Exercises, Problems, Problem Solution Walkthrough Videos, Data Analytics

Activities, and many more assessment tools and resources are available for
practice in Wiley’s online courseware.

Note: All asterisked Questions, Exercises, and Problems relate to material in the
appendix to the chapter.

Questions
1. What may be included under the heading of “cash”?
2. In what accounts should the following items be classified?

a. Coins and currency.

b. Government bonds.
c. Certificate of deposit (matures in 5 months).
d. Cash in a bank that is in receivership.
e. NSF check (returned with bank statement).
f. Deposit in foreign bank (exchangeability limited).
g. Postdated checks.
h. Cash to be used for retirement of long-term bonds.
i. Deposits in transit.
j. 100 shares of Daimler (DEU) (intention is to sell in one year or less).
k. Savings and checking accounts.
l. Petty cash.
m. Stamps.
n. Travel advances.

3. Define a “compensating balance.” How should a compensating balance be

reported?
4. Feng Group reported in a recent annual report “Restricted cash for debt
redemption.” What section of the statement of financial position would report this
item?
5. What are the reasons that a company gives trade discounts? Why are trade
discounts not recorded in the accounts like cash discounts?
6. What are two methods of recording accounts receivable transactions when a cash
discount situation is involved? Which is more theoretically correct? Which is used in
practice more of the time? Why?
7. Discuss the accounting for sales allowances and how they relate to the concept of
variable consideration.
8. What are the basic problems that occur in the valuation of accounts receivable?
9. What is the theoretical justification of the allowance method as contrasted with the
direct write-off method of accounting for bad debts?
10. Indicate how the percentage-of-receivables method, based on an aging schedule,
accomplishes the objectives of the allowance method of accounting for bad debts.
What other methods, besides an aging analysis, can be used for estimating
uncollectible accounts?
11. Of what merit is the contention that the allowance method lacks the objectivity of
the direct write-off method? Discuss in terms of accounting’s measurement function.
12. Explain how the accounting for bad debts can be used for earnings management.
13. Because of calamitous earthquake losses, Bernstein Company, one of your client’s
oldest and largest customers, suddenly and unexpectedly became bankrupt.
Approximately 30% of your client’s total sales have been made to Bernstein Company
during each of the past several years. The amount due from Bernstein Company—
none of which is collectible—equals 22% of total accounts receivable, an amount that
is considerably in excess of what was determined to be an adequate provision for
doubtful accounts at the close of the preceding year. How would your client record the
write-off of the Bernstein Company receivable if it is using the allowance method of
accounting for bad debts? Justify your suggested treatment.
14. What is the normal procedure for handling the collection of accounts receivable
previously written off using the direct write-off method? The allowance method?
15. On January 1, 2022, Antorio SpA sells property for which it had paid €690,000 to
Sargent Company, receiving in return Sargent’s zero-interest-bearing note for
€1,000,000 payable in 5 years. What entry would Antorio make to record the sale,
assuming that Antorio frequently sells similar items of property for a cash sales price
of €640,000?
16. What is “imputed interest”? In what situations is it necessary to impute an
interest rate for notes receivable? What are the considerations in imputing an
appropriate interest rate?
17. Indicate three reasons why a company might sell its receivables to another
company.
18. When is the risks and rewards approach to recording the transfers of receivables
used? When should a transfer of receivables be recorded as a sale?
19. Moon Hardware is planning to factor some of its receivables. The cash received
will be used to pay for inventory purchases. The factor has indicated that it will
require a full guarantee (with recourse) on the sold receivables. Explain to the
controller of Moon Hardware what “full guarantee” is and how the guarantee will be
reflected in Moon’s financial statements after the sale of the receivables.