Chapter 8: Q8RQ (page 465)
What occurs when a business pledges its receivables?
Answer
The business entity sells the receivable to the finance company under pledge.
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At January 1, 2018, Hilltop Flagpoles had Accounts Receivable of \(28,000, and Allowance for Bad Debts had a credit balance of \)3,000. During the year, Hilltop Flagpoles recorded the following:
a. Sales of \(185,000 (\)164,000 on account; \(21,000 for cash). Ignore Cost of Goods Sold.
b. Collections on account, \)135,000.
c. Write-offs of uncollectible receivables, $2,300.
Requirements
1. Journalize Hilltop’s transactions that occurred during 2018. The company uses the allowance method.
2. Post Hilltop’s transactions to the Accounts Receivable and Allowance for Bad Debts T-accounts.
3. Journalize Hilltop’s adjustment to record bad debts expense assuming Hilltop estimates bad debts as 3% of credit sales. Post the adjustment to the appropriate T-accounts.
4. Show how Hilltop Flagpoles will report net accounts receivable on its December 31, 2018, balance sheet.
What occurs when a business factors its receivables?
Question: On June 6, Lakeland Bank & Trust lent $80,000 to Stephan Stow on a 30-day, 9% note.
Requirements
1. Journalize for Lakeland the lending of the money on June 6.
2. Journalize the collection of the principal and interest at maturity. Specify the date Round to the nearest dollar
How do the percent-of-receivables and aging-of-receivables methods compute bad debts expense?
The comparative financial statements of Newton Cosmetic Supply for 2018, 2017,
and 2016 include the data shown here:
2018 2017 2016
Balance sheet—partial
Current Assets:
Cash \( 80,000 \) 50,000 $ 30,000
Short-term investment 150,000 170,000 125,000
Accounts Receivable, Net 310,000 260,000 220,000
Merchandise Inventory 360,000 335,000 330,000
Prepaid Expenses 50,000 30,000 35,000
Total Current Assets 950,000 845,000 740,000
Total Current Liabilities 530,000 630,000 670,000
Income statement—partial
Net Sales (all on account) 5,850,000 5,110,000 425,000
Requirements
1. Compute these ratios for 2018 and 2017:
a. Acid-test ratio (Round to two decimals.)
b. Accounts receivable turnover (Round to two decimals.)
c. Days’ sales in receivables (Round to the nearest whole day.)
2. Considering each ratio individually, which ratios improved from 2017 to 2018 and
which ratios deteriorated? Is the trend favorable or unfavorable for the company?
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