Topic #1 Cash Reporting Controls Accounts & Notes Receivables Initial Measurement Subsequent Measurement Financing with Receivables User’s Perspective

Topic #1 Cash

Reporting Controls

Accounts & Notes Receivables Initial Measurement Subsequent Measurement Financing with Receivables

User’s Perspective Current Issues

2

Cash consists of...

coins currency checks money orders money on hand deposits in bank

3

REPORTING CASH

Cash Recorded in both the balance

sheet and the statement of cash flows

The balance sheet shows the amount of cash available at a given point in time

The statement of cash flows shows the sources and uses of cash during a period of time.

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REPORTING CASHCash Equivalents

Cash equivalents are Readily convertible to known

amounts of cash So near maturity that their

value is relatively insensitive to interest rate changes

Examples include treasury bills, commercial paper, and money market funds

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Restricted Cash

Is cash that is not available for general use.

Is set aside for special purpose.

If not to be used within next year, report as noncurrent asset.

7-6

Restricted Cash andCompensating Balances

Restricted CashManagement’s intent to use a certain amountof cash for a specific purpose – future plant expansion, future payment of debt.

Compensating BalanceMinimum balance that must bemaintained in a company’s bankaccount as support for fundsborrowed from the bank.

Restricted CashManagement’s intent to use a certain amountof cash for a specific purpose – future plant expansion, future payment of debt.

Compensating BalanceMinimum balance that must bemaintained in a company’s bankaccount as support for fundsborrowed from the bank.

7-7

Accounts Receivable

Result from the credit sales of

goods or services to customers.

Are classified as current assets.

Are recorded net of trade discounts.

8

Internal controlSafeguards an organization’s assets from

Employee theft, robbery, unauthorized use

Enhances the accuracy and reliability of accounting records

Risk of errors and irregularities

PRINCIPLES OF INTERNAL CONTROL

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Establishment of responsibility: most effective

when only one person is responsible for a given task

Segregation of duties: the work of one

employee should provide a reliable basis for evaluating the work of another employee

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Documentation procedures: documents provide evidence

that transactions and events have occurred


Physical, Mechanical, and Electronic Controls

Independent Internal Verification

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Limitations of Internal Controls

Cost/Benefit - cost of establishing procedure should not exceed expected benefit

Human element - fatigue, carelessness, indifference

Collusion - two or more individuals who work together to get around controls

Size of business

15

ReviewSegregation of duties means?

a. Rotating employee duties and requiring vacations.

b. Reviewing, comparing and reconciling information from two sources.

c. The responsibility for related activities should be assigned to different individuals.

d. Physical separation of employees from each other.

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Cash is the most desirable asset...

because it is readily convertible into any other asset.

INTERNAL CONTROL OVER CASH RECEIPTS

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Review

Which of the following is not an internal control over cash receipts?

a. Store cash in safes and bank vaults.

b. Supervisors count cash receipts daily

c. Bond personnel who handle cash.d. Having the same person who

receives the cash to be the one that records it.

INTERNAL CONTROL OVER CASH DISBURSEMENTS

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Check processing is expensivenew methods are being developed to transfer funds among parties without the use of paper

Electronic Funds Transfer (EFT) System

a disbursement system that uses wire, telephone, telegraph, or computer to transfer cash from one location to another

Cash Disbursements ELECTRONIC FUNDS TRANSFER SYSTEM

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ReviewWhich of the following is not an internal control over cash disbursements?

a. Stamp invoices paid.b. Use prenumbered checks and

account for the sequence.c. Independent internal verification of

cash disbursements.d. Have multiple people available to

sign checks so they can be mailed promptly.

22

The use of a bank minimizes the amount of currency

that must be kept on hand contributes significantly to good

internal control over cash. A “double” record of cash is

maintained, one by the company, one by the bank. These two accounts must be reconciled.

USE OF A BANK

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Bank Statement shows• check &

other debits• deposits &

other credits

• daily cash balance

Bank Statement -

a copy of the bank’s records

sent to the customer for

periodic review.

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RECONCILING THE BANK ACCOUNT

Reconciliation is necessary as the balance per

bank and balance per books are seldom in agreement due to time lags and errors

A bank reconciliation should be prepared by an

employee who has no other responsibilities pertaining to cash

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Steps in preparing a bank reconciliation: Determine deposits in transit Determine outstanding checks Note any errors discovered Trace bank memoranda to the records

Each reconciling item used in determining the “Adjusted cash balance per books” should be recorded by the depositor with an adjusting entry

RECONCILING THE BANK ACCOUNT

BANK RECONCILIATION

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Terms Deposits in transit - deposits recorded by the

depositor that have not been recorded by the bank.

Outstanding checks - checks issued and recorded by the company that have not been paid by the bank.

NSF check - a check that is not paid by the bank because of insufficient funds in the customer’s bank account.

Adjusted balance - same as true cash balance, correct cash balance

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BANK RECONCILIATION

See Appendix 7-A for an illustration of a bank reconcilation

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ENTRIES FROM BANK RECONCILIATION

Collection of Note Receivable This entry involves four accounts. Interest of $50 has not been accrued and the collection fee is charged to Miscellaneous Expense.

GENERAL JOURNALDate Account Titles and Explanation Debit Credit

Apr. 30 CashMiscellaneous Expense Notes Receivable Interest Revenue (To record collection of notes receivable by bank)

1035 15 1000 50

Reconciliation items to the bank statement balance do not require journal entries!

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Book Error An examination of the cash disbursements journal shows that check No. 443 was a payment on account to Andrea Company, a supplier. The check, with a correct amount of $1,226.00, was recorded at $1,262.00.


Apr. 30 Cash Accounts Payable — Andrea Company (To correct error in recording check No. 443) 36

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NSF Check An NSF check becomes an accounts receivable to the depositor.


Apr. 30 Accounts Receivable — J. R. Baron Cash (To record NSF check)

425.60 425.60

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Bank Service Charges Check printing charges (DM) and other bank service charges (SC) are debited to Miscellaneous Expense because they are usually nominal in amount.


Apr. 30 Miscellaneous Expense Cash (To record charge for printing company checks)

30 30

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ReviewIn a bank reconciliation, adjustments to the book balance could include adding or subtracting company errors in its cash accounting.

a. True because the bank will notify the company of errors in the companies accounting records.

b. False because errors on the company’s books mean the bank statement is inaccurate.

c. True errors in the company’s books will not be duplicated in the bank’s accounting records.

d. False company errors do not effect the reconciliation of the two balances

Initial Valuation of Receivables

Definition Cash (Quick Pay) discounts

Gross Method Net Method

Non-Interest & Below Market Rate Interest Bearing Notes

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7-35

Accounts Receivable

Result from the credit sales of

goods or services to customers.

Are classified as current assets.

Are recorded net of trade discounts.

7-36

increase salesincrease sales

encourage early payment

encourage early payment

increase likelihood of collections

increase likelihood of collections

Cash discountsCash discounts

Cash Discounts

7-37

2/10,n/302/10,n/30Number of

days discount is available

Number of days

discount is available

Otherwise, net (or all)

is due

Otherwise, net (or all)

is due

CreditperiodCreditperiod

Discount percent

Discount percent

Cash Discounts

7-38

Cash Discounts

Sales are recorded at the invoice

amounts.

Sales are recorded at the invoice

amounts.

Sales discounts are recorded as reduction of revenue if payment is

received within the discount period.

Sales discounts are recorded as reduction of revenue if payment is

received within the discount period.

Gross Method

Sales are recorded at the invoice amount less the discount.

Sales are recorded at the invoice amount less the discount.

Sales discounts forfeited are recorded

as interest revenue if payment is received after

the discount period.

Sales discounts forfeited are recorded

as interest revenue if payment is received after

the discount period.

Net Method

7-39

Cash Discounts On October 5, Hawthorne sold merchandise for $20,000 with terms 2/10, n/30. On October 14, the customer sent a

check for $13,720 taking advantage of the discount to settle $14,000 of the amount. On November 4, the customer paid

the remaining $6,000.

October 5, 2013 October 5, 2013

October 14, 2013 October 14, 2013

November 4, 2013 November 4, 2013

7-40

REVIEW On November 10 of the current year, Flores

Mills sold carpet to a customer for $1,000 with credit terms 2/10, n/30. If the customer pays in full on November 18th, what percentage off will be discounted?

A. 10% B. 2% C. 30% D. 0%

7-41

Notes Receivable

A written promise to pay a specificamount at a specific future date.

Face amount of the note

×Annual interest

rate ×

Fraction of the annual

period = Interest

Even for maturities less than 1 year, the

rate is annualized.


rate is annualized.

7-42

Interest-Bearing Notes

On November 1, 2014, West, Inc., loans $25,000 to Winn Co. The note bears interest at 12% and is due

on November 1, 2015.

Prepare the journal entry on November 1, 2014, December 31, 2014, (year-end) and November 1,

2015, for West.November 1, 2014Notes receivable 25,000

Cash 25,000December 31, 2014Interest receivable 500

Interest revenue 500November 1, 2015Cash 28,000

Note receivable 25,000Interest receivable 500Interest revenue 2,500

7-43

Noninterest-Bearing Notes

Actually do bear interest.

Interest is deducted (discounted) from the face value of the note.

Cash proceeds equal face value of note less discount.

7-44


On Jan. 1, 2014, West, Inc., accepted a $25,000 noninterest-bearing note from Winn Co. as

payment for a sale. The note is discounted at 12% and is due on Dec. 31, 2014.

Prepare the journal entries on Jan. 1, 2014, and Dec. 31, 2014.




January 1, 2014Notes receivable 25,000

Discount on notes receivable 3,000Sales revenue 22,000

($25,000 * 12% = $3,000)December 31, 2014Cash 25,000Discount on notes receivable 3,000

Interest revenue 3,000Note receivable 25,000

7-45

Review

Long-term noninterest bearing notes receivable issued for sale of merchandise will be:

A. Discounted at an imputed interest rate.B. Recorded at the contract amount.C. Recorded at an amount equal to the future cash flows.D. Accounted for on the installment basis.

7-46

Subsequent Valuation of Accounts Receivable Sales Returns Bad Debt Financing with receivables

7-47

Merchandise may be returned

by a customer

to a supplier.

A special price

reduction, called an

allowance, may be given

as an incentive to

keep the merchandise.

Sales Returns

To avoid misstating the financial statements, sales revenue and accounts receivable should be

reduced by the amount of returns in the period of sale if the amount of

returns is anticipated to be material.

7-48

Sales ReturnsDuring the first year of operations, Hawthorne sold

$2,000,000 of merchandise that had cost them $1,200,000 (60%). Industry experience indicates a10%

return rate. During the year $130,000 was returned prior to customer payment. Record the returns and the

end of the year adjustment. Actual ReturnsSales returns 130,000

Accounts receivable 130,000Inventory 78,000

Cost of goods sold (60%) 78,000Adjusting EntriesSales returns 70,000

Allowance for sales returns 70,000Inventoryestimated returns 42,000

Cost of goods sold (60%) 42,000

7-49

Review Recognizing sales returns when they occur

could result in an overstatement of income in the period of the related sale.

A. True B. False

7-50

Uncollectible Accounts Receivable

Bad debts result from credit customers who are unable to pay the amount they owe, regardless of continuing collection

efforts.

Bad debts result from credit customers who are unable to pay the amount they owe, regardless of continuing collection

efforts.

PAST DUE

In conformity with the matching principle, bad debt expense should be recorded

in the same accounting period in which the sales

related to the uncollectible account were recorded.

In conformity with the matching principle, bad debt expense should be recorded

in the same accounting period in which the sales

related to the uncollectible account were recorded.

7-51

Uncollectible Accounts Receivable

Most businesses record an estimate of the bad debt expense by an

adjusting entry at the end of the accounting period.

Most businesses record an estimate of the bad debt expense by an

adjusting entry at the end of the accounting period.

Bad debt expense xxxAllowance for uncollectible accounts xxx

Contra asset account to

accounts receivable.

Normally classified as

a selling expense and

closed at year-end.

Allowance for Uncollectible Accounts

Net realizable value is the amount of the accounts receivable that the

business expects to collect.

Accounts Receivable

Less: Allowance for Uncollectible Accounts

Net Realizable Value

Accounts Receivable

Less: Allowance for Uncollectible Accounts

Net Realizable Value

Income Statement Approach

Balance Sheet ApproachComposite RateAging of Receivables

HybridCombine both approaches


Balance Sheet ApproachComposite RateAging of Receivables

HybridCombine both approaches PAST DUE

Estimating Bad Debts


Focuses on past credit sales to make estimate of bad debt expense.

Emphasizes the matching principle by estimating the bad debt expense associated with the current period’s credit sales.

Focuses on past credit sales to make estimate of bad debt expense.

Emphasizes the matching principle by estimating the bad debt expense associated with the current period’s credit sales.

Bad debts expense iscomputed as follows:

Bad debts expense iscomputed as follows:

Current Period Credit Sales × Bad Debt % = Estimated Bad Debts Expense


In 2012, MusicLand has credit sales of $400,000 and estimates that 0.6% of credit

sales are uncollectible.

What is Bad Debts Expense for 2012?


GENERAL JOURNAL Page 95

Date DescriptionPost Ref. Debit Credit

Dec. 31 Bad Debts Expense 2,400 Allowance forUncollectible Accounts 2,400

400,000$ × 0.60% = 2,400$

MusicLand computes estimated Bad Debts Expense of $2,400.


Balance Sheet Approach

Focuses on the collectibility of accounts receivable to make the estimate of uncollectible accounts.

Involves the direct computation of the desired balance in the allowance for uncollectible accounts.

Focuses on the collectibility of accounts receivable to make the estimate of uncollectible accounts.

Involves the direct computation of the desired balance in the allowance for uncollectible accounts.

Compute the desired balance in the Allowance for Uncollectible Accounts.

Bad Debts Expense is computed as:

Desired Balance in Allowance for Uncollectible Accounts

-Existing Year-End Balance in Allowance for Uncollectible Accounts

= Estimated Bad Debts Expense

Year-end Accounts Receivable × Bad Debt %

Balance Sheet ApproachComposite Rate

On Dec. 31, 2012, MusicLand has $50,000 in Accounts Receivable and a $200 credit

balance in Allowance for Uncollectible Accounts.

Past experience suggests that 5% of receivables are uncollectible.

What is MusicLand’s Bad Debts Expense for 2012?

On Dec. 31, 2012, MusicLand has $50,000 in Accounts Receivable and a $200 credit

balance in Allowance for Uncollectible Accounts.

Past experience suggests that 5% of receivables are uncollectible.

What is MusicLand’s Bad Debts Expense for 2012?




Dec. 31 Bad Debts Expense 2,300 Allowance forUncollectible Accounts 2,300

50,000$ × 5.00% = 2,500$

Desired balance in Allowancefor Uncollectible Accounts

200

2,300 2,500

Allowance for Uncollectible

Accounts


Now, let’s look at the accounts receivable aging

approach!

Year-end Accounts Receivable is broken down into age classifications.

Year-end Accounts Receivable is broken down into age classifications.

Each age grouping has a different likelihood of being uncollectible.

Each age grouping has a different likelihood of being uncollectible.

Compute desired uncollectible amount. Compute desired uncollectible amount.

Balance Sheet Approach Aging of Receivables

Compare desired uncollectible amount with the existing balance in the

allowance account.

Compare desired uncollectible amount with the existing balance in the

allowance account.

EastCo, Inc.

Schedule of Accounts Receivable by Age

December 31, 2012

Days Past Due

Accounts Receivable

Balance

Estimated Bad Debts

Percent

Estimated Uncollectible

Amount Current 45,000$ 1% 450$ 1 - 30 15,000 3% 450 31 - 60 5,000 5% 250 Over 60 2,000 10% 200

67,000$ 1,350$

At December 31, 2012, the receivables for EastCo, Inc. were categorized as follows:




EastCo’s unadjusted balance in the allowance account is

$500.

Per the previous computation, the desired balance is $1,350.


$500.


500

1,350


Accounts

Prepare the entry to record bad debts expense at Dec. 31, 2012.


500

850 1,350


Accounts



Dec. 31 Bad Debts Expense 850 Allowance forUncollectible Accounts 850



$500.



$500.




Emphasis on Realizable Value

Emphasis on Realizable Value

Accts. Rec.

Balance or

Aging

All. for Uncoll. Accts.

Income Statement

Focus

Income Statement

Focus

Balance Sheet Focus

Balance Sheet Focus



Emphasis on Matching

Emphasis on Matching

SalesBad

Debts Exp.

Methods to Estimate Bad Debts

Hybrid Approach –

1.For interim reporting, income statement approach maybe used.

2.At year end balance sheet approach can be applied and both allowance and bad debt expense be adjusted

If uncollectible accounts are immaterial, bad debts are simply recorded as they occur (without the use of an allowance

account).

If uncollectible accounts are immaterial, bad debts are simply recorded as they occur (without the use of an allowance

account).

Direct Write-off Method

Bad debts expense xxxAccounts receivable xxx

This is a method not generally permitted by GAAP

7-69Summary of Measurement and Reporting

Issues for Accounts ReceivableRecognition

Depends on the earnings process; for most credit sales, revenue and the related receivables are recognized at the point of delivery.

Initial valuationInitially recorded at the exchange price agreed upon by the buyer and seller.

Subsequent valuationInitial valuation reduced to net realizable value by:

1. Allowance for sales returns 2. Allowance for uncollectible accounts: The income statement approach The balance sheet approachClassification

Almost always classified as a current asset.

7-70

Review The income statement approach to estimating

bad debts requires an adjusting entry at the end of the period which includes a credit to accounts receivables? True False

7-71

Notes Receivable

A written promise to pay a specificamount at a specific future date.

Face amount of the note

×Annual interest

rate ×

Fraction of the annual

period = Interest


rate is annualized.


rate is annualized.

7-72

Interest-Bearing Notes

On November 1, 2014, West, Inc., loans $25,000 to Winn Co. The note bears interest at 12% and is due

on November 1, 2015.

Prepare the journal entry on November 1, 2014, December 31, 2014, (year-end) and November 1,

2015, for West.November 1, 2014Notes receivable 25,000

Cash 25,000December 31, 2014Interest receivable 500

Interest revenue 500November 1, 2015Cash 28,000

Note receivable 25,000Interest receivable 500Interest revenue 2,500

7-73


Actually do bear interest.

Interest is deducted (discounted) from the face value of the note.

Cash proceeds equal face value of note less discount.

7-74








January 1, 2014Notes receivable 25,000

Discount on notes receivable 3,000Sales revenue 22,000

($25,000 * 12% = $3,000)December 31, 2014Cash 25,000Discount on notes receivable 3,000

Interest revenue 3,000Note receivable 25,000

7-75

Review

Long-term notes receivable issued for sale of merchandise at an unrealistically low interest rate will be:


7-76

Review



7-77

Financing with Receivables

Companies may use their receivables to

obtain immediate cash.

Sale of Receivabl

es

Secured Borrowing

7-78

Factoring Arrangements

FACTOR (Transferee)

SUPPLIER(Transferor)

RETAILER1. Merchandise

2. Accounts Receivable

3. Accounts Receivable

4. Cash 5. C

ash

A factor is a financial institution that buys receivablesfor cash, handles the billing and collection of thereceivables, and charges a fee for the service.

A factor is a financial institution that buys receivablesfor cash, handles the billing and collection of thereceivables, and charges a fee for the service.

7-79

Secured BorrowingOn December 1, 2013, the Santa Teresa Glass Company borrowed $500,000 from Finance Bank and signed a promissory note. Interest at 12% is payable monthly. The company assigned $620,000 of its receivables as collateral for the loan. Finance Bank charges a finance fee equal to 1.5% of the accounts receivable assigned.

Cash (difference) 490,700Finance charge expense (1.5% * $620,000) 9,300

Liability – financing arrangement 500,000

Santa Teresa Glass will continue to collect the receivables, and will record any discounts, sales returns, and bad debt write-offs, but will remit the cash to Finance Bank, usually on a monthly basis. When $400,000 of the receivables assigned are collected in December, Santa Teresa Glass records the following entries.

Cash 400,000Accounts receivable 400,000

Interest expense ($500,000 * 12% * 1/12) 5,000Liability – financing arrangement 400,000

Cash 405,000

7-80

Sale of Receivables

Treat as a sale if all of these conditions are met: receivables are isolated from transferor. transferee has right to pledge or exchange

receivables. transferor does not have control over the

receivables. Transferor cannot repurchase

receivable before maturity. Transferor cannot require return

of specific receivables.

Treat as a sale if all of these conditions are met: receivables are isolated from transferor. transferee has right to pledge or exchange

receivables. transferor does not have control over the

receivables. Transferor cannot repurchase

receivable before maturity. Transferor cannot require return

of specific receivables.

FASC 860-10--40-5

7-81

Sale of Receivables

Without recourse An ordinary sale of receivables to the factor. Factor assumes all risk of uncollectibility. Control of receivable passes to the factor. Receivables are removed from the books, fair

value of cash and other assets received is recorded, and a financing expense or loss is recognized.

Without recourse An ordinary sale of receivables to the factor. Factor assumes all risk of uncollectibility. Control of receivable passes to the factor. Receivables are removed from the books, fair

value of cash and other assets received is recorded, and a financing expense or loss is recognized.

With recourse Transferor (seller) retains risk of uncollectibility. If the transaction fails to meet the three conditions

necessary to be classified as a sale, it will be treated as a secured borrowing.

With recourse Transferor (seller) retains risk of uncollectibility. If the transaction fails to meet the three conditions

necessary to be classified as a sale, it will be treated as a secured borrowing.

7-82

Sale of ReceivablesIn December 2013, 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% × $600,000 = $540,000). Factor retains the remaining 10% (estimated to have a fair value of $50,000) to cover its factoring fee (equal to 4% of the total factored amount; 4% × $600,000 = $24,000) and to provide a cushion against potential sales returns and allowances.

Assume the same facts as above, except that Santa Teresa Glass sold the receivables to Factor with recourse and estimates the fair value of the recourse obligation to be $5,000.

7-83

Sale of Receivables – Past Abuses

Securitization: Transfer receivables to a SPESpecial Purpose Entity (SPE)

Qualifying Special Purpose Entity (QSPE)New rules eliminate QSPE and require

consolidation! Participating Interests: Transfer portion of

a receivableExample: transfer right to interest, but

retain right to principalNew rules require a partial transfer be treated as a secured borrowing, unless

specific conditions are met!

7-84

Review



7-85

Interest receivable 5,000Interest revenue 5,000

Transfers of Notes Receivable

On December 31, Stridewell accepted a nine-month 10 percent note for $200,000 from a customer.

Three months later on March 31, Stridewell discounted the note at its local bank. The bank’s

discount rate is 12 percent.

$200,000 × 10% × 3/12

Before preparing the journal entry to record the discounting, Stridewell must record the accrued interest on the note

from December 31 until March 31.

7-86

Face amount of note receivable 200,000$ Interest to maturity ($200,000 × 10% × 9/12) 15,000 Maturity value of note receivable 215,000 Discount fee ($215,000 × 12% × 6/12) (12,900) Cash proceeds 202,100$

Transfers of Notes Receivable

Cash 202,100Loss on sale of note receivable 2,900

Notes receivable 200,000Interest receivable 5,000

$205,000 $202,100

7-87Deciding Whether to Account for a Transfer

as a Sale or a Secured Borrowing

7-88

ReviewIn deciding whether financing with receivables

is a secured borrowing or a sale under U.S. GAAP, the critical element is the extent to which: A. The transferee has received substantially all the risks and rewards of ownership.B. The age of the receivables transferred differs from the average age of the receivables.C. The transferor of the receivable surrenders control over the assets transferred.D. The transferee relies on funds from the transferor to maintain operations.

7-89User’s Perspective

Investors and creditors use financial statements to make future oriented decisions based on past historical performance.

Two important ratios related to accounts receivable include: AR Turnover Average Days to Collect

Both of these use NET accounts receivable which is based on accountant’s judgment not an actual measurement.

7-90

This ratio measures how many times a company converts its

receivables into cash each year.

Net Sales Average Accounts Receivable

ReceivablesTurnover

Ratio=

This ratio is an approximation of the number of days the average accounts

receivable balance is outstanding.

365 Receivables Turnover Ratio

Average Collection

Period=

Receivables Management

7-91

Symantec Corp. vs. CA, Inc., comparisonSymantec Corp. vs. CA, Inc., comparison

2011 2010 2011 2010Accounts receivable (net) 1,013$ 856$ 849$ 931$ Net sales 6,190 4,429

Symantec Corp. CA, Inc.

Receivables Management

(All dollar amounts in millions)

Symantec Corp CA, Inc Industry AverageReceivables turnover 6.62 4.98 5.96 Average collection period 55.14 days 73.29 days 61.3 days

7-92

Current Issues

Recent events related to the collapse of the real estate financing bubble have reshaped GAAP .

Much has been made of the ‘mark to market rule’

7-93

When a company holds a receivable from another company, there is some potential that

the receivable will eventually be impaired.

Impairment of a receivable occurs if the company believes it is probable that it will not receive all of the cash flows (principal and any

interest payments) associated with the receivable.

Current Issues: Accounting for Impairment of a Receivable and a Troubled Debt Restructuring

7-94Accounting for Impairment of a Receivable

and a Troubled Debt Restructuring

Bad debt expense 8,867,670Accrued interest receivable 3,000,000Allowance for uncollectible accounts 5,867,670

($30,000,000 - $24,132,330)

7-95Accounting for Impairment of a Receivable

and a Troubled Debt Restructuring

A troubled debt restructuring occurs when a creditor makes concessions in response to a debtor’s financial difficulties.

(in millions)Land (fair value) 20Bad debt expense 13

Accrued interest receivable 3Notes receivable 30

Sometimes a receivable in a troubled debt restructuring is actually settled at the time of the restructuring by the debtor making a payment of cash, some other noncash assets, or even shares of the debtor’s stock.

Documents

Topic #1 Cash Reporting Controls Accounts & Notes Receivables Initial Measurement Subsequent Measurement Financing with Receivables User’s Perspective