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CHAPTER 8

Accounting for Receivables

ASSIGNMENT CLASSIFICATION TABLE

 

 

 

Brief

 

 

A

 

B

Learning Objectives

Questions

Exercises

Do It!

Exercises

Problems

 

Problems

1.

Identify the different types

1, 2

1

 

 

 

 

 

 

of receivables.

 

 

 

 

 

 

 

2.

Explain how companies

3

2

 

1, 2

1A, 3A, 4A,

 

1B, 3B, 4B,

 

recognize accounts

 

 

 

 

6A, 7A

 

6B, 7B

 

receivable.

 

 

 

 

 

 

 

3.

Distinguish between the

4, 5, 6,

3, 4, 5,

1

3, 4, 5, 6

1A, 2A, 3A,

 

1B, 2B, 3B,

 

methods and bases

7, 8

6, 7

 

 

4A, 5A

 

4B, 5B

 

companies use to value

 

 

 

 

 

 

 

 

accounts receivable.

 

 

 

 

 

 

 

4.

Describe the entries to

9, 10, 11

8

2

7, 8, 9

6A, 7A

 

6B, 7B

 

record the disposition of

 

 

 

 

 

 

 

 

accounts receivable.

 

 

 

 

 

 

 

5.

Compute the maturity date

12, 13, 14,

9, 10

3

10, 11, 12,

6A, 7A

 

6B, 7B

 

of and interest on notes

15, 16

 

 

13

 

 

 

 

receivable.

 

 

 

 

 

 

 

6.

Explain how companies

 

11

 

10, 11, 12

7A

 

7B

 

recognize notes receivable.

 

 

 

 

 

 

 

7.

Describe how companies

 

 

 

 

7A

 

7B

 

value notes receivable.

 

 

 

 

 

 

 

8.

Describe the entries to

17

 

3

12, 13

6A, 7A

 

6B, 7B

 

record the disposition of

 

 

 

 

 

 

 

 

notes receivable.

 

 

 

 

 

 

 

9.

Explain the statement

18, 19

3, 12

4

14

1A, 6A

 

1B, 6B

 

presentation and analysis

 

 

 

 

 

 

 

 

of receivables.

 

 

 

 

 

 

 

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

8-1

ASSIGNMENT CHARACTERISTICS TABLE

Problem

 

 

Difficulty

Time

Number

Description

 

Level

Allotted (min.)

1A

Prepare journal entries related to bad debt expense.

 

Simple

15–20

2A

Compute bad debt amounts.

 

Moderate

20–25

3A

Journalize entries to record transactions related to bad debts.

 

Moderate

20–30

4A

Journalize transactions related to bad debts.

 

Moderate

20–30

5A

Journalize entries to record transactions related to bad debts.

 

Moderate

20–30

6A

Prepare entries for various notes receivable transactions.

 

Moderate

40–50

7A

Prepare entries for various receivable transactions.

 

Complex

50–60

1B

Prepare journal entries related to bad debt expense.

 

Simple

15–20

2B

Compute bad debt amounts.

 

Moderate

20–25

3B

Journalize entries to record transactions related to bad debts.

 

Moderate

20–30

4B

Journalize transactions related to bad debts.

 

Moderate

20–30

5B

Journalize entries to record transactions related to bad debts.

 

Moderate

20–30

6B

Prepare entries for various notes receivable transactions.

 

Moderate

40–50

7B

Prepare entries for various receivable transactions.

 

Complex

50–60

8-2

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

WEYGANDT FINANCIAL ACCOUNTING, IFRS Edition, 2e

CHAPTER 8

ACCOUNTING FOR RECEIVABLES

Number

 

LO

 

BT

 

Difficulty

 

Time (min.)

BE1

1

 

C

 

Simple

 

1–2

BE2

2

 

AP

 

Simple

 

5–7

BE3

3, 9

 

AN

 

Simple

 

4–6

BE4

3

 

AP

 

Simple

 

4–6

BE5

3

 

AP

 

Simple

 

4–6

BE6

3

 

AP

 

Simple

 

2–4

BE7

3

 

AN

 

Simple

 

4–6

BE8

4

 

AP

 

Simple

 

6–8

BE9

5

 

AP

 

Simple

 

8–10

BE10

5

 

AP

 

Moderate

 

8–10

BE11

6

 

AP

 

Simple

 

2–4

BE12

9

 

AP

 

Simple

 

4–6

DI1

3

 

AP

 

Simple

 

2–4

DI2

4

 

AP

 

Simple

 

4–6

DI3

5, 8

 

AP

 

Simple

 

6–8

DI4

9

 

AN

 

Simple

 

4–6

EX1

2

 

AP

 

Simple

 

8–10

EX2

2

 

AP

 

Simple

 

8–10

EX3

3

 

AN

 

Simple

 

8–10

EX4

3

 

AN

 

Simple

 

6–8

EX5

3

 

AP

 

Simple

 

6–8

EX6

3

 

AP

 

Simple

 

6–8

EX7

4

 

AP

 

Simple

 

4–6

EX8

4

 

AP

 

Simple

 

6–8

EX9

4

 

AP

 

Simple

 

6–8

EX10

5, 6

 

AN

 

Simple

 

8–10

EX11

5, 6

 

AN

 

Simple

 

6–8

EX12

5, 6, 8

 

AP

 

Moderate

 

10–12

EX13

5, 8

 

AP

 

Simple

 

8–10

EX14

9

 

AP

 

Simple

 

8–10

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

8-3

ACCOUNTING FOR RECEIVABLES (Continued)

Number

 

LO

 

BT

 

Difficulty

 

Time (min.)

P1A

2, 3, 9

 

AN

 

Simple

 

15–20

P2A

3

 

AN

 

Moderate

 

20–25

P3A

2, 3

 

AN

 

Moderate

 

20–30

P4A

2, 3

 

AN

 

Moderate

 

20–30

P5A

3

 

AN

 

Moderate

 

20–30

P6A

2, 4, 5, 8, 9

 

AN

 

Moderate

 

40–50

P7A

 

2, 4–8

 

AP

 

Complex

 

50–60

P1B

2, 3, 9

 

AN

 

Simple

 

15–20

P2B

3

 

AN

 

Moderate

 

20–25

P3B

2, 3

 

AN

 

Moderate

 

20–30

P4B

2, 3

 

AN

 

Moderate

 

20–30

P5B

3

 

AN

 

Moderate

 

20–30

P6B

2, 4, 5, 8, 9

 

AN

 

Moderate

 

40–50

P7B

 

2, 4–8

 

AP

 

Complex

 

50–60

BYP1

3

 

E

 

Moderate

 

20–25

BYP2

9

 

AN, E

 

Simple

 

10–15

BYP3

8

 

AP

 

Simple

 

10–15

BYP4

4

 

AN

 

Moderate

 

20–30

BYP5

3

 

E

 

Simple

 

10–15

BYP6

3

 

E

 

Simple

 

10–15

8-4

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

Only) Use Instructor (For Manual Solutions 2/e, ,IFRS ,Financial Weygandt .Inc Sons, & Wiley John 2013 © Copyright

5-8

Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-of-Chapter Exercises and Problems

 

Learning Objective

Knowledge

Comprehension

Application

Analysis

 

Synthesis

Evaluation

 

 

 

 

 

 

 

 

 

 

 

1.

Identify the different types of

Q8-2

Q8-1

BE8-1

 

 

 

 

 

 

 

receivables.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2.

Explain how companies recognize

 

 

 

Q8-3

E8-2

P8-1A P8-4A

P8-3B

 

 

 

accounts receivable.

 

 

 

BE8-2

P8-7A

P8-3A P8-6A

P8-4B

 

 

 

 

 

 

 

E8-1

P8-7B

P8-1B

P8-6B

 

 

 

 

 

 

 

 

 

 

 

 

 

3.

Distinguish between the methods and

Q8-8

Q8-4

 

BE8-4

E8-6

Q8-7 P8-1A

P8-1B

 

 

 

bases companies used to value

 

Q8-5

 

BE8-5

 

BE8-3 P8-2A

P8-2B

 

 

 

accounts receivable.

 

Q8-6

 

BE8-6

 

BE8-7 P8-3A

P8-3B

 

 

 

 

 

 

 

DI8-1

 

E8-3 P8-4A

P8-4B

 

 

 

 

 

 

 

E8-5

 

E8-4 P8-5A

P8-5B

 

 

 

 

 

 

 

 

 

 

 

 

 

4.

Describe the entries to record the

Q8-9

Q8-10

 

Q8-11

E8-8

P8-6A

 

 

 

 

disposition of accounts receivable.

 

 

 

BE8-8

E8-9

P8-6B

 

 

 

 

 

 

 

 

DI8-2

P8-7A

 

 

 

 

 

 

 

 

 

E8-7

P8-7B

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5.

Compute the maturity date of and

Q8-13

Q8-12

 

Q8-14

E8-12

E8-10

 

 

 

 

interest on notes receivable.

 

Q8-16

 

Q8-15

E8-13

E8-11

 

 

 

 

 

 

 

 

BE8-9

P8-7A

P8-6A

 

 

 

 

 

 

 

 

BE8-10

P8-7B

P8-6B

 

 

 

 

 

 

 

 

DI8-3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6.

Explain how companies recognize

 

 

 

BE8-11

P8-7B

E8-10

 

 

 

 

notes receivable.

 

 

 

P8-7A

E8-12

E8-11

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7.

Describe how companies value

 

 

 

P8-7A

 

 

 

 

 

 

notes receivable.

 

 

 

P8-7B

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8.

Describe the entries to record the

 

Q8-17

 

DI8-3

P8-7A

P8-6A

 

 

 

 

disposition of notes receivable.

 

 

 

E8-12

P8-7B

P8-6B

 

 

 

 

 

 

 

 

E8-13

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9.

Explain the statement presentation

Q8-18

 

 

Q8-19

 

BE8-3

P8-1B

 

 

 

and analysis of receivables.

 

 

 

Q8-20

 

DI8-4

P8-6B

 

 

 

 

 

 

 

BE8-12

 

P8-1A

 

 

 

 

 

 

 

 

E8-14

 

P8-6A

 

 

 

 

 

 

 

 

 

 

 

Broadening Your Perspective

 

 

 

Real-World Focus

Decision-Making Across

 

Financial Reporting

 

 

 

 

 

 

 

the Organization

 

 

Comparative Analysis

 

 

 

 

 

 

 

Comparative Analysis

 

Ethics Case

 

 

 

 

 

 

 

 

 

 

Communication

 

 

 

 

 

 

 

 

 

 

 

TABLE TAXONOMY BLOOM’S

ANSWERS TO QUESTIONS

1.Accounts receivable are amounts owed by customers on account. They result from the sale of goods and services. Notes receivable represent claims that are evidenced by formal instruments of credit.

2.Other receivables include nontrade receivables such as interest receivable, loans to company officers, advances to employees, and income taxes refundable.

3. Accounts Receivable .............................................................................................

40

Interest Revenue............................................................................................

40

4.The essential features of the allowance method of accounting for bad debts are:

(1)Uncollectible accounts receivable are estimated and matched against revenue in the same accounting period in which the revenue occurred.

(2)Estimated uncollectibles are debited to Bad Debt Expense and credited to Allowance for Doubtful Accounts through an adjusting entry at the end of each period.

(3)Actual uncollectibles are debited to Allowance for Doubtful Accounts and credited to Accounts Receivable at the time the specific account is written off.

5.Roger Holloway should realize that the decrease in cash realizable value occurs when estimated uncollectibles are recognized in an adjusting entry. The write-off of an uncollectible account reduces both accounts receivable and the allowance for doubtful accounts by the same amount. Thus, cash realizable value does not change.

6.The two bases of estimating uncollectibles are: (1) percentage-of-sales and (2) percentage-of- receivables. The percentage-of-sales basis establishes a percentage relationship between the amount of credit sales and expected losses from uncollectible accounts. This method emphasizes the matching of expenses with revenues. Under the percentage-of-receivables basis, the balance in the allowance for doubtful accounts is derived from an analysis of individual customer accounts. This method emphasizes cash realizable value.

7.The adjusting entry under the percentage-of-sales basis is:

Bad Debt Expense...............................................................................

370,000

Allowance for Doubtful Accounts..................................................

370,000

The adjusting entry under the percentage-of-receivables basis is:

 

Bad Debt Expense...............................................................................

260,000

Allowance for Doubtful Accounts (NT$580,000 – NT$320,000)....

260,000

8.Under the direct write-off method, bad debt losses are not estimated and no allowance account is used. When an account is determined to be uncollectible, the loss is debited to Bad Debt Expense. The direct write-off method makes no attempt to match bad debts expense to sales revenues or to show the cash realizable value of the receivables in the statement of financial position.

9.From its own credit cards, the Freida Company may realize financing charges from customers who do not pay the balance due within a specified grace period. National credit cards offer the following advantages:

(1)The credit card issuer makes the credit investigation of the customer.

(2)The issuer maintains individual customer accounts.

8-6

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

Questions Chapter 8 (Continued)

(3)The issuer undertakes the collection process and absorbs any losses from uncollectible accounts.

(4)The retailer receives cash more quickly from the credit card issuer than it would from individual customers.

10.The reasons companies are selling their receivables are:

(1)Receivables may be sold because they may be the only reasonable source of cash.

(2)Billing and collection are often time-consuming and costly. It is often easier for a retailer to sell the receivables to another party with expertise in billing and collection matters.

11. Cash.......................................................................................................

7,760,000

Service Charge Expense (3% X HK$800,000)........................................

240,000

Accounts Receivable ......................................................................

8,000,000

12.A promissory note gives the holder a stronger legal claim than one on an accounts receivable. As a result, it is easier to sell to another party. Promissory notes are negotiable instruments, which means they can be transferred to another party by endorsement. The holder of a promissory note also can earn interest.

13.The maturity date of a promissory note may be stated in one of three ways: (1) on demand, (2) on a stated date, and (3) at the end of a stated period of time.

14.The maturity dates are: (a) March 13 of the next year, (b) August 4, (c) July 20, and (d) August 30.

15.The missing amounts are: (a) €15,000, (b) €9,000, (c) 12%, and (d) four months.

16.If a financial institution uses 360 days rather than 365 days, it will receive more interest revenue. The reason is that the denominator is smaller, which makes the fraction larger and, therefore, the interest revenue larger.

17.When Jana Company has dishonored a note, the ledger can set up a receivable equal to the face amount of the note plus the interest due. It will then try to collect the balance due, or as much as possible. If there is no hope of collection it will write-off the receivable.

18.Each of the major types of receivables should be identified in the statement of financial position or in the notes to the financial statements. Both the gross amount of receivables and the allowance for doubtful accounts should be reported. If collectible within a year or the operating cycle, whichever is longer, these receivables are reported as current assets immediately above short-term investments.

19.Net credit sales for the period are 8.14 X £400,000 = $3,256,000.

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

8-7

SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 8-1

(a)Accounts receivable.

(b)Notes receivable.

(c)Other receivables.

BRIEF EXERCISE 8-2

 

 

 

 

(a)

Accounts Receivable...........................................

17,200

 

 

Sales Revenue..............................................

 

 

 

17,200

(b) Sales Returns and Allowances ...........................

3,800

 

 

Accounts Receivable ...................................

 

 

 

3,800

(c)

Cash ($13,400 – $268)..........................................

13,132

 

 

Sales Discounts ($13,400 X 2%)..........................

268

 

 

Accounts Receivable ($17,200 – $3,800) .......

 

 

 

13,400

BRIEF EXERCISE 8-3

 

 

 

 

(a)

Bad Debt Expense ...............................................

31,000

 

 

Allowance for Doubtful Accounts ...............

 

 

 

31,000

(b)

Current assets

 

 

 

 

 

Prepaid insurance ........................................

 

 

 

$ 7,500

 

Inventory.......................................................

 

 

 

118,000

 

Accounts receivable ....................................

$600,000

 

 

Less: Allowance for doubtful

 

 

 

 

 

Accounts ...........................................

31,000

569,000

 

..............................................................Cash

 

 

 

90,000

 

Total current assets .................................

 

 

 

$784,500

8-8

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

BRIEF EXERCISE 8-4

 

 

 

 

 

 

(a) Allowance for Doubtful Accounts ............................

6,200

 

 

Accounts Receivable—Marcello .......................

6,200

(b)

(1)

Before Write-Off (2)

After Write-Off

 

Accounts receivable

£700,000

 

£693,800

 

 

Allowance for doubtful

 

 

 

 

 

 

 

accounts

 

54,000

 

 

47,800

 

 

 

 

 

 

 

 

 

Cash realizable value

 

£646,000

 

 

£646,000

BRIEF EXERCISE 8-5

 

 

 

 

 

 

Accounts Receivable—Marcello ......................................

 

 

 

6,200

 

 

Allowance for Doubtful Accounts ............................

6,200

Cash ...................................................................................

 

 

 

6,200

 

 

Accounts Receivable—Marcello...............................

6,200

BRIEF EXERCISE 8-6

 

 

 

 

 

 

Bad Debt Expense [($800,000 – $38,000) X 2%] ..............

15,240

 

 

Allowance for Doubtful Accounts ............................

15,240

BRIEF EXERCISE 8-7

 

 

 

 

 

 

(a) Bad Debt Expense [(£420,000 X 1%) – £1,500]............

2,700

 

 

Allowance for Doubtful Accounts.....................

2,700

(b) Bad Debt Expense [(£420,000 X 1%) + £740] = £4,940

 

 

 

BRIEF EXERCISE 8-8

 

 

 

 

 

 

(a)

Cash (€175 – €7).........................................................

 

 

 

168

 

 

Service Charge Expense (€175 X 4%) ......................

7

 

 

Sales Revenue....................................................

 

 

 

175

(b)

Cash (€70,000 – €2,100).............................................

 

 

 

67,900

 

 

Service Charge Expense (€70,000 X 3%) .................

2,100

 

 

Accounts Receivable .........................................

 

 

 

70,000

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

8-9

BRIEF EXERCISE 8-9

 

 

 

Interest

Maturity Date

 

 

(a) $800

August 9

 

 

(b) $1,120

October 12

 

 

(c) $200

July 11

 

 

BRIEF EXERCISE 8-10

 

 

Maturity Date

Annual Interest Rate

Total Interest

(a) May 31

 

5%

$5,000

(b) August 1

 

8%

$

600

(c) September 7

10%

$

6,000

BRIEF EXERCISE 8-11

 

Jan. 10

Accounts Receivable ......................................

11,600

 

Sales Revenue .........................................

11,600

Feb. 9

Notes Receivable.............................................

11,600

 

Accounts Receivable...............................

11,600

BRIEF EXERCISE 8-12

Accounts Receivable Turnover Ratio:

$20B

=

$20B

= 7.3 times

($2.7B + $2.8B) ÷ 2

$2.75B

 

 

Average Collection Period for Accounts Receivable:

365 days = 50 days

7.3 times

8-10

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

SOLUTIONS FOR DO IT! REVIEW EXERCISES

DO IT! 8-1

The following entry should be prepared to increase the balance in the Allowance for Doubtful Accounts from R$4,700 credit to R$15,500 credit (5% X R$310,000):

Bad Debt Expense .....................................................

10,800

Allowance for Doubtful Accounts ...................

10,800

(To record estimate of uncollectible accounts)

DO IT! 8-2

To speed up the collection of cash, Paltrow could sell its accounts receivable to a factor. Assuming the factor charges Paltrow a 3% service charge, it would make the following entry:

Cash............................................................................

970,000

Service Charge Expense...........................................

30,000

Accounts Receivable........................................

1,000,000

(To record sale of receivables to factor)

 

DO IT! 8-3

(a)The maturity date is September 30. When the life of a note is expressed in terms of months, you find the date it matures by counting the months from the date of issue. When a note is drawn on the last day of a month, it matures on the last day of a subsequent month.

(b)The interest to be received at maturity is $186:

Face X Rate X Time = Interest $6,200 X 9% X 4/12 = $186

The entry recorded by Karbon Wholesalers at the maturity date is:

Cash .....................................................................

6,386

Notes Receivable..........................................

6,200

Interest Revenue...........................................

186

(To record collection of Bazaar note)

 

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

8-11

DO IT! 8-4

 

 

 

 

(a)

 

 

 

 

Net credit sales

÷

Average net

=

Accounts receivable

accounts receivable

turnover

$1,480,000

÷

$112,000 + $108,000

=

13.5 times

2

 

 

 

 

(b)

 

 

 

 

Days in year

÷

Accounts receivable

=

Average collection

 

 

turnover

 

period in days

365

÷

13.5 times

=

27 days

8-12

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

SOLUTIONS TO EXERCISES

EXERCISE 8-1

 

 

March 1

Accounts Receivable—Lynda Company ....

3,800

 

 

Sales Revenue ......................................

3,800

 

3

Sales Returns and Allowances....................

500

 

 

Accounts Receivable— Lynda

 

 

 

Company .............................................

500

 

9

Cash ..............................................................

3,234

 

 

Sales Discounts............................................

66

 

 

Accounts Receivable— Lynda

 

 

 

Company .............................................

3,300

 

15

Accounts Receivable ...................................

200

 

 

Sales Revenue ......................................

200

 

31

Accounts Receivable ...................................

3

 

 

Interest Revenue...................................

3

EXERCISE 8-2

 

 

(a)

Jan. 6

Accounts Receivable—Jackie Inc...............

7,000

 

 

Sales Revenue ......................................

7,000

 

16

Cash ($7,000 – $140) ....................................

6,860

 

 

Sales Discounts (2% X $7,000) ....................

140

 

 

Accounts Receivable—Jackie Inc .......

7,000

(b)

Jan. 10

Accounts Receivable—C. Bybee.................

9,000

 

 

Sales Revenue ......................................

9,000

 

Feb. 12

Cash ..............................................................

6,000

 

 

Accounts Receivable—C. Bybee .........

6,000

 

Mar. 10 Accounts Receivable—C. Bybee.................

60

 

 

Interest Revenue

 

 

 

[2% X ($9,000 – $6,000)]....................

60

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

8-13

EXERCISE 8-3

 

 

(a)

 

Dec. 31

Bad Debt Expense ..............................

1,400

 

 

 

Accounts Receivable—T.Thum......

1,400

(b)

(1)

Dec. 31

Bad Debt Expense

 

 

 

 

[(€840,000 – €28,000) X 1%]............

8,120

 

 

 

Allowance for Doubtful

 

 

 

 

Accounts..................................

8,120

 

(2)

Dec. 31

Bad Debt Expense ..............................

8,900

 

 

 

Allowance for Doubtful Accounts

 

 

 

 

[(€110,000 X 10%) – €2,100].....

8,900

(c)

(1)

Dec. 31

Bad Debt Expense

 

 

 

 

[(€840,000 – €28,000) X .75%].........

6,090

 

 

 

Allowance for Doubtful

 

 

 

 

Accounts..................................

6,090

 

(2)

Dec. 31

Bad Debt Expense ..............................

6,800

 

 

 

Allowance for Doubtful Accounts

 

 

 

 

[(€110,000 X 6%) + €200] .........

6,800

EXERCISE 8-4

 

 

 

(a) Accounts Receivable

Amount

%

Estimated Uncollectible

1–30 days

$65,000

2.0

$1,300

31–60 days

17,600

5.0

880

61–90 days

8,500

30.0

2,550

Over 90 days

7,000

50.0

3,500

 

 

 

$8,230

(b) Mar. 31 Bad Debt Expense ......................................

 

7,330

Allowance for Doubtful Accounts

($8,230 – $900).................................

 

7,330

8-14

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

EXERCISE 8-5

 

 

 

 

Allowance for Doubtful Accounts...................................

14,100

 

Accounts Receivable................................................

14,100

Accounts Receivable .......................................................

1,800

 

Allowance for Doubtful Accounts ...........................

1,800

Cash ..................................................................................

 

 

 

1,800

 

Accounts Receivable................................................

1,800

Bad Debt Expense............................................................

16,300

 

Allowance for Doubtful Accounts

 

 

[£19,000 – (£15,000 – £14,100 + £1,800)]..............

16,300

EXERCISE 8-6

 

 

 

 

 

 

December 31, 2013

 

Bad Debt Expense (2% X $360,000) ................................

7,200

 

Allowance for Doubtful Accounts ...........................

7,200

 

 

May 11, 2014

 

Allowance for Doubtful Accounts...................................

1,100

 

Accounts Receivable—Vetter ..................................

1,100

 

 

June 12, 2014

 

Accounts Receivable—Vetter..........................................

1,100

 

Allowance for Doubtful Accounts ...........................

1,100

Cash ..................................................................................

 

 

 

1,100

 

Accounts Receivable—Vetter ..................................

1,100

EXERCISE 8-7

 

 

 

 

(a)

Mar. 3

Cash (W620,000,000 –

 

 

 

W18,600,000)....................................

601,400,000

 

 

Service Charge Expense

 

 

 

(3% X W620,000,000)....................

18,600,000

 

 

Accounts Receivable...................

620,000,000

(b)

May 10

Cash (W3,500,000 –

W

175,000)........

3,325,000

 

 

Service Charge Expense

 

 

 

(5% X W3,500,000)........................

175,000

 

 

Sales Revenue...........................

3,500,000

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

8-15

EXERCISE 8-8

 

 

(a)

Apr.

2

Accounts Receivable—J. Keiser ............

1,500

 

 

 

Sales Revenue..................................

1,500

 

May

3

Cash..........................................................

900

 

 

 

Accounts Receivable—

 

 

 

 

J. Keiser........................................

900

 

June 1

Accounts Receivable—J. Keiser ............

6

 

 

 

Interest Revenue

 

 

 

 

[($1,500 – $900) X 1%]..................

6

(b)

July

4

Cash..........................................................

194

 

 

 

Service Charge Expense

 

 

 

 

(3% X $200)...........................................

6

 

 

 

Sales Revenue..................................

200

EXERCISE 8-9

 

 

(a)

Jan. 15

Accounts Receivable...............................

18,000

 

 

 

Sales Revenue..................................

18,000

 

 

20

Cash (HK$4,800 – HK$96) .......................

4,704

 

 

 

Service Charge Expense

 

 

 

 

(HK$4,800 X 2%)...................................

96

 

 

 

Sales Revenue..................................

4,800

 

Feb. 10

Cash..........................................................

10,000

 

 

 

Accounts Receivable .......................

10,000

 

 

15

Accounts Receivable (HK$8,000 X 1.5%)

120

 

 

 

Interest Revenue ..............................

120

(b)Interest Revenue is reported under other income and expense. Service Charge Expense is a selling expense.

8-16

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

EXERCISE 8-10

 

 

 

 

(a)

 

 

2014

 

 

 

Nov.

1

Notes Receivable............................................

15,000

 

 

Cash .........................................................

 

15,000

Dec. 11

Notes Receivable............................................

6,750

 

 

Sales Revenue.........................................

6,750

 

16

Notes Receivable............................................

4,400

 

 

Accounts Receivable—Russo................

4,400

 

31

Interest Receivable .........................................

277

 

 

Interest Revenue*....................................

277

*Calculation of interest revenue:

 

 

 

 

Jeanne’s note:

$15,000 X 9% X 2/12 = $225

 

Sharbo’s note:

6,750 X 8% X 20/360 =

30

 

 

Russo’s note:

4,400 X 12% X 15/360 =

 

22

 

 

 

 

 

 

 

 

Total accrued interest

$277

 

(b)

 

 

2015

 

 

 

Nov.

1

Cash.................................................................

 

16,350

 

 

Interest Receivable..................................

225

 

 

Interest Revenue*....................................

1,125

 

 

Notes Receivable.....................................

15,000

 

 

*($15,000 X 9% X 10/12)

 

 

 

EXERCISE 8-11

 

 

 

 

 

 

 

2014

 

 

 

May

1

Notes Receivable.............................................

7,500

 

 

Accounts Receivable—

 

 

 

 

 

Monroe

..................................................

7,500

Dec. 31

Interest Receivable ..........................................

450

 

 

Interest Revenue

 

 

 

 

 

(€7,500 X 9% X 8/12) .............................

450

 

31

Interest Revenue..............................................

450

 

 

Income Summary .....................................

450

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

8-17

EXERCISE 8-11 (Continued)

 

 

2015

 

May 1

Cash.................................................................

8,175

 

Notes Receivable.....................................

7,500

 

Interest Receivable..................................

450

 

Interest Revenue

 

 

(€7,500 X 9% X 4/12) ............................

225

EXERCISE 8-12

 

5/1/14

Notes Receivable ............................................

16,000

 

Accounts Receivable—Crane.................

16,000

7/1/14

Notes Receivable ............................................

25,000

 

Cash .........................................................

25,000

12/31/14

Interest Receivable .........................................

1,280

 

Interest Revenue

 

 

($16,000 X 12% X 8/12) ........................

1,280

 

Interest Receivable .........................................

1,250

 

Interest Revenue

 

 

($25,000 X 10% X 6/12)........................

1,250

4/1/15

Accounts Receivable—Howard......................

26,875

 

Notes Receivable.....................................

25,000

 

Interest Receivable..................................

1,250

 

Interest Revenue

 

 

($25,000 X 10% X 3/12 = $625) ............

625

5/1/15

Cash.................................................................

17,920

 

Notes Receivable.....................................

16,000

 

Interest Receivable..................................

1,280

 

Interest Revenue

 

 

($16,000 X 12% X 4/12 = $640) ............

640

8-18

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

EXERCISE 8-13

 

 

 

 

(a)

May 2

Notes Receivable..................................

7,600,000

 

 

 

 

Cash.................................................

 

 

7,600,000

(b)

Nov. 2

Accounts Receivable—Cortland

 

 

 

 

 

 

Inc.......................................................

7,904,000

 

 

 

 

Notes Receivable..........................

 

 

7,600,000

 

 

Interest Revenue

 

 

 

 

 

 

(Â¥7,600,000 X 8% X 1/2)..............

 

 

304,000

 

 

(To record the dishonor of

 

 

 

 

 

 

Cortland Inc. note with

 

 

 

 

 

 

expectation of collection)

 

 

 

 

(c)

Nov. 2 Allowance for Doubtful Accounts..........

7,600,000

 

 

 

 

Notes Receivable.............................

 

 

7,600,000

 

 

(To record the dishonor of

 

 

 

 

 

 

Cortland Inc. note with no

 

 

 

 

 

 

expectation of collection)

 

 

 

 

EXERCISE 8-14

 

 

 

 

(a)

Beginning accounts receivable .......................................

$

100,000

 

Net credit sales.................................................................

 

 

1,000,000

 

Cash collections...............................................................

 

 

(920,000)

 

Accounts written off.........................................................

 

 

(30,000)

 

Ending accounts receivable ............................................

 

$

150,000

 

(b)$1,000,000/[($100,000 + $150,000)/2] = 8

(c)365/8 = 45.6 days

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

8-19

SOLUTIONS TO PROBLEMS

PROBLEM 8-1A

(a) 1.

Accounts Receivable................................

 

3,315,000

 

 

 

Sales Revenue

...................................

 

 

 

 

3,315,000

2.

Sales Returns and Allowances ................

 

50,000

 

 

 

Accounts Receivable ........................

 

 

 

50,000

3.

Cash...........................................................

 

 

 

 

2,810,000

 

 

 

Accounts Receivable ........................

 

 

 

2,810,000

4.

Allowance for Doubtful Accounts............

90,000

 

 

 

Accounts Receivable ........................

 

 

 

90,000

5.

Accounts Receivable................................

 

29,000

 

 

 

Allowance for Doubtful Accounts.......

 

 

29,000

 

 

Cash...........................................................

 

 

 

 

29,000

 

 

 

Accounts Receivable ........................

 

 

 

29,000

(b)

 

 

 

 

 

 

 

 

 

 

Accounts Receivable

Allowance for Doubtful Accounts

 

Bal.

960,000

(2)

50,000

 

(4)

90,000

Bal.

70,000

(1)

3,315,000

(3)

2,810,000

 

 

 

(5)

29,000

(5)

29,000

(4)

90,000

 

 

 

 

 

 

 

 

(5)

29,000

 

 

 

 

 

 

Bal.

1,325,000

 

 

 

 

 

Bal.

9,000

8-20

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

PROBLEM 8-1A (Continued)

 

 

 

 

(c) Balance before adjustment [see (b)] ....................................

 

R$

9,000

 

Balance needed .....................................................................

 

 

 

125,000

 

Adjustment required..............................................................

 

 

R$

116,000

 

The journal entry would therefore be as follows:

 

 

 

Bad Debt Expense...........................................

 

116,000

 

 

 

 

Allowance for Doubtful Accounts ..........

 

 

116,000

(d)

 

R$3,315,000 – R$50,000

= R$3,265,000

= 3.12 times

 

 

(R$890,000 + R$1,200,000) ÷ 2

 

 

 

R$1,045,000

 

 

 

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

8-21

PROBLEM 8-2A

(a)£66,000.

(b)£75,000 (£2,500,000 X 3%).

(c)£64,900 [(£970,000 X 7%) – £3,000].

(d)£70,900 [(£970,000 X 7%) + £3,000].

(e)The weakness of the direct write-off method is two-fold. First, it does not match expenses with revenues. Second, the accounts receivable are not stated at cash realizable value at the statement of financial position date.

8-22

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

PROBLEM 8-3A

(a) Dec. 31

Bad Debt Expense....................................

 

 

32,730

 

 

 

 

Allowance for Doubtful Accounts

 

 

 

 

 

($41,730 – $9,000) .........................

 

 

32,730

(a) & (b)

 

 

 

 

 

 

Bad Debt Expense

 

 

 

 

 

 

 

 

 

 

 

Date

 

Explanation

Ref.

Debit

Credit

Balance

 

 

 

 

 

 

 

 

2014

 

 

 

 

 

 

 

Dec.

31

Adjusting

 

32,730

 

32,730

Allowance for Doubtful Accounts

 

 

 

 

 

 

 

 

 

 

 

Date

 

Explanation

Ref.

Debit

Credit

Balance

 

 

 

 

 

 

 

 

2014

 

 

 

 

 

 

 

Dec.

31

Balance

 

 

 

9,000

 

31

Adjusting

 

 

32,730

41,730

2015

 

 

 

 

 

 

 

Mar.

31

 

 

 

1,000

 

40,730

May

31

 

 

 

 

1,000

41,730

(b)

 

 

 

2015

 

 

 

 

 

 

 

(1)

 

 

 

Mar. 31

Allowance for Doubtful Accounts...........

1,000

 

 

 

 

Accounts Receivable........................

 

 

1,000

 

 

 

 

(2)

 

 

 

May 31

Accounts Receivable ...............................

 

 

1,000

 

 

 

 

Allowance for Doubtful Accounts......

 

1,000

 

 

31

Cash ..........................................................

 

 

1,000

 

 

 

 

Accounts Receivable........................

 

 

1,000

(c)

 

 

 

2015

 

 

 

Dec. 31 Bad Debt Expense....................................

 

 

32,400

 

 

 

 

Allowance for Doubtful Accounts

 

 

 

 

 

($31,600 + $800) ............................

 

 

32,400

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

8-23

PROBLEM 8-4A

(a)Total estimated bad debts

 

 

 

Number of Days Outstanding

 

 

Total

0–30

31–60

61–90

91–120

Over 120

Accounts

 

 

 

 

 

 

receivable

HK$193,000

HK$70,000

HK$46,000

HK$39,000

HK$23,000

HK$15,000

% uncollectible

 

1%

3%

5%

8%

10%

Estimated

 

 

 

 

 

 

Bad debts

HK$7,370

HK$700

HK$1,380

HK$1,950

HK$1,840

HK$1,500

(b)

Bad Debt Expense ....................................................

10,370

 

Allowance for Doubtful Accounts

 

 

[HK$7,370 + HK$3,000].....................................

10,370

(c) Allowance for Doubtful Accounts............................

5,000

 

Accounts Receivable ..........................................

5,000

(d)

Accounts Receivable................................................

5,000

 

Allowance for Doubtful Accounts ......................

5,000

 

Cash...........................................................................

5,000

 

Accounts Receivable ..........................................

5,000

(e)If Hú Inc. used 3% of total accounts receivable rather than aging the individual accounts the bad debt expense adjustment would be HK$8,790 [(HK$193,000 X 3%) + HK$3,000]. The rest of the entries would be the same as they were when aging the accounts receivable.

Aging the individual accounts rather than applying a percentage to the total accounts receivable should produce a more accurate allowance account and bad debts expense.

8-24

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

PROBLEM 8-5A

(a)The allowance method. Since the balance in the allowance for doubtful accounts is given, they must be using this method because the account would not exist if they were using the direct write-off method.

(b)

(1)

Dec. 31

Bad Debt Expense

 

 

 

 

($11,750 – $800) ............................

10,950

 

 

 

Allowance for Doubtful

 

 

 

 

Accounts................................

10,950

 

(2)

Dec. 31

Bad Debt Expense

 

 

 

 

($918,000 X 1%).............................

9,180

 

 

 

Allowance for Doubtful

 

 

 

 

Accounts................................

9,180

(c)

(1)

Dec. 31

Bad Debt Expense

 

 

 

 

($11,750 + $800) ............................

12,550

 

 

 

Allowance for Doubtful

 

 

 

 

Accounts................................

12,550

 

(2)

Dec. 31

Bad Debt Expense ............................

9,180

 

 

 

Allowance for Doubtful

 

 

 

 

Accounts................................

9,180

(d) Allowance for Doubtful Accounts ............................

3,000

 

 

Accounts Receivable .........................................

3,000

Note: The entry is the same whether the amount of bad debt expense at the end of 2014 was estimated using the percentage-of-receivables or the percentage-of-sales method.

(e) Bad Debt Expense .....................................................

3,000

Accounts Receivable .........................................

3,000

(f)Allowance for Doubtful Accounts is a contra-asset account. It is subtracted from the gross amount of accounts receivable so that accounts receivable is reported at its cash realizable value.

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

8-25

PROBLEM 8-6A

(a)

Oct.

7

Accounts Receivable...................................

 

 

6,300

 

 

 

 

Sales Revenue......................................

 

 

 

6,300

 

 

12

Cash ($1,200 – $36)......................................

 

 

1,164

 

 

 

 

Service Charge Expense

 

 

 

 

 

 

($1,200 X 3%)............................................

 

 

36

 

 

 

 

Sales Revenue......................................

 

 

 

1,200

 

 

15

Accounts Receivable...................................

 

 

460

 

 

 

 

Interest Revenue ..................................

 

 

 

460

 

 

15

Cash..............................................................

 

 

8,107

 

 

 

 

Notes Receivable .................................

 

 

8,000

 

 

 

Interest Receivable

 

 

 

 

 

 

($8,000 X 8% X 45/360).....................

 

 

80

 

 

 

Interest Revenue

 

 

 

 

 

 

 

($8,000 X 8% X 15/360).....................

 

 

27

 

 

24

Accounts Receivable—Skinner ..................

9,150

 

 

 

 

Notes Receivable .................................

 

 

9,000

 

 

 

Interest Receivable

 

 

 

 

 

 

($9,000 X 10% X 36/360)

...................

 

90

 

 

 

Interest Revenue

 

 

 

 

 

 

 

($9,000 X 10% X 24/360)

...................

 

60

 

 

31

Interest Receivable

 

 

 

 

 

 

 

($14,000 X 9% X 1/12)...............................

 

105

 

 

 

 

Interest Revenue ..................................

 

 

 

105

(b)

 

 

 

 

 

 

 

Notes Receivable

 

 

 

 

 

 

 

 

 

 

Date

Explanation

Ref.

Debit

Credit

Balance

 

 

 

 

 

 

 

Oct.

1

Balance



 

 

31,000

 

15

 

 

 

 

8,000

23,000

 

24

 

 

 

 

9,000

14,000

8-26

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

PROBLEM 8-6A (Continued)

Accounts Receivable

Date

 

Explanation

Ref.

Debit

Credit

Balance

 

 

 

 

 

 

 

 

 

Oct.

7

 

 

6,300

 

6,300

 

 

15

 

 

460

 

6,760

 

 

24

 

 

9,150

 

15,910

 

Interest Receivable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Date

 

Explanation

Ref.

Debit

Credit

Balance

 

 

 

 

 

 

 

 

 

Oct.

1

Balance



 

 

170

 

 

15

 

 

 

80

90

 

 

24

 

 

 

90

0

 

 

31

 

 

105

 

105

 

(c) Current assets

 

 

 

 

 

 

 

 

Notes receivable...............................................................

 

 

 

$14,000

 

 

 

Accounts receivable ........................................................

 

 

 

15,910

 

 

 

Interest receivable............................................................

 

 

 

 

105

 

 

 

Total receivables ......................................................

 

 

 

$30,015

 

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

8-27

PROBLEM 8-7A

Jan. 5

Accounts Receivable—Zwingle Company..........

24,000

 

Sales Revenue............................................

24,000

20

Notes Receivable...............................................

24,000

 

Accounts Receivable— Zwingle

 

 

Company.................................................

24,000

Feb. 18

Notes Receivable...............................................

8,000

 

Sales Revenue............................................

8,000

Apr. 20

Cash (€24,000 + €540)........................................

24,540

 

Notes Receivable .......................................

24,000

 

Interest Revenue

 

 

(€24,000 X 9% X 3/12) .............................

540

30

Cash (€30,000 + €1,200).....................................

31,200

 

Notes Receivable .......................................

30,000

 

Interest Revenue

 

 

(€30,000 X 12% X 4/12) ...........................

1,200

May 25

Notes Receivable...............................................

4,000

 

Accounts Receivable— Isabella Inc..........

4,000

Aug. 18

Cash (€8,000 + €320)..........................................

8,320

 

Notes Receivable .......................................

8,000

 

Interest Revenue

 

 

(€8,000 X 8% X 6/12)...............................

320

25

Accounts Receivable—Isabella Inc.

 

 

(€4,000 + €70) .................................................

4,070

 

Notes Receivable .......................................

4,000

 

Interest Revenue

 

 

(€4,000 X 7% X 3/12)...............................

70

Sept. 1

Notes Receivable...............................................

12,000

 

Sales Revenue............................................

12,000

8-28

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

8-29

PROBLEM 8-1B

(a) 1.

Accounts Receivable...................................

 

2,400,000

 

 

 

 

Sales Revenue

......................................

 

 

 

 

2,400,000

2.

Sales Returns and Allowances ...................

 

45,000

 

 

 

 

Accounts Receivable ...........................

 

 

 

 

45,000

3.

Cash..............................................................

 

 

 

 

 

2,250,000

 

 

 

 

Accounts Receivable ...........................

 

 

 

2,250,000

4.

Allowance for Doubtful ...............Accounts

13,000

 

 

 

 

Accounts Receivable ...........................

 

 

 

 

13,000

5.

Accounts Receivable...................................

 

2,000

 

 

 

 

Allowance for Doubtful

 

 

 

 

 

 

 

Accounts...........................................

 

 

 

 

 

 

2,000

 

 

Cash..............................................................

 

 

 

 

 

2,000

 

 

 

 

Accounts Receivable ...........................

 

 

 

 

2,000

(b)

 

 

 

 

 

 

 

 

 

 

 

 

Accounts Receivable

Allowance for Doubtful Accounts

 

Bal.

220,000

 

(2)

45,000

 

(4)

13,000

Bal.

15,000

(1)

2,400,000

 

(3)

2,250,000

 

 

 

(5)

 

2,000

(5)

2,000

 

(4)

13,000

 

 

 

 

 

 

 

 

 

 

(5)

2,000

 

 

 

 

 

 

 

Bal.

312,000

 

 

 

 

 

 

Bal.

 

4,000

(c) Balance before adjustment [see (b)] ...................................

 

 

 

$

4,000

 

Balance needed

....................................................................

 

 

 

 

 

 

 

22,000

 

Adjustment required.............................................................

 

 

 

 

 

$

18,000

The journal entry would therefore be as follows:

 

Bad Debt Expense............................................

 

 

 

18,000

 

Allowance for Doubtful Accounts ...........

18,000

(d)

$2,400,000 – $45,000

=

$2,355,000

= 9.52 times

 

($290,000 + $205,000) ÷ 2

$247,500

 

 

 

 

 

8-30

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

PROBLEM 8-2B

(a)$23,400.

(b)$27,600 ($920,000 X 3%).

(c)$21,830 [($369,000 X 7%) – $4,000].

(d)$27,830 [($369,000 X 7%) + $2,000].

(e)There are two major weaknesses with the direct write-off method. First, it does not match expenses with the associated revenues. Second, the accounts receivable are not stated at cash realizable value at the statement of financial position date.

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

8-31

PROBLEM 8-3B

(a) Dec. 31

Bad Debt Expense...................................

 

 

40,250

 

 

 

 

Allowance for Doubtful Accounts

 

 

 

 

 

($54,250 – $14,000).......................

 

 

40,250

(a) & (b)

 

 

 

 

 

 

Bad Debt Expense

 

 

 

 

 

 

 

 

 

 

 

Date

 

Explanation

Ref.

Debit

Credit

Balance

 

 

 

 

 

 

 

 

2014

 

 

 

 

 

 

 

Dec.

31

Adjusting

 

40,250

 

40,250

Allowance for Doubtful Accounts

 

 

 

 

 

 

 

 

 

 

 

Date

 

Explanation

Ref.

Debit

Credit

Balance

 

 

 

 

 

 

 

 

2014

 

 

 

 

 

 

 

Dec.

31

Balance

 

 

 

14,000

 

31

Adjusting

 

 

40,250

54,250

2015

 

 

 

 

 

 

 

Mar.

1

 

 

 

1,900

 

52,350

May

1

 

 

 

 

1,900

54,250

(b)

 

 

 

2015

 

 

 

 

 

 

 

(1)

 

 

 

Mar.

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

1,900

 

 

 

 

Accounts Receivable.........................

 

 

1,900

 

 

 

 

(2)

 

 

 

May

1

Accounts Receivable ................................

 

 

1,900

 

 

 

 

Allowance for Doubtful Accounts.......

 

1,900

 

 

1

Cash ...........................................................

 

 

1,900

 

 

 

 

Accounts Receivable.........................

 

 

1,900

(c)

 

 

 

2015

 

 

 

Dec. 31 Bad Debt Expense.....................................

 

 

45,700

 

 

 

 

Allowance for Doubtful Accounts

 

 

 

 

 

($42,300 + $3,400) ..........................

 

 

45,700

8-32

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

PROBLEM 8-4B

(a)Total estimated bad debts

 

 

 

 

Number of Days Outstanding

 

Total

0–30

31–60

61–90

91–120

Over 120

Accounts

 

 

 

 

 

 

receivable

CHF383,000

CHF220,000

CHF90,000

CHF40,000

CHF18,000

CHF15,000

% uncollectible

 

1%

3%

5%

8%

10%

Estimated

 

 

 

 

 

 

Bad debts

CHF9,840

CHF2,200

CHF2,700

CHF2,000

CHF1,440

CHF1,500

(b)

Bad Debt Expense ....................................................

8,240

 

Allowance for Doubtful Accounts

 

 

(CHF9,840 – CHF1,600)...................................

8,240

(c) Allowance for Doubtful Accounts ...........................

1,100

 

Accounts Receivable.........................................

1,100

(d)

Accounts Receivable................................................

700

 

Allowance for Doubtful Accounts.....................

700

 

Cash...........................................................................

700

 

Accounts Receivable.........................................

700

(e)When an allowance account is used, an adjusting journal entry is made at the end of each accounting period. This entry satisfies the expense recognition principle by recording the bad debt expense in the period in which the sales occur.

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

8-33

 

 

 

 

PROBLEM 8-5B

 

 

 

 

 

 

 

(a)

(1)

Dec. 31

Bad Debt Expense

 

 

 

 

($13,800 – $1,400)..........................

12,400

 

 

 

Allowance for Doubtful

 

 

 

 

 

Accounts................................

12,400

 

(2)

Dec. 31

Bad Debt Expense

 

 

 

 

($600,000 X 2%).............................

12,000

 

 

 

Allowance for Doubtful

 

 

 

 

 

Accounts................................

12,000

(b)

(1)

Dec. 31

Bad Debt Expense

 

 

 

 

($13,800 + $1,400) .........................

15,200

 

 

 

Allowance for Doubtful

 

 

 

 

 

Accounts................................

15,200

 

(2)

Dec. 31

Bad Debt Expense ............................

12,000

 

 

 

Allowance for Doubtful

 

 

 

 

 

Accounts................................

12,000

(c) Allowance for Doubtful Accounts.............................

3,200

 

 

Accounts Receivable .........................................

3,200

Note: The entry is the same whether the amount of bad debt expense at the end of 2014 was estimated using the percentage-of-receivables or the percentage-of-sales method.

(d) Bad Debt Expense .....................................................

3,200

Accounts Receivable .........................................

3,200

(e)The advantages of the allowance method over the direct write-off method are:

(1)It attempts to match bad debt expense related to uncollectible accounts receivable with sales revenues on the income statement.

(2)It attempts to show the cash realizable value of the accounts receiv- able on the statement of financial position.

8-34

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

PROBLEM 8-6B

(a)

July

5

Accounts Receivable

................................

 

7,200

 

 

 

 

Sales Revenue ...................................

 

 

 

7,200

 

 

14

Cash (€1,300 – €39) ...................................

 

 

1,261

 

 

 

 

Service Charge Expense

 

 

 

 

 

 

(€1,300 X 3%) .........................................

 

 

39

 

 

 

 

Sales Revenue ...................................

 

 

 

1,300

 

 

14

Accounts Receivable

................................

 

510

 

 

 

 

Interest Revenue................................

 

 

510

 

 

15

Cash ...........................................................

 

 

12,180

 

 

 

 

Notes Receivable ...............................

 

 

12,000

 

 

 

Interest Receivable

 

 

 

 

 

 

(€12,000 X 9% X 45/360)

.................

 

135

 

 

 

Interest Revenue

 

 

 

 

 

 

(€12,000 X 9% X 15/360)

.................

 

45

 

 

24

Accounts Receivable—Ascot Co. ............

30,500

 

 

 

 

Notes Receivable ...............................

 

 

30,000

 

 

 

Interest Receivable

 

 

 

 

 

 

(€30,000 X 10% X 36/360)...............

 

300

 

 

 

Interest Revenue

 

 

 

 

 

 

(€30,000 X 10% X 24/360)...............

 

200

 

 

31

Interest Receivable

 

 

 

 

 

 

 

(€18,000 X 12% X 1/12) ..........................

 

180

 

 

 

 

Interest Revenue................................

 

 

180

(b)

 

 

 

 

 

 

 

Notes Receivable

 

 

 

 

 

 

 

 

 

 

Date

Explanation

Ref.

Debit

Credit

Balance

 

 

 

 

 

 

 

July

1

Balance



 

 

60,000

 

15

 

 

 

 

12,000

48,000

 

24

 

 

 

 

30,000

18,000

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

8-35

PROBLEM 8-6B (Continued)

Accounts Receivable

Date

Explanation

Ref.

Debit

Credit

Balance

 

 

 

 

 

 

 

 

 

July

5

 

 

7,200

 

7,200

 

14

 

 

510

 

7,710

 

24

 

 

30,500

 

38,210

Interest Receivable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Date

Explanation

Ref.

Debit

Credit

Balance

 

 

 

 

 

 

 

 

 

July

1

Balance



 

 

435

 

15

 

 

 

135

300

 

24

 

 

 

300

0

 

31

Adjusting

 

180

 

180

(c)

Current assets

 

 

 

 

 

 

 

 

Notes receivable...............................................................

 

 

 

 

€18,000

 

 

Accounts receivable ........................................................

 

 

 

38,210

 

 

 

Interest receivable............................................................

 

 

 

 

180

 

 

 

Total receivables.......................................................

 

 

 

 

€56,390

8-36

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

PROBLEM 8-7B

Jan.

5

Accounts Receivable—Patrick

 

 

 

Company ........................................................

8,400

 

 

Sales Revenue............................................

8,400

Feb.

2

Notes Receivable...............................................

8,400

 

 

Accounts Receivable—Patrick

 

 

 

Company.................................................

8,400

 

12

Notes Receivable...............................................

13,500

 

 

Sales Revenue............................................

13,500

 

26

Accounts Receivable—Felton Co.....................

7,000

 

 

Sales Revenue............................................

7,000

Apr.

5

Notes Receivable...............................................

7,000

 

 

Accounts Receivable— Felton Co. ...........

7,000

 

12

Cash ($13,500 + $225) .......................................

13,725

 

 

Notes Receivable .......................................

13,500

 

 

Interest Revenue

 

 

 

($13,500 X 10% X 2/12)...........................

225

June

2

Cash ($8,400 + $280) .........................................

8,680

 

 

Notes Receivable .......................................

8,400

 

 

Interest Revenue

 

 

 

($8,400 X 10% X 4/12).............................

280

July

5

Accounts Receivable—Felton Co.

 

 

 

($7,000 + $140) ...............................................

7,140

 

 

Notes Receivable .......................................

7,000

 

 

Interest Revenue

 

 

 

($7,000 X 8% X 3/12)...............................

140

 

15

Notes Receivable...............................................

14,000

 

 

Sales Revenue ...........................................

14,000

Oct. 15

Allowance for Doubtful Accounts ....................

14,000

 

 

Notes Receivable .......................................

14,000

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

8-37

COMPREHENSIVE PROBLEM SOLUTION

(a) Jan. 1

Notes Receivable...........................................

1,500

 

Accounts Receivable—

 

 

Leon Company....................................

1,500

3

Allowance for Doubtful Accounts ................

780

 

Accounts Receivable.............................

780

8

Inventory ........................................................

17,200

 

Accounts Payable ..................................

17,200

11

Accounts Receivable.....................................

25,000

 

Sales Revenue........................................

25,000

 

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

17,500

 

Inventory.................................................

17,500

15

Cash ...............................................................

1,164

 

Service Charge Expense...............................

36

 

Sales Revenue........................................

1,200

 

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

780

 

Inventory.................................................

780

17

Cash ...............................................................

22,900

 

Accounts Receivable.............................

22,900

21

Accounts Payable..........................................

16,300

 

Cash........................................................

16,300

24

Accounts Receivable.....................................

330

 

Allowance for Doubtful Accounts.........

330

 

Cash ...............................................................

330

 

Accounts Receivable.............................

330

27

Supplies .........................................................

1,400

 

Cash........................................................

1,400

31

Other Operating Expenses ...........................

3,218

 

Cash........................................................

3,218

8-38

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

COMPREHENSIVE PROBLEM SOLUTION (Continued)

 

 

Adjusting Entries

 

Jan. 31

Interest Receivable........................................

10

 

Interest Revenue ($1,500 X 8% X 1/12).......

10

31

Bad Debt Expense [($19,600 X 5%) –

 

 

($800 – $780 + $330)]..................................

630

 

Allowance for Doubtful Accounts .........

630

31

Supplies Expense ..........................................

930

 

Supplies ($1,400 – $470)........................

930

(b)

VICTORIA COMPANY

 

 

 

 

 

 

 

 

Adjusted Trial Balance

 

 

 

 

 

January 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debit

 

 

Credit

 

Cash............................................................

$16,576

 

 

 

 

 

 

Notes Receivable .......................................

1,500

 

 

 

 

 

 

Accounts Receivable.................................

19,600

 

 

 

 

 

 

Allowance for Doubtful Accounts.............

 

 

 

980

 

 

Interest Receivable ....................................

10

 

 

 

 

 

 

Inventory ....................................................

8,320

 

 

 

 

 

 

Supplies......................................................

470

 

 

 

 

 

 

Accounts Payable......................................

 

 

 

9,650

 

 

Share Capital—Ordinary ...........................

 

 

 

20,000

 

 

Retained Earnings .....................................

 

 

 

12,730

 

Sales Revenue ...........................................

 

 

 

26,200

 

 

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

18,280

 

 

 

 

 

 

Supplies Expense ......................................

930

 

 

 

 

 

 

Bad Debt Expense .....................................

630

 

 

 

 

 

 

Service Charge Expense ...........................

36

 

 

 

 

 

 

Other Operating Expenses........................

3,218

 

 

 

 

 

 

Interest Revenue........................................

 

 

 

 

10

 

 

 

 

$69,570

 

$69,570

 

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

8-39

COMPREHENSIVE PROBLEM SOLUTION (Continued)

(b)Optional T accounts for accounts with multiple transactions

Cash

1/1 Bal.

13,100

1/21

16,300

1/15

1,164

1/27

1,400

1/17

22,900

1/31

3,218

1/24

330

 

 

1/31 Bal.

16,576

 

 

Accounts Receivable

1/1 Bal.

19,780

1/1

1,500

1/11

25,000

1/3

780

1/24

330

1/17

22,900

 

 

1/24

330

1/31 Bal.

19,600

 

 

Allowance for Doubtful Accounts

1/3

780

1/1 Bal.

800

 

 

1/24

330

 

 

1/31

630

 

 

1/31 Bal.

980

 

Inventory

 

1/1 Bal.

9,400

1/11

17,500

1/8

17,200

1/15

780

1/31 Bal.

8,320

 

 

Supplies

1/27

1,400

1/31

930

1/31 Bal.

470

 

 

Accounts Payable

 

1/21

16,300

1/1 Bal.

8,750

 

 

1/8

17,200

 

 

1/31 Bal.

9,650

 

Sales Revenue

 

 

 

1/11

25,000

 

 

1/15

1,200

 

 

1/31 Bal.

26,200

Cost of Goods Sold

 

1/11

17,500

 

 

1/15

780

 

 

1/31 Bal.

18,280

 

 

8-40

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

COMPREHENSIVE PROBLEM SOLUTION (Continued)

 

 

(c)

VICTORIA COMPANY

 

 

 

 

 

 

 

Income Statement

 

 

 

 

 

 

 

For the Month Ending January 31, 2014

 

 

 

 

 

 

 

 

 

 

 

Sales revenue..................................................

$

26,200

 

 

Cost of goods sold ........................................

 

 

 

 

18,280

 

 

Gross profit ....................................................

 

 

 

 

7,920

 

 

Operating expenses.......................................

 

 

 

 

 

 

 

Other operating expenses .....................

$3,218

 

 

 

 

 

 

Supplies expense ...................................

930

 

 

 

 

 

 

Bad debt expense...................................

630

 

 

 

 

 

 

Service charge expense.........................

36

 

 

 

 

 

 

..............................Total operating expenses

 

 

 

 

4,814

 

 

Income from operations ................................

 

 

 

 

3,106

 

 

Other income and expense ...........................

 

 

 

 

 

 

 

Interest revenue......................................

 

 

 

 

10

 

 

Net Income .....................................................

$

3,116

 

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

8-41

COMPREHENSIVE PROBLEM SOLUTION (Continued)

VICTORIA COMPANY

Retained Earnings Statement

For the Month Ending January 31, 2014

Retained Earnings, January 1 .........................................

 

 

 

$12,730

 

Add: Net income ..............................................................

 

 

 

3,116

 

Retained Earnings, January 31 .......................................

 

 

 

$15,846

 

VICTORIA COMPANY

 

 

 

 

 

 

Statement of Financial Position

 

 

 

January 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

Supplies ..................................................

 

 

 

$ 470

Inventory .................................................

 

 

 

8,320

Notes receivable .....................................

 

 

 

1,500

Accounts receivable...............................

$19,600

 

 

 

 

Less: Allowance for doubtful

 

 

 

 

 

 

accounts ......................................

980

 

18,620

..................................Interest receivable

 

 

 

10

Cash.........................................................

 

 

 

16,576

Total assets ....................................................

 

 

 

$45,496

Equity and Liabilities

 

 

 

 

 

 

Equity

 

 

 

 

 

 

Share capital—ordinary ........................

$20,000

 

 

 

 

Retained earnings...................................

15,846

 

$ 35,846

Current liabilities

 

 

 

 

 

 

Accounts payable...................................

 

 

 

 

9,650

Total equity and liabilities .............................

 

 

 

$45,496

8-42

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

CCC8

CONTINUING COOKIE CHRONICLE

 

 

(a)Answers to Natalie’s questions

1.Calculations you should perform on the statements are:

Working capital = Current assets – Current liabilities

Current ratio = Current assets ÷ Current liabilities

Inventory turnover = Cost of goods sold ÷ Average inventory

Days sales in inventory = Days in the year ÷ Inventory turnover

Given the type of business it is unlikely that Curtis would have a significant amount of accounts receivable.

Positive working capital and a high current ratio are indications that the company has good liquidity and will be more likely to be able to pay for the mixer. The inventory turnover and days sales in inventory will provide additional information – the days sales in inventory will tell you how long, on average, it takes for inventory to be sold.

2.Other alternatives to extending credit to Curtis include:

Waiting for 30 days to make the sale.

Have Curtis borrow from the bank.

Have Curtis use a credit card to finance the purchase.

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

8-43

CCC8 (Continued)

(a)(Continued)

3.The advantage of extending credit to customers is the anticipated increase in sales expected from customers who will purchase goods only if they can receive credit. The disadvantages of extending credit are the additional costs incurred to keep track of amounts owed, the additional costs incurred when staff need to be assigned to follow up on late account balances, and the risk of not collecting a receivable from a customer who is unable to pay.

The advantages of allowing customers to use credit cards include making the purchase easier for the customer, potentially increasing sales, as customers are not limited to the amount of cash in their wallet, and reducing the accounts receivable you have to manage if credit cards are used instead of granting credit to customers. In addition, the credit card company assumes the risk of nonpayment, and if a bank credit card is used the seller has cash immediately.

The disadvantage is the cost to your business. When a customer makes a purchase using a credit card you will have to pay a percentage of the sale to the credit card company. The rate varies but 3% would not be unusual. You will also have to pay to rent the equipment to process the credit card sales. The fee is not large but is an ongoing expense.

(b)

 

 

June 1

Accounts Receivable—Lesperance .....

1,150

 

Sales Revenue...................................

1,150

 

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

620

 

Inventory............................................

620

30

Notes Receivable.................................

1,150

 

Accounts Receivable—Lesperance

1,150

8-44

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

CCC8 (Continued)

(b) (Continued)

July 31

Accounts Receivable—Lesperance [$1,150 + $8]

1,158

 

Notes Receivable............................................

1,150

 

Interest Revenue [$1,150 X 8.25% X 1/12] .......

8

Aug. 7

Cash .....................................................................

1,158

 

Accounts Receivable—Lesperance...............

1,158

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

8-45

BYP 8-1

FINANCIAL REPORTING PROBLEM

 

 

(a)

CAF COMPANY

 

 

 

 

 

 

Accounts Receivable Aging Schedule

 

 

 

 

 

 

May 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proportion

 

 

 

Amount

Probability

Estimated

 

 

of

 

 

 

in

of Non-

Uncollectible

 

 

Total

 

 

Category

Collection

Amount

Not yet due

.600

$

840,000

.02

$16,800

 

Less than 30 days past due

.220

 

 

 

308,000

.04

12,320

 

30 to 60 days past due

.090

 

 

 

126,000

.06

7,560

 

61 to 120 days past due

.050

 

 

 

70,000

.09

6,300

 

121 to 180 days past due

.025

 

 

 

35,000

.25

8,750

 

Over 180 days past due

.015

 

 

 

21,000

 

.70

 

14,700

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1.000

 

$

1,400,000

 

 

 

$66,430

 

(b)

CAF COMPANY

 

 

 

 

Analysis of Allowance for Doubtful Accounts

 

 

May 31, 2014

 

 

 

 

 

 

 

 

 

June 1, 2013 balance ....................................................

$

29,500

 

Bad debts expense accrual ($2,800,000 X .045)..........

 

 

126,000

 

Balance before write-offs of bad accounts .................

 

 

155,500

 

Write-offs of bad accounts...........................................

 

 

102,000

 

Balance before year-end adjustment ..........................

 

 

53,500

 

Estimated uncollectible amount ..................................

 

 

66,430

 

Additional allowance needed.......................................

$

12,930

 

Bad Debt Expense ........................................................

12,930

 

 

 

Allowance for Doubtful Accounts ........................

 

 

12,930

8-46

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

BYP 8-1 (Continued)

(c) 1. Steps to Improve the

2. Risks and

 

Accounts Receivable Situation

 

Costs Involved

Establish more selective credit- granting policies, such as more restrictive credit requirements or more thorough credit investigations.

Establish a more rigorous collec- tion policy either through external collection agencies or by its own personnel.

Charge interest on overdue accounts. Insist on cash on delivery (cod) or cash on order (coo) for new cus- tomers or poor credit risks.

This policy could result in lost sales and increased costs of credit evaluation. The company may be all but forced to adhere to the pre- vailing credit-granting policies of the office equipment and supplies industry.

This policy may offend current customers and thus risk future sales. Increased collection costs could result from this policy.

This policy could result in lost sales and increased administrative costs.

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

8-47

BYP 8-2

COMPARATIVE ANALYSIS PROBLEM

 

 

(a) (1)

Accounts receivable turnover ratio

 

 

 

 

Zetar

 

 

Nestlé

 

£131,922

 

 

CHF109,722

 

(£24,935 + £19,062) ÷ 2

 

(CHF12,083 + CHF12,309) ÷ 2

 

£131,922

= 6.00 times

CHF109,722 = 9.0 times

 

£21,998.5

 

 

 

CHF12,196

(2)

Average collection period

 

 

 

 

365

= 60.8 days

365

 

= 40.6 days

 

6.0

9.0

 

 

 

 

 

 

 

(b)Nestlé’s average collection period is 20 days shorter the Zetar’s. While this might be due to Zetar’s difficulty in collecting from customers, it also might be at least partially explained by our assumption that all receivables are trade receivables.

8-48

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

BYP 8-3

REAL-WORLD FOCUS

 

 

(a)Factoring invoices enhances cash flow and allows a company to meet business expenses and take on new opportunities. The benefits of factoring include:

Predictable cash flow and elimination of slow payments.

Flexible financing, as factoring line is tied to sales. It’s the ideal tool for growth.

Factoring is easy to obtain. Works well with startups and established companies.

Factoring financing lines can be setup in a few days.

(b)Factoring rates range between 1.5% and 3.5% per month. The two major variables considered when determining the rate are: (1) the size of the transaction, and (2) the credit quality of the company’s clients.

(c)The first installment is paid within a couple of days and is typically 90% of the invoice amount. After customers pay the invoice amount to the factor, the second installment (10%) is paid, less a fee for the transaction.

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

8-49

BYP 8-4 DECISION-MAKING ACROSS THE ORGANIZATION

(a)

 

 

2014

 

 

 

 

2013

 

 

 

 

2012

 

Net credit sales....................................

$

500,000

$650,000

 

$400,000

 

Credit and collection expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collection agency fees...............

$

2,450

 

$

2,500

 

$

2,300

 

Salary of accounts receivable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

clerk.........................................

 

 

4,100

 

 

 

 

4,100

 

 

 

 

4,100

 

Uncollectible accounts ..............

 

 

8,000

 

 

 

 

10,400

 

 

 

 

6,400

 

Billing and mailing costs ...........

 

 

2,500

 

 

 

 

3,250

 

 

 

 

2,000

 

Credit investigation fees............

 

 

750

 

 

 

975

 

 

 

 

600

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total.....................................

$

17,800

 

$

21,225

 

$

15,400

 

Total expenses as a percentage of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

net credit sales ................................

3.56%

 

3.27%

 

3.85%

 

(b) Average accounts receivable (5%).........

$

25,000

 

$

32,500

 

$

20,000

 

Investment earnings (8%) ...................

$

2,000

 

$

2,600

$

1,600

Total credit and collection expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

per above .........................................

$

17,800

 

$

21,225

$

15,400

Add: Investment earnings* ................

 

 

2,000

 

 

 

2,600

 

 

 

1,600

 

 

 

 

 

 

 

 

 

 

 

 

 

Net credit and collection expenses........

$

19,800

 

$

23,825

$

17,000

Net expenses as a percentage of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

net credit sales ................................

3.96%

 

 

 

 

3.67%

 

4.25%

 

*The investment earnings on the cash tied up in accounts receivable is an additional expense of continuing the existing credit policies.

(c)The analysis shows that the credit card fee of 4% of net credit sales will be higher than the percentage cost of credit and collection expenses in each year before considering the effect of earnings from other investment opportunities. However, after considering investment earnings, the credit card fee of 4% will be less than the company’s percentage cost if annual net credit sales are less than $500,000.

8-50

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

BYP 8-4 (Continued)

Finally, the decision hinges on: (1) the accuracy of the estimate of investment earnings, (2) the expected trend in credit sales, and (3) the effect the new policy will have on sales. Non-financial factors include the effects on customer relationships of the alternative credit policies and whether the Piweks want to continue with the problem of handling their own accounts receivable.

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

8-51

BYP 8-5

COMMUNICATION ACTIVITY

 

 

Of course, this solution will differ from student to student. Important factors to look for would be definitions of the methods, how they are similar and how they differ. Also, look for use of good sentence structure, correct spelling, etc.

Example:

Dear Lily,

The three methods you asked about are methods of dealing with uncollectible accounts receivable. Two of them, percentage-of-sales and percentage-of- receivables, are “allowance” methods used to estimate the amount uncollectible. Under the percentage-of-sales basis, management establishes a percentage relationship between the amount of credit sales and expected losses from uncollectible accounts. This is based on past experience and anticipated credit policy. The percentage is then applied to either total credit sales or net credit sales of the current year. This basis of estimating emphasizes the matching of expenses with revenues.

Under the percentage-of-receivables basis, management establishes a per- centage relationship between the amount of receivables and expected losses from uncollectible accounts. Customer accounts are classified by the length of time they have been unpaid. This basis emphasizes cash realizable value of receivables and is therefore deemed a “statement of financial position” approach.

The direct write-off method does not estimate losses and an allowance account is not used. Instead, when an account is determined to be uncollectible, it is written off directly to Bad Debt Expense. Unless bad debt losses are insignifi- cant, this method is not acceptable for financial reporting purposes.

Sincerely,

8-52

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

BYP 8-6

ETHICS CASE

 

 

(a)The stakeholders in this situation are:

ï‚„The president of Vestin Co.

ï‚„The controller of Vestin Co.

ï‚„The shareholders.

(b)Yes. The controller is posed with an ethical dilemma—should he/she follow the president’s “suggestion” and prepare misleading financial statements (understated net income) or should he/she attempt to stand up to and possibly anger the president by preparing a fair (realistic) income statement.

(c)Vestin Co.’s growth rate should be a product of fair and accurate financial statements, not vice versa. That is, one should not prepare financial statements with the objective of achieving or sustaining a predetermined growth rate. The growth rate should be a product of management and operating results, not of creative accounting.

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

8-53

GAAP EXERCISE

GAAP-1

The FASB and IASB have both worked toward reporting financial instruments at fair value. Both require disclosure of fair value information in notes to financial statements and both permit (but do not require) companies to record some types of financial instruments at fair value.

IFRS requires that specific loans and receivables be reviewed for impairment and then all loans and receivables as a group be reviewed. This “two- tiered” approach is not used by the FASB. IFRS and GAAP also differ in the criteria used to derecognize receivables. IFRS considers risks and rewards as well as loss of control over the receivables sold or factored. GAAP uses only the loss of control as its criteria. In addition, IFRS allows partial derecognition but GAAP does not.

8-54

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solutions Manual (For Instructor Use Only)

GAAP FINANCIAL REPORTING PROBLEM

GAAP 8-2

(a) Accounts receivable turnover ratio

2010

2009

 

 

 

 

$517,149 __

 

$495,592

___

 

 

 

 

 

 

 

($37,394+$37,512)/2

 

($37,512+$31,213)/2

= $517,149

= $495,592

 

 

 

$37,453

 

$34,362.50

 

 

 

 

 

 

 

 

= 13.8 times

= 14.4 times

 

 

Average collection period

 

 

 

 

 

 

365 = 26.4 days

 

365 = 25.3 days

13.8

14.4

 

 

 

(b)The accounts receivable turnover ratio measures the number of times, on average, a company collects accounts receivable during a period. The average collection period measures the number of days it takes to collect a receivable. From the results shown in (a), it is apparent that Tootsie Roll Industries’ accounts receivable collections deteriorated slightly in 2010 over 2009. Both the turnover and the related collection period were worse in 2010 as compared to 2009. However, if Tootsie Roll’s credit terms are 30 days, both years’ collection period fall within those terms.

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8-55