CHAPTER 7
Cash and Receivables
ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)
Topics
Questions
Brief
Exercises
Exercises
Problems
Concepts
for Analysis
1.
Accounting for cash.
1, 2, 3, 4, 23
1
1, 2
1
2.
Accounting for
accounts receivable,
bad debts, other
allowances.
5, 6, 7, 8, 9,
10, 11, 12,
13, 14,
2, 3, 4, 5, 6
3, 4, 5, 6,
7, 8, 9, 10,
11, 12, 16
2, 3, 4,
5, 6
1, 2, 3, 4, 5
10, 11
3.
Accounting for notes
receivable.
7, 8, 9
2, 4, 6, 7, 8,
9
factoring of accounts
receivable.
17, 18, 19,
5.
Analysis of
receivables.
20, 21, 22
15
20, 21
ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)
Learning Objectives
Questions
Brief
Exercises
Exercises
Problems
Concepts
for
Analysis
1. Indicate how to report cash
and related items.
1, 2, 3, 4
1
1, 2
1
related to their recognition.
12, 16
2. Define receivables and
5, 6
2, 3,
3, 4, 5, 6,
6
4, 10, 11
3. Explain accounting issues
7, 8, 9, 10,
4, 5, 6
7, 8, 9, 10,
2, 3, 4, 5,
1, 3, 5, 10
receivable.
4. Explain accounting issues
15, 16
7, 8, 9
13, 14
7, 8, 9
2, 4, 6, 7,
receivable.
20, 21, 22
17, 18, 19,
20, 21
5. Explain additional
17, 18, 19,
10, 11, 12,
12, 15, 16,
10, 11
2, 6, 8
*6. Explain common techniques
employed to control cash.
23
16, 17, 18
22, 23, 24,
25
12, 13, 14
ASSIGNMENT CHARACTERISTICS TABLE
Item
Description
Level of
Difficulty
Time
(minutes)
E7.1
Determining cash balance.
Moderate
10–15
E7.2
Determining cash balance.
Moderate
10–15
E7.3
Financial statement presentation of receivables.
Moderate
10–15
E7.4
Determining ending accounts receivable.
Simple
10–15
E7.5
Recording sales gross and net.
Simple
15–20
E7.6
Recording sales transactions.
Moderate
5–10
E7.7
Recording bad debts.
Moderate
10–15
E7.8
Recording bad debts.
Simple
5–10
E7.9
Computing bad debts and preparing journal entries.
Simple
8–10
E7.10
Bad-debt reporting.
Simple
10–12
E7.11
Bad debts—aging.
Simple
8–10
E7.12
Journalizing various receivable transactions.
Simple
15–20
E7.13
Note transactions at unrealistic interest rates.
Simple
10–15
E7.14
Notes receivable with unrealistic interest rate.
Moderate
20–25
E7.15
Assigning accounts receivable.
Simple
10–15
E7.16
Journalizing various receivable transactions.
Simple
15–18
Transfer of receivables with guarantee.
Simple
10–15
Transfer of receivables without guarantee.
Moderate
15–20
Transfer of receivables without guarantee.
Simple
10–15
E7.20
Analysis of receivables.
Moderate
10–15
E7.21
Transfer of receivables.
Moderate
10–15
Petty cash.
Simple
5–10
Petty cash.
Simple
10–15
Bank reconciliation and adjusting entries.
Moderate
15–20
Bank reconciliation and adjusting entries.
Simple
15–20
P7.1
Determine proper cash balance.
Simple
20–25
P7.2
Bad-debt reporting.
Moderate
20–25
P7.3
Bad-debt reporting—aging.
Moderate
20–30
P7.4
Bad-debt reporting.
Moderate
25–35
P7.5
Bad-debt reporting.
Moderate
20–30
P7.6
Journalize various accounts receivable transactions.
Moderate
25–35
P7.7
Notes receivable with realistic interest rate.
Moderate
30–35
P7.8
Notes receivable journal entries.
Moderate
30–35
P7.9
Comprehensive receivables problem.
40–50
P7.10
Assigned accounts receivable—journal entries.
Moderate
25–30
P7.11
Income effects of receivables transactions.
Moderate
20–25
Petty cash, bank reconciliation.
Moderate
20–25
Bank reconciliation and adjusting entries.
Moderate
20–30
Bank reconciliation and adjusting entries.
Moderate
20–30
ASSIGNMENT CHARACTERISTICS TABLE (Continued)
Item
Description
Level of
Difficulty
Time
(minutes)
CA7.1
Bad-debt accounting.
Simple
10–15
CA7.2
Various receivable accounting issues.
Simple
15–20
CA7.3
Bad-debt reporting issues.
Moderate
25–30
CA7.4
Basic note and accounts receivable transactions.
Moderate
25–30
CA7.5
Bad-debt reporting, issues
Moderate
CA7.6
Sale of notes receivable.
Moderate
20–25
CA7.7
Zero-interest-bearing notes.
Moderate
20–30
CA7.9
Accounting for zero-interest-bearing note.
Moderate
25–30
CA7.10
Receivables management.
Moderate
25–30
CA7.11
Bad-debt reporting.
Moderate
25–30
ANSWERS TO QUESTIONS
1. Cash normally consists of coins and currency on hand, bank deposits, and various kinds of orders
for cash such as bank checks, money orders, travelers’ checks, demand bills of exchange, bank
drafts, and cashiers’ checks. Balances on deposit in banks which are subject to immediate with-
2. (a) Cash (h) Investments, possibly other assets.
(b) Investments (i) Cash.
(c) Temporary investments. (j) Trading securities.
3. A compensating balance is that portion of any demand deposit maintained by a corporation which
constitutes support for existing borrowing arrangements of a corporation with a lending institution.
4. Restricted cash for debt redemption would be reported in the long-term asset section, probably in
5. The seller normally uses trade discounts to avoid frequent changes in its catalogs, to quote different
prices for different quantities purchased, and to hide the true invoice price from competitors. Trade
discounts are not recorded in the accounts because the price finally quoted is generally an
Questions Chapter 7 (Continued)
6. Two methods of recording accounts receivable are:
(1) Record receivables and sales gross.
(2) Record receivables and sales net.
The net method is desirable from a theoretical standpoint because it values the receivable at its
7. When companies, sell a product with a sales allowance for possible dissatisfaction or other
issues, they should record the accounts receivable and related revenue at the amount of
8. The basic problems that relate to the valuation of receivables are (1) the determination of the face
value of the receivable, (2) the probability of future collection of the receivable, and (3) the length
9. The theoretical superiority of the allowance method over the direct write-off method of accounting
for bad debts is two-fold. First, since revenue is considered to be recognized at the point of sale
on the assumption that the resulting receivables are valid liquid assets merely awaiting collection, peri–
odic income will be overstated to the extent of any receivables that eventually become uncollectible.
10. The percentage-of-receivable method. Under this method Bad Debt Expense is debited and
Allowance for Doubtful Accounts is credited for purposes of reporting accounts receivable at their
Questions Chapter 7 (Continued)
Other methods that companies may use employ estimates based on historical loss ratios for
11. A major part of accounting is the measurement of financial data. Estimates of uncollectibility should
be recognized so that receivables are reported at net realizable value and in order for accounting
to provide useful information on a periodic basis.
The very existence of accounts receivable is based on the decision that a credit sale is an objec–
tive indication that revenue should be recognized. The alternative is to wait until the debt is paid in
12. Because estimation of the allowance account balance requires judgment, management could
either over-estimate or under-estimate the amount of uncollectible accounts depending on whether
a higher or lower earnings number is desired. For example, Sun Trust bank (referred to in the
LO: 3, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
13. The receivable due from Bernstein Company should be written off to an appropriately named loss
account and reported in the income statement as part of income from operations. In this case,
classification as an unusual item would seem appropriate. The loss may properly be reduced by
the portion of the allowance for doubtful accounts at the end of the preceding year that was
allocable to the Bernstein Company account.
14. If the direct write-off method is used, the only alternative is to debit Cash and credit a revenue
account entitled Uncollectible Amounts Recovered. If the allowance method is used, then the
Questions Chapter 7 (Continued)
15. The journal entry on Antonio’s books would be:
Notes Receivable ………………………………………………………………….. 1,000,000
Discount on Notes Receivable ……………………………………………. 360,000
16. Imputed interest is the interest ascribed or attributed to a situation or circumstance which is void of
a stated or otherwise appropriate interest factor. Imputed interest is the result of a process of interest
rate estimation called imputation.
An interest rate is imputed for notes receivable when (1) no interest rate is stated for the transaction,
or (2) the stated interest rate is unreasonable, or (3) the stated face amount of the note is
17. A company might sell receivables because money is tight and access to normal credit is not
available or prohibitively expensive. Also, a company may have to sell its receivables, instead of
18. The risks and rewards approach is used when receivables are sold with or without recourse (or
guarantee). A transfer of receivables should be recorded as a sale when the seller has transferred
19. Full guarantee (recourse) is a guarantee from Moon that if any of the sold receivables are
uncollectible, Moon will pay the factor for the amount of the uncollectible account. This guarantee
Questions Chapter 7 (Continued)
20. Several acceptable solutions are possible depending upon assumptions made as to whether certain
items are collectible within the operating cycle or not. The following illustrates one possibility:
Current Assets
Accounts receivable—Trade (of which accounts in the amount
of $75,000 have been assigned as security for loans payable)
21. The accounts receivable turnover ratio is computed by dividing net sales by average net receiv-
ables outstanding during the year. This ratio is used to assess the liquidity of the receivables. It
22. Because the restricted cash cannot be used by Woodlawn to meet current obligations, it should
not be reported as a current asset—it should be reported in investments or other assets. Thus,
*23. (1) The general checking account is the principal bank account of most companies and fre-
quently the only bank account of small companies. Most if not all transactions are cycled
through the general checking account, either directly or on an imprest basis.
(2) Imprest bank accounts are used to disburse cash (checks) for a specific purpose, such as
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 7.1
Cash in bank—savings account ………………………….
€68,000
Cash on hand …………………………………………………….
Checking account balance ………………………………….
BRIEF EXERCISE 7.2
June 1
Accounts Receivable ………………………
50,000
Sales Revenue ………………………..
50,000
BRIEF EXERCISE 7.3
June 1
Accounts Receivable ………………………
48,500*
Sales Revenue ………………………..
48,500
BRIEF EXERCISE 7.4
(a)
Accounts Receivable ………………………
BRIEF EXERCISE 7.4 (Continued)
(b)
Allowance for Sales Returns and
Allowances …………………………….
700
Accounts Receivable ………………
700
(c)
Sales Returns and Allowances ………..
Allowance for Sales Returns and
BRIEF EXERCISE 7.5
Bad Debt Expense …………………………………………………..
17,600
Allowance for Doubtful Accounts ……………………..
17,600
BRIEF EXERCISE 7.6
(a)
Bad Debt Expense …………………………………………………..
26,900
Allowance for Doubtful Accounts
[(10% X €250,000) + €1,900]…………………………..
26,900
(b)
Bad Debt Expense …………………………………………………..
Allowance for Doubtful Accounts
(€24,600 – €2,400) …………………………..
22,200
BRIEF EXERCISE 7.7
11/1/19
Notes Receivable …………………………………………………….
30,000
Sales Revenue …………………………..
30,000
12/31/19
Interest Receivable ………………………………………………….
Interest Revenue
BRIEF EXERCISE 7.7 (Continued)
5/1/20 Cash 30,900
BRIEF EXERCISE 7.8
Notes Receivable …………………………………………………….
16,529
Cash ……………………………………………………….
16,529
Notes Receivable …………………………………………………….
1,653
Interest Revenue
NT$16,529 X 10% ………………………………………….
Notes Receivable …………………………………………………….
1,818
Interest Revenue
(NT$16,529 + NT$1,653) X 10% ………………………
Cash ………………………………………………………………………
20,000
Notes Receivable …………………………………………….
20,000
BRIEF EXERCISE 7.9
Initial face value ………………………………………………………
€22,000
Less: Payments received ………………………………………..
Provision for uncollectibility ………………………….
Cash realizable value ………………………………………………
€14,000
BRIEF EXERCISE 7.10
Chung, Inc.
Cash ………………………………………………………………………
730,000
Finance Charge (¥1,000,000 X 2%) …………………………..
Notes Payable…………………………………………………
Seneca National Bank
Notes Receivable…………………………………………………….
750,000
Cash ……………………………………………………….
Financing Revenue (¥1,000,000 X 2%) ………………
BRIEF EXERCISE 7.11
Wood
Cash ………………………………………………………………………
138,000
Due from Factor ……………………………………………………..
9,000*
Loss on Sale of Receivables ……………………………………
Accounts Receivable ………………………………………
**2% X €150,000 = €3,000
Engram
Accounts Receivable ………………………………………………
150,000
Due to Wood …………………………………………………..
Financing Revenue …………………………………………
Cash ……………………………………………………….
BRIEF EXERCISE 7.12
Wood
Cash ………………………………………………………………………
138,000
Due from Factor …………………………..………………………….
9,000*
Finance Charge ………………………………………………………
3,000**
Recourse Liability …………………………………………..
**2% X €150,000 = €3,000
BRIEF EXERCISE 7.13
Cash $250,000 – [$250,000 X (.05 + .04)] ……………………
227,500
Due from Factor ($250,000 X .04) …………………………..
10,000
Loss on Sale of Receivables ……………………………………
12,500*
Accounts Receivable ………………………………………
BRIEF EXERCISE 7.14
The entry for the sale now would be:
Cash $250,000 – [($250,000 X (.05 + .04)] …………………..
227,500
Due from Factor ($250,000 X .04) …………………………..
10,000
Finance Charge ($250,000 X .05) …………………………..
12,500*
Recourse Liability ………………………………………….
BRIEF EXERCISE 7.15
The accounts receivable turnover is computed as follows:
*BRIEF EXERCISE 7.16
Petty Cash………………………………………………………………
200
Cash ………………………………………………………………
200
Supplies …………………………………………………………………
Miscellaneous Expense …………………………………………..
Cash Over and Short ……………………………………………….
Cash (£200 – £15) ……………………………………………
185
*BRIEF EXERCISE 7.17
(a) Added to balance per bank statement (1)
*BRIEF EXERCISE 7.18
(b)
Office Expense (Bank Charges) …………………………..
25
Cash ……………………………………………………….
25
(c)
Cash ……………………………………………………….……………..
31
Interest Revenue …………………………………………….
31
(e)
Accounts Receivable ………………………………………………
Cash ……………………………………………………….
377
SOLUTIONS TO EXERCISES
EXERCISE 7.1 (10–15 minutes)
(a) Cash includes the following:
1.
Commercial savings account—
First National Bank of Olathe ……………………………..
£ 600,000
1.
Commercial checking account—
First National Bank of Olathe ……………………………..
Money market fund—Volonte ………………………………..
Petty cash ……………………………………………………………
Commercial paper (cash equivalent) ……………………..
Currency and coin on hand …………………………………..
7,700
EXERCISE 7.1 (Continued)
(b) Other items classified as follows:
3. Travel advances (reimbursed by employee) * should be reported
as receivable—employee in the amount of £180,000.
4. Cash restricted in the amount of £1,500,000 for the retirement of
long-term debt should be reported as a noncurrent asset identi–
fied as “Cash restricted for retirement of long–term debt.”
9. Postdated check of £125,000 should be reported as an accounts
receivable.
10. The compensating balance requirement does not affect the bal–
ance in cash. A note disclosure indicating the arrangement and
EXERCISE 7.2 (10–15 minutes)
1. Cash balance of $925,000. Only the checking account balance should
be reported as cash. The certificates of deposit of $1,400,000 should
EXERCISE 7.2 (Continued)
2. Cash balance is $484,650 computed as follows:
Checking account balance ………………………….
$500,000
Overdraft …………………………………………………..
Petty cash …………………………………………………
Coin and currency ……………………………………..
1,350
3. Cash balance is $599,800 computed as follows:
Checking account balance ………………………….
$590,000
Certified check from customer …………………….
9,800
$599,800
4. Cash balance is $90,000 computed as follows:
Checking account balance ………………………….
$42,000
Money market mutual fund ………………………….
EXERCISE 7.2 (Continued)
5. Cash balance is $700,900 computed as follows:
Checking account balance ………………………….
$700,000
Cash advance received from customer ………..
900
EXERCISE 7.3 (10–15 minutes)
Current assets
Accounts receivable
Customers accounts (of which accounts
for a bank loan) …………………………..
Installment accounts due in 2020 ……
December 31, 2020* …………………….
Other** (€2,640 + €1,500) ……………………..
Investments
Advance to subsidiary company ………….
EXERCISE 7.4 (10–15 minutes)
Computation of cost of goods sold:
Merchandise purchased ………………………………..
$320,000
Less: Ending inventory …………………………………
70,000
Sales on account …………………
$350,000
Less: Collections ………………..
198,000
Uncollected balance …………….
Balance per ledger ………………
117,000
EXERCISE 7.5 (15–20 minutes)
(a)
1.
June 3
Accounts Receivable—Arquette …………………………..
2,000
Sales Revenue ………………………………………………..
2,000
June 12
Cash ……………………………………………………….
1,960
Sales Discounts (£2,000 X 2%) …………………………..
Accounts Receivable—Arquette ………………………
2,000
2.
June 3
Accounts Receivable—Arquette …………………………..
1,960
Sales Revenue (£2,000 X 98%) …………………………
1,960
June 12
Cash ……………………………………………………….
1,960
Accounts Receivable—Arquette ………………………
1,960