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Weygandt, Accounting Principles, 11e
Chapter Nine
Solutions to Challenge Exercises
Challenge Exercise 9-1 – Solution
(a) Dec. 31 Bad Debt Expense ............................................. 2,400
Accounts Receivable—Barking Ghosts ......... 2,400
(b) (1) Dec. 31 Bad Debt Expense ............................................. 13,500
[($1,400,000 – $50,000) X 1%]
Allowance for Doubtful
Accounts ............................................... 13,500
(2) Dec. 31 Bad Debt Expense ............................................. 12,370
Allowance for Doubtful
Accounts................................................... 12,370
[($200,000 X 6%) + $370]
(d) The direct write-off method makes no attempt to match bad debt expense to sales revenues or to show the
cash realizable value of the receivables in the balance sheet, while the allowance method does both of
these.
Challenge Exercise 9-2 – Solution
(a) Mar. 3 Cash ($700,000 – $21,000) .......................................... 679,000
Service Charge Expense .............................................. 21,000
(3% X $700,000)
Accounts Receivable .......................................... 700,000
(c) Companies now frequently sell their receivables to another company for cash, thereby shortening the cash-
to-cash
operating cycle. Companies sell receivables for two major reasons. First, they may be the only reasonable
source of
cash. When money is tight, companies may not be able to borrow in the usual credit markets. Or, if money
(d) Advantages of credit cards to the retailer are: the issuer maintains customer accounts, the issuer does the
credit
investigation of customers, the issuer undertakes the collection process and absorbs any losses, and the
retailer
receives cash more quickly from the credit card issuer.
