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5-60 Financial Accounting, 5e
Problem 5-8B (LO 5-7)
Requirement 1
Requirement 2
December 31, 2021
Debit
Credit
Interest Receivable (2021)
9,350
Chapter 5 - Receivables and Sales
Problem 5-8B (concluded)
April 15, 2023
Cash
13,200
Interest Receivable (2022)
9,350
Requirement 3
April 15, 2024
Debit
Credit
Cash
123,200
Notes Receivable
110,000
5-62 Financial Accounting, 5e
Problem 5-9B (LO 5-8)
Requirement 1
Sun Health Group
Select Medical
Receivables
turnover
=
Net sales
$1,930
$2,240
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
Healthcare in the most recent year reported in the text are 7.7 times and 47.4 days.
The receivables turnover ratio and average collection period for LifePoint Hospitals in
the most recent year reported in the text are 8.7 times and 42.0 days. Sun Health has
the most favorable (highest) receivables turnover ratio of the four companies.
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
Chapter 5 - Receivables and Sales
ADDITIONAL PERSPECTIVES
Additional Perspective 5-1
Requirement 1
Jan. 24, 2022
Debit
Credit
Equipment
5,000
Cash
5,000
Mar. 19, 2022
Accounts Receivable
4,000
Service Revenue
4,000
(Provide TEAM event)
Apr. 14, 2022
Deferred Revenue
7,500
Service Revenue
7,500
(Provide TEAM event)
AP5-1 (continued)
Requirement 1 (concluded)
May 31, 2022
Notes Receivable
6,000
Requirement 2(a)
Jun. 30, 2022
Debit
Credit
Bad Debt Expense
2,400
Requirement 2(b)
Jun. 30, 2022
Debit
Credit
Interest Receivable
40
Chapter 5 - Receivables and Sales
AP5-1 (continued)
Requirement 2(c)
Great Adventures, Inc.
Partial Balance Sheet
June 30, 2022
Assets
Current assets:
5-66 Financial Accounting, 5e
Additional Perspective 5-1 (in General Ledger)
Students will be given the following existing trial balance.
Great Adventures, Inc.
Trial Balance
June 30, 2022
Accounts
Debit
Credit
Cash
$ 38,500
Accounts Receivable
-0-
Allowance for Uncollectible Accounts
$ -0-
Interest Receivable
-0-
Service Revenue
-0-
Interest Revenue
-0-
Sales Discounts
-0-
Depreciation Expense
8,000
Insurance Expense
2,400
Requirements 1, 2(a), and 2(b) will be completed as shown above.
Chapter 5 - Receivables and Sales
Additional Perspective 5-1 (in General Ledger, continued)
Great Adventures, Inc.
Income Statement
For the period ended June 30, 2022
Revenues:
Service revenue
$44,500
Sales discounts
(350)
5-68 Financial Accounting, 5e
Additional Perspective 5-1 (in General Ledger, continued)
Great Adventures, Inc.
Balance Sheet
June 30, 2022
Assets
Liabilities
Current assets:
Current liabilities:
Cash
$ 47,650
Accounts payable
$ 2,800
Accounts receivable
24,000
Interest payable
1,650
Chapter 5 - Receivables and Sales
Additional Perspective 5-1 (in General Ledger, concluded)
Jun. 30, 2021
Debit
Credit
Service Revenue
44,500
Interest Revenue
40
Sales Discounts
350
5-70 Financial Accounting, 5e
Additional Perspective 5-2
Requirement 1
American Eagle shows an increasing trend in net sales for the past three years.
Requirement 2
Accounts receivable are reported in the balance sheet in the current asset section. The
Requirement 3
Yes. American Eagle reports accounts receivable “net”, indicating the company likely
Chapter 5 - Receivables and Sales
Additional Perspective 5-3
Requirement 1
Buckle shows a decreasing trend in net sales for the past three years.
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
5-72 Financial Accounting, 5e
Additional Perspective 5-4
American Eagle’s ratio of total current receivables to current assets is 8.1%. Buckle’s
Chapter 5 - Receivables and Sales
Additional Perspective 5-5
1. Increase income before taxes by $45,000.
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
2. Decrease total assets by $45,000.
3. Yes.
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
4. No.
However, 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
5-74 Financial Accounting, 5e
Chapter 5 - Receivables and Sales
Additional Perspective 5-6
(Note to instructors: Answers are based on Avon’s annual report for the year ended
December 31, 2016)
Requirement 1
The balance of net accounts receivable is $458.9 million. By adding back the
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:
Requirement 4
Receivables
turnover ratio
=
Net sales
=
$5,578.8
=
12.4
Average net
accounts
receivable
($458.9 + $443.0) / 2
5-76 Financial Accounting, 5e
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.
The difference between the two methods is in the timing of recording the bad debt
(time of estimation vs. when actually occurring). Over an extended period of time, the
two will approximately equal. However, in a given year, the difference can be large.
5-78 Financial Accounting, 5e
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
decreases compared to the previous year’s amount of $275,000.
Requirement 3
Using 4% instead of 9% of accounts receivable to estimate uncollectible accounts
