CHAPTER 8
Reporting and Analyzing Receivables
Learning Objectives
1. Explain how companies recognize accounts receivable.
2. Describe how companies value accounts receivable and record their disposition.
3. Explain how companies recognize, value, and dispose of notes receivable.
4. Describe the statement presentation of receivables and the principles of receivables management.
Summary of Questions by Learning Objectives and Bloom’s Taxonomy
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Questions
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Brief Exercises
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Do It! Exercises
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Exercises
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AN
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Problems: Set A
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8.
*Continuing Cookie Solutions for this chapter are available online.
ASSIGNMENT CHARACTERISTICS TABLE
Problem
Number
Description
Difficulty
Level
Time
Allotted (min.)
1A
Journalize transactions related to bad debts.
Moderate
15–20
2A
Prepare journal entries related to bad debt expense,
and compute ratios.
Moderate
15–20
3A
Journalize transactions related to bad debts.
Moderate
15–20
4A
Compute bad debt amounts.
Moderate
15–20
5A
Journalize entries to record transactions related to bad
debts.
Moderate
20–30
6A
Journalize various receivables transactions.
Moderate
25–30
7A
Explain the impact of transactions on ratios.
Moderate
20–30
8A
Prepare entries for various credit card and notes
receivable transactions.
Moderate
20–30
9A
Calculate and interpret various ratios.
Moderate
10–15
ANSWERS TO QUESTIONS
1. Accounts receivable are amounts customers owe on account. They result from the sale of goods
and services (i.e., in trade). Notes receivable represent claims that are evidenced by formal
instruments of credit.
LO 1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting
2. Other receivables include nontrade receivables such as interest receivable, loans to company
officers, advances to employees, and income taxes refundable.
LO 1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting
3. The essential features of the allowance method of accounting for bad debts are:
(1) Uncollectible accounts receivable are estimated and matched against revenues in the same
accounting period in which the revenues are recorded.
(2) Estimated uncollectibles are debited to Bad Debt Expense and credited to Allowance for
Doubtful Accounts through an adjusting entry at the end of each period.
(3) Actual uncollectibles are debited to Allowance for Doubtful Accounts and credited to Accounts
Receivable at the time the specific account is written off as uncollectible.
LO 2 BT: C Difficulty: Medium TOT: 3 min. AACSB: None AICPA FC: Reporting
4. Lance should realize that the decrease in cash realizable value occurs when estimated uncollectibles
are recognized in an adjusting entry. The write-off of an uncollectible account reduces both accounts
receivable and the allowance for doubtful accounts by the same amount. Thus, cash realizable
value does not change.
LO 2 BT: C Difficulty: Easy TOT: 2 min. AACCSB: None AICPA FC: Reporting
5. The adjusting entry under the percentage of receivables basis is:
Bad Debt Expense ……………………………………………………………………….. 2,900
Allowance for Doubtful Accounts ($5,100 – $2,200) …………………….. 2,900
LO 2 BT: AP Difficulty: Medium TOT: 2 min. AACSB: Analytic AICPA FC: Reporting
6. Apple reports two types of receivables on its balance sheet: Accounts receivable trade, and
vendor non-trade receivables. Since Apple’s balance sheet reports allowance amounts for
receivables, we know that Apple uses the allowance method rather than the direct write-off
method.
LO 2 BT: AN Difficulty: Medium TOT: 4 min. AACSB: Analytic AICPA FC: Reporting
7. Under the direct write-off method, bad debt losses are not estimated and no allowance account is used.
When an account is determined to be uncollectible, the loss is debited to Bad Debt Expense and
credited to Accounts Receivable. The direct write-off method makes no attempt to match bad debts
expense to revenues or to show the cash realizable value of the receivables in the balance sheet.
LO 2 BT: C Difficulty: Medium TOT: 4 min. AACSB: None AICPA FC: Reporting
8. Offering credit usually results in an increase in sales because customers prefer to “buy now and
pay later”. If a company decides to extend credit to customers, it should also establish credit
standards to determine if a particular customer is credit worthy. Standards that are easily met can
result in additional sales being made to customers that may not be able to meet the “tighter” credit
policies of competitors. If such customers fail to pay, the additional sales revenue will be offset by
higher collection costs and bad debt expense.
LO 2 BT: E Difficulty: Hard TOT: 5 min. AACSB: Reflective Thinking AICPA FC: Reporting
9. From its own credit cards, the JC Penney Company may realize financing charges from cus–
tomers who do not pay the balance due within a specified grace period. National credit cards
offer the following advantages:
(1) The credit card issuer does the credit investigation of the customer.
(2) The issuer maintains individual customer accounts.
(3) The issuer undertakes the collection process and absorbs any losses from uncollectible
accounts.
(4) The retailer receives cash more quickly from the credit card issuer than it would from
individual customers.
LO 2 BT: C Difficulty: Medium TOT: 5 min. AACSB: None AICPA FC: Reporting
10. The reasons companies sell their receivables are:
(1) For competitive reasons, companies often must provide financing to purchasers of their goods.
Such financing can result in receivables balances that are larger than the company wishes
to hold. Selling the receivables reduces the excessive balance.
(2) Receivables may be sold because they may be the only reasonable source of cash.
(3) Billing and collection are often time-consuming and costly. As a result, it is often easier for a
retailer to sell the receivables to another party that has expertise in billing and collecting
receivables.
LO 2 BT: C Difficulty: Medium TOT: 4 min. AACSB: None AICPA FC: reporting
11. Cash …………………………………………………………………………………………………. 388,000
Service Charge Expense (3% X $400,000) …………………………………………….. 12,000
Accounts Receivable ……………………………………………………………………. 400,000
LO 2 BT: AP Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Reporting
12. A promissory note gives the holder a stronger legal claim than one on an account receivable. As
a result, it is easier to sell to another party. Promissory notes are negotiable instruments, which
means they can be transferred to another party by endorsement. The holder of a promissory note
also can earn interest.
LO 3 BT: AN Difficulty: Medium TOT: 3 min. AACSB: Analytic AICPA FC: Reporting
13. The maturity date of a promissory note may be stated in one of three ways: (1) on demand,
(2) on a stated date, and (3) at the end of a stated period of time.
LO 3 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting
14. The missing amounts are: (a) $27,000, (b) 10%, (c) six months or 180 days, and (d) $7,200.
LO 3 BT: AP Difficulty: Medium TOT: 6 min. AACSB: Analytic AICPA FC: Reporting
15. When Mendosa Company has dishonored a note, the lender can renegotiate new terms for the
receivable which is equal to the full amount of the note plus the interest due. It will then try to collect
the balance due, or as much as possible. If there is no hope of collection, it will write-off the note
receivable.
LO 3 BT: C Difficulty: Medium TOT: 3 min. AACSB: None AICPA FC: Reporting
16. Each of the major types of receivables should be identified in the balance sheet or in the notes
to the financial statements. Both the gross amount of receivables and the allowance for doubtful
accounts should be reported. If collectible within a year or the operating cycle, whichever is longer,
these receivables are reported as current assets immediately below short-term investments. Notes
receivables are usually listed before accounts receivable because notes are more easily converted
to cash.
LO 4 BT: K Difficulty: Medium TOT: 4 min. AACSB: None AICPA FC: Reporting
17. The steps involved in receivables management are:
(1) Determine to whom to extend credit.
(2) Establish a payment period.
(3) Monitor collections.
(4) Evaluate the liquidity of receivables.
(5) Accelerate cash receipts from receivables when necessary.
LO 4 BT: K Difficulty: Medium TOT: 3 min. AACSB: None AICPA FC: Reporting
18. A company can prepare an aging schedule to monitor collection success. An aging schedule provides
information about the overall collection experience of a company and identifies problem accounts.
LO 4 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting
19. A concentration of credit risk is a threat of nonpayment from either a single large customer or class
of customers that could adversely affect the company’s financial health.
LO 4 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting
20. An increase in the current ratio normally indicates an improvement in short-term liquidity. This may
not always be the case because the composition of current assets may vary. In order to determine if
the increase is an improvement in financial health, other ratios that should be considered include:
accounts receivable turnover ratio and average collection period.
LO 4 BT: C Difficulty: Medium TOT: 4 min. AACSB: None AICPA FC: Reporting
21. An increase of more than 100% in the average collection period is probably caused by the adoption
of looser credit standards. The new sales director may have increased sales by extending credit to
customers that did not meet the company’s previous credit standards. Management should try
to determine if the longer collection period jeopardizes the company’s overall financial position.
It should compare its collection period to that of its competitors to determine if it is reasonable. It
should also monitor collections to see if the additional sales are producing significant increases in
costs associated with collection and bad debts. To reduce the average collection period,
management might consider offering a sales discount to encourage customers to pay sooner.
LO 4 BT: AN Difficulty: Hard TOT: 5 min. AACSB: Analytic AICPA FC: Reporting
22. Net credit sales for the period are 9.05 X $3,424 million = $30,987.2 million.
Average collection period in days = 365 days ÷ 9.05 = 40.3 days.
LO 4 BT: AP Difficulty: Medium TOT: 4 min. AACSB: Analytic AICPA FC: Reporting
23. Sales revenue is recorded when goods or services are provided, even if cash is yet to be
received. As a consequence, if sales are growing rapidly, cash collections are sometimes signifi–
cantly lower than sales.
LO 4 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting
24. Cash collections can be determined by adjusting Sales Revenue for the net change in Accounts
Receivable. An increase in the receivables balance is deducted from Sales Revenue, a decrease in
the receivables balance is added to Sales Revenue.
LO 4 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 8-1
(a) Other receivables.
BRIEF EXERCISE 8-2
(a) Accounts Receivable ………………………………………… 23,000
Sales Revenue ………………………………………….. 23,000
BRIEF EXERCISE 8-3
(a) Allowance for Doubtful Accounts ……………………… 4,300
Accounts Receivable ………………………………… 4,300
BRIEF EXERCISE 8-4
Accounts Receivable ………………………………………………. 4,300
BRIEF EXERCISE 8-5
(a) Bad Debt Expense
BRIEF EXERCISE 8-6
(a) Cash ($200 – $6) ………………………………………………. 194
BRIEF EXERCISE 8-7
Interest Maturity Date
(a) $800 August 9
BRIEF EXERCISE 8-8
Maturity Date Annual Interest Rate Total Interest
(a) May 31 9% $9,000
BRIEF EXERCISE 8-9
Jan. 10 Accounts Receivable ………………………………… 8,000
BRIEF EXERCISE 8-10
(a) Bad Debt Expense ………………………………………….. 18,000
(b) Current assets
Cash ………………………………………………………… $ 90,000
(c) Accounts receivable turnover =
$3,000,000
$300,000
= 10 times
BRIEF EXERCISE 8-11
Accounts Receivable Turnover:
$23.1B $23.1B
Average Collection Period:
LO 4 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Measurement and Reporting
BRIEF EXERCISE 8-12
Accounts Receivable
Beg. 70,000
or
Sales
–
Increase in Receivables
=
Cash Collections
$598,000
–
($91,000 – $70,000)
=
$577,000
SOLUTIONS TO DO IT! EXERCISES
DO IT! 8-1
Mar. 1 Accounts Receivable ………………………………… 28,000
Sales Revenue …………………………………… 28,000
LO 1 BT: AP Difficulty: Medium TOT: 8 min. AACSB: Analytic AICPA FC: Reporting
DO IT! 8-2a
The following entry should be prepared to bring the balance in the Allow–
ance for Doubtful Accounts up from $5,700 credit to $21,700 credit (7% X
$310,000):
DO IT! 8-2b
To speed up the collection of cash, Neumann sells $170,000 of its accounts
receivable to a factor. Assuming the factor charges Neumann a 2% service
charge, it would make the following entry:
DO IT! 8-3
The interest payable at maturity is $186:
Face X Rate X Time = Income
$6,200 X 9% X 4/12 = $186
DO IT! 8-4
(a)
Net credit sales
÷
Average net
accounts receivable
=
Accounts receivable
turnover
(b)
Days in year
÷
Accounts receivable
turnover
=
Average collection
period in days
SOLUTIONS TO EXERCISES
EXERCISE 8-1
Jan. 6 Accounts Receivable—Harley Inc ……………… 9,200
Sales Revenue ……………………………………. 9,200
EXERCISE 8-2
Jan. 10 Accounts Receivable—Amise ……………………. 1,700
Sales Revenue ……………………………………. 1,700
EXERCISE 8-3
(a) Accounts Receivable …………………………………….. 800,000
Sales Revenue ………………………………………….. 800,000
EXERCISE 8-3 (Continued)
(c) Accounts Receivable …………………………………….. 3,100
Allowance for Doubtful Accounts ……………… 3,100
(d) Bad Debt Expense…………………………………………. 20,200
Allowance for Doubtful Accounts ………….. 20,200
Allowance for Doubtful Accounts
Beg. Bal. 9,000
(e) Accounts Receivable Allowance for Doubtful Accounts
Beg. Bal. 200,000 Collections 763,000 Beg. Bal. 9,000
EXERCISE 8-4
(a) Dec. 31 Bad Debt Expense …………………………………….. 900
EXERCISE 8-4 (Continued)
(c) Dec. 31 Bad Debt Expense …………………………………….. 6,740
Allowance for Doubtful Accounts
EXERCISE 8-5
(a) Accounts Receivable Amount % Estimated Uncollectible
Current $65,000 2 $1,300
(b) Mar. 31 Bad Debt Expense …………………………………….. 6,575
Allowance for Doubtful Accounts
(c) The total balance of receivables increased from 2016 to 2017. However,
of concern is the fact that each of the three categories of older accounts
EXERCISE 8-6
December 31, 2016
Bad Debt Expense ………………………………………………….. 9,500
EXERCISE 8-6 (Continued)
May 11, 2017
Allowance for Doubtful Accounts ……………………………. 1,200
Accounts Receivable—Jared ……………………………. 1,200
EXERCISE 8-7
Mar. 3 Cash ($710,000 – $28,400) …………………………. 681,600
EXERCISE 8-8
May 10 Cash ($4,000 – $152) …………………………………. 3,848
EXERCISE 8-9
July 4 Cash ($250 – $10) ……………………………………… 240
EXERCISE 8-10
Nov. 1 Notes Receivable ……………………………………… 60,000
Cash …………………………………………………… 60,000
Dec. 11 Notes Receivable ……………………………………… 3,600
Sales Revenue ……………………………………. 3,600
EXERCISE 8-11
2016
May 1 Notes Receivable ……………………………………… 5,000
Accounts Receivable—R. Stoney ………… 5,000
(At the end of each year, interest is accrued for the time elapsed since the
date of a note.)
2017
May 1 Cash ………………………………………………………… 5,300
Notes Receivable ………………………………… 5,000
EXERCISE 8-12
EILEEN CORP.
Balance Sheet (Partial)
October 31, 2017
(in thousands)
Receivables
Notes receivable ………………………………………………… $1,353
Accounts receivable ………………………………………….. 2,910
EXERCISE 8-13
(a) 2. Reviewing company ratings in the Dun and Bradstreet Reference Book
of American Business.
EXERCISE 8-14
(a)
Accounts receivable
turnover
$35,497
= = 9.2 times
($3,391 + $4,359)/2
EXERCISE 8-14 (Continued)
(b) Accounts receivable comprise 48% ($3,391/$7,116) of the company’s
total current assets. This is certainly a material component.
EXERCISE 8-15
(a) At first glance it appears that Ming’s liquidity had deteriorated over the
past year since the company’s current ratio has fallen from 1.5:1 to 1.3:1.
However, it is taking the company less time to collect its accounts receiv-
able as evidenced by the higher accounts receivable turnover. The
company also appears to be moving its inventory more quickly as
evidenced by the higher inventory turnover. It is possible that the
lower current ratio is due to the fact that with improved collections and
inventory turnover, the company is carrying fewer current assets and not
because the company’s liquidity has deteriorated.
(b) Changes in the turnover ratios do not directly affect profitability. However,
improvements in turnover generally indicate that the company is better
able to convert sales to cash. Improved liquidity could allow the com–
pany to better manage its cash flows and therefore, indirectly improve
profitability.
(c) There are several steps that Ming might have taken to improve its
receivables and inventory turnover:
Receivables
– The company could limit credit to only the best customers, however,
this could negatively affect sales.
– The company could initiate the use of a cash discount to encourage
early payment of receivables.
EXERCISE 8-15 (Continued)
– The company could more aggressively monitor collections to encour-
age customers to pay on time.
– The company could sell its receivables to a factor to accelerate cash
receipts.
Inventory
– The company could limit the amount of inventory by improving its
purchasing relationships with suppliers. If inventory could be pur-
chased more frequently, required inventory levels could be reduced.
LO 4 BT: AN Difficulty: Hard TOT: 15 min. AACSB: Analytic AICPA FC: Measurement and Reporting
EXERCISE 8-16
One possible reason Office Depot chose to sell its receivables may have
been to improve its financial ratios. Other reasons include not wanting to
EXERCISE 8-17
(a)
Accounts Receivable
Beg 38,000