ACCT3302 Week 8 Workshop Solutions
Financial Reporting and Analysis (7th Ed.)
Chapter 8
Receivables
E8-3.
Determining ratio effects of write-offs
(AICPA adapted)
1. The current ratio [$30,000/$10,000 = 3:1] does not change as a result of the write-off to the
allowance account. Accounts receivable and its contra account, allowance for doubtful accounts, are
reduced by the same amount [$100]. Thus, accounts receivable (net), which is the number used in
computing the current ratio, does not change.
b. X equals Y
2. Net accounts receivable [prior: $3,300 − $300 = $3,000] does not change as a result of the writeoff to the allowance account [after: $3,200 − $200 = $3,000]. When the $100 account is written off,
accounts receivable and allowance for doubtful accounts are reduced by the same amount. Thus net
receivables are the same before and after the write-off.
b. X equals Y
3. Gross accounts receivable will be lower after the write-off than before the write-off because
accounts receivable is credited for the $100 uncollectible account that is written-off [$3,300 − $100 =
$3,200].
a. X greater than Y
1
E8-4.
Determining bad debt provision
(AICPA adapted)
Requirement 1:
We can determine the amount of bad debt provision in 2017 by first examining the allowance for
doubtful accounts.
Allowance for doubtful accounts
Accounts written off
$1,800
Beginning balance
$1,450
Provision for bad debts
$1,500
Additional provision for bad debts X
Ending Balance
Solving for the additional provision for bad debts:
$1,450 + $1,500 - $1,800 + X = $1,600
$1,600
X = $450
Total bad debt provision for the year ended December 31, 2017 should be:
Provision for bad debts [$150,000 x 1%]
Additional provision for bad debts
Total bad debt provision
Requirement 2:
To record the original provision for bad debts
DR Bad debt provision
CR Allowance for doubtful accounts
$1,500
450
$1,950
$ 1,500
$1,500
To record the write-off of bad debts
DR Allowance for doubtful accounts
CR Accounts receivable
$ 1,800
To record the additional provision for bad debts
DR Bad debt provision
CR Allowance for doubtful accounts
$ 450
$1,800
2
$450
E8-10.
Accounting for a securitization
Requirement 1:
FASB ASC 860-10-40-3 states that a financial asset should be considered sold and therefore should
be derecognized if it is transferred and control is surrendered. As the problem’s specifications state
this to be the case, the entry to record the sale follows:
DR Cash (or receivable from SE)
CR Accounts receivable
CR Gain on sale of receivables
$ 24,000,000
$20,500,000
3,500,000
Requirement 2:
When control over the receivables is not surrendered, as in this scenario, the transaction should be
treated as a collateralized borrowing:
DR
E8-14.
Cash (or receivable from SE)
CR Loan payable
$ 24,000,000
$24,000,000
Recording troubled debt settlement
The annual payment required to amortize the $150,000 loan over 5 years at 10% is $39,569.58
($150,000/3.79079). That is, 3.79079 is the present value factor for an ordinary annuity of $1 for n
= 5, r = 10%. (This is rounded to $39,570).
The amortization table below schedules the principal and interest
breakdown for each of the required payments and can be used to determine Smithfield’s debt to
John Deere at the time of the troubled debt
settlement.
Interest on
Annual
Previous
Principal
Loan
Payment
Balance
Reduction
Balance
$150,000
12/31/17
$39,570
$15,000
$24,570
125,430
12/31/18
39,570
12,543
27,027
98,403
12/31/19
39,570
9,840
29,730
68,673
12/31/20
39,570
6,867
32,703
35,970
12/31/21
39,570
3,600*
35,970
0
*Rounded
Loan balance after 2017 payment
Accrued interest from 2018
Due from Smithfield at time of
settlement
$125,430
12,543
$137,973
3
Journal entry:
DR Used inventory (FV)
DR Loss on note settlement
CR Note receivable
CR Interest receivable
E8-15.
$132,000
5,973
$125,430
12,543
Recording troubled debt restructuring
CVC (borrower)
(a) To record the modified note (restructured cash flows less than note
book value):
DR Notes payable
DR Interest payable
CR Restructured note payable
CR Gain on troubled debt
restructuring
$52,000
5,200
$50,000
7,200
Buffalo Supply (lender)
(a) To record the modified note (restructured cash flows less than note book value):
DR Restructured note receivable
($50,000 x 0.82645)
$41,323
15,877
DR Loss on receivable restructuring (plug)
CR Notes receivable
CR Interest receivable
$52,000
5,200
The lender records the restructured note as the present value of the future cash flows from the
modified note using the effective interest rate from the original note. The present value of a
payment due in two years at 10% discount rate is 0.82645.
4
P8-1.
Determining balance sheet presentation and preparing journal entries for various receivables
transactions
Requirement 1:
Journal entries
1.
April 1
DR Notes receivable
CR Accounts receivable
December 31
DR Interest receivable ($17,775 x .08 x
9/12)
CR Interest income
$
$
17,775
17,775
$
1,067
$
23,200
1,067
2. DR Allowance for uncollectibles
CR Accounts receivable
$
3. DR Cash ($1,765,000 x .20)
DR Accounts receivable ($1,765,000 x .80)
CR Sales revenue
$ 353,000
1,412,000
DR Cash ($1,925,000 – $353,000)
CR Accounts receivable
$
23,200
$1,765,000
$1,572,000
$1,572,000
4. DR Accounts Receivable
DR Sales returns and allowances ($50,000
x .10)
CR Sales
$
5. DR Cash ($65,000 x (1.0 – .05))
DR Prepaid interest ($65,000 x .05)
CR Notes payable
DR Notes payable
CR Cash
DR Interest expense
CR Prepaid interest
$
61,750
3,250
$
65,000
$
3,250
6. DR Bad debt provision [ ($1,765,000 + $50,000 from
part 4) x .015]
CR Allowance for uncollectibles
7. DR Notes receivable
CR Sales revenue
$
45,000
5,000
$
50,000
$
65,000
$
65,000
$
3,250
27,225
$ 27,225
$
79,383
$ 79,383
DR Notes receivable ($6,351 x 6/12)
CR Interest income
$
3,176
$
5
3,176
Accrued interest over 3-year loan term.
Annual
Date
Payment
7/01/17
6/30/18
$0
6/30/19
0
6/30/20
0
Interest
Income (8%)
Receivable
Increase
$6,351
6,859
7,407
$6,351
6,859
7,407
Receivable
Balance
$79,383
85,734
92,593
100,000
Requirement 2:
Balance sheet presentation at December 31, 2017
Notes receivable
Accounts receivable
Less: Allowance for uncollectible accounts
Smith note
Zebra original note
Zebra imputed interest
Ending balance
$100,334
419,025
(47,275)
$472,084
Notes receivable
$17,775
79,383
3,176
$100,334
Accounts receivable
Beginning balance
$ 575,000 Exchange for note
Sales on account
1,412,000 Write-offs
Sales on account (error)
50,000 Cash collections
Sales allowance
Ending balance
Write-offs
$17,775
23,200
1,572,000
5,000
$ 419,025
Allowance for uncollectibles
$23,200
Beginning balance
Bad debt provision
Ending balance
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$43,250
27,225
47,275
P8-6.
Analyzing accounts receivable
Bad debts written off (?)
Allowance for doubtful accounts
$65,464
Beginning balance 2017
Bad debt provision
$74,365
45,753
Ending balance 2017
Beginning balance 2017
Revenues
Ending Balance 2017
$54,654
Gross accounts receivable
$ 362,349 Cash collected (?)
3,519,444 Bad Debts Written off
$3,471,285
65,464
$ 345,044
Journal entries for 2017
DR Accounts receivable
CR Revenues
$3,519,444
$3,519,444
DR Bad debt provision
CR Allowance for doubtful accounts
$
45,753
DR Allowance for doubtful accounts
CR Accounts receivable
$
DR Cash
CR Accounts receivable
$3,471,285
$
45,753
$
65,464
65,464
$3,471,285
7
P8-10.
Balance sheet effects of collateralized borrowing
Requirement 1:
Required journal entries
August 1:
DR Cash
DR Interest expense ($260,000 x 5%)
CR Loan payable ($260,000 x 85%)
$208,000
13,000
August 31:
DR Loan payable
CR Accounts receivable
$160,000
$221,000
$160,000
DR Interest expense
CR Interest payable
(($260,000 - 160,000) x .005)
September 30:
DR Loan payable ($221,000 - 160,000)
DR Interest payable (per August 31)
DR Cash (a)
DR Interest expense
(($260,000 - 160,000 - 80,000) x .005)
CR Accounts receivable
(a) Cash collected by Needham:
Total cash collected by lender in September
Less:
August 31 interest payable
September 30 interest expense
Remaining loan payable balance
Total deductions from collected cash
Cash collected by Needham
8
500
500
$61,000
500
18,400
100
$80,000
$80,000
(500)
(100)
(61,000)
(61,600)
$18,400
Requirement 2:
August 31 balance sheet
Needham would disclose either in a note or on the face of the balance sheet:
Accounts receivable include assigned receivables of $100,000.
This amount comprises the initial balance of $260,000 less August collections of $160,000.
Liabilities would include a loan payable of $61,000 (initial balance of $221,000 less August
collections of $160,000) and interest payable of $500.
Requirement 3:
August
1:
DR Cash
DR Due from factor
DR Loss on sale of receivables ($260,000 x 5%)
CR Accounts receivable
August 31:
DR Loss on sale of receivables
CR Due from factor
208,000
39,000
13,000
260,000
500
500
September 30:
DR Loss on sale of receivables
DR Cash
(($260,000 - 160,000 - 80,000) x .005)
CR Due from factor
100
18,400
18,500
(Subsequent cash remittances from the factor will reduce the due from factor balance. Any
remaining balance in the due from factor account will be charged to the loss on sale of receivables
account upon final settlement with the factor.
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This is an additional question provided for student’s self-study
P8-16.
Determining whether existing receivables represent real sales
Requirement 1:
The shipment of the 19 motors to Macco Corporation do not represent sales, but a transfer of
inventory from one point (Moto-Lite’s factory) to another point (Macco’s production facility).
Since title to the engines transfers to Macco when the engines enter its production process, MotoLite should include in its sales revenues only the nine engines used by Macco for the period ending
October 31.
The remaining ten aircraft engines at Macco’s represent consigned inventory and as such would be
included in Moto-Lite’s ending inventory at October 31.
Requirement 2:
As stated above, the aircraft engines at Macco’s facility represent Moto-Lite (consigned) inventory
until they are placed into Macco’s production process. The nine engines used by Macco would be
included in Moto-Lites sales for the quarter ending October 31. Accordingly, for the quarter ending
October 31, Moto-Lite’s sales would include $54,000 ($6,000 x 9 engines), accounts receivable are
$18,000 ((9 engines sold minus 6 engines paid for) x $6,000) and gross profit is $18,900 (9 engines
x $6,000 x 35%). The following table details the overstatement of Moto-Lites accounts receivable,
sales and gross profit at October 31.
Moto-Lite Company
Summary of Overstatements
Description
Originally recorded:
($6000 x 19 engines)
Collections (6 engines)
Should be recorded:
($6000 x 9 engines)
Collections (6 engines)
Amount overstated
Accounts
Receivable
Sales
Gross Profit
(35% of sales)
$114,000
(36,000)
78,000
$114,000
114,000
$39,900
39,900
54,000
(36,000)
18,000
$60,000
54,000
54,000
$60,000
18,900
18,900
$21,000
Inventory is understated by $39,000. This is determined as follows. The average cost of each engine
is $3,900 (i.e., $6,000 selling price x .65). There are 10 engines on consignment, so $3,900 x 10 =
$39,000.
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