Chapter 7: 11BE (page 363)
Use the information in BE7-10 for Wood. Assume that the receivables are sold with recourse. Prepare the journal entry for Wood to record the sale, assuming that the recourse liability has a fair value of $7,500.
The business entity will recognize a loss on the sale of receivables equal to$10,500.
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What are the basic problems that occur in the valuation of accounts receivable?
Kimmel Company uses the net method of accounting for sales discounts. Kimmel also offers trade discounts to various groups of buyers.
On August 1, 2017, Kimmel sold some accounts receivable on a without recourse basis. Kimmel incurred a finance charge.
Kimmel also has some notes receivable bearing an appropriate rate of interest. The principal and total interest are due at maturity. The notes were received on October 1, 2017, and mature on September 30, 2019. Kimmel’s operating cycle is less than one year.
Instructions
(a) (1) Using the net method, how should Kimmel account for the sales discounts at the date of sale? What is the rationale for the amount recorded as sales under the net method?
(2) Using the net method, what is the effect on Kimmel’s sales revenues and net income when customers do not take the sales discounts?
(b) What is the effect of trade discounts on sales revenues and accounts receivable? Why?
(c) How should Kimmel account for the accounts receivable factor on August 1, 2017? Why?
(d) How should Kimmel account for the note receivable and the related interest on December 31, 2017? Why?
3. Which of the following statements is false?
(a) Receivables include equity securities purchased by the company.
(b) Receivables include credit card receivables.
(c) Receivables include amounts owed by employees as a result of company loans to employees.
(d) Receivables include amounts resulting from transactions with customers.
The following are a series of unrelated situations. 1. Halen Company’s unadjusted trial balance at December 31, 2017, included the following accounts.
Debit \( | Credit \) | |
Accounts receivables | \(53,000 | |
Allowance for doubtful accounts | 4,000 | |
Net sales | \)1,200,000 |
Halen Company estimates its bad debt expense to be 7% of gross accounts receivable. Determine its bad debt expense for 2017.
2. An analysis and aging of Stuart Corp. accounts receivable at December 31, 2017, disclosed the following.
Amounts estimated to be uncollectible | \(180,000 |
Accounts receivables | 1,750,000 |
Allowance for doubtful accounts (per books) | 125,000 |
What is the net realizable value of Stuart’s receivables at December 31, 2017?
3. Shore Co. provides for doubtful accounts based on 4% of gross accounts receivable, The following data are available for 2017.
Credit sales during 2017 | \)4,400,000 |
Bad debt expenses | 57,000 |
Allowance for doubtful accounts 1/1/17 | 17,000 |
Collection of accounts written off in prior years (Customer credit was re-established) | 8,000 |
Customer accounts written off as uncollectible during 2017 | 30,000 |
What is the balance in Allowance for Doubtful Accounts at December 31, 2017?
4. At the end of its first year of operations, December 31, 2017, Darden Inc. reported the following information.
Accounts receivable, net of allowance for doubtful accounts | \(950,000 |
Customer accounts written off as uncollectible during 2017 | 24,000 |
Bad debt expense for 2017 | 84,000 |
What should be the balance in accounts receivable at December 31, 2017, before subtracting the allowance for doubtful accounts?
5. The following accounts were taken from Bullock Inc.’s trial balance at December 31, 2017.
Debit | Credit | |
Net credit sales | \)750,000 | |
Allowance for doubtful accounts | $14,000 | |
Accounts receivables | 310,000 |
If doubtful accounts are 3% of accounts receivable, determine the bad debt expense to be reported for 2017.
Instructions
Answer the questions relating to each of the five independent situations as requested.
Under IFRS, cash and cash equivalents are reported:
(a) the same as GAAP.
(b) as separate items.
(c) similar to GAAP, except for the reporting of bank overdrafts.
(d) always as the first items in the current assets section.
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