Reporting and Analyzing Revenues and Receivables: Learning Objectives - Coverage by Question

Chapter 6
Reporting and Analyzing Revenues

and Receivables
Learning Objectives coverage by question
MiniExercises
Exercises
Problems
Cases and
Projects
LO1 Describe and apply the criteria

for determining when revenue is
recognized.
14, 15, 17
26, 27,
32, 39
LO2 Illustrate revenue and expense

recognition when the transaction
involves future deliverables.
17, 24, 25
30, 39, 40
46
LO3 Illustrate revenue and expense

recognition for long-term projects.
13, 16
28 - 30
42
18 - 21, 23
33 - 37
45
49
22
31, 34, 38
44
49
27, 32, 34
43, 44
48
LO4 Estimate and account for

uncollectible accounts receivable.
LO5 Calculate return on capital
employed, net operating profit after
taxes, net operating profit margin,
accounts receivable turnover, and
average collection period.
LO6 Discuss earnings management
and explain how it affects analysis
and interpretation of financial
statements.
LO7 Appendix 6A Describe and
illustrate the reporting for nonrecurring
items.
47 - 49
47, 48
41
Cambridge Business Publishers, 2014

Solutions Manual, Chapter 6
6-1
DISCUSSION QUESTIONS
Q6-1.
Revenue must be realized or realizable and earned before it can be reported in

the income statement. Realized or realizable means that the companys net
assets have increased, that is, the company has received an asset (for
example, cash or accounts receivable) or satisfied a liability as a result of the
transaction. Earned means that the company has done everything it must do
under the terms of the sale.
For retailers, like Abercrombie & Fitch, revenue is generally earned when title
to the merchandise passes to the buyer (e.g., when the buyer takes possession
of the merchandise), because returns can be estimated. For companies
operating under long-term contracts, the earning process is typically measured
using the percentage-of-completion method, that is, by the percentage of costs
incurred relative to total expected costs.
Q6-2.
Financial statement analysis is usually conducted for purposes of forecasting

future financial performance of the company. Discontinued operations are, by
definition, not expected to continue to affect the profits and cash flows of the
company. Accordingly, the financial statements separately report discontinued
operations from continuing operations to provide more useful measures of
financial performance and financial income. For example, yielding an income
measure that is more likely to persist into the future, and a net assets measure
absent discontinued items.
Q6-3.
In order for an event to be classified as an extraordinary item, its occurrence

must be both unusual and infrequent. Items that are considered to be both
unusual and infrequent might be the destruction of property by natural disaster
or the expropriation of assets by a foreign government in which the company
operates. Gains and losses on early retirement of long-term bonds, once
comprising the majority of extraordinary items, are no longer considered as
such unless they meet the tests outlined above. Other events not likely to be
included as extraordinary items include asset write-downs, gains and losses on
the sales of assets, and costs related to an employee strike.
Q6-4.
Restructuring costs typically consist of two general categories: asset writedowns and accruals of liabilities. Asset write-downs reduce assets and are
recognized in the income statement as an expense that reduces income and,
thus, equity. Liability accruals create a liability, such as for anticipated
severance costs and exit costs, and yield a corresponding expense that
reduces income and equity.
Big bath refers to an event in which a company records a nonrecurring loss in a
period of already depressed income. By deliberately reducing current period
earnings, the company removes future costs from the balance sheet or creates
reserves that can be used to increase future period earnings.

6-2
Financial Accounting, 4th Edition
Q6-5.
Earnings management may be motivated by a desire to reach or exceed

previously stated earnings targets, to meet analysts expectations, or to
maintain steady growth in earnings from year to year. This desire to achieve
income goals may be motivated by the need to avoid violating covenants in
loan indentures or to maximize incentive-based compensation.
The tactics used to manage income involve transaction timing (recognizing a
gain or loss) and estimations that increase (or decrease) income to achieve a
target.
Q6-6.
Pro forma income adjusts GAAP income to eliminate (and sometimes add)
various items that the company believes do not reflect its core operations. Such
pro forma disclosures are only reported in earnings and press releases and are
not part of the published 10-Ks or other annual reports provided for
shareholders. The SEC requires that GAAP income be reported together with
pro forma income. Yet, companies often report their GAAP income at the very
end of the earnings or press release, thus obfuscating their comparison and
focusing attention on the pro forma income.
It is because of this potential to confuse the reader about the true financial
performance of the company that the SEC has become concerned. Also, pro
forma numbers are not subject to accepted standards (and, thus, we observe
differing definitions across companies), are not subject to usual audit tests, and
are subject to considerable management latitude in what is and is not included
and how items are measured.
Q6-7.
Estimates are necessary in order to accurately measure and report income on

a timely basis. For example, in order to record periodic depreciation of longlived assets, one must estimate the useful life of the asset. Estimates allow
accountants to match revenues and expenses incurred in different periods. For
example, accountants estimate warranty costs so that the warranty expense is
matched against the corresponding sales revenue. If the accounting process
waited until no estimates were necessary, there would be a significant delay in
the reporting of financial results.
Q6-8.
When analysts publish earnings forecasts, these forecasts become a

benchmark against which some investors evaluate the companys
performance. A company that fails to meet analysts forecasts may suffer a
stock price decline, even though earnings are higher than previous years
earnings and overall performance is good. Consequently, management may
feel pressure to meet or slightly exceed analysts forecasts of earnings.

6-3
Q6-9.
Bad debts expense is recorded in the income statement when the allowance for
uncollectible accounts is increased. If a company overestimates the allowance
account, net income will be understated on the income statement and accounts
receivable (net of the allowance account) will be underestimated on the
balance sheet. In future periods, such a company will not need to add as much
to its allowance account since it is already overestimated from that prior period
(or, it can reverse the existing excess allowance balance). As a result, future
net income will be higher.
On the other hand, if a company underestimates its allowance account, then
current net income will be overstated. In future periods, however, net income
will be understated as the company must add to the allowance account and
report higher bad debts expense.
Q6-10. There are several possible explanations for a decrease in the allowance
account. First, after an aging of accounts receivable, Wallace Company may
have determined that a smaller percentage of its receivables are past due.
Wallace Company may have changed its credit policy such that it is attracting
lower-risk customers than in the past. Second, experience may have indicated
that the percentages used to estimate uncollectibles was too high in previous
years. By correcting the estimated percentage of defaults, the estimated
uncollectibles would end up lower than in past years. Third, Wallace Company
may be managing earnings. By lowering estimated uncollectibles, the
company can increase current earnings, but may end up reporting a loss in a
future year when write-offs exceed the balance in the allowance account.
Q6-11. Minimizing uncollectible accounts is not necessarily the best objective for
managing accounts receivable. That objective could be accomplished by not
offering to sell to customers on credit. The purpose of offering credit to
customers is to increase sales and profits. Losses from uncollectible accounts
are a cost of doing business. As long as the benefit (greater contribution to
profits due to increased sales) exceeds the cost (increased losses due to
uncollectibles) then a higher-risk credit policy which increases the amount of
uncollectible accounts would be a more profitable policy.
Q6-12. The number of defaults tends to rise and fall with the economy. For example,
in a recession, customers are more likely to default and companies take longer,
on average, to pay their bills than during a healthy economy. This would result
in higher estimated uncollectibles if the estimates are based on an aging of
accounts receivable.
For many companies, sales revenue also tends to decline during a recession.
If estimated uncollectibles are estimated as a percentage of sales, then the
estimate would tend to fall in a recession. This is contrary to the increase in the
number of defaults that occurs during a recession. Therefore, the percentage
of sales approach is not as sensitive to changing economic conditions as is
accounts receivable aging.

6-4
MINI EXERCISES
M6-13. (15 minutes)
Note: The completed contract method is not required but is presented for the
purpose of comparison.
Percentage-of-Completion Method
Completed Contract
Revenue
recognized
Percent
(percentage of
of total
Income
expected
(revenue
costs incurred
costs
total contract
costs
Revenue
(rounded)
amount)
incurred) recognized Income
Year
Costs
incurred
2013
$ 400,000
21%a
$ 525,000
$125,000
2014
1,000,000
53%b
1,325,000
325,000
2015
500,000
26%c
650,000
150,000
$2,500,000 $600,000
Total
$1,900,000
$2,500,000
$600,000
$2,500,000 $600,000
a
b
c
$400,000 / $1,900,000
$1,000,000/ $1,900,000
$500,000 / $1,900,000
M6-14. (20 minutes)

Company
GAP
Merck
Deere
Bank of America
Johnson Controls
Revenue recognition
When merchandise is given to the customer and returns can be
estimated (or the right of return period has expired).
estimated (or the right of return period has expired). The company
will also establish a reserve and recognize expense relating to
uncollectible accounts receivable at the time the sale is recorded.
When merchandise is given to the customer and the right of return
period, if any, has expired. The company will also establish a reserve
and recognize expense for uncollectible accounts receivable and
anticipated warranty costs at the time the sale is recorded.
Interest is earned by the passage of time. Each period, Bank of
America accrues income on each of its loans and establishes a
receivable on its balance sheet.
Revenue is recognized under long-term contracts under the
percentage-of-completion method.
6-5
M6-15. (15 minutes)

The Unlimited can only recognize revenues once they have been earned and the
amount of returns can be estimated with sufficient accuracy. Assuming that happens at
the time of sale, it must estimate the proportion of product that is likely to be returned
and deduct that amount from gross sales for the period. In this case, it would report $4.9
million in net revenue (98% of $5 million) for the period. If The Unlimited does not have
sufficient experience to estimate returns, then it should wait to recognize revenue until
the right of return period has elapsed.
M6-16. (20 minutes)
a. Percentage-of-completion method:
Year
Percent completed
Revenue
Construction costs
Gross profit
2013
30%
$12,000,000
9,000,000
$3,000,000
2014
50%
$20,000,000
15,000,000
$5,000,000
2015
20%
$8,000,000
6,000,000
$2,000,000
Total
$40,000,000
30,000,000
$10,000,000
2014
2015
$40,000,000
30,000,000
$10,000,000
Total
$40,000,000
30,000,000
$10,000,000
b. Completed contract method:

Year
Revenue
Construction costs
Gross profit
2013
M6-17. (20 minutes)

a. A.J. Smith should recognize the warranty revenue as it is earned. Since the
warranties provide coverage for three years beginning in 2014, one-third of the
revenue should be recognized in 2014, one-third in 2015, and the remaining third in
2016.
b.
Year
Revenue
Warranty expenses
Gross profit
2014
$566,666
166,666
$400,000
2015
$566,667
166,667
$400,000
2016
$566,667
166,667
$400,000
Total
$1,700,000
500,000
$1,200,000
continued next page

6-6
M6-17. concluded
c. Total revenue from sales of the camera packages is $79,800 ($399 x 200). The
revenue is allocated among the three elements of the sale (camera, printer and
warranty) as follows:
Element
Camera
Printer
Warranty
Total
Retail Price
$300
125
75
$500
Proportion of Total
60% ($300/$500)
25% ($125/$500)
15% ($75/$500)
100%
Using these proportions, the revenue is allocated among the three elements and
recognized for each element as it is earned. In this case, the portion of the revenue
allocated to the camera and printer are recognized immediately, while the revenue
allocated to the warranty is deferred and recognized over the three-year warranty
coverage period.
Year
2014
2015
2016
2017
Total
Revenue
$67,830
3,990
3,990
3,990
$79,800
($79,800 x .6 + $79,800 x .25)

($79,800 x .15 / 3)
M6-18. (15 minutes)

a. To bring the allowance to the desired balance of $2,100, the company will need to
increase the allowance account by $1,600, resulting in bad debt expense of that
same amount.
b. The net amount of Accounts Receivable is calculated as follows: $98,000
$95,900.
$2,100 =
c.
- Allowance for Doubtful Accounts (XA) +
500
Balance
1,600
(a)
2,100
Balance
(a)
Balance
+ Bad Debt Expense (E) 1,600

1,600

6-7
M6-19. (15 minutes)

a. Credit losses are incurred in the process of generating sales revenue. Specific
losses may not be known until many months after the sale. A company sets up an
allowance for uncollectible accounts to place the expense of uncollectible accounts
in the same accounting period as the sale and to report accounts receivable at its
estimated realizable value at the end of the accounting period.
b. The balance sheet presentation shows the gross amount of accounts receivable, the
allowance amount, and the difference between the two, the estimated net realizable
value. The balance sheet, thus, reports the net amount that we expect to collect.
That is the amount that is the most relevant to financial statement users.
c. The matching concept requires that expenses (credit losses) related to a given
revenue be matched with, and deducted from, the revenue in the determination of
net income. This dictates the use of the allowance method. Recognition of expense
only upon the write-off of the account would delay the reporting of our knowledge
that losses are likely and, thereby, reduce the informativeness of the income
statement. Accountants believe that providing more timely information justifies the
use of estimates that may not be as precise as we would like.
M6-20. (20 minutes)

a.
($ millions)
2011
2010
Accounts receivable (net) .............................................$6,361
$6,539
Allowance for uncollectible accounts ............................
143
246
Gross accounts receivable ...........................................$6,504
$6,785
Percentage of uncollectible accounts to gross

2.2%
accounts receivable ...................................................
($143/$6,504)
3.6%
($246/$6,785)
b. The decrease in the allowance for uncollectible accounts as a percentage of gross

accounts receivable may indicate that the quality of the accounts receivable has
improved, perhaps because the economy has improved, the company is selling to a
more creditworthy class of customers, or the companys management of accounts
receivable is more effective. It may also indicate, however, that the receivables were
over-reserved (e.g., allowance account was too high in 2010). This would result in
higher reported profits in 2011 because past profits were too low.
c. $54,365/[($6,361+$6,539)/2] = 8.43 times
365/8.43 = 43.3 days

6-8
M6-21. (10 minutes)

Bad debt expense of $2,400 ($120,000 0.02) would cause the allowance for
uncollectibles to increase by the same amount. If the allowance increased by only
$2,100 for the period, Sloan Company must have written off accounts totaling $300.
Under accounts receivable, sales revenue increased the account by $120,000, and the
write offs would decrease it by $300. If there was a net increase of $15,000 for the
period, Sloan Company must have collected $104,700 in cash. ($104,700 = $120,000 $300 - $15,000.)
M6-22. (20 minutes)
a.
Accounts Receivable Turnover rates for 2011
Procter & Gamble
$83,680 / [($6,068+$6,275)/2] = 13.6 times

365 / 13.6 = 26.8 days
Colgate-Palmolive
$16,734 / [($1,675+$1,610)/2] = 10.2 times

365 / 10.2 = 35.8 days
b. P&G turns its accounts receivable faster than Colgate-Palmolive. Receivable turns
typically evolve to an equilibrium level for each industry that arises from the general
business models used by industry competitors. Differences can arise due to
variations in the product mix of competitors, the types of customers they sell to, their
willingness to offer discounts for early payment, and their relative strength vis--vis
the companies or individuals owing them money.
Also, the size of the firm may affect the ability of a company to exert bargaining
power over major suppliers or customers. For instance, both of these companies sell
a significant amount of their product to Wal-Mart. P&G is a sizable company, and
may have greater bargaining power over Wal-Mart than does the smaller ColgatePalmolive.
One other possibility is that the difference is due to the companies differing fiscal
year-ends. If the receivable balance is not constant during the year due to some
seasonality, then the receivable turnover ratio will depend on the choice of fiscal
year.

6-9
M6-23. (20 minutes)

a.
i.
ii.
iii.
iv.
Accounts receivable (+A)

Sales revenue (+R, +SE) ..
3,200,000
Bad debts expense (+E, -SE)

Allowance for uncollectible accounts (+XA, -A).
42,000
Allowance for uncollectible accounts (-XA, +A) .

Accounts receivable (-A) ..
39,000
Accounts receivable (+A)

Allowance for uncollectible accounts (+XA, -A)
12,000
Cash (+A) ..
Accounts receivable (-A)
12,000
3,200,000
42,000
39,000
12,000
12,000
The recovered receivable is reinstated, so that its payment may be properly

recorded.
b. Besides the $12,000 in recovery, the collections from customers can be summarized
in the following entry:
v.
Cash (+A)
2,926,000
2,926,000
(This amount includes payment of the recovered receivable for $12,000. The
allowance increases by $15,000 over the period, so the fact that net receivables
increased by $220,000 means that gross receivables must have increased by
$235,000. That fact allows us to back out the cash received.)
c.
+
(iv)
(v)
(i)
(iv)
(iii)
Cash (A) 12,000

2,926,000
2,938,000
+ Accounts Receivable (A) 3,200,000
12,000
39,000
12,000
2,926,000
235,000
Allowance for Uncollectibles (XA)
42,000
39,000
12,000
15,000
+
(ii)
Sales Revenue (R) +

3,200,000
Bad Debts Expense (E)

42,000
(i)
(iii)
(iv)
(v)
+
(ii)
(iv)
continued next page

6-10
M6-23. concluded
d.
Balance Sheet
Transaction
Cash
Asset
i. Sales on
account.
Noncash
+ Assets
+3,200,000
Accounts Receivable
ii. Bad debt

expense.
iv. Reinstate
account
previously
written off.
Collect
reinstated
account.
+12,000
Cash
v. Collect cash
on sales. +2,926,000
Cash
Liabil=
ities
Income Statement
+
Contrib.
Capital
=
+42,000
Allowance for
Uncollectible
Accounts
-39,000
Accounts Receivable
-39,000
Allowance for
Uncollectible
Accounts
+12,000
Accounts Receivable
+12,000
Allowance for
Uncollectible
Accounts
iii. Write-off of
uncollectible
accounts.
Contra
Assets
Earned
+
Capital
+3,200,000
Retained
Earnings
-42,000
Retained
Earnings
-12,000
Accounts Receivable
-2,926,000
Accounts Receivable
Revenues
- Expenses = Net Income
+3,200,000
Sales
Revenue
= +3,200,000
+42,000
Bad Debt
Expense
-42,000
M6-24. (20 minutes)

a.
Fiscal Year
2012
2013
2014
20150
Revenue
48,000
55,000
62,000
62,000
Revenue Growth
14.6%
12.7%
0.0%
b.
Fiscal
Year Revenue
2012
48,000
2013
55,000
2014
62,000
2015
62,000
Unearned
Revenue Liability
(end of year)
20,000
24,000
26,000
25,000
Customer Purchases =
Revenue + Change in Unearned
Revenue Liability
Growth in
Customer
Purchases
55,000 + 4,000 = 59,000

62,000 + 2,000 = 64,000
62,000 - 1,000 = 61,000
8.5%
-4.7%
continued next page

6-11
M6-24. concluded
c. In both fiscal year 2014 and 2015, the growth in customer purchases is lower than
the growth in reported revenues. The practice of deferring revenue recognition
implies that reported revenues in a given period are the result of customer
purchases over many periods, resulting in a smoothing of revenues. In the case of
Finn Publishing, revenues in any given year are the result of newsstand and
bookstore purchases during that year, plus part of the subscriptions from that year,
plus part of the subscriptions from the previous year. That means that growth in
annual revenues is a composite of growth in customer purchases over an even
longer period of time.
For 2014 and 2015, Finns growth in revenues exceeds the growth in customer
purchases because the revenues are still reflecting growth from prior periods.
Purchases are a leading indicator of revenues, and thus, calculating customer
purchase behavior can be useful in forecasting future revenue and identifying
changes in customers attitudes about a companys current offerings.
M6-25. (15 minutes)
This question is based on an actual situation, in which the accounting rules were
influencing the product decisions. The rules for revenue deferral when there are
multiple deliverables deterred the company from providing enhancements and upgrades
that were available. If Commtechs customers (the wireless companies) had been
willing to pay for the upgrades to its customers phones, that would have been allowed.
(Its not clear what the wireless companies incentives would be, because they may
want to encourage users to purchase new phones with a new service contract rather
than improving their existing phones.)
The question can generate a discussion about whether accounting should drive
decisions. Whether it should or not, it does, so the question should evolve into what top
management should do about this type of situation. Does the situation described in the
problem require some managerial action, or not. Is the company foregoing sales
because of its accounting? Within Commtech, the finance staff was skeptical of
marketings predictions that the upgrades and enhancements would increase the sales
of existing phone models. If the upgrades and enhancements are delivered, Commtech
will have to change its accounting for revenue, with a resulting decrease in near-term
profitability. How might the company communicate that change in a way that the
investing public will understand as a net benefit to the company?

6-12
EXERCISES
E6-26. (20 minutes)
Company
The Limited
Boeing
Corporation
SUPERVALU
MTV
Real estate
developer
Wells Fargo
Harley-Davidson
Time-Warner
Revenue Recognition
estimated (or the right of return period has expired).
Revenue is recognized under long-term contracts under the
percentage-of-completion method.
When merchandise is given to the customer and cash is received.
When the content is aired by the TV stations.
When title to the houses is transferred to the buyers.
Interest is earned by the passage of time. Each period, Wells Fargo
accrues income on each of its loans and establishes an account
receivable on its balance sheet.
When title to the motorcycles is transferred to the buyer. Harley will
also set up a reserve for anticipated warranty costs and recognize
the expected warranty cost expense when it recognizes the sales
revenue.
When the magazines are sent to subscribers.
E6-27. (20 minutes)

Company
Real Money
Oracle
Intuit
Computer game
developer
Revenue Recognition
Recognize revenue ratably over the period of time that customers
can access its Web site, not when the cash is received. The
recognition of revenue is dependent upon Real Money providing
updates.
The fee to purchase the right to use the software can be recorded
as revenue when the software is installed, unless that fee includes
future deliverables like upgrades and support. (If such post-sale
services are included in the fee, some portion must be deferred and
recognized over the appropriate period.) Service revenue can only
be recognized ratably over the period of time covered by the service
contract.
Recognize revenue when the software is sent to customers. The
company must estimate potential warranty claims and establish a
reserve for them when revenue is recorded.
Record revenue after the 10-day right of return period has elapsed.

6-13
E6-28. (20 minutes)

a. Percentage-of-Completion Method
($ millions)
Year
Costs
incurred
Percent of
total
expected
costs
Revenue recognized
(percentage of costs
incurred total
contract amount)
b. Completed Contract
Income
(revenue
costs
incurred)
Revenue
recognized
Income
2013
$100
25%
$125
$ 25
2014
300
75%
375
75
500
100
$500
$100
$500
$100
$400
c. The percentage-of-completion method normally provides a reasonable estimate of

the revenues, expenses, and income earned for each period based on the amount of
work completed. A key assumption underlying the use of this method is that the
contract price is fixed and it is possible to obtain reliable estimates of expected costs
and costs to date. When such estimates are not available, the completed contract
method should be used.
The percentage-of-completion method is acceptable under GAAP for a variety of
contracts spanning more than one accounting period, such as in the consulting and
transportation industries.
E6-29. (20 minutes)
a.
($ millions)
Year
2014
Costs
incurred
$15
Percentage-of-Completion Method
Percent of
Revenue recognized
total
Income
(percentage of costs
expected
(revenue
costs
costs
incurred total
(rounded)
contract amount)
incurred)
18%
$ 21.6
$ 6.6
($15/$85)
Completed Contract
Revenue
recognized
$ 0
Income
$ 0
2015
40
47%
($40/$85)
56.4
16.4
2016
30
35%
($30/$85)
42.0
12.0
120
35
$120.0
$35.0
$120
$ 35
$85
b. The percentage-of-completion method provides a good estimate of the revenue and

income earned in each period. This method is also acceptable under GAAP for
contracts spanning more than one accounting period. Recognition of revenue and
income is not affected by the cash received, but the percentage-of-completion
method more closely approximates cash flows than the completed contract method.

6-14
E6-30. (15 minutes)

a. Multiple element arrangements are sales transactions in which two or more
deliverables are bundled together and sold for one price. The revenue should be
recognized on each deliverable element when it is earned. This involves first
assigning a portion of the sales revenue to each element and then recognizing each
portion of the revenue only when that element has been delivered to the customer.
b. The total revenue for the bundle is $190. However the Kindle, if sold alone sells for
$170 and the wireless and upgrades sell for $30, which brings the total value to
$200. Thus, the Kindle device represents 85% of the total value of the bundle
($170/$200). Amazon should recognize $161.50 at the time of the sale (85% of the
$190 sale price) and defer the remaining $28.50.
c.
Transaction
To record bundled sale
transaction
Cash
Asset
Balance Sheet
Noncash
Contrib.
+
= Liabil-ities +
+
Assets
Capital
+190
=
+28.50
Unearned
revenue
Cash (+A)
Sales revenue (+R, +SE)
Unearned revenue (+L)
Income Statement
Earned
Capital
+161.50
Retained
Earnings
Revenues - Expenses =
+161.50
Sales
revenue
Net
Income
+161.50
190.00
161.50
28.50
E6-31. (15 minutes)

a. 2010: 4,674 + 497 x (1-.35) = 4,997
2011: 6,029 + 514 x (1-.35) = 6,363
b. 2010: 4,997 / 97,761 = .0511 or 5.11%
2011: 6,363 / 106,540 = .0597 or 5.97%
c. 6,363 / [(143,844 - 23,571 + 131,487 - 21,191) / 2] = .0552 or 5.52%

6-15
E6-32. (15 minutes)

In none of these cases should Simpyl Technologies recognize revenue. Each of the
four settings touches on one of the four conditions for revenue recognition listed by the
SEC. In part a, persuasive evidence of an exchange agreement does not yet exist,
because the companys policies have defined a contract with authorized signatures to
constitute persuasive evidence. In part b, delivery has not occurred. The product has
been shipped, but not to the customer and not with the specified customizations that are
required by the customer. In part c, the price is not yet fixed or determinable, because
the negotiations over volume discounts have not been concluded. Finally, the
distributor in part d does not have the means to pay for the items delivered, so
collectibility cannot be reasonably assured (until the distributor sells the product to an
end customer). The delivery should be viewed as a consignment arrangement, in which
Simpyl recognizes revenue when the distributor sells the items to a third party.
This problem is based on the restatements of Symbol Technologies, Inc.s 10-K filing for
fiscal year 2002, in which they detail the errors and irregularities in financial statements
dating back to 1998. Symbol had made accounting entries that violated each of the
SECs four criteria for revenue recognition. An article by Steve Lohr describing the
incoming CEOs experiences at Symbol Technologies can be found in the New York
Times, June 21, 2004. The title of the article is Day 2: I Learn the Books are Cooked.
(Motorola, Inc., acquired Symbol Technologies in January 2007 for a price of $3.9
billion.)
E6-33. (20 minutes)
a. Prior to the aging of accounts, the balance in the Allowance for Uncollectible
Accounts would be a credit of $520 (the opening balance of $4,350 less the amounts
written off of $3,830).
2013 bad debt expense computation
$250,000 0.5%
$ 90,000 1%
20,000 2%
11,000 5%
6,000 10%
4,000 25%
Less: Unused balance before adjustment
Bad debt expense for 2013
=
=
=
=
=
=
$1,250
900
400
550
600
1,000
4,700
520
$4,180
continued next page

6-16
E6-33. concluded
b. Accounts receivable, net = $381,000 - $4,700 = $376,300
Reported in the balance sheet as follows:
Accounts receivable, net of $4,700 in allowances ...................................
$376,300
c.
+
(a)

4,180
- Allowance for Uncollectible Accounts (XA) +

4,350
Balance
Write-offs
3,830
4,180
(a)
4,700
Balance
E6-34. (25 minutes)

a. Allowance for doubtful accounts (-XA)
Provision for doubtful accounts (+E,-SE)
Allowance for doubtful accounts (+XA)
70
70
9
9
The provision for doubtful accounts (bad debt expense) has a credit entry that has
the effect of decreasing Ethan Allens reported income by $9 thousand for the year.
The write-off of $70 thousand of uncollectible accounts has no effect on income.
b.
2012
14,919
1,250
2011
15,036
1,171
Gross receivables (net plus allowance)
$16,169
$16,207
Allowance as a % of gross receivables
7.7%
7.2%
Accounts receivable, net

Allowance for doubtful accounts
c. $729,373 / [($14,919 + $15,036) / 2] = 48.7 times. The very fast ART is probably
due to the custom furniture aspect of Ethan Allens business. Many of their products
are not produced until a customer places an order and payment occurs upon
delivery or very soon thereafter.
d. $729,373 + ($65,465 - $62,649) ($14,919 - $15,036) $9 = $723,297.

6-17
E6-35. (15 minutes)

Accounts receivable
Less Allowance for uncollectible accounts
$138,100
10,384
$127,716
Computations
Accounts
Receivable
Beginning balance
Sales
Collections
Write-offs ($3,600 + $2,400 +$900)
Provision for uncollectibles ($1,173,000
0.8%)
Allowance for
Uncollectible Accounts
$ 122,000
1,173,000
(1,150,000)
(6,900)
_________
$ 138,100
$ 7,900
(6,900)
9,384
$ 10,384
E6-36. (20 minutes)

a. Aging schedule at December 31, 2013
Current $304,000 1% =
060 days past due
44,000 5% =
61180 days past due 18,000 15% =
Over 180 days past due 9,000 40% =
Amount required
Balance of allowance
Provision
b. Current Assets
Accounts receivable
Less: Allowance for uncollectible accounts
$ 3,040
2,200
2,700
3,600
11,540
4,200
$ 7,340 = 2010 bad debt expense
$375,000
11,540
$363,460
c.
+
(a)

7,340
- Allowance for Uncollectible Accounts (XA) +

4,200
Balance
7,340
(a)
11,540
Balance

6-18
E6-37. (30 minutes)

a.
Year
2012
2013
2014
Total
Sales
$ 751,000
876,000
972,000
$2,599,000
Collections
$ 733,000
864,000
938,000
$2,535,000
Accounts Written Off

$ 5,300
5,800
6,500
$17,600
Accounts Receivable at the end of 2014 is $46,400, computed as:

($2,599,000 - $2,535,000 - $17,600).
Bad Debts Expense is:
2012
2013
2014
2012-2014
$ 7,510
8,760
9,720
$25,990
computed as 1%
computed as 1%
computed as 1%
computed as 1%
$751,000
$876,000
$972,000
$2,599,000
Allowance for Uncollectible Accounts is $8,390 computed as:

$25,990 total bad debts expense less $17,600 in total write-offs.
b.
Beg Bal
Sales
2012 Bal
Sales
2013 Bal
Sales
2014 Bal
Accounts Receivable (A)

0
751,000
5,300
Write offs
733,000
Collections
12,700
876,000
5,800
Write offs
864,000
Collections
18,900
972,000
6,500
Write offs
938,000
Collections
46,400
Allowance for Uncollectibles (XA)

0
Beg Bal
Write offs
5,300
7,510 Bad debts exp.
Write offs
5,800
2,210
8,760
2012 Bal
Bad debts exp.
Write offs
6,500
5,170
9,720
2013 Bal
Bad debts exp.
8,390
2014 Bal
There isnt any indication that the 1% rate is incorrect. If the rate is too high, we
would expect the allowance to grow at a faster rate than receivables. If the rate is
too low, the opposite would occur. In this case, the allowance percentage of
receivables is 17%, 27% and 18% at the end of 2012, 2013 and 2014, respectively.
So, there is no clear direction that would indicate an inappropriate estimate.

6-19
E6-38. (20 minutes)

a.
Earnings
from
Operations
Personal Systems Group
End.
Assets
Beg.
Assets
Avg.
Assets
Return on
Capital
Employed
2,350
$ 15,781
$ 16,548
$16,164.5
14.5%
Services
5,149
40,614
41,989
41,301.5
12.5%
Imaging and Printing Group
3,973
11,939
12,514
12,226.5
32.5%
Enterprise Servers, Storage

and Network
3,026
17,539
18,262
17,900.5
16.9%
HP Software
698
21,028
9,979
15,503.5
4.5%
HP Financial Services
348
13,543
12,123
12,833.0
2.7%
b. The most profitable group seems to be the Imaging and Printing Group, which
represents HPs traditional strength. However, it is not growing very quickly (based
on sales percentage increases). The Enterprise Servers, Storage and Networking
Group and the Personal Systems Group (commercial and personal PCs,
workstations, etc.) also have good return on capital employed. The HP Software
Group has a low return on capital employed but that group appears to have had a
major investment in assets during the year, which can distort this measure,
depending on the timing of the capital expenditures.
c. Restructuring charges are reported above the line, as part of income from
continuing operations before income taxes. They are listed as a charge against
operating income in the income statement, and thus would reduce our calculation of
return on capital employed. Restructuring charges are nonrecurring, however, and
should be considered separately when evaluating profitability of a business
segment.

6-20
E6-39. (20 minutes)

a. Just like for-profit organizations, not-for-profit organizations cannot recognize
revenue until it has been earned. In the case of The Lyric Opera, it cannot
recognize the ticket revenue until the performances occur. (The Lyric does not issue
quarterly reports, so we cannot observe how much of the revenue has been earned
by six months through its fiscal year.)
b. This entry is simplified by the fact the fiscal year-end is after the end of the current
season and by assuming that all of The Lyrics deferred revenue relates to the
following season (and none to any years after the following season).
To record revenue for the fiscal year 2012 season:
Deferred ticket and other revenue (-L)
Cash or Accounts receivable (+A)
Ticket sales (+R, +NA)
12,711
12,319
25,030
(As a not-for-profit, The Lyric Opera does not have shareholders equity, but rather
net assets. Therefore, the recognition of revenue increases net assets (NA) on the
balance sheet.)
To record advance purchases for the fiscal year 2012 season:
Cash or Accounts receivable (+A)
12,638
Deferred ticket and other revenue (+L)
12,638
c. Its likely that the downturn in the economy caused some subscribers not to renew
(or to wait until after April 30 to renew) in 2009 and it would appear that three years
later, the advanced ticket sales have not recovered from the 2009 decline. Its
possible that the decline in advance purchases is a statement about the opera
selections. However, the loyal subscriber base (and the desire to keep ones
assigned seating) makes the economy a more likely cause.
d. The Lyric Opera usually operates at close to seating capacity. And, in a typical year,
approximately more than one-half of its seats are sold by the April 30th preceding
the season. So, the quantity of unsold seats will affect The Lyrics marketing efforts
for subscribers who have not yet renewed, outreach to new potential subscribers
and promotions for individual tickets which go on sale shortly before the season.
Those efforts can be scaled up or down depending on the experience with advance
sales.

6-21
E6-40. (20 minutes)

a. Membership fees are initially recorded as a liability (deferred membership fee
revenue) and recognized over a period of one year. Member rewards are similarly
deferred, but the offsetting debit is recorded as a reduction to sales revenue.
b.
Cash (+A)
Deferred membership fees (+L)
2.203
Deferred membership fees (-L)

Membership fee revenue (+R, +SE)
2,075
2,203
2,075
c.
Sales revenue (-R, -SE)
Accrued member rewards (+L)
900
Accrued member rewards (-L)

Merchandise inventory (-A)*
841
900
841
*The Costco note does not say how the membership rewards are redeemed. The
entry above assumes that the rewards are redeemed for merchandise, as is the
case in many such situations. If, instead, the rewards are redeemed for cash, the
credit entry would be to cash and not merchandise inventory.

6-22
PROBLEMS
P6-41.A (20 minutes)
a. The following items might be considered to be operating:
1. Net Sales, cost of sales, R&D expenses, and SG&A expenses are typically
designated as operating.
2. Amortization of intangible assets and restructuring charges would usually be
considered to be operating under the assumptions that the acquisition that gave
rise to the intangible assets is included as part of operations, and that the
restructuring did not involve discontinuation of distinct parts of the business.
3. The asbestos-related credit, restructuring charges and goodwill impairment
losses would be considered to be operating since they are related to Dow
Chemicals operating activities. (These items are both operating and
nonrecurring see b.)
4. Purchased in-process research and development charges and Acquisitionrelated expenses are caused by the companys investing activities, and would be
considered nonoperating.
5. Equity in earnings of nonconsolidated affiliates would be considered operating
under the assumption that the affiliates are related to Dows core operations,
which is typically the case.
6. Sundry income would generally be considered nonoperating in the absence of a
footnote clearly indicating its connection to the operating activities of the
company.
7. Interest income is considered nonoperating
8. Interest expense and amortization of debt discount is nonoperating.
continued next page

6-23
P6-41.A concluded
b. The following items might be identified as nonrecurring items:
1. Purchased in-process research and development and Acquisition-related
expenses these are one-time (e.g., nonrecurring) costs incurred in connection
with the acquisition of another company and can properly be expensed under
GAAP.
2. Asbestos-related credit this is a reversal of a previous accrual for litigation in
connection with asbestos-related lawsuits. GAAP requires such an accrual if the
loss is probable and can be reasonably estimated. Since it is a one-time
occurrence, it can be considered to be a transitory item.
3. Goodwill impairment losses this loss results from changes in expectations of
the performance of past acquisitions. It would be considered operating, but
transitory.
4. Restructuring charges these relate to the companys actions due to the
economic decline in 2008 and the expectations that future performance will not
meet prior expectations. Restructuring costs are considered special items,
meaning that individually they are transitory, but as a category, they happen
frequently.
5. The charge for discontinued operations would be considered nonrecurring.
We would need to examine prior years income statements to discern if the other
categories in Dows income statement are to be considered transitory.
c. 2010: $2,321 + ($1,473 + $143 - $125 - $37) x (1-.35) = $3,266.1
$3,266.1 / $53,674 = 6.1%
2009: $676 + ($1,571 + $7 + $166 - $891 - $39) x (1-.35) = $1,205.1
$1,205.1 / $44,875 = 2.7%

6-24
P6-42. (20 minutes)

a. 1. Percentage-of-completion based on number of employees trained
Year
Number of employees trained
Revenues (# trained x $1,200)
Expenses (# trained x $437.50)*
Gross Profit
2013
125
$150,000.00
54,687.50
$95,312.50
2014
200
$240,000.00
87,500.00
$152,500.00
2015
75
$90,000.00
32,812.50
$57,187.50
Total
400
$480,000.00
175,000.00
$305,000.00
* $437.50 = $175,000 / 400

2. Percentage-of-completion based on costs incurred
Year
Costs incurred
Percentage completed
Revenues (% x $480,000)
Expenses
Gross Profit
2013
$60,000
34.29%
$164,571.43
60,000.00
$104,571.43
2014
$75,000
42.86%
$205,714.29
75,000.00
$130,714.29
2015
$40,000
22.86%
$109,714.29
40,000.00
$69,714.29
Total
$175,000
100.00%
$480,000.00
175,000.00
$305,000.00
2013
$0
0
$0
2014
$0
0
$0
2015
$480,000
175,000
$305,000
Total
$480,000
175,000
$305,000
3. Completed contract method

Year
Revenues
Expenses
Gross Profit
b. Assuming that (1) Philbrick has a noncancelable contract that specifies the price at
$1,200 per employee, (2) the number of employees and the costs of training can be
estimated with a reasonable degree of accuracy, and (3) Elliot Company is a
reasonable credit risk, the best method would be to recognize revenues using the
percentage-of-completion method based on the number of employees trained. The
completed contract method should only be used if either of the first two conditions is
not met.

6-25
P6-43. (15 minutes)

a. Management would have an incentive to shift $1 million of income from the current
period into next. This might be accomplished by delaying revenue recognition or
accelerating expenses. This would increase their bonus by $100,000 next year
without decreasing the current bonus.
b. Management would have an incentive to shift $3 million of income from next year
into income reported this year. This would increase the current year bonus by
$300,000 without reducing next years bonus.
c. Management would have an incentive to shift income from the current year into next
year. Even though this would reduce earnings this year, earnings are already so low
that management does not expect to receive a bonus. Shifting earnings into a future
period increases the bonus in that period.
d. These incentives for earnings management would be mitigated if the kinks in the
bonus formula were removed. Alternatively, some companies pay bonuses based
on a three-year moving average of earnings to minimize the impact of earnings
management.
This problem can provide an opportunity to discuss the slippery slope of earnings
management. For example, managements optimism about next year in part b may not
turn out to be warranted. Suppose next years natural earnings turns out to be $20
million instead of $24 million. Managements action in the first year will have reduced
next years $20 million to $17 million, and earnings management would again be
required to meet the target. And, if meeting the target in one year causes the next
years target to increase, things can get out of control very quickly.

6-26
P6-44. (40 minutes)

(all in $ millions)
a. Net receivables as of January 28, 2012 were $2,033.

Net receivables as of January 29, 2011 were $2,026.
b.
Bad debts expense (+E, -SE)
Allowance for credit losses (+XA)
101
Allowance for credit losses (-XA)

153
Cash (+A)
Allowance for credit losses (+XA)
101
153
22
22
c. Estimated credit losses to gross credit card receivables are:

5.5% ($115/$2,074) in 2011
6.9% ($145/$2,103) in 2010
The decrease in the allowance for credit losses as a percent of credit card
receivables is reflected in the aging of Nordstroms receivables. The percentage of
receivables that are 30 or more days past due has decreased from 3.0% on January
29, 2011 to 2.6% at January 28, 2012. This could be caused by (1) a general
improvement in economic conditions (fewer customers are late or defaulting on their
obligations), (2) tighter credit policies (credit is denied to risky customers) and/or (3)
more rigorous collection practices.
d. The receivables turnover rate is $10,497 / [($2,033 + $2,026)/2] = 5.17
Days sales in accounts receivable is $365/5.17 = 70.6 days

6-27
P6-45. (25 minutes)

For the instructor:
This problem covers the accounting for product returns, which is not covered in the
chapter. The description of The Gaps practices should allow students to answer parts
a and b. Part c is a bit of a stretch, because it requires that the allowance for returns,
which is in gross profit terms, be grossed-up to revenue terms.
a. Beginning balance + $634 million - $635 million = $21 million, so Beginning balance
= $22 million.
b. Sale and expected returns:
(1) Record revenue.
Cash (+A)
Revenue (+R,+SE)
(2) Record COGS.
Cost of goods sold (+E,-SE)
Inventory (-A)
(3) Recognize
Revenue contra, returns (+XR, -SE)
expected returns.
COGS contra, returns (+XE, +SE)
Sales returns allowance (+L)
5,000
5,000
3,000
3,000
500
300
200
The sales returns allowance is equal to Gross sales ($5,000) times the probability of
return (10%) times the gross profit margin (40%), or $200. For these ten units, the
cost of goods was $300.
Returns:
(4) Process return
transactions.
Inventory (+A)
Sales returns allowance (-L)
Cash (-A)
300
200
500
At the conclusion of this transaction, the customers have their cash, the inventory
costs have been adjusted to include the returned items, and the sales returns
allowance liability has a balance of zero because the actual returns coincided with
the expected returns.
continued next page

6-28
P6-45. concluded
c. The Gaps reported gross profit is 36.2% of its net sales ($5,274million/$14,549
million). So, if The Gap expects returns of items with gross profit of $634 million,
those items must have had sales prices of $1,751 million ($634 million/0.362) and
cost of goods sold of $1,117 million ($1,751 million - $634 million). The entry that
would have reflected The Gaps accounting for these expected returns is the
following:
Recognize expected
returns.
Revenue contra, returns (+XR, -SE)

COGS contra, returns (+XE, +SE)
Sales returns allowance (+L)
1,751
1,117
634
The Gaps gross sales revenue would have been $16,300 million ($14,549 million +
$1,751 million), and its expected returns as a percentage of sales would be 10.7%
($1,751 million/$16,300 million).
The size of the allowance for 2011 ($634 million) relative to the end-of-year return
liability ($21 million) means that the vast majority of these product returns occurred
during the 2011 fiscal year, so it is more a reflection of actual experience than of
managements estimates of future events.
d. Under these circumstances, The Gap doesnt have to worry about accounting for
expected returns, because it has not satisfied the requirements for revenue
recognition. If the amount to be received (or in this case, the amount to be kept) is
not yet fixed or determinable, the revenue should not be recognized until it is.
P6-46. (25 minutes)

a.
Fiscal year
ending March 31
2005
2006
2007
2008
2009
2010
2011
2012
Net revenue
3,129
2,951
3,091
3,665
4,212
3,654
3,589
4,143
Growth
rate
-5.7%
4.7%
18.6%
14.9%
-13.2%
-1.8%
15.4%
continued next page

6-29
P6-46. concluded
b.
Fiscal year
ending
March 31
2005
2006
2007
2008
2009
2010
2011
2012
Net
revenue
3,129
2,951
3,091
3,665
4,212
3,654
3,589
4,143
Deferred net
revenue
(liability)
0
9
32
387
261
766
1,005
1,048
Purchases = Net
revenue + Change in
Deferred net revenue
3,129
2,960
3,114
4,020
4,086
4,159
3,828
4,186
Growth
rate
-5.4%
5.2%
29.1%
1.6%
1.8%
-8.0%
9.4%
When companies defer revenue, there is a lag between customers purchases and
the recognition of revenue on the income statement. When purchases grow
significantly (as they did in 2008) revenues grow in subsequent years. When
purchases fall off, we would expect revenues to fall off in subsequent years (see
2009 and 2010). 2012 appears to be an anomaly. Purchases declined in 2011 but
revenue grew significantly in 2012.
c. If customer purchases in 2012 are a leading indicator of revenue in 2013, we would
predict a substantial revenue growth for 2013.

6-30
CASES and PROJECTS

C6-47. (40 minutes)
a.
Cash (+A)
Sales revenue (+R, +SE)
Payable to merchant partners (+L)
120,000
60,000
60,000
b. Revenues were previously recorded at the full amount of the Groupon sale
($120,000 in a above) and the amount payable to the merchant partner was
recorded as an expense. This was changed in 2011 to record the sale of the
Groupon, net of the amount due to the merchant partner as revenue. The effect of
this change was that revenues and expenses were reduced by the amount paid to
the merchant partner. This did not alter the bottom line as net income does not
change. The NOPM ratio would increase due to the decrease in revenue without a
corresponding decrease in operating income.
c.
Sales revenue contra (-R, -SE)
Allowance for returns (+L)
6,000
Allowance for returns (-L)

Payable to merchant partners (-L)
Cash (-A)
6,000
6,000
Cost of revenue (+E, -SE)

Allowance for returns (+L)
6,000
Allowance for returns (-L)

Cash (-A)
6,000
6,000
12,000
d.
6,000
6,000
e. Groupon could wait to recognize revenue until the 60-day period to pay the
merchant partner has expired. By doing so, there would be no need to estimate
refunds that would involve reducing the payable or recovering a refund from the
merchant partner. Groupon would still need to estimate refunds for any cancelation
that might occur after the end of the 60-day period when the merchant partner has
been paid. This is when Groupons risk is greatest, since it cannot recover any part
of the refund from the merchant. However, by waiting 60 days before recognizing
the revenue (and estimating the refunds) Groupon would likely have a better idea
about the amount of refunds that will likely occur.

6-31
C6-48. (30 minutes)

a. When Dell sells other companies software products, it is often as part of a multipleelement sales agreement. For example, the customer may purchase hardware,
software, and customer support for one price. This is an example of a bundled sale.
Dell must allocate the sales price based on the relative fair market value of each
element. Revenue is recognized for each specific element when it is clear that the
element has been delivered and the revenue is earned.
There are at least two possibilities for earnings management here. First, Dell could
misallocate the sales price. By allocating more of the price to hardware and less to
software, Dell may be able to manage when earnings are reported. Second, Dell
may be aggressive in applying the earned and realizable criteria to each element,
thereby prematurely recognizing revenue.
From the information provided, it appears that Dell was recognizing revenue on
software resales at the time of sale. However, most software is not truly sold.
Instead, the customer purchases a license to use the software. As a result, Dell
should have deferred part of the revenue and recognized it ratably over the license
period.
b. Extended warranties are typically sold separately from other products. Therefore,
the revenue should be deferred and recognized ratably over the warranty contract
period. Dell employees were apparently recording revenue at the time of sale, or
were recognizing the revenue over a shorter time period than the contract period.
As a result, revenues and income were overstated.
c. It is common for managers to have performance targets based on revenues and
earnings. This provides an incentive for these employees to take actions to
accelerate revenue recognition when it appears that targets may not be met. On the
other hand, in periods when revenues and earnings exceed the targets, managers
may delay revenue recognition until a future period. In this way, they can store up
revenues and earnings to meet future targets.
The key to preventing this type of abuse is the periodic audit of divisional revenues
and earnings. In addition, businesses spend a large amount of resources trying to
design incentive compensation plans that do not encourage this type of abuse.

6-32
C6-49. (45 minutes)

a. 2011:
i. Bad debt expense (+E, -SE)
Allowance for doubtful accounts (+XA, -A)
ii.
Allowance for doubtful accounts (-XA, +A)

2012:
iii. Bad debt expense (+E, -SE)
Allowance for doubtful accounts (+XA, -A)
iv.
Allowance for doubtful accounts (-XA, +A)

13,989
13,989
1,206
1,206
2,111
2,111
14,903
14,903
- Allowance for Doubtful Accounts (XA) ($000) +

Balance
6,859
2010 Balance
Sales
13,989
(i)
(ii)
1,206
Balance
19,642
2011 Balance
2,111
(iii)
(iv)
14,903
6,850
2012 Balance
b. 2011: $19,642 / ($168,310 + $19,642 + $65,664) = 7.7%

2010: $6,850 / ($171,561 + $6,850 + $48,612) = 3.0%
The extra provision for the Borders account significantly increased Wileys allowance
account for 2011.
c. If sales returns are material in amount and can be estimated with a reasonable
degree of accuracy, they should be estimated just as bad debts are estimated.
Sales revenue is debited for the estimated returns while an allowance for returns is
credited. One important difference is that with sales returns (unlike bad debts) the
customer returns the product to the company and it is often returned to inventory.
Hence, the amount of allowance for returns is a net amount equal to the estimated
gross profit on expected returns.
continued next page

6-33
C6-49. concluded
d. To record estimated returns:
Sales revenue (est. sales returns) (-R, -SE)
Allowance for returns A/R (+XA)
112,948
112,948
Allowance for returns Inventory (+A)

Cost of sales (-E, +SE)
17,761
Allowance for returns royalties payable (+XL)

Royalty expense (-E, +SE)
12,286
17,761
12,286
To record actual returns:

Allowance for returns A/R (-XA, +A)
130,000
130,000
Inventory (+A)
Allowance for returns Inventory (-A)
20,000
Royalties payable (-L)

Allowance for returns Royalties payable (-XL)
13,963
20,000
13,963
The net amount reported in the allowance for returns consists of three separate
amounts one offsetting accounts receivable (a contra asset) an amount added to
inventory (an adjunct asset) and a third amount offsetting royalties payable (a contra
liability):
Allowance for returns A/R: $65,664 + $112,948 - $130,000 = $48,612
Allowance for returns Inventory: $9,485 + $17,761 - $20,000 = $7,246
Allowance for returns Royalties: $7,270 + $12,286 - $13,963 = $5,593
Note that $130,000 - $20,000 - $13,963 = $96,037, and $112,948 - $17,761 $12,286 = $82,901.
When these three accounts are combined, we get the net amount reported in the
allowance for returns each year.
e. Accounts receivable turnover: $1,782,742 / [($171,561 + $168,310)/2] = 10.5 times.
Average collection period: 365 / 10.5 = 34.8 days.

6-34

Reporting and Analyzing Revenues and Receivables: Learning Objectives - Coverage by Question

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Reporting and Analyzing Revenues and Receivables: Learning Objectives - Coverage by Question

Uploaded by

Copyright:

Available Formats

Chapter 6

Reporting and Analyzing Revenues

LO1 Describe and apply the criteria

LO2 Illustrate revenue and expense

LO3 Illustrate revenue and expense

LO4 Estimate and account for

Cambridge Business Publishers, 2014

Revenue must be realized or realizable and earned before it can be reported in

Financial statement analysis is usually conducted for purposes of forecasting

In order for an event to be classified as an extraordinary item, its occurrence

Cambridge Business Publishers, 2014

Financial Accounting, 4th Edition

Earnings management may be motivated by a desire to reach or exceed

Estimates are necessary in order to accurately measure and report income on

When analysts publish earnings forecasts, these forecasts become a

Cambridge Business Publishers, 2014

Cambridge Business Publishers, 2014

Financial Accounting, 4th Edition

M6-14. (20 minutes)

Solutions Manual, Chapter 6

M6-15. (15 minutes)

b. Completed contract method:

M6-17. (20 minutes)

Cambridge Business Publishers, 2014

Financial Accounting, 4th Edition

($79,800 x .6 + $79,800 x .25)

M6-18. (15 minutes)

+ Bad Debt Expense (E) 1,600

Cambridge Business Publishers, 2014

M6-19. (15 minutes)

M6-20. (20 minutes)

Accounts receivable (net) .............................................$6,361

Allowance for uncollectible accounts ............................

Gross accounts receivable ...........................................$6,504

Percentage of uncollectible accounts to gross

b. The decrease in the allowance for uncollectible accounts as a percentage of gross

Cambridge Business Publishers, 2014

Financial Accounting, 4th Edition

M6-21. (10 minutes)

$83,680 / [($6,068+$6,275)/2] = 13.6 times

$16,734 / [($1,675+$1,610)/2] = 10.2 times

Cambridge Business Publishers, 2014

M6-23. (20 minutes)

Accounts receivable (+A)

Bad debts expense (+E, -SE)

Allowance for uncollectible accounts (-XA, +A) .

Accounts receivable (+A)

The recovered receivable is reinstated, so that its payment may be properly

Cash (A) 12,000

Sales Revenue (R) +

Bad Debts Expense (E)

Cambridge Business Publishers, 2014

Financial Accounting, 4th Edition

ii. Bad debt

- Expenses = Net Income

M6-24. (20 minutes)

55,000 + 4,000 = 59,000

continued next page

Cambridge Business Publishers, 2014

Cambridge Business Publishers, 2014

Financial Accounting, 4th Edition

E6-27. (20 minutes)

Cambridge Business Publishers, 2014