Chapter 7
Accounts and Notes Receivable
QUESTIONS
1. When customers use credit cards, the selling companies can avoid having to directly
added convenience to buyers.
2. Revenues and expenses usually are not matched under the direct write–off method because
3. The accounting constraint of materiality suggests that the requirements of accounting
4. Creditors prefer notes receivable to accounts receivable because the notes can be more
5. Writing off a bad debt against the Allowance account does not reduce the estimated
6. The adjusted balances of Bad Debts Expense and Allowance for Doubtful Accounts are
equaled the beginning balance of the Allowance account.
7. Polaris lists its accounts receivable as “Trade receivables, net” on its balance sheet. Polaris
8. Artic Cat uses the allowance method to account for doubtful accounts as evidenced by the
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9. KTM’s lists its accounts receivable as “Accounts receivable— trade to third parties”,
10. Piaggio titles its accounts receivable as “Trade receivables.” Piaggio reports its accounts
QUICK STUDIES
Quick Study 7-1 (15 minutes)
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.
Quick Study 7-2 (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.
9
Cash ………………………………………………………………...
300
Accounts Receivable—C. Green …………………..
300
To record payment on a receivable.
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Quick Study 7-3 (15 minutes)
1.
Dec. 31
Bad Debts Expense …………………………………………
885
Allowance for Doubtful Accounts…………….…
885
To record estimate of uncollectibles.
Desired balance in allowance = $99,000 x 1.5%= $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 7-4 (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%).
Quick Study 7-5 (15 minutes)
1. Maturity date is October 31, which is computed as follows:
Days in August ………………………………………………………. 31
Minus the date of the note ………………………………………. 2
2.
Aug. 2 Notes Receivable—R. Albany …………………….. 6,000
Quick Study 7-6 (10 minutes)
Oct. 31 Cash ………………………………………………………….. 6,180
Quick Study 7-7 (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
Quick Study 7-8 (10 minutes)
May 1
Cash ……………………………………………………………..
121,875
Factoring Fee Expense* ………………………………...
3,125
Accounts Receivable ………………………………..
125,000
To record sale of receivable.
*($125,000 x 0.025)
Quick Study 7-9 (10 minutes)
Oct. 1
Bad Debts Expense ………………………………………….….
50,000
Accounts Receivable—P. Moore …………………….
50,000
To write off an account.
Quick Study 7-10 (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.
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422
Quick Study 7-11 (10 minutes)
Accounts receivable turnover =
Interpretation: An accounts receivable turnover of 5.9 implies that the
company’s average accounts receivable balance is converted into cash
Quick Study 7-12 (10 minutes)
a. Both U.S. GAAP and IFRS have similar asset criteria that apply to
recognition of receivables. Further, receivables that arise from revenue–
b. Both U.S. GAAP and IFRS require receivables to be reported net of
estimated uncollectibles. Further, both systems require that the expense
Net sales
Average accounts receivable
EXERCISES
Exercise 7-1 (25 minutes)
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
Morales Company
Schedule of Accounts Receivable
November 30, 2013
Ski Shop ………………………………………………………………………
$7,328
Welcome Enterprises …………………………………………………..
1,350
Zia Natara …………………………………………………………………….
623
Total …………………………………………………………………………….
$9,301
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).
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424
Exercise 7-2 (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 7-3 (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 7-4 (20 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.
Exercise 7-5 (15 minutes)
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
Exercise 7-6 (30 minutes)
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
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426
Exercise 7-6 (Concluded)
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
Exercise 7-7 (25 minutes)
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 7-8 (20 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.
Exercise 7-9 (25 minutes)
a. Expense is 1.5% of credit sales
Dec. 31
Bad Debts Expense ………………………………………..
4,500
Allowance for Doubtful Accounts ……………..
4,500
To record estimated bad debts
[$300,000 x .015].
The more advanced student might see that an abnormal $500 debit ($5,000 debit less
$4,500 credit) remains in the Allowance account; an instructor might desire to explain how
a company would likely alter its percent of sales estimate given an abnormal balance.
b. Expense is 0.5% of total sales
Dec. 31
Bad Debts Expense ………………………………………..
6,000
Allowance for Doubtful Accounts ……………..
6,000
To record estimated bad debts
[($300,000 + $900,000) x .005].
c. 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
Exercise 7-10 (20 minutes)
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 7-11 (15 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]
Exercise 7-12 (20 minutes)
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.
Exercise 7-13 (10 minutes)
Instructor note: The first printing of the book for the December 13 transaction
erroneously read “60-day” note, but should have read “45-day” note. This does
not impact Exercise 13, but does impact the January 27 entry for Exercise 14.
2012
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].
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Exercise 7-14 (15 minutes)
Instructor note: The first printing of the book for the December 13 transaction
of Exercise 13 erroneously read “60-day” note, but should have read “45-day”
note. This does not impact Exercise 13, but does impact the January 27 entry
for Exercise 14. An erroneous marginal check figure of Dr. Cash 9,627 should
correctly read Dr. Cash 9,595.
2013
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 [$5,000 x .10 x 90/360].
Exercise 7-15 (15 minutes)
Instructor note: The first printing of the book has the far-right-hand column
erroneously titled “2010” that should be titled “2011”.
Year 2012 accounts receivable turnover:
Analysis: Raheem Company turned over its accounts receivable 0.6 (9.4 – 8.8)
Exercise 7-16 (25 minutes)
($ in millions)
a. Expense is 0.4% of total revenues
Dec. 31
Bad Debts Expense ………………………………………..
37,263
Allowance for Doubtful Accounts ……………..
37,263
To record estimated bad debts
[9,315,807 x 0.004].
b. Allowance is 2.1% of trade receivables
Dec. 31
Bad Debts Expense ………………………………………..
34,681
Allowance for Doubtful Accounts ……………..
34,681
To record estimated bad debts.*
* Unadjusted balance ………………………………………………..
10,000 credit
Estimated balance (2,127,682 x 0.021) ……..……………..
44,681 credit
Required adjustment ……………………………….……………..
34,681 credit