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excerpt from what the heck is work anyway by alexander kjuerulf
Excerpt from: What the heck is work anyway?by Alexander Kjuerulf

Rather than try to come up with the most correct definition of work, i.e. one that would make sense in an economical, sociological and psychological perspective, I’d rather try to find a definition of work or rather a view of work, that promotes happiness at work in most normal kinds of work.

This immediately eliminates some definitions:

  • If work is simply that you do because you have to, then happiness at work is almost impossible by definition.
  • If work is only what you do for money, it eliminates all volunteer work.
  • If work is only what you do for a purpose, then all aspects of your job that are not productive are no longer work.

I’m not claiming to have the answer yet, but as I see it here are some elements of a definition if work that is conducive to happiness:

  • Work is something you choose to do. You may not have a choice of whether or not to work but you have choice in what work you do.
  • Work is something you’re valued for. Either someone pays you for your work or someone takes the time and resources to organize your work.
  • Work is an activity where you make a positive difference for someone else.
notes receivable
Notes Receivable

Supported by a formal promissory note.

  • A negotiable instrument.
  • Maker signs in favor of a Payee.
  • Interest-bearing (has a stated rate of interest) OR
  • Zero-interest-bearing (interest included in face amount).
notes receivable4
Notes Receivable..

Generally originate from:

  • Customers who need to extend payment period of an outstanding receivable.
  • High-risk or new customers.
  • Loans to employees and subsidiaries.
  • Sales of property, plant, and equipment.
  • Lending transactions (the majority of notes).
note receivable journal entries
Note Receivable Journal Entries

On June 30, 2011, the Esquire Company sold some merchandise to a customer for $30,000. In payment, Esquire agreed to accept a 6% note requiring the payment of interest and principal on March 31, 2012. The 6% rate is appropriate in this situation.

Prepare the journal entry to record the sale of merchandise (omit any entry that might be required for the cost of the goods sold).

June 30, 2011

Note receivable 30,000

Sales revenue 30,000

note receivable journal entries6
Note Receivable Journal Entries

On June 30, 2011, the Esquire Company sold some merchandise to a customer for $30,000. In payment, Esquire agreed to accept a 6% note requiring the payment of interest and principal on March 31, 2012. The 6% rate is appropriate in this situation.

Prepare the journal entry at December 31, 2011.

December 31, 2011

Interest receivable 900

Interest revenue 900

 ($30,000 x 6% x 6/12) = 900

note receivable journal entries7
Note Receivable Journal Entries

On June 30, 2011, the Esquire Company sold some merchandise to a customer for $30,000. In payment, Esquire agreed to accept a 6% note requiring the payment of interest and principal on March 31, 2012. The 6% rate is appropriate in this situation.

Prepare the journal entry at March 31, 2012.

March 31, 2012

Cash 31,350

Interest revenue 450

Interest receivable 900

Note receivable 30,000

($30,000 x 6% x 3/12) = 450

interest bearing note
Interest-bearing Note

Illustration: Morgan Corp. makes a loan to Marie Co. and receives in exchange a three-year, $10,000 note bearing interest at 10 percent annually. The market rate of interest for a note of similar risk is 12 percent. How does Morgan record the receipt of the note?

i = 12%

$10,000 Principal

$1,000

1,000

1,000 Interest

0

1

2

3

4

n = 3

FV=10,000, pmt=1,000, n=3, i=12% => PV=9,520

interest bearing note9
Interest-bearing Note

Illustration: How does Morgan record the receipt of the note?

Notes Receivable 10,000

Discount on Notes Receivable 480

Cash 9,520

interest bearing note10
Interest-bearing Note

Illustration 7-15

interest bearing note11
Interest-bearing Note

Journal Entries for Interest-Bearing Note

Cash 1,000

Discount on notes receivable 142

Interest revenue 1,142

discussion question
Discussion Question

Q7-15 What is “imputed interest”?

Imputed interest is the interest ascribed or attributed to a situation or circumstance which is void of a stated or otherwise appropriate interest factor. Imputed interest is the result of a process of interest rate estimation called imputation.

In what situations is it necessary to impute an interest rate for notes receivable?

An interest rate is imputed for notes receivable when (1) no interest rate is stated for the transaction, or (2) the stated interest rate is unreasonable, or (3) the stated face amount of the note is materially different from the current cash price for the same or similar items or from the current market value of the debt instrument.

discussion question13
Discussion Question

Q7-15 Continued – What are the considerations in imputing an appropriate rate?

In imputing an appropriate interest rate, consideration should be given to the prevailing interest rates for similar instruments of issuers with similar credit ratings, the collateral, and restrictive covenants.

non interest bearing note
Non-Interest Bearing Note

On April 30, 2011, the Rangers Company sold some merchandise to a customer for $40,000. Rangers agreed to accept a payment of $40,000 on April 30, 2016. A 6% interest rate is appropriate in this situation.

Prepare the journal entry to record the sale of merchandise (omit any entry that might be required for the cost of the goods sold).

FV=40,000, pmt=0, n=5, i=6% => PV=29,890

April 30, 2011

Note receivable 40,000

Discount on note receivable 10,110

Sales revenue 29,890

non interest bearing note15
Non-Interest Bearing Note

On April 30, 2011, the Rangers Company sold some merchandise to a customer for $40,000. Rangers agreed to accept a payment of $40,000 on April 30, 2016. A 6% interest rate is appropriate in this situation.

Prepare the amortization schedule.

non interest bearing note16
Non-Interest Bearing Note

On April 30, 2011, the Rangers Company sold some merchandise to a customer for $40,000. Rangers agreed to accept a payment of $40,000 on April 30, 2016. A 6% interest rate is appropriate in this situation.

Prepare the amortization schedule.

non interest bearing note17
Non-Interest Bearing Note

On April 30, 2011, the Rangers Company sold some merchandise to a customer for $40,000. Rangers agreed to accept a payment of $40,000 on April 30, 2016. A 6% interest rate is appropriate in this situation.

Prepare the amortization schedule.

non interest bearing note18
Non-Interest Bearing Note

On April 30, 2011, the Rangers Company sold some merchandise to a customer for $40,000. Rangers agreed to accept a payment of $40,000 on April 30, 2016. A 6% interest rate is appropriate in this situation.

Prepare the amortization schedule.

non interest bearing note19
Non-Interest Bearing Note

On April 30, 2011, the Rangers Company sold some merchandise to a customer for $40,000. Rangers agreed to accept a payment of $40,000 on April 30, 2016. A 6% interest rate is appropriate in this situation.

Prepare the journal entry at December 31, 2011.

December 31, 2011

Discount on note receivable 1,195

Interest revenue 1,195

(1,793 X 8/12)

non interest bearing note20
Non-Interest Bearing Note

On April 30, 2011, the Rangers Company sold some merchandise to a customer for $40,000. Rangers agreed to accept a payment of $40,000 on April 30, 2016. A 6% interest rate is appropriate in this situation.

Prepare the journal entry at December 31, 2012.

December 31, 2012

Discount on note receivable 1,865

Interest revenue 1,865

(1,793 X 4/12) + (1,901 X 8/12)

non interest bearing note21
Non-Interest Bearing Note

On April 30, 2011, the Rangers Company sold some merchandise to a customer for $40,000. Rangers agreed to accept a payment of $40,000 on April 30, 2016. A 6% interest rate is appropriate in this situation.

What is the balance of the note at December 31, 2012?

31,683 + (1,901 X 8/12) = 32,950

non interest bearing note22
Non-Interest Bearing Note

On April 30, 2011, the Rangers Company sold some merchandise to a customer for $40,000. Rangers agreed to accept a payment of $40,000 on April 30, 2016. A 6% interest rate is appropriate in this situation.

Prepare the journal entry at April 30, 2016.

April 30, 2016

Discount on note receivable 755

Interest revenue 755

(2,265 X 4/12)

Cash 40,000

Note receivable 40,000

notes received for property goods or services
Notes Received for Property, Goods or Services

In a bargained transaction entered into at arm’s length, the stated interest rate is presumed to be fair unless:

  • No interest rate is stated, or
  • Stated interest rate is unreasonable, or
  • Face amount of the note is materially different from the current cash sales price.
notes receivable example
Notes Receivable Example

Oasis Development Co. sold a corner lot to Rusty Pelican as a restaurant site. Oasis accepted in exchange a five-year note having a maturity value of $35,247 and no stated interest rate. The land originally cost Oasis $14,000. At the date of sale the land had a fair market value of $20,000.

Oasis uses the fair market value of the land, $20,000, as the present value of the note. Oasis therefore records the sale as:

($35,247 - $20,000) = $15,247

Notes Receivable 35,247

Discount on Notes Receivable 15,247

Land 14,000

Gain on Sale of Land 6,000

discussion question25
Discussion Question

Q7-16 What is the fair value option? Where do companies that elect the fair value option report unrealized holding gains and losses?

The fair value option gives companies the option of using fair value as the measurement basis for financial instruments. The Board believes that fair value measurement for financial instruments provides more relevant and understandable information than historical cost. If companies choose the fair value option, the receivables are recorded at fair value, with unrealized gains or losses reported as part of net income.

valuation of notes receivable
Valuation of Notes Receivable
  • Short-Term reported at Net Realizable Value (same as accounting for accounts receivable).
  • Long-Term- FASB requires companies disclose not only their cost but also their fair value in the notes to the financial statements.
    • Fair Value Option. Companies have the option to use fair value as the basis of measurement in the financial statements. Adjustments to value go through net income.
disposition of receivables
Disposition of Receivables

Owner may transfer accounts or notes receivables to another company for cash.

Reasons:

  • Competition.
  • Sell receivables because money is tight.
  • Billing / collection are time-consuming and costly.

Transfer accomplished by:

  • Secured borrowing
  • Sale of receivables
disposition of receivables28
Disposition of Receivables

Secured borrowing

  • Now

Cash XXX

Payable XXX

Get cash sooner, have A/R and payable on books

  • Later

Cash XXX

A/R XXX

Payable XXX

Cash XXX

Sale of Receivables

  • Now

Cash XXX

A/R XXX

Get cash sooner, but have nothing else on books

  • Later

Nothing

secured borrowing vs sale
Secured borrowing vs. Sale

The FASB concluded that a sale occurs only if the seller surrenders control of the receivables to the buyer.

Three conditions must be met.

sale of receivables
Sale of Receivables

Factorsare finance companies or banks that buy receivables from businesses for a fee.

Illustration 7-17

sale of receivables31
Sale of Receivables

Sale Without Recourse

  • Purchaser assumes risk of collection
  • Transfer is outright sale of receivable
  • Seller records loss on sale
  • Seller uses Due from Factor (receivable) account to cover discounts, returns, and allowances

Sale With Recourse

  • Seller guarantees payment to purchaser
  • Financial components approach used to record transfer
presentation of receivables
Presentation of Receivables
  • Segregate the different types of receivables that a company possesses, if material.
  • Appropriately offset the valuation accounts against the proper receivable accounts.
  • Determine that receivables classified in the current assets section will be converted into cash within the year or the operating cycle, whichever is longer.
  • Disclose any loss contingencies that exist on the receivables.
  • Disclose any receivables designated or pledged as collateral.
  • Disclose the nature of credit risk inherent in the receivables.
discussion question33
Discussion Question

Q7-21 What is the accounts receivable turnover ratio, and what type of information does it provide?

The accounts receivable turnover ratio is computed by dividing net sales by average net receiv­ables outstanding during the year. This ratio is used to assess the liquidity of the receivables. It measures the number of times, on average, receivables are collected during the period. It provides some indication of the quality of the receivables and how successful the company is in collecting its outstanding receivables.

a r turnover ratio
A/R Turnover Ratio
  • This Ratio used to:
    • Assess the liquidity of the receivables.
    • Measure the number of times, on average, a company collects receivables during the period.
slide35
IFRS

RELEVANT FACTS - Similarities

  • The accounting and reporting related to cash is essentially the same under both IFRS and GAAP. In addition, the definition used for cash equivalents is the same.
  • Like GAAP, cash and receivables are generally reported in the current assets section of the balance sheet under IFRS.
  • Similar to GAAP, IFRS requires that loans and receivables be accounted for at amortized cost, adjusted for allowances for doubtful accounts.
slide36
IFRS

RELEVANT FACTS - Differences

  • Under IFRS, companies may report cash and receivables as the last items in current assets under IFRS. Under 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. GAAP has explicit guidance in the area.
  • The fair value option is similar under GAAP and IFRS but not identical. The international standard related to the fair value option is subject to certain qualifying criteria not in the U.S. standard. In addition, there is some difference in the financial instruments covered.
slide37
IFRS

RELEVANT FACTS - Differences

  • Under IFRS, bank overdrafts are generally reported as cash. Under GAAP, such balances are reported as liabilities.
  • IFRS and 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. GAAP uses loss of control as the primary criterion. In addition, IFRS generally permits partial transfers; GAAP does not.
receivables journal entries
Receivables Journal Entries

Weldon Corporation’s fiscal year ends December 31. The following is a list of transactions involving receivables that occurred during 2011:

3/17 Accounts receivable of $1,700 were written off as uncollectible. The company uses the allowance method.

3/30 Loaned an officer of the company $20,000 and received a note requiring principal and interest at 7% to be paid on March 30, 2012.

6/30 Sold merchandise to the Blankenship Company for $12,000. Terms of the sale are 2/10, n/30. Weldon uses the gross method to account for cash discounts.

7/8 The Blankenship Company paid its account in full.

8/31 Sold stock in a nonpublic company with a book value of $5,000 and accepted a $6,000 non-interest-bearing note with a discount rate of 8%. The $6,000 payment is due on February 28, 2012. The stock has no ready market value.

12/31 Bad debt expense is estimated to be 2% of credit sales for the year. Credit sales for 2011 were $700,000.

Prepare all journal entries.

receivables journal entries39
Receivables Journal Entries

3/17 Accounts receivable of $1,700 were written off as uncollectible. The company uses the allowance method.

  • Allowance for uncollectible accounts 1,700

Accounts receivable 1,700

3/30 Loaned an officer of the company $20,000 and received a note requiring principal and interest at 7% to be paid on March 30, 2012.

  • Note receivable 20,000

Cash 20,000

receivables journal entries40
Receivables Journal Entries

6/30 Sold merchandise to the Blankenship Company for $12,000. Terms of the sale are 2/10, n/30. Weldon uses the gross method to account for cash discounts.

  • Accounts receivable 12,000

Sales revenue 12,000

7/8 The Blankenship Company paid its account in full.

  • Cash ($12,000 x 98%) 11,760

Sales discounts ($12,000 x 2%) 240

Accounts receivable 12,000

receivables journal entries41
Receivables Journal Entries

8/31 Sold stock in a nonpublic company with a book value of $5,000 and accepted a $6,000 non-interest-bearing note with a discount rate of 8%. The $6,000 payment is due on February 28, 2012. The stock has no ready market value.

  • Notes receivable (face amount) 6,000

Discount on note receivable 227

Investments (book value) 5,000

Gain on sale of investments (difference) 773

PV(FV=6,000, pmt=0, n=6/12, i=8%) = 5,773

12/31 Bad debt expense is estimated to be 2% of credit sales for the year. Credit sales for 2011 were $700,000.

  • Bad debt expense ($700,000 x 2%) 14,000

Allowance for uncollectible accounts 14,000

receivables journal entries42
Receivables Journal Entries

Adjusting Entries:

To accrue interest earned on note receivable from loan to officer.

  • Interest receivable1,050

Interest revenue ($20,000 x 7% x 9/12) 1,050

To accrue interest earned on note receivable from sale of stock.

  • Discount on note receivable 154

Interest revenue ($5,773 x 8% x 4/12) 154