Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Chapter Cash and Receivables QUESTIONS FOR REVIEW OF KEY TOPICS Question 7-1 Cash equivalents usually include negotiable instruments as well as highly liquid investments that have a maturity date no longer than three months from date of purchase Question 7-2 Internal control procedures involving accounting functions are intended to improve the accuracy and reliability of accounting information and to safeguard the company’s assets The separation of duties means that employees involved in recordkeeping should not also have physical responsibility for assets Question 7-3 Management must document the company’s internal controls and assess their adequacy The auditors must provide an opinion on management’s assessment The Public Company Accounting Oversight Board’s Auditing Standard No further requires the auditor to express its own opinion on whether the company has maintained effective internal control over financial reporting Question 7-4 A compensating balance is an amount of cash a depositor (debtor) must leave on deposit in an account at a bank (creditor) as security for a loan or a commitment to lend The classification and disclosure of a compensating balance depends on the nature of the restriction and the classification of the related debt If the restriction is legally binding, then the cash will be classified as either current or noncurrent depending on the classification of the related debt In either case, note disclosure is appropriate If the compensating balance arrangement is informal and no contractual agreement restricts the use of cash, note disclosure of the arrangement including amounts involved is appropriate The compensating balance can be included in the cash and cash equivalents category of current assets Question 7-5 Trade discounts are reductions below a list price and are used to establish a final price for a transaction The reduced price is the starting point for initial valuation of the transaction A cash discount is a reduction, not in the selling price of a good or service, but in the amount to be paid by a credit customer if the receivable is paid within a specified period of time Question 7-6 The gross method of accounting for cash discounts considers discounts not taken as part of sales revenue The net method considers discounts not taken as interest revenue, because they are viewed as compensation to the seller for allowing the buyer to defer payment Solutions Manual, Vol.1, Chapter © The McGraw-Hill Companies, Inc., 2007 7-1 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Answers to Questions (continued) Question 7-7 When returns are material and a company can make reasonable estimates of future returns, an allowance for sales returns is established At a financial reporting date, this provides an estimate of the amount of future returns for prior sales, and involves a debit to sales returns and a credit to allowance for sales returns for the estimated amount Allowance for sales returns is a contra account to accounts receivable When returns actually occur in the future reporting period, the allowance for sales returns is debited Question 7-8 Even when specific customer accounts haven’t been proven uncollectible by the end of the reporting period, bad debt expense properly should be matched with sales revenue on the income statement for that period Likewise, since it’s not expected that all accounts receivable will be collected, the balance sheet should report only the expected net realizable value of that asset So, to record the bad debt expense and the related reduction of accounts receivable when the amount hasn’t been determined, an estimate is needed In an adjusting entry, we record bad debt expense and reduce accounts receivable for an estimate of the amount that eventually will prove uncollectible If uncollectible accounts are immaterial or not anticipated, or it’s not possible to reliably estimate uncollectible accounts, an allowance for uncollectible accounts is not appropriate In these few cases, any bad debts that arise simply are written off as bad debt expense Question 7-9 The income statement approach to estimating bad debts determines bad debt expense directly by relating uncollectible amounts to credit sales The balance sheet approach to estimating future bad debts indirectly determines bad debt expense by estimating the net realizable value for accounts receivable that exist at the end of the period In other words, the allowance for uncollectible accounts at the end of the period is estimated and then bad debt expense is determined by adjusting the allowance account to reflect net realizable value Question 7-10 The assignment of all accounts receivable in general as collateral for debt requires no special accounting treatment other than note disclosure of the agreement Question 7-11 Accounts receivable factored without recourse are accounted for as the sale of an asset The difference between the book value and the proceeds received is recognized as a gain or a loss The accounting treatment of receivables factored with recourse depends on whether certain criteria are met If the criteria are met, the factoring is accounted for as a sale If they are not met, the factoring is accounted for as a loan In addition, note disclosure may be required © The McGraw-Hill Companies, Inc., 2007 7-2 Intermediate Accounting, 4/e Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Answers to Questions (concluded) Question 7-12 When a note is discounted, a financial institution, usually a bank, accepts the note and gives the seller cash equal to the maturity value of the note reduced by a discount The discount is computed by applying a discount rate to the maturity value and represents the financing fee the bank charges for the transaction The four-step process used to account for a discounted note receivable is as follows: Accrue any interest revenue earned since the last payment date (or date of the note) Compute the maturity value Subtract the discount the bank requires (discount rate times maturity value times the length of time from date of discounting to maturity date) from the maturity value to compute the proceeds to be received from the bank (maturity value less discount) Compute the difference between the proceeds and the book value of the note and related interest receivable The treatment of the difference will depend on whether the discounting is accounted for as a sale or as a loan If it’s a sale the difference is recorded as a loss or gain on the sale; if it’s a loan the difference is viewed as interest expense or interest revenue Question 7-13 A company’s investment in receivables is influenced by several related variables, to include the level of sales, the nature of the product or service, and credit and collection policies The receivables turnover and average collection period ratios are designed to monitor receivables Question 7-14 The items necessary to adjust the bank balance might include deposits outstanding (including undeposited cash), outstanding checks, and any bank errors discovered during the reconciliation process The items necessary to adjust the book balance might include collections made by the bank on the company’s behalf, service and other charges made by the bank, NSF (nonsufficient funds) check charges, and any company errors discovered during the reconciliation process Question 7-15 A petty cash fund is established by transferring a specified amount of cash from the company’s general checking account to an employee designated as the petty cash custodian The fund is replenished by writing a check to the petty cash custodian for the sum of the bills paid with petty cash The appropriate expense accounts are recorded from petty cash vouchers at the time the fund is replenished Solutions Manual, Vol.1, Chapter © The McGraw-Hill Companies, Inc., 2007 7-3 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com BRIEF EXERCISES Brief Exercise 7-1 The company could improve its internal control procedure for cash receipts by segregating the duties of recordkeeping and the handling of cash Jim Seymour, responsible for recordkeeping, should not also be responsible for depositing customer checks Brief Exercise 7-2 All of these items would be included as cash and cash equivalents except the U.S Treasury bills, which would be included in the current asset section of the balance sheet as short-term investments Brief Exercise 7-3 Income before tax in 2007 will be reduced by $2,500, the amount of the cash discounts $25,000 x 10 = $250,000 x 1% = $2,500 Brief Exercise 7-4 Income before tax in 2006 will be reduced by $2,500, the anticipated amount of cash discounts $25,000 x 10 = $250,000 x 1% = $2,500 © The McGraw-Hill Companies, Inc., 2007 7-4 Intermediate Accounting, 4/e Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Brief Exercise 7-5 Estimated returns = $10,600,000 x 8% = $848,000 Less: Actual returns (720,000) Remaining estimated returns $128,000 Sales returns 128,000 Allowance for sales returns 128,000 Inventory Cost of goods sold ($128,000 x 60%) 76,800 76,800 Brief Exercise 7-6 (1) Bad debt expense = $1,500,000 x 2% = $30,000 (2) Allowance for uncollectible accounts: Beginning balance $25,000 Add: Bad debt expense 30,000 Deduct: Write-offs (16,000) Ending balance $39,000 Solutions Manual, Vol.1, Chapter © The McGraw-Hill Companies, Inc., 2007 7-5 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Brief Exercise 7-7 (1) Allowance for uncollectible accounts: Beginning balance $ 25,000 Deduct: Write-offs (16,000) Required allowance (33,400)* Bad debt expense $24,400 (2) Required allowance = $334,000** x 10% = $33,400* Accounts receivable: Beginning balance Add: Credit sales Deduct: Cash collections Write-offs Ending balance $ 300,000 1,500,000 (1,450,000) (16,000) $ 334,000** Brief Exercise 7-8 Allowance for uncollectible accounts: Beginning balance Add: Bad debt expense Deduct: Required allowance Write-offs © The McGraw-Hill Companies, Inc., 2007 7-6 $30,000 40,000 (38,000) $32,000 Intermediate Accounting, 4/e Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Brief Exercise 7-9 Credit sales Deduct: Cash collections Write-offs Year-end balance in A/R Beginning balance in A/R $8,200,000 (7,950,000) (32,000)* (2,000,000) $1,782,000 *Allowance for uncollectible accounts: Beginning balance $30,000 Add: Bad debt expense 40,000 Deduct: Required allowance (38,000) Write-offs $32,000 Brief Exercise 7-10 2006 interest revenue: $20,000 x 6% x 1/12 = $100 2007 interest revenue: $20,000 x 6% x 2/12 = $200 Solutions Manual, Vol.1, Chapter © The McGraw-Hill Companies, Inc., 2007 7-7 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Brief Exercise 7-11 Assets decrease by $3,000: Cash increases by $100,000 x 85% = Receivable from factor increases by ([15% x $100,000] – $3,000 fee) Accounts receivable decrease Net decrease in assets $ 85,000 12,000 (100,000) $ (3,000) Liabilities would not change as a result of this transaction Income before income taxes decreases by $3,000, the amount of the factor’s fee ($100,000 x 3%) The journal entry to record the transaction is as follows: Cash (85% x $100,000) Loss on sale of receivables (3% x $100,000) Receivable from factor ([15% x $100,000] – $3,000 fee) Accounts receivable (balance sold) 85,000 3,000 12,000 100,000 Brief Exercise 7-12 Logitech would account for the transfer as a secured borrowing The receivables would remain on the company’s books and a liability is recorded for the amount borrowed plus the bank’s fee © The McGraw-Hill Companies, Inc., 2007 7-8 Intermediate Accounting, 4/e Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Brief Exercise 7-13 $30,000 450 30,450 (406) $30,044 Face amount Interest to maturity ($30,000 x 6% x 3/12) Maturity value Discount ($30,450 x 8% x 2/12) Cash proceeds Brief Exercise 7-14 Receivables turnover = $320,000 = 5.33 $60,000* ($50,000 + 70,000) ÷ = $60,000* Average collection period Solutions Manual, Vol.1, Chapter = 365 = 68 days 5.33 © The McGraw-Hill Companies, Inc., 2007 7-9 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com EXERCISES Exercise 7-1 Requirement Cash and cash equivalents includes: a Balance in checking account Balance in savings account b Undeposited customer checks c Currency and coins on hand f U.S treasury bills with 2-month maturity Total $13,500 22,100 5,200 580 15,000 $56,380 Requirement d The $400,000 savings account will be used for future plant expansion and therefore should be classified as a noncurrent asset, either in other assets or investments e The $20,000 in the checking account is a compensating balance for a longterm loan and should be classified as a noncurrent asset, either in other assets or investments f The $20,000 in 7-month treasury bills should be classified as a current asset along with other temporary investments © The McGraw-Hill Companies, Inc., 2007 7-10 Intermediate Accounting, 4/e Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Problem 7-10 (concluded) Requirement To record credits to cash revealed by the bank reconciliation Advertising expense Miscellaneous expense (bank service charges) Accounts receivable (NSF checks) Cash Solutions Manual, Vol.1, Chapter 90 22 440 552 © The McGraw-Hill Companies, Inc., 2007 7-47 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com CASES Judgment Case 7-1 Requirement To account for the accounts receivable factored on April 1, 2006, Magrath should decrease accounts receivable by the amount of accounts receivable factored, increase cash by the amount received from the factor, and record a loss equal to the difference The loss should be reported in the income statement Factoring of accounts receivable without recourse is equivalent to a sale Requirement Magrath should account for the collection of the accounts previously written off as uncollectible as follows: ● ● Increase both accounts receivable and the allowance for uncollectible accounts Increase cash and decrease accounts receivable Requirement One approach estimates uncollectible accounts based on credit sales This approach focuses on income determination by attempting to match uncollectible accounts expense with the revenues generated The other approach estimates uncollectible accounts based on the balance in receivables or on an aging of receivables The approach focuses on asset valuation by attempting to report receivables at realizable value © The McGraw-Hill Companies, Inc., 2007 7-48 Intermediate Accounting, 4/e Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Communication Case 7-2 Suggested Grading Concepts and Grading Scheme: Content (70%) 40 Explains the difference between the allowance method and the direct write-off method Direct write-off more objective Direct write-off has potential to violate the matching principle 15 Even if uncollectibles are fairly stable, when significant variations occur, profit will be overstated in one period and understated in another period 15 Even if uncollectibles remain constant, the direct write-off method will result in an overstatement of accounts receivable on the balance sheet _ 70 points Writing (30%) Terminology and tone appropriate to the audience of a company president 12 Organization permits ease of understanding Introduction that states purpose Paragraphs that separate main points 12 English Sentences grammatically clear and well organized, concise Word selection Spelling Grammar and punctuation _ 30 points Solutions Manual, Vol.1, Chapter © The McGraw-Hill Companies, Inc., 2007 7-49 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Judgment Case 7-3 Requirement a Hogan should account for the sales discounts at the date of sale using the net method by recording accounts receivable and sales revenue at the amount of sales less the sales discounts available Revenues should be recorded at the cash equivalent price at the date of sale Under the net method, the sale is recorded at an amount that represents the cash equivalent price at the date of exchange (sale) b There is no effect on Hogan’s sales revenues when customers not take the sales discounts Hogan’s net income is increased by the amount of interest earned when customers not take the sales discounts Requirement Trade discounts are neither recorded in the accounts nor reported in the financial statements Therefore, the amount recorded as sales revenues and accounts receivable is net of trade discounts and represents the cash equivalent price of the asset sold Requirement To account for the accounts receivable factored on August 1, 2006, Hogan should decrease accounts receivable by the amount of the accounts receivable factored, increase cash by the amount received from the factor, and record a loss Factoring of accounts receivable without recourse is equivalent to a sale The difference between the cash received and the carrying amount of the receivables is a loss Requirement Hogan should report the face amount of the interest-bearing notes receivable and the related interest receivable for the period from October through December 31 on its balance sheet as current assets Both assets are due on September 30, 2007, which is less than one year from the date of the balance sheet Hogan should report interest revenue from the notes receivable on its income statement for the year ended December 31, 2006 Interest revenue is equal to the amount accrued on the notes receivable at the appropriate interest rate Interest revenue is realized with the passage of time Accordingly, interest revenue should be accounted for as an element of income over the life of the notes receivable © The McGraw-Hill Companies, Inc., 2007 7-50 Intermediate Accounting, 4/e Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Ethics Case 7-4 Requirement Required allowance Revised allowance Increase in income before taxes of proposed change $180,000 135,000 $ 45,000 Requirement Discussion should include these elements Ethical Dilemma: You as the assistant controller have a responsibility to follow GAAP and make a reasonably accurate estimate of the net realizable value of receivables Is your responsibility to fairly present Stanton Industries' financial statements to external users greater than your obligation to improve the financial position of your employer? Alternative actions and consequences include: Refuse to comply with the controller's request to change the aging category of the large account Positive consequences: a Preservation of your honesty and integrity b Fair presentation of the net realizable value of receivables Negative consequences: a Possible loss of your job b Lower net income for Stanton Industries c A devalued stock price for Stanton Industries Comply with the controller's suggestion to report the allowance for uncollectible accounts at $135,000 Positive consequences: a Retention of your job b A more favorable net income for Stanton Industries c A more favorable position with unknowing creditors, financial analysts, current investors, and future investors Negative consequences: a Endure guilt feelings b A lack of trust in you by other managers and employees c Possible litigation from investors and creditors Solutions Manual, Vol.1, Chapter © The McGraw-Hill Companies, Inc., 2007 7-51 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Case 7-4 (concluded) Report the controller's suggestion to a higher level of management, the audit committee, or the auditors If one of these parties corrects the controller and compels fair reporting of the allowance account, the consequences would be the same as in alternative when you refuse to make the adjustment Your job may still be in jeopardy due to the fact that management may consider whistle blowing as indicative of employee disloyalty If the reportee parties agree with the controller and report the incorrect amount of $135,000, the consequences will be similar to those for the second alternative in 2, except that you run an even greater risk of losing your job Refuse to comply with the controller's request and resign as assistant controller If you report the controller's suggestion to higher management, the audit committee, or the auditor, the positive and negative considerations are the same as for alternative If you not report the controller's request, then the consequences are the same as for alternative In either case your job is not an issue since you have already resigned © The McGraw-Hill Companies, Inc., 2007 7-52 Intermediate Accounting, 4/e Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Judgment Case 7-5 A weakness is created by the fact that John need only submit a list of accounts and amounts to be charged to replenish the petty cash fund The supporting documentation for the petty cash disbursements also should be submitted with John’s list and reviewed by someone else Surprise counts of the fund also should be made to ensure that the fund is being maintained on an imprest basis, that is, to ensure that cash and/or receipts equal $200 at all times The internal control system for disbursements does not contain sufficient separation of duties Dean Leiser approves the vouchers, signs the checks, maintains the disbursement records, and reconciles the bank account There should be at least one other person involved in these activities to ensure accuracy and to safeguard cash from expropriation The internal control system for receipts does not contain sufficient separation of duties Fran Jones has physical control of the deposits and also maintains the subsidiary ledger for accounts receivable These duties should be separated In addition, the company should require that customers pay their bills via check and that cash not be used Solutions Manual, Vol.1, Chapter © The McGraw-Hill Companies, Inc., 2007 7-53 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Real World Case 7-6 Requirement 2004 2003 ($ in thousands) Accounts receivable, net Add: Allowances Accounts receivable, gross $19,804 696 $20,500 $22,712 977 $23,689 Requirement ($ in thousands) The answers to this question require an analysis of both accounts receivable and the allowance for uncollectible accounts for 2004 First of all, 2004 sales of $196,338 plus the decrease in receivables reported in the statement of cash flows indicates cash received from customers of $199,246 ($196,338 + 2,908) Analysis of accounts receivable Beginning accounts receivable Add: Credit sales Less: Cash collections Less: Write-offs Ending accounts receivable ($ in thousands) $ 23,689 196,338 (199,246) ? $ 20,500 Therefore, bad debt write-offs must have been $281 ($23,689 + 196,338 – 199,246 – 20,500 = $281) Analysis of allowance for uncollectible accounts Beginning allowance Add: Bad debt expense Less: Write-offs Ending allowance $977 ? (281) $696 Therefore, bad debt expense must have been $0, indicating that the allowance account from prior years’ was sufficient to cover future anticipated write-offs on yearend accounts receivable ($977 – 281 – 696 = $0) © The McGraw-Hill Companies, Inc., 2007 7-54 Intermediate Accounting, 4/e Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Real World Case 7-7 Requirement Answers will, of course, vary The following were reported in the financial statements for the year ended December 31, 2003 ($ in millions): a Net trade accounts receivable + Allowance for doubtful accounts = Gross accounts receivable $599.8 + 63.1 = $662.9 b The statement of cash flows indicates bad debt expense (provision for doubtful accounts) of $124.8 c Beginning allowance for doubtful accounts + Bad debt expense - Bad debt write-offs = Ending allowance for doubtful accounts $49.5 + 124.8 - Write-offs = $63.1 Write-offs = $111.2 d Beginning trade accounts receivable + Credit sales - Bad debt write-offs Cash collected = Ending trade accounts receivable Beginning trade accounts receivable = $555.4 + 49.5 = $604.9 $604.9 + 6,804.6 – 111.2 – Cash collections = $662.9 Cash collections = $6,635.4 Integrating Case 7-8 McLaughlin's underestimation of bad debts is treated as a change in accounting estimate Changes in estimates are accounted for prospectively When a company revises a previous estimate, prior financial statements are not restated Instead, the company merely incorporates the new estimate in any related accounting determinations from then on In this case, bad debt expense for 2007 will be higher than it would have been had not the underestimation occurred A disclosure note should describe the effect of a change in estimate on income before extraordinary items, net income, and related per-share amounts for 2007 Solutions Manual, Vol.1, Chapter © The McGraw-Hill Companies, Inc., 2007 7-55 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Analysis Case 7-9 Requirement These methods can be described by one of two basic arrangements: A secured borrowing, or A sale of receivables When a company chooses between a borrowing and a sale, the critical element is the extent to which it (the transferor) is willing to surrender control over the assets transferred Specifically, the transferor is determined to have surrendered control over the receivables if and only if three sale conditions are met Secured borrowings usually take the form of an assignment of receivables An assignment of receivables is a promise by the borrower (the owner of the receivables) that any failure to repay debt owed to the lender in accordance with the debt agreement, will cause the proceeds from collecting the receivables to go directly toward repayment of the debt This arrangement is no different from the use of a building as collateral for a mortgage loan The assignor (borrower) assigns the assignee (lender) the rights to specific receivables as collateral for a loan A variation of assigning specific receivables is when trade receivables in general rather than specific receivables are pledged as collateral The responsibility of collection of the receivables remains solely with the company This variation is referred to as a pledging of accounts receivable Two popular arrangements used for the sale of receivables are factoring and securitization A factor is a financial institution that buys receivables for cash, handles the billing and collection of the receivables, and charges a fee for this service Actually, credit cards like VISA and Mastercard are forms of factoring arrangements The seller relinquishes all rights to the future cash receipts in exchange for cash from the buyer (the factor) Another popular arrangement used to sell receivables is a securitization In a typical accounts receivable securitization, the company creates a Special Purpose Entity (SPE), usually a trust or a subsidiary The SPE buys a pool of trade receivables, credit card receivables, or loans from the company, and then sells related securities, for example bonds or commercial paper, that are backed (collateralized) by the receivables Similar to accounts receivable, a note receivable can be used to obtain immediate cash from a financial institution either by pledging the note as collateral for a loan or by selling the note The transfer of a note is referred to as discounting © The McGraw-Hill Companies, Inc., 2007 7-56 Intermediate Accounting, 4/e Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Case 7-9 (concluded) Requirement In an assignment of specific receivables, usually the amount borrowed is less than the amount of receivables assigned The difference provides some protection for the lender to allow for possible uncollectible accounts Also, the assignee (transferee) usually charges the assignor an up-front finance charge in addition to stated interest on the collateralized loan The borrower, assignor, records the loan liability, the finance fee expense, and the cash borrowed No special accounting treatment is needed for an assignment of receivables in general, and the arrangement is simply described in a disclosure note The specific accounting treatment for the sale of receivables using factoring and securitization arrangements depends on the amount of risk the factor assumes, in particular whether it buys the receivables without recourse or with recourse When a company sells accounts receivable without recourse, the buyer assumes the risk of uncollectibility This means the buyer has no recourse to the seller if customers don’t pay the receivables In that case, the seller simply accounts for the transaction as a sale of an asset The buyer charges a fee for providing this service, usually a percentage of the book value of receivables Because the fee reduces the proceeds the seller receives from selling the asset, the seller records a loss on sale of assets The typical factoring arrangement is made without recourse When a company sells accounts receivable with recourse, the seller retains the risk of uncollectibility In effect, the seller guarantees that the buyer will be paid even if some receivables prove to be uncollectible Even if receivables are sold with recourse, as long as the three conditions for sale treatment are met, the transferor would still account for the transfer as a sale The only difference would be the additional requirement that the transferor record the estimated fair value of the recourse obligation as a liability The recourse obligation is the estimated amount that the transferor will have to pay the transferee as a reimbursement for uncollectible receivables Solutions Manual, Vol.1, Chapter © The McGraw-Hill Companies, Inc., 2007 7-57 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Research Case 7-10 Requirement When a company sells accounts receivable without recourse, the buyer assumes the risk of uncollectibility This means the buyer has no recourse to the seller if customers don’t pay the receivables Requirement The transferor is determined to have surrendered control over the receivables if and only if all of the following conditions are met: a The transferred assets have been isolated from the transferor - put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership b Each transferee has the right to pledge or exchange the assets it received c The transferor does not maintain effective control over the transferred assets through either (1) an agreement that the transferor repurchase or redeem them before their maturity or (2) the ability to cause the transferee to return specific assets Statement of Financial Accounting Standards No 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," provides the authoritative guidance in this area The above conditions can be found in paragraph of the standard Requirement Cash (90% x $400,000) 360,000 Loss on sale of receivables (4% x $400,000) 16,000 Receivable from factor (10% x $400,000 – 16,000 fee) 24,000 Accounts receivable (balance sold) 400,000 © The McGraw-Hill Companies, Inc., 2007 7-58 Intermediate Accounting, 4/e Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Case 7-10 (concluded) Requirement Paragraph 47 of SFAS 140 states lists the following conditions: a The assets to be repurchased or redeemed are the same or substantially the same as those transferred b The transferor is able to repurchase or redeem them on substantially the agreed terms, even in the event of default by the transferee c The agreement is to repurchase or redeem them before maturity, at a fixed or determinable price d The agreement is entered into concurrently with the transfer Solutions Manual, Vol.1, Chapter © The McGraw-Hill Companies, Inc., 2007 7-59 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Analysis Case 7-11 Requirement Sara Lee Receivables turnover = 19,566 = 10.3 1,893 Average collection period = 365 10.3 = 35 days Tyson Foods 26,441 1,260 365 21 = 21 = 17 days Tyson Foods collects its receivables, on average, 18 days faster than does Sara Lee Assuming similar customer credit policies, this indicates that Tyson does a better job in managing its investment in receivables Requirement The objective of this requirement is to motivate students to obtain hands-on familiarity with actual annual reports and to apply the techniques learned in the chapter You may wish to provide students with multiple copies of the same annual reports and compare responses Another approach is to divide the class into teams who evaluate reports from a group perspective © The McGraw-Hill Companies, Inc., 2007 7-60 Intermediate Accounting, 4/e Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Analysis Case 7-12 Requirement Note indicates that cash equivalents are investments in short-term, interestbearing instruments with maturities of three months or less at the date of purchase Requirement ($ in millions) Net receivables Add: Allowances Gross receivables 2004 $3,027 151 $3,178 2003 $2,627 149 $2,776 Requirement ($ in millions) Allowances: Beginning of year Add: Bad debt expense (provision for uncollectible accounts - from statement of cash flows) Less: Ending balance Amount written off as uncollectible Solutions Manual, Vol.1, Chapter $ 149 106 (151) $104 © The McGraw-Hill Companies, Inc., 2007 7-61 ... understated by $900 2007 income before income taxes would be overstated by $900 Solutions Manual, Vol.1, Chapter © The McGraw-Hill Companies, Inc., 2007 7-19 Find more slides, ebooks, solution manual. .. the allowance account is increased by $22,500 © The McGraw-Hill Companies, Inc., 2007 7-28 Intermediate Accounting, 4/e Find more slides, ebooks, solution manual and testbank on www.downloadslide.com... $250,000 x 1% = $2,500 © The McGraw-Hill Companies, Inc., 2007 7-4 Intermediate Accounting, 4/e Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Brief Exercise 7-5