Problem 7-5B (75 minutes)
Part 1
Year 1
Nov. 1
Notes Receivable—S. Julian …………………………..
4,800
Accounts Receivable—S. Julian ………………….
4,800
Record note received on account.
Dec. 31
Interest Receivable …………………………………………..
64
Interest Revenue ………………………………………..
64
Record interest earned [$4,800 x 0.08 x 60/360].
Year 2
4,896
Interest Revenue* ……………………………………….
32
Interest Receivable ……………………………………..
64
Notes Receivable—S. Julian ……………………….
4,800
Feb. 28
Notes Receivable—King Co ……………………………..
12,600
Accounts Receivable—King Co. ………………….
12,600
Record note received on account.
Mar. 1
Notes Receivable—M. Shelley ………………………….
6,200
Accounts Receivable—M. Shelley ……………….
6,200
Record note received on account.
30
Accounts Receivable—King Co ………………………..
12,684
Interest Revenue ………………………………………..
84
Notes Receivable—King Co ………………………..
12,600
Record receivable for dishonored note
plus interest [$12,600 x 0.08 x 30/360].
6,324
Interest Revenue ………………………………………..
Notes Receivable—M. Shelley …………………….
6,200
Problem 7-5B (Concluded)
June 15
Notes Receivable—R. Solon …………………………..
2,000
Accounts Receivable—R. Solon …………………
2,000
Record note received on account.
June 21
Notes Receivable—J. Felton …………………………..
9,500
Accounts Receivable—J. Felton ………………..
9,500
Record note received on account.
2,032
Notes Receivable—R. Solon ……………………..
2,000
9,690
Notes Receivable—J. Felton ……………………..
9,500
Nov. 30
Allowance for Doubtful Accounts ……………………
12,684
Accounts Receivable—King Co …………………
12,684
Record write-off of accounts.
Part 2
Financial statement footnotes
Explanation: When a business pledges its receivables as security for a
loan and the loan is still outstanding at period-end, the business must
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 7
SERIAL PROBLEM — SP 7
Serial Problem — SP 7, Business Solutions (50 minutes)
1. a. Bad debts expense is recorded as 1% of total revenues:
$44,000 x .01 = $440.
2020
Mar. 31
Bad Debts Expense ………………………………………..
Allowance for Doubtful Accounts………………
440
Record estimated bad debts.
1. b. Bad debts expense is recorded as 2% of accounts receivable:
$22,867 x .02 = $457.34, which is $457 rounded to the nearest dollar.
Mar. 31
Bad Debts Expense ………………………………………..
457
Allowance for Doubtful Accounts………………
457
Record estimated bad debts.
2. Allowance Balance as of 3/31/20 ………………. $457 Cr.
Less: Account written off ………………………… (100) Dr.
Allowance Balance as of 6/30/20 ………………. $357 Cr. (before adjustment)
Required Balance: $20,250 x 0.02 = $405
Required Adjustment: $405 – $357 = $48
2020
June 30
Bad Debts Expense ………………………………………..
Allowance for Doubtful Accounts………………
48
Record estimated bad debts.
3. Many small business owners use the direct write-off method of
recording bad debts expense. The direct method is a simple and
Company Analysis — AA 7-1 (25 minutes)
1. Apple’s accounts receivables are $17,874 million.
4. Liquid assets as a percent of current liabilities ($ millions)
$20,289 + $53,892 + $17,874 + $4,855 = 96.1%
Sep. 30, 2017: $100,814
$20,484 + $46,671 + $15,754 + $2,132 = 107.6%
Sep. 24, 2016: $79,006
5. Worsened
Explanation: Looking solely at Apple’s ability to satisfy current
Comparative Analysis — AA 7-2 (35 minutes)
1. Accounts Receivable Turnover ($ millions)
a.
Apple (Current Year):
$ 229,234
($17,874 + $15,754) / 2 = 13.6 times
Apple (Prior Year):
$215,639
($15,754 + $16,849) / 2 = 13.2 times
2. Average Collection Period (or “Average Days’ Sales Uncollected”)
a. Apple (Current Year): 365 days / 13.6 times = 26.8 days
Apple (Prior Year): 365 days / 13.2 times = 27.7 days
3. Apple
Explanation: Apple collects accounts receivable over a shorter period
of time compared with Google in both years. Therefore, Apple more
quickly collects its receivables vis-à-vis Google.
Global Analysis — AA 7-3 (15 minutes)
1. Accounts Receivable Turnover (KRW in millions)
2. Average Collection Period (or “Average Days’ Sales Uncollected”)
Samsung (Current Year): 365 days / 9.2 times = 39.7 days
3. Outperform
Ethics Challenge — BTN 7-1
1. If the estimate for bad debts is reduced then less Bad Debts Expense
will be recognized on the income statement resulting in a higher net
income. It also means that a lower allowance will be shown on the
balance sheet, which will result in a higher realizable value for
receivables and, therefore, a larger amount of current liquid assets.
2. Accounting procedures often allow for alternate methods or require the
3. An informed owner or an effective board of directors will be aware of
alternate accounting methods and how estimates can affect the
financial statements. The owner or board should review the
reasonableness of the manager’s and accountant’s estimate for bad
Communicating in Practice — BTN 7-2
TO: Sid Omar
FROM: (Your Name)
DATE: _______________
SUBJECT: Difference Between Bad Debts Expense and Allowance
For Doubtful Accounts
In accounting for credit sales and bad debts, we report sales revenue in the
period the sales are made, even though some credit sales do not result in
collections until the following period. Of course, some credit sales
eventually prove to be uncollectible. The fact that some accounts will
become uncollectible is what gives rise to bad debts expense and the
allowance for doubtful accounts.
Determining Allowance For Doubtful Accounts
The Allowance for Doubtful Accounts unadjusted balance at the end of the
year is the cumulative result of recording bad debts expense and writing
off specific accounts receivable in all past years. The recognition of bad
debts expense at the end of each year has the effect of increasing the
Allowance for Doubtful Accounts balance. However, when specific
accounts receivable are written off, they decrease the Allowance for
Doubtful Accounts balance. Prior to this year’s bad debts expense
calculation, the cumulative total of writing off specific accounts was
$16,000 greater than the cumulative total of the past years’ bad debts
Taking It to the Net — BTN 7-3
2.
$ millions
December 31,
2016
December 31,
2015
Allowances for doubtful accounts
(and authorized credits)* ………………
$ 81
$ 84
Gross accounts receivable ……………..
$673
($592 + $81)
$703
($619 + $84)
% of uncollectible accounts ……………
12.0%
($81 / $673)
11.9%
($84 / $703)
*Reported in eBay’s “Schedule II” of its 10–K.
3. These percentages seem high compared to other companies, but
eBay’s operations are all online, and the risk of fraudulent transactions
is likely higher than other companies. eBay’s prior experience has
arguably led them to estimate a seemingly large percentage of
uncollectible accounts.
Teamwork in Action — BTN 7-4
Instructor note: Computations for the aging schedule are in the Problem 7-3A solution.
The check figure for total estimated uncollectibles is $41,650.
Adjusting entry
December 31 Balance Sheet Presentation
Accounts Receivable …………………………………….. $1,220,000*
Less Allowance for Doubtful Accounts ………….. 41,650 1,178,350**
* Total of each age category.
** Net Realizable Accounts Receivable.
Entrepreneurial Decision — BTN 7-5
1. Computation of added annual net income or loss
a.
Added Monthly Net Income or Loss under Plan A
Increased sales ……………………………………………………… $250,000
Additional Wages Expense …………………………………….. (135,500)
Credit card fees ($250,000 x 4.75%) ………………………… (11,875)
b.
Added Monthly Net Income or Loss under Plan B
Increased sales ……………………………………………………… $500,000
Cost of sales …………………………………………………………. (375,000)
Recordkeeping and shipping ($500,000 x 4%) …………. (20,000)
Entrepreneurial Decision — BTN 7-5 continued
2. Plan (A) provides a slightly higher income, so if the company can only
pursue one plan now, based purely on the financial aspect, it should
choose Plan (A).
Plan (A) expands its offerings into new markets, and could increase
sales over time. However, this is a new model for the company, and it
might lack the expertise to execute it. It will need to further assess
whether the benefit of subscription sales over time will be more/less
than the cost of lost advertising sales.
Hitting the Road — BTN 7-6
Telephone calls to VISA and American Express are the source of
information for this solution. VISA reports that the average transaction fee
it charges merchants is 3%. American Express has a range, depending on
volume of business and average price of merchandise sold, which ranges
from 2.95% to 4.5%.