Chapter 07 – Reporting and Analyzing Receivables
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Solutions Manual, Chapter 7
1
Chapter 7
Reporting and Analyzing Receivables
QUESTIONS
1. When customers use credit cards, the selling companies can avoid having to directly
evaluate the credit standing of their customers. They also avoid the risk of bad debts and
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
realizable value of a company’s accounts receivable because the write–off reduces the
6. The adjusted balances of Bad Debts Expense and Allowance for Doubtful Accounts are
virtually never equal because the expense amount reflects only the events of the current
7. Apple lists its accounts receivable as “Accounts receivables, less allowances of $98 and $53,
8. Google uses the allowance method to account for doubtful accounts as evidenced by the
receivables being reduced by an allowance of $133 million on the December 31, 2012,
9. Samsung’s lists its accounts receivable as “Trade and other receivables.” Samsung reports
10. Samsung lists its accounts receivable as “Trade and other receivables” in current assets.
There is no allowance listed on the face of the balance sheet. Students might follow up and
see that in its Note 10 – Trade and other receivables, Samsung reports using the allowance
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 7-4 (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
3.
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
2.
Aug. 2 Notes Receivable—R. Albany …………………….. 6,000
Quick Study 7-6 (10 minutes)
Oct. 31 Cash ………………………………………………………….. 6,180
Quick Study 7-11 (10 minutes)
Accounts receivable turnover =
5.9 times per year. The 5.9 turnover is about 21% lower than the average
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–
generating activities are subject to broadly similar criteria for U.S. GAAP
Net sales
Average accounts receivable
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 7-6 (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