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SOLUTIONS TO CONCEPTS FOR ANALYSIS
CA 7-1
(a) The direct write-off method overstates the trade accounts receivable on the balance sheet by
reporting them at more than their net realizable value. Furthermore, because the write-off often
occurs in a period after the revenues were generated, the direct write-off method does not match
CA 7-2
(a) 1. Kimmel should account for the sales discounts at the date of sale using the net method by
recording accounts receivable and sales revenue at the amount of sales less the sales
discounts available.
Revenues should be recorded at the cash-equivalent price at the date of sale. Under the net
method, the sale is recorded at an amount that represents the cash-equivalent price at the
date of exchange (sale).
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CA 7-2 (Continued)
Kimmel should report interest revenue from the notes receivable on its income statement for the
CA 7-3
(1) Allowances and charge-offs. Method (a) is recommended. In the case of this company which
has a large number of relatively small sales transactions, it is practicable to give effect currently to
the probable bad debt expense. Whenever practicable, it is advisable to accrue probable bad debt
(2) Collection expenses. Method (a) or (b) is recommended. In the case of this company, one strong
argument for method (a) is that it is advisable to have the Bad Debt Expense account show the full
amount of expense relating to efforts to collect and failure to collect balances receivable. On the
(3) Recoveries. Method (c) is recommended. This method treats the recovery as a correction of a
previous write-off. It produces an allowance account that reflects the net experience with bad
CA 7-4
Part 1
Since Wallace Company is a calendar-year company, six months of interest should be accrued on
12/31/12. The remaining interest revenue should be recognized on 6/30/13 when the note is collected.
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CA 7-4 (Continued)
Part 2
(a) The use of the allowance method based on credit sales to estimate bad debts is consistent with the
expense recognition principle because bad debts arise from and are a function of making credit
sales. Therefore, bad debt expense for the current period should be matched with current credit
CA 7-5
(a) VALASQUEZ COMPANY
Accounts Receivable Aging Schedule
May 31, 2013
Proportion
Amount in
Probability of
CA 7-5 (Continued)
(b) VALASQUEZ COMPANY
Analysis of Allowance for Doubtful Accounts
May 31, 2013
June 1, 2012 balance ………………………………………
$ 43,300
Bad debt expense accrual ($4,000,000 X .04) …….
Balance before year-end adjustment ………………..
(c)
(1) Steps to Improve
Accounts Receivable Situation
(2) Risks and Costs Involved
Establish more selective credit-
granting policies, such as more
This policy could result in lost
sales and increased costs of credit
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CA 7-6
(a) The appropriate valuation basis of a note receivable at the date of sale is its discounted present
value of the future amounts receivable for principal and interest using the customer’s market rate
of interest, if known or determinable, at the date of the equipment’s sale.
(c) 1. For notes receivable not sold, Corrs should recognize bad debt expense. The expense equals
the adjustment required to bring the balance of the allowance for doubtful accounts equal to
the estimated uncollectible amounts less the fair values of recoverable equipment.
CA 7-7
(a) 1. It was not possible to determine the machine’s fair value directly, so the sales price of the
machine is reported at the note’s September 30, 2011, fair value. The note’s September 30,
2011, fair value equals the present value of the two installments discounted at the buyer’s
September 30, 2011, market rate of interest.
CA 7-8
(a) 1. For the interest-bearing note receivable, the interest revenue for 2012 should be determined by
multiplying the principal (face) amount of the note by the note’s rate of interest by one half (July 1,
2012 to December 31, 2012). Interest accrues with the passage of time, and it should be
accounted for as an element of revenue over the life of the note receivable.
(b) The interest-bearing note receivable should be reported at December 31, 2012, as a current asset
at its principal (face) amount.
The zero-interest-bearing note receivable should be reported at December 31, 2012, as a non-
current asset at its face amount less the unamortized discount on the note at December 31, 2012.
CA 7-9
The controller of Engone Company cannot justify the manner in which the company has accounted for
the transaction in terms of sound financial accounting principles.
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CA 7-9 (Continued)
For a gain to occur, the interest imputation must result in an interest rate of about 5% or less. To
illustrate:
CA 7-10
To: Mark Price, Branch Manager
From: Accounting Major
Date: October 3, 2012
Subject: Discrepancy in the Accounts Receivable Account
While performing a routine test on accounts receivable balances today, I discovered a $2,000 shortage. I
believe that this matter deserves your immediate attention.
I realize that this situation is very sensitive and that we should not accuse any one individual without
further evidence. However, in order to protect the company’s assets, we must begin an immediate
investigation of this disparity.
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CA 7-11
(a) No, the controller should not be concerned with Marvin Company’s growth rate in estimating the
allowance. The accountant’s proper task is to make a reasonable estimate of bad debt expense. In
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FINANCIAL REPORTING PROBLEM
(a) Under “Cash Equivalents” in its notes to the consolidated financial
statements, P&G indicates:
“Cash equivalents are short-term, highly liquid investments that
are readily convertible to cash.”
COMPARATIVE ANALYSIS CASE
(a) Cash and cash equivalents:
Coca-Cola, 12/31/09 PepsiCo, 12/26/09
$7,021,000,000 $3,943,000,000
(b) Accounts receivable (net):
Coca-Cola, 12/31/09
PepsiCo, 12/26/09
$3,758,000,000
$4,624,000,000
Allowance for doubtful accounts receivable:
(c) Receivables turnover ratio and days outstanding for receivables:
Coca-Cola
PepsiCo
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FINANCIAL STATEMENT ANALYSIS CASE 1
(a) Cash may consist of funds on deposit at the bank, negotiable instru–
ments such as money orders, certified checks, cashier’s checks,
personal checks, bank drafts, and money market funds that provide
checking account privileges.
(c) A compensating balance is that portion of any cash deposit main–
tained by an enterprise which constitutes support for existing borrow-
ing arrangements with a lending institution.
A compensating balance representing a legally restricted deposit held
against short-term borrowing arrangements should be stated separately
among cash and cash equivalent items. A restricted deposit held as a
compensating balance against long-term borrowing arrangements
should be separately classified as a noncurrent asset in either the
investments or other assets section.
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FINANCIAL STATEMENT ANALYSIS CASE 1 (Continued)
(e) Occidental would record a loss of $30,000,000 as revealed in the
following entry to record the transaction: