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Chapter 8
Receivables
Review Questions
1. What is the difference between accounts receivable and notes receivable?
Accounts receivable represent the right to receive cash in the future from customers for
2. List some common examples of other receivables, besides accounts receivable and notes
receivable.
Common examples of other receivables include dividends receivable, interest receivable, and
taxes receivable.
3. What is a critical element of internal control in the handling of receivables by a business?
Explain how this element is accomplished .
A critical element of internal control is the separation of cash-handling and cash-accounting
4. When dealing with receivables, give an example of a subsidiary account.
A business must maintain a separate accounts receivable account for each customer in order
5. What type of account must the sum of all subsidiary accounts be equal to?
6.What are some benefits to a business in accepting credit cards and debit cards?
The benefits to a business of accepting credit cards and debit cards include the ability to
7. What occurs when a business factors its receivables?
When a business factors its receivables, it sells its receivables to a finance company or
8. What occurs when a business pledges its receivables?
In a pledging situation, a business uses its receivables as security for a loan. The business
9. What is the expense account associated with the cost of uncollectible receivables called?
Bad Debts Expense is the account associated with the cost of the uncollectible receivables.
10. When is bad debts expense recorded when using the direct write-off method?
11. What are some limitations of using the direct write-off method?
Limitations of the direct write-off method are that it violates the matching principle and is not
12. When is bad debts expense recorded when using the allowance method?
13. When using the allowance method, how are accounts receivable shown on the balance sheet?
Under the allowance method, accounts receivable are shown at the net realizable value. Net
14. When using the allowance method, what account is debited when writing off uncollectible
accounts? How does this differ from the direct write-off method?
When using the allowance method, the Allowance for Bad Debts account is debited when
15. When a receivable is written off under the allowance method, how does it affect the net
realizable value shown on the balance sheet?
16. How does the percent-of-sales method compute bad debts expense?
The percent-of-sales method computes bad debts expense as a percentage of net credit sales.
17. How do the percent-of-receivables and aging-of-receivables methods compute bad debts
expense?
In both the percent-of-receivables method and aging-of-receivables method, the business
18. What is the difference between the percent-of-receivables and aging-of-receivables methods?
In the percent-of-receivables method, the business uses only one percentage to determine the
19. In accounting for bad debts, how do the income statement approach and the balance sheet
approach differ?
The income statement approach focuses on the amount of expense, Bad Debt Expense, that is
20. What is the formula to compute interest on a note receivable?
21. Why must companies record accrued interest revenue at the end of the accounting period?
The interest revenue earned on the note up to year-end is part of that year’s earnings. Interest
22. How is the acid-test ratio calculated, and what does it signify?
23. What does the accounts receivable turnover ratio measure, and how is it calculated?
The accounts receivable turnover ratio measures the number of times the company collects
24. What does the days’ sales in receivables indicate, and how is it calculated?
Days’ sales in receivables, also called the collection period, indicates how many days it takes
Short Exercises
S8-1 Ensuring internal control over the collection of receivables
Learning Objective 1Consider internal control over receivables collections. What job must be
withheld from a company’s credit department in order to safeguard its cash? If the credit
department does perform this job, what can a credit department employee do to hurt the
company?
SOLUTION
S8-2 Recording credit sales and collections
Learning Objective 1
Record the following transactions for Summer Consulting. Explanations are not required.
Apr.
15
Provided consulting services to Bob Jones and billed the customer
$1,500.
18 Provided consulting services to Samantha Cruise and billed the
customer $865.
25 Received $750 cash from Jones.
28 Provided consulting services to Regan Taylor and billed the
customer $625.
28 Received $865 cash from Cruise.
30 Received $1,375 cash, $750 from Jones and $625 from Taylor.
SOLUTION
S8-3 Applying the direct write-off method to account for uncollectibles
Learning Objective 2
Shawna Valley is an attorney in Los Angeles. Valley uses the direct write-off method to account
for uncollectible receivables.
At April 30, 2018, Valley’s accounts receivable totaled $19,000. During May, she earned revenue
of $22,000 on account and collected $15,000 on account. She also wrote off uncollectible
receivables of $1,100 on May 31, 2018.
Requirements
1. Use the direct write-off method to journalize Valley’s write-off of the uncollectible
receivables.
2. What is Valley’s balance of Accounts Receivable at May 31, 2018?
SOLUTION
Requirement 1
S8-4 Collecting a receivable previously written off—direct write-off method
Learning Objective 2
Spring Garden Greenhouse had trouble collecting its account receivable from Steve Stone. On
June 19, 2018, Spring Garden Greenhouse finally wrote off Stone’s $600 account receivable. On
December 31, Stone sent a $600 check to Spring Garden Greenhouse.
Journalize the entries required for Spring Garden Greenhouse, assuming Spring Garden
Greenhouse uses the direct write-off method.
SOLUTION
S8-5 Applying the allowance method to account for uncollectibles
Learning Objective 3
The Accounts Receivable balance and Allowance for Bad Debts for Signature Lamp Company at
December 31, 2017, was $10,800 and $2,000 (credit balance), respectively. During 2018,
Signature Lamp Company completed the following transactions:
a. Sales revenue on account, $273,400 (ignore Cost of Goods Sold).
b. Collections on account, $223,000.
c. Write-offs of uncollectibles, $5,900.
d. Bad debts expense of $5,200 was recorded.
Requirements
1. Journalize Signature Lamp Company’s transactions for 2018 assuming Signature Lamp
Company uses the allowance method.
2. Post the transactions to the Accounts Receivable, Allowance for Bad Debts, and Bad Debts
Expense T-accounts, and determine the ending balance of each account.
3. Show how accounts receivable would be reported on the balance sheet at December 31, 2018.
SOLUTION
Requirement 1
S8-6 Applying the allowance method (percent-of-sales) to account for uncollectibles
Learning Objective 3
During its first year of operations, Fall Wine Tour earned net credit sales of $311,000. Industry
experience suggests that bad debts will amount to 3% of net credit sales. At December 31, 2018,
accounts receivable total $44,000. The company uses the allowance method to account for
uncollectibles.
Requirements
1. Journalize Fall Wine Tour’s Bad Debts Expense using the percent-of-sales method.
2. Show how to report accounts receivable on the balance sheet at December 31, 2018.
SOLUTION
Requirement 1
S8-7 Applying the allowance method (percent-of-receivables) to account for uncollectibles
Learning Objective 3
The Accounts Receivable balance for Lake, Inc. at December 31, 2017, was $20,000. During
2018, Lake earned revenue of $454,000 on account and collected $325,000 on account. Lake
wrote off $5,600 receivables as uncollectible. Industry experience suggests that uncollectible
accounts will amount to 5% of accounts receivable.
Requirements
1. Assume Lake had an unadjusted $2,700 credit balance in Allowance for Bad Debts at
December 31, 2018. Journalize Lake’s December 31, 2018, adjustment to record bad debts
expense using the percent-of-receivables method.
2. Assume Lake had an unadjusted $2,400 debit balance in Allowance for Bad Debts at
December 31, 2018. Journalize Lake’s December 31, 2018, adjustment to record bad debts
expense using the percent-of-receivables method.
SOLUTION
Requirement 1
