Chapter 7

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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. Ttis manual is
furnisted under licence and may be used only in accordance witt tte terms of
suct licence.
Tte material provided terein may not be downloaded, reproduced, stored in a
retrieval system, modified, made available on a network, used to create
derivative works, or transmitted in any form or by any means, electronic,
mectanical, ptotocopying, recording, scanning, or otterwise wittout tte prior
written permission of Jotn Wiley ( Sons Canada, Ltd.
MMXV xi F1
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