Chapter7-Cash and Receivables

8/19/2019 Chapter7-Cash and Receivables

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CHAPTER 7

CASH AND RECEIVABLES

TRUE-FALSE —ConceptualAnswe No! Desc "pt"on

T 1. Items considered cash.F 2. Items considered cash.F 3. Items considered cash.F 4. Cash equivalents definition.F 5. Bank overdrafts.T 6. Cash equivalents.F . Classification of receiva!les.

F ". Items considered trade receiva!les.T #. Trade discount uses.T 1$. %ales discounts.T 11. &aluation of receiva!les.F 12. 'ercenta(e)of)receiva!les a**roach.F 13. 'ercenta(e)of)sales method.T 14. +e*ortin( notes receiva!le.F 15. %tated interest rate vs. effective rate.F 16. Classification of notes receiva!le.T 1 . +ecourse lia!ilit,.F 1". Bu,in( receiva!les -ith recourse.T 1#. %ellin( receiva!les -ith recourse.

F 2$. Com*utin( receiva!les turnover.

#ULTIPLE CH$ICE —ConceptualAnswe No! Desc "pt"on

d 21. Identification of cash items.! 22. Identification of cash items.d 23. Classification of travel advance.d ' 24. Items included as cash.d %25. Cash equivalent definition.d 26. Classification of !ank overdraft.

d 2 . Classification of com*ensatin( !alances.d 2". efinition of trade receiva!les.d 2#. Identification of trade receiva!les.c %3$. 'resentation of nontrade receiva!les.d %31. Cash discount definition.d ' 32. Trade discount uses.a 33. Classification of sales discounts.c 34. &aluation of short)term receiva!les.d 35. Bad de!t *rovision and the matchin( conce*t.a 36. Bad de!ts as a *ercenta(e of sales.


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Test Ban% &o Inte 'e("ate Account"n)* Twel&t+ E("t"on

#ULTIPLE CH$ICE —Conceptual ,cont!Answe No! Desc "pt"on

! 3 . Bad de!ts as a *ercenta(e of sales.a 3". Bad de!ts as a *ercenta(e of receiva!les.d 3#. Financial statement effect of a note recorded incorrectl,.c 4$. Factorin( accounts receiva!le -ithout recourse.c %41. Classification of accounts and notes receiva!le.a %42. Transfer of receiva!les -ith recourse.a ' 43. /ccounts receiva!le turnover ratio.d 44. /ccounts receiva!le turnover ratio.c 045. ntr, to re*lenish 'ett, Cash.c 046. 'ur*ose of Cash ver %hort account.! 04 . Classification of !ank service char(es.c 04". Treatment of !ank credits on !ank reconciliation.

' These questions also a**ear in the 'ro!lem)%olvin( %urvival uide.% These questions also a**ear in the %tud, uide.0 This to*ic is dealt -ith in an /**endi to the cha*ter.

#ULTIPLE CH$ICE —Co'putat"onalAnswe No! Desc "pt"on

d 4#. Calculate effective interest on loan -ith required com*ensator, !alance.! 5$. +e*ortin( cash.c 51. Cash and cash equivalents.! 52. +e*ortin( cash.c 53. Cash and cash equivalents.c 54. etermine effective annual interest rate of sales discount.! 55. Calculate !alance of accounts receiva!le.! 56. Calculate net reali a!le value of accounts receiva!le.d 5 . Calculate net reali a!le value of accounts receiva!le.c 5". Calculate !ad de!t e *ense usin( a(in( of receiva!les.! 5#. Calculate !ad de!t e *ense usin( *ercent of sales.a 6$. Calculate !ad de!t e *ense usin( *ercent of receiva!les.! 61. &aluation of accounts receiva!le.! 62. Calculation of !ad de!t e *ense.d 63. Calculate /llo-ance for ou!tful /ccounts !alance.! 64. &aluation of accounts receiva!le.! 65. Calculation of !ad de!t e *ense.d 66. Calculate /llo-ance for ou!tful /ccounts !alance.! 6 . etermine a**ro*riate interest rate for a ero)interest)!earin( note.a 6". Calculate *resent value of a ero)interest)!earin( note.c 6#. Calculate cash *roceeds from transfer of receiva!les.c $. ntr, to record collection of assi(ned receiva!les.! 1. Factorin( receiva!les -ithout recourse.! 2. Factorin( receiva!les -ith recourse.c 3. Calculate loss on sale of receiva!les.c 4. Calculate loss on sale of receiva!les.c 5. Calculate accounts receiva!le turnover.c 6. Calculate accounts receiva!le turnover.

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Cash and +eceiva!les

#ULTIPLE CH$ICE —Co'putat"onal ,cont!Answe No! Desc "pt"on

d 0 . ntr, to re*lenish *ett, cash.! 0 ". Calculate correct !alance in !ank account.! 0 #. Calculate correct cash !alance.c 0"$. Calculate correct cash !alance.! 0"1. Calculate correct cash !alance.c 0"2. Calculate correct cash !alance.

#ULTIPLE CH$ICE —CPA A(apte(Answe No! Desc "pt"on

a "3. etermine current net receiva!les.d "4. Calculate ad7ustment for !ad de!ts.d "5. Calculate !ad de!t e *ense.

! "6. Calculate ad7ustment to -rite off !ad de!ts.c " . ffect of a -rite)off under the allo-ance method.d "". etermine !alance in the /llo-ance for ou!tful /ccounts.c "#. etermine interest revenue of a ero)interest)!earin( note.c #$. etermine interest receiva!le at ,ear end.! #1. /ssi(nment and factorin( of accounts receiva!le.a 0#2. Calculate correct cash !alance.a 0#3. Calculate the cash !alance *er !ooks.

E/ERCISESIte' Desc "pt"on

)#4 /sset classification.)#5 /llo-ance for dou!tful accounts.)#6 ntries for !ad de!t e *ense.)# /ccounts receiva!le assi(ned.

PR$BLE#SIte' Desc "pt"on' )#" ntries for !ad de!t e *ense.' )## /morti ation of discount on note.

' )1$$ /ccounts receiva!le assi(ned.0' )1$1 Factorin( accounts receiva!le.0' )1$2 Bank reconciliation.

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CHAPTER LEARNIN1 $B2ECTIVES1. Identif, items considered as cash.2. Indicate ho- to re*ort cash and related items.3. efine receiva!les and identif, the different t,*es of receiva!les.

4. *lain accountin( issues related to reco(nition of accounts receiva!le.5. *lain accountin( issues related to valuation of accounts receiva!le.6. *lain accountin( issues related to reco(nition of notes receiva!le.

. *lain accountin( issues related to valuation of notes receiva!le.". *lain accountin( issues related to dis*osition of accounts and notes receiva!le.#. *lain ho- to re*ort and anal, e receiva!les.

01$. *lain common techniques em*lo,ed to control cash.

SU##AR3 $F LEARNIN1 $B2ECTIVES B3 4UESTI$NSItem Type Item Type Item Type Item Type Item Type Item Type Item Type

Lea n"n) $56ect" e 81. TF 2. TF 3. TF 21. 8C 22. 8C 23. 8C ' 24. 8C

Lea n"n) $56ect" e .4. TF 6. TF 26. 8C 4#. 8C 51. 8C 53. 8C5. TF %25. 8C 2 . 8C 5$. 8C 52. 8C #4.

Lea n"n) $56ect" e 0. TF ". TF 2". 8C 2#. 8C %3$. 8C

Lea n"n) $56ect" e 9#. TF 1$. TF %31. 8C ' 32. 8C 33. 8C 54. 8C "3. 8C

Lea n"n) $56ect" e :11. TF 35. 8C 55. 8C 5#. 8C 63. 8C "4. 8C "". 8C12. TF 36. 8C 56. 8C 6$. 8C 64. 8C "5. 8C #5.13. TF 3 . 8C 5 . 8C 61. 8C 65. 8C "6. 8C #6.34. 8C 3". 8C 5". 8C 62. 8C 66. 8C " . 8C #". '

Lea n"n) $56ect" e ;14. TF 16. TF 6 . 8C "#. 8C ##. '15. TF 3#. 8C 6". 8C #$. 8C

Lea n"n) $56ect" e <1 . TF 4$. 8C 6#. 8C 2. 8C #1. 8C 1$1. '1". TF %41. 8C $. 8C 3. 8C # .

1#. TF%

42. 8C 1. 8C 4. 8C 1$$. 'Lea n"n) $56ect" e =

2$. TF ' 43. 8C 44. 8C 5. 8C 6. 8CLea n"n) $56ect" e >8?

45. 8C 4 . 8C . 8C #. 8C "1. 8C #2. 8C 1$2. '46. 8C 4". 8C ". 8C "$. 8C "2. 8C #3. 8C

9ote: TF ; True)False ; ercise8C ; 8ulti*le Choice ' ; 'ro!lem

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TRUE-FALSE —Conceptual

1. %avin(s accounts are usuall, classified as cash on the !alance sheet.

2. Certificates of de*osit are usuall, classified as cash on the !alance sheet.

3. Com*anies include *ostdated checks and *ett, cash funds as cash.

4. Cash equivalents are investments -ith ori(inal maturities of si months or less.

5. Bank overdrafts are al-a,s offset a(ainst the cash account in the !alance sheet.

6. %hort)term< hi(hl, liquid investments ma, !e included -ith cash on the !alance sheet.

. /ll claims held a(ainst customers and others for mone,< (oods< or services are re*orted ascurrent assets.

". Trade receiva!les include notes receiva!le and advances to officers and em*lo,ees.

#. Trade discounts are used to avoid frequent chan(es in catalo(s and to alter *rices for different quantities *urchased.

1$. In the (ross method< sales discounts are re*orted as a deduction from sales.

11. The net amount re*orted for short)term receiva!les is not affected -hen a s*ecific accountreceiva!le is determined to !e uncollecti!le.

12. The *ercenta(e)of)receiva!les a**roach of estimatin( uncollecti!le accounts em*hasi esmatchin( over valuation of accounts receiva!le.

13. The *ercenta(e)of)sales method results in a more accurate valuation of receiva!les on the!alance sheet.

14. Com*anies record and re*ort lon()term notes receiva!le at the *resent value of the cashthe, e *ect to collect.

15. =hen the stated rate of interest e ceeds the effective rate< the *resent value of the notereceiva!le -ill !e less than its face value.

16. 9otes receiva!le are (enerall, re*orted as noncurrent assets.

1 . +eco(nition of a recourse lia!ilit, -ill make a loss on sale of receiva!les lar(er than it -ouldother-ise have !een.

1". =hen !u,in( receiva!les -ith recourse< the *urchaser assumes the risk of collecti!ilit, anda!sor!s an, credit loss.

1#. For receiva!les sold -ith recourse< the seller (uarantees *a,ment to the *urchaser if thede!tor fails to *a,.

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2$. The receiva!les turnover ratio is com*uted !, dividin( net sales !, the endin( netreceiva!les.

T ue False Answe s— Conceptual

Ite' Ans! Ite' Ans! Ite' Ans! Ite' Ans!1. T 6. T 11. T 16. F2. F . F 12. F 1 . T3. F ". F 13. F 1". F4. F #. T 14. T 1#. T5. F 1$. T 15. F 2$. F

#ULTIPLE CH$ICE —Conceptual

21. =hich of the follo-in( is not considered cash for financial re*ortin( *ur*oses>a. 'ett, cash funds and chan(e funds!. 8one, orders< certified checks< and *ersonal checksc. Coin< currenc,< and availa!le fundsd. 'ostdated checks and I. .?.@s

22. =hich of the follo-in( is considered cash>a. Certificates of de*osit AC s!. 8one, market checkin( accountsc. 8one, market savin(s certificatesd. 'ostdated checks

23. Travel advances should !e re*orted asa. su**lies.!. cash !ecause the, re*resent the equivalent of mone,.c. investments.d. none of these.

' 24. =hich of the follo-in( items should not !e included in the Cash ca*tion on the !alancesheet>a. Coins and currenc, in the cash re(ister !. Checks from other *arties *resentl, in the cash re(ister c. /mounts on de*osit in checkin( account at the !ankd. 'osta(e stam*s on hand

%25. / cash equivalent is a short)term< hi(hl, liquid investment that is readil, converti!le intokno-n amounts of cash anda. is acce*ta!le as a means to *a, current lia!ilities.!. has a current market value that is (reater than its ori(inal costc. !ears an interest rate that is at least equal to the *rime rate of interest at the date of

liquidation.d. is so near its maturit, that it *resents insi(nificant risk of chan(es in interest rates.

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26. Bank overdrafts< if material< should !ea. re*orted as a deduction from the current asset section.!. re*orted as a deduction from cash.c. netted a(ainst cash and a net cash amount re*orted.d. re*orted as a current lia!ilit,.

2 . e*osits held as com*ensatin( !alancesa. usuall, do not earn interest.!. if le(all, restricted and held a(ainst short)term credit ma, !e included as cash.c. if le(all, restricted and held a(ainst lon()term credit ma, !e included amon( current

assets.d. none of these.

2". The cate(or, trade receiva!les includesa. advances to officers and em*lo,ees.!. income ta refunds receiva!le.c. claims a(ainst insurance com*anies for casualties sustained.d. none of these.

2#. =hich of the follo-in( should !e recorded in /ccounts +eceiva!le>a. +eceiva!les from officers!. +eceiva!les from su!sidiariesc. ividends receiva!led. 9one of these

%3$. =hat is the *refera!le *resentation of accounts receiva!le from officers< em*lo,ees< or affiliated com*anies on a !alance sheet>a. /s offsets to ca*ital.!. B, means of footnotes onl,.c. /s assets !ut se*aratel, from other receiva!les.

d. /s trade notes and accounts receiva!le if the, other-ise qualif, as current assets.%31. =hen a customer *urchases merchandise inventor, from a !usiness or(ani ation< she

ma, !e (iven a discount -hich is desi(ned to induce *rom*t *a,ment. %uch a discount iscalled aAna. trade discount.!. nominal discount.c. enhancement discount.d. cash discount.

' 32. Trade discounts area. not recorded in the accountsD rather the, are a means of com*utin( a *rice.!. used to avoid frequent chan(es in catalo(ues.c. used to quote different *rices for different quantities *urchased.d. all of the a!ove.

33. If a com*an, em*lo,s the (ross method of recordin( accounts receiva!le from customers<then sales discounts taken should !e re*orted asa. a deduction from sales in the income statement.!. an item of other e *ense in the income statement.c. a deduction from accounts receiva!le in determinin( the net reali a!le value of

accounts receiva!le.

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d. sales discounts forfeited in the cost of (oods sold section of the income statement.34. /ssumin( that the ideal measure of short)term receiva!les in the !alance sheet is the

discounted value of the cash to !e received in the future< failure to follo- this *racticeusuall, does not make the !alance sheet misleadin( !ecausea. most short)term receiva!les are not interest)!earin(.!. the allo-ance for uncollecti!le accounts includes a discount element.c. the amount of the discount is not material.d. most receiva!les can !e sold to a !ank or factor.

35. =hich of the follo-in( methods of determinin( !ad de!t e *ense does not *ro*erl, matche *ense and revenue>a. Char(in( !ad de!ts -ith a *ercenta(e of sales under the allo-ance method.!. Char(in( !ad de!ts -ith an amount derived from a *ercenta(e of accounts receiva!le

under the allo-ance method.c. Char(in( !ad de!ts -ith an amount derived from a(in( accounts receiva!le under the

allo-ance method.d. Char(in( !ad de!ts as accounts are -ritten off as uncollecti!le.

36. =hich of the follo-in( methods of determinin( annual !ad de!t e *ense !est achievesthe matchin( conce*t>a. 'ercenta(e of sales!. 'ercenta(e of endin( accounts receiva!lec. 'ercenta(e of avera(e accounts receiva!led. irect -rite)off

3 . =hich of the follo-in( is a (enerall, acce*ted method of determinin( the amount of thead7ustment to !ad de!t e *ense>a. / *ercenta(e of sales ad7usted for the !alance in the allo-ance!. / *ercenta(e of sales not ad7usted for the !alance in the allo-ancec. / *ercenta(e of accounts receiva!le not ad7usted for the !alance in the allo-anced. /n amount derived from a(in( accounts receiva!le and not ad7usted for the !alance in

the allo-ance

3". The advanta(e of relatin( a com*an,@s !ad de!t e *ense to its outstandin( accountsreceiva!le is that this a**roacha. (ives a reasona!l, correct statement of receiva!les in the !alance sheet.!. !est relates !ad de!t e *ense to the *eriod of sale.c. is the onl, (enerall, acce*ted method for valuin( accounts receiva!le.d. makes estimates of uncollecti!le accounts unnecessar,.

3#. /t the !e(innin( of 2$$6< Finne, Com*an, received a three),ear ero)interest)!earin(E1


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4$. =hich of the follo-in( is true -hen accounts receiva!le are factored -ithout recourse>a. The transaction ma, !e accounted for either as a secured !orro-in( or as a sale<

de*endin( u*on the su!stance of the transaction.!. The receiva!les are used as collateral for a *romissor, note issued to the factor !, the

o-ner of the receiva!les.c. The factor assumes the risk of collecti!ilit, and a!sor!s an, credit losses in collectin(

the receiva!les.d. The financin( cost Ainterest e *ense should !e reco(ni ed rata!l, over the collection

*eriod of the receiva!les.

%41. =hich of the follo-in( statements is incorrect re(ardin( the classification of accounts andnotes receiva!le>a. %e(re(ation of the different t,*es of receiva!les is required if the, are material.!. isclose an, loss contin(encies that e ist on the receiva!les.c. /n, discount or *remium resultin( from the determination of *resent value in notes

receiva!le transactions is an asset or lia!ilit, res*ectivel,.d. &aluation accounts should !e a**ro*riatel, offset a(ainst the *ro*er receiva!le

accounts.

%42. f the follo-in( conditions< -hich is the onl, one that is not required if the transfer of receiva!les -ith recourse is to !e accounted for as a sale>a. The transferor is o!li(ated to make a (enuine effort to identif, those receiva!les that

are uncollecti!le.!. The transferor surrenders control of the future economic !enefits of the receiva!les.c. The transferee cannot require the transferor to re*urchase the receiva!les.d. The transferor@s o!li(ation under the recourse *rovisions can !e reasona!l,

estimated.

' 43. The accounts receiva!le turnover ratio measures thea. num!er of times the avera(e !alance of accounts receiva!le is collected durin( the

*eriod.!. *ercenta(e of accounts receiva!le turned over to a collection a(enc, durin( the

*eriod.c. *ercenta(e of accounts receiva!le arisin( durin( certain seasons.d. num!er of times the avera(e !alance of inventor, is sold durin( the *eriod.

44. The accounts receiva!le turnover ratio is com*uted !, dividin(a. (ross sales !, endin( net receiva!les.!. (ross sales !, avera(e net receiva!les.c. net sales !, endin( net receiva!les.d. net sales !, avera(e net receiva!les.

045. =hich of the follo-in( is not true>a. The im*rest *ett, cash s,stem in effect adheres to the rule of dis!ursement !, check.!. ntries are made to the 'ett, Cash account onl, to increase or decrease the si e of

the fund or to ad7ust the !alance if not re*lenished at ,ear)end.c. The 'ett, Cash account is de!ited -hen the fund is re*lenished.d. /ll of these are not true.

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046. / Cash ver and %hort accounta. is not (enerall, acce*ted.!. is de!ited -hen the *ett, cash fund *roves out over.c. is de!ited -hen the *ett, cash fund *roves out short.d. is a contra account to Cash.

04 . The 7ournal entries for a !ank reconciliationa. are taken from the !alance *er !ank section onl,.!. ma, include a de!it to ffice *ense for !ank service char(es.c. ma, include a credit to /ccounts +eceiva!le for an 9%F check.d. ma, include a de!it to /ccounts 'a,a!le for an 9%F check.

04". =hen *re*arin( a !ank reconciliation< !ank credits area. added to the !ank statement !alance.!. deducted from the !ank statement !alance.c. added to the !alance *er !ooks.d. deducted from the !alance *er !ooks.

#ult"ple C+o"ce Answe s —ConceptualIte' Ans! Ite' Ans! Ite' Ans! Ite' Ans! Ite' Ans! Ite' Ans! Ite' Ans!

21. d %25. d 2#. d 33. a 3 . ! %41. c 045. c22. ! 26. d %3$. c 34. c 3". a %42. a 046. c23. d 2 . d %31. d 35. d 3#. d ' 43. a 04 . !

' 24. d 2". d ' 32. d 36. a 4$. c 44. d 04". c

%olutions to those 8ulti*le Choice questions for -hich the ans-er is Gnone of these.H23. /s receiva!les.2 . 8an, ans-ers are *ossi!le.2". *en accounts resultin( from short)term e tensions of credit to customers.2#. *en accounts resultin( from short)term e tensions of credit to customers.3#. verstate< understate< understate< ero.

#ULTIPLE CH$ICE —Co'putat"onal4#. n anuar, 1< 2$$ < 8ann Com*an, !orro-s E2


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51. Jorvath Com*an, has the follo-in( items at ,ear)end:

Cash in !ank E2$


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56. Before ,ear)end ad7ustin( entries< Bass Com*an,@s account !alances at ecem!er 31<2$$ < for accounts receiva!le and the related allo-ance for uncollecti!le accounts -ereE6$$


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6$. If the estimate of uncollecti!les is made !, takin( 1$ of (ross account receiva!les< theamount of the ad7ustment isa. E3


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65. el(ado Cor*oration had a 1K1K$ !alance in the /llo-ance for ou!tful /ccounts of E2$


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?se the follo-in( information for questions 6# and $.

Jenr, Co. assi(ned E4$$


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4. 8ortonson Cor*oration factored< -ith recourse< E3$$


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a. E3#


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#ult"ple C+o"ce Answe s— Co'putat"onalIte' Ans! Ite' Ans! Ite' Ans! Ite' Ans! Ite' Ans! Ite' Ans! Ite' Ans!

4#. d 54. c 5#. ! 64. ! 6#. c 4. c 0 #. !5$. ! 55. ! 6$. a 65. ! $. c 5. c 0"$. c

51. c 56. ! 61. ! 66. d 1. ! 6. c 0"1. !52. ! 5 . d 62. ! 6 . ! 2. ! 0 . d 0"2. c53. c 5". c 63. d 6". a 3. c 0 ". !

#ULTIPLE CH$ICE —CPA A(apte(

"3. n the ecem!er 31< 2$$ !alance sheet of Oount Co.< the current receiva!les consistedof the follo-in(:

Trade accounts receiva!le E 5


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/fter ,ear)end ad7ustment< the uncollecti!le accounts e *ense for 2$$ should !ea. E46


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#$. n une 1< 2$$ < =att Cor*. loaned Jall E3$$


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#ult"ple C+o"ce Answe s— CPA A(apte(Ite' Ans! Ite' Ans! Ite' Ans! Ite' Ans! Ite' Ans! Ite' Ans!

"3. a "5. d " . c "#. c #1. ! 0#3. a"4. d "6. ! "". d #$. c 0#2. a

DERIVATI$NS — Co'putat"onal

No! Answe De " at"on4#. d E2


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DERIVATI$NS — Co'putat"onal ,cont!

No! Answe De " at"on6 . ! and .

6". a E3$


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DERIVATI$NS — CPA A(apte( ,cont!

No! Answe De " at"on"". d E 5$


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Solut"on 7-=9

1. d 3. d 5. d . ! #. c2. a 4. a 6. c ". d 1$. a

E@! 7-=: P/llo-ance for dou!tful accounts.

=hen a com*an, has a *olic, of makin( sales for -hich credit is e tended< it is reasona!le toe *ect a *ortion of those sales to !e uncollecti!le. /s a result of this< a com*an, must reco(ni e!ad de!t e *ense. There are !asicall, t-o methods of reco(ni in( !ad de!t e *ense: A1 direct-rite)off method< and A2 allo-ance method.

Inst uct"ons

Aa escri!e full, !oth the direct -rite)off method and the allo-ance method of reco(ni in( !adde!t e *ense.

A! iscuss the reasons -h, one of the a!ove methods is *refera!le to the other and the reasons-h, the other method is not usuall, in accordance -ith (enerall, acce*ted accountin(*rinci*les.

Solut"on 7-=:

Aa There are !asicall, t-o methods of reco(ni in( !ad de!t e *ense: A1 direct -rite)off and A2allo-ance.

The direct -rite)off method requires the identification of s*ecific !alances that are deemed to!e uncollecti!le !efore an, !ad de!t e *ense is reco(ni ed. /t the time a s*ecific account isdeemed uncollecti!le< the account is removed from accounts receiva!le and a corres*ondin(

amount of !ad de!t e *ense is reco(ni ed.The allo-ance method requires an estimate of !ad de!t e *ense for a *eriod of time !,reference to the com*osition of the accounts receiva!le !alance at a s*ecific *oint in timeAa(in( or to the overall e *erience -ith credit sales over a *eriod of time. Thus< total !adde!t e *ense e *ected to arise as a result of o*erations for a s*ecific *eriod is estimated< thevaluation account Aallo-ance for dou!tful accounts is a**ro*riatel, ad7usted< and acorres*ondin( amount of !ad de!t e *ense is reco(ni ed. /s s*ecific accounts are identifiedas uncollecti!le< the account is -ritten off. It is removed from accounts receiva!le and acorres*ondin( amount is removed from the valuation account Aallo-ance for dou!tfulaccounts . 9et accounts receiva!le do not chan(e< and there is no char(e to !ad de!te *ense -hen s*ecific accounts are identified as uncollecti!le and -ritten off usin( the

allo-ance method.A! The allo-ance method is *refera!le !ecause it matches the cost of makin( a credit sale -ith

the revenues (enerated !, the sale in the same *eriod and achieves a *ro*er carr,in( valuefor accounts receiva!le at the end of a *eriod. %ince the direct -rite)off method does notreco(ni e the !ad de!t e *ense until a s*ecific amount is deemed uncollecti!le< -hich ma,!e in a su!sequent *eriod< it does not com*l, -ith the matchin( *rinci*le and does notachieve a *ro*er carr,in( value for accounts receiva!le at the end of a *eriod.

7 - .9


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E@! 7-=; P ntries for !ad de!t e *ense.

/ trial !alance !efore ad7ustment included the follo-in(: e!it Credit

/ccounts receiva!le E"$


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Solut"on 7-=7

Cash............................................................................................... 1#2


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Solut"on 7-=< Acont.

A! The *ercenta(e of receiva!les a**roach -ould !e affected as follo-s:ross receiva!les E1$$


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Solut"on 7-== Acont.

A! Bro-n Com*an,%chedule of 9ote iscount /morti ation

ffective Interest 8ethod5 9ote iscounted at 1$ AIm*uted

Cash ffective ?namorti ed 'resent Interest Interest iscount iscount &alue

ate A5 A1$ /morti ed Balance of 9ote12K31K$ E4#< 35 E35$


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P ! 7-8?8 PFactorin( /ccounts +eceiva!le.

n 8a, 1< Carter< Inc. factored E"$$


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>P ! 7-8?. Acont. .

8onth of /*ril +esults'er Bank 'er Books

Balance /*ril 3$ E2

Chapter7-Cash and Receivables

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Transcript of Chapter7-Cash and Receivables