c08AccountingforReceivables.

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Self-Test Questions 389

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SELF-TEST QUESTIONS

Answers are on page 405. receivable were written off. Past experience indicates
(LO 1) 1. Receivables are frequently classified as: that 3% of net credit sales become uncollectible. What
(a) accounts receivable, company receivables, and should be the adjusted balance of Allowance for Doubt-
other receivables. ful Accounts at December 31, 2014?
(b) accounts receivable, notes receivable, and (a) NT$100,500. (c) NT$225,000.
employee receivables. (b) NT$105,000. (d) NT$405,000.
(c) accounts receivable and general receivables. 8. An analysis and aging of the accounts receivable of Prince (LO 3)
(d) accounts receivable, notes receivable, and other Company at December 31 reveals the following data.
receivables. Accounts receivable £800,000
(LO 2) 2. Buehler Company on June 15 sells merchandise on Allowance for doubtful
account to Chaz Co. for HK$10,000, terms 2/10, n/30. accounts per books before
On June 20, Chaz Co. returns merchandise worth adjustment 50,000
HK$3,000 to Buehler Company. On June 24, payment Amounts expected to become
is received from Chaz Co. for the balance due. What is uncollectible 65,000
the amount of cash received?
The cash realizable value of the accounts receivable
(a) HK$7,000. (c) HK$6,860.
at December 31, after adjustment, is:
(b) HK$6,800. (d) None of the above.
(a) £685,000. (c) £800,000.
(LO 3) 3. Which of the following approaches for bad debts is best
(b) £750,000. (d) £735,000.
described as a statement of financial position method?
9. One of the following statements about promissory (LO 6)
(a) Percentage-of-receivables basis.
notes is incorrect. The incorrect statement is:
(b) Direct write-off method.
(a) The party making the promise to pay is called the
(c) Percentage-of-sales basis.
maker.
(d) Both percentage-of-receivables basis and direct
(b) The party to whom payment is to be made is
write-off method.
called the payee.
(LO 3) 4. Hughes Company has a credit balance of £5,000
(c) A promissory note is not a negotiable instrument.
in its Allowance for Doubtful Accounts before any
(d) A promissory note is often required from high-
adjustments are made at the end of the year. Based
risk customers.
on review and aging of its accounts receivable at the
10. Which of the following statements about Visa credit (LO 4)
end of the year, Hughes estimates that £60,000 of its
card sales is incorrect?
receivables are uncollectible. The amount of bad debt
(a) The credit card issuer makes the credit investiga-
expense which should be reported for the year is:
tion of the customer.
(a) £5,000. (c) £60,000.
(b) The retailer is not involved in the collection process.
(b) £55,000. (d) £65,000.
(c) Two parties are involved.
(LO 3) 5. Use the same information as in question 4, except that
(d) The retailer receives cash more quickly than it
Hughes has a debit balance of £5,000 in its Allowance
would from individual customers on account.
for Doubtful Accounts before any adjustments are made
11. Blinka Retailers accepted €50,000 of Citibank Visa (LO 4)
at the end of the year. In this situation, the amount of
credit card charges for merchandise sold on July 1.
bad debt expense that should be reported for the year is:
Citibank charges 4% for its credit card use. The entry
(a) £5,000. (c) £60,000.
to record this transaction by Blinka Retailers will
(b) £55,000. (d) £65,000.
include a credit to Sales Revenue of €50,000 and a
(LO 3) 6. Net sales for the month are W800,000,000 and bad debts
debit(s) to:
are expected to be 1.5% of net sales. The company uses
(a) Cash €48,000
the percentage-of-sales basis. If Allowance for Doubtful
and Service Charge Expense € 2,000
Accounts has a credit balance of W15,000,000 before
(b) Accounts Receivable €48,000
adjustment, what is the balance after adjustment?
and Service Charge Expense € 2,000
(a) W15,000,000. (c) W23,000,000.
(c) Cash €50,000
(b) W27,000,000. (d) W31,000,000.
(d) Accounts Receivable €50,000
(LO 3) 7. In 2014, Roso Carlson Company had net credit sales of
12. Foti Co. accepts a $1,000, 3-month, 6% promissory (LO 6)
NT$7,500,000. On January 1, 2014, Allowance for
note in settlement of an account with Bartelt Co. The
Doubtful Accounts had a credit balance of NT$180,000.
entry to record this transaction is as follows.
During 2014, NT$300,000 of uncollectible accounts
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390 8 Accounting for Receivables

(a) Notes Receivable 1,015 (d) Cash 10,300

Accounts Receivable 1,015 Notes Receivable 10,000
(b) Notes Receivable 1,000 Interest Revenue 300
Accounts Receivable 1,000 14. Accounts and notes receivable are reported in the (LO 9)
(c) Notes Receivable 1,000 current assets section of the statement of financial
Sales Revenue 1,000 position at:
(d) Notes Receivable 1,030 (a) cash (net) realizable value.
Accounts Receivable 1,030 (b) net book value.
(LO 8) 13. Ginter Co. holds Kolar Inc.’s €10,000, 120-day, 9% (c) lower-of-cost-or-net realizable value.
note. The entry made by Ginter Co. when the note is (d) invoice cost.
collected, assuming no interest has been previously 15. Oliveras Company had net credit sales during the (LO 9)
accrued, is: year of $800,000 and cost of goods sold of $500,000.
(a) Cash 10,300 The balance in accounts receivable at the beginning
Notes Receivable 10,300 of the year was $100,000, and the end of the year it
(b) Cash 10,000 was $150,000. What were the accounts receivable
Notes Receivable 10,000 turnover ratio and the average collection period in
(c) Accounts Receivable 10,300 days?
Notes Receivable 10,000 (a) 4.0 and 91.3 days. (c) 6.4 and 57 days.
Interest Revenue 300 (b) 5.3 and 68.9 days. (d) 8.0 and 45.6 days.

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QUESTIONS

1. What is the difference between an account receivable 11. WestSide Textiles decides to sell HK$8,000,000 of its
and a note receivable? accounts receivable to First Factors Inc. First Factors
2. What are some common types of receivables other assesses a service charge of 3% of the amount of receiv-
than accounts receivable and notes receivable? ables sold. Prepare the journal entry that WestSide Tex-
3. Texaco Oil Company issues its own credit cards. tiles makes to record this sale.
Assume that Texaco charges you $40 interest on an 12. Your roommate is uncertain about the advantages of
unpaid balance. Prepare the journal entry that Texaco a promissory note. Compare the advantages of a note
makes to record this revenue. receivable with those of an account receivable.
4. What are the essential features of the allowance 13. How may the maturity date of a promissory note be
method of accounting for bad debts? stated?
5. Roger Holloway cannot understand why cash realiz- 14. Indicate the maturity date of each of the following
able value does not decrease when an uncollectible promissory notes:
account is written off under the allowance method. Date of Note Terms
Clarify this point for Roger Holloway.
6. Distinguish between the two bases that may be used (a) March 13 one year after date of note
in estimating uncollectible accounts. (b) May 4 3 months after date
7. Borke Company has a credit balance of NT$320,000 in (c) June 20 30 days after date
Allowance for Doubtful Accounts. The estimated bad (d) July 1 60 days after date
debt expense under the percentage-of-sales basis is 15. Compute the missing amounts for each of the follow-
NT$370,000. The total estimated uncollectibles under ing notes.
the percentage-of-receivables basis is NT$580,000. Annual Total
Prepare the adjusting entry under each basis. Principal Interest Rate Time Interest
8. How are bad debts accounted for under the direct write-
(a) ? 9% 120 days € 450
off method? What are the disadvantages of this method?
(b) €30,000 10% 3 years ?
9. Freida Company accepts both its own credit cards
(c) €60,000 ? 5 months €3,000
and national credit cards. What are the advantages of
(d) €45,000 8% ? €1,200
accepting both types of cards?
10. An article recently appeared in the Wall Street Journal in- 16. In determining interest revenue, some financial insti-
dicating that companies are selling their receivables at a tutions use 365 days per year and others use 360 days.
record rate. Why are companies selling their receivables? Why might a financial institution use 360 days?
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Brief Exercises 391

17. Jana Company dishonors a note at maturity. What are 19. The accounts receivable turnover ratio is 8.14,
the options available to the lender? and average net receivables during the period are
18. General Motors Corporation (USA) has accounts £400,000. What is the amount of net credit sales for
receivable and notes receivable. How should the re- the period?
ceivables be reported on the statement of financial
position?

BRIEF EXERCISES

BE8-1 Presented below are three receivables transactions. Indicate whether these receivables Identify different types of
are reported as accounts receivable, notes receivable, or other receivables on a statement of receivables.
financial position. (LO 1)
(a) Sold merchandise on account for W64,000,000 to a customer.
(b) Received a promissory note of W57,000,000 for services performed.
(c) Advanced W8,000,000 to an employee.
BE8-2 Record the following transactions on the books of Galaxy Co. Record basic accounts
(a) On July 1, Galaxy Co. sold merchandise on account to Kingston Inc. for $17,200, receivable transactions.
terms 2/10, n/30. (LO 2)
(b) On July 8, Kingston Inc. returned merchandise worth $3,800 to Galaxy Co.
(c) On July 11, Kingston Inc. paid for the merchandise.
BE8-3 During its first year of operations, Energy Company had credit sales of $3,000,000; Prepare entry for allowance
$600,000 remained uncollected at year-end. The credit manager estimates that $31,000 of method and partial statement
these receivables will become uncollectible. of financial position.
(a) Prepare the journal entry to record the estimated uncollectibles. (LO 3, 9)
(b) Prepare the current assets section of the statement of financial position for Energy
Company. Assume that in addition to the receivables it has cash of $90,000, inventory
of $118,000, and prepaid insurance of $7,500.
BE8-4 At the end of 2014, Endrun Co. has accounts receivable of £700,000 and an allow- Prepare entry for write-off;
ance for doubtful accounts of £54,000. On January 24, 2015, the company learns that its determine cash realizable
receivable from Marcello is not collectible, and management authorizes a write-off of £6,200. value.
(a) Prepare the journal entry to record the write-off. (LO 3)
(b) What is the cash realizable value of the accounts receivable (1) before the write-off
and (2) after the write-off?
BE8-5 Assume the same information as BE8-4. On March 4, 2015, Endrun Co. receives pay- Prepare entries for collection
ment of £6,200 in full from Marcello. Prepare the journal entries to record this transaction. of bad debt write-off.

BE8-6 Hamblin Co. elects to use the percentage-of-sales basis in 2014 to record bad debt (LO 3)
expense. It estimates that 2% of net credit sales will become uncollectible. Sales revenues Prepare entry using percentage-
are $800,000 for 2014, sales returns and allowances are $38,000, and the allowance for of-sales method.
doubtful accounts has a credit balance of $9,000. Prepare the adjusting entry to record (LO 3)
bad debt expense in 2014.
BE8-7 Shenzhen Co. uses the percentage-of-receivables basis to record bad debt expense. Prepare entry using percentage-
It estimates that 1% of accounts receivable will become uncollectible. Accounts receivable of-receivables method.
are £420,000 at the end of the year, and the allowance for doubtful accounts has a credit (LO 3)
balance of £1,500.
(a) Prepare the adjusting journal entry to record bad debt expense for the year.
(b) If the allowance for doubtful accounts had a debit balance of £740 instead of a credit
balance of £1,500, determine the amount to be reported for bad debt expense.
BE8-8 Presented below are two independent transactions. Prepare entries to dispose of
(a) Fiesta Restaurant accepted a Visa card in payment of a €175 lunch bill. The bank accounts receivable.
charges a 4% fee. What entry should Fiesta make? (LO 4)
(b) St. Pierre Company sold its accounts receivable of €70,000. What entry should
St. Pierre make, given a service charge of 3% on the amount of receivables sold?
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392 8 Accounting for Receivables

Compute interest and BE8-9 Compute interest and find the maturity date for the following notes.
determine maturity dates
on notes. Date of Note Principal Interest Rate (%) Terms
(LO 5) (a) June 10 $80,000 6% 60 days
(b) July 14 $64,000 7% 90 days
(c) April 27 $12,000 8% 75 days

Determine maturity dates and BE8-10 Presented below are data on three promissory notes. Determine the missing amounts.
compute interest and rates on
notes. Date of Maturity Annual Total
(LO 5) Note Terms Date Principal Interest Rate Interest
(a) April 1 60 days ? $600,000 5% ?
(b) July 2 30 days ? 90,000 ? $600
(c) March 7 6 months ? 120,000 10% ?

Prepare entry for notes BE8-11 On January 10, 2014, Wilfer Co. sold merchandise on account to Elgin Co. for
receivable exchanged for $11,600, n/30. On February 9, Elgin Co. gave Wilfer Co. a 9% promissory note in settlement
account receivable. of this account. Prepare the journal entry to record the sale and the settlement of the account
(LO 6) receivable.
Compute ratios to analyze BE8-12 The financial statements of Minnesota Mining and Manufacturing Company (3M)
receivables. (USA) report net sales of $20.0 billion. Accounts receivable (net) are $2.7 billion at the begin-
(LO 9) ning of the year and $2.8 billion at the end of the year. Compute 3M’s accounts receivable
turnover ratio. Compute 3M’s average collection period for accounts receivable in days.

> DO IT! REVIEW

Prepare entry for DO IT! 8-1 Amazon Company has been in business several years. At the end of the current
uncollectible accounts. year, the ledger shows:
(LO 3) Accounts Receivable R$ 310,000 Dr.
Sales Revenue 2,200,000 Cr.
Allowance for Doubtful Accounts 4,700 Cr.
Bad debts are estimated to be 5% of receivables. Prepare the entry to adjust Allowance for
Doubtful Accounts.

Prepare entry for factored DO IT! 8-2 Paltrow Distributors is a growing company whose ability to raise capital has
accounts. not been growing as quickly as its expanding assets and sales. Paltrow’s local banker has
(LO 4) indicated that the company cannot increase its borrowing for the foreseeable future.
Paltrow’s suppliers are demanding payment for goods acquired within 30 days of the
invoice date, but Paltrow’s customers are slow in paying for their purchases (60–90 days).
As a result, Paltrow has a cash flow problem.
Paltrow needs $860,000 to cover next Friday’s payroll. Its balance of outstanding
accounts receivable totals $1,000,000. To alleviate this cash crunch, the company sells
all of its accounts receivable ($1,000,000). Record the entry that Paltrow would make
when it raises the needed cash. (Assume a 3% service charge.)
Prepare entries for notes DO IT! 8-3 Karbon Wholesalers accepts from Bazaar Stores a $6,200, 4-month, 9% note
receivable. dated May 31 in settlement of Bazaar’s overdue account. (a) What is the maturity date of
(LO 5, 8) the note? (b) What is the entry made by Karbon at the maturity date, assuming Bazaar
pays the note and interest in full at that time?
Compute ratios for DO IT! 8-4 In 2014, Lauren Company has net credit sales of $1,480,000 for the year. It
receivables. had a beginning accounts receivable (net) balance of $112,000 and an ending accounts
(LO 9) receivable (net) balance of $108,000. Compute Lauren Company’s (a) accounts receivable
turnover and (b) average collection period in days.

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Exercises 393

EXERCISES

E8-1 Presented below are selected transactions of Federer Company. Federer sells in large Journalize entries related to
quantities to other companies and also sells its product in a small retail outlet. accounts receivable.
March 1 Sold merchandise on account to Lynda Company for CHF3,800, terms 2/10, n/30. (LO 2)
3 Lynda Company returned merchandise worth CHF500 to Federer.
9 Federer collected the amount due from Lynda Company from the March 1
sale.
15 Federer sold merchandise for CHF200 in its retail outlet. The customer used
his Federer credit card.
31 Federer added 1.5% monthly interest to the customer’s credit card balance.
Instructions
Prepare journal entries for the transactions above.
E8-2 Presented below are two independent situations. Journalize entries for
recognizing accounts
(a) On January 6, Bennett Co. sells merchandise on account to Jackie Inc. for $7,000,
receivable.
terms 2/10, n/30. On January 16, Jackie Inc. pays the amount due. Prepare the entries
on Bennett’s books to record the sale and related collection. (LO 2)
(b) On January 10, Connor Bybee uses his Sheridan Co. credit card to purchase merchan-
dise from Sheridan Co. for $9,000. On February 10, Bybee is billed for the amount
due of $9,000. On February 12, Bybee pays $6,000 on the balance due. On March 10,
Bybee is billed for the amount due, including interest at 2% per month on the unpaid
balance as of February 12. Prepare the entries on Sheridan Co.’s books related to the
transactions that occurred on January 10, February 12, and March 10.
E8-3 The ledger of Elburn Company at the end of the current year shows Accounts Receiv- Journalize entries to record
able €110,000, Sales Revenue €840,000, and Sales Returns and Allowances €28,000. allowance for doubtful
accounts using two different
Instructions bases.
(a) If Elburn uses the direct write-off method to account for uncollectible accounts, jour-
(LO 3)
nalize the adjusting entry at December 31, assuming Elburn determines that T. Thum’s
€1,400 balance is uncollectible.
(b) If Allowance for Doubtful Accounts has a credit balance of €2,100 in the trial balance,
journalize the adjusting entry at December 31, assuming bad debts are expected to be
(1) 1% of net sales, and (2) 10% of accounts receivable.
(c) If Allowance for Doubtful Accounts has a debit balance of €200 in the trial balance,
journalize the adjusting entry at December 31, assuming bad debts are expected to be
(1) 0.75% of net sales and (2) 6% of accounts receivable.
E8-4 Leland Company has accounts receivable of $98,100 at March 31. An analysis of the Determine bad debt expense;
accounts shows the following information. prepare the adjusting entry for
bad debt expense.
Month of Sale Balance, March 31
(LO 3)
March $65,000
February 17,600
January 8,500
Prior to January 7,000
$98,100

Credit terms are 2/10, n/30. At March 31, Allowance for Doubtful Accounts has a credit
balance of $900 prior to adjustment. The company uses the percentage-of-receivables basis
for estimating uncollectible accounts. The company’s estimate of bad debts is shown below.

Estimated Percentage
Age of Accounts Uncollectible
1–30 days 2.0%
31–60 days 5.0%
61–90 days 30.0%
Over 90 days 50.0%
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394 8 Accounting for Receivables

Instructions
(a) Determine the total estimated uncollectibles.
(b) Prepare the adjusting entry at March 31 to record bad debt expense.
Journalize write-off and E8-5 At December 31, 2013, Crawford Company had a credit balance of £15,000 in Allowance
recovery. for Doubtful Accounts. During 2014, Crawford wrote off accounts totaling £14,100. One of
(LO 3) those accounts (£1,800) was later collected. At December 31, 2014, an aging schedule indicated
that the balance in Allowance for Doubtful Accounts should be £19,000.
Instructions
Prepare journal entries to record the 2014 transactions of Crawford Company.
Journalize percentage-of-sales E8-6 On December 31, 2013, Russell Co. estimated that 2% of its net sales of $360,000 will
basis, write-off, recovery. become uncollectible. The company recorded this amount as an addition to Allowance for
(LO 3) Doubtful Accounts. On May 11, 2014, Russell Co. determined that the B. Vetter account
was uncollectible and wrote off $1,100. On June 12, 2014, Vetter paid the amount previ-
ously written off.
Instructions
Prepare the journal entries on December 31, 2013, May 11, 2014, and June 12, 2014.
Journalize entries for the sale E8-7 Presented below are two independent situations.
of accounts receivable.
(a) On March 3, Pusan Appliances sells W620,000,000 of its receivables to Universal Factors
(LO 4) Inc. Universal Factors assesses a finance charge of 3% of the amount of receivables sold.
Prepare the entry on Pusan Appliances’ books to record the sale of the receivables.
(b) On May 10, Taejeon Company sold merchandise for W3,500,000 and accepted the cus-
tomer’s America Bank MasterCard. America Bank charges a 5% service charge for credit
card sales. Prepare the entry on Taejeon Company’s books to record the sale of merchandise.
Journalize entries for credit E8-8 Presented below are two independent situations.
card sales.
(a) On April 2, Julie Keiser uses her JCPenney Company credit card to purchase mer-
(LO 4) chandise from a JCPenney store for $1,500. On May 1, Keiser is billed for the $1,500
amount due. Keiser pays $900 on the balance due on May 3. On June 1, Keiser receives
a bill for the amount due, including interest at 1.0% per month on the unpaid balance
as of May 3. Prepare the entries on JCPenney Co.’s books related to the transactions
that occurred on April 2, May 3, and June 1.
(b) On July 4, Avalon Restaurant accepts a Visa card for a $200 dinner bill. Visa charges a
3% service fee. Prepare the entry on Avalon’s books related to this transaction.
Journalize credit card sales, E8-9 Hong Kong Stores accepts both its own and national credit cards. During the year,
and indicate the statement the following selected summary transactions occurred.
presentation of financing
Jan. 15 Made Hong Kong credit card sales totaling HK$18,000. (There were no balances
charges and service charge
expense. prior to January 15.)
20 Made Visa credit card sales (service charge fee 2%) totaling HK$4,800.
(LO 4) Feb. 10 Collected HK$10,000 on Hong Kong credit card sales.
15 Added finance charges of 1.5% to Hong Kong credit card account balances.
Instructions
(a) Journalize the transactions for Hong Kong Stores.
(b) Indicate the statement presentation of the financing charges and the credit card service
charge expense for Hong Kong Stores.
Journalize entries for notes E8-10 Reeves Supply Co. has the following transactions related to notes receivable during
receivable transactions. the last 2 months of 2014. The company does not make entries to accrue interest except
(LO 5, 6) at December 31.
Nov. 1 Loaned $15,000 cash to Norma Jeanne on a 12-month, 9% note.
Dec. 11 Sold goods to Bob Sharbo, Inc., receiving a $6,750, 90-day, 8% note.
16 Received a $4,400, 180-day, 12% note in exchange for Richard Russo’s outstanding
accounts receivable.
31 Accrued interest revenue on all notes receivable.
Instructions
(a) Journalize the transactions for Reeves Supply Co.
(b) Record the collection of the Jeanne note at its maturity in 2015.
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Problems: Set A 395

E8-11 Record the following transactions for Taylor Co. in the general journal. Journalize entries for notes
receivable.
2014
(LO 5, 6)
May 1 Received a €7,500, 12-month, 9% note in exchange for Len Monroe’s outstand-
ing accounts receivable.
Dec. 31 Accrued interest on the Monroe note.
Dec. 31 Closed the interest revenue account.
2015
May 1 Received principal plus interest on the Monroe note. (No interest has been accrued
in 2015.)

E8-12 Bieber Company had the following select transactions. Prepare entries for note
receivable transactions.
May 1, 2014 Accepted Crane Company’s 12-month, 12% note in settlement of a
$16,000 account receivable. (LO 5, 6, 8)
July 1, 2014 Loaned $25,000 cash to Sam Howard on a 9-month, 10% note.
Dec. 31, 2014 Accrued interest on all notes receivable.
Apr. 1, 2015 Sam Howard dishonored its note; Bieber expects it will eventually collect.
May 1, 2015 Received principal plus interest on the Crane note.

Instructions
Prepare journal entries to record the transactions. Bieber prepares adjusting entries once
a year on December 31.

E8-13 On May 2, Nanjing Company lends ¥7,600,000 to Cortland, Inc., issuing a 6-month, Journalize entries for dishonor
8% note. At the maturity date, November 2, Cortland indicates that it cannot pay. of notes receivable.
(LO 5, 8)
Instructions
(a) Prepare the entry to record the issuance of the note.
(b) Prepare the entry to record the dishonor of the note, assuming that Nanjing Company
expects collection will occur.
(c) Prepare the entry to record the dishonor of the note, assuming that Nanjing Company
does not expect collection in the future.

E8-14 Lashkova Company had accounts receivable of $100,000 on January 1, 2014. The Compute accounts receivable
only transactions that affected accounts receivable during 2014 were net credit sales of turnover and average
$1,000,000, cash collections of $920,000, and accounts written off of $30,000. collection period.
(LO 9)
Instructions
(a) Compute the ending balance of accounts receivable.
(b) Compute the accounts receivable turnover ratio for 2014.
(c) Compute the average collection period in days.

PROBLEMS: SET A

P8-1A At December 31, 2013, Cafu Co. reported the following information on its state- Prepare journal entries related
ment of financial position. to bad debt expense.
(LO 2, 3, 9)
Accounts receivable R$960,000
Less: Allowance for doubtful accounts 70,000

During 2014, the company had the following transactions related to receivables.
1. Sales on account R$3,315,000
2. Sales returns and allowances 50,000
3. Collections of accounts receivable 2,810,000
4. Write-offs of accounts receivable deemed uncollectible 90,000
5. Recovery of bad debts previously written off as uncollectible 29,000
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396 8 Accounting for Receivables

Instructions
(a) Prepare the journal entries to record each of these five transactions. Assume that no
cash discounts were taken on the collections of accounts receivable.
(b) Accounts receivable (b) Enter the January 1, 2014, balances in Accounts Receivable and Allowance for Doubt-
R$1,325,000 ful Accounts, post the entries to the two accounts (use T-accounts), and determine the
ADA R$9,000 balances.
(c) Bad debt expense (c) Prepare the journal entry to record bad debt expense for 2014, assuming that an aging
R$116,000 of accounts receivable indicates that expected bad debts are R$125,000.
(d) Compute the accounts receivable turnover ratio for 2014, assuming the expected bad
debt information presented in (c).
Compute bad debt amounts. P8-2A Information related to Hamilton Company for 2014 is summarized below.
(LO 3) Total credit sales £2,500,000
Accounts receivable at December 31 970,000
Bad debts written off 66,000
Instructions
(a) What amount of bad debt expense will Hamilton Company report if it uses the direct
write-off method of accounting for bad debts?
(b) Assume that Hamilton Company estimates its bad debt expense to be 3% of credit
sales. What amount of bad debt expense will Hamilton record if it has an Allowance
for Doubtful Accounts credit balance of £4,000?
(c) Assume that Hamilton Company estimates its bad debt expense based on 7% of
accounts receivable. What amount of bad debt expense will Hamilton record if it has
an Allowance for Doubtful Accounts credit balance of £3,000?
(d) Assume the same facts as in (c), except that there is a £3,000 debit balance in Allow-
ance for Doubtful Accounts. What amount of bad debt expense will Hamilton record?
(e) What is the weakness of the direct write-off method of reporting bad debt
expense?
Journalize entries to record P8-3A Presented below is an aging schedule for Sycamore Company.
transactions related to bad
debts. Worksheet.xls
(LO 2, 3) Home Insert Page Layout Formulas Data Review View

P18 fx

A B C D E F G
1 Number of Days Past Due
2 Not
3 Customer Total Yet Due 1–30 31–60 61–90 Over 90
4 Anders $ 28,000 $12,000 $16,000
5 Blake 40,000 $ 40,000
6 Cyrs 57,000 16,000 6,000 $35,000
7 De Jong 34,000 $34,000
8 Others 132,000 96,000 16,000 14,000 6,000
9 $291,000 $152,000 $34,000 $30,000 $35,000 $40,000
Esmated
10 percentage
uncollecble 2% 6% 13% 25% 60%
Total esmated
11 bad debts $ 41,730 $ 3,040 $ 2,040 $ 3,900 $ 8,750 $24,000
12

At December 31, 2014, the unadjusted balance in Allowance for Doubtful Accounts is a
credit of $9,000.
Instructions
(a) Bad debt expense $32,730 (a) Journalize and post the adjusting entry for bad debts at December 31, 2014.
(b) Journalize and post to the allowance account the following events and transactions in
the year 2015.
(1) On March 31, a $1,000 customer balance originating in 2014 is judged uncollectible.
(2) On May 31, a check for $1,000 is received from the customer whose account was
written off as uncollectible on March 31.
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Problems: Set A 397

(c) Journalize the adjusting entry for bad debts on December 31, 2015, assuming that (c) Bad debt expense $32,400
the unadjusted balance in Allowance for Doubtful Accounts is a debit of $800 and the
aging schedule indicates that total estimated bad debts will be $31,600.

P8-4A Hú Inc. uses the allowance method to estimate uncollectible accounts receivable. Journalize transactions
The company produced the following aging of the accounts receivable at year-end. related to bad debts.
(LO 2, 3)

Worksheet.xls
Home Insert Page Layout Formulas Data Review View

P18 fx

A B C D E F G
1 Number of Days Outstanding
2
3 Total 0–30 31–60 61–90 91–120 Over 120
4 Accounts receivable HK$193,000 HK$70,000 HK$46,000 HK$39,000 HK$23,000 HK$15,000
5 % uncollecble 1% 3% 5% 8% 10%
6 Esmated bad debts
7

Instructions
(a) Calculate the total estimated bad debts based on the above information. (a) Tot. est.
(b) Prepare the year-end adjusting journal entry to record the bad debts using the aged bad debts HK$7,370
uncollectible accounts receivable determined in (a). Assume the current balance in
Allowance for Doubtful Accounts is a HK$3,000 debit.
(c) Of the above accounts, HK$5,000 is determined to be specifically uncollectible. Prepare
the journal entry to write off the uncollectible account.
(d) The company collects HK$5,000 subsequently on a specific account that had previously
been determined to be uncollectible in (c). Prepare the journal entry(ies) necessary to
restore the account and record the cash collection.
(e) Comment on how your answers to (a)–(d) would change if Hú Inc. used 3% of total ac-
counts receivable, rather than aging the accounts receivable. What are the advantages
to the company of aging the accounts receivable rather than applying a percentage to
total accounts receivable?

P8-5A At December 31, 2014, the trial balance of Roberto Company contained the follow- Journalize entries to record
ing amounts before adjustment. transactions related to bad
debts.
Debits Credits (LO 3)
Accounts Receivable $385,000
Allowance for Doubtful Accounts $ 800
Sales Revenue 918,000
Instructions
(a) Based on the information given, which method of accounting for bad debts is Roberto
Company using—the direct write-off method or the allowance method? How can you
tell?
(b) Prepare the adjusting entry at December 31, 2014, for bad debt expense under each of (b) (2) $9,180
the following independent assumptions.
(1) An aging schedule indicates that $11,750 of accounts receivable will be uncollectible.
(2) The company estimates that 1% of sales will be uncollectible.
(c) Repeat part (b) assuming that instead of a credit balance there is an $800 debit balance
in Allowance for Doubtful Accounts.
(d) During the next month, January 2015, a $3,000 account receivable is written off as
uncollectible. Prepare the journal entry to record the write-off.
(e) Repeat part (d) assuming that Roberto uses the direct write-off method instead of the
allowance method in accounting for uncollectible accounts receivable.
(f ) What type of account is Allowance for Doubtful Accounts? How does it affect
how accounts receivable is reported on the statement of financial position at the end
of the accounting period?
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398 8 Accounting for Receivables

Prepare entries for various P8-6A Hilo Company closes its books monthly. On September 30, selected ledger account
notes receivable transactions. balances are:
(LO 2, 4, 5, 8, 9) Notes Receivable $31,000
Interest Receivable 170
Notes Receivable include the following.
Date Maker Face Term Interest
Aug. 16 Demaster Inc. $ 8,000 60 days 8%
Aug. 25 Skinner Co. 9,000 60 days 10%
Sept. 30 Almer Corp. 14,000 6 months 9%
Interest is computed using a 360-day year. During October, the following transactions
were completed.
Oct. 7 Made sales of $6,300 on Hilo credit cards.
12 Made sales of $1,200 on MasterCard credit cards. The credit card service charge
is 3%.
15 Added $460 to Hilo customer balance for finance charges on unpaid balances.
15 Received payment in full from Demaster Inc. on the amount due.
24 Received notice that the Skinner note has been dishonored. (Assume that Skinner
is expected to pay in the future.)
Instructions
(a) Journalize the October transactions and the October 31 adjusting entry for accrued
interest receivable.
(b) Accounts receivable (b) Enter the balances at October 1 in the receivable accounts. Post the entries to all of the
$15,910 receivable accounts.
(c) Total receivables $30,015 (c) Show the statement of financial position presentation of the receivable accounts at
October 31.
Prepare entries for various P8-7A On January 1, 2014, Derek Company had Accounts Receivable €139,000, Notes
receivable transactions. Receivable €30,000, and Allowance for Doubtful Accounts €13,200. The note receivable is
(LO 2, 4, 5, 6, 7, 8) from Kaye Noonan Company. It is a 4-month, 12% note dated December 31, 2013. Derek
Company prepares financial statements annually at December 31. During the year, the fol-
lowing selected transactions occurred.
Jan. 5 Sold €24,000 of merchandise to Zwingle Company, terms n/15.
20 Accepted Zwingle Company’s €24,000, 3-month, 9% note for balance due.
Feb. 18 Sold €8,000 of merchandise to Gerard Company and accepted Gerard’s €8,000,
6-month, 8% note for the amount due.
Apr. 20 Collected Zwingle Company note in full.
30 Received payment in full from Kaye Noonan Company on the amount due.
May 25 Accepted Isabella Inc.’s €4,000, 3-month, 7% note in settlement of a past-due
balance on account.
Aug. 18 Received payment in full from Gerard Company on note due.
25 The Isabella Inc. note was dishonored. Isabella Inc. is not bankrupt; future pay-
ment is anticipated.
Sept. 1 Sold €12,000 of merchandise to Fernando Company and accepted a €12,000,
6-month, 10% note for the amount due.
Instructions
Journalize the transactions.

PROBLEMS: SET B

Prepare journal entries related P8-1B At December 31, 2013, Globe Trotter Imports reported the following information
to bad debt expense. on its statement of financial position.
(LO 2, 3, 9) Accounts receivable $220,000
Less: Allowance for doubtful accounts 15,000
During 2014, the company had the following transactions related to receivables.
1. Sales on account $2,400,000
2. Sales returns and allowances 45,000
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Problems: Set B 399

3. Collections of accounts receivable 2,250,000

4. Write-offs of accounts receivable deemed uncollectible 13,000
5. Recovery of bad debts previously written off as uncollectible 2,000
Instructions
(a) Prepare the journal entries to record each of these five transactions. Assume that no
cash discounts were taken on the collections of accounts receivable.
(b) Enter the January 1, 2014, balances in Accounts Receivable and Allowance for Doubt- (b) Accounts receivable
ful Accounts. Post the entries to the two accounts (use T-accounts), and determine the $312,000
balances. ADA $4,000
(c) Prepare the journal entry to record bad debt expense for 2014, assuming that an aging (c) Bad debt expense
of accounts receivable indicates that estimated bad debts are $22,000. $18,000
(d) Compute the accounts receivable turnover ratio for the year 2014, assuming the ex-
pected bad debt information presented in (c).
P8-2B Information related to Izmir Company for 2014 is summarized below. Compute bad debt amounts.
Total credit sales 920,000 (LO 3)
Accounts receivable at December 31 369,000
Bad debts written off 23,400
Instructions
(a) What amount of bad debt expense will Izmir Company report if it uses the direct
write-off method of accounting for bad debts?
(b) Assume that Izmir Company decides to estimate its bad debt expense to be 3% of credit
sales. What amount of bad debt expense will Izmir record if Allowance for Doubtful
Accounts has a credit balance of 3,000?
(c) Assume that Izmir Company decides to estimate its bad debt expense based on 7% of
accounts receivable. What amount of bad debt expense will Izmir Company record if
Allowance for Doubtful Accounts has a credit balance of 4,000?
(d) Assume the same facts as in (c), except that there is a 2,000 debit balance in Allow-
ance for Doubtful Accounts. What amount of bad debt expense will Izmir record?
(e) What is the weakness of the direct write-off method of reporting bad debt
expense?
P8-3B Presented below is an aging schedule for Garry Owen Company. Journalize entries to record
transactions related to bad
Worksheet.xls debts.
Home Insert Page Layout Formulas Data Review View (LO 2, 3)
P18 fx

A B C D E F G
1 Number of Days Past Due
2 Not
3 Customer Total Yet Due 1–30 31–60 61–90 Over 90
4 Alma $ 26,000 $11,500 $14,500
5 Browne 45,000 $ 45,000
6 Conlon 75,000 22,500 7,500 $45,000
7 Dalton 57,000 $57,000
8 Others 189,000 138,000 22,500 19,500 9,000
9 $392,000 $205,500 $41,500 $34,000 $45,000 $66,000
Esmated
10 percentage
uncollecble 2% 6% 10% 25% 50%
11
Total esmated
bad debts $ 54,250 $ 4,110 $ 2,490 $ 3,400 $11,250 $33,000
12

At December 31, 2014, the unadjusted balance in Allowance for Doubtful Accounts is a
credit of $14,000.
Instructions
(a) Journalize and post the adjusting entry for bad debts at December 31, 2014. (a) Bad debt expense
(b) Journalize and post to the allowance account the following events and transactions in $40,250
the year 2015.
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400 8 Accounting for Receivables

(1) March 1, a $1,900 customer balance originating in 2014 is judged uncollectible.

(2) May 1, a check for $1,900 is received from the customer whose account was writ-
ten off as uncollectible on March 1.
(c) Bad debt expense $45,700 (c) Journalize the adjusting entry for bad debts on December 31, 2015. Assume that the
unadjusted balance in Allowance for Doubtful Accounts is a debit of $3,400, and the
Journalize transactions
aging schedule indicates that total estimated bad debts will be $42,300.
related to bad debts. P8-4B The following represents selected information taken from a company’s aging
(LO 2, 3) schedule to estimate uncollectible accounts receivable at year-end.

Worksheet.xls
Home Insert Page Layout Formulas Data Review View

P18 fx

A B C D E F G
1 Number of Days Outstanding
2
3 Total 0–30 31–60 61–90 91–120 Over 120
4 Accounts receivable CHF383,000 CHF220,000 CHF90,000 CHF40,000 CHF18,000 CHF15,000
5 % uncollecble 1% 3% 5% 8% 10%
6 Esmated bad debts
7

Instructions
(a) Tot. est. (a) Calculate the total estimated bad debts based on the above information.
bad debts CHF9,840 (b) Prepare the year-end adjusting journal entry to record the bad debts using the allow-
ance method and the aged uncollectible accounts receivable determined in (a). Assume
the current balance in Allowance for Doubtful Accounts is a CHF1,600 credit.
(c) Of the above accounts, CHF1,100 is determined to be specifically uncollectible. Pre-
pare the journal entry to write off the uncollectible accounts.
(d) The company subsequently collects CHF700 on a specific account that had previously
been determined to be uncollectible in (c). Prepare the journal entry(ies) necessary to
restore the account and record the cash collection.
(e) Explain how establishing an allowance account satisfies the expense recognition
principle.
Journalize entries to record P8-5B At December 31, 2014, the trial balance of Mariette Company contained the following
transactions related to bad amounts before adjustment.
debts.
Debits Credits
(LO 3)
Accounts Receivable $250,000
Allowance for Doubtful Accounts $ 1,400
Sales Revenue 600,000

Instructions
(a) (2) $12,000 (a) Prepare the adjusting entry at December 31, 2014, to record bad debt expense under
each of the following independent assumptions.
(1) An aging schedule indicates that $13,800 of accounts receivable will be uncollectible.
(2) The company estimates that 2% of sales will be uncollectible.
(b) Repeat part (a) assuming that instead of a credit balance, there is a $1,400 debit bal-
ance in Allowance for Doubtful Accounts.
(c) During the next month, January 2015, a $3,200 account receivable is written off as
uncollectible. Prepare the journal entry to record the write-off.
(d) Repeat part (c) assuming that Mariette Company uses the direct write-off method
instead of the allowance method in accounting for uncollectible accounts receivable.
(e) What are the advantages of using the allowance method in accounting for
uncollectible accounts as compared to the direct write-off method?
Prepare entries for various P8-6B Gehrig Co. closes its books monthly. On June 30, selected ledger account balances are:
notes receivable transactions.
Notes Receivable €60,000
(LO 2, 4, 5, 8, 9)
Interest Receivable 435
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Comprehensive Problem 401

Notes Receivable include the following.

Date Maker Face Term Interest
May 16 Fulton Inc. €12,000 60 days 9%
May 25 Ascot Co. 30,000 60 days 10%
June 30 Trayer Corp. 18,000 6 months 12%
During July, the following transactions were completed.
July 5 Made sales of €7,200 on Gehrig Co. credit cards.
14 Made sales of €1,300 on Visa credit cards. The credit card service charge is 3%.
14 Added €510 to Gehrig Co. credit card customer balances for finance charges on
unpaid balances.
15 Received payment in full from Fulton Inc. on the amount due.
24 Received notice that the Ascot Co. note has been dishonored. (Assume that
Ascot Co. is expected to pay in the future.)
Instructions
(a) Journalize the July transactions and the July 31 adjusting entry for accrued interest
receivable. (Interest is computed using 360 days.)
(b) Enter the balances at July 1 in the receivable accounts. Post the entries to all of the (b) Accounts receivable
receivable accounts. €38,210
(c) Show the statement of financial position presentation of the receivable accounts at (c) Total receivables €56,390
July 31.
P8-7B On January 1, 2014, Valdez Company had Accounts Receivable $91,000 and Al- Prepare entries for various
lowance for Doubtful Accounts $8,100. Valdez Company prepares financial statements receivable transactions.
annually at December 31. During the year, the following selected transactions occurred. (LO 2, 4, 5, 6, 7, 8)
Jan. 5 Sold $8,400 of merchandise to Patrick Company, terms n/30.
Feb. 2 Accepted an $8,400, 4-month, 10% promissory note from Patrick Company for
the balance due.
12 Sold $13,500 of merchandise to Marguerite Company and accepted Margue-
rite’s $13,500, 2-month, 10% note for the balance due.
26 Sold $7,000 of merchandise to Felton Co., terms n/10.
Apr. 5 Accepted a $7,000, 3-month, 8% note from Felton Co. for the balance due.
12 Collected Marguerite Company note in full.
June 2 Collected Patrick Company note in full.
July 5 Felton Co. dishonors its note of April 5. It is expected that Felton will eventually
pay the amount owed.
15 Sold $14,000 of merchandise to Planke Co. and accepted Planke’s $14,000,
3-month, 12% note for the amount due.
Oct. 15 Planke Co.’s note was dishonored. Planke Co. is bankrupt, and there is no hope
of future settlement.
Instructions
Journalize the transactions.

COMPREHENSIVE PROBLEM

CP8 Victoria Company’s statement of financial position at December 31, 2013, is presented
below.
Victoria Company
Statement of Financial Position
December 31, 2013
Inventory $ 9,400 Share capital—ordinary $20,000
Accounts receivable 19,780 Retained earnings 12,730
Allowance for doubtful accounts (800) Accounts payable 8,750
Cash 13,100 $41,480
$41,480
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402 8 Accounting for Receivables

During January 2014, the following transactions occurred. Victoria uses the perpetual
inventory method.
Jan. 1 Victoria accepted a 4-month, 8% note from Leon Company in payment of Leon’s
$1,500 account.
3 Victoria wrote off as uncollectible the accounts of Barker Corporation ($450)
and Elmo Company ($330).
8 Victoria purchased $17,200 of inventory on account.
11 Victoria sold for $25,000 on account inventory that cost $17,500.
15 Victoria sold inventory that cost $780 to Joe Haribo for $1,200. Haribo charged
this amount on his Visa First Bank card. The service fee charged Victoria by
First Bank is 3%.
17 Victoria collected $22,900 from customers on account.
21 Victoria paid $16,300 on accounts payable.
24 Victoria received payment in full ($330) from Elmo Company on the account
written off on January 3.
27 Victoria purchased supplies for $1,400 cash.
31 Victoria paid other operating expenses, $3,218.
Adjustment data:
1. Interest is recorded for the month on the note from January 1.
2. Bad debts are expected to be 5% of the January 31, 2014, accounts receivable.
3. A count of supplies on January 31, 2014, reveals that $470 remains unused.
Instructions
(You may want to set up T-accounts to determine ending balances.)
(a) Prepare journal entries for the transactions listed above and adjusting entries.
(Include entries for cost of goods sold using the perpetual system.)
(b) Prepare an adjusted trial balance at January 31, 2014.
(c) Prepare an income statement and a retained earnings statement for the month ending
January 31, 2014, and a classified statement of financial position as of January 31, 2014.

CONTINUING COOKIE CHRONICLE

(Note: This is a continuation of the Cookie Chronicle from Chapters 1–7.)

CCC8 One of Natalie’s friends, Curtis Lesperance, runs a coffee shop where he sells specialty
coffees and prepares and sells muffins and cookies. He is eager to buy one of Natalie’s fine
European mixers, which would enable him to make larger batches of muffins and cookies.
However, Curtis cannot afford to pay for the mixer for at least 30 days. He asks Natalie if she
would be willing to sell him the mixer on credit. Natalie comes to you for advice.

Go to the book’s companion website, www.wiley.com/college/weygandt, to see the completion of this

problem.

Broadening Your PERSPECTIVE

Financial Reporting and Analysis

Financial Reporting Problem: CAF Company

BYP8-1 CAF Company sells office equipment and supplies to many organizations in the city and
surrounding area on contract terms of 2/10, n/30. In the past, over 75% of the credit customers have
taken advantage of the discount by paying within 10 days of the invoice date.
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Broadening Your Perspective 403

The number of customers taking the full 30 days to pay has increased within the last year. Cur-
rent indications are that less than 60% of the customers are now taking the discount. Bad debts as
a percentage of gross credit sales have risen from the 2.5% provided in past years to about 4.5% in
the current year.
The company’s Finance Committee has requested more information on the collections of
accounts receivable. The controller responded to this request with the report reproduced below.

CAF Company
Accounts Receivable Collections
May 31, 2014

The fact that some credit accounts will prove uncollectible is normal. Annual bad debt write-offs
have been 2.5% of gross credit sales over the past 5 years. During the last fiscal year, this percentage
increased to slightly less than 4.5%. The current Accounts Receivable balance is $1,400,000. The
condition of this balance in terms of age and probability of collection is as follows.

Proportion of Total Age Categories Probability of Collection

60% not yet due 98%
22% less than 30 days past due 96%
9% 30 to 60 days past due 94%
5% 61 to 120 days past due 91%
21/2% 121 to 180 days past due 75%
11/2% over 180 days past due 30%

Allowance for Doubtful Accounts had a credit balance of $29,500 on June 1, 2013. CAF has
provided for a monthly bad debt expense accrual during the current fiscal year based on the
assumption that 4.5% of gross credit sales will be uncollectible. Total gross credit sales for the
2013–2014 fiscal year amounted to $2,800,000. Write-offs of bad accounts during the year totaled
$102,000.

Instructions
(a) Prepare an accounts receivable aging schedule for CAF Company using the age categories iden-
tified in the controller’s report to the Finance Committee showing the following.
(1) The amount of accounts receivable outstanding for each age category and in total.
(2) The estimated amount that is uncollectible for each category and in total.
(b) Compute the amount of the year-end adjustment necessary to bring Allowance for Doubtful
Accounts to the balance indicated by the age analysis. Then prepare the necessary journal entry
to adjust the accounting records.
(c) In a recessionary environment with tight credit and high interest rates:
(1) Identify steps CAF Company might consider to improve the accounts receivable situation.
(2) Then evaluate each step identified in terms of the risks and costs involved.

Comparative Analysis Problem: Nestlé S.A. vs. Zetar plc

BYP8-2 Nestlé’s financial statements are presented in Appendix B. Financial statements of Zetar
are presented in Appendix C.

Instructions
(a) Based on the information in these financial statements, compute the following ratios for each
company for the most recent fiscal year shown. (Assume all sales are credit sales and that all
receivables are trade receivables.)
(1) Accounts receivable turnover ratio.
(2) Average collection period for receivables.
(b) What conclusions about managing accounts receivable can you draw from these data?

Real-World Focus
BYP8-3 Purpose: To learn more about factoring from websites that provide factoring services.
Address: www.ccapital.net, or go to www.wiley.com/college/weygandt
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404 8 Accounting for Receivables

Steps: Go to the website, click on invoice Factoring, and answer the following questions.
(a) What are some of the benefits of factoring?
(b) What is the range of the percentages of the typical discount rate?
(c) If a company factors its receivables, what percentage of the value of the receivables can it
expect to receive from the factor in the form of cash, and how quickly will it receive the cash?

Critical Thinking

Decision-Making Across the Organization

BYP8-4 Hilda and Tim Piwek own Campus Fashions. From its inception, Campus Fashions has
sold merchandise on either a cash or credit basis, but no credit cards have been accepted. During
the past several months, the Piweks have begun to question their sales policies. First, they have lost
some sales because of refusing to accept credit cards. Second, representatives of two metropolitan
banks have been persuasive in almost convincing them to accept their national credit cards. One
bank, City National Bank, has stated that its credit card fee is 4%.
The Piweks decide that they should determine the cost of carrying their own credit sales. From
the accounting records of the past 3 years, they accumulate the following data.
2014 2013 2012
Net credit sales $500,000 $650,000 $400,000
Collection agency fees for slow-paying
customers 2,450 2,500 2,300
Salary of part-time accounts receivable clerk 4,100 4,100 4,100
Credit and collection expenses as a percentage of net credit sales are uncollectible accounts 1.6%,
billing and mailing costs 0.5%, and credit investigation fee on new customers 0.15%.
Hilda and Tim also determine that the average accounts receivable balance outstanding during
the year is 5% of net credit sales. The Piweks estimate that they could earn an average of 8% annu-
ally on cash invested in other business opportunities.

Instructions
With the class divided into groups, answer the following.
(a) Prepare a table showing, for each year, total credit and collection expenses in dollars and as a
percentage of net credit sales.
(b) Determine the net credit and collection expense in dollars and as a percentage of sales after
considering the revenue not earned from other investment opportunities.
(c) Discuss both the financial and non-financial factors that are relevant to the decision.

Communication Activity
BYP8-5 Lily Pao, a friend of yours, overheard a discussion at work about changes her employer
wants to make in accounting for uncollectible accounts. Lily knows little about accounting, and
she asks you to help make sense of what she heard. Specifically, she asks you to explain the differ-
ences between the percentage-of-sales, percentage-of-receivables, and the direct write-off methods
for uncollectible accounts.

Instructions
In a letter of one page (or less), explain to Lily the three methods of accounting for uncollectibles.
Be sure to discuss differences among these methods.

Ethics Case
BYP8-6 The controller of Vestin Co. believes that the yearly allowance for doubtful accounts for
Vestin Co. should be 2% of net credit sales. The president of Vestin Co., nervous that the sharehold-
ers might expect the company to sustain its 10% growth rate, suggests that the controller increase
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Another Perspective 405

the allowance for doubtful accounts to 4%. The president thinks that the lower net income, which
reflects a 6% growth rate, will be a more sustainable rate for Vestin Co.

Instructions
(a) Who are the stakeholders in this case?
(b) Does the president’s request pose an ethical dilemma for the controller?
(c) Should the controller be concerned with Vestin Co.’s growth rate? Explain your answer.

Answers to Chapter Questions

Answers to Insight and Accounting Across the Organization Questions

p. 378 How Does a Credit Card Work? Q: Assume that PPR prepares a bank reconciliation at the
end of each month. If some credit card sales have not been processed by the bank, how should PPR
treat these transactions on its bank reconciliation? A: PPR would treat the credit card receipts as
deposits in transit. It has already recorded the receipts as cash. Its bank will increase PPR’s cash
account when it receives the receipts.
p. 382 Can Fair Value Be Unfair? Q: What are the arguments in favor of and against fair value
accounting for loans and receivables? A: Arguments in favor of fair value accounting for loans and
receivables are that fair value would provide a more accurate view of a company’s financial posi-
tion. This might provide a useful early warning of when a bank or other financial institution was in
trouble because its loans were of poor quality. But, banks argue that estimating fair values is very
difficult to do accurately. They are also concerned that volatile fair values could cause large swings
in a bank’s reported net income.
p. 384 Filling the Void Q: Why do you suppose the company prefers to extend credit supported
by receivables rather than intangible assets? A: Receivables are much more liquid in nature, that
is, much easier to convert to cash. Intangible assets (such as patents) do not tend to have a readily
available market for sale and thus would be much more difficult to convert to cash in the event of
a default by the borrower.

Answers to Self-Test Questions

1. d 2. c (HK$10,000 2 HK$3,000) 3 (100% 2 2%) 3. a 4. b (£60,000 2 £5,000) 5. d (£60,000 1
£5,000) 6. b (W800,000,000 3 1.5%) 1 W15,000,000 7. b (NT$7,500,000 3 3%) 1 (NT$180,000 2
NT$300,000) 8. d (£800,000 2 £65,000) 9. c 10. c 11. a 12. b 13. d €10,000 1 (€10,000 3
120/360 3 9%) 14. a 15. c $800,000 4 [($100,000 1 $150,000) 4 2]

Another Perspective

The basic accounting and reporting issues related to recognition and measurement of receivables,
such as the use of allowance accounts, how to record trade and sales discounts, use of percentage-
of-sales and percentage-of-receivables methods, and factoring, are essentially the same under both
IFRS and GAAP.

Key Points
• Receivables are generally reported in the current assets section of the statement of financial posi-
tion (balance sheet) under GAAP and IFRS. However, companies that use GAAP report receiv-
ables in the current assets section generally after cash, based on liquidity. IFRS often does not use
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406 8 Accounting for Receivables

liquidity as a basis for placement in the current assets section. As a result, receivables are often
reported after inventory and other current assets except for cash.
• GAAP and IFRS account for bad debts in a similar fashion. Both account for short-term receiv-
ables at amortized cost, adjusted for allowances for doubtful accounts.
• Like the IASB, the FASB has worked to implement fair value measurement for all financial in-
struments, but both Boards have faced bitter opposition from various factions. As a consequence,
the Boards have adopted a piecemeal approach; the first step is disclosure of fair value informa-
tion in the notes. The second step is the fair value option, which permits, but does not require,
companies to record some types of financial instruments at fair value in the financial statements.
Both Boards have indicated that they believe all financial instruments should be recorded and
reported at fair value.
• Recently, the FASB and IASB completed a project on how to measure fair value. The project,
however, was silent on when to report fair value.
• IFRS and GAAP differ in the criteria used to derecognize (generally through a sale or factoring)
a receivable. IFRS uses a combination approach focused on risks and rewards and loss of control.
GAAP uses loss of control as the primary criterion. In addition, IFRS permits partial derecogni-
tion; GAAP does not.
• IFRS specifies a two-step process for determining the impairment of receivables for a period.
This process starts by identifying individual impairments of specific receivables and then esti-
mating impairments of groups of receivables. GAAP does not specify a similar approach.

Looking to the Future

It appears likely that the question of recording fair values for financial instruments will con-
tinue to be an important issue to resolve as the Boards work toward convergence. Both the
IASB and the FASB have indicated that they believe that financial statements would be more
transparent and understandable if companies recorded and reported all financial instruments
at fair value.
That said, in IFRS 9, which was issued in 2009, the IASB created a split model, where some
financial instruments are recorded at fair value, but other financial assets, such as loans and
receivables, can be accounted for at amortized cost if certain criteria are met. Critics say that
this can result in two companies with identical securities accounting for those securities in dif-
ferent ways. A proposal by the FASB would require that nearly all financial instruments, includ-
ing loans and receivables, be accounted for at fair value. It has been suggested that IFRS 9 will
likely be changed or replaced as the FASB and IASB continue to deliberate the best treatment
for financial instruments. In fact, one past member of the IASB said that companies should
ignore IFRS 9 and continue to report under the old standard because, in his opinion, it was
extremely likely that it would be changed before the mandatory adoption date of the standard
arrived in 2013.

GAAP Practice
GAAP Self-Test Questions
1. Under GAAP, receivables are reported on the balance sheet at:
(a) amortized cost.
(b) amortized cost adjusted for estimated loss allowances.
(c) historical cost.
(d) replacement cost.
2. Which of the following statements is false?
(a) Receivables include equity securities purchased by the company.
(b) Receivables include credit card receivables.
(c) Receivables include amounts owed by employees as a result of company loans to employees.
(d) Receivables include amounts resulting from transactions with customers.
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Another Perspective 407

3. In recording a factoring transaction:

(a) IFRS focuses on loss of control.
(b) GAAP focuses on loss of control and risks and rewards.
(c) IFRS and GAAP allow partial derecognition.
(d) IFRS allows partial derecognition
4. Under IFRS:
(a) the entry to record estimated uncollected accounts is the same as GAAP.
(b) receivables should only be tested for impairment as a group.
(c) it is always acceptable to use the direct write-off method.
(d) all financial instruments are recorded at fair value.
5. Which of the following statements is true?
(a) The fair value option requires that some types of financial instruments be recorded at fair
value.
(b) The fair value option requires that some types of financial instruments be recorded at
amortized cost.
(c) The fair value option allows, but does not require, that some types of financial instruments
be recorded at fair value.
(d) The FASB and IASB would like to reduce the reliance on fair value accounting for financial
instruments in the future.

GAAP Exercise
GAAP8-1 What are some steps taken by both the FASB and IASB to move to fair value measure-
ment for financial instruments? In what ways have some of the approaches differed?

GAAP Financial Reporting Problem: Tootsie Roll Industries, Inc.

GAAP8-2 The financial statements of Tootsie Roll are presented in Appendix D. The company’s com-
plete annual report, including the notes to its financial statements, is available at www.tootsie.com.

Instructions
Use the company’s financial statements and notes to the financial statements to answer the follow-
ing questions.
(a) Calculate the accounts receivable turnover ratio and average collection period for 2010 and
2009. Accounts receivable at January 1, 2009, was $31,213 (in thousands).
(b) What conclusions can you draw from the information in part (a)?

Answers to GAAP Self-Test Questions

1. b 2. a 3. d 4. a 5. c

✔ The Navigator

✔ Remember to go back to The Navigator box on the chapter opening page and check off your completed work.