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1. Cash and Receivables CHAPTER 7
2. Cash
3. Cash Equivalents
4. Internal Control
5. Control of Cash Receipts Separate responsibility for
handling cash,
recording cash transactions, and
reconciling cash balances.
Agree cash amounts deposited with cash amounts received.
Close supervision of cash-handling and cash-recording activities.
6. Control of Cash Disbursements Separate responsibilities for
cash disbursement documents,
check writing,
check signing,
check mailing, and
record keeping.
All disbursements, except petty cash, made by check.
7. Bank reconciliations are prepared periodically to explain the difference between cash reported on the bank statement and the cash balance on company’s books. Bank Reconciliation
8. Bank Reconciliation
9. Bank Reconciliation
10. Bank Reconciliation Prepare a July 31 bank reconciliation statement and the resulting journal entries for the Simmons Company. The July 31 bank statement indicated a cash balance of $9,610, while the cash ledger account on that date shows a balance of $7,430.
Additional information necessary for the reconciliation is shown on the next page.
11. Outstanding checks totaled $2,417.
A $500 check mailed to the bank for deposit had not reached the bank at the statement date.
The bank returned a customer’s NSF check for $225 received as payment of an account receivable.
The bank statement showed $30 interest earned on the bank balance for the month of July.
Check 781 for supplies cleared the bank for $268 but was erroneously recorded in our books as $240.
A $486 deposit by Acme Company was erroneously credited to our account by the bank.
13. Bank Reconciliation
14. Petty Cash
15. Petty Cash
16. Petty Cash Jackson Company maintains a petty cash fund of $400. The following summary information was taken from petty cash vouchers for July:
Travel Expenses $79.30
Customer Business Lunches 93.42
Express Mail Postage 55.00
Miscellaneous Office Supplies 32.48
Prepare the journal entry to record replenishing fund if the balance on July 31 was $137.80.
17. Petty Cash
18. Petty Cash
19. Petty Cash
20. Restricted Cash and Compensating Balances Restricted Cash
Management’s intent to use a certain amount of cash for a specific purpose.
Compensating Balance
Minimum balance that must be maintained in a company’s account as support for funds borrowed from the bank.
21. Amounts due from customers for credit sales.
Credit sales require:
Maintaining a separate account receivable for each customer.
Accounting for bad debts that result from credit sales. Accounts Receivable
22. Cash Discounts
23. Cash Discounts
24. Cash Discounts
25. Cash Discounts
26. Cash Discounts On May 10, Eddy, Inc. sold $5,000 of merchandise to a customer subject to a cash discount of 1/10, n/30. Eddy uses the periodic method to account for inventory.
Prepare the journal entry to record the sale if Eddy uses:
(a) the gross method.
(b) the net method.
27. Cash Discounts
28. Cash Discounts Assume that on May 19, Eddy, Inc. received a check in full payment of the sale made on May 10.
Prepare the journal entry to record the cash receipt if Eddy uses:
(a) the gross method.
(b) the net method.
29. Cash Discounts
30. Cash Discounts Instead of the payment on May 19, now assume that Eddy, Inc. received a check on May 31, in full payment of the sale made on May 10. Prepare the journal entry to record the cash receipt if Eddy uses:
(a) the gross method.
(b) the net method.
31. Cash Discounts
32. Sales Returns and Allowances
33. Sales Returns and Allowances On June 1, a customer of LarCo returns $750 of merchandise that was damaged. LarCo uses the periodic method to account for inventory.
Record the journal entry for the return of merchandise.
34. Sales Returns and Allowances
35. Uncollectible Accounts Receivable Bad debts result from credit customers who will not pay the business the amount they owe, regardless of continuing collection efforts.
36. Uncollectible Accounts Receivable 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.
37. Uncollectible Accounts Receivable Most businesses record an estimate of the bad debt expense by an adjusting entry at the end of the accounting period.
38. Uncollectible Accounts Receivable
39. Allowance for Uncollectible Accounts
The net realizable value is the amount of the accounts receivable that the business expects to collect.
40. Estimating Bad Debts Income Statement Approach
Balance Sheet Approach
Composite Rate
Aging of Receivables
41. Income Statement Approach 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.
42. Bad debts expense is computed as follows: Income Statement Approach
43. Income Statement Approach
44. Income Statement Approach
45. 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.
46. Compute the estimate of the Allowance for Uncollectible Accounts.
Bad Debts Expense is computed as: Balance Sheet ApproachComposite Rate
47. Balance Sheet ApproachComposite Rate
48. Balance Sheet ApproachComposite Rate
50. Balance Sheet Approach Aging of Receivables
51. Balance Sheet Approach Aging of Receivables
52. Balance Sheet Approach Aging of Receivables
53. Balance Sheet Approach Aging of Receivables
54. Methods to Estimate Bad Debts
55. Uncollectible Accounts As accounts become uncollectible, the following entry is made:
56. Collection of Previously Written-Off Accounts When a customer makes a payment after an account has been written off, two journal entries are required.
57. If uncollectible accounts are immaterial, bad debts are simply recorded as they occur (without the use of an allowance account). Direct Write-Off Method
59. Notes Receivable
60. Notes Receivable
61. Interest Computation
62. Interest-Bearing Notes On November 1, 2000, Winn, Inc. loans $25,000 to Westward, Co. The note bears interest at 12% and is due on November 1, 2001.
Prepare the journal entry on November 1, 2000, December 31, 2000, (year-end) and November 1, 2001.
63. Interest-Bearing Notes
64. Interest-Bearing Notes
65. 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.
66. Noninterest-Bearing Notes On January 1, 2000, Winn, Inc. accepted a $25,000 noninterest-bearing note from Westward, Co as payment for a sale. The note is discounted at 12% and is due on December 31, 2000.
Prepare the journal entries on January 1, 2000, and December 31, 2000.
67. Noninterest-Bearing Notes
68. Financing With Receivables Assigning
Factoring
Discounting
69. Assigning Accounts Receivable Merely a promise by the borrower (owner of receivables) that any failure to repay debt will result in proceeds from accounts receivable collections being used to repay the debt.
Reclassify Accounts Receivable as Accounts Receivable Assigned.
70. Factoring Accounts Receivable
71. Factoring Accounts Receivable Factoring without recourse
An ordinary sale of receivables to the factor.
Control of receivable passes to the factor.
Receivables are removed from our books, cash is received and a financing expense or loss is recognized.
72. Factoring Accounts Receivable Factoring with recourse -- to be recognized as a sale . . .
The transferred assets have been isolated from the transferor.
The transferee has the right to pledge or exchange the assets.
The transferor does not maintain effective control over the transferred assets through any agreements.
73. Factoring Accounts Receivable Factoring with recourse -- to be recognized as a loan . . .
If the transaction fails to meet the three conditions necessary to be classified as a sale, the agreement will be treated as a loan.
74. Discounting Receivables On May 31, Apex discounts a customer’s $25,000 receivable at the bank. The receivable was dated May 1 and matures in 90 days. The receivable bears interest at 12% and the bank charges a discount of 15% on the maturity value of the receivable.
Prepare the journal entry to record the discounting of the receivable.
75. Discounting Receivables
76. End of Chapter 7