19chapter 09_sm

Chapter 9

Accounting for Receivables

QUESTIONS

1. When customers use credit cards, the selling companies can avoid having to directly evaluate the credit standing of their customers. They also avoid the risk of bad debts and often are paid cash from the credit card company more quickly than if customers were granted credit directly. Moreover, they hope to increase sales, and net income, from the added convenience to buyers.

2. Revenues and expenses usually are not matched under the direct write-off method because the revenues recorded from the uncollectible accounts often appear on the income statement of one period while the bad debts expenses of those revenues appear on the income statement of a later period when the account(s) is known to be uncollectible.

3. The accounting constraint of materiality suggests that the requirements of accounting standards can be ignored if their effect on the financial statements is unimportant to their users’ business decisions.

4. Writing off a bad debt against the Allowance account does not reduce the estimated realizable value of a company’s accounts receivable because the write-off reduces the balances of both Accounts Receivable and the Allowance for Doubtful Accounts by equal amounts. This means the difference between them (called estimated realizable value) remains the same.

5. The adjusted balances of Bad Debts Expense and Allowance for Doubtful Accounts are virtually never equal because the expense amount reflects only the events of the current period, and the allowance is the accumulated result of events over a number of prior periods. The only way that they could be equal would be if write-offs during the prior period exactly equaled the beginning balance of the Allowance account.

6. Creditors prefer notes receivable to accounts receivable because the notes can be more easily converted into cash before they are due by discounting (or selling) them to a financial institution. Also, a note represents a clear written acknowledgment by the debtor of both the debt and its amount and terms.

7. Best Buy does not mention uncollectible accounts in its notes to its financial statements, and does not list its receivables as “net” of any allowance for uncollectibles, probably because uncollectible accounts are immaterial.

8. Circuit City uses the allowance method to account for doubtful accounts as evidenced by the receivables being reduced by an allowance on the balance sheet. The realizable value of accounts receivable as of February 28, 2007, is its net amount of $382,555,000.

9. Apple’s gross accounts receivable at September 30, 2006 are ($ millions) $1,252 + $52 = $1,304. Apple believes that the percent of accounts receivable that are uncollectible is $52/$1,304 = 4.0% (rounded)

©McGraw-Hill Companies, 2009

Solutions Manual, Chapter 9 525

QUICK STUDIES

Quick Study 9-1 (15 minutes)

1. Cash............................................................................... 15,360Credit Card Expense*................................................... 640 Sales......................................................................... 16,000 To record credit card sales less fees. *$16,000 x 4%

Cost of Goods Sold...................................................... 7,000 Merchandise Inventory........................................... 7,000 To record cost of sales.

2. Accounts Receivable—Credit Card Cos..................... 17,460Credit Card Expense*................................................... 540 Sales......................................................................... 18,000 To record credit card sales less fees. *$18,000 x 3%

Cost of Goods Sold...................................................... 7,800 Merchandise Inventory........................................... 7,800 To record cost of sales.

5 days laterCash............................................................................... 17,460

Accounts Receivable—Credit Card Cos............... 17,460To record cash receipts.


1.Oct. 31 Allowance for Doubtful Accounts........................... 750

Accounts Receivable—D. Elwick...................... 750 To write off account.

2.Dec. 9 Accounts Receivable—D. Elwick*............................ 400

Allowance for Doubtful Accounts..................... 400 To reinstate a written-off account.

*If there is a strong belief that the remaining $350 will be collected soon, then the full $750 balance can be reinstated.


Fundamental Accounting Principles, 19th Edition526

9 Cash........................................................................... 400 Accounts Receivable—D. Elwick...................... 400 To record payment on a receivable.




1.Dec. 31 Bad Debts Expense................................................ 875

Allowance for Doubtful Accounts................... 875To record estimate of uncollectibles. Desired balance in allowance = $95,000 x 1.5%= $1,425 cr.Adjustment required = $1,425 cr. - $550 cr. = $875

2. Desired balance in allowance = $1,425 (part 1)Adjustment required = $1,425 cr. + $150 dr. = $1,575


Dec. 31 Bad Debts Expense................................................ 1,750 Allowance for Doubtful Accounts................... 1,750 To record estimate of uncollectibles ($350,000 x 0.5%).


Aug. 2 Notes Receivable—D. Kissick.......................... 9,000Accounts Receivable—D. Kissick.............. 9,000

To record receipt of note on account.

Maturity date Oct. 31 Cash.................................................................... 9,135

Notes Receivable—D. Kissick.................... 9,000Interest Revenue.......................................... 135

To record cash received on note plus interest ($9,000 x 6% x 90/360).




Dec. 31 Interest Receivable............................................ 120Interest Revenue.......................................... 120

To record the year-end adjustment for interest earned ($24,000 x 6% x 30/360).

Maturity date Jan. 15 Cash.................................................................... 24,180

Interest Receivable...................................... 120Interest Revenue*........................................ 60Notes Receivable......................................... 24,000

To record cash received on note plus interest. * $24,000 x 6% x 15/360


Accounts receivable turnover =

= 6.2 times

Interpretation: An accounts receivable turnover of 6.2 implies that the company’s average accounts receivable balance is converted into cash 6.2 times per year. The 6.2 turnover is about 17% lower than the average turnover of 7.5 for its competitors. The company needs to identify the cause of this poor performance and rectify the situation to at least compete at the average level.



Net salesAverage accounts receivable

$910,600($138,500 + $153,400) / 2

EXERCISES

Exercise 9-1 (20 minutes)

Apr. 8 Cash........................................................................ 5,376Credit Card Expense*............................................ 224 Sales................................................................. 5,600 To record credit card sales less 4% fee. *($5,600 x .04)

8 Cost of Goods Sold......................................................4,138 Merchandise Inventory........................................... 4,138 To record cost of sales.

12 Accounts Receivable—Continental..................... 5,850Credit Card Expense*............................................ 150 Sales................................................................. 6,000 To record credit card sales less 2.5% fee. *($6,000 x .025)


20 Cash........................................................................ 5,850 Accounts Receivable—Continental................ 5,850 To record cash received on credit sales less fees.


Part 1

GENERAL LEDGER

Accounts Receivable SalesSales Returns and

AllowancesNov. 5 5,817 Nov. 21 268 Nov. 5 5,817 Nov. 21 268

10 1,774 10 1,77413 1,040 13 1,04030 3,698 30 3,698

Bal. 12,061



Exercise 9-2 (concluded)Part 1—continued

ACCOUNTS RECEIVABLE LEDGER

Ski Shop Welcome Enterprises Kit RoninNov. 5 5,817 Nov. 10 1,774 Nov. 13 1,04

0Nov. 21 268

30 3,698Bal. 9,515 Bal. 772

Part 2

Beachum CompanySchedule of Accounts Receivable

November 30, 2009

Ski Shop.................................................................................. $ 9,515Welcome Enterprises............................................................ 1,774Kit Ronin................................................................................. 772 Total........................................................................................ $12,061

Comparison: The total of the Schedule of Accounts Receivable ($12,061) is proved with the balance of the Accounts Receivable controlling T-account from Part 1 ($12,061).


Dec. 31 Bad Debts Expense..................................................... 5,148 Allowance for Doubtful Accounts........................ 5,148 To record estimated bad debts expense (.006 x $858,000).

Feb. 1 Allowance for Doubtful Accounts.............................. 429 Accounts Receivable—D. Fidel............................ 429 To write off an account.

June 5 Accounts Receivable—D. Fidel.................................. 429 Allowance for Doubtful Accounts........................ 429 To reinstate an account.

June 5 Cash.............................................................................. 429 Accounts Receivable—D. Fidel............................ 429



To record cash received on account.




a.Dec. 31 Bad Debts Expense*..................................................... 419

Allowance for Doubtful Accounts........................ 419 To record estimated bad debts expense.

*Unadjusted balance = $2,371 creditEstimated balance ($139,500 x .02) = 2,790 credit

Required adjustment = $ 419 credit

b.Dec. 31 Bad Debts Expense**....................................................3,277

Allowance for Doubtful Accounts........................ 3,277 To record estimated bad debts expense.

** Unadjusted balance = $ 487 debit Estimated balance ($139,500 x .02) = 2,790 credit

Required adjustment = $3,277 credit




a. Computation of the estimated balance of the allowance for uncollectibles:

Not due: $66,000 x 0.01 = $ 660 1 to 30: 15,000 x 0.02 = 30031 to 60: 6,000 x 0.04 = 24061 to 90: 3,000 x 0.07 = 210Over 90: 5,000 x 0.12 = 600

$2,010 credit

b.Dec. 31 Bad Debts Expense.............................................. 2,310

Allowance for Doubtful Accounts................ 2,310 To record estimated bad debts.*

* Unadjusted balance........................... $ 300 debit

Estimated balance............................. 2,010 credit

Required adjustment......................... $2,310 credit

c.Dec. 31 Bad Debts Expense.............................................. 1,810


* Unadjusted balance........................... $ 200 credit






a. Computation of the estimated balance of the allowance for uncollectibles:

$95,000 x 0.02 = $1,900 credit

b.Dec. 31 Bad Debts Expense.............................................. 2,200


* Unadjusted balance........................... $ 300 debit



c.Dec. 31 Bad Debts Expense.............................................. 1,700


* Unadjusted balance........................... $ 200 credit




Feb. 1 Allowance for Doubtful Accounts.............................. 950 Accounts Receivable—Laguna Co...................... 200 Accounts Receivable—Malibu Co........................ 750 To write off specific accounts.

June 5 Accounts Receivable—Laguna.................................. 200 Allowance for Doubtful Accounts........................ 200 To reinstate an account.

June 5 Cash.............................................................................. 200 Accounts Receivable—Laguna............................ 200 To record cash received on account.




a. Expense is 2% of credit sales

Dec. 31 Bad Debts Expense............................................... 6,000 Allowance for Doubtful Accounts.................. 6,000 To record estimated bad debts [$300,000 x .02].

b. Expense is 1% of total sales

Dec. 31 Bad Debts Expense............................................... 7,000 Allowance for Doubtful Accounts.................. 7,000 To record estimated bad debts [($300,000 + $400,000) x .01].

c. Allowance is 8% of accounts receivable

Dec. 31 Bad Debts Expense............................................... 6,200 Allowance for Doubtful Accounts.................. 6,200 To record estimated bad debts.*

* Unadjusted balance....................................................... $1,000 debit.

Estimated balance ($65,000 x 8%)................................ 5,200 credit

Required adjustment......................................................$6,200 credit




July 4 Accounts Receivable............................................ 7,160 Sales................................................................. 7,160 To record sales on credit.


9 Cash........................................................................ 19,285Factoring Fee Expense*........................................ 1,015 Accounts Receivable...................................... 20,300 To record sale of receivable. *($20,300 x .05)

17 Cash........................................................................ 3,938 Accounts Receivable...................................... 3,938 To record cash received on account.

27 Cash........................................................................ 11,000 Notes Payable.................................................. 11,000 To record cash from a loan.

Note to Financial StatementsAccounts receivable in the amount of $14,700 are pledged as security for a $11,000 note payable to Main Bank.




Nov. 1 Notes Receivable—C. Cruz................................ 15,000 Accounts Receivable—C. Cruz................... 15,000 To record receipt of note on account.

Dec. 31 Interest Receivable............................................. 175 Interest Revenue........................................... 175 To record interest earned [$15,000 x .07 x 60/360].

Apr. 30 Cash..................................................................... 15,525 Notes Receivable—C. Cruz.......................... 15,000 Interest Revenue........................................... 350 Interest Receivable....................................... 175 To record cash received on note plus interest earned [$15,000 x .07 x 120/360].


Mar. 21 Notes Receivable—J. Penn.................................. 17,200 Accounts Receivable—J. Penn...................... 17,200 To record receipt of note on account.

Sept. 17 Accounts Receivable—J. Penn............................ 17,802 Interest Revenue............................................. 602 Notes Receivable—J. Penn............................ 17,200 To record note dishonored plus interest earned [$17,200 x .07 x 180/360 = $602].

Dec. 31 Allowance for Doubtful Accounts........................ 17,802 Accounts Receivable—J. Penn...................... 17,802 To write off an account.




2008Dec. 13 Notes Receivable—A. Sumera.............................14,000

Accounts Receivable—A. Sumera................. 14,000 To record receipt of note on account.

31 Interest Receivable................................................ 63 Interest Revenue............................................. 63 To record interest earned [$14,000 x .09 x 18/360].

2009Feb. 11 Cash........................................................................14,210

Interest Revenue ............................................ 147 Interest Receivable.......................................... 63 Notes Receivable—A. Sumera....................... 14,000 To record cash received on note plus interest. [$14,000 x .09 x (60-18)/360=$147]

Mar. 3 Notes Receivable—Kudak Co..............................10,000 Accounts Receivable—Kudak Co.................. 10,000 To record receipt of note on account.

17 Notes Receivable—R. Burgess............................ 9,000 Accounts Receivable—R. Burgess............... 9,000 To record receipt of note on account.

Apr. 16 Accounts Receivable—R. Burgess..................... 9,060 Interest Revenue............................................. 60 Notes Receivable—R. Burgess...................... 9,000 To record receivable for dishonored note plus interest [$9,000 x .08 x 30/360].

May 1 Allowance for Doubtful Accounts........................ 9,060 Accounts Receivable—R. Burgess............... 9,060 To write off account.

June 1 Cash........................................................................10,225 Interest Revenue............................................. 225 Notes Receivable—Kudak Co........................ 10,000 To record cash received on note with interest [$10,000 x .09 x 90/360].




2008 accounts receivable turnover:

= 5.0 times

2009 accounts receivable turnover:

= 6.3 times

Analysis: Lucilla Company turned over its accounts receivable 1.3 (5.0 – 6.3) times more in 2009 than in 2008. This can indicate that the company has tightened its credit policy or has improved its collection efforts. However, relative to competitors’ turnover of 7, Lucilla is performing worse than average.



$193,000($37,200 + $40,500)/2

$262,000($40,500 + $42,700)/2

PROBLEM SET AProblem 9-1A (30 minutes)

June 4 Accounts Receivable—A. Bullaro............................ 700 Sales..................................................................... 700 To record sales on credit.

4 Cost of Goods Sold......................................................... 220 Merchandise Inventory.............................................. 220 To record cost of sales.

5 Cash........................................................................... 8,106Credit card expense*................................................. 294 Sales..................................................................... 8,400 To record credit card sales less fee. *($8,400 x .035)

5 Cost of Goods Sold.........................................................4,300 Merchandise Inventory.............................................. 4,300 To record cost of sales.

6 Accounts Receivable—Access................................ 5,850Credit card expense*................................................. 150 Sales..................................................................... 6,000 To record credit card sales less fee. *($6,000 x .025)


8 Accounts Receivable—Access................................ 4,368Credit card expense*................................................. 112 Sales..................................................................... 4,480 To record credit card sales less fee. *($4,480 x .025)


10 No journal entry required.

13 Allowance for Doubtful Accounts............................ 467 Accounts Receivable—T. Wanek....................... 467 To write off account due.

17 Cash........................................................................... 10,218 Accounts Receivable—Access.......................... 10,218



To record cash from credit card co. ($5,850 + $4,368).

18 Cash........................................................................... 686Sales Discounts*....................................................... 14 Accounts Receivable—A. Bullaro...................... 700 To record cash received less discount. *($700 x .02)



Problem 9-2A (35 minutes)

2008a. Accounts Receivable.......................................... 1,347,700

Sales............................................................... 1,347,700 To record sales on account.

Cost of Goods Sold......................................................982,500 Merchandise Inventory........................................... 982,500 To record cost of sales.

b. Allowance for Doubtful Accounts..................... 20,676 Accounts Receivable.................................... 20,676 To write off accounts.

c. Cash..................................................................... 671,100 Accounts Receivable.................................... 671,100 To record cash received on account.

d. Bad Debts Expense............................................ 29,203 Allowance for Doubtful Accounts .............. 29,203 To record estimated bad debts.*

*Beginning receivables........................ $ 0Credit sales......................................... 1,347,700Collections.......................................... (671,100)Write-offs............................................. (20,676 )Ending receivables............................. 655,924

Percent uncollectible......................... x 1.3% Required ending allowance............... 8,527** Cr.

Unadjusted balance........................... 20,676 Dr.Adjustment to the allowance............. $ 29,203 Cr.

** rounded to nearest dollar



Problem 9-2A (Concluded)

2009e. Accounts Receivable............................................... 1,517,800

Sales.................................................................... 1,517,800 To record sales on account.

Cost of Goods Sold......................................................1,302,200 Merchandise Inventory........................................... 1,302,200 To record cost of sales.

f. Allowance for Doubtful Accounts.......................... 32,624 Accounts Receivable......................................... 32,624 To record write-off of accounts.

g. Cash.......................................................................... 1,118,100 Accounts Receivable......................................... 1,118,100 To record cash received on account.

h. Bad Debts Expense................................................. 37,396 Allowance for Doubtful Accounts.................... 37,396 To record estimated bad debts.*

*Beginning receivables............................. $ 655,924Credit sales............................................... 1,517,800Collections................................................ (1,118,100)Write-offs................................................... (32,624 )Ending receivables................................... 1,023,000

Percent uncollectible............................... x 1.3% Required ending allowance..................... 13,299 Cr.Unadjusted balance Beginning (Cr.)....................................... $ 8,527 Write-offs (Dr.)........................................ 32,624 24,097 Dr.Adjustment to the allowance.................. $ 37,396 Cr.




Part 1

a. Expense is 1.5% of credit sales

Dec. 31 Bad Debts Expense...............................................55,800 Allowance for Doubtful Accounts.................. 55,800 To record estimated bad debts [$3,720,000 x .015].

b. Expense is 1% of total sales

Dec. 31 Bad Debts Expense...............................................59,047 Allowance for Doubtful Accounts.................. 59,047 To record estimated bad debts [($2,184,700 + $3,720,000) x .01].

c. Allowance is 3% of accounts receivable

Dec. 31 Bad Debts Expense...............................................62,855 Allowance for Doubtful Accounts.................. 62,855 To record estimated bad debts.*

* Unadjusted balance.......................................................$29,030 debit

Estimated balance ($1,127,500 x 3%)........................... 33,825 credit

Required adjustment......................................................$62,855 credit

Part 2 Current assetsAccounts receivable...........................................$1,127,500Less allowance for doubtful accounts............. (26,770 )* $1,100,730

Or: Accounts receivable (net of $26,770* uncollectible accounts).................................... $1,100,730

* Adjustment to the allowance......................................$55,800 credit Unadjusted allowance balance.................................. 29,030 debit

Adjusted balance........................................................$26,770 credit

Part 3 Current assetsAccounts receivable...........................................$1,127,500Less allowance for doubtful accts.................... (33,825 )** $1,093,675

Or: Accounts receivable (net of $33,825** uncollectible accounts).................................... $1,093,675

** See computations in Part 1c.




Part 1

Calculation of the estimated balance of the allowance for uncollectibles

Not due: $784,000 x .0125 = $ 9,800 1 to 30: 380,200 x .0200 = 7,60431 to 60: 81,800 x .0650 = 5,31761 to 90: 52,000 x .3275 = 17,030Over 90: 13,000 x .6800 = 8,840

$48,591 credit

Part 2

Dec. 31 Bad Debts Expense.............................................. 25,791 Allowance for Doubtful Accounts................ 25,791 To record estimated bad debts.*

* Unadjusted balance........................... $22,800 credit



Part 3

Writing off the account receivable in 2010 will not directly affect year 2010 net income. The entry to write off an account involves a debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable, both of which are balance sheet accounts. Net income is affected only by the annual recognition of the estimated bad debts expense, which is journalized as an adjusting entry. Net income for Year 2009 (the year of the original sale) included an estimated expense for write-offs such as this one.



Problem 9-5A (75 minutes)Part 1

2008Dec. 16 Notes Receivable—A. Bakko.............................. 14,400

Accounts Receivable—A. Bakko.................. 14,400 To record note received on account.

31 Interest Receivable.............................................. 48 Interest Revenue............................................ 48 To record interest earned [$14,400 x .08 x 15/360 = $48].

2009Feb. 14 Cash...................................................................... 14,592

Interest Revenue*........................................... 144 Interest Receivable........................................ 48 Notes Receivable—A. Bakko........................ 14,400 To record cash received on note with interest. *[$14,400 x 0.08 x 45/360 = $144]

Mar. 2 Notes Receivable—Mayday Co........................... 8,000 Accounts Receivable—Mayday Co.............. 8,000 To record note received on account.

17 Notes Receivable—C. Kadin............................... 2,200 Accounts Receivable—C. Kadin................... 2,200 To record note received on account.

Apr. 16 Accounts Receivable—C. Kadin......................... 2,211 Interest Revenue............................................ 11 Notes Receivable—C. Kadin......................... 2,200 To record receivable for dishonored note plus interest [$2,200 x 0.06 x 30/360= $11].

June 2 Accounts Receivable—Mayday Co.................... 8,180 Interest Revenue*........................................... 180 Notes Receivable—Mayday Co..................... 8,000

To record receivable for dishonored note [$8,000 x 0.09 x 90/360 = $180].



Problem 9-5A (Concluded)

July 17 Cash...................................................................... 8,274 Interest Revenue*........................................... 94 Accounts Receivable—Mayday Co.............. 8,180

To record cash received on account plus additional interest.*[$8,180 x .09 x 46/360= $94 (rounded)]

Aug. 7 Notes Receivable—Trenton Co.......................... 8,400 Accounts Receivable—Trenton Co. ............ 8,400 To record note received on account.

Sept. 3 Notes Receivable—C. Marin............................... 3,335 Accounts Receivable—C. Marin................... 3,335

To record note received on account.

Nov. 2 Cash...................................................................... 3,385 Interest Revenue*........................................... 50 Notes Receivable—C. Marin......................... 3,335

To record cash received on note plus interest*($3,335 x 0.09 x 60/360 = $50) (rounded).

5 Cash...................................................................... 8,652 Interest Revenue*........................................... 252 Notes Receivable—Trenton Co. .................. 8,400 To record cash received on note plus Interest. *($8,400 x .12 x 90/360 = $252)

Dec. 1 Allowance for Doubtful Accounts...................... 2,211 Accounts Receivable—C. Kadin................... 2,211 To record write-off of account.

Part 2

Analysis Component: When a business pledges its receivables as security for a loan and the loan is still outstanding at period-end, the business must disclose this information in notes to its financial statements. This is a requirement because the business has committed a portion of its assets to cover a specific portion of its liabilities, which means that if the business dishonors its obligations under the loan, the creditor can claim the amount of receivables identified in the pledge as collateral to cover the loan. This arrangement must be disclosed to satisfy the full-disclosure principle.



19chapter 09_sm

Documents