CHAPTER 9
Accounting for Receivables
Solutions
Complete the following: Questions #1,2 (p444) ; Brief Exercise #1 (p445)
01.The three major types and classification of receivables are as follows:
TypeClassification
(1)Accounts receivableCurrent asset
(2)Notes receivable Current or noncurrent asset depending on due date
(3)Other receivablesCurrent or noncurrent asset depending on due date
02.Other receivables include nontrade receivables such as interest receivable, loans to company officers, advances to employees, and income taxes refundable.
BRIEF EXERCISE 9-1
(a)Other receivables
(b)Notes receivable
(c)Accounts receivable
Complete the following: Questions #4, 5, 6, 7 (p444); Brief Exercises #3, 4, 5, 6 (p445); Exercises #2, 3, 4 (p446-7); Problems #2, 4, 5 (p. 447-9)
04.Under the direct write-off method, bad debt losses are not estimated and no allowance account is used. When an account is determined to be uncollectible, the loss is debited to Bad Debts Expense. The direct write-off method makes no attempt to match bad debts expense to sales revenues, or to show the net realizable value of the receivables in the balance sheet. The disadvantages are that it may not match expenses with revenue and it does not accurately reflect the collectible value of the accounts receivable on the balance sheet.
5.The essential features of the allowance method of accounting for bad debts are:
(1)Uncollectible accounts receivable are estimated in advance, in order to match the cost of the bad debts against sales in the same accounting period in which the sale occurred.
(2)Estimated uncollectibles are debited to Bad Debts Expense and credited to Allowance for Doubtful Accounts through an adjusting entry at the end of each period.
(3)Actual uncollectibles are debited to Allowance for Doubtful Accounts and credited to Accounts Receivable at the time a specific account is written off.0
6.Net realizable value is the difference between Accounts Receivable (normal debit balance) and the Allowance for Doubtful Accounts (normal credit balance). Soo Eng should realize that the decrease in net realizable value occurs when estimated uncollectibles are recognized in an adjusting entry (debit Bad Debt Expense; credit Allowance for Doubtful Accounts). The write-off of an uncollectible account reduces both accounts receivable and the allowance for doubtful accounts by the same amount. Thus, net realizable value does not change.
7.The two bases of estimating uncollectibles under the allowance method are (1) percentage of sales (income statement method) and (2) percentage of receivables (balance sheet method). The percentage of sales basis establishes a percentage relationship between the amount of credit sales and expected losses from uncollectible accounts. This method emphasizes the matching of expenses with revenues. Under the percentage of receivables basis, the balance in the allowance for doubtful accounts is derived either (a) by applying a percentage estimate of bad debts to total receivables or (b) from an analysis of individual customer accounts. This method emphasizes net realizable value.
BRIEF EXERCISE 9-3
April 30Bad Debt Expense [($800,000 – $50,000) X 2%]...... 15,000
Allowance for Doubtful Accounts...... 15,000
BRIEF EXERCISE 9-4
(a)Dec. 31Bad Debts Expense [($400,000 X 1%) – $3,000] 1,000
Allowance for Doubtful Accounts 1,000
(b)Dec. 31Bad Debts Expense [($400,000 X 1%) + $800] 4,800
Allowance for Doubtful Accounts 4,800
BRIEF EXERCISE 9-5
(a)Jan. 24Allowance for Doubtful Accounts...... 7,000
Accounts Receivable 7,000
(b)
(1) / (1) Before Write-Off / (2) After Write-OffAccounts receivable
Allowance for doubtful accounts
Net realizable value / $700,000
0054,000
$646,000 / $693,000
0047,000
$646,000
BRIEF EXERCISE 9-6
March 4Accounts Receivable 7,000
Allowance for Doubtful Accounts 7,000
Cash 7,000
Accounts Receivable 7,000
EXERCISE 9-2
(a)(1)Dec.31 Bad Debts Expense...... 8,000
[($840,000 – $40,000) X 1%]
Allowance for Doubtful Accounts...... 8,000
(2)Dec.31 Bad Debts Expense...... 8,500
Allowance for Doubtful Accounts...... 8,500
[($110,000 X 10%) – $2,500]
(b)(1)Dec.31 Bad Debts Expense...... 4,000
[($840,000 – $40,000) X 0.5%]
Allowance for Doubtful Accounts...... 4,000
(2)Dec.31 Bad Debts Expense...... 6,000
Allowance for Doubtful Accounts...... 6,000
[($110,000 X 5%) + $500]
EXERCISE 9-3
(a)
Accounts Receivable / Amount / % / Estimated Uncollectible0-30 days outstanding
31-60 days outstanding
61-90 days outstanding
Over 90 days outstanding / $65,000
017,600
008,500
006,400 / 2
10
30
50 / $1,300
01,760
02,550
03,200
$8,810
(b)Mar.31 Bad Debts Expense...... 7,010
Allowance for Doubtful Accounts...... 7,010
($8,810 – $1,800)
EXERCISE 9-4
2002
Dec. 31Bad Debts Expense (2% X $400,000)...... 8,000
Allowance for Doubtful Accounts...... 8,000
2003
May 11Allowance for Doubtful Accounts...... 1,100
Accounts Receivable–Worthy...... 1,100
June 12Accounts Receivable–Worthy...... 1,100
Allowance for Doubtful Accounts...... 1,100
12Cash...... 1,100
Accounts Receivable–Worthy...... 1,100
PROBLEM 9-2A(a)$38,000
(b)$63,000 ($2,100,000 X 3%)
The balance in the Allowance for Doubtful Accounts is irrelevant.
(c)$47,400 [($840,000 X 6%) – $3,000]
(d)$53,400 [($840,000 X 6%) + $3,000]
(e)The weaknesses of the direct write-off method are two-fold. First, it does not match expenses with revenues. Second, the accounts receivable are not stated at their estimated net realizable value at the balance sheet date.
PROBLEM 9-4A(a)
Accounts Receivable / Amount / % / Estimated Uncollectible0-30 days outstanding
31-60 days outstanding
61-90 days outstanding
Over 90 days outstanding / $100,000
60,000
50,000
30,000 / 1
5
10
25 / $ 1,000
3,000
5,000
7,500
$16,500
(b)Bad Debts Expense...... 6,500
Allowance for Doubtful Accounts ($16,500 – $10,000)...... 6,500
(c)Allowance for Doubtful Accounts...... 2,000
Accounts Receivable...... 2,000
(d)Accounts Receivable...... 1,000
Allowance for Doubtful Accounts...... 1,000
Cash...... 1,000
Accounts Receivable...... 1,000
(e)When an allowance is established, an estimate is made of the accounts receivable or credit sales that will not be collected. An entry is made to record this estimate in the period in which the sale occurred. This matches the estimated expense with the revenue it generated.
PROBLEM 9-5A(a)Bad Debts Expense (3% X $1,000,000)...... 30,000
Allowance for Doubtful Accounts...... 30,000
(b)Allowance for Doubtful Accounts...... 37,000
Accounts Receivable...... 37,000
(c)Accounts Receivable...... 5,000
Allowance for Doubtful Accounts...... 5,000
Cash...... 5,000
Accounts Receivable...... 5,000
(d)Beginning balance...... $09,000
Add: Bad debt expense...... 30,000
Recovery of account...... 5,000
Deduct: Write-off of uncollectible accounts...... (37,000)
Ending balance...... $ 7,000
(e)When the percentage of sales (income statement) method is used to estimate bad debts, recoveries of accounts previously written off do not directly affect the bad debts expense (They may have an indirect effect, by influencing the estimator’s judgment regarding the appropriate percentage of sales to use).
If the percentage of receivables (balance sheet) method of providing for bad debts was used, the recovery would have a direct effect by increasing the balance is the allowance account and therefore reducing the expense to be recorded in the year-end adjustment.
Complete the following: Question #12 (p444);
Brief Exercise #8 (p445); Exercises #7, 8 (p 447)
12.(a) Principal = $12,000 [($360 x 4/12) ÷ 9%]
(b)Interest = $5,400 [$30,000 x 6% x 3]
(c)Interest rate = 8.33% [($2,500 x 6/12) ÷ $60,000]
(d)Time = 3 months [$875 ÷ ($50,000 x 7%) ÷ 12]
BRIEF EXERCISE 9-8
(a)Total Interest = $15,000 [$900,000 x 10% x 2/12]
(b)Interest Rate = 8% [($526.67 x 12) ÷ $79,000]
(c)Principal = $56,000 [($1,680 x 12/6) ÷ 6%]
EXERCISE 9-7
Nov.1 Notes Receivable–A. Morgan...... 18,000
Cash...... 18,000
Dec.1 Notes Receivable–Wright...... 3,600
Sales...... 3,600
15Notes Receivable–Barnes...... 4,000
Accounts Receivable–Barnes...... 4,000
31Interest Receivable...... 331
Interest Revenue*...... 331
*Calculation of interest revenue:
Morgan: $18,000 X 10% X 2/12 ...... $300
Wright: $3,600 X 6% X 1/12...... 18
Barnes:$4,000 X 8% X 0.5/12 ...... 13
Total accrued interest ...... $331
EXERCISE 9-8
2002
May1Notes Receivable–Jones...... 10,500
Accounts Receivable—Jones...... 10,500
Dec. 31 Interest Receivable...... 700
Interest Revenue ($10,500 X 10% X 8/12)...... 700
2003
May1Cash...... 11,550
Notes Receivable–Jones...... 10,500
Interest Receivable...... 700
Interest Revenue ($10,500 X 10% X 4/12)...... 350
Complete the following: Question #13 (p444) ; Brief Exercise #9 (p445)
13.Accounts receivable are amounts owed by customers on account, resulting from the sale of goods and services in the normal course of business operations (i.e., in trade). Interest is not normally charged on accounts receivable unless they are overdue. Accounts receivable are normally collected within 30 or so days.
Notes receivable represent claims that are evidenced by formal instruments of credit. A promissory note gives the holder a stronger legal claim than one on an account receivable. As a result, it is easier to sell to another party. Promissory notes are negotiable instruments, which means they can be transferred to another party by endorsement. Interest is normally charged on notes receivable for the entire maturity period. Notes receivable can extend for any period of time, from 30 days to a number of years.
BRIEF EXERCISE 9-9
Jan.10Accounts Receivable–Opal...... 9,000
Sales...... 9,000
Feb.9Notes Receivable–Opal...... 9,000
Accounts Receivable–Opal...... 9,000
Complete the following: Questions #16, 17 (p444) ; Brief Exercise #12 (p445);
Exercise #12 (p448); Problem #10 (p451)
16.An increase in the current ratio normally indicates an improvement in short-term liquidity. This may not always be the case because the composition of current assets may vary. In order to determine if the increase is an improvement in financial health, other ratios that should be considered include: Receivable turnover and collection period and inventory turnover and days sales in inventory ratios.
17.Receivables turnover = Net credit sales ÷ Average accounts receivable
Net credit sales = Receivables turnover x Average accounts receivable
Net credit sales = 8.0583 x $4,542,500
Net credit sales = $36,604,828
BRIEF EXERCISE 9-12
Receivables turnover
$11,006 ÷ [($420 + $380) ÷ 2] = 27.52 times
Collection period
365 days ÷ 27.52 = 13.27 days
EXERCISE 9-12
Nike
Receivables Turnover
$8,995.1 ÷ $1,569.4 = 5.73 times
365 days ÷ 5.73 = 63.7 days
Reebok
$2,899.9 ÷ $417.4 = 6.95 times
365 days ÷ 6.95 = 52.5 days
Nike’s receivable turnover and collection period are not as good as Reebok’s or the industry average. Reebok’s ratios are slightly better than the industry average.
PROBLEM 9-10A(a)
2000 / 1999Current ratio / $1,125 ÷ $1,903 = 0.6:1 / $1,527 ÷ $1,777 = 0.9:1
Acid test ratio / $756 ÷ $1,903 = 0.4:1 / $1,110 ÷ $1,777 = 0.6:1
(b) / 2000 / 1999
Receivables turnover / $5,446 ÷ $770 = 7.1x / $5,261 ÷ $603.5 = 8.7x
Collection period / 365 days ÷ 7.1
= 51.4 days / 365 days ÷ 8.7
= 42.0 days
(c)CN’s short-term liquidity has deteriorated. The current and acid test ratios both declined. The receivables turnover is less and the average collection period is longer.