CHAPTER 9

Accounting for Receivables

ASSIGNMENT CLASSIFICATION TABLE
Study Objectives
1.

Identify and distinguish between the

different types of receivables.

2.

Show how accounts receivable are

recognized in the accounts.

Questions

Brief
Exercises

1, 2

Exercises

Problems
Set A

Problems
Set B

1, 6, 7, 8

1, 6, 7, 8

3. Describe and use the methods and

bases used to value accounts
receivable.

4, 5, 6, 7, 8

3, 4, 5, 6,
11

2, 3, 4

1, 2, 3, 4,
5, 6

1, 2, 3, 4,
5, 6

4.

Determine the entries to record the

disposition of accounts receivable.

9, 10, 11

5, 6, 10

8, 9

8, 9

5.

Determine the interest on notes

receivable.

12

8, 10

7, 8, 9

8, 9

8, 9

6.

Show how notes receivable are

recognized in the accounts.

13

9, 10

7, 8

8, 9

8, 9

7.

Demonstrate how notes receivable are

valued.

8, 9

8, 9

8.

Determine the entries to record the

disposition of notes receivable.

14

10

8, 9

8, 9

9.

Illustrate the statement presentation of

receivables.

15

3, 11

10, 11

7, 9

7, 9

16, 17

12

12

10

10

10. Evaluate short-term liquidity.

9-1

ASSIGNMENT CHARACTERISTICS TABLE

Problem
Number

Description

Difficulty
Level

Time
Allotted (min.)

1A

Prepare journal entries related to bad debts expense.

Simple

20-30

2A

Calculate bad debts amounts using various methods.

Simple

15-25

3A

Journalize transactions related to bad debts using ageing

schedule.

Moderate

20-30

4A

Calculate bad debts and journalize transactions using an

ageing schedule.

Moderate

15-25

5A

Journalize transactions related to bad debts using

percentage of sales.

Moderate

15-25

6A

Analyse accounts and prepare journal entries for

receivables and bad debts.

Complex

15-25

7A

Determine missing amounts related to sales and accounts

receivable.

Complex

15-25

8A

Prepare entries for various receivables transactions.

Moderate

35-45

9A

Prepare entries for various notes receivable transactions.

Show balance sheet presentation.

Moderate

35-45

10A

Calculate ratios to evaluate short-term liquidity.

Moderate

15-25

1B

Prepare journal entries related to bad debts expense.

Simple

20-30

2B

Calculate bad debts amounts using various methods.

Simple

15-25

3B

Journalize transactions related to bad debts using ageing

schedule.

Moderate

20-30

4B

Calculate bad debts and journalize transactions using an

ageing schedule.

Moderate

15-25

5B

Journalize transactions related to bad debts using

percentage of receivables.

Moderate

15-25

6B

Analyse accounts and prepare journal entries for

receivables and bad debts.

Complex

15-25

7B

Determine missing amounts related to sales and accounts

receivable.

Complex

15-25

8B

Prepare entries for various receivables transactions.

Moderate

35-45

9B

Prepare entries for various notes receivable transactions.

Show balance sheet presentation.

Moderate

35-45

10B

Calculate ratios to evaluate short-term liquidity.

Moderate

15-25

9-2

BLOOMS TAXONOMY TABLE

Correlation Chart between Blooms Taxonomy, Study Objectives and End-of-Chapter Material
Study Objective
1. Identify and
distinguish between
the different types of
receivables.

Knowledge
Q9-2
BE9-1

2. Show how accounts

receivable are
recognized in the
accounts.

Comprehension
Q9-1

Application

Analysis

Q9-3

BE9-2
E9-1
P9-1A
P9-8A
P9-1B
P9-8B
Q9-8
BE9-3
BE9-4
BE9-5
BE9-6
BE911
E9-2
E9-3
E9-4
BE9-7
E9-5
E9-10
P9-8A

P9-6A
P9-7A
P9-6B
P9-7B

3. Describe and use the

methods and bases
used to value
accounts receivable.

Q9-5

Q9-4
Q9-6
Q9-7

4. Determine the entries

to record the
disposition of
accounts receivable.

Q9-10

Q9-9
Q9-11
E9-6

Q9-12
BE910
E9-7
E9-8
E9-9
BE9-9
BE910
E9-7
E9-8
P9-8A
P9-8A
P9-9A
P9-8B
P9-9B
BE910
E9-9
P9-8A

5. Determine the interest

on notes receivable.

6. Show how notes

receivable are
recognized in the
accounts.

Q9-13

7. Demonstrate how
notes receivable are
valued.
8. Determine the entries
to record the
disposition of notes
receivable.

Q9-14

9. Illustrate the
statement
presentation of
receivables.

Q9-15

10. Evaluate short-term

liquidity.

BE9-11
E9-10
E9-11
P9-9A
P9-9B
Q9-17
BE9-12

Q9-16

Broadening Your
Perspective

BYP9-2
BYP9-3

9-3

P9-1A
P9-2A
P9-3A
P9-4A
P9-5A
P9-1B
P9-2B
P9-3B
P9-4B
P9-5B
P9-9A
P9-8B
P9-9B

P9-6A
P9-6B

P9-8A
P9-9A
P9-8B
P9-9B

BE9-8

Synthesis

Evaluation

BYP9-5

BYP9-6

P9-9A
P9-8B
P9-9B

P9-9A
P9-8B
P9-9B
P9-7A
P9-7B

E9-12
P9-10A
P9-10B
BYP9-1
BYP9-4

ANSWERS TO QUESTIONS
01. The three major types and classification
follows:
Type
(1) Accounts receivable
(2) Notes receivable
(3) Other receivables

of receivables are as

Classification
Current asset
Current or noncurrent
depending on due date
Current or noncurrent
depending on due date

asset
asset

02. Other receivables include nontrade receivables such as interest

receivable, loans to company officers, advances to employees, and
income taxes refundable.
03. Accounts Receivable ................................................................ 50
Interest Revenue .................................................................

50

04. Under the direct write-off method, bad debt losses are not estimated
and no allowance account is used. When an account is determined
to be uncollectible, the loss is debited to Bad Debts Expense. The
direct write-off method makes no attempt to match bad debts
expense to sales revenues, or to show the net realizable value of the
receivables in the balance sheet. The disadvantages are that it may
not match expenses with revenue and it does not accurately reflect
the collectible value of the accounts receivable on the balance sheet.
5. The essential features of the allowance method of accounting for
bad debts are:
(1) Uncollectible accounts receivable are estimated in advance, in
order to match the cost of the bad debts against sales in the
same accounting period in which the sale occurred.
(2) Estimated uncollectibles are debited to Bad Debts Expense and
credited to Allowance for Doubtful Accounts through an
adjusting entry at the end of each period.
(3) Actual uncollectibles are debited to Allowance for Doubtful
Accounts and credited to Accounts Receivable at the time a
specific account is written off.0
9-4

Questions Chapter 9 (Continued)

6.

Net realizable value is the difference between Accounts Receivable

(normal debit balance) and the Allowance for Doubtful Accounts
(normal credit balance). Soo Eng should realize that the decrease in
net realizable value occurs when estimated uncollectibles are
recognized in an adjusting entry (debit Bad Debt Expense; credit
Allowance for Doubtful Accounts). The write-off of an uncollectible
account reduces both accounts receivable and the allowance for
doubtful accounts by the same amount. Thus, net realizable value
does not change.

7.

The two bases of estimating uncollectibles under the allowance

method are (1) percentage of sales (income statement method) and
(2) percentage of receivables (balance sheet method). The
percentage of sales basis establishes a percentage relationship
between the amount of credit sales and expected losses from
uncollectible accounts. This method emphasizes the matching of
expenses with revenues. Under the percentage of receivables basis,
the balance in the allowance for doubtful accounts is derived either
(a) by applying a percentage estimate of bad debts to total
receivables or (b) from an analysis of individual customer accounts.
This method emphasizes net realizable value.

8.

The adjusting entry under the percentage of sales basis is:

Bad Debts Expense .....................................................
Allowance for Doubtful Accounts ........................

4,100
4,100

The adjusting entry under the percentage of receivables basis is:

Bad Debts Expense ..................................................... 2,300
Allowance for Doubtful Accounts ($5,800 $3,500)
9.

2,300

The first entry is made to reverse write-off of the account receivable.

The second entry records the collection of the account.

9-5

Questions Chapter 9 (Continued)

10. The reasons companies sometimes sell their receivables are:
(1) For competitive reasons, sellers often must provide financing to
purchasers of their goods for extended periods. Selling
receivables provides a more current source of cash to help
finance operations.
(2) Receivables may be sold because they may be the only
reasonable source of cash readily at hand.
(3) Billing and collection are often time-consuming and costly. As a
result, it is often easier for a retailer to sell the receivable to
another party who has expertise in billing and collection matters.
This will also speed up the collection of cash.
11. By using both its own credit cards, bank credit cards, and debit
cards, Sears provides more options to its customers, increases its
revenue, and reduces its risk.
The journal entries for each type of card follow:
Sears card:
Dr. Accounts Receivable
Cr. Sales Revenue
Bank credit card or debit card:
Dr. Cash
Dr. Credit / Debit Card Expense
Cr. Sales Revenue
12. (a) Principal = $12,000 [($360 x 12/4) 9%]
(b) Interest = $5,400 [$30,000 x 6% x 3]
(c) Interest rate = 8.33% [($2,500 x 12/6) $60,000]
(d) Time = 3 months [$875 ($50,000 x 7%) 12]

9-6

Questions Chapter 9 (Continued)

13. Accounts receivable are amounts owed by customers on account,
resulting from the sale of goods and services in the normal course
of business operations (i.e., in trade). Interest is not normally
charged on accounts receivable unless they are overdue. Accounts
receivable are normally collected within 30 or so days.
Notes receivable represent claims that are evidenced by formal
instruments of credit. A promissory note gives the holder a stronger
legal claim than one on an account receivable. As a result, it is
easier to sell to another party. Promissory notes are negotiable
instruments, which means they can be transferred to another party
by endorsement. Interest is normally charged on notes receivable
for the entire maturity period. Notes receivable can extend for any
period of time, from 30 days to a number of years.
14. Payee
Accounts Receivable.....................................................
Notes Receivable ......................................................
Interest Revenue .......................................................
MakerMay Company
Notes Payable ................................................................
Interest Expense ............................................................
Accounts Payable .....................................................

xxx
xxx
xxx
xxx
xxx
xxx

15. Each of the major types of receivables should be identified in the

balance sheet or in the notes to the financial statements. Both the
gross amount of receivables and the allowance for doubtful accounts /
notes should be reported. If collectible within a year or the operating
cycle, whichever is longer, these receivables are reported as current
assets immediately below temporary investments.
16. An increase in the current ratio normally indicates an improvement in
short-term liquidity. This may not always be the case because the
composition of current assets may vary. In order to determine if the
increase is an improvement in financial health, other ratios that should
be considered include: Receivable turnover and collection period and
inventory turnover and days sales in inventory ratios.
9-7

Questions Chapter 9 (Continued)

17. Receivables turnover = Net credit sales Average accounts receivable
Net credit sales = Receivables turnover x Average accounts receivable
Net credit sales = 8.0583 x $4,542,500
Net credit sales = $36,604,828

9-8

SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 9-1
(a) Other receivables
(b) Notes receivable
(c) Accounts receivable
BRIEF EXERCISE 9-2
July 1
8
31

Accounts Receivable ................................................. 14,000

Sales ....................................................................
Sales Returns and Allowances .................................
Accounts Receivable .........................................

14,000

3,800
3,800

Cash............................................................................. 10,200
Accounts Receivable ($14,000 $3,800) ..........

10,200

BRIEF EXERCISE 9-3

April 30 Bad Debt Expense [($800,000 $50,000) X 2%] ....... 15,000
Allowance for Doubtful Accounts .....................

15,000

BRIEF EXERCISE 9-4

(a) Dec. 31
(b) Dec. 31

Bad Debts Expense [($400,000 X 1%) $3,000] 1,000

Allowance for Doubtful Accounts............

1,000

Bad Debts Expense [($400,000 X 1%) + $800].

Allowance for Doubtful Accounts............

4,800

9-9

4,800

BRIEF EXERCISE 9-5

(a) Jan. 24 Allowance for Doubtful Accounts .....................
Accounts Receivable...................................

7,000
7,000

(b)
(1) Before Write-Off (2) After Write-Off
Accounts receivable
Allowance for doubtful accounts
Net realizable value

$700,000
0054,000
$646,000

$693,000
0047,000
$646,000

BRIEF EXERCISE 9-6

March 4

Accounts Receivable ..............................................

Allowance for Doubtful Accounts...................

7,000

Cash .........................................................................
Accounts Receivable .......................................

7,000

7,000
7,000

BRIEF EXERCISE 9-7

Bank credit card:
July 27

Cash ($75 $2.62) ...................................................

Credit Card Expense ($75 X 3.5%) .........................
Sales ..................................................................

72.38
2.62
75.00

(a) Debit card:

The above entry would not change unless the fee is different, except
that the account used to record the fee is called Debit Card Expense.
(b) Nonbank card:
July 27

Accounts Receivable ($75 $2.62)........................

Credit Card Expense ($75 X 3.5%) .........................
Sales ..................................................................
9-10

72.38
2.62
75.00

BRIEF EXERCISE 9-8

(a) Total Interest = $15,000 [$900,000 x 10% x 2/12]
(b) Interest Rate = 8% [($526.67 x 12) $79,000]
(c) Principal = $56,000 [($1,680 x 12/6) 6%]
BRIEF EXERCISE 9-9
Jan. 10
Feb.

Accounts ReceivableOpal ....................................

Sales .................................................................

9,000

Notes ReceivableOpal ..........................................

Accounts ReceivableOpal ............................

9,000

9,000
9,000

BRIEF EXERCISE 9-10

(a)
Apr.
July

(b)
Apr.
July

(c)
Apr.
July

1
1

1
1

1
1

Notes Receivable .................................................... 10,000

Accounts Receivable ......................................

10,000

Cash ......................................................................... 10,175

Notes Receivable.............................................
Interest Revenue ($10,000 x 7% x 3/12) .........

10,000
175

Notes Receivable .................................................... 10,000

Accounts Receivable ......................................

10,000

Accounts Receivable .............................................. 10,175

Notes Receivable.............................................
Interest Revenue ($10,000 x 7% x 3/12) .........

10,000
175

Notes Receivable .................................................... 10,000

Accounts Receivable ......................................

10,000

Allowance for Doubtful Notes ................................ 10,000

Notes Receivable.............................................

10,000

9-11

BRIEF EXERCISE 9-11

(a) Feb. 28 Bad Debts Expense ............................................ 36,000
Allowance for Doubtful Accounts ..............
(b)

36,000

WENDY COMPANY
Balance Sheet (Partial)
February 28, 2003
Assets
Current assets
Cash
Accounts receivable .......................................... $600,000
Less: Allowance for doubtful accounts ..........
36,000
Merchandise inventory ......................................
Prepaid expenses...............................................
Total current assets .................................

BRIEF EXERCISE 9-12

Receivables turnover
$11,006 [($420 + $380) 2] = 27.52 times
Collection period
365 days 27.52 = 13.27 days

9-12

$090,000
564,000
130,000
13,000
$797,000

SOLUTIONS TO EXERCISES
EXERCISE 9-1
1.

Jan.
Feb.

2.

6
5

Jan. 10
Feb. 12
Mar. 10

Accounts ReceivableWatson. ......................

Sales ...........................................................

5,000

Cash ...................................................................
Accounts ReceivableWatson................

5,000

5,000
5,000

Accounts ReceivableGiger ........................... 11,000

Sales ...........................................................
Cash ...................................................................
Accounts ReceivableGiger ...................

6,000

Accounts ReceivableGiger ...........................

Interest Revenue .......................................
[2% X ($11,000 $6,000)]

100

11,000
6,000
100

EXERCISE 9-2
(a) (1) Dec. 31

(2) Dec. 31

(b) (1) Dec. 31

(2) Dec. 31

Bad Debts Expense ...................................

[($840,000 $40,000) X 1%]
Allowance for Doubtful Accounts ....

8,000

Bad Debts Expense ...................................

Allowance for Doubtful Accounts ....
[($110,000 X 10%) $2,500]

8,500

Bad Debts Expense ...................................

[($840,000 $40,000) X 0.5%]
Allowance for Doubtful Accounts ....

4,000

Bad Debts Expense ...................................

Allowance for Doubtful Accounts ....
[($110,000 X 5%) + $500]

6,000

9-13

8,000
8,500

4,000
6,000

EXERCISE 9-3
(a)
Accounts Receivable

Amount

0-30 days outstanding

31-60 days outstanding
61-90 days outstanding
Over 90 days outstanding

$65,000
017,600
008,500
006,400

(b) Mar. 31

%
2
10
30
50

Estimated
Uncollectible
$1,300
01,760
02,550
03,200
$8,810

Bad Debts Expense...........................................

Allowance for Doubtful Accounts............
($8,810 $1,800)

7,010

Bad Debts Expense (2% X $400,000).....................

Allowance for Doubtful Accounts...................

8,000

Allowance for Doubtful Accounts..........................

Accounts ReceivableWorthy.........................

1,100

Accounts ReceivableWorthy................................
Allowance for Doubtful Accounts...................

1,100

Cash .........................................................................
Accounts ReceivableWorthy.........................

1,100

7,010

EXERCISE 9-4
2002
Dec. 31
2003
May 11
June 12
12

9-14

8,000

1,100
1,100
1,100

EXERCISE 9-5
(a) Dec. 15

Cash ($250 - $7.50).......................................

Credit Card Expense ($250 x 3%) ...............
Sales ......................................................

242.50
7.50
250.00

(b) Apr.

Accounts ReceivableZachos................... 1,300.00

Sales ......................................................
1,300.00

May

Cash ..............................................................
Accounts ReceivableZachos ...........

700.00

Accounts ReceivableZachos...................
Interest Revenue ..................................
[28.8% X ($1,300 $700) x 1/12 ]

14.40

June 1

700.00
14.40

EXERCISE 9-6
One possible reason CN sold its receivables may have been to provide it
with a source of current financing. Other possible reasons include not
wanting to deal with the administration of collecting accounts, the desire to
accelerate cash receipts, or to improve its financial ratios (e.g., receivables
turnover).

9-15

EXERCISE 9-7
Nov.
Dec.

1
1
16
31

Notes ReceivableA. Morgan ............................

Cash.............................................................

18,000

Notes ReceivableWright. .................................

Sales ............................................................

3,600

Notes ReceivableBarnes .................................

Accounts ReceivableBarnes ...................

4,000

Interest Receivable ............................................

Interest Revenue* .......................................

331

18,000
3,600
4,000
331

*Calculation of interest revenue:

Morgan: $18,000 X 10% X 2/12 ......................................
Wright: $3,600 X 6% X 1/12 ...........................................
Barnes: $4,000 X 8% X 0.5/12 .......................................
Total accrued interest ...............................................

$300
18
13
$331

EXERCISE 9-8
2002
May

Dec. 31
2003
May

Notes ReceivableJones ......................................

Accounts ReceivableJones ......................

10,500

Interest Receivable ...............................................

Interest Revenue ($10,500 X 10% X 8/12) ....

700

Cash .......................................................................
Notes ReceivableJones ..............................
Interest Receivable........................................
Interest Revenue ($10,500 X 10% X 4/12) ....

11,550

9-16

10,500
700

10,500
700
350

EXERCISE 9-9
(a) Nov. 1

Accounts ReceivableFein............................... 4,200

Notes ReceivableFein .............................
Interest Revenue .......................................
($4,000 X 10% X 6/12)
To record the dishonour of Fein Inc.
note, with expectation of future collection.

Allowance for Doubtful Notes......................... 4,000

Notes ReceivableFein ............................
To record the dishonour of Fein Inc.
note, with no expectation of collection.
EXERCISE 9-10

4,000
200

(b) Nov. 1

(a) Jan. 15

Accounts Receivable ........................................ 15,000

Sales ...........................................................

20 Cash ($4,500 $225) .........................................

Credit Card Expense ($4,500 X 5%) .................
Sales ...........................................................
30

Feb. 10
15

Cash ($1,000 - $30)............................................

Debit Card Expense ($1,000 X 3%) ..................
Sales ...........................................................

15,000

4,275
225
4,500
970
30
1,000

Cash ................................................................... 12,000

Accounts Receivable ................................
Accounts Receivable ($3,000 X 18% x 1/12) ...
Interest Revenue .......................................

4,000

12,000

45
45

(b) Interest Revenue is reported under other revenues and gains. The
Credit Card Expense and Debit Card Expense accounts are usually
categorized as selling expenses.

9-17

EXERCISE 9-11
DROST COMPANY
Balance Sheet (Partial)
October 31, 2003
(In millions)
Assets
Current assets
Accounts receivable ....................................... $2,907
Less: Allowance for doubtful accounts........
31
Advances to employees .................................
Notes receivable .............................................
HST recoverable .............................................
Total current assets ..............................

$2,876
5
228
25
$3,134

EXERCISE 9-12
Nike
Receivables Turnover
$8,995.1 $1,569.4 = 5.73 times
365 days 5.73 = 63.7 days
Reebok
$2,899.9 $417.4 = 6.95 times
365 days 6.95 = 52.5 days
Nikes receivable turnover and collection period are not as good as
Reeboks or the industry average. Reeboks ratios are slightly better than
the industry average.

9-18

SOLUTIONS TO PROBLEMS
PROBLEM 9-1A

(a) 1.
2.

Accounts Receivable ........................................ 3,300,000

Sales ...........................................................
3,300,000
Sales Returns and Allowances ........................
Accounts Receivable ................................

50,000
50,000

3.

Cash.................................................................... 2,800,000
Accounts Receivable ................................
2,800,000

4.

Allowance for Doubtful Accounts....................

Accounts Receivable ................................

90,000

Accounts Receivable.........................................
Allowance for Doubtful Accounts..........

25,000

Cash...................................................................
Accounts Receivable .............................

25,000

5.

90,000
25,000
25,000

(b)
Accounts Receivable
Bal.
(1)
(5)

960,000
3,300,000
25,000

Bal.

1,320,000

(2)
(3)
(4)
(5)

Allowance for Doubtful Accounts

50,000
2,800,000
90,000
25,000

9-19

(4)

90,000

Bal.
(5)

70,000
25,000

Bal.

5,000

PROBLEM 9-1A (Continued)

(c) Balance before adjustment [see (b)] ............................
Balance needed..............................................................
Adjustment required ......................................................

$ 5,000
125,000
$120,000

The journal entry would therefore be as follows:

March 31 Bad Debts Expense..................................... 120,000
Allowance for Doubtful Accounts.......
120,000

9-20

PROBLEM 9-2A

(a) $38,000
(b) $63,000 ($2,100,000 X 3%)
The balance in the Allowance for Doubtful Accounts is irrelevant.
(c) $47,400 [($840,000 X 6%) $3,000]
(d) $53,400 [($840,000 X 6%) + $3,000]
(e) The weaknesses of the direct write-off method are two-fold. First, it
does not match expenses with revenues. Second, the accounts
receivable are not stated at their estimated net realizable value at the
balance sheet date.

9-21

PROBLEM 9-3A

(a) Dec. 31

Bad Debts Expense........................................... 16,050

Allowance for Doubtful Accounts............
Estimated bad debts
Less: Unadjusted balance
Adjustment required

16,050

$25,050
9,000
$16,050

(a) and (b)

Bad Debts Expense
Date

Explanation

2002
Dec. 31

Adjusting entry

Ref.

Debit

Credit

16,050

Balance
16,050

Allowance for Doubtful Accounts

Date
2002
Dec. 31
31
2003
Mar. 1
May 1

Explanation

Ref.

Balance
Adjusting entry

Debit

Credit

16,050

09,000
25,050

00,1,000

24,050
25,050

1,000

9-22

Balance

PROBLEM 9-3A (Continued)

(b)
1.
2.

Mar.
May

1
1
1

Allowance for Doubtful Accounts ...................

Accounts Receivable ................................

1,000

Accounts Receivable ........................................

Allowance for Doubtful Accounts............

1,000

Cash ...................................................................
Accounts Receivable ................................

1,000

1,000
1,000
1,000

(c)
Dec. 31

Bad Debts Expense........................................... 12,050

Allowance for Doubtful Accounts............
($37,100 - $25,050)

9-23

12,050

PROBLEM 9-4A
(a)
Accounts Receivable

Amount

0-30 days outstanding

31-60 days outstanding
61-90 days outstanding
Over 90 days outstanding

$100,000
60,000
50,000
30,000

%
1
5
10
25

Estimated
Uncollectible
$ 1,000
3,000
5,000
7,500
$16,500

(b) Bad Debts Expense .......................................................

Allowance for Doubtful Accounts ($16,500 $10,000)

6,500

(c) Allowance for Doubtful Accounts ................................

Accounts Receivable...............................................

2,000

(d) Accounts Receivable .....................................................

Allowance for Doubtful Accounts ..........................

1,000

Cash ................................................................................
Accounts Receivable...............................................

1,000

6,500

2,000

1,000
1,000

(e) When an allowance is established, an estimate is made of the accounts

receivable or credit sales that will not be collected. An entry is made to
record this estimate in the period in which the sale occurred. This
matches the estimated expense with the revenue it generated.

9-24

PROBLEM 9-5A

(a) Bad Debts Expense (3% X $1,000,000)....................... 30,000

Allowance for Doubtful Accounts.......................

30,000

(b) Allowance for Doubtful Accounts ..............................

Accounts Receivable ...........................................

37,000
37,000

(c) Accounts Receivable ...................................................

Allowance for Doubtful Accounts.......................

5,000

Cash ..............................................................................
Accounts Receivable ...........................................

5,000

(d) Beginning balance .......................................................

Add:
Bad debt expense ..........................................
Recovery of account .....................................
Deduct: Write-off of uncollectible accounts..............
Ending balance ............................................................

5,000
5,000

$09,000
30,000
5,000
(37,000)
$ 7,000

(e) When the percentage of sales (income statement) method is used to

estimate bad debts, recoveries of accounts previously written off do
not directly affect the bad debts expense (They may have an indirect
effect, by influencing the estimators judgment regarding the
appropriate percentage of sales to use).
If the percentage of receivables (balance sheet) method of providing
for bad debts was used, the recovery would have a direct effect by
increasing the balance is the allowance account and therefore
reducing the expense to be recorded in the year-end adjustment.

9-25

PROBLEM 9-6A

Yr. 1 Balance
Sales
Yr. 2 Balance

Accounts Receivable
8,300,000
28,500,000
Write-offs
Collections
9,500,000

Allowance for Doubtful Accounts

Yr. 1 Balance
Bad debts
Write-offs
105,000
Yr. 2 Balance
Year 2
Bad Debts Expense ............................................
Allowance for Doubtful Accounts...........

105,000
27,195,000

750,000
285,000
930,000
285,000
285,000

Accounts Receivable .......................................... 28,500,000

Sales..........................................................

28,500,000

($285,000 = 1% of sales; Therefore sales = $28,500,000)

Allowance for Doubtful Accounts .....................
Accounts Receivable ...............................

105,000
105,000

($750,000 + $285,000 $930,000 = $105,000)

Cash.. ........................................................ 27,195,000
Accounts Receivable ...............................

27,195,000

($8,300,000 + $28,500,000 $105,000 $9,500,000 = $27,195,000)

9-26

PROBLEM 9-7A
(a)

Merchandise inventory at beginning of year ........................

Add: Purchases ......................................................................
Goods available for sale .........................................................
Less: Merchandise inventory at end of year.........................
Cost of goods sold ..................................................................
Add: Gross profit.....................................................................
Total sales ................................................................................
Less: Cash sales ....................................................................
Credit sales ..............................................................................

$36,000
60,000
96,000
32,000
64,000
27,000
91,000
15,000
$76,000

(b)

Accounts receivable at beginning of year ............................

Add: Credit sales ....................................................................

$24,000
76,000
100,000

Less: Accounts collected during the year ............ $61,000

Accounts written off during the year ..........
1,000
Accounts receivable at end of year .......................................

Beg. balance
Credit sales
End. balance

Accounts Receivable
24,000
76,000
Write-offs
Collections
38,000

9-27

1,000
61,000

62,000
$38,000

PROBLEM 9-8A
Jan.
Feb.

5
2
12
26

Apr.

5
12

June 2

July

15
Oct. 13
Dec. 31

Accounts ReceivableBrooks Company...........

Sales ...............................................................

7,000

Notes ReceivableBrooks Company .................

Accounts ReceivableBrooks Company ...

7,000

Notes ReceivableGage Company.....................

Sales ...............................................................

7,800

Accounts ReceivableMathias Co. ....................

Sales ...............................................................

4,000

Notes ReceivableMathias Co............................

Accounts ReceivableMathias Co..............

4,000

Cash ($7,800 + $130) .............................................

Notes ReceivableGage Company .............
Interest Revenue............................................
($7,800 X 10% X 2/12)

7,930

Cash ($7,000 + $187) .............................................

Notes ReceivableBrooks Company..........
Interest Revenue............................................
($7,000 X 8% X 4/12)

7,187

Accounts ReceivableMathias Co. ....................

($4,000 + $80)
Notes ReceivableMathias Co. ...................
Interest Revenue ($4,000 X 8% X 3/12) ........

4,080

Notes ReceivableTritt Inc..................................

Sales ...............................................................

5,000

Allowance for Doubtful Notes ..............................

Notes ReceivableTritt Inc. .........................

5,000

No entry required
9-28

7,000
7,000
7,800
4,000
4,000
7,800
130

7,000
187

4,000
80
5,000
5,000

PROBLEM 9-9A

(a) Oct.

7
12

15
31

31

Cash ...................................................................
Notes ReceivableForan .........................
Interest Receivable....................................
($8,000 X 6% X 2/12)

8,080

Accounts Receivable ........................................

Sales ...........................................................

6,900

8,000
80

6,900

Cash ($750 $26.25) ......................................... 723.75

Credit Card Expense ($750 X 3.5%) ................. 26.25
Sales ...........................................................
Accounts Receivable ........................................
Interest Revenue .......................................

485

Accounts ReceivableDrexler ........................

Notes ReceivableDrexler.......................
Interest Receivable....................................
($8,000 X 12% X 1/12)
Interest Revenue .......................................
($8,000 X 12% X 1/12)

8,160

Interest Receivable ...........................................

($12,000 X 9% X 1/12)
Interest Revenue .......................................

90

9-29

750.00
485
8,000
80
80

90

PROBLEM 9-9A (Continued)

(b)
Notes Receivable
Date
Oct.

Explanation
1
1
31

Ref.

Debit

Credit

Balance

8,000
8,000

28,000
20,000
12,000

Credit

Balance

Balance

Accounts Receivable
Date
Oct.

Explanation

Ref.

7
15
31

Debit
6,900
0,485
8,160

06,900
07,385
15,545

Interest Receivable
Date
Oct.

Explanation
1
1
31
31

Ref.

Debit

Credit

Balance

80
80
61.55

160
80
0
90

Balance
90

(c)
TARDIF COMPANY
Balance Sheet (partial)
October 31, 2003
Assets
Current assets
Notes receivable ..........................................................
Accounts receivable ....................................................
Interest receivable .......................................................
Total current assets ...........................................
9-30

$12,000
15,545
90
$27,635

PROBLEM 9-9A (Continued)

(d) Oct. 31 Allowance for Doubtful Notes............................
Notes ReceivableDrexler...........................
Interest Receivable........................................

8,080
8,000
80

Note that the interest previously accrued on this note should be

written off, as well as the note itself. Also, no interest would be
accrued for October.

9-31

PROBLEM 9-10A
(a)
2000

1999

Current ratio

$1,125 $1,903 = 0.6:1 $1,527 $1,777 = 0.9:1

Acid test ratio

$756 $1,903 = 0.4:1

$1,110 $1,777 = 0.6:1

(b)
2000

1999

Receivables
turnover

$5,446 $770 = 7.1x

$5,261 $603.5 = 8.7x

Collection period

365 days 7.1

= 51.4 days

365 days 8.7

= 42.0 days

(c) CNs short-term liquidity has deteriorated. The current and acid test
ratios both declined. The receivables turnover is less and the average
collection period is longer.

9-32

PROBLEM 9-1B

(a) 1.
2.
3.
4.
5.

Accounts Receivable .................................

Sales ....................................................

2,600,000

Sales Returns and Allowances .................

Accounts Receivable .........................

40,000

Cash ............................................................
Accounts Receivable .........................

2,300,000

Allowance for Doubtful Accounts ............

Accounts Receivable .........................

65,000

Accounts Receivable .................................

Allowance for Doubtful Accounts.....

25,000

Cash ............................................................
Accounts Receivable .........................

25,000

Bad Debts Expense....................................

Allowance for Doubtful Accounts .....
[($2,600,000 - $40,000) X 2%]

51,200

2,600,000
40,000
2,300,000
65,000
25,000
25,000

(b)
51,200

(c)
Accounts Receivable
Bal. 1,000,000 (2)
40,000
2,300,000
(1)
2,600,000 (3)
(5)
25,000 (4)
65,000
(5)
25,000
Bal. 1,195,000

9-33

Allowance for Doubtful Accounts

(4)
65,000 Bal.
60,000
(5)
25,000
51,200
Bal.

71,200

PROBLEM 9-2B

(a) $24,000
(b) $45,000 ($1,500,000 X 3%)
(c) $27,000 [($600,000 X 5%) $3,000]
(d) $32,000 [($600,000 X 5%) + $2,000]
(e) The direct write-off method of reporting bad debts expense is not in
accordance with generally accepted accounting principles because
it does not match expenses with the associated revenues. In
addition, the accounts receivable are not stated at their net realizable
value at the balance sheet date.
(f)

The answer will vary depending on which method the student

prefers.
Example:
Although either method is acceptable, I prefer the percentage of
receivables (ageing) basis because I believe it results in a better
estimate. It also may lead to better accounts receivable management
because of the focus on the age of individual accounts and
evaluation of loss percentages in each age category.
Often, I find it helpful to use both methods together to help check the
reasonableness of the estimate.

9-34

PROBLEM 9-3B

(a) Dec. 31

Bad Debts Expense.....................................

Allowance for Doubtful Accounts ......
($28,950 $10,000)

18,950

Allowance for Doubtful Accounts..............

Accounts Receivable ..........................

800

Accounts Receivable ..................................

Allowance for Doubtful Accounts ......

800

31 Cash..............................................................
Accounts Receivable ..........................

800

(b)
1. Mar. 31
2.

May 31

18,950

800
800
800

Bad Debts Expense

Date

Explanation

2002
Dec. 31

Adjusting

Ref.

Debit

Credit

18,950

Balance
18,950

Allowance for Doubtful Accounts

Date
2002
Dec. 31
31
2003
Mar. 31
May 31

Explanation

Ref.

Debit

Balance
Adjusting

Credit

Balance

18,950

10,000
28,950

800

28,150
28,950

800

(c)
Dec. 31

Bad Debts Expense..................................

Allowance for Doubtful Accounts ...
($40,000 - $37,030)

9-35

2,970
2,970

PROBLEM 9-4B

(a) Total estimated bad debts

Total
Accounts
receivable
% uncollectible
Estimated bad
debts

Number of Days Past Due

0-30
31-60
61-90
Over 90

$375,000 $220,000 $90,000 $40,000

1%
$10,300

$2,200

4%
$3,600

5%
$2,000

(b) Bad Debts Expense ...................................................

Allowance for Doubtful Accounts .....................
[$10,300 + $10,000]

20,300

(c) Allowance for Doubtful Accounts ............................

Accounts Receivable..........................................

5,000

(d) Accounts Receivable.................................................

Allowance for Doubtful Accounts .....................

5,000

Cash ...........................................................................
Accounts Receivable..........................................

5,000

$25,000
10%
$2,500

20,300

5,000
5,000
5,000

(e) If Image.com used 3% of accounts receivable rather than ageing the

accounts the allowance at year-end, the adjustment would be $21,250
[($375,000 x 3%) + $10,000]. The remaining entries would remain
unchanged.
(f) Ageing the accounts rather than applying a percentage to the total
accounts receivable should produce a more accurate allowance and
bad debt expense when the ageing of the accounts change. It also
focuses management attention on the receivables and the loss
percentages, which can result in better receivables management.

9-36

PROBLEM 9-5B

(a) Accounts Receivable ...............................................

Sales ..................................................................

1,300,000

(b) Allowance for Doubtful Accounts ..........................

Accounts Receivable .......................................

41,000

(c) Accounts Receivable ...............................................

Allowance for Doubtful Accounts...................

5,200

Cash ..........................................................................
Accounts Receivable .......................................

5,200

1,300,000

41,000

5,200
5,200

(d) Accounts receivable:

Beginning balance ...................................................
Add:
Credit sales ................................................

$ 150,000
1,300,000
1,450,000

Deduct: Collections on account ....................... $1,225,000

Write-off of uncollectible accounts ....
41,000
Unadjusted balance .................................................
Allowance for doubtful accounts:
Beginning balance ...................................................
Add:
Recovery of account .................................
Deduct: Write-off of uncollectible accounts..........
Unadjusted balance .................................................
(e) Bad Debts Expense [(12% X $184,000) + $25,800)
Allowance for Doubtful Accounts...................

9-37

1,266,000
$ 184,000

$10,000
5,200
41,000
$25,800 Debit
47,880
47,880

PROBLEM 9-5B (Continued)

(f)

Accounts receivable:
Beginning balance ...............................................
Add:
Credit sales ............................................
Deduct: Collections on account ......................... $1,225,000
Write-off of uncollectible accounts ......
41,000
Ending balance ....................................................
Allowance for doubtful accounts:
Beginning balance ................................................
Add:
Recovery of account ..............................
Bad debts expense .................................
Deduct: Write-off of uncollectible accounts.......
Ending balance .....................................................

9-38

$ 150,000
1,300,000
1,450,000
1,266,000
$ 184,000
$10,000
5,200
47,880
63,080
41,000
$22,080

PROBLEM 9-6B

Yr. 1 Balance
Sales
Yr. 2 Balance

Accounts Receivable
4,100,000
22,500,000
Write-offs
Collections
4,800,000

Allowance for Doubtful Accounts

Yr. 1 Balance
Bad debts
Write-offs
150,000
Yr. 2 Balance

150,000
21,650,000

350,000
225,000
425,000

Allowance for Doubtful Accounts .................

Accounts Receivable ...........................

150,000

Bad Debts Expense ........................................

Allowance for Doubtful Accounts.......

225,000

150,000

225,000

($350,000 $150,000 $425,000 = $225,000)

Accounts Receivable ......................................
Sales......................................................

22,500,000
22,500,000

($225,000 = 1% of sales; Therefore sales = $22,500,000)

Cash.. ....................................................
Accounts Receivable ...........................

21,650,000
21,650,000

($4,100,000 + $22,500,000 $150,000 $4,800,000 = $21,650,000)

9-39

PROBLEM 9-7B
(a)
Sales
Cost of goods sold
Gross profit on sales
Total sales
Cash sales
Credit sales
(b)

?
66,000
31,000

= $97,000 ($31,000 + $66,000)

= 18,000
= $79,000

Accounts receivable at December 31 is $24,500, as shown below:

Accounts Receivable
Beg. balance 27,000
Credit sales 79,000
Write-offs
Collections
End. balance 24,500

9-40

1,500
80,000

PROBLEM 9-8B
(a)
Jan.

5
20

Feb. 18
Apr. 20

30

May 25
Aug. 18

23
Sept. 1

Accounts ReceivableGeorge Company........

Sales ............................................................

18,000

Notes ReceivableGeorge Company ..............

Accounts ReceivableGeorge Company

18,000

Notes ReceivableSwaim Company ...............

Sales ............................................................

8,000

Cash ($18,000 + $405) ........................................

Notes ReceivableGeorge Company ......
Interest Revenue.........................................
($18,000 X 9% X 3/12)

18,405

Cash ($15,000 + $400) ........................................

Notes ReceivableAnnabelle Company..
Interest Revenue.........................................
($15,000 X 8% X 4/12)

15,400

Notes ReceivableAvery Inc............................

Accounts ReceivableAvery Inc..............

6,000

Cash ($8,000 + $400) ..........................................

Notes ReceivableSwaim Company........
Interest Revenue.........................................
($8,000 X 10% X 6/12)

8,400

Allowance for Doubtful Notes ...........................

Notes ReceivableAvery Inc. ...................

6,000

Notes ReceivableYoung Company ...............

Sales............................................................

12,000

9-41

18,000
18,000
8,000
18,000
405

15,000
400

6,000
8,000
400

6,000
12,000

PROBLEM 9-8B (Continued)

Nov. 22

There would probably be no entry made on November 22.

Since financial statements are prepared only at year-end,
Dot.com Company would probably wait until December 31
before making a decision regarding whether the note should
be written off.

Dec. 31

Interest Receivable ................................................

Interest Revenue.............................................
($12,000 x 10% X 4/12)

400
400

The company would evaluate the information available on

Young Company and may decide to write off the note and not
accrue the interest. If they decide that a write-off is appropriate,
the above entry would not be made and the following entry
would be made:
Dec. 31

Allowance for Doubtful Notes ............................... 12,000

Notes Receivable .........................................
12,000

(b) Interest should not be accrued if it is unlikely to be collected. In

addition, consideration would have to be given to whether the note
should be written off. At the very least, an allowance should be
created with respect to the Young Company note, based upon the
estimated probability of collection.

9-42

PROBLEM 9-9B

(a)

Don Co. $6,000 X 12% X 2/12 = $120

Jean Co. $4,800 X 11% X 1/12 = 44
Total
$164

(b) July 1

5
14

16
31

31

Cash ($6,000 + $120) ....................................

Notes ReceivableDon Co..................
Interest Receivable ...............................
($6,000 X 12% X 2/12)

6,120

Accounts Receivable ...................................

Sales ......................................................

6,200

Cash ($700 $21) .........................................

Credit Card Expense ($700 X 3%) ...............
Sales ......................................................

679
21

Accounts Receivable ...................................

Interest Revenue ...................................

415

Accounts ReceivableJean Co ..................

Notes ReceivableJean Co.................
Interest Receivable ...............................
($4,800 X 11% X 1/12)
Interest Revenue ...................................
($4,800 X 11% X 1/12)

4,888

Interest Receivable.......................................
($10,000 X 9% X 1/12)
Interest Revenue ...................................

75

9-43

6,000
120

6,200

700
415
4,800
44
44

75

PROBLEM 9-9B (Continued)

(c)
Notes Receivable
Date

Explanation

July 1
1
31

Balance

Ref.

Debit

Credit

Balance

6,000
4,800

20,800
14,800
10,000

Credit

Balance

Accounts Receivable
Date

Explanation

Ref.

July 5
16
31

Debit
6,200
415
4,888

6,200
6,615
11,503

Interest Receivable
Date

Explanation

July 1
1
31
31

Balance

Ref.

Debit

Credit

Balance

120
44

164
44
0
75

T
75

Adjusting entry

(d)
OUELLETTE CO.
Balance Sheet (partial)
July 31, 2003
Assets
Current assets
Notes receivable................................................................
Accounts receivable .........................................................
Interest receivable.............................................................
Total current assets ..................................................
9-44

$10,000
11,503
75
$21,578

PROBLEM 9-9B (Continued)

(e) Interest should not be accrued if it is unlikely to be collected. In
addition, consideration would have to be given to whether the note
should be written off. At the very least, an allowance should be
created with respect to the Jean Company note, based upon the
estimated probability of collection.

9-45

PROBLEM 9-10B
(a)
2000

1999

Current ratio

$782,878 $899,684
= 0.9:1

$1,133,906 $1,874,643
= 0.6:1

Acid test

$690,612 $899,684
= 0.8:1

$1,048,279 $1,874,643
= 0.6:1

(b)
2000

1999

Receivables
turnover

$4,210,313 $858,257
= 4.9 x

$4,160,167 $675,706
= 6.2 x

Collection period

365 days 4.9

= 74.4 days

365 days 6.2

= 58.9 days

(c) Becker Milks short-term liquidity has improved slightly. The current
and acid test ratios both increased. However, the receivables
turnover is lower and the collection period is longer. This could be
the reason the current and acid test ratios look artificially better.
Further investigation is warranted before one should conclude on
Becker Milks liquidity.

9-46

BYP 9-1 FINANCIAL REPORTING PROBLEM

(a)
($ in thousands)

2000

1999

Acid test ratio

$1,446 + $2,294 = 0.6:1

$6,405

$20,942 + $2,494 = 3.6:1

$6,451

Receivables turnover

$20,844
[$2,294 + $2,494) 2]
= 8.7 x

$21,465
[($2,494 + $7,196) 2]
= 4.4 x

Collection period

365 days = 41.9 days

8.7

365 days = 82.9 days

4.4

(b) The acid test ratio decreased significantly from 1999 to 2000. The
receivables turnover increased substantially, and the average
collection period decreased correspondingly, from 1999 to 2000.

9-47

BYP 9-2 INTERPRETING FINANCIAL STATEMENTS

(a)
($ in thousands)

1999

1998

Current ratio

$95,746 $56,862
= 1.7:1

$113,797 $71,817
= 1.6:1

Acid test ratio

$37,429 $56,862
= 0.7:1

$31,135 $71,817
= 0.4:1

(b)
($ in thousands)

1999

1998

Receivables
turnover

$302,392
[$29,955 + $30,776) 2]
= 9.9 x

$291,655
[$30,776 + $23,379) 2]
= 10.8 x

Collection period

365 days 9.9

= 36.9 days

365 days 10.8

= 33.8 days

(c) High Liner Foods does an adequate job of managing its receivables.
However, it appears the managements performance has deteriorated in
1999 compared to the previous year. Its average collection period of 34
days in 1998 and 37 days in 1999 is longer than its credit terms of 7 to
30 days.
(d) The same allowance for doubtful accounts appears reasonable. If there
was a significant difference in credit risk in the separate locations, this
should have been disclosed in the notes to the financial statements.

9-48

BYP 9-3 ACCOUNTING ON THE WEB

Due to the frequency of change with regard to information available on the

world wide web, the Accounting on the Web cases are updated as
required. Their suggested solutions are also updated whenever necessary,
and can be found on-line in the Instructor Resources section of our home
page [www.wiley.com/canada/weygandt2].

9-49

BYP 9-4 COLLABORATIVE LEARNING ACTIVITY

(a)
2003

2002

2001

Net credit sales ...................................... $500,000

$600,000

$400,000

Credit and collection expenses

Collection agency fees....................... $ 02,450
Salary of accounts receivable clerk..
3,800
Uncollectible accounts (1.6%) ...........
8,000
Billing and mailing costs (0.5%) ........
2,500
Credit investigation fees (0.15%) ......
750
Total .............................................. $ 17,500

$ 02,500
3,800
9,600
3,000
0
900
$ 19,800

$ 2,400
3,800
6,400
2,000
0 ,600
$ 15,200

Total expenses as a percentage of

net credit sales....................................

3.5%

3.3%

3.8%

(b)
Average accounts receivable (5%).......

$25,000

$30,000

$20,000

Investment income (8%)........................

$ 2,000

$ 2,400

$ 1,600

Total credit and collection expenses

per above............................................. $17,500
Add: Investment income*..................... 0002,000
Net credit and collection expense........ $19,500

$19,800
2,400
$22,200

$15,200
0 1,600
$16,800

3.7%

4.2%

Net expenses as a percentage of

net credit sales....................................

3.9%

* The lost investment income on the cash tied up in accounts receivable

is an additional expense of continuing the existing credit policies (an
opportunity cost).

9-50

BYP 9-4 (Continued)

(c) The analysis shows that the credit card fee of 3% of net credit sales
will be lower than the percentage cost of credit and collection
expenses in each year. This is true both before and after considering
the effect of income from other investment opportunities. It would be
cheaper for Campus Fashions to accept bank credit cards rather than
only their own credit card.
However, the decision hinges on (1) the accuracy of the estimate of
investment income, (2) the expected trend in credit sales, and (3) the
effect the new policy will have on sales. Non-financial factors include
the effects on customer relationships of the alternative credit policies,
and whether the Berkvoms want to continue with the problems of
handling their own accounts receivable.
Note that the case mentions that the company has lost some sales as a
result of its refusal to accept credit cards. If credit cards are accepted,
the extra sales will generate extra profits; operating expenses might
also be affected. These should be estimated and taken into
consideration as well.

9-51

BYP 9-5 COMMUNICATION ACTIVITY

Dear Lois,
The methods you asked about are methods of dealing with uncollectible
accounts receivables.
Allowance versus direct write-off methods:
The allowance method estimates uncollectible amounts and matches
the estimated bad debts expense against revenues generated in the
year of the sale. Estimated uncollectible accounts are recorded in a
contra account to accounts receivable, called Allowance for Doubtful
Accounts.
The direct write-off method does not estimate bad debts expenses in
advance and an allowance account is not used. Instead, when an
account is determined to be uncollectible, it is written off directly to
expense. Unless bad debt losses are insignificant, this method is not
acceptable for financial reporting purposes.
Allowance methodPercentage of sales and percentage of receivables
methods:
The percentage of sales and percentage of receivables methods are
both acceptable methods used to estimate the amount uncollectible
under the allowance" method. Under the percentage of sales basis,
management establishes a percentage relationship between the
amount of credit sales and expected losses from uncollectible
accounts. This is based on past experience and anticipated credit
policy. The percentage is then applied to either total credit sales or
net credit sales of the current year. This basis of estimating emphasizes the matching of expenses with revenues, and is therefore
deemed an income statement approach.

9-52

BYP 9-5 (Continued)

Under the percentage of receivables basis, management establishes a
percentage relationship between the amount of receivables and
expected losses from uncollectible accounts. This percentage can be
applied to total accounts receivable or to aged classes of receivables
in which customer accounts are classified by the length of time they
have been unpaid. This basis emphasizes net realizable value of
receivables and is therefore deemed a "balance sheet" approach.
I hope that this answers your questions. Please do not hesitate to contact
me if you require any further information.
Sincerely,

9-53

BYP 9-6 ETHICS CASE

(a) The stakeholders in this situation are:

The president of Shirt Co.
The controller of Shirt Co.
The parent company, Clothes Corp.
Any other parties who rely upon the companys financial
statements.
(b) Yes. The controller is posed with an ethical dilemmashould he/she
follow the president's suggestion and prepare misleading financial
statements (understated net income) or should he/she attempt to stand
up to and possibly anger the president by preparing a fair (realistic)
income statement.
(c) Shirt Co.'s growth rate should be a product of fair and accurate
financial statements. One should not prepare financial statements with
the objective of achieving or sustaining a predetermined growth rate.
The growth rate should be a product of management and operating
results, not of creative accounting.

9-54