Intermediate accounting volume 1 canadian 11th edition kieso solutions manual

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CHAPTER 7 CASH AND RECEIVABLES ASSIGNMENT CLASSIFICATION TABLE Topics

Brief Exercises

Exercises

Problems

1

Accounting for cash and financial assets.

1, 3, 4

1, 2

1

2

Accounting for accounts receivable, sales discounts, and other allowances.

2, 5, 6, 7, 8, 9

3, 4, 5, 6, 7

3

Bad debts and allowance for doubtful accounts.

10, 11

8, 9, 10, 11, 12, 13

2, 3, 4, 5, 6, 12, 13

4

Accounting for notes receivable.

12, 13, 14, 15, 16, 17

14, 15, 16

7, 8, 9, 10

5

Assignment and factoring of accounts receivable.

17, 18, 19, 20

7, 17, 18, 19, 20

10, 11, 13

6

Analysis of receivables.

21, 22

21, 22

1, 10, 12, 13

7

Petty cash and bank reconciliations.*

23, 24, 25, 26

23, 24, 25

14, 15, 16, 17

*This material is covered in an Appendix to the chapter.

ASSIGNMENT CHARACTERISTICS TABLE Item

Description

E7-1 E7-2 E7-3

Determining cash balance.

Determine cash balance.

Financial statement presentation of receivables.

Determine ending accounts receivable.

Record sales gross and net.

Record sales gross and net.

Journalizing various receivable transactions including factoring.

Bad debts – recording.

Calculating allowance for doubtful accounts.

Bad debt reporting.

Calculating bad debts and preparing journal entries.

Bad debts—aging.

Interest bearing and non-interestbearing notes.

Non-interest-bearing note.

Notes receivable with zero or low interest rates.

Notes receivable with zero interest rate.

Assigned accounts receivable.

Transfer of receivables with recourse.

Transfer of receivables with recourse.

Securitization transaction.

Determine receivables balance, turnover ratio.

Accounts receivable turnover ratio.

Petty cash.

Bank reconciliation and adjusting entries.

Bank reconciliation and adjusting entries.

E7-4 E7-5 E7-6 E7-7 E7-8 E7-9 E7-10 E7-11 E7-12 E7-13 E7-14 E7-15 E7-16 E7-17 E7-18 E7-19 E7-20 E7-21 E7-22 *E7-23 *E7-24 *E7-25

Level of Difficulty

Time (minutes)

Moderate Moderate Simple

10-15 10-15 10-15

Simple Simple Simple Moderate

10-15 15-20 15-20 15-20

Simple Simple

5-10 5-10

Simple Simple

10-15 15-20

Simple Moderate

10-15 20-25

Moderate Moderate

15-20 30-35

Moderate Simple Simple Moderate Moderate Moderate

15-20 10-15 10-15 15-20 20-25 10-15

Moderate Simple Moderate

10-15 5-10 15-20

Simple

15-20

ASSIGNMENT CHARACTERISTICS TABLE (CONTINUED) Item P7-1 P7-2 P7-3 P7-4 P7-5 P7-6 P7-7 P7-8 P7-9 P7-10 P7-11 P7-12 P7-13 *P7-14 *P7-15 *P7-16 *P7-17

Description Determine proper cash balance.

Bad debt reporting.

Bad debt reporting—aging.

Bad debt reporting.

Bad debt reporting.

Journalize various accounts receivable transactions.

Notes receivable journal entries.

Instalment note receivable.

Several notes receivable.

Comprehensive receivables.

Comprehensive receivables.

Bad debt reporting issues.

Comprehensive including factoring.

Petty cash, bank reconciliation.

Bank reconciliation and adjusting entries.

Bank reconciliation and adjusting entries.

Bank reconciliation.

Level of Difficulty

Time (minutes)

Simple Moderate Moderate Moderate Complex Simple

20-25 20-25 20-30 25-35 25-35 15-20

Moderate Moderate Complex Moderate Moderate Moderate Complex Moderate Moderate

20-30 30-35 40-50 25-35 15-20 25-30 30-35 20-25 20-30

Moderate

20-30

Moderate

25-35

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 7-1 Creative requires a higher amount of cash on hand in comparison to Technology. Creative should maintain a significant amount of cash on hand to service interest and upcoming debt repayments, finance inventory and pay expenses in the months preceding the holiday season, and purchase equipment needed to sustain current operations. Maintaining a significant amount of cash on hand will also minimize Creative’s borrowing requirements. In comparison, Technology has no debt repayments to service, and requires only very few capital expenditures to maintain its noncurrent assets used in current operations. As a mature, successful software development company, Technology likely has excess cash from operating activities which should be invested to try to minimize “idle” cash. Having significant “idle” cash on hand may eventually lead to wasteful spending or poor investment decisions by Technology’s management.

BRIEF EXERCISE 7-2 1. Implement more selective credit-granting policies: perform more rigorous credit checks prior to granting credit, require cash on delivery (COD) from new customers, establish credit limits for each account.

2. Implement more rigorous collection policies: establish procedures for internal collections personnel to follow (including follow up phone calls, collection letters), hold pending orders until payment is received, and/or refer collections to an external collection agency.

3. Charge interest on overdue accounts.

BRIEF EXERCISE 7-3 Cash in bank—savings account Cash on hand Chequing account balance Cash in foreign bank Debt instrument with maturity date of three months from the date acquired Cash and cash equivalents under ASPE

$56,200 14,800 46,300 90,000 12,000 $219,300

If Stowe follows IFRS, preferred shares acquired shortly before their maturity date would qualify as a cash equivalent. Therefore, under IFRS, cash and cash equivalents would total $234,800 ($219,300+ $15,500).

BRIEF EXERCISE 7-4 1. (a) Current, (b) Trade receivable 2. (a) Current, (b) Not a receivable; current liability 3. (a) Current, (b) Nontrade receivable 4. (a) Noncurrent, (b) Trade receivable 5. (a) Noncurrent, (b) Nontrade receivable

BRIEF EXERCISE 7-5 05/15/17 No entry required

05/31/17 Accounts Receivable .......................................................

3,800 Sales Revenue ........................................................

3,800

BRIEF EXERCISE 7-6 Accounts Receivable ......................................................

40,000 Sales Revenue........................................................

40,000

Cash .................................................................................

34,650 Sales Discounts ..............................................................

350 Accounts Receivable .............................................

35,000

Cash .................................................................................

5,000 Accounts Receivable .............................................

5,000

BRIEF EXERCISE 7-7 Accounts Receivable ......................................................

39,600 Sales Revenue........................................................ ($40,000 X .99)

39,600

Cash .................................................................................

34,650 Accounts Receivable ............................................. ($35,000 X .99)

34,650

Accounts Receivable ......................................................

50 Sales Discounts Forfeited .....................................

50

Cash .................................................................................

5,000 Accounts Receivable .............................................

5,000

BRIEF EXERCISE 7-8 Accounts Receivable ......................................................

110,000 Sales Revenue........................................................

Cash .................................................................................

108,900 Sales Discounts ..............................................................

1,100 Accounts Receivable ............................................. ($1,100 = $110,000 x 1%)

110,000

110,000

BRIEF EXERCISE 7-9 Accounts Receivable ......................................................

108,900 Sales Revenue........................................................ ($110,000 X .99) Cash .................................................................................

108,900 Accounts Receivable .............................................

108,900

108,900

BRIEF EXERCISE 7-10 Bad Debt Expense...........................................................

37,400 Allowance for Doubtful Accounts ......................... ($42,000 – $4,600)

37,400

BRIEF EXERCISE 7-11 Bad Debt Expense...........................................................

45,000 Allowance for Doubtful Accounts ......................... ($42,000 + $3,000)

45,000

BRIEF EXERCISE 7-12 (a) 11/1/17

Notes Receivable .............................................................

20,000 Sales Revenue ........................................................

20,000

12/31/17 Interest Receivable ..........................................................

200 Interest Income .......................................................

200 ($20,000 X 6% X 2/12) 5/1/18

(b) 1/1/18

5/1/18

Cash .................................................................................

20,600 Notes Receivable ....................................................

20,000 Interest Receivable .................................................

200 Interest Income .......................................................

400 ($400 = $20,000 X 6% X 4/12)

Interest Income ................................................................

200 Interest Receivable .................................................

200 Cash .................................................................................

20,600 Notes Receivable ....................................................

20,000 Interest Income .......................................................

600

BRIEF EXERCISE 7-13

Notes Receivable ............................................................

47,573 Cash ........................................................................

47,573

Cash .................................................................................

49,000 Notes Receivable ...................................................

Interest Income ......................................................

47,573 1,427

BRIEF EXERCISE 7-14 (a) Notes Receivable ............................................................

30,053 Cash ........................................................................

30,053

Notes Receivable ............................................................

3,005 Interest Income ...................................................... ($30,053 X 10%)

3,005

Notes Receivable ............................................................

3,306 Interest Income ...................................................... ([$30,053 + $3,005] X 10%)

3,306

Notes Receivable ............................................................

3,636 Interest Income ...................................................... ([$30,053 + $3,005 + $3,306] X 10%)

3,636

Cash .................................................................................

40,000 Notes Receivable .....................................................

(b)

40,000

Take the present value of the cash flows and divide by the face value of the note ($30,053 / $40,000) gives a factor of .75132. Under the table for the present value of a single payment, for three years, the factor .75132 appears under the column for 10%.

Using a financial calculator: PV $ (30,053) I ?

Yields 10.0% N 3 PMT 0 FV 40,000 Type 0 Excel formula: =RATE(nper,pmt,pv,fv,type)

BRIEF EXERCISE 7-15 (a) Notes Receivable ............................................

3,861 Accumulated Depreciation – Equipment ($15,000 – $2,500).................................... 12,500 Equipment ...............................................

15,000 Gain on Sale of Equipment.....................

1,361 Using a financial calculator: PV ?

Yield $(3,861) I 9% N 3 PMT 0 FV $5,000 Type 0 Excel formula: =PV(rate,nper,pmt,fv,type) *

Present value of the note: $5,000 X PVF3, 9% = $5,000 X .77218 = $3,861 Discount on Note Receivable = $5,000 - $3,861 = $1,139 Fair Value of Equipment (present value of note) Carrying Amount Gain on Sale of Equipment

$3,861 2,500 $1,361

(b) Since Aitocs follows IFRS, the effective interest method is required for recognizing interest income.

Interest for Year 1: Notes Receivable ............................................

Interest Income ....................................... ($3,861 X 9% = $347) Interest for Year 2: Notes Receivable ............................................

Interest Income ....................................... ([$3,861 + $347] X 9% = $379)

347 347

379 379

BRIEF EXERCISE 7-15 (CONTINUED) (b) (continued): Interest for Year 3: Notes Receivable ............................................

Interest Income ....................................... ([$3,861 + $347 + $379] X 9% = $413) (c) Collection of Note at Maturity: Cash ................................................................

Notes Receivable ....................................

413 413

5,000 5,000

BRIEF EXERCISE 7-16 (a) Notes Receivable ............................................

Accumulated Depreciation - Equipment ($15,000 – $2,500)....................................

Equipment ...............................................

Gain on Sale of Equipment.....................

3,861 12,500 15,000 1,361

Using a financial calculator: PV ?

Yield $(3,861) I 9% N 3 PMT 0 FV $5,000 Type 0 Excel formula: =PV(rate,nper,pmt,fv,type) *

Present value of the note: $5,000 X PVF3, 9% = $5,000 X .77218 = $3,861 Discount on Note Receivable = $5,000 - $3,861 = $1,139 Fair Value of Equipment (present value of note) Carrying Amount Gain on Sale of Equipment

(b) Interest for Year 1: Notes Receivable ............................................

Interest Income ....................................... ($1,139 X 1/3 = $380) Interest for Year 2: Notes Receivable ............................................

Interest Income ....................................... ($1,139 X 1/3 = $380)

$3,861 2,500 $1,361

380 380

380 380

BRIEF EXERCISE 7-16 (CONTINUED) (b) (continued): Interest for Year 3: Notes Receivable ............................................

Interest Income ....................................... ($1,139 - $380 - $380 = $379) *Adjusted due to rounding. (c) Collection of Note at Maturity: Cash ................................................................

Notes Receivable ....................................

379* 379*

5,000 5,000

BRIEF EXERCISE 7-17 Alpha Inc. Cash .................................................................................

2,480,000 Finance Expense ($3,000,000 X 4%) ..........................................................

120,000 Notes Payable ........................................................ 2,600,000 Alberta Provincial Bank Notes Receivable ............................................................

2,600,000 Cash ........................................................................ 2,480,000 Finance Revenue ................................................... 120,000

BRIEF EXERCISE 7-18 Landstalker Cash .................................................................................

682,500 Due from Factor ..............................................................

37,500 Loss on Sale of Receivables ..........................................

30,000 Accounts Receivable .............................................

750,000

Leander Accounts Receivable ......................................................

750,000 Due to Customer ....................................................

Financing Revenue ................................................

Cash ........................................................................

37,500 30,000 682,500

BRIEF EXERCISE 7-19 Cash .................................................................................

682,500 Due from Factor ..............................................................

37,500 Loss on Sale of Receivables ..........................................

39,000 Accounts Receivable .............................................

Recourse Liability ..................................................

750,000 9,000

BRIEF EXERCISE 7-20 Cash .................................................................................

620,000 Loss on Sale of Receivables ..........................................

6,000 Accounts Receivable .............................................

Servicing Liability ..................................................

600,000 26,000

BRIEF EXERCISE 7-21 The accounts receivable turnover ratio is calculated as follows: Net Sales Average Trade Receivables (net) $297,824 $22,693 + 25,484 2

= 12.36 times

The average collection period for accounts receivable in days is 365 days = 365 = 29.53 days Accounts Receivable Turnover 12.36

BRIEF EXERCISE 7-22 2013: The accounts receivable turnover ratio is calculated as follows: Net Sales Average Trade Receivables (net) $20,400 $2,995 + $2,978 2

= 6.83 times

The average collection period for accounts receivable in days is 365 days = Accounts Receivable Turnover

365 6.83

= 53.44 days

2014: The accounts receivable turnover ratio is calculated as follows: Net Sales Average Trade Receivables (net) $21,042 $2,999 + $2,995 2

= 7.02 times

The average collection period for accounts receivable in days is 365 days = Accounts Receivable Turnover

365 7.02

= 51.99 days

As indicated from these ratios, BCE Inc.’s accounts receivable turnover ratio improved in 2014 (to 7.02 times from 6.83 times in 2013). BCE’s average collection period improved as well, to 51.99 days from 53.44 days in 2013).

*BRIEF EXERCISE 7-23 Petty Cash .......................................................................

400 Cash ........................................................................

400

Supplies ...........................................................................

174 Inventory ..........................................................................

167 Cash Over and Short ......................................................2 Cash ($400 – $57) ...................................................

343

*BRIEF EXERCISE 7-24 (a)

(b)

Petty Cash .......................................................................

200 Cash ........................................................................

200

Cash ................................................................................

150 Petty Cash ..............................................................

150

Or if combined with the entry above, for (b) this would produce: Supplies ...........................................................................

174 Inventory ..........................................................................

167 Cash Over and Short ......................................................2 Cash ($400 – $57 – $150) .......................................

Petty Cash ..............................................................

193 150

*BRIEF EXERCISE 7-25 (1) Added to balance per bank statement (a) (2) Not needed for reconciliation (e) (3) Added to balance per books (c) (4) Deducted from balance per books (d) (5) Not needed for reconciliation (e) (6) Deducted from balance per bank statement (b) (7) Deducted from balance per books (d)

*BRIEF EXERCISE 7-26 Item (3)

Cash .................................................................................

31 Interest Income .......................................................31

(4)

Office Expense - Bank Charges......................................

20 Cash ........................................................................20

(7)

Accounts Receivable ......................................................

280 Cash ........................................................................

280

SOLUTIONS TO EXERCISES EXERCISE 7-1 (10-15 minutes) (a)

Cash includes the following: 1. Commercial savings account— First National Bank $ 600,000 1. Commercial chequing account— First National Bank 900,000 3. Money market fund—Commercial Bank of Montreal 5,000,000 6. Petty cash 3,000 8. Cash floats (8 X $475 + 12 X $600) 11,000 12. Currency and coin on hand 7,700 Cash reported on December 31, 2017, $6,521,700 balance sheet

(b)

Other items classified as follows:

1.

The bank overdraft at the Royal Scotia Bank of $35,000 should be reported as a current liability as there are is no available cash in another account at Royal Scotia Bank available for offset.

The balance (at First National Bank of $100,000) requirement does not affect the balance in cash. A note disclosure indicating the arrangement and the amounts involved should be described in the notes.

Travel advances (to be reimbursed by employees) should be reported as prepaid travel in the amount of $18,000.

Cash restricted in the amount of $1,500,000 for the retirement of long-term debt should be reported as a noncurrent asset identified as “Cash restricted for retirement of long-term debt.”

An IOU from Marianne Koch should be reported as a receivable from officer in the amount of $1,900.

2.

4.

5.

7.

EXERCISE 7-1 (CONTINUED) 9.

10.

11.

13.

Certificates of deposits of $500,000 each should be classified as temporary investments (probably using the cost/amortized cost model or the fair value through net income model). They cannot be cash equivalents as the original maturities exceed 90 days.

The first postdated cheque of $25,000 should be reported as an accounts receivable. The second postdated cheque of $11,500 is for unearned revenue, or customer deposits and should not be recognized until the cheque is deposited.

Commercial paper should be reported as temporary investments (probably using the cost/amortized cost model or the fair value through net income model) or as a cash equivalent.

Investments in shares of Sortel should be classified with Trading Securities at the fair value of $4,100.

(c)

The $100,000 balance in item 2 is called a compensating balance. First National Bank would require Fashion to maintain a compensating balance to support any existing or maturing obligations and/or credit facilities that Fashion has with First National Bank.

(d)

A potential lender to Fashion would be interested in Fashion’s liquidity, solvency, and ability to service obligations. From the perspective of a potential lender, it is important that Fashion excludes the $1.5 million restricted cash from the amount of cash reported, because the $1.5 million cannot be used by Fashion to meet current obligations. Inclusion of the $1.5 million restricted cash in the amount of cash reported would result in an inaccurately reported liquidity position.

EXERCISE 7-2 (10-15 minutes) 1.

Cash balance of $625,000. Only the chequing account balance should be reported as cash. The certificate of deposit of $1,100,000 should be reported as a temporary investment, the cash advance to subsidiary of $980,000 should be reported as a receivable, and the utility deposit of $180 should be identified as a receivable from the gas company.

2.

Cash balance is $484,650 calculated as follows: Chequing account balance Overdraft Petty cash Coin and currency

$500,000 (17,000) 300 1,350 $484,650

Cash held in a bond sinking fund is restricted. Assuming that the bonds are noncurrent, the restricted cash is also reported as noncurrent.

3.

Cash balance is $549,800 calculated as follows: Chequing account balance Certified cheque from customer

$540,000 9,800 $549,800

The postdated cheque of $11,000 should be reported as a receivable. Assuming the $100,000 cash restricted due to compensating balance is not included in the chequing account amount, it should be reported separately and classified as current or noncurrent (depending on the nature of the arrangement). If the $100,000 is included in the cash balance above and is correctly classified as a current item, this restriction must be disclosed and the nature of the restriction would be described in a note indicating the type of arrangement and amount. Postage stamps on hand are reported as part of supplies or prepaid expenses.

EXERCISE 7-2 (CONTINUED) 4.

Cash balance is $95,000 calculated as follows: Chequing account balance Money market mutual fund

$57,000 38,000 $95,000

The NSF cheque received from customer should be reported as a receivable (it would have been removed from the cash account per books, and added to accounts receivable).

5.

Cash balance is $700,900 calculated as follows: Chequing account balance $700,000 Cash advance received from customer 900 $700,900 Cash restricted for future plant expansion of $500,000 should be reported as restricted cash in noncurrent assets.

The 60-day treasury bills of $180,000 should be reported as cash equivalents. Cash advance received from customer of $900 should be included as part of cash and the credit reported as a liability; cash advance of $7,000 to company executive should be reported as a receivable; refundable deposit of $26,000 paid to federal government should be reported as a receivable.

EXERCISE 7-3 (10-15 minutes) Current assets Accounts receivable Customers Accounts (of which accounts in the amount of $40,000 have been pledged as security for a bank loan) Instalment accounts collectible due in 2018 Total from customers Other* ($12,640 + $69,649)

$165,000 91,000 256,000 82,289

$338,289

Non-Current Accounts Receivable Advance to subsidiary company** Instalment accounts collectible due after December 31, 2018

101,000 80,000

* These items could be separately classified, if considered material ** This classification assumes that these receivables are not collectible in the near term based on the fact that they were advanced in 2012 and remain outstanding.

EXERCISE 7-4 (10-15 minutes) (a) Calculation of cost of goods sold: Merchandise purchased Less: Ending inventory Cost of goods sold

$320,000 99,000 $221,000

Selling price = 1.4 X Cost of goods sold = 1.4 X $221,000 = $309,400 Sales on account Less collections Uncollected balance Balance per ledger Apparent shortage

(b)

$309,400 198,000 111,400 86,500 $ 24,900 —Enough for a large down payment on a new car!

Accounts receivable balance per ledger of $86,500 is less than estimated accounts receivable of $111,400, suggesting that some accounts receivable collections were recorded as collected, but were not actually deposited to the company’s bank account. Proper segregation of duties would help prevent theft, for example, an employee other than Mitra should be responsible for opening the mail and sending only cheque remittance advices to Mitra for updating of accounts receivable records. Every effort should be made to encourage customers to pay by cheque, in order to maintain a paper trail of collections received.

Preparation of a monthly bank reconciliation would help detect if cash was recorded as collected, but not deposited to the company’s bank account.

EXERCISE 7-5 (15-20 minutes) Sales recorded at gross: (a) July 1

Accounts Receivable .......................................................

82,000 Sales Revenue ........................................................

82,000

July 5

Sales Returns and Allowances .......................................

6,200 Accounts Receivable..............................................

6,200

July 10 Cash .................................................................................

74,284 Sales Discounts ($75,800 X 2%) .....................................

1,516 Accounts Receivable..............................................

75,800 July 17 Accounts Receivable .......................................................

160,000 Sales Revenue ........................................................

160,000 July 26 Cash .................................................................................

78,400 Sales Discounts ($160,000 X .5 X 2%) ............................

1,600 Accounts Receivable..............................................

80,000 Aug. 30 Cash .................................................................................

80,000 Accounts Receivable..............................................

80,000

EXERCISE 7-5 (CONTINUED) Sales recorded at net: (b) July 1

Accounts Receivable .......................................................

80,360 Sales Revenue ........................................................

80,360 ($82,000 X .98)

July 5

Sales Returns and Allowances .......................................

6,076 Accounts Receivable..............................................

6,076 ($6,200 X .98)

July 10 Cash .................................................................................

74,284 Accounts Receivable..............................................

74,284 July 17 Accounts Receivable .......................................................

156,800 Sales Revenue ........................................................

156,800 ($160,000 X .98) July 26 Cash .................................................................................

78,400 Accounts Receivable..............................................

78,400 Aug. 30 Cash .................................................................................

80,000 Sales Discounts Forfeited .....................................

1,600 Accounts Receivable..............................................

78,400

(Note to instructor: Sales discounts forfeited could have been recognized at the time the discount period lapsed. The company, however, would probably not record this forfeiture until final cash settlement.)

EXERCISE 7-6 (15-20 minutes) Sales recorded at gross: (a) 1. June 3 Accounts Receivable ......................................................

3,000 Sales Revenue........................................................

3,000 June 5 Sales Returns and Allowances ......................................

500 Accounts Receivable 500 June 7 Freight-Out ......................................................................

25 Cash ........................................................................

25 June 12 Cash .................................................................................

2,425 Sales Discounts ($2,500 X 3%) .......................................

75 Accounts Receivable ($3,000-$500) ..............................

2,500 Sales recorded at net: 2. June 3 Accounts Receivable ......................................................

2,910 Sales Revenue ($3,000 X 97%) ..............................

2,910 June 5 Sales Returns and Allowances ......................................

485 Accounts Receivable ($500 X 97%) ........................................................

485 June 7 Freight-Out ......................................................................

25 Cash ........................................................................

25 June 12 Cash .................................................................................

2,425 Accounts Receivable ($2,910 – $485) .....................................................

2,425

EXERCISE 7-6 (CONTINUED) (b)

July 29 Cash .................................................................................

2,500 Accounts Receivable .............................................

2,425 Sales Discounts Forfeited .....................................

75 (Note to instructor: Sales discounts forfeited could have been recognized at the time the discount period lapsed.

The company, however, would probably not record this forfeiture until final cash settlement.)

(c)

The implied interest rate on accounts receivable not paid to Arnold within the discount period = 3% / (50/365) = 21.9% (or more precisely the savings would be based on the net cost of 97 cents for each dollar or [3/97 / (50/365) = 22.6%]).

(Note that 21.9% (or 22.6%) is the stated annual interest rate.) If Chester Arthur has a line of credit facility with its bank at an interest rate of 10%, Chester Arthur is recommended to pay amounts owing to Arnold within the discount period, using funds borrowed against its line of credit facility. Chester Arthur would be using funds charged interest at a rate of 10%, to earn approximately 22% interest on early payment of amounts owing to Arnold.

EXERCISE 7-7 (15-20 minutes) (a) 7/1 Accounts Receivable ......................................................

8,730 Sales Revenue ($9,000 X 97%) .............................. 8,730 7/3 Sales Returns and Allowances ......................................

679 Accounts Receivable ($700 X 97%) ........................................................

679

7/5 Cash ($19,000 X 91%) ......................................................

17,290 Loss on Sale of Receivables ..........................................

1,710 Accounts Receivable ($19,000 X 98%) .................18,620 Sales Discounts Forfeited ..................................... 380 (Note: It is possible that the company already recorded the Sales Discounts Forfeited. In this case, the credit to the Accounts Receivable would be for $19,000. The same point applies to the next entry as well.)

7/9

Accounts Receivable ($15,000 x 2%) .............................

300 Sales Discounts Forfeited......................................300 Cash .................................................................................

10,670 Finance Expense ($11,000 X 3%) ....................................

330 Notes Payable .........................................................

11,000

7/11

Account Receivable… .....................................................

249 Sales Discounts Forfeited......................................249 [($9,000 – $700) X 3%] This entry may be made at the next time financial statements are prepared. Also, it may occur on 12/29 when Harding Ltd.’s receivable is adjusted.

12/29 Allowance for Doubtful Accounts ..................................

7,470 Accounts Receivable. ..............................................

7,470 [$8,730 – $679 + $249 = $8,300; $8,300 – (10% X $8,300) = $7,470]

EXERCISE 7-7 (CONTINUED) (b) If the receivables are factored without recourse, the transaction would be treated as a sale of receivables under ASPE and IFRS. The risks and rewards are assumed to have been transferred and control is also assumed to have been transferred. (c) If the receivables are factored with recourse, under IFRS the risks and rewards will not be considered to have been transferred. There is no transfer because Janut is guaranteeing payment if the customer does not pay the receivable. One of the IFRS 9 criteria of risks and rewards being transferred has not been met: “The entity has no obligation to pay amounts to the eventual recipients unless it collects equivalent amounts from the original receivable.” The receivables, therefore, remain on the books of Janut and a loan liability is recorded.

Under ASPE, Janut uses the decision tree provided under the standard. Assuming they have surrendered control (assets are isolated, transferee can pledge/sell assets, no repurchase agreement), Janut can use a financial components approach and the receivables can be removed from the books. A recourse obligation (liability) is recorded for the estimated amount that would have to be paid for the debtors who do not pay their receivables balance, as well as an estimated liability for any servicing costs.

EXERCISE 7-8 (5-10 minutes) (a) Morganfield Ltd. accounts receivable write-off: Allowance for Doubtful Accounts ..................................

20,000 Accounts Receivable..............................................

20,000

McKinley Ltd. reinstatement of partial accounts receivable for amounts previously written off and now determined to be collectible: Accounts Receivable—McKinley Ltd. ............................

6,000 Allowance for Doubtful Accounts .........................

6,000 ($60,000 X 10%)

(b)

Accounts Receivable (Book Value) Allowance for Doubtful Accounts Net Book Value

Before After Adjustments Adjustments $ 2,500,000 $2,486,000* 120,000 106,000** $ 2,380,000 $ 2,380,000

* $2,500,000 - $20,000 + $6,000 ** $120,000 - $20,000 + $6,000 The net realizable value is also $2,380,000 before and after the adjustments.

EXERCISE 7-9 (5-10 minutes) Balance, January 1, 2017 Bad debt expense accrual .8% X ($80,000,000 X 0.9) Uncollectible receivables written off Balance, December 31, 2017 before adjustment Allowance adjustment Balance, December 31, 2017

$400,000 576,000 976,000 (500,000) 476,000 49,000 $525,000

Bad Debt Expense ..........................................................

49,000 Allowance for Doubtful Accounts.........................49,000

EXERCISE 7-10 (10-15 minutes)

(a)

The direct write-off approach is not theoretically justifiable.

Direct write-off does not match (bad debt) expense with revenues of the period, nor does it result in receivables being stated at estimated realizable value on the balance sheet.

(b)

Bad Debt Expense using the allowance method and percentage-of-sales approach = 2% of Sales = $64,000 ($3,200,000 X 2%) Bad Debt Expense using the direct write-off method = $33,330 ($7,700 + $6,800 + $12,000 + $6,830) Net income would be $30,670 ($64,000 – $33,330) lower under the allowance method and percentage-of-sales approach.

(c)

The direct write-off method is not considered appropriate, except when the amount uncollectible is highly immaterial.

EXERCISE 7-11 (15- minutes) (a) 1.

Bad Debt Expense ..........................................................

6,150 Allowance for Doubtful Accounts......................... 6,150 [($105,000 X 4%) + $1,950]

2.

Bad Debt Expense ..........................................................

7,758 Allowance for Doubtful Accounts* ....................... 7,758

3.

Bad Debt Expense ..........................................................

2,250 Allowance for Doubtful Accounts......................... 2,250 [($105,000 X 4%) - $1,950]

4.

Bad Debt Expense ..........................................................

3,858 Allowance for Doubtful Accounts** ...................... 3,858

*($36,000 X .01 + $48,000 X .05 + $12,200 X .12 + $8,800 X .18) + $1,950 **($36,000 X .01 + $48,000 X .05 + $12,200 X .12 + $8,800 X .18) − $1,950 (b)

An unadjusted debit balance in allowance for doubtful accounts at year end is a result, in general, of write-offs during the year exceeding the total of beginning credit balance in allowance for doubtful accounts, plus the current year bad debt expense accrual. As an independent reviewer of Chloe’s financial statements, we can note that a bad debt expense accrual in the current year is needed to ensure there is a sufficient credit balance in the allowance for doubtful accounts at the end of the year. We would want to ensure that accounts receivable (net) is valued at net realizable value on the balance sheet.

EXERCISE 7-11 (CONTINUED) (c) When an entity assesses lifetime expected credit losses, it should examine at all possible default events over the life of the accounts receivable. It would use information available at the reporting date to evaluate a range of possible outcomes (based on past events, current conditions, and forecasts of future economic conditions) and their probability of occurring.

The allowance method examines the composition of the receivables at the reporting date. A percentage-of-sales approach relies on historical bad debt losses only and may not reflect all of the expected credit losses. If a percentageof-sales approach is used during the accounting period, the allowance method should be applied at the reporting date to further examine the make-up of the receivables at that time. Using the percentage-of-sales approach would only be appropriate if there is also an assessment of the year-end receivables to ensure that the Allowance account is appropriate (a mix of procedures). An adjustment may be needed to the account with the offsetting debit or credit being made to Bad Debt Expense.

Chloe uses an allowance method and the approach used in #2 and #4 are likely best, as the aging information should provide more information to assess collectability. Chloe would also want to ensure that information on current and forecasted conditions (considering factors like industry and geographic conditions) are also assessed in reviewing the receivables at the reporting date. This approach would be more consistent with IFRS 9 where impairment represents "expected credit losses resulting from all possible default events" (that is, more consistent with an expected loss model).

EXERCISE 7-11 (CONTINUED) (c) (continued) In some circumstances, there is an agreement in place with a particular customer giving that customer an additional grace period in paying their account. In this case, the age of the account should not be the primary criteria in assessing whether or not the account is likely to be collected. Such accounts should be assessed separately and excluded from the aging schedule calculation.

Chloe’s approach to accounting for sales returns differ under IFRS. For sales with a right of return, under IFRS, a Refund Liability account is credited and Sales Revenue is debited rather than Sales Returns and Allowances.

EXERCISE 7-12 (10-15 minutes) Balance 1/1 ($850 – $155) 4/12 (#2412) ($2,110 – $1,000 – $300) 11/18 (#5681) ($2,000 – $1,250) Balance December 31

$ 695 Over one year Eight months 810 and 18 days One month 750 and 12 days $2,255

In as much as later invoices have been paid in full, all three of these amounts should be investigated in order to determine why Hopkins Co. has not paid them. The amounts in the beginning balance and #2412 should be of particular concern.

EXERCISE 7-13 (20-25 minutes)

(a) Interest bearing note – Option 1: September 30, 2017 Notes Receivable ............................................................

105,000 Accounts Receivable .............................................105,000 December 31, 2017 Interest Receivable .........................................................

2,100 Interest Income....................................................... 2,100 ($105,000 X 8% X 3/12) September 30, 2018 Cash ................................................................................

113,400 Interest Receivable ................................................ 2,100 Interest Income....................................................... 6,300 Notes Receivable ...................................................105,000 ($105,000 X 8% X 9/12 = $6,300) (b) Non-interest bearing note – Option 2: September 30, 2017 Notes Receivable ............................................................

105,000 Accounts Receivable .............................................105,000 December 31, 2017 Notes Receivable ............................................................

2,100 Interest Income....................................................... 2,100 ($105,000 X 8% X 3/12) September 30, 2018 Notes Receivable ............................................................

6,300 Interest Income....................................................... 6,300 ($105,000 X 8% X 9/12) Cash ................................................................................

113,400 Notes Receivable ...................................................113,400

EXERCISE 7-13 (CONTINUED) (c)

There is no difference in the amount of interest income earned in 2017 and 2018 because both options bear interest at 8%. The “non-interest bearing” note has the interest included in the face amount of the note and is journalized to account for this. The actual interest earned is the same under both options.

(d)

The liquidity of Big Corp. at December 31, 2017 will remain unchanged whichever option is selected. Under option 1, the note balance remains at $105,000 but interest receivable of $2,100 results in a total of $107,100 under current assets. Under Option 2, the balance of the note, after recording the accrual of interest income is also $107,100 under current assets. The cash flows will also be the same under both options as the amount collected at the maturity of the note is $113,400.

EXERCISE 7-14 (15-20 minutes) (a) September 1, 2017 Notes Receivable ............................................................

31,250 Sales Revenue ........................................................ 31,250 Calculation of the present value of the note: Maturity value Present value of $35,000 due in 1 year at 12%—$35,000 X .89286 Discount

35,000

31,250 $3,750

Using a financial calculator: PV ?

Yields $ (31,250) I 12% N 1 PMT FV $ 35,000 Type 0 Excel formula: =PV(rate,nper,pmt,fv,type) December 31, 2017 Notes Receivable ............................................................

1,250 Interest Income....................................................... 1,250 ($ 31,250 X 12% X 4/12)

EXERCISE 7-14 (CONTINUED) (a) (continued) September 1, 2018 Notes Receivable ............................................................

2,500 Interest Income....................................................... 2,500 ($ 31,250 X 12% X 8/12)

Cash ..........................................................................

35,000 Notes Receivable ............................................

35,000

(b) Cash ..........................................................................

28,000 Loss on Impairment .................................................

4,500 Notes Receivable ($31,250 +$1,250) ..............................................

32,500 ($ 28,000 = $35,000 X 80%) (Note: this assumes that the entry to accrue interest for Jan – Sept 1, 2018 has not been recorded). (c) To decrease collection risk, Myo could have: 1. Required cash on delivery (COD) for at least a portion of the order 2. Required instalment payments (instead of one lumpsum payment in one year) 3. Applied more rigorous collection procedures, including frequent phone calls to Khin to determine any changes in credit risk associated with the note receivable 4. Referred collection of the note receivable to an external collection agency.

EXERCISE 7-15 (30-35 minutes) (a) 1.

Notes Receivable ............................................................

700,000 Land ........................................................................590,000 Gain on Sale of Land .............................................110,000 ($700,000 – $590,000) $1,101,460 .63552 700,000 1,101,460 $ 401,460

Face value of note Present value of 1 for 4 periods at 12% Present value of note Face value of note Discount on note receivable

Using a financial calculator: PV ? yields $(699,998) I 12% N 4 PMT FV $ 1,101,460 Type 0 Excel formula: =PV(rate,nper,pmt,fv,type)

EXERCISE 7-15 (CONTINUED) (a) (continued) 2.

Notes Receivable ............................................................

221,164 Service Revenue ....................................................221,164

Calculation of the present value of the note: Maturity value Present value of $400,000 due in 8 years at 12%—$400,000 X .40388 Present value of $12,000 payable annually for 8 years at 12% annually—$12,000 X 4.96764 Present value of the note and and interest Discount

400,000

$161,552

59,612

Using a financial calculator: PV ?

Yields $ (221,165) I 12% N 8 PMT $ 12,000 FV $ 400,000 Type 0 Excel formula: =PV(rate,nper,pmt,fv,type)

221,164 $178,836

EXERCISE 7-15 (CONTINUED) (a) (continued) 3.

Notes Receivable ..........................................................

63,397 Accounts Receivable .............................................

63,397

Calculation of the present value of the note: Present value of $20,000 payable annually for 4 years at 10% annually—$20,000 X 3.16986

63,397

Using a financial calculator: PV ? Yield $(63,397) I 10% N 4 PMT $20,000 FV Type 0 Excel formula: =PV(rate,nper,pmt,fv,type) (b) Effective Interest Table Instalment Note Receivable Debit Cash Credit Interest Income Carrying Debit Notes Receivable Amount Credit Notes of Note Receivable $20,000 20,000 20,000 20,000

$6,340 4,974 3,471 1,818

$63,397 49,737 34,711 18,182 —