Chapter 8 Solutions for Recommended Practice PDF

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Chapter 8 Receivables, Bad Debt Expense, and Interest Revenue

ANSWERS TO QUESTIONS 2.

Before discontinuing its credit card program, Kohl’s Corporation would have compared the gross profit given up as a result of lost credit card sales to the expenses given up (e.g., bad debts, wages and administration, interest). Presumably, Kohl’s cancelled its private credit card program because the extra expenses to run the credit card program exceeded the gross profit earned from it. In making this decision, Kohl’s would note that consumers could use national credit cards (such as Visa and MasterCard) rather than the Kohl’s credit card.

ANSWERS TO MINI-EXERCISES M8–13 a. b. c.

Receivables Turnover Ratio + +

Days to Collect + -

ANSWERS TO EXERCISES E8–1 (a) (b)

dr Bad Debt Expense (+E,-SE) ................................ 9,750 cr Allowance for Doubtful Accounts (+xA,-A) ...

9,750

dr Allowance for Doubtful Accounts (-xA,+A) ........... 1,000 cr Accounts Receivable (-A) .............................

1,000

Phillips et al. Fundamentals of Financial Accounting, 4Ce Copyright McGraw-Hill Ryerson, 2015

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E8–3 Req. 1 Dec. 10, 2014 dr Allowance for Doubtful Accounts (-xA,+A)............ cr Accounts Receivable (-A) .......................... Dec. 31, 2014 dr Bad Debt Expense (+E,-SE) ................................ cr Allowance for Doubtful Accounts (+xA,-A) . ($1,700 = $85,000 x 2%)

1,500 1,500

1,700 1,700

Req. 2 Income statement: Operating expenses: Bad Debt Expense ....................................................... Balance sheet: Current assets Accounts Receivable ................................... Less: Allowance for Doubtful Accounts ......

$1,700

$25,500* (1,000)** $24,500

* ($25,500 = $10,000 + $85,000 - $68,000 - $1,500) ** ($1,000 = $800 - $1,500 + $1,700) Req. 3 The 2% rate on credit sales appears to be too low because the Allowance for Doubtful Accounts had a balance of only $800 at the beginning of 2014, yet accounts totalling $1,500 were written off during 2014. This implies that the rate of uncollectible sales on credit was greater than 2%.

Phillips et al. Fundamentals of Financial Accounting, 4Ce Copyright McGraw-Hill Ryerson, 2015

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E8–4 (a) (b)

dr Allowance for Doubtful Accounts (-xA,+A) ........... cr Accounts Receivable (-A) .............................

300

dr Accounts Receivable (+A) .................................... cr Allowance for Doubtful Accounts (+xA,-A) ...

300

dr Cash (+A)............................................................. cr Accounts Receivable (-A) .............................

300

300 300

300

E8–8 Req.1 November 30, 2014 Adjusting Journal Entry: dr Bad Debt Expense (+E,-SE) ............................................. cr Allowance for Doubtful Accounts (+xA,-A) .............. ($500 = $100,000 x 0.005)

500 500

Req. 2 The adjustment for estimated Bad Debt Expense for 2014 is computed as follows:

Accounts Receivable Estimated Uncollectible (%) Estimated Uncollectible ($)

Total $ 89,000 $ 3,850

1-30 $ 75,000 x1% $ 750

31-90 $ 10,000 x 15 % $ 1,500

> 90 $ 4,000 x 40 % $ 1,600

Req. 3 Allowance for Doubtful Accounts 1,600 Unadj. Bal. 2,250 Adjustment 3,850 Desired Bal. The amount of Bad Debt Expense for the year 2014 should be $2,250 ($3,850 – $1,600). December 31, 2014 Adjusting Journal Entry: dr Bad Debt Expense (+E,-SE) ............................................. cr Allowance for Doubtful Accounts (+xA,-A) ..............

Phillips et al. Fundamentals of Financial Accounting, 4Ce Copyright McGraw-Hill Ryerson, 2015

2,250 2,250

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Req. 4 The accounts related to accounts receivable can be shown one of two ways on the December 31, 2014 balance sheet: Accounts Receivable Less: Allowance for Doubtful Accounts Accounts Receivable, net of Allowance

89,000 (3,850)

OR

Accounts Receivable, net of Allowance for Doubtful Accounts of $3,850

85,150

85,150

Phillips et al. Fundamentals of Financial Accounting, 4Ce Copyright McGraw-Hill Ryerson, 2015

Solutions Manual

ANSWERS TO GROUP A PROBLEMS PA8–4 Req. 1 a. Assets Accounts Receivable

=

Liabilities

+

+40,000

dr Accounts Receivable (+A) cr Service Revenue (+R,+SE)

Shareholders’ Equity Service Revenue (+R) +40,000

40,000 40,000

b. Assets Allowance for Doubtful Accounts (+xA)

=

Liabilities

+

–400

dr Bad Debt Expense (+E,-SE) cr Allowance for Doubtful Accounts (+xA, A)

Shareholders’ Equity Bad Debt Expense (+E)

–400

400 400

–

c. Assets Cash Accounts Receivable

=

Liabilities

+

Shareholders’ Equity

+20,000 –20,000

dr Cash (+A) cr Accounts Receivable (–A)

20,000 20,000

d. Assets Accounts Receivable Allow. for Doubtful Accts. (-xA)

=

Liabilities

+

Shareholders’ Equity

–100 +100

dr Allowance for Doubtful Accounts (xA,+A) cr Accounts Receivable (–A)

100 100

e. Assets Accounts Receivable

=

Liabilities

+

+30,000

dr Accounts Receivable (+A) cr Service Revenue (+R,+SE)

Shareholders’ Equity Service Revenue (+R) +30,000

30,000 30,000

f. Assets Allowance for Doubtful Accounts (+xA)

=

Liabilities

–300

dr Bad Debt Expense (+E,-SE) cr Allowance for Doubtful Accounts (+xA,–A) Phillips et al. Fundamentals of Financial Accounting, 4Ce Copyright McGraw-Hill Ryerson, 2015

+

Shareholders’ Equity Bad Debt Expense (+E)

–300

300 300 Solutions Manual

PA8–4 (continued) Req. 1 (continued) g. Assets Cash Note Receivable

=

Liabilities

+

Shareholders’ Equity

–2,400 +2,400

dr Note Receivable (+A) cr Cash (–A)

2,400 2,400

h. Assets Accounts Receivable Allow. for Doubt. Accts. (+xA) Cash Accounts Receivable

=

Liabilities

+

Shareholders’ Equity

+100 –100 +100 –100

dr Accounts Receivable (+A) cr Allowance for Doubtful Accounts (+xA,–A) dr Cash (+A) cr Accounts Receivable (–A)

100 100 100 100

i. Allowance for Doubtful Accounts AJE = $1,678 desired (see calculation below) – $1,200 current = $ 478 adjustment Total 0-30 $ 18,000 $ 7,300

Total Accounts Receivable Estimated Uncollectible (%) Estimated Uncollectible ($) Assets Allowance for Doubtful Accounts (+xA)

31-60 61-90 $ 8,480 $ 1,020

× 2% $ 1,678 =

× 10%

$ 146

Liabilities

$ 848 +

–478

dr Bad Debt Expense (+E,-SE) cr Allowance for Doubtful Accounts (+xA, –A)

> 90 $ 1,200

× 20%

× 40%

$ 204

$ 480

Shareholders’ Equity Bad Debt Expense (+E)

–478

478 478

j. Interest = Principal x Rate x Time = $2,400 x 6% x 1/12 = $12 Assets Interest Receivable

= +12

dr Interest Receivable (+A) cr Interest Revenue (+R,+SE)

Phillips et al. Fundamentals of Financial Accounting, 4Ce Copyright McGraw-Hill Ryerson, 2015

Liabilities

+

Shareholders’ Equity Interest Revenue (+R)

+12

12 12

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PA8–4 (continued) Req. 2 WEB WIZARD, INC. Partial Balance Sheet At March 31, 2014 Assets Current assets: Accounts Receivable Less: Allowance for Doubtful Accounts Accounts Receivable, Net of Allowance Note Receivable Interest Receivable

$ 18,000 1,678 $ 16,322 2,400 12

Req. 3 Web Wizard would report Bad Debt Expense before Income from Operations, and Interest Revenue after Income from Operations.

Phillips et al. Fundamentals of Financial Accounting, 4Ce Copyright McGraw-Hill Ryerson, 2015

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ANSWER TO COMPREHENSIVE PROBLEM C8–1 Req. 1

Customer Anjuli Stores Tony’s Pharmacy Travis Pharmaco Wal-Mart TOTAL

Total Balance $2,000 3,000 1,500 0 $6,500

June (one month)

May (two months) $2,000

April (three months)

Greater than three months) $3,000

$1,500 $0

$2,000

$1,500

$3,000

Req. 2 Accounts Receivable Estimated Uncollectible (%) Estimated Uncollectible ($)

Total $ 6,500 $ 1,600

2 months $ 2,000 x5% $ 100

3 months $ 1,500 x 20 % $ 300

> 3 months $ 3,000 x 40 % $ 1,200

Req. 3 OKAY OPTICAL, INC. Partial Balance Sheet At June 30, 2014 Accounts Receivable, Net of Allowance of $1,600……………………..$4,900 OKAY OPTICAL, INC. Partial Income Statement For the Six Months Ended June 30, 2014 Sales Revenue……………….…………..$33,000 ($20,000 + $3,000 + $8,000 + $2,000) Cost of Goods Sold………...……………. 19,000 ($12,000 + $1,400 + $4,400 + $1,200) Gross Profit……………….………………. 14,000 Bad Debt Expense……………………… 1,600 Income from Operations…………………$12,400

Phillips et al. Fundamentals of Financial Accounting, 4Ce Copyright McGraw-Hill Ryerson, 2015

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C8–1 (continued) Req. 4 OOI did not accurately estimate the precise amounts that would be collected from each customer, yet the total estimate was accurate. That is, OOI underestimated the amount collectible from Tony’s Pharmacy (40% of $3,000, or $1,200, was estimated uncollectible where it later turned out to be collectible in full). It overestimated the amount collectible from Travis Pharmaco (20% of $1,500, or $300, was estimated uncollectible where it later turned out to show that $1,500 was uncollectible). Looking at Travis Pharmaco and Tony’s Pharmacy combined, the estimated bad debt for both customers was $1,500, which is the same amount the company wrote off.

Phillips et al. Fundamentals of Financial Accounting, 4Ce Copyright McGraw-Hill Ryerson, 2015

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