Chapter 5
Short-Term Investments & Receivables
Ethics Check
(5-10 min.) EC 5-1
a. Objectivity and independence
b. Integrity
c. Integrity
d. Due care
Short Exercises
(5 min.) S 5-1
1. Trading securities are reported at their current market value (fair
value).
(10 min.) S 5-2
BALANCE SHEET
Current assets:
Investment in trading securities ……………………………….
$97,000
INCOME STATEMENT
Other revenue and gains (losses):
(10 min.) S 5-3
Req. 1
Journal
DATE
DEBIT
CREDIT
Unrealized Loss on Trading Securities
($109,000 − $92,000)…………………………………..
17,000
Investment in Trading Securities …………
17,000
Adjusted investment to market value.
(5 min.) S 5-4
No sales revenue should be reported because the goods were sold FOB
(5 min.) S 5-5
4/20, n/30 means that Costello Company will get a 4% discount if they
pay the invoice within 20 days of the invoice date; otherwise, the full
(5 min.) S 5-6
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
Cash ……………………………………………………….
500,000
Sales Revenue …………………………………….
To record sales.
500,000
Cost of Sales …………………………………………..
320,000
To record cost of sales.
Sales Revenue ………………………………………..
Refund Liability ……………………………………
Cost of Sales …………………………..…………..
To record estimated cost of refunds of 4%.
(10 min.) S 5-7
Req. 1
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
April 4
Accounts Receivable($5,000 x .98) …………..
4,900
Sales Revenue ……………………………………
4,900
April 4
Cost of Goods Sold…………………………………
4,000
Inventory ……………………………………………
4,000
11
Cash ($5,000 − $100) ……………………………….
4,900
Accounts Receivable ………………………….
4,900
(10 min.) S 5-8
Req. 1. and 2.
Cash
Beg. bal.
27,000
Collections
720,000
End. bal.
747,000
Beg. bal.
98,000
Service revenue
703,000
Collections
720,000
End. bal.
81,000
Service Revenue
Beg. bal.
Service revenue
End. bal.
(5-10 min.) S 5-9
MEMORANDUM
DATE:
TO: Alicia Donovan
FROM: Student Name
RE: Essential element of internal control over collection from
customers
Student responses may vary.
(5 min.) S 5-10
1.
Uncollectible-Account Expense ($461,000 × .04) …
18,440
Allowance for Uncollectible Accounts …………..
18,440
Accounts receivable …………………………………….
$ 56,000
Less: Allowance for uncollectible accounts …..
(18,440)
Accounts receivable, net ………………………………
$37,560
(10 min.) S 5-11
1. $450,000 × 2% = $9,000 estimated uncollectible account expense
Allowance for Uncollectible Accounts
Beg. bal.
4,000
Uncollectible –
2. Required ending balance in the Allowance account $14,000
Minus current balance in the Allowance account – 4,000
Equals the amount of uncollectible account expense $10,000
Allowance for Uncollectible Accounts
Uncollectible –
End. bal.
($220,000 × .10 × 7/12) ………………………
($220,000 × .10) ………………………………..
($220,000 × .10 × 5/12) ………………………
Principal ……………………………………………………
Interest ($220,000 × .10 × 6/12) ……………………
Total …………………………………………………………
(10 min.) S 5-13
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2016
a.
Aug. 31
Note Receivable — D. Fields …………………….
4,000
Cash ………………………………………………..
4,000
To loan money.
2017
June 30
Interest Receivable ($4,000 × .09 × 10/12) ….
Interest Revenue ………………………………
2017
c.
Aug. 31
Cash ($4,000 + $360) ……………………………….
4,360
Interest Receivable …………………………..
Interest Revenue ($4,000 × .09 × 2/12) ..
Note Receivable ……………………………….
4,000
To collect on note receivable.
(5 min.) S 5-14
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
Cash ………………………………………………………
7,760
Credit Card Discount Expense …………………
240*
Sales Revenue …………………………..…
8,000
To record sales on credit cards.
(10 min.) S 5-15
Req. 1
(Quick)
Cash + Short-term investments
$9,700 + $15,000
Acid-test
ratio
=
+ Net current receivables
=
+ $79,300
Total current liabilities
$100,000
Average net
10.36 times
(10 min.) S 5-16
1. True
2. False. Credit terms are usually stated in this form: 2/10 n/30.
3. The net amount of receivables — the amount the company expects to
collect — is more interesting because the company will probably
collect this amount in cash.
4.
Sales with sales discounts:
Sales revenue x (100% – Sales discount %)
= Net sales revenue
Exercises
(10-15 min.) E 5-17A
Req. 1
This is a trading security (trading investment) because Riverton
Corporation intends to sell the stock within a short time.
Req. 2
Dec. 15
Investment in Trading Securities
(1,000 × $48) …………………………………..
48,000
Cash …………………………………………..
48,000
Purchased investment.
Dec. 31
Investment in Trading Securities
10,000
Unrealized Gain on Trading
Securities ………………………………….
10,000
Adjusted investment to market value.
Investment in trading securities ………………………….
Unrealized gain on trading securities ………………….
(continued) E 5-17A
Req. 4
1. This is an available-for-sale security because it is not a trading
security.
2. Dec. 15 Investment in AFSS ……………………………. 48,000
Cash ……………………………………………… 48,000
(15-20 min.) E 5-18A
Req. 1
Journal
DATE
DEBIT
CREDIT
Nov. 2
1,287
1,287
10
2,450
2,450
11
1,287
1,287
15
1,666
1,666
19
Cash ($800 x 98%) …………………………………..
Accounts Receivable—Amanda O’Connor
(10-15 min.) E 5-19A
Req. 1 and 2
Accounts Receivable
Beg. bal.
97,000
Service revenue
on account
702,000
Collections
Write-offs
716,000
9,000
End. bal.
74,000
Write-offs
account expense
End. bal.
(10-15 min) E5-20A
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2016
Dec.
31
Doubtful-Account Expense ($550,000 × .02) …
11,000
Allowance for Doubtful Accounts …………..
11,000
BALANCE SHEET (Partial)
Current assets:
Accounts receivable, net of allowance
for doubtful accounts of $11,830* …………………….
BALANCE SHEET (Partial)
Current assets:
(15 min.) E 5-21A
Req. 1
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
July
Accounts Receivable …………………………………
198,000
Sales Revenue ………………………………………
198,000
July
Cash …………………………………………………………
169,000
Accounts Receivable …………………………….
169,000
July
Allowance for Uncollectible Accounts…………
2,890
Accounts Receivable …………………………….
2,890
July
Uncollectible-Account Expense
($198,000 × .04) ………………………………………….
7,920
Allowance for Uncollectible Accounts …….
(15-30 min.) E 5-22A
Req. 1
The credit balance at December 31 in Allowance for Doubtful Accounts
should be $23,400. The current balance is $18,700. Thus, the balance of
the allowance account is too low.
1-30 31–60 61–90 Over 90 Total
days days days days balance
$140,000 $110,000 $70,000 $30,000
Req. 2
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
Dec. 31
Doubtful-Account Expense …………………….
4,700
Allowance for Doubtful Accounts ……….
4,700
(continued) E 5-22A
Req. 3
BALANCE SHEET
Current assets:
Cash ………………………………………………………….
$ XX
Short-term investments ………………………………
XX
Accounts receivable, net of allowance
Accounts receivable …………………………………..
Less: Allowance for doubtful accounts ……….
(10-15 min.) E 5-24A
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
Oct.
1
Note Receivable — Carroll Fadal .………..
11,000
Cash………………………………………..
11,000
Dec.
6
Note Receivable — Fairway Masters……..
Note Receivable — Warren, Inc .………….
Accounts Receivable – Warren, Inc..…
Interest Receivable…………………………..
(10-15 min.) E 5-25A
Req. 1
Quick
Marketable Net current
(a)
(acid-test)
=
Cash + securities + receivables
ratio
Total current liabilities
=
$15,000 + $22,000 + $54,000
Sales revenue
=