Question Details

CHAPTER 9 ACCOUNTING FOR RECEIVABLES EXERCISES PART 10

Ex. 181
Stone Furniture Store has credit sales of $400,000 in 2008 and a debit balance of $600 in the
Allowance for Doubtful Accounts at year end. As of December 31, 2008, $130,000 of accounts
receivable remain uncollected. The credit manager prepared an aging schedule of accounts
receivable and estimates that $3,000 will prove to be uncollectible.
On March 4, 2009, the credit manager authorizes a write-off of the $1,000 balance owed by A.
Lowell.
Instructions
(a) Prepare the adjusting entry to record the estimated uncollectible accounts expense in 2008.
(b) Show the balance sheet presentation of accounts receivable on December 31, 2008.
(c) On March 4, before the write-off, assume the balance of Accounts Receivable account is
$160,000 and the balance of Allowance for Doubtful Accounts is a credit of $2,000. Make the
appropriate entry to record the write-off of the Lowell account. Also show the balance sheet
presentation of accounts receivable before and after the write-off.


9 - 39
Ex. 182
An inexperienced accountant made the following entries. In each case, the explanation to the
entry is correct.
Dec. 17 Cash........................................................................................ 2,940
Sales Discounts....................................................................... 60
Accounts Receivable ...................................................... 3,000
(To record collection of 12/4 sales, terms 2/10, n/30)
20 Cash........................................................................................ 18,360
Notes Receivable .......................................................... 18,000
Interest Revenue ........................................................... 360
(Collection of $18,000, 8%, 90 day note dated Sept. 21.
Interest had been accrued through Nov. 30.)
27 Cash........................................................................................ 1,000
Bad Debts Expense........................................................ 1,000
(Collection of account previously written off as
uncollectible under allowance method)
31 Bad Debts Expense................................................................. 600
Allowance for Doubtful Accounts.................................... 600
(To recognize estimated bad debts based on 1% of
net sales of $600,000)
Instructions
Prepare the correcting entries.


9 - 40 Test Bank for Accounting Principles, Eighth Edition
Ex. 183
Prepare the necessary journal entry for the following transaction.
Carlson Company sold $200,000 of its accounts receivables to a factor. The factor charges a 3%
fee.


Ex. 184
Morton Company has the following accounts receivable in its general ledger at July 31: Accounts
Receivable $32,000. During August, the following transactions occurred.
Aug. 1 Added 1% finance charges to $12,000 of credit card balances for not paying within the
30 day grace period.
15 Sold $20,000 of accounts receivable to Rush Factors Inc. who charge a 2%
commission.
28 Collected $7,000 from Morton credit card customers including $350 of finance charges
previously billed.
Instructions
(a) Journalize the transactions.
(b) Indicate the statement presentation of finance and service charges.


9 - 41
Ex. 185
Listed below are two independent situations involving the disposition of receivables.
1. Dylan Company sells $300,000 of its receivables to Speedy Factors, Inc. Speedy Factors
assesses a finance charge of 2% of the amount of receivables sold.
Instructions
Prepare the journal entry to record the sale of the receivables on Dylan Company's books.
2. A restaurant is the site for a large company party. The bill totals $3,000 and is charged by
the patron on a Visa credit card.
Instructions
Assume a 3% service fee is charged by Visa. Record the entry for the transaction on the
restaurant's books.


Ex. 186
Compute the maturity date and the maturity value associated with each of the following notes
receivables.
1. A $15,000, 6%, 3-month note dated April 20.
Maturity date ___________, Maturity value $____________.
2. A $25,000, 8%, 72-day note dated June 10.
Maturity date ___________, Maturity value $____________.
3. An $8,000, 9%, 30-day note dated September 20.
Maturity date ___________, Maturity value $____________.


Ex. 187
Compute the maturity date and interest for the following notes.
Dates of Notes Terms Principal Interest Rate
(a) April 17 60 days $60,000 6%
(b) August 11 3 months 80,000 8%


Ex. 188
Compute the missing amount for each of the following notes:
Principal Annual Interest Rate Time Total Interest
———————————————————————————————————————
(a) $40,000 10% 2.5 years ?
———————————————————————————————————————
(b) $120,000 ? 9 months $7,200
———————————————————————————————————————
(c) ? 10% 90 days $1,500
———————————————————————————————————————
(d) $40,000 9% ? $1,200
———————————————————————————————————————
Accounting for Receivables
9 - 43


Ex. 189
Prepare the necessary journal entries for the following transactions for Presley Co.
May 25 Presley Co. received a $25,000, 2-month, 6% note from Durler Company in settlement
of an account receivable.
June 25 Presley Co. received payment on the Durler note.


Ex. 190
Record the following transactions in general journal form for Klein Company.
July 1 Received a $10,000, 8%, 3-month note, dated July 1, from Ann Howe in payment of
her open account.
Oct. 1 Received notification from Ann Howe that she was unable to honor her note at this
time. It is expected that Howe will pay at a later date.
Nov. 15 Received full payment from Ann Howe for her note receivable previously dishonored.


9 - 44 Test Bank for Accounting Principles, Eighth Edition


Ex. 191
Rowe Boat Company often requires customers to sign promissory notes for major credit
purchases. Journalize the following transactions for Rowe Boat Company.
Feb. 12 Accepted a $25,000, 6%, 60-day note from Jim Stone for a 24-foot motorboat built to
his specifications.
April 14 Received notification from Jim Stone that he was unable to honor his promissory note
but that he expects to pay the amount owed in May.
May 26 Received a check from Jim Stone for the total amount owed.
June 10 Received notification by the bank that Jim Stone's check was being returned "NSF"
and that Mr. Stone had declared personal bankruptcy.


Ex. 192
The following information is available for Wenger Company.
Beginning accounts receivable $ 80,000
Ending accounts receivable 120,000
Net sales 1,000,000
Instructions
Compute the receivables turnover ratio and the average collection period.
Accounting for Receivables
9 - 45


9 - 46 Test Bank for Accounting Principles, Eighth Edition
COMPLETION STATEMENTS


193. Accounts receivable, which are also referred to as ______________ receivables, are
amounts owed by customers on account.
194. The three primary accounting problems associated with accounts receivable are (1)
______________, (2) _______________, and (3) ______________ of accounts
receivable.
195. In order to encourage prompt payment of a trade receivable, companies often offer a
______________ to customers.
196. When credit sales are made, _________________ Expense is considered a normal and
necessary risk of doing business on a credit basis.
197. The two methods of accounting for uncollectible accounts are the ____________ method
and the ______________ method.
198. Allowance for Doubtful Accounts is a _____________ account which is ______________
from Accounts Receivable on the balance sheet.
199. When the allowance method is used to account for uncollectible accounts, the
______________ is credited when an account is determined to be uncollectible.
200. The _____________ basis of estimating uncollectibles provides a better _____________
of bad debt expense with sales revenue and therefore emphasizes income statement
relationships.
201. The _________________ basis of estimating uncollectibles normally results in the best
approximation of _______________ value and therefore emphasizes balance sheet
relationships.
202. Sales resulting from the use of VISA and MasterCard are considered ______________ by
the retailer.
203. A finance company or bank that purchases receivables from businesses is known as a
______________.
204. A 75-day note receivable dated June 10 would mature on ______________.
205. Collection of a note receivable will result in a credit to ______________ for the face value
of the note and a credit to ______________.
206. A note which is not paid on the maturity date is said to be ______________.


9 - 47
MATCHING
207. Match the items below by entering the appropriate code letter in the space provided.
A. Aging of receivables F. Percentage of receivables basis
B. Direct write-off method G. Factoring
C. Promissory note H. Dishonored note
D. Trade receivables I. Average collection period
E. Percentage of sales basis J. Credit card sales
____ 1. A written promise to pay a specified amount on demand or at a definite time.
____ 2. Sales that involve the customer, the retailer, and the credit card issuer.
____ 3. Emphasizes the matching of costs and revenues in the same period.
____ 4. Amounts owed by customers from the sale of goods and services.
____ 5. A note which is not paid in full at maturity.
____ 6. Analysis of customer account balances by length of time they have been unpaid.
____ 7. Emphasizes expected cash realizable value of accounts receivable.
____ 8. Generally not acceptable for financial reporting purposes.
____ 9. The amount of time that a receivable is outstanding.
____ 10. Sale of accounts receivable to a factor.


9 - 48 Test Bank for Accounting Principles, Eighth Edition
SHORT-ANSWER ESSAY QUESTIONS
S-A E 208
Management can choose between two bases in calculating the estimated uncollectible accounts
under the allowance method. One basis emphasizes an income statement viewpoint whereas the
other emphasizes a balance sheet viewpoint. Identify the two bases and contrast the two
approaches. How do the different points of view affect the amount recognized as Bad Debts
Expense during the accounting period?


S-A E 209
Customer purchases using credit cards are a significant source of revenue for many retailers.
From the standpoint of a retailer, briefly discuss some advantages and disadvantages of a retail
store having its own credit card as opposed to accepting one of the national credit cards (e.g.,
VISA, MasterCard).


S-A E 210
Your friend Mark has opened an office supply store. He will extend open credit to local
businesses and is concerned about potential bad debts. What can Mark do to reduce potential
bad debts?
Accounting for Receivables
9 - 49


S-A E 211
Banks that issue credit cards generally charge retailers a fee of 2 to 4% of the amount of sale.
List reasons why companies are willing to pay these fees.


S-A E 212 (Ethics)
Linder Books, a small book publishing company, wrote off the debt of The Learning Center, and
the Academy of Basic Education, both small private schools, after it determined that the schools
were facing serious financial difficulty. No notice of the action was sent to the schools; Linder
Books simply stopped sending bills. Nearly a year later, The Learning Center was given a large
endowment and a government grant. The resulting publicity brought the school to the attention of
Linder Books, which immediately reinstated the account, and sent a new bill to the school,
including interest for the entire time the debt was outstanding. No further action was taken
regarding the Academy of Basic Education, which was still operational.
Required:
Did Linder Books act ethically in reinstating the debt of one client, and not the other? Explain.
9 - 50 Test Bank for Accounting Principles, Eighth Edition


S-A E 213 (Communication)
Grenwood Company received a letter from Jane Gambel, a customer. Jane had purchased $425
worth of clothing from Grenwood on credit. She has made two payments of $50 each. She has
missed the last two payments, and has received a collection letter from Grenwood. Her total debt
presently, with interest and late fees, is $351.13.
Jane sent a letter to Grenwood in which she asked for her debt to be forgiven. She said she had
heard that companies make allowances for accounts they are doubtful about collecting, and that
Grenwood certainly should have been doubtful about her—that as a college student she had
changed her major three times. She also said that she could not enjoy a high quality of life when
making such high payments, but that she didn't want to be embarrassed by bill collectors, either.
She especially didn't want her parents to find out that she had not paid her debts. Having
Grenwood write off her account seemed to her the best solution in the circumstances. She added
that the clothes she bought at Grenwood were among the best she had ever owned, and that she
"told everybody" that Grenwood was definitely the best place to get clothes.
Required:
You are the accounting manager for Grenwood. Write a short letter to Jane explaining why her
debt cannot be written off.
Accounting for Receivables
9 - 51