Fundamental Accounting Principles 21st Edition Wild Solutions Manual Download

Fundamental Accounting Principles 21st Edition Wild Solutions Manual
Fundamental Accounting Principles 21st Edition Wild

Solutions Manual
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Chapter 9
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. Creditors prefer notes receivable to accounts receivable because the notes can be more
easily converted into cash before they are due by discounting (or selling) them to a financial
institution. Also, a note represents a clear written acknowledgment by the debtor of both the
debt and its amount and terms.
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, 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. Polaris lists its accounts receivable as “Trade receivables, net” on its balance sheet. Polaris
does not report the amount of the allowance for doubtful accounts. Their Note 1 states that
“Polaris’ financial exposure to collection of accounts receivable is limited due to its
agreements with certain finance companies”.
8. Artic Cat uses the allowance method to account for doubtful accounts as evidenced by the
receivables being reduced by an allowance on the balance sheet. The realizable value of
accounts receivable as of March 31, 2011, is its net amount of $23,732 thousand.
©2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
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Solutions Manual, Chapter 9 571
9. KTM’s lists its accounts receivable as “Accounts receivable— trade to third parties”,
“Accounts receivable— trade to affiliated companies” and “Accounts receivable— trade to
associated companies”. KTM reports accounts receivable (in € thousands) of €49,924 from
third parties, €1,443 from affiliated companies and €2,227 from associated companies
10. Piaggio titles its accounts receivable as “Trade receivables.” Piaggio reports its accounts
receivable as a current asset. Interestingly, Piaggio includes a placeholder titled “Trade
receivables” in non-current assets but no balance is shown.
572 Fundamental Accounting Principles, 21st Edition
QUICK STUDIES
Quick Study 9-1 (15 minutes)
1. Cash ............................................................................... 19,000
Credit Card Expense* ................................................... 1,000
Sales......................................................................... 20,000
To record credit card sales less fees.
*$20,000 x 5%
Cost of Goods Sold ...................................................... 15,000
Merchandise Inventory ........................................... 15,000
To record cost of sales.
2. Accounts Receivable—Credit Card Cos..................... 4,800

Credit Card Expense* ................................................... 200
Sales......................................................................... 5,000
To record credit card sales less fees.
*$5,000 x 4%
Cost of Goods Sold ...................................................... 3,000
Merchandise Inventory ........................................... 3,000
5 days later
Cash ............................................................................... 4,800
Accounts Receivable—Credit Card Cos............... 4,800
To record cash receipts.

1.
Jan. 31 Allowance for Doubtful Accounts ........................... 800
Accounts Receivable—C. Green ....................... 800
To write off account.
2.
Mar. 9 Accounts Receivable—C. Green* ............................ 300
Allowance for Doubtful Accounts ..................... 300
To 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
To record payment on a receivable.
1.
Dec. 31 Bad Debts Expense ................................................ 885
Allowance for Doubtful Accounts................... 885
To 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
To record estimate of uncollectibles
($280,000 x 0.5%).
1. Maturity date is October 31, which is computed as follows:

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

Notes Receivable—R. Albany .................... 6,000
Interest Revenue ......................................... 180
To record cash received on note plus
interest ($6,000 x 12% x 90/360).
Dec. 31 Interest Receivable ............................................ 50

To record the year-end adjustment for
interest earned ($10,000 x 6% x 30/360).
Maturity date
Jan. 15 Cash .................................................................... 10,075
Interest Receivable ..................................... 50
Notes Receivable ........................................ 10,000
To record cash received on note plus interest.
May 1 Cash .......................................................................121,875

Factoring Fee Expense* ....................................... 3,125
Accounts Receivable ...................................... 125,000
To record sale of receivable.
*($125,000 x 0.025)
Oct. 1 Bad Debts Expense .....................................................50,000

Accounts Receivable—P. Moore ......................... 50,000
To write off an account.
Oct. 30 Accounts Receivable—P.Moore ................................50,000

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

Accounts Receivable— P. Moore ........................ 50,000
To record cash received on account.
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.
a. Both U.S. GAAP and IFRS have similar asset criteria that apply to
recognition of receivables. Further, receivables that arise from revenue-
generating activities are subject to broadly similar criteria for U.S. GAAP
and IFRS. Specifically, both refer to the realization principle and an
earnings process. However, while these criteria are broadly similar,
differences do exist, and they arise mainly from industry-specific
guidance under U.S. GAAP, which is very limited under IFRS.
b. Both U.S. GAAP and IFRS require receivables to be reported net of

estimated uncollectibles. Further, both systems require that the expense
for estimated uncollectibles be recorded in the same period when
revenues from those receivables are recorded. This means that in the
case of accounts receivable, both U.S. GAAP and IFRS require the
allowance method for uncollectibles (unless immaterial).
EXERCISES
Exercise 9-1 (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
Morales Company
Schedule of Accounts Receivable
November 30, 2013
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).
Apr. 8 Cash ......................................................................... 8,064
Credit Card Expense* ............................................. 336
Sales .................................................................. 8,400
To record credit card sales less 4% fee.
*($8,400 x .04)
8 Cost of Goods Sold ................................................ 6,000

Merchandise Inventory .................................... 6,000
12 Accounts Receivable—Continental ...................... 5,460

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

Merchandise Inventory .................................... 3,500
20 Cash ......................................................................... 5,460

Accounts Receivable—Continental ................. 5,460
To record cash received on credit sales less fees.
March 11 Bad Debts Expense ....................................................

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

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

45,000
Accounts Receivable—Lester Co. ...................... 45,000
Dec. 31 Bad Debts Expense ..................................................... 4,875
Allowance for Doubtful Accounts........................ 4,875
To record estimated bad debts expense
(.005 x $975,000).
Feb. 1 Allowance for Doubtful Accounts.............................. 580

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

Allowance for Doubtful Accounts ........................ 580
To reinstate an account.
June 5 Cash .............................................................................. 580

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

a.
Dec. 31 Bad Debts Expense* ..................................................... 685
Allowance for Doubtful Accounts........................ 685
To record estimated bad debts expense.
*
Unadjusted balance = $ 415 credit
Estimated balance ($55,000 x .02) = 1,100 credit
Required adjustment = $ 685 credit
b.
Dec. 31 Bad Debts Expense** ....................................................1,391
Allowance for Doubtful Accounts........................ 1,391
To record estimated bad debts expense.
**
Unadjusted balance = $ 291 debit
Estimated balance ($55,000 x .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
$11,820 credit
Exercise 9-6 (Concluded)
b.
Dec. 31 Bad Debts Expense.............................................. 8,220
Allowance for Doubtful Accounts ................ 8,220
To record estimated bad debts.*
*
Unadjusted balance .....................................$ 3,600 credit
Estimated balance ....................................... 11,820 credit
Required adjustment ...................................$ 8,220 credit
c.
*
Unadjusted balance .....................................$ 100 debit
Estimated balance ....................................... 11,820 credit
Required adjustment ...................................$11,920 credit
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
Feb. 1 Allowance for Doubtful Accounts.............................. 6,800

Accounts Receivable—Oakley Co ....................... 900
Accounts Receivable—Brookes Co .................... 5,900
To write off specific accounts.
June 5 Accounts Receivable—Oakley ................................... 900

Allowance for Doubtful Accounts ........................ 900
To reinstate an account.
June 5 Cash .............................................................................. 900

Accounts Receivable—Oakley ............................. 900
a. Expense is 1.5% of credit sales
Dec. 31 Bad Debts Expense............................................... 4,500

Allowance for Doubtful Accounts ................. 4,500
To record estimated bad debts
[$300,000 x .015].
b. Expense is 0.5% of total sales

[($300,000 + $900,000) x .005].
c. 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
July 4 Accounts Receivable ............................................ 7,245
Sales ................................................................. 7,245
To record sales on credit.
4 Cost of Goods Sold ......................................................

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

Factoring Fee Expense* ....................................... 800
To record sale of receivable. *($20,000 x .04)
17 Cash ....................................................................... 5,859

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

Notes Payable .................................................. 10,000
To record cash from a loan.
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.
Nov. 1 Notes Receivable—K. White ............................. 6,000

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

Interest Revenue .......................................... 80
To record interest earned
[$6,000 x .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 .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

Interest Revenue ............................................. 380
Notes Receivable—T. Jackson ...................... 9,500
To record note dishonored plus interest
earned [$9,500 x .08 x 180/360 = $380].
Dec. 31 Allowance for Doubtful Accounts ....................... 9,880

Accounts Receivable—T. Jackson ................ 9,880
Instructor note: The first printing of the book for the December 13 transaction
erroneously read “60-day” note, but should have read “45-day” note. This does
not impact Exercise 13, but does impact the January 27 entry for Exercise 14.
2012
Dec. 13 Notes Receivable—M. Lee........................... 9,500
Accounts Receivable—M. Lee .............. 9,500
Dec. 31 Interest Receivable ...................................... 38

Interest Revenue .................................... 38
To record interest earned [$9,500 x .08 x 18/360].
Instructor note: The first printing of the book for the December 13 transaction
of Exercise 13 erroneously read “60-day” note, but should have read “45-day”
note. This does not impact Exercise 13, but does impact the January 27 entry
for Exercise 14. An erroneous marginal check figure of Dr. Cash 9,627 should
correctly read Dr. Cash 9,595.
2013
Jan. 27 Cash ....................................................................... 9,595
Interest Revenue* ............................................ 57
Interest Receivable ......................................... 38
Notes Receivable—M. Lee ............................. 9,500
* [$9,500 x .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

Notes Receivable—H. Cheng ......................... 2,000
To record receivable for dishonored
note plus interest [$2,000 x .09 x 30/360].
May 1 Allowance for Doubtful Accounts ....................... 2,015

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

Notes Receivable—Tomas Co ....................... 5,000
To record cash received on note with
interest [$5,000 x .10 x 90/360].
Instructor note: The first printing of the book has the far-right-hand column
erroneously titled “2010” that should be titled “2011”.
Year 2012 accounts receivable turnover:

$335,280
($41,400 + $34,800)/2 = 8.8 times
Year 2013 accounts receivable turnover:

$405,140
($44,800 + $41,400)/2 = 9.4 times
Analysis: Raheem Company turned over its accounts receivable 0.6 (9.4 – 8.8)
times more in 2013 than in 2012. This may indicate that the company has
tightened its credit policy or has improved its collection efforts. Also, relative to
competitors’ turnover of 11, Raheem is performing worse than average.

($ in millions)
a. Expense is 0.4% of total revenues
[9,315,807 x 0.004].
b. Allowance is 2.1% of trade receivables

*
10,000 credit
Estimated balance (2,127,682 x 0.021) .........................44,681 credit
34,681 credit
PROBLEM SET A
Problem 9-1A (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
To record credit card sales less fee. *($6,900 x .03)
5 Cost of Goods Sold .........................................................4,200
Merchandise Inventory ............................................. 4,200
6 Accounts Receivable—Access ................................ 5,733
Sales ..................................................................... 5,850
8 Accounts Receivable—Access ................................ 4,263
Sales ..................................................................... 4,350
10 No journal entry required.
13 Allowance for Doubtful Accounts ............................ 429
Accounts Receivable—A. McKee....................... 429
To write off account due.
17 Cash ............................................................................ 9,996
Accounts Receivable—Access .......................... 9,996
To record cash received from credit card co. ($5,733+$4,263)
18 Cash ............................................................................ 637
Sales Discounts* ....................................................... 13
Accounts Receivable—N. Morris ....................... 650
To record cash received less discount. *($650 x .02)
2012
a. Accounts Receivable ......................................... 1,345,434
Sales .............................................................. 1,345,434
To record sales on account.
Cost of Goods Sold ......................................................

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

Accounts Receivable ................................... 18,300
To 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
Problem 9-2A (Concluded)
2013
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
To 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
Part 1
[$5,682,000 x .015].
b. Expense is 1% of total sales
[($1,905,000 + $5,682,000) x .01].
*
$16,580 debit
Estimated balance ($1,270,100 x 5%) ...........................
63,505 credit
$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.
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 in 2014 will not directly affect year 2014
net income. 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. Net income for Year 2013 (the year of the original sale)
included an estimated expense for write-offs such as this one.
Part 1
2012
Dec. 16 Notes Receivable—D. Todd................................ 10,800
Accounts Receivable—D. Todd ................... 10,800
To record note received on account.
31 Interest Receivable .............................................. 36

Interest Revenue ........................................... 36
To record interest earned
[$10,800 x .08 x 15/360 = $36].
2013
Feb. 14 Cash ...................................................................... 10,944
Interest Revenue* .......................................... 108
Interest Receivable........................................ 36
Notes Receivable—D. Todd.......................... 10,800
To 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
To record receivable for dishonored
note plus interest [$2,400 x .07 x 30/360= $14].
June 2 Accounts Receivable—Midnight Co. ................. 6,222

Notes Receivable—Midnight Co .................. 6,100
To record receivable for dishonored note
*[$6,100 x 0.08 x 90/360 = $122]
Problem 9-5A (Concluded)
July 17 Cash ...................................................................... 6,286

Accounts Receivable—Midnight Co. ........... 6,222
To record cash received on account
plus additional interest.
*[$6,222 x .08 x 46/360= $64 (rounded)]
Aug. 7 Notes Receivable—Mulan................................... 7,450

Accounts Receivable—Mulan ...................... 7,450
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
To record cash received on note plus interest
*($2,100 x .10 x 60/360 = $35).
5 Cash ...................................................................... 7,636

Notes Receivable—Mulan............................. 7,450
Interest. *($7,450 x .10 x 90/360 = $186)
Dec. 1 Allowance for Doubtful Accounts...................... 2,414

Accounts Receivable—A. Privet .................. 2,414
To record write-off of account.
Part 2
Analysis Component: 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. This
arrangement must be disclosed to satisfy the full-disclosure principle.
PROBLEM SET B
Problem 9-1B (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 Accounts Receivable—Aztec................................... 1,225
Credit card expense* ................................................ 25
Sales..................................................................... 1,250
Cost of Goods Sold ......................................................... 900
Merchandise Inventory .............................................. 900
14 Cash ........................................................................... 3,626
Sales Discounts* ....................................................... 74
Accounts Receivable—M. Carpenter ................ 3,700
To record cash received less discount.*($3,700 x .02)
15 Accounts Receivable—Aztec................................... 3,175
Credit Card Expense*(rounded to nearest dollar) ..... 65
Sales...................................................................... 3,240
18 No journal entry required.
22 Allowance for Doubtful Accounts ........................... 498
Accounts Receivable—Craw Co........................ 498
To write off account due.
25 Cash ........................................................................... 4,400
Accounts Receivable—Aztec............................. 4,400
To record cash rec’d from credit card co. ($1,225+$3,175)
2012
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.
** Rounded to nearest dollar
Problem 9-2B (Concluded)
2013
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.
Part 1
[$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].
*
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.
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 in 2014 will not directly affect Year 2014
net income. 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. Net income for Year 2013 (the year of the original sale)
included an estimated expense for write-offs such as this one.
Part 1
2012
Nov. 1 Notes Receivable—S. Julian .................................. 4,800
Accounts Receivable—S. Julian ...................... 4,800
Dec. 31 Interest Receivable .................................................. 64

Interest Revenue ............................................... 64
To record interest earned [$4,800 x .08 x 60/360].
2013
Jan. 30 Cash .......................................................................... 4,896
Interest Revenue* .............................................. 32
Interest Receivable............................................ 64
Notes Receivable—S. Julian ............................ 4,800
To record cash received on note with interest.
*[$4,800 x .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
To record receivable for dishonored note
plus interest [$12,600 x .08 x 30/360].
Apr. 30 Cash .......................................................................... 6,324

Notes Receivable—M. Shelley ......................... 6,200
To record cash received on note plus interest
($6,200 x .12 x 60/360 = $124).
Problem 9-5B (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. 14 Cash ........................................................................ 2,034

Notes Receivable—R. Solon .......................... 2,000
*[$2,000 x .08 x 72/360] rounded to nearest dollar
Sept. 19 Cash ........................................................................ 9,690

Notes Receivable—J. Felton .......................... 9,500
*[$9,500 x .08 x 90/360] rounded to nearest dollar
Nov. 30 Allowance for Doubtful Accounts........................ 12,684

Accounts Receivable—King Co ..................... 12,684
Part 2
Analysis Component: 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. This
arrangement must be disclosed to satisfy the full-disclosure principle.
SERIAL PROBLEM — SP 9
Serial Problem — SP 9, Success Systems (50 minutes)

1. a. Bad debts expense is recorded as 1% of total revenues:
$43,853 x .01 = $438.53 which is $439 rounded to nearest dollar.
2014
Mar. 31 Bad Debts Expense ............................................... 439
Allowance for Doubtful Accounts.................. 439
To record estimated bad debts.
1. b. Bad debts expense is recorded as 2% of accounts receivable:

$22,720 x .02 = $454.40 which is $454 rounded to the nearest dollar.
2014
Mar. 31 Bad Debts Expense ............................................... 454
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 3/31/14 ................... $454 Cr.

Less: Account written off .............................. (100) Dr.
Allowance Balance as of 6/30/14 ................... $354 Cr. (before adjustment)
Required Balance: $20,250 x 0.02 = $405
Required Adjustment: $405 - $354 = $51

2014
June 30 Bad Debts Expense ............................................... 51
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.
Reporting in Action — BTN 9-1
1. Polaris’s receivables at December 31, 2011, are $115,302 thousand.
2. Accounts receivable turnover for 2011 ($ thousands)

$2,656,949
($115,302 + $89,294)/2 = 25.97 times
3. Average collection period = 365/ Turnover = 365 / 25.97 = 14.05 days

This time period is about ~15 days because Polaris typically sells its
products to a financing company that extends longer terms to its end
customers. It is difficult to tell what window of time the remaining
customers outside of the financing company pay.
4. Liquid assets as a percent of current liabilities ($ thousands)

$325,336 + $115,302 + $298,042
Dec. 31, 2011: = 120.0%
$615,531
$393,927 + $89,294 + $235,927

Dec. 31, 2010: = 123.1%
$584,210
Comments: Current liabilities are obligations that are due to be paid or

liquidated within one year or one operating cycle of the business,
whichever is longer. Typically, cash provided from the operations of the
business during the year along with the existing liquid assets are used to
satisfy these obligations. Looking solely at Polaris’s ability to satisfy
current obligations using cash, investment, and receivables assets, the
company is in a slightly better position at December 21, 2010, as
compared to December 31, 2011. In either year, Polaris should not have
difficulty satisfying its current liabilities with these liquid assets. As a
benchmark, many prefer a ratio close to 100% for liquid assets divided by
current liabilities.
5. Note 1 to Polaris’s financial statements describes its significant

accounting policies. It reports that: “Polaris considers all highly liquid
investments purchased with an original maturity of 90 days or less to
be cash equivalents.”
6. Solution depends on the financial statement information obtained.
Comparative Analysis — BTN 9-2
1. Accounts Receivable Turnover ($ thousands)
Polaris (Current Year):

$2,656,949 = 25.97 times
($115,302 + $89,294)/2
Polaris (Prior Year):
$1,991,139
= 22.16 times
($89,294 + $90,405)/2
Arctic Cat (Current Year): $464,651 = 17.55 times

($23,732+ $29,227)/2
$450,728
Arctic Cat (Prior Year): ($29,227 + $38,231)/2 = 13.36 times
2. Average Collection Period (or “Average Days’ Sales Uncollected”)

Polaris (Current Year): 365 days / 25.97 times = 14.05 days
Polaris (Prior Year): 365 days / 22.16 times = 16.47 days
Arctic Cat(Current Year): 365 days / 17.55 times = 20.80 days
Arctic Cat (Prior Year): 365 days / 13.36 times = 27.32 days
Interpretation: The average collection period for Polaris is shorter than

Arctic Cat because Arctic Cat sells more of its products for longer-term
credit to its end customers. Polaris sells much of its products to a
financing company that extends longer-term credit to its end
customers.
3. Both companies appear reasonably efficient in collecting accounts

receivable. Arctic Cat collects them over a longer period of time in both
years vis-à-vis Polaris due to Polaris’ arrangement with a financing
company that extends longer-term credit directly to its end customers.
Both Polaris and Arctic Cat showed a favorable trend with a shorter
collection time for the current year.
Ethics Challenge — BTN 9-3
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.
Communicating in Practice — BTN 9-4
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 $43,000.
Sid, I hope this clarifies the matter for you. If you have further questions,
please call me.
Taking It to the Net — BTN 9-5
1. At December 31, 2011, eBay’s ($ thousands) net accounts receivable

were $681,593, and at December 31, 2010, its net accounts receivable
were $454,366.
2.
December 31, December 31,
$ thousands 2011 2010
Gross accounts receivable ....................... $768,794 $540,851
Allowance for doubtful accounts 87,201 86,485
(including authorized credits) ................
% of uncollectible accounts ..................... 11.3% 16.0%
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
apparently caused them to estimate this high amount of uncollectible
accounts.
Teamwork in Action — BTN 9-6
Instructor note: Computations for the aging schedule are in the Problem 9-4A 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, 2013, 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.
Entrepreneurial Decision — BTN 9-7
1. Computation of added annual net income or loss
a.
Added Monthly Net Income or Loss under Plan A
Increased sales ............................................................... $250,000
Cost of sales ................................................................... (135,500)
Credit card fees ($250,000 x 4.75%) .............................. (11,875)
Recordkeeping and shipping ($250,000 x 6%) ............. (15,000)
Lost gross profit on store sales ($35,000 x 25%) ........ (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
Entrepreneurial Decision — BTN 9-7 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) might expand its product into new markets, and could increase
sales over time. However, this is a new distribution method for the
company, and it might lack the expertise to do it well. It will need to
further assess whether the benefit of additional expansion of online
sales over time will be more/less than the cost of lost sales through
normal channels.
Taking credit cards for these online 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, possibly into more locations. This is
an expansion of a distribution method now employed.
The company does run some unknown risk associated with having new
customers. While the 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 9-8
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.
Fundamental Accounting Principles 21st Edition Wild Solutions Manual
Global Decision — BTN 9-9
1. Accounts Receivable Turnover (Euro in thousands)
Piaggio (Current Year): €1,516,463 19.44 times

(€65,560 + €90,421) / 2
2. Average Collection Period (or “Average Days’ Sales Uncollected”)
Piaggio (Current Year): 365 days / 19.44 times = 18.78 days
3. Piaggio is in between Polaris and Arctic Cat in terms of its turnover and
collection periods. Its collection period is relatively low however,
reflecting the impact of the factoring of receivables that Piaggio does.
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2. Accounts Receivable—Credit Card Cos..................... 4,800

Quick Study 9-2 (15 minutes)

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

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

Quick Study 9-4 (15 minutes)

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

Quick Study 9-5 (15 minutes)

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

Quick Study 9-6 (10 minutes)

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

Dec. 31 Interest Receivable ............................................ 50

Quick Study 9-8 (10 minutes)

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

Quick Study 9-9 (10 minutes)

Oct. 1 Bad Debts Expense .....................................................50,000

Quick Study 9-10 (10 minutes)

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

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

Interpretation: An accounts receivable turnover of 5.9 implies that the

Quick Study 9-12 (10 minutes)

b. Both U.S. GAAP and IFRS require receivables to be reported net of

Sales Returns and

ACCOUNTS RECEIVABLE LEDGER

Ski Shop Welcome Enterprises Zia Natara

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

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

12 Accounts Receivable—Continental ...................... 5,460

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

20 Cash ......................................................................... 5,460

Exercise 9-3 (20 minutes)

March 11 Bad Debts Expense ....................................................

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

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

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

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

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

Exercise 9-5 (15 minutes)

Exercise 9-6 (30 minutes)

Exercise 9-7 (25 minutes)

a. Computation of the estimated balance of the allowance for uncollectibles:

Feb. 1 Allowance for Doubtful Accounts.............................. 6,800

June 5 Accounts Receivable—Oakley ................................... 900

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

Exercise 9-9 (25 minutes)

a. Expense is 1.5% of credit sales

Dec. 31 Bad Debts Expense............................................... 4,500

b. Expense is 0.5% of total sales

c. Allowance is 6% of accounts receivable

4 Cost of Goods Sold ......................................................

9 Cash ....................................................................... 19,200

17 Cash ....................................................................... 5,859

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

Note to Financial Statements

Exercise 9-11 (15 minutes)

Nov. 1 Notes Receivable—K. White ............................. 6,000

Dec. 31 Interest Receivable ............................................ 80

Apr. 30 Cash .................................................................... 6,240

Mar. 21 Notes Receivable—T. Jackson ............................ 9,500

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

Dec. 31 Allowance for Doubtful Accounts ....................... 9,880