ANSWERS TO QUESTIONS

(1)

ANSWERS TO QUESTIONS

01. The three major types and classification of receivables are as follows:

Type Classification

(1) Accounts receivable Current asset

(2) Notes receivable Current or noncurrent asset depending on due date

(3) Other receivables Current or noncurrent asset depending on due date

02. Other receivables include nontrade receivables such as interest receivable, loans to company officers, advances to employees, and income taxes refundable.

03. Accounts Receivable ...

50

Interest Revenue... 50 04. Under the direct write-off method, bad debt losses are not

estimated and no allowance account is used. When an account is determined to be uncollectible, the loss is debited to Bad Debts Expense. The direct write-off method makes no attempt to match bad debts expense to sales revenues, or to show the net realizable value of the receivables in the balance sheet. The disadvantages are that it may not match expenses with revenue and it does not accurately reflect the collectible value of the accounts receivable on the balance sheet.

5. The essential features of the allowance method of accounting for bad debts are:

(1) Uncollectible accounts receivable are estimated in advance, in order to match the cost of the bad debts against sales in the same accounting period in which the sale occurred.

(2) Estimated uncollectibles are debited to Bad Debts Expense and credited to Allowance for Doubtful Accounts through an adjusting entry at the end of each period.

(2)

Doubtful Accounts and credited to Accounts Receivable at the time a specific account is written off.0

(3)

Questions Chapter 9 (Continued)

6. Net realizable value is the difference between Accounts Receivable (normal debit balance) and the Allowance for Doubtful Accounts (normal credit balance). Soo Eng should realize that the decrease in net realizable value occurs when estimated uncollectibles are recognized in an adjusting entry (debit Bad Debt Expense; credit Allowance for Doubtful Accounts). The write-off of an uncollectible account reduces both accounts receivable and the allowance for doubtful accounts by the same amount. Thus, net realizable value does not change.

7. The two bases of estimating uncollectibles under the allowance method are (1) percentage of sales (income statement method) and (2) percentage of receivables (balance sheet method). The percentage of sales basis establishes a percentage relationship between the amount of credit sales and expected losses from uncollectible accounts. This method emphasizes the matching of expenses with revenues. Under the percentage of receivables basis, the balance in the allowance for doubtful accounts is derived either (a) by applying a percentage estimate of bad debts to total receivables or (b) from an analysis of individual customer accounts. This method emphasizes net realizable value.

8. The adjusting entry under the percentage of sales basis is:

Bad Debts Expense ... 4,100

Allowance for Doubtful Accounts ... 4,100 The adjusting entry under the percentage of receivables

basis is:

Allowance for Doubtful Accounts ($5,800 – $3,500) 2,300 9. The first entry is made to reverse write-off of the account

receivable. The second entry records the collection of the account.

(4)

10. The reasons companies sometimes sell their receivables are:

(1) For competitive reasons, sellers often must provide financing to purchasers of their goods for extended periods. Selling receivables provides a more current source of cash to help finance operations.

(2) Receivables may be sold because they may be the only reasonable source of cash readily at hand.

(3) Billing and collection are often time-consuming and costly. As a result, it is often easier for a retailer to sell the receivable to another party who has expertise in billing and collection matters. This will also speed up the collection of cash.

11. By using both its own credit cards, bank credit cards, and debit cards, Sears provides more options to its customers, increases its revenue, and reduces its risk.

The journal entries for each type of card follow:

Sears card:

Dr. Accounts Receivable Cr. Sales Revenue Bank credit card or debit card:

Dr. Cash

Dr. Credit / Debit Card Expense Cr. Sales Revenue

12. (a) Principal = $12,000 [($360 x 12/4) ÷ 9%]

(b) Interest = $5,400 [$30,000 x 6% x 3]

(c) Interest rate = 8.33% [($2,500 x 12/6) ÷ $60,000]

(d) Time = 3 months [$875 ÷ ($50,000 x 7%) ÷ 12]

(5)

Questions Chapter 9 (Continued)

13. Accounts receivable are amounts owed by customers on account, resulting from the sale of goods and services in the normal course of business operations (i.e., in trade). Interest is not normally charged on accounts receivable unless they are overdue. Accounts receivable are normally collected within 30 or so days.

Notes receivable represent claims that are evidenced by formal instruments of credit. A promissory note gives the holder a stronger legal claim than one on an account receivable. As a result, it is easier to sell to another party.

Promissory notes are negotiable instruments, which means they can be transferred to another party by endorsement.

Interest is normally charged on notes receivable for the entire maturity period. Notes receivable can extend for any period of time, from 30 days to a number of years.

14. Payee

Accounts Receivable ... xxx

Notes Receivable ... xxx Interest Revenue ... xxx Maker–May Company

Notes Payable ... xxx Interest Expense ... xxx

Accounts Payable ... xxx 15. Each of the major types of receivables should be identified in

the balance sheet or in the notes to the financial statements.

Both the gross amount of receivables and the allowance for doubtful accounts / notes should be reported. If collectible within a year or the operating cycle, whichever is longer, these receivables are reported as current assets immediately below temporary investments.

16. An increase in the current ratio normally indicates an improvement in short-term liquidity. This may not always be the case because the composition of current assets may vary.

In order to determine if the increase is an improvement in financial health, other ratios that should be considered include: Receivable turnover and collection period and inventory turnover and days sales in inventory ratios.

(6)

17. Receivables turnover = Net credit sales ÷ Average accounts receivable

Net credit sales = Receivables turnover x Average accounts receivable

Net credit sales = 8.0583 x $4,542,500 Net credit sales = $36,604,828

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SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 9-1 (a) Other receivables (b) Notes receivable (c) Accounts receivable

BRIEF EXERCISE 9-2

July 1 Accounts Receivable ... 14,000

Sales ... 14,000 8 Sales Returns and Allowances ... 3,800

Accounts Receivable ... 3,800 31 Cash ... 10,200

Accounts Receivable ($14,000 – $3,800) ... 10,200

April 30 Bad Debt Expense [($800,000 – $50,000) X 2%] ... 15,000

Allowance for Doubtful Accounts ... 15,000

(a) Dec. 31 Bad Debts Expense [($400,000 X 1%) – $3,000] 1,000

Allowance for Doubtful Accounts ... 1,000 (b) Dec. 31 Bad Debts Expense [($400,000 X 1%) + $800] 4,800

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(a) Jan. 24 Allowance for Doubtful Accounts ... 7,000

Accounts Receivable... 7,000 (b)

(1) (1) Before Write-Off (2) After Write-Off Accounts receivable

Allowance for doubtful accounts Net realizable value

$700,000 0054,000

$646,000

$693,000 0047,000

$646,000

March 4 Accounts Receivable ... 7,000

Allowance for Doubtful Accounts ... 7,000 Cash ... 7,000

Accounts Receivable ... 7,000

BRIEF EXERCISE 9-7 Bank credit card:

July 27 Cash ($75 – $2.62) ... 72.38 Credit Card Expense ($75 X 3.5%) ... 2.62

Sales ... 75.00 (a) Debit card:

The above entry would not change unless the fee is different, except that the account used to record the fee is called Debit Card Expense.

(b) Nonbank card:

July 27 Accounts Receivable ($75 – $2.62) ... 72.38 Credit Card Expense ($75 X 3.5%) ... 2.62

Sales ... 75.00

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(a) Total Interest = $15,000 [$900,000 x 10% x 2/12]

(b) Interest Rate = 8% [($526.67 x 12) ÷ $79,000]

(c) Principal = $56,000 [($1,680 x 12/6) ÷ 6%]

Jan. 10 Accounts Receivable–Opal ... 9,000

Sales ... 9,000 Feb. 9 Notes Receivable–Opal ... 9,000

Accounts Receivable–Opal ... 9,000

BRIEF EXERCISE 9-10 (a)

Apr. 1 Notes Receivable ... 10,000

Accounts Receivable ... 10,000 July 1 Cash ... 10,175

Notes Receivable ... 10,000 Interest Revenue ($10,000 x 7% x 3/12) ... 175 (b)

Accounts Receivable ... 10,000 July 1 Accounts Receivable ... 10,175

Notes Receivable ... 10,000 Interest Revenue ($10,000 x 7% x 3/12) ... 175 (c)

Accounts Receivable ... 10,000 July 1 Allowance for Doubtful Notes ... 10,000

Notes Receivable ... 10,000

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(a) Feb. 28 Bad Debts Expense ... 36,000

(b) WENDY COMPANY

Balance Sheet (Partial) February 28, 2003

Assets Current assets

Cash $090,000

Accounts receivable ... $600,000

Less: Allowance for doubtful accounts ... 36,000 564,000 Merchandise inventory ... 130,000 Prepaid expenses ... 13,000 Total current assets ... $797,000

Receivables turnover

$11,006 ÷ [($420 + $380) ÷ 2] = 27.52 times Collection period

365 days ÷ 27.52 = 13.27 days

(11)

SOLUTIONS TO EXERCISES

EXERCISE 9-1

1. Jan. 6 Accounts Receivable—Watson. ... 5,000

Sales ... 5,000 Feb. 5 Cash ... 5,000

Accounts Receivable—Watson ... 5,000 2. Jan. 10 Accounts Receivable—Giger ... 11,000

Sales ... 11,000 Feb. 12 Cash ... 6,000

Accounts Receivable—Giger ... 6,000 Mar. 10 Accounts Receivable—Giger ... 100

Interest Revenue ... 100 [2% X ($11,000 – $6,000)]

EXERCISE 9-2

(a) (1) Dec. 31 Bad Debts Expense ... 8,000 [($840,000 – $40,000) X 1%]

Allowance for Doubtful Accounts ... 8,000 (2) Dec. 31 Bad Debts Expense ... 8,500

Allowance for Doubtful Accounts ... 8,500 [($110,000 X 10%) – $2,500]

(b) (1) Dec. 31 Bad Debts Expense ... 4,000 [($840,000 – $40,000) X 0.5%]

Allowance for Doubtful Accounts ... 4,000 (2) Dec. 31 Bad Debts Expense ... 6,000

Allowance for Doubtful Accounts ... 6,000 [($110,000 X 5%) + $500]

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(a)

Accounts Receivable Amount % Estimated

Uncollectible 0-30 days outstanding

31-60 days outstanding 61-90 days outstanding Over 90 days outstanding

$65,000 017,600 008,500 006,400

2 10 30 50

$1,300 01,760 02,550 03,200

$8,810

(b) Mar. 31 Bad Debts Expense ... 7,010 Allowance for Doubtful Accounts ...

7,010

($8,810 – $1,800)

EXERCISE 9-4 2002

Dec. 31 Bad Debts Expense (2% X $400,000) ... 8,000 Allowance for Doubtful Accounts ...

8,000 2003

May 11 Allowance for Doubtful Accounts ... 1,100 Accounts Receivable–Worthy ...

1,100

June 12 Accounts Receivable–Worthy ... 1,100 Allowance for Doubtful Accounts ...

1,100

12 Cash ... 1,100 Accounts Receivable–Worthy ...

1,100

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EXERCISE 9-5

(a) Dec. 15 Cash ($250 - $7.50) ... 242.50 Credit Card Expense ($250 x 3%) ... 7.50

Sales ... 250.00 (b) Apr. 2 Accounts Receivable—Zachos ... 1,300.00

Sales ... 1,300.00 May 3 Cash ... 700.00

Accounts Receivable—Zachos ... 700.00 June 1 Accounts Receivable—Zachos ... 14.40

Interest Revenue ... 14.40 [28.8% X ($1,300 – $700) x 1/12 ]

EXERCISE 9-6

One possible reason CN sold its receivables may have been to provide it with a source of current financing. Other possible reasons include not wanting to deal with the administration of collecting accounts, the desire to accelerate cash receipts, or to improve its financial ratios (e.g., receivables turnover).

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Nov. 1 Notes Receivable–A. Morgan ... 18,000

Cash ... 18,000 Dec. 1 Notes Receivable–Wright. ... 3,600

Sales ... 3,600 16 Notes Receivable–Barnes ... 4,000

Accounts Receivable–Barnes ... 4,000

31 Interest Receivable ... 331

Interest Revenue* ... 331

*Calculation of interest revenue: Morgan: $18,000 X 10% X 2/12 ... $300

Wright: $3,600 X 6% X 1/12 ... 18

Barnes: $4,000 X 8% X 0.5/12 ... 13

Total accrued interest ... $331

EXERCISE 9-8 2002 May 1 Notes Receivable–Jones ... 10,500 Accounts Receivable—Jones ... 10,500 Dec. 31 Interest Receivable ... 700

Interest Revenue ($10,500 X 10% X 8/12) .... 700

2003 May 1 Cash ... 11,550 Notes Receivable–Jones ... 10,500 Interest Receivable ... 700

Interest Revenue ($10,500 X 10% X 4/12) .... 350

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EXERCISE 9-9

(a) Nov. 1 Accounts Receivable–Fein ... 4,200

Notes Receivable–Fein ... 4,000 Interest Revenue ... 200 ($4,000 X 10% X 6/12)

To record the dishonour of Fein Inc.

note, with expectation of future collection.

(b) Nov. 1 Allowance for Doubtful Notes ... 4,000

Notes Receivable–Fein ... 4,000 To record the dishonour of Fein Inc.

note, with no expectation of collection.

EXERCISE 9-10

(a) Jan. 15 Accounts Receivable ... 15,000

Sales ... 15,000

20 Cash ($4,500 – $225) ... 4,275 Credit Card Expense ($4,500 X 5%) ... 225 Sales ...

4,500

30 Cash ($1,000 - $30) ... 970 Debit Card Expense ($1,000 X 3%) ... 30 Sales ...

1,000

Feb. 10 Cash ... 12,000

Accounts Receivable ... 12,000 15 Accounts Receivable ($3,000 X 18% x 1/12) .. 45

Interest Revenue ... 45 (b) Interest Revenue is reported under other revenues and gains.

The Credit Card Expense and Debit Card Expense accounts are usually categorized as selling expenses.

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DROST COMPANY Balance Sheet (Partial)

October 31, 2003 (In millions)

Accounts receivable ... $2,907

Less: Allowance for doubtful accounts ... 31 $2,876 Advances to employees ... 5 Notes receivable ... 228 HST recoverable ... 25 Total current assets ... $3,134 EXERCISE 9-12

Nike

Receivables Turnover

$8,995.1 ÷ $1,569.4 = 5.73 times 365 days ÷ 5.73 = 63.7 days Reebok

$2,899.9 ÷ $417.4 = 6.95 times 365 days ÷ 6.95 = 52.5 days

Nike’s receivable turnover and collection period are not as good as Reebok’s or the industry average. Reebok’s ratios are slightly better than the industry average.

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SOLUTIONS TO PROBLEMS

PROBLEM 9-1A

(a) 1. Accounts Receivable ... 3,300,000

Sales ... 3,300,000 2. Sales Returns and Allowances ... 50,000

Accounts Receivable ... 50,000 3. Cash ... 2,800,000

Accounts Receivable ... 2,800,000 4. Allowance for Doubtful Accounts ... 90,000

Accounts Receivable ... 90,000 5. Accounts Receivable ... 25,000

Accounts Receivable ... 25,000 (b)

Accounts Receivable Allowance for Doubtful Accounts Bal. 960,000

(1) 3,300,000 (5) 25,000

(2) 50,000 (3) 2,800,000 (4) 90,000 (5) 25,000

(4) 90,000 Bal. 70,000 (5) 25,000

Bal. 1,320,000 Bal. 5,000

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(c) Balance before adjustment [see (b)] ... $ 5,000 Balance needed ... 125,000 Adjustment required ... $120,000 The journal entry would therefore be as follows:

March 31 Bad Debts Expense ... 120,000

(19)

PROBLEM 9-2A

(a) $38,000

(b) $63,000 ($2,100,000 X 3%)

The balance in the Allowance for Doubtful Accounts is irrelevant.

(c) $47,400 [($840,000 X 6%) – $3,000]

(d) $53,400 [($840,000 X 6%) + $3,000]

(e) The weaknesses of the direct write-off method are two-fold.

First, it does not match expenses with revenues. Second, the accounts receivable are not stated at their estimated net realizable value at the balance sheet date.

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PROBLEM 9-3A

(a) Dec. 31 Bad Debts Expense ... 16,050

Estimated bad debts $25,050

Less: Unadjusted balance 9,000

Adjustment required $16,050

(a) and (b)

Bad Debts Expense

Date Explanation Ref. Debit Credit Balance

2002

Dec. 31 Adjusting entry 16,050 16,050

Allowance for Doubtful Accounts

2002 Dec. 31

31 2003 Mar. 1 May 1

Balance

Adjusting entry



1,000

16,050

00,1,000

09,000 25,050 24,050 25,050

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PROBLEM 9-3A (Continued) (b)

1. Mar. 1 Allowance for Doubtful Accounts ... 1,000

Accounts Receivable ... 1,000 2. May 1 Accounts Receivable ... 1,000

Allowance for Doubtful Accounts ... 1,000 1 Cash ... 1,000

Accounts Receivable ... 1,000 (c)

Dec. 31 Bad Debts Expense ... 12,050

Allowance for Doubtful Accounts ... 12,050 ($37,100 - $25,050)

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PROBLEM 9-4A (a)

$100,000 60,000 50,000 30,000

1 5 10 25

$ 1,000 3,000 5,000 7,500

$16,500

(b) Bad Debts Expense ... 6,500

Allowance for Doubtful Accounts ($16,500 – $10,000) 6,500

(c) Allowance for Doubtful Accounts ... 2,000

(d) Accounts Receivable ... 1,000

Allowance for Doubtful Accounts ... 1,000 Cash ... 1,000

(e) When an allowance is established, an estimate is made of the accounts receivable or credit sales that will not be collected.

An entry is made to record this estimate in the period in which the sale occurred. This matches the estimated expense with the revenue it generated.

SOLUTIONS TO PROBLEMS

PROBLEM 9-1A

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(a) 1. Accounts Receivable ... 3,300,000

Sales ... 3,300,000 2. Sales Returns and Allowances ... 50,000

Accounts Receivable ... 50,000 3. Cash ... 2,800,000

Accounts Receivable ... 2,800,000 4. Allowance for Doubtful Accounts ... 90,000

Accounts Receivable ... 90,000 5. Accounts Receivable ... 25,000

Accounts Receivable ... 25,000 (b)

Accounts Receivable Allowance for Doubtful Accounts Bal. 960,000

(1) 3,300,000 (5) 25,000

(2) 50,000 (3) 2,800,000 (4) 90,000 (5) 25,000

(4) 90,000 Bal. 70,000 (5) 25,000

Bal. 1,320,000 Bal. 5,000

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(c) Balance before adjustment [see (b)] ... $ 5,000 Balance needed ... 125,000 Adjustment required ... $120,000 The journal entry would therefore be as follows:

March 31 Bad Debts Expense ... 120,000

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PROBLEM 9-2A

(a) $38,000

(d) $63,000 ($2,100,000 X 3%)

The balance in the Allowance for Doubtful Accounts is irrelevant.

(c) $47,400 [($840,000 X 6%) – $3,000]

(d) $53,400 [($840,000 X 6%) + $3,000]

(e) The weaknesses of the direct write-off method are two-fold.

First, it does not match expenses with revenues. Second, the accounts receivable are not stated at their estimated net realizable value at the balance sheet date.

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PROBLEM 9-3A

(a) Dec. 31 Bad Debts Expense ... 16,050

Estimated bad debts $25,050

Less: Unadjusted balance 9,000

Adjustment required $16,050

(a) and (b)

2002

Dec. 31 Adjusting entry 16,050 16,050

2002 Dec. 31

31 2003 Mar. 1 May 1

Balance

Adjusting entry



1,000

16,050

00,1,000

09,000 25,050 24,050 25,050

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1. Mar. 1 Allowance for Doubtful Accounts ... 1,000

Accounts Receivable ... 1,000 2. May 1 Accounts Receivable ... 1,000

Allowance for Doubtful Accounts ... 1,000 1 Cash ... 1,000

Accounts Receivable ... 1,000 (c)

Dec. 31 Bad Debts Expense ... 12,050

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PROBLEM 9-4A (a)

$100,000 60,000 50,000 30,000

1 5 10 25

$ 1,000 3,000 5,000 7,500

$16,500

(b) Bad Debts Expense ... 6,500

Allowance for Doubtful Accounts ($16,500 – $10,000) 6,500

(e) Allowance for Doubtful Accounts ... 2,000

(d) Accounts Receivable ... 1,000

Allowance for Doubtful Accounts ... 1,000 Cash ... 1,000

(e) When an allowance is established, an estimate is made of the accounts receivable or credit sales that will not be collected.

An entry is made to record this estimate in the period in which the sale occurred. This matches the estimated expense with the revenue it generated.

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(30)

PROBLEM 9-5A

(a) Bad Debts Expense (3% X $1,000,000) ... 30,000

(b) Allowance for Doubtful Accounts ... 37,000

(c) Accounts Receivable ... 5,000

(d) Beginning balance ... $09,000 Add: Bad debt expense ... 30,000 Recovery of account ... 5,000 Deduct: Write-off of uncollectible accounts ... (37,000) Ending balance ... $ 7,000

(e) When the percentage of sales (income statement) method is used to estimate bad debts, recoveries of accounts previously written off do not directly affect the bad debts expense (They may have an indirect effect, by influencing the estimator’s judgment regarding the appropriate percentage of sales to use).

If the percentage of receivables (balance sheet) method of providing for bad debts was used, the recovery would have a direct effect by increasing the balance is the allowance account and therefore reducing the expense to be recorded in the year-end adjustment.

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PROBLEM 9-6A

Accounts Receivable Yr. 1 Balance 8,300,000

Sales 28,500,000

Write-offs 105,000 Collections 27,195,000 Yr. 2 Balance 9,500,000

Yr. 1 Balance 750,000 Bad debts 285,000 Write-offs 105,000

Yr. 2 Balance 930,000 Year 2

Allowance for Doubtful Accounts ... 285,000 Accounts Receivable ... 28,500,000

Sales ... 28,500,000 ($285,000 = 1% of sales; Therefore sales = $28,500,000)

Accounts Receivable ... 105,000 ($750,000 + $285,000 – $930,000 = $105,000)

Cash……….. ... 27,195,000

Accounts Receivable ... 27,195,000 ($8,300,000 + $28,500,000 – $105,000 – $9,500,000 =

$27,195,000)

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PROBLEM 9-7A

(a) Merchandise inventory at beginning of year ... $36,000 Add: Purchases ... 60,000 Goods available for sale ... 96,000 Less: Merchandise inventory at end of year ... 32,000 Cost of goods sold ... 64,000 Add: Gross profit ... 27,000 Total sales ... 91,000 Less: Cash sales ... 15,000 Credit sales... $76,000

(b) Accounts receivable at beginning of year ... $24,000 Add: Credit sales ... 76,000 100,000 Less: Accounts collected during the year ... $61,000

Accounts written off during the year ... 1,000 62,000 Accounts receivable at end of year ... $38,000

Accounts Receivable Beg. balance 24,000

Credit sales 76,000

Write-offs 1,000 Collections 61,000 End. balance 38,000

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PROBLEM 9-8A

Jan. 5 Accounts Receivable—Brooks Company ... 7,000

Sales ... 7,000 Feb. 2 Notes Receivable—Brooks Company ... 7,000

Accounts Receivable—Brooks Company... 7,000

12 Notes Receivable—Gage Company ... 7,800

Sales ... 7,800 26 Accounts Receivable—Mathias Co... 4,000

Sales ... 4,000 Apr. 5 Notes Receivable—Mathias Co. ... 4,000

Accounts Receivable—Mathias Co. ... 4,000 12 Cash ($7,800 + $130) ... 7,930

Notes Receivable—Gage Company ... 7,800 Interest Revenue ... 130 ($7,800 X 10% X 2/12)

June 2 Cash ($7,000 + $187) ... 7,187

Notes Receivable—Brooks Company ... 7,000 Interest Revenue ... 187 ($7,000 X 8% X 4/12)

July 4 Accounts Receivable—Mathias Co... 4,080 ($4,000 + $80)

Notes Receivable—Mathias Co. ... 4,000 Interest Revenue ($4,000 X 8% X 3/12) ... 80 15 Notes Receivable—Tritt Inc. ... 5,000

Sales ... 5,000 Oct. 13 Allowance for Doubtful Notes ... 5,000

Notes Receivable—Tritt Inc. ... 5,000 Dec. 31 No entry required

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PROBLEM 9-9A

(a) Oct. 1 Cash ... 8,080

Notes Receivable—Foran ... 8,000 Interest Receivable ... 80 ($8,000 X 6% X 2/12)

7 Accounts Receivable ... 6,900

Sales ... 6,900 12 Cash ($750 – $26.25) ... 723.75

Credit Card Expense ($750 X 3.5%) ... 26.25

Sales ... 750.00 15 Accounts Receivable ... 485

Interest Revenue ... 485 31 Accounts Receivable—Drexler ... 8,160

Notes Receivable—Drexler ... 8,000 Interest Receivable ... 80 ($8,000 X 12% X 1/12)

Interest Revenue ... 80 ($8,000 X 12% X 1/12)

31 Interest Receivable ... 90 ($12,000 X 9% X 1/12)

Interest Revenue ... 90

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Notes Receivable

Oct. 1 1 31

Balance 

8,000 8,000

28,000 20,000 12,000

Accounts Receivable

Oct. 7 15 31

6,900 0,485 8,160

06,900 07,385 15,545

Interest Receivable

Oct. 1 1 31 31

Balance

90

80 80 61.55

160 80 0 90 (c)

TARDIF COMPANY Balance Sheet (partial)

October 31, 2003 Assets Current assets

Notes receivable ... $12,000 Accounts receivable ... 15,545 Interest receivable ... 90 Total current assets ... $27,635

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(d) Oct. 31 Allowance for Doubtful Notes ... 8,080

Notes Receivable—Drexler ... 8,000 Interest Receivable ... 80 Note that the interest previously accrued on this note should

be written off, as well as the note itself. Also, no interest would be accrued for October.

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PROBLEM 9-10A

(a)

2000 1999

Current ratio $1,125 ÷ $1,903 = 0.6:1

$1,527 ÷ $1,777 = 0.9:1

Acid test ratio $756 ÷ $1,903 = 0.4:1

$1,110 ÷ $1,777 = 0.6:1

(b)

2000 1999

Receivables turnover

$5,446 ÷ $770 = 7.1x

$5,261 ÷ $603.5 = 8.7x

Collection period 365 days ÷ 7.1 = 51.4 days

365 days ÷ 8.7

= 42.0 days

(c) CN’s short-term liquidity has deteriorated. The current and acid test ratios both declined. The receivables turnover is less and the average collection period is longer.

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(a) 1. Accounts Receivable ... 2,600,000

Sales ... 2,600,000 2. Sales Returns and Allowances ... 40,000

Accounts Receivable ... 40,000 3. Cash ... 2,300,000

Accounts Receivable ... 2,300,000 4. Allowance for Doubtful Accounts ... 65,000

Accounts Receivable ... 65,000 5. Accounts Receivable ... 25,000

(b)

Allowance for Doubtful Accounts .... 51,200

[($2,600,000 - $40,000) X 2%]

(c)

Accounts Receivable Allowance for Doubtful Accounts Bal. 1,000,000

(1) 2,600,000 (5) 25,000

(2) 40,000 (3) 2,300,000 (4) 65,000 (5) 25,000

(4) 65,000 Bal. 60,000 (5) 25,000 51,200

Bal. 1,195,000 Bal. 71,200

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PROBLEM 9-2B

(a) $24,000

(b) $45,000 ($1,500,000 X 3%)

(c) $27,000 [($600,000 X 5%) – $3,000]

(d) $32,000 [($600,000 X 5%) + $2,000]

(e) The direct write-off method of reporting bad debts expense is not in accordance with generally accepted accounting principles because it does not match expenses with the associated revenues. In addition, the accounts receivable are not stated at their net realizable value at the balance sheet date.

(f) The answer will vary depending on which method the student prefers.

Example:

Although either method is acceptable, I prefer the percentage of receivables (ageing) basis because I believe it results in a better estimate. It also may lead to better accounts receivable management because of the focus on the age of individual accounts and evaluation of loss percentages in each age category.

Often, I find it helpful to use both methods together to help check the reasonableness of the estimate.

(40)

(a) Dec. 31 Bad Debts Expense ... 18,950

Allowance for Doubtful Accounts ... 18,950 ($28,950 – $10,000)

(b)

1. Mar. 31 Allowance for Doubtful Accounts ... 800

Accounts Receivable ... 800

2. May 31 Accounts Receivable ... 800

Allowance for Doubtful Accounts ... 800

31 Cash ... 800

Accounts Receivable ... 800

2002 Dec. 31

Adjusting 18,950 18,950

2002 Dec. 31

31 2003 Mar. 31 May 31

Balance Adjusting

800

18,950

800

10,000 28,950 28,150 28,950

(c)

Dec. 31 Bad Debts Expense ... 2,970

(41)

PROBLEM 9-4B

(a) Total estimated bad debts

Number of Days Past Due

Total 0-30 31-60 61-90 Over 90

Accounts

receivable $375,000 $220,000 $90,000 $40,000 $25,000

% uncollectible 1% 4% 5% 10%

Estimated bad

debts $10,300 $2,200 $3,600 $2,000 $2,500

(b) Bad Debts Expense ... 20,300

Allowance for Doubtful Accounts ... 20,300 [$10,300 + $10,000]

(c) Allowance for Doubtful Accounts ... 5,000

Accounts Receivable ... 5,000 (d) Accounts Receivable ... 5,000

Accounts Receivable ... 5,000 (e) If Image.com used 3% of accounts receivable rather than

ageing the accounts the allowance at year-end, the adjustment would be $21,250 [($375,000 x 3%) + $10,000]. The remaining entries would remain unchanged.

(f) Ageing the accounts rather than applying a percentage to the total accounts receivable should produce a more accurate allowance and bad debt expense when the ageing of the accounts change. It also focuses management attention on the receivables and the loss percentages, which can result in better receivables management.

(42)

PROBLEM 9-5B

(a) Accounts Receivable ... 1,300,000

Sales ... 1,300,000

(b) Allowance for Doubtful Accounts ... 41,000

(c) Accounts Receivable ... 5,200

(d) Accounts receivable:

Beginning balance ... $ 150,000 Add: Credit sales ... 1,300,000 1,450,000 Deduct: Collections on account ... $1,225,000

Write-off of uncollectible accounts ... 41,000 1,266,000 Unadjusted balance ... $ 184,000

Allowance for doubtful accounts:

Beginning balance ... $10,000 Add: Recovery of account ... 5,200 Deduct: Write-off of uncollectible accounts ... 41,000

Unadjusted balance ... $25,800 Debit

(e) Bad Debts Expense [(12% X $184,000) + $25,800) 47,880

(43)

PROBLEM 9-5B (Continued)

(f) Accounts receivable:

Beginning balance ... $ 150,000 Add: Credit sales ... 1,300,000 1,450,000 Deduct: Collections on account ... $1,225,000

Write-off of uncollectible accounts ... 41,000 1,266,000 Ending balance ... $ 184,000

Allowance for doubtful accounts:

Beginning balance ... $10,000 Add: Recovery of account ... 5,200 Bad debts expense ... 47,880 63,080 Deduct: Write-off of uncollectible accounts ... 41,000 Ending balance ... $22,080

(44)

PROBLEM 9-6B

Accounts Receivable Yr. 1 Balance 4,100,000

Sales 22,500,000

Write-offs 150,000 Collections 21,650,000 Yr. 2 Balance 4,800,000

Yr. 1 Balance 350,000 Bad debts 225,000 Write-offs 150,000

Yr. 2 Balance 425,000

Allowance for Doubtful Accounts ... 225,000 ($350,000 – $150,000 – $425,000 = $225,000)

Accounts Receivable ... 22,500,000

Sales ... 22,500,000 ($225,000 = 1% of sales; Therefore sales = $22,500,000)

Cash……….. ... 21,650,000

Accounts Receivable ... 21,650,000 ($4,100,000 + $22,500,000 – $150,000 – $4,800,000 =

$21,650,000)

(45)

PROBLEM 9-7B

(a)

Sales ?

Cost of goods sold 66,000 Gross profit on sales 31,000

Total sales = $97,000 ($31,000 + $66,000) Cash sales = 18,000

Credit sales = $79,000

(b) Accounts receivable at December 31 is $24,500, as shown below:

Accounts Receivable Beg. balance 27,000

Credit sales 79,000

Write-offs 1,500 Collections 80,000 End. balance 24,500

(46)

PROBLEM 9-8B (a)

Jan. 5 Accounts Receivable—George Company ... 18,000

Sales ... 18,000 20 Notes Receivable—George Company ... 18,000

Accounts Receivable—George Company 18,000

Feb. 18 Notes Receivable—Swaim Company ... 8,000

Sales ... 8,000 Apr. 20 Cash ($18,000 + $405) ... 18,405

Notes Receivable—George Company ... 18,000 Interest Revenue ... 405 ($18,000 X 9% X 3/12)

30 Cash ($15,000 + $400) ... 15,400

Notes Receivable—Annabelle Company .. 15,000 Interest Revenue ... 400 ($15,000 X 8% X 4/12)

May 25 Notes Receivable—Avery Inc. ... 6,000

Accounts Receivable—Avery Inc. ... 6,000 Aug. 18 Cash ($8,000 + $400) ... 8,400

Notes Receivable—Swaim Company ... 8,000 Interest Revenue ... 400 ($8,000 X 10% X 6/12)

23 Allowance for Doubtful Notes ... 6,000

Notes Receivable—Avery Inc. ... 6,000 Sept. 1 Notes Receivable—Young Company ... 12,000

Sales ... 12,000

(47)

Nov. 22 There would probably be no entry made on November 22. Since financial statements are prepared only at year-end, Dot.com Company would probably wait until December 31 before making a decision regarding whether the note should be written off.

Dec. 31 Interest Receivable ... 400

Interest Revenue ... 400 ($12,000 x 10% X 4/12)

The company would evaluate the information available on Young Company and may decide to write off the note and not accrue the interest. If they decide that a write-off is appropriate, the above entry would not be made and the following entry would be made:

Dec. 31 Allowance for Doubtful Notes ... 12,000

Notes Receivable ... 12,000

(b) Interest should not be accrued if it is unlikely to be collected.

In addition, consideration would have to be given to whether the note should be written off. At the very least, an allowance should be created with respect to the Young Company note, based upon the estimated probability of collection.

(48)

PROBLEM 9-9B

(a) Don Co. $6,000 X 12% X 2/12 = $120

Jean Co. $4,800 X 11% X 1/12 = 44

Total $164 (b) July 1 Cash ($6,000 + $120) ... 6,120 Notes Receivable—Don Co. ... 6,000 Interest Receivable ... 120

($6,000 X 12% X 2/12) 5 Accounts Receivable ... 6,200 Sales ... 6,200 14 Cash ($700 – $21) ... 679

Credit Card Expense ($700 X 3%) ... 21

Sales ... 700

16 Accounts Receivable ... 415

Interest Revenue ... 415

31 Accounts Receivable—Jean Co ... 4,888 Notes Receivable—Jean Co. ... 4,800 Interest Receivable ... 44

($4,800 X 11% X 1/12) Interest Revenue ... 44

($4,800 X 11% X 1/12) 31 Interest Receivable ... 75

($10,000 X 9% X 1/12) Interest Revenue ... 75

(49)

(c)

Notes Receivable

July 1 1 31

Balance 

6,000 4,800

20,800 14,800 10,000

Accounts Receivable

July 5 16 31

6,200 415 4,888

6,200 6,615 11,503

Interest Receivable

July 1 1 31 31

Balance

Adjusting entry



75

120 44

164 44 0 75

(d)

OUELLETTE CO.

Balance Sheet (partial) July 31, 2003

Notes receivable ... $10,000 Accounts receivable ... 11,503 Interest receivable ... 75 Total current assets ... $21,578

(50)

(e) Interest should not be accrued if it is unlikely to be collected.

In addition, consideration would have to be given to whether the note should be written off. At the very least, an allowance should be created with respect to the Jean Company note, based upon the estimated probability of collection.

(51)

PROBLEM 9-10B

(a)

2000 1999

Current ratio $782,878 ÷ $899,684

= 0.9:1

$1,133,906 ÷

$1,874,643

= 0.6:1 Acid test $690,612 ÷ $899,684

= 0.8:1

$1,048,279 ÷

$1,874,643

= 0.6:1

(b)

2000 1999

Receivables turnover

$4,210,313 ÷

$858,257 = 4.9 x

$4,160,167 ÷ $675,706 = 6.2 x

Collection period

365 days ÷ 4.9

= 74.4 days

365 days ÷ 6.2

= 58.9 days

(c) Becker Milk’s short-term liquidity has improved slightly. The current and acid test ratios both increased. However, the receivables turnover is lower and the collection period is longer. This could be the reason the current and acid test ratios look ‘artificially’ better. Further investigation is warranted before one should conclude on Becker Milk’s liquidity.