CHAPTER 9. BE9-1 a) employee advances - other receivable b) promissory note - note receivable c) sold goods on account - accounts receivable

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1 CHAPTER 9 BE9-1 a) employee advances - other receivable b) promissory note - note receivable c) sold goods on account - accounts receivable BE9-2 a) July 1 A/R - Cambridge Inc. 14,000 Sales 14,000 sold goods on account b) July 8 Sales R & A 3,800 A/R - Cambridge Inc. 3,800 goods returned for credit c) July 31 Cash 10,200 A/R - Cambridge Inc. 10,200 cash received on account BE9-3 Bad Debts = ($800, ,000) x 2% =$15,000 April 30 Bad Debts Expense 15,000 All. for Doubtfuls 15,000 to adjust for bad debts BE9-4 a) Uncollectible amount = $400,000 x 1% = $4,000 All. for Doubtfuls Dec. 31 Bad Debts Expense 1,000 3,000 All. for Doubtfuls 1,000 1,000 to adjust for bad debts bal. 4,000 b) All. for Doubtfuls 800 4,800 bal. 4,000

2 BE9-5 a) Jan. 24 Allowance for Doubtful Accounts 7,000 A/R - Hutley Inc. 7,000 wrote off an uncollectible account b) Before After A/R $700,000 $693,000 All. for Doubtfuls 54,000 47,000 $646,000 $646,000 BE9-6 March 4 A/R - Hutley Inc. 7,000 All. for Doubtfuls 7,000 to reinstate account previously written off March 4 Cash 7,000 A/R - Hutley Inc. 7,000 cash received on account BE9-7 July 27 Cash Credit Card Expense 2.63 Sales cash sales (75 * 0.035) a) Debit Card: use Debit Card Expense rather than Credit Card Expense b) American Express: use A/R - American Express rather than Cash BE9-8 a) Interest = $15,000 b) Rate = 8% $ x 12 months = $6,320/year; 6,320/79,000 = 0.08 c) Principal = $56,000 $1,680 x 2 = $3,360/year; 3,360/0.06 = $56,000 BE9-9 Jan. 10 A/R = Opal Co. 9,000 Sales 9,000 Feb. 9 Notes Receivable - Opal Co. 9,000 A/R - Opal Co. 9,000

3 BE9-10 a) April 1 Notes Receivable 10,000 A/R 10,000 July 1 Cash 10,175 Notes Receivable 10,000 honoured Interest Earned 175 b) July 1 A/R 10,175 Notes Receivable 10,000 dishonoured, expect Interest Earned 175 collection c) July 1 All. for Doubtful Notes 10,000 dishonoured, no Notes Receivable 10,000 collection BE9-12 Receivables Turnover = Net Credit Sales Average A/R = 11,006 ( )/2 = times Collection Period = 365 days = = 13 days E Jan 6 A/R - Watson Inc. 5,000 Sales 5,000 sold goods on account Feb 5 Cash 5,000 A/R - Watson Inc. 5,000 cash received on account 2. Jan 10 A/R - Margaret Giger 11,000 Sales 11,000 sold goods on account Feb 12 Cash 6,000 A/R - Margaret Giger 6,000 received cash on account Mar 10 A/R - Margaret Giger Interest Earned to record interest owing ($5,000 x 0.02)

4 E9-2 a) (1) 1% of net sales Dec. 31 Bad Debts Expense 8,000 All. for Doubtfuls 8,000 to adjust for bad debts (($840,000-40,000) x 0.01) (2) 10% of A/R Uncollectible = $110,000 x 0.10 = $11,000 Entry value = $11,000-2,500 (existing balance) = $8,500 Dec. 31 Bad Debts Expense 8,500 All. for Doubtfuls 8,500 to adjust for bad debts b) (1) 0.5% of net sales Dec. 31 Bad Debts Expense 4,000 All. for Doubtfuls 4,000 to adjust for bad debts ($800,000 x 0.005) (2) 5% of A/R Uncollectible = $110,000 x 0.05 = $5,500 Entry value = $5,500 - (-500) = $6,000 Dec. 31 Bad Debts Expense 6,000 All. for Doubtfuls 6,000 to adjust for bad debts E9-3 a) Month Age Balance % Uncollectible March 0-30 days $65,000 2% $1,300 February days 17,600 10% 1,760 Dec/Jan days 8,500 30% 2,550 Nov/Oct over 90 days 6,400 50% 3,200 $97,500 $8,810 b) March 31 Bad Debts Expense 7,010 All. for Doubtfuls 7,010 to adjust for bad debts ($8,810 needed balance - 1,800 existing balance)

5 E9-4 Dec. 31 Bad Debts Expense 8,000 All. for Doubtfuls 8,000 to adjust for bad debts ($ x 0.02) May 11 All. for Doubtfuls 1,100 A/R - Robert Worthy 1,100 to write off uncollectible account June 12 A/R - Robert Worthy 1,100 All. for Doubtfuls 1,100 to reinstate account previously written off June 12 Cash 1,100 A/R - Robert Worthy 1,100 collected cash on account E9-5 a) Dec 15 Cash Credit Card Expense 7.50 Sales (250 * 0.03) b) April 2 A/R - P. Zachos 1300 Sales 1300 May 3 Cash 700 A/R - P. Zachos 700 June 1 A/R - P. Zachos Interest Earned E9-6 - too much time & money spent to track and chase receivables - stable, but may have needed cash immediately; selling gets cash back into company E9-7 Nov. 1 Notes Receivable - A. Morgan 18,000 Cash 18,000 Dec. 1 Notes Receivable - Wright Inc. 3,600 Sales 3,600 Dec. 15 Notes Receivable - Barnes Company 4,000 A/R - Barnes Company 4,000 Dec. 31 Interest Receivable 331 Interest Earned 331 $18000 x 0.10 x 2/12 = $300; $3600 x 0.06 x 1/12 = $18; $4000 x 0.08 x 1/12 / 1/2 = $13

6 E May 1 Notes Receivable - Jones Bros. 10,500 A/R - Jones Bros. 10,500 Dec. 31 Interest Receivable 700 Interest Earned 700 $10500 x 0.10 x 8/ May 1 Cash 11,550 Notes Receivable - Jones Bros. 10,500 Interest Receivable 700 Interest Earned 350 E9-9 a) Nov 1 A/R - Fein Inc. 4,200 Notes Receivable - Fein Inc. 4,000 Interest Earned 200 (I = 4,000 * 0/10 * 6/12) b) Nov 1 All. for Doubtful Notes 4,000 Notes Receivable - Fein Inc. 4,000 E9-10 a) Jan 15 A/R 15,000 Sales 15,000 Jan 20 Cash 4,275 Credit Card Expense 225 Sales 4,500 (4,500 * 0.05) Jan 30 Cash 970 Debit Card Expense 30 Sales 1,000 (1,000 * 0.03) Feb 10 Cash 12,000 A/R 12,000 Feb 15 A/R 45 Interest Revenue 45 ($3,000 x 0.18 x 1/12) b) Credit Card Expense and Debit Card Expense go in the Expense section of the Income Statement Interest Revenue goes in the Revenue section of the Income Statement

7 E9-12 in millions Receivables turnover = Net Credit Sales Nike Reebok Average A/R = $8, = $ =5.73 times =6.95 times Collection period = 365 days Receivables turnover = 365 = =64 days =53 days Nike vs. Reebok: - Nike takes longer to collect receivables, thus taking longer to go through the cycle to collect cash vs. industry: - Nike is worse than the industry average of 6.8 times (53 days) - Reebok matches the industry average P9-1A a) 1. A/R 3,300,000 Sales 3,300, Sales R & A 50,000 A/R 50, Cash 2,800,000 A/R 2,800, Allowance for Doubtfuls 90,000 A/R 90, A/R 25,000 Allowance for Doubtfuls 25,000 Cash 25,000 A/R 25,000 b) A/R All. for Doubtfuls 960,000 50,000 (2) (4) 90,000 70,000 (1) 3,300,000 2,800,000 (3) 25,000 (5) (5) 25,000 90,000 (4) 25,000 (5) bal. 1,320, bal. c) Dec. 31 Bad Debts Expense 120,000 All. for Doubtfuls 120,000

8 P9-2A a) $38,000 - those written off b) Expense = credit sales x 0.03 = $2,100,000 x 0.03 = $63,000 therefore, bad debts expense is $63,000 c) Uncollectible = A/R x 0.06 = $840,000 x 0.06 = $50,400 Expense = new balance - current balance = $50,400-3,000 = $47,400 therefore, bad debts expense is $47,400 d) Expense = new balance - current balance = $50,400 - (-3,000) = $53,400 therefore, bad debts expense is $53,400 e) Direct write-off doesn't follow the matching principle. A write-off occurs in a different fiscal period than the sale. P9-3A a) 2002 Dec. 31 Bad Debts Expense 16,050 All. for Doubtfuls 16,050 ($25,050-9,000) b) 2003 March 1 All. for Doubtfuls 1,000 A/R 1,000 May 1 A/R 1,000 All. for Doubtfuls 1,000 May 1 Cash 1,000 A/R 1,000 c) Dec. 31 Bad Debts Expense 12,050 All. for Doubtfuls 12,050

9 P9-4A a) 0-30 days $100,000 1% $1, days 60,000 5% 3, days 50,000 10% 5,000 over 90 days 30,000 25% 7,500 $240,000 $16,500 b) Bad Debts Expense 6,500 All. for Doubtfuls 6,500 c) Allowance for Doubtfuls 2,000 A/R 2,000 d) A/R 1,000 All. for Doubtfuls 1,000 Cash 1,000 A/R 1,000 P9-5A a) Bad Debts Expense 30,000 All. for Doubtfuls 30,000 ($1,000,000 x 0.03) b) All. for Doubtfuls 37,000 A/R 37,000 c) A/R 5,000 All. for Doubtfuls 5,000 Cash 5,000 A/R 5,000 d) All. for Doubtfuls e) Recovery of a written-off account does not affect (b) 37,000 9,000 bal. bad debts expense in the current period - the 30,000 (a) expense account is only used for the year-end 5,000 (c) adjustment. 7,000 bal.

10 P9-6A A/R All. for Doubtfuls Bad Debts Expense (Yr. 1) 8,300, ,000 (Yr. 1) 249,000 (Yr. 1 exp) (Sales) 28,500, ,000 (Adj.) 105,000 (w-o) 105,000 (Adj.) 285,000 (Yr. 2 exp) 27,195,000 (Coll.) (Yr. 2) 9,500, ,000 (Yr. 2) Bad Debts Expense 285,000 All. for Doubtfuls 285,000 to adjust for bad debts All. for Bad Debts 105,000 A/R 105,000 to write-off uncollectible accounts Sales: 0.01x = $285,000 x = $28,500,000 A/R 28,500,000 Sales 28,500,000 sales on account Cash 27,195,000 A/R 27,195,000 collections on account (1% of sales) P9-9A a) Oct 1 Cash 8,080 Notes Receivable - Foran Inc. 8,000 Interest Receivable 80 ($8000 x 0.06 x 2/12) Oct. 7 A/R 6,900 Sales 6,900 Oct. 12 Cash 724 Credit Card Expense 26 Sales 750 ($750 x 0.035) Oct. 15 A/R 485 Interest Earned 485 Oct. 31 A/R 8,160 Notes Receivable - Drexler Co. 8,000 Interest Receivable 80 Interest Earned 80

11 Oct. 31 Interest Receivable 90 Interest Earned 90 ($12000 x 0.09 x 1/12) b) Notes Receivable Interest Receivable S ,000 S O. 1 8,000 O O. 31 8,000 O. 31 O ,000 16, , d) All. for Doubtful Notes 8,080 Notes Receivable 8,000 Interest Receivable 80 (write-off accrued interest for September) P9-10A in millions a) Current Ratio = Current Assets = $1,125 = $1,527 Current Liabilities 1,903 1,777 = 0.59:1 = 0.86:1 Acid-test Ratio = Cash + Investments + Net A/R = $756 = $1,110 Current Liabilities 1,903 1,777 = 0.40:1 = 0.62:1 b) Receivables Turnover = Net Credit Sales = $5,446 = $5,261 Average A/R ( )/2 ( )/2 = 7.07 times = 8.72 times Collection Period = 365 days = 365 = 365 Receivables Turnover = 52 days = 42 days c) Short-term liquidity: - decreasing - less able to pay debts; current and acid-test ratios are decreasing - receivables are not being collected quickly; period was 10 days longer in 2000 than 1999

12 Review - P9-7A Determine Sales: Sales $91,000 Beg. Inv. $36,000 + Purchases 60,000 = Cost of Goods Avail. 96,000 - End. Inv. 32,000 = Cost of Goods Sold 64,000 Gross Profit 27,000 Total Sales = Cash Sales + Sales on Account 91,000 = 15,000 + Sales on Account Sales on Account = $76,000 Accounts Receivable Bal. 24,000 1,000 write-offs Sales 76,000 61,000 collections 100,000 62,000 38,000 therefore, ending inventory is $38,000 Review - P9-8A Jan. 5 A/R - Brooks Company 7,000 Sales 7,000 Feb. 2 Notes Receivable - Brooks Company 7,000 A/R - Brooks Company 7,000 Feb. 12 Notes Receivable - Gage Company 7,800 Sales 7,800 Feb. 26 A/R - Mathias Co. 4,000 Sales 4,000 Apr. 5 Notes Receivable - Mathias Co. 4,000 A/R - Mathias Co. 4,000 Apr. 12 Cash 7,930 Notes Receivable - Gage Company 7,800 Interest Earned 130 (I = 7,800 * 0.10 * 2/12) June 2 Cash 7, Notes Receivable - Brooks Company 7,000 Interest Earned (I = 7,000 * 0.08 * 4/12) July 4 A/R - Mathias Co. 4,080 Notes Receivable - Mathias Co. 4,000 Interest Earned 80 (I = 4,000 * 0.08 * 3/12)

13 July 15 Notes Receivable - Tritt Inc. 5,000 Sales 5,000 Oct. 13 Allowance for Doubtful notes 5,000 Notes Receivable - Tritt Inc. 5,000 Dec there are no outstanding notes

CHAPTER 9 Accounting for Receivables

CHAPTER 9 Accounting for Receivables ASSIGNMENT CLASSIFICATION TABLE Study Objectives Questions Brief Exercises Exercises Problems Set A Problems Set B 1. Identify and distinguish between the different