Problem 5-8B (concluded)
April 15, 2020
Cash
13,200
Interest Receivable (2019)
9,350
Interest Revenue
3,850
December 31, 2020
Interest Revenue
9,350
Requirement 3
April 15, 2021
Debit
Credit
Cash
123,200
Notes Receivable
Interest Revenue
3,850
Chapter 5 – Receivables and Sales
Problem 5-9B (LO 5-8)
Requirement 1
Sun Health Group
Select Medical
Receivables
Net sales
$1,930
$2,240
Average
365
365
365
Compared to Select Medical, Sun Health has a higher receivables turnover ratio and a
lower average collection period, which means it collects cash more quickly from its
customers. The receivables turnover ratio and average collection period for Tenet
Requirement 2
The receivables turnover ratio and average collection period provide an indication of
management’s ability to collect cash from customers in a timely manner. A high
ADDITIONAL PERSPECTIVES
Additional Perspective 5-1
Requirement 1
Jan. 24, 2019
Debit
Credit
Equipment
5,000
Cash
5,000
(Pay cash for outdoor equipment)
Feb. 25, 2019
Accounts Receivable
3,000
Service Revenue
3,000
(Provide TEAM event)
Feb. 28, 2019
Cash
2,850
Sales Discounts
150
Accounts Receivable
3,000
(Receive cash on account less 5% discount)
Mar. 19, 2019
Accounts Receivable
4,000
(Provide TEAM event)
Mar. 27, 2019
Cash
3,800
Sales Discounts
(Receive cash on account less 5% discount)
Apr. 7, 2019
Cash
7,500
Deferred Revenue
7,500
(Received cash in advance for TEAM event)
Apr. 14, 2019
Deferred Revenue
7,500
Service Revenue
7,500
(Provide TEAM event)
May 9, 2019
Accounts Receivable
6,000
Service Revenue
6,000
(Provide TEAM event)
AP5-1 (concluded)
Requirement 1 (concluded)
Jun. 1-30, 2019
Accounts Receivable
24,000
Jun. 30, 2019
Notes Receivable
Requirement 2 (a)
Jun. 30, 2019
Debit
Credit
Bad Debt Expense
2,400
Requirement 2 (b)
Great Adventures, Inc.
Partial Balance Sheet
June 30, 2019
Assets
Current assets:
$21,600
Additional Perspective 5-2
Requirement 1
Requirement 2
Accounts receivable are reported in the balance sheet in the current asset section. The
receivables turnover ratio equals net credit sales divided by average accounts
receivable. The net sales amount reported in the income statement includes not only
Requirement 3
Chapter 5 – Receivables and Sales
Additional Perspective 5-3
Requirement 1
Requirement 2
Accounts receivable are reported in the balance sheet in the current asset section. The
receivables turnover ratio equals net credit sales divided by average accounts
Requirement 3
Additional Perspective 5-4
American Eagle’s ratio of total current receivables to current assets is 7.62%. Buckle’s
Chapter 5 – Receivables and Sales
Additional Perspective 5-5
Requirement 1
If the balance of the allowance for uncollectible accounts before adjustment is
$20,000 and the year-end estimate of future uncollectible accounts is $180,000, then
an adjustment of $160,000 is needed. This adjustment has the effect of increasing the
Requirement 2
What is the issue?
By making the change requested, net income and total assets will increase by $45,000.
Overstating these amounts will make the company appear more profitable and less
risky than it would have otherwise. This type of misreporting can fool investors and
Who are the parties involved?
You are new to the position. You might not be sure that it’s right for you to question
any decision of your superior. It is clear that the superior is asking you to engage in
What factors should you consider in making your decision?
Upsetting your superior may reduce your compensation, reduce the likelihood of
promotion, and increase your chance of being fired. You may feel that as long as your
Additional Perspective 5-6
(Note to instructors: Answers are based on Avon’s annual report for the year ended
December 31, 2014)
Requirement 1
The balance of net accounts receivable is $563.5 million. By adding back the
Requirement 2
Requirement 3
The ending balance of the allowance account equals the beginning balance plus bad
debt expense less actual write-offs. Using this formula, we calculate actual write-offs
to be:
($ in millions)
Beginning
allowance
+
Bad debt
expense
−
Actual
write-offs
=
Ending
allowance
Requirement 4
Receivables
turnover ratio
=
Net sales
=
$8,615.9
=
13.9
Average net
accounts
($563.5 + $676.3) / 2
Chapter 5 – Receivables and Sales
Additional Perspective 5-7
Students should communicate the following ideas.
Under the allowance method,
– Future bad debts are estimated.
Under the direct write-off method,
– Future bad debts are not estimated.
Chapter 5 – Receivables and Sales
Additional Perspective 5-8
Requirement 1
Debit
Credit
Bad Debt Expense
65,000
Allowance for Uncollectible Accounts
65,000*
Requirement 2
Revised operating income is $255,000 (= $320,000 − $65,000). Operating income
Requirement 3
Using 4% instead of 9% of accounts receivable to estimate uncollectible accounts
Requirement 4