Solution manual accounting 21e by warreni ch 08

Receivables are normally classified as 1 accounts receivable, 2 notes receivable, or 3 other receivables.. Alternatively, the accounts receivable may be shown at the gross amount of $88

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CHAPTER 8 RECEIVABLESCLASS DISCUSSION QUESTIONS

1 Receivables are normally classified as (1)

accounts receivable, (2) notes receivable,

or (3) other receivables.

2 Transactions in which merchandise is sold

or services are provided on credit generate

accounts receivable.

3 a Current assets

b Investments

4 Examples of other receivables include

interest receivable, taxes receivable, and

receivables from officers or employees.

5 The principle of separation of operations

and accounting is violated (Note to

Instructors: This weakness in internal

control may permit embezzlement For

example, the accounts receivable clerk may

misappropriate cash receipts and cover the

misappropriation by a process called

lapping In lapping, the cash receipts from

one account are taken and the cash

received on a subsequent account is used

to cover the shortage The receipts on

another account are then used to cover the

shortage in this latter customer’s account,

etc This lapping generally continues until

the records are falsified to correct for the

shortage, the cash is returned by the clerk,

or the embezzlement is discovered.)

6 The allowance method

7 Contra asset, credit balance

8 The accounts receivable and allowance for

doubtful accounts may be reported at a net

amount of $759,900 ($883,150 –

$123,250) 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

$883,150 less the amount of the allowance for doubtful accounts of $123,250, thus yielding net accounts receivable of

$759,900.

9 1 The percentage rate used is excessive

in relationship to the volume of 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.

10 An estimate based on analysis of

receivables provides the most accurate

estimate of the current net realizable value.

11 The advantages of a claim evidenced by a

note are (1) the debt is acknowledged, (2) the payment terms are specified, (3) it is a stronger claim in the event of court action, and (4) it is usually more readily transferable to a creditor in settlement of a debt or to a bank for cash.

12 a Ellsworth Company

b Notes Receivable

13 The interest will amount to $6,300 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.

14 Debit Accounts Receivable

Credit Notes Receivable Credit Interest Revenue

15 Cash 20,806

Accounts Receivable 20,600

Interest Revenue 206 ($20,600 × 30/360 × 12% = $206)

16 Current assets

145

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Ex 8–1

a Inappropriate Since Fridley has a large number of credit sales supported by promissory notes, a notes receivable ledger should be maintained Failure to maintain a subsidiary ledger when there are a significant number of notes receivable transactions violates the internal control procedure that mandates proofs and security Maintaining a notes receivable ledger will allow Fridley to operate more efficiently and will increase the chance that Fridley will detect accounting errors related to the notes receivable (The total of the accounts in the notes receivable ledger must match the balance of notes receivable in the general ledger.)

b Inappropriate The procedure of proper separation of duties is violated The accounts receivable clerk is responsible for too many related operations The clerk also has both custody of assets (cash receipts) and accounting responsibilities for those assets.

c Appropriate The functions of maintaining the accounts receivable account in the general ledger should be performed by someone other than the accounts receivable clerk.

d Appropriate Salespersons should not be responsible for approving credit.

e Appropriate A promissory note is a formal credit instrument that is frequently used for credit periods over 45 days.

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up in the excitement of gambling.

Ex 8–3

Account Due Date Number of Days Past Due Bear Creek Body Shop June 8 53 (22 + 31)

First Auto July 3 28

Kaiser Repair March 20 133 (11 + 30 + 31 + 30 + 31) Master’s Auto Repair May 15 77 (16 + 30 + 31)

Richter Auto June 18 43 (12 + 31)

Sabol’s April 12 110 (18 + 31 + 30 + 31)

Uptown Auto May 8 84 (23 + 30 + 31)

Westside Repair & Tow May 31 61 (30 + 31)

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Ex 8–4

a.

Customer Due Date Number of Days Past Due

Janzen Industries August 29 93 days (2 + 30 + 31 + 30)

Kuehn Company September 388 days (27 + 31 + 30)

Mauer Inc October 21 40 days (10 + 30)

Pollack Company November 23 7 days

Simrill Company December 3 Not past due

b.

Aging of Accounts Receivable

November 30

Days Past Due

Customer Balance Due 1–30 31–60 61–90 90 Aaker Brothers Inc 2,000 2,000

Aitken Company 1,500 1,500

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Zollo Company 5,000 5,000 Subtotals 972,500 640,000 180,000 78,500 42,300 31,700 Janzen Industries 40,000 40,000 Keuhn Company 8,500 8,500

Mauer Inc 18,000 18,000

Pollack Company 6,500 6,500

Simrill Company 7,500 7,500 Totals 1,053,000 647,500 186,500 96,500 50,800 71,700

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Ex 8–5

Days Past Due

Balance Due 1–30 31–60 61–90 90 Total receivables $1,053,000 $647,500 $186,500 $96,500 $50,800 $71,700 Percentage

Uncollectible 1% 4% 8% 20% 40% Allowances for

Doubtful Accounts $60,495 $6,475 $7,460 $7,720 $10,160 $28,680

Ex 8–6

Nov 30 Uncollectible Accounts Expense 53,315*

Allowances for Doubtful Accounts 53,315

*$60,495 – $7,180 = $53,315

Ex 8–7

Estimated Uncollectible Accounts Age Interval Balance Percent Amount Not past due $450,000 2% $ 9,000 1–30 days past due 110,000 4 4,400 31–60 days past due 51,000 6 3,060 61–90 days past due 12,500 20 2,500 91–180 days past due 7,500 60 4,500 Over 180 days past due 5,500 80 4,400 Total $636,500 $27,860

Ex 8–8

2006

Dec 31 Uncollectible Accounts Expense 29,435*

Allowance for Doubtful Accounts 29,435

*$27,860 + $1,575 = $29,435

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Accounts Receivable—Darlene Brogan 6,000

30 Allowance for Doubtful Accounts 6,100

Aug 3 Accounts Receivable—Darlene Brogan 6,100

3 Cash 6,100

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Accounts Receivable—Dr Jerry Jagers 9,000

12 Uncollectible Accounts Expense 9,500

Accounts Receivable—Dr Jerry Jagers 9,500

Dec 20 Accounts Receivable—Dr Jerry Jagers 9,500

Uncollectible Accounts Expense 9,500

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Ex 8–17

1 Sale on account.

2 Cost of merchandise sold for the sale on account.

3 A sales 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.

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Ex 8–18

2005

Dec 13 Notes Receivable 25,000

Accounts Receivable—Visage Co 25,000

31 Interest Receivable 75*

Interest Revenue 75

31 Interest Revenue 75

Income Summary 75

2006 Apr 12 Cash 25,500 Notes Receivable 25,000 Interest Receivable 75

*$25,000 × 0.06 × 18/360 = $75

Ex 8–19

July 8 Notes Receivable 30,000.00

Accounts Receivable—Pennington Co 30,000.00

Oct 6 Accounts Receivable—Pennington Co 30,600.00

Notes Receivable 30,000.00 Interest Revenue 600.00 Nov 5 Cash 30,855.00

Accounts Receivable—Pennington Co 30,600.00 Interest Revenue 255.00*

*$30,600 × 0.10 × 30/360 = $255.00

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Ex 8–20

Mar 1 Notes Receivable 15,000

Accounts Receivable—Absaroka Co 15,000

18 Notes Receivable 12,000

Accounts Receivable—Sturgis Co 12,000

Apr 30 Accounts Receivable—Absaroka Co 15,125

Notes Receivable 15,000 Interest Revenue 125

June 16 Accounts Receivable—Sturgis Co 12,270

July 11 Cash 15,367

Accounts Receivable—Absaroka Co 15,125 Interest Revenue 242*

*$15,125 × 0.08 × 72/360 = $242

Oct 12 Allowance for Doubtful Accounts 12,270

Accounts Receivable—Sturgis Co 12,270

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Cash $ 43,750 Notes receivable 300,000 Accounts receivable $576,180

Less allowance for doubtful accounts 71,200 504,980 Interest receivable 18,000

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Ex 8–23

a 2003: 7.9 days [$216,200 ÷ ($9,953,530 ÷ 365)]

2002: 6.1 days [$159,477 ÷ ($9,518,231 ÷ 365)]

b The number of days’ sales in receivables indicates a decrease in the efficiency

of collecting accounts receivable by increasing from 6.1 days to 7.9 days, an unfavorable trend Before reaching a more definitive conclusion, the ratios should be compared with industry averages and similar firms.

c The accounts receivable turnover indicates a slight increase in the efficiency

of collecting accounts receivable by increasing from 99.6 to 108.2, a favorable trend The number of days’ sales in receivables decreased from 3.4 days to 3.1 days, also indicating a favorable trend in collections of receivables Before reaching a more definitive conclusion, both ratios should be compared with those of past years, industry averages, and similar firms.

Note to Instructors: The high accounts receivable turnover and low number of

days’ sales in receivables suggests that most of The Limited’s sales are cash sales, such as those from MasterCard and VISA.

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Appendix Ex 8–26

June 1 Notes Receivable 60,000

Accounts Receivable—Rhodes Co 60,000

July 1 Cash 60,344*

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PROBLEMS Prob 8–1A

2.

2006

Mar 15 Cash 11,100

Accounts Receivable—Bimba Co 11,100

Accounts Receivable—Bimba Co 7,400

Apr 16 Accounts Receivable—Tom Miner 5,782

16 Cash 5,782

Accounts Receivable—Tom Miner 5,782

July 20 Allowance for Doubtful Accounts 5,500

Accounts Receivable—Martz Co 5,500

Oct 31 Accounts Receivable—Two Bit Saloon Co 6,100

31 Cash 6,100

Accounts Receivable—Two Bit Saloon Co 6,100

Dec 31 Allowance for Doubtful Accounts 9,250

Accounts Receivable—Asche Co 950

Dorsch Co 4,600 Krebs Distributors 2,500

J J Levi 1,200

31 Income Summary 11,918

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Prob 8–1A Concluded

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Prob 8–2A

1.

Customer Due Date Number of Days Past Due

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2 and 3.

Aging of Accounts Receivable December 31, 2006

Days Past Due

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Zinger Sports 2,900 2,900

Zug Bug Sports 6,200 6,200

Percentage Uncollectible 1% 4% 8% 25% 40% 80% Estimate of Doubtful

Accounts 65,212 2,548 5,930 8,444 10,350 14,220 23,720

4 Uncollectible Accounts Expense 68,012*

*$65,212 + $2,800

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Prob 8–3A

1.

Uncollectible Accounts Expense

Increase Balance of Expense Expense (Decrease) Allowance Actually Based on in Amount Account, Year Reported Estimate of Expense End of Year 1st $3,500 $ 6,375 $2,875 $ 2,875

$1,800) and $7,200.

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Dec 31 Interest Receivable 116

$12,000 × 0.06 × 42/360 = $ 84

$16,000 × 0.09 × 8/360 = 32 Total $116

4.

Jan 18 Cash 12,120

Notes Receivable 12,000 Interest Receivable 84 Interest Revenue 36

22 Cash 16,120

Notes Receivable 16,000 Interest Receivable 32 Interest Revenue 88

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Sept 1 Notes Receivable 24,000

Accounts Receivable 24,000

Oct 31 Cash 24,360

Nov 5 Notes Receivable 9,600

12 Cash 27,900

Dec 5 Cash 9,656

30 Cash 15,125

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Mar 6 Notes Receivable 24,000

Accounts Receivable—Emerson and Son 24,000

Accounts Receivable—Gwyn Co 25,000

Apr 10 Notes Receivable 12,000

Cash 240

May 5 Cash 24,240

13 Accounts Receivable—Gwyn Co 25,500

June 12 Cash 25,755

Accounts Receivable—Gwyn Co 25,500 Interest Revenue 255 ($25,500 × 0.12 × 30/360 = $255)

July 9 Cash 12,270

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Prob 8–6A Continued

Aug 24 Accounts Receivable—Haggerty Co 10,200

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Prob 8–6A Continued

This solution is applicable only if the P.A.S.S Software that accompanies the text

is used.

RIMROCK CO.

Income Statement For the Year Ended December 31, 20—

Operating revenue:

Sales $219,200 105.44 Less: Sales returns and allowance (10,000) (4.81)

Sales discounts (1,302) (0.63) Net sales $207,898 100.00 Cost of merchandise sold 84,413 40.60 Gross profit $123,485 59.40 Operating expenses:

Sales salaries expense $ 40,500 19.48 Advertising expense 8,000 3.85 Miscellaneous selling expense 500 0.24 Office salaries expense 16,500 7.94 Rent expense 12,250 5.89 Miscellaneous administrative expense 200 0.10 Total operating expenses 77,950 37.49 Net income from operations $ 45,535 21.90 Other revenue:

Interest revenue 1,505 0.72 Net income $ 47,040 22.63

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This solution is applicable only if the P.A.S.S Software that accompanies the text

RIMROCK CO.

Balance Sheet December 31, 20—

Assets Cash $ 98,940 Accounts receivable 24,500 Merchandise inventory 28,600 Total assets $152,040

Liabilities Accounts payable $ 35,000

Owner's Equity Sophia Dubra, capital 117,040 Total liabilities and owner’s equity $152,040

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Prob 8–1B

2.

2006

Feb 24 Accounts Receivable—Dina Ibis 1,025

24 Cash 1,025

Accounts Receivable—Dina Ibis 1,025

Mar 29 Allowance for Doubtful Accounts 7,500

Accounts Receivable—Hoxsey Co 7,500

July 10 Cash 4,800

Accounts Receivable—Foust Co 4,800

Accounts Receivable—Foust Co 7,200

Sept 8 Accounts Receivable—Louis Sabo 1,200

8 Cash 1,200

Accounts Receivable—Louis Sabo 1,200

Dec 31 Allowance for Doubtful Accounts 20,905

Accounts Receivable—Emery Co 8,050

Darigold Co 6,260 Zheng Furniture 3,775 Carey Wenzel 2,820

31 Income Summary 35,380

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