06 Chapter - Reporting and Interpreting Sales Revenue, Receivables, and Cash
Chapter 06
E66.
Req. 1
WOLVERINE WORLD WIDE INC.
Income Statement
For the Year Ended
(dollars in thousands)
Sales of merchandise
Cost of products sold
Gross profit
Selling and administrative expense
Income from operations
Other income (expense)
Interest expense
Other income
Pretax income
Income taxes
Net Income
$1,220,568
734,547
486,021
345,183
140,838
(2,850)
839
138,827
44,763
$ 94,064
Earnings per share ($94,064 48,888 shares)
$1.92
Req. 2
Gross profit margin: $1,220,568 $734,547 = $486,021.
Gross profit percentage ratio: $486,021 $1,220,568 = .398 (or 39.8%).
Gross margin or gross profit in dollars is the difference between the sales prices and the
costs of purchasing or manufacturing all goods that were sold during the period
(sometimes called the markup); that is, net revenue minus only one of the expenses-cost of goods sold. The gross profit ratio is the amount of each net sales dollar that was
gross profit during the period. For this company, the rate was 39.8%, which means that
$.398 of each net sales dollar was gross profit (alternatively, 39.8% of each sales dollar
was gross profit for the period).
Wolverine World Wide's gross profit percentage was below Deckerss current (2008)
percentage of 44.3%. Deckerss shoes have a reputation as a rugged product as well
as a premium "high fashion" product. This has allowed it to maintain higher prices and
higher gross margins. In marketing this is called the value of brand equity.
6-1
Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash
E613.
Req. 1
December 31, 2011-Adjusting entry:
Bad debt expense (+E, SE)......................................... 4,180
Allowance for doubtful accounts (+XA, A)........
4,180
To adjust for estimated bad debt expense for 2011 computed as follows:
Estimated
Estimated
percentage
amount
Aged accounts receivable
uncollectible
uncollectible
Not yet due
$50,000 x
3%
=
$ 1,500
Up to 180 days past due
14,000 x
12%
=
1,680
Over 180 days past due
4,000 x
30%
=
1,200
Estimated balance in Allowance for Doubtful Accounts
4,380
Current balance in Allowance for Doubtful Accounts
200
Bad Debt Expense for the year
$4,180
Req. 2
Balance sheet:
Accounts receivable ($50,000 + $14,000 + $4,000)
Less allowance for doubtful accounts......................
Accounts receivable, net of allowance for
doubtful accounts..........................................
6-2
$68,000
4,380
$63,620
Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash
E616.
Req. 1
Allowance for Doubtful Accounts
52
Beg. balance
Bad debt exp.
153
Write-offs
117
88
End. balance
Beg. Balance + Bad debt exp. Write-offs = End. Balance
Beg. Balance + Bad debt exp. End. Balance = Write-offs
117 + 88 153 = 52
Bad debt expense increases (is credited to) the allowance. Since we are given
the beginning and ending balances in the allowance, we can solve for write-offs,
which decrease (are debited to) the allowance.
Req. 2
Accounts Receivable (Gross)
Beg. balance*
Net sales
11,455
60,420
End. balance **
52
13,742
58,081
Write-offs
Cash collections
* 11,338 + 117
** 13,589 + 153
Beg. balance + Net sales Write-offs Cash collections = End. Balance
Beg. balance + Net sales Write-offs End. Balance = Cash collections
11,455 + 60,420 52 13,742 = 58,081
Accounts receivable gross is increased by recording credit sales and decreased
by recording cash collections and write-offs of bad debts. Thus, we can solve for
cash collections as the missing value.
6-3
Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash
E618.
Req. 1
Dec. 31, 2012
Allowance for doubtful accounts (XA, +A)................
Accounts receivable (J. Doe) (A)...................
To write off an account receivable determined to
be uncollectible.
Dec. 31, 2012
Bad debt expense (+E, SE) .....................................
Allowance for doubtful accounts (+XA, A).....
Adjusting entry--estimated loss on uncollectible
accounts; based on credit sales ($75,000 x 1.5%
= $1,125).
1,700
1,700
1,125
1,125
Req. 2
Income statement:
Operating expenses:
Bad debt expense.........................................................
Balance sheet:
Current assets
Accounts receivable ($16,000 + $75,000
- $60,000 - $1,700) ......................................
Less: Allowance for doubtful accounts
($900 - $1,700 + $1,125) .............................
$1,125
$29,300
325
$28,975
Req. 3
The 1.5% rate on credit sales may be too low because it resulted in bad debt expense only
two-thirds the amount of receivables written off ($1,700) during the year. However, if the
uncollectible account receivable written off during 2012 is not indicative of average
uncollectibles written off over a period of time, the 1.5% rate may be appropriate. There is
not sufficient historical data to make a definitive decision.
6-4
Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash
E620.
Req. 1
Receivables turnover =
Net Sales
= $35,497,000 = 9.16 times
Average Net Trade
$3,875,000*
Accounts Receivable
Average days sales
in receivables
365
=
Receivables Turnover
=
365 = 39.8 days
9.16
* ($4,359,000 + $3,391,000) 2
Req. 2
The receivables turnover ratio reflects how times many average trade receivables were
recorded and collected during the period. The average days sales in receivables
indicates the average time it takes a customer to pay its account.
PROBLEMS
P61.
Case A
Because Wendy's collects cash when the coupon books are sold, cash collection is not
an issue in this case. In order to determine if the revenue has been earned, the student
must be careful in analyzing what Wendy's actually sold. Students who focus on the
sale of the coupon book often conclude that the earning process is complete with the
delivery of the book to the customer. In reality, Wendy's has a significant additional
service to perform; it has to serve a meal. The correct point for revenue recognition in
this case is when the customer uses the coupon or when the coupon expires and
Wendy's has no further obligation.
Case B
In this case there is an extremely low down payment and some reason to believe that
Uptown Builders may default on the contract because of prior actions. If students
believe that Russell Land Development could sue and collect on the contract, they will
probably argue for revenue recognition. Given the risk of cash collection, most students
will argue that revenue should be recognized as cash is collected. The text does not
discuss FASB #66 (ASC 360-20-40), but the instructor may want to mention during the
discussion that there is authoritative guidance concerning minimum down payments
before revenue can be recorded on a land sale.
6-5
Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash
Case C
While warranty work on refrigerators can involve significant amounts of effort and
money, companies are permitted to record revenue at the point of sale. The text does
not discuss this specific issue but the matching concept is mentioned in the context of
revenue recognition. This is an excellent opportunity to mention the need to accrue
estimated warranty expense at the time that sales revenue is recorded. Some students
are surprised to see that costs that will be incurred in the future can be recorded as an
expense in the current accounting period.
6-6
Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash
P62.
Req. 1
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
(l)
(m)
Total
Sales
Revenue
+234,000
+11,500
+25,000
NE
+26,000
NE
NE
NE
+17,500
NE
NE
NE
NE
+$314,000
Sales Discounts
(taken)
NE
NE
NE
NE
NE
+220
+2,000*
+500
NE
70
NE
NE
NE
+$2,650
Sales Returns
and Allowances
NE
NE
NE
+500
NE
NE
NE
NE
NE
+3,500
NE
NE
NE
+$4,000
Bad Debt
Expense
NE
NE
NE
NE
NE
NE
NE
NE
NE
NE
NE
NE
+1,140**
+$1,140
*$98,000 (1 .02) = $100,000 gross sales; $100,000 x .02 = $2,000
**Credit sales ($11,500 + $25,000 + $26,000 + $17,500).. $80,000
Less: Sales returns ($500 + $3,500)..............................
4,000
Net sales revenue............................................................
76,000
Estimated bad debt rate...................................................x
1.5%
Bad debt expense............................................................
$1,140
Req. 2
Income statement:
Sales revenue............................................................. $314,000
Less: Sales returns and allowances...............
4,000
Sales discounts.....................................
2,650
Net sales revenue.......................................................
Operating expenses
Bad debt expense.....................................................
6-7
$307,350
1,140
Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash
P67.
Req. 1
WOOD COMPANY
Bank Reconciliation, April 30, 2011
Company's Books
Bank Statement
Ending balance per Cash
account..........................
$23,900
Additions:
Interest collected.................
Deductions:
NSFA.B. Wright...............
Bank charges.....................
Correct cash balance..........
1,180
25,080
160
50
Ending balance per bank
statement.......................
Additions:
Deposits in transit*..............
$23,570
5,400
28,970
Deductions:
Outstanding checks.............
210
$24,870
4,100
Correct cash balance...........
$24,870
*$41,500 - $36,100 = $5,400.
Req. 2
(1)
Cash (+A)............................................................................ 1,180
Interest revenue (+R, +SE)......................................
Interest collected.
(2)
(3)
Accounts receivable (A. B. Wright) (+A).............................
Cash (A).................................................................
Customer's check returned, insufficient funds.
160
Bank service charge expense (+E, SE)............................
Cash (A).................................................................
Bank service charges deducted from bank statement.
1,180
50
160
50
These entries are necessary because of the changes to the regular Cash account that
have not yet been recorded by the company. The bank already has recorded them in its
accounts. The Cash account (and the other accounts in the entries) must be brought up
to date for financial statement purposes.
Req. 3
Balance in regular Cash account........................................................
$24,870
Req. 4
Balance Sheet (April 30, 2011):
Current Assets:
Cash..............................................................................
$24,870
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