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Chapter 8
Receivables
Review Questions
1. What is the difference between accounts receivable and notes receivable?
Accounts receivable represent the right to receive cash in the future from customers for goods sold
2. List some common examples of other receivables, besides accounts receivable and notes receivable.
3. What is a critical element of internal control in the handling of receivables by a business? Explain
how this element is accomplished .
A critical element of internal control is the separation of cash-handling and cash-accounting duties.
4. When dealing with receivables, give an example of a subsidiary account.
5. What type of account must the sum of all subsidiary accounts be equal to?
6. What are some benefits to a business in accepting credit cards and debit cards?
The benefits to a business of accepting credit cards and debit cards include the ability to attract more
8-2
7. What occurs when a business factors its receivables?
When a business factors its receivables, it sells its receivables to a finance company or bank (often
8. What occurs when a business pledges its receivables?
In a pledging situation, a business uses its receivables as security for a loan. The business borrows
9. What is the expense account associated with the cost of uncollectible receivables called?
10. When is bad debts expense recorded when using the direct write-off method?
11. What are some limitations of using the direct write-off method?
Limitations of the direct write-off method are that it violates the matching principle and is not
12. When is bad debts expense recorded when using the allowance method?
13. When using the allowance method, how are accounts receivable shown on the balance sheet?
14. When using the allowance method, what account is debited when writing off uncollectible accounts?
How does this differ from the direct write-off method?
15. When a receivable is written off under the allowance method, how does it affect the net realizable
value shown on the balance sheet?
16. How does the percent-of-sales method compute bad debts expense?
The percent-of-sales method computes bad debts expense as a percentage of net credit sales.
17. How do the percent-of-receivables and aging-of-receivables methods compute bad debts expense?
In both the percent-of-receivables method and aging-of-receivables method, the business determines
18. What is the difference between the percent-of-receivables and aging-of-receivables methods?
In the percent-of-receivables method, the business uses only one percentage to determine the balance
19. In accounting for bad debts, how do the income statement approach and the balance sheet approach
differ?
The income statement approach focuses on the amount of expense, Bad Debt Expense, that is
20. What is the formula to compute interest on a note receivable?
21. Why must companies record accrued interest revenue at the end of the accounting period?
The interest revenue earned on the note up to year-end is part of that year’s earnings. Interest
8-4
22. How is the acid-test ratio calculated, and what does it signify?
23. What does the accounts receivable turnover ratio measure, and how is it calculated?
24. What does the days’ sales in receivables indicate, and how is it calculated?
Days’ sales in receivables, also called the collection period, indicates how many days it takes to
8-5
Short Exercises
S8-1 Ensuring internal control over the collection of receivables
Learning Objective 1Consider internal control over receivables collections. What job must be withheld
from a company’s credit department in order to safeguard its cash? If the credit department does perform
this job, what can a credit department employee do to hurt the company?
SOLUTION
The company’s credit department should not take customer payments or have any other cash-handling
S8-2 Recording credit sales and collections
Learning Objective 1
Record the following transactions for Summer Consulting. Explanations are not required.
Apr.
15
Provided consulting services to Bob Jones and billed the customer
$1,500.
18
Provided consulting services to Samantha Cruise and billed the
customer $865.
25
Received $750 cash from Jones.
28
Provided consulting services to Regan Taylor and billed the
customer $625.
28
Received $865 cash from Cruise.
30
Received $1,375 cash, $750 from Jones and $625 from Taylor.
8-6
SOLUTION
Date
Accounts and Explanation
Debit
Credit
Apr. 15
Accounts Receivable—Jones
1,500
Service Revenue
1,500
S8-3 Applying the direct write-off method to account for uncollectibles
Learning Objective 2
Shawna Valley is an attorney in Los Angeles. Valley uses the direct write-off method to account for
uncollectible receivables.
At April 30, 2018, Valley’s accounts receivable totaled $19,000. During May, she earned revenue of
$22,000 on account and collected $15,000 on account. She also wrote off uncollectible receivables of
$1,100 on May 31, 2018.
Requirements
1. Use the direct write-off method to journalize Valley’s write-off of the uncollectible receivables.
2. What is Valley’s balance of Accounts Receivable at May 31, 2018?
8-7
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
May 31
Bad Debts Expense
1,100
S8-4 Collecting a receivable previously written off—direct write-off method
Learning Objective 2
Spring Garden Greenhouse had trouble collecting its account receivable from Steve Stone. On June 19,
2018, Spring Garden Greenhouse finally wrote off Stone’s $600 account receivable. On December 31,
Stone sent a $600 check to Spring Garden Greenhouse.
Journalize the entries required for Spring Garden Greenhouse, assuming Spring Garden Greenhouse
uses the direct write-off method.
SOLUTION
Date
Accounts and Explanation
Debit
Credit
2018
Jun. 19
Bad Debts Expense
600
Accounts Receivable—Stone
600
S8-5 Applying the allowance method to account for uncollectibles
Learning Objective 3
The Accounts Receivable balance and Allowance for Bad Debts for Signature Lamp Company at
December 31, 2017, was $10,800 and $2,000 (credit balance), respectively. During 2018, Signature
Lamp Company completed the following transactions:
a. Sales revenue on account, $273,400 (ignore Cost of Goods Sold).
b. Collections on account, $223,000.
c. Write-offs of uncollectibles, $5,900.
d. Bad debts expense of $5,200 was recorded.
Requirements
1. Journalize Signature Lamp Company’s transactions for 2018 assuming Signature Lamp Company
uses the allowance method.
2. Post the transactions to the Accounts Receivable, Allowance for Bad Debts, and Bad Debts Expense
T-accounts, and determine the ending balance of each account.
3. Show how accounts receivable would be reported on the balance sheet at December 31, 2018.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
2018
a.
Accounts Receivable
273,400
Sales Revenue
273,400
8-9
S8-5, cont.
Requirement 2
Accounts Receivable
Dec. 31, 2017, Bal.
10,800
223,000
Collections
Net credit sales
273,400
5,900
Write-offs
Dec. 31, 2018, Bal.
55,300
Requirement 3
SIGNATURE LAMP COMPANY
Balance Sheet−Partial
December 31, 2018
S8-6 Applying the allowance method (percent-of-sales) to account for uncollectibles
Learning Objective 3
During its first year of operations, Fall Wine Tour earned net credit sales of $311,000. Industry
experience suggests that bad debts will amount to 3% of net credit sales. At December 31, 2018,
accounts receivable total $44,000. The company uses the allowance method to account for
uncollectibles.
Requirements
1. Journalize Fall Wine Tour’s Bad Debts Expense using the percent-of-sales method.
2. Show how to report accounts receivable on the balance sheet at December 31, 2018.
8-10
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
2018
Requirement 2
FALL WINE TOUR
Balance Sheet−Partial
December 31, 2018
S8-7 Applying the allowance method (percent-of-receivables) to account for uncollectibles
Learning Objective 3
The Accounts Receivable balance for Lake, Inc. at December 31, 2017, was $20,000. During 2018, Lake
earned revenue of $454,000 on account and collected $325,000 on account. Lake wrote off $5,600
receivables as uncollectible. Industry experience suggests that uncollectible accounts will amount to 5%
of accounts receivable.
Requirements
1. Assume Lake had an unadjusted $2,700 credit balance in Allowance for Bad Debts at December 31,
2018. Journalize Lake’s December 31, 2018, adjustment to record bad debts expense using the
percent-of-receivables method.
2. Assume Lake had an unadjusted $2,400 debit balance in Allowance for Bad Debts at December 31,
2018. Journalize Lake’s December 31, 2018, adjustment to record bad debts expense using the
percent-of-receivables method.
8-11
SOLUTION
Requirement 1
Accounts Receivable
Dec. 31, 2017, Bal.
20,000
325,000
Collections
Net credit sales
454,000
5,600
Write-offs
Dec. 31, 2018, Bal.
143,400
8-12
S8-8 Applying the allowance method (aging-of-receivables) to account for uncollectibles
Learning Objective 3
Surf and Sun had the following balances at December 31, 2018, before the year-end adjustments:
The aging of accounts receivable yields the following data:
Requirements
1. Journalize Surf and Sun’s entry to record bad debts expense for 2018 using the aging-of-receivables
method.
2. Prepare a T-account to compute the ending balance of Allowance for Bad Debts.
SOLUTION
Requirement 1
Age of Accounts Receivable
0 – 60 Days
Over 60 Days
Total Receivables
Accounts Receivable
$78,000
$3,000
$81,000
8-13
S8-9 Computing interest amounts on notes receivable
Learning Objective 4
A table of notes receivable for 2018 follows:
Principal
Interest Rate
Interest Period During
2018
Note 1
$ 30,000
6%
6 months
Note 2
12,000
10%
270 days
Note 3
14,000
14%
75 days
Note 4
100,000
7%
10 months
For each of the notes receivable, compute the amount of interest revenue earned during 2018. Round to
the nearest dollar.
SOLUTION
Principal
Interest
Rate
Interest
Period
Interest
Revenue
Earned
S8-10 Accounting for a note receivable
Learning Objective 4
On June 6, Lakeland Bank & Trust lent $80,000 to Stephan Stow on a 30-day, 9% note.
Requirements
1. Journalize for Lakeland the lending of the money on June 6.
2. Journalize the collection of the principal and interest at maturity. Specify the date. Round to the
nearest dollar.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
S8-10, cont.
Requirement 2
S8-11 Accruing interest revenue and recording collection of a note
Learning Objective 4
On December 1, Kyle Corporation accepted a 60-day, 9%, $12,000 note receivable from J. Michael in
exchange for his account receivable.
Requirements
1. Journalize the transaction on December 1.
2. Journalize the adjusting entry needed on December 31 to accrue interest revenue. Round to the
nearest dollar.
3. Journalize the collection of the principal and interest at maturity. Specify the date. Round to the
nearest dollar.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
Requirement 2
Date
Accounts and Explanation
Debit
Credit
Requirement 3
Date
Accounts and Explanation
Debit
Credit
8-15
S8-12 Recording a dishonored note receivable
Learning Objective 4
cKale Corporation has a three-month, $18,000, 9% note receivable from L. Peters that was signed on
June 1, 2018. Peters defaults on the loan on September 1.
Journalize the entry for McKale to record the default of the loan
SOLUTION
Date
Accounts and Explanation
Debit
Credit
2018
S8-13 Using the acid-test ratio, accounts receivable turnover ratio, and days’ sales in receivables to
evaluate a company
Learning Objective 5
Silver Clothiers reported the following selected items at April 30, 2018 (last year’s—2017—amounts
also given as needed):
Accounts Payable
$ 328,000
Accounts Receivable,
net:
Cash
573,720
April 30, 2018
$ 11,000
Merchandise Inventory:
April 30, 2017
165,000
April 30, 2018
250,000
Cost of Goods Sold
1,200,000
April 30, 2017
210,000
Short-term Investments
148,000
Net Credit Sales
Revenue
3,212,000
Other Current Assets
100,000
Long-term Assets
350,000
Other Current
Liabilities
188,000
Long-term Liabilities
130,000
Compute Silver’s (a) acid-test ratio, (b) accounts receivable turnover ratio, and (c) days’ sales in
receivables for the year ending April 30, 2018. Evaluate each ratio value as strong or weak. Silver sells
on terms of net 30. (Round days’ sales in receivables to a whole number.)
SOLUTION
a) Acid-test ratio = (Cash including cash equivalents + Short-term investments + Net current
receivables) / Total current liabilities
Exercises
E8-14 Defining common receivables terms
Learning Objective 1
Match the terms with their correct definition.
Terms
Definitions
1. Accounts receivable
2. Other receivables
3. Debtor
4. Notes receivable
5. Maturity date
6. Creditor
a.
The party to a credit transaction who takes on an
obligation/payable.
b.
The party who receives a receivable and will collect cash
in the future.
c. A written promise to pay a specified amount of money at
a particular future date.
d.
The date when the note receivable is due.
e. A miscellaneous category that includes any other type of
receivable where there is a right to receive cash in the
future.
f. The right to receive cash in the future from customers for
goods sold or for services performed.
SOLUTION
1.
F
8-18
E8-15 Identifying and correcting internal control weakness
Learning Objective 1
Suppose The Right Rig Dealership is opening a regional office in Omaha. Cary Regal, the office
manager, is designing the internal control system. Regal proposes the following procedures for credit
checks on new customers, sales on account, cash collections, and write-offs of uncollectible receivables:
• The credit department runs a credit check on all customers who apply for credit. When an
account proves uncollectible, the credit department authorizes the write-off of the accounts
receivable.
• Cash receipts come into the credit department, which separates the cash received from the
customer remittance slips. The credit department lists all cash receipts by customer name and
amount of cash received.
• The cash goes to the treasurer for deposit in the bank. The remittance slips go to the accounting
department for posting to customer accounts.
• The controller compares the daily deposit slip to the total amount posted to customer accounts.
Both amounts must agree.
Recall the components of internal control. Identify the internal control weakness in this situation, and
propose a way to correct it.
SOLUTION
The internal control weakness is that the credit department receives incoming cash from customers.
8-19
E8-16 Recording credit sales and collections
Learning Objective 1
3. $695
Steller Corporation had the following transactions in June:
Jun. 1
Sold merchandise inventory on account to Carter Company, $1,575.
6
Sold merchandise inventory for cash, $550.
12
Received cash from Carter Company in full settlement of its accounts receivable.
20
Sold merchandise inventory on account to Iris Company, $765.
22
Sold merchandise inventory on account to Driver Company, $230.
28
Received cash from Iris Company in partial settlement of its accounts receivable, $300.
Requirements
1. Journalize the transactions. Ignore Cost of Goods Sold. Omit explanations.
2. Post the transactions to the general ledger and the accounts receivable subsidiary ledger. Assume all
beginning balances are $0.
3. Verify the ending balance in the control Accounts Receivable equals the sum of the balances in the
subsidiary ledger.
Requirement 1
Date
Accounts and Explanation
Debit
Credit
Jun. 1
Accounts Receivable—Carter Company
1,575
Sales Revenue
1,575
8-20
Requirement 2
GENERAL LEDGER
SUBSIDIARY LEDGER
Cash
Accounts Receivable—Carter
Jun. 6
550
Jun. 1
1,575
1,575
Jun. 12
12
1,575
Bal.
0
Requirement 3
Control Account—Accounts Receivable
$ 695
E8-17 Journalizing transactions using the direct write-off method
Learning Objectives 1, 2
On June 1, 2018, Best Performance Cell Phones sold $21,000 of merchandise to Anthony Trucking
Company on account. Anthony fell on hard times and on July 15 paid only $5,000 of the account
receivable. After repeated attempts to collect, Best Performance finally wrote off its accounts
receivable from Anthony on September 5. Six months later, March 5, 2019, Best Performance
received Anthony’s check for $16,000 with a note apologizing for the late payment.
Requirements
1. Journalize the transactions for Best Performance Cell Phones using the direct write-off method.
Ignore Cost of Goods Sold.
2. What are some limitations that Best Performance will encounter when using the direct write-off
method?
Use the following information to answer Exercises E8-18 and E8-19.
At January 1, 2018, Hilltop Flagpoles had Accounts Receivable of $28,000, and Allowance for Bad
Debts had a credit balance of $3,000. During the year, Hilltop Flagpoles recorded the following:
a. Sales of $185,000 ($164,000 on account; $21,000 for cash). Ignore Cost of Goods Sold.
b. Collections on account, $135,000.
c. Write-offs of uncollectible receivables, $2,300.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
2018
Jun. 1
Accounts Receivable—Anthony Trucking Company
21,000
Sales Revenue
21,000
Record sales on account.
Requirement 2
Best Performance will encounter limitations with the direct write-off method because it violates the
matching principle. The matching principle requires that the expense of uncollectible accounts be
8-22
E8-18 Accounting for uncollectible accounts using the allowance method (percent-of-sales) and
reporting receivables on the balance sheet
Learning Objectives 1, 3
2. AR, Dec. 31 $54,700
Requirements
1. Journalize Hilltop’s transactions that occurred during 2018. The company uses the allowance
method.
2. Post Hilltop’s transactions to the Accounts Receivable and Allowance for Bad Debts T-accounts.
3. Journalize Hilltop’s adjustment to record bad debts expense assuming Hilltop estimates bad debts as
3% of credit sales. Post the adjustment to the appropriate T-accounts.
4. Show how Hilltop Flagpoles will report net accounts receivable on its December 31, 2018, balance
sheet.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
2018
a.
Accounts Receivable
164,000
Cash
21,000
Requirement 2
Accounts Receivable
Jan. 1, 2018, Bal.
28,000
135,000
Collections
E8-18, cont.
Requirement 3
Date
Accounts and Explanation
Debit
Credit
2018
Dec. 31
Bad Debts Expense
4,920
Requirement 4
HILLTOP FLAGPOLES
Balance Sheet−Partial
December 31, 2018
8-24
E8-19 Accounting for uncollectible accounts using the allowance method (percent-of-receivables)
and reporting receivables on the balance sheet
Learning Objectives 1, 3
3. Bad Debts Expense $4,770
Requirements
1. Journalize Hilltop’s transactions that occurred during 2018. The company uses the allowance
method.
2. Post Hilltop’s transactions to the Accounts Receivable and Allowance for Bad Debts T-accounts.
3. Journalize Hilltop’s adjustment to record bad debts expense assuming Hilltop estimates bad debts as
10% of accounts receivable. Post the adjustment to the appropriate T-accounts.
4. Show how Hilltop Flagpoles will report net accounts receivable on its December 31, 2018, balance
sheet.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
2018
a.
Accounts Receivable
164,000
Requirement 2
Accounts Receivable
Jan. 1, 2018, Bal.
28,000
135,000
Collections
E8-19, cont.
Requirement 3
Date
Accounts and Explanation
Debit
Credit
2018
Requirement 4
HILLTOP FLAGPOLES
Balance Sheet−Partial
December 31, 2018
Assets
8-26
E8-20 Accounting for uncollectible accounts using the allowance method (aging-of-receivables)
and reporting receivables on the balance sheet
Learning Objective 3
2. Allowance CR Bal. $25,360
At December 31, 2018, the Accounts Receivable balance of GPS Technology is $200,000. The
Allowance for Bad Debts account has a $24,110 debit balance. GPS Technology prepares the following
aging schedule for its accounts receivable:
Age of Accounts
1–30
Days
31–60
Days
61–90
Days
Over 90
Days
Accounts Receivable
$ 65,000
$ 50,000
$ 40,000
$ 45,000
Estimated percent
uncollectible
0.4%
3.0%
5.0%
48.0%
Requirements
1. Journalize the year-end adjusting entry for bad debts on the basis of the aging schedule. Show the T-
account for the Allowance for Bad Debts at December 31, 2018.
2. Show how GPS Technology will report its net accounts receivable on its December 31, 2018, balance
sheet.
SOLUTION
Requirement 1
Age of Accounts Receivable
1 – 30
Days
31 – 60
Days
61 – 90
Days
Over 90
Days
Total Receivables
Accounts
Receivable
$ 65,000
$ 50,000
$ 40,000
$ 45,000
$200,000
Requirement 2
Allowance for Bad Debts
Unadj. Bal.
24,110
49,470
Adj.
25,360
Bal.
E8-21 Journalizing transactions using the direct write-off method versus the allowance method
Learning Objectives 1, 2, 3
During August 2018, Lima Company recorded the following:
• Sales of $133,300 ($122,000 on account; $11,300 for cash). Ignore Cost of Goods Sold.
• Collections on account, $106,400.
• Write-offs of uncollectible receivables, $990.
• Recovery of receivable previously written off, $800.
Requirements
1. Journalize Lima’s transactions during August 2018, assuming Lima uses the direct write-off method.
2. Journalize Lima’s transactions during August 2018, assuming Lima uses the allowance method.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
2018
Aug.
Accounts Receivable
122,000
Cash
11,300
Sales Revenue
133,300
Recorded sales for the month.
8-29
E8-21, cont.
Requirement 2
Date
Accounts and Explanation
Debit
Credit
2018
Aug.
Accounts Receivable
122,000
Cash
11,300
Sales Revenue
133,300
Record sales for the month.
E8-22 Journalizing credit sales, note receivable transactions, and accruing interest
Learning Objectives 1, 4
Endurance Running Shoes reports the following:
2018
May 6
Recorded credit sales of $102,000. Ignore Cost of Goods Sold.
Jul. 1
Loaned $18,000 to Jerry Paul, an executive with the company, on a one-year, 7% note.
Dec. 31
Accrued interest revenue on the Paul note.
2019
Jul. 1
Collected the maturity value of the Paul note.
Journalize all entries required for Endurance Running Shoes.
SOLUTION
Date
Accounts and Explanation
Debit
Credit
2018
May 6
Accounts Receivable
102,000
Sales Revenue
102,000
Recorded credit sales.
E8-23 Journalizing note receivable transactions including a dishonored note
Learning Objective 4
On September 30, 2018, Team Bank loaned $94,000 to Kendall Warner on a one-year, 6% note. Team’s
fiscal year ends on December 31.
Requirements
1. Journalize all entries for Team Bank related to the note for 2018 and 2019.
2. Which party has a
a. note receivable?
b. note payable?
c. interest revenue?
d. interest expense?
3. Suppose that Kendall Warner defaulted on the note. What entry would Team record for the
dishonored note?
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
2018
Sep. 30
Notes Receivable—Kendall Warner
94,000
Cash
94,000
Recorded loan to Kendall Warner.
8-32
E8-23, cont.
Requirement 2
a.
note receivable
Team Bank
Requirement 3
Date
Accounts and Explanation
Debit
Credit
2019
E8-24 Journalizing note receivable transactions
Learning Objective 4
Jul. 1, 2019 Cash DR $17,280
The following selected transactions occurred during 2018 and 2019 for Baltic Importers. The company
ends its accounting year on September 30.
2018
Jul. 1
Loaned $16,000 cash to Bud Shyne on a one-year, 8% note.
Sep.
6
Sold goods to Lawn Pro, receiving a 90-day, 6% note for
$11,000. Ignore Cost of Goods Sold.
30
Made a single entry to accrue interest revenue on both notes.
?
Collected the maturity value of the Lawn Pro note.
2019
Jul. 1
Collected the maturity value of the Shyne note.
Journalize all required entries. Make sure to determine the missing maturity date. Round to the nearest
dollar.
8-33
SOLUTION
Date
Accounts and Explanation
Debit
Credit
2018
Jul. 1
Notes Receivable—Shyne
16,000
Cash
16,000
Recorded loan to Bud Shyne.
E8-25 Journalizing note receivable transactions
Learning Objective 4
Oct. 31 Cash DR $18,355
Professional Steam Cleaning performs services on account. When a customer account becomes four
months old, Professional converts the account to a note receivable. During 2018, the company
completed the following transactions:
Apr. 28
Performed service on account for Parkview Club, $18,000.
Sep. 1
Received an $18,000, 60-day, 12% note from Parkview Club in satisfaction
of its past-due account receivable.
Oct. 31
Collected the Parkview Club note at maturity.
Record the transactions in Professional’s journal. Round to the nearest dollar.
SOLUTION
Date
Accounts and Explanation
Debit
Credit
2018
Apr. 28
Accounts Receivable—Parkview Club
18,000
Service Revenue
18,000
8-35
E8-26 Evaluating ratio data
Learning Objective 5
Abanaki Carpets reported the following amounts in its 2018 financial statements. The 2017 figures are
given for comparison.
2018
2017
Balance sheet—partial
Current Assets:
Cash
Short-term Investments
Accounts Receivable
Less: Allowance for Bad Debts
Merchandise Inventory
Prepaid Insurance
Total Current Assets
Total Current Liabilities
Income statement—partial
Net Sales (all on account)
$ 64,000
(7,000)
$ 5,000
25,000
57,000
194,000
2,000
283,000
105,000
742,400
$ 77,000
(6,000)
$ 11,000
14,000
71,000
190,000
2,000
288,000
107,000
730,000
Requirements
1. Calculate Abanaki’s acid-test ratio for 2018. (Round to two decimals.) Determine whether Abanaki’s
acid-test ratio improved or deteriorated from 2017 to 2018. How does Abanaki’s acid-test ratio
compare with the industry average of 0.80?
2. Calculate Abanaki’s accounts receivable turnover ratio. (Round to two decimals.) How does
Abanaki’s ratio compare to the industry average accounts receivable turnover of 10?
3. Calculate the days’ sales in receivables for 2018. (Round to the nearest day.) How do the results
compare with Abanaki’s credit terms of net 30?
8-36
SOLUTION
Requirement 1
Acid-test ratio = (Cash including cash equivalents + Short-term investments + Net current
receivables) / Total current liabilities
2018
Requirement 2
Accounts receivable turnover ratio = Net credit sales / Average net accounts receivable
2018 = $742,400 / [($57,000 +$71,000) / 2]
Requirement 3
Days’ sales in receivables = 365 days / Accounts receivable turnover ratio
8-37
E8-27 Computing the collection period for receivables
Learning Objective 5
Unique Media Sign Incorporated sells on account. Recently, Unique reported the following figures:
2018
2017
Net Credit Sales
$ 594,920
$
602,000
Net Receivables at end of
year
38,500
47,100
Requirements
1. Compute Unique’s days’ sales in receivables for 2018. (Round to the nearest day.)
2. Suppose Unique’s normal credit terms for a sale on account are 2/10, net 30. How well does
Unique’s collection period compare to the company’s credit terms? Is this good or bad for Unique?
SOLUTION
Requirement 1
Accounts receivable turnover ratio = Net credit sales / Average net accounts receivables
2018 = $594,920 / [($38,500 + $47,100) / 2]
Requirement 2
8-38
Problems (Group A)
P8-28A Accounting for uncollectible accounts using the allowance (percent-of-sales) and direct
write-off methods and reporting receivables on the balance sheet
Learning Objectives 1, 2, 3
1. Bad Debts Expense $11,000
On August 31, 2018, Bouquet Floral Supply had a $140,000 debit balance in Accounts Receivable
and a $5,600 credit balance in Allowance for Bad Debts. During September, Bouquet made:
• Sales on account, $550,000. Ignore Cost of Goods Sold.
• Collections on account, $584,000.
• Write-offs of uncollectible receivables, $4,000.
Requirements
1. Journalize all September entries using the allowance method. Bad debts expense was estimated at 2%
of credit sales. Show all September activity in Accounts Receivable, Allowance for Bad Debts, and Bad
Debts Expense (post to these T-accounts).
2. Using the same facts, assume that Bouquet used the direct write-off method to account for
uncollectible receivables. Journalize all September entries using the direct write-off method. Post to
Accounts Receivable and Bad Debts Expense, and show their balances at September 30, 2018.
3. What amount of Bad Debts Expense would Bouquet report on its September income statement under
each of the two methods? Which amount better matches expense with revenue? Give your reason.
4. What amount of net accounts receivable would Bouquet report on its September 30, 2018, balance
sheet under each of the two methods? Which amount is more realistic? Give your reason.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
2018
Sep. 30
Accounts Receivable
550,000
Sales Revenue
550,000
8-40
P8-28A, cont.
Requirement 2
Date
Accounts and Explanation
Debit
Credit
2018
Sep. 30
Accounts Receivable
550,000
Sales Revenue
550,000
Requirement 3
Income Statement
Allowance
Method
Direct Write-
Off Method
Requirement 4
Balance Sheet
Allowance
Method
Direct Write-
Off Method
8-41
P8-29A Accounting for uncollectible accounts using the allowance method (aging-of-receivables)
and reporting receivables on the balance sheet
Learning Objectives 1, 3
2. Allowance CR Bal. $8,482 at Dec. 31, 2018
At September 30, 2018, the accounts of Green Terrace Medical Center (GTMC) include the following:
Accounts Receivable
$ 145,000
Allowance for Bad Debts (credit
balance)
3,500
During the last quarter of 2018, GTMC completed the following selected transactions:
• Sales on account, $450,000. Ignore Cost of Goods Sold.
• Collections on account, $427,100
• Wrote off accounts receivable as uncollectible: Regan, Co., $1,400; Owen Reis, $800; and
Patterson, Inc., $700
• Recorded bad debts expense based on the aging of accounts receivable, as follows:
Age of Accounts
1–30 Days
31–60 Days
61–90 Days
Over 90 Days
Accounts Receivable
$ 104,000
$ 39,000
$ 14,000
$ 8,000
Estimated percent uncollectible
0.3%
3%
30%
35%
Requirements
1. Open T-accounts for Accounts Receivable and Allowance for Bad Debts. Journalize the transactions
(omit explanations) and post to the two accounts.
2. Show how Green Terrace Medical Center should report net accounts receivable on its December 31,
2018, balance sheet.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
2018
Accounts Receivable
450,000
Sales Revenue
450,000
Age of Accounts Receivable
1 – 30
Days
31 – 60
Days
61 – 90
Days
Over 90
Days
Total Receivables
Accounts
Receivable
$104,000
$39,000
$14,000
$ 8,000
$165,000
Percent
× 0.3%
× 3.0%
× 30.0%
× 35.0%
8-43
P8-29A, cont.
Requirement 2
GREEN TERRACE MEDICAL CENTER
Balance Sheet−Partial
December 31, 2018
P8-30A Accounting for uncollectible accounts using the allowance method (percent-of-sales) and
reporting receivables on the balance sheet
Learning Objectives 1, 3
2. Net AR $119,800
Delta Watches completed the following selected transactions during 2018 and 2019:
2018
Dec. 31
Estimated that bad debts expense for the year was 2% of credit sales of
$450,000 and recorded that amount as expense. The company uses the
allowance method.
31
Made the closing entry for bad debts expense.
2019
Jan. 17
Sold merchandise inventory to Mack Smith, $400, on account. Ignore Cost
of Goods Sold.
Jun. 29
Wrote off Mack Smith’s account as uncollectible after repeated efforts to
collect from him.
Aug. 6
Received $400 from Mack Smith, along with a letter apologizing for being
so late. Reinstated Smith’s account in full and recorded the cash receipt.
Dec. 31
Made a compound entry to write off the following accounts as
uncollectible: Cam Carter, $1,400; Mike Venture, $1,200; and Russell
Reeves, $400.
31
Estimated that bad debts expense for the year was 2% on credit sales of
$510,000 and recorded the expense.
31
Made the closing entry for bad debts expense.
Requirements
1. Open T-accounts for Allowance for Bad Debts and Bad Debts Expense, assuming the accounts begin
with a zero balance. Record the transactions in the general journal (omit explanations), and post to
the two T-accounts.
2. Assume the December 31, 2019, balance of Accounts Receivable is $136,000. Show how net
accounts receivable would be reported on the balance sheet at that date.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
2018
Dec. 31
Bad Debts Expense
9,000
Allowance for Bad Debts
9,000
(2% × $450,000 = $9,000)
8-45
P8-30A, cont.
Requirement 1, cont.
Allowance for Bad Debts
0
Beginning Bal.
9,000
Dec. 31, Adj.
9,000
Dec. 31, 2018, Bal.
Bad Debts Expense
Beginning Bal.
0
Dec. 31, Adj.
9,000
Adj. Bal.
9,000
Requirement 2
DELTA WATCHES
Balance Sheet−Partial
December 31, 2019
Assets
Current Assets:
8-46
P8-31A Accounting for uncollectible accounts (aging-of-receivables method), notes receivable, and
accrued interest revenue
Learning Objectives 1, 3, 4
Dec. 31, 2018 Interest Receivable $1,640
Sleepy Recliner Chairs completed the following selected transactions:
2018
Jul. 1
Sold merchandise inventory to Stan-Mart, receiving a $41,000, nine-month,
8% note. Ignore Cost of Goods Sold.
Oct. 31
Recorded cash sales for the period of $24,000. Ignore Cost of Goods Sold.
Dec. 31
Made an adjusting entry to accrue interest on the Stan-Mart note.
31
Made an adjusting entry to record bad debts expense based on an aging of
accounts receivable. The aging schedule shows that $13,800 of accounts
receivable will not be collected. Prior to this adjustment, the credit balance
in Allowance for Bad Debts is $11,800.
2019
Apr. 1
Collected the maturity value of the Stan-Mart note.
Jun. 23
Sold merchandise inventory to Appeal, Corp., receiving a 60-day, 6% note
for $7,000. Ignore Cost of Goods Sold.
Aug.
22
Appeal, Corp. dishonored its note at maturity; the business converted the
maturity value of the note to an account receivable.
Nov.
16
Loaned $17,000 cash to Crosby, Inc., receiving a 90-day, 16% note.
Dec. 5
Collected in full on account from Appeal, Corp.
31
Accrued the interest on the Crosby, Inc. note.
Record the transactions in the journal of Sleepy Recliner Chairs. Explanations are not required. (Round
to the nearest dollar.)
SOLUTION
Date
Accounts and Explanation
Debit
Credit
2018
Jul. 1
Notes Receivable—Stan-Mart
41,000
Sales Revenue
41,000
2019
Apr. 1
Cash ($41,000 + $1,640 + $820)
43,460
Interest Receivable
1,640
Interest Revenue ($41,000 × 0.08 × 3/12)
820
Notes Receivable—Stan-Mart
41,000
Jun. 23
Notes Receivable—Appeal, Corp.
7,000
Sales Revenue
7,000
Aug. 22
Accounts Receivable—Appeal, Corp.
7,069
Interest Revenue ($7,000 × 0.06 × 60/365)
69
Notes Receivable – Appeal, Corp.
7,000
8-48
P8-32A Accounting for notes receivable and accruing interest
Learning Objective 4
1. Note 3 Dec. 18, 2018
Carley Realty loaned money and received the following notes during 2018.
Note
Date
Principal
Amount
Interest
Rate
Term
(1)
Apr. 1
$ 6,000
7%
1 year
(2)
Sep. 30
12,000
6%
6
months
(3)
Sep. 19
18,000
8%
90 days
Requirements
1. Determine the maturity date and maturity value of each note.
2. Journalize the entries to establish each Note Receivable and to record collection of principal and
interest at maturity. Include a single adjusting entry on December 31, 2018, the fiscal year-end, to
record accrued interest revenue on any applicable note. Explanations are not required. Round to the
nearest dollar.
SOLUTION
Requirement 1
Principal
Interest
Rate
Interest
Period
Interest
Revenue
Earned
Maturity
Value
(P + I)
Maturity
Date
Requirement 2
Date
Accounts and Explanation
Debit
Credit
2018
Apr. 1
Notes Receivable (Note 1)
6,000
Cash
6,000
Principal
Interest
Rate
Interest
Period
Interest
Revenue
Earned
Note 1
$ 6,000
× 0.07
× 9/12
$ 315
Note 2
12,000
× 0.06
× 3/12
180
$ 495
Date
Accounts and Explanation
Debit
Credit
2019
Mar. 30
Cash ($12,000 + $180 + $180)
12,360
Interest Receivable
180
8-50
P8-33A Accounting for notes receivable, dishonored notes, and accrued interest revenue
Learning Objective 4
Dec. 31, 2018 Income Summary CR $74
Consider the following transactions for CC Publishing.
2018
Dec.
6
Received a $18,000, 90-day, 6% note in settlement of an overdue
accounts receivable from Go Go Publishing.
31
Made an adjusting entry to accrue interest on the Go Go Publishing
note.
31
Made a closing entry for interest revenue.
2019
Mar.
6
Collected the maturity value of the Go Go Publishing note.
Jun.
30
Loaned $11,000 cash to Lincoln Music, receiving a six-month, 20%
note.
Oct. 2
Received a $2,400, 60-day, 20% note for a sale to Tusk Music. Ignore
Cost of Goods Sold.
Dec.
1
Tusk Music dishonored its note at maturity.
1
Wrote off the receivable associated with Tusk Music. (Use the
allowance method.)
30
Collected the maturity value of the Lincoln Music note.
Journalize all transactions for CC Publishing. Round all amounts to the nearest dollar.
8-51
SOLUTION
Date
Accounts and Explanation
Debit
Credit
2018
Dec. 6
Notes Receivable—Go Go Publishing
18,000
Accounts Receivable—Go Go Publishing
18,000
Jun. 30
Notes Receivable—Lincoln Music
11,000
Cash
11,000
Oct. 2
Notes Receivable—Tusk Music
2,400
Sales Revenue
2,400
Dec. 1
Accounts Receivable—Tusk Music
2,479
Interest Revenue ($2,400 × 0.20 × 60/365)
79
Notes Receivable—Tusk Music
2,400
8-52
P8-34A Using ratio data to evaluate a company’s financial position
Learning Objective 5
1. Acid-test ratio (2018) 0.88
The comparative financial statements of Norfolk Cosmetic Supply for 2018, 2017, and 2016 include the
data shown here:
2018
2017
2016
Balance sheet—partial
Current Assets:
Cash
Short-term investments
Accounts Receivable, Net
Merchandise Inventory
Prepaid Expenses
Total Current Assets
Total Current Liabilities
Income statement—partial
Net Sales (all on account)
$ 70,000
140,000
280,000
355,000
70,000
915,000
560,000
5,890,000
$ 60,000
170,000
240,000
330,000
35,000
835,000
630,000
5,130,000
$ 50,000
120,000
260,000
310,000
35,000
775,000
640,000
4,210,000
Requirements
1. Compute these ratios for 2018 and 2017:
a. Acid-test ratio (Round to two decimals.)
b. Accounts receivable turnover (Round to two decimals.)
c. Days’ sales in receivables (Round to the nearest whole day.)
2. Considering each ratio individually, which ratios improved from 2017 to 2018 and which ratios
deteriorated? Is the trend favorable or unfavorable for the company?
8-53
SOLUTION
Requirement 1
a. Acid-test ratio = (Cash including cash equivalents + Short-term investments + Net current
receivables) / Total current liabilities
2018
b. Accounts receivable turnover ratio = Net credit sales / Average net accounts receivables
c. Days’ sales in receivables = 365 days / Accounts receivable turnover ratio
2018 = 365 days / 22.65
Requirement 2
The acid-test ratio improved from 2017 to 2018. This trend is favorable to the company.
8-54
Problems (Group B)
P8-35B Accounting for uncollectible accounts using the allowance (percent-of-sales) and direct
write-off methods and reporting receivables on the balance sheet
Learning Objectives 1, 2, 3
1. Sep. 30 Bal. Accounts Receivable $91,000
On August 31, 2018, Forget-Me-Not Floral Supply had a $140,000 debit balance in Accounts
Receivable and a $5,600 credit balance in Allowance for Bad Debts. During September, Forget-Me-Not
made the following transactions:
• Sales on account, $530,000. Ignore Cost of Goods Sold.
• Collections on account, $573,000.
• Write-offs of uncollectible receivables, $6,000.
Requirements
1. Journalize all September entries using the allowance method. Bad debts expense was estimated at 2%
of credit sales. Show all September activity in Accounts Receivable, Allowance for Bad Debts, and
Bad Debts Expense (post to these T-accounts).
2. Using the same facts, assume that Forget-Me-Not used the direct write-off method to account for
uncollectible receivables. Journalize all September entries using the direct write-off method. Post to
Accounts Receivable and Bad Debts Expense, and show their balances at September 30, 2018.
3. What amount of Bad Debts Expense would Forget-Me-Not report on its September income statement
under each of the two methods? Which amount better matches expense with revenue? Give your
reason.
4. What amount of net accounts receivable would Forget-Me-Not report on its September 30, 2018,
balance sheet under each of the two methods? Which amount is more realistic? Give your reason.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
2018
Sep. 30
Accounts Receivable
530,000
Sales Revenue
530,000
Accounts Receivable
Aug. 31 Bal.
140,000
573,000
Collections
Net credit sales
530,000
6,000
Write-offs
Sep. 30 Bal.
91,000
8-56
P8-35B, cont.
Requirement 2
Date
Accounts and Explanation
Debit
Credit
2018
Sep. 30
Accounts Receivable
530,000
Sales Revenue
530,000
Accounts Receivable
Aug. 31 Bal.
140,000
573,000
Collections
Net credit sales
530,000
6,000
Write-offs
Sep. 30 Bal.
91,000
Requirement 3
Allowance
Direct Write-
8-57
P8-35B, cont.
Requirement 4
Balance Sheet
Allowance
Method
Direct Write-
Off Method
Accounts Receivable
$ 91,000
$ 91,000
Less: Allowance for Bad Debts
(10,200)
Accounts Receivable, net
$ 80,800
Net accounts receivable under the allowance method is more realistic because it shows the amount of the
receivables that the company expects to collect.
P8-36B Accounting for uncollectible accounts using the allowance method (aging-of-receivables) and
reporting receivables on the balance sheet
Learning Objectives 1, 3
2. Dec. 31, 2018 Allowance CR Bal. $11,401
At September 30, 2018, the accounts of Spring Mountain Medical Center (SMMC) include the
following:
Accounts Receivable
$145,000
Allowance for Bad Debts (credit
balance)
3,400
During the last quarter of 2018, SMMC completed the following selected transactions:
• Sales on account, $475,000. Ignore Cost of Goods Sold.
• Collections on account, $451,800.
• Wrote off accounts receivable as uncollectible: Randall, Co., $1,800; Oliver Welch, $900; and Rain,
Inc., $500
• Recorded bad debts expense based on the aging of accounts receivable, as follows:
Age of Accounts
1–30
Days
31–60
Days
61–90
Days
Over 90
Days
Accounts Receivable
$ 97,000
$ 37,000
$ 17,000
$ 14,000
Estimated percent
uncollectible
0.3%
3%
30%
35%
Requirements
1. Open T-accounts for Accounts Receivable and Allowance for Bad Debts. Journalize the transactions
(omit explanations) and post to the two accounts.
2. Show how Spring Mountain Medical Center should report net accounts receivable on its December
31, 2018, balance sheet.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
2018
Accounts Receivable
475,000
Sales Revenue
475,000
Age of Accounts Receivable
1 – 30
Days
31 – 60
Days
61 – 90
Days
Over 90
Days
Total Receivables
Requirement 2
Accounts Receivable
Sep. 30 Bal.
145,000
451,800
Collections
Net credit sales
475,000
3,200
Write-offs
Dec. 31 Bal.
165,000
8-59
P8-36B, cont.
Requirement 3
SPRING MOUNTAIN MEDICAL CENTER
Balance Sheet−Partial
December 31, 2018
P8-37B Accounting for uncollectible accounts using the allowance method (percent-of-sales) and
reporting receivables on the balance sheet
Learning Objectives 1, 3
1. Dec. 31, 2018, Allowance CR Bal. $12,300
Dialex Watches completed the following selected transactions during 2018 and 2019:
2018
Dec.
31
Estimated that bad debts expense for the year was 3% of credit sales
of $410,000 and recorded that amount as expense. The company
uses the allowance method.
31
Made the closing entry for bad debts expense.
2019
Jan. 17
Sold merchandise inventory to Marty White, $400, on account.
Ignore Cost of Goods Sold.
Jun.
29
Wrote off Marty White’s account as uncollectible after repeated
efforts to collect from him.
Aug. 6
Received $400 from Marty White, along with a letter apologizing
for being so late. Reinstated White’s account in full and recorded
the cash receipt.
Dec.
31
Made a compound entry to write off the following accounts as
uncollectible: Barry Krisp, $1,600; Maria Bryant, $1,100; and
Richard Renik, $400.
31
Estimated that bad debts expense for the year was 3% on credit
sales of $490,000 and recorded the expense.
31
Made the closing entry for bad debts expense.
Requirements
1. Open T-accounts for Allowance for Bad Debts and Bad Debts Expense, assuming the accounts begin
with a zero balance. Record the transactions in the general journal (omit explanations), and post to
the two T-accounts.
2. Assume the December 31, 2019, balance of Accounts Receivable is $136,000. Show how net
accounts receivable would be reported on the balance sheet at that date.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
2018
Dec. 31
Bad Debts Expense
12,300
Allowance for Bad Debts
12,300
(3% × $410,000 = $12,300)
8-61
P8-37B, cont.
Requirement 1, cont.
Allowance for Bad Debts
0
Beginning Bal.
12,300
Dec. 31, Adj.
Bad Debts Expense
Beginning Bal.
0
Dec. 31, Adj.
12,300
Adj. Bal.
12,300
12,300
Dec. 31, Closing
Requirement 2
DIALEX WATCHES
Balance Sheet−Partial
December 31, 2019
8-62
P8-38B Accounting for uncollectible accounts (aging-of-receivables method), notes receivable, and
accrued interest revenue
Learning Objectives 1, 3, 4
Dec. 31, 2018 Bad Debts Expense $4,200
Relax Recliner Chairs completed the following selected transactions:
2018
Jul. 1
Sold merchandise inventory to Go-Mart, receiving a $43,000,
nine-month, 16% note. Ignore Cost of Goods Sold.
Oct. 31
Recorded cash sales for the period of $23,000. Ignore Cost of
Goods Sold.
Dec. 31
Made an adjusting entry to accrue interest on the Go-Mart note.
31
Made an adjusting entry to record bad debts expense based on an
aging of accounts receivable. The aging schedule shows that
$14,900 of accounts receivable will not be collected. Prior to this
adjustment, the credit balance in Allowance for Bad Debts is
$10,700.
2019
Apr. 1
Collected the maturity value of the Go-Mart note.
Jun. 23
Sold merchandise inventory to Allure, Corp., receiving a 60-day,
6% note for $7,000. Ignore Cost of Goods Sold.
Aug. 22
Allure, Corp. dishonored its note at maturity; the business
converted the maturity value of the note to an account receivable.
Nov. 16
Loaned $20,000 cash to Tench, Inc., receiving a 90-day, 8% note.
Dec. 5
Collected in full on account from Allure, Corp.
31
Accrued the interest on the Tench, Inc. note.
Record the transactions in the journal of Relax Recliner Chairs. Explanations are not required. (Round to
the nearest dollar.)
SOLUTION
Date
Accounts and Explanation
Debit
Credit
2018
Jul. 1
Notes Receivable—Go-Mart
43,000
Sales Revenue
43,000
8-64
P8-39B Accounting for notes receivable and accruing interest
Learning Objective 4
1. Note 2 Maturity Value $20,430
Logan Realty loaned money and received the following notes during 2018.
Note
Date
Principal Amount
Interest Rate
Term
(1)
Oct. 1
$ 16,000
7%
1 year
(2)
Jun. 30
18,000
18%
9 months
(3)
Sep. 19
12,000
8%
90 days
Requirements
1. Determine the maturity date and maturity value of each note.
2. Journalize the entries to establish each Note Receivable and to record collection of principal and
interest at maturity. Include a single adjusting entry on December 31, 2018, the fiscal year-end, to
record accrued interest revenue on any applicable note. Explanations are not required. Round to the
nearest dollar.
SOLUTION
Requirement 1
Principal
Interest
Rate
Interest
Period
Interest
Revenue
Earned
Maturity
Value
(P + I)
Maturity
Date
Requirement 2
Date
Accounts and Explanation
Debit
Credit
2018
Oct. 1
Notes Receivable (Note 1)
16,000
Cash
16,000
Principal
Interest
Rate
Interest
Period
Interest
Revenue
Earned
Note 1
$ 16,000
× 0.07
× 3/12
$ 280
Note 2
18,000
× 0.18
× 6/12
1,620
$ 1,900
Date
Accounts and Explanation
Debit
Credit
2019
Mar. 30
Cash ($18,000 + $1,620 + $810)
20,430
8-66
P8-40B Accounting for notes receivable, dishonored notes, and accrued interest revenue
Learning Objective 4
March 6, 2019 Interest Revenue $128
Consider the following transactions for TLC Company.
2018
Dec.
6
Received a $8,000, 90-day, 9% note in settlement of an overdue
accounts receivable from Forest Music.
31
Made an adjusting entry to accrue interest on the Forest Music note.
31
Made a closing entry for interest revenue.
2019
Mar.
6
Collected the maturity value of the Forest Music note.
Jun.
30
Loaned $14,000 cash to Washington Music, receiving a six-month,
12% note.
Oct. 2
Received a $1,000, 60-day, 12% note for a sale to ZZZ Music. Ignore
Cost of Goods Sold.
Dec.
1
ZZZ Music dishonored its note at maturity.
1
Wrote off the receivable associated with ZZZ Music. (Use the
allowance method.)
30
Collected the maturity value of the Washington Music note.
Journalize all transactions for TLC Company. Round all amounts to the nearest dollar.
8-67
SOLUTION
Date
Accounts and Explanation
Debit
Credit
2018
Dec. 6
Notes Receivable—Forest Music
8,000
Accounts Receivable—Forest Music
8,000
8-68
P8-41B Using ratio data to evaluate a company’s financial position
Learning Objective 5
1. Days’ sales in receivables (2018) 18 days
The comparative financial statements of Newton Cosmetic Supply for 2018, 2017, and 2016 include the
data shown here:
2018
2017
2016
Balance sheet—partial
Current Assets:
Cash
$ 80,000
$ 50,000
$ 30,000
Short-term investment
150,000
170,000
125,000
Accounts Receivable, Net
310,000
260,000
220,000
Merchandise Inventory
360,000
335,000
330,000
Prepaid Expenses
50,000
30,000
35,000
Total Current Assets
950,000
845,000
740,000
Total Current Liabilities
530,000
630,000
670,000
Income statement—
partial
Net Sales (all on account)
5,850,000
5,110,000
425,000
Requirements
1. Compute these ratios for 2018 and 2017:
a. Acid-test ratio (Round to two decimals.)
b. Accounts receivable turnover (Round to two decimals.)
c. Days’ sales in receivables (Round to the nearest whole day.)
2. Considering each ratio individually, which ratios improved from 2017 to 2018 and which ratios
deteriorated? Is the trend favorable or unfavorable for the company?
SOLUTION
Requirement 1
a. Acid-test ratio = (Cash including cash equivalents + Short-term investments + Net current
receivables) / Total current liabilities
2018
c. Days' sales in receivables = 365 days / Accounts receivable turnover ratio
2018
= 365 days / 20.53
= 18 days (rounded)
2017
= 365 days / 21.29
= 17 days (rounded)
Requirement 2
The acid-test ratio improved from 2017 to 2017. This trend is favorable to the company.
8-70
Using Excel
P8-42 Using Excel for Aging Accounts Receivable
The Lake Lucerne Company uses the allowance method of estimating bad debts expense. An aging
schedule is prepared in order to calculate the balance in the allowance account. The percentage
uncollectible is calculated as follows:
1–30 Days
1%
31–60 Days
2%
61–90 Days
5%
91–365 Days
50%
After 365 days, the account is written off.
Requirements
1. Calculate the number of days each receivable is outstanding.
2. Complete the Schedule of Accounts Receivable.
3. Journalize the adjusting entry for Bad Debts Expense.
SOLUTION
The student templates for Using Excel are available online in MyAccountingLab in the Multimedia
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Continuing Problem
P8-43 Accounting for uncollectible accounts using the allowance method
This problem continues the Canyon Canoe Company situation from Chapter 7. Canyon Canoe
Company has experienced rapid growth in its first few months of operations and has had a
significant increase in customers renting canoes and purchasing T-shirts. Many of these customers
are asking for credit terms. Amber and Zack Wilson, stockholders and company managers, have
decided it is time to review their business transactions and update some of their business practices.
Their first step is to make decisions about handling accounts receivable.
So far, year to date credit sales have been $15,500. A review of outstanding receivables
resulted in the following aging schedule:
Requirements
1. The company wants to use the allowance method to estimate bad debts. Determine the estimated
bad debts expense under the following methods at June 30, 2019. Assume a zero beginning
balance for Allowance for Bad Debts. Round to the nearest dollar.
a. Percent-of-sales method, assuming 4.5% of credit sales will not be collected.
b. Percent-of-receivables method, assuming 22.5% of receivables will not be collected.
c. Aging-of-receivables method, assuming 5% of invoices 1–30 days will not be collected, 20%
of invoices 31–60 days, 40% of invoices 61–90 days, and 75% of invoices over 90 days.
2. Journalize the entry at June 30, 2019, to adjust for bad debts expense using the percent-of-sales
method.
3. Journalize the entry at June 30, 2019, to record the write-off of the Early Start Daycare invoice.
4. At June 30, 2019, open T-accounts for Accounts Receivable and Allowance for Bad Debts
before Requirements 2 and 3. Post entries from Requirements 2 and 3 to those accounts.
Assume a zero beginning balance for Allowance for Bad Debts.
5. Show how Canyon Canoe Company will report net accounts receivable on the balance sheet on
June 30, 2019.
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SOLUTION
Requirement 1
1a. Percent-of-sales method:
Bad Debt Expense
=
4.5% of credit sales
=
4.5% × $15,500
=
$698
1c. Aging-of-receivables method:
Age of Accounts as of June 30, 2019
Customer Name
1-30
Days
31-60
Days
61-90
Days
Over
90
Days
Total
Balance
P8-43, cont.
Requirements 2 and 3
Date
Accounts and Explanation
Debit
Credit
2019
Jun. 30
Bad Debt Expense
698
Requirement 4
Accounts Receivable
Allowance for Bad Debts
Requirement 5
CANYON CAONOE COMPANY
Balance Sheet−Partial
June 30, 2019
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Practice Set
P8-44 Accounting for uncollectible accounts using the allowance method and reporting net
accounts receivable on the balance sheet
This problem continues the Crystal Clear Cleaning problem begun in Chapter 2 and continued through
Chapter 7.
Crystal Clear Cleaning uses the allowance method to estimate bad debts. Consider the following
April 2019 transactions for Crystal Clear Cleaning:
Apr. 1
Performed cleaning service for Debbie’s D-list for $13,000 on account
with terms n/20.
10
Borrowed money from First Regional Bank, $30,000, making a 180-
day, 12% note.
12
After discussions with customer More Shine, Crystal Clear has
determined that $230 of the receivable owed will not be collected.
Wrote off this portion of the receivable.
15
Sold goods to Warner for $9,000 on account with terms n/30. Cost of
Goods Sold was $4,500.
28
Sold goods to Lelaine, Inc. for cash of $2,800 (cost $840).
28
Collected from More Shine, $230 of receivable previously written off.
29
Paid cash for utilities of $150.
30
Created an aging schedule for Crystal Clear Cleaning for accounts
receivable. Crystal Clear determined that $7,000 of receivables
outstanding for 1–30 days were 3% uncollectible, $10,000 of
receivables outstanding for 31–60 days were 20% uncollectible, and
$5,870 of receivables outstanding for more than 60 days were 30%
uncollectible. Crystal Clear Cleaning determined the total amount of
estimated uncollectible receivables and adjusted the Allowance for
Bad Debts. Assume the account had an unadjusted credit balance of
$260. (Round to nearest whole dollar.)
Requirements
1. Prepare all required journal entries for Crystal Clear. Omit explanations.
2. Show how net accounts receivable would be reported on the balance sheet as of April 30, 2019.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
2019
Apr. 1
Accounts Receivable—Debbie’s D-list
13,000
Service Revenue
13,000
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P8-44, cont.
Requirement 1, cont.
Aging Schedule for Accounts Receivable
1-30
Days
31-60
Days
Over 60
Days
Total Balance
Requirement 2
CRYSTAL CLEAR CLEANING
Balance Sheet—Partial
April 30, 2019
Critical Thinking
Tying It All Together Case 8-1
Before you begin this assignment, review the Tying It All Together feature in the chapter. It will
Sears Holdings Corporation is the parent company of Kmart Holding Corporation and Sears, Roebuck
and Co. The corporation operates more than 1,600 retail stores in the United States and offers online
shopping through both sears.com and kmart.com.
Requirements
1. On which financial statement would you find Accounts Receivable?
2. What was the amount of Accounts Receivable as of January 30, 2016? As of January 31, 2015?
3. Review the notes to the financial statements and read the note labeled Allowance for Doubtful
Accounts in Note 1–Summary of Significant Accounting Policies. What was the amount of
Allowance for Doubtful Accounts as of January 30, 2016? As of January 31, 2015?
4. Using the information from requirements 2 and 3, determine the gross amount of Accounts
Receivable as of January 30, 2016. As of January 31, 2015.
5. Find Schedule II—Valuation and Qualifying Accounts included in the notes to the financial
statements. Draw a T-account that details the changes in the Allowance for Doubtful Accounts
account for 2015. What would additions charged to costs and expenses represent? What would
deductions from the account represent?
SOLUTION
Requirement 1
Requirement 2
Requirement 3
Requirement 4
The gross amounts of accounts receivable were $453 million and $454 million at January 30, 2016 and
January 31, 2015, respectively.
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Requirement 5
Allowance for Doubtful Accounts
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Decision Case 8-1
Weddings on Demand sells on account and manages its own receivables. Average experience for the
past three years has been as follows:
Sales
$ 350,000
Cost of Goods Sold
210,000
Bad Debts Expense
4,000
Other Expenses
61,000
Unhappy with the amount of bad debts expense she has been experiencing, Aledia Sanchez,
controller, is considering a major change in the business. Her plan would be to stop selling on account
altogether but accept either cash, credit cards, or debit cards from her customers. Her market research
indicates that if she does so, her sales will increase by 10% (i.e., from $350,000 to $385,000), of which
$200,000 will be credit or debit card sales and the rest will be cash sales. With a 10% increase in sales,
there will also be a 10% increase in Cost of Goods Sold. If she adopts this plan, she will no longer have
bad debts expense, but she will have to pay a fee on debit/credit card transactions of 2% of applicable
sales. She also believes this plan will allow her to save $5,000 per year in other operating expenses.
Should Sanchez start accepting credit cards and debit cards? Show the computations of net income
under her present arrangement and under the plan.
SOLUTION
Actual
New Plan
Expected
Sales Revenue
$ 350,000
× 1.10 =
$ 385,000
Decision Case 8-2
Pauline’s Pottery has always used the direct write-off method to account for uncollectibles. The
company’s revenues, bad debt write-offs, and year-end receivables for the most recent year follow:
Year
Revenues
Write-
offs
Receivables at Year-
end
2018
$ 150,000
$ 3,900
$ 14,000
The business is applying for a bank loan, and the loan officer requires figures based on the allowance
method of accounting for bad debts. In the past, bad debts have run about 4% of revenues.
Requirements
Pauline must give the banker the following information:
1. How much more or less would net income be for 2018 if Pauline’s Pottery were to use the allowance
method for bad debts? Assume Pauline uses the percent-of-sales method.
2. How much of the receivables balance at the end of 2018 does Pauline’s Pottery actually expect to
collect? (Disregard beginning account balances for the purpose of this question.)
3. Explain why net income is more or less using the allowance method versus the direct write-off
method for uncollectibles.
SOLUTION
Requirement 1
Bad-debts Expense:
Requirement 2
Accounts Receivable
$ 14,000
Requirement 3
Net income is lower under the allowance method, because you recognize more Bad Debts Expense in
Fraud Case 8-1
Dylan worked for a propane gas distributor as an accounting clerk in a small Midwestern town. Last
winter, his brother Mike lost his job at the machine plant. By January, temperatures were sub-zero, and
Mike had run out of money. Dylan saw that Mike’s account was overdue, and he knew Mike needed
another delivery to heat his home. He decided to credit Mike’s account and debit the balance to the parts
inventory because he knew the parts manager, the owner’s son, was incompetent and would never notice
the extra entry. Months went by, and Dylan repeated the process until an auditor ran across the charges
by chance. When the owner fired Dylan, he said, “If you had only come to me and told me about Mike’s
situation, we could have worked something out.”
Requirements
1. What can a business like this do to prevent employee fraud of this kind?
2. What effect would Dylan’s actions have on the balance sheet? The income statement?
3. How much discretion does a business have with regard to accommodating hardship situations?
SOLUTION
Requirement 1
Dylan’s journal entries should be reviewed by a manager. Employees should not be able to access
Requirement 2
The parts inventory is overstated by the amount of the past due account. However, Accounts Receivable
Requirement 3
Small business owners have full discretion to make exceptions to normal procedures as they see fit.
Financial Statement Case 8-1
Use Target Corporation’s Fiscal 2015 Annual Report and the Note 9 data on “Credit Card Receivables
Transaction” to answer the following questions. Visit http://www.pearsonhighered.com/Horngren to
view a link to Target Corporation’s annual report.
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Requirements
1. How much accounts receivable did Target report on its balance sheet as of January 30, 2016? As of
January 31, 2015?
2. Target accepts customer payments via Target brand credit cards. Refer to Note 9, “Credit Card
Receivables Transaction.” How does Target account for these credit card sales?
3. Refer to Note 9. What are the advantages to Target in handling Target brand credit card transactions
as it does? What are Target’s responsibilities concerning these credit cards?
4. Compute Target’s acid-test ratio as of January 30, 2016 and January 31, 2015. Did the ratio improve
or deteriorate? For each date, if all the current liabilities came due immediately, could Target pay
them?
SOLUTION
Requirement 1
Requirement 2
Target Corporation sold their entire U.S. consumer credit card portfolio to TD Bank Group in March
2013. Target no longer reports the receivables on its financial statements. Sales transactions via Target
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Financial Statement Case 8-1, cont.
Requirement 3
The advantages to Target of having a third party (TD Bank Group) own and issue Target brand credit
cards include:
Requirement 4
Acid-test ratio = (Cash including cash equivalents + Short-term investments + Net current receivables) /
Total current liabilities
