PROBLEM

TOP: Revenue Recognition

1. During the month of March, Bob Feldman & Associates provided legal services totaling
$35,000. A deposit of $5,000 was received at the beginning of March. $23,000 was collected
during March and the remainder is expected to be collected in April.

Required:
1. How much revenue was recognized during the month of March related to this job?
2. How much revenue was recognized during the month of April related to this job?
3. What is the balance in accounts receivable at the end of March?

ANS:

1. $35,000
2. $0
3. $35,000 - $5,000 - $23,000 = $7,000

TOP: Accounting for Credit Customers Who Don't Pay

2. The following data apply to Coburn Corporation:

Income Statement for year ending Dec. 31 2006 2005

Sales 1,000,000 800,000
Bad debt expense (25,000) (20,000)

Balance Sheet as of Dec. 31 2006 2005

ARs 165,000 150,000
Allowance (5,000) (3,000)

Required:
1. Determine the amount of accounts receivable that were written off in 2006.
2. Determine the amount of cash that was collected from customers in 2006.

ANS: Write-offs of $14,000; collections of $576,000.

Cash ARs Allowance Rev & Exp

Beginning of 2006 150,000 (3,000)
Sales in 2006 1,000,000 1,000,000
Bad debt expense (25,000) (25,000)
Write-offs must have been (23,000) 23,000
And cash collections must
have been 962,000 (962,000)
 End of 2006 165,000 (5,000)

3.During 2005, Hemingway Company had total sales of $750,000. Eighty percent of the sales
were on credit. $480,000 of the receivables were collected. Beginning balances for 2005 in
Accounts Receivable and the Allowance for Bad Debts were $60,000 and $13,000 (credit),
respectively. During the year, bad debt of $9,500 were written off, of which $1,000 were
subsequently collected (and are included in the $480,000 of collections). Hemingway's
management estimated that an adjusting entry of $10,000 would be needed for collectible
accounts in 2006.

Required:

a. Determine the ending balance for Accounts Receivable at December 31, 2005.
b. Determine the ending balance for the Allowance for Bad Debts after adjustment at
December 31, 2005.
c. Determine net Accounts Receivable at December 31, 2005.

ANS: (bad debt)

a. Accounts Receivable, 12/31/05 $171,500

Beg Bal + sales on credit - collections - write-offs + reinstatement:
$60,000 + ($750,000  80%) - $480,000 - $9,500 + $1,000 = $171,500

b. Allowance for Bad Debts, 12/31/05 $14,500

Beg Bal - write-offs + reinstatement + yr-end adj:
$13,000 - $9,500 + $1,000 + $10,000 = $14,500

c. Net Accounts Receivable, 12/31/05 $157,000

A/R - Allow:
$171,500 - $14,500 = $157,000

Revenue Recognition– Case Study-1

Entity A has an existing manufacturing customer, entity B, who has recently announced that it
expects to have to restructure its debt with current creditors, including entity A, in order to
ensure sufficient operating liquidity to avoid bankruptcy.
Subsequent to the announcement, Entity A ships an order of replacement parts to entity B
based on a purchase order received from entity B prior to announcement
In this case, Entity A should not recognise revenue for the latest shipment to entity B as its not
probable that the economic benefit related to the products shipped will flow to the entity.
Entity A may record revenue when entity B pays for the shipment of replacement parts, which
is when it becomes probable that the economic benefit will flow to entity A and when the
amount of revenue can be measured reliably.
 In contrast, any allowance recorded against any existing receivable balance as a result of
entity’s B announcement of its need to restructure debts should be recorded as an expenses not as
a reversal of revenue

Revenue Recognition– Case Study-2

Entity A is a retailer and offers interest-free credit to a customer as part of its marketing strategy.
The interest-free credit is provided by a finance company.
The legal form of the transaction is that entity A sells the goods to the customer at $100 and
simultaneously the customer enters into a finance arrangement with the finance company .
This arrangement results in the finance company settling the customer’s account with the
retailer and receiving $100 from the customer over 2 Years.
Current Interest rate is 10%.
The finance company does not have any recourse to entity A for bad or slow payment by the
customer. How much revenue should entity A recognise and when ?
Entity A will receive $81 from the finance company in respect of the sale at, or close to, the
time of the sale, Entity A should, therefore, recognise revenue of $81 immediately.
A should derecognise the receivable of $81 on receipt of the consideration form the finance
company.
The finance company does not have recourse to entity A in respect of slow payment or non-
payment by the customer.
Assuming all the arrangement’s other term support the conclusion that entity A has transferred
substantially all the risk and rewards of ownership of the receivable to the finance company.