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Ch.7 Investments & Receivables

Ch.7 Investments & Receivables. Part I Investments (FYI only). Types of Investments. Investment in treasury bills Investment in a CD Investment in other companies’ bonds Investment in other companies’ stocks. Investment in a CD. Example:. Purchase of investment:

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Ch.7 Investments & Receivables

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  1. Ch.7Investments &Receivables

  2. Part IInvestments(FYI only)

  3. Types of Investments • Investment in treasury bills • Investment in a CD • Investment in other companies’ bonds • Investment in other companies’ stocks

  4. Investment in a CD Example: Purchase of investment: Short-TermInvestments—CD 100,000 Cash 100,000 On October 2, Apple invests $100,000 in a 120-day CD. Principal plus interest @ 6% due upon investment maturity. LO1

  5. Investment in a CD Year-end adjusting entry: Interest Receivable 1,500 Interest Revenue 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

  6. Investment in a CD Upon investment maturity: Cash 102,000 Short-Term Investments—CD 100,000 Interest Receivable 1,500 Interest Revenue* 500 *Interest earned in January: $100,000 × 6% × 30/360 = $500

  7. 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

  8. Fair Value Method Equity Method Consolidated Financial Statements 20% 100% 50% 0% No significant influence Significant influence Control Accounting for Common-Stock Investments Our focus in Appendix

  9. Part IIReceivables

  10. Credit Sales • An effort to increase sales • Slows inflow of cash • Risk of uncollectible accounts LO2

  11. Apple’s Consolidated Balance Sheets (Partial) (amounts in millions)2004 2003 Accounts receivables, less allowances of $47 and $49, respectively $774 $766 Net Realizable Value Estimated Uncollectible Accounts

  12. Two accounting methods for bad debts • Direct write-off method • Allowance method

  13. 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 Direct Write-off Method Period of sale Journal entry to record write-off in period determined to be uncollectible: Bad Debts Expense XXX Accounts Receivable—Dexter XXX

  14. 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 Allowance Method(acceptable under GAAP) Period of sale Estimated bad debt expense (and allowance account) recorded in the same period

  15. 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...

  16. Balance Sheet Presentation – Allowance Method Roberts Corp. Partial Balance Sheet Accounts receivable $250,000 Less: Allowance for doubtful accounts 6,000 Net accounts receivable $244,000

  17. 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 320 Bankrupt

  18. Approaches to Allowance Method % of Net Credit Sales % of Accounts Receivable • Aging Method Income Statement Approach Balance Sheet Approach

  19. Percentage of Net Credit Sales Method Example: 2007 Net credit sales $2,340,000 (given) Bad debt percentage 2% Bad debts expense $ 46,800 Journal entry: Bad Debts Expense 46,800 Allowance for Doubtful Accounts 46,800

  20. Estimated Percent Estimated Amount Category Amount Uncollectible Uncollectible Current $ 85,600 1% $ 856 Past due: 1–30 days 31,200 4% 1,248 31–60 days 24,500 10% 2,450 61–90 days 18,000 30% 5,400 90+ days 9,200 50% 4,600 Totals $168,500 $14,554 Aging Method

  21. Aging Method Assume the Allowance for Doubtful Accounts has a beginning credit balance of $1,230: Credit balance required in allowance account after adjustment $14,554 Less: Credit balance in allowance account before adjustment 1,230 Amount for bad debt expense entry $13,324

  22. 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.

  23. 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

  24. Part IIINotes receivables

  25. Principal Interest Maturity Date Interest-Bearing Promissory Note 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. Date: December 13, 2007 Signed:_________ Baker Corporation LO4

  26. Interest-Bearing Promissory Note Journal entry to record the receipt of the note on December 13: Notes Receivable 15,000 Sales Revenue 15,000

  27. Interest-Bearing Promissory Note Adjusting entry to record interest: Interest Receivable 90 Interest Revenue 90* *Interest = $15,000 × 12% × 18/360

  28. Interest-BearingPromissory 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

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