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CHAPTER 6: CASH, TEMPORARY INVESTMENTS, ACCOUNTS RECEIVABLE and NOTES RECEIVABLE PROBLEM SOLUTIONS
Assessing Your Recall6.1 Cash:
Probable Future Value – The probable future value in cash is the ability of the cash to be exchanged for goods and services in the future.Ownership – Ownership is evidenced by possession of currency and by the right to control bank accounts.Temporary Investments:Probable Future Value - The probable future value in temporary investments is the cash payments that will be received from the investments in the future. These payments take the form of dividends in the case of shares and interest in the case of debt as well as the ultimate sales price of the securities when they are sold.Ownership – Ownership is evidenced by share or debt certificates although sometimes these documents are not distributed to the owners but a record is kept by the brokerage house that handles the investments for the company.Account Receivable:Probable Future Value – The probable future value in accounts receivable is that they represent the right to receive cash at some (usually fixed) date in the future. The cash, in turn, has value in the ability to be exchanged for goods and services in the future.Ownership – Ownership is evidenced by contracts either written or implied between the buyer and the seller. Invoices and shipping documents usually provide the necessary evidence of proof that a receivable exits.Notes Receivable:Probable Future Value – The probable future value in notes receivable is that they represent the right to receive cash, either upon demand or at some fixed date in the future. The cash, in turn, has value in the ability to be exchanged for goods and services in the future.Ownership – Ownership is evidenced by a promissory note, or written contract between the maker and the payee.
6.2 The unit-of-measure assumption in accounting means that elements of the financial statements are to be measured using a common unit. That unit in Canada is the dollar. In most countries the unit-of-measure is the domestic currency.
6.3 Purchasing power risk is present for cash because when cash is held during periods of inflation the purchasing power of the dollar decreases. For example, if $100 is held in cash during a year of a price increase of 10% the $100 will buy 10% fewer goods and services
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at the end of the year, than at the beginning. Inventory, on the other hand, is not fixed in terms of the number of dollars that it represents. The value of the inventory can fluctuate with changing prices. If $100 worth of inventory was held during a year in which prices increased 10% it is possible that the price of the inventory could be raised to $110 to compensate. There may be supply and demand reasons why the price of inventory could not be raised to the full $110. If this is so then the inventory may be subject to some purchasing power risk but not to the same degree as cash.
6.4 At the end of every account period the accountant evaluates the cost and the current market value of the temporary investments portfolio. The book value of the portfolio at the end of the period must be the lower of the cost and market value. After this determination is made the carrying value of the portfolio (its cost less the current value in the valuation allowance account) is adjusted upwards or downwards to reflect the proper value at the end of the period. The adjustment is reported as an unrealized loss if the value of the portfolio is written down and an unrealized recovery if the value is written up.
6.5 The primary consideration in deciding if an investment should be classified as current or noncurrent is management’s intention. If management intends to hold the investment for more than one year, the investment should be classified as noncurrent. Otherwise, the investment should be classified as current as long as it can be sold.
6.6 The direct write-off method recognizes bad debt expense (loss) in the period in which the receivable is determined to be unrecoverable, not necessarily in the period in which the original sale was made. This creates a matching problem. The allowance method estimates and records the bad debt expense in the period of the original sale. This method provides a proper matching of the revenues and expenses (bad debt expense) from the sale and is the method that is most consistent with GAAP. The direct write-off method can be used f the results of applying it are not materially different from the results of applying the allowance method.
6.7 Two ratios that measure liquidity are the current ratio and the quick ratio. Both compare current assets to current liabilities, with the current ratio comparing total current assets and the quick ratio comparing total current assets less inventories and prepaid expenses. Both provide information on the ability of the company to pay its current liabilities, with the quick ratio providing more conservative information.
6.8 The accounts receivable turnover ratio measures the “turnover” of the accounts receivable in a year. This measures the average number of times the total accounts receivable could have been collected in full during the year. This ratio provides a measure of the efficiency of the
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collection of the accounts receivable, with larger ratios indicating faster collections, on average.
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Applying Your Knowledge
6.9 a)Comet Company
Bank ReconciliationJuly 31, 20x2
Balance per bank statement $7,582.45Add: Outstanding deposit 1,532.02
9,114.47Less: Outstanding cheques
#466 $1,250.00#467 520.00#468 360.50#470 1,350.75 3,481.25
Adjusted cash balance $5,633.22
Balance per general ledger $4,643.22Add: Collection of note receivable 1,015.00
5,658.22Less: July service charge 25.00Adjusted cash balance $5,633.22
b) At July 31, Comet actually has $5,633.22 in its account.
c) SE-Bank service charges 25.00A-Cash 25.00
A-Cash 1,015.00A-Note receivable 1,000.00SE-Interest revenue 15.00
6.10 a) deducted from cash balance b) deducted from cash balance
c) deducted from cash balanced) added to bank balancee) not included in the bank reconciliation because both Walters and the bank have recorded the transactionf) deducted from cash balanceg) added to cash balanceh) not included in the bank reconciliation because both Walters
and the bank have recorded the transactioni) deducted from the bank balancej)
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Peter HayesBank Reconciliation
Balance per bank statement $1,280Less: Outstanding cheques 432 Adjusted cash balance $ 848
Balance per cheque book $ 840Add: automatic deposit 50
890Less: error in recording cheque $18
NSF cheque 15 33857
Less: service charge ($857 - $848) 9Adjusted cash balance $ 848
6.12 a) Investment Cost MarketGreen Company $2,500 $2,600White Company 8,000 6,400
$10,500 $9,000
The investments will be reported at $9,000, the lower of cost and market.
b) On the balance sheet, an account titled valuation allowance for
temporary investments appears as a $1,500 ($10,500 - $9,000) offset to temporary investments. On the income statement, an unrealized loss on the valuation of temporary investments is recognized, also in the amount of $1,500.
6.13 a)Income from operations $45,000Add: dividend income 9001
Deduct: unrealized loss on temporary investments (1,500)Net income $44,4001(100 x $2) + (200 x $3.50) = $900
b)Return on investments = $900 / $10,500 = 8.57%Duggan Company did not attain its goal of attaining a 10% annual return on its investments.
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6.14 a) No journal entries are required for June 30th or December 31st because on both occasions, the market value of the Meta-Solid shares were higher than the original cost. Note: brokerage fees have been added to (or subtracted from) the cost of the shares purchased (or sold).
March 25 A-Investment in Meta-Solid 50,500 A-Cash 50,500
August 15 A-Dividends receivable 1,250 SE-Dividend income 1,250
October 25 A-Cash 1,250 A-Dividends receivable 1,250
February 18 A-Cash 12,175 A-Investment in Meta-Solid
10,100
SE-Gain on sale of temporary investments
2,075
b) At December 31, 20x1, the temporary investments would appear on the balance sheet at their original cost of $50,500 (2500 x $20.20 per share)
6.15 a) Dec 31, 20x1
SE-Unrealized loss on valuation of temporary investments
40,000
XA-Valuation allowance for temporary Investments
40,000
Dec 31, 20x2
XA-Valuation allowance for temporary investments
20,000
SE-Recovery of unrealized loss on valuation of temporary investments
20,000
Dec 31, 20x3
XA-Valuation allowance for temporary investments
20,000
SE-Recovery of unrealized loss on valuation of temporary investments
20,000
Dec 31, SE-Unrealized loss on valuation of 5,000
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20x4 temporary investments XA-Valuation allowance for temporary investments
5,000
b)Dec 31, 20x1 $210,000
20x2 280,00020x3 320,00020x4 345,000
6.16 a) Investment Cost MarketJack $22,500 $20,500Queen 15,000 19,000King 50,000 47,500
$87,500 $87,000
Aggregate cost $87,500Aggregate market value 87,000Unrealized loss $ 500
At December 31, 2000, the net investments would be reported at the market value of $87,000.
b) On the balance sheet, an account titled valuation allowance for temporary investments appears as a $500 offset to temporary investments. On the income statement, an unrealized loss on the valuation of temporary investments is recognized, also in the amount of $500.
6.17 a)
Income from operations $640,000Add: dividend income 12,0001
Deduct: unrealized loss on temporary investments (500)Net Income $651,5001 (500 x $5) + (500 x $7) + (500 x $12) = $12,000
b)Return on investments = $12,000 / $87,500 = 13.71%Upper Company did not attain its goal of attaining a 20% annual return on its investments.
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6.18 a)Mar. 13, 20x1
A-Temporary Investments 35,000
A-Cash 35,000
June 24, 20x1 A-Temporary Investments 65,000 A-Cash 65,000
Dec 31, 20x1 SE-Unrealized loss on valuation of temporary investments
2,000
XA-Valuation allowance for temporary investments
2,000
May 27, 20x2 A-Cash 70,000 A-Temporary investments 65,000 SE-Realized gain on sale of temporary investments
5,000
Oct. 8, 20x2 A-Temporary investments 95,000 A-Cash 95,000
Dec 31, 20x2 XA-Valuation allowance for temporary investments
2,000
SE-Recovery of unrealized loss on valuation of temporary investments
2,000
Aug 3, 20x3 A-Temporary investments 100,000 A-Cash 100,000
June 30, 20x3 A-Cash 105,000 A-Temporary investments 100,000 SE-Realized gain on sale of
temporary investments 5,000
Dec. 31, 20x3
SE-Unrealized loss on valuation of temporary investments
7,000
XA-Valuation allowance for temporary investments
7,000
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b) Income Statement
20x1 20x2 20x3Unrealized loss on valuation of T.I. (2,000) 0 (7,000)Recovery of unrealized loss on valuation of T.I.
2,000
Realized gain (loss) on sale of investments
5,000 5,000
Effect on Net Income of Temporary Investments (2,000) 7,000 (2,000)
Balance Sheet20x1 20x2 20x3
Temporary investments (at cost) 100,000 130,000 130,000Less: valuation allowance (2,000) 0 (7,000)Temporary investments (LCM)
98,000 130,000 123,000
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6.19 Faun & Faun Inc.a)
Selling Price $50,000Add: Loss on Sale 5,650Cost Price $55,650
Journal Entry for SalesA-Cash 50,000SE-Loss on Sale of temporary investments 5,650
A-Temporary investments 55,650
b)Temporary Investments: Ending Balance (at cost) $313,000Less: Purchases during 20x2 85,000
228,000Add: Sales during 20x2 55,650Opening Balance (at cost) $283,650
c) Valuation Allowance for TemporaryEnding Balance (20x2) 13,000Less: Unrealized loss on valuation 3,850Beginning balance 9,150
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6.20 a) 20x1 SE-Bad debt expense 3,000
XA-Allowance for doubtful accounts 3,000 (50,000 / 0.25) x 0.015
20x2 XA-Allowance for doubtful accounts 500A-Accounts receivable 500
A-Accounts receivable 500XA-Allowance for doubtful accounts 500
A-Cash 500A-Accounts receivable 500
b)Accounts receivable in Balance Sheet, December 31, 20x1
Accounts receivable $50,000Allowance for doubtful accounts (3,000)
$47,000
6.21 a)Allowance for doubtful accounts = $22,500
03 x 750,000Less: amount written-off (12,000)Allowance for doubtful accounts $10,500
b)Accounts receivable $70,000Less: allowance for doubtful accounts (10,500)
$59,500c) The balance in the allowance for doubtful accounts might not be reasonable if the collectibility of Dundee’s receivables is not reflective of the industry. This could occur if Dundee’s customers are less reliable, or if Dundee’s policies for checking and extending credit are more lenient. Furthermore, setting up an allowance for doubtful accounts based on a percentage of credit sales is unlikely to result in a close estimate of the accounts that will actually be uncollectible. Instead, basing the allowance for doubtful accounts upon specific customer balances that are overdue (i.e. an aging schedule) might results in a better valuation of accounts receivable.
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6.22 a) SE-Bad debt expense 172,000
XA-Allowance for doubtful accounts 172,00021,500,000 x 0.8 x 0.01
b) Accounts receivable $1,348,000Allowance for doubtful accounts (183,000)
Accounts receivable, net $1,165,000
c) Bad debt expense for year ending October 31, 20x1: $172,000
6.23 a) SE-Bad debt expense 31,250 XA-Allowance for doubtful accounts 31,250 $1,250,000 x .025 = $31,250b)
Allowance for doubtful accounts18,500 2% x 925,000
Write off 20x1 5,65012,850 Balance 20x1
Write off 20x2 19,200 31,250 20x2 allowance
24,900 Balance 20x2c) Accounts receivable, December 31, 20x2 $138,000Allowance for doubtful accounts (24,900)Accounts receivable, net $113,100
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6.24 a) March 12 A-Note receivable 10,000
A-Accounts receivable 10,000
August 31 A-Interest receivable 550 SE-Interest revenue 550
$10,000 x .11 x 6/12 = $550
b)A-Cash 10,825
A-Note receivable 10,000 A-Interest receivable 550
SE-Interest revenue 275$10,000 x .11 x 3/12 = $275
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6.25 a) Feb. 1 A-Note receivable 18,040.00 SE-Sales 18,040.00
June 30 A-Interest receivable 1,052.33 SE-Interest revenue 1,052.33
$18,040 x .14 . 5/12 = $1,052.33
Aug. 1 A-Cash 19,302.80A-Note receivable 18,040.00A-Interest receivable 1,052.33SE-Interest revenue 210.47
$18,040 x .14 x 1/12 = $210.47
b)June 30, 2000 Balance sheetNote receivable $18,040 Interest receivable 1,052
June 30, 2000 Income statementSales $18,040Interest revenue 1,052 (These amounts have been shown without the cents to simulate the rounding that occurs on financial statements.)
6.26 a) Interest earned at December 31, 2000 = Principal x rate x time
= $2,800 x 9% x 3/12 = $63
Interest earned at time note is due = Principal x rate x time
= $2,800 x 9% x 4/12= $84
b)Dec. 31, 2000 A-Interest receivable 63
SE-Interest revenue 63
Jan. 30, 2001 A-Cash 2,884A-Note receivable 2,800A-Interest receivable 63SE-Interest revenue 21
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6.27 a)Current ratio = 25,000 + 70,000 + 10,000 + 210,000 +
30,00045,000 + 20,000 + 25,000 + 6,000 +
60,000= 345,000
156,000= 2.21
Quick ratio = 345,000 - 210,000 - 30,000156,000
= 0.67
b) The company has been successful in achieving its desired results in terms of the current ratio, but it did not meet its target of 1.0 for the quick ratio.
c) The company could improve its current position through reducing its substantial investment in inventory, so long as the resulting effect on sales is not severe. Reducing the inventory levels would free up some cash, and thus enable the company to better meet its current obligations. In addition, Liquid Company could attempt to reduce its current levels of short-term liabilities, which would also improve its current position.
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6.28 a) Faraday Products Company
Balance SheetAt Year end
Current AssetsCash $44,000Accounts receivable 62,000Inventory 80,000Tax refund receivable 3,000Prepaid insurance 5,000Total current assets 194,000
Noncurrent AssetsLand 45,000Building and equipment $230,000Less: accumulated amortization 90,000 140,000Trademarks 35,000Total noncurrent assets 220,000
Total Assets $414,000
Current LiabilitiesAccounts payable $47,000Wages payable 20,000Taxes payable 16,000Unearned service revenue 26,000Total current liabilities 109,000
Noncurrent LiabilitiesBonds payable 125,000
Total Liabilities 234,000
Shareholders’ EquityCommon shares 120,000Retained earnings 60,000Total shareholders’ equity 180,000
Total Liabilities and Shareholders’ Equity $414,000
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b) Working capital = $194,000 - $109,000 = $85,000c) Current ratio, beginning of period = $120,000 / $55,000 = 2.18
Current ratio, end of period = $194,000 / $109,000 = 1.78The current ratio has declined during the period, since the current assets represent a smaller multiple of the current liabilities at the end of the period than at the beginning of the period.
d) The ending working capital of $85,000 is $20,000 more than the beginning working capital balance of $65,000. While working capital has increased by $20,000, the overall liquidity has declined. The ratio of current assets to current liabilities has declined because current liabilities have increased proportionally more than current assets.
e) Faraday management should prepare a careful analysis of projected cash flows to determine if it needs to take action to avoid future difficulties. In addition, it should compare its current working capital position and overall liquidity to prior years, and to other companies in the same industry.
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6.29Smythe Company
Cash Flow StatementYear ended December 31, 2000
Operating Activities:Net income $ 1,635Add back amortization 1,000Increase in accounts receivable (45)Increase in inventory (450)Increase in accounts payable 150Net cash provided by operating activities 2,290
Investing Activities:Purchase of property, plant and equipment 2,200
Increase in cash $ 90Cash position*, beginning of yearCash $ 500Temporary investments 450
$ 950Cash position, end of year
Cash $ 540Temporary investments 500
1,040Increase in cash $ 90
*NOTE: Recall that cash position in the Cash Flow Statement includes both cash and temporary investments.
Management Perspective Problems
6.30 A stock option plan that rewards managers for achieving a certain level of
reported net income has the potential to influence management’s assessment of the collectibility of its accounts receivable. For example, if management determines that the year-end balance of accounts receivable is collectible in full, then no bad debt expense is booked, and the reported net income is higher as a result.
6.31 A loan officer is likely to be interested in the market value of temporary
investments because this method provides a better indication of the cash that will be available to settle the loan than the historical cost basis. The use of market value might be
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preferred over the use of the lower of cost and market method because this method is consistent regarding both upward and downward fluctuations in the market, and reflects the realizable value of the temporary investments at the balance sheet date. On the other hand, the lower of cost and market method results in the minimum realizable amount from selling the temporary investments, and is a more conservative estimate of the cash that will be available for settlement of the loan.
6.32 A bank reconciliation is important for the management of cash because it keeps the company up to date in terms of recording all transactions that affect its cash balance. In doing so, the company can assess its need for cash, or perhaps plan short-term investments in order to earn a return on excess cash. A bank reconciliation is also a good internal control over cash because its basic function is to reconcile independent records of the same bank account.
6.33 a)A-Accounts receivable 1,250,000 SE-Sales
1,250,000
A-Cash 1,050,000 A-Accounts receivable 1,050,000
SE-Bad debt expense 37,500XA-Allowance for doubtful accounts 37,500
XA-Allowance for doubtful accounts 18,000A-Accounts receivable 18,000
b)Balance Sheet, December 31, 2001Accounts receivable $432,000Allowance for doubtful accounts (41,500)Accounts receivable, net $390,500
c) The only information available in evaluating the adequacy of Baltic’s allowance for doubtful accounts at December 31, 2001 is the value of the receivables written-off during 2001, the ending balance in receivables, and prior year-end information. In this case, bad debt expense of $37,500 was recorded and, as of December 31, 2001, $18,000 of accounts have been written-off. It would be very useful to analyze the remaining balance in accounts receivable to arrive at an estimate of the additional
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amount that is uncollectible. An allowance of $41,500 remains at December 31, 2001, while $22,000 remained at December 31, 2000. Based on the accounts receivable balance at those related points in time, the allowance as a percentage of accounts receivable was 9.6% (2001) and 8.8% (2000), representing approximately a 0.8% increase in the allowance percentage. It appears that the amounts of bad debt expense and allowance for doubtful accounts might be adequate based on the available information. Further analysis might reveal that an adjustment (additional charge) is appropriate.
6.34 a) and b)2001 2000 1999
Allowance for doubtful accounts
$128.9 $121.9 $118.0
Total accounts receivable $1,598.7 $1,352.5 $1,162.8% considered uncollectible
8.06% 9.01% 10.15%
Bad debt expense $312.4 $271.5 $267Sales $12,661.8 $11,367.8 $10,420Bad debt expense as a % of sales
2.47% 2.39% 2.56%
c) Although the actual number of write-offs in dollars has fluctuated during the three year period, the highest percentage of accounts written off in relation to either accounts receivable or operating revenues was in 1999. It appears from the following analysis that Lowrate improved considerably in 2000 and is doing roughly the same in 2001:
2001 2000 1999Accounts written off / sales 2.45% 2.38% 2.85%Accounts written off / accounts receivable
19.38%
19.98% 25.52%
d) Lowrate Communications records revenue and an account receivable when it bills its customers. Since customers are not liable for calls that were not made by the customers due to car phone theft, cloning, etc., Lowrate removes these charges from the customers’ accounts and must reduce receivables. At the same time, the company must record a reduction in recorded revenue, reduce the allowance for doubtful accounts, or establish an expense account (bad debt). Another option would be to establish one or more separate expense accounts in which these losses are recorded to track them more closely. It is not readily apparent from the financial data presented how
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Lowrate handles this situation. However, if it is handled through the allowance for doubtful accounts, we would expect the amounts reported as bad debts, the allowance for doubtful accounts, and the amount actually written off to increase.
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Reading and Interpreting Published Financial Statements
6.35 a) Short-term investments are included with the cash because, as stated in the notes to the financial statements, the investments are capable of prompt liquidation and mature in less than one year. According to GAAP, the short-term investments must mature within 90 days from the balance sheet date in order to be classified as cash. b) Air Canada appears to keep the minimum amount of cash on
hand by depositing any excess in interest-bearing accounts to earn interest on unused cash.
6.36 Cash can include short-term marketable securities if the securities are held
only as a substitute for cash and as long as the investments are readily marketable. Many companies do not allow their excess cash to remain in bank accounts where they do not earn interest but use the cash to invest in temporary investments where they can earn interest and dividends. If this is the case, then these temporary investments are treated as if they are cash.
6.37 1997 Accounts receivable turnover= $38,853 / $11,250 = 3.45365 / 3.45 = 105 days
1998 Accounts receivable turnover= $40,672 / $9,489 = 4.29365 / 4.29 = 85 days
Mosaid’s accounts receivable turnover increased from 1997 to 1998 meaning that it took less time to collect accounts receivable in 1998 than it did in 1997 (85 days versus 105 days). It is not known how many days Mosaid gives its customers to pay for goods and/or services. It is, therefore, difficult to determine if 85 to 105 days is reasonable. We also do not know if all of the sales are on credit. If some of them were cash sales, the turnover ratio would decline even further which would mean that the number of days to collection would be longer than 85.
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6.38 a) Percentage uncollectible in 1997 = $7/ $249 = 2.8%
Percentage uncollectible in 1998 = $12/ $334 = 3.6%
b) Accounts receivable turnover 1997$1,938 / $242 = 8.0 365/8.0 = 46 days
Accounts receivable turnover 1998$2,348 / $322 = 7.3 365/7.3 = 50 days
c) Journal entries for 1998A-Accounts receivable 2,348
SE-Sales 2,348
A-Cash 2,268A-Accounts receivable 2,268
$2,348 + $242 - $322 = $2,268
SE-Bad debt expense 5*XA-Allowance for doubtful accounts 5
*No information is given about the actual write off of accounts receivable during 1998. It is probable that the debit to bad debt expense was actually higher.
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6.39 a) Percentage uncollectible in 1996 = $9/ $301 = 3.0%Percentage uncollectible in 1997 = $3/ $270 = 1.1%Percentage uncollectible in 1998 = $3/ $193 = 1.6%
b) The following are possible explanations for the decrease in the allowance for doubtful accounts:
1. Suncor had fewer sales on credit. This is doubtful in that Suncor is an oil and gas company and probably has no cash sales.
2. The economy may have changed such that customers are less likely to default.
3. Suncor may be more thorough in its credit checks of customers which would improve the collectibility.
c) Accounts receivable turnover 1997$2,148 / ($292 + $267)/2 = 7.7
365/7.7 = 47 days
Accounts receivable turnover 1998$2,068 / ($267 + $190)/2 = 9.1
365/9.1 = 40 days
Suncor is collecting its accounts receivable in a shorter time, 40 days, in 1998, as compared to 1997 when it collected its accounts receivable on average every 47 days.
d) Journal entries for 1998A-Accounts receivable 2,068
SE-Sales 2,068
A-Cash 2,145A-Accounts receivable 2,145
$2,068 + $267 - $190 = $2,145
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6.40 a) Securitized accounts receivable probably means that the accounts receivable of Sears have been pledged as security on a loan, and thus represents a restricted asset that is not available for extinguishing other liabilities, financing investments in inventory, or for other purposes. b) Sears protects itself from customers defaulting in amounts
charged against credit cards through the use of a credit card company to absorb some of the losses. It charges a high rate of interest on outstanding balances which helps cover losses. It also has the option of reclaiming merchandise that has not been paid for.
Beyond the Book
6.41 Answers to this question will depend on the company selected.
6.42 Answers to this question will depend on the company selected.
Case6.43 Saintjay is experiencing a steady increase in sales, from $12,700
to $14,100 to $17,000 over the three years, but its cash is steadily decreasing, from $310 to $50 to $10. The main reasons for this are the large increases in accounts receivable and inventories. The accounts receivable turnover is steadily decreasing, from 10.8 to 9.3 to 8.6 This might indicate that Saintjay either is increasing its sales by granting easier credit or is experiencing serious problems in its accounts receivable department, especially in collections. Sainjay management should review this situation and take corrective action. They should also determine why inventories are increasing so rapidly. Inventories increased over 56% over the three years while sales on credit increased only 35%.
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Critical Thinking Questions
6.44 a)
A-Temporary investments 1,650 A-Cash 1,650
A-Cash 5,388A-Temporary investments 1,650SE-Gain on sale of investments 3,738
b) No changes occurred in the investments in 1998, because the investment
account on the balance sheet remains unchanged from 1997. In addition, the statements of changes in financial position indicate that no sale or purchase of investments occurred in 1998. However, it is confusing because a balance does exist beside the item titled change in noncash working capital related to investments.
6.45 a) Semi-Tech records the installment receivables at the full value, including carrying charges, then reduces this full value by the amount of the unearned carrying charges and allowance for doubtful accounts. Thus the balance sheet figure shows the net amount that is net of the unearned carrying charges and the amounts expected not to be collectible. b) Semi-Tech could record the installment receivables at their
full value, including the carrying charges, but this method would not be correct as the carrying charges represent interest that has not yet been earned. Semi-Tech could also have used the installment method which would have delayed the recognition of the revenue until the cash was collected. No accounts receivable would have been reported under this method.
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