Sandburg Company requires additional cash for its business. Sandburg has decided to use its accounts receivable to raise the additional cash and has asked you to determine the income statement effects of the following contemplated transactions.

1. On July 1, 2020, Sandburg assigned $400,000 of accounts receivable to Keller Finance Company. Sandburg received an advance from Keller of 80% of the assigned accounts receivable less a commission of 3% on the advance. Prior to December 31, 2020, Sandburg collected$220,000 on the assigned accounts receivable, and remitted $232,720 to Keller,$12,720 of which represented interest on the advance from Keller.

2. On December 1, 2020, Sandburg sold $300,000 of net accounts receivable to Wunsch Company for$270,000. The receivables were sold outright on a without recourse basis.

3. On December 31, 2020, an advance of $120,000 was received from First Bank by pledging$160,000 of Sandburg's accounts receivable. Sandburg's first payment to First Bank is due on January 30, 2021.

Prepare a schedule showing the income statement effects for the year ended December 31, 2020, as a result of the above facts.

The chief accountant for Dickinson Corporation provides you with the following list of accounts receivable written off in the current year.

$$\begin{array}{cccc} \underline{\hspace{25pt}\text{Date}\hspace{25pt}}&\underline{\hspace{40pt}\text{Customer}\hspace{40pt}}&\underline{\hspace{10pt}\text{Amount}\hspace{10pt}}\\ \text{March 31}\hspace{30pt}&\text{E. L. Masters Company}&\text{\$7,800}\\ \text{June 30}\hspace{35pt}&\text{Stephen Crane Associates}&\text{6,700}\\ \text{September 30}\hspace{10pt}&\text{Amy Lowell's Dress Shop}&\text{7,000}\\ \text{December 31}\hspace{15pt}&\text{R. Frost, Inc.}&\text{9,830}\\ \end{array}$$

Dickinson follows the policy of debiting Bad Debt Expense as accounts are written off. The chief accountant maintains that this procedure is appropriate for financial statement purposes because the Internal Revenue Service will not accept other methods for recognizing bad debts.

All of Dickinson's sales are on a 30-day credit basis. Sales for the current year total $2,200,000. The balance in Accounts Receivable at year-end is$77,000 and an analysis of customer risk and charge-off experience indicates that 12% of receivables will be uncollectible (assume a zero balance in the allowance).

Instructions

a. Do you agree or disagree with Dickinson's policy concerning recognition of bad debt expense? Why or why not?

b. By what amount would net income differ if bad debt expense was computed using the percentage of receivables approach?

Indicate how the percentage-of-receivables method, based on an aging schedule, accomplishes the objectives of the allowance method of accounting for bad debts. What other methods, besides an aging analysis, can be used for estimating uncollectible accounts?

The financial statements of Coca-Cola and PepsiCo are presented in Appendices C and D, respectively. The companies' complete annual reports, including the notes to the financial statements, are available online.

Instructions

Use the companies' financial information to answer the following questions.

a. What were the cash and cash equivalents reported by Coca-Cola and PepsiCo at the end of 2017? What does each company classify as cash equivalents?

b. What were the accounts receivable (net) for Coca-Cola and PepsiCo at the end of 2017? Which company reports the greater allowance for doubtful accounts (amount and percentage of gross receivable) at the end of 2017?

c. Assuming that all "net operating revenues" (Coca-Cola) and all "net revenues" (PepsiCo) were net credit sales, compute the accounts receivable turnover for 2017 for Coca-Cola and PepsiCo, also compute the days outstanding for receivables. What is your evaluation of the difference?

The financial statements of P&G are presented in Appendix B. The company's complete annual report, including the notes to the financial statements, is available online.

Instructions

Refer to P&G's financial statements and the accompanying notes to answer the following questions.

a. What criteria does P&G use to classify "Cash and cash equivalents" as reported in its balance sheet?

b. As of June 30, 2017, what balances did P&G have in cash and cash equivalents? What were the major uses of cash during the year?

c. P&G reports no allowance for doubtful accounts, suggesting that bad debt expense is not material for this company. Is it reasonable that a company like P&G would not have material bad debt expense? Explain.

Kraft Enterprises owns the following assets at December 31, 2020.

$$\begin{array}{lrrllrrr} \text{Cash in bank-savings account}&&\$68,000&\hspace{10pt}&\text{Checking account balance}&&\$17,000\\ \text{Cash on hand}&&9,300&\hspace{10pt}&\text{Postdated checks}&&750\\ \text{Cash refund due from IRS}&&31,400&\hspace{10pt}&\text{Certificates of deposit}&&90,000\\ \end{array}$$

What amount should be reported as cash?

What may be included under the heading of "cash"?

The controller for Clint Eastwood Co. is attempting to determine the amount of cash to be reported on its December 31, 2020, balance sheet. The following information is provided.

1. Commercial savings account of $600,000 and a commercial checking account balance of$900,000 are held at First National Bank of Yojimbo.

2. Money market fund account held at Volonte Co. (a mutual fund organization) permits Eastwood to write checks on this balance, $5,000,000.

3. Travel advances of$180,000 for executive travel for the first quarter of next year (employee to reimburse through salary reduction).

4. A separate cash fund in the amount of $1,500,000 is restricted for the retirement of long-term debt.

5. Petty cash fund of$1,000.

6. An L.O.U. from Marianne Koch, a company customer, in the amount of $190,000.

7. A bank overdraft of$110,000 has occurred at one of the banks the company uses to deposit its cash receipts. At the present time, the company has no deposits at this bank.

8. The company has two certificates of deposit, each totaling $500,000. These CDs have a maturity of 120 days.

9. Eastwood has received a check that is dated January 12, 2021, in the amount of$125,000.

10. Eastwood has agreed to maintain a cash balance of $500,000 at all times at First National Bank of Yojimbo to ensure future credit availability.

11. Eastwood has purchased$2,100,000 of commercial paper of Sergio Leone Co. which is due in 60 days.

12. Currency and coin on hand amounted to $7,700,

Instructions

a. Compute the amount of cash and cash equivalents to be reported on Eastwood Co.'s balance sheet at December 31, 2020.

b. Indicate the proper reporting for items that are not reported as cash and cash equivalents on the December 31, 2020, balance sheet.

As the new staff person in your company's treasury department, you have been asked to conduct research related to a proposed transfer of receivables. Your supervisor wants the authoritative sources for the following items that are discussed in the securitization agreement.

Instructions

If your school has a subscription to the FASB Codification, log in and prepare responses to the following. Provide Codification references for your responses.

a. Identify relevant Codification section that addresses transfers of receivables.

b. Provide definitions for the following:

1. Transfer.

2. Recourse.

3. Collateral.

The Flatiron Pub provides catering services to local businesses. The following information was available for The Flatiron Pub for the years ended December 31, 2019 and 2020.

Flatiron management is preparing for a meeting with its bank concerning renewal of a loan and has collected the following information related to the above balances.

1. The cash reported at December 31, 2020, reflects the following items: petty cash $1,575 and postage stamps$110. The other current assets balance at December 31, 2020, includes the checking account balance of $4,000.

2. On November 30, 2020, Flatiron agreed to accept a 6-month,$5,000 note bearing 12% interest, payable at maturity, from a major client in settlement of a $5,000 bill. The above balances do not reflect this transaction.

3. Flatiron factored some accounts receivable at the end of 2020, It transferred accounts totaling$10,000 to Final Factor, Inc. with recourse. Final Factor will receive the collections from Flatiron's customers and will retain 2% of the balances. Final Factor assesses Flatiron a finance charge of 3% on this transfer. The fair value of the recourse liability is $400. However, management has determined that the amount due from the factor and the fair value of the resource obligation have not been recorded, and neither are included in the balances above.

4. Flatiron charged off uncollectible accounts with balances of$1,600. On the basis of the latest available information, the 2020 provision for bad debts is estimated to be 2.5% of accounts receivable.

Accounting

a. Based on the above transactions, determine the balance for (1) Accounts Receivable and (2) Allow- ance for Doubtful Accounts at December 31, 2020.

b. Prepare the current assets section of The Flatiron Pub's balance sheet at December 31, 2020.

Analysis

a. Compute Flatiron's current ratio and accounts receivable turnover for December 31, 2020. Use these measures to analyze Flatiron's liquidity. The accounts receivable turnover in 2019 was 4.37.

b. Discuss how the analysis you did above of Flatiron's liquidity would be affected if Flatiron had trans- ferred the receivables in a secured borrowing transaction.

Principles

What is the conceptual basis for recording bad debt expense based on the percentage-of-receivables ap- proach at December 31, 2020?

Occidental Petroleum Corporation reported the following information in a recent annual report.

Occidental Petroleum Corporation

Consolidated Balance Sheets

(in millions)

$$\begin{array} {lrr} &\underline{\hspace{2pt}\text{Current Year}\hspace{2pt}}&\underline{\hspace{2pt}\text{Prior Year}\hspace{2pt}}\\ \text{Assets at December 31,}\\ \text{Current assets}\\\\ \hspace{10pt}\text{Cash and cash equivalents}\hspace{5pt} \ &\ \text{\$683}&\text{\$146}\\ \hspace{10pt}\text{Trade receivables, net of allowances}\hspace{5pt}& {\hspace{5pt}\text{804}}&{\hspace{5pt}\text{608}}\\ \hspace{10pt}\text{Receivables from joint ventures, partnerships, and other}\hspace{5pt} & \text{330}&\text{321}\\ \hspace{10pt}\text{Inventories}\hspace{5pt} & \text{510} &\text{491}\\ \hspace{10pt}\text{Prepaid expenses and other}\hspace{5pt}& \underline{\hspace{15pt}\text{147}}&\underline{\hspace{15pt}\text{307}}\\ \hspace{15pt}\text{Total current assets}\hspace{5pt} & \underline{\hspace{7pt}\text{2,474}}&\underline{\hspace{7pt}\text{1,873}}\\ \hspace{10pt}\text{Long-term receivables, net}\hspace{5pt}&\ \text{264}&\text{275}\\ \end{array}$$

Notes to Consolidated Financial Statements

Cash and Cash Equivalents. Cash equivalents consist of highly liquid investments. Cash equivalents totaled approximately $661 million and$116 million at current and prior year-ends, respectively.

Trade Receivables. Occidental has agreement to sell, under a revolving sale program, an undivided percentage ownership interest in a designated pool of non-interest-bearing receivables. Under this program, Occidental serves as the collection agent with respect to the receivables sold. An interest in new receivables is sold as collections are made from customers. The balance sold at current year-end was $360 million.

Instructions

a. What items other than coin and currency may be included in "cash"?

b. What items may be included in "cash equivalents"?

c. What are compensating balance arrangements, and how should they be reported in financial statements?

d. What are the possible differences between cash equivalents and short-term (temporary) investments?

e. Assuming that the sale agreement meets the criteria for sale accounting, cash proceeds were$345 million, the carrying value of the receivables sold was $360 million, and the fair value of the recourse liability was$15 million, what was the effect on income from the sale of receivables?

f. Briefly discuss the impact of the transaction in (e) on Occidental's liquidity.

What are some steps taken by both the FASB and IASB to move to fair value measurement for financial instruments? In what ways have some of the approaches differed?

Simms Company has significant amounts of trade accounts receivable. Simms uses the allowance method to estimate bad debts instead of the direct write-off method. During the year, some specific accounts were written off as uncollectible, and some that were previously written off as uncollectible were collected.

Instructions

a. What are the deficiencies of the direct write-off method?

b. Briefly describe the allowance method to estimate bad debts and the theoretical justification for its use?

c. How should Simms account for the collection of the specific accounts previously written off as uncollectible?

Under IFRS, cash and cash equivalents are reported:

a. the same as GAAP.

b. as separate items.

c. similar to GAAP, except for the reporting of bank overdrafts.

d. always as the first items in the current assets section.