Solution Manual For Financial and Managerial Accounting 8th by Wild

Solution Manual for Financial and Managerial Accounting 8th by Wild
Solution Manual for Financial and Managerial

Accounting 8th by Wild
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Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 7
Chapter 7
Accounting for Receivables
QUESTIONS
1. When customers use credit cards, the selling companies can avoid having to directly
evaluate the credit standing of their customers. They also avoid the risk of bad debts and
often are paid cash from the credit card company more quickly than if customers were
granted credit directly. Moreover, they hope to increase sales, and net income, from the
added convenience to buyers.
2. Revenues and expenses usually are not matched under the direct write-off method because
the revenues recorded from the uncollectible accounts often appear on the income statement
of one period while the bad debts expenses of those revenues appear on the income
statement of a later period when the account(s) is known to be uncollectible.
3. The accounting constraint of materiality suggests that the requirements of accounting
standards can be ignored if their effect on the financial statements is unimportant to their
users’ business decisions.
4. A note represents a written acknowledgment by the debtor of both the debt and its amount
and terms. This results in the note having greater legal significance.
5. Writing off a bad debt against the Allowance account does not reduce the estimated
realizable value of a company’s accounts receivable because the write-off reduces the
balances of both Accounts Receivable and the Allowance for Doubtful Accounts by equal
amounts. This means the difference between them (called estimated realizable value)
remains the same.
6. The adjusted balances of Bad Debts Expense and Allowance for Doubtful Accounts are
virtually never equal because the expense amount reflects only the events of the current
period (because it is a temporary account that is closed at the end of each period), and the
allowance is the accumulated result of events over a number of prior periods. The only way
that they could be equal would be if write-offs during the prior period exactly equaled the
beginning balance of the Allowance account.
7. Apple lists its accounts receivable as “Accounts receivable, less allowances of $58 and $53,
respectively” ($ millions) on its balance sheet. This means that Apple’s allowance is $58
million as of September 30, 2017, and $53 million as of September 24, 2016.
8. Google uses the allowance method to account for doubtful accounts as evidenced by the
receivables being reduced by an allowance of $674 million on the December 31, 2017,
balance sheet. The realizable value of accounts receivable as of December 31, 2017, is the
net amount of $18,336 million.
435
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9. Samsung titles its accounts receivable as “Trade receivables.” Samsung reports Trade
receivables (in KRW millions) of ₩27,695,995.
(“Non-trade receivables” commonly refer to amounts due from an entity other than its normal
customer invoices for merchandise shipped or services performed. Examples of non-trade
receivables are amounts due from its employees for loans or wage advances, tax refunds due
from by taxing authorities, or insurance claims due from an insurance company.)
10. Samsung titles its accounts receivable as “Trade receivables” and it reports them as part of
current assets. There is no allowance listed on the face of the balance sheet.
QUICK STUDIES
Quick Study 7-1 (15 minutes)
1. Cash ............................................................................... 19,000
Credit Card Expense* ................................................... 1,000
Sales......................................................................... 20,000
Record credit card sales less fees. *$20,000 x 5%
Cost of Goods Sold ...................................................... 15,000

Merchandise Inventory ........................................... 15,000
Record cost of sales.
2. Cash ............................................................................... 4,800

Credit Card Expense* ................................................... 200
Sales......................................................................... 5,000
Record credit card sales less fees. *$5,000 x 4%
Cost of Goods Sold ...................................................... 3,000

Merchandise Inventory ........................................... 3,000
Oct. 1 Bad Debts Expense .....................................................

50,000
Accounts Receivable—P. Moore ......................... 50,000
Write off an account.
436
Oct. 30 Accounts Receivable—P.Moore ................................50,000

Bad Debts Expense ............................................... 50,000
Reinstate an account previously written off.
Oct. 30 Cash ..............................................................................50,000

Accounts Receivable— P. Moore ........................ 50,000
Record cash received on account.
1. DW direct write-off method

2. A allowance method

1.
Jan. 31 Allowance for Doubtful Accounts ........................... 800
Accounts Receivable—C. Green ....................... 800
Write off account.
2.
Mar. 9 Accounts Receivable—C. Green* ............................ 300
Allowance for Doubtful Accounts ..................... 300
Reinstate a written off account.
*If there is a strong belief that the remaining $500 will be
collected soon, then the full $800 balance can be reinstated.
9 Cash ........................................................................... 300

Accounts Receivable—C. Green ....................... 300
Record payment on a receivable.
437
1. 2.
Before Write-Off After Write-Off
Accounts receivable ......................................... $50,000 $49,700

Less allowance for doubtful accounts ........... 2,000 1,700
Realizable value of accounts receivable ........ $48,000 $48,000
1.
Dec. 31 Bad Debts Expense ................................................ 885
Allowance for Doubtful Accounts................... 885
Record estimate of uncollectibles.
Desired balance in allowance = $99,000 x 1.5%= $1,485 cr.
Adjustment required = $1,485 - $600 cr. = $885
2. Desired balance in allowance = $1,485 (part 1)

Adjustment required = $1,485 cr. + $300 dr. = $1,785
Dec. 31 Bad Debts Expense ................................................ 1,400

Allowance for Doubtful Accounts................... 1,400
Record estimate of uncollectibles
($140,000 x 1%).
438

1. Estimated balance of allowance for doubtful accounts:
Not due: $80,000 x 0.01 = $ 800
1 to 30: 18,000 x 0.03 = 540
31 to 60: 7,200 x 0.05 = 360
61 to 90: 4,000 x 0.08 = 320
Over 90: 6,000 x 0.11 = 660
$2,680 credit
2.
Dec. 31 Bad Debts Expense.............................................. 1,680
Allowance for Doubtful Accounts ................ 1,680
Record estimated bad debts.*
*
Unadjusted balance .....................................$ 1,000 credit
Estimated balance ....................................... 2,680 credit
Required adjustment ...................................$ 1,680 credit
439
1. Maturity date is April 30, which is computed as follows:

Days in March .................................................................. 31
Minus the date of the note .............................................. 1
Days remaining in March ................................................ 30
Add days in April to equal 60 days (April 30) ............... 30
Period of the note in days .............................................. 60
Interest Expense is $100. Computed as $10,000 x 6% x (60/360).
2. Maturity date is August 13, which is computed as follows:

Days in May ...................................................................... 31
Days remaining in May ................................................... 16
Add days in June ............................................................. 30
Add days in July .............................................................. 31
Add days in August to equal 90 days (August 13) ....... 13
3. Maturity date is December 4, which is computed as follows:

Days in October ............................................................... 31
Days remaining in October............................................. 11
Add days in November ................................................... 30
Add days in December to equal 45 days (December 4) .. 4
440
1. Maturity date is October 31, which is computed as follows:

Days in August ................................................................ 31
Days remaining in August .............................................. 29
Add days in September .................................................. 30
Add days in October to equal 90 days (October 31) .... 31
2.
Aug. 2 Notes Receivable—R. Albany .......................... 6,000
Accounts Receivable—R. Albany .............. 6,000
Record receipt of note on account.
Oct. 31 Cash .................................................................... 6,180

Notes Receivable—R. Albany .................... 6,000
Interest Revenue ......................................... 180
Record cash received on note plus
interest ($6,000 x 12% x 90/360).
1.
Dec. 31 Interest Receivable ............................................ 50
Interest Revenue ......................................... 50
Record the year-end adjustment for
interest earned ($10,000 x 6% x 30/360).
2. Maturity date
Jan. 15 Cash .................................................................... 10,075
Interest Receivable ..................................... 50
Interest Revenue* ........................................ 25
Notes Receivable ........................................ 10,000
Record cash received on note plus interest.
*($10,000 x 6% x 15/360)
441
May 1 Cash .......................................................................121,875

Factoring Fee Expense* ....................................... 3,125
Accounts Receivable ...................................... 125,000
Record sale of receivable.
*($125,000 x 0.025)
FAIR TRADER CO.

Income Statement
For Year Ended December 31
Revenues
Sales ............................................................ $50,000
Interest revenue .......................................... 3,000
Total revenues ............................................ $53,000
Expenses
Salaries expense ........................................ 22,000
Rent expense .............................................. 15,000
Insurance expense ..................................... 4,000
Bad debt expense ....................................... 1,000
Factoring fees ............................................. 300
Supplies expense ....................................... 200
Total expenses ........................................... 42,500
Net income ....................................................... $10,500
442
BENNETT CO.
Balance Sheet
December 31
Assets
Current assets
Cash ........................................................................ $12,000
Accounts receivable (net of $500 allowance) ........ 9,500
Prepaid rent ........................................................... 1,000
Total current assets .............................................. 22,500
Long-term investments
Notes receivable (due in 4 years) ........................ 4,000
Total assets ................................................................ $26,500
Liabilities
Current liabilities
Accounts payable .................................................. $ 2,500
Long-term liabilities
Notes payable (due in 10 years)........................... 6,000
Total liabilities ........................................................... 8,500
Equity
Total equity ................................................................ 18,000
Total liabilities and equity ........................................ $26,500
443
Net sales
Accounts receivable turnover =
Average accounts receivable
$861,105
= ($153,400 + $138,500) / 2
= 5.9 times
Interpretation: An accounts receivable turnover of 5.9 implies that the

company’s average accounts receivable balance is converted into cash
5.9 times per year. The 5.9 turnover is about 21% lower than the average
turnover of 7.5 for its competitors. The company needs to identify the
cause of this poor performance and rectify the situation to at least
compete at the average level.
444
EXERCISES
Exercise 7-1 (25 minutes)
Part 1
GENERAL LEDGER
Sales Returns and

Accounts Receivable Sales Allowances
Nov. 5 4,615 Nov. 21 209 Nov. 5 4,615 Nov. 21 209
10 1,350 10 1,350
13 832 13 832
30 2,713 30 2,713
Bal. 9,301
ACCOUNTS RECEIVABLE LEDGER
Ski Shop Welcome Enterprises Zia Natara

Nov. 5 4,615 Nov. 10 1,350 Nov. 13 832 Nov. 21 209
30 2,713
Bal. 7,328 Bal. 623
Part 2
Vail Company
Schedule of Accounts Receivable
November 30
Ski Shop ................................................................................. $7,328
Welcome Enterprises ........................................................... 1,350
Zia Natara ............................................................................... 623
Total ........................................................................................ $9,301
Comparison: The total of the Schedule of Accounts Receivable ($9,301) is

proved with the balance of the Accounts Receivable controlling T-account
from Part 1 ($9,301).
445

Apr. 8 Cash ......................................................................... 8,064
Credit Card Expense* ............................................. 336
Sales .................................................................. 8,400
Record credit card sales less 4% fee. *($8,400 x 0.04)
8 Cost of Goods Sold ................................................ 6,000

Merchandise Inventory .................................... 6,000
12 Cash ......................................................................... 5,460

Credit Card Expense* ............................................. 140
Sales .................................................................. 5,600
Record credit card sales less 2.5% fee. *($5,600 x .025)
12 Cost of Goods Sold ................................................ 3,500

Merchandise Inventory .................................... 3,500

Apr. 30 Accounts Receivable ............................................. 1,000
Sales .................................................................. 1,000
Record own-store credit card sales.
30 Cost of Goods Sold ................................................ 650

Merchandise Inventory .................................... 650
May 31 Accounts Receivable ............................................. 4

Interest Revenue .............................................. 4
Interest earned from its own-store credit card.

March 11 Bad Debts Expense ....................................................
45,000
Accounts Receivable—Leer Co. .......................... 45,000
March 29 Accounts Receivable—Leer Co. ................................ 45,000

Bad Debts Expense .............................................. 45,000
Reinstate an account previously written off.
March 29 Cash .............................................................................

45,000
Accounts Receivable—Leer Co. .......................... 45,000
446
a.
Feb. 1 Allowance for Doubtful Accounts.............................. 6,800
Accounts Receivable—Oakley Co ....................... 900
Accounts Receivable—Brookes Co .................... 5,900
Write off specific accounts.
b.
June 5 Accounts Receivable—Oakley ................................... 900
Allowance for Doubtful Accounts ........................ 900
Reinstate an account.
June 5 Cash .............................................................................. 900

Accounts Receivable—Oakley ............................. 900

Dec. 31 Bad Debts Expense ..................................................... 4,875
Allowance for Doubtful Accounts........................ 4,875
Record estimated bad debts expense
(0.01 x $487,500).
Feb. 1 Allowance for Doubtful Accounts.............................. 580

Accounts Receivable—P. Park ............................ 580
June 5 Accounts Receivable—P. Park .................................. 580

Allowance for Doubtful Accounts ........................ 580
Reinstate an account.
June 5 Cash .............................................................................. 580

Accounts Receivable—P. Park ............................ 580
447

a.
Dec. 31 Bad Debts Expense ...................................................... 685
Allowance for Doubtful Accounts* ....................... 685
Record estimated bad debts expense.
*
Unadjusted balance = $ 415 credit
Estimated balance ($55,000 x 0.02) = 1,100 credit
Required adjustment = $ 685 credit
b.
Dec. 31 Bad Debts Expense ......................................................1,391
Allowance for Doubtful Accounts** ...................... 1,391
Record estimated bad debts expense.
**
Unadjusted balance = $ 291 debit
Estimated balance ($55,000 x 0.02) = 1,100 credit
Required adjustment = $1,391 credit

a. Computation of the estimated balance of the allowance for uncollectibles:
Not due: $396,000 x 0.01 = $ 3,960
1 to 30: 90,000 x 0.02 = 1,800
31 to 60: 36,000 x 0.05 = 1,800
61 to 90: 18,000 x 0.07 = 1,260
Over 90: 30,000 x 0.10 = 3,000
$11,820 credit
b.
*
Unadjusted balance .....................................$ 3,600 credit
Required adjustment ...................................$ 8,220 credit
c.
*
Unadjusted balance .....................................$ 100 debit
Required adjustment ...................................$11,920 credit
448

a. Computation of the estimated balance of the allowance for uncollectibles:
$570,000 x 0.045 = $25,650 credit
b.
*
Unadjusted balance ........................... $12,000 credit
Estimated balance ............................. 25,650 credit
Required adjustment ......................... $13,650 credit
c.
*
Unadjusted balance ........................... $ 1,000 debit

1.
1 to 30 31 to 60 61 to 90 Over 90
Not Yet Days Past Days Past Days Past Days Past
Customer Due Due Due Due Due
$4,000
BCC Company ..........................................................
Lannister Co. .............................................................
$1,000
Mike Properties ......................................................... $5,000
Ted Reeves ................................................................ $500
Jen Steffens .............................................................. $2,000
Total receivables .................................................
$1,000 $4,000 $2,000 $500 $5,000
Percent uncollectible ............................................
1% 3% 5% 8% 12%
Estimated uncollectible .......................................
$10 $120 $100 $40 $600
Estimated balance for Allowance for Doubtful Accounts: $870 [$10+$120+$100+$40+$600].
2.
Dec. 31 Bad Debts Expense.............................................. 770
Allowance for Doubtful Accounts ................ 770
*
Unadjusted balance ........................... $100 credit
Estimated balance ............................. 870 credit
Required adjustment ......................... $770 credit
449
1. Expense is 3.0% of credit sales
Dec. 31 Bad Debts Expense............................................... 9,000

Allowance for Doubtful Accounts ................. 9,000
Record estimated bad debts
[$300,000 x 0.03].
2. Expense is 1.0% of total sales

[($300,000 + $900,000) x 0.01].
3. Allowance is 6% of accounts receivable

*
Unadjusted balance ........................................................
$ 5,000 debit.
Estimated balance ($125,000 x 6%) .............................. 7,500 credit
Required adjustment ......................................................
$12,500 credit

Dec. 13 Notes Receivable—M. Lee................................... 9,500
Accounts Receivable—M. Lee ...................... 9,500
Dec. 31 Interest Receivable .............................................. 38

Interest Revenue ............................................ 38
Record interest earned [$9,500 x 0.08 x 18/360].
450
Jan. 27 Cash ....................................................................... 9,595

Interest Revenue* ............................................ 57
Interest Receivable ......................................... 38
Notes Receivable—M. Lee ............................. 9,500
* $9,500 x 0.08 x (45-18)/360 = $57
Mar. 3 Notes Receivable—Tomas Co. ............................ 5,000

Accounts Receivable-Tomas Co ................... 5,000
17 Notes Receivable—H. Cheng ............................... 2,000

Accounts Receivable—H. Cheng .................. 2,000
Apr. 16 Accounts Receivable—H. Cheng ........................ 2,015

Interest Revenue ............................................. 15
Notes Receivable—H. Cheng ......................... 2,000
Record receivable for dishonored
note plus interest [$2,000 x 0.09 x 30/360].
May 1 Allowance for Doubtful Accounts ....................... 2,015

Accounts Receivable—H. Cheng .................. 2,015
Write off account.
June 1 Cash ....................................................................... 5,125

Notes Receivable—Tomas Co ....................... 5,000
Record cash received on note with
interest [$5,000 x 0.10 x 90/360].
451
Nov. 1 Notes Receivable—K. White ............................. 6,000

Accounts Receivable—K. White ................. 6,000
Dec. 31 Interest Receivable ............................................ 80

Interest Revenue .......................................... 80
Record interest earned
[$6,000 x 0.08 x 60/360].
Apr. 30 Cash .................................................................... 6,240

Notes Receivable—K. White ....................... 6,000
Interest Revenue* ......................................... 160
Interest Receivable ...................................... 80
interest earned. *[$6,000 x 0.08 x 120/360]
Mar. 21 Notes Receivable—T. Jackson ............................ 9,500

Accounts Receivable—T. Jackson ................ 9,500
Sept. 17 Accounts Receivable—T. Jackson ...................... 9,880

Notes Receivable—T. Jackson ...................... 9,500
Record note dishonored plus interest
earned [$9,500 x 0.08 x 180/360 = $380].
Dec. 31 Allowance for Doubtful Accounts ....................... 9,880

Accounts Receivable—T. Jackson ................ 9,880
452
1.
Dec. 4 Accounts Receivable ............................................ 7,245
Sales ................................................................. 7,245
Record sales on credit.
4 Cost of Goods Sold ......................................................

5,000
Merchandise Inventory .......................................... 5,000
9 Cash ....................................................................... 19,200

Factoring Fee Expense* ....................................... 800
Record sale of receivable. *($20,000 x 0.04)
17 Cash ....................................................................... 5,859

27 Cash ....................................................................... 10,000

Notes Payable .................................................. 10,000
Record cash from a loan.
2. The December 27 transaction. An example of this disclosure follows.
Note to Financial Statements

Accounts receivable in the amount of $12,500 are pledged
as security for a $10,000 note payable to Main Bank.
453
1.
Year 2 accounts receivable turnover:
$335,280
($41,400 + $34,800)/2 = 8.8 times
Year 3 accounts receivable turnover:

$405,140
($44,800 + $41,400)/2 = 9.4 times
2. Worse.
Analysis: Raheem Company turned over its accounts receivable 0.6 (9.4 – 8.8)
times more in Year 3 than in Year 2. This improvement may indicate that the
company has tightened its credit policy or has improved its collection efforts.
However, relative to its competitor’s turnover of 11, Raheem is performing
worse than its competitor.
454
PROBLEM SET A
Problem 7-1A (30 minutes)
June 4 Accounts Receivable—N. Morris ............................. 650
Sales ..................................................................... 650
4 Cost of Goods Sold ......................................................... 400
Merchandise Inventory ............................................. 400
5 Cash ............................................................................ 6,693
Credit card expense* ................................................. 207
Sales ..................................................................... 6,900
Record credit card sales less fee. *($6,900 x 0.03)
5 Cost of Goods Sold .........................................................4,200
Merchandise Inventory ............................................. 4,200
6 Cash ............................................................................ 5,733
Sales ..................................................................... 5,850
8 Cash ............................................................................ 4,263
Sales ..................................................................... 4,350
13 Allowance for Doubtful Accounts ............................ 429
Accounts Receivable—A. McKee....................... 429
Write off account due.
18 Cash ............................................................................ 650
Accounts Receivable—N. Morris ....................... 650
Record cash received in payment of account.
455

Part 1
a. Expense is 1.5% of credit sales
[$5,682,000 x .015].
b. Expense is 1% of total sales
[($1,905,000 + $5,682,000) x .01].
c. Allowance is 5% of accounts receivable
*
Unadjusted balance ........................................................
$16,580 debit
Estimated balance ($1,270,100 x 5%) ...........................
63,505 credit
Required adjustment ......................................................
$80,085 credit
Part 2
Current assets
Accounts receivable ...........................................$1,270,100
Less allowance for doubtful accounts ............. (68,650)* $1,201,450
Or: Accounts receivable (net of $68,650*

uncollectible accounts) ................................... $1,201,450
* Adjustment to the allowance .....................................
$85,230 credit
Unadjusted allowance balance ..................................
16,580 debit
Adjusted balance .........................................................
$68,650 credit
Part 3
Current assets
Accounts receivable ...........................................$1,270,100
Less allowance for doubtful accts. ................... (63,505)** $1,206,595
Or: Accounts receivable (net of $63,505**

uncollectible accounts) ................................... $1,206,595
** See computations in Part 1c.
456
Part 1
Calculation of the estimated balance of the allowance for uncollectibles
Not due: $830,000 x .0125 = $10,375

1 to 30: 254,000 x .0200 = 5,080
31 to 60: 86,000 x .0650 = 5,590
61 to 90: 38,000 x .3275 = 12,445
Over 90: 12,000 x .6800 = 8,160
$41,650 credit
Part 2

*
Unadjusted balance ........................... $14,500 credit
Part 3
Writing off the account receivable does not directly affect net income.
Explanation: The entry to write off an account involves a debit to Allowance

for Doubtful Accounts and a credit to Accounts Receivable, both of which
are balance sheet accounts. Net income is affected only by the annual
recognition of the estimated bad debts expense, which is journalized as an
adjusting entry.
457
Year 1
a. Accounts Receivable ......................................... 1,345,434

Sales .............................................................. 1,345,434
Record sales on account.
Cost of Goods Sold ......................................................

975,000
b. Allowance for Doubtful Accounts..................... 18,300

Accounts Receivable ................................... 18,300
Write off accounts.
c. Cash ..................................................................... 669,200

d. Bad Debts Expense ............................................ 28,169

Allowance for Doubtful Accounts .............. 28,169
*
Beginning receivables ...................... $ 0
Credit sales ....................................... 1,345,434
Collections ........................................ (669,200)
Write-offs ........................................... (18,300)
Ending receivables ........................... 657,934
Percent uncollectible ........................ x 1.5%
Required ending allowance.............. 9,869** Cr.
Unadjusted balance .......................... 18,300 Dr.
Adjustment to the allowance ........... $ 28,169 Cr.
** rounded to nearest dollar
458
Problem 7-4A (Concluded)
Year 2
e. Accounts Receivable .............................................. 1,525,634

Sales ................................................................... 1,525,634

1,250,000
Merchandise Inventory .......................................... 1,250,000
f. Allowance for Doubtful Accounts ......................... 27,800

Accounts Receivable ........................................ 27,800
Record write-off of accounts.
g. Cash ......................................................................... 1,204,600

Accounts Receivable ........................................ 1,204,600
h. Bad Debts Expense................................................. 32,199

Allowance for Doubtful Accounts ................... 32,199
*
Beginning receivables ............................ $ 657,934
Credit sales.............................................. 1,525,634
Collections............................................... (1,204,600)
Write-offs ................................................. (27,800)
Ending receivables ................................. 951,168
Percent uncollectible .............................. x 1.5%
Required ending allowance .................... 14,268** Cr.
Unadjusted balance
Beginning (Cr.) ...................................... $ 9,869
Write-offs (Dr.) ....................................... 27,800 17,931 Dr.
Adjustment to the allowance .................. $ 32,199 Cr.
** rounded to nearest dollar
459

Part 1
Year 1
Dec. 16 Notes Receivable—D. Todd................................ 10,800
Accounts Receivable—D. Todd ................... 10,800
Record note received on account.
31 Interest Receivable .............................................. 36

Interest Revenue ........................................... 36
Record interest earned.
[$10,800 x .08 x 15/360 = $36].
Year 2
Feb. 14 Cash ...................................................................... 10,944
Interest Revenue* .......................................... 108
Interest Receivable........................................ 36
Notes Receivable—D. Todd.......................... 10,800
Record cash received on note with interest.
*[$10,800 x 0.08 x 45/360 = $108]
Mar. 2 Notes Receivable—Midnight Co ........................ 6,100

Accounts Receivable—Midnight Co. ........... 6,100
17 Notes Receivable—A. Privet .............................. 2,400

Accounts Receivable—A. Privet .................. 2,400
Apr. 16 Accounts Receivable—A. Privet ........................ 2,414

Interest Revenue ........................................... 14
Notes Receivable—A. Privet ........................ 2,400
Record receivable for dishonored note plus
interest [$2,400 x .07 x 30/360= $14].
May 31 Accounts Receivable—Midnight Co. ................. 6,222

Notes Receivable—Midnight Co .................. 6,100
Record receivable for dishonored note plus
interest *[$6,100 x 0.08 x 90/360 = $122]
460
Problem 7-5A (Concluded)
Aug. 7 Notes Receivable—Mulan................................... 7,440

Accounts Receivable—Mulan ...................... 7,440
Sept. 3 Notes Receivable—N. Carson ............................ 2,100

Accounts Receivable—N. Carson................ 2,100
Nov. 2 Cash ...................................................................... 2,135

Notes Receivable—N. Carson ...................... 2,100
Record cash received on note plus interest
*($2,100 x 0.10 x 60/360 = $35).
5 Cash ...................................................................... 7,626

Notes Receivable—Mulan............................. 7,440
interest. *($7,440 x 0.10 x 90/360 = $186)
Dec. 1 Allowance for Doubtful Accounts...................... 2,414

Accounts Receivable—A. Privet .................. 2,414
Record write-off of account.
Part 2
Financial statement footnotes
Explanation: When a business pledges its receivables as security for a
loan and the loan is still outstanding at period-end, the business must
disclose this information in notes to its financial statements. This is a
requirement because the business has committed a portion of its assets to
cover a specific portion of its liabilities, which means that if the business
dishonors its obligations under the loan, the creditor can claim the amount
of receivables identified in the pledge as collateral to cover the loan.
461
PROBLEM SET B
Problem 7-1B (30 minutes)
Aug. 4 Accounts Receivable—M. Carpenter ...................... 3,700
Sales..................................................................... 3,700
Cost of Goods Sold .........................................................2,000
Merchandise Inventory .............................................. 2,000
10 Cash ........................................................................... 5,044
Credit Card Expense* ............................................... 156
Sales..................................................................... 5,200
11 Cash ........................................................................... 1,225
Credit card expense* ................................................ 25
Sales..................................................................... 1,250
Cost of Goods Sold ......................................................... 900
Merchandise Inventory .............................................. 900
14 Cash ........................................................................... 3,700
Accounts Receivable—M. Carpenter ................ 3,700
Record cash received in payment of account.
15 Cash ........................................................................... 3,185
Credit Card Expense* ............................................... 65
Sales...................................................................... 3,250
22 Allowance for Doubtful Accounts ........................... 498
Accounts Receivable—Craw Co........................ 498
Write off account due.
462

Part 1
a. Expense is 2.5% of credit sales
[$1,342,000 x .025].
b. Expense is 1.5% of total sales
Dec. 31 Bad Debts Expense............................................ 35,505
Allowance for Doubtful Accts. .................... 35,505
[($1,025,000 + $1,342,000) x .015].
c. Allowance is 6% of accounts receivable
*
Estimated balance ($575,000 x 6%) ....... $ 34,500 credit
Unadjusted balance ................................ 7,500 credit
Required adjustment .............................. $ 27,000 credit
Part 2
Current assets
Accounts receivable .................................... $575,000
Less allowance for doubtful accounts ...... (41,050)* $533,950
Or: Accounts receivable (net of $41,050*

uncollectible accounts) ............................ $533,950
* Adjustment to the allowance .................... $33,550 credit
Unadjusted allowance balance ................. 7,500 credit
Adjusted balance ....................................... $41,050 credit
Part 3
Current assets
Accounts receivable .................................... $575,000
Less allowance for doubtful accounts ...... (34,500)** $540,500
Or: Accounts receivable (net of $34,500**

uncollectible accounts) ............ $540,500
** See computations in Part 1c.
463
Part 1
Calculation of the estimated balance of the allowance
Not due: $396,400 x .020 = $ 7,928

1 to 30: 277,800 x .040 = 11,112
31 to 60: 48,000 x .085 = 4,080
61 to 90: 6,600 x .390 = 2,574
Over 90: 2,800 x .820 = 2,296
$27,990
Part 2
Dec. 31 Bad Debts Expense........................................... 31,390

Allowance for Doubtful Accounts ............. 31,390
*
Unadjusted balance ...........................
$ 3,400 debit
Estimated balance ..............................
27,990 credit
Required adjustment .........................
$31,390 credit
Part 3
Writing off the account receivable does not directly affect net income.
Explanation: The entry to write off an account involves a debit to Allowance

for Doubtful Accounts and a credit to Accounts Receivable, both of which
are balance sheet accounts. Net income is affected only by the annual
recognition of the estimated bad debts expense, which is journalized as an
adjusting entry.
464
Year 1
a. Accounts Receivable ......................................... 685,350

Sales .............................................................. 685,350

500,000
b. Cash ..................................................................... 482,300

c. Allowance for Doubtful Accounts..................... 9,350

d. Bad Debts Expense ............................................ 11,287

Allowance for Doubtful Accounts............... 11,287
*Beginning receivables ..................... $ 0

Credit sales ...................................... 685,350
Collections ....................................... (482,300)
Write-offs .......................................... (9,350)
Ending receivables .......................... 193,700
Percent uncollectible ....................... x 1.0%
Required ending allowance ............. 1,937 Cr.
Unadjusted balance ......................... 9,350 Dr.
Adjustment to the allowance........... $ 11,287 Cr.
465
Problem 7-4B (Concluded)
Year 2
e. Accounts Receivable .......................................... 870,220

Sales ............................................................... 870,220

650,000
f. Cash ...................................................................... 990,800

Accounts Receivable .................................... 990,800
g. Allowance for Doubtful Accounts...................... 11,090

Accounts Receivable .................................... 11,090
h. Bad Debts Expense ............................................. 9,773

Allowance for Doubtful Accounts................ 9,773
*Beginning receivables ........................... $ 193,670

Credit sales ............................................ 870,220
Collections ............................................. (990,800)
Write-offs ................................................ (11,090)
Ending receivables ................................ 62,000
Percent uncollectible ............................. x 1.0%
Required ending allowance ................... 620 Cr.
Unadjusted balance
Beginning (credit) ................................ $ 1,937
Write-offs (debit) ..................................11,090 9,153 Dr.
Adjustment to the allowance................. $ 9,773 Cr.
466

Part 1
Year 1
Nov. 1 Notes Receivable—S. Julian .................................. 4,800
Accounts Receivable—S. Julian ...................... 4,800
Dec. 31 Interest Receivable .................................................. 64

Interest Revenue ............................................... 64
Record interest earned [$4,800 x 0.08 x 60/360].
Year 2
Jan. 30 Cash .......................................................................... 4,896
Interest Revenue* .............................................. 32
Interest Receivable............................................ 64
Notes Receivable—S. Julian ............................ 4,800
Record cash received on note with interest.
*[$4,800 x 0.08 x 30/360]
Feb. 28 Notes Receivable—King Co ................................... 12,600

Accounts Receivable—King Co. ...................... 12,600
Mar. 1 Notes Receivable—M. Shelley ............................... 6,200

Accounts Receivable—M. Shelley ................... 6,200
30 Accounts Receivable—King Co ............................. 12,684

Notes Receivable—King Co ............................. 12,600
Record receivable for dishonored note
plus interest [$12,600 x 0.08 x 30/360].
Apr. 30 Cash .......................................................................... 6,324

Notes Receivable—M. Shelley ......................... 6,200
Record cash received on note plus interest
($6,200 x 0.12 x 60/360 = $124).
467
Problem 7-5B (Concluded)
June 15 Notes Receivable—R. Solon ................................ 2,000

Accounts Receivable—R. Solon ..................... 2,000
June 21 Notes Receivable—J. Felton ................................ 9,500

Accounts Receivable—J. Felton .................... 9,500
Aug. 26 Cash ........................................................................ 2,032

Notes Receivable—R. Solon .......................... 2,000
*[$2,000 x 0.08 x 72/360]
Sept. 19 Cash ........................................................................ 9,690

Notes Receivable—J. Felton .......................... 9,500
*[$9,500 x 0.08 x 90/360]
Nov. 30 Allowance for Doubtful Accounts........................ 12,684

Accounts Receivable—King Co ..................... 12,684
Part 2
Financial statement footnotes
Explanation: When a business pledges its receivables as security for a
loan and the loan is still outstanding at period-end, the business must
disclose this information in notes to its financial statements. This is a
requirement because the business has committed a portion of its assets to
cover a specific portion of its liabilities, which means that if the business
dishonors its obligations under the loan, the creditor can claim the amount
of receivables identified in the pledge as collateral to cover the loan.
468
SERIAL PROBLEM — SP 7
Serial Problem — SP 7, Business Solutions (50 minutes)
1. a. Bad debts expense is recorded as 1% of total revenues:
$44,000 x .01 = $440.
2020
Mar. 31 Bad Debts Expense ............................................... 440
Allowance for Doubtful Accounts.................. 440
Record estimated bad debts.
1. b. Bad debts expense is recorded as 2% of accounts receivable:

$22,867 x .02 = $457.34, which is $457 rounded to the nearest dollar.
2020
Mar. 31 Bad Debts Expense ............................................... 457
Instructor note: It might help to stress that the beginning balance for the Allowance for
Doubtful Accounts is zero, which is unusual and exists because this is the first period that the
company applies the allowance method.
2. Allowance Balance as of 3/31/20 ................... $457 Cr.

Less: Account written off .............................. (100) Dr.
Allowance Balance as of 6/30/20 ................... $357 Cr. (before adjustment)
Required Balance: $20,250 x 0.02 = $405

Required Adjustment: $405 - $357 = $48
2020
June 30 Bad Debts Expense ............................................... 48
3. Many small business owners use the direct write-off method of

recording bad debts expense. The direct method is a simple and
straightforward method of accounting for bad debts expense. It can
also be justified if the amounts are immaterial. However, when the
amounts are material, the direct write-off method can result in accounts
receivable overstatements, bad debts expense understatements, and net
income overstatements. The method required per GAAP is the
allowance method, which will result in the best matching of a period’s
expenses to revenues.
469
Company Analysis — AA 7-1 (25 minutes)
1. Apple’s accounts receivables are $17,874 million.
2. Accounts receivable turnover ($ millions)

$229,234
($17,874 + $15,754) / 2 = 13.6 times
3. Average collection period = 365 / Turnover = 365 / 13.6 = 26.8 days
4. Liquid assets as a percent of current liabilities ($ millions)
$20,289 + $53,892 + $17,874 + $4,855 = 96.1%

Sep. 30, 2017: $100,814
$20,484 + $46,671 + $15,754 + $2,132 = 107.6%

Sep. 24, 2016: $79,006
5. Worsened
Explanation: Looking solely at Apple’s ability to satisfy current

obligations using liquid assets (cash, short-term investments, accounts
receivable and inventory), the company is in a slightly worse position this
year compared to last year. In both years, however, Apple should not
have difficulty satisfying its current liabilities with liquid assets.
470
Comparative Analysis — AA 7-2 (35 minutes)
1. Accounts Receivable Turnover ($ millions)

a.
Apple (Current Year):
$ 229,234
($17,874 + $15,754) / 2 = 13.6 times
Apple (Prior Year):

$215,639
($15,754 + $16,849) / 2 = 13.2 times
b.
Google (Current Year):
$ 110,855 = 6.8 times
($18,336 + $14,137) / 2
Google (Prior Year):

$90,272 = 7.0 times
($14,137 + $11,556) / 2
2. Average Collection Period (or “Average Days’ Sales Uncollected”)

a. Apple (Current Year): 365 days / 13.6 times = 26.8 days
Apple (Prior Year): 365 days / 13.2 times = 27.7 days
b. Google (Current Year): 365 days / 6.8 times = 53.7 days

Google (Prior Year): 365 days / 7.0 times = 52.1 days
3. Apple
Explanation: Apple collects accounts receivable over a shorter period

of time compared with Google in both years. Therefore, Apple more
quickly collects its receivables vis-à-vis Google.
471
Global Analysis — AA 7-3 (15 minutes)
1. Accounts Receivable Turnover (KRW in millions)
Samsung (Current Year): ₩ 239,575,376 = 9.2 times

(₩27,695,995 + ₩24,279,211) / 2
2. Average Collection Period (or “Average Days’ Sales Uncollected”)
Samsung (Current Year): 365 days / 9.2 times = 39.7 days
3. Outperform
Explanation: Samsung’s results are better than the industry average.

Samsung collects its receivables more rapidly than competitors in the
industry.
472
Ethics Challenge — BTN 7-1
1. If the estimate for bad debts is reduced then less Bad Debts Expense
will be recognized on the income statement resulting in a higher net
income. It also means that a lower allowance will be shown on the
balance sheet, which will result in a higher realizable value for
receivables and, therefore, a larger amount of current liquid assets.
2. Accounting procedures often allow for alternate methods or require the

use of estimates. Therefore, managers have some leeway in their
application of accounting procedures. In this case it seems reasonable
to doubt the motivation behind the manager’s recommendation for a
lower bad debts expense. There does not appear to be any economic
justification for the change in estimate aside from the self-interest of
the manager.
3. An informed owner or an effective board of directors will be aware of

alternate accounting methods and how estimates can affect the
financial statements. The owner or board should review the
reasonableness of the manager’s and accountant’s estimate for bad
debts expense. Also, if the company is audited, the auditors will review
this estimate for reasonableness.
473
Communicating in Practice — BTN 7-2
TO: Sid Omar

FROM: (Your Name)
DATE: _______________
SUBJECT: Difference Between Bad Debts Expense and Allowance
For Doubtful Accounts
In accounting for credit sales and bad debts, we report sales revenue in the
period the sales are made, even though some credit sales do not result in
collections until the following period. Of course, some credit sales
eventually prove to be uncollectible. The fact that some accounts will
become uncollectible is what gives rise to bad debts expense and the
allowance for doubtful accounts.
Determining Bad Debts Expense

Bad debts expense represents the estimated amount of the year's sales
that will become uncollectible. The reported amount of bad debts expense
is determined at the end of the accounting period by multiplying an
estimated percent times the annual sales for the period. This year's bad
debts expense of $59,000 is calculated as 2% of the annual sales of
$2,950,000.
Determining Allowance For Doubtful Accounts

The Allowance for Doubtful Accounts unadjusted balance at the end of the
year is the cumulative result of recording bad debts expense and writing
off specific accounts receivable in all past years. The recognition of bad
debts expense at the end of each year has the effect of increasing the
Allowance for Doubtful Accounts balance. However, when specific
accounts receivable are written off, they decrease the Allowance for
Doubtful Accounts balance. Prior to this year's bad debts expense
calculation, the cumulative total of writing off specific accounts was
$16,000 greater than the cumulative total of the past years' bad debts
expenses. Therefore, you could say that Allowance for Doubtful Accounts
had an "abnormal" balance of $16,000. Then, when this year's bad debts
expense of $59,000 is added to Allowance for Doubtful Accounts, the result
is an ending balance of $43,000.
Sid, I hope this clarifies the matter for you. If you have further questions,
please call me.
474
Taking It to the Net — BTN 7-3

1. At December 31, 2016, eBay’s ($ millions) net accounts receivable were
$592, and at December 31, 2015, its net accounts receivable were
$619—amounts reported in its balance sheet.
2.
December 31, December 31,
$ millions 2016 2015
Allowances for doubtful accounts
$ 81 $ 84
(and authorized credits)* ..................
Gross accounts receivable................. $673 $703
($592 + $81) ($619 + $84)
% of uncollectible accounts ............... 12.0% 11.9%
($81 / $673) ($84 / $703)
*Reported in eBay’s “Schedule II” of its 10-K.
3. These percentages seem high compared to other companies, but

eBay’s operations are all online, and the risk of fraudulent transactions
is likely higher than other companies. eBay’s prior experience has
arguably led them to estimate a seemingly large percentage of
uncollectible accounts.
Teamwork in Action — BTN 7-4

Instructor note: Computations for the aging schedule are in the Problem 7-3A solution.
The check figure for total estimated uncollectibles is $41,650.
Adjusting entry
*
Req. allowance balance .................... $41,650 credit
Unadjusted balance ........................... 14,500 credit
Adj. to the allowance ......................... $27,150 credit
December 31 Balance Sheet Presentation

Accounts Receivable ............................................ $1,220,000*
Less Allowance for Doubtful Accounts .............. 41,650 1,178,350**
* Total of each age category.

** Net Realizable Accounts Receivable.
475
Entrepreneurial Decision — BTN 7-5
1. Computation of added annual net income or loss
a.
Added Monthly Net Income or Loss under Plan A
Increased sales ............................................................... $250,000
Additional Wages Expense ............................................ (135,500)
Credit card fees ($250,000 x 4.75%) .............................. (11,875)
Recordkeeping ($250,000 x 6%) .................................... (15,000)
Lost advertising revenue ............................................... (8,750)
Additional net income (loss).......................................... $ 78,875
b.
Added Monthly Net Income or Loss under Plan B
Increased sales ............................................................... $500,000
Cost of sales ................................................................... (375,000)
Recordkeeping and shipping ($500,000 x 4%) ............. (20,000)
Uncollectible accounts ($500,000 x 6.2%) .................... (31,000)
Additional net income (loss).......................................... $ 74,000
476
Entrepreneurial Decision — BTN 7-5 continued
2. Plan (A) provides a slightly higher income, so if the company can only
pursue one plan now, based purely on the financial aspect, it should
choose Plan (A).
Plan (A) expands its offerings into new markets, and could increase
sales over time. However, this is a new model for the company, and it
might lack the expertise to execute it. It will need to further assess
whether the benefit of subscription sales over time will be more/less
than the cost of lost advertising sales.
Taking credit cards for these subscription sales reduces its risk of
uncollectible accounts. The credit card company takes the risk of the
customer not paying.
Plan (B) is a way to expand sales by offering merchandise.
The client company does run some unknown risk associated with
having new customers. While the client company may understand its
current customers, it will need to monitor the new customers to make
sure that the uncollectible accounts do not rise beyond acceptable
levels.
Hitting the Road — BTN 7-6
Telephone calls to VISA and American Express are the source of

information for this solution. VISA reports that the average transaction fee
it charges merchants is 3%. American Express has a range, depending on
volume of business and average price of merchandise sold, which ranges
from 2.95% to 4.5%.
Some merchants often choose not to accept certain cards because the
credit card fees are higher than others. In the case of VISA, compared to
American Express, a merchant might have to pay as much as 1.5% more on
its American Express transactions. This can be a major part of its net
profit margin, especially for businesses such as grocery and hardware
stores.
477
Solution Manual for Financial and Managerial Accounting 8th by Wild
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Cost of Goods Sold ...................................................... 15,000

2. Cash ............................................................................... 4,800

Cost of Goods Sold ...................................................... 3,000

Quick Study 7-2 (10 minutes)

Oct. 1 Bad Debts Expense .....................................................

Quick Study 7-3 (10 minutes)

Oct. 30 Accounts Receivable—P.Moore ................................50,000

Oct. 30 Cash ..............................................................................50,000

Quick Study 7-4 (15 minutes)

1. DW direct write-off method

Quick Study 7-5 (15 minutes)

9 Cash ........................................................................... 300

Quick Study 7-6 (10 minutes)

Accounts receivable ......................................... $50,000 $49,700

Quick Study 7-7 (15 minutes)

2. Desired balance in allowance = $1,485 (part 1)

Quick Study 7-8 (15 minutes)

Dec. 31 Bad Debts Expense ................................................ 1,400

Quick Study 7-9 (20 minutes)

Quick Study 7-10 (20 minutes)

1. Maturity date is April 30, which is computed as follows:

Interest Expense is $100. Computed as $10,000 x 6% x (60/360).

2. Maturity date is August 13, which is computed as follows:

Interest Expense is $300. Computed as $15,000 x 8% x (90/360).

3. Maturity date is December 4, which is computed as follows:

Interest Expense is $40. Computed as $8,000 x 4% x (45/360).

Quick Study 7-11 (15 minutes)

1. Maturity date is October 31, which is computed as follows:

Quick Study 7-12 (10 minutes)

Oct. 31 Cash .................................................................... 6,180

Quick Study 7-13 (15 minutes)

Quick Study 7-14 (10 minutes)

May 1 Cash .......................................................................121,875

Quick Study 7-15 (15 minutes)

FAIR TRADER CO.

Quick Study 7-16 (15 minutes)

Quick Study 7-17 (10 minutes)

Interpretation: An accounts receivable turnover of 5.9 implies that the

Sales Returns and

ACCOUNTS RECEIVABLE LEDGER

Ski Shop Welcome Enterprises Zia Natara

Comparison: The total of the Schedule of Accounts Receivable ($9,301) is

Exercise 7-2 (20 minutes)

8 Cost of Goods Sold ................................................ 6,000

12 Cash ......................................................................... 5,460

12 Cost of Goods Sold ................................................ 3,500

Exercise 7-3 (10 minutes)

30 Cost of Goods Sold ................................................ 650

May 31 Accounts Receivable ............................................. 4

Exercise 7-4 (15 minutes)

March 29 Accounts Receivable—Leer Co. ................................ 45,000

March 29 Cash .............................................................................

Exercise 7-5 (20 minutes)

June 5 Cash .............................................................................. 900

Exercise 7-6 (20 minutes)

Feb. 1 Allowance for Doubtful Accounts.............................. 580

June 5 Accounts Receivable—P. Park .................................. 580

June 5 Cash .............................................................................. 580

Exercise 7-7 (15 minutes)