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

This slide deck contains animations. Please disable animations if they cause issues with your device.
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

Copyright ©2020 John Wiley & Sons, Inc. 3

 Learning Objective 2
Define receivables and explain
accounting issues related to their
recognition.

LO 2 Copyright ©2020 John Wiley & Sons, Inc. 4

Accounts Receivable and Notes Receivable

LO 2 Copyright ©2020 John Wiley & Sons, Inc. 5

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.).

LO 2 Copyright ©2020 John Wiley & Sons, Inc. 6

Receivables Statement of Financial
Position Presentations

ILLUSTRATION 7.3

LO 2 Copyright ©2020 John Wiley & Sons, Inc. 7

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.

LO 2 Copyright ©2020 John Wiley & Sons, Inc. 8

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

LO 2 Copyright ©2020 John Wiley & Sons, Inc. 9

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.

LO 2 Copyright ©2020 John Wiley & Sons, Inc. 10

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.

LO 2 Copyright ©2020 John Wiley & Sons, Inc. 11

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

LO 2 Copyright ©2020 John Wiley & Sons, Inc. 12

Variable Consideration
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.

LO 2 Copyright ©2020 John Wiley & Sons, Inc. 13

Cash Discounts (Sales Discounts)
Entries Under Gross and Net Methods of
Recording Cash (Sales) Discounts

ILLUSTRATION 7.4
LO 2 Copyright ©2020 John Wiley & Sons, Inc. 14
Variable Consideration
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.

LO 2 Copyright ©2020 John Wiley & Sons, Inc. 15

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
LO 2 Copyright ©2020 John Wiley & Sons, Inc. 16
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).

LO 2 Copyright ©2020 John Wiley & Sons, Inc. 17

Variable Consideration
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.”

LO 2 Copyright ©2020 John Wiley & Sons, Inc. 18

 Learning Objective 3
Explain accounting issues related to
valuation of accounts receivable.

LO 3 Copyright ©2020 John Wiley & Sons, Inc. 19

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

LO 3 Copyright ©2020 John Wiley & Sons, Inc. 20

Direct Write-Off Method vs. Allowance
Method

LO 3 Copyright ©2020 John Wiley & Sons, Inc. 21

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

LO 3 Copyright ©2020 John Wiley & Sons, Inc. 22

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.

LO 3 Copyright ©2020 John Wiley & Sons, Inc. 23

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

LO 3 Copyright ©2020 John Wiley & Sons, Inc. 24

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.

LO 3 Copyright ©2020 John Wiley & Sons, Inc. 25

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.

LO 3 Copyright ©2020 John Wiley & Sons, Inc. 26

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:

Allowance for Doubtful Accounts 1,000

Accounts Receivable 1,000

LO 3 Copyright ©2020 John Wiley & Sons, Inc. 27

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:

Accounts Receivable 1,000

Allowance for Doubtful Accounts 1,000
Cash 1,000
Accounts Receivable 1,000

LO 3 Copyright ©2020 John Wiley & Sons, Inc. 28

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.

LO 3 Copyright ©2020 John Wiley & Sons, Inc. 29

Accounts Receivable Aging Schedule

ILLUSTRATION 7.6

LO 3 Copyright ©2020 John Wiley & Sons, Inc. 30

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

ILLUSTRATION 7.6
Bad Debt Expense 26,610
Allowance for Doubtful Accounts 26,610
LO 3 Copyright ©2020 John Wiley & Sons, Inc. 31
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
Allowance for Doubtful Accounts 25,810

LO 3 Copyright ©2020 John Wiley & Sons, Inc. 32

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.

LO 3 Copyright ©2020 John Wiley & Sons, Inc. 33

Estimating the Allowance Problem
Journal Entry (a)
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.
Bad Debt Expense 3,000
Allowance for Doubtful Accounts 3,000
€100,000 x .05 = €5,000 − €2,000 = €3,000
LO 3 Copyright ©2020 John Wiley & Sons, Inc. 34
Estimating the Allowance Problem
Journal Entry (b)
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 (b) 5% of accounts
receivable but the Allowance had a $1,500 debit balance.
Bad Debt Expense 6,500
Allowance for Doubtful Accounts 6,500
€100,000 x .05 = €5,000 + €1,500 = €6,500
LO 3 Copyright ©2020 John Wiley & Sons, Inc. 35
Copyright
Copyright © 2020 John Wiley & Sons, Inc.
All rights reserved. Reproduction or translation of this work beyond that permitted in
Section 117 of the 1976 United States Copyright Act without the express written
permission of the copyright owner is unlawful. Request for further information should be
addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may
make back-up copies for his/her own use only and not for distribution or resale. The
Publisher assumes no responsibility for errors, omissions, or damages, caused by the use
of these programs or from the use of the information contained herein.

Copyright ©2020 John Wiley & Sons, Inc. 36