CHAPTER 4: ACCOUNTING FOR ACCOUNTS RECEIVABLES
Problem 4-1 Dreamer Company
Analysis of the items included in the "Receivables" account
Account
Amount
Trade accounts receivable
775,000
Trade notes receivable
100,000
Installment receivable (due 1 to 2 yrs)
300,000
Customers' accounts with credit balances
(30,000)
Advance payments for purchase of merchandise
150,000
Customers' accounts with credit balances
(20,000)
Cash advance to subsidiary
400,000
Claim from insurance entity
15,000
Subscription receivable due in 60 days
300,000
Accrued interest receivable
10,000
Total Receivables
2,000,000
Requirement a: Entry to reclassify the receivables
Accounts receivable
775,000
Notes receivables
100,000
Installments receivables
300,000
Advances to suppliers
150,000
Advances to subsidiary
400,000
Claims receivable
15,000
Subscriptions receivable
300,000
Accrued interest receivable
10,000
Customers' accounts with credit balances
Advances from customers
30,000
20,000
Receivables
Classification
Accounts receivable
Notes receivable
Installment receivable
Payables
Advances to suppliers
Payables (advances)
Advances to subsidiary
Claims receivable
Subscriptions receivable
Accrued interest rec'l
Presentation
Current asset
Current asset
Current asset
Current liability
Current asset
Current liability
Noncurrent asset
Current asset
Current asset
Current asset
Requirement b: Trade and Other Receivables
Accounts receivable @ gross amount
Allowance for doubtful accounts
Accounts receivable @ net realizable value
Notes receivable
Installment receivables
Advances to suppliers
Claims receivable
Subscriptions receivable
Accrued interest receivable
Trade and other receivables - current asset
775,000
(50,000)
725,000
100,000
300,000
150,000
15,000
300,000
10,000
1,600,000
2,000,000
Requirement c: Classification of items excluded in (b)
1) The advances to subsidiary or affiliate account is classified as long-term investment under noncurrent assets.
2) The customers' accounts with credit balances are reclassified as payables under current liabilities.
Problem 4-2 Credible Company
Analysis of the items included in the T-account:
Beginning balance
Charge or credit sales
Shareholders' subscription
Deposit on contract
Claims against common carrier for damages
IOUs from employees
Cash advance to affiliates
Advances to suppliers
Collections from customers
Writeoff
Merchandise returns
Allowances to customer for shipping damages
Collections from carrier claims
Collection on subscription
Amount
600,000
6,000,000
200,000
120,000
100,000
10,000
100,000
50,000
5,300,000
35,000
40,000
25,000
40,000
50,000
Requirement a: Correct amount of Accounts Receivable
Accounts receivable, beginning
600,000
Charge or credit sales
6,000,000
Collections from customers
(5,300,000)
Writeoffs
(35,000)
Merchandise returns
(40,000)
Allowances for shipping damages
(25,000)
Accounts receivable, ending
1,200,000
Explanation
Beginning AR balance
Increases the AR balance
Presented as subscription receivable (SHE)
Presented as special deposits on contracts (NCA)
Presented as claims receivable (CA)
Presented as advances to employees (CA)
Presented as advances to affliates (NCA)
Presented as advances to suppliers (CA)
Decreases the AR balance
Decreases the AR balance
Decreases the AR balance
Decreases the AR balance
Decreases the claims receivable account
Decreases the subsription receivable account
Requirement b: Entry to adjust the Accounts Receivable account
Subscriptions receivable
150,000 (200,000 - 50,000)
Special deposits on contracts
120,000
Claims receivable
60,000 (100,000 - 40,000)
Advances to employees
10,000
Advances to affliates
100,000
Advances to suppliers
50,000
Accounts receivable
490,000
Requirement c: Trade and Other Receivables
Accounts receivable
1,200,000
Claims receivable
60,000
Advances to employees
10,000
Advances to supplier
50,000
Trade and other receivables
1,320,000
Requirement d: Classification of items excluded in (c)
1) The subscription receivable is silent as to period of collection, whether it is short-term or long-term.
Thus, the general rule is to classify it as a deduction from subscribed share capital under the SHE section.
2) The special deposit on contracts is also silent as to collection period, so it classified as noncurrent asset.
3) The advances to affiliate account is classified as long-term investment under noncurrent assets.
Problem 4-3 Affectionate Company
Terms
To record the sale and freight charges
Accounts receivable
500,000
FOB
Freight
out
10,000
destination,
Sales
freight
collect
Allowance for freight charge
Accounts receivable
500,000
FOB
10,000
destination, Freight out
Sales
freight
prepaid
Cash
Accounts receivable
500,000
FOB
Sales
shipping pt,
freight
collect
Accounts receivable
510,000
FOB
Sales
shipping pt,
Cash
freight
prepaid
To record the collection w/in the discount period
Cash
475,000
Sales discount (500k x 3%)
15,000
500,000 Allowance for freight charge 10,000
10,000
Accounts receivable
500,000
Cash
485,000
Sales discount (500k x 3%)
15,000
500,000
Accounts receivable
500,000
10,000
Cash
485,000
500,000 Sales discount (500k x 3%)
15,000
Accounts receivable
500,000
Cash (485k + 10k freight)
500,000 Sales discount (500k x 3%)
10,000
Accounts receivable
495,000
15,000
510,000
Problem 4-4 Fiancee Company
Trans 1:
Trans 2:
Trans 3:
Accounts receivable
Sales
4,000,000
Cash (98% of receivable)
Sales discount
Accounts receivable
1,470,000
30,000
Cash
1,000,000
4,000,000
Trans 5:
Sales return
Accounts receivable
The difference bet. AR and collection or 1,500,000 x 2%
1,500,000
Accounts receivable
Trans 4:
This is the am ount collected (net of 2% discount).
(1,470,000 cash collected ÷ 98% net of discount)
1,000,000
100,000
100,000
Sales return
20,000
Allowance for sales returns
20,000
AR is credited since it is already granted.
Allowance is credited since it is still an estim ate.
Problem 4-5 Romela Company (Gross Method)
Sale:
Accounts receivable
Sales
4,500,000
4,500,000
Collection:
Assuming payment was received on June 25 (within the discount period)
Cash
4,410,000
Sales discount (4.5M x 2%)
90,000
Accounts receivable
4,500,000
Collection:
Assuming payment was received on July 10 (beyond the discount period)
Cash
4,500,000
Accounts receivable
4,500,000
Problem 4-6 Prime Company (Net Method)
Sale:
Accounts receivable
Sales
2,450,000
2,450,000
Collection:
Assuming payment was received on February 24 (within the discount period)
Cash
2,450,000
Accounts receivable
2,450,000
Collection:
Assuming payment was received on March 10 (beyond the discount period)
Cash
2,500,000
Accounts receivable
2,450,000
Sales discount forfeited
50,000
Problem 4-7 Raven Company
Sale:
Returns:
Estimates:
Accounts receivable
Sales
Sales return
Accounts receivable
4,000,000
4,000,000
300,000
Sales return
100,000
Allowance for sales returns
Total estim ated return is 4% of sales.
Estim ated return = 4M x 4% = 400,000
Actual return is 300,000
300,000
Estim ated additional return = 400k - 300k
100,000
Problem 4-8
Trade accounts receivable
Allowance for doubtful accounts
Claims receivable
Trade and other receivables
2,000,000
(100,000)
300,000
2,200,000 A
• Trade and other receivables include "current" receivables only.
• Goods on consignm ent are only recorded as sales when actually sold.
Thus, the selling price is not considered as a receivable from the consignee.
• Security deposit on lease of warehouse is a long-term receivable.
Problem 4-9
Accounts receivable, beginning
Credit sales
Sales return*
Accounts written off*
Collections from customers
Accounts receivable, ending
Less: Allowances
Allowance for sales return**
Allowance for doubtful accounts**
Accounts receivable @ NRV
1,300,000
5,500,000
(150,000)
(100,000)
(5,000,000)
1,550,000
*Actual sales returns and accounts written off
are deducted outright from the AR account.
** The estim ated sales return and uncollectible accounts
(50,000)
are presented as allowances. These are deducted from
(250,000)
the gross am ount of AR to get its net realizable value.
1,250,000 B
Problem 4-10
Accounts receivable, beginning
Credit sales
Collections from customers
Accounts written off
Collections of accounts written off*
Accounts receivable (before ADA)
1,300,000
5,400,000
(4,750,000)
(125,000)
1,825,000 A
*Entry to record the collection of accounts written off:
• Reestablish first the custom er's account by reversing the entry m ade when the account was written off.
Accounts receivable
Allowance for doubtful accounts
25,000
25,000
• Record the collection of cash.
Cash
25,000
Accounts receivable
25,000
• So in effect, there is no adjustm ent in the AR account.
Problem 4-11
Analysis of items included in the AR account
Worthless accounts
Advance payment on purchase orders
Advances to subsidiary
Customers' accounts with credit balances
Trade accounts receivable
Subscription receivable
Trade installment receivable
Trade accounts receivable from officers
Postdated checks on trade accounts
Amount
100,000
400,000
1,000,000
(600,000)
3,500,000
2,200,000
800,000
150,000
200,000
Explanation
No longer part of AR
Separate account: Advances to suppliers (CA)
Separate account: Advances to subsidiary (NCA)
Separate account: Payables (CL)
Included in AR
Separate account: Subscription receivable (CA)
Included in AR (exclude unearned finance charge)
Included in AR
Included in AR
Trade accounts receivable
Trade installment receivable
Trade accounts receivable from officers
Postdated checks on trade accounts
Trade accounts receivable
3,500,000
800,000
150,000
200,000
4,650,000
A
Problem 4-12
Analysis of items included in the AR account
Jan 1 balance net of credit balances
Credit balances of AR
Charge sales
Charge for goods out on consignment
Shareholders' subscriptions
Accounts written off but recovered
Cash paid to customers for credit balances
Goods shipped to cover credit balances
Deposit on long-term contracts
Claim against common carrier
Advances to supplier
Collections from customers
Overpayment of customers
Writeoff
Merchandise returns
Allowance to customers for shipping damages
Collection on carrier claim
Collection on subscription
Requirement 1: Accounts receivable
Accounts receivable, beginning
Charge sales
Recovered accounts
Collections from customers
Writeoffs
Merchandise returns
Accounts, receivable, ending
Allowance to customers for shipping damages
Accounts receivable @ nrv
Amount
560,000
30,000
5,250,000
50,000
1,000,000
10,000
25,000
5,000
500,000
400,000
300,000
5,150,000
50,000
35,000
25,000
15,000
50,000
200,000
Explanation
Credit balances should not be netted
Presented separately as payable to customers (CL)
Increase in AR
Not considered as receivable
Presented separately as subscription receivable (SHE)
Reestablished AR and allowance account
Deduction from payable to customers
Deduction from payable to customers
Presented separately as long-term receivable (NCA)
Presented separately as claims receivable (CA)
Presented separately as advances to suppliers (CA)
Decrease in AR
Presented separately as payable to customers (CL)
Decrease in AR
Decrease in AR
Allowance (deducted from AR to get NRV)
Decrease in claims receivable
Decrease in subscription receivable
560,000
5,250,000
10,000
(5,150,000)
(35,000)
(25,000)
610,000
(15,000)
595,000 B
Requirement 2: Trade and other receivables
Accounts receivable
Claims receivable (net of collection)
Advances to supplier
Trade and other receivables
595,000
350,000
300,000
1,245,000 C
Requirement 3: Noncurrent receivables
Deposit on long-term contracts
Subscriptions receivable
Noncurrent receivables
500,000
800,000
1,300,000 C
Problem 4-13
Requirement 1: Accounts receivable
Accounts receivable, beginning
Credit sales
Collections from credit customers
Sales discount
Accounts written off
Credit memo for sales returns and allowances
Recoveries on accounts written off
Accounts receivable, ending
Requirement 2: Allowance for doubtful accounts
Allowance for doubtful accounts, beginning
Doubtful accounts expense
Accounts written off
Recoveries on accounts written off
Allowance for doubtful accounts, ending
950,000
3,800,000
(3,024,000)
(126,000)
(50,000)
(250,000)
1,300,000 A
Total sales of 5.9M less 2.1M cash sales = 3.8M credit sales
This am ount is net of 4% discount, so it pertains to 96% of AR
3,024,000 ÷ 96 = 3,150,000 AR x 4% = 126,000 discount
Debit ADA, credit AR
The 20,000 refund pertains to sales returns to cash custom ers.
AR is reestablished but subsequently credited for the collection.
100,000
70,000
Debit DAE, credit ADA
(50,000)
Debit ADA, credit AR
80,000
Debit AR, credit ADA
200,000 B
Problem 4-14
1 D The operating cycle is the period from the acquisition of assets up to their realization in cash.
2 D The operating cycle is not considered for the measurement of nontrade receivables.
3 A Generally, credit balances in AR are classified as payables under current liabilities.
4 C Only the expense and allowance account are affect in the adjusting entry.
5 D Writeoff is recorded as debit ADA, credit AR.
6 C Bad debt expense is matched with sales revenue.
7 D An expense is recorded immediately when collection is considered doubtful.
8 C This is the entry to reestablish a previously written off account.
9 A Net method is theoretically correct because it values the AR at net realizable value.
10 C Cash discount under net method is already deducted, thus, it does not affect the AR balance.
Problem 4-15
1 A Expense is recorded when collection is doubtful and not when actually uncollectible.
2 A Writeoff is recorded as debit ADA, credit AR.
3 A Both AR and ADA have decreased, so no effect in the NRV of AR.
4 D Recovery of accounts written off is recorded as debit AR, credit ADA and debit cash, credit AR.
5 B Net effect of entry in no. 4: debit Cash, credit ADA.