SM Chapter 08

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Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
CHAPTER 8
Reporting and Analyzing Receivables
ASSIGNMENT CLASSIFICATION TABLE
Brief A B
Study Objectives Questions Exercises Exercises Problems Problems BYP
1. Identify the types 1, 2, 3, 4, 1, 2, 3, 4, 1, 2 1A, 2A, 1B, 2B, 1, 5, 6

of receivables 5, 11, 12 10 6A 6B
and record
accounts
receivable
transactions.
2. Account for bad 6, 7, 8, 9, 5, 6, 7, 8 3, 4, 5, 6 1A, 2A, 1B, 2B, 3, 4

debts. 10 3A, 4A, 3B, 4B,
5A, 8A 5B, 8B
3. Account for notes 11, 12, 9, 10, 11, 7, 8, 9 6A, 7A, 8A 6B, 7B, 4
receivable. 13, 14, 12, 13 8B
15, 16
4. Explain the 17, 18, 19 14 10, 11 1A, 2A, 1B, 2B, 3

statement 8A, 9A 8B, 9B
presentation of
receivables.
5. Apply the 20, 21, 15 12, 13 10A, 11A 10B, 11B 1, 2, 4,

principles of 22, 23 6, 7
sound accounts
receivable
management.
Solutions Manual 8-1 Chapter 8

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ASSIGNMENT CHARACTERISTICS TABLE
Problem Difficulty Time

Number Description Level Allotted (min.)
1A Record receivables and bad debts transactions; Moderate 25-35

show statement presentation.
2A Record receivables and bad debts; show statement Moderate 25-35

presentation.
3A Determine missing amounts. Complex 15-20
4A Prepare aging schedule and record bad debts. Moderate 20-30
5A Prepare aging schedule; record bad debts for two Moderate 25-35
years.
6A Record receivables transactions. Moderate 20-30
7A Record notes receivable and payable transactions. Moderate 20-30
8A Record notes receivable transactions; show Moderate 30-35

statement presentation.
9A Prepare assets section. Moderate 20-30
10A Calculate and evaluate ratios. Moderate 15-20
11A Evaluate liquidity. Moderate 15-20
1B Record receivables and bad debts; show statement Moderate 25-35

presentation.
2B Record receivables and bad debts; show statement Moderate 25-35

presentation.
3B Determine missing amounts. Complex 15-20
4B Prepare aging schedule and record bad debts. Moderate 20-30
5B Prepare aging schedule, record bad debts for two Moderate 25-35
years.

ASSIGNMENT CHARACTERISTICS TABLE (Continued)
Problem Difficulty Time

Number Description Level Allotted (min.)
6B Record receivables transactions. Moderate 20-30
7B Record notes receivable and payable transactions. Moderate 20-30
8B Record notes receivable transactions; show Moderate 30-35

statement presentation.
9B Prepare assets section. Moderate 20-30
10B Calculate and evaluate ratios. Moderate 15-20
11B Evaluate liquidity. Moderate 15-20

ANSWERS TO QUESTIONS
1. Three types of receivables along with examples follows:
(a) Type (b) Examples

(1) Accounts receivable Accounts receivable from trade customers
(2) Notes receivable Notes receivables from trade customers

Notes receivable obtained when selling property
(3) Other receivables Interest receivable, loans to company officers, advances to

employees, sales tax recoverable, and income tax
receivable
2. Trade receivables are the result of sales transactions while nontrade receivables are the
result of transactions other than sales transactions of the business, such as interest
receivable, income tax receivable, and similar types of receivables.
3. (a) For a service company, a receivable is recorded when service is provided on

account as required by the revenue recognition criteria. For a merchandising
company, a receivable is recorded at the point of sale of merchandise on account as
required by the revenue recognition criteria.
(b) Revenue should be recognized when the performance or sales effort is substantially
complete. This normally occurs when the service is performed, or when goods are
delivered at the point of sale, but not necessarily when cash is received. In addition,
collection must be reasonably assured.

Answers to Questions (Continued)

4. (a) Nonbank credit cards: From its own company credit card, Canadian Tire realizes
interest revenue from customers who do not pay the balance due within a specified
grace period.
Bank credit cards: Bank credit cards offer the following advantages:
(1) The credit card issuer makes the credit card investigation of the customer.
(2) The issuer maintains individual customer accounts.
(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.
Debit cards: The advantage of the debit card is that the cash is deducted
immediately from the customer’s account. There are no credit checks or collection
concerns so the service charges are normally lower than for a bank credit card.
By using its own credit cards, bank credit cards and debit cards, Canadian Tire
provides more options to its customers, increases its revenue, and reduces its risk.
4. (b) Nonbank credit cards: To record a company credit card transaction, the seller
records a debit to Accounts Receivable and a credit to Sales.
Bank credit cards: To record a bank credit card transaction, the seller records a debit
to Cash and a credit to Sales.
Debit cards: To record a debit card transaction, the seller records a debit to Cash
and a credit to Sales.
Bank charges expense for debit card and bank credit card fees must also be
recorded, usually as part of the bank reconciliation process.
5. (a) Using an accounts receivable subsidiary ledger makes it possible to determine the
balance owed by an individual customer at any point in time. This makes it easier to
manage receivables, answer customer inquiries, follow up on payments and decide if
additional credit should be granted.
(b) The general ledger control account should agree with the total of the individual
accounts in the subsidiary ledger.


6. (a) An aging schedule shows the receivables in various stages outstanding 0–30 days,
31–60 days, 61–90 days, and so on as long as required.
(b) The aging schedule is used to apply percentages to outstanding receivables in each
age category to determine the total estimated uncollectible accounts.
7. (a) The purpose of the account Allowance for Doubtful Accounts is to show an estimate
of the accounts receivable expected to become uncollectible. The allowance account
is used because the amount is only an estimate and we do not know for certain which
customers will not pay, so we cannot reduce specific customer accounts in the
subsidiary ledger or the related accounts receivable control account in the general
ledger. Instead we increase the allowance account balance.
(b) The account can be in a debit balance if the amount of actual write offs exceeds
previous provisions for bad debts. A debit balance will arise during the period when
these write offs are recorded, but by the end of the reporting period adjusting entries
will be made that will bring the balance in the allowance account back into a credit
position. The credit entry to this account is offset with a debit to Bad Debts Expense.
8. The Bad Debts Expense account reflects only the current year’s estimates while the
Allowance for Doubtful Accounts is a cumulative result of estimates, write offs, and
subsequent recoveries from the current and prior periods.
9. The write off of an uncollectible account reduces both Accounts Receivable and the
Allowance for Doubtful Accounts by the same amount. Thus, net realizable value (which
is the difference between accounts receivable and allowance for doubtful accounts) does
not change. Net realizable value will change, however, when an adjusting entry is made
to record the estimate of uncollectible accounts because only the Allowance account is
affected in this entry.
10. Two journal entries are required because the first journal entry has to restore the
previously written off accounts receivable and the second journal entry records the actual
receipt of payment on the account. This way, there is a record that the person did
eventually pay, and that may affect future credit decisions. Furthermore, the date on
which the determination that the receivable is actually collectible and the date it is
actually collected may be different and this would necessitate the separate recording of
these events.


11. (a) The similarities between accounts receivable and notes receivable are that they are
both credit instruments, both can be sold, and both are valued at their net realizable
value.
(b) Differences between accounts receivable and notes receivable include the following.
An accounts receivable is an informal promise to pay, while a note receivable is a
written promise giving the payee a stronger legal claim. A note receivable is a
negotiated instrument that can be transferred to another party. An account receivable
arises from credit sales, while a note receivable can arise for a number of reasons
such as the financing of a purchase, lending money, or extending the terms of an
account receivable. An account receivable is usually due within a short period of time,
while a note receivable can extend for longer periods of time (which is why it bears
interest). An account receivable does not incur interest unless the account is overdue
while a note usually bears interest for an entire period.
12. (a) (1) Interest is normally recorded for an account receivable if a customer does not
pay in full within a specified period of time (usually 30 days). The invoice will
specifically state the amount or percentage of interest due on overdue accounts.
(2) In the case of notes receivable, the amount of interest accrues starting from the
date of the issuance of the note and continues to the maturity date of the note.
Interest earned is recorded when accrued at the end of each accounting period
or when collected, whichever comes first.
12. (b) (1) Accounts Receivable is normally debited for interest on overdue balances. This
accomplishes two goals: updating a particular customer’s balance in the
subsidiary ledger to allow management to decide if additional credit should be
granted if overdue balances are not yet paid; it also allows the company to
easily send a statement of transactions to the customer that includes interest
charges so that the customer will be aware of them.
(2) In the case of notes receivable when interest revenue is accrued, Interest
Receivable is debited. The Note Receivable account is for the amount of the
principal balance of the loan, whereas the interest is recorded and reported
separately.
13. Notes are not recorded at their maturity value (which would include interest) because the
interest on the note is not receivable when the note is first recorded. The interest is
earned over time and is recorded when earned.
14. Cobden Inc., as the party making the promise to pay, is the maker of the note. It would
record a note payable. Scotiabank, as the party who will be paid, is the payee. It would
record a note receivable.


15. When a note receivable is honoured at maturity it is paid in full, while a dishonoured note
is not paid in full at maturity. A dishonoured note receivable is no longer negotiable. The
payee still has a claim against the maker of the note and if eventual collection is
expected, an accounts receivable is recorded.
16. These notes should be recorded at their net realizable value. An entry should be made to
debit Bad Debts Expense for the 10% expected to be uncollectible and to credit
Allowance for Doubtful Notes for the same amount.
17. Both the gross amount of receivables and the allowance for doubtful accounts must be
reported either in the statement of financial position or in the notes to the financial
statements. It is usual to report the receivables on the statement of financial position at
their net realizable value and to provide additional information about the allowance in the
notes to the statements.
18. Current assets

Accounts receivable $xxx
Less: Allowance for doubtful accounts xxx
Net realizable value of accounts receivable $xxx
Notes receivable (due in three months) $xxx
Less: Allowance for doubtful notes xxx
Net realizable value of short-term notes xxx
Sales tax recoverable xxx
Income tax receivable xxx
Non-current assets
Notes receivable (due in two years) $xxx
19. (a) Account (b) Classification

(1) Sales or Service Revenue Revenues
(2) Bad Debt Expense Operating expenses
(3) Interest Revenue Other revenues and expenses
20. The steps involved in receivables management are:

(1) Determine who to extend credit to.
(2) Establish a payment period.
(3) Monitor collections.
(4) Evaluate the liquidity of receivables.


21. To help in determining whether Canam Group’s receivables management has improved
or worsened the average collection period should be determined.
2012 2011
Average collection period 365 = 118 days 365 = 111 days
3.1 3.3
Canam’s receivable management has worsened. The receivables turnover has

decreased from 3.3 times to 3.1 times, indicating a slower collection of receivables. The
average collection period shows this more clearly; the average time it takes to collect a
receivable has risen from 111 days to 118 days.
22. (a) An increase in the current ratio does not necessarily mean that the liquidity of a
company has improved. In order to determine if liquidity has improved, we need to
understand why the current ratio rose. If it rose because the company has more cash,
then the company is more liquid. On the other hand if the cash has fallen but
inventory has risen by a larger amount because of declining sales, the current ratio
will rise but this does not mean that the company is more liquid. It simply means that
the company has some inventory that it cannot sell and the company has less
liquidity. The same is true if net accounts receivable increase because of a slowdown
in collections not fully adjusted for in the estimate of uncollectible accounts.
(b) Other ratios that focus on specific current assets rather than current assets in total
(as the current ratio does) give us insight into the components of working capital and
allow us to understand liquidity in more detail. Examples include the receivables
turnover ratio and the inventory turnover ratio. In general, if these ratios are rising,
liquidity is improving because cash is being received more quickly.
23. If the receivables turnover is significantly higher than its competitors, it means the
company is collecting its receivables faster, indicating it may have an earlier payment
due date. Customers may move to a competitor that does not collect its receivables as
quickly to better manage their cash flow.
If a company has a receivables turnover that is significantly lower than its competitors, it
may be at a competitive disadvantage because it is financing its customers’ purchases
for a longer time and delaying the time it takes to receive cash.

SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 8-1
(a) Other receivables

(b) Other receivables
(c) Notes receivable
(d) Accounts receivable
(e) Accounts receivable
(f) Other receivables
(g) Notes receivable
BRIEF EXERCISE 8-2
(a) July 1 Accounts Receivable ................................................. 42,000

Sales .................................................................... 42,000
Cost of Goods Sold ................................................... 30,000

Merchandise Inventory......................................... 30,000
(b) July 8 Sales Returns and Allowances .................................. 7,200

Accounts Receivable ........................................... 7,200
Merchandise Inventory .............................................. 4,320

Cost of Goods Sold .............................................. 4,320
(c) July 9 Cash ($34,800 – $696).............................................. 34,104

Sales Discounts ($34,800 × 2%) ............................... 696
Accounts Receivable ($42,000 – $7,200) ............ 34,800
(d) Aug. 31 Accounts Receivable ................................................. 696

Interest Revenue [($42,000 – $7,200) × 24% × 1/12] 696

BRIEF EXERCISE 8-3
(a)
Visa card
Cash ........................................................................................ 100
Sales ............................................................................... 100
Bank Charges Expense ............................................................ 2

Cash ................................................................................ 2
(b)
Nonbank credit card
Accounts Receivable ................................................................ 100
Sales ............................................................................... 100
Because VISA is sponsored by a bank, it is appropriate to record a debit to cash in the first
entry. In the second entry, because a nonbank credit card is used, the company bears the
entire risk of collecting the amount, so it is recorded in accounts receivable. In addition, there
are normally no bank charges incurred with respect to the use of a company credit card.
BRIEF EXERCISE 8-4

Accounts Receivable Subsidiary Ledger
Chiu Corp. Elbaz Inc.

Jan. 7 1,800 Jan. 17 700 Jan. 15 6,000 Jan. 24 2,000
Jan. 31 Bal. 1,100 Jan. 31 Bal. 4,000
Lewis Corp.
Jan. 23 3,700 Jan. 29 3,700
Jan. 31 Bal. 0
General Ledger Control Account
Accounts Receivable
Jan. 31 11,500 Jan. 31 6,400
Jan. 31Bal. 5,100

BRIEF EXERCISE 8-5
(a) Bad Debts Expense ................................................................. 20,400

Allowance for Doubtful Accounts .................................... 20,400
[($600,000 × 4%) – $3,600]
(b) The amount to be reported as bad debts expense would be

[($600,000 × 4%) + $4,000] = $28,000
Bad Debts Expense ................................................................. 28,000

Allowance for Doubtful Accounts .................................... 28,000
BRIEF EXERCISE 8-6

(a)
Number of Days Accounts Estimated % Total Estimated
Outstanding Receivable Uncollectible Uncollected Accounts
0-30 days $368,000 1% $ 3,680
31-60 days 120,000 4% 4,800
61-90 days 72,000 10% 7,200
Over 90 days 40,000 20% 8,000
Total $600,000 $23,680
(b)
Dec. 31 Bad Debts Expense ($23,680 – $3,600).......................... 20,080
Allowance for Doubtful Accounts........................... 20,080
BRIEF EXERCISE 8-7

(a) Jan. 24 Allowance for Doubtful Accounts........................... 8,000
Accounts Receivable..................................... 8,000
(b) (1) Before Write Off (2) After Write Off

Accounts receivable $600,000 $592,000
Allowance for doubtful accounts 36,000 28,000
Net realizable value $564,000 $564,000
BRIEF EXERCISE 8-8

Mar. 4 Accounts Receivable ....................................................... 8,000
Allowance for Doubtful Accounts........................... 8,000
4 Cash ................................................................................ 8,000

Accounts Receivable ............................................. 8,000

BRIEF EXERCISE 8-9
(a) (b) (c)

Interest Interest Interest
Revenue Revenue Revenue
2014 2015 Total
(1) (2)
Note #1 $81,000 $54,000 $135,000
(3) (4)
Note #2 4,200 2,100 6,300
(5) (6)
Note #3 002,800 14,000 16,800
Totals $88,000 $70,100 $158,100
(1) $1,800,000 × 6% × 9/12 (April 1 to Dec. 31) = $81,000

(2) $1,800,000 × 6% × 6/12 (Jan. 1 to June 30) = $54,000
(3) $168,000 × 5% × 6/12 (July 2 to Dec. 31) = $4,200
(4) $168,000 × 5% × 3/12 (Jan. 1 to maturity) = $2,100
(5) $420,000 × 4% × 2/12 (Nov. 1 to Dec. 31) = $2,800
(6) $420,000 × 4% × 10/12 (Jan. 1 to Oct. 30) = $14,000
BRIEF EXERCISE 8-10
Jan. 2 Accounts Receivable ...................................................... 48,000

Sales ...................................................................... 48,000
Cost of Goods Sold ........................................................ 32,000

Merchandise Inventory ........................................... 32,000
Feb. 1 Notes Receivable ........................................................... 48,000

Accounts Receivable .............................................. 48,000
April 30 Interest Receivable ($48,000 × 7% × 3/12) .................... 840

Interest Revenue .................................................... 840
July 1 Cash ............................................................................... 49,400

Interest Receivable ................................................. 840
Notes Receivable ................................................... 48,000
Interest Revenue ($48,000 × 7% × 2/12)................ 560

BRIEF EXERCISE 8-11
2014
April 1 Notes Receivable ........................................................... 10,000
Sales ...................................................................... 10,000

Dec. 31 Interest Receivable ($10,000 × 9% × 9/12) .................... 675

2015
Mar 31 Cash ............................................................................... 10,900
BRIEF EXERCISE 8-12
2014
Apr. 1 Merchandise Inventory................................................. 10,000
Notes Payable..................................................... 10,000
Sept 30 Interest Expense ($10,000 × 9% × 6/12) ..................... 450

Interest Payable .................................................. 450
2015
Mar. 31 Interest Expense ($10,000 × 9% × 6/12) .................... 450
Interest Payable ........................................................... 450
Notes Payable.............................................................. 10,000
Cash ................................................................... 10,900

BRIEF EXERCISE 8-13
(a)
Apr. 1 Notes Receivable ......................................................... 40,000
Accounts Receivable .......................................... 40,000
July 1 Cash ............................................................................ 40,600

Notes Receivable ................................................ 40,000
Interest Revenue ($40,000 × 6% × 3/12) ............ 600
(b)
July 1 Accounts Receivable ................................................... 40,600

Interest Revenue ($40,000 × 6% × 3/12) ............ 600
(c)
July 1 Allowance for Doubtful Notes....................................... 40,000

Note that no interest revenue is recorded in (c) because it is unlikely that it will be
collected.
BRIEF EXERCISE 8-14
NIAS CORPORATION
Statement of Financial Position (Partial)
February 28, 2015
Assets
Current assets
Cash ........................................................................ $ 150,000
Trading investments................................................. 330,000
Accounts receivable ................................................. $470,000
Less: Allowance for doubtful accounts ..................... 30,000 440,000
Notes receivable (due Nov. 1, 2015)........................ 300,000
Sales tax recoverable .............................................. 38,000
Merchandise inventory ............................................. 380,000
Prepaid rent ............................................................. 8,000
Total current assets ................................................. $1,646,000

BRIEF EXERCISE 8-15
(a)
($ in thousands) 2012 2011

Receivables $4,864,779 70.8 $4,893,624 66.8
= =
turnover $55,954 + $81,477 times $81,477 + $65,084 times
2 2
Average 365 365
collection period 70.8 = 5 days 66.8 = 5 days
(b)
The receivables turnover is better in 2012 and the average collection period is generally
unchanged in 2012 (when rounded to the nearest day).

SOLUTIONS TO EXERCISES
EXERCISE 8-1
(a) Compton Limited
Jan. 6 Accounts Receivable. ..................................................... 24,000

Sales ...................................................................... 24,000

15 Cash ($24,000 – $480) ................................................... 23,520

Sales Discounts (2% × $24,000) .................................... 480
Accounts Receivable. ............................................. 24,000
(b) Singh Inc.
Jan. 6 Merchandise Inventory ................................................... 24,000

Accounts Payable ................................................... 24,000
15 Accounts Payable ........................................................... 24,000

Merchandise Inventory ........................................... 480
Cash ....................................................................... 23,520
EXERCISE 8-2
(a)
Feb. 2 Accounts Receivable (Andrew Noren) ............................ 1,140

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

Accounts Receivable (Andrew Noren) .................... 140
5 Accounts Receivable (Dong Corporation) ...................... 760

Sales ...................................................................... 760
8 Cash ............................................................................... 842

Sales ...................................................................... 842
10 Accounts Receivable (Discovery Sports) ........................ 920

Sales ...................................................................... 920

EXERCISE 8-2 (Continued)

(a) (Continued)
Feb. 14 Cash ($760 – $15) ................................................ 745

Sales Discount ($760 × 2%) ................................. 15
Accounts Receivable (Dong Corporation) .... 760
17 Accounts Receivable (Andrew Noren) ................. 696

Sales ............................................................ 696
22 Accounts Receivable (Batstone Corporation) ....... 1,738

Sales ............................................................ 1,738
28 Cash ..................................................................... 1,000

Accounts Receivable (Andrew Noren) ......... 1,000
(b) Accounts Receivable Subsidiary Ledger
Andrew Noren Dong Corporation

Feb. 2 1,140 Feb. 4 140 Feb. 5 760 Feb. 14 760
17 696 28 1,000 Feb. 28 Bal. 0
Feb. 28 Bal. 696
Batstone Corporation Discovery Sports (Company Credit Card)

Feb. 22 1,738 Feb. 10 920
Feb. 28 Bal. 1,738 Feb. 28 Bal. 920
General Ledger Control Account
Accounts Receivable
Feb. 2 1,140 Feb. 4 140
5 760 14 760
10 920 28 1,000
17 696
22 1,738
Feb. 28 Bal. 3,354
(c) Subledger listing

Andrew Noren ............................................................................... $ 696
Dong Corporation .......................................................................... 0
Batstone Corporation .................................................................... 1,738
Discovery Sports (Company credit card) ....................................... 920
Total .............................................................................................. $3,354
Balance per general ledger control account .................................. $3,354

EXERCISE 8-3
(a) Dec. 31 Bad Debts Expense ($36,000 – $4,400) .............. 31,600

Allowance for Doubtful Accounts ................. 31,600
(b) Dec. 31 Bad Debts Expense

($360,000 × 9% – $4,400) ................................. 28,000
(c) Dec. 31 Bad Debts Expense ($36,000 + $2,400) .............. 38,400

EXERCISE 8-4
(a) Age of Accounts Amount % Estimated Uncollectible

0-30 days $260,000 2 $ 5,200
31-60 days 50,400 10 5,040
61-90 days 34,000 30 10,200
Over 90 days 25,600 50 12,800
$33,240
(b) Mar. 31 Bad Debts Expense ............................................. 24,440

($33,240 – $8,800)
(c) The net realizable value of the accounts receivable at March 31 is as follows:
Accounts receivable ............................................................... $370,000

Less: Allowance for doubtful accounts ................................... 33,240
Net realizable value ................................................................ $336,760

EXERCISE 8-5
(a)
2014
Dec. 31 Bad Debts Expense ........................................................ 18,800

Allowance for Doubtful Accounts ............................. 18,800
($16,800 + $2,000)
2015
May 11 Allowance for Doubtful Accounts .................................... 1,900

Accounts Receivable ............................................... 1,900
Nov. 12 Accounts Receivable ...................................................... 1,900

Allowance for Doubtful Accounts ............................. 1,900
Cash ............................................................................... 1,900

Accounts Receivable ............................................... 1,900
(b)
Dec. 31 May 11 Nov.12
2014 2015 2015
Accounts receivable $300,000 $298,100 $298,100

Less: Allowance for doubtful accounts 16,800 14,900 16,800
Net realizable value $283,200 $283,200 $281,300

EXERCISE 8-6
(a)
Accounts Receivable
March 1 Balance 30,000
Sales 40,000
Collections 35,000
Write offs (1)
(1) Write offs: $30,000 + $40,000 – $35,000 – $32,000 = $3,000
Allowance for Doubtful Accounts

Bad debts (2)
Write offs (1)
(1) Write offs: $30,000 + $40,000 – $35,000 – $32,000 = $3,000

(2) Bad debts: $4,500 – [$5,000 – $3,000 (from (1) above)] = $2,500
(b) To record write offs:
Allowance for Doubtful Accounts ....................................... 3,000

Accounts Receivable ................................... 3,000
(c) To record bad debts expense:
Bad Debts Expense ........................................................... 2,500

Allowance for Doubtful Accounts .......................... 2,500

EXERCISE 8-7
Nov. 1 Notes Receivable ........................................................... 48,000

Cash ....................................................................... 48,000
Dec. 1 Notes Receivable ........................................................... 8,400

Sales ...................................................................... 8,400

15 Notes Receivable ........................................................... 16,000

Feb. 1 Cash ............................................................................... 8,484

Interest Revenue ($8,400 × 6% × 2/12).................. 84
28 Interest Receivable ......................................................... 1,513

Interest Revenue .................................................... 1,513
Calculation of interest revenue on February 28:

Bouchard note: $48,000 × 8% × 4/12 = $1,280
Aqualina note: $16,000 × 7% × 2.5/12 =. 233
Total accrued interest $1,513
28 Bad Debt Expense.......................................................... 16,000

Allowance for Doubtful Notes ................................. 16,000
EXERCISE 8-8
Dec. 1 Merchandise Inventory ................................................... 8,400

Notes Payable ........................................................ 8,400
31 Interest Expense ($8,400 × 6% × 1/12) .......................... 42

Interest Payable...................................................... 42
Feb. 1 Notes Payable ................................................................ 8,400

Interest Payable ............................................................. 42
Interest Expense............................................................. 42
Cash ....................................................................... 8,484

EXERCISE 8-9
May 1 Notes Receivable ........................................................... 12,000

June 30 Interest Receivable ($12,000 × 5% × 2/12) .................... 100

July 31 Notes Receivable ........................................................... 10,000

Cash ....................................................................... 10,000
Aug. 31 Cash ............................................................................... 58

Sept. 30 Cash ............................................................................... 58

Oct. 31 Cash ............................................................................... 10,058

Nov. 1 Allowance for Doubtful Accounts .................................... 12,100

Note Receivable ..................................................... 12,000

EXERCISE 8-10
DEERE & COMPANY

Statement of Financial Position (partial)
October 31, 2012
(in U.S. millions)
Assets
Current assets
Receivables
Trade accounts and notes receivable............................. $3,799.1
Less: Allowance for doubtful trade and notes receivables 66.0 $ 3,733.1
Financing receivables .................................................... $22,159.1
Less: Allowance for doubtful financing receivables ........ 177.0 21,982.1
Other receivables .............................................................................. 1,790.9
Total receivables ............................................................................... $27,506.1

EXERCISE 8-11
(a) (b)
SFP or
IS Classification
Accounts payable $22,600 SFP
Accounts receivable 18,200 SFP
Advances to employees 2,900 SFP
Allowance for doubtful accounts 1,300 SFP
Allowance for doubtful notes (current) 5,000 SFP
Bad debts expense 2,000 IS Operating expense
Cash 7,500 SFP
Interest expense 2,400 IS Non-operating expense
Interest revenue 6,000 IS Non-operating revenue
Merchandise inventory 26,400 SFP
Notes receivable (current) 25,000 SFP
Notes receivable (non-current) 75,000 SFP
Prepaid insurance 1,500 SFP
Sales 370,000 IS Operating revenue
Sales discounts 12,000 IS Contra operating revenue
Sales tax recoverable 3,150 SFP
(c)
APOLLO CORPORATION
November 30, 2015
Assets
Current assets
Cash .............................................................................. $ 7,500
Accounts receivable ....................................................... $18,200
Less: Allowance for doubtful accounts ........................... 1,300 16,900
Notes receivable ........................................................... $25,000
Less: Allowance for doubtful notes ................................. 5,000 20,000
Advances to employees ....................................................................... 2,900
Sales tax recoverable ........................................................................... 3,150
Merchandise inventory ......................................................................... 26,400
Prepaid insurance ................................................................................ 1,500
Total current assets ................................................................... $78,350

EXERCISE 8-12
(a) ($ in millions)
2012
Current ratio = $1,869 = 0.8 : 1
$2,203
Receivables turnover = $9,920 = 11.8 times

($841 + $836) ÷ 2
Average collection period = 365 days = 31 days

11.8 times
2011
Current ratio = $1,848 = 1.1 : 1
$1,715
Receivables turnover = $9,028 = 11.1 times

($836 + $796) ÷ 2

11.1 times
(b) In 2012, accounts receivable increased 0.6% [($841 − $836) ÷ $836] while revenues
increased 9.9% [($9,920 − $9,028) ÷ $9,028]. CN is doing a better job of collecting its
accounts receivable. The receivables turnover ratio and the average collection period
indicate that the company’s management of receivables has improved. The turnover
has improved from 11.1 times in 2011 to 11.8 times in 2012. The average collection
period has decreased from 33 days in 2011 to 31 days in 2012 so cash is being
collected sooner.
The current ratio has declined from 1.1:1 in 2011 to 0.8:1 in 2012. However, this
decrease is not due to slow-collection of receivables (or slow moving inventory). This
decrease can be attributed to the 28% [($2,203 – $1,715) ÷ $1,715] increase in current
liabilities compared to the modest increase in current assets of 1% [($1,869 – $1,848)
÷ $1,848].

EXERCISE 8-13
(a) At first glance, the increase in the current ratio might lead to the conclusion that Lin’s
liquidity has improved in 2015. When looking further and noting a deterioration in the
receivables and inventory turnover ratios in the same period, one must conclude that
the increase in the current ratio does not mean that Lin’s liquidity has improved. In this
case, total current assets have increased in comparison to current liabilities because
of increases in accounts receivable and inventory.
(b) Lin must determine the source of the deterioration of both the receivables and
inventory turnover ratios. If the deterioration is a result of specific policy changes in the
way in which Lin is managing its accounts receivable, by for example extending its
credit terms, the result of the deterioration of the accounts receivable turnover is not a
surprising result. Similarly, if the deterioration of the inventory turnover is a result of a
management strategy to improve sales and profitability, the outcome is also not a
surprise to management. On the other hand, if Lin establishes that there have been no
direct causes to the change that can be readily explained through the actions of
management, specific measures to improve the management of its accounts
receivable and inventory must be undertaken immediately.
These measures could include the following for accounts receivable:
1. Establishment of credit policies and credit limits for certain customers.

2. Initiate the use of a cash discount to encourage early payment of receivables.
3. Aggressively monitor collections to encourage customers to pay on time.
These measures could include the following for inventory:

1. Monitor its inventory levels carefully and only reorder when inventory is selling and
additional supplies are required.
2. Limit the amount of inventory by improving its purchasing relationships with
suppliers.
3. If possible, move to a just-in-time system where inventory is only purchased as
needed.

SOLUTIONS TO PROBLEMS
PROBLEM 8-1A
(a) 1. Accounts Receivable .................................................... 5,200,000

Sales ..................................................................... 5,200,000
2. Sales Returns and Allowances ...................................... 80,000

3. Cash .............................................................................. 5,400,000

Accounts Receivable ............................................. 5,400,000
4. Accounts Receivable ..................................................... 400,000

Interest Revenue ................................................... 400,000
5. Allowance for Doubtful Accounts ................................... 150,000

6. Accounts Receivable ..................................................... 60,000

Allowance for Doubtful Accounts ........................... 60,000
Cash .............................................................................. 60,000

7. Bad Debts Expense ....................................................... 66,000

Allowance for Doubtful Accounts ................................ 66,000
$100,000 – ($124,000 – $150,000 + $60,000) = $66,000
(b)
Accounts Receivable Allowance for Doubtful Accounts

Bal. 1,990,000 Bal. 124,000
(1) 5,200,000 (2) 80,000 (5) 150,000 (6) 60,000
(4) 400,000 (3) 5,400,000 (7) 66,000
(6) 60,000 (5) 150,000
(6) 60,000
Bal 1,960,000 Bal. 100,000

PROBLEM 8-1A (Continued)
(c) January 1, 2015

Accounts receivable ............................................................... $1,990,000
Net realizable value ................................................................ $1,866,000
December 31, 2015

Accounts receivable ............................................................... $1,960,000
Net realizable value ................................................................ $1,860,000
(d)
UNDERWOOD IMPORTS INC.
December 31, 2015
Assets
Current assets
Accounts receivable .................................................... $1,960,000
Less: Allowance for doubtful accounts ........................ 100,000 $1,860,000
(e)
UNDERWOOD IMPORTS INC.
Income Statement (partial)
Year Ended December 31, 2015
Sales ...................................................................................... $5,200,000

Less: Sales returns and allowances ....................................... 80,000
Net sales .......................................................................................................... $5,120,000
Operating expenses
Bad debts expense ................................................................................ 66,000
Other revenues and expenses
Interest revenue..................................................................................... 400,000

PROBLEM 8-2A
(a) Accounts Receivable ..................................................... 3,800,000

Sales ......................................................................... 3,800,000
Cash .............................................................................. 4,084,000

Accounts Receivable ................................................. 4,084,000
(b) Allowance for Doubtful Accounts ................................... 116,000

Accounts Receivable ................................................. 116,000
(c) Accounts Receivable ..................................................... 8,000

Allowance for Doubtful Accounts ............................... 8,000
Cash .............................................................................. 8,000

(d) Bad Debts Expense [see (e)] ......................................... 92,000

(e)

Beg. Bal. 1,600,000 Beg. Bal 88,000
Sales 3,800,000 Collections 4,084,000 Write off 116,000 Recovery 8,000
Recovery 8,000 Write off 116,000 Bad debts 92,000
Collections 8,000 End Bal 72,000
End Bal. 1,200,000
Before bad debts expense was recorded, the Allowance account had a debit balance of
$20,000 ($88,000 – $116,000 + $8,000). To adjust this to $72,000 requires a credit to this
account of $92,000 with an offsetting debit to Bad Debts Expense.
(f) AZIM ENTERPRISES LTD.

Assets
Current assets
Accounts receivable ................................................................ $1,200,000
Less: Allowance for doubtful accounts .................................... 72,000
Net realizable value ................................................................ 1,128,000

PROBLEM 8-3A
Accounts Receivable
Beg. bal. 18,000
55,000
(a) 78,000 (b) 1,000
End. bal. (c) 40,000

Beg. bal. 1,800
1,000
Unadj. bal. 800
(d) 1,200
End. bal. (e) 2,000
Sales
78,000
Bad Debts Expense

(f) 1,200
(a) Addition to accounts receivable (from Sales) = $78,000
(b) Write offs of accounts receivable obtained from reduction of allowance for doubtful
accounts $1,000
(c) $18,000 + $78,000 (a) – $1,000 (b) – $55,000 = $40,000, the ending balance
(d) $1,800 – $1,000 + (d) = $2,000 (e); (d) = $1,200 and this represents the credit side of
the bad debts expense entry.
(e) Allowance for doubtful accounts = $2,000 (given)
(f) Bad debts expense = Adjustment to allowance for doubtful accounts = $1,200 [from
(d)]

PROBLEM 8-4A
(a) Total estimated allowance for doubtful accounts:
Estimated Estimated
Number of Days Accounts Percentage Uncollectible
Outstanding Receivable Uncollectible Accounts
0-30 days $240,000 1% $ 2,400
31-60 days 120,000 5% 6,000
61-90 days 100,000 10% 10,000
Over 90 days 60,000 25% 5,000
Total $520,000 $33,400
(b) (1)
Bad Debts Expense ................................................................ 13,400
Allowance for Doubtful Accounts....................................... 13,400
[$33,400 – $20,000]
(2) 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 .............................................. 4,000

Accounts Receivable ......................................................... 4,000
(d) Accounts Receivable ................................................................ 1,700

Cash ......................................................................................... 1,700

(e) Part (a): The total estimated allowance for doubtful accounts = $520,000 × 6% =
$31,200.
Part (b): (1) The journal entry would record bad debts expense of $11,200
($31,200 – $20,000)
(2) If the allowance for doubtful accounts had an unadjusted debit balance
of $20,000, the bad debts expense in the entry above would be $51,200
($31,200 + $20,000)
Parts (c) and (d): no change


(f) 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.

PROBLEM 8-5A
(a) Total estimated allowance balance at Dec. 31, 2014:
Estimated Estimated
0-30 days $320,000 3% $ 9,600
31-60 days 114,000 6% 6,840
61-90 days 76,000 12% 9,120
Over 90 days 50,000 24% 12,000
Total $560,000 $37,560
Total estimated allowance balance at Dec. 31, 2015:
Estimated Estimated
0-30 days $300,000 3% $ 9,000
31-60 days 64,000 6% 3,840
61-90 days 86,000 12% 10,320
Over 90 days 130,000 24% 31,200
Total $580,000 $54,360
Total accounts receivable increased slightly from 2014 to 2015. However, estimated
allowance balance increased significantly. Amounts outstanding over 90 days more
than doubled while amounts less than 60 days decreased significantly. This implies the
receivables are less likely to be collected because they are increasing in age.
(b) Bad Debts Expense .................................................................. 28,560

($37,560 – $9,000)


Cash ......................................................................................... 3,000



(e) Bad Debts Expense .................................................................. 55,800
$54,360 – (balance in the allowance before adjustment):
$54,360 – ($37,560 – $42,000 + $3,000) = $55,800
(f) 2015 2014

Accounts receivable ................................................................. $580,000 $560,000
Less: Allowance for doubtful accounts ..................................... 54,360 37,560
Net realizable value .................................................................. $525,640 $522,440

PROBLEM 8-6A
Feb. 1 Accounts Receivable ...................................................... 6,000

Sales ................................................................. 6,000
Cost of Goods Sold ......................................................... 4,000

Merchandise Inventory............................................ 4,000
3 Notes Receivable ............................................................ 13,400

Sales ....................................................................... 13,400

26 Accounts Receivable ...................................................... 8,000

Sales ....................................................................... 8,000

Mar. 6 Cash ............................................................................... 4,000

Sales ....................................................................... 4,000

Bank Charges Expense .................................................. 120

Cash ....................................................................... 120
Mar. 31 Notes Receivable ............................................................ 8,000

Apr. 3 Cash ($13,400 + $134) ................................................... 13,534

Notes Receivable .................................................... 13,400
Interest Revenue ($13,400 × 6% × 2/12) ................ 134
May 31 Accounts Receivable ($8,000 + $93) ............................. 8,093

Interest Revenue ($8,000 × 7% × 2/12) .................. 93
31 Accounts Receivable ($6,000 × 24% × 4/12) .................. 480


PROBLEM 8-7A
(a) Nov. 1 Notes Receivable ...................................... 40,000

Accounts Receivable ........................ 40,000
Dec. 1 Cash ......................................................... 200

Interest Revenue .............................. 200
($40,000 × 6% × 1/12)
31 Interest Receivable ($40,000 × 6% × 1/12) 200

Jan. 1 Cash ......................................................... 200

Interest Receivable ........................... 200
Feb. 1 Cash ......................................................... 40,200

Interest Revenue ($40,000 × 6% × 1/12) 200
Notes Receivable .............................. 40,000
(b) Nov. 1 Accounts Payable ..................................... 40,000

Notes Payable .................................. 40,000
Dec. 1 Interest Expense ....................................... 200

Cash ($40,000 × 6% × 1/12) ............. 200
31 Interest Expense ($40,000 × 6% × 1/12) .. 200

Interest Payable ................................ 200
Jan. 1 Interest Payable ........................................ 200

Cash ................................................. 200
Feb. 1 Notes Payable .......................................... 40,000

Interest Expense ($40,000 × 6% × 1/12) .. 200
Cash ................................................. 40,200
(c)
(1) Feb. 1 Accounts Receivable ................................ 40,200
(2) Feb. 1 Allowance for Doubtful Notes.................... 40,000


PROBLEM 8-8A
(a) Notes receivable total $61,000 and interest receivable $603 at September 30, 2015:
RES Inc. $17,000 × 6% × 6/12 = $510

Ihara Ltd. 17,500 × 4% × 1/12 = 58
Dragon Limited 6,000 × 7% × 1/12 = 35
MGH Corp. 20,500 × 5% × 0/12 = 0
Total $61,000 $603
(b) Oct. 1 Cash ($17,500 × 4% × 1/12) ..................... 58

31 Accounts Receivable ................................ 6,070

Interest Receivable
($6,000 × 7% × 1/12) ........................ 35
Interest Revenue
($6,000 × 7% × 1/12) ........................ 35
31 Cash ......................................................... 17,595

Interest Receivable
($17,000 × 6% × 6/12) ...................... 510
Interest Revenue
($17,000 × 6% × 1/12) ...................... 85
31 Interest Receivable ................................... 143

Ihara Ltd. $17,500 × 4% × 1/12 = $ 58
MGH Corp. $20,500 × 5% × 1/12 = 85
Total $143
31 Bad Debt Expense .................................... 17,500

Allowance for Doubtful Notes............ 17,500


(c)
Interest Receivable Notes Receivable

Bal. see (a) 603 Oct. 1 58 Bal. see (a) 61,000 Oct. 31 6,000
Oct. 31 143 31 35 31 17,000
31 510
Bal. 143 Bal. 38,000
Allowance for Doubtful Notes

Bal. 0
Oct. 31 17,500
Bal. 17,500
(d)
TARDIF CORPORATION
Balance Sheet (partial)
October 31, 2015
_________________________________________________________________________
Assets
Current assets
Notes receivable .......................................................... $38,000
Less: Allowance for doubtful notes .............................. 17,500 $20,500
Interest receivable ....................................................... 143

PROBLEM 8-9A
CANADIANA CORPORATION
December 31, 2015
(in thousands)
Assets
Current assets
Cash $ 592
Trading investments 196
Accounts receivable $1,630
Less: Allowance for doubtful accounts 32 1,598
Notes receivable 2,481
Income tax receivable 99
Merchandise inventory 1,902
Supplies 85
Total current assets 6,953
Non-current assets
Notes receivable 101
Property, plant, and equipment
Land $ 1,077
Buildings $2,734
Less: Accumulated depreciation 960 1,774
Equipment $737
Less: Accumulated depreciation 488 249 3,100
Total assets $10,154

PROBLEM 8-10A
(a)
Nike Adidas
(in US $ millions) (in euro millions)
$24,128 €13,344
Receivables turnover ($3,212+$3,330) (€1,794+€1,858)
� � � �
2 2
=7.4 times =7.3 times
365 365
7.4 7.3
(b) Both companies’ collection experiences are very close to each other and to the industry.
Nike’s receivables turnover ratio and collection period are practically identical to the
industry average, whereas Adidas’ is slightly below that of Nike and the industry.
Adidas’ collection experience is marginally but not notably weaker (meaning that it
collects its receivables slower).

PROBLEM 8-11A
(a) 2015 2014 2013
Average 365 365 365

collection period = 45 days = 49 days = 54 days
8.2 7.4 6.7
Days in 365 365 365

inventory = 37 days = 42 days = 49 days
9.9 8.7 7.5
(b) At first glance, it appears that Pampered Pets’ liquidity has improved over the last two
years since the company’s current ratio has increased from 2.1:1 to 2.6:1. The current
ratio aggregates all current assets together. To get a better understanding of why this
increase in the current ratio occurred, we need to analyze specific accounts that are
included in this ratio. To do this, we can examine the receivables and inventory
turnover ratios. The increase in the receivables turnover ratio indicates that the
company is collecting its receivables faster and this improves cash flow and liquidity.
As well, the company appears to be moving its inventory more quickly as evidenced by
the higher inventory turnover ratio and this also improves cash flow and liquidity.
Therefore, it does appear that the company’s overall liquidity is improving.
(c) Changes in the turnover ratios indirectly affect profitability. Improvements in the
receivables turnover and inventory turnover speed up the cash cycle which provides
the company with better cash flow and decreases the need for outside financing , thus
decreasing interest expense. Furthermore, improvements in the receivables turnover
usually arise as a direct result of improvements in credit management and better
collection efforts. These improvements result in fewer defaults and decreases in bad
debts expense. Improvements in the inventory turnover improve profitability by
reducing carrying charges associated with stocking inventory (such as warehousing
costs). Improved inventory turnover also reduces the risk of merchandise not selling
and becoming obsolete or selling at reduced prices. Obsolete inventory lowers
profitability because the cost of this type of inventory has to be written off.
(d) Changes in the turnover ratios directly affect cash flow. Improvements in the
the company with better cash flow and less need for outside financing.

(e) There are several steps that Pampered Pets could consider to improve its receivables
and inventory turnover:
Receivables
o The company could establish credit policies and credit limits for certain
customers, if it doesn’t already have them.
o The company could initiate the use of a cash discount to encourage early
payment of receivables
o The company could more aggressively monitor collections to encourage

customers to pay on time.
Inventory
o Pampered Pets should monitor its inventory levels carefully and only reorder
when inventory is selling and additional supplies are required. If inventory is not
selling (e.g., not in favour or in season), it should mark it down quickly to get rid
of it rather than risk it not selling at all and having to pay carrying costs for
obsolete inventory.
o The company could limit the amount of inventory by improving its purchasing
relationships with suppliers. If inventory could be purchased more frequently,
high levels of inventory will not have to be carried and stored.
o Further to the above point, were it possible to move to a system where

inventory is only purchased as needed (called “just-in-time”), Pampered Pets
could reduce the amount of inventory it had to carry and improve the turnover
ratio. However, there is some risk to this option as sales could be lost if stock-
outs (which means shortages) occur.

PROBLEM 8-1B
(a) 1. Accounts Receivable ................................................ 1,600,000

Sales ............................................................... 1,600,000
2. Sales Returns and Allowances ................................. 250,000

Accounts Receivable ....................................... 250,000
3. Cash ........................................................................ 1,500,000

Accounts Receivable ....................................... 1,500,000
4. Accounts Receivable ................................................ 125,000

Interest Revenue ............................................. 125,000
5. Allowance for Doubtful Accounts .............................. 45,000

6. Accounts Receivable ................................................ 10,500

Allowance for Doubtful Accounts ..................... 10,500
Cash ........................................................................ 10,500

7. Bad Debts Expense .................................................. 24,500

Allowance for Doubtful Accounts............ 24,500
$25,000 – ($35,000 – $45,000 + $10,500) = $24,500
(b)

Bal. 480,000 Bal. 35,000
(1) 1,600,000 (2) 250,000 (5) 45,000 (6) 10,500
(4) 125,000 (3) 1,500,000 (7) 24,500
(6) 10,500 (5) 45,000
(6) 10,500
Bal. 410,000 Bal. 25,000

PROBLEM 8-1B (Continued)
(c) January 1, 2015

Accounts receivable ...................................................................... $480,000
Less: Allowance for doubtful accounts .......................................... 35,000
Net realizable value ....................................................................... $445,000
December 31, 2015

Accounts receivable ...................................................................... $410,000
Less: Allowance for doubtful accounts .......................................... 25,000
Net realizable value ....................................................................... $385,000
(d)
BORDEAUX INC.
December 31, 2015
Assets
Current assets
Accounts receivable .................................................. $410,000
Less: Allowance for doubtful accounts ...................... 25,000 $385,000
(e)
BORDEAUX INC.
Income Statement (partial)
Year Ended December 31, 2015
Sales .................................................................................. $1,600,000

Less: Sales returns and allowances ..................................... 250,000
Net sales .................................................................................................. $1,350,000
Operating expenses
Bad debts expense ........................................................................ 24,500
Other revenues and expenses
Interest revenue............................................................................. 125,000

PROBLEM 8-2B
(a) Accounts Receivable ..................................................... 800,000

Sales ......................................................................... 800,000
Cash .............................................................................. 723,000

(b) Allowance for Doubtful Accounts ................................... 21,000

(c) Accounts Receivable ..................................................... 3,500

Cash .............................................................................. 3,500

(d) Bad Debts Expense (see (e) below) .............................. 19,500

(e)
Accounts Receivable
Beg. Bal. 200,000
Sales 800,000 Collections 723,000
Recovery 3,500 Write off 21,000
Collections 3,500
End Bal. 256,000

Beg. Bal. 14,000
Write off 21,000 Recovery 3,500
Bad Debts 19,500
End Bal. 16,000
Before bad debts expense was recorded, the balance in the Allowance account was a debit
$3,500 ($14,000 – $21,000 + $3,500). To move this balance to a credit of $16,000 requires a
credit to the Allowance of $19,500 with an offsetting debit to Bad Debts Expense.

(f)
HUANG LTD.
Assets
Current assets
Accounts receivable .............................................................. $256,000
Net realizable value ................................................................ 240,000

PROBLEM 8-3B
Accounts Receivable
Beg. bal. (a) 27,750
(b) 250
225,000 230,000
End. bal. 22,500

Beg. bal. 1,000
250
Unadj. bal. 750
(c) 400
End. bal. (d) 1,150
Sales
(e) 225,000
Bad Debts Expense

(f) 400
(a) Solving for the opening Accounts Receivable balance (a) we get:
(a) + $225,000 – $230,000 – $250 (b) = $22,500
(a) = $27,750
(b) Write offs of accounts receivable obtained from reduction of allowance for doubtful
accounts $250.
(c) This amount represents the increase in the Allowance for Doubtful Accounts caused
by recorded bad debt expense:
Unadjusted balance $750 + (c) = $1,150 (we know the $1,150 balance (d) – it was
given) (c) = $400
(d) Allowance for doubtful accounts = $1,150 (given)
(e) Addition to Accounts receivable (arising from credit sales) = $225,000
(f) Bad debts expense = Adjustment to allowance for doubtful accounts = $400 (from (c))

PROBLEM 8-4B
(a) Total estimated allowance for doubtful accounts:
Estimated Estimated
0-30 days $110,000 1% $1,100
31-60 days 50,000 5% 2,500
61-90 days 20,000 10% 2,000
Over 90 days 12,500 20% 2,500
Total $192,500 $8,100
(b) (1)
Bad Debts Expense .................................................................. 13,100
($8,100 + $5,000 = $13,100)
(2)
If the allowance for doubtful accounts had an unadjusted credit balance of
$5,000, the bad debts expense in the entry above would be $3,100
($8,100 – $5,000)


Cash ......................................................................................... 1,500

(e) If Imagine used 4% of total accounts receivable rather than aging the individual
accounts to determine the allowance at year end, the bad debts expense adjustment
would be $12,700 [$7,700 ($192,500 × 4%) + $5,000]. If the allowance for doubtful
accounts had an unadjusted credit balance of $5,000, the bad debts expense in the
entry above would be $2,700. The answers to (c) – (d) would not change.
(f) Aging the individual accounts should produce a more accurate estimate of the net
realizable value of the accounts receivable. As the receivables get older, a higher
percentage is applied to them when calculating the uncollectable accounts. This is
more accurate because older receivables have a greater probability of not being
collected.

PROBLEM 8-5B
(a) Total estimated allowance balance at Dec. 31, 2014:
Estimated Estimated
0-30 days $220,000 3% $ 6,600
31-60 days 86,000 6% 5,160
61-90 days 52,000 12% 6,240
Over 90 days 22,000 20% 4,400
Total $380,000 $22,400
Total estimated allowance balance at Dec. 31, 2015:
Estimated Estimated
0-30 days $240,000 3% $ 7,200
31-60 days 104,000 6% 6,240
61-90 days 62,000 12% 7,440
Over 90 days 34,000 20% 6,800
Total $440,000 $27,680
Accounts receivable has increased and so has the allowance balance. The increase in the
accounts receivable appears to be spread throughout the aging analysis and is not
concentrated in any of the aging categories. Thus, the increase in the allowance is
attributable to a general increase in accounts receivable rather than to increased age.
(b) Bad Debts Expense .................................................................. 19,400

($22,400 – $3,000)

(d) Accounts Receivable ........................................................... 3,000

Cash ......................................................................................... 3,000


(e) Bad Debts Expense .................................................................. 30,280

$27,680 – balance in allowance before adjustment ($22,400 – $28,000 + $3,000)
(f) 2015 2014

Accounts receivable ................................................................. $440,000 $380,000
Less: Allowance for doubtful accounts ..................................... 27,680 22,400
Net realizable value ................................................................ $412,320 $357,600

PROBLEM 8-6B
Jan. 2 Notes Receivable ............................................................ 6,000

Cash ....................................................................... 6,000
5 Accounts Receivable ...................................................... 8,000

Sales ....................................................................... 8,000


Feb. 20 Cash ............................................................................... 60

Mar. 20 Cash ($8,000 + $60) ....................................................... 8,060

May 2 Cash ............................................................................... 6,160

Note Receivable ..................................................... 6,000

Aug. 1 Accounts Receivable ...................................................... 6,000

Sales ................................................................. 6,000

25 Allowance for Doubtful Notes.......................................... 3,000

Notes Receivable ............................................. 3,000
Sept. 30 Accounts Receivable ($6,000 × 24% × 2/12) .................. 240


PROBLEM 8-7B
(a) Aug. 1 Notes Receivable ...................................... 30,000

Accounts Receivable......................... 30,000

Interest Revenue ............................... 100
($30,000 × 4% × 1/12)
Sept. 1 Cash ......................................................... 100

Oct. 1 Cash .......................................................... 30,100

($30,000 × 4% × 1/12)
(b) Aug. 1 Accounts Payable ..................................... 30,000

Notes Payable ................................... 30,000
31 Interest Expense ($30,000 × 4% × 1/12)... 100

Interest Payable ................................ 100
Sept. 1 Interest Payable ........................................ 100

Cash.................................................. 100
Oct. 1 Notes Payable ........................................... 30,000

Interest Expense ....................................... 100
Cash ($30,000 × 4% × 1/12) ............. 30,100
(c) (1) Oct. 1 Accounts Receivable................................. 30,100

Interest Revenue ............................... 100
($30,000 × 4% × 1/12)
(2) Oct. 1 Allowance for Doubtful Notes .................... 30,000


PROBLEM 8-8B
(a) Total notes receivable are $58,000 and total interest receivable $918 at November 30,
2015:
Kootenay Inc. $17,000 × 6% × 8/12 = $680

Cassiar Ltd. 15,000 × 4% × 1/12 = 50
Namu Limited 6,000 × 7% × 3/12 = 105
Siska Corp. 20,000 × 5% × 1/12 = 83
Total $58,000 $918
(b) Dec. 1 Cash ($50 + $83) ...................................... 133

31 Allowance for Doubtful Notes ................... 6,105

Interest Receivable
($6,000 × 7% × 3/12) ........................ 105
31 Cash ......................................................... 17,765

Interest Receivable
($17,000 × 6% × 8/12) ...................... 680
Interest Revenue
($17,000 × 6% × 1/12) ...................... 85

Cassiar Ltd. $15,000 × 4% × 1/12 = $ 50
Siska Corp. $20,000 × 5% × 1/12 = 83
Total ............................................ $133
31 Bad Debt Expense .................................... 20,000

Allowance for Doubtful Notes............ 20,000


(c)
Interest Receivable Notes Receivable

Bal. See (a) 918 Dec. 1 133 Bal. See (a) 58,000 Dec. 31 6,000
Dec. 31 133 31 105 31 17,000
31 680
Bal. 133 Bal. 35,000
Allowance for Doubtful Notes

Bal. 0 Dec. 31 20,000
Bal. 20,000
(d)
KITIMAT CORPORATION
Balance Sheet (partial)
December 31, 2015
_________________________________________________________________________
Assets
Current assets
Notes receivable .......................................................... $35,000
Less: Allowance for doubtful notes .............................. 20,000 $15,000
Interest receivable ....................................................... 133

PROBLEM 8-9B
OUTAOUAIS INC.
January 31, 2015
(in thousands)
Assets
Current assets
Accounts receivable $2,468
Less: Allowance for doubtful accounts 268 $2,200
Notes receivable 50
Income tax receivable 20
Merchandise inventory 3,000
Supplies 50
Total current assets 5,320
Non-current assets
Notes receivable 300
Property, plant, and equipment
Land $200
Buildings $1,000
Less: Accumulated depreciation 250 750
Equipment $750
Less: Accumulated depreciation 375 375 1,325
Goodwill 100
Total assets $7,045

PROBLEM 8-10B
(a)
Rogers Shaw
(in millions) (in millions)
$12,486 $4,998
Receivables turnover ($1,693 + $1,665) ($472 + $461)
� � � �
2 2
= 7.4 times = 10.7 times
365 365
7.4 10.7
(b) Shaw’s receivables turnover was considerably better than that of Rogers’, which means
Shaw was more efficient than Rogers in collecting its receivables. While Rogers is
collecting their accounts receivable at a similar pace as that of the industry, it remains
considerably slower than Shaw’s.

PROBLEM 8-11B
(a) 2015 2014 2013
Average 365 365 365

collection period = 46 days = 52 days = 61 days
8 7 6
Days in 365 365 365

inventory = 61 days = 52 days = 46 days
6 7 8
(b) At first glance it appears that Tianjin’s liquidity had remained stable over the past year
since the company’s current ratio has remained at 1.5:1. However, the company is
taking less time to collect its accounts receivable as evidenced by the increasing
receivables turnover ratio and decreasing collection period. In contrast, it appears to
be moving its inventory less quickly as evidenced by the lower inventory turnover ratio
and increasing days in inventory. It is possible that the stable current ratio is due to the
fact that the improving collections and deteriorating inventory turnover ratios are
offsetting.
(c) Changes in the turnover ratios indirectly affect profitability. Improvements in the
the company with better cash flow and decreases the need for outside financing, thus
decreasing interest expense. Furthermore, improvements in the receivables turnover
usually arise as a direct result of improvements in credit management and better
collection efforts. These improvements result in fewer defaults and decreases in bad
debts expense. Improvements in the inventory turnover improve profitability by
reducing carrying charges associated with stocking inventory (such as warehousing
costs). Improved inventory turnover also reduces the risk of merchandise not selling
and becoming obsolete or selling at reduced prices. Obsolete inventory lowers
profitability because the cost of this type of inventory has to be written off.
(d) Changes in the turnover ratios directly affect cash flow. Improvements in the
the company with better cash flow and less need for outside financing.

(e) There are several steps that Tianjin might have taken to improve its receivables and
inventory turnover:
Receivables
o The company could establish credit policies and credit limits for certain
customers, if it doesn’t already have them.
o The company could initiate the use of a cash discount to encourage early
payment of receivables.
o The company could more aggressively monitor collections to encourage

customers to pay on time.
Inventory
o Tianjin should monitor its inventory levels carefully and only reorder when
inventory is selling and additional supplies are required. If inventory is not
selling (e.g., not in favour or in season), it should mark it down quickly to get rid
of it rather than risk it not selling at all and having to pay carrying costs for
obsolete inventory.
o The company could limit the amount of inventory by improving its purchasing
relationships with suppliers. If inventory could be purchased more frequently,
required inventory levels could be reduced.
o Further, were it possible to move to a system where inventory is only purchased

as needed (called “just-in-time”), Tianjin could reduce the amount of inventory it
had to carry and improve the turnover ratio. However, there is some risk to this
option as sales could be lost if stock-outs (which means shortages) occur.

BYP 8-1 FINANCIAL REPORTING
(a) Shoppers Drug Mart reports accounts receivable on its 2012 balance sheet.
(b)
($ in thousands) 2012 2011
Receivables $10,781,848 22.4 $10,458,652 21.7

= =
turnover $469,683 + $493,338 times $493,338 + $470,935 times
2 2
Average 365 16 365 17

= =
collection period 22.4 days 21.7 days
(c) Shoppers Drug Mart has exhibited relatively consistent performance in the collection
of its accounts receivable. It showed a slight improvement in its receivables
management in 2012. It should also be noted that an average collection period of less
than 30 days is normally an excellent collection period, depending on the terms of
sale.

BYP 8-2 COMPARATIVE ANALYSIS
(a)
($ in
thousands) Shoppers Drug Mart Jean Coutu
Current $2,764,997 $421,900

= 1.2:1 = 1.6:1
ratio $2,334,917 $265,300
Receivables $10,781,848 22.4 $2,468,000 12.2

= times =
turnover $469,683 + $493,338 $199,600 + $206,500 times
2 2
Average 365 365

16 30
collection 22.4 = 12.2 =
days days
period
(b)
Ratio Shoppers Jean Coutu Industry
Current ratio 1.2:1 1.6:1 1.6:1
Receivables turnover 22.4 times 12.2 times 22.4 times
Average collection period 16 days 30 days 16 days
Shoppers Drug Mart demonstrates superior management of accounts receivable as

shown by its receivables turnover and average collection period ratios, which are better
than those of Jean Coutu and identical to the industry average. It should be noted that
Jean Coutu’s collection period is still a reasonable one at 30 days, assuming its terms of
sale are 30 days.
On the other hand, Shoppers Drug Mart’s current ratio is below that of Jean Coutu as
well as that of the industry average. Still it is above 1:1 so given that and its receivables
position, its overall liquidity appears to be better than that of Jean Coutu. Further
investigation as to why Shoppers Drug Mart’s current ratio is lower than that of Jean
Coutu and the industry is warranted (for example, is their inventory turnover slower?)
before concluding on its liquidity.

BYP 8-3 COMPARING IFRS AND ASPE
(a) Both Lava and Flow provide the information on the net realizable value of the trade
receivable, but Lava provides disclosure of the amount of the allowance for doubtful
accounts. Lava also provides more detail as to the aging of its accounts receivables,
which is useful in assessing credit risk. The analyst can see that over 70% ($1,322 ÷
$1,854) of Lava’s receivables are current in 2015.
(b) Since Lava follows IFRS, it is required to provide more information for the users of the
financial statements to help them to assess credit and collection risks and
management’s policies with respect to accounts receivable.
(c) Big Bank would want an aging analysis of Flow. In addition, here are some examples of
additional information Big Bank would need in order to assess credit risk are:
• Normal payment terms for the company and industry;

• An analysis by major customers;
• Details on how creditworthiness is evaluated; and
• Details on how Lava and Flow follow up on receivables that are past due for a
significant amount of time.

BYP 8-4 CRITICAL THINKING CASE
Note to instructors: All of the material supplementing this group activity, including a
suggested solution, can be found in the Collaborative Learning section of the Instructor
Resource site accompanying this textbook as well as in the Prepare and Present section of
WileyPLUS.
(a) Current ratio
2015: 1.6:1 ($10,600,000 ÷ $6,800,000)

2014: 2.1:1 ($10,500,000 ÷ $5,100,000)
Yes, the current ratio exceeds the bank’s requirement of a current ratio of 1.5:1 in both
years.
(b)

Bal. 2014 500,000
2015 write offs 100,000
Bal. 2015 400,000
Notes Receivable
Bal. 2014 2,000,000
2015 New notes 1,500,000 2015 Collections 800,000
Bal. 2015 2,700,000
(c) It is difficult to say whether the Allowance for Doubtful Accounts is adequate or not. It is
noteworthy that in 2014 the allowance was 10% of the royalties receivable ($500,000 ÷
$5,000,000). In 2015, after the write-off, the allowance is 6.7% of the royalties receivable
($400,000 ÷ $6,000,000). It is quite likely, given the increase in sales from $50 million to
$60 million and the increase in receivables from $5 million to $6 million, that the
allowance should also increase proportionately unless there is evidence to the contrary.
HHL should prepare an aging of its accounts (royalty) receivable and monitor its
collection history so that it can ensure that it provides for the appropriate level of
allowance.

BYP 8-4 (Continued)
(d) Yes, I believe an allowance should be recorded for notes receivable. As the notes are
due in one year, and all of the notes issued during 2015 which amounted to $1.5 million,
are still outstanding at the end of the year, we need to determine what happened to the
$2 million of notes that were outstanding at the beginning of the year. Since $800,000 of
these notes has been collected, the remaining $1.2 million ($2,700,000 − $1,500,000)
must have been dishonoured.
An argument can be made for an allowance being recorded for the full amount of the
$1.2 million dishonoured notes as past experience indicates that they will probably not
be collected. To record this, the following journal entry would be required:
Bad Debt Expense 1,200,000

Allowance for Doubtful Notes 1,200,000
One could possibly argue that the outstanding notes that were issued in 2015 amounting
to $1.5 million should have an allowance provided for them but at this time it may be
difficult to quantify this.
(e) If an Allowance for Doubtful Notes of $1.2 million is recorded, this would lower current
assets to $9.4 million ($10.6 million − $1.2 million) and the current ratio would now be
1.4:1 ($9.4 million ÷ $6.8 million). This would violate the terms on the bank loan.
(f) Accounts receivable turnover ratio (calculated using ending balances rather than
average balances)
2015: 10.0 times ($60,000,000 ÷ $6,000,000)

2014: 10.0 times ($50,000,000 ÷ $5,000,000)
The liquidity of the company has deteriorated based on the decline in the current ratio
calculated in (a). The cash balance is lower in 2015 while current liabilities are higher.
While the accounts (royalties) receivables turnover is unchanged in 2015, the
collectability of the accounts receivable as well as the notes receivable arising from
dishonoured notes is suspect because of the reluctance of the vice president to write off
dishonoured notes.

BYP 8-5 ETHICS CASE
(a) The stakeholders in this situation are:
The controller of Encounter Limited, Sam Wong

The president of Encounter Limited, Suzanne Chen
The company’s bank
The shareholders of this publicly traded company
Any other parties who rely upon the company’s financial statements
(b) The president of the company likely made the request to improve the current ratio to
show that the company is more liquid than it really is for the benefit of the bank. In this
way, the bank’s expectations will be met.
(c) Yes. The controller has an ethical dilemma—should Sam follow the president's
“suggestion” and prepare misleading financial statements by understating the allowance
for doubtful accounts and bad debt expense or should Sam attempt to stand up to and
possibly anger the president by preparing a fair (realistic) statement of financial
position.
(d) No. Encounter’s liquidity should be a product of fair financial statements. The controller
should not prepare financial statements with the objective of achieving or sustaining a
predetermined level of liquidity. The current ratio should be a product of proper
estimates made by management and operating results, not of “creative accounting”.

BYP 8-6 “ALL ABOUT YOU” ACTIVITY
(a)

BYP 8-6 (Continued)
(b) Answers will vary by student.
(c) Money obtained from your credit cards is not “free” money. Your friend will be
responsible for making minimum monthly payments and ultimately paying for the TV.
Interest will accumulate at a possible average rate of 20% yearly on the monthly balance
that is outstanding on his credit card. If those minimum monthly payments are not met,
then there is a strong likelihood that your friend’s credit score will be impacted.

BYP 8-7 SERIAL CASE
(a) Advantages to Koebel’s of reducing credit from 30 to 15 days:
• If in fact Coffee Beans can meet these credit terms, cash flow will increase and the
stress of ensuring that there are adequate funds on hand to purchase additional
inventory and pay for salaries and wages will be alleviated.
• Will provide Koebel’s a consistent credit policy that they are able to use. When
negotiating with Biscuits, for example, they will be able to say that they have a credit
policy of 15 days which is the same as what is being offered to their current
customers.
Disadvantages to Koebel’s of reducing credit from 30 to 15 days:
• 30 days may be a consistent policy in this industry and Coffee Beans may chose to go
elsewhere to purchase their cupcake requirements (as may other customers such as
Biscuits). Not only would Koebel’s lose their current contractual commitment but the
additional sales they are expecting to earn in the future.
• Coffee Beans may in fact negotiate a 15 day settlement and still take 45 days to pay.
The 45 days it is taking Coffee Beans to pay could be a result of their cash flow
requirements.
(b) Implications of the doubling of cupcake requirements on a weekly basis and credit terms
remaining at 30 days
Natalie, Brian and Janet must carefully consider their cash flow requirements on a weekly
basis. Inventory requirements to prepare cupcakes will increase. There may be a need to
hire additional staff (bakers for example) as a result of the planned increase in sales. If so,
this amount will also have to be considered when determining cash flows. Utility costs,
such as electricity will also increase and expenditures for more equipment may also be
necessary. Finally, invoices are now being prepared on a weekly basis. Time will have to
be spent on ensuring that invoices are appropriately prepared, checked, sent and followed
up if they are not paid for on a timely basis.

BYP 8-7 (Continued)

(c) Alternatives:
• Consider not extending credit. Perhaps Coffee Beans would consider payment by
using a credit card. Some businesses do use credit cards to pay for goods purchased.
Although this is a valid alternative it may not be one that Coffee Beans would consider.
Many organizations want a consistent alternative when paying for product purchased.
Coffee Beans may not want to implement this strategy. Koebel’s would also have to
consider the costs of accepting payment by credit card. The issuing credit card
company or bank may charge a processing fee. This may be more costly than allowing
Coffee Beans to pay in 45 days.
• Consider the sale of receivables to an organization that will collect the receivable (a
factor). Although a valid alternative, this one may be a costly one to Koebel’s as the
fees charged by a factor can be significant.
• Consider providing Coffee Beans an incentive or discount to paying quickly, for

example a 2% discount. Again, a valid alternative but a costly one to Koebel’s. This
cost should be compared to the cost of credit card fees.
• No change. Consider discussions with Frank to encourage the 30 days payment

period instead of 45. Perhaps, arrangements could be made to have the funds
transferred from Coffee Beans bank account to Koebel’s bank account. This way funds
could be transferred on a timely basis.

Legal Notice
Copyright
Copyright © 2014 by John Wiley & Sons Canada, Ltd. or related companies. All rights
reserved.
The data contained in these files are protected by copyright. This manual is furnished under
licence and may be used only in accordance with the terms of such licence.
The material provided herein may not be downloaded, reproduced, stored in a retrieval
system, modified, made available on a network, used to create derivative works, or
transmitted in any form or by any means, electronic, mechanical, photocopying, recording,
scanning, or otherwise without the prior written permission of John Wiley & Sons Canada,
Ltd.
(MMXIII xi FI)


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ASSIGNMENT CLASSIFICATION TABLE

1. Identify the types 1, 2, 3, 4, 1, 2, 3, 4, 1, 2 1A, 2A, 1B, 2B, 1, 5, 6

2. Account for bad 6, 7, 8, 9, 5, 6, 7, 8 3, 4, 5, 6 1A, 2A, 1B, 2B, 3, 4

4. Explain the 17, 18, 19 14 10, 11 1A, 2A, 1B, 2B, 3

5. Apply the 20, 21, 15 12, 13 10A, 11A 10B, 11B 1, 2, 4,

Solutions Manual 8-1 Chapter 8

ASSIGNMENT CHARACTERISTICS TABLE

Problem Difficulty Time

1A Record receivables and bad debts transactions; Moderate 25-35

2A Record receivables and bad debts; show statement Moderate 25-35

3A Determine missing amounts. Complex 15-20

4A Prepare aging schedule and record bad debts. Moderate 20-30

6A Record receivables transactions. Moderate 20-30

7A Record notes receivable and payable transactions. Moderate 20-30

8A Record notes receivable transactions; show Moderate 30-35

9A Prepare assets section. Moderate 20-30

10A Calculate and evaluate ratios. Moderate 15-20

11A Evaluate liquidity. Moderate 15-20

1B Record receivables and bad debts; show statement Moderate 25-35

2B Record receivables and bad debts; show statement Moderate 25-35

3B Determine missing amounts. Complex 15-20

4B Prepare aging schedule and record bad debts. Moderate 20-30

Solutions Manual 8-2 Chapter 8

ASSIGNMENT CHARACTERISTICS TABLE (Continued)

Problem Difficulty Time

6B Record receivables transactions. Moderate 20-30

7B Record notes receivable and payable transactions. Moderate 20-30

8B Record notes receivable transactions; show Moderate 30-35

9B Prepare assets section. Moderate 20-30

10B Calculate and evaluate ratios. Moderate 15-20

11B Evaluate liquidity. Moderate 15-20

Solutions Manual 8-3 Chapter 8

(a) Type (b) Examples

(2) Notes receivable Notes receivables from trade customers

(3) Other receivables Interest receivable, loans to company officers, advances to

3. (a) For a service company, a receivable is recorded when service is provided on

Solutions Manual 8-4 Chapter 8

Answers to Questions (Continued)

Solutions Manual 8-5 Chapter 8

Answers to Questions (Continued)

Solutions Manual 8-6 Chapter 8

Answers to Questions (Continued)

Solutions Manual 8-7 Chapter 8

Answers to Questions (Continued)

18. Current assets

19. (a) Account (b) Classification

20. The steps involved in receivables management are:

Solutions Manual 8-8 Chapter 8

Answers to Questions (Continued)

Canam’s receivable management has worsened. The receivables turnover has

Solutions Manual 8-9 Chapter 8

SOLUTIONS TO BRIEF EXERCISES

(a) Other receivables

BRIEF EXERCISE 8-2

(a) July 1 Accounts Receivable ................................................. 42,000

Cost of Goods Sold ................................................... 30,000

(b) July 8 Sales Returns and Allowances .................................. 7,200

Merchandise Inventory .............................................. 4,320

(c) July 9 Cash ($34,800 – $696).............................................. 34,104

(d) Aug. 31 Accounts Receivable ................................................. 696

Solutions Manual 8-10 Chapter 8

BRIEF EXERCISE 8-3

Bank Charges Expense ............................................................ 2