C8–3 (continued)
Req. 5
(a) Had OTP used the percentage of sales method to estimate bad debts, the company would
have reported $346 ($17,284 x 0.02) of Bad Debt Expense.
(b) Had OTP reported $346 of Bad Debt Expense, the Allowance for Doubtful Accounts would
Fundamentals of Financial Accounting, 5/e 8– 51
© 2016 by McGraw– Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
ANSWERS TO SKILLS DEVELOPMENT CASES
S8–1
1. D
2. D
Calculations:
Req. 2
Receivables
Turnover
Ratio
=
Net sales
=
$78,812
=
56.4
times
Average net
receivables
($1,398 + $1,395)/2
Days to collect
=
365
=
365
=
6.5 days
Receivables Turnover
56.4
S8–2
Req. 1
No, Lowe’s does not report Accounts Receivable or Allowance for Doubtful Accounts on
its balance sheet. As explained in Note 1 to its financial statements (under “Credit
Programs”), Lowe’s sells its accounts receivable from commercial business customers
S8–3
The solutions to this project will depend on the company and/or accounting period
S8–4
Req. 1
Total
0–30 days
31–60
days
61–90
days
91–120
days
> 120 days
$ 750,000
$340,000
$260,000
$70,000
$30,000
$50,000
x 1%
x 5%
x 8%
x 10%
x 50%
$ 50,000
3,400
13,000
5,600
3,000
25,000
Allowance for Doubtful Accounts estimated balance = $ 50,000
Req. 2
Current Assets:
Accounts Receivable
Net Accounts Receivable
Total
Add:
Bad debt percentages
Total
S8–4 (continued)
Req. 5
The matter should be investigated. By issuing notes to companies to enable them to
S8–5
Req. 1
A bad debts estimate of $2,110 ($8,000 – $5,890) will produce the $8,000 balance in
the Allowance for Doubtful Accounts that the controller would like to see.
Req. 2
Bad Debt Expense …………………………………………………………. 2,110
Allowance for Doubtful Accounts ……………………………. 2,110
Req. 3 Clear Optics, Inc.
S8–5 (continued)
Req. 5 Clear Optics, Inc.
Quarterly Income Statement
For the third quarter
(amounts in thousands of U.S. dollars)
Net Sales
$ 135,800
Cost of Goods Sold
58,400
Gross Profit
77,400
Selling, General, and Administrative Expenses
56,560
Bad Debt Expense
5,160
*
Income before Income Tax Expense
15,680
Income Tax Expense
5,620
Net Income
$ 10,060
*$135,800 x 0.038 = $5,160
With this adjustment, the net income across the three quarters would no longer be a
“smooth” increase. It would go up from $11,200 to $12,030 and then fall to $10,060.
Req. 6
Yes, there is evidence of unethical behavior. The controller appeared to work
backwards to reach a preferred Allowance for Doubtful Accounts balance. This appears
to have been motivated by a desire to smooth income. The reduction in the historical
bad debt rate seems inconsistent with the controller’s statement that customers are
slower in paying this quarter.
S8–6
Req. 1
(a)
Receivables
Turnover
Ratio
=
Net sales
=
$7,015,069
=
8.7
Average net
receivables
($650,270 + $963,808)/2
(b)
Receivables
Turnover
Ratio
=
Net sales
=
$7,515,444
=
9.3
Average net
receivables
($650,270 + $963,808)/2
S8–7
Req. 1
Req. 2
Bad Debt Expense ……………………………………………………… 10,060
Allowance for Doubtful Accounts …………………………. 10,060
($10,060 = $18,060 – $8,000)
Req. 3
Fundamentals of Financial Accounting, 5/e 8– 57
CONTINUING CASES
CC8–1
Req. 1
September
Accounts Receivable …………………….
Sales Revenue ………………..………
Cost of Goods Sold ………..……………..
Inventory ………………………..………
1,800
900
1,800
900
October
Accounts Receivable …………………….
Sales Revenue ………………………..
Cost of Goods Sold ……..………………..
Inventory ………………………………..
450
200
450
200
November
Accounts Receivable …………………….
Sales Revenue ……………….……….
Cost of Goods Sold ………………………..
Inventory ………………………………..
300
190
300
190
December
Cash ……………………………………….
Accounts Receivable ………………….
1,200
1,200
Req. 2
Estimate the allowance for doubtful accounts:
($600 X 35%) + ($450 X 20%) + ($300 X 5%)
= $315
Req. 3
Allowance for Doubtful Accounts (xA)
47 Unadj. Bal.
268 AJE Bad Debt Expense
315 Desired Bal.
Bad Debt Expense ……………………………..
Allowance for Doubtful Accounts …………
268
268
CC8–1 (continued)
Req. 4
Accounts Receivable = ($1,800 – $1,200) + $450 + $300 = 1,350
Accounts Receivable
$1,350
Allowance for Doubtful Accounts
(315)
Net Accounts Receivable
$1,035
CC8–2