Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
CHAPTER 8
Reporting and Analysing Receivables
ASSIGNMENT CLASSIFICATION TABLE
Study Objectives
Questions
Brief
Exercises
Exercises
A
Problems
B
Problems
1.
Identify the different
types of receivables.
1,2
1
2.
Explain how accounts
receivable are recognized in the accounts.
3
2
1
1A, 2A,
6A, 7A,
1B, 2B,
6B, 7B,
3.
Describe the method
used to account for bad
debts.
4, 5, 6, 7
3, 4, 5, 9
2, 3, 4
1A, 2A,
3A, 4A,
5A, 7A
1B, 2B,
3B, 4B,
5B, 7B
4.
Explain how notes re8, 9, 10
ceivable are recognized
and valued in the accounts.
6, 7, 8
5, 6
6A, 8A,
9A
6B, 8B,
9B
5.
Explain the statement
presentation of receivables.
11
9
7, 11
9A
9B
6.
Describe the principles
of sound accounts receivable management.
12, 13
10
8
7.
Identify the ratios used
to analyse a company’s
receivables.
14, 15, 16
9, 11
9, 10
7A, 10A,
11A
7B, 10B,
11B
8.
Describe the methods
used to accelerate the
receipt of cash from receivables.
17, 18
12
11, 12
11A
11B
Solutions Manual
8-1
Chapter 8
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
ASSIGNMENT CHARACTERISTICS TABLE
Problem
Number
Description
Difficulty
Level
Time
Allotted (min.)
1A
Journalize receivables transactions.
Moderate
20-30
2A
Determine missing amounts.
Complex
15-20
3A
Journalize bad debts transactions.
Moderate
20-30
4A
Journalize bad debts transactions
Moderate
20-30
5A
Calculate bad debt amounts.
Moderate
20-30
6A
Journalize receivables transactions.
Moderate
20-30
7A
Journalize receivables transactions and calculate ratios.
Moderate
30-40
8A
Journalize notes receivables transactions.
Moderate
20-30
9A
Journalize credit card and notes receivable transactions; show balance sheet presentation.
Moderate
15-20
10A
Calculate and interpret ratios.
Moderate
15-20
11A
Evaluate liquidity.
Moderate
15-20
1B
Journalize receivables transactions.
Moderate
20-30
2B
Determine missing amounts.
Complex
15-20
3B
Journalize bad debts transactions.
Moderate
20-30
4B
Journalize and post bad debts transactions
Moderate
20-30
5B
Calculate bad debt amounts.
Moderate
20-30
6B
Journalize receivables transactions.
Moderate
20-30
7B
Journalize receivables transactions and calculate ratios.
Moderate
30-40
8B
Journalize notes receivables transactions.
Moderate
20-30
9B
Journalize credit card and notes receivable transac-
Moderate
15-20
Solutions Manual
8-2
Chapter 8
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kimmel, Weygandt, Kieso, Trenholm
Problem
Number
Description
tions; show balance sheet presentation.
Financial Accounting, Second Canadian Edition
Difficulty
Level
Time
Allotted (min.)
10B
Calculate and interpret ratios.
Moderate
15-20
11B
Evaluate liquidity.
Moderate
15-20
Solutions Manual
8-3
Chapter 8
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
ANSWERS TO QUESTIONS
1.
Accounts receivable are amounts owed by customers on account. They result from the
sale of goods and services in the normal course of business operations (i.e., in trade).
Notes receivable represent claims that are evidenced by formal instruments of credit.
Notes normally extend for periods longer than an account and have a specified interest
rate attached.
2.
Other receivables include nontrade receivables such as interest receivables, loans to
company officers, advances to employees, and income taxes refundable.
3.
The sale should be recorded at $10,000 on December 29. If the customer takes the discount it will be recorded on January 8 as a sales discount. If sales discounts covering
more than one period of time are material for a company, they should be estimated and
recorded in the proper period similar to the allowance for doubtful accounts.
4.
The purpose of the allowance for doubtful accounts is to show an estimate of the accounts receivable expected to become uncollectible. The allowance account is used because the amount is only an estimate and we do not know for certain which customers will
not pay. The account can be in a debit balance if the amount of actual write-offs exceeds
previous provisions for bad debts.
5.
Soo Eng should realize that the decrease in net realizable value occurs when estimated
uncollectibles are recognized in an adjusting entry. 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.
6.
A company should write off an account when all methods of attempting to collect it have
failed. Therefore once an account is written off the company should no longer actively attempt collection.
7.
Two journal entries are required because the first journal entry has to restore the previously written off accounts receivable and the second journal entry records the actual receipt of payment on the account. This way there is a record that the person did eventually
pay for the purpose of future credit decisions.
8.
Notes are not recorded at their maturity value because the interest on the note is earned
over time. According to the revenue recognition principle, interest is recorded as earned.
9.
In total the note will earn $1,250 interest ($30,000 x 5% x 10/12). $1,000 will be recorded
for the year ended December 31 – 8 months interest ($30,000 x 5% x 8/12).
Solutions Manual
8-4
Chapter 8
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
Questions (Continued)
10.
Payee:
Accounts Receivable ..............................................................
Notes Receivable ..............................................................
Interest Revenue ...............................................................
Maker (May Ltd.):
Notes Payable.........................................................................
Interest Expense .....................................................................
Accounts Payable ..............................................................
11.
Receivables
Accounts receivable
Less: Allowance for doubtful accounts
Net realizable value
Notes receivable
Less: Allowance for doubtful accounts
Net realizable value
xxx
xxx
xxx
xxx
xxx
xxx
$xxx
xx
xxx
$xxx
xx
xxx
12.
The steps involved in receivables management are:
(1) Determine to whom to extend credit
(2) Establish a payment period
(3) Monitor collections
(4) Evaluate the liquidity of receivables
(5) Accelerate cash receipts from receivables when necessary
13.
A concentration of credit risk exists when a material threat of nonpayment exists, from either a single customer or class of customers, that could adversely affect the company’s financial health.
14.
An increase in the receivables turnover ratio indicates a faster collection of receivables.
The higher the turnover ratio the fewer days it takes to collect the accounts receivable. An
increase in the collection period means that it is taking longer for the company to convert
sales in to cash.
15.
Sales for the period
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: the receivables turnover, average collection period, inventory turnover and days in inventory ratios.
= Receivables Turnover X Average Accounts Receivable
=
11.6 X $1,762.5 million
=
$20,445 million
Solutions Manual
8-5
Chapter 8
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
Questions (Continued)
17.
Bombardier may sell its receivables to accelerate the receipt of cash. The proceeds from
the sale of the receivables could be used to finance operations and reduce the need for the
company to rely on other sources of financing such as operating lines of credit. As well, the
company may not want to dedicate resources to the time consuming responsibility of billing
and collecting from customers. By selling the receivables and passing this responsibility to
others, Bombardier is free to concentrate on its core business activities.
18.
From its own credit cards, Sears may realize interest revenue from customers who do not
pay the balance due within a specified grace period. To account for these transactions the
company records a debit to accounts receivable and a credit to sales revenue.
Bank credit cards offer the following advantages:
(1) The credit card issuer makes the credit card investigation of the customer.
(2) The issuer maintains individual customer accounts.
(3) The issuer undertakes the collection process and absorbs any losses from uncollectible accounts.
(4) The retailer receives cash more quickly from the credit card issuer than it would from
individual customers.
To record a bank credit card transaction, the seller normally records a debit to cash for the
amount of the sale less the service charge required by the credit card company. A debit
is made to the service charge expense and a credit is made to sales revenue for the gross
amount of the sale.
The advantage of the debit card is that the cash is deducted immediately from the customers account. There are no credit checks or collection concerns so the service charges
are normally lower than for a bank credit card.
The entries to record a debit card sale are the same as the entry to record a bank credit
card sale.
By using its own credit cards, bank credit cards and debit cards Sears provides more
options to its customers, increases its revenue, and reduces its risk.
Solutions Manual
8-6
Chapter 8
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 8-1
(a)
(b)
(c)
(d)
Nontrade receivables
Notes receivable
Accounts receivable
Nontrade receivables
BRIEF EXERCISE 8-2
(a)
(b)
(c)
Accounts Receivable ................................................................
Sales ..............................................................................
14,000
Cost of Goods Sold ..................................................................
Inventory ..........................................................................
10,000
Sales Returns and Allowances .................................................
Accounts Receivable ......................................................
2,400
Inventory...................................................................................
Cost of Goods Sold ........................................................
1,440
Cash ($11,600 - $232) .............................................................
Sales Discounts ($11,600 X 2%) ..............................................
Accounts Receivable ($14,000 – $2,400) .......................
11,368
232
14,000
10,000
2,400
1,440
11,600
BRIEF EXERCISE 8-3
(a)
(b)
Bad Debt Expense ...................................................................
Allowance for Doubtful Accounts ....................................
4,500
4,500
The amount to be reported as bad debts expense would be $800 + $7,500 = $8,300.
Solutions Manual
8-7
Chapter 8
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
BRIEF EXERCISE 8-4
(a)
Allowance for Doubtful Accounts .......................................................
Accounts Receivable ...............................................................
(b)
(1)
Accounts receivable
Allowance for doubtful accounts
Net realizable value
Before Write-Off
$700,000
54,000
$646,000
18,000
18,000
(2)
After Write-Off
$682,000
36,000
$646,000
BRIEF EXERCISE 8-5
Accounts Receivable .........................................................................
Allowance for Doubtful Accounts .............................................
18,000
Cash ..................................................................................................
Accounts Receivable ...............................................................
18,000
18,000
18,000
BRIEF EXERCISE 8-6
Annual Interest Rate
10%
(a) 8%
12%
Total Interest
(b) $1,500.00
$400.00
(c) $1,680.00
BRIEF EXERCISE 8-7
Jan.
Feb.
10
9
Accounts Receivable ......................................................
Sales ....................................................................
12,000
Cost of Goods Sold ........................................................
Inventory ...........................................................
8,000
Notes Receivable ...........................................................
Accounts Receivable ...........................................
12,000
12,000
8,000
12,000
Solutions Manual
8-8
Chapter 8
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
BRIEF EXERCISE 8-8
(a)
Apr.
July
(b)
Apr.
July
1
1
1
1
Notes Receivable ....................................................................
Accounts Receivable .....................................................
10,000
Cash .......................................................................................
Notes Receivable ...........................................................
Interest Revenue ($10,000 x 7% x 3/12) ........................
10,175
Notes Receivable ....................................................................
Accounts Receivable .....................................................
10,000
Accounts Receivable ..............................................................
Notes Receivable ...........................................................
Interest Revenue ($10,000 x 7% x 3/12) ........................
10,175
10,000
10,000
175
10,000
10,000
175
BRIEF EXERCISE 8-9
(a)
(b)
Bad Debts Expense ..................................................................
Allowance for Doubtful Accounts .....................................
Current assets
Cash ................................................................................
Accounts receivable ........................................................
Less: Allowance for doubtful accounts ...........................
Merchandise inventory ....................................................
Prepaid expenses ............................................................
35,000
35,000
$ 90,000
$600,000
35,000
565,000
130,000
13,000
$798,000
(c)
Receivables turnover =
Average collection period =
$3,000,000
 5 times
$600,000
365 days
 73 days
5
Solutions Manual
8-9
Chapter 8
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
BRIEF EXERCISE 8-10
(a)
(b)
(c)
(d)
(e)
2.
3.
4.
5.
1.
Review company credit ratings
Collect information about competitors’ payment period policies
Prepare accounts receivable aging schedule
Calculate the receivables turnover and average collection period
Accept bank credit cards
BRIEF EXERCISE 8-11
Receivables Turnover ($ in millions):
$5,075.9
 20.7 times
($248.1 + $243.1)  2
Average Collection Period:
365 days
 18 days
20.7 times
BRIEF EXERCISE 8-12
Visa card
Cash ($100 – $3)......................................................................
Service Charge Expense ($100 X 3%) .....................................
Sales ...............................................................................
97
3
Nonbank card
Credit Card Receivables...........................................................
Sales ...............................................................................
100
Debit card
Cash ($100 – $3)......................................................................
Service Charge Expense ($100 X 3%) .....................................
Sales ...............................................................................
97
3
100
100
100
Solutions Manual
8-10
Chapter 8
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
SOLUTIONS TO EXERCISES
EXERCISE 8-1
Nicklaus Corp.
Jan.
6
16
Account Receivable—Watson Inc. .................................
Sales ......................................................................
6,000
Cost of Goods Sold ........................................................
Inventory .................................................................
3,600
Cash ($6,000 – $120) .....................................................
Sales Discounts (2% X $6,000) ......................................
Accounts Receivable—Watson Inc.........................
5,880
120
6,000
3,600
6,000
Watson Inc.
Jan.
6
16
Merchandise Inventory. ..................................................
Accounts Payable ...................................................
6,000
Accounts Payable ...........................................................
Merchandise Inventory ...........................................
Cash. ......................................................................
6,000
6,000
120
5,880
EXERCISE 8-2
(a)
(b)
Dec. 31
Dec. 31
Bad Debts Expense .............................................
Allowance for Doubtful Accounts .................
8,200
Bad Debts Expense .............................................
Allowance for Doubtful Accounts .................
7,500
8,200
7,500
Solutions Manual
8-11
Chapter 8
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
EXERCISE 8-3
(a)
Age of Accounts
0-30 days
31-60 days
61-90 days
Over 90 days
(b)
Mar. 31
(c)
Amount
$65,000
12,600
8,500
6,400
%
2
7
30
50
Estimated Uncollectible
$1,300
882
2,550
3,200
$7,932
Bad Debts Expense .............................................
Allowance for Doubtful Accounts .................
($7,932 – $2,200)
5,732
5,732
The total balance of receivables increased from 2003 to 2004. However, of concern is the
fact that each of the three categories of older accounts increased substantially during
2004. That is, customers are taking longer to pay and bad debts are likely to increase.
Management needs to investigate the causes of this change.
EXERCISE 8-4
2004
Dec. 31
Bad Debts Expense ........................................................
Allowance for Doubtful Accounts ....................................
($8,400 + $1,000)
9,400
9,400
2005
May 11
June 12
Allowance for Doubtful Accounts ....................................
Accounts Receivable—Worthy ................................
900
Accounts Receivable—Worthy .......................................
Allowance for Doubtful Accounts .............................
900
Cash ...............................................................................
Accounts Receivable—Worthy ................................
900
900
900
900
Solutions Manual
8-12
Chapter 8
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
EXERCISE 8-5
Nov.
Dec.
1
1
15
31
Notes Receivable ...........................................................
Cash .......................................................................
24,000
Notes Receivable ...........................................................
Sales ......................................................................
3,600
Cost of Goods Sold ........................................................
Inventory .................................................................
2,500
Notes Receivable ...........................................................
Accounts Receivable—B. Barnes ...........................
8,000
Interest Receivable .........................................................
Interest Revenue* ...................................................
361
*Calculation of interest revenue:
Bouchard’s note:
Wright’s note:
Barnes’ note:
Total accrued interest
$24,000 X 8% X 2/12
$3,600 X 6% X 1/12
$8,000 X 7% X 15/365
=
=
=.
24,000
3,600
2,500
8,000
361
$320
.18
23
$361
Note: Some students may also calculate interest using part months, rather than days.
EXERCISE 8-6
May
1
June 30
July
Oct.
Nov.
31
31
1
Notes Receivable ...........................................................
Accounts Receivable – Jioux Company .................
6,000
Interest Receivable ($6,000 X 5% X 2/12)......................
Interest Revenue ....................................................
50
Notes Receivable ...........................................................
Cash .......................................................................
10,000
Cash ...............................................................................
Note Receivable ............................................................
Interest Revenue ($10,000 X 7% X 3/12) ...............
10,175
Allowance for Doubtful Accounts ....................................
Note Receivable .....................................................
Interest Receivable ................................................
6,050
6,000
50
10,000
10,000
175
6,000
50
Solutions Manual
8-13
Chapter 8
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
EXERCISE 8-7
DEERE AND COMPANY
Balance Sheet (partial)
October 31, 2002
(in U.S. millions)
Receivables
Trade accounts and notes receivable .........................................................
Financing receivable
(net of allowance for doubtful accounts $136) ............................................
Other receivables .......................................................................................
Total receivables .......................................................................................
Less: Allowance for doubtful accounts* .............................................................
Net receivables..................................................................................................
$ 2,779.0
9,068.0
426.4
12,273.4
45.0
$12,228.4
* This presentation assumes that the allowance relates for all receivables. Some students may
also assume that it relates solely to accounts receivable.
EXERCISE 8-8
Bombardier has industry risk in that a significant amount of its receivables are concentrated in
the transportations and aerospace industry. However, due to the note disclosure, users are now
aware of this risk. So long as sales are being made to a variety of customers in the industry, users should not be concerned.
Solutions Manual
8-14
Chapter 8
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
EXERCISE 8-9
(a)
2002
Current ratio =
$1,163
 0.55 : 1
$2,134
2001
Current ratio =
$1,164
 0.71 : 1
$1,638
(b)
2002
Receivables turnover =
Average collection period =
2001
Receivables turnover =
Average collection period =
$6,110
 8.1 times
($781 + $726)  2
365 days
 45 days
8.1
$5,652
 7.4 times
($726 + $800)  2
365 days
 49 days
7.4
(c)
The accounts receivable represented 62.1% ($722  $1,163) of the company’s current
assets and 11.8% ($722  $6,110) of the company’s revenue in 2002. It represented
55.4% ($645  $1,164) of the company’s current assets and 11.4% ($645  $5,652) of the
company’s revenue in 2001. This is a significant portion of the company’s liquid assets
and its revenue and thus clearly deserves close monitoring.
(d)
The receivables turnover ratio and the average collection period seem to indicate that the
company’s management of receivables has improved. The turnover has improved from
7.4 times in 2001 to 8.1 times in 2002. The average collection period has decreased from
49 days in 2001 to 45 days in 2002. However it appears that overall liquidity has deteriorated as evidenced by the decline in the current ratio from 0.71:1 in 2001 to 0.55:1 in
2002.
Solutions Manual
8-15
Chapter 8
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
EXERCISE 8-10
(a)
(b)
(c)
(d)
Decrease
Increase
No effect
Increase
EXERCISE 8-11
(a)
Jan. 15
Jan. 20
Jan. 30
Feb. 10
Feb. 15
Credit Card Receivables .................................................
Sales ......................................................................
15,000
Cash ...............................................................................
Service Charge Expense ($4,500 X 2%) ........................
Sales ......................................................................
4,410
90
Cash ...............................................................................
Service Charge Expense ($1,000 X 3%) ........................
Sales ......................................................................
970
30
Cash ...............................................................................
Credit Card Receivables .........................................
12,000
Interest Receivable ($15,000 - $12,000 X 18% X 1/12)..
Interest Revenue ....................................................
45
15,000
4,500
1,000
12,000
45
(b) Service charge expense and interest revenue would be shown in the non–operating revenues and expense section of the Statement of Earnings
EXERCISE 8-12
One possible reason CN chose to sell may have been to improve its financial ratios. Other reasons include not wanting to deal with the administration of collecting accounts or the desire to
accelerate cash receipts.
Solutions Manual
8-16
Chapter 8
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
SOLUTIONS TO PROBLEMS
PROBLEM 8-1A
(a) Accounts Receivable ........................................
Sales .............................................................
800,000
Cash .................................................................
Accounts Receivable .....................................
743,000
(b) Allowance for Doubtful Accounts .......................
Accounts Receivable .....................................
7,000
(c) Accounts Receivable ........................................
Allowance for Doubtful Accounts ...................
4,000
Cash .................................................................
Accounts Receivable .....................................
4,000
(d) Bad Debt Expense ............................................
Allowance for Doubtful Accounts ...................
19,000
800,000
743,000
7,000
4,000
4,000
19,000
Allowance for Doubtful Accounts
Beg. Bal.
9,000
W/O
7,000 Recovery
4,000
Bad Debts 19,000
End Bal.
25,000
Solutions Manual
8-17
Chapter 8
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 8-1A (Continued)
(e)
Accounts Receivable
Beg. Bal. 200,000 Collections 743,000
Sales
800,000 W/O
7,000
Recovery
4,000 Collections
4,000
End Bal.
250,000
Allowance for Doubtful Accounts
Beg. Bal.
9,000
W/O
7,000 Recovery
4,000
Bad Debts 19,000
End Bal.
25,000
(f)
Net realizable value of receivables is $225,000 ($250,000 - $25,000)
Solutions Manual
8-18
Chapter 8
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 8-2A
(a)
Allowance for doubtful accounts = $425 (given)
(b)
$350 - $150 – (b) = $425
(b) = $225
(c)
Bad debt expense = Adjustment to allowance for doubtful accounts =
$225 (from (b))
(d)
Addition to Accounts Receivable = $45,000
(e)
Amounts written off = Reductions in the allowance account = $150
(f)
(f) + $45,000 - $46,350 - $150 = $4,500
(f) = $6,000
Solutions Manual
8-19
Chapter 8
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 8-3A
(a) Total estimated bad debts
Total
Accounts
receivable
% uncollectible
Estimated
bad debts
0-30
Number of Days Outstanding
31-60
61-90
91-120
$375,000
$220,000
1%
$90,000
4%
$40,000
8%
$10,000
16%
$15,000
30%
$15,100
$2,200
$3,600
$3,200
$1,600
$4,500
(b) Bad Debts Expense ...................................................
Allowance for Doubtful Accounts .........................
($15,100 + $10,000)
25,100
(c) Allowance for Doubtful Accounts ...............................
Accounts Receivable ...........................................
5,000
(d) Accounts Receivable .................................................
Allowance for Doubtful Accounts .........................
5,000
Cash ..........................................................................
Accounts Receivable ...........................................
5,000
(e)
Over 120
25,100
5,000
5,000
5,000
If Image.com used 4% of total accounts receivable rather than aging the individual accounts the allowance at year end, the bad debt expense adjustment
would be $25,000 [$15,000 ($375,000 x 4%) + $10,000]. The answers to (c)
– (d) would not change.
Aging the individual accounts rather than applying a percentage to the total
accounts receivable should produce a more accurate allowance and bad
debt expense.
Solutions Manual
8-20
Chapter 8
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 8-4A
(a)
Dec. 31 Bad Debts Expense ..............................
Allowance for Doubtful Accounts ..
($38,610 – $20,000)
(b)
18,610
18,610
2005
1.
2.
Mar. 31 Allowance for Doubtful Accounts ..........
Accounts Receivable ....................
800
May 31 Accounts Receivable ............................
Allowance for Doubtful Accounts ..
800
31 Cash .....................................................
Accounts Receivable ....................
800
(c)
800
800
800
2005
Dec. 31
Bad Debts Expense....................................
Allowance for Doubtful Accounts ..........
($38,610 – $45,000)
6,390
6,390
Solutions Manual
8-21
Chapter 8
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 8-5A
(a)
$36,000
(b)
$32,000 - $3,000 = $29,000
(c)
$32,000 + $3,000 = $35,000
(d)
Using the allowance method of reporting bad debt expense provides a better
balance sheet valuation for accounts receivable and better matches expenses to the period in which the sale occurs.
Solutions Manual
8-22
Chapter 8
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 8-6A
Jan. 5
20
Feb.18
Apr. 20
30
May 25
Aug. 18
25
Sept. 1
Accounts Receivable—George Company .........
Sales ..........................................................
16,000
Cost of Goods Sold ...........................................
Inventory ....................................................
9,600
Notes Receivable ..............................................
Accounts Receivable—George Company ..
16,000
Notes Receivable ..............................................
Sales ..........................................................
8,000
Cost of Goods Sold ...........................................
Inventory ....................................................
5,000
Cash ($16,000 + $360) .....................................
Notes Receivable .......................................
Interest Revenue ($16,000 X 9% X 3/12) ...
16,360
Cash ($11,000 + $293) .....................................
Notes Receivable .......................................
Interest Revenue ($11,000 X 8% X 4/12) ...
11,293
Notes Receivable ..............................................
Accounts Receivable—Avery Inc................
6,000
Cash ($8,000 + $200) .......................................
Notes Receivable .......................................
Interest Revenue ($8,000 X 5% X 6/12) .....
8,200
Accounts Receivable—Avery Inc. .....................
($6,000 + $120)
Notes Receivable .................................
Interest Revenue ($6,000 X 8% X 3/12)
6,120
Notes Receivable ..............................................
Sales ..........................................................
10,000
Cost of Goods Sold ...........................................
Inventory ....................................................
6,000
16,000
9,600
16,000
8,000
5,000
16,000
360
11,000
293
6,000
8,000
200
6,000
120
10,000
6,000
Solutions Manual
8-23
Chapter 8
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 8-7A
(a)
1.
Accounts Receivable .................................... 3,200,000
Sales .....................................................
3,200,000
2.
Sales Returns and Allowances ......................
Accounts Receivable.............................
50,000
50,000
3.
Cash ............................................................. 3,000,000
Accounts Receivable .............................
3,000,000
4.
Allowance for Doubtful Accounts ...................
Accounts Receivable .............................
90,000
Accounts Receivable.....................................
Allowance for Doubtful Accounts ...........
40,000
Cash .............................................................
Accounts Receivable .............................
40,000
5.
90,000
40,000
40,000
(b)
Accounts Receivable
Bal.
(1)
(5)
960,000 (2)
3,200,000 (3)
40,000 (4)
(5)
Bal. 1,020,000
(c)
50,000
3,000,000
90,000
40,000
Allowance for Doubtful Accounts
(4)
90,000 Bal.
(5)
70,000
40,000
Bal.
20,000
Balance before adjustment [see (b)] ....................
Balance needed ...................................................
Adjustment required .............................................
$ 20,000
110,000
$ 90,000
The journal entry would therefore be as follows:
Bad Debts Expense ......................................
Allowance for Doubtful Accounts ...........
90,000
90,000
Solutions Manual
8-24
Chapter 8
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 8-7A (Continued)
(d)
Receivables Turnover
$3,200,000 $50,000
 3.2 times
 $960,000 $1,020,000


2


Average Collection Period
Its average collection period is:
365 days
= 114 days
3.2
Solutions Manual
8-25
Chapter 8
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 8-8A
(a)
July 31
Aug. 31
Sept. 30
(b)
Sept. 30
30
Notes Receivable ........................ 50,000
Accounts Receivable ............
Interest Receivable .....................
Interest Revenue ..................
($50,000 x 5% x 1/12)
208
208
Cash ........................................... 50,416
Interest Receivable ...............
Interest Revenue
(50,000 X 5% X 1/12) ...........
Notes Receivable .................
Interest Receivable .....................
Interest Revenue ..................
($50,000 x 5% x 1/12)
50,000
208
208
50,000
208
Accounts Receivable ................... 50,416
Interest Receivable
($208 + $208) .......................
Notes Receivable .................
208
416
50,000
Solutions Manual
8-26
Chapter 8
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 8-9A
(a)
Oct. 1
7
12
21
31
31
Cash......................................................... . 8,093.33
Interest Receivable
($8,000 X 7% X 2/12) .........................
93.33
Notes Receivable ...............................
8,000.00
Accounts Receivable ................................
Sales ..................................................
6,900.00
Cash ($750 – $15)....................................
Service Charge Expense ($750 X 2%) .....
Sales ..........................................
735.00
15.00
Cash ($1,500 – $30).................................
Service Charge Expense ($1,500 X 2%) ..
Sales ..........................................
1,470.00
30.00
Accounts Receivable ...............................
Notes Receivable ...............................
Interest Receivable
($5,200 X 7% X 1/12) .........................
Interest Revenue
($5,200 X 7% X 1/12) .........................
5,260.66
Interest Receivable ..................................
Interest Revenue ................................
($10,200 X 9% X 1/12)
76.50
6,900.00
750.00
1,500.00
5,200.00
30.33
30.33
76.50
Solutions Manual
8-27
Chapter 8
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 8-9A (Continued)
(b)
Oct.1
Notes Receivable
Bal. 23,400.00 Oct. 15 8,000.00
Oct. 25 5,200.00
Oct. 31 Bal. 10,200.00
Interest Receivable
Oct. 1 Bal. 123.66 Oct. 1 93.33
Oct. 31
76.50 Oct. 31 30.33
Oct. 31 Bal. 76.50
Accounts Receivable
Oct. 7
6,900.00
Oct. 31
5,260.66
Oct. 31 Bal. 12,160.66
(c) Current assets
Notes receivable .......................................................
Accounts receivable. .................................................
Interest receivable. ....................................................
Total receivables .................................................
$10,200
12,161
77
$22,438
Solutions Manual
8-28
Chapter 8
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 8-10A
Rogers
Shaw
($ in millions)
Receivables turnover
$4,323
($558.8 $577.6) 2
Average collection period
$1,888.6
($208.8+ $206.8) 2
$4,323
= 7.6 times
$568.2
$1,888.6
 9.1 times
$207.8
365 days
= 48 days
7.6
365 days
= 40 days
9.1
Shaw’s receivables turnover was almost 20% higher than Rogers’, which
means Shaw was more efficient than Rogers in collecting its receivables.
However, both companies are still collecting their accounts receivables slower
than the industry average of 38 days.
Solutions Manual
8-29
Chapter 8
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 8-11A
(a)
At first glance it appears that Tianjin’s liquidity had deteriorated over the past
year since the company’s current ratio has fallen from 1:5:1 to 1:3:1. However, it is taking the company less time to collect its accounts receivable as
evidenced by the higher receivables turnover ratio. As well, the company appears to be moving its inventory more quickly as evidenced by the higher inventory turnover ratio. It is possible that the lower current ratio is due to the
fact that with improved collections and inventory turnover, the company is
carrying fewer current assets and not because the company’s liquidity has
deteriorated.
(b)
Changes in the turnover ratios do not directly affect profitability. However,
improvements in turnover generally indicate that the company is better able
to convert sales to cash. Improved liquidity could allow the company to better manage it cash flows and therefore, indirectly improve profitability.
(c)
There are several steps that Tianjin might have taken to improve its receivables and inventory turnover:
Receivables
-
The company could limit credit to only the best customers, however,
this could negatively affect sales.
-
The company could initiate the use of a cash discount to encourage
early payment of receivables.
-
The company could more aggressively monitor collections to encourage customers to pay on time.
-
The company could sell or factor its receivables to accelerate cash receipts.
Solutions Manual
8-30
Chapter 8
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 8-11A (Continued)
(c) (Continued)
Inventory
-
The company could limit the amount of inventory by improving its purchasing relationships with suppliers. If inventory could be purchased
more frequently, required inventory levels could be reduced.
-
Improvements in production processes could reduce the amount of
work in process and thereby reducing inventory and improving the
turnover ratio.
-
Moving to a system whereby inventory is only produced as needed, will
reduce the amount of finished goods inventory and improve the turnover ratio. However, there is some risk to this option as sales could be
lost if stock-outs occur.
Solutions Manual
8-31
Chapter 8
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 8-1B
(a) Accounts Receivable ........................................
Sales .............................................................
900,000
900,000
Cash ................................................................. 1,069,000
Accounts Receivable .....................................
1,069,000
(b) Allowance for Doubtful Accounts .......................
Accounts Receivable .....................................
6,000
(c) Accounts Receivable ........................................
Allowance for Doubtful Accounts ...................
3,000
Cash .................................................................
Accounts Receivable .....................................
3,000
(d) Bad Debt Expense ............................................
Allowance for Doubtful Accounts ...................
11,000
6,000
3,000
3,000
11,000
Allowance for Doubtful Accounts
10,000 Beg. Bal.
W/O
6,000 3,000 Recovery
11,000 Bad Debts
18,000 End. Bal.
Solutions Manual
8-32
Chapter 8
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 8-1B (Continued)
(e)
Beg. Bal.
Sales
Recovery
End Bal.
W/O
(f)
Accounts Receivable
400,000 Collections
900,000 W/O
3,000 Collections
225,000
1,069,000
6,000
3,000
Allowance for Doubtful Accounts
10,000
Beg. Bal.
6,000
3,000
Recovery
11,000
Bad Debts
18,000
End Bal.
Net realizable value of receivables is $207,000 ($225,000 - $18,000)
Solutions Manual
8-33
Chapter 8
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 8-2B
(a)
Allowance for doubtful accounts = $930 (given)
(b)
$930 - $750 + $105 = $285
(c)
Bad debt expense = Adjustment to allowance for doubtful accounts =
$285 [from (b)]
(d)
Addition to accounts receivable = Sales = $30,000
(e)
Amounts written off = Reductions in the allowance account = $105
(f)
$8,300 + $30,000 (d) - $32,000 - $105 (e) = $6,195
Solutions Manual
8-34
Chapter 8
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 8-3B
(a) Total estimated bad debts
Total
Accounts
receivable
% uncollectible
Estimated
bad debts
0-30
Number of Days Outstanding
31-60
61-90
91-120 Over 120
$260,000 $100,000 $60,000 $50,000 $30,000
1%
5%
10%
20%
$21,000
$1,000
$3,000
$5,000
$6,000
(b) Bad Debts Expense ...................................................
Allowance for Doubtful Accounts .........................
[$21,000 - $15,000]
6,000
(c) Allowance for Doubtful Accounts ...............................
Accounts Receivable ...........................................
2,000
(d) Accounts Receivable .................................................
Allowance for Doubtful Accounts .........................
1,000
Cash ..........................................................................
Accounts Receivable ...........................................
1,000
(e)
$20,000
30%
$6,000
6,000
2,000
1,000
1,000
By establishing an allowance at the end of each accounting period the bad
debt expense is recorded in the period in which the sales occur. This satisfies the matching principle.
Solutions Manual
8-35
Chapter 8
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 8-4B
(a)
Dec. 31 Bad Debts Expense ..............................
Allowance for Doubtful Accounts ..
($35,660 – $19,000)
(b)
16,660
16,660
2005
1.
2.
Mar. 1
May 1
1
(c)
Allowance for Doubtful Accounts ..........
Accounts Receivable ....................
800
Accounts Receivable ............................
Allowance for Doubtful Accounts ..
800
Cash .....................................................
Accounts Receivable ....................
800
800
800
800
2005
Dec. 31
Bad Debts Expense....................................
Allowance for Doubtful Accounts ..........
($35,660 – $40,000)
4,340
4,340
Solutions Manual
8-36
Chapter 8
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 8-5B
(a)
Bad debts written off
=
$28,000
(b)
$20,000 - $4,000 =
$16,000
(c)
$20,000 + $2,000 =
$22,000
(d)
The advantages of the allowance method are:
1.
It attempts to match bad debt expense related to uncollectible accounts
receivable with sales revenues on the statement of earnings.
2.
It attempts to show the net realizable value of the accounts receivable
on the balance sheet.
Solutions Manual
8-37
Chapter 8
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 8-6B
Jan.
5
Feb. 2
12
26
Apr.
5
12
Accounts Receivable—Brooks Company ...........
Sales ......................................................
6,000
Cost of Goods Sold ...........................................
Inventory ....................................................
4,000
Notes Receivable ..............................................
Accounts Receivable—Brooks Company ...
6,000
Notes Receivable ..............................................
Sales ..........................................................
7,800
Cost of Goods Sold ...........................................
Inventory ....................................................
5,000
Accounts Receivable—Mathias Co. ..................
Sales ..........................................................
5,000
Cost of Goods Sold ...........................................
Inventory ....................................................
3,750
Notes Receivable. .............................................
Accounts Receivable—Mathias Co. ...........
5,000
Cash ($7,800 + $78) .........................................
Notes Receivable .......................................
Interest Revenue ($7,800 X 6% X 2/12) .....
7,878
6,000
4,000
6,000
7,800
5,000
5,000
3,750
5,000
7,800
78
Solutions Manual
8-38
Chapter 8
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 8-6B (Continued)
June 2
July
5
July 15
Oct. 15
Cash ($6,000 + $80) .........................................
Notes Receivable .......................................
Interest Revenue ($6,000 X 6% X 4/12) .....
Accounts Receivable—Mathias Co.
($5,000 + $88) ..................................................
Notes Receivable .......................................
Interest Revenue ($5,000 X 7% X 3/12) .....
6,120
6,000
120
5,088
5,000
88
Notes Receivable ..............................................
Sales ..........................................................
2,000
Cost of Goods Sold ...........................................
Inventory ....................................................
1,500
Cash ($2,000 + $35) .........................................
Notes Receivable .......................................
Interest Revenue ($2,000 X 7% X 3/12) .....
2,035
2,000
1,500
2,000
35
Solutions Manual
8-39
Chapter 8
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 8-7B
(a)
1.
Accounts Receivable ......................................... 2,600,000
Sales .........................................................
2,600,000
2.
Sales Returns and Allowances .........................
Accounts Receivable .................................
40,000
40,000
3.
Cash................................................................. 2,200,000
Accounts Receivable .................................
2,200,000
4.
Allowance for Doubtful Accounts ......................
Accounts Receivable .................................
80,000
Accounts Receivable ........................................
Allowance for Doubtful Accounts ...............
25,000
Cash.................................................................
Accounts Receivable .................................
25,000
5.
80,000
25,000
25,000
(b)
Accounts Receivable
Bal.
(1)
(5)
Bal.
1,000,000 (2)
2,600,000 (3)
25,000 (4)
(5)
1,280,000
40,000
2,200,000
80,000
25,000
Allowance for Doubtful Accounts
(4)
Bal.
80,000 Bal.
(5)
50,000
25,000
5,000
Solutions Manual
8-40
Chapter 8
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 8-7B (Continued)
(c)
Balance before adjustment [see (b)] .........................
Balance needed .......................................................
Adjustment required .................................................
$ 5,000 dr.
70,000 cr.
$75,000 cr.
The journal entry would therefore be as follows:
Bad Debts Expense .................................................
Allowance for Doubtful Accounts....................
(d)
75,000
75,000
Receivables Turnover:
$2,600,000– $40,000
$2,560,000
=
= 2.25 times
($1,000,000 + $1,280,000)  2 $1,140,000
The average collection period is:
365 days
 162 days
2.25
Solutions Manual
8-41
Chapter 8
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 8-8B
(a)
Nov. 1
30
Dec. 31
Jan. 31
Feb. 1
(b)
Feb. 1
Notes Receivable ............................
Accounts Receivable ................
Interest Receivable
($20,000 X 7% X 1/12) ....................
Interest Revenue ......................
20,000
20,000
117
117
Interest Receivable..........................
Interest Revenue ......................
117
Interest Receivable..........................
Interest Revenue ......................
116
Cash................................................
Interest Receivable ...................
Notes Receivable .....................
20,350
Accounts Receivable .......................
Interest Receivable ...................
Notes Receivable .....................
20,350
117
116
350
20,000
350
20,000
Solutions Manual
8-42
Chapter 8
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 8-9B
(a) July 1
Cash ........................................................ 6,060.00
Notes Receivable ...............................
Interest Receivable
($6,000 X 6% X 2/12) ....................
5
14
31
31
Accounts Receivable ................................ 7,800.00
Sales ..................................................
Cash ($700 – $21)....................................
Service Charge Expense ($700 X 3%) .....
Sales ..................................................
60.00
7,800.00
679.00
21.00
700.00
Allowance For Doubtful Accounts ............ 4,824.00
Notes Receivable ...............................
Interest Receivable
($4,800 X 6% x 1/12) ....................
Interest Receivable ..................................
Interest Revenue
($9,000 X 5% X 1/12) ....................
6,000.00
4,800.00
24.00
37.50
37.50
Solutions Manual
8-43
Chapter 8
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 8-9B (Continued)
(b)
Notes Receivable
Jul. 1 Bal. 19,800 Jul. 1
Jul. 31
Jul. 31 Bal.
Jul. 1
Jul. 3
Jul. 5
9,000
Interest Receivable
84.00 Jul. 1 Bal.
37.50 Jul. 31
Jul. 31 Bal.
6,000
4,800
60.00
24.00
37.50
Accounts Receivable
7,800
Jul. 31 Bal.
7,800
(c) Current assets
Notes receivable ................................................
Accounts receivable ...........................................
Interest receivable ..............................................
Total receivables ..........................................
$ 9,000
7,800
38
$16,838
Solutions Manual
8-44
Chapter 8
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 8-10B
(a)
Nike
Reebok
($ in U.S. millions)
Receivables turnover
$9,893.0
$3,127.9
($1,693.5  $1,884.5 )  2 ($438.6  $482.7 )  2
$9,893.0
= 5.53 times
$1,789
Average collection period 365 = 66 days
5.53
$3,127.9
 6.79 times
$460.65
365
= 54 days
6.79
Reebok’s receivables turnover ratio was higher than Nike’s, which means that
Reebok was more efficient than Nike in turning receivables into cash. However, both companies are below the industry average in receivables turnover and
average collection period.
Solutions Manual
8-45
Chapter 8
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 8-11B
(a)
At first glance it appears that Hawryluk’s liquidity had improved over the past
year since the company’s current ratio has increased from 1:5:1 to 1:8:1.
However, it is taking the company more time to collect its accounts receivable as evidenced by the lower accounts receivable turnover ratio. As well,
the company appears to be moving its inventory less quickly as evidenced by
the lower inventory turnover ratio. The cause for these declines should be investigated as part of assessing the companies’ liquidity.
(b)
Changes in the turnover ratios directly affect cash flow. Improvements in the
receivables turnover and inventory turnover speed up the cash cycle which
provides the company with better cash flow and less need for outside financing.
(c)
There are several steps that Hawryluk could consider to improve its receivables and inventory turnover:
Receivables
-
The company could limit credit to only the best customers, however,
this could negatively affect sales.
-
The company could initiate the use of a cash discount to encourage
early payment of receivables
-
The company could more aggressively monitor collections to encourage customers to pay on time.
-
The company could sell or factor its receivables to accelerate cash receipts
Solutions Manual
8-46
Chapter 8
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 8-11B (Continued)
(c) Continued
Inventory
-
The company could limit the amount of inventory by improving its purchasing relationships with suppliers. If inventory could be purchased
more frequently, required inventory levels could be reduced.
-
Improvements in production processes could reduce the amount of
work in process and thereby reducing inventory and improving the
turnover ratio.
-
Moving to a system whereby inventory is only produced as needed will
reduce the amount of finished goods inventory and improve the turnover ratio. However, there is some risk to this option as sales could be
lost if stock-outs occur.
Solutions Manual
8-47
Chapter 8
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
BYP 8-1 FINANCIAL REPORTING PROBLEM
(a)
($ in millions)
Receivables turnover
$23,082
 42.9 times
($605  $472)  2
Average collection period
365
 8.5 days
42.9
Loblaw has very few credit sales. Given its average collection period of 8.5 days, one
can assume that the majority of its sales are cash sales.
(b)
Loblaw has a policy of writing off any credit card receivables that has a payment in arrears of greater than 180 days or where the likelihood of collection is considered remote.
(c)
Loblaw (through PC Bank) sells a portion of its credit card receivables to an independent
Trust through a process called securitization.
(d)
Loblaw seems to have a policy of quickly converting its receivables to cash. The company has very few receivables; therefore most of its sales must be on a cash basis. The
few receivables owned by the company are quickly sold through securitization allowing
the company to quickly turn the receivables into cash.
Solutions Manual
8-48
Chapter 8
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
BYP 8-2 COMPARATIVE ANALYSIS PROBLEM
(a)
Most of the receivables owned by the two companies are credit card receivables. However, Sobeys does have some mortgage and loans receivable representing long-term financing to franchisees.
(b)
($ in millions)
Loblaw
1.
Current ratio
$3,526
 1.12 : 1
$3,154
2.
= 42.9 times
$10,414.5
($285.4 + $251.0)  2
= 38.8 times
Average collection period
365
 8.5 days
42.9
(c)
$1,094.4
 0.92 : 1
$1,180.5
Receivables turnover
$23,082
($605  $472)  2
3.
Sobeys
365
= 9.4 days
38.8
Overall working capital management appear on par with the industry for both Loblaw and
Sobeys. The current ratio for Loblaws is around the industry average of 1:1 while Sobeys’
current ratio is less than the industry average. It appears that Loblaw manages it receivables better than the industry average. Its turnover rate is 42.9 times compared to the average of 40.4. Its average collection period of 8.5 days is slightly better than the industry average of 9 days. Sobeys’ ratios indicate that it is slightly below the industry average, at 38.8
times for its turnover ratio and 9.4 days for the average collection period.
Solutions Manual
8-49
Chapter 8
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
BYP 8-3 RESEARCH CASE
(a)
On the average, Canadians pay off 33% of their credit card balances monthly.
(b)
2.6% of balances are overdue by more than 30 days.
(c)
3% of uncollectible accounts were written off in the first quarter of 2002
(d)
In comparison to Canadians, Americans only pay off 15% of their balances monthly, delinquent accounts (accounts over 30 days) average 5.4% and in the first quarter of 2002
6.4% of uncollectible accounts were written off.
Solutions Manual
8-50
Chapter 8
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
BYP 8-4 INTERPRETING FINANCIAL STATEMENTS
(a)
($ in millions)
2002
2001
Current ratio
$722
 0.91 : 1
$797
$622
 0.80 : 1
$773
Receivables turnover
$4,902
($406 + $309)  2
$4,194
($309  $410)  2
= 13.7 times
= 11.7 times
Average collection period
365
 26.6 days
13.7
365
= 31.2 days
11.7
Suncor’s liquidity has improved over the past year. Its current ratio has increased to 0.91:1
from 0.80:1 and it is collecting its accounts receivables almost 5 days faster in 2002 versus
2001. The company’s current ratio is still under the industry average but they are collecting
receivables much faster than the average company in the industry.
(b)
By keeping the dollar amount of its allowance for doubtful accounts unchanged over the
past few years, the company had a much higher percentage of receivables recognized as
doubtful in 2001 versus 2002. It may be more relevant for the company to determine a percentage of receivables that it deems doubtful each year and adjust the balance in the
doubtful accounts by recognizing a bad debt expense annually. However, the company
may have identified specific accounts that are doubtful, which may be the reason why the
balance has not changed from year to year.
(c)
By regularly selling its accounts receivable Suncor is able to more quickly convert receivables into cash. The company may have determined that the fees associated with selling the
receivables are less than the cost of having to use short –term borrowings to finance operations. As well, the company may also not want to bother with the cost and effort required to
bill and collect the receivables and would rather sell the receivables and let another company deal with these issues.
Solutions Manual
8-51
Chapter 8
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
BYP 8-5 A GLOBAL FOCUS
(a)
Sears sold $8.1 billion of its receivables. This represents 20% ($8.1 ÷ ($32.595 + $8.1)) of
Sears’ total receivables. Thus, the sale of receivables by Sears is obviously significant.
Companies sell receivables to raise funds to meet cash needs. As well, Sears may not
have wanted to devote resources to the time consuming job of billing and collecting its receivables.
One concern that an investor would have is whether Sears is responsible for these receivables if the receivables go bad. That is, Sears may have to make up any deficiency to
the party it sold the receivables to if that party is not able to collect.
(b)
The receivables turnover ratio is calculated as net credit sales divided by average gross
accounts receivable.
($ in U.S. millions)
2002
$35,698
($32,595 + $29,321)  2
= 1.15 times
2001
$35,755
($29,321 + $18,003)  2
= 1.51 times
The average collection period is calculated as 365 (the number of days in a year) divided
by the receivables turnover ratio. For 2002 and 2001 this is calculated as:
2002
365
 317 days
1.15
2001
365
 242 days
1.51
Note that the average collection period for Sears is longer than for many companies because Sears provides instalment financing, allowing its customers to pay over an extended period of time.
Solutions Manual
8-52
Chapter 8
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
BYP 8-5 (Continued)
(c)
Both. By providing financing, Sears makes it possible for many of its customers to purchase goods that they don’t currently have adequate cash to purchase. Sears allows
these customers to pay off their balance in instalment payments, requiring that they pay
interest on the outstanding balance. This interest represents a significant portion of Sears'
revenue for the year.
(d)
The ratio of bad debts expense divided by sales for Sears for 2002 and 2001 is calculated
as:
2002
2001
$2,261
 6.3%
$35,698
$1,866
 5.2%
$35,755
This ratio gives an indication of the cost of bad debts per dollar of sales. The ratio has
gotten worse from 2001 to 2002. It should be monitored over time by management to ensure that the company’s credit policies are appropriate and that they are being followed.
Too tight a policy and the company will lose too many sales; too loose a policy and the
company will incur high bad debts expense.
Solutions Manual
8-53
Chapter 8
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
BYP 8-6 FINANCIAL ANALYSIS ON THE WEB
Due to the frequency of change with regard to information available on the World Wide Web, the
Accounting on the Web cases are updated as required. Their suggested solutions are also updated whenever necessary, and can be found online in the Instructor Resources section of our
home page <www.wiley.com/canada/kimmel>.
Solutions Manual
8-54
Chapter 8
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
BYP 8-7 COLLABORATIVE LEARNING ACTIVITY
(a)
2004
$500,000
2003
$600,000
2002
$400,000
$ 2,450
3,800
8,000
2,500
750
$17,500
$ 2,500
3,800
9,600
3,000
900
$19,800
$ 1,600
3,800
6,400
2,000
600
$14,400
3.5%
3.3%
3.6%
Average accounts receivable (5%) ................
$25,000
$30,000
$20,000
Investment earnings (5%) ..............................
$ 1,250
$ 1,500
$ 1,000
Total credit and collection expense per above
Add: Investment earnings*.............................
Net credit and collection expense ..................
$17,500
1,250
$18,750
$19,800
1,500
$21,300
$14,400
1,000
$15,400
Net expenses as a percentage of net sales ...
3.75%
3.55%
3.85%
Net credit sales ...........................................
Credit and collection expenses
Collection agency fees .......................
Salary of accounts receivable clerk ....
Uncollectible accounts........................
Billing and mailing costs .....................
Credit investigation fees .....................
Total ...........................................
Total expenses as a percentage of
net credit sales ...................................
(b)
*The investment earnings on the cash tied up in accounts receivables is an additional expense of continuing the existing credit policies.
(c)
The analysis shows that the credit card fee of 3% of net credit sales will be lower than the
percentage cost of credit and collection expenses in each year before considering the effect of earnings from other investment opportunities. However, after considering investment earnings, the credit card fee of 3% will be even more attractive to the company. Financially, the company should accept the offer to use the credit cards. However, the decision hinges on (1) the accuracy of the estimates of investment earnings, (2) the expected trend in credit sales, and (3) the effect the new policy will have on sales.
Nonfinancial factors include the effects on customer relationships of the alternative credit
policies and whether the Campus Fashions wants to continue with the handling of their
own accounts receivable.
Solutions Manual
8-55
Chapter 8
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
BYP 8-8 COMMUNICATION ACTIVITY
Memorandum
To:
Sales Staff
From:
Student
Re:
Management of the credit function
During the year Toys for Big Boys has experienced a significant increase in sales due to your efforts. However, it is important that the sales staff be aware that, in order for the company to generate the cash it needs to continue operations, it is essential that Toys for Big Boys be able to
generate cash from these sales. Cash is needed to pay for the inventory the company has purchased and to cover other operating expenses such as your sales commissions.
Over the past year, the company has noticed a trend whereby the average time to collect accounts receivables has increased from 30 days to 120 days. By allowing you to assume the role
of managing the credit function what it is likely is that you have become too focused on sales
without considering the quality of the sales and the ability of the customer to pay the receivable
within a reasonable period of time.
Given the increase in the average collection period, it is likely that the company has now assumed additional credit risk. The longer a customer takes to pay, the more likely that he will default on the receivable.
The selling staff has been placed in a conflict of interest position. While it is in your best interest
to stimulate sales, this may deter you from performing adequate credit checks. To improve this
process I would recommend using a separate credit department to evaluate the credit worthiness
of all potential credit customers. If the sales staff is opposed to this recommendation, at the very
least a set of specific criteria should be developed which would ensure that the selling staff only
grant credit to those customers who meet the company’s credit standards.
Solutions Manual
8-56
Chapter 8
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
BYP 8-9 ETHICS CASE
(a)
The stakeholders in this situation are:
The president of Shady Corporation
The controller of Shady Corporation
The shareholders of Shady Corporation
(b)
The ethical dilemma is whether the controller should issue the credit notes and reinvoice
the sale to make the receivable appear to be more current. This way Shady will be able to
meet the bank’s requirements and increase the amount of the operating line of credit.
(c)
To proceed with the president’s plan would be fraudulent. If Shady ever defaulted on the
loan and it was discovered that the invoices were reissued to manipulate the accounts receivable figures both Shady and potentially the controller could be liable. The controller
should point this out to Shady’s president and refuse to proceed with the adjustments. If
the president still insists that the invoices be reissued, the controller should resign from his
position.
Solutions Manual
8-57
Chapter 8
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
Legal Notice
Copyright
Copyright © 2004 by John Wiley & Sons Canada, Ltd. or related companies. All rights reserved.
The data contained in these files are protected by copyright. This manual is furnished under licence and
may be used only in accordance with the terms of such licence.
The material provided herein may not be downloaded, reproduced, stored in a retrieval system, modified,
made available on a network, used to create derivative works, or transmitted in any form or by any means,
electronic, mechanical, photocopying, recording, scanning, or otherwise without the prior written permission of John Wiley & Sons Canada, Ltd.
Solutions Manual
8-58
Chapter 8
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.