Unit 4 Revenues, receivables, inventory and

COGS

Class Problems from Chapter 6

M6-2 Reporting Net Sales with Sales Discounts, Credit
Card Discounts, and Sales Returns
Total gross sales for the period include the following:

 Credit card sales (discount 3%) $9,400

 Sales on account (2/ 15, n/60) $12,000

Sales returns related to sales on account were $650. All returns were made before
payment. One-half of the remaining sales on account were paid within the discount
period. The company treats all discounts and returns as contra-revenues. What amount
will be reported on the income statement as net sales?

Credit card sales (R)

Less: Credit card discount (XR)
Net credit card sales

Sales on account (R)

Less: Sales returns (XR)

Less: Sales discounts (XR)

Net sales on account
Net sales (reported on income statement)
E6-4 Determining the Effects of Credit Sales, Sales
Discounts, Credit Card Sales, and Sales Returns
and Allowances on Income Statement Categories
Brazen Shoe Company records Sales Returns and Allowances, Sales
Discounts, and Credit Card Discounts as contra-revenues. Complete the
following tabulation, indicating the effect (+ for increase, − for decrease, and
NE for no effect) and amount of the effects of each transaction, including
related cost of goods sold:
a. July12: Sold merchandise to customer at factory store who charged the
$300 purchase on her American Express card. American Express charges
a 1 percent credit card fee. Cost of goods sold was $175.
b. July15; Sold merchandise to Customer T at an invoice price of $5,000;
terms 3/10, n/30. Cost of goods sold was $2,500.
c. July20: Collected cash due from Customer T.
d. July21: Before paying for the order, a customer returned shoes with an
invoice price of $1,000, and cost of goods sold was $600.

Cost of
Transaction Net Sales Goods Sold Gross Profit
July 12
July 15
July 20
July 21
E6-9 Recording Bad Debt Expense Estimates and
Write-Offs Using the Percentage of Credit Sales
Method
During the current year, Adams Assembly, Inc., recorded credit sales of
$1,300,000. Based on prior experience, it estimates a 1 percent bad debt rate
on credit sales. Prepare journal entries for each transaction:
a. On September 29 of the current year, an account receivable for $4,000
from March of the current year was determined to be uncollectible and
was written off.
b. The appropriate bad debt expense adjustment was recorded for the
current year.

Activit Account Amount Dr Amount Cr

y
(a)

(b)

E6-10 Recording Bad Debt Expense Estimates and

Write-Offs Using the Percentage of Credit Sales
Method
During the current year, Sun Electronics, Incorporated, recorded credit sales of
$5,000,000. Based on prior experience, it estimates a 2 percent bad debt rate
on credit sales.
Prepare journal entries for each transaction:
a. On November 13 of the current year, an account receivable for $98,000
from a prior year was determined to be uncollectible and was written off.
b. At year-end, the appropriate bad debt expense adjustment was recorded
for the current year.

Activit Account Amount Dr Amount Cr

y
(a)
 (b)

E6-12 Recording and Determining the Effects of

Bad Debt Transactions on Income Statement
Categories Using the Percentage of Credit Sales
Method
During the current year, Giatras Electronics recorded credit sales of
$680,000. Based on prior experience, it estimates a 3.5 percent bad debt rate
on credit sales.
Required:
1. Prepare journal entries for each of the following transactions:
a. On October 28 of the current year, an account receivable for $2,800
from a prior year was determined to be uncollectible and was written
off.
b. At year-end, the appropriate bad debt expense adjustment was
recorded for the current year.
2. Complete the following tabulation, indicating the amount and effect (+ for
increase, − for decrease, and NE for no effect) of each transaction.
Req 1.

Activit Account Amount Dr Amount Cr

y
(a)

(b)

Req 2.

Income from
Transaction Net Sales Gross Profit Operations
a.
b.
E6-13 Computing Bad Debt Expense Using Aging
Analysis
Lin’s Dairy uses the aging approach to estimate bad debt expense. The
ending balance of each account receivable is aged on the basis of three time
periods as follows:
(1) not yet due, $22,000;
(2) up to 120 days past due, $6,500;
(3) more than 120 days past due, $2,800.
Experience has shown that for each age group, the average loss rate on the
amount of the receivables at year-end due to uncollectibility is (1) 3 %, (2)
14%, and (3) 34%, respectively.
At the end of the current year, the Allowance for Doubtful Accounts balance is
$1,200 (credit) before the end-of-period adjusting entry is made.
Required:
What amount should be recorded as Bad Debt Expense for the current year?

Estimated Estimated
percentage amount
Aged accounts receivable uncollectible uncollectible
Not yet due x =
Up to 120 days past due x =
Over 120 days past due x =
Estimated balance in Allowance for Doubtful Accounts
Current balance in Allowance for Doubtful Accounts
Bad Debt Expense for the year
E6-14 Recording and Reporting a Bad Debt
Estimate Using Aging Analysis
Casilda Company uses the aging approach to estimate bad debt expense.
The ending balance of each account receivable is aged on the basis of three
time periods as follows: (1) not yet due, $50,000; (2) up to 180 days past due,
$14,000; and (3) more than 180 days past due, $4,000.
Experience has shown that for each age group, the average loss rate on the
amount of the receivables at year-end due to uncollectibility is (1) 3 percent,
(2) 12 percent, and (3) 30 percent, respectively. At December 31, the end of
the current year, the Allowance for Doubtful Accounts balance is $200 (credit)
before the end-of-period adjusting entry is made.
Required:
1. Prepare the appropriate bad debt expense adjusting entry for the current
year.
2. Show how the various accounts related to accounts receivable should be
shown on the December 31, current year, balance sheet.

Req 1.

Activit Account Amount Dr Amount Cr

y
(a)

(b)

To adjust for estimated bad debt expense for the current year computed
as follows:
Estimated Estimated
percentage amount
uncollectible uncollectible
Aged accounts receivable
Not yet due x =
Up to 180 days past due x =
Over 180 days past due x =
Estimated balance in Allowance for Doubtful Accounts
Current balance in Allowance for Doubtful Accounts
Bad Debt Expense for the year
Req 2.

Balance sheet:
Accounts receivable ...............................................
Less allowance for doubtful accounts.....................___________
Accounts receivable, net of allowance for
doubtful accounts.........................................___________

E6-16 Interpreting Bad Debt Disclosures

Balance at Charges to Costs Amounts Balance at End
Beginning of and Expenses Written off of Period
Period

€1,103 €315 €(120) €1,208

Siemens is one of the world’s largest electrical engineering and electronics

companies. Headquartered in Germany, the company has been in business for
over 160 years and operates in 190 countries. In a recent annual report, it
disclosed the following information concerning its allowance for doubtful
accounts (euros in millions denoted as €):

Required:
1. Record summary journal entries to the allowance for doubtful accounts.
2. If Siemens had written off an additional €10M of Accounts Receivable,
what would be the effects?

Req 1.

Account Amount Dr Amount Cr

Req 2.
Comments:
E6-24 Computing and interpreting the Receivables
Turnover Ratio
A recent annual report for FedEx contained the following data:

Required:
1. Determine the receivables turnover ratio and average days sales in
receivables for the current year.
2. Explain the meaning of each number.

Req 1.

Receivables turnover = Net Sales = = times

Average Net Trade
Accounts Receivable

Average days sales = 365 = 365 = days

in receivables Receivables Turnover

Req 2.
Comments:
E6-25 Computing and interpreting the Receivables
Turnover Ratio
A recent annual report for Apple Inc. contained the following data:

Required:
3. Determine the receivables turnover ratio and average days sales in
receivables for the current year.
4. Explain the meaning of each number.

Req 1.

Receivables turnover = Net Sales = = times

Average Net Trade
Accounts Receivable

Average days sales = 365 = 365 = days

in receivables Receivables Turnover

Req 2.
Comments:
P6-4 Preparing an Income Statement and
Computing the Receivables Turnover Ratio with
Discounts, Returns, and Bad Debts
Tungsten Company, Inc., sells heavy construction equipment. There are
10,000 shares of capital stock outstanding. The annual fiscal period ends on
December 31. The following condensed trial balance was taken from the
general ledger on December 31, current year:

Required:

1. Beginning with the amount for net sales, prepare an income statement
(showing both gross profit and income from operations). Treat sales
discounts and sales returns and allowances as a contra-revenue.
2. The beginning balance in Accounts Receivable (net) was $16,000.
Compute the receivables turnover ratio and explain its meaning.
Req 1.

TUNGSTEN COMPANY, INC.

Income Statement
For the Year Ended December 31, Current Year

Net sales revenue ($147,100  $5,600  $6,400)................

Cost of goods sold................................................................__________
Gross profit ..........................................................................
Selling, general, and administrative expenses:
Selling expense............................................................
Administrative expense................................................
Bad debt expense......................................................... _________
Income from operations........................................................
Income tax expense.....................................................__________
Net income ........................................................................__________

Earnings per share on capital stock outstanding:

Req 2.

Receivables turnover = Net Sales = = times

Average Net Trade
Accounts Receivable

Comments: