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).
2. A trading security is always a current asset because the investor
intends to sell the trading investment in the very near future — days,
weeks, or only a few months. A current asset is to be sold within one
year or within the company’s operating cycle if longer than a year.
(10 min.) S 5-2
(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.
Req. 2
BALANCE SHEET
Current assets:
Investment in trading securities ……………………………………
$92,000
INCOME STATEMENT
Other revenues and gains (losses):
Unrealized (loss) on trading securities ………………………….
(5 min.) S 5-4
No sales revenue should be reported because the goods were sold FOB
destination, and revenue is not recorded until the goods are delivered on
January 2, 2017.
(5 min.) S 5-5
(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
Inventory …………………………………………….
To record cost of sales.
320,000
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
Req. 2
a. Parker Company
b. Wheeler Company
c. Wheeler Company
(10 min.) S 5-8
Req. 1. and 2.
Cash
Beg. bal.
27,000
Collections
720,000
End. bal.
747,000
Accounts Receivable
Beg. bal.
98,000
Service revenue
703,000
Collections
720,000
End. bal.
81,000
Service Revenue
Beg. bal.
0
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
Separation of duties is the essential element in a system to ensure that
cash received by mail from customers is properly handled and
accounted for. It is very important to separate cash-handling duties from
(5 min.) S 5-10
1.
Uncollectible-Account Expense ($461,000 × .04) …
18,440
Allowance for Uncollectible Accounts …………..
18,440
2.
Balance sheet
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
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
(10 min.) S 5-12
1. Interest for:
2016
($220,000 × .10 × 7/12) ………………………
$12,833
2017
($220,000 × .10) ………………………………..
22,000
2018
($220,000 × .10 × 5/12) ………………………
9,167
2. Charter Bank has a note receivable and interest revenue.
Laurie Walker has a note payable and interest expense.
3. Payoff at November 30, 2016:
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
b.
June 30
Interest Receivable ($4,000 × .09 × 10/12) ….
300
Interest Revenue ………………………………
300
To accrue interest revenue.
2017
c.
Aug. 31
Cash ($4,000 + $360) ……………………………….
4,360
Interest Receivable …………………………..
300
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
=
1.04
The company’s acid-test (quick) ratio compares favorably to the industry
average of 0.92.
Req. 2
Average net
accounts receivable
The company’s days’ sales in receivables (or days’ sales outstanding)
(35) is worse (higher) than the 30-day period of the credit terms.
An alternate way to compute days’ sales outstanding:
Accounts receivable
turnover
=
Net credit sales
=
$777,450
Average net
accounts receivable
($70,800 + $79,300) / 2
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.
5.
Sales with sales discounts:
Sales revenue x (100% – Sales discount %)
= Net sales revenue
Accounts receivable…………………….
XXX
Less: Allowance for uncollectibles……
(X)
Accounts receivable, net……………….
$XXX
6. False. The direct write-off method overstates assets because it fails
to show the amount of the receivables the company actually expects
to collect (it fails to show the allowance for uncollectible accounts).
Exercises
(10-15 min.) E 5-17A
Req. 1
Req. 2
Dec. 15
Investment in Trading Securities
(1,000 × $48) …………………………………..
48,000
Cash …………………………………………..
48,000
Purchased investment.
Dec. 31
Investment in Trading Securities
[(1,000 × $58) − $48,000] ………………….
10,000
Unrealized Gain on Trading
Securities ………………………………….
10,000
Adjusted investment to market value.
Req. 3
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
3. BALANCE SHEET (partial)
Current assets:
Investment in AFSS ……………………………………………. $58,000
Additionally, $10,000 would appear as a part of STOCKHOLDERS’
EQUITY, as “Accumulated OCI (Other Comprehensive Income)”.
(15-20 min.) E 5-18A
Req. 1
Journal
DATE
DEBIT
CREDIT
Nov. 2
1,287
1,287
10
2,450
2,450
11
Cash ($1,300 x 99%) ………………………………..
1,287
Accounts Receivable—Ella Barron ………
1,287
15
Sales Returns and Allowances ($1,700 x 98%)
1,666
1,666
19
Cash ($800 x 98%) …………………………………..
Accounts Receivable—Amanda O’Connor
Req. 2
Sales revenue ($1,287 + $2,450) …………………… $3,737
Less: Sales returns and allowances …………… (1,666)
Net sales revenue ………………………………………. $2,071
(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
Allowance for Uncollectible Accounts
Write-offs
account expense
End. bal.
Req. 3
BALANCE SHEET
Accounts receivable …………………………………………….
$74,000
Less Allowance for uncollectible accounts ……………
Accounts receivable, net ………………………………………
(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* …………………….
or
BALANCE SHEET (Partial)
Current assets:
Accounts receivable
Less: Allowance for doubtful accounts
$96,000
(11,830)
Accounts receivable, net
$84,170
(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…………
Accounts Receivable …………………………….
July
Uncollectible-Account Expense
($198,000 × .04) ………………………………………….
Req. 2
Accounts Receivable
Allowance for
Uncollectible Accounts
35,000
169,000
3,252
198,000
2,890
2,890
7,920
Bal.
61,110
Bal.
8,282
Req. 3
BALANCE SHEET (Partial)
Current assets:
Less: Allowance for uncollectible accounts
IINCOME STATEMENT (Partial)
Sales revenue
$198,000
(15-30 min.) E 5-22A
Req. 1
1-30 31–60 61–90 Over 90 Total
days days days days balance
$140,000 $110,000 $70,000 $30,000
Est. % uncollectible x .005 x .04 x .09 x .40
Bal. in Allow. for Doubtful
Accounts should be $700 $4,400 $6,300 $12,000 $23,400
Current balance (18,700)
Amount needed in adj. entry $4,700
Req. 2
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
(continued) E 5-22A
Req. 3
BALANCE SHEET
Current assets:
Cash ………………………………………………………….
$ XX
Short-term investments ………………………………
Accounts receivable, net of allowance
Or
*Another way to report accounts receivable is
Accounts receivable …………………………………..
$350,000
Less: Allowance for doubtful accounts ……….
(23,400)
326,600
(10-15 min.) E 5-23A
Req. 1
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
Mar.
Accounts Receivable ……………………………….
4,100
Service Revenue ………………………………….
4,100
Recorded revenue on account.
Allowance for Bad Debts ………………………
Recorded expense for the month.
Accounts Receivable …………………………...
(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……..
9,000
Service Revenue ………………………..
9,000
Note Receivable — Warren, Inc .………….
4,000
Accounts Receivable – Warren, Inc..…
Interest Receivable…………………………..
Interest Revenue………………………….
(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
A quick (acid-test) ratio of 0.74 is fairly weak.
(b)
One day’s
=
Sales revenue
=
$727,000
=
$1,992
sales
365
365
=
=
receivables
31 days’ sales in receivables is within an acceptable range relative to
credit terms of net 30 days.
Req. 2