Ch07 Kieso Ifrs4 PPT HN

Intermediate Accounting
IFRS Edition
Kieso, Weygandt, Warfield
Fourth Edition
Chapter 7
Cash and Receivables
Prepared by
Coby Harmon
University of California, Santa Barbara
Westmont College
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Copyright ©2020 John Wiley & Sons, Inc.
Learning Objectives
After studying this chapter, you should be able to:
LO 1 Indicate how to report cash and related items.
LO 2 Define receivables and explain accounting issues related
to their recognition.
LO 3 Explain accounting issues related to valuation of
accounts receivable.
LO 4 Explain accounting issues related to recognition and
valuation of notes receivable.
LO 5 Explain additional accounting issues related to accounts
and notes receivables.
Copyright ©2020 John Wiley & Sons, Inc. 2

PREVIEW OF CHAPTER 7

Learning Objective 1
Indicate how to report cash and related
items.
LO 1 Copyright ©2020 John Wiley & Sons, Inc. 4

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.

Cash Equivalents
Short-term, highly liquid investments that are both
a) readily convertible into known amounts of cash, and
b) subject to an insignificant risk of changes in value.
Examples: Government bonds, 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.
ILLUSTRATION 7.1

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 offsetting arrangements against
other accounts at the same bank).

Classification of Cash-Related Items
ILLUSTRATION 7.2
Define receivables and explain
accounting issues related to their
recognition.

Accounts Receivable and Notes Receivable

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.).

Receivables Statement of Financial
Position Presentations
ILLUSTRATION 7.3

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.

Recognition of Accounts Receivables
Example
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

Key Indicators of Change in Control
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.

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.

Trade Discounts
Use to:
• Avoid frequent changes
in catalogs.
• Alter prices for different
quantities purchased.
• Hide the true invoice
price from competitors.

Cash Discounts (Sales Discounts)
• Offered to induce prompt
payment.
• Terms such as 2/10, n/30,
2/10, E.O.M., or net 30,
E.O.M.
• Gross Method vs. Net
Method.

Cash Discounts (Sales Discounts)
Entries Under Gross and Net Methods of
Recording Cash (Sales) Discounts
ILLUSTRATION 7.4
Sales Returns and Allowances
• Sales Returns and Allowances are estimated at the time

of sale and credited to a Return Liability account.
• Sales Revenue is reduced by the estimated amount of
returns.
• The use of the Return Liability account helps to identify
potential problems associated with inferior merchandise,
inefficiencies in filling orders, and delivery or shipment
mistakes.
• If actual returns later prove to be higher or lower than
the estimated amount, Sales Revenue is adjusted.

Sales Returns and Allowances Example (1 of 2)
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.
Max should record the accounts receivable and related revenue at
the amount of consideration expected to be received.
On January 4, 2022, Max sells $5,000 of hurricane glass to Oliver
on account. Max expects that $400 of the hurricane glasses will be
returned. Max records the sale on account as follows.
January 4, 2022
Accounts Receivable 5,000
Sales Revenue 4,600
Return Liability 400

Sales Returns and Allowances Example (2 of 2)
Illustration: On January 16, 2022, 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.
January 15, 2022
Return Liability 300
Accounts Receivable 300
Max reports net sales revenue on the income statement of $4,600. In

addition, Max reports on its statement of financial position the total
accounts receivable balance of $4,700 ($5,000 - $300) and an estimated
return liability of $100 ($400 - $300).

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.”

Explain accounting issues related to
valuation of accounts receivable.

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

Direct Write-Off Method vs. Allowance
Method

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, 2022, 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

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 collectability.

Recording Estimated Uncollectibles
Illustration: Assume that Brown Furniture in 2022, 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

Presentation of Allowance for Doubtful
Accounts
ILLUSTRATION 7.5
The amount of £140,000 represents the cash realizable value of
the accounts receivable at the statement date.

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.

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, 2023. The entry to record the write-off is:


Recovery of an Uncollectible Account
Assume that on July 1, Randall plc pays the £1,000 amount

that Brown had written off on March 1. These are the entries:

Cash 1,000

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.

Accounts Receivable Aging Schedule
ILLUSTRATION 7.6

Journal Entry to Record Estimated
Uncollectibles
What entry would Wilson make
assuming that the allowance account
had a zero balance?
ILLUSTRATION 7.6

Another Journal Entry to Record
Estimated Uncollectibles
What entry would Wilson make
assuming the allowance account had
a credit balance of €800 before
adjustment?
ILLUSTRATION 7.6
Bad Debt Expense (€26,610 – €800) 25,810

Estimating the Allowance Problem
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) 5% of accounts receivable but Allowance for Doubtful
Accounts had a $1,500 debit balance.

Journal Entry (a)
adjustments.

assuming Duncan Company estimates bad debts at (a) 5% of accounts
receivable.
€100,000 x .05 = €5,000 − €2,000 = €3,000

Journal Entry (b)
adjustments.

assuming Duncan Company estimates bad debts at (b) 5% of accounts
receivable but the Allowance had a $1,500 debit balance.
€100,000 x .05 = €5,000 + €1,500 = €6,500

Explain additional accounting issues
related to accounts and notes
receivables.

Additional Issues Related to 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.

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.

Sales of Receivables
ILLUSTRATION 7.14
Factors are finance companies or banks that buy receivables from
businesses for a fee.
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.

Sale without Guarantee Example
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 7.15

Sale with Guarantee
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 with guarantee basis.
IILLUSTRATION 7.16

Secured Borrowing
A company often uses receivables as collateral in a borrowing
transaction.
Illustration: On March 1, 2022, 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.

Entries for Transfer of Receivables—
Secured Borrowing
ILLUSTRATION 7.17

Secured Borrowing Problem
Illustration: On April 1, 2022, Prince Company assigns $500,000 of its accounts
receivable to the Hibernia Bank as collateral for a $300,000 loan due July 1,
2022. 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, 2022, 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, 2022, through June 30, 2022.
c) On July 1, 2022, Prince paid Hibernia all that was due from the loan it
secured on April 1, 2022.

Secured Borrowing Problem
Solution
Instructions:
a) Prepare the April 1, 2022, journal entry for Prince Company.
b) Prepare the journal entry for Prince’s collection of $350,000.
c) On July 1, 2022, Prince paid Hibernia all that was due from the loan
it secured on April 1, 2022.
a) Cash 290,00
Finance Charge ($500,000) × 2% 10,000
Note Payable 300,000
b) Cash 350,000
c) Notes Payable 300,000
Interest Expense (10% × $300,00 × 3/12) 7,500
Cash 307,500

Summary of Transfers
Accounting for Transfers of Receivables
ILLUSTRATION 7.18

Presentation and Analysis
General rules in classifying receivables are:
1. Segregate and report carrying amounts of different categories of
receivables.
2. Indicate receivables classified as current and non-current in the statement
of financial position.
3. Appropriately offset the valuation accounts for receivables that are
impaired, including a discussion of individual and collectively determined
impairments.
4. Disclose the fair value of receivables in such a way that permits them to be
compared with their carrying amount.
5. Disclose information to assess the credit risk inherent in the receivables.
6. Disclose any receivables pledged as collateral.
7. Disclose all significant concentrations of credit risk arising from receivables.

Compare the accounting procedures
for cash and receivables under IFRS and
U.S. GAAP.

Global Accounting Insights
The basic accounting and reporting issues related to
recognition and measurement of cash and receivables are
similar between U.S. GAAP and IFRS. For example, the
definition of cash and cash equivalents as well as the use of
allowance accounts, how to record discounts, use of the
allowance method to account for bad debts, and factoring are
similar for both IFRS and U.S. GAAP. In the wake of the
international credit crisis, the Boards worked together to
improve the accounting for loan impairments and
securitizations.

Similarities
• The accounting and reporting related to cash is essentially the same under
both U.S. GAAP and IFRS. In addition, the definition used for cash
equivalents is the same.
• As with IFRS, cash and receivables are generally reported in the current
assets section of the statement of financial position (balance sheet) under
U.S. GAAP.
• As with IFRS, for trade and other accounts receivable without a significant
financing component, an allowance for uncollectible accounts should be
recorded to result in receivables reported at cash (net) realizable value. The
estimation approach used is similar to that under I FRS.
• Similar to U.S. GAAP, IFRS requires that loans and receivables be accounted
for at amortized cost, adjusted for allowances for doubtful accounts.

Differences
• Under IFRS, companies may report cash and receivables as

the last items in current assets under I FRS. Under U.S. GAAP,
these items are reported in order of liquidity.
• While IFRS implies that receivables with different
characteristics should be reported separately, there is no
standard that mandates this segregation. U.S. G AAP has
explicit guidance in the area.

More Differences
• IFRS differs from U.S. GAAP in its approach to estimating uncollectible
accounts on receivables with a significant financing component (e.g., notes
receivable). For long-term receivables that have not experienced a
deterioration in credit quality after origination, uncollectible accounts are
estimated based on expected losses over the next 12 months. For long-term
receivables that experience a credit quality decline, uncollectible accounts are
estimated based on lifetime expected losses (which is the model used under
U.S. GAAP for all receivables).
• Under IFRS, bank overdrafts are generally reported as cash. Under U.S. G AA
P , such balances are reported as liabilities.
• IFRS and U.S. GAAP differ in the criteria used to account for transfers of
receivables. IFRS is a combination of an approach focused on risks and
rewards and loss of control. U.S. GAAP uses loss of control as the primary
criterion. In addition, IFRS generally permits partial transfers; U.S. GAAP does
not.
About the Numbers

On the Horizon
Both the IASB and the FASB have indicated that they believe that
financial statements would be more transparent and
understandable if companies recorded and reported all financial
instruments at fair value. With the recently issued guidance on
impairments by both boards, IFRS and U.S. GAAP are now more
closely aligned with earlier recognition of impairments. Most
believe that both Boards’ approaches to estimating uncollectible
accounts represent improvements and address the weakness in
previous bad debt accounting that was highlighted by the 2007-
2008 financial crisis. Time will tell if one model or the other
provides more useful information to investors and creditors.

Copyright
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of these programs or from the use of the information contained herein.

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Intermediate Accounting

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• Sales Returns and Allowances are estimated at the time

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Illustration: On January 16, 2022, Max grants an allowance of $300

Max reports net sales revenue on the income statement of $4,600. In

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• Theoretically, any revenue after the period of sale is interest

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Allowance for Doubtful Accounts 1,000

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Assume that on July 1, Randall plc pays the £1,000 amount

Accounts Receivable 1,000

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Instructions: Prepare the journal entry to record Bad Debt Expense

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Instructions: Prepare the journal entry to record Bad Debt Expense

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Instructions: Prepare the journal entry to record Bad Debt Expense

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Various reasons for transfer of receivables to another party

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• Purchaser assumes risk of collection and absorbs any

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