7-1
CHAPTER 7
Receivables and Investments
OVERVIEW OF EXERCISES, PROBLEMS, AND CASES
Estimated
Time in
Learning Objectives Exercises Minutes Level
Module 1
1. Explain how to account for accounts receivable, 1 10 Mod
including bad debts. 2 25 Mod
Module 2
3. Explain how to account for interest-bearing 7 15 Mod
notes receivable. 8 10 Mod
Module 3
5. Explain the accounting for and disclosure of various types 10 15 Mod
Module 4
6. Explain the effects of transactions involving liquid assets 16 5 Easy
on the statement of cash flows. 17 10 Mod
7-2 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
Problems Estimated
and Time in
Learning Objectives Alternates Minutes Level
Module 1
1. Explain how to account for accounts receivable, 1 30 Mod
including bad debts. 2 15 Mod
Module 2
3. Explain how to account for interest-bearing 8* 20 Mod
Module 3
5. Explain the accounting for and disclosure of various types 5 25 Mod
of investments that companies make. 6 20 Mod
Module 4
CHAPTER 7 • RECEIVABLES AND INVESTMENTS 7-3
Estimated
Time in
Learning Objectives Cases Minutes Level
Module 1
1. Explain how to account for accounts receivable, 1 30 Mod
including bad debts. 2* 25 Mod
4* 25 Mod
Module 2
3. Explain how to account for interest-bearing
notes receivable.
Module 3
5. Explain the accounting for and disclosure of various types 4* 25 Mod
of investments that companies make.
Module 4
7-4 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
EXERCISES
LO 1 EXERCISE 7-1 COMPARISON OF THE DIRECT WRITE-OFF AND ALLOWANCE
METHODS OF ACCOUNTING FOR BAD DEBTS
Net income under each of the two alternatives is as follows:
Direct write-off method: $145,000 – $10,500 = $134,500
Allowance method: $145,000 – (2% × $650,000) = $145,000 – $13,000 = $132,000
LO 1 EXERCISE 7-2 ALLOWANCE METHOD OF ACCOUNTING FOR BAD DEBTS—
COMPARISON OF THE TWO APPROACHES
1. a. Based on 2% of net credit sales:
Journal 2016
Entry Dec. 31 Bad Debts Expense …………………………. 16,680
Analysis Allowance for Doubtful Accounts …… 16,680
To record estimated bad debts:
CHAPTER 7 • RECEIVABLES AND INVESTMENTS 7-5
EXERCISE 7-2 (Concluded)
b. Based on 6% of year-end accounts receivable:
Journal 2016
Entry Dec. 31 Bad Debts Expense …………………………. 16,606
Analysis Allowance for Doubtful Accounts …… 16,606
To record estimated bad debts:
Need balance of 6% of $320,100 $19,206 (Cr.)
2. a. No change.
b.
Journal 2016
Entry Dec. 31 Bad Debts Expense …………………………. 21,806
Analysis Allowance for Doubtful Accounts …… 21,806
To record estimated bad debts:
Need balance of 6% of $320,100 $19,206 (Cr.)
7-6 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
LO 1 EXERCISE 7-3 WORKING BACKWARD: ALLOWANCE FOR DOUBTFUL
ACCOUNTS
1. The gross amount of beginning accounts receivable is the net amount of $48,000
plus the allowance for doubtful accounts of $3,000 = $51,000. The ending amount is
$54,000 plus $5,000 = $59,000. The cash collected during the year can be found by
analyzing the Accounts Receivable account:
Accounts Receivable
2. The amount of bad debts expense can be found by analyzing the Allowance for
Doubtful Accounts account:
Allowance for Doubtful Accounts
3,000 Beg. Bal.
CHAPTER 7 • RECEIVABLES AND INVESTMENTS 7-7
LO 1 EXERCISE 7-4 USING AN AGING SCHEDULE TO ACCOUNT FOR BAD DEBTS
1. Estimated Percent Amount
Category Amount Uncollectible Uncollectible
Current $500,000 10% $ 50,000
Past due:
2. Journal entry:
Journal End of Year
Entry Bad Debts Expense …………………………. 165,000
Analysis Allowance for Doubtful Accounts …… 165,000
To record estimated bad debts:
LO 2 EXERCISE 7-5 ACCOUNTS RECEIVABLE TURNOVER FOR NIKE
1. Accounts receivable turnover:
Revenues/Average Accounts Receivable = $27,799/[($3,434 + $3,117)/2]
= $27,799/$3,275.5
7-8 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
EXERCISE 7-5 (Concluded)
3. Included in the types of customers Nike has:
• Running shoe stores
• Sporting goods chains
• Department store chains
LO 2 EXERCISE 7-6 WORKING BACKWARD: ACCOUNTS RECEIVABLE TURNOVER
If it takes the company 30 days to collect its accounts receivable, the accounts receiva-
ble turnover ratio is 360/30 = 12 times per year. The accounts receivable turnover ratio
is:
LO 3 EXERCISE 7-7 NOTES RECEIVABLE
1. Rozelle Company is the maker. Has a liability (Notes Payable) and incurs an ex-
pense (Interest Expense)
EXERCISE 7-7 (Concluded)
3.
Journal 2016
Entry Sept. 1 Notes Receivable …………………………….. 45,000
Analysis Accounts Receivable …………………… 45,000
To record receipt of six-month,
7% promissory note in exchange
for open account.
Journal 2016
Entry Dec. 31 Interest Receivable ………………………….. 1,050
Analysis Interest Revenue ………………………… 1,050
To record interest at year-end:
$45,000 × 7% × 4/12.
Balance Sheet Income Statement
Journal 2017
Entry Mar. 1 Cash ……………………………………………… 46,575
Analysis Interest Receivable ……………………… 1,050
Interest Revenue ………………………… 525
Notes Receivable ……………………….. 45,000
To record collection of promissory note:
$45,000 × 7% × 2/12.
Balance Sheet Income Statement
7-10 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
LO 3 EXERCISE 7-8 WORKING BACKWARD: NOTES RECEIVABLE
1. The interest rate on the note is the monthly interest of ($200 × 12 months)/$24,000 =
10%.
2.
Journal 2017
Entry Jan. 31 Cash ………………………………………………. 24,400
Analysis Notes Receivable ………………………… 24,000
Interest Revenue ………………………… 200
Interest Receivable ……………………… 200
To record collection of note.
Balance Sheet Income Statement
LO 4 EXERCISE 7-9 CREDIT CARD SALES
Journal June 12 Cash ……………………………………………………. 2,430
Entry Accounts Receivable—American Express … 3,500
Analysis Sales Revenue ………………………………… 5,930
To record weekly cash and credit sales.
Balance Sheet Income Statement
CHAPTER 7 • RECEIVABLES AND INVESTMENTS 7-11
EXERCISE 7-9 (Concluded)
Journal June 15 Cash ……………………………………………………. 3,360
Entry Collection Fee Expense …………………………. 140
Analysis Accounts Receivable—American Express 3,500
To record weekly receipts from credit card company.
Balance Sheet Income Statement
STOCKHOLDERS’
NET
LO 5 EXERCISE 7-10 CERTIFICATE OF DEPOSIT
Journal 2016
Entry May 31 Short-Term Investments: CD …………….. 50,000
Analysis Cash …………………………………………. 50,000
To record purchase of 120-day, 9% CD.
Balance Sheet Income Statement
ASSETS = LIABILITIES +
STOCKHOLDERS’
EQUITY REVENUES – EXPENSES =
NET
INCOME
Short-Term
Invest-
ments:
CD 50,000
Cash
(50,000)
7-12 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
EXERCISE 7-10 (Concluded)
Journal 2016
Entry Sept. 28 Cash ………………………………………………. 51,500
Analysis Interest Receivable ……………………… 375
Interest Revenue ………………………… 1,125
Short-Term Investments: CD ………… 50,000
To record redemption of $50,000 CD:
$50,000 × 9% × 90/360 = $1,125.
LO 5 EXERCISE 7-11 CLASSIFICATION OF CASH EQUIVALENTS AND INVESTMENTS
ON A BALANCE SHEET
1. STI 6. STI
2. STI 7. STI
CHAPTER 7 • RECEIVABLES AND INVESTMENTS 7-13
LO 5 EXERCISE 7-12 PURCHASE AND SALE OF BONDS
1. Journal entries:
Journal 2016
Entry Jan. 1 Investment in Northern Lights Bonds ….. 100,000
Analysis Cash …………………………………………. 100,000
To record purchase of Northern Lights
bonds at 100.
Journal 2016
Entry June 30 Cash ……………………………………………………. 4,000
Analysis Interest Revenue ……………………………… 4,000
To record interest on Northern Lights
bonds: $100,000 × 8% × 6/12.
Balance Sheet Income Statement
ASSETS = LIABILITIES +
STOCKHOLDERS’
EQUITY REVENUES – EXPENSES =
NET
INCOME
Cash 4,000
4,000
Interest Rev–
enue 4,000
4,000
7-14 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
EXERCISE 7-12 (Concluded)
Journal 2017
Entry Jan. 1 Cash ………………………………………………. 102,000
Analysis Investment in Northern Lights Bonds 100,000
Gain on Sale of Bonds …………………. 2,000
To record sale of Northern Lights bonds at 102.
Balance Sheet Income Statement
2. Starship was able to sell the bonds for more than the bonds will pay when they
mature because the bonds carry a higher periodic interest than the market rate of
interest that was in effect at the time of the sale.
LO 5 EXERCISE 7-13 INVESTMENT IN STOCK
Journal 2016
Entry Oct. 1 Investment in Denver Preferred Stock … 41,000
Analysis Cash …………………………………………. 41,000
To record purchase of stock for cash:
($1,000 × $40) + $1,000.
Balance Sheet Income Statement
CHAPTER 7 • RECEIVABLES AND INVESTMENTS 7-15
EXERCISE 7-13 (Concluded)
Journal 2016
Entry Oct. 20 Cash ………………………………………………. 1,000
Analysis Dividend Income …………………………. 1,000
To record $1-per-share dividend
declared on investment in 1,000
shares of Denver preferred stock.
Balance Sheet Income Statement
ASSETS = LIABILITIES +
STOCKHOLDERS’
EQUITY REVENUES – EXPENSES =
NET
INCOME
Cash 1,000
1,000
Dividend In-
come 1,000
1,000
LO 5 EXERCISE 7-14 INVESTMENT IN STOCK
Journal 2016
Entry Aug. 15 Investment in Sox Common Stock ……… 76,000
Analysis Cash …………………………………………. 76,000
To record purchase of 5,000 shares of
stock for $15 per share + $1,000 in fees.
Balance Sheet Income Statement
ASSETS = LIABILITIES +
STOCKHOLDERS’
EQUITY REVENUES – EXPENSES =
NET
INCOME
7-16 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
EXERCISE 7-14 (Concluded)
Journal 2016
Entry Oct. 20 Cash ………………………………………………. 50,000*
Analysis Loss on Sale of Stock ………………………. 26,000**
Investment in Sox Common Stock …. 76,000
To record sale of stock at a loss.
*5,000 × $10
**$76,000 – $50,000
LO 5 EXERCISE 7-15 WORKING BACKWARD: INVESTMENT IN STOCK
If Durango paid $25 per share to buy the 2,000 shares of ABC stock, and another $500
LO 6 EXERCISE 7-16 IMPACT OF TRANSACTIONS INVOLVING RECEIVABLES ON
STATEMENT OF CASH FLOWS
Increase in accounts receivable—Deducted from net income
Decrease in accounts receivable—Added to net income
Increase in notes receivable—Deducted from net income
Decrease in notes receivable—Added to net income
LO 6 EXERCISE 7-17 WORKING BACKWARD: ACCOUNTS RECEIVABLE AND THE
STATEMENT OF CASH FLOWS
CHAPTER 7 • RECEIVABLES AND INVESTMENTS 7-17
LO 6 EXERCISE 7-18 CASH COLLECTIONS—DIRECT METHOD
Cash collections to be reported in the Operating Activities section of Emily Enterprises’
2016 statement of cash flows (direct method):
MULTI-CONCEPT EXERCISE
LO 1,5,6 EXERCISE 7-19 IMPACT OF TRANSACTIONS INVOLVING CASH, INVEST-
MENTS, AND RECEIVABLES ON STATEMENT OF CASH FLOWS
Purchase of cash equivalents—N
Redemption of cash equivalents—N
7-18 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
PROBLEMS
LO 1 PROBLEM 7-1 ALLOWANCE METHOD FOR ACCOUNTING FOR BAD DEBTS
1.
Journal Accounts Receivable …………………………………… 840,000*
Entry Cash …………………………………………………………. 210,000
Analysis Sales Revenue ……………………………………… 1,050,000
To record sales for year: $1,050,000 × 80%
= $840,000* credit sales.
Journal Cash …………………………………………………………. 670,000
Entry Accounts Receivable ……………………………… 670,000
Analysis To record collection of customer accounts.
Balance Sheet Income Statement
ASSETS = LIABILITIES +
STOCKHOLDERS’
EQUITY REVENUES – EXPENSES =
NET
INCOME
Cash
670,000
Accounts
Receivable
(670,000)
CHAPTER 7 • RECEIVABLES AND INVESTMENTS 7-19
PROBLEM 7-1 (Continued)
2. a.
Journal Bad Debts Expense …………………………………….. 25,200
Entry Allowance for Doubtful Accounts ……………… 25,200
Analysis To record estimated bad debts expense:
$840,000 × 3%.
b.
Journal Bad Debts Expense …………………………………….. 20,010
Entry Allowance for Doubtful Accounts ……………… 20,010
Analysis To record estimated bad debts expense:
Accounts receivable at December 31, 2016
($140,000 + $840,000 – $670,000 – $4,000 = $306,000).
Allowance balance needed ($306,000 × 0.06) $18,360 (Cr.)
Balance before adjustment:
Beginning balance $2,350 (Cr.)
Write-off 4,000 (Dr.)
7-20 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
PROBLEM 7-1 (Concluded)
3. a. The net realizable value of accounts receivable on December 31, 2016, is
$282,450:
Accounts receivable, December 31 [from part (2b)] …………………….. $306,000
4. The recognition of bad debts expense reduces the net realizable value by the
amount recorded in bad debts expense and the allowance for doubtful accounts.
The write-off of accounts has no effect on the net realizable value.
LO 1 PROBLEM 7-2 USING AN AGING SCHEDULE TO ACCOUNT FOR BAD DEBTS
1. Estimated Estimated
Percent Amount
Category Amount Uncollectible Uncollectible
2. Journal entry:
Journal 2016
Entry Dec. 31 Bad Debts Expense …………………………. 17,300
Analysis Allowance for Doubtful Accounts …… 17,300
To record estimated bad debts:
$29,600 less $12,300 currently in
allowance account.