Chapter 7: Receivables and Investments
210. The 2016 annual report of Ski Products, Inc. reported the following amounts (in millions of dollars):
Net sales, for the year ended May 31, 2016
$15,111.2
Receivables, May 31, 2016
989.4
Receivables, May 31, 2015
1,011.6
Required:
1. Compute Ski’s accounts receivable turnover ratio for the year ended May 31, 2016. (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?
ANSWER:
1.
Accounts receivable turnover:
Net Credit Sales/Average
Accounts Receivable
= $15,111.2/[($989.4 + $1,011.6)/2]
= $15,111.2/$1,000.5
=15.10 times
2.
Average collection period (assuming
360 days in a year):
Number of Days in a Year/Turnover
= 360/15.10
= 23.8 days to collect an accounts receivable
3. Types of customers Ski might have:
• Athletic goods wholesalers
• Winter/outdoors wholesalers
• Sporting goods chains
• Outdoors outfitter chains
• Winter resort specialty stores
Whether or not an average of 23.8 days to collect an account is reasonable depends on
several factors. For example, how does this compare with other companies in the same
industry as Ski? How does it compare with prior years? What are Ski’s credit terms? If its
credit terms are 2/10, n/30, an average collection period of 23.8 days may be good, but not if
the credit terms are n/10, for example.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-02 – LO: 07-02
KEYWORDS:
Bloom’s: Analyzing
211. 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, 2016.
Identify the maturity date of the note. _______________________
How much interest income (to the nearest whole month) will Rafter.com earn over the term
of the note?
How much interest income will Rafter.com recognize during 2016?
ANSWER:
A) January 30, 2017
B) $12,000 × 10% × 3/12 = $300
C) $12,000 × 10% × 2/12 = $200
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-03 – LO: 07-03
KEYWORDS:
Bloom’s: Analyzing
212. 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, 2016. Cyprus’ accounting year-end is December 31.
Required: Identify the maturity date of the note.
ANSWER:
November 1, 2016
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-03 – LO: 07-03
KEYWORDS:
Bloom’s: Analyzing
213. 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, 2016. Cyprus’ accounting year-end is December 31.
Required: How much interest income will Cyprus Corp. recognize over the term of the note?
ANSWER:
$280
$8,000 (Principal) × 7% (Interest Rate) × 6/12 (Time Period) = $280
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-03 – LO: 07-03
KEYWORDS:
Bloom’s: Analyzing
214. 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, 2016.
Which party is the maker? _______________________
Which party is the payee? _____________________
Determine the maturity value of the note.
ANSWER:
A) Stutfeld Company
B) Hemmer Company
C) $10,000 + ($10,000 × 12% × 6/12) = $10,600
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-03 – LO: 07-03
KEYWORDS:
Bloom’s: Analyzing
215. On September 1, 2016, 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.
ANSWER:
1. Rudy Company is the maker, has a liability (Notes Payable) and incurs an expense
(Interest Expense)
Fox Corp. is the payee, has an asset (Notes Receivable) and earns revenue (Interest Revenue)
216. 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?
ANSWER:
April 12
Cash
3,650
Accounts Receivable—VISA
3,900
Sales Revenue
7,550
To record weekly cash and credit sales.
Balance Sheet
Income Statement
Assets
=
Liabilities
+
Stockholders’
Equity
Revenues
–
Expenses
=
Net
Income
Cash
3,650
Accounts
Receivable—
April 15
Cash
3,794.70
Collection Fee Expense
105.30
Accounts Receivable—VISA
To record weekly drafts from credit card company.
Assets
=
Liabilities
+
Revenues
=
The collection fee charged by VISA is $105.30/$3,900 = 2.7%.
Moderate
FACC.PONO.13.07-04 – LO: 07-04
Bloom’s: Analyzing
7,550
Sales
Revenue
7,550
7,550
217. 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.
ANSWER:
Sep 20
Cash
9,600
Collection Fee Expense
400
Sales Revenue*
10,000
To record credit card sales.
*Accounts Receivable if sale was already recorded.
Balance Sheet
Income Statement
Assets
=
Liabilities
+
Stockholders’
Equity
Revenues
–
Expenses
=
Net
Income
Cash
9,600
9,600
Sales
Revenue
10,000
Collection Fee
Expense
400
9,600
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-04 – LO: 07-04
KEYWORDS:
Bloom’s: Analyzing
218. On August 16, 2016, 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, 2016, 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, 2016, and the sale on October 21, 2016.
ANSWER:
2016
Aug. 16
Investment in Mountain Common Stock
104,000
Cash
104,000
To record purchase of 6,000 shares of stock for
$17 per share + $2,000 in fees.
Balance Sheet
Income Statement
2016
Oct. 21
Cash
72,000*
Loss on Sale of Stock
32,000**
Balance Sheet
Moderate
Bloom’s: Analyzing
219. On May 31, 2016, Evergreen Corp. purchased a 120-day, 6% certificate of deposit for $60,000. The CD was
redeemed on September 28, 2016. 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.
ANSWER:
a.
2016
May 31
Short-Term Investments: CD
60,000
Cash
60,000
2016
June 30
Interest Receivable
300
Interest Revenue
Sept. 28
Cash
61,200
Interest Revenue
$60,000 × 6% × 90/360 = $900.
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220. Bagel Inc. reported net income of $105,000 for the year ended December 31, 2016. The following items were
included on Bagel’s balance sheets at December 31, 2016 and 2015:
12/31/16
12/31/15
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 2016.
Required:
1. Prepare Bagel’s 2016 statement of cash flows.
2. Draft a brief memo to the owner to explain why cash decreased during a profitable year.
ANSWER:
1. Statement of cash flows:
BAGEL INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2016
Net income
$ 105,000
Adjustments to reconcile net income to net
cash used by operating activities:
Increase in accounts receivable
$(120,000)*
8,000**
Cash flows from operating activities
Cash, December 31, 2015
Cash, December 31, 2016
*$213,000 – $93,000
**$103,000 – $95,000
Moderate
FACC.PONO.13.07-06 – LO: 07-06
221. Hawthorne Industries’ comparative balance sheets included accounts receivable of $221,400 at December 31, 2015,
and $205,900 at December 31, 2016. Sales reported on Hawthorne’s 2016 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 2016
statement of cash flows assuming that the direct method is used? Show your calculations.
ANSWER:
Cash collections to be reported in the Operating Activities section of Hawthorne Industries’
2016 statement of cash flows (direct method):
Accounts receivable, December 31, 2015
$ 221,400
Plus: Sales during 2016
2,550,000
Less: Cash collections during 2016
(X)
Accounts receivable, December 31, 2016
$ 205,900
$221,400 + $2,550,000 – X = $205,900
X = $2,565,500
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-06 – LO: 07-06
KEYWORDS:
Bloom’s: Analyzing
222. 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.
ANSWER:
Sept. 10
Cash
10,000.00
Notes Payable
10,000.00
Balance Sheet
Income Statement
Assets
=
Liabilities
+
Stockholders’
Equity
Revenues
–
Expenses
=
Net
Income
Cash
10,000
Notes Payable
10,000
Sept. 30
Interest Expense
66.67
Interest Payable
66.67
$10,000 × .12 × 20/360 = $66.67
Balance Sheet
Income Statement
Assets
=
Liabilities
+
Stockholders’
Equity
Revenues
–
Expenses
=
Net
Income
Interest Payable +
66.67
(66.67)
Interest Expense
66.67
(66.67)
Nov. 9
Notes Payable
10,000.00
Interest Payable
66.67
Interest Expense
133.33
Cash
10,200
$10,000 × .12 × 40/360 = $133.33
223. 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 2016?
5) On what day will the note mature?
6) What journal entry will Royal record on the maturity date?
ANSWER:
1) $25,000 × 0.12 × (90/360) = $750
2)
2016
Dec. 13
Notes Receivable
25,000
Sales Revenue
25,000
3) Interest is for 18 days (31 – 13).
Dec. 31
Interest Receivable
Interest Revenue
Mar. 13
Cash
Notes Receivable
Interest Receivable
224. 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 2016.
1) What is the net realizable value of receivables for Momentum?
2) How should Momentum present this information on its balance sheet?
ANSWER:
1) $240,000
2)
Accounts receivable
$250,000
Less: Allowance for doubtful accounts
(10,000)
Net accounts receivable
$240,000
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 – LO: 07-01
KEYWORDS:
Bloom’s: Analyzing
Essay
225. The comparative financial statements for the years ended December 31, 2016 and 2015 for Sophia Company reported
the following information.
Balance Sheet:
2016
2015
Cash and cash equivalents
$77,000
$81,600
Accounts receivables, less allowance for doubtful
accounts of $80 (2016) and $82 (2015)
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, 2016? Why is this amount different than
the amount of receivables shown in the 2016 column of the balance sheet?
B) What is the net realizable value of accounts receivable for Sophia at December 31, 2016? What does this amount
represent?
ANSWER:
A) $2,700 + $80 = $2,780. It is different because it has been adjusted for the estimated
amount of receivables that are deemed uncollectible.
B) $2,700; This is the amount that Sophia expects to collect.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 – LO: 07-01
KEYWORDS:
Bloom’s: Applying
226. 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?
ANSWER:
1. When bad debts expense is estimated by using the percentage of accounts receivable
approach, the balance already in the allowance account must be considered. For example, if
the estimate of the accounts receivable that will prove to be uncollectible is $20,000 and the
allowance account has a balance of $3,000 before adjustment, only $17,000 has to be added
to it. Under the percentage of net credit sales approach, however, the emphasis is on the debit
to Bad Debts Expense. The balance in the allowance account before adjustment is ignored.
2. An aging schedule is a refinement of the percentage of accounts receivable approach to
estimating bad debts. The accountant categorizes the various receivables by the length of
time they are outstanding. The estimate of the percent uncollectible increases as the age of
the accounts go up.
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 – LO: 07-01
KEYWORDS:
Bloom’s: Applying
227. What is the purpose of an accounts receivable subsidiary ledger?
ANSWER:
An accounts receivable subsidiary ledger is used to keep track of the individual customer
balances so the company knows which customers have paid and which have not.
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 – LO: 07-01
KEYWORDS:
Bloom’s: Applying
228. What is the purpose of an aging schedule?
ANSWER:
An aging schedule categorizes the various account receivable amounts by age based on how
long an account is past due or outstanding. A company uses this for estimating how much of
its accounts receivable will be uncollectible. It is a more refined approach because it lists the
dollar amounts of receivables based on the period of time each have been outstanding, such
as 30, 60, or 90 days outstanding.
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-01 – LO: 07-01
KEYWORDS:
Bloom’s: Applying
229. 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?
ANSWER:
At an accounts receivable turnover of 10 times per year, Earl’s receivables are outstanding
approximately 36 days prior to collection (360/10 days). Given that Earl’s terms are 2/10,
n/20, one would expect customers to pay within 20 days. Customers should pay within ten
days to obtain the discount of 10%. Earl’s needs to make more efforts to collect its
receivables given its current credit terms.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-02 – LO: 07-02
KEYWORDS:
Bloom’s: Applying
230. Explain the distinction between a note receivable and an account receivable.
ANSWER:
A note receivable arises from a written promise by someone to pay a specific amount of
money in the future with interest. An account receivable arises from granting a customer an
open line of credit and does not normally include interest.
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-03 – LO: 07-03
KEYWORDS:
Bloom’s: Applying
231. Identify two methods of accelerating cash from sales.
ANSWER:
Using credit cards often accelerates cash collections. The bank charges a fee but the company
receives payment from the credit card company instead of waiting until the customer actually
pays. A company is also able to accelerate cash by discounting receivables to the bank. This
involves selling notes receivable to the bank instead of waiting for the customer to actually
pay.
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-04 – LO: 07-04
KEYWORDS:
Bloom’s: Applying
232. 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.
ANSWER:
When a note receivable is discounted with recourse, it means that if the customer fails to pay
the bank the total amount due on the maturity date, the company that sold the note to the
bank is liable to the bank for the full amount. Therefore, during the time a discounted note is
outstanding, the seller of the note is contingently liable. Accounting standards do not require
the seller to recognize the contingency as a liability, but a note is required to alert the
statement reader of the uncertainty.
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-04 – LO: 07-04
KEYWORDS:
Bloom’s: Applying
233. Corrigan Corp. purchased 1,000 shares of Microsoft common stock. What will determine whether the shares are
classified as current assets or noncurrent assets?
ANSWER:
Shares of common stock could be classified as either current assets or noncurrent assets. The
intent of the company determines the proper classification. If Corrigan purchases the
Microsoft shares with the intent of selling them in the near term, they should be classified as
current assets. Otherwise, the shares should be classified as noncurrent assets.
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.07-05 – LO: 07-05
KEYWORDS:
Bloom’s: Applying
234. Why are increases in accounts receivable reported as an adjustment to net income in the operating activities section
of a statement of cash flows?
ANSWER:
Accounts receivable arise from the accrual of sales revenue. The income statement, therefore,
includes sales revenue on the accrual basis, not the cash basis. By adjusting net income for
the change in the accounts receivable balance, sales on the accrual basis are being converted
to the cash basis. Increases in accounts receivable indicate that sales exceed actual cash
collections from customers, and thus, these increases must be deducted to determine the
amount of cash flows from operating activities.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-06 – LO: 07-06
KEYWORDS:
Bloom’s: Applying
235. 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.
ANSWER:
The increase of $50,000 – $35,000, or $15,000, in accounts receivable should be deducted
from net income under the indirect method of preparing the statement of cash flows. Sales
increase net income. An increase in accounts receivable is an indication that sales exceeded
cash collections; therefore, to arrive at cash from operations, a deduction is needed.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.07-06 – LO: 07-06
KEYWORDS:
Bloom’s: Applying