Solution manual intermediate accounting 9e by nicolai ch06

To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com CHAPTER CASH AND RECEIVABLES CONTENT ANALYSIS OF EXERCISES AND PROBLEMS Number Content Time Range (minutes) E6-1 Cash Determination of items to be included as cash on the balance sheet 5-10 E6-2 Cash Balance Computing amount to be reported on balance sheet Treatment of non-cash items 5-10 E6-3 Petty Cash Journal entries to record establishment, expenses, and replenishment 5-10 E6-4 Unknown Cash Balance Determine cash balance and adjusted cash balance through use of bank reconciliation Journal entries to update cash account balance 5-15 E6-5 Bank Reconciliation Prepare reconciliation from account balances Record journal entries to adjust the books 10-15 E6-6 Bank Reconciliation Prepare reconciliation from various transactions Record journal entries to adjust the books 10-15 E6-7 Bank Statement Balance Determine cash balance from prior journal entries, no bank statement available Discrepancy analysis 10-20 E6-8 Classification of Receivables Journal entries to properly record receivables Balance sheet disclosure 5-10 E6-9 Sales Discounts Journal entries to record the sale, collection, and year-end adjustment under the gross price and net price methods 10-15 E6-10 Discount Methods Comparison of gross price and net price methods Journal entries 10-15 E6-11 Returns and Allowances Record as actual, record as estimate Journal entries, financial statement disclosure 10-15 E6-12 Bad Debts Estimation versus direct write-off Journal entries 10-15 6-1 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Number Content Time Range (minutes) E6-13 Bad Debts Estimating from receivable balances Journal entries Balance sheet disclosure Computation of receivables turnover 5-15 E6-14 Aging Analysis Estimation of uncollectible receivables Journal entries with various balances in the allowance account 10-20 E6-15 Bad Debts Comparison of different estimation methods Journal entries for estimates based on total sales, credit sales, and accounts receivable 10-20 E6-16 (AICPA adapted) Receivables-Bad Debts Percentage of net sales method Schedule computing balance in the allowance account 10-20 E6-17 Assigning Accounts Receivable Sales return, collections, repayment Journal entries Balance sheet disclosure 15-20 E6-18 Factoring Accounts Receivable Sales returns and allowances on factored accounts Journal entries 10-15 E6-19 Credit Card Sales Sales, sales return Journal entries 5-10 E6-20 (AICPA adapted) Factoring and Assigning Accounts Receivable Income statement disclosure 15-20 E6-21 Notes Receivable Interest-bearing, noninterest-bearing Journal entries 10-15 E6-22 Notes Receivable Discounted Interest-bearing, noninterestbearing Determination of proceeds 10-20 E6-23 Notes Receivable Discounted Journal entries for issuance, discounting, default 10-20 P6-1 Cash and Other Items Determination of cash account balance, balance sheet disclosure of other items 10-20 P6-2 Bank Reconciliation Preparation from various transactions Record journal entries to adjust the books 20-30 P6-3 Unknown Book Balance Determination of unadjusted and adjusted cash balances Journal entries to update account balances 20-30 P6-4 Bank Reconciliation Preparation from bank statement Record journal entries to adjust the books 20-40 P6-5 (AICPA adapted) Comprehensive Reconciliation Bank reconciliation from various transactions Prepare journal entries to adjust book balance 60-75 6-2 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Number Content Time Range (minutes) P6-6 Bad Debts Change from direct write-off method to estimation of bad debts Percentage of credit sales, percentage of outstanding accounts receivable Analysis 30-40 P6-7 Accounts Receivable Various transactions affecting receivables Journal entries Balance sheet disclosure 30-40 P6-8 Notes Receivable Interest-bearing Discounted Default Journal entries 15-30 P6-9 Reconstructing Entries Changes in accounts receivable, allowance for doubtful accounts, allowance for sales returns and allowances, and allowance for sales discount Ending balance and financial statement disclosure 30-45 P6-10 Cash Discounts Gross price and net price methods Journal entries to record sale, collections, and returns Reversing entries 30-40 P6-11 Accounts Receivable Aging analysis Journal entries to record sale, collection, write-off of accounts receivable, and bad debts expense Balance sheet disclosure Calculation and discussion of receivables turnover 35-45 P6-12 Bad Debts Estimation as a percent of total sales, net credit sales, and gross accounts receivable Aging analysis Income statement vs balance sheet approach 30-40 P6-13 Notes Receivable Interest-bearing, discounted Journal entries Balance sheet disclosure 30-40 P6-14 Assigning Accounts Receivable Journal entries for various transactions Balance sheet disclosure 20-30 P6-15 Factoring Accounts Receivable Sales on account, sales returns and allowances, and sales discounts Factored and unfactored accounts receivable Journal entries 20-30 P6-16 Factoring and Assigning Accounts Receivable Journal entries for various transactions Financial statement disclosure 20-30 P6-17 (AICPA adapted) Accounts Receivable Reclassification of accounts Journal entries to write-off uncollectible accounts and adjust allowance for doubtful accounts 10-20 P6-18 (AICPA adapted) Bad Accounts Percentage of sales, original set up of the allowance account Adjusting journal entries 40-60 6-3 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Number Content Time Range (minutes) P6-19 (AICPA adapted) Allowance for Doubtful Accounts Prepare schedule analyzing changes in allowance account Prepare related adjusting journal entry 40-60 P6-20 (AICPA adapted) Correction of Allowance Account Prepare schedules to analyze initial and subsequent balance in allowance account, based on historical data 30-40 P6-21 Comprehensive Receivable Problem Sales, collections, writeoff, bad debts, assignment, returns and allowances, notes receivable discounted, default Calculation and discussion of receivables turnover 45-60 P6-22 (Appendix) Proof of Cash Preparation of four-column proof of cash from a list of account balances and transactions 45-60 P6-23 (Appendix) Proof of Cash Preparation of four-column proof of cash from a list of account balances and transactions 45-60 ANSWERS TO QUESTIONS Q6-1 Cash consists of coins, currency, unrestricted funds on deposit with a bank (either checking accounts or savings accounts), negotiable checks, and bank drafts Certificates of deposit, bank overdrafts, postdated checks, travel advances, and postage stamps may be confused with cash, but these items normally are categorized under other balance sheet captions Items that are available immediately to pay current debts and are not bound by any contractual or legal restrictions are classified under the "current asset cash" caption on the balance sheet, and those that not meet these criteria are reported elsewhere within the assets (or liabilities, in the case of a bank overdraft) section on the balance sheet Cash equivalents are short-term, highly liquid investments (e.g., commercial paper, treasury bills, money market securities) that are readily convertible into known amounts of cash and so near their maturity that there is little risk of changes in value because of changes in interest rates Q6-2 Internal control is the process (policies and procedures) a company uses to enhance the reliability of its financial reports, promote the effectiveness and efficiency of its operations (including safeguarding its assets), and ensure its compliance with applicable laws and regulations Two important elements of internal control over cash are a petty cash system and a bank reconciliation Q6-3 The purpose of a petty cash system is to allow a company to pay small amounts that might be impractical or impossible to pay by check 6-4 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Q6-4 The actual expenses rather than the Petty Cash account are debited when the fund is replenished because the petty cash fund is always carried in the company's accounting records at its original amount This entry has the effect of recording the expenses incurred for the period at the time the amount of cash expended is given to the custodian of the fund to replenish the petty cash fund Q6-5 A bank reconciliation is a schedule prepared by a company to analyze the difference between the ending cash balance in the company's accounting records and the ending cash balance reported by its bank in a bank statement in order to determine the correct ending cash balance The causes of the difference between the cash balance listed on a company's bank statement and the balance shown in the company's cash account include outstanding checks, deposits in transit, charges made directly by the bank, deposits made directly by the bank, and errors Q6-6 After the bank reconciliation is completed, adjusting entries are made to bring the company records up to date The adjustments to the company records on the bank reconciliation have not been previously recorded by the company, so journal entries must be prepared by the company for these items An example of an item on a bank reconciliation requiring an adjusting entry would be a bank service charge of $10 deducted on the bank statement but not yet recognized on the company books The adjusting entry would be a debit to Bank Service Charge Expense for $10 and a credit of $10 to Cash Q6-7 The two revenue recognition criteria are that (1) realization must have occurred and (2) the revenue must be earned (the earning process must be complete or virtually complete) In the case of some industries (e.g., book publishing), sometimes a company cannot make a reliable estimate of the collectibility of receivables (so realization has not occurred) or the risks and benefits of ownership have not been transferred (so that the earning process is not complete) In these cases, the company must defer revenue recognition Q6-8 The first method of recording accounts receivable (gross price method) when cash discounts are involved is to record accounts receivable and sales at the gross price In using this method, a company records both accounts at the total invoice price as if no cash discount were involved When the customer pays, if the allowable cash discount is taken the company records the difference between the cash received and the original amount of accounts receivable as a debit to Sales Discounts Taken If the cash discount is not taken, the amount of cash remitted by the customer will be equal to the original balance in the Accounts Receivable account and no further adjustment is necessary A second method (net price method) is to record accounts receivable and sales at the net invoice price When the customer pays, if the allowable cash discount is taken by the customer no adjustment is necessary because the amount of cash received is equal to the recorded amount of the receivable However, if the customer chooses not to take the cash discount, the amount of cash received is greater than the recorded Accounts Receivable balance The company credits this excess to an account entitled Sales Discounts Not Taken 6-5 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Q6-9 A sales return occurs when a customer returns goods to the seller A sales allowance occurs when a customer retains defective goods and is allowed a reduction in the purchase price Conceptually, a company should estimate and record sales returns and allowances in the period of sale so as to properly report net sales revenue and correctly value its ending accounts receivable Q6-10 Under the estimation methods of recording bad debts, a company studies the historical data about the actual bad debts it has incurred on credit sales or credit accounts receivable as a result of a particular credit policy This information is then compared with current sales or accounts receivable to determine relationships upon which to base estimates of current uncollectible accounts These relationships provide the information the company needs to prepare the adjusting entry to record the estimated bad debt expense for the period When the estimate of bad debts is recorded, the journal entry involves a debit to Bad Debt Expense and a credit to Allowance for Doubtful Accounts (or, alternatively, Allowance for Bad Debts) Estimation methods enable a company to match its expenses with revenues in the current period Bad debt expense is normally reported on the company's current year income statement as an operating expense However, some companies offset the account against gross sales, or disclose it as a financial expense in the other items section of the income statement The direct write-off method has the advantages of simplicity and of reporting actual losses rather than estimates When the direct write-off method is used, a company records bad debt expense when it determines a specific customer account is uncollectible At that time, the account is written off by debiting Bad Debt Expense and crediting Accounts Receivable However, this determination and write-off may not occur until a period later than the period of sale The use of the direct write-off method has the disadvantage of matching expenses associated with previous sales with current revenues, and of overstating accounts receivable associated with previous sales Furthermore, it allows the manipulation of income because management selects the period of write-off (and expense) Q6-11 Under the sales or income statement approach, a company estimates bad debts based on the historical relationship to sales This approach matches current revenues and anticipated current expenses It is income statement oriented because it is based upon the matching principle and results in recording bad debt expense in the period during which credit sales occur A percentage of total sales may be used as the basis for the estimate when there is a stable relationship between cash and credit sales However, if the proportion of credit to total sales varies from period to period, a percentage of total sales is not appropriate to use in any one period and net credit sales should be used Since this method focuses upon an expense account, any existing balance in the allowance account is ignored Also, if a company sells many products in different locations, it may choose to extend this analysis and estimate bad debts based on the historical net credit sales of particular products or in specific locations 6-6 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Q6-11 (continued) Under the accounts receivable or balance sheet approach, a company estimates bad debts based on the historical relationship between actual losses and accounts receivable This approach is balance sheet oriented in that the resulting accounts receivable balance is properly reported on the balance sheet at its net realizable value A relatively simple balance sheet approach is to base the estimated expense on the relationship between the actual bad debts and the outstanding receivable balance at the end of the year However, a more sophisticated method is to categorize the outstanding receivables by the length of time they have been outstanding and then apply a different uncollectible percentage to each category This method is termed "aging." Q6-12 The net realizable value of a company's accounts receivable is the amount expected to be collected in the future The company reports the net realizable value of its accounts receivable on its balance sheet by deducting the balance of a contra account, entitled Allowance for Doubtful Accounts, from the balance of the Accounts Receivable account (If a company has other accounts such as Allowance for Sales Returns and Allowances, Allowance for Sales Discounts, and Deferred Gross Profit, it would also deduct these accounts from Accounts Receivable to determine the net realizable value.) Q6-13 The aging of accounts receivable method categorizes individual accounts based on the length of time they are outstanding The length of time an account is outstanding is an important factor in estimating the probability that it will be collected A company is much more likely to collect an open account that is 30 days old than one that is 360 days old Q6-14 If bad debt expense is recorded based on an estimate, an individual account is written off the accounting records when it is determined to be uncollectible by debiting Allowance for Doubtful Accounts and crediting Accounts Receivable This write-off is simply an adjustment required to recognize that previously anticipated losses are now realized It has no effect on the net realizable accounts receivable on the balance sheet because both the asset and contra-asset accounts are reduced by the same amount There is no impact on the income statement as a result of this write-off because it does not involve a revenue or expense account Q6-15 When a company pledges its accounts receivable, it is using these only as collateral for a loan, and the servicing activities generally remain the responsibility of the borrower The borrower records the loan in the usual manner and then uses the cash collected from the receivables to repay the loan plus any interest charges Upon full payment, the pledge is canceled When a company assigns its accounts receivable to a finance institution (or bank), it enters into a lending agreement with the institution to receive cash on specific customer accounts Usually the borrowing company (assignor) retains ownership of the assigned accounts, incurs bad debts, collects the amounts due from customers, and then uses these funds to repay the loan When a company factors its accounts receivable, it sells individual accounts to a finance institution or bank, called a factor The accounts receivable are sold without recourse so the collection activities and the risk of ownership are assumed by the factor Also, any related collection costs and bad debt expenses are incurred by the factor 6-7 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Q6-16 A company (transferor) records the transfer of accounts receivable to a transferee as a sale when all of the following conditions are met: (1) The transferred assets have been isolated from the transferor (i.e., put beyond the reach of the transferor) (2) The transferee obtains the right to exchange (e.g., sell) the transferred assets (3) The transferor does not maintain effective control over the transferred assets through an agreement that entitles and obligates the transferor to repurchase the transferred assets before their maturity If the conditions for a sale are not met, the company records the proceeds from the transfer of accounts receivable as a secured borrowing with a pledge of collateral Q6-17 A note receivable is an unconditional written agreement to receive a certain sum of money on a specific date Notes receivable have two attributes not found in accounts receivable: (1) They are negotiable instruments, which means that they are legally and readily transferable among parties and may be used to satisfy debts by the holders of these instruments, and (2) They usually involve interest Q6-18 A non-interest-bearing note is a note that does not specify an interest rate For a short-term non-interest-bearing note, the maturity value is listed as the face value, and includes both principal and implicit interest Therefore, the note is initially recorded at its maturity value, the total interest to be earned over the life of the note is recorded as Interest Revenue, and Sales is credited for the difference If the fiscal period ends prior to collection of the note an adjusting entry must be made to reduce the interest revenue and establish a contra-asset account for any unearned interest In contrast, for a short-term interest bearing note, the Notes Receivable account is recorded at the face value of the note After issuance, interest revenue is recorded as earned and is determined by multiplying the principal by the stated interest rate for the time the note has been outstanding Q6-19 Notes receivable discounted are customer notes receivable that a company has transferred to a bank with recourse in exchange for cash The customer is notified to pay the bank directly at the maturity date and the company guarantees payment of the note if the customer defaults During the interim period between the discount date and the maturity date, the note represents a contingent liability to the company This contingent liability is disclosed in a separate contra account entitled Notes Receivable Discounted This account is offset against Notes Receivable on any balance sheet prepared prior to the note's maturity date Q6-20 When a note receivable is discounted, the cash proceeds are determined by multiplying the discount rate times the maturity value of the note (face value of the note plus total interest) for the discount period, and then deducting the resulting discount from the maturity value Q6-21 The proof of cash reconciliation provides the following four separate reconciliations: (a) the reconciliation of the bank and book balance for the previous month; (2) the reconciliation of the receipts recorded by the bank with the receipts recorded on the books for the current month; (3) the reconciliation of the payments recorded by the bank with the payments recorded on the books for the current month; and (4) the reconciliation of the bank and book balances for the current month 6-8 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com ANSWERS TO CASES C6-1 The two main aspects of cash management are cash planning systems and cash control systems Cash planning systems consist of those methods and procedures adopted to ensure that a company has adequate cash available to meet maturing obligations and that it invests any unused or excess cash Cash control systems are the methods and procedures adopted to ensure the safeguarding of the company's funds The major component of a cash planning system is the cash budget A cash budget is a plan of cash activity that forecasts cash inflows and outflows, and identifies the timing of potential cash surpluses and shortages The cash budget is primarily a managerial accounting technique The second aspect of cash management, cash control systems, requires adequate internal control procedures Internal control consists of the policies and procedures a company uses to enhance the reliability of its financial reports, promote the effectiveness and efficiency of its operations, (including safeguarding its assets), and ensure its compliance with applicable laws and regulations Internal control procedures are designed to reduce the possibility of errors or omissions Whenever a company adopts internal control procedures, the cost associated with the use of the measure should not exceed the value of the derived benefits Cash control systems can be divided into main functions: (1) control over receipts and (2) control over disbursements Two important elements of internal control over cash are a petty cash system and a bank reconciliation C6-2 The two-column and the four-column (known as a Proof of Cash) reconciliations each start with two different amounts: the balance of the cash account in the company's records and the bank statement balance, and each adjusts both balances to one common amount, which is the corrected cash balance Both types of reconciliation make adjustments to the bank balance and the book balance in the same manner (i.e outstanding checks are deducted from the bank balance) The difference between the two types of reconciliations is based on format and purpose The two-column reconciliation only reconciles the bank balance and the book balance for the current month The proof of cash incorporates the monthly cash receipts and payments to test the internal control over cash and provide additional evidence of the accuracy of the cash balance In essence, the proof of cash provides four separate reconciliations The four reconciliations are: (1) the reconciliation of the bank and book balance for the previous month; (2) the reconciliation of the receipts recorded by the bank with the receipts recorded on the books for the current month; (3) the reconciliation of the payments recorded by the bank with the payments recorded on the books for the current month; and (4) the reconciliation of the bank and book balances for the current month 6-9 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com C6-2 (continued) After either type of reconciliation is completed, the company makes adjusting entries to bring its records up to date The adjustments to the book balance on the bank reconciliation have not been previously recorded on the accounting records, so journal entries must be prepared for these items to bring the bank and book records into agreement C6-3 (AICPA adapted solution) There are basically two methods of recognizing bad debt expense: (1) direct write-off and (2) allowance The direct write-off method requires the identification of specific balances that are deemed to be uncollectible before any bad debt expense is recognized At the time that a specific account is deemed uncollectible, the account is removed from accounts receivable and a corresponding amount of bad debt expense is recognized The allowance method requires an estimate of bad debt expense for a period of time by reference to the composition of the accounts receivable balance at a specific point in time (aging) or to the overall experience with credit sales over a period of time Thus, total bad debt expense expected to arise as a result of operations for a specific period is estimated, the valuation account (allowance for doubtful accounts) is appropriately adjusted, and a corresponding amount of bad debt expense is recognized As specific accounts are identified as uncollectible, the account is written off; that is, it is removed from accounts receivable and a corresponding amount is removed from the valuation account (allowance for doubtful accounts) Net accounts receivable not change, and there is no charge to bad debt expense when specific accounts are identified as uncollectible and written off using the allowance method The allowance method is preferable because it matches the cost of making a credit sale with the revenues generated by the sale in the same period and achieves a proper carrying value for accounts receivable at the end of a period Since the direct write-off method does not recognize the bad debt expense until a specific amount is deemed uncollectible, which may be in a subsequent period, it does not comply with the matching concept and does not achieve a proper carrying value for accounts receivable at the end of a period C6-4 In order to obtain cash, the Moore Company could: a pledge accounts receivable b assign accounts receivable c factor accounts receivable (sale without recourse) When a company pledges its accounts receivable, it is using these only as collateral for a loan, and the servicing activities generally remain the responsibility of the borrower The borrower records the loan in the usual manner and then uses the cash collected from the receivables to repay the loan plus any interest charges Upon full payment, the pledge is canceled 6-10 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com P6-12 (continued) The income statement approach, in which a percentage of sales is used, results in a matching of current expenses with current sales However, this approach does not necessarily result in reporting accounts receivable at their net realizable value since it does not consider the characteristics of the individual accounts that make up the total receivables balance The balance sheet approach, which uses a percentage of outstanding accounts receivable or an aging analysis as the basis for estimating bad debts, results in reporting accounts receivable at their expected net realizable value on the balance sheet However, the balance sheet approach may result in matching past expenses with current revenues if a portion of the receivables balance has been outstanding for over a year P6-13 Oct Notes Receivable: Weedon Accounts Receivable (or Sales) 5,000 12 Notes Receivable: Black Accounts Receivable (or Sales) 6,000 15 Interest Receivable (see below*) Interest Revenue 10.00 15 Cash (see calculations below*) Loss from Discounting of Note Notes Receivable Discounted Interest Receivable 4,992.90 17.10 *Face value of note Interest to maturity ($5,000 x 0.12 x 60/360) Maturity value of note Discount [$5,100 x 0.14 x (60 - 6)/360] Proceeds Accrued interest revenue: $10 ($5,000 x 0.12 x 6/360) Book value of note ($5,000 + $10) Loss from discounting of note Nov 11 Interest Receivable (see next page*) Interest Revenue 6-48 5,000 6,000 10.00 5,000.00 10.00 $5,000.00 100.00 $5,100.00 (107.10) $4,992.90 (5,010.00) $ (17.10) 50.00 50.00 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com P6-13 (continued) (continued) Nov 11 Cash (see calculations below*) Loss from Discounting of Note Notes Receivable Discounted Interest Receivable 5,996.25 53.75 *Face value of note Interest to maturity ($6,000 x 0.10 x 90/360) Maturity value of note Discount [$6,150 x 0.15 x (90 - 30)/360] Proceeds Accrued interest revenue: $50 ($6,000 x 0.10 x 30/360) Book value of note ($6,000 + $50) Loss from discounting of note Dec $6,000.00 150.00 $6,150.00 ( 153.75) $5,996.25 (6,050.00) $ (53.75) 16 Notes Receivable: Butcher Accounts Receivable (or Sales) 8,000 20 Notes Receivable: Goldman Accounts Receivable (or Sales) 6,000 Notes Receivable: Lambert Accounts Receivable (or Sales) 9,000 Notes Receivable Discounted Notes Receivable: Weedon 5,000 10 Interest Receivable Interest Revenue 10 Cash (see calculations below*) Loss from Discounting of Note Notes Receivable Discounted Interest Receivable 36.67 *Face value of note Interest to maturity ($6,000 x 0.11 x 120/360) Maturity value of note Discount [$6,220 x 0.13 x (120 - 20)/360] Proceeds Accrued interest revenue: $36.67 ($6,000 x 0.11 x 20/360) Book value of note ($6,000 + $36.67) Loss from discounting of note 6-49 6,000.00 50.00 5,995.39 41.28 8,000 6,000 9,000 5,000 36.67 6,000.00 36.67 $6,000.00 220.00 $6,220.00 (224.61) $5,995.39 (6,036.67) $ (41.28) To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com P6-13 (continued) (continued) Dec 31 Interest Receivable Interest Revenue [($8,000 x 0.12 x 45/360) + ($9,000 x 0.13 x 30/360)] Notes receivable Less: Notes receivable discounted Net notes receivable 217.50 217.50 $29,000 (12,000) $17,000 P6-14 Cash Assignment Service Charge Expense Note Payable ($400,000 x 0.80) 238,000 2,000 Accounts Receivable Assigned Accounts Receivable 300,000 Cash Accounts Receivable Assigned 220,000 Interest Expense Note Payable Cash 2,100 207,900 Sales Returns and Allowances Accounts Receivable Assigned 5,000 Current Assets:* Accounts receivable assigned $75,000 Current Liabilities: Note payable $32,100 *Cash may have to be restricted by $12,100, the amount collected from Accounts Receivable Assigned but not yet remitted to the finance company to reduce the principal of the note payable 6-50 240,000 300,000 220,000 210,000 5,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com P6-15 Accounts Receivable Sales 100,000 Cash [($70,000 x 0.90) - $8,400] Factoring Expense ($70,000 x 0.12) Receivable from Factor ($70,000 x 0.10) Accounts Receivable 54,600 8,400 7,000 Sales Returns and Allowances Receivable from Factor 3,000 Sales Returns and Allowances Accounts Receivable 1,300 Cash Sales Discounts Taken Accounts Receivable a($100,000 b($28,700 28,149 551b 70,000 3,000 1,300 28,700a - $70,000) - $1,300 x 0.96) x 0.02, rounded Cash ($4,000 - $1,260) Sales Discounts Taken Receivable from Factor a$7,000 100,000 2,740 1,260b 4,000a - $3,000 sales returns and allowances b($70,000 - $3,000) x 0.94 x 0.02, sales discounts taken on factored accounts receivable, rounded P6-16 Cash [($56,100 x 0.8) - $5,610] Receivable from Factor ($56,100 x 0.2) Loss from Factoring ($56,100 x 0.1)* Accounts Receivable ($187,000 x 0.3) *Assuming the company does not normally factor its accounts receivable, as implied in the problem 6-51 39,270 11,220 5,610 56,100 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com P6-16 (continued) (continued) Accounts Receivable Assigned ($187,000 x 0.7) Accounts Receivable 130,900 Cash ($130,900 x 0.8) Note Payable 104,720 Cash Accounts Receivable Assigned 84,000 Note Payable Interest Expense ($104,720 x 0.15 x 1/12) Cash 84,000 1,309 130,900 104,720 84,000 85,309 The Accounts Receivable Assigned, Receivable From Factor, and Note Payable accounts would be reported on Lazard's balance sheet and the Factoring Expense and Interest Expense accounts would be reported on its income statement as follows Detailed disclosures about Lazard's factoring and assignment agreements would also be disclosed in the notes to its financial statements Balance Sheet Current Assets: Accounts receivable assigned Receivable from factor $46,900 11,220 Current Liabilities: Note payable $20,720 Income Statement Loss From Factoring Interest Expense $ 5,610 1,309 P6-17 (AICPA adapted solution) June 30 Receivable from Officers Advances to Employees Accounts Receivable Customer Advances To reclassify nontrade accounts receivable and credit balances in customer accounts 6-52 8,500 1,411 8,165 1,746 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com P6-17 (continued) June 30 Allowance for Doubtful Accounts Accounts Receivable To write off uncollectible accounts 1,187 June 30 Bad Debt Expense Allowance for Doubtful Accounts To record estimated bad debts expense of ½% of the year's net credit sales of $16,750,000 83,750 1,187 83,750 P6-18 (AICPA adapted solution) Adjusting journal entry: Bad Debts Recovered Provision for Bad Accounts Allowance for Bad Accounts 600 7,100 7,700 To establish Allowance for Bad Accounts at December 31, 2004 Bad Debts Recovered is eliminated from income because recoveries of bad accounts are properly restored to the Allowance for Bad Accounts Supporting computations The provision for bad accounts for 2004 should be based on the experience for the years 2000 to 2002 inclusive, since complete data for these years are now available Year 2000 2001 2002 Total Charge Sales $100,000 250,000 300,000 $650,000 Bad Accounts $ 2,550 6,200 8,500 $17,250 Less: Recoveries $ 100 400 500 $1,000 Net Bad Accounts $ 2,450 5,800 8,000 $16,250 The allowance for bad accounts is computed as follows: Sales Sales for 2003 Sales for 2004 $325,000 275,000 $600,000 6-53 Percent of Sales 2.45 2.32 2.67 2.50 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com P6-18 (continued) (continued) Estimated bad accounts (2.50%) Less: Already charged off: 2003 accounts 2004 accounts $ 15,000 $6,500 1,400 $7,900 (600) Less: Recoveries Amount required $ (7,300) 7,700 P6-19 (AICPA adapted solution) HARRIS CORPORATION Analysis of Changes in the Allowance for Doubtful Accounts For the Year Ended December 31, 2004 Balance at January 1, 2004 Provision for doubtful accounts ($9,000,000 x 2%) Recovery in 2004 of bad debts written off previously Deduct write-offs for 2004 ($90,000 + $60,000) Balance at December 31, 2004, before change in accounting estimate Increase due to change in accounting estimate during 2004 ($235,300 - $175,000) Balance at December 31, 2004, adjusted (Schedule 1) Schedule $175,000 60,300 $235,300 Computation of Allowance for Doubtful Accounts at December 31, 2004 Aging category November-December 2004 July-October January-June Prior to 1/1/04 a$130,000 $130,000 180,000 15,000 $325,000 (150,000) Balance $1,140,000 600,000 400,000 70,000a - $60,000 6-54 Percent 10 25 75 Doubtful accounts $ 22,800 60,000 100,000 52,500 $235,300 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com P6-19 (continued) HARRIS CORPORATION Journal Entry December 31, 2004 Bad Debt Expense Allowance for Doubtful Accounts To increase the allowance for doubtful accounts at December 31, 2004, resulting from a change in accounting estimate 60,300 60,300 P6-20 (AICPA adapted solution) Note to Instructor: Requirement requires a journal entry for a correction of an error Chapter discusses this journal entry in sufficient depth so that it can be made here by students A more complete discussion is provided in Chapters 16 and 22 SUMMIT COMPANY Journal Entry January 1, 2005 Retained Earnings Allowance for Doubtful Accounts To set up the allowance for doubtful accounts at January 1, 2005, resulting from the correction of an error (Schedule 1) 20,000 20,000 Schedule : Computation of Allowance for Doubtful Accounts at January 1, 2005 Accounts receivable at December 31, 2004 Doubtful accounts expense as a percentage of sales for the four years ended December 31, 2005 (Schedule 2) Allowance for doubtful accounts 6-55 $1,250,000 $ x 1.60% 20,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com P6-20 (continued) (continued) Schedule 2: Computation of Doubtful Accounts Expense as a Percentage to Credit Sales From Inception to December 31, 2004 Year 2001 2002 2003 2004 Credit Sales $ 1,500,000 2,250,000 2,950,000 3,300,000 $10,000,000 Accounts Written Off Net of Recoveries $ 15,000 ($ 15,000 - $0) 35,300 ($ 38,000 - $ 2,700) 49,500 ($ 52,000 - $ 2,500) 60,200 ($ 65,000 - $ 4,800) $160,000 ($170,000 - $10,000) Percentage of doubtful accounts expense to installment sales: 1.60% ($160,000 $10,000,000) SUMMIT COMPANY Analysis of Changes in the Allowance for Doubtful Accounts For the Year Ended December 31, 2005 Balance at January 1, 2005 Provision for doubtful accounts required for 2005 ($83,000 - $20,000 - $5,000 + $24,820) Recovery in 2005 of bad debts written off previously Deduct write-offs for 2005 Allowance for doubtful accounts at December 31, 2005 (Schedule 3) $ 20,000 82,820 5,000 $107,820 (83,000) $ 24,820 Schedule 3: Computation of Allowance for Doubtful Accounts at December 31, 2005 Accounts receivable at December 31, 2005 Doubtful accounts expense as a percentage of sales for the years ended December 31, 2005 (Schedule 4) Allowance for doubtful accounts 6-56 $1,460,000 x 1.70% $ 24,820 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com P6-20 (continued) (continued) Schedule 4: Computation of Doubtful Accounts Expense as a Percentage to Credit Sales for Five Years Ended December 31, 2001 Year 2001-2004 (Schedule 2) 2005 Credit Sales $10,000,000 4,000,000 $14,000,000 Accounts Written Off Net of Recoveries $160,000 ($170,000 - $10,000) 78,000 ($ 83,000 - $ 5,000) $238,000 ($253,000 - $15,000) Percentage of doubtful accounts expense to credit sales: 1.70% ($238,000 $14,000,000) P6-21 2004 During Accounts Receivable the Sales year 2,200,000 Cash Accounts Receivable 1,900,000 Allowance for Doubtful Accounts Accounts Receivable Mar 31 May 18,000 Accounts Receivable Allowance for Doubtful Accounts 1,350 Cash Accounts Receivable 1,350 Cash Notes Receivable Interest Revenue 12,460 Notes Receivable Discounted Notes Receivable 10,000 Notes Receivable: Licata Accounts Receivable 4,800 18 Notes Receivable: Eagle Sales 6,900 6-57 2,200,000 1,900,000 18,000 1,350 1,350 12,000 460 10,000 4,800 6,900 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com P6-21 (continued) (continued) June 2 Interest Receivable ($55.47a + $34.50b) Interest Revenue 89.97 Cash ($4,836.62a + $6,899.71b) Loss from Discounting of Notes ($18.85 + $34.79) Notes Receivable Discounted ($4,800 + $6,900) Interest Receivable 11,736.33 53.64 11,700.00 89.97 aLicata Note Face value of note Interest to maturity ($4,800 x 0.13 x 120/360) Maturity value of note Discount ($5,008 x 0.14 x 88/360) Proceeds Accrued interest revenue: $55.47 ($4,800 x 0.13 x 32/360) Book value of note ($4,800 + $55.47) Loss from discounting of note $4,800.00 208.00 $5,008.00 (171.38) $4,836.62 (4,855.47) $ (18.85) bEagle Note Face value of note Interest to maturity ($6,900 x 0.12 x 90/360) Maturity value of note Discount ($7,107.00 x 0.14 x 75/360) Proceeds Accrued interest revenue: $34.50 ($6,900 x 0.12 x 15/360) Book value of note ($6,900.00 + $34.50) Loss from discounting of note July $6,900.00 207.00 $7,107.00 (207.29) $6,899.71 (6,934.50) $ (34.79) Cash [($140,000 x 0.85) - $5,000] Assignment Service Charge Expense Notes Payable 114,000 5,000 Accounts Receivable Assigned Accounts Receivable 140,000 Sales Returns and Allowances Accounts Receivable Assigned 6-58 89.97 2,500 119,000 140,000 2,500 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com P6-21 (continued) (continued) July Aug 13 Sales Returns and Allowances Accounts Receivable Assigned 800 31 Cash Accounts Receivable Assigned 50,000 31 Notes Payable Interest Expense ($119,000 x 0.015) Cash 50,000 1,785 31 Cash Accounts Receivable Assigned 60,000 31 Notes Payable Interest Expense ($69,000 x 0.015) Cash 69,000 1,035 Accounts Receivable Accounts Receivable Assigned 26,700c 31 800 50,000 51,785 60,000 70,035 26,700 c$140,000 - $2,500 - $800 $50,000 - $60,000 31 Sept Notes Receivable Discounted Notes Receivable: Eagle 6,900 Notes Receivable Dishonored Notes Receivable Discounted Notes Receivable: Licata Cash [$4,800 + ($4,800 x 0.13 x 120/360) + $25] 5,033 4,800 Cash Notes Receivable Dishonored 5,033 31 Cash Interest Revenue 5,000 31 Bad Debt Expense ($16,204.95d + $1,650) Allowance for Doubtful Accounts Dec 6-59 6,900 4,800 5,033 17,854.95 5,033 5,000 17,854.95 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com P6-21 (continued) (continued) dAge Amount $240,487 113,421 30,933 17,185 6,874 $408,900 Under 30 days 30- 60 days 61- 90 days 91-240 days Over 240 days Estimated Percentage Uncollectible 0.5% 1.5 8.0 35.0 70.0 Accounts receivable Less: Allowance for doubtful accounts Estimated Amount Uncollectible $ 1,202.44 1,701.32 2,474.64 6,014.75 4,811.80 $16,204.95 $408,900.00 (16,204.95) Notes receivable Total receivables Receivables turnover = = $392,695.05 38,000.00 $430,695.05 Net credit sales $2,200,000 = Aver net accts rec [$230,00 + ($408,900 - $16,205)] $2,200,000 = 7.07 or 52 days $311,348 Since Blackmon's terms are n/EOM, its 52-day accounts receivable turnover seems slightly slow but not unreasonable Note: The amounts listed in Requirement are based on the following account balances Accounts Receivable 12/31/03 bal 245,000 2,200,000 1,350 26,700 12/31/04 bal 408,900 Accounts Receivable Assigned 140,000 12/31/04 bal Allowance for Doubtful Accounts 18,000 12/31/03 bal 15,000 1,350 17,854.95 12/31/04 bal 16,204.95 1,900,000 18,000 1,350 4,800 140,000 2,500 800 50,000 60,000 26,700 Notes Receivable 12/31/03 bal 60,000 4,800 6,900 12/31/04 bal -0- Notes Receivable Discounted 10,000 12/31/03 bal 10,000 6,900 11,700 4,800 12/31/04 bal -0- 6-60 38,000 12,000 10,000 6,900 4,800 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com P6-22 Bank cash balance Deposit in transit: July June Undeposited cash Outstanding checks: July: #1345 #1353 #1354 June: #1082 #1086 #1087 Adjusted balance Book cash balance NSF check Error Note collected Interest Service charge Adjusted balance SMITH CORPORATION Proof of Cash July 31, 2004 Reconciliation 6-30-04 $13,031.78 146.73 July Receipts $10,051.17 1,098.51 (146.73) 472.50 (372.15) (552.40) (196.80) $12,057.16 $11,475.45 $12,057.16 $10,460.45 1,000.00 15.00 $12,057.16 July Disbursements $5,326.52 $11,475.45 6-61 Reconciliation 7-31-04 $17,756.43 1,098.51 472.50 27.00 13.23 14.24 (372.15) (552.40) (196.80) $4,259.64 $4,102.69 113.15 36.00 7.80 $4,259.64 (27.00) (13.23) (14.24) $19,272.97 $18,414.92 (113.15) (36.00) 1,000.00 15.00 (7.80) $19,272.97 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com P6-23 Bank cash balance Deposit in transit: August July Undeposited cash Outstanding checks: August: #2265 #2269 #2270 July: #2150 #2151 #2152 Adjusted balance Book cash balance NSF check Error Note collected Interest Service charge Adjusted balance JONES CORPORATION Proof of Cash August 31, 2004 Reconciliation 7-31-04 $ 9,852.46 953.71 August Receipts $16,755.64 1,235.32 (953.71) 421.68 (345.26) (156.72) (97.43) $10,206.76 $17,458.93 $10,206.76 $15,913.93 1,500.00 45.00 $10,206.76 August Disbursements $14,928.85 $17,458.93 6-62 Reconciliation 8-31-04 $11,679.25 1,235.32 421.68 56.89 341.72 185.75 (345.26) (156.72) (97.43) $14,913.80 $14,813.95 96.75 (9.00) 12.10 $14,913.80 (56.89) (341.72) (185.75) $12,751.89 $11,306.74 (96.75) 9.00 1,500.00 45.00 (12.10) $12,751.89 ... is a schedule prepared by a company to analyze the difference between the ending cash balance in the company's accounting records and the ending cash balance reported by its bank in a bank statement... risk of ownership are assumed by the factor Also, any related collection costs and bad debt expenses are incurred by the factor 6-7 To download more slides, ebook, solutions and test bank, visit... adapted solution) To account for the accounts receivable factored on April 3, 2004, Magrath should decrease accounts receivable by the amount of accounts receivable factored, increase cash by the