Chapter 8: Q3RQ (page 465)
What is a critical element of internal control in the handling of receivables by a business? Explain how this element is accomplished.
Answer
A critical element of internal control is the separation of duties related to managing cash and cash-accounting duties.
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Accounting for notes receivable and accruing interestLogan Realty loaned money and received the following notes during 2018.Note Date Principal Amount Interest Rate Term
(1) Oct. 1 $ 16,000 7% 1 year
(2) Jun. 30 18,000 18% 9 months
(3) Sep. 19 12,000 8% 90 days
Requirements
1. Determine the maturity date and maturity value of each note.
2. Journalize the entries to establish each Note Receivable and to record collection ofprincipal and interest at maturity. Include a single adjusting entry on December 31,2018, the fiscal year-end, to record accrued interest revenue on any applicable note.Explanations are not required. Round to the nearest dollar.
Weddings on Demand sells on account and manages its own receivables. My average
experience for the past three years has been as follows:
Sales \( 350,000
Cost of Goods Sold 210,000
Bad Debts Expense 4,000
Other Expenses 61,000
Unhappy with the amount of bad debts expense she has been experiencing, Aledia
Sanchez, controller, is considering a major change in the business. Her plan would be
to stop selling on account altogether but accept either cash, credit cards, or debit cards
from her customers. Her market research indicates that if she does so, her sales will
increase by 10% (i.e., from \)350,000 to \(385,000), of which \)200,000 will be credit
or debit card sales and the rest will be cash sales. With a 10% increase in sales, there
will also be a 10% increase in Cost of Goods Sold. If she adopts this plan, she will
no longer have bad debts expense, but she will have to pay a fee on debit/credit card
transactions of 2% of applicable sales. She also believes this plan will allow her to save
$5,000 per year in other operating expenses.
Should Sanchez start accepting credit cards and debit cards? Show the
computations of net income under her present arrangement and under the plan.
Question: Endurance Running Shoes reports the following:
2018 | |
May 6 | Recorded credit sales of \(102,000. Ignore Cost of Goods Sold. |
Jul. 1 | Loaned \)18,000 to Jerry Paul, an executive with the company, on a one-year, 7% note |
Dec. 31 | Accrued interest revenue on the Paul note |
2019 | |
Jul. 1 | Collected the maturity value of the Paul note |
Journalize all entries required for Endurance Running Shoes.
Ensuring internal control over the collection of receivables Consider internal control over receivables collections. What job must be withheld from a company’s credit department in order to safeguard its cash? If the credit department does perform this job, what can a credit department employee do to hurt the company?
What does the accounts receivable turnover ratio measure, and how is it calculated?
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