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CA 7.2 (Continued)
Kimmel should report interest revenue from the notes receivable on its income statement for the
CA 7.3
(1) Allowances and charge-offs. Method (a) is recommended. In the case of this company which
has a large number of relatively small sales transactions, it is practicable to give effect currently to
(2) Collection expenses. Method (a) or (b) is recommended. In the case of this company, one strong
argument for method (a) is that it is advisable to have the Bad Debt Expense account show the full
amount of expense relating to efforts to collect and failure to collect balances receivable. On the
(3) Recoveries. Method (c) is recommended. This method treats the recovery as a correction of a
previous write-off. It produces an allowance account that reflects the net experience with bad
CA 7.4
Part 1
Since Wallace Company is a calendar-year company, six months of interest should be accrued on
cash is received.
CA 7.4 (Continued)
Part 2
(a) The allowance method based on the balance in accounts receivable is consistent with the expense
recognition principle. It attempts to value accounts receivable at the amount expected to be
collected and records bad debt expense in periods when credit quality decreases. The method is
used.
(b) On Wallace’s statement of financial position, the allowance for doubtful accounts is presented as a
contra account to accounts receivable with the resulting difference representing the net accounts
LO: 2,4, Bloom: AP, Difficulty: Moderate, Time: 25-30, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None
CA 7.5
(a) VALASQUEZ SA
Accounts Receivable Aging Schedule
May 31, 2019
Proportion
of Total
Amount in
Category
Probability of
Non-Collection
Estimated
Uncollectible
Amount
Not yet due
.680
R$1,088,000
.010
R$10,880
CA 7.5 (Continued)
(b) VALASQUEZ SA
Analysis of Allowance for Doubtful Accounts
May 31, 2019
June 1, 2018 balance .............................................
R$ 43,300
Bad debt expense accrual (R$4,000,000 X .04) ....
160,000
(c)
(1) Steps to Improve
Accounts Receivable Situation
(2) Risks and Costs Involved
Establish more selective credit-
granting policies, such as more
restrictive credit requirements or
This policy could result in lost sales
and increased costs of credit
evaluation. The company may be all
CA 7.6
(a) The appropriate valuation basis of a note receivable at the date of sale is its discounted present
value of the future amounts receivable for principal and interest using the customer’s market rate
of interest, if known or determinable, at the date of the equipment’s sale.
(b) Corrs should increase the carrying amount of the note receivable by the effective-interest revenue
(c) 1. For notes receivable not sold, Corrs should recognize bad debt expense. The expense equals
the adjustment required to bring the balance of the allowance for doubtful accounts equal to
the estimated uncollectible amounts less the fair values of recoverable equipment.
CA 7.7
(a) 1. It was not possible to determine the machine’s fair value directly, so the sales price of the
2. Rolen reports 2019 interest revenue determined by multiplying the note’s carrying amount at
September 30, 2019, times the buyer’s market rate of interest at the date of issue, times three-
twelfths. Rolen should recognize that there is an interest factor implicit in the note, and this
interest is earned with the passage of time. Therefore, interest revenue for 2019 should include
three months’ revenue. The rate used should be the market rate established by the original
present value, and this is applied to the carrying amount of the note.
(b) To report the sale of the note receivable with guarantee, Rolen should increase a liability to the
factor by the carrying amount of the note, increase cash by the amount received, record a
CA 7.8
(a) 1. For the interest-bearing note receivable, the interest revenue for 2019 should be determined by
2. For the zero-interest-bearing note receivable, the interest revenue for 2019 should be deter-
mined by multiplying the carrying value of the note by the prevailing rate of interest at the date
of the note by one third (September 1, 2019 to December 31, 2019). The carrying value of the
note at September 1, 2019 is the face amount discounted for two years at the prevailing interest
rate from the maturity date of August 31, 2021 back to the issuance date of September 1, 2019.
Interest, even if unstated, accrues with the passage of time, and it should be accounted for as an
element of revenue over the life of the note receivable.
(b) The interest-bearing note receivable should be reported at December 31, 2019 as a current asset
at its principal (face) amount.
CA 7.9
The controller of Engone Company cannot justify the manner in which the company has accounted for
the transaction in terms of sound financial accounting principles.
Several problems are inherent in the sale of Henderson Enterprises stock to Bimini Inc. First, the issue
of whether an arm’s-length transaction has occurred may be raised. The controller stated that the stock
has not been marketable for the past six years. Thus, the recognition of revenue is highly questionable
in view of the limited market for the stock; i.e., has an exchange occurred?
CA 7.9 (Continued)
For a gain to occur, the interest imputation must result in an interest rate of about 5% or less. To
illustrate:
Present value of an annuity of £1 at 5% for 10 years = 7.72173; thus the present value of ten
CA 7.10
To: Mark Price, Branch Manager
From: Accounting Major
Date: October 3, 2019
Subject: Shortage in the Accounts Receivable Account
While performing a routine test on accounts receivable balances today, I discovered a $58,000 shortage.
I believe that this matter deserves your immediate attention.
To compute the shortage, I determined that the accounts receivable balance should have been based
on the amount of inventory which has been sold. When we opened for business this year, we
purchased $360,000 worth of merchandise inventory, and this morning, the balance in this account was
$90,000.
CA 7.11
(a) No, the controller should not be concerned with Marvin Company’s growth rate in estimating the
allowance. The accountant’s proper task is to make a reasonable estimate of bad debt expense.
In making the estimate, the controller should consider the previous year’s write-offs and also an-
ticipate economic factors which might affect the company’s industry and influence Marvin’s current
FINANCIAL REPORTING PROBLEM
(a) M&S’s cash and cash equivalents include short-term deposits with
banks and other financial institutions, with an initial maturity of three
months or less and credit card debtor’s receivable within 48 hours.
The carrying amount of these assets approximates their fair value.
COMPARATIVE ANALYSIS CASE
Puma adidas
€ millions € millions
(a) 338.8
Cash and cash equivalents
12/31/15
Cash and cash equivalents
1,365
Cash and cash equivalents
12/31/15
Cash and cash equivalents
(b) 521.9
38.8
Trade receivables 12/31/15
Value adjustments
2,198
149
Accounts receivable, gross
12/31/15 accumulated
allowances for doubtful
receivables
FINANCIAL STATEMENT ANALYSIS CASE 1
(a) Cash may consist of funds on deposit at the bank, negotiable instru-
ments such as money orders, certified checks, cashier’s checks,
personal checks, bank drafts, and money market funds that provide
checking account privileges.
(b) Cash equivalents are short-term, highly liquid investments that are
(c) A compensating balance is that portion of any cash deposit main-
tained by an enterprise which constitutes support for existing borrow-
ing arrangements with a lending institution.
(d) Short-term investments are the investments held temporarily in place
of cash and can be readily converted to cash when current financing
FINANCIAL STATEMENT ANALYSIS CASE 1 (Continued)
The major differences between cash equivalents and short-term
investments are (1) cash equivalents typically have shorter maturity
(e) Petrochina would record a loss of RMB30,000,000 as revealed in the
following entry to record the transaction:
Cash ................................................................
345,000,000
Loss on Sale of Receivables ................................
30,000,000
FINANCIAL STATEMENT ANALYSIS CASE 2
Part 1
(a) Cash equivalents are short-term, highly liquid investments that can be
converted into specific amounts of cash. They include money market
(b)
(in millions)
Meriter
Monitor
(1) Current ratio
€4,934
= 1.4
€1,362.1
= 2.2
€3,645
€614.8
FINANCIAL STATEMENT ANALYSIS CASE 2 (Continued)
Part 2
(a)
Accounts Receivable
Turnover
€10,799
=
€10,799
= 7.01 times
(€1,624 + €1,459)/2
€1,541.5
(c) Accounts receivable is reduced by the amount of bad debts in the
allowance account. This makes the denominator of the turnover ratio
ACCOUNTING, ANALYSIS, AND PRINCIPLES
ACCOUNTING
(a) Accounts Receivable:
Beginning balance .............................. € 46,000
Allowance for Doubtful Accounts:
Beginning balance .............................. € 550
Write-offs ............................................. (1,600)
(b) Current assets section of December 31, 2019 Flatiron Pub statement of
financial position
Accounts receivable (net of €1,575
allowance for uncollectibles ........... €61,425
ACCOUNTING, ANALYSIS, AND PRINCIPLES (Continued)
ANALYSIS
(a) 2018 current ratio = (€2,000 + €46,000 – €550 + €8,500) ÷ €37,000 = 1.51
2019 current ratio = €76,285 ÷ €44,660 = 1.71
the current ratio and accounts receivable turnover.
PRINCIPLES
The expense recognition principle requires that bad debt expense be
recorded in the period of the sale. Otherwise, income will be overstated by
RESEARCH CASE
(a) IFRS 9, paragraph 3.2 addresses derecognition of financial assets.
(b) According to 3.2.3 An entity shall derecognise a financial asset when,
and only when:
3.2.4 An entity transfers a financial asset if, and only if, it either:
(a) transfers the contractual rights to receive the cash flows of the
3.2.5 When an entity retains the contractual rights to receive the cash flows
of a financial asset (the ‘original asset’), but assumes a contractual
obligation to pay those cash flows to one or more entities (the
‘eventual recipients’), the entity treats the transaction as a transfer of
RESEARCH CASE (Continued)
(c) The entity has an obligation to remit any cash flows it collects
on behalf of the eventual recipients without material delay. In
(c) Transfers that qualify for derecognition – According to paragraph
3.2.10 If an entity transfers a financial asset in a transfer that qualifies
for derecognition in its entirety and retains the right to service the
(d) Paragraph 3.2.16 addresses continuing involvement…
If an entity neither transfers nor retains substantially all the risks and
rewards of ownership of a transferred asset, and retains control of the
transferred asset, the entity continues to recognise the transferred
asset to the extent of its continuing involvement. The extent of the
entity’s continuing involvement in the transferred asset is the extent to
which it is exposed to changes in the value of the transferred asset.
For example:
(a) When the entity’s continuing involvement takes the form of
guaranteeing the transferred asset, the extent of the entity’s
RESEARCH CASE (Continued)
(b) When the entity’s continuing involvement takes the form of a
written or purchased option (or both) on the transferred asset,
(c) When the entity’s continuing involvement takes the form of a
3.2.17 When an entity continues to recognise an asset to the extent of its
continuing involvement, the entity also recognises an associated
liability. Despite the other measurement requirements in this
Standard, the transferred asset and the associated liability are
3.2.18 The entity shall continue to recognise any income arising on the
transferred asset to the extent of its continuing involvement and
shall recognise any expense incurred on the associated liability.
3.2.19 For the purpose of subsequent measurement, recognised changes
RESEARCH CASE (Continued)
3.2.20 If an entity’s continuing involvement is in only a part of a
financial asset (eg when an entity retains an option to repurchase part
of a transferred asset, or retains a residual interest that does not result
3.2.14 apply. The difference between:
(a) the carrying amount (measured at the date of derecognition)
allocated to the part that is no longer recognised and
(b) the consideration received for the part no longer recognised
shall be recognised in profit or loss.
3.2.21 If the transferred asset is measured at amortised cost, the option in
GAAP CONCEPTS and APPLICATION
7.1 Both the IASB and the FASB have indicated that they believe that
financial statements would be more transparent and understandable if
7.2 Key similarities relate to (1) the definition used for cash equivalents,
(2) accounting and reporting issues related to recognition and
measurement of receivables, such as the use of allowance accounts,
how to record trade and sales discounts, use of percentage of sales
and receivables methods, pledging, and factoring, and (3) both
