CHAPTER 6

DISCUSSION QUESTIONS

1. Revenues should be recognized and report- would be created among others. On the oth-
ed when (1) the entity has transferred to the er hand, if a company has too many bad ac-
buyer the significant risks and rewards of counts, it could eventually go bankrupt. Thus,
ownership of the goods; (2) the entity retains it is important that a company walk a fine
neither continuing managerial involvement line in deciding who should and should not
to the degree usually associated with own- be granted credit. If too strict, the firm may
ership nor effective control over the goods lose customers; if too lenient, it may lose
sold; (3) the amount of revenue can be profits and possibly even solvency. The op-
measured reliably; (4) it is probable that the timal position for a company to take is to
economic benefits associated with the choose that point at which the marginal rev-
transaction will flow to the entity; and (5) the enues from customers just equals the mar-
costs incurred or to be incurred in respect of ginal cost of bad debts and other costs of
the transaction can be measured reliably. servicing customers.
2. Some of the reasons revenues are misstat- 5. The allowance method of accounting for
ed to manipulate financial statements are: uncollectible receivables is required by the
profession because it provides a better
a. It is quite easy. All one has to do to
matching of expenses with revenues. For
overstate revenues is record fictitious
example, if a sale made in the last month of
sales, record sales earlier than they
a year eventually became uncollectible, the
should be recorded, or overstate the
bad debt would not be recognized until the
amount of legitimate sales.
following year (at the time the bad debt is
b. When revenues are overstated, assets
known) when using the direct write-off
(accounts receivables) are also over-
method. The revenue would be recognized
stated. By overstating revenues and as-
in the first period and the expense in the
sets, financial statements look good.
second. With the allowance method, the
c. Determining when to recognize reve-
amount of bad debts is estimated on the ba-
nues is not always easy and requires
sis of past experience or industry averages
professional judgment.
and matched with revenues of that period.
3. It is important to have separate sales returns
6. The net balance of Accounts Receivable
and allowances and sales discounts ac-
does not change when an uncollectible ac-
counts rather than to reduce Sales Revenue
count is written off because the journal entry
directly because knowledge of the original
to write off the receivable decreases the Ac-
amount of sales (undisturbed by adjust-
counts Receivable balance and the Allow-
ments for returns and discounts) is valuable
ance for bad debts account by the same
when assessing what percentage of sales is
amount.
returned and/or what the net revenue from
sales is. For example, if a company found 7. Aging of accounts receivable is usually more
that a significant percentage of sales was accurate than basing the estimate on total
being returned (as calculated by dividing receivables because the aging procedure
sales returns and allowances by sales), it considers the length of time receivables
might decide that it is selling inferior mer- have been outstanding. Each age category
chandise or has a return policy that is too is multiplied by an expected uncollectible
liberal. rate rather than applying a general uncol-
lectible rate to all receivables.
4. Most companies tolerate a small percentage
of uncollectible accounts receivable because 8. Operating ratios such as accounts receiva-
if they monitored their customers so closely ble turnover tell you how fast a company is
that there were never any bad debts, their collecting receivables. When examined over
credit policy would be so strict that many po- a period of time, trends in collectibility can
tential customers would be lost and ill will be assessed. Having money tied up in ac-

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 Chapter 6

counts receivable is very expensive for an

organization. Some companies have even
gone bankrupt because they let their receiv-
ables get out of hand.

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Chapter 6

PRACTICE EXERCISES

PE 6-1 (LO2) Revenue Recognition

PE 6-2 (LO2) Revenue Recognition

Cash (95  $29) ..................................................................... 2,755

Accounts Receivable (80  $29) .......................................... 2,320
Sales Revenue................................................................. 5,075

Cost of Goods Sold .............................................................. 3,500

Inventory .......................................................................... 3,500

PE 6-3 (LO2) Cash Collection

Cash.......... ............................................................................ 2,320

Accounts Receivable ...................................................... 2,320

PE 6-4 (LO2) Sales

(1). Cash ($2,320  0.98) ..................................................... 2,273.60

Sales Discounts ($2,320  0.02) .................................. 46.40
Accounts Receivable .............................................. 2,320.00

(2). Cash .............................................................................. 2,320

Accounts Receivable .............................................. 2,320

PE 6-5 (LO2) Sales Returns and Allowances

(1). Sales Returns and Allowances ................................... 435

Cash ............................................................................ 435

Inventory ....................................................................... 300

Cost of Goods Sold ................................................... 300

(2). Sales Returns and Allowances ................................... 435

Accounts Receivable .............................................. 435

Inventory ....................................................................... 300

Cost of Goods Sold ................................................... 300

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 Chapter 6

PE 6-6 (LO2) Computing Net Sales

Gross sales ......................................................................................... $3,750,000

Less: Sales discounts........................................................................ (100,000)
Less: Sales returns and allowances ................................................. (150,000)
Net sales ............................................................................................. $3,500,000

PE 6-7 (LO3) The Allowance Method

Please notice the revision of PE 6-7 in 5th print of the textbook: "Joplin Company
used the allowance method and had the beginning balance of $50,000 for Allow-
ance for Bad Debts. During the year, $43,000 of accounts receivable were deter-
mined worthless due to the bankruptcy of those customers, but had not been
recorded. At the end of the period, it was determined that the ending balance of
Allowance for Bad Debts was $100,000. Using the allowance method of account-
ing for bad debt expense, make the journal entries necessary to record (1) bad
debt expense for the year and (2) the write-off of uncollectible accounts."

1. Bad Debt Expense ........................................................ 93,000

Allowance for Bad Debts ........................................ 93,000

2. Allowance for Bad Debts ............................................. 43,000

Accounts Receivable .............................................. 43,000

PE 6-8 (LO3) Computing Net Accounts Receivable

(1). Before Write-Off (2). After Write-Off

Accounts receivable $200,000 Accounts receivable $157,000

Less: Allowance for ($200,000 – $43,000)
bad debts 50,000 Less: Allowance for
Net realizable value $150,000 bad debts
($50,000 – $43,000) 7,000
Net realizable value $150,000

PE 6-9 (LO3) Collecting an Account Previously Written Off

Accounts Receivable ........................................................... 7,000

Allowance for Bad Debts ................................................ 7,000

Cash .................................................................................... 7,000

Accounts Receivable ...................................................... 7,000

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Chapter 6

PE 6-10 (LO3) Estimating Uncollectible Accounts Receivable as a Percentage

of Total Receivables

Bad Debt Expense ................................................................ 6,480

Allowance for Bad Debts ................................................ 6,480*
To adjust the allowance account to the desired balance:
*$102,000  0.09 = $9,180; $9,180 – $2,700 = $6,480

PE 6-11 (LO3) Estimating Uncollectible Accounts Receivable Using Aging

Accounts Receivable

Estimate of Losses from Uncollectible Accounts

Percentage Estimated
Age Balances to Be Uncollectible Amount
Current $16,450 1.75% $ 288
1–30 days past due 8,150 6 489
31–60 days past due 7,150 15 1,073
61–90 days past due 900 35 315
91–120 day past due 2,000 65 1,300
Over 120 days past due 4,000 90 3,600
Totals $38,650 $7,065

1. The $7,065 represents the receivables that are likely to be uncollectible. We

need to adjust the allowance account to this balance with the following entry:
Bad Debt Expense ........................................................ 5,065
Allowance for Bad Debts ........................................ 5,065
To adjust the allowance account to the desired ending balance:
$7,065 – $2,000 = $5,065

2. Bad Debt Expense ........................................................ 10,665

Allowance for Bad Debts ........................................ 10,665
To adjust the allowance account to the desired ending balance:
$7,065 + $3,600 = $10,665

PE 6-12 (LO3) Evaluating Quality of Accounts Receivable

Begin the analysis of accounts receivable by dividing the ending allowance for
bad debts by the ending accounts receivable balance to get the allowance for bad
debts as a percentage of accounts receivable, as shown below.

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 Chapter 6

Allowance for Bad Debts

Ending Ending Allowance as a Percentage
Year Accounts Receivable for Bad Debts of Accounts Receivable
Year 3 $307,800 $51,650 17%
Year 2 268,150 37,540 14
Year 1 224,300 21,800 10
In Year 1, the company believed it would not collect 10% of its accounts receiva-
ble. This percentage increased to 17% by Year 3. For some reason, the quality of
accounts receivable has decreased over the past three years as evidenced by the
fact that the company believes a greater percentage of its accounts receivable
will not be collected.

PE 6-13 (LO4) Accounts Receivable Turnover

Sales Revenue $520,000

A/R Turnover = = = 10.40
Average Accounts Receivable [($46,000 + $54,000)/2]

PE 6-14 (LO4) Average Collection Period

365 365
Average Collection Period = = = 35.1 days
Accounts Receivable Turnover 10.40*
*The accounts receivable turnover of 10.40 was calculated in PE 6-13 by dividing
sales by the average accounts receivable.

PE 6-15 (LO5) Recording Notes Receivable

May 1
Notes Receivable.................................................................. 8,500
Sales Revenue................................................................. 8,500

PE 6-16 (LO5) Recording Notes Receivable

June 30
Cash .................................................................................... 8,642
Notes Receivable ............................................................ 8,500
Interest Revenue (€8,500  10%  60/360) ..................... 142

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Chapter 6

PE 6-17 (LO5) Recording Notes Receivable

(1). The maturity date is December 31.

(2).
Dec. 31
Cash .................................................................................... 15,337.5
Notes Receivable ............................................................ 15,000
Interest Revenue ($15,000  9%  3/12) ......................... 337.5

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 Chapter 6

EXERCISES

E 6-1 (LO2) Recording Sales Transactions

June 3 Accounts Receivable ........................................ 9,000

Sales Revenue .............................................. 9,000
Sold merchandise to Mary Company,
terms 2/10, n/30.
7 Sales Returns and Allowances......................... 850
Accounts Receivable ................................... 850
Accepted return of merchandise from
Mary Company.
21 Cash.................................................................... 8,150
Accounts Receivable ................................... 8,150
Received payment in full from Mary Company.

E 6-2 (LO2) Recording Sales Transactions

June 24 Accounts Receivable ........................................ 140,000

Sales Revenue .............................................. 140,000
Sold merchandise to Brooke Bowman,
terms 2/10, n/30.

To be complete, the journal entries should also include:

June 24 Cost of Goods Sold XXX
Inventory XXX
(For the beginners, this point will be clearer after learning Chapter 7.)

30 Cash.................................................................... 78,400
Sales Discounts ................................................. 1,600
Accounts Receivable ................................... 80,000
Received partial payment from Brooke
Bowman.
July 20 Cash.................................................................... 42,000
Sales Returns and Allowances......................... 18,000
Accounts Receivable ................................... 60,000
Received remaining payment from Brooke
Bowman and accepted her return of
merchandise that originally sold for $18,000.

To be complete, the journal entries should also include:

July 20 Inventory XXX

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Chapter 6

Cost of Goods Sold XXX

(For the beginners, this point will be clearer after learning Chapter 7.)

E 6-3 (LO3) Estimating Bad Debts

1. Bad debt expense = $3,900 + $1,300 = $5,200

2. Bad debt expense = ($66,400  4% = $2,656); $2,656 + $1,300 = $3,956

E 6-4 (LO3) Accounting for Bad Debts

1. The allowance method:

Allowance for Bad Debts .................................................. 630,000
Accounts Receivable ................................................... 630,000
To write off uncollectible accounts.
Accounts Receivable ......................................................... 35,000
Allowance for Bad Debts ............................................. 35,000
To reinstate the balance previously written off
as uncollectible.
Cash .................................................................................... 35,000
Accounts Receivable ................................................... 35,000
Received payment of $35,000.
Bad Debt Expense ............................................................. 645,000
Allowance for Bad Debts ............................................. 645,000
To adjust the allowance account to the desired
balance of $650,000.*
*$600,000 (beginning balance) – $630,000 (written off
in 2017) + $35,000 (restored in 2017) = $5,000 (remaining
credit balance).
$650,000 (desired balance) – $5,000 (remaining credit
balance) = $645,000 (adjustment needed).

2. The direct write-off method is objective in that an account is written off at

the time it proves to be uncollectible. This method, however, compromises
the matching principle because expenses incurred in generating revenues
may not be accurately matched with related revenues on a period-by-period
basis. For example, sales made near the end of an accounting period may
not be identified as uncollectible until the next period. Alternatively, when
using the allowance method, uncollectible balances are accounted for dur-
ing the period in which the sales occurred. Although the allowance method
is generally accepted in practice, it may result in a somewhat imprecise ex-

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 Chapter 6

pense amount; this is seen as a less serious problem than the failure to
match revenues and expenses (direct write-off).

E 6-5 (LO2) Accounting for Accounts Receivables

(a) Accounts Receivable 17,200

Sales Revenue 17,200

To be complete, the journal entries should also include:

Cost of Goods Sold XXX
Inventory XXX
(For the beginners, this point will be clearer after learning Chapter 7.)

(b) Sales Returns and Allowances 3,800

Accounts Receivable 3,800

To be complete, the journal entries should also include:

Inventory XXX
Cost of Goods Sold XXX
(For the beginners, this point will be clearer after learning Chapter 7.)

(c) Cash ($13,400 – $268) 13,132

Sales Discounts ($13,400 X 2%) 268
Accounts Receivable ($17,200 – $3,800) 13,400

E 6-6 (LO3) Accounting for Uncollectible Accounts Receivable

1. Allowance for Bad Debts

Write-offs 50,000 Beg. bal. 45,000
Bad debt
expense 95,000
End. bal. 90,000

Answers: December 31, 2017, balance of Allowance for Bad Debts = $90,000
Bad debt expense for 2017 = $95,000 ($45,000 beg. bal. + $50,000
in 2017) (as computed in the T-account above)

2. Accounts Receivable
Beg. bal. 750,000 Collections 3,075,000
Sales 3,500,000 Write-offs 50,000
End. bal. 1,125,000

Answer: December 31,2017, balance of gross Accounts Receivable = $1,125,000

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Chapter 6

E 6-7 (LO3) Aging of Accounts Receivable

0.5%  $720,000 = $ 3,600

3.0%  $395,000 = 11,850
16.0%  $105,000 = 16,800
52.5%  $52,000 = 27,300
92.0%  $13,000 = 11,960
$71,510
Balance needed $71,510
Prior balance 42,000
Adjustment needed $29,510
Journal Entry
Bad Debt Expense ................................................................ 29,510
Allowance for Bad Debts ................................................ 29,510
To record the bad debt expense.

E 6-8 (LO3) Aging of Accounts Receivable

1. Category Amount Percentage Total

Less than 30 days ........................ $122,000 2% $ 2,440
31–60 days .................................... 24,000 10 2,400
61–90 days .................................... 8,000 30 2,400
Over 90 days ................................. 9,000 75 6,750
Total estimated uncollectible accounts ........................................... $13,990

2. Bad Debt Expense ................................................................... 13,990

Allowance for Bad Debts .................................................. 13,990
To record estimated allowance for bad debts.

3. The net accounts receivable balance at December 31, 2017, is $149,010

($163,000 – $13,990).

E 6-9 (LO4) Ratio Analysis

1. Accounts Receivable Turnover

Formula Year 3 Year 2
Parker Enterprises, Inc.
Sales Revenue $3,700 $3,875
Average Accounts Receivable ($1,400 + $1,800)/2 ($1,800 + $1,725)/2

2.3 times 2.2 times

Sales Revenue $17,825 $16,549

Boulder, Inc.
Average Accounts Receivable ($5,525 + $5,800)/2 ($5,800 + $6,205)/2

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 Chapter 6

3.1 times 2.8 times

Average Collection Period

Parker Enterprises, Inc. 365 ÷ 2.3 = 159 days 365 ÷ 2.2 = 166 days
Boulder, Inc. 365 ÷ 3.1 = 118 days 365 ÷ 2.8 = 130 days

2. Boulder, Inc., appears to have the better credit management policy. Its turn-
over is higher, and its average collection period is shorter than Parker's.

E 6-10 (LO4) Assessing How Well Companies Manage Their Receivables

In determining the answer, it is necessary to first compute average receivables

for each year. The average receivables for 2016 are $542,500 [($520,000 +
$565,000)/2]. The average receivables for 2017 are $585,000 [($565,000 +
$605,000)/2].

The accounts receivable turnover ratios are as follows:

2017 2016
Sales Revenue $3,040,000 $2,470,000
= 5.2 times = 4.6 times
Average Accounts Receivable $585,000 $542,500

The average collection periods are:

2017 2016
365 365 365
= 70 days = 79 days
Accounts Receivable Turnover 5.2 times 4.6 times

Based on the above data, Leif Company appears to be managing its receivables
much better in 2017 than it did in 2016. It has increased its receivable turnover
 
(from 4.6 to 5.2 times per year) and has shortened its average collection period
from 79 days to 70 days.

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Chapter 6

E 6-11 (LO5) Accounting for Notes Receivable

(1). (31 – 1) + 30 + 31 + 29 = 120

The maturity date is June 29.

(2).
Jun. 29 Cash .................................................................................. 6,160
Notes Receivable—Kingstone Co. ......................... 6,000
Interest Revenue ..................................................... 160

E 6-12 (LO5) Notes Receivable

Dec. 1 Notes Receivable ............................................................... 60,000

Accounts Receivable ................................................... 60,000

Dec. 31 Interest Receivable ........................................................... 400

Interest Revenue ($0,000 × 8% × 30/360) .................... 400

(a).
Mar. 1 Cash .................................................................................. 61,200
Notes Receivable ..................................................... 60,000
Interest Receivable .................................................. 400
Interest Revenue ..................................................... 800
(b).
Mar. 1 Accounts Receivable ......................................................... 61,200
Notes Receivable ..................................................... 60,000
Interest Receivable .................................................. 400
Interest Revenue ..................................................... 800

E 6-13 (LO5) Recording Notes Receivable

2016
Aug. 1 Notes Receivable—Lala Co............................................... 9,600
Accounts Receivable ................................................... 9,600
Dec. 31 Interest Receivable ........................................................... 320
Interest Revenue .......................................................... 320
2017
Jan. 31 Cash .................................................................................. 9,984
Notes Receivable—Lala Co. ................................... 9,600
Interest Receivable .................................................. 320
Interest Revenue ..................................................... 64

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 Chapter 6

E 6-14 (LO5) Recording Notes Receivable

1.
Apr. 1 Notes Receivable ............................................................... 1,000,000
Cash............................................................................... 1,000,000

2.
Oct. 1 Accounts Receivable ........................................................ 1,060,000
Notes Receivable ..................................................... 1,000,000
Interest Revenue ..................................................... 60,000

3.
Oct. 1
Allowance for Bad Debts .................................................. 1,060,000
Notes Receivable ..................................................... 1,000,000
Interest Revenue ..................................................... 60,000

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Chapter 6

PROBLEMS

P 6-1 (LO2) Sales Transactions

G.E Company—Seller
(a) Accounts Receivable .............................................................. 60,000
Sales Revenue ................................................................... 60,000
Sold merchandise for $60,000.

To be complete, the journal entries should also include:

Cost of Goods Sold XXX
Inventory XXX
(For the beginners, this point will be clearer after learning Chapter 7.)

(b) Sales Returns and Allowances .............................................. 4,000

Accounts Receivable ......................................................... 4,000
Customer returned $4,000 of merchandise.

To be complete, the journal entries should also include:

Inventory XXX
Cost of Goods Sold XXX
(For the beginners, this point will be clearer after learning Chapter 7.)

(c) Cash ......................................................................................... 54,880

Sales Discounts ...................................................................... 1,120
Accounts Receivable ......................................................... 56,000
Received full amount from STARK Company (included
2% discount).

(d) Cash ......................................................................................... 56,000

Accounts Receivable ......................................................... 56,000
Collected full amount from STARK Company.

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 Chapter 6

P 6-2 (LO3) Accounting for Accounts Receivable

1. Accounts Receivable ......................................................... 4,200,000

Sales Revenue .............................................................. 4,200,000
To record 2017 sales.
Cash .................................................................................... 3,616,000
Sales Discounts ................................................................. 64,000
Accounts Receivable .................................................... 3,680,000
To recognize collections of receivables.
Sales Returns and Allowances ......................................... 48,000
Accounts Receivable .................................................... 48,000
To record sales returns from customers.

Allowance for Bad Debts ................................................... 18,800

Accounts Receivable .................................................... 18,800
To write off uncollectible accounts receivable.
Bad Debt Expense .............................................................. 41,800*
Allowance for Bad Debts ............................................. 41,800
To record bad debt expense for the year.
*($20,600 – $18,800 = $1,800; $43,600 – $1,800 = $41,800)

To be complete, the journal entries for the sales transaction should also include:
Cost of Goods Sold XXX
Inventory XXX

(For the beginners, this point will be clearer after learning Chapter 7.)

Also to be complete, the journal entries for sales return transaction should in-
clude:
Inventory XXX
Cost of Goods Sold XXX

(For the beginners, this point will be clearer after learning Chapter 7.)

2. a. Gross sales ................................................................................... $4,200,000

Less: Sales discounts ............................................................... (64,000)
Sales returns and allowances ........................................ (48,000)
Net sales ........................................................................................ $4,088,000
b.
Accounts Receivable
Beg. Bal. 640,000 Collected 3,680,000
Sales 4,200,000 Returns 48,000
Allow. for Bad Debts 18,800
End. Bal. 1,093,200

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Chapter 6

P 6-3 (LO3) Analysis of Allowance for Bad Debts

1. Estimated bad debts 2%  $1,140,000 = $ 22,800

10%  $600,000 = 60,000
23%  $400,000 = 92,000
75%  $120,000 = 90,000
$264,800
Allowance for Bad Debts on December 31, 2017:
December 31, 2016 allowance ........................................................... $130,000
Accounts written off........................................................................... (90,000)
Accounts recovered ........................................................................... 15,000
$ 55,000
Bad Debt Expense ................................................................... 209,800
Allowance for Bad Debts .................................................. 209,800
To record estimate of uncollectible accounts
receivable ($264,800 – $55,000).

2. Allowance for Bad Debts ........................................................ 90,000

Accounts Receivable ......................................................... 90,000
To write off uncollectible accounts receivable.
Accounts Receivable .............................................................. 15,000
Allowance for Bad Debts .................................................. 15,000
To reinstate account balance previously written off.
Cash ......................................................................................... 15,000
Accounts Receivable ......................................................... 15,000
To recognize collection of previously written off
receivables.

P 6-4 (LO3) Analysis of Receivables

1. The $5,000 credit balance in the allowance account represents accounts that
are expected to be uncollectible but have not yet been written off.

2. The prior year’s estimate of uncollectible accounts may have been overstat-
ed. However, it is possible that more of the accounts created before January
1, 2017, will be written off after December 31, 2017.

3. a. Allowance for Bad Debts .................................................. 3,500

Accounts Receivable ................................................... 3,500
To write off uncollectible accounts.
b. Bad Debt Expense ............................................................. 7,500
Allowance for Bad Debts ............................................. 7,500
To record estimate of bad debts for the year.

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 Chapter 6

($9,000 – $1,500 balance = $7,500)

P 6-5 (LO3) Computing and Recording Bad Debt Expense

1. Bad Debt Expense ........................................................ 63,500

Allowance for Bad Debts ........................................ 63,500
To adjust the allowance account to desired balance.*
*$2,300,000 Total accounts receivable
 0.03
$ 69,000 Total estimated uncollectible receivables
(5,500) Previous balance
$ 63,500 Net addition to account
When the estimate is based on receivables, the existing balance must be
considered. Theoretically, the receivables could relate to any period.

2. Bad Debt Expense ................................................................... 58,500

Allowance for Bad Debts .................................................. 58,500
To adjust the allowance account to desired balance.*
* 1%  $1,900,000 = $19,000
6%  $200,000 = 12,000
10%  $100,000 = 10,000
20%  $70,000 = 14,000
30%  $30,000 = 9,000
$64,000 Total estimated uncollectible receivables
(5,500) Previous balance
$58,500 Net addition to account

P 6-6 (LO3) Unifying Concepts: Aging of Accounts Receivable and

Uncollectible Accounts

1. Dec. 31, 2016

Bad Debt Expense .................................................................... 1,387
Allowance for Bad Debts .................................................. 1,387
To adjust the allowance account to desired balance.*
*$105,600  0.5% = $ 528.00
$31,400  3% = 942.00
$14,200  4.5% = 639.00
$3,600  8% = 288.00
$900  10% = 90.00
$2,487.00 Total estimated uncollectible receivables
(1,100.00) Previous balance
$ 1,387.00 Net addition to account

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Chapter 6

2. Feb. 14, 2017

Allowance for Bad Debts ........................................................... 89
Accounts Receivable ......................................................... 89
To write off the uncollectible account of Shannon Johnson.

3. Jun. 29, 2017

Accounts Receivable ................................................................. 89
Allowance for Bad Debts .................................................. 89
To reinstate account balance previously written off.
Cash ......................................................................................... 89
Accounts Receivable ......................................................... 89
Received payment in full from Shannon Johnson of an
amount previously written off as uncollectible.

4. Dec. 31, 2016

Bad Debt Expense .................................................................... 3,587
Allowance for Bad Debts .................................................. 3,587
To adjust the allowance account to desired balance.*
*Balance from aging................................ $2,487
Deficit balance in account ..................... 1,100
Total entry needed ............................. $3,587

P 6-7 (LO3) Estimating Uncollectible Accounts

Please notice the revision of P 6-7 in 5th print of the textbook: “Ulysis Corporation”
changed to “Petite Corners” in question 4.

1. Bad Debt Expense ................................................................... 65,600

Allowance for Bad Debts .................................................. 65,600
Estimated uncollectible accounts receivable.
($2,320,000  0.03 = $69,600; $69,600 – $4,000 = $65,600.
Existing balance in Allowance for Bad Debts is considered.)

2. Bad Debt Expense ................................................................... 46,000

Allowance for Bad Debts .................................................. 46,000
Estimated uncollectible accounts receivable. (Existing
balance in Allowance for Bad Debts is considered.)
$1,200,000  0.5% = $ 6,000
$800,000  1% = 8,000
$200,000  4% = 8,000
$80,000  20% = 16,000
$40,000  30% = 12,000
$50,000 Total estimated uncollectible receivables
(4,000) Previous balance
$46,000 Net addition to account

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 Chapter 6

3. a. Bad Debt Expense ................................................ 64,000

Accounts Receivable ...................................... 64,000
Wrote off $64,000 uncollectible account from
Petite Corners.
b. Allowance for Bad Debts ..................................... 64,000
Accounts Receivable ...................................... 64,000
Wrote off $64,000 uncollectible account from
Petite Corners.

4. a. Accounts Receivable ........................................... 64,000

Bad Debt Expense .......................................... 64,000
Cash ...................................................................... 64,000
Accounts Receivable ...................................... 64,000
Received payment of $64,000 from Petite Corners.
This amount had been previously written off as
uncollectible.
b. Accounts Receivable ........................................... 64,000
Allowance for Bad Debts................................ 64,000
Cash ...................................................................... 64,000
Accounts Receivable ...................................... 64,000
Received payment of $64,000 from Petite Corners.
This amount had been previously written off as
uncollectible.

5. The allowance method, although less precise, is generally accepted because

it matches the revenues and expenses for the period. The allowance method
uses an estimate rather than the actual amount of loss, but it provides a
more realistic measurement of income in the year of sale than does the di-
rect write-off method.

P 6-8 (LO3) The Aging Method

1. Category Amount Percentage Total

Less than 30 days $294,000 1% $ 2,940
31–60 days 66,000 5 3,300
61–90 days 10,000 30 3,000
Over 90 days 15,000 90 13,500
Total $22,740

2. Bad Debt Expense ................................................................... 19,240

Allowance for Bad Debts .................................................. 19,240
To adjust the allowance for bad debts to the
appropriate ending balance [$22,740 + $16,500
(write-offs) – $20,000 (beginning) = $19,240].

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Chapter 6

3. The net accounts receivable balance as of December 31, 2017, is $362,260

($385,000 – $22,740).

P 6-9 (LO4) Analysis of Accounts Receivable

1. There is some cause for alarm in the data because Rouge’s average collec-
tion period has increased dramatically:
2017 2016
365
142.2 days 125.1 days
(Sales Revenue/Average Accounts Receivable )
It seems very odd that Rouge would have a lower percentage of bad ac-
counts in its accounts receivable and yet have such an extended collection
period. This increase in the average collection period is quite troubling and
merits further investigation.

P6-10(LO4) Computing Accounts Receivable Turnover and Average Collec-

tion Period

1. Beginning accounts receivable........................................................ € 180,000

Net credit sales .................................................................................. 1,500,000
Cash collections ................................................................................ (980,000)
Accounts written off.......................................................................... (50,000)
Ending accounts receivable ............................................................. € 650,000

2. €1,500,000/[(€180,000 + €650,000)/2] = 3.61

3. 365/3.61 = 101.11 days

P 6-11 (LO5) Recording Notes Receivable

1.
Suntory: (31 – 4) + 31 + 30 + 2 = 90, October 2
Toyota: (31 – 15) + 30 + 14 = 60, October 14
Kyoto: 4 months, January 31

2.
Sep. 30 Interest Receivable—Suntory Co.................................... 6,844
Interest Receivable—Toyota Co. .................................... 2,990
Interest Revenue ..................................................... 9,834

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 Chapter 6

Notes Receivable—Kyoto Inc.......................................... 580,000

Cash/ Accounts Receivable.................................... 580,000

3.
Oct. 2 Cash .................................................................................. 357,000
Notes Receivable—Suntory Co. ............................. 350,000
Interest Receivable—Suntory Co. .......................... 6,844
Interest Revenue ..................................................... 156

Oct. 14 Cash .................................................................................. 263,900

Notes Receivable—Toyota Co. ............................... 260,000
Interest Receivable—Toyota Co............................. 2,990
Interest Revenue ..................................................... 910

P 6-12 (LO5) Recording Notes Receivable

1.
KAVALAN: (31 – 4) + 23 = 50, June 23
Glenlivet: 5 + 6 = 11, November 15
Macallan: 31 + 29 = 60, August 29

2.
June 23 Cash ................................................................................. 16,178
Notes Receivable—KAVALAN Co. ......................... 16,000
Interest Revenue ..................................................... 178

June 30 Interest Receivable—Glenlivet Inc. ............................... 210

Interest Revenue (14,000  12%  1.5/12 = 210) .... 210

Notes Receivable—Macallan Co. .................................. 50,000

Cash/ Accounts Receivable.................................... 50,000
3.
June 23 Accounts Receivable ...................................................... 16,178
Notes Receivable—KAVALAN Co. ......................... 16,000
Interest Revenue ..................................................... 178
4.
June 23 Allowance for Bad Debts ................................................ 16,178
Notes Receivable—KAVALAN Co. ......................... 16,000
Interest Revenue ..................................................... 178

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Chapter 6

P 6-13 (LO5) Accounting for Notes Receivable Transactions

5/1/17 Notes Receivable .......................................................... 16,000

Accounts Receivable—Crane ............................. 16,000

7/1/17 Notes Receivable .......................................................... 25,000

Cash ...................................................................... 25,000

12/31/17 Interest Receivable ....................................................... 1,280

Interest Revenue
($16,000 X 12% X 8/12).................................... 1,280

Interest Receivable ....................................................... 1,250

Interest Revenue
($25,000 X 10% X 6/12) ................................... 1,250

4/1/18 Accounts Receivable—Howard ................................... 26,875

Notes Receivable ................................................. 25,000
Interest Receivable .............................................. 1,250
Interest Revenue
($25,000 X 10% X 3/12 = $625) ........................ 625

5/1/18 Cash ............................................................................... 17,920

Notes Receivable ................................................. 16,000
Interest Receivable .............................................. 1,280
Interest Revenue
($16,000 X 12% X 4/12 = $640)........................ 640

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 Chapter 6

ANALYTICAL ASSIGNMENTS

AA 6-1 Credit Policy Review

Discussion
Sales Manager's Proposal
Increase in income:
Revenues ....................................................................................... $ 900,000
Bad debt expense .......................................................................... 15,000
Net increase in revenue ................................................................. $ 885,000
Cost of sales .................................................................................. 225,000
$ 660,000
Vice Presidents Proposal
Increase in income:
Revenues ....................................................................................... $1,500,000
Cost of sales .................................................................................. 375,000
Gross margin .................................................................................. $1,125,000
Credit card fees .............................................................................. 60,000
$1,065,000

Accepting consumer credit cards would result in $1,065,000 of additional income, whereas the loosened
credit policies would result in only $660,000 of additional income. The company would be better off ac-
cepting credit cards if the assumptions made are valid.

If the company abolished all credit sales, it would lose a significant portion of its revenues and profits.
Considering that uncollectibles are only 1.3% of credit sales and gross margin is 75%, the company
would benefit from increasing its credit sales, not eliminating them.

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Chapter 6

AA 6-2 You Decide: Can pre-billing customers increase revenues?

Judgment Call
Issues to be discussed with this question are:
1. What your boss is asking you to do is fraud. Pre-billing customers before services have been per-
formed is a type of fraud that has been quite common in many of the recent financial statement fraud
cases.
2. Revenues should be recognized when earned and that is most often when the service is performed,
not when cash is collected or when bills are sent out.

AA 6-3 You Decide: Can a company overestimate bad debts in good years
and then use lower estimates when times are bad?

Judgment Call
Issues to be discussed with this question are:
1. What the boss is asking you to do is a form of income smoothing or reserve accounting. While we
suspect this happens quite often, it is inappropriate because the allowance (or reserve) needs to be
estimated consistently from year to year. It is inappropriate to “reserve whatever the bottom line can
afford.”
2. Temptations to do exactly what the boss is asking are great in the business world, and there have
been a number of financial statement fraud cases where this issue has been central to the case.

AA 6-4 Philips

Real Company Analysis

1. Accounts Receivable ............................................................... 24,244,000,000
Sales Revenue ..................................................................... 24,244,000,000
2. Once we know the beginning and ending Accounts Receivable balances, as well as revenues for the
period, we can infer approximately how much cash was collected relating to accounts receivable. The
beginning balance (€4,476 million) plus revenues (€24,244 million) less the ending balance (€4,727
million) allows us to infer that $23,993 million was received during the period. The journal entry to
record that cash receipt would be:
Cash ........................................................................................ 23,993,000,000
Accounts Receivable ............................................................ 23,993,000,000

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 Chapter 6

AA 6-5 Philips Group

Real Company Analysis

1. Bad Debt Expense ................................................................... 78,000,000
Allowance for Bad Debts ...................................................... 78,000,000

2. Allowance for Bad Debts ......................................................... 25,000,000

Accounts (or Loans) Receivable .......................................... 25,000,0000

3. Allowance for Bad Debts (Amounts are in millions EUR.):

Balance on January 1, 2015 (given) ........................................ EUR 227
Plus: Bad debt expense for 2015 (given) ................................ 78
Less: Write-offs for 2015 (given) ............................................. (25)
Plus: Other movements (computed) ........................................ 21
Balance on December 31, 2015 (given) .................................. EUR 301

AA 6-6 Microsoft and IBM

Real Company Analysis

1. It would be reasonable to expect that Microsoft has the lower average collection period because
Microsoft does not sell large computers that would require financing, as IBM does.
2. (in millions) $93,580/[($17,908+ $19,544)/2)] = 5 times; 365 days/ = 73 days
3. (in millions) $81,741/[($8,333+ $9,090)/2)] = 9.38 times; 365 days/9.38 = 38.9 days

AA 6-7 Samsung

International
1. 1997 1996
Net sales in trillions of Korean won ......................................... 91,519 74,641
Exchange rate (end of year) .................................................... 1,695 845
Net sales in billions of U.S. dollars .......................................... 54.0 88.3
Because of the drastic decline in the value of the won during 1997, Samsung’s sales, in terms of U.S.
dollars, actually declined in 1997. A more accurate conversion from won to dollars could be made if
the average exchange rate for the year were used instead of the end-of-year exchange rate.

2. 1996 Average collection period = 365/(Sales/Accounts Receivable)

= 365/(74,641/6,233)
= 30.5 days
1997 Average collection period = 365/(Sales/Accounts Receivable)
= 365/(91,519/10,064)
= 40.1 days
3. The lengthening of the average collection period in 1997 is consistent with the belief that Samsung's
Asian customers suffered from the economic crisis during that period and were accordingly slower in
paying their bills.

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Chapter 6

4. It is also likely that Samsung's accounts payable balance increased in 1997 as it attempted to man-
age its cash flow by lengthening its own payment period to its suppliers. And, in fact, Samsung's ac-
counts payable balance increased by 50% in 1997.

AA 6-8 Changing Our Estimates in Order to Meet Analysts’ Expectations

Ethics
John must make sure that the estimates being made are reasonable and are consistent with prior years'
estimates. It is not uncommon for estimates to be changed, but any changes that significantly modify the
financial results would need to be disclosed and discussed in a note to the financial statements. If the
changes being proposed are not reasonable, then what John would be proposing would be wrong. The
objective of financial statements is to fairly represent the financial situation of a firm. If the controller know-
ingly makes estimates and assumptions that result in the financial statements not fairly reflecting the per-
formance of the firm, then he would be doing something wrong; he could be held civilly and criminally lia-
ble should financial statement users rely on those financial statements and incur a loss.

On the other hand, John is not required to go out of his way to present an overly gloomy picture of Bio-
Medic's performance. In many cases involving accounting estimates, reasonable people can honestly
disagree over the bad debt percentage of sales or the proper amount of warranty expense. Given this
honest disagreement, it is certainly reasonable for John and the board of BioMedic's to prefer to report
the most favorable result possible, as long as the accounting estimates are within an acceptable range.

This potential honest disagreement over accounting estimates illustrates the importance of the auditor in
the financial reporting process. John must be able to convince BioMedic’s auditor that all accounting es-
timates are reasonable.

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