E8-1. Analyzing accounts receivable
(AICPA adapted)
To find the amount of gross sales, start by determining credit
sales. We
can do this with the accounts receivable T-account below.
Beginning AR
Credit sales
Ending AR
Accounts Receivable
$80,000
$1,000
Accounts written off
X
35,000
Cash collected
$74,000
$80,000 + X - $1,000 - $35,000 = $74,000
X = $30,000 = credit sales
Now that we know the amount of credit sales, we can add
cash sales to
this amount to find gross sales.
Credit sales
Cash sales
Gross sales
$30,000
30,000
$60,000
E8-10. Accounting for a securitization
Requirement 1:
FASB ASC 860-10-40-3 states that a financial asset should
be considered sold and therefore should be derecognized if it
is transferred and control is surrendered. As the problem’s
specifications state this to be the case, the entry to record the
sale follows:
DR Cash (or receivable from SE)
CR Accounts receivable
CR Gain on sale of receivables
$ 24,000,000
$20,500,000
3,500,000
Requirement 2:
When control over the receivables is not surrendered, as in
this scenario, the transaction should be treated as a
collateralized borrowing:
1
DR Cash (or receivable from SE)
CR Loan payable
$ 24,000,000
$24,000,000
E8-11. Determining whether it is a real sale
Years Ending December 31,
2011
2012
2013
$1,785,980 $1,839,559 $1,986,724
220,189
227,896
267,094
Sales
Accounts Receivable at year-end
Assuming that sales occur more or less uniformly over the
course of each month, approximately 15 days, on average,
lapse before invoices are mailed. Add this 15 days to the net
30 days credit terms to get average days sales in receivables
that should be outstanding if all customers pay on time. The
45 days sales in receivables outstanding [365 ÷ ($1,785,980 ÷
$220,189)] at the end of 2011 are consistent with this
explanation.
Requirement 1: Sales growth
Sales grew by 3% in 2012 ([$1,839,559 - $1,785,980] ÷
$1,785,980), while receivables grew by 3.5% ([$227,896 $220,189] ÷ $220,189). However,
sales grew by 8% in 2013 ([$1,986,724 - $1,839,559] ÷
$1,839,559), while receivables grew by 17.2% ([$267,094 $227,896] ÷ $227,896).
Requirement 2: Potential problems
The data in 2012 do not suggest any potential problems
because growth rates in sales and accounts receivable should
be roughly equal in the absence of changes in sales terms,
customer credit standing, or accounting methods. However,
the growth rate disparity in 2013 suggests that one or more of
these factors has come into play.
Requirement 3: Possible explanations
A change in sales terms would not necessarily require any
corrective
action to bring the financial statements into conformity with
GAAP.
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However, if required credit standings were relaxed, more
customers would
be expected to experience difficulty in paying (promptly) and
an increase in the Allowance for uncollectibles is probably
warranted. Changes in accounting methods require—at
minimum—adequate disclosure and may indicate that sales
were inappropriately included in the current period. For
example, various ―channel stuffing‖ schemes (e.g., bill and
hold) designed
to accelerate revenue usually result in disproportionate growth
in accounts
receivable and revenue, and should not—under GAAP—result
in immediately recognizable revenue.
3
P8-4. Preparing journal entries, aging analysis and balance
sheet presentation
Requirement 1:
The accounts receivable balance at December 31, 2011 and
related journal entries are:
Beginning balance
Sales
Ending balance
Accounts receivable
$ 850,000 $7,975,000 Collections
8,200,000
85,000 Write off
$ 990,000
DR Accounts receivable
CR Sales revenue
$8,200,000
$8,200,000
DR Cash
CR Accounts receivable
$7,975,000
DR Allowance for uncollectibles
CR Accounts receivable
$
$7,975,000
$
Requirement 2:
Oettinger Corporation
Accounts Receivable Aging Schedule
December 31, 2011
Accounts receivable
Age
Aging %
Balance
0-30 days
20.0%
$ 198,000
31-60 days
40.0%
396,000
61-90 days
35.0%
346,500
91-120 days
3.0%
29,700
120 days or more
2.0%
19,800
Total
$ 990,000
2011 writeoffs
85,000
85,000
Uncollectibles
Percentage Amount
2.0%
$ 3,960
5.0%
19,800
15.0%
51,975
25.0%
7,425
50.0%
9,900
$ 93,060
Allowance for uncollectibles
$85,000
$25,000
Beginning balance
82,000
22,000
71,060
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Provided based on 1% of sales
Required adjustment
$93,060
Ending balance,
per aging schedule
Requirement 3:
The journal entries affecting the allowance for uncollectible
accounts are:
DR Bad debt expense
$82,000
CR Allowance for uncollectibles
$82,000
To record bad debt expense as a % of sales ($8,200,000
x .01)
DR Bad debt expense
$71,060
CR Allowance for uncollectibles
$71,060
To adjust allowance for uncollectibles to required aging
analysis balance
(Note: This excludes the entry for the $85,000 write-off made
in
Requirement 1.)
Requirement 4:
Accounts receivable balance sheet presentation at December
31, 2011:
Gross accounts receivable
Less: Allowance for uncollectibles
Accounts receivable (net)
5
$990,000
(93,060)
$896,940
P8-5. Securitization
Requirement 1:
FASB ASC 860-10-40 on the subject of conditions for a sale
of financial assets states that a financial asset should be
considered sold if it is transferred and control is surrendered.
Control is deemed to be surrendered if transferred assets are
isolated from the transferor, the transferee’s rights to pledge
or exchange the assets are not impaired, and the transferor
does not maintain effective control over the transferred assets
via a repurchase or other agreement. The scenario regarding
Eva’s securitization appears to meet these criteria and thus
the securitization qualifies for sale accounting.
Requirement 2:
DR Cash (or Due from SE)
$20,750,000
CR Accounts receivable
$20,000,000
CR Gain on sale of receivables
750,000
Requirement 3:
Assets
Cash [$10 + $20.75]
$30.75
Mortgage receivables [$58 – $20]
38.00
Investments
27.00
Other assets
13.00
Total
$108.75
Liabilities and shareholders' equity
Notes payable
$50.00
Common stock
11.00
Retained earnings [$47 + $0.75]
47.75
Total
$108.75
Eva’s debt to equity ratio before securitization = $50 ÷ $58
= .8621
Eva’s debt to equity ratio after securitization = $50 ÷ $58.75
= .8511
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Therefore, Eva’s debt to equity ratio improves as a result of
the securitization.
Requirement 4:
Assets
Cash [$10 + $20.75]
Mortgage receivables
Investments
Other assets
Total
$30.75
58.00
27.00
13.00
$128.75
Liabilities and shareholders' equity
Notes payable [$50 + 20.75]
$70.75
Common stock
11.00
Retained earnings
47.00
Total
$128.75
If the securitization did not qualify for ―sale accounting,‖ it
would be treated as a collateralized borrowing, thus Eva’s
reported debt would increase:
Eva’s debt to equity ratio before securitization = $50 ÷ $58
= .8621
Eva’s debt to equity ratio after securitization = $70.75 ÷ $58 =
1.2198
P8-6. Analyzing accounts receivable
Allowance for doubtful accounts
$74,365 Beginning balance 2011
45,753 Bad debt expense
Bad debts written off (Plug
number)
$65,464
$54,654 Ending balance 2011
Gross accounts receivable
Beginning balance
2011
$
362,349
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Revenues
3,519,444
$3,471,285 Cash collected (plug number)
65,464 Bad Debts Written off
Ending Balance
2011
$ 345,044
Journal entries for 2011
DR Accounts receivable
CR Revenues
$3,519,444
$3,519,444
DR Bad debt expense
CR Allowance for doubtful accounts
$
45,753
DR Allowance for doubtful accounts
CR Accounts receivable
$
DR Cash
CR Accounts receivable
$3,471,285
$
45,753
$
65,464
65,464
$3,471,285
P8-16. Determining whether existing receivables represent real
sales
Requirement 1:
The shipment of the 19 motors to Macco Corporation do not
represent sales, but a transfer of inventory from one point
(Moto-Lite’s factory) to another point (Macco’s production
facility). Since title to the engines transfers to Macco when the
engines enter its production process, Moto-Lite should include
in its sales revenues only the nine engines used by Macco for
the period ending October 31.
The remaining ten aircraft engines at Macco’s represent
consigned inventory and as such would be included in MotoLite’s ending inventory at October 31.
Requirement 2:
As stated above, the aircraft engines at Macco’s facility
represent Moto-Lite (consigned) inventory until they are
placed into Macco’s production process. The nine engines
used by Macco would be included in Moto-Lites sales for the
quarter ending October 31. Accordingly, for the quarter ending
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October 31, Moto-Lite’s sales would include $54,000 ($6,000
x 9 engines), accounts receivable are $18,000 ((9 engines
sold minus 6 engines paid for) x $6,000) and gross profit is
$18,900 (9 engines x $6,000 x 35%). The following table
details the overstatement of Moto-Lites accounts receivable,
sales and gross profit at October 31.
Moto-Lite Company
Summary of Overstatements
Accounts
Gross Profit
Receivable
Sales
(35% of sales)
Description
Originally recorded:
($6000 x 19 engines)
Collections (6 engines)
Should be recorded:
($6000 x 9 engines)
Collections (6 engines)
Amount overstated
$114,000
(36,000)
78,000
$114,000
114,000
$39,900
39,900
54,000
(36,000)
18,000
$60,000
54,000
54,000
$60,000
18,900
18,900
$21,000
Inventory is understated by $39,000. This is determined as
follows. The average cost of each engine is $3,900 (i.e.,
$6,000 selling price x .65). There are 10 engines on
consignment, so $3,900 x 10 = $39,000.
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