chapter 8 receivables · cash 245,427 accounts receivable ... ($243,600 × 30/360 × 9% = $1,827)....

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1. Receivables are normally classified as (1) accounts receivable, (2) notes receivable, or(3) other receivables.

2. Dan’s Hardware should use the direct write-off method because it is a small business that has a relatively small number and volume of accounts receivable.

3. Contra asset, credit balance

4. The accounts receivable and provision for doubtful accounts may be reported at a net amount of $661,500 ($673,400 – $11,900) in the Current Assets section of the statement offinancial position. In this case, the amount of the provision for doubtful accounts should be shown separately in a note to the financial statements or in parentheses on the statement of financial position. Alternatively, the accounts receivable may be shown at the gross amount of $673,400 less the amount of the provision for doubtful accounts of $11,900, thus yielding net accounts receivable of $661,500.

5. (1) The percentage rate used is excessive in relationship to the accounts written off asuncollectible; hence, the balance in the allowance is excessive.

(2) A substantial volume of old uncollectible accounts is still being carried in the accounts receivable account.

6. An estimate based on analysis of receivables provides the most accurate estimate of the current net realizable value.

7. a. Sailfish Companyb. Notes Receivable

8. The interest will amount to $5,100 ($85,000 × 6%) only if the note is payable one year fromthe date it was created. The usual practice is to state the interest rate in terms of an annualrate, rather than in terms of the period covered by the note.

9. Debit Accounts Receivable for $243,600Credit Notes Receivable for $240,000Credit Interest Revenue for $3,600

10. Cash 245,427Accounts Receivable [$240,000 + ($240,000 × 6% × 90/360)] 243,600Interest Revenue 1,827

($243,600 × 30/360 × 9% = $1,827).

CHAPTER 8RECEIVABLES

DISCUSSION QUESTIONS

CHAPTER 8 Receivables


11 Trade receivable is two one example of items in the loans and receivables category. From the perspective of accounting treatment, the IFRS for loans and receivables follows the nature of debt securities. Under this framework, IAS 39 requires loans and receivables to be measured initially at fair value. Valuation changesafter the initial purchase are accounted for at amortized cost using the effective interest method.

12 Classification for measurement is a foundation for accounting standards. Based on this principle and theissues from IAS 39, IFRS 9 Financial Instruments classifies financial assets by measurement methods. Inparticular, IFRS 9 classifies financial assets into two categories on the basis of measurement methods—amortized cost and fair value. This classification by itself refers to the measurement method, further clarifying the measurement methods for financial assets.

13 The primary difference between IAS 39 and IFRS 9 is in the classfication of financial instruments. The classification under IAS 39 is not based wholly on the measurement methods. Instead, the classification mixes a firm’s business models of financial instruments and measurement methods, creating confusions to accounting for financial instruments. In contrast, IFRS 9 classifies financial instruments by mmeasurement methods. In particular, IFRS 9 classifies financial instruments into the categories of fair value and amortized cost method.

14 IAS 39 classifies financial instruments into the four categories: (1) Financial assets at fair value through profit or loss (FVTPL), (2) Available-for-sale financial assets (AFS), (3) Loans andreceivables (LR), and (4) Held-to-maturity investments (HTM).IFRS 9 Financial Instruments classifies financial assets by measurement methods. Inparticular, IFRS 9 classifies financial assets into two categories on the basis of measurement methods—amortized cost and fair value. This classification by itself refers to the measurement method, further clarifying the measurement methods for financial assets.

15 According to IAS 39 and IFRS 9, loans and receivables are measured at amortized cost using effectiveinterest rate method. The effective interest rate is the implied discount rate under which the discounted valueof estimated future cash payments or receipts is equal to the net carrying amount.



Ex. 8–1Accounts receivable from the U.S. government are significantly different from receivables from commercial aircraft carriers such as Delta and United. Thus,Boeing should report each type of receivable separately. In its filing with theSecurities and Exchange Commission, Boeing reports the receivables togetheron the statement of financial position, but discloses each receivable separately in a note to the financial statements.

Ex. 8–2a. MGM Resorts International: 22.6% ($93,760,000 ÷ $415,654,000)

b. Johnson & Johnson: 3.4% ($340,000,000 ÷ $10,114,000,000)

c. Casino operations experience greater bad debt risk, since it is difficult to control the creditworthiness of customers entering the casino. In addition, individuals who may have adequate creditworthiness could overextend themselves and lose more than they can afford if they get caught up in the excitement of gambling. In contrast, Johnson & Johnson’s customers are primarily other businesses such as grocery store chains.

Ex. 8–3

Jan. 30 Accounts Receivable—Dr. Cindy Mott 85,000Sales 85,000

30 Cost of Goods sold 50,000Inventory 50,000

June 3 Cash 48,000Bad Debt Expense 37,000

Accounts Receivable—Dr. Cindy Mott 85,000

Nov. 27 Accounts Receivable—Dr. Cindy Mott 37,000Bad Debt Expense 37,000

27 Cash 37,000Accounts Receivable—Dr. Cindy Mott 37,000

EXERCISES



Ex. 8–4

a. Bad Debt Expense 11,750Accounts Receivable—Wil Treadwell 11,750

b. Allowance for Doubtful Accounts 11,750Accounts Receivable—Wil Treadwell 11,750

Ex. 8–5a. $501,000 ($66,800,000 × 0.0075) c. $334,000 ($66,800,000 × 0.0050)b. $493,000 ($475,000 + $18,000) d. $350,000 ($360,000 – $10,000)

Ex. 8–6

Avalanche AutoBales AutoDerby Auto RepairLucky’s Auto RepairPit Stop AutoReliable Auto RepairTrident AutoValley Repair & Tow

Account Due DateAugust 8October 11

108 (16 + 31 + 30 + 31)

June 23September 2September 19July 15

68 (7 + 30 + 31)August 24May 17

Number of Days Past Due84 (23 + 30 + 31)

167 (14 + 30 + 31 + 31 + 30 +

20 (31 – 11)130 (7 + 31 + 31 + 30 + 31)59 (28 + 31)42 (11 + 31)



Ex. 8–7a.

CustomerColor World IndustriesHawks CompanyOsler Inc. Sather Sales CompanyWisdom Company

b.

Not Past OverCustomer Balance Due 1–30 31–60 61–90 90Allied Industries Inc. 3,000 3,000Archer Company 4,500 4,500

Zussman Company 5,000 5,000Subtotals 750,000 480,000 160,000 75,000 28,000 7,000Color World Industries 33,000 33,000Hawks Company 15,000 15,000Osler Inc. 21,000 21,000Sather Sales Company 8,000 8,000Wisdom Company 6,500 6,500Totals 833,500 488,000 166,500 96,000 43,000 40,000

Ex. 8–8

Not Past OverBalance Due 1–30 31–60 61–90 90

Total receivables 833,500 488,000 166,500 96,000 43,000 40,000Percentage uncollectible 2% 6% 12% 30% 75%Provision for doubtful

accounts 74,170 9,760 9,990 11,520 12,900 30,000

Days Past Due

Days Past Due

Due DateMarch 13

Number of Days Past Due171 days (18 + 30 + 31 + 30 + 31 + 31)

June 29July 8

Aging of Receivables ScheduleAugust 31

63 days (1 + 31 + 31)54 days (23 + 31)

September 6August 25

Not past due6 days (31 – 25)



Ex. 8–9

Aug. 31 Bad Debt Expense 67,820Allowance for Doubtful Accounts 67,820

Uncollectible accounts estimate($74,170 – $6,350).

Ex. 8–10

Balance Percent AmountNot past due $ 740,000 0.5% $ 3,7001–30 days past due 390,000 2% 7,800 31–60 days past due 85,000 4% 3,40061–90 days past due 28,000 14% 3,92091–180 days past due 42,000 32% 13,440Over 180 days past due 15,000 80% 12,000

Total $1,300,000 $44,260

Ex. 8–11

2014 Dec. 31 Bad Debt Expense 47,635

Allowance for Doubtful Accounts 47,635Uncollectible accounts estimate

($44,260 + $3,375).

Estimated

Age IntervalUncollectible Accounts



Ex. 8–12

a. Apr. 13 Bad Debt Expense 8,450Accounts Receivable—Dean Sheppard 8,450

May 15 Cash 500Bad Debt Expense 6,600

Accounts Receivable—Dan Pyle 7,100

July 27 Accounts Receivable—Dean Sheppard 8,450Bad Debt Expense 8,450

27 Cash 8,450Accounts Receivable—Dean Sheppard 8,450

Dec. 31 Bad Debt Expense 13,510Accounts Receivable—Paul Chapman 2,225Accounts Receivable—Duane DeRosa 3,550Accounts Receivable—Teresa Galloway 4,770Accounts Receivable—Ernie Klatt 1,275Accounts Receivable—Marty Richey 1,690

31 No entry



Ex. 8–12 (Concluded)

b. Apr. 13 Allowance for Doubtful Accounts 8,450Accounts Receivable—Dean Sheppard 8,450

May 15 Cash 500Allowance for Doubtful Accounts 6,600

Accounts Receivable—Dan Pyle 7,100

July 27 Accounts Receivable—Dean Sheppard 8,450Allowance for Doubtful Accounts 8,450

27 Cash 8,450Accounts Receivable—Dean Sheppard 8,450

Dec. 31 Allowance for Doubtful Accounts 13,510Accounts Receivable—Paul Chapman 2,225Accounts Receivable—Duane DeRosa 3,550Accounts Receivable—Teresa Galloway 4,770Accounts Receivable—Ernie Klatt 1,275Accounts Receivable—Marty Richey 1,690

31 Bad Debt Expense 28,335Allowance for Doubtful Accounts 28,335

Uncollectible accounts estimate($3,778,000 × 0.75% = $28,335).

c. Bad debt expense under:

Allowance method………………………...……………………………………… $28,335Direct write-off method ($8,450 + $6,600 – $8,450 + $13,510)……………… 20,110Difference ($28,335 – $20,110)…………………………………………………… $ 8,225

Shipway Company’s income would be $8,225 higher under the direct write-offmethod than under the allowance method.



Ex. 8–13$482,800 [$487,500 + $27,800 – ($3,250,000 × 1%)]

Ex. 8–14a. $593,000 [$600,000 + $34,000 – ($4,100,000 × 1%)]

b. $11,700 ($32,500 – $27,800) + ($41,000 – $34,000)

Ex. 8–15

a. Bad Debt Expense 30,000Accounts Receivable—Shawn Brooke 4,650Accounts Receivable—Eve Denton 5,180Accounts Receivable—Art Malloy 11,050Accounts Receivable—Cassie Yost 9,120

b. Allowance for Doubtful Accounts 30,000Accounts Receivable—Shawn Brooke 4,650Accounts Receivable—Eve Denton 5,180Accounts Receivable—Art Malloy 11,050Accounts Receivable—Cassie Yost 9,120

Bad Debt Expense 39,375Allowance for Doubtful Accounts 39,375

Uncollectible accounts estimate($5,250,000 × 0.75% = $39,375).

c. Net profit would have been $9,375 higher in 2014 under the direct write-off method, because bad debt expense would have been $9,375 higher under the allowance method ($39,375 expense under the allowance method vs. $30,000 expense under the direct write-off method).



Ex. 8–16Interest

a. $1,100 [$55,000 × 0.08 × (90/360)]b. May 8 300 [$36,000 × 0.05 × (60/360)]c. July 30 390 [$78,000 × 0.04 × (45/360)]d. Nov. 3 161 [$13,800 × 0.07 × (60/360)]e. Jan. 29 1,160 [$58,000 × 0.06 × (120/360)]

Ex. 8–17a. June 18 (10 + 31 + 30 + 31 + 18)

b. $153,500 [($150,000 × 7% × 120/360) + $150,000]

c. (1) Notes Receivable 150,000Accounts Rec.—Dry Creek Interior Decorators 150,000

(2) Cash 153,500Notes Receivable 150,000Interest Revenue 3,500

Ex. 8–181. Sale on account.

2. Cost of goods sold for the sale on account.

3. A sale return or allowance.

4. Cost of merchandise returned.

5. Note received from customer on account.

6. Note dishonored and charged maturity value of note to customer’s account receivable.

7. Payment received from customer for dishonored note plus interest earned after due date.

Due DateApr. 22



Ex. 8–19

2013 Dec. 16 Notes Receivable 21,000

Accounts Receivable—Lake ShoreClothing & Bags Co. 21,000

31 Interest Receivable 70Interest Revenue 70

Accrued interest($21,000 × 0.08 × 15/360 = $70).

31 Interest Revenue 70Income Summary 70

2014 Mar. 16 Cash 21,420

Notes Receivable 21,000Interest Receivable 70Interest Revenue 350

($21,000 × 0.08 × 75/360).

Ex. 8–20

July 12 Notes Receivable 240,000Accounts Receivable—Accolade Co. 240,000

Nov. 9 Accounts Receivable—Accolade Co. 245,600Notes Receivable 240,000Interest Revenue 5,600

($240,000 × 0.07 × 120/360).

Dec. 9 Cash 247,442Accounts Receivable—Accolade Co. 245,600Interest Revenue 1,842

($245,600 × 0.09 × 30/360).



Ex. 8–21

Apr. 18 Notes Receivable 60,000Accounts Receivable—Glenn Cross 60,000

30 Notes Receivable 42,000Accounts Receivable—Rhoni Melville 42,000

May 18 Accounts Receivable—Glenn Cross 60,350Notes Receivable 60,000Interest Revenue 350

($60,000 × 7% × 30/360).

June 29 Accounts Receivable—Rhoni Melville 42,560Notes Receivable 42,000Interest Revenue 560

($42,000 × 8% × 60/360).

Aug. 16 Cash 61,557Accounts Receivable—Glenn Cross 60,350Interest Revenue 1,207

($60,350 × 8% × 90/360).

Oct. 22 Allowance for Doubtful Accounts 42,560Accounts Receivable—Rhoni Melville 42,560

Ex. 8–221. The interest receivable should be reported separately as a current asset. It

should not be deducted from notes receivable.

2. The provision for doubtful accounts should be deducted from accountsreceivable.

A corrected partial statement of financial position would be as follows:

Current assets:Interest receivable 4,500Accounts receivable $1,200,000

Less provision for doubtful accounts 11,500 1,188,500Notes receivable 300,000Cash $ 78,500

NAPA VINO COMPANYStatement of Financial Position

December 31, 2014Assets



Ex. 8–23a. and b.

Net sales…………………………Accounts receivable……………Average accts. receivable………

Accts. receivable turnover……

Average daily sales………………

Days’ sales in receivables……

c. The accounts receivable turnover indicates an increase in the efficiency of collecting accounts receivable by increasing from 9.4 to 10.5, a favorable trend. The days’ salesin receivables also indicates an increase in the efficiency of collecting accounts receivable by decreasing from 39.0 to 34.8, which is a favorable trend. However,before reaching a final conclusion, the ratios should be compared with industryaverages and similar firms.

Ex. 8–24a. and b.

Net sales…………………………Accounts receivable……………Average accts. receivable………


Average daily sales………………


c. The accounts receivable turnover indicates a decrease in the efficiency of collecting accounts receivable by decreasing from 9.5 to 9.3, an unfavorable trend. The number of days’ sales in receivables increased from 38.6 to 39.4 days, also indicating an unfavorable trend in collections of receivables. These unfavorable trends are consistent with the economic downturn that occurred worldwide in Year 1 and Year 2. However, before reaching a final conclusion, both ratios should be compared with those of past years, industry averages, and similar firms.

$1,155,185 $1,108,567.5

Year 2 Year 1$10,706,588 $10,494,983$1,265,032 $1,045,338

($1,155,185 ÷ $29,333.1) ($1,108,567.5 ÷ $28,753.4)

($10,706,588 ÷ 365 days) ($10,494,983 ÷ 365 days)39.4

9.3 9.5

$29,333.1 $28,753.4

38.6

[($1,265,032 + $1,045,338) ÷ 2] [($1,045,338 + $1,171,797) ÷ 2]

$486,200

($4,978,900 ÷ 365 days)

9.4($5,660,300 ÷ $539,450) ($4,978,900 ÷ $531,450)

[($486,200 + $576,700) ÷ 2]

$15,507.7($5,660,300 ÷ 365 days)

($539,450 ÷ $15,507.7) ($531,450 ÷ $13,640.8)

$531,450$539,450[($592,700 + $486,200) ÷ 2]

39.034.8

Year 2 Year 1$5,660,300 $4,978,900

($10,706,588 ÷ $1,155,185) ($10,494,983 ÷ $1,108,567.5)

$592,700

$13,640.8

10.5



Ex. 8–25a. and b.

Net sales…………………………Accounts receivable……………Average accts. receivable……


Average daily sales……………


c. The accounts receivable turnover indicates an increase in the efficiency of collecting accounts receivable by increasing from 30.7 to 37.3, a favorable trend.The days’ sales in receivables indicates an increase in the efficiency of collecting accounts receivable by decreasing from 11.9 to 9.8, also indicating a favorable trend. Before reaching a conclusion, however, the ratios should be compared with industry averages and similar firms.

$9,613 $8,632$ 267 $ 249

Year 2 Year 1

($9,613 ÷ $258) ($8,632 ÷ $281)37.3

$ 281$ 258[($267 + $249) ÷ 2] [($249 + $313) ÷ 2]

30.7

($258 ÷ $26.3) ($281 ÷ $23.6)11.99.8

$26.3($9,613 ÷ 365 days)

$23.6($8,632 ÷ 365 days)



Ex. 8–26a. The average accounts receivable turnover ratios are as follows:

The Limited Brands Inc.: 34.0 [(37.3 + 30.7) ÷ 2]H.J. Heinz Company: 9.4 [(9.3 + 9.5) ÷ 2]

Note: For computations of the individual ratios, see Ex. 8–27 and Ex. 8–28.

b. The Limited Brands has the higher average accounts receivable turnover ratio.

c. The Limited Brands operates a specialty retail chain of stores that sell directly to individual consumers. Many of these consumers (retail customers) pay with MasterCards or VISAs that are recorded as cash sales. In contrast, H.J. Heinz manufactures processed foods that are sold to food wholesalers, grocery store chains, and other food distributors that eventually sell Heinz products to individual consumers. Accordingly, because of the extended distribution chain, we would expect Heinz to have more accounts receivable than The Limited Brands. In addition, we would expect Heinz’s business customers to take a longer period to pay their receivables. Thus, we wouldexpect Heinz’s average accounts receivable turnover ratio to be lower thanThe Limited Brands, as shown in (a).



Prob. 8–1A

2. 20— Feb. 8 Cash 7,200

Allowance for Doubtful Accounts 10,800Accounts Receivable—DeCoy Co. 18,000

May 27 Accounts Receivable—Seth Nelsen 7,350Allowance for Doubtful Accounts 7,350

27 Cash 7,350Accounts Receivable—Seth Nelsen 7,350

Aug. 13 Allowance for Doubtful Accounts 6,400Accounts Receivable—Kat Tracks Co. 6,400

Oct. 31 Accounts Receivable—Crawford Co. 3,880Allowance for Doubtful Accounts 3,880

31 Cash 3,880Accounts Receivable—Crawford Co. 3,880

Dec. 31 Allowance for Doubtful Accounts 23,200Accounts Receivable—Newbauer Co. 7,190Accounts Receivable—Bonneville Co. 5,500Accounts Receivable—Crow Distributors 9,400Accounts Receivable—Fiber Optics 1,110


Uncollectible accounts estimate($35,700 + $3,170).

PROBLEMS



Prob. 8–1A (Concluded)1. and 2.

Feb. 8 10,800 Jan. 1 Balance 26,000Aug. 13 6,400 May 27 7,350Dec. 31 23,200 Oct. 31 3,880Dec. 31 Unadjusted Balance 3,170

Dec. 31 Adjusting Entry 38,870

Dec. 31 Adj. Balance 35,700


3. $1,749,300 ($1,785,000 – $35,700)

4. a. $45,500 ($18,200,000 × 0.0025)b. $42,330 ($45,500 – $3,170)c. $1,742,670 ($1,785,000 – $42,330)

Allowance for Doubtful Accounts

Bad Debt Expense



Prob. 8–2A1.

CustomerAdams Sports & FliesBlue Dun FliesCicada Fish Co.Deschutes SportsGreen River Sports 54 days (23 + 31)Smith River Co. 33 days (2 + 31)Western Trout Company 24 daysWolfe Sports

2. and 3.

NotPast Over

Customer Balance Due 1–30 31–60 61–90 91–120 120AAA Outfitters 20,000 20,000Brown Trout Fly Shop 7,500 7,500

Zigs Fish Adventures 4,000 4,000Subtotals 1,300,000 750,000 290,000 120,000 40,000 20,000 80,000Adams Sports & Flies 5,000 5,000Blue Dun Flies 4,900 4,900Cicada Fish Co. 8,400 8,400Deschutes Sports 7,000 7,000Green River Sports 3,500 3,500Smith River Co. 2,400 2,400Western Trout Company 6,800 6,800Wolfe Sports 4,400 4,400Totals 1,342,400 754,400 296,800 125,900 51,900 28,400 85,000Percentage uncollectible 1% 2% 10% 30% 40% 80%Estimate of uncollectible

accounts 121,000 7,544 5,936 12,590 15,570 11,360 68,000

Aging of Receivables Schedule

82 days (21 + 30 + 31)93 days (1 + 31 + 30 + 31)

Nov. 7, 2013Nov. 28, 2013Dec. 7, 2013

Oct. 10, 2013Sept. 29, 2013

Days Past Due

Due DateMay 22, 2013

Number of Days Past Due223 days (9 + 30 + 31 + 31 + 30 + 31 + 30 + 31)

December 31, 2013

Oct. 20, 2013

Jan. 20, 2014

72 days (11 + 30 + 31)

Not past due



Prob. 8–2A (Concluded)

4. Bad Debt Expense 124,600Allowance for Doubtful Accounts 124,600

Uncollectible accounts estimate($121,000 + $3,600).

5. On the statement of financial position, assets would be overstated by $124,600, since the provision for doubtful accounts would be understated by $124,600. In addition, the equity (retained earnings) account would be overstated by $124,600, since bad debt expense would be understated and net profit overstated by $124,600 on the statement of comprehensive income.



Prob. 8–3A1.

Increase Balance ofExpense Expense (Decrease) ProvisionActually Based on in Amount Account,

Reported Estimate of Expense End of Year$ 4,500 $ 9,000 $4,500 $ 4,500

9,600 12,500 2,900 7,40012,800 15,000 2,200 9,60016,550 22,000 5,450 15,050

2. Yes. The actual write-offs of accounts originating in the first two years are reasonably close to the expense that would have been charged to those years on the basis of 1% of sales. The total write-off of receivables originating in the first year amounted to $8,500 ($4,500 + $3,000 + $1,000), as compared with bad debt expense, based on the percentage of sales, of $9,000 ($900,000 × 1%). Forthe second year, the comparable amounts were $11,800 ($6,600 + $3,700 + $1,500)and $12,500 ($1,250,000 × 1%).

3rd4th

Bad Debt Expense

Year1st2nd



Prob. 8–4A1.

Note

1. $5002. 3603. 8404. 9455. 2706. Jan. 29 300

2. Nov. 17 Accounts Receivable 42,840Notes Receivable 42,000Interest Revenue 840

3. Dec. 31 Interest Receivable 154Interest Revenue 154

Accrued interest.$27,000 × 6% × 32/360 = $144$72,000 × 5% × 1/360 10

Total $154

4. Jan. 28 Cash 27,270Notes Receivable 27,000Interest Receivable 144Interest Revenue 126

($27,000 × 6% × 28/360).

29 Cash 72,300Notes Receivable 72,000Interest Receivable 10Interest Revenue 290

($72,000 × 5% × 29/360).

Apr. 20Due Date

Jan. 28

(a)

June 22Nov. 17Dec. 5

($27,000 × 60/360 × 6%)

Interest Due at Maturity(b)

($72,000 × 30/360 × 5%)

($80,000 × 45/360 × 5%)($24,000 × 60/360 × 9%)($42,000 × 120/360 × 6%)($54,000 × 90/360 × 7%)



Prob. 8–5A

Apr. 10 Notes Receivable 144,000Accounts Receivable 144,000

May 15 Notes Receivable 270,000Accounts Receivable 270,000

June 9 Cash 145,200Notes Receivable 144,000Interest Revenue 1,200

Aug. 22 Notes Receivable 150,000Accounts Receivable 150,000

Sept. 12 Cash 276,300Notes Receivable 270,000Interest Revenue 6,300

30 Notes Receivable 210,000Accounts Receivable 210,000

Oct. 6 Cash 150,750Notes Receivable 150,000Interest Revenue 750


Nov. 29 Cash 212,800Notes Receivable 210,000Interest Revenue 2,800

Dec. 17 Cash 121,000Notes Receivable 120,000Interest Revenue 1,000



Prob. 8–6A

Jan. 3 Notes Receivable 18,000Cash 18,000

Feb. 10 Accounts Receivable—Bradford & Co. 24,000Sales 24,000


13 Accounts Receivable—Dry Creek Co. 60,000Sales 60,000


Mar. 12 Notes Receivable 24,000Accounts Receivable—Bradford & Co. 24,000

14 Notes Receivable 60,000Accounts Receivable—Dry Creek Co. 60,000

Apr. 3 Notes Receivable 18,000Cash 360

Notes Receivable 18,000Interest Revenue 360

($18,000 × 8% × 90/360).

May 11 Cash 24,280Notes Receivable 24,000Interest Revenue 280

($24,000 × 7% × 60/360).

13 Accounts Receivable—Dry Creek Co. 60,900Notes Receivable 60,000Interest Revenue 900

($60,000 × 9% × 60/360).

July 12 Cash 62,118Accounts Receivable—Dry Creek Co. 60,900Interest Revenue 1,218

($60,900 × 12% × 60/360).



Prob. 8–6A (Concluded)

Aug. 1 Cash 18,540Notes Receivable 18,000Interest Revenue 540

($18,000 × 9% × 120/360).

Oct. 5 Accounts Receivable—Halloran Co. 13,500Sales 13,500


15 Cash 13,230Sales Discounts 270

Accounts Receivable—Halloran Co. 13,500



Prob. 8–1B

2. 20— Jan. 19 Accounts Receivable—Arlene Gurley 2,660

Allowance for Doubtful Accounts 2,660

19 Cash 2,660Accounts Receivable—Arlene Gurley 2,660

Apr. 3 Allowance for Doubtful Accounts 12,750Accounts Receivable—Premier GS Co. 12,750

July 16 Cash 5,500Allowance for Doubtful Accounts 16,500

Accounts Receivable—Hayden Co. 22,000

Nov. 23 Accounts Receivable—Harry Carr 4,000Allowance for Doubtful Accounts 4,000

23 Cash 4,000Accounts Receivable—Harry Carr 4,000

Dec. 31 Allowance for Doubtful Accounts 24,000Accounts Receivable—Cavey Co. 3,300Accounts Receivable—Fogle Co. 8,100Accounts Receivable—Lake Furniture 11,400Accounts Receivable—Melinda Shryer 1,200





Prob. 8–1B (Concluded)1. and 2.

Apr. 3 12,750 Jan. 1 Balance 50,000July 16 16,500 Jan. 19 2,660Dec. 31 24,000 Nov. 23 4,000

Dec. 31 Unadjusted Balance 3,410 Dec. 31 Adjusting Entry 56,590

Dec. 31 Adjusted Balance 60,000


3. $2,290,000 ($2,350,000 – $60,000)

4. a. $79,000 ($15,800,000 × 0.005)b. $82,410 ($79,000 + $3,410)c. $2,267,590 ($2,350,000 – $82,410)

Allowance for Doubtful Accounts

Bad Debt Expense



Prob. 8–2B1.

CustomerArcade BeautyCreative ImagesExcel Hair ProductsFirst Class Hair CareGolden Images 38 days (7 + 31)Oh That Hair 32 days (1 + 31)One Stop Hair Designs 24 daysVisions Hair & Nail

2. and 3.

NotPast Over

Customer Balance Due 1–30 31–60 61–90 91–120 120ABC Beauty 15,000 15,000Angel Wigs 8,000 8,000

Zodiac Beauty 3,000 3,000Subtotals 875,000 415,000 210,000 112,000 55,000 18,000 65,000Arcade Beauty 10,000 10,000Creative Images 8,500 8,500Excel Hair Products 7,500 7,500First Class Hair Care 6,600 6,600Golden Images 3,600 3,600Oh That Hair 1,400 1,400One Stop Hair Designs 4,000 4,000Visions Hair & Nail 9,000 9,000Totals 925,600 424,000 214,000 117,000 63,500 24,600 82,500Percentage uncollectible 1% 4% 16% 25% 40% 80%Estimate of uncollectible

accounts 123,235 4,240 8,560 18,720 15,875 9,840 66,000

Aging of Receivables Schedule

62 days (1 + 30 + 31)181 days (28 + 31 + 30 + 31 + 30 + 31)

Nov. 23, 2013Nov. 29, 2013Dec. 7, 2013

Oct. 30, 2013July 3, 2013

Days Past Due

Due DateAug. 17, 2013

Number of Days Past Due136 days (14 + 30 + 31 + 30 + 31)

December 31, 2013

Sept. 8, 2013

Jan. 11, 2014

114 days (22 + 31 + 30 + 31)

Not past due



Prob. 8–2B (Concluded)

4. Bad Debt Expense 115,860Allowance for Doubtful Accounts 115,860


5. On the statement of financial position, assets would be overstated by $115,860, since the provision for doubtful accounts would be understated by $115,860. In addition, the equity (retained earnings) account would be overstated by $115,860, since bad debt expense would be understated and net profit overstated by $115,860 on the statement of comprehensive income.



Prob. 8–3B1.

Increase Balance ofExpense Expense (Decrease) ProvisionActually Based on in Amount Account,

Reported Estimate of Expense End of Year$18,000 $31,250 $13,250 $13,250

30,200 37,000 6,800 20,05039,900 45,000 5,100 25,15052,600 60,000 7,400 32,550

2. Yes. The actual write-offs of accounts originating in the first two years are reasonably close to the expense that would have been charged to those years onthe basis of 1/4% of sales. The total write-off of receivables originating in the firstyear amounted to $30,600 ($18,000 + $9,000 + $3,600), as compared with bad debtexpense based on the percentage of sales, of $31,250 ($12,500,000 × 0.0025). For thesecond year, the comparable amounts were $35,600 ($21,200 + $9,300 + $5,100) and $37,000 ($14,800,000 × 0.0025).

3rd4th

Bad Debt Expense

Year1st2nd



Prob. 8–4B1.

Note

1. $1102. 5253. 6004. 2005. 4806. Feb. 8 240

2. Oct. 10 Accounts Receivable 48,600Notes Receivable 48,000Interest Revenue 600

3. Dec. 31 Interest Receivable 452Interest Revenue 452

Accrued interest.$36,000 × 8% × 46/360 = $368$24,000 × 6% × 21/360 84

Total $452

4. Jan. 14 Cash 36,480Notes Receivable 36,000Interest Receivable 368Interest Revenue 112

($36,000 × 8% × 14/360).

Feb. 8 Cash 24,240Notes Receivable 24,000Interest Receivable 84Interest Revenue 156

($24,000 × 6% × 39/360).

Feb. 13Due Date

Jan. 14

(a)

Apr. 23Oct. 10Nov. 6

($36,000 × 60/360 × 8%)

Interest Due at Maturity(b)

($24,000 × 60/360 × 6%)

($33,000 × 30/360 × 4%)($60,000 × 45/360 × 7%)($48,000 × 90/360 × 5%)($16,000 × 75/360 × 6%)



Prob. 8–5B

Mar. 8 Notes Receivable 33,000Accounts Receivable 33,000




June 11 Notes Receivable 36,000Accounts Receivable 36,000

29 Cash 81,400Notes Receivable 80,000Interest Revenue 1,400

July 26 Cash 36,270Notes Receivable 36,000Interest Revenue 270

Aug. 4 Notes Receivable 48,000Accounts Receivable 48,000

14 Cash 73,260Notes Receivable 72,000Interest Revenue 1,260

Dec. 2 Cash 49,440Notes Receivable 48,000Interest Revenue 1,440



Prob. 8–6B

20— Jan. 21 Accounts Receivable—Black Tie Co. 28,000

Sales 28,000


Mar. 18 Notes Receivable 28,000Accounts Receivable—Black Tie Co. 28,000


($28,000 × 6% × 60/360).

June 15 Accounts Receivable—Pioneer Co. 17,700Sales 17,700


21 Notes Receivable 18,000Cash 18,000

25 Cash 17,523Sales Discounts 177

Accounts Receivable—Pioneer Co. 17,700

July 21 Notes Receivable 18,000Cash 120

Notes Receivable 18,000Interest Revenue 120

($18,000 × 8% × 30/360).

Sept. 19 Cash 18,270Notes Receivable 18,000Interest Revenue 270

($18,000 × 9% × 60/360).

22 Accounts Receivable—Wycoff Co. 20,000Sales 20,000



Prob. 8–6B (Concluded)

Sept. 22 Cost of Goods sold 12,000Inventory 12,000

Oct. 14 Notes Receivable 20,000Accounts Receivable—Wycoff Co. 20,000

Nov. 13 Accounts Receivable—Wycoff Co. 20,100Notes Receivable 20,000Interest Revenue 100

($20,000 × 6% × 30/360).

Dec. 28 Cash 20,301Accounts Receivable—Wycoff Co. 20,100Interest Revenue 201

($20,100 × 8% × 45/360).



CP 8–1By computing interest using a 365-day year for depository accounts (liabilities), Bev is minimizing interest expense to the bank. By computing interest using a 360-day year for loans (assets), Bev is maximizing interest revenue to the bank. However, federal legislation (Truth in Lending Act) requires banks to computeinterest on a 365-day year. Hence, Bev is behaving in an unprofessional manner.

CP 8–21. a. b.

Addition to Provision Accounts Writtenfor Doubtful Accounts Off During Year

$20,000 $15,000 ($20,000 – $5,000)22,000 18,750 ($5,000 + $22,000 – $8,250)24,000 22,050 ($8,250 + $24,000 – $10,200)25,500 21,300 ($10,200 + $25,500 – $14,400)

2. a. The estimate of 1/2 of 1% of credit sales may be too large, since the provisionfor doubtful accounts has steadily increased each year. The increasing balanceof the provision for doubtful accounts may also be due to the failure to writeoff a large number of uncollectible accounts. These possibilities could be evaluated by examining the accounts in the accounts receivable subsidiaryledger for collectibility and comparing the result with the balance in theprovision for doubtful accounts.

Note to Instructors: Since the provision for doubtful accounts increased by 188% [($14,400 – $5,000) ÷ $5,000], while sales have increased by 27.5% [($5,100,000 – $4,000,000) ÷ $4,000,000], the increase cannot be explained by an expanding volume of sales.

CASES & PROJECTS

201220132014

Year2011



CP 8–2 (Concluded)b. The balance of Allowance for Doubtful Accounts that should exist at

December 31, 2014, can only be determined after all attempts have been made to collect the receivables on hand at December 31, 2014. However, the account balances at December 31, 2014, could be analyzed, perhapsusing an aging schedule, to determine a reasonable amount of allowance and to determine accounts that should be written off. Also, past write-offs of uncollectible accounts could be analyzed in depth in order to develop a reasonable percentage for future adjusting entries, based on past history. Caution, however, must be exercised in using historical percentages. Specifically, inquiries should be made to determine whether any significant changes between prior years and the current year may have occurred, which might reduce the accuracy of the historical data. For example, a recent change in credit-granting policies or changes in the general economy (entering a recessionary period, for example) could reduce the usefulness of analyzing historical data.

Based on the preceding analyses, a recommendation to decrease the annual rate charged as an expense may be in order (perhaps Xtreme Co. is experiencing a lower rate of uncollectibles than is the industry average), or perhaps a change to the “estimate based on analysis of receivables” method may be appropriate.

CP 8–31. and 2.

Net sales…………………………Accounts receivable…………Average accts. receivable……


Average daily sales……………


3. The accounts receivable turnover indicates a decrease in the efficiency of collecting accounts receivable by decreasing from 25.6 to 23.0, an unfavorable trend. The days’ sales in receivables increased from 14.3 days to 15.9, an unfavorable trend. Thus, based on (1) and (2), Best Buy has decreased its efficiency in the collection of receivables.

$1,944.0$2,184.0[($2,348 + $2,020) ÷ 2] [($2,020 + $1,868) ÷ 2]

($2,184.0 ÷ $137.7) ($1,944.0 ÷ $136.1)14.315.9

($49,694 ÷ 365)

25.6($50,272 ÷ $2,184.0) ($49,694 ÷ $1,944.0)

$137.7($50,272 ÷ 365)

$136.1

23.0

$2,348 $2,020

Year 2 Year 1$50,272 $49,694



CP 8–3 (Concluded)4. We assumed that the percentage of credit sales to total sales remains constant

from one period to the next and no major changes in operations occurred between years. For example, if the percentage of credit sales to total sales is not similar or if the percentage changes between years, then the ratios would be distorted and, thus, not comparable. Also, any major changes in operations could distort the comparison between years.

CP 8–41. Year 2: 14.7 {$65,225 ÷ [($5,510 + $3,361) ÷ 2]}

Year 1: 14.8 {$42,905 ÷ [($3,361 + $2,422) ÷ 2]}

2. Year 2: 24.8 days [($5,510 + $3,361) ÷ 2] = $4,435.5; [$4,435.5 ÷ ($65,225 ÷ 365)]Year 1: 24.6 days [($3,361 + $2,422) ÷ 2] = $2,891.5; [$2,891.5 ÷ ($42,905 ÷ 365)]

3. The accounts receivable turnover indicates a slight decrease in the efficiency of collecting accounts receivable by decreasing from 14.8 to 14.7, an unfavorable trend. The days’ sales in receivables increased from 24.6 days to 24.8, an unfavorable trend. Before reaching a more definitive conclusion, the ratios should be compared with industry averages and similar firms.



CP 8–51. and 2.

Net sales………………………………Accounts receivable…………………Average accts. receivable…………

Accts. receivable turnover…………

Average daily sales…………………

Days’ sales in receivables…………

3. The accounts receivable turnover indicates a decrease in the efficiency of collecting accounts receivable by decreasing from 64.5 to 61.7, an unfavorable trend. The days’ sales in receivables increased from 5.7 days to 5.9 days, an unfavorable trend. Before reaching a more definitive conclusion, the ratios should be compared with industry averages and similar firms.

4. Costco’s accounts receivable turnover would normally be higher than that of atypical manufacturing company such as H.J. Heinz Company. This is becausemany of Costco’s customers charge their purchases to American Express cardsor pay with checks or cash. In contrast, the customers of H.J. Heinz Company are other businesses that pay their accounts receivable on a less timely basis. Fora recent year, the accounts receivable turnover ratio for H.J. Heinz was 9.3(see Ex. 8–24).

Note: Costco does not accept MasterCard or Visa, but only American Express.

Year 2 Year 1$77,946 $71,422

64.561.7($71,422 ÷ $1,107.0)

5.9 5.7

$1,321 $1,205$1,263.0 $1,107.0

[($1,321 + $1,205) ÷ 2]

($77,946 ÷ $1,263.0)

[($1,205 + $1,009) ÷ 2]

($1,263.0 ÷ $213.6) ($1,107.0 ÷ $195.7)

($77,946 ÷ 365) ($71,422 ÷ 365)$213.6 $195.7



CP 8–61. Note to Instructors: The turnover ratios will vary over time. Recently, the

various turnover ratios (rounded to one decimal place) were as follows:

Alcoa Inc. ……………………………… 10.3AutoZone, Inc. ………………………… 58.4Barnes & Noble, Inc. ………………… 54.5Caterpillar ……………………………… 2.6The Coca-Cola Company …………… 8.6Delta Air Lines ………………………… 18.0The Home Depot ……………………… 66.4IBM ……………………………………… 3.4Kroger …………………………………… 93.7Procter & Gamble …………………… 12.0Walmart ………………………………… 91.4Whirlpool Corporation ……………… 7.0

Based on the above, the companies can be categorized as follows:

Alcoa Inc. AutoZone, Inc.Caterpillar Barnes & Noble, Inc.The Coca-Cola Company Delta Air LinesIBM The Home DepotProcter & Gamble KrogerWhirlpool Corporation Walmart

2. The companies with accounts receivable turnover ratios above 15 are all companiesselling primarily to individual consumers. In contrast, companies with turnoverratios below 15 are companies selling primarily to other businesses. Generally, wewould expect companies selling to individual consumers to have higher turnoverratios, since many customers will charge their purchases on credit cards. In contrast,companies selling to other businesses normally allow a credit period of at least 30days or longer.

Below 15 Above 15Accounts Receivable Turnover Ratio

chapter 8 receivables · cash 245,427 accounts receivable ... ($243,600 × 30/360 × 9% = $1,827)....

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