Tutorial 7

Chapter 9
Receivables
Review Questions
1. What is the difference between accounts receivable and notes receivable?
Accounts receivable represent the right to receive cash in the future from customers for goods sold
or for services performed. Accounts receivable are usually collected within a short period of time
such as 30 or 60 days. Notes receivable are usually longer in term than accounts receivable. Notes
receivable represent a written promise that a borrower will pay a fixed amount of principal plus
interest by a certain date in the future.
2. What do the terms ‘creditor’ and ‘debtor’ mean?.
The creditor is the one who receives a receivable (an asset). The creditor will collect cash from the
customer or borrower. The debtor is the party to a credit transaction who takes on an
obligation/payable (a liability). The debtor will pay cash later.
3. What is a critical element of internal control in the handling of receivables by a business? Explain
how this element is accomplished.
A critical element of internal control is the separation of cash-handling and cash-accounting duties.
For good internal control over cash collections from receivables, separation of duties must be
maintained and the credit department should have no access to cash. Additionally, those who handle
cash should not be in a position to grant credit to customers.
4. Separate customer accounts receivable are called subsidiary accounts. Why does a company create
subsidiary accounts?
A subsidiary account must be maintained for each customer in order to account for payments
received from the customer and amounts still owed.
5. What is the disadvantage of an account receivable?
The disadvantage of an account receivable is that some customers do not pay, creating uncollectible
receivables. Customers’ accounts receivable that are uncollectible must be written off or removed
from the books because the company does not expect to receive cash in the future. Instead, the
company must record an expense associated with the cost of the uncollectible account. This expense
is called bad debts expense.
6. What are some benefits to a business in accepting credit cards and debit cards?
The benefits to a business of accepting credit cards and debit cards include the ability to attract more
customers, not having to check each customer’s credit rating, and not having to keep accounts
receivable records or make collections from the customer.
© 2016 Pearson Education, Ltd. 9-1

7. What are two common methods used when accepting deposits for credit card and debit card
transactions?
Two common methods for deposits of proceeds from credit card sales are the net method and the
gross method. With the net method, the total sale less the processing fee assessed equals the net
amount of cash deposited by the processor, usually within a few days of the sale date. With the gross
method, the total sale is deposited daily, within a few days of the actual sale date. The processing
fees for all transactions processed for the month are deducted from the company’s bank account by
the processor, often on the last day of the month.
8. What occurs when a business factors its receivables?
When a business factors its receivables, it sells its receivables to a finance company or bank (often
called a factor). The business receives cash less an applicable fee from the factor for the receivables.
The factor, instead of the business, now collects the cash on the receivables. The business no longer
has to deal with the recordkeeping and collection of the receivables.
9. What occurs when a business pledges its receivables?
In a pledging situation, a business uses its receivables as security for a loan. The business borrows
money from a bank and offers its receivables as collateral. The business still is responsible for
collecting on the receivables and uses the money collected to pay off the loan along with interest. In
pledging, if the loan is not paid, the bank can collect on the receivables.
10. What are the advantages and disadvantages of selling on credit?
Bad Debts Expenses are the cost to the seller of extending credit. It arises from the failure to collect
from some credit customers. Bad debts expense is sometimes called doubtful accounts expense or
uncollectible accounts expense.
11. What is the bad debt expense? What is another term for the bad debt expense?
Limitations of the direct write-off method are that it violates the matching principle and is not
preferred by GAAP. The matching principle requires that the expense of uncollectible accounts be
matched with the related revenue. Under the direct write-off method the expense can occur in future
months or years. In addition, the accounts receivable (asset) are overstated on the balance sheet.
12. What are some limitations of using the direct write-off method?
Limitations of the direct write-off method are that it violates the matching principle and is not
preferred by GAAP. The matching principle requires that the expense of uncollectible accounts be
matched with the related revenue. Under the direct write-off method the expense can occur in future
months or years. In addition, the accounts receivable (asset) are overstated on the balance sheet.
13. When is bad debts expense recorded when using the allowance method?
Under the allowance method, bad debts expense is estimated and recorded in the same period as the
sales revenue as an adjusting entry at the end of the accounting period.

14. When using the allowance method, how are accounts receivable shown on the balance sheet?
Under the allowance method, accounts receivable are shown at the net realizable value. Net
realizable value is the net value that the company expects to collect from its receivables (Accounts
Receivable less Allowance for Bad Debts).
15. What should a company do when its customer pays a debt which had been written off?
The allowance for bad debts is a contra account, related to accounts receivable, that holds the
estimated amount of uncollectible accounts. Companies use their past experience as well as
considering the economy, the industry they operate in, and other variables. In short, they make an
educated guess, called an estimate. There are three basic ways to estimate uncollectibles: Percent-of-
sales, Percent-of-receivables, and Aging-of-receivables.
16. What is the allowance for bad debt or the Allowance for Doubtful Accounts? How do companies
determine bad debts?
The percent-of-sales method computes bad debts expense as a percentage of net credit sales.
17. How does the percent-of-sales method compute bad debts expense?
The percent-of-sales method computes bad debts expense as a percentage of net credit sales.
18. How do the percent-of-receivables and aging-of-receivables methods compute bad debts expense?
In both the percent-of-receivables method and aging-of-receivables method, the business determines
the target balance of the Allowance for Bad Debts account based on a percentage of accounts
receivable. This target balance is then used to determine the amount of bad debts expense after
considering the previous balance in the Allowance for Bad Debts.
19. What is the difference between the percent-of-receivables and aging-of-receivables methods?
In the percent-of-receivables method, the business uses only one percentage to determine the balance
of the Allowance for Bad Debts account. However, in the aging-of-receivables method, the business
groups’ individual accounts according to how long the receivable has been outstanding. They then
apply a different percentage to each aging category.
20. What is the formula to compute interest on a note receivable?
The formula for computing interest is as follows: Amount of interest = Principal × Interest rate ×
Time.
21. Why must companies record accrued interest revenue at the end of the accounting period?
The interest revenue earned on the note up to year-end is part of that year’s earnings. Interest
revenue is earned over time, not just when cash is received. Because of the revenue recognition
principle, a business must record the earnings from the note in the year in which they were earned.

22. How is the acid-test ratio calculated, and what does it signify?
The acid-test ratio is a ratio of the sum of cash (including cash equivalents) plus short-term
investments plus net current receivables to total current liabilities. The acid-test ratio reveals whether
the entity could pay all its current liabilities if they were to become due immediately.
23. What does the accounts receivable turnover ratio measure, and how is it calculated?
The accounts receivable turnover ratio measures the number of times the company collects the
average accounts receivable balance in a year. The higher the ratio, the faster the cash collections. It
is calculated by taking net credit sales divided by average net accounts receivable.
24. What does the days’ sales in receivables indicate, and how is it calculated?
Days’ sales in receivables, also called the collection period, indicates how many days it takes to
collect the average level of accounts receivable. The number of days’ sales in receivables should be
close to the number of days customers are allowed to pay when credit is extended. The shorter the
collection period, the more quickly the organization can use its cash. The longer the collection
period, the less cash is available for operations. It is calculated by taking 365 days divided by the
accounts receivable turnover ratio.
Short Exercises
S9-1 Ensuring internal control over the collection of receivables

Learning Objective 1
Consider internal control over receivables collections. What job must be withheld from a company’s
credit department in order to safeguard its cash? If the credit department does perform this job, what can
a credit department employee do to hurt the company?
SOLUTION
The company’s credit department should not take customer payments or have any other cash-handling
responsibilities. For example, if a credit department employee also handles cash, the company would
have no separation of duties. The employee could pocket money received from a customer. He or she
could then label the customer’s account as uncollectible, and the company would stop billing that
customer. The employee may be able to cover his or her theft.

S9-2 Recording credit card and debit card sales
Restaurants do a large volume of business by credit and debit cards. Suppose Summer, Sand, and
Castles Resort restaurant had these transactions on January 28, 2016:
Requirements
1. Suppose Summer, Sand, and Castles Resort’s processor charges a 2% fee and deposits sales net of
the fee. Journalize these sales transactions for the restaurant.
2. Suppose Summer, Sand, and Castles Resort’s processor charges a 2% fee and deposits sales using
the gross method. Journalize these sales transactions for the restaurant.
SOLUTION
Requirement 1
Date Accounts and Explanation Debit Credit

Jan. 28 Cash 20,384
Credit Card Expense ($20,800 × 0.02) 416
Sales Revenue 20,800
Recorded credit card sales, net of fee.
Requirement 2

Jan. 28 Cash 20,800
Sales Revenue ($10,800 + $10,000) 20,800
Recorded credit card sales.

S9-3 Applying the direct write-off method to account for uncollectibles
Susan Knoll is an attorney in Los Angeles. Knoll uses the direct write-off method to account for
uncollectible receivables.
At January 31, 2016, Knoll’s accounts receivable totaled $18,000. During February, she earned revenue
of $21,000 on account and collected $23,000 on account. She also wrote off uncollectible receivables of
$1,050 on February 29, 2016.
Requirements
1. Use the direct write-off method to journalize Knoll’s write-off of the uncollectible receivables.
2. What is Knoll’s balance of Accounts Receivable at February 29, 2016?
SOLUTION
Requirement 1

Feb. 29 Bad Debts Expense 1,050
Accounts Receivable 1,050
Wrote off uncollectible accounts.
Requirement 2
Accounts Receivable
Jan 31 Bal 18,000 23,000 collected
revenue 21,000 1,050 wrote off
Bal 14,950

S9-4 Collecting a receivable previously written off—direct write-off method
Gate City Cycles had trouble collecting its account receivable from Shawna Brown. On June 19, 2016,
Gate City finally wrote off Brown’s $700 account receivable. On December 31, Brown sent a $700
check to Gate City.
Journalize the entries required for Gate City Cycles, assuming Gate City uses the direct write-off
method.
SOLUTION

2016
Jun. 19 Bad Debts Expense 700
Accounts Receivable—Brown 700
Wrote off receivable.
Dec. 31 Accounts Receivable—Brown 700

Bad Debts Expense 700
Reinstated previously written off account.
31 Cash 700
Accounts Receivable—Brown 700
Collected cash on account.
S9-5 Applying the allowance method to account for uncollectibles

The Accounts Receivable balance and Allowance for Bad Debts for Turning Leaves Furniture
Restoration at December 31, 2015, was $10,800 and $2,000 (credit balance). During 2016, Turning
Leaves completed the following transactions:
a. Sales revenue on account, $265,800 (ignore Cost of Goods Sold).
b. Collections on account, $220,000.
c. Write-offs of uncollectibles, $6,100.
d. Bad debts expense of $5,000 was recorded.
Requirements
1. Journalize Turning Leaves’s transactions for 2016 assuming Turning Leaves uses the allowance
method.
2. Post the transactions to the Accounts Receivable, Allowance for Bad Debts, and Bad Debts Expense
T-accounts, and determine the ending balance of each account.
3. Show how accounts receivable would be reported on the balance sheet at December 31, 2016.

SOLUTION
Requirement 1

2016
a. Accounts Receivable 265,80
0
b. Cash 220,00
0
c. Allowance for Bad Debts 6,100

d. Bad Debts Expense 5,000

Allowance for Bad Debts 5,000
Requirement 2
Accounts Receivable
12/31/15, Bal 10,800 220,000 collected
12/31/16, Bal 50,500
Allowance for Bad Debts

2,000 12/31/15, Bal
wrote off 6,100 5,000 expense
900 12/31/16, Bal
Bad Debts Expense

expense 5,000
Bal 5,000
Requirement 3
TURNING LEAVES FURNITURE RESTORATION

Balance Sheet−Partial
December 31, 2016
Assets
Current Assets:
Accounts Receivable $ 50,500
Less: Allowance for Bad Debts (900) $ 49,600

S9-6 Applying the allowance method (percent-of-sales) to account for uncollectibles
During its first year of operations, Signature Lamp Company earned net credit sales of
$314,000. Industry experience suggests that bad debts will amount to 4% of net credit sales. At
December 31, 2016, accounts receivable total $45,000. The company uses the allowance method to
account for uncollectibles.
Requirements
1. Journalize Signature’s Bad Debts Expense using the percent-of-sales method.
2. Show how to report accounts receivable on the balance sheet at December 31, 2016.
SOLUTION
Requirement 1

2016
Dec. 31 Bad Debts Expense ($314,000 × 4%) 12,560
Recorded bad debts expense for the period.
Requirement 2
SIGNATURE LAMP COMPANY

December 31, 2016
Assets
Current Assets:
Less: Allowance for Bad Debts (12,560) $ 32,440

S9-7 Applying the allowance method (percent-of-receivables) to account for uncollectibles
The Accounts Receivable balance for Field, Inc. at December 31, 2015, was $25,000. During 2016,
Field earned revenue of $457,000 on account and collected $326,000 on account. Field wrote off $5,900
receivables as uncollectible. Industry experience suggests that uncollectible accounts will amount to 4%
of accounts receivable.
Requirements
1. Assume Field had an unadjusted $2,300 credit balance in Allowance for Bad Debts at December 31,
2016. Journalize Field’s December 31, 2016, adjustment to record bad debts expense using the
percent-of-receivables method.
2. Assume Field had an unadjusted $1,900 debit balance in Allowance for Bad Debts at December 31,
2016. Journalize Field’s December 31, 2016, adjustment to record bad debts expense using the
percent-of-receivables method.
SOLUTION
Requirement 1
Accounts Receivable
12/31/15, Bal 25,000 326,000 collected
12/31/16, Bal 150,100

2016
Dec. 31 Bad Debts Expense 3,704
($150,100 × 4% = $6,004; $6,004 – $2,300 = $3,704)
Requirement 2

2016
($150,100 × 4% = $6,004; $6,004 + $1,900 = $7,904)

S9-8 Applying the allowance method (aging-of-receivables) to account for uncollectibles
World Class Work Shoes had the following balances at December 31, 2016, before the year-end
adjustments:
The aging of accounts receivable yields the following data:
Requirements
1. Journalize World Class’s entry to record bad debts expense for 2016 using the aging-of-receivables
method.
2. Prepare a T-account to compute the ending balance of Allowance for Bad Debts.
SOLUTION
Requirement 1
Age of Accounts Receivable

0 – 60 Days Over 60 Days Total Receivables
Accounts Receivable $73,000 $5,000 $78,000
Percent uncollectible × 2% × 24%
Estimated total uncollectible $1,460 $1,200 $2,660 (Target Balance)

2016
($2,660 – $1,060 = $1,600)
Requirement 2
1,060 Balance
1,600 expense
2,660 Balance

S9-9 Computing interest amounts on notes receivable
A table of notes receivable for 2016 follows:
For each of the notes receivable, compute the amount of interest revenue earned during 2016. Round to
the nearest dollar.
SOLUTION
Interest Interest Revenue

Principal Interest Rate Period Earned
Note 1 $ 30,000 × 0.04 × 3/12 = $ 300
Note 2 8,000 × 0.05 ×180/360 = 200
Note 3 28,000 × 0.12 × 90/360 = 840
Note 4 110,000 × 0.10 × 6/12 = 5,500
S9-10 Accounting for a note receivable

On June 6, Southside Bank & Trust lent $90,000 to Samantha Michael on a 60-day, 6% note.
Requirements
1. Journalize for Southside the lending of the money on June 6.
2. Journalize the collection of the principal and interest at maturity. Specify the date.
SOLUTION
Requirement 1

June 6 Notes Receivable—Michael 90,000
Cash 90,000
Lent money to Samantha Michael.

S9-10, cont.
Requirement 2

Aug. 5 Cash ($90,000 + $900) 90,900
Notes Receivable—Michael 90,000
Interest Revenue ($90,000 × 0.06 × 60/360) 900
Collected note receivable plus interest.
S9-11 Accruing interest revenue and recording collection of a note

On December 1, Kole Corporation accepted a 120-day, 6%, $17,000 note receivable from J. Peterman in
exchange for his account receivable.
Requirements
1. Journalize the transaction on December 1.
2. Journalize the adjusting entry needed on December 31 to accrue interest revenue.
3. Journalize the collection of the principal and interest at maturity. Specify the date.
SOLUTION
Requirement 1

Dec. 1 Notes Receivable—Peterman 17,000
Accounts Receivable—Peterman 17,000
Accepted note receivable in exchange for an
account receivable.
Requirement 2

Dec. 31 Interest Receivable 85
Interest Revenue (17,000 × 0.06 × 30/360) 85
Accrued interest earned.
Requirement 3

Mar. 31 Cash ($17,000 + $85 + $255) 17,340
Notes Receivable—Peterman 17,000
Interest Receivable 85
Collected note receivable plus interest.

S9-12 Recording a dishonored note receivable
Midway Corporation has a six-month, $24,000, 3% note receivable from L. Summers that was signed on
June 1, 2016. Summers defaults on the loan on December 1.
Journalize the entry for Midway to record the default of the loan.
SOLUTION

2016
Dec. 1 Accounts Receivable—Summers 24,360
Notes Receivable—Summers 24,000
Recorded default of loan.
S9-13 Using the acid-test ratio, accounts receivable turnover ratio, and days’ sales in receivables to
evaluate a company
Gold Clothiers reported the following selected items at September 30, 2016 (last year’s—2015—
amounts also given as needed):
Compute Gold’s (a) acid-test ratio, (b) accounts receivable turnover ratio, and (c) days’ sales in
receivables for 2016. Evaluate each ratio value as strong or weak. Gold sells on terms of net 30. (Round
days’ sales in receivables to a whole number.)

SOLUTION
a) Acid-test ratio = (Cash including cash equivalents + Short-term investments + Net current
receivables) / Total current liabilities
= ($302,900 + $151,000 + $303,000) / ($331,000 + $191,000)
= $756,900 / $522,000
= 1.45
The acid-test ratio is a strong ratio.
b) Accounts receivable turnover ratio = Net credit sales / Average net accounts receivables
= $3,321,500 / [($152,000 + $303,000) / 2]
= $3,321,500 / $227,500
= 14.60
The accounts receivable turnover ratio is strong relative to credit terms of net 30.
c) Days’ sales in receivables = 365 days / Accounts receivable turnover ratio

= 365 days / 14.60
= 25 days
The days’ sales in receivables is strong relative to credit terms of net 30.
Exercises
E9-14 Defining common receivables terms
Match the terms with their correct definition.
SOLUTION
1. F
2. E
3. A
4. C
5. D
6. B

E9-15 Identifying and correcting internal control weakness
Suppose The Right Rig Dealership is opening a regional office in Omaha. Cary Regal, the office
manager, is designing the internal control system. Regal proposes the following procedures for credit
checks on new customers, sales on account, cash collections, and write-offs of uncollectible receivables:
 The credit department runs a credit check on all customers who apply for credit. When an account
proves uncollectible, the credit department authorizes the write-off of the accounts receivable.
 Cash receipts come into the credit department, which separates the cash received from the customer
remittance slips. The credit department lists all cash receipts by customer name and amount of cash
received.
 The cash goes to the treasurer for deposit in the bank. The remittance slips go to the accounting
department for posting to customer accounts.
 The controller compares the daily deposit slip to the total amount posted to customer accounts. Both
amounts must agree.
Recall the components of internal control. Identify the internal control weakness in this situation, and
propose a way to correct it.
SOLUTION
The internal control weakness is that the credit department receives incoming cash from customers.
With access to cash, an employee in the credit department can pocket cash received from a customer and
destroy the remittance slip. The credit department can then write-off the customer’s account as
uncollectible, and the company will stop pursuing collection from the customer.
To strengthen the controls, the company can have cash go to a lock box belonging to the bank or to the
company mail room, not to the credit department. An employee that is outside of the credit department
should then handle the receipt of the cash.
Student responses may vary.
E9-16 Journalizing transactions using the direct write-off method

Learning Objectives 1, 2
On June 1, High Performance Cell Phones sold $19,000 of merchandise to Andrew Trucking Company
on account. Andrew fell on hard times and on July 15 paid only $7,000 of the account receivable. After
repeated attempts to collect, High Performance finally wrote off its accounts receivable from Andrew on
September 5. Six months later, March 5, High Performance received Andrew’s check for $12,000 with a
note apologizing for the late payment.
Requirements
1. Journalize the transactions for High Performance Cell Phones using the direct write-off method.
Ignore Cost of Goods Sold.
2. What are some limitations that High Performance will encounter when using the direct write-off
method?

SOLUTION
Requirement 1

June 1 Accounts Receivable—Andrew Trucking Company 19,000
Record sales on account.
July 15 Cash 7,000

Accounts Receivable—Andrew Trucking Company 7,000
Record payment on account.
Sep. 5 Bad Debts Expense 12,000

Wrote-off account balance.
Mar. 5 Accounts Receivable—Andrew Trucking Company 12,000

Bad Debts Expense 12,000
5 Cash 12,000
Collected cash on account.
Requirement 2
High Performance will encounter limitations with the direct write-off method because it violates the
matching principle. The matching principle requires that the expense of uncollectible accounts be
matched with the related revenue. For example when using the direct write-off method, a company
might record sales revenue in 2015 but not record the bad debts expense until 2016. By recording the
bad debts expense in a different year than when the revenue was recorded, the company is overstating
net income in 2015 and understating net income in 2016. In addition, on the balance sheet, Accounts
Receivable will be overstated in 2015 because the company will have some receivables that will be
uncollectible but are not yet written off. This method is only acceptable for companies that have very
few uncollectible receivables.

Use the following information to answer Exercises E9-17 and E9-18.
At January 1, 2016, Hilly Mountain Flagpoles had Accounts Receivable of $31,000, and Allowance for
Bad Debts had a credit balance of $3,000. During the year, Hilly Mountain Flagpoles recorded the
following:
a. Sales of $174,000 ($157,000 on account; $17,000 for cash). Ignore Cost of Goods Sold.
b. Collections on account, $131,000.
c. Write-offs of uncollectible receivables, $2,200.
E9-17 Accounting for uncollectible accounts using the allowance method (percent-of-sales) and
reporting receivables on the balance sheet
2. AR, Dec. 31 $54,800
Requirements
1. Journalize Hilly’s transactions that occurred during 2016. The company uses the allowance method.
2. Post Hilly’s transactions to the Accounts Receivable and Allowance for Bad Debts T-accounts.
3. Journalize Hilly’s adjustment to record bad debts expense assuming Hilly estimates bad debts as 4%
of credit sales. Post the adjustment to the appropriate T-accounts.
4. Show how Hilly Mountain Flagpoles will report net accounts receivable on its December 31, 2016,
balance sheet.
SOLUTION
Requirement 1

2016
0
Cash 17,000
b. Cash 131,00
0

Requirement 2
Accounts Receivable
1/1 Bal 31,000 131,000 collected
12/31 Bal 54,800

3,000 1/1 Bal
wrote off© 2016
2,200
Pearson Education, Ltd. 9-18
800 12/31 Unadj. Bal
E9-17, cont.
Requirement 3

2016
4% × $157,000 = $6,280

3,000 1/1 Bal
wrote off 2,200
800 Unadj. Bal
6,280 expense
7,080 12/31Bal
Bad Debts Expense

1/1 Bal 0
12/31 exp. 6,280
12/31 Bal 6,280
Requirement 4
HILLY MOUNTAIN FLAGPOLES

December 31, 2016
Assets
Current Assets:

E9-18 Accounting for uncollectible accounts using the allowance method (percent-of-receivables)
and reporting receivables on the balance sheet
3. Bad Debts Expense $844
Requirements
1. Journalize Hilly’s transactions that occurred during 2016. The company uses the allowance method.
2. Post Hilly’s transactions to the Accounts Receivable and Allowance for Bad Debts T-accounts.
3. Journalize Hilly’s adjustment to record bad debts expense assuming Hilly estimates bad debts as 3%
of accounts receivable. Post the adjustment to the appropriate T-accounts.
4. Show how Hilly Mountain Flagpoles will report net accounts receivable on its December 31, 2016,
balance sheet.
SOLUTION
Requirement 1

2016
0
Cash 17,000
b. Cash 131,00
0

Requirement 2
Accounts Receivable
1/1 Bal 31,000 131,000 collected
12/31 Bal 54,800

3,000 1/1 Bal
wrote off 2,200
800 12/31 Unadj.Bal

E9-18, cont.
Requirement 3

2016
Dec. 31 Bad Debts Expense 844
Allowance for Bad Debts 844
3% × $54,800 = $1,644; $1,644 – $800 = $844

3,000 1/01 Bal
wrote off 2,200
800 Unadj. Bal
844 expense
1,644 12/31 Bal
Bad Debts Expense

1/1 Bal 0
12/31 exp. 844
12/31 Bal 844
Requirement 4
HILLY MOUNTAIN FLAGPOLES

December 31, 2016
Assets
Current Assets:

E9-19 Accounting for uncollectible accounts using the allowance method (aging- of-receivables)
2. Allowance CR Bal. $25,100
At December 31, 2016, the Accounts Receivable balance of TM Manufacturer is $230,000. The
Allowance for Bad Debts account has a $24,000 debit balance. TM Manufacturer prepares the following
aging schedule for its accounts receivable:
Requirements
1. Journalize the year-end adjusting entry for bad debts on the basis of the aging schedule. Show the T-
account for the Allowance for Bad Debts at December 31, 2016.
2. Show how TM Manufacturer will report its net accounts receivable on its December 31, 2016,
balance sheet.
SOLUTION
Requirement 1

1 – 30 31 – 60 61 – 90 Over 90 Total Receivables
Days Days Days Days
Accounts Receivable $75,000 $80,000 $35,000 $40,000 $230,000
Percent uncollectible × 0.8% × 4.0% × 6.0% × 48.0%
Estimated total $ 600 $ 3,200 $ 2,100 $19,200 $ 25,100 (Target
uncollectible Balance)

2016
$24,000 + $25,100 = $49,100

Requirement 2

Bal 24,000
49,100 expense
25,100 Bal
TM MANUFACTURER
December 31, 2016
Assets
Current Assets:

E9-20 Journalizing transactions using the direct write-off method versus the allowance method
Learning Objectives 1, 2, 3
During August 2016, Ritter Company recorded the following:

 Sales of $62,100 ($55,000 on account; $7,100 for cash). Ignore Cost of Goods Sold.
 Collections on account, $37,800.
 Write-offs of uncollectible receivables, $1,690.
 Recovery of receivable previously written off, $500.
Requirements
1. Journalize Ritter’s transactions during August 2016, assuming Ritter uses the direct write-off
method.
2. Journalize Ritter’s transactions during August 2016, assuming Ritter uses the allowance method.
SOLUTION
Requirement 1

2016
Aug. Accounts Receivable 55,000
Cash 7,100
Record sales for the month.
Cash 37,800
Record collections on account.

Write-off uncollectible receivables.
Accounts Receivable 500

Bad Debts Expense 500
Reinstate previously written off account.
Cash 500
Accounts Receivable
Record collection of account. 500

E9-20, cont.
Requirement 2

2016
Aug. Accounts Receivable 55,000
Cash 7,100
Recorded sales for the month.
Cash 37,800
Recorded collections on account.

Wrote-off uncollectible receivables.

Cash 500
Recorded collection of account.

E9-21 Journalizing credit card sales, note receivable transactions, and accruing interest
Marathon Running Shoes reports the following:
Journalize all entries required for Marathon Running Shoes.
SOLUTION

2016
Feb 4 Cash 95,040
Credit Card Expense ($96,000 × 0.01) 960
Recorded sales for the month.
Sep. 1 Notes Receivable—Jess Prichett 23,000

Cash 23,000
Recorded loan to employee.
Dec. 31 Interest Receivable 920

Accrued interest earned on Prichett note.
2017
Sep. 1 Cash ($23,000 + $920 + $1,840) 25,760
Interest Revenue ($23,000 × 0.12 × 8/12) 1,840
Notes Receivable—Jess Prichett 23,000
Collected note and interest from Prichett.

E9-22 Journalizing note receivable transactions including a dishonored note
On September 30, 2016, Regal Bank loaned $92,000 to Kim Warner on a one-year, 6% note. Regal’s
fiscal year ends on December 31.
Requirements
1. Journalize all entries for Regal Bank related to the note for 2016 and 2017.
2. Which party has a
a. note receivable?
b. note payable?
c. interest revenue?
d. interest expense?
3. Suppose that Kim Warner defaulted on the note. What entry would Regal record for the dishonored
note?

SOLUTION
Requirement 1

2016
Sep. 30 Notes Receivable—Kim Warner 92,000
Cash 92,000
Recorded loan to Kim Warner.
Dec. 31 Interest Receivable 1,380

Accrued interest earned on Warner note.
2017
Sep. 30 Cash ($92,000 + $4,140 + $1,380) 97,520
Interest Receivable 1,380
Notes Receivable—Kim Warner 92,000
Collected note and interest from Warner.
Requirement 2
a. note receivable Regal Bank
b. note payable Kim Warner
c. interest revenue Regal Bank
d. interest expense Kim Warner
Requirement 3

2017
Sep. 30 Accounts Receivable—Kim Warner 97,520
Notes Receivable—Kim Warner 92,000
To record dishonored note.

E9-23 Journalizing note receivable transactions
Feb. 1, 2017 Cash DR $21,200
The following selected transactions occurred during 2016 and 2017 for Mediterranean Importers. The
company ends its accounting year on April 30.
Journalize all required entries. Make sure to determine the missing maturity date.
SOLUTION

2016
Feb. 1 Notes Receivable—Candace Smith 20,000
Cash 20,000
Recorded loan to Candace Smith.
Apr. 6 Notes Receivable—Green Masters 10,000

Sold goods for a note.
30 Interest Receivable 360

Interest Revenue ($300 + $60) 360
($20,000 × 0.06 × 3/12)+($10,000 × 0.09 ×
24/360)
Accrued interest earned on the two notes.
Jul. 5 Cash ($10,000 + $60 + $165) 10,225

Notes Receivable—Green Masters 10,000
Collected note and interest from Green Masters.
2017
Feb. 1 Cash ($20,000 + $300 + $900) 21,200
Notes Receivable—Candace Smith 20,000
Collected note and interest from Smith.

E9-24 Journalizing note receivable transactions
Oct. 31 Cash DR $24,240
Like New Steam Cleaning performs services on account. When a customer account becomes four
months old, Like New converts the account to a note receivable. During 2016, the company completed
the following transactions:
Record the transactions in Like New’s journal.
SOLUTION

2016
Apr. 28 Accounts Receivable—Java Club 24,000
Service Revenue 24,000
Performed services on account.
Sep. 1 Notes Receivable—Java Club 24,000

Accounts Receivable—Java Club 24,000
Received note in satisfaction of past due account
Oct. 31 Cash ($24,000 + $240) 24,240

Notes Receivable—Java Club 24,000
Collected note and interest from Java.

E9-25 Evaluating ratio data
Chippewa Carpets reported the following amounts in its 2016 financial statements. The 2015 figures are
given for comparison.
Requirements
1. Calculate Chippewa’s acid-test ratio for 2016. (Round to two decimals.) Determine whether
Chippewa’s acid-test ratio improved or deteriorated from 2015 to 2016. How does Chippewa’s acid-
test ratio compare with the industry average of 0.80?
2. Calculate Chippewa’s accounts receivable turnover ratio. (Round to two decimals.) How does
Chippewa’s ratio compare to the industry average accounts receivable turnover of 10?
3. Calculate the days’ sales in receivables for 2016. (Round to the nearest day.) How do the results
compare with Chippewa’s credit terms of net 30?

SOLUTION
Requirement 1
Acid-test ratio = (Cash including cash equivalents + Short-term investments + Net current
2016
= ($3,000 + $21,000 + $52,000) / $105,000
= $76,000 / $105,000
= 0.72 (rounded)
2015
= ($9,000 + $10,000 + $66,000) / $107,000
= $85,000 / $107,000
= 0.79 (rounded)
The acid-test ratio deteriorated from 2015 to 2016. The company’s acid-test ratio is a little worse
than the industry average of 0.80.
Requirement 2
Accounts receivable turnover ratio = Net credit sales / Average net accounts receivable
2016
= $654,900 / [($66,000 +$52,000) / 2]
= $654,900 / $59,000
= 11.10
The company’s accounts receivable turnover ratio is better than the industry average of 10.
Requirement 3
Days’ sales in receivables = 365 days / Accounts receivable turnover ratio

= 365 days / 11.10
= 33 days (rounded)
Chippewa’s days’ sales in receivables calculation is a little worse than the company’s net 30-day credit
period.

E9-26 Computing the collection period for receivables
New Media Sign Incorporated sells on account. Recently, New reported the following
figures:
Requirements
1. Compute New’s days’ sales in receivables for 2016. (Round to the nearest day.)
2. Suppose New’s normal credit terms for a sale on account are “2/10, net 30.” How well does New’s
collection period compare to the company’s credit terms? Is this good or bad for New?
SOLUTION
Requirement 1
Accounts receivable turnover ratio = Net credit sales / Average net accounts receivables
2016
= $539,220 / [($38,600 + $43,100) / 2]
= $539,220 / $40,850
= 13.20
= 365 days / 13.20
= 28 days (rounded)
Requirement 2
New’s collection period is shorter than the 30 day credit terms. This is good for New. It appears that
some of their credit customers are taking advantage of the discount for early payment.

Problems (Group A)
P9-27A Accounting for uncollectible accounts using the allowance (percent-of-sales) and direct
write-off methods and reporting receivables on the balance sheet
1. Bad Debts Expense $5,400
On August 31, 2016, Lily Floral Supply had a $145,000 debit balance in Accounts Receivable and a
$5,800 credit balance in Allowance for Bad Debts. During September, Lily made
 Sales on account, $540,000. Ignore Cost of Goods Sold.
Requirements
1. Journalize all September entries using the allowance method. Bad debts expense was estimated at
1% of credit sales. Show all September activity in Accounts Receivable, Allowance for Bad Debts,
and Bad Debts Expense (post to these T-accounts).
2. Using the same facts, assume that Lily used the direct write-off method to account for uncollectible
receivables. Journalize all September entries using the direct write-off method. Post to Accounts
Receivable and Bad Debts Expense, and show their balances at September 30, 2016.
3. What amount of Bad Debts Expense would Lily report on its September income statement under
each of the two methods? Which amount better matches expense with revenue? Give your reason.
4. What amount of net accounts receivable would Lily report on its September 30, 2016, balance sheet
under each of the two methods? Which amount is more realistic? Give your reason.

SOLUTION
Requirement 1

2016
Sep. 30 Accounts Receivable 540,00
0
30 Cash 581,00
0
30 Allowance for Bad Debts 5,000

30 Bad Debts Expense 5,400

(1% × $540,000 = $5,400)
Accounts Receivable
8/31 Bal 145,000 581,000 collected
9/30 Bal 99,000

5,800 8/31 Bal
6,200 9/30 Bal
Bad Debts Expense

expense 5,400
Bal 5,400

P9-27A, cont.
Requirement 2

2016
0
30 Cash 581,00
0

Accounts Receivable
8/31 Bal 145,000 581,000 collected
9/30 Bal 99,000
Bad Debts Expense

expense 5,000
Bal 5,000
Requirement 3
Allowance Direct Write-

Income Statement Method Off Method
Bad Debts Expense $5,400 $5,000
Bad Debts Expense under the allowance method better matches expense with revenue because the
expense is recorded in the same period the sales are made.
Requirement 4

Balance Sheet Method Off Method
Accounts Receivable $ 99,000 $ 99,000
Less: Allowance for Bad Debts (6,200)
Accounts Receivable, net $ 92,800
Net accounts receivable under the allowance method is more realistic because it shows the amount of the
receivables that the company expects to collect.

P9-28A Accounting for uncollectible accounts using the allowance method (aging-of-receivables)
2. Allowance CR Bal. $7,539 at Dec. 31, 2016
At September 30, 2016, the accounts of Park Terrace Medical Center (PTMC) include the following:
During the last quarter of 2016, PTMC completed the following selected transactions:
Requirements
1. Journalize the transactions.
2. Open the Allowance for Bad Debts T-account, and post entries affecting that account. Keep a
running balance.
3. Show how Park Terrace Medical Center should report net accounts receivable on its December 31,
2016, balance sheet.

SOLUTION
Requirement 1

2016
Dec. 28 Allowance for Bad Debts 2,800
Accounts Receivable—Silver, Co. 1,200
Accounts Receivable—Oscar Wells 1,000
Accounts Receivable—Rain Company 600

($7,539 – $500 = $7,039)

Days Days Days Days
Accounts Receivable $103,000 $41,000 $13,000 $ 6,000 $163,000
Estimated total $ 309 $ 1,230 $ 3,900 $ 2,100 $7,539 (Target
Requirement 2

3,300 9/30 Bal
wrote off 2,800
500 12/28 Bal
7,039 expense
7,539 12/31 Bal
Requirement 3
PARK TERRACE MEDICAL CENTER

December 31, 2016
Assets
Current Assets:

P9-29A Accounting for uncollectible accounts using the allowance method (percent-of-sales) and
3. Net AR $107,300
Beta Watches completed the following selected transactions during 2016 and 2017:
Requirements
1. Open T-accounts for Allowance for Bad Debts and Bad Debts Expense. Keep running balances,
assuming all accounts begin with a zero balance.
2. Record the transactions in the general journal, and post to the two T-accounts.
3. Assume the December 31, 2017, balance of Accounts Receivable is $131,000. Show how net
accounts receivable would be reported on the balance sheet at that date.

SOLUTION
Requirements 1 and 2

0 Bal
12,000
12,000 12/31/2016 Bal
Jun. 29 900
11,100 06/29/2017 Bal
900 Aug. 6
12,000 08/06/2017 Bal
Dec. 31 3,300
8,700 12/31/2017 Bal
15,000 Dec. 31
23,700 12/31/2017 Bal
Bad Debts Expense

Bal 0
Dec. 31 12,000
12/31/2016 Bal 12,000
12,000 closing entry
01/1/2017 Bal 0
Dec. 31 15,000
12/31/2017 Bal 15,000
15,000 closing entry
01/1/2018 Bal 0

P9-29A, cont.
Requirements 1 and 2, cont.

2016
(3% × $400,000 = $12,000)
31 Income Summary 12,000

2017
Jan. 17 Accounts Receivable—Marty Viller 900
Sales Revenue 900
Jun. 29 Allowance for Bad Debts 900

Accounts Receivable—Marty Viller 900
Aug. 6 Accounts Receivable—Marty Viller 900

6 Cash 900
Accounts Receivable—Marty Viller 900

Accounts Receivable—Bob Keffer 1,900
Accounts Receivable—Mary Martin 1,000
Accounts Receivable—Robert Ronson 400

(3% × $500,000 = $15,000)

Requirement 3
BETA WATCHES
December 31, 2017
Assets
Current Assets:

P9-30A Accounting for uncollectible accounts (aging-of-receivables method), credit card sales,
notes receivable, and accrued interest revenue
Dec. 31, 2016 Interest Receivable $3,600
Quality Recliner Chairs completed the following selected transactions:
Record the transactions in the journal of Quality Recliner Chairs. Explanations are not required. (For
notes stated in days, use a 360-day year. Round to the nearest dollar.)

SOLUTION

2016
Jul. 1 Notes Receivable—Gray Mart 45,000
Oct. 31 Cash 23,000

Nov. 3 Credit Card Expense 460

Cash 460

Interest Revenue 3,600
($45,000 × 0.16 × 6/12)

($15,200 – $11,400 = $3,800)
2017
Apr. 1 Cash ($45,000 + $1,800 + $3,600) 50,400
Notes Receivable—Gray Mart 45,000
Jun. 23 Notes Receivable—Artist Company 8,000

Sales Revenue 8,000
Aug. 22 Accounts Receivable—Artist, Company 8,080

Notes Receivable – Artist Company 8,000
Nov. 16 Notes Receivable—Creed Company 22,000

Cash 22,000
Dec. 5 Cash 8,080

Accounts Receivable—Artist Company 8,080

Interest Revenue 330
($22,000 × 0.12 × 45/360)

P9-31A Accounting for notes receivable and accruing interest
1. Note 3 Dec. 18, 2016
Cathy Realty loaned money and received the following notes during 2016.
Requirements
1. Determine the maturity date and maturity value of each note.
2. Journalize the entries to establish each Note Receivable and to record collection of principal and
interest at maturity. Include a single adjusting entry on December 31, 2016, the fiscal year-end, to
record accrued interest revenue on any applicable note. Explanations are not required.
SOLUTION
Requirement 1
Principal Interest Interest Interest Maturity Maturity Date

Rate Period Revenue Value
Earned (P + I)
Note 1 $ 18,000 × 0.08 × 12/12 $ 1,440 $ 19,440 Jun 1, 2017
Note 2 24,000 × 0.12 × 6/12 1,440 25,440 Mar 30, 2017
Note 3 10,000 × 0.09 × 60/360 150 10,150 Dec. 18, 2016

P9-31A, cont.
Requirement 2
2016
Jun. 1 Notes Receivable (Note 1) 18,000
Cash 18,000
Sep. 30 Notes Receivable (Note 2) 24,000

Cash 24,000
Oct. 19 Notes Receivable (Note 3) 10,000

Cash 10,000
Dec. 18 Cash ($10,000 + $150) 10,150

Interest Revenue ($10,000 × 0.09 ×60/360) 150
Notes Receivable (Note 3) 10,000
31 Interest Receivable 1,540

Principal Interest Interest Interest

Rate Period Revenue
Earned
Note 1 $ 18,000 × 0.08 × 7/12 $ 840
Note 2 24,000 × 0.12 × 3/12 720
$ 1,540
2017
Mar. 30 Cash ($24,000 + $720 + $720) 25,440
Jun. 1 Cash ($18,000 + $600 + $840) 19,440


P9-32A Accounting for notes receivable, dishonored notes, and accrued interest revenue
Dec. 31, 2016 Income Summary CR $75
Consider the following transactions for Jo Jo Music.
Journalize all transactions for Jo Jo Music. Round all amounts to the nearest dollar. (For notes stated in
days, use a 360-day year.)

SOLUTION

2016
Dec. 6 Notes Receivable—Concord Sounds 9,000
Accounts Receivable—Concord Sounds 9,000
31 Interest Revenue 75
Income Summary 75
2017
Mar. 6 Cash 9,270
Notes Receivable—Concord Sounds 9,000
Jun. 30 Notes Receivable—Main Street Music 11,000

Cash 11,000
Oct. 2 Notes Receivable—Salem Sounds 9,000

Sales Revenue 9,000
Dec. 1 Accounts Receivable—Salem Sounds 9,180

Notes Receivable—Salem Sounds 9,000

Accounts Receivable—Salem Sounds 9,180
30 Cash 11,660
Notes Receivable—Main Street Music 11,000

P9-33A Using ratio data to evaluate a company’s financial position
1. Acid-test ratio (2016) 0.86
The comparative financial statements of Perfection Cosmetic Supply for 2016, 2015, and 2014 include
the data shown here:
Requirements
1. Compute these ratios for 2016 and 2015:
a. Acid-test ratio (Round to two decimals.)
b. Accounts receivable turnover (Round to two decimals.)
c. Days’ sales in receivables (Round to the nearest whole day.)
2. Considering each ratio individually, which ratios improved from 2015 to 2016 and which ratios
deteriorated? Is the trend favorable or unfavorable for the company?

SOLUTION
Requirement 1
a. Acid-test ratio = (Cash including cash equivalents + Short-term investments + Net current
2016
= ($60,000 + $135,000 + $270,000) / ($540,000)
= $465,000 / $540,000
= 0.86
2015
= ($80,000 + $150,000 + $280,000) / ($570,000)
= $510,000 / $570,000
= 0.89
b. Accounts receivable turnover ratio = Net credit sales / Average net accounts receivables
2016
= $5,860,000 / [($270,000 + $280,000) / 2]
= $5,860,000 / $275,000
= 21.31
2015
= $5,120,000 / [($280,000 + $260,000) / 2]
= $5,120,000 / $270,000
= 18.96
c. Days’ sales in receivables = 365 days / Accounts receivable turnover ratio

2016
= 365 days / 21.31
= 17 days (rounded)
2015
= 365 days / 18.96
= 19 days (rounded)
Requirement 2
The acid-test ratio decreased from 2015 to 2016. This trend is unfavorable to the company.
The accounts receivable turnover increased from 2015 to 2016. This trend is favorable to the company.
The days’ sales in receivables decreased from 2015 to 2016. This trend is favorable to the company.

Problems (Group B)
P9-34B Accounting for uncollectible accounts using the allowance (percent-of-sales) and direct
write-off methods and reporting receivables on the balance sheet
1. Sep. 30 Bal. AR $128,000
On August 31, 2016, Bouquet Floral Supply had a $170,000 debit balance in Accounts Receivable and a
$6,800 credit balance in Allowance for Bad Debts. During September, Bouquet made the following
transactions:
 Sales on account, $550,000. Ignore Cost of Goods Sold.
Requirements
1. Journalize all September entries using the allowance method. Bad debts expense was estimated at
2% of credit sales. Show all September activity in Accounts Receivable, Allowance for Bad Debts,
and Bad Debts Expense (post to these T-accounts).
2. Using the same facts, assume that Bouquet used the direct write-off method to account for
uncollectible receivables. Journalize all September entries using the direct write-off method. Post to
Accounts Receivable and Bad Debts Expense, and show their balances at November 30, 2016.
3. What amount of Bad Debts Expense would Bouquet report on its September income statement under
each of the two methods? Which amount better matches expense with revenue? Give your reason.
4. What amount of net accounts receivable would Bouquet report on its September 30, 2016, balance
sheet under each of the two methods? Which amount is more realistic? Give your reason.

SOLUTION
Requirement 1

2016
0
30 Cash 584,00
0


(2% × $550,000 = $11,000)
Accounts Receivable
8/31 Bal 170,000 584,000 collected
9/30 Bal 128,000

6,800 8/31 Bal
9,800 9/30 Bal
Bad Debts Expense

expense 11,000
Bal 11,000

P9-34B, cont.
Requirement 2

2016
0
30 Cash 584,00
0

Accounts Receivable
8/31 Bal 170,000 584,000 collected
9/30 Bal 128,000
Bad Debts Expense

expense 8,000
Bal 8,000
Requirement 3

Income Statement Method Off Method
Bad Debts Expense $ 11,000 $ 8,000
Bad Debts Expense under the allowance method better matches expense with revenue because the
expense is recorded in the same period the sales are made.

P9-34B, cont.
Requirement 4

Balance Sheet Method Off Method
Accounts Receivable $ 128,000 $ 128,000
Less: Allowance for Bad Debts (9,800)
Accounts Receivable, net $ 118,200
Net accounts receivable under the allowance method is more realistic because it shows the amount of the
receivables that the company expects to collect.
P9-35B Accounting for uncollectible accounts using the allowance method (aging-of-receivables)
2. Dec. 31, 2016 Allowance CR Bal. $4,616
At September 30, 2016, the accounts of Spring Heights Medical Center (SHMC) include the following:
During the last quarter of 2016, SHMC completed the following selected transactions:
Requirements
1. Journalize the transactions.
2. Open the Allowance for Bad Debts T-account, and post entries affecting that account. Keep a
running balance.
3. Show how Spring Heights Medical Center should report net accounts receivable on its December 31,
2016, balance sheet.

SOLUTION
Requirement 1

2016
Accounts Receivable—Silver Co. 1,400
Accounts Receivable—Owen Reis 700
Accounts Receivable—Pristine, Inc. 700

($4,616 − $500 = $4,116)

Days Days Days Days
Accounts Receivable $103,000 $ 43,000 $ 14,000 $ 3,000 $ 163,000
Estimated total $ 206 $ 860 $ 2,800 $ 750 $ 4,616 (Target
Requirement 2

3,300 9/30 Bal
wrote off 2,800
500 12/28 Bal
4,116 expense
4,616 12/31 Bal
Requirement 3
SPRING HEIGHTS MEDICAL CENTER

December 31, 2016
Assets
Current Assets:

P9-36B Accounting for uncollectible accounts using the allowance method (percent-of-sales) and
1. Dec. 31, 2017, Allowance CR Bal. $5,900
Quality Watches completed the following selected transactions during 2016 and 2017:
Requirements
1. Open T-accounts for Allowance for Bad Debts and Bad Debts Expense. Keep running balances,
assuming all accounts begin with a zero balance.
2. Record the transactions in the general journal, and post to the two T-accounts.
3. Assume the December 31, 2017, balance of Accounts Receivable is $136,000. Show how net
accounts receivable would be reported on the balance sheet at that date.

SOLUTION

0 Bal
4,400
4,400 12/31/2016 Bal
Jun. 29 500
3,900 6/29/2017 Bal
500 Aug. 6
4,400 8/06/2017 Bal
Dec. 31 3,500
900 12/31/2017 Bal
5,000 Dec. 31
5,900 12/31/2017 Bal
Bad Debts Expense

Bal. 0
Dec. 31 4,400
12/31/2016 Bal 4,400
4,400 closing entry
1/01/2017 Bal 0
Dec. 31 5,000
12/31/2017 Bal 5,000
5,000 closing entry
1/01/2018 Bal 0

P9-36B, cont.
Requirements 1 and 2, cont.

2016
(1% × $440,000 = $4,400)

2017
Jan. 17 Accounts Receivable—Malcom Monet 500
Sales Revenue 500
Jun. 29 Allowance for Bad Debts 500

Accounts Receivable—Malcom Monet 500
Aug. 6 Accounts Receivable—Malcom Monet 500

6 Cash 500
Accounts Receivable—Malcom Monet 500

Accounts Receivable—Bernard Klaus 1,800
Accounts Receivable—Mo Vanez 1,500
Accounts Receivable—Russell Reeves 200

(1% × $500,000 = $5,000)

Requirement 3
QUALITY WATCHES
December 31, 2017
Assets
Current Assets:

P9-37B Accounting for uncollectible accounts (aging-of-receivables method), credit card sales,
notes receivable, and accrued interest revenue
Dec. 31, 2016 Bad Debts Expense $3,900
Comfy Recliner Chairs completed the following selected transactions:
Record the transactions in the journal of Comfy Recliner Chairs. Explanations are not required. (For
notes stated in days, use a 360-day year. Round to the nearest dollar.)

SOLUTION

2016
Jul. 1 Notes Receivable—Gray Mart 43,000
Oct. 31 Cash 21,000

Nov. 3 Credit Card Expense 400

Cash 400

($43,000 × 0.12 × 6/12)

($14,600 – $10,700 = $3,900)
2017
Apr. 1 Cash ($43,000 + $2,580 + $1,290) 46,870
Notes Receivable—Gray Mart 43,000
Jun. 23 Notes Receivable—Aglow, Corp. 13,000

Aug. 22 Accounts Receivable—Aglow, Corp. 13,195

Notes Receivable—Aglow, Corp. 13,000
Nov. 16 Notes Receivable—Crowe, Inc. 22,000

Cash 22,000
Dec. 5 Cash 13,195

Accounts Receivable—Aglow, Corp. 13,195

($22,000 × 0.16 × 45/360)

P9-38B Accounting for notes receivable and accruing interest
1. Note 2 Maturity Value $20,300
Christie Realty loaned money and received the following notes during 2016.
Requirements
1. Determine the maturity date and maturity value of each note.
2. Journalize the entries to establish each Note Receivable and to record collection of principal and
interest at maturity. Include a single adjusting entry on December 31, 2016, the fiscal year-end, to
record accrued interest revenue on any applicable note. Explanations are not required.

SOLUTION
Requirement 1
Principal Interest Interest Interest Maturity Maturity Date

Rate Period Revenue Value
Earned (P + I)
Note 1 $ 24,000 × 0.07 × 12/12 $ 1,680 $ 25,680 Aug 1, 2017
Note 2 20,000 × 0.06 × 3/12 300 20,300 Feb 28, 2017
Note 3 10,000 × 0.12 × 30/360 100 10,100 Jan 18, 2017
Requirement 2

2016
Aug. 1 Notes Receivable (Note 1) 24,000
Cash 24,000
Nov. 30 Notes Receivable (Note 2) 20,000

Cash 20,000
Dec. 19 Notes Receivable (Note 3) 10,000

Cash 10,000

Principal Interest Interest Interest

Rate Period Revenue
Earned
Note 1 $ 24,000 × 0.07 × 5/12 $ 700
Note 2 20,000 × 0.06 × 1/12 100
Note 3 10,000 × 0.12 × 12/360 40
$ 840

P9-38B, cont.
Requirement 2, cont.

2017
Jan. 18 Cash ($10,000 + $40 + $60) 10,100
Feb. 28 Cash ($20,000 + $100 + $200) 20,300

Aug. 1 Cash ($24,000 + $980 + $700) 25,680

P9-39B Accounting for notes receivable, dishonored notes, and accrued interest revenue
March 6, 2017 Interest Revenue $325
Consider the following transactions for Smith’s Publishing.
Journalize all transactions for Smith’s Publishing. Round all amounts to the nearest dollar. (For notes
stated in days, use a 360-day year.)

SOLUTION

2016
Dec. 6 Notes Receivable—Jazz Music 15,000
Accounts Receivable—Jazz Music 15,000

31 Interest Revenue 125

Income Summary 125
2017
Mar. 6 Cash 15,450
Notes Receivable—Jazz Music 15,000
Jun. 30 Notes Receivable—RS Publishing 11,000

Cash 11,000
Oct. 2 Notes Receivable—Tusk Music 3,000

Sales Revenue 3,000
Dec. 1 Accounts Receivable—Tusk Music 3,060

Notes Receivable—Tusk Music 3,000

Accounts Receivable—Tusk Music 3,060
30 Cash 11,660
Notes Receivable—RS Publishing 11,000

P9-40B Using ratio data to evaluate a company’s financial position
1. Days’ sales in receivables (2016) 16 days
The comparative financial statements of True Beauty Cosmetic Supply for 2016, 2015, and 2014 include
the data shown here:
Requirements
1. Compute these ratios for 2016 and 2015:
a. Acid-test ratio (Round to two decimals.)
b. Accounts receivable turnover (Round to two decimals.)
c. Days’ sales in receivables (Round to the nearest whole day.)
2. Considering each ratio individually, which ratios improved from 2015 to 2016 and which ratios
deteriorated? Is the trend favorable or unfavorable for the company?

SOLUTION
Requirement 1
a. Acid-test ratio = (Cash including cash equivalents + Short-term investments + Net current
2016
= ($90,000 + $140,000 + $270,000) / $540,000
= $500,000 / $540,000
= 0.93 (rounded)
2015
= ($80,000 + $150,000 + $260,000) / $580,000
= $490,000 / $580,000
= 0.84 (rounded)
b. Accounts receivable turnover ratio = Net credit sales / Average net accounts receivables
2016
= $5,880,000 / [($270,000 + $260,000) / 2]
= $5,880,000 / $265,000
= 22.19 (rounded)
2015
= $5,210,000 / [($260,000 + $220,000) / 2]
= $5,210,000 / $240,000
= 21.7
c. Days' sales in receivables = 365 days / Accounts receivable turnover ratio

2016
= 365 days / 22.19
= 16 days (rounded)
2015
= 365 days / 21.7
= 17 days (rounded)
Requirement 2
The acid-test ratio increased from 2015 to 2016. This trend is favorable to the company.
The accounts receivable turnover increased from 2015 to 2016. This trend is favorable to the company.
The days’ sales in receivables decreased from 2015 to 2016. This trend is favorable to the company.

Continuing Problem
P9-41 Accounting for uncollectible accounts using the allowance method
This problem continues the Daniels Consulting situation from Problem P8-33 of Chapter 8. Daniels
Consulting reviewed the receivables list from the January transactions. Daniels uses the allowance
method for receivables, estimating uncollectibles to be 6% of January sales revenue of $8,180. Daniels
identified on February 15 that a customer was not going to pay his receivable of $176.
Requirements
1. Journalize the January 31 entry to record and establish the allowance using the percent-of-sales
method for January sales revenue.
2. Journalize the entry to record the write-off of the customer’s bad debt.
SOLUTION

Jan. 31 Bad Debts Expense 491
(6% × $8,180 = $491)
Feb. 15 Allowance for Bad Debts 176


Practice Set
This problem continues the Crystal Clear Cleaning problem begun in Chapter 2 and continued through
Chapters 3–8.
P9-42 Accounting for uncollectible accounts using the allowance method and reporting net
accounts receivable on the balance sheet
Crystal Clear Cleaning uses the allowance method to estimate bad debts. Consider the following January
transactions for Crystal Clear:
Requirements
1. Prepare all required journal entries for Crystal Clear.
2. Show how net accounts receivable would be reported on the balance sheet as of January 31, 2018.

SOLUTION

2018
Jan. 1 Accounts Receivable—Debbie’s D-list 9,000
Service Revenue 9,000
10 Cash 20,000
Notes Payable—High Roller Bank 20,000
12 Allowance for Bad Debts 275

Accounts Receivable—Merry Cleaners 275
15 Accounts Receivable—Westford 8,000

Sales Revenue 8,000
Cost of Goods Sold 400

Merchandise Inventory 400
28 Cash 2,000
Sales Revenue 2,000
Cost of Goods Sold 350

Merchandise Inventory 350
28 Accounts Receivable—Merry Cleaners 275

Cash 275
Accounts Receivable—Merry Cleaners 275
29 Utilities Expense 450

Cash 450

$2,126 – $240 = $1,886

P9-42, cont.
Accounts Receivable
Total Receivables
Accounts Receivable $ 8,100 $ 9,775 $ 850 $ 18,725
Percent uncollectible × 5.0% × 15.0% × 30.0%
Estimated total uncollectible $ 405 $ 1,466 $ 255 $ 2,126 (Target Balance)
CRYSTAL CLEAR CLEANING

Balance Sheet—Partial
January 31, 2018
Assets
Current Assets:

Critical Thinking
Decision Case 9-1
Weddings on Demand sells on account and manages its own receivables. Average experience for the
past three years has been as follows:
Unhappy with the amount of bad debts expense she has been experiencing, Aledia Sanchez, controller,
is considering a major change in the business. Her plan would be to stop selling on account altogether
but accept either cash, credit cards, or debit cards from her customers. Her market research indicates that
if she does so, her sales will increase by 10% (i.e., from $350,000 to $385,000), of which $200,000 will
be credit or debit card sales and the rest will be cash sales. With a 10% increase in sales, there will also
be a 10% increase in Cost of Goods Sold. If she adopts this plan, she will no longer have bad debts
expense, but she will have to pay a fee on debit/credit card transactions of 2% of applicable sales. She
also believes this plan will allow her to save $5,000 per year in other operating expenses.
Should Sanchez start accepting credit cards and debit cards? Show the computations of net income
under her present arrangement and under the plan.
SOLUTION
Actual New Plan Expected
Sales Revenue $ 350,000 × 1.10 = $ 385,000
Cost of Goods Sold $ 210,000 × 1.10 = $ 231,000

Bad Debts Expense 4,000 – 4,000 = 0
Credit Card Expense (200,000 × 2%) 4,000
Other Expenses 61,000 – 5,000 = 56,000
Total Expenses 275,000 291,000
Net Income $ 75,000 $ 94,000
Sanchez should stop selling on account and start accepting debit and credit cards; it has the potential to
increase her net income by $19,000.

Decision Case 9-2
Pauline’s Pottery has always used the direct write-off method to account for uncollectibles. The
company’s revenues, bad debt write-offs, and year-end receivables for the most recent year follow:
The business is applying for a bank loan, and the loan officer requires figures based on the allowance
method of accounting for bad debts. In the past, bad debts have run about 4% of revenues.
Requirements
Pauline must give the banker the following information:
1. How much more or less would net income be for 2016 if Pauline’s Pottery were to use the allowance
method for bad debts? Assume Pauline uses the percent-of-sales method.
2. How much of the receivables balance at the end of 2016 does Pauline’s Pottery actually expect to
collect? (Disregard beginning account balances for the purpose of this question.)
3. Explain why net income is more or less using the allowance method versus the direct write-off
method for uncollectibles.
SOLUTION
Requirement 1
Bad-debts Expense:
Allowance method ($150,000 × 0.04) $6,000
Direct write-off method 3,900
Decrease in net income under allowance method $2,100
Requirement 2

Pauline’s Pottery expects to collect $8,000 if the company uses the percent-of-sales method for the
allowance calculation.
Requirement 3
Net income is lower under the allowance method, because you recognize more Bad Debts Expense in
the current year. The difference in Bad Debt Expense is $2,100 = $6,000 − $3,900.

Fraud Case 9-1
Dylan worked for a propane gas distributor as an accounting clerk in a small Midwestern town. Last
winter, his brother Mike lost his job at the machine plant. By January, temperatures were sub-zero, and
Mike had run out of money. Dylan saw that Mike’s account was overdue, and he knew Mike needed
another delivery to heat his home. He decided to credit Mike’s account and debit the balance to the parts
inventory because he knew the parts manager, the owner’s son, was incompetent and would never notice
the extra entry. Months went by, and Dylan repeated the process until an auditor ran across the charges
by chance. When the owner fired Dylan, he said, “If you had only come to me and told me about Mike’s
situation, we could have worked something out.”
Requirements
1. What can a business like this do to prevent employee fraud of this kind?
2. What effect would Dylan’s actions have on the balance sheet? The income statement?
3. How much discretion does a business have with regard to accommodating hard- ship situations?
SOLUTION
Requirement 1
Dylan’s journal entries should be reviewed by a manager. Employees should not be able to access
family accounts. Regular inventory should be taken of the parts, which would have indicated a
difference in the account. The company should make sure that all its employees are competent,
adequately trained, and able to spot irregularities.
Requirement 2
The parts inventory is overstated by the amount of the past due account. However, Accounts Receivable
is understated by the same amount. The net effect of the two misstatements is zero. If the company uses
the percent-of-receivables or aging approach to estimate bad debts, then Bad Debts Expense and the
Allowance for Bad Debts are probably both understated.
Requirement 3
Small business owners have full discretion to make exceptions to normal procedures as they see fit.
These cases often amount to a tradeoff where the owners are willing to take lower profits in order to
help their customers. Larger scale companies must have more rigid policies and controls, and would
have far fewer discretionary powers.

Financial Statement Case 9-1
Use Starbucks Corporation’s Fiscal 2013 Annual Report and the Note 1 data on “Allowance for
Doubtful Accounts” to answer the following questions. Visit
http://www.pearsonhighered.com/Horngren to view a link to Starbucks Corporation’s annual report.
Requirements
1. How much accounts receivables did Starbucks report as of September 29, 2013? As of September
30, 2012?
2. Refer to Note 1, “Allowance for Doubtful Accounts.” How does Starbucks calculate allowance for
doubtful accounts? What was the amount of the account as of September 29, 2013? As of September
30, 2012?
3. Compute Starbucks’s acid-test ratio at the end of 2013. If all the current liabilities came due
immediately, could Starbucks pay them?
4. Compute Starbucks’s accounts receivable turnover at the end of 2013. Use total net revenues.
5. Compute Starbucks’s days’ sales in receivables at the end of 2013.
6. How does Starbucks compare to Green Mountain Coffee Roasters, Inc. on the basis of the acid-
test ratio, accounts receivable turnover, and days’ sales in receivables?
SOLUTION
Requirement 1
Starbucks Corporation September 29, 2013 September 30, 2012

Accounts Receivable, net (in millions) $561.4 $485.9
Requirement 2
Starbucks Corporation calculates the Allowance for Doubtful Accounts based on historical experience,
customer credit risk, and application of the specific identification method.
Starbucks Corporation September 29, 2013 September 30, 2012

Allowance for Doubtful Accounts (in millions) $5.7 $5.6

Financial Statement Case 9-1, cont.
Requirement 3
Acid-test ratio = (Cash including cash equivalents + Short-term investments + Net current
2013
= ($2,575.7 + $658.1 + $561.4) / $5,377.3
= $3,795.2 / $5,377.3
= .71
This ratio indicates Starbucks cannot pay all current liabilities if they are due
immediately.
Requirement 4
Accounts receivable turnover ratio = Net credit sales (net revenues) / Average net accounts
receivables 2013
= $14,892.2 / [($561.4 + $485.9) / 2]
= $14,892.2 / $523.65
= 28.44
Requirement 5

2011
= 365 days / 28.44
= 13 days (rounded)
Requirement 6
Starbucks has much better ratios regarding collectability of receivables while falling short of Green
Mountain in covering payment of current liabilities utilizing the current assets of cash, cash equivalents,
short term investments, and accounts receivables.
Starbucks Green Mountain

Acid-test ratio 0.71 1.22
Accounts receivable turnover 28.44 10.48
Days sales in receivable 13 days 35 days

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Chapter 9

2. What do the terms ‘creditor’ and ‘debtor’ mean?.

5. What is the disadvantage of an account receivable?

© 2016 Pearson Education, Ltd. 9-1

8. What occurs when a business factors its receivables?

9. What occurs when a business pledges its receivables?

10. What are the advantages and disadvantages of selling on credit?

© 2016 Pearson Education, Ltd. 9-2

20. What is the formula to compute interest on a note receivable?

© 2016 Pearson Education, Ltd. 9-3

S9-1 Ensuring internal control over the collection of receivables

© 2016 Pearson Education, Ltd. 9-4

Date Accounts and Explanation Debit Credit

Date Accounts and Explanation Debit Credit

© 2016 Pearson Education, Ltd. 9-5

Date Accounts and Explanation Debit Credit

© 2016 Pearson Education, Ltd. 9-6

Date Accounts and Explanation Debit Credit

Dec. 31 Accounts Receivable—Brown 700

S9-5 Applying the allowance method to account for uncollectibles

© 2016 Pearson Education, Ltd. 9-7

Date Accounts and Explanation Debit Credit

c. Allowance for Bad Debts 6,100

d. Bad Debts Expense 5,000

Allowance for Bad Debts

Bad Debts Expense

TURNING LEAVES FURNITURE RESTORATION

© 2016 Pearson Education, Ltd. 9-8

Date Accounts and Explanation Debit Credit

SIGNATURE LAMP COMPANY

© 2016 Pearson Education, Ltd. 9-9

Date Accounts and Explanation Debit Credit

Date Accounts and Explanation Debit Credit

© 2016 Pearson Education, Ltd. 9-10

The aging of accounts receivable yields the following data:

Age of Accounts Receivable

Date Accounts and Explanation Debit Credit

© 2016 Pearson Education, Ltd. 9-11

A table of notes receivable for 2016 follows:

Interest Interest Revenue

S9-10 Accounting for a note receivable

Date Accounts and Explanation Debit Credit

© 2016 Pearson Education, Ltd. 9-12

Date Accounts and Explanation Debit Credit

S9-11 Accruing interest revenue and recording collection of a note

Date Accounts and Explanation Debit Credit

Date Accounts and Explanation Debit Credit

Date Accounts and Explanation Debit Credit

© 2016 Pearson Education, Ltd. 9-13

Date Accounts and Explanation Debit Credit

© 2016 Pearson Education, Ltd. 9-14

c) Days’ sales in receivables = 365 days / Accounts receivable turnover ratio

Match the terms with their correct definition.

© 2016 Pearson Education, Ltd. 9-15

Student responses may vary.

E9-16 Journalizing transactions using the direct write-off method

© 2016 Pearson Education, Ltd. 9-16

Date Accounts and Explanation Debit Credit

July 15 Cash 7,000

Sep. 5 Bad Debts Expense 12,000

Mar. 5 Accounts Receivable—Andrew Trucking Company 12,000

© 2016 Pearson Education, Ltd. 9-17

Date Accounts and Explanation Debit Credit

c. Allowance for Bad Debts 2,200