Corporate Financial Accounting 14th Edition Warren Solutions Manual

Corporate Financial Accounting 14th
Edition Warren Solutions Manual

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CHAPTER 8
RECEIVABLES
DISCUSSION QUESTIONS
1. Receivables are normally classified as (1) accounts receivable, (2) notes receivable, or
(3) other receivables.
2. Dan’s Hardware should use the direct write-off method because it is a small business that has
a relatively small number and volume of accounts receivable.
3. Contra asset, credit balance
4. The accounts receivable and allowance for doubtful accounts may be reported at a net amount
of $661,500 ($673,400 – $11,900) in the current assets section of the balance sheet. In
this case, the amount of the allowance for doubtful accounts should be shown separately in a
note to the financial statements or in parentheses on the balance sheet. Alternatively, the
accounts receivable may be shown at the gross amount of $673,400 less the amount of the
allowance for doubtful accounts of $11,900, thus yielding net accounts receivable of
$661,500.
5. (1) The percentage rate used is excessive in relationship to the accounts written off as
uncollectible; hence, the balance in the allowance is excessive.
(2) A substantial volume of old uncollectible accounts is still being carried in the accounts
receivable account.
6. An estimate based on analysis of receivables provides the most accurate estimate of the
current net realizable value.
7. A. Sailfish Company
B. Notes Receivable
8. The interest will amount to $5,100 ($85,000 × 6%) only if the note is payable one year from
the date it was created. The usual practice is to state the interest rate in terms of an annual
rate, rather than in terms of the period covered by the note.
9. Debit Accounts Receivable for $243,600
Credit Notes Receivable for $240,000
Credit Interest Revenue for $3,600
10. Cash 245,427
Accounts Receivable [$240,000 + ($240,000 × 6% × 90 ÷ 360)] 243,600
Interest Revenue 1,827
($243,600 × 30 ÷ 360 × 9% = $1,827).
8-1
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CHAPTER 8 Receivables
BASIC EXERCISES
BE 8–1
Mar. 17 Cash 275
Bad Debt Expense 1,000
Accounts Receivable—Shawn McNeely 1,275
July 29 Accounts Receivable—Shawn McNeely 1,000

29 Cash 1,000
BE 8–2
Mar. 17 Cash 275
Allowance for Doubtful Accounts 1,000
July 29 Accounts Receivable—Shawn McNeely 1,000

29 Cash 1,000
BE 8–3
A. $129,625 [$51,850,000 × (1/4 × 1%)]
B. Adjusted Balance
Accounts Receivable..……………………………………………… $ 2,150,000
Allowance for Doubtful Accounts ($12,962,500 – $10,500)… 12,952,000
Bad Debt Expense………………………………………………… 12,962,500
C. Net realizable value ($2,150,000 – $12,952,000)……………… $(10,802,000)
BE 8–4
A. $120,500 ($110,000 + $10,500)
B. Adjusted Balance
Accounts Receivable..………………………………………………. $2,150,000
Allowance for Doubtful Accounts……………………………….. 110,000
Bad Debt Expense………………………………………………….. 120,500
C. Net realizable value ($2,150,000 – $110,000)…………………… $2,040,000
8-2
BE 8–5
A. The due date for the note is August 7, determined as follows:
April………………………………………………………………….. 21 days (30 – 9)
May…………………………………………………………………… 31 days
June………………………………………………………………….. 30 days
July…………………………………………………………………… 31 days
August………………………………………………………….……. 7 days
Total………………………………………………………………….. 120 days
B. $462,000 [$450,000 + ($450,000 × 8% × 120 ÷ 360)]
C. Aug. 7 Cash 462,000

Notes Receivable 450,000
8-3
EXERCISES
Ex. 8–1
Accounts receivable from the U.S. government are significantly different from
receivables from commercial aircraft carriers such as Delta and United. Thus,
Boeing should report each type of receivable separately. In its filing with the
Securities and Exchange Commission, Boeing reports the receivables together
on the balance sheet, but discloses each receivable separately in a note to the
financial statements.
Ex. 8–2
A. MGM Resorts International: 15.9% ($89,602,000 ÷ $562,947,000)
B. Johnson & Johnson: 2.4% ($275,000,000 ÷ $11,260,000,000)
C. Casino operations experience greater bad debt risk because it is difficult to
control the creditworthiness of customers entering the casino. In addition,
individuals who may have adequate creditworthiness could overextend
themselves and lose more than they can afford if they get caught up in the
excitement of gambling. In contrast, Johnson & Johnson’s customers are
primarily other businesses such as grocery store chains.
Ex. 8–3
Jan. 19 Accounts Receivable—Dr. Kyle Norby 6,400
Sales 6,400
19 Cost of Goods Sold 3,000

Inventory 3,000
June 2 Cash 500

Accounts Receivable—Dr. Kyle Norby 6,400
Oct. 23 Accounts Receivable—Dr. Kyle Norby 5,900

23 Cash 5,900
Accounts Receivable—Dr. Kyle Norby 5,900
8-4
Ex. 8–4
May 24 Accounts Receivable—Old Town Cafe 18,450
Sales 18,450

Inventory 11,000
Sept. 30 Cash 6,000

Accounts Receivable—Old Town Cafe 18,450
Dec. 7 Accounts Receivable—Old Town Cafe 12,450

7 Cash 12,450
Accounts Receivable—Old Town Cafe 12,450
Ex. 8–5
A. Bad Debt Expense 11,750
Accounts Receivable—Wil Treadwell 11,750
B. Allowance for Doubtful Accounts 11,750

Accounts Receivable—Wil Treadwell 11,750
Ex. 8–6
A. $205,500 [$27,400,000 × (3/4 × 1%)] C. $137,000 [$27,400,000 × (1/2 × 1%)]
B. $197,500 ($188,000 + $9,500) D. $143,600 ($175,000 – $31,400)
Ex. 8–7
Account Due Date Number of Days Past Due
Avalanche Auto August 8 84 (23 + 30 + 31)
Bales Auto October 11 20 (31 – 11)
Derby Auto Repair June 23 130 (7 + 31 + 31 + 30 + 31)
Lucky’s Auto Repair September 2 59 (28 + 31)
Pit Stop Auto September 19 42 (11 + 31)
Reliable Auto Repair July 15 108 (16 + 31 + 30 + 31)
Trident Auto August 24 68 (7 + 30 + 31)
Valley Repair & Tow May 17 167 (14 + 30 + 31 + 31 + 30 + 31)
8-5
Ex. 8–8
A.
Customer Due Date Number of Days Past Due
Boyd Industries April 7 115 days (23 + 31 + 30 + 31)
Hodges Company May 29 63 days (2 + 30 + 31)
Kent Creek Inc. June 8 53 days (22 + 31)
Lockwood Company August 10 Not past due
Van Epps Company July 2 29 days (31 – 2)
B.
Aging of Receivables Schedule
July 31
Days Past Due
Not Past Over
Customer Balance Due 1–30 31–60 61–90 90
Acme Industries Inc. 3,000 3,000
Alliance Company 4,500 4,500
Zollinger Company 5,000 5,000

Subtotals 1,050,000 600,000 220,000 115,000 85,000 30,000
Boyd Industries 36,000 36,000
Hodges Company 11,500 11,500
Kent Creek Inc. 6,600 6,600
Lockwood Company 7,400 7,400
Van Epps Company
Totals 1,124,500 607,400 233,000 121,600 96,500 66,000
Ex. 8–9
Days Past Due
Not Past Over
Balance Due 1–30 31–60 61–90 90
Total receivables 1,124,500 607,400 233,000 121,600 96,500 66,000
Percentage
uncollectible 1% 3% 12% 30% 75%
Allowance for doubtful
accounts 106,106 6,074 6,990 14,592 28,950 49,500
8-6
Ex. 8–10
July 31 Bad Debt Expense 97,866
Uncollectible accounts estimate
($106,106 – $8,240).
Ex. 8–11
Estimated
Uncollectible Accounts
Age Interval Balance Percent Amount
Not past due $ 892,000 0.75% $ 6,690
1–30 days past due 285,000 1.00% 2,850
31–60 days past due 101,000 8.00% 8,080
61–90 days past due 63,000 16.00% 10,080
91–180 days past due 43,100 50.00% 21,550
Over 180 days past due 17,700 80.00% 14,160
Total $1,401,800 $63,410
Ex. 8–12
Dec. 31 Bad Debt Expense 68,550
($63,410 + $5,140).
8-7
Ex. 8–13
A. Apr. 13 Bad Debt Expense 8,450
Accounts Receivable—Dean Sheppard 8,450
May 15 Cash 500

Accounts Receivable—Dan Pyle 7,100
July 27 Accounts Receivable—Dean Sheppard 8,450

27 Cash 8,450

Accounts Receivable—Paul Chapman 2,225
Accounts Receivable—Duane DeRosa 3,550
Accounts Receivable—Teresa Galloway 4,770
Accounts Receivable—Ernie Klatt 1,275
Accounts Receivable—Marty Richey 1,690
31 No entry
8-8
Ex. 8–13 (Concluded)

B. Apr. 13 Allowance for Doubtful Accounts 8,450
May 15 Cash 500

Accounts Receivable—Dan Pyle 7,100
July 27 Accounts Receivable—Dean Sheppard 8,450

27 Cash 8,450
Dec. 31 Allowance for Doubtful Accounts 13,510

Accounts Receivable—Paul Chapman 2,225
Accounts Receivable—Duane DeRosa 3,550
Accounts Receivable—Teresa Galloway 4,770
Accounts Receivable—Ernie Klatt 1,275
Accounts Receivable—Marty Richey 1,690
31 Bad Debt Expense 28,335

($3,778,000 × 0.75% = $28,335).
C. Bad debt expense under:

Allowance method..………………………...……………………………………. $28,335
Direct write-off method ($8,450 + $6,600 – $8,450 + $13,510)…………… 20,110
Difference ($28,335 – $20,110)………………………………………………… $ 8,225
Shipway Company’s income would be $8,225 higher under the direct write-off
method than under the allowance method.
8-9
Ex. 8–14
A. June 8 Bad Debt Expense 8,440
Accounts Receivable—Kathy Quantel 8,440
Aug. 14 Cash 3,000

Accounts Receivable—Rosalie Oakes 12,500
Oct. 16 Accounts Receivable—Kathy Quantel 8,440

16 Cash 8,440

Accounts Receivable—Wade Dolan 4,600
Accounts Receivable—Greg Gagne 3,600
Accounts Receivable—Amber Kisko 7,150
Accounts Receivable—Shannon Poole 2,975
Accounts Receivable—Niki Spence 6,630
31 No entry
8-10
Ex. 8–14 (Continued)

B. June 8 Allowance for Doubtful Accounts 8,440
Aug. 14 Cash 3,000

Accounts Receivable—Rosalie Oakes 12,500
Oct. 16 Accounts Receivable—Kathy Quantel 8,440

16 Cash 8,440

Accounts Receivable—Wade Dolan 4,600
Accounts Receivable—Greg Gagne 3,600
Accounts Receivable—Amber Kisko 7,150
Accounts Receivable—Shannon Poole 2,975
Accounts Receivable—Niki Spence 6,630

($47,090 – $1,545).
Computations:
Aging Class Receivables Estimated Doubtful
(Number of Days Balance on Accounts
Past Due) December 31 Percent Amount
0–30 days $320,000 1% $ 3,200
31–60 days 110,000 3% 3,300
61–90 days 24,000 10% 2,400
91–120 days 18,000 33% 5,940
More than 120 days 43,000 75% 32,250
Total receivables $515,000 $47,090
Estimated balance of allowance account from aging schedule………………… $47,090

Unadjusted credit balance of allowance account…………………………………. 1,545
Adjustment…………………………………………………………………………………. $45,545
Unadjusted credit balance of allowance account = $36,000 – $8,440 – $9,500 + $8,440 – $24,955 = $1,545
8-11
Ex. 8–14 (Concluded)

C. Bad debt expense under:
Allowance method……………………………………………………………. $45,545
Direct write-off method ($8,440 + $9,500 – $8,440 + $24,955)………… 34,455
Difference……………………………………………………………………….. $11,090
Rustic Tables’ income would be $11,090 higher under the direct write-off method
than under the allowance method.
Ex. 8–15
$482,800 [$487,500 + $27,800 – ($3,250,000 × 1%)]
Ex. 8–16
A. $593,000 [$600,000 + $34,000 – ($4,100,000 × 1%)]
B. $11,700 ($32,500 – $27,800) + ($41,000 – $34,000)
Ex. 8–17
Accounts Receivable—Shawn Brooke 4,650
Accounts Receivable—Eve Denton 5,180
Accounts Receivable—Art Malloy 11,050
Accounts Receivable—Cassie Yost 9,120

Accounts Receivable—Shawn Brooke 4,650
Accounts Receivable—Eve Denton 5,180
Accounts Receivable—Art Malloy 11,050
Accounts Receivable—Cassie Yost 9,120

($5,250,000 × 0.75% = $39,375).
C. Net income would have been $9,375 higher under the direct write-off method
because bad debt expense would have been $9,375 higher under the
allowance method ($39,375 expense under the allowance method versus
$30,000 expense under the direct write-off method).
8-12
Ex. 8–18
Accounts Receivable—Kim Abel 21,550
Accounts Receivable—Lee Drake 33,925
Accounts Receivable—Jenny Green 27,565
Accounts Receivable—Mike Lamb 19,460

Accounts Receivable—Kim Abel 21,550
Accounts Receivable—Lee Drake 33,925
Accounts Receivable—Jenny Green 27,565
Accounts Receivable—Mike Lamb 19,460

($109,650 + $7,500).
Computations:
Aging Class Receivables Estimated Doubtful
(Number of Days Balance on Accounts
Past Due) December 31 Percent Amount
0–30 days $ 715,000 1% $ 7,150
31–60 days 310,000 2% 6,200
61–90 days 102,000 15% 15,300
91–120 days 76,000 30% 22,800
More than 120 days 97,000 60% 58,200
Total receivables $1,300,000 $109,650
Unadjusted debit balance of Allowance for Doubtful Accounts

($102,500 – $95,000) ............................................................................ $ 7,500
Estimated balance of Allowance for Doubtful Accounts
from aging schedule ........................................................................... 109,650
Adjustment ............................................................................................. $117,150
C. Net income would have been $14,650 lower under the allowance method
because bad debt expense would have been $14,650 higher under the
allowance method ($117,150 expense under the allowance method versus
$102,500 expense under the direct write-off method).
8-13
Ex. 8–19
Due Date Interest
A. May 2 $1,600 [$80,000 × 0.06 × (120 ÷ 360)]
B. March 21 90 [$27,000 × 0.04 × (30 ÷ 360)]

C. July 8 625 [$62,500 × 0.08 × (45 ÷ 360)]
D. Nov. 28 375 [$30,000 × 0.05 × (90 ÷ 360)]
E. Jan. 2 700 [$40,000 × 0.07 × (90 ÷ 360)]
Ex. 8–20
A. August 13 (15 + 31 + 30 + 31 + 13)
B. $61,000 [($60,000 × 5% × 120 ÷ 360) + $60,000]
C. (1) Notes Receivable 60,000
Accounts Rec.—Valley Designs 60,000
(2) Cash 61,000

Ex. 8–21
A. Sale on account.
B. Cost of goods sold for the sale on account.
C. Note received from customer on account.
D. Note dishonored and charged face value of note plus interest to customer’s
account receivable.
E. Payment received from customer for dishonored note plus interest earned
after due date.
8-14
Ex. 8–22
20Y7
Dec. 7 Notes Receivable 75,000
Accounts Receivable—Unitarian Clothing &
Bags Co. 75,000
31 Interest Receivable 150

Interest Revenue 150
Accrued interest
($75,000 × 0.03 × 24 ÷ 360 = $150).
31 Interest Revenue 150

Income Summary 150
20Y8
Feb. 5 Cash 75,375
Interest Receivable 150
($75,000 × 0.03 × 36 ÷ 360).
Ex. 8–23
June 23 Notes Receivable 48,000
Accounts Receivable—Radon Express Co. 48,000
Sept. 21 Accounts Receivable—Radon Express Co. 48,960

($48,000 × 0.08 × 90 ÷ 360).
Oct. 21 Cash 49,368

Accounts Receivable—Radon Express Co. 48,960
($48,960 × 0.10 × 30 ÷ 360).
8-15
Ex. 8–24
Mar. 29 Notes Receivable 30,000
Accounts Receivable—Karie Platt 30,000
Apr. 30 Notes Receivable 24,000

Accounts Receivable—Jon Kelly 24,000
May 28 Accounts Receivable—Karie Platt 30,250

($30,000 × 5% × 60 ÷ 360).
June 29 Accounts Receivable—Jon Kelly 24,320

($24,000 × 8% × 60 ÷ 360).
Aug. 26 Cash 30,855

Accounts Receivable—Karie Platt 30,250
($30,250 × 8% × 90 ÷ 360).
Oct. 22 Allowance for Doubtful Accounts 24,320

Accounts Receivable—Jon Kelly 24,320
Ex. 8–25
1. The interest receivable should be reported separately as a current asset. It
should not be deducted from notes receivable.
2. The allowance for doubtful accounts should be deducted from accounts
receivable.
A corrected partial balance sheet would be as follows:
Napa Vino Company

Balance Sheet
December 31, 20Y6
Assets
Current assets:
Cash $ 78,500
Notes receivable 300,000
Accounts receivable $1,200,000
Allowance for doubtful accounts (11,500)
Accounts receivable, net 1,188,500
Interest receivable 4,500
8-16
PROBLEMS
Prob. 8–1A
2.
Feb. 8 Cash 7,200
Accounts Receivable—DeCoy Co. 18,000
May 27 Accounts Receivable—Seth Nelsen 7,350

27 Cash 7,350
Accounts Receivable—Seth Nelsen 7,350
Aug. 13 Allowance for Doubtful Accounts 6,400

Accounts Receivable—Kat Tracks Co. 6,400
Oct. 31 Accounts Receivable—Crawford Co. 3,880

31 Cash 3,880
Accounts Receivable—Crawford Co. 3,880

Accounts Receivable—Newbauer Co. 7,190
Accounts Receivable—Bonneville Co. 5,500
Accounts Receivable—Crow Distributors 9,400
Accounts Receivable—Fiber Optics 1,110

($35,700 + $3,170).
8-17
Prob. 8–1A (Concluded)

1. and 2.
Allowance for Doubtful Accounts
Feb. 8 10,800 Jan. 1 Balance 26,000
Aug. 13 6,400 May 27 7,350
Dec. 31 23,200 Oct. 31 3,880
Dec. 31 Unadjusted Balance 3,170
Dec. 31 Adjusting Entry 38,870
Dec. 31 Adj. Balance 35,700
Bad Debt Expense

3. $1,749,300 ($1,785,000 – $35,700)
4. A. $45,500 [$18,200,000 × (1/4 × 1%)]

B. $42,330 ($45,500 – $3,170)
C. $1,742,670 ($1,785,000 – $42,330)
8-18
Prob. 8–2A
1.
Adams Sports & Flies May 22, 2015 223 days (9 + 30 + 31 + 31 + 30 + 31 + 30 + 31)
Blue Dun Flies Oct. 10, 2015 82 days (21 + 30 + 31)
Cicada Fish Co. Sept. 29, 2015 93 days (1 + 31 + 30 + 31)
Deschutes Sports Oct. 20, 2015 72 days (11 + 30 + 31)
Green River Sports Nov. 7, 2015 54 days (23 + 31)
Smith River Co. Nov. 28, 2015 33 days (2 + 31)
Western Trout Company Dec. 7, 2015 24 days
Wolfe Sports Jan. 20, 2016 Not past due
2. and 3.
December 31, 20Y4
Not Days Past Due
Past Over
Customer Balance Due 1–30 31–60 61–90 91–120 120
AAA Outfitters 20,000 20,000
Brown Trout Fly Shop 7,500 7,500
Zigs Fish Adventures 4,000 4,000

Subtotals 1,300,000 750,000 290,000 120,000 40,000 20,000 80,000
Adams Sports & Flies 5,000 5,000
Blue Dun Flies 4,900 4,900
Cicada Fish Co. 8,400 8,400
Deschutes Sports 7,000 7,000
Green River Sports 3,500 3,500
Smith River Co. 2,400 2,400
Western Trout Company 6,800 6,800
Wolfe Sports 4,400 4,400
Totals 1,342,400 754,400 296,800 125,900 51,900 28,400 85,000
Percentage uncollectible 1% 2% 10% 30% 40% 80%

Estimate of uncollectible
accounts 121,000 7,544 5,936 12,590 15,570 11,360 68,000
8-19

4. 20Y4
($121,000 + $3,600).
5. On the balance sheet, assets would be overstated by $124,600 because the

allowance for doubtful accounts would be understated by $124,600. In
addition, the stockholders’ equity (retained earnings) would be overstated by
$124,600 because bad debt expense would be understated and net income
overstated by $124,600 on the income statement.
8-20
Prob. 8–3A
1. Bad Debt Expense
Increase Balance of
Expense Expense (Decrease) Allowance
Actually Based on in Amount Account,
Year Reported Estimate of Expense End of Year
1 $ 4,500 $ 9,000 $4,500 $ 4,500
2 9,600 12,500 2,900 7,400
3 12,800 15,000 2,200 9,600
4 16,550 22,000 5,450 15,050
2. Yes. The actual write-offs of accounts originating in the first two years are
reasonably close to the expense that would have been charged to those years
on the basis of 1% of sales. The total write-off of receivables originating in
the first year amounted to $8,500 ($4,500 + $3,000 + $1,000), as compared with
bad debt expense, based on the percentage of sales, of $9,000 ($900,000 × 1%). For
the second year, the comparable amounts were $11,800 ($6,600 + $3,700 + $1,500)
and $12,500 ($1,250,000 × 1%).
8-21
Prob. 8–4A
1. (A) (B)
Note Due Date Interest Due at Maturity
1. May 5 $500 ($75,000 × 60 ÷ 360 × 4%)
2. May 22 300 ($40,000 × 45 ÷ 360 × 6%)
3. Dec. 10 600 ($36,000 × 120 ÷ 360 × 5%)
4. Nov. 21 180 ($27,000 × 30 ÷ 360 × 8%)
5. Feb. 17 360 ($48,000 × 90 ÷ 360 × 3%)
6. Jan. 29 450 ($72,000 × 45 ÷ 360 × 5%)
2. Dec. 10 Accounts Receivable 36,600

3. Dec. 31 Interest Receivable 328

Accrued interest:
$48,000 × 3% × 42 ÷ 360 = $168
$72,000 × 5% × 16 ÷ 360 160
Total $328
4. Jan. 29 Cash 72,450

($72,000 × 5% × 29 ÷ 360).
Feb. 17 Cash 48,360

($48,000 × 3% × 48 ÷ 360).
8-22
Prob. 8–5A
Accounts Receivable 144,000
May 15 Notes Receivable 270,000

June 9 Cash 145,200

Aug. 22 Notes Receivable 150,000

Sept. 12 Cash 276,300

30 Notes Receivable 210,000

Oct. 6 Cash 150,750


Nov. 29 Cash 212,800

Dec. 17 Cash 121,000

8-23
Prob. 8–6A
Jan. 3 Notes Receivable 18,000
Cash 18,000
Feb. 10 Accounts Receivable—Bradford & Co. 24,000

Sales 24,000

Inventory 14,400
13 Accounts Receivable—Dry Creek Co. 60,000

Sales 60,000

Inventory 54,000

Accounts Receivable—Bradford & Co. 24,000

Accounts Receivable—Dry Creek Co. 60,000

Cash 360
($18,000 × 8% × 90 ÷ 360).
May 11 Cash 24,280

($24,000 × 7% × 60 ÷ 360).
13 Accounts Receivable—Dry Creek Co. 60,900

($60,000 × 9% × 60 ÷ 360).
July 12 Cash 62,118

Accounts Receivable—Dry Creek Co. 60,900
($60,900 × 12% × 60 ÷ 360).
8-24

Aug. 1 Cash 18,540
($18,000 × 9% × 120 ÷ 360).
Oct. 5 Accounts Receivable—Halloran Co. 13,230

Sales 13,230

Inventory 8,100
15 Cash 13,230
Accounts Receivable—Halloran Co. 13,230
8-25
Prob. 8–1B
2.
Jan. 19 Accounts Receivable—Arlene Gurley 2,660
19 Cash 2,660
Accounts Receivable—Arlene Gurley 2,660
Apr. 3 Allowance for Doubtful Accounts 12,750

Accounts Receivable—Premier GS Co. 12,750
July 16 Cash 5,500

Accounts Receivable—Hayden Co. 22,000
Nov. 23 Accounts Receivable—Harry Carr 4,000

23 Cash 4,000
Accounts Receivable—Harry Carr 4,000

Accounts Receivable—Cavey Co. 3,300
Accounts Receivable—Fogle Co. 8,100
Accounts Receivable—Lake Furniture 11,400
Accounts Receivable—Melinda Shryer 1,200

($60,000 – $3,410).
8-26
Prob. 8–1B (Concluded)

1. and 2.
Allowance for Doubtful Accounts
Apr. 3 12,750 Jan. 1 Balance 50,000
July 16 16,500 Jan. 19 2,660
Dec. 31 24,000 Nov. 23 4,000
Dec. 31 Unadjusted Balance 3,410
Dec. 31 Adjusted Balance 60,000
Bad Debt Expense

3. $2,290,000 ($2,350,000 – $60,000)
4. A. $79,000 [$15,800,000 × (1/2 × 1%)]

B. $82,410 ($79,000 + $3,410)
C. $2,267,590 ($2,350,000 – $82,410)
8-27
Prob. 8–2B
1.
Arcade Beauty Aug. 17, 2015 136 days (14 + 30 + 31 + 30 + 31)
Creative Images Oct. 30, 2015 62 days (1 + 30 + 31)
Excel Hair Products July 3, 2015 181 days (28 + 31 + 30 + 31 + 30 + 31)
First Class Hair Care Sept. 8, 2015 114 days (22 + 31 + 30 + 31)
Golden Images Nov. 23, 2015 38 days (7 + 31)
Oh That Hair Nov. 29, 2015 32 days (1 + 31)
One Stop Hair Designs Dec. 7, 2015 24 days
Visions Hair & Nail Jan. 11, 2016 Not past due
2. and 3.
December 31, 20Y7
Not Days Past Due
Past Over
Customer Balance Due 1–30 31–60 61–90 91–120 120
ABC Beauty 15,000 15,000
Angel Wigs 8,000 8,000
Zodiac Beauty 3,000 3,000

Subtotals 875,000 415,000 210,000 112,000 55,000 18,000 65,000
Arcade Beauty 10,000 10,000
Creative Images 8,500 8,500
Excel Hair Products 7,500 7,500
First Class Hair Care 6,600 6,600
Golden Images 3,600 3,600
Oh That Hair 1,400 1,400
One Stop Hair Designs 4,000 4,000
Visions Hair & Nail 9,000 9,000
Totals 925,600 424,000 214,000 117,000 63,500 24,600 82,500
Percentage uncollectible 1% 4% 16% 25% 40% 80%

Estimate of uncollectible
accounts 123,235 4,240 8,560 18,720 15,875 9,840 66,000
8-28

4. 20Y7
($123,235 – $7,375).
5. On the balance sheet, assets would be overstated by $115,860 because the

allowance for doubtful accounts would be understated by $115,860. In addition,
the stockholders’ equity (retained earnings) would be overstated by $115,860
because bad debt expense would be understated and net income overstated by
$115,860 on the income statement.
8-29
Prob. 8–3B
1. Bad Debt Expense
Increase Balance of
Expense Expense (Decrease) Allowance
Actually Based on in Amount Account,
Year Reported Estimate of Expense End of Year
1 $18,000 $31,250 $13,250 $13,250
2 30,200 37,000 6,800 20,050
3 39,900 45,000 5,100 25,150
4 52,600 60,000 7,400 32,550
2. Yes. The actual write-offs of accounts originating in the first two years are
reasonably close to the expense that would have been charged to those years on
the basis of 1/4% of sales. The total write-off of receivables originating in the first
year amounted to $30,600 ($18,000 + $9,000 + $3,600), as compared with bad debt
expense, based on the percentage of sales, of $31,250 ($12,500,000 × 0.0025). For
the second year, the comparable amounts were $35,600 ($21,200 + $9,300 + $5,100)
and $37,000 ($14,800,000 × 0.0025).
8-30
Prob. 8–4B
1. (A) (B)
Note Due Date Interest Due at Maturity
1. Feb. 13 $110 ($33,000 × 30 ÷ 360 × 4%)
2. Apr. 23 525 ($60,000 × 45 ÷ 360 × 7%)
3. Oct. 10 600 ($48,000 × 90 ÷ 360 × 5%)
4. Nov. 6 200 ($16,000 × 75 ÷ 360 × 6%)
5. Jan. 14 480 ($36,000 × 60 ÷ 360 × 8%)
6. Feb. 8 240 ($24,000 × 60 ÷ 360 × 6%)
2. Oct. 10 Accounts Receivable 48,600

3. Dec. 31 Interest Receivable 452

Accrued interest:
$36,000 × 8% × 46 ÷ 360 = $368
$24,000 × 6% × 21 ÷ 360 84
Total $452
4. Jan. 14 Cash 36,480

($36,000 × 8% × 14 ÷ 360).
Feb. 8 Cash 24,240

($24,000 × 6% × 39 ÷ 360).
8-31
Prob. 8–5B

May 7 Cash 33,275


June 11 Notes Receivable 36,000

29 Cash 81,400
July 26 Cash 36,270

Aug. 4 Notes Receivable 48,000

14 Cash 73,260
Dec. 2 Cash 49,440

8-32
Prob. 8–6B
Jan. 21 Accounts Receivable—Black Tie Co. 28,000

Sales 28,000

Inventory 16,800

Accounts Receivable—Black Tie Co. 28,000
May 17 Cash 28,280

($28,000 × 6% × 60 ÷ 360).
June 15 Accounts Receivable—Pioneer Co. 17,523

Sales 17,523

Inventory 10,600

Cash 18,000
25 Cash 17,523
Accounts Receivable—Pioneer Co. 17,523
July 21 Notes Receivable 18,000

Cash 120
($18,000 × 8% × 30 ÷ 360).
Sept. 19 Cash 18,270

($18,000 × 9% × 60 ÷ 360).
22 Accounts Receivable—Wycoff Co. 20,000

Sales 20,000
8-33

Sept. 22 Cost of Goods Sold 12,000
Inventory 12,000
Oct. 14 Notes Receivable 20,000

Accounts Receivable—Wycoff Co. 20,000
Nov. 13 Accounts Receivable—Wycoff Co. 20,100

($20,000 × 6% × 30 ÷ 360).
Dec. 28 Cash 20,301

Accounts Receivable—Wycoff Co. 20,100
($20,100 × 8% × 45 ÷ 360).
8-34
ANALYSIS FOR DECISION MAKING
ADM–1
Sales
A. Accounts Receivable Turnover =
Average Accounts Receivable
$88,988
Amazon: = 17.1
($4,767 + $5,612) ÷ 2
$40,339
Best Buy: = 31.2
($1,308 + $1,280) ÷ 2

B. Number of Days’ Sales in Receivables = Average Daily Sales
($4,767 + $5,612) ÷ 2
Amazon: = 21.3 days
$88,988 ÷ 365
($1,308 + $1,280) ÷ 2
Best Buy: = 11.7 days
$40,339 ÷ 365
C. Best Buy turns accounts receivable into cash 31.2 times per year, while
Amazon only turns the receivables into cash 17.1 times per year. Likewise, Best
Buy has only 11.7 days of sales in accounts receivable, while Amazon has
21.3 days of sales in accounts receivable. By these metrics, it appears Best Buy
is more efficient than Amazon in turning accounts receivable into cash.
D. The large difference in the ratios between these two companies suggests that
there is a fundamental difference in the accounts receivable collection policies
or in the types of customers served by the two companies. The most likely
explanation is a difference in their customers. Retail customers frequently
purchase goods with cash or credit card, thus no accounts receivable is
established upon sale. However, accounts receivable is more frequently
established with sales to business customers. Thus, it is likely the sales to
business customers as a proportion of total sales is higher for Amazon than it is
for Best Buy. If so, this would explain the difference between the two ratios.
ADM–2
Sales
A. Accounts Receivable Turnover =
$7,450
Year 1: = 14.2
($588 + $458) ÷ 2
8-35
$7,620
Year 2: = 12.3
($655 + $588) ÷ 2
8-36
ADM–2 (Concluded)
B. Number of Days’ Sales in Receivables =
Average Daily Sales
($588 + $458) ÷ 2
Year 1: = 25.6 days
$7,450 ÷ 365
($655 + $588) ÷ 2
Year 2: = 29.7 days
$7,620 ÷ 365
C. The accounts receivable turnover has declined from 14.2 to 12.3 between the
two years. In addition, the number of days’ sales in receivables increased from
25.6 days to 29.7 days. There appears to be a decline in the efficiency in
collecting accounts receivable between the two years.
ADM–3
A. Year 2 Year 1
Average receivables:
($244 + $252) ÷ 2 248
($203 + $244) ÷ 2 223.5
Accounts receivable turnover:
$11,454 ÷ $248 46.2
$10,773 ÷ $223.5 48.2
B. Year 2 Year 1
Average receivables:
($244 + $252) ÷ 2 248
($203 + $244) ÷ 2 223.5
Sales per day:
$11,454 ÷ $365 31.4
$10,773 ÷ $365 29.5
Number of days’ sales in receivables
$248 ÷ $31.4 7.9 days
$223.5 ÷ $29.5 7.6 days
C. The accounts receivable turnover decreased from 48.2 to 46.2, indicating a

decline in the efficiency of collecting accounts receivable. The number of days’
sales in receivables increased from 7.6 to 7.9, also indicating a decrease in the
efficiency of collecting receivables. Before reaching a conclusion, however,
the ratios should be compared with industry averages and similar firms.
8-37
ADM–4
A. The average accounts receivable turnover ratios are as follows:
Ralph Lauren: 13.3 [(14.2 + 12.3) ÷ 2]
L Brands: 47.2 [(46.2 + 48.2) ÷ 2]
Note: Computations for the individual ratios are provided in ADM–2 and ADM–3.
B. L Brands has the higher average accounts receivable turnover ratio.
C. L Brands operates a specialty retail chain of stores that sell directly to

individual consumers. Many of these consumers (retail customers) pay with
credit cards or with cash. In contrast, Ralph Lauren sells its products to
retailers, which are then sold to the final consumer. Ralph Lauren has a
business-to-business relationship wherein trade accounts are a normal
part of the sales cycle. Thus, we would expect Ralph Lauren to have more
accounts receivable supporting its sales than would L Brands. In addition, we
would expect Ralph Lauren’s business customers to take a longer period to
pay their receivables. Thus, we would expect Ralph Lauren’s average
accounts receivable turnover across the two years to be lower than L Brands,
as shown in (A).
8-38
TAKE IT FURTHER
TIF 8–1
Estimates of uncollectible accounts receivable create a unique financial reporting
challenge. Because the company does not know with certainty the amount of accounts
receivable that will be uncollectible, there is no “correct” estimate. The company must
use its judgment along with historical data to develop an estimate that fairly presents the
portion of credit sales that will become uncollectible. These estimates are required under
GAAP and should be representationally faithful and accurately match bad debt expense
to revenues generated from credit sales.
In this case, both Tim and Gowen appear to be acting unethically. The historical data
indicates that a higher estimate is needed, and they have both knowingly ignored this
data in order to improve the company’s reported earnings. Tim and Gowen have used
the subjectivity in these estimates inappropriately. The result is a bad debt expense
amount that does not faithfully represent the potential losses associated with
uncollectible accounts receivable.
TIF 8–2
A sample solution based on Nike Inc.’s Form 10-K for the fiscal year ended May 31, 2015,
follows:
1. A. $3,358 million (from balance sheet).
B. $78 million (Note 1).
C. 21.0% ($3,358 ÷ $15,976) in 2015; 25.1% ($3,434 ÷ $13,696) in 2014.
Accounts receivable as a percentage of total current assets has increased.
D. The amount for Nike is so small that it is not reported in the financial
statements.
2. The company’s receivables turnover has improved from 8.5 in 2014 to 9.0 in 2015,
as shown below.
2015 2014
Sales $30,601 $ 27,799
Beginning Accounts Receivable $ 3,434 $ 3,117
Ending Accounts Receivable 3,358 3,434
Average Accounts Receivable $ 3,396 $3,275.5
Accounts Receivable Turnover 9.0 8.5
8-39
TIF 8–3
To: Todd Hurley, CEO
From: A+ Student
Re: Allowance Method for Uncollectible Accounts
Accounts receivable result from the sale of goods to customers on account. Because
payment is received from customers after goods are delivered, there is a risk that
customers will default on their accounts. While the company does not know which
customers will default, it does have historical information on the portion of accounts
receivable that has become uncollectible in the past. The allowance method uses this
information to estimate the amount of accounts receivable that will be uncollectible
at the end of the accounting period. Based on this estimate, an adjusting entry is used to
record bad debt expense. However, because the company does not know which
customer accounts will be uncollectible, the specific customer accounts cannot be
removed. Instead, a contra asset account, Allowance for Doubtful Accounts, is credited
for the estimated bad debts in the adjusting journal entry:
Bad Debt Expense XXX

Allowance for Doubtful Accounts XXX
This adjusting entry affects both the income statement and balance sheet. On the
income statement, bad debt expense is matched against the revenues generated
by the accounts receivable. On the balance sheet, the accounts receivable balance is
reduced by the allowance for doubtful accounts, which is the portion of the accounts
receivable that the company does not expect to collect. This resulting number is the
amount of accounts receivable that the company expects to collect, called the net
realizable value of the receivables.
When a specific customer’s account is identified as uncollectible, it is written off against

the allowance account. This requires the company to remove the specific account
receivable from the accounts receivable ledger and an equal amount from the allowance
account. Because the adjusting entry for bad debt expense is an estimate and the
write-off of accounts receivable is based on actual defaults, the allowance account
will rarely have a zero balance at the beginning or end of a period.
8-40
8-41

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July 29 Accounts Receivable—Shawn McNeely 1,000

July 29 Accounts Receivable—Shawn McNeely 1,000

B. $462,000 [$450,000 + ($450,000 × 8% × 120 ÷ 360)]

C. Aug. 7 Cash 462,000

19 Cost of Goods Sold 3,000

June 2 Cash 500

Oct. 23 Accounts Receivable—Dr. Kyle Norby 5,900

24 Cost of Goods Sold 11,000

Sept. 30 Cash 6,000

Dec. 7 Accounts Receivable—Old Town Cafe 12,450

B. Allowance for Doubtful Accounts 11,750

Zollinger Company 5,000 5,000

May 15 Cash 500

July 27 Accounts Receivable—Dean Sheppard 8,450

Dec. 31 Bad Debt Expense 13,510

Ex. 8–13 (Concluded)

May 15 Cash 500

July 27 Accounts Receivable—Dean Sheppard 8,450

Dec. 31 Allowance for Doubtful Accounts 13,510

31 Bad Debt Expense 28,335

C. Bad debt expense under:

Aug. 14 Cash 3,000

Oct. 16 Accounts Receivable—Kathy Quantel 8,440

Dec. 31 Bad Debt Expense 24,955

Ex. 8–14 (Continued)

Aug. 14 Cash 3,000

Oct. 16 Accounts Receivable—Kathy Quantel 8,440

Dec. 31 Allowance for Doubtful Accounts 24,955

31 Bad Debt Expense 45,545

Estimated balance of allowance account from aging schedule………………… $47,090

Ex. 8–14 (Concluded)

B. Allowance for Doubtful Accounts 30,000

Bad Debt Expense 39,375

B. Allowance for Doubtful Accounts 102,500

Bad Debt Expense 117,150

Unadjusted debit balance of Allowance for Doubtful Accounts

B. March 21 90 [$27,000 × 0.04 × (30 ÷ 360)]

(2) Cash 61,000

31 Interest Receivable 150

31 Interest Revenue 150

Sept. 21 Accounts Receivable—Radon Express Co. 48,960

Oct. 21 Cash 49,368

Apr. 30 Notes Receivable 24,000

May 28 Accounts Receivable—Karie Platt 30,250

June 29 Accounts Receivable—Jon Kelly 24,320

Aug. 26 Cash 30,855

Oct. 22 Allowance for Doubtful Accounts 24,320

Napa Vino Company

May 27 Accounts Receivable—Seth Nelsen 7,350

Aug. 13 Allowance for Doubtful Accounts 6,400

Oct. 31 Accounts Receivable—Crawford Co. 3,880

Dec. 31 Allowance for Doubtful Accounts 23,200

31 Bad Debt Expense 38,870

Prob. 8–1A (Concluded)

Bad Debt Expense

3. $1,749,300 ($1,785,000 – $35,700)

4. A. $45,500 [$18,200,000 × (1/4 × 1%)]

Zigs Fish Adventures 4,000 4,000

Percentage uncollectible 1% 2% 10% 30% 40% 80%

Prob. 8–2A (Concluded)

5. On the balance sheet, assets would be overstated by $124,600 because the

6. Jan. 29 450 ($72,000 × 45 ÷ 360 × 5%)