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Chapter 7: Receivables and Investments
172. Stream Media Inc. and Techtronics are competitors in the same industry.
The following information was summarized from a recent annual report of Stream Media Inc.:
(In millions)
Receivables:
December 31, 2015 $ 1,968
December 31, 2014
642
Revenue for the year ended:
December 31, 2015
46,980
December 31, 2014
40,023
The following information was summarized from a recent annual report of Techtronics:
(In millions)
Accounts and notes receivable, net
December 31, 2015
$ 246
December 31, 2014
264
Revenues for the year ended:
December 31, 2015
4,335
December 31, 2014
4,251
REQUIRED:
1. Calculate the accounts receivable turnover ratios for Stream Media and Techtronics for the most recent year.
2. Calculate the average collection period, in days, for both companies for the most recent year. Comment on
the reasonableness of the collection periods for these companies considering the nature of their business.
3. Which company appears to be performing better? What other information should you consider in
determining how these companies are performing?
Chapter 7: Receivables and Investments
173. The 2015 annual report of Ski Products, Inc. reported the following amounts (in millions of dollars):
Net sales, for the year ended May 31, 2015
$15,111.2
Receivables, May 31, 2015
989.4
Receivables, May 31, 2014
1,011.6
REQUIRED:
1. Compute Ski’s accounts receivable turnover ratio for the year ended May 31, 2015. (Assume that all sales are
on credit.)
2. What is the average collection period in days for an account receivable? Explain your answer.
3. Ski’s main products are medium to high-end skis and snow boards. Give some examples of the types of
customers you would expect Ski to have. Do you think the average collection period for sales to these customers
is reasonable? What other information do you need to fully answer that question?
174. Rafter.com received a 10%, 90-day promissory note with a face amount of $12,000 from Joyce Company, for the
sale of merchandise on November 1, 2014.
A) Identify the maturity date of the note.
B) How much interest income (to the nearest whole month) will Rafter.com earn over the
term of the note?
C) How much interest income will Rafter.com recognize during 2014?
Chapter 7: Receivables and Investments
175. Cyprus Corp. received a 7%, 6-month promissory note with a face amount of $8,000 from the Mustafa Company
for the sale of merchandise on May 1, 2014. Cyprus’ accounting year-end is December 31.
REQUIRED: Identify the maturity date of the note.
176. Cyprus Corp. received a 7%, 6-month promissory note with a face amount of $8,000 from the Mustafa Company
for the sale of merchandise on May 1, 2014. Cyprus’ accounting year-end is December 31.
REQUIRED: How much interest income will Cyprus Corp. recognize over the term of the note?
177. Hemmer Company received a 12%, 6-month promissory note with a face amount of $10,000 from
Stutfeld Company, for the sale of merchandise on December 1, 2014.
A) Which party is the maker? _______________________
B) Which party is the payee? _____________________
C) Determine the maturity value of the note.
Chapter 7: Receivables and Investments
178. On September 1, 2015, Fox Corp. accepted a six-month, 6%, $65,000 interest bearing note from Rudy Company in
payment of an accounts receivable. Fox’s year-end is December 31. Rudy paid the note and interest on the due
date.
REQUIRED:
1. Who is the maker and who is the payee of the note?
2. What is the maturity date of the note?
3. Prepare all necessary journal entries that Fox needs to make in connection with this note.
Chapter 7: Receivables and Investments
179. Speed Wear Bicycle Gear accepts VISA credit cards from its customers. Speed Wear is closed on Sundays and
on that day records the weekly sales and remits the credit card drafts to VISA. For the week ending on Sunday,
April 12, cash sales totaled $3,650 and credit card sales amounted to $3,900. On April 15, Speed Wear received
$3,794.70 from VISA as payment for the credit card drafts. Prepare the necessary journal entries on April 12 and
April 15. As a percentage, what collection fee is VISA charging Speed Wear?
Chapter 7: Receivables and Investments
180. On September 20, Mendes Inc. presents credit card drafts to its bank in the amount of $10,000; the
collection charge is 4%.
Required: Prepare the journal entry on Mendes' books on September 20, the date of deposit.
Chapter 7: Receivables and Investments
181. On August 16, 2015, Blenim Corp. purchases 6,000 shares of common stock in Mountain Inc. at a market price of
$17 per share. In addition, Blenim pays brokerage fees of $2,000. On October 21, 2015, Blenim sells the Mountain
stock for $12 per share.
REQUIRED:
Prepare all necessary entries on Blenim’s books in connection with the investment beginning with the purchase of
the common stock on August 16, 2015, and the sale on October 21, 2015.
Chapter 7: Receivables and Investments
182. On May 31, 2015, Evergreen Corp. purchased a 120-day, 6% certificate of deposit for $60,000. The CD was
redeemed on September 28, 2015. Prepare the journal entries on Evergreen’s books to account for:
a. The purchase of the CD.
b. The accrual of interest adjustment for interest earned through June 30, the end of the company’s fiscal year.
c. The redemption of the CD. Assume 360 days in a year.
Chapter 7: Receivables and Investments
183. Bagel Inc. reported net income of $105,000 for the year ended December 31, 2014. The following items were
included on Bagel’s balance sheets at December 31, 2014 and 2013:
12/31/14
12/31/13
Cash
$106,000
$113,000
Accounts receivable
213,000
93,000
Notes receivable
95,000
103,000
Bagel uses the indirect method to prepare its statement of cash flows. Bagel does not have any other current
assets or current liabilities and did not enter into any investing or financing activities during 2014.
REQUIRED:
1. Prepare Bagel’s 2014 statement of cash flows.
2. Draft a brief memo to the owner to explain why cash decreased during a profitable year.
Chapter 7: Receivables and Investments
184. Hawthorne Industries’ comparative balance sheets included accounts receivable of $221,400 at December 31,
2013, and $205,900 at December 31, 2014. Sales reported on Hawthorne’s 2014 income statement amounted
to $2,550,000. What is the amount of cash collections that Hawthorne will report in the Operating Activities
category of its 2014 statement of cash flows assuming that the direct method is used? Show your calculations.
185. The comparative financial statements for the years ended December 31, 2014 and 2013 for Sophia Company
reported the following information.
Balance Sheet:
2014
2013
Cash and cash equivalents
$77,000
$81,600
Accounts receivables, less allowance for doubtful
accounts of $80 (2014) and $82 (2013)
2,700
2,300
Income Statement:
Net sales for the year
$9,700
$8,800
Net income for the year
950
1,070
Statement of Cash Flows:
Net cash provided by operating activities
$1,000
$1,100
Increase in accounts receivable
(460)
(280)
Answer these questions concerning Sophia Company's receivables:
A) What is the gross amount of accounts receivable for Sophia at December 31, 2014? Why is this amount
different than the amount of receivables shown in the 2014 column of the balance sheet?
B) What is the net realizable value of accounts receivable for Sophia at December 31, 2014? What does
this amount represent?
Chapter 7: Receivables and Investments
186. Write a short paragraph explaining the following:
1. When bad debts are estimated, why is the balance in Allowance for Doubtful Accounts considered when
the percentage of accounts receivable approach is used but not when the percentage of net credit sales
approach is used?
2. When estimating bad debts on the basis of a percentage of accounts receivable, what is the advantage of
using an aging schedule?
187. What is the purpose of an accounts receivable subsidiary ledger?
188. What is the purpose of an aging schedule?
189. Earl’s Company reported its accounts receivable turnover ratio at 10 times. Its credit terms are 2/10, n/20.
What does this ratio tell you about Earl’s Company?
190. Explain the distinction between a note receivable and an account receivable.
191. Identify two methods of accelerating cash from sales.
Chapter 7: Receivables and Investments
192. Why does the discounting of a note receivable with recourse result in a contingent liability? Should the liability
be reported on the balance sheet? Explain.
193. Corrigan Corp. purchased 1,000 shares of Microsoft common stock. What will determine whether the shares
are classified as current assets or noncurrent assets?
194. Why are increases in accounts receivable reported as an adjustment to net income in the operating activities
section of a statement of cash flows?
195. Evanston Inc. started the year with $35,000 in accounts receivable and ended the year with $50,000 in the
account. Describe how information regarding the company’s accounts receivable should be reflected on its
statement of cash flows, assuming use of the indirect method.
For each item listed below, identify how it will be reported on the Statement of Cash Flows under the
indirect method.
a. Operating activity
b. Investing activity
c. Financing activity
d. Not reported separately on the cash flow statement
196. Write-off of a customer’s account receivable under the allowance method
197. Decrease in accounts receivable
Chapter 7: Receivables and Investments
198. Increase in short-term notes receivable
Select the term from the list below that matches each of the following six descriptions.
a. Interest
b. Maturity value
c. Principal
d. Payee
e. Discounting
f. Term
g. Recourse
h. Implicit
i. Maker
199. The sale of a note
200. The length of time a note is outstanding—the period of time between the date it is issued and the date it matures
201. The party that receives payment due from a note
202. Transfer a note with a contingent liability
203. The difference between the principal amount of the note and its maturity value
204. The amount of cash the maker is to pay the payee on the maturity date of the note
205. The most common type of receivables is accounts receivable.
a. True
b. False
206. A contra-asset account used to reduce accounts receivable to its net realizable value is known as a(n)
____________________.
207. Accountants use the to overcome the deficiencies of the direct write-off method for
bad debts.
Chapter 7: Receivables and Investments
208. The direct write-off method estimates the amount of bad debts before they occur.
a. True
b. False
209. Which one of the following is not an accurate statement regarding the direct write-off method of accounting for
bad debts?
a. The direct write-off method has some deficiencies when accounting for bad debts.
b. The direct write-off method ignores the possibility that partial collection of a company's outstanding accounts
receivable may occur.
c. Under the direct write-off method, an expense is increased.
d. The allowance method for bad debts violates the matching principle, but the direct write-off method does not.
Match the following definitions with their appropriate terms in Questions 210 - 217.
a. A receivable arising from the sale of goods or services with a verbal promise to pay.
b. A form used to categorize the various individual accounts receivable according to the length of time
each has been outstanding.
c. A method of estimating bad debts on the basis of either the net credit sales of the period or the
accounts receivable at the end of the period.
d. A measure of the number of times receivables are collected in a period.
e. The general ledger account that is supported by a subsidiary ledger.
f. A contra-asset account used to reduce accounts receivable to its net realizable value.
g. The detail for a number of individual items that collectively make up a single general ledger account.
h. The recognition of bad debts expense at the point an account is written off as uncollectible.
210. Account receivable
211. Subsidiary ledger
212. Control account
213. Direct write-off method
214. Allowance method
215. Allowance for doubtful accounts
Chapter 7: Receivables and Investments
216. Aging schedule
217. Accounts Receivable turnover
Match the following definitions with their appropriate terms in Questions 218 - 231.
a. A liability resulting from the signing of a promissory note.
b. A measure of how long it takes to collect receivables.
c. A written promise to repay a definite sum of money on demand or at a fixed or determinable date in the future.
d. The length of time a note is outstanding, that is, the period of time between the date it is issued and the date it
matures.
e. The party that will receive the money from a promissory note at some future date.
f. The process of selling a promissory note.
g. The date the promissory note is due.
h. The amount of cash the maker is to pay the payee on the maturity date of the note.
i. The difference between the principal amount of the note and its maturity value.
j. An asset resulting from the acceptance of a promissory note from another company.
k. Securities issued by corporations and governmental bodies as a form of borrowing.
l. Securities issued by corporations as a form of ownership in the business.
m. The party that agrees to repay the money for a promissory note at some future date.
n. The amount of cash received, or the fair value of the products or services received, by the maker when a
promissory note is issued.
218. Promissory note
219. Maker
220. Payee
221. Note receivable
222. Note payable
223. Principal
224. Maturity date
Chapter 7: Receivables and Investments
225. Term
226. Maturity value
227. Interest
228. Discounting
229. Number of days' sales in receivables
230. Equity securities
231. Debt securities
232. Cash flows from purchases, sales, and maturities of investments are usually classified as operating activities.
a. True
b. False
Chapter 7: Receivables and Investments
233. Prepare journal entries without explanations for the following transactions involving notes payable for
Marcus Company whose fiscal year ends September 30. Round all numbers to the nearest penny.
Sept. 10 Received cash for a 60-day, 12 percent, $10,000 note payable. Interest is in addition to
the face value.
30 Made end-of-year adjusting entry to accrue interest expense for the note.
Nov. 9 Paid amount due on the note plus interest.
Chapter 7: Receivables and Investments
234. Assume that on December 13, 2016, Royal Company sells a computer to Savco Corp. at an invoice price of
$25,000. Because Savco is short of cash, it gives Royal a 90-day, 12% promissory note. [Assume a 360 day year
for interest calculations.]
Required:
1) What is the total amount of interest that will be due on the maturity date?
2) What journal entry will Royal make to record receipt of the note?
3) If Royal has a December 31 year-end, what adjusting journal entry is needed to record interest due but not yet
received?
4) How much interest will Royal earn in 2017?
5) On what day will the note mature?
6) What journal entry will Royal record on the maturity date?
Chapter 7: Receivables and Investments
235. Assume that Momentum Inc. has total accounts receivable of $250,000 and an associated allowance for doubtful
accounts of $10,000 at the end of 2015.
1) What is the net realizable value of receivables for Momentum?
2) How should Momentum present this information on its balance sheet?
