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Exercises(cont.)
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BRIEF EXERCISES
The company could improve its internal control
Brief Exercise 7-1procedure for cash receipts by segregating the duties of
recordkeeping and the handling of cash. Jim Seymour,
responsible for recordkeeping, should not also be responsible for depositing customer
checks.
Under IFRS the cash balance would be $245,000,
Brief Exercise 7-2because they could offset the two accounts. Under U.S.
GAAP the balance would be $250,000, because they could
not offset the two accounts.
All of these items would be included as cash and cash
Brief Exercise 7-3equivalents except the U.S. Treasury bills, which would be
included in the current asset section of the balance sheet as
short-term investments.
Income before tax in 2012 will be reduced by $2,500, the
Brief Exercise 7-4amount of the cash discounts.
$25,000 x 10 = $250,000 x 1% = $2,500
Income before tax in 2011 will be reduced by $2,500, the
Brief Exercise 7-5anticipated amount of cash discounts.
$25,000 x 10 = $250,000 x 1% = $2,500
$848,000
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
(1) Bad debtallowed.
expense
=
$1,500,000 x
2%
=
Brief Exercise 7-8
$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
$ 300,000
1,500,000
(1,450,000)
(16,000)
$ 334,000**
Brief Exercise
85,000
7,000
8,000
banks fee.
Face amount
Interest to maturity ($30,000 x 6% x 3/12)
Maturity value
Discount ($30,450 x 8% x 2/12)
Cash proceeds
Receivables turnover =
$60,000*
$320,000 = 5.33
Average collection
period
365 = 68 days
5.33
EXERCISES
Exercise 7-1Requirement 1
$13,500
22,100
5,200
580
15,000
$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 longterm 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.
Exercise 7-2Requirement 1
$22,500
5,000
1,350
1,840
$30,690
Requirement 2
Requirement 2: IFRS
$175,000
Current Assets:
Cash
$160,000
Current Liabilities:
Bank Overdrafts
$ 15,000
(No current liabilities with respect to overdrafts.)
Exercise 7-4
Requirement 1
Sales price = 100 units x $600 = $60,000 x 70% = $42,000
November 17, 2011
Accounts receivable...................................................
..............................................................Sales revenue
.........................................................................42,000
42,000
41,160
840
Requirement 2
42,000
42,000
41,160
42,000
..........................................................Interest revenue
..............................................................................840
Exercise 7-5Requirement 1
Sales price = 1,000 units x $50 = $50,000
July 15, 2011
Accounts receivable...................................................
..............................................................Sales revenue
.........................................................................50,000
50,000
49,000
1,000
Requirement 2
July 15, 2011
Accounts receivable...................................................
..............................................................Sales revenue
.........................................................................50,000
50,000
Cash............................................................................
...................................................Accounts receivable
.........................................................................50,000
50,000
Exercise 7-6Requirement 1
July 15, 2011
Accounts receivable................................................... 49,000
........................................................Sales revenue (98% x $50,000)
.................................................................................... 49,000
49,000
Requirement 2
July 15, 2011
Accounts receivable................................................... 49,000
........................................................Sales revenue (98% x $50,000)
.................................................................................... 49,000
50,000
..........................................................Interest revenue
...........................................................................1,000
Requirement 1
Estimated returns = 4% x $11,500,000 =
Less: Actual returns
(450,000)
Remaining estimated returns
$10,000
Exercise 7-7
$460,000
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
...................................................Accounts receivable
.......................................................................450,000
December 31, 2011 To record the estimated sales returns
Sales returns (4% x $11,500,000)................................... 460,000
.......................................Allowance for sales returns
.......................................................................460,000
Inventory-estimated returns ....................................... 299,000
................................................Cost of goods sold (65% x $460,000)
.................................................................................... 299,000
$300,000
460,000
(450,000)
$310,000
Exercise 7-8Requirement 1
Requirement 2
Allowance for uncollectible accounts
Balance, beginning of year
Add: Bad debt expense for 2011 (1.5% x $4,500,000)
Less: End-of-year balance
Accounts receivable written off
$42,000
67,500
(40,000)
$69,500
Requirement 3
$69,500 the amount of accounts receivable written off.
Exercise 7-9Requirement 1
To record the write-off of receivables.
Allowance for uncollectible accounts........................
...................................................Accounts receivable
.........................................................................21,000
21,000
1,200
Cash............................................................................
...................................................Accounts receivable
...........................................................................1,200
1,200
$32,000
(21,000)
1,200
12,200
(62,500)
$50,300
50,300
Requirement 2
Current assets:
Accounts receivable, net of $62,500 allowance
for uncollectible accounts
$562,500
Using the direct write-off method, bad debt expense is equal to
Exercise 7-10actual write-offs. Collections of previously written-off receivables
are recorded as revenue.
Allowance for uncollectible accounts:
Balance, beginning of year
Deduct: Receivables written off
Add: Collection of receivables previously written off
Less: End of year balance
Solutions Manual, Vol.1, Chapter 7
$17,280
(17,100)
2,200
(22,410)
Exercise 7-11
Balance, beginning of year
Add: Bad debt expense
Less: End of year balance
Write-offs during the year
$20,030
($ in millions)
Allowance for uncollectible accounts:
$16
14
(18)
$ 12*
$ 1,100
4,271
(12)
(971)
$4,388
Exercise 7-12Requirement 1
June 30, 2011
Note receivable...........................................................
..............................................................Sales revenue
.........................................................................30,000
30,000
31,350
Requirement 2
2011 income before income taxes would be understated by $900
2012 income before income taxes would be overstated by $900.
Exercise 7-13Requirement 1
June 30, 2011
Requirement 2
$ 1,800
$28,200
= 6.383%
12/
x
9
_______
= 8.511%
30,000
Exercise 7-14Requirement 1
$16,000
$ 2,200
=
10% rate
Intermediate Accounting, 6/e
$ 22,000
Requirement 2
To record sale of stock in exchange for note receivable.
January 1, 2011
Note receivable...........................................................
.................................................................Investments
.........................................................................16,000
.......................................Gain on sale of investments
...........................................................................6,000
22,000
Exercise 7-15
Exercise 7-16
Exercise 7-17
52,800
5,200
5,000
Exercise 7-19
52,800
1,200
Face amount
Interest to maturity ($15,000 x 10% x 6/12)
Maturity value
Discount ($15,750 x 12% x 4/12)
$15,120
Cash proceeds
Step 4: To record a loss for the difference between the cash proceeds and the
notes book value.
February 28, 2011
Cash (proceeds determined above)...................................
Loss on sale of note receivable (difference).................
.......................................Note receivable (face amount)
.........................................................................15,000
....Interest receivable (accrued interest determined above)
..............................................................................250
Exercise 7-20
c 1. Internal control
j
2. Trade discount
g 3. Cash equivalents
h 4. Allowance for uncollectibles
i
5. Cash discount
l
6. Balance sheet approach
d 7. Income statement approach
k 8. Net method
a 9. Compensating balance
m 10. Discounting
b 11. Gross method
e 12. Direct write-off method
f
13. Factoring
15,120
130
List A List B
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
Restriction on cash.
Cash discount not taken is sales revenue.
Includes separation of duties.
Bad debt expense a % of credit sales.
Recognizes bad debts as they occur.
Sale of receivables to a financial institution.
Include highly liquid investments.
Estimate of bad debts.
Reduction in amount paid by credit customer.
Reduction below list price.
Cash discount not taken is interest revenue.
Bad debt expense determined by estimating realizable
value.
m. Sale of note receivable to a financial institution.
Exercise 7-21Requirement 1
March 17, 2011
Allowance for uncollectible accounts........................
...................................................Accounts receivable
...........................................................................1,700
1,700
20,000
$20,000
1,400
21,400
(1,427)
$19,973
Face amount
Interest to maturity ($20,000 x 7%)
Maturity value
Discount ($21,400 x 8% x 10/12)
Cash proceeds
July 8, 2011
Cash ($12,000 x 98%)....................................................
Sales discounts ($12,000 x 2%).....................................
...................................................Accounts receivable
.........................................................................12,000
19,973
260
12,000
11,760
240
14,000
Second quarter:
Receivables turnover =
$10,244
Exercise 7-22
Average collection
=
91 = 56 days
period
1.62
Third quarter:
Receivables turnover =
Average collection
period
$13,648
$10,068
$16,629 = 1.62
= 1.36
91 = 67 days
1.36
Exercise 7-23
= 365 Accounts
= 365 50 = 7.3
= $2,555,000
Exercise 7-24
Solutions Manual, Vol.1, Chapter 7
October 2, 2011
Petty Cash......................................................
................................Cash (checking account)
200
200
76
48
20
19
163
Exercise 7-25
September 30, 2011 To replenish the petty cash fund
Delivery expense...........................................
16
Office supplies expense.................................
19
Receivable from employee............................
25
Postage expense.............................................
32
................................Cash (checking account)
92
$23,820
(2,340)
1,890
(38)
$23,332
$23,332
2,340
(1,890)
$23,782
$23,820
(38)
$23,782
Requirement 1
$38,018
6,300
(8,420)
270
$36,168
$38,918
1,800
(30)
(1,200)
(3,320)
$36,168
Requirement 2
1,800
30
Note payable..................................................
...............................................................Cash
..............................................................4,550
3,000
Note: Each of the adjustments to the book balance required journal entries.
Noneoftheadjustmentstothebankbalancerequireentries.
Exercise 7-28
ANALYSIS
Previous Value:
$ 1,200,000
12,000,000
$13,200,000
New Value:
Interest
$1 million
x 1.73554 *
Principal $11 million
x 0.82645 **
Present value of the receivable
=
=
$1,735,540
9,090,950
Loss:
(10,826,490)
$ 2,373,510
January 1, 2011
Loss on troubled debt restructuring (to balance)..........
Accrued interest receivable (account balance).........
Note receivable ($12,000,000 - 10,826,490)............
2,373,510
1,200,000
1,173,510
1,000,000
82,649
1,082,649
1,000,000
90,861
11,000,000
1,090,861*
11,000,000
Cash
Interest
by agreement
1
2
1,000,000
1,000,000
2,000,000
Effective
Increase in
Interest
Balance
10% x Outstanding Balance Discount Reduction
.10 (10,826,490) = 1,082,649
.10 (10,909,139) = 1,090,861*
2,173,510
82,649
90,861
173,510
Outstanding
Balance
10,826,490
10,909,139
11,000,000
* rounded
Exercise 7-29
ANALYSIS
Previous Value:
$ 24,000
240,000
$264,000
New Value:
(226,997)
$ 37,003
January 1, 2011
Loss on troubled debt restructuring (to balance)..........
Accrued interest receivable (10% x $240,000)........
Note receivable ($240,000 - 226,997).....................
37,003
24,000
13,003
22,700
22,700
24,968
274,665
24,968*
274,665
1
2
0
0
Effective
Interest
10% x Outstanding Balance
.10 (226,997) = 22,700
.10 (249,697) = 24,968*
47,668
Increase in
Outstanding
Balance
Balance
Discount Reduction
22,700
24,968
47,668
226,997
249,697
274,665
* rounded
Exercise 7-30
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 management's 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 7-31
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.Accountsreceivablesfromrelatedpartiesshouldbeshownseparately
fromtradereceivables:FASBACS21010S991:BalanceSheet
OverallSECMaterialsGeneral.AlsoappearsunderACS3101045
13:ReceivablesOverallOtherPresentationMattersReceivables
fromOfficers,EmployeesorAffiliates,andunderASC85010502:
"RelatedPartyDisclosuresOverallDisclosure"
2.DefinitionofCashEquivalents:FASBACS3051020:CashandCash
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 310-10-35-8: "ReceivablesOverallSubsequent
Measurement."
$260,000
180,000
(325,000)
$115,000
$ 600
3,200
(200)
(500)
$3,100
$ 650,000
2,700,000
(75,000)
(40,000)
(2,150,000)
$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.
$45,000
(16,000)
$29,000
1
PROBLEMS Requirement
Monthly bad debt expense accrual summary.
Problem 7-1
78,600
68,000
Requirement 2
Bad debt expense .......................................................
.............Allowance for uncollectible accounts (below)
...........................................................................4,300
4,300
Amount
$430,000
98,000
60,000
55,000
$643,000
Percent
Uncollectible
4%
15%
25%
40%
Estimated
Allowance
$17,200
14,700
15,000
22,000
$68,900
$54,000
78,600
(68,000)
64,600
68,900
$ 4,300
Requirement 3
Bad debt expense for 2011:
Monthly accruals
Year-end adjustment
Total
$78,600
4,300
$82,900
Balance sheet:
Current assets:
Accounts receivable, net of $68,900
allowance for uncollectible accounts
$574,100
Problem 7-2Requirement 1
(a)
$ 587,230
2,158,755
(2,230,065)
(509,986)
$
5,934
(b)
Allowance for uncollectible accounts analysis ($ in thousands):
Beginning balance
Solutions Manual, Vol.1, Chapter 7
$6,590
The McGraw-Hill Companies, Inc., 2011
7-51
(5,934)
(5,042)
$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
$509,986
$587,230
Current assets:
Receivables
(b) ($ in thousands)
Problem 7-3Requirement 1
2009
2008
($ in thousands)
$13,306
451
$13,757
$22,652
404
$23,056
Requirement 2
($ in thousands)
The answers to this question require an analysis of both gross accounts receivable
and the allowance for uncollectible accounts for 2009. First of all, 2009 sales of
$174,642 plus the decrease in receivables reported in the statement of cash flows
indicates cash received from customers of $183,988 ($174,642+ 9,346).
The activity in gross accounts receivable would be:
Gross Accounts Receivable
__________________________________________
The McGraw-Hill Companies, Inc., 2011
7-52
($ in thousands)
Beg. Bal.
Sales
23,056
174,642
183,988
Writeoffs
End. Bal.
Collections
47
_________________
13,757
Note that, to make the T-account balance, this solution debits accounts receivable
for writeoffs. Rather than decreasing A/R by writing off accounts, Cirrus must be
reinstating some previously written off accounts after determining that those accounts
are now collectible, making the journal entry:
Accounts Receivable................................................................47
Allowance for Uncollectible Accounts....................................
47
404
47
-0_________________
451
Beg. Bal.
Reinstated A/R
Bad Debt Expense
End. Bal.
Problem 7-4Requirement 1
35,000
3,000
Cash............................................................................
3,000
...................................................Accounts receivable
...........................................................................3,000
Requirement 2
(a)
December 31, 2011
Bad debt expense (3% x $1,750,000).............................
........................Allowance for uncollectible accounts
.........................................................................52,500
52,500
(b)
December 31, 2011
Bad debt expense........................................................
.............Allowance for uncollectible accounts (below)
.........................................................................36,700
36,700
$ 462,000
1,750,000
(35,000)
(1,830,000)
$ 347,000
$30,000
3,000
(35,000)
(2,000) debit balance
34,700
$36,700
(c)
December 31, 2011
Bad debt expense........................................................
.............Allowance for uncollectible accounts (below)
.........................................................................37,047
37,047
Required allowance:
Age Group
0-60 days
61-90 days
91-120 days
Over 120 days
Totals
Amount
$225,550
69,400
34,700
17,350
$347,000
Percent
uncollectible
4%
15%
25%
40%
Estimated
allowance
$ 9,022
10,410
8,675
6,940
$35,047
Year-end allowance
$30,000
3,000
(35,000)
(2,000) debit balance
35,047
$37,047
(a)
$347,000
[$(2,000) + 52,500]
= $296,500
(b)
$347,000
34,700
= $312,300
(c)
$347,000
35,047
= $311,953
Problem 7-5Requirement 1
Accounts receivable, net
Add: Allowances
Accounts receivable, gross
($ in millions)
2009
$837,010
20,991
$858,001
2008
$758,200
23,314
$781,514
Requirement 2
($ in millions)
$8,915
1,500
(8,863)
$1,552
Requirement 3
($ in millions)
$12,128
3,155
(14,399)
$ 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)
Accounts receivable analysis:
Balance, beginning of year
Add: Credit sales
Less: Bad debt write-offs
Less: Actual sales returns
Less: Balance end of year
Cash collections
$ 781,514
6,150,684
(1,552)
(3,155)
(858,001)
$6,069,490
Problem 7-6Requirement 1
$650,000
Solutions Manual, Vol.1, Chapter 7
645,000
$ 5,000
$16,000
(10,000)
$ 6,000
$10,000
6,000
5,000
$21,000
Problem 7-7Requirement 1
Alternative a:
Alternative b:
To record the transfer of receivables.
July 1, 2011
Cash ($550,000 x 98%).................................................. 539,000
Loss on transfer of receivables (2% x $550,000)........... 11,000
...................................................Accounts receivable
.......................................................................550,000
Requirement 2
Alternative a:
July, 2011
Cash (80% x $780,000).................................................. 624,000
...................................................Accounts receivable
.......................................................................624,000
July 31, 2011
Interest expense ($500,000 x 12% x 1/12)........................
5,000
Note payable............................................................... 500,000
............................................................................Cash
.......................................................................505,000
Requirement 3
Alternative a.
Alternative b.
Problem 7-8
35,000
60,000
Walken would net the 40,000 and (5000) cash balances, yielding a balance of
35,000.
b
The receivables factored with Dependable dont qualify for sales treatment, as substantially all risks and rewards of ownership are retained by Walken.
Problem 7-10Requirement 1
February 28, 2011
Note receivable...........................................................
..............................................................Sales revenue
.........................................................................10,000
10,000
April 3, 2011
Accounts receivable...................................................
..............................................................Sales revenue
...........................................................................7,000
7,000
$6,860
140
5,000
3,200
49,500
500
$10,000
583
10,583
(317)
Solutions Manual, Vol.1, Chapter 7
10,266
67
Face amount
Interest to maturity ($10,000 x 10% x 7/12)
Maturity value
Discount ($10,583 x 12% x 3/12)
The McGraw-Hill Companies, Inc., 2011
7-65
$10,266
Cash proceeds
Requirement 3
Income
increase (decrease)
$10,000
7,200
7,000
(140)
(5,000)
3,200
(500)
333
(67)
600
$22,626
Date
February 28
March 31
April 3
April 11
April 17
April 17
April 30
June 30
June 30
December 31
Total effect
Problem 7-11
Note
Note Face
Value
Date of
Note
Interest
Rate
Date
Discounted
Discount
Rate
Proceeds
Received
$50,000
3-31-11
8%
6-30-11
10%
$50,350 (1)
50,000
3-31-11
8%
9-30-11
10%
51,675 (2)
50,000
3-31-11
8%
9-30-11
12%
51,410 (3)
80,000
6-30-11
6%
10-31-11
10%
81,027 (4)
80,000
6-30-11
6%
10-31-11
12%
80,752 (5)
80,000
6-30-11
6%
11-30-11
10%
81,713 (6)
(1)
$50,000
3,000
53,000
(2,650)
$50,350
Face amount
Interest to maturity ($50,000 x 8% x 9/12)
Maturity value
Discount ($53,000 x 10% x 6/12)
Cash proceeds
$50,000
3,000
53,000
(1,325)
$51,675
Face amount
Interest to maturity ($50,000 x 8% x 9/12)
Maturity value
Discount ($53,000 x 10% x 3/12)
Cash proceeds
(2)
Face amount
Interest to maturity ($50,000 x 8% x 9/12)
Maturity value
Discount ($53,000 x 12% x 3/12)
Cash proceeds
$80,000
2,400
82,400
(1,373)
$81,027
Face amount
Interest to maturity ($80,000 x 6% x 6/12)
Maturity value
Discount ($82,400 x 10% x 2/12)
Cash proceeds
$80,000
2,400
82,400
(1,648)
$80,752
Face amount
Interest to maturity ($80,000 x 6% x 6/12)
Maturity value
Discount ($82,400 x 12% x 2/12)
Cash proceeds
$80,000
2,400
82,400
(687)
$81,713
Face amount
Interest to maturity ($80,000 x 6% x 6/12)
Maturity value
Discount ($82,400 x 10% x 1/12)
Cash proceeds
(4)
(5)
(6)
Requirement 1
Problem 7-12
In addition to sales revenue of $1,340,000, the 2012 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 =
$60,000 note:
$ 60,000 x 8%(1) x 10/12 =
Total interest revenue
$3,000
4,000
$7,000
$800 represents interest for two months (November and December of 2011) 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)
Add: Credit sales
Less: Cash collections
Less: Write-offs
Ending accounts receivable
$ 242,000
1,340,000
(1,280,000)
(22,000)
$ 280,000
$24,000
?
(22,000)
$28,000
(2)
Face amount
Interest to maturity ($200,000 x 6%)
Maturity value
Discount ($212,000 x 8% x 3/12)
Cash proceeds
Requirement 2
Accounts receivable, net of $28,000 in allowance for
uncollectible accounts
$252,000
Requirement 3
Accounts receivable turnover ratio:
$1,340,000
------------$235,000(3)
= 5.7
(3)
Problem 7-13
Computation
of balance per books:
Balance per bank statement
Add: Deposits outstanding
Deduct: Checks outstanding
Error in recording rent check
Add: Automatic mortgage payment
Add: Bank service charges
Deduct: Deposit credit to companys
account in error
Add: NSF check charge
Balance per books
Step 1:
(875.00)
85.00
$13,542.87
$14,632.12
575.00
(1,320.25)
(18.00)
450.00
14.00
$14,632.12
575.00
(875.00)
(1,320.25)
$13,011.87
$13,542.87
18.00
(450.00)
(14.00)
(85.00)
$13,011.87
Requirement 1
Problem 7-13 (concluded)
The McGraw-Hill Companies, Inc., 2011
7-72
Requirement 2
18
18
Requirement 3
Checking account balance
Petty cash
U.S. treasury bills
Total cash and cash equivalents
350
100
14
85
549
$13,011.87
200.00
5,000.00
$18,211.87
Problem 7-14
Requirement 1
Step 1:
$3,851
2,150 (1)
(1,300)
(831) (2)
$3,870
$4,422
(90)
(22)
(440)
$3,870
(1) Receipts
Less: December receipts deposited:
Bank deposits
$43,000
Less: Deposit error
(1,300)
Less: Prior month's
deposits outstanding
(1,200)
Deposits outstanding, Dec. 31
$42,650
$41,853
90
40,500
$ 2,150
(41,313)
630
201
$ 831
90
22
440
552
Problem 7-15Requirement 1
($inmillions)
Land..........................................................................................16
Loss on debt restructuring..........................................................6
Note receivable.........................................................................
Accrued interest receivable......................................................
20
2
Requirement 2
ANALYSIS
Previous Value:
Accrued 2010 interest (10% x $20,000,000)
Principal
Carrying amount of the receivable
New Value:
Interest
$1 million x 3.16987 * =
Principal $15 million x 0.68301 ** =
Present value of the receivable
Loss:
$ 2,000,000
20,000,000
$22,000,000
$ 3,169,870
10,245,150
(13,415,020)
$ 8,584,980
January 1, 2011
Loss on troubled debt restructuring (to balance)...............
Accrued interest receivable (10% x $20,000,000)........
Note receivable ($20,000,000 - $13,415,020)..............
8,584,980
2,000,000
6,584,980
1,341,502
1,375,652
1,413,217
1,454,609*
Cash
Interest
by agreement
1
2
3
4
1,000,000
1,000,000
1,000,000
1,000,000
4,000,000
Effective
Interest
10% x Outstanding Balance
.10(13,415,020) = 1,341,502
.10(13,756,522) = 1,375,652
.10(14,132,174) = 1,413,217
.10(14,545,391) = 1,454,609*
5,584,980
Increase in
Balance
Discount Reduction
341,502
375,652
413,217
454,609
1,584,980
Outstanding
Balance
13,415,020
13,756,522
14,132,174
14,545,391
15,000,000
* rounded
ANALYSIS
Previous Value:
Accrued interest (10% x $20,000,000)
Principal
Carrying amount of the receivable
New Value:
$27,775,000 x 0.68301 * =
Loss:
$ 2,000,000
20,000,000
$22,000,000
(18,970,603)
$ 3,029,397
January 1, 2011
.....
2,086,766
.....
1,897,060
.....
2,000,000
1,029,397
.....
3,029,397
2,295,443
.....
Cash
Interest
by agreement
1
2
3
4
0
0
0
0
Effective
Increase in
Interest
Balance
10% x Outstanding Balance Discount Reduction
.10 (18,970,603) = 1,897,060
.10 (20,867,663) = 2,086,766
.10 (22,954,429) = 2,295,443
.10 (25,249,872) = 2,525,128*
8,804,397
1,897,060
2,086,766
2,295,443
2,525,128
8,804,397
Outstanding
Balance
18,970,603
20,867,663
22,954,429
25,249,872
27,775,000
* rounded
CASES
Judgment Case 7-1Requirement 1
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 realizable value.
Suggested Grading Concepts and Grading
Communication Case 7-2Scheme:
Content (70%)
_______ 40 Explains the difference between the allowance method and the
direct write-off method.
______ Direct write-off 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.
Solutions Manual, Vol.1, Chapter 7
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.
The McGraw-Hill Companies, Inc., 2011
7-84
Requirement 3
To account for the accounts receivable factored on August 1, 2011, 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, 2012, 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, 2011. 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.
Required allowance
135,000
$ 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 controller's request to change the aging category of the
large account.
Positive consequences:
a. Preservation of your honesty and integrity.
Solutions Manual, Vol.1, Chapter 7
Requirement 3
Real World Case 7-6
Answers will, of course, vary depending on the year.
The following were reported in the financial statements
for the year ended December 31, 2008 ($ in millions):
a. Net trade accounts receivable + Allowance for doubtful accounts = Gross
accounts receivable
$687.8 + 127.9 = $815.7
b. The statement of cash flows indicates bad debt expense (provision for
doubtful accounts) of $195.5
c. Beginning allowance for doubtful accounts + Bad debt expense - Bad debt
write-offs = Ending allowance for doubtful accounts
$141.1 + 195.5 - Write-offs = $127.9
Write-offs = $208.7
d. Beginning trade accounts receivable + Credit sales - Bad debt write-offs Cash collected = Ending trade accounts receivable
Beginning trade accounts receivable = $795.0+ 141.1 = $936.1
$936.1 + 10,588.9 208.7 Cash collections = $815.7
Cash collections = $10,500.6
McLaughlin's underestimation of bad debts is treated
Integrating Case 7-7as 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 2012 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 2012.
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.
Requirement 1
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 transferor - put presumptively
beyond the reach of the transferor and its creditors, even 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.)
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.
3,627
233
Average collection
period
365
15.6
= 15.6
= 23.4 days
Smithfield
12,488
667
365
18.7
= 18.7
= 19.5 days
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.
Net receivables
Add: Allowance
Gross receivables
2009
$4,731
112
$4,843
2008
$5,961
103
$6,064