Accounts-receivables_solutions

CHAPTER 4: ACCOUNTING FOR ACCOUNTS RECEIVABLES Problem 4-1 Dreamer Company Analysis of the items included in the "Receivables" account Account Amount Trade accounts receivable 775,000 Trade notes receivable 100,000 Installment receivable (due 1 to 2 yrs) 300,000 Customers' accounts with credit balances (30,000) Advance payments for purchase of merchandise 150,000 Customers' accounts with credit balances (20,000) Cash advance to subsidiary 400,000 Claim from insurance entity 15,000 Subscription receivable due in 60 days 300,000 Accrued interest receivable 10,000 Total Receivables 2,000,000 Requirement a: Entry to reclassify the receivables Accounts receivable 775,000 Notes receivables 100,000 Installments receivables 300,000 Advances to suppliers 150,000 Advances to subsidiary 400,000 Claims receivable 15,000 Subscriptions receivable 300,000 Accrued interest receivable 10,000 Customers' accounts with credit balances Advances from customers

30,000 20,000

Receivables

Classification Accounts receivable Notes receivable Installment receivable Payables Advances to suppliers Payables (advances) Advances to subsidiary Claims receivable Subscriptions receivable Accrued interest rec'l

Presentation Current asset Current asset Current asset Current liability Current asset Current liability Noncurrent asset Current asset Current asset Current asset

Requirement b: Trade and Other Receivables Accounts receivable @ gross amount Allowance for doubtful accounts Accounts receivable @ net realizable value Notes receivable Installment receivables Advances to suppliers Claims receivable Subscriptions receivable Accrued interest receivable Trade and other receivables - current asset

775,000 (50,000) 725,000 100,000 300,000 150,000 15,000 300,000 10,000 1,600,000

2,000,000

Requirement c: Classification of items excluded in (b) 1) The advances to subsidiary or affiliate account is classified as long-term investment under noncurrent assets. 2) The customers' accounts with credit balances are reclassified as payables under current liabilities. Problem 4-2 Credible Company Analysis of the items included in the T-account: Beginning balance Charge or credit sales Shareholders' subscription Deposit on contract Claims against common carrier for damages IOUs from employees Cash advance to affiliates Advances to suppliers Collections from customers Writeoff Merchandise returns Allowances to customer for shipping damages Collections from carrier claims Collection on subscription

Amount 600,000 6,000,000 200,000 120,000 100,000 10,000 100,000 50,000 5,300,000 35,000 40,000 25,000 40,000 50,000

Requirement a: Correct amount of Accounts Receivable Accounts receivable, beginning 600,000 Charge or credit sales 6,000,000 Collections from customers (5,300,000) Writeoffs (35,000) Merchandise returns (40,000) Allowances for shipping damages (25,000) Accounts receivable, ending 1,200,000

Explanation Beginning AR balance Increases the AR balance Presented as subscription receivable (SHE) Presented as special deposits on contracts (NCA) Presented as claims receivable (CA) Presented as advances to employees (CA) Presented as advances to affliates (NCA) Presented as advances to suppliers (CA) Decreases the AR balance Decreases the AR balance Decreases the AR balance Decreases the AR balance Decreases the claims receivable account Decreases the subsription receivable account Requirement b: Entry to adjust the Accounts Receivable account Subscriptions receivable 150,000 (200,000 - 50,000) Special deposits on contracts 120,000 Claims receivable 60,000 (100,000 - 40,000) Advances to employees 10,000 Advances to affliates 100,000 Advances to suppliers 50,000 Accounts receivable 490,000

Requirement c: Trade and Other Receivables Accounts receivable 1,200,000 Claims receivable 60,000 Advances to employees 10,000 Advances to supplier 50,000 Trade and other receivables 1,320,000 Requirement d: Classification of items excluded in (c) 1) The subscription receivable is silent as to period of collection, whether it is short-term or long-term. Thus, the general rule is to classify it as a deduction from subscribed share capital under the SHE section. 2) The special deposit on contracts is also silent as to collection period, so it classified as noncurrent asset. 3) The advances to affiliate account is classified as long-term investment under noncurrent assets.

Problem 4-3 Affectionate Company Terms

To record the sale and freight charges Accounts receivable 500,000 FOB Freight out 10,000 destination, Sales freight collect Allowance for freight charge Accounts receivable 500,000 FOB 10,000 destination, Freight out Sales freight prepaid Cash Accounts receivable 500,000 FOB Sales shipping pt, freight collect Accounts receivable 510,000 FOB Sales shipping pt, Cash freight prepaid

To record the collection w/in the discount period Cash 475,000 Sales discount (500k x 3%) 15,000 500,000 Allowance for freight charge 10,000 10,000 Accounts receivable 500,000 Cash 485,000 Sales discount (500k x 3%) 15,000 500,000 Accounts receivable 500,000 10,000 Cash 485,000 500,000 Sales discount (500k x 3%) 15,000 Accounts receivable 500,000 Cash (485k + 10k freight) 500,000 Sales discount (500k x 3%) 10,000 Accounts receivable

495,000 15,000 510,000

Problem 4-4 Fiancee Company Trans 1: Trans 2:

Trans 3:

Accounts receivable Sales

4,000,000

Cash (98% of receivable) Sales discount Accounts receivable

1,470,000 30,000

Cash

1,000,000

4,000,000

Trans 5:

Sales return Accounts receivable

The difference bet. AR and collection or 1,500,000 x 2%

1,500,000

Accounts receivable Trans 4:

This is the am ount collected (net of 2% discount). (1,470,000 cash collected ÷ 98% net of discount)

1,000,000 100,000 100,000

Sales return 20,000 Allowance for sales returns

20,000

AR is credited since it is already granted.

Allowance is credited since it is still an estim ate.

Problem 4-5 Romela Company (Gross Method) Sale:

Accounts receivable Sales

4,500,000 4,500,000

Collection:

Assuming payment was received on June 25 (within the discount period) Cash 4,410,000 Sales discount (4.5M x 2%) 90,000 Accounts receivable 4,500,000

Collection:

Assuming payment was received on July 10 (beyond the discount period) Cash 4,500,000 Accounts receivable 4,500,000

Problem 4-6 Prime Company (Net Method) Sale:

Accounts receivable Sales

2,450,000 2,450,000

Collection:

Assuming payment was received on February 24 (within the discount period) Cash 2,450,000 Accounts receivable 2,450,000

Collection:

Assuming payment was received on March 10 (beyond the discount period) Cash 2,500,000 Accounts receivable 2,450,000 Sales discount forfeited 50,000

Problem 4-7 Raven Company Sale: Returns: Estimates:

Accounts receivable Sales Sales return Accounts receivable

4,000,000 4,000,000 300,000

Sales return 100,000 Allowance for sales returns

Total estim ated return is 4% of sales. Estim ated return = 4M x 4% = 400,000 Actual return is 300,000

300,000 Estim ated additional return = 400k - 300k

100,000

Problem 4-8 Trade accounts receivable Allowance for doubtful accounts Claims receivable Trade and other receivables

2,000,000 (100,000) 300,000 2,200,000 A

• Trade and other receivables include "current" receivables only. • Goods on consignm ent are only recorded as sales when actually sold. Thus, the selling price is not considered as a receivable from the consignee. • Security deposit on lease of warehouse is a long-term receivable.

Problem 4-9 Accounts receivable, beginning Credit sales Sales return* Accounts written off* Collections from customers Accounts receivable, ending Less: Allowances Allowance for sales return** Allowance for doubtful accounts** Accounts receivable @ NRV

1,300,000 5,500,000 (150,000) (100,000) (5,000,000) 1,550,000

*Actual sales returns and accounts written off are deducted outright from the AR account.

** The estim ated sales return and uncollectible accounts (50,000) are presented as allowances. These are deducted from (250,000) the gross am ount of AR to get its net realizable value. 1,250,000 B

Problem 4-10 Accounts receivable, beginning Credit sales Collections from customers Accounts written off Collections of accounts written off* Accounts receivable (before ADA)

1,300,000 5,400,000 (4,750,000) (125,000) 1,825,000 A

*Entry to record the collection of accounts written off: • Reestablish first the custom er's account by reversing the entry m ade when the account was written off.

Accounts receivable Allowance for doubtful accounts

25,000 25,000

• Record the collection of cash.

Cash

25,000 Accounts receivable

25,000

• So in effect, there is no adjustm ent in the AR account.

Problem 4-11 Analysis of items included in the AR account Worthless accounts Advance payment on purchase orders Advances to subsidiary Customers' accounts with credit balances Trade accounts receivable Subscription receivable Trade installment receivable Trade accounts receivable from officers Postdated checks on trade accounts

Amount 100,000 400,000 1,000,000 (600,000) 3,500,000 2,200,000 800,000 150,000 200,000

Explanation No longer part of AR Separate account: Advances to suppliers (CA) Separate account: Advances to subsidiary (NCA) Separate account: Payables (CL) Included in AR Separate account: Subscription receivable (CA) Included in AR (exclude unearned finance charge) Included in AR Included in AR

Trade accounts receivable Trade installment receivable Trade accounts receivable from officers Postdated checks on trade accounts Trade accounts receivable

3,500,000 800,000 150,000 200,000 4,650,000

A

Problem 4-12 Analysis of items included in the AR account Jan 1 balance net of credit balances Credit balances of AR Charge sales Charge for goods out on consignment Shareholders' subscriptions Accounts written off but recovered Cash paid to customers for credit balances Goods shipped to cover credit balances Deposit on long-term contracts Claim against common carrier Advances to supplier Collections from customers Overpayment of customers Writeoff Merchandise returns Allowance to customers for shipping damages Collection on carrier claim Collection on subscription Requirement 1: Accounts receivable Accounts receivable, beginning Charge sales Recovered accounts Collections from customers Writeoffs Merchandise returns Accounts, receivable, ending Allowance to customers for shipping damages Accounts receivable @ nrv

Amount 560,000 30,000 5,250,000 50,000 1,000,000 10,000 25,000 5,000 500,000 400,000 300,000 5,150,000 50,000 35,000 25,000 15,000 50,000 200,000

Explanation Credit balances should not be netted Presented separately as payable to customers (CL) Increase in AR Not considered as receivable Presented separately as subscription receivable (SHE) Reestablished AR and allowance account Deduction from payable to customers Deduction from payable to customers Presented separately as long-term receivable (NCA) Presented separately as claims receivable (CA) Presented separately as advances to suppliers (CA) Decrease in AR Presented separately as payable to customers (CL) Decrease in AR Decrease in AR Allowance (deducted from AR to get NRV) Decrease in claims receivable Decrease in subscription receivable

560,000 5,250,000 10,000 (5,150,000) (35,000) (25,000) 610,000 (15,000) 595,000 B

Requirement 2: Trade and other receivables Accounts receivable Claims receivable (net of collection) Advances to supplier Trade and other receivables

595,000 350,000 300,000 1,245,000 C

Requirement 3: Noncurrent receivables Deposit on long-term contracts Subscriptions receivable Noncurrent receivables

500,000 800,000 1,300,000 C

Problem 4-13 Requirement 1: Accounts receivable Accounts receivable, beginning Credit sales Collections from credit customers Sales discount Accounts written off Credit memo for sales returns and allowances Recoveries on accounts written off Accounts receivable, ending Requirement 2: Allowance for doubtful accounts Allowance for doubtful accounts, beginning Doubtful accounts expense Accounts written off Recoveries on accounts written off Allowance for doubtful accounts, ending

950,000 3,800,000 (3,024,000) (126,000) (50,000) (250,000) 1,300,000 A

Total sales of 5.9M less 2.1M cash sales = 3.8M credit sales This am ount is net of 4% discount, so it pertains to 96% of AR 3,024,000 ÷ 96 = 3,150,000 AR x 4% = 126,000 discount Debit ADA, credit AR The 20,000 refund pertains to sales returns to cash custom ers. AR is reestablished but subsequently credited for the collection.

100,000 70,000 Debit DAE, credit ADA (50,000) Debit ADA, credit AR 80,000 Debit AR, credit ADA 200,000 B

Problem 4-14 1 D The operating cycle is the period from the acquisition of assets up to their realization in cash. 2 D The operating cycle is not considered for the measurement of nontrade receivables. 3 A Generally, credit balances in AR are classified as payables under current liabilities. 4 C Only the expense and allowance account are affect in the adjusting entry. 5 D Writeoff is recorded as debit ADA, credit AR. 6 C Bad debt expense is matched with sales revenue. 7 D An expense is recorded immediately when collection is considered doubtful. 8 C This is the entry to reestablish a previously written off account. 9 A Net method is theoretically correct because it values the AR at net realizable value. 10 C Cash discount under net method is already deducted, thus, it does not affect the AR balance. Problem 4-15 1 A Expense is recorded when collection is doubtful and not when actually uncollectible. 2 A Writeoff is recorded as debit ADA, credit AR. 3 A Both AR and ADA have decreased, so no effect in the NRV of AR. 4 D Recovery of accounts written off is recorded as debit AR, credit ADA and debit cash, credit AR. 5 B Net effect of entry in no. 4: debit Cash, credit ADA.