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Financial Accounting A Critical
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CHAPTER 6
Cash, Receivables, and the Time Value of Money
QUESTIONS
Q6-1.
Internal controls are the policies and procedures that management implements to protect an
entity’s assets and ensure the integrity of the accounting information system. Strong internal
controls provide assurance to stakeholders that the entity’s assets can’t be stolen, used
inappropriately, or used without proper authorization, and that the information produced by the
accounting system can be relied on. Strong internal controls are extremely important because
without them actions that could be very detrimental to the profitability and survival of the entity
could occur. For example, theft by employees and customers can cost a company a large amount
of money.
Q6-2.
Segregation of duties means that people who handle an asset shouldn’t also be responsible for
record keeping for that asset. If duties aren’t segregated, an employee may be able to steal cash
and cover up the theft by making fictitious entries to the accounting records. The idea is that an
employee shouldn’t be in a position to steal or misuse an asset and be able to cover up the theft
or misuse through access to the accounting records. If the same employee maintains custody of
an asset and maintains the accounting records, that person can steal assets and modify the records
such that the theft can’t easily be discovered.
Q6-3.
Cash is an unproductive asset because the return earned on cash by depositing it in the bank is
much less than the cost of financing cash. That is particularly so for businesses that receive little
or no interest on cash balances in chequing accounts but must pay at least 3% to 4% interest on
borrowed funds. People invest cash in businesses to earn a return that is larger than what they
would receive from a bank investment. However, an adequate reserve of cash is crucial to
provide liquidity.
Q6-4.
If an entity has more cash than is required either for operating purposes or for planned
investments in productive assets then the owners would be better off if the cash was returned to
them so that they could invest it in productive assets. The reason is that cash is an unproductive
asset because it doesn’t earn a reasonable return to the investor. A crucial decision for
management is determining what the appropriate amount of cash the entity should have.
John Friedlan, Financial Accounting: A Critical Approach, 4th edition Page 6-1
Solutions Manual Copyright © 2013 McGraw-Hill Ryerson Ltd.
Q6-5.
Unless there has been a period of zero or negative inflation, you are worse off now in the sense
that you have less purchasing power than when the money was misplaced. Also, you have
foregone the interest that you would have earned had you invested all or part of the $500 during
the four-year period. You also delayed enjoying the $500 for four years.
Q6-6.
A nominal dollar is a dollar that isn’t adjusted for changes in the purchasing power. The use of
the nominal dollar ignores purchasing power gains and losses. That means that while the
absolute (nominal) number of dollars stays the same, the quantity of goods a dollar will purchase
changes over time. If there is inflation and an entity has a liability that must be paid in money, it
costs the entity less to repay the debt in terms of the purchasing power that is sacrificed. The fact
that less is sacrificed in terms of purchasing power isn’t captured by IFRS/ASPE accounting.
Q6-7.
Restricted cash is cash that is set aside for a particular purpose and not available for general use
by the entity. This could be because of a legal or contractual obligation to use it in a particular
way. The implication is that when assessing an entity’s liquidity it’s necessary to ignore
restricted cash because it isn’t available for general use.
Q6-8.
There are several reasons for a preference for money now. There is an opportunity to earn a
return on the money, there is a risk that the future payment may not occur, and there is a loss of
purchasing power unless there is zero inflation or deflation. Also, having money now allows you
to spend it sooner, which means that you get satisfaction of some form sooner (a vacation today
is probably more attractive than the same one a year later).
Q6-9.
Simple interest is paid only on the principal while compound interest is paid on the principal and
interest earned in previous periods. Given the same interest rate, you earn more interest with
compound interest, because with compound interest the interest is calculated on a larger amount.
Q6-10.
The present value of future cash flows is the value today of amounts that will be received in the
future. Future value is the amount that will be received in the future by investing today. When
estimating the value of a lottery that will pay $25,000 each year for 10 years, present value is
appropriate. Future value is the amount we will have in the bank at retirement if we deposit
$10,000 in the bank today at 6% per year until retirement. (Other examples are appropriate as
well.)
Q6-11.
A receivable is an amount owed to the entity. Receivables can be classified as current or non-
current assets, depending on when they are expected to be collected (current if they will be
collected within one year or one operating cycle). Receivables are valued at NRV (net realizable
value)—the estimated amount that will be collected. Common types of receivables are accounts
receivable (amounts due from customers), notes receivable (a more formal receivable, often from
customers), interest receivable, and receivables from shareholders (amounts due from
shareholders).
Q6-12.
When revenue is recognized earlier, the balance in accounts receivable is larger and the firm
reports more current assets. As a result, balance sheet measures of liquidity such as the current
and quick ratios indicate a more liquid entity when revenue is recognized earlier. There is no real
impact on economic liquidity using different revenue recognition methods since the ability to
meet obligations depends on cash availability, not the timing of revenue recognition. The same
conclusion is true if cash is received before or at the same time as revenue is recognized.
Recognition of revenue improves measured liquidity in this case because current liabilities
(unearned revenue) decrease.
Q6-13.
When revenue is recognized before cash is collected accounts receivable are reported on the
balance sheet. Thus recognition of revenue gives rise to receivables. The revenue recognition
criteria determine when receivables are reported.
Q6-14.
The benefit is that the business is able to sell merchandise to customers who don’t wish to pay
cash at the time of sale, and almost certainly obtains sales that otherwise would go to
competitors. The drawback is that the company must wait for the receivable to be collected and
there is a risk that the money will never be collected. Indeed, it’s almost a certainty that some
percentage of credit sales won’t be collected. A company would prefer to collect the cash at the
time of the sale, unless there is a very high interest rate on the amount owing. For example,
credit card companies earn significant amounts of money when customers don’t pay
immediately. Other than for retail businesses most transactions are carried out with credit terms,
with suppliers sending invoices to customers for payment.
Q6-15.
The amount reported on the balance sheet is usually less than the sum of individual receivables
because the reported amount is net of an allowance for an estimated amount that won’t be
collected. Accounts receivable are reported at net realizable value, which is the amount that will
be realized in cash. If an entity sells on credit it’s highly likely that some customers won’t pay so
it’s necessary to reflect the fact that all the money people promised to pay won’t be collected. In
addition to uncollectable amounts, estimated returns and discounts are deducted from gross
accounts receivable, which reduces the NRV and increases the difference between the gross and
net amount of accounts receivable.
Q6-16.
The owner’s decision criteria for writing off receivables needs to be explained. The owner may
wait too long to write off receivables (thus leaving assets and net income overstated) or that he
writes off receivables in an arbitrary manner (potentially at times when it is convenient for him).
It’s possible that since the owner is seeking a loan, he may delay writing off bad debts to make
his financial statements appear stronger. As a result the bank manager may not be receiving the
information he needs to make a good decision (the amount of cash that will be received). As a
bank manager I would ask to see an aging schedule and information on the collectability of
receivables before approving the loan request.
Q6-17.
When the percentage-of-receivables or percentage-of-credit-sales method is used the expense is
accrued when financial statements are prepared. The amount accrued recognizes that some
receivables wouldn’t be collected, but it isn’t known which ones. The decision to write off a
receivable is recognition that a specific receivable won’t be collected. So part of the estimate is
converted into a known amount (the actual customer). The journal entry to record the write-off
would reduce the allowance (the general recognition) and the receivable (the specific customer),
which has no effect on the income statement as these are both balance sheet accounts.
Q6-18.
The direct write-off method results in both an income statement that doesn’t match expenses to
related revenues and a balance sheet that reports accounts receivable at an amount that exceeds
the net realizable value. In accrual accounting all costs incurred to earn revenue in a period
should be expensed in that period. The direct write-off method recognizes the cost of
uncollectible amounts when an amount is determined to be uncollectible, which may occur in a
period other than when the related revenue was recognized.
Q6-19.
The percentage-of-credit-sales method estimates the amount of credit sales recognized in a
period that isn’t collectible and recognize an expense for that amount in the period. The amount
of the expense is added to the allowance account. Because the percentage-of-credit-sales method
focusses on credit sales, which is an income statement account, it’s considered an income
statement approach. In the percentage-of-receivables method the focus is on getting the amount
of receivables reported on the balance sheet to reflect the net realizable value (NRV) of the
receivables. Here the focus is on the balance sheet. The amount of the expense is simply the
amount required to get the allowance to the desired amount. Because of the focus on amount of
accounts receivable on the balance sheet it’s considered a balance sheet approach.
Q6-20.
If the percentage is too low, income will be overstated, as will the net balance in accounts
receivable (because the allowance is too small). Over time net receivables could become
significantly overstated if the underestimation of bad debts isn’t noticed because the
underestimate each year will build up in the allowance account. If the expense is consistently too
high, income will be understated, as will the net balance in accounts receivable (because the
allowance is too large). Over time net receivables could become significantly understated if the
overestimation of bad debts isn’t noticed because the overestimate each year will build up in the
allowance account.
Q6-21.
An aging schedule classifies accounts receivable according to the time they have been
outstanding. It’s useful for assessing the bad debt expense and the collectability of receivables
because the longer a receivable is outstanding and overdue, the less likely it is the amount will be
collected.
Q6-22.
The decision is a combination of past experience and a consideration of trends in the economy in
general and the specific industry and entities who owe money. Some of the analysis is objective
but the judgment of management is also informed by subjective assessments. The process is
subjective because it’s a prediction. The actual outcome depends on uncertain future events that
won’t be known with certainty when the estimate is made.
Q6-23.
There are a variety of circumstances that may cause a manager to write off an account
receivable. The company that owes the money may have declared bankruptcy, efforts to collect
the money may have been unsuccessful, or the debtor may have informed the creditor that they
have no intention or ability to pay. Such decisions are often subjective with respect to the timing
of the write off, but there are objective criteria such as the length of time that has passed without
payment of any part of the debt. There is always some probability that a written off account
receivable will be collected. The timing of write offs won’t have any immediate effect on the
accrual methods because the effect of the write off is to shift the effect from the allowance
account to the specific account receivable. The timing may affect future estimates of bad debts
though.
If the direct write off approach is used the timing and judgement exercised by management will
have an immediate effect on the income statement and balance sheet. Deciding to write off a
receivable during a period (as opposed to another) will reduce net income and the balance in
accounts receivable by the amount of the write off. The decision to defer a write off would
increase net income and receivables in the period relative to if a receivable was written off.
Q6-24.
The amount of the revenue should be reported at the present value of the future payment or at the
fair value of the merchandise (the cash selling price). This is the effect of the time value of
money—a dollar today is worth more than one received two years in the future. By deferring
collection two years the amount of revenue is less than if it were collected immediately. The
difference between the amount collected in two years and the amount recognized as revenue
today should be treated as interest revenue over the two years. By recognizing the full $100,000
as revenue upon delivery, Verlo has overstated revenue in the current period as the interest
revenue hasn’t yet been earned.
Q6-25
Allowing customers to return product indicates that at company stands behind their merchandise
giving their customers confidence in purchases. As a result sales may be higher. However,
allowing returns comes at a cost to the company including the cost of restocking, record keeping
and the reselling of items (perhaps at a discount). Returns should be accrued at the end of a
period by estimating the amount that will be returned. Returns are reflected on the income
statement as a contra revenue account with a corresponding entry on the balance sheet as a contra
asset account (contra accounts receivable—allowance for returns (if a credit sale)) or an accrued
liability (if a cash sale).
Q6-26
The benefits of giving a discount to customers are to give the customer an incentive to pay
earlier rather than later. This may reduce the risk of default and give the company providing the
discount quicker access to cash it can use to meet its obligations. The challenge accountants face
with respect to discounts is estimating the amount that will be taken by customers (the proportion
of receivables eligible for discounts at the end of the period that will be claimed). Practically this
isn’t a big problem because the actual amount will usually be known within a few days of the
end of the period (the discount period is usually short).
Q6-27.
Hidden reserves are accounting estimates that management uses to manage earnings. A hidden
reserve allows management to increase or decrease revenues or expenses in a period and thereby
shift income among periods to achieve a reporting objective. Hidden reserves are made possible
by inadequate accounting disclosure—entities don’t disclose all the estimates they make or the
underlying assumptions. Hidden reserves create a problem for users of financial statements
because they distort income and related measures and they aren’t observable or identifiable by
stakeholders. As a result the measures affected by hidden reserves can’t be interpreted
effectively.
Q6-28.
The quick ratio is cash, cash equivalents, temporary investments, and receivables (really assets
that will or can be converted to cash quickly) divided by current liabilities. The ratio provides an
indication of liquidity by using only current assets that are cash or will be realized in cash very
soon. The ratio excludes inventory, prepaid assets and other current assets from the numerator of
the current ratio because generally these assets are less liquid. The inventory of a jewellery store
can’t be sold quickly—it’s not very liquid—so the current ratio may not be as good an indication
of liquidity. For the gold mine, inventory is very liquid because gold bullion can be sold at any
time on the open market, so the current ratio provides a very good indication of the mine’s ability
to meet its financial obligations.
Q6-29.
The accounts receivable turnover ratio is useful for evaluating liquidity because it provides
insight into how quickly receivables are converted into cash. The higher the ratio, the faster
receivables are being collected and the more quickly the entity collects cash from its
customers, which shortens the cash lag.
EXERCISES
E6-1.
Cash is money on hand and cash equivalents are short-term investments easily and quickly
converted into a known amount of cash.
a. Cash in the office should be included in cash and cash equivalents because it’s money on
hand.
b. Cash in a bank savings account should be included in cash and cash equivalents because
it’s money on hand and readily available for use.
c. Uncashed cheques should be classified as cash because a cheque is equivalent to cash

(although there is some uncertainty since the debtor might not have the funds to cover the
cheque).
d. The amount owed by an executive is a receivable, not cash. The amount isn’t money on
hand or available and it isn’t a short-term investment easily and quickly converted into a
known amount of cash (it’s not even clear if or when the amount will be repaid).
e. The investment certificate should be classified as cash and cash equivalents because it’s
easily convertible to a known amount of cash. The certificate can be cashed at any time
for its face value plus interest so the amount of cash is known.
f. The amount borrowed is cash (only borrowed amount). The unborrowed portion of the
line isn’t included in cash and cash equivalents.
g. This item shouldn’t be considered as cash and cash equivalents because it’s being held by
a foreign government and not available for use. The amount is similar to restricted cash.
h. The post-dated cheques shouldn’t be included in cash and cash equivalents because they
can’t be converted to cash until February 21. On the balance sheet date (December 31,
2017) they don’t represent cash that’s available or an investment. If the cheques represent
payments from the customers they would be classified as receivables until they are
cashed or become cashable.
i. The amount held by the lawyer shouldn’t be included in cash and cash equivalents. Since
the cash is held by the lawyer for a specific and restricted purpose it should be classified
as restricted cash. Restricted cash isn’t readily available for use. The restricted cash
would be disclosed separately on the financial statements.
j. The British pounds should be included in cash and cash equivalents. While the pounds
can’t be converted into a known amount of Canadian cash, they can be converted quickly
and easily and are readily available for use. Also, if the pounds are used to pay
obligations denominated in pounds, exchange isn’t an issue.
k. These items shouldn’t be included in cash and cash equivalents because the value of
publicly traded shares fluctuates daily. It’s uncertain how much cash would be received
for the shares until they were sold.
E6-2.
Future Value amount invested
a. FV = (1.04)6 × $100,000 = $126,531.90

b. FV= (1.02)12 × $100,000 = $126,824.18
c. FV= (1.01)24 × $100,000 = $126,973.46
d. FV= (1.0033333)72 × $100,000 = $127,074.19
E6-3.
Future Value amount invested
a. FV = (1.03)8 × $5,000 = $6,333.85

b. FV= (1.025)24 × $70,000 = $126,610.82
c. FV= (1.08)4 × $100,000 = $136,048.90
d. FV= (1.00)6 × $25,000 = $25,000
E6-4.
PV=
a. PV = $200,000/(1.14)10 = $53,949
b. PV = [$50,000/(1.06)1] + [$25,000/(1.06)3] + [$10,000/(1.06)5]
= $47,169.81 + $20,990.48 + $7,472.58
= $75,632.88
c. PV = [$10,000/(1.06)1] + [$25,000/(1.06)3] + [$50,000/(1.06)5]

= $9433.96 + $20,990.48 + $37,362.91
= $67,787.35
E6-5.
PV=
a. PV = $20,000/(1.08)3 = $15,876.64.
If $20,000 is to be paid in the future revenue should be $15,877 with 8% recorded as
interest revenue each year.
b. PV = $4,000/(1.12) + $3,000/(1.12)2 + $2,000/(1.12)3

= $3,571.43 + $2,391.58 + $1,423.56
= $7,386.57
Yes, the present value of the future cash flows is higher than the $7,000 investment.
c. PV= $5,000/(1.10)20 = $743.22

You should pay no more than $743.22 for the bond because that’s what $5,000 to be
received in twenty years is equivalent to.
d. PV = $6,000/(1.08) + $4,000/(1.08)2 + $8,000/(1.08)3

= $5,555.56 + $3,429.36 + $6,350.66
= $15,335.57
You should pay no more than $15,335.57 for the investment as that the present value of
the amount that will be received.
e. PV =$15,000/(1.10)5 =$9,313.82
Choosing $10,000 today is a better option since $15,000 in five years is only worth
$9,313.82 today.
E6-6.
The solutions are calculated using the equation from the text:
a. 1/.08*[1 – 1/(1 + .08)25] x $40,000= $426,991.05.

The real value of the prize is $426,991 given the present value of the annuity.
b. 1/.12*[1 – 1/(1 + .12)15] x $250,000 = $1,702,716.12

Since the $250,000 annuity is worth only $1,702,716.12 today, you would prefer to
receive $2,000,000 now.
c. 1/.01*[1 – 1/(1 + .01)36] x $50 + $200
=$1,505 + $200
=$1,705 would be the equivalent cash prize today
d. 1/.10*[1 – 1/(1 + .10)10] x $200 + $2500/(1.10)10= $2,192.77

The present value of the annuity and lump sum is $2,192.77 today. This is the maximum
amount you would pay for the investment.
E6-7.
a. Future Value: $5,000 X (1.04)10 = $7,401.22 will be the maturity value.
b. Comparing Present values to $1000:

Option 1:
PV = $2,500/(1.10)5 = $1,552.30
Option 2:
PV = $500/(1.10)1 + $650/1.102 +$800/1.103 +$200/1.104 +$100/1.105
= $1,791.48
Option 3:
PVannuity = 1/.10*[1 – 1/(1 + .10)5] x $400 = $1,516.31
Option 2 has the highest present value and would be the best investment.
c. PVannuity = 1/.07*[1 – 1/(1 + .07)20] x $10,000 = $105,940.14

She would pay $105,940.14 for the annuity.
d. Future Value = $50,000(1.09)3 = $64,751.45 will be the amount owing on the loan.
e. Students may approach from PV or FV in their solution:

Using PV :
(i) PV = $1500/(1.10)3 = $1,126.97
(ii) PV = $1500/(1.15)3 = $986.27
Using FV:
(i) FV = $1000 x (1.10)3 = $1,331.00
(ii) FV = $1000 x (1.15)3 = $1,520.88
Both methods yield the same choice, at 10% it is a better option to take the $1,500 in the
future while at 15% it is better to take the $1000 now.
f. Present value of an annuity:

1/.08*[1 – 1/(1 + .08)25] x $2,000,000 = $21,349,552
The real value of the prize is $21,349,552.38
E6-8.
a. Dr. Cash 175,000

Dr. Accounts receivable 625,000
Cr. Sales 800,000
b. Dr. Cash 405,000

Cr. Accounts receivable 405,000
c. Dr. Bad debt expense 31,250

Cr. Allowance for bad debts 31,250
d. Dr. Allowance for bad debts 34,000

E6-9.
a. Dr. Cash 2,500

Dr. Accounts receivable 7,000
Cr. Sales 9,500
b. Dr. Allowance for bad debts 7,000

c. Dr. Cash 7,000

Cr. Allowance for bad debts 7,000
E6-10.
a. Dr. Bad debt expense 50,000

The effect of this entry on net income would be to decrease it by $50,000.
b. Dr. Allowance for bad debts 50,000

This entry has no effect on net income. The effect on net income occurs when the bad
debt expense is recorded at the end of the period, based on the amount of credit sales
made during the period.
c. Allowance for bad debts 50,000

Accounts receivable 50,000
This entry has no effect on net income. The effect on net income occurs when the bad
debt expense is recorded at the end of the period, based on the amount of ending accounts
receivable that is estimated not to be collectable.
d. Malagash decided to write off the account receivable because collectability was no longer
reasonably assured. The company exercised judgment by deciding to write off the
amount immediately. This is a conservative approach, avoiding overstating assets. From
an objectives standpoint the writedown could have served to lower income currently,
thereby avoiding a reduction in the future.
E6-11
a. $4,000,000 + $4,000,000(1.14)-1 + $4,000,000 (1.14)-2 + $4,000,000 (1.14)-3
= $13,286,528.11
Or use the PV of an annuity:
 1 
PVn, r =   n
 Amount to be received or paid in each period
 (1 + r ) 
1  1 
=  1 −   Amount to be received or paid in each period
r  (1 + r ) n 
= $4,000,000 + (1/.14*[1 – 1/(1 + .14)3] x $4,000,000)
= $13,286,528.11
Dr. Cash 4,000,000.00

Dr. Long-term Receivables 9,286,528.11
Cr. Revenue 13,286,528.11
b.
Debden Ltd.
Long-term Receivable Schedule 2018-2020
Reduction in
Beginning balance Interest long-term Ending balance in
in long-term Cash revenue receivable long-term
receivable account Payment (Bal. X 14%) (Pmt-Interest) receivable account
2018 $9,286,528.11 $4,000,000 $1,300,113.94 $2,699,886.06 $6,586,642.04
2019 6,586,642.04 4,000,000 922,129.89 3,077,870.11 3,508,771.93
2020 3,508,771 .93 4,000,000 491,228.07 3,508,771.93 0
*numbers may vary due to rounding
2018 Cash 4,000,000.00

Long-term receivable 2,699,886.06
Interest revenue 1,300,113.94
2019 Cash 4,000,000.00
Interest revenue 922,129.89
2020 Cash 4,000,000.00

Interest revenue 491,228.07
c.
Total receivable Long-term Current portion

May 31,2017 $ 9,286,528.11 $ 5,777,756 $ 3,508,772
May 31,2018 $ 6,586,642.04 $ 3,077,870 $ 3,508,772
May 31,2019 $ 3,508,771.93 $ - $ 3,508,772
May 31,2020 $ - $ - $ -
For each year, the amount of the long-term receivable reported on the balance sheet is the
present value of the remaining payments. Since $4,000,000 is paid each year the amount
reported as current on the May 31, balance sheet each year is the present value of
$4,000,000. The remainder is long-term.
d. It would be misleading to users of the financial statements if Debden recognized the full
$16,000,000 immediately since income is overstated. If the time value of money is
ignored, stakeholders might get the impression that the sale was more profitable than it
actually was. In addition, stakeholders wouldn’t realize that Debden isn’t only selling
land, but is also financing the purchase, which has cash flow implications. Debden’s
management would favour this approach if it wanted to increase income in the current
period, perhaps because of a bonus plan or an interest in impressing external stakeholders
with higher income.
E6-12.
Cash Accounts Allowance Revenu Bad

receivable for e debt
uncollectable expense
accounts
Beginnin 75,800 (3,000)
g
balances
7/31/17
350,000 350,000
375,000 (375,000)
(3,500) (3,500)
(3,200) 3,200
Ending 375,000 47,600 (3,300) 350,000 (3,500)
balances
7/31/18
Note: The ending balance in accounts receivable on July 31, 2018 was $47,600. During 2018 $3,200 was
written off from accounts receivable.
E6-13.
Cash Accounts Allowance Unearned Revenue Bad debt

receivable for revenue expense
uncollectable
accounts
Beginning
balances
12/31/2016 134,750 (7,062) 56,100
902,000 (47,300) 949,300
31,240 31,240
847,000 (847,000)
(9,130) (9,130)
(7,480) 7,480
Ending
balances
12/31/2017 878,240 182,270 (8,712) 40,040 949,300 (9,130)
Amounts that have to be calculated are shown in grey. It’s necessary to calculate the amount of
the unearned revenue that was recognized in 2017 (this is done by calculating that amount from
the other three pieces of information about the unearned revenue account. With the amount of
unearned revenue recognized it’s then possible to calculate the increase in accounts receivable
for the period (the information gives revenue for the period so the increase in accounts receivable
is revenue – the decrease in unearned revenue. The other amounts then flow from there.
E6-14.
Allowance for doubtful accounts December 31, 2016 $38,150
Less: Accounts written of during 2017 (39,600)
Pre-closing allowance for doubtful accounts December 31,
2017 (1,450)
Credit sales during 2017 2,262,500

Average percentage of credit sales uncollectible 2%
Bad debts expense for 2017 45,250
Pre-closing allowance for doubtful accounts December 31,
2017 (1,450)
Allowance for doubtful accounts December 31, 2017 $43,800
Bad debt expense 45,250

Allowance for bad debts 45,250
To record bad debt expense for 2017
E6-15.
a.
Credit Percent Bad Debt

Year Sales Uncollected Expense
2014 $500,000 2% $10,000
2015 500,000 2% 10,000
2016 500,000 2% 10,000
2017 500,000 2% 10,000
2018 500,000 2.3% 11,500
b. By only recording a bad debt expense of $10,000 when in fact bad debts were $11,500,
net income was overstated by $1,500 for each of the years 2014 to 2017. The company
corrected addressed the issue in 2018 so it recorded an appropriate expense in 2018, in
addition to correcting the error.
c.
Credited To Debited To
Allowance
Year Allowance Allowance Balance
Open $(11,500)
2014 $(10,000) $11,500 $(10,000)
2015 (10,000) 11,500 (8,500)
2016 (10,000) 11,500 (7,000)
2017 (10,000) 11,500 (5,500)
2018 (11,500) 11,500 (5,500)
2018 (6,000)* (11,500)
*Adjustment to correct understatement from 2014-2017 (part e)
The impact is that net accounts receivable are overstated because the allowance is understated.
d. The correction is needed to “catch up” with the expense understatement made in 2014
through 2017. The result is that the allowance and the bad debt expense will be “correct”
at the end of 2018. From 2014 through 2017 the bad debt expense was understated by
$1,500 each year so the correction would require an additional bad debt expense of
$6,000 ($1,500 4).
e. Bad debt expense 6,000

Allowance for doubtful accounts 6,000
E6-16.
a. Bad debt expense = $94, 500 ($1,575,000 6%) – $11,250 = $83,250

Allowance for doubtful accounts = $1,575,000 6% = $94,500
Bad debt expense (94,500 – 11,250) 83,250

b. Bad debt expense = $9,361,500 1.5%) = $140,422.50

Allowance for doubtful accounts = $140,422.50 + $11,250 = $151,672.50
Bad debt expense 140,422.50

Allowance for doubtful accounts 140,422.50
c. Bad debt expense = $94, 500 ($1,575,000 6%) + $11,250 = $105,750

Allowance for doubtful accounts = $1,575,000 6% = $94,500
Bad debt expense (94,500 + 11,250) 105,750

Bad debt expense = $9,361,500 1.5% = $140,422.50

Allowance for doubtful accounts = $140,422.50 – $11,250 = $129,172.50
Bad debt expense 140,422.50

A debit balance in allowance for doubtful accounts indicates that the estimate of
bad debts was too low. Under the percentage of receivables method, the focus is on
reporting receivables at their net realizable value. This means that the allowance must
reflect the amount of receivables estimated to be uncollectible. Therefore the bad debt
expense must be debited an additional $11,250, resulting in a higher bad debts expense.
Under the percentage of credit sales method, the focus is to report an accurate bad
debt expense. It follows that the bad debt expense for the period won’t be changed
because of the balance in the allowance account. However, the allowance for doubtful
accounts will be $11,250 lower, and accounts receivable won’t be stated at their
estimated net realizable value on the balance sheet. With the percentage credit sales
method it’s possible for the allowance balance to become unrepresentative of the amount
of receivables that won’t be collected if there is an error that persists in one direction (i.e.
the bad debt expense is continually overstated or understated).
E6-17.
Percent Amount
Account Age Balance Uncollectible Uncollectible
Current $700,000 2.50% $17,500
1-30 days 288,000 10% 28,800
31-90 days 128,400 25% 32,100
> 90 days 58,800 60% 35,280
Total $1,175,200 $113,680
Allowance Account
Pre-closing balance $10,800
Required balance (113,680)
Required adjustment ($124,480)
a. The amount of closing accounts receivable that is estimated to be uncollectible is

$113,680.
b.

To record bad debt expense for the period
E6-18.
a.
(520,000 + 475,000)
Average accounts receivable = 2
= 497,500
Credit sales
Accounts receivable turnover Average accounts
ratio = receivable
4,150,000
= 497,500
= 8.34
b.
365
Average collection period of accounts receivable = 8.34
= 43.76 days
c. The reasonableness of the collection period can’t be determined with the information
provided. Benchmarks are required, such as the collection period in prior years, credit
terms offered to customers, economic conditions, amount for comparable firms, etc.
E6-19.
a. Allowance for doubtful accounts 53,000

b. The effect of making estimates of bad debts that were higher than the actual amount was
to understate net income in each year by the excess of the estimate over the actual
amount. The adjusting entry increases net income by $53,000 in the year of the
correction, which reverses the cumulative effect of the high estimates over the past three
years. In other words, net income in the current year will be $53,000 higher after the
adjustment than it otherwise would have been, but in the previous three years (taken
together) net income would have been $53,000 lower than it should have been.
c. The error and adjusting entry could mislead financial statement users if it’s material. Net
income in each of the previous three years has been understated which may cause users to
underestimate Trilby’s future cash flows. In addition, the large decrease in bad debt
expense due to the adjusting entry will overstate the current year’s net income. This could
cause users to overestimate Trilby’s future cash flows (especially if these adjustments and
misestimates aren’t disclosed). Also, the balance sheets of all the affected periods
wouldn’t reflect the net realizable value of accounts receivable. This could affect the
decisions of creditors since decision criteria such as current assets, current ratio, quick
ratio, etc., will be misleading. Stakeholders may have made decisions that weren’t
optimal for them versus the ones they would have made if they had obtained more
accurate information.
E6-20
a. Sales Returns and Allowances 10,000

(contra sales)
Allowance for Returns 10,000
(contra accounts receivable)
This assumes no beginning balances in the contra accounts.
b. Accounts Receivable balance would be $515,000 (525,000 – 10,000) and net sales would
be $4,115,000 (4,125,000 – 10,000).
c. Allowance for Returns 2,000

Accounts Receivable 2,000
Inventory XXX
Cost of Sales XXX
E6-21
a. Sales Discounts (30% x 120,000 x 2%) 720
(contra sales)
Allowance for Trade Discount 720
(contra accounts receivable)
b. Accounts Receivable balance would be $274,280 (275,000 – 720) and net sales would be
$1,964,280 (1,965,000 – 720).
c. Cash 980
Allowance for Trade Discount 20
Accounts Receivable 1000
E6-22
Account Age Balance Uncollectible Uncollectible

Current $180,000 2.00% $3,600
Up to 60 days 40,000 20% $8,000
>60 days 15,000 50% $7,500
Total $235,000 $19,100
a. Bad Debt Expense 19,100

Sales Discounts ($120,000 x 40% x 2%) 960

Allowance for sales discounts (A/R) 960
Sales Returns and Allowances 12,000

Allowance for sales returns (A/R) 12,000
b. Accounts Receivable balance would be $202,940 (235,000 – 19,100 – 960 – 12,000).
c. The amount of net sales recorded for the year is $1,887,040 ( 1,900,000 – 960 – 12,000).
Bad debts would be reported as an expense.
d. A stakeholder should be concerned with the estimates made by management, especially

in the first year of operations as there is an absence of historical data to base the
estimates.
E6-23.
a. This item shouldn’t be included when calculating the quick ratio because prepaids aren’t
liquid assets (they represent cash flows that have already occurred).
b. This item should be included in calculating the quick ratio because it represents the current
portion of interest that is receivable within the period. Consideration should be given to when
the interest is due to be paid.
c. This item should be included when calculating the quick ratio because the maturity date is
very soon, one month.
d. This item shouldn’t be included when calculating the quick ratio because it is a long-term
receivable that can’t be quickly converted to cash.
e. This item should be included in the quick ratio because the current portion of long term
receivable is collectible within the operating cycle in the form of cash.
f. This item shouldn’t be included when calculating the quick ratio because long term assets
can’t be quickly converted to cash.
g. This item shouldn’t be included in the calculation of the quick ratio because it can’t be
converted into cash to cover current liabilities prior to maturity.
h. This item should be included in the calculation of the quick ratio because gold can be quickly
converted into cash.
i. This item shouldn’t be included when calculating the quick ratio because restricted cash isn’t
available for general purpose use.
j. This item shouldn’t be included in the quick ratio because it can’t be converted to cash
quickly.
k. This item should be included when calculating the quick ratio because post-dated cheques
pertain to receivables, which are included in quick assets.
l. This item should be included in the quick ratio as it will be converted to cash in a very short
period of time.
m. Shares in privately owned corporations are often not very liquid (there is no ready market,
sales are often restricted) so these shouldn’t be considered quick assets.
E6-24.
a.
Current assets
Current ratio =
Current liabilities
2017 513,750
=
401,250
= 1.28
2018 627,750
=
342,500
= 1.83
Quick assets
Quick ratio =
Current liabilities
2017 250,000
=
401,250
= 0.62
2018 332,500
=
342,500
= 0.97
Quick Assets 2018 2017

Cash and cash equivalents $ 95,000 $105,000
Accounts receivable 237,500 145,000
Total quick assets 332,500 250,000
b. Both Seahorse’s current and quick ratios increased from 2017 to 2018. This indicates that
Seahorse has improved its ability to meet its current obligations. Also, the current ratio of
1.83 at the end of 2018 suggests that its liquidity position is solid. It should be noted,
however, that the current ratio includes current non-liquid assets (such as prepaids),
which aren’t readily available to meet current obligations. Also, both the current and
quick ratios include items, which may or may not convert into cash that will be available
to satisfy current obligations. This includes such items as accounts receivable and
inventory. Whether or not these items represent resources that will be available to meet
current obligations depends on how quickly they get converted to cash.
c. One scenario in which a significant increase in the quick ratio could be an indicator of a
deteriorating liquidity position is when there is a large increase in accounts receivable but
the receivables aren’t collectable. This could indicate that the entity is having difficulty
converting its accounts receivable into cash. In this situation, accounts receivable
wouldn’t be as liquid as expected because their collectability is in doubt. This analysis
presumes that management didn’t properly account for the collectability problem by
recording an adequate allowance for doubtful accounts and bad debt expense.
E6-25.
Assume all sales are on credit:
Credit sales
Accounts receivable turnover ratio =
Average accounts receivable
1,592,000
4.92 =
1,592,000
Average accounts receivable =
4.92
= $323,577
365
Average collection period =
Accounts receivable turnover ratio
= 365
4.92
= 74.19
E6-26.
Average collection period = 365
Accounts receivable turnover
ratio
47 = 365
Accounts receivable turnover ratio = 365

47
= 7.77
Credit sales
125,125,000
7.77 =
Average accounts receivable = 125,125,000

7.77
= 16,111,986
Accounts receivable at the end of 2019

= (ARend 2018 + ARend 2019) =$16,111,986
2
= (ARend 2018 + 1.12*ARend 2018) =$16,111,986
2
=2.12* ARend 2018 =$2*16,111,986 = $32,223,972
ARend 2018 = $15,199,986
= ARend 2019 = 1.12*ARend 2018 = $17,023,984
E6-27.
Assume all sales are on credit:
2017 2016 2015

Accounts receivable $275,200 $249,800 $244,900
Allowance for uncollectable amounts 8,256 8,243 7,837
Net accounts receivable 266,944 241,557 237,063
Sales 1,845,000 1,552,000
The following formulas were used to calculate answers:

Credit sales
Average accounts receivable = Opening A/R + Closing A/R

2
365
Average collection period = Accounts receivable turnover
ratio
2016
Accounts receivable turnover Credit sales
=
ratio Average accounts receivable
1,552,000
=
(241,557+237,063)/2
= 6.49
2017
Accounts receivable turnover Credit sales
=
ratio Average accounts receivable
1,845,000
=
(266,944+241,557)/2
= 7.26
2016
365
ratio
= 365
6.49
= 56.3
2017
365
Average collection period = Accounts receivable turnover ratio
= 365
7.26
= 50.3
Accounts receivable turnover measures the number of times during a period an entity collects its
receivable. The average collection period is the number of days it takes to collect receivables (on
average). Accounts receivable turned over more often in 2017 (7.26 times) than in 2016 (6.49
times), indicating the company has improved in their collection practices year over year. This is
reflected in the number of days it takes for the company to collect. It took on average 56.3 days
to collect in 2016 versus 50.3 days in 2017.
E6-28.
Assume all sales are on credit.

Credit sales

2
365
ratio
2018 2017 2016

Credit Sales $1,922,720 $1,424,250 $1,076,700
Opening Accounts Receivable 165,624 122,283 93,113

Ending Accounts Receivable 261,800 165,624 122,283
Average Accounts Receivable 213,712 143,954 107,698

(ARTO) 9.00 9.89 10.00
Average collection period 40.57 36.89 36.51
As a bank manager I am a bit concerned that the ARTO is decreasing and the average
collection period is increasing. The company is taking a longer period of time to collect
on its receivables. In 2016 and 2017 the company was collecting on its receivables almost
within their specified period of 30 days (just under 37 days) but in 2018 the collection
period increased almost four days. It is important that Aggassiz maintains control over
receivables by following up on overdue accounts and ensure that credit is only offered to
customers with acceptable credit ratings. To properly assess Aggasiz’s situation I would
require more information such as industry standards for these ratios, an aging schedule
for receivables, a full balance sheet, income statement, and a cash flow statement.
PROBLEMS
P6-1.
It costs Alix 10% per year to borrow from the line of credit. Therefore if Alix borrows $1,000
from the line of credit to pay their supplier on day 10 and subsequently pays off the line of credit
on day 30, the amount of interest that Alix will pay is for a 20 day period.
$1,000 * (20/365) * 10% = $5.48 in interest
The savings that Alix realized from paying early was $20.00
$20 – $5.48 = $14.52 net savings
Alix should immediately change their policy to pay their suppliers early whenever possible even
if it means using the line of credit. Another way to look at this question can be to compare the
interest rates.
365/20 = 18.25 , therefore there are 18.25 cycles in a year

2% * 18.25 = 36.5%
Therefore suppliers are providing an equivalent of 36.5% discount per year for early payment
while it only cost 10% interest to borrow.
P6-2.
The main weakness in this scenario is the lack of physical safeguards over cash. Due to the
location of the cash, and the fact that the drawer is unlocked, anyone could easily steal the cash.
The cash should be kept in a more secure location, in a locked drawer or safe. The cash should
be taken to the bank on a more timely basis – could use night deposit. There is also a lack of
separation of duties. The volunteer treasurer could take some of the cash and deposit the rest in
the bank and no one would be aware of it. One volunteer should keep records of cash donations,
and a second volunteer should have to sign for receiving the cash when he or she takes it to the
bank for deposit.
P6-3.
The weakness in this scenario is the lack of verification of expenses claimed by the trustees.
Expenses charged to the cards only require explanation if the staff person requests it, and even
then if the trustee has a suitable explanation then the expense is approved. This system could
easily allow trustees to charge items to the card that aren’t employment related. To improve this
control, trustees should be required to submit receipts for all expenses and also provide a
statement explaining what the item purchased was as well as why it was required. Additionally,
there appears to be no verification regarding the amount of kilometres driven. A trustee could
claim the distance travelled was for employment reasons, however without verification the
trustee could easily claim distances travelled for personal reasons. A better control would be to
require the trustee to note the reason for the travel, their starting point and destination as well as
submit a calculation that provides the kilometres driven (for example, a print out from a mapping
website such as Map Quest or Google Maps). The expenses should be approved by a manager or
chair of the board. Additionally, the travel expenses should be submitted more frequently so that
there are fewer expenses to verify with each submission.
P6-4.
The weakness in this scenario is the lack of separation of duties. The person hired by the park to
collect the cash could steal some of it and give the rest to the park manager at the end of the day.
This kind of theft is difficult to detect. A better system is to have one person collect the cash
from customers, and a separate person record the sales and issue receipts, with each person
separately turning in the cash and receipts at the end of the day. This could be done by having a
separate person sell tickets for the rides and have the ride operator only collect tickets from
customers. In either case it would be possible to give free rides to people. In the latter case rides
could be sold to people for cash on the side. This behaviour could be checked by having
someone observe the operator from time to time.
P6-5.
Retail businesses have large amounts of inventory that are included in the calculation of the
current ratio but not the quick ratio. For retail businesses inventory is usually by far the largest
current asset and often the largest asset category on the balance sheet so the impact of leaving
out inventory when calculating the quick ratio will be significant. The denominator, current
liabilities, is the same for both ratios and current liabilities includes amounts owing for inventory
while inventory isn’t classified as a quick asset.
P6-6.
a. $15,000 + $22,500/(1.10)1 + $37,500/(1.10)2 = $66,446.28
b. $50,000 (1.05)18 = $120,330.96
c. $1/.08*[1 – 1/(1 + .08)12] $25,000 = $188,401.95

The maximum amount the investor should pay is $188,401.95
d. The company will have to repay the original amount of the loan, $500,000 plus interest.
The amount that must be repaid is the future value of $500,000 with interest compounded
at 9% per year for five years. It’s assumed that interest owing is compounded each year.
$500,000 (1.09)4 = $705,790.08
e. $30,000 today = $30,000

$50,000 (1.10)5 = $31,046.07
$1/.10 [1 – 1/(1 + .10)5] x $8,000 = $30,326.29
Of the three alternatives, the $50,000 to be received in 5 years has the highest present
value and so is the preferred option.
P6-7.
The purpose of this report is to provide an analysis of the recent credit policy change at Magundy
Inc. Four issues are covered in the report. These are the bad debt expense for 2017, the accounts
receivable turnover ratio, the effect of the change on Magundy’s liquidity, and an assessment of
the policy. Each issue is discussed below.
a. The new aggressive policy and the old conservative policy are opposite extremes. The
estimated percentage-of-credit-sales uncollectible amount should be adjusted to
reflect this change. Given that new customers who are granted credit will pose more
risk, meaning there will likely be an increase in uncollected amounts, the rate should
be modified with the new sales policy in mind. The exact new percentage that should
be used will require an assessment of the customers. However, the new percentage
should be higher than 2%.
b. The new credit policies allow customers more time to pay and provides credit to more
risky customers, which implies that Magundy’s accounts receivable balance will
grow more quickly than sales. As a result the average accounts receivable balance
will increase, which will cause Magundy’s accounts receivable turnover to decrease.
c. Magundy’s new credit strategy will reduce the liquidity of the company. The looser
credit terms means that cash will be collected more slowly, which means more cash
will be tied up. This is indicated by the decreasing accounts receivable turnover. In
addition, the increased sales will likely require additional inventory and that will
require more cash investment as well. On the other hand, cash flow increase because
the company is selling more merchandise (this assumes that the changed credit policy
is beneficial).
d. Whether or not the policy is good or bad also depends on the outcome. The increase
in sales is a good thing but costs also increase. The attractiveness of the strategy
depends on whether the benefits exceed the costs. While sales are rising as a result of
the new strategy there will be additional costs from bad debts, collection, and
financing. The certain measures of liquidity will also likely decline with the
associated consequences.
P6-8.
Wooler Inc.’s profit margin to start off is low, roughly 11% of sales for years 2014 and 2015
with all sales on a cash basis. In 2016 and 2017 it declined to just over 8%. Accepting credit
cards comes at a transaction cost of 3.5% of sales. Wooler accepting credit cards increased
business however the result of flat profits was a result of their existing customers paying with
credit cards also. From 2016 to 2017 credit sales went from 61% to 81% of total sales. Simply
put, if cash sales yielded an 11% margin, then 100% credit sales would only yield a 7.5% (11-
3.5) margin. It appears that most customers are taking advantage of using credit cards at a cost of
3.5% to Wooler. As a result of existing customers paying on credit the over margin reduced on
each transaction resulting if flat profits—the gain in profits from increased sales was offset by
the added cost of credit, which applied to new and existing sales.
P6-9.
a.
i. $84,000
ii. 1.5% (8,470,000 85%) = $107,992.50
iii. 9.5% (1,220,000) = $115,900
115,900 – (96,000 – 84,000) = $103,900
b.
i. $0 (There is no allowance for doubtful accounts under the direct method)
ii. $96,000 – $84,000 + $107,992.50 = $119,992.50
iii. $115,900
c.
i. Bad debt expense 84,000
To record the bad debt expense under the direct-write-off method.
ii. Bad debt expense 107,992.50

To record the bad debt expense under the percentage-of-credit-sales method.
iii. Bad debt expense 103,900

To record the bad debt expense under the percentage-of-receivables method.
d.
i. $500,000 – 84,000 = $416,000
ii. $500,000 – 107,992.50= $392,007.50
iii. $500,000 –103,900 = $396,100
e. The differences arise because each method of determining bad debts has a different focus.
Under the direct method bad debts are charged to income as they occur, which means
matching doesn’t occur. Under the percentage-of-credit-sales method, the focus is to
report a reasonably accurate bad debt expense. Under the percentage-of-receivables
method the focus is to report accounts receivable reasonably close to their net realizable
value. If the estimates using the latter two methods aren’t correct year after year
differences in the methods will occur because the percentage-of-receivables method
adjusts the balance in the allowance account to ensure that the net accounts receivable
approximates its NRV. The percentage-of-credit-sales method doesn’t consider the NRV
of accounts receivable, only the expense for the period. In principle, the percentage-of-
credit sales and percentage-of-receivables should provide the same result. However, the
methods will diverge, even if they are set up to yield the same result, once estimates and
actuals are different in a year.
f. Of the two accrual methods they to ways of achieving the same end. No method is
inherently better or worse, each one involves a trade-off. The direct method provides
accurate information about the amount of bad debts, but doesn’t match the expense to the
revenue it helped generate, which is why it’s not used under accrual accounting. The
percentage-of-credit-sales method matches the expense to the revenue it helped generate,
but is an estimate, not an actual indication of what won’t be collected. The percentage-of-
receivables method also matches the expense to the revenue and provides an
approximation of the receivables net realizable value, but the amount of bad debts may be
even less accurate than the percentage-of-credit-sales method. It must be stressed that if
the estimates are unbiased (over time estimation errors average to zero) the methods
should yield similar results. Differences among the methods are caused by errors in
estimating bad debts. These methods, it should be remembered, are means to an end; to
provide an appropriate valuation for accounts receivable and to determine an appropriate
expense for the calculation of net income.
P6-10.
a.
i. $18,000
ii. 2.5% (750,000 85%) = $15,937.50
iii. 10% (145,000) = $14,500
14,500 – (13,500 – 18,000) = $19,000
b.
i. $0 (There is no allowance for doubtful accounts under the direct method)
ii. 13,500 – 18,000 + 15,937.5 = $11,437.5
iii. $14,500
c.
i. Bad debt expense 18,000
To record the bad debt expense under the direct-write-off method.
ii. Bad debt expense 15,937.50

To record the bad debt expense under the percentage-of-credit-sales method.
iii. Bad debt expense 19,000

To record the bad debt expense under the percentage-of-receivables method.
d.
i. $45,000 – 18,000 = $27,000
ii. $45,000 – 15,937.5 = $29,062.50
iii. $45,000 – 19,000 = $26,000
e. The differences arise because each method of determining bad debts has a different focus.
Under the direct method bad debts are charged to income as they occur, which means
matching doesn’t occur. Under the percentage-of-credit-sales method, the focus is to
report a reasonably accurate bad debt expense. Under the percentage-of-receivables
method the focus is to report accounts receivable reasonably close to their net realizable
value. If the estimates using the latter two methods aren’t correct year after year
differences in the methods will occur because the percentage-of-receivables method
adjusts the balance in the allowance account to ensure that the net accounts receivable
approximates its NRV. The percentage-of-credit-sales method doesn’t consider the NRV
of accounts receivable, only the expense for the period. In principle, the percentage-of-
credit sales and percentage-of-receivables should provide the same result. However, the
methods will diverge, even if they are set up to yield the same result, once estimates and
actuals are different in a year.
f. Of the two accrual methods they to ways of achieving the same end. No method is
inherently better or worse, each one involves a trade-off. The direct method provides
accurate information about the amount of bad debts, but doesn’t match the expense to the
revenue it helped generate, which is why it’s not used under accrual accounting. The
percentage-of-credit-sales method matches the expense to the revenue it helped generate,
but is an estimate, not an actual indication of what won’t be collected. The percentage-of-
receivables method also matches the expense to the revenue and provides an
approximation of the receivables net realizable value, but the amount of bad debts may be
even less accurate than the percentage-of-credit-sales method. It must be stressed that if
the estimates are unbiased (over time estimation errors average to zero) the methods
should yield similar results. Differences among the methods are caused by errors in
estimating bad debts. These methods, it should be remembered, are means to an end; to
provide an appropriate valuation for accounts receivable and to determine an appropriate
expense for the calculation of net income.
P6-11.
a.
% Bad Debt
Year Credit Sales Uncollectible Expense
2013 $ 3,375,000 3% $ 101,250
2014 3,712,500 3% 111,375
2015 4,185,000 3% 125,550
2016 4,725,000 3% 141,750
2017 5,377,500 3% 161,325
2018 5,850,000 3% 175,500
b.
Year Opening balance Write-offs Bad debt expense Ending balance

2013 $ 90,000 $ 88,200 $101,250 $103,050
2014 103,050 101,475 111,375 112,950
2015 112,950 80,438 125,550 158,062
2016 158,062 74,016 141,750 225,796
2017 225,796 103,496 161,325 283,625
2018 283,625 107,550 175,500 351,575
c. Ending allowance Accounts

Year balance receivable % of A/R
2013 $103,050 $1,183,500 8.71%
2014 112,950 1,264,500 8.93%
2015 158,062 1,381,500 11.44%
2016 225,796 1,512,000 14.93%
2017 283,625 1,692,000 16.76%
2018 351,575 1,813,500 19.39%
The allowance account is growing rapidly relative to gross accounts receivable. This is occurring
because the bad debt expense is being consistently overstated. Since the percentage-of-credit-
sales method focuses on the income statement, the overstatement of the bad debt expense results
in a buildup in the allowance account. The errors are accumulating and the increase in the
allowance is due to the increase in sales and the error buildup.
d. In general, overestimating the bad debt expense will cause net income to be understated
because “too much” of credit sales is being expensed as uncollectible. Since the
expectation is that 2% of sales will go uncollected whereas 3% is being expensed, net
income is, on average, being understated each year by 1% of credit sales.
e. The net amount of accounts receivable on Halkirk’s balance sheet on December 31, 2018
will be $1,461,925 ($1,813,500 – $351,575)). The balance doesn’t reflect the net
realizable value of the accounts receivable. The amount is understated by the cumulative
excess of bad debts expense from 2013 to 2018.
f. Bad debt expense calculated as 2% of credit sales, beginning in 2015:
Year Credit Sales % Uncollectible Bad Debt Expense

2013 $ 3,375,000 3% $101,250
2014 3,712,500 3% 111,375
2015 4,185,000 2% 83,700
2016 4,725,000 2% 94,500
2017 5,377,500 2% 107,550
2018 5,850,000 2% 117,000
Total 27,225,000 615,375
Year Opening balance Write-offs Bad debt expense Ending balance

2013 $90,000 $88,200 $101,250 $103,050
2014 103,050 101,475 111,375 112,950
2015 112,950 80,438 83,700 116,212
2016 116,212 74,016 94,500 136,696
2017 136,696 103,496 107,550 140,750
2018 140,750 107,550 117,000 150,200
The allowance on December 31, 2018 would be $150,200 if the percentage had been adjusted in
2015.
g. Allowance for bad debts 201,375

The entry serves to increase income in 2018 by $201,375. This would have a very
significant effect on net income for that year. (If all Halkirk’s sales are on credit and the
company has a profit margin of 10% the adjustment would serve to increase income by
almost 34%. This entry might give the impression on the financial statements that the
company’s bad debt expense is lower than it actually is. This could mislead users when
they are attempting to gauge future net income (flow of wealth). The financial statements
would be even more confusing if this adjustment wasn’t disclosed separately. Users
might conclude that the $201,375 was part of ongoing earnings. However, users won’t be
misled when determining future cash flows from accounts receivable as they are now
stated at net realizable value.
P6-12.
Credit sales

2
365
ratio
Tadoussac Inc. Sturgis Ltd.

2018 2017 2018 2017
Accounts receivable
turnover 5.85 5.74 7.59 7.63
Average Collection Period 62.37 63.64 48.07 47.84
Comparing the two companies, Sturgis has a better accounts receivable turnover ratio,
which means it’s more effective at collecting its debts. Sturgis is collecting its debts 15
days faster than Tadoussac. On the surface at least Sturgis is better at managing its cash
flows and has better controls in place to ensure collection. Additional useful information
regarding the receivables of the companies includes the period each company allows
customers to pay (the difference between the two might not be meaningful if Tadoussac
offers more time), any incentives for early payment (discount for prompt payment), and
information on the risk profile of the customers (are conditions each company faces
different regarding its customers).
P6-13
Current Quick Ratio Accounts Receivable Turnover Average Collection Period
Ratio Ratio of
Accounts Receivable
1 Increase Increase Increase Decrease
2 No effect No effect No effect No effect
3 Increase Increase No effect No effect
4 Decrease Decrease Decrease Increase
7* No effect No Effect No effect No effect

 The credit sale increases ARTO because the impact on the denominator is less than the
effect on the numerator. In the denominator the beginning accounts receivable isn’t
affected by the credit sale, only ending receivables is. The opposite logic applies to when
there are decreases as in item 4.
* Assumes that an accrual method for bad debts is used (write-off has no effect on net
accounts receivable). If the direct write-off approach is used the answer would be
decrease, decrease, increase, decrease.
P6-14.
Current Quick Accounts Receivable Average Collection
Ratio Ratio Turnover Ratio Period of Accounts
Receivable
1 Decrease Decrease Increase Decrease
2 No effect No effect Increase Decrease
3 Decrease Decrease No effect No effect
4 Decrease Decrease No effect No effect
5 Increase Increase No effect No effect
6 Decrease Decrease Increase Decrease
P6-15.
Note that amounts calculated by students may vary slightly depending on how much rounding
they do. Items to be solved are shown in grey.
Current assets on December 31, 2017 $1,523,750

Current ratio on December 31, 2017 1.15
Current liabilities on December 31, 2017 $1,325,000
Quick assets on December 31, 2017 $850,000
Quick ratio on December 31, 2017 0.64
Accounts receivable on December 31, 2017 $275,192
Revenues (all on credit) during 2017 $2,750,000
Average collection period of accounts receivable for 2017 32 days
Accounts receivable turnover ratio for 2017 11.41
P6-16.
Note that amounts calculated by students may vary slightly depending on how much rounding
they do. Items to be solved are shown in bold.
Current assets on December 31, 2018 $275,000

Current ratio on December 31, 2018 1.25
Current liabilities on December 31, 2018 $220,000
Quick assets on December 31, 2018 $187,000
Quick ratio on December 31, 2018 0.85
Revenues (all on credit) during 2018 $287,500
Average collection period of accounts receivable for 2018 63.48
Accounts receivable turnover ratio for 2018 5.75
P6-17.
Average
Accounts collection
receivable period of
Current turnover accounts Debt-to- Profit
ratio Quick ratio ratio receivable equity ratio margin ratio
Writeoff of
an account No Effect No Effect No Effect No Effect No Effect No Effect
receivable1
Recording
the
allowance Decrease Decrease Increase Decrease Increase Decrease
for
discounts2
Recording
the bad debt Decrease Decrease Increase Decrease Increase Decrease
3
expense
Sale of
merchandise
Decrease
on credit;
(less No Effect Increase Decrease Decrease Increase
payment
inventory)
due in three
years4
1
Writeoff of an account receivable reduces the allowance and a specific receivable account. There’s no effect
on current assets or the income statement.
2
Debit Sales—allowance for discounts (contra sales), Credit Allowance for discounts (contra accounts
receivable)
3
Debit Bad debt expense (expense), Credit Allowance for uncollectables (contra accounts receivable)
4
Debit Long-term accounts receivable, Credit Sales; Debit Cost of goods sold, Credit inventory
* Assume that allowance for returns has been journalized.
P6-18.
Average
Accounts collection
receivable period of Profit
Current turnover accounts Debt-to- margin
ratio Quick ratio ratio receivable equity ratio ratio
Recording the
allowance for Decrease Decrease Increase Decrease Increase Decrease
1
returns
Collection of a
previously
written off No Effect No Effect Increase Decrease No Effect No Effect
account
receivable2
Sale of
merchandise
on credit; Increase Increase Increase Decrease Decrease Increase
payment due in
30 days3
Collection of
an account No Effect No Effect Increase Decrease No Effect No Effect
4
receivable
1
Debit Sales—allowance for return (contra sales), Credit Allowance for returns (contra accounts receivable)
2
Debit Accounts receivable, Credit Allowance for uncollectables, Debit Cash, Credit Accounts receivable
3
Debit Accounts receivable, Credit Sales; the increase in sales is greater than the increase in average accounts
receivable.
4
Debit Cash, Credit Accounts receivable.
P6-19.
365
Average collection period
= 365
62
= 5.89
Credit Sales
Average accounts receivable =
= 2,456,000
5.89
= 416,978
Average accounts receivable = Beg. A/R+420,000

= 416,978
2
Beginning A/R = 413,956
a. No effect because a write-off of accounts receivable doesn’t affect net receivables so the
calculation isn’t affected.
b. Collection of an additional $80,000 of accounts receivable causes average accounts

receivable to decrease by $40,000.
Accounts receivable turnover ratio= 2,456,000 = 6.51

376,978
Average collection period= 365 = 56 days

6.51
c. No effect because the transaction was a cash sale.
d. Additional credit revenue means the numerator of the equation increases by $125,000.
Since it is a credit sale average accounts receivable would also increase, by $62,500

479,478
Average collection period= 365 = 68 days

5.38
e. An additional bad debt expense of $5,000 would cause average accounts receivable to
decrease by $2,500.

414,478
Average collection period= 365 = 61.6 days

5.92
f. An allowance for sales returns of $7,500 would cause average accounts receivable to
decrease by $3,750 but reduce net sales by the entire amount.

413,228
Average collection period= 365 = 61.6 days

5.93
P6-20.
a. The amount of revenue that Bellburn should recognize is the present value of the long-
term receivable:
$5,000,000/(1.1)2 = $4,132,231
The entry to record the sale is:
Long-term receivable 4,132,231

Revenue 4,132,231
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The man, however, who has crowned with his acumen the
written science of war is Jomini, who first became known as a young
staff-officer of Marshal Ney’s, and died but twenty years ago. Though
he rose to the highest rank in the Russian service, his career was as
military adviser rather than as commander. His chief value to us lies
in his having collated and so plainly set down the lessons taught by
the great captains, particularly Frederick and Napoleon, that all may
now study them, as during the last century they could not be studied,
—were not even understood. He has enabled us to assimilate the
history of war. Other military students have since written with equal
profundity. But our debt to Jomini is not lessened thereby.
Gustavus Adolphus was born in Stockholm, in 1594, the son of
Charles IX. of Sweden, but at a time when his cousin Sigismund III.
occupied the throne. He was a lad of great personal beauty and
strength, and his naturally bright mind profited well by the careful
training he received. His boyhood showed all the traits of strong
earnestness, clean-cut courage, and deep religious feeling which
later characterized the Champion of the Reformation. Of naturally
quick temper, in youth a blow followed a word; in manhood he
acquired exceptional self-control. His education was largely under
the direction of Oxenstiern, who later became his prime-minister,
general, and greatest intimate. He was a constant reader, an
eloquent and persuasive speaker, a poet whose religious verses are
still sung in every household of Sweden. He was famous in athletics,
and was both a noted rider and able swordsman.
The Swedish government was an elective-hereditary monarchy.
Sigismund, a bigoted Catholic, was deposed when Gustavus was
ten years old, and the lad’s father made king. Sigismund retired to
Poland, of which country he was also monarch, and remained
thereafter the sworn enemy of Charles and of Gustavus.
The young prince went through every step of military rank and
training, and at seventeen was declared of age and participated with
distinguished credit, and rare skill and enterprise, in a war with
Denmark. In this same year (A.D. 1611) his father died, and, against
all precedent, Gustavus Adolphus was chosen king. During his reign
of twenty-one years, his people and he were an unit. The world has
never seen a more striking instance of mutual love and confidence,
justly earned, between king and people.
Sweden was at war with Denmark, Russia, and Poland.
Gustavus determined to finish each war, if possible, singly and in
turn. From the very beginning he showed in his military conduct that
his intelligence ranged beyond the conventional method of
conducting war, which he had been taught with so much care. In
1613 he conquered a peace with Denmark.
In 1614 he began war with Russia, making, meanwhile, a two
years’ truce with Poland. In this year, and the next, he drew the
attention of all Europe to his bold invasion of the Russian territory, at
the point where now stands St. Petersburg, and was for the first time
approached by the Protestants of Germany with a request to aid
their cause. In 1617 Gustavus conquered a peace with Russia.
Sigismund would not hear of peace, but under the curious habit
of that day, of conducting war on a sort of picnic system, he did
extend the existing truce for five years. At its expiration, in 1621,
active war began. Gustavus, with twenty-four thousand men, making
Livonia his objective, landed at Riga, took the place, and from thence
as a base, conducted his campaign.
Sigismund represented the Catholic element; Gustavus was the
most prominent Protestant prince, and as such received many
urgent petitions for help from the harassed Protestants of Germany.
The eventual necessity of taking a share in the religious war was
clearly foreseen by Sweden. With the advice and consent of the
ministry and people, Gustavus reorganized the army and created a
distinctly national force of eighty thousand men, and based its
discipline and character on the most intelligent foundation. Sweden
thus acquired the first modern regular military organization. Other
nations, as a rule, whenever a war was imminent, raised troops from
the crowds of soldiers of fortune, with whom all Europe swarmed,
and discharged them after its expiration. The Swedish organization
consisted of one-quarter regular troops for service out of the country,
and three-quarters landwehr for the defence of the Fatherland and
for filling gaps in the regulars. Recruitment was by districts on a well-
settled plan of quotas. The troops in service and the militia were
scrupulously drilled and taught, uniformed, well armed and fed, and
regularly paid.
The Polish war lasted until 1629, the campaigns being annual,
but varying in scope. Gustavus invariably took the offensive, and
was habitually successful. He was always head and front of every
movement, full of intelligence, activity, and courage, ran constantly
great personal danger, and suffered from frequent wounds. No
character of modern history exhibits the qualities of the ancient hero
so distinctly as Gustavus Adolphus. Cautious and intelligent to a
marked degree in his campaigns, he was in battle a very Alexander
for audacity and chivalrous bearing. Always in the thickest of the fray,
he led his men in person, and, despite the protests of his generals
and suite, could never be restrained from exposing himself at the
point of greatest importance. He was unwisely reckless of his own
safety, though never losing for a moment his cool calculation or
power to gauge the situation. His army partook his enthusiasm, as it
shared his earnest religious feeling, and was devotedly attached to
him as man and king.
In 1628, Wallenstein, the distinguished commander of the
Imperial forces, had won great success in northern Germany, and
had laid siege to Stralsund. The German Protestants again turned
with piteous appeals to Gustavus. The king well knew that sooner or
later Protestant Sweden must, in self-defence, enter the lists against
the Catholic Empire, and threw a Swedish garrison into Stralsund,
which, gallantly backed by the citizens, held the place against
Wallenstein’s best efforts.
In the campaign of 1629, the Emperor sent an army to reënforce
the Poles. This the more impelled Gustavus to actively embrace the
Protestant cause. At the end of this campaign, Sigismund, largely
under the influence of Richelieu, was prevailed on to agree to a six
years’ truce. France could not openly join the Protestants in their
struggle against the Catholic Emperor, but was glad to see Gustavus
do so in order to check such success by Ferdinand as might disturb
the balance of power.
This truce ended the Swedish-Polish wars, which had lasted
eight years (1621–1629). The king had conducted six campaigns
against Poland, and two against Denmark and Russia. These were
to him what the Gallic campaigns were to Cæsar, a practical school
of war, in which both he could learn his trade, and his army be
disciplined and toughened. He had observed the practical working of
his new army organization, and learned the weak points of the
existing system of war. Comparison showed the advantages of his
own conceptions. In the three remaining years of his life he moulded
these into a new art, which pointed the way back to a system full of
intellectual and moral force as well as more consonant with common
Christian charity. The king, during this period, gleaned varied
experience. He learned the habits of different leaders and armies,
and how to adapt his own ways to theirs. His infantry underwent a
good schooling. His cavalry he gradually improved by imitating the
admirable Polish horsemen, and by adding discipline and ensemble
to it. His artillery gave a good account of itself. Under Gustavus’
careful eye, every branch of the service during these campaigns
grew in efficiency. Equipment, arms, rationing, medical attendance,
drill and discipline, field-manœuvres, camp and garrison duty,
reached a high grade of perfection. Each year added to the skill and
self-poise of the Swedish forces. They were distinctly superior to any
European army of the day.
Not only had Gustavus learned to know his generals and men,
but these had gauged their king. There had arisen between them
that mutual confidence, esteem, and affection which only great souls
ever evoke and keep. And as there was no danger or labor of which
Gustavus did not bear with them his equal part, so the Swedish army
saw in its king a harbinger of victory, a sure protection in disaster.
Gustavus’ own character, his bravery, religious ardor, honesty, and
humanity infused itself into every soldier in the Swedish ranks.
Gustavus Adolphus was now in a position to afford efficient aid
to the German Protestants. The efforts of the latter had been noble,
but far from systematic, and they were fast being driven to the wall.
The war had been marked by barbarities characteristic of religious
struggles, and by the adoption of happy-go-lucky plans of campaign.
Armies had moved into a province, not because it was strategically
important, but because it was rich in plunder. Manœuvres were
conducted without reference to base or communications. There was
no aim beyond temporary expediency in any one’s movements. A
fortress would arrest the march of an army, which would sit down
before it without the remotest conception of whether its capture
would have an effect on the general result. Lack of system was
supplemented by religious fanaticism, which made everything
redolent of atrocity. No general but was characterized by some
fearful vice. Gustavus Adolphus was destined to change all this in a
short two years.
As a soldier Gustavus is less noted for his battles than for the
conduct, in 1630, 1631, and 1632, of a campaign on one broad,
intelligent, far-seeing plan, from which he never swerved. This of
itself was an entire novelty in this period of shallow operations. In
lieu of detailing one of his manœuvres, I will give a hasty sketch of
his entire plan of campaign in Germany. This was the first crisply
strategic series of operations since the days of Cæsar.
It was clear that if the Emperor overcame the Protestants of
Germany he would turn on Sweden. To await attack was the
preference of the Swedish ministry. But Gustavus pointed out the
advantages of an immediate offensive war in Germany. The struggle
would be kept from Swedish territory. The Emperor would not gain
so much headway as to lay Sweden open to an exhausting war.
They owed a duty to their oppressed Protestant brethren. He
convinced his people and gained their support. He took with him
fifteen thousand men. This number he expected to, and did in fact,
largely increase in Germany by recruitment and the aid of Protestant
allies.
Gustavus landed in Rügen in June, 1630. He added five
thousand men of the Stralsund garrison to his army, and took
possession of all the islands at the mouths of the Oder. He then
captured Stettin and extended his grasp right and left along the
coast. He proposed to base himself on the Baltic, as Alexander had
done on the Mediterranean. He took and garrisoned many seaboard
towns and others lying not far inland. His army, reënforced by
German allies and recruitment, soon rose to twenty-five thousand
men, and he established a firm footing on the Oder, which river was
an excellent line for operations into the heart of Germany. The
imperial Field Marshal Conti, who had ten thousand men in his front,
was unable to interfere with his operations. Garrisoning Stettin,
Gustavus moved into Mecklenburg to encourage its Protestant
princes, further secure his base, increase his supplies and forces,
and gain active allies. He relied on collecting seventy to eighty
thousand men. Count Tilly had been put in supreme command of the
Imperial forces, in place of Wallenstein, against whom the Catholic
princes had conceived a marked prejudice. This resulted in
disbanding a large part of Wallenstein’s soldiers, who considered
themselves only in his personal service, and left Ferdinand for the
nonce but unimportant armies to oppose to the Swedish advance.
CAMPAIGN OF GUSTAVUS ADOLPHUS IN
GERMANY, 1630–1–2
Having substantially rescued Mecklenburg from the Imperialists,
Gustavus left a force to operate there and returned to Stettin,
purposing to move with the main army up the Oder (Dec., 1630). The
end of the year was at hand. The Imperial army in his front was in no
condition for a winter campaign, either from habit, discipline, or
equipment. For this very reason Gustavus moved against it, his own
troops being well clad and equipped, and inured to cold. He soon
drove the enemy back to the line of the Warta, and then sat down in
an entrenched camp at Bärwalde till he could recruit his army up to a
standard equal to larger operations. The Protestant Elector of
Brandenburg meanly refused his help to the cause, but Catholic
France subsidized the king, and the Protestants called an assembly
at Leipsic to agree on new measures of defence.
Tilly now appeared on the scene, thirty-four thousand strong.
The king had but twenty-five thousand men and would not risk a
battle, neither would Tilly assault the Bärwalde camp. But Gustavus
had a better scheme in his head. He planned to draw Tilly into
Mecklenburg, and then quickly return and capture the enemy’s line
on the Warta. He made forced marches into that province, fell on the
Imperialists and again defeated them. Tilly, alarmed, followed with
twenty-four thousand men. Gustavus, by occupying the direct road,
had compelled Tilly to resort to a long circuit. When Tilly was fairly on
the way, Gustavus moved rapidly and secretly back to Stettin,
advanced on Frankfort, took it after a seventeen days’ siege, and
thus broke up the enemy’s line. The Warta fully protected his left
flank in advancing into Germany. Gustavus had completely baffled
his adversary. But Tilly took bitter revenge by the capture of
Magdeburg, which, though it cannot perhaps be charged to Tilly
himself, was given up to sack, and suffered a horrible fate at the
hands of his unbridled soldiery. Gustavus had been unable to cross
neutral Brandenburg to its assistance.
The barbarous treatment of Magdeburg enraged instead of
disheartening the Protestants. Two able allies, Hesse Cassel and
Saxony, joined the king’s train. And by able manœuvring, restless
energy, and clear-headed method he swept Pomerania and
Mecklenburg of Imperial troops.
The pusillanimous conduct of the Elector of Brandenburg, under
the plea of neutrality, finally constrained Gustavus to dictate terms to
him. He marched on Berlin and compelled the Elector to allow free
passage to the Swedes over his territory, as well as to refrain from
damaging the Protestant cause, if he would not help it.
Thus in one year from his landing in Germany, Gustavus had
occupied Pomerania and Mecklenburg, and had neutralized
Brandenburg (June, 1631). By holding the lines of the Havel, the
Spree, and the Oder, he controlled all the territory to the confines of
Poland and Silesia, and with a sufficiency of reënforcements he
could safely advance on central Germany.
Tilly invaded Hesse Cassel. Gustavus tried a diversion to lure
him away from his new ally. Count Pappenheim opposed him at the
Elbe. Gustavus stole a clever march on him, crossed and went into
an entrenched camp near Werben. These entrenched camps, it will
be perceived, were a feature of this period which Gustavus still
affected. They continued in use until he himself in part, and
Frederick wholly, demonstrated that entrenchments could be taken
by vigorous assault. At this time it was considered the height of
foolhardiness to attack entrenchments.
Tilly vacated Hesse Cassel and moved on the Swedish camp.
Gustavus had but ten thousand men there; Tilly had twenty-seven
thousand; but the king waylaid Tilly’s isolated cavalry, handled it
roughly, and returned safely to camp. Tilly, despite his excess of
force, did not care to risk an assault. Large reënforcements soon
reached both armies. Gustavus’ diversion had accomplished all he
sought. By defending the line of the Elbe and Havel, he prevented
Tilly from making any compromising advance.
Tilly was ordered to Saxony. The cruelties here perpetrated by
his troops made the Elector all the better ally. He offered Gustavus
the support of his army of eighteen thousand men. The king again
crossed the Elbe, at Wittenberg, and joined the Saxons at Düben.
This gave him a force of forty thousand men, of which twelve
thousand were cavalry. Tilly had arrived at Leipsic, and promptly
advanced to meet Gustavus with thirty-two thousand under the
colors. But, at the battle of Breitenfeld, he suffered a stinging defeat,
with the loss of six thousand men.
Tilly’s soldiers were in action much what their commander was,
—a stiff, dense, unwieldy mass, still hide-bound in the Spanish
school, which won its way by mere weight of men in the old
phalangial manner. The Swedes were quite a different body.
Gustavus had reduced the number of their firing-ranks to three,
placed reliance on their individual intelligence, which was marked,
and had drilled his musketeers, as well as his gunners, to fire as
much more rapidly than the enemy, as Frederick’s men with their iron
ramrods, or the Prussians of this generation with their needle-guns.
In this, his first great battle, the result was, despite the ignominious
flight of the Saxons, predetermined by the condition of the respective
armies and their leaders. Here, as on all occasions, the king, in
personal conduct, was an Alexander in audacity; a Cæsar in
intelligence.
Gustavus Adolphus had been only fourteen months in Germany,
but he had by his broad, prescient, cautious, and well-digested
scheme, crowned by the victory of Breitenfeld, completely changed
the prospects of the Protestants. He had got a firm footing in
northern Germany, where he now held most of the strong places. He
had secured his communications with Sweden by the possession of
the sea. He had grown in strength by his treaties with Hesse Cassel
and Saxony, and by accessions of troops from all quarters. He had
gained enormously in moral weight, and his army in aplomb and
confidence. His operations had been slow and cautious,—though
rapid when measured by the times,—but they had been sure, and
were justified by the event. The late victory had placed him on a
totally different footing. The Catholic party no longer looked down on
the “Snow-king,” as Wallenstein had jeeringly called him. The
Imperial army had lost in spirit and organization that which he had
gained. Its present retreat to the Weser opened the heart of the
Emperor’s possessions to the king’s advance. The former’s authority
had received its first severe blow, and the Protestants of north and
west Germany, lately cowed into submission, now rose and joined
Gustavus’ standard. These fourteen months had shifted the moral
superiority from the Catholic to the Protestant cause. But the work
was far from ended. It required the same wise and cautious action,
coupled with vigor and intelligence, to complete what had been so
well begun.
The advisers of Gustavus strongly urged an advance on Austria,
believing that such a course would bring Ferdinand to terms. But so
far Gustavus’ successes had come from a systematic plan of
campaign which embraced the whole of Germany in its scope. He
had secured each step and had risked nothing unnecessarily. He
saw the chances pointed out, but he also saw that if he advanced
south, his right rear would be threatened by Tilly, who had, after his
defeat, retired toward the Rhenish provinces and there made a new
base. The king preferred his own plan of first gaining a firm footing in
western Germany. He held interior lines and saw that he could
operate against his enemies in detail. To complete his plan would
secure him from the lower Elbe to the middle and upper Rhine, and
he could then turn against Bavaria and Austria from the west, as his
advisers would now have him do from the north, and with distinctly
better effect. Meanwhile the Saxons could operate towards Silesia
and Bohemia to secure Gustavus’ left in his advance, and Hesse
Cassel could hold head against Tilly on Gustavus’ right. The scheme
was wise and far-sighted, took into calculation all the political and
military elements of the situation, and was based on broad, sound
judgment. For seventeen hundred years, no one had looked at war
with so large an intelligence.
It may be said that war is a game of risks. But to play a
gambler’s game was not Gustavus’ forte. When the occasion
demanded, he could disregard every danger. What he has taught us
is method, not temerity. His mission was to abolish the Quixotism of
his day.
The Saxon Elector, with a mixed army over twenty thousand
strong, accordingly marched into Bohemia and Silesia (Oct., 1631)
and pushed the Imperialists back from Prague on Tabor. Everything
promised success. But all at once the Elector appeared to lose heart,
arrested his advance, and opened negotiations with the Emperor,
who, seeing that threats had not succeeded, had tried conciliation.
This part of the operation was nullified.
Gustavus moved to Würzburg. Franconia joined the Protestant
cause as Thuringia had already done. Tilly, having recovered from
his late defeat, and his present position being no threat to Gustavus,
marched southerly. With allies he collected over fifty thousand men
and proposed to seek battle. But the Elector of Bavaria, fearful for
his territory, kept Tilly on the defensive.
Gustavus was now firmly established on the Main, and in
Thuringia and Franconia, and he presently moved down the river to
fully secure the Rhineland, leaving a sufficient force opposite Tilly in
Franconia. His men marched along both banks with the baggage on
boats. He crossed the Rhine, took Mainz and transformed it into an
allied fortress.
Germany was metamorphosed. The allies had one hundred and
fifty thousand men in the field. Recruiting was lively. All Protestants
were united in sentiment, purpose, and efforts. France was helpful in
keeping the Catholic princes along the Rhine in a condition of
neutrality, while Gustavus lay in a central position between the
Emperor and these same princes. Bavaria was an uncertain
element. The Emperor had a total of but eighty thousand men, and
of these the bulk were protecting the Danube instead of carrying
desolation into the Protestant territory.
Gustavus now concentrated on the middle Main to the number of
forty-five thousand men and marched on Nürnberg, where he was
received with enthusiasm. Tilly crossed the Danube and took up a
position over against Rain, behind the Lech, with forty thousand
effective. From Nürnberg Gustavus marched to Donauwörth, also
crossed the Danube and sent out a detachment to take Ulm.
The king was daring at the proper time. His whole campaign so
far had been cautious and systematic, neglecting no point in his
general scheme. He was now face to face with the army he had
driven from northern and western Germany, and was ready for
battle. He could not draw Tilly from his entrenched camp; and he
determined to impose on him by boldly crossing the river in his front
and attacking it,—then simply an unheard-of proceeding. He
believed that the moral advantage to be gained by a stroke of
audacity would more than compensate for the danger, and danger
was to Gustavus an incentive. He erected a battery of seventy-two
guns on the left bank of the Lech, opposite Rain, and under cover of
its fire set over a portion of the troops in boats, built in two days a
bridge and a bridge-head, led over the infantry, and sent the cavalry
up stream to ford the river above the enemy’s position (April, 1632).
Tilly and the Elector of Bavaria sought too late to interrupt these
fearless proceedings. They issued from their camp with a select
body of troops and attacked the Swedes, who were backing on the
Lech. But the crossfire of the admirably posted Swedish batteries
was severe; the Swedish infantry held its own, and the cavalry rode
down upon their flank. In this obstinate combat Tilly was mortally
wounded. His second in command suffered a like fate. The Imperial
troops lost heart and took refuge within their breastworks. Oncoming
darkness forestalled pursuit. But Gustavus had gained his object.
The Imperial army had lost morale and organization, and his own
had gained in abundant measure. This is the first instance of forcing
the passage of a wide and rapid river in the teeth of the enemy.
The Elector retired to Ratisbon. The Swedes took possession of
many towns in Bavaria, including Munich. But the country population
was so hostile that a permanent occupation seemed a waste of
energy; Gustavus retired to Ingolstadt.
A disturbing element now arose in a curious suspicion of the
ulterior motives of Gustavus. Both Protestants and Catholics—
Germans alike—began to fear that the king might be tempted by his
successes to make himself autocrat of Germany. This feeling soon
begot a half-heartedness among the king’s supporters. Richelieu
feared that Gustavus, instead of Ferdinand, was reaching a point
which might make him dangerous to France. The Emperor,
meanwhile, went back to Wallenstein, who had been so successful
before his deposition from command. Wallenstein made hard terms,
but he was a power which could no longer be disregarded.
Ferdinand, to gain his aid, gave him uncontrolled authority over the
army he should raise and all its operations.
Wallenstein began recruiting. He soon had forty thousand men.
The Catholics grew braver when the reconciliation of Wallenstein
and the Emperor became known. This, added to the suspicions of
the allies, constrained Gustavus to cease his successful offensive for
a cautious holding of what he already had.
Wallenstein marched into Bohemia, the Saxons offering no
resistance, and took Prague. He then moved to Bavaria and joined
the Elector. Seeing that Wallenstein by this manœuvre had gained a
position from which he might endanger his communications with
northern Germany, Gustavus marched summarily on Nürnberg,
which was the “cross-roads” of that section of the country, to head
Wallenstein off from Saxony, and ordered his outlying detachments
to concentrate there. He had under his immediate command but
one-third of Wallenstein’s total, and could not assume the offensive.
But he would not abandon southern Germany until driven from it. He
entrenched a camp near the town. Despite superior numbers,
Wallenstein did not attack. He could not rise above the prejudice of
the day. He deemed hunger a more efficient ally than assault. He sat
down before Nürnberg (July, 1632). The small-war indulged in
generally ran in favor of the king, who patiently awaited
reënforcements, having provided two months’ provisions for his army
and the town. Oxenstiern meanwhile collected thirty-eight thousand
men and advanced to the aid of his chief. Gustavus marched out to
meet him. Wallenstein did not interfere. The king was prepared for
battle should he do so. It was a grave military error that Wallenstein
took no means to prevent this junction.
Soon after Gustavus had received his reënforcements, he
determined to bring Wallenstein to battle, for famine had begun to
make inroads in Nürnberg and in both camps. He accordingly
marched out and drew up in the enemy’s front, but Wallenstein could
not be induced to leave his entrenchments (Aug., 1632). Failing in
this, the king at last resorted to an assault on the Imperial
fortifications. But after a gallant struggle he was driven back with a
loss of two thousand men. He has been blamed for this assault. He
deserves rather the highest praise for his effort to show the world
that gallantry and enterprise are among the best characteristics of
war. After him, Frederick proved that good troops can more often
take entrenchments than fail. His grenadiers were accustomed to
assault works held by two to one of their own number,—and take
them, too, under the king’s stern eye.
After ten weeks of this futile struggle, and much loss on both
sides, Gustavus, fairly starved out by want of rations and of battle,
determined to regain his communications with northern Germany. He
left five thousand men in Nürnberg, and marching past Wallenstein’s
camp unchallenged, moved to Würzburg. He had but twenty-four
thousand men left. Wallenstein, who again neglected an admirable
chance of falling on Gustavus’ flank, soon after marched to Bamberg
with the relics of his army, reduced to about the same number (Sept.,
1632).
Learning that Wallenstein had left Nürnberg, Gustavus, in the
belief that his opponent would seek repose for a period, marched
back to the Danube to resume the thread of his own work. The
Nürnberg incident had interrupted, not discontinued his general plan.
Wallenstein, as he had anticipated, sat quietly in Bamberg. He had
shown singular disinclination to come to blows with the king, and
exhibited far less activity, though, in truth, Wallenstein was both a
distinguished and able soldier.
On other fields the Swedes and allies were generally successful,
but finally thirty thousand Imperialists concentrated in Saxony, and
Wallenstein joined them and took Leipsic. Gustavus (Sept., 1632)
feared for his Saxon alliance, without which he could scarcely
maintain himself. He again put off the prosecution of his general
scheme, to go where lay the most imminent danger. Oxenstiern
again advised a summary march on Vienna, but Gustavus wisely
rejected the advice. At that day Vienna had not its importance of
1805. The king left a suitable force in Bavaria (Oct., 1632), marched
northward and entrenched a camp at Naumberg. Wallenstein turned
to meet him. His evident duty was to concentrate and attack. But,
according to the idea of that day, he parcelled out his army in
detachments, sending Pappenheim to Halle while he marched to
Merseburg. The Imperial general had blundered into a cardinal
position in the midst of the allies. The Swedes, twenty-seven
thousand strong, were at Naumberg, the Saxons, with eighteen
thousand, at Torgau, and ten thousand allies were marching up the
left bank of the Elbe. Wallenstein’s manifest operation was to fall on
each of these forces singly—on Gustavus first, as the strongest. But
he appeared to lose both head and heart when facing Gustavus. He
grew weaker as Gustavus grew more bold. He made no use of his
advantage, even if he comprehended it.
The king had got possession of the crossing of the Saale, but
Wallenstein stood between him and the Saxons. Gustavus’ generals
advised a manœuvre to join these allies, but the king was instinct
with mettle, and determined upon action.
The ensuing battle of Lützen has little which is remarkable,
beyond the fiery ardor which ended in the death of Gustavus
Adolphus. It was a battle in simple parallel order, but the better
discipline of the Swedish army and the greater mobility of its
organization showed as marked superiority over Wallenstein’s
masses as the Roman legion, for the same reason, had shown over
the Macedonian phalanx eighteen centuries before. The Swedes
won the victory, but they lost their king, and Germany its protector
and champion.
As is the case with all great captains, Gustavus Adolphus gave
the impulse to every action while on the theatre of operations of the
Thirty Years’ War. For many centuries war had been conducted
without that art and purpose which Alexander, Hannibal, and Cæsar
so markedly exhibited. But in the operations of the Swedish king we
again find the hand of the master. We recognize the same method
which has excited our admiration in the annals of the noted
campaigns of antiquity, and from now on we shall see generals who
intelligently carry forward what Gustavus Adolphus rescued from the
oblivion of the Middle Ages.
The operations of the king, from his appearance in Germany,
showed his exceptional genius for war. He had no military guide,
except his study of the deeds of the ancients, for modern war up to
his day had altogether lacked depth and directness. During the first
fourteen months, he secured his foothold in the northern coast
provinces, in a most clear-witted and orderly manner. Every
circumstance was against him. He had weak forces to oppose to the
Emperor’s might. The half-hearted, fear-ridden Protestants yielded
him little aid and comfort; yet he reached his goal, step by step,
seizing and holding strong places at key points, and accumulating
supplies where he could count on their safety. But once, during his
entire German campaign,—at Nürnberg,—was he out of rations, and
this without ravaging the country. He carefully secured his
communications with the base he had established and with Sweden,
and never manœuvred so as to lose them. He gradually
strengthened himself with allies and recruits. Unlike the armies of the
day, who behaved as if the populations of the countries they
traversed were of less consequence than the beasts of the field,
Gustavus dealt with them in a spirit of kindliness and Christian
charity which won them over to his side. He kept his troops under
strict discipline, and by supplying all their wants and paying them
regularly, could rightfully prohibit marauding and plunder. He
understood how to avoid battle with an enemy too strong to beat,
how to lead him astray on the strategic field, how to manœuvre
energetically against an enemy, his equal or inferior in strength; how
to make the tactical mobility of his troops and his own ardor on the
battle-field tell; how to improve victory; and how to heighten and
maintain the morale of his troops under victory and defeat alike.
When, by his cautious and intelligent plan, the king stood firmly
planted between the sea, the Oder, and the Elbe, with flanks and
rear well guarded, he at once altered his conduct. He crossed the
Elbe and boldly attacked the enemy, adding to his strength by
beating him; and, leaving the allies to protect his flanks and
communications, he advanced with spirit and energy. In thirty days
he had established himself firmly on the Main; in little over four
months more he had moved down the Main, and had possessed
himself of or neutralized the whole middle Rhine; and in twelve
weeks thence had crossed the Danube, beaten the enemy at the
Lech, and occupied almost all Bavaria. Thus in less than nine
months (Sept., 1631 to June, 1632) he had overrun a much larger
territory than he had previously gained in fourteen, and had added
vastly to his standing. He had been bold and decisive, and yet never
lacking in the method and caution which were his guide. He had
established himself as firmly in southern Germany as previously in
northern.
At the height of his reputation and success, he was now ready to
attack Austria from the west. But the policy of France changed, his
allies became suspicious, and Wallenstein moved toward his rear.
The scene changed. Gustavus had no longer the security of whole-
hearted allies to connect him with Sweden, and his policy at once
shifted to the cautious one he had first shown. The thing for him to
consider, if he was to be thrown on his own resources, was first and
foremost his communications. With forces inferior to Wallenstein’s,
he acted on the defensive. With the accessions which made his
army equal to Wallenstein’s, he again went over to an offensive at
that day startling in its audacity. This failing, and provision having
given out, he moved, not to Bavaria, but to the Main, to protect his
line of retreat, which naturally traversed Hesse Cassel. So soon as
Wallenstein retired to Bamberg, Gustavus, leaving a lieutenant to
observe him, felt at liberty to take up his old thread in Bavaria. He
had gauged his opponent aright. When again Wallenstein, by his
Saxon affiliations, threatened, and this time more seriously, the
king’s allies, and remotely the security of his advanced position,
Gustavus again resorted to decisive operations. His march to
Saxony and his attack on the enemy at Lützen were equally bold,
rapid, and skilful.
Herein is a peculiarly intelligent adaptation of work to existing
conditions. From the king’s landing to the passage of the Elbe, while
securing his base, a cautious, but by no means indecisive policy;
from crossing the Elbe to Nürnberg, while moving upon the enemy, a
singular quickness and boldness, but by no means lacking in
intelligent and methodical caution; from Nürnberg to Lützen an
alternation from caution to boldness as circumstances warranted.
After Cæsar’s day, Gustavus was the first who firmly and intelligently
carried through a campaign on one well considered, fully digested,
broad, and intelligent plan, and swerved therefrom only momentarily
and partially to meet exigencies which could not be foreseen. The
advice of his most trusted aides was often opposed to what he did;
but they could not see as far as he saw. Each variation had its
definite object, which attained, the general plan was at once
resumed. There was an entire freedom from blind subservience to
the rules of war as then laid down; an intelligent sequence and inter-
dependence of movement on a plan elastic enough to meet
unexpected obstacles; these produced a perfectly systematic whole,
in which the unity of plan was never disturbed; and with this broad
scheme went hand in hand a careful execution of detail upon which
depended the success of the whole. His occupation remained firm;
his victualling was sufficient to his needs; his movements
accomplished what he sought.
In pursuance of his cautious plan he neglected no essential
fortress or city; he held the passages of important rivers by erecting
bridge-heads or occupying towns; he kept upon his line of operations
suitable detachments, or met descents upon it by a prompt
movement towards the enemy. He so managed the division of his
forces as not to endanger his strength nor to lose the ability to
concentrate. He used his allies for the work they could best perform.
He kept the main offensive in his own hands, generally so ordering
that his lieutenants should act on the defensive, unless they
outnumbered the enemy, and then made them push with vigor. He
uniformly did the right thing at the right moment.
The secret of Gustavus’ success lay in his breadth of plan, in his
constancy to the work cut out, and in his properly adapting boldness
or caution to the existing circumstances. As with Alexander,
Hannibal, and Cæsar, it was the man himself whose soul illumined
his work; and this man had those transcendent qualities which
produce incomparable results in war, whenever they coexist with
great events. Equal as monarch and soldier, he united in his one
person the art of both. His nation and army were devoted to him soul
and body. His motives were the highest and purest which have ever
inspired a great captain; his pursuit of them was steadfast and noble,
open-handed and above-board, prudent and intrepid. In weighing his
intelligence, sound judgment, strong will, elevated sentiment, energy
and vigilance, he is properly put in the highest rank. But though his
record cannot perhaps vie with the others in the brilliancy of his
tactics, in the splendor of his victories, in extent of conquest, in
immensity of ambition, in the surmounting of all but impossible
natural or artificial barriers, in resisting overwhelming disaster with
heroic constancy,—still, if we look at the man, upon the results of
what he did, at the purposeless and barbarous nature of war as
conducted up to his day; if we weigh the influence of his short
campaigns upon all modern war, and consider how his nobility of
character and his life-work has made toward civilization, we cannot
rate Gustavus Adolphus too high. His pointing out the importance of
key-points in holding a country; the value of feeding an army by
careful accumulation of supplies, instead of by ravaging every
territory it enters; the advantage of a carefully drawn plan extending
over the entire theatre of operations; and the propriety of waging war
in a more Christian and civilized spirit,—marks the first step towards
the modern system. Gustavus Adolphus must be called the father of
the modern art of war; and is acknowledged as the one of all others
who re-created systematic, intellectual war, and stripped war of its
worst horrors.
After his death, his lieutenants tried fruitlessly to carry on his
methods. They retained a part of what he gave them; in many things
they slid back into the old ruts; and war (except with masters like
Turenne, Prince Eugene, and Marlborough) resumed its character of
isolated raids, until Frederick once more elevated it and stamped
upon it a permanence which it cannot now lose.
Among his enemies, during the remainder of the Thirty Years’
War there was nothing but the extremity of barbarous methods, over
which it is well to draw a veil.
Gustavus Adolphus was tall, handsome, and strong. In his later
years he grew so heavy that none but well-bred horses of great bone
and endurance could carry him. But he rode fast and far. His bearing
was noble, full of simple complaisance, and genuine. His quick mind
robbed work of effort; his ideas were clear, and he expressed them
crisply and in happy words; his voice was rich, his manner
convincing. A remarkable memory served to retain the names and
merits of his subordinate officers and numberless worthy men. He
maintained stern discipline in a just and kindly spirit. His religious
fervor was as honest as his courage was high-pitched. The Bible
was his constant companion and guide. He began all his acts with
unaffected prayer, and ended with thanksgiving. The Christian
virtues never resided in a more princely soul. He was sober, of
simple habit, and upright life. Towering over all around him in mind
and heart, and inflexible withal, he was yet modest and ready to
weigh the opinions of others. A tireless worker, he demanded equal
exertion from his officials and aides. But in his intercourse with all
men were kingly condescension and dignity joined. He was more
than monarch,—he was a man.

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Financial Accounting A Critical

Approach CANADIAN Canadian 4th

c. Uncashed cheques should be classified as cash because a cheque is equivalent to cash

a. FV = (1.04)6 × $100,000 = $126,531.90

a. FV = (1.03)8 × $5,000 = $6,333.85

c. PV = [$10,000/(1.06)1] + [$25,000/(1.06)3] + [$50,000/(1.06)5]

b. PV = $4,000/(1.12) + $3,000/(1.12)2 + $2,000/(1.12)3

c. PV= $5,000/(1.10)20 = $743.22

d. PV = $6,000/(1.08) + $4,000/(1.08)2 + $8,000/(1.08)3

a. 1/.08*[1 – 1/(1 + .08)25] x $40,000= $426,991.05.

b. 1/.12*[1 – 1/(1 + .12)15] x $250,000 = $1,702,716.12

c. 1/.01*[1 – 1/(1 + .01)36] x $50 + $200

d. 1/.10*[1 – 1/(1 + .10)10] x $200 + $2500/(1.10)10= $2,192.77

b. Comparing Present values to $1000:

c. PVannuity = 1/.07*[1 – 1/(1 + .07)20] x $10,000 = $105,940.14

e. Students may approach from PV or FV in their solution:

f. Present value of an annuity:

a. Dr. Cash 175,000

b. Dr. Cash 405,000

c. Dr. Bad debt expense 31,250

d. Dr. Allowance for bad debts 34,000

a. Dr. Cash 2,500

b. Dr. Allowance for bad debts 7,000

c. Dr. Cash 7,000

a. Dr. Bad debt expense 50,000

The effect of this entry on net income would be to decrease it by $50,000.

b. Dr. Allowance for bad debts 50,000

c. Allowance for bad debts 50,000

Dr. Cash 4,000,000.00

2018 Cash 4,000,000.00

2019 Cash 4,000,000.00

2020 Cash 4,000,000.00

Total receivable Long-term Current portion

Cash Accounts Allowance Revenu Bad

Cash Accounts Allowance Unearned Revenue Bad debt

Credit sales during 2017 2,262,500

Bad debt expense 45,250

Credit Percent Bad Debt

e. Bad debt expense 6,000

a. Bad debt expense = $94, 500 ($1,575,000 6%) – $11,250 = $83,250

Bad debt expense (94,500 – 11,250) 83,250

b. Bad debt expense = $9,361,500 1.5%) = $140,422.50

Bad debt expense 140,422.50

c. Bad debt expense = $94, 500 ($1,575,000 6%) + $11,250 = $105,750

Bad debt expense (94,500 + 11,250) 105,750

Bad debt expense = $9,361,500 1.5% = $140,422.50

Bad debt expense 140,422.50

a. The amount of closing accounts receivable that is estimated to be uncollectible is

Bad debt expense 124,480

a. Allowance for doubtful accounts 53,000

a. Sales Returns and Allowances 10,000

c. Allowance for Returns 2,000

Account Age Balance Uncollectible Uncollectible

a. Bad Debt Expense 19,100

Sales Discounts ($120,000 x 40% x 2%) 960

Sales Returns and Allowances 12,000

b. Accounts Receivable balance would be $202,940 (235,000 – 19,100 – 960 – 12,000).

d. A stakeholder should be concerned with the estimates made by management, especially

Quick Assets 2018 2017

Accounts receivable turnover ratio = 365

Average accounts receivable = 125,125,000

Accounts receivable at the end of 2019

ARend 2018 = $15,199,986