Solution manual financial accounting 8th by harrison CH05

Chapter 5 Short-Term Investments & Receivables Other revenue loss: Unrealized loss on investment……… $7,000 Perry, the accountant, should not handle the company’s cash.. Chapter 5 Short

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2 A trading investment is always a current asset because the

investor intends to sell the trading investment in the very

asset is to be sold within one year or within the company’s operating cycle if longer than a year

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Chapter 5 Short-Term Investments & Receivables

Other revenue (loss):

Unrealized (loss) on investment……… $(7,000)

Perry, the accountant, should not handle the company’s cash With cash-handling duties, the accountant can steal cash and hide the theft by writing off a customer’s account receivable as uncollectible

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(5-10 min.) S 5-5

MEMORANDUM

DATE:

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

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352

1 True

company will probably collect this amount in cash

Less Allowance for uncollectibles…… (X)

Accounts receivable, net……… $ XX

4 False The direct write-off method overstates assets because

it fails to show the amount of the receivables the company actually expects to collect

5 California Bank has interest receivable and interest revenue Sacramento Company has interest payable and interest

expense

Interest for one month ($200,000 × 08 × 1/12)… $1,333.33

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Carl Abbott has a note payable and interest expense

Principal……… $170,000.00

Total……… $176,941.67

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= 34 days

The company’s days’-sales-in-receivables ratio (34) is okay relative to the 30-day period of the credit terms

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(10-15 min.) S 5-17

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358

Exercises

Group A

1 This is a trading investment because Northern Corporation

intends to sell the stock within a short time

Other revenue and gains:

Unrealized gain on investment……… $ 9,600

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Dividend Revenue

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Accounts receivable, net of allowance

for doubtful accounts of

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(15 min.) E 5-22A

Req 1

Journal

DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT

Net accounts receivable = $45,560 ($51,700 − $6,140)

Hilly Mountain Party Planners expects to collect the net receivable amount

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Hilly Mountain Party Planners does not expect to collect the full

$51,700 because some credit customers are likely not to pay their accounts

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balance of the allowance account is too low

Req 2

Journal

Doubtful-Account Expense……… 3,380

Allowance for Doubtful Accounts

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366

Recorded revenue on account

Recorded expense for the year

Wrote off uncollectible receivables

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(10-15 min.) E 5-26A

Journal

Nov 6 Note Receivable — Turf Masters.…… 12,000

Accounts Receivable - Voleron Inc

Aegean Realty earned interest revenue of $696 this year

** Rounded to nearest dollar

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(10-15 min.) E 5-28A

Short-term Net current (a) Acid-test

$19,000 + $103,000

$122,000

31 days’ sales in average receivables is good relative to credit

terms of net 30 days

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370

Req 1

Average collection period: Millions of dollars

365

Days’ sales in average receivables

= ($3,910 + $4,710) / 2 = 3 days (average collection period) $1,569.99

Req 2

Modern Co., Inc’s collection period is short because Modern

Co sells mainly for cash and on credit cards and bank cards The company’s receivables are very low

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Exercises

Group B

1 This is a trading investment because River Corporation

intends to sell the stock within a short time

Other revenue and gains:

Unrealized gain on investment……… $ 4,800

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Dividend Revenue

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Accounts

20,000

BALANCE SHEET

Current assets:

Accounts receivable, net of allowance

_

1

$820 + $20,000 = $20,820

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374

Req 1

Journal

May Accounts Receivable……… 156,000

Net accounts receivable = $49,880 ($54,700 − $4,820)

Hilltop Party Planners expects to collect the net receivable amount

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Hilltop Party Planners does not expect to collect the full

$54,700 because some credit customers are likely not to pay their accounts

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of the allowance account is too low

Req 2

Journal

Doubtful-Account Expense……… 1,660

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(15-20 min.) E 5-37B

Recorded revenue on account

Recorded expense for the year

Wrote off uncollectible receivables

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380

Journal

Jun 6 Note Receivable — Putt Masters.…… 14,000

Accounts Receivable - Voleron Inc

Celtic Realty earned interest revenue of $917 this year

** Rounded to nearest dollar

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382

Short-term Net current (a) Acid-test

$15,000 + $105,000

$120,000

32 days’ sales in average receivables is good relative to credit

terms of net 30 days

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(10-15 min.) E 5-41B

Req 1

Average collection period: Millions of dollars

365

Days’ sales in average receivables

= ($3,880 + $4,810) / 2 = 3 days (average collection period) $1,567.12

Req 2

Contemporary Co sells mainly for cash and on credit cards and bank cards The company’s receivables are very low

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384

Challenge Exercises

Actual without Bank Cards

Expected with Bank Cards

Decision: Accept bank cards because of the expected

increase in net income

****$175,000 − $9,000 = $166,000

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Received cash dividend

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Req 4

INCOME STATEMENT

Other revenue and (loss):

Dividend revenue……… $ 432 Unrealized (loss) on investment……… (3,600)

Sold investment at a gain

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390

MEMORANDUM

customers

By opening the mail, the accountant has direct access to cash This creates an internal control weakness because the accountant also posts credits to customer accounts She can steal a cash receipt from a customer and write off the customer account as uncollectible The theft is hard to detect because the customer’s account gets zeroed out, and the company does not pursue collection

To correct this internal control weakness, the accountant should be denied access to cash Someone else in the organization should open the mail and separate cash receipts from the accompanying remittance slips The cash should be deposited in the bank immediately, and only the remittance slips should go to the accountant

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(25-35 min.) P 5-63A

Req 1

Journal

Nov 30 Allowance for Doubtful Accounts……… 2,000

Dec 31 Doubtful-Account Expense……… 4.890

_

*Computation:

Required credit balance in Allowance for Doubtful

Accounts based on aging of Accounts

Receivable ($140,000 × 001) + ($45,000 × 01) +

($18,000 × 10) + ($29,000 × 30)……… $11,090

Credit balance in Allowance for Doubtful Accounts

before the December 31 adjusting entry — (see

the T-account in the answer to Req 2;

$8,200 − $2,000)……… 6,200 Credit entry needed to produce the required credit

balance in Allowance for Doubtful Accounts…… $4,890

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394

Req 2

Req 3

Perfecto Communications Comparative Balance Sheet December 31, 2011 and December 31, 2010

Accounts receivable……… $232,000 $214,000 Less: Allowance for doubtful accounts (11,090) (4,600) Accounts receivable, net……… $220,910 $209,400

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396

Req 3

− Unrealized loss on trading investments

the direct write-off method………… 7,500 (10,500)

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= Average net receivables = ($270+$250)/2 ($250+$240)/2

One day’s sales $16.11 $14.05

= 16 days = 17days

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TO: Top management of Highland Pools

FROM: Student Name

RE: Changes in ratio values from 2010 to 2011

The current ratio improved from 1.40 to 1.57 The acid-test ratio increased from 0.79 to 85 Days’ sales in receivables decreased from 17 days to 16 days

All three ratio values improved during the current year This is

a favorable trend because it shows that the company is finding

it easier to pay bills and collect receivables

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Received cash dividend

Unrealized loss on investment……… $ 3,600

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404

MEMORANDUM

deposited in the bank and that each day’s total cash receipts are posted to accounts receivable

1 Someone other than the accountant opens the mail This

person separates customer checks from the accompanying remittance slips

2 An employee with no access to the accounting records

deposits the cash in the bank immediately

3 The remittance slips go to the accountant, who uses them for posting credits to the customer accounts The accountant adds up the total of the credits for the day

4 A third person, such as the manager or the president, compares the amount of the bank deposit to the total of the customer credits posted by the accountant This gives some assurance that the day’s cash receipts went into the bank and that the same amount was posted to customer accounts

5 Someone other than the accountant should prepare the bank

reconciliation

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(25-35 min.) P 5-70B

Req 1

Journal

Dec 28 Allowance for Doubtful Accounts………… 1,900

Accounts Receivable — Blue Carpets 1,500 Accounts Receivable — Show-In-Tell 400

Dec 31 Doubtful-Account Expense……… 1,470

Allowance for Doubtful Accounts…… 1,470*

_

*Computation:

Required credit balance in Allowance for Doubtful

Accounts based on aging of Accounts

Receivable ($160,000 × 002) + ($35,000 × 01) +

($14,000 × 05) + ($21,000 × 30)……… $7,670

Credit balance in Allowance for Doubtful Accounts

before the December 31 entry — (see the

T-account in the answer to Req 2;

Credit entry needed to produce the required credit

balance in Allowance for Doubtful Accounts……… $1,470

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408

Req 2

Req 3

Image Communications Comparative Balance Sheet December 31, 2011 and December 31, 2010

Accounts receivable, net……… $222,330 $208,800

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410

Req 3

− Unrealized loss on trading investments

the direct write-off method………… 5,500 (14,600)

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213

Mar 1 Note Receivable — Don’s Market ……… 7,200

Accounts Receivable — Don’s Market

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= Average net receivables = ($290+260)/2 ($260+$230)/2

One day’s sales $16.14 $14.11

= 17 days = 17 days

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TO: Top management of Gold Pools, Inc

FROM: Student Name

RE: Changes in ratio values from 2010 to 2011

The current ratio improved from 1.40 to 1.67 The acid-test ratio increased from 0.82 to 0.90 Days’ sales in receivables were unchanged at 17 days

Two of the three ratio values improved during the current year, and the third ratio value held steady This is a favorable trend because it indicates that the company is finding it easier to pay its bills

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Decision Cases

(20-25 min.) Decision Case 1

Clearview Cablevision Summary Income Statement Year Ended December 31, 2010

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*Net accounts receivable

Days’ sales in receivables decreased nicely during 2010

Cash collections from customers for 2010 and 2009:

Collections from customers increased dramatically during

2010

Based on the improving trends of sales and collections from customers, and the drop in days’ sales in receivables, we would lend $500,000 to Dean Young Beauty Aids

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Ethical Issue

(20-30 minutes)

Req 1

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 2 and Req 3

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

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418

instances where misstatements of income have dulled people’s perceptions of the truth and resulted in tragic losses of

resources and reputations An article in The Wall Street Journal

concluded with this statement, ―The danger with spin artistry in accounting is that the spinner may believe the spin.‖ While manipulations such as this might have a temporarily positive impact, in the long run, creditors and analysts will catch on that the company is manipulating earnings, and the markets will react in a harshly negative way toward Sunnyvale, hurting all parties concerned

Legal analysis: As explained in chapter 4, material and intentional manipulations of earnings are known as fraudulent financial reporting, and are illegal Such dealings will eventually result in adverse legal and regulatory consequences for the company, as well as its officers and directors

smoothing income is unethical because the owner deliberately

underestimates Uncollectible-Account 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

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