Solution manual financial accounting 8th by harrison CH05

To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Chapter Short-Term Investments & Receivables Short Exercises (5 min.) S 5-1 Trading investments are reported at their current market value A trading investment is always a current asset because the investor intends to sell the trading investment in the very near future — days, weeks, or only a few months A current asset is to be sold within one year or within the company’s operating cycle if longer than a year (10 min.) BALANCE SHEET Current assets: Short-term trading investments, at market value INCOME STATEMENT Other revenue and gains (losses): Unrealized gain on investment……………… _ S 5-2 $98,000 $11,000* *$98,000 − $87,000 = $11,000 Chapter Short-Term Investments & Receivables 345 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (10 min.) Unrealized Loss on Investment ($103,000 − $96,000) 7,000 Short-Term Investment…………………………… Adjusted investment to market value S 5-3 7,000 BALANCE SHEET Current assets: Short-term trading investment, at market value $96,000 INCOME STATEMENT Other revenue (loss): Unrealized (loss) on investment……………… $(7,000) (5 min.) S 5-4 Perry, the accountant, should not handle the company’s cash With cash-handling duties, the accountant can steal cash and hide the theft by writing off a customer’s account receivable as uncollectible 346 Chapter Short-Term Investments & Receivables To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (5-10 min.) S 5-5 MEMORANDUM DATE: TO: Zach Peters FROM: Student Name RE: Essential element of internal control over collection from customers Separation of duties is the essential element in a system to ensure that cash received by mail from customers is properly handled and accounted for It is very important to separate cash-handling duties from accounting duties Otherwise, an employee can steal a cash receipt from a customer and cover the theft by writing off the customer account as uncollectible Student responses may vary Chapter Short-Term Investments & Receivables 347 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com S 5-6 (5 min.) Uncollectible-Account Expense ($312,000 × 04)… Allowance for Uncollectible Accounts……… Balance sheet Accounts receivable…………………………… Less Allowance for uncollectible accounts… Accounts receivable, net……………………… 12,480 12,480 $38,000 (12,480) $25,520 (5-10 min.) Accounts Receivable…………………………………… Sales Revenue…………………………………… 1,000,000 Cash………………………………………………… …… Accounts Receivable…………………………… 870,000 1,000,00 870,000 Allowance for Uncollectible Accounts……………… Accounts Receivable…………………………… 12,000 Uncollectible-Account Expense ($1,000,000 × 04) Allowance for Uncollectible Accounts……… 40,000 348 Chapter S 5-7 12,000 Short-Term Investments & Receivables 40,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (10 min.) S 5-8 Accounts Receivable Beg bal 38,000 Net credit sales 1,000,000 Collections Write-offs End bal 156,000 870,000 12,000 Amount customers owe the company Allowance for Uncollectible Accounts Beg bal Write-offs 12,000 Allowance for Uncollectible accounts End bal 12,480 40,000 40,480 Amount the company expects not to collect Accounts receivable, net ($156,000 − $40,480)……………… Chapter $115,520 Short-Term Investments & Receivables 349 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (5-10 min.) S 5-9 (a) Accounts Receivable……………………… 175,000 Sales Revenue………………………… 175,000 (b) Cash…………………………………………… 128,000 Accounts Receivable………………… 128,000 (c) Allowance for Uncollectible Accounts… Accounts Receivable………………… 2,800 (d) Uncollectible-Account Expense………… Allowance for Uncollectible Accounts……………………………… 650 2,800 650 Allowance for Uncollectible Accounts Beg bal 4,000 Write-offs 2,800 Uncollectible – account exp X = 650 End bal 1,850 350 Chapter Short-Term Investments & Receivables To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (10 min.) S 5-10 and Accounts Receivable Beg bal 97,000 Net credit sales 698,000 Collections Write-offs End bal 65,000 722,000 8,000 Allowance for Uncollectible Accounts Beg bal 5,000 Write-offs 8,000 Uncollectible – account expense 14,000 End bal 11,000 BALANCE SHEET Accounts receivable……………………… Less Allowance for uncollectible accounts Accounts receivable, net………………… Chapter $65,000 (11,000) $54,000 Short-Term Investments & Receivables 351 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (10 min.) S 5-11 True The net amount of receivables — the amount the company expects to collect — is more interesting because the company will probably collect this amount in cash Accounts receivable…………………… $XXX Less Allowance for uncollectibles…… (X) Accounts receivable, net……………… $ XX False The direct write-off method overstates assets because it fails to show the amount of the receivables the company actually expects to collect California Bank has interest receivable and interest revenue Sacramento Company has interest payable and interest expense Interest for one month ($200,000 × 08 × 1/12)… $1,333.33 California Bank: Accrual of interest 352 Assets = Liabilities + Equity Chapter Short-Term Investments & Receivables To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (5-10 min.) S 5-12 a May Note Receivable — S Peters…… 130,000 Cash…………………………… 130,000 b Nov Cash………………………………… 135,850 Note Receivable — S Peters 130,000 Interest Revenue ($130,000 × 09 × 6/12)… 5,850 (10 min.) S 5-13 Interest for: 2010 ($170,000 × 07 × 8/12)……………… $7,933.33 2011 ($170,000 × 07)……………………… 11,900.00 2012 ($170,000 × 07 × 4/12)……………… 3,966.67 BCDE Bank has a note receivable and interest revenue Carl Abbott has a note payable and interest expense Payoff at November 30, 2010: Principal……………………………………… $170,000.00 Interest ($170,000 × 07 × 7/12)………… 6,941.67 Total………………………………………… $176,941.67 Chapter Short-Term Investments & Receivables 353 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (10 min.) S 5-14 2010 a Aug.31 Note Receivable — N Thompson…… 2,000.00 Cash………………………………… 2,000.00 To loan money 2011 b June30 Interest Receivable ($2,000 × 10 × 10/12)…………………… 166.67 Interest Revenue………………… To accrue interest revenue 166.67 2011 c Aug.31 Cash ($2,000 + $200)…………………… 2,200.00 Interest Receivable……………… 166.67 Interest Revenue ($2,000 × 10 × 2/12)…………… 33.33 Note Receivable………………… 2,000.00 To collect on note receivable 354 Chapter Short-Term Investments & Receivables To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (20-25 min.) P 5-71B Req Cash ($56,000 − $24,000)…………………… Short-term trading investments, at market value…………………………… Accounts receivable………………………… $44,000 Less: Allowance for uncollectibles…… (14,600) Inventory……………………………………… Prepaid expenses…………………………… Total current assets……………………… Total current liabilities…………………… $ 32,000 11,000 29,400 55,000 16,000 $100,400 $96,000 Req As reported Corrected Current $189,000 = = 1.97 ratio $96,000 ($56,000 + $18,000 Acid-test + $44,000) = = 1.23 ratio $96,000 Chapter $143,400 = 1.49 $96,000 $32,000 + $11,000 + $29,400 = 0.75 $96,000 Short-Term Investments & Receivables 409 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (continued) P 5-71B Req Net income, as reported………………… − Unrealized loss on trading investments ($18,000 − $11,000)…………………… − Correction for conversion to the allowance method — Uncollectible-account expense should be ($670,000 × 03)……….… Uncollectible-account expense by the direct write-off method………… Net income, as corrected………………… 410 Chapter $99,000 (7,000) $20,100 5,500 (14,600) $77,400 Short-Term Investments & Receivables To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (20-30 min.) P 5-72B Req Journal DATE ACCOUNT TITLES AND EXPLANATION 2010 Nov 30 Note Receivable — Bragg Market……… Service Revenue…………………… Dec 31 Interest Receivable ($32,000 × 04 × 1/12) Interest Revenue……………………… DEBIT CREDIT 32,000 32,000 107 107 2011 Feb 28 Cash…………………………………………… 32,320 Note Receivable — Bragg Market 32,000 Interest Receivable………………… 107 Interest Revenue ($32,000 × 04 × 213 2/12) Mar 1 Note Receivable — Don’s Market ……… 7,200 Accounts Receivable — Don’s Market Cash…………………………………………… Financing Expense………………………… Note Receivable — Don’s Market … Chapter 7,200 7,000 200 7,200 Short-Term Investments & Receivables 411 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (continued) P 5-72B Journal DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT 2011 Dec 16 Note Receivable — Stratford Provisions 15,400 Cash…………………………………… 15,400 Dec 31 Interest Receivable……………………… 60 Interest Revenue ($15,400 × 095 × 15/365) 60 Req BALANCE SHEET Current assets: Note receivable………………… Interest receivable…………… 412 Chapter December 31 2011 2010 $15,400 60 $32,000 107 Short-Term Investments & Receivables To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com P 5-73B (30-40 min.) Req Dollar amounts in millions 2011 2010 a Current ratio = Total current assets Total current liabilities = $935 = 1.67 $560 $855 = 1.40 $610 Cash + Short-term investments b Acid-test = ratio + Net current receivables Total current liabilities = $70+$145+$290 $80+$160+$260 $560 $610 = c One day’s = sales Days’ sales in average = receivables Net sales = 365 Average net receivables One day’s sales = = Chapter 0.90 $5,890 365 = $16.14 = 0.82 $5,150 365 = $14.11 ($290+260)/2 ($260+$230)/2 $16.14 $14.11 17 days = 17 days Short-Term Investments & Receivables 413 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (continued) P 5-73B Req MEMORANDUM DATE: _ TO: Top management of Gold Pools, Inc FROM: Student Name RE: Changes in ratio values from 2010 to 2011 The current ratio improved from 1.40 to 1.67 The acid-test ratio increased from 0.82 to 0.90 Days’ sales in receivables were unchanged at 17 days Two of the three ratio values improved during the current year, and the third ratio value held steady This is a favorable trend because it indicates that the company is finding it easier to pay its bills 414 Chapter Short-Term Investments & Receivables To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Decision Cases (20-25 min.) Decision Case Clearview Cablevision Summary Income Statement Year Ended December 31, 2010 Service revenue……………………………… Total expenses, excluding bad debts…… Bad-debt expense ($940,000 × 05)……… Net income…………………………………… $940,000 (670,000) (47,000) $223,000 Conclusion: The business was profitable during 2010 Computation: Accounts Receivable Dec 31, 2009 Balance 2010 REVENUES Dec 31, 2010 Balance 110,000 940,000 2010 Collections 2010 Write-offs 180,000 Chapter 840,000 30,000 Short-Term Investments & Receivables 415 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com (15-20 min.) Decision Case The trend of sales is increasing (Dollars in thousands) Days’ sales in receivables = 2010 2009 ($115* + $96*) / $1,475 / 365 days ($96* + $85*) / $1,001 / 365 days = 26 days = 33 days _ *Net accounts receivable Days’ sales in receivables decreased nicely during 2010 Cash collections from customers for 2010 and 2009: 2010 2009 Beginning net accounts receivable + Sales revenue − Ending net accounts receivable = Estimated cash collections $ 96 1,475 (115) $1,456 $ 85 1,001 (96) $ 990 Collections from customers increased dramatically during 2010 Based on the improving trends of sales and collections from customers, and the drop in days’ sales in receivables, we would lend $500,000 to Dean Young Beauty Aids 416 Chapter Short-Term Investments & Receivables To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ethical Issue (20-30 minutes) Req The ethical issue in this case is whether it is acceptable to ―smooth‖ earnings by way of judgmental positive or negative changes to uncollectible accounts expense that understate or overstate the amount, based on what management decides they want net income to be What should be the determining factors in making the judgments for this computation? Req and Req The stakeholders to this decision are Sunnyvale Loan Company, its officers and directors, its shareholders, Sunnyvale’s banker, securities analysts, and the equity and credit markets Economic analysis: The stock and credit markets don’t like surprises The markets usually reward steadily performing and upward-trending earnings with increasing share prices and good credit ratings, but only if these trends are real and not ―engineered‖ by management Burnham’s reasoning is faulty The income overstatements may offset the income understatements in some periods, but there is no guarantee Chapter Short-Term Investments & Receivables 417 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com that this will always occur The accounting literature is full of instances where misstatements of income have dulled people’s perceptions of the truth and resulted in tragic losses of resources and reputations An article in The Wall Street Journal concluded with this statement, ―The danger with spin artistry in accounting is that the spinner may believe the spin.‖ While manipulations such as this might have a temporarily positive impact, in the long run, creditors and analysts will catch on that the company is manipulating earnings, and the markets will react in a harshly negative way toward Sunnyvale, hurting all parties concerned Legal analysis: As explained in chapter 4, material and intentional manipulations of earnings are known as fraudulent financial reporting, and are illegal Such dealings will eventually result in adverse legal and regulatory consequences for the company, as well as its officers and directors Ethical analysis: Sunnyvale Loan Company’s practice of smoothing income is unethical because the owner deliberately underestimates periods and Uncollectible-Account overstates the expense Expense in other in some periods Burnham’s purpose is to manipulate income This is lying, which violates the rights of all other stakeholders in favor of temporary enrichment for a few Rather than manipulating the 418 Chapter Short-Term Investments & Receivables To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com accounting information, Burnham should be using accounting information to represent the business truthfully to her bank lender We can be sure the bank as well as securities analysts expect truthful financial statements from Sunnyvale Loan Company Req Uncollectible accounts expense and the allowance for uncollectible accounts should be based on a truthful and accurate projection of how much a company truly expects to collect over the next operating cycle, rather than figuring out what a company wants net income to be and adjusting the expense and allowance accordingly While Student responses may vary to this question, this represents the main message Chapter Short-Term Investments & Receivables 419 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Focus on Financials: Amazon.com, Inc (30-40 min.) Req ―Net‖ means ―net of allowance for doubtful accounts.‖ ―Other‖ likely means ―Other current assets,‖ which are apparently immaterial in comparison with total current assets and total assets, and are therefore not discussed separately Req According to the ―Accounts Receivable, Net, and Other‖ section of Note 1, vendor receivables, net of allowance, constitute $400 million in 2008, and $280 million in 2007 Customer receivables, net of allowance, constitute $311 million in 2008 and $296 million in 2007 Together, these amounts constitute $711 million of the $827 million balance in 2008 and $576 million of the $705 million balance in 2007 Req According to the ―Allowance for Doubtful Accounts‖ section of Note 1, the allowance for doubtful customer and vendor accounts receivable is $81 million in 2008 and $64 million in 2007 420 Chapter Short-Term Investments & Receivables To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Focus on Analysis: Foot Locker, Inc (20 min.) Req According to Footnote 6, at the end of fiscal 2006, Foot Locker, Inc owned tax exempt municipal bonds of $44 million and equity securities of $205 million in short-term investments At the end of fiscal 2007, the company owned only $5 million of short-term investments These were available-for-sale investments, rather than trading securities These types of securities are discussed in Chapter 10 of the textbook However, because the company’s intent at the end of 2006 was to sell the securities before the end of the next fiscal year, they were still listed as current, rather than a long-term asset Req Short-term investments Beginning balance Purchases (statement of cash flows, investing section) Ending balance (unadjusted) $249 1,378 Sales (statement of cash flows, investing section) $7 $1,620 See the explanation in Footnote under the listing of the securities The equity securities consisted of preferred auction rate securities that had a face value of $7, which corresponds to the account balance above However, due to the global credit and capital market crisis that existed at the end of 2007, the company determined that these securities had declined in value to $5 Therefore, the company wrote these securities down to $5, as follows: Chapter Short-Term Investments & Receivables 421 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Focus on analysis (continued) Short-term investments Unadjusted balance $7 Write-down Adjusted balance 422 $5 Chapter Short-Term Investments & Receivables $2 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Group Project Student responses will vary Chapter Short-Term Investments & Receivables 423 ... cash and hide the theft by writing off a customer’s account receivable as uncollectible 346 Chapter Short-Term Investments & Receivables To download more slides, ebook, solutions and test bank,... system to ensure that cash received by mail from customers is properly handled and accounted for It is very important to separate cash-handling duties from accounting duties Otherwise, an employee... cover the theft by writing off the customer account as uncollectible Student responses may vary Chapter Short-Term Investments & Receivables 347 To download more slides, ebook, solutions and test