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177
CHAPTER 6
RECEIVABLES AND INVENTORIES
CLASS DISCUSSION QUESTIONS
1. Receivables are normally classified as
(1) accounts receivable, (2) notes re-
ceivable, or (3) other receivables.
5. Carter’s should use the direct write-off
method because it is a small business
that has a relatively small number and
volume of accounts receivable.
6. The allowance method
7. Contra asset
$428,200.
9. (1) The percentage rate used is exces-
sive in relationship to the volume of
accounts written off as uncollectible;
hence, the balance in the allowance
account is excessive.
(2) A substantial volume of old uncollectible
accounts is still being carried in the accounts
receivable account.
sitions costs rather than the most recent acquisi-
tions costs.
12. a. FIFO c. FIFO
b. LIFO d. LIFO
13. FIFO
14. LIFO. In periods of rising prices, the use of LIFO
178
EXERCISES
E6–1
Accounts receivable from the U.S. government are significantly different from re-
ceivables from commercial aircraft carriers such as Delta and United. For example,
U.S. government receivables often involve complex contracts, but are backed by
E6–2
Due Date Interest Due at Maturity
a. Feb. 14 $125 [$25,000 × 0.06 × (30/360)]
b. June 30 $135 [$13,500 × 0.04 × (90/360)]
E6–3
a. MGM: 14.6% ($92,571,000 ÷ $633,116,000)
b. IBM: 3.2% ($297,000,000 ÷ $9,225,000,000)
c. Casino operations experience greater bad debt risk since it is difficult to
control the creditworthiness of customers entering the casino. In addition,
individuals who may have adequate creditworthiness could overextend them-
179
E6–4
Collected $5,000
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Accounts
Wrote-off $10,000
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Retained
Accounts Receivable = Earnin
g
s
Ma
r
. 18.
(
10,000
)
(
10,000
)
Statement of Cash Flows Income Statement
No effect 0 Mar. 18. Bad debt
expense
(
10,000
)
Reinstated Account
Balance Sheet
Assets = Liabilities + Stockholders’ Equity
Retained
180
E6–4, Concluded
Collected $10,000
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Accounts
E6–5
Collected $2,500
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Accounts
Cash + Receivable
Jul
y
3. 2,500
(
2,500
)
Statement of Cash Flows Income Statement
Jul
y
3. Operatin
g
2,500 No effect 0
Wrote-off $11,000
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Accounts Allowance fo
r
181
E6–5, Concluded
Reinstated Account
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Accounts Allowance for
Collected $11,000
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Accounts
Cash + Receivable
Oct. 8. 11,000
(
11,000
)
Statement of Cash Flows Income Statement
Oct. 8. Operatin
g
11,000 No effect 0
182
E6–6
a.
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Accounts Retained
b.
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Accts. Allowance for
Rec.
–
Doubtful Accounts
(
13,000
)
13,000
Statement of Cash Flows Income Statement
No effect 0 No effect 0
E6–7
Estimated balance of Allowance for Doubtful Accounts: $48,700
Computed as shown below.
Estimated
Uncollectible Accounts
Age Interval Balance Percent Amount
Not past due ............................................... $ 925,000 1% $ 9,250
1–30 days past due .................................... 375,000 2 7,500
183
E6–8
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Allowance for Retained
E6–9
a. $172,500 ($34,500,000 × 0.005) c. $258,750 ($34,500,000 × 0.0075)
b. $181,500 ($200,000 – $18,500) d. $264,000 ($255,000 + $9,000)
E6–10
$108,200 [$120,000 + $16,000 – ($2,780,000 × 1%)]
184
E6–12
a. $24,750 (90 units at $275)
b. $19,080 [(54 units × $200) + (36 units × $230) = $10,800 + $8,280]
c. $22,320 (90 units at $248; $99,200 ÷ 400 units = $248)
Cost of merchandise available for sale:
54 units at $200 ........................................................ $10,800
E6–13
Cost
Ending Cost of Goods
Inventory Method Inventory Sold
a. FIFO ........................................ $22,700 $70,700
b. LIFO ........................................ 24,100 69,300
c. Weighted average ................. 23,350 70,050
Cost of merchandise available for sale:
10 units at $970 each ............................................... $ 9,700
45 units at $960 each ............................................... 43,200
30 units at $890 each ............................................... 26,700
15 units at $920 each ............................................... 13,800
100 units (at an average unit cost of $934) .............. $93,400
185
E6–13, Concluded
c. Weighted average cost:
E6–14
1. a. FIFO ending inventory > (greater than) LIFO ending inventory
b. FIFO cost of goods sold < (less than) LIFO cost of goods sold
2. In periods of rising prices, the net income shown on the company’s tax return
would be lower under LIFO than under FIFO; thus, there is a tax advantage of
using LIFO.
Note to Instructors: The federal tax laws require that if LIFO is used for tax pur-
poses, LIFO also must be used for financial reporting purposes. This is known
E6–15
1. a. The interest receivable should be reported separately as a current asset.
It should not be deducted from notes receivable.
186
E6–15, Concluded
ZABEL COMPANY
Balance Sheet
December 31, 20Y4
Assets
Current assets:
Cash ............................................................................ $ 75,000
Notes receivable ........................................................ 115,000
E6–16
Product
Inventory
Quantit
y
Cost
per
Unit
Market
Value per
Unit (Net
Realizable
V
alue
)
Total
Cost Market LCM
Adams 100 $140 $125 $ 14,000 $ 12,500 $ 12,500
Coolid
g
e 375 90 112 33,750 42,000 33,750
E6–17
The inventory would appear in the Current Assets section, as follows:
Inventory—at lower of cost (FIFO) or market ............................... $250,370
187
P6–1
1.
A
B C D E F G H
1 Aging-of-Receivables Schedule
2 December 31, 20
Y
7
3 Da
y
s Past Due
4 Custome
r
Balance
Not Past
Due 1
–
30 31
–
60 61
–
90 91
–
120
Over
120
5 AAA Beaut
y
27,500 27,500
6 Amelia’s Wigs 3,750 3,750
2.
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Allowance for Retained
–
Doubtful Accounts = Earnin
g
s
20Y7
188
P6–1, Continued
3.
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Allowance for Retained
4.
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Accounts Allowance fo
r
Receivable
–
Doubtful Accounts
20Y8
Mar. 4.
(
2,950
)
2,950
Statement of Cash Flows Income Statement
No effect 0 No effect 0
189
P6–1, Continued
5.
Reinstated Account
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Accounts Allowance for
Receivable
–
Doubtful Accounts
20Y8
Au
g
. 17. 2,950
(
2,950
)
Statement of Cash Flows Income Statement
No effect 0 No effect 0
Collected $2,950
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Accounts
6. a.
Write-off of Account
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Retained
190
P6–1, Concluded
6. b.
Reinstated Account
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Retained
Accounts Receivable = Earnin
g
s
20Y8
Au
g
. 17. 2,950
2,950
Statement of Cash Flows Income Statement
No effect 0 20Y8
Au
g
. 17.
Bad debt
expense
2,950
Collected $2,950
Balance Sheet
Assets = Liabilities + Stockholders’ Equity
Accounts
