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Chapter 7
Accounts and Notes Receivable
QUESTIONS
1.
When customers use credit cards, the selling companies can avoid having to directly
evaluate the credit standing of their customers. They also avoid the risk of bad debts and
often are paid cash from the credit card company more quickly than if customers were
granted credit directly. Moreover, they hope to increase sales, and net income, from the
added convenience to buyers.
2.
Revenues and expenses usually are not matched under the direct write-off method because
the revenues recorded from the uncollectible accounts often appear on the income statement
of one period while the bad debts expenses of those revenues appear on the income
statement of a later period when the account(s) is known to be uncollectible.
3.
The accounting constraint of materiality suggests that the requirements of accounting
standards can be ignored if their effect on the financial statements is unimportant to their
users’ business decisions.
4.
Writing off a bad debt against the Allowance account does not reduce the estimated
realizable value of a company’s accounts receivable because the write-off reduces the
balances of both Accounts Receivable and the Allowance for Doubtful Accounts by equal
amounts. This means the difference between them (called estimated realizable value)
remains the same.
5.
The adjusted balances of Bad Debts Expense and Allowance for Doubtful Accounts are
virtually never equal because the expense amount reflects only the events of the current
period, and the allowance is the accumulated result of events over a number of prior periods.
The only way that they could be equal would be if write-offs during the prior period exactly
equaled the beginning balance of the Allowance account.
6.
Creditors prefer notes receivable to accounts receivable because the notes can be more
easily converted into cash before they are due by discounting (or selling) them to a financial
institution. Also, a note represents a clear written acknowledgment by the debtor of both the
debt and its amount and terms.
7.
Best Buy does not mention uncollectible accounts in its notes to its financial statements,
and does not list its receivables as “net” of any allowance for uncollectibles, probably
because uncollectible accounts are immaterial.
8.
Circuit City uses the allowance method to account for doubtful accounts as evidenced by the
receivables being reduced by an allowance on the balance sheet. The realizable value of
accounts receivable as of February 28, 2007, is its net amount of $382,555,000.
9.
Apple’s gross accounts receivable at September 30, 2006 are ($ millions) $1,252 + $52 =
$1,304. Apple believes that the percent of accounts receivable that are uncollectible is
$52/$1,304 = 4.0% (rounded)
©McGraw-Hill Companies, 2009
Solutions Manual, Chapter 7
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QUICK STUDIES
Quick Study 7-1 (15 minutes)
1.
Cash ............................................................................... 15,360
Credit Card Expense* ...................................................
640
Sales.........................................................................
16,000
To record credit card sales less fees.
*$16,000 x 4%
Cost of Goods Sold ...................................................... 7,000
Merchandise Inventory ...........................................
7,000
To record cost of sales.
2.
Accounts Receivable—Credit Card Cos..................... 17,460
Credit Card Expense* ...................................................
540
Sales.........................................................................
18,000
To record credit card sales less fees.
*$18,000 x 3%
Cost of Goods Sold ...................................................... 7,800
Merchandise Inventory ...........................................
7,800
To record cost of sales.
5 days later
Cash ............................................................................... 17,460
Accounts Receivable—Credit Card Cos...............
17,460
To record cash receipts.
Quick Study 7-2 (15 minutes)
1.
Oct. 31 Allowance for Doubtful Accounts ...........................
Accounts Receivable—D. Elwick ......................
750
750
To write off account.
2.
Dec. 9 Accounts Receivable—D. Elwick* ...........................
Allowance for Doubtful Accounts .....................
400
400
To reinstate a written-off account.
*If there is a strong belief that the remaining $350 will be
collected soon, then the full $750 balance can be reinstated.
9 Cash ...........................................................................
Accounts Receivable—D. Elwick ......................
400
400
To record payment on a receivable.
©McGraw-Hill Companies, 2009
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Financial and Managerial Accounting, 3rd Edition
Quick Study 7-3 (15 minutes)
1.
Dec. 31 Bad Debts Expense ................................................
Allowance for Doubtful Accounts...................
875
875
To record estimate of uncollectibles.
Desired balance in allowance = $95,000 x 1.5%= $1,425 cr.
Adjustment required = $1,425 cr. - $550 cr. = $875
2.
Desired balance in allowance = $1,425 (part 1)
Adjustment required = $1,425 cr. + $150 dr. = $1,575
Quick Study 7-4 (10 minutes)
Dec. 31 Bad Debts Expense ................................................ 1,750
Allowance for Doubtful Accounts...................
1,750
To record estimate of uncollectibles
($350,000 x 0.5%).
Quick Study 7-5 (15 minutes)
Aug. 2
Notes Receivable—D. Kissick ..........................
Accounts Receivable—D. Kissick .............
9,000
9,000
To record receipt of note on account.
Oct. 31
Maturity date
Cash ....................................................................
Notes Receivable—D. Kissick ...................
Interest Revenue .........................................
9,135
9,000
135
To record cash received on note plus
interest ($9,000 x 6% x 90/360).
©McGraw-Hill Companies, 2009
Solutions Manual, Chapter 7
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Quick Study 7-6 (15 minutes)
Dec. 31
Interest Receivable ............................................
Interest Revenue .........................................
120
120
To record the year-end adjustment for
interest earned ($24,000 x 6% x 30/360).
Jan. 15
Maturity date
Cash ....................................................................
Interest Receivable .....................................
Interest Revenue* ........................................
Notes Receivable ........................................
24,180
120
60
24,000
To record cash received on note plus interest.
* $24,000 x 6% x 15/360
Quick Study 7-7 (10 minutes)
Accounts receivable turnover =
Net sales
Average accounts receivable
$910,600
($138,500 + $153,400) / 2
=
6.2 times
Interpretation: An accounts receivable turnover of 6.2 implies that the
company’s average accounts receivable balance is converted into cash 6.2
times per year. The 6.2 turnover is about 17% lower than the average
turnover of 7.5 for its competitors. The company needs to identify the
cause of this poor performance and rectify the situation to at least compete
at the average level.
©McGraw-Hill Companies, 2009
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Financial and Managerial Accounting, 3rd Edition
EXERCISES
Exercise 7-1 (20 minutes)
Apr. 8 Cash ........................................................................ 5,376
Credit Card Expense* ............................................
224
Sales .................................................................
5,600
To record credit card sales less 4% fee.
*($5,600 x .04)
8 Cost of Goods Sold ......................................................
4,138
Merchandise Inventory ..........................................
4,138
To record cost of sales.
12 Accounts Receivable—Continental ..................... 5,850
Credit Card Expense*............................................
150
Sales .................................................................
6,000
To record credit card sales less 2.5% fee.
*($6,000 x .025)
12 Cost of Goods Sold ......................................................
4,400
Merchandise Inventory ..........................................
4,400
To record cost of sales.
20 Cash ........................................................................ 5,850
Accounts Receivable—Continental ................
5,850
To record cash received on credit sales less fees.
Exercise 7-2 (25 minutes)
Part 1
GENERAL LEDGER
Accounts Receivable
Nov. 5
5,817 Nov. 21 268
10
1,774
13
1,040
30
3,698
Bal. 12,061
Sales
Nov. 5
10
13
30
5,817
1,774
1,040
3,698
Sales Returns and
Allowances
Nov. 21 268
©McGraw-Hill Companies, 2009
Solutions Manual, Chapter 7
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Exercise 7-2 (concluded)
Part 1—continued
ACCOUNTS RECEIVABLE LEDGER
Nov. 5
30
Bal.
Ski Shop
5,817
3,698
9,515
Welcome Enterprises
Nov. 10 1,774
Kit Ronin
Nov. 13 1,040 Nov. 21
Bal.
268
772
Part 2
Beachum Company
Schedule of Accounts Receivable
November 30, 2009
Ski Shop ................................................................................. $ 9,515
Welcome Enterprises ...........................................................
1,774
Kit Ronin ................................................................................
772
Total ........................................................................................ $12,061
Comparison: The total of the Schedule of Accounts Receivable ($12,061) is
proved with the balance of the Accounts Receivable controlling T-account
from Part 1 ($12,061).
Exercise 7-3 (20 minutes)
Dec. 31 Bad Debts Expense ..................................................... 5,148
Allowance for Doubtful Accounts........................
5,148
To record estimated bad debts expense
(.006 x $858,000).
Feb. 1 Allowance for Doubtful Accounts..............................
Accounts Receivable—D. Fidel............................
429
429
To write off an account.
June 5 Accounts Receivable—D. Fidel..................................
Allowance for Doubtful Accounts ........................
429
429
To reinstate an account.
June 5 Cash ..............................................................................
Accounts Receivable—D. Fidel............................
429
429
To record cash received on account.
©McGraw-Hill Companies, 2009
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Financial and Managerial Accounting, 3rd Edition
Exercise 7-4 (15 minutes)
a.
Dec. 31 Bad Debts Expense* ..................................................... 419
Allowance for Doubtful Accounts........................
419
To record estimated bad debts expense.
*
Unadjusted balance
Estimated balance ($139,500 x .02)
Required adjustment
= $2,371
= 2,790
= $ 419
credit
credit
credit
b.
Dec. 31 Bad Debts Expense** ....................................................3,277
Allowance for Doubtful Accounts........................
3,277
To record estimated bad debts expense.
**
Unadjusted balance
Estimated balance ($139,500 x .02)
Required adjustment
= $ 487
= 2,790
= $3,277
debit
credit
credit
©McGraw-Hill Companies, 2009
Solutions Manual, Chapter 7
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Exercise 7-5 (30 minutes)
a. Computation of the estimated balance of the allowance for uncollectibles:
Not due:
1 to 30:
31 to 60:
61 to 90:
Over 90:
$66,000 x 0.01 =
15,000 x 0.02 =
6,000 x 0.04 =
3,000 x 0.07 =
5,000 x 0.12 =
$ 660
300
240
210
600
$2,010 credit
b.
Dec. 31 Bad Debts Expense..............................................
Allowance for Doubtful Accounts ................
2,310
2,310
To record estimated bad debts.*
*
Unadjusted balance ...........................
Estimated balance .............................
$
300 debit
2,010 credit
Required adjustment .........................
$2,310 credit
c.
Dec. 31 Bad Debts Expense..............................................
Allowance for Doubtful Accounts ................
1,810
1,810
To record estimated bad debts.*
*
Unadjusted balance ...........................
Estimated balance .............................
$ 200 credit
2,010 credit
Required adjustment .........................
$1,810 credit
©McGraw-Hill Companies, 2009
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Financial and Managerial Accounting, 3rd Edition
Exercise 7-6 (25 minutes)
a. Computation of the estimated balance of the allowance for uncollectibles:
$95,000 x 0.02 =
$1,900 credit
b.
Dec. 31 Bad Debts Expense..............................................
Allowance for Doubtful Accounts ................
2,200
2,200
To record estimated bad debts.*
*
Unadjusted balance ...........................
Estimated balance .............................
$
300 debit
1,900 credit
Required adjustment .........................
$2,200 credit
c.
Dec. 31 Bad Debts Expense..............................................
Allowance for Doubtful Accounts ................
To record estimated bad
*
1,700
1,700
debts.*
Unadjusted balance ...........................
Estimated balance .............................
$ 200 credit
1,900 credit
Required adjustment .........................
$1,700 credit
Exercise 7-7 (20 minutes)
Feb. 1 Allowance for Doubtful Accounts..............................
Accounts Receivable—Laguna Co ......................
Accounts Receivable—Malibu Co .......................
950
200
750
To write off specific accounts.
June 5 Accounts Receivable—Laguna ..................................
Allowance for Doubtful Accounts ........................
200
200
To reinstate an account.
June 5 Cash ..............................................................................
Accounts Receivable—Laguna ............................
200
200
To record cash received on account.
©McGraw-Hill Companies, 2009
Solutions Manual, Chapter 7
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Exercise 7-8 (25 minutes)
a. Expense is 2% of credit sales
Dec. 31 Bad Debts Expense...............................................
Allowance for Doubtful Accounts .................
6,000
6,000
To record estimated bad debts
[$300,000 x .02].
b. Expense is 1% of total sales
Dec. 31 Bad Debts Expense...............................................
Allowance for Doubtful Accounts .................
7,000
7,000
To record estimated bad debts
[($300,000 + $400,000) x .01].
c. Allowance is 8% of accounts receivable
Dec. 31 Bad Debts Expense...............................................
Allowance for Doubtful Accounts .................
To record estimated bad
*
6,200
6,200
debts.*
Unadjusted balance ........................................................
$1,000 debit.
Estimated balance ($65,000 x 8%) ................................
5,200 credit
Required adjustment ......................................................
$6,200 credit
©McGraw-Hill Companies, 2009
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Financial and Managerial Accounting, 3rd Edition
Exercise 7-9 (20 minutes)
July 4 Accounts Receivable ............................................ 7,160
Sales .................................................................
7,160
To record sales on credit.
4 Cost of Goods Sold ......................................................
4,582
Merchandise Inventory ..........................................
4,582
To record cost of sales.
9 Cash ....................................................................... 19,285
Factoring Fee Expense* ....................................... 1,015
Accounts Receivable ......................................
20,300
To record sale of receivable. *($20,300 x .05)
17 Cash ....................................................................... 3,938
Accounts Receivable ......................................
3,938
To record cash received on account.
27 Cash ....................................................................... 11,000
Notes Payable ..................................................
11,000
To record cash from a loan.
Note to Financial Statements
Accounts receivable in the amount of $14,700 are pledged
as security for a $11,000 note payable to Main Bank.
©McGraw-Hill Companies, 2009
Solutions Manual, Chapter 7
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Exercise 7-10 (15 minutes)
Nov. 1 Notes Receivable—C. Cruz ...............................
Accounts Receivable—C. Cruz ...................
15,000
15,000
To record receipt of note on account.
Dec. 31 Interest Receivable ............................................
Interest Revenue ..........................................
175
175
To record interest earned
[$15,000 x .07 x 60/360].
Apr. 30 Cash ....................................................................
Notes Receivable—C. Cruz .........................
Interest Revenue ..........................................
Interest Receivable ......................................
15,525
15,000
350
175
To record cash received on note plus
interest earned [$15,000 x .07 x 120/360].
Exercise 7-11 (20 minutes)
Mar. 21 Notes Receivable—J. Penn .................................. 17,200
Accounts Receivable—J. Penn .....................
17,200
To record receipt of note on account.
Sept. 17 Accounts Receivable—J. Penn ........................... 17,802
Interest Revenue .............................................
Notes Receivable—J. Penn ............................
602
17,200
To record note dishonored plus interest
earned [$17,200 x .07 x 180/360 = $602].
Dec. 31 Allowance for Doubtful Accounts ....................... 17,802
Accounts Receivable—J. Penn .....................
17,802
To write off an account.
©McGraw-Hill Companies, 2009
402
Financial and Managerial Accounting, 3rd Edition
Exercise 7-12 (25 minutes)
2008
Dec. 13 Notes Receivable—A. Sumera ............................. 14,000
Accounts Receivable—A. Sumera ................
14,000
To record receipt of note on account.
31 Interest Receivable ...............................................
Interest Revenue .............................................
63
63
To record interest earned [$14,000 x .09 x 18/360].
2009
Feb. 11 Cash ....................................................................... 14,210
Interest Revenue ............................................
Interest Receivable .........................................
Notes Receivable—A. Sumera .......................
147
63
14,000
To record cash received on note plus
interest. [$14,000 x .09 x (60-18)/360=$147]
Mar. 3 Notes Receivable—Kudak Co. ............................. 10,000
Accounts Receivable—Kudak Co. ................
10,000
To record receipt of note on account.
17 Notes Receivable—R. Burgess ............................ 9,000
Accounts Receivable—R. Burgess ...............
9,000
To record receipt of note on account.
Apr. 16 Accounts Receivable—R. Burgess ..................... 9,060
Interest Revenue .............................................
Notes Receivable—R. Burgess ......................
60
9,000
To record receivable for dishonored
note plus interest [$9,000 x .08 x 30/360].
May 1 Allowance for Doubtful Accounts ....................... 9,060
Accounts Receivable—R. Burgess ...............
9,060
To write off account.
June 1 Cash ....................................................................... 10,225
Interest Revenue .............................................
Notes Receivable—Kudak Co ........................
225
10,000
To record cash received on note with
interest [$10,000 x .09 x 90/360].
©McGraw-Hill Companies, 2009
Solutions Manual, Chapter 7
403
Exercise 7-13 (15 minutes)
2008 accounts receivable turnover:
$193,000
($37,200 + $40,500)/2
= 5.0 times
2009 accounts receivable turnover:
$262,000
($40,500 + $42,700)/2
= 6.3 times
Analysis: Lucilla Company turned over its accounts receivable 1.3 (5.0 –
6.3) times more in 2009 than in 2008. This can indicate that the company
has tightened its credit policy or has improved its collection efforts.
However, relative to competitors’ turnover of 7, Lucilla is performing worse
than average.
©McGraw-Hill Companies, 2009
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Financial and Managerial Accounting, 3rd Edition
PROBLEM SET A
Problem 7-1A (30 minutes)
June 4 Accounts Receivable—A. Bullaro ............................
Sales .....................................................................
700
700
To record sales on credit.
4 Cost of Goods Sold ......................................................... 220
Merchandise Inventory .............................................
220
To record cost of sales.
5 Cash ............................................................................
Credit card expense* .................................................
Sales .....................................................................
8,106
294
8,400
To record credit card sales less fee. *($8,400 x .035)
5 Cost of Goods Sold .........................................................4,300
Merchandise Inventory .............................................
4,300
To record cost of sales.
6 Accounts Receivable—Access ................................
Credit card expense* .................................................
Sales .....................................................................
5,850
150
6,000
To record credit card sales less fee. *($6,000 x .025)
6 Cost of Goods Sold .........................................................3,680
Merchandise Inventory .............................................
3,680
To record cost of sales.
8 Accounts Receivable—Access ................................
Credit card expense* .................................................
Sales .....................................................................
4,368
112
4,480
To record credit card sales less fee. *($4,480 x .025)
8 Cost of Goods Sold .........................................................2,600
Merchandise Inventory .............................................
2,600
To record cost of sales.
10 No journal entry required.
13 Allowance for Doubtful Accounts ............................
Accounts Receivable—T. Wanek .......................
467
467
To write off account due.
17 Cash ............................................................................ 10,218
Accounts Receivable—Access ..........................
10,218
To record cash received from credit card co. ($5,850 + $4,368).
18 Cash ............................................................................
Sales Discounts* .......................................................
Accounts Receivable—A. Bullaro ......................
686
14
700
To record cash received less discount. *($700 x .02)
©McGraw-Hill Companies, 2009
Solutions Manual, Chapter 7
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Problem 7-2A (35 minutes)
2008
a.
Accounts Receivable ......................................... 1,347,700
Sales ..............................................................
1,347,700
To record sales on account.
Cost of Goods Sold ......................................................
982,500
Merchandise Inventory ..........................................
982,500
To record cost of sales.
b.
Allowance for Doubtful Accounts.....................
Accounts Receivable ...................................
20,676
20,676
To write off accounts.
c.
Cash .....................................................................
Accounts Receivable ...................................
671,100
671,100
To record cash received on account.
d.
Bad Debts Expense ............................................
Allowance for Doubtful Accounts ..............
To record estimated bad
*
29,203
29,203
debts.*
Beginning receivables ......................
Credit sales .......................................
Collections ........................................
Write-offs ...........................................
Ending receivables ...........................
Percent uncollectible ........................
Required ending allowance..............
Unadjusted balance ..........................
Adjustment to the allowance ...........
$
0
1,347,700
(671,100)
(20,676)
655,924
x 1.3%
8,527**
20,676
$ 29,203
Cr.
Dr.
Cr.
** rounded to nearest dollar
©McGraw-Hill Companies, 2009
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Financial and Managerial Accounting, 3rd Edition
Problem 7-2A (Concluded)
2009
e.
Accounts Receivable .............................................. 1,517,800
Sales ...................................................................
1,517,800
To record sales on account.
Cost of Goods Sold ......................................................
1,302,200
Merchandise Inventory ..........................................
1,302,200
To record cost of sales.
f.
Allowance for Doubtful Accounts .........................
Accounts Receivable ........................................
32,624
32,624
To record write-off of accounts.
g.
Cash ......................................................................... 1,118,100
Accounts Receivable ........................................
1,118,100
To record cash received on account.
h.
Bad Debts Expense.................................................
Allowance for Doubtful Accounts ...................
To record estimated bad
*
37,396
37,396
debts.*
Beginning receivables ............................
Credit sales..............................................
Collections...............................................
Write-offs .................................................
Ending receivables .................................
Percent uncollectible ..............................
Required ending allowance ....................
Unadjusted balance
Beginning (Cr.) ...................................... $ 8,527
Write-offs (Dr.) ....................................... 32,624
Adjustment to the allowance ..................
$ 655,924
1,517,800
(1,118,100)
(32,624)
1,023,000
x 1.3%
13,299 Cr.
$
24,097
37,396
Dr.
Cr.
©McGraw-Hill Companies, 2009
Solutions Manual, Chapter 7
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Problem 7-3A (35 minutes)
Part 1
a. Expense is 1.5% of credit sales
Dec. 31 Bad Debts Expense............................................... 55,800
Allowance for Doubtful Accounts .................
55,800
To record estimated bad debts
[$3,720,000 x .015].
b. Expense is 1% of total sales
Dec. 31 Bad Debts Expense............................................... 59,047
Allowance for Doubtful Accounts .................
59,047
To record estimated bad debts
[($2,184,700 + $3,720,000) x .01].
c. Allowance is 3% of accounts receivable
Dec. 31 Bad Debts Expense............................................... 62,855
Allowance for Doubtful Accounts .................
62,855
To record estimated bad debts.*
*
Unadjusted balance ........................................................
$29,030 debit
Estimated balance ($1,127,500 x 3%) ...........................
33,825 credit
Required adjustment ......................................................
$62,855 credit
Part 2
Current assets
Accounts receivable ...........................................$1,127,500
Less allowance for doubtful accounts ............. (26,770)*
Or: Accounts receivable (net of $26,770*
uncollectible accounts) ...................................
$1,100,730
$1,100,730
* Adjustment to the allowance ......................................
$55,800 credit
Unadjusted allowance balance ..................................
29,030 debit
Adjusted balance .........................................................
$26,770 credit
Part 3
Current assets
Accounts receivable ...........................................$1,127,500
Less allowance for doubtful accts. ................... (33,825)**
Or: Accounts receivable (net of $33,825**
uncollectible accounts) ...................................
$1,093,675
$1,093,675
** See computations in Part 1c.
©McGraw-Hill Companies, 2009
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Financial and Managerial Accounting, 3rd Edition
Problem 7-4A (35 minutes)
Part 1
Calculation of the estimated balance of the allowance for uncollectibles
Not due:
1 to 30:
31 to 60:
61 to 90:
Over 90:
$784,000 x .0125 =
380,200 x .0200 =
81,800 x .0650 =
52,000 x .3275 =
13,000 x .6800 =
$ 9,800
7,604
5,317
17,030
8,840
$48,591 credit
Part 2
Dec. 31 Bad Debts Expense.............................................. 25,791
Allowance for Doubtful Accounts ................
To record estimated bad
*
25,791
debts.*
Unadjusted balance ...........................
Estimated balance .............................
$22,800 credit
48,591 credit
Required adjustment .........................
$25,791 credit
Part 3
Writing off the account receivable in 2010 will not directly affect year 2010
net income. The entry to write off an account involves a debit to Allowance
for Doubtful Accounts and a credit to Accounts Receivable, both of which
are balance sheet accounts. Net income is affected only by the annual
recognition of the estimated bad debts expense, which is journalized as an
adjusting entry. Net income for Year 2009 (the year of the original sale)
included an estimated expense for write-offs such as this one.
©McGraw-Hill Companies, 2009
Solutions Manual, Chapter 7
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Problem 7-5A (75 minutes)
Part 1
2008
Dec. 16 Notes Receivable—A. Bakko.............................. 14,400
Accounts Receivable—A. Bakko .................
14,400
To record note received on account.
31 Interest Receivable ..............................................
Interest Revenue ...........................................
48
48
To record interest earned
[$14,400 x .08 x 15/360 = $48].
2009
Feb. 14 Cash ...................................................................... 14,592
Interest Revenue* ..........................................
Interest Receivable........................................
Notes Receivable—A. Bakko........................
144
48
14,400
To record cash received on note with interest.
*[$14,400 x 0.08 x 45/360 = $144]
Mar. 2 Notes Receivable—Mayday Co ..........................
Accounts Receivable—Mayday Co..............
8,000
8,000
To record note received on account.
17 Notes Receivable—C. Kadin ..............................
Accounts Receivable—C. Kadin ..................
2,200
2,200
To record note received on account.
Apr. 16 Accounts Receivable—C. Kadin ........................
Interest Revenue ...........................................
Notes Receivable—C. Kadin ........................
2,211
11
2,200
To record receivable for dishonored
note plus interest [$2,200 x 0.06 x 30/360= $11].
June 2 Accounts Receivable—Mayday Co. ..................
Interest Revenue* ..........................................
Notes Receivable—Mayday Co ....................
8,180
180
8,000
To record receivable for dishonored note
[$8,000 x 0.09 x 90/360 = $180].
©McGraw-Hill Companies, 2009
410
Financial and Managerial Accounting, 3rd Edition
Problem 7-5A (Concluded)
July 17 Cash ......................................................................
Interest Revenue* ..........................................
Accounts Receivable—Mayday Co..............
8,274
94
8,180
To record cash received on account
plus additional interest.
*[$8,180 x .09 x 46/360= $94 (rounded)]
Aug. 7 Notes Receivable—Trenton Co. .........................
Accounts Receivable—Trenton Co. ...........
8,400
8,400
To record note received on account.
Sept. 3 Notes Receivable—C. Marin ...............................
Accounts Receivable—C. Marin ..................
3,335
3,335
To record note received on account.
Nov. 2 Cash ......................................................................
Interest Revenue* ..........................................
Notes Receivable—C. Marin .........................
3,385
50
3,335
To record cash received on note plus interest
*($3,335 x 0.09 x 60/360 = $50) (rounded).
5 Cash ......................................................................
Interest Revenue* ..........................................
Notes Receivable—Trenton Co. ..................
8,652
252
8,400
To record cash received on note plus
Interest. *($8,400 x .12 x 90/360 = $252)
Dec. 1 Allowance for Doubtful Accounts......................
Accounts Receivable—C. Kadin ..................
2,211
2,211
To record write-off of account.
Part 2
Analysis Component: When a business pledges its receivables as security
for a loan and the loan is still outstanding at period-end, the business must
disclose this information in notes to its financial statements. This is a
requirement because the business has committed a portion of its assets to
cover a specific portion of its liabilities, which means that if the business
dishonors its obligations under the loan, the creditor can claim the amount
of receivables identified in the pledge as collateral to cover the loan. This
arrangement must be disclosed to satisfy the full-disclosure principle.
©McGraw-Hill Companies, 2009
Solutions Manual, Chapter 7
411
PROBLEM SET B
Problem 7-1B (30 minutes)
Aug. 4 Accounts Receivable—K. Carpen ...........................
Sales.....................................................................
600
600
To record sales on credit.
10
11
14
15
18
22
25
Cost of Goods Sold ......................................................... 470
Merchandise Inventory ..............................................
To record cost of sales.
Cash ...........................................................................
5,978
Credit Card Expense* ...............................................
122
Sales.....................................................................
To record credit card sales less fee. *($6,100 x .02)
Cost of Goods Sold .........................................................5,100
Merchandise Inventory ..............................................
To record cost of sales.
Accounts Receivable—Aztec ...................................
7,128
Credit card expense* ................................................
72
Sales.....................................................................
To record credit card sales less fee. *($7,200 x .01)
Cost of Goods Sold .........................................................6,150
Merchandise Inventory ..............................................
To record cost of sales.
Cash ...........................................................................
588
Sales Discounts* .......................................................
12
Accounts Receivable—K. Carpen .....................
To record cash received less discount.*($600 x .02)
Accounts Receivable—Aztec ...................................
4,851
Credit Card Expense*(rounded to nearest dollar) .....
49
Sales......................................................................
To record credit card sales less fee. *($4,900 x .01)
Cost of Goods Sold .........................................................3,500
Merchandise Inventory ..............................................
To record cost of sales.
No journal entry required.
Allowance for Doubtful Accounts ...........................
568
Accounts Receivable—Rayvac Co. ...................
To write off account due.
Cash ........................................................................... 11,979
Accounts Receivable—Aztec .............................
To record cash rec’d from credit card co. ($7,128+$4,851)
470
6,100
5,100
7,200
6,150
600
4,900
3,500
568
11,979
©McGraw-Hill Companies, 2009
412
Financial and Managerial Accounting, 3rd Edition
Problem 7-2B (35 minutes)
2008
a.
Accounts Receivable ......................................... 1,346,800
Sales ..............................................................
1,346,800
To record sales on account.
Cost of Goods Sold ......................................................
980,300
Merchandise Inventory ..........................................
980,300
To record cost of sales.
b.
Cash .....................................................................
Accounts Receivable ...................................
666,300
666,300
To record cash received on account.
c.
Allowance for Doubtful Accounts.....................
Accounts Receivable ...................................
21,000
21,000
To record write-off of accounts.
d.
Bad Debts Expense ............................................
Allowance for Doubtful Accounts...............
To record estimated bad
28,914
28,914
debts.*
*Beginning receivables .....................
Credit sales ......................................
Collections .......................................
Write-offs ..........................................
Ending receivables ..........................
Percent uncollectible .......................
Required ending allowance .............
Unadjusted balance .........................
Adjustment to the allowance...........
$
0
1,346,800
(666,300)
(21,000)
659,500
x 1.2%
7,914
21,000
$ 28,914
Cr.
Dr.
Cr.
©McGraw-Hill Companies, 2009
Solutions Manual, Chapter 7
413
Problem 7-2B (Concluded)
2009
e.
Accounts Receivable .......................................... 1,562,400
Sales ...............................................................
1,562,400
To record sales on account.
Cost of Goods Sold ......................................................
1,339,300
Merchandise Inventory ..........................................
1,339,300
To record cost of sales.
f.
Cash ...................................................................... 1,168,400
Accounts Receivable ....................................
1,168,400
To record cash received on account.
g.
Allowance for Doubtful Accounts......................
Accounts Receivable ....................................
30,400
30,400
To record write-off of accounts.
h.
Bad Debts Expense .............................................
Allowance for Doubtful Accounts................
To record estimated bad
34,763
34,763
debts.*
*Beginning receivables ...........................
$ 659,500
Credit sales ............................................
1,562,400
Collections .............................................
(1,168,400)
Write-offs ................................................
(30,400)
Ending receivables ................................
1,023,100
Percent uncollectible .............................
x 1.2%
Required ending allowance ...................
12,277 Cr.
Unadjusted balance
Beginning (credit) ................................
$ 7,914
Write-offs (debit) ..................................
30,400
22,486 Dr.
Adjustment to the allowance.................
$ 34,763 Cr.
©McGraw-Hill Companies, 2009
414
Financial and Managerial Accounting, 3rd Edition
Problem 7-3B (35 minutes)
Part 1
a. Expense is 1.2% of credit sales
Dec. 31 Bad Debts Expense.............................................. 35,112
Allowance for Doubtful Accounts ................
35,112
To record estimated bad debts
[$2,926,000 x .012].
b.
Expense is 0.7% of total sales
Dec. 31 Bad Debts Expense............................................
Allowance for Doubtful Accts. ....................
31,682
31,682
To record estimated bad debts
[($1,600,000 + $2,926,000) x .007].
c.
Allowance is 5% of accounts receivable
Dec. 31 Bad Debts Expense.............................................. 42,000
Allowance for Doubtful Accounts ................
42,000
To record estimated bad debts.*
*
Estimated balance ($886,000 x 5%) .......
Unadjusted balance ................................
$ 44,300 credit
2,300 credit
Required adjustment ..............................
$ 42,000 credit
Part 2
Current assets
Accounts receivable .................................... $886,000
Less allowance for doubtful accounts ......
(37,412)*
Or: Accounts receivable (net of $37,412*
uncollectible accounts) ............................
* Adjustment to the allowance .................... $ 35,112
Unadjusted allowance balance .................
2,300
Adjusted balance ....................................... $ 37,412
$848,588
$848,588
credit
credit
credit
Part 3
Current assets
Accounts receivable .................................... $886,000
Less allowance for doubtful accounts ......
(44,300)**
Or: Accounts receivable (net of $44,300**
uncollectible accounts) ............
$841,700
$841,700
** See computations in Part 1c.
©McGraw-Hill Companies, 2009
Solutions Manual, Chapter 7
415
Problem 7-4B (35 minutes)
Part 1
Calculation of the estimated balance of the allowance
Not due:
1 to 30:
31 to 60:
61 to 90:
Over 90:
$616,000 x .0090 = $ 5,544
298,000 x .0165 =
4,917
64,000 x .0615 =
3,936
41,000 x .3100 = 12,710
9,200 x .6400 =
5,888
$32,995
Part 2
Dec. 31 Bad Debts Expense........................................... 35,795
Allowance for Doubtful Accounts .............
To record estimated bad
*
35,795
debts.*
Unadjusted balance ..........................
$ 2,800 debit
Estimated balance .............................
32,995 credit
Required adjustment .........................
$35,795 credit
Part 3
Writing off the account receivable in 2010 will not directly affect Year 2010
net income. The entry to write off an account involves a debit to Allowance
for Doubtful Accounts and a credit to Accounts Receivable, both of which
are balance sheet accounts. Net income is affected only by the annual
recognition of the estimated bad debts expense, which is journalized as an
adjusting entry. Net income for Year 2009 (the year of the original sale)
included an estimated expense for write-offs such as this one.
©McGraw-Hill Companies, 2009
416
Financial and Managerial Accounting, 3rd Edition
Problem 7-5B (75 minutes)
Part 1
2008
Nov. 1 Notes Receivable—E. Merklin ................................ 13,560
Accounts Receivable—E. Merklin....................
13,560
To record note received on account.
Dec. 31 Interest Receivable ..................................................
Interest Revenue ...............................................
226
226
To record interest earned [$13,560 x .10 x 60/360].
2009
Jan. 30 Cash .......................................................................... 13,899
Interest Revenue* ..............................................
Interest Receivable............................................
Notes Receivable—E. Merklin ..........................
113
226
13,560
To record cash received on note with interest.
*[$13,560 x .10 x 30/360]
Mar. 1 Notes Receivable—Zada Co. ..................................
Accounts Receivable—Zada Co. .....................
6,000
6,000
To record note received on account.
Mar. 2 Notes Receivable—S. Patru ...................................
Accounts Receivable—S. Patru .......................
4,080
4,080
To record note received on account.
31 Accounts Receivable—Zada Co. ...........................
Interest Revenue ...............................................
Notes Receivable—Zada Co. ............................
6,040
40
6,000
To record receivable for dishonored note
plus interest [$6,000 x .08 x 30/360].
May 1 Cash ..........................................................................
Interest Revenue ...............................................
Notes Receivable—S. Patru .............................
4,114
34
4,080
To record cash received on note plus interest
($4,080 x .05 x 60/360 = $34).
©McGraw-Hill Companies, 2009
Solutions Manual, Chapter 7
417
Problem 7-5B (Concluded)
June 15 Notes Receivable—M. Braff..................................
Accounts Receivable—M. Braff .....................
9,000
9,000
To record note received on account.
June 21 Notes Receivable—H. Guam ................................
Accounts Receivable—H. Guam ....................
3,160
3,160
To record note received on account.
Aug. 14 Cash ........................................................................
Interest Revenue* ............................................
Notes Receivable—M. Braff............................
9,165
165
9,000
To record cash received on note plus interest.
*[$9,000 x .11 x 60/360] (rounded)
Sept. 19 Cash ........................................................................
Interest Revenue* ............................................
Notes Receivable—H. Guam ..........................
3,239
79
3,160
To record cash received on note plus interest.
*[$3,160 x .10 x 90/360]
Nov. 30 Allowance for Doubtful Accounts........................
Accounts Receivable—Zada Co. ...................
6,040
6,040
To record write-off of accounts.
Part 2
Analysis Component: When a business pledges its receivables as security
for a loan and the loan is still outstanding at period-end, the business must
disclose this information in notes to its financial statements. This is a
requirement because the business has committed a portion of its assets to
cover a specific portion of its liabilities, which means that if the business
dishonors its obligations under the loan, the creditor can claim the amount
of receivables identified in the pledge as collateral to cover the loan. This
arrangement must be disclosed to satisfy the full-disclosure principle.
©McGraw-Hill Companies, 2009
418
Financial and Managerial Accounting, 3rd Edition
SERIAL PROBLEM
— SP 7
Serial Problem — SP 7, Success Systems (50 minutes)
1.
a. Bad debts expense is recorded as 1% of total revenues:
$43,853 x .01 = $438.53 which is $439 rounded to nearest dollar.
2010
Mar. 31
Bad Debts Expense ...............................................
Allowance for Doubtful Accounts..................
439
439
To record estimated bad debts.
b. Bad debts expense is recorded as 2% of accounts receivable:
$22,720 x .02 = $454.40 which is $454 rounded to the nearest dollar.
2010
Mar. 31
Bad Debts Expense ...............................................
Allowance for Doubtful Accounts..................
454
454
To record estimated bad debts.
2. Allowance Balance as of 3/31/10 ................... $454 Cr.
Less: Account written off .............................. (100) Dr.
Allowance Balance as of 6/30/10 ................... $354 Cr. (before adjustment)
Required Balance: $20,250 x 0.02 = $405
Required Adjustment: $405 - $354 = $51
2010
June 30
Bad Debts Expense ...............................................
Allowance for Doubtful Accounts..................
51
51
To record estimated bad debts.
3. Many small business owners use the direct write-off method of
recording bad debts expense. The direct method is a simple and
straightforward method of accounting for bad debts expense. It can
also be justified if the amounts are immaterial. However, when the
amounts are material, the direct write-off method can result in accounts
receivable overstatements, bad debts expense understatements, and net
income overstatements.
The method required per GAAP is the
allowance method, which will result in the best matching of a period’s
expenses to revenues.
©McGraw-Hill Companies, 2009
Solutions Manual, Chapter 7
419
Reporting in Action
— BTN 7-1
1. Best Buy’s receivables at March 3, 2007, are $548,000,000.
2. Accounts receivable turnover for fiscal 2007 ($ millions)
$35,934
($449 + $548)/2
= 72.1 times
3. Average collection period = 365/ Turnover = 365 / 72.1 = 5.1 days
This time period is so short because Best Buy does not generally sell
items on credit. Customers use cash or credit cards to pay for their
merchandise. It is not likely that all customers pay in about 5 days. It
is more likely that credit customers pay in about 30 to 60 days. Since
there are so few of them, however, the average is very short. This is
because the numerator includes all sales (cash and credit) and the
denominator includes only credit sales.
4. Liquid assets as a percent of current liabilities ($ millions)
Mar. 3, 2007:
$1,205 + $2,588 + $548
$6,301
= 68.9%
Feb. 25, 2006:
$748 + $3,041 + $449
$6,056
= 70.0%
Comments: Current liabilities are obligations that are due to be paid or
liquidated within one year or one operating cycle of the business,
whichever is longer. Typically, cash provided from the operations of the
business during the year along with the existing liquid assets are used to
satisfy these obligations. Looking solely at Best Buy’s ability to satisfy
current obligations using cash, investment, and receivables assets, the
company is in a worse position at March 3, 2007, as compared to February
25, 2006. Best Buy may have some trouble satisfying its current liabilities
with these liquid assets. As a benchmark it is preferable to have about
100% in liquid assets to cover current liabilities.
5. Note 1 to Best Buy’s consolidated financial statements reports its
significant accounting policies. It reports that: “Cash primarily consists of
cash on hand and bank deposits. Cash equivalents primarily consist of
money market accounts and other highly liquid investments with an
original maturity of three months or less when purchased.”
6. Solution depends on the financial statement information obtained.
©McGraw-Hill Companies, 2009
420
Financial and Managerial Accounting, 3rd Edition
Comparative Analysis
1.
— BTN 7-2
Accounts Receivable Turnover ($ millions)
Best Buy (Current Year):
$35,934
($449 + $548)/2
= 72.1 times
Best Buy (Prior Year):
$30,848
($375 + $449)/2
= 74.9 times
Circuit City (Current Year):
$12,430
($221 + $383)/2
= 41.2 times
Circuit City (Prior Year):
$11,514
($231 + $221)/2
= 50.9 times
RadioShack (Current Year):
$4,778
($309 + $248)/2
= 17.2 times
RadioShack (Prior Year):
$5,082
($241 + $309)/2
= 18.5 times
2. Average Collection Period (or “Average Days’ Sales Uncollected”)
Best Buy (Current Year):
365 days / 72.1 times = 5.1 days
Best Buy (Prior Year):
365 days / 74.9 times = 4.9 days
Circuit City (Current Year): 365 days / 41.2 times = 8.9 days
Circuit City (Prior Year):
365 days / 50.9 times = 7.2 days
RadioShack (Current Year):365 days / 17.2 times = 21.2 days
RadioShack (Prior Year): 365 days / 18.5 times = 19.7 days
©McGraw-Hill Companies, 2009
Solutions Manual, Chapter 7
421
Comparative Analysis BTN 7-2 (concluded)
2.
(concluded)
Interpretation: The time periods for Best Buy and Circuit City are so
short because neither company sells merchandise on credit very often.
Receivables are a small percent of current assets and credit sales are a
small percent of total sales. RadioShack, however, has a longer
collection period because they sell on credit more often than Best Buy
and Circuit City.
3. All of the companies appear efficient in collecting accounts receivable,
but Best Buy and Circuit City collects them much more quickly in both
years than RadioShack. The differences between Best Buy and Circuit
City are not likely material.
Ethics Challenge
— BTN 7-3
1. If the estimate for bad debts is reduced then less Bad Debts Expense
will be recognized on the income statement resulting in a higher net
income. It also means that a lower allowance will be shown on the
balance sheet, which will result in a higher realizable value for
receivables and, therefore, a larger amount of current liquid assets.
2. Accounting procedures often allow for alternate methods or require the
use of estimates. Therefore, managers have some leeway in their
application of accounting procedures. In this case it seems reasonable
to doubt the motivation behind the manager’s recommendation for a
lower bad debts expense. There does not appear to be any economic
justification for the change in estimate aside from the self-interest of
the manager.
3. An informed owner or an effective board of directors will be aware of
alternate accounting methods and how estimates can affect the
financial statements.
The owner or board should review the
reasonableness of the manager’s and accountant’s estimate for bad
debts expense. Also, if the company is audited, the auditors will review
this estimate for reasonableness.
©McGraw-Hill Companies, 2009
422
Financial and Managerial Accounting, 3rd Edition
Communicating in Practice
— BTN 7-4
TO:
Sid Omar
FROM:
(Your Name)
DATE:
_______________
SUBJECT: Difference Between Bad Debts Expense and Allowance
For Doubtful Accounts
In accounting for credit sales and bad debts, we report sales revenue in the
period the sales are made, even though some credit sales do not result in
collections until the following period. Of course, some credit sales
eventually prove to be uncollectible. The fact that some accounts will
become uncollectible is what gives rise to bad debts expense and the
allowance for doubtful accounts.
Determining Bad Debts Expense
Bad debts expense represents the estimated amount of the year's sales
that will become uncollectible. The reported amount of bad debts expense
is determined at the end of the accounting period by multiplying an
estimated percent times the annual sales for the period. This year's bad
debts expense of $59,000 is calculated as 2% of the annual sales of
$2,950,000.
Determining Allowance For Doubtful Accounts
The Allowance for Doubtful Accounts unadjusted balance at the end of the
year is the cumulative result of recording bad debts expense and writing
off specific accounts receivable in all past years. The recognition of bad
debts expense at the end of each year has the effect of increasing the
Allowance for Doubtful Accounts balance.
However, when specific
accounts receivable are written off, they decrease the Allowance for
Doubtful Accounts balance. Prior to this year's bad debts expense
calculation, the cumulative total of writing off specific accounts was
$16,000 greater than the cumulative total of the past years' bad debts
expenses. Therefore, you could say that Allowance for Doubtful Accounts
had an "abnormal" balance of $16,000. Then, when this year's bad debts
expense of $59,000 is added to Allowance for Doubtful Accounts, the result
is an ending balance of $43,000.
Sid, I hope this clarifies the matter for you. If you have further questions,
please call me.
©McGraw-Hill Companies, 2009
Solutions Manual, Chapter 7
423
Taking It to the Net
1.
— BTN 7-5
At December 31, 2006, eBay’s ($ thousands) net accounts receivable
were $393,195, and at December 31, 2005, its net accounts receivable
were $322,788. (These amounts do not reconcile to gross accounts
receivable less allowances shown below because eBay subtracts
another Allowance for Authorized Credits account.)
2.
December 31,
($ thousands)
2006
Gross accounts receivable ....................... $476,060
Allowance for doubtful accounts ............. 68,401
% of uncollectible accounts ..................... 14.4%
3.
December 31,
2005
$396,373
62,507
15.8%
These percentages seem high compared to other companies, but
eBay’s operations are all online, and the risk of fraudulent transactions
is likely higher than other companies. eBay’s prior experience has led
them to estimate this high amount of uncollectible accounts.
Teamwork in Action
— BTN 7-6
Instructor note: Computations for the aging schedule are in the Problem 7-4A solution.
The check figure for total estimated uncollectibles is $48,591.
Adjusting entry
Dec. 31 Bad Debts Expense.............................................. 25,791
Allowance for Doubtful Accounts ................
To record estimated bad
*
25,791
debts.*
Req. allowance balance ....................
Unadjusted balance ...........................
$48,591 credit
22,800 credit
Adj. to the allowance .........................
$25,791 credit
December 31, 2009, Balance Sheet Presentation
Accounts Receivable ............................................ $1,311,000*
Less Allowance for Doubtful Accounts ..............
48,591
1,262,409**
* Total of each age category.
** Net Realizable Accounts Receivable.
©McGraw-Hill Companies, 2009
424
Financial and Managerial Accounting, 3rd Edition
Entrepreneurial Decision
— BTN 7-7
1. Computation of added annual net income or loss
a.
Added Monthly Net Income or Loss under Plan A
Increased sales ............................................................... $250,000
Cost of sales ................................................................... (135,500)
Credit card fees ($250,000 x 4.75%) ..............................
(11,875)
Recordkeeping and shipping ($250,000 x 6%) .............
(15,000)
Lost gross profit on store sales ($35,000 x 25%) ........
(8,750)
Net income (loss) ............................................................ $ 78,875
b.
Added Monthly Net Income or Loss under Plan B
Increased sales ............................................................... $500,000
Cost of sales ................................................................... (375,000)
Recordkeeping and shipping ($500,000 x 4%) .............
(20,000)
Uncollectible accounts ($500,000 x 6.2%) ....................
(31,000)
Net income (loss) ............................................................ $ 74,000
©McGraw-Hill Companies, 2009
Solutions Manual, Chapter 7
425
Entrepreneurial Decision — BTN 7-7 continued
2. Plan (A) provides a slightly higher income, so if the company can only
pursue one plan now, based purely on the financial aspect, it should
choose Plan (A).
Plan (A) might expand its product into new markets, and could increase
sales over time. However, this is a new distribution method for the
company, and it might lack the expertise to do it well. It will need to
further assess whether the benefit of additional expansion of online
sales over time will be more/less than the cost of lost sales through
normal channels.
Taking credit cards for these online sales reduces its risk of
uncollectible accounts. The credit card company takes the risk of the
customer not paying.
Plan (B) is a way to expand sales, possibly into more locations. This is
an expansion of a distribution method now employed.
The company does run some unknown risk associated with having new
customers. While the company may understand its current customers,
it will need to monitor the new customers to make sure that the
uncollectible accounts do not rise beyond acceptable levels.
Hitting the Road
— BTN 7-8
Telephone calls to VISA and American Express are the source of
information for this solution. VISA reports that the average transaction fee
it charges merchants is 3%. American Express has a range, depending on
volume of business and average price of merchandise sold, which ranges
from 2.95% to 4.5%.
Some merchants often choose not to accept certain cards because the
credit card fees are higher than others. In the case of VISA, compared to
American Express, a merchant might have to pay as much as 1.5% more on
its American Express transactions. This can be a major part of its net
profit margin, especially for businesses such as grocery and hardware
stores.
©McGraw-Hill Companies, 2009
426
Financial and Managerial Accounting, 3rd Edition
Global Decision — BTN
7-9
1. Accounts Receivable Turnover (£ millions)
DSG (Current Year):
£7,930
(£370 + £393) / 2
= 20.8 times
2. Average Collection Period (or “Average Days’ Sales Uncollected”)
DSG (Current Year):
365 days / 20.8 times
= 17.5 days
3. DSG is more like RadioShack than Best Buy or Circuit City in terms of
its turnover and collection periods. DSG probably sells on credit more
than both Best Buy and Circuit City.
©McGraw-Hill Companies, 2009
Solutions Manual, Chapter 7
427
©McGraw-Hill Companies, 2009
428
Financial and Managerial Accounting, 3rd Edition