the Allowance for Doubtful Accounts. An
entry is then made to credit the customer’s account and debit Cash upon receipt of the remittance.
14. The journal entry on Lombard’s books would be:
Notes Receivable ………………………………………………………………….. 1,000,000
15. Imputed interest is the interest ascribed or attributed to a situation or circumstance which is void of
a stated or otherwise appropriate interest factor. Imputed interest is the result of a process of interest
rate estimation called imputation.
16. The fair value option gives companies the option of using fair value as the measurement basis for
financial instruments. The Board believes that fair value measurement for financial instruments
17. A company might sell receivables because money is tight and access to normal credit is not
available or prohibitively expensive. Also, a company may have to sell its receivables, instead of
borrowing, to avoid violating existing lending arrangements. In addition, billing and collection of
receivables are often time-consuming and costly.
18. The financial components approach is used when receivables are sold but there is continuing
involvement by the seller in the receivable. Examples of continuing involvement are recourse
provisions or continuing rights to service the receivable. A transfer of receivables should be
Questions Chapter 7 (Continued)
19. Recourse is a guarantee from Moon that if any of the sold receivables are uncollectible, Moon will
20. Several acceptable solutions are possible depending upon assumptions made as to whether certain
items are collectible within the operating cycle or not. The following illustrates one possibility:
Current Assets
Accounts receivable—Trade (of which accounts in the amount
21. The accounts receivable turnover ratio is computed by dividing net sales by average net receiv–
ables outstanding during the year. This ratio is used to assess the liquidity of the receivables. It
measures the number of times, on average, receivables are collected during the period. It provides
some indication of the quality of the receivables and how successful the company is in collecting
its outstanding receivables.
22. Because the restricted cash cannot be used by Woodlawn to meet current obligations, it should
*23. (1) The general checking account is the principal bank account of most companies and fre–
quently the only bank account of small companies. Most if not all transactions are cycled
through the general checking account, either directly or on an imprest basis.
*24. A loan is considered impaired when it is probable that the creditor will be unable to collect all
amounts due (both principal and interest) according to the contractual terms of the loan. If a loan is
*25. A loan is impaired when there is a reduction in the likelihood of collecting the interest and principal
payments as originally scheduled. An impairment should be recorded by a creditor when it is
“probable” that the payment will not be collected as scheduled. Debtors do not record impairments.
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 7-1
Cash in bank—savings account …………………………..
$68,000
Cash on hand ……………………………………………………..
Checking account balance …………………………………..
BRIEF EXERCISE 7-2
June 1
Accounts Receivable ………………………
50,000
Sales Revenue ………………………..
50,000
BRIEF EXERCISE 7-3
June 1
Accounts Receivable ………………………
48,500*
Sales Revenue ………………………..
BRIEF EXERCISE 7-4
Bad Debt Expense …………………………………………………..
28,000
Allowance for Doubtful Accounts
($1,400,000 X 2%) ………………………………………….
28,000
BRIEF EXERCISE 7-5
(a)
Bad Debt Expense …………………………………………………..
22,600
Allowance for Doubtful Accounts
(b)
Bad Debt Expense …………………………………………………..
22,200
Allowance for Doubtful Accounts
($24,600 – $2,400) …………………………..
BRIEF EXERCISE 7-6
11/1/14
Notes Receivable …………………………………………………….
30,000
Sales Revenue …………………………..
30,000
12/31/14
Interest Receivable ………………………………………………….
Interest Revenue
($30,000 X 6% X 2/12)…………………………..
Cash ……………………………………………………….
Notes Receivable …………………………..
Interest Receivable …………………………..
Interest Revenue
($30,000 X 6% X 4/12) …………………………..
BRIEF EXERCISE 7-7
Notes Receivable ……………………………………………………
20,000
Discount on Notes Receivable …………………………
3,471
Cash ………………………………………………………………
16,529
Discount on Notes Receivable …………………………..
1,653
Interest Revenue
$16,529 X 10% …………………………..…………………
Discount on Notes Receivable …………………………..
1,818
Interest Revenue
($16,529 + $1,653) X 10% …………………………..
1,818
BRIEF EXERCISE 7-8
Chung, Inc.
Cash ……………………………………………………………………….
730,000
Interest Expense ($1,000,000 X 2%) …………………………..
20,000
Notes Payable …………………………………………………
750,000
Seneca National Bank
Notes Receivable …………………………………………………….
750,000
Cash ……………………………………………………….
730,000
Interest Revenue ($1,000,000 X 2%) ………………….
20,000
BRIEF EXERCISE 7-9
Wood
Cash ……………………………………………………………………….
138,000
Due from Factor ………………………………………………………
9,000*
Loss on Sale of Receivables …………………………………….
3,000**
Accounts Receivable ……………………………………….
**2% X $150,000 = $3,000
Engram
Accounts Receivable ……………………………………………….
150,000
Due to Customer (Wood) …………………………..
Interest Revenue ……………………………………………..
Cash ……………………………………………………….
BRIEF EXERCISE 7-10
Wood
Cash ……………………………………………………………………….
138,000
Due from Factor ………………………………………………………
9,000*
Loss on Sale of Receivables …………………………………….
10,500**
Accounts Receivable ……………………………………….
BRIEF EXERCISE 7-11
Cash $250,000 – [$250,000 X (.05 + .04)] ……………………
227,500
Due from Factor ($250,000 X .04) …………………………..
10,000
Loss on Sale of Receivables ……………………………………
Accounts Receivable ………………………………………
Recourse Liability …………………………………………..
BRIEF EXERCISE 7-12
The entry for the sale now would be:
Cash $250,000 – [($250,000 X (.05 + .04)] ………………….
227,500
Due from Factor ($250,000 X .04) …………………………..
10,000
Loss on Sale of Receivables ……………………………………
Account Receivable ………………………………………..
Recourse Liability …………………………………………..
BRIEF EXERCISE 7-13
The accounts receivable turnover ratio is computed as follows:
The days outstanding (average collection period) for accounts receivable in
days is
*BRIEF EXERCISE 7-14
Petty Cash ………………………………………………………………
200
Cash ……………………………………………………………….
Supplies ………………………………………………………………….
94
Miscellaneous Expense ……………………………………………
Cash Over and Short ……………………………………………….
Cash ($200 – $15) …………………………………………….
*BRIEF EXERCISE 7-15
(a) Added to balance per bank statement (1)
*BRIEF EXERCISE 7-16
(b)
Office Expense ……………………………………………………….
25
Cash……………………………………………………….
25
(c)
Cash ……………………………………………………………………….
31
Interest Revenue ……………………………………………..
31
(e)
Accounts Receivable ……………………………………………….
377
Cash……………………………………………………….
*BRIEF EXERCISE 7-17
National American Bank (Creditor):
SOLUTIONS TO EXERCISES
EXERCISE 7-1 (10–15 minutes)
(a) Cash includes the following:
1.
Commercial savings account—
First National Bank of Yojimbo
$ 600,000
1.
Commercial checking account—
First National Bank of Yojimbo
Petty cash
Commercial Paper (cash equivalent)
Currency and coin on hand
7,700
(b) Other items classified as follows:
3. Travel advances (reimbursed by employee)* should be reported
as receivable—employee in the amount of $180,000.
7. The bank overdraft of $110,000 should be reported as a current
liability.**
8. Certificates of deposits of $500,000 each should be classified as
temporary investments.
EXERCISE 7-1 (Continued)
EXERCISE 7-2 (10–15 minutes)
1. Cash balance of $925,000. Only the checking account balance should
be reported as cash. The certificates of deposit of $1,400,000 should
2. Cash balance is $584,650 computed as follows:
Checking account balance
$600,000
Overdraft
(17,000)
Petty cash
Coins and currency
1,350
EXERCISE 7-2 (Continued)
3. Cash balance is $599,800 computed as follows:
Checking account balance
$590,000
Certified check from customer
9,800
4. Cash balance is $85,000 computed as follows:
Checking account balance
$37,000
Money market mutual fund
5. Cash balance is $700,900 computed as follows:
Checking account balance
$700,000
Cash advance received from customer
900