Financial & Managerial Accounting, 5th Edition
444
Problem 7-5B (75 minutes)
Part 1
2012
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].
2013
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 7-5B (Concluded)
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.
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
SERIAL PROBLEM — SP 7
Serial Problem — SP 7, Success Systems (50 minutes)
1. a. Bad debts expense is recorded as 1% of total revenues:
$43,853 x .01 = $438.53 which is $439 rounded to nearest dollar.
2014
Mar. 31
Bad Debts Expense ………………………………………..
Allowance for Doubtful Accounts……………...
439
To record estimated bad debts.
1. b. Bad debts expense is recorded as 2% of accounts receivable:
Mar. 31
Bad Debts Expense ………………………………………..
454
Allowance for Doubtful Accounts……………...
454
To record estimated bad debts.
Bad Debts Expense ………………………………………..
Allowance for Doubtful Accounts……………...
To record estimated bad debts.
Reporting in Action — BTN 7-1
1. Polaris’s receivables at December 31, 2011, are $115,302 thousand.
2. Accounts receivable turnover for 2011 ($ thousands)
This time period is about ~15 days because Polaris typically sells its
4. Liquid assets as a percent of current liabilities ($ thousands)
company is in a slightly better position at December 21, 2010, as
compared to December 31, 2011. In either year, Polaris 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 Polaris’s financial statements describes its significant
6. Solution depends on the financial statement information obtained.
($115,302 + $89,294)/2
$325,336 + $115,302 + $298,042
Comparative Analysis — BTN 7-2
1. Accounts Receivable Turnover ($ thousands)
Polaris (Current Year):
= 25.97 times
2. Average Collection Period (or “Average Days’ Sales Uncollected”)
Polaris (Current Year): 365 days / 25.97 times = 14.05 days
Polaris (Prior Year): 365 days / 22.16 times = 16.47 days
3. Both companies appear reasonably efficient in collecting accounts
receivable. Arctic Cat collects them over a longer period of time in both
years vis-à-vis Polaris due to Polaris’ arrangement with a financing
$2,656,949
($115,302 + $89,294)/2
Ethics Challenge — BTN 7-3
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
2. Accounting procedures often allow for alternate methods or require the
use of estimates. Therefore, managers have some leeway in their
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.
Communicating in Practice — BTN 7-4
TO: Sid Omar
FROM: (Your Name)
DATE: _______________
SUBJECT: Difference Between Bad Debts Expense and Allowance
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
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
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 $43,000.
Sid, I hope this clarifies the matter for you. If you have further questions,
please call me.
Taking It to the Net — BTN 7-5
1. At December 31, 2011, eBay’s ($ thousands) net accounts receivable
2.
$ thousands
December 31,
2011
December 31,
2010
Gross accounts receivable …………….…….
$768,794
$540,851
Allowance for doubtful accounts
(including authorized credits) …………….
87,201
86,485
% of uncollectible accounts …………..…….
11.3%
16.0%
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.
Teamwork in Action — BTN 7-6
Instructor note: Computations for the aging schedule are in the Problem 7-4A solution.
The check figure for total estimated uncollectibles is $41,650.
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, 2013, 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.
Entrepreneurial Decision — BTN 7-7
1. Computation of added annual net income or loss
a.
Added Monthly Net Income or Loss under Plan A
Increased sales ……………………………………………………… $250,000
Cost of sales …………………………………………………………. (135,500)
Entrepreneurial Decision — BTN 7-7 continued
2. Plan (A) provides a slightly higher income, so if the 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
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 company does run some unknown risk associated with having new
customers. While the 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 7-8
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.
Global Decision — BTN 7-9
1. Accounts Receivable Turnover (Euro in thousands)
2. Average Collection Period (or “Average Days’ Sales Uncollected”)
3. Piaggio is in between Polaris and Arctic Cat in terms of its turnover and
collection periods. Its collection period is relatively low however,