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Chapter 6. Investments and Receivables. Financial Accounting, Alternate 4e by Porter and Norton. highly liquid. selling on credit. PepsiCo Inc. Consolidated Balance Sheet (partial). ASSETS (in millions) Dec. 28 Dec. 29 2002 2001 . Current Assets:

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chapter 6

Chapter 6

Investments

and Receivables

Financial Accounting, Alternate 4e by Porter and Norton

pepsico inc consolidated balance sheet partial

highly liquid

selling on credit

PepsiCo Inc. Consolidated Balance Sheet (partial)

ASSETS (in millions) Dec. 28 Dec. 29

2002 2001 .

Current Assets:

Cash and cash equivalents $1,638 $ 683

Short-term investments, at cost 207 966

1,845 1,649

Accounts & notes receivable 2,531 2,142

Inventories 1,342 1,310

Prepaid expenses & other assets 695 752

Total Current Assets $6,413 $5,853

pepsico inc consolidated balance sheet partial3

Highly Liquid

Less

Liquid

PepsiCo Inc.Consolidated Balance Sheet (partial)

ASSETS (in millions)

Current Assets:

Cash and cash equivalents

Short-term investments, at cost

Accounts and notes receivable

Inventories

Prepaid expenses & other assets

Total Current Assets

investment in cd
Investment in CD

Example:

Invest $100,000 in a 120-day CD. Principal plus interest @ 6% due upon investment maturity.

Assets = Liab. + O/E + Rev. – Exp.

Short-term

Inv. – CD 100,000

Cash (100,000)

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investment in cd5
Investment in CD

Year-end adjusting entry :

Assets = Liab. + O/E + Rev. – Exp.

Interest Rec. 1,500 Interest Inc. 1,500

Interest = Principal x Rate x Time

$1,500 = $100,000 x 6% x 90/360

October – 29 days

November – 30 days

December – 31 days

90 days

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investment in cd6
Investment in CD

Upon investment maturity:

Assets = Liab. + O/E + Rev. – Exp.

Cash 102,000 Interest Inc. 500

Short-Term

Inv. – CD 100,000

Interest Rec. 1,500

Interest earned in January:

$100,000 x 6% x 30/360 = $500

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reasons companies invest in other companies
Reasons Companies Invest in Other Companies
  • Short-term cash excesses
  • Long-term investing for future cash needs
  • Exert influence over investee
  • Obtain control of investee
accounting for common stock investments

Fair

Value

Method

Equity

Method

Consolidated

F/S

0%

20%

50%

100%

No significant

influence

Significant

influence

Control

Accounting for Common-Stock Investments

Our

Focus

investments without significant influence

Use fair value method to account for these investments

Investments Without Significant Influence
  • Held-to-Maturity Securities
  • Trading Securities
  • Available-for-Sale Securities
held to maturity securities

$100,000 9% Bond

Due 2019

Held-to-Maturity Securities
  • Bonds of other companies
  • Intent and ability to hold until maturity
held to maturity securities11
Held-to-Maturity Securities

Example:

On 1/1/04, Homer buys:

  • $100,000; 10% bonds @ face value.
  • Bonds mature December 31, 2013
  • Interest payable semiannually

.

Record the purchase of the bonds and receipt of the first interest payment

recording bond purchase

$100,000 10% Bond

Due 2014

Recording Bond Purchase

Assets = Liab. + O/E + Rev. – Exp.

Inv. in Bonds 100,000

Cash (100,000)

recording receipt of interest payment

Interest for

Investor

Borrower

Recording Receipt of Interest Payment

Assets = Liab. + O/E + Rev. – Exp.

Cash 5,000 Interest Inc. 500

recording bond sale

Interest for

Investor

Borrower

Recording Bond Sale

Assets = Liab. + O/E + Rev. – Exp.

Cash 99,000 Loss on Sale of Bonds 1,000

Inv. in Bonds (100,000)

trading securities

Stocks

Bonds

  • Intent to sell in near term (classified as current assets)

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Trading Securities
  • Purchased to generate profit from short-term appreciation
trading securities16

Stocks

Bonds

  • Unrealized gain or loss recognized on income statement

Income

Statement

Trading Securities
  • At end of each period, security is “marked to market”
trading securities17
Trading Securities

Example:

Dexter Corp. holds the following trading securities at 12/31/04:

Cost Market

Menlo preferred stock $25,000 $27,500

Canby common stock 40,000 39,000

Record the unrealized gain or loss at 12/31/04.

recording unrealized gain or loss on trading securities
Recording Unrealized Gain or Loss on Trading Securities

Assets = Liab. + O/E + Rev. – Exp.

Inv. in Menlo Unrealized Gain –

Pref. Stock 2,500 Trading Sec.* 1,500

Inv. in Canby

Pref. Stock (1,000)

* income statement account

available for sale securities

Stocks

Bonds

  • Can be classified as short-term or long-term, depending on expected date of disposition
Available-for-Sale Securities
  • Securities not classified as held-to-maturity or trading
available for sale securities20

Stocks

Bonds

  • Unrealized gain or loss accumulated in stockholders’ equity account

Balance

Sheet

Available-for-Sale Securities
  • Also “marked to market” at end of accounting period
available for sale securities21
Available-for-Sale Securities

Example:

Lenox Corp. holds the following AFS securities at 12/31/04:

CostMarket

Adair preferred stock $15,000 $16,000

Casey common stock 35,000 32,500

Record the unrealized gain or loss at 12/31/04.

recording unrealized gain or loss on afs securities
Recording Unrealized Gain or Loss on AFS Securities

Assets = Liab. + O/E + Rev. – Exp.

Inv. in Adair Unrealized Gain/Loss

Pref. Stock 1,000 – AFS Sec.* (1,500)

Inv. in Casey

Com. Stock (2,500)

* part of Stockholders’ Equity

accounting for investments without significant influence
Accounting for Investments Without Significant Influence

Recognize Report Report FV

Categories as income on BS at changes on

Held-to-maturity interest cost N/A

Trading interest, div. fair value Income stmt.

Avail.-for-Sale interest, div. fair value Balance sheet

credit sales

Terms: 2/10,

net 30

Sales Invoice

Credit Sales
  • Slows inflow of cash
  • Risk of uncollectible accounts

Trade Credit

Retail Customer

Receivables

menkhaus corporation sample accts rec subsidiary ledger
Menkhaus Corporation Sample Accts. Rec. Subsidiary Ledger

In 000s

Total Due

ABC Distributors $ 25

HIJ Distributors 336

: :

: :

XYZ Distributors 108

$ 1,105

Gross Accounts

Receivable

winnebago industries inc consolidated balance sheet partial
Winnebago Industries, Inc.Consolidated Balance Sheet (partial)

20022001

Receivables, less allowance

for doubtful accounts ($120

and $244, respectively) $28,616 $21,571

Estimated

Uncollectible

Accounts

Net

Realizable

Value

accounting for bad debts direct write off method

Future Period charged with expense of bad debt write-off

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Accounting for Bad Debts:Direct Write-off Method

Period of Sale

Adjustment to write off uncollectible account:

Assets = Liab. + O/E + Rev. – Exp.

Accts. Rec. Bad Debts

– Dexter (500) Exp. (500)

accounting for bad debts allowance method

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Accounting for Bad Debts: Allowance Method

Period of Sale

Estimated bad debt expense (and allowance account) recorded in same period

balance sheet presentation allowance method
Balance Sheet Presentation - Allowance Method

Roberts Corp.

Partial Balance Sheet

Current assets:

Accounts receivable $ 250,000

Less: Allowance for

doubtful accounts ( 6,000)

Net accounts receivable $ 244,000

accounting for bad debts allowance method30
Accounting for Bad Debts:Allowance Method

Adjustment for estimated bad debt expense :

Assets = Liab. + O/E + Rev. – Exp.

Allow. for Bad Debts

Doubtful Exp. (6,000)

Accts (6,000)

I estimate...

accounting for bad debts allowance method31
Accounting for Bad Debts:Allowance Method

Adjustment to write off uncollectible account:

Assets = Liab. + O/E + Rev. – Exp.

Allow. for

Doubtful Accts 500

Accts. Rec.

– Dexter (500)

Bankrupt

approaches to allowance method
Approaches to Allowance Method

% of Net Credit Sales

% of Accounts Receivable

  • Aging Method

Income Statement Approach

Balance Sheet Approach

percentage of net credit sales method
Percentage of Net Credit Sales Method

Example:

Assume prior years’ net credit sales and bad debt expense are as follows:

YearNet credit salesBad debts

1999 $1,250,000 $ 26,400

2000 1,340,000 29,350

2001 1,200,000 23,100

2002 1,650,000 32,150

2003 2,120,000 42,700

$7,560,000 $153,700

percentage of net credit sales method34
Percentage of Net Credit Sales Method

Example:

Develop bad debt percentage:

$153,700

$7,560,000

= 0.02033

use 2%

percentage of net credit sales method35
Percentage of Net Credit Sales Method

Example:

2004 Net credit sales (given) $2,340,000

Bad debt percentage 2%

Bad debts expense 46,800

Assets = Liab. + O/E + Rev. – Exp.

Allow. for Bad Debts

Doubtful Exp. (46,800)

Accts (46,800)

aging method
Est. Percent Est. Amount

CategoryAmountUncollectibleUncollectible

Current $ 85,600 1% $ 856

Past due:

1-30 days 31,200 4% 1,248

31-60 days 24,500 10% 2,450

61-90 days 18,000 30% 5,400

90+ days 9,200 50% 4,600

Totals $168,500 $14,554

Aging Method

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aging method37
Aging Method

To determine the amount recognized as bad debts:

Bal. required in allow. acct. after adj. $14,554

Less: Bal. in allow. acct. before adj. 1,230

Amount of adjustment $13,324

aging method example
Aging Method Example

Adjustment for estimated bad debt expense :

Assets = Liab. + O/E + Rev. – Exp.

Allow. for Bad Debts

Doubtful Exp. (13,324)

Accts (13,324)

comparison of methods
% of Net Sales

Computes bad debt expense

Aging

Computes ending balance in the allowance account

Comparison of Methods
accounts receivable turnover
Accounts Receivable Turnover

Net Credit Sales

Average Accounts Receivable

Indicates how quickly a company is collecting (i.e., turning over) its receivables

accounts receivable turnover41
Too fast

credit policies too

stringent; may be

losing sales

Too slow

credit department not

operating effectively;

dissatisfied customers

Accounts Receivable Turnover
interest bearing promissory note

Principal

Interest

Maturity

Date

Interest-Bearing Promissory Note

Baker Corporation promises to pay HighTec, Inc. $15,000 plus 12% annual interest on March 13, 2005.

Date: December 13, 2004

Signed:_________

Baker Corporation

non interest bearing promissory note

In exchange for $9,000 applied toward my purchase today, I promise to pay $9,900 in six months.

Date: November 1, 2004

Signed:_________

J.E. Privett

Non-Interest-Bearing Promissory Note

Effective interest rate on note = 20%

$900 12

$9,000 x 6

balance sheet presentation of discounted notes

Discount transferred to interest revenue over life of note

Balance Sheet Presentation of Discounted Notes

12/31/044/30/05

Notes receivable $ 9,900 $ 9,900

Less: Discount on

notes receivable ( 600) - 0 -

$ 9,300 $ 9,900

Upon

Maturity

accelerating cash inflow from sales
Accelerating Cash Inflow From Sales
  • Sales Discounts
  • Credit Card Sales
  • Discounting Notes Receivable
credit card sales
Credit Card Sales
  • Competitive necessity
  • Credit card company:
    • Charges fee
    • Assumes risk of nonpayment
discounting notes receivable

Baker Corporation promises to pay HighTec, Inc. $15,000 plus 12% annual interest on December 31, 1998.

Date: January 1, 1998

Signed:_________

Baker Corporation

Discounting Notes Receivable
  • Sell note prior to maturity date for cash
  • Receive less than face value (i.e., discounted amount)
  • Can be sold with or without recourse
liquid assets and the statement of cash flows indirect method
Liquid Assets and the Statement of Cash Flows - Indirect Method

Operating Activities

Net income xxxx

Increase in accounts receivable -

Decrease in accounts receivable +

Increase in notes receivable -

Decrease in notes receivable +

Investing Activities

Purchases of held-to-maturity and

available-for-sale securities -

Sales/maturities of held-to-maturity and

available-for-sale securities +

Financing Activities

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