CHAPTER 4: ACCOUNTING FOR ACCOUNTS RECEIVABLES

Problem 4-1 Dreamer Company

Analysis of the items included in the "Receivables" account

Account Amount Classification Presentation
Trade accounts receivable 775,000 Accounts receivable Current asset
Trade notes receivable 100,000 Notes receivable Current asset
Installment receivable (due 1 to 2 yrs) 300,000 Installment receivable Current asset
Customers' accounts with credit balances (30,000) Payables Current liability
Advance payments for purchase of merchandise 150,000 Advances to suppliers Current asset
Customers' accounts with credit balances (20,000) Payables (advances) Current liability
Cash advance to subsidiary 400,000 Advances to subsidiary Noncurrent asset
Claim from insurance entity 15,000 Claims receivable Current asset
Subscription receivable due in 60 days 300,000 Subscriptions receivable Current asset
Accrued interest receivable 10,000 Accrued interest rec'l Current asset
Total Receivables 2,000,000

Requirement a: Entry to reclassify the receivables Requirement b: Trade and Other Receivables
Accounts receivable 775,000 Accounts receivable @ gross amount 775,000
Notes receivables 100,000 Allowance for doubtful accounts (50,000)
Installments receivables 300,000 Accounts receivable @ net realizable value 725,000
Advances to suppliers 150,000 Notes receivable 100,000
Advances to subsidiary 400,000 Installment receivables 300,000
Claims receivable 15,000 Advances to suppliers 150,000
Subscriptions receivable 300,000 Claims receivable 15,000
Accrued interest receivable 10,000 Subscriptions receivable 300,000
Customers' accounts with credit balances 30,000 Accrued interest receivable 10,000
Advances from customers 20,000 Trade and other receivables - current asset 1,600,000
Receivables 2,000,000

Requirement c: Classification of items excluded in (b)

1) The advances to subsidiary or affiliate account is classified as long-term investment under noncurrent assets.
2) The customers' accounts with credit balances are reclassified as payables under current liabilities.

Problem 4-2 Credible Company

Analysis of the items included in the T-account: Amount Explanation

Beginning balance 600,000 Beginning AR balance
Charge or credit sales 6,000,000 Increases the AR balance
Shareholders' subscription 200,000 Presented as subscription receivable (SHE)
Deposit on contract 120,000 Presented as special deposits on contracts (NCA)
Claims against common carrier for damages 100,000 Presented as claims receivable (CA)
IOUs from employees 10,000 Presented as advances to employees (CA)
Cash advance to affiliates 100,000 Presented as advances to affliates (NCA)
Advances to suppliers 50,000 Presented as advances to suppliers (CA)
Collections from customers 5,300,000 Decreases the AR balance
Writeoff 35,000 Decreases the AR balance
Merchandise returns 40,000 Decreases the AR balance
Allowances to customer for shipping damages 25,000 Decreases the AR balance
Collections from carrier claims 40,000 Decreases the claims receivable account
Collection on subscription 50,000 Decreases the subsription receivable account

Requirement a: Correct amount of Accounts Receivable Requirement b: Entry to adjust the Accounts Receivable account
Accounts receivable, beginning 600,000 Subscriptions receivable 150,000 (200,000 - 50,000)
Charge or credit sales 6,000,000 Special deposits on contracts 120,000
Collections from customers (5,300,000) Claims receivable 60,000 (100,000 - 40,000)
Writeoffs (35,000) Advances to employees 10,000
Merchandise returns (40,000) Advances to affliates 100,000
Allowances for shipping damages (25,000) Advances to suppliers 50,000
Accounts receivable, ending 1,200,000 Accounts receivable 490,000

Requirement c: Trade and Other Receivables

Accounts receivable 1,200,000
Claims receivable 60,000
Advances to employees 10,000
Advances to supplier 50,000
Trade and other receivables 1,320,000

Requirement d: Classification of items excluded in (c)

1) The subscription receivable is silent as to period of collection, whether it is short-term or long-term.
Thus, the general rule is to classify it as a deduction from subscribed share capital under the SHE section.
2) The special deposit on contracts is also silent as to collection period, so it classified as noncurrent asset.
3) The advances to affiliate account is classified as long-term investment under noncurrent assets.
Problem 4-3 Affectionate Company

Terms To record the sale and freight charges To record the collection w/in the discount period
FOB Accounts receivable 500,000 Cash 475,000
destination, Freight out 10,000 Sales discount (500k x 3%) 15,000
freight Sales 500,000 Allowance for freight charge 10,000
collect Allowance for freight charge 10,000 Accounts receivable 500,000
FOB Accounts receivable 500,000 Cash 485,000
destination, Freight out 10,000 Sales discount (500k x 3%) 15,000
freight Sales 500,000 Accounts receivable 500,000
prepaid Cash 10,000
FOB Accounts receivable 500,000 Cash 485,000
shipping pt, Sales 500,000 Sales discount (500k x 3%) 15,000
freight Accounts receivable 500,000
collect
FOB Accounts receivable 510,000 Cash (485k + 10k freight) 495,000
shipping pt, Sales 500,000 Sales discount (500k x 3%) 15,000
freight Cash 10,000 Accounts receivable 510,000
prepaid
Problem 4-4 Fiancee Company

Trans 1: Accounts receivable 4,000,000

Sales 4,000,000

Trans 2: Cash (98% of receivable) 1,470,000 This is the am ount collected (net of 2% discount).
Sales discount 30,000 The difference bet. AR and collection or 1,500,000 x 2%
Accounts receivable 1,500,000 (1,470,000 cash collected ÷ 98% net of discount)

Trans 3: Cash 1,000,000

Accounts receivable 1,000,000

Trans 4: Sales return 100,000

Accounts receivable 100,000 AR is credited since it is already granted.

Trans 5: Sales return 20,000

Allowance for sales returns 20,000 Allowance is credited since it is still an estim ate.
Problem 4-5 Romela Company (Gross Method)

Sale: Accounts receivable 4,500,000

Sales 4,500,000

Collection: Assuming payment was received on June 25 (within the discount period)
Cash 4,410,000
Sales discount (4.5M x 2%) 90,000
Accounts receivable 4,500,000

Collection: Assuming payment was received on July 10 (beyond the discount period)
Cash 4,500,000
Accounts receivable 4,500,000
Problem 4-6 Prime Company (Net Method)

Sale: Accounts receivable 2,450,000

Sales 2,450,000

Collection: Assuming payment was received on February 24 (within the discount period)
Cash 2,450,000
Accounts receivable 2,450,000

Collection: Assuming payment was received on March 10 (beyond the discount period)
Cash 2,500,000
Accounts receivable 2,450,000
Sales discount forfeited 50,000
Problem 4-7 Raven Company

Sale: Accounts receivable 4,000,000 Total estim ated return is 4% of sales.

Sales 4,000,000 Estim ated return = 4M x 4% = 400,000

Returns: Sales return 300,000 Actual return is 300,000

Accounts receivable 300,000

Estimates: Sales return 100,000 Estim ated additional return = 400k - 300k
Allowance for sales returns 100,000
Problem 4-8
Trade accounts receivable 2,000,000
Allowance for doubtful accounts (100,000)
Claims receivable 300,000
Trade and other receivables 2,200,000 A

• Trade and other receivables include "current" receivables only.

• Goods on consignm ent are only recorded as sales when actually sold.
Thus, the selling price is not considered as a receivable from the consignee.
• Security deposit on lease of warehouse is a long-term receivable.
Problem 4-9
Accounts receivable, beginning 1,300,000
Credit sales 5,500,000
Sales return* (150,000) *Actual sales returns and accounts written off
Accounts written off* (100,000) are deducted outright from the AR account.
Collections from customers (5,000,000)
Accounts receivable, ending 1,550,000
Less: Allowances ** The estim ated sales return and uncollectible accounts
Allowance for sales return** (50,000) are presented as allowances. These are deducted from
Allowance for doubtful accounts** (250,000) the gross am ount of AR to get its net realizable value.
Accounts receivable @ NRV 1,250,000 B

Problem 4-10
Accounts receivable, beginning 1,300,000
Credit sales 5,400,000
Collections from customers (4,750,000)
Accounts written off (125,000)
Collections of accounts written off* -
Accounts receivable (before ADA) 1,825,000 A

*Entry to record the collection of accounts written off:

• Reestablish first the custom er's account by reversing the entry m ade when the account was written off.
Accounts receivable 25,000
Allowance for doubtful accounts 25,000
• Record the collection of cash.
Cash 25,000
Accounts receivable 25,000
• So in effect, there is no adjustm ent in the AR account.
Problem 4-11
Analysis of items included in the AR account Amount Explanation
Worthless accounts 100,000 No longer part of AR
Advance payment on purchase orders 400,000 Separate account: Advances to suppliers (CA)
Advances to subsidiary 1,000,000 Separate account: Advances to subsidiary (NCA)
Customers' accounts with credit balances (600,000) Separate account: Payables (CL)
Trade accounts receivable 3,500,000 Included in AR
Subscription receivable 2,200,000 Separate account: Subscription receivable (CA)
Trade installment receivable 800,000 Included in AR (exclude unearned finance charge)
Trade accounts receivable from officers 150,000 Included in AR
Postdated checks on trade accounts 200,000 Included in AR

Trade accounts receivable 3,500,000

Trade installment receivable 800,000
Trade accounts receivable from officers 150,000
Postdated checks on trade accounts 200,000
Trade accounts receivable 4,650,000 A
Problem 4-12
Analysis of items included in the AR account Amount Explanation
Jan 1 balance net of credit balances 560,000 Credit balances should not be netted
Credit balances of AR 30,000 Presented separately as payable to customers (CL)
Charge sales 5,250,000 Increase in AR
Charge for goods out on consignment 50,000 Not considered as receivable
Shareholders' subscriptions 1,000,000 Presented separately as subscription receivable (SHE)
Accounts written off but recovered 10,000 Reestablished AR and allowance account
Cash paid to customers for credit balances 25,000 Deduction from payable to customers
Goods shipped to cover credit balances 5,000 Deduction from payable to customers
Deposit on long-term contracts 500,000 Presented separately as long-term receivable (NCA)
Claim against common carrier 400,000 Presented separately as claims receivable (CA)
Advances to supplier 300,000 Presented separately as advances to suppliers (CA)
Collections from customers 5,150,000 Decrease in AR
Overpayment of customers 50,000 Presented separately as payable to customers (CL)
Writeoff 35,000 Decrease in AR
Merchandise returns 25,000 Decrease in AR
Allowance to customers for shipping damages 15,000 Allowance (deducted from AR to get NRV)
Collection on carrier claim 50,000 Decrease in claims receivable
Collection on subscription 200,000 Decrease in subscription receivable

Requirement 1: Accounts receivable Requirement 2: Trade and other receivables

Accounts receivable, beginning 560,000 Accounts receivable 595,000
Charge sales 5,250,000 Claims receivable (net of collection) 350,000
Recovered accounts 10,000 Advances to supplier 300,000
Collections from customers (5,150,000) Trade and other receivables 1,245,000 C
Writeoffs (35,000)
Merchandise returns (25,000) Requirement 3: Noncurrent receivables
Accounts, receivable, ending 610,000 Deposit on long-term contracts 500,000
Allowance to customers for shipping damages (15,000) Subscriptions receivable 800,000
Accounts receivable @ nrv 595,000 B Noncurrent receivables 1,300,000 C

Problem 4-13

Requirement 1: Accounts receivable

Accounts receivable, beginning 950,000
Credit sales 3,800,000 Total sales of 5.9M less 2.1M cash sales = 3.8M credit sales
Collections from credit customers (3,024,000) This am ount is net of 4% discount, so it pertains to 96% of AR
Sales discount (126,000) 3,024,000 ÷ 96 = 3,150,000 AR x 4% = 126,000 discount
Accounts written off (50,000) Debit ADA, credit AR
Credit memo for sales returns and allowances (250,000) The 20,000 refund pertains to sales returns to cash custom ers.
Recoveries on accounts written off - AR is reestablished but subsequently credited for the collection.
Accounts receivable, ending 1,300,000 A

Requirement 2: Allowance for doubtful accounts

Allowance for doubtful accounts, beginning 100,000
Doubtful accounts expense 70,000 Debit DAE, credit ADA
Accounts written off (50,000) Debit ADA, credit AR
Recoveries on accounts written off 80,000 Debit AR, credit ADA
Allowance for doubtful accounts, ending 200,000 B
Problem 4-14
1 D The operating cycle is the period from the acquisition of assets up to their realization in cash.
2 D The operating cycle is not considered for the measurement of nontrade receivables.
3 A Generally, credit balances in AR are classified as payables under current liabilities.
4 C Only the expense and allowance account are affect in the adjusting entry.
5 D Writeoff is recorded as debit ADA, credit AR.
6 C Bad debt expense is matched with sales revenue.
7 D An expense is recorded immediately when collection is considered doubtful.
8 C This is the entry to reestablish a previously written off account.
9 A Net method is theoretically correct because it values the AR at net realizable value.
10 C Cash discount under net method is already deducted, thus, it does not affect the AR balance.

Problem 4-15
1 A Expense is recorded when collection is doubtful and not when actually uncollectible.
2 A Writeoff is recorded as debit ADA, credit AR.
3 A Both AR and ADA have decreased, so no effect in the NRV of AR.
4 D Recovery of accounts written off is recorded as debit AR, credit ADA and debit cash, credit AR.
5 B Net effect of entry in no. 4: debit Cash, credit ADA.