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Chapter 7: Cash and Receivables

Discussion Questions: Key Points


1. The individual who places the order should neither receive goods nor approve payment. If those duties were combined, the purchasing agent could buy goods and have them shipped to his or her home or side-business. Although kickbacks are always a risk, even with segregation of duties, this risk can be reduced with improved segregation of duties. Also, the person approving payment should not sign checks or maintain custody of the goods purchased. Checks could be written for items not received if duties are not segregated at this stage. 2. The reconciling items associated with the balance per books will require journal entries. The company preparing the bank reconciliation upon receipt of the bank statement finds out new information that its books did not reflect. Journal entries are necessary in order to bring the balance in the cash account in line with the correct cash balance. The company has no need or interest in preparing adjusting entries for the banks books. 3. The surest way to eliminate bad debts is to avoid extending credit to customers. Requiring customers to pay in cash before receipt of the goods would eliminate bad debts but would also reduce the potential customer base. Many businesses cannot or will not conduct business that way. So, they would be unwilling to buy from the company. 4. One of the key principles in GAAP is the matching principle. The matching principle requires an entity match expenses with the revenues they helped create. Since extending credit is essential for many businesses that wish to attract a broader customer base (see # 3 above), it follows that the expense associated with credit granting should be matched with the sales it helped generate. The allowance method attempts to do this through the estimation of the expense and establishment of an allowance at the end of the accounting period. The direct write-off method makes no such attempt. By waiting until the account is clearly uncollectible, which is often several months after the date that the goods were sold or services rendered, the expense is likely to be in a different accounting period than the revenue that was recognized. 5. Allowance for doubtful accounts appears on the balance sheet as a contra-asset. By subtracting the allowance from the gross accounts receivable balance, the company arrives at an estimate of the amount of cash they expect to collect from customers with balances as of the balance sheet date. This gives a more accurate indicator of the true amount of accounts receivable. 6. The percentage of sales method is focused on the relationship between sales and bad debts expense, both income statement items, in determining the amount of the adjusting entry to bad debts expense. The credit to the allowance account is plugged in to balance the entry. Under the aging approach, the focus is in determining the amount by which the allowance account would need to be adjusted in order to make the ending balance reflect the results of the aging of accounts receivable. Both the allowance and the accounts receivable balances are reported on the balance sheet. The debit to bad debt expense in
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the adjusting entry is again plugged in to make the entry balance. The focus is on the allowance account determined by its relationship to accounts receivable. 7. The balance in the allowance account would affect the adjusting entry when using the aging analysis approach, for reasons discussed in #6 above. 8. The net realizable value of accounts receivable does not change when an account is written off under the allowance method. The write-off involves a debit to the allowance account and a credit to the accounts receivable account being written off. Both the contraasset and asset accounts are decreasing, causing total assets to remain the same. 9. Three accounts will be creditedthe notes receivable account, interest revenue, and interest receivable. The interest receivable account was created during the process of preparing year-end adjusting entries. 10. The recession of 2009 was characterized by an unwillingness of banks to loan money. This restriction of the flow of capital sent shock waves through businesses. The contraction made it harder for companies to earn the type of revenue that they were expecting to help them to be able to pay off their debts. All of this caused accounts receivable turnover ratios to become lower than they were in previous years when cash flowed more freely.

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Short Exercises
(5-10 min.) S 7-1
Book Bank Book Book Bank 1. 2. 3. 4. 5. Bank service charge Deposit in transit Bank collection of amount due from customer Interest revenue on bank balance Outstanding checks

(10-15 min.) S 7-2


Bank + Bank Book + Book + Book Book Book + Bank 1. 2. 3. 4. 5. 6. 7. 8. Outstanding checks Deposits in transit NSF check Bank collection of our note receivable Interest earned on bank balance Bank service charge Book error: We credited Cash for $200. The correct amount of the check was $2,000 Bank error: The bank decreased our account for a check written by another customer

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(5-10 min.) S 7-3

MEE AUTO SERVICE Bank Reconciliation March 31, 2010 Bank Balance, March 31 Add: Deposit in transit 200 4,100 $3,900 Book Balance, March 31 Add: Bank collection Interest revenue 710 10 3,220 Less: Outstanding checks Adjusted bank balance (900) $3,200 Less: Service charge Adjusted book balance (20) $3,200 $2,500

Amounts agree

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(5-10 min.) S 7-4

Journal POST DATE Mar 31 Cash Interest Revenue Record interest earned on bank balance. ACCOUNTS REF. Dr. 10 10 Cr.

31

Miscellaneous Expense Cash Record bank service charge.

20 20

31

Accounts Receivable Cash Record NSF checks

180 180

(5-10 min.) S 7-5


Assets Current Assets:
Cash

Accounts Receivable Inventory Total Current Assets

$ 22,500 63,000 55,500 $141,000

Computations: Cash in Bank Accounts plus Petty Cash = $500 + $22,000 = $22,500

(5-10 min.) S 7-6

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f. i.

1. A contra-account, related to accounts receivable, which holds the estimated 2. A method of accounting for uncollectible receivables in which the company

amount of uncollectible receivables waits until a specific customers account receivable is uncollectible before recording uncollectible accounts expense e. a. receivable h. b. d. customers g. 8. A method of estimating uncollectible receivables that calculates uncollectible accounts expense based on net credit sales 5. A way to estimate uncollectible accounts by analyzing individual accounts 6. The party to a credit transaction who makes a purchase and has a payable 7. Cost to the seller of credit sales; arises from the failure to collect from credit receivable according to the length of time they have been receivable 3. A method of recording collection losses on the basis of estimates instead of 4. The party to a credit transaction who sells goods or a service and obtains a waiting to see which customers the company will not collect from

(5-10 min.) S 7-7


Accounts Receivable balance at September 30: Bal. Services on account Bal. Accounts Receivable 8,000 Collections 20,000 Write-offs 4,000 22,000 2,000

Galvan probably does not expect to collect all $4,000 of the accounts receivable because, realistically, he knows he will most likely not be able to collect from some clients.

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(5-10 min.) S 7-8


Journal POST DATE 1. ACCOUNTS Uncollectible Accounts Expense ($400,000 .02) Allowance for Uncollectible Accounts Record estimate of uncollectible accounts expense for the year. REF. Dr. 8,000 8,000 Cr.

2.

Balance sheet: Accounts Receivable Less: Allowance for Uncollectible Accounts Accounts Receivable, net

$90,000 8,000 $82,000

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(5-10 min.) S 7-9

Journal POST DATE a. ACCOUNTS AND EXPLANATIONS Accounts Receivable Service Revenue Record service revenue. REF. Dr. 600,000 600,000 Cr.

b.

Cash Accounts Receivable Record collections on account.

580,000 580,000

c.

Allowance for Uncollectible Accounts Accounts Receivable Write off uncollectible accounts.

15,000 15,000

d.

Uncollectible Accounts Expense ($600,000 .02) Allowance for Uncollectible Accounts Record estimate of uncollectible accounts expense for the year.

12,000 12,000

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(5-10 min.) S 7-10


Journal POST DATE a. ACCOUNTS AND EXPLANATIONS Accounts Receivable Sales Revenue Record sales on account. REF. Dr. 400,000 400,000 Cr.

b.

Cash Accounts Receivable Record collections on account.

320,000 320,000

c.

Allowance for Uncollectible Accounts Accounts Receivable Write off uncollectible accounts.

15,000 15,000

d.

Uncollectible Accounts Expense Allowance for Uncollectible Accounts Record estimate of uncollectible accounts expense for the year. Allowance for Uncollectible Accounts 15,000 Bal. Uncollectible accounts expense Bal.

14,000 14,000

Write-offs

6,000 X 5,000 = 14,000

(continued) S 7-10
Alternative solution:
Waybright Kemp Financial Accounting 1e 157

Ending balance = Beginning balance write offs + Uncollectible Accounts Expense Where X = Uncollectible Accounts Expense, $5,000 = $6,000 - $15,000 + X $5,000 + $15,000 - $6,000 = X $14,000 = X

(5-10 min.) S 7-11


Journal POST DATE 2010 Dec. 31 Uncollectible Accounts Expense ($3,600 $1,300) ACCOUNTS AND EXPLANATIONS REF. Dr. Cr.

2,300 2,300

Allowance for Uncollectible Accounts Record estimate of uncollectible accounts expense for the year.

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(5-10 min.) S 7-11 continued


Computations: Required balance for Allowance for Uncollectible Accounts based on the aging schedule: Age of Accounts 1-30 Days Amount receivable Estimate percentage uncollectible Required balance for Allowance for Uncollectible Accounts $70,000 X 1% 31-60 Days $20,000 X 2% 61-90 Days $10,000 X 5% Over 90 Days $4,000 X 50% Total Receivables $104,000

$700

+ $400

+ $500

+ $2,000

= $

3,600

Allowance for Uncollectible Accounts Bal. Uncollectible accounts Expense Bal. 1,300 = 2,300 3,600

(10-15 min.) S 7-12


Procedure b is the only procedure that includes an internal control weakness. The internal control weakness is the lack of separation of duties that allows the credit department to receive incoming cash receipts from customers. With access to cash, a credit-department employee can pocket cash received from a customer and destroy the related remittance slip. The employee can then authorize the write off the customers account as uncollectible, and the company will stop pursuing collection from the customer. To strengthen the controls, the company can have cash go to a lock box at the bank or to the company mailroom, not to the credit department.
Waybright Kemp Financial Accounting 1e 159

(10-15 min.) S 7-13

i e c g b h f d a

1. A written promise to pay a specified amount of money at a particular future date 2. The date when final payment of the note is due; also called the due date. 3. The percentage rate of interest specified by the note for one year 4. The entity to whom the maker promises future payment 5. The period of time during which interest is earned 6. The amount loaned out by the payee and borrowed by the maker of the note 7. The sum of the principal plus interest due at maturity 8. The entity that signs the note and promises to pay the required amount 9. The revenue to the payee for loaning money; the expense to the debtor

(10-15 min.) S 7-14


Note 1: Note 2: Note 3: Note 4: $100,000 .08 6/12 = $4,000 $30,000 .12 75/360 = $750 $20,000 .09 60/360 = $300 $50,000 .10 3/12 = $1,250

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(10-15 min.) S 7-15


Journal POST DATE 1. June 12 ACCOUNTS AND EXPLANATIONS Note ReceivableC. Kleuters Cash REF. Dr. 100,000 100,000 Cr.

2. Sept.

10

Cash ($100,000 + $2,000) Note ReceivableC. Kleuters Interest Revenue ($100,000 .08 90/360)

102,000 100,000

2,000

(5-10 min.) S 7-16


Jaxon Cash Short-term Investments Net Receivables = Total Quick Assets Current Liabilities = Quick Ratio $10,000 5,000 45,000 $60,000 $45,000 1.33 Kilborn $25,000 15,000 52,000 $92,000 $100,000 .92

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(5-10 min.) S 7-17


Moore Noel

Net Credit Sales Divide by average Accounts Receivable* Equals accounts receivable turnover

$73,000 $12,500 5.8

$45,625 $22,000 2.1

* (Net Accounts Receivable, beginning + Net Accounts Receivable, ending)/2

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Exercises

(10-15 min.) E 7-18A


Bank Balance, January 31 Add: Deposit in transit 600 (a) 1,600 Less: Outstanding checks Adjusted bank balance Computations (a) Subtotal: $1,000 Bank balance, January 31 +$ 600 Deposit in transit = $1,600 Subototal Outstanding checks: $1,600 Subtotal from part (a) $1,200 Adjusted bank balance $ 400 Outstanding checks Balance, January 31: $1,230 Subtotal from part (d) below $ 425 Bank collection $ 15 Interest revenue $ 790 Book balance, January 31 Subtotal: $1,200 Adjusted book balance + $ 30 Service charge = $1,230 Subtotal (b) (400) $1,000 Balance, January 31 Add: Bank collection Interest revenue Less: Service charge (30) $1,200 $1,200 Adjusted book balance 425 15 (d) 1,230 Book (c) $ 790

(b)

(c)

(d)

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(20-25 min.) E 7-19A


Req. 1 DIRK COLE Bank Reconciliation September 30, 2010 Bank Balance, September 30 Add: Deposit in transit 4,095 5,283 Less: Correction of book error Less: Outstanding checks No. 926 No. 927 Adjusted bank balance (175) (1,000) Recorded $70 check as $60 Cost of checks Service charge (10) (20) (15) $4,108 $1,188 Balance, September 30 Books $4,153

$4,108 Adjusted book balance

Coles account actually has cash of $4,108 on September 30.

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Req. 2 Journal DATE Sep 30 ACCOUNTS Accounts payable Cash To correct error on check written to vendor. Miscellaneous Expense Cash Record bank service charge and cost of checks. POST REF. Dr. 10 Cr. 10 35 35

30

(20-25 min.) E 7-20A


Req.1 GODDARD PICTURE FRAMES Bank Reconciliation January 31, 2010 Bank Balance, January 31 Add: Deposit in transit 2,700 3,700 Less: Correction of book error Less: Outstanding checks No 213 No 214 Adjusted bank balance (325) (200) Recorded $300 check as $30 Service charge Charge for printed checks NSF checks (270) (15) (10) (65) $3,175 $1,000 Balance, January 31 Add: EFT collectionrent 500 3,535 Books $3,035

$3,175 Adjusted book balance

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Req. 2 Journal DATE Jan 31 ACCOUNTS Cash Rental Income To record rental income Salaries Expense Cash To correct error on check written to pay salaries. Miscellaneous Expense Cash Record bank service charge and cost of checks. Accounts Receivable Cash Record NSF checks POST REF. Dr. 500 Cr. 500 270 270 25 25 65 65

31

31

31

(5-10 min.) E 7-21A


Journal DATE ACCOUNTS AND EXPLANATIONS Feb. 3 Accounts Receivable Bill Hanson Sales Revenue Record sales on account. Aug. 8 Uncollectible Accounts Expense Accounts Receivable Bill Hanson Write off uncollectible accounts. 10 Accounts Receivable Bill Hanson Uncollectible Accounts Expense Reinstate part of Bill Hansons account 10 Cash Accounts Receivable Bill Hanson Collected cash on account POST REF. Dr. 600 600 600 600 400 400 400 400 Cr.

Nov.

Nov

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(10-15 min.) E 7-22A


Req. 1 Journal DATE Jan. ACCOUNTS AND EXPLANATIONS Cash Accounts Receivable Sales Revenue Record sales. Cash Accounts Receivable Record collections on account. Jan. Allowance for Uncollectible Accounts Accounts Receivable Write off uncollectible accounts. Uncollectible Accounts Expense ($120,000 .02) Allowance for Uncollectible Accounts Record estimate of uncollectible accounts expense for the month. 1,200 1,200 2,400 2,400 POST REF. Dr. 60,000 120,000 Cr.

180,000 90,000 90,000

Jan.

Jan.

Req. 2 Accounts Receivable Bal. 30,000 Collections Credit Sales 120,000 Write-offs Bal. 58,800 90,000 1,200 Allowance for Uncollectible Accounts Write-offs 1,200 Bal. 1,500 Uncollectible 2,400 accounts expense Bal. 2,700

Net Accounts Receivable: $58,800 $2,700 = $56,100. Rice Automotive expects to collect the net Accounts Receivable of $56,100.

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(15-20 min.) E 7-23A


Req. 1 Journal DATE ACCOUNTS AND EXPLANATIONS 2010 Dec. 31 Uncollectible Accounts Expense ($10,700 - $3,900) Allowance for Uncollectible Accounts Record estimate of uncollectible accounts expense for the year. Computations: Balance needed in allowance account: ($140,000 .005) + ($80,000 .01) + ($70,000 .06) + ($10,000 .50) = $700 + $800 + $4,200 + $5,000 = $10,700 Adjusting entry amount: $10,700 balance needed $3,900 current balance = $6,800 Allowance for Uncollectible Accounts Bal. Uncollectible accounts expense Bal. Req. 2 Journal DATE ACCOUNTS AND EXPLANATIONS 2010 Dec. 31 Uncollectible Accounts Expense ($10,700 + $1,300) Allowance for Uncollectible Accounts Record estimate of uncollectible accounts expense for the year. Computations: Balance needed in allowance account: ($140,000 .005) + ($80,000 .01) + ($70,000 .06) + ($10,000 .50) = $700 + $800 + $4,200 + $5,000 = $10,700 Adjusting entry amount: $10,700 balance needed + $1,300 current balance = $12,000 Bal. Allowance for Uncollectible Accounts 1,300 Uncollectible accounts expense Bal. 12,000 10,700 POST REF. Dr. 12,000 12,000 Cr. 3,900 6,800 10,700 POST REF. Dr. 6,800 6,800 Cr.

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(15-20 min.) E7 -24A


Req 1 Journal DATE ACCOUNTS AND EXPLANATIONS 2010 Dec. 31 Uncollectible Accounts Expense Allowance for Uncollectible Accounts Record estimate of uncollectible accounts expense for the year. Computations: ($550,000 .005) = $2,750 Req 2 Journal DATE ACCOUNTS AND EXPLANATIONS 2010 Dec. 31 Uncollectible Accounts Expense Allowance for Uncollectible Accounts Record estimate of uncollectible accounts expense for the year. Computations: Balance needed in allowance account: $2,575 Adjusting entry amount: $2,575 balance needed - $600 current balance = $1,975 POST REF. Dr. 1,975 1,975 Cr. POST REF. Dr. 2,750 2,750 Cr.

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(15-20 min.) E 7-25A


Req. 1 Interest for: 2010: 2011: Req. 2 a. b. c. d. Req. 3 Payoff at November 30, 2010: Principal Interest $100,000 .06 7/12 = Total $100,000 3,500 $103,500 Citibank has a note receivable. Grant Hughes has a note payable. Citibank has interest revenue. Grant Hughes has interest expense.

$100,000 .06 8/12 $100,000 .06 4/12

= $4,000 = $2,000

(15-20 min.) E 7-26A


Journal DATE Apr. 1 ACCOUNTS AND EXPLANATIONS Note ReceivableR. Simpson Cash Record loan supported by note. Note ReceivableFriday Corp. Sales Revenue Record note received for goods sold. Interest Receivable ($400 + $20) Interest Revenue Accrue interest revenue. POST REF. Dr. 20,000 Cr. 20,000 3,000 3,000 420 420

June

30

Computations: Interest Receivable: R. Simpson: $20,000 .08 3/12 = $400 Friday Corp.: $ 3,000 .10 24/360 = 20 Total interest receivable at June 30 $420
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(15-20 min.) E 7-27A


Req. 1 Journal DATE 2010 June 29 ACCOUNTS AND EXPLANATIONS Accounts ReceivableI. Happy Sales Revenue Record sale on account. Note Receivable I. Happy Accounts ReceivableI. Happy Record note received for account. Cash ($10,000 + $150) Note Receivable I. Happy Interest Revenue($10,000 .09 x 60/360) Record collection of note receivable. POST REF. Dr. 10,000 10,000 10,000 10,000 10,150 10,000 150 Cr.

Nov.

Dec.

31

(15-20 min.) E 7-28A


Cash Short-term Investments Net Receivables = Total Quick Assets Current Liabilities = Quick ratio A $ 92,000 70,000 125,000 $287,000 $205,000 1.40 B $ 64,000 28,000 110,000 $202,000 $101,000 2.00 C $23,000 15,000 52,000 $90,000 $60,000 1.50 D $107,000 53,000 140,000 $300,000 $350,000 .86

Company D should be concerned because they only have $.86 of Quick Assets to pay for every $1 owed of Current Liabilities.

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(15-20 min.) E 7-29A


a. Quick ratio Cash + Dollar amounts in thousands Net Short-term Receivables + Investments Total current liabilities

= = = =

$215 + $220 + $165 $449 + $145 $600 $594 1.01

A quick ratio of 1.01 is strong. b. Accounts Receivable Turnover

Net Credit Sales Average net Accounts Receivable

$1,930 [($220 + $150) / 2]

= 10.4 times per year An accounts receivable turnover ratio of 10.4 is somewhat weak relative to credit terms of net 30.

(10-15 min.) E 7-30B


Bank Balance, March 31 Add: Deposit in transit 680 (a) 1,670 Less: Outstanding checks Adjusted bank balance Computations (a) Subtotal:
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Book $ 990 Balance, March 31 Add: Bank collection Interest revenue Less: (b) (430) Service charge (40) $1,240 $1,240 Adjusted book balance 420 100 (d) 1,280 (c) $ 760

(b)

(c)

(d)

$990 Bank balance, March 31 + $680 Deposit in transit = $1,670 Subototal Outstanding checks: $1,670 Subtotal from part (a) $1,240 Adjusted bank balance $ 430 Outstanding checks Balance, March 31: $1,280 Subtotal from part (d) below $ 420 Bank collection $ 100 Interest revenue $ 760 Book balance, March 31 Subtotal: $1,240 Adjusted book balance + $ 40 Service charge = $1,280 Subtotal

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(20-25 min.) E 7-31B


Req. 1 DAN CRYER Bank Reconciliation October 31, 2010 Bank Balance, October 31 Add: Deposit in transit 5,285 6,370 Less: Correction of book error Less: Outstanding checks No. 926 No. 927 Adjusted bank balance 117 984 Recorded $163 check as $63 Cost of checks Service charge 100 25 10 $5,269 $1,085 Balance, October 31 Book $5,404

$5,269 Adjusted book balance

Cryers account actually has cash of $5,269 on October 31.

Req. 2
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Journal DATE Oct 31 ACCOUNTS Accounts payable Cash To correct error on check written to vendor. Miscellaneous Expense Cash Record bank service charge and cost of checks. POST REF. Dr. 100 Cr. 100 35 35

31

(20-25 min.) E 7-32B


Req. 1 SHEPPARD PICTURE FRAMES Bank Reconciliation November 30, 2010 Bank Balance, November 30 Add: Deposit in transit 2,000 3,587 Less: Correction of book error Less: Outstanding checks No. 213 No. 214 Adjusted bank balance 310 180 Recorded $600 check as $60 Service charge Charge for printed checks NSF checks 540 30 16 80 $3,097 $1,587 Balance, November 30 Add: EFT collectionrent 750 3,763 Book $3,013

$3,097 Adjusted book balance

Req. 2 Journal
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DATE Nov 30

ACCOUNTS Cash Rental Income To record rental income Accounts payable Cash To correct error on check written to vendor. Miscellaneous Expense Cash Record bank service charge and cost of checks. Accounts Receivable Cash Record NSF Checks

POST REF.

Dr. 750

Cr. 750

30

540 540 46 46 80 80

30

30

(5-10 min.) E 7-33B


Journal DATE ACCOUNTS AND EXPLANATIONS May 3 Accounts Receivable Sam Martin Sales Revenue Record sales. Nov. 8 Uncollectible Accounts Expense Accounts Receivable Sam Martin Write off uncollectible accounts. 10 Accounts Receivable Sam Martin Uncollectible Accounts Expense Reinstate part of Sam Martins account 10 Cash Accounts Receivable Sam Martin Record receipt of cash on account POST REF. Dr. 970 970 970 970 200 200 200 200 Cr.

Dec.

Dec

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(10-15 min.) E 7-34B


Req. 1 Journal DATE Jan. ACCOUNTS AND EXPLANATIONS Cash Accounts Receivable Sales Revenue Record sales. Cash Accounts Receivable Record collections on account. Jan. Allowance for Uncollectible Accounts Accounts Receivable Write off uncollectible accounts. Uncollectible Accounts Expense ($160,000 .04) Allowance for Uncollectible Accounts Record estimate of uncollectible accounts expense for the month. 2,500 2,500 6,400 6,400 POST REF. Dr. 100,000 160,000 Cr.

260,000 54,000 54,000

Jan.

Jan.

Req. 2 Accounts Receivable Bal. 20,000 Collections Credit Sales 160,000 Write-offs Bal. 123,500 54,000 2,500 Allowance for Uncollectible Accounts Write-offs 2,500 Bal. 5,900 Uncollectible 6,400 accounts expense Bal. 9,800

Net Accounts Receivable: $123,500 $9,800 = $113,700. Ortiz Automotive expects to collect the net Accounts Receivable of $113,700.

(15-20 min.) E 7-35B


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Req. 1 Journal DATE ACCOUNTS AND EXPLANATIONS 2010 Jul. 31 Uncollectible Accounts Expense ($15,500 - $6,400) Allowance for Uncollectible Accounts Record estimate of uncollectible accounts expense for the year. Computations: Balance needed in allowance account: ($175,000 .008) + ($70,000 .03) + ($60,000 .05) + ($15,000 .60) = $1,400 + $2,100 + $3,000 + $9,000 = $15,500. Adjusting entry amount: $15,500 balance needed $6,400 current balance = $9,100. Allowance for Uncollectible Accounts Bal. Uncollectible accounts expense Bal. Req. 2 Journal DATE ACCOUNTS AND EXPLANATIONS 2010 Jul. 31 Uncollectible Accounts Expense ($15,500 + $500) Allowance for Uncollectible Accounts Record estimate of uncollectible accounts expense for the year. Computations: Balance needed in allowance account: ($175,000 .008) + ($70,000 .03) + ($60,000 .05) + ($15,000 .60) = $1,400 + $2,100 + $3,000 + $9,000 = $15,500. Adjusting entry amount: $15,500 balance needed + $500 current balance = $16,000. Bal. Allowance for Uncollectible Accounts 500 Uncollectible accounts expense Bal.
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POST REF.

Dr. 9,100

Cr.

9,100

6,400 9,100 15,500

POST REF.

Dr. 16,000

Cr.

16,000

16,000 15,500

(15-20 min.) E7 -36B


Req 1 Journal DATE ACCOUNTS AND EXPLANATIONS 2010 May 31 Uncollectible Accounts Expense Allowance for Uncollectible Accounts Record estimate of uncollectible accounts expense for the year. Computations: ($750,000 .0075) = $5,625 Req 2 Journal DATE ACCOUNTS AND EXPLANATIONS 2010 Dec. 31 Uncollectible Accounts Expense Allowance for Uncollectible Accounts Record estimate of uncollectible accounts expense for the year. Computations: Balance needed in allowance account: $3,120 Adjusting entry amount: $3,120 balance needed - $1,300 current balance = $1,820 POST REF. Dr. 1,820 1,820 Cr. POST REF. Dr. 5,625 5,625 Cr.

(15-20 min.) E 7-37B


Req. 1 Interest for: 2010: 2011:

$2,000,000 .07 6/12 $2,000,000 .07 6/12

= $70,000 = $70,000

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Req. 2 a. b. c. d. Req. 3 Payoff at January 31, 2011: Principal Interest $2,000,000 .07 7/12 = Total $2,000,000 81,667 $2,081,667 Nature Bank has a note receivable. Gary Simon has a note payable. Nature Bank has interest revenue. Gary Simon has interest expense.

(15-20 min.) E 7-38B


Journal DATE Feb. 1 ACCOUNTS AND EXPLANATIONS Note ReceivableC. Fadal Cash Record loan supported by note. Note ReceivableLawn Pro Sales Revenue Record service revenue provided for note receivable. Interest Receivable ($375 + $16) Interest Revenue Accrue interest revenue. POST REF. Dr. 15,000 Cr. 15,000 6,000 6,000

April

30

391 391

Computations: Interest Receivable: C. Fadal: $15,000 .10 3/12 Lawn Pro: $ 6,000 .04 24/360 Total interest receivable at April 30 = $375 = 16 $391

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(15-20 min.) E 7-39B


Req. 1 Journal DATE 2010 March 29 ACCOUNTS AND EXPLANATIONS Accounts ReceivableMontclair, Inc. Sales Revenue Record sale on account. Note ReceivableMontclair, Inc. Accounts ReceivableMontclair, Inc. Record note received for account. Cash ($21,000 + $175) Note Receivable Montclair, Inc. Interest Revenue($21,000 .05 x 60/360) Record collection of note receivable. POST REF. Dr. 21,000 21,000 21,000 21,000 21,175 21,000 175 Cr.

Aug.

Sep.

30

(15-20 min.) E 7-40B


Cash Short-term investments Net receivables Total quick assets Current liabilities Quick ratio A $ 93,000 75,000 126,000 $294,000 $335,000 .88 B $ 67,000 27,000 110,000 $204,000 $280,000 .73 C $23,000 18,000 54,000 $95,000 $35,000 2.71 D $111,000 49,000 144,000 $304,000 $220,000 1.38

Company A should be concerned because they only have $.88 of Quick Assets to pay for every $1 owed in Current Liabilities and Company B should be concerned because they only have $.73 of Quick Assets to pay for every $1 owed of Current Liabilities.

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(15-20 min.) E 7-41B


Dollar amounts in millions Net Current Short-term Receivables + Investments Total Current Liabilities

a.

Quick ratio

= = = =

Cash

$210 + $200 + $170 $434 + $170 $580 $604 .96

A quick ratio of .96 is strong. b. Accounts Receivable Turnover

Net Credit Sales Average net Accounts Receivable 15.8/year

$2,450 [($200 + $110) / 2]

An accounts receivable turnover ratio of 15.8 is strong relative to credit terms of net 30.

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Problems
(20-25 min.) P 7-42A
NIELSON, INC. Bank Reconciliation May 31, 2010 Bank Balance, May 31 Add: Deposit in transit 2,037 10,337 $ 8,300 Balance, May 31 Add: EFT collection of rent Bank collection of note receivable Less: Less: Outstanding checks No. 1420 No. 1421 No. 1422 Adjusted bank balance 970 200 2,267 NSF check EFT payment of insurance Service charge Book error$216 check recorded as $126 90 $6,900 441 340 25 1,000 7,796 625 Book $6,171

$ 6,900 Adjusted book balance

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(20-25 min.) P7-43A


Req. 1 BLAKES HAMBURGER Bank Reconciliation October 31, 2010 Bank Balance, October 31 Add: Deposit in transit Correction of bank error Charged our account for the check of another company Less: Outstanding checks No. 800 No. 802 No. 806 No. 809 No. 810 No. 811 Adjusted bank balance 402 74 36 Less: 161 229 48 NSF check NSF check Service charge 67 192 7 $12,050 410 13,000 381 $12,209 Balance, October 31 Add: EFTcollection on account Bank collection of rental Revenue Interest revenue on bank Balance 16 12,316 900 200 Books $11,200

$12,050 Adjusted book balance

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Req. 2 Journal DATE Oct. 31 Cash ACCOUNTS POST REF. Dr. 200 Cr. 200

Accounts Receivable Record EFT collection from customer. 31 Cash Rental Revenue Record rental revenue collected by bank. 31 Cash Interest Revenue Record interest earned on bank balance. 31 Accounts Receivable ($67 + $192) Cash Record NSF checks returned by the bank. 31 Miscellaneous Expense Cash Record bank service charge. 259 16 900

900

16

259

7 7

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(20-25 min.) P 7-44A


Req. 1 Journal DATE ACCOUNTS AND EXPLANATIONS Sept. 30 Accounts Receivable Sales Revenue Record sales on account. 30 Cash Accounts Receivable Record collections on account. 30 Allowance for Uncollectible Accounts Accounts Receivable Write off uncollectible accounts. 30 Uncollectible Accounts Expense (500,000 .02) Allowance for Uncollectible Accounts Record estimate of uncollectible accounts expense for the month. 7,000 7,000 10,000 10,000 POST REF. Dr. 500,000 Cr. 500,000 550,000 550,000

Bal. Credit sales Bal.

Accounts Receivable 150,000 Collections 500,000 Write-offs 93,000

550,000 7,000

Allowance for Uncollectible Accounts Bal. 9,000 Write7,000 Uncollectible 10,000 offs accounts expense Bal. 12,000

Uncollectible Accounts Expense Uncollectible 10,000 accounts expense Bal. 10,000

Req. 2
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Journal DATE ACCOUNTS AND EXPLANATIONS Sept. 30 Accounts Receivable Sales Revenue Record sales on account. 30 Cash Accounts Receivable Record collections on account. 30 Uncollectible Accounts Expense Accounts Receivable Write off uncollectible accounts. 7,000 7,000 POST REF. Dr. 500,000 Cr. 500,000 550,000 550,000

Bal. Credit sales Bal. Req. 3

Accounts Receivable 150,000 Collections 500,000 Write-offs 93,000

550,000 7,000

Uncollectible Accounts Expense Write-offs 7,000 Bal. 7,000

Income statement: Uncollectible Accounts Expense

Allowance Method $10,000

Direct WriteOff Method $7,000

Uncollectible Accounts Expense under the allowance method better matches expense with revenue because it is recorded in the same period sales are made. The expense measured by the direct write-off method is not related to revenue in any systematic way. Req. 4 Balance sheet: Accounts Receivable Less: Allowance for Uncollectible Accounts Accounts Receivable, net Allowance Method $93,000 12,000 $81,000 Direct WriteOff Method $93,000 $93,000

Net accounts receivable under the allowance method is more realistic because it shows the amount of the receivables that the company expects to collect. The net receivable measured by the direct write-off method is unrealistic because the company knows that it will fail to collect from some customers.

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(15-20 min.) P 7-45A


Req. 1 Allowance for Uncollectible Accounts Bal. 1,800 Write-off 600 Reinstate 600 Write-off 1,600 adjustment 2,100 Bal. 2010 2,300 Req. 2 Journal DATE 2010 Jan. 17 ACCOUNTS AND EXPLANATIONS Accounts ReceivableAbe Gomez Sales Revenue Record sale on account. Allowance for Uncollectible Accounts Accounts Receivable Abe Gomez Write off uncollectible account. Accounts Receivable Abe Gomez Allowance for Uncollectible accounts Reinstate account receivable. Cash Accounts Receivable Abe Gomez Record partial collection on account. Sept. 4 Cash ($600 $200) Accounts ReceivableAbe Gomez Record balance collected on account. Allowance for Uncollectible Accounts Accounts ReceivableBernard Clark Accounts ReceivableMarie Montrose Accounts ReceivableTerry Forman Write off uncollectible accounts. Uncollectible Accounts Expense Allowance for Uncollectible Accounts Record estimate of uncollectible accounts expense for the year. 400 400 1,600 700 300 600 2,100 2,100 POST REF. Dr. 600 600 600 600 600 600 200 200 Cr. Uncollectible Accounts Expense Bal. 0 adjustment 2,100 2,100

June

29

Aug.

Dec.

31

31

Req. 3
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Balance sheet at December 31, 2010: Current assets: Accounts receivable Less: Allowance for uncollectible accounts Accounts receivable, net

$139,000 2,300 $136,700

(20-25 min.) P 7-46A


Req. 1 Note Due Date (1) Dec. 23, 2011 (2) May 31, 2011 (3) Jan. 6, 2011 Req. 2 Journal DATE 2010 Dec. 31 ACCOUNTS AND EXPLANATIONS Interest Receivable ($26 + $120 + $60) Interest Revenue POST REF. Dr. 206 206 Cr. Principal + Interest $13,000 + $1,170 ($13,000 .09 1) $12,000 + $720 ($12,000 .12 6/12) $9,000 + $75 ($9,000 .10 30/360) = = = = Maturity Value $14,170 $12,720 $ 9,075

Computations: Note (1): Note (2): Note (3): Total interest revenue Req. 3 Journal DATE 2011 Dec. 23 ACCOUNTS AND EXPLANATIONS Cash ($13,000 + $26 + $1,144) Note Receivable Interest Receivable ($13,000 .09 8/360) Interest Revenue ($13,000 .09 352/360) POST REF. Dr. 14,170 13,000 26 1,144
189

$13,000 .09 8/360 $12,000 .12 1/12 $ 9,000 .10 24/360

= = = =

$ 26 120 60 $206

Cr.

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(20-25 min.) P 7-47A


Req. 1 Journal DATE 2009 Dec. 19 31 ACCOUNTS Note ReceivableArnold Collins Accounts ReceivableArnold Collins Interest Receivable ($3,000 .12 12/360) Interest Revenue Interest Revenue Retained Earnings Cash ($3,000 + $12 + $48) Note ReceivableArnold Collins Interest Receivable ($3,000 .12 12/360) Interest Revenue ($3,000 .12 48/360) Note ReceivableElectra Mann Cash Note ReceivableMark Phillips Accounts ReceivableMark Phillips Cash ($10,000 + $550) Note Receivable Electra Mann Interest Revenue ($10,000 .11 6/12) POST REF. Dr. 3,000 3,000 12 12 12 12 3,060 3,000 12 48 10,000 10,000 1,500 1,500 10,550 10,000 550 Cr.

31 2010 Feb. 17

June Oct. Dec.

1 31 1

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(20-25 min.) P 7-48A


Req. 1 Dollar amounts in thousands 2010 2009 a. Quick Ratio Cash + Net current receivables + ST investments $82 + $257 + $140 = = Total current liabilities $680 = A/R Net sales = Turnover Average A/R* *(beginning A/R + ending A/R)/2 b. Req. 2 MEMORANDUM DATE: TO: FROM: RE: The Owner of Bien Taco Restaurants Student Name Changes in ratio values from 2009 to 2010 0.70 $5,189 = $261 = $80 + $265 + $174 $700 0.74

19.9

$4,995 = $241.5

20.7

The quick ratio decreased from .74 to .70. Short-term investments and current liabilities both decreased from 2009 to 2010. Because the decrease in short-term investments was greater than that for current liabilities, the quick ratio deteriorated. The accounts receivable turnover was approximately the same at 20 times for both years. The decline in the quick ratio conveys an unfavorable impression about the company. Student responses may vary.

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(20-25 min.) P 7-49B


STENBACK, INC. Bank Reconciliation November 30, 2010 Bank Balance, November 30 Add: Deposit in transit 2,040 11,090 $ 9,050 Balance, November 30 Add: EFT collection of rent Bank collection of note receivable Less: Less: Outstanding checks No. 1420 No. 1421 No. 1422 Adjusted bank balance 960 210 2,250 NSF check EFT payment of insurance Service charge Book error$214 check recorded as $124 90 $7,670 452 350 45 1,800 8,607 635 Book $6,172

$ 7,670 Adjusted book balance

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(20-25 min.) P7-50B


Req. 1 BILLYS HAMBURGERS Bank Reconciliation December 31, 2010 Bank Balance, December 31 Add: Deposit in transit Correction of bank error Charged our account for the check of another company Less: Outstanding checks No. 800 No. 802 No. 806 No. 809 No. 810 No. 811 Adjusted bank balance 415 75 34 Less: 123 228 39 NSF check NSF check Service charge 60 205 19 $12,828 410 13,742 330 $13,002 Balance, December 31 Add: EFTcollection on account Bank collection of rental Revenue Interest revenue on bank Balance 12 13,112 700 400 Book $12,000

$12,828 Adjusted book balance

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Req. 2 Journal DATE Dec. 31 Cash ACCOUNTS POST REF. Dr. 400 Cr. 400

Accounts Receivable Record EFT collection from customer. 31 Cash Rental Revenue Record rental revenue collected by bank. 31 Cash Interest Revenue Record interest earned on bank balance. 31 Accounts Receivable ($60 + $205) Cash Record NSF checks returned by the bank. 31 Miscellaneous Expense Cash Record bank service charge. 265 12 700

700

12

265 19 19

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(20-25 min.) P 7-51B


Req. 1 Journal DATE Apr ACCOUNTS AND EXPLANATIONS 30 Accounts Receivable Sales Revenue Record sales on account. 30 Cash Accounts Receivable Record collections on account. 30 Allowance for Uncollectible Accounts Accounts Receivable Write off uncollectible accounts. 30 Uncollectible Accounts Expense (490,000 .02) Allowance for Uncollectible Accounts Record estimate of uncollectible accounts expense for the month. 6,000 6,000 9,800 9,800 POS T REF. Dr. 490,000 Cr. 490,000 425,000 425,000

Bal. Credit sales Bal.

Accounts Receivable 165,000 Collections 490,000 Write-offs 224,000

425,000 6,000

Allowance for Uncollectible Accounts Bal. 8,000 Write6,000 Uncollectible 9,800 offs accounts expense Bal. 11,800

Uncollectible Accounts Expense Uncollectible 9,800 accounts expense Bal. 9,800

Req 2.
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Journal DATE ACCOUNTS AND EXPLANATIONS April. 30 Accounts Receivable Sales Revenue Record sales on account. 30 Cash Accounts Receivable Record collections on account. 30 Uncollectible Accounts Expense Accounts Receivable Write off uncollectible accounts. Accounts Receivable 165,000 Collections 490,000 Write-offs 224,000 6,000 6,000 POST REF. Dr. 490,000 Cr. 490,000 425,000 425,000

Bal. Credit sales Bal. Req. 3

425,000 6,000

Uncollectible Accounts Expense Write-offs 6,000 Bal. 6,000

Income statement: Uncollectible Accounts Expense

Allowance Method $9,800

Direct WriteOff Method $6,000

Uncollectible Accounts Expense under the allowance method better matches expense with revenue because it is recorded in the same period sales are made. The expense measured by the direct write-off method is not related to revenue in any systematic way. Req. 4 Balance sheet: Accounts receivable Less: Allowance for uncollectible accounts Accounts receivable, net Allowance Method $224,000 11,800 $212,200 Direct WriteOff Method $224,000 $224,000

Net accounts receivable under the allowance method is more realistic because it shows the amount of the receivables that the company expects to collect. The net receivable measured by the direct write-off method is unrealistic because the company knows that it will fail to collect from some customers.

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(15-20 min.) P 7-52B


Req. 1 Allowance for Uncollectible Accounts Bal. 1,500 Write-off 800 Reinstate 800 Write-off 2,100 adjustment 3,200 Bal. 2010 2,600 Req. 2 Journal DATE 2010 Jan. 17 ACCOUNTS AND EXPLANATIONS Accounts ReceivableAbe Gomez Sales Revenue Record sale on account. Allowance for Uncollectible Accounts Accounts Receivable Abe Gomez Write off uncollectible account. Accounts Receivable Abe Gomez Allowance for Uncollectible accounts Reinstate account receivable. Cash Accounts Receivable Abe Gomez Record partial collection on account. Sept. 4 Cash ($800 $250) Accounts ReceivableAbe Gomez Record balance collected on account. Allowance for Uncollectible Accounts Accounts ReceivableBrian Kemper Accounts ReceivableMarie Montrose Accounts ReceivableTanya Wayne Write off uncollectible accounts. Uncollectible Accounts Expense Allowance for Uncollectible Accounts Record estimate of uncollectible accounts expense for the year. 550 550 2,100 1,000 200 900 3,200 3,200 POST REF. Dr. 800 800 800 800 800 800 250 250 Cr. Uncollectible Accounts Expense Bal. 0 adjustment 3,200 3,200

June

29

Aug.

Dec.

31

31

Req. 3
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Balance sheet at December 31, 2010: Current assets: Accounts receivable Less: Allowance for uncollectible accounts Accounts receivable, net

$133,000 2,600 $130,400

(20-25 min.) P 7-53B


Req. 1 Note Due Date (1) Oct. 23, 2011 (2) Nov 30, 2010 (3) Nov. 21, 2010 Req. 2 Journal DATE 2010 Oct. 31 ACCOUNTS AND EXPLANATIONS Interest Receivable ($23 + $73 + $80) Interest Revenue $13,000 .08 8/360 $8,000 .11 1/12 $ 10,000 .12 24/360 POST REF. Dr. 176 176 Cr. Principal + Interest $13,000 + $1,040 ($13,000 .08 1) 8,000 + $147 ($8,000 .11 2/12) 10,000 + $150 ($10,000 .12 45/360) = = = = Maturity Value $14,040 8,147 10,150

Computations: Note (1): Note (2): Note (3): Total interest revenue

= = = =

$ 23 73 80 $176

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Req. 3 Journal DATE 2011 Oct. 23 ACCOUNTS AND EXPLANATIONS Cash ($13,000 + $23 + $1,017) Note Receivable Interest Receivable ($13,000 .08 8/360) Interest Revenue ($13,000 .08 352/360) POST REF. Dr. 14,040 13,000 23 1,017 Cr.

(20-25 min.) P 7-54B


Req. 1 Journal DATE 2009 Dec. 19 31 ACCOUNTS Note ReceivableAVC Company Accounts ReceivableAVC Company Interest Receivable ($6,000 .12 12/360) Interest Revenue Interest Revenue Retained Earnings Cash ($6,000 + $24 + $96) Note ReceivableArnold Collins Interest Receivable($6,000 .12 12/360) Interest Revenue ($6,000 .12 48/360) Note ReceivableLincoln Music Cash Note ReceivableYing Yang Music Accounts ReceivableYing Yang Music Cash ($12,000 + $660) Note Receivable Lincoln Music Interest Revenue ($12,000 .11 6/12) POST REF. Dr. 6,000 6,000 24 24 24 24 6,120 6,000 24 96 12,000 12,000 5,500 5,500 12,660 12,000 660
199

Cr.

31 2010 Feb. 17

June Oct. Dec.

1 31 1

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(20-25 min.) P 7-55B


Req. 1 Dollar amounts in thousands 2010 2009 a. Quick Ratio Cash + Net current receivables + ST investments $82 + $290 + $130 = = Total current liabilities $780 = A/R Net Sales = Turnover Average A/R* *(beginning A/R + ending A/R)/2 b. 0.64 $5,223 = $297.5 $80 + $305 + $178 $800 = 0.70

17.6

$5,039 = $280.5

18.0

Req. 2 MEMORANDUM DATE: TO: FROM: RE: The Owner of Perfection Taco Restaurants Student Name Changes in ratio values from 2009 to 2010

The quick ratio decreased from .70 to .64. Short-term investments and current liabilities both decreased from 2009 to 2010. Because the decrease in short-term investments was greater than that for current liabilities, the quick ratio deteriorated. The accounts receivable turnover was substantially the same at around 18 times for both years. The decline in the quick ratio conveys an unfavorable impression about the company. Student responses may vary.

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Continuing Exercise
Journal DATE ACCOUNTS AND EXPLANATIONS Aug. 18 Cash Accounts Receivable J. Henderson Oct. 12 Uncollectible Accounts Expense Accounts receivable J. Henderson POST. REF. DEBIT 250 150 150 CREDIT 250

Continuing Problem
Req 1 Accounts Receivable Bal 8/31 5,400 September Sales 52,000 Bal 9/30 57,400 Req 2 Journal DATE ACCOUNTS AND EXPLANATIONS Sep 30 Uncollectible Accounts Expense * Allowance for Uncollectible Accounts Record estimated uncollectible accounts POST. REF. DEBIT 2,870 CREDIT 2,870

*$57,400 x .05 = $2,870 (Note: There was no beginning balance in Allowance for Doubtful Accounts.) Req 3 Balance sheet at September 30, 2010: Current assets: Accounts receivable Less: Allowance for uncollectible accounts Accounts receivable, net

$57,400 2,870 $54,530

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Ethics in Action
Case #1 Yes, Ed should provide financial statements that reflect this new information. This one account represents a substantial amount of the total account receivable balance owed and the fact that it will not be collected needs to be reflected in the financials. While Ed may have supplied the bank with the original information, once he became aware of this bankruptcy he would have a responsibility to update the old financial information. There are certainly ethical issues regarding new information that will have a material impact on financial statements previously provided. In this case, the bank is basing its lending decisions upon the financials Ed originally provided. Knowing that a $24,295 account receivable will become uncollectible may influence the lending decision, and accordingly, it must ethically be disclosed. The allowance method is designed for establishing an estimated allowance; given that it was more than 90 days past due, a larger allowance was warranted. Usually banks request an aging schedule to determine the individual customers and the various ages of the related balances. In this case, Ed would have to disclose that the account was uncollectible rather than 90 days past due. Also, most companies disclose individual customers who represent unusually large account balances relative to their other customers. This provides further insight into the possible risk exposures. Had a relatively small account become uncollectible, the amount in the allowance account could easily be used for the write off. Thus, there would be no material impact on the existing financial information and the bank would not need to be notified.

Case #2 Yes, it would be unethical. Changing the percentage used when applying the allowance method for estimating bad debt expense would be permissible if new information was available that would require the percentage to change in order to reflect a more accurate allowance. However, merely changing the percentage to manipulate the financial
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statement disclosures to a desired result would be unethical. The financial statements must provide reliable information for users to make informed decisions. Again, the ethical dilemma lies in the reason for the percentage change, rather than the percentage change itself. Merely attempting to manipulate the financial statements is not a valid business reason for changing the percentage used. It is unlikely that they would disclose the true reason as to why they changed the percentage amount. Further, disclosing the fact that the percentage was changed simply to provide a higher net income would still be unacceptable. No compromise would be acceptable. The allowance method is based upon the past experience of the business in order to provide the most reliable information for accruing the bad debt expense and related allowance for uncollectible accounts. If the past experience clearly supports 5% of credit sales, then that needs to be used for estimating the bad debt expense. If there are legitimate business reasons for reducing the current amount of bad debt expense then it would be acceptable to reduce the 5% of credit sales amount to a lower percentage that would better reflect the estimated uncollectible accounts. However, they should be conservative in their estimate and thus gradually lower the rate. By using the 1% of credit sales for the bad debt expense, the allowance for uncollectible accounts will not be large enough to accommodate the uncollectible accounts receivable in the next fiscal year. While they may be able to go undetected in the short run, they cannot continue to manipulate the financial statements in the long run and they will eventually be found out. They should use the most accurate information available in order to provide the most reliable financial statement disclosures.

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Financial Analysis
1. The balance as of December 31, 2008 was $299,585,000. The balance as of December 31, 2007 was $300,506,000. There was a decrease of $921,000. 2. The fact that Columbia Sportswears accounts receivable is shown at net value indicates that it uses the allowance method. 3. In Note 2 the allowance for doubtful accounts balances are provided. So, at December 31, 2008, the total accounts receivable balance was $309,127,000 ($299,585,000 net + $9,542,000 allowance). 4. The allowance for doubtful accounts increased by $2,173,000 from $7,369,000 in 2007 to $9,542,000 in 2008. In order to determine the amount of bad debts written off during the year, you would need to know the amount of the provision for bad debts (bad debt expense) that was added to the allowance account. Because this information is not provided in the income statement, it is impossible to determine the amount of bad debts that were written off during the year.

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Industry Analysis
Accounts receivable turnover is the ratio of credit sales to average accounts receivable. It is calculated by dividing the total sales (found on the income statement) by the average accounts receivable. We have to assume that all of the sales for both companies for the year were credit sales, since we dont know otherwise. To find the average accounts receivable, you would add the ending accounts receivable and the beginning accounts receivable (which would be the ending accounts receivable from the previous year) and divide the sum by 2. The calculation of accounts receivable turnover for the two companies would be as follows:

Columbia Sportswear: Average accounts receivable: (ending 2008 - $299,585 + ending 2007 - $300,506) = $600,091/2 = $300,045. Total sales for 2008 - $1,317,835 divided by average accounts receivable - $300,045 = 4.39 times.

Under Armour: Average accounts receivable: (ending 2008 - $81,302 + ending 2007 - $93,515) = $174,817/2 = $87,408. Total sales for 2008 - $725,244 divide by average accounts receivable - $87,408 = 8.3 times.

From the calculations above, Under Armour has the higher accounts receivable turnover. It is better to have a higher accounts receivable turnover than a lower one because that usually indicates that the accounts receivable is being collected faster. However, to really know if Under Armour is doing better by having a higher turnover ratio, we would have to compare this years turnover rate to last years turnover rate. Were not able to do that with the data given because we dont know what the ending accounts receivable was for 2006 to calculate average accounts receivable. However, if we assume that both companies offer a 30-day credit period, then neither company is doing very well because with 30-day credit terms, you would expect a ratio of closer to 12 (360 days divided by 30 days).

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Small Business Analysis


The check that you received from Burns & Associates was returned as an NSF (not sufficient funds) check. In other words, their check bounced! So the amount of the check was removed from your checking account. In addition, your bank balance was reduced by a charge from the bank for processing the check, known as a return check charge. The last item is the normal monthly service charge imposed by the bank. As a result of these transactions, you will have to make some journals entries. Based on the three transactions above, the journal entry would look like this: Debit Credit 30,200.00 300.00 30,500.00

Accounts Receivable - Burns & Associates, Inc. Bank Service Charges Cash Record NSF check from Burns & Associates, Inc.

The journal entry above puts the amount of the returned check plus the return check charge back into accounts receivable for Burns & Associates, Inc. The logic there is that your company incurred an additional $200 expense that Burns should be responsible for paying. If it subsequently becomes necessary to write off the entire amount due from Burns and you are using the Allowance method to account for bad debts, the journal entry would look like this: Debit 30,200.00 Credit 30,200.00

Allowance for Doubtful Accounts Accounts Receivable Burns & Associates, Inc. Write off Burns & Associates, Inc. receivable

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Written Communication
Proposed correspondence: Mr. Burns: I have attached a copy of your check which was returned by the bank for non-sufficient funds. I have also attached a copy of the correspondence from the bank that accompanied the check showing where they charged my account $200 for processing the returned check. This presents several different problems for me. First of all, there is the matter of the $200 charged to my account. I would appreciate it if you could immediately reimburse me for that amount. But the second matter is of much more concern to me. You may remember that we had several discussions prior to my receipt of your check about the lateness of the payment. Now that the check has been returned, we are back in the same situation of you not having paid me, but now it is even later than when we had our last discussion. Just as I do with all of my clients, I value your business and I wish to continue our business relationship for many years to come. However, I cannot condone late payments and certainly do not appreciate having checks bounce out of my account! If we want to continue doing business with each other, we cant let this happen again. Please contact me at your earliest convenience, so we can discuss the quickest way to get this matter taken care of.

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Appendix: Short Exercises


(5-10 min.) S 7A-1

Journal DATE Nov. 1 30 ACCOUNTS Petty Cash Cash Postage Expense Cash POST REF. Dr. 100 67 67 Cr. 100

(5-10 min.) S 7A-2

Journal DATE June 1 30 ACCOUNTS Petty Cash Cash Office Supplies Entertainment Expense Cash Short Cash Petty Cash Cash POST REF. Dr. 200 104 70 4 178 100 100 Cr. 200

30

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Exercises
(10-15 min.) E 7A-3A
Journal DATE ACCOUNTS Mar 1 Petty Cash Cash Open the petty cash fund. 31 Delivery Expense Postage Expense Supplies Expense ($44 + $30) Miscellaneous Expense Cash Short Cash Replenish the petty cash fund. POST REF. Dr. 200 Cr. 200 20 40 74 16 5 155

(10-15 min.) E 7A-4A


Journal DATE Mar. 31 ACCOUNTS Office Supplies Delivery Expense Cash Short Cash Replenish the petty cash fund. Petty Cash Cash Increase Petty Cash fund by $100 to $250 POST REF. Dr. 90 50 3 Cr.

143 100 100

31

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(10-15 min.) E 7A-5B


Journal DATE ACCOUNTS Oct. 1 Petty Cash Cash Open the petty cash fund. Oct. 31 Delivery Expense Postage Expense Supplies Expense ($43 + $10) Miscellaneous Expense Cash Short Cash Replenish the petty cash fund. POST REF. Dr. 220 Cr. 220 15 50 53 19 28 165

(10-15 min.) E 7A-6B


Journal DATE April 30 ACCOUNTS Office Supplies Delivery Expense Cash Short Cash Replenish the petty cash fund. Petty Cash Cash Increase Petty Cash fund by $120 to $370 POST REF. Dr. 185 40 6 Cr.

231 120 120

30

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Problems
10-15 min.) P 7A-7A
Req. 1 Journal DATE Jul ACCOUNTS 1 Petty Cash Cash Open the petty cash fund. POST REF. Dr. 300 Cr. 300

Req. 2 Journal DATE Jul ACCOUNTS 31 Office Supplies Expense Travel Expense Delivery Expense Entertainment Expense Cash Short Cash Replenish the petty cash fund. POST REF. Dr. 86 25 17 90 20 Cr.

238

A difference of $20 charged to the cash short account is approaching an amount that is significant. A review of the internal controls supporting the petty cash fund should be performed to prevent the custodian from taking cash for personal use. Req. 3 Journal DATE Aug 1 ACCOUNTS Petty Cash ($350 $300) Cash Increase the petty cash fund from $300 to $350. POST REF. Dr. 50 Cr. 50

The custodian cashes the check and places $50 in currency and coin in the fund.

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(10-15 min.) P 7A-8B


Req. 1 Journal DATE ACCOUNTS Mar 1 Petty Cash Cash Open the petty cash fund. Req. 2 Journal DATE ACCOUNTS Mar 31 Office Supplies Expense Travel Expense Delivery Expense Entertainment Expense Cash Short Cash Replenish the petty cash fund. POST REF. Dr. 86 27 10 110 30 Cr. POST REF. Dr. 300 Cr. 300

263

A difference of $30 charged to the cash short account is approaching an amount that is significant. A review of the internal controls supporting the petty cash fund should be performed to prevent the custodian from taking cash for personal use. Req. 3 Journal DATE April 1 ACCOUNTS Petty Cash ($375 $300) Cash Increase the petty cash fund from $300 to $375. POST REF. Dr. 75 Cr. 75

The custodian cashes the check and places $75 in currency and coin in the fund.

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