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Reporting and Analyzing Receivables
FOR INSTRUCTOR USE ONLY
8-61
Ex. 231
On December 31, 2016, when its Allowance for Doubtful Accounts had a credit balance of
$1,500, Leeds Company estimates that 6% of its accounts receivable balance of $95,000 will
become uncollectible. On March 3, 2017, Leeds Company determined that Megan Jost’s account
of $950 was uncollectible. On May 15, 2017, Jost paid the amount previously written off.
Instructions
Prepare the journal entries for December 31, 2016, March 3, 2017 and May 15, 2017.
Ex. 232
The percentage of receivables approach to estimating bad debts expense is used by Hayes
Company. On February 28, the firm had accounts receivable in the amount of $585,000 and
Allowance for Doubtful Accounts had a credit balance of $370 before adjustment. Net credit sales
for February amounted to $3,000,000. The credit manager estimated that uncollectible accounts
would amount to 5% of accounts receivable. On March 10, an accounts receivable from Mark
Dole for $2,100 was determined to be uncollectible and written off. However, on March 31, Dole
received an inheritance and immediately paid his past due account in full.
(a) Prepare the journal entries made by Hayes Company on the following dates:
1. February 28
2. March 10
3. March 31
(b) Assume no other transactions occurred that affected the allowance account during March.
Determine the balance of Allowance for Doubtful Accounts at March 31.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
8-62
Ex. 233
Hess Computer Store has credit sales of $450,000 in 2016 and a debit balance of $600 in the
Allowance for Doubtful Accounts at year end. As of December 31, 2016, $130,000 of accounts
receivable remain uncollected. The credit manager of Hess prepared an aging schedule of
accounts receivable and estimates that $7,800 will prove to be uncollectible.
On March 4, 2017 the credit manager authorizes a write-off of the $1,000 balance owed by A.
Myers.
Instructions
(a) Prepare the adjusting entry to record the estimated uncollectible accounts expense in 2016.
(b) Show the balance sheet presentation of accounts receivable on December 31, 2016.
(c) On March 4, before the write-off, assume the balance of Accounts Receivable account is
$145,000 and the balance of Allowance for Doubtful Accounts is a credit of $5,000. Make the
appropriate entry to record the write off of the Myers account. Also show the balance sheet
presentation of accounts receivable before and after the write-off.
Reporting and Analyzing Receivables
FOR INSTRUCTOR USE ONLY
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Cash Realizable Value $140,000 $140,000
Ex. 234
Hachey Company has accounts receivable of $95,100 at March 31, 2017. An analysis of the
accounts shows these amounts.
Balance, March 31
Month of Sale 2017 2016
March $65,000 $75,000
February 12,600 8,000
December and January 10,100 2,400
November and October 7,400 1,100
$95,100 $86,500
Credit terms are 2/10, n/30. At March 31, 2017, there is a $2,500 credit balance in Allowance for
Doubtful Accounts prior to adjustment. The company uses the percentage of receivables basis for
estimating uncollectible accounts. The company's estimates of bad debts are as shown below
Estimated Percentage
Age of Accounts Uncollectible
Current 2%
1–30 days past due 7
31–90 days past due 25
Over 90 days past due 50
Instructions
(a) Determine the total estimated uncollectibles.
(b) Prepare the adjusting entry at March 31, 2017, to record bad debts expense.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
8-64
Ex. 235
Compute the missing amount for each of the following notes:
Principal Annual Interest Rate Time Total Interest
______________________________________________________________________
(a) $50,000 5% 2.5 years ?
______________________________________________________________________
(b) $120,000 ? 9 months $7,200
______________________________________________________________________
(c) ? 9% 90 days $1,350
______________________________________________________________________
(d) $60,000 6% ? $1,200
______________________________________________________________________
Ex. 236
Record the following transactions in general journal form for the Newell Company.
July 1 Received a $9,000, 8%, 3-month note, dated July 1, from Lois Patton in payment of
her open account.
Oct. 1 Received notification from Lois Patton that she was unable to honor her note at this
time. It is expected that Patton will pay at a later date.
Nov. 15 Received full payment from Lois Patton for note receivable previously dishonored.
Reporting and Analyzing Receivables
FOR INSTRUCTOR USE ONLY
8-65
Ex. 237
Grey Boat Company often requires customers to sign promissory notes for major credit
purchases. Journalize the following transactions for Grey Boat Company.
Feb. 12 Accepted a $35,000, 6%, 60-day note from Bill Bazil for a 19-foot motorboat built to
his specifications.
April 14 Received notification from Bill Bazil that he was unable to honor his promissory note
but that he expects to pay the amount owed in May.
May 26 Received a check from Bill Bazil for the total amount owed.
June 10 Received notification by the bank that Bill Bazil’s check was being returned “NSF” and
that Mr. Bazil had declared personal bankruptcy.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
8-66
Ex. 238
Compute the maturity value as indicated for each of the following notes receivable.
1. An $8,000, 6%, 3-month note dated April 20.
Maturity value $____________.
2. A $20,000, 9%, 72-day note dated March 5.
Maturity value $____________.
3. A $12,000, 5%, 30-day note dated September 10.
Maturity value $____________.
4. A $9,000, 7%, 6-month note dated November 15.
Maturity value $____________.
Ex. 239
Great Plains Supply Co. has the following transactions related to notes receivable during the last
2 months of the year.
Nov. 1 Loaned $75,000 cash to B. Benson on a 1-year, 8% note.
Dec. 11 Sold goods to Roswell, Inc., receiving a $9,000, 90-day, 7% note.
16 Received a $20,000, 6-month, 9% note to settle an open account from M. Ling.
31 Accrued interest revenue on all notes receivable.
Instructions
Journalize the transactions for Great Plains Supply Co.
Reporting and Analyzing Receivables
FOR INSTRUCTOR USE ONLY
8-67
Ex. 240
These transaction took place for Sanders Co.
2016
May 1 Received a $15,000, 1-year, 9% note in exchange for an outstanding account
receivable from T. Foley.
Dec. 31 Accrued interest revenue on the T. Foley note.
2017
May 1 Received principal plus interest on the T. Foley note. (No interest has been accrued
since December 31, 2016.)
Instructions
Record the transactions in general journal.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
8-68
Ex. 241
Presented here is basic financial information (in millions) from the annual reports of Nike and
Adidas.
Nike Adidas
Sales revenue $18,627 $10,299
Allowance for doubtful accounts, Jan. 1 71.5 112
Allowance for doubtful accounts, Dec. 31 78.4 111
Accounts receivable balance (gross), Jan 1 2,566.2 1,527
Accounts receivable balance (gross), Dec. 31 2,873.7 1,570
Instructions
Calculate the accounts receivable turnover and average collection period for both companies.
Comment on the difference in their collection experiences.
Ex. 242
The following information is available from the annual reports of Nite and Day Companies.
(In millions)
Nite Day
Sales revenue $112,500 $32,000
Beginning accounts receivable, net 19,000 3,500
Ending accounts receivable, net 18,500 4,400
Instructions
(a) Based on the preceding information, compute the following for each company:
1. Accounts receivable turnover. (Assume all sales were credit sales.)
2. Average collection period.
(b) What conclusion concerning the management of accounts receivable can be drawn from
these data?
Reporting and Analyzing Receivables
FOR INSTRUCTOR USE ONLY
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Ex. 243
Shafer Company has the following accounts in its general ledger at July 31: Accounts Receivable
$49,000 and Allowance for Doubtful Accounts $3,400. During August, the following transactions
occurred.
Aug. 15 Sold $30,000 of accounts receivable to More Factors, Inc. who assesses a 2%
finance charge.
25 Made sales of $2,500 on Visa credit cards. The credit card service charge is 3%.
28 Made sales of $4,000 on Shafer credit cards.
Instructions
(a) Journalize the transactions.
(b) Indicate the statement presentation of service charges.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
8-70
COMPLETION STATEMENTS
244. Notes and accounts receivable that result from sales transactions are often called
______________ receivables.
245. Two accounting problems associated with accounts receivable are (1) ______________
and (2) ______________ accounts receivable.
246. The net amount expected to be collected in cash from receivables is the _____________.
247. When credit sales are made, _________________ Expense is considered a normal and
necessary risk of doing business on a credit basis.
248. The two methods used in accounting for uncollectible accounts are the ____________
method and the ______________ method.
249. Allowance for Doubtful Accounts is a _____________ account which is ______________
from Accounts Receivable on the balance sheet.
250. When the allowance method is used to account for uncollectible accounts, ____________
is debited when an account is determined to be uncollectible.
251. The _________________ basis of estimating uncollectibles normally results in the best
approximation of _______________ value.
252. A 75-day note receivable dated July 5 would mature on ______________.
253. Collection of a note receivable will result in a credit to ______________ for the face value
of the note and a credit to ______________.
254. A note that is not paid on the maturity date is said to be ______________.
Reporting and Analyzing Receivables
8-71
255. A concentration of ______________ is a threat of nonpayment from a single customer or
class of customers.
256. The ratio used to assess the liquidity of accounts receivable is the ______________.
257. A finance company or bank that purchases receivables from businesses is known as a
______________.
Answers to Completion Statements
MATCHING
258. Match the items below by entering the appropriate code letter in the space provided.
A. Aging the accounts receivable F. Percentage of receivables basis
B. Direct write-off method G. Promissory note
C. Obligation due H. Dishonored note
D. Trade receivables I. Cash net realizable value
E. Accounts receivable turnover J. Credit card sales
____ 1. A written promise to pay a specified amount on demand or at a definite time.
____ 2. Sales that involve the customer, the retailer, and the credit card issuer.
____ 3. A measure of the liquidity of receivables.
____ 4. Notes and accounts receivable that result from sales transactions.
____ 5. A note which is not paid in full at maturity.
____ 6. Analysis of customer account balances by length of time they have been unpaid.
____ 7. Emphasizes expected cash realizable value of accounts receivable.
____ 8. Bad debt losses are not estimated and no allowance account is used.
____ 9. The net amount expected to be received in cash.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
8-72
Answers to Matching
5. H
SHORT-ANSWER ESSAY QUESTIONS
S-A E 259
a. List the characteristics of promissory notes.
b. List the reasons for obtaining promissory notes from customers.
c. What action relating to promissory notes must be taken at the end of the accounting period?
S-A E 260
Two methods can be used in accounting for uncollectible accounts. Identify and contrast the two
methods. How do the methods differ regarding the time periods in which Bad Debt Expense is
recognized?
Reporting and Analyzing Receivables
FOR INSTRUCTOR USE ONLY
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S-A E 261
Your roommate is uncertain about the advantages of a promissory note. Compare the
advantages of a note receivable with those of an account receivable.
S-A E 262
Jenkins Company dishonors a note at maturity. What are the options available to the lender?
S-A E 263
An article in the Wall Street Journal indicated that companies are selling receivables at a record
rate. Why do companies sell their receivables?
S-A E 264
Your friend Mark has opened an office supply store. He will extend open credit to local
businesses and is concerned about potential bad debts. What can Mark do to reduce potential
bad debts?
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
8-74
S-A E 265
Company
Name
Net Credit
Sales
Beginning
Net Receivables
Ending
Net Receivables
Brown
$180,000
$ 5,000
$30,000
Pink
$400,000
$52,000
$42,000
Yellow
$ 75,000
$ 5,400
$ 5,800
(a) Which company is doing the best job of managing its accounts receivable? Why? Be sure to
support your answer with computations.
(b) What are your concerns about these companies?
Reporting and Analyzing Receivables
FOR INSTRUCTOR USE ONLY
8-75
S-A E 266
Banks that issue credit cards generally charge retailers a fee of 2 to 4% of the amount of sale.
List reasons why companies are willing to pay these fees.
S-A E 267
Customer purchases using credit cards are a significant source of revenue for many retailers.
From the standpoint of a retailer, briefly discuss some advantages and disadvantages of a retail
store having its own credit card as opposed to accepting one of the national credit cards (e.g.,
Visa or MasterCard).
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
8-76
S-A E 268 (Ethics)
Two Brothers, a small book publishing company, wrote off the debt of The Learning Place, and
the Academy of Basic Education, both small private schools, after it determined that the schools
were facing serious financial difficulty. No notice of the action was sent to the schools; Two
Brothers simply stopped sending bills. Nearly a year later, The Learning Place was given a large
endowment and a government grant. The resulting publicity brought the school to the attention of
Two Brothers, which immediately reinstated the account, and sent a new bill to the school,
including interest for the entire time the debt was outstanding. No further action was taken
regarding the Academy of Basic Education, which was still operational.
Required:
Did Two Brothers act ethically in reinstating the debt of one client, and not the other? Explain.
S-A E 269 (Communication)
Schmidt Company received a letter from Deborah Stine, a customer. Deborah had purchased
$325 worth of clothing from Schmidt on credit. She has made two payments of $50 each. She
has missed the last two payments, and has received a collection letter from Schmidt. Her total
debt presently, with interest and late fees, is $251.13.
Deborah sent a letter to Schmidt in which she asked for her debt to be forgiven. She said she had
heard that companies make allowances for accounts they are doubtful about collecting, and that
Schmidt certainly should have been doubtful about her—that as a college student she had
changed her major three times. She also said that she could not enjoy a high quality of life when
making such high payments, but that she didn't want to be embarrassed by bill collectors, either.
She especially didn't want her parents to find out that she had not paid her debts. Having Schmidt
write off her account seemed to her the best solution in the circumstances. She added that the
clothes she bought at Schmidt were among the best she had ever owned, and that she "told
everybody" that Schmidt was definitely the best place to get clothes.
Reporting and Analyzing Receivables
FOR INSTRUCTOR USE ONLY
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S-A E 269 (Cont.)
Required:
You are the accounting manager for Schmidt. Write a short letter to Deborah explaining why her
debt cannot be written off.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
8-78
IFRS QUESTIONS
1. Which receivables accounting and reporting issue is not essentially the same for IFRS
and GAAP?
a. The use of allowance accounts and the allowance method.
b. How to record discounts.
c. How to record factoring.
d. All of these answer choices are essentially the same for IFRS and GAAP.
2. Which receivables accounting and reporting issue is essentially the same for IFRS and
GAAP?
a. The use of allowance accounts and the allowance method.
b. How to record discounts.
c. How to record factoring.
d. All of these answer choices are essentially the same for IFRS and GAAP.
3. IFRS requires loans and receivables to be recorded at
a. amortized cost.
b. amortized cost, adjusted for allowances for doubtful accounts.
c. unamortized cost.
d. unamortized cost, adjusted for allowances for doubtful accounts.
4. IFRS sometimes refers to allowances as
a. revenues.
b. discounts.
c. provisions.
d. reserves.
5. IFRS
a. implies that receivables with different characteristics should be reported separately.
b. requires that receivables with different characteristics should be reported separately.
c. implies that receivables with different characteristics should be reported as one unseg-
regated amount.
d. requires that receivables with different characteristics should be reported as one un-
segregated amount.
Reporting and Analyzing Receivables
8-79
6. Which board(s) has(have) worked to implement fair value measurement for financial in-
struments?
a. FASB, but not IASB.
b. IASB, but not FASB.
c. both FASB and IASB.
d. neither FASB nor IASB.
7. Which board(s) has(have) faced bitter opposition when working to implement fair value
measurement for financial instruments?
a. FASB, but not IASB.
b. IASB, but not FASB.
c. Both FASB and IASB.
d. Neither FASB nor IASB.
8. Which is part of IFRS accounting for financial instruments?
Disclosure of fair value information Optional recording of some financial
for receivables in the notes instruments at fair value
a. Yes Yes
b. Yes No
c. No Yes
d. No No
9. Which requires a two-tiered approach to test whether the value of loans and receivables
are impaired?
GAAP IFRS
a. yes no
b. yes yes
c. no no
d. no yes
10. What criteria are used to determine how to record a factoring transaction?
GAAP IFRS
a. risks and rewards, and loss of control risks and rewards, and loss of control
b. risks and rewards, and loss of control loss of control
c. loss of control loss of control
d. loss of control risks and rewards, and loss of control
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
8-80
11. Which permits partial derecognition of receivables?
GAAP IFRS
a. yes no
b. yes yes
c. no no
d. no yes
