Solution manual accounting 25th editon warren chapter 09

In this case, the amount of the allowance for doubtful accounts should be shown separately in a note to the financial statements or in parentheses on the balance sheet.. The decrease in

CHAPTER 9 RECEIVABLES

DISCUSSION QUESTIONS

1 Receivables are normally classified as (1) accounts receivable, (2) notes receivable, or

(3) other receivables

2 Dan’s Hardware should use the direct write-off method because it is a small business that has

a relatively small number and volume of accounts receivable

3 Contra asset, credit balance

4 The accounts receivable and allowance for doubtful accounts may be reported at a net amount

of $661,500 ($673,400 – $11,900) in the Current Assets section of the balance sheet In this

case, the amount of the allowance for doubtful accounts should be shown separately in a note

to the financial statements or in parentheses on the balance sheet Alternatively, the accounts

receivable may be shown at the gross amount of $673,400 less the amount of the allowance

for doubtful accounts of $11,900, thus yielding net accounts receivable of

$661,500

5 (1) The percentage rate used is excessive in relationship to the accounts written off as

uncollectible; hence, the balance in the allowance is excessive

(2) A substantial volume of old uncollectible accounts is still being carried in the accounts

receivable account

6 An estimate based on analysis of receivables provides the most accurate estimate of the

current net realizable value

7 a Sailfish Company

b Notes Receivable

8 The interest will amount to $5,100 ($85,000 × 6%) only if the note is payable one year from

the date it was created The usual practice is to state the interest rate in terms of an annual

rate, rather than in terms of the period covered by the note

9 Debit Accounts Receivable for $243,600

Credit Notes Receivable for $240,000

Credit Interest Revenue for $3,600

PRACTICE EXERCISES

PE 9–1A

PE 9–1B

PE 9–2A

CHAPTER 9 Receivables

PE 9–2B

Allowance for Doubtful Accounts ($9,000 + $55,500)……… 64,500

c Net realizable value ($685,000 – $64,500)……… $620,500

PE 9–3B

a $231,500 ($46,300,000 × 0.0050)

Accounts Receivable……… $3,460,000 Allowance for Doubtful Accounts ($231,500 – $12,500)………… 219,000

c Net realizable value ($3,460,000 – $219,000)……… $3,241,000

PE 9–4A

a $41,000 ($50,000 – $9,000)

c Net realizable value ($685,000 – $50,000)……… $635,000

PE 9–4B

a $257,500 ($245,000 + $12,500)

c Net realizable value ($3,460,000 – $245,000)……… $3,215,000

Average daily sales………

Average accts receivable…………

Number of days’ sales in

c The decrease in the accounts receivable turnover from 10.2 to 9.1 and the

increase in the number of days’ sales in receivables from 35.8 days to 40.1

days indicate unfavorable trends in the efficiency of collecting receivables.

PE 9–6B

Net sales………

Accounts receivable: Beginning of year………

End of year………

Average accts receivable………

Accts receivable turnover………

$7,906,000 $6,726,000 $ 600,000 $ 540,000 $ 580,000 $ 600,000 $ 590,000 $ 570,000 [($600,000 + $580,000) ÷ 2] [($540,000 + $600,000) ÷ 2] 13.4 11.8 ($7,906,000 ÷ $590,000) ($6,726,000 ÷ $570,000) b Number of Days’ Sales in Receivables 2014 2013 Net sales………

Average daily sales………

Average accts receivable………

Number of days’ sales in receivables………

c The increase in the accounts receivable turnover from 11.8 to 13.4 and the

decrease in the number of days’ sales in receivables from 30.9 days to 27.2

days indicate favorable trends in the efficiency of collecting receivables.

Ex 9–1

Accounts receivable from the U.S government are significantly different from

receivables from commercial aircraft carriers such as Delta and United Thus,

Boeing should report each type of receivable separately In its filing with the

Securities and Exchange Commission, Boeing reports the receivables together

on the balance sheet, but discloses each receivable separately in a note to the

financial statements.

Ex 9–2

a MGM Resorts International: 22.6% ($93,760,000 ÷ $415,654,000)

b Johnson & Johnson: 3.4% ($340,000,000 ÷ $10,114,000,000)

c Casino operations experience greater bad debt risk, since it is difficult to

control the creditworthiness of customers entering the casino In addition,

individuals who may have adequate creditworthiness could overextend

themselves and lose more than they can afford if they get caught up in the

excitement of gambling In contrast, Johnson & Johnson’s customers are

primarily other businesses such as grocery store chains.

Dec 22 Accounts Receivable—Midnight Delights Co 15,500

Avalanche Auto August 8 84 (23 + 30 + 31)

Derby Auto Repair June 23 130 (7 + 31 + 31 + 30 + 31)

Lucky’s Auto Repair September 2 59 (28 + 31)

Pit Stop Auto September 19 42 (11 + 31)

Reliable Auto Repair July 15 108 (16 + 31 + 30 + 31)

Valley Repair & Tow May 17 167 (14 + 30 + 31 + 31 + 30 + 31)

Ex 9–8

a.

Color World Industries March 13 171 days (18 + 30 + 31 + 30 + 31 + 31)

Sather Sales Company September 6 Not past due

Days Past Due

Over 90 Allied Industries Inc 3,000 3,000

Days Past Due

Over 90

Allowance for doubtful

Ex 9–10

Uncollectible accounts estimate ($74,170 – $6,350).

Ex 9–11

Estimated Uncollectible Accounts

Ex 9–12

2014

Uncollectible accounts estimate ($44,260 + $3,375).

Ex 9–13

31 No entry

method than under the allowance method.

Uncollectible accounts estimate ($3,778,000 × 0.75% = $28,335).

Ex 9–14

31 No entry

Ex 9–14 (Continued)

b.

Computations:

Aging Class (Number of Days

Past Due)

Receivables Balance on December 31

Estimated Doubtful Accounts Percent Amount

Uncollectible accounts estimate ($47,090 – $1,545).

c Net income would have been $9,375 higher in 2014 under the direct write-off

method, because bad debt expense would have been $9,375 higher under

the allowance method ($39,375 expense under the allowance method vs.

$30,000 expense under the direct write-off method).

Uncollectible accounts estimate

($5,250,000 × 0.75% = $39,375).

Past Due)

Receivables Balance on December 31

Estimated Doubtful Accounts

Estimated balance of Allowance for Doubtful Accounts

c Net income would have been $14,650 lower in 2014 under the allowance

method, because bad debt expense would have been $14,650 higher under the

allowance method ($117,150 expense under the allowance method versus

$102,500 expense under the direct write-off method).

Uncollectible accounts estimate

($109,650 + $7,500).

2 Cost of merchandise sold for the sale on account.

3 A sale return or allowance.

4 Cost of merchandise returned.

5 Note received from customer on account.

6 Note dishonored and charged maturity value of note to customer’s account

receivable.

7 Payment received from customer for dishonored note plus interest earned

after due date.

Ex 9–22

2013

Accounts Receivable—Lake Shore

Accrued interest ($21,000 × 0.08 × 15/360 = $70).

Ex 9–24

Ex 9–25

1 The interest receivable should be reported separately as a current asset It

should not be deducted from notes receivable.

2 The allowance for doubtful accounts should be deducted from accounts

receivable.

A corrected partial balance sheet would be as follows:

NAPA VINO COMPANY Balance Sheet December 31, 2014 Assets Current assets:

Average accts receivable………

Accts receivable turnover………

Average daily sales………

Days’ sales in receivables………

in receivables also indicates an increase in the efficiency of collecting accounts

receivable by decreasing from 39.0 to 34.8, which is a favorable trend However,

before reaching a final conclusion, the ratios should be compared with industry

averages and similar firms.

Ex 9–27

a and b.

Net sales………

Accounts receivable………

Average accts receivable………

Accts receivable turnover………

Average daily sales………

Days’ sales in receivables………

of days’ sales in receivables increased from 38.6 to 39.4 days, also indicating an

unfavorable trend in collections of receivables These unfavorable trends are

consistent with the economic downturn that occurred worldwide in Year 1 and Year 2 However, before reaching a final conclusion, both ratios should be compared with those of past years, industry averages, and similar firms.

Average daily sales………

Days’ sales in receivables……

c The accounts receivable turnover indicates an increase in the efficiency of

collecting accounts receivable by increasing from 30.7 to 37.3, a favorable trend The days’ sales in receivables indicates an increase in the efficiency of collecting accounts receivable by decreasing from 11.9 to 9.8, also indicating a favorable trend Before reaching a conclusion, however, the ratios should be compared with industry averages and similar firms.

Ex 9–29

a The average accounts receivable turnover ratios are as follows:

The Limited Brands Inc.: 34.0 [(37.3 + 30.7) ÷ 2]

H.J Heinz Company: 9.4 [(9.3 + 9.5) ÷ 2]

Note: For computations of the individual ratios, see Ex 9–27 and Ex 9–28.

b The Limited Brands has the higher average accounts receivable turnover ratio.

c The Limited Brands operates a specialty retail chain of stores that sell directly

to individual consumers Many of these consumers (retail customers) pay with MasterCards or VISAs that are recorded as cash sales In contrast, H.J Heinz manufactures processed foods that are sold to food wholesalers, grocery store chains, and other food distributors that eventually sell Heinz products to individual consumers Accordingly, because of the extended distribution chain, we would expect Heinz to have more accounts receivable than The Limited Brands In addition, we would expect Heinz’s business customers to take a longer period to pay their receivables Thus, we would expect Heinz’s average accounts receivable turnover ratio to be lower than The Limited Brands, as shown in (a).

PROBLEMSProb 9–1A

2 20—

Uncollectible accounts estimate ($35,700 + $3,170).

Prob 9–1A (Concluded)

1 and 2 Allowance for Doubtful Accounts

Dec 31 Unadjusted Balance 3,170

Dec 31 Adjusting Entry 38,870

Bad Debt Expense Dec 31 Adjusting Entry 38,870

3 $1,749,300 ($1,785,000 – $35,700)

4 a $45,500 ($18,200,000 × 0.0025)

b $42,330 ($45,500 – $3,170)

c $1,742,670 ($1,785,000 – $42,330)

Prob 9–2A

1.

Adams Sports & Flies May 22, 2013 223 days (9 + 30 + 31 + 31 + 30 + 31 + 30 + 31) Blue Dun Flies Oct 10, 2013 82 days (21 + 30 + 31)

Cicada Fish Co Sept 29, 2013 93 days (1 + 31 + 30 + 31)

Deschutes Sports Oct 20, 2013 72 days (11 + 30 + 31)

Green River Sports Nov 7, 2013 54 days (23 + 31)

Western Trout Company Dec 7, 2013 24 days

Days Past Due 1–30 31–60 61–90 91–120

Over 120 AAA Outfitters 20,000 20,000

Brown Trout Fly Shop 7,500 7,500

Zigs Fish Adventures 4,000 4,000

Subtotals 1,300,000 750,000 290,000 120,000 40,000 20,000 80,000

Green River Sports 3,500 3,500

Western Trout Company 6,800 6,800

Wolfe Sports 4,400 4,400

Totals 1,342,400 754,400 296,800 125,900 51,900 28,400 85,000 Percentage uncollectible 1% 2% 10% 30% 40% 80% Estimate of uncollectible

accounts 121,000 7,544 5,936 12,590 15,570 11,360 68,000

Prob 9–2A (Concluded)

4.

5 On the balance sheet, assets would be overstated by $124,600, since the

allowance for doubtful accounts would be understated by $124,600 In

addition, the owner’s capital account would be overstated by $124,600,

since bad debt expense would be understated and net income overstated

by $124,600 on the income statement.

Uncollectible accounts estimate

($121,000 + $3,600).

Prob 9–3A

1.

2 Yes The actual write-offs of accounts originating in the first two years are

reasonably close to the expense that would have been charged to those years

on the basis of 1% of sales The total write-off of receivables originating in

the first year amounted to $8,500 ($4,500 + $3,000 + $1,000), as compared with

bad debt expense, based on the percentage of sales, of $9,000 ($900,000 × 1%) For the second year, the comparable amounts were $11,800 ($6,600 + $3,700 + $1,500) and $12,500 ($1,250,000 × 1%).

Bad Debt Expense

Year

Expense Actually Reported

Expense Based on Estimate

Increase (Decrease)

in Amount

of Expense

Balance of Allowance Account, End of Year

$500 360 840 945 270

(b) Interest Due at Maturity ($80,000 × 45/360 × 5%) ($24,000 × 60/360 × 9%) ($42,000 × 120/360 × 6%) ($54,000 × 90/360 × 7%) ($27,000 × 60/360 × 6%)

Prob 9–6A (Concluded)

Prob 9–1B

2 20—

Uncollectible accounts estimate ($60,000 – $3,410).

Prob 9–1B (Concluded)

Dec 31 Unadjusted Balance 3,410

Dec 31 Adjusted Balance 60,000 Bad Debt Expense

Dec 31 Adjusting Entry 56,590

3 $2,290,000 ($2,350,000 – $60,000)

4 a $79,000 ($15,800,000 × 0.005)

b $82,410 ($79,000 + $3,410)

c $2,267,590 ($2,350,000 – $82,410)

Prob 9–2B

1.

Arcade Beauty Aug 17, 2013 136 days (14 + 30 + 31 + 30 + 31)

Creative Images Oct 30, 2013 62 days (1 + 30 + 31)

Excel Hair Products July 3, 2013 181 days (28 + 31 + 30 + 31 + 30 + 31)

First Class Hair Care Sept 8, 2013 114 days (22 + 31 + 30 + 31)

Oh That Hair Nov 29, 2013 32 days (1 + 31)

One Stop Hair Designs Dec 7, 2013 24 days

Visions Hair & Nail Jan 11, 2014 Not past due

Days Past Due

Over 120

Estimate of uncollectible

Prob 9–2B (Concluded)

4.

5 On the balance sheet, assets would be overstated by $115,860, since the

allowance for doubtful accounts would be understated by $115,860 In addition, the owner’s capital account would be overstated by $115,860, since bad debt

expense would be understated and net income overstated by $115,860 on the

income statement.

Uncollectible accounts estimate

($123,235 – $7,375).

Prob 9–3B

1.

2 Yes The actual write-offs of accounts originating in the first two years are

reasonably close to the expense that would have been charged to those years on the basis of 1/4% of sales The total write-off of receivables originating in the first year amounted to $30,600 ($18,000 + $9,000 + $3,600), as compared with bad debt expense based on the percentage of sales, of $31,250 ($12,500,000 × 0.0025) For the second year, the comparable amounts were $35,600 ($21,200 + $9,300 + $5,100) and $37,000 ($14,800,000 × 0.0025).

Bad Debt Expense

Year

Expense Actually Reported

Expense Based on Estimate

Increase (Decrease)

in Amount

of Expense

Balance of Allowance Account, End of Year

$110 525 600 200 480

(b) Interest Due at Maturity ($33,000 × 30/360 × 4%) ($60,000 × 45/360 × 7%) ($48,000 × 90/360 × 5%) ($16,000 × 75/360 × 6%) ($36,000 × 60/360 × 8%)

Prob 9–6B (Concluded)

CASES & PROJECTS

CP 9–1

By computing interest using a 365-day year for depository accounts (liabilities),

Bev is minimizing interest expense to the bank By computing interest using a

360-day year for loans (assets), Bev is maximizing interest revenue to the bank

However, federal legislation (Truth in Lending Act) requires banks to compute

interest on a 365-day year Hence, Bev is behaving in an unprofessional manner.

2 a The estimate of 1/2 of 1% of credit sales may be too large, since the allowance

for doubtful accounts has steadily increased each year The increasing balance

of the allowance for doubtful accounts may also be due to the failure to write off a large number of uncollectible accounts These possibilities could be evaluated by examining the accounts in the accounts receivable subsidiary ledger for collectibility and comparing the result with the balance in the

allowance for doubtful accounts.

Note to Instructors: Since the allowance for doubtful accounts increased by 188%

[($14,400 – $5,000) ÷ $5,000], while sales have increased by 27.5% [($5,100,000 –

$4,000,000) ÷ $4,000,000], the increase cannot be explained by an expanding volume

of sales.