Chapter Review
9-9cDiscussion Questions
1. What are the three classifications of receivables?
2. Dan’s Hardware is a small hardware store in the rural township of Twin Bridges. It rarely extends credit to its customers in the form of an account receivable. The few customers who are allowed to carry accounts receivable are long-time residents of Twin Bridges with a history of doing business at Dan’s Hardware. What method of accounting for uncollectible receivables should Dan’s Hardware use? Why?
3. What kind of an account (asset, liability, etc.) is Allowance for Doubtful Accounts, and is its normal balance a debit or a credit?
4. After the accounts are adjusted and closed at the end of the fiscal year, Accounts Receivable has a balance of $673,400 and Allowance for Doubtful Accounts has a balance of $11,900. Describe how the accounts receivable and the allowance for doubtful accounts are reported on the balance sheet.
5. A firm has consistently adjusted its allowance account at the end of the fiscal year by adding a fixed percent of the period’s sales on account. After seven years, the balance in Allowance for Doubtful Accounts has become very large in relation to the balance in Accounts Receivable. Give two possible explanations.
6. Which of the two methods of estimating uncollectibles provides for the most accurate estimate of the current net realizable value of the receivables?
7. Neptune Company issued a note receivable to Sailfish Company. (a) Who is the payee? (b) What is the title of the account used by Sailfish Company in recording the note?
8. If a note provides for payment of principal of $85,000 and interest at the rate of 6%, will the interest amount to $5,100? Explain.
9. The maker of a $240,000, 6%, 90-day note receivable failed to pay the note on the due date of November 30. What accounts should be debited and credited by the payee to record the dishonored note receivable?
10. The note receivable dishonored in Discussion Question 9 is paid on December 30 by the maker, plus interest for 30 days at 9%. What entry should be made to record the receipt of the payment?
9-9dPractice Exercises
PE 9-1A
Direct write-off method
1. Obj. 3
Example Exercise 9-1
Journalize the following transactions, using the direct write-off method of accounting for uncollectible receivables:
| Apr. 15. |
|
Received $800 from Jean Tooley and wrote off the remainder owed of $1,200 as uncollectible. |
| Aug. 7. |
|
Reinstated the account of Jean Tooley and received $1,200 cash in full payment. |
PE 9-1B
Direct write-off method
1. Obj. 3
Example Exercise 9-1
Journalize the following transactions, using the direct write-off method of accounting for uncollectible receivables:
| Oct. 2. |
|
Received $600 from Rachel Elpel and wrote off the remainder owed of $1,350 as uncollectible. |
| Dec. 20. |
|
Reinstated the account of Rachel Elpel and received $1,350 cash in full payment. |
PE 9-2A
Allowance method
1. Obj. 4
Example Exercise 9-2
Journalize the following transactions, using the allowance method of accounting for uncollectible receivables:
| Apr. 15. |
|
Received $800 from Jean Tooley and wrote off the remainder owed of $1,200 as uncollectible. |
| Aug. 7. |
|
Reinstated the account of Jean Tooley and received $1,200 cash in full payment. |
PE 9-2B
Allowance method
1. Obj. 4
Example Exercise 9-2
Journalize the following transactions, using the allowance method of accounting for uncollectible receivables:
| Oct. 2. |
|
Received $600 from Rachel Elpel and wrote off the remainder owed of $1,350 as uncollectible. |
| Dec. 20. |
|
Reinstated the account of Rachel Elpel and received $1,350 cash in full payment. |
PE 9-3A
Percent of sales method
1. Obj. 4
Example Exercise 9-3
At the end of the current year, Accounts Receivable has a balance of $3,750,000, Allowance for Doubtful Accounts has a credit balance of $22,750, and sales for the year total $48,400,000. Bad debt expense is estimated at ¾ of 1% of sales.
Determine (a) the amount of the adjusting entry for uncollectible accounts; (b) the adjusted balances of Accounts Receivable, Allowance for Doubtful Accounts, and Bad Debt Expense; and (c) the net realizable value of accounts receivable.
PE 9-3B
Percent of sales method
1. Obj. 4
Example Exercise 9-3
At the end of the current year, Accounts Receivable has a balance of $3,460,000, Allowance for Doubtful Accounts has a debit balance of $12,500, and sales for the year total $46,300,000. Bad debt expense is estimated at ½ of 1% of sales.
Determine (a) the amount of the adjusting entry for uncollectible accounts; (b) the adjusted balances of Accounts Receivable, Allowance for Doubtful Accounts, and Bad Debt Expense; and (c) the net realizable value of accounts receivable.
PE 9-4A
Analysis of receivables method
1. Obj. 4
Example Exercise 9-4
At the end of the current year, Accounts Receivable has a balance of $3,750,000, Allowance for Doubtful Accounts has a credit balance of $22,750, and sales for the year total $48,400,000. Using the aging method, the balance of Allowance for Doubtful Accounts is estimated as $390,000.
Determine (a) the amount of the adjusting entry for uncollectible accounts; (b) the adjusted balances of Accounts Receivable, Allowance for Doubtful Accounts, and Bad Debt Expense; and (c) the net realizable value of accounts receivable.
PE 9-4B
Analysis of receivables method
1. Obj. 4
Example Exercise 9-4
At the end of the current year, Accounts Receivable has a balance of $3,460,000, Allowance for Doubtful Accounts has a debit balance of $12,500, and sales for the year total $46,300,000. Using the aging method, the balance of Allowance for Doubtful Accounts is estimated as $245,000.
Determine (a) the amount of the adjusting entry for uncollectible accounts; (b) the adjusted balances of Accounts Receivable, Allowance for Doubtful Accounts, and Bad Debt Expense; and (c) the net realizable value of accounts receivable.
PE 9-5A
Note receivable
1. Obj. 6
Example Exercise 9-5
Lundquist Company received a 60-day, 9% note for $28,000, dated July 23, from a customer on account.
1. Determine the due date of the note.
2. Determine the maturity value of the note.
3. Journalize the entry to record the receipt of the payment of the note at maturity.
PE 9-5B
Note receivable
1. Obj. 6
Example Exercise 9-5
Prefix Supply Company received a 120-day, 8% note for $450,000, dated April 9, from a customer on account.
1. Determine the due date of the note.
2. Determine the maturity value of the note.
3. Journalize the entry to record the receipt of the payment of the note at maturity.
PE 9-6A
Accounts receivable turnover and days’ sales in receivables
1. Obj. 8
Example Exercise 9-6
Financial statement data for years ending December 31 for Chiro-Solutions Company follow:
1. Determine the accounts receivable turnover for 20Y2 and 20Y1.
2. Determine the days’ sales in receivables for 20Y2 and 20Y1. Use 365 days and round to one decimal place.
3. Does the change in accounts receivable turnover and the days’ sales in receivables from 20Y1 to 20Y2 indicate a favorable or unfavorable change?
PE 9-6B
Accounts receivable turnover and days’ sales in receivables
1. Obj. 8
Example Exercise 9-6
Financial statement data for years ending December 31 for Robinhood Company follow:
1. Determine the accounts receivable turnover for 20Y9 and 20Y8.
2. Determine the days’ sales in receivables for 20Y9 and 20Y8. Use 365 days and round to one decimal place.
3. Does the change in accounts receivable turnover and the days’ sales in receivables from 20Y8 to 20Y9 indicate a favorable or unfavorable change?
9-9eExercises
EX 9-1
Classifications of receivables
1. Obj. 1
Boeing is one of the world’s major aerospace firms with operations involving commercial aircraft, military aircraft, missiles, satellite systems, and information and battle management systems. As of a recent year, Boeing had $4,864 million of receivables involving U.S. government contracts and $2,250 million of receivables involving commercial aircraft customers such as Delta Air Lines and United Airlines.
Should Boeing report these receivables separately in the financial statements or combine them into one overall accounts receivable amount? Explain.
EX 9-2
Nature of uncollectible accounts
1. Obj. 2
MGM Resorts International owns and operates hotels and casinos including the MGM Grand and the Bellagio in Las Vegas, Nevada. As of a recent year, MGM reported accounts receivable of $570,348,000 and allowance for doubtful accounts of $89,789,000. Johnson & Johnson manufactures and sells a wide range of health care products including Band-Aid® bandages and Tylenol®. As of a recent year, Johnson & Johnson reported accounts receivable of $11,002,000,000 and allowance for doubtful accounts of $268,000,000.
1. Compute the percentage of the allowance for doubtful accounts to the accounts receivable for MGM Resorts International. Round to one decimal place.
Answer
Check Figure: 15.7%
2. Compute the percentage of the allowance for doubtful accounts to the accounts receivable for Johnson & Johnson. Round to one decimal place.
3. Discuss possible reasons for the difference in the two ratios computed in (a) and (b).
EX 9-3
Entries for uncollectible accounts, using direct write-off method
1. Obj. 3
Journalize the following transactions in the accounts of Champion Medical Co., a medical equipment company that uses the direct write-off method of accounting for uncollectible receivables:
| Jan. 19. |
|
Sold merchandise on account to Dr. Dale Van Dyken, $30,000. The cost of the merchandise sold was $20,500. |
| July 7. |
|
Received $12,000 from Dr. Dale Van Dyken and wrote off the remainder owed on the sale of January 19 as uncollectible. |
| Nov. 2. |
|
Reinstated the account of Dr. Dale Van Dyken that had been written off on July 7 and received $18,000 cash in full payment. |
EX 9-4
Entries for uncollectible receivables, using allowance method
1. Obj. 4
Journalize the following transactions in the accounts of Sedona Interiors Company, a restaurant supply company that uses the allowance method of accounting for uncollectible receivables:
| May 1. |
|
Sold merchandise on account to Beijing Palace Co., $18,900. The cost of the merchandise sold was $11,200. |
| Aug. 30. |
|
Received $8,000 from Beijing Palace Co. and wrote off the remainder owed on the sale of May 1 as uncollectible. |
| Dec. 8. |
|
Reinstated the account of Beijing Palace Co. that had been written off on August 30 and received $10,900 cash in full payment.
|
EX 9-5
Entries to write off accounts receivable
1. Obj. 3, 4
Quantum Solutions Company, a computer consulting firm, has decided to write off the $33,550 balance of an account owed by a customer, Alliance Inc. Journalize the entry to record the write-off, assuming that (a) the direct write-off method is used and (b) the allowance method is used.
EX 9-6
Providing for doubtful accounts
1. Obj. 4
At the end of the current year, the accounts receivable account has a debit balance of $6,800,000 and sales for the year total $81,500,000. Determine the amount of the adjusting entry to provide for doubtful accounts under each of the following assumptions:
1. The allowance account before adjustment has a debit balance of $68,250. Bad debt expense is estimated at ¾ of 1% of sales.
Answer
Check Figure: $611,250
2. The allowance account before adjustment has a debit balance of $68,250. An aging of the accounts in the customer ledger indicates estimated doubtful accounts of $575,000.
Answer
Check Figure: $643,250
3. The allowance account before adjustment has a credit balance of $45,000. Bad debt expense is estimated at ½ of 1% of sales.
4. The allowance account before adjustment has a credit balance of $45,000. An aging of the accounts in the customer ledger indicates estimated doubtful accounts of $450,000.
EX 9-7
Number of days past due
1. Obj. 4
Toot Auto Supply distributes new and used automobile parts to local dealers throughout the Midwest. Toot’s credit terms are n/30. As of the end of business on October 31, the following accounts receivable were past due:
Determine the number of days each account is past due as of October 31.
Answer
Check Figure: Avalanche Auto, 84 days
EX 9-8
Aging of receivables schedule
1. Obj. 4
The accounts receivable clerk for Kirchhoff Industries prepared the following partially completed aging of receivables schedule as of the end of business on August 31:
The following accounts were unintentionally omitted from the aging schedule and not included in the preceding subtotals:
1. Determine the number of days past due for each of the preceding accounts as of August 31.
2. Complete the aging of receivables schedule by adding the omitted accounts to the bottom of the schedule and updating the totals.
EX 9-9
Estimating allowance for doubtful accounts
1. Obj. 4
Kirchhoff Industries has a past history of uncollectible accounts, as follows. Estimate the allowance for doubtful accounts, based on the aging of receivables schedule you completed in Exercise 9-8.
Answer
Check Figure: Allowance for doubtful accounts, $131,712
EX 9-10
Adjustment for uncollectible accounts
1. Obj. 4
Using data in Exercise 9-9, assume that the allowance for doubtful accounts for Kirchhoff Industries has a credit balance of $10,112 before adjustment on August 31. Journalize the adjusting entry for uncollectible accounts as of August 31.
EX 9-11
Estimating doubtful accounts
1. Obj. 4
Performance Bike Co. is a wholesaler of motorcycle supplies. An aging of the company’s accounts receivable on December 31 and a historical analysis of the percentage of uncollectible accounts in each age category are as follows:
Estimate the proper balance of the allowance for doubtful accounts as of December 31.
EX 9-12
Entry for uncollectible accounts
1. Obj. 4
Using the data in Exercise 9-11, assume that the allowance for doubtful accounts for Performance Bike Co. had a debit balance of $28,400 as of December 31.
Journalize the adjusting entry for uncollectible accounts as of December 31.
EX 9-13
Entries for bad debt expense under the direct write-off and allowance methods
1. Obj. 5
The following selected transactions were taken from the records of Shipway Company for the first year of its operations ending December 31:
1. Journalize the transactions under the direct write-off method.
2. Journalize the transactions under the allowance method. Shipway Company uses the percent of credit sales method of estimating uncollectible accounts expense. Based on past history and industry averages, ¾% of credit sales are expected to be uncollectible. Shipway Company recorded $3,778,000 of credit sales during the year.
3. How much higher (lower) would Shipway Company’s net income have been under the direct write-off method than under the allowance method?
Answer
Check Figure: $8,225 higher
EX 9-14
Entries for bad debt expense under the direct write-off and allowance methods
1. Obj. 5
The following selected transactions were taken from the records of Rustic Tables Company for the year ending December 31:
1. Journalize the transactions under the direct write-off method.
2. Journalize the transactions under the allowance method, assuming that the allowance account had a beginning credit balance of $36,000 on January 1 and the company uses the analysis of receivables method. Rustic Tables Company prepared the following aging schedule for its accounts receivable:
3. How much higher (lower) would Rustic Tables’ net income have been under the direct write-off method than under the allowance method?
Answer
Check Figure: $11,090 higher
EX 9-15
Effect of doubtful accounts on net income
1. Obj. 5
During its first year of operations, Mack’s Plumbing Supply Co. had sales of $3,250,000, wrote off $27,800 of accounts as uncollectible using the direct write-off method, and reported net income of $487,500. Determine what the net income would have been if the allowance method had been used and the company estimated that 1% of sales would be uncollectible.
EX 9-16
Effect of doubtful accounts on net income
1. Obj. 5
Using the data in Exercise 9-15, assume that during the second year of operations, Mack’s Plumbing Supply Co. had sales of $4,100,000, wrote off $34,000 of accounts as uncollectible using the direct write-off method, and reported net income of $600,000.
1. Determine what net income would have been in the second year if the allowance method (using 1% of sales) had been used in both the first and second years.
2. Determine what the balance of the allowance for doubtful accounts would have been at the end of the second year if the allowance method had been used in both the first and second years. Hint: Use an Allowance for Doubtful Accounts T account.
Answer
Check Figure: $11,700 credit balance
EX 9-17
Entries for bad debt expense under the direct write-off and allowance methods
1. Obj. 5
Casebolt Company wrote off the following accounts receivable as uncollectible for the first year of its operations ending December 31:
1. Journalize the write-offs under the direct write-off method.
2. Journalize the write-offs under the allowance method. Also, journalize the adjusting entry for uncollectible accounts. The company recorded $5,250,000 of credit sales during the year. Based on past history and industry averages, ¾% of credit sales are expected to be uncollectible.
3. How much higher (lower) would Casebolt Company’s net income have been under the direct write-off method than under the allowance method?
Answer
Check Figure: $9,375 higher
EX 9-18
Entries for bad debt expense under the direct write-off and allowance methods
1. Obj. 5
Seaforth International wrote off the following accounts receivable as uncollectible for the year ending December 31:
The company prepared the following aging schedule for its accounts receivable on December 31:
1. Journalize the write-offs under the direct write-off method.
2. Journalize the write-offs and the year-end adjusting entry under the allowance method, assuming that the allowance account had a beginning credit balance of $95,000 on January 1 and the company uses the analysis of receivables method.
3. How much higher (lower) would Seaforth International’s net income have been under the allowance method than under the direct write-off method?
EX 9-19
Determine due date and interest on notes
1. Obj. 6
Determine the due date and the amount of interest due at maturity on the following notes:
Answer
Check Figure: Apr. 10, $500
EX 9-20
Entries for notes receivable
1. Obj. 6
Spring Designs & Decorators issued a 120-day, 4% note for $60,000, dated April 13 to Jaffe Furniture Company on account.
1. Determine the due date of the note.
2. Determine the maturity value of the note.
Answer
Check Figure: $60,800
3. Journalize the entries to record the following: (1) receipt of the note by Jaffe Furniture and (2) receipt of payment of the note at maturity.
EX 9-21
Entries for notes receivable
1. Obj. 6
The series of five transactions recorded in the following T accounts were related to a sale to a customer on account and the receipt of the amount owed. Briefly describe each transaction.
EX 9-22
Entries for notes receivable, including year-end entries
1. Obj. 6
The following selected transactions were completed by Fasteners Inc. Co., a supplier of buttons and zippers for clothing:
| 20Y3 |
|
|
| Nov. 21. |
|
Received from McKenna Outer Wear Co., on account, a $96,000, 60-day, 3% note dated November 21 in settlement of a past due account. |
| Dec. 31. |
|
Recorded an adjusting entry for accrued interest on the note of December 3. |
| 20Y4 |
|
|
| Jan. 20. |
|
Received payment of note and interest from McKenna Outer Wear Co. |
Journalize the entries to record the transactions.
EX 9-23
Entries for receipt and dishonor of note receivable
1. Obj. 6
Journalize the following transactions of Trapper Jon’s Productions:
| June 23. |
|
Received a $48,000, 90-day, 8% note dated June 23 from Radon Express Co. on account. |
| Sept. 21. |
|
The note is dishonored by Radon Express Co. |
| Oct. 21. |
|
Received the amount due on the dishonored note plus interest for 30 days at 10% on the total amount charged to Radon Express Co. on September 21. |
EX 9-24
Entries for receipt and dishonor of notes receivable
1. Obj. 4, 6
Journalize the following transactions in the accounts of Safari Games Co., which operates a riverboat casino:
| Apr. 18. |
|
Received a $60,000, 30-day, 7% note dated April 18 from Glenn Cross on account. |
| 30. |
|
Received a $42,000, 60-day, 8% note dated April 30 from Rhoni Melville on account. |
| May 18. |
|
The note dated April 18 from Glenn Cross is dishonored, and the customer’s account is charged for the note, including interest. |
| June 29. |
|
The note dated April 30 from Rhoni Melville is dishonored, and the customer’s account is charged for the note, including interest. |
| Aug. 16. |
|
Cash is received for the amount due on the dishonored note dated April 18 plus interest for 90 days at 8% on the total amount debited to Glenn Cross on May 18. |
| Oct. 22. |
|
Wrote off against the allowance account the amount charged to Rhoni Melville on June 29 for the dishonored note dated April 30. |
EX 9-25
Receivables on the balance sheet
1. Obj. 7
List any errors you can find in the following partial balance sheet:
EX 9-26
Accounts receivable turnover and days’ sales in receivables
1. Obj. 8
Ralph Lauren Corporation designs, markets, and distributes a variety of apparel, home decor, accessory, and fragrance products. The company’s products include such brands as Polo by Ralph Lauren, Ralph Lauren Purple Label, Ralph Lauren, Polo Jeans Co., and Chaps. Polo Ralph Lauren reported the following (in thousands) for two recent years:
Assume that accounts receivable (in millions) were $607,000 at the beginning of Year 1.
1. Compute the accounts receivable turnover for Year 2 and Year 1. Round to two decimal places.
Answer
Check Figure: Year 2: 9.20
2. Compute the days’ sales in receivables for Year 2 and Year 1. Use 365 days and round to one decimal place.
3. What conclusions can be drawn from these analyses regarding Ralph Lauren’s efficiency in collecting receivables?
EX 9-27
Accounts receivable turnover and days’ sales in receivables
1. Obj. 8
The Campbell Soup Company manufactures and markets food products throughout the world. The following sales and receivable data (in millions) were reported by Campbell Soup for two recent years:
Assume that the accounts receivable (in thousands) were $635 million at the beginning of Year 1.
1. Compute the accounts receivable turnover for Year 2 and Year 1. Round average accounts receivable to one decimal place and accounts receivable turnover to two decimal places.
Answer
Check Figure: Year 2: 12.27
2. Compute the days’ sales in receivables at the end of Year 2 and Year 1. Use 365 days and round to one decimal place.
3. What conclusions can be drawn from these analyses regarding Campbell’s efficiency in collecting receivables?
EX 9-28
Accounts receivable turnover and days’ sales in receivables
1. Obj. 8
American Eagle Outfitters, Inc. sells clothing, accessories, and personal care products for men and women through its retail stores. American Eagle reported the following data (in millions) for two recent years:
Assume that accounts receivable (in millions) were $74 million at the beginning of Year 1.
1. Compute the accounts receivable turnover for Year 2 and Year 1. Round to two decimal places.
2. Compute the day’s sales in receivables for Year 2 and Year 1. Use 365 days and round to one decimal place.
3. What conclusions can be drawn from these analyses regarding American Eagle Outfitters’ efficiency in collecting receivables?
EX 9-29
Accounts receivable turnover
1. Obj. 8
Use the data in Exercises 9-27 and 9-28 to analyze the accounts receivable turnover ratios of the Campbell Soup Company and American Eagle Outfitters, Inc.
1. Compute the average accounts receivable turnover ratio for Campbell Soup and American Eagle for the years shown in Exercises 9-27 and 9-28.
2. Does Campbelll Soup or American Eagle have the higher average accounts receivable turnover ratio?
3. Explain why the average turnover ratios are different in (b).
9-9fProblems: Series A
PR 9-1A
Entries related to uncollectible accounts
Obj. 4
The following transactions were completed by Daws Company during the current fiscal year ended December 31:
| Jan. 29. |
|
Received 35% of the $9,000 balance owed by Kovar Co., a bankrupt business, and wrote off the remainder as uncollectible. |
| Apr. 18. |
|
Reinstated the account of Spencer Clark, which had been written off in the preceding year as uncollectible. Journalized the receipt of $4,000 cash in full payment of Clark’s account. |
| Aug. 9. |
|
Wrote off the $11,850 balance owed by Iron Horse Co., which has no assets. |
| Nov. 7. |
|
Reinstated the account of Vinyl Co., which had been written off in the preceding year as uncollectible. Journalized the receipt of $7,000 cash in full payment of the account. |
| Dec. 31. |
|
Wrote off the following accounts as uncollectible (one entry): Beth Connelly Inc., $12,100; DeVine Co., $8,110; Moser Distributors, $21,950; Oceanic Optics, $10,000. |
| 31. |
|
Based on an analysis of the $1,450,000 of accounts receivable, it was estimated that $60,000 will be uncollectible. Journalized the adjusting entry. |
Instructions
1. Record the January 1 credit balance of $54,200 in a T account for Allowance for Doubtful Accounts.
2. Journalize the transactions. Post each entry that affects the following selected T accounts and determine the new balances:
| Allowance for Doubtful Accounts |
| Bad Debt Expense |
3. Determine the expected net realizable value of the accounts receivable as of December 31.
Answer
Check Figure: $1,390,000
4. Assuming that instead of basing the provision for uncollectible accounts on an analysis of receivables the adjusting entry on December 31 had been based on an estimated expense of ½ of 1% of the sales of $13,200,000 for the year, determine the following:
1. Bad debt expense for the year.
2. Balance in the allowance account after the adjustment of December 31.
3. Expected net realizable value of the accounts receivable as of December 31.
PR 9-2A
Aging of receivables; estimating allowance for doubtful accounts
Obj. 4
Trophy Fish Company supplies flies and fishing gear to sporting goods stores and outfitters throughout the western United States. The accounts receivable clerk for Trophy Fish prepared the following partially completed aging of receivables schedule as of the end of business on December 31, 20Y6:
The following accounts were unintentionally omitted from the aging schedule:
Trophy Fish has a past history of uncollectible accounts by age category, as follows:
Instructions
1. Determine the number of days past due for each of the preceding accounts.
2. Complete the aging of receivables schedule by adding the omitted accounts to the bottom of the schedule and updating the totals.
3. Estimate the allowance for doubtful accounts, based on the aging of receivables schedule.
Answer
Check Figure: $121,000
4. Assume that the allowance for doubtful accounts for Trophy Fish Company has a debit balance of $3,600 before adjustment on December 31, 20Y6. Journalize the adjusting entry for uncollectible accounts.
5. Assuming that the adjusting entry in (4) was inadvertently omitted, how would the omission affect the balance sheet and income statement?
PR 9-3A
Compare two methods of accounting for uncollectible receivables
Obj. 3, 4, 5
Call Systems Company, a telephone service and supply company, has just completed its fourth year of operations. The direct write-off method of recording bad debt expense has been used during the entire period. Because of substantial increases in sales volume and the amount of uncollectible accounts, the company is considering changing to the allowance method. Information is requested as to the effect that an annual provision of 1% of sales would have had on the amount of bad debt expense reported for each of the past four years. It is also considered desirable to know what the balance of Allowance for Doubtful Accounts would have been at the end of each year. The following data have been obtained from the accounts:
Instructions
1. Assemble the desired data, using the following column headings:
Answer
Check Figure: Year 4: Balance of allowance account, end of year, $15,050
2. Experience during the first four years of operations indicated that the receivables either were collected within two years or had to be written off as uncollectible. Does the estimate of 1% of sales appear to be reasonably close to the actual experience with uncollectible accounts originating during the first two years? Explain.
PR 9-4A
Details of notes receivable and related entries
Obj. 6
Flush Mate Co. wholesales bathroom fixtures. During the current fiscal year, Flush Mate Co. received the following notes:
Instructions
1. Determine for each note (a) the due date and (b) the amount of interest due at maturity, identifying each note by number.
Answer
Check Figure: Note 2: Due date, June 22; Interest due at maturity, $360
2. Journalize the entry to record the dishonor of Note (3) on its due date.
3. Journalize the adjusting entry to record the accrued interest on Notes (5) and (6) on December 31.
4. Journalize the entries to record the receipt of the amounts due on Notes (5) and (6) in January.
PR 9-5A
Notes receivable entries
Obj. 6
The following data relate to notes receivable and interest for CGH Cable Co., a cable manufacturer and supplier. (All notes are dated as of the day they are received.)
| Apr. 10. |
|
Received a $144,000, 5%, 60-day note on account. |
| May 15. |
|
Received a $270,000, 7%, 120-day note on account. |
| June 9. |
|
Received $145,200 on note of April 10. |
| Aug. 22. |
|
Received a $150,000, 4%, 45-day note on account. |
| Sept. 12. |
|
Received $276,300 on note of May 15. |
| 30. |
|
Received a $210,000, 8%, 60-day note on account. |
| Oct. 6. |
|
Received $150,750 on note of August 22. |
| 18. |
|
Received a 120,000, 5%, 60-day note on account. |
| Nov. 29. |
|
Received $212,800 on note of September 30. |
| Dec. 17. |
|
Received $121,000 on note of October 18. |
Instructions
1. Journalize the entries to record the transactions.
PR 9-6A
Sales and notes receivable transactions
Obj. 6
The following were selected from among the transactions completed by Caldemeyer Co. during the current year. Caldemeyer Co. sells and installs home and business security systems.
| Jan. 3. |
|
Loaned $18,000 cash to Trina Gelhaus, receiving a 90-day, 8% note. |
| Feb. 10. |
|
Sold merchandise on account to Bradford & Co., $24,000. The cost of the merchandise sold was $14,400. |
| 13. |
|
Sold merchandise on account to Dry Creek Co., $60,000. The cost of merchandise sold was $54,000.
|
| Mar. 12. |
|
Accepted a 60-day, 7% note for $24,000 from Bradford & Co. on account. |
| 14. |
|
Accepted a 60-day, 9% note for $60,000 from Dry Creek Co. on account. |
| Apr. 3. |
|
Received the interest due from Trina Gelhaus and a new 120-day, 9% note as a renewal of the loan of January 3. (Record both the debit and the credit to the notes receivable account.) |
| May 11. |
|
Received from Bradford & Co. the amount due on the note of March 12. |
| 13. |
|
Dry Creek Co. dishonored its note dated March 14. |
| July 12. |
|
Received from Dry Creek Co. the amount owed on the dishonored note, plus interest for 60 days at 12% computed on the maturity value of the note. |
| Aug. 1. |
|
Received from Trina Gelhaus the amount due on her note of April 3. |
| Oct. 5. |
|
Sold merchandise on account to Halloran Co., $13,500. The cost of the merchandise sold was $8,100. |
| 15. |
|
Received from Halloran Co. the amount of the invoice of October 5. |
Instructions
1. Journalize the entries to record the transactions.
9-9gProblems: Series B
PR 9-1B
Entries related to uncollectible accounts
Obj. 4
The following transactions were completed by The Wild Trout Gallery during the current fiscal year ended December 31:
| Jan. 19. |
|
Reinstated the account of Arlene Gurley, which had been written off in the preceding year as uncollectible. Journalized the receipt of $2,660 cash in full payment of Arlene’s account. |
| Apr. 3. |
|
Wrote off the $12,750 balance owed by Premier GS Co., which is bankrupt. |
| July 16. |
|
Received 25% of the $22,000 balance owed by Hayden Co., a bankrupt business, and wrote off the remainder as uncollectible. |
| Nov. 23. |
|
Reinstated the account of Harry Carr, which had been written off two years earlier as uncollectible. Recorded the receipt of $4,000 cash in full payment. |
| Dec. 31. |
|
Wrote off the following accounts as uncollectible (one entry): Cavey Co., $3,300; Fogle Co., $8,100; Lake Furniture, $11,400; Melinda Shryer, $1,200. |
| 31. |
|
Based on an analysis of the $2,350,000 of accounts receivable, it was estimated that $60,000 will be uncollectible. Journalized the adjusting entry. |
Instructions
1. Record the January 1 credit balance of $50,000 in a T account for Allowance for Doubtful Accounts.
2. Journalize the transactions. Post each entry that affects the following T accounts and determine the new balances:
| Allowance for Doubtful Accounts |
| Bad Debt Expense |
3. Determine the expected net realizable value of the accounts receivable as of December 31.
Answer
Check Figure: $2,290,000
4. Assuming that instead of basing the provision for uncollectible accounts on an analysis of receivables the adjusting entry on December 31 had been based on an estimated expense of ½ of 1% of the sales of $15,800,000 for the year, determine the following:
1. Bad debt expense for the year.
2. Balance in the allowance account after the adjustment of December 31.
3. Expected net realizable value of the accounts receivable as of December 31.
PR 9-2B
Aging of receivables; estimating allowance for doubtful accounts
Obj. 4
Wig Creations Company supplies wigs and hair care products to beauty salons throughout Texas and the Southwest. The accounts receivable clerk for Wig Creations prepared the following partially completed aging of receivables schedule as of the end of business on December 31, 20Y1:
The following accounts were unintentionally omitted from the aging schedule:
Wig Creations has a past history of uncollectible accounts by age category, as follows:
Instructions
1. Determine the number of days past due for each of the preceding accounts.
2. Complete the aging of receivables schedule by adding the omitted accounts to the bottom of the schedule and updating the totals.
3. Estimate the allowance for doubtful accounts, based on the aging of receivables schedule.
Answer
Check Figure: $123,235
4. Assume that the allowance for doubtful accounts for Wig Creations has a credit balance of $7,375 before adjustment on December 31, 20Y1. Journalize the adjustment for uncollectible accounts.
5. Assuming that the adjusting entry in (4) was inadvertently omitted, how would the omission affect the balance sheet and income statement?
PR 9-3B
Compare two methods of accounting for uncollectible receivables
Obj. 3, 4, 5
Digital Depot Company, which operates a chain of 40 electronics supply stores, has just completed its fourth year of operations. The direct write-off method of recording bad debt expense has been used during the entire period. Because of substantial increases in sales volume and the amount of uncollectible accounts, the firm is considering changing to the allowance method. Information is requested as to the effect that an annual provision of ¼% of sales would have had on the amount of bad debt expense reported for each of the past four years. It is also considered desirable to know what the balance of Allowance for Doubtful Accounts would have been at the end of each year. The following data have been obtained from the accounts:
Instructions
1. Assemble the desired data, using the following column headings:
Answer
Check Figure: Year 4: Balance of allowance account, end of year, $32,550
2. Experience during the first four years of operations indicated that the receivables either were collected within two years or had to be written off as uncollectible. Does the estimate of ¼% of sales appear to be reasonably close to the actual experience with uncollectible accounts originating during the first two years? Explain.
PR 9-4B
Details of notes receivable and related entries
Obj. 6
Gen-X Ads Co. produces advertising videos. During the current fiscal year, Gen-X Ads Co. received the following notes:
Instructions
1. Determine for each note (a) the due date and (b) the amount of interest due at maturity, identifying each note by number.
Answer
Check Figure: Note 1: Due date, Feb. 13; Interest due at maturity, $110
2. Journalize the entry to record the dishonor of Note (3) on its due date.
3. Journalize the adjusting entry to record the accrued interest on Notes (5) and (6) on December 31.
4. Journalize the entries to record the receipt of the amounts due on Notes (5) and (6) in January and February.
PR 9-5B
Notes receivable entries
Obj. 6
The following data relate to notes receivable and interest for Owens Co., a financial services company. (All notes are dated as of the day they are received.)
| Mar. 8. |
|
Received a $33,000, 5%, 60-day note on account. |
| 31. |
|
Received an $80,000, 7%, 90-day note on account. |
| May 7. |
|
Received $33,275 on note of March 8. |
| 16. |
|
Received a $72,000, 7%, 90-day note on account.
|
| June 11. |
|
Received a $36,000, 6%, 45-day note on account. |
| 29. |
|
Received $81,400 on note of March 31. |
| July 26. |
|
Received $36,270 on note of June 11. |
| Aug. 4. |
|
Received a $48,000, 9%, 120-day note on account. |
| 14. |
|
Received $73,260 on note of May 16. |
| Dec. 2. |
|
Received $49,440 on note of August 4. |
Instructions
1. Journalize the entries to record the transactions.
PR 9-6B
Sales and notes receivable transactions
Obj. 6
The following were selected from among the transactions completed during the current year by Danix Co., an appliance wholesale company:
| Jan. 21. |
|
Sold merchandise on account to Black Tie Co., $28,000. The cost of merchandise sold was $16,800. |
| Mar. 18. |
|
Accepted a 60-day, 6% note for $28,000 from Black Tie Co. on account. |
| May 17. |
|
Received from Black Tie Co. the amount due on the note of March 18. |
| June 15. |
|
Sold merchandise on account to Pioneer Co. for $17,700. The cost of merchandise sold was $10,600. |
| 21. |
|
Loaned $18,000 cash to JR Stutts, receiving a 30-day, 8% note. |
| 25. |
|
Received from Pioneer Co. the amount due on the invoice of June 15. |
| July 21. |
|
Received the interest due from JR Stutts and a new 60-day, 9% note as a renewal of the loan of June 21. (Record both the debit and the credit to the notes receivable account.) |
| Sept. 19. |
|
Received from JR Stutts the amount due on her note of July 21. |
| 22. |
|
Sold merchandise on account to Wycoff Co., $20,000. The cost of merchandise sold was $12,000. |
| Oct. 14. |
|
Accepted a 30-day, 6% note for $20,000 from Wycoff Co. on account. |
| Nov. 13. |
|
Wycoff Co. dishonored the note dated October 14. |
| Dec. 28. |
|
Received from Wycoff Co. the amount owed on the dishonored note, plus interest for 45 days at 8% computed on the maturity value of the note. |
Instructions
1. Journalize the entries to record the transactions.
9-9hCases & Projects
CP 9-1
Ethics in Action
Bud Lighting Co. is a retailer of commercial and residential lighting products. Gowen Geter, the company’s chief accountant, is in the process of making year-end adjusting entries for uncollectible accounts receivable. In recent years, the company has experienced an increase in accounts that have become uncollectible. As a result, Gowen believes that the company should increase the percentage used for estimating doubtful accounts from 2% to 4% of credit sales. This change will significantly increase bad debt expense, resulting in a drop in earnings for the first time in company history. The company president, Tim Burr, is under considerable pressure to meet earnings goals. He suggests that this is “not the right time” to change the estimate. He instructs Gowen to keep the estimate at 2%. Gowen is confident that 2% is too low, but he follows Tim’s instructions.
1. Evaluate the decision to use the lower percentage to improve earnings. Are Tim and Gowen acting in an ethical manner?
CP 9-2
Ethics in Action
Bev Wynn, vice president of operations for Dillon County Bank, has instructed the bank’s computer programmer to use a 365-day year to compute interest on depository accounts (liabilities). Bev also instructed the programmer to use a 360-day year to compute interest on loans (assets).
1. Discuss whether Bev is behaving in a professional manner.
CP 9-3
Team Activity
In teams, select a public company that interests you and is a business that has accounts receivable. Obtain the company’s most recent annual report on Form 10-K. The Form 10-K is a company’s annually required filing with the Securities and Exchange Commission (SEC). It includes the company’s financial statements and accompanying notes. The Form 10-K can be obtained either (a) by referring to the investor relations section of the company’s website or (b) by using the company search feature of the SEC’s EDGAR database service found at www.sec.gov/edgar/searchedgar/companysearch.html.
1. Based on the information in the company’s most recent annual report, answer the following questions:
1. What amount of accounts receivable did the company report at the end of the most recent year?
2. What is the balance in the company’s Allowance for Uncollectible Accounts at the end of the most recent year?
3. What percentage of total current assets is accounts receivable at the end of each of the two years presented? Has this percentage increased, decreased, or remained the same during this period?
4. How much bad debt expense did the company report for the most recent year?
2. Using the information presented in the company’s annual report, calculate the company’s accounts receivable turnover for the current and previous years. Based on this information, has the company’s management of accounts receivable improved? Briefly explain your answer.
CP 9-4
Communication
On January 1, Xtreme Co. began offering credit with terms of n/30. Uncollectible accounts are estimated to be 1% of credit sales, which is the average for the industry. The CEO, Todd Hurley, has no background in accounting and is struggling to understand the allowance method.
1. Write a brief memo to Todd, explaining the allowance method and how this information is reported in the financial statements.
CP 9-5
Estimate uncollectible accounts
For several years, Xtreme Co.’s sales have been on a “cash only” basis. On January 1, 20Y4, however, Xtreme Co. began offering credit on terms of n/30. The amount of the adjusting entry to record the estimated uncollectible receivables at the end of each year has been ½ of 1% of credit sales, which is the rate reported as the average for the industry. Credit sales and the year-end credit balances in Allowance for Doubtful Accounts for the past four years are as follows:
Laurie Jones, president of Xtreme Co., is concerned that the method used to account for and write off uncollectible receivables is unsatisfactory. She has asked for your advice in the analysis of past operations in this area and for recommendations for change.
1. Determine the amount of (a) the addition to Allowance for Doubtful Accounts and (b) the accounts written off for each of the four years.
2.
1. Advise Laurie Jones as to whether the estimate of ½ of 1% of credit sales appears reasonable.
2. Assume that after discussing (a) with Laurie Jones, she asked you what action might be taken to determine what the balance of Allowance for Doubtful Accounts should be at December 31, 20Y7, and what possible changes, if any, you might recommend in accounting for uncollectible receivables. How would you respond?
CP 9-6
Accounts receivable turnover and days’ sales in receivables
Best Buy is a specialty retailer of consumer electronics, including personal computers, entertainment software, and appliances. Best Buy operates retail stores in addition to the Best Buy, Media Play, On Cue, and Magnolia Hi-Fi websites. For two recent years, Best Buy reported the following (in millions):
Assume that the accounts receivable (in millions) were $1,308 at the beginning of fiscal Year 1.
1. Compute the accounts receivable turnover for Year 2 and Year 1. Round to two decimal places.
2. Compute the days’ sales in receivables at the end of Year 2 and Year 1. Use 365 days and round to one decimal place.
3. What conclusions can be drawn from (1) and (2) regarding Best Buy’s efficiency in collecting receivables?
4. What assumption did we make about sales for the Best Buy ratio computations that might distort the ratios and therefore cause the ratios not to be comparable for Year 2 and Year 1?
CP 9-7
Accounts receivable turnover and days’ sales in receivables
Apple Inc. designs, manufactures, and markets personal computers and related personal computing and communicating solutions for sale primarily to education, creative, consumer, and business customers. Substantially all of the company’s sales over the last five years are from sales of its Macs, iPods, iPads, and related software and peripherals. For two recent fiscal years, Apple reported the following (in millions):
Assume that the accounts receivable (in millions) were $24,094 at the beginning of fiscal Year 1.
1. Compute the accounts receivable turnover for Year 2 and Year 1. Round to two decimal places.
2. Compute the days’ sales in receivables at the end of Year 2 and Year 1. Use 365 days and round to one decimal place.
3. What conclusions can be drawn from (1) and (2) regarding Apple’s efficiency in collecting receivables?
CP 9-8
Accounts receivable turnover and days’ sales in receivables
Costco Wholesale Corporation operates membership warehouses that sell a variety of branded and private label products. Headquartered in Issaquah, Washington, it also sells merchandise online in the United States (Costco.com) and in Canada (Costco.ca). For two recent years, Costco reported the following (in millions):
Assume that the accounts receivable (in thousands) were $1,822 at the beginning of Year 1.
1. Compute the accounts receivable turnover for Year 2 and Year 1. Round to two decimal places.
2. Compute the days’ sales in receivables at the end of Year 2 and Year 1. Use 365 days and round to one decimal place.
3. What conclusions can be drawn from (1) and (2) regarding Costco’s efficiency in collecting receivables?
4. Given the nature of Costco’s operations, do you believe Costco’s accounts receivable turnover ratio would be higher or lower than a typical manufacturing company such as the Campbell Soup Company? Explain.
CP 9-9
Accounts receivable turnover
The accounts receivable turnover ratio will vary across companies, depending on the nature of the company’s operations. For example, an accounts receivable turnover of 6 for a retailer is unacceptable but might be excellent for a manufacturer of specialty milling equipment. A list of well-known companies follows:
| Alcoa Inc. |
The Coca-Cola Company |
Kroger |
| AutoZone, Inc. |
Delta Air Lines |
Procter & Gamble |
| Barnes & Noble, Inc. |
The Home Depot |
Wal-Mart |
| Caterpillar |
IBM |
Whirlpool Corporation |
1. Categorize each of the preceding companies as to whether its turnover ratio is likely to be above or below 15.
2. Based on (1), identify a characteristic of companies with accounts receivable turnover ratios above 15.
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