ACCT 327 Exam 2 - Cline

2/10, n/30

customers recieve 2% if paid within 10 days, but the full amount is due in 30 days

Gross method of recording sales discounts

Most common, records receivables at the full amount of the sale

Net method of recording sales discounts

more correct, records the receivables at the net amount

how is A/R valued

at NRV, AR - ADA

Estimating bad debt under GAAP

Allowance method is used, CECL is a newly past standard to determine how this amount should be estimated

What does CECL stand for?

Current Expected Credit Losses

How do companies estimate credit losses under CECL?

Based on past experience, current market conditions, and analysis of outstanding balances

JE for sale on account using gross method

A/R. 100,000
Sales revenue. 100,000

JE for payment if received in discount period using gross method

Cash 98,000
Sales Discount. 2,000
A/R. 100,000

JE for payment if received after the discount period using gross method

Cash 100,000
A/R. 100,000

JE for sale on account using net method

A/R. 98,000
Sales Revenue. 98,000

JE for payment if received in discount period using net method

Cash 98,000
A/R. 98,000

JE for payment if received after the discount period using net method

Cash. 100,000
A/R 98,000
Sales discount forfeited. 2,000

HOw is sales discount forfeited in net method recorded

Other income/loss

How to record BDE

debit BDE and credit ADA

How to write off an uncollectible account

debit ADA and credit A/R

How to record payment received on a written off account

2 entries, first one debits A/R and credits ADA, second one debits cash and credits A/R

The 2 ways to transfer account receivables

Pledging (assigning, more desperate), and factoring of receivables

Pledging

Using A/R as collateral for a loan. continue to collect on A/R and paying off the principal and interest from the proceeds of the receivables. receivables remain on sellers books

Steps for pledging

1. Reclassify A/R
2. Record loan proceeds
3. Record collections
4. Remit interest to lender
5. Reclassify A/R assigned

JE for reclassifying A/R (pledging)

debit A/R assigned, credit A/R

JE for recording loan proceeds (pledging)

Cash. XX
Finance expense XX
..............Note Payable. XX

JE for recording collection (pledging)

Cash. XX
Sales discounts. XX
Sales returns. XX
...............Assigned A/R. XX

JE to remit interest to lender (pledging)

Note Payable. XX
Interest Expense. XX
..................Cash. XX

JE to reclassify A/R after note is paid off (pledging)

A/R. XX
......A/R assigned. XX

Factoring of A/R

Finance companies called factors buy receivables from companies for a fee then collect from customers directly

Without recourse

buyer assumes risk of uncollectibility and absorbs losses associated with uncollectible account

With recourse

seller of the recievables keeps the risk of uncollectibility

3 conditions if a factoring is considered a sale

1. Has the asset been completely out of reach of the seller
2. does the buyer have the right to pledge the assets
3. is there a repurchase/redemption agreement

Record sale of receivables (Factoring without recourse)

Cash XX
Loss on sale. XX
DFF. XX
A/R. XX

Sales return from customer (factoring without recourse)

Sales Return. XX
DFF. XX

Closing out DFF (factoring without recourse)

Cash. XX
DFF. XX

JE recording sales of receivables (Factoring with recourse)

Cash. XX
Loss on sale XX
DFF XX
..........A/R XX
............Recourse Liability XX

JE recording customers not able to pay (Factoring with recourse)

Recourse liability XX
...........Cash XX

Secured borrowing

One of the three conditions of a sale was not met, similar to pledging.

cash consists of

Coin & currency, deposits in banks, money orders, certified checks, cashiers checks, personal checks, and bank drafts

This not included in cash

postdated checks, IOUs, NSF checks (these are receivables)

Cash and cash equivalents

cash equivalents are short term investments, treasury bills, commercial paper, money market funds, which are convertible to known amounts of cash in 3 months or less

Restricted cash

lender requirements for minimum cash balance, amounts set aside for PP&E expansion, amounts set aside to retire bonds. restricted material is disclosed on the balance sheet

Bank reconciliation

comparing balances in cash from bank and books and reconciles the discrepancies. form of an internal control

NSF check effect

always reduces books balance

service charge effect

always reduces books balance

deposits in transit effect

always increases bank balance

outstanding checks effect

always decreases bank balance

Note recievables are written promises to pay

fixed amount, on fixed date, with interest

Note giver or maker

the party that makes a promise to pay at inception

the payee

the party that gets paid over the course of the note term

issued at face value

the stated interest rate is equal to the market rate

issued as a discount

the stated interest rate is less than the effective rate

issued at a premium

the stated interest rate is greater than the effective rate

discount and premium situations are also known as

unreasonable interest rate situations

the discount or premium must be ____________ over the life of the note using _________

amortized, the effective interest method

when do companies purchase securities

when they have excess cash which they would like to invest

Debt securities

creditor relationship between 2 entities such as corporate bonds or convertible debt

three ways debt securities can be classified

HTM, AFS, Trading

HTM

securities which the company has the ability and intent to hold to maturity

AFS

securities not classified as HTM or trading

Trading securities

securities purchased with the intent of selling within 3 months to generate income

how is the investment account for all debt securities recorded

at amortized cost

how should trading and AFS securities be reported on the balance sheet and by what process

at fair value by mark to market and the use of a SFVA account

balance sheet representation of fair value investments

Investment +/- SFVA = net investment

how are HTM securities shown on the balance sheet

at amortized cost, however at time of purchase the company can elect to show them at market value

how can a company who when they sell a security if the fair value adjustment account is not closed out

They will show the effect the transaction by presenting a reclassification adjustment on statement of comprehensive income (this is a disclosure not a JE)

Equity securities

show ownership in an entity as well as rights to acquire or dispose ownership of an entity. All equity securities are recorded at cost

20% or less ownership of a equity security

fair value is relevant to investors as the investing company does not have control over the investee

20%-50% ownership of a equity security

investor can exert significant influence over the investee for this reason we use the equity method

50% ownership or more of a equity security

the investor has controlling influence so it should be reported as one economic entity therefore we consolidate financial statements

If significant influence use

THE EQUITY METHOD

significant influence is assumed for

20-50% of stock ownership unless evidence is contrary

What is the equity method

1. record investment at cost
2. Increase the investment account balance when investee reports net income; decrease with net loss
3. Decrease the investment account when the investee pays a dividend

How record income if the stock was bought mid year

adjust for percentage of year own

What to do if the losses are so low that the invest account goes below zero

stop using the equity method and use fair value method instead

How are dividends recorded in the equity method

recorded when declared no matter when the stock was purchased

dividends under the equity method

not considered revenue

Issues with security valuation

1. measuring assets based on intent is confusing and subjective
2. gains trading - selling "winning" AFS securities and holding on to the losers inflates income because the losses are on OCI and wins are on NI
3. If assets are at fair value but liabilities are not then this unbalances evaluations of a company
4. GAAP incorporates more fair value measurement than IFRS