7-41 Solutions
7.40 continued.
c. The contract has three elements: quarterly service (fair value of $320
January 4, 2008: Journal entry to record contract for pest control
services.
Cash ………………………………………………………………. 300
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+300
+300
Advances from Customers ………………………………… 108
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–108
+108
IncSt → RE
d. and e.
Stone should recognize the portion of the contract price associated
with the interim service calls, $48 (= 16% X $300) pro rata over the life
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–4
+4
IncSt → RE
Solutions 7-42
7-43 Solutions
7.40 d. and e. continued.
Stone would not recognize incremental revenue on April 30, 2008
when it sprays for ants.
7.41 (Kajima Corporation; analyzing changes in accounts receivable.)
(Amounts in Millions)
a. 2007 2006 2005
(1) Sales on Account
Sales Revenue …….. 1,891,466 1,775,274 1,687,380
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+1,891,466
+1,891,466
IncSt → RE
+1,775,274
+1,775,274
IncSt → RE
+1,687,380
+1,687,380
IncSt → RE
2007 2006 2005
(2) Provision for
Estimated Uncol-
lectible Accounts
collectible Ac-
counts …………….. 1,084 3,152 2,999
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–1,084
–1,084
IncSt → RE
–3,152
–3,152
IncSt → RE
–2,999
–2,999
IncSt → RE
Solutions 7-44
7.41 a. continued.
(3) Write Off of Actual
Bad Debts
Allowance for Uncol-
lectible Accounts …… 6,471a 820b 8,099c
Accounts Receiv-
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+6,471/–6,471
+820/–820
+8,099/–8,099
2007 2006 2005
(4) Collection of Cash
from Customers
d¥468,387 + ¥1,891,466 – ¥6,471 – ¥630,044 = ¥1,723,338.
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+1,723,338/
–1,723,338
+1,761,584/–
1,761,584
+1,606,456/–
1,606,456
7-45 Solutions
7.41 continued.
b. 2007 2006 2005
(1) Accounts Receivable Turnover
2007: ¥1,891,466/.5(¥624,758 + ¥457,714) … 3.49
(2) Bad Debt Expense/Revenues
2007: ¥1,084/¥1,891,466 ………………………….. 0.06%
(3) Allowance for Uncollectible Accounts/
Gross Accounts Receivable at End of
Year
(4) Accounts Written Off/Average Gross
Accounts Receivable
2007: ¥6,471/.5(¥630,044 + ¥468,387) ………. 1.18%
2005: ¥8,099/.5(¥455,517 + ¥382,692) ………. 1.93%
c. The accounts receivable turnover ratio decreased during the three-
year period from 4.13 (in 2005) to 3.92 (in 2006) to 3.49 (in 2007). The
firm decreased the amount of accounts written off between 2005 and
Solutions 7-46
7.42 (Polaris Corporation; analyzing changes in accounts receivable.)
(Amounts in Millions)
a. 2008 2007 2006 2005
Allowance for Uncollectible
Accounts, Beginning of Year …… $ 138.1 $ 115.1 $ 111.0 $ 97.8
b. 2008 2007 2006 2005
Accounts Receivable, Gross at
Beginning of Year ………………….. $ 605.6 $ 599.2 $ 566.7 $ 539.5
Plus Sales on Accounta ……………… 3,660.1 3,221.6 2,809.7 2,479.1
aTotal Sales X 0.75.
c. 2008 2007 2006 2005
Cash Collections from Cash
Salesa …………………………………… $1,220.0 $1,073.9 $ 936.6 $ 826.4
aTotal Sales X 0.25.
d. Total Sales/Average Accounts Re- 2008 2007 2006 2005
ceivable, Net:
7.43 (Aracruz Celulose; analyzing changes in accounts receivable.) (Amounts
in Thousands)
a. Carrying Value = Accounts Receivable, Net.
7-47 Solutions
Solutions 7-48
7.43 continued.
b. Total Amount Customers Owe = Accounts Receivable, Gross.
c. Journal Entries for Bad Debt Expense:
2007
Bad Debt Expense …………………………………………… 117
Allowance for Uncollectible Accounts …………….. 117
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–117
–117
IncSt → RE
Bad Debt Expense equals $117 (= $4,318 + $433 –
$4,634).
2006
Bad Debt Expense …………………………………………… 592
Allowance for Uncollectible Accounts …………….. 592
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–592
–592
IncSt → RE
Bad Debt Expense equals $592 (= $4,634 + $25 –
$4,067).
7.44 Metso Corporation; analyzing disclosures of accounts receivable.)
(Amounts in Millions)
a. Carrying Value = Accounts Receivable, Net.
b. Total Amount Customers Owe = Accounts Receivable, Gross.
7-49 Solutions
7.44 continued.
c. Journal Entries for Writeoffs:
2007
Allowance for Doubtful Accounts ………………………. 5
Accounts Receivable, Gross …………………………... 5
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–5
+5
Writeoff equals 5 (= 35 + 13 – 7 – 36).
2006
Allowance for Doubtful Accounts ………………………. 6
Accounts Receivable, Gross …………………………... 6
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–6
+6
Writeoff equals 6 (= 35 + 10 – 4 – 35).
7.45 (Pins Company; reconstructing transactions affecting accounts receivable
and uncollectible accounts.)
a. $192,000 Dr. = $700,000 – $500,000 – $8,000.
f. $289,000 = $300,000 – $11,000.
Solutions 7-50
7.46 (Effect of errors involving accounts receivable on financial statement ratios.)
Accounts
Rate of Receivable Liabilities
Return on Turnover to Assets
Assets Ratio Ratio
a. Bad Debt Expense ………………………………………………………………… X
Allowance for Uncollectible Accounts …………………………………. X
O/S
O/S = O/S NO
O/S = U/S NO
O/S = U/S
Assets
=
Liabilities
+
Shareholders’
Equity
(Class)
–Amount
–Amount
IncSt → RE
b. Allowance for Uncollectible Accounts …………………………………….. X
Accounts Receivable ………………………………………………………… X
NO
NO = NO NO
NO = NO NO
NO = NO
Assets
=
Liabilities
+
Shareholders
’
Equity
(Class)
+Amount
–Amount
c. Advances from Customers …………………………………………………….. X
Accounts Receivable …………………………………………………………. X
NO
O/S = U/S NO
O/S = U/S O/S
O/S = O/S
Assets
=
Liabilities
+
Shareholders
’
Equity
(Class)
–Amount
–Amount
7-51 Solutions
7.46 continued.
d. Sales Revenue ………………………………………………………………………. X
Accounts Receivable ………………………………………………………… X
O/S
O/S = O/S O/S
O/S = O/S NO
O/S = U/S
Assets
=
Liabilities
+
Shareholders
’
Equity
(Class)
–Amount
–Amount
Inventory ……………………………………………………………………………. X
Cost of Goods Sold …………………………………………………………… X
Assets
=
Liabilities
+
Shareholders
’
Equity
(Class)
+Amount
+Amount
e. Sales Return …………………………………………………………………………. X
Accounts Receivable ………………………………………………………… X
O/S
O/S = O/S O/S
O/S = O/S NO
O/S = U/S
Assets
=
Liabilities
+
Shareholders
’
Equity
(Class)
–Amount
–Amount
Inventory ……………………………………………………………………………. X
Cost of Goods Sold …………………………………………………………… X
Assets
=
Liabilities
+
Shareholders
’
Equity
(Class)
+Amount
+Amount
Note: This problem asks only for the net effect of each error on the three financial ratios. The journal entries and the
numerator and denominator effects show the reason for the net effect.
Solutions 7-52
7.47 (Areva Group: income recognition for uranium enrichment plant.)
(Amounts in Millions)
a.1. Percentage-of-Completion Method
Incremental
Percentage Revenue Expenses
Year Complete Recognized Recognized Income
2008 340/1,700 (.20) $ 400 $ 340 $ 60
2. Completed Contract Method
Revenue Expenses
Year Recognized Recognized Income
2008 -0- -0- -0-
b. Journal Entries:
1. Percentage-of-Completion Method
2007
December 20, 2007: At time of contract signing.
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+20
+20
7-53 Solutions
7.47 b. continued.
2008
Cash …………………………………………………………… 340
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+340
–340
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+100
–20
+400
IncSt → RE
+280
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–340
–340
IncSt → RE
2009–2013
Construction in Process ……………………………………. 238
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+238
–238
Cash ………………………………………………………………. 100
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+100
+280
IncSt → RE
+180
Solutions 7-54
7.47 b. continued.
Construction in Process ………………………………… 238
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–238
–238
IncSt → RE
2014
Construction in Process ……………………………………. 170
Cash …………………………………………………………… 170
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+170
–170
Sales Revenue ……………………………………………… 200
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+1,380
+200
IncSt → RE
–1,180
Cost of Sales ……………………………………………………. 170
Construction in Process ………………………………… 170
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–170
–170
IncSt → RE
2. Completed Contract Method
2007
December 20, 2007: At time of contract signing.
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+20
+20
7-55 Solutions
7.47 b. continued.
2008
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+340
–340
Cash ………………………………………………………………. 100
Advances from Customer ……………………………… 100
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+100
+100
2009–2013
Cash …………………………………………………………… 238
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+238
–238
Cash ………………………………………………………………. 100
Advances form Customer ……………………………… 100
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+100
+100
2014
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+170
–170
Solutions 7-56
7.47 b. continued.
Cash ………………………………………………………………. 1,380
Sales Revenue ……………………………………………… 2,000
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+1,380
–620
+2,000
IncSt → RE
Cost of Sales ……………………………………………………. 1,700
Construction in Process ………………………………… 1,700
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–1,700
–1,700
IncSt → RE
7.48 (Flanikin Construction Company; income recognition for a contractor.)
a. Calculation of Revenues, Expenses, and Income
1. Percentage-of-Completion Method
Incremental
Percentage Revenue Expenses
Year Complete Recognized Recognized Income
2005 12/120 (.10) $ 18,000,000 $ 12,000,000 $ 6,000,000
2. Completed Contract Method
Revenue Expenses
Year Recognized Recognized Income
2005 -0- -0- -0-
7-57 Solutions
7.48 continued.
b. Journal Entries
1. Percentage-of-Completion Method
2005
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+12
+12
Cash ………………………………………………………………. 36
Advances from Customer ……………………………… 18
Sales Revenue ……………………………………………… 18
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+36
+18
+18
IncSt → RE
Cost of Sales ……………………………………………………. 12
Construction in Process ………………………………… 12
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–12
–12
IncSt → RE
2006
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+36
+36
Cash ………………………………………………………………. 45
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+45
–9
+54
IncSt → RE
Solutions 7-58
7.48 b. continued.
Cost of Sales ……………………………………………………. 36
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–36
–36
IncSt → RE
2007
Accounts Payable …………………………………………. 48
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+48
+48
Cash ………………………………………………………………. 45
Advances from Customer …………………………………. 9
Receivable from Customer ……………………………….. 18
Sales Revenue ……………………………………………… 72
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+45
–9
+72
IncSt → RE
+18
Cost of Sales ……………………………………………………. 48
Construction in Process ………………………………… 48
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–48
–48
IncSt → RE
2008
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+24
+24
7-59 Solutions
7.48 b. continued.
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+54
+36
IncSt → RE
–18
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–24
–24
IncSt → RE
2. Completed Contract Method
2005
Construction in Process ……………………………………. 12
Accounts Payable …………………………………………. 12
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+12
+12
Cash ………………………………………………………………. 36
Advances from Customer ……………………………… 36
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+36
+36
2006
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+36
+36
Solutions 7-60
7.48 b. continued.
Cash ………………………………………………………………. 45
Advances from Customer ……………………………… 45
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+45
+45
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+48
+48
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+45
+45
2008
Construction in Process ……………………………………. 24
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+24
+24
Cash ………………………………………………………………. 54
Advances from Customer …………………………………. 126
Sales Revenue ……………………………………………… 180
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+54
–126
+180
IncSt → RE
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–120
–120
IncSt → RE