Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 7
Chapter 7
Accounting for Receivables
QUESTIONS
1. When customers use credit cards, the selling companies can avoid having to directly
evaluate the credit standing of their customers. They also avoid the risk of bad debts and
often are paid cash from the credit card company more quickly than if customers were
granted credit directly. Moreover, they hope to increase sales, and net income, from the
added convenience to buyers.
2. Revenues and expenses usually are not matched under the direct write-off method because
the revenues recorded from the uncollectible accounts often appear on the income statement
of one period while the bad debts expenses of those revenues appear on the income
statement of a later period when the account(s) is known to be uncollectible.
4. A note represents a written acknowledgment by the debtor of both the debt and its amount
and terms. This results in the note having greater legal significance.
5. Writing off a bad debt against the Allowance account does not reduce the estimated
realizable value of a company’s accounts receivable because the write-off reduces the
balances of both Accounts Receivable and the Allowance for Doubtful Accounts by equal
amounts. This means the difference between them (called estimated realizable value)
remains the same.
8. Google uses the allowance method to account for doubtful accounts as evidenced by the
receivables being reduced by an allowance of $674 million on the December 31, 2017,
balance sheet. The realizable value of accounts receivable as of December 31, 2017, is the
net amount of $18,336 million.
9. Samsung titles its accounts receivable as “Trade receivables.” Samsung reports Trade
receivables (in KRW millions) of ₩27,695,995.
(“Non-trade receivables” commonly refer to amounts due from an entity other than its normal
customer invoices for merchandise shipped or services performed. Examples of non-trade
receivables are amounts due from its employees for loans or wage advances, tax refunds due
from by taxing authorities, or insurance claims due from an insurance company.)
QUICK STUDIES
Quick Study 7-1 (15 minutes)
1.
Cash …………………………………………………………………….
19,000
Credit Card Expense* ……………………………………………
1,000
Sales ……………………………………………………………….
20,000
Record credit card sales less fees. *$20,000 x 5%
Cost of Goods Sold ………………………………………………
15,000
Merchandise Inventory …………………………………….
15,000
Record cost of sales.
2.
Cash …………………………………………………………………….
4,800
Credit Card Expense* ……………………………………………
200
Sales ……………………………………………………………….
5,000
Record credit card sales less fees. *$5,000 x 4%
Cost of Goods Sold ………………………………………………
3,000
Merchandise Inventory …………………………………….
3,000
Record cost of sales.
Quick Study 7-2 (10 minutes)
Oct. 1
Bad Debts Expense ……………………………………………..
50,000
Accounts Receivable—P. Moore …………………….
50,000
Write off an account.
Quick Study 7-3 (10 minutes)
Oct. 30
Accounts Receivable—P.Moore …………………………..
50,000
Bad Debts Expense ………………………………………..
Reinstate an account previously written off.
Oct. 30
50,000
Accounts Receivable— P. Moore ……………………
50,000
Record cash received on account.
Quick Study 7-4 (15 minutes)
1. DW direct write-off method
2. A allowance method
3. A allowance method
Quick Study 7-5 (15 minutes)
1.
Jan. 31
Allowance for Doubtful Accounts ………………………
800
Accounts Receivable—C. Green …………………..
800
Write off account.
2.
Mar. 9
Accounts Receivable—C. Green* ……………………….
300
Allowance for Doubtful Accounts …………………
300
Reinstate a written off account.
*If there is a strong belief that the remaining $500 will be
collected soon, then the full $800 balance can be reinstated.
300
Accounts Receivable—C. Green …………………..
300
Record payment on a receivable.
Quick Study 7-6 (10 minutes)
1.
Before Write-Off
2.
After Write-Off
Accounts receivable …………………………………..
$50,000
$49,700
Less allowance for doubtful accounts ………..
2,000
1,700
Realizable value of accounts receivable ……..
$48,000
$48,000
Quick Study 7-7 (15 minutes)
1.
Dec. 31
Bad Debts Expense …………………………………………
885
Allowance for Doubtful Accounts……………….
885
Record estimate of uncollectibles.
Desired balance in allowance = $99,000 x 1.5%= $1,485 cr.
Adjustment required = $1,485 – $600 cr. = $885
Quick Study 7-8 (15 minutes)
Dec. 31
Bad Debts Expense …………………………………………
Allowance for Doubtful Accounts……………….
Quick Study 7-9 (20 minutes)
1. Estimated balance of allowance for doubtful accounts:
2.
Dec. 31
Bad Debts Expense ……………………………………….
1,680
Allowance for Doubtful Accounts …………….
1,680
Record estimated bad debts.*
* Unadjusted balance …………………………..
$ 1,000 credit
Estimated balance …………………………………
2,680 credit
Required adjustment …………………………..
$ 1,680 credit
Quick Study 7-10 (20 minutes)
1. Maturity date is April 30, which is computed as follows:
2. Maturity date is August 13, which is computed as follows:
Days in May ……………………………………………………………. 31
Minus the date of the note ………………………………………. 15
Days remaining in May …………………………………………… 16
Add days in June ……………………………………………………. 30
Add days in July …………………………………………………….. 31
Add days in August to equal 90 days (August 13) ……. 13
Period of the note in days ………………………………………. 90
Interest Expense is $300. Computed as $15,000 x 8% x (90/360).
3. Maturity date is December 4, which is computed as follows:
Days in October ……………………………………………………… 31
Quick Study 7-11 (15 minutes)
1. Maturity date is October 31, which is computed as follows:
Days in August ………………………………………………………. 31
Minus the date of the note ………………………………………. 2
Days remaining in August ………………………………………. 29
Add days in September ………………………………………….. 30
Add days in October to equal 90 days (October 31) …. 31
Period of the note in days ………………………………………. 90
Quick Study 7-12 (10 minutes)
Quick Study 7-13 (15 minutes)
1.
Dec. 31 Interest Receivable …………………………………….. 50
Interest Revenue ………………………………….. 50
Record the year-end adjustment for
interest earned ($10,000 x 6% x 30/360).
2. Maturity date
Jan. 15 Cash ………………………………………………………….. 10,075
Quick Study 7-14 (10 minutes)
May 1
Cash ……………………………………………………………..
121,875
Factoring Fee Expense* …………………………………
3,125
Accounts Receivable ………………………………..
125,000
Record sale of receivable.
*($125,000 x 0.025)
Quick Study 7-15 (15 minutes)
FAIR TRADER CO.
Income Statement
For Year Ended December 31
Revenues
Sales …………………………………………………… $50,000
Interest revenue …………………………………… 3,000
Total revenues …………………………………….. $53,000
Expenses
Quick Study 7-16 (15 minutes)
BENNETT CO.
Balance Sheet
December 31
Assets
Current assets
Cash ……………………………………………………………… $12,000
Accounts receivable (net of $500 allowance) …….. 9,500
Prepaid rent ………………………………………………….. 1,000
Total current assets ………………………………………. 22,500
Long-term investments
Notes receivable (due in 4 years) …………………… 4,000
Total assets ………………………………………………………. $26,500
Liabilities
Quick Study 7-17 (10 minutes)
Accounts receivable turnover =
=
= 5.9 times
Net sales
Average accounts receivable
$861,105
($153,400 + $138,500) / 2
EXERCISES
Exercise 7-1 (25 minutes)
Part 1
GENERAL LEDGER
Nov. 5
Nov. 21
209
4,615
10
1,350
1,350
13
30
2,713
2,713
Bal.
9,301
Sales Returns and
ACCOUNTS RECEIVABLE LEDGER
Ski Shop
Welcome Enterprises
Zia Natara
Nov. 5
4,615
Nov. 10
1,350
Nov. 13
832
Nov. 21
209
30
2,713
Bal.
7,328
Bal.
623
Part 2
Vail Company
Schedule of Accounts Receivable
November 30
Ski Shop ………………………………………………………………………
$7,328
Welcome Enterprises …………………………………………………..
Comparison: The total of the Schedule of Accounts Receivable ($9,301) is
proved with the balance of the Accounts Receivable controlling T-account
from Part 1 ($9,301).
Exercise 7-2 (20 minutes)
Apr. 8
Cash ……………………………………………………………….
8,064
Credit Card Expense* ………………………………………
336
Sales …………………………………………………………
Record credit card sales less 4% fee. *($8,400 x 0.04)
8
Cost of Goods Sold …………………………………………
6,000
Merchandise Inventory ………………………………
Record cost of sales.
12
Cash ……………………………………………………………….
5,460
Credit Card Expense* ………………………………………
140
Sales …………………………………………………………
5,600
Record credit card sales less 2.5% fee. *($5,600 x .025)
12
Cost of Goods Sold …………………………………………
3,500
Merchandise Inventory ………………………………
3,500
Record cost of sales.
Exercise 7-3 (10 minutes)
Apr. 30
Accounts Receivable ………………………………………
1,000
Sales …………………………………………………………
Record own-store credit card sales.
30
Cost of Goods Sold …………………………………………
650
Merchandise Inventory ………………………………
Record cost of sales.
Accounts Receivable ………………………………………
Interest Revenue ……………………………………….
Exercise 7-4 (15 minutes)
March 11
Bad Debts Expense …………………………………………….
45,000
Accounts Receivable—Leer Co. ……………………..
Write off an account.
March 29
Accounts Receivable—Leer Co. …………………………..
45,000
Bad Debts Expense ……………………………………….
Reinstate an account previously written off.
March 29
Cash …………………………………………………………………..
45,000
Accounts Receivable—Leer Co. ……………………..
45,000
Record cash received on account.
Exercise 7-5 (20 minutes)
a.
Feb. 1
Allowance for Doubtful Accounts …………………………
6,800
Accounts Receivable—Oakley Co …………………..
Accounts Receivable—Brookes Co ………………..
Write off specific accounts.
900
900
Reinstate an account.
900
Accounts Receivable—Oakley ………………………..
900
Record cash received on account.
Exercise 7-6 (20 minutes)
Dec. 31
Bad Debts Expense ……………………………………………..
4,875
Allowance for Doubtful Accounts……………………
Record estimated bad debts expense
(0.01 x $487,500).
Feb. 1
Allowance for Doubtful Accounts …………………………
580
Accounts Receivable—P. Park ……………………….
Write off an account.
580
580
Reinstate an account.
580
Accounts Receivable—P. Park ……………………….
580
Record cash received on account.
Exercise 7-7 (15 minutes)
a.
Dec. 31
Bad Debts Expense ………………………………………………
685
Allowance for Doubtful Accounts* …………………..
Record estimated bad debts expense.
*Unadjusted balance
= $ 415 credit
Estimated balance ($55,000 x 0.02)
= 1,100 credit
Required adjustment
= $ 685 credit
b.
Dec. 31
Bad Debts Expense ………………………………………………
1,391
Allowance for Doubtful Accounts** ………………….
Record estimated bad debts expense.
** Unadjusted balance
= $ 291 debit
Estimated balance ($55,000 x 0.02)
= 1,100 credit
Required adjustment
= $1,391 credit
Exercise 7-8 (30 minutes)
a. Computation of the estimated balance of the allowance for uncollectibles:
Dec. 31
Bad Debts Expense ……………………………………….
Allowance for Doubtful Accounts …………….
* Unadjusted balance …………………………..
$ 3,600 credit
Estimated balance …………………………………
11,820 credit
c.
Dec. 31
Bad Debts Expense ……………………………………….
11,920
Allowance for Doubtful Accounts …………….
11,920
Record estimated bad debts.*
* Unadjusted balance …………………………..
$ 100 debit
Estimated balance …………………………………
11,820 credit
Required adjustment …………………………..
$11,920 credit
Exercise 7-9 (25 minutes)
a. Computation of the estimated balance of the allowance for uncollectibles:
$570,000 x 0.045 =
$25,650
credit
b.
Dec. 31
Bad Debts Expense ……………………………………….
13,650
Allowance for Doubtful Accounts …………….
13,650
Record estimated bad debts.*
* Unadjusted balance ………………………
$12,000 credit
Estimated balance ………………………..
25,650 credit
Required adjustment …………………….
$13,650 credit
Dec. 31
Bad Debts Expense ……………………………………….
26,650
Allowance for Doubtful Accounts …………….
26,650
Record estimated bad debts.*
* Unadjusted balance ………………………
$ 1,000 debit
Estimated balance ………………………..
Exercise 7-10 (30 minutes)
1.
Customer
Not Yet
Due
1 to 30
Days Past
Due
31 to 60
Days Past
Due
61 to 90
Days Past
Due
Over 90
Days Past
Due
BCC Company …………………………..
$4,000
Lannister Co. …………………………..
$1,000
Mike Properties …………………………..
$5,000
Ted Reeves …………………………..
Jen Steffens …………………………..
2.
Dec. 31
Bad Debts Expense ……………………………………….
770
Allowance for Doubtful Accounts …………….
770
Record estimated bad debts.*
* Unadjusted balance ………………………
$100 credit
Estimated balance ………………………..
870 credit
Required adjustment …………………….
$770 credit
Exercise 7-11 (25 minutes)
1. Expense is 3.0% of credit sales
Dec. 31
Bad Debts Expense ………………………………………..
9,000
Allowance for Doubtful Accounts ……………..
9,000
Record estimated bad debts
[$300,000 x 0.03].
2. Expense is 1.0% of total sales
Dec. 31
Bad Debts Expense ………………………………………..
Allowance for Doubtful Accounts ……………..
12,000
Record estimated bad debts
[($300,000 + $900,000) x 0.01].
3. Allowance is 6% of accounts receivable
Dec. 31
Bad Debts Expense ………………………………………..
Allowance for Doubtful Accounts ……………..
12,500
Exercise 7-12 (10 minutes)
Dec. 13
Notes Receivable—M. Lee……………………………..
9,500
Accounts Receivable—M. Lee ………………….
9,500
Record receipt of note on account.
Dec. 31
Interest Receivable ……………………………………….
Interest Revenue ……………………………………..
Exercise 7-13 (15 minutes)
Jan. 27
Cash ……………………………………………………………..
9,595
Interest Revenue* …………………………..…………
57
Interest Receivable …………………………………..
38
Notes Receivable—M. Lee ………………………..
9,500
Record cash received on note plus interest.
* $9,500 x 0.08 x (45–18)/360 = $57
Mar. 3
Notes Receivable—Tomas Co. ……………………….
5,000
Accounts Receivable-Tomas Co ……………….
5,000
Record receipt of note on account.
17
Notes Receivable—H. Cheng ………………………….
2,000
Accounts Receivable—H. Cheng ………………
2,000
Record receipt of note on account.
Accounts Receivable—H. Cheng ……………………
2,015
Interest Revenue ………………………………………
15
Notes Receivable—H. Cheng …………………….
2,000
Record receivable for dishonored
note plus interest [$2,000 x 0.09 x 30/360].
Allowance for Doubtful Accounts …………………..
2,015
Accounts Receivable—H. Cheng ………………
2,015
Write off account.
June 1
Cash ……………………………………………………………..
5,125
Interest Revenue ………………………………………
125
Notes Receivable—Tomas Co …………………..
5,000
Record cash received on note with
interest [$5,000 x 0.10 x 90/360].
Exercise 7-14 (15 minutes)
Nov. 1
Notes Receivable—K. White ………………………..
6,000
Accounts Receivable—K. White ……………..
6,000
Record receipt of note on account.
Dec. 31
Interest Receivable ……………………………………..
80
Interest Revenue ……………………………………
80
Record interest earned
[$6,000 x 0.08 x 60/360].
6,240
Notes Receivable—K. White …………………..
6,000
Interest Revenue* …………………………..………
Interest Receivable ………………………………..
80
Record cash received on note plus
interest earned. *[$6,000 x 0.08 x 120/360]
Exercise 7-15 (20 minutes)
Mar. 21
Notes Receivable—T. Jackson ……………………….
9,500
Accounts Receivable—T. Jackson …………….
9,500
Record receipt of note on account.
9,880
Notes Receivable—T. Jackson ………………….
9,500
earned [$9,500 x 0.08 x 180/360 = $380].
Dec. 31
Allowance for Doubtful Accounts …………………..
9,880
Accounts Receivable—T. Jackson …………….
9,880
Write off an account.
Exercise 7-16 (20 minutes)
1.
Dec. 4
Accounts Receivable ……………………………………..
7,245
Sales ……………………………………………………….
7,245
Record sales on credit.
4
Cost of Goods Sold ………………………………………………
5,000
Merchandise Inventory ……………………………………
5,000
Record cost of sales.
9
Accounts Receivable ………………………………..
Record sale of receivable. *($20,000 x 0.04)
5,859
Accounts Receivable ………………………………..
5,859
Record cash received on account.
Notes Payable …………………………………………..
Record cash from a loan.
2. The December 27 transaction. An example of this disclosure follows.
Note to Financial Statements
Accounts receivable in the amount of $12,500 are pledged
as security for a $10,000 note payable to Main Bank.
Exercise 7-17 (15 minutes)
1.
Year 2 accounts receivable turnover:
= 8.8 times
$405,140
($44,800 + $41,400)/2
2. Worse.
Analysis: Raheem Company turned over its accounts receivable 0.6 (9.4 – 8.8)
times more in Year 3 than in Year 2. This improvement may indicate that the
company has tightened its credit policy or has improved its collection efforts.
However, relative to its competitor’s turnover of 11, Raheem is performing
worse than its competitor.
$335,280
($41,400 + $34,800)/2