4.
Times
a.
Receivable Turnover
$720,000
d
Average Accounts Receivable
9.0
CASH AND RECEIVABLES
CHAPTER 7—Solutions
=
Chapter 7, SE 2.
Net Sales
Chapter 7, SE 1.
353
Times
$ 250
4,543.33
12.96
Add interest income
Less outstanding checks
9.2
9.2
Chapter 7, SE 3.
=
Chapter 7, SE 4.
Currency and coins on hand
$117,500
a.
b.
=
3,028.89
8.64
$2,488.12
31 7,500 7,500
$750,000 × 0.01 = $7,500
30 102,000 102,000
$129,000 – $27,000 = $102,000
30 150,000 150,000
$129,000 + $21,000 = $150,000
Chapter 7, SE 6.
Less outstanding checks
Add interest income
Adjusted book balance, June 30
Chapter 7, SE 7.
Allowance for Uncollectible Accounts
To record estimated uncollectible
accounts expense
Oct. Uncollectible Accounts Expense
Chapter 7, SE 8.
b.
a.
Sept. Uncollectible Accounts Expense
Allowance for Uncollectible Accounts
To record estimated uncollectible
To record estimated uncollectible
accounts expense
accounts expense
Sept. Uncollectible Accounts Expense
Allowance for Uncollectible Accounts
355
30 68,000 68,000
$86,000 – $18,000 = $68,000
b.
Chapter 7, SE 9.
Uncollectible Accounts Expense
accounts expense
To record estimated uncollectible
a.
Allowance for Uncollectible Accounts
June
+=
$20,000.00
$20,443.84
$443.84
+
Chapter 7, SE 11.
Chapter 7, SE 12.
$517.81
a. Maturity date:
June 19
Rate of
=
1.
3.
4.
1.
2.
3.
Chapter 7, E 1.
contra-asset accounts, but their purposes are different. Allowance for Uncol-
from period to period, especially in the absence of changes in credit policies
able turnover and more average days to collect. These changes occur because
or economic conditions, might mean that management is underestimating the
include toy companies, college textbook publishers, amusement parks, con-
9.
Times
$ 5,600
10,000
Chapter 7, E 4.
8.4
Currency and coins on hand
Money orders from customers
Chapter 7, E 3.
b
$380,000
Key Ratios:
Chapter 7, E 5.
8.4
4,509.62
$40,020.50
39.70
$24,384.18
a. 1,475 1,475
( – $200 )
Chapter 7, E 6.
Adjusted book balance, May 31
0.008
$3,787,500 ×
to a balance of $1,675
$36,750 ($30,300 + $6,450).
Chapter 7, E 8.
To record estimated uncollectible accounts
The balance of Allowance for Uncollectible Accounts after this adjustment is
expense and bring the allowance account
$1,675
Uncollectible Accounts Expense
Allowance for Uncollectible Accounts
Add deposits in transit
Less bank service charge
× 0.014 =
Adjusting entry:
1. T accounts prepared to determine ending balances:
Collections 1,475,000
Accounts Receivable
Chapter 7, E 9.
2. a. Percentage of net sales method applied
215,000
Bal.
361
$322,500
21,150 21,150
$19,350
1,800
$21,150
$322,500
Uncollectible Accounts
Estimated uncollectible accounts
Balance sheet presentation:
Accounts receivable
Chapter 7, E 9. (Continued)
Balance sheet presentation:
Accounts receivable
2. b. Aging of accounts receivable method applied
Debit balance in Allowance for
Adjusting entry:
Uncollectible Accounts Expense
Allowance for Uncollectible Accounts
To record estimated uncollectible
accounts expense
Uncollectible accounts expense
×=
The balance of Allowance for Uncollectible Accounts after this adjustment is
(–
b. 94,000 94,000
+=
The balance of Allowance for Uncollectible Accounts after this adjustment is
(–
c.
Chapter 7, E 10.
$94,000
0.015 $85,500
$85,500 $24,000 ) .
tions or the quality of the accounts receivable.
ance in the allowance account, which may have resulted from changed condi-
not be expected to be exactly the same. The aging of accounts receivable
$24,000 ) .
method that can take into account current conditions. For example, the per-
centage of net sales method does not directly take into account the debit bal-
Accounts receivable aging method:
Uncollectible Accounts Expense
Allowance for Uncollectible Accounts
$70,000
$70,000
method is usually considered more reliable because it is a direct valuation
The results are different because these are estimation methods. They would
$24,000 $94,000
To record estimated uncollectible accounts
expense for the year
$61,500
363
a. July 31
×=
(–
(+
b. July 31
accounts expense0.014
have been $35,600 $32,200 $3,400
$3,400
Uncollectible Accounts Expense 33,400Allowance for Uncollectible Accounts 33,400
$32,200 ) .
To record estimated uncollectible
$28,800
$32,200
32,200 32,200
$2,300,000
Uncollectible Accounts Expense
Allowance for Uncollectible Accounts
Chapter 7, E 11.
Journal entries for uncollectible accounts prepared
Percentage of net sales method:
If the beginning balance of Allowance for Uncollectible Accounts had been a
credit, the entry would have been the same, but the resulting balance would
The resulting balance of Allowance for Uncollectible Accounts is
) .
Accounts receivable aging method:
e. × 6 / 100 × 60 / =
365
$18,360
Chapter 7, E 12.
$181.08
365
13
31
30
16
90
+=
Interest in 2012:
$295.89
×× Time
Rate of
InterestPrincipal
= Interest
Interest at maturity: $1,775.34
Total days
Chapter 7, E 14.
Days in April
Days in May
Maturity date: May 16
Days remaining in February (28 – 15)
Days in March
$443.84 $15,443.84$15,000.00
+
=
=
366
a.
× 10 / 100 × 60 / =
$39.45
×
Time
=
Principal
×
$2,400 $39.45365
Chapter 7, E 16.
January 5, accepted a 60-day, 10% note for $2,400
Rate of
Interest
Maturity value:
×
Interest at maturity:
Interest
$29.59
×Rate of
Interest
$2,439.45
Principal Time
= Interest
1,400.00 30,099.68
$311,533.84
14,605.28
2,280.00 3,142.00
1. Bank reconciliation prepared
Merry Corporation
Chapter 7, P 1.
Bank Reconciliation
Less outstanding checks
deducted by bank
NSF check of Jim Hall
600.00
30 792.00 792.00
30 70.00 70.00
To record bank service charge for April
Cash
A bank reconciliation is a necessary internal control because certain events and
items—for example, a note receivable collected by a bank, interest income on a note,
interest income, overstatement of deposits, collection fees, NSF checks, or service
Journal entries prepared
by bank
To record note and interest collected
4. User Insight: Importance of bank reconciliation discussed
Chapter 7, P 1. (Continued)
Cash
2011
2.
74,500
= ( – ) × 0.016
=
=+
=
=–
Bal.
1.
Sales returns and allowances
Chapter 7, P 2.
T accounts prepared and data entered
2. Uncollectible accounts expense and ending balance of Allowance for
Accounts Receivable 18,250
$18,250
Allowance for Uncollectible Accounts $4,488
$5,563
$298,750
Accounts Receivable, net
1.6 percent
$63,500
$1,075
$5,563
$4,488
4.
Because the percentage of net sales method and the accounts receivable aging
method are both estimates and are based on different assumptions, it is expected
that they would differ in their effects. Also, the amount of uncollectible accounts
expense under the accounts receivable aging method depends partially on how
Chapter 7, P 2. (Continued)
$18,250
3. Receivable turnover and days' sales uncollected calculated
–
$298,750
good the estimates of losses were in the prior year because the amount of expense
is affected by the current balance of Allowance for Uncollectible Accounts, which
User Insight: Difference in methods and rationales discussed
4.4
Times Days
1–30 31–60 61–90 Over
Not Yet Days Days Days 90 Days
Total Due Past Due Past Due Past Due Past Due
$44,820 $24,515 $12,055 $4,605 $1,995 $1,650
465 465
$ 45,215
237,500
$282,715
Less: $ 3,100
4,400
Sales returns and allowances
Accounts Receivable
Beginning balance
Credit sales
Subtotal
Account
Accounts written off
Balance
S. Ballarin
Customer
Chapter 7, P 3.
1. Aging analysis completed
Forward
2. End-of-year balances computed
analyze their accounts receivable history to determine the estimated percentage
uncollectible in each category. These percentages are multiplied by the amount in
5. User Insight: Role of estimates discussed
Estimates play an important role in applying the aging analysis method. Businesses
Estimated Uncollectible Accounts
Thorn Company
Chapter 7, P 3. (Continued)
3. Analysis of estimated uncollectible accounts prepared
Uncollectible accounts expense calculated
4.
28
30
31
+=
15
30
15
60
× 13 / 100 × 60 / = $170.96
$15,000.00
$443.84
Rate of
Interest ×Time
=
May 16, accepted $8,000, 60-day, 13% note receivable
Principal
Interest at maturity: $170.96
Chapter 7, P 4.
Days in June
Days in July
1. Maturity date, interest on the note, and maturity value for each note determined
May 3, accepted $15,000, 90-day, 12% note receivable
Days remaining in May (31 – 3)
$8,000 365
×
Interest
Days remaining in May (31 – 16)
Days in June
Days in July
Total days
July 15
August 1Maturity date:
Maturity date:
2. Interest income on June 30 reported
Since interest income on these notes receivable will not be received until maturity,
3. User Insight: Cash flow effect discussed
Date of
Accrued interest income as of June 30
Chapter 7, P 4. (Continued)
Rate of
$203.42Interest at maturity:
3,936.80
178.56 748.56
NSF check of Justin Curtis
Less outstanding checks
1. Bank reconciliation prepared
Lotus Lake, Inc.
Chapter 7, P 5.
Bank Reconciliation
31 250.00 250.00
31 540.00 540.00
31 30.00 30.00
31 178.56 178.56
items—for example, a note receivable collected by a bank, interest income on a note,
interest income, overstatement of deposits, collection fees, NSF checks, or service
A bank reconciliation is a necessary internal control because certain events and
4. User Insight: Importance of bank reconciliation discussed
2. Journal entries prepared
2011
Chapter 7, P 5. (Continued)
Cash
To correct an incorrect entry for purchase
640,000
2,104,000
(
= $567,870
$49,930
Accounts Receivable, Net
$43,730
Allowance for Uncollectible Accounts = –
Uncollectible accounts expense and ending balance of Allowance for
Bal.
Chapter 7, P 6.
1. T accounts prepared and data entered
106,800
1,986,000
Accounts Receivable
Credit sales
=
2. Uncollectible Accounts determined
Sales returns and allowances
Collections from customers
=
=
= $2,104,000 –
0.025
$49,930 $6,200
) ×
$611,600
$106,800
$43,730–
=
method are both estimates and are based on different assumptions, it is expected
Chapter 7, P 6. (Continued)
3. Receivable turnover and days' sales uncollected calculated
that they would differ in their effects. Also, the amount of uncollectible accounts
good the estimates of losses were in the prior year because the amount of ex-
User Insight: Difference in methods and rationales discussed
pense is affected by the current balance of Allowance for Uncollectible Accounts,
3.4
expense under the accounts receivable aging method depends partially on how
Because the percentage of net sales method and the accounts receivable aging
4.
1–30 31–60 61–90 Over
Not Yet Days Days Days 90 Days
Total Due Past Due Past Due Past Due Past Due
$793,791 $438,933 $149,614 $106,400 $57,442 $41,402
11,077 11,077
$ 442,341
3,722,000
$4,164,341
Less: $ 60,000
44,300
Account
Forward
2. End-of-year balances computed
Customer
Chapter 7, P 7.
1. Aging analysis completed
K. Baker
Accounts written off
Balance
Sales returns and allowances
Accounts Receivable
Beginning balance
Credit sales
Subtotal
4. Uncollectible accounts expense calculated
Fossella Fashions
Chapter 7, P 7. (Continued)
3. Analysis of estimated uncollectible accounts prepared
Estimated Uncollectible Accounts
5. User insight: Role of estimates discussed
January 31, 2011
Estimates play an important role in applying the aging analysis method. Businesses
analyze their accounts receivable history to determine the estimated percentage
uncollectible in each category. These percentages are multiplied by the amount in
28
30
31
1
90
× 10 / 100 × 90 / = $1,479.45
+=
Interest at maturity:
$61,479.45
March 3, accepted $60,000, 90-day, 10% note receivable
Interest Maturity Value
×Time
$61,479.45
May 15Maturity date:
×
= Interest
$1,479.45
June 1
$60,000 365
Rate of
Interest
Chapter 7, P 8.
Days remaining in March (31 – 3)
Maturity date:
1. Maturity date, interest on the note, and maturity value for each note determined
Days in April
Days in May
Days in June
Principal
Principal
March 16, accepted $32,000, 60-day, 11% note receivable
Total days
$60,000.00 $1,479.45
+=
Maturity value:
$665.75Interest at maturity:
×Time
×
Rate of
Interest
Chapter 7, P 8. (Continued)
= InterestPrincipal
2. Interest income on April 30 reported
cash flow impact on June 30 is zero.
Accrued interest income as of April 30
Since interest income on these notes receivable will not be paid until maturity, the
3. User Insight: Cash flow effect discussed
383
3.
cash situation by offering more attractive terms for early payment, such as a sales
discount (for example, 2/10, n/60).
Since Gerard sells its appliances to large, established customers, the accounts
and notes receivable, which total $12 million, should provide adequate security to
raise the needed $10 million in cash. Gerard might also be able to improve its
billing operation are needed to handle the new credit customers. The small fee
the matching rule, each year Mitsubishi will need to estimate the amount of un-
lectible accounts that will arise from these credit sales and record it as an ad-
Chapter 7, C 1.
and payments because management felt that such terms would increase sales
September. Third, there is the cost of uncollectible accounts. In accordance with
Mitsubishi established the generous credit terms of 14 months without interest
dramatically. Customers could make large purchases without emptying their
pockets. There are three main costs to Mitsubishi. First, a credit department and
charged to the dealer will help cover that cost. Second, there is an implicit inter-
est cost associated with carrying the no-interest receivables until the following
Chapter 7, C 4.
is 54.5 and 59.8 days for 2008 and 2009, respectively. Although days' sales uncol-
lected for Fosters are decreasing, it takes Fosters longer to collect a receivable
than it does Heineken. Thus, proportionately, Fosters has more capital tied up in
its receivables. However, it is not possible to determine which company has the
$1,046,000 $1,048,000 $1,008,000
== 3.2%
3.1%
Chapter 7, C 5.
1. Financial ratios computed (dollar amounts in thousands)
2011 2010
2009
Receivable
9.9
10.3 Times
Times
9.9
=
9.8=
=
=
=
(Note: The net accounts receivable needs to be calculated for 2011, 2010, and 2009.)
Receivable Turnover Average Accounts Receivable
Net Sales
Chapter 7, C 5. (Continued)
2. Receivable turnover and days' sales uncollected calculated
$956,150
$982,300
$1,006,900
Ratios interpreted
2011. Thus, the ratio of allowance for uncollectible accounts to accounts receivable
pense. However, perhaps management has been underestimating the amounts that
for the three years exceed the total provisions made for uncollectible accounts ex-
This opinion is also supported by the fact that the net accounts written off in total
has decreased from 4.9 percent in 2009 to 3.6 percent in 2011.
Chapter 7, C 5. (Continued)
3.
1.
2.
3.
needed in the last quarter.
have excess cash from operations after the fourth quarter (which is also the bal-
ance sheet date) and in the first half of the year. More cash for operations will be
be fairly steady during the course of the year. However, there is some variation.
In Note 15, it may be observed that the sales are lowest in the first and third
quarters (January to March and July to September) of the year. The fourth quar-
ter (October to December) has the most sales. Thus, the company is likely to
Chapter 7, C 6.
makes few sales to consumers on credit, its note on accounts receivable states
389
365 = Days*20.72008 17.6
$4,982.0
Times
=
18.2
=
18.2
Chapter 7, C 7.
$5,420.5 =
=
17.6
Times
Times
*Rounded
=
Days
390
2.
is expected because both CVS and Walgreens sell mostly to retail customers who
pay with cash or credit cards or to insurance companies (for prescriptions) that
that CVS has some insurance accounts for its pharmacy items.
denced by the high receivable turnovers and short days' sales uncollected. This
Walgreens does, as shown by the receivables turnovers. This probably means
$2,382.0
=
pay quickly. On a basis relative to sales, CVS has about as many receivables as
Walgreens' Days' Sales Uncollected
=
25.2
= $2,511.5
Times
24.8
391
This case addresses several issues that get at the heart of the question, does ac-
counting matter? The main issue is whether accounting should be used to accom-
Chapter 7, C 8.