7

Cash and Receivables

Lecture No. 7

PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA

McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.
 Accounts Receivable

current assets.

net of trade discounts.

7-2
 Uncollectible Accounts Receivable
Bad debts

Bad debt expense xxx

Allowance for uncollectible accounts xxx

7-3
 Income Statement Approach

Current Period Credit Sales

× Estimated Bad Debt %
= Estimated Bad Debt Expense

7-4
 Income Statement Approach
In 2012, MusicLand has credit sales of $400,000 and
estimates that 0.6% of credit sales are uncollectible.
What is Bad Debt Expense for 2012?

MusicLand computes $ 400,000

estimated Bad Debt × 0.60%
Expense of $2,400. = $ 2,400

Bad debt expense 2,400

Allowance for uncollectible accounts 2,400

7-5
 Balance Sheet Approach

Desired Balance in Allowance for

Uncollectible Accounts
Existing Year-End Balance in Allowance for
- Uncollectible Accounts
= Estimated Bad Debt Expense

7-6
 Balance Sheet Approach
Composite Rate

On Dec. 31, 2012, MusicLand has

$50,000 in Accounts Receivable and a
$200 credit balance in Allowance for
Uncollectible Accounts.
Past experience suggests that 5% of
receivables are uncollectible.
What is MusicLand’s Bad Debt
Expense for 2012?

7-7
 Balance Sheet Approach
Composite Rate

Desired balance in Allowance Allowance for

for Uncollectible Accounts Uncollectible
Accounts
$ 50,000 200
× 5.00% 2,300
= $ 2,500 2,500

Bad debt expense 2,300

Allowance for uncollectible accounts 2,300

7-8
 Financing With Receivables

- Pledging (Borrowing)
- Transfer

7-9
 Factoring Arrangements
2. Accounts Receivable
SUPPLIER RETAILER
(Transferor)
1. Merchandise

FACTOR
(Transferee)
A factor is a financial institution that buys receivables
for cash, handles the billing and collection of the
receivables and charges a fee for the service.
7 - 10
 Secured Borrowing (Pledging)

7 - 11
 Sale of Receivables
Without recourse
• Receivables are removed from the books

With recourse
• Record Recourse Liability

7 - 12
 Sale of Receivables
In December 2011, the Santa Teresa Glass Company factored accounts receivable that
had a book value of $600,000 to Factor Bank. The transfer was made without recourse.
The Factor immediately remits to Santa Teresa cash equal to 90% of the factored
amount .The factoring fee equal to 4% of the total factored amount . When the bank
collects the receivables, it will remit to Company the retained amount (Which the
Company estimates has a fair value of $ 50,000 ) less a 4% fee.

Assume the same facts as above, except that Santa Teresa sold the receivables to
Factor with recourse and estimates the fair value of the recourse obligation to be $5,000.

7 - 13
 Additional Assignment
for Topic No.5
• E 7-15, p.580
• E7-16
• E 7-17
• P 7-7, p. 586
• P 7-8

7 - 14