CH 06 SM

CHAPTER 6: CASH, TEMPORARY INVESTMENTS, ACCOUNTS RECEIVABLE
and NOTES RECEIVABLE PROBLEM SOLUTIONS
Assessing Your Recall
6.1 Cash:
Probable Future Value – The probable future value in cash is the ability of
the cash to be exchanged for goods and services in the future.
Ownership – Ownership is evidenced by possession of currency and by the
right to control bank accounts.
Temporary Investments:
Probable Future Value The probable future value in temporary investments
is the cash payments that will be received from the investments in the
future. These payments take the form of dividends in the case of shares and
interest in the case of debt as well as the ultimate sales price of the securities
when they are sold.
Ownership – Ownership is evidenced by share or debt certificates although
sometimes these documents are not distributed to the owners but a record is
kept by the brokerage house that handles the investments for the company.
Account Receivable:
Probable Future Value – The probable future value in accounts receivable is
that they represent the right to receive cash at some (usually fixed) date in
the future. The cash, in turn, has value in the ability to be exchanged for
goods and services in the future.
Ownership – Ownership is evidenced by contracts either written or implied
between the buyer and the seller. Invoices and shipping documents usually
provide the necessary evidence of proof that a receivable exits.
Notes Receivable:
Probable Future Value – The probable future value in notes receivable is
that they represent the right to receive cash, either upon demand or at some
fixed date in the future. The cash, in turn, has value in the ability to be
exchanged for goods and services in the future.
Ownership – Ownership is evidenced by a promissory note, or written
contract between the maker and the payee.
6.2 The unitofmeasure assumption in accounting means that elements of the
financial statements are to be measured using a common unit. That unit in
Canada is the dollar. In most countries the unitofmeasure is the domestic
currency.
6.3 Purchasing power risk is present for cash because when cash is held during
periods of inflation the purchasing power of the dollar decreases. For
1
example, if $100 is held in cash during a year of a price increase of 10% the
$100 will buy 10% fewer goods and services at the end of the year, than at
the beginning. Inventory, on the other hand, is not fixed in terms of the
number of dollars that it represents. The value of the inventory can
fluctuate with changing prices. If $100 worth of inventory was held during a
year in which prices increased 10% it is possible that the price of the
inventory could be raised to $110 to compensate. There may be supply and
demand reasons why the price of inventory could not be raised to the full
$110. If this is so then the inventory may be subject to some purchasing
power risk but not to the same degree as cash.
6.4 At the end of every account period the accountant evaluates the cost and the
current market value of the temporary investments portfolio. The book value
of the portfolio at the end of the period must be the lower of the cost and
market value. After this determination is made the carrying value of the
portfolio (its cost less the current value in the valuation allowance account) is
adjusted upwards or downwards to reflect the proper value at the end of the
period. The adjustment is reported as an unrealized loss if the value of the
portfolio is written down and an unrealized recovery if the value is written
up.
6.5 The primary consideration in deciding if an investment should be classified
as current or noncurrent is management’s intention. If management intends
to hold the investment for more than one year, the investment should be
classified as noncurrent. Otherwise, the investment should be classified as
current as long as it can be sold.
6.6 The direct writeoff method recognizes bad debt expense (loss) in the period
in which the receivable is determined to be unrecoverable, not necessarily in
the period in which the original sale was made. This creates a matching
problem. The allowance method estimates and records the bad debt expense
in the period of the original sale. This method provides a proper matching of
the revenues and expenses (bad debt expense) from the sale and is the
method that is most consistent with GAAP. The direct writeoff method can
be used f the results of applying it are not materially different from the
results of applying the allowance method.
6.7 Two ratios that measure liquidity are the current ratio and the quick ratio.
Both compare current assets to current liabilities, with the current ratio
comparing total current assets and the quick ratio comparing total current
assets less inventories and prepaid expenses. Both provide information on
the ability of the company to pay its current liabilities, with the quick ratio
providing more conservative information.
2
6.8 The accounts receivable turnover ratio measures the “turnover” of the
accounts receivable in a year. This measures the average number of times
the total accounts receivable could have been collected in full during the
year. This ratio provides a measure of the efficiency of the collection of the
accounts receivable, with larger ratios indicating faster collections, on
average.
3
Applying Your Knowledge
6.9 a)
Comet Company
Bank Reconciliation
July 31, 20x2
Balance per bank statement $7,582.45
Add: Outstanding deposit 1,532.02
9,114.47
Less: Outstanding cheques
#466 $1,250.00
#467 520.00
#468 360.50
#470 1,350.75 3,481.25
Adjusted cash balance $5,633.22
Balance per general ledger $4,643.22
Add: Collection of note receivable 1,015.00
5,658.22
Less: July service charge 25.00
Adjusted cash balance $5,633.22
b) At July 31, Comet actually has $5,633.22 in its account.
c) SEBank service charges 25.00
ACash 25.00
ACash 1,015.00
ANote receivable 1,000.00
SEInterest revenue 15.00
6.10 a) deducted from cash balance
b b) deducted from cash balance
c c) deducted from cash balance
d) added to bank balance
e) not included in the bank reconciliation because both Walters and
the bank have recorded the transaction
f) deducted from cash balance
4
g) added to cash balance
h) not included in the bank reconciliation because both Walters and
the bank have recorded the transaction
i) deducted from the bank balance
j)
6.11
Peter Hayes
Bank Reconciliation

Balance per bank statement $1,280
Less: Outstanding cheques 432

Adjusted cash balance $ 848
Balance per cheque book $ 840
Add: automatic deposit 50
890
Less: error in recording cheque $18
NSF cheque 15 33
857
Less: service charge ($857 $848) 9
Adjusted cash balance $ 848
6.12 a) Investment Cost Market

Green Company $2,500 $2,600
White Company 8,000 6,400
$10,500 $9,000
The investments will be reported at $9,000, the lower of cost and
market.
b) On the balance sheet, an account titled valuation allowance for
temporary investments appears as a $1,500 ($10,500 $9,000) offset to
temporary investments. On the income statement, an unrealized loss
on the valuation of temporary investments is recognized, also in the
amount of $1,500.
6.13 a)
Income from operations $45,000
Add: dividend income 9001
Deduct: unrealized loss on temporary
5
investments (1,500)
Net income $44,400
1
(100 x $2) + (200 x $3.50) = $900
b)
Return on investments = $900 / $10,500 = 8.57%
Duggan Company did not attain its goal of attaining a 10% annual
return on its investments.
6.14 a) No journal entries are required for June 30th or December 31st
because on both occasions, the market value of the MetaSolid shares
were higher than the original cost. Note: brokerage fees have been
added to (or subtracted from) the cost of the shares purchased (or sold).
March 25 AInvestment in MetaSolid 50,500

ACash 50,500
August 15 ADividends receivable 1,250

SEDividend income 1,250
October 25 ACash 1,250

ADividends receivable 1,250
February 18 ACash 12,175

AInvestment in MetaSolid 10,100
SEGain on sale of temporary 2,075
investments
b) At December 31, 20x1, the temporary investments would appear on
the balance sheet at their original cost of $50,500 (2500 x $20.20
per share)
6.15 a)
Dec 31, SEUnrealized loss on valuation of temporary 40,000
20x1 investments
XAValuation allowance for temporary 40,000
Investments
Dec 31, XAValuation allowance for temporary 20,000
6
20x2 investments
SERecovery of unrealized loss on valuation 20,000
of temporary investments
Dec 31, XAValuation allowance for temporary 20,000

20x3 investments
SERecovery of unrealized loss on valuation 20,000
of temporary investments
Dec 31, SEUnrealized loss on valuation of temporary 5,000

20x4 investments
XAValuation allowance for temporary 5,000
investments
b)
Dec 31, 20x1 $210,000
20x2 280,000
20x3 320,000
20x4 345,000
6.16 a) Investment Cost Market

Jack $22,500 $20,500
Queen 15,000 19,000
King 50,000 47,500
$87,500 $87,000
Aggregate cost $87,500
Aggregate market value 87,000
Unrealized loss $ 500
At December 31, 2000, the net investments would be reported at the
market value of $87,000.
b) On the balance sheet, an account titled valuation allowance for
temporary investments appears as a $500 offset to temporary
investments. On the income statement, an unrealized loss on the
valuation of temporary investments is recognized, also in the amount
of $500.
7
6.17 a)
Income from operations $640,000
Add: dividend income 12,0001
Deduct: unrealized loss on temporary investments (500)
Net Income $651,500
1
(500 x $5) + (500 x $7) + (500 x $12) = $12,000
b)
Return on investments = $12,000 / $87,500 = 13.71%
Upper Company did not attain its goal of attaining a 20% annual
return on its investments.
8
6.18 a)
Mar. 13, 20x1 ATemporary Investments 35,000
ACash 35,000
June 24, 20x1 ATemporary Investments 65,000

ACash 65,000
Dec 31, 20x1 SEUnrealized loss on valuation of 2,000

temporary investments
XAValuation allowance for 2,000
May 27, 20x2 ACash 70,000

ATemporary investments 65,000
SERealized gain on sale of 5,000
Oct. 8, 20x2 ATemporary investments 95,000

ACash 95,000
Dec 31, 20x2 XAValuation allowance for 2,000

SERecovery of unrealized loss on 2,000
valuation of temporary
investments
Aug 3, 20x3 ATemporary investments 100,000

ACash 100,000
June 30, 20x3 ACash 105,000

SERealized gain on sale of 5,000
Dec. 31, 20x3 SEUnrealized loss on valuation of 7,000

XAValuation allowance for 7,000

9
b)
Income Statement
20x1 20x2 20x3
Unrealized loss on valuation of T.I. (2,000) 0 (7,000)
Recovery of unrealized loss on 2,000
valuation of T.I.
Realized gain (loss) on sale of 5,000 5,000
investments
Effect on Net Income of Temporary
Investments (2,000) 7,000 (2,000)
Balance Sheet
20x1 20x2 20x3
Temporary investments (at cost) 100,000 130,000 130,000
Less: valuation allowance (2,000) 0 (7,000)
Temporary investments (LCM)
98,000 130,000 123,000
10
6.19 Faun & Faun Inc.
a)
Selling Price $50,000
Add: Loss on Sale 5,650
Cost Price $55,650
Journal Entry for Sales
ACash 50,000
SELoss on Sale of temporary investments 5,650
b)
Temporary Investments:
Ending Balance (at cost) $313,000
Less: Purchases during 20x2 85,000
228,000
Add: Sales during 20x2 55,650
Opening Balance (at cost) $283,650
c) Valuation Allowance for Temporary
Ending Balance (20x2) 13,000
Less: Unrealized loss on valuation 3,850
Beginning balance 9,150
11
6.20 a)
20x1 SEBad debt expense 3,000
XAAllowance for doubtful accounts 3,000
(50,000 / 0.25) x 0.015
20x2 XAAllowance for doubtful accounts 500

AAccounts receivable 500
XAAllowance for doubtful accounts 500
ACash 500
b)
Accounts receivable in Balance Sheet, December 31, 20x1
Accounts receivable $50,000
Allowance for doubtful accounts (3,000)
$47,000
6.21 a)
Allowance for doubtful accounts = $22,500
03 x 750,000
Less: amount writtenoff (12,000)
Allowance for doubtful accounts $10,500
b)
Less: allowance for doubtful accounts (10,500)
$59,500
c) The balance in the allowance for doubtful accounts might not be
reasonable if the collectibility of Dundee’s receivables is not reflective of the
industry. This could occur if Dundee’s customers are less reliable, or if
Dundee’s policies for checking and extending credit are more lenient.
Furthermore, setting up an allowance for doubtful accounts based on a
percentage of credit sales is unlikely to result in a close estimate of the
accounts that will actually be uncollectible. Instead, basing the allowance for
doubtful accounts upon specific customer balances that are overdue (i.e. an
aging schedule) might results in a better valuation of accounts receivable.
12
6.22 a)
SEBad debt expense 172,000
21,500,000 x 0.8 x 0.01
b)
Accounts receivable $1,348,000
Accounts receivable, net $1,165,000
c) Bad debt expense for year ending October 31, 20x1: $172,000
6.23 a)
$1,250,000 x .025 = $31,250
b)
Allowance for doubtful accounts
18,500 2% x 925,000
Write off 20x1 5,650
12,850 Balance 20x1
Write off 20x2 19,200 31,250 20x2 allowance
24,900 Balance 20x2
c)
Accounts receivable, December 31, 20x2 $138,000
Accounts receivable, net $113,100
13
6.24 a)
March 12 ANote receivable 10,000
AAccounts receivable 10,000
August 31 AInterest receivable 550

SEInterest revenue 550
$10,000 x .11 x 6/12 = $550
b)
ACash 10,825
ANote receivable 10,000
AInterest receivable 550
$10,000 x .11 x 3/12 = $275
14
6.25 a)
Feb. 1 ANote receivable 18,040.00
SESales 18,040.00
June 30 AInterest receivable 1,052.33

SEInterest revenue 1,052.33
$18,040 x .14 . 5/12 = $1,052.33
Aug. 1 ACash 19,302.80

ANote receivable 18,040.00
AInterest receivable 1,052.33
SEInterest revenue 210.47
$18,040 x .14 x 1/12 = $210.47
b)
June 30, 2000 Balance sheet
Note receivable $18,040
Interest receivable 1,052
June 30, 2000 Income statement
Sales $18,040
Interest revenue 1,052
(These amounts have been shown without the cents to simulate the
rounding that occurs on financial statements.)
6.26 a)
Interest earned at
December 31, 2000 = Principal x rate x time
= $2,800 x 9% x 3/12
= $63
Interest earned at
time note is due = Principal x rate x time
= $2,800 x 9% x 4/12
= $84
b)
Dec. 31, 2000 AInterest receivable 63
15
Jan. 30, 2001 ACash 2,884
ANote receivable 2,800
AInterest receivable 63

6.27 a)
Current ratio = 25,000 + 70,000 + 10,000 + 210,000 + 30,000
45,000 + 20,000 + 25,000 + 6,000 + 60,000
= 345,000
156,000
= 2.21
Quick ratio = 345,000 210,000 30,000
156,000
= 0.67
b) The company has been successful in achieving its desired results in
terms of the current ratio, but it did not meet its target of 1.0 for
the quick ratio.
c) The company could improve its current position through reducing
its substantial investment in inventory, so long as the resulting
effect on sales is not severe. Reducing the inventory levels would
free up some cash, and thus enable the company to better meet its
current obligations. In addition, Liquid Company could attempt to
reduce its current levels of shortterm liabilities, which would also
improve its current position.
16
6.28 a)
Faraday Products Company
Balance Sheet
At Year end
Current Assets
Cash $44,000
Accounts receivable 62,000
Inventory 80,000
Tax refund receivable 3,000
Prepaid insurance 5,000
Total current assets 194,000
Noncurrent Assets
Land 45,000
Building and equipment $230,000
Less: accumulated amortization 90,000 140,000
Trademarks 35,000
Total noncurrent assets 220,000
Total Assets $414,000
Current Liabilities
Accounts payable $47,000
Wages payable 20,000
Taxes payable 16,000
Unearned service revenue 26,000
Total current liabilities 109,000
Noncurrent Liabilities
Bonds payable 125,000
Total Liabilities 234,000
Shareholders’ Equity
Common shares 120,000
Retained earnings 60,000
Total shareholders’ equity 180,000
Total Liabilities and Shareholders’ Equity $414,000
17
b) Working capital = $194,000 $109,000 = $85,000
d c) Current ratio, beginning of period = $120,000 / $55,000 = 2.18
Current ratio, end of period = $194,000 / $109,000 = 1.78
The current ratio has declined during the period, since the current assets
represent a smaller multiple of the current liabilities at the end of the
period than at the beginning of the period.
e d) The ending working capital of $85,000 is $20,000 more than the beginning
working capital balance of $65,000. While working capital has increased by
$20,000, the overall liquidity has declined. The ratio of current assets to
current liabilities has declined because current liabilities have increased
proportionally more than current assets.
f e) Faraday management should prepare a careful analysis of projected
cash flows to determine if it needs to take action to avoid future
difficulties. In addition, it should compare its current working capital
position and overall liquidity to prior years, and to other companies in the
same industry.
18
6.29
Smythe Company
Cash Flow Statement
Year ended December 31, 2000
Operating Activities:
Net income $ 1,635
Add back amortization 1,000
Increase in accounts receivable (45)
Increase in inventory (450)
Increase in accounts payable 150
Net cash provided by operating activities 2,290
Investing Activities:
Purchase of property, plant and equipment 2,200
Increase in cash $ 90
Cash position*, beginning of year
Cash $ 500
Temporary investments 450
$ 950
Cash position, end of year
Cash $ 540
Temporary investments 500
1,040
Increase in cash $ 90
*NOTE: Recall that cash position in the Cash Flow Statement
includes both cash and temporary investments.
Management Perspective Problems
6.30 A stock option plan that rewards managers for achieving a certain
level of
reported net income has the potential to influence management’s
assessment of the collectibility of its accounts receivable. For example,
if management determines that the yearend balance of accounts
receivable is collectible in full, then no bad debt expense is booked, and
the reported net income is higher as a result.
6.31 A loan officer is likely to be interested in the market value of
temporary
19
investments because this method provides a better indication of the
cash that will be available to settle the loan than the historical cost
basis. The use of market value might be preferred over the use of the
lower of cost and market method because this method is consistent
regarding both upward and downward fluctuations in the market, and
reflects the realizable value of the temporary investments at the
balance sheet date. On the other hand, the lower of cost and market
method results in the minimum realizable amount from selling the
temporary investments, and is a more conservative estimate of the
cash that will be available for settlement of the loan.
6.32 A bank reconciliation is important for the management of cash because
it keeps the company up to date in terms of recording all transactions
that affect its cash balance. In doing so, the company can assess its
need for cash, or perhaps plan shortterm investments in order to earn
a return on excess cash. A bank reconciliation is also a good internal
control over cash because its basic function is to reconcile independent
records of the same bank account.
6.33 a)
AAccounts receivable 1,250,000
SESales 1,250,000
ACash 1,050,000
AAccounts receivable 1,050,000
b)
Balance Sheet, December 31, 2001
Accounts receivable, net $390,500
c) The only information available in evaluating the adequacy of Baltic’s
allowance for doubtful accounts at December 31, 2001 is the value of
the receivables writtenoff during 2001, the ending balance in
20
receivables, and prior yearend information. In this case, bad debt
expense of $37,500 was recorded and, as of December 31, 2001, $18,000
of accounts have been writtenoff. It would be very useful to analyze
the remaining balance in accounts receivable to arrive at an estimate
of the additional amount that is uncollectible. An allowance of $41,500
remains at December 31, 2001, while $22,000 remained at December
31, 2000. Based on the accounts receivable balance at those related
points in time, the allowance as a percentage of accounts receivable
was 9.6% (2001) and 8.8% (2000), representing approximately a 0.8%
increase in the allowance percentage. It appears that the amounts of
bad debt expense and allowance for doubtful accounts might be
adequate based on the available information. Further analysis might
reveal that an adjustment (additional charge) is appropriate.
6.34 a) and b)
2001 2000 1999
Allowance for doubtful accounts $128.9 $121.9 $118.0
Total accounts receivable $1,598.7 $1,352.5 $1,162.8
% considered uncollectible 8.06% 9.01% 10.15%
Bad debt expense $312.4 $271.5 $267
Sales $12,661.8 $11,367.8 $10,420
Bad debt expense as a % of 2.47% 2.39% 2.56%
sales
g c) Although the actual number of writeoffs in dollars has fluctuated
during the three year period, the highest percentage of accounts
written off in relation to either accounts receivable or operating
revenues was in 1999. It appears from the following analysis that
Lowrate improved considerably in 2000 and is doing roughly the same
in 2001:
2001 2000 1999

Accounts written off / sales 2.45% 2.38% 2.85%
Accounts written off / accounts 19.38% 19.98% 25.52%
receivable
h d) Lowrate Communications records revenue and an account receivable
when it bills its customers. Since customers are not liable for calls
that were not made by the customers due to car phone theft, cloning,
etc., Lowrate removes these charges from the customers’ accounts and
must reduce receivables. At the same time, the company must record
21
a reduction in recorded revenue, reduce the allowance for doubtful
accounts, or establish an expense account (bad debt). Another option
would be to establish one or more separate expense accounts in which
these losses are recorded to track them more closely. It is not readily
apparent from the financial data presented how Lowrate handles this
situation. However, if it is handled through the allowance for
doubtful accounts, we would expect the amounts reported as bad
debts, the allowance for doubtful accounts, and the amount actually
written off to increase.
22
Reading and Interpreting Published Financial Statements
6.35 a) Shortterm investments are included with the cash because, as
stated in the notes to the financial statements, the investments are
capable of prompt liquidation and mature in less than one year.
According to GAAP, the shortterm investments must mature within
90 days from the balance sheet date in order to be classified as cash.
b) Air Canada appears to keep the minimum amount of cash on hand
by
depositing any excess in interestbearing accounts to earn interest on
unused cash.
6.36 Cash can include shortterm marketable securities if the securities are
held
only as a substitute for cash and as long as the investments are readily
marketable. Many companies do not allow their excess cash to remain
in bank accounts where they do not earn interest but use the cash to
invest in temporary investments where they can earn interest and
dividends. If this is the case, then these temporary investments are
treated as if they are cash.
6.37 1997 Accounts receivable turnover
= $38,853 / $11,250 = 3.45
365 / 3.45 = 105 days
1998 Accounts receivable turnover
= $40,672 / $9,489 = 4.29
365 / 4.29 = 85 days
Mosaid’s accounts receivable turnover increased from 1997 to 1998
meaning that it took less time to collect accounts receivable in 1998
than it did in 1997 (85 days versus 105 days). It is not known how
many days Mosaid gives its customers to pay for goods and/or services.
It is, therefore, difficult to determine if 85 to 105 days is reasonable.
We also do not know if all of the sales are on credit. If some of them
were cash sales, the turnover ratio would decline even further which
would mean that the number of days to collection would be longer than
85.
23
6.38 a) Percentage uncollectible in 1997 = $7/ $249 = 2.8%
Percentage uncollectible in 1998 = $12/ $334 = 3.6%
b) Accounts receivable turnover 1997
$1,938 / $242 = 8.0 365/8.0 = 46 days
Accounts receivable turnover 1998
$2,348 / $322 = 7.3 365/7.3 = 50 days
c) Journal entries for 1998
SESales 2,348
ACash 2,268
$2,348 + $242 $322 = $2,268
SEBad debt expense 5*
XAAllowance for doubtful
accounts 5
*No information is given about the actual write off of accounts
receivable during 1998. It is probable that the debit to bad debt
expense was actually higher.
24
6.39 a) Percentage uncollectible in 1996 = $9/ $301 = 3.0%
b) The following are possible explanations for the decrease in the
allowance for doubtful accounts:
1. Suncor had fewer sales on credit. This is doubtful in that Suncor
is an oil and gas company and probably has no cash sales.
2. The economy may have changed such that customers are less
likely to default.
3. Suncor may be more thorough in its credit checks of customers
which would improve the collectibility.
c) Accounts receivable turnover 1997
$2,148 / ($292 + $267)/2 = 7.7
365/7.7 = 47 days
Accounts receivable turnover 1998
$2,068 / ($267 + $190)/2 = 9.1
365/9.1 = 40 days
Suncor is collecting its accounts receivable in a shorter time, 40 days,
in 1998, as compared to 1997 when it collected its accounts receivable
on average every 47 days.
d) Journal entries for 1998
SESales 2,068
ACash 2,145
$2,068 + $267 $190 = $2,145
25
6.40 a) Securitized accounts receivable probably means that the accounts
receivable of Sears have been pledged as security on a loan, and thus
represents a restricted asset that is not available for extinguishing
other liabilities, financing investments in inventory, or for other
purposes.
b) Sears protects itself from customers defaulting in amounts charged
against credit cards through the use of a credit card company to absorb
some of the losses. It charges a high rate of interest on outstanding
balances which helps cover losses. It also has the option of reclaiming
merchandise that has not been paid for.
Beyond the Book
6.41 Answers to this question will depend on the company selected.
6.42 Answers to this question will depend on the company selected.

Case
6.43 Saintjay is experiencing a steady increase in sales, from $12,700 to
$14,100 to $17,000 over the three years, but its cash is steadily
decreasing, from $310 to $50 to $10. The main reasons for this are the
large increases in accounts receivable and inventories. The accounts
receivable turnover is steadily decreasing, from 10.8 to 9.3 to 8.6 This
might indicate that Saintjay either is increasing its sales by granting
easier credit or is experiencing serious problems in its accounts
receivable department, especially in collections. Sainjay management
should review this situation and take corrective action. They should
also determine why inventories are increasing so rapidly. Inventories
increased over 56% over the three years while sales on credit increased
only 35%.
26
Critical Thinking Questions
6.44 a)
ACash 1,650
ACash 5,388
SEGain on sale of investments 3,738
b) No changes occurred in the investments in 1998, because the
investment
account on the balance sheet remains unchanged from 1997. In
addition, the statements of changes in financial position indicate that
no sale or purchase of investments occurred in 1998. However, it is
confusing because a balance does exist beside the item titled change in
noncash working capital related to investments.
6.45 a) SemiTech records the installment receivables at the full value,
including carrying charges, then reduces this full value by the amount
of the unearned carrying charges and allowance for doubtful accounts.
Thus the balance sheet figure shows the net amount that is net of the
unearned carrying charges and the amounts expected not to be
collectible.
b) SemiTech could record the installment receivables at their full
value,
including the carrying charges, but this method would not be correct as
the carrying charges represent interest that has not yet been earned.
SemiTech could also have used the installment method which would
have delayed the recognition of the revenue until the cash was
collected. No accounts receivable would have been reported under this
method.
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CH 06 SM

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CH 06 SM

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CHAPTER 6: CASH, TEMPORARY INVESTMENTS, ACCOUNTS RECEIVABLE

6.12 a) Investment Cost Market

March 25 A­Investment in Meta­Solid 50,500

August 15 A­Dividends receivable 1,250

October 25 A­Cash 1,250

February 18 A­Cash 12,175

Dec 31, XA­Valuation allowance for temporary 20,000

Dec 31, XA­Valuation allowance for temporary 20,000

Dec 31, SE­Unrealized loss on valuation of temporary 5,000

6.16 a) Investment Cost Market

June 24, 20x1 A­Temporary Investments 65,000

Dec 31, 20x1 SE­Unrealized loss on valuation of 2,000

May 27, 20x2 A­Cash 70,000

Oct. 8, 20x2 A­Temporary investments 95,000

Dec 31, 20x2 XA­Valuation allowance for 2,000

Aug 3, 20x3 A­Temporary investments 100,000

June 30, 20x3 A­Cash 105,000

Dec. 31, 20x3 SE­Unrealized loss on valuation of 7,000

20x2 XA­Allowance for doubtful accounts 500

August 31 A­Interest receivable 550

June 30 A­Interest receivable 1,052.33

Aug. 1 A­Cash 19,302.80

2001 2000 1999

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March 25 AInvestment in MetaSolid 50,500

August 15 ADividends receivable 1,250

October 25 ACash 1,250

February 18 ACash 12,175

Dec 31, XAValuation allowance for temporary 20,000

Dec 31, XAValuation allowance for temporary 20,000

Dec 31, SEUnrealized loss on valuation of temporary 5,000

June 24, 20x1 ATemporary Investments 65,000

Dec 31, 20x1 SEUnrealized loss on valuation of 2,000

May 27, 20x2 ACash 70,000

Oct. 8, 20x2 ATemporary investments 95,000

Dec 31, 20x2 XAValuation allowance for 2,000

Aug 3, 20x3 ATemporary investments 100,000

June 30, 20x3 ACash 105,000

Dec. 31, 20x3 SEUnrealized loss on valuation of 7,000

20x2 XAAllowance for doubtful accounts 500

August 31 AInterest receivable 550

June 30 AInterest receivable 1,052.33

Aug. 1 ACash 19,302.80