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Solution Manual for Fundamental Accounting Principles

22nd Edition by Wild Shaw and Chiappetta ISBN 0077862279 9780077862275

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Chapter 9 Accounting for Receivables QUESTIONS

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

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

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

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

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

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

7. Apple lists its accounts receivable as “Accounts receivables, less allowances of $99 and $98, respectively” ($ in millions) on its balance sheet. This means that Apple’s allowance is $99 million as of September 28, 2013, and $98 million as of September 29, 2012.

Chapter 09 - Accounting for Receivables

Education.

consent of McGraw-Hill

8. Google uses the allowance method to account for doubtful accounts as evidenced by the receivables being reduced by an allowance of $631 million on the December 31, 2013, balance sheet. The realizable value of accounts receivable as of December 31, 2013, is its net amount of $8,882 million.

9-544

Chapter 09 - Accounting for Receivables

9. Samsung’s lists its accounts receivable as “Trade and other receivables.” Samsung reports accounts receivable (in KRW millions) of ₩27,875,934

10. Samsung lists its accounts receivable as “Trade and other receivables” in current assets. There is no allowance listed on the face of the balance sheet. Students might follow up and see that in its Note 10 – Trade and other receivables, Samsung reports using the allowance method and has an allowance of ₩287,721 (₩267,675 million for trade receivables and₩20,046 for non-trade receivables) at December 31, 2013. Per Note 10, Samsung also reports that it has noncurrent accounts receivable of ₩60,181 million (₩36,024 million for trade receivables and ₩24,157 for non-trade receivables) at December 31, 2013, which is reported in noncurrent assets.

QUICK STUDIES

Quick Study 9-1 (15 minutes)

Chapter 09 - Accounting for Receivables

9-545

1. Cash............................................................................ 19,000 Credit Card Expense*................................................ 1,000 Sales..................................................................... 20,000 To record credit card sales less fees. *$20,000 x 5% Cost of Goods Sold................................................... 15,000 Merchandise Inventory....................................... 15,000 To record cost of sales. 2. Accounts Receivable Credit Card Cos................. 4,800 Credit Card Expense*................................................ 200 Sales..................................................................... 5,000 To record credit card sales less fees. *$5,000 x 4% Cost of Goods Sold................................................... 3,000 Merchandise Inventory....................................... 3,000 To record cost of sales. 5 days later Cash............................................................................ 4,800 Accounts Receivable—Credit Card Cos........... 4,800 To record cash receipts.

Study 9-2

minutes) Oct. 1 Bad Debts Expense .............................................. 50,000 Accounts Receivable—P. Moore................... 50,000 To write off an account. Quick Study 9-3 (10 minutes) Oct. 30 Accounts Receivable P.Moore.......................... 50,000 Bad Debts Expense ........................................ 50,000 To reinstate an account previously written off. Oct. 30 Cash....................................................................... 50,000 Accounts Receivable— P. Moore.................. 50,000 To record cash received on account.

Quick

(10

direct write-off method

allowance method 3. allowance method 4. direct write-off method 5. direct write-off method 6. allowance method

Quick Study 9-4 (15 minutes) 1.

Quick Study 9-5 (15 minutes)

there is a strong belief that the remaining $500 will be collected soon, then the full $800 balance can be reinstated.

Quick Study 9-6 (15 minutes)

1. Jan. 31 Allowance for Doubtful Accounts ...................... 800 Accounts Receivable—C. Green .................. 800 To write off account. 2. Mar. 9 Accounts Receivable—C. Green* ....................... 300 Allowance for Doubtful Accounts ................ 300 To reinstate a written off account. *If

9 Cash ...................................................................... 300 Accounts Receivable—C. Green .................. 300 To record payment on a receivable.

1. Dec. 31 Bad Debts Expense .......................................... 885 Allowance for Doubtful Accounts............. 885 To record estimate of uncollectibles. Desired balance in allowance = $99,000 x

$1,485 cr. Adjustment required = $1,485

$600 cr. = $885 2. Desired balance in allowance = $1,485 (part 1) Adjustment required = $1,485 cr. + $300 dr. = $1,785 Quick Study 9-7 (15 minutes) Dec. 31 Bad Debts Expense .......................................... 1,400 Allowance for Doubtful Accounts............. 1,400 To record estimate of uncollectibles ($280,000 x 0.5%).

1.5%=

Quick Study 9-8 (15 minutes)

Quick Study 9-9 (10 minutes)

Maturity date is October 31,

is computed as follows: Days in August ................................................................ 31 Minus the date of the note.............................................. 2 Days remaining in August.............................................. 29 Add days in September .................................................. 30 Add days in October to equal 90 days (October 31).... 31 Period of the note in days .............................................. 90 2. Aug. 2 Notes Receivable—R. Albany .......................... 6,000 Accounts Receivable R. Albany.............. 6,000 To record receipt of note on account.

which

Oct. 31 Cash.................................................................... 6,180 Notes Receivable—R. Albany.................... 6,000 Interest Revenue......................................... 180 To record cash received on note plus interest ($6,000 x 12% x 90/360). Quick Study 9-10 (15 minutes) Dec. 31 Interest Receivable............................................ 50 Interest Revenue......................................... 50 To record the year-end adjustment for interest earned ($10,000 x 6% x 30/360). Maturity date Jan. 15 Cash.................................................................... 10,075 Interest Receivable ..................................... 50 Interest Revenue......................................... 25 Notes Receivable ........................................ 10,000 To record cash received on note plus interest.

Quick Study 9-11 (10 minutes)

Quick Study 9-12 (10 minutes)

Accounts receivable turnover = =

= 5.9 times

Net sales

Interpretation: An accounts receivable turnover of 5.9 implies that the company’s average accounts receivable balance is converted into cash 5.9 times per year. The 5.9 turnover is about 21% lower than the average turnover of 7.5 for its competitors. The company needs to identify the cause of this poor performance and rectify the situation to at least compete at the average level.

Quick Study 9-13 (10 minutes)

a. Both U.S. GAAP and IFRS have similar asset criteria that apply to recognition of receivables. Further, receivables that arise from revenuegenerating activities are subject to broadly similar criteria for U.S. GAAP and IFRS. Specifically, both refer to the realization principle and an earnings process. However, while these criteria are broadly similar, differences do exist, and they arise mainly from industry-specific guidance under U.S. GAAP, which is very limited under IFRS.

b. Both U.S. GAAP and IFRS require receivables to be reported net of estimated uncollectibles. Further, both systems require that the expense for estimated uncollectibles be recorded in the same period when revenues from those receivables are recorded. This means that in the case of accounts receivable, both U.S. GAAP and IFRS require the allowance method for uncollectibles (unless immaterial).

2015

May 1 Cash................................................................... 121,875 Factoring Fee Expense*................................... 3,125 Accounts Receivable ................................. 125,000 To record sale of receivable. *($125,000 x 0.025)

Average accounts receivable $861,105 ($153,400 + $138,500) / 2

Exercise 9-1 (25 minutes)

Comparison: The total of the Schedule of Accounts Receivable ($9,301) is proved with the balance of the Accounts Receivable controlling T-account from Part 1 ($9,301).

Chapter 09 - Accounting for Receivables 9-550 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. EXERCISES

Part 1 GENERAL LEDGER Accounts Receivable Sales Sales Returns and Allowances Nov. 5 4,615 Nov. 21 209 Nov. 5 4,615 Nov. 21 209 10 1,350 10 1,350 13 832 13 832 30 2,713 30 2,713 Bal. 9,301 ACCOUNTS RECEIVABLE LEDGER Ski Shop Welcome Enterprises Zia Natara Nov. 5 4,615 Nov. 10 1,350 Nov. 13 832 Nov. 21 209 30 2,713 Bal. 7,328 Bal. 623 Part 2 Vail Company Schedule of Accounts Receivable November 30, 2015 Ski Shop.............................................................................. $7,328 Welcome Enterprises......................................................... 1,350 Zia Natara............................................................................ 623 Total..................................................................................... $9,301

Chapter 09 - Accounting for Receivables 9-551 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Exercise 9-2 (20 minutes) Apr. 8 Cash....................................................................... 8,064 Credit Card Expense*........................................... 336 Sales................................................................. 8,400 To record credit card sales less 4% fee. *($8,400 x .04) 8 Cost of Goods Sold .............................................. 6,000 Merchandise Inventory................................... 6,000 To record cost of sales. 12 Accounts Receivable—Continental.................... 5,460 Credit Card Expense*........................................... 140 Sales.................................................................. 5,600 To record credit card sales less 2.5% fee. *($5,600 x .025) 12 Cost of Goods Sold .............................................. 3,500 Merchandise Inventory................................... 3,500 To record cost of sales. 20 Cash....................................................................... 5,460 Accounts Receivable—Continental................. 5,460 To record cash received on credit sales less fees. Exercise 9-3 (20 minutes) March 11 Bad Debts Expense............................................ 45,000 Accounts Receivable Lester Co............... 45,000 To write off an account. March 29 Accounts Receivable—Lester Co..................... 45,000 Bad Debts Expense...................................... 45,000 To reinstate an account previously written off. March 29 Cash..................................................................... 45,000 Accounts Receivable—Lester Co............... 45,000 To record cash received on account.

Exercise 9-4 (20 minutes)

Exercise 9-5 (15 minutes)

Exercise 9-6 (30 minutes)

Dec. 31 Bad Debts Expense .............................................. 4,875 Allowance for Doubtful Accounts................. 4,875 To record estimated bad debts expense (.005 x $975,000). Feb. 1 Allowance for Doubtful Accounts....................... 580 Accounts Receivable—P. Park...................... 580 To write off an account. June 5 Accounts Receivable—P. Park............................ 580 Allowance for Doubtful Accounts ................. 580 To reinstate an account. June 5 Cash....................................................................... 580 Accounts Receivable—P. Park...................... 580 To record cash received on account.

a. Dec. 31 Bad Debts Expense .............................................. 685 Allowance for Doubtful Accounts* ............... 685 To record estimated bad debts expense. *Unadjusted balance = $ 415 credit Estimated balance ($55,000 x .02) = 1,100 credit Required adjustment = $ 685 credit b. Dec. 31 Bad Debts Expense .............................................. 1,391 Allowance for Doubtful Accounts** .............. 1,391 To record estimated bad debts expense. ** Unadjusted balance = $ 291 debit Estimated balance ($55,000 x .02) = 1,100 credit Required adjustment = $1,391 credit

a. Computation of the estimated balance of the allowance for uncollectibles: Not due: $396,000 x 0.01 = $ 3,960 1 to 30: 90,000 x 0.02 = 1,800 31 to 60: 36,000 x 0.05 = 1,800 61 to 90: 18,000 x 0.07 = 1,260 Over 90: 30,000 x 0.10 = 3,000 $11,820 credit

Exercise 9-6 (Concluded

Exercise 9-7 (25 minutes)

) b. Dec. 31 Bad Debts Expense......................................... 8,220 Allowance for Doubtful Accounts............ 8,220 To record estimated bad debts.* * Unadjusted balance $ 3,600 credit Estimated balance .............................. 11,820 credit Required adjustment $ 8,220 credit c. Dec. 31 Bad Debts Expense......................................... 11,920 Allowance for Doubtful Accounts............ 11,920 To record estimated bad debts.* * Unadjusted balance............................ $ 100 debit Estimated balance 11,820 credit Required adjustment .......................... $11,920 credit

a. Computation of the estimated balance of the allowance for uncollectibles: $570,000 x 0.045 = $25,650 credit b. Dec. 31 Bad Debts Expense......................................... 13,650 Allowance for Doubtful Accounts............ 13,650 To record estimated bad debts.* * Unadjusted balance........................... $12,000 credit Estimated balance ............................. 25,650 credit Required adjustment ......................... $13,650 credit c. Dec. 31 Bad Debts Expense......................................... 26,650 Allowance for Doubtful Accounts............ 26,650 To record estimated bad debts.* * Unadjusted balance........................... $ 1,000 debit Estimated balance ............................. 25,650 credit Required adjustment ......................... $26,650 credit

Exercise 9-8 (20 minutes)

Exercise 9-9 (25 minutes)

Feb. 1 Allowance for Doubtful Accounts....................... 6,800 Accounts Receivable—Oakley Co ................ 900 Accounts Receivable Brookes Co.............. 5,900 To write off specific accounts. June 5 Accounts Receivable—Oakley............................ 900 Allowance for Doubtful Accounts ................. 900 To reinstate an account. June 5 Cash....................................................................... 900 Accounts Receivable—Oakley...................... 900 To record cash received on account.

Expense

Dec. 31 Bad Debts Expense........................................... 9,000 Allowance for Doubtful Accounts.............. 9,000 To record estimated bad debts [$300,000 x .03].

Expense is 1.0% of total sales Dec. 31 Bad Debts Expense........................................... 12,000 Allowance for Doubtful Accounts.............. 12,000 To record estimated bad debts [($300,000 + $900,000) x .01].

Allowance is 6% of accounts receivable Dec. 31 Bad Debts Expense........................................... 12,500 Allowance for Doubtful Accounts.............. 12,500 To record estimated bad debts.* * Unadjusted balance $ 5,000 debit Estimated balance ($125,000 x 6%) ........... 7,500 credit Required adjustment................................... $12,500 credit

is 3.0% of credit sales

Chapter 09 - Accounting for Receivables 9-555 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Exercise 9-10 (10 minutes) 2014 Dec. 13 Notes Receivable—M. Lee.......................... 9,500 Accounts Receivable—M. Lee.............. 9,500 To record receipt of note on account. Dec. 31 Interest Receivable...................................... 38 Interest Revenue.................................... 38 To record interest earned [$9,500 x .08 x 18/360]. Exercise 9-11 (15 minutes) 2015 Jan. 27 Cash.................................................................. 9,595 Interest Revenue* ...................................... 57 Interest Receivable.................................... 38 Notes Receivable M. Lee........................ 9,500 To record cash received on note plus interest. * [$9,500 x .08 x (45-18)/360 = $57] Mar. 3 Notes Receivable Tomas Co........................ 5,000 Accounts Receivable-Tomas Co.............. 5,000 To record receipt of note on account. 17 Notes Receivable H. Cheng ......................... 2,000 Accounts Receivable H. Cheng............. 2,000 To record receipt of note on account. Apr. 16 Accounts Receivable—H. Cheng................... 2,015 Interest Revenue........................................ 15 Notes Receivable H. Cheng ................... 2,000 To record receivable for dishonored note plus interest [$2,000 x .09 x 30/360]. May 1 Allowance for Doubtful Accounts.................. 2,015 Accounts Receivable—H. Cheng............. 2,015 To write off account. June 1 Cash.................................................................. 5,125 Interest Revenue........................................ 125 Notes Receivable—Tomas Co.................. 5,000 To record cash received on note with interest [$5,000 x .10 x 90/360].

Exercise 9-12 (15 minutes)

Exercise 9-13 (20 minutes)

Nov. 1 Notes Receivable—K. White........................... 6,000 Accounts Receivable—K. White .............. 6,000 To record receipt of note on account. Dec. 31 Interest Receivable.......................................... 80 Interest Revenue........................................ 80 To record interest earned [$6,000 x .08 x 60/360]. Apr. 30 Cash.................................................................. 6,240 Notes Receivable—K. White..................... 6,000 Interest Revenue* ...................................... 160 Interest Receivable.................................... 80 To record cash received on note plus interest earned. *[$6,000 x .08 x 120/360]

Mar. 21 Notes Receivable—T. Jackson....................... 9,500 Accounts Receivable—T. Jackson.......... 9,500 To record receipt of note on account. Sept. 17 Accounts Receivable—T. Jackson................ 9,880 Interest Revenue........................................ 380 Notes Receivable—T. Jackson................. 9,500 To record note dishonored plus interest earned [$9,500 x .08 x 180/360 = $380]. Dec. 31 Allowance for Doubtful Accounts.................. 9,880 Accounts Receivable—T. Jackson.......... 9,880 To write off an account.

Accounts receivable in the amount of $12,500 are pledged as security for a $10,000 note payable to Main Bank.

July 4 Accounts Receivable ....................................... 7,245 Sales ............................................................ 7,245 To record sales on credit. 4 Cost of Goods Sold.......................................... 5,000 Merchandise Inventory .............................. 5,000 To record cost of sales. 9 Cash................................................................... 19,200 Factoring Fee Expense*................................... 800 Accounts Receivable ................................. 20,000 To record sale of receivable. *($20,000 x .04) 17 Cash................................................................... 5,859 Accounts Receivable ................................. 5,859 To record cash received on account. 27 Cash................................................................... 10,000 Notes Payable............................................. 10,000 To record cash from a loan.

Exercise 9-14 (20 minutes)

Note

Financial Statements

Exercise 9-15 (15 minutes)

Year 2014 accounts receivable turnover: = 8.8 times

Year 2015 accounts receivable turnover: = 9.4 times

Analysis: Raheem Company turned over its accounts receivable 0.6 (9.4 – 8.8) times more in 2015 than in 2014. This may indicate that the company has tightened its credit policy or has improved its collection efforts. Also, relative to competitors’ turnover of 11, Raheem is performing worse than average.

Exercise 9-16 (25 minutes)

(¥ in millions)

a. Expense is 0.4% of total revenues

b. Allowance is 2.0% of trade receivables, gross

Chapter 09 - Accounting for Receivables 9-558

Dec. 31 Bad Debts Expense........................................... 36,164 Allowance for Doubtful Accounts.............. 36,164 To record estimated bad debts [9,041,071 x 0.004].

Dec. 31 Bad Debts Expense........................................... 40,000 Allowance for Doubtful Accounts.............. 40,000 To record estimated bad debts.* * Unadjusted balance 10,000 credit Estimated balance (2,500,000 x 0.02) ........ 50,000 credit Required adjustment 40,000 credit $335,280 ($41,400 + $34,800)/2 $405,140 ($44,800 + $41,400)/2

PROBLEM SET A

Problem 9-1A (30 minutes) June 4 Accounts Receivable—N. Morris......................... 650 Sales................................................................. 650 To record sales on credit. 4 Cost of Goods Sold .............................................. 400 Merchandise Inventory................................... 400 To record cost of sales. 5 Cash....................................................................... 6,693 Credit card expense*............................................ 207 Sales................................................................. 6,900 To record credit card sales less fee. *($6,900 x .03) 5 Cost of Goods Sold .............................................. 4,200 Merchandise Inventory................................... 4,200 To record cost of sales. 6 Accounts Receivable—Access............................ 5,733 Credit card expense*............................................ 117 Sales................................................................. 5,850 To record credit card sales less fee. *($5,850 x .02) 6 Cost of Goods Sold .............................................. 3,800 Merchandise Inventory................................... 3,800 To record cost of sales. 8 Accounts Receivable—Access............................ 4,263 Credit card expense*............................................ 87 Sales................................................................. 4,350 To record credit card sales less fee. *($4,350 x .02) 8 Cost of Goods Sold .............................................. 2,900 Merchandise Inventory................................... 2,900 To record cost of sales. 10 No journal entry required. 13 Allowance for Doubtful Accounts ....................... 429 Accounts Receivable—A. McKee.................. 429 To write off account due. 17 Cash....................................................................... 9,996 Accounts Receivable—Access...................... 9,996 To record cash received from credit card co. ($5,733+$4,263) 18 Cash....................................................................... 637 Sales Discounts*................................................... 13 Accounts Receivable—N. Morris................... 650 To record cash received less discount. *($650 x .02)

Problem 9-2A (35 minutes)

Expense is 1.5% of credit sales Dec. 31 Bad Debts Expense................................... 85,230 Allowance for Doubtful Accounts...... 85,230 To record estimated bad debts [$5,682,000 x .015].

Expense is 1% of total sales Dec. 31 Bad Debts Expense................................... 75,870 Allowance for Doubtful Accounts...... 75,870 To record estimated bad debts [($1,905,000 + $5,682,000) x .01]. c. Allowance is 5% of accounts receivable Dec. 31 Bad Debts Expense................................... 80,085 Allowance for Doubtful Accounts...... 80,085 To record estimated bad debts.* * Unadjusted balance................................. $16,580 debit Estimated balance ($1,270,100 x 5%)..... 63,505 credit Required adjustment $80,085 credit Part 2 Current assets Accounts receivable.................................... $1,270,100 Less allowance for doubtful accounts....... (68,650)* $1,201,450 Or: Accounts receivable (net of $68,650* uncollectible accounts)............................. $1,201,450 * Adjustment to the allowance $85,230 credit Unadjusted allowance balance........ 16,580 debit Adjusted balance............................... $68,650 credit Part 3 Current assets Accounts receivable.................................... $1,270,100 Less allowance for doubtful accts. ............ (63,505)** $1,206,595 Or: Accounts receivable (net of $63,505** uncollectible accounts)............................. $1,206,595

See

1c.

Part

computations in Part

Problem 9-3A (35 minutes)

Part 1

Calculation of the estimated balance of the allowance for uncollectibles

Part 3

Writing off the account receivable in 2016 will not directly affect year 2016 net income. The entry to write off an account involves a debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable, both of which are balance sheet accounts. Net income is affected only by the annual recognition of the estimated bad debts expense, which is journalized as an adjusting entry. Net income for Year 2015 (the year of the original sale) included an estimated expense for write-offs such as this one.

Chapter 09 - Accounting for Receivables 9-561 Copyright

Not due: $830,000 x .0125 = $10,375 1 to 30: 254,000 x .0200 = 5,080 31 to 60: 86,000 x .0650 = 5,590 61 to 90: 38,000 x .3275 = 12,445 Over 90: 12,000 x .6800 = 8,160 $41,650 credit

2 Dec. 31 Bad Debts Expense......................................... 27,150 Allowance for Doubtful Accounts............ 27,150 To record estimated bad debts.* * Unadjusted balance $14,500 credit Estimated balance ............................. 41,650 credit Required adjustment ......................... $27,150 credit

Part

Problem 9-4A (35 minutes)

2014 a. Accounts Receivable...................................... 1,345,434 Sales........................................................... 1,345,434 To record sales on account. Cost of Goods Sold ........................................ 975,000 Merchandise Inventory............................. 975,000 To record cost of sales. b. Allowance for Doubtful Accounts................. 18,300 Accounts Receivable................................ 18,300 To write off accounts. c. Cash................................................................. 669,200 Accounts Receivable................................ 669,200 To record cash received on account. d. Bad Debts Expense ........................................ 28,169 Allowance for Doubtful Accounts .......... 28,169 To record estimated bad debts.* *Beginning receivables .................... $ 0 Credit sales ..................................... 1,345,434 Collections ...................................... (669,200) Write-offs (18,300) Ending receivables ......................... 657,934 Percent uncollectible...................... x 1.5% Required ending allowance............ 9,869** Cr. Unadjusted balance........................ 18,300 Dr. Adjustment to the allowance $ 28,169 Cr. ** rounded to nearest dollar

Problem 9-4A (Concluded)

2015 e. Accounts Receivable ........................................ 1,525,634 Sales ............................................................. 1,525,634 To record sales on account. Cost of Goods Sold........................................... 1,250,000 Merchandise Inventory ............................... 1,250,000 To record cost of sales. f. Allowance for Doubtful Accounts.................... 27,800 Accounts Receivable .................................. 27,800 To record write-off of accounts. g. Cash.................................................................... 1,204,600 Accounts Receivable .................................. 1,204,600 To record cash received on account. h. Bad Debts Expense........................................... 32,199 Allowance for Doubtful Accounts.............. 32,199 To record estimated bad debts.* *Beginning receivables........................ $ 657,934 Credit sales......................................... 1,525,634 Collections.......................................... (1,204,600) Write-offs............................................ (27,800) Ending receivables............................. 951,168 Percent uncollectible ......................... x 1.5% Required ending allowance............... 14,268** Cr. Unadjusted balance Beginning (Cr.) ................................. $ 9,869 Write-offs (Dr.).................................. 27,800 17,931 Dr. Adjustment to the allowance............. $ 32,199 Cr. ** rounded to nearest dollar

Problem 9-5A (75 minutes)

Part 1

2014 Dec. 16 Notes Receivable D. Todd............................. 10,800 Accounts Receivable D. Todd................. 10,800 To record note received on account. 31 Interest Receivable........................................... 36 Interest Revenue......................................... 36 To record interest earned [$10,800 x .08 x 15/360 = $36]. 2015 Feb. 14 Cash................................................................... 10,944 Interest Revenue*........................................ 108 Interest Receivable..................................... 36 Notes Receivable D. Todd....................... 10,800 To record cash received on note with interest. *[$10,800 x 0.08 x 45/360 = $108] Mar. 2 Notes Receivable—Midnight Co...................... 6,100 Accounts Receivable—Midnight Co......... 6,100 To record note received on account. 17 Notes Receivable—A. Privet............................ 2,400 Accounts Receivable—A. Privet 2,400 To record note received on account. Apr. 16 Accounts Receivable—A. Privet ..................... 2,414 Interest Revenue......................................... 14 Notes Receivable—A. Privet...................... 2,400 To record receivable for dishonored note plus interest [$2,400 x .07 x 30/360= $14]. May 31 Accounts Receivable—Midnight Co............... 6,222 Interest Revenue*........................................ 122 Notes Receivable Midnight Co................ 6,100 To record receivable for dishonored note *[$6,100 x 0.08 x 90/360 = $122]

Problem 9-5A (Concluded)

Part 2

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

July 16 Cash.................................................................. 6,286 Interest Revenue*....................................... 64 Accounts Receivable Midnight Co........ 6,222 To record cash received on account plus additional interest. *[$6,222 x .08 x 46/360= $64 (rounded)] Aug. 7 Notes Receivable Mulan............................... 7,450 Accounts Receivable Mulan................... 7,450 To record note received on account. Sept. 3 Notes Receivable—N. Carson ........................ 2,100 Accounts Receivable—N. Carson............ 2,100 To record note received on account. Nov. 2 Cash.................................................................. 2,135 Interest Revenue*....................................... 35 Notes Receivable N. Carson .................. 2,100 To record cash received on note plus interest *($2,100 x .10 x 60/360 = $35). 5 Cash.................................................................. 7,636 Interest Revenue*....................................... 186 Notes Receivable—Mulan......................... 7,450 To record cash received on note plus Interest. *($7,450 x .10 x 90/360 = $186) Dec. 1 Allowance for Doubtful Accounts.................. 2,414 Accounts Receivable—A. Privet .............. 2,414 To record write-off of account.

PROBLEM SET B

Problem 9-1B (30 minutes)

Aug. 4 Accounts Receivable—M. Carpenter................... 3,700 Sales................................................................. 3,700 To record sales on credit. Cost of Goods Sold............................................... 2,000 Merchandise Inventory................................... 2,000 To record cost of sales. 10 Cash........................................................................ 5,044 Credit Card Expense*............................................ 156 Sales................................................................. 5,200 To record credit card sales less fee. *($5,200 x .03) Cost of Goods Sold............................................... 2,800 Merchandise Inventory................................... 2,800 To record cost of sales. 11 Accounts Receivable—Aztec............................... 1,225 Credit card expense*............................................. 25 Sales................................................................. 1,250 To record credit card sales less fee. *($1,250 x .02) Cost of Goods Sold............................................... 900 Merchandise Inventory................................... 900 To record cost of sales. 14 Cash........................................................................ 3,626 Sales Discounts*................................................... 74 Accounts Receivable—M. Carpenter............. 3,700 To record cash received less discount.*($3,700 x .02) 15 Accounts Receivable—Aztec............................... 3,175 Credit Card Expense*(rounded to nearest dollar).. 65 Sales.................................................................. 3,240 To record credit card sales less fee. *($3,240 x .02) Cost of Goods Sold............................................... 1,758 Merchandise Inventory................................... 1,758 To record cost of sales. 18 No journal entry required. 22 Allowance for Doubtful Accounts........................ 498 Accounts Receivable Craw Co.................... 498 To write off account due. 25 Cash........................................................................ 4,400 Accounts Receivable Aztec......................... 4,400 To record cash rec’d from credit card co. ($1,225+$3,175)

Problem 9-2B (35 minutes)

Part

Expense is 2.5% of credit sales Dec. 31 Bad Debts Expense........................................ 33,550 Allowance for Doubtful Accounts........... 33,550 To record estimated bad debts [$1,342,000 x .025].

Expense is 1.5% of total sales Dec. 31 Bad Debts Expense........................................ 35,505 Allowance for Doubtful Accts. ................ 35,505 To record estimated bad debts [($1,025,000 + $1,342,000) x .015]. c. Allowance is 6% of accounts receivable Dec. 31 Bad Debts Expense........................................ 27,000 Allowance for Doubtful Accounts........... 27,000 To record estimated bad debts.* * Estimated balance ($575,000 x 6%)..... $ 34,500 credit Unadjusted balance 7,500 credit Required adjustment $ 27,000 credit Part 2 Current assets Accounts receivable .................................. $575,000 Less allowance for doubtful accounts..... (41,050)* $533,950 Or: Accounts receivable (net of $41,050* uncollectible accounts) .......................... $533,950 * Adjustment to the allowance............... $33,550 credit Unadjusted allowance balance............ 7,500 credit Adjusted balance .................................. $41,050 credit Part 3 Current assets Accounts receivable .................................. $575,000 Less allowance for doubtful accounts..... (34,500)** $540,500 Or: Accounts receivable (net of $34,500** uncollectible accounts) ............ $540,500

1c.

**See computations in Part

Problem 9-3B (35 minutes)

Part 1

Part 3

Writing off the account receivable in 2016 will not directly affect Year 2016 net income. The entry to write off an account involves a debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable, both of which are balance sheet accounts. Net income is affected only by the annual recognition of the estimated bad debts expense, which is journalized as an adjusting entry. Net income for Year 2015 (the year of the original sale) included an estimated expense for write-offs such as this one.

Calculation of the estimated balance of the allowance Not due: $396,400 x .020 = $ 7,928 1 to 30: 277,800 x .040 = 11,112 31 to 60: 48,000 x .085 = 4,080 61 to 90: 6,600 x .390 = 2,574 Over 90: 2,800 x .820 = 2,296 $27,990 Part 2 Dec. 31 Bad Debts Expense..................................... 31,390 Allowance for Doubtful Accounts........ 31,390 To record estimated bad debts.* * Unadjusted balance............. $ 3,400 debit Estimated balance................ 27,990 credit Required adjustment ........... $31,390 credit

Problem 9-4B (35 minutes)

2014 a. Accounts Receivable........................................ 685,350 Sales............................................................. 685,350 To record sales on account. Cost of Goods Sold .......................................... 500,000 Merchandise Inventory............................... 500,000 To record cost of sales. b. Cash................................................................... 482,300 Accounts Receivable.................................. 482,300 To record cash received on account. c. Allowance for Doubtful Accounts................... 9,350 Accounts Receivable.................................. 9,350 To record write-off of accounts. d. Bad Debts Expense .......................................... 11,287 Allowance for Doubtful Accounts............. 11,287 To record estimated bad debts.* *Beginning receivables................... $ 0 Credit sales..................................... 685,350 Collections...................................... (482,300) Write-offs........................................ (9,350) Ending receivables ........................ 193,700 Percent uncollectible..................... x 1.0% Required ending allowance........... 1,937** Cr. Unadjusted balance....................... 9,350 Dr. Adjustment to the allowance......... $ 11,287 Cr. ** Rounded to nearest dollar

Problem 9-4B (Concluded)

2015 e. Accounts Receivable........................................ 870,220 Sales............................................................. 870,220 To record sales on account. Cost of Goods Sold .......................................... 650,000 Merchandise Inventory............................... 650,000 To record cost of sales. f. Cash................................................................... 990,800 Accounts Receivable.................................. 990,800 To record cash received on account. g. Allowance for Doubtful Accounts................... 11,090 Accounts Receivable.................................. 11,090 To record write-off of accounts. h. Bad Debts Expense .......................................... 9,773 Allowance for Doubtful Accounts............. 9,773 To record estimated bad debts.* *Beginning receivables................ $ 193,670 Credit sales.................................. 870,220 Collections................................... (990,800) Write-offs..................................... (11,090) Ending receivables ..................... 62,000 Percent uncollectible.................. x 1.0% Required ending allowance........ 620 Cr. Unadjusted balance Beginning (credit) ..................... $ 1,937 Write-offs (debit) ....................... 11,090 9,153 Dr. Adjustment to the allowance...... $ 9,773 Cr.

Problem 9-5B (75 minutes)

Part 1

2014 Nov. 1 Notes Receivable—S. Julian............................... 4,800 Accounts Receivable—S. Julian .................. 4,800 To record note received on account. Dec. 31 Interest Receivable.............................................. 64 Interest Revenue............................................ 64 To record interest earned [$4,800 x .08 x 60/360]. 2015 Jan. 30 Cash...................................................................... 4,896 Interest Revenue*........................................... 32 Interest Receivable........................................ 64 Notes Receivable—S. Julian......................... 4,800 To record cash received on note with interest. *[$4,800 x .08 x 30/360] Feb. 28 Notes Receivable—King Co................................ 12,600 Accounts Receivable—King Co. .................. 12,600 To record note received on account. Mar. 1 Notes Receivable M. Shelley............................ 6,200 Accounts Receivable M. Shelley ............... 6,200 To record note received on account. 30 Accounts Receivable King Co ......................... 12,684 Interest Revenue............................................ 84 Notes Receivable—King Co.......................... 12,600 To record receivable for dishonored note plus interest [$12,600 x .08 x 30/360]. Apr. 30 Cash...................................................................... 6,324 Interest Revenue............................................ 124 Notes Receivable—M. Shelley...................... 6,200 To record cash received on note plus interest ($6,200 x .12 x 60/360 = $124).

Problem 9-5B (Concluded)

Part 2

June 15 Notes Receivable R. Solon............................ 2,000 Accounts Receivable R. Solon ................ 2,000 To record note received on account. June 21 Notes Receivable—J. Felton............................ 9,500 Accounts Receivable—J. Felton ............... 9,500 To record note received on account. Aug. 14 Cash................................................................... 2,034 Interest Revenue*........................................ 34 Notes Receivable—R. Solon...................... 2,000 To record cash received on note plus interest. *[$2,000 x .08 x 72/360] rounded to nearest dollar Sept. 19 Cash................................................................... 9,690 Interest Revenue*........................................ 190 Notes Receivable—J. Felton...................... 9,500 To record cash received on note plus interest. *[$9,500 x .08 x 90/360] rounded to nearest dollar Nov. 30 Allowance for Doubtful Accounts................... 12,684 Accounts Receivable—King Co ................ 12,684 To record write-off of accounts.

SERIAL PROBLEM SP 9

Serial Problem — SP 9, Business Solutions (50 minutes)

1. a. Bad debts expense is recorded as 1% of total revenues: $44,000 x .01 = $440.

1. b. Bad debts expense is recorded as 2% of accounts receivable: $22,867 x .02 = $457.34, which is $457 rounded to the nearest dollar.

Instructor note: It might help to stress that the beginning balance for the Allowance for Doubtful Accounts is zero, which is unusual and exists because this is the first period that the company applies the allowance method.

2. Allowance Balance as of 3/31/16 ...................

Required Balance: $20,250 x 0.02 = $405

Required Adjustment: $405 - $357 = $48

3. Many small business owners use the direct write-off method of recording bad debts expense. The direct method is a simple and straightforward method of accounting for bad debts expense. It can also be justified if the amounts are immaterial. However, when the amounts are material, the direct write-off method can result in accounts receivable overstatements, bad debts expense understatements, and net income overstatements. The method required per GAAP is the allowance method, which will result in the best matching of a period’s expenses to revenues.

Chapter 09 - Accounting for Receivables 9-573 Copyright

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2016 Mar. 31 Bad Debts Expense .......................................... 440 Allowance

Doubtful

440

for

Accounts.............

To record estimated bad debts.

2016 Mar.

Bad Debts Expense .......................................... 457 Allowance for Doubtful Accounts............. 457

To record estimated bad debts.

$457

(100)

$357

Cr. Less: Account written off ..............................

Dr. Allowance Balance as of 6/30/16 ...................

Cr. (before adjustment)

2016 June 30 Bad Debts Expense .......................................... 48 Allowance for Doubtful Accounts............. 48

To record estimated bad debts.

1. Apple’s receivables at September 28, 2013, are $13,102 million.

2. Accounts receivable turnover for 2013 ($ millions) = 14.22 times

($13,102

+ 10,930) / 2

3. Average collection period = 365 / Turnover = 365 / 14.22 = 25.67 days

4. Liquid assets as a percent of current liabilities ($ millions)

Sep. 28, 2013: = 126.9%

$170,910 $14,259 + $26,287 + $13,102 + $1,764 $43,658

Sep. 29, 2012: = 106.0%

Comments: Current liabilities are obligations that are due to be paid or liquidated within one year or one operating cycle of the business, whichever is longer. Typically, cash provided from the operations of the business during the year along with the existing liquid assets are used to satisfy these obligations. Looking solely at Apple’s ability to satisfy current obligations using cash, investments, receivables and inventory, the company is in a slightly better position at September 28, 2013, as compared to September 29, 2012. In both years, however, Apple should not have difficulty satisfying its current liabilities with these liquid assets. As a benchmark, many prefer a ratio close to 100% for liquid assets divided by current liabilities.

5. Note 1 to Apple’s financial statements describes its accounting policies. That note reports that: “All highly liquid investments with maturities of three months or less at the date of purchase are classified as cash equivalents.”

Chapter 09 - Accounting for Receivables 9-574

Reporting in Action — BTN 9-1

6. Solution depends on the financial statement information obtained. $10,746 + $18,383 + $10,930 + $791 $38,542

Comparative Analysis — BTN 9-2

1. Accounts Receivable Turnover ($ millions)

$170,910

($13,102 + $10,930) / 2

$156,508

Apple (Current Year): = 14.22 times Apple (Prior Year): = 19.20 times

($10,930 + $5,369) / 2

$59,825

Google (Current Year): = 7.14 times

($8,882 + $7,885) / 2

$50,175

Google (Prior Year): = 7.54 times

($7,885 + $5,427) / 2

2. Average Collection Period (or “Average Days’ Sales Uncollected”)

Interpretation: The average collection period for Google is longer than Apple; this is because Apple sells more of its products for shorter-term credit periods to its end customers (iTunes is one example) and Google has more ‘corporate clients’ that buy ad space and negotiate better payment terms.

3. Both companies appear reasonably efficient in collecting accounts receivable. Apple collects them over a shorter period of time in both years. Both Apple and Google showed an unfavorable trend with a shorter collection time for the prior year.

Chapter 09 - Accounting for Receivables 9-575

= 25.67

Apple

Year): 365

= 19.01 days

Google

Apple (Current Year): 365 days / 14.22 times

days

(Prior

days / 19.20 times

Google (Current Year): 365 days / 7.14 times = 51.12 days

(Prior Year): 365 days / 7.54 times = 48.41 days

1. If the estimate for bad debts is reduced then less Bad Debts Expense will be recognized on the income statement resulting in a higher net income. It also means that a lower allowance will be shown on the balance sheet, which will result in a higher realizable value for receivables and, therefore, a larger amount of current liquid assets.

2. Accounting procedures often allow for alternate methods or require the use of estimates. Therefore, managers have some leeway in their application of accounting procedures. In this case it seems reasonable to doubt the motivation behind the manager’s recommendation for a lower bad debts expense. There does not appear to be any economic justification for the change in estimate aside from the self-interest of the manager.

3. An informed owner or an effective board of directors will be aware of alternate accounting methods and how estimates can affect the financial statements. The owner or board should review the reasonableness of the manager’s and accountant’s estimate for bad debts expense. Also, if the company is audited, the auditors will review this estimate for reasonableness.

Chapter 09 - Accounting for Receivables 9-576

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Ethics Challenge — BTN 9-3

TO: Sid Omar

FROM: (Your Name)

DATE: _______________

SUBJECT: Difference Between Bad Debts Expense and Allowance For Doubtful Accounts

In accounting for credit sales and bad debts, we report sales revenue in the period the sales are made, even though some credit sales do not result in collections until the following period. Of course, some credit sales eventually prove to be uncollectible. The fact that some accounts will become uncollectible is what gives rise to bad debts expense and the allowance for doubtful accounts.

Determining Bad Debts Expense

Bad debts expense represents the estimated amount of the year's sales that will become uncollectible. The reported amount of bad debts expense is determined at the end of the accounting period by multiplying an estimated percent times the annual sales for the period. This year's bad debts expense of $59,000 is calculated as 2% of the annual sales of $2,950,000.

Determining Allowance For Doubtful Accounts

The Allowance for Doubtful Accounts unadjusted balance at the end of the year is the cumulative result of recording bad debts expense and writing off specific accounts receivable in all past years. The recognition of bad debts expense at the end of each year has the effect of increasing the Allowance for Doubtful Accounts balance. However, when specific accounts receivable are written off, they decrease the Allowance for Doubtful Accounts balance. Prior to this year's bad debts expense calculation, the cumulative total of writing off specific accounts was $16,000 greater than the cumulative total of the past years' bad debts expenses. Therefore, you could say that Allowance for Doubtful Accounts had an "abnormal" balance of $16,000. Then, when this year's bad debts expense of $59,000 is added to Allowance for Doubtful Accounts, the result is an ending balance of $43,000.

Sid, I hope this clarifies the matter for you. If you have further questions, please call me.

Chapter 09 - Accounting for Receivables 9-577 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Communicating in Practice — BTN 9-4

1. At December 31, 2013, eBay’s ($ millions) net accounts receivable were $899, and at December 31, 2012, its net accounts receivable were $822.

3. These percentages seem high compared to other companies, but eBay’s operations are all online, and the risk of fraudulent transactions is likely higher than other companies. eBay’s prior experience has apparently caused them to estimate this high amount of uncollectible accounts.

Instructor note: Computations for the aging schedule are in the Problem 9-3A solution. The check figure for total estimated uncollectibles is $41,650.

— BTN 9-5

Taking It to the Net

2. $ millions December 31, 2013 December 31,

Gross accounts receivable ........................................................... $1,005 $911 Allowance for doubtful accounts (including authorized credits) ......................................................... 106 89 % of uncollectible accounts ........................................................... 10.5% 9.8%

2012

Teamwork in Action — BTN 9-6

Adjusting entry Dec. 31 Bad Debts Expense......................................... 27,150 Allowance for Doubtful Accounts............ 27,150 To record estimated bad debts.* * Req. allowance balance................... $41,650 credit Unadjusted balance 14,500 credit Adj. to the allowance....................... $27,150 credit December 31, 2015, Balance Sheet Presentation Accounts Receivable............................................$1,220,000* Less Allowance for Doubtful Accounts .............. 41,650 1,178,350**

* Total of each age category.

** Net Realizable Accounts Receivable.

Chapter 09 - Accounting for Receivables

1. Computation of added annual net income or loss

a. Added Monthly Net Income or Loss under Plan A

b. Added Monthly Net Income or Loss under Plan B

Chapter 09 - Accounting for Receivables 9-580 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Entrepreneurial Decision — BTN 9-7

Increased sales............................................................... $250,000 Cost of sales ................................................................... (135,500) Credit card fees ($250,000 x 4.75%).............................. (11,875) Recordkeeping and shipping ($250,000 x 6%)............. (15,000) Lost gross profit on store sales ($35,000 x 25%) ........ (8,750) Additional net income (loss).......................................... $ 78,875

Increased sales............................................................... $500,000 Cost of sales ................................................................... (375,000) Recordkeeping and shipping ($500,000 x 4%)............. (20,000) Uncollectible accounts ($500,000 x 6.2%).................... (31,000) Additional net income (loss).......................................... $ 74,000

2. Plan (A) provides a slightly higher income, so if the client company can only pursue one plan now, based purely on the financial aspect, it should choose Plan (A).

Plan (A) might expand its product into new markets, and could increase sales over time. However, this is a new distribution method for the client company, and it might lack the expertise to do it well. It will need to further assess whether the benefit of additional expansion of online sales over time will be more/less than the cost of lost sales through normal channels.

Taking credit cards for these online sales reduces its risk of uncollectible accounts. The credit card company takes the risk of the customer not paying.

Plan (B) is a way to expand sales, possibly into more locations. This is an expansion of a distribution method now employed.

The client company does run some unknown risk associated with having new customers. While the client company may understand its current customers, it will need to monitor the new customers to make sure that the uncollectible accounts do not rise beyond acceptable levels.

Hitting the Road BTN 9-8

Telephone calls to VISA and American Express are the source of information for this solution. VISA reports that the average transaction fee it charges merchants is 3%. American Express has a range, depending on volume of business and average price of merchandise sold, which ranges from 2.95% to 4.5%.

Some merchants often choose not to accept certain cards because the credit card fees are higher than others. In the case of VISA, compared to American Express, a merchant might have to pay as much as 1.5% more on its American Express transactions. This can be a major part of its net profit margin, especially for businesses such as grocery and hardware stores.

Chapter 09 - Accounting for Receivables 9-581 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Entrepreneurial Decision — BTN 9-7 continued

1. Accounts Receivable Turnover (KRW in millions)

Samsung (Current Year): ₩228,692,667 = 8.38 times

₩27,875,934 + ₩26,674,596) / 2

2. Average Collection Period (or “Average Days’ Sales Uncollected”)

Samsung (Current Year): 365 days / 8.38 times = 43.56 days

3. Samsung’s results are between Apple and Google in terms of its turnover and collection periods. Apple collects its receivables more rapidly than Google and Samsung. Google and Samsung are relatively close in terms of their collection periods.

Chapter 09 - Accounting for Receivables

9-582

prior

Global

— BTN 9-9

written consent of McGraw-Hill Education.

Decision