Solution manual financial accounting 9th harrison ch05

Find more at www.downloadslide.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.) S 5-2 BALANCE SHEET Current assets: Short-term trading investment, at market value… $96,000 INCOME STATEMENT Other revenue and gains (losses): Unrealized gain on investment…………………… $11,000* _ *$96,000 − $85,000 = $11,000 Chapter Short Term Investments and Receivables 5-1 Find more at www.downloadslide.com (10 min.) S 5-3 DATE Journal ACCOUNT TITLES AND EXPLANATION Unrealized Loss on Investment ($109,000 − $100,000) Short-Term Trading Investment……… Adjusted investment to market value DEBIT CREDIT 9,000 9,000 BALANCE SHEET Current assets: Short-term trading investment, at market value $100,000 INCOME STATEMENT Other revenues and gains (losses): Unrealized (loss) on investment……………… $(9,000) (5 min.) S 5-4 Peel, the accountant, should not handle the company’s cash With cashhandling duties, the accountant can steal cash and hide the theft by writing off a customer’s account receivable as uncollectible (5 min.) S 5-5 No sales revenue should be reported because the goods were sold FOB destination, and revenue is not recorded until the goods are received 5-2 Financial Accounting 9/e Solutions Manual Find more at www.downloadslide.com (5 min.) S 5-6 2/10, n/30 means that Sports R Us will get a 2% discount if they pay the invoice in 10 days; otherwise, the full amount is due within 30 days Sports R Us will only have to pay $123,480 ($126,000 × 98), resulting in a potential savings of $2,520 Assuming the invoice is dated December 23, 2012, Sports R Us needs to pay Big Sky by January 2, 2013, in order to receive the discount (5 min.) S 5-7 Journal DATE ACCOUNT TITLES AND EXPLANATION Sales Returns and Allowances …………… Accounts Receivable……………………… Chapter DEBIT 5,000 CREDIT 5,000 Short Term Investments and Receivables 5-3 Find more at www.downloadslide.com (5-10 min.) S 5-8 MEMORANDUM DATE: TO: Zeke Pitt 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 (5 min.) S 5-9 Uncollectible-Account Expense ($361,000 × 02)… Allowance for Uncollectible Accounts…………… 7,220 7,220 Balance sheet Accounts receivable…………………………… $35,000 Less: Allowance for uncollectible accounts… (7,220) Accounts receivable, net………………………… 5-4 Financial Accounting 9/e Solutions Manual $27,780 Find more at www.downloadslide.com (5-10 min.) S 5-10 Accounts Receivable 1,030,000 Sales Revenue 1,030,000 Cash Accounts Receivable 895,000 Allowance for Uncollectible Accounts Accounts Receivable 15,000 Uncollectible-Account Expense ($1,030,000 × 02) Allowance for Uncollectible Accounts 20,600 895,000 15,000 20,600 (10 min.) S 5-11 Beg bal Net credit sales End bal Accounts Receivable 35,000 1,030,000 Collections Write-offs 155,000 895,000 15,000 Amount customers owe the company Write-offs Allowance for Uncollectible Accounts Beg bal 15,000 Uncollectible-account expense End bal 7,220 20,600 12,820 Amount the company expects not to collect Accounts receivable, net ($155,000 − $12,820)……………… Chapter $142,180 Short Term Investments and Receivables 5-5 Find more at www.downloadslide.com (5-10 min.) S 5-12 (a) Accounts Receivable Sales Revenue 183,000 (b) Cash Accounts Receivable 133,000 (c) Allowance for Uncollectible Accounts Accounts Receivable 2,500 (d) Uncollectible-Account Expense Allowance for Uncollectible Accounts 2,290 183,000 Allowance for Uncollectible Accounts Beg bal Write-offs 2,500 Uncollectible – account exp End bal 133,000 2,500 2,290 2,000 X = 2,290 1,790 (10 min.) S 5-13 and Beg bal Net credit sales End bal Accounts Receivable 101,000 696,000 Collections Write-offs 66,000 Allowance for Uncollectible Accounts Beg bal Write-offs 13,000 Uncollectible – account expense End bal 718,000 13,000 9,000 11,000 7,000 BALANCE SHEET Accounts receivable……………………… Less Allowance for uncollectible accounts Accounts receivable, net………………… 5-6 Financial Accounting 9/e Solutions Manual $66,000 (7,000) $59,000 Find more at www.downloadslide.com (10 min.) S 5-14 True False Credit terms are usually stated in this form: 2/10 n/30 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 Sales revenue Less: Sales returns and allowances Less: Sales discounts = Net sales revenue $XXX (X) (X) $ XX Accounts receivable…………………… Less: Allowance for uncollectibles…… Accounts receivable, net……………… $XXX (X) $ 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 Carolina Bank has interest receivable and interest revenue Sumter Company has interest payable and interest expense Interest for one month ($150,000 × 06 × 1/12)… $750 Carolina Bank: Assets = Liabilities + Equity Accrual of interest Sumter Company: Interest expense Assets = Liabilities + Equity False Credit card sales are usually recorded as a cash sale with a credit card discount expense 10 False Since factoring receivables can be expensive, companies that have a strong liquidity will usually choose a less expensive form of financing Chapter Short Term Investments and Receivables 5-7 Find more at www.downloadslide.com (5-10 min.) S 5-15 a b Feb May 10 Note Receivable — S Summers Cash 150,000 10 Cash…………………………………… Note Receivable — S.Summers Interest Revenue ($150,000 × 08 × 3/12)… 153,000 150,000 150,000 3,000 (10 min.) S 5-16 Interest for: 2012 ($220,000 × 08 × 7/12)……………… 2013 ($220,000 × 08)……………………… 2014 ($220,000 × 08 × 5/12)……………… $10,267 17,600 7,333 TMRN Bank has a note receivable and interest revenue Bob Morrison has a note payable and interest expense Payoff at November 30, 2012: Principal……………………………………… Interest ($220,000 × 08 × 6/12)………… Total………………………………………… 5-8 Financial Accounting 9/e Solutions Manual $220,000 8,800 $228,800 Find more at www.downloadslide.com (10 min.) S 5-17 Journal DATE ACCOUNT TITLES AND EXPLANATION 2012 a Aug 31 Note Receivable — N Totten………… Cash…………………………………… To loan money 2013 b June 30 Interest Receivable ($5,000 × 07 × 10/12)………………… Interest Revenue…………………… To accrue interest revenue 2013 c Aug 31 Cash ($5,000 + $350)…………………… Interest Receivable………………… Interest Revenue ($5,000 × 07 × 2/12)……………… Note Receivable……………………… To collect on note receivable Chapter DEBIT CREDIT 5,000 5,000 292 292 5,350 292 58 5,000 Short Term Investments and Receivables 5-9 Find more at www.downloadslide.com (5-10 min.) S 5-18 a BALANCE SHEET June 30, 2013 Current assets: Note receivable………………………… $5,000 Interest receivable……………………… 292 b INCOME STATEMENT Year ended June 30, 2013 Revenues: Interest revenue………………………… $ 292 c BALANCE SHEET June 30, 2014 Nothing to report because the note was collected on August 31, 2013 d INCOME STATEMENT Year ended June 30, 2014 Revenues: Interest revenue………………………… 5-10 Financial Accounting 9/e Solutions Manual $ 58 Find more at www.downloadslide.com (continued) P 5-74B Req MEMORANDUM DATE: _ TO: Top management of Lakeland Pools, Inc FROM: Student Name RE: Changes in ratio values from 2012 to 2013 The current ratio improved from 1.39 to 1.69 The quick (acid-test) ratio increased from 0.81 to 0.93 Days’ sales in receivables improved from 18 days to 17 days All three ratio values improved during the current year This is a favorable trend because it indicates that the company is finding it easier to pay its bills Student responses may vary Req Lakeland Pools can improve cash flow from receivables by offering a discount for early payment and/or emphasize credit cards for sales 5-62 Financial Accounting 9/e Solutions Manual Find more at www.downloadslide.com Challenge Exercises and Problem (15-20 min.) E 5-75 Sales revenue Actual without Bank Cards …………………… $500,000 Cost of goods sold…………………… Expected with Bank Cards $550,000* $250,000 $275,000** Uncollectible-account expense……… 12,000 Bank-card discount expense………… — Other expenses………………………… 165,000 157,000**** Total expenses………………………… 427,000 441,000 Net income……………………………… $ 73,000 $109,000 Decision: — 9,000*** Accept bank cards because of the expected increase in net income _ *$500,000 × 1.10 = $550,000 **$250,000 × 1.10 = $275,000 ***$550,000 − $250,000 = $300,000 × 03 = $9,000 The switch to bank cards should produce bankcard discount expense on only the portion of sales that are made on bank cards ****$165,000 − $8,000 = $157,000 Chapter Short Term Investments and Receivables 5-63 Find more at www.downloadslide.com (15-20 min.) E 5-76 T-accounts are helpful, as follows (in millions): (a) Allowance for Doubtful Accounts Beg bal Write-offs Expense End bal Gross Accounts Receivable Beg bal ($2,269 + $67) 2,336 Total revenue 26,667 Write-offs Collections End bal ($2,582 + $71) 2,653 5-64 Financial Accounting 9/e Solutions Manual 67 71 26,346 (b) Find more at www.downloadslide.com (15-20 min.) P 5-77 Req Beginning balance $ 930 + Uncollectible account expense c 200 - Write-offs 130 = Ending balance $1,000 Allowance for Uncollectible Accounts Accounts Receivable Beg Bal 9,430 Cr sales16,500 930 Beg Bal 900 Returns Write-offs 130 130 Write-offs 200 cUncoll Acct exp 234 aDiscounts 15,366 bCollections End Bal 9,300 1,000 End Bal Req Beginning balance $ 9,430 + Credit sales 16,500 - Returns 900 - Write-offs 130 - a - b Discounts ($15,600 x 75% x 2%) 234 Collections 15,366 = Ending balance $ 9,300 Chapter $15,600 Short Term Investments and Receivables 5-65 Find more at www.downloadslide.com Decision Cases (20-25 min.) Decision Case Clearview Cablevision Summary Income Statement Year Ended December 31, 2012 Service revenue……………………………………… $940,000 Total expenses, excluding bad debt …………… (670,000) Bad-debt expense ($940,000 × 05)……………… (47,000) Net income…………………………………………… $223,000 Conclusion: The business was profitable during 2012 Computation: Accounts Receivable Dec 31, 2011 Balance 110,000 2012 Revenues 940,000 2012 Collections 2012 Write-offs Dec 31, 2012 Balance 5-66 180,000 Financial Accounting 9/e Solutions Manual 840,000 30,000 Find more at www.downloadslide.com (15-20 min.) Decision Case The trend of sales is increasing (Dollars in thousands) Days’ sales in receivables = = 2013 2012 ($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 2013 + − = Cash collections from customers for 2013 and 2012: 2013 2012 Beginning net accounts receivable Sales revenue Ending net accounts receivable Estimated cash collections $ 85 1,001 (96) $ 990 $ 96 1,475 (115) $1,456 Collections from customers increased dramatically during 2013 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 Chapter Short Term Investments and Receivables 5-67 Find more at www.downloadslide.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 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 5-68 Financial Accounting 9/e Solutions Manual Find more at www.downloadslide.com (continued) Ethical Issue 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 UncollectibleAccount Expense in some periods and overstates the expense in other 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 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 and Receivables 5-69 Find more at www.downloadslide.com Focus on Financials: Amazon.com, Inc (30-40 min.) Req a According to Note 1, the ―Marketable Securities‖ account includes short- to intermediate-term fixed income securities and AAA-rated money market funds b According to Note 1, the company invests its excess cash in these accounts This is done in order to earn a return on excess cash balances c The balance in Marketable Securities increased by 71% from $2,922 million in 2009 to $4,985 million in 2010 This shows that the company is accumulating cash This could be for a variety of reasons, including the possibility of a large capital investment d According to Note 1, these marketable securities are recorded at fair value with unrealized gains and losses included in other comprehensive income e Note shows that, during 2010, the company had $22 million of unrealized gains and $1 million of realized losses on marketable securities Overall, the market value of the portfolio increased during the year Req Amazon recognizes revenue from product sales or services rendered when the following four criteria are met:  Persuasive evidence of an arrangement exists,  Delivery has occurred or services have been rendered,  The selling price is fixed or determinable, and  Collectability is reasonably assured 5-70 Financial Accounting 9/e Solutions Manual Find more at www.downloadslide.com (continued)Amazon.com 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 Note 1, ― Accounts Receivable, Net, and Other‖ include vendor receivables ($763 million) and customer receivables ($561 million) Req According to Note 1, the allowance for doubtful customer and vendor accounts receivable is $72 million in 2010 Req 2010 2009 (Dollar amounts in millions) Current ratio: Total current assets Total current liabilities = Quick ratio: Quick assets Total current liabilities = $13,747 $10,372 = 1.33 $9,797 $7,364 = 1.33 $10,349 = 1.00 $10,372 $7,354 $7,364 = 1.00 Working capital: Current assets – Current liabilities = ($13,747-$10,372) = Chapter $3,375 ($9,797-$7,364) = $2,433 Short Term Investments and Receivables 5-71 Find more at www.downloadslide.com (continued)Amazon.com As of the end of 2010, Amazon.Com, Inc.’s the current ratio and quick ratio were approximately the same as in 2009 indicating that liquidity was also relatively unchanged However, working capital, the difference between its current assets and current liabilities, actually widened Overall, a current ratio of 1.33 and a quick ratio of 1.00 implies that Amazon.com can cover its current liabilities with its current assets Industry averages for these ratios would be helpful in evaluating these ratios 5-72 Financial Accounting 9/e Solutions Manual Find more at www.downloadslide.com Focus on Analysis: RadioShack Corp (20 min.) Req According to Note 2, RadioShack Corp.’s revenue primarily comes from the sale of products and services to consumers Additionally, revenue is recognized net of estimates for refunds and returns when the following criteria are met:  persuasive evidence of an arrangement exists,  delivery has occurred or services have been rendered,  the sales price is fixed or determinable, and  collectability is reasonably assured Req In Note 2, the company alludes to the fact that their accounts receivables are primarily the result of dealer receivables These receivables are due from the dealer’s of RadioShack’s products who have purchased the products on account Allowing sales on account allows RadioShack customers to purchase from RadioShack more easily Sales most likely would decrease if RadioShack did not sell on credit The average payment term for these receivables, according to Note 2, is approximately 45 days Chapter Short Term Investments and Receivables 5-73 Find more at www.downloadslide.com (continued) RadioShack Req a Net Sales 365 b $4,472.8 = Avg Accts Rec = Sales per day 365 ($377.5 + $322.5)/2 $12.25 = $12.25 28.6 days c The average payment period is 45 days whereas the average days’ sales to collection for AR is only 28.6 days So, the company performed better than its normal payment terms for its credit customers Req Current ratio: 2010 2009 (Dollar amounts in millions) Total current assets Total current liabilities $1,778.7 = $908.1 $2,015.7 = 1.96 $654.5 = 3.08 Quick ratio: Quick assets Total current liabilities = $946.9 = 1.04 $908.12 $1,230.7 = 1.88 $654.5 Working capital: Current assets – Current liabilities = ($1,778.7- $908.1) = 5-74 Financial Accounting 9/e Solutions Manual $870.6 ($2,015.7- $654.5) = $1,361.2 Find more at www.downloadslide.com (continued) RadioShack The current ratio, quick ratio, and working capital has fallen significantly from 2009 to 2010 Thus, the company’s liquidity has fallen from 2009 to 2010 However, the current ratio and quick ratio are still significantly above meaning that the company still has the ability to cover its current liabilities Some information that would be very helpful in evaluating these ratios would be industry averages for these ratios This would allow for benchmarking RadioShack, Corp to the industry Chapter Short Term Investments and Receivables 5-75 Find more at www.downloadslide.com Group Project Student responses will vary 5-76 Financial Accounting 9/e Solutions Manual ... FOB destination, and revenue is not recorded until the goods are received 5-2 Financial Accounting 9/e Solutions Manual Find more at www.downloadslide.com (5 min.) S 5-6 2/10, n/30 means that... Allowance for uncollectible accounts… (7,220) Accounts receivable, net………………………… 5-4 Financial Accounting 9/e Solutions Manual $27,780 Find more at www.downloadslide.com (5-10 min.) S 5-10 Accounts... Less Allowance for uncollectible accounts Accounts receivable, net………………… 5-6 Financial Accounting 9/e Solutions Manual $66,000 (7,000) $59,000 Find more at www.downloadslide.com (10 min.) S