Intermediate Accounting Assignment PDF

Intermediate Accounting
Chapter 7
Cash and Receivables
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Learning Objectives
After studying this chapter, you should be able to:
● Indicate how to report cash and related items.
● Define receivables and explain accounting issues related to their
recognition.
● Explain accounting issues related to valuation of accounts receivable.
● Explain accounting issues related to recognition and valuation of
__notes____ receivable.
Learning Objective 1
Indicate How to Report Cash and Related Items
Cash
● Most liquid asset
● Standard medium of exchange
● Basis for measuring and accounting for all 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

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: Treasury bills, Commercial paper, and Money market
__funds_____.
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.
Bank Overdrafts
Company writes a check for more than the amount in its cash account.
● Reported as a current ___liability___________
● Offset against other cash accounts only when accounts are with the
same bank
Learning Objective 2
Define Receivables and Explain Accounting Issues Related to Their
Recognition

Receivables
Claims held against customers and others for money, goods, or services.
Classified in the balance sheet as:
● Current or noncurrent
● Trade or nontrade
● Accounts receivable
● Notes receivable
Nontrade Receivables
● Advances to officers and employees.
● Advances to subsidiaries.
● Deposits paid to cover potential damages or losses.
● Deposits paid as a guarantee of performance or _payment________ .
● Dividends and interest receivable.
● 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.).
Nontrade Receivables
Receivables Balance Sheet Presentations

Recognition of Accounts Receivables
● Accounts receivable generally arise as part of a revenue arrangement
● 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.
Recognition of Accounts Receivables
Illustration
If Lululemon 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
Recognition of Accounts Receivables
Key indicators control has been _____transferred_________
● Lululemon has the right to payment from the customer.
● Lululemon has passed legal title to the customer.
● Lululemon has transferred physical possession of the goods.
● Lululemon no longer has significant risks and rewards of ownership of
the goods.
● Jennifer has accepted the asset.

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.
Variable Consideration
Trade Discounts
● Reductions from the list price
● Not recognized in the accounting records
● Customers are billed net of discounts
Variable Consideration
Cash Discounts (Sales Discounts)
● Offered to induce prompt payment
● Presented in terms
● 2/10, n/30
● 2/10, E.O.M.
● net 30, E.O.M.
● Gross Method vs. Net Method

Cash Discounts (Sales Discounts)
Cash Discounts (Sales Discounts)
Gross Method
On June 3, Bolton Company sold to Arquette Company merchandise
having a sale price of $2,000 with terms of 2/10, n/60, f.o.b. shipping point.
On June 12, the company received a check for the balance due from
Arquette Company. Prepare the journal entries on Bolton Company books
to record the ___sale_______ .
June 3
Accounts Receivable
2,000
Sales Revenue
2,000
June 12
Cash ($2,000 ×98%)
1,960
Sales Discounts
40
Accounts Receivable
2,000
Cash Discounts (Sales Discounts)

Net Method
On June 3, Bolton Company sold to Arquette Company merchandise
having a sale price of $2,000 with terms of 2/10, n/60, f.o.b. shipping point.
On June 12, the company received a check for the balance due from
Arquette Company. Prepare the journal entries on Bolton Company books
to record the sale.
June 3
Accounts Receivable
1,960
Sales Revenue
1,960
June 12
Cash ($2,000 ×98%)
1,960
Accounts Receivable
1,960
Cash Discounts (Sales Discounts)
Net Method, payment made on July 29
On June 3, Bolton Company sold to Arquette Company merchandise
having a sale price of $2,000 with terms of 2/10, n/60, f.o.b. shipping point.
On July 29, the company received a check for the balance due from
Arquette Company. Prepare the journal entries on Bolton Company books
to record the sale.
June 3
Accounts Receivable
1,960
Sales
1,960

July 29
Cash
2,000
Accounts Receivable
1,960
Sales Discounts Forfeited
40
Variable Consideration
Sales Returns and Allowances
● Contra revenue account to Sales Revenue
● Allowance for Sales Returns and Allowances is a contra asset
account to Accounts Receivable
● 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________________ .
Sales Returns and Allowances
Illustration
Assume on January 4, 2020, Max sells $5,000 of hurricane glass to Oliver
on __account______. Max records the sale on account as follows.
On January 16, 2020, 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.