Chapter 10 Receivables
Questions
1. When customers use credit cards, the selling company can increase sales and profits by providing the added convenience and avoid having to evaluate the credit standing of customers. They also avoid the risk of bad debts and often are paid cash from the credit card company more quickly than if customers were granted credit directly.
2. Writing off a bad debt against the allowance does not reduce the estimated realizable value of a company’s accounts receivable because the write-off reduces the balances of both Accounts Receivable and Allowance for Doubtful Accounts by equal amounts, and the difference between them remains the same.
3. The adjusted balances of Bad Debt Expense and Allowance for Doubtful Accounts are virtually never equal because the expense describes only the events of the current year, and the allowance is the accumulated result of events over a number of past years. The only way that they could be equal would be if write-offs during the past year exactly equalled the beginning balance of the allowance.
4. Revenues and expenses are not matched under the direct write-off method because the revenue from the bad debt sales often appears on the income statement of one period while the expense of getting those sales appears on the income statement of a later period.
5. The accounting principle of materiality holds that the requirements of accounting principles may be ignored if the effect on the financial statements is unimportant to their users.
6. Creditors prefer notes to accounts receivable because the notes can be more easily converted into cash before becoming due by discounting (or selling) them to a bank. Also, a note represents a clear written acknowledgement by the debtor of both the debt and its amount and terms.
7. Accounts receivable increased a total of $32,000 from $626,000 at June 26, 2004 to $594,000 at June 25, 2005.
*8. If receivables are sold without recourse then the buyer of the receivables has responsibility to make sure the accounts are ultimately collected and takes the loss for any bad debts.
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.Solutions Manual for Chapter 10 850
QUICK STUDY
Quick Study 10-1March 1 Accounts Receivable – JP Holdings. 40,000
Sales....................................... 40,000To record sale terms n/30.
1 COGS........................................... 32,000Merchandise Inventory............. 32,000
To record cost of sale.
27 Cash............................................ 40,000Accounts Receivable – JP Holdings
40,000To record receipt of payment in full.
Quick Study 10-2Apr. 2 Accounts receivable – Aurora......... 50,000
Sales....................................... 50,000To record sales resulting from non-bank credit cards.
2 Cost of Goods Sold........................ 45,000Merchandise Inventory............. 45,000
To record cost of sales.
7 No entry
15 Cash............................................245,000Credit Card Expense..................... 5,000
Accounts receivable – Aurora.... 250,000To record collection from credit card company net of credit card expense; 250,000 x 2% = 5,000.
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.851 Fundamental Accounting Principles, Twelfth Canadian Edition
Quick Study 10-3a. May 3 Cash............................................. 9,500
Credit Card Expense...................... 500 Sales...................................... 10,000
To record sales resulting from bank credit card.
3 COGS........................................... 4,000 Merchandise Inventory............ 4,000
To record cost of sales.
b. May 6 Accounts Receivable—Credit Card Companies3,000
Sales...................................... 3,000 To record sales resulting from non-bank credit card.
6 COGS............................................ 1,100 Merchandise Inventory............ 1,100
To record cost of sales.
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.Solutions Manual for Chapter 10 852
Quick Study 10-4
March 4 Accounts Receivable – Various...... 165,000
Service Revenue................. 165,000
Performed work for a customer on account.
15
Cash........................................... 80,000
Accounts Receivable – Various.......................................
80,000
Collected cash from credit customers.
20
Allowance for Doubtful Accounts. . 5,000
Accounts Receivable – Tom Williams......................................
5,000
Wrote off customer account.
25
Accounts Receivable – Tom Williams......................................
5,000
Allowance for Doubtful Accounts.....................................
5,000
Reversed the write-off.
25
Cash........................................... 5,000
Accounts Receivable – Tom Williams......................................
5,000
Collected cash from credit customer.
April 2 Accounts Receivable – Various...... 280,000
Service Revenue................. 280,000
Performed services for customers on account.
9 Cash........................................... 110,000
Accounts Receivable – 110,0Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.853 Fundamental Accounting Principles, Twelfth Canadian Edition
Various....................................... 00 Collected cash from credit customers.
30
Bad Debt Expense........................ 8,000
Allowance for Doubtful Accounts.....................................
8,000
Estimated bad debts expense.
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.Solutions Manual for Chapter 10 854
Quick Study 10-5BIATECH
Partial Balance SheetDecember 31, 2011
Assets Current assets: Cash..................................... $10,0
00 Accounts receivable.............. $29,0
00 Less: Allowance for doubtful accounts........................
1,3 00
27,700
Office supplies...................... 400 Prepaid insurance................. 95
0 Total current assets.............. $39,0
50
Note: Bad Debt Expense is an income statement account and is therefore not listed on the balance sheet. Machinery is a balance sheet account but is shown under Property, Plant and Equipment.
Quick Study 10-6Oct. 31 Bad Debt Expense......................... 2,760
Allowance for doubtful accounts2,760
To estimate uncollectible accounts(690,000 × 2/3 = 460,000 × .006 = 2,760).
Quick Study 10-7Allowance for Doubtful
Accounts450 Dec. 31
unadjusted balance
16,000
Dec. 31 required adjusted balance
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.855 Fundamental Accounting Principles, Twelfth Canadian Edition
15,550 credit entry is necessary in order to get the required balance of 16,000 (640,000 × .025).
Dec. 31 Bad Debt Expense......................... 15,550Allowance for doubtful accounts
15,550To estimate uncollectible accounts.
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.Solutions Manual for Chapter 10 856
Quick Study 10-8a.Dec. 31 Bad debt expense......................... 835
Allowance for Doubtful Accounts835
($89,000 × 1.5%) – $500 = $835b. ($89,000 × 1.5%) + $200 = $1,535c. $270,000 × 1% = $2,700
Quick Study 10-9Dec
.31
Bad Debt Expense........................ 7,400
Allowance for Doubtful Accounts.....................................
7,400
Adjusting entry to estimate uncollectible
accounts receivable.
Calculated as:
Allowance for Doubtful Accounts
800 Dec. 31 unadjusted balance
8,200
Dec. 31 required adjusted balance
*(110,000 × 2% = 2,200) + (40,000 × 5% = 2,000) + (10,000 × 40% = 4,000) = 8,200
Quick Study 10-10Mar. 28 Bad Debt Expense......................... 1,100
Accounts Receivable – Jim Patterson1,100
To write-off an uncollectible receivable using the direct write-off method.
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.857 Fundamental Accounting Principles, Twelfth Canadian Edition
7,400 credit entry is necessary in order to get the required balance of 8,200*.
Quick Study 10-11Aug. 2 Notes Receivable (90-day, 12%)....5,500.00
Accounts Receivable—Will Carr. 5,500.00Maturity date:
Oct. 31 Cash............................................5,662.74Notes Receivable..................... 5,500.00Interest Revenue...................... 162.74
$5,500 × 12% × 90/365 = $162.74.
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.Solutions Manual for Chapter 10 858
Quick Study 10-12Dec. 31 Interest Receivable....................... 59.18
Interest Revenue...................... 59.18$8,000 × 9% × 30/365.
Maturity date:Jan. 15 Cash............................................8,088.77
Interest Receivable.................. 59.18Interest Revenue...................... 29.59*Notes Receivable..................... 8,000.00
*[($8,000 × 9% × 45/365) – $59.18] or [$8,000 × 9% × 15/365]
Quick Study 10-13April 4 Accounts Receivable – Beatrice Inc.
17,097.81Interest Revenue...................... 97.81Note Receivable.......................
17,000.00To charge the account of Beatrice for a dishonoured note including interest of $17,000 × 7% × 30/365 = $97.81.
*Quick Study 10-14June 4 Cash............................................105,300.00
Factoring Fees Expense................2,700.00Accounts Receivable.................
108,000.00Sold accounts receivable for cash, less a 2.5% factoring fee; 108,000 × 2.5% = 2,700.
*Quick Study 10-15Aug. 10 Cash............................................50,188.81
Interest Revenue...................... 188.81Notes Receivable.....................
50,000.00Discounted a note receivable.
Principal of Note...........................$50,000.00Add: Interest from Note ($50,000 ×8% ×45/365)
493.15Maturity Value..............................$50,493.15
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.859 Fundamental Accounting Principles, Twelfth Canadian Edition
Less: Bank Discount ($50,493.15 × 11% × 20/365) 304.34
Proceeds......................................$50,188.81
*Quick Study 10-16a)Mega Companyb)Holton Company; unfavourablec) Holton Company
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.Solutions Manual for Chapter 10 860
EXERCISES
Exercise 10-1 (20 minutes)Apr. 6 Cash............................................8,832.00
Credit Card Expense ($9,200 .04) 368.00Sales....................................... 9,200.00
6 COGS...........................................5,300.00Merchandise Inventory............. 5,300.00
10 Accounts Receivable—Colonial....... 310.00Sales....................................... 310.00
10 COGS........................................... 160.00Merchandise Inventory............. 160.00
17 No entry required.
28 Cash............................................5,370.40Credit Card Expense ($5,480 × .02) 109.60
Accounts Receivable—Colonial. . 5,480.00
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.861 Fundamental Accounting Principles, Twelfth Canadian Edition
Exercise 10-2 (25 minutes)1.
GENERAL LEDGER
Accounts Receivable
SalesSales Returns
and Allowances
Nov. 3
8,834
Nov. 19
378 Nov. 3
8,834 Nov. 19
378
8 2,500
82,500
11 1,466
111,466
28 5,212
285,212
Bal. 17,634
18,012
ACCOUNTS RECEIVABLE SUBLEDGERABC Shop Colt Enterprises Red McKenzie
Nov. 38,834 Nov.
82,50
0Nov. 11
1,466
Nov. 19
378
285,212 Bal. 1,088
Bal. 14,046
2. Subledger proof:
ABC Shop..................................... $14,046Colt Enterprises............................ 2,500Red McKenzie............................... 1,088Balance of the Accounts Receivable account $17,634
Exercise 10-3 (15 minutes)a.Oct. 31 Allowance for Doubtful Accounts.. . 1,000
Accounts Receivable—Gwen Rowe1,000
b.Dec. 9 Accounts Receivable—Gwen Rowe. 200
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.Solutions Manual for Chapter 10 862
Allowance for Doubtful Accounts200
9 Cash............................................ 200Accounts Receivable—Gwen Rowe
200
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.863 Fundamental Accounting Principles, Twelfth Canadian Edition
Exercise 10-4 (20 minutes)Dec. 31 Bad Debt Expense......................... 8,750
Allowance for Doubtful Accounts8,750
Expense = .005 × $1,750,000 = $8,750.
Feb. 1 Allowance for Doubtful Accounts.. . 1,800Accounts Receivable—Catherine Hicks
1,800
June 5 Accounts Receivable—Catherine Hicks 1,800Allowance for Doubtful Accounts
1,800
5 Cash............................................ 1,800Accounts Receivable—Catherine Hicks
1,800
Exercise 10-5 (15 minutes)a.Dec. 31 Bad Debt Expense......................... 3,615
Allowance for Doubtful Accounts3,615
Accounts ReceivableAllowance for
Doubtful Accounts2,745
Unadjusted balance
? = 3,615 Adjustment
Bal. 159,000× 4%$ 6,360
6,360
Required Adjusted Balance
b.Dec. 31 Bad Debt Expense......................... 10,356Allowance for Doubtful Accounts
10,356
Accounts ReceivableAllowance for
Doubtful AccountsUnadjusted balance
3,996
? = 10,356 Adjustment
Required
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.Solutions Manual for Chapter 10 864
Bal. 159,000× 4%$ 6,360
6,360
Balance
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.865 Fundamental Accounting Principles, Twelfth Canadian Edition
Exercise 10-6 (15 minutes)a)$345,000b)$356,000c) $2,900d)$170e)$2,550
Exercise 10-7 (15 minutes)LISTEL
Partial Balance SheetMarch 31, 2011
Assets Current assets: Cash..................................... $
29,000 Accounts receivable.............. $102,0
00 Less: Allowance for doubtful accounts......................................
2,10 0
99,900
Notes receivable, due November 30, 2011......................................
17,000
Merchandise inventory.......... 65,000 Supplies............................... 4,50
0 Total current assets.............. $215,4
00
Note: Bad Debt Expense is an income statement account and is therefore not listed on the balance sheet. Notes Receivable due May 1, 2013, Building and Accumulated Amortization, Building are asset accounts shown on the balance sheet but they are not current assets.
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.Solutions Manual for Chapter 10 866
Exercise 10-8 (30 minutes)a. 2011Dec.
31Bad Debt Expense.......................... 7,314
Allowance for Doubtful Accounts 7,314 To record estimate for uncollectible accounts; 492,500 – 4,900 = 487,600 x 1.5% = 7,314.
b.201
2Accounts Receivable....................... 620,00
0 Sales....................................... 620,00
0 To record credit sales during 2012.
Cost of Goods Sold......................... 406,500
Merchandise Inventory............. 406,500
To record cost of sales during 2012.
Cash.............................................. 491,300
Sales Discounts.............................. 6,200 Accounts Receivable................ 497,50
0 To record collections less sales discounts.
Allowance for Doubtful Accounts... . 12,450 Accounts Receivable................ 12,450 To record the write-off of uncollectible accounts.
c.2012Dec.
31Bad Debt Expense.......................... 9,207
Allowance for Doubtful Accounts 9,207
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.867 Fundamental Accounting Principles, Twelfth Canadian Edition
To record estimate for uncollectible accounts; 620,000 – 6,200 = 613,800 x 1.5% = 9,207.
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.Solutions Manual for Chapter 10 868
Exercise 10-8 (concluded)d.Assets Current assets: Accounts receivable1.......................... $180,0
50 Less: Allowance for doubtful accounts2.................................................
4,9 71
$175,079
OR
Accounts receivable (net).................... $175,079
Calculations:1. 2.
Accounts Receivable Allowance for Doubtful Accounts
Bal. Dec 31/11
2012 sales
70,000
620,000
497,500
12,450
2012 collections
2012 write-offs
900
7,314
Unadj.Bal. Dec 31/11
AdjustmentDec 31/11
Bal. Dec 31/12
180,050 2012
write-offs
12,450
8,214
9,207
Adj. Bal. Dec 31/11
Adjustment Dec 31/12
4,971
Adj. Bal. Dec 31/12
Analysis component: The main advantage of the income statement approach is
its simplicity. Like the balance sheet approach, it satisfies the generally accepted accounting principles of matching and conservatism. The main disadvantage is that it does not compensate for over or under estimations from year to year because it is not focused on the element that is uncollectible, namely, the accounts receivable.
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.869 Fundamental Accounting Principles, Twelfth Canadian Edition
Exercise 10-9 (30 minutes)a. 2011Dec.
31Bad Debt Expense........................ 500
Allowance for Doubtful Accounts.....................................
500
To record estimate for uncollectible accounts; 70,000 x 2% = 1,400; 1,400 – 900 = 500.
b.201
2Accounts Receivable.................... 620,00
0 Sales..................................... 620,00
0 To record credit sales during 2012.
Cost of Goods Sold....................... 406,500
Merchandise Inventory.......... 406,500
To record cost of sales during 2012.
Cash............................................ 491,300
Sales Discounts............................ 6,200 Accounts Receivable.............. 497,50
0 To record collections less sales discounts.
Allowance for Doubtful Accounts. . 12,450 Accounts Receivable.............. 12,450 To record the write-off of uncollectible accounts.
c.2012
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.Solutions Manual for Chapter 10 870
Dec. 31
Bad Debt Expense........................ 14,651
Allowance for Doubtful Accounts.....................................
14,651
To record estimate for uncollectible accounts; 180,050 x 2% = 3,601; 3,601 – 1,400 + 12,450 = 14,651.
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.871 Fundamental Accounting Principles, Twelfth Canadian Edition
Exercise 10-9 (concluded)d.Assets Current assets: Accounts receivable......................... $180,0
50 Less: Allowance for doubtful accounts................................................
3,6 01
$176,449
OR
Accounts receivable (net)................. $176,449
Calculations:Accounts Receivable Allowance for Doubtful
AccountsBal. Dec 31/11
2012 sales
70,000
620,000
497,500
12,450
2012 collections
2012 write-offs
900Unadj. Bal. Dec 31/11
AdjustmentDec 31/11
Bal. Dec 31/12
180,050
2012 write-
offs12,4
50
1,400 Adj. Bal. Dec 31/11
Adjustment Dec 31/12
3,601Adj. Bal. Dec 31/12
Analysis componentThe main advantage of the balance sheet approach is that it adjusts the allowance for doubtful accounts to the estimated amount of uncollectibles. Like the income statement approach, it satisfies the generally accepted accounting principles of matching and conservatism. The main disadvantage is that it does require more effort in terms of calculations.
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.Solutions Manual for Chapter 10 872
500
14,651
Exercise 10-10 (30 minutes)a. 2011Dec.
31Bad Debt Expense............................ 2,250
Allowance for Doubtful Accounts. . 2,250 To record estimate for uncollectible accounts; (95,000 x 1% = 950) + (35,000 x 4% = 1,400) + (8,000 x 10% = 800) + (2,000 x 60% = 1,200) = 4,350; 4,350 – 2,100 = 2,250.
b.2012Dec.
31Bad Debt Expense............................ 39,01
0 Allowance for Doubtful Accounts. . 39,01
0 To record estimate for uncollectible accounts; (215,000 x 1% = 2,150) + (95,000 x 4% = 3,800) + (35,100 x 10% = 3,510) + (15,000 x 60% = 9,000) = 18,460; 18,460 – 4,350 + 24,900 = 39,010.
c.Assets Current assets: Accounts receivable............................. $360,
100 Less: Allowance for doubtful accounts.. 18,4
60$341,6
40
OR
Accounts receivable (net)...................... $341,640
Calculations:Accounts Receivable Allowance for Doubtful Accounts
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.873 Fundamental Accounting Principles, Twelfth Canadian Edition
Bal. Dec 31/11
2012 sales
140,000
1,240,000
995,000
24,900
2012 collections
2012 write-offs
2,100Unadj.Bal. Dec 31/11
AdjustmentDec 31/11
Bal. Dec 31/12
360,100
2012write-
offs24,9
00
4,350 Adj. Bal. Dec 31/11
Adjustment Dec 31/12
18,460
Adj. Bal. Dec 31/12
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.Solutions Manual for Chapter 10 874
2,250
39,010
Exercise 10-10 (concluded)Analysis component One of the ways to apply the balance sheet approach is to
use an aging analysis of outstanding receivables. The main advantage of the aging analysis is that it adjusts the allowance for doubtful accounts to the estimated amount of uncollectible receivables based on a detailed analysis that considers the risk associated with the age of a receivable. Like the income statement approach, it satisfies the generally accepted accounting principles of matching and conservatism. The main disadvantage is that it does require more effort in terms of calculations. However, computerization of the accounting information system has negated that disadvantage.
Exercise 10-11 (15 minutes)May 3 Bad Debt Expense......................... 1,100
Accounts Receivable – Wilma Benz1,100
To write-off an uncollectible receivable using the direct write-off method.
Analysis component:Using 2% of credit sales, bad debt expense would be $5,600 (280,000 × 2% = 5,600) for 2011 thereby decreasing net income by $4,500 more than the direct write-off method. Using 4% of outstanding accounts receivable would result in a bad debt expense of $2,940 (46,000 × 4% = 1,840 + 1,100 = 2,940) thereby decreasing net income by $1,840 more than the direct write-off method.
Exercise 10-12 (20 minutes)Mar. 21 Notes Receivable..........................6,200.00
Accounts Receivable—Bradley Brooks6,200.00 To record 6-month, 10% note to replace
past-due account.
Sept. 21 Accounts Receivable—Bradley Brooks 6,510.00Interest Revenue...................... 310.00Notes Receivable..................... 6,200.00
To record dishonoured note; $6,200 × 0 .10 × 6/12 = $310.00.
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.875 Fundamental Accounting Principles, Twelfth Canadian Edition
Dec. 31 Allowance for Doubtful Accounts.. .6,510.00Accounts Receivable—Bradley Brooks
6,510.00 To record write-off of Brooks’ account.
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.Solutions Manual for Chapter 10 876
Exercise 10-13 (15 minutes)Oct. 31 Notes Receivable—Leann Grimes...5,000.00
Accounts Receivable—Leann Grimes5,000.00 To record 6-month, 8% note to replace
past-due account.
Dec. 31 Interest Receivable.......................66.67 Interest Revenue...................... 66.67
To record accrued interest; $5,000 × .08 × 2/12 = $66.67.
Apr. 30 Cash............................................5,200.00Notes Receivable—Leann Grimes
5,000.00 ......................Interest Revenue133.33 ..................Interest Receivable66.67
To record collection of note and interest; $5,000 × .08 × 4/12 = $133.33.
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.877 Fundamental Accounting Principles, Twelfth Canadian Edition
Exercise 10-14 (25 minutes)2011
Dec. 16 Notes Receivable..........................17,200.00Accounts Receivable—Carmel Karuthers
17,200.00 To record 60-day, 7% note to replace
past-due account.
31 Interest Receivable....................... 49.48Interest Revenue...................... 49.48
To record accrued interest; $17,200 × 0.07 × 15/365 = $49.48.
31 Interest Revenue.......................... 49.48Income Summary..................... 49.48
To record the closing of the Interest Revenue account.
2012Feb. 14 Cash............................................17,397.92
Interest Revenue...................... 148.44Interest Receivable.................. 49.48Notes Receivable.....................
17,200.00 To record collection of note plus interest; $17,200 x 0 .07 x 60/365 = 197.92; 197.92 – 49.48 = 148.44.
Mar. 2 Notes Receivable..........................8,000.00Accounts Receivable—ATW Company
8,000.00 To record 90-day, 8% note to replace
past-due account.
17 Notes Receivable..........................3,200.00Accounts Receivable—Leroy Johnson
3,200.00 To record 30-day, 9% note to replace
past-due account.
May 31 Cash............................................8,157.81Interest Revenue...................... 157.81Notes Receivable..................... 8,000.00
To record collection of note plus interest; $8,000 × 0.08 × 90/365 = $157.81.
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.Solutions Manual for Chapter 10 878
*Exercise 10-15 (20 minutes)Aug. 2 Accounts Receivable.....................6,295.00
Sales....................................... 6,295.00 To record sales on credit.
2 Cost of Goods Sold........................3,150.00Merchandise Inventory............. 3,150.00
To record cost of sales.
7 Cash............................................18,488.45Factoring Fee Expense.................. 281.55
Accounts Receivable.................18,770.00
To record sale of accounts receivable; $18,770 × .015.
15 Cash............................................3,436.00Accounts Receivable................. 3,436.00
To record collection from credit customers.
25 Cash............................................10,000.00Notes Payable..........................
10,000.00 To record note; pledged $14,000 of accounts
receivable as security for the loan.
Note:
Accounts receivable in the amount of $14,000 are pledged as security for a $10,000 note payable to Fidelity Bank.
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.879 Fundamental Accounting Principles, Twelfth Canadian Edition
*Exercise 10-16 (20 minutes)Jan. 20 Note Receivable............................170,000.00
Accounts Receivable – Steve Soetart170,000.00
Received note in settlement of account.
Feb. 19 Cash............................................170,487.58Interest Revenue...................... 487.58Notes Receivable.....................
170,000.00Discounted a note receivable.
Principal of Note...........................$170,000.00Add: Interest from Note ($170,000 × 9% × 90/365) 3,772.60Maturity Value..............................$173,772.60Less: Bank Discount ($173,772.60 × 11.5% × 60/365) 3,285.02Proceeds......................................$170,487.58
*Exercise 10-17 (15 minutes)Part 1
Accounts Receivable Turnover
Days’ Sales Uncollected
$7,280 = 13.43 times
$598 x 365 = 29.98 days
($598 + $486)/2 $7,280
Part 2
WestCon is not collecting its receivables as quickly as the industry average which is generally unfavourable. WestCon has more days of uncollected sales (or receivables) than the industry average, also unfavourable.
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.Solutions Manual for Chapter 10 880
PROBLEMS
Problem 10-1A (30 minutes)May 4 Accounts Receivable—Anne Bismarck 1,130.00
Sales....................................... 1,130.00
4 COGS........................................... 428.00Merchandise Inventory............. 428.00
5 Cash............................................11,511.96Credit Card Expense..................... 356.04
Sales.......................................11,868.00
$11,868 × 0.03 = $356.04.
5 COGS...........................................4,500.00Merchandise Inventory............. 4,500.00
5 Accounts Receivable—UniCharge...9,752.00Sales....................................... 9,752.00
5 COGS...........................................3,600.00Merchandise Inventory............. 3,600.00
8 Accounts Receivable—UniCharge...6,426.00Sales....................................... 6,426.00
8 COGS...........................................2,440.00Merchandise Inventory............. 2,440.00
10 No entry required.17 Cash............................................15,854.44
Credit Card Expense..................... 323.56Accounts Receivable—UniCharge
16,178.00 ($9,752 + $6,426) × 0.02 = $323.56.
18 Cash............................................1,107.40Sales Discounts............................ 22.60
Accounts Receivable—Anne Bismarck1,130.00
$1,130 ×0.02 = $22.60.
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.881 Fundamental Accounting Principles, Twelfth Canadian Edition
Problem 10-1A (concluded)Analysis component:
Advantages Disadvantagesa. bank credit cards
— encourages customer purchases— immediate payment to Clipper Sales— no uncollectible accounts
— service charges
b. non-bank credit cards
— encourages customer purchases— no uncollectible accounts
— service charges— delayed payments (likely faster than credit sales but much slower than bank credit cards)
c. debit cards
— encourages customer purchases— no uncollectible accounts— immediate payment to Clipper Sales
— service charges
d. cash — immediate collection— no uncollectible accounts
— less likely to encourage customer purchases if ‘cash only’ policy
Problem 10-2A (35 minutes) Part 1a. Expense is 2% of credit sales:Dec. 31 Bad Debt Expense.........................141,360.00
Allowance for Doubtful Accounts141,360.00
$10,675,500 – $3,607,500 = $7,068,000 × 0.02 = $141,360.
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.Solutions Manual for Chapter 10 882
b. Allowance is 5% of accounts receivable:
Dec. 31 Bad Debt Expense.........................138,510.00Allowance for Doubtful Accounts
138,510.00Calculations:Total receivables $2,140,200.00Percent uncollectible × 5.0%Required allowance balance$ 107,010.00
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.883 Fundamental Accounting Principles, Twelfth Canadian Edition
AFDA31,500 ? =
138,510107,010
Problem 10-2A (concluded) Part 2Current assets:Accounts receivable.................$2,140,200Less: Allowance for doubtful accounts
109,860* $2,030,340OR
Accounts receivable (net of $109,860*estimated uncollectible accounts)
$2,030,340
*Adjustment to the allowance...$141,360 creditUnadjusted allowance balance. . 31,500 debitAdjusted balance.....................$109,860 credit
Part 3Current assets:Accounts receivable.................$2,140,200Less: Allowance for doubtful accounts
107,010$2,033,190OR
Current assets:Accounts receivable (net of $107,010estimated uncollectible accounts)
$2,033,190
Analysis component:If bad debts are not adjusted for at the end of the accounting period, matching and conservatism are violated. If bad debts are not recorded at period end, they are not being matched to the revenues which caused the resulting net income and assets being overstated for that period. When assets and/or income are overstated, conservatism is being violated.
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.Solutions Manual for Chapter 10 884
Problem 10-3A (35 minutes) Part 11. Calculation of the required balance of the allowance:
Not due: $1,460,000 .0125 = $ 18,250 1 to 30: $ 708,000 .0200 = 14,16031 to 60: $ 152,000 .0650 = 9,88061 to 90: $ 96,000 .3275 = 31,440Over 90: $ 24,000 .6800 = 16,320
$90,050 credit2. Dec.31 Bad Debt Expense.........................63,250.00
Allowance for Doubtful Accounts63,250.00
Calculation:
Analysis component:
Writing off the account receivable will not affect 2012 net income. The entry to write off an account involves a debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable, both of which are balance sheet accounts. Net income is affected only by the annual recognition of the estimated bad debt expense, which is journalized as an adjusting entry.
Net income for 2011 (the year of the original sale) should have included an estimated expense for write-offs like this one.
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.885 Fundamental Accounting Principles, Twelfth Canadian Edition
AFDA26,800 ? = 63,25090,050
Problem 10-4A (30 minutes)Part A1.a) Cash........................................... 740,00
0Accounts Receivable.................... 2,220,0
00 Sales.................................... 2,960,0
00 To record sales; 25% x $2,960,000 total sales = cash sales of $740,000.
Cost of Goods Sold...................... 1,804,000
Merchandise Inventory.......... 1,804,000
To record cost of sales.
b) Sales Returns and Allowances...... 114,000
Accounts Receivable.............. 57,000 Cash..................................... 57,000 To record return of defective merchandise to be scrapped.
c) Accounts Receivable.................... 24,000 Allowance For Doubtful Accounts.....................................
24,000
To reverse write-off due to recovery.
Cash........................................... 24,000 Accounts Receivable.............. 24,000 To record recovery.
d) Allowance For Doubtful Accounts. 39,000 Accounts Receivable.............. 39,000 To record write-off of uncollectible accounts.
e) Cash........................................... 1,880,0
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.Solutions Manual for Chapter 10 886
00 Accounts Receivable.............. 1,880,0
00 To record collections from credit customers.
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.887 Fundamental Accounting Principles, Twelfth Canadian Edition
Problem 10-4A (continued)Part B2.Dec. 31 Bad Debt Expense......................... 21,630
Allowance for Doubtful Accounts21,630
2,220,000 – 57,000 = 2,163,0002,163,000 × 1% = 21,630.
3. Current assets:Accounts receivable.................$742,000Less: Allowance for doubtful accounts
23,310$718,690OR
Current assets:Accounts receivable (net of $23,310 estimated uncollectible acounts)
$718,690
Calculation of balance in AFDA :
4. $21,630
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.Solutions Manual for Chapter 10 888
AFDA
39,000
16,68024,00021,63023,310
Problem 10-4A (concluded)
Part C5.Dec. 31 Bad Debt Expense......................... 20,580
Allowance for Doubtful Accounts20,580
742,000 × 3% = 22,260 – 1,680 = 20,580.
Calculations:
Accounts ReceivableAllowance for Doubtful
AccountsDec.
31/10Balance
498,000
16,680 Dec. 31/10Balance
a) 2,220,000
57,000 b)
c) 24,000 24,000 c) 24,000 c)39,000 d) d)
39,0001,880,
000e)
1,680Unadjusted balance, Dec. 31/11
Dec. 31/11
Balance742,00
0
× 3%$22,26
022,260 Required
adjusted balance
6.Current assets:
Accounts receivable.................$742,000 Less: Allowance for doubtful accounts 22,260$719,740
ORCurrent assets:
Accounts receivable (net of $22,260estimated uncollectible acounts)
$719,740
7. $20,580
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.889 Fundamental Accounting Principles, Twelfth Canadian Edition
What adjustment
Problem 10-5A (35 minutes)2011a. Accounts Receivable....................... 2,289,000
Sales......................................... 2,289,000
COGS.............................................. 1,240,000Merchandise Inventory............... 1,240,000
b. Allowance for Doubtful Accounts..... 34,540Accounts Receivable................... 34,540
c. Cash............................................... 1,334,460Accounts Receivable................... 1,334,460
d. Bad Debt Expense........................... 48,340Allowance for Doubtful Accounts. 48,340
Calculations:
Accounts ReceivableAllowance for Doubtful
Accounts0 Unadjust
ed Balance
34,540
CreditSales 2,289,0
0034,540 Write-
offs1,334,4
60Collections
48,340
Balance 920,000 13,800 Required Balance
× 1.5%
13,80 0
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.Solutions Manual for Chapter 10 890
Adjustment needed
Problem 10-5A (concluded)2012e. Accounts Receivable....................... 2,941,560
Sales......................................... 2,941,560
COGS.............................................. 1,592,000Merchandise Inventory............... 1,592,000
f. Allowance for Doubtful Accounts..... 53,760Accounts Receivable................... 53,760
g. Cash............................................... 2,207,800Accounts Receivable................... 2,207,800
h. Bad Debt Expense........................... 63,960Allowance for Doubtful Accounts. 63,960
Calculations:
Accounts ReceivableAllowance for Doubtful
AccountsBal. 920,000
13,800 Bal.
CreditSales
2,941,560 53,760 Write-
offsWrite-offs
53,760
2,207,800
Collections
63,960
Bal. 1,600,000 24,000
Required Balance
× 1.5%
24,000
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.891 Fundamental Accounting Principles, Twelfth Canadian Edition
Adjustment needed
Problem 10-6A (30 minutes)a. 2011
Oct. 31
Bad Debt Expense...................... 23,850
Allowance for Doubtful Accounts....................................
23,850
To record estimate for uncollectible accounts; 1,590,000 x 1.5% = 23,850.
b.Assets Current assets: Accounts receivable........................ $124,00
0 Less: Allowance for doubtful accounts*.............................................
21,050 $102,950
OR
Accounts receivable (net)................ $102,950
*Calculations:Allowance for Doubtful Accounts
Unadj. Bal.Oct 31/11
2,800 23,85
0
AdjustmentOct 31/11
21,050
Adj. Bal. Oct 31/11
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.Solutions Manual for Chapter 10 892
Problem 10-6A (concluded)c. 2011
Oct. 31
Bad Debt Expense...................... 9,000
Allowance for Doubtful Accounts 9,000
To record estimate for uncollectible accounts; 124,000 x 5% = 6,200; 6,200 + 2,800 = 9,000.*
*Calculations:Allowance for Doubtful Accounts
Unadj. Bal.Oct 31/11
2,800 Adjustment
Oct 31/11
6,200 Adj. Bal. Oct 31/11
d.Assets Current assets: Accounts receivable........................ $124,00
0 Less: Allowance for doubtful accounts..............................................
6,20 0
$117,800
OR
Accounts receivable (net)................ $117,800
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.893 Fundamental Accounting Principles, Twelfth Canadian Edition
9,000
Problem 10-7A (25 minutes)Part 1
Jul. 31 Bad Debt Expense......................... 8,6751
Allowance For Doubtful Accounts8,675
To record estimated uncollectible accounts.
Part 2Aug. 31 Bad Debt Expense......................... 5,625
Allowance For Doubtful Accounts5,625
To record estimated uncollectible accounts.
Calculations:
Allowance for Doubtful Accounts
13,500
Balance, June 30
July write-
offs15,50
08,6751 Adjustment to
estimate bad debts for July
6,675 Balance, July 31
1,950 Recovery of account previously written off
8,625 Unadjusted balance, August 31
14,250
Desired balance, August 31 based on aging analysis
1. (900,000 – 32,500) × 1% = 8,675.2. 14,250 – 8,625 = 5,625 is the required adjustment.
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.Solutions Manual for Chapter 10 894
What adjustment is necessary to get the desired balance2?
5,6252
Problem 10-8A (30 minutes)a)
Sept. Aug. July June May
CustomerNot yet
due
1 to 29 days past due
30 to 59 days
past due
60 to 89 days
past due
90 to 119 days past due
B. Axley $28,000
T. Holton $14,000
$24,000
$72,000
W. Nix12,000 4,000
$18,000
C. Percy10,000 4,000
K. Willis96,000
Totals $132,000
$28,000
$76,000
$18,000
$28,000
Percent Uncollectible ×0.5% × 1% × 4% ×10% ×20%Estimated uncollectible accounts $ 660 $ 280
$3,040
$1,800
$5,600
Total=
$11,380
b)Sept. 30 Bad Debt Expense………………………… 9,780
Allowance for Doubtful Accounts…….9,780
To record estimate for uncollectible accounts.
Calculations:Allowance for Doubtful Accounts
1,600
Unadjusted balance Sept. 30
11,380
Desired adjusted balance
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.895 Fundamental Accounting Principles, Twelfth Canadian Edition
What adjustment is necessary to achieve the
Problem 10-9A (30 minutes)a. 2011Dec.
31Bad Debt Expense..................... 48,6
50 Allowance for Doubtful Accounts 48,65
0 To record estimated uncollectible accountsusing the income statement approach;
1,946,000 x 2.5% = 48,650.
2012Dec.
31Bad Debt Expense..................... 19,4
80 Allowance for Doubtful Accounts 19,48
0 To record estimated uncollectible accounts; 512,000 x 4% = 20,480; 20,480 – 1,000
= 19,480.
2013Dec.
31Bad Debt Expense..................... 29,9
00 Allowance for Doubtful Accounts 29,90
0To record estimated uncollectible
accounts;29,200 + 700 = 29,900.
Analysis component The normal balance in AFDA is a credit. Write-offs greater
than the estimated uncollectibles recorded at the end of the previous accounting period would create a debit unadjusted balance.
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.Solutions Manual for Chapter 10 896
Problem 10-10A (30 minutes)a), b), c)
Note
Date of Note
Principal
Interest
Rate TermMaturity
Date
Days of Accrued Interest
atDec. 31,
2011
Accrued Interest at Dec.
31, 20111 Nov.
1/10$
240,000
7% 180 days
Apr. 30/111
0 0
2 Jan. 5/11
$
100,000
8% 90 days
Apr. 5/112
0 0
3 Nov. 20/11
$
90,000
10% 45 days
Jan. 4/123
41 days $1010.965
4 Dec. 10/11
$
120,000
12% 30 days
Jan. 9/124
21 days $828.496
Calculations as denoted by superscripts: 1. Days in November.. 30Minus date of note...... 1Days remaining in November................................. 29Add days in December 31Add days in January.... 31Add days in February.. 28Add days in March...... 31Add days in April........ 30Period of note in days.180
2. Days in January...... 31Minus date of note...... 5Days remaining in January..............................26Add days in February.. 28Add days in March...... 31Add days in April........ 5Period of note in days. 90
3. Days in November. 30Minus date of note... . 20Days remaining in November................. 10Add days in December.............................31Add days in January... 4Period of note in days 45
4. Days in December. 31Minus date of note... . 10Days remaining in December................. 21Add days in January... 9Period of note in days 30
5. $90,000 × 10% × 41/365 = $1010.966. $120,000 × 12% ×
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.897 Fundamental Accounting Principles, Twelfth Canadian Edition
21/365 = $828.49
d)Dec. 31/11Interest Receivable – Note 3..........1010.96
Interest Revenue...................... 1010.96To accrue interest on Note 3.
e)Jan. 4/12 Cash............................................91,109.59
Interest Revenue...................... 98.63Interest Receivable.................. 1010.96Note Receivable – Note 3..........
90,000.00To record collection of Note 3 and interest;
90,000 x 10% x 45/365 = 1,109.59; 1,109.59 – 1010.96 = 98.63Problem 10-11A (75 minutes)a)2010Dec. 16 Notes Receivable..........................19,200.00
Accounts Receivable—Hal Krueger19,200.00
31 Interest Receivable....................... 71.01Interest Revenue...................... 71.01
$19,200 .09 15/365 = $71.01
31 Interest Revenue.......................... 71.01Income Summary..................... 71.01
2011Feb. 14 Cash............................................19,484.05
Interest Revenue...................... 213.04Interest Receivable.................. 71.01Notes Receivable.....................
19,200.00 19,200 x 9% x 60/365 = 284.05; 284.05 – 71.01 =
213.04Mar. 2 Notes Receivable..........................10,240.00
Accounts Receivable—ARC Company10,240.00
17 Notes Receivable..........................3,200.00
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.Solutions Manual for Chapter 10 898
Accounts Receivable—Penny Bobek3,200.00Apr. 16 Accounts Receivable—Penny Bobek 3,223.67
Interest Revenue...................... 23.67Notes Receivable..................... 3,200.00
$3,200 × .09 × 30/365 = $23.67b) Days in March.......... 31
Minus date of note... 2 Days remaining in March 29Add days in April...... 30Add days in May....... 31Days to equal Maturity date 90
Therefore, the maturity date is May 31, 2011.2011May 31 Cash............................................10,492.49
Interest Revenue...................... 252.49Notes Receivable.....................
10,240.00To record collection of note plus interest; 10,240 × 90/365 × 10% = 252.49.
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.899 Fundamental Accounting Principles, Twelfth Canadian Edition
Problem 10-12A (30 minutes)2011
a.
Apr. 15
Notes Receivable – John Daley. . . 120,000.00
Accounts Receivable – John Daley.......................................
120,000.00
To record acceptance of a 6%, 90-day note.
b.
May 1
Notes Receivable – ABC Drilling. 50,000.00
Accounts Receivable – ABC Drilling.....................................
50,000.00
To record acceptance of a 6%, 6-month note.
c. 31 Interest Receivable................... 1,157.40
Interest Revenue.................. 1,157.40
To record accrued interest at year end; Daley: 120,000 x 6% x 46/365 = 907.40; ABC: 50,000 x 6% x 1/12 = 250.00 1,157.40
d.
July 14
Cash......................................... 121,775.34
Interest Receivable.............. 907.40 Interest Revenue.................. 867.94 Notes Receivable – John Daley.......................................
120,000.00
To record collection of note; 120,000 x 6% x 90/365 = 1,775.34 – 907.40 = 867.94.
e.
Nov. 1
Accounts Receivable – ABC Drilling.....................................
51,500.00
Interest Revenue.................. 1,250.00
Interest Receivable.............. 250.00
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.Solutions Manual for Chapter 10 900
Notes Receivable – ABC Drilling.....................................
50,000.00
To record dishonour of note; 50,000 x 6% x 6/12 = 1,500.00 – 250.00 = 1,250.00.
f. 15 Allowance for Doubtful Accounts 51,500.00
Accounts Receivable – ABC Drilling.....................................
51,500.00
To record write-off of account receivable.
Analysis component:The debit balance of $55,500 (4,000 + 51,500) in AFDA after recording the write-off of November 15 indicates that write-offs were greater than the expected amount of uncollectibles. $55,500 may not be a material amount relative to total accounts receivable (unknown) in which case the underestimation is not a concern. However, if the $55,500 is significant in comparison to total outstanding accounts receivable, then a review of the estimating procedure and/or the credit policy are in order.
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.901 Fundamental Accounting Principles, Twelfth Canadian Edition
*Problem 10-13A (30 minutes)Mar. 2 Notes Receivable..........................10,240.00
Accounts Receivable – JNC Company10,240.00
Apr. 21 Cash............................................10,140.00Interest Expense.......................... 100.00
Notes Receivable.....................10,240.00
June 2 Accounts Receivable – JNC Company10,492.49
Cash........................................10,492.49
$10,240 + ($10,240 × .10 × 90/365) = $10,492.49
July 16 Cash............................................10,621.85Interest Revenue...................... 129.36Accounts Receivable – JNC Company
10,492.49 10,492.49 x 10% x 45/365 = 129.36.
Sept. 3 Notes Receivable..........................4,160.00Accounts Receivable – Cecile Duval
4,160.00
18 Cash............................................4,110.00Interest Expense.......................... 50.00
Notes Receivable..................... 4,160.00
Analysis componentWhen a business discounts notes receivable with recourse and these notes have not matured prior to year end, the business must disclose this information in the notes to the financial statements. This is a requirement because the business has a contingent liability, which means that if the maker of the note dishonours (fails to pay) the note, the business will have to pay the third party the full maturity value. This contingent liability must be disclosed to satisfy the full-disclosure principle.
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.Solutions Manual for Chapter 10 902
*Problem 10-14A (60 minutes)2011Dec. 11 Notes Receivable..........................15,000.00
Accounts Receivable—Fred Calhoun15,000.00
31 Interest Receivable....................... 98.63Interest Revenue...................... 98.63
[Interest = $15,000 × 0.12 × 20/365 = $98.63]
31 Interest Revenue.......................... 98.63Income Summary..................... 98.63
2012
Jan. 10 Cash............................................15,119.88Interest Receivable.................. 98.63Interest Revenue...................... 21.25Notes Receivable.....................
15,000.00Calculations:
Principal............................$15,000.00Interest = $15,000.00 × 0.12 × (60/365)
295.89Maturity value....................15,295.89Discount = $15,295.89 × 0.14 × (30/365)
176.01Proceeds............................$15,119.88
Feb. 10 Accounts Receivable—Fred Calhoun15,355.89
Cash........................................15,355.89
[Balance = $15,295.89 + $60.00 = $15,355.89]
Mar. 5 Notes Receivable..........................4,500.00Accounts Receivable—Donna Reed
4,500.00
29 Cash............................................4,513.59Interest Revenue...................... 13.59Notes Receivable..................... 4,500.00
Calculations:Principal............................$4,500.00
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.903 Fundamental Accounting Principles, Twelfth Canadian Edition
Interest = $4,500.00 × 0.11 × (60/365) 81.37
Maturity value....................$4,581.37Discount = $4,581.37 × 0.15 × (36/365)
67.78Proceeds............................$4,513.59
May 7 No entry required.
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.Solutions Manual for Chapter 10 904
*Problem 10-14A (concluded)June 9 Notes Receivable..........................6,750.00
Accounts Receivable—Jack Miller6,750.00
Aug. 8 Cash............................................6,860.96Interest Revenue...................... 110.96Notes Receivable..................... 6,750.00
[Interest = $6,750 × 0.10 × 60/365 = $110.96]
11 Notes Receivable..........................8,000.00Accounts Receivable—Roger Addison
8,000.00
31 Cash............................................8,015.66Interest Revenue...................... 15.66Notes Receivable..................... 8,000.00
Calculations:Principal............................$8,000.00Interest = $8,000.00 × 0.10 × (60/365)
131.51Maturity value....................$8,131.51Discount = $8,131.51 × 0.13 × (40/365)
115.85Proceeds............................$8,015.66
Oct. 12 Accounts Receivable—Roger Addison 8,191.51Cash........................................ 8,191.51
[Balance = $8,131.51 + $60 = $8,161.51]
Nov. 19 Cash............................................8,281.28Interest Revenue...................... 89.77Accounts Receivable—Roger Addison
8,191.51Calculations:
Maturity value....................$8,131.51Protest fee......................... 60.00 Balance due.......................$8,191.51Interest = $8,191.51 × 0.10 × (40/365)
89.77 Amount collected................$8,281.28
Dec. 23 Allowance for Doubtful Accounts.. .15,355.89Accounts Receivable—Fred Calhoun
15,355.89
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.905 Fundamental Accounting Principles, Twelfth Canadian Edition
ALTERNATE PROBLEMSProblem 10-1B (30 minutes)July 2 Accounts Receivable—J.R. Lacey . . .2,780.00
Sales....................................... 2,780.00
2 COGS...........................................1,660.00Merchandise Inventory............. 1,660.00
8 Cash............................................3,150.56Credit Card Expense..................... 97.44
Sales....................................... 3,248.00 $3,248 × .03 = $97.44.
8 COGS...........................................1,950.00Merchandise Inventory............. 1,950.00
8 Accounts Receivable—Fortune Credit Co 1,114.00Sales....................................... 1,114.00
8 COGS........................................... 665.00Merchandise Inventory............. 665.00
12 Cash............................................2,724.40Sales Discounts............................ 55.60
Accounts Receivable—J.R. Lacey 2,780.00 $2,780 × .02.
13 Accounts Receivable—Fortune Credit Co. 2,960.00Sales....................................... 2,960.00
13 COGS...........................................1,775.00Merchandise Inventory............. 1,775.00
16 No entry required.
23 Cash............................................3,992.52Credit Card Expense...................... 81.48
Accounts Receivable—Fortune Credit Co.4,074.00 ($1,114 + $2,960) × .02.
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.Solutions Manual for Chapter 10 906
Problem 10-1B (concluded)Analysis component:
Advantages Disadvantagesa. cash — immediate
collection— no uncollectible accounts
— less likely to encourage customer purchases if ‘cash only’ policy
b. debit cards
— encourages customer purchases— no uncollectible accounts— immediate collection
— service charges
c. credit cards
— encourages customer purchases— immediate collection— no uncollectible accounts
— service charges
d. cheques — encourages customer purchases
— service charges— delayed payments (because cheques must be processed in order for cash to transfer to Ace’s bank account)— risk of NSF (not sufficient funds) cheques
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.907 Fundamental Accounting Principles, Twelfth Canadian Edition
Problem 10-2B (35 minutes) Part 1a. Expense is 2.5% of credit sales:Dec. 31 Bad Debt Expense......................... 31,025
Allowance for Doubtful Accounts31,025
$1,241,000 × .025 = $31,025.b. Allowance is 6% of accounts receivable:Dec. 31 Bad Debt Expense......................... 23,300
Allowance for Doubtful Accounts23,300
Calculations:Accounts Receivable
Allowance for Doubtful Accounts
5,200 Bal.
23,300
Bal. 475,000 28,500 Required Bal.
× 6%28,500
Part 2Current assets:
Accounts receivable....................$475,000Less: Allowance for doubtful accounts
36,225*$438,775OR
Accounts receivable (net of $36,225*estimated uncollectible accounts).
$438,775
*Calculations:Allowance for
Doubtful Accounts5,200 Unadjus
ted balance
31,025 Adjustment
36,225 Adjusted balance
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.Solutions Manual for Chapter 10 908
Adjustment Needed
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.909 Fundamental Accounting Principles, Twelfth Canadian Edition
Problem 10-2B (concluded)Part 3
Current assets:Accounts receivable....................$475,000Less: Allowance for doubtful accounts
28,500$446,500OR
Accounts receivable (net of $28,500estimated uncollectible accounts).
$446,500
Analysis component:I would recommend that Genie use the balance sheet approach to estimate uncollectible accounts receivable because it more accurately reflects uncollectible receivables since it is based on an aging analysis. The balance sheet approach does require more effort to calculate than the income statement approach. Bad debt expense represents accounts that are not expected to be collected so the fact that the income statement approach mixes both collected and uncollected accounts in its estimation of uncollectible accounts makes it less accurate than the balance sheet approach.
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.Solutions Manual for Chapter 10 910
Problem 10-3B (35 minutes)1. Calculation of the required balance of the allowance:
Not due: $296,400 × .020 = $ 5,9281 to 30: $177,800 × .040 = 7,112
31 to 60: $ 58,000 × .085 = 4,93061 to 90: $ 7,600 × .390 = 2,964Over 90: $ 3,800 × .825 = 3,1,35
$24,069
2. Dec.31 Bad debt expense......................... 28,169Allowance for Doubtful Accounts
28,169Analysis component
Writing off the account receivable will not affect 2012 net income. The entry to write off an account involves a debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable, both of which are balance sheet accounts. Net income is affected only by the annual recognition of the estimated bad debt expense, which is journalized as an adjusting entry.
Net income for 2011 (the year of the original sale) should have included an estimated expense for write-offs like this one.
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.911 Fundamental Accounting Principles, Twelfth Canadian Edition
Allowance for Doubtful Accounts
Unadjusted
balance4,100
28,169
24,06 Required
Adjustment Needed
Problem 10-4B (30 minutes)Part A1. a) Cash........................................... 517,50
0Accounts Receivable.................... 2,932,5
00 Sales.................................... 3,450,0
00 To record sales; 15% x $3,450,000 total sales = cash sales of $517,500.
Cost of Goods Sold...................... 2,415,000
Merchandise Inventory.......... 2,415,000
To record cost of sales.
b) Sales Returns and Allowances...... 98,000 Accounts Receivable.............. 98,000 To record return of defective merchandise to be scrapped.
c) Accounts Receivable.................... 58,000 Allowance For Doubtful Accounts.....................................
58,000
To reverse write-off due to recovery.
Cash........................................... 58,000 Accounts Receivable.............. 58,000 To record recovery.
d) Allowance For Doubtful Accounts. 265,000
Accounts Receivable.............. 265,000
To record write-off of uncollectible accounts.
e) Cash........................................... 2,949,000
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.Solutions Manual for Chapter 10 912
Sales Discounts........................... 52,000 Accounts Receivable.............. 3,001,0
00 To record collections from credit customers less discounts of $52,000.
Part B2.Dec. 31 Bad Debt Expense.........................222,600
Allowance for Doubtful Accounts222,600
2,932,500 – 98,000 – 52,000 = 2,782,5002,782,500 × 8% = 222,600
Problem 10-4B (continued)3.
Current assets:Accounts receivable.................$548,000Less: Allowance for doubtful accounts
40,520$507,480OR
Current assets:Accounts receivable (net of $40,520estimated uncollectible accounts)
$507,480 Calculation of balance in AFDA:
Calculation:
4. $222,600
Part C5.Dec. 31 Bad Debt Expense.........................204,020
Allowance for Doubtful Accounts204,020
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.913 Fundamental Accounting Principles, Twelfth Canadian Edition
AFDA
265,000
24,920 58,000222,600 40,520
To record estimated uncollectible accountsreceivable.
Calculations:Accounts Receivable
Allowance for Doubtful Accounts
Dec. 31/10
Balance980,00
024,920 Dec. 31/10
Balance
a) 2,932,500
98,000 b)
c) 58,000 58,000 c) 58,000 c)265,00
0d) d) 265,0
003,001,
000e) Unadjust
ed balance,
Dec. 31/11
182,080
Dec. 31/11
Balance548,50
0
× 4%21,940 Required
adjusted balance
= $21,94
0Problem 10-4B (concluded)6.
Current assets:Accounts receivable.................$548,000Less: Allowance for doubtful accounts
21,940$526,060OR
Current assets:Accounts receivable (net of $21,940estimated uncollectible accounts)
$526,060
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.Solutions Manual for Chapter 10 914
204,020
What adjustment
7. $204,020
Problem 10-5B (35 minutes)2011a. Accounts Receivable............................. 673,490
Sales............................................... 673,490
COGS................................................... 486,000Merchandise Inventory..................... 486,000
b. Cash.................................................... 437,250Accounts Receivable......................... 437,250
c. Allowance for Doubtful Accounts........... 8,240Accounts Receivable......................... 8,240
d. Bad Debt Expense................................. 10,520Allowance for Doubtful Accounts....... 10,520
Calculations:
Accounts ReceivableAllowance for Doubtful
Accounts0
CreditSales
673,490437,250 Collecti
ons
8,240 Write-offs
Write-offs
8,240
Balance
228,000 2,280 Required Balance
× 1%
2,280
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.915 Fundamental Accounting Principles, Twelfth Canadian Edition
10,520 Adjustment needed
Problem 10-5B (concluded)2012e. Accounts Receivable............................ 927,310
Sales.............................................. 927,310
COGS.................................................. 716,000Merchandise Inventory.................... 716,000
f. Cash................................................... 890,220Accounts Receivable....................... 890,220
g. Allowance for Doubtful Accounts.......... 10,090Accounts Receivable....................... 10,090
h. Bad Debt Expense............................... 10,360Allowance for Doubtful Accounts..... 10,360
Accounts ReceivableAllowance for Doubtful
AccountsBal. 228,000
2,280 Bal.
CreditSales
927,310 890,220 Collections
10,090 Write-offs
Write-offs
10,090
10,360
Bal. 255,000 2,550
Required Balance
× 1%
2,550
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.Solutions Manual for Chapter 10 916
Adjustment needed
Problem 10-6B (30 minutes)a. 2011May
31Bad Debt Expense............................. 10,5
00 Allowance for Doubtful Accounts. . . 10,50
0 To record estimate for uncollectible accounts; 420,000 x 2.5% = 10,500.
b.Assets Current assets: Accounts receivable............. $140,
000 Less: Allowance for doubtful accounts*.....................
13, 700
$126,300
OR
Accounts receivable (net).... $126,300
*Calculations:Allowance for Doubtful Accounts
3,200
10,500
Unadj. Bal.May 31/11
AdjustmentMay 31/11
13,700
Adj. Bal. May 31/11
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.917 Fundamental Accounting Principles, Twelfth Canadian Edition
Problem 10-6B (concluded)c. 2011May
31Bad Debt Expense...................... 840
Allowance for Doubtful Accounts....................................
840
To record estimate for uncollectible accounts; 4,040* – 3,200 = 840.**
*Calculations:
May 31, 2011Accounts
Receivable
Expected Percentag
e Uncollecti
ble
Estimated Uncollecti
bles
$ 98,000 1% = 98039,000 4% = 1,5603,000 50% = 1,500
4,040
**Calculations:
Allowance for Doubtful Accounts
3,200 Unadj. Bal.May 31/11
AdjustmentMay 31/11
4,040 Adj. Bal. May 31/11
d.Assets Current assets: Accounts receivable............. $140,0
00 Less: Allowance for doubtful accounts.......................
4,04 0
$135,960
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.Solutions Manual for Chapter 10 918
840
OR
Accounts receivable (net).... $135,960
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.919 Fundamental Accounting Principles, Twelfth Canadian Edition
Problem 10-7B (35 minutes)Part 1
Oct. 31 Bad Debt Expense......................... 11,500Allowance For Doubtful Accounts
11,500To record estimated uncollectible accounts;
2,300,000 x .005 = 11,500.
Part 2Nov. 30 Bad Debt Expense......................... 7,550
Allowance For Doubtful Accounts7,550
To record estimated uncollectible accounts.Calculations:
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.Solutions Manual for Chapter 10 920
Accounts ReceivableAllowance for Doubtful
AccountsBal. Sept. 30 320,00
04,80
0Bal. Sept. 30
Revenues on credit
2,300,000
2,025,000
Collection of customer accounts
65,000
Recovery
Set-up recovery 65,000 25,000 Write-off
of uncollectible account
Write-off of uncollectible account
25,000
11,5001
Adjustment to estimate bad debts for October
Bal. Oct. 31 635,00
056,3
00Bal. Oct. 31
Revenues on credit
1,975,000
1,865,000
Collection of customer accounts
28,000 Write-off of uncollectible account
Write-off of uncollectible account
28,000
Bal. Nov. 30 717,00
028,3
00Unadjusted bal. Nov. 30
7,550
35,8502
Desired bal. Nov. 30
1. 2,300,000 × ½% = 11,5002. 717,000 × 5% = 35,8503. 35,850 – 28,300 = 7,550
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.921 Fundamental Accounting Principles, Twelfth Canadian Edition
What adjustment is necessary to get the
Problem 10-8B (30 minutes)a)
Aug. + July June May April
Not yet due1 to 29 days
past due
30 to 59 days
past due
60 to 89 days
past dueA. Leslie $29,000 $12,000T. Meston
$26,000
P. Obrian
21,000 + 52,000 = 73,000
L. Timms 14,000 $26,000 63,000W. Victor
61,000 + 32,000 = 93,000
83,000
Totals $209,000
$109,000
$75,000
$26,000
Percent Uncollectible
× 1% × 2% × 5% × 20%
Estimated uncollectible accounts $2,090 $2,180
$3,750
$5,200
Total=
$13,220
b)Aug. 31 Bad Debt Expense......................... 19,520
Allowance for Doubtful Accounts19,520
To record estimate for uncollectible accounts.
Calculations:
Allowance for Doubtful AccountsUnadjusted
balance Aug. 31
6,300
19,520
13,220
Desired adjusted balance
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.Solutions Manual for Chapter 10 922
What adjustment is necessary to achieve the
Problem 10-9B (30 minutes)a. 2011Mar.
31Bad Debt Expense..................... 45,86
5 Allowance for Doubtful Accounts..................................
45,865
To record estimated uncollectible accounts using the income statement approach; 9,173,000 x .5% = 45,865.
2012Mar.
31Bad Debt Expense..................... 51,53
0 Allowance for Doubtful Accounts..................................
51,530
To record estimated uncollectible accounts; 729,000 x 7% = 51,030; 51,030 + 500 = 51,530.
2013Mar.
31Bad Debt Expense..................... 72,50
0 Allowance for Doubtful Accounts..................................
72,500
To record estimated uncollectible accounts; 59,000 + 13,500 = 72,500.
Analysis component
YearAllowance
for Doubtful Accounts
Accounts Receivable Sales
2011 $43,565* $486,000
$9,173,000
2012 51,030 729,000 7,942,0002013 59,000 946,000 7,500,000
*45,865 – 2,300 = 43,565
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.923 Fundamental Accounting Principles, Twelfth Canadian Edition
Sales are decreasing while the balance in Accounts Receivable is increasing indicating that the collection of receivables is less efficient in 2013 than in 2012 and 2011. Also, the balance in the Allowance for Doubtful Accounts account is increasing with decreasing sales confirming that the collection of receivables requires attention.
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.Solutions Manual for Chapter 10 924
Problem 10-10B (30 minutes)(a) (b) (c)
Note
Date of Note
Principal
Interest Rate Term
Maturity Date
Days of Accrued Interest
atDec. 31,
2011
Accrued Interest at Dec.
31, 20111 Sept.
20/10$245,
0007% 120
daysJan.
18/1110 0
2 Jun. 1/11
$120,000
9% 45 days
July 16/112
0 0
3 Nov. 23/11
$ 82,00
0
9% 90 days
Feb. 21/123
38 days $768.335
4 Dec. 18/11
$ 60,00
0
10% 30 days
Jan. 17/124
13 days $213.706
Calculations as denoted by superscripts:1. Days in September. 30Minus date of note...... 20Days remaining in September................. 10Add days in October.... 31Add days in November 30Add days in December 31Add days in January.... 18Period of note in days. 120
2. Days in June........... 30Minus date of note...... 1Days remaining in June..............................29Add days in July.......... 16Period of note in days. 45
3. Days in November... 30Minus date of note....... 23Days remaining in November.................... 7Add days in December.. 31Add days in January..... 31Add days in February... 21Period of note in days. . 90
4. Days in December. . . 31Minus date of note....... 18Days remaining in December.................... 13Add days in January..... 17Period of note in days. . 30
5. $82,000 × 9% × 38/365 = $768.336. $60,000 × 10% × 13/365 = $213.70
d) 2011Dec. 31 Interest Receivable – Note 4.......... 213.70
Interest Revenue...................... 213.70Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.925 Fundamental Accounting Principles, Twelfth Canadian Edition
To accrue interest on Note 4.
e) 2012Jan. 17 Cash............................................60,493.15
Interest Revenue...................... 279.45Interest Receivable.................. 213.70Note Receivable – Note 4..........
60,000.00To record collection of Note 4 and interest;
60,000 x 10% x 30/365 = 493.15; 493.15 – 213.70 = 279.45.
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.Solutions Manual for Chapter 10 926
Problem 10-11B (75 minutes) a.2011Nov. 16 Notes Receivable..........................3,700.00
Accounts Receivable—Bess Parker3,700.00
Dec. 31 Interest Receivable....................... 54.74Interest Revenue...................... 54.74
$3,700 × .12 × 45/365 = $54.74
31 Interest Revenue.......................... 54.74Income Summary..................... 54.74
2012Feb. 14 Cash............................................3,809.48
Interest Earned........................ 54.74Interest Receivable.................. 54.74Notes Receivable..................... 3,700.00
28 Notes Receivable..........................12,400.00Accounts Receivable—The Simms Co.
12,400.00Mar. 1 Notes Receivable..........................5,100.00
Accounts Receivable—Bedford Holmes5,100.00
30 Accounts Receivable—The Simms Co12,491.73
Interest Revenue...................... 91.73Notes Receivable.....................
12,400.00$12,400 × .09 × 30/365 = $91.73.
b.Days in March.......... 31Minus date of note. . . 1Days remaining in March 30Add days in April...... 30Days to equal Maturity date 60
Therefore, the maturity date is April 30, 2012.
2012Apr. 30 Cash............................................5,183.84
Interest Revenue...................... 83.84Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.927 Fundamental Accounting Principles, Twelfth Canadian Edition
Notes Receivable..................... 5,100.00To record collection of note plus interest(5,100 × 60/365 × 10% = 83.84).
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.Solutions Manual for Chapter 10 928
Problem 10-12B (30 minutes)2011
a.
Nov. 17
Notes Receivable – RoadWorks. . 45,000.00
Accounts Receivable – RoadWorks...............................
45,000.00
To record acceptance of 7%, 90-day note.
b.
Dec. 1
Notes Receivable – Ellen Huskey 8,000.00
Accounts Receivable – Ellen Huskey.....................................
8,000.00
To record acceptance of 7%, 4-month note.
2012c. Jan.
31Interest Receivable................... 740.59
Interest Revenue.................. 740.59 To record accrued interest; RoadWorks: 45,000 x 7% x 75/365 = 647.26; Huskey: 8,000 x 7% x 2/12 = 93.33 740.59
d.
Feb. 15
Cash......................................... 45,776.71
Notes Receivable – RoadWorks...............................
45,000.00
Interest Receivable.............. 647.26 Interest Revenue.................. 129.45 To record collection of note; 45,000 x 7% x 90/365 = 776.71; 776.71 – 647.26 = 129.45.
e.
Apr. 1
Accounts Receivable – Ellen Huskey.....................................
8,186.66
Interest Receivable.............. 93.33 Interest Revenue.................. 93.33 Notes Receivable – Ellen Huskey.....................................
8,000.00
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.929 Fundamental Accounting Principles, Twelfth Canadian Edition
To record dishonour of note; 8,000 x 7% x 2/12 = 93.33.
f. July 15
Allowance for Doubtful Accounts................................................
8,186.66
Accounts Receivable – Ellen Huskey.....................................
8,186.66
To record write-off of accounts receivable.
Analysis component:The credit balance in AFDA is $41,813.34 (50,000 – 8,186.66) after recording the July 15 write-off. Assuming no additional write-offs were recorded prior to year end, the large unused portion of AFDA indicates that write-offs were significantly less than expected.
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.Solutions Manual for Chapter 10 930
*Problem 10-13B (30 minutes)Date Description Debit Credit
Mar. 1 Notes Receivable.......................... 5,100Accounts Receivable – Bolton Company
5,100
23 Cash............................................ 5,050Interest Expense.......................... 50
Notes Receivable..................... 5,100
June 21 Notes Receivable.......................... 9,300Accounts Receivable – Vince Soto
9,300
July 5 Cash............................................ 9,100Interest Expense.......................... 200
Notes Receivable..................... 9,300
Sept. 25 No entry required.
Analysis componentWhen a business discounts notes receivable with recourse and these notes have not matured prior to year end, the business must disclose this information in the notes to the financial statements. This is a requirement because the business has a contingent liability, which means that if the maker of the note dishonours (fails to pay) the note, the business will have to pay the third party the full maturity value. This contingent liability must be disclosed to satisfy the full-disclosure principle.
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.931 Fundamental Accounting Principles, Twelfth Canadian Edition
*Problem 10-14B (60 minutes)Jan. 10 Notes Receivable..........................3,000.00
Accounts Receivable—David Huerta3,000.00
Mar. 14 Accounts Receivable—David Huerta 3,059.18Interest Revenue...................... 59.18Notes Receivable..................... 3,000.00
$3000 × .12 × 60/365 = $59.18,
19 Notes Receivable..........................2,100.00Accounts Receivable—Rose Jones
2,100.00
28 Cash............................................2,075.38Interest Expense.......................... 24.62
Notes Receivable..................... 2,100.00Calculations:
Principal............................$2,100.00Interest = $2,100.00 × 0.10 × (90/365)
51.78Maturity value....................$2,151.78Discount = $2,151.78 × 0.16 × (81/365)
76.40Proceeds............................$2,075.38
June 20 No entry required
27 Cash............................................ 700.00Notes Receivable..........................1,300.00
Accounts Receivable—Jake Thomas2,000.00
July 24 Cash............................................1,308.86Interest Revenue...................... 8.86Notes Receivable..................... 1,300.00
Calculations:Principal............................$1,300.00Interest = $1,300.00 × 0.12 × (60/365)
25.64Maturity value....................$1,325.64Discount = $1,325.64 × 0.14 × (33/365)
16.78Proceeds............................$1,308.86
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.Solutions Manual for Chapter 10 932
Aug. 29 Accounts Receivable—Jake Thomas1,345.64Cash.......................................... 1,345.64
Sept. 4 Notes Receivable..........................1,500.00Accounts Receivable—Ginnie Bauer
1,500.00
*Problem 10-14B (concluded)Oct. 13 Cash............................................1,514.82
Interest Revenue...................... 14.82Notes Receivable..................... 1,500.00
Calculations:Principal............................$1,500.00Interest = $1,500.00 × 0.11 × (60/365)
27.12Maturity value....................$1,527.12Discount = $1,527.12 × 0.14 × (21/365)
12.30Proceeds............................$1,514.82
Nov. 6 Accounts Receivable—Ginnie Bauer 1,547.12Cash........................................ 1,547.12
Dec. 6 Cash............................................1,561.11 Interest Revenue..................... 13.99 Accounts Receivable—Ginnie Bauer
1,547.12 1,547.12 x 11% x 30/365 = 13.99.
28 Allowance for Doubtful Accounts.. .4,404.82Accounts Receivable—David Huerta
3,059.18Accounts Receivable—Jake Thomas
1,345.64
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.933 Fundamental Accounting Principles, Twelfth Canadian Edition
ANALYTICAL AND REVIEW PROBLEMS
A&R Problem 10-1 (20 minutes)a)$97,000 (159,000 – 48,000 – 14,000)b)$90,000 (97,000 + 52,000 + 21,000 – 7,000 – 52,000 – × =
21,000)c) $168,000 (104,000 + 43,000 + 21,000)d)$104,000 (48,000 + 104,000 – 48,000)e)$207,000 (48,000 + 17,000 + 90,000 + 52,000)f) $237,000 [(–159,000 + 7,000 + 207,000 + 14,000) +
168,000]
g) Dec. 31 Bad Debt Expense....................... 17,010 Allowance for Doubtful Accounts
17,010 $168,000 × .02 = $3,360;
$14,000 + $3,360 – $350 = $17,010.
h) $3,360
i) Current assets:Accounts receivable.............................$168,000Less: Allowance for doubtful accounts. 3,360
$164,640OR
Current assets:Accounts receivable (net of $3,360estimated uncollectible accounts)........
$164,640
Analysis component:Farthington maintains an Accounts Receivable Subledger because keeping records by individual credit customer makes it easier to retrieve and track information such as which customers are/are not paying their accounts in a timely manner. Farthington might also maintain an accounts payable subledger to monitor credit with suppliers, an inventory subledger to monitor inventory, and a capital asset subledger to monitor capital assets.
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.Solutions Manual for Chapter 10 934
A&R Problem 10-22011
Jan. 15 Accounts Receivable – JanCo. . . 29,000.00
Sales................................. 29,000.00
To record credit sales; terms 3/5, n15.
15 Cost of Goods Sold................. 25,000.00
Merchandise Inventory....... 25,000.00
To record cost of sales.
16 Allowance for Doubtful Accounts................................
15,000
Accounts Receivable – Fedun....................................
15,000
Write-off uncollectible account.
20 Cash...................................... 28,130.00
Sales discounts...................... 870.00 Accounts Receivable – JanCo 29,000.
00 To record collection of credit sale within the discount period.
Mar. 1 Notes Receivable – Parker Holdings................................
12,000.00
Accounts Receivable – Parker Holdings................................
12,000.00
To record acceptance of 60-day, 7% note.
Apr. 15 Accounts Receivable – Commercial............................
71,000.00
Sales................................. 71,000.00
To record non-bank credit card sales.
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.935 Fundamental Accounting Principles, Twelfth Canadian Edition
15 Cost of Goods Sold................. 62,000.00
Merchandise Inventory....... 62,000.00
To record cost of sales.
30* Cash...................................... 12,138.08
Notes Receivable – Parker Holdings................................
12,000.00
Interest Revenue............... 138.08 To record collection of note and interest; 12,000 x 7% x 60/365 = 138.08.
* Days in March 31Minus date of note 1Days remaining in March 30Days to equal 60 days or Maturity Date, April
30 30Period of the note in days 60
days
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.Solutions Manual for Chapter 10 936
A&R Problem 10-2 (continued)May 7 Cash.................................. 70,290.0
0Credit Card Expense........... 710.00 Accounts Receivable – Commercial........................
71,000.00
To record collection of credit card receipts; 71,000 x 1% = 710.
Nov. 1 Notes Receivable – Grant Company...........................
24,000.00
Accounts Receivable – Grant Company..................
24,000.00
To record acceptance of 3-month, 6% note.
Dec. 31
Interest Receivable............ 240.00
Interest Revenue........... 240.00 To record accrued interest; 24,000 x 6% x 2/12 = 240.
31 Bad Debt Expense.............. 8,100.00
Allowance for Doubtful Accounts...........................
8,100.00
To record estimated uncollectible accounts; 9,700 – 1,600 – 8,100.
2012Feb. 1 Accounts Receivable – Grant
Company...........................24,360.00
Interest Receivable........ 240.00 Interest Revenue........... 120.00 Notes Receivable – Grant Company...........................
24,000.00
To record dishonour of note; 24,000 x 6% x 1/12 = 120.
Mar. 5 Accounts Receivable – Derek 1,500.
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.937 Fundamental Accounting Principles, Twelfth Canadian Edition
Holston............................. 00 Allowance for Doubtful Accounts...........................
1,500.00
To reverse write-off.
5 Cash.................................. 1,500.00
Accounts Receivable – Derek Holston
1,500.00
To record collection of account previously written off.
14 Allowance for Doubtful Accounts...........................
24,360.00
Accounts Receivable – Grant Company
24,360.00
To record write-off.
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.Solutions Manual for Chapter 10 938
A&R Problem 10-2 (concluded)Analysis component:A change in the receivable turnover from 7 to 7.5 in 2011 to 2012 is favourable and indicates that receivables are being collected more quickly which has a positive effect on cashflow.
Ethics ChallengeEC 10-11. If the estimate for bad debts is reduced then a lower bad
debt expense will be recognized on the Income Statement resulting in a higher net income. Also a smaller allowance will be shown on the Balance Sheet which will result in a higher realizable value for receivables and, therefore, a larger amount of current, liquid assets.
2. Often accounting procedures allow for alternate accounting treatments or require the use of estimates. Therefore executives have some leeway in their application of accounting procedures. In this case it seems reasonable to doubt the motivation behind the CEO’s recommendation for a lower bad debt expense. There does not appear to be any economic or business justification for the change in estimate aside from the self-interest of the CEO.
3. An effective board of directors will be aware of alternate accounting treatments and how estimates can affect the financial statements. The board should review the reasonableness of the CEO’s and controller’s estimates for bad debt expense. Also, the external auditors will review the estimate for reasonableness as part of their annual review.
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.939 Fundamental Accounting Principles, Twelfth Canadian Edition
Focus on Financial StatementsFFS 10-1
Dover Plumbing Sales and ServiceBalance SheetMarch 31, 2011
Assets Current assets: Cash1....................................................... $
36,400 Accounts receivable................................. $28,00
0 Less: Allowance for doubtful accounts. 4,20
023,800
Merchandise inventory............................ 26,000 Prepaid insurance................................... 3,800 Prepaid rent............................................ 6,500 Total current assets................................. $
96,500
Long-term investments: Notes receivable, due December 1, 2013. . 14,00
0
Property, plant and equipment: Tools..................................................... $82,00
0 Less: Accumulated amortization.......... 11,00
0$71,00
0 Truck.................................................... $67,00
0 Less: Accumulated amortization.......... 14,00
0 53,00
0 Total property, plant and equipment...... 124,
000 Total assets................................................ $234,
500
Liabilities Current liabilities: Accounts payable.................................. $
7,800 Salaries payable................................. 1,100 Unearned plumbing fees..................... 9,000 Notes payable, due February 1, 2012..... 6,000
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.Solutions Manual for Chapter 10 940
Total current liabilities........................ $23,900
Long-term liabilities: Notes payable, due August 31, 2014...... 17,00
0 Total liabilities......................................... $
40,900
Owner’s Equity Clara Dover, capital.................................. 193,6
00 Total liabilities and owner’s equity.............. $234,
500
Calculations:1. Cash of $36,000 was combined with Petty cash of $400 = $36,400
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.941 Fundamental Accounting Principles, Twelfth Canadian Edition
FFS 10-1 (concluded)Analysis component:
2011 2010$23,800/$114,000 × 365 = 76.20 days
$21,200/$86,000 × 365 = 89.98 days
Dover has fewer receivables at March 31, 2011 than at March 31, 2010 indicating that it has become more efficient in collecting receivables. This is a favourable change especially considering that sales are at a higher level in 2011 than in 2010.
FFS 10-2
1. Accounts receivable is a current asset. It results from credit sales to customers.
2. Danier’s receivables decreased in total by $32 (thousand) or 5.11% (32,000/626,000 × 100), which is more than the corresponding decrease in revenue of $892 (thousand) or 0.51% (892,000/175,270,000 × 100). It would seem logical that if revenue decreased, receivables would also decrease.
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.Solutions Manual for Chapter 10 942
Critical Thinking QuestionCT 10-1Note to instructor: Student responses will vary therefore the answer here is only suggested and not inclusive of all possibilities; it is presented in point form for brevity.
This mini-case is based on a real life situation where the external auditor detected a fraud perpetrated for the purpose of ensuring that the bank did not call in a loan because the required quick ratio was not being maintained.
Problem(s):— To determine if Delta Designs should be approved for a
$600,000 loan Goal(s)*:
— To review information provided by Delta Designs to determine if a loan should be granted or not
Assumption(s)/Principle(s):— Information provided by Delta Designs should be based
on GAAPFacts:
— as presented— If sales, all on credit, occur evenly throughout the year,
that averages out to $331,667/month (3,980,000/12 = 331,667).
— 85% or $401,200 of the receivables balance are not yet due (472,000 × 85% = 401,200)
— The receivables not yet due is 21% (402,200 – 331,667 = 70,533/331,667 × 100) greater than the average monthly sales on credit; receivables not yet due should be less than the average monthly sales on credit
Conclusion(s)/Consequence(s):— The accounts receivable balance needs to be
investigated as it appears that it is inflated (whether the overstatement is intentional or not also needs to be determined which, if intentional, may have legal implications for Delta Designs and, whether intentional or not, will likely cause the bank to impose consequences)
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.943 Fundamental Accounting Principles, Twelfth Canadian Edition
*The goal is highly dependent on “perspective.”
Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.Solutions Manual for Chapter 10 944