CHAPTER 8

RECEIVABLES
CLASS DISCUSSION QUESTIONS

401
1. Receivables are normally classified as (1) 5. The principle of separation of operations and
accounts receivable, (2) notes receivable, or accounting is violated. (Note to Instructors:
(3) other receivables. This weakness in internal control may permit
2. Transactions in which merchandise is sold embezzlement. For example, the accounts
or services are provided on credit generate receivable clerk may misappropriate cash
accounts receivable. receipts and cover the misappropriation by a
3. a. Current assets process called lapping. In lapping, the cash
b. Investments receipts from one account are taken and the
4. Examples of other receivables include cash received on a subsequent account is
interest receivable, taxes receivable, and used to cover the shortage. The receipts on
receivables from officers or employees. another account are then used to cover the
shortage in this latter customer’s account,
 etc. This lapping generally continues until shown separately in a note to the financial
the records are falsified to correct for the statements or in parentheses on the balance
shortage, the cash is returned by the clerk, sheet. Alternatively, the accounts receivable
or the embezzlement is discovered.) may be shown at the gross amount of
6. The allowance method
7. Contra asset, credit balance
8. The accounts receivable and allowance for
doubtful accounts may be reported at a net
amount of $759,900 ($883,150 – $123,250)
in the Current Assets section of the balance
sheet. In this case, the amount of the
allowance for doubtful accounts should be
$883,150 less the amount of the allowance for 10. An estimate based on analysis of
doubtful accounts of $123,250, thus yielding receivables provides the most accurate
net accounts receivable of $759,900. estimate of the current net realizable value.
9. 1. The percentage rate used is excessive 11. The advantages of a claim evidenced by a
in relationship to the volume of accounts note are (1) the debt is acknowledged, (2)
written off as uncollectible; hence, the the payment terms are specified, (3) it is a
balance in the allowance is excessive. stronger claim in the event of court action,
2. A substantial volume of old uncollectible and (4) it is usually more readily transferable
accounts is still being carried in the to a creditor in settlement of a debt or to a
accounts receivable account. bank for cash.
12. a. Ellsworth Company
 b. Notes Receivable Accounts Receivable 20,600
13. The interest will amount to $6,300 only if the Interest Revenue...... 206
note is payable one year from the date it ($20,600 × 30/360 × 12% = $206)
was created. The usual practice is to state 16. Current assets
the interest rate in terms of an annual rate,
rather than in terms of the period covered by
the note.
14. Debit Accounts Receivable
Credit Notes Receivable
Credit Interest Revenue
15. Cash.............................. 20,806
 EXERCISES

Ex. 8–1

a. Inappropriate. Since Fridley has a large number of credit sales supported by

promissory notes, a notes receivable ledger should be maintained. Failure to
maintain a subsidiary ledger when there are a significant number of notes
receivable transactions violates the internal control procedure that mandates
proofs and security. Maintaining a notes receivable ledger will allow Fridley to
operate more efficiently and will increase the chance that Fridley will detect
accounting errors related to the notes receivable. (The total of the accounts in
the notes receivable ledger must match the balance of notes receivable in the
general ledger.)
b. Inappropriate. The procedure of proper separation of duties is violated. The
accounts receivable clerk is responsible for too many related operations. The
clerk also has both custody of assets (cash receipts) and accounting
responsibilities for those assets.
c. Appropriate. The functions of maintaining the accounts receivable account in
the general ledger should be performed by someone other than the accounts
receivable clerk.
d. Appropriate. Salespersons should not be responsible for approving credit.
e. Appropriate. A promissory note is a formal credit instrument that is frequently
used for credit periods over 45 days.

406
Ex. 8–2

a. Hotel accounts and notes receivable:

$3,256,000 ÷ $75,796,000 = 4.3%
b. Casino accounts receivable:
$6,654,000 ÷ $26,334,000 = 25.3%
c. Casino operations experience greater bad debt risk than do hotel operations,
since it is difficult to control the creditworthiness of customers entering the
casino. In addition, individuals who may have adequate creditworthiness may
overextend themselves and lose more than they can afford if they get caught
up in the excitement of gambling.

Ex. 8–3

Account Due Date Number of Days Past Due

Bear Creek Body Shop June 8 53 (22 + 31)
First Auto July 3 28
Kaiser Repair March 20 133 (11 + 30 + 31 + 30 + 31)
Master’s Auto Repair May 15 77 (16 + 30 + 31)
Richter Auto June 18 43 (12 + 31)
Sabol’s April 12 110 (18 + 31 + 30 + 31)
Uptown Auto May 8 84 (23 + 30 + 31)
Westside Repair & Tow May 31 61 (30 + 31)

407
Ex. 8–4

a.
Customer Due Date Number of Days Past Due
Janzen Industries August 29 93 days (2 + 30 + 31 + 30)
Kuehn Company September 3 88 days (27 + 31 + 30)
Mauer Inc. October 21 40 days (10 + 30)
Pollack Company November 23 7 days
Simrill Company December 3 Not past due

b.
Aging of Accounts Receivable
November 30
Days Past Due
Not Past Over
Customer Balance Due 1–30 31–60 61–90 90
Aaker Brothers Inc. 2,000 2,000
Aitken Company 1,500 1,500
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Zollo Company 5,000 5,000
Subtotals 972,500 640,000 180,000 78,500 42,300 31,700
Janzen Industries 40,000 40,000
Keuhn Company 8,500 8,500
Mauer Inc. 18,000 18,000
Pollack Company 6,500 6,500
Simrill Company 7,500 7,500
Totals 1,053,000 647,500 186,500 96,500 50,800 71,700

408
Ex. 8–5

Days Past Due

Not Past Over
Balance Due 1–30 31–60 61–90 90
Total receivables $1,053,000 $647,500 $186,500 $96,500 $50,800 $71,700
Percentage
Uncollectible 1% 4% 8% 20% 40%
Allowances for
Doubtful Accounts $60,495 $6,475 $7,460 $7,720 $10,160 $28,680

Ex. 8–6

Nov. 30 Uncollectible Accounts Expense....................... 53,315*

Allowances for Doubtful Accounts............. 53,315
*$60,495 – $7,180 = $53,315

Ex. 8–7

Estimated Uncollectible Accounts

Age Interval Balance Percent Amount
Not past due................................ $450,000 2% $ 9,000
1–30 days past due.................... 110,000 4 4,400
31–60 days past due.................. 51,000 6 3,060
61–90 days past due.................. 12,500 20 2,500
91–180 days past due................ 7,500 60 4,500
Over 180 days past due............. 5,500 80 4,400
Total........................................ $636,500 $27,860

Ex. 8–8

2006
Dec. 31 Uncollectible Accounts Expense....................... 29,435*
Allowance for Doubtful Accounts................. 29,435
*$27,860 + $1,575 = $29,435

409
Ex. 8–9

a. $17,875 c. $35,750
b. $13,600 d. $41,450

Ex. 8–10

a. Allowance for Doubtful Accounts................................. 7,130

Accounts Receivable................................................. 7,130

b. Uncollectible Accounts Expense.................................. 7,130

Accounts Receivable................................................. 7,130

Ex. 8–11

Feb. 20 Accounts Receivable—Darlene Brogan............ 12,100

Sales................................................................ 12,100
20 Cost of Merchandise Sold................................... 7,260
Merchandise Inventory................................. 7,260

May 30 Cash....................................................................... 6,000

Accounts Receivable—Darlene Brogan..... 6,000

30 Allowance for Doubtful Accounts...................... 6,100

Accounts Receivable—Darlene Brogan..... 6,100

Aug. 3 Accounts Receivable—Darlene Brogan............ 6,100

Allowance for Doubtful Accounts............... 6,100
3 Cash....................................................................... 6,100
Accounts Receivable—Darlene Brogan..... 6,100

410
Ex. 8–12

July 6 Accounts Receivable—Dr. Jerry Jagers............ 18,500

Sales................................................................ 18,500
6 Cost of Merchandise Sold................................... 11,100
Merchandise Inventory................................. 11,100

Sept. 12 Cash....................................................................... 9,000

Accounts Receivable—Dr. Jerry Jagers..... 9,000

12 Uncollectible Accounts Expense....................... 9,500

Accounts Receivable—Dr. Jerry Jagers..... 9,500

Dec. 20 Accounts Receivable—Dr. Jerry Jagers............ 9,500

Uncollectible Accounts Expense................ 9,500
20 Cash....................................................................... 9,500
Accounts Receivable—Dr. Jerry Jagers..... 9,500

Ex. 8–13

$223,900 [$212,800 + $112,350 – ($4,050,000 × 2 1/2%)]

Ex. 8–14

a. $257,100 [$262,300 + $114,800 – ($4,800,000 × 2 1/2%)]

b. $5,900 Dr. [($101,250 – $112,350) + ($120,000 – $114,800)]

411
Ex. 8–15

Due Date Interest

a. Aug. 31 $120
b. Dec. 28 480
c. Nov. 30 250
d. May 5 150
e. July 19 100

Ex. 8–16

a. August 8
b. $24,480
c. (1) Notes Receivable....................................................... 24,000
Accounts Rec.—Magpie Interior Decorators.... 24,000
(2) Cash............................................................................ 24,480
Notes Receivable.................................................. 24,000
Interest Revenue.................................................. 480

Ex. 8–17

1. Sale on account.
2. Cost of merchandise sold for the sale on account.
3. A sales return or allowance.
4. Cost of merchandise returned.
5. Note received from customer on account.
6. Note dishonored and charged maturity value of note to customer’s account
receivable.
7. Payment received from customer for dishonored note plus interest earned
after due date.

412
Ex. 8–18

2005
Dec. 13 Notes Receivable.................................................. 25,000
Accounts Receivable—Visage Co............... 25,000
31 Interest Receivable............................................... 75*
Interest Revenue............................................ 75
31 Interest Revenue.................................................. 75
Income Summary........................................... 75

2006
Apr. 12 Cash....................................................................... 25,500
Notes Receivable........................................... 25,000
Interest Receivable........................................ 75
Interest Revenue............................................ 425

*$25,000 × 0.06 × 18/360 = $75

Ex. 8–19

July 8 Notes Receivable.................................................. 30,000.00

Accounts Receivable—Pennington Co....... 30,000.00

Oct. 6 Accounts Receivable—Pennington Co............. 30,600.00

Notes Receivable........................................... 30,000.00
Interest Revenue............................................ 600.00
Nov. 5 Cash....................................................................... 30,855.00
Accounts Receivable—Pennington Co....... 30,600.00
Interest Revenue............................................ 255.00*
*$30,600 × 0.10 × 30/360 = $255.00

413
Ex. 8–20

Mar. 1 Notes Receivable.................................................. 15,000

Accounts Receivable—Absaroka Co.......... 15,000
18 Notes Receivable.................................................. 12,000
Accounts Receivable—Sturgis Co.............. 12,000

Apr. 30 Accounts Receivable—Absaroka Co................. 15,125

Notes Receivable........................................... 15,000
Interest Revenue............................................ 125

June 16 Accounts Receivable—Sturgis Co..................... 12,270

Notes Receivable........................................... 12,000
Interest Revenue............................................ 270

July 11 Cash....................................................................... 15,367

Accounts Receivable—Absaroka Co.......... 15,125
Interest Revenue............................................ 242*
*$15,125 × 0.08 × 72/360 = $242

Oct. 12 Allowance for Doubtful Accounts...................... 12,270

Accounts Receivable—Sturgis Co.............. 12,270

414
Ex. 8–21

1. The interest receivable should be reported separately as a current asset. It

should not be deducted from notes receivable.
2. The allowance for doubtful accounts should be deducted from accounts
receivable.

A corrected partial balance sheet would be as follows:

PEMBROKE COMPANY
Balance Sheet
July 31, 2006
Assets
Current assets:
Cash............................................................................... $ 43,750
Notes receivable........................................................... 300,000
Accounts receivable.................................................... $576,180
Less allowance for doubtful accounts.............. 71,200 504,980
Interest receivable........................................................ 18,000

Ex. 8–22

a. 2003: 53.0 {$9,953,530 ÷ [($216,200 + $159,477) ÷ 2]}

2002: 44.8 {$9,518,231 ÷ [($159,477 + $265,515) ÷ 2]}

b. The accounts receivable turnover indicates an increase in the efficiency of

collecting accounts receivable by increasing from 44.8 to 53.0, a favorable
trend. Before reaching a more definitive conclusion, the ratios should be
compared with industry averages and similar firms.

415
Ex. 8–23

a. 2003: 7.9 days [$216,200 ÷ ($9,953,530 ÷ 365)]

2002: 6.1 days [$159,477 ÷ ($9,518,231 ÷ 365)]

b. The number of days’ sales in receivables indicates a decrease in the

efficiency of collecting accounts receivable by increasing from 6.1 days to 7.9
days, an unfavorable trend. Before reaching a more definitive conclusion, the
ratios should be compared with industry averages and similar firms.

Ex. 8–24

a. 2002: 108.2 {$9,363,000 ÷ [($79,000 + $94,000) ÷ 2]}

2001: 99.6 {$10,105,000 ÷ [($94,000 + $109,000) ÷ 2]}

b. 2002: 3.1 days [$79,000 ÷ ($9,363,000 ÷ 365)]

2001: 3.4 days [$94,000 ÷ ($10,105,000 ÷ 365)]

c. The accounts receivable turnover indicates a slight increase in the efficiency

of collecting accounts receivable by increasing from 99.6 to 108.2, a favorable
trend. The number of days’ sales in receivables decreased from 3.4 days to
3.1 days, also indicating a favorable trend in collections of receivables. Before
reaching a more definitive conclusion, both ratios should be compared with
those of past years, industry averages, and similar firms.

Note to Instructors: The high accounts receivable turnover and low number of
days’ sales in receivables suggests that most of The Limited’s sales are cash
sales, such as those from MasterCard and VISA.

416
Appendix Ex. 8–25

a. $20,300

b. 60 days

c. $271 ($20,300 × 0.08 × 60/360)

d. $20,029 ($20,300 – $271)

e. Cash.................................................................................. 20,029
Interest Revenue........................................................ 29
Notes Receivable....................................................... 20,000

Appendix Ex. 8–26

June 1 Notes Receivable.................................................. 60,000

Accounts Receivable—Rhodes Co............. 60,000

July 1 Cash....................................................................... 60,344*

Notes Receivable........................................... 60,000
Interest Revenue............................................ 344
*$60,800 – ($60,800 × 0.09 × 30/360) = $60,344
31 Accounts Receivable—Rhodes Co.................... 61,000
Cash................................................................ 61,000

Aug. 30 Cash....................................................................... 61,610*

Accounts Receivable—Rhodes Co............. 61,000
Interest Revenue ........................................... 610
*$61,000 + ($61,000 × 0.12 × 30/360) = $61,610

417
 PROBLEMS

Prob. 8–1A

2.
2006
Mar. 15 Cash....................................................................... 11,100
Accounts Receivable—Bimba Co................ 11,100

15 Allowance for Doubtful Accounts...................... 7,400

Accounts Receivable—Bimba Co................ 7,400

Apr. 16 Accounts Receivable—Tom Miner..................... 5,782

Allowance for Doubtful Accounts............... 5,782
16 Cash....................................................................... 5,782
Accounts Receivable—Tom Miner.............. 5,782

July 20 Allowance for Doubtful Accounts...................... 5,500

Accounts Receivable—Martz Co................. 5,500

Oct. 31 Accounts Receivable—Two Bit Saloon Co....... 6,100

Allowance for Doubtful Accounts............... 6,100
31 Cash....................................................................... 6,100
Accounts Receivable—Two Bit Saloon Co.
6,100

Dec. 31 Allowance for Doubtful Accounts...................... 9,250

Accounts Receivable—Asche Co................ 950
Dorsch Co.............. 4,600
Krebs Distributors. 2,500
J. J. Levi................. 1,200
31 Uncollectible Accounts Expense....................... 11,918
Allowance for Doubtful Accounts............... 11,918
31 Income Summary.................................................. 11,918
Uncollectible Accounts Expense................ 11,918

418
Prob. 8–1A Concluded

1. and 2.
Allowance for Doubtful Accounts 115
Balance
Date Item Dr. Cr. Dr. Cr.

2006
Jan. 1 Balance.................... ............. ............. ............. 12,050
Mar. 15 .................................. 7,400 ............. ............. 4,650
Apr. 16 .................................. ............. 5,782 ............. 10,432
July 20 .................................. 5,500 ............. ............. 4,932
Oct. 31 .................................. ............. 6,100 ............. 11,032
Dec. 31 .................................. 9,250 ............. ............. 1,782
31 .................................. ............. 11,918 ............. 13,700

Income Summary 313

2006
Dec. 31 .................................. 11,918 ............. 11,918 .............

Uncollectible Accounts Expense 718

2006
Dec. 31 .................................. 11,918 ............. 11,918 .............
31 .................................. ............. 11,918 — —

3. $522,050 ($535,750 – $13,700)

4. a. $15,500 ($3,100,000 × 0.005)

b. $17,282 ($15,500 + $1,782)
c. $518,468 ($535,750 – $17,282)

419
Prob. 8–2A

1.
Customer Due Date Number of Days Past Due
Able Sports & Flies June 15, 2006 199 days (15 + 31 + 31 + 30 + 31 + 30 + 31)
Red Tag Sporting Goods July 28, 2006 156 days (3 + 31 + 30 + 31 + 30 + 31)
Highlite Flies Sept. 11, 2006 111 days (19 + 31 + 30 + 31)
Midge Co. Sept. 30, 2006 92 days (31 + 30 + 31)
Snake River Outfitters Oct. 7, 2006 85 days (24 + 30 + 31)
Pheasant Tail Sports Oct. 27, 2006 65 days (4 + 30 + 31)
Big Sky Sports Oct. 30, 2006 62 days (1 + 30 + 31)
Ross Sports Nov. 18, 2006 43 days (12 + 31)
Sawyer’s Pheasant Tail Nov. 26, 2006 35 days (4 + 31)
Tent Caddis Outfitters Nov. 29, 2006 32 days
Wulff Company Dec. 10, 2006 21 days
Zug Bug Sports Jan. 6, 2007 Not past due

420
Prob. 8–2A Concluded

2. and 3.
Aging of Accounts Receivable
December 31, 2006
Days Past Due
Not Past Over
Customer Balance Due 1–30 31–60 61–90 91–120 120
Alpha Fishery 5,000 5,000
Brown Trout Sports 6,400 6,400
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Zinger Sports 2,900 2,900
Subtotals 580,000 248,600 147,250 98,750 33,300 29,950 22,150
Able Sports & Flies 3,500 3,500
Red Tag Sporting Goods 4,000 4,000
Highlite Flies 2,500 2,500
Midge Co. 3,100 3,100
Snake River Outfitters 4,500 4,500
Pheasant Tail Sports 1,600 1,600
Big Sky Sports 2,000 2,000
Ross Sports 500 500
Sawyer’s Pheasant Tail 2,800 2,800
Tent Caddis Outfitters 3,500 3,500
Wulff Company 1,000 1,000
Zug Bug Sports 6,200 6,200
Totals 615,200 254,800 148,250 105,550 41,400 35,550 29,650
Percentage Uncollectible 1% 4% 8% 25% 40% 80%
Estimate of Doubtful
Accounts 65,212 2,548 5,930 8,444 10,350 14,220 23,720

4. Uncollectible Accounts Expense.................................... 68,012*

Allowance for Doubtful Accounts............................. 68,012
*$65,212 + $2,800

421
Prob. 8–3A

1.
Uncollectible Accounts Expense
Increase Balance of
Expense Expense (Decrease) Allowance
Actually Based on in Amount Account,
Year Reported Estimate of Expense End of Year
1st $3,500 $ 6,375 $2,875 $ 2,875
2nd 3,250 7,200 3,950 6,825
3rd 6,300 9,000 2,700 9,525
4th 8,400 13,500 5,100 14,625

2. Yes. The actual write-offs of accounts originating in the first two years are
reasonably close to the expense that would have been charged to those years
on the basis of 3/4% of sales. The total write-off of receivables originating in
the first year amounted to $6,200 ($3,500 + $1,900 + $800), as compared with
uncollectible accounts expense, based on the percentage of sales, of $6,375.
For the second year, the comparable amounts were $7,650 ($1,350 + $4,500 +
$1,800) and $7,200.

422
Prob. 8–4A

1.
(a) (b)
Note Due Date Interest Due at Maturity

(1) May 6 $240

(2) July 18 126
(3) Dec. 28 204
(4) Dec. 30 405
(5) Jan. 18 120
(6) Jan. 22 120

2.
Dec. 28 Accounts Receivable........................................... 10,404
Notes Receivable........................................... 10,200
Interest Revenue............................................ 204

3.
Dec. 31 Interest Receivable............................................... 116
Interest Revenue............................................ 116
$12,000 × 0.06 × 42/360 = $ 84
$16,000 × 0.09 × 8/360 = 32
Total $116

4.
Jan. 18 Cash....................................................................... 12,120
Notes Receivable........................................... 12,000
Interest Receivable........................................ 84
Interest Revenue............................................ 36
22 Cash....................................................................... 16,120
Notes Receivable........................................... 16,000
Interest Receivable........................................ 32
Interest Revenue............................................ 88

423
Prob. 8–5A

June 4 Notes Receivable.................................................. 18,800

Accounts Receivable.................................... 18,800

July 15 Notes Receivable.................................................. 27,000

Accounts Receivable.................................... 27,000

Aug. 3 Cash....................................................................... 19,082

Notes Receivable........................................... 18,800
Interest Revenue............................................ 282

Sept. 1 Notes Receivable.................................................. 24,000

Accounts Receivable.................................... 24,000

Oct. 31 Cash....................................................................... 24,360

Notes Receivable........................................... 24,000
Interest Revenue............................................ 360

Nov. 5 Notes Receivable.................................................. 9,600

Accounts Receivable.................................... 9,600
12 Cash....................................................................... 27,900
Notes Receivable........................................... 27,000
Interest Revenue............................................ 900
30 Notes Receivable.................................................. 15,000
Accounts Receivable.................................... 15,000

Dec. 5 Cash....................................................................... 9,656

Notes Receivable........................................... 9,600
Interest Revenue............................................ 56
30 Cash....................................................................... 15,125
Notes Receivable........................................... 15,000
Interest Revenue............................................ 125

424
Prob. 8–6A

Jan. 10 Notes Receivable.................................................. 12,000

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

Feb. 4 Accounts Receivable—Emerson and Son........ 24,000

Sales................................................................ 24,000
4 Cost of Merchandise Sold................................... 14,400
Merchandise Inventory................................. 14,400
12 Accounts Receivable—Gwyn Co........................ 25,000
Sales................................................................ 25,000
12 Cost of Merchandise Sold................................... 15,000
Merchandise Inventory................................. 15,000

Mar. 6 Notes Receivable.................................................. 24,000

Accounts Receivable—Emerson and Son.. 24,000
14 Notes Receivable.................................................. 25,000
Accounts Receivable—Gwyn Co................. 25,000

Apr. 10 Notes Receivable.................................................. 12,000

Cash....................................................................... 240
Notes Receivable........................................... 12,000
Interest Revenue............................................ 240

May 5 Cash....................................................................... 24,240

Notes Receivable........................................... 24,000
Interest Revenue............................................ 240
13 Accounts Receivable—Gwyn Co........................ 25,500
Notes Receivable........................................... 25,000
Interest Revenue............................................ 500

June 12 Cash....................................................................... 25,755

Accounts Receivable—Gwyn Co................. 25,500
Interest Revenue............................................ 255
($25,500 × 0.12 × 30/360 = $255)

July 9 Cash....................................................................... 12,270

Notes Receivable........................................... 12,000
Interest Revenue............................................ 270

425
Prob. 8–6A Continued

Aug. 24 Accounts Receivable—Haggerty Co.................. 10,200

Sales................................................................ 10,200
24 Cost of Merchandise Sold................................... 6,000
Merchandise Inventory................................. 6,000

Sept. 3 Cash....................................................................... 10,098

Sales Discounts.................................................... 102
Accounts Receivable—Haggerty Co........... 10,200

426
Prob. 8–6A Continued

This solution is applicable only if the P.A.S.S. Software that accompanies the
text is used.

RIMROCK CO.
Income Statement
For the Year Ended December 31, 20—
Operating revenue:
Sales................................................................. $219,200 105.44
Less: Sales returns and allowance............. (10,000) (4.81)
Sales discounts.................................. (1,302) (0.63)
Net sales................................................................. $207,898 100.00
Cost of merchandise sold..................................... 84,413 40.60
Gross profit............................................................ $123,485 59.40
Operating expenses:
Sales salaries expense.................................. $ 40,500 19.48
Advertising expense...................................... 8,000 3.85
Miscellaneous selling expense..................... 500 0.24
Office salaries expense................................. 16,500 7.94
Rent expense.................................................. 12,250 5.89
Miscellaneous administrative expense........ 200 0.10
Total operating expenses...................... 77,950 37.49
Net income from operations................................. $ 45,535 21.90
Other revenue:
Interest revenue.............................................. 1,505 0.72
Net income.............................................................. $ 47,040 22.63

427
Prob. 8–6A Concluded

This solution is applicable only if the P.A.S.S. Software that accompanies the
text is used.

RIMROCK CO.
Statement of Owner’s Equity
For the Year Ended December 31, 20—
Sophia Dubra, capital (beg. of year)................................. $100,000
Net income for the year...................................................... $47,040
Less: Withdrawals............................................................... 30,000
Increase in capital............................................................... 17,040
Sophia Dubra, capital (end of year).................................. $117,040

RIMROCK CO.
Balance Sheet
December 31, 20—
Assets
Cash........................................................................................................ $ 98,940
Accounts receivable............................................................................. 24,500
Merchandise inventory......................................................................... 28,600
Total assets...................................................................................... $152,040

Liabilities
Accounts payable................................................................................. $ 35,000

Owner's Equity
Sophia Dubra, capital........................................................................... 117,040
Total liabilities and owner’s equity............................................... $152,040

428
Prob. 8–1B

2.
2006
Feb. 24 Accounts Receivable—Dina Ibis........................ 1,025
Allowance for Doubtful Accounts............... 1,025
24 Cash....................................................................... 1,025
Accounts Receivable—Dina Ibis................. 1,025

Mar. 29 Allowance for Doubtful Accounts...................... 7,500

Accounts Receivable—Hoxsey Co.............. 7,500

July 10 Cash....................................................................... 4,800

Accounts Receivable—Foust Co................. 4,800

10 Allowance for Doubtful Accounts...................... 7,200

Accounts Receivable—Foust Co................. 7,200

Sept. 8 Accounts Receivable—Louis Sabo.................... 1,200

Allowance for Doubtful Accounts............... 1,200
8 Cash....................................................................... 1,200
Accounts Receivable—Louis Sabo............. 1,200

Dec. 31 Allowance for Doubtful Accounts...................... 20,905

Accounts Receivable—Emery Co................ 8,050
Darigold Co............ 6,260
Zheng Furniture..... 3,775
Carey Wenzel......... 2,820
31 Uncollectible Accounts Expense....................... 35,380
Allowance for Doubtful Accounts............... 35,380
31 Income Summary.................................................. 35,380
Uncollectible Accounts Expense................ 35,380

429
Prob. 8–1B Concluded

1. and 2.
Allowance for Doubtful Accounts 115
Balance
Date Item Dr. Cr. Dr. Cr.

2006
Jan. 1 Balance.................... ............. ............. ............. 28,500
Feb. 24 .................................. ............. 1,025 ............. 29,525
Mar. 29 .................................. 7,500 ............. ............. 22,025
July 10 .................................. 7,200 ............. ............. 14,825
Sept. 8 .................................. ............. 1,200 ............. 16,025
Dec. 31 .................................. 20,905 ............. 4,880 .............
31 .................................. ............. 35,380 ............. 30,500

Income Summary 313

2006
Dec. 31 .................................. 35,380 ............. 35,380 .............

Uncollectible Accounts Expense 718

2006
Dec. 31 .................................. 35,380 ............. 35,380 .............
31 .................................. ............. 35,380 — —

3. $857,050 ($887,550 – $30,500)

4. a. $31,875 ($12,750,000 × 0.0025)

b. $26,995 ($31,875 – $4,880)
c. $860,555 ($887,550 – $26,995)

430
Prob. 8–2B

1.
Customer Due Date Number of Days Past Due
Allison’s Uniquely Yours July 6, 2006 178 days (25 + 31 + 30 + 31 + 30 + 31)
Western Designs Aug. 10, 2006 143 days (21 + 30 + 31 + 30 + 31)
Treat’s Sept. 6, 2006 116 days (24 + 31 + 30 + 31)
Nicole’s Beauty Store Sept. 29, 2006 93 days (1 + 31 + 30 + 31)
Ginburg Supreme Oct. 10, 2006 82 days (21 + 30 + 31)
Jeremy’s Hair Products Oct. 20, 2006 72 days (11 + 30 + 31)
Hairy’s Hair Care Oct. 31, 2006 61 days (30 + 31)
Southern Images Nov. 18, 2006 43 days (12 + 31)
Lopez’s Blond Bombs Nov. 23, 2006 38 days (7 + 31)
Josset Ritz Nov. 30, 2006 31 days
Cool Designs Dec. 4, 2006 27 days
Buttram Images Jan. 3, 2007 Not past due

431
Prob. 8–2B Concluded

2. and 3.
Aging of Accounts Receivable
December 31, 2006
Days Past Due
Not Past Over
Customer Balance Due 1–30 31–60 61–90 91–120 120
Adams Beauty 8,000 8,000
Barkell Wigs 7,500 7,500
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Zimmer’s Beauty 2,900 2,900
Subtotals 880,000 498,600 197,250 88,750 43,300 29,950 22,150
Allison’s Uniquely Yours 1,000 1,000
Western Designs 2,500 2,500
Treat’s 1,800 1,800
Nicole’s Beauty Store 4,000 4,000
Ginburg Supreme 1,500 1,500
Jeremy’s Hair Products 600 600
Hairy’s Hair Care 2,000 2,000
Southern Images 1,200 1,200
Lopez’s Blond Bombs 1,800 1,800
Josset Ritz 3,500 3,500
Cool Designs 1,000 1,000
Buttram Images 5,200 5,200
Totals 906,100 503,800 198,250 95,250 47,400 35,750 25,650
Percentage Uncollectible 1% 4% 6% 15% 30% 70%
Estimate of Doubtful
Accounts 54,473 5,038 7,930 5,715 7,110 10,725 17,955

4. Uncollectible Accounts Expense.................................... 46,123*

Allowance for Doubtful Accounts............................. 46,123

*$54,473 – $8,350

432
Prob. 8–3B

1.
Uncollectible Accounts Expense
Increase Balance of
Expense Expense (Decrease) Allowance
Actually Based on in Amount Account,
Year Reported Estimate of Expense End of Year
1st $1,000 $ 3,250 $2,250 $2,250
2nd 2,650 4,600 1,950 4,200
3rd 6,200 5,250 (950) 3,250
4th 9,150 11,250 2,100 5,350

2. Yes. The actual write-offs of accounts originating in the first two years are
reasonably close to the expense that would have been charged to those years
on the basis of 1/2% of sales. The total write-off of receivables originating in
the first year amounted to $3,550 ($1,000 + $750 + $1,800), as compared with
uncollectible accounts expense, based on the percentage of sales, of $3,250.
For the second year, the comparable amounts were $5,200 ($1,900 + $1,400 +
$1,900) and $4,600.

433
Prob. 8–4B

1.
(a) (b)
Note Due Date Interest Due at Maturity

(1) July 7 $180

(2) Sept. 8 300
(3) Nov. 6 540
(4) Dec. 15 350
(5) Jan. 22 270
(6) Feb. 16 960

2.
Nov. 6 Accounts Receivable........................................... 36,540
Notes Receivable........................................... 36,000
Interest Revenue............................................ 540

3.
Dec. 31 Interest Receivable............................................... 379
Interest Revenue............................................ 379
$18,000 × 0.09 × 38/360 = $ 171
$48,000 × 0.12 × 13/360 = 208
Total $ 379

4.
Jan. 22 Cash....................................................................... 18,270
Notes Receivable........................................... 18,000
Interest Receivable........................................ 171
Interest Revenue............................................ 99
Feb. 16 Cash....................................................................... 48,960
Notes Receivable........................................... 48,000
Interest Receivable........................................ 208
Interest Revenue............................................ 752

434
Prob. 8–5B

Mar. 3 Notes Receivable.................................................. 14,000

Accounts Receivable.................................... 14,000
21 Notes Receivable.................................................. 9,500
Accounts Receivable.................................... 9,500

May 2 Cash....................................................................... 14,210

Notes Receivable........................................... 14,000
Interest Revenue............................................ 210
16 Notes Receivable.................................................. 40,000
Accounts Receivable.................................... 40,000
31 Notes Receivable.................................................. 6,000
Accounts Receivable.................................... 6,000

June 19 Cash....................................................................... 9,690

Notes Receivable........................................... 9,500
Interest Revenue............................................ 190
30 Cash....................................................................... 6,040
Notes Receivable........................................... 6,000
Interest Revenue............................................ 40

July 1 Notes Receivable.................................................. 12,000

Accounts Receivable.................................... 12,000
31 Cash....................................................................... 12,120
Notes Receivable........................................... 12,000
Interest Revenue............................................ 120

Aug. 14 Cash....................................................................... 40,700

Notes Receivable........................................... 40,000
Interest Revenue............................................ 700

435
Prob. 8–6B

20—
Jan. 6 Accounts Receivable—Alta Co........................... 10,500
Sales................................................................ 10,500
6 Cost of Merchandise Sold................................... 6,300
Merchandise Inventory................................. 6,300

Mar. 9 Notes Receivable.................................................. 10,500

Accounts Receivable—Alta Co. .................. 10,500

May 8 Cash....................................................................... 10,640

Notes Receivable........................................... 10,500
Interest Revenue............................................ 140

June 1 Accounts Receivable—Witmer’s........................ 8,000

Sales................................................................ 8,000
1 Cost of Merchandise Sold................................... 4,800
Merchandise Inventory................................. 4,800
5 Notes Receivable.................................................. 11,000
Cash................................................................ 11,000
11 Cash....................................................................... 7,840
Sales Discounts.................................................... 160
Accounts Receivable—Witmer’s................. 8,000

July 5 Notes Receivable.................................................. 11,000

Cash....................................................................... 55
Notes Receivable........................................... 11,000
Interest Revenue............................................ 55

Sept. 3 Cash....................................................................... 11,165

Notes Receivable........................................... 11,000
Interest Revenue............................................ 165
8 Accounts Receivable—Rochin Co. ................... 10,000
Sales................................................................ 10,000
8 Cost of Merchandise Sold................................... 6,000
Merchandise Inventory................................. 6,000

436
Prob. 8–6B Continued

Oct. 8 Notes Receivable.................................................. 10,000

Accounts Receivable—Rochin Co.............. 10,000

Dec. 7 Accounts Receivable—Rochin Co. ................... 10,100

Notes Receivable........................................... 10,000
Interest Revenue............................................ 100
28 Cash....................................................................... 10,153
Accounts Receivable—Rochin Co.............. 10,100
Interest Revenue............................................ 53
($10,100 × 0.09 × 21/360 = $53)

437
Prob. 8–6B Continued

This solution is applicable only if the P.A.S.S. Software that accompanies the
text is used.

WESTPHAL CO.
Income Statement
For the Year Ended December 31, 20—
Operating revenue:
Sales................................................................. $203,025 100.08
Less: Sales discounts.................................... (160.00) (0.08)
Net sales................................................................. $202,865 100.00
Cost of merchandise sold..................................... 54,100 26.67
Gross profit............................................................ $148,765 73.33
Operating expenses:
Sales salaries expense.................................. $ 45,500 22.43
Advertising expense...................................... 7,500 3.70
Miscellaneous selling expense..................... 1,250 0.62
Office salaries expense................................. 26,500 13.06
Rent expense.................................................. 25,500 12.57
Miscellaneous administrative expense........ 225 0.11
Total operating expenses...................... 106,475 52.49
Net income from operations................................. $ 42,290 20.85
Other revenue:
Interest revenue.............................................. 513 0.25
Net income.............................................................. $ 42,803 21.10

438
Prob. 8–6B Concluded

This solution is applicable only if the P.A.S.S. Software that accompanies the
text is used.

WESTPHAL CO.
Statement of Owner’s Equity
For the Year Ended December 31, 20—
Andrea Young, capital (beg. of year)................................ $ 75,779
Net income........................................................................... $42,803
Less: Withdrawals............................................................... 31,000
Increase in capital............................................................... 11,803
Andrea Young, capital (end of year)................................. $ 87,582

WESTPHAL CO.
Balance Sheet
December 31, 20—
Assets
Cash.................................................................................................... $ 77,182
Accounts receivable......................................................................... 9,500
Merchandise inventory..................................................................... 10,900
Total assets................................................................................ $ 97,582

Liabilities
Accounts payable............................................................................. $ 10,000

Owner's Equity
Andrea Young, capital...................................................................... 87,582
Total liabilities and equity........................................................ $ 97,582

439
 SPECIAL ACTIVITIES

Activity 8–1

By computing interest using a 365-day year for depository accounts (payables),

Precilla is minimizing interest expense to the bank. By computing interest using
a 360-day year for loans (receivables), Precilla is maximizing interest revenue to
the bank. However, federal legislation (Truth in Lending Act) requires banks to
compute interest on a 365-day year. Hence, Precilla is behaving in an
unprofessional manner.

Activity 8–2

Because of the size and number of customers’ accounts, it is probably

unreasonable for Stonecipher to not allow credit to contractors and to require
cash or credit card payment. To do so, as Bruce points out, would probably cost
Stonecipher most of its contractor customers. Thus, Stonecipher is faced with
having to allow credit to its contracting customers.
Many building contractors obtain construction loans from local financial
institutions. They are then allowed to draw upon (withdraw) these funds as
portions of the construction are completed. Most of the time, a representative of
the financial institution granting the construction loan must approve the
disbursement based upon an observation of the work to verify that it was
actually performed. Building contractors are, of course, charged interest on the
balances withdrawn from their construction loans. Thus, building contractors
have an incentive to delay payment of construction bills as long as possible. At
the same time, it is unreasonable to expect payment from the contractors until
the representative of the financial institution has approved payment. Thus, it is
probably reasonable to expect that accounts will remain open for 30–45 days
after the contractor has received the materials.
The primary problem that Stonecipher is facing is that some contractors are
apparently abusing Stonecipher’s liberal credit policy. One alternative would be
for Stonecipher to allow a discount for payment within 30 days. For example,
Stonecipher might allow a 2% discount if the bill is paid within 30 days. Credit
then might be discontinued for any contractor with a bill outstanding more than
60 days. This would provide the contractors an incentive to pay their bills early.
That is, a 2% discount for payment 30 days early (the bill must be paid within 60
days) is equivalent to an annual interest rate of 24% (2% × 360/30). This discount

440
Activity 8–2 Concluded

rate would easily exceed most interest rates on construction loans. Such a
payment policy would give contractors a “positive” incentive to pay early. Before
initiating such a policy, Stonecipher should consider its effect on profits. That is,
does the discount offered compensate for the reduction in the uncollectible
accounts expense? Also, earlier payments would allow Stonecipher to earn
interest (profit) on the monies received from the contractors.
An alternative approach would be to charge contractors interest on past-due
accounts. For example, Stonecipher might charge accounts over 60 days past
due interest at 1 1/2% per month (equivalent to approximately 18% per year). This
approach would be more of a “negative” approach to motivating contractors to
pay earlier.
Finally, yet another approach would be to stop extending credit to contractors
who routinely abuse Stonecipher’s liberal credit policy. However, this approach
is more extreme than the preceding two approaches. It might be more
appropriate for contractors who continue to abuse the credit policy after one of
the preceding approaches has been implemented.
Regardless of the approach chosen, exceptions probably should be allowed for
good customers who suffer unusual situations. For example, a contractor’s bill
might be past due because of unforeseen construction problems, such as bad
weather, disagreement on contract specifications, etc.

441
Activity 8–3

Pam’s first suggestion of recording only $42,000 of uncollectible accounts

expense to increase the allowance for doubtful accounts to $60,000 is
acceptable. Accounting standards allow for recording the minimum estimate for
the allowance account if a range of estimates is provided, with no one estimate
within the range better than any other.
Pam’s second suggestion of paying $50,000 of her receivable to decrease it to
$20,000 so that it can be reported as part of accounts receivable is improper.
Pam’s receivable is $70,000 as of December 31, 2005, and therefore a payment in
January 2006 will not decrease the amount of the receivable as of December 31,
2005.
A more difficult issue is whether the receivable should be reported as a current
asset. Pam made no payments during 2005. Instead, the amount of the receivable
actually increased by $50,000. This would suggest that the receivable is a
noncurrent asset. However, the fact that Pam agrees to pay $50,000 next week
would suggest that the receivable is current.
Eric should probably respond to Pam by arguing that (1) the receivable has to be
reported as $70,000 on the December 31, 2005 balance sheet; (2) the receivable is
too large to be reported as an account receivable but must be reported as an
“other receivable” or “officer receivable”; and (3) the receivable can be reported
as a current receivable as long as Pam commits to a payment schedule that will
pay off the receivable within the next year. Pam may resist these suggestions. In
this case, Eric should point out that the bank will be receiving the financial
statements, and to distort or file false statements with the bank is fraudulent.
That is, Pam has no other choice in this matter. If Pam refuses, then Eric should
disassociate himself from the financial statements and probably resign from the
company.
Note to Instructors: Consider pointing out to students that if Eric agreed with
Pam’s treatment of the receivable, he could be considered an accomplice to
fraud.

442
Activity 8–4

1.
a. b.
Addition to Allowance Accounts Written
Year for Doubtful Accounts Off During Year

2003 $17,000 $ 9,900 ($17,000 – $7,100)

2004 17,500 11,400 ($7,100 + $17,500 – $13,200)
2005 17,750 12,050 ($13,200 + $17,750 – $18,900)
2006 18,125 9,675 ($18,900 + $18,125 – $27,350)
2. a. The estimate of 1/4 of 1% of credit sales may be too large, since the
allowance for doubtful accounts has steadily increased each year. The
increasing balance of the allowance for doubtful accounts may also be
due to the failure to write off a large number of uncollectible accounts.
These possibilities could be evaluated by examining the accounts in the
subsidiary ledger for collectibility and comparing the result with the
balance in the allowance for doubtful accounts.
Note to Instructors: Since the amount of credit sales has been fairly uniform over
the years, the increase cannot be explained by an expanding volume of sales.
b. The balance of Allowance for Doubtful Accounts that should exist at
December 31, 2006, can only be determined after all attempts have been
made to collect the receivables on hand at December 31, 2006. However,
the account balances at December 31, 2006, could be analyzed, perhaps
using an aging schedule, to determine a reasonable amount of allowance
and to determine accounts that should be written off. Also, past write-offs
of uncollectible accounts could be analyzed in depth in order to develop a
reasonable percentage for future adjusting entries, based on past history.
Caution, however, must be exercised in using historical percentages.
Specifically, inquiries should be made to determine whether any
significant changes between prior years and the current year may have
occurred, which might reduce the accuracy of the historical data. For
example, a recent change in credit-granting policies or changes in the
general economy (entering a recessionary period, for example) could
reduce the usefulness of analyzing historical data.
Based on the preceding analyses, a recommendation to decrease the
annual rate charged as an expense may be in order (perhaps Filet Co. is
experiencing a lower rate of uncollectibles than is the industry average),
or perhaps a change to the “estimate based on analysis of receivables”
method may be appropriate.

443
Activity 8–5

Note to Instructors: The purpose of this activity is to familiarize students with the
factors that a bank or a business uses in deciding to grant credit to a customer.

Activity 8–6

Note to Instructors: The purpose of this activity is to familiarize students with the
financial information that is available online and to calculate and compare the
accounts receivable turnover for two real companies, based on that information.

Activity 8–7

1. 2002: 25.7 {$1,357,421 ÷ [($59,014 + $46,736) ÷ 2]}

2001: 23.5 {$1,244,928 ÷ [($46,736 + $59,211) ÷ 2]}

2. 2002: 15.9 days [$59,014 ÷ ($1,357,421 ÷ 365)]

2001: 13.7 days [$46,736 ÷ ($1,244,928 ÷ 365)]

3. The accounts receivable turnover indicates an increase in the efficiency of

collecting accounts receivable by increasing from 23.5 to 25.7, a favorable
trend. However, the days’ sales in receivables also increased from 13.7 days
to 15.9 days, an unfavorable trend. Before reaching a more definitive
conclusion, the ratios should be compared with industry averages and similar
firms.

4. Earthlink’s accounts receivable turnover would normally be higher than that

of a typical manufacturing company such as Boeing or Kellogg. This is
because Earthlink is an Internet Service Provider (ISP) that bills its customers
monthly for Internet service access fees. The monthly bills are normally
charged to customers’ MasterCard, VISA, or American Express cards. In
contrast, the customers of Boeing and Kellogg are other businesses who pay
their accounts receivable on a less timely basis. For a recent year, the
accounts receivable turnover ratios for Kellogg and Boeing were 10.2 and
10.4, respectively.

444
Activity 8–8

1. Note to Instructors: The turnover ratios will vary over time. For a recent year,
the various turnover ratios (rounded to one decimal place) were as follows:

Alcoa 8.9
AutoZone 251.8
Barnes & Noble 60.6
Coca-Cola 10.7
Delta Air Lines 37.7
Gillette 6.1
Home Depot 58.7
IBM 9.4
Kroger 66.3
Maytag Corporation 7.0
Wal-Mart 109.3
Whirlpool 7.1

2. Based upon (1), the companies can be categorized as follows:

Accounts Receivable Turnover Ratio

Below 15 Above 15
Alcoa AutoZone
Coca-Cola Barnes & Noble
Gillette Delta Air Lines
IBM Home Depot
Maytag Corporation Kroger
Whirlpool Wal-Mart

3. The companies with accounts receivable turnover ratios above 15 are all
companies selling directly to individual consumers. In contrast, companies
with turnover ratios below 15 all sell to other businesses. Generally, we would
expect companies selling directly to consumers to have higher turnover
ratios since many customers will charge their purchases on credit cards that
will be collected within a month. In contrast, companies selling to other
businesses normally allow a credit period of at least 30 days or longer.

445