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Horngren’s Accounting, 10Ce

Chapter 9

Instructor’s Solutions Manual

Chapter 9 Receivables

Starters (5 min.)

S 9-1

Versi-Vista Berries Partial Balance Sheet September 30, 2017 ASSETS Current: Cash

$112,000

Accounts receivable

$75,000

Less: Allowance for doubtful accounts

2,800

72,200

Office supplies

1,200

Prepaid rent

650

Total current assets

$186,050

(5 min.)

S 9-2

Req. 1

General Journal DATE 2016 Dec. 31

ACCOUNT TITLES AND EXPLANATIONS Bad Debt Expense Allowance for Doubtful Accounts ($700,000 x 0.01)

DEBIT

CREDIT

7,000 7,000

Req. 2 Balance Sheet Accounts receivable Less: Allowance for doubtful accounts Accounts receivable, net

Copyright © 2017 Pearson Canada Inc.

$80,000 7,000 $73,000

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Chapter 9

(5-10 min.)

S 9-3

General Journal DATE 1.

2.

3.

4.

ACCOUNT TITLES AND EXPLANATIONS Accounts Receivable Service Revenue

DEBIT 800,000

Cash Accounts Receivable

840,000

CREDIT 800,000

840,000

Allowance for Doubtful Accounts Accounts Receivable

6,000

Bad Debt Expense Allowance for Doubtful Accounts ($800,000 x 0.01)

8,000

6,000

8,000

Balance sheet Accounts receivable* Less: Allowance for doubtful accounts** Accounts receivable, net

$34,000 9,000 $25,000

*$80,000 + $800,000 – $840,000 – $6,000 = $34,000 ** $7,000 – $6,000 +$8,000 = $9,000

(10-15 min.)

1. $5,850 2. $18,000 + $195,000 - $87,000 - $3,450 = $122,550

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Copyright © 2017 Pearson Canada Inc.

S 9-4

Horngren’s Accounting, 10Ce

Chapter 9

Instructor’s Solutions Manual

(10-15 min.)

S 9-5

Req. 1

General Journal DATE 2017 Dec.

31

ACCOUNT TITLES AND EXPLANATIONS

DEBIT

Bad Debt Expense Allowance for Doubtful Accounts ($5,000 – $4,000)

CREDIT

1,800 1,800

AGING SCHEDULE Age of Accounts Receivable 0-60 Days Amount receivable % uncollectible Amount uncollectible

Over 60 Days

$140,000

$8,000

 3%

 20%

$4,200

$1600

Total Receivables $148,000

=

$ 5,800

Req. 2 Allowance for Doubtful Accounts Bal. before adjustment

4,000

Bad debt expense

1,800

Balance needed based on aging schedule

5,800

Req. 3 $148,0003.5% = $5,180 $5,180 –$4,000 = $1,180 bad debt expense

General Journal DATE 2017 Dec.

31

ACCOUNT TITLES AND EXPLANATIONS Bad Debt Expense Allowance for Doubtful Accounts ($5,180 – $4,000)

Copyright © 2017 Pearson Canada Inc.

DEBIT

CREDIT

1,180 1,180

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Chapter 9

(10 min.)

S 9-6

1.

General Journal DATE 2016 Oct.

15

2017 May

2.

15

ACCOUNT TITLES AND EXPLANATIONS

DEBIT

Accounts Receivable—Marine Specialties Sales Revenue To record sale.

2,200

Bad Debt Expense Accounts Receivable—Marine Specialities To record write off of balance due from bankrupt client.

2,200

CREDIT 2,200

2,200

As evidenced with this example, the direct write-off method fails to attain matching of revenues and expenses incurred to earn those revenues. The Marine Specialties sale was generated in 2016, while the bad debt expense associated with that sale was incurred in 2017. (10 min.)

S 9-7

Req. 1

General Journal DATE Jun. 12

ACCOUNT TITLES AND EXPLANATIONS Bad Debt Expense Accounts Receivable Wrote off bad accounts.

DEBIT 6,000

CREDIT 6,000

Req. 2 ACCOUNTS RECEIVABLE AT JUNE 30 Balance, May 31 June revenue on account Less: Collections on account Write-offs Balance, June 30

$32,000 40,000 36,000 6,000 $30,000

Libbey likely does expect to collect all $30,000 of the accounts receivable because he rarely has delinquent accounts and has not set up an allowance for doubtful accounts. This indicates he does not expect to have uncollectible receivables.

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Copyright © 2017 Pearson Canada Inc.

Horngren’s Accounting, 10Ce

Chapter 9

Instructor’s Solutions Manual

(5-10 min.)

S 9-8

General Journal DATE Jan.

Dec.

19

31

31

ACCOUNT TITLES AND EXPLANATIONS

DEBIT

Allowance for Doubtful Accounts Accounts Receivable—Matt Reid Wrote off uncollectible account.

2,400

Accounts Receivable—Matt Reid Allowance for Doubtful Accounts Reinstated Matt Wilson’s account receivable.

2,400

Cash Accounts Receivable—Matt Reid Collected on account.

2,400

CREDIT 2,400

2,400

2,400

(5 min.) S 9-9 General Journal DATE Jun. 22

ACCOUNT TITLES AND EXPLANATIONS Cash Card Discount Expense Sales Revenue Recorded MasterCard sales.

Copyright © 2017 Pearson Canada Inc.

DEBIT 1,940 60

CREDIT

2,000

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Chapter 9

(10 min.)

S 9-10

General Journal DATE Jul. 17

Jul.

Jul.

17

17

ACCOUNT TITLES AND EXPLANATIONS Cash Credit Card Discount Expense Sales Revenue Recorded VISA credit card sales ($20,000 x 0.03)

POST REF.

4,800 200 5,000

Cash Debit Card Service Fee Sales Revenue Recorded debit card sales ($16,0000.02)

$8,000 ($200,0000.086/12)

Note 2 -

$247 ($30,0000.0475/365)

Note 3 -

$296 ($20,0000.0960/365)

Note 4 -

$1250 ($100,0000.053/12)

CREDIT

20,000

Accounts Receivable—non-bank credit cards Credit Card Discount Expense Sales Revenue Recorded non-bank credit card sales ($5,000 x 0.04)

Note 1 -

DEBIT 19,400 600

15,680 320 16,000

(10 min.)

S 9-11

(5-10 min.)

S 9-12

General Journal DATE 1. May 6

2. Aug.

ACCOUNT TITLES AND EXPLANATIONS Notes Receivable—J. Schroeder Cash

POST. REF.

Cash Note Receivable—J. Schroeder Interest Revenue* * ($200,0000.04 90/365)

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4

Copyright © 2017 Pearson Canada Inc.

DEBIT 200,000

CREDIT 200,000

201,973 200,000 1,973

Horngren’s Accounting, 10Ce

Chapter 9

Instructor’s Solutions Manual

(20-25 min.)

S 9-13

1.

General Journal DATE Oct. 2

ACCOUNT TITLES AND EXPLANATIONS Note Receivable Accounts Receivable—M. Bonicalzi Set up 4-month note for an old account.

POST. REF.

DEBIT 12,900

CREDIT 12,900

2.

$12,900 × .04 ÷ 12 = $43 per month – so for 3 months, interest accrued is $43 × 3 = $129

3.

There is one month left on the loan so there is $43 of interest which will be earned in 2017. (20-25 min.)

S 9-14

DOLLAR AMOUNTS IN THOUSANDS

a.

Acid-test ratio

Cash + Short-term investments + Net current receivables = = =

Total current liabilities $860 + $330 + $440 $1,796 + $290 $1,630 $2,086

= 0.78 An acid-test ratio of 0.78 is fair. b.

One day’s sales Days’ sales in average receivables

=

Net sales revenue 365

=

Average net accounts receivable = =

One day’s sales

$7,720 365

=

$21.15

($440 + $300) / 2 =

$21.15

17.3 days

17 days’ sales in average receivables is very good relative to credit terms of net 30, but this should also be compared to previous years. Investors might want to question the increase in inventory from 2016 to 2017.

Copyright © 2017 Pearson Canada Inc.

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Chapter 9

(continued)

S 9-14

$2,190

Total current assets c.

Current = ratio

Total current liabilities

$860 + $330 + $440 + $380 + $180 $1,796 + $290

=

=

1.05

$2,086 The current ratio should normally be above 1.0. Vision Electronics’ current ratio is fair.

d.

Debt ratio

=

Total liabilities Total assets

=

$2,086 + $20 $2,190 + $820

=

0.70

Investors and lenders get nervous when the debt ratio exceeds 0.50, so Vision’s ratio of 0.70 seems high.

e.

Gross margin percentage

=

Gross margin Net sales revenue

=

$7,720 – $4,800 $7,720

=

38%

The gross margin percentage should be compared with that of other companies in the same industry and to historic Vision gross margin percentages.

f.

Rate of inventory turnover

=

Cost of goods sold Average inventory

=

$4,800 ($380 + $320) / 2

=

13.71 times

Inventory turnover should be compared to that of other companies in the industry and to Vision’s historic inventory turnover rates. The rapid increase in inventory this year will probably lead to an increase in this year’s rate of inventory turnover. This may be a concern to investors and lenders.

(15-20 min.)

S 9-15

Berry’s Bait has the higher number of days to collect its receivables, which is unfavourable. Berry’s Bait is not looking good in 2017 as it takes longer to collect its receivables.

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Copyright © 2017 Pearson Canada Inc.

Horngren’s Accounting, 10Ce

Chapter 9

Instructor’s Solutions Manual

(5 min.)

S 9-16

Yes. The value presented on the balance sheet is the gross amount of receivables owed to a company by its customers less an estimate of the accounts the company does not think it can collect. The gross receivable value is readily available and can be accurately determined. However, the allowance for doubtful accounts is estimated. Thus, if companies do not take care when determining this amount, the number will be less reliable. However, most companies use an aging schedule to determine their uncollectible accounts and also look at historical trends to ensure a good estimate. Thus, the value presented for net accounts receivable on the balance sheet is both relevant, as it reflects fair value, and reliable, as it is an accurate representation of fair value.

Copyright © 2017 Pearson Canada Inc.

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Chapter 9

Exercises (10-20 min.)

E 9-1

Delainey’s Hardscaping Partial Balance Sheet December 31, 2017 ASSETS Current: Cash

$15,000

Accounts receivable

$51,000

Less: Allowance for Doubtful Accounts

3,500

Inventory

47,500 22,000

Supplies

1,440

Notes receivable, due August 31, 2018

12,000

Total Current Assets

$97,940

(10 min.)

E 9-2

BooBoo’s Home Health Care Partial Balance Sheet April 30, 2017 ASSETS Current: Cash

$98,700

Accounts receivable

$51,000

Less: Allowance for Doubtful Accounts Notes receivable, due July 1, 2017 Inventory

48,500 41,000 122,750

Prepaid Expenses

2,100

Total Current Assets

9-706

2,500

$313,050

Copyright © 2017 Pearson Canada Inc.

Horngren’s Accounting, 10Ce

Chapter 9

Instructor’s Solutions Manual

(15 min.)

E 9-3

Req. 1

General Journal DATE Mar. 31

Mar.

Mar.

Mar.

31

31

31

ACCOUNT TITLES AND EXPLANATIONS Cash Accounts Receivable Sales Revenue

POST. REF.

DEBIT 5,500 60,000

CREDIT

65,500

Cash Accounts Receivable

53,000 53,000

Bad Debt Expense Allowance for Doubtful Accounts ($60,000 × 0.03)

1,800

Allowance for Doubtful Accounts Accounts Receivable

1,250

1,800

1,250

Req. 2 Feb. Mar.

Accounts Receivable 28 25,500 60,000 31 31,250

53,000 1,250

Allowance for Doubtful Accounts 1,250 Feb. 28 1,300 1,800 Mar. 31 1,850

Net accounts receivable = $29,400 ($31,250 – $1,850) Big White Ski Equipment expects to collect an amount approximating the net receivable.

Copyright © 2017 Pearson Canada Inc.

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Chapter 9

(30-45 min.)

E 9-4

Req. 1

AGE OF ACCOUNTS RECEIVABLE Customer

0–30 DAYS

31–60 DAYS

61–90 DAYS

OVER 90 DAYS

TOTAL RECEIVABLES

1,400

1,400

Dr. Evans Dr. Hall Dr. Kim

3,200

Dr. Murray

3,200 6,700

6,700

Req. 2 ($3,200 × 0.02) + ($6,700 × 0.15) + ($1,400 × 0.50) = $1,769

Req. 3 Accounts Receivable Less: Allowance for Doubtful Accounts Net Realizable Value

$ 11,300 1,769 $ 9,531

Req. 4 Lui Dental is within normal guidelines for estimating bad debts. It has allowed $1,769 for delinquent accounts and if it needs $1,400 of that to absorb the writeoff it still would have $369 to allow for any subsequent write-offs. However, if the Dr. Murray account can’t be collected, the allowance may not be large enough.

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Copyright © 2017 Pearson Canada Inc.

Horngren’s Accounting, 10Ce

Chapter 9

Instructor’s Solutions Manual

(15-30 min.)

E 9-5

Req. 1 Allowance for Doubtful Accounts: Credit balance needed ($140,0000.005)..........................................................................

$ 700

($80,0000.020)............................................................................

1,600

($70,0000.060)............................................................................

4,200

($10,0000.500)............................................................................

5,000 $11,500

Unadjusted balance...................................................................................

8,900

Adjusting entry amount............................................................................

$ 2,600

General Journal DATE 2017 Dec.

31

ACCOUNT TITLES AND EXPLANATIONS Adjusting Entry Bad Debt Expense Allowance for Doubtful Accounts

POST. REF.

Allowance for Doubtful Accounts Bal. before adj. Adj. entry

DEBIT

CREDIT

2,600 2,600

8,900 2,600 11,500

Copyright © 2017 Pearson Canada Inc.

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Chapter 9

(continued)

E 9-5

Req. 2 Balance sheet: Current assets: Accounts receivable, net of allowance for doubtful accounts of $11,500

$288,500*

*Another way to report accounts receivable is: Accounts Receivable $300,000 Less: Allowance for Doubtful Accounts 11,500

$288,500

Req. 3 Allowance for Doubtful Accounts: Credit balance needed

$11,500

Unadjusted balance (debit).......................................................................

(900)

Adjusting entry amount (credit)...............................................................

$ 12,400

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Copyright © 2017 Pearson Canada Inc.

Horngren’s Accounting, 10Ce

Chapter 9

Instructor’s Solutions Manual

(20 min.)

E 9-6

Req. 1

General Journal a)

DATE 2017 Dec. 31

b)

c)

d)

31

31

31

ACCOUNT TITLES AND EXPLANATIONS Accounts Receivable Sales Revenue

POST. REF.

DEBIT 422,400

CREDIT 422,400

Cash Accounts Receivable

415,600 415,600

Allowance for Doubtful Accounts Accounts Receivable

4,290

Bad Debt Expense Allowance for Doubtful Accounts ($422,400 x 0.005)

2,112

4,290

2,112

Req. 2

Open Bal.

Accounts Receivable 40,500 422,400

415,600 4,290

43,010

Allowance for Doubtful Accounts Open Bal. 4,310 4,290 2,112 2,132

Req. 3

AGE OF ACCOUNTS RECEIVABLE OVER 90 DAYS

0–30 DAYS

31–60 DAYS

61–90 DAYS

$26,400

$6,600

$5,500

$4,510

Percent uncollectible

× 1%

× 1%

× 3%

× 40%

Amount uncollectible

$264

$66

$165

$1,804

Amount receivable

Copyright © 2017 Pearson Canada Inc.

TOTAL RECEIVABLES $43,010 $2,299

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Chapter 9

Req. 4

(continued) Allowance for Doubtful Accounts Open Bal. 4,290

E 9-6

4,310 2,112 167 2,299

General Journal DATE 2017 Dec. 31

ACCOUNT TITLES AND EXPLANATIONS Bad Debt Expense Allowance for Doubtful Accounts ($2,299 – $2,132)

POST. REF.

Balance Sheet:

$40,711*

*Another way to report accounts receivable is: Accounts Receivable Less: Allowance for Doubtful Accounts

9-712

CREDIT 167

Req. 5

Current assets: Accounts receivable net of allowance for doubtful accounts of $2,299

DEBIT 167

$43,010 2,299 $40,711

Copyright © 2017 Pearson Canada Inc.

Horngren’s Accounting, 10Ce

Chapter 9

Instructor’s Solutions Manual

(15 min.)

E 9-7

Req. 1

General Journal ACCOUNT TITLES AND EXPLANATIONS a.

b.

c.

d.

e.

DEBIT

Accounts Receivable—Brodie Tru...