Receivables

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.

Recording credit sales and collections

Steller Corporation had the following transactions in June:

Requirements

1. Journalize the transactions. Ignore Cost of Goods Sold. Omit explanations.

2. Post the transactions to the general ledger and the accounts receivable subsidiary 

ledger. Assume all beginning balances are \)0.

3. Verify the ending balance in the control Accounts Receivable equals the sum of the 

balances in the subsidiary ledger.

On June 1, 2018, Best Performance Cell Phones sold \(21,000 of merchandise to Anthony Trucking Company on account. Anthony fell on hard times and on July 15 paid only \)5,000 of the account receivable. After repeated attempts to collect, Best Performance finally wrote off its accounts receivable from Anthony on September 5. Six months later, on March 5, 2019, Best Performance received Anthony’s check for $16,000 with a note apologizing for the late payment.

Requirements

1. Journalize the transactions for Best Performance Cell Phones using the direct write-off method. Ignore Cost of Goods Sold.

2. What are some limitations that Best Performance will encounter when using the direct write-off method?

Dialex Watches completed the following selected transactions during 2018 and 2019:

2018

Dec. 31 Estimated that bad debts expense for the year was 3% of credit sales of

\(410,000 and recorded that amount as expense. The company uses the

allowance method.

31 Made the closing entry for bad debts expense.

2019

Jan. 17 Sold merchandise inventory to Marty White, \)400, on account. Ignore Cost of

Goods Sold.

Jun. 29 Wrote off Marty White’s account as uncollectible after repeated efforts to

collect from him.

Aug. 6 Received \(400 from Marty White, along with a letter apologizing for being

so late. Reinstated White’s account in full and recorded the cash receipt.

Dec. 31 Made a compound entry to write off the following accounts as uncollectible:

Barry Krisp, \)1,600; Maria Bryant, \(1,100; and Richard Renik, \)400.

31 Estimated that bad debts expense for the year was 3% on credit sales of

\(490,000 and recorded the expense.

31 Made the closing entry for bad debts expense.

Requirements

1. Open T-accounts for Allowance for Bad Debts and Bad Debts Expense, assuming

the accounts begin with a zero balance. Record the transactions in the general

journal (omit explanations), and post to the two T-accounts.

2. Assume the December 31, 2019, balance of Accounts Receivable is \)136,000. Show

how net accounts receivable would be reported on the balance sheet at that date.

Williams Company uses the direct write-off method to account for uncollectible receivables. On July 18, Williams wrote off a

$6,800 account receivable from customer W. Jennings. On August 24, Williams unexpectedly received full payment from Jennings

on the previously written off account.

7. Journalize Williams’s write-off on the uncollectible receivable.

8. Journalize Williams’s collection of the previously written off receivable

Johnson Company uses the allowance method to account for uncollectible receivables. On September 2, Johnson wrote off a

\(14,000 account receivable from customer J. Mraz. On December 12, Johnson unexpectedly received full payment from Mraz on

the previously written off account. Johnson records an adjusting entry for bad debts expense of \)800 on December 31.

9. Journalize Johnson’s write-off of the uncollectible receivable.

10. Journalize Johnson’s collection of the previously written off receivable.

11. Journalize Johnson’s adjustment for bad debts expense.

On August 1, Taylor Company lent $80,000 to L. King on a 90-day, 5% note.

12. Journalize for Taylor Company the lending of the money on August 1.

13. Journalize the collection of the principal and interest at maturity. Specify the date. Round interest to the nearest dollar.

Lovett Company reported the following selected items at March 31, 2018 (last year’s—2017—amounts also given as needed):

Accounts Payable \( 128,000 Accounts Receivable, net:

Cash 104,000 March 31, 2018 \) 108,000

Merchandise Inventory: March 31, 2017 68,000

March 31, 2018 116,000 Cost of Goods Sold 460,000

March 31, 2017 80,000 Short-term Investments 56,000

Net Credit Sales Revenue 1,168,000 Other Current Assets 48,000

Long-term Assets 168,000 Other Current Liabilities 72,000

Long-term Liabilities 52,000

14. Compute Lovett’s (a) acid-test ratio, (b) accounts receivable turnover ratio, and (c) days’ sales in receivables as of

March 31, 2018.

What is the difference between accounts receivable and notes receivable?

List some common examples of other receivables, besides accounts receivable and notes receivable.

What is a critical element of internal control in the handling of receivables by a business? Explain how this element is accomplished.

When dealing with receivables, give an example of a subsidiary account

What type of account must the sum of all subsidiary accounts be equal to?

What are some benefits to a business in accepting credit cards and debit cards?

What occurs when a business factors its receivables?

What do the days’ sales in receivables indicate, and how is it calculated?

 What occurs when a business pledges its receivables?

What is the expense account associated with the cost of uncollectible receivables called?

When is bad debts expense recorded when using the direct write-off method?

What are some limitations of using the direct write-off method?

When is bad debts expense recorded when using the allowance method?

When using the allowance method, how are accounts receivable shown on the balance sheet?

 When using the allowance method, what account is debited when writing off uncollectible accounts? How does this differ from the direct write-off method?

When a receivable is written off under the allowance method, how does it affect the net realizable value shown on the balance sheet?

How does the percent-of-sales method compute bad debts expense?

How do the percent-of-receivables and aging-of-receivables methods compute bad debts expense?

What is the difference between the percent-of-receivables and aging-of-receivables methods?

In accounting for bad debts, how do the income statement approach and the balance sheet approach differ?

What is the formula to compute interest on a note receivable?

Why must companies record accrued interest revenue at the end of the accounting period? 

How is the acid-test ratio calculated, and what does it signify?

What does the accounts receivable turnover ratio measure, and how is it calculated?

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?

Recording credit sales and collections

Record the following transactions for Summer Consulting. Explanations are not required.

Applying the direct write-off method to account for uncollectibles

Shawna Valley is an attorney in Los Angeles. Valley uses the direct write-off method to account for uncollectible receivables.

At April 30, 2018, Valley’s accounts receivable totaled \(19,000. During May, she earned revenue of \)22,000 on account and collected \(15,000 on account. She also wrote off uncollectible receivables of \)1,100 on May 31, 2018.

Requirements

1. Use the direct write-off method to journalize Valley’s write-off of the uncollectible receivables.

2. What is Valley’s balance of Accounts Receivable at May 31, 2018?

Collecting a receivable previously written off—direct write-off method

Spring Garden Greenhouse had trouble collecting its account receivable from Steve Stone. On June 19, 2018, Spring Garden Greenhouse finally wrote off Stone’s \(600 account receivable. On December 31, Stone sent a \)600 check to Spring Garden Greenhouse.

Journalize the entries required for Spring Garden Greenhouse, assuming Spring Garden Greenhouse uses the direct write-off method.

Applying the allowance method to account for uncollectibles

The Accounts Receivable balance and Allowance for Bad Debts for Signature Lamp 

Company at December 31, 2017, was \(10,800 and \)2,000 (credit balance), respectively. 

During 2018, Signature Lamp Company completed the following transactions:

a. Sales revenue on account, \(273,400 (ignore Cost of Goods Sold).

b. Collections on account, \)223,000.

c. Write-offs of uncollectibles, \(5,900.

d. Bad debts expense of \)5,200 was recorded

Requirements

1. Journalize Signature Lamp Company’s transactions for 2018 assuming Signature Lamp Company uses the allowance method.

2. Post the transactions to the Accounts Receivable, Allowance for Bad Debts, and Bad Debts Expense T-accounts, and determine the ending balance of each account.

3. Show how accounts receivable would be reported on the balance sheet at December 31, 2018.

Applying the allowance method (percent-of-sales) to account for Uncollectibles

During its first year of operations, Fall Wine Tour earned net credit sales of \(311,000. Industry experience suggests that bad debts will amount to 3% of net credit sales. At December 31, 2018, accounts receivable total \)44,000. The company uses the allowance method to account for uncollectibles. 

Requirements

1. Journalize Fall Wine Tour’s Bad Debts Expense using the percent-of-sales method.

2. Show how to report accounts receivable on the balance sheet at December 31, 2018

Applying the allowance method (percent-of-receivables) to account for Uncollectibles

The Accounts Receivable balance for Lake, Inc. at December 31, 2017, was \(20,000. During 2018, Lake earned revenue of \)454,000 on account and collected \(325,000 on account. Lake wrote off \)5,600 receivables as uncollectible. Industry experience suggests that uncollectible accounts will amount to 5% of accounts receivable.

Requirements

1. Assume Lake had an unadjusted \(2,700 credit balance in Allowance for Bad Debts at December 31, 2018. Journalize Lake’s December 31, 2018, adjustment to record bad debts expense using the percent-of-receivables method.

2. Assume Lake had an unadjusted \)2,400 debit balance in Allowance for Bad Debts at December 31, 2018. Journalize Lake’s December 31, 2018, adjustment to record bad debts expense using the percent-of-receivables method

Applying the allowance method (aging-of-receivables) to account for Uncollectibles Surf and Sun had the following balances at December 31, 2018, before the year-end adjustments:

Accounts Receivable

Allowance for Bad Debts

The aging of accounts receivable yields the following data:

Requirements        

1. Journalize Surf and Sun’s entry to record bad debts expense for 2018 using the aging-of-receivables method.

2. Prepare a T-account to compute the ending balance of Allowance for Bad Debts.

Question: A table of notes receivable for 2018 follows:

 For each of the notes receivable, compute the amount of interest revenue earned during 2018. Round to the nearest dollar

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

Question: On December 1, Kyle Corporation accepted a 60-day, 9%, $12,000 note receivable from J. Michael in exchange for his account receivable. 

Requirements

1. Journalize the transaction on December 1.

2. Journalize the adjusting entry needed on December 31 to accrue interest revenue. Round to the nearest dollar.

3. Journalize the collection of the principal and interest at maturity. Specify the date. Round to the nearest dollar.

Question: McKale Corporation has a three-month, $18,000, 9% note receivable from L. Peters that was signed on June 1, 2018. Peters defaults on the loan on September 1.

Journalize the entry for McKale to record the default of the loan

Question: Silver Clothiers reported the following selected items at April 30, 2018 (last year’s—2017—amounts also given as needed):

Compute Silver’s (a) acid-test ratio, (b) accounts receivable turnover ratio, and (c) days’ sales in receivables for the year ending April 30, 2018. Evaluate each ratio value as strong or weak. Silver sells on terms of net 30. (Round days’ sales in receivables to a whole number.)

Defining common receivables terms

Match the terms with their correct definition.

Terms Definitions

Suppose The Right Rig Dealership is opening a regional office in Omaha. Cary Regal, the office manager, is designing the internal control system. Regal proposes the following procedures for credit checks on new customers, sales on account, cash collections, and write-offs of uncollectible receivables:

•            The credit department runs a credit check on all customers who apply for credit. When an account proves uncollectible, the credit department authorizes the write off of the accounts receivable.

•            Cash receipts come into the credit department, which separates the cash received from the customer remittance slips. The credit department lists all cash receipts by customer name and amount of cash received.

•            The cash goes to the treasurer for deposit in the bank. The remittance slips go to the accounting department for posting to customer accounts.

•            The controller compares the daily deposit slip to the total amount posted to customer accounts. Both amounts must agree.

Recall the components of internal control. Identify the internal control weakness in this situation, and propose a way to correct it.

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.

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 10% of accounts receivable. 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

Accounting for uncollectible accounts using the allowance method (aging-of-receivables) and reporting receivables on the balance sheet.

At December 31, 2018, the Accounts Receivable balance of GPS Technology is \(200,000. The Allowance for Bad Debts account has a \)24,110 debit balance. GPS Technology prepares the following aging schedule for its accounts receivable:

Requirement:

1. Journalize the year-end adjusting entry for bad debts on the basis of the aging schedule. Show the T-account for the Allowance for Bad Debts at December 31, 2018.

2. Show how GPS Technology will report its net accounts receivable on its December 31, 2018, balance sheet