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Chapter 10 Receivables

Questions

1. When customers use credit cards, the selling company can increase sales and profits by providing the added convenience and avoid having to evaluate the credit standing of customers. They also avoid the risk of bad debts and often are paid cash from the credit card company more quickly than if customers were granted credit directly.

2. Writing off a bad debt against the allowance does not reduce the estimated realizable value of a company’s accounts receivable because the write-off reduces the balances of both Accounts Receivable and Allowance for Doubtful Accounts by equal amounts, and the difference between them remains the same.

3. The adjusted balances of Bad Debt Expense and Allowance for Doubtful Accounts are virtually never equal because the expense describes only the events of the current year, and the allowance is the accumulated result of events over a number of past years. The only way that they could be equal would be if write-offs during the past year exactly equalled the beginning balance of the allowance.

4. Revenues and expenses are not matched under the direct write-off method because the revenue from the bad debt sales often appears on the income statement of one period while the expense of getting those sales appears on the income statement of a later period.

5. The accounting principle of materiality holds that the requirements of accounting principles may be ignored if the effect on the financial statements is unimportant to their users.

6. Creditors prefer notes to accounts receivable because the notes can be more easily converted into cash before becoming due by discounting (or selling) them to a bank. Also, a note represents a clear written acknowledgement by the debtor of both the debt and its amount and terms.

7. Accounts receivable increased a total of $32,000 from $626,000 at June 26, 2004 to $594,000 at June 25, 2005.

*8. If receivables are sold without recourse then the buyer of the receivables has responsibility to make sure the accounts are ultimately collected and takes the loss for any bad debts.

Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.Solutions Manual for Chapter 10 850

QUICK STUDY

Quick Study 10-1March 1 Accounts Receivable – JP Holdings. 40,000

Sales....................................... 40,000To record sale terms n/30.

1 COGS........................................... 32,000Merchandise Inventory............. 32,000

To record cost of sale.

27 Cash............................................ 40,000Accounts Receivable – JP Holdings

40,000To record receipt of payment in full.

Quick Study 10-2Apr. 2 Accounts receivable – Aurora......... 50,000

Sales....................................... 50,000To record sales resulting from non-bank credit cards.

2 Cost of Goods Sold........................ 45,000Merchandise Inventory............. 45,000

To record cost of sales.

7 No entry

15 Cash............................................245,000Credit Card Expense..................... 5,000

Accounts receivable – Aurora.... 250,000To record collection from credit card company net of credit card expense; 250,000 x 2% = 5,000.

Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.851 Fundamental Accounting Principles, Twelfth Canadian Edition

Quick Study 10-3a. May 3 Cash............................................. 9,500

Credit Card Expense...................... 500 Sales...................................... 10,000

To record sales resulting from bank credit card.

3 COGS........................................... 4,000 Merchandise Inventory............ 4,000


b. May 6 Accounts Receivable—Credit Card Companies3,000

Sales...................................... 3,000 To record sales resulting from non-bank credit card.

6 COGS............................................ 1,100 Merchandise Inventory............ 1,100



Quick Study 10-4

March 4 Accounts Receivable – Various...... 165,000

Service Revenue................. 165,000

Performed work for a customer on account.

15

Cash........................................... 80,000

Accounts Receivable – Various.......................................

80,000

Collected cash from credit customers.

20

Allowance for Doubtful Accounts. . 5,000

Accounts Receivable – Tom Williams......................................

5,000

Wrote off customer account.

25


5,000

Allowance for Doubtful Accounts.....................................

5,000

Reversed the write-off.

25

Cash........................................... 5,000


5,000

Collected cash from credit customer.

April 2 Accounts Receivable – Various...... 280,000

Service Revenue................. 280,000

Performed services for customers on account.

9 Cash........................................... 110,000

Accounts Receivable – 110,0Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.853 Fundamental Accounting Principles, Twelfth Canadian Edition

Various....................................... 00 Collected cash from credit customers.

30

Bad Debt Expense........................ 8,000


8,000

Estimated bad debts expense.


Quick Study 10-5BIATECH

Partial Balance SheetDecember 31, 2011

Assets Current assets: Cash..................................... $10,0

00 Accounts receivable.............. $29,0

00 Less: Allowance for doubtful accounts........................

1,3 00

27,700

Office supplies...................... 400 Prepaid insurance................. 95

0 Total current assets.............. $39,0

50

Note: Bad Debt Expense is an income statement account and is therefore not listed on the balance sheet. Machinery is a balance sheet account but is shown under Property, Plant and Equipment.

Quick Study 10-6Oct. 31 Bad Debt Expense......................... 2,760

Allowance for doubtful accounts2,760

To estimate uncollectible accounts(690,000 × 2/3 = 460,000 × .006 = 2,760).

Quick Study 10-7Allowance for Doubtful

Accounts450 Dec. 31

unadjusted balance

16,000

Dec. 31 required adjusted balance


15,550 credit entry is necessary in order to get the required balance of 16,000 (640,000 × .025).

Dec. 31 Bad Debt Expense......................... 15,550Allowance for doubtful accounts

15,550To estimate uncollectible accounts.


Quick Study 10-8a.Dec. 31 Bad debt expense......................... 835

Allowance for Doubtful Accounts835

($89,000 × 1.5%) – $500 = $835b. ($89,000 × 1.5%) + $200 = $1,535c. $270,000 × 1% = $2,700

Quick Study 10-9Dec

.31

Bad Debt Expense........................ 7,400


7,400

Adjusting entry to estimate uncollectible

accounts receivable.

Calculated as:

Allowance for Doubtful Accounts

800 Dec. 31 unadjusted balance

8,200

Dec. 31 required adjusted balance

*(110,000 × 2% = 2,200) + (40,000 × 5% = 2,000) + (10,000 × 40% = 4,000) = 8,200

Quick Study 10-10Mar. 28 Bad Debt Expense......................... 1,100

Accounts Receivable – Jim Patterson1,100

To write-off an uncollectible receivable using the direct write-off method.


7,400 credit entry is necessary in order to get the required balance of 8,200*.

Quick Study 10-11Aug. 2 Notes Receivable (90-day, 12%)....5,500.00

Accounts Receivable—Will Carr. 5,500.00Maturity date:

Oct. 31 Cash............................................5,662.74Notes Receivable..................... 5,500.00Interest Revenue...................... 162.74

$5,500 × 12% × 90/365 = $162.74.


Quick Study 10-12Dec. 31 Interest Receivable....................... 59.18

Interest Revenue...................... 59.18$8,000 × 9% × 30/365.

Maturity date:Jan. 15 Cash............................................8,088.77

Interest Receivable.................. 59.18Interest Revenue...................... 29.59*Notes Receivable..................... 8,000.00

*[($8,000 × 9% × 45/365) – $59.18] or [$8,000 × 9% × 15/365]

Quick Study 10-13April 4 Accounts Receivable – Beatrice Inc.

17,097.81Interest Revenue...................... 97.81Note Receivable.......................

17,000.00To charge the account of Beatrice for a dishonoured note including interest of $17,000 × 7% × 30/365 = $97.81.

*Quick Study 10-14June 4 Cash............................................105,300.00

Factoring Fees Expense................2,700.00Accounts Receivable.................

108,000.00Sold accounts receivable for cash, less a 2.5% factoring fee; 108,000 × 2.5% = 2,700.

*Quick Study 10-15Aug. 10 Cash............................................50,188.81

Interest Revenue...................... 188.81Notes Receivable.....................

50,000.00Discounted a note receivable.

Principal of Note...........................$50,000.00Add: Interest from Note ($50,000 ×8% ×45/365)

493.15Maturity Value..............................$50,493.15


Less: Bank Discount ($50,493.15 × 11% × 20/365) 304.34

Proceeds......................................$50,188.81

*Quick Study 10-16a)Mega Companyb)Holton Company; unfavourablec) Holton Company


EXERCISES

Exercise 10-1 (20 minutes)Apr. 6 Cash............................................8,832.00

Credit Card Expense ($9,200 .04) 368.00Sales....................................... 9,200.00

6 COGS...........................................5,300.00Merchandise Inventory............. 5,300.00

10 Accounts Receivable—Colonial....... 310.00Sales....................................... 310.00

10 COGS........................................... 160.00Merchandise Inventory............. 160.00

17 No entry required.

28 Cash............................................5,370.40Credit Card Expense ($5,480 × .02) 109.60

Accounts Receivable—Colonial. . 5,480.00


Exercise 10-2 (25 minutes)1.

GENERAL LEDGER

Accounts Receivable

SalesSales Returns

and Allowances

Nov. 3

8,834

Nov. 19

378 Nov. 3

8,834 Nov. 19

378

8 2,500

82,500

11 1,466

111,466

28 5,212

285,212

Bal. 17,634

18,012

ACCOUNTS RECEIVABLE SUBLEDGERABC Shop Colt Enterprises Red McKenzie

Nov. 38,834 Nov.

82,50

0Nov. 11

1,466

Nov. 19

378

285,212 Bal. 1,088

Bal. 14,046

2. Subledger proof:

ABC Shop..................................... $14,046Colt Enterprises............................ 2,500Red McKenzie............................... 1,088Balance of the Accounts Receivable account $17,634

Exercise 10-3 (15 minutes)a.Oct. 31 Allowance for Doubtful Accounts.. . 1,000

Accounts Receivable—Gwen Rowe1,000

b.Dec. 9 Accounts Receivable—Gwen Rowe. 200


Allowance for Doubtful Accounts200

9 Cash............................................ 200Accounts Receivable—Gwen Rowe

200


Exercise 10-4 (20 minutes)Dec. 31 Bad Debt Expense......................... 8,750

Allowance for Doubtful Accounts8,750

Expense = .005 × $1,750,000 = $8,750.

Feb. 1 Allowance for Doubtful Accounts.. . 1,800Accounts Receivable—Catherine Hicks

1,800

June 5 Accounts Receivable—Catherine Hicks 1,800Allowance for Doubtful Accounts

1,800

5 Cash............................................ 1,800Accounts Receivable—Catherine Hicks

1,800

Exercise 10-5 (15 minutes)a.Dec. 31 Bad Debt Expense......................... 3,615


Accounts ReceivableAllowance for

Doubtful Accounts2,745

Unadjusted balance

? = 3,615 Adjustment

Bal. 159,000× 4%$ 6,360

6,360

Required Adjusted Balance

b.Dec. 31 Bad Debt Expense......................... 10,356Allowance for Doubtful Accounts

10,356

Accounts ReceivableAllowance for

Doubtful AccountsUnadjusted balance

3,996

? = 10,356 Adjustment

Required


Bal. 159,000× 4%$ 6,360

6,360

Balance


Exercise 10-6 (15 minutes)a)$345,000b)$356,000c) $2,900d)$170e)$2,550

Exercise 10-7 (15 minutes)LISTEL

Partial Balance SheetMarch 31, 2011

Assets Current assets: Cash..................................... $

29,000 Accounts receivable.............. $102,0

00 Less: Allowance for doubtful accounts......................................

2,10 0

99,900

Notes receivable, due November 30, 2011......................................

17,000

Merchandise inventory.......... 65,000 Supplies............................... 4,50

0 Total current assets.............. $215,4

00

Note: Bad Debt Expense is an income statement account and is therefore not listed on the balance sheet. Notes Receivable due May 1, 2013, Building and Accumulated Amortization, Building are asset accounts shown on the balance sheet but they are not current assets.


Exercise 10-8 (30 minutes)a. 2011Dec.

31Bad Debt Expense.......................... 7,314

Allowance for Doubtful Accounts 7,314 To record estimate for uncollectible accounts; 492,500 – 4,900 = 487,600 x 1.5% = 7,314.

b.201

2Accounts Receivable....................... 620,00

0 Sales....................................... 620,00

0 To record credit sales during 2012.

Cost of Goods Sold......................... 406,500

Merchandise Inventory............. 406,500

To record cost of sales during 2012.

Cash.............................................. 491,300

Sales Discounts.............................. 6,200 Accounts Receivable................ 497,50

0 To record collections less sales discounts.

Allowance for Doubtful Accounts... . 12,450 Accounts Receivable................ 12,450 To record the write-off of uncollectible accounts.

c.2012Dec.

31Bad Debt Expense.......................... 9,207

Allowance for Doubtful Accounts 9,207


To record estimate for uncollectible accounts; 620,000 – 6,200 = 613,800 x 1.5% = 9,207.


Exercise 10-8 (concluded)d.Assets Current assets: Accounts receivable1.......................... $180,0

50 Less: Allowance for doubtful accounts2.................................................

4,9 71

$175,079

OR

Accounts receivable (net).................... $175,079

Calculations:1. 2.

Accounts Receivable Allowance for Doubtful Accounts

Bal. Dec 31/11

2012 sales

70,000

620,000

497,500

12,450

2012 collections

2012 write-offs

900

7,314

Unadj.Bal. Dec 31/11

AdjustmentDec 31/11

Bal. Dec 31/12

180,050 2012

write-offs

12,450

8,214

9,207

Adj. Bal. Dec 31/11

Adjustment Dec 31/12

4,971

Adj. Bal. Dec 31/12

Analysis component: The main advantage of the income statement approach is

its simplicity. Like the balance sheet approach, it satisfies the generally accepted accounting principles of matching and conservatism. The main disadvantage is that it does not compensate for over or under estimations from year to year because it is not focused on the element that is uncollectible, namely, the accounts receivable.



31Bad Debt Expense........................ 500


500

To record estimate for uncollectible accounts; 70,000 x 2% = 1,400; 1,400 – 900 = 500.

b.201

2Accounts Receivable.................... 620,00

0 Sales..................................... 620,00

0 To record credit sales during 2012.

Cost of Goods Sold....................... 406,500

Merchandise Inventory.......... 406,500

To record cost of sales during 2012.

Cash............................................ 491,300

Sales Discounts............................ 6,200 Accounts Receivable.............. 497,50

0 To record collections less sales discounts.

Allowance for Doubtful Accounts. . 12,450 Accounts Receivable.............. 12,450 To record the write-off of uncollectible accounts.

c.2012


Dec. 31

Bad Debt Expense........................ 14,651


14,651

To record estimate for uncollectible accounts; 180,050 x 2% = 3,601; 3,601 – 1,400 + 12,450 = 14,651.


Exercise 10-9 (concluded)d.Assets Current assets: Accounts receivable......................... $180,0

50 Less: Allowance for doubtful accounts................................................

3,6 01

$176,449

OR

Accounts receivable (net)................. $176,449

Calculations:Accounts Receivable Allowance for Doubtful

AccountsBal. Dec 31/11

2012 sales

70,000

620,000

497,500

12,450

2012 collections

2012 write-offs

900Unadj. Bal. Dec 31/11

AdjustmentDec 31/11

Bal. Dec 31/12

180,050

2012 write-

offs12,4

50

1,400 Adj. Bal. Dec 31/11


3,601Adj. Bal. Dec 31/12

Analysis componentThe main advantage of the balance sheet approach is that it adjusts the allowance for doubtful accounts to the estimated amount of uncollectibles. Like the income statement approach, it satisfies the generally accepted accounting principles of matching and conservatism. The main disadvantage is that it does require more effort in terms of calculations.


500

14,651


31Bad Debt Expense............................ 2,250

Allowance for Doubtful Accounts. . 2,250 To record estimate for uncollectible accounts; (95,000 x 1% = 950) + (35,000 x 4% = 1,400) + (8,000 x 10% = 800) + (2,000 x 60% = 1,200) = 4,350; 4,350 – 2,100 = 2,250.

b.2012Dec.

31Bad Debt Expense............................ 39,01

0 Allowance for Doubtful Accounts. . 39,01

0 To record estimate for uncollectible accounts; (215,000 x 1% = 2,150) + (95,000 x 4% = 3,800) + (35,100 x 10% = 3,510) + (15,000 x 60% = 9,000) = 18,460; 18,460 – 4,350 + 24,900 = 39,010.

c.Assets Current assets: Accounts receivable............................. $360,

100 Less: Allowance for doubtful accounts.. 18,4

60$341,6

40

OR

Accounts receivable (net)...................... $341,640

Calculations:Accounts Receivable Allowance for Doubtful Accounts


Bal. Dec 31/11

2012 sales

140,000

1,240,000

995,000

24,900

2012 collections

2012 write-offs

2,100Unadj.Bal. Dec 31/11

AdjustmentDec 31/11

Bal. Dec 31/12

360,100

2012write-

offs24,9

00

4,350 Adj. Bal. Dec 31/11


18,460

Adj. Bal. Dec 31/12


2,250

39,010

Exercise 10-10 (concluded)Analysis component One of the ways to apply the balance sheet approach is to

use an aging analysis of outstanding receivables. The main advantage of the aging analysis is that it adjusts the allowance for doubtful accounts to the estimated amount of uncollectible receivables based on a detailed analysis that considers the risk associated with the age of a receivable. Like the income statement approach, it satisfies the generally accepted accounting principles of matching and conservatism. The main disadvantage is that it does require more effort in terms of calculations. However, computerization of the accounting information system has negated that disadvantage.

Exercise 10-11 (15 minutes)May 3 Bad Debt Expense......................... 1,100

Accounts Receivable – Wilma Benz1,100

To write-off an uncollectible receivable using the direct write-off method.

Analysis component:Using 2% of credit sales, bad debt expense would be $5,600 (280,000 × 2% = 5,600) for 2011 thereby decreasing net income by $4,500 more than the direct write-off method. Using 4% of outstanding accounts receivable would result in a bad debt expense of $2,940 (46,000 × 4% = 1,840 + 1,100 = 2,940) thereby decreasing net income by $1,840 more than the direct write-off method.

Exercise 10-12 (20 minutes)Mar. 21 Notes Receivable..........................6,200.00

Accounts Receivable—Bradley Brooks6,200.00 To record 6-month, 10% note to replace

past-due account.

Sept. 21 Accounts Receivable—Bradley Brooks 6,510.00Interest Revenue...................... 310.00Notes Receivable..................... 6,200.00

To record dishonoured note; $6,200 × 0 .10 × 6/12 = $310.00.


Dec. 31 Allowance for Doubtful Accounts.. .6,510.00Accounts Receivable—Bradley Brooks

6,510.00 To record write-off of Brooks’ account.


Exercise 10-13 (15 minutes)Oct. 31 Notes Receivable—Leann Grimes...5,000.00

Accounts Receivable—Leann Grimes5,000.00 To record 6-month, 8% note to replace

past-due account.

Dec. 31 Interest Receivable.......................66.67 Interest Revenue...................... 66.67

To record accrued interest; $5,000 × .08 × 2/12 = $66.67.

Apr. 30 Cash............................................5,200.00Notes Receivable—Leann Grimes

5,000.00 ......................Interest Revenue133.33 ..................Interest Receivable66.67

To record collection of note and interest; $5,000 × .08 × 4/12 = $133.33.


Exercise 10-14 (25 minutes)2011

Dec. 16 Notes Receivable..........................17,200.00Accounts Receivable—Carmel Karuthers

17,200.00 To record 60-day, 7% note to replace

past-due account.

31 Interest Receivable....................... 49.48Interest Revenue...................... 49.48

To record accrued interest; $17,200 × 0.07 × 15/365 = $49.48.

31 Interest Revenue.......................... 49.48Income Summary..................... 49.48

To record the closing of the Interest Revenue account.

2012Feb. 14 Cash............................................17,397.92

Interest Revenue...................... 148.44Interest Receivable.................. 49.48Notes Receivable.....................

17,200.00 To record collection of note plus interest; $17,200 x 0 .07 x 60/365 = 197.92; 197.92 – 49.48 = 148.44.

Mar. 2 Notes Receivable..........................8,000.00Accounts Receivable—ATW Company


past-due account.

17 Notes Receivable..........................3,200.00Accounts Receivable—Leroy Johnson


past-due account.

May 31 Cash............................................8,157.81Interest Revenue...................... 157.81Notes Receivable..................... 8,000.00

To record collection of note plus interest; $8,000 × 0.08 × 90/365 = $157.81.


*Exercise 10-15 (20 minutes)Aug. 2 Accounts Receivable.....................6,295.00

Sales....................................... 6,295.00 To record sales on credit.

2 Cost of Goods Sold........................3,150.00Merchandise Inventory............. 3,150.00


7 Cash............................................18,488.45Factoring Fee Expense.................. 281.55

Accounts Receivable.................18,770.00

To record sale of accounts receivable; $18,770 × .015.

15 Cash............................................3,436.00Accounts Receivable................. 3,436.00

To record collection from credit customers.

25 Cash............................................10,000.00Notes Payable..........................

10,000.00 To record note; pledged $14,000 of accounts

receivable as security for the loan.

Note:

Accounts receivable in the amount of $14,000 are pledged as security for a $10,000 note payable to Fidelity Bank.


*Exercise 10-16 (20 minutes)Jan. 20 Note Receivable............................170,000.00

Accounts Receivable – Steve Soetart170,000.00

Received note in settlement of account.

Feb. 19 Cash............................................170,487.58Interest Revenue...................... 487.58Notes Receivable.....................

170,000.00Discounted a note receivable.

Principal of Note...........................$170,000.00Add: Interest from Note ($170,000 × 9% × 90/365) 3,772.60Maturity Value..............................$173,772.60Less: Bank Discount ($173,772.60 × 11.5% × 60/365) 3,285.02Proceeds......................................$170,487.58

*Exercise 10-17 (15 minutes)Part 1

Accounts Receivable Turnover

Days’ Sales Uncollected

$7,280 = 13.43 times

$598 x 365 = 29.98 days

($598 + $486)/2 $7,280

Part 2

WestCon is not collecting its receivables as quickly as the industry average which is generally unfavourable. WestCon has more days of uncollected sales (or receivables) than the industry average, also unfavourable.


PROBLEMS

Problem 10-1A (30 minutes)May 4 Accounts Receivable—Anne Bismarck 1,130.00

Sales....................................... 1,130.00


5 Cash............................................11,511.96Credit Card Expense..................... 356.04

Sales.......................................11,868.00

$11,868 × 0.03 = $356.04.


5 Accounts Receivable—UniCharge...9,752.00Sales....................................... 9,752.00


8 Accounts Receivable—UniCharge...6,426.00Sales....................................... 6,426.00


10 No entry required.17 Cash............................................15,854.44

Credit Card Expense..................... 323.56Accounts Receivable—UniCharge

16,178.00 ($9,752 + $6,426) × 0.02 = $323.56.

18 Cash............................................1,107.40Sales Discounts............................ 22.60

Accounts Receivable—Anne Bismarck1,130.00

$1,130 ×0.02 = $22.60.


Problem 10-1A (concluded)Analysis component:

Advantages Disadvantagesa. bank credit cards

— encourages customer purchases— immediate payment to Clipper Sales— no uncollectible accounts

— service charges

b. non-bank credit cards

— encourages customer purchases— no uncollectible accounts

— service charges— delayed payments (likely faster than credit sales but much slower than bank credit cards)

c. debit cards

— encourages customer purchases— no uncollectible accounts— immediate payment to Clipper Sales

— service charges

d. cash — immediate collection— no uncollectible accounts

— less likely to encourage customer purchases if ‘cash only’ policy

Problem 10-2A (35 minutes) Part 1a. Expense is 2% of credit sales:Dec. 31 Bad Debt Expense.........................141,360.00

Allowance for Doubtful Accounts141,360.00

$10,675,500 – $3,607,500 = $7,068,000 × 0.02 = $141,360.


b. Allowance is 5% of accounts receivable:

Dec. 31 Bad Debt Expense.........................138,510.00Allowance for Doubtful Accounts

138,510.00Calculations:Total receivables $2,140,200.00Percent uncollectible × 5.0%Required allowance balance$ 107,010.00


AFDA31,500 ? =

138,510107,010

Problem 10-2A (concluded) Part 2Current assets:Accounts receivable.................$2,140,200Less: Allowance for doubtful accounts

109,860* $2,030,340OR

Accounts receivable (net of $109,860*estimated uncollectible accounts)

$2,030,340

*Adjustment to the allowance...$141,360 creditUnadjusted allowance balance. . 31,500 debitAdjusted balance.....................$109,860 credit

Part 3Current assets:Accounts receivable.................$2,140,200Less: Allowance for doubtful accounts

107,010$2,033,190OR

Current assets:Accounts receivable (net of $107,010estimated uncollectible accounts)

$2,033,190

Analysis component:If bad debts are not adjusted for at the end of the accounting period, matching and conservatism are violated. If bad debts are not recorded at period end, they are not being matched to the revenues which caused the resulting net income and assets being overstated for that period. When assets and/or income are overstated, conservatism is being violated.


Problem 10-3A (35 minutes) Part 11. Calculation of the required balance of the allowance:

Not due: $1,460,000 .0125 = $ 18,250 1 to 30: $ 708,000 .0200 = 14,16031 to 60: $ 152,000 .0650 = 9,88061 to 90: $ 96,000 .3275 = 31,440Over 90: $ 24,000 .6800 = 16,320

$90,050 credit2. Dec.31 Bad Debt Expense.........................63,250.00

Allowance for Doubtful Accounts63,250.00

Calculation:

Analysis component:

Writing off the account receivable will not affect 2012 net income. The entry to write off an account involves a debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable, both of which are balance sheet accounts. Net income is affected only by the annual recognition of the estimated bad debt expense, which is journalized as an adjusting entry.

Net income for 2011 (the year of the original sale) should have included an estimated expense for write-offs like this one.


AFDA26,800 ? = 63,25090,050

Problem 10-4A (30 minutes)Part A1.a) Cash........................................... 740,00

0Accounts Receivable.................... 2,220,0

00 Sales.................................... 2,960,0

00 To record sales; 25% x $2,960,000 total sales = cash sales of $740,000.

Cost of Goods Sold...................... 1,804,000

Merchandise Inventory.......... 1,804,000


b) Sales Returns and Allowances...... 114,000

Accounts Receivable.............. 57,000 Cash..................................... 57,000 To record return of defective merchandise to be scrapped.

c) Accounts Receivable.................... 24,000 Allowance For Doubtful Accounts.....................................

24,000

To reverse write-off due to recovery.

Cash........................................... 24,000 Accounts Receivable.............. 24,000 To record recovery.

d) Allowance For Doubtful Accounts. 39,000 Accounts Receivable.............. 39,000 To record write-off of uncollectible accounts.

e) Cash........................................... 1,880,0


00 Accounts Receivable.............. 1,880,0

00 To record collections from credit customers.


Problem 10-4A (continued)Part B2.Dec. 31 Bad Debt Expense......................... 21,630


2,220,000 – 57,000 = 2,163,0002,163,000 × 1% = 21,630.

3. Current assets:Accounts receivable.................$742,000Less: Allowance for doubtful accounts

23,310$718,690OR

Current assets:Accounts receivable (net of $23,310 estimated uncollectible acounts)

$718,690

Calculation of balance in AFDA :

4. $21,630


AFDA

39,000

16,68024,00021,63023,310

Problem 10-4A (concluded)

Part C5.Dec. 31 Bad Debt Expense......................... 20,580


742,000 × 3% = 22,260 – 1,680 = 20,580.

Calculations:

Accounts ReceivableAllowance for Doubtful

AccountsDec.

31/10Balance

498,000

16,680 Dec. 31/10Balance

a) 2,220,000

57,000 b)

c) 24,000 24,000 c) 24,000 c)39,000 d) d)

39,0001,880,

000e)

1,680Unadjusted balance, Dec. 31/11

Dec. 31/11

Balance742,00

0

× 3%$22,26

022,260 Required

adjusted balance

6.Current assets:

Accounts receivable.................$742,000 Less: Allowance for doubtful accounts 22,260$719,740

ORCurrent assets:

Accounts receivable (net of $22,260estimated uncollectible acounts)

$719,740

7. $20,580


What adjustment

Problem 10-5A (35 minutes)2011a. Accounts Receivable....................... 2,289,000

Sales......................................... 2,289,000

COGS.............................................. 1,240,000Merchandise Inventory............... 1,240,000

b. Allowance for Doubtful Accounts..... 34,540Accounts Receivable................... 34,540

c. Cash............................................... 1,334,460Accounts Receivable................... 1,334,460

d. Bad Debt Expense........................... 48,340Allowance for Doubtful Accounts. 48,340

Calculations:


Accounts0 Unadjust

ed Balance

34,540

CreditSales 2,289,0

0034,540 Write-

offs1,334,4

60Collections

48,340

Balance 920,000 13,800 Required Balance

× 1.5%

13,80 0


Adjustment needed

Problem 10-5A (concluded)2012e. Accounts Receivable....................... 2,941,560

Sales......................................... 2,941,560

COGS.............................................. 1,592,000Merchandise Inventory............... 1,592,000

f. Allowance for Doubtful Accounts..... 53,760Accounts Receivable................... 53,760

g. Cash............................................... 2,207,800Accounts Receivable................... 2,207,800

h. Bad Debt Expense........................... 63,960Allowance for Doubtful Accounts. 63,960

Calculations:


AccountsBal. 920,000

13,800 Bal.

CreditSales

2,941,560 53,760 Write-

offsWrite-offs

53,760

2,207,800

Collections

63,960

Bal. 1,600,000 24,000

Required Balance

× 1.5%

24,000


Adjustment needed

Problem 10-6A (30 minutes)a. 2011

Oct. 31

Bad Debt Expense...................... 23,850

Allowance for Doubtful Accounts....................................

23,850

To record estimate for uncollectible accounts; 1,590,000 x 1.5% = 23,850.

b.Assets Current assets: Accounts receivable........................ $124,00

0 Less: Allowance for doubtful accounts*.............................................

21,050 $102,950

OR

Accounts receivable (net)................ $102,950

*Calculations:Allowance for Doubtful Accounts

Unadj. Bal.Oct 31/11

2,800 23,85

0

AdjustmentOct 31/11

21,050

Adj. Bal. Oct 31/11


Problem 10-6A (concluded)c. 2011

Oct. 31

Bad Debt Expense...................... 9,000

Allowance for Doubtful Accounts 9,000

To record estimate for uncollectible accounts; 124,000 x 5% = 6,200; 6,200 + 2,800 = 9,000.*


Unadj. Bal.Oct 31/11

2,800 Adjustment

Oct 31/11

6,200 Adj. Bal. Oct 31/11

d.Assets Current assets: Accounts receivable........................ $124,00

0 Less: Allowance for doubtful accounts..............................................

6,20 0

$117,800

OR

Accounts receivable (net)................ $117,800


9,000

Problem 10-7A (25 minutes)Part 1

Jul. 31 Bad Debt Expense......................... 8,6751

Allowance For Doubtful Accounts8,675

To record estimated uncollectible accounts.

Part 2Aug. 31 Bad Debt Expense......................... 5,625


To record estimated uncollectible accounts.

Calculations:


13,500

Balance, June 30

July write-

offs15,50

08,6751 Adjustment to

estimate bad debts for July

6,675 Balance, July 31

1,950 Recovery of account previously written off

8,625 Unadjusted balance, August 31

14,250

Desired balance, August 31 based on aging analysis

1. (900,000 – 32,500) × 1% = 8,675.2. 14,250 – 8,625 = 5,625 is the required adjustment.


What adjustment is necessary to get the desired balance2?

5,6252

Problem 10-8A (30 minutes)a)

Sept. Aug. July June May

CustomerNot yet

due

1 to 29 days past due

30 to 59 days

past due

60 to 89 days

past due

90 to 119 days past due

B. Axley $28,000

T. Holton $14,000

$24,000

$72,000

W. Nix12,000 4,000

$18,000

C. Percy10,000 4,000

K. Willis96,000

Totals $132,000

$28,000

$76,000

$18,000

$28,000

Percent Uncollectible ×0.5% × 1% × 4% ×10% ×20%Estimated uncollectible accounts $ 660 $ 280

$3,040

$1,800

$5,600

Total=

$11,380

b)Sept. 30 Bad Debt Expense………………………… 9,780

Allowance for Doubtful Accounts…….9,780

To record estimate for uncollectible accounts.

Calculations:Allowance for Doubtful Accounts

1,600

Unadjusted balance Sept. 30

11,380

Desired adjusted balance


What adjustment is necessary to achieve the

Problem 10-9A (30 minutes)a. 2011Dec.

31Bad Debt Expense..................... 48,6

50 Allowance for Doubtful Accounts 48,65

0 To record estimated uncollectible accountsusing the income statement approach;

1,946,000 x 2.5% = 48,650.

2012Dec.

31Bad Debt Expense..................... 19,4


0 To record estimated uncollectible accounts; 512,000 x 4% = 20,480; 20,480 – 1,000

= 19,480.

2013Dec.

31Bad Debt Expense..................... 29,9


0To record estimated uncollectible

accounts;29,200 + 700 = 29,900.

Analysis component The normal balance in AFDA is a credit. Write-offs greater

than the estimated uncollectibles recorded at the end of the previous accounting period would create a debit unadjusted balance.


Problem 10-10A (30 minutes)a), b), c)

Note

Date of Note

Principal

Interest

Rate TermMaturity

Date

Days of Accrued Interest

atDec. 31,

2011

Accrued Interest at Dec.

31, 20111 Nov.

1/10$

240,000

7% 180 days

Apr. 30/111

0 0

2 Jan. 5/11

$

100,000

8% 90 days

Apr. 5/112

0 0

3 Nov. 20/11

$

90,000

10% 45 days

Jan. 4/123

41 days $1010.965

4 Dec. 10/11

$

120,000

12% 30 days

Jan. 9/124

21 days $828.496

Calculations as denoted by superscripts: 1. Days in November.. 30Minus date of note...... 1Days remaining in November................................. 29Add days in December 31Add days in January.... 31Add days in February.. 28Add days in March...... 31Add days in April........ 30Period of note in days.180

2. Days in January...... 31Minus date of note...... 5Days remaining in January..............................26Add days in February.. 28Add days in March...... 31Add days in April........ 5Period of note in days. 90

3. Days in November. 30Minus date of note... . 20Days remaining in November................. 10Add days in December.............................31Add days in January... 4Period of note in days 45

4. Days in December. 31Minus date of note... . 10Days remaining in December................. 21Add days in January... 9Period of note in days 30

5. $90,000 × 10% × 41/365 = $1010.966. $120,000 × 12% ×


21/365 = $828.49

d)Dec. 31/11Interest Receivable – Note 3..........1010.96

Interest Revenue...................... 1010.96To accrue interest on Note 3.

e)Jan. 4/12 Cash............................................91,109.59

Interest Revenue...................... 98.63Interest Receivable.................. 1010.96Note Receivable – Note 3..........

90,000.00To record collection of Note 3 and interest;

90,000 x 10% x 45/365 = 1,109.59; 1,109.59 – 1010.96 = 98.63Problem 10-11A (75 minutes)a)2010Dec. 16 Notes Receivable..........................19,200.00

Accounts Receivable—Hal Krueger19,200.00


$19,200 .09 15/365 = $71.01


2011Feb. 14 Cash............................................19,484.05

Interest Revenue...................... 213.04Interest Receivable.................. 71.01Notes Receivable.....................

19,200.00 19,200 x 9% x 60/365 = 284.05; 284.05 – 71.01 =

213.04Mar. 2 Notes Receivable..........................10,240.00

Accounts Receivable—ARC Company10,240.00

17 Notes Receivable..........................3,200.00


Accounts Receivable—Penny Bobek3,200.00Apr. 16 Accounts Receivable—Penny Bobek 3,223.67

Interest Revenue...................... 23.67Notes Receivable..................... 3,200.00

$3,200 × .09 × 30/365 = $23.67b) Days in March.......... 31

Minus date of note... 2 Days remaining in March 29Add days in April...... 30Add days in May....... 31Days to equal Maturity date 90

Therefore, the maturity date is May 31, 2011.2011May 31 Cash............................................10,492.49


10,240.00To record collection of note plus interest; 10,240 × 90/365 × 10% = 252.49.


Problem 10-12A (30 minutes)2011

a.

Apr. 15

Notes Receivable – John Daley. . . 120,000.00

Accounts Receivable – John Daley.......................................

120,000.00

To record acceptance of a 6%, 90-day note.

b.

May 1

Notes Receivable – ABC Drilling. 50,000.00

Accounts Receivable – ABC Drilling.....................................

50,000.00

To record acceptance of a 6%, 6-month note.

c. 31 Interest Receivable................... 1,157.40

Interest Revenue.................. 1,157.40

To record accrued interest at year end; Daley: 120,000 x 6% x 46/365 = 907.40; ABC: 50,000 x 6% x 1/12 = 250.00 1,157.40

d.

July 14

Cash......................................... 121,775.34

Interest Receivable.............. 907.40 Interest Revenue.................. 867.94 Notes Receivable – John Daley.......................................

120,000.00

To record collection of note; 120,000 x 6% x 90/365 = 1,775.34 – 907.40 = 867.94.

e.

Nov. 1


51,500.00

Interest Revenue.................. 1,250.00

Interest Receivable.............. 250.00


Notes Receivable – ABC Drilling.....................................

50,000.00

To record dishonour of note; 50,000 x 6% x 6/12 = 1,500.00 – 250.00 = 1,250.00.

f. 15 Allowance for Doubtful Accounts 51,500.00


51,500.00

To record write-off of account receivable.

Analysis component:The debit balance of $55,500 (4,000 + 51,500) in AFDA after recording the write-off of November 15 indicates that write-offs were greater than the expected amount of uncollectibles. $55,500 may not be a material amount relative to total accounts receivable (unknown) in which case the underestimation is not a concern. However, if the $55,500 is significant in comparison to total outstanding accounts receivable, then a review of the estimating procedure and/or the credit policy are in order.


*Problem 10-13A (30 minutes)Mar. 2 Notes Receivable..........................10,240.00

Accounts Receivable – JNC Company10,240.00

Apr. 21 Cash............................................10,140.00Interest Expense.......................... 100.00

Notes Receivable.....................10,240.00

June 2 Accounts Receivable – JNC Company10,492.49

Cash........................................10,492.49

$10,240 + ($10,240 × .10 × 90/365) = $10,492.49

July 16 Cash............................................10,621.85Interest Revenue...................... 129.36Accounts Receivable – JNC Company

10,492.49 10,492.49 x 10% x 45/365 = 129.36.

Sept. 3 Notes Receivable..........................4,160.00Accounts Receivable – Cecile Duval

4,160.00

18 Cash............................................4,110.00Interest Expense.......................... 50.00

Notes Receivable..................... 4,160.00

Analysis componentWhen a business discounts notes receivable with recourse and these notes have not matured prior to year end, the business must disclose this information in the notes to the financial statements. This is a requirement because the business has a contingent liability, which means that if the maker of the note dishonours (fails to pay) the note, the business will have to pay the third party the full maturity value. This contingent liability must be disclosed to satisfy the full-disclosure principle.


*Problem 10-14A (60 minutes)2011Dec. 11 Notes Receivable..........................15,000.00

Accounts Receivable—Fred Calhoun15,000.00


[Interest = $15,000 × 0.12 × 20/365 = $98.63]


2012

Jan. 10 Cash............................................15,119.88Interest Receivable.................. 98.63Interest Revenue...................... 21.25Notes Receivable.....................

15,000.00Calculations:

Principal............................$15,000.00Interest = $15,000.00 × 0.12 × (60/365)

295.89Maturity value....................15,295.89Discount = $15,295.89 × 0.14 × (30/365)

176.01Proceeds............................$15,119.88

Feb. 10 Accounts Receivable—Fred Calhoun15,355.89

Cash........................................15,355.89

[Balance = $15,295.89 + $60.00 = $15,355.89]

Mar. 5 Notes Receivable..........................4,500.00Accounts Receivable—Donna Reed

4,500.00

29 Cash............................................4,513.59Interest Revenue...................... 13.59Notes Receivable..................... 4,500.00

Calculations:Principal............................$4,500.00


Interest = $4,500.00 × 0.11 × (60/365) 81.37

Maturity value....................$4,581.37Discount = $4,581.37 × 0.15 × (36/365)

67.78Proceeds............................$4,513.59

May 7 No entry required.


*Problem 10-14A (concluded)June 9 Notes Receivable..........................6,750.00

Accounts Receivable—Jack Miller6,750.00

Aug. 8 Cash............................................6,860.96Interest Revenue...................... 110.96Notes Receivable..................... 6,750.00

[Interest = $6,750 × 0.10 × 60/365 = $110.96]

11 Notes Receivable..........................8,000.00Accounts Receivable—Roger Addison

8,000.00

31 Cash............................................8,015.66Interest Revenue...................... 15.66Notes Receivable..................... 8,000.00

Calculations:Principal............................$8,000.00Interest = $8,000.00 × 0.10 × (60/365)

131.51Maturity value....................$8,131.51Discount = $8,131.51 × 0.13 × (40/365)

115.85Proceeds............................$8,015.66

Oct. 12 Accounts Receivable—Roger Addison 8,191.51Cash........................................ 8,191.51

[Balance = $8,131.51 + $60 = $8,161.51]

Nov. 19 Cash............................................8,281.28Interest Revenue...................... 89.77Accounts Receivable—Roger Addison

8,191.51Calculations:

Maturity value....................$8,131.51Protest fee......................... 60.00 Balance due.......................$8,191.51Interest = $8,191.51 × 0.10 × (40/365)

89.77 Amount collected................$8,281.28

Dec. 23 Allowance for Doubtful Accounts.. .15,355.89Accounts Receivable—Fred Calhoun

15,355.89


ALTERNATE PROBLEMSProblem 10-1B (30 minutes)July 2 Accounts Receivable—J.R. Lacey . . .2,780.00

Sales....................................... 2,780.00


8 Cash............................................3,150.56Credit Card Expense..................... 97.44

Sales....................................... 3,248.00 $3,248 × .03 = $97.44.


8 Accounts Receivable—Fortune Credit Co 1,114.00Sales....................................... 1,114.00


12 Cash............................................2,724.40Sales Discounts............................ 55.60

Accounts Receivable—J.R. Lacey 2,780.00 $2,780 × .02.

13 Accounts Receivable—Fortune Credit Co. 2,960.00Sales....................................... 2,960.00


16 No entry required.

23 Cash............................................3,992.52Credit Card Expense...................... 81.48

Accounts Receivable—Fortune Credit Co.4,074.00 ($1,114 + $2,960) × .02.


Problem 10-1B (concluded)Analysis component:

Advantages Disadvantagesa. cash — immediate

collection— no uncollectible accounts

— less likely to encourage customer purchases if ‘cash only’ policy

b. debit cards

— encourages customer purchases— no uncollectible accounts— immediate collection

— service charges

c. credit cards

— encourages customer purchases— immediate collection— no uncollectible accounts

— service charges

d. cheques — encourages customer purchases

— service charges— delayed payments (because cheques must be processed in order for cash to transfer to Ace’s bank account)— risk of NSF (not sufficient funds) cheques


Problem 10-2B (35 minutes) Part 1a. Expense is 2.5% of credit sales:Dec. 31 Bad Debt Expense......................... 31,025


$1,241,000 × .025 = $31,025.b. Allowance is 6% of accounts receivable:Dec. 31 Bad Debt Expense......................... 23,300


Calculations:Accounts Receivable


5,200 Bal.

23,300

Bal. 475,000 28,500 Required Bal.

× 6%28,500

Part 2Current assets:

Accounts receivable....................$475,000Less: Allowance for doubtful accounts

36,225*$438,775OR

Accounts receivable (net of $36,225*estimated uncollectible accounts).

$438,775

*Calculations:Allowance for

Doubtful Accounts5,200 Unadjus

ted balance

31,025 Adjustment

36,225 Adjusted balance


Adjustment Needed

Problem 10-2B (concluded)Part 3

Current assets:Accounts receivable....................$475,000Less: Allowance for doubtful accounts

28,500$446,500OR

Accounts receivable (net of $28,500estimated uncollectible accounts).

$446,500

Analysis component:I would recommend that Genie use the balance sheet approach to estimate uncollectible accounts receivable because it more accurately reflects uncollectible receivables since it is based on an aging analysis. The balance sheet approach does require more effort to calculate than the income statement approach. Bad debt expense represents accounts that are not expected to be collected so the fact that the income statement approach mixes both collected and uncollected accounts in its estimation of uncollectible accounts makes it less accurate than the balance sheet approach.


Problem 10-3B (35 minutes)1. Calculation of the required balance of the allowance:

Not due: $296,400 × .020 = $ 5,9281 to 30: $177,800 × .040 = 7,112

31 to 60: $ 58,000 × .085 = 4,93061 to 90: $ 7,600 × .390 = 2,964Over 90: $ 3,800 × .825 = 3,1,35

$24,069

2. Dec.31 Bad debt expense......................... 28,169Allowance for Doubtful Accounts

28,169Analysis component

Writing off the account receivable will not affect 2012 net income. The entry to write off an account involves a debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable, both of which are balance sheet accounts. Net income is affected only by the annual recognition of the estimated bad debt expense, which is journalized as an adjusting entry.

Net income for 2011 (the year of the original sale) should have included an estimated expense for write-offs like this one.



Unadjusted

balance4,100

28,169

24,06 Required

Adjustment Needed

Problem 10-4B (30 minutes)Part A1. a) Cash........................................... 517,50

0Accounts Receivable.................... 2,932,5

00 Sales.................................... 3,450,0

00 To record sales; 15% x $3,450,000 total sales = cash sales of $517,500.

Cost of Goods Sold...................... 2,415,000

Merchandise Inventory.......... 2,415,000


b) Sales Returns and Allowances...... 98,000 Accounts Receivable.............. 98,000 To record return of defective merchandise to be scrapped.

c) Accounts Receivable.................... 58,000 Allowance For Doubtful Accounts.....................................

58,000

To reverse write-off due to recovery.

Cash........................................... 58,000 Accounts Receivable.............. 58,000 To record recovery.

d) Allowance For Doubtful Accounts. 265,000

Accounts Receivable.............. 265,000

To record write-off of uncollectible accounts.

e) Cash........................................... 2,949,000


Sales Discounts........................... 52,000 Accounts Receivable.............. 3,001,0

00 To record collections from credit customers less discounts of $52,000.

Part B2.Dec. 31 Bad Debt Expense.........................222,600


2,932,500 – 98,000 – 52,000 = 2,782,5002,782,500 × 8% = 222,600

Problem 10-4B (continued)3.

Current assets:Accounts receivable.................$548,000Less: Allowance for doubtful accounts

40,520$507,480OR


$507,480 Calculation of balance in AFDA:

Calculation:

4. $222,600

Part C5.Dec. 31 Bad Debt Expense.........................204,020



AFDA

265,000

24,920 58,000222,600 40,520

To record estimated uncollectible accountsreceivable.

Calculations:Accounts Receivable


Dec. 31/10

Balance980,00

024,920 Dec. 31/10

Balance

a) 2,932,500

98,000 b)

c) 58,000 58,000 c) 58,000 c)265,00

0d) d) 265,0

003,001,

000e) Unadjust

ed balance,

Dec. 31/11

182,080

Dec. 31/11

Balance548,50

0

× 4%21,940 Required

adjusted balance

= $21,94

0Problem 10-4B (concluded)6.

Current assets:Accounts receivable.................$548,000Less: Allowance for doubtful accounts

21,940$526,060OR


$526,060


204,020

What adjustment

7. $204,020

Problem 10-5B (35 minutes)2011a. Accounts Receivable............................. 673,490

Sales............................................... 673,490

COGS................................................... 486,000Merchandise Inventory..................... 486,000

b. Cash.................................................... 437,250Accounts Receivable......................... 437,250

c. Allowance for Doubtful Accounts........... 8,240Accounts Receivable......................... 8,240

d. Bad Debt Expense................................. 10,520Allowance for Doubtful Accounts....... 10,520

Calculations:


Accounts0

CreditSales

673,490437,250 Collecti

ons

8,240 Write-offs

Write-offs

8,240

Balance

228,000 2,280 Required Balance

× 1%

2,280


10,520 Adjustment needed

Problem 10-5B (concluded)2012e. Accounts Receivable............................ 927,310

Sales.............................................. 927,310

COGS.................................................. 716,000Merchandise Inventory.................... 716,000

f. Cash................................................... 890,220Accounts Receivable....................... 890,220

g. Allowance for Doubtful Accounts.......... 10,090Accounts Receivable....................... 10,090

h. Bad Debt Expense............................... 10,360Allowance for Doubtful Accounts..... 10,360


AccountsBal. 228,000

2,280 Bal.

CreditSales

927,310 890,220 Collections

10,090 Write-offs

Write-offs

10,090

10,360

Bal. 255,000 2,550

Required Balance

× 1%

2,550


Adjustment needed

Problem 10-6B (30 minutes)a. 2011May

31Bad Debt Expense............................. 10,5

00 Allowance for Doubtful Accounts. . . 10,50

0 To record estimate for uncollectible accounts; 420,000 x 2.5% = 10,500.

b.Assets Current assets: Accounts receivable............. $140,

000 Less: Allowance for doubtful accounts*.....................

13, 700

$126,300

OR

Accounts receivable (net).... $126,300


3,200

10,500

Unadj. Bal.May 31/11

AdjustmentMay 31/11

13,700

Adj. Bal. May 31/11


Problem 10-6B (concluded)c. 2011May

31Bad Debt Expense...................... 840

Allowance for Doubtful Accounts....................................

840

To record estimate for uncollectible accounts; 4,040* – 3,200 = 840.**

*Calculations:

May 31, 2011Accounts

Receivable

Expected Percentag

e Uncollecti

ble

Estimated Uncollecti

bles

$ 98,000 1% = 98039,000 4% = 1,5603,000 50% = 1,500

4,040

**Calculations:


3,200 Unadj. Bal.May 31/11

AdjustmentMay 31/11

4,040 Adj. Bal. May 31/11

d.Assets Current assets: Accounts receivable............. $140,0

00 Less: Allowance for doubtful accounts.......................

4,04 0

$135,960


840

OR

Accounts receivable (net).... $135,960


Problem 10-7B (35 minutes)Part 1

Oct. 31 Bad Debt Expense......................... 11,500Allowance For Doubtful Accounts

11,500To record estimated uncollectible accounts;

2,300,000 x .005 = 11,500.

Part 2Nov. 30 Bad Debt Expense......................... 7,550


To record estimated uncollectible accounts.Calculations:



AccountsBal. Sept. 30 320,00

04,80

0Bal. Sept. 30

Revenues on credit

2,300,000

2,025,000

Collection of customer accounts

65,000

Recovery

Set-up recovery 65,000 25,000 Write-off

of uncollectible account

Write-off of uncollectible account

25,000

11,5001

Adjustment to estimate bad debts for October

Bal. Oct. 31 635,00

056,3

00Bal. Oct. 31

Revenues on credit

1,975,000

1,865,000

Collection of customer accounts

28,000 Write-off of uncollectible account

Write-off of uncollectible account

28,000

Bal. Nov. 30 717,00

028,3

00Unadjusted bal. Nov. 30

7,550

35,8502

Desired bal. Nov. 30

1. 2,300,000 × ½% = 11,5002. 717,000 × 5% = 35,8503. 35,850 – 28,300 = 7,550


What adjustment is necessary to get the

Problem 10-8B (30 minutes)a)

Aug. + July June May April

Not yet due1 to 29 days

past due

30 to 59 days

past due

60 to 89 days

past dueA. Leslie $29,000 $12,000T. Meston

$26,000

P. Obrian

21,000 + 52,000 = 73,000

L. Timms 14,000 $26,000 63,000W. Victor

61,000 + 32,000 = 93,000

83,000

Totals $209,000

$109,000

$75,000

$26,000

Percent Uncollectible

× 1% × 2% × 5% × 20%

Estimated uncollectible accounts $2,090 $2,180

$3,750

$5,200

Total=

$13,220

b)Aug. 31 Bad Debt Expense......................... 19,520


To record estimate for uncollectible accounts.

Calculations:

Allowance for Doubtful AccountsUnadjusted

balance Aug. 31

6,300

19,520

13,220

Desired adjusted balance


What adjustment is necessary to achieve the

Problem 10-9B (30 minutes)a. 2011Mar.

31Bad Debt Expense..................... 45,86

5 Allowance for Doubtful Accounts..................................

45,865

To record estimated uncollectible accounts using the income statement approach; 9,173,000 x .5% = 45,865.

2012Mar.

31Bad Debt Expense..................... 51,53


51,530

To record estimated uncollectible accounts; 729,000 x 7% = 51,030; 51,030 + 500 = 51,530.

2013Mar.

31Bad Debt Expense..................... 72,50


72,500

To record estimated uncollectible accounts; 59,000 + 13,500 = 72,500.

Analysis component

YearAllowance

for Doubtful Accounts

Accounts Receivable Sales

2011 $43,565* $486,000

$9,173,000

2012 51,030 729,000 7,942,0002013 59,000 946,000 7,500,000

*45,865 – 2,300 = 43,565


Sales are decreasing while the balance in Accounts Receivable is increasing indicating that the collection of receivables is less efficient in 2013 than in 2012 and 2011. Also, the balance in the Allowance for Doubtful Accounts account is increasing with decreasing sales confirming that the collection of receivables requires attention.


Problem 10-10B (30 minutes)(a) (b) (c)

Note

Date of Note

Principal

Interest Rate Term

Maturity Date

Days of Accrued Interest

atDec. 31,

2011

Accrued Interest at Dec.

31, 20111 Sept.

20/10$245,

0007% 120

daysJan.

18/1110 0

2 Jun. 1/11

$120,000

9% 45 days

July 16/112

0 0

3 Nov. 23/11

$ 82,00

0

9% 90 days

Feb. 21/123

38 days $768.335

4 Dec. 18/11

$ 60,00

0

10% 30 days

Jan. 17/124

13 days $213.706

Calculations as denoted by superscripts:1. Days in September. 30Minus date of note...... 20Days remaining in September................. 10Add days in October.... 31Add days in November 30Add days in December 31Add days in January.... 18Period of note in days. 120

2. Days in June........... 30Minus date of note...... 1Days remaining in June..............................29Add days in July.......... 16Period of note in days. 45

3. Days in November... 30Minus date of note....... 23Days remaining in November.................... 7Add days in December.. 31Add days in January..... 31Add days in February... 21Period of note in days. . 90

4. Days in December. . . 31Minus date of note....... 18Days remaining in December.................... 13Add days in January..... 17Period of note in days. . 30

5. $82,000 × 9% × 38/365 = $768.336. $60,000 × 10% × 13/365 = $213.70

d) 2011Dec. 31 Interest Receivable – Note 4.......... 213.70

Interest Revenue...................... 213.70Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.925 Fundamental Accounting Principles, Twelfth Canadian Edition

To accrue interest on Note 4.

e) 2012Jan. 17 Cash............................................60,493.15

Interest Revenue...................... 279.45Interest Receivable.................. 213.70Note Receivable – Note 4..........

60,000.00To record collection of Note 4 and interest;

60,000 x 10% x 30/365 = 493.15; 493.15 – 213.70 = 279.45.


Problem 10-11B (75 minutes) a.2011Nov. 16 Notes Receivable..........................3,700.00

Accounts Receivable—Bess Parker3,700.00

Dec. 31 Interest Receivable....................... 54.74Interest Revenue...................... 54.74

$3,700 × .12 × 45/365 = $54.74


2012Feb. 14 Cash............................................3,809.48

Interest Earned........................ 54.74Interest Receivable.................. 54.74Notes Receivable..................... 3,700.00

28 Notes Receivable..........................12,400.00Accounts Receivable—The Simms Co.

12,400.00Mar. 1 Notes Receivable..........................5,100.00

Accounts Receivable—Bedford Holmes5,100.00

30 Accounts Receivable—The Simms Co12,491.73


12,400.00$12,400 × .09 × 30/365 = $91.73.

b.Days in March.......... 31Minus date of note. . . 1Days remaining in March 30Add days in April...... 30Days to equal Maturity date 60

Therefore, the maturity date is April 30, 2012.

2012Apr. 30 Cash............................................5,183.84

Interest Revenue...................... 83.84Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.927 Fundamental Accounting Principles, Twelfth Canadian Edition

Notes Receivable..................... 5,100.00To record collection of note plus interest(5,100 × 60/365 × 10% = 83.84).


Problem 10-12B (30 minutes)2011

a.

Nov. 17

Notes Receivable – RoadWorks. . 45,000.00

Accounts Receivable – RoadWorks...............................

45,000.00

To record acceptance of 7%, 90-day note.

b.

Dec. 1

Notes Receivable – Ellen Huskey 8,000.00

Accounts Receivable – Ellen Huskey.....................................

8,000.00

To record acceptance of 7%, 4-month note.

2012c. Jan.

31Interest Receivable................... 740.59

Interest Revenue.................. 740.59 To record accrued interest; RoadWorks: 45,000 x 7% x 75/365 = 647.26; Huskey: 8,000 x 7% x 2/12 = 93.33 740.59

d.

Feb. 15

Cash......................................... 45,776.71

Notes Receivable – RoadWorks...............................

45,000.00

Interest Receivable.............. 647.26 Interest Revenue.................. 129.45 To record collection of note; 45,000 x 7% x 90/365 = 776.71; 776.71 – 647.26 = 129.45.

e.

Apr. 1


8,186.66

Interest Receivable.............. 93.33 Interest Revenue.................. 93.33 Notes Receivable – Ellen Huskey.....................................

8,000.00


To record dishonour of note; 8,000 x 7% x 2/12 = 93.33.

f. July 15

Allowance for Doubtful Accounts................................................

8,186.66


8,186.66

To record write-off of accounts receivable.

Analysis component:The credit balance in AFDA is $41,813.34 (50,000 – 8,186.66) after recording the July 15 write-off. Assuming no additional write-offs were recorded prior to year end, the large unused portion of AFDA indicates that write-offs were significantly less than expected.


*Problem 10-13B (30 minutes)Date Description Debit Credit

Mar. 1 Notes Receivable.......................... 5,100Accounts Receivable – Bolton Company

5,100

23 Cash............................................ 5,050Interest Expense.......................... 50

Notes Receivable..................... 5,100

June 21 Notes Receivable.......................... 9,300Accounts Receivable – Vince Soto

9,300

July 5 Cash............................................ 9,100Interest Expense.......................... 200

Notes Receivable..................... 9,300

Sept. 25 No entry required.

Analysis componentWhen a business discounts notes receivable with recourse and these notes have not matured prior to year end, the business must disclose this information in the notes to the financial statements. This is a requirement because the business has a contingent liability, which means that if the maker of the note dishonours (fails to pay) the note, the business will have to pay the third party the full maturity value. This contingent liability must be disclosed to satisfy the full-disclosure principle.


*Problem 10-14B (60 minutes)Jan. 10 Notes Receivable..........................3,000.00

Accounts Receivable—David Huerta3,000.00

Mar. 14 Accounts Receivable—David Huerta 3,059.18Interest Revenue...................... 59.18Notes Receivable..................... 3,000.00

$3000 × .12 × 60/365 = $59.18,

19 Notes Receivable..........................2,100.00Accounts Receivable—Rose Jones

2,100.00

28 Cash............................................2,075.38Interest Expense.......................... 24.62

Notes Receivable..................... 2,100.00Calculations:

Principal............................$2,100.00Interest = $2,100.00 × 0.10 × (90/365)


76.40Proceeds............................$2,075.38

June 20 No entry required

27 Cash............................................ 700.00Notes Receivable..........................1,300.00

Accounts Receivable—Jake Thomas2,000.00

July 24 Cash............................................1,308.86Interest Revenue...................... 8.86Notes Receivable..................... 1,300.00



16.78Proceeds............................$1,308.86


Aug. 29 Accounts Receivable—Jake Thomas1,345.64Cash.......................................... 1,345.64

Sept. 4 Notes Receivable..........................1,500.00Accounts Receivable—Ginnie Bauer

1,500.00

*Problem 10-14B (concluded)Oct. 13 Cash............................................1,514.82

Interest Revenue...................... 14.82Notes Receivable..................... 1,500.00



12.30Proceeds............................$1,514.82

Nov. 6 Accounts Receivable—Ginnie Bauer 1,547.12Cash........................................ 1,547.12

Dec. 6 Cash............................................1,561.11 Interest Revenue..................... 13.99 Accounts Receivable—Ginnie Bauer

1,547.12 1,547.12 x 11% x 30/365 = 13.99.

28 Allowance for Doubtful Accounts.. .4,404.82Accounts Receivable—David Huerta

3,059.18Accounts Receivable—Jake Thomas

1,345.64


ANALYTICAL AND REVIEW PROBLEMS

A&R Problem 10-1 (20 minutes)a)$97,000 (159,000 – 48,000 – 14,000)b)$90,000 (97,000 + 52,000 + 21,000 – 7,000 – 52,000 – × =

21,000)c) $168,000 (104,000 + 43,000 + 21,000)d)$104,000 (48,000 + 104,000 – 48,000)e)$207,000 (48,000 + 17,000 + 90,000 + 52,000)f) $237,000 [(–159,000 + 7,000 + 207,000 + 14,000) +

168,000]

g) Dec. 31 Bad Debt Expense....................... 17,010 Allowance for Doubtful Accounts

17,010 $168,000 × .02 = $3,360;

$14,000 + $3,360 – $350 = $17,010.

h) $3,360

i) Current assets:Accounts receivable.............................$168,000Less: Allowance for doubtful accounts. 3,360

$164,640OR

Current assets:Accounts receivable (net of $3,360estimated uncollectible accounts)........

$164,640

Analysis component:Farthington maintains an Accounts Receivable Subledger because keeping records by individual credit customer makes it easier to retrieve and track information such as which customers are/are not paying their accounts in a timely manner. Farthington might also maintain an accounts payable subledger to monitor credit with suppliers, an inventory subledger to monitor inventory, and a capital asset subledger to monitor capital assets.


A&R Problem 10-22011

Jan. 15 Accounts Receivable – JanCo. . . 29,000.00

Sales................................. 29,000.00

To record credit sales; terms 3/5, n15.

15 Cost of Goods Sold................. 25,000.00

Merchandise Inventory....... 25,000.00


16 Allowance for Doubtful Accounts................................

15,000

Accounts Receivable – Fedun....................................

15,000

Write-off uncollectible account.

20 Cash...................................... 28,130.00

Sales discounts...................... 870.00 Accounts Receivable – JanCo 29,000.

00 To record collection of credit sale within the discount period.

Mar. 1 Notes Receivable – Parker Holdings................................

12,000.00

Accounts Receivable – Parker Holdings................................

12,000.00

To record acceptance of 60-day, 7% note.

Apr. 15 Accounts Receivable – Commercial............................

71,000.00

Sales................................. 71,000.00

To record non-bank credit card sales.


15 Cost of Goods Sold................. 62,000.00

Merchandise Inventory....... 62,000.00


30* Cash...................................... 12,138.08

Notes Receivable – Parker Holdings................................

12,000.00

Interest Revenue............... 138.08 To record collection of note and interest; 12,000 x 7% x 60/365 = 138.08.

* Days in March 31Minus date of note 1Days remaining in March 30Days to equal 60 days or Maturity Date, April

30 30Period of the note in days 60

days


A&R Problem 10-2 (continued)May 7 Cash.................................. 70,290.0

0Credit Card Expense........... 710.00 Accounts Receivable – Commercial........................

71,000.00

To record collection of credit card receipts; 71,000 x 1% = 710.

Nov. 1 Notes Receivable – Grant Company...........................

24,000.00

Accounts Receivable – Grant Company..................

24,000.00

To record acceptance of 3-month, 6% note.

Dec. 31

Interest Receivable............ 240.00

Interest Revenue........... 240.00 To record accrued interest; 24,000 x 6% x 2/12 = 240.

31 Bad Debt Expense.............. 8,100.00

Allowance for Doubtful Accounts...........................

8,100.00

To record estimated uncollectible accounts; 9,700 – 1,600 – 8,100.

2012Feb. 1 Accounts Receivable – Grant

Company...........................24,360.00

Interest Receivable........ 240.00 Interest Revenue........... 120.00 Notes Receivable – Grant Company...........................

24,000.00

To record dishonour of note; 24,000 x 6% x 1/12 = 120.

Mar. 5 Accounts Receivable – Derek 1,500.


Holston............................. 00 Allowance for Doubtful Accounts...........................

1,500.00

To reverse write-off.

5 Cash.................................. 1,500.00

Accounts Receivable – Derek Holston

1,500.00

To record collection of account previously written off.

14 Allowance for Doubtful Accounts...........................

24,360.00

Accounts Receivable – Grant Company

24,360.00

To record write-off.


A&R Problem 10-2 (concluded)Analysis component:A change in the receivable turnover from 7 to 7.5 in 2011 to 2012 is favourable and indicates that receivables are being collected more quickly which has a positive effect on cashflow.

Ethics ChallengeEC 10-11. If the estimate for bad debts is reduced then a lower bad

debt expense will be recognized on the Income Statement resulting in a higher net income. Also a smaller allowance will be shown on the Balance Sheet which will result in a higher realizable value for receivables and, therefore, a larger amount of current, liquid assets.

2. Often accounting procedures allow for alternate accounting treatments or require the use of estimates. Therefore executives have some leeway in their application of accounting procedures. In this case it seems reasonable to doubt the motivation behind the CEO’s recommendation for a lower bad debt expense. There does not appear to be any economic or business justification for the change in estimate aside from the self-interest of the CEO.

3. An effective board of directors will be aware of alternate accounting treatments and how estimates can affect the financial statements. The board should review the reasonableness of the CEO’s and controller’s estimates for bad debt expense. Also, the external auditors will review the estimate for reasonableness as part of their annual review.


Focus on Financial StatementsFFS 10-1

Dover Plumbing Sales and ServiceBalance SheetMarch 31, 2011

Assets Current assets: Cash1....................................................... $

36,400 Accounts receivable................................. $28,00

0 Less: Allowance for doubtful accounts. 4,20

023,800

Merchandise inventory............................ 26,000 Prepaid insurance................................... 3,800 Prepaid rent............................................ 6,500 Total current assets................................. $

96,500

Long-term investments: Notes receivable, due December 1, 2013. . 14,00

0

Property, plant and equipment: Tools..................................................... $82,00

0 Less: Accumulated amortization.......... 11,00

0$71,00

0 Truck.................................................... $67,00

0 Less: Accumulated amortization.......... 14,00

0 53,00

0 Total property, plant and equipment...... 124,

000 Total assets................................................ $234,

500

Liabilities Current liabilities: Accounts payable.................................. $

7,800 Salaries payable................................. 1,100 Unearned plumbing fees..................... 9,000 Notes payable, due February 1, 2012..... 6,000


Total current liabilities........................ $23,900

Long-term liabilities: Notes payable, due August 31, 2014...... 17,00

0 Total liabilities......................................... $

40,900

Owner’s Equity Clara Dover, capital.................................. 193,6

00 Total liabilities and owner’s equity.............. $234,

500

Calculations:1. Cash of $36,000 was combined with Petty cash of $400 = $36,400


FFS 10-1 (concluded)Analysis component:

2011 2010$23,800/$114,000 × 365 = 76.20 days

$21,200/$86,000 × 365 = 89.98 days

Dover has fewer receivables at March 31, 2011 than at March 31, 2010 indicating that it has become more efficient in collecting receivables. This is a favourable change especially considering that sales are at a higher level in 2011 than in 2010.

FFS 10-2

1. Accounts receivable is a current asset. It results from credit sales to customers.

2. Danier’s receivables decreased in total by $32 (thousand) or 5.11% (32,000/626,000 × 100), which is more than the corresponding decrease in revenue of $892 (thousand) or 0.51% (892,000/175,270,000 × 100). It would seem logical that if revenue decreased, receivables would also decrease.


Critical Thinking QuestionCT 10-1Note to instructor: Student responses will vary therefore the answer here is only suggested and not inclusive of all possibilities; it is presented in point form for brevity.

This mini-case is based on a real life situation where the external auditor detected a fraud perpetrated for the purpose of ensuring that the bank did not call in a loan because the required quick ratio was not being maintained.

Problem(s):— To determine if Delta Designs should be approved for a

$600,000 loan Goal(s)*:

— To review information provided by Delta Designs to determine if a loan should be granted or not

Assumption(s)/Principle(s):— Information provided by Delta Designs should be based

on GAAPFacts:

— as presented— If sales, all on credit, occur evenly throughout the year,

that averages out to $331,667/month (3,980,000/12 = 331,667).

— 85% or $401,200 of the receivables balance are not yet due (472,000 × 85% = 401,200)

— The receivables not yet due is 21% (402,200 – 331,667 = 70,533/331,667 × 100) greater than the average monthly sales on credit; receivables not yet due should be less than the average monthly sales on credit

Conclusion(s)/Consequence(s):— The accounts receivable balance needs to be

investigated as it appears that it is inflated (whether the overstatement is intentional or not also needs to be determined which, if intentional, may have legal implications for Delta Designs and, whether intentional or not, will likely cause the bank to impose consequences)


*The goal is highly dependent on “perspective.”


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