Solution manual financial accounting 9th harrison ch05

C hapter 5 Short Term Investments and Receivables 5-5 Amount the company expects not to collect 3.. C hapter 5 Short Term Investments and Receivables 5-7 10 min.. C hapter 5 Short Term

C hapter 5 Short Term Investments and Receivables 5-1

Chapter 5

Short-Term Investments & Receivables

Short Exercises

(5 min.) S 5-1

1 Trading investments are reported at their current market value

2 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:

INCOME STATEMENT

Other revenue and gains (losses):

_

*$96,000 − $85,000 = $11,000

(10 min.) S 5-3

Journal

Unrealized Loss on Investment ($109,000 − $100,000)

9,000

Adjusted investment to market value

BALANCE SHEET

Current assets:

INCOME STATEMENT

Other revenues and gains (losses):

(5 min.) S 5-4

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

C hapter 5 Short Term Investments and Receivables 5-3

(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

(5-10 min.) S 5-8 MEMORANDUM

DATE:

FROM: Student Name

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

1 Uncollectible-Account Expense ($361,000 × 02)… 7,220

2 Balance sheet

C hapter 5 Short Term Investments and Receivables 5-5

Amount the company

expects not to collect

3

Accounts receivable, net

(5-10 min.) S 5-12 (a) Accounts Receivable 183,000

Allowance for Uncollectible Accounts

C hapter 5 Short Term Investments and Receivables 5-7

(10 min.) S 5-14

1 True

2 False Credit terms are usually stated in this form: 2/10 n/30

3 The net amount of receivables — the amount the company expects to

collect this amount in cash

4

5

Sales revenue Less: Sales returns and allowances Less: Sales discounts

= Net sales revenue Accounts receivable………

$XXX (X) (X)

$ XX

$XXX

6 False The direct write-off method overstates assets because it fails

to show the amount of the receivables the company actually expects

to collect

7 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

2 TMRN Bank has a note receivable and interest revenue

Bob Morrison has a note payable and interest expense

3 Payoff at November 30, 2012:

C hapter 5 Short Term Investments and Receivables 5-9

C hapter 5 Short Term Investments and Receivables 5-11

(10-15 min.) S 5-20

C hapter 5 Short Term Investments and Receivables 5-13

Exercises

(10-15 min.) E 5-21A

1 This is a trading investment because Eastern Corporation

intends to sell the stock within a short time

Cash 57,000 Purchased investment

[(1,000 × $58) − $57,000] 1,000

Adjusted investment to market value

3 BALANCE SHEET (partial)

Current assets:

INCOME STATEMENT (partial)

Other revenue and gains:

Unrealized gain on investment $ 1,000

C hapter 5 Short Term Investments and Receivables 5-15

(15-20 min.) E 5-23A

Req 1

Journal

July 2 Accounts Receivable 800

Sales Revenue 800

July 10 Accounts Receivable 1,500 Sales Revenue 1,500 July 12 Cash ($800 - $16)… 784

Sales Discounts ($800 × 2%) 16

Accounts Receivable 800

July 15 Sales Returns and Allowances 500

Accounts Receivable 500

July 20 Cash ($1,000 - $20) 980

Sales Discounts ($1,000 × 2%) 20

Accounts Receivable ($1,500 - $500) 1,000 Req 2 Sales revenue ($1,500 + $800) $2,300 Less: Sales returns and allowances - 500

Sales discounts ($20 + $16) - 36

Accounts receivable, net of allowance

_

1

$840 + $6,000 = $6,840

2 $91,000 − $6,840 = $84,160

C hapter 5 Short Term Investments and Receivables 5-17

(15 min.) E 5-25A

Req 1

Journal

Net accounts receivable = $58,410 ($60,300 − $1,890)

High Peaks Party Planners expects to collect the net receivable amount

IINCOME STATEMENT (Partial)

High Peaks Party Planners does not expect to collect the full $60,300

because some credit customers are likely not to pay their accounts

C hapter 5 Short Term Investments and Receivables 5-19

Bal in Allow for Doubtful

Allowance for Doubtful Accounts

Accounts receivable, net of allowance

C hapter 5 Short Term Investments and Receivables 5-21

(15-20 min.) E 5-28A

Recorded revenue on account

Recorded expense for the year

Wrote off uncollectible receivables

(10-15 min.) E 5-29A

Journal

** Rounded to nearest dollar

Arabian Realty earned interest revenue of $246 this year

C hapter 5 Short Term Investments and Receivables 5-23

INCOME STATEMENT

_

*$90,000 × 09 × 4/12 = $2,700

(10-15 min.) E 5-31A

Req 1

(a) (acid-test)

32 days’ sales in average receivables is within an acceptable range

relative to credit terms of net 30 days

Req 2

C hapter 5 Short Term Investments and Receivables 5-25

(10-15 min.) E 5-32A

Req 1

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

(10-15 min.) E 5-33B

1 This is a trading investment because Summer Corporation

intends to sell the stock within a short time

Purchased investment

Dec 31 Short-Term Investment

Adjusted investment to market value

3 BALANCE SHEET (Partial)

Current assets:

INCOME STATEMENT (Partial)

Other revenue and gains:

C hapter 5 Short Term Investments and Receivables 5-27

(15-20 min.) E 5-35B

Req 1

Journal

C hapter 5 Short Term Investments and Receivables 5-29

Accounts receivable, net of allowance

(15 min.) E 5-37B

Req 1

Journal

Oct Accounts Receivable 163,000

Sales Revenue 163,000

Net accounts receivable = $56,110 ($61,600 − $5,490)

Premier Party Planners expects to collect the net receivable amount

Req 3

BALANCE SHEET (Partial)

Current assets:

C hapter 5 Short Term Investments and Receivables 5-31

Premier Party Planners does not expect to collect the full $61,600

because some credit customers are likely not to pay their accounts

Bal in Allow for Doubtful

Allowance for Doubtful Accounts

C hapter 5 Short Term Investments and Receivables 5-33

(continued) E 5-39B Req 3

BALANCE SHEET

Current assets:

Accounts receivable, net of allowance

Recorded revenue on account

Recorded expense for the month

Wrote off uncollectible receivables

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

Journal

May 1 Note Receivable — Carl Fajar 19,000

Cash 19,000

C hapter 5 Short Term Investments and Receivables 5-35

INCOME STATEMENT

_

*$75,000 × 11 × 8/12 = $5,500

(10-15 min.) E 5-43B

Req 1

Short-term Net current (a) Acid-test

C hapter 5 Short Term Investments and Receivables 5-37

(10-15 min.) E 5-44B

Req 1

Unique Co., Inc’s collection period is short because Unique Co sells

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

C hapter 5 Short Term Investments and Receivables 5-39

Dec 16 Cash (1,300 × $0.22) 286

Received cash dividend

Short-Term Investment

Adjusted investment to fair value

Sold investment at a gain

C hapter 5 Short Term Investments and Receivables 5-41

(10-15 min.) P 5-62A 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

Student responses may vary

C hapter 5 Short Term Investments and Receivables 5-43

(25-35 min.) P 5-64A

Req 1

Journal

Nov 30 Allowance for Doubtful Accounts 2,000

Dec 31 Doubtful-Account Expense 4,888

_

$139,000 $53,000 $20,000 $19,000 Est % uncollectible x .002 x 02 x 15 x 35

Bal in Allow for Doubtful

Accounts should be $278 $1,060 $3,000 $6,650 $10,988

Req 2

Allowance for Doubtful Accounts

(continued) P 5-64A

Req 3

Up-To-Date Communications Comparative Balance Sheets (Partial) December 31, 2013 and December 31, 2012

C hapter 5 Short Term Investments and Receivables 5-45

(continued) P 5-65A

Req 3

Less: Unrealized loss on trading investments

Uncollectible-account expense as reported

C hapter 5 Short Term Investments and Receivables 5-47

(20-30 min.) P 5-66A Journal

Cash 15,400

Dec 31 Interest Receivable 206

C hapter 5 Short Term Investments and Receivables 5-49

= Total current assets = $920 = 1.56 $820 = 1.30

Cash + Short-term investments

(continued) P 5-67A

Req 2

MEMORANDUM

The current ratio improved from 1.30 to 1.56 The quick (acid-test) ratio increased from 0.75 to 82 Days’ sales in receivables decreased from 18 days to 17 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

Student responses may vary

Req 3

True Beauty Pools can improve cash flows from receivables by either offering a discount for early payment and/or emphasizing credit cards

C hapter 5 Short Term Investments and Receivables 5-51

Received cash dividend

Short-Term Investment ($13,200 − $10,800) 2,400 Adjusted investment to market value

Other expenses and loss:

C hapter 5 Short Term Investments and Receivables 5-53

(10-15 min.) P 5-69B MEMORANDUM

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

Student responses may vary

C hapter 5 Short Term Investments and Receivables 5-55

(25-35 min.) P 5-71B

Req 1

Journal

Nov 30 Allowance for Doubtful Accounts 2,000

Dec 31 Doubtful-Account Expense 7,235

_

$135,000 $40,000 $14,000 $41,000 Est % uncollectible x .003 x 03 x 12 x 25

Bal in Allow for Doubtful

Accounts should be $405 $1,200 $1,680 $10,250 $13,535

Req 2

Allowance for Doubtful Accounts

(continued) P 5-71B

Req 3

Media Communications Comparative Balance Sheets (Partial) December 31, 2013 and December 31, 2012

C hapter 5 Short Term Investments and Receivables 5-57

(continued) P 5-72B

Req 3

Less: Unrealized loss on trading securities

Uncollectible-account expense as reported

C hapter 5 Short Term Investments and Receivables 5-59

Accounts Receivable — Daphne’s Market 7,400

19 Cash 7,200

Financing Expense 200

Cash 15,800 Dec 31 Interest Receivable 195

C hapter 5 Short Term Investments and Receivables 5-61

= Total current assets = $930 = 1.69 $850 = 1.39

Cash + Short-term investments

b Quick

(acid-test)

ratio

= + Net current receivables = $90+$130+$290 $70+$165+$260

= Average net receivables = ($290+$260)/2 ($260+$250)/2

= 17 days = 18 days

(continued) P 5-74B

Req 2

MEMORANDUM

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 3

Lakeland Pools can improve cash flow from receivables by offering a discount for early payment and/or emphasize credit cards for sales

C hapter 5 Short Term Investments and Receivables 5-63

Challenge Exercises and Problem

(15-20 min.) E 5-75

Actual without Bank Cards

Expected with Bank Cards

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

(15-20 min.) E 5-76

T-accounts are helpful, as follows (in millions):

Allowance for Doubtful Accounts

C hapter 5 Short Term Investments and Receivables 5-65

Decision Cases

(20-25 min.) Decision Case 1

Clearview Cablevision Summary Income Statement Year Ended December 31, 2012

C hapter 5 Short Term Investments and Receivables 5-67

(15-20 min.) Decision Case 2

The trend of sales is increasing

*Net accounts receivable

Days’ sales in receivables decreased nicely during 2013

Cash collections from customers for 2013 and 2012:

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