Solution Manual for Financial and Managerial Accounting
14th Edition by Warren Reeve and Duchac ISBN
1337119202
9781337119207
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CHAPTER 8 RECEIVABLES DISCUSSION QUESTIONS
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 allowance for doubtful accounts may be reported at a net amount of $661,500 ($673,400 – $11,900) in the current assets section of the balance sheet. In this case, the amount of the allowance for doubtful accounts should be shown separately in a note to the financial statements or in parentheses on the balance sheet. Alternatively, the accounts receivable may be shown at the gross amount of $673,400 less the amount of the allowance 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 as uncollectible; 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 Company B. Notes Receivable
8. The interest will amount to $5,100 ($85,000 × 6%) only if the note is payable one year from the date it was created. The usual practice is to state the interest rate in terms of an annual rate, rather than in terms of the period covered by the note.
9. Debit Accounts Receivable for $243,600
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8-2 © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Credit Notes Receivable for $240,000 Credit Interest Revenue for $3,600 10. Cash 245,427 Accounts Receivable [$240,000 + ($240,000 × 6% × 90 ÷ 360)] 243,600 Interest Revenue 1,827 ($243,600 × 30 ÷ 360 × 9% = $1,827).
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CHAPTER 8 Receivables
BE 8–1 Mar. 17 Cash 275 Bad Debt Expense 1,000 Accounts Receivable—Shawn McNeely 1,275 July 29 Accounts Receivable—Shawn McNeely 1,000 Bad Debt Expense 1,000 29 Cash 1,000 Accounts Receivable—Shawn McNeely 1,000 BE 8–2 Mar. 17 Cash 275 Allowance for Doubtful Accounts 1,000 Accounts Receivable—Shawn McNeely 1,275 July 29 Accounts Receivable—Shawn McNeely 1,000 Allowance for Doubtful Accounts 1,000 29 Cash 1,000 Accounts Receivable—Shawn McNeely 1,000 BE 8–3 A. B. $129,625 [$51,850,000 × (1/4 × 1%)] Adjusted Balance Accounts Receivable..……………………………………………… $ 2,150,000 Allowance for Doubtful Accounts ($12,962,500 – $10,500)… 12,952,000 Bad Debt Expense………………………………………………… 12,962,500 C. Net realizable value ($2,150,000 – $12,952,000)……………… $(10,802,000) BE 8–4 A. B. $120,500 ($110,000 + $10,500) Adjusted Balance Accounts Receivable..………………………………………………. $2,150,000 Allowance for Doubtful Accounts……………………………….. 110,000 Bad Debt Expense………………………………………………….. 120,500 C. Net realizable value ($2,150,000 – $110,000)…………………… $2,040,000
BASIC EXERCISES
CHAPTER 8 Receivables
BE 8–5
A. The due date for the note is August 7, determined as follows:
April………………………………………………………………….. 21 days (30 – 9)
May…………………………………………………………………… 31 days
June………………………………………………………………….. 30 days
July…………………………………………………………………… 31 days
August………………………………………………………….…… 7 days
Total………………………………………………………………… 120 days
B. $462,000 [$450,000 + ($450,000 × 8% × 120 ÷ 360)]
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C. Aug. 7 Cash 462,000 Notes Receivable 450,000 Interest Revenue 12,000
CHAPTER 8 Receivables EXERCISES
Ex.
8–1
Accounts 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 the Securities and Exchange Commission, Boeing reports the receivables together on the balance sheet, but discloses each receivable separately in a note to the financial statements.
Ex.
8–2
A. MGM Resorts International: 15.9% ($89,602,000 ÷ $562,947,000)
B. Johnson & Johnson: 2.4% ($275,000,000 ÷ $11,260,000,000)
C. Casino operations experience greater bad debt risk because 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.
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Ex. 8–3 Jan. 19 Accounts Receivable—Dr. Kyle Norby 6,400 Sales 6,400 19 Cost of Goods Sold 3,000 Inventory 3,000 June 2 Cash 500 Bad Debt Expense 5,900 Accounts Receivable—Dr. Kyle Norby 6,400 Oct. 23 Accounts Receivable—Dr. Kyle Norby 5,900 Bad Debt Expense 5,900 23 Cash 5,900 Accounts Receivable—Dr. Kyle Norby 5,900
CHAPTER 8 Receivables
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Ex. 8–4 May 24 Accounts Receivable—Old Town Cafe 18,450 Sales 18,450 24 Cost of Goods Sold 11,000 Inventory 11,000 Sept. 30 Cash 6,000 Allowance for Doubtful Accounts 12,450 Accounts Receivable—Old Town Cafe 18,450 Dec. 7 Accounts Receivable—Old Town Cafe 12,450 Allowance for Doubtful Accounts 12,450 7 Cash 12,450 Accounts Receivable—Old Town Cafe 12,450 Ex. 8–5 A. B. Ex. 8–6 A. $205,500 [$27,400,000 × (3/4 × 1%)] C. $137,000 [$27,400,000 × (1/2 × 1%)] B. $197,500 ($188,000 + $9,500) D. $143,600 ($175,000 – $31,400) Ex. 8–7 Account Due Date Number of Days Past Due Avalanche Auto August 8 84 (23 + 30 + 31) Bales Auto October 11 20 (31 – 11) Derby Auto Repair June 23 130 (7 + 31 + 31 + 30 + 31) Lucky’s Auto Repair September 2 59 (28 + 31) Pit Stop Auto September 19 42 (11 + 31) Reliable Auto Repair July 15 108 (16 + 31 + 30 + 31) Trident Auto August 24 68 (7 + 30 + 31) Valley Repair & Tow May 17 167 (14 + 30 + 31 + 31 + 30 + 31) Bad Debt Expense 11,750 Accounts Receivable—Wil Treadwell 11,750 Allowance for Doubtful Accounts 11,750 Accounts Receivable Wil Treadwell 11,750
CHAPTER 8 Receivables
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Ex. 8–8 A. B. Aging of Receivables Schedule July 31 Customer Balance Not Past Due Days Past Due 1–30 31–60 61–90 Over 90 Acme Industries Inc. 3,000 3,000 AllianceCompany 4,500 4,500 ZollingerCompany 5,000 5,000 Subtotals 1,050,000 600,000 220,000 115,000 85,000 30,000 Boyd Industries 36,000 36,000 HodgesCompany 11,500 11,500 Kent Creek Inc. 6,600 6,600 LockwoodCompany 7,400 7,400 Van Epps Company Totals 1,124,500 607,400 233,000 121,600 96,500 66,000 Ex. 8–9 Balance Not Past Due Days Past Due 1–30 31–60 61–90 Over 90 Total receivables 1,124,500 607,400 233,000 121,600 96,500 66,000 Percentage uncollectible 1% 3% 12% 30% 75% Allowance for doubtful accounts 106,106 6,074 6,990 14,592 28,950 49,500 Customer Due Date Number of Days Past Due Boyd Industries April 7 115 days (23 + 31 + 30 + 31) Hodges Company May 29 63 days (2 + 30 + 31) Kent Creek Inc. June 8 53 days (22 + 31) Lockwood Company August 10 Not past due Van Epps Company July 2 29 days (31 – 2)
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8 Receivables Ex. 8–10 July 31 Bad Debt Expense 97,866 Allowance for Doubtful Accounts 97,866 Uncollectible accounts estimate ($106,106 – $8,240). Ex. 8–11 Age Interval Balance Estimated UncollectibleAccounts Percent Amount Not past due $ 892,000 0.75% $ 6,690 1–30 days past due 285,000 1.00% 2,850 31–60 days past due 101,000 8.00% 8,080 61–90 days past due 63,000 16.00% 10,080 91–180 days past due 43,100 50.00% 21,550 Over 180 days past due 17,700 80.00% 14,160 Total $1,401,800 $63,410 Ex. 8–12 Dec. 31 Bad Debt Expense 68,550 Allowance for Doubtful Accounts 68,550 Uncollectible accounts estimate ($63,410 + $5,140).
CHAPTER
CHAPTER 8 Receivables
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Ex. 8–13 A. Apr. 13 Bad Debt Expense 8,450 Accounts Receivable—Dean Sheppard 8,450 May 15 Cash 500 Bad Debt Expense 6,600 Accounts Receivable—Dan Pyle 7,100 July 27 Accounts Receivable—Dean Sheppard 8,450 Bad Debt Expense 8,450 27 Cash 8,450 Accounts Receivable—Dean Sheppard 8,450 Dec. 31 Bad Debt Expense 13,510 Accounts Receivable—Paul Chapman 2,225 Accounts Receivable—Duane DeRosa 3,550 Accounts Receivable—Teresa Galloway 4,770 Accounts Receivable—Ernie Klatt 1,275 Accounts Receivable—Marty Richey 1,690 31 No entry
CHAPTER 8 Receivables
Ex. 8–13 (Concluded)
B.
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C. Bad debt expense under: Allowance method..………………………...……………………………………. $28,335 Direct write-off method ($8,450 + $6,600 – $8,450 + $13,510)…………… 20,110 Difference ($28,335 – $20,110)………………………………………………… $ 8,225 Shipway Company’s income would be $8,225 higher under the direct write-off method than under the allowance method. Apr. 13 Allowance for Doubtful Accounts 8,450 Accounts Receivable—Dean Sheppard 8,450 May 15 Cash 500 Allowance for Doubtful Accounts 6,600 Accounts Receivable—Dan Pyle 7,100 July 27 Accounts Receivable—Dean Sheppard 8,450 Allowance for Doubtful Accounts 8,450 27 Cash 8,450 Accounts Receivable—Dean Sheppard 8,450 Dec. 31 Allowance for Doubtful Accounts 13,510 Accounts Receivable—Paul Chapman 2,225 Accounts Receivable—Duane DeRosa 3,550 Accounts Receivable—Teresa Galloway 4,770 Accounts Receivable—Ernie Klatt 1,275 Accounts Receivable—Marty Richey 1,690 31 Bad Debt Expense 28,335 Allowance for Doubtful Accounts 28,335 Uncollectible accounts estimate ($3,778,000 × 0.75% = $28,335).
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Ex. 8–14 A. June 8 Bad Debt Expense 8,440 Accounts Receivable—Kathy Quantel 8,440 Aug. 14 Cash 3,000 Bad Debt Expense 9,500 Accounts Receivable—Rosalie Oakes 12,500 Oct. 16 Accounts Receivable—Kathy Quantel 8,440 Bad Debt Expense 8,440 16 Cash 8,440 Accounts Receivable—Kathy Quantel 8,440 Dec. 31 Bad Debt Expense 24,955 Accounts Receivable—Wade Dolan 4,600 Accounts Receivable—Greg Gagne 3,600 Accounts Receivable—Amber Kisko 7,150 Accounts Receivable—Shannon Poole 2,975 Accounts Receivable—Niki Spence 6,630 31 No entry
CHAPTER 8 Receivables
CHAPTER 8 Receivables
Ex. 8–14 (Continued)
B.
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Computations: Aging Class (Number of Days Past Due) Receivables Balance on December 31 EstimatedDoubtful Accounts Percent Amount 0–30 days $320,000 1% $ 3,200 31–60 days 110,000 3% 3,300 61–90 days 24,000 10% 2,400 91–120 days 18,000 33% 5,940 More than 120 days 43,000 75% 32,250 Total receivables $515,000 $47,090 Estimated balance of allowance account from aging schedule………………… $47,090 Unadjusted credit balance of allowance account…………………………………. 1,545 Adjustment…………………………………………………………………………………. $45,545 Unadjusted credit balance of allowance account = $36,000 – $8,440 – $9,500 + $8,440 – $24,955 = $1,545 June 8 Allowance for Doubtful Accounts 8,440 Accounts Receivable—Kathy Quantel 8,440 Aug. 14 Cash 3,000 Allowance for Doubtful Accounts 9,500 Accounts Receivable—Rosalie Oakes 12,500 Oct. 16 Accounts Receivable—Kathy Quantel 8,440 Allowance for Doubtful Accounts 8,440 16 Cash 8,440 Accounts Receivable—Kathy Quantel 8,440 Dec. 31 Allowance for Doubtful Accounts 24,955 Accounts Receivable—Wade Dolan 4,600 Accounts Receivable—Greg Gagne 3,600 Accounts Receivable—Amber Kisko 7,150 Accounts Receivable—Shannon Poole 2,975 Accounts Receivable—Niki Spence 6,630 31 Bad Debt Expense 45,545 Allowance for Doubtful Accounts 45,545 Uncollectible accounts estimate ($47,090 – $1,545).
CHAPTER 8 Receivables
Ex. 8–14 (Concluded)
C. Bad debt expense under:
($8,440 + $9,500 – $8,440 + $24,955)…………
Rustic Tables’ income would be $11,090 higher under the direct write-off method than under the allowance method.
Ex. 8–15
$482,800 [$487,500 + $27,800 – ($3,250,000 × 1%)]
Ex. 8–16
A. $593,000 [$600,000 + $34,000 – ($4,100,000 × 1%)]
B. $11,700 ($32,500 – $27,800) + ($41,000 – $34,000)
Ex. 8–17
A.
B.
× 0.75% = $39,375).
C. Net income would have been $9,375 higher 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 versus $30,000 expense under the direct write-off method).
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Allowance method……………………………………………………………. $45,545 Direct write-off method
34,455 Difference……………………………………………………………………….. $11,090
Bad Debt Expense 30,000 Accounts Receivable—Shawn Brooke 4,650 Accounts Receivable—Eve Denton 5,180 Accounts Receivable—Art Malloy 11,050 Accounts Receivable—Cassie Yost 9,120 Allowance for Doubtful Accounts 30,000 Accounts Receivable Shawn Brooke 4,650 Accounts Receivable Eve Denton 5,180 Accounts Receivable Art Malloy 11,050 Accounts Receivable Cassie Yost 9,120 Bad Debt Expense 39,375 Allowance for Doubtful Accounts 39,375 Uncollectible accounts
estimate ($5,250,000
CHAPTER 8 Receivables
Ex. 8–18 A. B.
C. Net income would have been $14,650 lower under the allowance method because bad debt expense would have been $14,650 higher under the allowance method ($117,150 expense under the allowance method versus $102,500 expense under the direct write-off method).
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Computations: Aging Class (Number of Days Past Due) Receivables Balance on December 31 Estimated Doubtful Accounts Percent Amount 0–30 days $ 715,000 1% $ 7,150 31–60 days 310,000 2% 6,200 61–90 days 102,000 15% 15,300 91–120 days 76,000 30% 22,800 More than 120 days 97,000 60% 58,200 Totalreceivables $1,300,000 $109,650 Unadjusted debit balance of Allowance for Doubtful Accounts ($102,500 – $95,000) ............................................................................ $ 7,500 Estimated balance of Allowance for Doubtful Accounts from aging schedule ........................................................................... 109,650 Adjustment ............................................................................................. $117,150
Bad Debt Expense 102,500 Accounts Receivable—Kim Abel 21,550 Accounts Receivable—Lee Drake 33,925 Accounts Receivable—Jenny Green 27,565 Accounts Receivable—Mike Lamb 19,460 Allowance for Doubtful Accounts 102,500 Accounts Receivable Kim Abel 21,550 Accounts Receivable Lee Drake 33,925 Accounts Receivable Jenny Green 27,565 Accounts Receivable Mike Lamb 19,460 Bad Debt Expense 117,150 Allowance for Doubtful Accounts 117,150 Uncollectible accounts estimate ($109,650
$7,500).
+
CHAPTER 8 Receivables
Ex. 8–19
Ex. 8–20
A. August 13 (15 + 31 + 30 + 31 + 13)
B. $61,000 [($60,000 × 5% × 120 ÷ 360) + $60,000]
C. (1) (2)
Ex. 8–21
A. Sale on account.
B. Cost of goods sold for the sale on account.
C. Note received from customer on account.
D. Note dishonored and charged face value of note plus interest to customer’s account receivable.
E. Payment received from customer for dishonored note plus interest earned after due date.
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Due Date A. May 2 Interest $1,600 [$80,000 × 0.06 × (120 ÷ 360)] B. March 21 90 [$27,000 × 0.04 × (30 ÷ 360)] C. July 8 625 [$62,500 × 0.08 × (45 ÷ 360)] D. Nov. 28 375 [$30,000 × 0.05 × (90 ÷ 360)] E. Jan. 2 700 [$40,000 × 0.07 × (90 ÷ 360)]
Notes Receivable 60,000 Accounts Rec.—Valley Designs 60,000 Cash 61,000 Notes Receivable 60,000 Interest Revenue 1,000
CHAPTER 8 Receivables
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Ex. 8–22 20Y7 Dec. 7 Notes Receivable 75,000 Accounts Receivable—Unitarian Clothing & Bags Co. 75,000 31 Interest Receivable 150 Interest Revenue 150 Accrued interest ($75,000 × 0.03 × 24 ÷ 360 = $150). 31 Interest Revenue 150 Income Summary 150 20Y8 Feb. 5 Cash 75,375 Notes Receivable 75,000 Interest Receivable 150 Interest Revenue 225 ($75,000 × 0.03 × 36 ÷360). Ex. 8–23 June 23 Notes Receivable 48,000 Accounts Receivable—Radon Express Co. 48,000 Sept. 21 Accounts Receivable Radon Express Co. 48,960 Notes Receivable 48,000 Interest Revenue 960 ($48,000 × 0.08 × 90 ÷360). Oct. 21 Cash 49,368 Accounts Receivable—Radon Express Co. 48,960 Interest Revenue 408 ($48,960 × 0.10 × 30 ÷360).
1. The interest receivable should be reported separately as a current asset. It should not be deducted from notes receivable.
2. The allowance for doubtful accounts should be deducted from accounts receivable.
A corrected partial balance sheet would be as follows:
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Ex. 8–24 Mar. 29 Notes Receivable 30,000 Accounts Receivable—Karie Platt 30,000 Apr. 30 Notes Receivable 24,000 Accounts Receivable—Jon Kelly 24,000 May 28 Accounts Receivable—Karie Platt 30,250 Notes Receivable 30,000 Interest Revenue 250 ($30,000 × 5% × 60 ÷360). June 29 Accounts Receivable—Jon Kelly 24,320 Notes Receivable 24,000 Interest Revenue 320 ($24,000 × 8% × 60 ÷360). Aug. 26 Cash 30,855 Accounts Receivable—Karie Platt 30,250 Interest Revenue 605 ($30,250 × 8% × 90 ÷360). Oct. 22 Allowance for Doubtful Accounts 24,320 Accounts Receivable—Jon Kelly 24,320
8–25
CHAPTER 8 Receivables
Ex.
Napa Vino Company Balance Sheet December 31, 20Y6 Assets Current assets: Cash $ 78,500 Notes receivable 300,000 Accounts receivable $1,200,000 Allowance for doubtful accounts (11,500) Accounts receivable, net 1,188,500 Interest receivable 4,500
CHAPTER 8 Receivables PROBLEMS
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Prob. 8–1A 2. Feb. 8 Cash 7,200 Allowance for Doubtful Accounts 10,800 Accounts Receivable—DeCoy Co. 18,000 May 27 Accounts Receivable—Seth Nelsen 7,350 Allowance for Doubtful Accounts 7,350 27 Cash 7,350 Accounts Receivable—Seth Nelsen 7,350 Aug. 13 Allowance for Doubtful Accounts 6,400 Accounts Receivable—Kat Tracks Co. 6,400 Oct. 31 Accounts Receivable—Crawford Co. 3,880 Allowance for Doubtful Accounts 3,880 31 Cash 3,880 Accounts Receivable—Crawford Co. 3,880 Dec. 31 Allowance for Doubtful Accounts 23,200 Accounts Receivable—Newbauer Co. 7,190 Accounts Receivable—Bonneville Co. 5,500 Accounts Receivable—Crow Distributors 9,400 Accounts Receivable—Fiber Optics 1,110 31 Bad Debt Expense 38,870 Allowance for Doubtful Accounts 38,870 Uncollectible accounts estimate ($35,700 + $3,170).
CHAPTER 8 Receivables
Prob. 8–1A (Concluded)
1. and 2.
3. $1,749,300 ($1,785,000 – $35,700)
4. A. $45,500 [$18,200,000 × (1/4 × 1%)]
B. $42,330 ($45,500 – $3,170)
C. $1,742,670 ($1,785,000 – $42,330)
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Allowance for Doubtful Accounts Bad Debt Expense Dec. 31 Adjusting Entry 38,870
Feb. 8 10,800 Jan. 1 Balance 26,000 Aug. 13 6,400 May 27 7,350 Dec. 31 23,200 Oct. 31 3,880 Dec. 31 Unadjusted Balance 3,170 Dec. 31 Adjusting Entry 38,870 Dec. 31 Adj. Balance 35,700
CHAPTER 8 Receivables
Prob. 8–2A
1.
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Aging of Receivables Schedule December 31, 20Y4 Customer Balance Not Past Due Days Past Due 1–30 31–60 61–90 91–120 Over 120 AAA Outfitters 20,000 20,000 Brown Trout Fly Shop 7,500 7,500 Zigs Fish Adventures 4,000 4,000 Subtotals 1,300,000 750,000 290,000 120,000 40,000 20,000 80,000 Adams Sports & Flies 5,000 5,000 Blue Dun Flies 4,900 4,900 Cicada Fish Co. 8,400 8,400 Deschutes Sports 7,000 7,000 Green River Sports 3,500 3,500 Smith River Co. 2,400 2,400 Western Trout Company 6,800 6,800 Wolfe Sports 4,400 4,400 Totals 1,342,400 754,400 296,800 125,900 51,900 28,400 85,000 Percentage 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 Customer Due Date Number of Days Past Due Adams Sports & Flies May 22, 2015 223 days (9 + 30 + 31 + 31 + 30 + 31 + 30 + 31) Blue Dun Flies Oct. 10, 2015 82 days (21 + 30 + 31) Cicada Fish Co. Sept. 29, 2015 93 days (1 + 31 + 30 + 31) Deschutes Sports Oct. 20, 2015 72 days (11 + 30 + 31) Green River Sports Nov. 7, 2015 54 days (23 + 31) Smith River Co. Nov. 28, 2015 33 days (2 + 31) Western Trout Company Dec. 7, 2015 24 days Wolfe Sports Jan. 20, 2016 Not past due
2. and 3.
CHAPTER 8 Receivables
Prob. 8–2A (Concluded)
4.
5. On the balance sheet, assets would be overstated by $124,600 because the allowance for doubtful accounts would be understated by $124,600. In addition, the stockholders’ equity (retained earnings) would be overstated by $124,600 because bad debt expense would be understated and net income overstated by $124,600 on the income statement.
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20Y4 Dec. 31 Bad Debt Expense 124,600 Allowance for Doubtful Accounts 124,600 Uncollectible accounts estimate ($121,000 + $3,600).
CHAPTER 8 Receivables
Prob. 8–3A
1.
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%). For the second year, the comparable amounts were $11,800 ($6,600 + $3,700 + $1,500) and $12,500 ($1,250,000 × 1%).
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Bad Debt Expense Year Expense Actually Reported Expense Based on Estimate Increase (Decrease) in Amount of Expense Balance of Allowance Account, End of Year 1 $ 4,500 $ 9,000 $4,500 $ 4,500 2 9,600 12,500 2,900 7,400 3 12,800 15,000 2,200 9,600 4 16,550 22,000 5,450 15,050
CHAPTER 8 Receivables
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Prob. 8–4A 1. Note 1. 2. 3. 4. 5. (A) Due Date May 5 May 22 Dec. 10 Nov. 21 Feb. 17 $500 300 600 180 360 (B) Interest Due at Maturity ($75,000 × 60 ÷ 360 × 4%) ($40,000 × 45 ÷360 × 6%) ($36,000 × 120 ÷360 × 5%) ($27,000 × 30 ÷360 × 8%) ($48,000 × 90 ÷360 × 3%) 6. Jan. 29 450 ($72,000 × 45 ÷360 × 5%) 2. 3. 4. Dec. 10 Accounts Receivable 36,600 Notes Receivable 36,000 Interest Revenue 600 Dec. 31 Interest Receivable 328 Interest Revenue 328 Accrued interest: $48,000 × 3% × 42 ÷360 = $168 $72,000 × 5% × 16 ÷360 160 Total $328 Jan. 29 Cash 72,450 Notes Receivable 72,000 Interest Receivable 160 Interest Revenue 290 ($72,000 × 5% × 29 ÷360). Feb. 17 Cash 48,360 Notes Receivable 48,000 Interest Receivable 168 Interest Revenue 192 ($48,000 × 3% × 48 ÷360).
CHAPTER 8 Receivables
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Prob. 8–5A Apr. 10 Notes Receivable 144,000 Accounts Receivable 144,000 May 15 Notes Receivable 270,000 Accounts Receivable 270,000 June 9 Cash 145,200 Notes Receivable 144,000 Interest Revenue 1,200 Aug. 22 Notes Receivable 150,000 Accounts Receivable 150,000 Sept. 12 Cash 276,300 Notes Receivable 270,000 Interest Revenue 6,300 30 Notes Receivable 210,000 Accounts Receivable 210,000 Oct. 6 Cash 150,750 Notes Receivable 150,000 Interest Revenue 750 18 Notes Receivable 120,000 Accounts Receivable 120,000 Nov. 29 Cash 212,800 Notes Receivable 210,000 Interest Revenue 2,800 Dec. 17 Cash 121,000 Notes Receivable 120,000 Interest Revenue 1,000
CHAPTER 8 Receivables
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Prob. 8–6A Jan. 3 Notes Receivable 18,000 Cash 18,000 Feb. 10 Accounts Receivable—Bradford & Co. 24,000 Sales 24,000 10 Cost of Goods Sold 14,400 Inventory 14,400 13 Accounts Receivable—Dry Creek Co. 60,000 Sales 60,000 13 Cost of Goods Sold 54,000 Inventory 54,000 Mar. 12 Notes Receivable 24,000 Accounts Receivable—Bradford & Co. 24,000 14 Notes Receivable 60,000 Accounts Receivable—Dry Creek Co. 60,000 Apr. 3 Notes Receivable 18,000 Cash 360 Notes Receivable 18,000 Interest Revenue 360 ($18,000 × 8% × 90 ÷360). May 11 Cash 24,280 Notes Receivable 24,000 Interest Revenue 280 ($24,000 × 7% × 60 ÷360). 13 Accounts Receivable—Dry Creek Co. 60,900 Notes Receivable 60,000 Interest Revenue 900 ($60,000 × 9% × 60 ÷360). July 12 Cash 62,118 Accounts Receivable—Dry Creek Co. 60,900 Interest Revenue 1,218 ($60,900 × 12% × 60 ÷360).
CHAPTER 8 Receivables
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Prob. 8–6A (Concluded) Aug. 1 Cash 18,540 Notes Receivable 18,000 Interest Revenue 540 ($18,000 × 9% × 120 ÷360). Oct. 5 Accounts Receivable—Halloran Co. 13,230 Sales 13,230 5 Cost of Goods Sold 8,100 Inventory 8,100 15 Cash 13,230 Accounts Receivable—Halloran Co. 13,230
CHAPTER 8 Receivables
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Prob. 8–1B 2. Jan. 19 Accounts Receivable—Arlene Gurley 2,660 Allowance for Doubtful Accounts 2,660 19 Cash 2,660 Accounts Receivable—Arlene Gurley 2,660 Apr. 3 Allowance for Doubtful Accounts 12,750 Accounts Receivable—Premier GS Co. 12,750 July 16 Cash 5,500 Allowance for Doubtful Accounts 16,500 Accounts Receivable—Hayden Co. 22,000 Nov. 23 Accounts Receivable—Harry Carr 4,000 Allowance for Doubtful Accounts 4,000 23 Cash 4,000 Accounts Receivable—Harry Carr 4,000 Dec. 31 Allowance for Doubtful Accounts 24,000 Accounts Receivable—Cavey Co. 3,300 Accounts Receivable—Fogle Co. 8,100 Accounts Receivable—Lake Furniture 11,400 Accounts Receivable—Melinda Shryer 1,200 31 Bad Debt Expense 56,590 Allowance for Doubtful Accounts 56,590 Uncollectible accounts estimate ($60,000 – $3,410).
CHAPTER 8 Receivables
Prob. 8–1B (Concluded)
1. and 2. Allowance for Doubtful Accounts
Bad Debt Expense
3. $2,290,000 ($2,350,000 – $60,000)
4. A. $79,000 [$15,800,000 × (1/2 × 1%)]
B. $82,410 ($79,000 + $3,410)
C. $2,267,590 ($2,350,000 – $82,410)
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Apr. 3 12,750 Jan. 1 Balance 50,000 July 16 16,500 Jan. 19 2,660 Dec. 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
Dec. 31 Adjusting Entry 56,590
CHAPTER 8 Receivables
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Prob. 8–2B 1.
and
Aging of Receivables Schedule December 31, 20Y7 Customer Balance Not Past Due Days Past Due 1–30 31–60 61–90 91–120 Over 120 ABC Beauty 15,000 15,000 Angel Wigs 8,000 8,000 Zodiac Beauty 3,000 3,000 Subtotals 875,000 415,000 210,000 112,000 55,000 18,000 65,000 Arcade Beauty 10,000 10,000 Creative Images 8,500 8,500 Excel Hair Products 7,500 7,500 First Class Hair Care 6,600 6,600 Golden Images 3,600 3,600 Oh That Hair 1,400 1,400 One Stop Hair Designs 4,000 4,000 Visions Hair & Nail 9,000 9,000 Totals 925,600 424,000 214,000 117,000 63,500 24,600 82,500 Percentage 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 Customer Due Date Number of Days Past Due Arcade Beauty Aug. 17, 2015 136 days (14 + 30 + 31 + 30 + 31) Creative Images Oct. 30, 2015 62 days (1 + 30 + 31) Excel Hair Products July 3, 2015 181 days (28 + 31 + 30 + 31 + 30 + 31) First Class Hair Care Sept. 8, 2015 114 days (22 + 31 + 30 + 31) Golden Images Nov. 23, 2015 38 days (7 + 31) Oh That Hair Nov. 29, 2015 32 days (1 + 31) One Stop Hair Designs Dec. 7, 2015 24 days Visions Hair & Nail Jan. 11, 2016 Not past due
2.
3.
CHAPTER 8 Receivables
Prob. 8–2B (Concluded)
4.
5. On the balance sheet, assets would be overstated by $115,860 because the allowance for doubtful accounts would be understated by $115,860. In addition, the stockholders’ equity (retained earnings) would be overstated by $115,860 because bad debt expense would be understated and net income overstated by $115,860 on the income statement.
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20Y7 Dec. 31 Bad Debt Expense 115,860 Allowance for Doubtful Accounts 115,860 Uncollectible accounts estimate ($123,235 – $7,375).
CHAPTER 8 Receivables
Prob. 8–3B
1.
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 1/4% of sales. The total write-off of receivables originating in the first year amounted to $30,600 ($18,000 + $9,000 + $3,600), as compared with bad debt expense, based on the percentage of sales, of $31,250 ($12,500,000 × 0.0025). For the second year, the comparable amounts were $35,600 ($21,200 + $9,300 + $5,100) and $37,000 ($14,800,000 × 0.0025).
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Bad Debt Expense Year Expense Actually Reported Expense Based on Estimate Increase (Decrease) in Amount of Expense Balance of Allowance Account, End of Year 1 $18,000 $31,250 $13,250 $13,250 2 30,200 37,000 6,800 20,050 3 39,900 45,000 5,100 25,150 4 52,600 60,000 7,400 32,550
CHAPTER 8 Receivables
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Prob. 8–4B 1. Note 1. 2. 3. 4. 5. (A) Due Date Feb. 13 Apr. 23 Oct. 10 Nov. 6 Jan. 14 $110 525 600 200 480 (B) Interest Due at Maturity ($33,000 × 30 ÷ 360 × 4%) ($60,000 × 45 ÷360 × 7%) ($48,000 × 90 ÷360 × 5%) ($16,000 × 75 ÷360 × 6%) ($36,000 × 60 ÷360 × 8%) 6. Feb. 8 240 ($24,000 × 60 ÷360 × 6%) 2. 3. 4. Oct. 10 Accounts Receivable 48,600 Notes Receivable 48,000 Interest Revenue 600 Dec. 31 Interest Receivable 452 Interest Revenue 452 Accrued interest: $36,000 × 8% × 46 ÷360 = $368 $24,000 × 6% × 21 ÷360 84 Total $452 Jan. 14 Cash 36,480 Notes Receivable 36,000 Interest Receivable 368 Interest Revenue 112 ($36,000 × 8% × 14 ÷360). Feb. 8 Cash 24,240 Notes Receivable 24,000 Interest Receivable 84 Interest Revenue 156 ($24,000 × 6% × 39 ÷360).
CHAPTER 8 Receivables
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Prob. 8–5B Mar. 8 Notes Receivable 33,000 Accounts Receivable 33,000 31 Notes Receivable 80,000 Accounts Receivable 80,000 May 7 Cash 33,275 Notes Receivable 33,000 Interest Revenue 275 16 Notes Receivable 72,000 Accounts Receivable 72,000 June 11 Notes Receivable 36,000 Accounts Receivable 36,000 29 Cash 81,400 Notes Receivable 80,000 Interest Revenue 1,400 July 26 Cash 36,270 Notes Receivable 36,000 Interest Revenue 270 Aug. 4 Notes Receivable 48,000 Accounts Receivable 48,000 14 Cash 73,260 Notes Receivable 72,000 Interest Revenue 1,260 Dec. 2 Cash 49,440 Notes Receivable 48,000 Interest Revenue 1,440
CHAPTER 8 Receivables
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Prob. 8–6B Jan. 21 Accounts Receivable—Black Tie Co. 28,000 Sales 28,000 21 Cost of Goods Sold 16,800 Inventory 16,800 Mar. 18 Notes Receivable 28,000 Accounts Receivable—Black Tie Co. 28,000 May 17 Cash 28,280 Notes Receivable 28,000 Interest Revenue 280 ($28,000 × 6% × 60 ÷360). June 15 Accounts Receivable—Pioneer Co. 17,523 Sales 17,523 15 Cost of Goods Sold 10,600 Inventory 10,600 21 Notes Receivable 18,000 Cash 18,000 25 Cash 17,523 Accounts Receivable—Pioneer Co. 17,523 July 21 Notes Receivable 18,000 Cash 120 Notes Receivable 18,000 Interest Revenue 120 ($18,000 × 8% × 30 ÷360). Sept. 19 Cash 18,270 Notes Receivable 18,000 Interest Revenue 270 ($18,000 × 9% × 60 ÷360). 22 Accounts Receivable—Wycoff Co. 20,000 Sales 20,000
CHAPTER 8 Receivables
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Prob. 8–6B (Concluded) Sept. 22 Cost of Goods Sold 12,000 Inventory 12,000 Oct. 14 Notes Receivable 20,000 Accounts Receivable—Wycoff Co. 20,000 Nov. 13 Accounts Receivable—Wycoff Co. 20,100 Notes Receivable 20,000 Interest Revenue 100 ($20,000 × 6% × 30 ÷360). Dec. 28 Cash 20,301 Accounts Receivable—Wycoff Co. 20,100 Interest Revenue 201 ($20,100 × 8% × 45 ÷360).
ANALYSIS FOR DECISION MAKING
C. Best Buy turns accounts receivable into cash 31.2 times per year, while Amazon only turns the receivables into cash 17.1 times per year. Likewise, Best Buy has only 11.7 days of sales in accounts receivable, while Amazon has 21.3 days of sales in accounts receivable. By these metrics, it appears Best Buy is more efficient than Amazon in turning accounts receivable into cash.
D. The large difference in the ratios between these two companies suggests that there is a fundamental difference in the accounts receivable collection policies or in the types of customers served by the two companies. The most likely explanation is a difference in their customers. Retail customers frequently purchase goods with cash or credit card, thus no accounts receivable is established upon sale. However, accounts receivable is more frequently established with sales to business customers. Thus, it is likely the sales to business customers as a proportion of total sales is higher for Amazon than it is for Best Buy. If so, this would explain the difference between the two ratios.
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8 Receivables
ADM–1
Accounts Receivable Turnover = Amazon: $88,988 ($4,767 + $5,612) ÷2 = 17.1 Sales Average Accounts Receivable Best Buy: $40,339 ($1,308 + $1,280) ÷2 = 31.2
CHAPTER
A.
Average Accounts Receivable Average Daily Sales Amazon: ($4,767
÷
=
days $88,988 ÷365 Best Buy: ($1,308
$1,280)
= $40,339
B. Number of Days’ Sales in Receivables =
+ $5,612)
2
21.3
+
÷ 2
÷365 11.7 days
ADM–2
Sales Average Accounts Receivable Year 1: $7,450
14.2 ($588 + $458) ÷ 2
A. Accounts Receivable Turnover =
=
8-37 © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 8 Receivables Year 2: $7,620 = 12.3 ($655 + $588) ÷ 2
CHAPTER 8 Receivables
ADM–2 (Concluded)
B. Number of Days’ Sales in Receivables = Average Accounts Receivable Average Daily Sales
Year 1: ($588 + $458) ÷ 2 = 25.6 days
$7,450 ÷365
Year 2: ($655 + $588) ÷ 2 = 29.7 days
$7,620 ÷365
C. The accounts receivable turnover has declined from 14.2 to 12.3 between the two years. In addition, the number of days’ sales in receivables increased from 25.6 days to 29.7 days. There appears to be a decline in the efficiency in collecting accounts receivable between the two years.
ADM–3
+ $252) ÷ 2
+ $244) ÷ 2
+ $244) ÷ 2
C. The accounts receivable turnover decreased from 48.2 to 46.2, indicating a decline in the efficiency of collecting accounts receivable. The number of days’ sales in receivables increased from 7.6 to 7.9, also indicating a decrease in the efficiency of collecting receivables. Before reaching a conclusion, however, the ratios should be compared with industry averages and similar firms.
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($244
($203
Accounts receivable
$11,454 ÷$248 $10,773÷$223.5 Year 2 248 46.2 Year 1 223.5 48.2
($244
($203
Sales
$11,454
$10,773
Number
$248 ÷$31.4 $223.5 ÷$29.5 Year 2 Year 1 248 223.5 31.4 29.5 7.9
7.6
A. Average receivables:
turnover:
B. Average receivables:
+ $252) ÷ 2
per day:
÷$365
÷$365
of days’ sales in receivables
days
days
CHAPTER 8 Receivables
ADM–4
A. The average accounts receivable turnover ratios are as follows:
Ralph Lauren: 13.3 [(14.2 + 12.3) ÷ 2]
L Brands: 47.2 [(46.2 + 48.2) ÷ 2]
Note: Computations for the individual ratios are provided in ADM–2 and ADM–3.
B. L Brands has the higher average accounts receivable turnover ratio.
C. L Brands operates a specialty retail chain of stores that sell directly to individual consumers. Many of these consumers (retail customers) pay with credit cards or with cash. In contrast, Ralph Lauren sells its products to retailers, which are then sold to the final consumer. Ralph Lauren has a business-to-business relationship wherein trade accounts are a normal part of the sales cycle. Thus, we would expect Ralph Lauren to have more accounts receivable supporting its sales than would L Brands. In addition, we would expect Ralph Lauren’s business customers to take a longer period to pay their receivables. Thus, we would expect Ralph Lauren’s average accounts receivable turnover across the two years to be lower than L Brands, as shown in (A).
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CHAPTER 8 Receivables
TAKE IT FURTHER
TIF 8–1
Estimates of uncollectible accounts receivable create a unique financial reporting challenge. Because the company does not know with certainty the amount of accounts receivable that will be uncollectible, there is no “correct” estimate. The company must use its judgment along with historical data to develop an estimate that fairly presents the portion of credit sales that will become uncollectible. These estimates are required under GAAP and should be representationally faithful and accurately match bad debt expense to revenues generated from credit sales.
In this case, both Tim and Gowen appear to be acting unethically. The historical data indicates that a higher estimate is needed, and they have both knowingly ignored this data in order to improve the company’s reported earnings. Tim and Gowen have used the subjectivity in these estimates inappropriately. The result is a bad debt expense amount that does not faithfully represent the potential losses associated with uncollectible accounts receivable.
TIF 8–2
A sample solution based on Nike Inc.’s Form 10-K for the fiscal year ended May 31, 2015, follows:
1. A. $3,358 million (from balance sheet).
B. $78 million (Note 1).
C. 21.0% ($3,358 ÷$15,976) in 2015; 25.1% ($3,434 ÷$13,696) in 2014. Accounts receivable as a percentage of total current assets has increased.
D. The amount for Nike is so small that it is not reported in the financial statements.
2. The company’s receivables turnover has improved from 8.5 in 2014 to 9.0 in 2015, as shown below.
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2015 2014 Sales $30,601 $ 27,799 Beginning Accounts Receivable $ 3,434 $ 3,117 Ending Accounts Receivable 3,358 3,434 Average Accounts Receivable $ 3,396 $3,275.5 Accounts Receivable Turnover 9.0 8.5
CHAPTER 8 Receivables
TIF 8–3
To: Todd Hurley, CEO
From: A+ Student
Re: Allowance Method for Uncollectible Accounts
Accounts receivable result from the sale of goods to customers on account. Because payment is received from customers after goods are delivered, there is a risk that customers will default on their accounts. While the company does not know which customers will default, it does have historical information on the portion of accounts receivable that has become uncollectible in the past. The allowance method uses this information to estimate the amount of accounts receivable that will be uncollectible at the end of the accounting period. Based on this estimate, an adjusting entry is used to record bad debt expense. However, because the company does not know which customer accounts will be uncollectible, the specific customer accounts cannot be removed. Instead, a contra asset account, Allowance for Doubtful Accounts, is credited for the estimated bad debts in the adjusting journal entry:
Bad Debt Expense XXX
Allowance for Doubtful Accounts XXX
This adjusting entry affects both the income statement and balance sheet. On the income statement, bad debt expense is matched against the revenues generated by the accounts receivable. On the balance sheet, the accounts receivable balance is reduced by the allowance for doubtful accounts, which is the portion of the accounts receivable that the company does not expect to collect. This resulting number is the amount of accounts receivable that the company expects to collect, called the net realizable value of the receivables.
When a specific customer’s account is identified as uncollectible, it is written off against the allowance account. This requires the company to remove the specific account receivable from the accounts receivable ledger and an equal amount from the allowance account. Because the adjusting entry for bad debt expense is an estimate and the write-off of accounts receivable is based on actual defaults, the allowance account will rarely have a zero balance at the beginning or end of a period.
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