Cash and Receivables

Solutions Manual and Test Bank of Intermediate Accounting Kieso Weygandt Warfield 15th edition

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Chapter 7 Cash and Receivables

QUESTIONS
1. What may be included under the heading of “cash”?
2. In what accounts should the following items be classified?
(a) Coins and currency.
(b) U.S. Treasury (government) bonds.
(c) Certificate of deposit.
(d) Cash in a bank that is in receivership.
(e) NSF check (returned with bank statement).
(f) Deposit in foreign bank (exchangeability limited).
(g) Postdated checks.
(h) Cash to be used for retirement of long-term bonds.
(i) Deposits in transit.
(j) 100 shares of Dell stock (intention is to sell in one year or less).
(k) Savings and checking accounts.
(l) Petty cash.
(m) Stamps.
(n) Travel advances.
3. Define a “compensating balance.” How should a compensating balance be reported?
4. Springsteen Inc. reported in a recent annual report “Restricted cash for debt redemption.” What section of the balance sheet would report this item?
5. What are the reasons that a company gives trade discounts? Why are trade discounts not recorded in the accounts like cash discounts?
6. What are two methods of recording accounts receivable transactions when a cash discount situation is involved? Which is more theoretically correct? Which is used in practice more of the time? Why?
7. What are the basic problems that occur in the valuation of accounts receivable?
8. What is the theoretical justification of the allowance method as contrasted with the direct write-off method of accounting for bad debts?
9. Indicate how well the percentage-of-sales method and the aging method accomplish the objectives of the allowance method of accounting for bad debts.
10. Of what merit is the contention that the allowance method lacks the objectivity of the direct write-off method? Discuss in terms of accounting’s measurement function.
11. Explain how the accounting for bad debts can be used for earnings management.
12. Because of calamitous earthquake losses, Bernstein Company, one of your client’s oldest and largest customers, suddenly and unexpectedly became bankrupt. Approximately 30% of your client’s total sales have been made to Bernstein Company during each of the past several years. The amount due from Bernstein Company—none of which is collectible—equals 22% of total accounts receivable, an amount that is considerably in excess of what was determined to be an adequate provision for doubtful accounts at the close of the preceding year. How would your client record the write-off of the Bernstein Company receivable if it is using the allowance method of accounting for bad debts? Justify your suggested treatment.
13. What is the normal procedure for handling the collection of accounts receivable previously written off using the direct write-off method? The allowance method?
14. On January 1, 2012, Lombard Co. sells property for which it had paid $690,000 to Sargent Company, receiving in return Sargent’s zero-interest-bearing note for $1,000,000 payable in 5 years. What entry would Lombard make to record the sale, assuming that Lombard frequently sells similar items of property for a cash sales price of $640,000?
15. What is “imputed interest”? In what situations is it necessary to impute an interest rate for notes receivable? What are the considerations in imputing an appropriate interest rate?
16. What is the fair value option? Where do companies that elect the fair value option report unrealized holding gains and losses?
17. Indicate three reasons why a company might sell its receivables to another company.
18. When is the financial components approach to recording the transfers of receivables used? When should a transfer of receivables be recorded as a sale?
19. Moon Hardware is planning to factor some of its receivables. The cash received will be used to pay for inventory purchases. The factor has indicated that it will require “recourse” on the sold receivables. Explain to the controller of Moon Hardware what “recourse” is and how the recourse will be reflected in Moon’s financial statements after the sale of the receivables.
20. Horizon Outfitters Company includes in its trial balance for December 31 an item for Accounts Receivable $789,000. This balance consists of the following items: Due from regular customers $523,000 Refund receivable on prior year’s income taxes (an established claim) 15,500 Travel advance to employees 22,000 Loan to wholly owned subsidiary 45,500 Advances to creditors for goods ordered 61,000 Accounts receivable assigned as security for loans payable 75,000 Notes receivable past due plus interest on these notes 47,000 Total $789,000 Illustrate how these items should be shown in the balance sheet as of December 31.
21. What is the accounts receivable turnover ratio, and what type of information does it provide?
22. You are evaluating Woodlawn Racetrack for a potential loan. An examination of the notes to the financial statements indicates restricted cash at year-end amounts to $100,000. Explain how you would use this information in evaluating Woodlawn’s liquidity.
* 23. Distinguish among the following: (1) a general checking account, (2) an imprest bank account, and (3) a lockbox account.
* 24. What are the general rules for measuring and recognizing gain or loss by both the debtor and the creditor in an impairment?
* 25. What is meant by impairment of a loan? Under what circumstances should a creditor recognize an impaired loan?


BE7-1 Kraft Enterprises owns the following assets at December 31, 2012. Cash in bank—savings account 68,000 Checking account balance 17,000 Cash on hand 9,300 Postdated checks 750 Cash refund due from IRS 31,400 Certificates of deposit (180-day) 90,000 What amount should be reported as cash?
BE7-2 Restin Co. uses the gross method to record sales made on credit. On June 1, 2012, it made sales of $50,000 with terms 3/15, n/45. On June 12, 2012, Restin received full payment for the June 1 sale. Prepare the required journal entries for Restin Co.
BE7-3 Use the information from
BE7-2, assuming Restin Co. uses the net method to account for cash discounts. Prepare the required journal entries for Restin Co.
BE7-4 Wilton, Inc. had net sales in 2012 of $1,400,000. At December 31, 2012, before adjusting entries, the balances in selected accounts were: Accounts Receivable $250,000 debit, and Allowance for Doubtful Accounts $2,400 credit. If Wilton estimates that 2% of its net sales will prove to be uncollectible, prepare the December 31, 2012, journal entry to record bad debt expense.
BE7-5 Use the information presented in
BE7-4 for Wilton, Inc. (a) Instead of estimating the uncollectibles at 2% of net sales, assume that 10% of accounts receivable will prove to be uncollectible. Prepare the entry to record bad debt expense. (b) Instead of estimating uncollectibles at 2% of net sales, assume Wilton prepares an aging schedule that estimates total uncollectible accounts at $24,600. Prepare the entry to record bad debt expense.
BE7-6 Milner Family Importers sold goods to Tung Decorators for $30,000 on November 1, 2012, accepting Tung’s $30,000, 6-month, 6% note. Prepare Milner’s November 1 entry, December 31 annual adjusting entry, and May 1 entry for the collection of the note and interest.
BE7-7 Dold Acrobats lent $16,529 to Donaldson, Inc., accepting Donaldson’s 2-year, $20,000, zero-interestbearing note. The implied interest rate is 10%. Prepare Dold’s journal entries for the initial transaction, recognition of interest each year, and the collection of $20,000 at maturity.
BE7-8 On October 1, 2012, Chung, Inc. assigns $1,000,000 of its accounts receivable to Seneca National Bank as collateral for a $750,000 note. The bank assesses a finance charge of 2% of the receivables assigned and interest on the note of 9%. Prepare the October 1 journal entries for both Chung and Seneca.
BE7-9 Wood Incorporated factored $150,000 of accounts receivable with Engram Factors Inc. on a withoutrecourse basis. Engram assesses a 2% finance charge of the amount of accounts receivable and retains an amount equal to 6% of accounts receivable for possible adjustments. Prepare the journal entry for Wood Incorporated and Engram Factors to record the factoring of the accounts receivable to Engram.
BE7-10 Use the information in
BE7-9 for Wood. Assume that the receivables are sold with recourse. Prepare the journal entry for Wood to record the sale, assuming that the recourse liability has a fair value of $7,500.
BE7-11 Arness Woodcrafters sells $250,000 of receivables to Commercial Factors, Inc. on a with recourse basis. Commercial assesses a finance charge of 5% and retains an amount equal to 4% of accounts receivable. Arness estimates the fair value of the recourse liability to be $8,000. Prepare the journal entry for Arness to record the sale.
BE7-12 Use the information presented in
BE7-11 for Arness Woodcrafters but assume that the recourse liability has a fair value of $4,000, instead of $8,000. Prepare the journal entry and discuss the effects of this change in the value of the recourse liability on Arness’s financial statements.
BE7-13 The financial statements of General Mills, Inc. report net sales of $12,442,000,000. Accounts receivable are $912,000,000 at the beginning of the year and $953,000,000 at the end of the year. Compute General Mills’s accounts receivable turnover ratio. Compute General Mills’s average collection period for accounts receivable in days. *B E7-14 Finman Company designated Jill Holland as petty cash custodian and established a petty cash fund of $200. The fund is reimbursed when the cash in the fund is at $15. Petty cash receipts indicate funds were disbursed for office supplies $94 and miscellaneous expense $87. Prepare journal entries for the establishment of the fund and the reimbursement. *B E7-15 Horton Corporation is preparing a bank reconciliation and has identified the following potential reconciling items. For each item, indicate if it is (1) added to balance per bank statement, (2) deducted from balance per bank statement, (3) added to balance per books, or (4) deducted from balance per books. 1 4 4 5 5 6 6 8 8 8 8 8 9 10 10 (a) Deposit in transit $5,500. (d) Outstanding checks $7,422. (b) Bank service charges $25. (e) NSF check returned $377. (c) Interest credited to Horton’s account $31. *
BE7-16 Use the information presented in
BE7-15 for Horton Corporation. Prepare any entries necessary to make Horton’s accounting records correct and complete. *
BE7-17 Assume that Toni Braxton Company has recently fallen into financial difficulties. By reviewing all available evidence on December 31, 2012, one of Toni Braxton’s creditors, the National American Bank, determined that Toni Braxton would pay back only 65% of the principal at maturity. As a result, the bank decided that the loan was impaired. If the loss is estimated to be $225,000, what entry(ies) should National American Bank make to record this loss?
E7-1 (Determining Cash Balance) The controller for Weinstein Co. is attempting to determine the amount of cash and cash equivalents to be reported on its December 31, 2012, balance sheet. The following information is provided. 1. Commercial savings account of $600,000 and a commercial checking account balance of $800,000 are held at First National Bank of Olathe. 2. Money market fund account held at Volonte Co. (a mutual fund organization) permits Weinstein to write checks on this balance, $5,000,000. 3. Travel advances of $180,000 for executive travel for the first quarter of next year (employee to reimburse through salary reduction). 4. A separate cash fund in the amount of $1,500,000 is restricted for the retirement of long-term debt. 5. Petty cash fund of $1,000. 6. An I.O.U. from Marianne Koch, a company customer, in the amount of $150,000. 7. A bank overdraft of $110,000 has occurred at one of the banks the company uses to deposit its cash receipts. At the present time, the company has no deposits at this bank. 8. The company has two certificates of deposit, each totaling $500,000. These CDs have a maturity of 120 days. 9. Weinstein has received a check that is dated January 12, 2013, in the amount of $125,000. 10. Weinstein has agreed to maintain a cash balance of $500,000 at all times at First National Bank of Olathe to ensure future credit availability. 11. Weinstein has purchased $2,100,000 of commercial paper of Sergio Leone Co. which is due in 60 days. 12. Currency and coin on hand amounted to $7,700.
Instructions (a) Compute the amount of cash and cash equivalents to be reported on Weinstein Co.’s balance sheet at December 31, 2012. (b) Indicate the proper reporting for items that are not reported as cash on the December 31, 2012, balance sheet.
E7-2 (Determine Cash Balance) Presented below are a number of independent situations.
Instructions For each individual situation, determine the amount that should be reported as cash. If the item(s) is not reported as cash, explain the rationale. 1. Checking account balance $925,000; certificate of deposit $1,400,000; cash advance to subsidiary of $980,000; utility deposit paid to gas company $180. 2. Checking account balance $500,000; an overdraft in special checking account at same bank as normal checking account of $17,000; cash held in a bond sinking fund $200,000; petty cash fund $300; coins and currency on hand $1,350. 3. Checking account balance $590,000; postdated check from a customer $11,000; cash restricted due to maintaining compensating balance requirement of $100,000; certified check from customer $9,800; postage stamps on hand $620. 4. Checking account balance at bank $42,000; money market balance at mutual fund (has checking privileges) $48,000; NSF check received from customer $800. 5. Checking account balance $700,000; cash restricted for future plant expansion $500,000; short-term Treasury bills $180,000; cash advance received from customer $900 (not included in checking account balance); cash advance of $7,000 to company executive, payable on demand; refundable deposit of $26,000 paid to federal government to guarantee performance on construction contract. 1 1
E7-3 (Financial Statement Presentation of Receivables) Patriot Company shows a balance of $241,140 in the Accounts Receivable account on December 31, 2012. The balance consists of the following. Installment accounts due in 2013 $23,000 Installment accounts due after 2013 34,000 Overpayments to creditors 2,640 Due from regular customers, of which $40,000 represents accounts pledged as security for a bank loan 89,000 Advances to employees 1,500 Advance to subsidiary company (made in 2010) 91,000
Instructions Illustrate how the information above should be shown on the balance sheet of Patriot Company on December 31, 2012.
E7-4 (Determine Ending Accounts Receivable) Your accounts receivable clerk, Mary Herman, to whom you pay a salary of $1,500 per month, has just purchased a new Audi. You decided to test the accuracy of the accounts receivable balance of $117,000 as shown in the ledger. The following information is available for your first year in business. (1) Collections from customers $198,000 (2) Merchandise purchased 320,000 (3) Ending merchandise inventory 70,000 (4) Goods are marked to sell at 40% above cost
Instructions Compute an estimate of the ending balance of accounts receivable from customers that should appear in the ledger and any apparent shortages. Assume that all sales are made on account.
E7-5 (Record Sales Gross and Net) On June 3, Bolton Company sold to Arquette Company merchandise having a sale price of $2,000 with terms of 2/10, n/60, f.o.b. shipping point. An invoice totaling $90, terms n/30, was received by Arquette on June 8 from John Booth Transport Service for the freight cost. On June 12, the company received a check for the balance due from Arquette Company.
Instructions (a) Prepare journal entries on the Bolton Company books to record all the events noted above under each of the following bases. (1) Sales and receivables are entered at gross selling price. (2) Sales and receivables are entered at net of cash discounts. (b) Prepare the journal entry under basis 2, assuming that Arquette Company did not remit payment until July 29.
E7-6 (Recording Sales Transactions) Presented below is information from Lopez Computers Incorporated. July 1 Sold $30,000 of computers to Smallwood Company with terms 3/15, n/60. Lopez uses the gross method to record cash discounts. 10 Lopez received payment from Smallwood for the full amount owed from the July transactions. 17 Sold $250,000 in computers and peripherals to The Clark Store with terms of 2/10, n/30. 30 The Clark Store paid Lopez for its purchase of July 17.
Instructions Prepare the necessary journal entries for Lopez Computers.
E7-7 (Recording Bad Debts) Sandel Company reports the following financial information before adjustments. Dr. Cr. Accounts Receivable $160,000 Allowance for Doubtful Accounts $ 2,000 Sales Revenue (all on credit) 800,000 Sales Returns and Allowances 50,000
Instructions Prepare the journal entry to record bad debt expense assuming Sandel Company estimates bad debts at (a) 1% of net sales and (b) 5% of accounts receivable.
E7-8 (Recording Bad Debts) At the end of 2012, Sorter Company has accounts receivable of $900,000 and an allowance for doubtful accounts of $40,000. On January 16, 2013, Sorter Company determined that its receivable from Ordonez Company of $8,000 will not be collected, and management authorized its write-off.
Instructions (a) Prepare the journal entry for Sorter Company to write off the Ordonez receivable. (b) What is the net realizable value of Sorter Company’s accounts receivable before the write-off of the Ordonez receivable? (c) What is the net realizable value of Sorter Company’s accounts receivable after the write-off of the Ordonez receivable?
E7-9 (Computing Bad Debts and Preparing Journal Entries) The trial balance before adjustment of Estefan Inc. shows the following balances. Dr. Cr. Accounts Receivable $80,000 Allowance for Doubtful Accounts 1,750 Sales, Net Revenue (all on credit) $580,000
Instructions Give the entry for estimated bad debts assuming that the allowance is to provide for doubtful accounts on the basis of (a) 4% of gross accounts receivable and (b) 1% of net sales.
E7-10 (Bad-Debt Reporting) The chief accountant for Dollywood Corporation provides you with the following list of accounts receivable written off in the current year. Date Customer Amount March 31 E. L. Masters Company $7,800 June 30 Hocking Associates 9,700 September 30 Amy Lowell’s Dress Shop 7,000 December 31 R. Bronson, Inc. 9,830 Dollywood Corporation follows the policy of debiting Bad Debt Expense as accounts are written off. The chief accountant maintains that this procedure is appropriate for financial statement purposes because the Internal Revenue Service will not accept other methods for recognizing bad debts. All of Dollywood Corporation’s sales are on a 30-day credit basis. Sales for the current year total $2,400,000, and research has determined that bad debt losses approximate 2% of sales.
Instructions (a) Do you agree or disagree with Dollywood’s policy concerning recognition of bad debt expense? Why or why not? (b) By what amount would net income differ if bad debt expense was computed using the percentageof- sales approach?
E7-11 (Bad Debts—Aging) Puckett, Inc. includes the following account among its trade receivables. Alstott Co. 1/1 Balance forward 700 1/28 Cash (#1710) 1,100 1/20 Invoice #1710 1,100 4/2 Cash (#2116) 1,350 3/14 Invoice #2116 1,350 4/10 Cash (1/1 Balance) 255 4/12 Invoice #2412 1,710 4/30 Cash (#2412) 1,000 9/5 Invoice #3614 490 9/20 Cash (#3614 and 890 10/17 Invoice #4912 860 part of #2412) 11/18 Invoice #5681 2,000 10/31 Cash (#4912) 860 12/20 Invoice #6347 800 12/1 Cash (#5681) 1,250 12/29 Cash (#6347) 800
Instructions Age the balance and specify any items that apparently require particular attention at year-end.
E7-12 (Journalizing Various Receivable Transactions) Presented below is information related to Sanford Corp. July 1 Sanford Corp. sold to Legler Co. merchandise having a sales price of $10,000 with terms 2/10, net/60. Sanford records its sales and receivables net. 5 Accounts receivable of $12,000 (gross) are factored with Rothchild Credit Corp. without recourse at a fi nancing charge of 9%. Cash is received for the proceeds; collections are handled by the fi nance company. (These accounts were all past the discount period.) 9 Specifi c accounts receivable of $9,000 (gross) are pledged to Rather Credit Corp. as security for a loan of $6,000 at a fi nance charge of 6% of the amount of the loan. The fi nance company will make the collections. (All the accounts receivable are past the discount period.) Dec. 29 Legler Co. notifi es Sanford that it is bankrupt and will pay only 10% of its account. Give the entry to write off the uncollectible balance using the allowance method. (Note: First record the increase in the receivable on July 11 when the discount period passed.)
Instructions Prepare all necessary entries in general journal form for Sanford Corp.
E7-13 (Assigning Accounts Receivable) On April 1, 2012, Prince Company assigns $500,000 of its accounts receivable to the Third National Bank as collateral for a $300,000 loan due July 1, 2012. The assignment agreement calls for Prince Company to continue to collect the receivables. Third National Bank assesses a finance charge of 2% of the accounts receivable, and interest on the loan is 10% (a realistic rate of interest for a note of this type).
Instructions (a) Prepare the April 1, 2012, journal entry for Prince Company. (b) Prepare the journal entry for Prince’s collection of $350,000 of the accounts receivable during the period from April 1, 2012, through June 30, 2012. (c) On July 1, 2012, Prince paid Third National all that was due from the loan it secured on April 1, 2012. Prepare the journal entry to record this payment.
E7-14 (Journalizing Various Receivable Transactions) The trial balance before adjustment for Sinatra Company shows the following balances. Dr. Cr. Accounts Receivable $82,000 Allowance for Doubtful Accounts 1,750 Sales Revenue $430,000
Instructions Using the data above, give the journal entries required to record each of the following cases. (Each situation is independent.) 1. To obtain additional cash, Sinatra factors without recourse $20,000 of accounts receivable with Stills Finance. The finance charge is 10% of the amount factored. 2. To obtain a one-year loan of $55,000, Sinatra assigns $65,000 of specific receivable accounts to Ruddin Financial. The finance charge is 8% of the loan; the cash is received and the accounts turned over to Ruddin Financial. 3. The company wants to maintain Allowance for Doubtful Accounts at 5% of gross accounts receivable. 4. The company wishes to increase the allowance account by 1?% of net sales.
E7-15 (Transfer of Receivables with Recourse) Bryant Inc. factors receivables with a carrying amount of $200,000 to Warren Company for $190,000 on a with recourse basis.
Instructions The recourse provision has a fair value of $2,000. This transaction should be recorded as a sale. Prepare the appropriate journal entry to record this transaction on the books of Bryant Inc.
E7-16 (Transfer of Receivables with Recourse) Gringo Corporation factors $250,000 of accounts receivable with Winkler Financing, Inc. on a with recourse basis. Winkler Financing will collect the receivables. The receivables records are transferred to Winkler Financing on August 15, 2012. Winkler Financing assesses a finance charge of 2% of the amount of accounts receivable and also reserves an amount equal to 4% of accounts receivable to cover probable adjustments.
Instructions (a) What conditions must be met for a transfer of receivables with recourse to be accounted for as a sale? (b) Assume the conditions from part (a) are met. Prepare the journal entry on August 15, 2012, for Gringo to record the sale of receivables, assuming the recourse liability has a fair value of $3,000.
E7-17 (Transfer of Receivables without Recourse) SEK Corp. factors $400,000 of accounts receivable with Mays Finance Corporation on a without recourse basis on July 1, 2012. The receivables records are transferred to Mays Finance, which will receive the collections. Mays Finance assesses a finance charge of 1?% of the amount of accounts receivable and retains an amount equal to 4% of accounts receivable to cover sales discounts, returns, and allowances. The transaction is to be recorded as a sale.
Instructions (a) Prepare the journal entry on July 1, 2012, for SEK Corp. to record the sale of receivables without recourse. (b) Prepare the journal entry on July 1, 2012, for Mays Finance Corporation to record the purchase of receivables without recourse.
E7-18 (Note Transactions at Unrealistic Interest Rates) On July 1, 2012, Rentoul Inc. made two sales. 1. It sold land having a fair value of $900,000 in exchange for a 4-year zero-interest-bearing promissory note in the face amount of $1,416,163. The land is carried on Rentoul’s books at a cost of $590,000. 8 5 8 8 8 8 6 2. It rendered services in exchange for a 3%, 8-year promissory note having a face value of $400,000 (interest payable annually). Rentoul Inc. recently had to pay 8% interest for money that it borrowed from British National Bank. The customers in these two transactions have credit ratings that require them to borrow money at 12% interest.
Instructions Record the two journal entries that should be recorded by Rentoul Inc. for the sales transactions above that took place on July 1, 2012.
E7-19 (Notes Receivable with Unrealistic Interest Rate) On December 31, 2011, Hurly Co. performed environmental consulting services for Cascade Co. Cascade was short of cash, and Hurly Co. agreed to accept a $300,000 zero-interest-bearing note due December 31, 2013, as payment in full. Cascade is somewhat of a credit risk and typically borrows funds at a rate of 10%. Hurly is much more creditworthy and has various lines of credit at 6%.
Instructions (a) Prepare the journal entry to record the transaction of December 31, 2011, for the Hurly Co. (b) Assuming Hurly Co.’s fiscal year-end is December 31, prepare the journal entry for December 31, 2012. (c) Assuming Hurly Co.’s fiscal year-end is December 31, prepare the journal entry for December 31, 2013. (d) Assume that Hurly Co. elects the fair value option for this note. Prepare the journal entry at December 31, 2012, if the fair value of the note is $295,000.
E7-20 (Analysis of Receivables) Presented below is information for Grant Company. 1. Beginning-of-the-year Accounts Receivable balance was $15,000. 2. Net sales (all on account) for the year were $100,000. Grant does not offer cash discounts. 3. Collections on accounts receivable during the year were $80,000.
Instructions (a) Prepare (summary) journal entries to record the items noted above. (b) Compute Grant’s accounts receivable turnover ratio for the year. The company does not believe it will have any bad debts. (c) Use the turnover ratio computed in (b) to analyze Grant’s liquidity. The turnover ratio last year was 7.0.
E7-21 (Transfer of Receivables) Use the information for Grant Company as presented in
E7-20. Grant is planning to factor some accounts receivable at the end of the year. Accounts totaling $10,000 will be transferred to Credit Factors, Inc. with recourse. Credit Factors will retain 5% of the balances for probable adjustments and assesses a finance charge of 4%. The fair value of the recourse liability is $1,000.
Instructions (a) Prepare the journal entry to record the sale of the receivables. (b) Compute Grant’s accounts receivable turnover ratio for the year, assuming the receivables are sold, and discuss how factoring of receivables affects the turnover ratio. *E 7-22 (Petty Cash) McMann, Inc. decided to establish a petty cash fund to help ensure internal control over its small cash expenditures. The following information is available for the month of April. 1. On April 1, it established a petty cash fund in the amount of $200. 2. A summary of the petty cash expenditures made by the petty cash custodian as of April 10 is as follows. Delivery charges paid on merchandise purchased $60 Supplies purchased and used 25 Postage expense 40 I.O.U. from employees 17 Miscellaneous expense 36 The petty cash fund was replenished on April 10. The balance in the fund was $12. 3. The petty cash fund balance was increased $100 to $300 on April 20.
Instructions Prepare the journal entries to record transactions related to petty cash for the month of April. Exercises 411 9 6 7 8 10 *E 7-23 (Petty Cash) The petty cash fund of Teasdale’s Auto Repair Service, a sole proprietorship, contains the following. 1. Coins and currency $ 10.20 2. Postage stamps 7.90 3. An I.O.U. from Richie Cunningham, an employee, for cash advance 40.00 4. Check payable to Teasdale’s Auto Repair from Pottsie Weber, an employee, marked NSF 34.00 5. Vouchers for the following: Stamps $ 20.00 Two Rose Bowl tickets for Nick Teasdale 170.00 Printer cartridge 14.35 204.35 $296.45 The general ledger account Petty Cash has a balance of $300.
Instructions Prepare the journal entry to record the reimbursement of the petty cash fund. *E 7-24 (Bank Reconciliation and Adjusting Entries) Kipling Company deposits all receipts and makes all payments by check. The following information is available from the cash records. June 30 Bank Reconciliation Balance per bank $ 7,000 Add: Deposits in transit 1,540 Deduct: Outstanding checks (2,000) Balance per books $ 6,540 Month of July Results Per Bank Per Books Balance July 31 $8,650 $9,250 July deposits 4,500 5,810 July checks 4,000 3,100 July note collected (not included in July deposits) 1,500 — July bank service charge 15 — July NSF check from a customer, returned by the bank 335 — (recorded by bank as a charge)
Instructions (a) Prepare a bank reconciliation going from balance per bank and balance per book to correct cash balance. (b) Prepare the general journal entry or entries to correct the Cash account. *
E7-25 (Bank Reconciliation and Adjusting Entries) Aragon Company has just received the August 31, 2012, bank statement, which is summarized below. County National Bank Disbursements Receipts Balance Balance, August 1 $ 9,369 Deposits during August $32,200 41,569 Note collected for depositor, including $40 interest 1,040 42,609 Checks cleared during August $34,500 8,109 Bank service charges 20 8,089 Balance, August 31 8,089 The general ledger Cash account contained the following entries for the month of August. Cash Balance, August 1 10,050 Disbursements in August 35,403 Receipts during August 35,000 Deposits in transit at August 31 are $3,800, and checks outstanding at August 31 total $1,550. Cash on hand at August 31 is $310. The bookkeeper improperly entered one check in the books at $146.50 which was written for $164.50 for supplies (expense); it cleared the bank during the month of August.
Instructions (a) Prepare a bank reconciliation dated August 31, 2012, proceeding to a correct balance. (b) Prepare any entries necessary to make the books correct and complete. (c) What amount of cash should be reported in the August 31 balance sheet?
*E 7-26 (Impairments) On December 31, 2012, Iva Majoli Company borrowed $62,092 from Paris Bank, signing a 5-year, $100,000 zero-interest-bearing note. The note was issued to yield 10% interest. Unfortunately, during 2014, Majoli began to experience financial difficulty. As a result, at December 31, 2014, Paris Bank determined that it was probable that it would receive back only $75,000 at maturity. The market rate of interest on loans of this nature is now 11%.
Instructions (a) Prepare the entry to record the issuance of the loan by Paris Bank on December 31, 2012. (b) Prepare the entry, if any, to record the impairment of the loan on December 31, 2014, by Paris Bank. *E 7-27 (Impairments) On December 31, 2012, Conchita Martinez Company signed a $1,000,000 note to Sauk City Bank. The market interest rate at that time was 12%. The stated interest rate on the note was 10%, payable annually. The note matures in 5 years. Unfortunately, because of lower sales, Conchita Martinez’s financial situation worsened. On December 31, 2014, Sauk City Bank determined that it was probable that the company would pay back only $600,000 of the principal at maturity. However, it was considered likely that interest would continue to be paid, based on the $1,000,000 loan.
Instructions (a) Determine the amount of cash Conchita Martinez received from the loan on December 31, 2012. (b) Prepare a note amortization schedule for Sauk City Bank up to December 31, 2014. (c) Determine the loss on impairment that Sauk City Bank should recognize on December 31, 2014.

Problems 413 11 PROBLEMS
P7-1 (Determine Proper Cash Balance) Francis Equipment Co. closes its books regularly on December 31, but at the end of 2012 it held its cash book open so that a more favorable balance sheet could be prepared for credit purposes. Cash receipts and disbursements for the first 10 days of January were recorded as December transactions. The information is given below. 1. January cash receipts recorded in the December cash book totaled $45,640, of which $28,000 represents cash sales, and $17,640 represents collections on account for which cash discounts of $360 were given. 2. January cash disbursements recorded in the December check register liquidated accounts payable of $22,450 on which discounts of $250 were taken. 3. The ledger has not been closed for 2012. 4. The amount shown as inventory was determined by physical count on December 31, 2012. The company uses the periodic method of inventory.
Instructions (a) Prepare any entries you consider necessary to correct Francis’s accounts at December 31. (b) To what extent was Francis Equipment Co. able to show a more favorable balance sheet at December 31 by holding its cash book open? (Compute working capital and the current ratio.) Assume that the balance sheet that was prepared by the company showed the following amounts: Dr. Cr. Cash $39,000 Accounts receivable 42,000 Inventory 67,000 Accounts payable $45,000 Other current liabilities 14,200
P7-2 (Bad-Debt Reporting) Presented below are a series of unrelated situations. 1. Halen Company’s unadjusted trial balance at December 31, 2012, included the following accounts. Debit Credit Allowance for doubtful accounts $4,000 Net sales $1,200,000 Halen Company estimates its bad debt expense to be 1?% of net sales. Determine its bad debt expense for 2012.
2. An analysis and aging of Stuart Corp. accounts receivable at December 31, 2012, disclosed the following. Amounts estimated to be uncollectible $ 180,000 Accounts receivable 1,750,000 Allowance for doubtful accounts (per books) 125,000 What is the net realizable value of Stuart’s receivables at December 31, 2012? 3. Shore Co. provides for doubtful accounts based on 3% of credit sales. The following data are available for 2012. Credit sales during 2012 $2,400,000 Allowance for doubtful accounts 1/1/12 17,000 Collection of accounts written off in prior years (customer credit was reestablished) 8,000 Customer accounts written off as uncollectible during 2012 30,000 What is the balance in Allowance for Doubtful Accounts at December 31, 2012? 4. At the end of its first year of operations, December 31, 2012, Darden Inc. reported the following information. Accounts receivable, net of allowance for doubtful accounts $950,000 Customer accounts written off as uncollectible during 2012 24,000 Bad debt expense for 2012 84,000 What should be the balance in accounts receivable at December 31, 2012, before subtracting the allowance for doubtful accounts? 5. The following accounts were taken from Bullock Inc.’s trial balance at December 31, 2012. Debit Credit Net credit sales $750,000 Allowance for doubtful accounts $ 14,000 Accounts receivable 310,000 If doubtful accounts are 3% of accounts receivable, determine the bad debt expense to be reported for 2012.
Instructions Answer the questions relating to each of the five independent situations as requested.
P7-3 (Bad-Debt Reporting—Aging) Manilow Corporation operates in an industry that has a high rate of bad debts. Before any year-end adjustments, the balance in Manilow’s Accounts Receivable account was $555,000 and the Allowance for Doubtful Accounts had a credit balance of $40,000. The year-end balance reported in the balance sheet for Allowance for Doubtful Accounts will be based on the aging schedule shown below. Probability of Days Account Outstanding Amount Collection Less than 16 days $300,000 .98 Between 16 and 30 days 100,000 .90 Between 31 and 45 days 80,000 .85 Between 46 and 60 days 40,000 .80 Between 61 and 75 days 20,000 .55 Over 75 days 15,000 .00
Instructions (a) What is the appropriate balance for Allowance for Doubtful Accounts at year-end? (b) Show how accounts receivable would be presented on the balance sheet. (c) What is the dollar effect of the year-end bad debt adjustment on the before-tax income? (CMA adapted)
P7-4 (Bad-Debt Reporting) From inception of operations to December 31, 2012, Fortner Corporation provided for uncollectible accounts receivable under the allowance method: provisions were made monthly at 2% of credit sales; bad debts written off were charged to the allowance account; recoveries of bad debts previously written off were credited to the allowance account; and no year-end adjustments to the allowance account were made. Fortner’s usual credit terms are net 30 days. The balance in Allowance for Doubtful Accounts was $130,000 at January 1, 2012. During 2012, credit sales totaled $9,000,000, interim provisions for doubtful accounts were made at 2% of credit sales, $90,000 of bad debts were written off, and recoveries of accounts previously written off amounted to $15,000. Fortner installed a computer system in November 2012, and an aging of accounts receivable was prepared for the first time as of December 31, 2012. A summary of the aging is as follows.
Classification by Balance in Estimated % Month of Sale Each Category Uncollectible November–December 2012 $1,080,000 2% July–October 650,000 10% January–June 420,000 25% Prior to 1/1/12 150,000 80% $2,300,000 Based on the review of collectibility of the account balances in the “prior to 1/1/12” aging category, additional receivables totaling $60,000 were written off as of December 31, 2012. The 80% uncollectible estimate applies to the remaining $90,000 in the category. Effective with the year ended December 31, 2012, Fortner adopted a different method for estimating the allowance for doubtful accounts at the amount indicated by the year-end aging analysis of accounts receivable.
Instructions (a) Prepare a schedule analyzing the changes in Allowance for Doubtful Accounts for the year ended December 31, 2012. Show supporting computations in good form. (Hint: In computing the 12/31/12 allowance, subtract the $60,000 write-off). (b) Prepare the journal entry for the year-end adjustment to the Allowance for Doubtful Accounts balance as of December 31, 2012. (AICPA adapted)
P7-5 (Bad-Debt Reporting) Presented below is information related to the Accounts Receivable accounts of Gulistan Inc. during the current year 2012. 1. An aging schedule of the accounts receivable as of December 31, 2012, is as follows. % to Be Applied after Age Net Debit Balance Correction Is Made Under 60 days $172,342 1% 60–90 days 136,490 3% 91–120 days 39,924* 6% Over 120 days 23,644 $3,700 definitely uncollectible; $372,400 estimated remainder uncollectible is 25% *The $3,240 write-off of receivables is related to the 91-to-120 day category. 2. The Accounts Receivable control account has a debit balance of $372,400 on December 31, 2012. 3. Two entries were made in the Bad Debt Expense account during the year: (1) a debit on December 31 for the amount credited to Allowance for Doubtful Accounts, and (2) a credit for $3,240 on November 3, 2012, and a debit to Allowance for Doubtful Accounts because of a bankruptcy. 4. Allowance for Doubtful Accounts is as follows for 2012. Allowance for Doubtful Accounts Nov. 3 Uncollectible accounts Jan. 1 Beginning balance 8,750 written off 3,240 Dec. 31 5% of $372,400 18,620 5. A credit balance exists in the Accounts Receivable (60–90 days) of $4,840, which represents an advance on a sales contract.
Instructions Assuming that the books have not been closed for 2012, make the necessary correcting entries.
P7-6 (Journalize Various Accounts Receivable Transactions) The balance sheet of Starsky Company at December 31, 2012, includes the following. Notes receivable $ 36,000 Accounts receivable 182,100 Less: Allowance for doubtful accounts 17,300 200,800 Transactions in 2012 include the following. 1. Accounts receivable of $138,000 were collected including accounts of $60,000 on which 2% sales discounts were allowed. 2. $5,300 was received in payment of an account which was written off the books as worthless in 2012. 3. Customer accounts of $17,500 were written off during the year. 4. At year-end, Allowance for Doubtful Accounts was estimated to need a balance of $20,000. This estimate is based on an analysis of aged accounts receivable.
Instructions Prepare all journal entries necessary to reflect the transactions above.
P7-7 (Assigned Accounts Receivable—Journal Entries) Salen Company finances some of its current operations by assigning accounts receivable to a finance company. On July 1, 2012, it assigned, under guarantee, specific accounts amounting to $150,000. The finance company advanced to Salen 80% of the accounts assigned (20% of the total to be withheld until the finance company has made its full recovery), less a finance charge of ?% of the total accounts assigned. On July 31, Salen Company received a statement that the finance company had collected $80,000 of these accounts and had made an additional charge of ?% of the total accounts outstanding as of July 31. This charge is to be deducted at the time of the first remittance due Salen Company from the finance company. (Hint: Make entries at this time.) On August 31, 2012, Salen Company received a second statement from the finance company, together with a check for the amount due. The statement indicated that the finance company had collected an additional $50,000 and had made a further charge of ?% of the balance outstanding as of August 31.
Instructions Make all entries on the books of Salen Company that are involved in the transactions above. (AICPA adapted)
P7-8 (Notes Receivable with Realistic Interest Rate) On October 1, 2012, Arden Farm Equipment Company sold a pecan-harvesting machine to Valco Brothers Farm, Inc. In lieu of a cash payment Valco Brothers Farm gave Arden a 2-year, $120,000, 8% note (a realistic rate of interest for a note of this type). The note required interest to be paid annually on October 1. Arden’s financial statements are prepared on a calendar-year basis.
Instructions Assuming Valco Brothers Farm fulfills all the terms of the note, prepare the necessary journal entries for Arden Farm Equipment Company for the entire term of the note.
P7-9 (Notes Receivable Journal Entries) On December 31, 2012, Oakbrook Inc. rendered services to Begin Corporation at an agreed price of $102,049, accepting $40,000 down and agreeing to accept the balance in four equal installments of $20,000 receivable each December 31. An assumed interest rate of 11% is imputed.
Instructions Prepare the entries that would be recorded by Oakbrook Inc. for the sale and for the receipts and interest on the following dates. (Assume that the effective-interest method is used for amortization purposes.) (a) December 31, 2012. (c) December 31, 2014. (e) December 31, 2016. (b) December 31, 2013. (d) December 31, 2015.
P7-10 (Comprehensive Receivables Problem) Braddock Inc. had the following long-term receivable account balances at December 31, 2011. Note receivable from sale of division $1,500,000 Note receivable from offi cer 400,000 Transactions during 2012 and other information relating to Braddock’s long-term receivables were as follows. 1. The $1,500,000 note receivable is dated May 1, 2011, bears interest at 9%, and represents the balance of the consideration received from the sale of Braddock’s electronics division to New York Company. Principal payments of $500,000 plus appropriate interest are due on May 1, 2012, 2013, and 2014. The first principal and interest payment was made on May 1, 2012. Collection of the note installments is reasonably assured. 2. The $400,000 note receivable is dated December 31, 2011, bears interest at 8%, and is due on December 31, 2014. The note is due from Sean May, president of Braddock Inc. and is collateralized by 10,000 shares of Braddock’s common stock. Interest is payable annually on December 31, and all interest payments were paid on their due dates through December 31, 2012. The quoted market price of Braddock’s common stock was $45 per share on December 31, 2012. 3. On April 1, 2012, Braddock sold a patent to Pennsylvania Company in exchange for a $100,000 zerointerest- bearing note due on April 1, 2014. There was no established exchange price for the patent, and the note had no ready market. The prevailing rate of interest for a note of this type at April 1, 2012, was 12%. The present value of $1 for two periods at 12% is 0.797 (use this factor). The patent had a carrying value of $40,000 at January 1, 2012, and the amortization for the year ended December 31, 2012, would have been $8,000. The collection of the note receivable from Pennsylvania is reasonably assured. 4. On July 1, 2012, Braddock sold a parcel of land to Splinter Company for $200,000 under an installment sale contract. Splinter made a $60,000 cash down payment on July 1, 2012, and signed a 4-year 11% note for the $140,000 balance. The equal annual payments of principal and interest on the note will be $45,125 payable on July 1, 2013, through July 1, 2016. The land could have been sold at an established cash price of $200,000. The cost of the land to Braddock was $150,000. Circumstances are such that the collection of the installments on the note is reasonably assured.
Instructions (a) Prepare the long-term receivables section of Braddock’s balance sheet at December 31, 2012. (b) Prepare a schedule showing the current portion of the long-term receivables and accrued interest receivable that would appear in Braddock’s balance sheet at December 31, 2012. (c) Prepare a schedule showing interest revenue from the long-term receivables that would appear on Braddock’s income statement for the year ended December 31, 2012.
P7-11 (Income Effects of Receivables Transactions) Sandburg Company requires additional cash for its business. Sandburg has decided to use its accounts receivable to raise the additional cash and has asked you to determine the income statement effects of the following contemplated transactions. 1. On July 1, 2012, Sandburg assigned $400,000 of accounts receivable to Keller Finance Company. Sandburg received an advance from Keller of 80% of the assigned accounts receivable less a commission of 3% on the advance. Prior to December 31, 2012, Sandburg collected $220,000 on the assigned accounts receivable, and remitted $232,720 to Keller, $12,720 of which represented interest on the advance from Keller. 2. On December 1, 2012, Sandburg sold $300,000 of net accounts receivable to Wunsch Company for $270,000. The receivables were sold outright on a without-recourse basis. 3. On December 31, 2012, an advance of $120,000 was received from First Bank by pledging $160,000 of Sandburg’s accounts receivable. Sandburg’s first payment to First Bank is due on January 30, 2013.
Instructions Prepare a schedule showing the income statement effects for the year ended December 31, 2012, as a result of the above facts.
*P7-12 (Petty Cash, Bank Reconciliation) Bill Jovi is reviewing the cash accounting for Nottleman, Inc., a local mailing service. Jovi’s review will focus on the petty cash account and the bank reconciliation for the month ended May 31, 2012. He has collected the following information from Nottleman’s bookkeeper for this task. Problems 417 Bank Reconciliation THIRD NATIONAL BANK BANK STATEMENT Disbursements Receipts Balance Balance, May 1, 2012 $8,769 Deposits $28,000 Note payment direct from customer (interest of $30) 930 Checks cleared during May $31,150 Bank service charges 27 Balance, May 31, 2012 6,522 Nottleman’s Cash Account Balance, May 1, 2012 $ 8,850 Deposits during May 2012 31,000 Checks written during May 2012 (31,835) Deposits in transit are determined to be $3,000, and checks outstanding at May 31 total $850. Cash on hand (besides petty cash) at May 31, 2012, is $246. Petty Cash 1. The petty cash fund was established on May 10, 2012, in the amount of $250. 2. Expenditures from the fund by the custodian as of May 31, 2012, were evidenced by approved receipts for the following. Postage expense $33.00 Mailing labels and other supplies 65.00 I.O.U. from employees 30.00 Shipping charges 57.45 Newspaper advertising 22.80 Miscellaneous expense 15.35 8 9 10 On May 31, 2012, the petty cash fund was replenished and increased to $300; currency and coin in the fund at that time totaled $26.40.
Instructions (a) Prepare the journal entries to record the transactions related to the petty cash fund for May. (b) Prepare a bank reconciliation dated May 31, 2012, proceeding to a correct cash balance, and prepare the journal entries necessary to make the books correct and complete. (c) What amount of cash should be reported in the May 31, 2012, balance sheet?
*P7-13 (Bank Reconciliation and Adjusting Entries) The cash account of Aguilar Co. showed a ledger balance of $3,969.85 on June 30, 2012. The bank statement as of that date showed a balance of $4,150. Upon comparing the statement with the cash records, the following facts were determined. 1. There were bank service charges for June of $25. 2. A bank memo stated that Bao Dai’s note for $1,200 and interest of $36 had been collected on June 29, and the bank had made a charge of $5.50 on the collection. (No entry had been made on Aguilar’s books when Bao Dai’s note was sent to the bank for collection.) 3. Receipts for June 30 for $3,390 were not deposited until July 2. 4. Checks outstanding on June 30 totaled $2,136.05. 5. The bank had charged the Aguilar Co.’s account for a customer’s uncollectible check amounting to $253.20 on June 29. 6. A customer’s check for $90 had been entered as $60 in the cash receipts journal by Aguilar on June 15. 7. Check no. 742 in the amount of $491 had been entered in the cash journal as $419, and check no. 747 in the amount of $58.20 had been entered as $582. Both checks had been issued to pay for purchases of equipment.
Instructions (a) Prepare a bank reconciliation dated June 30, 2012, proceeding to a correct cash balance. (b) Prepare any entries necessary to make the books correct and complete.
*P 7-14 (Bank Reconciliation and Adjusting Entries) Presented below is information related to Haselhof Inc. Balance per books at October 31, $41,847.85; receipts $173,523.91; disbursements $164,893.54. Balance per bank statement November 30, $56,274.20. The following checks were outstanding at November 30. 1224 $1,635.29 1230 2,468.30 1232 2,125.15 1233 482.17 Included with the November bank statement and not recorded by the company were a bank debit memo for $27.40 covering bank charges for the month, a debit memo for $372.13 for a customer’s check returned and marked NSF, and a credit memo for $1,400 representing bond interest collected by the bank in the name of Haselhof Inc. Cash on hand at November 30 recorded and awaiting deposit amounted to $1,915.40.
Instructions (a) Prepare a bank reconciliation (to the correct balance) at November 30, for Haselhof Inc. from the information above. (b) Prepare any journal entries required to adjust the cash account at November 30.
*P7-15 (Loan Impairment Entries) On January 1, 2012, Botosan Company issued a $1,200,000, 5-year, zerointerest- bearing note to National Organization Bank. The note was issued to yield 8% annual interest. Unfortunately, during 2013 Botosan fell into financial trouble due to increased competition. After reviewing all available evidence on December 31, 2013, National Organization Bank decided that the loan was impaired. Botosan will probably pay back only $800,000 of the principal at maturity.
Instructions (a) Prepare journal entries for both Botosan Company and National Organization Bank to record the issuance of the note on January 1, 2012. (Round to the nearest $10.) (b) Assuming that both Botosan Company and National Organization Bank use the effective-interest method to amortize the discount, prepare the amortization schedule for the note. (c) Under what circumstances can National Organization Bank consider Botosan’s note to be impaired? (d) Compute the loss National Organization Bank will suffer from Botosan’s financial distress on December 31, 2013. What journal entries should be made to record this loss?

CA7-1 (Bad-Debt Accounting) Simms Company has significant amounts of trade accounts receivable. Simms uses the allowance method to estimate bad debts instead of the direct write-off method. During the year, some specific accounts were written off as uncollectible, and some that were previously written off as uncollectible were collected.
Instructions (a) What are the deficiencies of the direct write-off method? (b) What are the two basic allowance methods used to estimate bad debts, and what is the theoretical justification for each? (c) How should Simms account for the collection of the specific accounts previously written off as uncollectible?
CA7-2 (Various Receivable Accounting Issues) Kimmel Company uses the net method of accounting for sales discounts. Kimmel also offers trade discounts to various groups of buyers. On August 1, 2012, Kimmel sold some accounts receivable on a without recourse basis. Kimmel incurred a finance charge. Kimmel also has some notes receivable bearing an appropriate rate of interest. The principal and total interest are due at maturity. The notes were received on October 1, 2012, and mature on September 30, 2014. Kimmel’s operating cycle is less than one year.
Instructions (a) (1) Using the net method, how should Kimmel account for the sales discounts at the date of sale? What is the rationale for the amount recorded as sales under the net method? (2) Using the net method, what is the effect on Kimmel’s sales revenues and net income when customers do not take the sales discounts? (b) What is the effect of trade discounts on sales revenues and accounts receivable? Why? (c) How should Kimmel account for the accounts receivable factored on August 1, 2012? Why? (d) How should Kimmel account for the note receivable and the related interest on December 31, 2012? Why?
CA7-3 (Bad-Debt Reporting Issues) Clark Pierce conducts a wholesale merchandising business that sells approximately 5,000 items per month with a total monthly average sales value of $250,000. Its annual bad debt rate has been approximately 1?% of sales. In recent discussions with his bookkeeper, Mr. Pierce has become confused by all the alternatives apparently available in handling the Allowance for Doubtful Accounts balance. The following information has been presented to Pierce. 1. An allowance can be set up (a) on the basis of a percentage of sales or (b) on the basis of a valuation of all past due or otherwise questionable accounts receivable. Those considered uncollectible can be charged to such allowance at the close of the accounting period, or specific items can be charged off directly against (1) Gross Sales or to (2) Bad Debt Expense in the year in which they are determined to be uncollectible. 2. Collection agency and legal fees, and so on, incurred in connection with the attempted recovery of bad debts can be charged to (a) Bad Debt Expense, (b) Allowance for Doubtful Accounts, (c) Legal Expense, or (d) Administrative Expense. 3. Debts previously written off in whole or in part but currently recovered can be credited to (a) Other Revenue, (b) Bad Debt Expense, or (c) Allowance for Doubtful Accounts.
Instructions Which of the foregoing methods would you recommend to Mr. Pierce in regard to (1) allowances and charge-offs, (2) collection expenses, and (3) recoveries? State briefly and clearly the reasons supporting your recommendations.
CA7-4 (Basic Note and Accounts Receivable Transactions) Part 1 On July 1, 2012, Wallace Company, a calendar-year company, sold special-order merchandise on credit and received in return an interest-bearing note receivable from the customer. Wallace Company will receive interest at the prevailing rate for a note of this type. Both the principal and interest are due in one lump sum on June 30, 2013.
Instructions When should Wallace Company report interest revenue from the note receivable? Discuss the rationale for your answer.
Part 2 On December 31, 2012, Wallace Company had significant amounts of accounts receivable as a result of credit sales to its customers. Wallace uses the allowance method based on credit sales to estimate bad debts. Past experience indicates that 2% of credit sales normally will not be collected. This pattern is expected to continue.
Instructions (a) Discuss the rationale for using the allowance method based on credit sales to estimate bad debts. Contrast this method with the allowance method based on the balance in the trade receivables accounts. (b) How should Wallace Company report the allowance for doubtful accounts on its balance sheet at December 31, 2012? Also, describe the alternatives, if any, for presentation of bad debt expense in Wallace Company’s 2012 income statement. (AICPA adapted)
CA7-5 (Bad-Debt Reporting Issues) Valasquez Company sells office equipment and supplies to many organizations in the city and surrounding area on contract terms of 2/10, n/30. In the past, over 75% of the credit customers have taken advantage of the discount by paying within 10 days of the invoice date. The number of customers taking the full 30 days to pay has increased within the last year. Current indications are that less than 60% of the customers are now taking the discount. Bad debts as a percentage of gross credit sales have risen from the 1.5% provided in past years to about 4% in the current year. The controller has responded to a request for more information on the deterioration in collections of accounts receivable with the report reproduced below.  VALASQUEZ COMPANY FINANCE COMMITTEE REPORT—ACCOUNTS RECEIVABLE COLLECTIONS MAY 31, 2013 The fact that some credit accounts will prove uncollectible is normal. Annual bad debt write-offs have been 1.5% of gross credit sales over the past fi ve years. During the last fi scal year, this percentage increased to slightly less than 4%. The current Accounts Receivable balance is $1,600,000. The condition of this balance in terms of age and probability of collection is as follows. Proportion of Total Age Categories Probability of Collection 68% not yet due 99% 15% less than 30 days past due 9612% 8% 30 to 60 days past due 95% 5% 61 to 120 days past due 91% 212% 121 to 180 days past due 70% 112% over 180 days past due 20% Allowance for Doubtful Accounts had a credit balance of $43,300 on June 1, 2012. Valasquez Company has provided for a monthly bad debt expense accrual during the current fi scal year based on the assumption that 4% of gross credit sales will be uncollectible. Total gross credit sales for the 2012–2013 fi scal year amounted to $4,000,000. Write-offs of bad accounts during the year totaled $145,000.
Instructions (a) Prepare an accounts receivable aging schedule for Valasquez Company using the age categories identified in the controller’s report to the finance committee showing: (1) The amount of accounts receivable outstanding for each age category and in total. (2) The estimated amount that is uncollectible for each category and in total. (b) Compute the amount of the year-end adjustment necessary to bring Allowance for Doubtful Accounts to the balance indicated by the age analysis. Then prepare the necessary journal entry to adjust the accounting records. (c) In a recessionary environment with tight credit and high interest rates: (1) Identify steps Valasquez Company might consider to improve the accounts receivable situation. (2) Then evaluate each step identified in terms of the risks and costs involved. (CMA adapted)
CA7-6 (Sale of Notes Receivable) Corrs Wholesalers Co. sells industrial equipment for a standard 3-year note receivable. Revenue is recognized at time of sale. Each note is secured by a lien on the equipment and has a face amount equal to the equipment’s list price. Each note’s stated interest rate is below the customer’s market rate at date of sale. All notes are to be collected in three equal annual installments beginning one year after sale. Some of the notes are subsequently sold to a bank with recourse, some are subsequently sold without recourse, and some are retained by Corrs. At year end, Corrs evaluates all outstanding notes receivable and provides for estimated losses arising from defaults.
Instructions (a) What is the appropriate valuation basis for Corrs’s notes receivable at the date it sells equipment? (b) How should Corrs account for the sale, without recourse, of a February 1, 2012, note receivable sold on May 1, 2012? Why is it appropriate to account for it in this way? (c) At December 31, 2012, how should Corrs measure and account for the impact of estimated losses resulting from notes receivable that it (1) Retained and did not sell? (2) Sold to bank with recourse? (AICPA adapted)
CA7-7 (Zero-Interest-Bearing Note Receivable) On September 30, 2011, Rolen Machinery Co. sold a machine and accepted the customer’s zero-interest-bearing note. Rolen normally makes sales on a cash basis. Since the machine was unique, its sales price was not determinable using Rolen’s normal pricing practices. After receiving the first of two equal annual installments on September 30, 2012, Rolen immediately sold the note with recourse. On October 9, 2013, Rolen received notice that the note was dishonored, and it paid all amounts due. At all times prior to default, the note was reasonably expected to be paid in full.
Instructions (a) (1) How should Rolen determine the sales price of the machine? (2) How should Rolen report the effects of the zero-interest-bearing note on its income statement for the year ended December 31, 2011? Why is this accounting presentation appropriate? (b) What are the effects of the sale of the note receivable with recourse on Rolen’s income statement for the year ended December 31, 2012, and its balance sheet at December 31, 2012? (c) How should Rolen account for the effects of the note being dishonored?
CA7-8 (Reporting of Notes Receivable, Interest, and Sale of Receivables) On July 1, 2012, Moresan Company sold special-order merchandise on credit and received in return an interest-bearing note receivable from the customer. Moresan will receive interest at the prevailing rate for a note of this type. Both the principal and interest are due in one lump sum on June 30, 2013. On September 1, 2012, Moresan sold special-order merchandise on credit and received in return a zero-interest-bearing note receivable from the customer. The prevailing rate of interest for a note of this type is determinable. The note receivable is due in one lump sum on August 31, 2014. Moresan also has significant amounts of trade accounts receivable as a result of credit sales to its customers. On October 1, 2012, some trade accounts receivable were assigned to Indigo Finance Company on a non-notification (Moresan handles collections) basis for an advance of 75% of their amount at an interest charge of 8% on the balance outstanding. On November 1, 2012, other trade accounts receivable were sold on a without-recourse basis. The factor withheld 5% of the trade accounts receivable factored as protection against sales returns and allowances and charged a finance charge of 3%.
Instructions (a) How should Moresan determine the interest revenue for 2012 on the: (1) Interest-bearing note receivable? Why? (2) Zero-interest-bearing note receivable? Why? (b) How should Moresan report the interest-bearing note receivable and the zero-interest-bearing note receivable on its balance sheet at December 31, 2012? (c) How should Moresan account for subsequent collections on the trade accounts receivable assigned on October 1, 2012, and the payments to Indigo Finance? Why? (d) How should Moresan account for the trade accounts receivable factored on November 1, 2012? Why? (AICPA adapted)
CA7-9 (Accounting for Zero-Interest-Bearing Note) Soon after beginning the year-end audit work on March 10 at Engone Company, the auditor has the following conversation with the controller. Controller: The year ended March 31st should be our most profi table in history and, as a consequence, the board of directors has just awarded the offi cers generous bonuses. Auditor: I thought profi ts were down this year in the industry, according to your latest interim report. Controller: Well, they were down, but 10 days ago we closed a deal that will give us a substantial increase for the year. Auditor: Oh, what was it? Controller: Well, you remember a few years ago our former president bought stock in Henderson Enterprises because he had those grandiose ideas about becoming a conglomerate. For 6 years we have not been able to sell this stock, which cost us $3,000,000 and has not paid a nickel in dividends. Thursday we sold this stock to Bimini Inc. for $4,000,000. So, we will have a gain of $700,000 ($1,000,000 pretax) which will increase our net income for the year to $4,000,000, compared with last year’s $3,800,000. As far as I know, we’ll be the only company in the industry to register an increase in net income this year. That should help the market value of the stock! Auditor: Do you expect to receive the $4,000,000 in cash by March 31st, your fi scal year-end? Controller: No. Although Bimini Inc. is an excellent company, they are a little tight for cash because of their rapid growth. Consequently, they are going to give us a $4,000,000 zero-interestbearing note with payments of $400,000 per year for the next 10 years. The fi rst payment is due on March 31 of next year. Auditor: Why is the note zero-interest-bearing? Controller: Because that’s what everybody agreed to. Since we don’t have any interest-bearing debt, the funds invested in the note do not cost us anything and besides, we were not getting any dividends on the Henderson Enterprises stock.
Instructions Do you agree with the way the controller has accounted for the transaction? If not, how should the transaction be accounted for?
CA7-10 (Receivables Management) As the manager of the accounts receivable department for Beavis Leather Goods, Ltd., you recently noticed that Kelly Collins, your accounts receivable clerk who is paid $1,200 per month, has been wearing unusually tasteful and expensive clothing. (This is Beavis’s first year in business.) This morning, Collins drove up to work in a brand new Lexus. Naturally suspicious by nature, you decide to test the accuracy of the accounts receivable balance of $192,000 as shown in the ledger. The following information is available for your first year (precisely 9 months ended September 30, 2012) in business. (1) Collections from customers $188,000 (2) Merchandise purchased 360,000 (3) Ending merchandise inventory 90,000 (4) Goods are marked to sell at 40% above cost.
Instructions Assuming all sales were made on account, compute the ending accounts receivable balance that should appear in the ledger, noting any apparent shortage. Then, draft a memo dated October 3, 2012, to Mark Price, the branch manager, explaining the facts in this situation. Remember that this problem is serious, and you do not want to make hasty accusations.
CA7-11 (Bad-Debt Reporting) Marvin Company is a subsidiary of Hughes Corp. The controller believes that the yearly allowance for doubtful accounts for Marvin should be 2% of net credit sales. The president, nervous that the parent company might expect the subsidiary to sustain its 10% growth rate, suggests that the controller increase the allowance for doubtful accounts to 3% yearly. The president thinks that the lower net income, which reflects a 6% growth rate, will be a more sustainable rate for Marvin Company.
Instructions (a) Should the controller be concerned with Marvin Company’s growth rate in estimating the allowance? Explain your answer. (b) Does the president’s request pose an ethical dilemma for the controller? Give your reasons.

FINANCIAL REPORTING Financial Reporting Problem The Procter & Gamble Company (P&G) The financial statements of P&G are presented in Appendix 5B or can be accessed at the book’s companion website, www.wiley.com/college/kieso.
Instructions Refer to P&G’s financial statements and the accompanying notes to answer the following questions. (a) What criteria does P&G use to classify “Cash and cash equivalents” as reported in its balance sheet? (b) As of June 30, 2009, what balances did P&G have in cash and cash equivalents? What were the major uses of cash during the year? (c) P&G reports no allowance for doubtful accounts, suggesting that bad debt expense is not material for this company. Is it reasonable that a company like P&G would not have material bad debt expense? Explain. Comparative Analysis Case The Coca-Cola Company and PepsiCo, Inc.
Instructions Go to the book’s companion website and use the information found there to answer the following questions related to The Coca-Cola Company and PepsiCo, Inc. (a) What were the cash and cash equivalents reported by Coca-Cola and PepsiCo at the end of 2009? What does each company classify as cash equivalents? (b) What were the accounts receivable (net) for Coca-Cola and PepsiCo at the end of 2009? Which company reports the greater allowance for doubtful accounts receivable (amount and percentage of gross receivable) at the end of 2009? (c) Assuming that all “net operating revenues” (Coca-Cola) and all “net sales” (PepsiCo) were net credit sales, compute the accounts receivable turnover ratio for 2009 for Coca-Cola and PepsiCo; also compute the days outstanding for receivables. What is your evaluation of the difference?

Financial Statement Analysis Cases Case I Occidental Petroleum Corporation Occidental Petroleum Corporation reported the following information in a recent annual report. Consolidated Balance Sheets (in millions) Current Prior Assets at December 31, year year Current assets Cash and cash equivalents $ 683 $ 146 Trade receivables, net of allowances 804 608 Receivables from joint ventures, partnerships, and other 330 321 Inventories 510 491 Prepaid expenses and other 147 307 Total current assets 2,474 1,873 Long-term receivables, net 264 275 Notes to Consolidated Financial Statements Cash and Cash Equivalents. Cash equivalents consist of highly liquid investments. Cash equivalents totaled approximately $661 million and $116 million at current and prior year-ends, respectively.
Trade Receivables. Occidental has agreement to sell, under a revolving sale program, an undivided percentage ownership interest in a designated pool of non-interest-bearing receivables. Under this program, Occidental serves as the collection agent with respect to the receivables sold. An interest in new receivables is sold as collections are made from customers. The balance sold at current year-end was $360 million.
Instructions (a) What items other than coin and currency may be included in “cash”? (b) What items may be included in “cash equivalents”? (c) What are compensating balance arrangements, and how should they be reported in financial statements? (d) What are the possible differences between cash equivalents and short-term (temporary) investments? (e) Assuming that the sale agreement meets the criteria for sale accounting, cash proceeds were $345 million, the carrying value of the receivables sold was $360 million, and the fair value of the recourse liability was $15 million, what was the effect on income from the sale of receivables? (f) Briefly discuss the impact of the transaction in (e) on Occidental’s liquidity. Case 2 Microsoft Corporation Microsoft is the leading developer of software in the world. To continue to be successful Microsoft must generate new products, which requires significant amounts of cash. Shown below is the current asset and current liability information from Microsoft’s June 30, 2009, balance sheet (in millions). Following the Microsoft data is the current asset and current liability information for Oracle (in millions), another major software developer. Microsoft Corporation Balance Sheets (partial) As of June 30 (in millions) Current assets 2009 2008 Cash and equivalents $ 6,076 $10,339 Short-term investments 25,371 13,323 Accounts receivable 11,192 13,589 Other 6,641 5,991 Total current assets $49,280 $43,242 Total current liabilities $27,034 $29,886 Oracle Balance Sheets (partial) As of May 31 (in millions) Current assets 2009 2008 Cash and equivalents $ 8,995 $ 8,262 Short-term investments 3,629 2,781 Receivables 4,430 5,127 Other current assets 1,527 1,933 Total current assets $18,581 $18,103 Current liabilities $ 9,149 $10,029 Part 1 (Cash and Cash Equivalents)
Instructions (a) What is the definition of a cash equivalent? Give some examples of cash equivalents. How do cash equivalents differ from other types of short-term investments? (b) Calculate (1) the current ratio and (2) working capital for each company for 2009 and discuss your results. (c) Is it possible to have too many liquid assets?
Instructions (a) Compute Microsoft’s accounts receivable turnover ratio for 2009 and discuss your results. Microsoft had sales revenue of $58,437 million in 2009. (b) Reconstruct the summary journal entries for 2009 based on the information in the disclosure. (c) Briefly discuss how the accounting for bad debts affects the analysis in Part 2 (a). Accounting, Analysis, and Principles The Flatiron Pub provides catering services to local businesses. The following information was available for The Flatiron for the years ended December 31, 2011 and 2012. December December 31, 2011 31, 2012 Cash $ 2,000 $ 1,685 Accounts receivable 46,000 ? Allowance for doubtful accounts 550 ? Other current assets 8,500 7,925 Current liabilities 37,000 44,600 Total credit sales 205,000 255,000 Collections on accounts receivable 190,000 228,000 Flatiron management is preparing for a meeting with its bank concerning renewal of a loan and has collected the following information related to the above balances. 1. The cash reported at December 31, 2012, reflects the following items: petty cash $1,575 and postage stamps $110. The Other current assets balance at December 31, 2012, includes the checking account balance of $4,000. 2. On November 30, 2012, Flatiron agreed to accept a 6-month, $5,000 note bearing 12% interest, payable at maturity, from a major client in settlement of a $5,000 bill. The above balances do not reflect this transaction. 3. Flatiron factored some accounts receivable at the end of 2012. It transferred accounts totaling $10,000 to Final Factor, Inc. with recourse. Final Factor will receive the collections from Flatiron’s customers and will retain 2% of the balances. Final Factor assesses Flatiron a fi nance charge of 3% on this transfer. The fair value of the recourse liability is $400. However, management has determined that the amount due from the factor and the fair value of the resource obligation have not been recorded, and neither are included in the balances above. 4. Flatiron charged off uncollectible accounts with balances of $1,600. On the basis of the latest available information, the 2012 provision for bad debts is estimated to be 2.5% of accounts receivable.

Allowance for Doubtful Accounts.
The allowance for doubtful accounts reflects our best estimate of probable losses inherent in the accounts receivable balance. We determine the allowance based on known troubled accounts, historical experience, and other currently available evidence. Activity in the allowance for doubtful accounts is as follows: (in millions) Balance at Charged to beginning of costs Write-offs Balance at Year Ended June 30 period and expenses and other end of period 2007 $142 $ 64 $(89) $117 2008 117 88 (52) 153 2009 153 360 (62) 451
Part 2 (Accounts Receivables) Microsoft provided the following disclosure related to its accounts receivable.
Accounting (a) Based on the above transactions, determine the balance for (1) Accounts Receivable and (2) Allowance for Doubtful Accounts at December 31, 2012. (b) Prepare the current assets section of The Flatiron’s balance sheet at December 31, 2012.
Analysis (a) Compute Flatiron’s current ratio and accounts receivable turnover ratio for December 31, 2012. Use these measures to analyze Flatiron’s liquidity. The accounts receivable turnover ratio in 2011 was 4.37. (b) Discuss how the analysis you did above of Flatiron’s liquidity would be affected if Flatiron had transferred the receivables in a secured borrowing transaction.
Principles What is the conceptual basis for recording bad debt expense based on the percentage-of-receivables at December 31, 2012?

BRIDGE TO THE PROFESSION Professional Research: FASB Codification As the new staff person in your company’s treasury department, you have been asked to conduct research related to a proposed transfer of receivables. Your supervisor wants the authoritative sources for the following items that are discussed in the securitization agreement.
Instructions If your school has a subscription to the FASB Codification, go to http://aaahq.org/asclogin.cfm to log in and prepare responses to the following. Provide Codification references for your responses. (a) Identify relevant Codification section that addresses transfers of receivables. (b) What are the objectives for reporting transfers of receivables? (c) Provide definitions for the following: (1) Transfer. (2) Recourse. (3) Collateral. (d) Provide other examples (besides recourse and collateral) that qualify as continuing involvement.

Professional Simulation
In this simulation, you are asked to address various requirements regarding the accounting for receivables. Prepare responses to all parts. Directions Situation Measurement Financial Statement Analysis Explanation Resources During 2012, Horn had the following transactions. 1. On June 30, sales of $50,000 to a major customer were settled, with Horn accepting a 1-year $50,000 note bearing 11% interest, payable at maturity. 2. Horn factors some accounts receivable at the end of the year. Accounts totaling $47,700 are transferred to First Factors, Inc. with recourse. First Factors will receive the collections from Horn’s customers and retain 6% of the balances. Horn is assessed a finance charge of 4% on this transfer. The fair value of the recourse liability is $4,000. 3. On the basis of the latest available information, the 2012 provision for bad debts is estimated to be 0.8% of credit sales. Horn charged off as uncollectible, accounts with balances of $2,300. Mike Horn Corporation manufactures sweatshirts for sale to athletic-wear retailers. The following information was available for Horn for the years ended December 31, 2011 and 2012. December 31, December 31, 2011 2012 Based on the above transactions, determine the balance for Accounts Receivable and Allowance for Doubtful Accounts at December 31, 2012. Cash Accounts receivable Allowance for doubtful accounts Inventory Current liabilities Total credit sales Collections on accounts receivable $ 20,000 40,000 5,500 85,000 80,000 480,000 440,000 $ 15,000 ? ? 80,000 86,000 550,000 500,000 Compute the current ratio and the accounts receivable turnover ratio for Horn at December 31, 2012. Use these measures to analyze Horn’s liquidity. The accounts receivable turnover ratio in 2011 was 10.37. Discuss how the analysis above would be affected if Horn had transferred the accounts receivable in a secured borrowing transaction. Prepare the current assets section of Horn’s balance sheet at December 31, 2012. The cash balance at December 31, 2012, reflects the following items: checking account $9,600; postage stamps $100; petty cash $300; currency $3,000; customers’ checks (post-dated) $2,000.

Directions Situation Measurement Financial Statement Analysis Explanation Resources 1 2 3 45 A B C + KWW_Professional_Simulation
Accounting for Receivables Time Remaining 2 hours 20 minutes Unsplit Split Horiz Split Vertical Spreadsheet Calculator Exit The basic accounting and reporting issues related to recognition and measurement of receivables, such as the use of allowance accounts, how to record discounts, use of the allowance method to account for bad debts, and factoring, are similar for both IFRS and GAAP. IAS 1 (“Presentation of Financial Statements”) is the only standard that discusses issues specifically related to cash. IFRS 7 (“Financial Instruments: Disclosure”) and IAS 39 (“Financial Instruments: Recognition and Measurement”) are the two international standards that address issues related to financial instruments and more specifically receivables.
RELEVANT FACTS • The accounting and reporting related to cash is essentially the same under both IFRS and GAAP. In addition, the definition used for cash equivalents is the same. One difference is that, in general, IFRS classifi es bank overdrafts as cash. • Like GAAP, cash and receivables are generally reported in the current assets section of the balance sheet under IFRS. However, companies may report cash and receivables as the last items in current assets under IFRS. • IFRS requires that loans and receivables be accounted for at amortized cost, adjusted for allowances for doubtful accounts. IFRS sometimes refers to these allowances as provisions. The entry to record the allowance would be: Bad Debt Expense xxxxxx Provision for Doubtful Accounts xxxxxx • Although IFRS implies that receivables with different characteristics should be reported separately, there is no standard that mandates this segregation. • The fair value option is similar under GAAP and IFRS but not identical. The international standard related to the fair value option is subject to certain qualifying criteria not in the U.S. standard. In addition, there is some difference in the financial instruments covered. • IFRS and GAAP differ in the criteria used to account for transfers of receivables. IFRS is a combination of an approach focused on risks and rewards and loss of control. GAAP uses loss of control as the primary criterion. In addition, IFRS generally permits partial transfers; GAAP does not. ABOUT THE NUMBERS Impairment Evaluation Process IFRS provides detailed guidelines to assess whether receivables should be considered uncollectible (often referred to as impaired). GAAP does not identify a specifi c approach. Under IFRS, companies assess their receivables for impairment each reporting period and start the impairment assessment by considering whether objective evidence indicates that one or more loss events have occurred. Examples of possible loss events are: • Significant financial problems of the customer. • Payment defaults. • Renegotiation of terms of the receivable due to financial difficulty of the customer. IFRS Insights • Measurable decrease in estimated future cash fl ows from a group of receivables since initial recognition, although the decrease cannot yet be identifi ed with individual assets in the group. A receivable is considered impaired when a loss event indicates a negative impact on the estimated future cash fl ows to be received from the customer (IAS 39, paragraphs 58–70). The IASB requires that the impairment assessment should be performed as follows. 1. Receivables that are individually significant are considered for impairment separately, if impaired, the company recognizes it. Receivables that are not individually significant may also be assessed individually, but it is not necessary to do so. 2. Any receivable individually assessed that is not considered impaired is included with a group of assets with similar credit-risk characteristics and collectively assessed for impairment. 3. Any receivables not individually assessed are collectively assessed for impairment. To illustrate, assume that Hector Company has the following receivables classifi ed into individually significant and all other receivables. Individually significant receivables Yaan Company $ 40,000 Randon Inc. 100,000 Fernando Co. 60,000 Blanchard Ltd. 50,000 $250,000 All other receivables 500,000 Total $750,000 Hector determines that Yaan’s receivable is impaired by $15,000, and Blanchard’s receivable is totally impaired. Both Randon’s and Fernando’s receivables are not considered impaired. Hector also determines a composite rate of 2% is appropriate to measure impairment on all other receivables. The total impairment is computed as follows. Accounts Receivable Impairments Individually assessed receivables Yaan Company $15,000 Blanchard Ltd. 50,000 Collectively assessed receivables $500,000 Add: Randon Co. 100,000 Fernando Co. 60,000 Total collectively assessed receivables $660,000 Collectively assessed impairments ($660,00 3 2%) 13,200 Total impairment $78,200 Hector therefore has an impairment related to its receivables of $78,200. The most controversial part of this computation is that Hector must include in the collective assessment the receivables from Randon and Fernando that were individually assessed and not considered impaired. The rationale for including Randon and Fernando in the collective assessment is that companies often do not have all the information at hand to make an informed decision for individual assessment.
Recovery of Impairment Loss The accounting for loan impairments is similar between GAAP and IFRS. Subsequent to recording an impairment, events or economic conditions may change such that the extent of the impairment loss decreases (e.g., due to an impairment in the debtor’s credit rating). Under IFRS, some or all of the previously recognized impairment loss shall be reversed either directly, with a debit to Accounts Receivable, or by debiting the allowance account and crediting Bad Debt Expense. Such reversals of impairment losses are not allowed under GAAP. To illustrate, recall the Ogden Bank impairment example of page 402. In that situation, Ogden Bank (the creditor) recognized an impairment loss of $12,434 by debiting Bad Debt Expense for the expected loss. At the same time, it reduced the overall value of the receivable by crediting Allowance for Doubtful Accounts. Ogden made the following entry to record the loss. Bad Debt Expense 12,434 Allowance for Doubtful Accounts 12,434 Now, assume that in the year following the impairment recorded by Ogden, Carl King (the borrower) has worked his way out of financial difficulty. Ogden now expects to receive all payments on the loan according to the original loan terms. Based on this new information, the present value of the expected payments is $100,000. Thus, Ogden makes the following entry to reverse the previously recorded impairment. Allowance for Doubtful Accounts 12,434 Bad Debt Expense 12,434 Note that the reversal of impairment losses shall not result in carrying amount of the receivable that exceeds the amortized cost that would have been reported had the impairment not been recognized. Under GAAP, reversal of an impairment is not permitted. Rather, the balance of the loan after the impairment becomes the new basis for the loan.
ON THE HORIZON The question of recording fair values for financial instruments will continue to be an important issue to resolve as the Boards work toward convergence. Both the IASB and the FASB have indicated that they believe that financial statements would be more transparent and understandable if companies recorded and reported all financial instruments at fair value. That said, in IFRS 9, which was issued in 2009, the IASB created a split model, where some financial instruments are recorded at fair value, but other financial assets, such as loans and receivables, can be accounted for at amortized cost if certain criteria are met. Critics say that this can result in two companies with identical securities accounting for those securities in different ways. A proposal by the FASB would require that nearly all financial instruments, including loans and receivables, be accounted for at fair value. It has been suggested that IFRS 9 will likely be changed or replaced as the FASB and IASB continue to deliberate the best treatment for financial instruments. In fact, one member of the IASB said that companies should ignore IFRS 9 and continue to report under the old standard, because in his opinion, it is extremely likely that it would be changed before the mandatory adoption date of this standard in 2013.

IFRS SELF-TEST QUESTIONS 1. Under IFRS, cash and cash equivalents are reported: (a) the same as GAAP. (b) as separate items. (c) similar to GAAP, except for the reporting of bank overdrafts. (d) always as the fi rst items in the current assets section. 2. Under IFRS, receivables are to be reported on the balance sheet at: (a) amortized cost. (b) amortized cost adjusted for estimated loss provisions. (c) historical cost. (d) replacement cost. 3. Which of the following statements is false? (a) Receivables include equity securities purchased by the company. (b) Receivables include credit card receivables. (c) Receivables include amounts owed by employees as result of company loans to employees. (d) Receivables include amounts resulting from transactions with customers. 4. Under IFRS: (a) the entry to record estimated uncollected accounts is the same as GAAP. (b) loans and receivables should only be tested for impairment as a group. (c) it is always acceptable to use the direct write-off method. (d) all financial instruments are recorded at fair value. 5. Which of the following statements is true? (a) The fair value option requires that some types of financial instruments be recorded at fair value. (b) The fair value option requires that all noncurrent financial instruments be recorded at amortized cost. (c) The fair value option allows, but does not require, that some types of financial instruments be recorded at fair value. (d) The FASB and IASB would like to reduce the reliance on fair value accounting for financial instruments in the future.

IFRS CONCEPTS AND APPLICATION
IFRS7-1 Briefly describe the impairment evaluation process and assessment of receivables on an individual or collective basis.
IFRS7-2 What are some steps taken by both the FASB and IASB to move to fair value measurement for financial instruments? In what ways have some of the approaches differed?
IFRS7-3 On December 31, 2012, Firth Company borrowed $62,092 from Paris Bank, signing a 5-year, $100,000 zero-internet-bearing note. The note was issued to yield 10% interest. Unfortunately, during 2012, Firth began to experience financial difficulty. As a result, at December 31, 2012, Paris Bank determined that it was probable that it would collect only $75,000 at maturity. The market rate of interest on loans of this nature is now 11%.
Instructions (a) Prepare the entry (if any) to record the impairment of the loan on December 31, 2014, by Paris Bank. (b) Prepare the entry on March 31, 2015, if Paris learns that Firth will be able to repay the loan under the original terms. w
IFRS7-4 As the new staff person in your company’s treasury department, you have been asked to conduct research related to a proposed transfer of receivables. Your supervisor wants the authoritative sources for the following items that are discussed in the receivables transfer agreement.
Instructions Access the IFRS authoritative literature at the IASB website (http://eifrs.iasb.org/ ). When you have accessed the documents, you can use the search tool in your Internet browser to prepare responses to the following items: (a) Identify relevant IFRSs that address transfers of receivables. (b) What are the objectives for reporting transfers of receivables? (c) Provide the definition for “Amortized cost.” International Financial Reporting Problem: Marks and Spencer plc
IFRS7-5 The financial statements of Marks and Spencer plc (M&S) are available at the book’s companion website or can be accessed at http://corporate.marksandspencer. com/documents/publications/2010/Annual_Report_2010.
Instructions Refer to M&S’s financial statements and the accompanying notes to answer the following questions. (a) What criteria does M&S use to classify “Cash and cash equivalents” as reported in its statement of financial position? (b) As of 3 April 2010, what balances did M&S have in cash and cash equivalents? What were the major uses of cash during the year? (c) What amounts related to trade receivables does M&S report? Does M&S have any past due but not impaired receivables? ANSWERS TO IFRS SELF-TEST



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