Chapter 7

Reporting and Analyzing Receivables

QUESTIONS
1. When customers use credit cards, the selling companies can avoid having to directly evaluate
the credit standing of their customers. They also avoid the risk of bad debts and often are paid
cash from the credit card company more quickly than if customers were granted credit directly.
Moreover, they hope to increase sales, and net income, from the added convenience to buyers.
2. Revenues and expenses usually are not matched under the direct write-off method because
the revenues recorded from the uncollectible accounts often appear on the income statement
of one period while the bad debts expenses of those revenues appear on the income statement
of a later period when the account(s) is known to be uncollectible.
3. The accounting constraint of materiality suggests that the requirements of accounting
standards can be ignored if their effect on the financial statements is unimportant to their
users’ business decisions.
4. Writing off a bad debt against the Allowance account does not reduce the estimated realizable
value of a company’s accounts receivable because the write-off reduces the balances of both
Accounts Receivable and the Allowance for Doubtful Accounts by equal amounts. This means
the difference between them (called estimated realizable value) remains the same.
5. The adjusted balances of Bad Debts Expense and Allowance for Doubtful Accounts are
virtually never equal because the expense amount reflects only the events of the current
period, and the allowance is the accumulated result of events over a number of prior periods.
The only way that they could be equal would be if write-offs during the prior period exactly
equaled the beginning balance of the Allowance account.
6. Creditors prefer notes receivable to accounts receivable because the notes can be more easily
converted into cash before they are due by discounting (or selling) them to a financial
institution. Also, a note represents a clear written acknowledgment by the debtor of both the
debt and its amount and terms.
7. Research In Motion lists its accounts receivable as “Accounts receivable, net” on its balance
sheet. Accounts receivable at February 27, 2010, is net of a $2 million allowance.
8. Apple uses the allowance method to account for doubtful accounts as evidenced by the
receivables being reduced by an allowance on the balance sheet. The realizable value of
accounts receivable as of September 26, 2009, is its net amount of $3,361 million.
9. Palm’s gross accounts receivable at May 31, 2009, is ($ thousands) $66,452 + $350 = $66,802.
Palm believes that the percent of accounts receivable that are uncollectible is $350/$66,802 =
0.5% (rounded).
10. Nokia titles its accounts receivable as “Accounts receivable, net of allowance for doubtful
accounts.” It believes the percent of accounts receivable that are uncollectible is 4.7% (rounded
from EUR 391/(EUR 7,981 + EUR 391)).

©McGraw-Hill Companies, 2013

Solutions Manual, Chapter 7 133
 QUICK STUDIES
Quick Study 7-1 (15 minutes)

1. Cash 9,500
Credit Card Expense................................................. 500
Sales..................................................................... 10,000
To record credit card sales less fees.

Cost of Goods Sold................................................... 7,500

Merchandise Inventory........................................ 7,500
To record cost of sales.

2. Accounts Receivable—Credit Card Cos.................. 2,880

Credit Card Expense................................................. 120
Sales..................................................................... 3,000
To record credit card sales less fees.

Cost of Goods Sold................................................... 1,500

Merchandise Inventory........................................ 1,500
To record cost of sales.

7 days later
Cash 2,880
Accounts Receivable—Credit Card Cos............ 2,880
To record cash receipts.

Quick Study 7-2 (15 minutes)

1.
Oct. 31 Allowance for Doubtful Accounts........................ 1,000
Accounts Receivable—C. Schaub.................. 1,000
To write off account.

2.
Dec. 9 Accounts Receivable—C. Schaub*....................... 200
Allowance for Doubtful Accounts................... 200
To reinstate a written off account.
*If there is a strong belief that the remaining $800 will be
paid soon, then the full $1,000 balance can be reinstated.

9 Cash........................................................................ 200
Accounts Receivable—C. Schaub.................. 200
©McGraw-Hill Companies, 2013
134 Financial Accounting, 6th Edition
 To record payment on a receivable.

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Solutions Manual, Chapter 7 135
Quick Study 7-3 (15 minutes)

1.
Dec. 31 Bad Debts Expense........................................... 835
Allowance for Doubtful Accounts............... 835
To record estimate of uncollectibles
[($89,000 x 1.5%) - $500 credit].

2. ($89,000 x 1.5%) + $200 debit = $1,535

Quick Study 7-4 (15 minutes)

Dec. 31 Bad Debts Expense........................................... 2,700

Allowance for Doubtful Accounts............... 2,700
To record estimate of uncollectibles
($270,000 x 1%).

Quick Study 7-5 (15 minutes)

1. Maturity date is October 31, which is computed as follows:

Days in August................................................................. 31
Minus the date of the note............................................... 2
Days remaining in August................................................ 29
Add days in September.................................................... 30
Add days in October to equal 90 days (October 31)...... 31
Period of the note in days................................................ 90

2. Aug. 2 Notes Receivable—T. Menke............................. 5,500

Accounts Receivable—T. Menke....................... 5,500
To record receipt of note on account.

Quick Study 7-6 (10 minutes)

Oct. 31 Cash.................................................................... 5,665

Notes Receivable—T. Menke....................... 5,500
Interest Revenue.......................................... 165
To record cash received on note plus
interest ($5,500 x 12% x 90/360).

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136 Financial Accounting, 6th Edition
Quick Study 7-7 (15 minutes)

Dec. 31 Interest Receivable............................................. 40

Interest Revenue................................................ 40
To record the year-end adjustment for
interest earned ($8,000 x 6% x 30/360).

Maturity date
Jan. 15 Cash.................................................................... 8,060
Interest Receivable...................................... 40
Interest Revenue.......................................... 20
Notes Receivable......................................... 8,000
To record cash received on note plus interest.

Quick Study 7-8 (10 minutes)

May 1 Cash.................................................................... 970

Factoring Fee Expense*.................................... 30
Accounts Receivable................................... 1,000
To record sale of receivable. *($1,000 x 0.03)

Quick Study 7-9 (10 minutes)

May 1 Bad Debts Expense............................................... 1,000

Accounts Receivable—P. Carroll................... 1,000
To write off an account.

Quick Study 7-10 (10 minutes)

May 30 Accounts Receivable—P. Carroll......................... 1,000

Bad Debts Expense......................................... 1,000
To reinstate an account previously written off.

May 30 Cash........................................................................ 1,000

Accounts Receivable— P. Carroll.................. 1,000
To record cash received on account.

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Solutions Manual, Chapter 7 137
Quick Study 7-11 (10 minutes)

Net sales
Accounts receivable turnover =
Average accounts receivable

$754,200
($152,900 + $133,700) / 2

= 5.3 times

Interpretation: An accounts receivable turnover of 5.3 implies that the

company’s average accounts receivable balance is converted into cash 5.3
times per year. The 5.3 turnover is 29% lower than the average turnover of
7.5 for its competitors. The company needs to identify the cause of this poor
performance and rectify the situation to at least compete at the average
level.

Quick Study 7-12 (10 minutes)

a. Both U.S. GAAP and IFRS have similar asset criteria that apply to
recognition of receivables. Further, receivables that arise from revenue-
generating activities are subject to broadly similar criteria for U.S. GAAP
and IFRS. Specifically, both refer to the realization principle and an
earnings process. However, while these criteria are broadly similar,
differences do exist, and they arise mainly from industry-specific
guidance under U.S. GAAP, which is very limited under IFRS.

b. Both U.S. GAAP and IFRS require receivables to be reported net of

estimated uncollectibles. Further, both systems require that the expense
for estimated uncollectibles be recorded in the same period when
revenues from those receivables are recorded. This means that in the
case of accounts receivable, both U.S. GAAP and IFRS require the
allowance method for uncollectibles (unless immaterial).

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138 Financial Accounting, 6th Edition
 EXERCISES
Exercise 7-1 (20 minutes)

Apr. 8 Cash 8,832

Credit Card Expense*........................................ 368
Sales............................................................. 9,200
To record credit card sales less 4% fee.
*($9,200 x .04)

Cost of Goods Sold........................................... 6,800

Merchandise Inventory................................ 6,800
To record cost of sales.

12 Accounts Receivable—Continental Bank........ 5,265

Credit Card Expense*........................................ 135
Sales............................................................... 5,400
To record credit card sales less 2.5% fee.
*($5,400 x .025)

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

Merchandise Inventory................................ 3,500
To record cost of sales.

20 Cash.................................................................... 5,265
Accounts Receivable—Continental Bank..... 5,265
To record cash received on credit sales less fees.

©McGraw-Hill Companies, 2013

Solutions Manual, Chapter 7 139
Exercise 7-2 (25 minutes)
Part 1
GENERAL LEDGER

Sales Returns and

Accounts Receivable Sales Allowances
Nov. 5 4,417 Nov. 21 189 Nov. 5 4,417 Nov. 21 189
10 1,250 10 1,250
13 733 13 733
30 2,606 30 2,606
Bal. 8,817

ACCOUNTS RECEIVABLE LEDGER

Surf Shop Yum Enterprises Matt Albin

Nov. 5 4,417 Nov. 10 1,250 Nov. 13 733 Nov. 21 189
30 2,606
Bal. 7,023 Bal. 544

Part 2
Sami Company
Schedule of Accounts Receivable
November 30, 2011
Surf Shop........................................................................... $7,023
Yum Enterprises................................................................ 1,250
Matt Albin........................................................................... 544
Total.................................................................................... $8,817

Comparison: The total of the Schedule of Accounts Receivable ($8,817) is

proved with the balance of the Accounts Receivable controlling T-account
from Part 1 ($8,817).

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140 Financial Accounting, 6th Edition
Exercise 7-3 (20 minutes)

June 11 Bad Debts Expense............................................... 9,000

Accounts Receivable—Chaffey Co................ 9,000
To write off an account.

June 29 Accounts Receivable—Chaffey Co...................... 9,000

Bad Debts Expense......................................... 9,000
To reinstate an account previously written off.

June 29 Cash........................................................................ 9,000

Accounts Receivable—Chaffey Co................ 9,000
To record cash received on account.

Exercise 7-4 (20 minutes)

Dec. 31 Bad Debts Expense............................................... 4,375

Allowance for Doubtful Accounts................... 4,375
To record estimated bad debts expense
(.005 x $875,000).

Feb. 1 Allowance for Doubtful Accounts........................ 420

Accounts Receivable—P. Coble..................... 420
To write off an account.

June 5 Accounts Receivable—P. Coble........................... 420

Allowance for Doubtful Accounts................... 420
To reinstate an account.

June 5 Cash........................................................................ 420

Accounts Receivable—P. Coble..................... 420
To record cash received on account.

©McGraw-Hill Companies, 2013

Solutions Manual, Chapter 7 141
Exercise 7-5 (15 minutes)

a.
Dec. 31 Bad Debts Expense*.............................................. 1,205
Allowance for Doubtful Accounts.................. 1,205
To record estimated bad debts expense.
*
Unadjusted balance = $ 915 credit
......................................................................
Estimated balance ($53,000 x .04) = 2,120 credit
......................................................................
Required adjustment = $1,205 credit
......................................................................
b.
Dec. 31 Bad Debts Expense**.............................................. 3,452
Allowance for Doubtful Accounts.................. 3,452
To record estimated bad debts expense.
**
Unadjusted balance = $ 1,332 debit
....................................................................
Estimated balance ($53,000 x .04) = 2,120 credit
....................................................................
Required adjustment = $3,452 credit
....................................................................

Exercise 7-6 (30 minutes)

a. Computation of the estimated balance of the allowance for uncollectibles:

Not due: $132,000 x 0.01 = $ 1,320

1 to 30: 30,000 x 0.02 = 600
31 to 60: 12,000 x 0.04 = 480
61 to 90: 6,000 x 0.07 = 420
Over 90: 10,000 x 0.12 = 1,200
$ 4,020 credit

b.
Dec. 31 Bad Debts Expense.......................................... 3,420
Allowance for Doubtful Accounts.............. 3,420
To record estimated bad debts.*

*
Unadjusted balance............................. $ 600 credit
Estimated balance............................... 4,020 credit
Required adjustment........................... $3,420 credit
c.
Dec. 31 Bad Debts Expense.......................................... 4,420
Allowance for Doubtful Accounts.............. 4,420

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142 Financial Accounting, 6th Edition
 To record estimated bad debts.*

*
Unadjusted balance............................. $ 400 debit
Estimated balance............................... 4,020 credit
Required adjustment........................... $4,420 credit

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Solutions Manual, Chapter 7 143
Exercise 7-7 (25 minutes)

a. Computation of the estimated balance of the allowance for uncollectibles:

$190,000 x 0.035 = $6,650 credit

b.
Dec. 31 Bad Debts Expense.......................................... 6,350
Allowance for Doubtful Accounts.............. 6,350
To record estimated bad debts.*

*
Unadjusted balance............................ $ 300 credit
Estimated balance.............................. 6,650 credit
Required adjustment.......................... $6,350 credit

c.
Dec. 31 Bad Debts Expense.......................................... 6,850
Allowance for Doubtful Accounts.............. 6,850
*
To record estimated bad debts.

*
Unadjusted balance............................ $ 200 debit
Estimated balance.............................. 6,650 credit
Required adjustment.......................... $6,850 credit

Exercise 7-8 (20 minutes)

Feb. 1 Allowance for Doubtful Accounts........................ 1,900

Accounts Receivable—Oxford Co.................. 400
Accounts Receivable—Brookes Co............... 1,500
To write off specific accounts.

June 5 Accounts Receivable—Oxford............................. 400

Allowance for Doubtful Accounts................... 400
To reinstate an account.

June 5 Cash........................................................................ 400

Accounts Receivable—Oxford........................ 400
To record cash received on account.

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144 Financial Accounting, 6th Edition
Exercise 7-9 (25 minutes)

a. Expense is 1.5% of credit sales

Dec. 31 Bad Debts Expense............................................. 13,500

Allowance for Doubtful Accounts................ 13,500
To record estimated bad debts
[$900,000 x .015].

b. Expense is 0.5% of total sales

Dec. 31 Bad Debts Expense............................................. 10,500

Allowance for Doubtful Accounts................ 10,500
To record estimated bad debts
[($900,000 + $1,200,000) x .005].

c. Allowance is 6% of accounts receivable

Dec. 31 Bad Debts Expense............................................. 14,700

Allowance for Doubtful Accounts................ 14,700
To record estimated bad debts.*
*
Unadjusted balance..................................... $ 3,000 debit.
Estimated balance ($195,000 x 6%)............ 11,700 credit
Required adjustment................................... $14,700 credit

©McGraw-Hill Companies, 2013

Solutions Manual, Chapter 7 145
Exercise 7-10 (20 minutes)

July 4 Accounts Receivable........................................ 6,295

Sales............................................................ 6,295
To record sales on credit.

Cost of Goods Sold.......................................... 4,000

Merchandise Inventory............................... 4,000
To record cost of sales.

9 Cash................................................................... 17,280
Factoring Fee Expense*................................... 720
Accounts Receivable.................................. 18,000
To record sale of receivable. *($18,000 x .04)

17 Cash................................................................... 3,436
Accounts Receivable.................................. 3,436
To record cash received on account.

27 Cash................................................................... 10,000
Notes Payable............................................. 10,000
To record cash from a loan.

Note to Financial Statements:

Accounts receivable in the amount of $13,000 are pledged as security
for a $10,000 note payable to Center Bank.

Exercise 7-11 (15 minutes)

Nov. 1 Notes Receivable—M. Allen............................. 5,000

Accounts Receivable—M. Allen................. 5,000
To record receipt of note on account.

Dec. 31 Interest Receivable........................................... 50

Interest Revenue......................................... 50
To record interest earned
[$5,000 x .06 x 60/360].

Apr. 30 Cash................................................................... 5,150

Notes Receivable—M. Allen....................... 5,000
Interest Revenue......................................... 100
Interest Receivable..................................... 50
To record cash received on note plus
interest earned [$5,000 x .06 x 120/360].

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146 Financial Accounting, 6th Edition
Exercise 7-12 (20 minutes)

Mar. 21 Notes Receivable—S. Hernandez.................... 3,100

Accounts Receivable—S. Hernandez........ 3,100
To record receipt of note on account.

Sept. 17 Accounts Receivable—S. Hernandez.............. 3,255

Interest Revenue......................................... 155
Notes Receivable—S. Hernandez.............. 3,100
To record note dishonored plus interest
earned [$3,100 x .10 x 180/360 = $155].

Dec. 31 Allowance for Doubtful Accounts................... 3,255

Accounts Receivable—S. Hernandez........ 3,255
To write off an account.

Exercise 7-13 (10 minutes)

2010
Dec. 13 Notes Receivable—L. Clark............................. 10,000
Accounts Receivable—L. Clark................. 10,000
To record receipt of note on account.

31 Interest Receivable........................................... 40
Interest Revenue......................................... 40
To record interest earned
[$10,000 x .08 x 18/360].

©McGraw-Hill Companies, 2013

Solutions Manual, Chapter 7 147
Exercise 7-14 (15 minutes)

2011
Jan. 27 Cash................................................................... 10,100
Interest Revenue ........................................ 60
Interest Receivable..................................... 40
Notes Receivable—L. Clark....................... 10,000
To record cash received on note plus
interest. [$10,000 x .08 x (45-18)/360= $60]

Mar. 3 Notes Receivable—Shandi Co......................... 4,000

Accounts Receivable-Shandi Co............... 4,000
To record receipt of note on account.

17 Notes Receivable—J. Torres........................... 2,000

Accounts Receivable—J. Torres............... 2,000
To record receipt of note on account.

Apr. 16 Accounts Receivable—J. Torres..................... 2,015

Interest Revenue......................................... 15
Notes Receivable—J. Torres..................... 2,000
To record receivable for dishonored
note plus interest [$2,000 x .09 x 30/360].

May 1 Allowance for Doubtful Accounts................... 2,015

Accounts Receivable—J. Torres............... 2,015
To write off account.

June 1 Cash................................................................... 4,100

Interest Revenue......................................... 100
Notes Receivable—Shandi Co................... 4,000
To record cash received on note with
interest [$4,000 x .10 x 90/360].

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148 Financial Accounting, 6th Edition
Exercise 7-15 (15 minutes)

Year 2010 accounts receivable turnover:

$236,000
($20,700 + $17,400)/2 = 12.4 times

Year 2011 accounts receivable turnover:

$305,000
($22,900 + $20,700)/2 = 14.0 times

Analysis: Waseem Company turned over its accounts receivable 1.6 (14.0 – 12.4)
times more in 2011 than in 2010. This may indicate that the company has
tightened its credit policy or has improved its collection efforts. Also, relative to
competitors (turnover of 11), Waseem is performing better than average.

Exercise 7-16 (25 minutes)

a. Expense is 0.4% of total revenues

Dec. 31 Bad Debts Expense............................................. 40,001

Allowance for Doubtful Accounts................ 40,001
To record estimated bad debts
[10,000,369 x 0.004].

b. Allowance is 2.1% of trade receivables

Dec. 31 Bad Debts Expense............................................. 35,775

Allowance for Doubtful Accounts................ 35,775
*
To record estimated bad debts.
*
Unadjusted balance..................................... 10,000 credit
Estimated balance (2,179,764 x 0.021)........ 45,775 credit
Required adjustment................................... 35,775 credit

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Solutions Manual, Chapter 7 149
 PROBLEM SET A
Problem 7-1A (30 minutes)
June 4 Accounts Receivable—A. Cianci.......................... 750
Sales................................................................. 750
To record sales on credit.

Cost of Goods Sold................................................. 500

Merchandise Inventory...................................... 500
To record cost of sales.

5 Cash....................................................................... 5,723
Credit card expense*............................................. 177
Sales................................................................. 5,900
To record credit card sales less fee. *($5,900 x .03)

Cost of Goods Sold................................................. 3,200

Merchandise Inventory...................................... 3,200
To record cost of sales.

6 Accounts Receivable—Access............................. 4,704

Credit card expense*............................................. 96
Sales................................................................. 4,800
To record credit card sales less fee. *($4,800 x .02)

Cost of Goods Sold................................................. 2,800

Merchandise Inventory...................................... 2,800
To record cost of sales.

8 Accounts Receivable—Access............................. 3,136

Credit card expense*............................................. 64
Sales................................................................. 3,200
To record credit card sales less fee. *($3,200 x .02)

Cost of Goods Sold................................................. 1,900

Merchandise Inventory...................................... 1,900
To record cost of sales.

10 No journal entry required.

13 Allowance for Doubtful Accounts......................... 329

Accounts Receivable—N. Wells...................... 329
To write off account due.

17 Cash.......................................................................... 7,840
Accounts Receivable—Access......................... 7,840
To record cash received from credit card co.
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150 Financial Accounting, 6th Edition
 ©McGraw-Hill Companies, 2013
Solutions Manual, Chapter 7 151
 18 Cash.......................................................................... 735
Sales Discounts*...................................................... 15
Accounts Receivable—A. Cianci...................... 750
To record cash received less discount. *($750 x .02)
Problem 7-2A (35 minutes)

2010
a. Accounts Receivable...................................... 1,803,750
Sales........................................................... 1,803,750
To record sales on account.

Cost of Goods Sold......................................... 1,475,000

Merchandise Inventory.............................. 1,475,000
To record cost of sales.

b. Allowance for Doubtful Accounts.................. 20,300

Accounts Receivable................................ 20,300
To write off accounts.

c. Cash................................................................. 789,200
Accounts Receivable................................ 789,200
To record cash received on account.

d. Bad Debts Expense......................................... 35,214

Allowance for Doubtful Accounts ........... 35,214
To record estimated bad debts.*

*
Beginning receivables..................... $ 0
Credit sales....................................... 1,803,750
Collections........................................ (789,200)
Write-offs.......................................... (20,300)
Ending receivables.......................... 994,250
Percent uncollectible....................... x 1.5%
Required ending allowance............. 14,914** Cr.
Unadjusted balance......................... 20,300 Dr.
Adjustment to the allowance........... $ 35,214 Cr.
** rounded to nearest dollar

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152 Financial Accounting, 6th Edition
Problem 7-2A (Concluded)

2011
e. Accounts Receivable.......................................... 1,825,700
Sales............................................................... 1,825,700
To record sales on account.

Cost of Goods Sold............................................. 1,450,000

Merchandise Inventory................................. 1,450,000
To record cost of sales.

f. Allowance for Doubtful Accounts...................... 28,800

Accounts Receivable.................................... 28,800
To record write-off of accounts.

g. Cash..................................................................... 1,304,800
Accounts Receivable.................................... 1,304,800
To record cash received on account.

h. Bad Debts Expense............................................. 36,181

Allowance for Doubtful Accounts................ 36,181
*
To record estimated bad debts.

*
Beginning receivables.................... $ 994,250
Credit sales..................................... 1,825,700
Collections...................................... (1,304,800)
Write-offs......................................... (28,800)
Ending receivables......................... 1,486,350
Percent uncollectible...................... x 1.5%
Required ending allowance........... 22,295** Cr.
Unadjusted balance
Beginning (Cr.).............................. $14,914
Write-offs (Dr.).............................. 28,800 13,886 Dr.
Adjustment to the allowance......... $ 36,181 Cr.
** rounded to nearest dollar

©McGraw-Hill Companies, 2013

Solutions Manual, Chapter 7 153
Problem 7-3A (35 minutes)
Part 1
a. Expense is 2% of credit sales:
Dec. 31 Bad Debts Expense.................................... 70,680
Allowance for Doubtful Accounts....... 70,680
To record estimated bad debts
[$3,534,000 x .02].
b. Expense is 1% of total sales:
Dec. 31 Bad Debts Expense.................................... 53,378
Allowance for Doubtful Accounts....... 53,378
To record estimated bad debts
[($1,803,750 + $3,534,000) x .01].
c. Allowance is 5% of accounts receivable:
Dec. 31 Bad Debts Expense.................................... 69,255
Allowance for Doubtful Accounts....... 69,255
To record estimated bad debts.*
*
Unadjusted balance.............................. $15,750 debit
Estimated balance ($1,070,100 x 5%)... 53,505 credit
Required adjustment............................. $69,255 credit

Part 2
Current assets:
Accounts receivable...................................... $1,070,100
Less allowance for doubtful accounts......... (54,930)* $1,015,170

Or: Accounts receivable (net of $54,930*

uncollectible accounts)............................... $1,015,170

* Adjustment to the allowance................ $70,680 credit

Unadjusted allowance balance............. 15,750 debit
Adjusted balance.................................. $54,930 credit

Part 3
Current assets:
Accounts receivable...................................... $1,070,100
Less allowance for doubtful accts................ (53,505)** $1,016,595

Or: Accounts receivable (net of $53,505**

uncollectible accounts)............................... $1,016,595

** See computations in Part 1c.

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154 Financial Accounting, 6th Edition
Problem 7-4A (35 minutes)

Part 1

Calculation of the estimated balance of the allowance for uncollectibles

Not due: $730,000 x .0125 = $ 9,125

1 to 30: 354,000 x .0200 = 7,080
31 to 60: 76,000 x .0650 = 4,940
61 to 90: 48,000 x .3275 = 15,720
Over 90: 12,000 x .6800 = 8,160
$45,025 Credit

Part 2

Dec. 31 Bad Debts Expense.......................................... 31,625

Allowance for Doubtful Accounts.............. 31,625
*
To record estimated bad debts.

*
Unadjusted balance............................. $13,400 credit
Estimated balance............................... 45,025 credit
Required adjustment........................... $31,625 credit

Part 3

Writing off the account receivable in 2012 will not directly affect year 2012
net income. The entry to write off an account involves a debit to Allowance
for Doubtful Accounts and a credit to Accounts Receivable, both of which
are balance sheet accounts. Net income is affected only by the annual
recognition of the estimated bad debts expense, which is journalized as an
adjusting entry. Net income for Year 2011 (the year of the original sale)
included an estimated expense for write-offs such as this one.

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Solutions Manual, Chapter 7 155
Problem 7-5A (75 minutes)
Part 1
2010
Dec. 16 Notes Receivable—T. Duke............................... 9,600
Accounts Receivable—T. Duke................... 9,600
To record note received on account.

31 Interest Receivable............................................ 36
Interest Revenue.......................................... 36
To record interest earned
[$9,600 x .09 x 15/360].

2011
Feb. 14 Cash.................................................................... 9,744
Interest Revenue.......................................... 108
Interest Receivable...................................... 36
Notes Receivable—T. Duke......................... 9,600
To record cash received on note with interest.

Mar. 2 Notes Receivable—Mare Co.............................. 4,120

Accounts Receivable—Mare Co................. 4,120
To record note received on account.

17 Notes Receivable—J. Halaam........................... 2,400

Accounts Receivable—J. Halaam............... 2,400
To record note received on account.

Apr. 16 Accounts Receivable—J. Halaam..................... 2,414

Interest Revenue.......................................... 14
Notes Receivable—J. Halaam..................... 2,400
To record receivable for dishonored
note plus interest [$2,400 x .07 x 30/360].

June 2 Accounts Receivable—Mare Co....................... 4,202*

Interest Revenue.......................................... 82
Notes Receivable—Mare Co........................ 4,120
To record receivable for dishonored note
[$4,120 + ($4,120 x .08 x 90/360)] = $4,120 +
$82.40 = $4,202.40 * Rounded to nearest dollar

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156 Financial Accounting, 6th Edition
 Problem 7-5A (Concluded)

July 17 Cash................................................................... 4,245

Interest Revenue......................................... 43
Accounts Receivable—Mare Co................ 4,202
To record cash received on account
plus additional interest
[$4,202 x .08 x 46/360 = $43 (rounded)].

Aug. 7 Notes Receivable—Birch and Byer................. 5,440

Accounts Receivable—Birch and Byer....... 5,440
To record note received on account.

Sept. 3 Notes Receivable—York.................................. 2,080

Accounts Receivable—York...................... 2,080
To record note received on account.

Nov. 2 Cash................................................................... 2,115

Interest Revenue......................................... 35
Notes Receivable—York............................. 2,080
To record cash received on note plus interest
($2,080 x .10 x 60/360 = $35 rounded).

5 Cash................................................................... 5,576
Interest Revenue......................................... 136
Notes Receivable—Birch and Byer........... 5,440
To record cash received on note plus
interest ($5,440 x .10 x 90/360 = $136).

Dec. 1 Allowance for Doubtful Accounts................... 2,414

Accounts Receivable—J. Halaam.............. 2,414
To record write-off of account.

Part 2

Analysis Component: When a business pledges its receivables as security

for a loan and the loan is still outstanding at period-end, the business must
disclose this information in notes to its financial statements. This is a
requirement because the business has committed a portion of its assets to
cover a specific portion of its liabilities, which means that if the business
dishonors its obligations under the loan, the creditor can claim the amount
of receivables identified in the pledge as collateral to cover the loan. This
arrangement must be disclosed to satisfy the full-disclosure principle.

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Solutions Manual, Chapter 7 157