Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Tenth Canadian Edition
CHAPTER 7
CASH AND RECEIVABLES
ASSIGNMENT CLASSIFICATION TABLE
Topics
Brief
Exercises Exercises Problems
Writing
Assignments
1
Accounting for cash
and financial assets.
1, 3, 4
1, 2
1
1
2
Accounting for
accounts receivable,
sales discounts, and
other 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
2, 4
4
Accounting for notes
receivable.
12, 13,
14, 15,
16, 17
14, 15, 16
7, 8, 9, 10
3
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 cash and bank
reconciliations.*
23, 24,
25, 26
23, 24, 25
14, 15,
16, 17
*This material is covered in an Appendix to the chapter.
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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 cash balance.
Determine cash 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 with zero or low
interest rates.
Notes receivable with zero interest rate.
Assigned accounts receivable.
Transfer of receivables with recourse.
Transfer of receivables with recourse.
Securitization transaction.
Determine receivables balance,
turnover ratio.
Accounts receivable turnover ratio.
Petty cash.
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
Simple
10-15
15-20
15-20
15-20
Simple
Simple
5-10
5-10
Simple
Simple
10-15
10-15
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
15-20
10-15
Moderate
Simple
Moderate
10-15
5-10
15-20
Simple
15-20
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ASSIGNMENT CHARACTERISTICS TABLE (CONTINUED)
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 cash 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.
Comprehensive receivables.
Comprehensive receivables.
Bad debt reporting issues.
Comprehensive including factoring.
Petty cash, 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
20-25
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
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SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 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. In 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.
BRIEF EXERCISE 7-2
1. Implement 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. Implement 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.
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BRIEF EXERCISE 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
$48,500
14,800
30,500
90,000
12,000
$195,800
If Stowe follows IFRS, preferred shares acquired shortly before
their maturity date would qualify as a cash equivalent. Therefore,
under IFRS, cash and cash equivalents would total $211,300
($195,800 + $15,500).
BRIEF EXERCISE 7-4
1.
2.
3.
4.
5.
(a) Current, (b) Trade receivable
(a) Current, (b) Not a receivable; current liability
(a) Current, (b) Nontrade receivable
(a) Noncurrent, (b) Trade receivable
(a) Noncurrent, (b) Nontrade receivable
BRIEF EXERCISE 7-5
05/14/14 No entry required
05/31/14 Accounts Receivable ......................................................
2,200
Sales Revenue .......................................................
2,200
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BRIEF EXERCISE 7-6
Accounts Receivable ......................................................
40,000
Sales Revenue ........................................................
40,000
Cash .................................................................................
34,650
Sales Discounts ..............................................................
350
Accounts Receivable .............................................
35,000
Cash .................................................................................
5,000
Accounts Receivable .............................................
5,000
BRIEF EXERCISE 7-7
Accounts Receivable ......................................................
39,600
Sales Revenue ........................................................
($40,000 X .99)
39,600
Cash .................................................................................
34,650
Accounts Receivable .............................................
($35,000 X .99)
34,650
Accounts Receivable ......................................................
50
Sales Discounts Forfeited .....................................
50
Cash .................................................................................
5,000
Accounts Receivable .............................................
5,000
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BRIEF EXERCISE 7-8
Accounts Receivable ......................................................
45,000
Sales Revenue ........................................................
45,000
Cash .................................................................................
44,550
Sales Discounts ..............................................................
450
Accounts Receivable .............................................
45,000
BRIEF EXERCISE 7-9
Accounts Receivable ......................................................
44,550
Sales Revenue ........................................................
($45,000 X .99)
Cash .................................................................................
44,550
Accounts Receivable .............................................
44,550
44,550
BRIEF EXERCISE 7-10
Bad Debt Expense ...........................................................
27,200
Allowance for Doubtful Accounts .........................
($30,000 – $2,800)
27,200
BRIEF EXERCISE 7-11
Bad Debt Expense ...........................................................
33,000
Allowance for Doubtful Accounts .........................
($30,000 + $3,000)
33,000
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BRIEF EXERCISE 7-12
(a)
11/1/14
Notes Receivable ............................................................
20,000
Sales Revenue .......................................................
20,000
12/31/14 Interest Receivable .........................................................
200
Interest Income ......................................................
200
($20,000 X 6% X 2/12)
5/1/15
(b)
1/1/15
5/1/15
Cash ................................................................................
20,600
Notes Receivable ...................................................
20,000
Interest Receivable ................................................
200
Interest Income ......................................................
400
($400 = $20,000 X 6% X 4/12)
Interest Income ...............................................................
200
Interest Receivable ................................................
200
Cash ................................................................................
20,600
Notes Receivable ...................................................
20,000
Interest Income ......................................................
600
BRIEF EXERCISE 7-13
Notes Receivable.............................................................
47,573
Cash ........................................................................
47,573
Cash .................................................................................
49,000
Notes Receivable ...................................................
Interest Income.......................................................
47, 573
1,427
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BRIEF EXERCISE 7-14
(a)
Notes Receivable.............................................................
30,053
Cash ........................................................................
30,053
Notes Receivable.............................................................
3,005
Interest Income.......................................................
($30,053 X 10%)
3,005
Notes Receivable.............................................................
3,306
Interest Income.......................................................
([$30,053 + $3,005] X 10%)
3,306
Notes Receivable.............................................................
3,636
Interest Income.......................................................
([$30,053 + $3,005 + $3,306] X 10%)
3,636
Cash .................................................................................
40,000
Notes 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)
I
?
Yields 10.0%
N
3
PMT
0
FV
40,000
Type
0
Excel formula: =RATE(nper,pmt,pv,fv,type)
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BRIEF EXERCISE 7-15
(a) Notes 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)
I
9%
N
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 Note 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 Barthos follows IFRS, the effective interest method is
required for recognizing interest income.
Interest for Year 1:
Notes Receivable ............................................
Interest Income........................................
($3,861 X 9% = $347)
Interest for Year 2:
Notes Receivable ............................................
Interest Income........................................
([$3,861 + $347] X 9% = $379)
347
347
379
379
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BRIEF EXERCISE 7-15 (Continued)
(b) Continued:
Interest for Year 3:
Notes Receivable ............................................
Interest Income........................................
([$3,861 + $347 + $379] X 9% = $413)
(c) Collection of Note at Maturity:
Cash.................................................................
Notes Receivable ....................................
413
413
5,000
5,000
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BRIEF EXERCISE 7-16
(a) Notes 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)
I
9%
N
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 Note Receivable = $5,000 - $3,861 = $1,139
Fair Value of Equipment (present value of note)
Carrying Amount
Gain on Sale of Equipment
(b) Interest for Year 1:
Notes Receivable ............................................
Interest Income........................................
($1,139 X 1/3 = $380)
Interest for Year 2:
Notes Receivable ............................................
Interest Income........................................
($1,139 X 1/3 = $380)
$3,861
2,500
$1,361
380
380
380
380
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BRIEF EXERCISE 7-16 (Continued)
(b) Continued:
Interest for Year 3:
Notes Receivable ............................................
Interest Income........................................
($1,139 - $380 - $380 = $379)
*Adjusted due to rounding.
(c) Collection of Note at Maturity:
Cash.................................................................
Notes Receivable ....................................
379*
379*
5,000
5,000
BRIEF EXERCISE 7-17
Alpha Inc.
Cash .................................................................................
1,520,000
Finance Expense
($2,000,000 X 4%) ..........................................................
80,000
Notes Payable......................................................... 1,600,000
Alberta Provincial Bank
Notes Receivable.............................................................
1,600,000
Cash ........................................................................ 1,520,000
Finance Revenue ....................................................
80,000
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BRIEF EXERCISE 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
BRIEF EXERCISE 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
BRIEF EXERCISE 7-20
Cash .................................................................................
620,000
Loss on Sale of Receivables ..........................................
6,000
Accounts Receivable ............................................. 600,000
Recourse Liability ..................................................
26,000
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BRIEF EXERCISE 7-21
The accounts receivable turnover ratio is calculated as follows:
Net Sales
Average Trade Receivables (net)
$23,223,804
$616,797 + $590,322
2
= 38.48 times
The average collection period for accounts receivable in days is
365 days
= 365
= 9.49 days
Accounts Receivable Turnover
38.48
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BRIEF EXERCISE 7-22
2010:
The accounts receivable turnover ratio is calculated as follows:
Net Sales
Average Trade Receivables (net)
$18,069
$2,525 + $1,140
2
= 9.86 times
The average collection period for accounts receivable in days is
365 days
=
Accounts Receivable Turnover
365
9.86
= 37.02 days
2011:
The accounts receivable turnover ratio is calculated as follows:
Net Sales
Average Trade Receivables (net)
$19,497
$2,964 + $2,525
2
= 7.10 times
The average collection period for accounts receivable in days is
365 days
=
Accounts Receivable Turnover
365
7.10
= 51.41 days
As indicated from these ratios, BCE Inc.’s accounts receivable
turnover ratio deteriorated in 2011 (to 7.10 times from 9.86 times
in 2010). BCE’s average collection period deteriorated as well, to
51.41 days from 37.02 days in 2010).
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*BRIEF EXERCISE 7-23
Petty Cash........................................................................
400
Cash ........................................................................
400
Supplies ...........................................................................
174
Inventory ..........................................................................
167
Cash Over and Short .......................................................2
Cash ($400 – $57) ...................................................
343
*BRIEF EXERCISE 7-24
(a)
(b)
Petty Cash .......................................................................
200
Cash ........................................................................
200
Cash .................................................................................
150
Petty Cash ..............................................................
150
Or if combined with the entry above, for (b) this would produce:
Supplies ...........................................................................
174
Inventory ..........................................................................
167
Cash Over and Short .......................................................2
Cash ($400 – $57 – $150) .......................................
193
Petty Cash ..............................................................
150
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*BRIEF EXERCISE 7-25
(1) Added to balance per bank statement (a)
(2) Not needed for reconciliation (e)
(3) Added to balance per books (c)
(4) Deducted from balance per books (d)
(5) Not needed for reconciliation (e)
(6) Deducted from balance per bank statement (b)
(7) Deducted from balance per books (d)
*BRIEF EXERCISE 7-26
Item
(3)
Cash .................................................................................
31
Interest Income .......................................................
31
(4)
Office Expense- Bank Charges .......................................
20
Cash ........................................................................
20
(7)
Accounts Receivable .......................................................
280
Cash ........................................................................
280
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SOLUTIONS TO EXERCISES
EXERCISE 7-1 (10-15 minutes)
(a)
Cash includes the following:
1. Commercial savings account—
First National Bank
$ 600,000
1. Commercial chequing account—
First National Bank
900,000
3. Money market fund—Commercial Bank of
Montreal
5,000,000
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, 2014,
$6,521,700
balance sheet
(b)
1.
Other items classified as follows:
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 National 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 IOU from Marianne Koch should be reported as a
receivable from officer in the amount of $1,900.
2.
4.
5.
7.
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EXERCISE 7-1 (Continued)
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.
Investments 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 National Bank would require Eastwood to
maintain a compensating balance to support any existing
or maturing obligations and/or credit facilities that
Eastwood has with First National Bank.
(d)
A potential lender to Eastwood would be interested in
Eastwood’s liquidity, solvency, and ability to service
obligations. From the perspective of a potential lender, it is
important that Eastwood excludes the $1.5 million
restricted cash from the amount of cash reported, because
the $1.5 million cannot be used by Eastwood to meet
current obligations. Inclusion of the $1.5 million restricted
cash in the amount of cash reported would result in an
inaccurately reported liquidity position.
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EXERCISE 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). If 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.
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Intermediate Accounting, Tenth Canadian Edition
EXERCISE 7-2 (Continued)
4.
Cash balance is $95,000 calculated as follows:
Chequing account balance
Money market mutual fund
$57,000
38,000
$95,000
The NSF cheque received from customer should be
reported as a receivable (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.
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Intermediate Accounting, Tenth Canadian Edition
EXERCISE 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)
Instalment accounts collectible
due in 2015
Total from customers
Other* ($12,640 + $49,649)
$165,000
48,000
213,000
62,289
$275,289
Non-Current Accounts Receivable
Advance to subsidiary company**
Instalment accounts collectible
due after December 31, 2015
101,000
44,000
* 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 2009 and remain outstanding.
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Intermediate Accounting, Tenth Canadian Edition
EXERCISE 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 good 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.
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Chapter 7
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Intermediate Accounting, Tenth Canadian Edition
EXERCISE 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
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Intermediate Accounting, Tenth Canadian Edition
EXERCISE 7-5 (Continued)
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
(Note 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.)
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Intermediate Accounting, Tenth Canadian Edition
EXERCISE 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
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EXERCISE 7-6 (Continued)
(b)
July 29 Cash .................................................................................
2,500
Accounts Receivable
2,425
Sales Discounts Forfeited .....................................
75
(Note 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)
Implied interest rate on accounts receivable not paid to
Arnold within the discount period = 3% / (50/365) = 21.9%.
(Note that 21.9% is the stated annual interest rate.) If
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 21.9% interest on early payment of
amounts owing to Arnold.
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Chapter 7
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Intermediate Accounting, Tenth Canadian Edition
EXERCISE 7-7 (15-20 minutes)
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
(Note: It is possible that the company already recorded the
Sales Discounts Forfeited. In 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
Notes 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]
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Intermediate Accounting, Tenth Canadian Edition
EXERCISE 7-8 (5-10 minutes)
(a)
Morganfield Ltd. accounts receivable writeoff:
Allowance for Doubtful Accounts...................................
16,000
Accounts Receivable ..............................................
16,000
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
Net Book Value
Before
After
Adjustments
Adjustments
$ 1,200,000
$ 1,190,000
80,000
70,000
$ 1,120,000
$ 1,120,000
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Intermediate Accounting, Tenth Canadian Edition
EXERCISE 7-9 (5-10 minutes)
Balance, January 1, 2014
Bad debt expense accrual .8% X ($80,000,000 X 0.9)
Uncollectible receivables written off
Balance, December 31, 2014 before adjustment
Allowance adjustment
Balance, December 31, 2014
$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
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Chapter 7
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EXERCISE 7-10 (10-15 minutes)
(a)
The direct writeoff approach is not theoretically justifiable.
Direct writeoff 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 writeoff method =
$33,330 ($7,700 + $6,800 + $12,000 + $6,830)
Net income would be $30,670 ($64,000 – $33,330) lower
under the allowance method and percentage-of-sales
approach.
(c)
The direct writeoff method is not considered appropriate,
except when the amount uncollectible is highly immaterial.
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Chapter 7
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Intermediate Accounting, Tenth Canadian Edition
EXERCISE 7-11 (10-15 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.
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Intermediate Accounting, Tenth Canadian Edition
EXERCISE 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
In 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.
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Chapter 7
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Intermediate Accounting, Tenth Canadian Edition
EXERCISE 7-13 (20-25 minutes)
(a) Interest bearing note – Option 1:
September 30, 2014
Notes Receivable.............................................................
105,000
Accounts Receivable .............................................105,000
December 31, 2014
Interest Receivable .........................................................
2,100
Interest Income ....................................................... 2,100
($105,000 X 8% X 3/12)
September 30, 2015
Cash ................................................................................
113,400
Interest Receivable................................................. 2,100
Interest Income ....................................................... 6,300
Notes Receivable....................................................105,000
($105,000 X 8% X 9/12 = $6,300)
(b) Non-interest bearing note – Option 2:
September 30, 2014
Notes Receivable.............................................................
105,000
Accounts Receivable .............................................105,000
December 31, 2014
Notes Receivable.............................................................
2,100
Interest Income ....................................................... 2,100
($105,000 X 8% X 3/12)
September 30, 2015
Notes Receivable.............................................................
6,300
Interest Income ....................................................... 6,300
($105,000 X 8% X 9/12)
Cash ................................................................................
113,400
Notes Receivable....................................................113,400
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Chapter 7
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EXERCISE 7-13 (Continued)
(c)
There is no difference in the amount of interest income
earned in 2014 and 2015 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, 2014 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.
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Chapter 7
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Intermediate Accounting, Tenth Canadian Edition
EXERCISE 7-14 (15-20 minutes)
(a)
September 1, 2014
Notes 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)
I
12%
N
1
PMT
FV
$ 35,000
Type
0
Excel formula: =PV(rate,nper,pmt,fv,type)
December 31, 2014
Notes Receivable.............................................................
1,250
Interest Income ....................................................... 1,250
($ 31,250 X 12% X 4/12)
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Intermediate Accounting, Tenth Canadian Edition
EXERCISE 7-14 (Continued)
September 1, 2015
Notes Receivable.............................................................
2,500
Interest Income ....................................................... 2,500
($ 31,250 X 12% X 8/12)
Cash ..........................................................................
35,000
Notes Receivable.............................................
35,000
(b)
Cash ..........................................................................
28,000
Loss on Impairment .................................................
4,500
Notes Receivable.............................................
32,500
($ 28,000 = 35,000 X 80%) (Note: this assumes that the entry
to accrue interest for Jan – Sept 1, 2014 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.
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Intermediate Accounting, Tenth Canadian Edition
EXERCISE 7-15 (30-35 minutes)
1.
Notes 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)
I
12%
N
4
PMT
FV
$ 1,101,460
Type
0
Excel formula: =PV(rate,nper,pmt,fv,type)
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Chapter 7
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Intermediate Accounting, Tenth Canadian Edition
EXERCISE 7-15 (Continued)
2.
Notes 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
221,164
$178,836
Using a financial calculator:
PV
?
Yields $ (221,165)
I
12%
N
8
PMT
$ 12,000
FV
$ 400,000
Type
0
Excel formula: =PV(rate,nper,pmt,fv,type)
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Chapter 7
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Intermediate Accounting, Tenth Canadian Edition
EXERCISE 7-15 (Continued)
3.
Notes Receivable ..........................................................
63,397
Accounts Receivable .............................................
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
63,397
Using a financial calculator:
PV
? Yield $(63,397)
I
10%
N
4
PMT
$20,000
FV
Type
0
Excel formula: =PV(rate,nper,pmt,fv,type)
(b)
Effective Interest Table Instalment Note Receivable
Debit Cash
Credit Interest Income
Carrying
Debit Notes Receivable
Amount
Credit Notes
of Note
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
—
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Intermediate Accounting, Tenth Canadian Edition
EXERCISE 7-15 (Continued)
From the perspective of Agincourt, an instalment note reduces
the risk of non-collection when compared to a non-interestbearing note. In 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.
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EXERCISE 7-16 (15-20 minutes)
(a)
Notes Receivable ...........................................................
159,438
Service Revenue ...................................................
159,438*
Using a financial calculator:
PV
? Yields $ (159,439)
I
12%
N
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)
Notes Receivable ............................................................
19,133
Interest Income .....................................................
19,133*
*$159,438 X 12% = $19,133
(c)
Notes Receivable ............................................................
21,429*
Interest Income ......................................................
21,429
*($159,439 + $19,133) X 12% = $21,429
Cash .................................................................................
200,000
Notes Receivable ..................................................
200,000
(d)
The balance of the note at December 31, 2014 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, 2015 is
within the next fiscal year.
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Intermediate Accounting, Tenth Canadian Edition
EXERCISE 7-16 (continued)
(e)
Fair value of the consulting services provided can be used
to value and record the transaction, instead of fair value of
the note received.
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EXERCISE 7-17 (10-15 minutes)
(a)
Cash .................................................................................
188,000
Finance Expense (400,000 X 3%) ...................................
12,000
Notes Payable ........................................................
200,000
(b)
Cash .................................................................................
350,000
Accounts Receivable .............................................
350,000
(c)
Notes Payable .................................................................
200,000
Interest Expense .............................................................
5,000
Cash ........................................................................
205,000
($200,000 X 10% X 3/12)
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Intermediate Accounting, Tenth Canadian Edition
EXERCISE 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
Notes 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%) ................................................
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6,450
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EXERCISE 7-19 (15-20 minutes)
(a) To be recorded as a sale under IFRS, 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.
(b) Calculation of net proceeds:
Cash received ($600,000 X 92.25%)
Due from factor ($600,000 X 5.25%)
Less: Recourse obligation
Net proceeds
Calculation of gain or loss:
Carrying amount of receivables
Net proceeds
Loss on sale of receivables
$553,500
31,500 $585,000
6,000
$579,000
$600,000
579,000
$ 21,000
Note: 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).
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EXERCISE 7-19 (Continued)
The following journal entry would be recorded on August 15, 2014:
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, 2014, 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. If, 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)
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.
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EXERCISE 7-20 (15-20 minutes)
(a) Calculation of net proceeds:
Cash received ($355,000 X 96%)
Less: Recourse obligation
Less: Unrecovered Service Costs
Net proceeds
Calculation of gain or loss:
Carrying amount of receivables
Net 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
Accrued Liabilities.......................................... 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, 2014, 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. If, 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.
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EXERCISE 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)
Net 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.
It 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.
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EXERCISE 7-22 (10-15 minutes)
(a)
Accounts Receivable Turnover =
2011 =
=
2010 =
=
Sales (All Revenues)
Average Receivables
$3,893,667
($146,753 + $90,137)/2
32.87 times
or about 11.1 days
$3,918,790
($90,137 + $63,669)/2
50.96 times
or about 7.2 days
(b)
The accounts receivable turnover ratio has decreased from
50.96 times to 32.87 times in a single year. The
disproportionately low balance in accounts receivable at
April 30, 2009 (about a third of the balance as of April 30,
2011) can explain the reason for this. 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 and is likely
negotiating special terms for payment, which can
significantly affect the balance of accounts receivable at
any point in time. 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.
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*EXERCISE 7-23 (5-10 minutes)
(a) Jan. 1 Petty Cash ........................................................................
200.00
Cash.........................................................................
200.00
Jan. 22 Cash Over and Short .......................................................
1.08
Supplies Expense ............................................................
9.50
Delivery Expense .............................................................
25.00
Advances to Employees ..................................................
100.00
Miscellaneous Expense ...................................................
28.02
Cash ($200.00 – $36.40) ..........................................
163.60
June
Petty Cash ........................................................................
100.00
Cash.........................................................................
100.00
(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 at year end, 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.
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*EXERCISE 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
NSF cheque
Correct cash balance, May 31
$8,760
2,350
(1,100)
$10,010
$9,370
1,000
$ 25
335
(360)
$10,010
(c) Cash .................................................................................
640
Office Expense ................................................................
25
Accounts Receivable ......................................................
335
Notes Receivable.................................................... 1,000
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*EXERCISE 7-25 (15-20 minutes)
(a)
Eli Corp.
Bank Reconciliation, August 31, 2014
Provincial Bank of Manitoba
Balance per bank statement, Aug. 31, 2014
Add: Cash on hand
Deposits in transit
$ 8,089
$ 310
3,800
Deduct: Outstanding cheques
Correct cash balance
Balance per books, August 31, 2014
($10,050 + $35,000 – $34,903)
Add: Note ($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
Notes Receivable.................................................... 1,000
Interest Income .......................................................
40
(To record collection of note and interest)
Office Expense - Bank Charges .....................................
20
Cash ........................................................................
(To record August bank charges)
Supplies Expense............................................................
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, 2014 balance sheet.
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TIME AND PURPOSE OF PROBLEMS
Problem 7-1
(Time 20-25 minutes)
Purpose—to provide the student with an understanding of the balance sheet
effect that occurs when the cash book is left open. In addition, the student is
asked to adjust the present balance sheet to an adjusted balance sheet,
reflecting the proper cash presentation.
Problem 7-2
(Time 20-25 minutes)
Purpose—to provide the student with the opportunity to determine various items
related to accounts receivable and the allowance for doubtful accounts. Five
independent situations are provided.
Problem 7-3
(Time 20-30 minutes)
Purpose—to provide a short problem related to the aging of accounts receivable.
The appropriate balance for allowance for doubtful accounts must be determined.
In addition, the manner of reporting accounts receivable on the balance sheet
must be shown.
Problem 7-4
(Time 25-35 minutes)
Purpose—the student prepares an analysis of the changes in the allowance for
doubtful accounts and supports it with an aging schedule. The adjusting entry is
prepared.
Problem 7-5
(Time 25-35 minutes)
Purpose—a problem that must be analyzed to make the necessary correcting
entries. This is a good problem for indicating the types of adjustments that might
occur with respect to receivables.
Problem 7-6
(Time 20-25 minutes)
Purpose—to provide the student with a number of business transactions related
to accounts receivable that must be journalized. Recoveries of receivables, and
writeoffs are the types of transactions presented. The problem provides a good
cross section of a number of accounting issues related to receivables.
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TIME AND PURPOSE OF PROBLEMS (CONTINUED)
Problem 7-7
(Time 20-30 minutes)
Purpose—a short problem involving the entries for a simple note receivable
carrying a fair interest rate over a term of two years. One set of entries are
prepared without the use of reversing entries and the second set uses reversing
entries.
Problem 7-8
(Time 30-35 minutes)
Purpose—to provide the student with a problem requiring the imputation of
interest. The student is required to make journal entries on a series of dates
when note instalments are collected. Bond discount amortization is also involved.
Problem 7-9
(Time 40-50 minutes)
Purpose—the student calculates cash flows, the current portion of long-term
receivables and interest receivable, and prepares the long-term receivables
section of the balance sheet. Then the student prepares a schedule showing
interest income. The problem includes interest-bearing and zero-interest-bearing
notes and an instalment receivable.
Problem 7-10
(Time 25-35 minutes)
Purpose—to provide the student the opportunity to prepare entries for a factoring
transaction and assess impact on ratios.
Problem 7-11
(Time 15-20 minutes)
Purpose—to provide the student the opportunity to determine the income effects
of the sales of receivables with and without recourse and the pledging of
accounts receivable.
Problem 7-12
(Time 25-30 minutes)
Purpose—the student prepares an accounts receivable aging schedule,
calculates the amount of the adjustment, and prepares the journal entry to adjust
the allowance. The student is asked to identify steps to improve collection and
evaluate each step in terms of risks and costs involved.
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TIME AND PURPOSE OF PROBLEMS (CONTINUED)
Problem 7-13
(Time 30-35 minutes)
Purpose—this is a comprehensive problem, which allows the student the
opportunity to derive the balance of accounts receivable and the allowance for
doubtful accounts at the end of the fiscal year. The student must first deal with
the treatment of several transactions for the fiscal year that affect these
accounts. Factoring receivables, accruing for bad debts and accepting a note in
payment transactions are also involved in this problem. Finally some ratio
analysis is performed by the student.
*Problem 7-14
(Time 20-25 minutes)
Purpose—to provide the student with the opportunity to account for petty cash
and to prepare a bank reconciliation.
*Problem 7-15
(Time 20-30 minutes)
Purpose—to provide the student with the 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 the student with the opportunity to prepare a bank
reconciliation, which goes from balance per bank to corrected balance.
Traditional types of adjustments are presented such as deposits in transit, bank
service charges and NSF cheques. Journal entries are also required.
*Problem 7-17
(Time 25-35 minutes)
Purpose—to provide the student with the opportunity to prepare a bank
reconciliation, which goes from balance per bank to corrected balance. Parts of
the original documents are provided to the students and they have to abstract the
data from these documents.
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SOLUTIONS TO PROBLEMS
PROBLEM 7-1
(a)
December 31
Accounts Receivable
Sales Revenue
Cash
Sales Discounts
14,230
25,300
38,900
630
December 31
Cash
Purchase Discounts
Accounts Payable
(b)
24,330
520
24,850
Per
balance
sheet
Current assets
Cash ($39,000 – $38,900 + $24,330)
Accounts Receivable ($42,000 +
$14,230)
Inventory
Total
$ 39,000 $ 24,430
42,000
56,230
Current liabilities
Accounts payable ($45,000 + $24,850)
Accrued liabilities
Total
Working capital
$
Current ratio
After
Adj.
67,000
148,000
45,000
14,200
59,200
88,800 $
67,000
147,660
69,850
14,200
84,050
63,610
2.5 to 1 1.76 to 1
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PROBLEM 7-1 (Continued)
(c) Dev is preparing financial statements for credit purposes.
Key users including creditors and/or potential lenders will
rely on Dev’s financial statements in making their
investment decisions. In particular, key users will assess
Dev’s liquidity, solvency, and ability to service obligations.
The practice of holding the cash book open after year end
and showing a more favourable financial position (and more
favourable liquidity) is an example of “window dressing”, or
presenting the accounts in a way that presents a stronger
financial position or stronger financial performance than
actual. Window dressing is unethical because the resulting
financial statements are biased and misleading. The results
of unethical behaviour can include severe loss of reputation,
civil action against the company, and criminal action for
fraudulent behaviour.
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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 1/1/14
Establishment of accounts written off in prior
years (recovery)
Customer accounts written off in 2014
Bad debt expense for 2014 ($3,200,000 X 4.5%)
Allowance for doubtful accounts 12/31/14
(d) Bad debt expense for 2014
Customer accounts written off as uncollectible
during 2014
Allowance for doubtful accounts balance
12/31/14
Accounts receivable, net of allowance for
doubtful accounts
Allowance for doubtful accounts balance
12/31/14
Accounts receivable, before deducting
allowance for doubtful accounts
$37,000
18,000
(36,000)
144,000
$163,000
$92,000
(24,000)
$68,000
$ 950,000
68,000
$1,018,000
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PROBLEM 7-2 (Continued)
(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
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PROBLEM 7-3
(a)
Opening balance
Credit sales in year
Accounts written off
Reinstatement of account collected
Cash collected on account
Ending balance
(b)
The Allowance for Doubtful Accounts should have a
balance of $54,860 at year end. The supporting
calculations are shown below:
Days Account
Outstanding
Amount
Expected
Percentage
Uncollectible
0-15 days
16-30 days
31-45 days
46-60 days
61-75 days
$270,000
117,000
80,000
38,000
20,000
.03
.08
.20
.30
.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
The accounts which have been outstanding over 75 days
($25,000) and have zero probability of collection would be
written off immediately and not be considered when
determining the proper amount for the Allowance for
Doubtful Accounts. Therefore, the Accounts Receivable
and the Allowance account should both 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
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PROBLEM 7-3 (Continued)
December 31
Bad Debt Expense
Allowance for Doubtful Accounts
44,985
44,985
(c) Accounts Receivable ($550,000 - $25,000) ....................
$525,000
Less allowance for doubtful accounts ...........................54,860
Accounts receivable (net) ......................................
$470,140
(d) The year end bad debt adjustment would decrease beforetax income $44,985 as calculated below:
Estimated amount required in the Allowance for
Doubtful Accounts
Balance in the account after write-off of bad
accounts but before adjustment (see above)
Required charge to expense
$54,860
9,875
$44,985
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PROBLEM 7-4
(a)
Balance at January 1, 2014
Bad debt expense accrued in 2014
($9,400,000 X 2.5%)
Recovery of bad debts in 2012
previously written off
$184,000
235,000
15,000
434,000
Deduct writeoffs for 2014
($95,000 + $69,000)
Balance at December 31, 2014
before change in accounting estimate
Increase due to change in accounting estimate
during 2014
Balance at December 31, 2014
adjusted (Schedule 1)
164,000
270,000
30,250
$300,250
Schedule 1
Calculation of Allowance for Doubtful Accounts
at December 31, 2014
Aging
category
Nov – Dec. 2014
July – Oct.
Jan – Jun.
Prior to 1/1/14
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
*$150,000 – $69,000
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Intermediate Accounting, Tenth Canadian Edition
PROBLEM 7-4 (Continued)
(b)
Campbell Corporation
Journal Entry
December 31, 2014
Account
Bad Debt Expense
Allowance for Doubtful Accounts
(To increase the allowance for
doubtful accounts at December 31,
2014, resulting from a change in
accounting estimate)
Dr.
30,250
Cr.
30,250
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PROBLEM 7-5
Bad Debt Expense
Accounts Receivable
(To correct bad debt expense and
write off accounts receivable)
2,740
Accounts Receivable
Unearned Revenue
(To reclassify credit balance in
accounts receivable)
4,840
Allowance for Doubtful Accounts
Accounts Receivable
(To write off $4,200 of uncollectible
accounts)
4,200
2,740
4,840
4,200
(Note to instructor: Many students will not make this entry at
this point. Because $4,200 is totally uncollectible, a write off
immediately seems most appropriate. The remainder of the
solution therefore assumes that the student made this entry.)
Allowance for Doubtful Accounts
Bad Debt Expense
(To reduce allowance for doubtful
account balance)
7,975
7,975
Balance ($8,750 + $18,620 – $2,740 – $4,200)
Corrected balance (see below)
Adjustment
$20,430
12,455
$ 7,975
Age
Balance
Aging
Sch.
Under 60 days
61-90 days
91-120 days
Over 120 days
$172,342
141,330 ($136,490 + $4,840)
37,184 ($39,924 – $2,740)
19,444 ($23,644 – $4,200)
1%
3%
7%
20%
$ 1,723.42
4,239.90
2,602.88
3,888.80
$12,455.00
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PROBLEM 7-5 (Continued)
If the student did not make the entry to record the $4,200 writeoff
earlier, the following would change in the problem. After the
adjusting entry for $7,975, an entry would have to be made to
write off the $4,200.
Balance ($8,750 + $18,620 – $2,740)
Corrected balance (see below)
Adjustment
$24,630
16,655
$ 7,975
Age
Balance
Aging
Schedule
Under 60 days
61-90 days
91-120 days
Over 120 days
$172,342
141,330
37,184
23,644
1%
3%
7%
—
$ 1,723.42
4,239.90
2,602.88
8,088.80*
$16,655.00
*$4,200 + (20% X $19,444)
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PROBLEM 7-6
-1Cash
Sales Discounts
Accounts Receivable
137,200
800
138,000
-2-
Accounts Receivable
Allowance for Doubtful Accounts
6,700
Cash
6,700
6,700
Accounts Receivable
6,700
-3Allowance for Doubtful Accounts
Accounts Receivable
19,500
19,500
-4Bad Debt Expense
Allowance for Doubtful Accounts
($17,300 + $6,700 – $19,500 = $4,500;
$21,000 – $4,500 = $16,500)
16,500
16,500
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PROBLEM 7-7
(a)
October 1, 2014
Notes Receivable
Sales Revenue
150,000
150,000
December 31, 2014
Interest Receivable
Interest Income
($150,000 X 10% X 3/12)
3,750
3,750
October 1, 2015
Cash
15,000
Interest Receivable
Interest Income
($150,000 X 10% X 9/12)
December 31, 2015
Interest Receivable
Interest Income
($150,000 X 10% X 3/12)
3,750
11,250
3,750
3,750
October 1, 2016
Cash
Interest Receivable
Interest Income
Notes Receivable
($150,000 X 10% X 9/12 = $11,250)
165,000
3,750
11,250
150,000
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PROBLEM 7-7 (Continued)
(b)
October 1, 2014
Notes Receivable
Sales Revenue
150,000
150,000
December 31, 2014
Interest Receivable
Interest Income
($150,000 X 10% X 3/12)
3,750
3,750
January 1, 2015
Interest Income
Interest Receivable
3,750
3,750
October 1, 2015
Cash
15,000
Interest Income
December 31, 2015
Interest Receivable
Interest Income
($150,000 X 10% X 3/12)
15,000
3,750
3,750
January 1, 2016
Interest Income
Interest Receivable
3,750
3,750
October 1, 2016
Cash
165,000
Interest Income
Notes Receivable
15,000
150,000
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PROBLEM 7-8
(a)
1.
December 31, 2014
Cash
Notes Receivable
Service Revenue
36,000.00
55,844.10
91,844.10
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)
To record revenue at the present value of the
note plus the immediate cash 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.
December 31, 2015
Cash
18,000.00
Notes Receivable
Notes Receivable
Interest Income
18,000.00
6,142.85
6,142.85
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PROBLEM 7-8 (Continued)
Schedule of Note Receivable Amortization
Date
Debit, Notes
Receivable /
Credit, Interest
Income
Instalment
Paid
Present
Value of
Note
12/31/14
12/31/15
12/31/16
12/31/17
12/31/18
—
$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
—
a
$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
3.
December 31, 2016
Cash
18,000.00
Notes Receivable
Notes Receivable
Interest Income
4.
18,000.00
4,838.56
4,838.56
December 31, 2017
Cash
18,000.00
Notes Receivable
Notes Receivable
Interest Income
5.
18,000.00
3,390.81
3,390.81
December 31, 2018
Cash
18,000.00
Notes Receivable
Notes Receivable
Interest Income
18,000.00
1,783.68
1,783.68
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PROBLEM 7-8 (Continued)
(b)
From the perspective of Zhang, an instalment note reduces
the risk of non-collection when compared to a non-interestbearing note. For a non-interest-bearing note, the full
amount is due at the maturity of the note. An instalment
note provides a regular reduction of the principal balance
in every payment received annually. This is demonstrated
in the schedule of note receivable amortization. In addition,
receiving cash earlier enables it to be used for other
purposes.
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PROBLEM 7-9
(a) 1.
Cash inflows from notes:
2014
2015
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
Downpayment
Payments
2016
2017
2018
$200,000
60,000
______
$854,000
45,125
45,125
$785,125 $1,331,125
45,125 45,125
$45,125 $45,125
* 9% Note receivable interest payment calculations:
2014: $1,800,000 X 9% = $162,000
2015: ($1,800,000 - $600,000) X 9% = $108,000
2016: ($1,800,000 - $600,000 - $600,000) X 9% = $54,000
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PROBLEM 7-9 (Continued)
2. Interest Income reported in 2014:
Note Receivable—Sale of Division
Interest earned – 1/1 to 5/1/2014
($1,800,000 X 9% X 4/12)
$ 54,000
Interest earned – 5/1 to 12/31/2014
($1,200,000 X 9% X 8/12)
72,000 $ 126,000
Note Receivable—Employees
Interest earned 1/1 to 12/31/2014
($400,000 X 8%)
32,000
Zero-interest-bearing Note—Patent
Face amount 4/1/14
$200,000
Less imputed interest
[$200,000 – ($200,000 X 0.79719)]
40,562
Balance, 4/1/2014
159,438
Interest earned to 12/31/2014
($159,438 X 12% X 9/12)
14,349
Instalment Contract—Sale of Land
Interest accrued from 7/1 to 12/31/2014
($140,000 X 11% X 6/12)
Total Interest Income reported in 2014
7,700
$180,049
3. Notes and interest reported as current assets:
Current portion of notes receivable
—Sale of Division
$600,000
(1)
Accrued interest on note—Sale of
Division, from 5/1 to 12/31/2014
($1,200,000 X 9% X 8/12)
72,000
672,000
Current portion of instalment contract
29,725 (3)
Accrued interest—Instalment contract
7,700
37,425
$709,425
Total current notes and interest
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PROBLEM 7-9 (Continued)
4. 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
(b)
$600,000 (1)
400,000
173,787 (2)
110,275 (3)
$1,284,062
Desrosiers Ltd.
Long-Term Receivables Section of Balance Sheet
December 31, 2014
9% note receivable from sale of division,
due in annual instalments of $600,000 to
May 1, 2016, less current instalment
8% note receivable from officer, due Dec. 31,
2016, collateralized by 10,000 shares of
Desrosiers Ltd., common shares with a
fair value of $450,000
Zero-interest-bearing note from sale of
patent, net of 12% imputed interest,
due April 1, 2016
Instalment contract receivable, due in
annual instalments of $45,125 to July 1,
2018, less current instalment
Total long-term receivables
$600,000 (1)
400,000
173,787 (2)
110,275 (3)
$1,284,062
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PROBLEM 7-9 (Continued)
(c)
Desrosiers Ltd.
Selected Balance Sheet Balances
December 31, 2014
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
Total accrued interest receivable
(d)
$600,000 (1)
29,725 (3)
$629,725
$72,000 (4)
7,700
$79,700
Desrosiers Ltd.
Interest Income from Long-Term Receivables
For the Year Ended December 31, 2014
Interest income:
Note receivable from sale of division
$126,000
Note receivable from sale of patent
14,349 (2)
Note receivable from employee
32,000
Instalment contract receivable from sale of land
7,700
Total interest income for year ended 12/31/14
$180,049
Explanation of Amounts
1. Long-term Portion of 9% Note Receivable
at 12/31/2014
Face amount, 5/1/2013
Less instalment received 5/1/2014
Balance, 12/31/2014
Less instalment due 5/1/2015
Long-term portion, 12/31/2014
$1,800,000
600,000
1,200,000
600,000
$ 600,000
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PROBLEM 7-9 (Continued)
2. Zero-interest-bearing Note, Net of Imputed
Interest at 12/31/2014
Face amount 4/1/2014
Less imputed interest
[$200,000 – ($200,000 X 0.79719)]
Balance, 4/1/2014
Add interest earned to 12/31/2014
($159,438 X 12% X 9/12)
Balance, 12/31/2014
3.
4.
Long-term Portion of Instalment Contract
Receivable at 12/31/10
Contract selling price, 7/1/2014
Less down payment, 7/1/2014
Balance, 12/31/14
Less instalment due, 7/1/2015
[$45,125 – ($140,000 X 11%)]
Long-term portion, 12/31/2014
Accrued Interest—Note Receivable, Sale of
Division at 12/31/2014
Interest accrued from 5/1 to 12/31/2014
($1,200,000 X 9% X 8/12)
$ 200,000
40,562
159,438
14,349
$ 173,787
$ 200,000
60,000
140,000
29,725
$ 110,275
$ 72,000
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PROBLEM 7-10
Part I
(a)
Cash
Accounts Receivable
Sales Revenue
250,000
215,000
465,000
Notes Receivable
Accounts Receivable
50,000
50,000
Cash
160,000
Accounts Receivable
160,000
12/31 Interest Receivable
Interest Income
($50,000 X 11% X 6/12)
(b) Current Ratio Dec. 31, 2014
2,750
2,750
=
=
Current Ratio Dec. 31, 2013
=
=
=
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)
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PROBLEM 7-10 (Continued)
Current Ratio of 2.241 in 2014 is much higher than last year at
1.813. Accounts Receivable turnover of 3.19 times is
significantly lower than last year’s 4.75. The current ratio is
considerably higher due to the increase in trade receivables
(particularly the note receivable), and, for the same reason, the
turnover is reduced. The existence of the one-year note from the
major customer skews the turnover measurement as this
receivable is no longer governed by normal credit terms. If the
note receivable is excluded from the turnover ratio, the turnover
is 5.06, indicating that the remainder of the receivables on open
account are being collected with a slight improvement over the
previous year.
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PROBLEM 7-10 (Continued)
Part 2
(c)
(d)
Cash
Loss on Sale of Receivables
Notes Receivable
Interest Receivable
($50,000 X 11% X 6/12) = $2,750
($50,000 + $2,750) X 3.5% = $1,846
$52,750 - $1,846 = $50,904
50,904
1,846
Cash
Due from Factor
Loss on Sale of Receivables
Accounts Receivable
Recourse Liability
36,000
2,400
5,600
(e) Current Ratio
50,000
2,750
40,000
4,000
=
=
=
=
Accounts Receivable Turnover =
=
=
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
Credit Sales
Average Receivables
$215,000
($5,000 + $40,000)/2
9.56 times
(or about 38 days)
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PROBLEM 7-10 (Continued)
Logo has been able to speed up collection of receivables
by transferring the note to the bank and selling accounts
receivable to First Factors and has improved the current
ratio from 1.813 to 2.1.
(f)
With a secured borrowing, the receivables stay on Logo’s
books and Logo records a Note Payable. This would
reduce the current ratio and leave the receivable turnover
ratio at approximately the same level as in Part I.
(g)
The total effect on Prairie Bank’s net income will be the
difference between the maturity value of the note and the
cash paid to Logo, $55,500 - $50,904 = $4,596. However,
because purchase of the note receivables was without
recourse, Prairie Bank assumes the risk of collection and
absorbs any losses.
(h)
The total effect on Primary Factors’ net income will be the
difference between the cash it will collect (a total of
$40,000) and the cash it will pay to Logo (a total of $38,400)
= finance revenue of $1,600, because purchase of
receivables with recourse means that Logo guarantees
payment of the receivables to Primary Factors if the
accounts receivable debtors fail to pay. Therefore, Primary
Factors will have no bad debts related to these receivables.
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PROBLEM 7-11
Ibran Corp.
INCOME STATEMENT EFFECT
For the year ended December 31, 2014
Expenses resulting from accounts receivable
assigned (Schedule 1)
Loss resulting from accounts receivable sold
($300,000 – $275,000)
Total expenses
$28,920
25,000
$53,920
Schedule 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 there is no income effect as there is
no interest expense incurred since the advance was
received on December 31, 2014.
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PROBLEM 7-12
(a)
Cormier Corporation
Accounts Receivable Aging Schedule
May 31, 2014
Proportion Amount in
of Total
Category
Not yet due
Less than 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
.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
Estimated
of Non- Uncollectible
Collection
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, 2014
June 1, 2013 balance
Bad debt expense accrual ($4,000,000 X .04)
Balance before writeoffs of bad accounts
Writeoffs 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
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PROBLEM 7-12 (Continued)
(c) 1. Steps to Improve
Accounts Receivable
Situation
2. Risks and Costs
Involved
Establish more selective
credit-granting policies,
such as more restrictive
credit requirements or more
thorough credit
investigations.
This policy could result in
lost sales and increased
costs of credit evaluation.
The company may be all
but forced to adhere to the
prevailing credit-granting
policies of the office
equipment and supplies
industry.
Establish a more rigorous
collection policy either
through external collection
agencies or by its own
personnel.
This policy may offend
current customers and thus
risk future sales. Increased
collection costs could
result from this policy.
Charge interest on overdue
accounts. Insist on cash on
delivery (COD) or cash on
order (COO) for new
customers or poor credit
risks.
This policy could result in
lost sales and increased
administrative costs.
Offer discounts to
encourage early payment of
balances. With high interest
rates this is usually a
popular strategy.
This policy could
potentially be expensive to
the organization.
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PROBLEM 7-13
(a)
Cash ........................................................................
53,400
Due from Factor......................................................
3,000 *
Loss on Sale of Receivables .................................
10,600**
Recourse Liability ..........................................
Accounts Receivable .....................................
* ($60,000 X 5%)
** ($60,000 X 6%) + Recourse Liability of $7,000
7,000
60,000
(b)
Accounts Receivable:
Balance December 31, 2013
Add credit sales during 2014
Less collections on account 2014
Less accounts receivable factored
Less writeoffs during 2014
Add receivable for post-dated cheque from cash
Balance December 31, 2014
$ 90,000
550,000
(500,000)
(60,000)
(3,200)
2,000
$ 78,800
Allowance for Doubtful Accounts:
Balance December 31, 2013
Less writeoffs during 2014
Add bad debt expense accrual (plug)
Balance December 31, 2014
$ 8,500
(3,200)
6,700
$ 12,000
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Tenth Canadian Edition
PROBLEM 7-13 (Continued)
(c)
Current Assets
Cash
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)
(d)
Current Ratio =
2014 =
=
2013 =
=
* ($20,000 + $90,000 - $8,500 + $85,000)
Current Assets
Current Liabilities
$246,067
$86,000
2.86
$186,500*
$80,000
2.33
(e)
Accounts Receivable Turnover =
2014 =
=
2013 =
Credit Sales
Average Receivables
$550,000
($81,500 + $66,800)/2
7.42 times
3.8 times
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Intermediate Accounting, Tenth Canadian Edition
PROBLEM 7-13 (Continued)
Alternatively, the credit sales could be increased by the June 1
$80,000 sales to a major customer, and the outstanding Note
Receivable should then be included in determining the average
accounts receivable balance. This reduces the turnover in 2014
to 5.52 ($630,000 ÷ $114,150), still an improvement over the 2013
ratio.
(f) Both liquidity ratios show improvement from 2013 to 2014.
(g)
Current Ratio =
2014 =
=
=
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 Cash received less Due from Factor
** ($40,000 - $7,000) Additional Loan less Recourse Liability
Accounts Receivable Turnover =
Credit Sales
Average Receivables
2014 =
$550,000
[$81,500 + ($66,800 + $60,000)]/2
=
= 5.28 times
As demonstrated by the above recalculated ratio, if $40,000 of
the receivables had been assigned instead of $60,000 factored,
the current ratio in 2014 would be 2.43 instead of 2.86 as
calculated above in (d).
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Tenth Canadian Edition
PROBLEM 7-13 (Continued)
The accounts receivable turnover ratio would have shown a
dramatic deterioration from 7.42 under the factoring scenario to
5.28 times under the assignment. (If the $80,000 Note Receivable
were included in the 2014 ending receivables balance, this
would increase the numerator by $80,000 and the denominator
by an additional $40,000 and reduce the turnover still further to
4.37 times from 5.52.)
These significant differences explain why companies often tend
to prefer the effects of factoring on key ratios rather than the
effects of assigning receivables.
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Intermediate Accounting, Tenth Canadian Edition
*PROBLEM 7-14
(a) May 10 Petty Cash ......................................
Cash.......................................
400.00
May 31 Office Expense ($63+$99.50+$35) .
Supplies..........................................
Delivery Expense ...........................
Advertising Expense .....................
Miscellaneous Expense.................
Freight-in ........................................
Cash Over and Short .....................
Cash ($400.00 – $47.10)........
197.50
25.00
48.50
22.80
18.75
37.70
2.65
May 31 Petty Cash ......................................
Cash.......................................
100.00
400.00
352.90
100.00
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Tenth Canadian Edition
*PROBLEM 7-14 (Continued)
(b)
Balance per bank:
Add:
Cash on Hand
Deposit in Transit
$6,812
246
3,000
Deduct: Outstanding cheques
Balance per books:
($9,300 + $31,000 – $31,685)
Add: Note Receivable
Deduct: Bank Service Charge
Cash
$8,615
930
(37)
$9,508
930
Notes Receivable
Interest Income
Office Expense-Bank Charges
Cash
(c)
3,246
10,058
(550)
$9,508
900
30
37
37
$9,508 + $500 = $10,008.
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Intermediate Accounting, Tenth Canadian Edition
*PROBLEM 7-15
(a)
Balance per bank, June 30
Add: Deposits in transit
Deduct: Outstanding cheques
Corrected balance, June 30
Balance per books, June 30
Add: Error in recording deposit ($90 – $60)
Error on cheque no. 747
($582.00 – $58.20)
Note collection ($900 + $36)
Deduct: NSF cheque
Error on cheque no. 742 ($491 – $419)
Bank service charges ($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)
Cash
Accounts Receivable***
Accounts Payable
Notes Receivable
Interest Income
1,489.80
(555.70)
$4,903.95
1,489.80
30.00
523.80*
900.00
36.00
Accounts Receivable
453.20
Accounts Payable
72.00**
Office Expense
30.50
Cash
555.70
*Assumes that the purchase of the equipment was recorded at
its proper price. If a straight cash purchase, then Equipment
should be credited instead of Accounts Payable.
**If a straight cash purchase, then Equipment should be debited
instead of Accounts Payable.
*** Assumes the cheque is a payment on account and that the
sale was recorded at its proper price. If a straight cash sale,
then Sales should be credited instead of Accounts Receivable.
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Tenth Canadian Edition
*PROBLEM 7-16
(a)
Balance per bank statement, November 30
Add:
Cash on hand, not deposited
Deduct:
Outstanding cheques
#1224
#1230
#1232
#1233
Correct cash 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 charges not recorded in books
Customer’s cheque returned NSF
Correct cash 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
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Intermediate Accounting, Tenth Canadian Edition
*PROBLEM 7-16 (Continued)
(b)
November 30
Cash
1,400.00
Interest Income
1,400.00
November 30
Office Expense- Bank Charges
Cash
31.40
31.40
November 30
Accounts Receivable
Cash
572.13
572.13
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Intermediate Accounting, Tenth Canadian Edition
*PROBLEM 7-17
Calculation of Cash Balance per Books
General Chequing Account
Cash balance, June 1, 2014
Receipts for June:
Deposit on 6/12
Deposit on 6/23
Deposit on 6/28
Deposit in transit
$30,200.80
$1,507.06
1,458.55
4,157.48
4,607.96
Cash available
Deduct disbursements per cheque register
Cash balance June 30, 2014
11,731.05
41,931.85
10,708.35
$31,223.50
Quartz Industries Ltd.
Bank Reconciliation—General Chequing Account
June 30, 2014
Balance per bank statement June 30, 2014
$28,735.78
Add: Deposit in transit (June receipts
not deposited by June 30)
Deduct:
Outstanding cheques
#6139
#6146
#6149
#6152
#6153
Correct cash balance
Balance per books, June 30, 2014
Deduct: Bank service charges
NSF cheque
Correct cash 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
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