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CHAPTER 8
RECEIVABLES
DISCUSSION QUESTIONS
1. Receivables are normally classified as (1) accounts receivable, (2) notes receivable, or
(3) other receivables.
2. Dan’s Hardware should use the direct write-off method because it is a small business that has
a relatively small number and volume of accounts receivable.
3. Contra asset, credit balance
4. The accounts receivable and allowance for doubtful accounts may be reported at a net
amount of $661,500 ($673,400 – $11,900) in the Current Assets section of the balance sheet.
In this case, the amount of the allowance for doubtful accounts should be shown separately in
a note to the financial statements or in parentheses on the balance sheet. Alternatively, the
accounts receivable may be shown at the gross amount of $673,400 less the amount of the
allowance for doubtful accounts of $11,900, thus yielding net accounts receivable of
$661,500.
5. (1) The percentage rate used is excessive in relationship to the accounts written off as
uncollectible; hence, the balance in the allowance is excessive.
(2) A substantial volume of old uncollectible accounts is still being carried in the accounts
receivable account.
6. An estimate based on analysis of receivables provides the most accurate estimate of the
current net realizable value.
7. a. Sailfish Company
b. Notes Receivable
8. The interest will amount to $5,100 ($85,000 × 6%) only if the note is payable one year from
the date it was created. The usual practice is to state the interest rate in terms of an annual
rate, rather than in terms of the period covered by the note.
9. Debit Accounts Receivable for $243,600
Credit Notes Receivable for $240,000
Credit Interest Revenue for $3,600
10. Cash 245,427
Accounts Receivable [$240,000 + ($240,000 × 6% × 90/360)] 243,600
Interest Revenue 1,827
($243,600 × 30/360 × 9% = $1,827).
8-1
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CHAPTER 8 Receivables
PRACTICE EXERCISES
PE 8–1A
Feb. 12 Cash 800
Bad Debt Expense 2,400
Accounts Receivable—Leo Jorgenson 3,200
3 Cash 2,400
Accounts Receivable—Leo Jorgenson 2,400
PE 8–1B
Oct. 2 Cash 600
Bad Debt Expense 1,350
Accounts Receivable—Rachel Elpel 1,950
20 Cash 1,350
Accounts Receivable—Rachel Elpel 1,350
PE 8–2A
Feb. 12 Cash 800
Allowance for Doubtful Accounts 2,400
Accounts Receivable—Leo Jorgenson 3,200
3 Cash 2,400
Accounts Receivable—Leo Jorgenson 2,400
8-2
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CHAPTER 8 Receivables
PE 8–2B
Oct. 2 Cash 600
Allowance for Doubtful Accounts 1,350
Accounts Receivable—Rachel Elpel 1,950
20 Cash 1,350
Accounts Receivable—Rachel Elpel 1,350
PE 8–3A
a. $55,500 ($7,400,000 × 0.0075)
b. Adjusted Balance
Accounts Receivable…………………………………………………… $685,000
Allowance for Doubtful Accounts ($9,000 + $55,500)…………… 64,500
Bad Debt Expense……………………………………………………… 55,500
c. Net realizable value ($685,000 – $64,500)…………………………… $620,500
PE 8–3B
a. $231,500 ($46,300,000 × 0.0050)
b. Adjusted Balance
Accounts Receivable…………………………………………………… $3,460,000
Allowance for Doubtful Accounts ($231,500 – $12,500)………… 219,000
Bad Debt Expense……………………………………………………… 231,500
c. Net realizable value ($3,460,000 – $219,000)……………………… $3,241,000
8-3
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CHAPTER 8 Receivables
PE 8–4A
a. $41,000 ($50,000 – $9,000)
b. Adjusted Balance
Accounts Receivable………………………………………………… $685,000
Allowance for Doubtful Accounts…………………………………… 50,000
Bad Debt Expense……………………………………………………… 41,000
c. Net realizable value ($685,000 – $50,000)………………………… $635,000
PE 8–4B
a. $257,500 ($245,000 + $12,500)
b. Adjusted Balance
Accounts Receivable………………………………………………… $3,460,000
Allowance for Doubtful Accounts…………………………………… 245,000
Bad Debt Expense……………………………………………………… 257,500
c. Net realizable value ($3,460,000 – $245,000)……………………… $3,215,000
PE 8–5A
a. The due date for the note is September 6, determined as follows:
August …………………………………………………………….…… 24 days (31 – 7)
September……………………………………………………………… 6 days
Total……………………………………………………………………… 30 days
b. $210,875 [$210,000 + ($210,000 × 5% × 30/360)]
c.
Sept. 6 Cash 210,875
Notes Receivable 210,000
Interest Revenue 875
8-4
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CHAPTER 8 Receivables
PE 8–5B
a. The due date for the note is August 7, determined as follows:
April…………………………………………………………………… 21 days (30 – 9)
May……………………………………………………………………. 31 days
June…………………………………………………………………… 30 days
July……………………………………………………………………. 31 days
August………………………………………………………….……… 7 days
Total…………………………………………………………………… 120 days
PE 8–6A
a. Accounts Receivable Turnover 2014 2013
Net sales……………………………… $2,912,000 $2,958,000
Accounts receivable:
Beginning of year……………… $ 300,000 $ 280,000
End of year……………………… $ 340,000 $ 300,000
Average accts. receivable………… $ 320,000 $ 290,000
[($300,000 + $340,000) ÷ 2] [($280,000 + $300,000) ÷ 2]
Accts. receivable turnover………… 9.1 10.2
($2,912,000 ÷ $320,000) ($2,958,000 ÷ $290,000)
c. The decrease in the accounts receivable turnover from 10.2 to 9.1 and the
increase in the number of days’ sales in receivables from 35.8 days to 40.1
days indicate unfavorable trends in the efficiency of collecting receivables.
8-5
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CHAPTER 8 Receivables
PE 8–6B
a. Accounts Receivable Turnover 2014 2013
Net sales………………………………… $7,906,000 $6,726,000
Accounts receivable:
Beginning of year………………… $ 600,000 $ 540,000
End of year………………………… $ 580,000 $ 600,000
Average accts. receivable…………… $ 590,000 $ 570,000
[($600,000 + $580,000) ÷ 2] [($540,000 + $600,000) ÷ 2]
Accts. receivable turnover…………… 13.4 11.8
($7,906,000 ÷ $590,000) ($6,726,000 ÷ $570,000)
c. The increase in the accounts receivable turnover from 11.8 to 13.4 and the
decrease in the number of days’ sales in receivables from 30.9 days to 27.2
days indicate favorable trends in the efficiency of collecting receivables.
8-6
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CHAPTER 8 Receivables
EXERCISES
Ex. 8–1
Accounts receivable from the U.S. government are significantly different from
receivables from commercial aircraft carriers such as Delta and United. Thus,
Boeing should report each type of receivable separately. In its filing with the
Securities and Exchange Commission, Boeing reports the receivables together
on the balance sheet, but discloses each receivable separately in a note to the
financial statements.
Ex. 8–2
a. MGM Resorts International: 22.6% ($93,760,000 ÷ $415,654,000)
b. Johnson & Johnson: 3.4% ($340,000,000 ÷ $10,114,000,000)
c. Casino operations experience greater bad debt risk, since it is difficult to
control the creditworthiness of customers entering the casino. In addition,
individuals who may have adequate creditworthiness could overextend
themselves and lose more than they can afford if they get caught up in the
excitement of gambling. In contrast, Johnson & Johnson’s customers are
primarily other businesses such as grocery store chains.
Ex. 8–3
Jan. 30 Accounts Receivable—Dr. Cindy Mott 85,000
Sales 85,000
27 Cash 37,000
Accounts Receivable—Dr. Cindy Mott 37,000
8-7
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CHAPTER 8 Receivables
Ex. 8–4
Mar. 19 Accounts Receivable—Midnight Delights Co. 37,500
Sales 37,500
22 Cash 15,500
Accounts Receivable—Midnight Delights Co. 15,500
Ex. 8–5
a. Bad Debt Expense 11,750
Accounts Receivable—Wil Treadwell 11,750
Ex. 8–6
a. $501,000 ($66,800,000 × 0.0075) c. $334,000 ($66,800,000 × 0.0050)
b. $493,000 ($475,000 + $18,000) d. $350,000 ($360,000 – $10,000)
Ex. 8–7
Account Due Date Number of Days Past Due
Avalanche Auto August 8 84 (23 + 30 + 31)
Bales Auto October 11 20 (31 – 11)
Derby Auto Repair June 23 130 (7 + 31 + 31 + 30 + 31)
Lucky’s Auto Repair September 2 59 (28 + 31)
Pit Stop Auto September 19 42 (11 + 31)
Reliable Auto Repair July 15 108 (16 + 31 + 30 + 31)
Trident Auto August 24 68 (7 + 30 + 31)
Valley Repair & Tow May 17 167 (14 + 30 + 31 + 31 + 30 +
8-8
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CHAPTER 8 Receivables
Ex. 8–8
a.
Customer Due Date Number of Days Past Due
Color World Industries March 13 171 days (18 + 30 + 31 + 30 + 31 + 31)
Hawks Company June 29 63 days (1 + 31 + 31)
Osler Inc. July 8 54 days (23 + 31)
Sather Sales Company September 6 Not past due
Wisdom Company August 25 6 days (31 – 25)
b.
Aging of Receivables Schedule
August 31
Days Past Due
Not Past Over
Customer Balance Due 1–30 31–60 61–90 90
Allied Industries Inc. 3,000 3,000
Archer Company 4,500 4,500
Ex. 8–9
Days Past Due
Not Past Over
Balance Due 1–30 31–60 61–90 90
Total receivables 833,500 488,000 166,500 96,000 43,000 40,000
Percentage uncollectible 2% 6% 12% 30% 75%
Allowance for doubtful
accounts 74,170 9,760 9,990 11,520 12,900 30,000
8-9
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
CHAPTER 8 Receivables
Ex. 8–10
Aug. 31 Bad Debt Expense 67,820
Allowance for Doubtful Accounts 67,820
Uncollectible accounts estimate
($74,170 – $6,350).
Ex. 8–11
Estimated
Uncollectible Accounts
Age Interval Balance Percent Amount
Not past due $ 740,000 0.5% $ 3,700
1–30 days past due 390,000 2% 7,800
31–60 days past due 85,000 4% 3,400
61–90 days past due 28,000 14% 3,920
91–180 days past due 42,000 32% 13,440
Over 180 days past due 15,000 80% 12,000
Total $1,300,000 $44,260
Ex. 8–12
2014
Dec. 31 Bad Debt Expense 47,635
Allowance for Doubtful Accounts 47,635
Uncollectible accounts estimate
($44,260 + $3,375).
8-10
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
CHAPTER 8 Receivables
Ex. 8–13
a. Apr. 13 Bad Debt Expense 8,450
Accounts Receivable—Dean Sheppard 8,450
27 Cash 8,450
Accounts Receivable—Dean Sheppard 8,450
31 No entry
8-11
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CHAPTER 8 Receivables
27 Cash 8,450
Accounts Receivable—Dean Sheppard 8,450
Shipway Company’s income would be $8,225 higher under the direct write-off
method than under the allowance method.
8-12
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CHAPTER 8 Receivables
Ex. 8–14
a. June 8 Bad Debt Expense 8,440
Accounts Receivable—Kathy Quantel 8,440
16 Cash 8,440
Accounts Receivable—Kathy Quantel 8,440
31 No entry
8-13
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CHAPTER 8 Receivables
16 Cash 8,440
Accounts Receivable—Kathy Quantel 8,440
Computations:
Aging Class Receivables Estimated Doubtful
(Number of Days Balance on Accounts
Past Due) December 31 Percent Amount
0–30 days $320,000 1% $ 3,200
31–60 days 110,000 3% 3,300
61–90 days 24,000 10% 2,400
91–120 days 18,000 33% 5,940
More than 120 days 43,000 75% 32,250
Total receivables $515,000 $47,090
8-14
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
CHAPTER 8 Receivables
Ex. 8–15
$482,800 [$487,500 + $27,800 – ($3,250,000 × 1%)]
Ex. 8–16
a. $593,000 [$600,000 + $34,000 – ($4,100,000 × 1%)]
b. $11,700 ($32,500 – $27,800) + ($41,000 – $34,000)
Ex. 8–17
a. Bad Debt Expense 30,000
Accounts Receivable—Shawn Brooke 4,650
Accounts Receivable—Eve Denton 5,180
Accounts Receivable—Art Malloy 11,050
Accounts Receivable—Cassie Yost 9,120
c. Net income would have been $9,375 higher in 2014 under the direct write-off
method, because bad debt expense would have been $9,375 higher under
the allowance method ($39,375 expense under the allowance method vs.
$30,000 expense under the direct write-off method).
8-15
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CHAPTER 8 Receivables
Ex. 8–18
a. Bad Debt Expense 102,500
Accounts Receivable—Kim Abel 21,550
Accounts Receivable—Lee Drake 33,925
Accounts Receivable—Jenny Green 27,565
Accounts Receivable—Mike Lamb 19,460
Computations:
Aging Class Receivables Estimated Doubtful
(Number of Days Balance on Accounts
Past Due) December 31 Percent Amount
0–30 days $ 715,000 1% $ 7,150
31–60 days 310,000 2% 6,200
61–90 days 102,000 15% 15,300
91–120 days 76,000 30% 22,800
More than 120 days 97,000 60% 58,200
Total receivables $1,300,000 $109,650
c. Net income would have been $14,650 lower in 2014 under the allowance
method, because bad debt expense would have been $14,650 higher under
the allowance method ($117,150 expense under the allowance method versus
$102,500 expense under the direct write-off method).
8-16
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
CHAPTER 8 Receivables
Ex. 8–19
Due Date Interest
a. Apr. 22 $1,100 [$55,000 × 0.08 × (90/360)]
b. May 8 300 [$36,000 × 0.05 × (60/360)]
c. July 30 390 [$78,000 × 0.04 × (45/360)]
d. Nov. 3 161 [$13,800 × 0.07 × (60/360)]
e. Jan. 29 1,160 [$58,000 × 0.06 × (120/360)]
Ex. 8–20
a. June 18 (10 + 31 + 30 + 31 + 18)
b. $153,500 [($150,000 × 7% × 120/360) + $150,000]
c. (1) Notes Receivable 150,000
Accounts Rec.—Dry Creek Interior Decorators 150,000
Ex. 8–21
1. Sale on account.
2. Cost of merchandise sold for the sale on account.
3. A sale return or allowance.
4. Cost of merchandise returned.
5. Note received from customer on account.
6. Note dishonored and charged maturity value of note to customer’s account
receivable.
7. Payment received from customer for dishonored note plus interest earned
after due date.
8-17
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CHAPTER 8 Receivables
Ex. 8–22
2013
Dec. 16 Notes Receivable 21,000
Accounts Receivable—Lake Shore
Clothing & Bags Co. 21,000
31 Interest Receivable 70
Interest Revenue 70
Accrued interest
($21,000 × 0.08 × 15/360 = $70).
31 Interest Revenue 70
Income Summary 70
2014
Mar. 16 Cash 21,420
Notes Receivable 21,000
Interest Receivable 70
Interest Revenue 350
($21,000 × 0.08 × 75/360).
Ex. 8–23
July 12 Notes Receivable 240,000
Accounts Receivable—Accolade Co. 240,000
8-18
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CHAPTER 8 Receivables
Ex. 8–24
Apr. 18 Notes Receivable 60,000
Accounts Receivable—Glenn Cross 60,000
Ex. 8–25
1. The interest receivable should be reported separately as a current asset. It
should not be deducted from notes receivable.
2. The allowance for doubtful accounts should be deducted from accounts
receivable.
A corrected partial balance sheet would be as follows:
8-19
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
CHAPTER 8 Receivables
Ex. 8–26
a. and b.
Year 2 Year 1
Net sales………………………… $5,660,300 $4,978,900
Accounts receivable…………… $592,700 $486,200
Average accts. receivable……… $539,450 $531,450
[($592,700 + $486,200) ÷ 2] [($486,200 + $576,700) ÷ 2]
Accts. receivable turnover…… 10.5 9.4
($5,660,300 ÷ $539,450) ($4,978,900 ÷ $531,450)
Average daily sales…………… $15,507.7 $13,640.8
($5,660,300 ÷ 365 days) ($4,978,900 ÷ 365 days)
Days’ sales in receivables…… 34.8 39.0
($539,450 ÷ $15,507.7) ($531,450 ÷ $13,640.8)
Ex. 8–27
a. and b.
Year 2 Year 1
Net sales………………………… $10,706,588 $10,494,983
Accounts receivable…………… $1,265,032 $1,045,338
Average accts. receivable……… $1,155,185 $1,108,567.5
[($1,265,032 + $1,045,338) ÷ 2] [($1,045,338 + $1,171,797) ÷ 2]
Accts. receivable turnover…… 9.3 9.5
($10,706,588 ÷ $1,155,185) ($10,494,983 ÷ $1,108,567.5)
Average daily sales…………… $29,333.1 $28,753.4
($10,706,588 ÷ 365 days) ($10,494,983 ÷ 365 days)
Days’ sales in receivables…… 39.4 38.6
($1,155,185 ÷ $29,333.1) ($1,108,567.5 ÷ $28,753.4)
8-20
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