ch07 - CHAPTER 7 RECEIVABLES CLASS DISCUSSION QUESTIONS 1...

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CHAPTER 7 RECEIVABLES CLASS DISCUSSION QUESTIONS 1. Receivables are normally classified as (1) accounts receivable, (2) notes receivable, or (3) other receivables. 2. Transactions in which merchandise is sold or services are provided on credit generate accounts receivable. 3. a. Current assets b. Investments 4. Examples of other receivables include in- terest receivable, taxes receivable, and re- ceivables from officers or employees . 5. The principle of separation of operations and accounting is violated. ( Note to Instruct- ors: This weakness in internal control may permit embezzlement. For example, the ac- counts receivable clerk may misappropriate cash receipts and cover the misappropri- ation by a process called lapping. In lapping, the cash receipts from one account are taken and the cash received on a sub- sequent account is used to cover the short- age. The receipts on another account are then used to cover the shortage in this latter customer’s account, etc. This lapping gener- ally continues until the records are falsified to correct for the shortage, the cash is re- turned by the clerk, or the embezzlement is discovered.) 6. The allowance method 7. Contra asset, credit balance 8. The accounts receivable and allowance for doubtful accounts may be reported at a net amount of $759,900 ($883,150 – $123,250) in the Current Assets section of the balance sheet. In this case, the amount of the allow- ance for doubtful accounts should be shown separately in a note to the financial state- ments or in parentheses on the balance sheet. Alternatively, the accounts receivable may be shown at the gross amount of $883,150 less the amount of the allowance for doubtful accounts of $123,250, thus yielding net accounts receivable of $759,900. 9. 1. The percentage rate used is excessive in relationship to the volume of ac- counts written off as uncollectible; hence, the balance in the allowance is excessive. 2. A substantial volume of old uncollectible accounts is still being carried in the ac- counts receivable account. 10. An estimate based on analysis of receiv- ables provides the most accurate estimate of the current net realizable value . 11. The advantages of a claim evidenced by a note are (1) the debt is acknowledged, (2) the payment terms are specified, (3) it is a stronger claim in the event of court action, and (4) it is usually more readily transfer- able to a creditor in settlement of a debt or to a bank for cash. 12. a. Ellsworth Company b. Notes Receivable 13. The interest will amount to $6,300 only if the note is payable one year from the date it was created. The usual practice is to state the interest rate in terms of an annual rate, rather than in terms of the period covered by the note. 14. Debit Accounts Receivable Credit Notes Receivable Credit Interest Revenue 15. Cash .............................. 20,806 Accounts Receivable 20,600 Interest Revenue ...... 206 ($20,600 × 30/360 × 12% = $206) 16. Current assets 81 81
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EXERCISES Ex. 7–1 a. Inappropriate. Since Fridley has a large number of credit sales supported by promissory notes, a notes receivable ledger should be maintained. Failure to
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