Current and Long-Term Assets

Chapter 7&8

John J. Wild
Financial Accounting: Information for
Decisions
9th Edition

© 2019 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted
without the prior written consent of McGraw-Hill Education.
 Current assets (CH 7)
• assets that are expected to be converted into cash within one year or
within the operating cycle of an entity
• Cash and Cash Equivalents
• A/R
• Allowance for D.A (-)
• N/R
• Inventory
• Prepaid Rent
• Prepaid Insurance
• Marketable Securities (Short-term Investments)
• Other Current Assets

Chapter 7 2
 Why is Current Asset Management
Important?
• Liquidity (solvency)
• Working Capital management

Net Working Capital = Current A – Current L.

Chapter 7 3
 Cash and Cash Equivalents
• Cash
– Petty Cash
• Cash Equivalents
– Investments that are readily convertible to cash with
insignificant risk and with a maturity less than or equal
to 90 days- e.g. Treasury Bills, term-deposits with less
than 90 days maturity

Chapter 7 4
 Receivables
• Recognized according to the revenue recognition principle
• Classification
– Short-term versus long-term
• Valued at Net Realizable (Recoverable) Value (NRV)
• Trade Receivables
– Accounts Receivable
– Notes Receivable
• Other Receivables
– Receivables from employees
– Tax receivables

Chapter 7 5
 Sales on Credit
On July 1, TechCom had a credit sale of $950 to
CompStore and a collection of $720 from RDA
Electronics from a prior credit sale.

Learning Objective C1: Describe accounts receivable and how they

occur and are recorded.
© McGraw-Hill Education 6
 Valuation of Receivables-IFRS
• Uncollectability risk
• Net Realizable (Net Recoverable) Value
• Assessment of impairment and determination of impairment loss, if
any:
• Indication of financial difficulty of a customer
• A high probability of bankruptcy of a customer
• Delays in the payment of the customer
• Previous requests for extension of maturity
• Economic and industrial financial difficulties

Chapter 7 7
 Direct Write-Off Method
Some customers may not pay their account.
Uncollectible amounts are referred to as bad
debts.

There are two methods of

accounting for bad debts:
• Direct Write-Off Method
• Allowance Method

Learning Objective P1: Apply the direct write-off method to accounts

receivable.
© McGraw-Hill Education 8
 Direct Write-Off Method – Recording and Writing
Off Bad Debts

TechCom determines on January 23 that it cannot

collect $520 owed to it by its customer J. Kent.

Notice that the specific customer is noted in the

transaction so we can make the proper entry in the
customer’s Accounts Receivable subsidiary ledger.
Learning Objective P1: Apply the direct write-off method to accounts
receivable.
© McGraw-Hill Education 9
 Direct Write-Off Method –Recovering a Bad
Debt
On March 11, J. Kent was able to make full
payment to TechCom for the amount
previously written-off.

Learning Objective P1: Apply the direct write-off method to accounts

receivable.
© McGraw-Hill Education 10
 NEED-TO-KNOW 7-2
Example: A retailer applies the direct write-off method in accounting for uncollectible
accounts. Prepare journal entries to record the following selected transactions.
Feb. 14 The retailer determines that it cannot collect $400 of its accounts
receivable from a customer named ZZZ Company.
Apr. 1 ZZZ Company unexpectedly pays its account in full to the retailer, which
then records its recovery of this bad debt.

Date General Journal Debit Credit

Feb. 14 Bad Debts Expense 400
Accounts Receivable - ZZZ Co. 400
Apr. 1 Accounts Receivable - ZZZ Co. 400
Bad Debts Expense 400
Apr. 1 Cash 400
Accounts Receivable - ZZZ Co. 400

© McGraw-Hill Education 11
 Allowance Method
At the end of each period, estimate total bad debts
expected to be realized from that period’s sales.

Two advantages to the allowance method:

1. It records estimated bad debts expense in the
period when the related sales are recorded.
2. It reports accounts receivable on the balance
sheet at the estimated amount of cash to be
collected.

Learning Objective P2: Apply the allowance method to accounts

receivable.
© McGraw-Hill Education 12
 Allowance Method -
Recording Bad Debts Expense

TechCom had credit sales of $300,000 during its first year of

operations. At the end of the first year, $20,000 of credit sales
remained uncollected. Based on the experience of similar businesses,
TechCom estimated that $1,500 of its accounts receivable would be
uncollectible. The estimated uncollectible account includes Kent’s
receivable ($520).

Learning Objective P2: Apply the allowance method to accounts

receivable.
© McGraw-Hill Education 13
 Balance Sheet Presentation

© McGraw-Hill Education 14
 Allowance Method – Recovering a Bad Debt

To help restore credit standing, a customer

sometimes pays all or part of the amount owed on an
account even after it has been written off.
On March 11, Kent pays in full his $520 account
previously written off.

© McGraw-Hill Education
One more entry to go! 15
Allowance Method – Writing Off a Bad Debt
TechCom has determined that J. Kent’s $520
account is uncollectible.

Learning Objective P2: Apply the allowance method to accounts

receivable.
© McGraw-Hill Education 16
 NEED-TO-KNOW
A retailer applies the allowance 7-3 SOLUTION
method in accounting for uncollectible accounts. Prepare
journal entries to record the following selected transactions.
12/31/20X1 The retailer estimates $3,000 of its accounts receivable are
uncollectible.
2/14/20X2 The retailer determines that it cannot collect $400 of its accounts
receivable from a customer named ZZZ Company.
4/1/20X2 ZZZ Company unexpectedly pays its account in full to the retailer, which
then records its recovery of this bad debt.
Date General Journal Debit Credit

12/31/20X1 Bad Debts Expense 3,000

Allowance for Doubtful Accounts 3,000

2/14/20X2 Allowance for Doubtful Accounts 400

Accounts Receivable - ZZZ Co. 400

4/1/20X2 Accounts Receivable - ZZZ Co. 400

Allowance for Doubtful Accounts 400

4/1/20X2 Cash 400

Accounts Receivable - ZZZ Co. 400

4/1/20X2 Allowance for Doubtful Accounts 400

Bad Debts Expense 400
- ZZZ Co.
© McGraw-Hill Education 17
 Other Current Assets

• Value Added Taxes

• Prepaid Expenses (Prepaid Rent, Prepaid
Insurance)
• Other

Chapter 7 18
 Common Financial Ratios Used in Management of
Current Assets

Current Assets
1. Current Ratio = Current Liabilities

(Cash and Cash Eqvt  Accounts and Notes Rec.  Short term Security Investment s
Quick Ratio 
2. Current Liabilitie s

Net Sales
3a.Accounts Receivable Turnover = Average Accounts Receivable

365
3b. Collection Period=
Accounts Receivable Turnover

Chapter 7 19
 Inventory Analysis- Ratios

4. Gross Profit Ratio: Gross Profit / Net Sales

5a. Inventory turnover Ratio: measures the number of times

on average the inventory is sold during the period.
Cost of Goods Sold
Inventory =
Turnover Ratio Average Inventory

5b. Days in inventory: measures the average number of

days inventory is held.
Days in Year (365)
Days in Inventory =
Inventory Turnover
6-20
EXERCISES FOR CHAPTER 7
 Example 1:

Net Sales on account 800.000

Beginning Accounts Receivable 350.000
Beginning Balance of Allowance 3.250
for Doubtful Accounts
During the current year, management estimated that net recoverable amount of
accounts receivable is TL 631.050.

Required:

1. Determine the balance of Accounts Receivable and the Allowance for Doubtful
Accounts as of 31 December 2014.
Accounts Receivable 1,150,000
Less: Allowance For Doubtful Accounts (518,950)
Accounts Receivable, net 631,050

6-22
2. Determine the Bad Debt Expense for the current year.
Allowance For Doubtful. Accounts
3.250
515.700
518.950

If there is a beg. balance for the “Allow. For Doubtful Accounts” account, the
Bad Debt Expense will be:

Bad Debt Expense = Ending Balnce of Allow. For Doubtful Account – Beg.
Balance of Allow. For Doubtful Account

Bad Debt Expense = 518,950-3,250 =515,700

6-23
3. Compute receivables turnover rate and average collection period

A/R Turnover Rate = 800,000/Average A/R

Average A/R = (Beg. Net A/R +End. Net A/R)/2

Beg. Net A/R = 350,000 – 3,250 = 346,750

End. Net A/R = 631,050
Average A/R = (346,750+631,050)/2 =488,050

A/R Turnover Rate = 800,000/488,050 =1,64 times

Average Days To collect Receiavable: 365/1,64 =222 days.

6-24
Example 2: As of 1 January 2018 Biber Company had accounts receivable of TL 480.000 and the balance of
Allowance for Uncollectible Accounts was TL21.590 credit. During the year the following transactions
occurred.

Credit Sales 1,347,000

Sales Returns and Allowances 37,500
Collections from Customers 869,000

Management estimated that net recoverable amount of accounts receivable is TL

874.684,5. All sales are on account

Required:
1. Determine the Bad Debt Expense for the year ended on 31 December 2018
2. Determine the balance of Accounts Receivable and the Allowance for
Uncollectible Accounts as of 31 December 2018.
3. Compute receivables turnover rate and average collection period

6-25
 Accounts Receivable
480.000 869.000
1.347.000 37.500

920.500
Bad Debt
Allowance for Doubtful Expense
21.590
24.225,50
45.815,50

A/R,net 920.500-874.684,5
45.815,50

6-26
 Net Sales 1.347.000-37.500
1.309.500

Accounts Rece.(2017) =480.000-21.590

458.410

Accounts Rece.(2018) =920.500-45.815,5

874.684,50

Average Acc. Rec =(874.684,5+458.410)/2

666.547,25

Turnover 1,96 185,79 days

6-27
 Chapter 8
Non-current assets
• assets that are expected to be used for at least more than a year or the operating cycle of an
entity

• A/R
• N/R
• Marketable Securities (long-term investments)
• Property, Plant &Equipment (PPE)
– Land
– Building
– Mac&Eq
– F&F
– MV
– Acc. Dep.
• Intangible Assets (long-term rights)
– Franchises
– Patents
– Copyrights
– Trademarks
Chapter 7 28
• Other Non-Current Assets
 Cost Determination

Learning Objective C1: Explain the cost principle for computing the
cost of plant assets.
© McGraw-Hill Education 29
 NEED-TO-KNOW 8-1
Example: Compute the amount recorded as the cost of a new machine given the following
payments related to its purchase: gross purchase price, $700,000; sales tax, $49,000;
purchase discount taken, $21,000; freight cost—terms FOB shipping point, $3,500; normal
assembly costs, $3,000; cost of necessary machine platform, $2,500; cost of parts used in
maintaining machine, $4,200.

Gross purchase price $700,000

Sales tax 49,000
Purchase discount taken (21,000)
Freight cost (FOB shipping point) 3,500
Normal assembly costs 3,000
Necessary machine platform 2,500
0
Costs of parts used in maintaining machine
Cost of new machine $737,000

Learning Objective P1: Compute and record depreciation using the

straight-line, units-of-production, and declining-balance methods.
© McGraw-Hill Education 30
 Depreciation
• estimate the useful life of the asset
• estimate the residual (salvage) value
• select the appropriate depreciation method
– several alternative methods of computing depreciation
– can use different methods for different types of assets
– consistency
aim is to allocate the cost of the asset over its useful
life

Chapter 10 Mugan-Akman 2012 31

 Depreciation Methods
 TIME BASED METHODS
• Straight-line method
• Declining Balance (double declining) method
 PRODUCTION BASED METHODS
• Units of Production

Chapter 10 Mugan-Akman 2012 32

 Straight-line Method
Depreciation Expense =
(Cost-Salvage Value i.e. depreciable amount)
Useful Life(in years or periods)
 same every period
 reflected through the adjusting entries

Chapter 10 Mugan-Akman 2012 33

 Straight-line -example
Cost of the packaging machine: TL 44.200
Salvage value : TL 1.700
useful life: 5 years
Depreciation method: straight line rate = 1/5 = 20% per year

Depreciable Amount = 44.200 - 1.700 = TL 42.500

Annual Depreciation Expense = 44.200 - 1.700 = TL 8.500

5
Or TL 42.500 x 20% = TL 8.500
Date Account Title and Description Debit Credit
31-Dec Depreciation Expense 8500
Accum. Depreciation-Packaging 8500
Machine
Adjusting entry for depreciation of the
packaging machine

Chapter 10 Mugan-Akman 2012 34

 Depreciation Schedule-St.Line

Net Book Value = 44.200- 8.500 (1)

Net Book Value = 44.200- 17.000 (2)
Net Book Value = 44.200- 25.500 (3)

Sold the machinery at 19.000TL in 2016.

Gain/Loss?
Compare S/P with the NBV

Net10Book
Chapter Value = 44.200- 25.500 = 18.700
Mugan-Akman 2012vs 19.000 = 300 Gain on sale of35
 Declining Balance Method

 Depreciation rate is constant from year to

year but the depreciable amount declines
every year
 Depreciable Amount = Book Value

Chapter 10 Mugan-Akman 2012 36

Declining Balance Method-example
Cost of the packaging machine: TL 44.200
Salvage value : TL 1.700
useful life: 5 years
Depreciation method: straight line rate = 1/5 = 20% per year
double declining = 2 x 20%= 40% per year

1st year depreciation expense: TL 44.200 x 40% = TL 17.680

Date Account Title and Description Debit Credit

31-Dec Depreciation Expense 17,680
Accum. Depreciation-Packaging 17,680
Machine
Adjusting entry for depreciation of the
packaging machine

Chapter 10 Mugan-Akman 2012 37

 Depreciation Schedule-Double Declining

Chapter 10 Mugan-Akman 2012 38

 Depreciation Schedule-Double Declining

Chapter 10 Mugan-Akman 2012 39

 Depreciation Schedule-Double Declining

Chapter 10 Mugan-Akman 2012 40

 NEED-TO-KNOW
Part 1. A machine 8-2
costing $22,000 SOLUTION:
with Straight-Line
a five-year life and an estimated $2,000
salvage value is installed on January 1.

Year Straight-Line Dep. Expense

Year 1 $4,000
Year 2 4,000
Year 3 4,000
Year 4 4,000
Year 5 4,000
Total $20,000

Straight-Line
Cost − Salvage $22,000 − $2,000 $4,000 per year
EUL (years) 5 years

© McGraw-Hill Education 41
 NEED-TO-KNOW 8-2 SOLUTION: Double-Declining Balance Part 2
Double-Declining-Balance

Beginning Book DDB Depreciation Accumulated Book

Value Rate Expense Depreciation Value

Year 1 $22,000 40% $8,800 $8,800 $13,200

Year 2 13,200 40% 5,280 14,080 7,920
Year 3 7,920 40% 3,168 17,248 4,752
Year 4 4,752 40% 1,901 19,149 2,851
Year 5 2,851 40% 851 20,000 2,000
Total $20,000 $20,000

Year Double-Declining-Balance Depreciation Expense

Year 1 $8,800
Year 2 5,280
Year 3 3,168
Year 4 1,901
Year 5 851
Total $20,000

© McGraw-Hill Education 42
 Disposal of Plant Assets
The packaging machine that was purchased in 1 January 2014 for
TL 44.200 with a salvage value of TL 1.700 is sold for TL 7.600 on
30 June 2018.

Chapter 10 Mugan-Akman 2012 43

 Asset Ratios

Provides information about a company’s

efficiency in using its assets.

ROA = Net Income / Total Assets

Provides information about using its assets

to generate income.

© McGraw-Hill Education 44