Chapter 7
Receivables and Investments
Using Financial Accounting Information:
The Alternative to Debits and Credits, 6/e
by
Gary A. Porter and Curtis L. Norton
Copyright © 2009 South-Western, a part of Cengage Learning.
Apple’s Consolidated Balance
Sheets (Partial)
ASSETS (in millions)
Current assets:
Cash and cash equivalents
Short-term investments
Accounts receivable, less
allowances of $52 and $46
Inventories
Deferred tax assets
Other current assets
Total current assets
September 30,
2006
September 24,
2005
$6,392
3,718
$3,491
4,770
1,252
270
607
2,270
$14,509
895
165
331
648
$10,300
Apple’s Consolidated Balance
Sheets (Partial)
ASSETS (in millions)
Current assets:
Cash and cash equivalents
Short-term investments
Accounts receivable
Inventories
Deferred tax assets
Other current assets
Total current assets
Highly
liquid
Less
liquid
Apple Inc.
Sample Accounts Receivable
Subsidiary Ledger
Acme
Baxter
Jones
Martin
Smith
Gross Accounts
Receivable
Total Due
$ 10,000
50,000
15,000
20,000
5,000
$100,000
LO1
Apple’s Consolidated Balance
Sheets (Partial)
(amounts in millions)
Accounts receivables, less
allowances of $52 and
$46 respectively
2006
2005
$1,252
$895
Net
Realizable
Value
Credit Sales
 Slows inflow of cash
 Risk of uncollectible accounts
Trade Credit
Retail Customer
Receivables
Sales Invoice
Terms: 2/10,
net 30
LO2
Accounting for Bad Debts:
Direct Write-off Method
Period of sale
Future period charged with
expense of bad debt write-off
Balance Sheet
Assets =
Liabilities + Stockholders’ +
Equity
Accounts
Receivable (500)
Income Statement
Revenues - Expenses
Bad Debts
Expense (500)
Accounting for Bad Debts:
Allowance Method
Period of sale
Estimated bad debt
expense (and allowance
account) recorded in the
same period
Accounting for
Bad Debts:
Allowance Method
I estimate...
Record estimated bad debt expense in period of sale:
Balance Sheet
Assets
=
Income Statement
Liabilities + Stockholders’ + Revenues -- Expenses
Equity
Allowance for
Bad Debts
Doubtful Accts
Expense
Balance Sheet Presentation –
Allowance Method
Roberts Corporation
Partial Balance Sheet
Accounts receivable
Less: Allowance for
doubtful accounts
Net accounts receivable
$250,000
6,000
$244,000
Accounting for
Bad Debts:
Allowance Method
Bankrupt
Record bad debt write-off in period determined
uncollectible:
Balance Sheet
Income Statement
Assets =
Liabilities + Stockholders’ + Revenues -- Expenses
Equity
Allowance for
Doubtful Accts xxx
Accounts Receivable (xxx)
Approaches to Allowance Method
% of Net Credit Sales
% of Accounts Receivable
Aging Method
Income
Statement
Approach
Balance
Sheet
Approach
Percentage of Net Credit Sales
Method
Example:
Assume prior years’ net credit sales and bad debt
expense is as follows:
Year
2003
2004
2005
2006
2007
Net Credit Sales
$1,250,000
1,340,000
1,200,000
1,650,000
2,120,000
$7,560,000
Bad Debts
$ 26,400
29,350
23,100
32,150
42,700
$153,700
Percentage of Net Credit
Sales Method
Example:
Develop bad debt percentage:
$153,700 = 0.02033
$7,560,000
use 2%
Percentage of Net Credit Sales
Method
Example:
2007 Net credit sales
Bad debt percentage
Bad debts expense
$2,340,000 (given)
2%
$ 46,800
Balance Sheet
Income Statement
Assets =
Liabilities + Stockholders’ + Revenues -- Expenses
Equity
Allowance
for Doubtful
Bad Debts Expense
Accts (46,800)
(46,800)
Percentage of Accounts
Receivable Method
Example:
Assume prior years’ Accounts Receivable at December 31
and bad debt expense is as follows:
Year
2003
2004
2005
2006
2007
Accts Rec at 12/31
$ 650,000
785,000
854,000
824,000
925,000
$4,038,000
Bad Debts
$ 5,250
6,230
6,950
6,450
7,450
$ 32,330
Percentage of Accounts
Receivable Method
Example:
Develop bad debt percentage:
$ 32,330 = 0.080064
$4,038,000
Use 8%
Percentage of
Accounts Receivable
Assume 8% of accounts receivable are uncollectible,
and Allowance for Doubtful Accounts is $2,100 before
adjustment. The adjustment would be:
Balance Sheet
Income Statement
Assets = Liabilities + Stockholders’ + Revenues -- Expenses
Equity
Allowance
for Doubtful
Bad Debts Expense
Accts (4,820)
(4,820)
(8% X $865,000 = $6,920 - $2,100 = $4,820)
Aging Accounts
Receivable Method
Assume prior years’ net credit sales and bad debt expense is
as follows:
Est %
Est Amount
Category
Amount
Uncollectible
Uncollectible
Current
$ 85,600
Past due:
1-30 days
31,200
31-60 days
24,500
61-90 days
18,000
Over 90 days
9,200
Totals
$168,500
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
$14,554
1,230
$13,324
Aging Accounts Receivable
Assume the Allowance for Doubtful Accounts are $1,230
before adjustment. The adjustment would be:
Balance Sheet
Income Statement
Assets = Liabilities + Stockholders’ + Revenues -- Expenses
Equity
Allowance
For Doubtful
Bad Debts Expense
Accts (13,324)
(13,324)
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
Accounts Receivable Turnover
Net Credit Sales
Average Accounts Receivable
Indicates how quickly a company is collecting
(i.e., turning over) its receivables
LO2
Accounts Receivable Turnover
 Too fast may mean:
credit policies too
stringent; may be
losing sales
 Too slow may mean:
credit department
not operating
effectively;
dissatisfied customers
Interest-Bearing Promissory Note
Principal
Baker Corporation promises to pay HighTec,
Inc. $15,000 plus 12% annual interest on
March 13, 2009.
Interest
Date: December 13, 2008
Signed:_________
Baker Corporation
Maturity
Date
LO3
Interest-Bearing Promissory Note
Maker
Gives a
Note to
Payee
Receipt of Interest-Bearing
Promissory Note
To record the receipt of the note on December 13:
Assets
Balance Sheet
Income Statement
= Liabilities + Stockholders’ + Revenues -- Expenses
Equity
Notes
Receivable
15,000
Sales Revenue 15,000
Interest-Bearing Promissory Note
Adjustment to record interest:
Assets
Balance Sheet
Income Statement
= Liabilities + Stockholders’ + Revenues -- Expenses
Equity
Interest
Receivable
90
Interest Revenue 90*
*Interest = $15,000 × 12% × 18/360
Interest-Bearing Promissory Note
Entry to record the collection of note on March 13, 2009:
Balance Sheet
Income Statement
Assets = Liabilities + Stockholders’ + Revenues -- Expenses
Equity
Cash 15,450
Interest Revenue 360*
Notes
Receivable (15,000)
Interest
Receivable (90)
*15,000 × 12% × 72/360
Accelerating the Cash
Inflow from Sales
 Credit card sales
 Discounting notes receivable
LO4
Credit Card Sales
 Competitive necessity
 Credit card company:
• Charges fee
• Assumes risk of nonpayment
Discounting Notes Receivable
 Sell note prior to maturity date for cash
 Receive less than face value (i.e.,
discounted amount)
 Can be sold with or without recourse
Reasons Companies Invest in
Other Companies
 Short-term cash excesses
 Long-term investing for future cash needs
 Exert influence over investee
 Obtain control of investee
LO5
Investment in a CD
October 2, purchase $100,000, 6%, 120-day CD:
Balance Sheet
Income Statement
Assets = Liabilities + Stockholders’ + Revenues -- Expenses
Equity
Short term
Investment—CD
100,000
Cash (100,000)
To record the purchase of short-term CD
Investment in a CD
Year-end adjustment:
Balance Sheet
Income Statement
Assets
= Liabilities + Stockholders’ + Revenues -- Expenses
Equity
Interest
Interest Revenue 1,500
Receivable 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
To record the maturity of the note:
Balance Sheet
Income Statement
Assets = Liabilities + Stockholders’ + Revenues -- Expenses
Equity
Cash 102,000
Short term
Interest Revenue 500*
Investment—CD
(100,000)
Interest Receivable
(1,500)
*Interest earned in January: $100,000 × 6% × 30/360 = $500
Accounting for Common-Stock
Investments
Fair
Value
Method
Equity
Method
20%
0%
No significant
influence
Our
Focus
Significant
influence
Consolidated
Financial
Statements
100%
50%
Control
Investment in Bonds
 Bonds of other companies
 Intent and ability to hold until maturity
$100,000, 10% bond due in 10 years
Investment in Bonds
Example:
On 1/1/08, Atlantic buys:
 $100,000, 10% bonds @ face value
 Bonds mature in ten years
 Interest payable semiannually
Record the purchase of the bonds and
receipt of the first interest payment
Recording Bond Purchase
Record purchase of ABC bonds:
Assets
=
Balance Sheet
Income Statement
Liabilities + Stockholders’ + Revenues -- Expenses
Equity
Investment in
Bonds 100,000
Cash (100,000)
$100,000, 10% bond due 2017
Recording Receipt of
Interest Payment
To record interest income on ABC bonds:
Assets
=
Cash 5,000
Balance Sheet
Income Statement
Liabilities + Stockholders’ + Revenues -- Expenses
Equity
Interest Revenue 5,000*
*($100,000 × 10% × 1/2)
Recording Bond Sale
Record sale of ABC bonds:
Assets
=
Balance Sheet
Income Statement
Liabilities + Stockholders’ + Revenues -- Expenses
Equity
Cash 99,000
Investment in Bonds
(100,000)
Loss on Sale
of Bonds (1,000)
Investment in Stocks
 Stocks of other companies
 Recorded at cost, including any brokerage
fees, commissions or other fees paid to
acquire the shares
Investment in Stocks
Example:
On February 1, 2008, Dexter Corp. pays $50,000 for shares
of Stuart common stock plus $1,000 commissions :
Balance Sheet
Income Statement
Assets = Liabilities + Stockholders’ + Revenues -- Expenses
Equity
Investment in
Stuart Stock 51,000
Cash
(51,000)
Record the purchase of common stock
Recording Receipt of Dividends
Dexter receives $500 cash dividends from Stuart common
stock:
Assets
Balance Sheet
Income Statement
= Liabilities + Stockholders’ + Revenues -- Expenses
Equity
Cash 500
Dividend Revenue 500
To record the receipt of dividends
Sale of Investment in Stocks
Sale of Investment in Stuart common stock for $53,000:
Assets
Balance Sheet
= Liabilities + Stockholders’ +
Income Statement
Revenues -- Expenses
Equity
Cash
53,000
Investment Stuart
Stock (51,000)
Gain on Sale of
Stock 2,000
To record the sale of Stuart common stock
Liquid Assets and the Statement
of Cash Flows – Indirect Method
Operating Activities
Net income
Increase in accounts receivable
Decrease in accounts receivable
Increase in notes receivable
Decrease in notes receivable
Investing Activities
Purchases of held-to-maturity and
available-for-sale securities
Sales/maturities of held-to-maturity and
available-for-sale securities
Financing Activities
xxx
–
+
–
+
–
+
LO6
End of Chapter 7