2100 Solutions - CH8

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Chapter 8: Reporting and Analysing Receivables

Kimmel, Weygandt, Kieso, Trenholm

Financial Accounting, Second Canadian Edition

CHAPTER 8

Reporting and Analysing ReceivablesASSIGNMENT CLASSIFICATION TABLE

Study ObjectivesQuestionsBriefExercisesExercisesAProblemsBProblems

1.Identify the different types of receivables.1,21

2.Explain how accounts receivable are recognized in the accounts.3211A, 2A, 6A, 7A, 1B, 2B, 6B, 7B,

3.Describe the method used to account for bad debts.4, 5, 6, 73, 4, 5, 92, 3, 41A, 2A, 3A, 4A, 5A, 7A 1B, 2B, 3B, 4B, 5B, 7B

4.Explain how notes receivable are recognized and valued in the accounts.8, 9, 106, 7, 85, 66A, 8A,

9A 6B, 8B,

9B

5.Explain the statement presentation of receivables.1197, 119A9B

6.Describe the principles of sound accounts receivable management.12, 13108

7.Identify the ratios used to analyse a companys receivables.14, 15, 169, 119, 107A, 10A, 11A7B, 10B, 11B

8.Describe the methods used to accelerate the receipt of cash from receivables.17, 181211, 1211A11B

ASSIGNMENT CHARACTERISTICS TABLE

ProblemNumberDescriptionDifficultyLevelTimeAllotted (min.)

1AJournalize receivables transactions.Moderate20-30

2ADetermine missing amounts.Complex15-20

3AJournalize bad debts transactions.Moderate20-30

4AJournalize bad debts transactionsModerate20-30

5ACalculate bad debt amounts.Moderate20-30

6AJournalize receivables transactions.Moderate20-30

7AJournalize receivables transactions and calculate ratios.Moderate30-40

8AJournalize notes receivables transactions.Moderate20-30

9AJournalize credit card and notes receivable transactions; show balance sheet presentation.Moderate15-20

10ACalculate and interpret ratios.Moderate15-20

11AEvaluate liquidity.Moderate15-20

1BJournalize receivables transactions.Moderate20-30

2BDetermine missing amounts.Complex15-20

3BJournalize bad debts transactions.Moderate20-30

4BJournalize and post bad debts transactionsModerate20-30

5BCalculate bad debt amounts.Moderate20-30

6BJournalize receivables transactions.Moderate20-30

7BJournalize receivables transactions and calculate ratios.Moderate30-40

8BJournalize notes receivables transactions.Moderate20-30

9BJournalize credit card and notes receivable transactions; show balance sheet presentation.Moderate15-20

10BCalculate and interpret ratios.Moderate15-20

11BEvaluate liquidity.Moderate15-20

ANSWERS TO QUESTIONS

1. Accounts receivable are amounts owed by customers on account. They result from the sale of goods and services in the normal course of business operations (i.e., in trade). Notes receivable represent claims that are evidenced by formal instruments of credit. Notes normally extend for periods longer than an account and have a specified interest rate attached.

2. Other receivables include nontrade receivables such as interest receivables, loans to company officers, advances to employees, and income taxes refundable.

3. The sale should be recorded at $10,000 on December 29. If the customer takes the discount it will be recorded on January 8 as a sales discount. If sales discounts covering more than one period of time are material for a company, they should be estimated and recorded in the proper period similar to the allowance for doubtful accounts.

4. The purpose of the allowance for doubtful accounts is to show an estimate of the accounts receivable expected to become uncollectible. The allowance account is used because the amount is only an estimate and we do not know for certain which customers will not pay. The account can be in a debit balance if the amount of actual write-offs exceeds previous provisions for bad debts.

5. Soo Eng should realize that the decrease in net realizable value occurs when estimated uncollectibles are recognized in an adjusting entry. The write-off of an uncollectible account reduces both accounts receivable and the allowance for doubtful accounts by the same amount. Thus, net realizable value does not change.

6. A company should write off an account when all methods of attempting to collect it have failed. Therefore once an account is written off the company should no longer actively attempt collection.

7. Two journal entries are required because the first journal entry has to restore the previously written off accounts receivable and the second journal entry records the actual receipt of payment on the account. This way there is a record that the person did eventually pay for the purpose of future credit decisions.

8. Notes are not recorded at their maturity value because the interest on the note is earned over time. According to the revenue recognition principle, interest is recorded as earned.

9. In total the note will earn $1,250 interest ($30,000 x 5% x 10/12). $1,000 will be recorded for the year ended December 31 8 months interest ($30,000 x 5% x 8/12).

Questions (Continued) 10.

Payee:

Accounts Receivable

xxx

Notes Receivable

xxx

Interest Revenue

xxx

Maker (May Ltd.):

Notes Payable

xxx

Interest Expense

xxx

Accounts Payable

xxx

11.Receivables

Accounts receivable$xxx

Less: Allowance for doubtful accounts xx

Net realizable value xxx

Notes receivable$xxx

Less: Allowance for doubtful accounts xx

Net realizable value xxx12.The steps involved in receivables management are:

(1)Determine to whom to extend credit

(2) Establish a payment period

(3) Monitor collections

(4) Evaluate the liquidity of receivables

(5) Accelerate cash receipts from receivables when necessary

13.A concentration of credit risk exists when a material threat of nonpayment exists, from either a single customer or class of customers, that could adversely affect the companys financial health.

14.An increase in the receivables turnover ratio indicates a faster collection of receivables. The higher the turnover ratio the fewer days it takes to collect the accounts receivable. An increase in the collection period means that it is taking longer for the company to convert sales in to cash.

15.Sales for the period = Receivables Turnover X Average Accounts Receivable

=11.6 X $1,762.5 million

=$20,445 million

16. An increase in the current ratio normally indicates an improvement in short-term liquidity. This may not always be the case because the composition of current assets may vary. In order to determine if the increase is an improvement in financial health other ratios that should be considered include: the receivables turnover, average collection period, inventory turnover and days in inventory ratios.

Questions (Continued)17.Bombardier may sell its receivables to accelerate the receipt of cash. The proceeds from the sale of the receivables could be used to finance operations and reduce the need for the company to rely on other sources of financing such as operating lines of credit. As well, the company may not want to dedicate resources to the time consuming responsibility of billing and collecting from customers. By selling the receivables and passing this responsibility to others, Bombardier is free to concentrate on its core business activities.

18.From its own credit cards, Sears may realize interest revenue from customers who do not pay the balance due within a specified grace period. To account for these transactions the company records a debit to accounts receivable and a credit to sales revenue.

Bank credit cards offer the following advantages:

(1)The credit card issuer makes the credit card investigation of the customer.

(2) The issuer maintains individual customer accounts.

(3) The issuer undertakes the collection process and absorbs any losses from uncollectible accounts.

(4) The retailer receives cash more quickly from the credit card issuer than it would from individual customers.

To record a bank credit card transaction, the seller normally records a debit to cash for the amount of the sale less the service charge required by the credit card company. A debit is made to the service charge expense and a credit is made to sales revenue for the gross amount of the sale.

The advantage of the debit card is that the cash is deducted immediately from the customers account. There are no credit checks or collection concerns so the service charges are normally lower than for a bank credit card.

The entries to record a debit card sale are the same as the entry to record a bank credit card sale.

By using its own credit cards, bank credit cards and debit cards Sears provides more

options to its customers, increases its revenue, and reduces its risk.

SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 8-1

(a)Nontrade receivables

(b)Notes receivable

(c)Accounts receivable

(d)Nontrade receivables

BRIEF EXERCISE 8-2

(a)Accounts Receivable

14,000

Sales

14,000

Cost of Goods Sold

10,000

Inventory

10,000

(b)Sales Returns and Allowances

2,400

Accounts Receivable

2,400

Inventory

1,440

Cost of Goods Sold

1,440

(c)Cash ($11,600 - $232)

11,368

Sales Discounts ($11,600 X 2%)

232

Accounts Receivable ($14,000 $2,400)

11,600BRIEF EXERCISE 8-3

(a)Bad Debt Expense

4,500

Allowance for Doubtful Accounts

4,5