Financial Reporting and Analysis (7th Ed.)
Chapter 8 Solutions
Receivables
Exercises
Exercises
E8-1. Analyzing accounts receivable (LO8-2)
(AICPA adapted)
To find the amount of gross sales, start by determining credit sales.
We
can do this with the accounts receivable T-account below.
Accounts Receivable
X = $30,000 = credit sales
Now that we know the amount of credit sales, we can add cash
sales to
this amount to find gross sales.
E8-2. Analyzing accounts receivable (LO 8-2)
(AICPA adapted)
(Note to instructor: Students should be aware that the account
titles
to recreate the journal entries that affected accounts receivable and
CR Allowance for doubtful accounts
Based on the two entries above, the balance in the allowance for
doubtful accounts at the end of the year was $10,000. The amount
of
E8-3. Determining ratio effects of write-offs (LO 8-2)
(AICPA adapted)
1. The current ratio [$30,000/$10,000 = 3:1] does not change as a
result of the write-off to the allowance account. Accounts receivable
2. Net accounts receivable [prior: $3,300 − $300 = $3,000] does not
change as a result of the write-off to the allowance account [after:
b. X equals Y
3. Gross accounts receivable will be lower after the write-off than
before the write-off because accounts receivable is credited for the
a. X greater than Y
E8-4. Determining bad debt provision (LO 8-1)
(AICPA adapted)
Requirement 1:
Allowance for doubtful accounts
$1,450 Beginning balance
1,500 Provision for bad debts
Accounts written off $1,800
X Additional provision for bad debts
$1,600 Ending Balance
Solving for the additional provision for bad debts:
Total bad debt provision for the year ended December 31, 2017
should be:
Requirement 2:
To record the original provision for bad debts
To record the write-off of bad debts
To record the additional provision for bad debts
E8-5. Preparing an amortization schedule (LO 8-4)
(AICPA adapted)
The amortization table for Lake Company appears below.
Date Payments
Interest
Income
Reduction
of Principal
Net Installments
Due
*rounded
E8-6. Discounting a note (LO 8-6)
(AICPA adapted)
First, determine the value of the principal plus the interest.
Next, find the interest charged by the bank, discounted at 15% for
one-half year.
E8-7. Recording note receivable carrying amount and fair value
option (LO 8-4, LO 8-5) (AICPA adapted)
Requirement 1:
Calculation of the present value of Fletcher’s note at a 10% effective
rate of interest:
Present value of $200,000 principal repayment in 5 years at 10%
Present value of five interest payments of $12,000
($200,000 x .05) each at 10%:
Requirement 2:
$16,209
Requirement 3:
The difference between interest revenue and cash received increases
Requirement 4:
Calculation of the present value of Fletcher’s note at a 12% effective
rate of interest:
Present value of four remaining interest payments of
$12,000 ($200,000 x .05) each at 12%:
Requirement 5:
value= $10,823
E8-8. Aging accounts receivable (LO 8-1)
(AICPA adapted)
The estimated uncollectible accounts at December 31, 2017, total:
So, Vale should report an Allowance for uncollectible accounts of
$4,800.
E8-9. Analyzing accounts receivable and fair value option (LO 8-5)
(AICPA adapted)
Accounts receivable
Beginning balance $ 750,000
Ending balance X
The FASB defines fair value as “The price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction
ending account balance or $1,320,700 = [$1,405,000 x 94%].
Because this offer was to purchase the receivables without
E8-10. Accounting for a securitization (LO-7)
Requirement 1:
FASB ASC 860-10-40-3 states that a financial asset should be
considered sold and therefore should be derecognized if it is
transferred and control is surrendered. As the problem’s
specifications state this to be the case, the entry to record the sale
follows:
DR Cash (or receivable from SE) $ 24,000,000
Requirement 2:
When control over the receivables is not surrendered, as in this
scenario, the transaction should be treated as a collateralized
borrowing:
E8-11. Determining whether it is a real sale (LO 8-3)
Years Ending December 31,
2017 2018 2019
Assuming that sales occur more or less uniformly over the course of
each month, approximately 15 days, on average, lapse before
Requirement 1: Sales growth
Sales grew by 3% in 2018 ([$1,839,559 – $1,785,980] ÷
$1,785,980), while receivables grew by 3.5% ([$227,896 –
Requirement 2: Potential problems
The data in 2018 do not suggest any potential problems because
growth rates in sales and accounts receivable should be roughly
Requirement 3: Possible explanations
A change in sales terms would not necessarily require any
corrective
be expected to experience difficulty in paying (promptly) and an
increase in the Allowance for uncollectibles is probably warranted.
accounts
E8-12. Calculating imputed interest on noninterest-bearing note (LO
8-4)
The cash selling price of the equipment is found by taking the
Data needed for the solution of this exercise is found in the following
amortization table.
(1) (2) (3)
Interest on Ending
Annual Previous Loan
Payment Balance* Balance
*(Column 3 for previous year times 12%)
E8-13. Factoring receivables with recourse (LO 8-6)
Requirement 1:
Requirement 2:
(or Gain on sale if received in a subsequent year)
E8-14. Recording troubled debt settlement (LO 8-8)
The annual payment required to amortize the $150,000 loan over 5
The amortization table below schedules the principal and interest
breakdown for each of the required payments and can be used to
Interest on
Annual Previous Principal Loan
Payment Balance Reduction Balance
*Rounded
Journal entry:
E8-15. Recording troubled debt restructuring (LO 8-8)
CVC (borrower)
(a) To record the modified note (restructured cash flows less than
note
book value):
Buffalo Supply (lender)
(a) To record the modified note (restructured cash flows less than
note book value):
DR Restructured note receivable
The lender records the restructured note as the present value of the
future cash flows from the modified note using the effective interest