Solutions to Exercises and Problems Chapter 7

Solutions to Exercises and Problems Chapter 7 - Chapter 7...

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Chapter 7 Reporting and Analyzing Receivables QUESTIONS 1. When customers use credit cards, the selling companies can avoid having to directly evaluate the credit standing of its customers. They also avoid the risk of bad debts and often are paid cash from the credit card company more quickly than if customers were granted credit directly. Moreover, they hope to increase sales, and net income, from the added convenience to buyers. 2. Revenues and expenses usually are not matched under the direct write-off method because the revenues recorded from the uncollectible accounts often appear on the income statement of one period while the bad debts expenses of those revenues appear on the income statement of a later period when the account(s) is known to be uncollectible. 3. The accounting principle of materiality suggests that the requirements of accounting standards can be ignored if their effect on the financial statements is unimportant to their users’ business decisions. 4. Writing off a bad debt against the Allowance account does not reduce the estimated realizable value of a company’s accounts receivable because the write-off reduces the balances of both Accounts Receivable and the Allowance for Doubtful Accounts by equal amounts. This means the difference between them (called estimated realizable value) remains the same. 5. The adjusted balances of Bad Debts Expense and Allowance for Doubtful Accounts are virtually never equal because the expense amount reflects only the events of the current period, and the allowance is the accumulated result of events over a number of prior periods. The only way that they could be equal would be if write-offs during the prior period exactly equaled the beginning balance of the Allowance account. 6. Creditors prefer notes receivable to accounts receivable because the notes can be more easily converted into cash before they are due by discounting (or selling) them to a financial institution. Also, a note represents a clear written acknowledgment by the debtor of both the debt and its amount and terms. 7. Best Buy does not mention uncollectible accounts in its notes to its financial statements, and does not list its receivables as “net” of any allowance for uncollectibles, probably because uncollectible accounts are immaterial. 8. Circuit City uses the allowance method to account for doubtful accounts as evidenced by the receivables being reduced by an allowance on the balance sheet. The realizable value of accounts receivable as of February 28, 2005, is its net amount of $172,995,000.
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9. Apple’s gross accounts receivable at September 25, 2004 are ($ millions) $774 + $47 = $821 . Apple believes that the percent of accounts receivable that are uncollectible is $47/$821 = 5.7%
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QUICK STUDIES Quick Study 7-1 (15 minutes) 1. Cash 19,000 Credit Card Expense* ............................................... 1,000 Sales .................................................................... 20,000 To record credit card sales less fees.
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