Intermediate Accounting IFRS Edition: Kieso, Weygandt, Warfield

Intermediate Accounting
IFRS Edition
Kieso, Weygandt, Warfield
Fourth Edition
Chapter 7
Cash and Receivables
Prepared by
Coby Harmon
University of California, Santa Barbara
Westmont College
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Cash
• Most liquid asset.
• Standard medium of exchange.
• Basis for measuring and accounting for all other items.
• Current asset.
• Examples: Coin, currency, available funds on deposit at the
bank, money orders, certified checks, cashier’s checks,
personal checks, bank drafts and savings accounts.
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Cash Equivalents
Short-term, highly liquid investments that are both
a) readily convertible into known amounts of cash, and
b) subject to an insignificant risk of changes in value.
Examples: Government bonds, commercial paper, and money
market funds

Restricted Cash
Companies segregate restricted cash from “regular” cash.
Examples, restricted for:
1) plant expansion,
2) retirement of long-term debt, and
3) compensating balances.
ILLUSTRATION 7.1

Bank Overdrafts
Company writes a check for more than the amount in its
cash account.
• Generally reported as a current liability.
• Included as a component of cash if such overdrafts are
repayable on demand and are an integral part of a
company’s cash management (such as the common
practice of establishing offsetting arrangements against
other accounts at the same bank).

Classification of Cash-Related Items
ILLUSTRATION 7.2
Accounts Receivable and Notes Receivable

Non-Trade Receivables
1. Advances to officers and employees.
2. Advances to subsidiaries.
3. Deposits paid to cover potential damages or losses.
4. Deposits paid as a guarantee of performance or payment.
5. Dividends and interest receivable.
6. Claims against: Insurance companies for casualties sustained;
defendants under suit; governmental bodies for tax refunds;
common carriers for damaged or lost goods; creditors for
returned, damaged, or lost goods; customers for returnable
items (crates, containers, etc.).

Recognition of Accounts Receivables
• Accounts receivable generally arise as part of a
revenue arrangement.
• The revenue recognition principle indicates that a
company should recognize revenue when it satisfies its
performance obligation by transferring the good or
service to the customer.

Recognition of Accounts Receivables
Example
For example, if Lululemon Athletica, Inc. (CAN) sells a yoga
outfit to Jennifer Burian for $100 on account, the yoga outfit
is transferred when Jennifer obtains control of this outfit.
When this change in control occurs, Lululemon should
recognize an account receivable and sales revenue. Lululemon
makes the following entry:
Accounts Receivable 100
Sales Revenue 100

Key Indicators of Change in Control
Some key indicators that Lululemon has transferred and that
Jennifer has obtained control of the yoga outfit.
1. Lululemon has the right to payment from the customer.
2. Lululemon has passed legal title to the customer.
3. Lululemon has transferred physical possession of the
goods.
4. Lululemon no longer has significant risks and rewards of
ownership of the goods.
5. Jennifer has accepted the asset.

Measurement of the Transaction Price
The transaction price is the amount of consideration that a
company expects to receive from a customer in exchange for
transferring goods or services.
Variable Consideration
In some cases, the price of a good or service is dependent on
future events. These future events often include such items as
discounts, returns and allowances, rebates, and performance
bonuses.

Trade Discounts
Use to:
• Avoid frequent changes
in catalogs.
• Alter prices for different
quantities purchased.
• Hide the true invoice
price from competitors.

Cash Discounts (Sales Discounts)
• Offered to induce prompt

payment.
• Terms such as 2/10, n/30,
2/10, E.O.M., or net 30,
E.O.M.
• Gross Method vs. Net
Method.

Cash Discounts (Sales Discounts)
Entries Under Gross and Net Methods of
Recording Cash (Sales) Discounts
ILLUSTRATION 7.4
Sales Returns and Allowances
• Sales Returns and Allowances are estimated at the time
of sale and credited to a Return Liability account.
• Sales Revenue is reduced by the estimated amount of
returns.
• The use of the Return Liability account helps to identify
potential problems associated with inferior merchandise,
inefficiencies in filling orders, and delivery or shipment
mistakes.
• If actual returns later prove to be higher or lower than
the estimated amount, Sales Revenue is adjusted.

Sales Returns and Allowances Example (1 of 2)
Illustration: Assume that Max Glass sells hurricane glass to Oliver
Builders. As part of the sales agreement, Max includes a provision
that if Oliver is dissatisfied with the product, Max will grant an
allowance on the sales price or agree to take the product back. Max
should record the accounts receivable and related revenue at the
amount of consideration expected to be received.
On January 4, 2022, Max sells $5,000 of hurricane glass to Oliver
on account. Max expects that $400 of the hurricane glasses will be
returned. Max records the sale on account as follows.
January 4, 2022
Accounts Receivable 5,000
Sales Revenue 4,600
Return Liability 400
Sales Returns and Allowances Example (2 of 2)
Illustration: On January 16, 2022, Max grants an allowance of $300

to Oliver because some of the hurricane glass is defective. The
entry to record this transaction is as follows.
January 15, 2022
Return Liability 300
Max reports net sales revenue on the income statement of $4,600. In

addition, Max reports on its statement of financial position the total
accounts receivable balance of $4,700 ($5,000 - $300) and an estimated
return liability of $100 ($400 - $300).

Time Value of Money
• Theoretically, any revenue after the period of sale is interest
revenue.
• Companies ignore interest revenue related to accounts
receivable because the amount of the discount is not usually
material in relation to the net income for the period.
• The profession specifically excludes from present value
considerations “receivables arising from transactions with
customers in the normal course of business which are due in
customary trade terms not exceeding approximately one year.”

Valuation of Accounts Receivable
Uncollectible Accounts Receivable
• Record credit losses as debits to Bad Debt Expense (or
Uncollectible Accounts Expense).
• Normal and necessary risk of doing business on credit.
• Two methods to account for uncollectible accounts:
1) Direct write-off method
2) Allowance method

Direct Write-Off Method vs. Allowance
Method

Direct Write-Off Method for
Uncollectible Accounts
When a company determines a particular account to be
uncollectible, it charges the loss to Bad Debt Expense.
Assume, for example, that on December 10, 2022, Cruz Ltd.
writes off as uncollectible Yusado’s NT$8,000,000 balance.
The entry is:
Bad Debt Expense 8,000,000
Accounts Receivable (Yusado) 8,000,000

Allowance Method for Uncollectible
Accounts
• Involves estimating uncollectible accounts at the end of
each period.
• Ensures that companies state receivables on the statement
of financial position at their cash realizable value.
• Companies estimate uncollectible accounts and cash
realizable value using information about past and current
events as well as forecasts of future collectability.

Recording Estimated Uncollectibles
Illustration: Assume that Brown Furniture in 2022, its first year of
operations, has credit sales of £1,800,000. Of this amount,
£150,000 remains uncollected at December 31. The credit manager
estimates that £10,000 of these sales will be uncollectible. The
adjusting entry to record the estimated uncollectibles (assuming a
zero balance in the allowance account) is:
Bad Debt Expense 10,000

Allowance for Doubtful Accounts 10,000

Presentation of Allowance for Doubtful
Accounts
ILLUSTRATION 7.5
The amount of £140,000 represents the cash realizable value of
the accounts receivable at the statement date.

Recording the Write-Off of an
Uncollectible Account
• When companies have exhausted all means of collecting a
past-due account and collection appears impossible, the
company should write off the account.
• In the credit card industry, for example, it is standard
practice to write off accounts that are 210 days past due.

Write-Off of an Uncollectible Account
Illustration: The financial vice president of Brown Furniture
authorizes a write-off of the £1,000 balance owed by Randall
plc on March 1, 2023. The entry to record the write-off is:


Recovery of an Uncollectible Account
Assume that on July 1, Randall plc pays the £1,000 amount that
Brown had written off on March 1. These are the entries:

Cash 1,000

Estimating the Allowance
Percentage-of-Receivables Approach
• Reports estimate of receivables at cash realizable value.
Companies may apply this method using
• one composite rate, or
• an aging schedule using different rates.

Accounts Receivable Aging Schedule
ILLUSTRATION 7.6

Journal Entry to Record Estimated
Uncollectibles
What entry would Wilson make
assuming that the allowance account
had a zero balance?
ILLUSTRATION 7.6
Another Journal Entry to Record
Estimated Uncollectibles
What entry would Wilson make
assuming the allowance account had
a credit balance of €800 before
adjustment?
ILLUSTRATION 7.6
Bad Debt Expense (€26,610 – €800) 25,810

Estimating the Allowance Problem
Illustration: Duncan SA reports the following financial information before
adjustments.
Instructions: Prepare the journal entry to record Bad Debt Expense

assuming Duncan Company estimates bad debts at (a) 5% of accounts
receivable and (b) 5% of accounts receivable but Allowance for Doubtful
Accounts had a $1,500 debit balance.

Journal Entry (a)
adjustments.

assuming Duncan Company estimates bad debts at (a) 5% of accounts
receivable.
€100,000 x .05 = €5,000 − €2,000 = €3,000
Journal Entry (b)
adjustments.

assuming Duncan Company estimates bad debts at (b) 5% of accounts
receivable but the Allowance had a $1,500 debit balance.
€100,000 x .05 = €5,000 + €1,500 = €6,500
Notes Receivable (1 of 2)
Supported by a formal promissory note.
• Written promise to pay a certain sum of money at a
specific future date.
• A negotiable instrument.
• Maker signs in favor of a Payee.
• Interest-bearing (has a stated rate of interest) OR
• Zero-interest-bearing (interest included in face amount).

Notes Receivable (2 of 2)
Generally originate from:
• Customers who need to extend payment period of an
outstanding receivable.
• High-risk or new customers.
• Loans to employees and subsidiaries.
• Sales of property, plant, and equipment.
• Lending transactions (the majority of notes).

Recognition of Notes Receivable

Note Issued at Face Value
Illustration: Bigelow SA lends Scandinavian Imports €10,000 in exchange
for a €10,000, three-year note bearing interest at 10 percent annually.
The market rate of interest for a note of similar risk is also 10 percent.
How does Bigelow record the receipt of the note?
ILLUSTRATION 7.7

Computation of the Present Value of
the Note
ILLUSTRATION 7.8
The present value of the note equals its face value because the
market (effective) and stated rates of interest are the same.

Journal Entries to Record Receipt of
Note and Interest
Journal entry to record receipt of note:
Note Receivable 10,000

Cash 10,000
Journal entry to recognize interest revenue each year:
Cash 1,000
Interest Revenue 1,000

Zero-Interest-Bearing Notes
Illustration: Jeremiah Company receives a three-year, $10,000
zero-interest-bearing note. The market rate of interest for a note of
similar risk is 9 percent. The implicit rate that equates the total
cash to be received $10,000 at maturity to the present value of the
future cash flows is $7,721.80.
ILLUSTRATION 7.9
Jeremiah records the note for the present value of $7,721.80 as

follows:
Note Receivable 7,721.80
Cash 7,721.80

Discount Amortization Schedule—
Effective-Interest Method (1 of 2)
ILLUSTRATION 7.10

Journal Entry to Record Interest
Revenue—Year 1
ILLUSTRATION 7.10
Jeremy records interest revenue at the end of the first year using the
effective-interest method as follows.
Notes Receivable 694.96
Interest Revenue ($7,721.80 x .09) 694.96

Interest-Bearing Notes
Illustration: Morgan Group makes a loan to Marie Co. and receives
in exchange a three-year, €10,000 note bearing interest at 10
percent annually. The market rate of interest for a note of similar
risk is 12 percent. Prepare the journal entry to record the receipt
of the note?
ILLUSTRATION 7.11

Journal Entry to Record Receipt of Note
ILLUSTRATION 7.12
Morgan exchanged the note at a discount. Morgan records the

present value of the note as follows.
Notes Receivable 9,520

Cash 9,520

Discount Amortization Schedule—
Effective-Interest Method (2 of 2)
ILLUSTRATION 7.13
Morgan records receipt of the annual interest and amortization of

the discount for the years year as follows.
Cash 1,000
Notes Receivable 142
Interest Revenue 1,142
Notes Received for Property, Goods, or
Services
In a bargained transaction entered into at arm’s length, the
stated interest rate is presumed to be fair unless:
1. No interest rate is stated, or
2. Stated interest rate is unreasonable, or
3. Face amount of the note is materially different from the
o current cash sales price or
o from the current market value of the debt instrument.

Notes for Property, Goods, or Services
Example
Illustration: Oasis Development Co. sold a corner lot to Rusty
Pelican as a restaurant site. Oasis accepted in exchange a five-year
note having a maturity value of $35,247 and no stated interest rate.
The land originally cost Oasis $14,000. At the date of sale the land
had a fair market value of $20,000. Oasis uses the fair market value
of the land, $20,000, as the present value of the note. Oasis
therefore records the sale as:
Notes Receivable 20,000
Land 14,000
Gain on Sale of Land ($20,000 − $14,000) 6,000

Valuation of Notes Receivable
• Companies record and report short-term notes receivable
at their cash realizable value.
• Computations and estimations involved in valuing short-
term notes receivable and in recording bad debt expense
and the related allowance exactly parallel that for trade
accounts receivable.

Additional Issues Related to Receivables
Derecognition of Receivables
1. When the receivable no longer has any value; that is, the
contractual rights to the cash flows of the receivable no
longer exist.
2. When a company transfers (e.g., sells) a receivable to
another company, thereby transferring the risks and
rewards of ownership to this other company.

Transfer of Receivables
Various reasons for transfer of receivables to another party
• Accelerate the receipt of cash.
• Competition.
• Sell receivables because money is tight.
• Billing / collection are time-consuming and costly.
Transfer of receivables for cash happens in two ways:
1. Sales of receivables.
2. Secured borrowing.

Sales of Receivables
ILLUSTRATION 7.14
Factors are finance companies or banks that buy receivables from
businesses for a fee.
Sale without Guarantee
• Purchaser assumes risk of collection and absorbs any
credit losses.
• Transfer is outright sale of receivable.
• Seller records loss on sale.
• Seller uses a Due from Factor (receivable) account to cover
probable sales discounts, sales returns, and sales
allowances.

Sale without Guarantee Example
Illustration: Crest Textiles, Inc. factors €500,000 of accounts receivable
with Commercial Factors, Inc., on a non-guarantee basis. Commercial
Factors assesses a finance charge of 3 percent of the amount of accounts
receivable and retains an amount equal to 5 percent of the accounts
receivable (for probable adjustments). Crest Textiles and Commercial
Factors make the following journal entries for the receivables transferred
without guarantee.
ILLUSTRATION 7.15

Sale with Guarantee
Sale with Guarantee
• Seller guarantees payment to purchaser.
• Transfer is considered a borrowing—sometimes referred to as a
failed sale.
Assume Crest Textiles sold the receivables on a with guarantee basis.
IILLUSTRATION 7.16

Secured Borrowing
A company often uses receivables as collateral in a borrowing
transaction.
Illustration: On March 1, 2022, Meng Mills, Inc. provides
(assigns) NT$700,000 of its accounts receivable to Sino Bank
as collateral for a NT$500,000 note. Meng Mills continues to
collect the accounts receivable; the account debtors are not
notified of the arrangement. Sino Bank assesses a finance
charge of 1 percent of the accounts receivable and interest on
the note of 12 percent. Meng Mills makes monthly payments
to the bank for all cash it collects on the receivables.

Entries for Transfer of Receivables—
Secured Borrowing
ILLUSTRATION 7.17

Secured Borrowing Problem
Illustration: On April 1, 2022, Prince Company assigns $500,000 of its accounts
receivable to the Hibernia Bank as collateral for a $300,000 loan due July 1,
2022. The assignment agreement calls for Prince Company to continue to collect
the receivables. Hibernia Bank assesses a finance charge of 2% of the accounts
receivable, and interest on the loan is 10% (a realistic rate of interest for a note
of this type).
Instructions:
a) Prepare the April 1, 2022, journal entry for Prince Company.
b) Prepare the journal entry for Prince’s collection of $350,000 of the accounts
receivable during the period from April 1, 2022, through June 30, 2022.
c) On July 1, 2022, Prince paid Hibernia all that was due from the loan it
secured on April 1, 2022.

Secured Borrowing Problem
Solution
Instructions:
a) Prepare the April 1, 2022, journal entry for Prince Company.
b) Prepare the journal entry for Prince’s collection of $350,000.
c) On July 1, 2022, Prince paid Hibernia all that was due from the loan
it secured on April 1, 2022.
a) Cash 290,00
Finance Charge ($500,000) × 2% 10,000
Note Payable 300,000
b) Cash 350,000
c) Notes Payable 300,000
Interest Expense (10% × $300,00 × 3/12) 7,500
Cash 307,500

Summary of Transfers
Accounting for Transfers of Receivables
ILLUSTRATION 7.18

Presentation and Analysis
General rules in classifying receivables are:
1. Segregate and report carrying amounts of different categories of
receivables.
2. Indicate receivables classified as current and non-current in the statement
of financial position.
3. Appropriately offset the valuation accounts for receivables that are
impaired, including a discussion of individual and collectively determined
impairments.
4. Disclose the fair value of receivables in such a way that permits them to be
compared with their carrying amount.
5. Disclose information to assess the credit risk inherent in the receivables.
6. Disclose any receivables pledged as collateral.
7. Disclose all significant concentrations of credit risk arising from receivables.

Accounts Receivable Turnover
This ratio used to:
• Assess the liquidity of the receivables.
• Measure the number of times, on average, a company
collects receivables during the period.

Analysis of Receivables
Computation of Accounts Receivable Turnover
Analysis of Receivables
Illustration: Louis Vuitton (LVMH Group) (FRA) reported net sales
of €35,664 million. Its beginning and ending (net) accounts
receivable balances were €2,274 million an €2,521 million,
respectively. The computation of its accounts receivable turnover is
as follows.
ILLUSTRATION 7.20

Cash Controls
Management faces two problems in accounting for cash
transactions:
1. Establish proper controls to prevent any unauthorized
transactions by officers or employees.
2. Provide information necessary to properly manage cash on
hand and cash transactions.

Using Bank Accounts
To obtain desired control objectives, a company can vary the
number and location of banks and the types of accounts.
• General checking account
• Collection float
• Lockbox accounts
• Imprest bank accounts

The Imprest Petty Cash System
Steps 1 and 2
Used to pay small amounts for miscellaneous expenses.
Steps:
1. Record the transfer of $300 to petty cash:
Petty Cash 300
Cash 300
2. Petty cash custodian obtains signed receipts from each

individual to whom he or she pays cash.

Step 3
Steps:
3. Custodian receives a company check to replenish the fund
when the fund runs low.
Supplies Expense 42
Postage Expense 53
Miscellaneous Expense 76
Cash Over and Short 2
Cash 173

Step 4
Steps:
4. If the company decides that the amount of cash in the
petty cash fund is excessive by $50, it lowers the fund
balance as follows.
Cash 50
Petty Cash 50

Physical Protection of Cash Balances
Company should
• Minimize the cash on hand.
• Only have on hand petty cash and current day’s receipts.
• Keep funds in a vault, safe, or locked cash drawer.
• Transmit each day’s receipts to the bank as soon as
practicable.
• Periodically prove the balance shown in the general ledger.

Reconciliation of Bank Balances
Schedule explaining any differences between the bank’s and

the company’s records of cash.

Bank Reconciliation Form and Content
ILLUSTRATION 7A.1

Reconciliation of Bank Balances Example
To illustrate, Nugget Mining Company’s books show a cash balance at the Denver National Bank on November 30,
2022, of $20,502. The bank statement covering the month of November shows an ending balance of $22,190. An
examination of Nugget’s accounting records and November bank statement identified the following reconciling items.
1. A deposit of $3,680 that Nugget mailed November 30 does not appear on the bank statement.
2. Checks written in November but not charged to the November bank statement are:
Check #7327 $. 150
#7348 4,820
#7349 31
3. Nugget has not yet recorded the $600 of interest collected by the bank November 20 on Sequoia Co. bonds
held by the bank for Nugget.
4. Bank service charges of $18 are not yet recorded on Nugget’s books.
5. The bank returned one of Nugget’s customer’s checks for $220 with the bank statement, marked “NSF.” The
bank treated this bad check as a disbursement.
6. Nugget discovered that it incorrectly recorded check #7322, written in November for $131 in payment of an
account payable, as $311.
7. A check for Nugent Oil Co. in the amount of $175 that the bank incorrectly charged to Nugget accompanied the
statement.

Sample Bank Reconciliation
ILLUSTRATION 7A.2

Journal Entries Required to Adjust and
Correct Books
The required adjusting entries to adjust and correct Nugget’s books in
early December 2022 are taken from the items in the “Balance per
books” section and are as follows.
Cash 600
Interest Revenue 600
(To record interest on Sequoia Co. bonds, collected by bank)
Cash 180
Accounts Payable 180
(To correct error in recording amount of check #7322)
Office Expense (bank charges) 18
Cash 18
(To record bank service charges for November)
Cash 220
(To record customer’s check returned NSF)

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• Offered to induce prompt

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Illustration: On January 16, 2022, Max grants an allowance of $300

Max reports net sales revenue on the income statement of $4,600. In

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Bad Debt Expense 10,000

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Allowance for Doubtful Accounts 1,000

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Accounts Receivable 1,000

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Instructions: Prepare the journal entry to record Bad Debt Expense

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Instructions: Prepare the journal entry to record Bad Debt Expense

Instructions: Prepare the journal entry to record Bad Debt Expense

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Note Receivable 10,000

Journal entry to recognize interest revenue each year:

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Jeremiah records the note for the present value of $7,721.80 as

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Morgan exchanged the note at a discount. Morgan records the

Notes Receivable 9,520

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Morgan records receipt of the annual interest and amortization of

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