CHAPTER
5
Accounting for and Presentation
of Current Assets
CHAPTER OUTLINE:
I. Preliminary topics
A. Operating Cycle
II. Cash and Cash Equivalents
A. Balance sheet valuation — amount available
B. The Bank Reconciliation as a Control Over Cash
1. Timing differences
a. Deposits in transit
b. Outstanding checks
c. Charges for bank services
d. Interest added to the account
e. NSF checks
3. Adjustments required
III. Short-Term Marketable Securities
A. Reasons for investing in debt and equity securities
IV. Accounts Receivable
A. Balance sheet valuation — net realizable value
B. Bad debts/uncollectible accounts
1. Expense recognition/valuation adjustment
2. Write-off of uncollectible accounts
C. Cash discounts
1. Credit terms
2. Cash discounts subtracted from revenues in income statement
Chapter 5 Accounting for and Presentation of Current Assets
V. Notes Receivable
A. Comparison with accounts receivable
B. Interest accrual
VI. Inventories
A. Alternative generally accepted practices exist
B. Flow of costs from inventory to cost of goods sold
C. Inventory cost flow assumptions
2. Weighted-average cost
4. LIFO
1. Perpetual
2. Periodic
G. Inventory errors
H. Balance sheet valuation at the lower of cost or market
VII. Prepaid Expenses and Other Current Assets
Instructor’s Manual / Solutions Manual
PRELIMINARY WARNING:
The coverage of six current asset elements in this chapter includes descriptions of many
accounting/bookkeeping procedures that enhance the student’s understanding of business and
make the coverage more complete; however, these procedures do not have to be mastered by the
TEACHING/LEARNING OBJECTIVES:
Principal:
1. To have the student understand and be able to analyze the transactions that affect current
3. To have the student understand the significance of inventories to many entities; to recognize
4. To have the student integrate accounting for current assets with its impact on profitability
Supporting:
5. To continue to build the student’s understanding of the double entry system and the use of
journal entries to record transactions and adjustments.
7. To have the student understand the reasons for, and valuation of, short-term investments.
8. To introduce the student to the concept and components of the system of internal control.
Chapter 5 Accounting for and Presentation of Current Assets
TEACHING OBSERVATIONS/ASSIGNMENT SUGGESTIONS:
1. The discussion of cash provides an opportunity to explain the bank reconciliation process,
which many students follow for their own checking account. Exercises 5-7 through 5-8 are
3. A key to understanding the allowance for bad debts account is to have students understand
the idea of detailed accounts receivable records and an allowance account that applies to
4. The Business In Practice box about Internal Control should be emphasized, because students
will encounter internal controls in their work, and now is the time to learn why they exist.
6. Inventory accounting is the first topic in the text coverage for which alternative accounting
practices exist.
Problems 5-31 through 5-34 are straightforward “numbers” assignments.
8. The impact of changing price levels is the most important integrating concept for the student
9. It is important to integrate the inventory cost flow assumption material with its impact on
10. Illustrations from actual annual reports should be utilized extensively so students become
more familiar with “reading” the financial statements and to illustrate the application of the
Instructor’s Manual / Solutions Manual
ASSIGNMENT OVERVIEW:
NO.
LEARNING
OBJECTIVES
DIFFICULTY &
TIME ESTIMATE
OTHER
COMMENTS
M5.1.
3
Easy, 5-8 min.
Basic bank reconciliation.
M5.2.
3
Easy, 2-3 min.
Related to M5.1.
M5.3.
5
Med., 7-10 min.
T-account analysis of Accounts Receivable and Allowance for
Bad Debts to determine ending balances.
M5.4.
5
Med., 7-10 min.
See M5.3. T-account analysis of Allowance for Bad Debts.
M5.5.
7, 8
Med., 7-10 min.
Basic FIFO-LIFO mini-exercise using periodic.
M5.6.
7, 8
Med., 7-10 min.
See M5.5. Basic FIFO-LIFO mini-exercise with an interesting
twist to calculate number of units purchased in October.
E5.7.
3
Easy, 5-8 min.
Basic bank reconciliation.
E5.8.
3
Easy, 5-8 min.
Basic bank reconciliation.
E5.9.
3
Easy, 2-3 min.
Related to E5.7.
E5.10.
3
Easy, 2-3 min.
Related to E5.8.
1) the adjustment to accrue bad debts expense, versus
5
Med., 7-10 min.
See E5.11. Good in-class demonstration exercise.
E5.13.
5
Med., 5-8 min.
Students should review the Business in Practice—Cash
Discounts before attempting this problem.
5
Easy, 4-6 min.
See E5.13. Good in-class demonstration exercise.
E5.15.
6
Easy, 5-8 min.
Can use as a follow-up problem to reinforce the adjustment
process introduced in Chapter 4.
6
Easy, 5-8 min.
See E5.15. Good homework assignment.
E5.17.
7, 8
Med., 5-8 min.
Good in-class discussion exercise.
E5.18.
7, 8
Med., 5-8 min.
See E5.17.
10
Med., 7-10 min.
See P7.27 for an integrating assignment. E5.20 covers the
5, 6, 8
Easy-Med., 5-7 min.
Basic transaction analysis.
E5.22.
Easy-Med., 5-7 min.
E5.23.
5, 6, 7
Easy-Med., 5-7 min.
Basic transaction analysis.
E5.24.
7, 8, 10
Med., 7-10 min.
Good homework assignment.
P5.25.
3
Med., 7-10 min.
Emphasize the bank reconciliation format (“book” vs. “bank”)
and solve for the beginning balances.
P5.26.
3
Med., 7-10 min.
P5.27.
5
Med., 7-10 min.
Part b can be used to explain why the allowance method is
conceptually superior to the direct write-off method.
P5.28.
5
Med., 10-12 min.
P5.29.
5
Med., 7-10 min.
Excellent “T–accounts” problem.
P5.30.
5
Med., 7-10 min.
See P5.29. Good homework assignment.
P5.31.
7, 8
Med., 12-15 min.
Basic FIFO-LIFO problem using periodic.
P5.32.
7, 8
Med., 12-15 min.
See P5.31. Good in-class demonstration problem.
P5.33.
7, 8
Med.-Hard,
15-20 min.
cost of goods sold recognition (periodic vs. perpetual).
Students should review Business in Practice—The Perpetual
Inventory System before attempting this problem. Emphasize
the Balance Sheet—Income Statement link, and the timing of
Chapter 5 Accounting for and Presentation of Current Assets
ASSIGNMENT OVERVIEW (continued):
NO.
LEARNING
OBJECTIVES
DIFFICULTY &
TIME ESTIMATE
OTHER
COMMENTS
P5.34.
15-20 min.
7-10 min.
attempting this problem.
12-15 min.
stress the importance of inventory valuation.
5, 7
Med.-Hard,
12-15 min.
Take a quick look at the solutions. Parts a and b provide an
opportunity to discuss how to “read between the numbers” to
make better use of your knowledge about a company’s
SOLUTIONS:
M5.1.
Balance per bank………
$22,260
Balance per books………………
$24,860
Add: Deposit in transit…
2,400
Add: Interest earned…………….
80
Less: Outstanding checks.
(760)
Less: NSF check…………………
Bank service charges……………
Reconciled balance……
$23,900
Reconciled balance………………
$23,900
M5.2.
a.
Balance Sheet Income Statement .
Assets = Liabilities + Stockholders’ Equity Net income = Revenues – Expenses
Cash Int.Rev. Misc.Exp.
-960 +80 -140
Acc. Rec.
b.
The cash amount to be shown on the balance sheet is the $23,900 reconciled amount.
M5.3.
Accounts Receivable
Beginning balance ……………… 72,000 Cash collections …………………. 290,000
Sales on account ………………… 300,000 Accounts written off ………… 6,000
Ending balance ………………….. ? .
Allowance for Bad Debts
Bad debt write-offs Beginning balance………..………. 5,750
(During the year) ……………….. 7,100 Bad debt expense …………………. 6,000
Ending balance …………….………. ? .
Net realizable value:
Accounts receivable ……………………………………………………..…… $76,000
Less: Allowance for bad debts ………………………………………..…… (4,650) $71,350
M5.4.
Allowance for Bad Debts
Bad debt write-offs Beginning balance………..………. 10,600
(During the year) ……………….. ? Bad debt expense………….………. 18,800
M5.5.
Calculation ending inventory in units:
Beginning inventory .. ……….. ……….. ……….. ……….. ……….. ……….. 400 units
Purchase 1 …… ……….. ……….. ……….. ……….. ……….. ……….. ……….. 500 units
Calculation of cost of goods sold amounts:
a. ——- FIFO ——- b. ——- LIFO ——-
Beginning inventory.. 400 @ $10 = $4,000 Purchase 2 … ……. 300 @ $14 = $4,200
Calculation of ending inventory amounts:
a. ——- FIFO ——- b. ——- LIFO ——-
Purchase 2 …… ……….. 300 @ $14 = $4,200 Beg. inventory….. 400 @ $10 = $4,000
M5.6.
a.
b.
Beginning inventory .. ……….. ……….. ……….. 600 units @ $20 per unit = $ ?
May purchases ……….. ……….. ……….. ……….. 1,200 units @ ? per unit = 26,400
Solution approach:
Use the information available to solve for the missing information.
Number of units purchased in October = 2,600 – 600 – 1,200 = 800 units
Number of units sold = 2,600 – 1,100 = 1,500 units
Calculation of cost of goods sold amounts:
——— FIFO ——— ——— LIFO ——–
Beginning inventory.. 600 @ $20 = $12,000 October purchases.… 800 @ $24 = $19,200
M5.6.
b.
Ending inventory ……. ……….. $25,800 Ending inventory………………. $23,000
(continued)
Calculation of ending inventory amounts:
——— FIFO ——— —–—- LIFO ——–
October purchases ….. 800 @ $24 = $19,200 Beg. inventory……. 600 @ $20 = $12,000
E5.7.
Balance per bank…………
$ 746
Balance per books………………….
$1,688
Less: Outstanding checks
Error in recording check
($26 + $100)……………
(126)
(as $46 instead of $64)……………
Reconciled balance………
Reconciled balance………………..
E5.8.
Balance per bank…………
$9,810
Balance per books………………….
$9,488
Add: Deposit in transit……
1,260
Add: Interest earned……………….
Less: Outstanding checks…
(1,890)
Less: Check charge…………………
Error in recording payment………..
Reconciled balance…………………
$9,180
E5.9.
a.
Balance Sheet Income Statement .
Assets = Liabilities + Stockholders’ Equity Net income = Revenues – Expenses
Accounts Accounts
b.
The cash amount to be shown on the balance sheet is the $1,520 reconciled amount.
E5.10.
a.
Balance Sheet Income Statement .
Assets = Liabilities + Stockholders’ Equity Net income = Revenues – Expenses
Cash Acc. Pay. Int.Rev. Misc.Exp.
-308 -360 +108 -56
E5.11.
Allowance for Bad Debts
Bad debt write-offs 1/1/16 balance …………….… $26,800
(from 1/1 to 11/30) ……………… ? Bad debt expense
(from 1/1 to 11/30) ……… 42,924
11/30/16 balance ………… $19,526
Adjustment required (12/31/16)… ?
12/31/16 balance …………… $19,000
a.
Solution approach: The bad debt write-offs from January through November can be
determined by subtracting the November 30 balance from the total of the beginning
b.
The adjustment required at December 31, 2016 can be determined by comparing the
November 30 balance in the allowance account to the desired ending balance.
Bad debt expense adjustment = $19,526 – $19,000 = $526