CHAPTER 7 • RECEIVABLES AND INVESTMENTS 7-21
PROBLEM 7-2 (Concluded)
3. Partial balance sheet at December 31, 2016:
Current Assets
Accounts receivable …………………………………………………. $271,000
Allowance for doubtful accounts ………………………………… 29,600
Net accounts receivable ……………………………………………. $241,400
LO 2 PROBLEM 7-3 MAKING BUSINESS DECISIONS: ANALYZING THE COCA-COLA
COMPANY’S ACCOUNTS RECEIVABLE TURNOVER RATIO
Part A. Ratio Analysis Model
1. Formulate the Question:
How many times a year does The Coca-Cola Company turn over its accounts
receivable?
2. Gather the Information from the Financial Statements:
3. Calculate the Ratio:
Accounts Receivable Turnover Ratio = Net Credit Sales*
7-22 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
PROBLEM 7-3 (Continued)
4. Compare the Ratio with Other Ratios:
Accounts Receivable Turnover Ratio
9.7 times 9.9 times 9.5 times 9.4 times
Calculations:
Coca-Cola:
5. Interpret the Ratios:
Coca-Cola turned over its accounts receivable 9.7 times during 2013. This means
that, on average, the company collects its receivables every 37 days (360 days/9.7).
Part B. Business Decision Model
1. Formulate the Question:
After considering all relevant information, should I loan money to The Coca-Cola
Company?
2. Gather Information from the Financial Statements and Other Sources:
The information will come from a variety of sources, not limited to but including:
a. The balance sheet provides information about liquidity.
CHAPTER 7 • RECEIVABLES AND INVESTMENTS 7-23
PROBLEM 7-3 (Concluded)
3. Analyze the Information Gathered:
The information gathered in (2) above must be analyzed. Among the relevant ques-
tions that must be answered are the following:
a. Refer to part (5) of the Ratio Analysis Model for a comparison of the turnover
ratios for Coca-Cola and its competitor, PepsiCo, over the last two years. Which
company turns over its receivables more often?
4. Make the Decision:
Taking into account all of the various sources of information, decide either to loan
money to The Coca-Cola Company or find an alternative use for the money.
5. Monitor Your Decision:
LO 4 PROBLEM 7-4 CREDIT CARD SALES
1. Gross margin $0.99
Cost of goods sold 2.00
Net selling price $2.99
2. If his normal charge is $3.05 to credit card customers, he can offer a $0.06 discount
to cash customers and still maintain his gross margin.
7-24 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
LO 5 PROBLEM 7-5 INVESTMENTS IN BONDS AND STOCK
Journal 2016
Journal 2016
Entry Oct. 23 Investment in Eagle Rock Stock ………………. 12,000
Analysis Cash ………………………………………………. 12,000
To record purchase of 600 shares of
common stock at $20 per share.
Balance Sheet Income Statement
ASSETS = LIABILITIES +
STOCKHOLDERS’
EQUITY REVENUES – EXPENSES =
NET
INCOME
Investment in
Eagle Rock
Stock
12,000
Cash
(12,000)
CHAPTER 7 • RECEIVABLES AND INVESTMENTS 7-25
PROBLEM 7-5 (Concluded)
Journal 2016
Entry Dec. 10 Cash ……………………………………………………. 1,300
Analysis Dividend Income ………………………………. 1,300
To record receipt of dividends on securities:
Eagle Rock—600 × $1.50 $ 900
Montana—200 × $2.00 400
$1,300
Balance Sheet Income Statement
ASSETS = LIABILITIES +
STOCKHOLDERS’
EQUITY REVENUES – EXPENSES =
NET
INCOME
Cash 1,300
1,300
Dividend
Income 1,300
1,300
Journal 2016
Entry Dec. 31 Cash ………………………………………………. 300
Analysis Interest Revenue ………………………… 300
To record receipt of interest:
$10,000 × 6% × 6/12.
7-26 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
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LO 5 PROBLEM 7-6 INVESTMENTS IN STOCK
Journal 2016
Entry May 23 Cash ……………………………………………………. 400
Analysis Dividend Income ………………………………. 400
To record receipt of dividends of $2 per
share on 200 shares of Bassett stock.
Balance Sheet Income Statement
ASSETS = LIABILITIES +
STOCKHOLDERS’
EQUITY REVENUES – EXPENSES =
NET
INCOME
Cash 400
400
Dividend
Income 400
400
CHAPTER 7 • RECEIVABLES AND INVESTMENTS 7-27
PROBLEM 7-6 (Concluded)
Journal 2016
Entry Oct. 20 Cash ……………………………………………………. 8,000
Analysis Loss on Sale of Stock ……………………………. 2,500
Investment in Bassett Stock ……………….. 10,500
To record sale of Bassett stock:
(200 shares × $42) – $400 = $8,000.
Balance Sheet Income Statement
ASSETS = LIABILITIES +
STOCKHOLDERS’
EQUITY REVENUES – EXPENSES =
NET
INCOME
Cash 8,000
Investment in
Bassett
Stock
(10,500)
(2,500)
Loss on Sale of
Stock 2,500
(2,500)
1. Statement of cash flows:
STEGNER INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2016
Net income …………………………………………………………. $ 130,000
Adjustments to reconcile net income to net cash
PROBLEM 7-7 (Concluded)
2. Memorandum to the president:
TO: Owner of Stegner, Inc.
FROM: Student’s name
DATE: January XX, 2017
SUBJECT: Cash Flows
MULTI-CONCEPT PROBLEM
LO 1,3 PROBLEM 7-8 ACCOUNTS AND NOTES RECEIVABLE
1. Journal entries:
Journal 2016
Entry May 15 Accounts Receivable—M. Baxter ……….. 5,000
Analysis Sales Revenue …………………………… 5,000
To record sale on credit; terms n/30.
CHAPTER 7 • RECEIVABLES AND INVESTMENTS 7-29
PROBLEM 7-8 (Continued)
Journal 2016
Entry Aug. 10 Allowance for Doubtful Accounts ………… 5,000
Analysis Accounts Receivable—M. Baxter ….. 5,000
To write off uncollectible account.
Balance Sheet Income Statement
ASSETS = LIABILITIES +
STOCKHOLDERS’
EQUITY REVENUES – EXPENSES =
NET
INCOME
Journal 2016
Entry Dec. 1 Accounts Receivable—M. Baxter ……….. 5,000
Analysis Allowance for Doubtful Accounts …… 5,000
To restore account previously written off.
Balance Sheet Income Statement
ASSETS = LIABILITIES +
STOCKHOLDERS’
EQUITY REVENUES – EXPENSES =
NET
INCOME
Accounts Re–
ceivable—
M. Baxter
7-30 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
PROBLEM 7-8 (Concluded)
Journal 2016
Entry Dec. 31 Interest Receivable ……………………………….. 30
Analysis Interest Revenue ……………………………… 30
To accrue interest: $4,000 × 9% × 1/12.
Balance Sheet Income Statement
ASSETS = LIABILITIES +
STOCKHOLDERS’
EQUITY REVENUES – EXPENSES =
NET
INCOME
Interest Re-
ceivable 30
30
Interest
Revenue 30
30
Journal 2017
Entry Jan. 31 Cash ………………………………………………. 4,060
Analysis Interest Receivable ……………………… 30
Interest Revenue ………………………… 30
Notes Receivable ………………………… 4,000
To record collection of note and interest.
Balance Sheet Income Statement
2. Baxter is interested in reestablishing a good credit standing with its supplier, Lenox,
and for this reason has sent the check and signed a note for the balance.
CHAPTER 7 • RECEIVABLES AND INVESTMENTS 7-31
ALTERNATE PROBLEMS
LO 1 PROBLEM 7-1A ALLOWANCE METHOD FOR ACCOUNTING FOR BAD DEBTS
1.
Journal Cash …………………………………………………………… 502,500
Entry Accounts Receivable ……………………………….. 502,500
Analysis To record collection of customer accounts.
Balance Sheet Income Statement
ASSETS = LIABILITIES +
STOCKHOLDERS’
EQUITY REVENUES – EXPENSES =
NET
INCOME
Cash
502,500
Accounts
Receivable
(502,500)
7-32 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
PROBLEM 7-1A (Continued)
2. a.
Journal Bad Debts Expense ………………………………………. 18,900
Entry Allowance for Doubtful Accounts ……………….. 18,900
Analysis To record estimated bad debts expense:
$630,000 × 3%.
b.
Journal Bad Debts Expense ………………………………………. 14,820
Entry Allowance for Doubtful Accounts ……………….. 14,820
Analysis To record estimated bad debts expense:
Accounts receivable at December 31, 2016
($105,000 + $630,000 – $502,500 – $3,000) = $229,500
× 0.06
Allowance balance needed $ 13,770 (Cr.)
Balance before adjustment:
Beginning balance $1,950 (Cr.)
3. a. The net realizable value of accounts receivable on December 31, 2016, is $211,650:
Accounts receivable, December 31 [from part (2b)] $229,500
CHAPTER 7 • RECEIVABLES AND INVESTMENTS 7-33
PROBLEM 7-1A (Concluded)
b. The net realizable value of accounts receivable on December 31, 2016, is
$215,730:
Accounts receivable, December 31 [from part (2b)] $229,500
Allowance for doubtful accounts, December 31
LO 1 PROBLEM 7-2A USING AN AGING SCHEDULE TO ACCOUNT FOR BAD DEBTS
1. Estimated Estimated
Percent Amount
Category Amount Uncollectible Uncollectible
Current $200,000 10% $20,000
Past due:
Less than one month 60,300 25 15,075
One to two months 35,000 35 12,250
Over two months 45,000 75 33,750
Totals $340,300 $81,075
2. The controller is primarily responsible for the accuracy of the records, rather than the
3. Partial balance sheet at December 31, 2016:
Current Assets