Reporting and Analyzing Receivables: Learning Objectives

Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition
CHAPTER 8
REPORTING AND ANALYZING RECEIVABLES
LEARNING OBJECTIVES
1. Identify the types of receivables and record accounts receivable transactions.
2. Account for bad debts.
3. Account for notes receivable.
4. Explain the statement presentation of receivables.
5. Apply the principles of sound accounts receivable management.
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES

AND BLOOM’S TAXONOMY
Item LO BT Item LO BT Item LO BT Item LO BT Item LO BT
Questions
1. 1 C 6. 2 K 11. 2 C 16. 3 C 21. 5 K
2. 1 C 7. 2 C 12. 1,3 C 17. 3 C 22. 5 C
3. 1 C 8. 2 C 13. 1,3 C 18. 4 K 23. 5 C
4. 1 C 9. 2 C 14. 3 C 19. 4 C 24. 5 C
5. 1 C 10. 2 C 15. 3 K 20. 4 K
Brief Exercises
1. 1 K 4. 1 AP 7. 2 AP 10. 1,3 AP 13. 4 AP
2. 1 AP 5. 2 AP 8. 2 AP 11. 3 AP 14. 5 AN
3. 1 AP 6. 2 AP 9. 3 AP 12. 3 AP 15. 5 AN
Exercises
1. 1 AP 4. 2 AP 7. 3 AP 10. 4 AP 13. 5 AN
2. 1 AN 5. 2 AP 8. 3 AP 11. 5 AN
3. 2 AP 6. 2 AP 9. 4 AP 12. 5 AN
Problems: Set A and B
1. 1,2,4 AP 4. 2 AP 7. 3 AP 10. 5 AN
2. 1,2,4 AP 5. 2 AP 8. 2,3,4 AP 11. 5 AN
3. 2 AN 6. 1,3 AP 9. 4 AP
Accounting Cycle Review
1. 1,2,3,4 AP
Cases
1. 1,5 AN 3. 2,4 E 5. 1 C
2. 5 AN 4. 2,3,5 E 6. 5 E
Legend: The following abbreviations will appear throughout the solutions
manual file.
Solutions Manual 8-1 Chapter 8

Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
LO Learning objective
BT Bloom's Taxonomy
K Knowledge
C Comprehension
AP Application
AN Analysis
S Synthesis
E Evaluation
Difficulty: Level of difficulty
S Simple
M Moderate
C Complex
Time: Estimated time to prepare in minutes
AACSB Association to Advance Collegiate Schools of Business

Communication Communication
Ethics Ethics
Analytic Analytic
Tech. Technology
Diversity Diversity
Reflec. Thinking Reflective Thinking
CPA CM CPA Canada Competency
cpa-e001 Ethics Professional and Ethical Behaviour
cpa-e002 PS and DM Problem-Solving and Decision-Making
cpa-e003 Comm. Communication
cpa-e004 Self-Mgt. Self-Management
cpa-e005 Team & Lead Teamwork and Leadership
cpa-t001 Reporting Financial Reporting
cpa-t002 Stat. & Gov. Strategy and Governance
cpa-t003 Mgt. Accounting Management Accounting
cpa-t004 Audit Audit and Assurance
cpa-t005 Finance Finance
cpa-t006 Tax Taxation

ANSWERS TO QUESTIONS
1. Three types of receivables along with examples follow:
(a) Type (b) Examples

(1) Accounts receivable Accounts receivable from trade customers
(2) Notes receivable Notes receivable from trade customers

Notes receivable obtained when selling property
(3) Other receivables Interest receivable, loans to company officers,

advances to employees, sales tax
recoverable, and income tax receivable
LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
2. Trade receivables are the result of sales transactions while nontrade

receivables are the result of transactions other than sales (or service
revenue in a non-merchandising business) transactions of the business,
such as interest receivable, income tax receivable, and similar types of
receivables.

3. (a) For a service company, a receivable is recorded when the revenue is

considered to be earned, which occurs when the service is provided.
In a merchandising company, a receivable is recorded when revenue
is considered to be earned, which occurs when the merchandise is
sold (normally at the point of sale).
(b) The five-step process used to measure and report revenue:
1. Identify the contract with the client or customer.

2. Identify the performance obligations in the contract.
3. Determine the transaction price.
4. Allocate the transaction price to the performance obligations in
the contract.
5. Recognize revenue when (or as) the company satisfies the
performance obligations.
The timing of the recognition of revenue will determine the point at

which the account receivable will be recognized in the accounts.

4. (a)
The advantages of accepting credit cards are:
(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 uncollectible accounts.
(4) The retailer receives cash more quickly from the credit card
issuer than it would from individual customers.
(5) It allows the company to remain competitive (as competitors
accept credit cards).
(6) It increases sales as customers are able to make purchases
when they don’t have the required cash.
Debit cards: The advantage of the debit card is that the cash is
deducted immediately from the customer’s account. There are no
credit checks or collection concerns so the service charges are
normally lower than for a bank credit card.
By accepting credit cards and debit cards, Canadian Tire provides

more options to its customers, increases its revenue, and reduces its
risk.
(b) Bank credit cards: To record a bank credit card transaction, the seller
records a debit to Cash and a credit to Sales.
Debit cards: To record a debit card transaction, the seller records a

debit to Cash and a credit to Sales.
Bank charges expense for debit card and bank credit card fees must
also be recorded, usually as part of the bank reconciliation process.
LO 1 BT: C Difficulty: C Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

5. (a) Using an accounts receivable subsidiary ledger makes it possible to

determine the balance owed by an individual customer at any point in
time. This makes it easier to manage receivables, answer customer
inquiries, follow up on payments, and decide if additional credit should
be granted.
(b) The general ledger control account should agree with the total of the
individual accounts in the subsidiary ledger.
6. (a) An aging schedule shows the receivables in various stages

outstanding; 0–30 days, 31–60 days, 61–90 days, and so on, as long
as required.
(b) The aging schedule is used to apply percentages to outstanding

receivables in each age category, to determine the total estimated
uncollectible accounts.
LO 2 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
7. (a) The purpose of the account Allowance for Doubtful Accounts is to

show an estimate of the accounts 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 customers will
not pay, so we cannot reduce specific customer accounts in the
subsidiary ledger or the related accounts receivable control account
in the general ledger. Instead we increase the allowance account
balance.
(b) The account can be in a debit balance if the amount of actual write
offs exceeds previous provisions for bad debts. A debit balance will
arise during the period when these write offs are recorded, but by the
end of the reporting period, adjusting entries will be made that will
bring the balance in the allowance account back into a credit position.
The credit entry to this account is offset with a debit to Bad Debts
Expense.

8. Debit balances in the Allowance for Doubtful Account occur during the year
when the amounts recorded for bad debt write offs exceed the opening
balance in the Allowance for Doubtful Accounts. Since the amount arrived
at for the adjusted balance in the Allowance for Doubtful Accounts at the
end of the previous period is based on estimates, it is possible that this
situation could occur. The excess amount of write offs beyond the opening
balance of the allowance account could relate to accounts receivable that
were outstanding at the end of the previous period. To the extent that this
is the case, the financial statements of the previous period had an
understatement in the Bad Debts Expense account as well as an
understatement of Allowance for Doubtful Accounts balance, and therefore
overstatement of net accounts receivable. This situation is treated as a
change in estimate and is not considered an error in the previous period
financial statements.
9. The Bad Debts Expense account reflects only the current year’s estimates
while the Allowance for Doubtful Accounts is a cumulative result of
estimates, write offs, and subsequent recoveries from the current and prior
periods.
10. The write off of an uncollectible account reduces both Accounts Receivable
and the Allowance for Doubtful Accounts by the same amount. Thus, net
carrying amount (which is the difference between accounts receivable and
allowance for doubtful accounts) does not change. The carrying amount
will change, however, when an adjusting entry is made to record the
estimate of uncollectible accounts, because only the Allowance account is
affected in this entry.

11. Two journal entries are required because the first journal entry has to
restore the previously 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, and that may
affect future credit decisions. Furthermore, the date on which the
determination that the receivable is actually collectible and the date it is
actually collected may be different and this would necessitate the separate
recording of these events.
12. (a) The similarities between accounts receivable and notes receivable
are that they are both credit instruments, both can be sold, and both
are valued at their carrying amount.
(b) Differences between accounts receivable and notes receivable

include the following. An accounts receivable is an informal promise
to pay, while a note receivable is a written promise giving the payee
a stronger legal claim. A note receivable is a negotiated instrument
that can be transferred to another party. An account receivable arises
from credit sales, while a note receivable can arise for a number of
reasons such as the financing of a purchase, lending money, or
extending the terms of an account receivable. An account receivable
is usually due within a short period of time, while a note receivable
can extend for longer periods of time (which is why it bears interest).
An account receivable does not incur interest unless the account is
overdue, while a note usually bears interest for the entire period.
LO 1,3 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

13. (a) (1) Interest is normally recorded for an account receivable if a

customer does not pay in full within a specified period of time
(usually 30 days). The invoice will specifically state the amount
or percentage of interest due on overdue accounts.
(2) In the case of notes receivable, the amount of interest accrues

starting from the date of the issuance of the note and continues
to the maturity date of the note. Interest earned is recorded
when accrued at the end of each accounting period or when
collected, whichever comes first.
(b) (1) Accounts Receivable is normally debited for interest accrued on

overdue balances. This accomplishes two goals: updating a
particular customer’s balance in the subsidiary ledger to allow
management to decide if additional credit should be granted if
overdue balances are not yet paid; it also allows the company
to easily send a statement of transactions to the customer that
includes interest charges so that the customer will be aware of
them.
(2) In the case of notes receivable, when accrued, Interest

Revenue is credited and Interest Receivable is debited. The
Note Receivable account is for the principal balance of the loan,
whereas the interest is recorded and reported separately.
LO 1,3 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
14. Notes are not recorded at their maturity value (which would include
interest) because the interest on the note is not receivable when the note
is first recorded. The interest is earned over time and is recorded when
earned.
15. Cobden Inc., as the party making the promise to pay, is the maker of the
note. It would record a note payable. Scotiabank, as the party who will be
paid, is the payee. It would record a note receivable.

16. When a note receivable is honoured at maturity it is paid in full, while a

dishonoured note is not paid in full at maturity. A dishonoured note
receivable is no longer negotiable. The payee still has a claim against the
maker of the note and, if eventual collection is expected, an accounts
receivable is recorded.
17. These notes should be reported at their carrying amount. An entry should
be made to debit Bad Debts Expense for the 10% expected to be
uncollectible and to credit Allowance for Doubtful Notes for the same
amount.
18. Both the gross amount of receivables and the allowance for doubtful
accounts must be reported either on the statement of financial position or
in the notes to the financial statements. It is usual to report the receivables
on the statement of financial position at their carrying amount and to
provide additional information about the allowance in the notes to the
statements.
19. Current assets

Accounts receivable $xxx
Less: Allowance for doubtful accounts xxx
Carrying amount of accounts receivable $xxx
Notes receivable (due in three months) $xxx
Less: Allowance for doubtful notes xxx
Carrying amount of short-term notes xxx
Sales tax recoverable xxx

Income tax receivable xxx
Non-current assets
Notes receivable (due in two years) $xxx

20. (a) Account (b) Classification

(1) Sales or Service Revenue Revenues
(2) Bad Debt Expense Operating expenses
(3) Interest Revenue Other revenues and expenses
21. The steps involved in good receivables management are:

(1) Determine to whom credit is extended.
(2) Establish a payment period.
(3) Monitor collections.
(4) Evaluate the liquidity of receivables.
22. To help in determining whether High Liner’s receivables management has

improved or worsened the average collection period should be determined.
2016 2015
Average collection period 365 = 28.1 days 365 = 28.5 days
13.0 12.8
High Liner’s receivable management has improved slightly. The
receivables turnover has increased from 12.8 times to 13.0 times,
indicating a slightly faster collection of receivables. The average collection
period shows this more clearly; the average time it takes to collect a
receivable has been lowered from 28.5 days to 28.1 days.
LO 5 BT: C Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001, cpa-t005
CM: Reporting and Finance

23. (a) An increase in the current ratio does not necessarily mean that the
liquidity of a company has improved. To determine if liquidity has
improved, we need to understand why the current ratio rose. If it rose
because the company has more cash, then the company is more
liquid. On the other hand, if the cash has fallen but inventory has risen
by a larger amount because of declining sales, the current ratio will
rise but this does not mean that the company is more liquid. It simply
means that the company has some inventory that it cannot sell and
the company has less liquidity. The same is true if net accounts
receivable increases because of a slowdown in collections, not fully
adjusted for in the estimate of uncollectible accounts.
(b) Other ratios that focus on specific current assets rather than current
assets in total (as the current ratio does) give us insight into the
components of working capital and allow us to understand liquidity in
more detail. Examples include the receivables turnover ratio and the
inventory turnover ratio. In general, if these ratios are rising, liquidity
is improving because cash is being received more quickly.
LO 5 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001, cpa-t005
24. If the receivables turnover is significantly higher than its competitors, it

means the company is collecting its receivables faster, indicating it may
have an earlier payment due date. Customers may move to a competitor
that does not collect its receivables as quickly, to better manage their cash
flow.
If a company has a receivables turnover that is significantly lower than its
competitors, it may be at a competitive disadvantage because it is
financing its customers’ purchases for a longer time and delaying the time
it takes to receive cash.
LO 5 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001, cpa-t005

SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 8-1
(a) Notes receivable

(b) Accounts receivable
(c) Other receivables
(d) Other receivables
(e) Notes receivable
(f) Other receivables
BRIEF EXERCISE 8-2
(a) July 1 Accounts Receivable ................................................. 58,000

Sales .................................................................... 58,000
Cost of Goods Sold ................................................... 32,000

Inventory .............................................................. 32,000
(b) July 8 Sales Returns and Allowances .................................. 6,400

Accounts Receivable............................................ 6,400
Inventory .................................................................... 4,320

Cost of Goods Sold .............................................. 4,320
(c) July 9 Cash ($51,600 – $1,032) ........................................... 50,568

Sales Discounts ($51,600 × 2%) ............................... 1,032
Accounts Receivable ($58,000 – $6,400) ............ 51,600
(d) Aug. 31 Accounts Receivable ................................................. 1,032

Interest Revenue [($58,000 – $6,400) × 24% × 1/12] 1,032
LO 1 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 8-3
(a) April 28 Accounts Receivable ................................................. 26,000

Sales .................................................................... 26,000

Inventory .............................................................. 18,000
(b) May 1 Accounts Receivable ................................................. 35,000

Sales .................................................................... 35,000

Inventory .............................................................. 24,000
(c) May 3 Sales Returns and Allowances .................................. 1,200

Accounts Receivable............................................ 1,200
Inventory .................................................................... 850

Cost of Goods Sold .............................................. 850
(d) May 6 Cash ($24,800 - 496)................................................. 24,304

Sales Discounts ($24,800 × 2%) ............................... 496
Accounts Receivable ($26,000 – $1,200) ............ 24,800
(e) June 30 Accounts Receivable ................................................. 525

Interest Revenue ($35,000 × 18% × 1/12) ........... 525

BRIEF EXERCISE 8-4

Accounts Receivable Subsidiary Ledger
Chiu Corp. Lewis Corp.

Elbaz Inc.
Jan. 7 1,800 Jan. 17 700 Jan. 23
Jan. 15 3,700
6,000 Jan.2924
Jan. 3,700
2,000
Jan. 31 Bal. 1,100 Jan.
Jan.31
31Bal. 0
Bal. 4,000
Elbaz Inc.
Jan. 15 6,000 Jan. 24 2,000
Jan. 31 Bal. 4,000
General Ledger Control Account
Accounts Receivable
Jan. 31 11,500 Jan. 31 6,400
Jan. 31Bal. 5,100

BRIEF EXERCISE 8-5

Estimated
Number of Days Accounts Percentage Total Estimated
Outstanding Receivable Uncollectible Uncollectible Accounts
0–45 days $726,000 2% $14,520

46–90 days 248,000 5% 12,400
Over 90 days 112,000 16% 17,920
Total $1,086,000 $44,840
Required ending balance for Allowance for Doubtful Accounts ........ $44,840
(a) Bad Debts Expense ..................................................... 31,665

Allowance for Doubtful Accounts ........................ 31,665
($44,840 – $13,175)
(b) Bad Debts Expense ..................................................... 53,760

Allowance for Doubtful Accounts ........................ 53,760
($44,840 + $8,920)

BRIEF EXERCISE 8-6
(a)
Estimated Total Estimated
Number of Days Accounts Percentage Uncollected
Outstanding Receivable Uncollectible Accounts
0-30 days $368,000 1% $ 3,680
31-60 days 120,000 4% 4,800
61-90 days 72,000 10% 7,200
Over 90 days 40,000 20% 8,000
Total $600,000 $23,680
(b)
Dec. 31 Bad Debts Expense ($23,680 – $3,600) ......................... 20,080
Allowance for Doubtful Accounts........................... 20,080
(c)
Dec. 31 Bad Debts Expense ($23,680 + $5,400) ......................... 29,080
BRIEF EXERCISE 8-7

(a) Jan. 24 Allowance for Doubtful Accounts........................... 11,000
Accounts Receivable..................................... 11,000
(b) (1) Before Write Off (2) After Write Off

Accounts receivable $480,000 $469,000
Allowance for doubtful accounts 29,000 18,000
Carrying amount $451,000 $451,000

BRIEF EXERCISE 8-8
Mar. 4 Accounts Receivable ....................................................... 11,000

4 Cash ................................................................................ 11,000

Accounts Receivable............................................. 11,000
BRIEF EXERCISE 8-9
Aug. 1 Notes Receivable ........................................................... 26,000

Accounts Receivable .............................................. 26,000
Aug. 31 Interest Receivable ($26,000 × 6% × 1/12) .................... 130

Interest Revenue .................................................... 130
Sept. 30 Interest Receivable ($26,000 × 6% × 1/12) .................... 130

Oct. 1 Cash ............................................................................... 26,260

Interest Receivable ................................................. 260
Notes Receivable ................................................... 26,000

BRIEF EXERCISE 8-10
Jan. 2 Accounts Receivable ...................................................... 48,000

Sales ...................................................................... 48,000
Cost of Goods Sold ........................................................ 32,000

Inventory................................................................. 32,000
Feb. 1 Notes Receivable ........................................................... 48,000

April 30 Interest Receivable ($48,000 × 7% × 3/12) .................... 840

July 1 Cash ............................................................................... 49,400

Interest Revenue ($48,000 × 7% × 2/12)................ 560
LO 1,3 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 8-11
2017
April 1 Notes Receivable ........................................................... 10,000
Sales ...................................................................... 10,000

Inventory................................................................. 6,000
Dec. 31 Interest Receivable ($10,000 × 9% × 9/12) .................... 675

(At the end of each year, interest is accrued for the time elapsed since the date of a note)
2018
Mar 31 Cash ............................................................................... 10,900

BRIEF EXERCISE 8-12
(a) Apr. 1 Notes Receivable ......................................................... 40,000

Accounts Receivable .......................................... 40,000
July 1 Cash ............................................................................ 40,600
Notes Receivable ................................................ 40,000
Interest Revenue ($40,000 × 6% × 3/12) ............ 600
(b) Apr. 1 Notes Receivable ......................................................... 40,000
July 1 Accounts Receivable ................................................... 40,600

Interest Revenue ($40,000 × 6% × 3/12) ............ 600
(c) Apr. 1 Notes Receivable ......................................................... 40,000

July 1 Allowance for Doubtful Notes....................................... 40,000

Note that no interest revenue is recorded in (c) because it is unlikely that it

will be collected.

BRIEF EXERCISE 8-13
NIAS CORPORATION
Statement of Financial Position (Partial)
February 28, 2018
Assets
Current assets
Cash ........................................................................ $ 150,000
Held for trading investments .................................... 330,000
Accounts receivable ................................................. $470,000
Less: Allowance for doubtful accounts ..................... 30,000 440,000
Notes receivable (due Nov. 1, 2018) ....................... 300,000
Sales tax recoverable .............................................. 38,000
Inventory .................................................................. 380,000
Prepaid rent ............................................................. 8,000
Total current assets ................................................. $1,646,000

BRIEF EXERCISE 8-14
(a)
($ in thousands) 2015 2014

Receivables $3,292,932 143.1 $3,157,241 109.5
= =
turnover $25,537 + $20,498 times $20,498 + $37,173 times
2 2
Average 365 2.6 365 3.3
collection period 143.1 = 109.5 =
days days
Average gross Accounts receivable

Net credit sales ÷ =
accounts receivable turnover
Accounts receivable Average collection period in

Days in year ÷ =
turnover days
(b) The receivables turnover is better in 2015 and the average collection period
is correspondingly reduced by a fraction of a day.
LO 5 BT: AN Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001, cpa-t005


BRIEF EXERCISE 8-15
(a)
($ in millions) 2015 2014

Receivables $3,925.3 27.0 $3,347.6 31.8
= =
turnover $196.3 + $95.0 times $95.0 + $115.3 times
2 2
Average 365 13.5 365 11.5
collection period 27.0 = 31.8 =
days days


Days in year ÷ =
turnover days
(b) The receivables turnover is worse in 2015 and the average collection period
is correspondingly slower by 2.0 days.


SOLUTIONS TO EXERCISES
EXERCISE 8-1
(a) Compton Limited

Jan. 6 Accounts Receivable. ..................................................... 45,200
Sales ...................................................................... 45,200

Inventory................................................................. 26,500
15 Cash ($45,200 – $904) ................................................... 44,296

Sales Discounts (2% × $45,200) .................................... 904
Accounts Receivable. ............................................. 45,200
(b) Singh Inc.

Jan. 6 Inventory ......................................................................... 45,200
Accounts Payable ................................................... 45,200
15 Accounts Payable ........................................................... 45,200

Inventory................................................................. 904
Cash ....................................................................... 44,296

EXERCISE 8-2
(a)
Feb. 2 Accounts Receivable (Andrew Noren) ............................ 1,140

Sales ...................................................................... 1,140
Cost of Goods Sold ........................................................ 765

Inventory................................................................. 765
4 Sales Returns and Allowances ....................................... .... 140

Accounts Receivable (Andrew Noren) .................... 140
Inventory ......................................................................... 85
Cost of Goods Sold ................................................ 85
5 Accounts Receivable (Dong Corporation) ...................... 760

Sales ...................................................................... 760

Inventory................................................................. 490
8 Cash ............................................................................... 842

Sales ...................................................................... 842

Inventory................................................................. 622
10 Cash ............................................................................... 920

Sales ...................................................................... 920

Inventory................................................................. 680
14 Cash ($760 – $15) .......................................................... 745

Sales Discount ($760 × 2%) ................................... 15
Accounts Receivable (Dong Corporation) .............. 760
17 Accounts Receivable (Andrew Noren) ............................ 696

Sales ...................................................................... 696

Inventory................................................................. 410

EXERCISE 8-2 (CONTINUED)

(a) (continued)
Feb. 22 Accounts Receivable (Batstone Corporation) ................. 1,738

Sales..................................................................... 1,738
Inventory ............................................................... 1,105
28 Cash ............................................................................... 1,000

Accounts Receivable (Andrew Noren) .................. 1,000
(b) Accounts Receivable Subsidiary Ledger
Andrew Noren Dong Corporation

Feb. 2 1,140 Feb. 4 140 Feb. 5 760 Feb. 14 760
17 696 28 1,000 Feb. 28 Bal. 0
Feb. 28 Bal. 696
Batstone Corporation
Feb. 22 1,738
Feb. 28 Bal. 1,738
General Ledger Control Account
Accounts Receivable
Feb. 2 1,140 Feb. 4 140
5 760 14 760
17 696 28 1,000
22 1,738
Feb. 28 Bal. 2,434
(c) Subledger listing

Andrew Noren ............................................................................... $ 696
Dong Corporation .......................................................................... 0
Batstone Corporation .................................................................... 1,738
Total .............................................................................................. $2,434
Balance per general ledger control account .................................. $2,434

LO 1 BT: AN Difficulty: C Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 8-3
(a) Dec. 31 Bad Debts Expense ($36,000 – $4,400) .... 31,600

Allowance for Doubtful Accounts ....... 31,600
(b) Dec. 31 Bad Debts Expense ($36,000 + $2,400) .... 38,400

Allowance for Doubtful Accounts ....... 8,400
EXERCISE 8-4
(a) Age of Accounts Amount % Estimated Uncollectible

0-30 days $260,000 2 $ 5,200
31-60 days 50,400 10 5,040
61-90 days 34,000 30 10,200
Over 90 days 25,600 50 12,800
$33,240
(b) Mar. 31 Bad Debts Expense ......................................... 24,440

Allowance for Doubtful Accounts ............. 24,440
($33,240 – $8,800)
(c) The carrying amount of the accounts receivable at March 31 is as follows:
Accounts receivable ............................................................. $370,000

Less: Allowance for doubtful accounts ................................. 33,240
Carrying amount ................................................................... $336,760

EXERCISE 8-5
(a)
2017
Dec. 31 Bad Debts Expense ........................................................ 18,800

Allowance for Doubtful Accounts ............................. 18,800
($16,800 + $2,000)
2018
May 11 Allowance for Doubtful Accounts .................................... 1,900

Accounts Receivable ............................................... 1,900
Nov. 12 Accounts Receivable ...................................................... 1,900

Allowance for Doubtful Accounts ............................. 1,900
Cash ............................................................................... 1,900

Accounts Receivable ............................................... 1,900
(b)
Dec. 31 May 11 Nov.12
2017 2018 2018
Accounts receivable $300,000 $298,100 $298,100

Less: Allowance for doubtful accounts 16,800 14,900 16,800
Carrying amount $283,200 $283,200 $281,300

EXERCISE 8-6
(a)
Accounts Receivable
March 1 Balance 30,000
Sales 40,000
Collections 35,000
Write offs (1)
(1) Write offs: $30,000 + $40,000 – $35,000 – $32,000 = $3,000
Allowance for Doubtful Accounts

Bad debts (2)
Write offs (1)
(1) Write offs: $30,000 + $40,000 – $35,000 – $32,000 = $3,000

(2) Bad debts: $4,500 – [$5,000 – $3,000 (from (1) above)] = $2,500
(b) To record write offs:
Allowance for Doubtful Accounts .................................. 3,000

Accounts Receivable ....................................... 3,000
(c) To record bad debts expense:
Bad Debts Expense...................................................... 2,500

Allowance for Doubtful Accounts ..................... 2,500

EXERCISE 8-7
Nov. 1 Notes Receivable ........................................................... 116,000

Cash ....................................................................... 116,000
Dec. 1 Notes Receivable ........................................................... 22,600

Sales ...................................................................... 22,600

Inventory................................................................. 13,200
15 Notes Receivable ........................................................... 24,000

Feb. 1 Cash ............................................................................... 22,826

28 Interest Receivable ......................................................... 3,780

Interest Revenue .................................................... 3,780
Calculation of interest revenue on February 28:
Bouchard note: $116,000 × 9% × 4/12 = $3,480

Aquilina note: $24,000 × 6% × 2.5/12 =. 300
Total accrued interest $3,780
28 Bad Debt Expense ......................................................... 18,200

Allowance for Doubtful Notes ................................. 18,200

EXERCISE 8-8
May 1 Notes Receivable ........................................................... 12,000

June 30 Interest Receivable ($12,000 × 5% × 2/12) .................... 100

July 31 Notes Receivable ........................................................... 10,000

Cash ....................................................................... 10,000
Aug. 31 Cash ............................................................................... 58

Sept. 30 Cash ............................................................................... 58

Oct. 31 Cash ............................................................................... 10,058

Nov. 1 Bad Debts Expense ........................................................ 12,100

Note Receivable ..................................................... 12,000

EXERCISE 8-9
FINNING INTERNATIONAL INC.

Statement of Financial Position (partial)
December 31, 2015
(in millions)
Assets
Current assets
Receivables
Trade accounts receivable ............................................. $748
Less: Allowance for doubtful accounts ......................... 23 $ 725
Other receivables .......................................................... 112
Suppliers claims receivable ............................................ 76
Value added tax receivable ............................................ 11
Income tax recoverable .................................................. 1
Total receivables $925

EXERCISE 8-10
(a) (b)
SFP or
IS Classification
Accounts payable $22,600 SFP
Accounts receivable 18,200 SFP
Advances to employees 2,900 SFP
Allowance for doubtful accounts 1,300 SFP
Allowance for doubtful notes (current) 5,000 SFP
Bad debts expense 2,000 IS Operating expense
Cash 7,500 SFP
Interest expense 2,400 IS Non-operating expense
Interest revenue 6,000 IS Non-operating revenue
Inventory 26,400 SFP
Notes receivable (current) 25,000 SFP
Notes receivable (non-current) 75,000 SFP
Prepaid insurance 1,500 SFP
Sales 370,000 IS Operating revenue
Sales discounts 12,000 IS Contra operating revenue
Sales tax recoverable 3,150 SFP
(c)
APOLLO CORPORATION
November 30, 2018
Assets
Current assets
Cash .............................................................................. $ 7,500
Accounts receivable ....................................................... $18,200
Less: Allowance for doubtful accounts ........................... 1,300 16,900
Notes receivable ........................................................... $25,000
Less: Allowance for doubtful notes ..................................... 5,000 20,000
Advances to employees ........................................................................ 2,900
Sales tax recoverable ............................................................................ 3,150
Inventory ............................................................................................... 26,400
Prepaid insurance ................................................................................. 1,500
Total current assets .................................................................... $78,350

EXERCISE 8-11
(a) ($ in millions)
2015
Current ratio = $2,153 = 0.7 : 1
$2,998
Current Assets
Current Liabilities
Receivables turnover = $12,611 = 13.8 times

($885 + $937) ÷ 2
Average gross Accounts

accounts receivable receivable turnover
Average collection period = 365 days = 26.4 days

13.8 times
Accounts Average collection

Days in year ÷ receivable = period in days
turnover
2014
Current ratio = $1,993 = 0.9 : 1
$2,201

($937 + $822) ÷ 2
Average collection period = 365 days = 26.4 days

13.8 times

EXERCISE 8-11(CONTINUED)
(b) In 2015, accounts receivable decreased 5.5% [($937 − $885) ÷ $937] while
revenues increased 3.9% [($12,611 − $12,134) ÷ $12,134]. The
receivables turnover ratio and the average collection period are
unchanged, though. This indicates that CN is likely selling less on account
and is doing a consistent job of collecting its receivables.
The current ratio has declined from 0.9:1 in 2014 to 0.7:1 in 2015. However,
this decrease is not due to slow-collection of receivables (or slow-moving
inventory). This decrease can be attributed to the 36% [($2,998 – $2,201)
 $2,201] increase in current liabilities compared to the modest increase in
current assets of 8% [($2,153 – $1,993)  $1,993].

EXERCISE 8-12
(a) (US $ in millions)
2015
Current ratio = $1,553 = 0.9 : 1
$1,747
Current Assets
Current Liabilities

($475 + $715) ÷ 2
Average gross Accounts

accounts receivable receivable turnover
Average collection period = 365 days = 34 days

10.6 times
Accounts Average collection

Days in year ÷ receivable = period in days
turnover
2014
Current ratio = $1,938 = 0.9 : 1
$2,198

($715 + $507) ÷ 2
Average collection 365 days = 31 days

period = 11.6 times

EXERCISE 8-12 (CONTINUED)
(b) In 2015, accounts receivable decreased 33.6% [($715 − $475) ÷ $715]

while revenues decreased 11.7% [($7,115 − $6,279) ÷ $7,115]. The
receivables turnover ratio and the average collection period indicate that
the company’s management of receivables has deteriorated slightly. The
turnover has decreased from 11.6 times in 2014 to 10.6 times in 2015. The
average collection period has increased from 31 days in 2014 to 34 days in
2015 so cash is being collected more slowly. Overall, Potash appears to
be selling less on account (i.e., the decrease in accounts receivable was
greater than the decrease in sales despite the deteriorating accounts
receivable turnover ratio).
The current ratio has remained unchanged at 0.9:1. This lack of change in
the ratio occurred because the 20.5% [($2,198 – $1,747)  $2,198]
decrease in current liabilities almost matched the decrease in current
assets of 19.9% [($1,938 – $1,553)  $1,938].

EXERCISE 8-13
(a) At first glance, the increase in the current ratio might lead to the conclusion
that Lin’s liquidity has improved in 2018. When looking further and noting a
deterioration in the receivables and inventory turnover ratios in the same
period, one must conclude that the increase in the current ratio does not
mean that Lin’s liquidity has improved. In this case, total current assets
have increased in comparison to current liabilities because of increases in
accounts receivable and inventory.
(b) Lin must determine the source of the deterioration of both the receivables
and inventory turnover ratios. If the deterioration is a result of specific policy
changes in the way in which Lin is managing its accounts receivable, by for
example extending its credit terms, the deterioration of the accounts
receivable turnover is not a surprising result. Similarly, if the deterioration
of the inventory turnover is a result of a management strategy to improve
sales and profitability, the outcome is also not a surprise to management.
On the other hand, if Lin establishes that there have been no direct causes
to the change that can be readily explained through the actions of
management, specific measures to improve the management of its
accounts receivable and inventory must be undertaken immediately.
These measures could include the following for accounts receivable:
1. Establishment of credit policies and credit limits for certain customers.
2. Initiate the use of a cash discount to encourage early payment of
receivables.
3. Aggressively monitor collections to encourage customers to pay on
time.
These measures could include the following for inventory:
1. Monitor its inventory levels carefully and only reorder when inventory
is selling and additional inventory is required.
2. Limit the amount of inventory by improving its purchasing relationships
with suppliers.
3. If possible, move to a just-in-time system, where inventory is only
purchased as needed.
LO 5 BT: AN Difficulty: C Time: 20 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and
Finance

SOLUTIONS TO PROBLEMS
PROBLEM 8-1A
(a) 1. Accounts Receivable .................................................... 5,400,000

Sales ..................................................................... 5, 400,000
Cost of Goods Sold ....................................................... 2,970,000

Inventory................................................................ 2,970,000
2. Sales Returns and Allowances ...................................... 80,000

Accounts Receivable ............................................. 80,000
Inventory ...................................................................... 44,000

Cost of Goods Sold ............................................... 44,000
3. Cash .............................................................................. 5,400,000

Accounts Receivable ............................................. 5,400,000
4. Accounts Receivable ..................................................... 400,000

Interest Revenue ................................................... 400,000
5. Allowance for Doubtful Accounts ................................... 160,000

6. Accounts Receivable ..................................................... 72,000

Allowance for Doubtful Accounts ........................... 72,000
Cash .............................................................................. 72,000

7. Bad Debts Expense ....................................................... 74,000

Allowance for Doubtful Accounts ................................ 74,000
$104,000 – ($118,000 – $160,000 + $72,000) = $74,000

PROBLEM 8-1A (CONTINUED)

(b)
Accounts Receivable Allowance for Doubtful Accounts
Bal. 1,760,000 Bal. 118,000
(1) 5,400,000 (2) 80,000 (5) 160,000 (6) 72,000
(4) 400,000 (3) 5,400,000 (7) 74,000
(6) 72,000 (5) 160,000
(6) 72,000
Bal 1,920,000 Bal. 104,000
(c) January 1, 2018

Accounts receivable ............................................................... $1,760,000
Less: Allowance for doubtful accounts ................................... 118,000
Carrying amount ..................................................................... $1,642,000
December 31, 2018

Carrying amount ..................................................................... $1,816,000
(d) UNDERWOOD IMPORTS INC.

December 31, 2018
Assets
Current assets
Accounts receivable .................................................... $1,920,000
Less: Allowance for doubtful accounts ........................ 104,000 $1,816,000

(e) UNDERWOOD IMPORTS INC.

Income Statement (partial)
Year Ended December 31, 2018
Sales ...................................................................................... $5,400,000

Less: Sales returns and allowances ....................................... 80,000
Net sales .......................................................................................................... $5,320,000
Less: Cost of goods sold * ............................................................................... 2,926,000
Gross profit....................................................................................................... 2,394,000
Operating expenses
Bad debts expense ................................................................................ 74,000
Other revenues and expenses
Interest revenue..................................................................................... 400,000
* ($2,970,000 – $44,000) = $2,926,000
LO 1,2,4 BT: AP Difficulty: M Time: 45 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 8-2A
(a) Accounts Receivable ..................................................... 4,300,000

Sales ......................................................................... 4,300,000
Cost of Goods Sold........................................................ 3,100,000

Inventory.................................................................... 3,100,000
Cash .............................................................................. 5,200,000

Accounts Receivable ................................................. 5,200,000
(b) Allowance for Doubtful Accounts ................................... 185,000

Accounts Receivable ................................................. 185,000
(c) Accounts Receivable ..................................................... 28,000

Allowance for Doubtful Accounts ............................... 28,000
Cash .............................................................................. 28,000

(d) Bad Debts Expense [see (e)] ......................................... 98,000

(e)

Beg. Bal. 2,100,000 Beg. Bal 144,000
Sales 4,300,000 Collections 5,200,000 Write off 185,000 Recovery 28,000
Recovery 28,000 Write off 185,000 Bad debts 98,000
Collections 28,000 End Bal 85,000
End Bal. 1,015,000
Before bad debts expense was recorded, the Allowance account had a debit
balance of $13,000 ($144,000 – $185,000 + $28,000). To adjust this to $85,000
requires a credit to this account of $98,000 with an offsetting debit to Bad Debts
Expense.

(f) AZIM ENTERPRISES LTD.

Assets
Current assets
Carrying amount..................................................................... 930,000

PROBLEM 8-3A
Accounts Receivable
Beg. bal. 18,000
55,000
(a) 78,000 (b) 1,000
End. bal. (c) 40,000

Beg. bal. 1,800
1,000
Unadj. bal. 800
(d) 1,200
End. bal. (e) 2,000
Sales
78,000
Bad Debts Expense

(f) 1,200
(a) Addition to accounts receivable (from Sales) = $78,000
(b) Write offs of accounts receivable obtained from reduction of allowance for
doubtful accounts $1,000
(c) $18,000 + $78,000 (a) – $1,000 (b) – $55,000 = $40,000, the ending
balance
(d) $1,800 – $1,000 + (d) = $2,000 (e); (d) = $1,200 and this represents the
credit side of the bad debts expense entry.
(e) Allowance for doubtful accounts = $2,000 (given)
(f) Bad debts expense = Adjustment to allowance for doubtful accounts =

$1,200 [from (d)]

PROBLEM 8-4A
(a) Total estimated allowance for doubtful accounts:
Estimated Estimated
Number of Days Accounts Percentage Uncollectible
0-30 days $ 780,000 2% $ 15,600
31-60 days 340,000 6% 20,400
61-90 days 115,000 12% 13,800
Over 90 days 76,000 22% 16,720
Total $1,311,000 $66,520
(b) (1)
Bad Debts Expense ................................................................ 54,160

Allowance for Doubtful Accounts ....................................... 54,160
[$66,520 – $12,360]
(2) If the allowance for doubtful accounts had an unadjusted debit

balance of $12,360, the bad debts expense in the entry above would
be $78,880 ($66,520 + $12,360)
(c) Allowance for Doubtful Accounts .............................................. 45,730

Accounts Receivable ......................................................... 45,730
(d) Accounts Receivable ................................................................ 8,850

Cash ......................................................................................... 8,850


PROBLEM 8-5A
(a) Total estimated allowance balance at Dec. 31, 2017:
Estimated Estimated
0-30 days $320,000 3% $ 9,600
31-60 days 114,000 6% 6,840
61-90 days 76,000 12% 9,120
Over 90 days 50,000 24% 12,000
Total $560,000 $37,560
Total estimated allowance balance at Dec. 31, 2018:
Estimated Estimated
0-30 days $300,000 3% $ 9,000
31-60 days 64,000 6% 3,840
61-90 days 86,000 12% 10,320
Over 90 days 130,000 24% 31,200
Total $580,000 $54,360
Total accounts receivable increased slightly from 2017 to 2018. However,

the estimated allowance balance increased significantly. Amounts
outstanding over 90 days more than doubled while amounts less than 60
days decreased significantly. This implies the receivables are less likely to
be collected because they are increasing in age.
(b) Bad Debts Expense .................................................................. 28,560

($37,560 – $9,000)



Cash ......................................................................................... 3,000

(e) Bad Debts Expense .................................................................. 55,800

$54,360 – (balance in the allowance before adjustment):
$54,360 – ($37,560 – $42,000 + $3,000) = $55,800
(f) 2018 2017

Accounts receivable.................................................................. $580,000 $560,000
Less: Allowance for doubtful accounts...................................... 54,360 37,560
Carrying amount ..................................................................... $525,640 $522,440

PROBLEM 8-6A
Feb. 1 Accounts Receivable ....................................................... 8,000
Sales .................................................................. 8,000
Inventory ................................................................ 6,000
Sales ...................................................................... 13,400
Inventory ................................................................ 8,800
26 Accounts Receivable ...................................................... 12,000
Sales ...................................................................... 12,000
Inventory ................................................................ 7,600
Mar. 6 Accounts Receivable ...................................................... 4,000
Sales ...................................................................... 4,000

Inventory ................................................................ 3,000
Mar. 27 Notes Receivable ........................................................... 12,000

Accounts Receivable.............................................. 12,000
Apr. 3 Cash ($13,400 + $134) .................................................. 13,534

Interest Revenue ($13,400 × 6% × 2/12) ............... 134
May 27 Accounts Receivable ($12,000 + $140) ........................ 12,140

31 Interest Receivable ($8,000 × 24% × 3/12) .................... 480


PROBLEM 8-7A
(a) Nov. 1 Notes Receivable ...................................... 60,000

Accounts Receivable......................... 60,000
Dec. 1 Cash .......................................................... 450

Interest Revenue ............................... 450
($60,000 × 9% × 1/12)
31 Interest Receivable ($60,000 × 9% × 1/12) 450

Jan. 1 Cash .......................................................... 450

Interest Receivable ........................... 450
Feb. 1 Cash .......................................................... 60,450

Interest Revenue ($60,000 × 9% × 1/12) 450
Notes Receivable .............................. 60,000
(b) Nov. 1 Accounts Payable ..................................... 60,000

Notes Payable ................................... 60,000
Dec. 1 Interest Expense ....................................... 450

Cash ($60,000 × 9% × 1/12) ............. 450
31 Interest Expense ($60,000 × 9% × 1/12)... 450

Interest Payable ................................ 450
Jan. 1 Interest Payable ........................................ 450

Cash.................................................. 450
Feb. 1 Notes Payable ........................................... 60,000

Interest Expense ($60,000 × 9% × 1/12)... 450
Cash.................................................. 60,450


(c)
(1) Feb. 1 Accounts Receivable................................. 60,450

(2) Feb. 1 Bad Debts Expense .................................. 60,000


PROBLEM 8-8A
(a) Notes receivable total $61,000 and interest receivable $603 at September
30, 2018:
RES Inc. $17,000 × 6% × 6/12 = $510

Ihara Ltd. 17,500 × 4% × 1/12 = 58
Dragon Limited 6,000 × 7% × 1/12 = 35
MGH Corp. 20,500 × 5% × 0/12 = 0
Total $61,000 $603
(b) Oct. 1 Cash ($17,500 × 4% × 1/12) ..................... 58

31 Accounts Receivable................................. 6,070

Interest Receivable
($6,000 × 7% × 1/12) ........................ 35
Interest Revenue
($6,000 × 7% × 1/12) ........................ 35
31 Cash .......................................................... 17,595

Interest Receivable
($17,000 × 6% × 6/12) ...................... 510
Interest Revenue
($17,000 × 6% × 1/12) ...................... 85
31 Interest Receivable ................................... 143

Ihara Ltd. $17,500 × 4% × 1/12 = $ 58
MGH Corp. $20,500 × 5% × 1/12 = 85
Total $143
31 Bad Debts Expense .................................. 17,500

Allowance for Doubtful Notes ............ 17,500

(c)
Interest Receivable Notes Receivable

Bal. see (a) 603 Oct. 1 58 Bal. see (a) 61,000 Oct. 31 6,000
Oct. 31 143 31 35 31 17,000
31 510
Bal. 143 Bal. 38,000
Allowance for Doubtful Notes

Bal. 00
Oct. 31 17,500
Bal. 17,500
(d)
TARDIF CORPORATION
October 31, 2018
______________________________________________________________
Assets
Current assets
Notes receivable .................................................... $17,500
Less: Allowance for doubtful notes ........................ 17,500 $ 0
Interest receivable.................................................. ..... 143
Non-current assets
Notes receivable .................................................... ..... 18,500

PROBLEM 8-9A
CANADIANA CORPORATION
December 31, 2018
(in thousands)
Assets
Current assets
Cash $ 592
Held for trading investments 196
Accounts receivable $1,630
Less: Allowance for doubtful accounts 32 1,598
Notes receivable 2,481
Income tax receivable 99
Inventory 1,902
Supplies 85
Total current assets 6,953
Non-current assets
Notes receivable 101
Property, plant, and equipment
Land $ 1,077
Buildings $2,734
Less: Accumulated depreciation 960 1,774
Equipment $737
Less: Accumulated depreciation 488 249 3,100
Total assets $10,154

PROBLEM 8-10A
(a)
Nike Adidas
(in US $ millions) (in euro millions)
$30,601 €16,915
Receivables turnover ($3,475+$3,358) (€2,085+€2,198)
[ ] [ ]
2 2
=9.0 times =7.9 times
365 365
9.0 7.9


Days in year ÷ =
turnover days
(b) Nike has a better turnover than Adidas, but both companies fall short of the
industry average. Adidas’ collection experience is weaker (meaning that it
collects its receivables more slowly).


PROBLEM 8-11A
(a) 2018 2017 2016
Average 365 365 365

collection period = 45 days = 49 days = 54 days
8.2 7.4 6.7
Days in 365 365 365

inventory = 37 days = 42 days = 49 days
9.9 8.7 7.5
(b) At first glance, it appears that Pampered Pets’ liquidity has improved over
the past two years since the company’s current ratio has increased from
2.1:1 to 2.6:1. The current ratio aggregates all current assets together. To
get a better understanding of why this increase in the current ratio
occurred, we need to analyze specific accounts that are included in this
ratio. To do this, we can examine the receivables and inventory turnover
ratios. The increase in the receivables turnover ratio indicates that the
company is collecting its receivables faster and this improves cash flow
and liquidity. As well, the company appears to be moving its inventory more
quickly as evidenced by the higher inventory turnover ratio and this also
improves cash flow and liquidity. Therefore, it does appear that the
company’s overall liquidity is improving.
(c) Changes in the turnover ratios indirectly affect profitability. Improvements
in the receivables turnover and inventory turnover speed up the cash cycle,
which provides the company with better cash flow and decreases the need
for outside financing, thus decreasing interest expense. Furthermore,
improvements in the receivables turnover usually arise as a direct result of
improvements in credit management and better collection efforts. These
improvements result in fewer defaults and decreases in bad debts
expense. Improvements in the inventory turnover improve profitability by
reducing carrying charges associated with stocking inventory (such as
warehousing costs). Improved inventory turnover also reduces the risk of
merchandise not selling and becoming obsolete or selling at reduced
prices. Obsolete inventory lowers profitability because the cost of this type
of inventory has to be written off.


(d) Changes in the turnover ratios directly affect cash flow. Improvements in
the receivables turnover and inventory turnover speed up the cash cycle,
which provides the company with better cash flow and less need for outside
financing.
(e) There are several steps that Pampered Pets could consider to improve its
receivables and inventory management:
Receivables
The company could establish credit policies and credit limits for certain
customers, if it doesn’t already have them.
The company could initiate the use of a cash discount to encourage
early payment of receivables.
The company could more aggressively monitor collections to
encourage customers to pay on time.
Inventory
Pampered Pets should monitor its inventory levels carefully and only
reorder when inventory is selling and additional quantities are required.
If inventory is not selling (e.g., not in favour or in season), it should mark
it down quickly to get rid of it rather than risk it not selling at all and
having to pay carrying costs for obsolete inventory.
The company could limit the amount of inventory by improving its

purchasing relationships with suppliers. If inventory could be purchased
more frequently, high levels of inventory will not have to be carried and
stored.
Also, were it possible to move to a system where inventory is only

purchased as needed (called “just-in-time”), Pampered Pets could
reduce the amount of inventory it had to carry and improve the turnover
ratio. However, there is some risk to this option as sales could be lost if
stock-outs occur.
LO 5 BT: AN Difficulty: C Time: 30 min. AACSB: Analytic CPA: cpa-t001, cpa-t005


PROBLEM 8-1B
(a) 1. Accounts Receivable ................................................. 1,800,000

Sales ................................................................ 1,800,000
Cost of Goods Sold ................................................... 1,044,000

Inventory .......................................................... 1,044,000
2. Sales Returns and Allowances .................................. 280,000

Inventory ................................................................... 162,000

Cost of Goods Sold .......................................... 162,000
3. Cash ......................................................................... 1,600,000

Accounts Receivable ....................................... 1,600,000
4. Accounts Receivable ................................................. 125,000

Interest Revenue ............................................. 125,000
5. Allowance for Doubtful Accounts............................... 51,000

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

Allowance for Doubtful Accounts ..................... 12,000
Cash ......................................................................... 12,000

7. Bad Debts Expense .................................................. 28,000

Allowance for Doubtful Accounts ............ 28,000
$31,000 – ($42,000 – $51,000 + $12,000) = $28,000

PROBLEM 8-1B (CONTINUED)
(b)

Bal. 510,000 Bal. 42,000
(1) 1,800,000 (2) 280,000 (5) 51,000 (6) 12,000
(4) 125,000 (3) 1,600,000 (7) 28,000
(6) 12,000 (5) 51,000
(6) 12,000
Bal. 504,000 Bal. 31,000
(c) January 1, 2018

Accounts receivable ...................................................................... $510,000
Less: Allowance for doubtful accounts .......................................... 42,000
Carrying amount ........................................................................... $468,000
December 31, 2018

Accounts receivable ...................................................................... $504,000
Less: Allowance for doubtful accounts .......................................... 31,000
Carrying amount ........................................................................... $473,000
(d)
BORDEAUX INC.
December 31, 2018
Assets
Current assets
Accounts receivable .................................................. $504,000
Less: Allowance for doubtful accounts ...................... 31,000 $473,000


(e)
BORDEAUX INC.
Income Statement (partial)
Year Ended December 31, 2018
Sales .................................................................................. $1,800,000

Less: Sales returns and allowances .................................... 280,000
Net sales.................................................................................................. $1,520,000
Less: Cost of goods sold * ....................................................................... 882,000
Gross Profit.............................................................................................. 638,000
Operating expenses
Bad debts expense ....................................................................... 28,000
Other revenues and expenses
Interest revenue ............................................................................ 125,000
* ($1,044,000 - $162,000) = $882,000

PROBLEM 8-2B
(a) Accounts Receivable...................................................... 4,700,000

Sales .......................................................................... 4,700,000
Cost of Goods Sold ........................................................ 2,900,000

Inventory .................................................................... 2,900,000
Cash............................................................................... 4,800,000
Accounts Receivable ................................................. 4,800,000
(b) Allowance for Doubtful Accounts ................................... 146,000

(c) Accounts Receivable...................................................... 3,000

Cash............................................................................... 3,000
(d) Bad Debts Expense (see (e) below) .............................. 101,000

(e)
Accounts Receivable
Beg. Bal. 945,000
Sales 4,700,000 Collections 4,800,000
Recovery 3,000 Write off 146,000
Collections 3,000
End Bal. 699,000

Beg. Bal. 139,000
Write off 146,000 Recovery 3,000
Bad Debts 101,000
End Bal. 97,000

(e) (continued)
Before bad debts expense was recorded, the balance in the Allowance
account was a debit $4,000 ($139,000 – $146,000 + $3,000). To adjust this
balance to a credit of $97,000 requires a credit to the Allowance of
$101,000 with an offsetting debit to Bad Debts Expense.
(f)
HUANG LTD.
Assets
Current assets
Accounts receivable .............................................................. $699,000
Less: Allowance for doubtful accounts .................................. 97,000
Carrying amount ................................................................... 602,000

PROBLEM 8-3B
Accounts Receivable
Beg. bal. (a) 27,750
(b) 250
225,000 230,000
End. bal. 22,500

Beg. bal. 1,000
250
Unadj. bal. 750
(c) 400
End. bal. (d) 1,150
Sales
(e) 225,000
Bad Debts Expense

(f) 400
(a) Solving for the opening Accounts Receivable balance (a) we get:
(a) + $225,000 – $230,000 – $250 (b) = $22,500
(a) = $27,750
(b) Write offs of accounts receivable obtained from reduction of allowance for
doubtful accounts $250.
(c) This amount represents the increase in the Allowance for Doubtful
Accounts caused by recorded bad debt expense:
Unadjusted balance $750 + (c) = $1,150 (we know the $1,150 balance (d)
– it was given) (c) = $400
(d) Allowance for doubtful accounts = $1,150 (given)

(e) Addition to Accounts receivable (arising from credit sales) = $225,000
(f) Bad debts expense = Adjustment to allowance for doubtful accounts =

$400 (from (c))

PROBLEM 8-4B
(a) Total estimated allowance for doubtful accounts:
Estimated Estimated
0-30 days $280,000 1% $2,800
31-60 days 90,000 3% 2,700
61-90 days 45,000 10% 4,500
Over 90 days 18,000 15% 2,700
Total $433,000 $12,700
(b) (1)
Bad Debts Expense .................................................................. 17,000

($12,700 + $4,300 = $17,000)
(2) If the allowance for doubtful accounts had an unadjusted credit

balance of $4,300, the bad debts expense in the entry above would
be $8,400 ($12,700 – $4,300)


Cash ......................................................................................... 2,300


PROBLEM 8-5B
(a) Total estimated allowance balance at Dec. 31, 2017:
Estimated Estimated
0-30 days $220,000 3% $ 6,600
31-60 days 86,000 6% 5,160
61-90 days 52,000 12% 6,240
Over 90 days 22,000 20% 4,400
Total $380,000 $22,400
Total estimated allowance balance at Dec. 31, 2018:
Estimated Estimated
0-30 days $240,000 3% $ 7,200
31-60 days 104,000 6% 6,240
61-90 days 62,000 12% 7,440
Over 90 days 34,000 20% 6,800
Total $440,000 $27,680
Accounts receivable has increased and so has the allowance balance. The
increase in the accounts receivable appears to be spread throughout the
aging analysis and is not concentrated in any of the aging categories. Thus,
the increase in the allowance is attributable to a general increase in
accounts receivable rather than to increased age.

(b) Bad Debts Expense .................................................................. 19,400

($22,400 – $3,000)

(d) Accounts Receivable ............................................................ 3,000

Cash ......................................................................................... 3,000

(e) Bad Debts Expense .................................................................. 30,280

$27,680 – balance in allowance before adjustment ($22,400 – $28,000 + $3,000)
(f) 2018 2017

Accounts receivable.................................................................. $440,000 $380,000
Less: Allowance for doubtful accounts...................................... 27,680 22,400
Carrying amount .................................................................... $412,320 $357,600

PROBLEM 8-6B
Jan. 2 Notes Receivable ........................................................... 10,000

Cash ....................................................................... 10,000
5 Accounts Receivable ...................................................... 11,000
Sales ...................................................................... 11,000
Inventory ................................................................ 6,700
Feb. 20 Cash ............................................................................... 83
Mar. 20 Cash ($11,000 + $83) .................................................... 11,083

May 2 Cash ............................................................................... 10,267

Note Receivable ..................................................... 10,000

Aug. 1 Accounts Receivable ....................................................... 6,000
Sales .................................................................. 6,000

Inventory ................................................................ 4,000
25 Bad Debts Expense ....................................................... 3,000
Notes Receivable ............................................ 3,000
Sept. 30 Accounts Receivable ($6,000 × 24% × 1/12) ................. 120

PROBLEM 8-7B
(a) Aug. 1 Notes Receivable ...................................... 30,000

Accounts Receivable ......................... 30,000
31 Interest Receivable .................................... 100

($30,000 × 4% × 1/12)
Sept. 1 Cash ......................................................... 100

Interest Receivable ............................ 100
Oct. 1 Cash .......................................................... 30,100

Interest Revenue .............................. 100
($30,000 × 4% × 1/12)
(b) Aug. 1 Accounts Payable ...................................... 30,000

Notes Payable ................................... 30,000
31 Interest Expense ($30,000 × 4% × 1/12) ... 100

Interest Payable ................................ 100
Sept. 1 Interest Payable ........................................ 100

Cash .................................................. 100
Oct. 1 Notes Payable ........................................... 30,000

Interest Expense ($30,000 x 4% x 1/12).... 100
Cash ................................................. 30,100

(c)
(1) Oct. 1 Accounts Receivable ................................. 30,100
($30,000 × 4% × 1/12)
(2) Oct. 1 Bad Debts Expense ................................... 30,000


PROBLEM 8-8B
(a) Total notes receivable is $58,000 and total interest receivable $918 at
November 30, 2018:
Kootenay Inc. $17,000 × 6% × 8/12 = $680
Cassiar Ltd. 15,000 × 4% × 1/12 = 50
Namu Limited 6,000 × 7% × 3/12 = 105
Siska Corp. 20,000 × 5% × 1/12 = 83
Total $58,000 $918
(b) Dec. 1 Cash ($50 + $83) ...................................... 133

31 Allowance for Doubtful Notes ................... 6,105

Interest Receivable
($6,000 × 7% × 3/12) ........................ 105
31 Cash .......................................................... 17,765

Interest Receivable
($17,000 × 6% × 8/12) ...................... 680
Interest Revenue
($17,000 × 6% × 1/12) ...................... 85
31 Interest Receivable ................................... 133

Cassiar Ltd. $15,000 × 4% × 1/12 = $ 50
Siska Corp. $20,000 × 5% × 1/12 = 83
Total ................................................ $133
31 Bad Debts Expense .................................. 20,000

Allowance for Doubtful Notes ............ 20,000

(c)
Interest Receivable Notes Receivable

Bal. See (a) 918 Dec. 1 133 Bal. See (a) 58,000 Dec. 31 6,000
Dec. 31 133 31 105 31 17,000
31 680
Bal. 133 Bal. 35,000
Allowance for Doubtful Notes

Bal. 0 Dec. 31 20,000
Bal. 20,000
(d)
KITIMAT CORPORATION
December 31, 2018
________________________________________________________________________
Assets
Current assets
Notes receivable .......................................................... $35,000
Less: Allowance for doubtful notes .............................. 20,000 $15,000
Interest receivable........................................................ 133

PROBLEM 8-9B
OUTAOUAIS INC.
January 31, 2018
(in thousands)
Assets
Current assets
Less: Allowance for doubtful accounts 268 $2,200
Notes receivable 50
Income tax receivable 20
Inventory 3,000
Supplies 50
Total current assets 5,320
Non-current assets
Notes receivable 300
Property, plant, and equipment
Land $200
Buildings $1,000
Less: Accumulated depreciation 250 750
Equipment $750
Less: Accumulated depreciation 375 375 1,325
Goodwill 100
Total assets $7,045

PROBLEM 8-10B
(a)
Rogers Shaw
(in millions) (in millions)
$13,414 $5,488
Receivables turnover ($1,689 + $1,878) ($525 + $494)
[ ] [ ]
2 2
= 7.5 times = 10.8 times
365 365
7.5 10.8

Accounts receivable Average collection

Days in year ÷ =
turnover period in days
(b) Shaw’s receivables turnover was considerably better than that of Rogers’,
which means Shaw was more efficient than Rogers in collecting its
receivables. However, both companies collect their receivables at a slower
pace than does the industry. Shaw takes about 4 days longer than the
industry average to collect its receivables, while Rogers takes about 19
days longer.


PROBLEM 8-11B
(a) 2018 2017 2016
Average 365 365 365

collection period = 46 days = 52 days = 61 days
8 7 6
Days in 365 365 365

inventory = 61 days = 52 days = 46 days
6 7 8
(b) At first glance it appears that Tianjin’s liquidity had remained stable over
the past year since the company’s current ratio has remained at 1.5:1.
However, the company is taking less time to collect its accounts receivable
as evidenced by the increasing receivables turnover ratio and decreasing
collection period. In contrast, it appears to be moving its inventory less
quickly as evidenced by the lower inventory turnover ratio and increasing
days in inventory. It is possible that the stable current ratio is due to the
fact that the improving collections and deteriorating inventory turnover
ratios are offsetting.
(c) Changes in the turnover ratios indirectly affect profitability. Improvements

in the receivables turnover and inventory turnover speed up the cash cycle,
which provides the company with better cash flow and decreases the need
for outside financing, thus decreasing interest expense. Furthermore,
improvements in the receivables turnover usually arise as a direct result of
improvements in credit management and better collection efforts. These
improvements result in fewer defaults and decreases in bad debts
expense. Improvements in the inventory turnover improve profitability by
reducing carrying charges associated with stocking inventory (such as
warehousing costs). Improved inventory turnover also reduces the risk of
merchandise not selling and becoming obsolete or selling at reduced
prices. Obsolete inventory lowers profitability because the cost of this type
of inventory has to be written off.

(d) Changes in the turnover ratios directly affect cash flow. Improvements in
the receivables turnover and inventory turnover speed up the cash cycle,
which provides the company with better cash flow and less need for outside
financing.
(e) There are several steps that Tianjin might consider to improve its
receivables and inventory management:
Receivables
The company could establish credit policies and credit limits for
certain customers, if it doesn’t already have them.
The company could initiate the use of a cash discount to encourage

early payment of receivables.
The company could more aggressively monitor collections, to

encourage customers to pay on time.
Inventory
Tianjin should monitor its inventory levels carefully and only reorder
when inventory is selling and additional quantities are required. If
inventory is not selling (e.g., not in favour or in season), it should mark
it down quickly to get rid of it rather than risk it not selling at all and
having to pay carrying costs for obsolete inventory.
The company could limit the amount of inventory by improving its

purchasing relationships with suppliers. If inventory could be
purchased more frequently, required inventory levels could be
reduced.
Further, were it possible to move to a system where inventory is only

purchased as needed (called “just-in-time”), Tianjin could reduce the
amount of inventory it had to carry and improve the turnover ratio.
However, there is some risk to this option as sales could be lost if
stock-outs occur.
LO 5 BT: AN Difficulty: C Time: 30 min. AACSB: Analytic CPA: cpa-t001, cpa-t005

ACR8-1 ACCOUNTING CYCLE REVIEW

(a) Jan. 4 Cash ................................................................. 236,000
Accounts Receivable................................. 236,000
6 Inventory ........................................................... 150,000

Accounts Payable ..................................... 150,000
8 Cash ................................................................. 51,000

Notes Receivable ...................................... 50,000
Interest Receivable ................................... 900
Interest Revenue ....................................... 100
[($50,000 x 12% x 2/12) less $900] = $100
10 Account Receivable .......................................... 188,000

Unearned Revenue ........................................... 10,000
Sales ......................................................... 198,000
Cost of Goods Sold ........................................... 102,000

Inventory ................................................... 102,000
12 Salaries Payable ............................................... 16,000

Salaries Expense .............................................. 10,000
Cash.......................................................... 26,000
14 Allowance for Doubtful Accounts....................... 18,000

14 Accounts Payable ............................................. 150,000

Inventory ................................................... 3,000
Cash.......................................................... 147,000
15 Notes Receivable ............................................. 20,000

17 Sales Returns and Allowances.......................... 4,000

ACR8-1 (CONTINUED)
(a) (continued)
Jan. 17 Inventory ........................................................... 2,400
Cost of Goods Sold ................................... 2,400
19 Accounts Receivable......................................... 9,000

Allowance for Doubtful Accounts............... 9,000

Cash ................................................................. 9,000

23 Cash ................................................................. 92,000

Accounts Receivable......................................... 92,000
Sales ......................................................... 184,000
Cost of Goods Sold ........................................... 98,000

Inventory ................................................... 98,000
25 Accounts Payable ............................................. 117,000

Cash.......................................................... 117,000
26 Inventory ........................................................... 138,000

Accounts Payable ..................................... 138,000
31 Bank Loan Payable ........................................... 15,000

Interest Expense ($800,000 x 3% x 1/12) ......... 2,000
Cash.......................................................... 17,000

ACR8-1 (CONTINUED)
(a) (continued)
Total estimated allowance balance at Jan. 31, 2018:

Estimated Estimated
0-30 days $280,000 2% $ 5,600
31-60 days 130,000 5% 6,500
61-90 days 40,000 6% 2,400
Over 90 days 20,000 12% 2,400
Total $470,000 $16,900
(e) Jan. 31 Bad Debts Expense .......................................... 12,900

Allowance for Doubtful Accounts............... 12,900
Required balance $16,900 above less unadjusted
Balance $4,000 [from T account part (b]
(c) DITURI DESIGNS LTD.

Bank Reconciliation
January 31, 2018
Balance per bank statement ........................................... $332,772
Less: Outstanding cheques ........................................... 67,000

Reconciled cash balance per bank ................................. $265,772
Balance per books [from T account part (b] .................... $278,000
Less: NSF cheque ...................................................... $12,100

Bank service charges ......................................... 128 12,228
Reconciled cash balance per books ............................... $265,772
(d) Jan. 31 Accounts Receivable......................................... 12,100

Bank Charges Expense .................................... 128
Cash.......................................................... 12,228

ACR8-1 (CONTINUED)
(b) and (e)
Cash
Inventory
Dec. 31 Bal. 197,000 Jan. 12 26,000
Dec. 31 Bal. 2,682,000 Jan. 10 102,000
Jan. 4 236,000 Jan. 14 147,000
Jan. 6 150,000 Jan. 14 3,000
Jan. 8 51,000 Jan. 25 117,000
Jan. 17 2,400 Jan. 23 98,000
Jan. 19 9,000 Jan. 31 17,000
Jan. 26 138,000
Jan. 23 92,000
Bal. Jan. 31 2,769,400
Unadj. Bal. 278,000
Jan. 31 AJE 12,228
Prepaid Insurance
Bal. Jan. 31 265,772
Dec. 31 Bal. 14,000
Unadj. Bal. 14,000
Accounts Receivable
Jan. 31 AJE 1,750
Dec. 31 Bal. 468,000 Jan. 4 236,000
Bal. Jan. 31 12,250
Jan. 10 188,000 Jan. 14 18,000
Jan. 19 9,000 Jan. 15 20,000
Interest Receivable
Jan. 23 92,000 Jan. 17 4,000
Dec. 31 Bal. 900 Jan. 9 900
Jan. 19 9,000
Unadj. Bal. 0
Unadj. Bal. 470,000
Jan. 31 AJE 75
Jan. 31 AJE 12,100
Bal. Jan. 31 75
Bal. Jan. 31 482,100
Equipment
Dec. 31 Bal. 1,560,000
Jan. 31 Bal. 1,560,000
Dec. 31 Bal. 13,000
Jan. 14 18,000 Jan. 19 9,000 Accumulated Depreciation-Equipment
Unadj. Bal. 4,000 Dec. 31 Bal. 972,000
Jan. 31 AJE 12,900 Unadj. Bal. 972,000
Jan. 31 Bal. 16,900 Jan. 31 AJE 13,000
Jan. 31 Bal. 985,000
Notes Receivable
Dec. 31 Bal. 50,000 Jan. 8 50,000
Jan. 15 20,000
Bal. Jan. 31 20,000

ACR8-1 (CONTINUED)
(b) and (e) (continued)
Accounts Payable Sales

Jan. 14 150,000 Dec. 31 Bal. 398,000 Jan. 10 198,000
Jan. 25 117,000 Jan. 6 150,000 Jan. 23 184,000
Jan. 26 138,000 Jan. 31 Bal. 382,000
Jan. 31 Bal. 419,000
Sales Returns and Allowances
Income Tax Payable Jan. 17 4,000
Jan. 31 AJE 24,000 Jan. 31 Bal. 4,000
Salaries Payable Cost of Goods Sold

Jan. 10 102,000 Jan. 17 2,400
Jan. 12 16,000 Dec. 31 Bal. 16,000 Jan. 23 98,000
Unadj. Bal. 0 Jan. 31 Bal. 197,600
Jan. 31 AJE 36,000
Jan. 31 Bal. 36,000
Salaries Expense
Unearned Revenue Jan. 12 10,000
Jan. 10 10,000 Dec. 31 Bal. 44,000 Unadj. Bal. 10,000
Jan. 31 Bal. 34,000
Jan. 31 AJE 36,000
Bank Loan Payable Jan. 31 Bal. 46,000
Jan. 31 15,000 Dec. 31 Bal. 800,000
Jan. 31 Bal. 785,000 Depreciation Expense
Jan. 31 AJE 13,000
Common Shares
Dec. 31 Bal. 600,000 Insurance Expense
Jan. 31 Bal. 600,000 Jan. 31 AJE 1,750
Retained Earnings Bank Charges Expense

Dec. 31 Bal. 2,128,900 Jan. 31 AJE 128
Jan. 31 Bal. 2,128,900
Bad Debts Expense
Jan. 31 AJE 12,900

ACR8-1 (CONTINUED)
(b) and (e) (continued)
Interest Revenue Interest Expense

Jan. 8 100 Jan. 31 2,000
Unadj. Bal. 100
Jan. 31 AJE 75 Income Tax Expense
Jan. 31 Bal. 175 Jan. 31 AJE 24,000

ACR8-1 (CONTINUED)
Adjusting journal entries (AJE)
Jan. 31 Depreciation Expense ......................................... 13,000

Accumulated Depreciation—Equipment ..... 13,000
($1,560,000 ÷ 10 x 1/12)
31 Insurance Expense .............................................. 1,750

Prepaid Insurance ...................................... 1,750
($14,000 ÷ 8)
31 Salaries Expense................................................. 36,000

Salaries Payable ........................................ 36,000
31 Interest Receivable .............................................. 75

Interest Revenue ........................................ 75
($20,000 x 9% x .5/12)
31 Income Tax Expense ........................................... 24,000

Income Tax Payable .................................. 24,000

ACR8-1 (CONTINUED)
(f)
DITURI DESIGNS LTD.
Adjusted Trial Balance
January 31, 2018
Debit Credit
Cash 265,772
Accounts receivable 482,100
Allowance for doubtful accounts 16,900
Inventory 2,769,400
Prepaid insurance 12,250
Interest receivable 75
Equipment 1,560,000 -
Accumulated depreciation—equipment 985,000
Accounts payable 419,000
Income tax payable 24,000
Salaries payable 36,000
Unearned revenue 34,000
Bank loan payable 785,000
Common shares 600,000
Retained earnings 2,128,900
Sales 382,000
Sales returns and allowances 4,000
Cost of goods sold 197,600
Depreciation expense 13,000
Salaries expense 46,000
Insurance expense 1,750
Bad debts expense 12,900
Bank charges expense 128
Interest revenue 175
Interest expense 2,000
Income tax expense 24,000 ________
$5,410,975 $5,410,975

ACR8-1 (CONTINUED)
(g) (1)
DITURI DESIGNS LTD.
Income Statement
Month ended January 31, 2018
Sales $382,000
Less: Sales returns and allowances 4,000
Net sales 378,000
Cost of goods sold 197,600
Gross profit 180,400
Operating expenses
Salaries expense $46,000
Depreciation expense 13,000
Bad debts expense 12,900
Insurance expense 1,750
Bank charges expense 128
Total operating expenses 73,778
Income from operations 106,622
Other expenses and revenues
Interest revenue ($175)
Interest expense 2,000 1,825
Income before income tax 104,797
Income tax expense 24,000
Net income $ 80,797
(g) (2)
DITURI DESIGNS LTD.
Statement of Changes in Equity
Month ended January 31, 2018
Common Retained Total

Shares Earnings Equity
Balance, January 1 $600,000 $2,128,900 $2,728,900
Net income 0000 000 80,797 80,797
Balance, January 31 $600,000 $2,209,697 $2,809,697

ACR8-1 (CONTINUED)
(g) (3)
DITURI DESIGNS LTD.
Statement of Financial Position
January 31, 2018
Assets
Current assets
Cash $ 265,772
Less: Allowance for doubtful accounts 16,900 465,200
Interest receivable 75
Inventory 2,769,400
Prepaid insurance 12,250
Total current assets 3,532,697
Property, plant and equipment
Equipment $1,560,000
Less: Accumulated depreciation 985,000 575,000
Total assets $4,107,697
Liabilities and Shareholders’ Equity
Current Liabilities
Accounts payable $ 419,000
Salaries payable 36,000
Income tax payable 24,000
Unearned revenue 34,000
Current portion of bank loan payable* 180,000
Total current liabilities 693,000
Bank loan payable 605,000
Total Liabilities 1,298,000
Shareholders’ equity
Common shares $ 600,000
Retained earnings 2,209,697
Total shareholders’ equity 2,809,697
Total liabilities and shareholders’ equity $4,107,697
*$15,000 x 12 months = $180,000
LO 1,2,3,4 BT: AP Difficulty: M Time: 80 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

CT8-1 FINANCIAL REPORTING CASE

(a) The North West Company Inc. reports $79,373,000 accounts receivable
on its January 31, 2016 balance sheet. From note 5, we can see that this
amount is made up of:
Trade accounts receivable $78,190,000

Corporate and other accounts receivable 13,566,000
Less: Allowance for doubtful accounts (12,383,000)
$79,373,000
(b)
($ in
thousands) 2016 2015
Receivables $1,796,035 23.7 $1,624,400 22.7

= =
turnover $79,373 + $72,506 times $72,506 + $70,527 times
2 2
Average 365 = 15 365 = 16

collection 23.7 days 22.7 days
period
Average net Accounts receivable

Accounts receivable Average collection

Days in year ÷ =
turnover period in days
(c) North West has exhibited relatively consistent performance in the collection
of its accounts receivable. It showed an improvement in its receivables
management in 2016. It should also be noted that an average collection
period of less than 30 days is normally an excellent collection period,
depending on the terms of sale.
LO 1,5 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting
and Finance


(a)
($ in
thousands) North West ($ in thousands) Sobeys ($ in millions)
Current $335,581 $2,581.4

= 2.2:1 = 1.0:1
ratio $155,501 $2,707.4
Receivables $1,796,035 23.7 $24,618.8 49.8

= times =
turnover $79,373 + $72,506 $489.4 + $499.7 times
2 2
Average 365 = 15 365 = 7

collection 23.7 days 49.8 days
period
(b) Ratio North West Sobeys Industry

Current ratio 2.2:1 1.0:1 1.18:1
Receivables turnover 23.7 times 49.8 times 24.2 times
Average collection period 15 days 7 days 15 days
Sobeys demonstrates superior management of accounts receivable as
shown by its receivables turnover and average collection period ratios,
which are better than those of North West and the industry average. It
should be noted that North West sells appliances and other household
items, which Sobeys and other industry competitors do not. The credit
terms granted to customers on these purchases may be longer, explaining
why their average collection period is also longer.
On the other hand, Sobeys’ current ratio is less than half that of North West
and below the industry average. Further investigation as to why Sobeys’
current ratio is so low is warranted (for example, is their inventory turnover
slower?) before drawing a conclusion about its liquidity.
LO 5 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and
Finance


(a) Both Lava and Flow provide the information on the carrying amount of the
trade receivables, but Lava provides disclosure of the amount of the
allowance for doubtful accounts. Lava also provides more detail as to the
aging of its accounts receivable, which is useful in assessing credit risk.
The analyst can see that over 70% ($1,322 ÷ $1,854) of Lava’s receivables
are current in 2018.
(b) Since Lava is a publicly traded company with many shareholders and
creditors, it is to its benefit to provide more information for the users of the
financial statements to help them to assess credit and collection risks and
management’s policies with respect to accounts receivable.
(c) Big Bank would want an aging analysis of Flow. In addition, here are some
examples of additional information Big Bank would need to assess credit
risk:
• Normal payment terms for the company and industry;

• An analysis by major customers;
• Details on how creditworthiness is evaluated; and
• Details on how Lava and Flow follow up on receivables that are past
due for a significant amount of time.
LO 2,4 BT: E Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

CT8-4 FINANCIAL ANALYSIS CASE

Note to instructors: All of the material supplementing this group activity, including
a suggested solution, can be found in the Collaborative Learning section of the
Instructor Resource site accompanying this textbook as well as in the Prepare
and Present section of WileyPLUS.
(a) Current ratio
2018: 1.6:1 ($10,600,000 ÷ $6,800,000)

2017: 2.1:1 ($10,500,000 ÷ $5,100,000)
Yes, the current ratio exceeds the bank’s requirement of a current ratio of
1.5:1 in both years.
(b)
Bal. 2017 500,000
2018 write offs 100,000
Bal. 2018 400,000
Notes Receivable
Bal. 2017 2,000,000
2018 New notes 1,500,000 2018 Collections 800,000
Bal. 2018 2,700,000
(c) It is difficult to say whether the Allowance for Doubtful Accounts is

adequate or not. It is noteworthy that in 2017 the allowance was 10% of
the royalties receivable ($500,000 ÷ $5,000,000). In 2018, after the write
off, the allowance is 6.7% of the royalties receivable ($400,000 ÷
$6,000,000). It is quite likely, given the increase in sales from $50 million
to $60 million and the increase in receivables from $5 million to $6 million,
that the allowance should also increase proportionately unless there is
evidence to the contrary.
HHL should prepare an aging of its accounts (royalty) receivable and

monitor its collection history so that it can ensure that it provides for the
appropriate level of allowance.

CT8-4 (CONTINUED)
(d) Yes, I believe an allowance should be recorded for notes receivable. As
the notes are due in one year, and all the notes issued during 2018, which
amounted to $1.5 million, are still outstanding at the end of the year, we
need to determine what happened to the $2 million of notes that were
outstanding at the beginning of the year. Since $800,000 of these notes
has been collected, the remaining $1.2 million ($2,700,000 − $1,500,000)
must have been dishonoured.
An argument can be made for an allowance being recorded for the full
amount of the $1.2 million dishonoured notes as past experience indicates
that they will probably not be collected. To record this, the following journal
entry would be required:
Bad Debts Expense 1,200,000

Allowance for Doubtful Notes 1,200,000
One could possibly argue that the outstanding notes that were issued in
2018 amounting to $1.5 million should have an allowance provided for
them but, at this time, it may be difficult to quantify this.
(e) If an Allowance for Doubtful Notes of $1.2 million is recorded, this would
lower current assets to $9.4 million ($10.6 million − $1.2 million) and the
current ratio would now be 1.4:1 ($9.4 million ÷ $6.8 million). This would
violate the terms on the bank loan.

CT8-4 (CONTINUED)
(f) Accounts receivable turnover ratio (calculated using ending balances

rather than average balances)
2018: 10.0 times ($60,000,000 ÷ $6,000,000)

2017: 10.0 times ($50,000,000 ÷ $5,000,000)
The liquidity of the company has deteriorated based on the decline in the
current ratio calculated in (a). The cash balance is lower in 2018 while
current liabilities are higher. While the accounts (royalties) receivable
turnover is unchanged in 2018, the collectability of the accounts receivable
as well as the notes receivable arising from dishonoured notes is suspect
because of the reluctance of the vice-president to write off dishonoured
notes.
LO 2,3,5 BT: E Difficulty: C Time: 30 min. AACSB: Analytic CPA: cpa-t001, cpa-t005

CT8-5 ETHICS CASE

(a) The stakeholders in this situation are:
The controller of Encounter Limited, Sam Wong

The president of Encounter Limited, Suzanne Chen
The company’s bank
The shareholders of this publicly traded company
Any other parties who rely upon the company’s financial statements
(b) The president of the company likely made the request to improve the
current ratio to show that the company is more liquid than it really is, for
the benefit of the bank. In this way, the bank’s expectations will be met.
(c) Yes. The controller has an ethical dilemma—should Sam follow the
president's “suggestion” and prepare misleading financial statements by
understating the allowance for doubtful accounts and bad debt expense or
should Sam attempt to stand up to and possibly anger the president by
preparing a fair (realistic) statement of financial position.
(d) No. Encounter’s liquidity should be measured using fair financial

statements. The controller should not prepare financial statements with the
objective of achieving or sustaining a predetermined level of liquidity. The
current ratio should be a product of proper estimates made by
management and operating results, not of “creative accounting.”
LO 1 BT: C Difficulty: M Time: 20 min. AACSB: Ethics CPA: cpa-t001, cpa-e001

CM: Reporting and Ethics

CT8-6 SERIAL CASE

(a) Software Solutions is currently adhering to ABC’s credit terms of 30 days
but have asked for an increase to 60 days. Several major clients, however,
have extended their payment period to 45 days. Advantages to Anthony
Business Company (ABC) of enforcing credit terms of 30 days for its
clients:
• Cash flow will increase and the stress of ensuring that there are
adequate funds on hand to purchase additional inventory and pay for
salaries and salary related costs will be alleviated with respect to
those clients currently taking longer than 30 days to pay.
• Will provide ABC with a consistent credit policy. When negotiating

terms with new customers it may wish to offer credit to, it will be able
to say that it has a credit policy that is consistent with what is being
offered to current customers—whether major or not.
Disadvantages to ABC of enforcing credit terms of 30 days for clients:

• Software Solutions and other major clients wishing a payment period
of longer than 30 days may choose to go elsewhere. Not only would
ABC lose its current contractual commitment but also the additional
revenues it expects to earn from these clients in the future.
• Since some clients have been delaying payment to 45 days in the

past without any consequences, enforcing a 30-day payment period
may be problematic. If ABC feels that a particular client in this
situation is loyal and is a major source of its profitability and growth, it
may have to consider whether the cost equals the benefits of
enforcing credit terms of 30 days.
(b) I do not believe that ABC should reduce its credit terms to 15 days.
Because ABC is a young growing company, it should be very careful about
its customer relations. For existing customers, particularly Software
Solutions, ABC should not disturb their current terms. In the case of ABC,
15 day terms are not likely standard in its industry and would likely turn
new customers away. ABC should consider the delays in collection as a
cost of doing business and arrange for the proper financing of the cash flow
demands of the future. It is better to incur interest costs and retain clients
than pay staff who are not assigned billable work.

CT8-6 (CONTINUED)
(b) (continued)
Advantages to (ABC) of reducing credit from 30 to 15 days:

• If in fact clients can meet these credit terms, cash flow will increase.
• Will provide ABC with a consistent credit policy.
• If ABC needs to borrow money, it can demonstrate to its creditor that

it has good control over the collection of accounts receivable.
Disadvantages to ABC of reducing credit from 30 to 15 days:

• 30 days may be a consistent policy in this industry. ABC should check
this out before making any change.
• Some clients may in fact agree to a 15-day payment period and still
take 45 days to pay. ABC will have to be clear on what the penalty is
for late payment (interest, for example) and what enforcement
measures it is prepared to take.
• ABC may experience down time (or not as productive performance)

from its employees through loss of customers.
• ABC may experience a loss of reputation. ABC may be perceived as

being cash strapped and consequently customers may incorrectly
conclude that ABC is not a reliable source of service.
(c) Implications of the doubling services for Software Solutions on operations

and cash flows.
Doug, Bev, and Emily must carefully consider the company’s cash flow
requirements. ABC will need to hire additional staff as a result of the
planned increase in services. These additional costs will have to be
considered when determining cash flows. All employee related costs will
increase as a consequence of the additional staff. For example, electricity
costs will increase and expenditures for more equipment may be
necessary. Payments for payroll and related costs cannot be delayed.
Since ABC is selling services and not inventory to Software Solutions, it
cannot pass on to its own suppliers, delays in payment.

CT8-6 (CONTINUED)
(d) Alternatives:
• Consider not extending credit for the purchase of goods. Perhaps

clients might consider payment by using a corporate credit card.
Although this is an alternative for the sale of goods, it may not be one
that clients would accept, considering some are currently taking 45
days to pay their ABC invoices. In addition, not all clients may have a
corporate credit card nor wish to acquire one. It is not as common as
a personal credit card. ABC would also have to consider the costs of
accepting payment by credit card. The issuing credit card company or
bank will charge a processing fee. This may be more costly than
allowing selected clients to pay in 45 days.
• Consider providing clients an incentive or discount to paying quickly,

for example a 1% discount. Again, a valid alternative but might be a
costly one to ABC. This cost should be compared to the cost of credit
card fees and potential interest paid if cash was borrowed by ABC to
finance operations.
• Consider the sale of receivables to an organization that will collect the

receivable (a factor). Although a valid alternative, this one may be a
costly one to ABC, as the fees charged by a factor can be significant
and likely far more significant than any savings it would occur from
receiving the collection of an account 15 days (45 days – 30 days)
earlier. In addition, it may make ABC look desperate and could lead
clients to the perception that ABC has a poor financial position.
LO 5 BT: E Difficulty: C Time: 45 min. AACSB: Communication CPA: cpa-t001, cpa-t005, cpa-e003
CM: Reporting, Finance and Comm.

Legal Notice
Copyright © 2017 by John Wiley & Sons Canada, Ltd. or related companies. All
rights reserved.
The data contained in these files are protected by copyright. This manual is
furnished under licence and may be used only in accordance with the terms of
such licence.
The material provided herein may not be downloaded, reproduced, stored in a

retrieval system, modified, made available on a network, used to create derivative
works, or transmitted in any form or by any means, electronic, mechanical,
photocopying, recording, scanning, or otherwise without the prior written
permission of John Wiley & Sons Canada, Ltd.
(MMXVII vi F2)


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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition

SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES

Solutions Manual 8-1 Chapter 8

AACSB Association to Advance Collegiate Schools of Business

Solutions Manual 8-2 Chapter 8

(a) Type (b) Examples

(2) Notes receivable Notes receivable from trade customers

(3) Other receivables Interest receivable, loans to company officers,

2. Trade receivables are the result of sales transactions while nontrade

Solutions Manual 8-3 Chapter 8

3. (a) For a service company, a receivable is recorded when the revenue is

(b) The five-step process used to measure and report revenue:

1. Identify the contract with the client or customer.

The timing of the recognition of revenue will determine the point at

Solutions Manual 8-4 Chapter 8

By accepting credit cards and debit cards, Canadian Tire provides

Debit cards: To record a debit card transaction, the seller records a

Solutions Manual 8-5 Chapter 8

5. (a) Using an accounts receivable subsidiary ledger makes it possible to

6. (a) An aging schedule shows the receivables in various stages

(b) The aging schedule is used to apply percentages to outstanding

7. (a) The purpose of the account Allowance for Doubtful Accounts is to

Solutions Manual 8-6 Chapter 8

Solutions Manual 8-7 Chapter 8

(b) Differences between accounts receivable and notes receivable

Solutions Manual 8-8 Chapter 8

13. (a) (1) Interest is normally recorded for an account receivable if a

(2) In the case of notes receivable, the amount of interest accrues

(b) (1) Accounts Receivable is normally debited for interest accrued on

(2) In the case of notes receivable, when accrued, Interest

Solutions Manual 8-9 Chapter 8

16. When a note receivable is honoured at maturity it is paid in full, while a

19. Current assets

Sales tax recoverable xxx

Solutions Manual 8-10 Chapter 8

20. (a) Account (b) Classification

21. The steps involved in good receivables management are:

22. To help in determining whether High Liner’s receivables management has

Solutions Manual 8-11 Chapter 8

24. If the receivables turnover is significantly higher than its competitors, it

Solutions Manual 8-12 Chapter 8

SOLUTIONS TO BRIEF EXERCISES

(a) Notes receivable

BRIEF EXERCISE 8-2

(a) July 1 Accounts Receivable ................................................. 58,000

Cost of Goods Sold ................................................... 32,000

(b) July 8 Sales Returns and Allowances .................................. 6,400

Inventory .................................................................... 4,320

(c) July 9 Cash ($51,600 – $1,032) ........................................... 50,568

(d) Aug. 31 Accounts Receivable ................................................. 1,032

Solutions Manual 8-13 Chapter 8

BRIEF EXERCISE 8-3

(a) April 28 Accounts Receivable ................................................. 26,000

Cost of Goods Sold ................................................... 18,000

(b) May 1 Accounts Receivable ................................................. 35,000

Cost of Goods Sold ................................................... 24,000

(c) May 3 Sales Returns and Allowances .................................. 1,200

Inventory .................................................................... 850

(d) May 6 Cash ($24,800 - 496)................................................. 24,304

(e) June 30 Accounts Receivable ................................................. 525

Solutions Manual 8-14 Chapter 8

BRIEF EXERCISE 8-4

Chiu Corp. Lewis Corp.