CHAPTER 6: CASH, TEMPORARY INVESTMENTS, ACCOUNTS RECEIVABLE
and NOTES RECEIVABLE PROBLEM SOLUTIONS
Assessing Your Recall
6.1
Cash:
Probable Future Value – The probable future value in cash is the ability of
the cash to be exchanged for goods and services in the future.
Ownership – Ownership is evidenced by possession of currency and by the
right to control bank accounts.
Temporary Investments:
Probable Future Value - The probable future value in temporary investments
is the cash payments that will be received from the investments in the
future. These payments take the form of dividends in the case of shares and
interest in the case of debt as well as the ultimate sales price of the
securities when they are sold.
Ownership – Ownership is evidenced by share or debt certificates although
sometimes these documents are not distributed to the owners but a record is
kept by the brokerage house that handles the investments for the company.
Account Receivable:
Probable Future Value – The probable future value in accounts receivable is
that they represent the right to receive cash at some (usually fixed) date in
the future. The cash, in turn, has value in the ability to be exchanged for
goods and services in the future.
Ownership – Ownership is evidenced by contracts either written or implied
between the buyer and the seller. Invoices and shipping documents usually
provide the necessary evidence of proof that a receivable exits.
Notes Receivable:
Probable Future Value – The probable future value in notes receivable is
that they represent the right to receive cash, either upon demand or at some
fixed date in the future. The cash, in turn, has value in the ability to be
exchanged for goods and services in the future.
Ownership – Ownership is evidenced by a promissory note, or written
contract between the maker and the payee.
6.2
The unit-of-measure assumption in accounting means that elements of the
financial statements are to be measured using a common unit. That unit in
Canada is the dollar. In most countries the unit-of-measure is the domestic
currency.
6.3
Purchasing power risk is present for cash because when cash is held during
periods of inflation the purchasing power of the dollar decreases. For
example, if $100 is held in cash during a year of a price increase of 10% the
$100 will buy 10% fewer goods and services at the end of the year, than at
the beginning. Inventory, on the other hand, is not fixed in terms of the
1
number of dollars that it represents. The value of the inventory can
fluctuate with changing prices. If $100 worth of inventory was held during a
year in which prices increased 10% it is possible that the price of the
inventory could be raised to $110 to compensate. There may be supply and
demand reasons why the price of inventory could not be raised to the full
$110. If this is so then the inventory may be subject to some purchasing
power risk but not to the same degree as cash.
6.4
At the end of every account period the accountant evaluates the cost and the
current market value of the temporary investments portfolio. The book
value of the portfolio at the end of the period must be the lower of the cost
and market value. After this determination is made the carrying value of
the portfolio (its cost less the current value in the valuation allowance
account) is adjusted upwards or downwards to reflect the proper value at the
end of the period. The adjustment is reported as an unrealized loss if the
value of the portfolio is written down and an unrealized recovery if the value
is written up.
6.5
The primary consideration in deciding if an investment should be classified
as current or noncurrent is management’s intention. If management intends
to hold the investment for more than one year, the investment should be
classified as noncurrent. Otherwise, the investment should be classified as
current as long as it can be sold.
6.6
The direct write-off method recognizes bad debt expense (loss) in the period
in which the receivable is determined to be unrecoverable, not necessarily in
the period in which the original sale was made. This creates a matching
problem. The allowance method estimates and records the bad debt expense
in the period of the original sale. This method provides a proper matching of
the revenues and expenses (bad debt expense) from the sale and is the
method that is most consistent with GAAP. The direct write-off method can
be used f the results of applying it are not materially different from the
results of applying the allowance method.
6.7
Two ratios that measure liquidity are the current ratio and the quick ratio.
Both compare current assets to current liabilities, with the current ratio
comparing total current assets and the quick ratio comparing total current
assets less inventories and prepaid expenses. Both provide information on
the ability of the company to pay its current liabilities, with the quick ratio
providing more conservative information.
6.8
The accounts receivable turnover ratio measures the “turnover” of the
accounts receivable in a year. This measures the average number of times
the total accounts receivable could have been collected in full during the
year. This ratio provides a measure of the efficiency of the collection of the
accounts receivable, with larger ratios indicating faster collections, on
average.
2
Applying Your Knowledge
6.9
a)
Comet Company
Bank Reconciliation
July 31, 20x2
Balance per bank statement
Add: Outstanding deposit
Less: Outstanding cheques
#466
#467
#468
#470
Adjusted cash balance
$7,582.45
1,532.02
9,114.47
$1,250.00
520.00
360.50
1,350.75
Balance per general ledger
Add: Collection of note receivable
$4,643.22
1,015.00
5,658.22
25.00
$5,633.22
Less: July service charge
Adjusted cash balance
b)
c)
6.10
3,481.25
$5,633.22
At July 31, Comet actually has $5,633.22 in its account.
SE-Bank service charges
A-Cash
25.00
A-Cash
A-Note receivable
SE-Interest revenue
1,015.00
25.00
1,000.00
15.00
a) deducted from cash balance
b) deducted from cash balance
c) deducted from cash balance
d) added to bank balance
e) not included in the bank reconciliation because both Walters and
the bank have recorded the transaction
f) deducted from cash balance
g) added to cash balance
h) not included in the bank reconciliation because both Walters and
the bank have recorded the transaction
i) deducted from the bank balance
3
j)
6.11
Peter Hayes
Bank Reconciliation
Balance per bank statement
Less: Outstanding cheques
$1,280
432
Adjusted cash balance
$ 848
Balance per cheque book
Add: automatic deposit
$ 840
50
890
Less: error in recording cheque
NSF cheque
$18
15
Less: service charge ($857 - $848)
Adjusted cash balance
6.12
a)
Investment
Green Company
White Company
Cost
$2,500
8,000
$10,500
33
857
9
$ 848
Market
$2,600
6,400
$9,000
The investments will be reported at $9,000, the lower of cost and
market.
b) On the balance sheet, an account titled valuation allowance for
temporary investments appears as a $1,500 ($10,500 - $9,000) offset to
temporary investments. On the income statement, an unrealized loss
on the valuation of temporary investments is recognized, also in the
amount of $1,500.
6.13
a)
Income from operations
Add: dividend income
Deduct: unrealized loss on temporary
investments
Net income
1(100
$45,000
9001
(1,500)
$44,400
x $2) + (200 x $3.50) = $900
b)
Return on investments = $900 / $10,500 = 8.57%
4
Duggan Company did not attain its goal of attaining a 10% annual
return on its investments.
6.14
a) No journal entries are required for June 30th or December 31st
because on both occasions, the market value of the Meta-Solid shares
were higher than the original cost. Note: brokerage fees have been
added to (or subtracted from) the cost of the shares purchased (or sold).
March 25
A-Investment in Meta-Solid
A-Cash
August 15
October 25
February 18
50,500
50,500
A-Dividends receivable
SE-Dividend income
1,250
A-Cash
A-Dividends receivable
1,250
A-Cash
A-Investment in Meta-Solid
SE-Gain on sale of temporary
investments
1,250
1,250
12,175
10,100
2,075
b) At December 31, 20x1, the temporary investments would appear
on the balance sheet at their original cost of $50,500 (2500 x
$20.20 per share)
6.15
a)
Dec 31,
20x1
Dec 31,
20x2
Dec 31,
20x3
Dec 31,
SE-Unrealized loss on valuation of temporary
investments
XA-Valuation allowance for temporary
Investments
40,000
XA-Valuation allowance for temporary
investments
SE-Recovery of unrealized loss on valuation
of temporary investments
20,000
XA-Valuation allowance for temporary
investments
SE-Recovery of unrealized loss on valuation
of temporary investments
20,000
SE-Unrealized loss on valuation of temporary
5,000
40,000
20,000
20,000
5
20x4
investments
XA-Valuation allowance for temporary
investments
5,000
b)
Dec 31,
6.16 a)
20x1
20x2
20x3
20x4
$210,000
280,000
320,000
345,000
Investment
Jack
Queen
King
Aggregate cost
Aggregate market value
Unrealized loss
Cost
$22,500
15,000
50,000
$87,500
Market
$20,500
19,000
47,500
$87,000
$87,500
87,000
$
500
At December 31, 2000, the net investments would be reported at the
market value of $87,000.
b) On the balance sheet, an account titled valuation allowance for
temporary investments appears as a $500 offset to temporary
investments. On the income statement, an unrealized loss on the
valuation of temporary investments is recognized, also in the amount
of $500.
6.17
a)
Income from operations
Add: dividend income
Deduct: unrealized loss on temporary investments
Net Income
1
$640,000
12,0001
(500)
$651,500
(500 x $5) + (500 x $7) + (500 x $12) = $12,000
b)
Return on investments = $12,000 / $87,500 = 13.71%
Upper Company did not attain its goal of attaining a 20% annual
return on its investments.
6
6.18
a)
Mar. 13, 20x1
June 24, 20x1
Dec 31, 20x1
May 27, 20x2
Oct. 8, 20x2
Dec 31, 20x2
Aug 3, 20x3
June 30, 20x3
Dec. 31, 20x3
A-Temporary Investments
A-Cash
35,000
A-Temporary Investments
A-Cash
65,000
SE-Unrealized loss on valuation of
temporary investments
XA-Valuation allowance for
temporary investments
35,000
65,000
2,000
2,000
A-Cash
A-Temporary investments
SE-Realized gain on sale of
temporary investments
70,000
A-Temporary investments
A-Cash
95,000
XA-Valuation allowance for
temporary investments
SE-Recovery of unrealized loss on
valuation of temporary
investments
65,000
5,000
95,000
2,000
2,000
A-Temporary investments
A-Cash
100,000
A-Cash
A-Temporary investments
SE-Realized gain on sale of
temporary investments
105,000
SE-Unrealized loss on valuation of
temporary investments
XA-Valuation allowance for
temporary investments
100,000
100,000
5,000
7,000
7,000
7
b)
Income Statement
Unrealized loss on valuation of T.I.
Recovery of unrealized loss on
valuation of T.I.
Realized gain (loss) on sale of
investments
Effect on Net Income of Temporary
Investments
20x1
(2,000)
(2,000)
20x2
0
2,000
20x3
(7,000)
5,000
5,000
7,000
(2,000)
Balance Sheet
Temporary investments (at cost)
Less: valuation allowance
Temporary investments (LCM)
20x1
100,000
(2,000)
20x2
130,000
0
20x3
130,000
(7,000)
98,000
130,000
123,000
8
6.19
Faun & Faun Inc.
a)
Selling Price
Add: Loss on Sale
Cost Price
$50,000
5,650
$55,650
Journal Entry for Sales
A-Cash
SE-Loss on Sale of temporary investments
A-Temporary investments
50,000
5,650
55,650
b)
Temporary Investments:
Ending Balance (at cost)
Less: Purchases during 20x2
Add: Sales during 20x2
Opening Balance (at cost)
c) Valuation Allowance for Temporary
Ending Balance (20x2)
Less: Unrealized loss on valuation
Beginning balance
$313,000
85,000
228,000
55,650
$283,650
13,000
3,850
9,150
9
6.20 a)
20x1 SE-Bad debt expense
XA-Allowance for doubtful accounts
(50,000 / 0.25) x 0.015
20x2 XA-Allowance for doubtful accounts
A-Accounts receivable
3,000
3,000
500
500
A-Accounts receivable
XA-Allowance for doubtful accounts
500
A-Cash
A-Accounts receivable
500
500
500
b)
Accounts receivable in Balance Sheet, December 31, 20x1
Accounts receivable
Allowance for doubtful accounts
6.21
$50,000
(3,000)
$47,000
a)
Allowance for doubtful accounts =
Less: amount written-off
Allowance for doubtful accounts
$22,500
03 x 750,000
(12,000)
$10,500
b)
Accounts receivable
Less: allowance for doubtful accounts
$70,000
(10,500)
$59,500
c) The balance in the allowance for doubtful accounts might not be
reasonable if the collectibility of Dundee’s receivables is not reflective of the
industry. This could occur if Dundee’s customers are less reliable, or if
Dundee’s policies for checking and extending credit are more lenient.
Furthermore, setting up an allowance for doubtful accounts based on a
percentage of credit sales is unlikely to result in a close estimate of the
accounts that will actually be uncollectible. Instead, basing the allowance for
doubtful accounts upon specific customer balances that are overdue (i.e. an
aging schedule) might results in a better valuation of accounts receivable.
10
6.22
a)
SE-Bad debt expense
XA-Allowance for doubtful accounts
21,500,000 x 0.8 x 0.01
b)
Accounts receivable
Allowance for doubtful accounts
Accounts receivable, net
172,000
172,000
$1,348,000
(183,000)
$1,165,000
c) Bad debt expense for year ending October 31, 20x1: $172,000
6.23
a)
SE-Bad debt expense
XA-Allowance for doubtful accounts
31,250
31,250
$1,250,000 x .025 = $31,250
b)
Allowance for doubtful accounts
18,500
Write off 20x1
5,650
12,850
Write off 20x2
19,200
31,250
24,900
c)
Accounts receivable, December 31, 20x2
Allowance for doubtful accounts
Accounts receivable, net
2% x 925,000
Balance 20x1
20x2 allowance
Balance 20x2
$138,000
(24,900)
$113,100
11
6.24
a)
March 12
A-Note receivable
A-Accounts receivable
August 31
A-Interest receivable
SE-Interest revenue
$10,000 x .11 x 6/12 = $550
b)
A-Cash
A-Note receivable
A-Interest receivable
SE-Interest revenue
$10,000 x .11 x 3/12 = $275
10,000
10,000
550
550
10,825
10,000
550
275
12
6.25
a)
Feb. 1
A-Note receivable
SE-Sales
18,040.00
18,040.00
June 30
A-Interest receivable
SE-Interest revenue
$18,040 x .14 . 5/12 = $1,052.33
1,052.33
1,052.33
Aug. 1
A-Cash
A-Note receivable
A-Interest receivable
SE-Interest revenue
$18,040 x .14 x 1/12 = $210.47
19,302.80
18,040.00
1,052.33
210.47
b)
June 30, 2000 Balance sheet
Note receivable
$18,040
Interest receivable
1,052
June 30, 2000 Income statement
Sales
$18,040
Interest revenue
1,052
(These amounts have been shown without the cents to simulate the
rounding that occurs on financial statements.)
6.26
a)
Interest earned at
December 31, 2000
Interest earned at
time note is due
b)
Dec. 31, 2000
Jan. 30, 2001
= Principal x rate x time
= $2,800 x 9% x 3/12
= $63
= Principal x rate x time
= $2,800 x 9% x 4/12
= $84
A-Interest receivable
SE-Interest revenue
A-Cash
A-Note receivable
A-Interest receivable
SE-Interest revenue
63
63
2,884
2,800
63
21
13
6.27
a)
Current ratio
Quick ratio
=
25,000 + 70,000 + 10,000 + 210,000 + 30,000
45,000 + 20,000 + 25,000 + 6,000 + 60,000
=
345,000
156,000
=
2.21
=
345,000 - 210,000 - 30,000
156,000
=
0.67
b) The company has been successful in achieving its desired results in
terms of the current ratio, but it did not meet its target of 1.0 for
the quick ratio.
c) The company could improve its current position through reducing
its substantial investment in inventory, so long as the resulting
effect on sales is not severe. Reducing the inventory levels would
free up some cash, and thus enable the company to better meet its
current obligations. In addition, Liquid Company could attempt to
reduce its current levels of short-term liabilities, which would also
improve its current position.
14
6.28
a)
Faraday Products Company
Balance Sheet
At Year end
Current Assets
Cash
Accounts receivable
Inventory
Tax refund receivable
Prepaid insurance
Total current assets
Noncurrent Assets
Land
Building and equipment
Less: accumulated amortization
Trademarks
Total noncurrent assets
Total Assets
Current Liabilities
Accounts payable
Wages payable
Taxes payable
Unearned service revenue
Total current liabilities
Noncurrent Liabilities
Bonds payable
Total Liabilities
Shareholders’ Equity
Common shares
Retained earnings
Total shareholders’ equity
Total Liabilities and Shareholders’ Equity
$44,000
62,000
80,000
3,000
5,000
194,000
45,000
$230,000
90,000
140,000
35,000
220,000
$414,000
$47,000
20,000
16,000
26,000
109,000
125,000
234,000
120,000
60,000
180,000
$414,000
15
b) Working capital = $194,000 - $109,000 = $85,000
c) Current ratio, beginning of period = $120,000 / $55,000 = 2.18
Current ratio, end of period = $194,000 / $109,000 = 1.78
The current ratio has declined during the period, since the current assets
represent a smaller multiple of the current liabilities at the end of the
period than at the beginning of the period.
d) The ending working capital of $85,000 is $20,000 more than the
beginning working capital balance of $65,000. While working capital has
increased by $20,000, the overall liquidity has declined. The ratio of current
assets to current liabilities has declined because current liabilities have
increased proportionally more than current assets.
e) Faraday management should prepare a careful analysis of projected
cash flows to determine if it needs to take action to avoid future
difficulties. In addition, it should compare its current working capital
position and overall liquidity to prior years, and to other companies in the
same industry.
16
6.29
Smythe Company
Cash Flow Statement
Year ended December 31, 2000
Operating Activities:
Net income
Add back amortization
Increase in accounts receivable
Increase in inventory
Increase in accounts payable
Net cash provided by operating activities
Investing Activities:
Purchase of property, plant and equipment
Increase in cash
Cash position*, beginning of year
Cash
Temporary investments
Cash position, end of year
Cash
Temporary investments
Increase in cash
$ 1,635
1,000
(45)
(450)
150
2,290
$
2,200
90
$ 500
450
$ 950
$ 540
500
1,040
$ 90
*NOTE: Recall that cash position in the Cash Flow Statement
includes both cash and temporary investments.
Management Perspective Problems
6.30 A stock option plan that rewards managers for achieving a certain
level of
reported net income has the potential to influence management’s
assessment of the collectibility of its accounts receivable. For example,
if management determines that the year-end balance of accounts
receivable is collectible in full, then no bad debt expense is booked, and
the reported net income is higher as a result.
6.31 A loan officer is likely to be interested in the market value of
temporary
investments because this method provides a better indication of the
cash that will be available to settle the loan than the historical cost
basis. The use of market value might be preferred over the use of the
17
lower of cost and market method because this method is consistent
regarding both upward and downward fluctuations in the market, and
reflects the realizable value of the temporary investments at the
balance sheet date. On the other hand, the lower of cost and market
method results in the minimum realizable amount from selling the
temporary investments, and is a more conservative estimate of the
cash that will be available for settlement of the loan.
6.32
A bank reconciliation is important for the management of cash because
it keeps the company up to date in terms of recording all transactions
that affect its cash balance. In doing so, the company can assess its
need for cash, or perhaps plan short-term investments in order to earn
a return on excess cash. A bank reconciliation is also a good internal
control over cash because its basic function is to reconcile independent
records of the same bank account.
6.33
a)
A-Accounts receivable
1,250,000
SE-Sales
1,250,000
A-Cash
A-Accounts receivable
1,050,000
1,050,000
SE-Bad debt expense
XA-Allowance for doubtful accounts
37,500
XA-Allowance for doubtful accounts
A-Accounts receivable
18,000
37,500
18,000
b)
Balance Sheet, December 31, 2001
Accounts receivable
Allowance for doubtful accounts
Accounts receivable, net
$432,000
(41,500)
$390,500
c) The only information available in evaluating the adequacy of Baltic’s
allowance for doubtful accounts at December 31, 2001 is the value of
the receivables written-off during 2001, the ending balance in
receivables, and prior year-end information. In this case, bad debt
expense of $37,500 was recorded and, as of December 31, 2001,
$18,000 of accounts have been written-off. It would be very useful to
analyze the remaining balance in accounts receivable to arrive at an
estimate of the additional amount that is uncollectible. An allowance
of $41,500 remains at December 31, 2001, while $22,000 remained at
18
December 31, 2000. Based on the accounts receivable balance at those
related points in time, the allowance as a percentage of accounts
receivable was 9.6% (2001) and 8.8% (2000), representing
approximately a 0.8% increase in the allowance percentage. It appears
that the amounts of bad debt expense and allowance for doubtful
accounts might be adequate based on the available information.
Further analysis might reveal that an adjustment (additional charge)
is appropriate.
6.34
a) and b)
2001
Allowance for doubtful accounts $128.9
Total accounts receivable
$1,598.7
% considered uncollectible
8.06%
Bad debt expense
$312.4
Sales
$12,661.8
Bad debt expense as a % of
2.47%
sales
2000
$121.9
$1,352.5
9.01%
$271.5
$11,367.8
2.39%
1999
$118.0
$1,162.8
10.15%
$267
$10,420
2.56%
c) Although the actual number of write-offs in dollars has fluctuated
during the three year period, the highest percentage of accounts
written off in relation to either accounts receivable or operating
revenues was in 1999. It appears from the following analysis that
Lowrate improved considerably in 2000 and is doing roughly the same
in 2001:
Accounts written off / sales
Accounts written off / accounts
receivable
2001
2.45%
19.38%
2000
2.38%
19.98%
1999
2.85%
25.52%
d) Lowrate Communications records revenue and an account
receivable when it bills its customers. Since customers are not liable
for calls that were not made by the customers due to car phone theft,
cloning, etc., Lowrate removes these charges from the customers’
accounts and must reduce receivables. At the same time, the
company must record a reduction in recorded revenue, reduce the
allowance for doubtful accounts, or establish an expense account (bad
debt). Another option would be to establish one or more separate
expense accounts in which these losses are recorded to track them
more closely. It is not readily apparent from the financial data
presented how Lowrate handles this situation. However, if it is
handled through the allowance for doubtful accounts, we would expect
the amounts reported as bad debts, the allowance for doubtful
accounts, and the amount actually written off to increase.
19
20
Reading and Interpreting Published Financial Statements
6.35
a) Short-term investments are included with the cash because, as
stated in the notes to the financial statements, the investments are
capable of prompt liquidation and mature in less than one year.
According to GAAP, the short-term investments must mature within
90 days from the balance sheet date in order to be classified as cash.
b) Air Canada appears to keep the minimum amount of cash on hand
by
depositing any excess in interest-bearing accounts to earn interest on
unused cash.
6.36 Cash can include short-term marketable securities if the securities are
held
only as a substitute for cash and as long as the investments are readily
marketable. Many companies do not allow their excess cash to remain
in bank accounts where they do not earn interest but use the cash to
invest in temporary investments where they can earn interest and
dividends. If this is the case, then these temporary investments are
treated as if they are cash.
6.37
1997 Accounts receivable turnover
= $38,853 / $11,250 = 3.45
365 / 3.45 = 105 days
1998 Accounts receivable turnover
= $40,672 / $9,489 = 4.29
365 / 4.29 = 85 days
Mosaid’s accounts receivable turnover increased from 1997 to 1998
meaning that it took less time to collect accounts receivable in 1998
than it did in 1997 (85 days versus 105 days). It is not known how
many days Mosaid gives its customers to pay for goods and/or services.
It is, therefore, difficult to determine if 85 to 105 days is reasonable.
We also do not know if all of the sales are on credit. If some of them
were cash sales, the turnover ratio would decline even further which
would mean that the number of days to collection would be longer than
85.
21
6.38
a)
Percentage uncollectible in 1997 = $7/ $249 = 2.8%
Percentage uncollectible in 1998 = $12/ $334 = 3.6%
b) Accounts receivable turnover 1997
$1,938 / $242 = 8.0
365/8.0 = 46 days
Accounts receivable turnover 1998
$2,348 / $322 = 7.3
365/7.3 = 50 days
c) Journal entries for 1998
A-Accounts receivable
SE-Sales
A-Cash
A-Accounts receivable
$2,348 + $242 - $322 = $2,268
2,348
2,348
2,268
2,268
SE-Bad debt expense
5*
XA-Allowance for doubtful
accounts
5
*No information is given about the actual write off of accounts
receivable during 1998. It is probable that the debit to bad debt
expense was actually higher.
22
6.39
a)
Percentage uncollectible in 1996 = $9/ $301 = 3.0%
Percentage uncollectible in 1997 = $3/ $270 = 1.1%
Percentage uncollectible in 1998 = $3/ $193 = 1.6%
b) The following are possible explanations for the decrease in the
allowance for doubtful accounts:
1. Suncor had fewer sales on credit. This is doubtful in that Suncor
is an oil and gas company and probably has no cash sales.
2. The economy may have changed such that customers are less
likely to default.
3. Suncor may be more thorough in its credit checks of customers
which would improve the collectibility.
c) Accounts receivable turnover 1997
$2,148 / ($292 + $267)/2 = 7.7
365/7.7 = 47 days
Accounts receivable turnover 1998
$2,068 / ($267 + $190)/2 = 9.1
365/9.1 = 40 days
Suncor is collecting its accounts receivable in a shorter time, 40 days,
in 1998, as compared to 1997 when it collected its accounts receivable
on average every 47 days.
d) Journal entries for 1998
A-Accounts receivable
SE-Sales
A-Cash
A-Accounts receivable
$2,068 + $267 - $190 = $2,145
2,068
2,068
2,145
2,145
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6.40
a) Securitized accounts receivable probably means that the accounts
receivable of Sears have been pledged as security on a loan, and thus
represents a restricted asset that is not available for extinguishing
other liabilities, financing investments in inventory, or for other
purposes.
b) Sears protects itself from customers defaulting in amounts charged
against credit cards through the use of a credit card company to absorb
some of the losses. It charges a high rate of interest on outstanding
balances which helps cover losses. It also has the option of reclaiming
merchandise that has not been paid for.
Beyond the Book
6.41
Answers to this question will depend on the company selected.
6.42
Answers to this question will depend on the company selected.
6.43
Case
Saintjay is experiencing a steady increase in sales, from $12,700 to
$14,100 to $17,000 over the three years, but its cash is steadily
decreasing, from $310 to $50 to $10. The main reasons for this are the
large increases in accounts receivable and inventories. The accounts
receivable turnover is steadily decreasing, from 10.8 to 9.3 to 8.6 This
might indicate that Saintjay either is increasing its sales by granting
easier credit or is experiencing serious problems in its accounts
receivable department, especially in collections. Sainjay management
should review this situation and take corrective action. They should
also determine why inventories are increasing so rapidly. Inventories
increased over 56% over the three years while sales on credit increased
only 35%.
24
Critical Thinking Questions
6.44
a)
A-Temporary investments
A-Cash
1,650
A-Cash
5,388
A-Temporary investments
SE-Gain on sale of investments
1,650
1,650
3,738
b) No changes occurred in the investments in 1998, because the
investment
account on the balance sheet remains unchanged from 1997. In
addition, the statements of changes in financial position indicate that
no sale or purchase of investments occurred in 1998. However, it is
confusing because a balance does exist beside the item titled change in
noncash working capital related to investments.
6.45
a) Semi-Tech records the installment receivables at the full value,
including carrying charges, then reduces this full value by the amount
of the unearned carrying charges and allowance for doubtful accounts.
Thus the balance sheet figure shows the net amount that is net of the
unearned carrying charges and the amounts expected not to be
collectible.
b) Semi-Tech could record the installment receivables at their full
value,
including the carrying charges, but this method would not be correct as
the carrying charges represent interest that has not yet been earned.
Semi-Tech could also have used the installment method which would
have delayed the recognition of the revenue until the cash was
collected. No accounts receivable would have been reported under this
method.
25