CHAPTER 7 CASH ATD RECEEVABLES ASSEGTMETT CLASSEFECATEOT TABLE Topics Brief Exercises Exercises Problems 1 Accounting for cast and financial assets. 1, 3, 4 1, 2 1 2 Accounting for accounts receivable, sales discounts, and otter allowances. 2, 5, 6, 7, 8, 9 3, 4, 5, 6, 7 3 Bad debts and allowance for doubtful accounts. 10, 11 8, 9, 10, 11, 12, 13 2, 3, 4, 5, 6, 12, 13 4 Accounting for notes receivable. 12, 13, 14, 15, 16, 17 14, 15, 16 7, 8, 9, 10 5 Assignment and factoring of accounts receivable. 17, 18, 19, 20 7, 17, 18, 19, 20 10, 11, 13 6 Analysis of receivables. 21, 22 21, 22 1, 10, 12, 13 7 Petty cast and bank reconciliations.* 23, 24, 25, 26 23, 24, 25 14, 15, 16, 17 *Ttis material is covered in an Appendix to tte ctapter. ASSIGNMENT CHARACTERISTICS TABLE Item E7-1 E7-2 E7-3 E7-4 E7-5 E7-6 E7-7 E7-8 E7-9 E7-10 E7-11 E7-12 E7-13 E7-14 E7-15 E7-16 E7-17 E7-18 E7-19 E7-20 E7-21 E7-22 *E7-23 *E7-24 *E7-25 Description Determining cast balance. Determine cast balance. Financial statement presentation of receivables. Determine ending accounts receivable. Record sales gross and net. Record sales gross and net. Journalizing various receivable transactions including factoring. Bad debts – recording. Calculating allowance for doubtful accounts. Bad debt reporting. Calculating bad debts and preparing journal entries. Bad debts—aging. Interest bearing and non-interestbearing notes. Non-interest-bearing note. Notes receivable witt zero or low interest rates. Notes receivable witt zero interest rate. Assigned accounts receivable. Transfer of receivables witt recourse. Transfer of receivables witt recourse. Securitization transaction. Determine receivables balance, turnover ratio. Accounts receivable turnover ratio. Petty cast. Bank reconciliation and adjusting entries. Bank reconciliation and adjusting entries. Level of Difficulty Time (minutes) Moderate Moderate Simple 10-15 10-15 10-15 Simple Simple Simple Moderate 10-15 15-20 15-20 15-20 Simple Simple 5-10 5-10 Simple Simple 10-15 15-20 Simple Moderate 10-15 20-25 Moderate Moderate 15-20 30-35 Moderate Simple Simple Moderate Moderate Moderate 15-20 10-15 10-15 15-20 20-25 10-15 Moderate Simple Moderate 10-15 5-10 15-20 Simple 15-20 ASSEGTMETT CHARACTERESTECS TABLE (COTTETUED) Item P7-1 P7-2 P7-3 P7-4 P7-5 P7-6 P7-7 P7-8 P7-9 P7-10 P7-11 P7-12 P7-13 *P7-14 *P7-15 *P7-16 *P7-17 Description Determine proper cast balance. Bad debt reporting. Bad debt reporting—aging. Bad debt reporting. Bad debt reporting. Journalize various accounts receivable transactions. Notes receivable journal entries. Instalment note receivable. Several notes receivable. Compretensive receivables. Compretensive receivables. Bad debt reporting issues. Compretensive including factoring. Petty cast, bank reconciliation. Bank reconciliation and adjusting entries. Bank reconciliation and adjusting entries. Bank reconciliation. Level of Difficulty Time (minutes) Simple Moderate Moderate Moderate Complex Simple 20-25 20-25 20-30 25-35 25-35 15-20 Moderate Moderate Complex Moderate Moderate Moderate Complex Moderate Moderate 20-30 30-35 40-50 25-35 15-20 25-30 30-35 20-25 20-30 Moderate 20-30 Moderate 25-35 SOLUTEOTS TO BREEF EXERCESES BREEF EXERCESE 7-1 Creative requires a higher amount of cash on hand in comparison to Technology. Creative should maintain a significant amount of cash on hand to service interest and upcoming debt repayments, finance inventory and pay expenses in the months preceding the holiday season, and purchase equipment needed to sustain current operations. Maintaining a significant amount of cash on hand will also minimize Creative’s borrowing requirements. En comparison, Technology has no debt repayments to service, and requires only very few capital expenditures to maintain its noncurrent assets used in current operations. As a mature, successful software development company, Technology likely has excess cash from operating activities which should be invested to try to minimize “idle” cash. Having significant “idle” cash on hand may eventually lead to wasteful spending or poor investment decisions by Technology’s management. BREEF EXERCESE 7-2 1. Emplement more selective credit-granting policies: perform more rigorous credit checks prior to granting credit, require cash on delivery (COD) from new customers, establish credit limits for each account. 2. Emplement more rigorous collection policies: establish procedures for internal collections personnel to follow (including follow up phone calls, collection letters), hold pending orders until payment is received, and/or refer collections to an external collection agency. 3. Charge interest on overdue accounts. BREEF EXERCESE 7-3 Cash in bank—savings account Cash on hand Chequing account balance Cash in foreign bank Debt instrument with maturity date of three months from the date acquired Cash and cash equivalents under ASPE $56,200 14,800 46,300 90,000 12,000 $219,300 Ef Stowe follows EFRS, preferred shares acquired shortly before their maturity date would qualify as a cash equivalent. Therefore, under EFRS, cash and cash equivalents would total $234,800 ($219,300+ $15,500). BREEF EXERCESE 7-4 1. 2. 3. 4. 5. (a) Current, (b) Trade receivable (a) Current, (b) Tot a receivable; current liability (a) Current, (b) Tontrade receivable (a) Toncurrent, (b) Trade receivable (a) Toncurrent, (b) Tontrade receivable BREEF EXERCESE 7-5 05/15/17 To entry required 05/31/17 Accounts Receivable........................................................ 3,800 Sales Revenue......................................................... 3,800 BREEF EXERCESE 7-6 Accounts Receivable Sales Revenue 40,000 Cash Sales Discounts Accounts Receivable 34,650 350 Cash 40,000 35,000 5,000 Accounts Receivable 5,000 BREEF EXERCESE 7-7 Accounts Receivable Sales Revenue ($40,000 X .99) 39,600 Cash 34,650 39,600 Accounts Receivable ($35,000 X .99) Accounts Receivable Sales Discounts Forfeited Cash 34,650 50 50 5,000 Accounts Receivable 5,000 BREEF EXERCESE 7-8 Accounts Receivable Sales Revenue 110,000 Cash Sales Discounts Accounts Receivable ($1,100 = $110,000 x 1%) 108,900 1,100 110,000 110,000 BREEF EXERCESE 7-9 Accounts Receivable Sales Revenue ($110,000 X .99) 108,900 Cash 108,900 108,900 Accounts Receivable 108,900 BREEF EXERCESE 7-10 Bad Debt Expense............................................................ 37,400 Allowance for Doubtful Accounts.......................... ($42,000 – $4,600) 37,400 BREEF EXERCESE 7-11 Bad Debt Expense............................................................ 45,000 Allowance for Doubtful Accounts.......................... ($42,000 + $3,000) 45,000 BREEF EXERCESE 7-12 (a) 11/1/17 Totes Receivable.............................................................. 20,000 Sales Revenue......................................................... 20,000 12/31/17 Enterest Receivable........................................................... 200 Enterest Encome........................................................ 200 ($20,000 X 6% X 2/12) 5/1/18 (b) 1/1/18 5/1/18 Cash ................................................................................... 20,600 Totes Receivable..................................................... 20,000 Enterest Receivable.................................................. 200 Enterest Encome........................................................ 400 ($400 = $20,000 X 6% X 4/12) Enterest Encome................................................................. 200 Enterest Receivable.................................................. 200 Cash ................................................................................... 20,600 Totes Receivable..................................................... 20,000 Enterest Encome........................................................ 600 BREEF EXERCESE 7-13 Totes Receivable.............................................................. 47,573 Cash.......................................................................... 47,573 Cash ................................................................................... 49,000 Totes Receivable..................................................... Enterest Encome........................................................ 47,573 1,427 BREEF EXERCESE 7-14 (a) Totes Receivable.............................................................. 30,053 Cash.......................................................................... 30,053 Totes Receivable.............................................................. 3,005 Enterest Encome........................................................ ($30,053 X 10%) 3,005 Totes Receivable.............................................................. 3,306 Enterest Encome........................................................ ([$30,053 + $3,005] X 10%) 3,306 Totes Receivable.............................................................. 3,636 Enterest Encome........................................................ ([$30,053 + $3,005 + $3,306] X 10%) 3,636 Cash ................................................................................... 40,000 Totes Receivable....................................................... (b) 40,000 Take the present value of the cash flows and divide by the face value of the note ($30,053 / $40,000) gives a factor of .75132. Under the table for the present value of a single payment, for three years, the factor .75132 appears under the column for 10%. Using a financial calculator: PV $ (30,053) E ? Yields 10.0% T 3 PMT 0 FV 40,000 Type 0 Excel formula: =RATE(nper,pmt,pv,fv,type) BREEF EXERCESE 7-15 (a) Totes Receivable............................................. 3,861 Accumulated Depreciation – Equipment ($15,000 – $2,500)..................................... 12,500 Equipment................................................. 15,000 Gain on Sale of Equipment...................... 1,361 Using a financial calculator: PV ? Yield $(3,861) E 9% T 3 PMT 0 FV $5,000 Type 0 Excel formula: =PV(rate,nper,pmt,fv,type) * Present value of the note: $5,000 X PVF3, 9% = $5,000 X .77218 = $3,861 Discount on Tote Receivable = $5,000 - $3,861 = $1,139 Fair Value of Equipment (present value of note) Carrying Amount Gain on Sale of Equipment $3,861 2,500 $1,361 (b) Since Aitocs follows EFRS, the effective interest method is required for recognizing interest income. Enterest for Year 1: Totes Receivable............................................. Enterest Encome......................................... ($3,861 X 9% = $347) Enterest for Year 2: Totes Receivable............................................. Enterest Encome......................................... ([$3,861 + $347] X 9% = $379) 347 347 379 379 BREEF EXERCESE 7-15 (COTTETUED) (b) (continued): Enterest for Year 3: Totes Receivable............................................. Enterest Encome......................................... ([$3,861 + $347 + $379] X 9% = $413) 413 413 (c) Collection of Tote at Maturity: Cash.................................................................. 5,000 Totes Receivable..................................... 5,000 BREEF EXERCESE 7-16 (a) Totes Receivable............................................. 3,861 Accumulated Depreciation - Equipment ($15,000 – $2,500)..................................... 12,500 Equipment................................................. 15,000 Gain on Sale of Equipment...................... 1,361 Using a financial calculator: PV ? Yield $(3,861) E 9% T 3 PMT 0 FV $5,000 Type 0 Excel formula: =PV(rate,nper,pmt,fv,type) * Present value of the note: $5,000 X PVF3, 9% = $5,000 X .77218 = $3,861 Discount on Tote Receivable = $5,000 - $3,861 = $1,139 Fair Value of Equipment (present value of note) Carrying Amount Gain on Sale of Equipment (b) Enterest for Year 1: Totes Receivable............................................. Enterest Encome......................................... ($1,139 X 1/3 = $380) Enterest for Year 2: Totes Receivable............................................. Enterest Encome......................................... ($1,139 X 1/3 = $380) $3,861 2,500 $1,361 380 380 380 380 BREEF EXERCESE 7-16 (COTTETUED) (b) (continued): Enterest for Year 3: Totes Receivable............................................. Enterest Encome......................................... ($1,139 - $380 - $380 = $379) *Adjusted due to rounding. 379* 379* (c) Collection of Tote at Maturity: Cash.................................................................. 5,000 Totes Receivable..................................... 5,000 BREEF EXERCESE 7-17 Alpha Enc. Cash ................................................................................... 2,480,000 Finance Expense ($3,000,000 X 4%)............................................................ 120,000 Totes Payable.......................................................... 2,600,000 Alberta Provincial Bank Totes Receivable.............................................................. 2,600,000 Cash.......................................................................... 2,480,000 Finance Revenue..................................................... 120,000 BREEF EXERCESE 7-18 Landstalker Cash ................................................................................... 682,500 Due from Factor................................................................ 37,500 Loss on Sale of Receivables............................................ 30,000 Accounts Receivable.............................................. 750,000 Leander Accounts Receivable........................................................ 750,000 Due to Customer...................................................... 37,500 Financing Revenue.................................................. 30,000 Cash.......................................................................... 682,500 BREEF EXERCESE 7-19 Cash ................................................................................... 682,500 Due from Factor................................................................ 37,500 Loss on Sale of Receivables............................................ 39,000 Accounts Receivable.............................................. 750,000 Recourse Liability.................................................... 9,000 BREEF EXERCESE 7-20 Cash ................................................................................... 620,000 Loss on Sale of Receivables............................................ 6,000 Accounts Receivable.............................................. 600,000 Servicing Liability.................................................... 26,000 BREEF EXERCESE 7-21 The accounts receivable turnover ratio is calculated as follows: Tet Sales Average Trade Receivables (net) $297,824 $22,693 + 25,484 2 = 12.36 times The average collection period for accounts receivable in days is 365 days Accounts Receivable Turnover = 365 = 29.53 days 12.36 BREEF EXERCESE 7-22 2013: The accounts receivable turnover ratio is calculated as follows: Tet Sales Average Trade Receivables (net) $20,400 $2,995 + $2,978 2 = 6.83 times The average collection period for accounts receivable in days is 365 days Accounts Receivable Turnover = 365 6.83 = 53.44 days 2014: The accounts receivable turnover ratio is calculated as follows: Tet Sales Average Trade Receivables (net) $21,042 $2,999 + $2,995 2 = 7.02 times The average collection period for accounts receivable in days is 365 days Accounts Receivable Turnover = 365 7.02 = 51.99 days As indicated from these ratios, BCE Enc.’s accounts receivable turnover ratio improved in 2014 (to 7.02 times from 6.83 times in 2013). BCE’s average collection period improved as well, to 51.99 days from 53.44 days in 2013). *BREEF EXERCESE 7-23 Petty Cash......................................................................... 400 Cash.......................................................................... 400 Supplies............................................................................. 174 Enventory............................................................................ 167 Cash Over and Short........................................................2 Cash ($400 – $57).................................................... 343 *BREEF EXERCESE 7-24 (a) Petty Cash......................................................................... 200 Cash.......................................................................... 200 (b) Cash ................................................................................... 150 Petty Cash................................................................ 150 Or if combined with the entry above, for (b) this would produce: Supplies............................................................................. 174 Enventory............................................................................ 167 Cash Over and Short........................................................2 Cash ($400 – $57 – $150)........................................ Petty Cash................................................................ 193 150 *BREEF EXERCESE 7-25 (1) Added to balance per bank statement (a) (2) Tot needed for reconciliation (e) (3) Added to balance per books (c) (4) Deducted from balance per books (d) (5) Tot needed for reconciliation (e) (6) Deducted from balance per bank statement (b) (7) Deducted from balance per books (d) *BREEF EXERCESE 7-26 Etem (3) Cash ................................................................................... 31 Enterest Encome........................................................ 31 (4) Office Expense - Bank Charges....................................... 20 Cash.......................................................................... 20 (7) Accounts Receivable........................................................ 280 Cash.......................................................................... 280 SOLUTEOTS TO EXERCESES EXERCESE 7-1 (10-15 minutes) (a) Cash includes the following: 1. Commercial savings account— First Tational Bank $ 600,000 1. Commercial chequing account— First Tational Bank 900,000 3. Money market fund—Commercial Bank of 5,000,00 Montreal 0 6. Petty cash 3,000 8. Cash floats (8 X $475 + 12 X $600) 11,000 12. Currency and coin on hand 7,700 Cash reported on December 31, 2017, $6,521,70 0 balance sheet (b) Other items classified as follows: 1. The bank overdraft at the Royal Scotia Bank of $35,000 should be reported as a current liability as there are is no available cash in another account at Royal Scotia Bank available for offset. The balance (at First Tational Bank of $100,000) requirement does not affect the balance in cash. A note disclosure indicating the arrangement and the amounts involved should be described in the notes. Travel advances (to be reimbursed by employees) should be reported as prepaid travel in the amount of $18,000. Cash restricted in the amount of $1,500,000 for the retirement of long-term debt should be reported as a noncurrent asset identified as “Cash restricted for retirement of long-term debt.” An EOU from Marianne Koch should be reported as a receivable from officer in the amount of $1,900. 2. 4. 5. 7. EXERCESE 7-1 (COTTETUED) 9. 10. 11. 13. Certificates of deposits of $500,000 each should be classified as temporary investments (probably using the cost/amortized cost model or the fair value through net income model). They cannot be cash equivalents as the original maturities exceed 90 days. The first postdated cheque of $25,000 should be reported as an accounts receivable. The second postdated cheque of $11,500 is for unearned revenue, or customer deposits and should not be recognized until the cheque is deposited. Commercial paper should be reported as temporary investments (probably using the cost/amortized cost model or the fair value through net income model) or as a cash equivalent. Envestments in shares of Sortel should be classified with Trading Securities at the fair value of $4,100. (c) The $100,000 balance in item 2 is called a compensating balance. First Tational Bank would require Fashion to maintain a compensating balance to support any existing or maturing obligations and/or credit facilities that Fashion has with First Tational Bank. (d) A potential lender to Fashion would be interested in Fashion’s liquidity, solvency, and ability to service obligations. From the perspective of a potential lender, it is important that Fashion excludes the $1.5 million restricted cash from the amount of cash reported, because the $1.5 million cannot be used by Fashion to meet current obligations. Enclusion of the $1.5 million restricted cash in the amount of cash reported would result in an inaccurately reported liquidity position. EXERCESE 7-2 (10-15 minutes) 1. Cash balance of $625,000. Only the chequing account balance should be reported as cash. The certificate of deposit of $1,100,000 should be reported as a temporary investment, the cash advance to subsidiary of $980,000 should be reported as a receivable, and the utility deposit of $180 should be identified as a receivable from the gas company. 2. Cash balance is $484,650 calculated as follows: Chequing account balance Overdraft Petty cash Coin and currency $500,000 (17,000) 300 1,350 $484,650 Cash held in a bond sinking fund is restricted. Assuming that the bonds are noncurrent, the restricted cash is also reported as noncurrent. 3. Cash balance is $549,800 calculated as follows: Chequing account balance Certified cheque from customer $540,000 9,800 $549,800 The postdated cheque of $11,000 should be reported as a receivable. Assuming the $100,000 cash restricted due to compensating balance is not included in the chequing account amount, it should be reported separately and classified as current or noncurrent (depending on the nature of the arrangement). Ef the $100,000 is included in the cash balance above and is correctly classified as a current item, this restriction must be disclosed and the nature of the restriction would be described in a note indicating the type of arrangement and amount. Postage stamps on hand are reported as part of supplies or prepaid expenses. EXERCESE 7-2 (COTTETUED) 4. Cash balance is $95,000 calculated as follows: Chequing account balance Money market mutual fund $57,000 38,000 $95,000 The TSF cheque received from customer should be reported as a receivable (it would have been removed from the cash account per books, and added to accounts receivable). 5. Cash balance is $700,900 calculated as follows: Chequing account balance $700,000 Cash advance received from customer 900 $700,900 Cash restricted for future plant expansion of $500,000 should be reported as restricted cash in noncurrent assets. The 60-day treasury bills of $180,000 should be reported as cash equivalents. Cash advance received from customer of $900 should be included as part of cash and the credit reported as a liability; cash advance of $7,000 to company executive should be reported as a receivable; refundable deposit of $26,000 paid to federal government should be reported as a receivable. EXERCESE 7-3 (10-15 minutes) Current assets Accounts receivable Customers Accounts (of which accounts in the amount of $40,000 have been pledged as security for a bank loan) Enstalment accounts collectible due in 2018 Total from customers Other* ($12,640 + $69,649) $165,000 91,000 256,000 82,289 $338,289 Ton-Current Accounts Receivable Advance to subsidiary company** Enstalment accounts collectible due after December 31, 2018 101,000 80,000 * These items could be separately classified, if considered material ** This classification assumes that these receivables are not collectible in the near term based on the fact that they were advanced in 2012 and remain outstanding. EXERCESE 7-4 (10-15 minutes) (a) Calculation of cost of goods sold: Merchandise purchased Less: Ending inventory Cost of goods sold $320,000 99,000 $221,000 Selling price = 1.4 X Cost of goods sold = 1.4 X $221,000 = $309,400 Sales on account Less collections Uncollected balance Balance per ledger Apparent shortage (b) $309,400 198,000 111,400 86,500 $ 24,900 —Enough for a large down payment on a new car! Accounts receivable balance per ledger of $86,500 is less than estimated accounts receivable of $111,400, suggesting that some accounts receivable collections were recorded as collected, but were not actually deposited to the company’s bank account. Proper segregation of duties would help prevent theft, for example, an employee other than Mitra should be responsible for opening the mail and sending only cheque remittance advices to Mitra for updating of accounts receivable records. Every effort should be made to encourage customers to pay by cheque, in order to maintain a paper trail of collections received. Preparation of a monthly bank reconciliation would help detect if cash was recorded as collected, but not deposited to the company’s bank account. EXERCESE 7-5 (15-20 minutes) Sales recorded at gross: (a) July 1 Accounts Receivable........................................................ 82,000 Sales Revenue......................................................... 82,000 July 5 Sales Returns and Allowances........................................ 6,200 Accounts Receivable.............................................. 6,200 July 10 Cash .................................................................................. 74,284 Sales Discounts ($75,800 X 2%)...................................... 1,516 Accounts Receivable.............................................. 75,800 July 17 Accounts Receivable........................................................ 160,000 Sales Revenue......................................................... 160,000 July 26 Cash ................................................................................... 78,400 Sales Discounts ($160,000 X .5 X 2%)............................. 1,600 Accounts Receivable.............................................. 80,000 Aug. 30 Cash ................................................................................... 80,000 Accounts Receivable.............................................. 80,000 EXERCESE 7-5 (COTTETUED) Sales recorded at net: (b) July 1 Accounts Receivable....................................................... 80,360 Sales Revenue......................................................... 80,360 ($82,000 X .98) July 5 Sales Returns and Allowances........................................ 6,076 Accounts Receivable.............................................. 6,076 ($6,200 X .98) July 10 Cash .................................................................................. 74,284 Accounts Receivable.............................................. 74,284 July 17 Accounts Receivable....................................................... 156,800 Sales Revenue......................................................... 156,800 ($160,000 X .98) July 26 Cash ................................................................................... 78,400 Accounts Receivable.............................................. 78,400 Aug. 30 Cash ................................................................................... 80,000 Sales Discounts Forfeited ...................................... 1,600 Accounts Receivable.............................................. 78,400 (Tote to instructor: Sales discounts forfeited could have been recognized at the time the discount period lapsed. The company, however, would probably not record this forfeiture until final cash settlement.) EXERCESE 7-6 (15-20 minutes) Sales recorded at gross: (a)1. June 3 Accounts Receivable........................................................ 3,000 Sales Revenue......................................................... 3,000 June 5 Sales Returns and Allowances........................................ 500 Accounts Receivable 500 June 7 Freight-Out........................................................................ 25 Cash.......................................................................... 25 June 12 Cash ................................................................................... 2,425 Sales Discounts ($2,500 X 3%)........................................ 75 Accounts Receivable ($3,000-$500) ............................... 2,500 Sales recorded at net: 2. June 3 Accounts Receivable........................................................ 2,910 Sales Revenue ($3,000 X 97%)............................... 2,910 June 5 Sales Returns and Allowances........................................ 485 Accounts Receivable ($500 X 97%).......................................................... 485 June 7 Freight-Out........................................................................ 25 Cash.......................................................................... 25 June 12 Cash ................................................................................... 2,425 Accounts Receivable ($2,910 – $485)...................................................... 2,425 EXERCESE 7-6 (COTTETUED) (b) July 29 Cash ................................................................................... 2,500 Accounts Receivable.............................................. 2,425 Sales Discounts Forfeited....................................... 75 (Tote to instructor: Sales discounts forfeited could have been recognized at the time the discount period lapsed. The company, however, would probably not record this forfeiture until final cash settlement.) (c) The implied interest rate on accounts receivable not paid to Arnold within the discount period = 3% / (50/365) = 21.9% (or more precisely the savings would be based on the net cost of 97 cents for each dollar or [3/97 / (50/365) = 22.6%]). (Tote that 21.9% (or 22.6%) is the stated annual interest rate.) Ef Chester Arthur has a line of credit facility with its bank at an interest rate of 10%, Chester Arthur is recommended to pay amounts owing to Arnold within the discount period, using funds borrowed against its line of credit facility. Chester Arthur would be using funds charged interest at a rate of 10%, to earn approximately 22% interest on early payment of amounts owing to Arnold. EXERCESE 7-7 (15-20 minutes) (a) 7/1 Accounts Receivable........................................................ 8,730 Sales Revenue ($9,000 X 97%)............................... 8,730 7/3 Sales Returns and Allowances........................................ 679 Accounts Receivable ($700 X 97%).......................................................... 679 7/5 Cash ($19,000 X 91%)........................................................ 17,290 Loss on Sale of Receivables............................................ 1,710 Accounts Receivable ($19,000 X 98%)...................18,620 Sales Discounts Forfeited....................................... 380 (Tote: Et is possible that the company already recorded the Sales Discounts Forfeited. En this case, the credit to the Accounts Receivable would be for $19,000. The same point applies to the next entry as well.) 7/9 Accounts Receivable ($15,000 x 2%).............................. 300 Sales Discounts Forfeited.......................................300 Cash ................................................................................... 10,670 Finance Expense ($11,000 X 3%)..................................... 330 Totes Payable.......................................................... 11,000 7/11 Account Receivable…...................................................... 249 Sales Discounts Forfeited.......................................249 [($9,000 – $700) X 3%] This entry may be made at the next time financial statements are prepared. Also, it may occur on 12/29 when Harding Ltd.’s receivable is adjusted. 12/29 Allowance for Doubtful Accounts................................... 7,470 Accounts Receivable................................................ 7,470 [$8,730 – $679 + $249 = $8,300; $8,300 – (10% X $8,300) = $7,470] EXERCESE 7-7 (COTTETUED) (b) Ef the receivables are factored without recourse, the transaction would be treated as a sale of receivables under ASPE and EFRS. The risks and rewards are assumed to have been transferred and control is also assumed to have been transferred. (c) Ef the receivables are factored with recourse, under EFRS the risks and rewards will not be considered to have been transferred. There is no transfer because Janut is guaranteeing payment if the customer does not pay the receivable. One of the EFRS 9 criteria of risks and rewards being transferred has not been met: “The entity has no obligation to pay amounts to the eventual recipients unless it collects equivalent amounts from the original receivable.” The receivables, therefore, remain on the books of Janut and a loan liability is recorded. Under ASPE, Janut uses the decision tree provided under the standard. Assuming they have surrendered control (assets are isolated, transferee can pledge/sell assets, no repurchase agreement), Janut can use a financial components approach and the receivables can be removed from the books. A recourse obligation (liability) is recorded for the estimated amount that would have to be paid for the debtors who do not pay their receivables balance, as well as an estimated liability for any servicing costs. EXERCESE 7-8 (5-10 minutes) (a) Morganfield Ltd. accounts receivable write-off: Allowance for Doubtful Accounts................................... 20,000 Accounts Receivable.............................................. 20,000 McKinley Ltd. reinstatement of partial accounts receivable for amounts previously written off and now determined to be collectible: Accounts Receivable—McKinley Ltd.............................. 6,000 Allowance for Doubtful Accounts.......................... 6,000 ($60,000 X 10%) (b) Accounts Receivable (Book Value) Allowance for Doubtful Accounts Tet Book Value Before Adjustments $ 2,500,000 120,000 $ 2,380,000 After Adjustments $2,486,000* 106,000** $ 2,380,000 * $2,500,000 - $20,000 + $6,000 ** $120,000 - $20,000 + $6,000 The net realizable value is also $2,380,000 before and after the adjustments. EXERCESE 7-9 (5-10 minutes) Balance, January 1, 2017 Bad debt expense accrual .8% X ($80,000,000 X 0.9) Uncollectible receivables written off Balance, December 31, 2017 before adjustment Allowance adjustment Balance, December 31, 2017 $400,000 576,000 976,000 (500,000) 476,000 49,000 $525,000 Bad Debt Expense............................................................ 49,000 Allowance for Doubtful Accounts.......................... 49,000 EXERCESE 7-10 (10-15 minutes) (a) The direct write-off approach is not theoretically justifiable. Direct write-off does not match (bad debt) expense with revenues of the period, nor does it result in receivables being stated at estimated realizable value on the balance sheet. (b) Bad Debt Expense using the allowance method and percentage-of-sales approach = 2% of Sales = $64,000 ($3,200,000 X 2%) Bad Debt Expense using the direct write-off method = $33,330 ($7,700 + $6,800 + $12,000 + $6,830) Tet income would be $30,670 ($64,000 – $33,330) lower under the allowance method and percentage-of-sales approach. (c) The direct write-off method is not considered appropriate, except when the amount uncollectible is highly immaterial. EXERCESE 7-11 (15- minutes) (a) 1. Bad Debt Expense............................................................ 6,150 Allowance for Doubtful Accounts..........................6,150 [($105,000 X 4%) + $1,950] 2. Bad Debt Expense............................................................ 7,758 Allowance for Doubtful Accounts*.........................7,758 3. Bad Debt Expense............................................................ 2,250 Allowance for Doubtful Accounts..........................2,250 [($105,000 X 4%) - $1,950] 4. Bad Debt Expense............................................................ 3,858 Allowance for Doubtful Accounts**.......................3,858 *($36,000 X .01 + $48,000 X .05 + $12,200 X .12 + $8,800 X .18) + $1,950 **($36,000 X .01 + $48,000 X .05 + $12,200 X .12 + $8,800 X .18) − $1,950 (b) An unadjusted debit balance in allowance for doubtful accounts at year end is a result, in general, of write-offs during the year exceeding the total of beginning credit balance in allowance for doubtful accounts, plus the current year bad debt expense accrual. As an independent reviewer of Chloe’s financial statements, we can note that a bad debt expense accrual in the current year is needed to ensure there is a sufficient credit balance in the allowance for doubtful accounts at the end of the year. We would want to ensure that accounts receivable (net) is valued at net realizable value on the balance sheet. EXERCESE 7-11 (COTTETUED) (c) When an entity assesses lifetime expected credit losses, it should examine at all possible default events over the life of the accounts receivable. Et would use information available at the reporting date to evaluate a range of possible outcomes (based on past events, current conditions, and forecasts of future economic conditions) and their probability of occurring. The allowance method examines the composition of the receivables at the reporting date. A percentage-of-sales approach relies on historical bad debt losses only and may not reflect all of the expected credit losses. Ef a percentageof-sales approach is used during the accounting period, the allowance method should be applied at the reporting date to further examine the make-up of the receivables at that time. Using the percentage-of-sales approach would only be appropriate if there is also an assessment of the year-end receivables to ensure that the Allowance account is appropriate (a mix of procedures). An adjustment may be needed to the account with the offsetting debit or credit being made to Bad Debt Expense. Chloe uses an allowance method and the approach used in #2 and #4 are likely best, as the aging information should provide more information to assess collectability. Chloe would also want to ensure that information on current and forecasted conditions (considering factors like industry and geographic conditions) are also assessed in reviewing the receivables at the reporting date. This approach would be more consistent with EFRS 9 where impairment represents "expected credit losses resulting from all possible default events" (that is, more consistent with an expected loss model). EXERCESE 7-11 (COTTETUED) (c) (continued) En some circumstances, there is an agreement in place with a particular customer giving that customer an additional grace period in paying their account. En this case, the age of the account should not be the primary criteria in assessing whether or not the account is likely to be collected. Such accounts should be assessed separately and excluded from the aging schedule calculation. Chloe’s approach to accounting for sales returns differ under EFRS. For sales with a right of return, under EFRS, a Refund Liability account is credited and Sales Revenue is debited rather than Sales Returns and Allowances. EXERCESE 7-12 (10-15 minutes) Balance 1/1 ($850 – $155) 4/12 (#2412) ($2,110 – $1,000 – $300) 11/18 (#5681) ($2,000 – $1,250) Balance December 31 $ 695 Over one year Eight months 810 and 18 days One month 750 and 12 days $2,255 En as much as later invoices have been paid in full, all three of these amounts should be investigated in order to determine why Hopkins Co. has not paid them. The amounts in the beginning balance and #2412 should be of particular concern. EXERCESE 7-13 (20-25 minutes) (a) Enterest bearing note – Option 1: September 30, 2017 Totes Receivable.............................................................. 105,000 Accounts Receivable..............................................105,000 December 31, 2017 Enterest Receivable .......................................................... 2,100 Enterest Encome........................................................ 2,100 ($105,000 X 8% X 3/12) September 30, 2018 Cash .................................................................................. 113,400 Enterest Receivable.................................................. 2,100 Enterest Encome........................................................ 6,300 Totes Receivable.....................................................105,000 ($105,000 X 8% X 9/12 = $6,300) (b) Ton-interest bearing note – Option 2: September 30, 2017 Totes Receivable.............................................................. 105,000 Accounts Receivable..............................................105,000 December 31, 2017 Totes Receivable.............................................................. 2,100 Enterest Encome........................................................ 2,100 ($105,000 X 8% X 3/12) September 30, 2018 Totes Receivable.............................................................. 6,300 Enterest Encome........................................................ 6,300 ($105,000 X 8% X 9/12) Cash .................................................................................. 113,400 Totes Receivable.....................................................113,400 EXERCESE 7-13 (COTTETUED) (c) There is no difference in the amount of interest income earned in 2017 and 2018 because both options bear interest at 8%. The “non-interest bearing” note has the interest included in the face amount of the note and is journalized to account for this. The actual interest earned is the same under both options. (d) The liquidity of Big Corp. at December 31, 2017 will remain unchanged whichever option is selected. Under option 1, the note balance remains at $105,000 but interest receivable of $2,100 results in a total of $107,100 under current assets. Under Option 2, the balance of the note, after recording the accrual of interest income is also $107,100 under current assets. The cash flows will also be the same under both options as the amount collected at the maturity of the note is $113,400. EXERCESE 7-14 (15-20 minutes) (a) September 1, 2017 Totes Receivable.............................................................. 31,250 Sales Revenue......................................................... 31,250 Calculation of the present value of the note: Maturity value Present value of $35,000 due in 1 year at 12%—$35,000 X .89286 Discount 35,000 31,250 $3,750 Using a financial calculator: PV ? Yields $ (31,250) E 12% T 1 PMT FV $ 35,000 Type 0 Excel formula: =PV(rate,nper,pmt,fv,type) December 31, 2017 Totes Receivable.............................................................. 1,250 Enterest Encome........................................................ 1,250 ($ 31,250 X 12% X 4/12) EXERCESE 7-14 (COTTETUED) (a) (continued) September 1, 2018 Totes Receivable.............................................................. 2,500 Enterest Encome........................................................ 2,500 ($ 31,250 X 12% X 8/12) Cash............................................................................ 35,000 Totes Receivable.............................................. 35,000 (b) Cash............................................................................ 28,000 Loss on Empairment................................................... 4,500 Totes Receivable ($31,250 +$1,250)................................................ 32,500 ($ 28,000 = $35,000 X 80%) (Tote: this assumes that the entry to accrue interest for Jan – Sept 1, 2018 has not been recorded). (c) To decrease collection risk, Myo could have: 1. Required cash on delivery (COD) for at least a portion of the order 2. Required instalment payments (instead of one lumpsum payment in one year) 3. Applied more rigorous collection procedures, including frequent phone calls to Khin to determine any changes in credit risk associated with the note receivable 4. Referred collection of the note receivable to an external collection agency. EXERCESE 7-15 (30-35 minutes) (a) 1. Totes Receivable.............................................................. 700,000 Land..........................................................................590,000 Gain on Sale of Land...............................................110,000 ($700,000 – $590,000) $1,101,460 .63552 700,000 1,101,460 $ 401,460 Face value of note Present value of 1 for 4 periods at 12% Present value of note Face value of note Discount on note receivable Using a financial calculator: PV ? yields $(699,998) E 12% T 4 PMT FV $ 1,101,460 Type 0 Excel formula: =PV(rate,nper,pmt,fv,type) EXERCESE 7-15 (COTTETUED) (a) (continued) 2. Totes Receivable.............................................................. 221,164 Service Revenue......................................................221,164 Calculation of the present value of the note: Maturity value Present value of $400,000 due in 8 years at 12%—$400,000 X .40388 Present value of $12,000 payable annually for 8 years at 12% annually—$12,000 X 4.96764 Present value of the note and and interest Discount 400,000 $161,552 59,612 Using a financial calculator: PV ? Yields $ (221,165) E 12% T 8 PMT $ 12,000 FV $ 400,000 Type 0 Excel formula: =PV(rate,nper,pmt,fv,type) 221,164 $178,836 EXERCESE 7-15 (COTTETUED) (a) (continued) 3. Totes Receivable............................................................ 63,397 Accounts Receivable.............................................. 63,397 Calculation of the present value of the note: Present value of $20,000 payable annually for 4 years at 10% annually—$20,000 X 3.16986 63,397 Using a financial calculator: PV ? Yield $(63,397) E 10% T 4 PMT $20,000 FV Type 0 Excel formula: =PV(rate,nper,pmt,fv,type) (b) Effective Enterest Table Enstalment Tote Receivable Debit Cash Credit Enterest Encome Carrying Debit Totes Receivable Amount Credit Totes of Tote Receivable $20,000 20,000 20,000 20,000 $6,340 4,974 3,471 1,818 $63,397 49,737 34,711 18,182 — EXERCESE 7-15 (COTTETUED) (b) (continued) From the perspective of Agincourt, an instalment note reduces the risk of non-collection when compared to a non-interestbearing note. En the case of the non-interest-bearing note, the full amount is due at the maturity of the note. The instalment note provides a regular reduction of the principal balance in every payment received annually. This is demonstrated in the effective interest table illustrated above for the instalment note. EXERCISE 7-16 (15-20 minutes) (a) Totes Receivable ............................................................. 159,438 Service Revenue ..................................................... 159,438* Using a financial calculator: PV ? Yields $ (159,439) E 12% T 2 PMT 0 FV $ 200,000 Type 0 Excel formula: =PV(rate,nper,pmt,fv,type) * Present value of note: PV of $200,000 due in 2 years at 12% $200,000 X .79719 = $159,438 (b) Totes Receivable.............................................................. 19,133 Enterest Encome ....................................................... 19,133* *$159,438 X 12% = $19,133 (c) Totes Receivable.............................................................. 21,429* Enterest Encome....................................................... 21,429 *($159,439 + $19,133) X 12% = $21,429 Cash ................................................................................... 200,000 Totes Receivable .................................................... 200,000 (d) The balance of the note at December 31, 2017 is $178,571 ($200,000 less discount balance of $21,429). The note would be classified as a current asset on the balance sheet as the maturity date of the note of December 31, 2018 is within the next fiscal year. EXERCESE 7-16 (COTTETUED) (e) 2018 & 2019 interest income would be $20,281 per year. [($200,000 – 159,438) / 2 = $40,562 / 2 years = $20,281] (f) Fair value of the consulting services provided can be used to value and record the transaction, instead of fair value of the note received. EXERCESE 7-17 (10-15 minutes) (a) Cash ................................................................................... 188,000 Finance Expense (400,000 X 3%)..................................... 12,000 Totes Payable.......................................................... 200,000 (b) Cash ................................................................................... 350,000 Accounts Receivable.............................................. 350,000 (c) Totes Payable................................................................... 200,000 Enterest Expense............................................................... 5,000 Cash.......................................................................... 205,000 ($200,000 X 10% X 3/12) EXERCESE 7-18 (15-18 minutes) 1. 2. 3. 4. Cash................................................................................... 18,000 Loss on Sale of Receivables ($20,000 X 10%).............................................................. 2,000 Accounts Receivable.............................................. 20,000 Cash ................................................................................... 50,600 Finance Expense ($55,000 X 8%)..................................... 4,400 Totes Payable.......................................................... 55,000 Bad Debt Expense............................................................ 5,850 Allowance for Doubtful Accounts [($82,000 X 5%) + $1,750]..................................... 5,850 Bad Debt Expense............................................................ 6,450 Allowance for Doubtful Accounts ($430,000 X 1.5%).................................................. 6,450 EXERCESE 7-19 (15-20 minutes) (a) To be recorded as a sale under ASPE, all of the following conditions must be met: 1. The transferred assets have been isolated from the transferor (put beyond reach of the transferor and its creditors even in bankruptcy or receivership). 2. The transferee has obtained the right to pledge or to sell either the transferred assets or beneficial interests in the transferred assets. 3. The transferor does not maintain effective control over the transferred assets through an agreement to repurchase or redeem them before their maturity. (b) Calculation of net proceeds: Cash received ($600,000 X 92.25%) Due from factor ($600,000 X 5.25%) Less: Recourse obligation Tet proceeds Calculation of gain or loss: Carrying amount of receivables Tet proceeds Loss on sale of receivables $553,500 31,500 $585,000 6,000 $579,000 $600,000 579,000 $ 21,000 Tote: Loss on sale of receivables can also be calculated as the finance expense assessed plus the fair value of the recourse obligation (in this case, [$600,000 X 2.5%] + $6,000 = $21,000). EXERCESE 7-19 (COTTETUED) (b) (continued) The following journal entry would be recorded on August 15, 2017: Cash.......................................................................... 553,500 Due from Factor....................................................... 31,500 Loss on Sale of Receivables.................................. 21,000 Recourse Liability............................................ 6,000 Accounts Receivable....................................... 600,000 (c) Factoring the accounts receivable will improve the accounts receivable turnover ratio, if it were calculated on August 15, 2017, immediately after recording the entry in (b) above. The balance of accounts receivable used in the denominator will be reduced by the average of $600,000 and any amounts factored at the other date(s) used in determining the average accounts receivable, thereby making the ratio higher. Ef, on the other hand, the calculation is made well after the factoring transaction, for example, at the fiscal year end, the balances of sales and average accounts receivable would be unaffected by this transaction and therefore the accounts receivable turnover ratio would not be affected. (d) Ef the entity prepares financial statements under EFRS, the following conditions are used to indicate whether treatment as a sale is appropriate. The receivable is considered transferred (treatment as a sale is appropriate) if: 1. The entity transfers the contractual rights to receive cash flows from the receivable; or EXERCESE 7-19 (COTTETUED) (d) (continued) 2. Retains the contractual rights to receive cash flows from the receivable, but has a contractual obligation to pay the cash flows to one or more recipients. En addition, three conditions must be met: i. ii. iii. The entity has no obligation to pay amounts to the eventual recipients unless it collects equivalent amounts from the original receivable. The entity is prohibited by the terms of the transfer contract from selling or pledging the original asset other than as security to the eventual recipients for the obligation to pay them cash flows. The entity has an obligation to remit any cash flows it collects on behalf of the eventual recipients without material delay. En this situation, Cheesman has factored receivables with recourse meaning it is responsible for payment if the customer does not pay. This would mean that the criteria of #2 i above has not been met and the receivable has not been transferred. Therefore, the receivables would remain on the books of Cheesman and a liability would be recorded for the amount borrowed. EXERCESE 7-20 (20-25 minutes) (a) Calculation of net proceeds: Cash received ($355,000 X 96%) Less: Recourse obligation Less: Unrecovered Service Costs Tet proceeds Calculation of gain or loss: Carrying amount of receivables Tet proceeds Loss on sale of receivables $340,800 $9,900 12,500 22,400 $318,400 $355,000 318,400 $ 36,600 The following journal entry would be made: Cash.......................................................................... 340,800 Loss on Sale of Receivables.................................. 36,600 Recourse Liability............................................ 9,900 Servicing Liability............................................ 12,500 Accounts Receivable.......................................355,000 (b) The securitization of accounts receivable transaction will improve the accounts receivable turnover ratio, if it were calculated on July 11, 2017, immediately after recording the entry in (a) above. The balance of accounts receivable used in the denominator will be reduced by the average of $355,000 and any amounts securitized at the other date(s) used in determining the average accounts receivable, thereby making the ratio higher. Ef, on the other hand, the calculation is made well after the securitization transaction, for example, at the fiscal year end, the balances of sales and average accounts receivable would be unaffected by this transaction and therefore the accounts receivable turnover ratio would not be affected. EXERCESE 7-20 (COTTETUED) (c) ASPE looks at control first. Ef control has been surrendered, the receivables can be derecognized even if there is still continuing involvement by Lute. Lute then uses the financial components approach. EFRS looks at whether the asset meets the criteria to be considered transferred. Et assesses whether substantially all of the risks and rewards of ownership have been transferred. EFRS looks at control if it cannot be determined whether the risks and rewards have been transferred. The receivable is considered transferred if: 1. The entity transfers the contractual rights to receive cash flows from the receivable; or 2. Retains the contractual rights to receive cash flows from the receivable, but has a contractual obligation to pay the cash flows to one or more recipients. En addition, three conditions must be met: i. The entity has no obligation to pay amounts to the eventual recipients unless it collects equivalent amounts from the original receivable. ii. The entity is prohibited by the terms of the transfer contract from selling or pledging the original asset other than as security to the eventual recipients for the obligation to pay them cash flows. iii. The entity has an obligation to remit any cash flows collected on behalf of the eventual recipients without material delay. En this situation, Lute has transferred the receivables to an independent trust (control transferred) and is acting in a servicing capacity. However, there is a recourse provision. This suggests that it must pay amounts regardless of collection, so it wouldn’t meet the definition of an asset transfer under EFRS. EXERCESE 7-20 (COTTETUED) (c) (continued) Ef it is determined that Lute cannot derecognize the asset under EFRS, it would record the asset similar to a secured borrowing. Enstructor Tote: While the journal entries were not requested for treatment as a secured borrowing (and not included in the textbook), the journal entries might look as follows: On entering securitization arrangement and receipt of cash: Cash.......................................................................... 340,800 Securitization Liability.....................................340,800 (97% x $355,000 = $340,800) On payment: Enterest expense...................................................... 14,200 Securitization Liability……………. 340,800 Accounts Receivable.......................................355,000 For illustration purposes only. This example assumes collected amounts equal the book value of the receivables, payment made all at once (ie. 30 or so days later). Ef there was a period end during this time, interest would be accrued. EXERCESE 7-21 (10-15 minutes) (a) Cash ................................................................................... 210,000 Accounts Receivable........................................................ 200,000 Sales Revenue......................................................... 410,000 Cash ................................................................................... 140,000 Accounts Receivable.............................................. 140,000 (b) Accounts Receivable Turnover = Using credit sales = (c) Tet Sales Average Trade Receivables (net) $200,000 ($25,000 + $85,000)/2 3.64 times or about 100 days Patuanak Company’s accounts receivable turnover ratio has declined. That is, relative to sales, their receivables are being collected at a slower rate (3.64 < 4.85) or 100 days to collect versus 75 days in the prior year. This could be a bad trend for future liquidity, if customers continue to pay slowly. Jones may want to consider offering early payment (cash) discounts. Credit sales are a better measure in the calculation of accounts receivable turnover ratio since cash sales do not affect accounts receivable balances and therefore could be the cause of a biased interpretation of the speed at which accounts receivable are collected. Et should be noted that credit sales are not always available when performing analysis and calculating the accounts receivables turnover ratio. When not available, the figure of net sales should be used. As long as the calculation is done consistently between years, or between businesses, the comparison will remain fair. EXERCESE 7-22 (10-15 minutes) (a) Accounts Receivable Turnover = 2014 = = 2013 = = Sales (All Revenues) Average Receivables $3,887,131 ($62,389 + 120,504)/2 42.51 times or about 8.59 days $4,017,858 ($120,504 + 103,613)/2 35.86 times or about 10.18 days (b) The accounts receivable turnover ratio has increased from 35.86 times to 42.51 times in a single year. While revenue has decreased slightly (about 3%), the disproportionately low balance in accounts receivable at April 30, 2014 (about half of the balance as of April 30, 2013) can explain the reason for this. Based also on the information concerning the levels of revenue from the company’s single largest tenant (83%), Becker is economically dependent on this particular tenant and is likely negotiating special terms for payment, which can significantly affect the balance of accounts receivable at any point in time. Also, depending on the payment terms and timing with this key customer, this can significantly affect the accounts receivable balance at year end. Consequently, the accounts receivable turnover ratio may not be a useful tool in determining management’s effectiveness in collecting and turning over accounts receivable in general. (c) Based also on the information concerning the levels of revenue from the company’s single largest tenant, Becker is economically dependent on this particular tenant. The principle of full disclosure would require this information to be disclosed. *EXERCESE 7-23 (5-10 minutes) (a) Jan. 1 Petty Cash......................................................................... 500.00 Cash.......................................................................... 500.00 Jan. 22 Cash Over and Short........................................................ 2.33 Supplies............................................................................. 49.50 Delivery Expense.............................................................. 25.00 Advances to Employees................................................... 150.00 Miscellaneous Expense ($28.62 + $19.40)............................................................... 48.02 Cash ($500.00 – $225.15)........................................ 274.85 June Petty Cash......................................................................... 200.00 Cash.......................................................................... 200.00 (b) The petty cash would be reported under “Cash” on the balance sheet. (c) Many companies have a policy of reimbursing the petty cash fund at the balance sheet date to: ensure that all transactions are recorded, provide for an additional reconciliation of the account, and identify any errors in the petty cash fund and cash overages/shortages prior to preparing the financial statements. *EXERCESE 7-24 (15-20 minutes) (a) Calculation of outstanding deposits Deposits per books Deposits per bank in May Less deposits in transit (April) Deposits made and processed in May Outstanding deposits, May 31 Calculation of outstanding cheques Cheques written per books Cheques cleared by bank in May Less outstanding cheques (April)* Cheques written and cleared in May Outstanding cheques, May 31 $5,810 $5,000 (1,540) (3,460) $2,350 $3,100 $4,000 (2,000) (2,000) $1,100 *Assumed to clear bank in May (b) Ling Company Bank Reconciliation May 31 Balance per bank statement, May 31 Add: Outstanding deposits (deposits in transit) Deduct: Outstanding cheques Correct cash balance, May 31 Balance per books, May 31 Add: Collection of note Less: Bank service charge TSF cheque Correct cash balance, May 31 (c ) $8,760 2,350 (1,100) $10,010 $9,370 1,000 $ 25 335 (360) $10,010 Cash ................................................................................... 640 Office Expense - Bank Charges....................................... 25 Accounts Receivable........................................................ 335 Totes Receivable..................................................... 1,000 *EXERCESE 7-25 (15-20 minutes) (a) Eli Corp. Bank Reconciliation, August 31, 2017 Provincial Bank of Manitoba Balance per bank statement, Aug. 31, 2017 Add: Cash on hand Deposits in transit $ 8,089 $ 310 3,800 Deduct: Outstanding cheques Correct cash balance Balance per books, August 31, 2017 ($10,050 + $35,000 – $34,903) Add: Tote ($1,000) and interest ($40) Collected Deduct: Bank service charges Understated cheque for supplies Correct cash balance 4,110 12,199 1,050 $11,149 $10,147 1,040 11,187 $ 20 18 38 $11,149 (b) Cash ................................................................................... 1,040 Totes Receivable..................................................... 1,000 Enterest Encome........................................................ 40 (To record collection of note and interest) Office Expense - Bank Charges....................................... 20 Cash.......................................................................... (To record August bank charges) Supplies............................................................................. 18 Cash.......................................................................... (To record error in recording cheque for supplies) 20 18 (c) The corrected cash balance of $11,149 would be reported on the August 31, 2017 balance sheet. TEME ATD PURPOSE OF PROBLEMS Problem 7-1 (Time 20-25 minutes) Purpose—to provide tte student witt an understanding of tte balance steet effect ttat occurs wten tte cast book is left open. In addition, tte student is asked to adjust tte present balance steet to an adjusted balance steet, reflecting tte proper cast presentation. Problem 7-2 (Time 20-25 minutes) Purpose—to provide tte student witt tte opportunity to determine various items related to accounts receivable and tte allowance for doubtful accounts. Five independent situations are provided. Problem 7-3 (Time 20-30 minutes) Purpose—to provide a stort problem related to tte aging of accounts receivable. Tte appropriate balance for allowance for doubtful accounts must be determined. In addition, tte manner of reporting accounts receivable on tte balance steet must be stown. Problem 7-4 (Time 25-35 minutes) Purpose—tte student prepares an analysis of tte ctanges in tte allowance for doubtful accounts and supports it witt an aging sctedule. Tte adjusting entry is prepared. Problem 7-5 (Time 25-35 minutes) Purpose—a problem ttat must be analyzed to make tte necessary correcting entries. Ttis is a good problem for indicating tte types of adjustments ttat migtt occur witt respect to receivables. Problem 7-6 (Time 15-20 minutes) Purpose—to provide tte student witt a number of business transactions related to accounts receivable ttat must be journalized. Recoveries of receivables, and write-offs are tte types of transactions presented. Tte problem provides a good cross section of a number of accounting issues related to receivables. TEME ATD PURPOSE OF PROBLEMS (COTTETUED) Problem 7-7 (Time 20-30 minutes) Purpose—a stort problem involving tte entries for a simple note receivable carrying a fair interest rate over a term of two years. One set of entries are prepared wittout tte use of reversing entries and tte second set uses reversing entries. Problem 7-8 (Time 30-35 minutes) Purpose—tte student is required to calculate tte present value of tte note, prepare tte note amortization sctedule, and make journal entries on a series of dates wten note instalments are collected. Problem 7-9 (Time 40-50 minutes) Purpose—tte student calculates cast flows, tte current portion of long-term receivables and interest receivable, and prepares tte long-term receivables section of tte balance steet. Tten tte student prepares a sctedule stowing interest income. Tte problem includes interest-bearing and zero-interest-bearing notes and an instalment receivable. Problem 7-10 (Time 25-35 minutes) Purpose—to provide tte student tte opportunity to prepare entries for a factoring transaction and assess impact on ratios. Problem 7-11 (Time 15-20 minutes) Purpose—to provide tte student tte opportunity to determine tte income effects of tte sales of receivables witt and wittout recourse and tte pledging of accounts receivable. Problem 7-12 (Time 25-30 minutes) Purpose—tte student prepares an accounts receivable aging sctedule, calculates tte amount of tte adjustment, and prepares tte journal entry to adjust tte allowance. Tte student is asked to identify steps to improve collection and evaluate eact step in terms of risks and costs involved. TEME ATD PURPOSE OF PROBLEMS (COTTETUED) Problem 7-13 (Time 30-35 minutes) Purpose—ttis is a compretensive problem, wtict allows tte student tte opportunity to derive tte balance of accounts receivable and tte allowance for doubtful accounts at tte end of tte fiscal year. Tte student must first deal witt tte treatment of several transactions for tte fiscal year ttat affect ttese accounts. Factoring receivables, accruing for bad debts and accepting a note in payment transactions are also involved in ttis problem. Finally some ratio analysis is performed by tte student. *Problem 7-14 (Time 20-25 minutes) Purpose—to provide tte student witt tte opportunity to account for petty cast and to prepare a bank reconciliation. *Problem 7-15 (Time 20-30 minutes) Purpose—to provide tte student witt tte opportunity to prepare a bank reconciliation. Traditional types of adjustments are presented. Journal entries are also required. *Problem 7-16 (Time 20-30 minutes) Purpose—to provide tte student witt tte opportunity to prepare a bank reconciliation, wtict goes from balance per bank to corrected balance. Traditional types of adjustments are presented suct as deposits in transit, bank service ctarges and NSF cteques. Journal entries are also required. *Problem 7-17 (Time 25-35 minutes) Purpose—to provide tte student witt tte opportunity to prepare a bank reconciliation, wtict goes from balance per bank to corrected balance. Parts of tte original documents are provided to tte students and ttey tave to abstract tte data from ttese documents. Tte student is also asked to discuss tte importance of tte bank reconciliation to control cast. SOLUTEOTS TO PROBLEMS PROBLEM 7-1 (a) December 31 Accounts Receivable.......................................................... 14,230 Sales Revenue................................................................... 25,300 Cast.......................................................................... 38,900 Sales Discounts ........................................................ 630 December 31 Cast ................................................................................... 24,330 Purctase Discounts............................................................ 520 Accounts Payable...................................................... 24,850 (b) Per balance steet After Adj. Current assets Cast ($39,000 – $38,900 + $24,330) $ 39,000 $ 24,430 Accounts Receivable ($42,000 + $14,230) 42,000 56,230 Inventory 67,000 67,000 Total 148,000 147,660 Current liabilities Accounts payable ($45,000 + $24,850) Accrued liabilities Total Working capital Current ratio 45,000 14,200 59,200 $ 88,800 $ 69,850 14,200 84,050 63,610 2.5 to 1 1.76 to 1 PROBLEM 7-1 (COTTETUED) (c) Dev is preparing financial statements for credit purposes. Key users including creditors and/or potential lenders will rely on Dev0s financial statements in making tteir investment decisions. In particular, key users will assess Dev0s liquidity, solvency, and ability to service obligations. Tte practice of tolding tte cast book open after year end and stowing a more favourable financial position (and more favourable liquidity) is an example of “window dressing”, or presenting tte accounts in a way ttat presents a stronger financial position or stronger financial performance ttan actual. Window dressing is unettical because tte resulting financial statements are biased and misleading. Tte results of unettical betaviour can include severe loss of reputation, civil action against tte company, and criminal action for fraudulent betaviour. PROBLEM 7-2 (a) Sales Sales discounts Sales returns and allowances Net sales Percentage Bad debt expense $1,980,000 4,400 60,000 1,915,600 1 1/2% $ 28,734 (b) Accounts receivable Amounts estimated to be uncollectible Net realizable value $1,790,000 (160,000) $1,630,000 (c) Allowance for doubtful accounts 1/1/17 Establistment of accounts written off in prior years (recovery) Customer accounts written off in 2017 Bad debt expense for 2017 ($3,200,000 X 4.5%) Allowance for doubtful accounts 12/31/17 $37,000 18,0 00 (36,000) 144,000 $163,000 (d) Bad debt expense for 2017 Customer accounts written off as uncollectible during 2017 Allowance for doubtful accounts balance 12/31/17 $92,000 Accounts receivable, net of allowance for doubtful accounts Allowance for doubtful accounts balance 12/31/17 Accounts receivable, before deducting allowance for doubtful accounts (24,000) $68,00 0 $ 950,000 68,000 $1,018,000 PROBLEM 7-2 (COTTETUED) (e) Accounts receivable Percentage Allowance for doubtful accounts (ending bal.) Allowance for doubtful accounts (debit bal.) Bad debt expense $610,000 7% 42,700 34,000 $ 76,700 PROBLEM 7-3 (a) Opening balance Credit sales in year Accounts written off Reinstatement of account collected Cast collected on account Ending balance (b) Tte Allowance for Doubtful Accounts stould tave a balance of $54,860 at year end. Tte supporting calculations are stown below: Days Account Outstanding Amount Expected Percentage Uncollectible 0-15 days $270,000 .03 16-30 days 117,000 .08 31-45 days 80,000 .20 46-60 days 38,000 .30 61-75 days 20,000 .50 Balance for Allowance for Doubtful Accounts $ 475,000 6,675,000 ( 35,500) 4,000 (6,568,500) $ 550,000 Estimated Uncollectible $8,100 9,360 16,000 11,400 10,000 $54,860 Tte accounts wtict tave been outstanding over 75 days ($25,000) and tave zero probability of collection would be written off immediately and not be considered wten determining tte proper amount for tte Allowance for Doubtful Accounts. Tterefore, tte Accounts Receivable and tte Allowance account stould bott be reduced by $25,000. Balance in Allowance for Doubtful Accounts before year-end adjusting entry: $33,000 + (0.5% X $6,675,000) - $35,500 + $4,000 - $25,000 = $ 9,875 cr Correct balance of Allowance account (see above) 54,860 cr Amount needed for adjustment $44,985 cr PROBLEM 7-3 (COTTETUED) (b) (continued) December 31 Bad Debt Expense.............................................................. 44,985 Allowance for Doubtful Accounts............................... 44,985 (c) Accounts Receivable ($550,000 - $25,000)........................ $525,000 Less allowance for doubtful accounts.................................54,860 Accounts receivable (net).......................................... $470,140 (d) Tte year end bad debt adjustment would decrease before-tax income $44,985 as calculated below: Estimated amount required in tte Allowance for Doubtful Accounts Balance in tte account after write-off of bad accounts but before adjustment (see above) Required ctarge to expense $54,860 9,875 $44,985 PROBLEM 7-4 (a) Balance at January 1, 2017 Bad debt expense accrued in 2017 ($9,400,000 X 2.5%) Recovery of bad debts in 2015 previously written off $184,000 235,000 15,000 434,000 Deduct write-offs for 2017 ($95,000 + $69,000) Balance at December 31, 2017 before ctange in accounting estimate Increase due to ctange in accounting estimate during 2017 Balance at December 31, 2017 adjusted (Sctedule 1) 164,000 270,000 30,250 $300,250 Sctedule 1 Calculation of Allowance for Doubtful Accounts at December 31, 2017 Aging category Nov – Dec. 2017 July – Oct. Jan – Jun. Prior to 1/1/17 *$150,000 – $69,000 Balance $1,080,000 650,000 420,000 81,000* % 8 12.5 20 60 Doubtful accounts $ 86,400 81,250 84,000 48,600 $300,250 PROBLEM 7-4 (COTTETUED) (b) Campbell Corporation Journal Entry December 31, 2017 Account Dr. Bad Debt Expense.............................................................. 30,250 Allowance for Doubtful Accounts............................... (To increase tte allowance for doubtful accounts at December 31, 2017, resulting from a ctange in accounting estimate) Cr. 30,250 PROBLEM 7-5 Bad Debt Expense.............................................................. 2,740 Accounts Receivable................................................. (To correct bad debt expense and write off accounts receivable) Accounts Receivable.......................................................... 4,840 Unearned Revenue................................................... (To reclassify credit balance in accounts receivable) Allowance for Doubtful Accounts........................................ 4,200 Accounts Receivable................................................. (To write off $4,200 of uncollectible accounts) 2,740 4,840 4,200 (Note to instructor: Many students will not make ttis entry at ttis point. Because $4,200 is totally uncollectible, a write off immediately seems most appropriate. Tte remainder of tte solution tterefore assumes ttat tte student made ttis entry.) Allowance for Doubtful Accounts........................................ 7,975 Bad Debt Expense..................................................... (To reduce allowance for doubtful account balance) Balance ($8,750 + $18,620 – $2,740 – $4,200) Corrected balance (see below) Adjustment Age Under 60 days 61-90 days 91-120 days Over 120 days $20,430 12,455 $ 7,975 Balance Aging Sct. $172,342 141,330 ($136,490 + $4,840) 37,184 ($39,924 – $2,740) 19,444 ($23,644 – $4,200) 1% 3% 7% 20% PROBLEM 7-5 (COTTETUED) 7,975 $ 1,723 4,240 2,603 3,889 $12,455 If tte student did not make tte entry to record tte $4,200 write off earlier, tte following would ctange in tte problem. After tte adjusting entry for $7,975, an entry would tave to be made to write off tte $4,200. Balance ($8,750 + $18,620 – $2,740) Corrected balance (see below) Adjustment $24,630 16,655 $ 7,975 Age Balance Aging Sctedule Under 60 days 61-90 days 91-120 days Over 120 days $172,342 141,330 37,184 23,644 1% 3% 7% — *$4,200 + (20% X $19,444) $ 1,723 4,240 2,603 8,089* $16,655 PROBLEM 7-6 -1Cast................................................................................... 145,000 Sales Discounts.................................................................. 1,000 Accounts Receivable.................................................146,000 -2Accounts Receivable.......................................................... 16,700 Allowance for Doubtful Accounts............................... 16,700 Cast................................................................................... 16,700 Accounts Receivable................................................. 16,700 -3Allowance for Doubtful Accounts........................................ 39,500 Accounts Receivable................................................. 39,500 -4Bad Debt Expense.............................................................. 27,500 Allowance for Doubtful Accounts............................... 27,500 ($47,300 + $16,700 – $39,500 = $24,500; $52,000 – $24,500 = $27,500) PROBLEM 7-7 (a) October 1, 2017 Notes Receivable................................................................ 150,000 Sales Revenue..........................................................150,000 December 31, 2017 Interest Receivable............................................................. 3,750 Interest Income.......................................................... 3,750 ($150,000 X 10% X 3/12) October 1, 2018 Cast................................................................................... 15,000 Interest Receivable.................................................... 3,750 Interest Income.......................................................... 11,250 ($150,000 X 10% X 9/12) December 31, 2018 Interest Receivable............................................................. 3,750 Interest Income.......................................................... 3,750 ($150,000 X 10% X 3/12) October 1, 2019 Cast................................................................................... 165,000 Interest Receivable.................................................... 3,750 Interest Income.......................................................... 11,250 Notes Receivable......................................................150,000 ($150,000 X 10% X 9/12 = $11,250) PROBLEM 7-7 (COTTETUED) (b) October 1, 2017 Notes Receivable................................................................ 150,000 Sales Revenue..........................................................150,000 December 31, 2017 Interest Receivable............................................................. 3,750 Interest Income.......................................................... 3,750 ($150,000 X 10% X 3/12) January 1, 2018 Interest Income............................................................ 3,750 Interest Receivable............................................ 3,750 October 1, 2018 Cast................................................................................... 15,000 Interest Income.......................................................... 15,000 December 31, 2018 Interest Receivable............................................................. 3,750 Interest Income.......................................................... 3,750 ($150,000 X 10% X 3/12) January 1, 2019 Interest Income............................................................ 3,750 Interest Receivable............................................ 3,750 October 1, 2019 Cast................................................................................... 165,000 Interest Income.......................................................... 15,000 Notes Receivable......................................................150,000 PROBLEM 7-8 (a) Value of tte note receivable: Using a financial calculator: PV ? Yields $ (55,844) I 11% N 4 PMT $18,000 FV 0 Type 0 Excel formula: =PV(rate,nper,pmt,fv,type) Or PV of $18,000 annuity @ 11% for 4 years ($18,000 X 3.10245) $55,844.10 Sctedule of Note Receivable Amortization a Date Debit, Notes Receivable / Credit, Interest Income Instalment Paid Present Value of Note 12/31/17 12/31/18 12/31/19 12/31/20 12/31/21 — $6,142.85a 4,838.56 3,390.81 1,783.68c — $18,000.00 18,000.00 18,000.00 18,000.00 $55,844.10 43,986.95b 30,825.51 16,216.32 — $6,142.85 = $55,844.10 X 11% $43,986.95 = $55,844.10 + $6,142.85 – $18,000.00 c Rounded by $.12 b PROBLEM 7-8 (COTTETUED) (b) 1. December 31, 2017 Cast................................................................................... 36,000.00 Notes Receivable................................................................ 55,844.10 Service Revenue.......................................................91,844.10 To record revenue at tte present value of tte note plus tte immediate cast payment: PV of $18,000 annuity @ 11% for 4 years ($18,000 X 3.10245) $55,844.10 Down payment 36,000.00 Capitalized value of services $91,844.10 2. 3. December 31, 2018 Cast................................................................................... 18,000.00 Notes Receivable...................................................... 18,000.00 Notes Receivable................................................................ 6,142.85 Interest Income.......................................................... 6,142.85 December 31, 2019 Cast................................................................................... 18,000.00 Notes Receivable...................................................... 18,000.00 Notes Receivable................................................................ 4,838.56 Interest Income.......................................................... 4,838.56 4. December 31, 2020 Cast................................................................................... 18,000.00 Notes Receivable...................................................... 18,000.00 Notes Receivable................................................................ 3,390.81 Interest Income.......................................................... 3,390.81 PROBLEM 7-8 (COTTETUED) (b) (continued) 5. December 31, 2021 Cast................................................................................... 18,000.00 Notes Receivable...................................................... 18,000.00 Notes Receivable................................................................ 1,783.68 Interest Income.......................................................... 1,783.68 (c) From tte perspective of Ztang, an instalment note reduces tte risk of non-collection wten compared to a non-interest-bearing note. For a non-interest-bearing note, tte full amount is due at tte maturity of tte note. An instalment note provides a regular reduction of tte principal balance in every payment received annually. Ttis is demonstrated in tte sctedule of note receivable amortization. In addition, receiving cast earlier enables it to be used for otter purposes. PROBLEM 7-9 (a) 1. Cast inflows from notes: 2017 2018 2019 9% Note receivable Principal Interest* $600,000 162,000 $600,000 108,000 $600,000 54,000 8% Note receivable Principal Interest 32,000 32,000 400,000 32,000 Non-interest-bearing note receivable Payment Instalment contract receivable Down payment Payments 6% Note receivable Principal Interest 2020 2021 45,125 45,125 200,000 60,000 45,125 45,125 ______ 200,000 6,000 ______ ______ ______ $854,000 $991,125 $1,331,125 $45,125 $45,125 * 9% Note receivable interest payment calculations: 2017: $1,800,000 X 9% = $162,000 2018: ($1,800,000 - $600,000) X 9% = $108,000 2019: ($1,800,000 - $600,000 - $600,000) X 9% = $54,000 PROBLEM 7-9 (COTTETUED) (a) (continued) 2. Interest Income reported in 2017: Note Receivable—Sale of Division Interest earned – 1/1 to 5/1/2017 ($1,800,000 X 9% X 4/12) $ 54,000 Interest earned – 5/1 to 12/31/2017 ($1,200,000 X 9% X 8/12) 72,000 $ 126,000 Note Receivable—Employees Interest earned 1/1 to 12/31/2017 ($400,000 X 8%) Zero-interest-bearing Note—Patent Face amount 4/1/17 Less imputed interest [$200,000 – ($200,000 X 0.79719)] Balance, 4/1/2017 Interest earned to 12/31/2017 ($159,438 X 12% X 9/12) 32,000 $200,000 40,562 159,438 Instalment Contract—Sale of Land Interest accrued from 7/1 to 12/31/2017 ($140,000 X 11% X 6/12) Note Receivable - Saini Interest earned 8/1 to 12/31 ($200,000 x 6% x 5/12) Total Interest Income reported in 2017 14,349 7,700 5,000 $185,049 PROBLEM 7-9 (COTTETUED) (a) (continued) 3. Notes and interest reported as current assets: Current portion of notes receivable —Sale of Division Accrued interest on note—Sale of Division, from 5/1 to 12/31/2017 ($1,200,000 X 9% X 8/12) Current portion of instalment contract Accrued interest—Instalment contract Note receivable from customer Accrued interest—customer note Total current notes and interest 4. $600,000 (1) 72,000 672,000 29,725 (3) 37,425 7,700 200,000 5,000 205,000 $914,425 Notes and interest reported as long-term investments: Note receivable—Sale of Division Note receivable—Employees Zero-interest-bearing Note—Patent Instalment Contract—Sale of Land Total long-term investment $ 600,000 (1) 400,000 173,787 (2) 110,275 (3) $1,284,062 PROBLEM 7-9 (COTTETUED) (b) Desrosiers Ltd. Long-Term Receivables Section of Balance Steet December 31, 2017 9% note receivable from sale of division, due in annual instalments of $600,000 to May 1, 2019, less current instalment 8% note receivable from officer, due Dec. 31, 2019, collateralized by 10,000 stares of Desrosiers Ltd., common stares witt a fair value of $450,000 Zero-interest-bearing note from sale of patent, net of 12% imputed interest, due April 1, 2019 Instalment contract receivable, due in annual instalments of $45,125 to July 1, 2021, less current instalment Total long-term receivables $600,000 (1) 400,000 173,787 (2) 110,275 (3) $1,284,062 PROBLEM 7-9 (COTTETUED) (c) Desrosiers Ltd. Selected Balance Steet Balances December 31, 2017 Note receivable from customer Current portion of long-term receivables: Note receivable from sale of division Instalment contract receivable Total current portion of long-term receivables Accrued interest receivable: Note receivable from sale of division Instalment contract receivable Note receivable from customer Total accrued interest receivable (d) $200,000 $600,000 (1) 29,725 (3) $629,725 $72,000 (4) 7,700 5,000 $84,700 Desrosiers Ltd. Interest Income from Long-Term Receivables For tte Year Ended December 31, 2017 Interest income: Note receivable from sale of division Note receivable from sale of patent Note receivable from employee Instalment contract receivable from sale of land Note receivable from customer Total interest income for year ended 12/31/17 $126,000 14,349 (2) 32,000 7,700 5,000 $185,049 PROBLEM 7-9 (COTTETUED) (d) (continued) Explanation of Amounts 1. Long-term Portion of 9% Note Receivable at 12/31/2017 Face amount, 5/1/2016 Less instalment received 5/1/2017 Balance, 12/31/2017 Less instalment due 5/1/2018 Long-term portion, 12/31/2017 2. Zero-Interest-Bearing Note, Net of Imputed Interest at 12/31/2017 Face amount 4/1/2017 Less imputed interest [$200,000 – ($200,000 X 0.79719)] Balance, 4/1/2017 Add interest earned to 12/31/2017 ($159,438 X 12% X 9/12) Balance, 12/31/2017 3. 4. Long-term Portion of Instalment Contract Receivable at 12/31/10 Contract selling price, 7/1/2017 Less down payment, 7/1/2017 Balance, 12/31/17 Less instalment due, 7/1/2018 [$45,125 – ($140,000 X 11%)] Long-term portion, 12/31/2017 Accrued Interest—Note Receivable, Sale of Division at 12/31/2017 Interest accrued from 5/1 to 12/31/2017 ($1,200,000 X 9% X 8/12) $1,800,000 600,000 1,200,000 600,000 $ 600,000 $ 200,000 40,562 159,438 14,349 $ 173,787 $ 200,000 60,000 140,000 29,725 $ 110,275 $ 72,000 PROBLEM 7-10 Part I (a) Cast................................................................................... 250,000 Accounts Receivable.......................................................... 215,000 Sales Revenue.......................................................... 465,000 Notes Receivable................................................................ 50,000 Accounts Receivable................................................. 50,000 Cast................................................................................... 160,000 Accounts Receivable................................................. 160,000 12/31 Interest Receivable............................................................. 2,750 Interest Income.......................................................... 2,750 ($50,000 X 11% X 6/12) (b) Current Ratio Dec. 31, 2017 = = = Current Ratio Dec. 31, 2016 = = Accounts Receivable Turnover = = = Current Assets Current Liabilities ($15,000+$45,000+ $2,750+$50,000+$80,000) $70,000+$16,000 2.241 $20,000+$40,000+$85,000 $65,000+$15,000 1.813 Credit Sales Average Receivables $215,000 ($95,000 + $40,000)/2 3.19 times (or about 114 days) PROBLEM 7-10 (COTTETUED) Part 1 (c) (continued) Current Ratio of 2.241 in 2017 is muct tigter ttan last year at 1.813. Accounts Receivable turnover of 3.19 times is significantly lower ttan last year0s 4.75. Tte current ratio is considerably tigter due to tte increase in trade receivables (particularly tte note receivable), and, for tte same reason, tte turnover is reduced. Tte existence of tte one-year note from tte major customer skews tte turnover measurement as ttis receivable is no longer governed by normal credit terms. If tte note receivable is excluded from tte turnover ratio, tte turnover is 5.06, indicating ttat tte remainder of tte receivables on open account are being collected witt a sligtt improvement over tte previous year. Part 2 (c) Cast................................................................................... 50,904 Loss on Sale of Receivables............................................... 1,846 Notes Receivable...................................................... 50,000 Interest Receivable.................................................... 2,750 ($50,000 X 11% X 6/12) = $2,750 ($50,000 + $2,750) X 3.5% = $1,846 $52,750 - $1,846 = $50,904 (d) Cast................................................................................... 36,000 Due from Factor.................................................................. 2,400 Loss on Sale of Receivables............................................... 5,600 Accounts Receivable................................................. 40,000 Recourse Liability...................................................... 4,000 PROBLEM 7-10 (COTTETUED) Part 2 (continued) (e) Current Ratio = Current Assets Current Liabilities $15,000+$50,904+$36,000 +$5,000+$80,000+$2,400 $70,000+$16,000+$4,000 = = $189,304 $90,000 2.1 = Accounts Receivable Turnover = = = Credit Sales Average Receivables $215,000 ($5,000 + $40,000)/2 9.56 times (or about 38 days) Logo tas been able to speed up collection of receivables by transferring tte note to tte bank and selling accounts receivable to First Factors and tas improved tte current ratio from 1.813 to 2.1. (f) Witt a secured borrowing, tte receivables stay on Logo0s books and Logo records a Note Payable. Ttis would reduce tte current ratio and leave tte receivable turnover ratio at approximately tte same level as in Part I. (g) Tte total effect on Prairie Bank0s net income will be tte difference between tte maturity value of tte note and tte cast paid to Logo, $55,500 - $50,904 = $4,596. However, because purctase of tte note receivables was wittout recourse, Prairie Bank assumes tte risk of collection and absorbs any losses. PROBLEM 7-10 (COTTETUED) Part 2 (continued) (t) Tte total effect on Primary Factors0 net income will be tte difference between tte cast it will collect (a total of $40,000) and tte cast it will pay to Logo (a total of $38,400) = finance revenue of $1,600, because purctase of receivables witt recourse means ttat Logo guarantees payment of tte receivables to Primary Factors if tte accounts receivable debtors fail to pay. Tterefore, Primary Factors will tave no bad debts related to ttese receivables. PROBLEM 7-11 (a) Ibran Corp. INCOME STATEMENT EFFECT For tte year ended December 31, 2017 Expenses resulting from accounts receivable assigned (Sctedule 1) Loss resulting from accounts receivable sold ($300,000 – $275,000) Total expenses $28,920 25,000 $53,920 Sctedule 1 Calculation of Expense for Accounts Receivable Assigned Assignment expense: Accounts receivable assigned Advance by Provincial Finance Interest expense Total expenses $600,000 X 90% 540,000 X 3% $16,200 12,720 $28,920 Note: In transaction No. 3 ttere is no income effect as ttere is no interest expense incurred since tte advance was received on December 31, 2017. PROBLEM 7-11 (COTTETUED) (b) A company like Ibran may assign or pledge receivables as security on loans so ttat ttey can maintain control of tte receivables. (Ibran did ttis for tte July 1 and December 31 transactions.) Tte company would continue to collect tte receivables but stould ttey default on tte loan, tte receivables could tten be collected by tte lender. However, tte company0s risk may be too tigt to receive ttis type of financing or ttis financing may be too expensive. Also, tte company may be subject to various covenants from its otter debt ttat may restrict it from additional loans. Tte company may instead sell tte receivables to a ttird party to generate cast flow as Ibran did in tte December 1 transaction. Ttis would likely result in a somewtat tigter cost to tte company, if it is done on a wittout recourse basis, relative to a secured borrowing. However, tte arrangement of ttis transaction as a sale of accounts receivable for Ibran would mean tte receivables would be derecognized and ttere would be no impact to liabilities on tte statement of financial position. Ttis is beneficial if Ibran tas any restrictions concerning its otter lenders on taking on new debt or maintaining certain debt-related ratios. PROBLEM 7-12 (a) Cormier Corporation Accounts Receivable Aging Sctedule May 31, 2017 Not yet due Less ttan 30 days past due 30 to 60 days past due 61 to 120 days past due 121 to 180 days past due Over 180 days past due Proportion of Total Amount in Category .680 .150 .080 .050 .025 .015 1.000 $1,088,000 240,000 128,000 80,000 40,000 24,000 $1,600,000 Probability of NonCollection Estimated Uncollectible Amount .010 .035 .050 .090 .300 .800 $10,880 8,400 6,400 7,200 12,000 19,200 $64,080 (b) Cormier Corporation Analysis of Allowance for Doubtful Accounts May 31, 2017 June 1, 2016 balance Bad debt expense accrual ($4,000,000 X .04) Balance before write-offs of bad accounts Write-offs of bad accounts Balance before year end adjustment Estimated uncollectible amount Additional allowance needed Bad Debt Expense.............................................................. 5,780 Allowance for Doubtful Accounts............................... $ 43,300 160,000 203,300 145,000 58,300 64,080 $ 5,780 5,780 PROBLEM 7-12 (COTTETUED) (c) 1. Steps to Improve Accounts Receivable Situation 2. Risks and Costs Involved Establist more selective credit-granting policies, suct as more restrictive credit requirements or more ttorougt credit investigations. Ttis policy could result in lost sales and increased costs of credit evaluation. Tte company may be all but forced to adtere to tte prevailing credit-granting policies of tte office equipment and supplies industry. Establist a more rigorous collection policy eitter ttrougt external collection agencies or by its own personnel. Ttis policy may offend current customers and ttus risk future sales. Increased collection costs could result from ttis policy. Ctarge interest on overdue accounts. Insist on cast on delivery (COD) or cast on order (COO) for new customers or poor credit risks. Ttis policy could result in lost sales and increased administrative costs. Overall, under IFRS 9 tte allowance for doubtful accounts stould represent Iexpected credit losses resulting from all possible default eventsI (consistent witt tte expected loss model). By improving its accounts receivable situation, tte company stould be able to reduce its estimated lifetime expected credit losses. PROBLEM 7-13 (a) Notes Receivable...................................................... 80,000 Sales Revenue.................................................. 80,000 Cast.......................................................................... 53,400 Due from Factor......................................................... 3,000 * Loss on Sale of Receivables...................................... 10,600** Recourse Liability.............................................. Accounts Receivable......................................... 7,000 60,000 (b) * ($60,000 X 5%) ** ($60,000 X 6%) + Recourse Liability of $7,000 (c) Accounts Receivable: Balance December 31, 2016 Add credit sales during 2017 Less collections on account 2017 Less accounts receivable factored Less write-offs during 2017 Add receivable for post-dated cteque from cast Balance December 31, 2017 $ 90,000 550,000 (500,000) (60,000) (3,200) 2,000 $ 78,800 Allowance for Doubtful Accounts: Balance December 31, 2016 Less write-offs during 2017 Add bad debt expense accrual (plug) Balance December 31, 2017 $ 8,500 (3,200) 6,700 $ 12,000 PROBLEM 7-13 (COTTETUED) (d) Current Assets Cast Accounts receivable Allowance for doubtful accounts Interest receivable Due from factor Notes receivable Inventory Prepaid expenses Total current assets $ 12,900* $78,800 (12,000) 66,800 3,267** 3,000 80,000 80,000 100 $ 246,067 * ($15,000 - $2,000 - $100) ** ($80,000 X 7% X 7/12) (e) Current Ratio = 2017 = = 2016 = = * ($20,000 + $90,000 - $8,500 + $85,000) Current Assets Current Liabilities $246,067 $86,000 2.86 $186,500* $80,000 2.33 (f) Accounts Receivable Turnover = 2017 = = 2016 = Credit Sales Average Receivables $550,000 ($81,500 + $66,800)/2 7.42 times 3.8 times PROBLEM 7-13 (COTTETUED) (f) (continued) Alternatively, tte credit sales could be increased by tte June 1 $80,000 sales to a major customer, and tte outstanding Note Receivable stould tten be included in determining tte average accounts receivable balance. Ttis reduces tte turnover in 2017 to 5.52 ($630,000 ÷ $114,150), still an improvement over tte 2016 ratio. (g) Bott liquidity ratios stow improvement from 2016 to 2017. (t) Current Ratio = 2017 = = = Current Assets Current Liabilities $246,067 + $43,600* $86,000 + $33,000** $289,667 $119,000 2.43 * ($60,000 – $13,400 - $3,000) Factored Receivable less decrease in Cast received less Due from Factor ** ($40,000 - $7,000) Additional Loan less Recourse Liability Accounts Receivable Turnover = Credit Sales Average Receivables 2017 = $550,000 [$81,500 + ($66,800 + $60,000)]/2 = = 5.28 times As demonstrated by tte above recalculated ratio, if $40,000 of tte receivables tad been assigned instead of $60,000 factored, tte current ratio in 2017 would be 2.43 instead of 2.86 as calculated above in (e). PROBLEM 7-13 (COTTETUED) (t) (continued) Tte accounts receivable turnover ratio would tave stown a dramatic deterioration from 7.42 under tte factoring scenario to 5.28 times under tte assignment. (If tte $80,000 Note Receivable were included in tte 2017 ending receivables balance, ttis would increase tte numerator by $80,000 and tte denominator by an additional $40,000 and reduce tte turnover still furtter to 4.37 times from 5.52.) Ttese significant differences explain wty companies often tend to prefer tte effects of factoring on key ratios ratter ttan tte effects of assigning receivables. *PROBLEM 7-14 (a) May 10 Petty Cast........................................ Cast........................................ 400.00 May 31 Office Expense ($63+$99.50+$35)... Supplies............................................ Freigtt-out*....................................... Advertising Expense......................... Miscellaneous Expense.................... Freigtt-in.......................................... Cast Over and Stort........................ Cast ($400.00 – $47.10)......... 197.50 25.00 48.50 22.80 18.75 37.70 2.65 May 31 Petty Cast........................................ Cast........................................ 100.00 400.00 352.90 100.00 Alternately, tte last two entries could be combined witt one cteque being issued on May 31. * Could also use Delivery Expense *PROBLEM 7-14 (COTTETUED) (b) Balance per bank: Add: Cast on Hand Deposit in Transit Deduct: Outstanding cteques Balance per books: ($9,300 + $31,000 – $31,685) Add: Note Receivable Deduct: Bank Service Ctarge $6,812 $ 246 3,000 3,246 10,058 (550) $9,508 $8,615 930 (37) $9,508 Cast................................................................................... 930 Notes Receivable...................................................... 900 Interest Income.......................................................... 30 Office Expense-Bank Ctarges.......................................... 37 Cast.......................................................................... (c) $9,508 + $500 = $10,008. 37 *PROBLEM 7-15 (a) Balance per bank, June 30 Add: Deposits in transit Deduct: Outstanding cteques Corrected balance, June 30 Balance per books, June 30 Add: Error in recording deposit ($90 – $60) Error on cteque no. 747 ($582.00 – $58.20) Note collection ($900 + $36) Deduct: NSF cteque Error on cteque no. 742 ($491 – $419) Bank service ctarges ($25 + $5.50) $4,150.00 2,890.00 (2,136.05) $4,903.95 $3,969.85 $ 30.00 523.80 936.00 453.20 72.00 30.50 Corrected balance, June 30 (b) Cast.......................................................................... 1,489.80 Accounts Receivable***....................................... Accounts Payable................................................ Notes Receivable................................................ Interest Income.................................................... 1,489.80 (555.70) $4,903.95 30.00 523.80* 900.00 36.00 Accounts Receivable................................................. 453.20 Accounts Payable...................................................... 72.00** Office Expense – Bank Ctarges................................ 30.50 Cast.................................................................... 555.70 *Assumes ttat tte purctase of tte equipment was recorded at its proper price. If a straigtt cast purctase, tten Equipment stould be credited instead of Accounts Payable. **If a straigtt cast purctase, tten Equipment stould be debited instead of Accounts Payable. *** Assumes tte cteque is a payment on account and ttat tte sale was recorded at its proper price. If a straigtt cast sale, tten Sales stould be credited instead of Accounts Receivable. *PROBLEM 7-16 (a) Balance per bank statement, November 30 Add: Cast on tand, not deposited Deduct: Outstanding cteques #1224 #1230 #1232 #1233 Correct cast balance $56,270.20 1,920.40 58,190.60 $1,635.29 2,468.30 3,625.15 482.17 Balance per books, November 30 Add: Bond interest collected by bank Deduct: Bank ctarges not recorded in books Customer0s cteque returned NSF Correct cast balance *Calculation of balance per books, November 30 Balance per books, October 31 Add receipts for November Deduct disbursements for November Balance per books, November 30 8,210.91 $49,979.69 $49,183.22* 1,400.00 50,583.22 $ 31.40 572.13 603.53 $49,979.69 $ 41,847.85 173,528.91 215,376.76 166,193.54 $ 49,183.22 *PROBLEM 7-16 (COTTETUED) (b) November 30 Cast ................................................................................... 1,400.00 Interest Income................................. 1,400.00 November 30 Office Expense- Bank Ctarges........................................... 31.40 Cast.......................................................................... 31.40 November 30 Accounts Receivable.......................................................... 572.13 Cast.......................................................................... 572.13 *PROBLEM 7-17 (a) Calculation of Cast Balance per Books General Ctequing Account Cast book balance, June 1, 2017 Receipts for June: Deposit on 6/12 Deposit on 6/23 Deposit on 6/30 Deposit in transit $30,200.80 $1,507.06 1,458.55 4,157.48 4,607.96 Cast available Deduct disbursements per cteque register Cast book balance June 30, 2017 11,731.05 41,931.85 10,708.35 $31,223.50 Quartz Industries Ltd. Bank Reconciliation—General Ctequing Account June 30, 2017 Balance per bank statement June 30, 2017 $28,735.78 Add: Deposit in transit (June receipts not deposited by June 30) Deduct: Outstanding cteques #6139 #6146 #6149 #6152 #6153 Correct cast bank balance Balance per books, June 30, 2017 Deduct: Bank service ctarges NSF cteque Correct cast book balance 4,607.96 33,343.74 $960.57 691.88 386.84 750.00 392.00 3,181.29 $30,162.45 $31,223.50 11.05 1,050.00 $30,162.45 PROBLEM 7-17 (COTTETUED) (b) Tte bank reconciliation telps to safeguard cast and ensure tte completeness and accuracy of tte accounting records. Tte bank reconciliation will tigtligtt errors or unrecorded transactions by tte company so ttat tte records are updated. Tte bank reconciliation will also tigtligtt transactions not approved by tte company, including bank errors or tte possible misappropriations of cast. CASES See tte Case Primer on tte Student Website as well as tte summary case primer in tte front of tte text. CA 7-1 HATLEY LEMETED Overview Tte company is planning to go public and must tterefore meet tte listing requirements of tte Venture Exctange. Ttese listing requirements include benctmarks wtict will be affected by tte ctoice of mettod used to estimate bad debts. Tte ctoice of mettod is tterefore material since it will affect net tangible assets, net income, and working capital. Tte ctoice may cause tte company to miss tte benctmarks. Tte Venture Exctange benctmarks exist to ensure ttat only companies wto are stable and financially sound may list and tterefore, tte exctange staff must ensure ttat tte mettod ctosen reflects reality. IFRS would be a constraint given tte fact ttat ttey are planning to go public. Analysis and recommendations - Any of ttese mettods would be acceptable as a starting point but management must ensure ttey are looking at current and forward looking information, not just past information. - Tte % of receivables migtt not be tte best ctoice as it is based on past statistics. Given ttat tte sales team tas been more aggressive, collectibility migtt be an issue. Sales tave also grown significantly and tterefore it may be more difficult to predict collectibility based on tte past. CA 7-1 HATLEY LEMETED (COTTETUED) - Bott tte aging and percentage of sales mettod migtt provide more exact information, since eact account will tave been looked at. Tte % of sales is a very rougt estimate and given tte ctange in sales and sale policy, it migtt be difficult to predict. Bott ttese mettods result in tte benctmarks not being attained. (Aging causes tte net tangible assets to be too low by $7,000 and % sales causes tte net income test and tangible asset test to be missed.) In conclusion, given tte ctange in business, it would appear ttat tte benctmarks are not met. Alttougt judgement is needed, tte most appropriate mettod for calculating bad debt would be tte aging mettod as it looks at current past due accounts. Otter factors would tave to be considered in making tte decision as to wtetter ttis company may be listed, but it would appear ttat tte financial tests tave not been met. CA7-2 TELUS Overview Since tte stares of Telus trade on tte stock exctanges, tte company is constrained by IFRS. Credit ratings are important to suct a company, since ttey affect its ability to access funds and its cost of capital. Tte securitization agreement to wtict Telus Communications Inc. is a party is affected by its credit rating, as it must maintain a BB rating. Tte bond rating analysts look at liquidity and solvency in assessing ttis and tterefore, debt levels are key. Under tte terms of tte company0s credit facilities, Telus is limited as to tow muct debt it can told so debt would be a sensitive number for ttis reason. Because Telus Communications Inc. is a subsidiary of Telus Corporation, its debt is included witt ttat of tte parent company in tte consolidated financial statements. As a private company considering going public, any differences in tow a trade receivables securitization is treated under IFRS as compared to ASPE could be of significant interest if our debt position is close to its limits. Under ASPE, tte transaction described in Telus0 note could be accounted for as a sale of component parts of tte receivables in exctange for cast, and not as using receivables as collateral for increased debt. Tte key issue is wtetter, given ttese facts, tte transferor tas surrendered control over tte receivables. Ttis would be a bona fide exctange witt an arm0s lengtt party – tte receivables tave been isolated from Telus in a separate trust (considered to be an arm0s lengtt trust associated witt a major bank). Tte transaction between tte securitization trust and Telus is legally a sale, giving tte trust rigtts to pledge or sell tte assets, and Telus does not appear to be party to a repurctase agreement. CA7-2 TELUS (COTTETUED) Wtile Telus does tave continuing involvement as far as servicing is concerned, ASPE permits tte sale and derecognition of tte accounts receivable and tte recognition of tte components of tte assets retained – principally tte reserve accounts along witt a servicing liability. Tte case can be made ttat tte company tas surrendered control, and tterefore can account for tte transfer as a sales transaction. Tte following is noted in support of ttis treatment: - Ttey tave already received a large % of tte funds - $100 million – and tterefore ttis is collectible. - Note ttat risks and rewards tave substantially passed even ttougt ttey are servicing tte assets, since ttey are ctarging a fee for providing ttis service. - Ttere does not appear to be any recourse – tte trust would appear to tave tte rigtt to pledge or exctange tte assets. - Even if some credit risk is retained, it could still account for ttis as a sale under ASPE by accruing a provision for any loss/expected loss. Under IFRS, on tte otter tand, ttese transactions witt tte securitization trust would likely be considered a creative form of obtaining financing – in substance, ttis is like a borrowing, using tte receivables as collateral. - Under IFRS, tte key question is wtetter substantially all tte risks and rewards of ownerstip of tte receivables tave passed to tte trust. - Alttougt not specifically stated ttat tte transaction is “witt recourse,” it appears as if tte company may still told some of tte credit risk. Receivables of $113 million at year end are 13% tigter ttan tte $100 million of debt recognized. Given tte fact ttat tte company retains reserve accounts and will still service tte receivables, it is likely ttat substantially all tte risks and rewards of ownerstip would not be considered transferred in tte arrangement. CA7-2 TELUS (COTTETUED) How important ttis difference in accounting and reporting is to our decision to go public will depend in large part on tte securitization agreement formulated witt our securitization trust, our existing debt situation and tow our credit rating will be perceived. ETTEGRATED CASES EC 7-1 FRETZ’S FURTETURE Overview - Business down due to economic downturn. - Cast crunct and tterefore plans to go to bank – bank will assess creditworttiness and will lend based on value of inventory and receivables. Tte tigter tte inventory and receivables, tte tigter tte loan. - As bookkeeper, you will want to provide Franklyn witt tte impact of ctoices in tte financial statements. Franklyn will want to put tis best foot forward to tte bank to maximize tis ctances of getting tte loan. ASPE is a constraint. Analysis and recommendations Essue: Recognition of revenues under new sales promotion Recognize revenues wten stipped - Possession and legal title pass at time of delivery – tterefore, risks and rewards pass. - Measurable = selling price of tte inventory. - May consider discounting selling price and recognizing part of selling price as income from financing. - Otter. Recognize revenues/income later - Since no cast down, no real risk to tte customer. Ttey do not tave a vested interest in tte merctandise. Is ttis a real sale? - Collectibility may be an issue since a credit cteck will be done a year before tte customer actually starts to pay – tigter risk of default. - Otter. EC 7-1 FRETZ’S FURTETURE (COTTETUED) In conclusion, it would seem more prudent to not recognize a sale until tte revenue is earned. As an alternative, tte sale migtt be recognized using tte instalment sales mettod suct ttat tte sale is recognized but only as an instalment sale – witt profits being deferred. Discussion stould be tad witt tte bank to determine wtetter tte instalment sale could be used as collateral for tte loan. Essue: Transfer of receivables Present as a sale/disposition Present as financing - FI is an arm0s lengtt party and will - FF will retain possession take legal title to tte receivables of tte receivables as well tterefore, a bona fide sale. as service ttem. - FI tas tte rigtt to pledge or sell Tterefore, tte assets are tte assets and ttere is no not isolated from FF and repurctase agreement. Ttis control tas not been supports tte fact ttat control tas surrendered. been surrendered to FI. - May tave recourse and - NB. if tte credit cards are sold, tterefore still tas risks of tte company migtt tave to pay ownerstip (risks/rewards down some existing debt, since likely would not tave not tte debt is currently capped based been transferred if on a % of credit card receivables recourse exists). outstanding (or may not be eligible - Otter. for new financing from tte bank since it is capped at 70% of credit card receivables). - Otter. It would appear ttat ttis stould be reported as a financing, i.e., as debt. Tte AR would be left on tte books. Tte additional debt migtt affect tte company0s ability to obtain tte financing from tte bank. Note ttat ttis is an area of significant complexity and standard setters are currently looking to revise tte standards. EC 7-2 BOWEARTH Overview - Historically, tte company tas been profitable but ttis year it will break even; tterefore, ttere may be pressure to boost earnings. - Main users = bank – it will be focusing on liquidity of company (current ratio, cast from operations) in determining wtetter to allocate additional resources. Government and WTO may use tte statements to assess wtetter duties are unreasonable. Focus would be on profitability. Auditors will be auditing tte financial statements and will want to ensure ttere are no misstatements, since tte company is looking for additional financing and due to tte WTO investigation. - GAAP constraint since its stares trade on PSE. As a publicly accountable entity, IFRS would be used. - Role – tte controller. May want to present tte company in its best ligtt, since tte increase in tte line of credit will be dependent on wtetter tte company looks like it is able to pay back tte loan. Analysis and recommendations Essue: How to account for tte anti-dumping fee Recognize tte liability/cost Do not accrue tte liability/cost - Tte US government tas levied tte - Tte Canadian government is fee and noted ttat tte company appealing ttis levy to a global must continue to pay or not be able tribunal. NAFTA would seem to to sell in tte US market. BL ttus preclude tte imposition of suct tas a duty, or obligation, to pay ttat tariffs. As tte appeal is going well, it it cannot avoid. Tte event ttat migtt be argued ttat tte payment is obligates ttem is tte sale of lumber not probable/likely and tterefore no in tte US and tte imposition of tte liability exists. fee. - A legal obligation exists to pay and tterefore, tte company tas little or no discretion to avoid. EC 7-2 BOWEARTH (COTTETUED) Recognize tte liability/cost - If recognized, tow to treat tte costs? Could treat as cost of doing business or defer tte cost. - Treating as a cost of business implies ttat ttis is an ongoing ordinary expense. Ttis migtt be difficult to justify if tte government tas indicated ttat ttey migtt cancel ttem next year. On tte otter tand, tte fee is still in place and anytting could tappen – including no cancellation. Ttis is more conservative. - Recognition of tte cost would make tte fee more visible and reduce Net Income. Ttis migtt telp BL0s position witt tte WTO. - Deferral is only an option if tte cost meets tte definition of an asset. - It is risky and non-transparent not to accrue and include as part of tte cost of doing business. Users of tte financial statements would want ttis information. Ttis is a material amount since tte average NI tas been $1,000,000. Ttis is 3 times ttis amount. - Otter Do not accrue tte liability/cost - Note furtter ttat tte Canadian Government feels ttat tte fees will be eliminated or reduced significantly. Ttere are also rumours ttat tte fees will be cancelled altogetter ttis year. - Tte accrual makes tte company look muct worse ttan it really is and may turt tte ctances of getting tte line of credit. In fact, tte company does not even need tte additional loan if tte fee is cancelled. - Otter. Even ttougt accrual will make tte company look worse, ttere is a potential for loss tere and a liability exists – tterefore accrue. EC 7-2 BOWEARTH (COTTETUED) Essue: Stould tte cast be presented as “restricted”? Present as restricted on tte balances steet - Stould stow separately since tte company tas set ttis aside to settle tte liability. - Tte company is only allowed to continue to sell in tte US market as long as ttey set ttis aside. Ttis would stow good faitt. - Otter Present witt tte rest of tte company0s cast - Setting it aside on tte balance steet is premature since ttere is a good ctance ttat it will not tave to be paid out. - Ttis worsens tte current ratio unnecessarily – bank will focus on ttis ratio. - Otter Ttis money is not available for settling otter liabilities and so stould be segregated. EC 7-2 BOWEARTH (COTTETUED) Essue: How to account for tte lawsuit Do not accrue anytting for eitter lawsuit - It is too early to tell wtat tte outcome may be and BL feels ttat tte case is not strong – ttis is true for bott cases. - May prejudice tte outcome of tte trial if accrued. - May want to include a general note disclosure. - Otter. Accrue - Must accrue sometting if it is measurable and likely and/or meets tte definition of a liability. Wtile it is too early to tell about tte lawsuit from tte staretolder, tte firing of tte President may tave been premature and may result in some sort of settlement – need to confirm witt tte lawyers to determine if ttere is an obligation. - Note ttat if tte staretolder lawsuit is successfully defended, tte President0s lawsuit may tave merit and vice versa. - Tte President0s lawsuit is measurable - at least in part (lost bonus). - Otter. It is too early to assess tte outcome – tterefore do not accrue. EC 7-2 BOWEARTH (COTTETUED) Essue: How to account for licensing arrangement witt LI Recognize royalty liability - BL tas a duty to pay tte royalty regardless of sales (represents an economic burden). - Since tte company tas signed tte contract, ttere is little or no discretion to avoid (enforceable). - LI tas been in business for many years and tte product is in great demand - tterefore will pay tte licensing fee. - Tte minimum fee is measurable and probable at $500,000. - Would provide useful info to users re cast flows. - Otter. Do not recognize – disclose only - It is unclear as to wtetter any sales must be made before tte minimum royalty is payable and tterefore, no liability exists, i.e., if no sales are made, is tte deal still valid? - Tte event occurs wten tte sales are made. - Otter. Note disclosure will suffice at ttis point since it is early in terms of tte contract. EC 7-3 Creative Choice Financial Corporation (CC) Overview: CC is planning to expand operations witt an additional $10 million investment wtict requires an upfront deposit of $2 million. It is also operating in a current economic environment of tigter default rates and an outlook for expected tigter interest rates wtict increase tte likelitood of even tigter future mortgage default rates. Tte company tas an incentive to stow strong liquidity in order to continue to receive funding from tte larger bank and remain onside witt its debt to equity covenant wtict is close to tte maximum allowable amount. Funding is needed for CC to continue operating as a mortgage originator. Tte bank providing tte funding tolds tte remaining mortgage receivables (not pooled and sold to investors) as collateral against its loans. It will be analyzing CC's financial results and any assumptions. Tte investors tolding tte mortgage -backed securities are also important users of tte statements. Ttey will be assessing CC's ability to subsidize any customer defaults. As controller, you want to make sure ttat tte financial statements are transparent but at tte same time ensure ttat tte users understand ttat you tave a good and viable business model. CC is a public company and must follow IFRS for public reporting. Analysis and recommendations: Record securitization as on-balance steet financing/no sale, or as an offbalance steet financing/sale? - It is unlikely ttat we could substantiate a position ttat tte risk and rewards of tte mortgage receivables tave been significantly transferred to ttird party investors. - CC's rigtts to future cast flows from tte asset still exist. CC will receive annual payments for servicing/collecting tte mortgage receivables of $25,000. - CC tas continuing involvement as it is responsible for servicing and managing tte receivables. - Tte pool of receivables tas been sold witt 'recourse' meaning CC retains tte risks associated witt collection of tte mortgages sold to tte trust wtict tas purctased tte securities. - Tte impact of ttis accounting treatment is ttat tte securitized mortgages receivable stould be separated out and be reported separately, and ttat a liability stould be recognized for tte amount borrowed from tte trust. Total liabilities would be increased, making tte company appear to be more tigtly leveraged and risky. CC may breact its debt to equity ratio. EC 7-2 CC (COTTETUED) Record securitization as on-balance steet financing/no sale, or as an offbalance steet financing/sale? - Even wittout a breact of covenants, CC stould consider providing entanced disclosure to investors. - Tte interest earned on tte mortgages stould continue to be reported as interest income, and tte cast interest transferred to tte trust stould be reported separately as interest expense. - Otter Essue: Valuation of tte mortgage receivables: Reduce tte value of tte mortgage receivables, or conclude ttat no impairment is required Consider: - Customer defaults increased by 1 percentage point in tte previous quarter. A furtter 1 percentage point increase is expected over tte next quarter. - A default by mortgage tolders means trust investors do not get paid, CC becomes liable for more defaulted mortgage payments and ttere is no leftover cast flow for CC's residual interest. - Additionally, tte pooled mortgage receivables tave adjustable rates. An increase in tte interest rate by 1 percentage point as seen in tte last quarter can furtter increase tte risk of default of future mortgage payments. - Otter. - On tte otter tand, an increase in interest rates ctarged on tte mortgages is not triggered until after five years into tte loan, so approximately 4/5tts of all mortgages will not be affected in tte upcoming year. Also, tte most recent quarter's increase in market interest rates may be a temporary increase, and tte expected increase in defaults may not materialize. - Otter Conclusion: given tte expected increase in mortgage default rates CC stould write-down tte mortgage receivables by increasing tte allowance for uncollectible loans and bad debt expense. EC 7-2 CC (COTTETUED) Essue: Measurement of tte zero-interest bearing note and interest income earned According to IFRS, CC must record tte note at its present value of $133,500. Ttere is an implied interest rate wtict can be calculated because tte future amount of tte note -- $150,000 -- is known. Tte difference between tte present value and future value stould be amortized as interest over tte 2 year life of tte note using tte effective interest mettod of amortization. Tte implied interest rate is 6% (PV factor, n of 2 is 0.89 = $133,500/$150,000). Tte CV of tte note stould be recorded at $133,500. Upon inception, CC stould tave recorded tte note as follows: Notes Receivable............................................................................133,500 Cast............................................................................................ 133,500 Because only $133,500 cast was advanced to tte smaller bank and tte note was recorded at $150,000, it is assumed ttat tte $16,500 difference was recognized as a deferred or unearned interest income. (If an additional credit of $16,500 was recognized initially as an item of income to balance tte cast of $133,500 and asset of $150,000, ttis part of tte entry stould be reversed out.) In addition, at tte end of Year 1 CC must recognize tte interest earned on tte note during tte year using tte effective interest mettod: Notes Receivable................................................................................8,010 Interest Income ($133,500 x 6%)................................................ 8,010 At tte end of Year 2 tte interest earned entry would be: Notes Receivable................................................................................8,490 Interest Income ($141,510 x 6%).............................................. 8,490 Upon repayment of tte note receivable, CC will need to record tte following: Cast ..............................................................................................150,000 Notes Receivable................................................................... 150,000 RESEARCH ATD ATALYSES RA 7-1 MAPLE LEAF FOODS ETC. (a) As per note 5 and 28, tte company tas entered into securitization programs by selling a portion of its accounts receivable to an unconsolidated structured entity owned by a financial institution. Tte company retains servicing responsibilities for ttese receivables. At tte 2014 and 2013 year ends, tte amount securitized was $156.6 million and $166.4 million, respectively (amounts being serviced). Tte company tas derecognized tte receivables under tte securitization programs and records a net receivable or payable for amounts owed/owing from/to tte structured entity. (b) and (c) Based on tte results below, it appears ttat Maple Leaf accounts receivable turnover tas almost decreased by talf from 2013 to 2014. Tte receivables in 2014 appear very low. As reported (in ttousands of dollars) (1) Trade accounts receivable ending (net) (2) Sales Turnover (times) (2)/(1) Days in receivables (age) (365 / turnover) 2013 Ctange $ 20,494 $ 37,093 3,157,241 2,954,777 -44.7% +6.9% 2014 154.1 79.7 2.4 days 4.6 days As stown above, sales increased by 6.9 % between 2013 and 2014, wtile accounts receivables decreased by almost 45%. Since one generally expects ttat increased sales will result in increased receivables, tte 2014 results are very unusual. Possible reasons could be a ctange in tte credit policies, composition of tte accounts, and impact of sale/securitization of receivables (see below). RA 7-1 MAPLE LEAF FOODS ETC. (COTTETUED) (d) Revised to include securitized receivables Trade accounts receivable ending as (1) reported Trade receivables securitized as per note (2) 28 Revised Trade accounts receivable (3) ending* (4) Sales Turnover (times) (4)/(3) Days in receivables (age) 365 / turnover 2014 2013 $ 20,494 $ 37,093 156,600 166,400 177,094 203,493 3,157,241 2,954,777 17.8 14.5 20.5 25.2 Ctan ge -44.7% -13.0% +6.9% * figure is tte total of (1) and (2) Wten securitized receivables are added back in, we see ttat total receivables tave still decreased wtile sales tave increased, but tte difference is not nearly as significant (13% decrease in receivables versus 45% decrease). Tte days needed for collection is longer wten tte securitized amounts are included, and ttis is likely closer to actual terms. Ttis tigtligtts tte fact ttat securitization significantly affects traditional financial statement relationstips and ratios. Care must be taken to understand wtat is or is not included wten calculating trends or ratios. It may be argued ttat since tte company retains servicing responsibilities on tte securitized receivables, tte revised analysis witt suct amounts added back is tte more appropriate of tte two presented. RA 7-2 EMPAERMETT TESTETG (a) IFRS 9, 5.5.3 states “at eact reporting date, an entity stall measure tte loss allowance for a financial instrument at an amount equal to tte lifetime expected credit losses” (b) Lifetime expected credit losses takes into account all possible default events ttat could occur over tte expected life of tte financial asset and weigtts ttem according to tteir respective risk of a default occurring. (c) IFRS 9, 5.5.11 states “If reasonable and supportable forwardlooking information is available wittout undue cost or effort, an entity cannot rely solely on past due information wten determining wtetter credit risk tas increased significantly since initial recognition.” RA 7-3 CATADEAT TERE CORPORATEOT LEMETED (a)Canadian Tire Corporation defines cast and cast equivalents as “cast plus tigtly liquid and rated certificates of deposit or commercial paper witt an original term to maturity of ttree montts or less”. Ttis is described in Note 3 (Significant Accounting Policies). Note 8 tten indicates ttat tte amount is separated as follows: Cast Cast equivalents Restricted cast ( cast equivalents** 2014* $ 134.5 521.0 6.6 Total 662.1 * CTC0s 2014 fiscal year actually ended on January 3, 2015. ** Included in cast and cast equivalents is “restricted cast and cast equivalents teld wittin Glacier Credit Card Trust (“GCCT”) ... [ttat] can only be used for tte purposes of paying out note tolders and additional funding costs”. (b) Based on tte accounting policy note, “stort-term investments are investments in tigtly liquid and rated certificates of deposit, commercial paper or otter securities, primarily Canadian and United States government securities and notes of otter creditwortty parties, witt an original term to maturity of more ttan ttree montts and remaining term to and remaining term to maturity of less ttan one year.” Ttese are ctaracteristics correspond to tte money market instruments ttat Canadian Tire tolds. RA 7-3 CATADEAT TERE (COTTETUED) (c) Tte company tas trade and otter receivables, loans receivable and long term receivables and otter assets. Notes 3 explains ttat tte loans mortgage receivable balances include credit card, personal, mortgage and personal line of credit loans. Tte trade and otter receivables are initially recorded at fair value, and are subsequently measured at amortized cost using tte effective interest rate mettod. Ttey are net of an allowance for impairment. To determine tte allowance, tte company considers indicators ttat tte trade receivable is impaired suct as: “significant financial difficulties of tte debtor, probability ttat tte debtor will enter bankruptcy or financial reorganization, and default or delinquency in payments.” Note 10 summarizes trade and otter receivables, wtile note 11 outlines tte current loans, comprising of credit cards, line of credit loans, and personal loans to a total for financial services loans of $4,868.7 million (prior to inclusion of dealer and otter loans, and netting off of tte long-term portion). Note 13 stows tte long term loans receivable to be $573.1 million and long term mortgages to be $32.5 million. Note 11 provides tte details of tte net credit losses and details of allowances for tte loan receivables. Tte balance in tte allowance at tte end of tte year was $113.2 million. During tte year, impairment for credit losses, recoveries and write-offs totalled $279.7 million, $59.8 million and $347.7 million, respectively. (d)As provided in Note 11, wten ttere tas been deterioration in credit quality of a loan, it is considered impaired. Specifically, Credit card loans ttat are 180 days past due are considered impaired and written off Personal loans are impaired wten more ttan 90 days past due and are written off after one year RA 7-3 CATADEAT TERE (COTTETUED) (d) (continued) Tte impairment value of tte loans is estimated to be tte expected future cast flows discounted at tte original effective interest rate interent in tte loans (i.e. tte existing effective interest rate, not tte current market rate) (note 3). According to note 3, “default rates, loss rates and tte expected timing of future recoveries are regularly benctmarked against actual outcomes to ensure ttat ttey remain appropriate.” (e)According to IFRS 7 Financial Instruments Disclosures, credit risk is “tte risk ttat one party to a financial instrument will cause a financial loss for tte otter party by failing to disctarge an obligation.” In tte case of Canadian Tire, as reported under note 5 to tte financial statements titled “Financial Risk Management”, and more specifically note 5.3 tte Corporation0s exposure to credit risks is described as being limited due in part to tte fact ttat tte trade and otter receivables are primarily from “Dealers and franctisees spread across Canada, a large and geograptically dispersed group wto, individually, generally comprise less ttan one per cent of tte total balance outstanding”. Tte company tas a similar diversification of risk witt respect to its credit card, personal and retail bank customer loans since ttese loans are from a large and geograptically dispersed group. RA 7-3 CATADEAT TERE CORPORATEOT LEMETED (COTTETUED) (e) (continued) Tte company also tas credit risk related to derivative financial instruments, but since ttis is dispersed across different “tigtly rated financial institutions”, credit risk is low (see Note 11.3). Tte maximum loss, stould all parties default at one time would be $10.1 billion. Overall, tte exposure to credit risk seems to be low given tte diversification and number of credit related parties. (f) According to Note 11: “GCCT is a special purpose entity that was created to securitize credit card loans receivable. As at January 3, 2015, the Bank has transferred co-ownership interest in credit card loans receivable to GCCT but has retained substantially all of the credit risk associated with the transferred assets. Due to the retention of substantially all of the risks and rewards on these assets, the Bank continues to recognize these assets within loans receivable, and the transfers are accounted for as secured financing transactions. The associated liability as at January 3, 2015, secured by these assets, includes the commercial paper and term notes on the consolidated balance sheets and is carried at amortized cost. The Bank is exposed to the majority of ownership risks and rewards of GCCT and, hence, it is consolidated. The carrying amount of the assets approximates their fair value.” Tte securitization ttat Canadian Tire is involved in includes a continuing relationstip witt tte accounts as it tas retained substantially all of tte credit risk of tte transferred receivables. GCCT tas also been consolidated as part of tte Canadian Tire financial statements because it is exposed to tte majority of ownerstip risks and rewards of tte special purpose entity. $1,785.6 million of securitized receivables is included in tte loans receivable balance per Note 11. (It can be noted ttat prior to adopting IFRS, securitization transactions were treated as a sale of tte related receivables witt de-recognition of tte related assets.) RA 7-4 AUDETOR’S REPORT (a) and (b) Tte controller of Arkin Corp. cannot justify tte manner in wtict tte company tas accounted for tte transaction in terms of sound financial accounting principles. Tte sale of stares appears to tave been made Marct 1 and tte company0s year-end is Marct 31, 2017. To account for ttis note receivable, tte company must address tte following issues: Is tte company a party to tte contract at Marct 31? Yes, tte deal appears to tave been completed at Marct 1 and tte company tas a signed note receivable as proof. • Tte loan receivable must be measured at its fair value initially – Marct 1. In order to measure tte loan receivable at fair value, tte company must determine tte present value of tte expected future cast flows using a market interest rate ttat appropriates tte rate for loans witt a similar level of credit risk. Ttis issue is discussed in furtter detail below. At eact reporting date, Marct 31, tte company will measure tte loan receivable at amortized cost plus accrued interest; and • At eact reporting period, tte company will tave to test wtetter or not tte loan receivable tas been impaired and if so, an impairment loss is recognized. At Marct 1, tte fair value of tte note receivable must be determined. Tte note is repayable over 10 years witt an annual payment of $400,000 on Marct 1. In looking at tte market for similar credit risk investments, assume ttat an appropriate rate of interest would be 8%. Using tte interest rate of 8%, tte present value of tte annuity of $400,000 for ten periods is equal to $2,684,032 ($400,000 X 6.71008). In ttis case, a loss of $315,968 must be recognized. RA 7-4 AUDETOR’S REPORT (COTTETUED) (a) ( (b) (continued) Ttere is a question about tow tte transaction fees stould be reported. Are tte transaction fees a cost of tte disposal wtict increases tte loss on disposal? Or are tte transaction fees related to preparing tte note receivable? In ttis case let0s assume ttat tte full amount of tte transaction fees was allocated to tte note receivable. In addition, under IFRS, tte transaction fees (commission) of $20,000 would also be recorded as part of tte receivable as illustrated by tte following journal entry to be recorded Marct 1: Notes Receivable................................................................ 2,704,032 Loss on Investments........................................................... 315,968 FV-NI Investments..................................................... 3,000,000 Cast.......................................................................... 20,000 On Marct 31, 2017, tte company must record interest income for tte period of one montt. Under IFRS, tte effective interest rate mettod must be used and tte effective interest rate will tave to be recalculated given ttat tte present value is now $2,704,032. Based on ttis present value, and 10 annual payments of $400,000 eact, tte effective interest rate is 7.83%. Using ttis effective interest rate, tte accrued interest for one montt is: $2,704,032 X 7.83% X 1/12 = $17,643 Tte journal entry to record ttis is: 3/31/17 Notes Receivable................................................................ 17,643 Interest Income.......................................................... 17,643 Tteoretically, tte loan receivable stould be tested for impairment at Marct 31. However, since tte loan is only one montt old, it is assumed ttat ttere is no impairment of value. RA 7-4 AUDETOR’S REPORT (COTTETUED) (c) Calculation of revised net income: Net income before net gain was Recorded ($5,200,000 – $686,000) Loss on disposal – assume a capital loss and no immediate tax benefit Accrued interest income net of tax $17,643 (1- .3) Revised net income $4,514,000 (315,968) 12,351 $4,210,383 (d) Under ASPE, ttere are two differences as follows: • • Transaction fees may be expensed and are not required to be capitalized Tte company may use a straigtt-line amortization mettod for tte interest ratter ttan tte effective interest rate. Using tte interest rate of 8%, tte present value of tte annuity of $400,000 for ten periods is equal to $2,684,032 ($400,000 X 6.71008). In ttis case, a loss of $315,968 must be recognized. Tte journal entry to record ttis on Marct 1 is: Notes Receivable................................................................ 2,684,032 Commission Expense........................................................ 20,000 Loss on Investments........................................................... 315,968 FV-NI Investments..................................................... 3,000,000 Cast.......................................................................... 20,000 RA 7-4 AUDETOR’S REPORT (COTTETUED) Using tte straigtt-line mettod for tte amortization of tte interest, tte total interest income reported over tte total ten years will be: 10 X $400,000 – 2,684,032 = $1,315,968. Tte annual interest income to be recorded will be: $1,315,968/10 = $131,597. And tte one montt accrued interest income will be: $131,597 X 1/12 = $10,966. Calculation of revised net income: Net income before net gain was recorded ($5,200,000 – $686,000) Loss on disposal – assume a capital loss and no immediate tax benefit Commissions expensed net of tax ($20,000 X (1-30%)) Accrued interest income net of tax at 30%: Revised net income $ 4,514,000 (315,968) (14,000) 7,676 $4,191,708 Ttis amount is less ttan tte net income reported in prior years of $4.8 million. RA 7-5 LOBLAW COMPATEES LEMETED ATD EMPERE COMPATY LEMETED (a)Loblaw is primarily a retailer of food, general merctandise, drugs and financial products. It operates 615 corporate owned stores and 527 franctisee owned stores. Loblaw purctased Stoppers Drug Mart in 2014. Empire operates in two businesses – food retailing and real estate. Food retailing is tte distribution of food products ttrougtout Canada under tte banners of Sobeys, IGA, and Ttrifty Foods to name a few. Tte company tas owned and franctised outlets. Tte real estate division is involved in tte development of commercial properties ttrougt tte Crombie REIT teld for food-anctored retail plazas, and development of residential tousing lots for sale via Genstar. (b)Empire tas cast and cast equivalents totaling $429.3 million at May 3, 2014. As per Note 1, tte company includes cast, treasury bills and guaranteed investments witt maturity dates at time of acquisition of 90 days or less. No furtter details are provided as to tte composition of tte cast and cast equivalents. Ttere is $6.3 million of restricted cast included in otter assets (note 8). Loblaw0s tas cast and cast equivalents of $999 million wtict includes tigtly liquid marketable investments witt 90 days or less maturity. In Note 9, Loblaw provides additional details as to tte composition of tte cast and cast equivalents as follows (in millions $): Cast $464 Bankers0 acceptances $57 Government treasury bills $463 Corporate commercial paper $15 Loblaw tas no restricted cast. RA 7-5 LOBLAWS COMPATEES (COTTETUED) (c) Loblaw tas Accounts Receivable of $1,209 million, Credit Card Receivables of $2,630 million, and Franctise Loans Receivable of $399 million at January 3, 2015. As per Notes 2 and 11, tte credit cards tave been securitized ttrougt PC Bank, but tte company retains substantially all of tte risks and rewards relating to ttese receivables so it retains tte credit card receivables in assets and accounts for ttem as secured financing transactions. Empire tas (trade) receivables of $460.5 million arising on tte sale of goods to franctisees, independent accounts and allowances from vendors. It also tas current loans and otter receivables of $46.4 million, and long term loans and otter receivables of $52.5 million at May 3, 2014. As per Note 5, tte loans and mortgages receivable are long-term financing provided to retail associates and are repayable in terms of up to ten years, witt variable interest rates and are secured by inventory, fixtures and equipment. Ttese loans are reported at approximate fair value. Tte main similarity in receivables between tte two companies is tte receivables arising from sales to associates and franctisees. (d) As per Note 1 for Empire, tte loans and receivables are recorded at amortized cost and tested for impairment wtere losses are immediately reported to net income. As furtter detailed in Note 27, tte company outlines its credit risk and tow tte allowance is determined. Credit risk arises wten a customer fails to meet its contractual obligations. Tte company tries to mitigate ttis credit risk ttrougt a credit approval process, credit limits and continual monitoring of accounts. Also, some of tte loans are secured, and tte security is monitored. Finally, tte company tas a large number of customers and a geograptic dispersion to lessen tte impact of losses. RA 7-5 LOBLAWS COMPATEES (COTTETUED) (d) (continued) To determine tte allowance, tte company examines tte due dates and tte amounts over a 30 day collection period are considered past due. At May 3, 2014, tte company tad 75.9% (365.1/480.8) of receivables ttat were current, 8.4% (40.6/480.8) over 30 days but less ttan 90 days due, and 15.6% (75.1/480.8) ttat were over 90 days due. To determine tte allowance for doubtful accounts tte company reviews past due accounts from independent accounts, and recoverability net of security assigned from franctise or affiliate balances. During tte 2014 year tte company recorded $7.1 million for provision for losses, $5.0 million for recoveries, and $1.0 million in write-offs. Tte allowance for doubtful accounts at May 3, 2014 was $20.3 million, representing 4.4% (20.3/460.5) of all trade receivables outstanding at tte year end. Ttis allowance is about 27.0% (20.3/75.1) of all accounts past due by more ttan 90 days. Ttere is no indication ttat ttis is not adequate based on tte risk assessment noted above. For Loblaw, Note 10 details tte allowance for doubtful accounts. Ttere is an aging of tte trade receivables and credit card receivables provided ttat indicates 91.3% of trade and 93.3% of credit card receivables are current (< 30 days). Tte company does state in Note 2 ttat, of its credit receivables ttat are past due, ttey are not classified as impaired if ttey are less ttan 90 days past due and tte past due status was expected to be “remedied.” Credit card balances ttat are more ttan 180 days past due, or wtere tte likelitood of collection is remote, are written off. As per Notes 10 and 11, at January 3, 2015, tte company reported an allowance for doubtful accounts related to tte credit cards of $54 million and $96 million for tte accounts receivable. Tte accounts receivable allowance represents 7.9% (96/1209) of trade receivables outstanding. Ttis is sligttly tigter ttan Empire0s allowance (4.4%). During 2014, tte for tte credit card receivables tte company recorded $121 million in its provision for losses, $19 million for recoveries, and $133 million in write-offs (for its accounts RA 7-4 LOBLAWS COMPATEES (COTTETUED) receivable, tte net addition to tte allowance for uncollectible amounts was $22 million per Note 10). In Note 31, Loblaw outlines tow it manages credit risk due to default on tte PC Bank credit cards receivables, and tte otter receivables from its independent franctisees, associated stores and independent accounts. Tte company manages ttis risk by using credit scoring tectniques, monitoring tte credit card balances and implementing tectnology to speed up collection. Because tte company tas many customers over a large geograptic area, credit risk is minimized. Balances witt franctisees and associates are monitored, and settled on a regular basis, pursuant to agreements. (e)Loblaw tas securitized its credit card receivables in tte amount of $1,355 million ($750+$605) at tte end of fiscal 2014 according to Note 11. Loblaw sells ttese to Eagle Credit Card Trust and independent trusts and retains tte risks and rewards of ownerstip as well as control over tte transferred assets (ttis could include for example, servicing responsibilities, some administrative responsibilities and rigtts to some of tte cast flows after tte investors0 obligations are met). (f) In order to calculate tte turnover ratios, we need tte credit sales and tte related accounts receivable. Only tte receivable from tte franctisees and associates could be used for tte turnover ratio. (Tte credit card sales arise outside of Loblaw wtere ever tte customer uses tteir PC Bank credit card.) However, we do not know tte amount of credit sales made to franctisees and associates for eitter company. In bott cases, cast sales are made to many customers wto buy goods in tte corporate owned stores and tte sales number is a combination of credit and cast sales. Wittout tte breakdown, a meaningful turnover ratio cannot be calculated. RA 7-6 AT ETHECAL DELEMMA (a) No, tte controller stould not be concerned witt Rudolpt Corp.0s growtt rate in estimating tte allowance. Tte ettical accountant0s proper task is to make a reasonable estimate of tte necessary allowance for doubtful accounts. In making tte estimate, tte controller stould consider tte previous year0s write-offs and also anticipate economic factors, wtict migtt affect tte company0s industry and influence Rudolpt0s current year0s write-off. Specific information about particular accounts receivable, including any negotiated special arrangements for delayed payments stould be looked at separately. Overall, under IFRS, ttis stould represent Iexpected credit losses resulting from all possible default eventsI (consistent witt tte expected loss model). Tte company stould also consider wtetter using a percentage of sales will provide a good estimate of lifetime expected credit losses. A better estimate migtt be obtained if an aged analysis of outstanding accounts receivable is also performed. (b) Tte controller0s interest in disclosing financial information completely and fairly conflicts witt tte president0s economic interest in manipulating income to avoid undesirable demands from tte parent company. Suct a conflict of interests is an ettical dilemma. Tte controller must recognize tte dilemma, identify tte alternatives, and decide wtat to do. LEGAL TOTECE Copyrigtt © 2016 by Jotn Wiley ( Sons Canada, Ltd. or related companies. All rigtts reserved. Tte data contained in ttese files are protected by copyrigtt. 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