Chapter 5
Short-Term Investments & Receivables
Short Exercises
(5 min.) S 5-1
1. Trading securities are reported at their current market value (fair
value).
2. A trading security is always a current asset because the investor
intends to sell the trading investment in the very near future — days,
(10 min.) S 5-2
BALANCE SHEET
Current assets:
Investment in trading securities ……………………………….
$172,000
INCOME STATEMENT
Other revenue and gains (losses):
Unrealized gain on trading securities ……………………….
$12,000*
_____
*$172,000 − $160,000 = $12,000
(10 min.) S 5-3
Journal
DATE
DEBIT
CREDIT
Unrealized Loss on Trading Securities
($85,000 − $78,000) ……………………………………
7,000
Investment in Trading Securities ………..
7,000
Adjusted investment to market value.
BALANCE SHEET
Current assets:
Investment in trading securities ……………………………………
$78,000
INCOME STATEMENT
Other revenues and gains (losses):
Unrealized (loss) on trading securities ………………………….
$(7,000)
(5 min.) S 5-4
No sales revenue should be reported because the goods were sold FOB
destination, and revenue is not recorded until the goods are delivered on
January 2, 2015.
(5 min.) S 5-5
2/10, n/30 means that Sports R Us will get a 2% discount if they pay the
invoice within 10 days of the invoice date; otherwise, the full amount is
(5 min.) S 5-6
Journal
DATE
DEBIT
CREDIT
6,100
6,100
(5-10 min.) S 5-7
MEMORANDUM
DATE:
TO: Spencer Crew
FROM: Student Name
RE: Essential element of internal control over collection from
customers
Separation of duties is the essential element in a system to ensure that
cash received by mail from customers is properly handled and
(5 min.) S 5-8
1.
Uncollectible-Account Expense ($483,000 × .02) …
9,660
Allowance for Uncollectible Accounts …………..
9,660
2.
Balance sheet
Accounts receivable …………………………………….
$49,000
Less: Allowance for uncollectible accounts …..
(9,660)
Accounts receivable, net ………………………………
$39,340
(10 min.) S 5-9
1. and 2.
Accounts Receivable
Beg. bal.
303,000
Net credit sales
1,978,000
Collections
2,010,000
Write-offs
29,000
End. bal.
242,000
Allowance for Uncollectible Accounts
Beg. bal.
26,000
Write-offs
29,000
Uncollectible –
account expense
35,000
End. bal.
32,000
3.
BALANCE SHEET
Accounts receivable …………………………………………….
$242,000
Less Allowance for uncollectible accounts ……………
(32,000)
Accounts receivable, net ………………………………………
$210,000
(10 min.) S 5-10
1. True
2. False. Credit terms are usually stated in this form: 2/10 n/30.
4.
5.
Sales revenue
Less: Sales returns and allowances
Less: Sales discounts
= Net sales revenue
Accounts receivable…………………….
$XXX
(X)
(X)
$ XX
$XXX
Less: Allowance for uncollectibles……
(X)
Accounts receivable, net……………….
$ XX
6. False. The direct write-off method overstates assets because it fails
to show the amount of the receivables the company actually expects
to collect.
(10 min.) S 5-11
1. Interest for:
2014
($220,000 × .05 × 7/12) ………………………
$ 6,417
2015
($220,000 × .05) ……………………………….
11,000
2016
($220,000 × .05 × 5/12) ………………………
4,583
3. Payoff at November 30, 2014:
Principal ……………………………………………………
$220,000
Interest ($220,000 × .05 × 6/12) …………………….
5,500
Total ………………………………………………………….
$225,500
(10 min.) S 5-12
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2014
a.
Aug. 31
Note Receivable — N. Herrera ………………….
5,000
Cash ………………………………………………..
5,000
To loan money.
2015
b.
June 30
Interest Receivable ($5,000 × .06 × 10/12) ….
250
Interest Revenue ………………………………
250
To accrue interest revenue.
2015
c.
Aug. 31
Cash ($5,000 + $300) ……………………………….
5,300
Interest Receivable …………………………..
250
Interest Revenue ($5,000 × .06 × 2/12) ..
50
Note Receivable ……………………………….
5,000
To collect on note receivable.
(10 min.) S 5-13
Req. 1
Cash + Short-term investments
$18,600 + $27,500
Acid-test
ratio
=
+ Net current receivables
=
+ $146,800
Total current liabilities
$203,000
=
.95
The company’s acid-test ratio compares favorably to the industry
average of 0.92.
Req. 2
One day’s sales
=
$1,593,000
=
$4,364
365
Days’ sales in
receivables
Average net
=
accounts receivable
=
($146,800 + $141,800) / 2
One day’s sales
$4,364
=
33 days
Exercises
(10-15 min.) E 5-14A
Req. 1
This is a trading investment because Western Corporation
intends to sell the stock within a short time.
Req. 2
Dec. 15
Investment in Trading Securities
(1,240 × $57) ……………………………………
70,680
Cash ……………………………………………
70,680
Purchased investment.
Dec. 31
Investment in Trading Securities
[(1,240 × $58) − $70,680] …………………..
1,240
Unrealized Gain on Trading
Securities ………………………………….
1,240
Adjusted investment to market value.
Req. 3
BALANCE SHEET (partial)
Current assets:
Investment in trading securities ………………………….
$71,920
INCOME STATEMENT (partial)
Other revenue and gains:
Unrealized gain on trading securities …………………..
$ 1,240
Copyright © 2015 Pearson Education Inc. Chapter 5 Short Term Investments & Receivables
5-9
(continued) E 5-14A
Req. 4
1. This is an available-for-sale security because it is not a trading
security.
2. Dec. 15 Investment in AFSS ……………………………. 70,680
Cash ……………………………………………… 70,680
3. BALANCE SHEET (partial)
Current assets:
Investment in AFSS ……………………………………………. $71,920
(15-20 min.) E 5-15A
Req. 1
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
July 2
Accounts Receivable ………………………………
450
Sales Revenue ……………………………………
450
July 10
Accounts Receivable ………………………………
2,500
Sales Revenue ……………………………………
2,500
July 11
Cash ($450 − $9) ……………………………………..
441
Sales Discounts ($450 × 2%) ……………………
9
Accounts Receivable ………………………….
450
July 15
Sales Returns and Allowances ………………..
350
Accounts Receivable ………………………….
350
July 19
Cash ($2,150 − $43) …………………………………
2,107
Sales Discounts ($2,150 × 2%) …………………
43
Accounts Receivable ($2,500 − $350) …..
2,150
Req. 2
Sales revenue ($450 + $2,500) $2,950
(15-20 min) E5-16A
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2014
Dec.
31
Doubtful-Account Expense ($608,000 × .01) …
6,080
Allowance for Doubtful Accounts …………..
6,080
BALANCE SHEET
Current assets:
Accounts receivable, net of allowance
for doubtful accounts of $7,420* ………………………
$88,580**
_____
*$1,340 + $6,080 = $7,420
**$96,000 − $7,420 = $88,580
(15 min.) E 5-17A
Req. 1
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
Dec.
Accounts Receivable …………………………………
195,000
Sales Revenue ………………………………………
195,000
Dec.
Cash …………………………………………………………
164,000
Accounts Receivable …………………………....
164,000
Dec.
Allowance for Uncollectible Accounts…………
2,820
Accounts Receivable …………………………....
2,820
Dec.
Uncollectible-Account Expense
($195,000 × .01) ………………………………………….
1,950
Allowance for Uncollectible Accounts …….
1,950
Req. 2
Accounts Receivable
Allowance for
Uncollectible Accounts
43,000
164,000
3,700
195,000
2,820
2,820
1,950
Bal.
71,180
Bal.
2,830
Net accounts receivable = $68,350 ($71,180 − $2,830)
Windsor Party Planners expects to collect the net receivable amount.
Req. 3
BALANCE SHEET (Partial)
Current assets:
Accounts receivable
Less: Allowance for uncollectible accounts
$71,180
(2,830)
Accounts receivable, net
$68,350
IINCOME STATEMENT (Partial)
Net sales
$195,000
(15-30 min.) E 5-18A
Req. 1
The credit balance at December 31 in Allowance for Doubtful Accounts
1-30 31–60 61–90 Over 90 Total
days days days days balance
$140,000 $100,000 $80,000 $40,000
Req. 2
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
Dec. 31
Doubtful-Account Expense …………………….
6,600
Allowance for Doubtful Accounts ……….
6,600
Allowance for Doubtful Accounts
22,500
6,600
Bal.
29,100
(continued) E 5-18A
Req. 3
BALANCE SHEET
Current assets:
Cash ………………………………………………………….
$ XX
Short-term investments ………………………………
XX
Accounts receivable, net of allowance
for doubtful accounts of $29,100 …………….
330,900*
Or
*Another way to report accounts receivable is
Accounts receivable …………………………………..
$360,000
Less: Allowance for doubtful accounts ……….
(29,100)
330,900
(15-20 min.) E 5-19A
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
May
Accounts Receivable ……………………………….
4,050
Service Revenue ………………………………….
4,050
Recorded revenue on account.
May
Bad-Debt Expense ($4,050 × .025) ……………..
101
Allowance for Bad Debts ………………………
101
Recorded expense for the month.
May
Sales Returns and Allowances ………………….
106
Accounts Receivable
106
Recorded sales returns from customers.
May
Allowance for Bad Debts ($33 + $53) …………
86
Accounts Receivable …………………………...
86
Wrote off uncollectible receivables.
(10-15 min.) E 5-20A
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
Aug.
1
Note Receivable — Jill Waterman………..
5,000
Cash………………………………………..
5,000
Oct.
6
Note Receivable — King Properties……..
12,000
Service Revenue ………………………..
12,000
16
Note Receivable — Vernon, Inc.………….
2,000
Accounts Receivable – Vernon, Inc..…
2,000
31
Interest Receivable…………………………..
140*
Interest Revenue………………………….
140
_____
*($5,000 × .07 × 91/365) + ($12,000 × .06 × 25/365) + ($2,000 × .05 × 15/365)
$87** + $49** + $4** = $140
** Rounded to nearest dollar.
Harland Services earned interest revenue of $140 this year.
(10-15 min.) E 5-21A
Req. 1
Quick
Cash and Marketable Net current
(a)
(acid-test)
=
Cash equiv. + securities + receivables
ratio
Total current liabilities
=
$11,000 + $27,000 + $61,000
$20,000 + $112,000
=
$99,000
$132,000
=
0.75
A quick (acid-test) ratio of 0.75 is fairly weak.
(b)
One day’s
=
Sales revenue
=
$780,000
=
$2,137
sales
365
365
Days’ sales
Average net
in
=
accounts receivable
=
($61,000 + $75,000) / 2
receivables
One day’s sales
$2,137
=
32 days
Req. 2
Sutterfield could speed up cash flows from receivables by offering
discounts for early payments or increasing penalties for late payments.
(10-15 min.) E 5-22A
Req. 1
Average collection period:
Millions of dollars
One day’s sales
=
$750,000
=
$2,055
365
Days’ sales in receivables
=
($6,810 + $5,310) / 2
=
2.95 days
(average collection period)
$2,055
Req. 2
Jennings Co., Inc’s collection period is short because Jennings Co. sells
(10-15 min.) E 5-23B
Req. 1
This is a trading investment because Spring Corporation
intends to sell the stock within a short time.
Req. 2
Dec. 15
Investment in Trading Securities
(825 × $59) ………………………………………
48,675
Cash ……………………………………………
48,675
Purchased investment.
Dec. 31
Investment in Trading Securities
[(825 × $62) − $48,675] ……………………..
2,475
Unrealized Gain on Trading
Securities ………………………………….
2,475
Adjusted investment to market value.
Req. 3
BALANCE SHEET (Partial)
Current assets:
Investment in trading securities …………………………...
$51,150
INCOME STATEMENT (Partial)
Other revenue and gains:
Unrealized gain on trading securities …………………….
$ 2,475
(continued) E 5-23B
Req. 4
1. This is an available-for-sale security because it is not a trading
security.
2. Dec. 15 Investment in AFSS ……………………………. 48,675
Cash ……………………………………………… 48,675
INCOME STATEMENT (partial)
(nothing)
STATEMENT OF COMPREHENSIVE INCOME:
(15-20 min.) E 5-24B
Req. 1
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
Nov. 8
Accounts Receivable ……………………………….
650
Sales Revenue …………………………………….
650
Nov. 15
Accounts Receivable ……………………………….
1,800
Sales Revenue …………………………………….
1,800
Nov. 16
Sales Returns and Allowances …………………
500
Accounts Receivable …………………………..
500
Nov. 17
Cash ($650 − $13) …………………………………….
637
Sales Discounts ($650 × 2%) …………………….
Accounts Receivable …………………………..
13
650
Nov. 24
Cash ($1,300 − $26) ………………………………….
1,274
Sales Discounts ($1,300 × 2%) ………………….
26
Accounts Receivable ($1,800 − $500) ……
1,300
Req. 2
Sales revenue ($650 + $1,800) $2,450