C07 - Chapter 7 of FA 11th edition Solutions PDF

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Summary

Chapter 7 of FA 11th edition Solutions...

Description

CHAPTER 7 CASH AND RECEIVABLES ASSIGNMENT CLASSIFICATION TABLE Topics

Brief Exercises

Exercises

Problems

1

Accounting for cash and financial assets.

1, 3, 4

1, 2

1

2

Accounting for accounts receivable, sales discounts, and other allowances.

2, 5, 6, 7, 8, 9

3, 4, 5, 6, 7

3

Bad debts and allowance for doubtful accounts.

10, 11

8, 9, 10, 11, 12, 13

2, 3, 4, 5, 6, 12, 13

4

Accounting for notes receivable.

12, 13, 14, 15, 16, 17

14, 15, 16

7, 8, 9, 10

5

Assignment and factoring of accounts receivable.

17, 18, 19, 20

7, 17, 18, 19, 20

10, 11, 13

6

Analysis of receivables.

21, 22

21, 22

1, 10, 12, 13

7

Petty cash and bank reconciliations.*

23, 24, 25, 26

23, 24, 25

14, 15, 16, 17

*This material is covered in an Appendix to the chapter.

ASSIGNMENT CHARACTERISTICS TABLE Item E7-1 E7-2 E7-3 E7-4 E7-5 E7-6 E7-7 E7-8 E7-9 E7-10 E7-11 E7-12 E7-13 E7-14 E7-15 E7-16 E7-17 E7-18 E7-19 E7-20 E7-21 E7-22 *E7-23 *E7-24 *E7-25

Description Determining cash balance. Determine cash balance. Financial statement presentation of receivables. Determine ending accounts receivable. Record sales gross and net. Record sales gross and net. Journalizing various receivable transactions including factoring. Bad debts – recording. Calculating allowance for doubtful accounts. Bad debt reporting. Calculating bad debts and preparing journal entries. Bad debts—aging. Interest bearing and non-interestbearing notes. Non-interest-bearing note. Notes receivable with zero or low interest rates. Notes receivable with zero interest rate. Assigned accounts receivable. Transfer of receivables with recourse. Transfer of receivables with recourse. Securitization transaction. Determine receivables balance, turnover ratio. Accounts receivable turnover ratio. Petty cash. Bank reconciliation and adjusting entries. Bank reconciliation and adjusting entries.

Level of Difficulty

Time (minutes)

Moderate Moderate Simple

10-15 10-15 10-15

Simple Simple Simple Moderate

10-15 15-20 15-20 15-20

Simple Simple

5-10 5-10

Simple Simple

10-15 15-20

Simple Moderate

10-15 20-25

Moderate Moderate

15-20 30-35

Moderate Simple Simple Moderate Moderate Moderate

15-20 10-15 10-15 15-20 20-25 10-15

Moderate Simple Moderate

10-15 5-10 15-20

Simple

15-20

ASSIGNMENT CHARACTERISTICS TABLE (CONTINUED) Item P7-1 P7-2 P7-3 P7-4 P7-5 P7-6 P7-7 P7-8 P7-9 P7-10 P7-11 P7-12 P7-13 *P7-14 *P7-15 *P7-16 *P7-17

Description Determine proper cash balance. Bad debt reporting. Bad debt reporting—aging. Bad debt reporting. Bad debt reporting. Journalize various accounts receivable transactions. Notes receivable journal entries. Instalment note receivable. Several notes receivable. Comprehensive receivables. Comprehensive receivables. Bad debt reporting issues. Comprehensive including factoring. Petty cash, bank reconciliation. Bank reconciliation and adjusting entries. Bank reconciliation and adjusting entries. Bank reconciliation.

Level of Difficulty

Time (minutes)

Simple Moderate Moderate Moderate Complex Simple

20-25 20-25 20-30 25-35 25-35 15-20

Moderate Moderate Complex Moderate Moderate Moderate Complex Moderate Moderate

20-30 30-35 40-50 25-35 15-20 25-30 30-35 20-25 20-30

Moderate

20-30

Moderate

25-35

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 7-1 Creative requires a higher amount of cash on hand in comparison to Technology. Creative should maintain a significant amount of cash on hand to service interest and upcoming debt repayments, finance inventory and pay expenses in the months preceding the holiday season, and purchase equipment needed to sustain current operations. Maintaining a significant amount of cash on hand will also minimize Creative’s borrowing requirements. In comparison, Technology has no debt repayments to service, and requires only very few capital expenditures to maintain its noncurrent assets used in current operations. As a mature, successful software development company, Technology likely has excess cash from operating activities which should be invested to try to minimize “idle” cash. Having significant “idle” cash on hand may eventually lead to wasteful spending or poor investment decisions by Technology’s management.

BRIEF EXERCISE 7-2 1. Implement more selective credit-granting policies: perform more rigorous credit checks prior to granting credit, require cash on delivery (COD) from new customers, establish credit limits for each account. 2. Implement more rigorous collection policies: establish procedures for internal collections personnel to follow (including follow up phone calls, collection letters), hold pending orders until payment is received, and/or refer collections to an external collection agency. 3. Charge interest on overdue accounts.

BRIEF EXERCISE 7-3 Cash in bank—savings account Cash on hand Chequing account balance Cash in foreign bank Debt instrument with maturity date of three months from the date acquired Cash and cash equivalents under ASPE

$56,200 14,800 46,300 90,000 12,000 $219,300

If Stowe follows IFRS, preferred shares acquired shortly before their maturity date would qualify as a cash equivalent. Therefore, under IFRS, cash and cash equivalents would total $234,800 ($219,300+ $15,500).

BRIEF EXERCISE 7-4 1. 2. 3. 4. 5.

(a) Current, (b) Trade receivable (a) Current, (b) Not a receivable; current liability (a) Current, (b) Nontrade receivable (a) Noncurrent, (b) Trade receivable (a) Noncurrent, (b) Nontrade receivable

BRIEF EXERCISE 7-5 05/15/17 No entry required 05/31/17 Accounts Receivable........................................................ 3,800 Sales Revenue......................................................... 3,800

BRIEF EXERCISE 7-6 Accounts Receivable Sales Revenue

40,000

Cash Sales Discounts Accounts Receivable

34,650 350

Cash

40,000

35,000 5,000

Accounts Receivable

5,000

BRIEF EXERCISE 7-7 Accounts Receivable Sales Revenue ($40,000 X .99)

39,600

Cash

34,650

39,600

Accounts Receivable ($35,000 X .99) Accounts Receivable Sales Discounts Forfeited Cash

34,650 50 50 5,000

Accounts Receivable

5,000

BRIEF EXERCISE 7-8 Accounts Receivable Sales Revenue

110,000

Cash Sales Discounts Accounts Receivable ($1,100 = $110,000 x 1%)

108,900 1,100

110,000

110,000

BRIEF EXERCISE 7-9 Accounts Receivable Sales Revenue ($110,000 X .99)

108,900

Cash

108,900

108,900

Accounts Receivable

108,900

BRIEF EXERCISE 7-10 Bad Debt Expense............................................................ 37,400 Allowance for Doubtful Accounts.......................... ($42,000 – $4,600)

37,400

BRIEF EXERCISE 7-11 Bad Debt Expense............................................................ 45,000 Allowance for Doubtful Accounts.......................... ($42,000 + $3,000)

45,000

BRIEF EXERCISE 7-12 (a) 11/1/17

Notes Receivable.............................................................. 20,000 Sales Revenue......................................................... 20,000

12/31/17 Interest Receivable........................................................... 200 Interest Income........................................................ 200 ($20,000 X 6% X 2/12) 5/1/18

(b) 1/1/18 5/1/18

Cash ................................................................................... 20,600 Notes Receivable..................................................... 20,000 Interest Receivable.................................................. 200 Interest Income........................................................ 400 ($400 = $20,000 X 6% X 4/12)

Interest Income................................................................. 200 Interest Receivable.................................................. 200 Cash ................................................................................... 20,600 Notes Receivable..................................................... 20,000 Interest Income........................................................ 600

BRIEF EXERCISE 7-13 Notes Receivable.............................................................. 47,573 Cash..........................................................................

47,573

Cash ................................................................................... 49,000 Notes Receivable..................................................... Interest Income........................................................

47,573 1,427

BRIEF EXERCISE 7-14 (a) Notes Receivable.............................................................. 30,053 Cash..........................................................................

30,053

Notes Receivable.............................................................. 3,005 Interest Income........................................................ ($30,053 X 10%)

3,005

Notes Receivable.............................................................. 3,306 Interest Income........................................................ ([$30,053 + $3,005] X 10%)

3,306

Notes Receivable.............................................................. 3,636 Interest Income........................................................ ([$30,053 + $3,005 + $3,306] X 10%)

3,636

Cash ................................................................................... 40,000 Notes Receivable....................................................... (b)

40,000

Take the present value of the cash flows and divide by the face value of the note ($30,053 / $40,000) gives a factor of .75132. Under the table for the present value of a single payment, for three years, the factor .75132 appears under the column for 10%. Using a financial calculator: PV $ (30,053) I ? Yields 10.0% N 3 PMT 0 FV 40,000 Type 0 Excel formula: =RATE(nper,pmt,pv,fv,type)

BRIEF EXERCISE 7-15 (a) Notes Receivable............................................. 3,861 Accumulated Depreciation – Equipment ($15,000 – $2,500)..................................... 12,500 Equipment................................................. 15,000 Gain on Sale of Equipment...................... 1,361 Using a financial calculator: PV ? Yield $(3,861) I 9% N 3 PMT 0 FV $5,000 Type 0 Excel formula: =PV(rate,nper,pmt,fv,type) *

Present value of the note: $5,000 X PVF3, 9% = $5,000 X .77218 = $3,861 Discount on Note Receivable = $5,000 - $3,861 = $1,139 Fair Value of Equipment (present value of note) Carrying Amount Gain on Sale of Equipment

$3,861 2,500 $1,361

(b) Since Aitocs follows IFRS, the effective interest method is required for recognizing interest income. Interest for Year 1: Notes Receivable............................................. Interest Income......................................... ($3,861 X 9% = $347) Interest for Year 2: Notes Receivable............................................. Interest Income......................................... ([$3,861 + $347] X 9% = $379)

347 347

379 379

BRIEF EXERCISE 7-15 (CONTINUED) (b) (continued): Interest for Year 3: Notes Receivable............................................. Interest Income......................................... ([$3,861 + $347 + $379] X 9% = $413) (c) Collection of Note at Maturity: Cash.................................................................. Notes Receivable.....................................

413 413

5,000 5,000

BRIEF EXERCISE 7-16 (a) Notes Receivable............................................. 3,861 Accumulated Depreciation - Equipment ($15,000 – $2,500)..................................... 12,500 Equipment................................................. 15,000 Gain on Sale of Equipment...................... 1,361 Using a financial calculator: PV ? Yield $(3,861) I 9% N 3 PMT 0 FV $5,000 Type 0 Excel formula: =PV(rate,nper,pmt,fv,type) *

Present value of the note: $5,000 X PVF3, 9% = $5,000 X .77218 = $3,861 Discount on Note Receivable = $5,000 - $3,861 = $1,139 Fair Value of Equipment (present value of note) Carrying Amount Gain on Sale of Equipment

(b) Interest for Year 1: Notes Receivable............................................. Interest Income......................................... ($1,139 X 1/3 = $380) Interest for Year 2: Notes Receivable............................................. Interest Income......................................... ($1,139 X 1/3 = $380)

$3,861 2,500 $1,361

380 380

380 380

BRIEF EXERCISE 7-16 (CONTINUED) (b) (continued): Interest for Year 3: Notes Receivable............................................. Interest Income......................................... ($1,139 - $380 - $380 = $379) *Adjusted due to rounding. (c) Collection of Note at Maturity: Cash.................................................................. Notes Receivable.....................................

379* 379*

5,000 5,000

BRIEF EXERCISE 7-17 Alpha Inc. Cash ................................................................................... 2,480,000 Finance Expense ($3,000,000 X 4%)............................................................ 120,000 Notes Payable.......................................................... 2,600,000 Alberta Provincial Bank Notes Receivable.............................................................. 2,600,000 Cash.......................................................................... 2,480,000 Finance Revenue..................................................... 120,000

BRIEF EXERCISE 7-18 Landstalker Cash ................................................................................... 682,500 Due from Factor................................................................ 37,500 Loss on Sale of Receivables............................................ 30,000 Accounts Receivable.............................................. 750,000 Leander Accounts Receivable........................................................ 750,000 Due to Customer...................................................... 37,500 Financing Revenue.................................................. 30,000 Cash.......................................................................... 682,500

BRIEF EXERCISE 7-19 Cash ................................................................................... 682,500 Due from Factor................................................................ 37,500 Loss on Sale of Receivables............................................ 39,000 Accounts Receivable.............................................. 750,000 Recourse Liability.................................................... 9,000

BRIEF EXERCISE 7-20 Cash ................................................................................... 620,000 Loss on Sale of Receivables............................................ 6,000 Accounts Receivable.............................................. 600,000 Servicing Liability.................................................... 26,000

BRIEF EXERCISE 7-21 The accounts receivable turnover ratio is calculated as follows: Net Sales Average Trade Receivables (net) $297,824 $22,693 + 25,484 2

= 12.36 times

The average collection period for accounts receivable in days is 365 days = 365 = 29.53 days Accounts Receivable Turnover 12.36

BRIEF EXERCISE 7-22 2013: The accounts receivable turnover ratio is calculated as follows: Net Sales Average Trade Receivables (net) $20,400 $2,995 + $2,978 2

= 6.83 times

The average collection period for accounts receivable in days is 365 days = Accounts Receivable Turnover

365 6.83

= 53.44 days

2014: The accounts receivable turnover ratio is calculated as follows: Net Sales Average Trade Receivables (net) $21,042 $2,999 + $2,995 2

= 7.02 times

The average collection period for accounts receivable in days is 365 days = Accounts Receivable Turnover

365 7.02

= 51.99 days

As indicated from these ratios, BCE Inc.’s accounts receivable turnover ratio improved in 2014 (to 7.02 times from 6.83 times in 2013). BCE’s average collection period improved as well, to 51.99 days from 53.44 days in 2013).

*BRIEF EXERCISE 7-23 Petty Cash......................................................................... 400 Cash..........................................................................

400

Supplies............................................................................. 174 Inventory............................................................................ 167 Cash Over and Short........................................................2 Cash ($400 – $57)....................................................

343

*BRIEF EXERCISE 7-24 (a)

Petty Cash......................................................................... 200 Cash.......................................................................... 200

(b)

Cash ................................................................................... 150 Petty Cash................................................................ 150

Or if combined with the entry above, for (b) this would produce: Supplies............................................................................. 174 Inventory............................................................................ 167 Cash Over and Short........................................................2 Cash ($400 – $57 – $150)........................................ Petty Cash................................................................

193 150

*BRIEF EXERCISE 7-25 (1) Added to balance per bank statement (a) (2) Not needed for reconciliation (e) (3) Added to balance per books (c) (4) Deducted from balance per books (d) (5) Not needed for reconciliation (e) (6) Deducted from balance per bank statement (b) (7) Deducted from balance per books (d)

*BRIEF EXERCISE 7-26 Item (3)

Cash ................................................................................... 31 Interest Income........................................................ 31

(4)

Office Expense - Bank Charges....................................... 20 Cash.......................................................................... 20

(7)

Accounts Receivable........................................................ 280 Cash.......................................................................... 280

SOLUTIONS TO EXERCISES EXERCISE 7-1 (10-15 minute...