Chapter 8 Solutions

Kimmel, Weygandt, Kieso, Trenholm, Irvine
Financial Accounting, Fifth Canadian Edition
EXERCISE 8-2
(a)
Feb.
2
4
5
8
10
Accounts Receivable ......................................................

Sales .....................................................................
1,140
Sales Returns and Allowances .......................................

Accounts Receivable ..............................................
140

Sales .....................................................................
760
Cash ...............................................................................
Sales .....................................................................
842
Cash ($920 $18)..........................................................

Credit Card Expense ($920 2%)..................................
Sales .....................................................................
902
18
1,140
140
760
842
920
Posted with permission from John Wiley & Sons Canada, Ltd.
Solutions Manual
8-1
Chapter 8
Copyright 2012 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
.
EXERCISE 8-2 (Continued)

(a) (Continued)
Feb.
14
17
22
28
(b)
Cash ($760 $15) ...........................................................

Sales Discount ($760 2%) ............................................
745
15

Sales.......................................................................
696
Accounts Receivable .......................................................

Sales.......................................................................
1,738
Cash ................................................................................
1,000
760
696
1,738
1,000
Accounts Receivable Subsidiary Ledger
Andrew Noren
Feb. 2
1,140 Feb. 4
17
696
28
Feb. 28 Bal. 696
140
1,000
Dong Corporation
Feb. 5
760 Feb. 14
Feb. 28 Bal.
0
760
Batstone Corporation
Feb. 22
1,738
Feb. 28 Bal. 1,738
General Ledger Control Account
Accounts Receivable
Feb. 2
1,140 Feb. 4
5
760
14
17
696
28
22
1,738
Feb. 28 Bal. 2,434
(c)
140
760
1,000
Subledger listing
Andrew Noren ...............................................................................
Dong Corporation ..........................................................................
Batstone Corporation ....................................................................
Total ..............................................................................................
$ 696
0
1,738
$2,434
Balance per general ledger control account ..................................
$2,434
Solutions Manual
8-2
Chapter 8
.
EXERCISE 8-6
(a)
2011
Dec. 31
31
(b)
2012
Dec. 31
31
(c)
Allowance for Doubtful Accounts ....................................

Accounts Receivable ...............................................
12,000
12,000
Bad Debts Expense........................................................

182,000
Allowance for Doubtful Accounts .............................
182,000
(1.7m 10% + $12,000 = $170,000 + $12,000)
Balance is currently a $12,000 debit and we want a credit balance of $170,000.
Allowance for Doubtful Accounts ....................................
Accounts Receivable ...............................................
14,000
14,000
Bad Debts Expense........................................................

54,000
Allowance for Doubtful Accounts .............................
54,000
[(2.1m 10%) ($170,000 $14,000)]
Balance is currently a credit balance of $156,000 and we want a credit balance of
$210,000.
The companys policy of estimating doubtful accounts at 10% of outstanding receivables appears to be overly conservative given that write-offs are much lower.
Solutions Manual
8-3
Chapter 8
.
EXERCISE 8-8
Nov.
Dec.
1
1
15
31
Feb.
Notes Receivable ...........................................................

Cash .......................................................................
48,000

Sales ......................................................................
8,400
Cost of Goods Sold ........................................................

Merchandise Inventory ...........................................
5,000

16,000
Interest Receivable.........................................................
Interest Revenue*...................................................
729
Cash ...............................................................................
Notes Receivable ...................................................
Interest Receivable.................................................
Interest Revenue ....................................................
8,484
Calculation of interest revenue on December 31:

Bouchard note:
$48,000 8% 2/12
Wright note:
$8,400 6% 1/12
Aqualina note:
$16,000 7% 0.5/12*
Total accrued interest
=
=
=.
48,000
8,400
5,000
16,000
729
8,400
42
42
$640
42
47
$729
* Note: Some students may also calculate interest using days, rather than partial months.
Solutions Manual
8-4
Chapter 8
.
EXERCISE 8-10
(a)
DEERE & COMPANY
Statement of Financial Position (partial)
October 31, 2010
(in U.S. millions)
Assets
Current assets
Receivables
Trade accounts and notes receivable ............................
$3,535.2
Less: Allowance for doubtful trade and notes receivables
71.0
Financing receivables ....................................................
$20,875.0
Less: Allowance for doubtful financing receivables ........
225.0
Other receivables ..............................................................................
Total receivables ...............................................................................
$ 3,464.2
20,650.0
925.6
$25,039.8
(b)
Allowance for Doubtful Financing Receivables
Write-offs
Beginning Balance
Bad debts
239
102
Ending Balance
225
XXXX
Write-offs = $239 + $102 $225 = $116
Solutions Manual
8-5
Chapter 8
.
PROBLEM 8-3A
(a)
Addition to accounts receivable = Sales = $60,000
(b)
$18,000 + $60,000 (a) $56,000 = $22,000, the ending balance
(c)
$1,800 $1,000 + (c) = $2,000 (d); (c) = 1,200 and this represents the
credit side of the bad debts expense entry.
(d)
Allowance for doubtful accounts = $2,000 (given)
(e)
Bad debts expense = Adjustment to allowance for doubtful accounts =

$1,200 [from (c)]
Solutions Manual
8-6
Chapter 8
.
PROBLEM 8-4A
(a)
Opening balance in allowance account ...................... $ 40,000

Accounts written off.................................................... (96,000)
Add amounts later recovered .....................................
16,000
Bad debts expense ....................................................
Solve
Ending balance in allowance account ........................ $104,000
To solve: $104,000 ($40,000 $96,000 + $16,000) = $144,000
(b)
Opening balance in allowance account ...................... $ 20,000

Accounts written off.................................................... (96,000)
Add amounts later recovered .....................................
16,000
Bad debts expense ....................................................
Solve
Ending balance in allowance account ........................ $104,000
To solve: $104,000 ($20,000 $96,000 + $16,000) = $164,000
(c)
The advantages of the allowance method are:

1.
It attempts to match bad debts expense related to uncollectible accounts receivable with sales revenues on the income statement.
2.
It provides a better statement of financial position valuation for accounts receivable by showing them at net realizable value.
Solutions Manual
8-7
Chapter 8
.
PROBLEM 8-5A
(a) Total estimated allowance for doubtful accounts:
Accounts receivable
% uncollectible
Estimated allowance for
doubtful accounts
Number of Days Outstanding

Total
0-30
31-60
61-90
Over 90
$520,000 $240,000 $120,000 $100,000 $60,000
1%
5%
10%
25%
$33,400
$2,400
$6,000
(b) Bad Debts Expense ...................................................

Allowance for Doubtful Accounts .........................
[$33,400 $20,000]
$10,000 $15,000
13,400
13,400
If the allowance for doubtful accounts had an unadjusted debit balance of

$20,000, the bad debts expense in the entry above would be $53,400
($33,400 + $20,000)
(c) Allowance for Doubtful Accounts ...............................
Accounts Receivable ...........................................
4,000
(d) Accounts Receivable .................................................

Allowance for Doubtful Accounts .........................
1,700
Cash ..........................................................................
Accounts Receivable ...........................................
1,700
(e)
4,000
1,700
1,700
Using the allowance method matches the bad debts expense against sales
revenues in the income statement in the period in which the sales occur. In
addition, the allowance method reports accounts receivable in the statement of financial position at their net realizable value.
Solutions Manual
8-8
Chapter 8
.
PROBLEM 8-5A (Continued)

(f)
Part (a): the total estimated allowance for doubtful accounts = $520,000
5% = $26,000
Part (b): the journal entry would record bad debts expense of $6,000
($26,000 $20,000)
If the allowance for doubtful accounts had an unadjusted debit
balance of $20,000, the bad debts expense in the entry above
would be $46,000 ($26,000 + $20,000)
Parts (c) and (d): no change
Aging the individual accounts should produce a more accurate estimate of the
net realizable value of the receivables. As the receivables get older, a higher
percentage is applied to them when calculating the amount of uncollectible accounts. This is more accurate because older receivables have a greater probability of not being collected.
Solutions Manual
8-9
Chapter 8
.
PROBLEM 8-10A
(a) Note that the question asks about the receivables turnover ratio while the
information provided is expressed in days to collect (the collection period).
We can derive the receivables turnover ratio by manipulating the formula
for the average collection period.
Average Collection Period = 365 Receivables Turnover
or alternatively:
Receivables Turnover = 365 Average Collection Period
The collection period can be restated as receivables turnover as follows:
2012
2011
2010
Pacific Enterprises Ltd.
14.6
8.7
11.1
Atlantic Limited
10.1
7.4
12.6
Northwest Inc.
33.2
9.9
11.4
Atlantic Limited had the best receivables turnover ratio in 2010 because it
had the highest ratio. We must remember though, with this turnover ratio, it
should not be abnormally high as it would indicate that the companys
credit policies are too tight. A good receivables turnover ratio should be
somewhat higher than that of its competitors, indicating that the company
is collecting cash from its receivables more quickly.
(b) The industry suffered a recession in 2011 as evidenced by the large increase in the collection period for all three companies.
(c) This company is most likely Atlantic Limited. Excess sales recorded in
2012 would cause an overstatement in revenue and accounts receivable
and cause a drop in the receivables turnover (or an increase in collection
period). This happens because in percentage terms, the accounts receivable would be increasing more than sales because of the improper accounting. In examining the turnover amounts above (or the collection period values in the problem), both Pacific and Northwest had receivables
turnover amounts (and collection period amounts) that were more favourable in 2012 than in 2010. We will ignore comparing to 2011 because of
the recession.
Solutions Manual
8-10
Chapter 8
.
PROBLEM 8-10A (Continued)

(d) Northwest most likely factored its receivables in 2012. Its collection period
experienced a large decrease from 2011 to 2012 from 37 days to 11. Factoring receivables means that only the denominator in the turnover ratio
decreases. This causes a sharp increase in the turnover ratio and consequently a sharp decrease in the collection period.
(e) The company that tightened its credit-granting policies is most likely Pacific
Enterprises Ltd. Pacific experienced an improvement in its collection period
over its 2010 level (before the recession). Atlantic Limited had an increase
in its collection period from 2010, and it recorded excess sales in 2012.
Solutions Manual
8-11
Chapter 8
.

Chapter 8 Solutions

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Chapter 8 Solutions

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Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Fifth Canadian Edition

Accounts Receivable ......................................................

Sales Returns and Allowances .......................................

Accounts Receivable ......................................................

Cash ($920 $18)..........................................................

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Fifth Canadian Edition

EXERCISE 8-2 (Continued)

Cash ($760 $15) ...........................................................

Accounts Receivable ......................................................

Accounts Receivable .......................................................

Accounts Receivable Subsidiary Ledger

Balance per general ledger control account ..................................

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Fifth Canadian Edition

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

Bad Debts Expense........................................................

Bad Debts Expense........................................................

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Fifth Canadian Edition

Notes Receivable ...........................................................

Notes Receivable ...........................................................

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

Notes Receivable ...........................................................

Calculation of interest revenue on December 31:

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Fifth Canadian Edition

Write-offs = $239 + $102 $225 = $116

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Fifth Canadian Edition

Addition to accounts receivable = Sales = $60,000

$18,000 + $60,000 (a) $56,000 = $22,000, the ending balance

Allowance for doubtful accounts = $2,000 (given)

Bad debts expense = Adjustment to allowance for doubtful accounts =

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Fifth Canadian Edition

Opening balance in allowance account ...................... $ 40,000

Opening balance in allowance account ...................... $ 20,000

The advantages of the allowance method are:

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Fifth Canadian Edition

Number of Days Outstanding

(b) Bad Debts Expense ...................................................

If the allowance for doubtful accounts had an unadjusted debit balance of

(d) Accounts Receivable .................................................

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Fifth Canadian Edition

PROBLEM 8-5A (Continued)

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Fifth Canadian Edition

Kimmel, Weygandt, Kieso, Trenholm, Irvine

Financial Accounting, Fifth Canadian Edition

PROBLEM 8-10A (Continued)

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