CHAPTER 5
Receivables and Sales
BRIEF EXERCISES
Record accounts
receivable and trade
discount (LO2)
BE5–1 The Giles Agency offers a 10% trade discount when providing advertising
services of $1,000 or more to its customers. Audrey’s Antiques decides to purchase
advertising services of $2,500 (not including the trade discount), while Michael’s
Motors purchases only $600 of advertising. Both services are provided on account.
Record both transactions for The Giles Agency, accounting for any trade discounts.
Calculate net sales (LO2)
BE5–2 Kelly’s Jewelry reported the following amounts at the end of the year: total
jewelry sales = $650,000; sales discounts = $15,000; sales returns = $40,000; sales
allowances = $20,000. Compute net sales.
Record the adjustment
for uncollectible
accounts (LO3)
BE5–3 At the end of the year, Mercy Cosmetics’ balance of Allowance for Uncollectible
Accounts is $500 (credit) before adjustment. The balance of Accounts Receivable
is $20,000. The company estimates that 15% of accounts will not be collected over
the next year. What adjustment would Mercy Cosmetics record for Allowance for
Uncollectible Accounts?
Record the adjustment
for uncollectible
accounts (LO3)
BE5–4 At the end of the year, Dahir Incorporated’s balance of Allowance for
Uncollectible Accounts is $2,000 (credit) before adjustment. The company estimates
future uncollectible accounts to be $10,000. What adjustment would Dahir record for
Allowance for Uncollectible Accounts?
Record the adjustment
for uncollectible
accounts (LO3)
BE5–5 Refer to the information in BE5–4, but now assume that the balance of
Allowance for Uncollectible Accounts before adjustment is $2,000 (debit). The
company still estimates future uncollectible accounts to be $10,000. What is the
adjustment Dahir would record for Allowance for Uncollectible Accounts?
Record the writeoff of uncollectible
accounts (LO4)
BE5–6 At the beginning of the year, Mitchum Enterprises allows for estimated
uncollectible accounts of $14,000. By the end of the year, actual bad debts total
$15,000. Record the write–off to uncollectible accounts. Following the write-off,
what is the balance of Allowance for Uncollectible Accounts?
Record collection of
account previously
written off (LO4)
BE5–7 Barnes Books allows for possible bad debts. On May 7, Barnes writes off a
customer account of $6,000. On September 9, the customer unexpectedly pays the
$6,000 balance. Record the cash collection on September 9.
Calculate uncollectible
accounts using the aging
method (LO5)
BE5–8 Williamson Distributors separates its accounts receivable into three age
groups for purposes of estimating the percentage of uncollectible accounts.
1. Accounts not yet due = $30,000; estimated uncollectible = 5%.
2. Accounts 1–30 days past due = $10,000; estimated uncollectible = 20%.
3. Accounts more than 30 days past due = $4,000; estimated uncollectible = 30%.
Compute the total estimated uncollectible accounts.
Use the direct
write-off method to
account for uncollectible
accounts (LO6)
BE5–9 Brady is hired in 2012 to be the accountant for Anderson Manufacturing, a
private company. At the end of 2012, the balance of Accounts Receivable is $24,000.
In the past, Anderson has used only the direct write-off method to account for bad
debts. Based on a detailed analysis of amounts owed, Brady believes the best estimate
of future bad debts is $8,000. If Anderson continues to use the direct write-off method
to account for uncollectible accounts, what adjustment, if any, would Brady record
at the end of 2012? What adjustment, if any, would Brady record if Anderson instead
uses the allowance method to account for uncollectible accounts?
Calculate amounts related
to interest (LO7)
BE5–10 Calculate the missing amount for each of the following notes receivable.
Face Value
Annual
Interest Rate
Fraction of
the Year
Interest
$10,000
$20,000
$25,000
(d)
6%
4%
(c)
8%
4 months
(b)
6 months
6 months
(a)
$800
$500
$600
CHAPTER 5
Receivables and Sales
BE5–11 On October 1, 2012, Oberley Corporation loans one of its employees $30,000
and accepts a 12-month, 8% note receivable. Calculate the amount of interest revenue
Oberley will recognize in 2012 and 2013.
Calculate interest revenue
on notes receivable (LO7)
BE5–12 At the end of the year, Brinkley Incorporated’s balance of Allowance for
Uncollectible Accounts is $3,000 (credit) before adjustment. The company estimates
future uncollectible accounts to be 4% of credit sales for the year. Credit sales for the
year total $125,000. What is the adjustment Brinkley would record for Allowance for
Uncollectible Accounts using the percentage-of-credit-sales method?
Use the percentage-ofcredit-sales method to
adjust for uncollectible
accounts (LO9)
BE5–13 Refer to the information in BE5–12, but now assume that the balance
of Allowance for Uncollectible Accounts before adjustment is $3,000 (debit). The
company still estimates future uncollectible accounts to be 4% of credit sales for the
year. What adjustment would Brinkley record for Allowance for Uncollectible Accounts
using the percentage-of-credit-sales method?
Use the percentage-ofcredit-sales method to
adjust for uncollectible
accounts (LO9)
EXERCISES
E5–1 On May 7, Juanita Construction provides services on account to Michael Wolfe
for $3,000. Michael pays for those services on May 13.
Record credit sale (LO1)
Required:
For Juanita Construction, record the service on account on May 7 and the collection
of cash on May 13.
E5–2 Merry Maidens Cleaning generally charges $200 for a detailed cleaning of
a normal-size home. However, to generate additional business, Merry Maidens is
offering a new-customer discount of 10%. On May 1, Ms. E. Pearson has Merry
Maidens clean her house and pays cash equal to the discounted price.
Record cash sales with a
trade discount (LO2)
Required:
Record the revenue earned by Merry Maidens Cleaning on May 1.
E5–3 On March 12, Medical Waste Services provides services on account to Grace
Hospital for $10,000, terms 3/10, n/30. Grace pays for those services on March 20.
Record credit sale and
cash collection with a
sales discount (LO1, 2)
Required:
For Medical Waste Services, record the service on account on March 12 and the
collection of cash on March 20.
E5–4 Refer to the information in E5–3, but now assume that Grace does not pay for
services until March 31, missing the 3% sales discount.
Record credit sale and
cash collection (LO1, 2)
Required:
For Medical Waste Services, record the service on account on March 12 and the
collection of cash on March 31.
Flip Side of E5–5
E5–5 Refer to the information in E5–4.
Record credit
purchase and cash
payment (LO1, 2)
Required:
For Grace Hospital, record the purchase of services on account on March 12 and the
payment of cash on March 31.
E5–6 On April 25, Foreman Electric installs wiring in a new home for $2,500 on
account. However, on April 27, Foreman’s electrical work does not pass inspection,
and Foreman grants the customer an allowance of $500 because of the problem.
The customer makes full payment of the balance owed, excluding the allowance, on
April 30.
Flip Side of E5–4
Record credit sales with a
sales allowance (LO1, 2)
CHAPTER 5
Receivables and Sales
Required:
1. Record the credit sale on April 25.
2. Record the sales allowance on April 27.
3. Record the cash collection on April 30.
4. Calculate net sales associated with these transactions.
Record the adjustment
for uncollectible accounts
and calculate net
realizable value (LO3)
E5–7 During 2012, its first year of operations, Pave Construction provides services
on account of $140,000. By the end of 2012, cash collections on these accounts
total $100,000. Pave estimates that 30% of the uncollected accounts will be bad
debts.
Required:
1. Record the adjustment for uncollectible accounts on December 31, 2012.
2. Calculate the net realizable value of accounts receivable.
Record the adjustment
for uncollectible accounts
and calculate net
realizable value (LO3)
E5–8 Physicians’ Hospital has the following balances on December 31, 2012, before
any adjustment: Accounts Receivable = $50,000; Allowance for Uncollectible
Accounts = $1,000 (credit). On December 31, 2012, Physicians’ estimates uncollectible
accounts to be 20% of accounts receivable.
Required:
1. Record the adjustment for uncollectible accounts on December 31, 2012.
2. Determine the amount at which bad debt expense is reported in the income
statement and the allowance for uncollectible accounts is reported in the balance
sheet.
3. Calculate the net realizable value of accounts receivable.
Record the adjustment for
uncollectible accounts and
calculate net realizable
value (LO3)
E5–9 Southwest Pediatrics has the following balances on December 31, 2012, before
any adjustment: Accounts Receivable = $120,000; Allowance for Uncollectible
Accounts = $2,000 (debit). On December 31, 2012, Southwest estimates uncollectible
accounts to be 10% of accounts receivable.
Required:
1. Record the adjustment for uncollectible accounts on December 31, 2012.
2. Determine the amount at which bad debt expense is reported in the income statement
and the allowance for uncollectible accounts is reported in the balance sheet.
3. Calculate the net realizable value of accounts receivable.
Identify the financial
statement effects of
transactions related to
accounts receivable and
allowance for uncollectible
accounts (LO3, 4)
E5–10 Consider the following transactions associated with accounts receivable and the
allowance for uncollectible accounts.
Credit Sales
Transaction Cycle
Assets
Liabilities
Stockholders’
Equity
Revenues
Expenses
1. Provide services on
account
2. Estimate uncollectible
accounts
3. Write off accounts as
uncollectible
4. Collect on account
previously written off
Required:
For each transaction, indicate whether it would increase (I), decrease (D), or have
no effect (NE) on the account totals. (Hint: Make sure the accounting equation,
Assets = Liabilities + Stockholders’ Equity, remains in balance after each
transaction.)
CHAPTER 5
Receivables and Sales
E5–11 Mercy Hospital has the following balances on December 31, 2012, before
any adjustment: Accounts Receivable = $60,000; Allowance for Uncollectible
Accounts = $1,500 (credit). Mercy estimates uncollectible accounts based on an aging
of accounts receivable as shown below.
Age Group
Not yet due
0 –30 days past due
31– 90 days past due
More than 90 days past due
Total
Amount
Receivable
Estimated Percent
Uncollectible
$40,000
10,000
7,000
3,000
$60,000
10%
20%
50%
90%
Record the adjustment
for uncollectible
accounts using the aging
method (LO5)
Required:
1. Estimate the amount of uncollectible receivables.
2. Record the adjustment for uncollectible accounts on December 31, 2012.
3. Calculate the net realizable value of accounts receivable.
E5–12 The Physical Therapy Center specializes in helping patients regain motor skills
after serious accidents. The center has the following balances on December 31, 2012,
before any adjustment: Accounts Receivable = $100,000; Allowance for Uncollectible
Accounts = $3,000 (debit). The center estimates uncollectible accounts based on an
aging of accounts receivable as shown below.
Age Group
Not yet due
0 – 60 days past due
61–120 days past due
More than 120 days past due
Total
Amount
Receivable
Estimated Percent
Uncollectible
$ 50,000
25,000
15,000
10,000
$100,000
5%
10%
20%
70%
Record the adjustment
for uncollectible
accounts using the aging
method (LO5)
Required:
1. Estimate the amount of uncollectible receivables.
2. Record the adjustment for uncollectible accounts on December 31, 2012.
3. Calculate the net realizable value of accounts receivable.
E5–13 At the beginning of 2012, Brad’s Heating & Air (BHA) has a balance of $25,000
in accounts receivable. Because BHA is a privately owned company, the company has
used only the direct write-off method to account for uncollectible accounts. However,
at the end of 2012, BHA wishes to obtain a loan at the local bank, which requires the
preparation of proper financial statements. This means that BHA now will need to use
the allowance method. The following transactions occur during 2012 and 2013.
a. During 2012, install air conditioning systems on account, $180,000.
b. During 2012, collect $175,000 from customers on account.
c. At the end of 2012, estimate that uncollectible accounts total 20% of ending
accounts receivable.
d. In 2013, customers’ accounts totaling $7,000 are written off as uncollectible.
Compare the allowance
method and the direct
write-off method (LO6)
Required:
1. Record each transaction using the allowance method.
2. Record each transaction using the direct write-off method.
3. Calculate the difference in net income (before taxes) in 2012 and 2013 between
the two methods.
E5–14 During 2012, LeBron Corporation accepts the following notes receivable.
a. On April 1, LeBron provides services to a customer on account. The customer
signs a four-month, 9% note for $6,000.
Record notes
receivable (LO7)
CHAPTER 5
Receivables and Sales
b. On June 1, LeBron lends cash to one of the company’s executives by accepting
a six-month, 10% note for $10,000.
c. On November 1, LeBron accepts payment for prior services by having a customer
with a past-due account receivable sign a three-month, 8% note for $5,000.
Required:
Record the acceptance of each of the notes receivable.
Record notes
receivable and interest
revenue (LO7)
Flip Side of E5–16
E5–15 On March 1, Terrell & Associates provides legal services to Whole Grain Bakery
regarding some recent food poisoning complaints. Legal services total $10,000. In
payment for the services, Whole Grain Bakery signs a 10% note requiring the payment
of the face amount and interest to Terrell & Associates on September 1.
Required:
For Terrell & Associates, record the acceptance of the note receivable on March 1 and
the cash collection on September 1.
Record notes payable and
interest expense (LO7)
Flip Side of E5–15
Record notes
receivable and interest
revenue (LO7)
E5–16 Refer to the information in E5–15.
Required:
For Whole Grain Bakery, record the issuance of the note payable on March 1 and the
cash payment on September 1.
E5–17 On April 1, 2012, Shoemaker Corporation realizes that one of its main
suppliers is having difficulty meeting delivery schedules, which is hurting Shoemaker’s
business. The supplier explains that it has a temporary lack of funds that is slowing its
production cycle. Shoemaker agrees to lend $500,000 to its supplier using a 12-month,
12% note.
Required:
Record the following transactions for Shoemaker Corporation.
1. The loan of $500,000 and acceptance of the note receivable on April 1, 2012.
2. The adjustment for accrued interest on December 31, 2012.
3. Cash collection of the note and interest on April 1, 2013.
Calculate receivables
ratios (LO8)
E5–18 Below are amounts (in millions) from three companies’ annual reports.
Walmart
Target
Costco Wholesale
Beginning Accounts
Receivable (net)
Ending Accounts
Receivable (net)
Net Sales
$1,715
$5,666
$ 529
$2,662
$6,194
$ 565
$312,427
$ 57,878
$ 58,963
Required:
For each company, calculate the receivables turnover ratio and the average collection
period (rounded to one decimal place). Which company appears most efficient in
collecting cash from sales?
Compare the percentageof-receivables method
and the percentage-ofcredit-sales method (LO9)
E5–19 Suzuki Supply reports the following amounts at the end of 2012 (before
adjustment).
Credit Sales for 2012
Accounts Receivable, December 31, 2012
Allowance for Uncollectible Accounts, December 31, 2012
$250,000
45,000
1,000
(credit )
Required:
1. Record the adjustment for uncollectible accounts using the percentage-ofreceivables method. Suzuki estimates 10% of receivables will not be collected.
CHAPTER 5
Receivables and Sales
2. Record the adjustment for uncollectible accounts using the percentage-of-creditsales method. Suzuki estimates 2% of credit sales will not be collected.
3. Calculate the effect on net income (before taxes) and total assets in 2012 for each
method.
E5–20 Refer to the information in E5–19, but now assume that the balance of the
Allowance for Uncollectible Accounts on December 31, 2012, is $1,000 (debit) (before
adjustment).
Compare the percentageof-receivables method
and the percentage-ofcredit-sales method (LO9)
Required:
1. Record the adjustment for uncollectible accounts using the percentage-ofreceivables method. Suzuki estimates 10% of receivables will not be collected.
2. Record the adjustment for uncollectible accounts using the percentage-of-creditsales method. Suzuki estimates 2% of credit sales will not be collected.
3. Calculate the effect on net income (before taxes) and total assets in 2012 for
each method.
PROBLEMS: SET A
P5–1A Assume the following scenarios.
Scenario 1: During 2012, IBM provides consulting services on its mainframe
computer for $10,000 on account. The customer does not pay for those
services until 2013.
Scenario 2: On January 1, 2012, Gold’s Gym sells a one-year membership for $1,200
cash. Normally, this type of membership would cost $1,500, but the
company is offering a 20% “New Year’s Resolution” discount.
Scenario 3: During 2012, The Manitowoc Company provides shipbuilding services
to the U.S. Navy for $300,000. The U.S. Navy will pay $100,000 at the end
of each year for the next three years, beginning in 2012.
Scenario 4: During 2012, Goodyear sells tires to customers on account for $24,000.
By the end of the year, collections total $20,000. At the end of 2013, it
becomes apparent that the remaining $4,000 will never be collected from
customers.
Calculate the amount
of revenue to
recognize (LO1)
Required:
For each scenario, calculate the amount of revenue to be recognized in 2012.
P5–2A Outdoor Expo provides guided fishing tours. The company charges $200 per
person but offers a 10% discount to parties of four or more. Consider the following
transactions during the month of May.
May 2 Charlene books a fishing tour with Outdoor Expo for herself and four friends at
the group discount price ($900 = $180 × 5). The tour is scheduled for May 7.
May 7 The fishing tour occurs. Outdoor Expo asks that payment be made within
30 days of the tour and offers a 5% discount for payment within 15 days.
May 9 Charlene is upset that no one caught a single fish and asks management for a
discount. Outdoor Expo has a strict policy of no discounts related to number
of fish caught.
May 15 Upon deeper investigation, management of Outdoor Expo discovers that
Charlene’s tour was led by a new guide who did not take the group to some of
the better fishing spots. In concession, management offers a sales allowance
of 40% of the amount due.
May 20 Charlene pays for the tour after deducting the sales allowance.
Required:
1. Record the necessary transaction(s) for Outdoor Expo on each date.
2. Calculate net sales.
3. Show how Outdoor Expo would present net sales in its income statement.
Record transactions
related to credit sales and
contra revenues (LO1, 2)
CHAPTER 5
Record transactions
related to accounts
receivable (LO3, 4)
QB
Receivables and Sales
P5–3A The following events occur for The Underwood Corporation during 2012 and
2013, its first two years of operations.
June 12, 2012
September 17, 2012
December 31, 2012
Provide services to customers on account for $35,000.
Receive $20,000 from customers on account.
Estimate that 40% of accounts receivable at the end of the year
will not be received.
Provide services to customers on account for $50,000.
Receive $10,000 from customers for services provided in 2012.
Write off the remaining amounts owed from services provided
in 2012.
Receive $40,000 from customers for services provided in 2013.
Estimate that 40% of accounts receivable at the end of the year
will not be received.
March 4, 2013
May 20, 2013
July 2, 2013
October 19, 2013
December 31, 2013
Required:
1. Record transactions for each date.
2. Post transactions to the following accounts: Cash, Accounts Receivable, and
Allowance for Uncollectible Accounts.
3. Calculate the net realizable value of accounts receivable at the end of 2012
and 2013.
Record transactions
related to uncollectible
accounts (LO3, 4, 5)
P5–4A Pearl E. White Orthodontist specializes in correcting misaligned teeth. During
2012, Pearl provides services on account of $580,000. Of this amount, $70,000 remains
receivable at the end of the year. An aging schedule as of December 31, 2012, is provided
below.
Age Group
Not yet due
0 –90 days past due
91–180 days past due
More than 180 days past due
Total
Amount
Receivable
Estimated Percent
Uncollectible
$30,000
15,000
10,000
15,000
$70,000
5%
10%
30%
80%
Required:
1. Calculate the allowance for uncollectible accounts.
2. Record the December 31, 2012, adjustment, assuming the balance of Allowance for
Uncollectible Accounts before adjustment is $4,000 (credit).
3. On July 19, 2013, a customer’s account balance of $7,000 is written off as
uncollectible. Record the write-off.
4. On September 30, 2013, the customer whose account was written off in Requirement
3 unexpectedly pays the full amount. Record the cash collection.
Compare the direct
write-off method
to the allowance
method (LO3, 6)
P5–5A In an effort to boost sales in the current year, Roy’s Gym has implemented a
new program where members do not have to pay for their annual membership until
the end of the year. The program seems to have substantially increased membership
and revenues. Below are year-end amounts.
Membership
Revenues
Last year
Current year
$100,000
300,000
Accounts
Receivable
$
5,000
160,000
Arnold, the owner, realizes that many members have not paid their annual membership
fees by the end of the year. However, Arnold believes that no allowance for uncollectible
accounts should be reported in the current year because none of the nonpaying
CHAPTER 5
Receivables and Sales
members’ accounts have proven uncollectible. Arnold wants to use the direct
write-off method to record bad debts, waiting until the end of next year before writing
off any accounts.
Required:
1. Do you agree with Arnold’s reasoning for not reporting any allowance for future
uncollectible accounts? Explain.
2. Suppose that similar programs in the past have resulted in uncollectible
accounts of approximately 75%. If Arnold uses the allowance method, what
should be the balance of Allowance for Uncollectible Accounts at the end of the
current year?
3. Based on your answer in Requirement 2, for what amount will total assets and
expenses be misstated in the current year if Arnold uses the direct write-off method?
Ignore tax effects.
P5–6A Willie Cheetum is the CEO of Happy Foods, a distributor of produce to grocery
store chains throughout the Midwest. At the end of the year, the company’s accounting
manager provides Willie with the following information, before any adjustment.
Accounts receivable
Estimated percentage uncollectible
Allowance for uncollectible accounts
Operating income
Using estimates of
uncollectible accounts to
overstate income (LO3)
$1,000,000
10%
$30,000 (credit)
$250,000
Willie’s compensation contract states that if the company generates operating income
of at least $200,000, he will get a salary bonus early next year.
Required:
1. Record the adjustment for uncollectible accounts using the accountant’s estimate of
10% of accounts receivable.
2. After the adjustment is recorded in Requirement 1, what is the revised amount
of operating income? Will Willie get his salary bonus?
3. Willie instructs the accountant to record the adjustment for uncollectible accounts
using 7% rather than 10% of accounts receivable. Now will Willie get his salary
bonus? Explain.
4. By how much would total assets and operating income be misstated using the 7%
amount?
P5–7A Humanity International sells medical and food supplies to those in need in
underdeveloped countries. Customers in these countries are often very poor and
must purchase items on account. At the end of 2012, total accounts receivable equal
$1,200,000. The company understands that it’s dealing with high credit risk clients.
These countries are often in the middle of a financial crisis, civil war, severe drought,
or some other difficult circumstance. Because of this, Humanity International typically
estimates the percentage of uncollectible accounts to be 40% (= $480,000). Actual
write-offs in 2013 total only $200,000, which means that the company significantly
overestimated uncollectible accounts in 2012. It appears that efforts by the
International Monetary Fund (IMF) and the United Nations (UN), and a mild winter
mixed with adequate spring rains, have provided for more stable economic conditions
than were expected, helping customers to pay on their accounts.
Required:
1. Record the adjustment for uncollectible accounts at the end of 2012, assuming there
is no balance in Allowance for Uncollectible Accounts at the end of 2012 before any
adjustment.
2. By the end of 2013, Humanity International has the benefit of hindsight to know
that estimates of uncollectible accounts in 2012 were too high. How did this
overestimation affect the reported amounts of total assets and expenses at the end
of 2012? Ignore tax effects.
Overestimating
future uncollectible
accounts (LO3, 4)
CHAPTER 5
Receivables and Sales
3. Should Humanity International prepare new financial statements for 2012 to
show the correct amount of uncollectible accounts? Explain.
Record long-term notes
receivable and interest
revenue (LO7)
P5–8A On December 1, 2012, Liang Chemical provides services to a customer for
$80,000. In payment for the services, the customer signs a three-year, 12% note.
The face amount and all interest are due at the end of the third year.
Required:
1. Record the acceptance of the note on December 1, 2012.
2. Record the adjustment for interest revenue on December 31, 2012, 2013,
and 2014.
3. Record the cash collection on December 1, 2015.
PROBLEMS: SET B
Calculate the amount
of revenue to
recognize (LO1)
P5–1B Assume the following scenarios.
Scenario 1: During 2012, The Hubbard Group provides services of $800,000 for
repair of a state highway. The company receives an initial payment of
$200,000 with the balance to be received the following year.
Scenario 2: Rolling Stone magazine typically charges $60 for a one-year
subscription. On January 1, 2012, Herman, age 72, purchases a oneyear subscription to the magazine and receives a 10% senior citizen
discount.
Scenario 3: During 2012, Waste Management provides services on account for
$20,000. The customer pays for those services in 2013.
Scenario 4: During 2012, Sysco Corporation sells grocery items to one of its
customers for $250,000 on account. Cash collections on those sales are
$170,000 in 2012 and $50,000 in 2013. The remaining $30,000 is written
off as uncollectible in 2013.
Required:
For each scenario, calculate the amount of revenue to be recognized in 2012.
Record transactions
related to credit sales and
contra revenues (LO1, 2)
P5–2B Data Recovery Services (DRS) specializes in data recovery from crashed hard
drives. The price charged varies based on the extent of damage and the amount of data
being recovered. DRS offers a 20% discount to students and faculty at educational
institutions. Consider the following transactions during the month of June.
June 10
June 12
June 13
June 16
June 19
June 20
June 30
Rashid’s hard drive crashes and he sends it to DRS.
After initial evaluation, DRS e-mails Rashid to let him know that full data
recovery will cost $2,000.
Rashid informs DRS that he would like them to recover the data and that
he is a student at UCLA, qualifying him for a 20% educational discount
and reducing the cost by $400 (= $2,000 × 20%).
DRS performs the work and claims to be successful in recovering all data.
DRS asks Rashid to pay within 30 days of today’s date, offering a 3%
discount for payment within 10 days.
When Rashid receives the hard drive, he notices that DRS did not
successfully recover all data. Approximately 25% of the data has not been
recovered and he informs DRS.
DRS reduces the amount Rashid owes by 25%.
Rashid pays the amount owed.
Required:
1. Record the necessary transaction(s) for Data Recovery Services on each date.
2. Calculate net sales.
3. Show how net sales would be presented in the income statement.
4. Calculate net sales if Rashid had paid his bill on June 25.
CHAPTER 5
Receivables and Sales
P5–3B The following events occur for Morris Engineering during 2012 and 2013, its
first two years of operations.
February 2, 2012
July 23, 2012
December 31, 2012
April 12, 2013
June 28, 2013
September 13, 2013
October 5, 2013
December 31, 2013
Provide services to customers on account for $32,000.
Receive $22,000 from customers on account.
Estimate that 30% of uncollected accounts will not be received.
Provide services to customers on account for $45,000.
Receive $6,000 from customers for services provided in 2012.
Write off the remaining amounts owed from services provided
in 2012.
Receive $40,000 from customers for services provided in 2013.
Estimate that 30% of uncollected accounts will not be received.
Record transactions
related to accounts
receivable (LO3, 4)
QB
Required:
1. Record transactions for each date.
2. Post transactions to the following accounts: Cash, Accounts Receivable, and
Allowance for Uncollectible Accounts.
3. Calculate the net realizable value of accounts receivable at the end of 2012 and 2013.
P5–4B Facial Cosmetics provides plastic surgery primarily to hide the appearance of
unwanted scars and other blemishes. During 2012, the company provides services of
$400,000 on account. Of this amount, $50,000 remains uncollected at the end of the
year. An aging schedule as of December 31, 2012, is provided below.
Age Group
Not yet due
0–30 days past due
31–60 days past due
More than 60 days past due
Total
Amount
Receivable
Estimated Percent
Uncollectible
$30,000
10,000
7,000
3,000
$50,000
2%
5%
10%
20%
Record transactions
related to uncollectible
accounts (LO3, 4, 5)
Required:
1. Calculate the allowance for uncollectible accounts.
2. Record the December 31, 2012, adjustment, assuming the balance of Allowance for
Uncollectible Accounts before adjustment is $300 (debit).
3. On April 3, 2013, a customer’s account balance of $400 is written off as
uncollectible. Record the write-off.
4. On July 17, 2013, the customer whose account was written off in Requirement 3
unexpectedly pays $100 of the amount but does not expect to pay any additional
amounts. Record the cash collection.
P5–5B Letni Corporation engages in the manufacture and sale of semiconductor chips
for the computing and communications industries. During the past year, operating
revenues remained relatively flat compared to the prior year but management notices
a big increase in accounts receivable. The increase in receivables is largely due to the
recent economic slowdown in the computing and telecommunications industries.
Many of the company’s customers are having financial difficulty, lengthening the
period of time it takes to collect on account. Below are year-end amounts.
Age Group
Operating
Revenue
Accounts
Receivable
Average
Age
Two years ago
Last year
Current year
$1,200,000
1,500,000
1,600,000
$140,000
150,000
320,000
5 days
7 days
40 days
Accounts
Written Off
$
0
1,000
0
Paul, the CEO of Letni, notices that accounts written off over the past three years have
been minimal and, therefore, suggests that no allowance for uncollectible accounts be
Compare the direct
write-off method
to the allowance
method (LO3, 6)
CHAPTER 5
Receivables and Sales
established in the current year. Any account proving uncollectible can be charged to
next year’s financial statements (the direct write-off method).
Required:
1. Do you agree with Paul’s reasoning? Explain.
2. Suppose that other companies in these industries have had similar increasing
trends in accounts receivable aging. These companies also had very successful
collections in the past but now estimate uncollectible accounts to be 20% because
of the significant downturn in the industries. If Letni uses the allowance method
estimated at 20% of accounts receivable, what should be the balance of Allowance
for Uncollectible Accounts at the end of the current year?
3. Based on your answer in Requirement 2, for what amount will total assets and
expenses be misstated in the current year if Letni uses the direct write-off method?
Ignore tax effects.
Using estimates of
uncollectible accounts to
understate income (LO3)
P5–6B Wanda B. Rich is the CEO of Outlet Flooring, a discount provider of carpet, tile,
wood, and laminate flooring. At the end of the year, the company’s accountant provides
Wanda with the following information, before any adjustment.
Accounts receivable
Estimated percentage uncollectible
Allowance for uncollectible accounts
Operating income
$10,000,000
3%
$100,000 (credit)
$2,400,000
Wanda has significant stock ownership in the company and, therefore, would like
to keep the stock price high. Analysts on Wall Street expect the company to have
operating income of $1,800,000. The fact that actual operating income is well above
this amount will make investors happy and help maintain a high stock price. Meeting
analysts’ expectations will also help Wanda keep her job.
Required:
1. Record the adjustment for uncollectible accounts using the accountant’s estimate of
3% of accounts receivable.
2. After the adjustment is recorded in Requirement 1, what is the revised amount
of operating income? Will Outlet Flooring still meet analysts’ expectations?
3. Wanda instructs the accountant to instead record $600,000 as bad debt expense
so that operating income will exactly meet analysts’ expectations. By how much
would total assets and operating income be misstated if the accountant records
this amount?
4. Why would Wanda be motivated to manage operating income in this way?
Underestimating
future uncollectible
accounts (LO3, 4)
P5–7B By the end of its first year of operations, Previts Corporation has credit
sales of $650,000 and accounts receivable of $250,000. Given it’s the first year of
operations, Previts’ management is unsure how much allowance for uncollectible
accounts it should establish. One of the company’s competitors, which has been in
the same industry for an extended period, estimates uncollectible accounts to be 4%
of ending accounts receivable, so Previts decides to use that same amount. However,
actual write-offs in the following year were 20% of the $250,000 (= $50,000). Previts’
inexperience in the industry led to making sales to high credit risk customers.
Required:
1. Record the adjustment for uncollectible accounts at the end of the first year
of operations using the 4% estimate of accounts receivable.
2. By the end of the second year, Previts has the benefit of hindsight to know that
estimates of uncollectible accounts in the first year were too low. By how much
did Previts underestimate uncollectible accounts in the first year? How did this
underestimation affect the reported amounts of total assets and expenses at the
end of the first year? Ignore tax effects.
3. Should Previts prepare new financial statements for the first year of operations
to show the correct amount of uncollectible accounts? Explain.
CHAPTER 5
Receivables and Sales
P5–8B On April 15, 2012, Sampson Consulting provides services to a customer for
$100,000. To pay for the services, the customer signs a three-year, 9% note. The face
amount and all interest are due at the end of the third year. [Hint: Because the note
is accepted during the middle of the month, Sampson plans to recognize one-half
month of interest revenue in April 2012, and one-half month of interest revenue in
April 2015.]
Required:
1. Record the acceptance of the note on April 15, 2012.
2. Record the adjustment for interest revenue on December 31, 2012, 2013, and 2014.
3. Record the cash collection on April 15, 2015.
Record long-term notes
receivable and interest
revenue (LO7)