Chap 007 Cash and Receivables

The McGraw-Hill Companies, Inc.
, 2013
Solutions Manual, Vol.1, Chapter 7 71

AACSB assurance of learning standards in accounting and business education require
documentation of outcomes assessment. Although schools, departments, and faculty may approach
assessment and its documentation differently, one approach is to provide specific questions on
exams that become the basis for assessment. To aid faculty in this endeavor, we have labeled each
question, exercise, and problem in Intermediate Accounting, 7e, with the following AACSB learning
skills:

Questions AACSB Tags Exercises (cont.) AACSB Tags
71 Reflective thinking 73 Communications
72 Reflective thinking 74 Analytic
74 Reflective thinking, Communications 76 Analytic
75 Diversity, Reflective thinking 77 Analytic
77 Reflective thinking 79 Communications
720 Diversity, Reflective thinking 722 Reflective thinking
Brief Exercises
723 Analytic
74 Analytic 727 Analytic
79 Analytic
CPA/CMA

712 Analytic 3 Reflective thinking
717 Analytic 8 Diversity, Analytic
Exercises
9 Diversity, Reflective thinking
71 Analytic 10 Diversity, Reflective thinking
72 Analytic 1 Reflective thinking
2 Analytic
Chapter 7 Cash and Receivables
The McGraw-Hill Companies, Inc., 2013
72 Intermediate Accounting, 7/e

CPA/CMA cont. AACSB Tags

3 Analytic
Problems

71 Analytic
72 Analytic
73 Analytic
74 Analytic
75 Analytic
76 Analytic
77 Analytic
78 Analytic
79 Diversity, Analytic
710 Analytic
711 Analytic
712 Analytic
713 Analytic
714 Analytic
715 Analytic


Question 71
Cash equivalents usually include negotiable instruments as well as highly liquid
investments that have a maturity date no longer than three months from date of
purchase.
Question 72
Internal control procedures involving accounting functions are intended to
improve the accuracy and reliability of accounting information and to safeguard the
companys assets. The separation of duties means that employees involved in
recordkeeping should not also have physical responsibility for assets.
Question 73
Management must document the companys internal controls and assess their
adequacy. The auditors must provide an opinion on managements assessment. The
Public Company Accounting Oversight Boards Auditing Standard No. 5, which
supersedes Auditing Standard No. 2, further requires the auditor to express its own
opinion on whether the company has maintained effective internal control over
financial reporting.
Question 74
A compensating balance is an amount of cash a depositor (debtor) must leave on
deposit in an account at a bank (creditor) as security for a loan or a commitment to
lend. The classification and disclosure of a compensating balance depends on the
nature of the restriction and the classification of the related debt. If the restriction is
legally binding, then the cash will be classified as either current or noncurrent
(investments and funds or other assets) depending on the classification of the related
debt. In either case, note disclosure is appropriate. If the compensating balance
arrangement is informal and no contractual agreement restricts the use of cash, note
disclosure of the arrangement including amounts involved is appropriate. The
compensating balance can be included in the cash and cash equivalents category of
current assets.
Question 75
Yes, IFRS and U.S. GAAP differ in how bank overdrafts are treated. Under
IFRS, overdrafts can be offset against other cash accounts. Under U.S. GAAP,
overdrafts must be treated as liabilities.

Questions for Review of Key Topics

Answers to Questions (continued)
Question 76
Trade discounts are reductions below a list price and are used to establish a final
price for a transaction. The reduced price is the starting point for initial valuation of
the transaction. A cash discount is a reduction, not in the selling price of a good or
service, but in the amount to be paid by a credit customer if the receivable is paid
within a specified period of time.
Question 77
The gross method of accounting for cash discounts considers discounts not taken
as part of sales revenue. The net method considers discounts not taken as interest
revenue, because they are viewed as compensation to the seller for allowing the buyer
to defer payment.
Question 78
When returns are material and a company can make reasonable estimates of
future returns, an allowance for sales returns is established. At a financial reporting
date, this provides an estimate of the amount of future returns for prior sales, and
involves a debit to sales returns and a credit to allowance for sales returns for the
estimated amount. Allowance for sales returns is a contra account to accounts
receivable. When returns actually occur in the future reporting period, the allowance
for sales returns is debited.
Question 79
Even when specific customer accounts havent been proven uncollectible by the
end of the reporting period, bad debt expense properly should be matched with sales
revenue on the income statement for that period. Likewise, since its not expected that
all accounts receivable will be collected, the balance sheet should report only the
expected net realizable value of that asset. So, to record the bad debt expense and the
related reduction of accounts receivable when the amount hasnt been determined, an
estimate is needed. In an adjusting entry, we record bad debt expense and reduce
accounts receivable for an estimate of the amount that eventually will prove
uncollectible.
If uncollectible accounts are immaterial or not anticipated, or its not possible to
reliably estimate uncollectible accounts, an allowance for uncollectible accounts is not
appropriate. In these few cases, any bad debts that do arise simply are written off as
bad debt expense at the time they prove uncollectible.

Question 710
The income statement approach to estimating bad debts determines bad debt
expense directly by relating uncollectible amounts to credit sales. The balance sheet
approach to estimating future bad debts indirectly determines bad debt expense by
estimating the net realizable value for accounts receivable that exist at the end of the
period. In other words, the allowance for uncollectible accounts at the end of the
period is estimated and then bad debt expense is determined by adjusting the
allowance account to reflect net realizable value.
Question 711
A company has to separately disclose trade receivables and receivables from
related parties under U.S. GAAP, but not under IFRS.
Question 712
The assignment of all accounts receivable in general as collateral for debt
requires no special accounting treatment other than note disclosure of the agreement.
Question 713
The accounting treatment of receivables factored with recourse depends on
whether certain criteria are met. If the criteria are met, the factoring is accounted for
as a sale. If they are not met, the factoring is accounted for as a loan. In addition,
note disclosure may be required. Accounts receivable factored without recourse are
accounted for as the sale of an asset. The difference between the book value and the
fair value of proceeds received is recognized as a gain or a loss.
Question 714
U.S. GAAP focuses on whether control of assets has shifted from the transferor
to the transferee. In contrast, IFRS focuses on whether the company has transferred
substantially all of the risks and rewards of ownership, as well as whether the
company has transferred control. Under IFRS:
1. If the company transfers substantially all of the risks and rewards of
ownership, the transfer is treated as a sale.
2. If the company retains substantially all of the risks and rewards of
ownership, the transfer is treated as a secured borrowing.
3. If neither conditions 1 or 2 hold, the company accounts for the transaction
as a sale if it has transferred control, and as a secured borrowing if it has
retained control.


Question 715
When a note is discounted, a financial institution, usually a bank, accepts the note
and gives the seller cash equal to the maturity value of the note reduced by a discount.
The discount is computed by applying a discount rate to the maturity value and
represents the financing fee the bank charges for the transaction.
The four-step process used to account for a discounted note receivable is as
follows:
1. Accrue any interest revenue earned since the last payment date (or date of the
note).
2. Compute the maturity value.
3. Subtract the discount the bank requires (discount rate times maturity value
times the remaining length of time from date of discounting to maturity date)
from the maturity value to compute the proceeds to be received from the bank
(maturity value less discount).
4. Compute the difference between the proceeds and the book value of the note
and related interest receivable. The treatment of the difference will depend on
whether the discounting is accounted for as a sale or as a loan. If its a sale,
the difference is recorded as a loss or gain on the sale; if its a loan, the
difference is viewed as interest expense or interest revenue.
Question 716
A companys investment in receivables is influenced by several related variables,
to include the level of sales, the nature of the product or service, and credit and
collection policies. The receivables turnover and average collection period ratios are
designed to monitor receivables.
Question 717
The items necessary to adjust the bank balance might include deposits
outstanding (including undeposited cash), outstanding checks, and any bank errors
discovered during the reconciliation process. The items necessary to adjust the book
balance might include collections made by the bank on the companys behalf, service
and other charges made by the bank, NSF (nonsufficient funds) check charges, and
any company errors discovered during the reconciliation process.

Answers to Questions (concluded)
Question 718
A petty cash fund is established by transferring a specified amount of cash from
the companys general checking account to an employee designated as the petty cash
custodian. The fund is replenished by writing a check to the petty cash custodian for
the sum of the bills paid with petty cash. The appropriate expense accounts are
recorded from petty cash vouchers at the time the fund is replenished.

Question 719
When a creditors investment in a receivable becomes impaired, due to a troubled
debt restructuring or for any other reason, the receivable is remeasured based on the
discounted present value of currently expected cash flows discounted at the loans
original effective rate (regardless of the extent to which expected cash receipts have
been reduced). The extent of the impairment is the difference between the carrying
amount of the receivable (the present value of the receivables cash flows prior to the
restructuring) and the present value of the revised cash flows discounted at the loans
original effective rate. This difference is recorded as bad debt expense or as an
impairment loss at the time the receivable is reduced.
Question 720
No. Under both U.S. GAAP and IFRS, a company can recognize in net income
the recovery of impairment losses of accounts and notes receivable.

Brief Exercise 71
The company could improve its internal control procedure for cash receipts by
segregating the duties of recordkeeping and the handling of cash. J im Seymour,
responsible for recordkeeping, should not also be responsible for depositing customer
checks.
Brief Exercise 72
Under IFRS the cash balance would be $245,000, because they could offset the
two accounts. Under U.S. GAAP the balance would be $250,000, because they could
not offset the two accounts.
Brief Exercise 73
All of these items would be included as cash and cash equivalents except the U.S.
Treasury bills, which would be included in the current asset section of the balance
sheet as short-term investments.
Brief Exercise 74
Income before tax in 2014 will be reduced by $2,500, the amount of the cash
discounts.

$25,000 x 10 =$250,000 x 1% =$2,500
Brief Exercise 75
Income before tax in 2013 will be reduced by $2,500, the anticipated amount of
cash discounts.

$25,000 x 10 =$250,000 x 1% =$2,500
BRIEF EXERCISES

Brief Exercise 76

Estimated returns =$10,600,000 x 8% = $848,000
Less: Actual returns (720,000)
Remaining estimated returns $128,000

Sales returns .................................................................... 128,000
Allowance for sales returns ....................................... 128,000

Inventoryestimated returns ........................................ 76,800
Cost of goods sold ($128,000 x 60%) ........................... 76,800

Brief Exercise 77

Singletary cannot combine the two types of receivables under U.S. GAAP, as the
director is a related party. Under IFRS a combined presentation would be allowed.

Brief Exercise 78

(1) Bad debt expense =$1,500,000 x 2% =$30,000

(2) Allowance for uncollectible accounts:
Beginning balance $25,000
Add: Bad debt expense 30,000
Deduct: Write-offs (16,000)
Ending balance $39,000


Brief Exercise 79

(1) Allowance for uncollectible accounts:
Beginning balance $ 25,000
Required allowance (33,400)*
Bad debt expense $24,400

(2) Required allowance =$334,000** x 10% =$33,400*

Accounts receivable:
Add: Credit sales 1,500,000
Deduct: Cash collections (1,450,000)
Write-offs (16,000)
Ending balance $ 334,000**

Brief Exercise 710

Allowance for uncollectible accounts:
Deduct: Required allowance (38,000)
Write-offs $32,000


Brief Exercise 711

Credit sales $8,200,000
Deduct: Cash collections (7,950,000)
Write-offs (32,000)*
Year-end balance in A/R (2,000,000)
Beginning balance in A/R $1,782,000

*Allowance for uncollectible accounts:
Deduct: Required allowance (38,000)
Write-offs $32,000

Brief Exercise 712

2013 interest revenue:
$20,000 x 6% x
1
/
12 = $100

2014 interest revenue:
$20,000 x 6% x
2
/
12 = $200


Brief Exercise 713
Assets decrease by $7,000:
Cash increases by $100,000 x 85% = $ 85,000
Receivable from factor increases by
($11,000 3,000 fee) 8,000
Accounts receivable decrease (100,000)
Net decrease in assets $ (7,000)

Liabilities would not change as a result of this transaction.

Income before income taxes decreases by $7,000
(the loss on sales of receivables)

The journal entry to record the transaction is as follows:

Cash (85% x $100,000) ....................................................... 85,000
Loss on sale of receivables (to balance) ............................ 7,000
Receivable from factor ($11,000 fair value 3,000 fee) ....... 8,000
Accounts receivable (balance sold) ................................ 100,000

Brief Exercise 714
Logitech would account for the transfer as a secured borrowing. The receivables
remain on the companys books and a liability is recorded for the amount borrowed
plus the banks fee.

Brief Exercise 715

Under IFRS Huling would treat this transaction as a secured borrowing, because
it retains substantially all of the risks and rewards of ownership. Under U.S. GAAP
Huling would treat this transaction as a sale, because it has transferred control. Note,
however, that in practice we would typically expect for the entity that has the risks and
rewards of ownership to also have control over the assets, so we would expect these
criteria to usually lead to the same accounting.


Brief Exercise 716

$30,000 Face amount
450 Interest to maturity ($30,000 x 6% x
3
/
12
)
30,450 Maturity value
(406) Discount ($30,450 x 8% x
2
/
12
)
$30,044 Cash proceeds

Brief Exercise 717

Receivables turnover = $320,000 =5.33 times

$60,000*

($50,000 +$70,000) 2 =$60,000*

Average collection = 365
= 68 days

period 5.33


Exercise 71
Requirement 1
Cash and cash equivalents includes:

a. Balance in checking account $13,500
Balance in savings account 22,100
b. Undeposited customer checks 5,200
c. Currency and coins on hand 580
f. U.S. treasury bills with 2-month maturity 15,000
Total $56,380
Requirement 2

d. The $400,000 savings account will be used for future plant expansion and
therefore should be classified as a noncurrent asset, either in other assets or
investments.

e. The $20,000 in the checking account is a compensating balance for a long-
term loan and should be classified as a noncurrent asset, either in other
assets or investments.

f. The $20,000 in 7-month treasury bills should be classified as a current asset
along with other temporary investments.
EXERCISES

Exercise 72
Requirement 1
Cash and cash equivalents includes:

Cash in bankchecking account $22,500
U.S. treasury bills 5,000
Cash on hand 1,350
Undeposited customer checks 1,840
Total $30,690
Requirement 2

The $10,000 in 6-month treasury bills should be classified as a current asset
along with other temporary investments.


Exercise 73

The FASB Accounting Standards Codification represents the single source of
authoritative U.S. generally accepted accounting principles. The specific citation for
each of the following items is:

1. Accounts receivables from related parties should be shown separately from
trade receivables: FASB ACS 21010S991: Balance SheetOverallSEC
MaterialsGeneral. Also appears under ACS 310104513: Receivables
OverallOther Presentation MattersReceivables from Officers, Employees or
Affiliates, and under ASC 85010502: "Related Party Disclosures
OverallDisclosure"

2. Definition of Cash Equivalents: FASB ACS 3051020: Cash and Cash
EquivalentsOverallGlossary.

3. Notes exchanged for cash are valued at the cash proceeds: FASB ACS 310
10302: ReceivablesOverallInitial MeasurementNotes Exchanged for
Cash.

4. The two conditions that must be met to accrue a loss on an account
receivable: FASB ASC 31010358: "ReceivablesOverallSubsequent
Measurement."

Exercise 74
Requirement 1: U.S. GAAP

Current Assets:
Cash $175,000

Current Liabilities:
Bank overdrafts $ 15,000

Requirement 2: IFRS

Current Assets:
Cash $160,000

(No current liabilities with respect to overdrafts.)


Exercise 75
Requirement 1

Sales price = 100 units x $600 = $60,000 x 70% = $42,000

November 17, 2013
Accounts receivable ........................................................ 42,000
Sales revenue ............................................................... 42,000

November 26, 2013
Cash (98% x $42,000)......................................................... 41,160
Sales discounts (2% x $42,000) .......................................... 840
Accounts receivable .................................................... 42,000
Requirement 2

November 17, 2013
Sales revenue ............................................................... 42,000

December 15, 2013
Cash ................................................................................. 42,000

Exercise 75 (concluded)
Requirement 3

Requirement 1, using the net method:

November 17, 2013
Sales revenue (98% x $42,000) ...................................... 41,160

November 26, 2013
Cash ................................................................................ 41,160

Requirement 2, using the net method:

November 17, 2013
Sales revenue (98% x $42,000) ...................................... 41,160

December 15, 2013
Cash ................................................................................ 42,000
Interest revenue........................................................... 840

Exercise 76
Requirement 1

Sales price = 1,000 units x $50 = $50,000

July 15, 2013
Sales revenue ............................................................... 50,000

July 23, 2013
Cash (98% x $50,000)......................................................... 49,000
Sales discounts (2% x $50,000) .......................................... 1,000
Requirement 2

July 15, 2013
Sales revenue ............................................................... 50,000

Aug. 15, 2013
Cash ................................................................................. 50,000

Exercise 77
Requirement 1

July 15, 2013
Sales revenue (98% x $50,000) ...................................... 49,000

July 23, 2013
Cash ................................................................................ 49,000
Requirement 2

July 15, 2013
Sales revenue (98% x $50,000) ...................................... 49,000

August 15, 2013
Cash ................................................................................ 50,000
Interest revenue........................................................... 1,000

Exercise 78
Requirement 1

Estimated returns =4% x $11,500,000 = $460,000
Remaining estimated returns $10,000

To record the actual sales returns
Sales returns .................................................................... 450,000

Inventoryestimated returns ......................................... 292,500
Cost of goods sold ($450,000 x 65%) ............................ 292,500

December 31, 2013 To record the estimated sales returns
Sales returns .................................................................... 10,000
Allowance for sales returns ........................................ 10,000

Cost of goods sold ($10,000 x 65%) .............................. 6,500

Note: another series of journal entries that produce the same end result would be:
To record the actual sales returns
Allowance for sales returns ............................................. 450,000

December 31, 2013 To record the estimated sales returns
Sales returns (4% x $11,500,000) ........................................ 460,000
Allowance for sales returns ........................................ 460,000

Cost of goods sold (65% x $460,000) ............................. 299,000

Exercise 78 (continued)
Requirement 2
Beginning balance in allowance account $300,000
Add: Year-end estimate 460,000
Ending balance in allowance account $310,000

Exercise 79
Requirement 1
The specific citation that specifies these disclosure policies is FASB ACS 31010
509: ReceivablesOverallDisclosureAccounting Policies for Credit Losses
and Doubtful Accounts.
Requirement 2
FASB ACS 31010509 reads as follows:
In addition to disclosures required by this Subsection and Subtopic 450-20, an entity
shall disclose a description of the accounting policies and methodology the entity used
to estimate its allowance for loan losses, allowance for doubtful accounts, and any
liability for off-balance-sheet credit losses and related charges for loan, trade
receivable or other credit losses in the notes to the financial statements. Such a
description shall identify the factors that influenced managements judgment (for
example, historical losses and existing economic conditions) and may also include
discussion of risk elements relevant to particular categories of financial instruments.


Exercise 710
Requirement 1
Bad debt expense =$67,500 (1.5% x $4,500,000)
Requirement 2
Allowance for uncollectible accounts

Balance, beginning of year $42,000
Add: Bad debt expense for 2013 (1.5% x $4,500,000) 67,500
Less: End-of-year balance (40,000)
Accounts receivable written off $69,500
Requirement 3
$69,500 the amount of accounts receivable written off.


Exercise 711
Requirement 1
To record the write-off of receivables:

Allowance for uncollectible accounts ............................ 21,000

To reinstate an account previously written off and to record the collection:

Allowance for uncollectible accounts ........................ 1,200

Cash ................................................................................ 1,200

Deduct: Receivables written off (21,000)
Add: Collection of receivable previously written off 1,200
Balance, before adjusting entry for 2013 bad debts 12,200

Required allowance: 10% x $625,000 (62,500)

To record bad debt expense for the year:

Bad debt expense ............................................................ 50,300
Requirement 2

Current assets:
Accounts receivable, net of $62,500 allowance
for uncollectible accounts $562,500

Exercise 712
Using the direct write-off method, bad debt expense is equal to actual write-offs.
Collections of previously written-off receivables are recorded as revenue.


Deduct: Receivables written off (17,100)
Add: Collection of receivables previously written off 2,200
Less: End of year balance (22,410)
Bad debt expense for the year 2013 $20,030

Exercise 713
($ in millions)

Balance, beginning of year $15.8
Add: Bad debt expense 12.7
Less: End of year balance (16.3)
Write-offs during the year $ 12.2*

Accounts receivable analysis:

Balance, beginning of year $ 1,057.4
($1,041.6 +15.8)
Add: Credit sales 14,880.2
Less: Write-offs* (12.2)
Less: Balance, end of year (1,178.6)
($1,162.3 +16.3)
Cash collections $14,746.8

Allowance
15.8
12.7
write-
offs

16.3
Gross A/R
1,057.4
14,880.2 12.2
collections
1,178.6

Exercise 714
Requirement 1

June 30, 2013
Note receivable ............................................................... 30,000
Sales revenue .............................................................. 30,000

December 31, 2013
Interest receivable ........................................................... 900
Interest revenue ($30,000 x 6% x
6
/
12
) ........................... 900

March 31, 2014
Cash [$30,000 +($30,000 x 6% x
9
/
12)] ................................ 31,350
Interest revenue
($30,000 x 6% x
3
/
12
) ........................... 450
Interest receivable (accrued at December 31) .................. 900
Note receivable .......................................................... 30,000

Requirement 2
2013 income before income taxes would be understated by $900
2014 income before income taxes would be overstated by $900.


Exercise 715
Requirement 1

June 30, 2013
Note receivable(face amount) ............................................ 30,000
Discount on note receivable ($30,000 x 8% x
9
/
12
) ......... 1,800
Sales revenue(difference) .............................................. 28,200

December 31, 2013
Discount on note receivable ........................................... 1,200
Interest revenue($30,000 x 8% x
6
/
12)
............................ 1,200

March 31, 2014
Discount on note receivable ........................................... 600
3
/
12)
............................ 600

Cash ................................................................................ 30,000
Note receivable (face amount) ....................................... 30,000

Requirement 2
$ 1,800 interest for 9 months
$28,200 sales price
= 6.383% rate for 9 months
x
12
/
9
to annualize the rate
_______
= 8.511% effective interest rate


Exercise 716
Requirement 1
Book value of stock $16,000
Plus gain on sale of stock 6,000
= Note receivable $22,000

Interest reported for the year $ 2,200

= 10% rate
Divided by value of note $ 22,000
Requirement 2
To record sale of stock in exchange for note receivable:

January 1, 2013
Note receivable ............................................................... 22,000
Investments ................................................................. 16,000
Gain on sale of investments ........................................ 6,000

To accrue interest on note receivable for twelve months:

December 31, 2013
Interest receivable ........................................................... 2,200
Interest revenue ($22,000 x 10%) .................................. 2,200

Exercise 717

Cash (difference) ................................................................ 439,200
Finance charge expense (1.8% x $600,000) ........................ 10,800
Liabilityfinancing arrangement .............................. 450,000
Exercise 718

Cash (90% x $60,000)......................................................... 54,000
Receivable from factor ($5,000 fair value [2% x $60,000]) 3,800
Exercise 719

Cash ([90% 2%] x $60,000) .............................................. 52,800
Receivable from factor ($5,000 fair value) ......................... 5,000
Recourse liability ....................................................... 3,000

Exercise 720

Mountain High retains significant risks and rewards and therefore must treat the
transfer as a secured borrowing. The accounts receivable stay on the balance sheet of
Mountain High, and they must record a liability.

Cash ([90% 2%] x $60,000) .............................................. 52,800
Finance charge expense (2% x $60,000) ............................ 1,200
Liability ...................................................................... 54,000

Exercise 721
Step 1: Accrue interest earned.

February 28, 2013
2
/
12
).......................... 250

Step 2: Add interest to maturity to calculate maturity value.
Step 3: Deduct discount to calculate cash proceeds.

$15,000 Face amount
6
/
12
)
(630) Discount ($15,750 x 12% x
4
/
12
)

Step 4: Record a loss for the difference between the cash proceeds and the
notes book value.

February 28, 2013
Cash (proceeds determined above) ........................................ 15,120
Loss on sale of note receivable (difference) ..................... 130
Interest receivable (accrued interest determined above) .... 250

Exercise 722

List A List B

c 1. Internal control a. Restriction on cash.
j 2. Trade discount b. Cash discount not taken is sales revenue.
g 3. Cash equivalents c. Includes separation of duties.
h 4. Allowance for uncollectibles d. Bad debt expense a % of credit sales.
i 5. Cash discount e. Recognizes bad debts as they occur.
l 6. Balance sheet approach f. Sale of receivables to a financial institution.
d 7. Income statement approach g. Include highly liquid investments.
k 8. Net method h. Estimate of bad debts.
a 9. Compensating balance i. Reduction in amount paid by credit customer.
m 10. Discounting j. Reduction below list price.
b 11. Gross method k. Cash discount not taken is interest revenue.
e 12. Direct write-off method l. Bad debt expense determined by estimating realizable
value.
f 13. Factoring m. Sale of note receivable to a financial institution.


Exercise 723
Requirement 1

March 17, 2013

March 30, 2013
Note receivable ............................................................... 20,000
Cash ............................................................................ 20,000

Step 1: Accrue interest earned for two months on note receivable.

May 30, 2013
2
/
12
) ............................ 233

Step 2: Add interest to maturity to calculate maturity value.
Step 3: Deduct discount to calculate cash proceeds.

$20,000 Face amount
1,400 Interest to maturity ($20,000 x 7%)
(1,427) Discount ($21,400 x 8% x
10
/
12
)


Exercise 723 (continued)

Step 4: Record a loss for the difference between the cash proceeds and the notes book value.

May 30, 2013
Cash (proceeds determined above) ........................................ 19,973
Loss on sale of note receivable (difference) ...................... 260
Interest receivable (from adjusting entry) ........................ 233

June 30, 2013
Sales revenue ............................................................... 12,000

July 8, 2013
Cash ($12,000 x 98%)......................................................... 11,760
Sales discounts ($12,000 x 2%) .......................................... 240

August 31, 2013
Notes receivable(face amount) .......................................... 6,000
Discount on note receivable ($6,000 x 8% x
6
/
12
) .......... 240
Investments (book value) ............................................... 5,000
Gain on sale of investments (difference) ....................... 760

December 31, 2013
Bad debt expense ($700,000 x 2%) .................................... 14,000
Allowance for uncollectible accounts ......................... 14,000

Requirement 2
To accrue interest earned on note receivable:

December 31, 2013
Discount on note receivable ........................................... 160
4
/
12
) ............................. 160

Exercise 724

Second quarter:
Receivables turnover = $19,953 =1.772 times

$11,260

= 51.35 days

period 1.772

Third quarter:
Receivables turnover = $16,428 =
1.43 times

$11,453.5

= 63.64 days

period 1.43


Exercise 725
Average collection period =365 Accounts receivable turnover =50 days

Accounts receivable turnover =365 50 =7.3

Average accounts receivable =($400,000 +300,000) 2 =$350,000

Accounts receivable turnover =Net sales Average accounts receivable
7.3 =Net sales $350,000

Net sales = 7.3 x $350,000 =$2,555,000

Exercise 726
To establish the petty cash fund:

October 2, 2013
Petty Cash........................................................... 200
Cash (checking account) ................................ 200

To replenish the petty cash fund:
October 31, 2013
Office supplies expense ..................................... 76
Entertainment expense ....................................... 48
Postage expense ................................................. 20
Miscellaneous expense ....................................... 19


Exercise 727
September 30, 2013 To replenish the petty cash fund
Delivery expense ............................................... 16
Office supplies expense ..................................... 19
Receivable from employee ................................ 25
Postage expense ................................................. 32

Exercise 728

Compute balance per bank statement:
Balance per books $23,820
Deduct: Deposits outstanding (2,340)
Add: Checks outstanding 1,890
Deduct: Bank service charges (38)
Balance per bank $23,332

Step 1: Bank Balance to Corrected Balance

Balance per bank statement $23,332
Add: Deposits outstanding 2,340
Deduct: Checks outstanding (1,890)
Corrected cash balance $23,782

Step 2: Book Balance to Corrected Balance

Deduct: Service charges (38)


Exercise 729
Requirement 1
Requirement 2
To correct error in recording cash receipt from credit customer:
Cash .................................................................... 1,800
Accounts receivable ....................................... 1,800
To record credits to cash revealed by the bank reconciliation:
Miscellaneous expense (bank service charges) . 30
Accounts receivable (NSF checks) .................... 1,200
Interest expense .................................................. 320
Note payable....................................................... 3,000
Cash ................................................................ 4,550
Note: Each of the adjustments to the book balance required journal entries.
None of the adjustments to the bank balance require entries.


Add: Deposits outstanding 6,300
Deduct: Checks outstanding (8,420)
Add: Bank error in recording check 270


Add: Error in recording cash
receipt ($2,000 200) 1,800
Deduct:
Service charges (30)
NSF checks (1,200)
Automatic monthly loan payment (3,320)


Exercise 730
ANALYSIS
Previous Value:
Accrued 2012 interest (10% x $12,000,000) $ 1,200,000
Principal 12,000,000
Carrying amount of the receivable $13,200,000
New Value:
Interest $1 million x 1.73554
*
= $1,735,540
Principal $11 million x 0.82645
**
= 9,090,950
Present value of the receivable (10,826,490)
Loss: $ 2,373,510
*
present value of an ordinary annuity of $1: n =2, i =10% (from Table 4)
**
present value of $1: n =2, i =10% (from Table 2)

JOURNAL ENTRIES
January 1, 2013
Loss on troubled debt restructuring (to balance) ......... 2,373,510
Accrued interest receivable (account balance) ........ 1,200,000
Note receivable ($12,000,000 10,826,490) .......... 1,173,510
December 31, 2013
Cash (required by new agreement) .................. ........... 1,000,000
Note receivable (to balance) ........................ .. ....... 82,649
Interest revenue (10% x $10,826,490) ........ ........... 1,082,649

December 31, 2014
Note receivable (to balance) ............................ ........... 90,861
Interest revenue (10% x [$10,826,490 +82,649]) .. 1,090,861*

Note receivable (balance) ............................ ........... 11,000,000
* rounded to amortize the note to $11,000,000 (per schedule below)

Amortization Schedule Not required

Cash Effective Increase in Outstanding
Interest Interest Balance Balance
by agreement 10% x Outstanding Balance Discount Reduction
10,826,490
1 1,000,000 .10 (10,826,490) =1,082,649 82,649 10,909,139
2 1,000,000 .10 (10,909,139) =1,090,861* 90,861 11,000,000
2,000,000 2,173,510 173,510
*
rounded


Exercise 731
ANALYSIS
Previous Value:
Accrued 2012 interest (10% x $240,000) $ 24,000
Principal 240,000
Carrying amount of the receivable $264,000
New Value:
$11,555 +11,555 +11,555 +240,000 =$274,665
$274,665 x 0.82645
*
= (226,997)
Loss: $ 37,003
*
present value of $1: n =2, i =10% (from Table 2)

JOURNAL ENTRIES
January 1, 2013
Loss on troubled debt restructuring (to balance) ......... 37,003
Accrued interest receivable (10% x $240,000) ....... 24,000
Note receivable ($240,000 226,997) ........ ........... 13,003
December 31, 2013
Interest revenue (10% x $226,997) ............. ........... 22,700

December 31, 2014
Interest revenue (10% x [$226,997 +22,700]) ....... 24,968*

Cash (required by new agreement) .................. ........... 274,665
Note receivable (balance) ............................ ........... 274,665
* rounded to amortize the note to $274,665 (per schedule below)


226,997
1 0 .10 (226,997) =22,700 22,700 249,697
2 0 .10 (249,697) =24,968* 24,968 274,665
47,668 47,668
*
rounded


CPA / CMA REVIEW QUESTIONS
CPA Exam Questions

1. a. Allowance for uncollectible accounts, beginning balance $260,000
Add: Bad debt expense (2% x $9,000,000) 180,000
Less: Write-offs (325,000)
Allowance for uncollectible accounts, ending balance $115,000
2. a. Accounts receivable, beginning balance $ 600
Add: Credit sales 3,200
Less: Write-offs (200)
Less: Accounts receivable, ending balance (500)
Cash collections $3,100

3. c. The reinstatement of a previously written off account increases the
allowance account. The collection of the reinstated account does not
affect the allowance account. The net effect of the reinstatement and
collection is an increase in the allowance account. Neither the
reinstatement nor the subsequent collection of the account has any
effect on the expense.

4. b. Accounts receivable, beginning balance $ 650,000
Less: Sales returns (75,000)
Less: Cash collections (2,150,000)
Accounts receivable, ending balance $1,085,000
5. c. The key phrase is "without recourse" which means that Gar Co. has
transferred the collection risk to Ross Bank. Ross does not have any
recourse against Gar Co. if the accounts are not collected. Thus, Gar
has sold the accounts receivable to Ross Bank and has also transferred
the risk associated with collection.


CPA Exam Questions (concluded)

6. a. The aging method is a balance sheet approach that calculates the required
ending balance in the allowance for uncollectible accounts. The
calculation is as follows:
Estimated %
Uncollectible

x

Amount

=
Required
Balance
1% x $120,000 = $1,200
2% x $ 90,000 = 1,800
6% x $100,000 = 6,000
Total required balance $9,000

7. a. The estimate using the income statement approach is:
$1,750,000 x 2% =$35,000

The estimate using the balance sheet approach is:

Required ending balance ($900,000 x 5%) $45,000
Less: Allowance for uncollectible accounts
before recording bad debt expense (16,000)

8. b. IFRS allows overdrafts to be offset with positive cash balances if the
overdrafts are payable on demand and which fluctuate as part of its cash
management program.

9. c. IAS No. 39 allows receivables to be accounted for as available for sale
investments if that approach is elected upon initial recognition of the
receivable.

10. d. Under IFRS, measurement of an impairment of a receivable is required if there
is objective evidence that a loss event has occurred that has an impact on the future
cash flows to be collected and that can be estimated reliably.

CMA Exam Questions

1. c. The allowance method records bad debt expense systematically as a
percentage of either credit sales or the level of accounts receivable.
The latter calculation considers the amount already existing in the
allowance account. The credit is to a contra asset or allowance
account. As accounts receivable are written off, they are charged to
the allowance account.
2. d. If a company uses the allowance method, the write-off of a receivable
has no effect on total assets. The journal entry involves a debit to the
allowance account and a credit to accounts receivable. The net effect
is that the asset section is both debited and credited for the same
amount. Thus, there will be no effect on either total assets or net
income.
3. c. The entry is to debit bad debt expense and credit the allowance
account. Net credit sales were $1,500,000 ($1,800,000 $125,000 of
discounts $175,000 of returns). Thus, the expected bad debt
expense is $22,500 (1.5% x $1,500,000). This amount is recorded
regardless of the balance remaining in the allowance account from
previous periods. The net effect is that the allowance account is
increased by $22,500.


PROBLEMS
Problem 71
Requirement 1
Monthly bad debt expense accrual summary.

Bad debt expense (3% x $2,620,000) .................................. 78,600
Allowance for uncollectible accounts ......................... 78,600

To record year 2013 accounts receivable write-offs:

Allowance for uncollectible accounts ............................. 68,000
Requirement 2

Bad debt expense ........................................................... 4,300
Allowance for uncollectible accounts (below) ............. 4,300

Year-end required allowance for uncollectible accounts:

Summary
Percent Estimated
Age Group Amount Uncollectible Allowance
060 days $430,000 4% $17,200
6190 days 98,000 15% 14,700
91120 days 60,000 25% 15,000
Over 120 days 55,000 40% 22,000
Totals $643,000 $68,900


Problem 71 (concluded)


Add: Monthly bad debt accruals 78,600
Balance before year-end adjustment 64,600
Required allowance (determined above) 68,900
Required year-end increase in allowance $ 4,300
Requirement 3
Bad debt expense for 2013:

Monthly accruals $78,600
Year-end adjustment 4,300
Total $82,900

Balance sheet:

Current assets:
Accounts receivable, net of $68,900
allowance for uncollectible accounts $574,100


Problem 72
Requirement 1
(a)

Accounts receivable analysis ($ in thousands):

Balance, beginning of year ($580,640 +6,590) $ 587,230
Less: Balance end of year ($504,944 +5,042) (509,986)
Accounts receivable written off during year $ 5,934

(b)

Allowance for uncollectible accounts analysis ($ in thousands):

Less: Write-offs (from above) (5,934)
Less: Year-end balance (5,042)
Bad debt expense for the current year $4,386

(c)

$4,386 of bad debt expense divided by $2,158,755 in credit sales
equals .2% (.002).
Requirement 2
(a) ($ in thousands)
Current year Previous year
Current assets:
Receivables $509,986 $587,230

(b) ($ in thousands)

Bad debt expense would be equal to actual receivables written off
of $5,934.


Problem 73
Requirement 1
2011 2010
($ in thousands)
Accounts receivable, net $39,098 $23,963
Add: Allowances 421 488
Accounts receivable, gross $39,519 $24,451
Requirement 2
($ in thousands)
The answers to this question require an analysis of both gross accounts receivable
and the allowance for uncollectible accounts for 2011. First of all, 2011 sales of
$369,571 plus the increase in receivables reported in the statement of cash flows
indicates cash received from customers of $354,436 ($369,571 15,135).

The activity in gross accounts receivable would be:

Gross Accounts Receivable
________________________________________
($ in thousands)
Beg. Bal. 24,451
Sales 369,571
354,436 Collections
67 Write-offs
_________________
End. Bal. 39,519

The journal entry to record write-offs would be:

Allowance for Uncollectible Accounts ........... ........................ 67
Accounts Receivable ................................... ............................ 67


Problem 73 (continued)

Considering the allowance for uncollectible accounts in light of these write-offs
allows us to solve for bad debt expense:

Allowance for Uncollectible Accounts
________________________________________
($ in thousands)
488 Beg. Bal.
Write-offs 67

0 Bad Debt Expense
_________________
421 End. Bal.

Cirrus recognized zero bad debt expense during 2011.

Problem 74
Requirement 1
To record accounts receivable written off during the year 2013:


To record collection of account receivable previously written off:


Cash ................................................................................ 3,000
Requirement 2
(a)

December 31, 2013
Bad debt expense (3% x $1,750,000) ................................. 52,500

(b)

December 31, 2013
Bad debt expense ............................................................ 36,700



Ending balance $ 347,000

$347,000 x 10% =$34,700 =Required allowance for uncollectible accounts

Allowance for uncollectible accounts analysis:
Balance before adjustment (2,000) debit balance
Required allowance (determined above) 34,700
Bad debt expense adjustment $36,700

(c)

December 31, 2013
Bad debt expense ............................................................ 37,047

Required allowance:

Age Group

Amount
Percent
Uncollectible
Estimated
Allowance
060 days $225,550 4% $ 9,022
6190 days 69,400 15% 10,410
91120 days 34,700 25% 8,675
Over 120 days 17,350 40% 6,940
Totals $347,000 $35,047



Allowance for uncollectible accounts analysis:
Balance before adjustment (2,000) debit balance
Required allowance 35,047
Bad debt expense adjustment $37,047
Requirement 3
Accounts receivable Year-end allowance

(a) $347,000 [(2,000) +52,500] =$296,500

(b) $347,000 34,700 =$312,300

(c) $347,000 35,047 =$311,953


Problem 75
Requirement 1
($ in millions)
2009 2008
Accounts receivable, net $837,010 $758,200
Add: Allowances 20,991 23,314
Accounts receivable, gross $858,001 $781,514
Requirement 2
($ in millions)
Analysis of allowance for doubtful accounts
Less: Balance end of year (8,863)
Write-offs $1,552
Requirement 3
($ in millions)
Analysis of allowance for sales returns
Balance, end of year $12,128
Add: Actual returns 3,155
Less: Balance beginning of year (14,399)
Estimated sales returns $ 884

Gross sales for the year equal net sales of $6,149,800 +estimated sales returns of
$884 =$6,150,684 thousand.
Requirement 4
($ in millions)
Balance, beginning of year $ 781,514
Less: Bad debt write-offs (1,552)
Less: Actual sales returns (3,155)
Less: Balance end of year (858,001)
Cash collections $6,069,490

Problem 76
Requirement 1
Total face value of notes =$300,000 +150,000 +200,000 = $650,000
Balance sheet carrying value = 645,000
Difference is the remaining discount on note 3 $ 5,000

Note 3 is a 6-month note, with three months remaining. Therefore,
$5,000 represents one-half of the total discount of $10,000.
$10,000 $200,000 =5% x
12
/
6 =10% discount rate.

Requirement 2
Total accrued interest receivable $16,000
Less: Interest accrued on note 1:
$300,000 x 10% x
4
/
12 = (10,000)
Interest accrued on note 2 $ 6,000

$6,000 $150,000 =4% x
12
/
6 = 8%

Requirement 3
Note 1 $10,000
Note 2 6,000
Note 3 ($200,000 x 10% x
3
/
12
) 5,000
Total interest revenue $21,000


Problem 77
Requirement 1
Alternative a:

To record the borrowing of $500,000 and signing of a note payable:

July 1, 2013
Cash ................................................................................. 500,000
Note payable ............................................................... 500,000

Alternative b:

To record the transfer of receivables:

July 1, 2013
Cash ($550,000 x 98%) ....................................................... 539,000
Loss on transfer of receivables (2% x $550,000) ............... 11,000
Requirement 2

Alternative a:

July, 2013
Cash (80% x $780,000) ....................................................... 624,000

July 31, 2013
Interest expense($500,000 x 12% x
1
/
12
) ............................ 5,000
Note payable.................................................................... 500,000
Cash ............................................................................. 505,000



Alternative b:

$550 of accounts receivable are now held by the bank, and presumably the bank
has collected .8 x $550 =$440 during J uly. Lonergan still holds accounts receivable
of ($780 550 =$230), so should have collected .8 x $230 =$184 during J uly.
July 31, 2013
Cash [80% x ($780,000 550,000)] ..................................... 184,000
Requirement 3
Alternative a. Note disclosure is required for the assignment of accounts
receivable as collateral for the $500,000 note.

Alternative b. No disclosure is required since the transfer of receivables
was made without recourse.

Problem 78

Cash (90% x $800,000) ...................................................... 720,000
Accounts receivable (balance sold) ............................... 800,000


Problem 79

WALKEN COMPANY
Balance Sheet
December 31, 2013
Current Assets
Cash
a
35,000
Accounts receivable (net)
b
60,000

a
Walken would net the 40,000 and (5000) cash balances, yielding a balance of
35,000.

b
Net accounts receivable would be affected as follows:
Beginning balance: 25,000
Credit sales 85,000
Cash collections (30,000)
Receivables factored with Reliable (20,000)
Receivables factored with Dependable
c
-0-
Total 60,000

c
The receivables factored with Dependable dont qualify for sales treatment, as
substantially all risks and rewards of ownership are retained by Walken.


Problem 710
Requirement 1

February 28, 2013
Note receivable ............................................................... 10,000
Sales revenue .............................................................. 10,000

March 31, 2013
Note receivable(face amount) ........................................... 8,000
Discount ($8,000 x 10%) ............................................... 800
Sales revenue (difference) ............................................. 7,200

April 3, 2013
Sales revenue .............................................................. 7,000

April 11, 2013
Cash (98% x $7,000) .......................................................... $6,860
Sales discounts (2% x $7,000) ........................................... 140

April 17, 2013
Sales returns .................................................................... 5,000

Inventory ......................................................................... 3,200
Cost of goods sold ...................................................... 3,200



April 30, 2013
Cash (99% x $50,000) ......................................................... 49,500
Loss on sale of receivables (1% x $50,000) ....................... 500

To accrue interest on note receivable for four months:

June 30, 2013
4
/
12
) .......................... 333

To record discounting of note receivable:

June 30, 2013
Cash (proceeds determined below) ........................................ 10,266
Loss on sale of note receivable (to balance) ...................... 67
Interest receivable(from adjusting entry) ........................ 333
Note receivable(face amount) ........................................ 10,000

$10,000 Face amount
7
/
12
)
(317) Discount ($10,583 x 12% x
3
/
12
)

August 31, 2013 NO ENTRY REQUIRED

Requirement 2

To accrue nine months interest on the Maddox Co. note receivable:

Discount ......................................................................... 600
9
/
12
) ........................... 600
Requirement 3
Income
Date increase (decrease)
February 28 $10,000
March 31 7,200
April 3 7,000
April 11 (140)
April 17 (5,000)
April 17 3,200
April 30 (500)
J une 30 333
J une 30 (67)
December 31 600
Total effect $22,626


Problem 711

Note
Note Face
Value
Date of
Note
Interest
Rate
Date
Discounted
Discount
Rate
Proceeds
Received

1 $50,000 3-31-11 8% 6-30-11 10% $50,350 (1)

2 50,000 3-31-11 8% 9-30-11 10% 51,675 (2)

3 50,000 3-31-11 8% 9-30-11 12% 51,410 (3)

4 80,000 6-30-11 6% 10-31-11 10% 81,027 (4)

5 80,000 6-30-11 6% 10-31-11 12% 80,752 (5)

6 80,000 6-30-11 6% 11-30-11 10% 81,713 (6)

(1)
$50,000 Face amount
3,000 Interest to maturity ($50,000 x 8% x
9
/
12
)
(2,650) Discount ($53,000 x 10% x
6
/
12
)

(2)
$50,000 Face amount
9
/
12
)
(1,325) Discount ($53,000 x 10% x
3
/
12
)



(3)
$50,000 Face amount
9
/
12
)
(1,590) Discount ($53,000 x 12% x
3
/
12
)

(4)
$80,000 Face amount
6
/
12
)
(1,373) Discount ($82,400 x 10% x
2
/
12
)

(5)
$80,000 Face amount
6
/
12
)
(1,648) Discount ($82,400 x 12% x
2
/
12
)

(6)
$80,000 Face amount
6
/
12
)
(687) Discount ($82,400 x 10% x
1
/
12
)


Problem 712
Requirement 1
In addition to sales revenue of $1,340,000, the 2014 income statement will
include (1) interest revenue, (2) bad debts expense, and (3) loss on sale of note
receivable.

Interest revenue
$200,000 note: $200,000 x 6% x 3/12 = $3,000
$60,000 note: $ 60,000 x 8%
(1)
x 10/12 = 4,000
Total interest revenue $7,000

(1)
The interest rate on the $60,000 note can be determined as follows:
Interest receivable in 12/31/2013 balance sheet = $6,800
Less: Interest on $200,000 note: $200,000 x 6% x 6/12 = (6,000)
Interest on $60,000 note $ 800

$800 represents interest for two months (November and December of 2013) or
$400 per month. Annual interest is $400 x 12 =$4,800.
$4,800 $60,000 =8% interest rate.

Bad debt expense
Analysis of accounts receivable
Beginning accounts receivable ($218,000 +24,000) $ 242,000
Ending accounts receivable $ 280,000

Analysis of allowance for uncollectible accounts
Beginning allowance $24,000
Add: Bad debt expense ?
Ending allowance
(2)
$28,000

Therefore bad debt expense is $26,000 ($24,000 22,000 28,000)

(2)
$280,000 x 10% =$28,000


Loss on sale of note receivable
Interest accrued on the $200,000 note for nine months (6/30/2013 to 3/31/2014):
$200,000 x 6% x 9/12 =$9,000
Calculation of cash proceeds received from discounting note:

$200,000 Face amount
12,000 Interest to maturity ($200,000 x 6%)
(4,240) Discount ($212,000 x 8% x
3
/
12
)

Carrying value of note $209,000 ($200,000 +9,000 interest receivable)
Less: Cash proceeds (207,760)
Loss on sale of note receivable $ 1,240

Requirement 2
Accounts receivable, net of $28,000 in allowance for
uncollectible accounts $252,000

Requirement 3
Accounts receivable turnover ratio:

$1,340,000
------------- = 5.7 times
$235,000
(3)

(3)
($218,000 +252,000) 2 = $235,000


Problem 713
Requirement 1
Computation of balance per books:

Balance per bank statement $14,632.12
Add: Deposits outstanding 575.00
Deduct: Checks outstanding (1,320.25)
Error in recording rent check (18.00)
Add: Automatic mortgage payment 450.00
Add: Bank service charges 14.00
Deduct: Deposit credit to companys
account in error (875.00)
Add: NSF check charge 85.00
Balance per books $13,542.87


Balance per bank statement $14,632.12
Add: Deposits outstanding 575.00
Deduct:
Bank errordeposit incorrectly
credited to company account (875.00)
Checks outstanding (1,320.25)
Corrected cash balance $13,011.87


Balance per books $13,542.87
Add: Error in recording rent check 18.00
Deduct:
Automatic mortgage note payment (450.00)
Service charges (14.00)
NSF checks (85.00)
Corrected cash balance $13,011.87


Requirement 2
To correct error in recording cash disbursement for rent:
Cash ................................................................... 18
Rent expense .................................................. 18
Interest expense ................................................. 350
Mortgage note payable ...................................... 100
Accounts receivable (NSF checks) .................... 85
Cash ............................................................... 549
Requirement 3
Checking account balance $13,011.87
Petty cash 200.00
U.S. treasury bills 5,000.00
Total cash and cash equivalents $18,211.87


Problem 714
Requirement 1


Add: Deposits outstanding 2,150 (1)
Deduct:
Bank errordeposit incorrectly
credited to company account (1,300)
Outstanding checks (831) (2)


Deduct:
Error in recording check #411 (90)
Service charges (22)
NSF checks (440)
Corrected book balance $3,870

(1) Receipts $42,650
Less: December receipts deposited:
Bank deposits $43,000
Less: Deposit error (1,300)
Less: Prior months
deposits outstanding (1,200) 40,500
Deposits outstanding, Dec. 31 $ 2,150

(2) Dec. disbursements $41,853
Error in recording check #411 90
Less: December checks cleared:
Total checks cleared $41,918
Prior month's checks:
#363 $123
#380 56
#381 86
#382 340 (605) (41,313)
December checks outstanding 630
Add: check #365 201
Total checks outstanding, Dec. 31 $ 831


Requirement 2
Advertising expense .......................................... 90
Accounts receivable (NSF checks) .................... 440
Cash ............................................................... 552


Problem 715
Requirement 1
($ in millions)
Land ................................................................. ......................... 16
Loss on debt restructuring ............................... ........................... 6
Note receivable ........................................... ............................. 20
Accrued interest receivable ......................... ............................. 2

Requirement 2
ANALYSIS
Previous Value:
Accrued 2012 interest (10% x $20,000,000) $ 2,000,000
New Value:
Interest $1 million x 3.16987
*
= $ 3,169,870
Principal $15 million x 0.68301
**
= 10,245,150
Present value of the receivable (13,415,020)
Loss: $ 8,584,980
*
Present value of an ordinary annuity of $1: n =4, i =10% (from Table 4)
**
Present value of $1: n =4, i =10% (from Table 2)

JOURNAL ENTRIES
January 1, 2013
Loss on troubled debt restructuring (to balance) .............. 8,584,980
Accrued interest receivable (10% x $20,000,000) ........ 2,000,000
Note receivable ($20,000,000 13,415,020) .............. 6,584,980
December 31, 2013
Cash (required by new agreement) 1,000,000
Note receivable (to balance).. 341,502
Interest revenue (10% x $13,415,020) ........ ................. 1,341,502

December 31, 2014
Cash (required by new agreement) 1,000,000
Note receivable (to balance) 375,652


December 31, 2015
Cash (required by new agreement) .................. . 1,000,000
Note receivable (to balance) ............................ .... 413,217

December 31, 2016
Cash (required by new agreement) .................. . 1,000,000
Note receivable (to balance) ............................ .... 454,609
Interest revenue (10% x $14,545,391) ........ ................. 1,454,609*

Cash (required by new agreement) .................. 15,000,000
Note receivable (balance) ............................ ................. 15,000,000


13,415,020
1 1,000,000 .10(13,415,020) = 1,341,502 341,502 13,756,522
2 1,000,000 .10(13,756,522) = 1,375,652 375,652 14,132,174
3 1,000,000 .10(14,132,174) = 1,413,217 413,217 14,545,391
4 1,000,000 .10(14,545,391) = 1,454,609* 454,609 15,000,000
4,000,000 5,584,980 1,584,980
*
rounded


Requirement 3
ANALYSIS
Previous Value:
Accrued interest (10% x $20,000,000) $ 2,000,000
New Value:
$27,775,000 x 0.68301
*
= (18,970,603)
Loss: $ 3,029,397
*
Present value of $1: n =4, i =10% (from Table 2)

JOURNAL ENTRIES
January 1, 2013 ....
Loss on troubled debt restructuring (to balance) .............. 3,029,397
Accrued interest receivable (10% x $20,000,000) ........ 2,000,000
Note receivable ($20,000,000 18,970,603) ................ 1,029,397
December 31, 2013 ....
Note receivable (to balance) . 1,897,060

December 31, 2014 ....
Note receivable (to balance).. 2,086,766
Interest revenue (10% x [$18,970,603 +1,897,060]) ... 2,086,766

December 31, 2015 ....
Note receivable (to balance). 2,295,443
Interest revenue (10% x balance [see schedule]) .......... 2,295,443

December 31, 2016 ....
Note receivable (to balance).. 2,525,128
Interest revenue (10% x balance [see schedule]) .......... 2,525,128*

Cash (required by new agreement). 27,775,000
Note receivable (balance)............................ ................. 27,775,000


18,970,603
1 0 .10 (18,970,603) =1,897,060 1,897,060 20,867,663
2 0 .10 (20,867,663) =2,086,766 2,086,766 22,954,429
3 0 .10 (22,954,429) =2,295,443 2,295,443 25,249,872
4 0 .10 (25,249,872) =2,525,128* 2,525,128 27,775,000
8,804,397 8,804,397
*
rounded


Judgment Case 71
Requirement 1
To account for the accounts receivable factored on April 1, 2013, Magrath should
decrease accounts receivable by the amount of accounts receivable factored, increase
cash by the amount received from the factor, and record a loss equal to the difference.
The loss should be reported in the income statement. Factoring of accounts receivable
without recourse is equivalent to a sale.
Requirement 2
Magrath should account for the collection of the accounts previously written off
as uncollectible as follows:

Increase both accounts receivable and the allowance for uncollectible accounts.
Increase cash and decrease accounts receivable.
Requirement 3
One approach estimates uncollectible accounts based on credit sales. This
approach focuses on income determination by attempting to match uncollectible
accounts expense with the revenues generated.
The other approach estimates uncollectible accounts based on the balance in
receivables or on an aging of receivables. The approach focuses on asset valuation by
attempting to report receivables at net realizable value.

CASES

Communication Case 72
Suggested Grading Concepts and Grading Scheme:
Content (70%)
______ 40 Explains the difference between the allowance method and the
direct write-off method.
____ Direct write-off is more objective.
____ Direct write-off has potential to violate the matching
principle.

______ 15 Even if uncollectibles are fairly stable, when significant
variations do occur, profit will be overstated in one period
and understated in another period.

______ 15 Even if uncollectibles remain constant, the direct write-off
method will result in an overstatement of accounts receivable
in the balance sheet.

____
______ 70 points

Writing (30%)
______ 6 Terminology and tone appropriate to the audience of a
company president.

______ 12 Organization permits ease of understanding.
____ Introduction that states purpose.
____ Paragraphs that separate main points.

______ 12 English
____ Sentences grammatically clear and well organized,
concise.
____ Word selection.
____ Spelling.
____ Grammar and punctuation.
____
______ 30 points

Judgment Case 73
Requirement 1
a. Hogan should account for the sales discounts at the date of sale using the net
method by recording accounts receivable and sales revenue at the amount of
sales less the sales discounts available.
Revenues should be recorded at the cash equivalent price at the date of sale.
Under the net method, the sale is recorded at an amount that represents the
cash equivalent price at the date of exchange (sale).

b. There is no effect on Hogans sales revenues when customers do not take the
sales discounts. Hogans net income is increased by the amount of interest
earned when customers do not take the sales discounts.
Requirement 2
Trade discounts are neither recorded in the accounts nor reported in the financial
statements. Therefore, the amount recorded as sales revenues and accounts receivable
is net of trade discounts and represents the cash equivalent price of the asset sold.
Requirement 3
To account for the accounts receivable factored on August 1, 2013, Hogan should
decrease accounts receivable by the amount of the accounts receivable factored,
increase cash by the amount received from the factor, and record a loss. Factoring of
accounts receivable without recourse is equivalent to a sale. The difference between
the cash received and the carrying amount of the receivables is a loss.
Requirement 4
Hogan should report the face amount of the interest-bearing notes receivable and
the related interest receivable for the period from October 1 through December 31 on
its balance sheet as current assets. Both assets are due on September 30, 2014, which
is less than one year from the date of the balance sheet.
Hogan should report interest revenue from the notes receivable on its income
statement for the year ended December 31, 2013. Interest revenue is equal to the
amount accrued on the notes receivable at the appropriate interest rate.
Interest revenue is realized with the passage of time. Accordingly, interest
revenue should be accounted for as an element of income over the life of the notes
receivable.


Real World Case 74
Requirement 2

a. Sales returns reserve is a contra-asset account, serving to reduce the
carrying value of accounts receivable for the estimated amount of sales
returns. Green Mountain is using the term reserve rather than
allowance, but the account serves the same purpose.

b.
Sales Returns Reserve
________________________________________
3,809 Beg. Bal.
31 Acquisition
40,139 charged to cost and expense
Deductions 31,237
_________________
12,742 End. Bal.

c.

Sales returns (a contra-revenue account) ......... ................. 40,139
Sales returns reserve .................................... ............................ 40,139

This journal entry reduces revenue for $40,139 of estimated sales returns
and increases the reserve by that amount. Note: They refer to this as
amount charged to cost and expense, but it actually is an amount charged
to a contra-revenue account which has the same effect on income as an
expense.

Sales returns reserve ........................................ ................. 31,237
Accounts receivable ..................................... ............................ 31,237

This journal entry recognizes that returns of $31,237 occurred during the
period, reducing both the sales returns reserve and accounts receivable.

Real World Case 74 (continued)

d. In the operations section of the statement of cash flows, $40,139 is added back
to net income because it is an amount that reduces net income (by being
subtracted from revenue) but does not in itself use any cash. The $31,237
reduction in accounts receivable is included in the overall change in
receivables of ($102,297).
Requirement 3

a.
________________________________________
12,742 Beg. bal.
27,521 charged to cost and expense (from Antar)
Deductions assumed to be 0
_________________
40,263 End. bal.

b.
________________________________________
40,263 Beg. bal.
Recovery (from Antar) 22,259
Deductions assumed to be 0
_________________
18,004 End. bal.

c.

Sales returns reserve ........................................ .................. 22,259
Recovery of sales returns (increasing revenue) ........................ 22,259

This journal entry increases revenue by $22,259, the amount by which the
sales returns reserve is being reduced.


Real World Case 74 (concluded)

d. It could be that Green Mountain unintentionally overestimated returns in Q1
by a very large amount, and then experienced lower than expected returns and
so had to reduce their allowance to correct their estimate. On the other hand,
Green Mountain could have intentionally overestimated returns in Q1 as a
way to shift income from Q1 to Q2, since income would be reduced by the
estimated returns in Q1 and increased by the recovery in Q2.

Ethics Case 75
Requirement 1
Required allowance $180,000
Revised allowance 135,000
Increase in income before taxes of proposed change $ 45,000
Requirement 2
Discussion should include these elements.

Ethical Dilemma:
You, as the assistant controller, have a responsibility to follow GAAP and make a
reasonably accurate estimate of the net realizable value of receivables. Is your
responsibility to fairly present Stanton Industries financial statements to external
users greater than your obligation to improve the financial position of your employer?

Alternative actions and consequences include:

1. Refuse to comply with the controllers request to change the aging category of the
large account.
Positive consequences:
a. Preservation of your honesty and integrity.
b. Fair presentation of the net realizable value of receivables.
Negative consequences:
a. Possible loss of your job.
b. Lower net income for Stanton Industries.
c. A devalued stock price for Stanton Industries.

2. Comply with the controller's suggestion to report the allowance for uncollectible
accounts at $135,000.
Positive consequences:
a. Retention of your job.
b. A more favorable net income for Stanton Industries.
c. A more favorable position with unknowing creditors, financial analysts,
current investors, and future investors.
Negative consequences:
a. Endure guilt feelings.
b. A lack of trust in you by other managers and employees.
c. Possible litigation from investors and creditors.

Case 75 (concluded)

3. Report the controllers suggestion to a higher level of management, the audit
committee, or the auditors. If one of these parties corrects the controller and
compels fair reporting of the allowance account, the consequences would be the
same as in alternative 1 when you refuse to make the adjustment. Your job may
still be in jeopardy due to the fact that management may consider whistle blowing
as indicative of employee disloyalty. If the reportee parties agree with the
controller and report the incorrect amount of $135,000, the consequences will be
similar to those for the second alternative in 2, except that you run an even greater
risk of losing your job.

4. Refuse to comply with the controllers request and resign as assistant controller. If
you report the controllers suggestion to higher management, the audit committee,
or the auditor, the positive and negative considerations are the same as for
alternative 3. If you do not report the controllers request, then the consequences
are the same as for alternative 2. In either case, your job is not an issue since you
have already resigned.


Judgment Case 76
1. A weakness is created by the fact that J ohn need only submit a list of accounts and
amounts to be charged to replenish the petty cash fund. The supporting
documentation for the petty cash disbursements also should be submitted with
J ohns list and reviewed by someone else. Surprise counts of the fund also should
be made to ensure that the fund is being maintained on an imprest basis, that is, to
ensure that cash and/or receipts equal $200 at all times.
2. The internal control system for disbursements does not contain sufficient
separation of duties. Dean Leiser approves the vouchers, signs the checks,
maintains the disbursement records, and reconciles the bank account. There should
be at least one other person involved in these activities to ensure accuracy and to
safeguard cash from expropriation.
3. The internal control system for receipts does not contain sufficient separation of
duties. Fran J ones has physical control of the deposits and also maintains the
subsidiary ledger for accounts receivable. These duties should be separated. In
addition, the company should require that customers pay their bills via check and
that cash not be used.


Real World Case 77
Requirement 3
Avon Products, Inc., information from 2010
2010 Net sales: $10,731.3
2010 net accounts receivable: $826.3 (allowance $232)
2009 net accounts receivable: $765.7 (allowance $165.1)
Provision for doubtful accounts (bad debt expense) from cash flow statement: $215.7

Answers will, of course, vary depending on the year. The following were
reported in the financial statements for the year ended December 31, 2010 ($ in
millions):
a. Net trade accounts receivable +Allowance for doubtful accounts =Gross
accounts receivable
$826.3 +232 =$ 1,058.3

b. The statement of cash flows indicates bad debt expense (provision for
doubtful accounts) of $215.7

c. Beginning allowance for doubtful accounts +Bad debt expense Bad debt
write-offs =Ending allowance for doubtful accounts
$165.1 +215.7 Write-offs =$232.0
Write-offs =$148.8

d. Beginning trade accounts receivable +Credit sales Bad debt write-offs
Cash collected =Ending trade accounts receivable
Beginning trade accounts receivable =$765.7+165.1=$930.8
$930.8 +10,731.3 148.8 Cash collections =$1,058.3
Cash collections =$10,455


Integrating Case 78
McLaughlin's underestimation of bad debts is treated as a change in accounting
estimate. Changes in estimates are accounted for prospectively. When a company
revises a previous estimate, prior financial statements are not restated. Instead, the
company merely incorporates the new estimate in any related accounting
determinations from then on. In this case, bad debt expense for 2014 will be higher
than it would have been had not the underestimation occurred. A disclosure note
should describe the effect of a change in estimate on income before extraordinary
items, net income, and related per share amounts for 2014.

Analysis Case 79
Requirement 1
These methods can be described by one of two basic arrangements:
1. A secured borrowing, or
2. A sale of receivables.
When a company chooses between a borrowing and a sale, the critical element is
the extent to which it (the transferor) is willing to surrender control over the assets
transferred. Specifically, the transferor is determined to have surrendered control over
the receivables if and only if three sale conditions are met.
Secured borrowings usually take the form of an assignment of receivables. An
assignment of receivables is a promise by the borrower (the owner of the receivables)
that any failure to repay debt owed to the lender in accordance with the debt
agreement will cause the proceeds from collecting the receivables to go directly
toward repayment of the debt. This arrangement is no different from the use of a
building as collateral for a mortgage loan. The assignor (borrower) assigns the
assignee (lender) the rights to specific receivables as collateral for a loan. A variation
of assigning specific receivables is when trade receivables in general rather than
specific receivables are pledged as collateral. The responsibility of collection of the
receivables remains solely with the company. This variation is referred to as a
pledging of accounts receivable.
Two popular arrangements used for the sale of receivables are factoring and
securitization. A factor is a financial institution that buys receivables for cash,
handles the billing and collection of the receivables, and charges a fee for this service.
Actually, credit cards like VISA and Mastercard are forms of factoring arrangements.
The seller relinquishes all rights to the future cash receipts in exchange for cash from
the buyer (the factor).
Another popular arrangement used to sell receivables is a securitization. In a
typical accounts receivable securitization, the company creates a Special Purpose
Entity (SPE), usually a trust or a subsidiary. The SPE buys a pool of trade
receivables, credit card receivables, or loans from the company, and then sells related
securities, for example bonds or commercial paper, that are backed (collateralized) by
the receivables.
Similar to accounts receivable, a note receivable can be used to obtain immediate
cash from a financial institution either by pledging the note as collateral for a loan or
by selling the note. The transfer of a note is referred to as discounting.


Case 79 (concluded)
Requirement 2
In an assignment of specific receivables, usually the amount borrowed is less
than the amount of receivables assigned. The difference provides some protection for
the lender to allow for possible uncollectible accounts. Also, the assignee (transferee)
usually charges the assignor an up-front finance charge in addition to stated interest on
the collateralized loan. The borrower, assignor, records the loan liability, the finance
fee expense, and the cash borrowed.
No special accounting treatment is needed for an assignment of receivables in
general, and the arrangement is simply described in a disclosure note.
The specific accounting treatment for the sale of receivables using factoring and
securitization arrangements depends on the amount of risk the factor assumes, in
particular whether it buys the receivables without recourse or with recourse.
When a company sells accounts receivable without recourse, the buyer assumes
the risk of uncollectibility. This means the buyer has no recourse to the seller if
customers dont pay the receivables. In that case, the seller simply accounts for the
transaction as a sale of an asset. The buyer charges a fee for providing this service,
usually a percentage of the book value of receivables. Because the fee reduces the
proceeds the seller receives from selling the asset, the seller records a loss on sale of
assets. The typical factoring arrangement is made without recourse.
When a company sells accounts receivable with recourse, the seller retains the
risk of uncollectibility. In effect, the seller guarantees that the buyer will be paid even
if some receivables prove to be uncollectible. Even if receivables are sold with
recourse, as long as the three conditions for sale treatment are met, the transferor
would still account for the transfer as a sale. The only difference would be the
additional requirement that the transferor record the estimated fair value of the
recourse obligation as a liability. The recourse obligation is the estimated amount that
the transferor will have to pay the transferee as a reimbursement for uncollectible
receivables.


Real World Case 710
Requirement 1
Sanofi-Aventis uses the terms provision for impairment and impairment for
allowance for bad debts. The (126) is the allowance necessary to adjust gross
accounts receivable for estimated bad debts.
Requirement 2
Sanofi-Aventis does not factor or securitize its receivables. We know this
because note D.10 states, Group policy is to retain receivables until maturity, and
hence not to use receivables securitization programs.
Requirement 3
a. Accounts receivable would be reduced in the period of change, as Sanofi-
Aventis would collect outstanding receivables and immediately securitize new
receivables.
b. Cash flow from operations would be increased in the period of change, as
Sanofi-Aventis would show cash inflows both from collecting outstanding
receivables and from immediately securitizing new receivables.
c. Accounts receivable would be stable at a relatively low level, as Sanofi-
Aventis would immediately securitize new receivables.
d. Cash flow from operations would return to approximately its former level, as
Sanofi-Aventis would show cash inflows only from immediately securitizing
new receivables.
Requirement 4
The answers to requirement 3 highlight that decisions to increase or decrease the
extent of securitization create one-time changes in receivables and cash flows in the
period in which the company transitions to the new level. For example, increasing
securitization will boost cash flow in the period of change. However, the increased
cash flow is only temporaryin future periods cash flow will revert to former levels
unless the company increases the extent of securitization yet further.

Research Case 711
Requirement 1
When a company sells accounts receivable without recourse, the buyer assumes
the risk of uncollectibility. This means the buyer cannot pursue collection from the
seller (has no recourse) if customers dont pay the receivables.
Requirement 2
FASB ASC 86010405: Transfers and ServicingOverallDerecognition
Criteria for a Sale of Financial Assets.
The transferor is determined to have surrendered control over the receivables if
and only if all of the following conditions are met:

a. The transferred assets have been isolated from the transferorput presumptively
beyond the reach of the transferor and its creditorseven in bankruptcy or other
receivership.
b. Each transferee has the right to pledge or exchange the assets it received.
c. The transferor does not maintain effective control over the transferred assets
through either (1) an agreement that the transferor repurchase or redeem them
before their maturity or (2) the ability to cause the transferee to return specific
assets.

(These criteria were included in Statement of Financial Accounting Standards
No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" subsequently modified by SFAS No. 166, Accounting
for Transfers of Financial Assets, an amendment of FASB Statement No. 140. (The
above conditions can be found in paragraph 9 of the standard.)

Case 711 (concluded)
Requirement 3

Cash (90% x $400,000) ...................................................... 360,000
Accounts receivable (balance sold) ............................... 400,000
Requirement 4
FASB ACS 860104024: Transfers and ServicingOverallDerecognition
Effective Control Through Both a Right and an Obligation (previously paragraph 47
of SFAS No. 140) lists the following conditions:
a. The assets to be repurchased or redeemed are the same or substantially the same
as those transferred.
b. The transferor is able to repurchase or redeem them on substantially the agreed
terms, even in the event of default by the transferee.
c. The agreement is to repurchase or redeem them before maturity, at a fixed or
determinable price.
d. The agreement is entered into concurrently with the transfer.

Analysis Case 712
Requirement 1

Del Monte Smithfield

Receivables turnover = 3,627 =17.61 times

12,202.7 = 18.33 times
205.95 665.55

= 20.73 days
365
= 19.91 days

period 17.61 18.33

The receivable turnover ratios are in a close range with one another. This is not
surprising since the companies operate in the same industry, selling similar products
with similar terms and customers.

Requirement 2
The objective of this requirement is to motivate students to obtain hands-on
familiarity with actual annual reports and to apply the techniques learned in the
chapter. You may wish to provide students with multiple copies of the same annual
reports and compare responses. Another approach is to divide the class into teams
who evaluate reports from a group perspective.


Analysis Case 713
Requirement 1
Note 1 indicates Cash and Cash EquivalentsAll highly liquid investments,
including credit card receivables due from banks, with original maturities of three
months or less at date of purchase, are reported at fair value and are considered to be
cash equivalents. All other investments not considered to be cash equivalents are
separately categorized as investments.

Requirement 2
$13,913 (in millions)from the balance sheet.
Requirement 3
($ in millions, from Note 12) 2011 2010
Net receivables $6,493 $5,837
Add: Allowance 96 115
Gross receivables $6,589 $5,952


Air FranceKLM Case
Requirement 1

AF indicates the following:

3.10.1 Valuation of trade receivables and noncurrent financial assets
Trade receivables, loans and other noncurrent financial assets are considered to
be assets issued by the Group and are recorded at fair value then, subsequently,
using the amortized cost method less impairment losses, if any. The purchases
and sales of financial assets are accounted for as of the transaction date.

This approach is consistent with U.S. GAAP. The receivables are recorded initially at
their fair value (their value when the sales transaction occurs). If they are discounted
for the time value of money, the amount of any discount is amortized to interest
revenue over the life of the receivable. And, an allowance for bad debts is set up to
account for uncollectible accounts (per note 24, they call that allowance a valuation
allowance), which they refer to as impairment losses in the footnote.
Requirement 2

Valuation Allowance for Trade Accounts Receivable
________________________________________
89 Beg. Bal.
14 bad debt expense
write-offs 15
currency translation adj. 1
reclassification 4
_________________
83 End. Bal.
Requirement 3

AF has bank overdrafts of 129 as of March 31, 2011. Under IFRS, those overdrafts
would be netted against AFs total cash and cash equivalents of 3,717 if the
overdrafts are payable on demand and are part of the AFs normal cash management
process. Instead, the overdrafts are shown as a current liability, consistent with U.S.
GAAP and suggesting that the overdrafts dont meet IFRSs requirements for netting
against the cash balance.

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