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Chapter 8 Reporting and Analysing Receivables

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Chapter 8 Reporting and Analysing Receivables

Kimmel, Weygandt, Kieso, Trenholm Financial Accounting, Second Canadian Edition

    CHAPTER 8

    Reporting and Analysing Receivables

    ASSIGNMENT CLASSIFICATION TABLE

     Brief A B

    Study Objectives Questions Exercises Exercises Problems Problems

    1. Identify the different 1,2 1

    types of receivables.

    2. Explain how accounts 3 2 1 1A, 2A, 1B, 2B,

    receivable are recog-6A, 7A, 6B, 7B,

    nized in the accounts.

    3. Describe the method 4, 5, 6, 7 3, 4, 5, 9 2, 3, 4 1A, 2A, 1B, 2B,

    used to account for bad 3A, 4A, 3B, 4B,

    debts. 5A, 7A 5B, 7B

    4. Explain how notes re- 8, 9, 10 6, 7, 8 5, 6 6A, 8A, 6B, 8B,

    ceivable are recognized 9A 9B

    and valued in the ac-

    counts.

    5. Explain the statement 11 9 7, 11 9A 9B

    presentation of receiv-

    ables.

    6. Describe the principles 12, 13 10 8

    of sound accounts re-

    ceivable management.

    7. Identify the ratios used 14, 15, 16 9, 11 9, 10 7A, 10A, 7B, 10B,

    to analyse a company’s 11A 11B

    receivables.

    8. Describe the methods 17, 18 12 11, 12 11A 11B

    used to accelerate the

    receipt of cash from re-

    ceivables.

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Kimmel, Weygandt, Kieso, Trenholm Financial Accounting, Second Canadian Edition

    ASSIGNMENT CHARACTERISTICS TABLE

    Problem Difficulty Time Number Description Level Allotted (min.)

    1A Journalize receivables transactions. Moderate 20-30

    2A Determine missing amounts. Complex 15-20

    3A Journalize bad debts transactions. Moderate 20-30

    4A Journalize bad debts transactions Moderate 20-30

    5A Calculate bad debt amounts. Moderate 20-30

    6A Journalize receivables transactions. Moderate 20-30

    7A Journalize receivables transactions and calculate ra- Moderate 30-40

    tios.

    8A Journalize notes receivables transactions. Moderate 20-30

    9A Journalize credit card and notes receivable transac- Moderate 15-20

    tions; show balance sheet presentation.

    10A Calculate and interpret ratios. Moderate 15-20

    11A Evaluate liquidity. Moderate 15-20

    1B Journalize receivables transactions. Moderate 20-30

    2B Determine missing amounts. Complex 15-20

    3B Journalize bad debts transactions. Moderate 20-30

    4B Journalize and post bad debts transactions Moderate 20-30

    5B Calculate bad debt amounts. Moderate 20-30

    6B Journalize receivables transactions. Moderate 20-30

    7B Journalize receivables transactions and calculate ra- Moderate 30-40

    tios.

    8B Journalize notes receivables transactions. Moderate 20-30

    9B Journalize credit card and notes receivable transac- Moderate 15-20

Solutions Manual 8-2 Chapter 8

    Copyright ? 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Kimmel, Weygandt, Kieso, Trenholm Financial Accounting, Second Canadian Edition

    Problem Difficulty Time Number Description Level Allotted (min.)

    tions; show balance sheet presentation.

    10B Calculate and interpret ratios. Moderate 15-20

    11B Evaluate liquidity. Moderate 15-20

Solutions Manual 8-3 Chapter 8

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Kimmel, Weygandt, Kieso, Trenholm Financial Accounting, Second Canadian Edition

    ANSWERS TO QUESTIONS

    1. Accounts receivable are amounts owed by customers on account. They result from the

    sale of goods and services in the normal course of business operations (i.e., in trade).

    Notes receivable represent claims that are evidenced by formal instruments of credit.

    Notes normally extend for periods longer than an account and have a specified inter-

    est rate attached.

    2. Other receivables include nontrade receivables such as interest receivables, loans to

    company officers, advances to employees, and income taxes refundable.

    3. The sale should be recorded at $10,000 on December 29. If the customer takes the

    discount it will be recorded on January 8 as a sales discount. If sales discounts cover-

    ing more than one period of time are material for a company, they should be estimated

    and recorded in the proper period similar to the allowance for doubtful accounts.

    4. The purpose of the allowance for doubtful accounts is to show an estimate of the ac-

    counts receivable expected to become uncollectible. The allowance account is used

    because the amount is only an estimate and we do not know for certain which cus-

    tomers will not pay. The account can be in a debit balance if the amount of actual

    write-offs exceeds previous provisions for bad debts.

    5. Soo Eng should realize that the decrease in net realizable value occurs when esti-

    mated uncollectibles are recognized in an adjusting entry. The write-off of an uncollect-

    ible account reduces both accounts receivable and the allowance for doubtful ac-

    counts by the same amount. Thus, net realizable value does not change.

    6. A company should write off an account when all methods of attempting to collect it

    have failed. Therefore once an account is written off the company should no longer ac-

    tively attempt collection.

    7. Two journal entries are required because the first journal entry has to restore the pre-

    viously written off accounts receivable and the second journal entry records the actual

    receipt of payment on the account. This way there is a record that the person did

    eventually pay for the purpose of future credit decisions.

    8. Notes are not recorded at their maturity value because the interest on the note is

    earned over time. According to the revenue recognition principle, interest is recorded

    as earned.

    9. In total the note will earn $1,250 interest ($30,000 x 5% x 10/12). $1,000 will be re-

    corded for the year ended December 31 8 months interest ($30,000 x 5% x 8/12).

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    Copyright ? 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Kimmel, Weygandt, Kieso, Trenholm Financial Accounting, Second Canadian Edition

Questions (Continued)

10.

Payee:

     Accounts Receivable .............................................................. xxx

     Notes Receivable .............................................................. xxx

     Interest Revenue ............................................................... xxx

Maker (May Ltd.):

     Notes Payable......................................................................... xxx

     Interest Expense ..................................................................... xxx

     Accounts Payable .............................................................. xxx

11. Receivables

     Accounts receivable $xxx

     Less: Allowance for doubtful accounts xx

     Net realizable value xxx

     Notes receivable $xxx

     Less: Allowance for doubtful accounts xx

     Net realizable value xxx

12. The steps involved in receivables management are:

     (1) Determine to whom to extend credit

     (2) Establish a payment period

     (3) Monitor collections

     (4) Evaluate the liquidity of receivables

     (5) Accelerate cash receipts from receivables when necessary

    13. A concentration of credit risk exists when a material threat of nonpayment exists, from

    either a single customer or class of customers, that could adversely affect the com-

    pany’s financial health.

    14. An increase in the receivables turnover ratio indicates a faster collection of receivables.

    The higher the turnover ratio the fewer days it takes to collect the accounts receivable.

    An increase in the collection period means that it is taking longer for the company to

    convert sales in to cash.

    15. Sales for the period = Receivables Turnover X Average Accounts Receivable

     = 11.6 X $1,762.5 million

     = $20,445 million

    16. An increase in the current ratio normally indicates an improvement in short-term liquidity.

    This may not always be the case because the composition of current assets may vary.

    In order to determine if the increase is an improvement in financial health other ratios

    that should be considered include: the receivables turnover, average collection period,

    inventory turnover and days in inventory ratios.

Solutions Manual 8-5 Chapter 8

    Copyright ? 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Kimmel, Weygandt, Kieso, Trenholm Financial Accounting, Second Canadian Edition

Questions (Continued)

    17. Bombardier may sell its receivables to accelerate the receipt of cash. The proceeds

    from the sale of the receivables could be used to finance operations and reduce the

    need for the company to rely on other sources of financing such as operating lines of

    credit. As well, the company may not want to dedicate resources to the time consuming

    responsibility of billing and collecting from customers. By selling the receivables and

    passing this responsibility to others, Bombardier is free to concentrate on its core busi-

    ness activities.

    18. From its own credit cards, Sears may realize interest revenue from customers who do

    not pay the balance due within a specified grace period. To account for these transac-

    tions the company records a debit to accounts receivable and a credit to sales revenue.

     Bank credit cards offer the following advantages:

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

    (2) The issuer maintains individual customer accounts.

    (3) The issuer undertakes the collection process and absorbs any losses from uncol-

    lectible accounts.

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

    from individual customers.

    To record a bank credit card transaction, the seller normally records a debit to cash for

    the amount of the sale less the service charge required by the credit card company. A

    debit is made to the service charge expense and a credit is made to sales revenue for

    the gross amount of the sale.

    The advantage of the debit card is that the cash is deducted immediately from the cus-

    tomers account. There are no credit checks or collection concerns so the service

    charges are normally lower than for a bank credit card.

    The entries to record a debit card sale are the same as the entry to record a bank

    credit card sale.

    By using its own credit cards, bank credit cards and debit cards Sears provides more

    options to its customers, increases its revenue, and reduces its risk.

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    Copyright ? 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Kimmel, Weygandt, Kieso, Trenholm Financial Accounting, Second Canadian Edition

    SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 8-1

(a) Nontrade receivables

    (b) Notes receivable

    (c) Accounts receivable

    (d) Nontrade receivables

BRIEF EXERCISE 8-2

    (a) Accounts Receivable ................................................................ 14,000

     Sales .............................................................................. 14,000

     Cost of Goods Sold .................................................................. 10,000

     Inventory .......................................................................... 10,000

    (b) Sales Returns and Allowances ................................................. 2,400

     Accounts Receivable ...................................................... 2,400

     Inventory................................................................................... 1,440

     Cost of Goods Sold ........................................................ 1,440

    (c) Cash ($11,600 - $232).............................................................. 11,368

     Sales Discounts ($11,600 X 2%) .............................................. 232

     Accounts Receivable ($14,000 $2,400) ....................... 11,600

BRIEF EXERCISE 8-3

    (a) Bad Debt Expense ................................................................... 4,500

     Allowance for Doubtful Accounts .................................... 4,500

    (b) The amount to be reported as bad debts expense would be $800 + $7,500 = $8,300.

Solutions Manual 8-7 Chapter 8

    Copyright ? 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Kimmel, Weygandt, Kieso, Trenholm Financial Accounting, Second Canadian Edition

BRIEF EXERCISE 8-4

(a)

    Allowance for Doubtful Accounts ....................................................... 18,000

     Accounts Receivable ............................................................... 18,000

(b) (1) Before Write-Off (2) After Write-Off

     Accounts receivable $700,000 $682,000

     Allowance for doubtful accounts 54,000 36,000

     Net realizable value $646,000 $646,000

BRIEF EXERCISE 8-5

    Accounts Receivable ......................................................................... 18,000

     Allowance for Doubtful Accounts ............................................. 18,000

Cash .................................................................................................. 18,000

     Accounts Receivable ............................................................... 18,000

BRIEF EXERCISE 8-6

     Annual Interest Rate Total Interest

     10% (b) $1,500.00

    (a) 8% $400.00

     12% (c) $1,680.00

BRIEF EXERCISE 8-7

    Jan. 10 Accounts Receivable ...................................................... 12,000

     Sales .................................................................... 12,000

     Cost of Goods Sold ........................................................ 8,000

     Inventory ........................................................... 8,000

    Feb. 9 Notes Receivable ........................................................... 12,000

     Accounts Receivable ........................................... 12,000

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    Copyright ? 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Kimmel, Weygandt, Kieso, Trenholm Financial Accounting, Second Canadian Edition

BRIEF EXERCISE 8-8

     (a)

    Apr. 1 Notes Receivable .................................................................... 10,000

     Accounts Receivable ..................................................... 10,000

    July 1 Cash ....................................................................................... 10,175

     Notes Receivable ........................................................... 10,000

     Interest Revenue ($10,000 x 7% x 3/12) ........................ 175

(b)

    Apr. 1 Notes Receivable .................................................................... 10,000

     Accounts Receivable ..................................................... 10,000

    July 1 Accounts Receivable .............................................................. 10,175

     Notes Receivable ........................................................... 10,000

     Interest Revenue ($10,000 x 7% x 3/12) ........................ 175

BRIEF EXERCISE 8-9

    (a) Bad Debts Expense .................................................................. 35,000

     Allowance for Doubtful Accounts ..................................... 35,000

(b) Current assets

     Cash ................................................................................ $ 90,000

     Accounts receivable ........................................................ $600,000

     Less: Allowance for doubtful accounts ........................... 35,000 565,000

     Merchandise inventory .................................................... 130,000

     Prepaid expenses ............................................................ 13,000

     $798,000

(c)

     $3,000,0005 times Receivables turnover = $600,000

    365 days Average collection period = 73days 5

Solutions Manual 8-9 Chapter 8

    Copyright ? 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Kimmel, Weygandt, Kieso, Trenholm Financial Accounting, Second Canadian Edition

BRIEF EXERCISE 8-10

(a) 2. Review company credit ratings

    (b) 3. Collect information about competitors’ payment period policies

    (c) 4. Prepare accounts receivable aging schedule

    (d) 5. Calculate the receivables turnover and average collection period (e) 1. Accept bank credit cards

BRIEF EXERCISE 8-11

Receivables Turnover ($ in millions):

    $5,075.9 20.7 times ($248.1 + $243.1) 2

Average Collection Period:

     365 days18 days 20.7 times

BRIEF EXERCISE 8-12

Visa card

     Cash ($100 $3) ...................................................................... 97

     Service Charge Expense ($100 X 3%) ..................................... 3

     Sales ............................................................................... 100

Nonbank card

     Credit Card Receivables........................................................... 100

     Sales ............................................................................... 100

Debit card

     Cash ($100 $3) ...................................................................... 97

     Service Charge Expense ($100 X 3%) ..................................... 3

     Sales ............................................................................... 100

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    Copyright ? 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

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