Chapter 6
Reporting and Interpreting Sales Revenue,
Receivables, and Cash
ANSWERS TO QUESTIONS
1. The difference between sales revenue and net sales includes the amount of
goods returned by customers because the goods were either unsatisfactory or
2. Gross profit or gross margin on sales is the difference between net sales and
3. A credit card discount is the fee charged by the credit card company for services.
4. A sales discount is a discount given to customers for payment of accounts within
a specified short period of time. Sales discounts arise only when goods are sold
on credit and the seller extends credit terms that provide for a cash discount. For
5. A sales allowance is an amount allowed to a customer for unsatisfactory
merchandise or for an overcharge in the sales price. A sales allowance reduces
6. An account receivable is an amount owed to the business on open account by a
7. In conformity with the expense recognition (matching) principle, the allowance
method records bad debt expense in the same period in which the credit was
granted and the sale was made.
9. The write-off of bad debts using the allowance method decreases the asset
10. An increase in the receivables turnover ratio generally indicates faster collection
11. Cash includes money and any instrument, such as a check, money order, or
bank draft, which banks normally will accept for deposit and immediate credit to
12. The primary characteristics of an internal control system for cash are: (a)
separation of the functions of cash receiving from cash payments, (b) separation
Financial Accounting, 10/e 6-3
13. Cash-handling and cash-recording activities should be separated to remove the
opportunity for theft of cash and a cover-up by altering the records. This
14. The purposes of a bank reconciliation are (a) to determine the “true” cash
balance and (b) to provide data to adjust the Cash account to that balance. A
bank reconciliation involves reconciling the balance in the Cash account at the
end of the period with the balance shown on the bank statement (which is not the
15. The total amount of cash that should be reported on the balance sheet is the
sum of (a) the true cash balances in all checking accounts (verified by a bank
ANSWERS TO MULTIPLE CHOICE
Authors’ Recommended Solution Time
(Time in minutes)
Mini-exercises
Exercises
Problems
Alternate
Problems
Cases and
Projects
No.
Time
No.
Time
No.
Time
No.
1
5
1
35
1
35
1
2
10
2
35
2
35
2
3
10
3
50
3
50
3
4
10
4
40
4
40
4
5
10
5
45
5
45
5
6
5
6
45
6
7
45
8
9
10
11
12
13
1
30
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
* Due to the nature of these cases and projects, it is very difficult to estimate the amount
of time students will need to complete the assignment. As with any open-ended project,
it is possible for students to devote a large amount of time to these assignments. While
Financial Accounting, 10/e 6-5
MINI-EXERCISES
M6–1.
If the buyer pays within the discount period, the income statement will report $9,405 as
M6–2.
Credit card sales (R)
$9,400.00
Less: Credit card discount (XR)
282.00
Net credit card sales
Sales on account (R)
Less: Sales returns (XR)
11,350.00
Less: Sales discounts (1/2 x $11,350 x 2%) (XR)
113.50
Net sales on account
Net sales (reported on income statement)
M6–3.
(a) Allowance for doubtful accounts (–XA, +A) ………….. 14,500
Accounts receivable (–A) ……………………………. 14,500
M6–4.
Assets
Liabilities
Stockholders’ Equity
(a)
Allowance for doubtful
accounts –15,000
Bad debt expense –15,000
M6–5.
+
(a)
Granted credit with shorter payment deadlines.
+
Increased effectiveness of collection methods.
(c)
Granted credit to less creditworthy customers.
M6–6.
Reconciling Item
Company’s
Books
Bank
Statement
(a) Outstanding checks
–
(b) Bank service charge
(c) Deposit in transit
M6–7. (Supplement)
A $6,000 credit sale with terms, 3/10, n/30, should be recorded as follows:
Accounts receivable (+A) ……………………………………… 6,000
EXERCISES
E6–1.
Sales revenue ($1,500 + $850 + $400) ………………………………. $2,750
E6–2.
Sales revenue ($3,000 + $9,000 +$4,000) ………………………….. $16,000
E6–3.
Sales revenue ($5,500 + $400 + $9,000) ……………………………. $14,900
E6–4.
Cost of
Transaction
Net Sales
Goods Sold
Gross Profit
July 12
+ 297
+ 175
+ 122
July 15
July 20
July 21
E6–5.
Req. 1 (Amount saved ÷ Amount paid) = Interest rate for 40 days.
Req. 2 Yes, because the 15% rate charged by the bank is less than the 28.22%
E6–6.
Step 1. Identify the contract between the
company and customer.
Bundled: Laptop computer and future warranty
services
Step 2. Identify the performance obligations
(promised goods and services).
#1 Hardware with essential software
#2 Future warranty services
Step 4. Allocate the transaction price to the
#1 Hardware with essential software → $960
#2 Future warranty services → $40
E6–7.
Step 1. Identify the contract between the company
and customer.
Bundled: Samsung S9 phone and 12 months of
cellphone service
Step 2. Identify the performance obligations
(promised goods and services).
#1 Hardware with essential software
#2 Future cellphone service
Financial Accounting, 10/e 6-9
E6–8.
Accounts Receivable (Gross)
Beg. balance
48,067
289,850
Collections on acct.
Sales on account
Write-offs
End. balance
55,671
Allowance for Doubtful Accounts
8,384
Beg. balance
Bad debt exp.
6,100
End. balance
Income statement:
Selling, general, and administrative expenses:
Bad debt expense ……………………………………………….. $4,685
E6–9.
(a) Allowance for doubtful accounts (–XA, +A) ………….. 4,000
E6–10.
(a) Allowance for doubtful accounts (–XA, +A) ………….. 98,000
Accounts receivable (–A) ……………………………. 98,000
To write off a specific bad debt.
E6–11.
Assets
Liabilities
Stockholders’ Equity
(a)
Allowance for doubtful
accounts +98,000
E6–12.
Req. 1
(a) Allowance for doubtful accounts (–XA, +A) ………….. 2,800
Accounts receivable (–A) ……………………………. 2,800
To write off a specific bad debt.
Financial Accounting, 10/e 6-11
E6–13.
Aged accounts receivable
Estimated
percentage
uncollectible
Estimated
amount
uncollectible
Not yet due
$22,000
x
3%
=
$ 660
Up to 120 days past due
x
=
Over 120 days past due
x
=
Estimated balance in Allowance for Doubtful Accounts
Current balance in Allowance for Doubtful Accounts
Bad Debt Expense for the year
$1,322
E6–14.
Req. 1
December 31-Adjusting entry:
follows:
Aged accounts receivable
Estimated
percentage
uncollectible
Estimated
amount
uncollectible
Not yet due
$50,000
x
3%
=
$ 1,500
Up to 180 days past due
x
=
Over 180 days past due
x
=
Estimated balance in Allowance for Doubtful Accounts
Current balance in Allowance for Doubtful Accounts
Bad Debt Expense for the year
Req. 2
Balance sheet:
Accounts receivable ($50,000 + $14,000 + $4,000) $68,000
Less allowance for doubtful accounts ………………… 4,380
Accounts receivable, net of allowance for
doubtful accounts ………………………………….. $63,620
E6–15.
Req. 1
December 31-Adjusting entry:
follows:
Aged accounts receivable
Estimated
percentage
uncollectible
Estimated
amount
uncollectible
Not yet due
$295,000
x
2.5%
=
$ 7,375
Up to 120 days past due
55,000
x
11%
=
6,050
Over 120 days past due
18,000
x
30%
=
5,400
Estimated balance in Allowance for Doubtful Accounts
18,825
Current balance in Allowance for Doubtful Accounts
Bad Debt Expense for the year
E6–16.
Req. 1
(Amounts in millions)
Bad debt expense (+E, –SE) …………………………………………. ,315
Allowance for doubtful accounts (+XA, –A) ……………… ,315
To record estimated bad debt expense.
affected.
Financial Accounting, 10/e 6-13
E6–17.
Req. 1
(Amounts in millions)
Bad debt expense (+E, –SE) …………………………………………. 18.1
Allowance for doubtful accounts (+XA, –A) ……………… 18.1
To record estimated bad debt expense.
E6–18.
(Amounts in thousands)
Req. 1 Allowance for Doubtful Accounts
117
Beg. balance
Write-offs
52
88
Bad debt exp.
153
End. balance
Req. 2 Accounts Receivable (Gross)
Beg. balance*
11,455
52
Write-offs
Net sales
Cash collections
End. balance **
13,742
Financial Accounting, 10/e 6-15
E6–19.
(Amounts in millions)
Req. 1 Allowance for Doubtful Accounts
426
Beg. balance
Write-offs
106
85
Bad debt exp.
405
End. balance
Req. 2 Accounts Receivable (Gross)
Beg. balance*
18,703
106
Write-offs
Net sales
89,950
88,350
Cash collections
End. balance **
20,197
E6–20.
(Amounts in thousands)
Req. 1
The allowance for doubtful accounts is increased (credited) when bad debt expense is
recorded and decreased (debited) when uncollectible accounts are written off. This case
Allowance for Doubtful Accounts
286,000
Beg. balance
Bad debt exp.
307,000
End. balance
Req. 2
Working capital is unaffected by the write-off of an uncollectible account when the
allowance method is used. The asset account (accounts receivable) and the contra–
asset account (allowance for doubtful accounts) are both reduced by the same amount;
therefore, the book value of net accounts receivable is unchanged.
Req. 3
The entry to record the write-off of an uncollectible account did not affect any income
statement accounts; therefore, net income is unaffected by the $156,000 write-off in
year 2.
E6–21.
Req. 1
Dec. 31
Allowance for doubtful accounts (–XA, +A) …………… 1,700
Accounts receivable (J. Doe) (–A) ……………… 1,700
Dec. 31
Bad debt expense (+E, –SE) ……………………………… 1,125
Req. 2
Income statement:
Operating expenses:
Bad debt expense ……………………………………………….. $1,125
Balance sheet:
Current assets
Req. 3
The 1.5% rate on credit sales may be too low because it resulted in bad debt expense only
two-thirds the amount of receivables written off ($1,700) during the year. However, if the
E6–22.
Req. 1
Dec. 31
Allowance for doubtful accounts (–XA, +A) …………… 550
Accounts receivable (Toby’s Gift Shop) (–A) .. 550
Req. 2
Income statement:
Operating expenses:
Bad debt expense ……………………………………………….. $500
Req. 3
The 2% rate on credit sales appears reasonable because it approximates the amount of
Financial Accounting, 10/e 6-19
E6–23.
Req. 1
Dec.
Allowance for doubtful accounts (–XA, +A) …………… 750
Accounts receivable (Patty’s Bake Shop) (–A) 750
Aged accounts receivable
Estimated
percentage
uncollectible
Estimated
amount
uncollectible
Not yet due
$14,000
x
2%
=
$ 280
Up to 120 days past due
x
=
Over 120 days past due
x
=
Estimated balance in Allowance for Doubtful Accounts
Current balance in Allowance for Doubtful Accounts
Bad Debt Expense for the year
Req. 2
Income statement:
Operating expenses:
Bad debt expense ……………………………………………….. $770
Req. 3
The aging analysis seems reasonable because it approximates the amount of receivables
written off ($750) during the year. However, if the uncollectible account receivable written
E6–24.
Req. 1
(Dollar amounts in thousands)
Receivables turnover
=
Net Sales
=
=
8.123 times
Average Net Trade
Accounts Receivable
Average days sales
=
=
=
44.93 days
in receivables
Req. 2
The receivables turnover ratio reflects how many times average trade receivables were
recorded and collected during the period. The average days sales in receivables
E6–25.
Req. 1
(Dollar amounts in thousands)
Receivables turnover
=
Net Sales
=
$229,234,000
=
13.634 times
Average Net Trade
Accounts Receivable
$16,814,000*
Average days sales
=
=
=
26.77 days
in receivables
Req. 2
The receivables turnover ratio reflects how many times average trade receivables were