CHAPTER 6 Investments and Receivables

OVERVIEW OF EXERCISES, PROBLE S, A!" CASES

Lea#nin$ Ob%ective E&e#cises Estimated Time in in'tes Level

() Demonstrate an understanding of the accounting for various types of investments companies make.

1 2 3 4 5 6 16!

15 15 15 10 20 25 25 5 20 25 20 5 20 5 15 15 5 15 5

Easy Easy Mod Easy Mod Mod Mod Easy Mod Mod Mod Easy Mod Easy Mod Mod Easy Mod Easy

*) Demonstrate an understanding of ho" to account for accounts receiva$%e& inc%uding $ad de$ts.

# ' 10 16! 11 16! 12 13 14 15 16!

+) Demonstrate an understanding of ho" to account for interest($earing notes receiva$%e. ,) Demonstrate an understanding of ho" to account for non(interest($earing notes receiva$%e. -) E)p%ain various techni*ues that companies use to acce%erate the inf%o" of cash from sa%es. 6) E)p%ain the effects of transactions invo%ving %i*uid assets on the statement of cash f%o"s. !E)ercise& pro$%em& or case covers t"o or more %earning o$+ectives ,eve% - Difficu%ty %eve%s. Easy/ Moderate 0Mod1/ Difficu%t 0Diff1

6/*

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Lea#nin$ Ob%ective

P#.blems and Alte#nates

Estimated Time in in'tes

Level

() Demonstrate an understanding of the accounting for various types of investments companies make. *) Demonstrate an understanding of ho" to account for accounts receiva$%e& inc%uding $ad de$ts.

1 2 3 4 5 '! '! 6

30 25 45 25 20 20 20 25 10

Mod Mod Diff Mod Mod Mod Mod Mod Mod Mod

+) Demonstrate an understanding of ho" to account for interest($earing notes receiva$%e. ,) Demonstrate an understanding of ho" to account for non(interest($earing notes receiva$%e. -) E)p%ain various techni*ues that companies use to acce%erate the inf%o" of cash from sa%es. 6) E)p%ain the effects of transactions invo%ving %i*uid assets on the statement of cash f%o"s. !E)ercise& pro$%em& or case covers t"o or more %earning o$+ectives ,eve% - Difficu%ty %eve%s. Easy/ Moderate 0Mod1/ Difficu%t 0Diff1

20

6<5=9E> 6 34?E;9ME49; 54D >E6E3?5@,E;

6/+

Lea#nin$ Ob%ective

Cases

Estimated Time in in'tes

Level

() Demonstrate an understanding of the accounting for various types of investments companies make. *) Demonstrate an understanding of ho" to account for accounts receiva$%e& inc%uding $ad de$ts. +) Demonstrate an understanding of ho" to account for interest($earing notes receiva$%e. ,) Demonstrate an understanding of ho" to account for non(interest($earing notes receiva$%e. -) E)p%ain various techni*ues that companies use to acce%erate the inf%o" of cash from sa%es. 6) E)p%ain the effects of transactions invo%ving %i*uid assets on the statement of cash f%o"s. !E)ercise& pro$%em& or case covers t"o or more %earning o$+ectives ,eve% - Difficu%ty %eve%s. Easy/ Moderate 0Mod1/ Difficu%t 0Diff1

3! 4! 6 1 2 4! 5! 5!

20 20 25 25 30 20 25 25 30

Mod Mod Mod Mod Mod Mod Mod Mod Mod

3!

20

Mod

6/,

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01ESTIO!S () ;hares of common stock cou%d $e c%assified as either trading or avai%a$%e( for(sa%e securities. 9he intent of the company determines the proper c%assification. 3f ;tanAe% purchases the 3@M shares "ith the intent of se%%ing them in the near term& they shou%d $e c%assified as trading securities. 7ther"ise& the shares shou%d $e c%assified as avai%a$%e(for( sa%e securities. 9he first 6D shou%d $e c%assified as a cash e*uiva%ent $ecause it has an origina% maturity of three months or %ess. 9he second 6D is c%assified as a short(term investment. 3t is a current asset $ecause it "i%% $e converted into cash "ithin the ne)t year& even though its origina% maturity of more than three months dis*ua%ifies it from c%assification as a cash e*uiva%ent. 9he accounting re*uirements for trading securities and avai%a$%e(for(sa%e securities are simi%ar. 9he primary difference is in the treatment of unrea%iAed gains and %osses from changes in the market va%ue of the securities. 2or trading securities& the gains and %osses are reported on the income statement in the period "hen they occur. 2or avai%a$%e(for(sa%e securities& the f%uctuations in va%ue are reported as a separate component of stockho%dersB e*uity rather than on the income statement. 9he different treatment is +ustified on the grounds that the inc%usion in income of f%uctuations in va%ue of securities that "i%% not necessari%y $e so%d in the near future 0avai%a$%e(for(sa%e securities1 cou%d %ead to unnecessary vo%ati%ity in reported earnings. 2%uctuations in the va%ue of trading securities are reported as gains and %osses on the income statement. 9hese gains and %osses are considered unrealized& ho"ever& $ecause the securities have not $een so%d. 9he a%%o"ance method of accounting for $ad de$ts tries to match one of the costs associated "ith granting credit& i.e. unco%%ecti$%e accounts& "ith the revenue of the period. 8nder the matching princip%e& an estimate of $ad de$ts is made on the $asis of either the sa%es of the period or the accounts receiva$%e at the end of the period& and an e)pense is recogniAed. Chen $ad de$ts e)pense is estimated $y using the percentage of accounts receiva$%e approach& the $a%ance a%ready in the a%%o"ance account must $e considered. 2or e)amp%e& if the estimate of the accounts receiva$%e that "i%% prove to $e unco%%ecti$%e is D20&000 and the a%%o"ance account has a $a%ance of D3&000 $efore ad+ustment& on%y D1 &000 has to $e added to it. 8nder the percentage of net credit sa%es approach& ho"ever& the emphasis is on the de$it to $ad de$ts e)pense. 9he $a%ance in the a%%o"ance account $efore ad+ustment is ignored. 5n aging schedu%e is a refinement of the percentage of accounts receiva$%e approach to estimating $ad de$ts. 9he accountant categoriAes the various receiva$%es $y the %ength of time they are outstanding. 9he

*)

+)

,)

-)

6)

2)

6<5=9E> 6 34?E;9ME49; 54D >E6E3?5@,E;

6/-

estimate of the percent unco%%ecti$%e increases as the age of the accounts go up. 3) 5 note receiva$%e arises from a "ritten promise $y someone to pay a specific amount of money in the future "ith interest. 5n account receiva$%e arises from granting a customer an open %ine of credit and does not norma%%y inc%ude interest. 9his statement is f%a"ed in one important respect. @oth interest($earing and non(interest($earing notes resu%t in the recognition of interest revenue to the ho%der of the note. 3nterest is earned on a non(interest($earing note. 9he interest is imp%icit in the agreement. Chether or not more interest is earned on an interest($earing note or a non(interest($earing note depends on the specific terms of the agreement. Chen a note receiva$%e is discounted "ith recourse& it means that if the customer fai%s to pay the $ank the tota% amount due on the maturity date& the company that so%d the note to the $ank is %ia$%e to the $ank for the fu%% amount. 9herefore& during the time a discounted note is outstanding& the se%%er of the note is contingent%y %ia$%e. 5ccounting standards do not re*uire the se%%er to recogniAe the contingency as a %ia$i%ity& $ut a note is re*uired to a%ert the statement reader of the uncertainty.

4)

(5)

EXERCISES LO ( *55, 9o record purchase of the 6D.

BALA!CE SHEET
Assets 6 Liabilities 7 O8ne#s9 E:'it; a) 5E31 ;hort(term 3nvestments. 6D 50&000 6ash 050&0001
I!CO E

EXERCISE 6/( CERTIFICATE OF "EPOSIT

STATE

E!T

7 Reven'es < E&=enses

9o record interest earned. D50&000

BALA!CE SHEET
Assets b) 6E30 3nterest >eceiva$%e 6 3 5 Liabilities

'G F 30E360.
I!CO E

STATE

E!T

O8ne#s9 E:'it;

7 Reven'es < E&=enses 3nterest >evenue 3 5

9o record redemption of D50&000 6D. D50&000

'G F '0E360 - D1&125.

6/6

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BALA!CE SHEET
Assets 6 Liabilities 7 O8ne#s9 E:'it; c. 'E2# 6ash 51&500 3nterest >eceiva$%e03 51 ;hort(term 3nvest( ments 050&0001

I!CO E

STATE

E!T

7 Reven'es < E&=enses 3nterest >evenue 1&125

LO (

EXERCISE 6/* CLASSIFICATIO! OF CASH E01IVALE!TS A!" I!VEST E!TS O! A BALA!CE SHEET

() *) +) ,) -)

;93 ;93 ;93 6E ,93

6) 2) 3) 4) (5)

;93 ;93 ,93 ;93 6E

LO 1 () 9 *) E +) 5; ,) ; -) 5; LO ( () 5; *) <M +) 9 ,) 9 -) 5;

EXERCISE 6/+ CLASSIFICATIO! OF I!VEST E!TS

EXERCISE 6/, CLASSIFICATIO! OF I!VEST E!TS

EXERCISE 6/- P1RCHASE A!" SALE OF BO!"S LO ( () 9o record purchase of 4orthern ,ights $onds at 100.

6<5=9E> 6 34?E;9ME49; 54D >E6E3?5@,E;

6/2

BALA!CE SHEET
Assets 6 Liabilities 7 O8ne#s9 E:'it; *55, 1E1 3nvestment in 4orthern ,ights @onds 100&000 6ash 0100&0001

I!CO E

STATE

E!T

7 Reven'es < E&=enses

9o record interest income on 4orthern ,ights $onds. D100&000

BALA!CE SHEET
Assets *55, 6E30 6ash 6 4&000 Liabilities 7 O8ne#s9 E:'it;
I!CO E

#G F 6E12.
E!T

STATE

7 Reven'es < E&=enses 3nterest 3ncome 4&000

9o record interest income on 4orthern ,ights $onds.

BALA!CE SHEET
Assets *55, 12E31 6ash 6 4&000 Liabilities 7 O8ne#s9 E:'it;
I!CO E

STATE

E!T

7 Reven'es < E&=enses 3nterest 3ncome 4&000

9o record sa%e of 4orthern ,ights $onds at 102.

BALA!CE SHEET
Assets *551E1 6ash 102&000 3nvestment in 4orthern ,ights @onds 0100&0001 6 Liabilities 7 O8ne#s9 E:'it;
I!CO E

STATE

E!T

7 Reven'es < E&=enses :ain on ;a%e of @onds

2&000

*) ;tarship "as a$%e to se%% the $onds for more than the $onds "i%% pay "hen they mature $ecause the $onds carry a higher periodic interest than the market rate of interest that "as in effect at the time of the sa%e.

6/3

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LO ( ()

EXERCISE 6/6 I!VEST E!T I! STOC>

6hicago shou%d c%assify its investment in Denver stock as trading securities $ecause it p%ans to ho%d the stock for a short time and profit from an increase in its market price.

*) 9o record purchase of trading securities for cash.

BALA!CE SHEET
Assets *55, 12E1 3nvestment in Denver =referred ;tock 40&000 6ash 040&0001 6 Liabilities 7 O8ne#s9 E:'it;
I!CO E

STATE

E!T

7 Reven'es < E&=enses

9o record receiva$%e for D1 per share dividend dec%ared on investment on 1&000 shares of Denver preferred stock.
BALA!CE SHEET
Assets 6 Liabilities 7 O8ne#s9 E:'it; *55, 12E20 Dividends >eceiva$%e 1&000
I!CO E

STATE

E!T

7 Reven'es < E&=enses Dividend 3ncome 1&000

9o ad+ust trading securities to fair va%ue. 2air va%ue 01&000 shares F D42 per share1 6ost. 1&000 shares F D40 per share 8nrea%iAed gain
BALA!CE SHEET
Assets 6 Liabilities 7

D 42&000 40&000 D 2&000

I!CO E

STATE

E!T

O8ne#s9 E:'it;

7 Reven'es < E&=enses 8nrea%iAed :ainH9rading ;ecurities

*55, 12E31 3nvestment in Denver =referred ;tock 2&000

2&000

9o record receipt of dividend.

BALA!CE SHEET
Assets 6 Liabilities 7 O8ne#s9 E:'it; *551E15 6ash 1&000 Dividends >eceiva$%e 01&0001
I!CO E

STATE

E!T

7 Reven'es < E&=enses

9o record sa%e of 1&000 shares at D45 each.

6<5=9E> 6 34?E;9ME49; 54D >E6E3?5@,E;

6/4

BALA!CE SHEET
Assets *552E12 6 Liabilities 7 O8ne#s9 E:'it;

I!CO E

STATE

E!T

7 Reven'es < E&=enses :ain on ;a%e of ;tock

6ash 45&000 3nvestment in Denver =referred ;tock 042&0001

3&000

+) 6hicago shou%d c%assify its investment on its Decem$er 31 $a%ance sheet as a current asset.

LO (

EXERCISE 6/2 I!VEST E!T I! STOC>

() 6u$s shou%d c%assify its investment in ;o) stock as avai%a$%e(for(sa%e $ecause it p%ans to ho%d the stock indefinite%y rather than as a part of its active trading portfo%io. 7n%y $onds can *ua%ify as he%d(to(maturity securities. *) 9o record purchase of avai%a$%e(for(sa%e securities for cash. 5&000 shares D15 per share I D1&000 fees.
BALA!CE SHEET
Assets 6 Liabilities 7 O8ne#s9 E:'it; *55, #E15 3nvestment in ;o) 6ommon ;tock 6&000 6ash 0 6&0001
I!CO E

STATE

E!T

7 Reven'es < E&=enses

9o ad+ust avai%a$%e(for(sa%e securities to fair va%ue. 6ost D 6&000 2air va%ue. 5&000 shares F D13 65&000 8nrea%iAed %oss D 11&000
BALA!CE SHEET
Assets 6 Liabilities 7 O8ne#s9 E:'it; *55, 12E31 3nvestment in ;o) 6ommon ;tock 011&0001
I!CO E

STATE

E!T

7 Reven'es < E&=enses

8nrea%iAed :ainE,ossH 5vai%a$%e(for(;a%e ;ecurities 011&0001

9o record sa%e of stock at a %oss.

BALA!CE SHEET
Assets 6 Liabilities 7 O8ne#s9 E:'it;
I!CO E

STATE

E!T

7 Reven'es < E&=enses

6/(5

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*55E# 6ash 50&000! 3nvestment in ;o) 6ommon ;tock 065&0001!!! ;ecurities 11&000

8nrea%iAed :ainE,ossH 5vai%a$%e(for(;a%e ;ecurities 11&000

,oss on ;a%e of ;tock 026&0001!!

!5&000 F D10 !!D 6&000 J D50&000 !!!D 6&000 J D11&000 +) 6u$s shou%d c%assify its investment on its Decem$er 31 $a%ance sheet according to its intent at that point in time. 9he e)ercise indicates that 6u$s p%ans to ho%d the stock indefinite%y. 9hus& the stock shou%d pro$a$%y $e c%assified as a noncurrent asset at Decem$er 31& even though 6u$s does se%% the stock in the fo%%o"ing year.

LO *

EXERCISE 6/3 CO PARISO! OF THE "IRECT WRITE/OFF A!" ALLOWA!CE ETHO"S OF ACCO1!TI!? FOR BA" "EBTS

4et income under each of the t"o a%ternatives is as fo%%o"s. Direct "rite(off method. D145&000 J D10&500 - D134&500 5%%o"ance method. D145&000 J 02G D132&000
F

D650&0001 - D145&000 J D13&000 -

C.ncl'si.n@ 9he direct "rite(off method "ou%d resu%t in a %esser amount of e)pense and therefore in a higher net income. <o"ever& under current accounting standards& if $ad de$ts are materia% in amount& the a%%o"ance method must $e used. 3n addition& it is not accepta$%e for a company to choose accounting methods on the $asis of their effects on net income.

6<5=9E> 6 34?E;9ME49; 54D >E6E3?5@,E;

6/((

LO *

EXERCISE 6/4 ALLOWA!CE ETHO" OF ACCO1!TI!? FOR BA" "EBTSACO PARISO! OF THE TWO APPROACHES

@ased on 2G of net credit sa%es. 9o record estimated $ad de$ts. 2G

BALA!CE SHEET
Assets *55, 12E31 5%%o"ance for Dou$tfu% 5ccounts 016&6#01 6 Liabilities 7 O8ne#s9 E:'it; F

D#34&000.
I!CO E

STATE

E!T

7 Reven'es < E&=enses @ad De$ts E)pense

016&6#01

@ased on 6G of year(end accounts receiva$%e. 9o record estimated $ad de$ts. 4eed $a%ance of 6G of D320&100 @a%ance $efore ad+ustment is 5mount of ad+ustment must $e
BALA!CE SHEET
Assets 6 Liabilities 7 O8ne#s9 E:'it; *55, 12E31 5%%o"ance for Dou$tfu% 5ccounts 016&6061

D 1'&206 2&600 D 16&606

I!CO E

STATE

E!T

7 Reven'es < E&=enses @ad De$ts E)pense

016&6061

LO *

EXERCISE 6/(5 ACCO1!TS RECEIVABLE T1R!OVER FOR ?E!ERAL ILLS

() 5ccounts receiva$%e turnover. 4et credit sa%esE5verage accounts receiva$%e - D &'4'EK0D1&010 I D6641E2L - D &'4'ED#3 - '.50 times *) 5verage co%%ection period 0assuming 360 days in a year1. 4um$er of days in a yearEturnover - 360E'.50 - 3# days to co%%ect an account receiva$%e +) 9ypes of customers :enera% Mi%%s might have. M :rocery "ho%esa%ers. M :rocery chains. M 3nstitutiona% food services. Chether or not an average of 3# days to co%%ect an account is reasona$%e depends on severa% factors. 2or e)amp%e& ho" does this compare "ith other companies in the same industry as :enera% Mi%%sN <o" does it compare "ith prior yearsN Chat are :enera% Mi%%sB credit termsN 3f its credit terms

6/(*

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are 2E10& net 30& an average co%%ection period of 3# days may $e need to $e investigated.

LO +

EXERCISE 6/(( I!TEREST/BEARI!? !OTES RECEIVABLE

() >oAe%%e 6ompany is the maker/ Dougherty 6orporation is the payee. *) 9he maturity date is March 1& 2005. +) 9o record receipt of si)(month& G promissory note in e)change for open account.
BALA!CE SHEET
Assets 6 Liabilities 7 O8ne#s9 E:'it; a) *55, 'E1 4otes >eceiva$%e 45&000 5ccounts >eceiva$%e 045&0001
I!CO E

STATE

E!T

7 Reven'es < E&=enses

9o record interest earned. D45&000

BALA!CE SHEET
Assets 6 Liabilities

G F 4E12.
I!CO E

STATE

E!T

O8ne#s9 E:'it;

7 Reven'es < E&=enses 3nterest >evenue 1&050

b) *55, 12E31 3nterest >eceiva$%e 1&050

9o record co%%ection of promissory note. D45&000

BALA!CE SHEET
Assets c) *553E1 6ash 3nterest >eceiva$%e 4otes >eceiva$%e 46&5 5 01&0501 045&0001 6 Liabilities 7

G F 2E12.
I!CO E

STATE

E!T

O8ne#s9 E:'it;

7 Reven'es < E&=enses 3nterest >evenue 525

LO ,

EXERCISE 6/(* !O!/I!TEREST/BEARI!? !OTE

() 6ash do"n payment 4otes receiva$%e 5mount received or receiva$%e ,ess. cash price 3nterest revenue *) 9o record sa%e for cash and a non(interest($earing note.

300 1&625 D 1&'25 1&#00 D 125

6<5=9E> 6 34?E;9ME49; 54D >E6E3?5@,E;

6/(+

BALA!CE SHEET
Assets 6 Liabilities 7 O8ne#s9 E:'it; 5E1 6ash 300 4otes >eceiv( a$%e 1&625 Discount on 4otes >eceiva$%e 01251

I!CO E

STATE

E!T

7 Reven'es < E&=enses ;a%es 1&#00

9o accrue interest revenue. #E10

BALA!CE SHEET
Assets 6 Liabilities

D125.
I!CO E

STATE

E!T

O8ne#s9 E:'it;

7 Reven'es < E&=enses 3nterest >evenue 100

12E31 Discount on 4otes >eceiva$%e 100

9o record co%%ection of note. 2E10

BALA!CE SHEET
Assets 6 Liabilities

D125.
I!CO E

STATE

E!T

O8ne#s9 E:'it;

7 Reven'es < E&=enses 3nterest >evenue 25

3E1 6ash 1&625 Discount on 4otes >eceiva$%e 25 4otes >eceiv( a$%e 01&6251

+)

,et F - annua% interest rate D125 - F F 0D1&#00 J D3001 D125 - D1&250 F - 10G
F F

010E121

LO -

EXERCISE 6/(+ CRE"IT CAR" SALES

9o record "eek%y cash and credit sa%es.

BALA!CE SHEET
Assets 6 Liabilities 7 O8ne#s9 E:'it; 6E12 6ash 2&430 5ccounts >eceiva$%eH 5merican E)press 3&500
I!CO E

STATE

E!T

7 Reven'es < E&=enses ;a%es >evenue 5&'30

9o record "eek%y drafts from credit card company.

6/(,

23454635, 566784934: ;7,89374; M5485,

BALA!CE SHEET
Assets 6 Liabilities 7 O8ne#s9 E:'it; 6E15 6ash 3&360 5ccounts >eceiva$%eH 5merican E)press 03&5001

I!CO E

STATE

E!T

7 Reven'es < E&=enses 6o%%ection 2ee E)pense 01401

9he co%%ection fee charged $y 5merican E)press is. D140ED3&500 - 4G. LO 6

EXERCISE 6/(, I PACT OF TRA!SACTIO!S I!VOLVI!? RECEIVABLES O! STATE E!T OF CASH FLOWS

Deducted from net incomeH3ncrease in accounts receiva$%e 5dded to net incomeHDecrease in accounts receiva$%e Deducted from net incomeH3ncrease in notes receiva$%e 5dded to net incomeHDecrease in notes receiva$%e

LO 6

EXERCISE 6/(- CASH COLLECTIO!SA"IRECT ETHO"

6ash co%%ections to $e reported in the operating activities section of Emi%y EnterprisesB 2004 statement of cash f%o"s 0direct method1. 5ccounts receiva$%e& Decem$er 31& 2003 =%us sa%es during 2004 ,ess cash co%%ections during 2004 5ccounts receiva$%e& Decem$er 31& 2004 D224&600 I D2&250&000 J F - D205& 00 F - D2&26#&'00 1LTI/CO!CEPT EXERCISE D 224&600 2&250&000 0F1 D 205& 00

LO (,*,+,6

EXERCISE 6/(6 I PACT OF TRA!SACTIO!S I!VOLVI!? CASH, SEC1RITIES A!" RECEIVABLES O! STATE E!T OF CASH FLOWS

4H=urchase of cash e*uiva%ents 4H>edemption of cash e*uiva%ents 3H=urchase of avai%a$%e(for(sa%e securities 3H;a%e of avai%a$%e(for(sa%e securities 4HCrite(off customer account 0under the a%%o"ance method1

6<5=9E> 6 34?E;9ME49; 54D >E6E3?5@,E;

6/(-

PROBLE LO (
PROBLE

6/( I!VEST E!TS I! BO!"S A!" STOC>

() 9o record purchase of 6G& :a%%atin $onds.

BALA!CE SHEET
Assets *55, E1 3nvestment in :a%%atin @onds 10&000 6ash 010&0001 6 Liabilities 7 O8ne#s9 E:'it;
I!CO E

STATE

E!T

7 Reven'es < E&=enses

9o record purchase of 600 shares of common stock at D20 per share.

BALA!CE SHEET
Assets *55, 10E23 3nvestment in Eag%e >ock ;tock 12&000 6ash 012&0001 6 Liabilities 7 O8ne#s9 E:'it;
I!CO E

STATE

E!T

7 Reven'es < E&=enses

9o record purchase of 200 shares of preferred stock at D30 per share.

BALA!CE SHEET
Assets *55, 11E21 3nvestment in Montana ;tock 6&000 6ash 06&0001 6 Liabilities 7 O8ne#s9 E:'it;
I!CO E

STATE

E!T

7 Reven'es < E&=enses

9o record receipt of dividends on trading securities. Eag%e >ock 600 F D1.50 D '00 Montana 200 F D2.00 400 D 1&300
BALA!CE SHEET
Assets *55, 12E10 6ash 6 1&300 Liabilities 7 O8ne#s9 E:'it;
I!CO E

STATE

E!T

7 Reven'es < E&=enses Dividend 3ncome 1&300

9o record sa%e of 400 shares of Eag%e >ock stock.

BALA!CE SHEET
I!CO E

STATE

E!T

6/(6

23454635, 566784934: ;7,89374; M5485,

Assets

Liabilities

O8ne#s9 E:'it;

7 Reven'es < E&=enses :ain on ;a%e of ;tock

*55, 12E2# 6ash 10&000! 3nvestment in Eag%e >ock ;tock 0#&0001!!

2&000

!400 F D25 !!400 F D20 9o record receipt of interest. D10&000

BALA!CE SHEET
Assets *55, 12E31 6ash 6 300 Liabilities 7 O8ne#s9 E:'it; F

6G F 6E12.
I!CO E

STATE

E!T

7 Reven'es < E&=enses 3nterest 3ncome 300

9o ad+ust trading securities to fair va%ue. Sec'#it; Eag%e >ock Montana T.tal T.tal Fai# Val'e C.st at (*B+(B5, D 4&000 D 5&#00 0200! F D201 0200 F D2'1 6&000 5&200 0200 F D301 0200 F D261 D10&000 D 11&000 ?ain CL.ssD D 1&#00 0#001 D 1&000

!600 origina% purchase %ess 400 so%d on Decem$er 2#

BALA!CE SHEET
Assets 6 Liabilities 7 O8ne#s9 E:'it; *55, 12E31 3nvestment in Eag%e >ock ;tock 1&#00 3nvestment in Montana ;tock 0#001
I!CO E

STATE

E!T

7 Reven'es < E&=enses 8nrea%iAed :ainH 9rading ;ecurities 1&000

*) =artia% $a%ance sheet at Decem$er 31& 2004. 6urrent 5ssets. 3nvestment in trading securities& at fair va%ue ,ong(term 5ssets. 3nvestment in $onds

D11&000 D10&000

+) 3tems on the 2004 income statement. Dividend income 3nterest income :ain on sa%e of stock

D 1&300 300 2&000

6<5=9E> 6 34?E;9ME49; 54D >E6E3?5@,E;

6/(2 1&000

8nrea%iAed gain on trading securities LO (

PROBLE 6/* I!VEST E!TS I! STOC>

() 9o record purchase of 200 shares of stock at D50 per share& p%us D500 in commissions.
BALA!CE SHEET
Assets *55, 1E15 3nvestment in ;ears ;tock 10&500 6ash 010&5001 6 Liabilities 7 O8ne#s9 E:'it;
I!CO E

STATE

E!T

7 Reven'es < E&=enses

9o record receipt of dividends of D2 per share on 200 shares of ;ears stock.

BALA!CE SHEET
Assets *55, 5E23 6ash 400 6 Liabilities 7 O8ne#s9 E:'it;
I!CO E

STATE

E!T

7 Reven'es < E&=enses Dividend 3ncome 400

9o record purchase of 100 shares of stock at D 4 per share& p%us D300 in commissions.
BALA!CE SHEET
Assets 6 Liabilities 7 O8ne#s9 E:'it; *55, 6E1 3nvestment in 2ord ;tock & 00 6ash 0 & 001
I!CO E

STATE

E!T

7 Reven'es < E&=enses

9o record sa%e of ;ears stock. 0200 shares

BALA!CE SHEET
Assets *55, 10E20 6ash #&000 3nvestment in ;ears ;tock 010&5001 6 Liabilities 7

D421 J D400 - D#&000.

I!CO E

STATE

E!T

O8ne#s9 E:'it;

7 Reven'es < E&=enses ,oss on ;a%e of ;tock

02&5001

6/(3

23454635, 566784934: ;7,89374; M5485,

9o record notification of the dec%aration of D1.50 per share dividend on 100 shares of 2ord stock.
BALA!CE SHEET
Assets 6 Liabilities 7 O8ne#s9 E:'it; *55, 12E15 Dividends >eceiva$%e 150
I!CO E

STATE

E!T

7 Reven'es < E&=enses Dividend 3ncome 150

9o ad+ust 2ord stock to fair va%ue. 2air ?a%ue 0100 shares F D#5 per share1 6ost 8nrea%iAed :ainE,ossH 5vai%a$%e(for(;a%e ;ecurities
BALA!CE SHEET
Assets 6 Liabilities 7

D #&500 & 00 D #00

I!CO E

STATE

E!T

O8ne#s9 E:'it;

7 Reven'es < E&=enses

*55, 12E31 3nvestment in 2ord ;tock #00

8nrea%iAed :ainE,ossH 5vai%a$%e(for(;a%e ;ecurities #00

*)

9ota% income from investments during 2004. Dividend income on ;ears stock ,oss on sa%e of ;ears stock Dividend income on 2ord stock 9ota% income 0%oss1

400 02&5001 150 D 01&'501

!.te@ 9he unrea%iAed gain from the increase in market va%ue of the 2ord stock is not recogniAed in income $ut rather as an ad+ustment to stockho%dersB e*uity $ecause the securities are c%assified as avai%a$%e(for( sa%e. +) 3f 5t%as categoriAes its securities as trading securities& an additiona% D#00 of income "ou%d $e recogniAed in 2004& resu%ting in a net %oss from the investments of D1&'50 J D#00& or D1&150. 3ncreases and decreases in the va%ue of trading securities are recogniAed on the income statement $ut not for avai%a$%e(for(sa%e securities. LO *
PROBLE 6/+ ALLOWA!CE ETHO" FOR ACCO1!TI!? FOR BA" "EBTS
F

() 9o record sa%es for year. D1&050&000

BALA!CE SHEET
Assets 6 Liabilities 7

#0G - D#40&000 credit sa%es.

I!CO E

STATE

E!T

O8ne#s9 E:'it;

7 Reven'es < E&=enses ;a%es >evenue 1&050&000

5ccounts >eceiv( a$%e #40&000 6ash 210&000

6<5=9E> 6 34?E;9ME49; 54D >E6E3?5@,E;

6/(4

9o record co%%ection of customer accounts.

BALA!CE SHEET
Assets 6ash 5ccounts >eceiva$%e 6 6 0&000 06 0&0001 Liabilities 7 O8ne#s9 E:'it;
I!CO E

STATE

E!T

7 Reven'es < E&=enses

9o record "rite(off of accounts receiva$%e.

BALA!CE SHEET
Assets 6 Liabilities 7 O8ne#s9 E:'it; 5%%o"ance for Dou$tfu% 5ccounts 4&000 5ccounts >eceiv( a$%e 04&0001
I!CO E

STATE

E!T

7 Reven'es < E&=enses

*a) 9o record estimated $ad de$t e)pense. D#40&000

BALA!CE SHEET
Assets 6 Liabilities 7

3G.
I!CO E

STATE

E!T

O8ne#s9 E:'it;

7 Reven'es < E&=enses @ad De$t E)pense 025&2001

5%%o"ance for Dou$tfu% 5ccounts 025&2001

*b) 9o record estimated $ad de$t e)pense. 5ccounts receiva$%e at Dec. 31& 2004 0D140&000 I D#40&000 J D6 0&000 J D4&0001 5%%o"ance $a%ance needed @a%ance $efore ad+ustment. @eginning $a%ance D 2&350 Crite(off 4&000 5mount of ad+ustment must $e
BALA!CE SHEET
Assets 5%%o"ance for Dou$tfu% 5ccounts 020&0101 6 Liabilities 7

D 306&000 F .06 D 1#&360

D
O8ne#s9 E:'it;

1&650 20&010
I!CO E

STATE

E!T

7 Reven'es < E&=enses @ad De$t E)pense 020&0101

+a) 9he net rea%iAa$%e va%ue of accounts receiva$%e on Decem$er 31& 2004 is D2#2&450. 5ccounts receiva$%e& Dec. 31 0from =art *b)1 ,ess. 5%%o"ance for dou$tfu% accounts& Dec. 31 0D2&350 J D4&000 I D25&2001 4et rea%iAa$%e va%ue& Decem$er 31 D 306&000 23&550 D 2#2&450

6/*5

23454635, 566784934: ;7,89374; M5485,

+b) 9he net rea%iAa$%e va%ue of accounts receiva$%e on Decem$er 31& 2004 is D2# &640. 5ccounts receiva$%e& Dec. 31 0from =art *b)1 ,ess. 5%%o"ance for dou$tfu% accounts& Dec. 31 0D2&350 J D4&000 I D20&0101 4et rea%iAa$%e va%ue& Decem$er 31 D 306&000 1#&360 D 2# &640

,) 9he recognition of $ad de$t e)pense reduces the net rea%iAa$%e va%ue $y the amount recorded in $ad de$t e)pense and the a%%o"ance for dou$tfu% accounts. 9he "rite(off of accounts has no effect on the net rea%iAa$%e va%ue. LO * ()
Cate$.#; Am.'nt
PROBLE 6/, A?I!? SCHE"1LE TO ACCO1!T FOR BA" "EBTS

Estimated Pe#cent 1nc.llectible

Estimated Am.'nt 1nc.llectible

6urrent =ast due. ,ess than 1 month 1 to 2 months More than 2 months 9ota%s

D 200&000 45&000 25&000 10&000 D 2#0&000

5G 20G 40G 60G

D 10&000 '&000 10&000 6&000 D 35&000

*) 9o record estimated $ad de$ts. a%%o"ance account.

BALA!CE SHEET
Assets 6 Liabilities 7

D35&000 %ess D12&300 current%y in

I!CO E

STATE

E!T

O8ne#s9 E:'it;

7 Reven'es < E&=enses @ad De$ts E)pense

*55, 12E31 5%%o"ance for Dou$tfu% 5ccounts 022& 001

022& 001

+) =artia% $a%ance sheet at Decem$er 31& 2004. C'##ent Assets 5ccounts receiva$%e ,ess. 5%%o"ance for dou$tfu% accounts 4et accounts receiva$%e D 2#0&000 035&0001 D 245&000

6<5=9E> 6 34?E;9ME49; 54D >E6E3?5@,E;

6/*(

LO 2

PROBLE 6/- ACCO1!TS RECEIVABLE T1R!OVER FOR WHIRLPOOL A!" AETA?

() 5ccounts receiva$%e turnover ratios. WFi#l=..l@ D11&016EK0D1& #1 I D1&5151E2L - D11&016ED1&64#.0 - 6.6# times. a;ta$@ D4&666&031EK0D5#6&44 times. *) 5verage co%%ection period. WFi#l=..l@ 360E6.6# - 53.#' days. a;ta$@ 360E . 5 - 46.45 days. 5n average co%%ection period of 54 days& or a%most t"o months& appears to $e reasona$%e. <o"ever& MaytagBs average co%%ection period of a$out 46 days is even $etter. +) MaytagBs accounts receiva$%e turnover ratio is s%ight%y higher than Chir%poo%Bs. . 5 versus 6.6#. 3t takes Maytag an average of 46.45 days to co%%ect its receiva$%es/ Chir%poo% re*uires an average of 53.#' days. 3t "ou%d $e especia%%y he%pfu% to measure these statistics& accounts receiva$%e turnover ratio and average co%%ection period& "ith the same measures for prior years. 3t "ou%d a%so $e he%pfu% to compare these measures "ith the industry averages. I D61#&1011E2L - D4&666&031ED602&2 4 . 5

LO ,

PROBLE 6/6 !O!/I!TEREST/BEARI!? !OTES RECEIVABLE

() 9o record sa%e in e)change for do"n payment and note.

BALA!CE SHEET
Assets 6 Liabilities 7 O8ne#s9 E:'it; a) *55, 5E31 6ash 5&000 4otes >eceiva$%e 20&000 Discount on 4otes >eceiva$%e 01&0001
I!CO E

STATE

E!T

7 Reven'es < E&=enses ;a%es >evenue 24&000

6/**

23454635, 566784934: ;7,89374; M5485,

9o record interest earned in Oune. D1&000

BALA!CE SHEET
Assets 6 Liabilities 7

30E'0.
I!CO E

STATE

E!T

O8ne#s9 E:'it;

7 Reven'es < E&=enses 3nterest >evenue

b) *55, 6E30 Discount on 4otes >eceiva$%e 333

333

9o record co%%ection of note and recognition of interest earned for Ou%y and 5ugust. 0D1&000 F 60E'01 - D66 .
BALA!CE SHEET
Assets 6 Liabilities 7 O8ne#s9 E:'it; c) *55, #E2' 6ash 20&000 Discount on 4otes >eceiva$%e 66 4otes >eceiva$%e 020&0001
I!CO E

STATE

E!T

7 Reven'es < E&=enses 3nterest >evenue

66

*) 9o find the effective rate of interest. () 6ash se%%ing price ,ess. Do"n payment 8npaid cash $a%ance 5mount of promissory note 3mp%icit interest in the note *) ,ength of note +) 4um$er of '0(day periods in a year ,) 5mount of interest that "ou%d app%y to a fu%% year. 1&000 F 4 -) Effective annua% interest rate. D4&000ED1'&000 D 24&000 5&000 D 1'&000 20&000 1&000 '0 days 4 D 4&000 21G

LO -

PROBLE

6/2 CRE"IT CAR" SALES

() 4et se%%ing price 6ost of goods so%d :ross margin

D1.00 . 5 D .25

9he o"ner must net D1 per ga%%on on the se%%ing price. 9he amount per ga%%on he "ou%d have to charge credit card customers is F J .02F .'#F F 1.00 1.00 D1.02 per ga%%on

03t is "orth noting that not a%% gas companies charge a higher price for credit card purchases.1

6<5=9E> 6 34?E;9ME49; 54D >E6E3?5@,E;

6/*+

*) 3f his norma% charge is D1.02 to credit card customers& he can offer a D.02 discount to cash customers and sti%% maintain his gross margin. LO 6
PROBLE 6/3 EFFECTS OF CHA!?ES I! RECEIVABLE BALA!CES O! STATE E!T OF CASH FLOWS

() ;tatement of cash f%o"s. STE?!ER I!C) STATE E!T OF CASH FLOWS FOR THE EEAR E!"E" "ECE BER +(, *55, 4et income 5d+ustments to reconci%e net income to net cash used $y operating activities. 3ncrease in accounts receiva$%e Decrease in notes receiva$%e 6ash f%o"s from operating activities 6ash& Decem$er 31& 2003 6ash& Decem$er 31& 2004 !D223&000 J D#3&000 !!D100&000 J D'5&000 em.#and'm t. tFe =#esident@ 97. 2>7M. D59E. 7"ner of ;tegner& 3nc. ;tudentBs name Oanuary FF& 2005 D 130&000 D 0140&0001! 5&000!!

0135&0001 D 05&0001 110&000 D 105&000

*)

;8@OE69. 6ash 2%o"s Pou recent%y e)pressed concern a$out the decrease in the companyBs cash $a%ance in spite of the profita$%e year that "as reported on this yearBs income statement. My thoughts and a copy of the companyBs 2004 statement of cash f%o"s fo%%o". 5%though net income on an accrua% $asis "as D130&000& the companyBs cash $a%ance dec%ined $y D5&000 during the year for t"o reasons. Most important%y& accounts receiva$%e increased $y D140&000 during the year from D#3&000 to D223&000/ "e did not co%%ect amounts due from our customers as sa%es "ere made. 9his drain on cash "as partia%%y offset $y a D5&000 decrease in notes receiva$%e during the year& from D100&000 to D'5&000. Ce can $etter manage our cash f%o" $y increasing our co%%ection efforts.

6/*,

23454635, 566784934: ;7,89374; M5485,

1LTI/CO!CEPT PROBLE LO *,+

PROBLE 6/4 ACCO1!TS A!" !OTES RECEIVABLE

() 9o record the sa%e on credit/ terms net 30.

BALA!CE SHEET
Assets 6 Liabilities 7 O8ne#s9 E:'it; *55, 5E15 5ccounts >eceiva$%eH 6. @ro"n 5&000
I!CO E

STATE

E!T

7 Reven'es < E&=enses ;a%es >evenue 5&000

9o "rite off unco%%ecti$%e account.

BALA!CE SHEET
Assets 6 Liabilities 7 O8ne#s9 E:'it; *55, #E10 5%%o"ance for Dou$tfu% 5ccounts 5&000 5ccounts >eceiva$%eH 6. @ro"n 05&0001
I!CO E

STATE

E!T

7 Reven'es < E&=enses

6<5=9E> 6 34?E;9ME49; 54D >E6E3?5@,E;

6/*-

9o restore account previous%y "ritten off.

BALA!CE SHEET
Assets 6 Liabilities 7 O8ne#s9 E:'it; *55, 12E1 5%%o"ance for Dou$tfu% 5ccounts 05&0001 5ccounts >eceiva$%eH 6. @ro"n 5&000
I!CO E

STATE

E!T

7 Reven'es < E&=enses

9o record partia% co%%ection on open account and receipt of t"o(month& 'G note for the $a%ance.
BALA!CE SHEET
Assets *55, 12E1 6ash 1&000 4otes >eceiv( a$%e 4&000 5ccounts >eceiva$%eH 6. @ro"n 05&0001 6 Liabilities 7 O8ne#s9 E:'it;
I!CO E

STATE

E!T

7 Reven'es < E&=enses

9o accrue interest earned. D4&000

BALA!CE SHEET
Assets *55, 12E31 3nterest >eceiva$%e 6 Liabilities

'G F 1E12.
I!CO E

STATE

E!T

O8ne#s9 E:'it;

7 Reven'es < E&=enses 3nterest >evenue 30

30

9o record co%%ection of note and interest.

BALA!CE SHEET
Assets 6 Liabilities 7 O8ne#s9 E:'it; *551E31 6ash 4&060 3nterest >eceiva$%e 0301 4otes >eceiv( a$%e 04&0001
I!CO E

STATE

E!T

7 Reven'es < E&=enses 3nterest >evenue 30

*) @ro"n is interested in reesta$%ishing a good credit standing "ith its supp%ier& ,inus& and for this reason has sent the check and signed a note for the $a%ance.

6/*6

23454635, 566784934: ;7,89374; M5485,

ALTER!ATE PROBLE

LO (

PROBLE STOC>

6/(A I!VEST E!TS I! BO!"S A!"

() 9o record purchase of #G Maine $onds.

BALA!CE SHEET
Assets 6 Liabilities 7 O8ne#s9 E:'it; *55, E1 3nvestment in Maine @onds 10&000 6ash 010&0001
I!CO E

STATE

E!T

7 Reven'es < E&=enses

9o record purchase of 1&000 shares of common stock at D15 per share.

BALA!CE SHEET
Assets 6 Liabilities 7 O8ne#s9 E:'it; *55, 10E23 3nvestment in ?irginia ;tock 15&000 6ash 015&0001
I!CO E

STATE

E!T

7 Reven'es < E&=enses

9o record purchase of 600 shares of preferred stock at D# per share.

BALA!CE SHEET
Assets *55, 11E21 3nvestment in 6aro%ina ;tock 4&#00 6ash 04&#001 6 Liabilities 7 O8ne#s9 E:'it;
I!CO E

STATE

E!T

7 Reven'es < E&=enses

9o record receipt of dividends on trading securities. ?irginia 1&000 F D.50 D 500 6aro%ina 600 F D1.00 600 D 1&100
BALA!CE SHEET
Assets *55, 12E10 6ash 6 1&100 Liabilities 7 O8ne#s9 E:'it;
I!CO E

STATE

E!T

7 Reven'es < E&=enses Dividend 3ncome 1&100

6<5=9E> 6 34?E;9ME49; 54D >E6E3?5@,E;

6/*2

9o record sa%e of 00 shares of ?irginia stock.

BALA!CE SHEET
Assets 6 Liabilities 7 O8ne#s9 E:'it; *55, 12E2# 6ash 13&300! 3nvestment in ?irginia ;tock 010&5001!!
I!CO E

STATE

E!T

7 Reven'es < E&=enses :ain on ;a%e of ;tock

2&#00

! 00 F D1' !! 00 F D15 9o record receipt of interest.

BALA!CE SHEET
Assets *55, 12E31 6ash 6 400! F Liabilities 7 O8ne#s9 E:'it;
I!CO E

STATE

E!T

7 Reven'es < E&=enses 3nterest 3ncome 400

!D10&000

#G F 1E2 year

9o ad+ust trading securities to fair va%ue. Sec'#it; ?irginia 6aro%ina T.tal C.st D 4&500 0300! F D151 4&#00 0600 F D#1 D '&300 T.tal Fai# Val'e at (*B+(B5( D 6&000 0300 F D201 6&600 0600 F D111 D 12&600 ?ain CL.ssD D 1&500 1&#00 D 3&300

!1&000 origina% purchase %ess 00 so%d on Decem$er 2#.

BALA!CE SHEET
Assets 6 Liabilities 7 O8ne#s9 E:'it; *55, 12E31 3nvestment in ?irginia ;tock 1&500 3nvestment in 6aro%ina ;tock 1&#00
I!CO E

STATE

E!T

7 Reven'es < E&=enses 8nrea%iAed :ainH 9rading ;ecur( ities 3&300

*) =artia% $a%ance sheet at Decem$er 31& 2004. 6urrent 5ssets. 3nvestment in trading securities& at fair va%ue ,ong(term 5ssets. 3nvestment in $onds

D 12&600 D 10&000

6/*3

23454635, 566784934: ;7,89374; M5485,

+) 3tems on the 2004 income statement. Dividend income 3nterest income :ain on sa%e of stock 8nrea%iAed gain on trading securities

D 1&100 400 2&#00 3&300

LO (

PROBLE

6/*A I!VEST E!TS I! STOC>

() 9o record purchase of 100 shares of stock at D130 per share& p%us D250 in commissions.
BALA!CE SHEET
Assets 6 Liabilities 7 O8ne#s9 E:'it; *55, 1E15 3nvestment in 3@M ;tock 13&250 6ash 013&2501
I!CO E

STATE

E!T

7 Reven'es < E&=enses

9o record receipt of dividends of D1 per share on 100 shares of 3@M stock.

BALA!CE SHEET
Assets *55, 5E23 6ash 100 6 Liabilities 7 O8ne#s9 E:'it;
I!CO E

STATE

E!T

7 Reven'es < E&=enses Dividend 3ncome 100

9o record purchase of 200 shares of stock at D60 per share& p%us D300 in commissions.
BALA!CE SHEET
Assets 6 Liabilities 7 O8ne#s9 E:'it; *55, 6E1 3nvestment in :M ;tock 12&300 6ash 012&3001
I!CO E

STATE

E!T

7 Reven'es < E&=enses

9o record sa%e of 3@M stock. 0100 shares

BALA!CE SHEET
Assets 6 Liabilities 7

D1401 J D400.
I!CO E

STATE

E!T

O8ne#s9 E:'it;

7 Reven'es < E&=enses :ain on ;a%e of ;tock

*55, 10E20 6ash 13&600 3nvestment in 3@M ;tock013&2501

350

6<5=9E> 6 34?E;9ME49; 54D >E6E3?5@,E;

6/*4

9o record notification of the dec%aration of D. 5 per share dividend on 200 shares of :M stock.
BALA!CE SHEET
Assets *55, 12E15 Dividends >eceiva$%e 6 Liabilities 7 O8ne#s9 E:'it;
I!CO E

STATE

E!T

7 Reven'es < E&=enses Dividend 3ncome 150

150

9o ad+ust :M stock to fair va%ue. T.tal C.st D12&300

BALA!CE SHEET
Assets 6 Liabilities 7 O8ne#s9 E:'it; 8nrea%iAed :ainE,ossH 5vai%a$%e( for(;a%e ;ecurities *55, 12E31 3nvestment in :M ;tock 03&3001

T.tal Fai# Val'e D'&000 0200 F D451

?ain CL.ssD D03&3001

I!CO E

STATE

E!T

7 Reven'es < E&=enses

03&3001

*) 9ota% income from investments during 2004. Dividend income on 3@M stock :ain on sa%e of 3@M stock Dividend income on :M stock 9ota% income

D D

100 350 150 600

!.te@ 9he unrea%iAed %oss from the decrease in market va%ue of the :M stock is not recogniAed in income $ut rather as an ad+ustment to stockho%dersB e*uity $ecause the securities are c%assified as avai%a$%e(for( sa%e. +) 3f 9rendy categoriAes its securities as trading securities& a %oss of D3&300 "ou%d $e recogniAed in 2004& resu%ting in a net %oss from the investments of D3&300 J D1&100& or D2&200. 3ncreases and decreases in the va%ue of trading securities are recogniAed on the income statement& $ut not for avai%a$%e(for(sa%e securities.

6/+5

23454635, 566784934: ;7,89374; M5485,

LO *

PROBLE 6/+A ALLOWA!CE FOR BA" "EBTS

ETHO" FOR ACCO1!TI!?

() 9o record sa%es for year. D # &500

BALA!CE SHEET
Assets 5ccounts >eceiva$%e 6ash 6 630&000 15 &500 Liabilities

#0G - D630&000 credit sa%es.

I!CO E

STATE

E!T

O8ne#s9 E:'it;

7 Reven'es < E&=enses ;a%es >evenue # &500

9o record co%%ection of customer accounts.

BALA!CE SHEET
Assets 6ash 5ccounts >eceiva$%e 6 502&500 0502&5001 Liabilities 7 O8ne#s9 E:'it;
I!CO E

STATE

E!T

7 Reven'es < E&=enses

9o record "rite(off of accounts receiva$%e.

BALA!CE SHEET
Assets 6 Liabilities 7 O8ne#s9 E:'it; 5%%o"ance for Dou$t( fu% 5ccounts 3&000 5ccounts >eceiva$%e 03&0001
I!CO E

STATE

E!T

7 Reven'es < E&=enses

*a) 9o record estimated $ad de$t e)pense. D630&000

BALA!CE SHEET
Assets 6 Liabilities 7

3G.
I!CO E

STATE

E!T

O8ne#s9 E:'it;

7 Reven'es < E&=enses @ad De$t E)pense 01#&'001

5%%o"ance for Dou$t( fu% 5ccounts 01#&'001

*b) 9o record estimated $ad de$t e)pense. 5ccounts receiva$%e at Dec. 31& 2001 0D105&000 I D630&000 J D502&500 J D3&0001 5%%o"ance $a%ance needed @a%ance $efore ad+ustment. @eginning $a%ance D 1&'50 0cr1 Crite(off 3&000 0dr1 5mount of entry must $e

D 22'&500 F .06 D 13& 0 0cr1

1&050 0dr1 14&#20 0cr1

6<5=9E> 6 34?E;9ME49; 54D >E6E3?5@,E;

6/+(

BALA!CE SHEET
Assets 6 Liabilities 7 O8ne#s9 E:'it; 5%%o"ance for Dou$t( fu% 5ccounts 014&#201

I!CO E

STATE

E!T

7 Reven'es < E&=enses @ad De$t E)pense 014&#201

+a) 9he net rea%iAa$%e va%ue of accounts receiva$%e on Decem$er 31& 2004 is D211&650. 5ccounts receiva$%e& Dec. 31 0from =art *b)1 D 22'&500 ,ess. a%%o"ance for dou$tfu% accounts& Dec. 31 0D1&'50 J D3&000 I D1#&'001 1 &#50 4et rea%iAa$%e va%ue& Decem$er 31 D 211&650 +b) 9he net rea%iAa$%e va%ue of accounts receiva$%e on Decem$er 31& 2004 is D215& 30. 5ccounts receiva$%e& Dec. 31 0from =art *b)1 D 22'&500 ,ess. a%%o"ance for dou$tfu% accounts& Dec. 31 0D1&'50 J D3&000 I D14&#201 13& 0 4et rea%iAa$%e va%ue& Decem$er 31 D 215& 30 ,) 9he recognition of $ad de$t e)pense reduces the net rea%iAa$%e va%ue $y the amount recorded in $ad de$t e)pense and the a%%o"ance for dou$tfu% accounts. 9he "rite(off of accounts has no effect on the net rea%iAa$%e va%ue. LO * ()
Cate$.#; Am.'nt
PROBLE 6/,A A?I!? SCHE"1LE TO ACCO1!T FOR BA" "EBTS

Estimated Pe#cent 1nc.llectible

Estimated Am.'nt 1nc.llectible

6urrent =ast due. ,ess than 1 month 1 to 2 months More than 2 months 9ota%s

D 135&000 60&300 35&000 45&000 D 2 5&300

10G 25G 35G 5G

D 13&500 15&0 5 12&250 33& 50 D 4&5 5

*) 9he contro%%er is primari%y responsi$%e for the accuracy of the records& rather than the co%%ection process. 9hus& the contro%%erQs main concern shou%d $e "ith the ade*uacy of the $a%ance in the a%%o"ance account. 9he amount of the a%%o"ance shou%d pro$a$%y $e increased& given the re%ative%y %arge amount "hich is %ike%y to $e unco%%ecti$%e.

6/+*

23454635, 566784934: ;7,89374; M5485,

+) =artia% $a%ance sheet at Decem$er 31& 2004. C'##ent Assets 5ccounts receiva$%e ,ess. 5%%o"ance for dou$tfu% accounts 4et accounts receiva$%e D 2 5&300 4&5 5 D 200& 25

LO *

PROBLE 6/-A ACCO1!TS RECEIVABLE T1R!OVER FOR BOISE CASCA"E A!" ?EOR?IA/PACIFIC CORPORATIO!

() 5ccounts receiva$%e turnover ratios. B.ise Cascade@ D &412&32'EK0D423&' 6 I D424& 221E2L - D &412&32'ED424&34' - 1 .4 times. ?e.#$ia/PaciGic C.#=.#ati.n@ D23&2 1EK0D1& I D2&3521E2L - D23&2 1ED2&064.5 11.2 times. *) 5verage co%%ection period. B.ise Cascade@ 360E1 .4 - 20.61 days. ?e.#$ia/PaciGic C.#=.#ati.n@ 360E11.2 - 31.'4 days. 5verage co%%ection periods of either 21 days or 32 days appear reasona$%e for customers of companies that manufacture paper products. +) @oise 6ascadeBs accounts receiva$%e turnover ratio is higher than :eorgia( =acificBs. 1 .4 versus 11.2 . 3t takes @oise 6ascade an average of on%y 20.6 days to co%%ect its receiva$%es/ :eorgia(=acific re*uires an average of 31.' days. 3t "ou%d a%so $e he%pfu% to measure these statisticsHaccounts receiva$%e turnover ratio and average co%%ection periodH"ith the same measures for prior years. 3t "ou%d a%so $e he%pfu% to compare these measures "ith the industry averages.

LO ,

PROBLE

6/6A !O!/I!TEREST/BEARI!? !OTE RECEIVABLE

() 9o record co%%ection of note. 6ash se%%ing price ,ess. Do"n payment 8npaid cash $a%ance 5mount of promissory note 3mp%icit interest in the note

D 4#&000 12&000 D 36&000 36&'00 D '00

6<5=9E> 6 34?E;9ME49; 54D >E6E3?5@,E;

6/++

BALA!CE SHEET
Assets 6 Liabilities 7 O8ne#s9 E:'it; *55, #E2' 4otes >eceiv( a$%e 36&'00 6ash 12&000 Discount on 4otes >e( ceiva$%e 0'001

I!CO E

STATE

E!T

7 Reven'es < E&=enses ;a%es >evenue 4#&000

*) 9o find the effective rate of interest. () ,ength of note *) 4um$er of '0(day periods in a year +) 5mount of interest that "ou%d app%y to a fu%% year. D'00 0from =art ()1 F 4 ,) Effective annua% interest rate. D3&600ED36&000 '0 days 4 D 3&600 10G

LO -

PROBLE

6/2A CRE"IT CAR" SALES

() 6ost of credit card operation per out%et. E*uipmentEphone %ine ;a%es fee. 6redit sa%es. D#00&000 F 5G F 2ee 9ota% cost

D D 40&000 F .015

#00

600 D 1&400

C.ncl'si.n@ to cover the cost of the ne" e*uipment in the first year& ne" sa%es "ou%d need to net D1&400 per out%et. *) 9he company shou%d a%so consider competition in its decision on the use of credit cards. 3t may in fact suffer a %oss of sa%es if its competitors start offering credit to customers and it does not. 9he company may find that customer good"i%% is increased $y the offer to use a credit card.

6/+,

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LO 6

PROBLE 6/3A EFFECTS OF CHA!?ES I! RECEIVABLE BALA!CES O! STATE E!T OF CASH FLOWS

() ;tatement of cash f%o"s. ST) CHARLES A!TI01E AR>ET STATE E!T OF CASH FLOWS FOR THE EEAR E!"E" "ECE BER +(, *55, 4et %oss 5d+ustments to reconci%e net %oss to net cash provided $y operating activities. Decrease in accounts receiva$%e 3ncrease in notes receiva$%e 6ash f%o"s from operating activities 6ash& Decem$er 31& 2003 6ash& Decem$er 31& 2004 !D126&000 J D '&000 !!D104&#00 J D112&600 *) em.#and'm t. tFe =#esident@ 97. 2>7M. D59E. 7"ner of ;t. 6har%es 5nti*ue Market ;tudentBs name Oanuary FF& 2005 D 06&0001 4 &000! 0 &#001!! D 33&200 3&100 D 36&300

;8@OE69. 6ash 2%o"s Pou recent%y *uestioned the increase in the companyBs cash $a%ance in %ight of this yearBs net %oss. My thoughts and a copy of the companyBs 2004 statement of cash f%o"s fo%%o". ;t. 6har%es 5nti*ue Market "as a$%e to generate a significant amount of cash from operations even though the company incurred an accrua% $asis net %oss during 2004 of D6&000. Most important%y& the amount of accounts receiva$%e decreased $y D4 &000 during the year from D126&000 to D '&000/ co%%ections of accounts receiva$%e generated cash for the company. 9his cash f%o" "as partia%%y offset $y a D &#00 increase in notes receiva$%e during the year& from D104&#00 to D112&600.

6<5=9E> 6 34?E;9ME49; 54D >E6E3?5@,E;

6/+-

ALTER!ATE LO *,+

1LTI/CO!CEPT PROBLE

PROBLE 6/4A ACCO1!TS A!" !OTES RECEIVABLE

() 9o record sa%e on credit/ terms net 30.

BALA!CE SHEET
Assets 6 Liabilities 7 O8ne#s9 E:'it; *55, E31 5ccounts >eceiva$%eH =.D. 6at 6&000
I!CO E

STATE

E!T

7 Reven'es < E&=enses ;a%es >evenue 6&000

9o "rite off unco%%ecti$%e account.

BALA!CE SHEET
Assets 6 Liabilities 7 O8ne#s9 E:'it; *55, 12E24 5%%o"ance for Dou$tfu% 5ccounts 6&000 5ccounts >eceiva$%eH =.D. 6at 06&0001
I!CO E

STATE

E!T

7 Reven'es < E&=enses

9o restore account previous%y "ritten off.

BALA!CE SHEET
Assets *551E15 6 Liabilities 7 O8ne#s9 E:'it;
I!CO E

STATE

E!T

7 Reven'es < E&=enses

5ccounts >eceiva$%eH =.D. 6at 6&000 5%%o"ance for Dou$tfu% 5ccounts 06&0001

9o record partia% co%%ection on open account and receipt of t"o(month #G note for the $a%ance.
BALA!CE SHEET
Assets *551E15 6 Liabilities 7 O8ne#s9 E:'it;
I!CO E

STATE

E!T

7 Reven'es < E&=enses

6ash 1&500 4otes >eceiva$%eH =.D. 6at 4&500 5ccounts >eceiva$%eH =.D. 6at 06&0001

9o record co%%ection of note and interest. D4&500

#G F 2E12.

6/+6

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BALA!CE SHEET
Assets 6 Liabilities 7 O8ne#s9 E:'it; *553E15 6ash 4&560 4otes >eceiv( a$%e 04&5001

I!CO E

STATE

E!T

7 Reven'es < E&=enses 3nterest >evenue 60

*) =.D. 6at is interested in reesta$%ishing a good credit standing "ith its supp%ier& 9"eedy& and for this reason has sent the check and signed a note for the $a%ance.

"ECISIO! CASES REA"I!? A!" I!TERPRETI!? FI!A!CIAL STATE E!TS LO *

"ECISIO! CASE 6/( REA"I!? A!" I!TERPRETI!? WI!!EBA?O I!"1STRIESH FI!A!CIAL STATE E!TS

() 9he $a%ance in the 5%%o"ance for Dou$tfu% 5ccounts is found on the $a%ance sheet. 9he $a%ance is D120&000 at the end of 2002 and D244&000 at the end of 2001. 9he net rea%iAa$%e va%ue at the end of 2002 "as D2#&616&000& and at the end of 2001& D21&5 1&000. *) 5%%o"ance for dou$tfu% accounts Divided $y. :ross accounts receiva$%e 2002. D120&000 I D2#&616&000 2001. D244&000 I D21&5 1&000 >atio 3B+(B5* D 120&000 2#& 36&000 .4G 21&#15&000 1.1G 3B*-B5( D244&000

+) 9here are any num$er of possi$%e reasons "hy Cinne$ago 3ndustries might decide to decrease the estimated percentage unco%%ecti$%e. 3t may $e $ecause the company has tightened its credit terms and therefore customers are more %ike%y to pay their $i%%s. 5%ternative%y& they may fee% as if the economy is improving and it is more %ike%y that customers "i%% $e a$%e to pay. 2urthermore& "e do not kno" "hether they have $ased their $ad de$t e)pense and a decrease in the a%%o"ance for dou$tfu% accounts on a percentage of sa%es or on a percentage of accounts receiva$%e.

6<5=9E> 6 34?E;9ME49; 54D >E6E3?5@,E;

6/+2

LO *

"ECISIO! CASE 6/* CO PARI!? TWO CO PA!IES I! THE SA E I!"1STRE@ WI!!EBA?O I!"1STRIES A!" O!ACO COACH CORPORATIO!

()

Monoco 6oachBs 5%%o"ance for Dou$tfu% 5ccounts contains $a%ances of D ''&000 and D541&000 at the end of 2002 and 2001& respective%y. 9he net rea%iAa$%e va%ue of the receiva$%es are D116&64 &000 and D#2&##5&000 at the end of 2002 and 2001& respective%y.

*) 9he ratio of the 5%%o"ance for Dou$tfu% 5ccounts to :ross >eceiva$%es for Monaco 6oach 6orporation at the end of each of the t"o years is. 2002. D ''ED116&64 I D '' - D ''ED11 &446 - . G 2001. D541ED#2&##5 I D541 - D541ED#3&426 - .6G Cinne$ago 3ndustries ratios "ere .4G and 1.1G at the end of 2002 and 2001. 9he comparison of the ratios for the t"o companies indicates that in 2002& the receiva$%es of Cinne$ago 3ndustries "ere s%ight%y more co%%ecti$%e& i.e. the ratio of unco%%ecti$%e accounts to receiva$%es "as higher for Monaco 6oach. 3n contrast& Monaco 6oachBs receiva$%es "ere more co%%ecti$%e in 2001. +) 5n increase in trade receiva$%es cou%d $e due to a num$er of factors& such as an increase in sa%es& a %oosening of credit po%icies or difficu%ty in co%%ecting from customers.

,) 9he receiva$%es turnover ratios for the t"o companies for 2002 are found $y dividing net sa%es $y average accounts receiva$%e. Cinne$ago 3ndustries. D#25&26'EK0D2#&616 D#25&26'ED25&0'3.5 - 32.' times I D21&5 11E2L -

Monaco 6oach 6orporation. D1&222&6#'EK0D116&64 D1&222&6#'ED''& 66 - 12.3 times

I D#2&##51E2L -

7n the $asis of these ratios& it "ou%d appear that Cinne$ago 3ndustries turns its inventory more often than does Monaco 6oach. <o"ever& it must $e noted that on%y the account tit%ed R>eceiva$%esS "as inc%uded in the computation of Cinne$ago 3ndustries ratio. 9hey have a significant amount on their $a%ance sheet in the account RDea%er 2inancing >eceiva$%es.S

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LO (,6

"ECISIO! CASE 6/+ REA"I!? PEPSICO9S STATE E!T OF CASH FLOWS

(. =epsi6o spent D62 mi%%ion in 2002 to ac*uire short(term investments. 9his is significant%y %ess than in 2001 and 2000 "hen the company spent D2&53 mi%%ion and D4&'50 mi%%ion& respective%y. *) 9he company received D#33 mi%%ion from investments that matured in 2002. 9his is significant%y %ess than in 2001 and 2000 "hen =epsi6o received D2&0 # mi%%ion and D4&5#5 mi%%ion& respective%y. +) =epsi6o $oth spent %ess and received %ess for its investments in 2002 than in the t"o prior years. 2or many companies short(term investments are made "hen there is an e)cess of cash avai%a$%e that is not needed immediate%y. 3t may have $een that =epsi6o did not need to either invest id%e cash nor redeem short(term investments to generate cash to the e)tent that it found necessary in the t"o prior years. A>I!? FI!A!CIAL "ECISIO!S LO (,* 97. 2>7M. D59E.
"ECISIO! CASE 6/, LI01I"ITE

9he =resident of 24@ of ?erona <eights Ooe ;mith& ,oan 7fficer FEFEFF

;8@OE69. ,oan proposa%s 3 have revie"ed the %oan proposa%s recent%y su$mitted $y > Montague and O 6apu%et and "ou%d %ike to summariAe for you my findings. @ecause of %imited resources avai%a$%e for short(term %oans& my recommendation is that "e make a si)(month D10 mi%%ion %oan to O 6apu%et on%y. 9he tota% current asset positions of the t"o companies are identica%. Each has D33 mi%%ion in current assets. <o"ever& the composition of the current assets differs considera$%y $et"een the t"o companies. 7n the surface& > Montague may appear to $e stronger $ecause it has t"ice the amount of cash on hand that O 6apu%et does. <o"ever& cash is essentia%%y a non( earning asset& and 3 am skeptica% as to "hy > Montague fee%s it necessary to maintain that much cash on hand& and conse*uent%y& "hy it fee%s as if it needs to $orro" an additiona% D10 mi%%ion. 9he accounts receiva$%e for O 6apu%et is significant%y %arger than that for > Montague. 5ssuming that the estimates of $ad de$ts are reasona$%y re%ia$%e& > Montague has a $igger pro$%em "ith unco%%ecti$%es than does O 6apu%et. > Montague has an a%%o"ance that is 1E15& or 6.6 G of accounts receiva$%e& "hi%e O 6apu%etQs percentage is on%y 1E23& or 4.35G. 3n summary& 3 fee% that O 6apu%et is a $etter candidate at the present time for a %oan. 3 recommend that "e make a si)(month D10 mi%%ion %oan to O

6<5=9E> 6 34?E;9ME49; 54D >E6E3?5@,E;

6/+4

6apu%et at the current market rate of interest. =%ease ca%% if you need any further detai%s in connection "ith these t"o %oan re*uests. LO +,,
"ECISIO! CASE 6/- !OTES RECEIVABLE

() >egard%ess of "hich offer it accepts& Carren shou%d recogniAe D 5&000 from the sa%e of the %ot. 9his represents the cash e*uiva%ent se%%ing price $ecause it is the fair va%ue of the property according to a recent appraisa%. @oth $ui%ders "ou%d pay more than this amount for the %ot& $ut this is $ecause they "ou%d $e paying over a period of time. *) 2irst& the president is "rong to c%aim that the %oan to @ui%der @ "ou%d not invo%ve interest. @ecause @ui%der @ "ou%d pay more than fair va%ue for the %ot 0D 5&0001 over the ne)t year& there is an interest charge. 3t is imp%icitH that is& interest is $ui%t into the agreement. 9he sa%es manager is a%so "rong to c%aim that it doesnQt matter "hich offer is accepted $ecause $oth invo%ve the receipt of more than the appraised va%ue of the property. 7ne of the t"o offers is $etter if "e consider the time va%ue of money. @oth $ui%ders "ou%d pay D100&000 over the ne)t year. <o"ever& of this tota% amount& @ui%der @ "ou%d pay a higher amount immediate%y. D20&000 do"n as opposed to on%y D12&000 do"n from @ui%der 5. Carren shou%d accept the offer from @ui%der @.

ACCO1!TI!? A!" ETHICS@ WHAT WO1L" EO1 "OI LO (

"ECISIO! CASE 6/6 FAIR I!VEST E!TS AR>ET VAL1ES FOR

() 4et income under t"o different assumptions. CaD ;tock is c%assified as a trading security. 4et income $efore ad+ustment 8nrea%iAed %oss 4et income !10&000 shares CbD
F

400&000 0250&0001! D150&000

0D100 J D 51. D400&000

;tock is c%assified as an avai%a$%e(for(sa%e security. 4et income

05ny unrea%iAed gains or %osses on avai%a$%e(for(sa%e securities are reported as a component of stockho%dersB e*uity and are not reported on the income statement.1 *) 9he proper c%assification of the 6%ean 5ir stock is a matter of +udgment. :iven the circumstances& ho"ever& it seems most appropriate to c%assify the stock as trading securities. 9he case indicates that Tennedy regu%ar%y ho%ds stocks of various companies in a trading securities portfo%io. 9here is

6/,5

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nothing in the case to suggest that the o$+ective in ho%ding the 6%ean 5ir stock is any different. +) 9he treasurerBs advice presents the contro%%er "ith a c%ear ethica% di%emma. ;hou%d the proper c%assification of an investment for financia% reporting purposes $e dictated& or at %east inf%uenced& $y the effect of the c%assification on net incomeN 9he treasurer is accurate in stating that regard%ess of this decision& the stock "i%% $e reported on the $a%ance sheet at fair va%ue. <o"ever& accounting standards ca%% for the recognition of a %oss on the income statement for dec%ines in va%ue of trading securities. >eporting the security as avai%a$%e(for(sa%e fai%s to recogniAe the %oss on the income statement. 3f the investment is %isted as avai%a$%e(for(sa%e& "hen it shou%d $e c%assified as a trading security the information presented does not faithfu%%y represent "hat it c%aims to represent. @y misc%assifying the investment 0if there is no intent to ho%d the security past the norma% term for a trading security1& the company $enefits and outsiders are harmed. 9he companyBs performance appears to $e $etter "hen the securities are recorded as avai%a$%e( for sa%e. 9his method of reporting mis%eads outside investors and creditors and they may make incorrect investment and %ending decisions. Management %ooks %ike they are doing a $etter +o$ "hen the income is higher.

LO ,

"ECISIO! CASE 6/2 !OTES RECEIVABLE

() 9he suggestion for recording the sa%e of the property vio%ates t"o princip%es. the revenue recognition princip%e and the historica% cost princip%e. >evenue is recogniAed at the appropriate time& "hen a sa%e takes p%ace& $ut for the "rong amount. 9he fair va%ue of the property& D .5 mi%%ion& shou%d $e used as a measure of the amount of revenue to $e recogniAed& rather than the face va%ue of the note. *) 97. 2>7M. D59E. ?ice(president ;tudentBs name 12E31EFF

;8@OE69. ,and sa%e 9his is in response to your suggestion a$out the proper accounting for the recent sa%e of our 100(acre tract for the ne" shopping center. 3 have considered your recommendation that "e recogniAe revenue in the amount of D10 mi%%ion& "hich is e*uiva%ent to the D2 mi%%ion insta%%ments on the note over each of the ne)t five years. =%ease understand my interest in ma)imiAing profits to our shareho%ders "henever possi$%e. 9he suggested treatment for this sa%e& ho"ever& is a c%ear vio%ation of genera%%y accepted accounting princip%es. 9he reason for the vio%ation is straightfor"ard. D10 mi%%ion is not the va%ue of the asset "e sacrificed in e)change for the five(year note. 9he property "as recent%y

6<5=9E> 6 34?E;9ME49; 54D >E6E3?5@,E;

6/,(

appraised at a fair market va%ue of D .5 mi%%ion. 9he difference $et"een the D10 mi%%ion in face va%ue of the note and the D .5 mi%%ion fair va%ue of the property represents the interest "e "i%% earn over the ne)t five years as "e co%%ect on the note. Ce "i%%& in fact& recogniAe this difference of D2.5 mi%%ion as income& $ut on%y over the %ife of the note& and as interest income rather than sa%es revenue. 2or no" the amount of revenue "e shou%d recogniAe is D .5 mi%%ion. =%ease ca%% me at any time if you "ou%d %ike to discuss this matter further. FRO CO!CEPT TO PRACTICE 6)(

=epsi6oBs accounts and notes receiva$%e increased $y D3#' mi%%ion during 2002. 9hese receiva$%es are very significant& comprising 3'.5G of the companyBs tota% current assets at the end of 2002. 5ccounts receiva$%e arising from se%%ing to customers on an open account "hi%e notes receiva$%e resu%t from re*uiring customers to sign a promissory note to purchase products. FRO CO!CEPT TO PRACTICE 6)*

3n the note& Cinne$ago 3ndustries e)p%ains that the a%%o"ance account is $ased on previous %oss e)perience. 5%though it is not possi$%e for certain to te%% "hich method it uses& it is %ike%y that the company uses the percentage of accounts receiva$%e approach to estimate $ad de$ts. @ad de$ts e)pense is most %ike%y inc%uded in genera% and administrative e)penses on the income statement.

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