Chapter 7

Report
Ch.7
Investments &
Receivables
Chapter 7, Slide #1
Part I
Investments
(FYI only)
Chapter 7, Slide #2
Types of Investments
•
•
•
•
Investment in treasury bills
Investment in a CD
Investment in other companies’ bonds
Investment in other companies’ stocks
Chapter 7, Slide #3
Investment in a CD
Example:
On October 2, Apple invests $100,000 in a 120day CD. Principal plus interest @ 6% due upon
investment maturity.
Purchase of investment:
Short-Term Investments—CD
Cash
100,000
100,000
LO1
Investment in a CD
Year-end adjusting entry:
Interest Receivable
Interest Revenue
1,500
1,500
Interest (I) = Principal (P) × Rate (R) × Time (T)
$1,500
= $100,000
× 6%
× 90/360
October –
29 days
November – 30 days
December – 31 days
90 days
Investment in a CD
Upon investment maturity:
Cash
Short-Term Investments—CD
Interest Receivable
Interest Revenue*
102,000
*Interest earned in January:
$100,000 × 6% × 30/360 = $500
100,000
1,500
500
Reasons Companies Invest in Other
Companies’ stocks
 Short-term cash excesses
 Long-term investing for
future cash needs
 Exert influence over investee
 Obtain control of investee
Chapter 7, Slide #7
Accounting for Common-Stock
Investments
Fair
Value
Method
0%
Equity
Method
20%
No significant
influence
Our
focus
Appendix
Chapter in
7, Slide
#8
Significant
influence
Consolidated
Financial
Statements
100%
50%
Control
Part II
Receivables
Chapter 7, Slide #9
Credit Sales
 An effort to increase sales
 Slows inflow of cash
 Risk of uncollectible accounts
Chapter 7, Slide #10
LO2
Apple’s Consolidated Balance
Sheets (Partial)
(amounts in millions)
Accounts receivables, less
allowances of $47 and $49,
respectively
2004
2003
$774
$766
Net
Realizable
Value
Chapter 7, Slide #11
Two accounting methods
for bad debts
• Direct write-off method
• Allowance method
Chapter 7, Slide #12
Direct Write-off Method
Period of sale
1
2
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5
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12
13
14
15
16
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18
19
20
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25
26
27
28
29
30
31
Future period charged
with expense of bad debt
write-off
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
Journal entry to record write-off in period determined
to be uncollectible:
Bad Debts Expense
XXX
Accounts Receivable—Dexter
XXX
Chapter 7, Slide #13
Allowance Method
(acceptable under GAAP)
Estimated bad debt
expense (and allowance
account) recorded in the
same period
Period of sale
Chapter 7, Slide #14
1
2
3
4
5
6
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29
30
31
Accounting for Bad Debts:
Allowance Method
Journal entry to record estimated bad debt
expense in period of sale:
Bad Debts Expense
6,000
Allowance for Doubtful Accounts
6,000
I estimate...
Chapter 7, Slide #15
Balance Sheet Presentation –
Allowance Method
Roberts Corp.
Partial Balance Sheet
Accounts receivable
Less: Allowance for
doubtful accounts
Net accounts receivable
Chapter 7, Slide #16
$250,000
6,000
$244,000
Accounting for Bad Debts:
Allowance Method
Journal entry to record bad debt write-off of
customer John’s account for $320 in
period determined uncollectible:
Allowance for Doubtful Accounts 320
Accounts Receivable—Dexter
Bankrupt
Chapter 7, Slide #17
320
Approaches to Allowance Method
% of Net Credit Sales
Income
Statement
Approach
% of Accounts Receivable
– Aging Method
Chapter 7, Slide #18
Balance
Sheet
Approach
Percentage of Net Credit Sales
Method
Example:
2007 Net credit sales
Bad debt percentage
Bad debts expense
$2,340,000 (given)
2%
$ 46,800
Journal entry:
Bad Debts Expense
46,800
Allowance for Doubtful Accounts
46,800
Chapter 7, Slide #19
Aging Method
Category
Amount
Current
$ 85,600
Past due:
1–30 days
31,200
31–60 days
24,500
61–90 days
18,000
90+ days
9,200
Totals
$168,500
Estimated Percent Estimated Amount
Uncollectible
Uncollectible
1%
$ 856
4%
10%
30%
50%
1,248
2,450
5,400
4,600
$14,554
Aging Method
Assume the Allowance for Doubtful Accounts
has a beginning credit balance of $1,230:
Credit balance required in allowance
account after adjustment
Less: Credit balance in allowance
account before adjustment
Amount for bad debt expense entry
Chapter 7, Slide #21
$14,554
1,230
$13,324
Aging Method
Assume the Allowance for Doubtful Accounts
has a beginning credit balance of $1,230:
Journal entry:
Bad Debts Expense
13,324
Allowance for Doubtful Accounts
13,324
To record estimated bad debts.
Chapter 7, Slide #22
Aging Method
The net realizable value of accounts receivable
would be determined as follows:
Accounts receivable
$168,500
Less: Allowance for doubtful accounts
14,554
Net realizable value
$153,946
Chapter 7, Slide #23
Part III
Notes receivables
Chapter 7, Slide #24
Interest-Bearing Promissory Note
Principal
On Dec. 13, 2006, High Tech Company sold
merchandise inventory to Baker Corporation
in exchange for a $15,000,12% promissory
note which matures on March 13, 2007.
Interest
Date: December 13, 2007
Baker Corporation
Signed:_________
Chapter 7, Slide #25
Maturity
Date
LO4
Interest-Bearing
Promissory Note
Journal entry to record the receipt of the note
on December 13:
Notes Receivable
15,000
Sales Revenue
15,000
Chapter 7, Slide #26
Interest-Bearing
Promissory Note
Adjusting entry to record interest:
Interest Receivable
90
Interest Revenue
*Interest = $15,000 × 12% × 18/360
Chapter 7, Slide #27
90*
Interest-Bearing
Promissory Note
Journal entry to record the collection of the
note on March 13, 2008:
Cash
15,450
Notes Receivable
15,000
Interest Revenue
360*
Interest Receivable
90
*15,000 × 12% × 72/360
Chapter 7, Slide #28

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