5
Short-Term Chapter Investments & Receivables
Short Exercises
(5 min.) S 5-1
1. Trading investments are reported at their current market
value.
2. A trading investment is always a current asset because the
investor intends to sell the trading investment in the very
near future days, weeks, or only a few months. A current
asset is to be sold within one year or within the companys
operating cycle if longer than a year.
(10 min.)
BALANCE SHEET
Current assets:
Short-term trading investments, at market
value.
S 5-2
$98,000
INCOME STATEMENT
Other revenue and gains (losses):
Unrealized gain on investment $11,000*
_____
*$98,000 $87,000 = $11,000
Chapter 5
Short-Term Investments & Receivables
89
(10 min.)
Unrealized Loss on Investment ($103,000 $96,000) 7,000
Short-Term Investment
Adjusted investment to market value.
S 5-3
7,000
BALANCE SHEET
Current assets:
Short-term trading investment, at market value
$96,000
INCOME STATEMENT
Other revenue (loss):
Unrealized (loss) on investment
$(7,000)
(5 min.)
S 5-4
Perry, the accountant, should not handle the companys cash.
With cash-handling duties, the accountant can steal cash and
hide the theft by writing off a customers account receivable as
uncollectible.
90
Chapter 5
Short-Term Investments & Receivables
(5-10 min.)
S 5-5
MEMORANDUM
DATE:
TO:
Zach Peters
FROM:
Student Name
RE: Essential element of internal control over collection from
customers
Separation of duties is the essential element in a system to
ensure that cash received by mail from customers is properly
handled and accounted for. It is very important to separate
cash-handling duties from accounting duties. Otherwise, an
employee can steal a cash receipt from a customer and cover
the theft by writing off the customer account as uncollectible.
Student responses may vary.
Chapter 5
Short-Term Investments & Receivables
91
(5 min.)
1. Uncollectible-Account Expense ($312,000 .04)..
Allowance for Uncollectible Accounts..
S 5-6
12,480
12,480
2. Balance sheet
Accounts receivable... $38,000
Less Allowance for uncollectible accounts. (12,480)
Accounts receivable, net.. $25,520
(5-10 min.)
S 5-7
1. Accounts Receivable 1,000,000
Sales Revenue.
1,000,000
2. Cash..
Accounts Receivable.
870,000
3. Allowance for Uncollectible Accounts.
Accounts Receivable..
12,000
4. Uncollectible-Account Expense ($1,000,000 .04)..
Allowance for Uncollectible Accounts..
40,000
92
Chapter 5
870,000
12,000
Short-Term Investments & Receivables
40,000
(10 min.)
S 5-8
1.
Accounts Receivable
Beg. bal.
38,000
Net credit sales 1,000,000 Collections
Write-offs
End. bal.
156,000
870,000
12,000
Amount customers
owe the company
2.
Allowance for Uncollectible Accounts
Beg. bal.
Write-offs
12,000 Allowance for
Uncollectible accounts
End. bal.
12,480
40,000
40,480
Amount the
company
expects not
to collect
3.
Accounts receivable, net
($156,000 $40,480)
Chapter 5
$115,520
Short-Term Investments & Receivables
93
(5-10 min.)
S 5-9
(a) Accounts Receivable.. 175,000
Sales Revenue.
175,000
(b) Cash 128,000
.
Accounts Receivable.
128,000
(c) Allowance for Uncollectible Accounts..
Accounts Receivable.
2,800
(d) Uncollectible-Account Expense..
Allowance for Uncollectible
Accounts.
650
2,800
65
0
Allowance for Uncollectible Accounts
Beg. bal.
4,000
Write-offs
2,800 Uncollectible
account exp.
X = 650
End. bal.
1,850
94
Chapter 5
Short-Term Investments & Receivables
(10 min.)
S 5-10
1. and 2.
Accounts Receivable
Beg. bal.
97,000
Net credit sales
698,000 Collections
Write-offs
End. bal.
65,000
722,000
8,000
Allowance for Uncollectible Accounts
Beg. bal.
5,000
Write-offs
8,000 Uncollectible
account expense 14,000
End. bal.
11,000
3.
BALANCE SHEET
Accounts receivable
Less Allowance for uncollectible accounts
Accounts receivable, net
$65,000
(11,000)
$54,000
(10 min.)
Chapter 5
S 5-11
Short-Term Investments & Receivables
95
1. True
2. The net amount of receivables the amount the company
expects to collect is more interesting because the
company will probably collect this amount in cash.
3. Accounts receivable. $XXX
Less Allowance for uncollectibles
(X)
Accounts receivable, net. $ XX
4. False. The direct write-off method overstates assets because
it fails to show the amount of the receivables the company
actually expects to collect.
5. California Bank has interest receivable and interest revenue.
Sacramento Company has interest payable and interest
expense.
Interest for one month ($200,000 .08 1/12)...$1,333.33
6. California Bank:
Accrual of interest
96
Assets = Liabilities + Equity
0
Chapter 5
Short-Term Investments & Receivables
(5-10 min.)
S 5-12
a. May
6 Note Receivable S. Peters. 130,000
Cash
130,000
b. Nov.
6 Cash. 135,850
Note Receivable S. Peters
130,000
Interest Revenue
($130,000 .09 6/12)
5,850
(10 min.)
S 5-13
1.
Interest for:
2010
($170,000 .07 8/12). $7,933.33
2011
($170,000 .07). 11,900.00
2012
($170,000 .07 4/12). 3,966.67
2.
BCDE Bank has a note receivable and interest revenue.
Carl Abbott has a note payable and interest expense.
3.
Payoff at November 30, 2010:
Principal $170,000.00
Interest ($170,000 .07 7/12)...
6,941.67
Total... $176,941.67
Chapter 5
Short-Term Investments & Receivables
97
(10 min.)
S 5-14
2010
a. Aug.31 Note Receivable N. Thompson 2,000.00
Cash
2,000.00
To loan money.
2011
b. June30 Interest Receivable
($2,000 .10 10/12)..
166.67
Interest Revenue..
To accrue interest revenue.
166.67
2011
c. Aug.31 Cash ($2,000 + $200) 2,200.00
Interest Receivable.
166.67
Interest Revenue
($2,000 .10 2/12).
33.33
Note Receivable..
2,000.00
To collect on note receivable.
98
Chapter 5
Short-Term Investments & Receivables
(5-10 min.)
a. BALANCE SHEET
June 30, 2011
Current assets:
Note receivable.
Interest
receivable
b. INCOME STATEMENT
Year ended June 30, 2011
Revenues:
Interest revenue
S 5-15
$2,000.00
166.67
$ 166.67
c. BALANCE SHEET
June 30, 2012
Nothing to report because the note was
collected on August 31, 2011.
d. INCOME STATEMENT
Year ended June 30, 2012
Revenues:
Interest revenue
Chapter 5
$ 33.33
Short-Term Investments & Receivables
99
(10 min.)
S 5-16
Req. 1
2011
Acid-test
ratio
=
Cash + Short-term investments
+ Net current receivables
Total current liabilities
=
$9,700 + $17,000
+ $76,900
$99,000
=
1.05
The companys acid-test ratio compares favorably to the
industry average of 0.97.
Req. 2
One days sales
=
$802,000
365
= $2,197.26
Average net
Days sales in average
accounts receivable
($76,900 + $70,900) / 2
accounts receivable =
=
One days sales
$2,197.26
= 34 days
The companys days-sales-in-receivables ratio (34) is okay
relative to the 30-day period of the credit terms.
100
Chapter 5
Short-Term Investments & Receivables
(10-15 min.)
1. Classifications
Unearned revenues
Allowance for
doubtful accounts..
Other expenses
Accounts receivable...
Accounts payable
Service revenue
Other assets..
Property, plant, and
equipment.
Operating expense..
Cash
Notes payable......
S 5-17
Income Statement Balance Sheet
Debit
Credit
Debit
Credit
Balance Balance Balance Balance
X
X
X
X
X
X
X
X
X
X
X
Thousands
2. Service revenue $ 23,653
Operating expense..
(11,610)
Other
(12,559)
expenses.
Net loss...
$ (516)
3.
Quick ratio = ($289 + $4,467 - $309)/($2,255 + $607) = 1.55
Norberts liquidity position is very good.
The company has $1.55 in quick assets to pay off each dollar of
current liabilities.
Chapter 5
Short-Term Investments & Receivables
101
Exercises
Group A
(10-15 min.)
E 5-18A
1. This is a trading investment because Northern Corporation
intends to sell the stock within a short time.
2. Dec.
15
Short-Term Investment (800 $54)..
43,200
Cash.
Purchased investment.
Dec.
31
43,200
Short-Term Investment
[(800 $66) $43,200]..
Unrealized Gain on Investment
Adjusted investment to market value.
9,600
3. BALANCE SHEET
Current assets:
Short-term investment, at market value
9,600
$52,800
INCOME STATEMENT
Other revenue and gains:
Unrealized gain on investment $ 9,600
102
Chapter 5
Short-Term Investments & Receivables
(10-20 min.)
E 5-19A
INCOME STATEMENT
Other revenue (loss):
Dividend revenue $ 400
Unrealized (loss) on investment ($95,000
(3,000)
$92,000).
BALANCE SHEET
Current assets:
Short-term investments, at market value $92,000
(15-30 min.)
Cash
97,000
21,600
486*
Bal35,670
Short-Term
Investment
21,600
5,400
27,000
Unrealized Gain
On Investment
E 5-20A
Dividend
Revenue
486*
Gain on Sale
Of Investment
5,400
8,670
_____
*600 shares $.81 = $486
(15-20 min.)
Chapter 5
E 5-21A
Short-Term Investments & Receivables
103
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2010
Dec. 31
Year-end entry:
Doubtful-Account Expense
($900,000 .03)
Allowance for Doubtful
Accounts
BALANCE SHEET
Current assets:
Accounts receivable, net of allowance
for doubtful accounts of
$27,9001.
_____
1
$900 + $27,000 = $27,900
2
$88,000 $27,900 = $60,100
104
Chapter 5
27,000
27,000
$60,1002
Short-Term Investments & Receivables
(15 min.)
E 5-22A
Req. 1
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
Oct.
Accounts Receivable... 161,000
Sales Revenue
161,000
Oct.
Cash.. 137,000
Accounts Receivable
137,000
Oct.
Allowance for Uncollectible Accounts
Accounts Receivable
Oct.
Uncollectible-Account Expense
($161,000 .04)..
Allowance for Uncollectible
Accounts
2,300
2,300
6,440
6,440
Req. 2
Accounts Receivable
30,000
137,000
161,000
2,300
Bal
51,700
Allowance for
Uncollectible Accounts
2,000
2,300
6,440
6,140
Net accounts receivable = $45,560 ($51,700 $6,140)
Hilly Mountain Party Planners expects to collect the net
receivable amount.
Chapter 5
Short-Term Investments & Receivables
105
Req. 3
BALANCE SHEET
Current assets:
Accounts receivable, net of allowance for
uncollectible accounts of $6,140
106
Chapter 5
$45,560
Short-Term Investments & Receivables
(10-15 min.)
E 5-23A
Req. 1
Journal
DATE
Oct.
ACCOUNT TITLES AND EXPLANATION
DEBIT
Uncollectible-Account Expense..
Accounts Receivable
CREDIT
2,300
2,300
Req. 2
Net accounts receivable would be $51,700, the balance in
Accounts Receivable, computed as follows:
Beg. bal.
Cr. sales
End. bal.
Accounts Receivable
30,000
161,000 Collections
Write-offs
51,700
137,000
2,300
Hilly Mountain Party Planners does not expect to collect the full
$51,700 because some credit customers are likely not to pay
their accounts.
Chapter 5
Short-Term Investments & Receivables
107
(15-30 min.)
E 5-24A
Req. 1
The credit balance at December 31 in Allowance for Doubtful
Accounts should be $16,880.
($80,000 .006) + ($60,000 .040) + ($40,000 .05) + ($30,000 .
40) = $16,880. The current balance is $13,500. Thus, the balance
of the allowance account is too low.
Req. 2
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
Doubtful-Account Expense..
Allowance for Doubtful Accounts
CREDIT
3,380
3,380
Allowance for Doubtful Accounts
13,500
3,380
Bal.
16,880
108
Chapter 5
Short-Term Investments & Receivables
Req. 3
BALANCE SHEET
Current assets:
Cash.
$
XX
Short-term investments.
XX
Accounts receivable, net of
allowance
for doubtful accounts of
193,120*
$16,880..
_____
*Another way to report accounts receivable is
Accounts receivable $210,000
Less Allowance for doubtful
(16,880) 193,120
accounts
Chapter 5
Short-Term Investments & Receivables
109
(15-20 min.)
E 5-25A
March Accounts Receivable.
Service Revenue
Recorded revenue on account.
7,000
March Bad-Debt Expense ($7,000 .01)
Allowance for Bad Debts
Recorded expense for the year.
70
March Allowance for Bad Debts ($34 + $112)..
Accounts Receivable
Wrote off uncollectible receivables.
146
110
Chapter 5
7,000
70
Short-Term Investments & Receivables
146
(10-15 min.)
E 5-26A
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
Sept. 1 Note Receivable Carroll Fadal..
Cash.
Nov.
DEBIT
15,000
15,000
6 Note Receivable Turf Masters.. 12,000
Service Revenue
16 Note Receivable Voleron, Inc.
Accounts Receivable - Voleron
Inc.
30 Interest Receivable..
Interest Revenue.
_____
CREDIT
12,000
4,000
4,000
450*
450
($15,000 .10 90/365) + ($12,000 .08 24/365) + ($4,000 .11 14/365) = $450
$370**
$17**
$63**
Aegean Realty earned interest revenue of $696 this year.
** Rounded to nearest dollar.
Chapter 5
Short-Term Investments & Receivables
111
(15 min.)
2010
E 5-27A
2011
BALANCE SHEET
Current assets:
Note receivable $125,000 $
Interest receivable ($125,000 .12
11,250
9/12)
INCOME STATEMENT
Interest revenue.
_____
*$125,000 .12 3/12 = $3,750
112
Chapter 5
11,250 3,750*
Short-Term Investments & Receivables
(10-15 min.)
(a) Acid-test
ratio
=
=
=
=
E 5-28A
Short-term Net current
Cash + investments + receivables
Total current liabilities
$3,000 + $20,000 + $55,000
$19,000 + $103,000
$78,000
$122,000
0.64
An acid-test ratio of 0.64 is fairly weak.
(b) One day's
sales
=
Sales revenue
365
=
$730,000
365
= $2,000
Days sales
Average net
in average
accounts receivable
($55,000 + $69,000) / 2
=
=
receivables
One days sales
$2,000
= 31 days
31 days sales in average receivables is good relative to credit
terms of net 30 days.
Chapter 5
Short-Term Investments & Receivables
113
(10-15 min.)
E 5-29A
Req. 1
Average collection period:
Millions of dollars
One days sales
=
$573,000
365
= $1,569.99
Days sales in average receivables
($3,910 + $4,710) / 2
=
=
(average collection period)
$1,569.99
3 days
Req. 2
Modern Co., Incs collection period is short because Modern
Co. sells mainly for cash and on credit cards and bank cards.
The companys receivables are very low.
114
Chapter 5
Short-Term Investments & Receivables
Exercises
Group B
(10-15 min.)
E 5-30B
1. This is a trading investment because River Corporation
intends to sell the stock within a short time.
2. Dec.
15
Short-Term Investment (600 $40)..
24,000
Cash.
Purchased investment.
Dec.
31
24,000
Short-Term Investment
[(600 $48) $24,000]..
Unrealized Gain on Investment
Adjusted investment to market value.
4,800
3. BALANCE SHEET
Current assets:
Short-term investment, at market value
4,800
$28,800
INCOME STATEMENT
Other revenue and gains:
Unrealized gain on investment $ 4,800
Chapter 5
Short-Term Investments & Receivables
115
(10-20 min.)
E 5-31B
INCOME STATEMENT
Other revenue (loss):
Dividend revenue $ 700
Unrealized (loss) on investment ($98,000
(4,000)
$94,000).
BALANCE SHEET
Current assets:
Short-term investments, at market value $94,000
(15-30 min.)
Cash
94,000
46,800
468*
Bal.
66,465
Short-Term
Investment
46,800
1,800
48,600
Unrealized Gain
On Investment
E 5-32B
Dividend
Revenue
468*
Gain on Sale
Of Investment
1,800
17,865
_____
*900 shares $.52 = $468
116
Chapter 5
Short-Term Investments & Receivables
(15-20 min.)
E 5-33B
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2010
Dec. 31
Year-end entry:
Doubtful-Account Expense
($500,000 .04)..
Allowance for Doubtful
Accounts
BALANCE SHEET
Current assets:
Accounts receivable, net of allowance
for doubtful accounts of $20,8201
_____
1
$820 + $20,000 = $20,820
2
$92,000 $20,820 = $71,180
Chapter 5
20,000
20,000
$71,1802
Short-Term Investments & Receivables
117
(15 min.)
E 5-34B
Req. 1
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
May
Accounts Receivable... 156,000
Sales Revenue..
156,000
May
Cash.. 132,000
Accounts Receivable..
132,000
May
Allowance for Uncollectible Accounts
Accounts Receivable..
May
Uncollectible-Account Expense
($156,000 .02)..
Allowance for Uncollectible
Accounts
2,300
2,300
3,120
3,120
Req. 2
Accounts Receivable
33,000
132,000
156,000
2,300
Bal.
54,700
Allowance for
Uncollectible Accounts
4,000
2,300
3,120
4,820
Net accounts receivable = $49,880 ($54,700 $4,820)
Hilltop Party Planners expects to collect the net receivable
amount.
118
Chapter 5
Short-Term Investments & Receivables
Req. 3
BALANCE SHEET
Current assets:
Accounts receivable, net of allowance for
uncollectible accounts of $4,820
Chapter 5
$49,880
Short-Term Investments & Receivables
119
(10-15 min.)
E 5-35B
Req. 1
Journal
DATE
May
ACCOUNT TITLES AND EXPLANATION
DEBIT
Uncollectible-Account Expense..
Accounts Receivable.
CREDIT
2,300
2,300
Req. 2
Net accounts receivable would be $54,700, the balance in
Accounts Receivable, computed as follows:
Beg. bal.
Cr. sales
End. bal.
Accounts Receivable
33,000
156,000 Collections
Write-offs
54,700
132,000
2,300
Hilltop Party Planners does not expect to collect the full
$54,700 because some credit customers are likely not to pay
their accounts.
120
Chapter 5
Short-Term Investments & Receivables
(15-30 min.)
E 5-36B
Req. 1
The credit balance at December 31 in Allowance for Doubtful
Accounts should be $8,460.
($60,000 .006) + ($50,000 .040) + ($30,000 .07) + ($10,000 .
40) = $8,460. The current balance is $6,800. Thus, the balance of
the allowance account is too low.
Req. 2
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
Doubtful-Account Expense..
Allowance for Doubtful Accounts
CREDIT
1,660
1,660
Allowance for Doubtful Accounts
Bal.
Chapter 5
6,800
1,660
8,460
Short-Term Investments & Receivables
121
Req. 3
BALANCE SHEET
Current assets:
Cash
$
XX
Short-term investments
XX
Accounts receivable, net of allowance
for doubtful accounts of $8,460
141,540*
_____
*Another way to report accounts receivable is
Accounts receivable.
$150,000
Less Allowance for doubtful accounts
(8,460) 141,540
122
Chapter 5
Short-Term Investments & Receivables
(15-20 min.)
E 5-37B
March Accounts Receivable.
Service Revenue.
Recorded revenue on account.
6,850
March Bad-Debt Expense ($6,850 .01)
Allowance for Bad Debts.
Recorded expense for the year.
68.50
March Allowance for Bad Debts ($35 + $110)..
Accounts Receivable....
Wrote off uncollectible receivables.
145
Chapter 5
6,850
68.50
Short-Term Investments & Receivables
145
123
(10-15 min.)
E 5-38B
Journal
DATE
Apr.
Jun.
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
1 Note Receivable Britt Durant.. 11,000
Cash
11,000
6 Note Receivable Putt Masters.. 14,000
Service Revenue..
14,000
16 Note Receivable Voleron, Inc.
Accounts Receivable - Voleron
Inc.
30 Interest Receivable..
Interest Revenue.
_____
3,000
3,000
241*
241
($11,000 .06 90/365) + ($14,000 .07 24/365) + ($3,000 .12 14/365) = $241
$163**
$14**
$64**
Celtic Realty earned interest revenue of $917 this year.
** Rounded to nearest dollar.
124
Chapter 5
Short-Term Investments & Receivables
(15 min.)
E 5-39B
2010
2011
BALANCE SHEET
Current assets:
Note receivable $50,000 $
Interest receivable ($50,000 .07
2,625
9/12)
INCOME STATEMENT
Interest revenue
_____
*$50,000 .07 3/12 = $875
Chapter 5
2,625
Short-Term Investments & Receivables
875*
125
(10-15 min.)
(a) Acid-test
ratio
=
=
=
=
E 5-40B
Short-term Net current
Cash + investments + receivables
Total current liabilities
$4,000 + $23,000 + $56,000
$15,000 + $105,000
$83,000
$120,000
0.69
An acid-test ratio of 0.69 is fairly weak.
(b) One day's
sales
=
Sales revenue
365
=
$727,000
365
= $1,992
Days sales
Average net
in average
accounts receivable
($56,000 + $70,000) / 2
=
=
receivables
One days sales
$1,992
= 32 days
32 days sales in average receivables is good relative to credit
terms of net 30 days.
126
Chapter 5
Short-Term Investments & Receivables
(10-15 min.)
E 5-41B
Req. 1
Average collection period:
Millions of dollars
One days sales
=
$572,000
365
= $1,567.12
Days sales in average receivables
($3,880 + $4,810) / 2
=
=
(average collection period)
$1,567.12
3 days
Req. 2
Contemporary Co., Incs collection period is short because
Contemporary Co. sells mainly for cash and on credit cards
and bank cards. The companys receivables are very low.
Chapter 5
Short-Term Investments & Receivables
127
Challenge Exercises
(15-20 min.)
Sales revenue...
Cost of goods sold..
Uncollectible-account expense
Bank-card discount expense
Other expenses
Total expenses.
Net income.
Decision:
E 5-42
Actual
without Bank Expected with
Cards
Bank Cards
$700,000
$784,000*
$385,000
$431,200**
18,000
8,680***
175,000
166,000****
578,000
605,800
$ 122,000
$178,120
Accept bank cards because of the expected
increase in net income.
_____
*$700,000 1.12 = $784,000
**$385,000 1.12 = $431,200
***$784,000 $350,000 = $434,000 .02 = $8,680
The switch to bank cards should produce bankcard
discount expense on only the portion of sales that are
made on bank cards.
****$175,000 $9,000 = $166,000
128
Chapter 5
Short-Term Investments & Receivables
(15-20 min.)
E 5-43
T-accounts are helpful, as follows (in millions):
Writeoffs
64
16
End. bal.
(a)
Allowances
Beg. bal.
10 Expense
70
Receivables, Net
Beg. bal. ($2,268 + $64)
2,332
Total revenue
53,333 Write-offs
Collections
End. bal. ($2,586 + $70)
2,656
Chapter 5
10
52,999 (b)
Short-Term Investments & Receivables
129
Quiz
Q5-44
Q5-45
Q5-46
Q5-47
Q5-48
Q5-49
Q5-50
Q5-51
Q5-52
Q5-53
Q5-54
Q5-55
Q5-56
Q5-57
Q5-58
Q5-59
130
d
c
d
a
[($160,000 .04) + ($32,000 .10) + ($8,000 .
21) $4,000 = $7,280]
($200,000 $11,280 = $188,720)
($130,000 .03 = $3,900)
($3,900 + $2,000 = $5,900)
($3,900 + $2,000 $3,900 = $2,000)
($50,000 .12 5/12 = $2,500)
$188,720
a
c
$2,000
c
d
a
($50,000 .12 6/12 = $3,000)
d
Cash ... 53,000
Note Receivable
50,000
Interest Receivable..
2,500
Interest Revenue..
500
b
c
[($110,000 + $120,000) / 2] ($1,017,000 / 365
days) = 41 days
c
Chapter 5
Short-Term Investments & Receivables
Problems
Group A
(20-30 min.)
P 5-60A
Reqs. 1 and 2
Cash
15,000
432**
10,800*
Dividend Revenue
432**
Short-Term Investment
10,800*
3,600+
7,200
Unrealized Loss on
Investment
3,600+
_____
*900 $12 = $10,800
**900 $.48 = $432
$10,800 (900 $4.00) = $7,200
+
Chapter 5
Short-Term Investments & Receivables
131
(continued)
P 2
Journal
DATE
ACCOUNT 5-60A
Req. TITLES AND EXPLANATION
DEBIT
CREDIT
2010
Nov. 12 Short-Term Investment. 10,800
Cash (900 $12)
10,800
Purchased investment.
Dec. 14
31
Cash (900 $0.48)...
Dividend Revenue
Received cash dividend.
432
432
Unrealized Loss on Investment.. 3,600
Short-Term Investment
[$10,800 (900 $8.00)].
3,600
Adjusted investment to market value.
Req. 3
BALANCE SHEET
Current assets:
Short-term investment, at market value
(900 $8.00)
132
Chapter 5
$7,200
Short-Term Investments & Receivables
Req. 4
INCOME STATEMENT
Other revenue and (loss):
Dividend revenue
Unrealized (loss) on investment
$ 432
(3,600)
Req. 5
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
2010
Jan. 10 Cash. 8,388
Short-Term Investment
Gain on Sale of Investment
Sold investment at a gain.
Chapter 5
CREDIT
7,200
1,188
Short-Term Investments & Receivables
133
(10-15 min.)
P 5-61A
MEMORANDUM
DATE:
_________________
TO:
Management of Laptop Delivery, Inc.
FROM:
Student Name
RE: Evaluation of internal control over cash receipts from
customers
By opening the mail, the accountant has direct access to cash.
This creates an internal control weakness because the
accountant also posts credits to customer accounts. She can
steal a cash receipt from a customer and write off the customer
account as uncollectible. The theft is hard to detect because
the customers account gets zeroed out, and the company does
not pursue collection.
To correct this internal control weakness, the accountant
should be denied access to cash. Someone else in the
organization should open the mail and separate cash receipts
from the accompanying remittance slips. The cash should be
deposited in the bank immediately, and only the remittance
slips should go to the accountant.
Student responses may vary.
134
Chapter 5
Short-Term Investments & Receivables
(15-20 min.)
P 5-62A
(All amounts in millions)
Reqs. 1 and 3
Accounts Receivable
3,434
31,864
32,481
354
3,697
Allowance for Uncollectibles
155
354
325
126
Req. 2
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
a.
Accounts Receivable
Service Revenue..
32,481
Cash..
Accounts Receivable
31,864
b.
c.
d.
CREDIT
32,481
31,864
Uncollectible-Account Expense
Allowance for Uncollectibles
($32,481 .02)
650*
Allowance for Uncollectibles..
Accounts Receivable
679
650*
679
Req. 4
These balances agree with the actual Mail Time amounts.
Chapter 5
Short-Term Investments & Receivables
135
(continued)
P 5-62A
Req. 5
INCOME STATEMENT
Service revenue.
Uncollectible-account expense
136
Chapter 5
$32,481
650
Short-Term Investments & Receivables
(25-35 min.)
P 5-63A
Req. 1
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
Nov. 30 Allowance for Doubtful Accounts.. 2,000
Accounts Receivable Black Carpets
1,400
Accounts Receivable Old Timer...
600
Dec. 31 Doubtful-Account Expense..... 4.890
Allowance for Doubtful Accounts.
4,890*
_____
*Computation:
Required credit balance in Allowance for Doubtful
Accounts based on aging of Accounts
Receivable ($140,000 .001) + ($45,000 .01) +
($18,000 .10) + ($29,000 .30).. $11,090
Credit balance in Allowance for Doubtful Accounts
before the December 31 adjusting entry (see
the T-account in the answer to Req. 2;
$8,200 $2,000)...
6,200
Credit entry needed to produce the required credit
balance in Allowance for Doubtful Accounts..
$4,890
Chapter 5
Short-Term Investments & Receivables
137
(continued)
P 5-63A
Req. 2
Allowance for Doubtful Accounts
Nov. 30 Write-offs
2,000 Sept. 30 Balance
Dec. 31 Adjusting
Dec. 31 Balance
8,200
4,890
11,090
Req. 3
Perfecto Communications
Comparative Balance Sheet
December 31, 2011 and December 31, 2010
2011
2010
Accounts receivable.... $232,000 $214,000
Less: Allowance for doubtful accounts.
(11,090)
(4,600)
Accounts receivable, net $220,910 $209,400
138
Chapter 5
Short-Term Investments & Receivables
(20-25 min.)
P 5-64A
Req. 1
Cash ($53,000 $17,000)
Short-term trading investments,
at market value.
Accounts receivable $36,000
Less: Allowance for uncollectibles. (10,500)
Inventory.
Prepaid expenses.
Total current assets.
Total current liabilities
$ 36,000
10,000
25,500
63,000
10,000
$144,500
$106,000
Req. 2
As reported
Corrected
Current
$186,000
=
= 1.75
ratio
$106,000
$144,500
= 1.36
$106,000
($53,000 + $24,000
Acid-test
+ $36,000)
1.0
=
=
7
ratio
$106,000
$36,000 + $10,000
+ $25,500
$103,000
Chapter 5
Short-Term Investments & Receivables
=
0.6
9
139
(continued)
P 5-64A
Req. 3
Net income, as reported..
Unrealized loss on trading investments
($24,000 $10,000)...
Correction for conversion to the
allowance method
Uncollectible-account expense
should be ($600,000 .03)... $18,000
Uncollectible-account expense by
the direct write-off method
7,500
Net income, as corrected
140
Chapter 5
$92,000
(14,000)
(10,500)
$67,500
Short-Term Investments & Receivables
(20-30 min.)
P 5-65A
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
2010
Oct. 31 Note Receivable Buy Low Foods.
Sales Revenue
34,000
Dec. 31 Interest Receivable
($34,000 .0525 2/12)
Interest Revenue
CREDIT
298
2011
Jan. 31 Cash..
.
Note Receivable Safeway
Interest Receivable
Interest Revenue
($34,000 .0525 1/12)
34,000
298
34,447
34,000
298
149
Feb. 18 Note Receivable Duton Market
Accounts Receivable
Duton Market
7,600
19Cash..
.
Financing Expense
Note Receivable Duton Market
7,400
Chapter 5
7,600
200
Short-Term Investments & Receivables
7,600
141
(continued)
P 5-65A
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2011
Nov. 11 Note Receivable Street Provisions . 14,600
Cash
14,600
Dec. 31 Interest Receivable...
200
Interest Revenue ($14,600 .10 50/365)
200
Req. 2
BALANCE SHEET
Current assets:
Note receivable
Interest receivable
142
Chapter 5
December 31,
2011
2010
$14,600
200
$34,000
298
Short-Term Investments & Receivables
P 5-66A
(15-25 min.)
Req. 1
Dollar amounts in millions
2011
2010
a. Current
ratio
=
Total current assets
Total current liabilities
=
$910
= 1.57
$580
$865
= 1.40
$620
Cash + Short-term investments
b. Acid-test
ratio
=
+ Net current receivables
Total current liabilities
=
$80+$145+$270
$70+$170+$250
$580
$620
=
c. One days
=
sales
Net sales
Days sales =
in average
receivables
Average net receivables
=
365
One days sales
=
=
Chapter 5
.85
$5,880
365
= $16.11
=
0.79
$5,130
365
= $14.05
($270+$250)/2
($250+$240)/2
$16.11
$14.05
16 days
=
17days
Short-Term Investments & Receivables
143
(continued)
P 5-66A
Req. 2
MEMORANDUM
DATE:
_________________
TO:
Top management of Highland Pools
FROM:
Student Name
RE:
Changes in ratio values from 2010 to 2011
The current ratio improved from 1.40 to 1.57. The acid-test ratio
increased from 0.79 to .85. Days sales in receivables
decreased from 17 days to 16 days.
All three ratio values improved during the current year. This is
a favorable trend because it shows that the company is finding
it easier to pay bills and collect receivables.
Student responses may vary.
144
Chapter 5
Short-Term Investments & Receivables
Problems
Group B
(20-30 min.)
P 5-67B
Reqs. 1 and 2
Cash
22,000
576**
12,000*
Dividend Revenue
576**
Short-Term Investment
12,000*
3,600+
8,400
Unrealized Loss
on Investment
3,600+
_____
*1,200 $10 = $12,000
**1,200 $.48 = $576
+
$12,000 $8,400 = $3,600 unrealized loss
Chapter 5
Short-Term Investments & Receivables
145
(continued)
P 5-67B
Req. 2
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
2010
Nov. 13 Short-Term Investment..
Cash (1,200 $10)
Purchased investment.
Dec
DEBIT
CREDIT
12,000
12,000
14 Cash (1,200 $0.48)
Dividend Revenue
Received cash dividend.
576
31 Unrealized Loss on Investment
Short-Term Investment
($12,000 $8,400)
Adjusted investment to market value.
3,600
576
3,600
Req. 3
BALANCE SHEET
Current assets:
Short-term investment, at market value
$8,400
Req. 4
INCOME STATEMENT
Other revenue and gain:
Dividend revenue
$576
Other expenses and loss:
Unrealized loss on investment
$ 3,600
146
Chapter 5
Short-Term Investments & Receivables
(continued)
P 5-67B
Req. 5
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
2011
Jan. 21 Cash
Gain on Sale of Investment
Short-Term Investment
Sold investment at a Gain
Chapter 5
DEBIT
CREDIT
10,512
2,112
8.400
Short-Term Investments & Receivables
147
(10-15 min.)
P 5-68B
MEMORANDUM
DATE:
_________________
TO:
Company Employees
FROM:
Larry Higgins, President
RE: Procedures to ensure that all cash receipts are deposited
in the bank and that each days total cash receipts are
posted to accounts receivable.
1. Someone other than the accountant opens the mail. This
person separates customer checks from the accompanying
remittance slips.
2. An employee with no access to the accounting records
deposits the cash in the bank immediately.
3. The remittance slips go to the accountant, who uses them for
posting credits to the customer accounts. The accountant
adds up the total of the credits for the day.
4. A third person, such as the manager or the president,
compares the amount of the bank deposit to the total of the
customer credits posted by the accountant. This gives some
assurance that the days cash receipts went into the bank
and that the same amount was posted to customer accounts.
5. Someone other than the accountant should prepare the bank
reconciliation.
Student responses may vary.
148
Chapter 5
Short-Term Investments & Receivables
(15-20 min.)
P 5-69B
(All amounts in thousands)
Reqs. 1 and 3
Accounts Receivable
3,435
31,877
32,487
352
3,693
Allowance for Uncollectibles
156
352
325
129
Req. 2
Journal
DATE
a.
b.
c.
d.
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
Accounts Receivable. 32,487
Service Revenue
32,487
Cash 31,877
Accounts Receivable
Uncollectible-Account Expense.
Allowance for Uncollectibles
($32,487 .01)
325
Allowance for Uncollectibles...
Accounts Receivable
31.877
352
325
352
Req. 4
These balances agree with the Dependable Delivery amounts.
Chapter 5
Short-Term Investments & Receivables
149
(continued)
P 5-69B
Req. 5
INCOME STATEMENT
Service revenue $32,487
Uncollectible-account expense
325
150
Chapter 5
Short-Term Investments & Receivables
(25-35 min.)
P 5-70B
Req. 1
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
Dec. 28 Allowance for Doubtful Accounts.. 1,900
Accounts Receivable Blue Carpets
Accounts Receivable Show-In-Tell
1,500
400
Dec. 31 Doubtful-Account Expense.. 1,470
Allowance for Doubtful Accounts
1,470*
_____
*Computation:
Required credit balance in Allowance for Doubtful
Accounts based on aging of Accounts
Receivable ($160,000 .002) + ($35,000 .01) +
($14,000 .05) + ($21,000 .30)
$7,670
Credit balance in Allowance for Doubtful Accounts
before the December 31 entry (see the
T-account in the answer to Req. 2;
$8,100 $1,900)
6,200
Credit entry needed to produce the required credit
balance in Allowance for Doubtful Accounts...
$1,470
Chapter 5
Short-Term Investments & Receivables
151
(continued)
P 5-70B
Req. 2
Allowance for Doubtful Accounts
Dec. 28 Write-offs
1,900 Sept. 30 Balance
Dec. 31 Adjusting
Dec. 31 Balance
8,100
1,470
7,670
Req. 3
Image Communications
Comparative Balance Sheet
December 31, 2011 and December 31, 2010
2011
2010
Accounts receivable 230,000 $213,000
Less: Allowance for doubtful accounts.
(7,670)
(4,200)
Accounts receivable, net $222,330 $208,800
152
Chapter 5
Short-Term Investments & Receivables
(20-25 min.)
P 5-71B
Req. 1
Cash ($56,000 $24,000)
Short-term trading investments,
at market value.
Accounts receivable $44,000
Less: Allowance for uncollectibles. (14,600)
Inventory.
Prepaid expenses.
Total current assets.
Total current liabilities
$ 32,000
11,000
29,400
55,000
16,000
$100,400
$96,000
Req. 2
As reported
Corrected
Current
$189,000
=
= 1.97
ratio
$96,000
($56,000 + $18,000
Acid-test
+ $44,000)
=
= 1.23
ratio
$96,000
Chapter 5
$143,400
= 1.49
$96,000
$32,000 + $11,000 + $29,400
= 0.75
$96,000
Short-Term Investments & Receivables
153
(continued)
P 5-71B
Req. 3
Net income, as reported..
Unrealized loss on trading investments
($18,000 $11,000)...
Correction for conversion to the
allowance method
Uncollectible-account expense
should be ($670,000 .03).
Uncollectible-account expense by
the direct write-off method
Net income, as corrected
154
Chapter 5
$99,000
(7,000)
$20,100
5,500
(14,600)
$77,400
Short-Term Investments & Receivables
(20-30 min.)
P 5-72B
Req. 1
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
2010
Nov. 30 Note Receivable Bragg Market.
Service Revenue
Dec. 31 Interest Receivable ($32,000 .04 1/12).
Interest Revenue
DEBIT
CREDIT
32,000
32,000
107
107
2011
Feb. 28 Cash 32,320
Note Receivable Bragg Market
32,000
Interest Receivable
107
Interest Revenue ($32,000 .04
213
2/12).
Mar. 1
1
Note Receivable Dons Market ... 7,200
Accounts Receivable Dons
Market
Cash.
Financing Expense..
Note Receivable Dons Market
Chapter 5
7,200
7,000
200
7,200
Short-Term Investments & Receivables
155
(continued)
P 5-72B
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
2011
Dec. 16 Note Receivable Stratford Provisions 15,400
Cash.
15,400
Dec. 31 Interest Receivable.
60
Interest Revenue ($15,400 .095 15/365)
60
Req. 2
BALANCE SHEET
Current assets:
Note receivable
Interest receivable
156
Chapter 5
December 31
2011
2010
$15,400
60
$32,000
107
Short-Term Investments & Receivables
P 5-73B
(30-40 min.)
Req. 1
Dollar amounts in millions
2011
2010
a. Current
ratio
=
Total current assets
Total current liabilities
=
$935
= 1.67
$560
$855
= 1.40
$610
Cash + Short-term investments
b. Acid-test
=
ratio
+ Net current receivables
Total current liabilities
=
$70+$145+$290
$80+$160+$260
$560
$610
=
c. One days
=
sales
Days sales =
in average
receivables
Net sales
=
365
Average net receivables
One days sales
=
=
Chapter 5
0.90
$5,890
365
= $16.14
=
0.82
$5,150
365
= $14.11
($290+260)/2
($260+$230)/2
$16.14
$14.11
17 days
=
17 days
Short-Term Investments & Receivables
157
(continued)
P 5-73B
Req. 2
MEMORANDUM
DATE:
_________________
TO:
Top management of Gold Pools, Inc.
FROM:
Student Name
RE:
Changes in ratio values from 2010 to 2011
The current ratio improved from 1.40 to 1.67. The acid-test ratio
increased from 0.82 to 0.90. Days sales in receivables were
unchanged at 17 days.
Two of the three ratio values improved during the current year,
and the third ratio value held steady. This is a favorable trend
because it indicates that the company is finding it easier to pay
its bills.
158
Chapter 5
Short-Term Investments & Receivables
Decision Cases
(20-25 min.) Decision Case 1
Clearview Cablevision
Summary Income Statement
Year Ended December 31, 2010
Service revenue
Total expenses, excluding bad debts.
Bad-debt expense ($940,000 .05)..
Net income.
$940,000
(670,000)
(47,000
)
$223,000
Conclusion: The business was profitable during 2010.
Computation:
Accounts Receivable
Dec. 31, 2009 Balance
2010 REVENUES
Dec. 31, 2010 Balance
110,000
940,000 2010 Collections
2010 Write-offs
180,000
Chapter 5
840,000
30,000
Short-Term Investments & Receivables
159
(15-20 min.) Decision Case 2
The trend of sales is increasing.
(Dollars in thousands)
2010
Days
sales in
receivables
=
2009
($115* + $96*) / 2
$1,475 / 365 days
($96* + $85*) / 2
$1,001 / 365 days
= 26 days
= 33 days
_____
*Net accounts receivable
Days sales in receivables decreased nicely during 2010.
Cash collections from customers for 2010 and 2009:
2010
2009
Beginning net accounts receivable
+ Sales revenue
Ending net accounts receivable
= Estimated cash collections
$ 96
1,475
(115)
$1,456
$ 85
1,001
(96)
$ 990
Collections from customers increased dramatically during
2010.
Based on the improving trends of sales and collections from
customers, and the drop in days sales in receivables, we
would lend $500,000 to Dean Young Beauty Aids.
160
Chapter 5
Short-Term Investments & Receivables
Ethical Issue
(20-30 minutes)
Req. 1
The ethical issue in this case is whether it is acceptable to
smooth earnings by way of judgmental positive or negative
changes to uncollectible accounts expense that understate or
overstate the amount, based on what management decides
they want net income to be. What should be the determining
factors in making the judgments for this computation?
Req. 2 and Req. 3
The stakeholders to this decision are Sunnyvale Loan
Company,
its
officers
and
directors,
its
shareholders,
Sunnyvales banker, securities analysts, and the equity and
credit markets.
Economic analysis: The stock and credit markets dont like
surprises. The markets usually reward steadily performing and
upward-trending earnings with increasing share prices and
good credit ratings, but only if these trends are real and not
engineered by management. Burnhams reasoning is faulty.
The income overstatements may offset the income
understatements in some periods, but there is no guarantee
Chapter 5
Short-Term Investments & Receivables
161
that this will always occur. The accounting literature is full of
instances where misstatements of income have dulled peoples
perceptions of the truth and resulted in tragic losses of
resources and reputations. An article in The Wall Street Journal
concluded with this statement, The danger with spin artistry in
accounting is that the spinner may believe the spin. While
manipulations such as this might have a temporarily positive
impact, in the long run, creditors and analysts will catch on that
the company is manipulating earnings, and the markets will
react in a harshly negative way toward Sunnyvale, hurting all
parties concerned.
Legal analysis:
As explained in chapter 4, material and
intentional manipulations of earnings are known as fraudulent
financial reporting, and are illegal.
Such dealings will
eventually result in adverse legal and regulatory consequences
for the company, as well as its officers and directors.
Ethical analysis:
Sunnyvale Loan Companys practice of
smoothing income is unethical because the owner deliberately
underestimates
periods
and
Uncollectible-Account
overstates
the
expense
Expense
in
other
in
some
periods.
Burnhams purpose is to manipulate income. This is lying,
which violates the rights of all other stakeholders in favor of
temporary enrichment for a few. Rather than manipulating the
162
Chapter 5
Short-Term Investments & Receivables
accounting information, Burnham should be using accounting
information to represent the business truthfully to her bank
lender. We can be sure the bank as well as securities analysts
expect truthful financial statements from Sunnyvale Loan
Company.
Req. 4
Uncollectible
accounts
expense
and
the
allowance
for
uncollectible accounts should be based on a truthful and
accurate projection of how much a company truly expects to
collect over the next operating cycle, rather than figuring out
what a company wants net income to be and adjusting the
expense and allowance accordingly.
While Student responses may vary to this question, this
represents the main message.
Chapter 5
Short-Term Investments & Receivables
163
Focus on Financials: Amazon.com, Inc.
(30-40 min.)
Req. 1
Net means net of allowance for doubtful accounts. Other
likely means Other current assets, which are apparently
immaterial in comparison with total current assets and total
assets, and are therefore not discussed separately.
Req. 2
According to the Accounts Receivable, Net, and Other
section of Note 1, vendor receivables, net of allowance,
constitute $400 million in 2008, and $280 million in 2007.
Customer receivables, net of allowance, constitute $311 million
in 2008 and $296 million in 2007. Together, these amounts
constitute $711 million of the $827 million balance in 2008 and
$576 million of the $705 million balance in 2007.
Req. 3
According to the Allowance for Doubtful Accounts section of
Note 1, the allowance for doubtful customer and vendor
accounts receivable is $81 million in 2008 and $64 million in
2007.
164
Chapter 5
Short-Term Investments & Receivables
Focus on Analysis: Foot Locker, Inc.
(20 min.)
Req. 1
According to Footnote 6, at the end of fiscal 2006, Foot Locker, Inc.
owned tax exempt municipal bonds of $44 million and equity securities
of $205 million in short-term investments. At the end of fiscal 2007, the
company owned only $5 million of short-term investments. These were
available-for-sale investments, rather than trading securities. These
types of securities are discussed in Chapter 10 of the textbook.
However, because the companys intent at the end of 2006 was to sell
the securities before the end of the next fiscal year, they were still listed
as current, rather than a long-term asset.
Req. 2
Short-term investments
Beginning balance
Purchases (statement
of cash flows,
investing section)
Ending balance
(unadjusted)
$249
1,378 Sales (statement of
cash flows, investing
section)
$7
$1,620
See the explanation in Footnote 6 under the listing of the securities. The
equity securities consisted of preferred auction rate securities that had a
face value of $7, which corresponds to the account balance above.
However, due to the global credit and capital market crisis that existed at
Chapter 5
Short-Term Investments & Receivables
165
the end of 2007, the company determined that these securities had
declined in value to $5. Therefore, the company wrote these securities
down to $5, as follows:
Focus on analysis (continued)
Short-term investments
Unadjusted balance
$7
Write-down
Adjusted balance
166
$5
Chapter 5
Short-Term Investments & Receivables
$2
Group Project
Student responses will vary.
Chapter 5
Short-Term Investments & Receivables
167