Chap 009

Chapter 9
Accounting for Receivables

QUESTIONS
1.
When customers use credit cards, the selling company can avoid having to directly evaluate
the credit standing of its customers. They also avoid the risk of bad debts and often are paid
cash from the credit card company more quickly than if customers were granted credit
directly. Moreover, they hope to increase sales, and net income, from the added convenience
to buyers.
2.
Revenues and expenses usually are not matched under the direct write-off method because
the revenues recorded from the uncollectible accounts often appear on the income statement
of one period while the bad debts expenses of those revenues appear on the income
statement of a later period when the account(s) is known to be uncollectible.
3.
The accounting principle of materiality suggests that the requirements of accounting

standards can be ignored if their effect on the financial statements is unimportant to their
users business decisions.
4.
Writing off a bad debt against the Allowance account does not reduce the estimated realizable
value of a companys accounts receivable because the write-off reduces the balances of both
Accounts Receivable and the Allowance for Doubtful Accounts by equal amounts. This
means the difference between them (called estimated realizable value) remains the same.
5.
The adjusted balances of Bad Debts Expense and Allowance for Doubtful Accounts are
virtually never equal because the expense number reflects only the events of the current
period, and the allowance is the accumulated result of events over a number of prior periods.
The only way that they could be equal would be if write-offs during the prior period exactly
equaled the beginning balance of the Allowance account.
6.
Creditors prefer notes receivable to accounts receivable because the notes can be more
easily converted into cash before they are due by discounting (or selling) them to a financial
institution. Also, a note represents a clear written acknowledgment by the debtor of both the
debt and its amount and terms.
7.
($ thousands)
Allowance / (Net Receivables + Allowance)

February 2, 2003:
$1,453/ ($34,373 + $1,453) = 4.06%
February 3, 2002:
$1,182 / ($26,894 + $1,182) = 4.21%
The allowance for fiscal year-end February 2, 2003, is a smaller percent of accounts receivable
than it is in the previous year (4.06% compared to 4.21%).
Solutions Manual, Chapter 9
McGraw-Hill Companies, Inc., 2005

19
8.
Tastykake uses the allowance method to account for doubtful accounts as evidenced by the
receivables being reduced by an allowance on the balance sheet. The realizable value of
accounts receivable as of December 28, 2002, is its net amount of $20,881,597. Another name
for the Allowance for Doubtful Accounts is the Allowance for Uncollectible Accounts.
9.
Harley-Davidson, Inc., shows accounts receivable and the current portion of finance
receivables in the current asset section of the balance sheet. If motorcycle buyers obtain
financing for their purchases from Harley then the amounts owed in the next 12 months (and
sometimes longer) from these buyers will show in the finance receivables account. The
finance receivables comprise a greater percentage of the current assets than do the accounts
receivables.
QUICK STUDIES
Quick Study 9-1 (15 minutes)
1.
Cash
9,500
Credit Card Expense....................................................
500
Sales.........................................................................
10,000
To record credit card sales less fees.
Cost of Goods Sold...................................................... 7,500

Merchandise Inventory...........................................
7,500
To record cost of sales.
2.
Accounts ReceivableCredit Card Cos..................... 2,880

Credit Card Expense....................................................
120
Sales.........................................................................
3,000
To record credit card sales less fees.
Cost of Goods Sold...................................................... 1,500

1,500
7 days later
Cash
2,880
Accounts ReceivableCredit Card Cos...............
2,880
To record cash receipts.

20
Fundamental Accounting Principles, 17th Edition

1.
Oct. 31 Allowance for Doubtful Accounts........................... 1,000
Accounts ReceivableC. Schaub.....................
1,000
To write off account.
2.
Dec. 9 Accounts ReceivableC. Schaub*..........................
Allowance for Doubtful Accounts.....................
200
200
To reinstate a written off account.

*If there is a strong belief that the remaining $800 will be
paid soon, then the full $800 balance can be reinstated.
9 Cash...........................................................................
Accounts ReceivableC. Schaub.....................
200
200
To record payment on a receivable.

1.
Dec. 31 Bad Debts Expense................................................
Allowance for Doubtful Accounts...................
835
835
To record estimate of uncollectibles

[($89,000 x 1.5%) - $500 credit].
2.
($89,000 x 1.5%) + $200 debit = $1,535
3.
Dec. 31 Bad Debts Expense................................................ 2,700
Allowance for Doubtful Accounts...................
2,700
To record estimate of uncollectibles

($270,000 x 1%).

Aug. 2
Notes ReceivableT. Menke............................

Accounts ReceivableT. Menke......................
5,500
5,500
To record receipt of note on account.
Oct. 31
Maturity date
Cash....................................................................
Notes ReceivableT. Menke......................
5,665
5,500

21
Interest Revenue..........................................
165
To record cash received on note plus

interest ($5,500 x 12% x 90/360).

22

Dec. 31
Interest Receivable............................................
Interest Revenue................................................
40
40
To record the year-end adjustment for

interest earned ($8,000 x 6% x 30/360).
Jan. 15
Maturity date
Cash....................................................................
Interest Receivable......................................
Interest Revenue..........................................
Notes Receivable.........................................
8,060
40
20
8,000
To record cash received on note plus interest.

Accounts receivable turnover =
Net sales
Average accounts receivable
$754,200
($152,900 + $133,700) / 2
5.3 times
Interpretation: An accounts receivable turnover of 5.3 implies that the

companys average accounts receivable balance is converted into cash 5.3
times per year. The 5.3 turnover is 30% lower than the average turnover of
7.5 for its competitors. The company needs to identify the cause of this
poor performance and rectify the situation to at least compete at the
average level.

23
EXERCISES
Exercise 9-1 (20 minutes)
Apr. 8 Cash
8,832
Credit Card Expense*............................................
368
Sales.................................................................
9,200
To record credit card sales less 4% fee.

*($9,200 x .04)
Cost of Goods Sold......................................................

6,800
6,800
12 Accounts ReceivableContinental Bank........... 5,265

Credit Card Expense*............................................
135
Sales.................................................................
5,400
To record credit card sales less 2.5% fee.

*($5,400 x .025)

3,500
3,500
20 Cash........................................................................ 5,265
Accounts ReceivableContinental Bank.......
5,265
To record cash received on credit sales less fees.

Part 1
GENERAL LEDGER
Accounts Receivable
Nov. 5 4,417 Nov. 21 189
10 1,250
13
733
30 2,606
Bal. 8,817

24
Sales
Nov. 5
10
13
30
4,417
1,250
733
2,606
Sales Returns and

Allowances
Nov. 21
189
Exercise 9-2 (concluded)

Part 1continued
ACCOUNTS RECEIVABLE LEDGER
Surf Shop
Nov. 5 4,417
30 2,606
Bal. 7,023
Yum Enterprises
Nov. 10 1,250
Nov. 13
Bal.
Matt Albin
733 Nov. 21
189
544
Part 2
Sami Company
Schedule of Accounts Receivable
November 30, 2005
Surf Shop...............................................................................
Yum Enterprises...................................................................
Matt Albin...............................................................................
Total........................................................................................
$7,023
1,250
544
$8,817
Comparison: The total of the Schedule of Accounts Receivable ($8,817) is

proved with the balance of the Accounts Receivable controlling T-account
from Part 1 ($8,817).
Dec. 31 Bad Debts Expense..................................................... 4,375
Allowance for Doubtful Accounts........................
4,375
To record estimated bad debts expense

(.005 x $875,000).
Feb. 1 Allowance for Doubtful Accounts..............................

Accounts ReceivableP. Coble...........................
420
420
To write off an account.
June 5 Accounts ReceivableP. Coble.................................

420
420
To reinstate an account.
June 5 Cash..............................................................................
Accounts ReceivableP. Coble...........................
420
420

25
To record cash received on account.

26

a.
Dec. 31 Bad Debts Expense*.....................................................1,205
1,205
To record estimated bad debts expense.

*
Unadjusted balance
Estimated balance ($53,000 x .04)
Required adjustment
= $ 915
= 2,120
= $1,205
credit
credit
credit
b.
Dec. 31 Bad Debts Expense**....................................................3,452
3,452
To record estimated bad debts expense.

**
Unadjusted balance
Estimated balance ($53,000 x .04)
Required adjustment
= $ 1,332
= 2,120
= $3,452
debit
credit
credit

July 4 Accounts Receivable............................................ 6,295
Sales.................................................................
6,295
To record sales on credit.

4,000
4,000
9 Cash........................................................................17,280
Factoring Fee Expense*........................................ 720
Accounts Receivable......................................
18,000
To record sale of receivable. *($18,000 x .04)
17 Cash........................................................................ 3,436
Accounts Receivable......................................
3,436
27 Cash........................................................................10,000
Notes Payable..................................................
10,000
To record cash from a loan.

Note to Financial Statements:

27
Accounts receivable in the amount of $13,000 are pledged as security

for a $10,000 note payable to Center Bank.

28

Nov. 1 Notes ReceivableM. Allen...............................
Accounts ReceivableM. Allen..................
5,000
5,000
Dec. 31 Interest Receivable.............................................

Interest Revenue...........................................
50
50
To record interest earned

[$5,000 x .06 x 60/360].
Apr. 30 Cash.....................................................................
Notes ReceivableM. Allen.........................
Interest Revenue...........................................
Interest Receivable.......................................
5,150
5,000
100
50

interest earned [$5,000 x .06 x 120/360].

Mar. 21 Notes ReceivableS. Hernandez........................ 3,100
Accounts ReceivableS. Hernandez............
3,100
Sept. 17 Accounts ReceivableS. Hernandez.................. 3,255

Interest Revenue.............................................
Notes ReceivableS. Hernandez..................
155
3,100
To record note dishonored plus interest

earned [$3,100 x .10 x 180/360 = $155].
Dec. 31 Allowance for Doubtful Accounts........................ 3,255

Accounts ReceivableS. Hernandez............
3,255
To write off an account.

29

2004
Dec. 13 Notes ReceivableL. Clark..................................10,000
Accounts ReceivableL. Clark.....................
10,000
31 Interest Receivable................................................
40
40
To record interest earned [$10,000 x .08 x 18/360].
2005
Feb. 11 Cash........................................................................10,133
Interest Revenue ............................................
Interest Receivable..........................................
Notes ReceivableL. Clark............................
93*
40
10,000

interest. [$10,000 x .08 x (60-18)/360=
$93 rounded]
Mar. 3 Notes ReceivableShandi Co............................. 4,000

Accounts Receivable-Shandi Co...................
4,000
17 Notes ReceivableJ. Torres................................ 2,000

Accounts ReceivableJ. Torres....................
2,000
Apr. 16 Accounts ReceivableJ. Torres.......................... 2,015

Notes ReceivableJ. Torres..........................
15
2,000
To record receivable for dishonored

note plus interest [$2,000 x .09 x 30/360].
May 1 Allowance for Doubtful Accounts........................ 2,015

Accounts ReceivableJ. Torres....................
2,015
To write off account.
June 1 Cash........................................................................ 4,100

Notes ReceivableShandi Co.......................
100
4,000
To record cash received on note with

interest [$4,000 x .10 x 90/360].

30

Year 2004 accounts receivable turnover:
$236,000
($20,700 + $17,400)/2
= 12.4 times
Year 2005 accounts receivable turnover:

$305,000
($22,900 + $20,700)/2
= 14.0 times
Analysis: Waseem Company turned over its accounts receivable 1.6 (14.0 12.4)
times more in 2005 than in 2004. This may indicate that the company has tightened
its credit policy or has improved its collection efforts. Also, relative to
competitors (turnover of 11), Waseem is performing better than average.

31
PROBLEM SET A
Problem 9-1A (30 minutes)
June 4 Accounts ReceivableA. Cianci..........................
Sales..................................................................
750
750
Cost of Goods Sold.............................................................. 500

Merchandise Inventory..................................................
500
5 Cash.........................................................................
Credit card expense*..............................................
Sales..................................................................
5,723
177
5,900
To record credit card sales less fee. *($5,900 x .03)
Cost of Goods Sold..............................................................3,200

3,200
6 Accounts ReceivableAccess.............................
Sales..................................................................
4,704
96
4,800

2,800
8 Accounts ReceivableAccess.............................
Sales..................................................................
3,136
64
3,200

1,900
10 No journal entry required.
13 Allowance for Doubtful Accounts.........................

Accounts ReceivableN. Wells......................
329
329
To write off account due.
17 Cash................................................................................
Accounts ReceivableAccess..............................
32
7,840
7,840
To record cash received from credit card co.
18 Cash................................................................................
Sales Discounts*............................................................
Accounts ReceivableA. Cianci...........................
735
15
750
To record cash received less discount. *($750 x .02)

33

2004
a.
Accounts Receivable.......................................... 1,803,750
Sales...............................................................
1,803,750
To record sales on account.

1,475,000
1,475,000
b.

Accounts Receivable....................................
20,300
20,300
To write off accounts.
c.
Cash.....................................................................
789,200
789,200
d.
Bad Debts Expense............................................

Allowance for Doubtful Accounts ..............
35,214
35,214
To record estimated bad debts.*

*
Beginning receivables.......................
Credit sales........................................
Collections.........................................
Write-offs............................................
Ending receivables............................
Percent uncollectible.........................
Required ending allowance...............
Unadjusted balance...........................
Adjustment to the allowance............
$
0
1,803,750
(789,200)
(20,300)
994,250
x 1.5%
14,914**
20,300
$ 35,214
Cr.
Dr.
Cr.
** rounded to nearest dollar

34
Problem 9-2A (Concluded)

2005
e.
Accounts Receivable............................................... 1,825,700
Sales....................................................................
1,825,700

1,450,000
1,450,000
f.
Allowance for Doubtful Accounts..........................

Accounts Receivable.........................................
28,800
28,800
To record write-off of accounts.
g.
Cash.......................................................................... 1,304,800
Accounts Receivable.........................................
1,304,800
h.
Bad Debts Expense.................................................

Allowance for Doubtful Accounts....................
To record estimated bad debts.
*
36,181
36,181
Beginning receivables.............................
Credit sales..............................................
Collections...............................................
Write-offs..................................................
Ending receivables..................................
Percent uncollectible...............................
Required ending allowance....................
Unadjusted balance
Beginning (Cr.)....................................... $14,914
Write-offs (Dr.)........................................ 28,800
Adjustment to the allowance..................
$ 994,250
1,825,700
(1,304,800)
(28,800)
1,486,350
x 1.5%
22,295** Cr.
13,886
36,181
Dr.
Cr.
** rounded to nearest dollar

35

Part 1
a. Expense is 2% of credit sales:
Dec. 31 Bad Debts Expense...............................................70,680
Allowance for Doubtful Accounts..................
70,680
To record estimated bad debts

[$3,534,000 x .02].
b. Expense is 1% of total sales:

53,378

[($1,803,750 + $3,534,000) x .01].
c. Allowance is 5% of accounts receivable:

*
69,255
Unadjusted balance.......................................................
$15,750 debit
Estimated balance ($1,070,100 x 5%)...........................
53,505 credit
Required adjustment......................................................
$69,255 credit
Part 2
Current assets:
Accounts receivable.................................... $1,070,100
Less allowance for doubtful accounts.......
(54,930)*
Or: Accounts receivable (net of $54,930*
uncollectible accounts).............................
$1,015,170
$1,015,170
* Adjustment to the allowance......................................

$70,680 Credit
Unadjusted allowance balance..................................
15,750 Debit
Adjusted balance........................................................
$54,930 credit
Part 3
Current assets:
Accounts receivable.................................... $1,070,100
Less allowance for doubtful accts..............
(53,505)**
Or: Accounts receivable (net of $53,505**
uncollectible accounts).............................
$1,016,595
$1,016,595
** See computations in Part 1c.

36

Part 1
Calculation of the estimated balance of the allowance for uncollectibles
Not due:
1 to 30:
31 to 60:
61 to 90:
Over 90:
$730,000 x .0125 =
354,000 x .0200 =
76,000 x .0650 =
48,000 x .3275 =
12,000 x .6800 =
$ 9,125
7,080
4,940
15,720
8,160
$45,025 Credit
Part 2
Dec. 31 Bad Debts Expense.............................................. 31,625
Allowance for Doubtful Accounts................
31,625

*
Estimated balance.............................
$13,400 credit
45,025 credit
Required adjustment.........................
$31,625 credit
Part 3
Writing off the account receivable in 2006 will not directly affect year 2006
net income. The entry to write off an account involves a debit to Allowance
for Doubtful Accounts and a credit to Accounts Receivable, both of which
are balance sheet accounts. Net income is affected only by the annual
recognition of the estimated bad debts expense, which is journalized as an
adjusting entry. Net income for Year 2005 (the year of the original sale)
included an estimated expense for write-offs such as this one.

37

Part 1
2004
Dec. 16 Notes ReceivableT. Duke.................................
Accounts ReceivableT. Duke.....................
9,600
9,600
To record note received on account.
31 Interest Receivable..............................................
Interest Revenue............................................
36
36
To record interest earned

[$9,600 x .09 x 15/360].
2005
Feb. 14 Cash......................................................................
Interest Receivable........................................
Notes ReceivableT. Duke...........................
9,744
108
36
9,600
To record cash received on note with interest.
Mar. 2 Notes ReceivableMare Co...............................

Accounts ReceivableMare Co...................
4,120
4,120
17 Notes ReceivableJ. Halaam.............................

Accounts ReceivableJ. Halaam................
2,400
2,400
Apr. 16 Accounts ReceivableJ. Halaam......................

Notes ReceivableJ. Halaam.......................
2,414
14
2,400
To record receivable for dishonored

note plus interest [$2,400 x .07 x 30/360].
June 2 Accounts ReceivableMare Co.........................

Notes ReceivableMare Co.........................
4,202*
82
4,120
To record receivable for dishonored note

[$4,120 + ($4,120 x .08 x 90/360)] = $4,120 +
$82.40 = $4,202.40 * Rounded to nearest dollar

38
Problem 9-5A (Concluded)

July 17 Cash......................................................................
Accounts ReceivableMare Co...................
4,245
43
4,202
To record cash received on account

plus additional interest [$4,202 x .08 x 46/360
= $43 (rounded)].
Aug. 7 Notes ReceivableBirch and Byer....................

Accounts ReceivableBirch and Byer..........
5,440
5,440
Sept. 3 Notes ReceivableYork......................................

Accounts ReceivableYork..........................
2,080
2,080
Nov. 2 Cash......................................................................
Notes ReceivableYork................................
2,115
35
2,080

interest ($2,080 x .10 x 60/360 = $35
rounded).
5 Cash......................................................................
Notes ReceivableBirch and Byer..............
5,576
136
5,440

interest ($5,440 x .10 x 90/360 = $136).
Dec. 1 Allowance for Doubtful Accounts......................

Accounts ReceivableJ. Halaam................
2,414
2,414
To record write-off of account.
Part 2
Analysis Component: When a business pledges its receivables as security
for a loan and the loan is still outstanding at period-end, the business must
disclose this information in notes to its financial statements. This is a
requirement because the business has committed a portion of its assets to
cover a specific portion of its liabilities, which means that if the business
dishonors its obligations under the loan, the creditor can claim the amount

39
of receivables identified in the pledge as collateral to cover the loan. This

arrangement must be disclosed to satisfy the full-disclosure principle.

40
PROBLEM SET B
Problem 9-1B (30 minutes)
Aug. 4 Accounts ReceivableStacy Dalton....................
Sales..................................................................
2,780
2,780

1,750
10 Cash.........................................................................
Credit Card Expense* (rounded to nearest dollar).....
Sales..................................................................
To record credit card sales less fee.
03)
3,151
97
3,248
*($3,248 x .

2,456
11 Accounts ReceivableAztec................................
Credit card expense*(rounded to nearest dollar).......
Sales..................................................................
02)
1,543
32
1,575
*($1,575 x .

1,150
14 Cash................................................................................
Sales Discounts* (rounded to nearest dollar)................
Accounts ReceivableStacy Dalton.....................
To record cash received less discount.
2,780
*($2,780 x .02)
15 Accounts ReceivableAztec.......................................
Credit Card Expense*(rounded to nearest dollar)..........
Sales...........................................................................
02)
2,724
56
2,901
59
2,960
*($2,960 x .

1,758

41
18 No journal entry required.

22 Allowance for Doubtful Accounts................................
Accounts ReceivableNess City..........................
398
398
To write off account due.
25 Cash................................................................................
Accounts ReceivableAztec.................................
4,444
4,444
To record cash received from credit card co.

2004
a.
Accounts Receivable..........................................
Sales...............................................................
673,490
673,490

500,000
500,000
b.
Cash.....................................................................
437,250
437,250
c.

8,330
8,330
d.
Bad Debts Expense............................................

Allowance for Doubtful Accounts...............
10,609
10,609

*Beginning receivables.....................
Credit sales.......................................
Collections........................................
Write-offs..........................................
Ending receivables..........................
Percent uncollectible.......................
Required ending allowance.............
Unadjusted balance.........................
Adjustment to the allowance...........
$
0
673,490
(437,250)
(8,330)
227,910
x 1.0%
2,279**
8,330
$ 10,609
Cr.
Dr.
Cr.
** Rounded to nearest dollar

42
Problem 9-2B (Concluded)

2005
e.
Accounts Receivable........................................... 930,100
Sales................................................................
930,100

650,000
650,000
f.
Cash...................................................................... 890,220
Accounts Receivable.....................................
890,220
g.
Allowance for Doubtful Accounts......................

Accounts Receivable.....................................
10,090
10,090
h.
Bad Debts Expense..............................................

10,388
*Beginning receivables...........................
Credit sales.............................................
Collections..............................................
Write-offs................................................
Ending receivables................................
Percent uncollectible.............................
Required ending allowance...................
Unadjusted balance
Beginning (credit).................................
$ 2,279
Write-offs (debit)...................................
10,090
Adjustment to the allowance.................
10,388
$ 227,910
930,100
(890,220)
(10,090)
257,700
x 1.0%
2,577 Cr.
7,811 Dr.
$ 10,388 Cr.

43

Part 1
a.
Expense is 2.5% of credit sales:

31,025

[$1,241,000 x .025].
b.
Expense is 1.5% of total sales:

Dec. 31 Bad Debts Expense............................................
Allowance for Doubtful Accts......................
33,840
33,840

[($1,015,000 + $1,241,000) x .015].
c.
Allowance is 6% of accounts receivable:

23,300

*
Estimated balance ($475,000 x 6%)....... $ 28,500 credit

Unadjusted balance................................
5,200 credit
Required adjustment.............................. $ 23,300 credit
Part 2
Current assets:
Accounts receivable.................................... $475,000
Less allowance for doubtful accounts....... (36,225)*
Or: Accounts receivable (net of $36,225*
uncollectible accounts)............................
* Adjustment to the allowance.....................
Unadjusted allowance balance.................
Adjusted balance.......................................
$31,025
5,200
$36,225
$438,775
$438,775
credit
credit
credit
Part 3
Current assets:
Accounts receivable..................................... $475,000
Less allowance for doubtful accounts....... (28,500)**

44
$446,500
Or: Accounts receivable (net of $28,500**

uncollectible accounts)............
$446,500
** See computations in Part 1c.

45

Part 1
Calculation of the estimated balance of the allowance
Not due: $296,400 x .020 = $ 5,928
1 to 30: 177,800 x .040 =
7,112
31 to 60:
58,000 x .085 =
4,930
61 to 90:
7,600 x .390 =
2,964
Over 90:
3,700 x .820 =
3,034
$23,968
Part 2
Dec. 31 Bad Debts Expense........................................... 28,068
Allowance for Doubtful Accounts..............
28,068

*
$ 4,100 debit
Estimated balance.............................
23,968 credit
Required adjustment.........................
$28,068 credit
Part 3
Writing off the account receivable in 2006 will not directly affect Year 2006
net income. The entry to write off an account involves a debit to Allowance
for Doubtful Accounts and a credit to Accounts Receivable, both of which
are balance sheet accounts. Net income is affected only by the annual
recognition of the estimated bad debts expense, which is journalized as an
adjusting entry. Net income for Year 2005 (the year of the original sale)
included an estimated expense for write-offs such as this one.

46

Part 1
2004
Nov. 1 Notes ReceivableJ. Stephens............................. 4,800
Accounts ReceivableJ. Stephens.................
4,800
Dec. 31 Interest Receivable..................................................

64
64
To record interest earned [$4,800 x .08 x

60/360].
2005
Jan. 30 Cash.......................................................................... 4,896
Interest Receivable............................................
Notes ReceivableJ. Stephens.......................
32
64
4,800
To record cash received on note with interest.
Feb. 28 Notes ReceivableKramer Co............................... 12,600

Accounts ReceivableKramer Co...................
12,600
Mar. 1 Notes ReceivableS. Myers................................... 6,200

Accounts ReceivableS. Myers......................
6,200
30 Accounts ReceivableKramer Co......................... 12,663

Notes ReceivableKramer Co.........................
63
12,600
To record receivable for dishonored note

plus interest [$12,600 x .06 x 30/360].
Apr. 30 Cash.......................................................................... 6,283

Notes ReceivableS. Meyers...........................
83
6,200
To record cash received on note plus interest

($6,200 x .08 x 60/360 = $83 rounded).

47
Problem 9-5B (Concluded)

June 15 Notes ReceivableR. Rye....................................
Accounts ReceivableR. Rye........................
2,000
2,000
June 21 Notes ReceivableJ. Striker................................

Accounts ReceivableJ. Striker...................
9,500
9,500
Aug. 14 Cash........................................................................
Interest Revenue*............................................
Notes ReceivableR. Rye..............................
2,033
33
2,000

[$2,000 x .10 x 60/360]. *Rounded to nearest
dollar.
Sept. 19 Cash
Notes ReceivableJ. Striker..........................
9,785
285
9,500

[$9,500 x .12 x 90/360].
Nov. 30 Allowance for Doubtful Accounts........................ 12,663

Accounts ReceivableKramer Co................
12,663
Part 2
Analysis Component: When a business pledges its receivables as security
for a loan and the loan is still outstanding at period-end, the business must
disclose this information in notes to its financial statements. This is a
requirement because the business has committed a portion of its assets to
cover a specific portion of its liabilities, which means that if the business
dishonors its obligations under the loan, the creditor can claim the amount
of receivables identified in the pledge as collateral to cover the loan. This
arrangement must be disclosed to satisfy the full-disclosure principle.

48
SERIAL PROBLEM
Serial Problem, Success Systems (50 minutes)
1.
a. Bad debts expense is recorded as 1% of total revenues:
$43,853 x .01 = $438.53 $439 (rounded to nearest dollar)
2005
Mar. 31
Bad Debts Expense...............................................

439
439
b. Bad debts expense is recorded as 2% of accounts receivable:

c. $22,720 x .02 = $454.40 $454 (rounded to nearest dollar)
2005
Mar. 31

454
454
2. Allowance Balance as of 3/31/05................... $454 Cr.

Less: Account written off.............................. (100) Dr.
Allowance Balance as of 6/30/05................... $354 Cr. (before adjustment)
Required Balance: $20,250 X .02 = $405
Required Adjustment: $405 - $354 = $51
2005
June 30

51
51
3. Many small business owners use the direct write-off method of recording
bad debts expense. The direct method is a simple and straight-forward
method of accounting for bad debts expense. It can also be justified if
the amounts are immaterial. However, when the amounts are material,
the direct write-off method can result in accounts receivable
overstatements, bad debts expense understatements, and net income
overstatements. The method required per GAAP is the allowance
method, which will result in the best matching of a periods expenses to
revenues.

49
Reporting in Action
1.
BTN 9-1
($ thousands)
Accounts receivable, less allowance for doubtful

accounts of $1,453.........................................................................
$34,373
2. Liquid assets as a percent of current liabilities ($ thousands)

Feb. 2, 2003:
Feb. 3, 2002:
$32,203 + 22,976 + 34,373 + 11,062 + 884

$59,687
= 170.1%
$21,904 + 15,292 + 26,894 + 9,017 + 2,771

= 144.4%
$52,533
Comments: Current liabilities are obligations that are due to be paid or

liquidated within one year or one operating cycle of the business,
whichever is longer. Typically, cash provided from the operations of the
business during the year along with the existing liquid assets are used
to satisfy these obligations. Looking solely at Krispy Kremes ability to
satisfy current obligations using cash, investment, and receivables
assets, the company is in a better position at February 2, 2003, as
compared to February 3, 2002. Krispy Kreme will probably not have
trouble covering its current liabilities with its liquid assets in 2003. As a
benchmark it is preferable to have about 100.00% in liquid assets to
cover current liabilities.
3. Note 2 to Krispy Kremes consolidated financial statements reports its
significant accounting policies. It reports that: The Company
considers cash on hand, deposits in banks, and all highly liquid debt
instruments with a maturity of three months or less at date of
acquisition to be cash and cash equivalents."
4. Accounts receivable turnover for 2003 ($ thousands):
$491,549
($34,373+ $26,894)/2
= 16.0 times
[Instructor note: Krispy Kremes accounts receivable turnover for 2002 is 16.8.]
5. Solution depends on the financial statement information obtained.

50
Comparative Analysis
1.
BTN 9-2
Accounts Receivable Turnover: ($ thousands)

Krispy (Current Year):
Krispy (Prior Year):
$491,549
($34,373 + $26,894)/2
= 16.0 times
$394,354
($26,894 + $19,855)/2
= 16.9 times
Tastykake (Current Year):
$162,263
= 7.5 times
($20,882 + $22,233)/2
Tastykake (Prior Year):
$166,245
($22,233 + $20,772)/2
= 7.7 times
2. Average Collection Period (or Average Days Sales Uncollected)

365 days / 16.0 times = 23 days
365 days / 16.9 times = 22 days
365 days / 7.5 times
= 49 days
365 days / 7.7 times
= 47 days
3. Krispy Kreme is more efficient at collecting accounts receivable as it takes

22-23 days, on average, to collect an accounts receivable while it takes
Tastykake 47-49 days, on average, to collect its accounts receivable.
4. As of the most recent two years ($ thousands)
Percent of uncollectibles = Allowance / (Allowance + Net receivable)
$1,453 / ($1,453 + $34,373) = 4.06%
$1,182 / ($1,182 + $26,894) = 4.21%
$3,606 / ($3,606 + $20,882) = 14.73%
$3,752 / ($3,752 + $22,233) = 14.44%
Tastykake estimates about 14-15% of its receivables balance to be

uncollectible. Krispy Kreme estimates about one-third of that at 4% to
5%.

51
Ethics Challenge
BTN 9-3
1. If the estimate for bad debts is reduced then less Bad Debts Expense will
be recognized on the income statement resulting in a higher net income. It
also means that a lower allowance will be shown on the balance sheet,
which will result in a higher realizable value for receivables and, therefore,
a larger amount of current liquid assets.
2. Accounting procedures often allow for alternate methods or require the use
of estimates. Therefore, managers have some leeway in their application of
accounting procedures. In this case it seems reasonable to doubt the
motivation behind the managers recommendation for a lower bad debts
expense. There does not appear to be any economic justification for the
change in estimate aside from the self-interest of the manager.
3. An informed owner or an effective board of directors will be aware of
alternate accounting methods and how estimates can affect the financial
statements. The owner or board should review for reasonableness the
managers and accountants estimate for bad debts expense. Also, if the
company is audited, the auditors will review this estimate for
reasonableness.

52
Communicating in Practice
BTN 9-4
TO:
SID OMAR
FROM:
(YOUR NAME)
DATE:
_______________
SUBJECT: Difference Between Bad Debts Expense and Allowance
For Doubtful Accounts
In accounting for credit sales and bad debts, we report sales revenue in the
period the sales are made, even though some credit sales do not result in
collections until the following period. Of course, some credit sales
eventually prove to be uncollectible. The fact that some accounts will
become uncollectible is what gives rise to bad debts expense and the
allowance for doubtful accounts.
DETERMINING BAD DEBTS EXPENSE
Bad debts expense represents the estimated amount of the year's sales that
will become uncollectible. The reported amount of bad debts expense is
determined at the end of the accounting period by multiplying an estimated
percent times the annual sales for the period. This year's bad debts
expense of $59,000 is calculated as 2% of the annual sales of $2,950,000.
DETERMINING ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Allowance for Doubtful Accounts unadjusted balance at the end of the
year is the cumulative result of recording bad debts expense and writing off
specific accounts receivable in all past years. The recognition of bad debts
expense at the end of each year has the effect of increasing the Allowance
for Doubtful Accounts balance. However, when specific accounts
receivable are written off, they decrease the Allowance for Doubtful
Accounts balance. Prior to this year's bad debts expense calculation, the
cumulative total of writing off specific accounts was $16,000 greater than
the cumulative total of the past years' bad debts expenses. Therefore, you
could say that Allowance for Doubtful Accounts had an "abnormal" balance
of $16,000. Then, when this year's bad debts expense of $59,000 is added to
Allowance for Doubtful Accounts, the result is an ending balance of $43,000.
Sid, I hope this clarifies the matter for you. If you have further questions,
please call me.

53
Taking It to the Net
BTN 9-5
1. The accounts receivable balances for Surg II, Inc., were $44,734 at
December 31, 2001, and zero at December 31, 2002.
2. Notes to its financial statements indicate that the company ceased
operations on January 22, 2002, and that the companys operating
assets were sold on that date. Note 2 reports that the accounts
receivables were sold for an amount of $38,467.
Teamwork in Action
BTN 9-6
Instructor note: Computations for the aging schedule are in the Problem 9-4A solution.
The check figure for total estimated uncollectibles is $45,025.
Adjusting entry
*
31,625
Req. allowance balance.....................

$45,025 credit
13,400 credit
Adj. to the allowance.........................
$31,625 credit
December 31, 2005, Balance Sheet Presentation

Accounts Receivable............................................$1,220,000*
Less Allowance for Doubtful Accounts...............
45,025 1,174,975**
* Total of each age category.
** Net Realizable Accounts Receivable.
Business Week Activity
BTN 9-7
1. Cards Issued: Sears Gold MasterCard and Sears Card

2. 5.55%
3. David Wyss, chief economist at Standard and Poors, says it usually
takes 2 to 3 years for balances to peak on new cards issued.
4. Sears MasterCard......................... $1,333
Sears Card..................................... $1,133 ($200 less than on MasterCard)
54
Entrepreneurial Decision
BTN 9-8
1. Computation of added monthly net income (loss)

Note: $3,000,000/12 = $250,000 monthly cash sales
Added Monthly Net Income (Loss) under Plan A

Sales ($250,000 x 20%)...................................................... $50,000
Current costs [$250,000 x 20% x (1 30%)].................... (35,000)
New costs [$250,000 x 20% x (4.8% + 1.2%)]................... (3,000)
Net income (loss)............................................................... $12,000
Added Monthly Net Income (Loss) under Plan B
Sales ($250,000 x 24%)...................................................... $60,000
Current costs [$250,000 x 24% x (1 30%)].................... (42,000)
New costs [$250,000 x 24% x (6.7% + 1.3% + 2.0%)]...... (6,000)
Net income (loss)............................................................... $12,000
2. Manzi is indifferent between Plans A and B because both yield an
expected additional net income of $12,000 per month. (However,
pursuing Plan A is likely to be less risky in that uncollectible accounts
will not play a major role. Also, Plan A is likely to result in earlier receipt
of cash from credit card companies vis--vis cash receipts from
customers who are granted credit terms.) Moreover, Manzi might
consider implementing both plansthat is, accept credit cards and grant
credit directly to selected customers. This combination plan would
require additional analysis before implementation.
The financial factors relevant to this decision relate to those impacting
the computations in part 1. These include (a) estimates for both cash
and credit sales, (b) estimates of current and new costs, (c) potential
effects of future industry or economic factors, and (d) the effect of these
plans on current sales. The nonfinancial factors include (a) the effect of
a new credit policy on customer relations, and (b) any additional burdens
on Manzi from implementing this new policy.

55
Hitting the Road
BTN 9-9
Telephone calls to VISA and American Express are the source of

information for this solution. VISA reports that the average transaction fee
it charges merchants is 3%. American Express has a range depending on
volume of business and average price of merchandise sold which ranges
from 2.95% to 4.5%.
Some merchants often choose not to accept certain cards because the
credit card fees are higher than others. In the case of VISA compared to
American Express, a merchant might have to pay as much as 1.5% more on
its American Express transactions. This can be a major part of its net profit
margin, especially for businesses such as grocery and hardware stores.
Global Decision BTN
9-10
1. Grupo Bimbo presents, as a singular line item, the combined balances of

notes and accounts receivable. Also, Grupo Bimbo does not state that
the balances are presented net of an allowance for doubtful accounts.
Both Krispy Kreme and Tastykake present accounts receivable
separately on the balance sheet and do so net of the allowance for
doubtful accounts. Both also report the amount of the allowance that
has been deducted to arrive at the net accounts receivable balance.
2. An investor likely prefers the disclosure treatment by the two U.S.
companies. Specifically, the presentation by Krispy Kreme and
Tastykake allows individuals to see that bad debts have been accounted
for and what effect the uncollectible accounts have on the gross
accounts receivable balance. Also, presenting accounts receivable as a
separate item on the balance sheet is more helpful than grouping it with
notes receivable as Grupo Bimbo does. It is not possible to discern from
Grupo Bimbos presentation the respective balances of accounts
receivable and notes receivable.

56

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Chapter 9

Accounting for Receivables

The accounting principle of materiality suggests that the requirements of accounting

Allowance / (Net Receivables + Allowance)

$1,453/ ($34,373 + $1,453) = 4.06%

$1,182 / ($26,894 + $1,182) = 4.21%

Solutions Manual, Chapter 9

McGraw-Hill Companies, Inc., 2005

To record credit card sales less fees.

Cost of Goods Sold...................................................... 7,500

To record cost of sales.

Accounts ReceivableCredit Card Cos..................... 2,880

To record credit card sales less fees.

Cost of Goods Sold...................................................... 1,500

To record cost of sales.

To record cash receipts.

McGraw-Hill Companies, Inc., 2005

Fundamental Accounting Principles, 17th Edition

Quick Study 9-2 (15 minutes)

To write off account.

To reinstate a written off account.

To record payment on a receivable.

Quick Study 9-3 (15 minutes)

To record estimate of uncollectibles

($89,000 x 1.5%) + $200 debit = $1,535

To record estimate of uncollectibles

Quick Study 9-4 (15 minutes)

Notes ReceivableT. Menke............................

To record receipt of note on account.

Solutions Manual, Chapter 9

McGraw-Hill Companies, Inc., 2005

To record cash received on note plus

McGraw-Hill Companies, Inc., 2005

Fundamental Accounting Principles, 17th Edition

Quick Study 9-5 (15 minutes)

To record the year-end adjustment for

To record cash received on note plus interest.

Quick Study 9-6 (10 minutes)

Interpretation: An accounts receivable turnover of 5.3 implies that the

Solutions Manual, Chapter 9

McGraw-Hill Companies, Inc., 2005

To record credit card sales less 4% fee.

Cost of Goods Sold......................................................

To record cost of sales.

12 Accounts ReceivableContinental Bank........... 5,265

To record credit card sales less 2.5% fee.

Cost of Goods Sold......................................................

To record cost of sales.

To record cash received on credit sales less fees.

Exercise 9-2 (25 minutes)

McGraw-Hill Companies, Inc., 2005

Sales Returns and

Fundamental Accounting Principles, 17th Edition

Exercise 9-2 (concluded)

Comparison: The total of the Schedule of Accounts Receivable ($8,817) is

To record estimated bad debts expense

Feb. 1 Allowance for Doubtful Accounts..............................

To write off an account.

June 5 Accounts ReceivableP. Coble.................................

McGraw-Hill Companies, Inc., 2005

To record cash received on account.

McGraw-Hill Companies, Inc., 2005

Fundamental Accounting Principles, 17th Edition

Exercise 9-4 (15 minutes)