ACCT3010

Intermediate Accounting I
Professor Amy Zang

Chapters 7
7-1
 PREVIEW OF CHAPTER 7

7-2
 LEARNING OBJECTIVE 1
Cash Indicate how to report cash
and related items.

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.

7-3 LO 1
 Cash

Reporting Cash
Cash Equivalents

Short-term, highly liquid investments that are both

a) readily convertible to cash, and

b) so near their maturity that they present insignificant
risk of changes in value.

Examples: Government bonds, commercial paper, and

money market funds

7-4 LO 1
 FEBRUARY 19, 2008, 1:32 PM ET
From Texas Instruments to Motorola: When Cash Isn’t Really Cash

…in this case, a Merrill Lynch report on how technology companies that look secure because of the
cash on their balance sheets may actually be depending on some debt securities that they may
have to write down later.

…According to the investment bank’s technology team, the companies with the most exposure include
Foundry Networks, Texas Instruments and Photon Dynamics, who respectively have 68%, 62%,
and 54% of the “cash” portion of their balance sheets tied up in now-risky debt such as auction-
rate securities and asset backed- and mortgage-rate securities. Those debt instruments looked
like “cash equivalents” as recently as last year. Now: not so much.

…Other big names may be at danger because tomorrow (and tomorrow, and tomorrow) they still will be
drawing a big chunk of their income from the interest on those securities. Alcatel-Lucent, IDT,
Nortel and Motorola all draw more than half of their pretax income from the interest-payments on
that debt.

…That means technology companies may have to make bite-size versions of the same kinds of write-
downs that have wracked investment banks and other financial firms, Merrill said. Some
companies are reclassifying the securities and either writing down the value of some of the debt
or waiting until the market gets better.

…And how about Microsoft, which plans to use the cash on its balance sheet (plus proceeds from the
mammoth sale of $20 billion-plus of debt) to try to buy Yahoo? About 10% of Microsoft’s net cash
is at risk, Merrill concludes.
7-5
 Reporting Cash

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 7.2
Disclosure of Restricted Cash

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 Reporting Cash

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 off setting arrangements against
other accounts at the same bank).

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 ILLUSTRATION 7.2
Classification of Cash-Related Items

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 Receivables

Receivables - Claims held against customers and

others for money, goods, or services.

Oral promises of the Written promises to pay a

purchaser to pay for goods certain sum of money on a
and services sold. specified future date.

Accounts Notes
Receivable Receivable

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 Receivables

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.).
7-10 LO 2
 Non-Trade
Receivables

ILLUSTRATION 7.3
Receivables Statement of Financial
Position Sheet Presentations

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 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. (CH18)

7-12 LO 2
 Recognition of Accounts Receivables

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

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 Recognition of Accounts Receivables

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.

7-14 LO 2
 Receivables

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.

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 Variable Consideration

Trade Discounts
Use to:
 Avoid frequent changes in 10 %
catalogs. Discount for
new Retail
 Alter prices for different
Store
quantities purchased.
Customers
 Hide the true invoice price
from competitors.

7-16 LO 2
 Variable Consideration

Cash Discounts (Sales Discounts)

 Offered to induce prompt
payment.

 Terms such as 2/10, n/30,

2/10, E.O.M., or net 30,
Payment
E.O.M. terms are
 Gross Method vs. Net 2/10, n/30
Method.

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 Cash Discounts (Sales Discounts)

ILLUSTRATION 7.5
Entries under Gross and Net Methods

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 Variable Consideration

Sales Returns and Allowances

 Sales Returns and Allowances is a contra revenue
account to Sales Revenue.

 Allowance for Sales Returns and Allowances is a contra

asset account to Accounts Receivable.

 The use of both Sales Returns and Allowances, and

Allowance for Sales Return and Allowances accounts is
helpful to identify potential problems associated with
inferior merchandise, inefficiencies in filling orders, or
delivery or shipment mistakes.

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 Sales Returns and Allowances

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.
On January 4, 2019, Max sells $5,000 of hurricane glass to Oliver
on account. Max records the sale on account as follows.

Accounts Receivable 5,000

Sales Revenue 5,000

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 Sales Returns and Allowances

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.
On January 16, 2019, 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.

Sales Returns and Allowances 300

Accounts Receivable 300

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 Sales Returns and Allowances

On January 31, 2019, before preparing financial statements, Max

estimates that an additional $100 in sales returns and allowances
will result from the sale to Oliver on January 4, 2019. An adjusting
entry to record this additional allowance is as follows.

Sales Returns and Allowances 100

Allowance for Sales Returns and Allowances 100

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 Variable Consideration

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.”

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 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

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 Accounts Receivable

How are these accounts presented on the Statement of

Financial Position?

Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.

End. 500 25 End.

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 Accounts Receivable

Brown Furniture
Statement of Financial Position (partial)
Current Assets:
Cash $ 330
Accounts receivable 500
Less: Allowance for doubtful accounts (25) 475
Inventory 812
Prepaid expense 40
Total current assets 1,657

7-26 LO 2
 Accounts Receivable
Alternate
Brown Furniture Presentation
Statement of Financial Position (partial)
Current Assets:
Cash $ 330
Accounts receivable, net of $25 allowance 475
Inventory 812
Prepaid expense 40
Total current assets 1,657

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 Accounts Receivable
Journal entry for credit sale of $100?
Accounts Receivable 100
Sales Revenue 100

Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.

End. 500 25 End.

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 Accounts Receivable
Journal entry for credit sale of $100?
Accounts Receivable 100
Sales Revenue 100

Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
Sale 100

End. 600 25 End.

7-29 LO 2
 Accounts Receivable
Collected $333 on account?
Cash 333
Accounts Receivable 333

Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
Sale 100

End. 600 25 End.

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 Accounts Receivable
Collected $333 on account?
Cash 333
Accounts Receivable 333

Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
Sale 100 333 Coll.

End. 267 25 End.

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 Accounts Receivable
Adjustment of $15 for estimated bad debts?
Bad Debt Expense 15
Allowance for Doubtful Accounts 15

Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
Sale 100 333 Coll.

End. 267 25 End.

7-32 LO 2
 Accounts Receivable
Adjustment of $15 for estimated bad debts?
Bad Debt Expense 15
Allowance for Doubtful Accounts 15

Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
Sale 100 333 Coll. 15 Est.

End. 267 40 End.

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 Accounts Receivable
Write-off of uncollectible accounts for $10?
Allowance for Doubtful accounts 10
Accounts Receivable 10

Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
Sale 100 333 Coll. 15 Est.

End. 267 40 End.

7-34 LO 2
 Accounts Receivable
Write-off of uncollectible accounts for $10?
Allowance for Doubtful accounts 10
Accounts Receivable 10

Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
Sale 100 333 Coll. 15 Est.
10 W/O W/O 10

End. 257 30 End.

7-35 LO 2
 Accounts Receivable

Brown Furniture
Statement of Financial Position (partial)
Current Assets:
Cash $ 330
Accounts receivable, net of $30 allowance 227
Inventory 812
Prepaid expense 40
Total current assets 1,409

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 Valuation of Accounts Receivable

Methods of Accounting for Uncollectible Accounts

Direct Write-Off Method Allowance Method

Theoretically deficient: Losses are estimated:
 Fails to record expenses as  Percentage-of-sales.
incurred.  Percentage-of-receivables.
 Receivable not stated at  IFRS requires when bad
cash realizable value. debts are material in
 Not appropriate when amount.
amount uncollectible is
material.
7-37 LO 3
 Valuation of Accounts Receivable

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 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

No Matching,
Not Allowed!
7-38 LO 3
 Valuation of Accounts Receivable

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
collectibility.

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 Allowance Method for Uncollectible Accounts

Recording Estimated Uncollectibles

Illustration: Assume that Brown Furniture in 2019, 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

7-40 LO 3
 Recording Estimated Uncollectibles

ILLUSTRATION 7.5
Presentation of Allowance for Doubtful Accounts

The amount of £140,000 represents the cash realizable value of

the accounts receivable at the statement date.

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 Allowance Method for Uncollectible Accounts

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.

7-42 LO 3
 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. The entry to record the write-off is:

Allowance for Doubtful Accounts 1,000

Accounts Receivable 1,000

Assume that on July 1, Randall plc pays the £1,000 amount that
Brown had written off on March 1. These are the entries:
Accounts Receivable 1,000
Allowance for Doubtful Accounts 1,000
Cash 1,000
Accounts Receivable 1,000
7-43 LO 3
 Allowance Method

The percentage-of-sales basis The percentage-of-receivables

results in a better matching of basis produces the better estimate of
expenses with revenues cash realizable value

7-44 LO 5
 Allowance Method

Percentage-of-Sales Approach
 Percentage based upon past experience and anticipate
credit policy.
 Achieves better matching of cost and revenues.
 Any balance in Allowance for Doubtful Accounts is
ignored.
 Method frequently referred to as the income statement
approach.

7-45 LO 5
 Percentage-of-Sales Approach

Illustration: Gonzalez Company estimates that about 1% of net

credit sales will become uncollectible. If net credit sales are
R$800,000 for the year, it records bad debt expense as follows.

Bad Debt Expense (1% x R$800,000) 8,000

Allowance for Doubtful Accounts 8,000

ILLUSTRATION 7-8

7-46 LO 5
 Allowance Method for Uncollectible Accounts

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.

7-47 LO 3
 Estimating the Allowance ILLUSTRATION 7.6
Accounts Receivable
Aging Schedule

7-48 LO 3
 Estimating the Allowance

ILLUSTRATION 7.6
Accounts Receivable
Aging Schedule

What entry
would Wilson
make assuming
the allowance
account had a
credit balance
of €800 before
adjustment?

Bad Debt Expense (€26,610 – €800) 25,810

Allowance for Doubtful Accounts 25,810

7-49 LO 3
 Estimating the Allowance

ILLUSTRATION 7.6
Accounts Receivable
Aging Schedule

What entry
would Wilson
make assuming
that the
allowance
account had
credit balance
of €36,610
before
adjustment?
Allowance for Doubtful Accounts 10,000
Bad Debt Expense (€36,610 - €26,610) 10,000

7-50 LO 3
 Estimating the Allowance

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) 1% of net sales

7-51 LO 3
 Estimating the Allowance

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.
Bad Debt Expense 3,000
Allowance for Doubtful Accounts 3,000
€100,000 x 5% = €5,000 - €2,000 = €3,000
7-52 LO 3
 Estimating the Allowance

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 (b) 1% of net
sales.
Bad Debt Expense 8,500
Allowance for Doubtful Accounts 8,500
(€900,000-50,000) x 1% = €850,000 x 1% = €8,500
7-53 LO 3
 LEARNING OBJECTIVE 4
Notes Receivable Explain accounting issues
related to recognition and
valuation of notes receivable.

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).

7-54 LO 4
 Notes Receivable

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).

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 Recognition of Notes Receivable

Short-Term Long-Term
Record at
Record at
Present Value
Face Value,
of cash expected
less allowance
to be collected

Interest Rates Note Issued at

Stated rate = Market rate Face Value
Stated rate > Market rate Premium
Stated rate < Market rate Discount

7-56 LO 4
 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?
i = 10%
€10,000 Principal

PV-OA €1,000 €1,000 €1,000 Interest

0 1 2 3 4
n=3
ILLUSTRATION 7.7
Time Diagram for Note Issued at Face Value
7-57 LO 4
 Note Issued at Face Value
TABLE 6.4 PRESENT VALUE OF AN ORDINARY ANNUITY OF 1
PV of Interest

1 1
1− 1 −
(1 + i )n = (1 + .1)3
i .1

€1,000 x 2.48685 = €2,487

Interest Received Factor Present Value

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 Note Issued at Face Value
TABLE 6.2 PRESENT VALUE OF 1
PV of Principal

1 1
=
(1 + i )n (1 + .1)3
€10,000 x .75132 = €7,513
Principal Factor Present Value

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 Note Issued at Face Value

Summary Present value of interest € 2,487

Present value of principal 7,513
Note current market value €10,000

Journal Entries

Jan. yr. 1 Notes Receivable 10,000

Cash 10,000

Dec. yr. 1 Cash 1,000

Interest Revenue 1,000

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 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. How does Jeremiah record the
receipt of the note?

i = 9%
$10,000 Principal

PV-0A $0 $0 $0 Interest

0 1 2 3 4
n=3
ILLUSTRATION 7.9
Time Diagram for Zero-
Interest-Bearing Note

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 Zero-Interest-Bearing Notes
TABLE 6.2 PRESENT VALUE OF 1
PV of Principal

1 1
=
(1 + i )n (1 + .09)3
$10,000 x .77218 = $7,721.80
Principal Factor Present Value

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 Zero-Interest-Bearing Notes

ILLUSTRATION 7.10
Discount Amortization Schedule—
Effective-Interest Method

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 Zero-Interest-Bearing Notes ILLUSTRATION 7.10
Discount Amortization
Schedule—Effective-
Interest Method

Prepare the journal entry to record the receipt of the note.

Notes Receivable 7,721.80

Cash 7,721.80

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 Zero-Interest-Bearing Notes ILLUSTRATION 7.10
Discount Amortization
Schedule—Effective-
Interest Method

Record interest revenue at the end of the first year.

Notes Receivable 694.96

Interest Revenue ($7,721.80 x 9%) 694.96

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 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?

i = 12%
€10,000 Principal

PV-0A €1,000 €1,000 €1,000 Interest

0 1 2 3 4
n=3

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 Interest-Bearing Notes
TABLE 6.4 PRESENT VALUE OF AN ORDINARY ANNUITY OF 1
PV of Interest

1 1
1− 1 −
(1 + i )n = (1 + .12)3
i .12

€1,000 x 2.40183 = €2,402

Interest Received Factor Present Value

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 Interest-Bearing Notes
TABLE 6.2 PRESENT VALUE OF 1
PV of Principal

1 1
=
(1 + i )n (1 + .12)3
€10,000 x .71178 = €7,118
Principal Factor Present Value

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 Interest-Bearing Notes
ILLUSTRATION 7.12
Illustration: Record the receipt of the note? Computation of Present
Value—Effective Rate
Different from Stated Rate

Notes Receivable 9,520

Cash 9,520

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 Interest-Bearing Notes

ILLUSTRATION 7.13
Discount Amortization Schedule—
Effective-Interest Method

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 Interest-Bearing Notes ILLUSTRATION 7.13
Discount Amortization Schedule—
Effective-Interest Method

Record interest revenue at the end of the first year.

Cash 1,000
Notes Receivable 142
Interest Revenue 1,142
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 Notes Receivable

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

 current cash sales price or

 from the current market value of the debt instrument.

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 Notes for Property, Goods, or Services

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

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 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.

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 LEARNING OBJECTIVE 5
Other Issues Related Explain additional accounting
issues related to accounts and
to Receivables notes 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.

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 Derecognition of Receivables

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.

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 Derecognition of Receivables

Secured Borrowing
Using receivables as collateral in a borrowing transaction.

Illustration: On March 1, 2019, 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.

7-77 LO 5
 ILLUSTRATION 7.17
7-78 Entries for Transfer of Receivables—Secured Borrowing
 Secured Borrowing
Illustration: On April 1, 2019, Prince Company assigns $500,000 of its
accounts receivable to the Hibernia Bank as collateral for a $300,000 loan
due July 1, 2019. 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, 2019, 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, 2019, through
June 30, 2019.
c) On July 1, 2019, Prince paid Hibernia all that was due from the loan it
secured on April 1, 2019.

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 Secured Borrowing
Instructions:
a) Prepare the April 1, 2019, journal entry for Prince Company.
b) Prepare the journal entry for Prince’s collection of $350,000.
c) On July 1, 2019, Prince paid Hibernia all that was due from the loan it
secured on April 1, 2019.
a) Cash 290,000
Finance Charge ($500,000 x 2%) 10,000
Notes Payable 300,000

b) Cash 350,000
Accounts Receivable 350,000

c) Notes Payable 300,000

Interest Expense (10% x $300,000 x 3/12) 7,500
Cash 307,500
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 Sales of Receivables
ILLUSTRATION 7.14
Basic Procedures in Factoring

Factors are finance companies or banks that buy receivables

from businesses for a fee.
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 Sales of Receivables

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.

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 Sale without Guarantee

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 7.6
Entries for Sale of Receivables without Guarantee

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 Sales of Receivables

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

ILLUSTRATION 7.16
with guarantee basis. Sale with Guarantee

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 Summary of Transfers ILLUSTRATION 7.18
Accounting for Transfers
of Receivables

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 Presentation and Analysis

Analysis of Receivables
Illustration: Louis Vuitton (LVMH Group) (FRA) reported 2015 net sales
of €35,664 million, its beginning and ending accounts receivable
balances were €2,274 million an €2,521 million, respectively. The
computation of its accounts receivable turnover is as follows.

 Assess the liquidity of the receivables.

 Measure the number of times, on average, a company collects

receivables during the period.
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 Presentation and Analysis

Analysis of Receivables ILLUSTRATION 7.20

Computation of 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.

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