Ch.8 Reporting and Analyzing Receivables Verified Test Bank

CHAPTER 8

REPORTING AND ANALYZING RECEIVABLES

Summary of Question TYPEs by LEARNING Objective, Level of difficulty, BLOOM’S TAXONOMY, CPA CODES, and AACSB Codes

LOD: E = Easy M = Medium H = Hard

Bloom’s: AP = Application C = Comprehension K = Knowledge

CPA: F = Financial Reporting

AACSB: AN = Analytic

Summary of Question TYPEs by LEARNING Objective, Level of difficulty, BLOOM’S TAXONOMY, CPA CODES, and AACSB Codes

(Cont’d)

LOD: E = Easy M = Medium H = Hard

Bloom’s: AN = Analysis AP = Application C = Comprehension K = Knowledge

CPA: F = Financial Reporting C = Communication

AACSB: AN = Analytic C = Communication

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE

Note: TF = True-False MC = Multiple Choice Ma = Matching

Ex = Exercise SAE = Short-Answer Essay CP = CPA Questions

CHAPTER LEARNING OBJECTIVES

1. Identify the types of receivables and record accounts receivable transactions. Receivables can include accounts receivable, notes receivable, and other types of receivables. Accounts and notes resulting from sales transactions are called trade receivables. Other receivables include nontrade receivables such as interest receivable, loans to company officers, advances to employees, sales tax recoverable, and income tax receivable.

Accounts receivable arising from sales or services on credit are recorded at the transaction price. The accounts receivable subsidiary ledger is used to keep track of the account balances of each customer. Accounts Receivable is a control account, meaning it controls the accounts receivable subsidiary ledger. Any entry to the control account must also be made in the subsidiary ledger, and any entry in the subsidiary ledger must also be made in the control account. Normally a single entry is made to the control account for the total of all the entries made to the individual customer accounts in the subsidiary ledger. It is essential that the total of the customer account information in the subsidiary ledger equal the balance in the control account.

When interest is charged on a past-due receivable, interest is added to the Accounts Receivable balance and is realized as interest income.

2. Account for bad debts. The allowance method, using a percentage of receivables, is used to ensure that the carrying amount of accounts receivable reflects management’s best estimate of the amount that will ultimately be collected. It also results in bad debts expense being recorded in the same period when the revenue from the related credit sale was earned.

Because the specific customer accounts that will become uncollectible are not known at the time the bad debt estimate is made, no entry can be made to Accounts Receivable because it would not be possible to make an entry to the subsidiary ledger. Instead, Allowance for Doubtful Accounts, a contra asset account, is used to record the estimated uncollectible receivables.

A percentage of total receivables, or an aging schedule applying percentages to different age groupings of receivables, is used to estimate the uncollectible accounts (which is also the ending balance in Allowance for Doubtful Accounts). When a specific account receivable is determined to be uncollectible, it is written off and the allowance account reduced. When an account that has previously been written off is collected, the write off is reversed and then the collection is recorded. Bad debts expense is the difference between the estimated total uncollectible accounts (required balance in the allowance account) and the unadjusted balance in the allowance account.

3. Account for notes receivable. Notes receivable are recorded at their principal amount. Interest is earned from the date the note is issued until it matures and is recorded in a separate interest receivable account.

Notes can be held to maturity, at which time the principal plus any unpaid interest is due and the note is removed from the accounts when paid (honoured). In some situations, the maker of the note dishonours the note (defaults). If eventual collection is expected, an account receivable replaces the note receivable and any unpaid interest. If the amount is not expected to be repaid, the note is written off.

4. Explain the statement presentation of receivables. Each major type of receivable should be identified in the statement of financial position, with supplemental detail included in the statement or supporting notes. Companies must report the carrying amount of their receivables on the statement of financial position. The gross amount of receivables and allowance for doubtful accounts can be reported directly on the statement or in the notes. Bad debts expense is reported in the statement of income as an operating expense, and interest income is shown in the non-operating section of the statement.

5. Apply the principles of sound accounts receivable management. To properly manage receivables, management must (a) determine whom to extend credit to, (b) establish a payment period, (c) monitor collections, and (d) evaluate the liquidity of receivables by calculating the receivables turnover and average collection period.

The receivables turnover is calculated by dividing credit sales by average gross accounts receivable. The average collection period converts the receivables turnover into days, dividing 365 days by the receivables turnover ratio. A higher receivables turnover or a lower average collection period indicates that the company is doing a good job collecting its accounts and is not experiencing collection issues.

TRUE-FALSE STATEMENTS

1. Other receivables include nontrade receivables such as loans to company officers.

2. Advances to employees are a type of accounts receivable.

3. Receivables are considered financial assets.

4. Both accounts receivable and notes receivable represent claims that are expected to be collected in cash.

5. Accounts receivable can be the result of either cash or credit sales.

6. When posting is up-to-date, the balance in the accounts receivable subsidiary ledger must equal the balance in the general ledger.

7. Interest income is never earned on accounts receivable.

8. An aging of accounts receivable schedule is based on the premise that the longer the period an account remains unpaid, the greater the probability that it will eventually be collected.

9. Uncollectible accounts must be estimated because it is not possible to know which accounts will not be collected.

10. The percentage of receivables basis of estimating uncollectible accounts ignores the existing balance in the allowance account when the bad debts adjusting entry is recorded.

11. Under the aging method of estimating the allowance for doubtful accounts, the balance in the allowance account must be considered prior to adjusting for estimated uncollectible accounts.

12. It is possible for the allowance account to have a debit balance before the year-end adjusting entry is recorded.

13. Allowance for Doubtful Accounts is credited when an account is determined to be uncollectible.

14. Allowance for Doubtful Accounts is a contra account that is deducted from Accounts Receivable on the statement of financial position.

15. The Allowance for Doubtful Accounts is a liability account and has a normal credit balance.

16. The carrying amount of Accounts Receivable is determined by adding the Allowance for Doubtful Accounts to Accounts Receivable.

17. Bad Debts Expense is a contra account to the Sales account.

18. A note receivable is a written promise by the maker to the payee to pay a specified amount of money at a definite time.

19. The two key parties to a note are the maker and the payee.

20. Atlas Inc. borrowed money from a bank; therefore, it is regarded as the payee.

21. When the due date of a note is stated in months, the time factor in calculating interest, if it is due monthly, is the number of months divided by 12.

22. Interest on a 3-month, 3%, $20,000 note is calculated by multiplying $20,000 × 3% × 3.

Ex. 116

Paradine Corp., which uses a perpetual inventory system and charges 8% interest on the balance due if not paid within the payment terms and has an estimated return rate of 13%, sells merchandise on account to two customers:

The first customer was Vertigo Inc. where Paradine sold $1,500 worth of merchandise on August 1, terms n/30. The goods had cost Paradine $900. On October 1 Vertigo paid the entire balance due.

The second customer was Notorious Limited where Paradine sold $2,500 worth of merchandise on August 2, terms n/30. The goods had cost Paradine $1,500. On August 6, Notorious returned merchandise worth $500 to Paradine. This merchandise had a cost of $300 and there was nothing wrong with the merchandise. On August 11, Paradine received payment from Notorious for the balance due.

Instructions

Assuming that Paradine Corp. prepares adjusting entries on a monthly basis, prepare the appropriate journal entries. Round to the nearest dollar.

Ex. 117

Eyre Inc. uses a perpetual inventory system and charges 10% interest on the balance due if not paid within the payment terms and has an estimated return rate of 10%, sells merchandise on account to two customers:

The first customer was Jane Limited where Eyre sold $1,800 worth of merchandise on October 31, terms n/30. The goods had cost Eyre $990. On November 4, Jane returned merchandise worth $600. This merchandise had a cost of $275 and the merchandise was not returned to inventory as it was defective. On December 2, Eyre received payment from Jane for the entire balance due.

The second customer was Pride Inc. where Eyre sold $5,000 worth of merchandise on November 1, terms n/30. The goods had cost Eyre $2,750. On November 9 Pride paid off their account.

Instructions

Assuming that Eyre Inc. prepares adjusting entries on a monthly basis, prepare the appropriate journal entries. Round to the nearest dollar.

Ex. 118

Presented below are various receivable transactions entered into by the Tractor Towing Corporation. Indicate whether the receivables are reported as accounts receivable, notes receivable, or other receivables on the statement of financial position.

1. Advanced $4,500 to a trusted employee.

2. Accepted a $7,000 promissory note from a customer as payment on account.

3. Determined that a $10,500 income tax refund is due from the government.

4. Sold goods to a customer on account for $5,000.

5. Recorded $350 accrued interest on a note receivable due next year.

6. Lent a company officer $10,000.

Ex. 119

Selected transactions for Mason Corporation follow:

Aug. 2 Sold $15,000 of merchandise to Vanderbilt Inc., terms n/30. Mason uses a perpetual inventory system and the cost of the goods sold was $9,000. Mason’s management expects a return rate of 6%.

13 Merchandise with a selling price of $750 was returned by Vanderbilt because it was the wrong size. A credit was provided to Potter. The cost of the merchandise returned was $450. The returned goods were in saleable condition and returned to inventory.

26 Received a partial payment of $10,500 from Vanderbilt.

28 Made sales of $7,500 on account to Reisen Ltd., terms n/30. The cost of the goods sold was $4,500. Mason’s management expects a return rate of 6%.

Instructions

Record the above transactions on Mason’s books, including any cost of goods sold entries.

Ex. 120

Prepare general journal entries without explanations to record the following transactions:

Jan 1 Sold merchandise to Kelly Graham for $1,000 on account. The merchandise cost $600 and the company uses a perpetual inventory system and does not expect any returns.

Feb 1 Received $300 from Graham.

Jul 1 Wrote off the balance of Graham’s account as uncollectible.

Sep 1 Unexpectedly received payment in full from Graham.

Ex. 121

The December 31, 2021 statement of financial position of Ocean Breezes Limited reported Accounts Receivable of $450,000 and the Allowance for Doubtful Accounts of $45,000. Ocean Breezes does not provide any refunds of its services. During 2022, the following transactions occurred:

1. service revenue billed on account, $1,500,000;

2. collections from customers, $1,300,000;

3. accounts written off $37,000;

4. previously written off accounts of $4,000 were collected (in addition to the “regular” collections).

Instructions

(a) Record the 2022 transactions.

(b) If the company uses the percentage of receivables basis to estimate bad debts expense and determines that uncollectible accounts are expected to be 5% of accounts receivable, prepare the adjusting entry for bad debts expense at December 31, 2022.

Ex. 122

An inexperienced accountant made the following entries. In each case, the explanation to the entry is correct.

Dec 17 Cash 4,900

Accounts Receivable 4,900

(To record a sales return from a Dec. 10 sale made on account)

27 Cash 1,200

Bad Debts Expense 1,200

(Collection of account previously written off as

uncollectible under allowance method)

31 Bad Debts Expense 5,000

Accounts Receivable 5,000

(To reduce the receivables to their carrying amount of

$580,000. Balances before adjustment:

Accounts Receivable = $600,000

Allowance for Doubtful Accounts = $15,000 credit)

Instructions

Prepare the correcting entries.

Ex. 123

Prepare journal entries to record the following transactions entered into by Bluenote Corporation:

2021

Jun 1 Received a $9,000, 4%, 1-year note from Kim Sharp as full payment on her account. Interest is due at maturity.

Nov 1 Sold merchandise on account to Henrik Inc. for $7,000, terms n/30. The cost of the merchandise was $5,950. Blue Note has an estimated return rate of 10%, and uses a perpetual inventory system.

5 Henrik Inc. returned unopened merchandise that it had paid $2,000 for, which had cost Bluenote $1,700. The inventory was returned to the store shelves.

9 Received payment in full from Henrik Inc.

Dec 31 Accrued interest on Sharp’s note.

2022

Jun 1 Kim Sharp honoured her promissory note by sending the principal amount plus interest. No interest has been accrued in 2022.

Ex. 124

L&S Sales Limited had the following transactions in June 2022. L&S uses a perpetual inventory system and its cost of goods sold is 40% of the selling price and has an estimated return rate of 10%.

1. Sales on account for June 2022 were $120,000.

2. $168,000 was received as payments on account during the month. This included $7,500 from Mini- Store Inc., which had previously been written off.

3. L&S received returned merchandise of $4,000 from a customer. The merchandise was unopened and was returned to the store shelves. The customer's account was credited for the full amount.

4. Colville Co. Limited contacted the credit department because it was having difficulty making payments on its account. On June 15, they signed a 5%, 2-month note for the balance in their account ($24,000).

5. On June 30, the company advanced $6,000 to an employee. There is no interest on the amount and it is due in 6 months.

6. Based on a review of the aged accounts receivable, the accountant estimates that $16,000 will be uncollectible. The balance in the Allowance for Doubtful Accounts at May 31, 2022 was a credit of $5,000.

7. The balance in accounts receivable at June 1, 2022 was $210,000. There were no other receivables at June 1, 2022.

Instructions

(a) Prepare entries for the above transactions and any month end adjustments and accruals required.

(b) Calculate the balances and show how the receivables will be shown on the statement of financial position at June 30, 2022.

Ex. 125

The following information is available for Nature’s Best Corporation about the age of its receivables at December 31, its year end:

Number of days outstanding 0-30 31-60 61-90 Over 90

Accounts Receivable $400,000 $240,000 $200,000 $80,000

Estimated percentage uncollectible 3% 5% 10% 15%

Instructions

(a) Using the above aging schedule, determine the total estimated uncollectible accounts.

(b) Assuming that Allowance for Doubtful Accounts has an unadjusted credit balance of $16,000, prepare the journal entry to record bad debts expense at December 31.

(c) Assuming that Allowance for Doubtful Accounts has an unadjusted debit balance of $8,400, prepare the journal entry to record bad debts expense at December 31.

Ex. 126

You have replaced the accountant who prepared the following entries incorrectly. In each case, the explanation and amount to the entry is correct.

Dec 31 Allowance for Doubtful Accounts 6,500

Accounts Receivable 6,500

(To record estimate of uncollectible accounts)

Jan 25 Bad Debts Expense 1,800

Accounts Receivable 1,800

(To write off an uncollectible account)

Feb 3 Accounts Receivable 1,800

Bad Debts Expense 1,800

(To reverse write off of an uncollectible account)

Cash 1,800

Bad Debts Expense 1,800

(Collection of account previously written off as uncollectible)

Instructions

Prepare the correcting entries.

Ex. 127

Canvas Limited had a $1,600 credit balance in Allowance for Doubtful Accounts at December 31, 2022, before the current year's provision for uncollectible accounts. An aging of the accounts receivable revealed the following:

Estimated Percentage

Uncollectible

Current Accounts $300,000 1%

1-30 days past due 30,000 3%

31-60 days past due 16,000 6%

61-90 days past due 10,000 12%

Over 90 days past due 12,000 30%

Total Accounts Receivable $368,000

Instructions

(a) Prepare the adjusting entry at December 31, 2022, to recognize bad debts expense.

(b) Assume the same facts as above except that the Allowance for Doubtful Accounts account had an $1,600 debit balance before the current year's provision for uncollectible accounts. Prepare the adjusting entry for the current year's bad debts.

Ex. 128

Brinkley Corporation uses the perpetual inventory system and the allowance method for estimating uncollectible accounts.

Instructions

Prepare entries to record the following transactions for a company that uses the perpetual inventory method:

Jan 5 Sold merchandise to Amy Ward for $1,500, terms n/15. The merchandise cost $900 and no returns are expected.

Apr 15 Received partial payment of $500 from Amy Ward.

Aug 21 Wrote off as uncollectible the balance of the Amy Ward account when she declared bankruptcy.

Oct 5 Received a cheque for $350 from Amy Ward. No further collections are expected.

Ex. 129

For their fiscal year ended December 31, 2021, the Texas Tech Store had credit sales of $750,000. At year end, the unadjusted trial balance shows a debit balance of $1,800 in the Allowance for Doubtful Accounts, and $140,000 in Accounts Receivable. The credit manager prepared an aging schedule of accounts receivable and estimates that $5,200 will prove to be uncollectible.

On March 4, 2022 the credit manager authorizes a write off of the $2,000 balance owed by Crystal Rivers.

Instructions

(a) Prepare the adjusting entry to record the estimated bad debts expense for 2021.

(b) Show the statement of financial position presentation of accounts receivable at December 31, 2021.

(c) On March 4, 2022, before the write off, assume the balance of Accounts Receivable account is $175,000 and the balance of Allowance for Doubtful Accounts is a credit of $5,500. Record the entry to write off the Rivers account. Also, show the statement of financial position presentation of accounts receivable before and after the write off.

Ex. 130

The general ledger of Grangehill Corporation at December 31, 2022 shows the following balances, all of which are normal:

Cash $ 34,000

Inventory 160,000

Prepaid expenses 8,000

Accounts receivable 182,000

Allowance for doubtful accounts 10,000

Management estimates the carrying amount of accounts receivable should be $158,000.

Instructions

(a) Prepare the adjusting entry for bad debts for 2022.

(b) Show how the current assets would be presented on the statement of financial position at December 31, 2022.

Ex. 131

Arizon Ltd. accepts a three-month, 4%, $7,500 note dated August 1 in settlement of Memon Corporation’s overdue account. Interest is due at maturity. Arizon records adjusting entries annually and has a September 30 year end.

Instructions

(a) Assuming that Memon pays the note and interest in full on November 1, prepare the journal entry for the note and any adjusting journal entries Arizon would make throughout the period that the note is outstanding.

(b) Assuming that Memon could not pay the note but that it was still expected to be collected in the future, prepare the journal entry on November 1.

(c) Assuming that Memon could not pay the note and the note was not expected to be collected in the future, prepare the journal entry on November 1.

Ex. 132

Calculate the maturity value associated with each of the following notes receivable, assuming interest is due at maturity. (Round your answers to the nearest cent.)

(a) A $10,000, 7%, 3-month note dated April 20.

(b) A $5,000, 5.5%, 4-month note dated March 5.

(c) An $8,000, 3%, 1-month note dated September 10.

Ex. 133

Calculate the missing amount for each of the following notes:

Principal Annual Interest Rate Time Total Interest

————————————————————————————————————————

(a) $60,000 5% 9 months ?

————————————————————————————————————————

(b) $120,000 ? 8 months $4,000

————————————————————————————————————————

(c) ? 5% 6 months $1,250

————————————————————————————————————————

(d) $40,000 8% ? $800

————————————————————————————————————————

Ex. 134

Record the following transactions for Lucea Corporation:

Jul 1 Received an $8,000, 3%, 3-month note, dated July 1, from Frank Baker in payment of his open account. Interest is due at maturity.

Oct 1 Received notification from Frank Baker that he is unable to honour his note at this time. It is expected that Baker will pay at a later date.

Nov 15 Received full payment from Frank Baker for note receivable previously dishonoured.

Ex. 135

Copeland Industries has the following transactions related to notes receivable during the last month of the year:

Dec 1 Lent $75,000 cash to P. Arthur on a 1-year, 6% note. Interest is due the first of each month, commencing January 1.

15 Sold goods to F. Murdoch, receiving a $12,000, 4-month, 4% note. Interest is due the 15 of each month, commencing January 15. Copeland uses the periodic inventory method. No returns are expected.

31 Accrued interest income on notes receivable.

Instructions

Record the above transactions for Greenland Distributors.

Ex. 136

Alvira Inc. often requires customers to sign notes for major credit purchases. Record the following transactions for Alvira:

Feb 12 Accepted a $42,000, 4%, 2-month note from John Doe for a 19-foot motorboat built to his specifications. Interest is due at maturity. The company uses the periodic inventory method.

Apr 14 Received notification from John Doe that he was unable to honour his note but that he expects to pay the amount owed next month.

May 26 Received a cheque from John Doe for the total amount owed.

Jun 1 Received notification by the bank that John Doe’s cheque was being returned "NSF" and that Mr. Doe had declared personal bankruptcy.

Ex. 137

Perrin Limited reports the following selected information at December 31, 2022:

Accounts receivable $300,000 Interest Income $12,000

Advances to employees 10,000 Interest receivable 8,000

Allowance for doubtful accounts 15,000 Inventory 220,000

Bad debts expense 20,000 Note receivable (due in 120 days) 50,000

Cost of goods sold 2,320,000 Notes receivable (due in 4 years) 150,000

Depreciation expense 100,000 Salaries expense 810,000

Income tax expense 150,000 Sales 4,000,000

Income tax receivable 15,000 Sales tax recoverable 5,000

Instructions

Prepare a partial statement of financial position for Perrin Ltd.

Ex. 138

The following partial statement of financial position has been incorrectly presented for Alpha Corporation:

ALPHA CORPORATION

Statement of Financial Position (Partial)

December 31, 2022

(in thousands)

Current Assets

Accounts receivable $3,920

Allowance for doubtful notes 35 $3,885

Cash 6,525

Notes receivable (due 2020) 1,459

Allowance for doubtful accounts 62 1,397

Trading Investments 3,500

Interest receivable 145

Instructions

Prepare the partial statement of financial position in good form.

Ex. 139

The Essentials Manufacturing has a receivables turnover of 12 times given credit sales of $1,200,000 and an opening gross accounts receivable balance of $120,000.

Instructions

(a) Calculate the average gross accounts receivable.

(b) Calculate the ending gross accounts receivable.

(c) Calculate the collection period.

Ex. 140

The following data are presented for Ratalan Ltd. for 2022:

Beginning Ending

Accounts receivable $135,500 $350,000

Allowance for doubtful accounts 3,500 11,000

Sales 0 975,000

Instructions

Calculate the receivables turnover and the average collection period for accounts receivable in days.

Ex. 141

The following information is available from the financial statements of Amamco Corp. and Brindle Corp.:

(in millions)

Amamco Corp. Brindle Corp.

Sales $45,000 $25,000

Beginning receivables, gross 22,000 3,500

Ending receivables, gross 17,500 4,000

Instructions

(a) Calculate the following for each company:

Receivables turnover. (Assume all sales were credit sales.)

Average collection period.

(b) What conclusion concerning the management of accounts receivable can be drawn from these data?

Ex. 142

Complete the following table, indicating whether the transaction would: I - improve, W - worsen or NE - have no effect on the items noted.

Ex. 143

The financial statements of Secrets Inc. reported the following information for the years ended December 31, 2022 and December 31, 2021:

Dec. 31, 2022 Dec. 31, 2021 Dec. 31, 2020

Sales $ (b) $1,323,000 $1,385,000

Accounts receivable $265,500 $308,000 (d)

Receivables turnover (a) 4.5x 4.2x

Average collection period 72 days (c) 87 days

Instructions

Assuming all sales are on credit, complete the missing data in the above table.