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CHAPTER 8
Accounting for Receivables
ASSIGNMENT CLASSIFICATION TABLE

Learning Objectives

Questions

Brief
Exercises

1.

Identify the different types of receivables.

1, 2

1

2.

Explain how companies recognize accounts receivable. 3

2

3.

Distinguish between the methods and bases companies use to value accounts receivable.

4, 5, 6,
7, 8

3, 4, 5,
6, 7

4.

Describe the entries to record the disposition of accounts receivable.

9, 10, 11

5.

Compute the maturity date of and interest on notes receivable. 12, 13, 14,
15, 16

6.

Explain how companies recognize notes receivable.

7.

Describe how companies value notes receivable.

8.

Describe the entries to record the disposition of notes receivable.

17

9.

Explain the statement presentation and analysis of receivables.

18, 19

Do It!

Exercises

A
Problems

B
Problems

1, 2

1A, 3A, 4A, 1B, 3B, 4B,
6A, 7A
6B, 7B

1

3, 4, 5, 6

1A, 2A, 3A, 1B, 2B, 3B,
4A, 5A
4B, 5B

8

2

7, 8, 9

6A, 7A

6B, 7B

9, 10

3

10, 11, 12,
13

6A, 7A

6B, 7B

10, 11, 12

7A

7B

7A

7B

11

3

3, 12

12, 13

6A, 7A

6B, 7B

4

14

1A, 6A

1B, 6B

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)

8-1

ASSIGNMENT CHARACTERISTICS TABLE
Problem
Number Description
1A
2A

Simple

15–20

Moderate

20–25

3A

Journalize entries to record transactions related to bad debts.

Moderate

20–30

4A

Journalize transactions related to bad debts.

Moderate

20–30

5A

Journalize entries to record transactions related to bad debts.

Moderate

20–30

6A

Prepare entries for various notes receivable transactions.

Moderate

40–50

7A

Prepare entries for various receivable transactions.

Complex

50–60

1B

Prepare journal entries related to bad debt expense.

Simple

15–20

2B

Moderate

20–25

3B

Journalize entries to record transactions related to bad debts.

Moderate

20–30

4B

Journalize transactions related to bad debts.

Moderate

20–30

5B

Journalize entries to record transactions related to bad debts.

Moderate

20–30

6B

Prepare entries for various notes receivable transactions.

Moderate

40–50

7B

8-2

Prepare journal entries related to bad debt expense.

Difficulty
Time
Level
Allotted (min.)

Prepare entries for various receivable transactions.

Complex

50–60

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)

WEYGANDT FINANCIAL ACCOUNTING, IFRS Edition, 2e
CHAPTER 8
ACCOUNTING FOR RECEIVABLES
Number

LO

BT

Difficulty

Time (min.)

BE1

1

C

Simple

1–2

BE2

2

AP

Simple

5–7

BE3

3, 9

AN

Simple

4–6

BE4

3

AP

Simple

4–6

BE5

3

AP

Simple

4–6

BE6

3

AP

Simple

2–4

BE7

3

AN

Simple

4–6

BE8

4

AP

Simple

6–8

BE9

5

AP

Simple

8–10

BE10

5

AP

Moderate

8–10

BE11

6

AP

Simple

2–4

BE12

9

AP

Simple

4–6

DI1

3

AP

Simple

2–4

DI2

4

AP

Simple

4–6

DI3

5, 8

AP

Simple

6–8

DI4

9

AN

Simple

4–6

EX1

2

AP

Simple

8–10

EX2

2

AP

Simple

8–10

EX3

3

AN

Simple

8–10

EX4

3

AN

Simple

6–8

EX5

3

AP

Simple

6–8

EX6

3

AP

Simple

6–8

EX7

4

AP

Simple

4–6

EX8

4

AP

Simple

6–8

EX9

4

AP

Simple

6–8

EX10

5, 6

AN

Simple

8–10

EX11

5, 6

AN

Simple

6–8

EX12

5, 6, 8

AP

Moderate

10–12

EX13

5, 8

AP

Simple

8–10

EX14

9

AP

Simple

8–10

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)

8-3

ACCOUNTING FOR RECEIVABLES (Continued)
Number

LO

BT

Difficulty

Time (min.)

P1A

2, 3, 9

AN

Simple

15–20

P2A

3

AN

Moderate

20–25

P3A

2, 3

AN

Moderate

20–30

P4A

2, 3

AN

Moderate

20–30

P5A

3

AN

Moderate

20–30

P6A

2, 4, 5, 8, 9

AN

Moderate

40–50

P7A

2, 4–8

AP

Complex

50–60

P1B

2, 3, 9

AN

Simple

15–20

P2B

3

AN

Moderate

20–25

P3B

2, 3

AN

Moderate

20–30

P4B

2, 3

AN

Moderate

20–30

P5B

3

AN

Moderate

20–30

P6B

2, 4, 5, 8, 9

AN

Moderate

40–50

P7B

2, 4–8

AP

Complex

50–60

BYP1

3

E

Moderate

20–25

BYP2

9

AN, E

Simple

10–15

BYP3

8

AP

Simple

10–15

BYP4

4

AN

Moderate

20–30

BYP5

3

E

Simple

10–15

BYP6

3

E

Simple

10–15

8-4

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)

Explain how companies recognize accounts receivable.

Distinguish between the methods and bases companies used to value accounts receivable.

Describe the entries to record the disposition of accounts receivable.

Compute the maturity date of and interest on notes receivable.

Explain how companies recognize notes receivable.

Describe how companies value notes receivable.

Describe the entries to record the disposition of notes receivable.

Explain the statement presentation and analysis of receivables.

2.

3.

4.

5.

6.

7.

8.

9.

Identify the different types of receivables. 1.

Learning Objective

Q8-18

Q8-13

Q8-9

Q8-8

Q8-2

Knowledge

Q8-17

Q8-12
Q8-16

Q8-10

Q8-4
Q8-5
Q8-6

Q8-1

BE8-1

Comprehension

P8-3B
P8-4B
P8-6B

E8-10
E8-11
P8-6A
P8-6B

BE8-3
DI8-4
P8-1A
P8-6A

P8-7A P8-6A
P8-7B P8-6B

P8-7B E8-10
E8-12 E8-11

E8-12
E8-13
P8-7A
P8-7B

E8-8 P8-6A
E8-9 P8-6B
P8-7A
P8-7B

P8-1B
P8-6B

Real-World Focus Decision-Making Across the Organization
Comparative Analysis

Q8-19
Q8-20
BE8-12
E8-14

DI8-3
E8-12
E8-13

P8-7A
P8-7B

BE8-11
P8-7A

Q8-14
Q8-15
BE8-9
BE8-10
DI8-3

Q8-11
BE8-8
DI8-2
E8-7

P8-1A
P8-2A
P8-3A
P8-4A
P8-5A

Q8-7
BE8-3
BE8-7
E8-3
E8-4

BE8-4
BE8-5
BE8-6
DI8-1
E8-5

E8-6

P8-1B
P8-2B
P8-3B
P8-4B
P8-5B

E8-2 P8-1A P8-4A
P8-7A P8-3A P8-6A
P8-1B
P8-7B

Analysis

Q8-3
BE8-2
E8-1

Application

Synthesis

Financial Reporting
Comparative Analysis
Ethics Case
Communication

Evaluation

Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-of-Chapter Exercises and Problems

BLOOM’S TAXONOMY TABLE

8-5

1.

Accounts receivable are amounts owed by customers on account. They result from the sale of goods and services. Notes receivable represent claims that are evidenced by formal instruments of credit.

2.

Other receivables include nontrade receivables such as interest receivable, loans to company officers, advances to employees, and income taxes refundable.

3.

Accounts Receivable ...............................................................................................
Interest Revenue..............................................................................................

40
40

4.

The essential features of the allowance method of accounting for bad debts are:
(1) Uncollectible accounts receivable are estimated and matched against revenue in the same accounting period in which the revenue occurred.
(2) Estimated uncollectibles are debited to Bad Debt Expense and credited to Allowance for Doubtful
Accounts through an adjusting entry at the end of each period.
(3) Actual uncollectibles are debited to Allowance for Doubtful Accounts and credited to Accounts
Receivable at the time the specific account is written off.

5.

Roger Holloway should realize that the decrease in cash realizable value occurs when estimated uncollectibles are recognized in an adjusting entry. The write-off of an uncollectible account reduces both accounts receivable and the allowance for doubtful accounts by the same amount. Thus, cash realizable value does not change.

6.

The two bases of estimating uncollectibles are: (1) percentage-of-sales and (2) percentage-ofreceivables. The percentage-of-sales basis establishes a percentage relationship between the amount of credit sales and expected losses from uncollectible accounts. This method emphasizes the matching of expenses with revenues. Under the percentage-of-receivables basis, the balance in the allowance for doubtful accounts is derived from an analysis of individual customer accounts. This method emphasizes cash realizable value.

7.

The adjusting entry under the percentage-of-sales basis is:
Allowance for Doubtful Accounts ...................................................

370,000

The adjusting entry under the percentage-of-receivables basis is:
Allowance for Doubtful Accounts (NT\$580,000 – NT\$320,000) ....

260,000

370,000

260,000

8.

Under the direct write-off method, bad debt losses are not estimated and no allowance account is used.
When an account is determined to be uncollectible, the loss is debited to Bad Debt Expense. The direct write-off method makes no attempt to match bad debts expense to sales revenues or to show the cash realizable value of the receivables in the statement of financial position.

9.

From its own credit cards, the Freida Company may realize financing charges from customers who do not pay the balance due within a specified grace period. National credit cards offer the following advantages: (1) The credit card issuer makes the credit investigation of the customer.
(2) The issuer maintains individual customer accounts.

8-6

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)

Questions Chapter 8 (Continued)
(3) The issuer undertakes the collection process and absorbs any losses from uncollectible accounts.
(4) The retailer receives cash more quickly from the credit card issuer than it would from individual customers. 10.

The reasons companies are selling their receivables are:
(1) Receivables may be sold because they may be the only reasonable source of cash.
(2) Billing and collection are often time-consuming and costly. It is often easier for a retailer to sell the receivables to another party with expertise in billing and collection matters.

11.

Cash ........................................................................................................
Service Charge Expense (3% X HK\$800,000)........................................
Accounts Receivable .......................................................................

7,760,000
240,000
8,000,000

12.

A promissory note gives the holder a stronger legal claim than one on an accounts receivable. As a result, it is easier to sell to another party. Promissory notes are negotiable instruments, which means they can be transferred to another party by endorsement. The holder of a promissory note also can earn interest.

13.

The maturity date of a promissory note may be stated in one of three ways: (1) on demand, (2) on a stated date, and (3) at the end of a stated period of time.

14.

The maturity dates are: (a) March 13 of the next year, (b) August 4, (c) July 20, and (d) August 30.

15.

The missing amounts are: (a) €15,000, (b) €9,000, (c) 12%, and (d) four months.

16.

If a financial institution uses 360 days rather than 365 days, it will receive more interest revenue. The reason is that the denominator is smaller, which makes the fraction larger and, therefore, the interest revenue larger.

17.

When Jana Company has dishonored a note, the ledger can set up a receivable equal to the face amount of the note plus the interest due. It will then try to collect the balance due, or as much as possible. If there is no hope of collection it will write-off the receivable.

18.

Each of the major types of receivables should be identified in the statement of financial position or in the notes to the financial statements. Both the gross amount of receivables and the allowance for doubtful accounts should be reported. If collectible within a year or the operating cycle, whichever is longer, these receivables are reported as current assets immediately above short-term investments. 19.

Net credit sales for the period are 8.14 X £400,000 = \$3,256,000.

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)

8-7

SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 8-1
(a) Accounts receivable.
(b) Notes receivable.
(c) Other receivables.

BRIEF EXERCISE 8-2
(a) Accounts Receivable ...........................................
Sales Revenue ..............................................

17,200

(b) Sales Returns and Allowances ...........................
Accounts Receivable ...................................

3,800

(c) Cash (\$13,400 – \$268) ..........................................
Sales Discounts (\$13,400 X 2%)..........................
Accounts Receivable (\$17,200 – \$3,800) .......

13,132
268

17,200

3,800

13,400

BRIEF EXERCISE 8-3
Allowance for Doubtful Accounts ...............
(b) Current assets
Prepaid insurance ........................................
Inventory .......................................................
Accounts receivable.....................................
Less: Allowance for doubtful
Accounts ............................................
Cash ...............................................................
Total current assets .................................

8-8

31,000
31,000

\$ 7,500
118,000
\$600,000
31,000

569,000
90,000
\$784,500

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)

BRIEF EXERCISE 8-4
(a) Allowance for Doubtful Accounts .............................
Accounts Receivable—Marcello ........................
(b)

(1) Before Write-Off
Accounts receivable
Allowance for doubtful accounts Cash realizable value

6,200
6,200

(2) After Write-Off

£700,000

£693,800

54,000
£646,000

47,800
£646,000

BRIEF EXERCISE 8-5
Accounts Receivable—Marcello .......................................
Allowance for Doubtful Accounts .............................

6,200

Cash .....................................................................................
Accounts Receivable—Marcello ...............................

6,200

6,200
6,200

BRIEF EXERCISE 8-6
Bad Debt Expense [(\$800,000 – \$38,000) X 2%] ...............
Allowance for Doubtful Accounts .............................

15,240
15,240

BRIEF EXERCISE 8-7
(a) Bad Debt Expense [(£420,000 X 1%) – £1,500] ............
Allowance for Doubtful Accounts .....................

2,700
2,700

(b) Bad Debt Expense [(£420,000 X 1%) + £740] = £4,940
BRIEF EXERCISE 8-8
(a) Cash (€175 – €7)..........................................................
Service Charge Expense (€175 X 4%) .......................
Sales Revenue .....................................................

168
7

(b) Cash (€70,000 – €2,100) ..............................................
Service Charge Expense (€70,000 X 3%) ..................
Accounts Receivable ..........................................

67,900
2,100

175

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)

70,000
8-9

BRIEF EXERCISE 8-9
Interest
(a) \$800
(b) \$1,120
(c) \$200

Maturity Date
August 9
October 12
July 11

BRIEF EXERCISE 8-10
Maturity Date

Annual Interest Rate

Total Interest

5%
8%
10%

\$5,000
\$ 600
\$6,000

(a) May 31
(b) August 1
(c) September 7

BRIEF EXERCISE 8-11
Jan. 10

Feb. 9

Accounts Receivable .......................................
Sales Revenue ..........................................

11,600

Notes Receivable ..............................................
Accounts Receivable ................................

11,600

11,600

11,600

BRIEF EXERCISE 8-12
Accounts Receivable Turnover Ratio:

\$20B
\$20B
=
= 7.3 times
(\$2.7B + \$2.8B) ÷ 2 \$2.75B
Average Collection Period for Accounts Receivable:
365 days
= 50 days
7.3 times

8-10

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)

SOLUTIONS FOR DO IT! REVIEW EXERCISES
DO IT! 8-1
The following entry should be prepared to increase the balance in the
Allowance for Doubtful Accounts from R\$4,700 credit to R\$15,500 credit
(5% X R\$310,000):
Allowance for Doubtful Accounts ...................
(To record estimate of uncollectible accounts) 10,800
10,800

DO IT! 8-2
To speed up the collection of cash, Paltrow could sell its accounts receivable to a factor. Assuming the factor charges Paltrow a 3% service charge, it would make the following entry:
Cash ............................................................................ 970,000
Service Charge Expense ........................................... 30,000
Accounts Receivable .......................................
1,000,000
(To record sale of receivables to factor)
DO IT! 8-3
(a)

The maturity date is September 30. When the life of a note is expressed in terms of months, you find the date it matures by counting the months from the date of issue. When a note is drawn on the last day of a month, it matures on the last day of a subsequent month.

(b) The interest to be received at maturity is \$186:
Face X Rate X Time = Interest
\$6,200 X 9% X 4/12 = \$186
The entry recorded by Karbon Wholesalers at the maturity date is:
Cash .....................................................................
6,386
Notes Receivable ..........................................
6,200
Interest Revenue ...........................................
186
(To record collection of Bazaar note)

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)

8-11

DO IT! 8-4
(a)
Net credit sales

÷

Average net accounts receivable

=

Accounts receivable turnover \$1,480,000

÷

\$112,000 + \$108,000
2

=

13.5 times

Days in year

÷

Accounts receivable
=
turnover

365

÷

(b)

8-12

13.5 times

=

Average collection period in days
27 days

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)

SOLUTIONS TO EXERCISES
EXERCISE 8-1
March 1

Accounts Receivable—Lynda Company .....
Sales Revenue .......................................
Sales Returns and Allowances ....................
Accounts Receivable— Lynda
Company ..............................................

31

200

Accounts Receivable ....................................
Interest Revenue ....................................

15

3,234
66

Accounts Receivable ....................................
Sales Revenue .......................................

9

500

Cash................................................................
Sales Discounts.............................................
Accounts Receivable— Lynda
Company ..............................................

3

3,800

3

Accounts Receivable—Jackie Inc ...............
Sales Revenue .......................................

7,000

Cash (\$7,000 – \$140) .....................................
Sales Discounts (2% X \$7,000) .....................
Accounts Receivable—Jackie Inc ........

6,860
140

Accounts Receivable—C. Bybee .................
Sales Revenue .......................................

9,000

Cash................................................................
Accounts Receivable—C. Bybee..........

6,000

Accounts Receivable—C. Bybee .................
Interest Revenue
[2% X (\$9,000 – \$6,000)] ....................

60

3,800

500

3,300
200
3

EXERCISE 8-2
(a) Jan. 6
16

(b) Jan. 10
Feb. 12
Mar. 10

7,000

7,000

9,000
6,000

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60

8-13

EXERCISE 8-3
(a)

Dec. 31

(b) (1) Dec. 31

(2) Dec. 31

(c) (1) Dec. 31

(2) Dec. 31

Accounts Receivable—T.Thum ......
[(€840,000 – €28,000) X 1%].............
Allowance for Doubtful
Accounts ...................................
Allowance for Doubtful Accounts
[(€110,000 X 10%) – €2,100] .....
[(€840,000 – €28,000) X .75%]..........
Allowance for Doubtful
Accounts ...................................
Allowance for Doubtful Accounts
[(€110,000 X 6%) + €200] ..........

1,400
1,400

8,120
8,120
8,900
8,900

6,090
6,090
6,800
6,800

EXERCISE 8-4
(a) Accounts Receivable
1–30 days
31–60 days
61–90 days
Over 90 days

(b) Mar. 31

8-14

Amount

%

Estimated Uncollectible

\$65,000
17,600
8,500
7,000

2.0
5.0
30.0
50.0

\$1,300
880
2,550
3,500
\$8,230

Allowance for Doubtful Accounts
(\$8,230 – \$900) ..................................

7,330
7,330

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)

EXERCISE 8-5
Allowance for Doubtful Accounts ....................................
Accounts Receivable .................................................

14,100

Accounts Receivable ........................................................
Allowance for Doubtful Accounts ............................

1,800

Cash ....................................................................................
Accounts Receivable .................................................

1,800

Allowance for Doubtful Accounts
[£19,000 – (£15,000 – £14,100 + £1,800)] ..............

16,300

14,100
1,800
1,800

16,300

EXERCISE 8-6
December 31, 2013
Bad Debt Expense (2% X \$360,000) .................................
Allowance for Doubtful Accounts ............................

7,200

May 11, 2014
Allowance for Doubtful Accounts ....................................
Accounts Receivable—Vetter ...................................

1,100

June 12, 2014
Accounts Receivable—Vetter...........................................
Allowance for Doubtful Accounts ............................

1,100

Cash ....................................................................................
Accounts Receivable—Vetter ...................................

7,200

1,100

1,100
1,100
1,100

EXERCISE 8-7
(a) Mar. 3

Cash (W620,000,000 –
W18,600,000).................................... 601,400,000
Service Charge Expense
(3% X W620,000,000).................... 18,600,000
Accounts Receivable...................
620,000,000

(b) May 10

Cash (W3,500,000 – W175,000)........
Service Charge Expense
(5% X W3,500,000)........................
Sales Revenue...........................

3,325,000
175,000

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)

3,500,000
8-15

EXERCISE 8-8
(a) Apr. 2

May 3

June 1

(b) July 4

Accounts Receivable—J. Keiser .............
Sales Revenue ...................................

1,500

Cash ...........................................................
Accounts Receivable—
J. Keiser .........................................

900

Accounts Receivable—J. Keiser .............
Interest Revenue
[(\$1,500 – \$900) X 1%] ...................

6

Cash ...........................................................
Service Charge Expense
(3% X \$200) ............................................
Sales Revenue ...................................

194

Accounts Receivable ................................
Sales Revenue ...................................

18,000

Cash (HK\$4,800 – HK\$96) ........................
Service Charge Expense
(HK\$4,800 X 2%) ....................................
Sales Revenue ...................................

4,704

Cash ...........................................................
Accounts Receivable ........................

10,000

Accounts Receivable (HK\$8,000 X 1.5%)
Interest Revenue ...............................

120

1,500

900

6

6
200

EXERCISE 8-9
(a) Jan. 15

20

Feb. 10

15

18,000

96
4,800

10,000

120

(b) Interest Revenue is reported under other income and expense.
Service Charge Expense is a selling expense.

8-16

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)

EXERCISE 8-10
(a)
Nov. 1
Dec. 11
16
31

2014
Notes Receivable .............................................
Cash ..........................................................

15,000
15,000

Notes Receivable .............................................
Sales Revenue ..........................................

6,750

Notes Receivable .............................................
Accounts Receivable—Russo ................

4,400

Interest Receivable ..........................................
Interest Revenue* .....................................

277

6,750
4,400
277

*Calculation of interest revenue:
Jeanne’s note:
\$15,000 X 9% X 2/12 = \$225
Sharbo’s note:
6,750 X 8% X 20/360 = 30
Russo’s note:
4,400 X 12% X 15/360 = 22
Total accrued interest
\$277
(b)
Nov. 1

2015
Cash ..................................................................
Interest Receivable ..................................
Interest Revenue* .....................................
Notes Receivable .....................................

16,350
225
1,125
15,000

*(\$15,000 X 9% X 10/12)
EXERCISE 8-11
May

1

Dec. 31

31

2014
Notes Receivable .............................................
Accounts Receivable—
Monroe ..................................................

7,500
7,500

Interest Receivable ..........................................
Interest Revenue
(€7,500 X 9% X 8/12) .............................

450

Interest Revenue ..............................................
Income Summary .....................................

450

450

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)

450

8-17

EXERCISE 8-11 (Continued)

May

1

2015
Cash ..................................................................
Notes Receivable ......................................
Interest Receivable ...................................
Interest Revenue
(€7,500 X 9% X 4/12) .............................

8,175
7,500
450
225

EXERCISE 8-12
5/1/14

12/31/14

4/1/15

5/1/15

8-18

16,000

Notes Receivable..............................................
Cash ...........................................................

25,000

Interest Receivable...........................................
Interest Revenue
(\$16,000 X 12% X 8/12) .........................

1,280

Interest Receivable...........................................
Interest Revenue
(\$25,000 X 10% X 6/12) .........................

7/1/14

Notes Receivable..............................................
Accounts Receivable—Crane ..................

1,250

Accounts Receivable—Howard ......................
Notes Receivable ......................................
Interest Receivable ...................................
Interest Revenue
(\$25,000 X 10% X 3/12 = \$625) .............

26,875

Cash ..................................................................
Notes Receivable ......................................
Interest Receivable ...................................
Interest Revenue
(\$16,000 X 12% X 4/12 = \$640) .............

17,920

16,000

25,000

1,280

1,250

25,000
1,250
625

16,000
1,280
640

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)

EXERCISE 8-13
(a)

May 2

(b) Nov. 2

(c) Nov. 2

Notes Receivable.................................. 7,600,000
Cash.................................................

7,600,000

Accounts Receivable—Cortland
Inc....................................................... 7,904,000
Notes Receivable..........................
Interest Revenue
(¥7,600,000 X 8% X 1/2)..............
(To record the dishonor of
Cortland Inc. note with expectation of collection)

7,600,000
304,000

Allowance for Doubtful Accounts.......... 7,600,000
Notes Receivable.............................
(To record the dishonor of
Cortland Inc. note with no expectation of collection)

7,600,000

EXERCISE 8-14
(a) Beginning accounts receivable ........................................
Net credit sales ..................................................................
Cash collections ................................................................
Accounts written off ..........................................................
Ending accounts receivable .............................................

\$ 100,000
1,000,000
(920,000)
(30,000)
\$ 150,000

(b) \$1,000,000/[(\$100,000 + \$150,000)/2] = 8
(c) 365/8 = 45.6 days

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)

8-19

SOLUTIONS TO PROBLEMS
PROBLEM 8-1A

(a) 1.

3.
4.
5.

3,315,000

Sales Returns and Allowances .................
Accounts Receivable .........................

50,000

Cash ............................................................
Accounts Receivable .........................

2,810,000

Allowance for Doubtful Accounts .............
Accounts Receivable .........................

90,000

Accounts Receivable .................................
Allowance for Doubtful Accounts .......

29,000

Cash ............................................................
Accounts Receivable .........................

2.

Accounts Receivable .................................
Sales Revenue ....................................

29,000

3,315,000
50,000
2,810,000
90,000
29,000
29,000

(b)
Bal.
(1)
(5)
Bal.

8-20

Accounts Receivable
50,000
960,000 (2)
2,810,000
3,315,000 (3)
90,000
29,000 (4)
(5)
29,000
1,325,000

Allowance for Doubtful Accounts
(4)
90,000 Bal.
70,000
(5)
29,000

Bal.

9,000

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)

PROBLEM 8-1A (Continued)
(c) Balance before adjustment [see (b)] .....................................
Balance needed ......................................................................

R\$

9,000
125,000
R\$116,000

The journal entry would therefore be as follows:
Allowance for Doubtful Accounts ..........
(d)

116,000
116,000

R\$3,315,000 – R\$50,000
R\$3,265,000
= 3.12 times
=
( R \$ 890 ,000 + R \$1,200 ,000) ÷ 2 R \$ 1,045 ,0 00

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)

8-21

PROBLEM 8-2A

(a) £66,000.
(b) £75,000 (£2,500,000 X 3%).
(c) £64,900 [(£970,000 X 7%) – £3,000].
(d) £70,900 [(£970,000 X 7%) + £3,000].
(e) The weakness of the direct write-off method is two-fold. First, it does not match expenses with revenues. Second, the accounts receivable are not stated at cash realizable value at the statement of financial position date. 8-22

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)

PROBLEM 8-3A

(a) Dec. 31

Allowance for Doubtful Accounts
(\$41,730 – \$9,000) .........................

32,730
32,730

(a) & (b)
Date
2014
Dec. 31

Explanation

Ref.

Allowance for Doubtful Accounts
Date
Explanation
2014
Dec. 31 Balance
2015
Mar. 31
May 31
(b)
Mar. 31

May 31

31

(c)
Dec. 31

Debit

Credit

32,730

Ref.

Debit

Balance
32,730

Credit

Balance

32,730

9,000
41,730

1,000

40,730
41,730

1,000

2015
(1)
Allowance for Doubtful Accounts ..........
Accounts Receivable .......................
(2)
Accounts Receivable ...............................
Allowance for Doubtful Accounts .....
Cash ..........................................................
Accounts Receivable .......................
2015
Allowance for Doubtful Accounts
(\$31,600 + \$800) ............................

1,000
1,000
1,000
1,000
1,000
1,000

32,400

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)

32,400
8-23

PROBLEM 8-4A

(a)

Number of Days Outstanding
Total

Accounts receivable HK\$193,000

% uncollectible
Estimated

0–30
HK\$70,000
1%

HK\$7,370

HK\$700

31–60

61–90

HK\$46,000 HK\$39,000
3%
HK\$1,380

5%
HK\$1,950

91–120

Over 120

HK\$23,000 HK\$15,000
8%
HK\$1,840

Allowance for Doubtful Accounts
[HK\$7,370 + HK\$3,000] ......................................

5,000

(d) Accounts Receivable .................................................
Allowance for Doubtful Accounts .......................

5,000

Cash ............................................................................
Accounts Receivable ............................................

HK\$1,500

10,370

(c) Allowance for Doubtful Accounts.............................
Accounts Receivable ............................................

10%

5,000

10,370

5,000

5,000

5,000

(e) If Hú Inc. used 3% of total accounts receivable rather than aging the individual accounts the bad debt expense adjustment would be
HK\$8,790 [(HK\$193,000 X 3%) + HK\$3,000]. The rest of the entries would be the same as they were when aging the accounts receivable.
Aging the individual accounts rather than applying a percentage to the total accounts receivable should produce a more accurate allowance account and bad debts expense.

8-24

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)

PROBLEM 8-5A

(a) The allowance method. Since the balance in the allowance for doubtful accounts is given, they must be using this method because the account would not exist if they were using the direct write-off method.
(b) (1) Dec. 31

(2) Dec. 31

(c) (1) Dec. 31

(2) Dec. 31

(\$11,750 – \$800) .............................
Allowance for Doubtful
Accounts ................................
(\$918,000 X 1%) .............................
Allowance for Doubtful
Accounts ................................
(\$11,750 + \$800) .............................
Allowance for Doubtful
Accounts ................................

10,950
10,950

9,180
9,180

12,550
12,550

Allowance for Doubtful
Accounts ................................

9,180

(d) Allowance for Doubtful Accounts .............................
Accounts Receivable ..........................................

3,000

9,180

3,000

Note: The entry is the same whether the amount of bad debt expense at the end of 2014 was estimated using the percentage-of-receivables or the percentage-of-sales method.
Accounts Receivable ..........................................
(f)

3,000
3,000

Allowance for Doubtful Accounts is a contra-asset account. It is subtracted from the gross amount of accounts receivable so that accounts receivable is reported at its cash realizable value.

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)

8-25

PROBLEM 8-6A

(a) Oct. 7

12

15

15

24

31

Accounts Receivable ...................................
Sales Revenue ......................................

6,300

Cash (\$1,200 – \$36) ......................................
Service Charge Expense
(\$1,200 X 3%) ............................................
Sales Revenue ......................................

1,164

Accounts Receivable ...................................
Interest Revenue ..................................

460

Cash ..............................................................
Notes Receivable .................................
Interest Receivable
(\$8,000 X 8% X 45/360) .....................
Interest Revenue
(\$8,000 X 8% X 15/360) .....................

8,107

Accounts Receivable—Skinner ..................
Notes Receivable .................................
Interest Receivable
(\$9,000 X 10% X 36/360) ...................
Interest Revenue
(\$9,000 X 10% X 24/360) ...................

9,150

6,300

36
1,200

460

8,000
80
27

Interest Receivable
(\$14,000 X 9% X 1/12) ..............................
Interest Revenue ..................................

9,000
90
60

105
105

(b)
Notes Receivable
Date
Explanation
Oct. 1 Balance
15
24

8-26

Ref.

Debit

Credit
8,000
9,000

Balance
31,000
23,000
14,000

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)

PROBLEM 8-6A (Continued)
Accounts Receivable
Date
Oct. 7
15
24

Explanation

Ref.

Debit
6,300
460
9,150

Credit

Balance
6,300
6,760
15,910

Ref.

Debit

Credit

Balance
170
90
0
105

Interest Receivable
Date
Oct. 1
15
24
31

Explanation
Balance

80
90
105

(c) Current assets
Notes receivable................................................................
Accounts receivable .........................................................
Interest receivable.............................................................
Total receivables .......................................................

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)

\$14,000
15,910
105
\$30,015

8-27

PROBLEM 8-7A

Jan.

5

20

Feb. 18

Apr. 20

30

May 25

Aug. 18

25

Sept. 1

8-28

Accounts Receivable—Zwingle Company ..........
Sales Revenue .............................................

24,000

Notes Receivable ................................................
Accounts Receivable— Zwingle
Company ..................................................

24,000

Notes Receivable ................................................
Sales Revenue .............................................

8,000

Cash (€24,000 + €540) .........................................
Notes Receivable.........................................
Interest Revenue
(€24,000 X 9% X 3/12) ..............................

24,540

Cash (€30,000 + €1,200) ......................................
Notes Receivable.........................................
Interest Revenue
(€30,000 X 12% X 4/12) ............................

31,200

Notes Receivable ................................................
Accounts Receivable— Isabella Inc. .........

4,000

Cash (€8,000 + €320) ...........................................
Notes Receivable.........................................
Interest Revenue
(€8,000 X 8% X 6/12) ................................

8,320

Accounts Receivable—Isabella Inc.
(€4,000 + €70) ..................................................
Notes Receivable.........................................
Interest Revenue
(€4,000 X 7% X 3/12) ................................
Notes Receivable ................................................
Sales Revenue .............................................

24,000

24,000

8,000

24,000
540

30,000
1,200

4,000

8,000
320

4,070
4,000
70
12,000
12,000

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)

PROBLEM 8-1B

(a) 1.
2.
3.
4.

Accounts Receivable .................................... 2,400,000
Sales Revenue .......................................
Sales Returns and Allowances ....................
Accounts Receivable ............................

45,000
45,000

Cash ............................................................... 2,250,000
Accounts Receivable ............................
Allowance for Doubtful Accounts ...............
Accounts Receivable ............................
Accounts Receivable ....................................
Allowance for Doubtful
Accounts ............................................

2,250,000

13,000
2,000

Cash ...............................................................
Accounts Receivable ............................

5.

2,400,000

2,000

13,000

2,000
2,000

(b)
Bal.
(1)
(5)
Bal.

Accounts Receivable
220,000 (2)
45,000
2,400,000 (3)
2,250,000
2,000 (4)
13,000
(5)
2,000
312,000

Allowance for Doubtful Accounts
(4)
13,000 Bal.
15,000
(5)
2,000

Bal.

4,000

(c) Balance before adjustment [see (b)] .....................................
Balance needed ......................................................................

\$ 4,000
22,000
\$18,000

The journal entry would therefore be as follows:
Allowance for Doubtful Accounts ............

(d)

18,000
18,000

\$2,400,000 – \$45,000
\$2,355,000
=
= 9.52 times
(\$290,000 + \$205,000) ÷ 2
\$247, 500

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)

8-29

PROBLEM 8-2B

(a) \$23,400.
(b) \$27,600 (\$920,000 X 3%).
(c) \$21,830 [(\$369,000 X 7%) – \$4,000].
(d) \$27,830 [(\$369,000 X 7%) + \$2,000].
(e) There are two major weaknesses with the direct write-off method. First, it does not match expenses with the associated revenues. Second, the accounts receivable are not stated at cash realizable value at the statement of financial position date.

8-30

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)

PROBLEM 8-3B

(a) Dec. 31

Allowance for Doubtful Accounts
(\$54,250 – \$14,000) .......................

40,250
40,250

(a) & (b)
Date
Explanation
2014
Allowance for Doubtful Accounts
Date
Explanation
2014
Dec. 31 Balance
2015
Mar. 1
May 1
(b)
Mar. 1

May 1

1

(c)
Dec. 31

Ref.

Debit

Credit

40,250

Ref.

Debit

Balance
40,250

Credit

Balance

40,250

14,000
54,250

1,900

52,350
54,250

1,900

2015
(1)
Allowance for Doubtful Accounts ............
Accounts Receivable .........................
(2)
Accounts Receivable .................................
Allowance for Doubtful Accounts .......
Cash ............................................................
Accounts Receivable .........................
2015
Allowance for Doubtful Accounts
(\$42,300 + \$3,400) ...........................

1,900
1,900
1,900
1,900
1,900
1,900

45,700

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)

45,700
8-31

PROBLEM 8-4B

(a)

Number of Days Outstanding
Total

Accounts receivable CHF383,000 CHF220,000

% uncollectible
Estimated

0–30

31–60
CHF90,000

61–90

91–120

Over 120

CHF40,000 CHF18,000 CHF15,000

1%
CHF9,840

3%

5%

8%

10%

CHF2,200

CHF2,700

CHF2,000

CHF1,440

CHF1,500

Allowance for Doubtful Accounts
(CHF9,840 – CHF1,600) ....................................

8,240

(c) Allowance for Doubtful Accounts.............................
Accounts Receivable ..........................................

1,100

(d) Accounts Receivable .................................................
Allowance for Doubtful Accounts ......................

700

Cash ............................................................................
Accounts Receivable ..........................................

700

8,240

1,100

700

700

(e) When an allowance account is used, an adjusting journal entry is made at the end of each accounting period. This entry satisfies the expense recognition principle by recording the bad debt expense in the period in which the sales occur.

8-32

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)

PROBLEM 8-5B

(a) (1) Dec. 31

(2) Dec. 31

(b) (1) Dec. 31

(2) Dec. 31

(\$13,800 – \$1,400) ..........................
Allowance for Doubtful
Accounts ................................
(\$600,000 X 2%) .............................
Allowance for Doubtful
Accounts ................................
(\$13,800 + \$1,400) ..........................
Allowance for Doubtful
Accounts ................................

12,400
12,400
12,000
12,000

15,200
15,200

Allowance for Doubtful
Accounts ................................

12,000

(c) Allowance for Doubtful Accounts .............................
Accounts Receivable ..........................................

3,200

12,000

3,200

Note: The entry is the same whether the amount of bad debt expense at the end of 2014 was estimated using the percentage-of-receivables or the percentage-of-sales method.
Accounts Receivable ..........................................

3,200
3,200

(e) The advantages of the allowance method over the direct write-off method are:
(1) It attempts to match bad debt expense related to uncollectible accounts receivable with sales revenues on the income statement.
(2) It attempts to show the cash realizable value of the accounts receivable on the statement of financial position.

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)

8-33

PROBLEM 8-6B

(a) July 5

14

14

15

24

31

Accounts Receivable .................................
Sales Revenue ....................................

7,200

Cash (€1,300 – €39) ....................................
Service Charge Expense
(€1,300 X 3%) ..........................................
Sales Revenue ....................................

1,261

Accounts Receivable .................................
Interest Revenue ................................

510

Cash ............................................................
Notes Receivable ...............................
Interest Receivable
(€12,000 X 9% X 45/360) .................
Interest Revenue
(€12,000 X 9% X 15/360) .................

12,180

Accounts Receivable—Ascot Co. ............
Notes Receivable ...............................
Interest Receivable
(€30,000 X 10% X 36/360) ...............
Interest Revenue
(€30,000 X 10% X 24/360) ...............

30,500

Interest Receivable
(€18,000 X 12% X 1/12) ..........................
Interest Revenue ................................

7,200

39
1,300

510

12,000
135
45

30,000
300
200

180
180

(b)
Notes Receivable
Date
Explanation
July 1 Balance
15
24

8-34

Ref.

Debit

Credit
12,000
30,000

Balance
60,000
48,000
18,000

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)

PROBLEM 8-6B (Continued)
Accounts Receivable
Date
July

Explanation

Ref.

Debit
7,200
510
30,500

Credit

Balance
7,200
7,710
38,210

Ref.

Debit

Credit

Balance
435
300
0
180

5
14
24

Interest Receivable
Date
July

1
15
24
31

Explanation
Balance

135
300

180

(c) Current assets
Notes receivable................................................................
Accounts receivable .........................................................
Interest receivable.............................................................
Total receivables .......................................................

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)

€18,000
38,210
180
€56,390

8-35

PROBLEM 8-7B

Jan.

5

Feb. 2

12

26

Apr.

5

12

June 2

July

5

15

Oct. 15

8-36

Accounts Receivable—Patrick
Company.........................................................
Sales Revenue ............................................

8,400
8,400

Notes Receivable ...............................................
Accounts Receivable—Patrick
Company .................................................

8,400

Notes Receivable ...............................................
Sales Revenue ............................................

13,500

Accounts Receivable—Felton Co. ....................
Sales Revenue ............................................

7,000

Notes Receivable ...............................................
Accounts Receivable— Felton Co. ...........

7,000

Cash (\$13,500 + \$225) ........................................
Notes Receivable........................................
Interest Revenue
(\$13,500 X 10% X 2/12) ...........................

13,725

Cash (\$8,400 + \$280) ..........................................
Notes Receivable........................................
Interest Revenue
(\$8,400 X 10% X 4/12) .............................

8,680

Accounts Receivable—Felton Co.
(\$7,000 + \$140)................................................
Notes Receivable........................................
Interest Revenue
(\$7,000 X 8% X 3/12) ...............................

8,400

13,500

7,000

7,000

13,500
225

8,400
280

7,140
7,000
140

Notes Receivable ...............................................
Sales Revenue ............................................

14,000

Allowance for Doubtful Accounts ....................
Notes Receivable .......................................

14,000

14,000

14,000

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)

COMPREHENSIVE PROBLEM SOLUTION
(a) Jan. 1

15

17
21
24

27
31

780

Inventory .........................................................
Accounts Payable...................................

17,200

Accounts Receivable .....................................
Sales Revenue ........................................

25,000

17,500

Cash ................................................................
Service Charge Expense ...............................
Sales Revenue ........................................

1,164
36

780

Cash ................................................................
Accounts Receivable .............................

22,900

Accounts Payable ..........................................
Cash .........................................................

16,300

Accounts Receivable .....................................
Allowance for Doubtful Accounts .........

330

Cash ................................................................
Accounts Receivable .............................

11

Allowance for Doubtful Accounts.................
Accounts Receivable .............................

Cost of Goods Sold ........................................
Inventory .................................................

8

1,500

Cost of Goods Sold ........................................
Inventory .................................................

3

Notes Receivable ...........................................
Accounts Receivable—
Leon Company.....................................

330

Supplies ..........................................................
Cash .........................................................

1,400

Other Operating Expenses ............................
Cash .........................................................

3,218

1,500
780
17,200
25,000

17,500

1,200

780
22,900
16,300
330

330
1,400

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)

3,218
8-37

COMPREHENSIVE PROBLEM SOLUTION (Continued)
Jan. 31

31

31

(b)

Interest Receivable ........................................
Interest Revenue (\$1,500 X 8% X 1/12) .......
Bad Debt Expense [(\$19,600 X 5%) –
(\$800 – \$780 + \$330)] ..................................
Allowance for Doubtful Accounts .........
Supplies Expense ..........................................
Supplies (\$1,400 – \$470) ........................

10

630
630
930
930

VICTORIA COMPANY
January 31, 2014
Cash.............................................................
Notes Receivable ........................................
Accounts Receivable .................................
Allowance for Doubtful Accounts.............
Interest Receivable .....................................
Inventory .....................................................
Supplies ......................................................
Accounts Payable ......................................
Share Capital—Ordinary ...........................
Retained Earnings ......................................
Sales Revenue ............................................
Cost of Goods Sold ....................................
Supplies Expense .......................................
Service Charge Expense ...........................
Other Operating Expenses ........................
Interest Revenue ........................................

Debit
\$16,576
1,500
19,600

Credit

980
10
8,320
470
9,650
20,000
12,730
26,200
18,280
930
630
36
3,218
\$69,570

8-38

10

10
\$69,570

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)

COMPREHENSIVE PROBLEM SOLUTION (Continued)
(b)

Optional T accounts for accounts with multiple transactions

Cash
1/1 Bal. 13,100 1/21
1/15
1,164 1/27
1/17
22,900 1/31
1/24
330
1/31 Bal. 16,576

16,300
1,400
3,218

1/27
1/31 Bal.

1/21
Accounts Receivable
1/1 Bal. 19,780 1/1
1,500
1/11
25,000 1/3
780
1/24
330 1/17
22,900
1/24
330
1/31 Bal. 19,600

Allowance for Doubtful Accounts
1/3
780 1/1 Bal.
800
1/24
330
1/31
630
1/31 Bal.
980

Inventory
1/1 Bal.
9,400 1/11
1/8
17,200 1/15
1/31 Bal. 8,320

Supplies
1,400 1/31
470

930

Accounts Payable
16,300 1/1 Bal.
8,750
1/8
17,200
1/31 Bal. 9,650
Sales Revenue
1/11
25,000
1/15
1,200
1/31 Bal. 26,200

Cost of Goods Sold
1/11
17,500
1/15
780
1/31 Bal. 18,280

17,500
780

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)

8-39

COMPREHENSIVE PROBLEM SOLUTION (Continued)

(c)

VICTORIA COMPANY
Income Statement
For the Month Ending January 31, 2014
Sales revenue ..................................................
Cost of goods sold ..........................................
Gross profit ......................................................
Operating expenses ........................................
Other operating expenses.......................
Supplies expense.....................................
Service charge expense ..........................
Total operating expenses ...............................
Income from operations..................................
Other income and expense.............................
Interest revenue .......................................
Net Income .......................................................

8-40

\$26,200
18,280
7,920
\$3,218
930
630
36
4,814
3,106
10
\$ 3,116

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)

COMPREHENSIVE PROBLEM SOLUTION (Continued)

VICTORIA COMPANY
Retained Earnings Statement
For the Month Ending January 31, 2014
Retained Earnings, January 1...........................................
Retained Earnings, January 31.........................................

\$12,730
3,116
\$15,846

VICTORIA COMPANY
Statement of Financial Position
January 31, 2014
Assets
Current assets
Supplies ...................................................
Inventory ..................................................
Notes receivable......................................
Accounts receivable................................
Less: Allowance for doubtful accounts .......................................
Interest receivable ...................................
Cash ..........................................................
Total assets .....................................................

\$

470
8,320
1,500

\$19,600
980

18,620
10
16,576
\$45,496

Equity and Liabilities
Equity
Share capital—ordinary .........................
Retained earnings ...................................
Current liabilities
Accounts payable....................................
Total equity and liabilities ..............................

\$20,000
15,846

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)

\$ 35,846
9,650
\$45,496

8-41

CCC8

(a)

1. Calculations you should perform on the statements are:

Working capital = Current assets – Current liabilities
Current ratio = Current assets ÷ Current liabilities
Inventory turnover = Cost of goods sold ÷ Average inventory
Days sales in inventory = Days in the year ÷ Inventory turnover

Given the type of business it is unlikely that Curtis would have a significant amount of accounts receivable.
Positive working capital and a high current ratio are indications that the company has good liquidity and will be more likely to be able to pay for the mixer. The inventory turnover and days sales in inventory will provide additional information – the days sales in inventory will tell you how long, on average, it takes for inventory to be sold.
2. Other alternatives to extending credit to Curtis include:
• Waiting for 30 days to make the sale.
• Have Curtis borrow from the bank.
• Have Curtis use a credit card to finance the purchase.

8-42

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)

CCC8 (Continued)
(a) (Continued)
3. The advantage of extending credit to customers is the anticipated increase in sales expected from customers who will purchase goods only if they can receive credit. The disadvantages of extending credit are the additional costs incurred to keep track of amounts owed, the additional costs incurred when staff need to be assigned to follow up on late account balances, and the risk of not collecting a receivable from a customer who is unable to pay.
The advantages of allowing customers to use credit cards include making the purchase easier for the customer, potentially increasing sales, as customers are not limited to the amount of cash in their wallet, and reducing the accounts receivable you have to manage if credit cards are used instead of granting credit to customers. In addition, the credit card company assumes the risk of nonpayment, and if a bank credit card is used the seller has cash immediately.
The disadvantage is the cost to your business. When a customer makes a purchase using a credit card you will have to pay a percentage of the sale to the credit card company. The rate varies but 3% would not be unusual. You will also have to pay to rent the equipment to process the credit card sales. The fee is not large but is an ongoing expense.
(b)
June 1 Accounts Receivable—Lesperance ......
Sales Revenue ...................................
Cost of Goods Sold ................................
Inventory.............................................
30 Notes Receivable..................................
Accounts Receivable—Lesperance

1,150
1,150
620
620
1,150

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)

1,150

8-43

CCC8 (Continued)
(b) (Continued)
July 31 Accounts Receivable—Lesperance [\$1,150 + \$8] 1,158
Notes Receivable ............................................
Interest Revenue [\$1,150 X 8.25% X 1/12] .......

1,150
8

Aug. 7 Cash ......................................................................
Accounts Receivable—Lesperance ..............

1,158

8-44

1,158

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)

BYP 8-1

(a)

FINANCIAL REPORTING PROBLEM

CAF COMPANY
Accounts Receivable Aging Schedule
May 31, 2014
Proportion
of
Total

Not yet due
Less than 30 days past due
30 to 60 days past due
61 to 120 days past due
121 to 180 days past due
Over 180 days past due

(b)

Amount in Category

Probability of NonCollection

Estimated
Uncollectible
Amount

.600
.220
.090
.050
.025
.015
1.000

\$ 840,000
308,000
126,000
70,000
35,000
21,000
\$1,400,000

.02
.04
.06
.09
.25
.70

\$16,800
12,320
7,560
6,300
8,750
14,700
\$66,430

CAF COMPANY
Analysis of Allowance for Doubtful Accounts
May 31, 2014
June 1, 2013 balance .....................................................
Bad debts expense accrual (\$2,800,000 X .045) ..........
Balance before write-offs of bad accounts .................
Estimated uncollectible amount ...................................
Allowance for Doubtful Accounts ........................

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)

\$ 29,500
126,000
155,500
102,000
53,500
66,430
\$ 12,930

12,930

8-45

BYP 8-1 (Continued)
(c) 1. Steps to Improve the
Accounts Receivable Situation

2. Risks and
Costs Involved

Establish more selective creditgranting policies, such as more restrictive credit requirements or more thorough credit investigations.

Establish a more rigorous collection policy either through external collection agencies or by its own personnel. This policy may offend current customers and thus risk future sales. Increased collection costs could result from this policy.

Charge interest on overdue accounts.
Insist on cash on delivery (cod) or cash on order (coo) for new customers or poor credit risks.

8-46

This policy could result in lost sales and increased costs of credit evaluation. The company may be all but forced to adhere to the prevailing credit-granting policies of the office equipment and supplies industry. This policy could result in lost sales and increased administrative costs.

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)

BYP 8-2

COMPARATIVE ANALYSIS PROBLEM

(a) (1) Accounts receivable turnover ratio
Zetar

Nestlé

£131,922
(£24,935 + £19,062) ÷ 2

CHF109,722
(CHF12,083 + CHF12,309) ÷ 2

£131,922
= 6.00 times
£21,998.5

CHF109,722
= 9.0 times
CHF12,196

(2) Average collection period
365 = 60.8 days
6.0

365
9.0

= 40.6 days

(b) Nestlé’s average collection period is 20 days shorter the Zetar’s. While this might be due to Zetar’s difficulty in collecting from customers, it also might be at least partially explained by our assumption that all receivables are trade receivables.

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)

8-47

BYP 8-3

(a)

REAL-WORLD FOCUS

Factoring invoices enhances cash flow and allows a company to meet business expenses and take on new opportunities. The benefits of factoring include:

Predictable cash flow and elimination of slow payments.
Flexible financing, as factoring line is tied to sales. It’s the ideal tool for growth.
Factoring is easy to obtain. Works well with startups and established companies.
Factoring financing lines can be setup in a few days.

(b)

Factoring rates range between 1.5% and 3.5% per month. The two major variables considered when determining the rate are: (1) the size of the transaction, and (2) the credit quality of the company’s clients. (c)

The first installment is paid within a couple of days and is typically
90% of the invoice amount. After customers pay the invoice amount to the factor, the second installment (10%) is paid, less a fee for the transaction. 8-48

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)

BYP 8-4

DECISION-MAKING ACROSS THE ORGANIZATION

(a)

2014
Net credit sales .....................................
Credit and collection expenses
Collection agency fees ...............
Salary of accounts receivable clerk ..........................................
Uncollectible accounts ...............
Billing and mailing costs ............
Credit investigation fees.............
Total ......................................
Total expenses as a percentage of net credit sales .................................

2013

2012

\$500,000

\$650,000

\$400,000

\$

\$

\$

2,450

2,500

2,300

4,100
8,000
2,500
750
\$ 17,800

4,100
10,400
3,250
975
\$ 21,225

4,100
6,400
2,000
600
\$ 15,400

3.56%

3.27%

3.85%

\$ 25,000

\$ 32,500

\$ 20,000

Investment earnings (8%) ....................

\$

\$

\$

Total credit and collection expenses per above ..........................................
Net credit and collection expenses ........

\$ 17,800
2,000
\$ 19,800

\$ 21,225
2,600
\$ 23,825

\$ 15,400
1,600
\$ 17,000

Net expenses as a percentage of net credit sales .................................

3.96%

3.67%

4.25%

(b) Average accounts receivable (5%).........

2,000

2,600

1,600

*The investment earnings on the cash tied up in accounts receivable is an additional expense of continuing the existing credit policies.
(c) The analysis shows that the credit card fee of 4% of net credit sales will be higher than the percentage cost of credit and collection expenses in each year before considering the effect of earnings from other investment opportunities. However, after considering investment earnings, the credit card fee of 4% will be less than the company’s percentage cost if annual net credit sales are less than \$500,000.

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)

8-49

BYP 8-4 (Continued)
Finally, the decision hinges on: (1) the accuracy of the estimate of investment earnings, (2) the expected trend in credit sales, and (3) the effect the new policy will have on sales. Non-financial factors include the effects on customer relationships of the alternative credit policies and whether the Piweks want to continue with the problem of handling their own accounts receivable.

8-50

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)

BYP 8-5

COMMUNICATION ACTIVITY

Of course, this solution will differ from student to student. Important factors to look for would be definitions of the methods, how they are similar and how they differ. Also, look for use of good sentence structure, correct spelling, etc.
Example:
Dear Lily,
The three methods you asked about are methods of dealing with uncollectible accounts receivable. Two of them, percentage-of-sales and percentage-ofreceivables, are “allowance” methods used to estimate the amount uncollectible.
Under the percentage-of-sales basis, management establishes a percentage relationship between the amount of credit sales and expected losses from uncollectible accounts. This is based on past experience and anticipated credit policy. The percentage is then applied to either total credit sales or net credit sales of the current year. This basis of estimating emphasizes the matching of expenses with revenues.
Under the percentage-of-receivables basis, management establishes a percentage relationship between the amount of receivables and expected losses from uncollectible accounts. Customer accounts are classified by the length of time they have been unpaid. This basis emphasizes cash realizable value of receivables and is therefore deemed a “statement of financial position” approach. The direct write-off method does not estimate losses and an allowance account is not used. Instead, when an account is determined to be uncollectible, it is written off directly to Bad Debt Expense. Unless bad debt losses are insignificant, this method is not acceptable for financial reporting purposes.

Sincerely,

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)

8-51

BYP 8-6

ETHICS CASE

(a) The stakeholders in this situation are:
The president of Vestin Co.
The controller of Vestin Co.
The shareholders.
(b) Yes. The controller is posed with an ethical dilemma—should he/she follow the president’s “suggestion” and prepare misleading financial statements (understated net income) or should he/she attempt to stand up to and possibly anger the president by preparing a fair (realistic) income statement. (c) Vestin Co.’s growth rate should be a product of fair and accurate financial statements, not vice versa. That is, one should not prepare financial statements with the objective of achieving or sustaining a predetermined growth rate. The growth rate should be a product of management and operating results, not of creative accounting.

8-52

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)

GAAP EXERCISE

GAAP-1
The FASB and IASB have both worked toward reporting financial instruments at fair value. Both require disclosure of fair value information in notes to financial statements and both permit (but do not require) companies to record some types of financial instruments at fair value.
IFRS requires that specific loans and receivables be reviewed for impairment and then all loans and receivables as a group be reviewed. This “twotiered” approach is not used by the FASB. IFRS and GAAP also differ in the criteria used to derecognize receivables. IFRS considers risks and rewards as well as loss of control over the receivables sold or factored. GAAP uses only the loss of control as its criteria. In addition, IFRS allows partial derecognition but GAAP does not.

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)

8-53

GAAP FINANCIAL REPORTING PROBLEM

GAAP 8-2
(a) Accounts receivable turnover ratio
2010
\$517,149 __
(\$37,394+\$37,512)/2

2009
\$495,592
___
(\$37,512+\$31,213)/2

= \$517,149
\$37,453

= \$495,592
\$34,362.50

= 13.8 times

= 14.4 times

Average collection period
365 = 26.4 days
13.8

(b)

8-54

365 = 25.3 days
14.4

The accounts receivable turnover ratio measures the number of times, on average, a company collects accounts receivable during a period. The average collection period measures the number of days it takes to collect a receivable. From the results shown in (a), it is apparent that Tootsie Roll Industries’ accounts receivable collections deteriorated slightly in 2010 over 2009. Both the turnover and the related collection period were worse in 2010 as compared to 2009.
However, if Tootsie Roll’s credit terms are 30 days, both years’ collection period fall within those terms.

Copyright © 2013 John Wiley & Sons, Inc. Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)

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#### Acc 557

...MATTEL, Inc. BYP8-5 November 3, 2011 ACC 557 Jerry Mays Manhattan Company 1234 Long Lane Manhattan, New York 11131 November 3, 2011 Mr. Mays, I hope this letter finds you well. As the new auditor for the CPA firm of Croix, Marais, and Kale, I would like to offer some suggestions to your great company for your internal controls. When having a strong internal control system, the internal controls are established to perform the following: 1. “Safeguard its assets from employee theft, robbery, and unauthorized use. 2. Enhance the accuracy and reliability of its accounting records. This is done by reducing the risk of errors (unintentional mistakes) and irregularities (intentional mistakes and misrepresentations) in the accounting process” (Weygandt, Kimmel, Kieso, p.340, 2010). After reviewing some of your financial records and looking into your internal control system, they are some valuable suggestions I would like to recommend to your company. “Control is most effective when only one person is responsible for a given task (Weygandt, Kimmel, Kieso, p.341).” Your company possesses weakness in the following areas: establishment of responsibility (assign responsibility to specific employees) and segregation of duties (separation of duties) and documentation procedures. Your checks are properly endorsed; however, there should be a record of what checks are deposited. This way the......

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#### Acc 290

...Comparison between IFRS and GAAP Agustin Blanco ACC 290 06/06/2016 Dan Jensen Comparison between IFRS and GAAP This paper provides a comparison between the International Financial Reporting Standards (IFRS) and the United States Generally Accepted Accounting Principles (GAAP) and how they are differentiate from each other in the format of financial statement, conceptual framework, and IFRS terms. There is also a description of some issues the SEC must consider in order to adopt IFRS in the United States as well as a comparison of the rules regarding revenue recognition under IFRS versus GAAP. There is an explanation of the definitions Under IFRS for revenues and expenses, as well as an explanation of the competitive implications (both pros and cons) of Sarbanes-Oxley Act (SOX). Questions IFRS 2-1: In what ways does the format of a statement of financial position under IFRS often differ from a balance sheet presented under GAAP? The main difference between the formatting of IFRS and GAAP statement of financial of position and a GAAP balance sheet is the ordering of liquidity. IFRS does not require a particular order or any classification of accounts. It is common for companies to report assets in reverse liquidity under IFRS. Instead, GAAP specifies and requires all a company’s account be classified and ordered based on liquidity. IFRS 2-2: Do the IFRS and GAAP conceptual frameworks differ in terms of the objective of financial......

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