Chapter ACCT 201 7 Reporting and Analyzing Receivables
Chapter ACCT 201 7 Reporting and Analyzing Receivables and Investments ACCT 201 UAA – ACCT 201 Principles of Financial Accounting Dr. Fred Barbee 1
ACCT 201 Day #2 ACCT 201 2
Chapter 7 - Day 2 - Agenda Topic LO Read HW C 2, P 3, P 4 301304 QS 4, 5; E 6 Converting Rec to C 3 Cash Before Maturity 304306 E 5 Short-Term Investments 306310 310311 Notes Receivable (Introduction) Decision Analysis C 4, P 5 A 1 No HW Due Today! E 9, E 11 QS 8, E 12 3
ACCT 201 Notes Receivable ACCT 201 4
ACCT 201 Notes Receivable ACCT 201 A note is a written promise to pay a specific amount at a specific future date. 5
Exh. 7. 14 Notes Receivable $1, 000. 00 Term Payee after date I promise to pay to Ninety days the order of July 10, 2002 Tech. Company, Los Angeles, CA One thousand no/100 ----------------- Dollars First National Bank of Los Angeles, CA Maker Value received with interest at 12% per annum Payable at No. 42 Due Oct. 8, 2002 Julia Browne For Tech. Com. ACCT 201 6
Exh. 7. 14 Notes Receivable $1, 000. 00 July 10, 2002 after date I promise to pay to Ninety days the Principal order of Tech. Company, Los Angeles, CA One thousand no/100 ----------------Payable at First National Interest. Bank Rateof Los Angeles, CA Value received with interest at No. Dollars 42 Due 12% per annum Oct. 8, 2002 Julia Browne For Tech. Com. Due Date ACCT 201 7
Interest Computation Even for maturities less than 1 year, the rate is annualized. ACCT 201 Exh. 7. 16 If the note is expressed in days, base a year on 360 days. ACCT 201 8
ACCT 201 Interest Computation ACCT 201 On March 1, 2002, Smithson, Inc. purchased a copier for $9, 000 from Machines, Inc. Smithson gave Machines, Inc. a 12% note due in 90 days in payment for the copier. ACCT 201 How much interest will be paid to Machines, Inc. in 90 days? 9
Exh. 7. 16 Interest Computation $9, 000 X 12% ACCT 201 X 90/360 ACCT 201 = $270 ACCT 201 10
ACCT 201 End-of-Period Adjustments ACCT 201 When a note receivable is outstanding at the end of an accounting period, the company must prepare an adjusting entry to accrue interest income. 11
ACCT 201 Converting Receivables to Cash Before Maturity ACCT 201 Sell the accounts receivable to a financing company or bank (called factoring). ACCT 201 Borrow money and pledge the receivables as security for the loan (called pledging). 12
ACCT 201 Full-Disclosure Principle ACCT 201 Requires financial statements and notes to report all relevant information about the operations and financial position of a company. ACCT 201 Potential tax assessments Guarantee of debts of others Outstanding lawsuits 13
ACCT 201 Short-Term Investments ACCT 201 14
ACCT 201 Short-Term Investments (Marketable Securities) ACCT 201 Management intends to convert to cash within one year or the operating cycle whichever is longer. ACCT 201 Are readily convertible to cash. 15
ACCT 201 Short-Term Investments. . . ACCT 201 Debt Securities reflect creditor relationship (notes, bonds, etc. ) Equity Securities reflect owner relationship (stock). ACCT 201 16
ACCT 201 Accounting for Short-Term Investments ACCT 201 17
Exercise ACCT 201 7 -9 ACCT 201 Accounting For Short-Term Investment Transactions ACCT 201 18
Exercise ACCT 201 7 -9 ACCT 201 Prepare journal entries to record the following transactions involving the short-term investments of Morford Co. , all of which occurred during year 2002. 19
a. Short-Term Investments On February 15, paid $120, 000 cash to purchase MRI’s 90 -day short term debt securities (120, 000 principal), which are dated February 15 and pay 8% interest (categorized as held-to-maturity securities). 2/15 ST Investments-HTM Cash Purchased 90 -day, 8% debt securities ACCT 201 120, 000 ACCT 201 20
b. Short-Term Investments On March 22, purchased 700 shares of GRE Company stock at $27. 50 per share plus a $150 brokerage fee. These shares are categorized as trading securities. 3/22 ST Inv – Trading Cash Purchased 700 shares of stock @ $27. 50 + $150 brokerage fee. ACCT 201 19, 400 ACCT 201 21
c. Short-Term Investments On May 1, received a check from MRI in payment of the principal and 90 days’ interest on the debt securities purchased in transaction a. 5/16 Cash ST Inv – HTM Int Revenue 122, 400 120, 000 2, 400 Collected proceeds of debt security with interest of $120, 000 x. 08 x 90/360. ACCT 201 22
d. Short-Term Investments On August 1, paid $80, 000 cash to purchase Flash Electronics’ 10% debt securities $80, 000 principal), dated July 30, 2002, and maturing January 30, 2003 (categorized as available-for-sale securities). 8/01 ST Investments – AFS Cash 80, 000 Purchased 6 -month, 10% debt securities. ACCT 201 23
e. Short-Term Investments On September 1, received a $1. 00 per share cash dividend on the GRE Company stock purchased in transaction b. 9/01 Cash Dividend Revenue 700 Received dividend on stock (700 x $1. 00) ACCT 201 24
f. Short-Term Investments On October 8, sold 350 shares of GRE Co. stock for $34 per share, less a $140 brokerage fee. 10/08 Cash ST Inv – Trading Gain on sale of ST Inv 11, 760 9, 700 2, 060 Sold 350 shares of stock. ACCT 201 25
g. Short-Term Investments On October 30, received a check from Flash Electronics for 90 days’ interest on the debt securities purchased in transaction d. 10/30 Cash Interest Revenue 2, 000 Received cash interest payment ($80, 000 x. 10 x 90/360) ACCT 201 26
ACCT 201 Valuing and reporting shortterm investments ACCT 201 27
ACCT 201 Short-Term Investments. . . ACCT 201 Held-To-Maturity Securities Trading Securities Available-For-Sale Securities ACCT 201 28
ACCT 201 Held-to-Maturity Securities ACCT 201 Debt securities that management intends to hold to their maturity whose cash value is not needed until that date. ACCT 201 Carried on the Balance Sheet at cost. 29
ACCT 201 Trading Securities ACCT 201 Debt and equity securities that are bought and held principally for the purpose of being sold in the near term. ACCT 201 Frequently bought and sold to generate profits on short-term changes in their prices. 30
ACCT 201 Trading Securities ACCT 201 Entire portfolio of trading securities is reported at its market value with a “market adjustment” from the cost of the portfolio. 31
ACCT 201 Trading Securities ACCT 201 Any unrealized gain (or loss) from a change in the market value of the portfolio of trading securities during a period is reported on the income statement. 32
ACCT 201 Available-for-Sale Securities ACCT 201 Debt and equity securities not classified as trading or held-tomaturity securities. ACCT 201 33
Exercise ACCT 201 7 -10 ACCT 201 Accounting For Trading Securities ACCT 201 34
ACCT 201 Focus Co. purchases short-term investments in trading securities at a cost of $66, 000 on December 27, 2002. (This is the first and only purchase of such securities). ACCT 201 At December 31, 2002, these securities had a market value of $72, 000. 35
Trading Securities Let’s record the purchase. 12/27 Short-Term Investments 66, 000 Cash 66, 000 Purchase of Trading Securities ACCT 201 36
Trading Securities 1. Prepare the 12/31/02 year-end adjusting entry for the trading securities’ portfolio. (Year-end value = $72, 000) 12/27 Market Adj – Trading Unrealized Gain – Inc. To reflect an unrealized gain in market values of trading securities. ACCT 201 6, 000 ACCT 201 37
Trading Securities 2. For each account in the entry for part 1, explain how it is reported in financial statements. 12/27 Market Adj – Trading Unrealized Gain – Inc. To reflect an unrealized gain in market values of trading securities. ACCT 201 6, 000 ACCT 201 38
Trading Securities An adjunct asset account in the Balance 2. For each account in the entry for part 1, Sheet. It increases the balance of the explain how it is –reported in financial ST Investments Trading account to the statements. securities market value of $72, 000. 12/27 Market Adj – Trading 6, 000 Unrealized Gain – Inc. 6, 000 To reflect an unrealized gain in market values of Reported in the Other Revenues and trading securities. Gains section of the Income Statement. ACCT 201 39
Trading Securities 3. Prepare the 01/03/03 entry when Focus sells one-half of these securities for $35, 000 01/03 Cash 35, 000 Gain on ST Investments 2, 000 ST Inv-Trading 33, 000 To record sale of trading securities. ACCT 201 40
Exercise ACCT 201 7 -11 ACCT 201 Adjusting available-for-sale securities to market. ACCT 201 41
ACCT 201 On 12/31/02, Quaker Company held the following ST investments in its portfolio of available-for-sale securities. Quaker had no ST investments in its prior accounting periods. ACCT 201 Prepare the 12/31/02 adjusting entry to report these securities at market value. 42
ACCT 201 Valdez Corporation Bonds Payable Transunion Corp. Notes Payable Lake Placid Company common stock Cost Market $89, 600 $91, 600 70, 600 62, 900 86, 500 83, 100 ACCT 201 $246, 700 $237, 600 $246, 700 - $237, 600 = ($9, 100) 43
Available-for-Sale Securities Make the journal entry. 01/03 Unrealized Loss – Equity Mkt Adjustment - AFS To reflect unrealized loss ACCT 201 9, 100 ACCT 201 44
Short-Term Investments Exh. 7. 17 Held To Maturity Trading Available for Sale Debt securities held to maturity. Debt & Equity securities actively traded. Debt & Equity securities not in the other two categories. Cost. Market value. ** *Unrealized gains/losses reported on the income statement. **Unrealized gains/losses reported in the equity section of the balance sheet and in comprehensive income. 45
ACCT 201 Chapter 7 Ratios ACCT 201 46
ACCT 201 Accounts Receivable Turnover ACCT 201 This ratio provides useful information for evaluating how efficient management has been in granting credit to produce revenue. ACCT 201 Net sales Average accounts receivable 47
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