Judgment Case 7–3
Requirement 1
a. Hogan should account for the sales discounts at the date of sale using the
Revenues should be recorded at the cash equivalent price at the date of
Requirement 2
Trade discounts are neither recorded in the accounts nor reported in the
Requirement 3
To account for the accounts receivable factored on August 1, 2018, Hogan
should decrease accounts receivable by the amount of the accounts receivable
Requirement 4
Hogan should report the face amount of the interest-bearing notes receivable
and the related interest receivable for the period from October 1 through December
Hogan should report interest revenue from the notes receivable on its income
Interest revenue is realized with the passage of time. Accordingly, interest
Real World Case 7–4
Requirement 2
a. Sales returns reserve is a contra-asset account, serving to reduce the
b.
Sales Returns Reserve
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31 Acquisition
c.
This journal entry reduces revenue for $40,139 of estimated sales returns
and increases the reserve by that amount. Note: They refer to this as
This journal entry recognizes that returns of $31,237 occurred during the
period, reducing both the sales returns reserve and accounts receivable.
Real World Case 7–4 (continued)
d. In the operations section of the statement of cash flows, $40,139 is added
back to net income because it is an amount that reduces net income (by
Requirement 3
a.
Sales Returns Reserve
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b.
Sales Returns Reserve
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Recovery (from Antar) 22,259
Deductions assumed to be 0
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c.
Real World Case 7–4 (concluded)
d. It could be that Green Mountain unintentionally overestimated returns in
Q1 by a very large amount, and then experienced lower than expected
Ethics Case 7–5
Requirement 1
Required allowance $180,000
Requirement 2
Ethical Dilemma:
You, as the assistant controller, have a responsibility to follow GAAP and
make a reasonably accurate estimate of the amount of receivables that will be
Alternative actions and consequences include:
1. Refuse to comply with the controller’s request to change the aging category of
the large account.
Positive consequences:
Negative consequences:
a. Possible loss of your job.
2. Comply with the controller’s suggestion to report the allowance for
uncollectible accounts at $135,000.
Positive consequences:
a. Retention of your job.
Negative consequences:
Case 7–5 (concluded)
3. Report the controller’s suggestion to a higher level of management, the audit
committee, or the auditors. If one of these parties corrects the controller and
compels fair reporting of the allowance account, the consequences would be the
4. Refuse to comply with the controller’s request and resign as assistant controller.
If you report the controller’s suggestion to higher management, the audit
Judgment Case 7–6
1. A weakness is created by the fact that John need only submit a list of accounts
and amounts to be charged to replenish the petty cash fund. The supporting
3. The internal control system for receipts does not contain sufficient separation of
Real World Case 7–7
Answers will, of course, vary depending on the year. The following were reported
in Cisco’s financial statements for the year ended July 25, 2015 ($ in millions):
2015 Net sales: $49,161
Requirement 3
a. Net trade accounts receivable + Allowance for doubtful accounts = Gross
accounts receivable
b. The statement of cash flows indicates bad debt expense (provision for
c.
Allowance for Uncollectible Accounts
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Write-offs 97
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Case 7–7 (concluded)
d.
Gross Accounts Receivable
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Collections
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