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CHAPTER 9: Accounting for receivables
ANSWERS TO QUESTIONS
1. Accounts receivable are amounts owed by customers on account. They result from the sale of goods and services in the normal course of business operations (i.e. in trade). Notes receivable represent claims that are evidenced by formal instruments of credit.
4. The essential features of the allowance method of accounting for impairment of receivables are:
(1) Impaired accounts receivable are estimated and matched against revenue in the same accounting period in which the revenue occurred.
(2) Estimated uncollectables are debited to Bad Debts Expense and credited to Allowance for Impairment
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Group Work – Chapter 7
1. Assume McGregor Inc. has the following account balances at December 31, 2014 – before adjusting entries:
Refer to the information above for McGregor
a. If McGregor uses the Balance Sheet Approach and estimates its bad debt for the year to be 6% of the Accounts Receivable balance, prepare the adjusting journal entry as of December 31, 2014.
[54,000 * .06 = 3,240]
Bad Debt Expense 3,740
Allowance For Doubtful Accounts 3,740
b. What is the Net Realizable Value of Accounts Receivable that will be reported on the December 31, 2014 Balance Sheet after the adjusting entry is posted?
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| |Moderate | |10–15 |
ANSWERS TO QUESTIONS
1. Accounts receivable are amounts owed by customers on account. They result from the sale of goods and services. Notes receivable represent claims that are evidenced by formal instruments of credit.
2. Other receivables include nontrade receivables such as interest receivable, loans to company officers, advances to employees, and income taxes refundable.
3. Accounts Receivable 40
Interest Revenue 40
4. The essential features of the allowance method of accounting for bad debts are:
(1) Uncollectible accounts receivable are estimated and matched against
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Days Account Outstanding > 75 days, has amount = $15,000, Expected Precentage Uncollectible=0% would be written off immediately and not be considered when determining the proper amount of the Allowance for Doubtful Accounts.
Allowance for Doubtful Accounts.|$ 51,750|
Net Accounts Receivable|$683,250|
* Account Receivable= $750000 - $ 15.000 = $735.000
c. The year-end bad debt adjustment would decrease the year’s before-tax income by $29,250, as shown
Estimated amount required in the Allowance for Doubtful Accounts|$51,750|
Balance in the account after write-off of bad accounts but before adjustment|$22,500|
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Date: October 9, 2013
Subject: Notes receivable from related parties
While testing accounts receivable, it has come to my attention that there are some issues regarding notes receivable owed by family members of Mr. Sigar. Because these notes were issued to individuals directly related to Mr. Sigar, there are some additional considerations that must be taken into account when recording and classifying these notes.
According to FASB accounting standards codification 850-10-50-2, notes or accounts receivable from officers, employees or affiliated entities must be shown separately and not included under a general heading such as notes receivable or
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YOUR NEXT QUIZ (ON TUE) WILL BE OVER ACCOUNTS AND NOTES RECEIVABLE AND FIXED ASSETS
FOR ACCOUNTS RECEIVABLE:
HOW TO CALCULATE AND RECORD BAD DEBTS FROM AN AGING SCHEDULE
JOURNAL ENTRY TO FACTOR AN ACCOUNT RECEIVABLE
WRITEOFF OF A BAD DEBT
FOR NOTES RECEIVABLE
KNOW HOW THEY DIFFER FROM ACCOUNTS RECEIVABLE
KNOW THAT STRAIGHT LINE, DECLINING BALANCE, MACRS AND UNITS OF ACTIVITY ARE ALL DEPRECIATION METHODS
KNOW HOW TO CALCULATE STRAIGHT LINE AND DOUBLE DECLINING BALANCE DEPRECIATION FOR THE FIRST TWO YEARS OF AN ASSET’S LIFE
KNOW WHAT BOOK VALUE AND SALVAGE VALLUE MEAN
KNOW HOW TO RECORD SALE AND DISPOSAL OF FIXED ASSETS
Practice questions for bonus quiz two. The
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CHAPTER 6: CASH, TEMPORARY INVESTMENTS, ACCOUNTS RECEIVABLE and NOTES RECEIVABLE PROBLEM SOLUTIONS
Assessing Your Recall
Probable Future Value – The probable future value in cash is the ability of the cash to be exchanged for goods and services in the future.
Ownership – Ownership is evidenced by possession of currency and by the right to control bank accounts.
Probable Future Value - The probable future value in temporary investments is the cash payments that will be received from the investments in the future. These payments take the form of dividends in the case of shares and interest in the case of debt as well as the ultimate sales price of the
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Ethics in Accounting
In this case without reclassification of accounts receivable, net cash that is utilized in operation is given as;
|Net Income |$60000 |
|Decrease or (Increase) in accounts receivable |($80000) |
|Net amount provided in operation |($20000) |
If there is reclassification as anticipated, the net
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Multiple Choice 1.10 – p.128
1) Retained Earnings is not
a) Increased by net income
b) Decreased by expenses
c) Increased by revenues
d) Decreased by dividends declared
e)*** Decreased by gains and losses
2) Which of the following transactions resulted in a $35,000 increase in assets and a $35,000 increase in liabilities?
a. Collected accounts receivable of $35,000
b. Paid accounts payable of $35,000
c.*** Purchased land for $50,000, paying $15,000 in cash as a down payment and signing a note payable for the balance
d. Purchased on account, and used, $35,000 worth of office supplies during the period
e. Reclassified a $35,000 account receivable as a note receivable when the
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Here are some excerpts from the model solution to UpBeat that discuss four possible alternative solutions to the issues raised in this case.
For each of the transfer provisions included in the agreement, determine whether the provision would preclude sales accounting.
Alternative 1 — Fail sale accounting criteria because of Transfer Provision 1.
ASC 860-10-40-5(b) requires that the bank have the right to pledge or exchange the accounts receivable it received and that no condition both “constrains [the bank] from taking advantage of its right to pledge or exchange [the receivables and] provides more than a trivial benefit” to UpBeat Inc. Transfer Provision
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turnover (cost of goods sold/finished goods inventory) for 2006 and 2007:
| COGS | / | Finished goods | = | Finished Goods Turnover |
2006 | $619,832 | | $175,117 | | 3.54 times per year |
2007 | $631,368 | | $168,884 | | 3.74 times per year |
The finished goods inventory turnover ratio measures the cycle of finished goods inventory from when it is moved into inventory from work in progress until it is sold as finished goods.
Callaway’s finished goods inventory turnover improved in 2007 over 2006, meaning that finished goods cycled out of inventory due to sales at a faster rate in 2007 than in 2006.
Part B: Accounts Receivable
1 a. Journal entry:
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ACCT504 - Case 1 - Part A
Purchased Supplies on Account
Purchased equipment on Account
Provided service for Cash
Purchase Land with Cash
Jun 11 Accounts Receivable
Provided Service on Account
Jun 16 Accounts Payable
Parcial payment on account for Equipment
Jun 17 Utilities Expense
Paid for Telephone Utility Expense
Jun 18 Cash
Received Cash on Account
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CHAPTER 2: Recording Process ( SWD: Lecture Review)
What is an account?
An account is an accounting record of increases and decreases in a specific asset, liability, or owner’s equity item. For
example, Softbyte (the company discussed in Chapter 1) would have separate accounts for Cash, Accounts
Receivable, Accounts Payable, Service Revenue, and Salaries Expense. In its simplest form, an account consists of
three parts: (1) a title, (2) a left or debit side, and (3) a right or credit side. Because the format of an account
resembles the letter T, we refer to it as a T account.
Debits and Credits
The terms debit and credit are directional signals: Debit indicates left, and credit indicates
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U04a1 – UNIT 4 – INVESTMENTS IN INVENTORY AND ACCOUNTS RECEIVABLE –
I. How Is Inventory Turnover Calculated?
Inventory turnover ratio reflects how many times average inventory was produced and sold during the period (Libby et al). It means that it measures the number of times a company sells its inventory during the year. It is calculated using this formula:
Inventory Turnover Ratio = Cost of goods sold (COGS).
A high inventory turnover ratio indicated that the product is selling well. The product moves quickly through the production process to the ultimate customer
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benefit of that to the small business owner of manager is that it provides a working capital cushion that generates cash to meet short-term obligations and therefore gives the company flexibility in meeting its obligations, paying its people, and gives it the opportunity to take advantage of market conditions.
The two other measurements of liquidity are very important to a business manager and/or owner. And one relates to the accounts receivable and the other relates to the inventory. And there is a ratio that relates to the number of days that the receivables – accounts receivable are outstanding. And the reason I mention this is accounts receivable and inventory, for most small businesses
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illustration of the likely journal entries.)
Accounts Receivable $4,600
To determine if the balance in this account is accurate the accountant might review the detailed listing of customers who have not paid their invoices for goods or services. (This is often referred to as the amount of open or unpaid sales invoices and is often found in the accounts receivable subsidiary ledger.) When those open invoices are sorted according to the date of the sale, the company can tell how old the receivables are. Such a report is referred to as an aging of accounts receivable. Let's assume the review indicates that the preliminary balance in Accounts Receivable of $4,600 is accurate as far as the amounts that
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Finance : Chapter 3 Assigned Problems Solved! 1. Transactions.
NLF Shares are issued for cash. Goods for inventory are sold for cash. Goods from inventory are sold on account. A fixed asset is sold for cash for less than book value. A fixed asset is sold for cash for more than book value. Corporate income tax is paid. Payment is made to trade creditors. Cash is obtained through a short-term bank loan. Cash is obtained through a long-term bank loan. A cash dividend is declared and paid. Accounts receivable are collected. Merchandise is purchased on account. Cash advances are made to employees. Minority interest in a firm is acquired for cash. Equipment is acquired for cash. + + + + + 0 0 0
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cash flow statement.
Alternative 2 The acquisition of property, plant, and equipment on account should not be reflected in the statement of cash flows until actual payments have been made is the correct alternative.
3. Sale of Accounts Receivable
Accounts receivable securitization is a popular form of off balance sheet financing. Such transactions are carried out by selling accounts receivable and receiving cash in return. These accounts receivable are due but still not collected. By creating a special purpose entity, the entity arranges the finance for purchasing the accounts receivable by issuing commercial paper backed by future stream of cash to be collected from the customers.
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ACC 557 MIDTERM EXAM PART 2
Net income is gross profit less
• financing expenses.
• operating expenses.
• other expenses and losses.
• other expenses.
On November 2, 2014, Kasdan Company has cash sales of $6,000 from merchandise having a cost of $3,600. The entries to record the day's cash sales will include:
• a $3,600 credit to Cost of Goods Sold.
• a $6,000 credit to Cash.
• a $3,600 credit to Inventory.
• d a $6,000 debit to Accounts Receivable.
Glenn Company purchased merchandise inventory with an invoice price of $9,000 and credit terms of 2/10, n/30. What is the net cost of the goods if Glenn Company pays within the
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Problem Set 1
Problem Set 1
(Chapter 1 - P1-3A)
On June 1, Beardsley Service Co. was started with an initial investment in the company of $22,100 cash. Here are the assets and liabilities of the company at June 30, and the revenues and expenses for the month of June, its first month of operations:
Cash | $ 4,600 | Notes payable | $12,000 |
Accounts receivable | 4,000 | Accounts payable | 500 |
Service revenue | 7,500 | Supplies expense | 1,000 |
Supplies | 2,400 | Maintenance and repairs expense | 600 |
Advertising expense | 400 | Utilities expense | 300 |
Equipment | 26,000 | Salaries and wages expense | 1,400 |
In June, the company issued no additional stock
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Problems – Chapter 16
1. Your consulting firm was recently hired to improve the performance of Shin-Soenen Inc, which is highly profitable but has been experiencing cash shortages due to its high growth rate. As one part of your analysis, you want to determine the firm’s cash conversion cycle. Using the following information and a 365-day year, what is the firm’s present cash conversion cycle?
Average inventory = $75,000
Annual sales = $600,000
Annual cost of goods sold = $360,000
Average accounts receivable = $160,000
Average accounts payable = $25,000
Cash Conversion Cycle:
Inventory conversion period (ICP) = Average inventory / Cost of goods sold per day
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at a convention Unearned Revenue
e The payment in part (d) from the client's point of view Prepaid Expense
f Amounts paid on June 30 for a 1-year insurance policy Prepaid Expense
g The bank loan payable in part (a) None of the foregoing
h Repairs to the firm's copy machine, incurred and paid in June None of the foregoing
2. Understanding the closing process. Examine the following list of accounts:
Note Payable Accumulated Depreciation: Building
Alex Kenzy, Drawing Accounts Payable
Product Revenue Cash
Accounts Receivable Supplies Expense
Which of the preceding accounts
a. appear on a post-closing trial balance? Note Payable, Accounts
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Kudler Fine Foods: Automated Process of Accounting Information Systems
Learning Team A
Melanie Barnes, James Corradino, Carmelita Quito,
Heather Romano, & Shawndele Stafford
Accounting Information Systems/ACC542
Richard E. Westbay
May 22, 2010
Characteristics of the system that support the recommended course of action
Kudler Fine Foods is similar to any other business. Kudler uses payroll, accounts payable, accounts receivable, and inventory processes. Kudler would like to improve these four processes by incorporating the use of accounting information systems (AIS). The business must decide whether to purchase industry-specific software or develop customized software
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effectiveness in extending credit as well as collecting debts. The receivables turnover ratio is an activity ratio, measuring how efficiently a firm uses its assets.
This is the ratio of the number of times that accounts receivable amount is collected throughout the year. A high accounts receivable turnover ratio indicates a tight credit policy. A low accounts receivable turnover ratio indicates a collection problem, part of which may be due to bad debts.
Times Interest Earned Ratio
Tootsie Roll Industries Times Interest Earned Ratio is 145.24, Hersheys Company Ratios is 3.87，both of them have ability to meet its debt obligations, both of them more than 1 It is calculated by taking a
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73. The form of organization that has limited liability for the owners is a:
|Long-term debt |$ 190 |
|Cash | (1) |
|Total stockholders' equity | (2) |
|Total liabilities | (3) |
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) in accounts receivable
– Increase (+ decrease) in inventory
– Increase (+ decrease) in other assets, excluding cash and cash equivalents
+ Increase (– decrease) in accounts payable
+ Increase (– decrease) in other current liabilities, excluding notes payable and debt
Cash from operations
Cash from operations will be lower than working capital from operations when
current assets (e.g., accounts receivable, inventory, and other non‐cash assets)
increase and when current liabilities (e.g., accounts payable and other current
liabilities, excluding notes payable and debt) decrease.
Accounts receivable and inventory could be increasing
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2.1 Items of inventory destroyed or damaged
2.2 Collectability of accounts receivable
2.3 Unfulfilled contract to supply books
2.4 Replacement cost of damaged PP&E
2.5 Cleaning up costs in May 2011
2.6 Receiving Government Assistance
This research report provides an analysis and evaluation of the current state of Milley Ltd which is a book publisher located in Brisbane. The company's office and warehouse suffered damage during the recent floods and storms. The circumstance resulted accounting issues about the presentation
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d. Accounts Receivable
14. The accounting cycle is
a. the length of the time it takes to complete a set of financial statements after the books are closed
b. a process that begins with adjusting entries and ends with the preparation of the financial statements
c. applicable only to manual systems, not to computerized systems
d. the sequence of procedures used by a business to process economic information and produce financial statements
15. The accrual basis of accounting recognizes
a. revenues when cash is received
b. expenses when cash is paid
c. expenses when resources are consumed as
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: is the personal or real property that is given to provide security.
* Transferee: the receiving end of the asset.
* Transferor: the entity that is transferring the asset.
* Factoring: discounting accounts receivable on a nonrecourse, notification basis, so the account receivables can be sold to a transferee (the factor) with no recourse to the transferor.
* Transfer of Receivables with Recourse: in a transfer of a receivable (partial, full, or grouped) with recourse, the transferor is obligated under provisions to provide full or limited recourse to the transferee.
* Securitization: the process in which financial assets are turned into securities.
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month at a convention
e. The payment in part (d) from the client's point of view
f. Amounts paid on June 30 for a 1-year insurance policy
g. The bank loan payable in part (a)
None of the foregoing
h. Repairs to the firm's copy machine, incurred and paid in June
None of the foregoing
2. Understanding the closing process. Examine the following list of accounts:
Note Payable | Accumulated Depreciation: Building |
Alex Kenzy, Drawing | Accounts Payable |
Product Revenue | Cash |
Accounts Receivable | Supplies Expense |
Utility Expense |
Which of the preceding accounts
a. Appear on a post-closing trial balance
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. The Current Ratio ----decreased ----, due to ---assets ------, and increased----- in liabilities, which indicates a ---10% ------change in the ratio of assets to liabilities. The sharp drop in cash was offset by large rises in Net Accounts Receivable and Inventory, which are ordinarily unfavorable events also. However, if significant supplies were purchased (due to vendor discounts), the increase in Inventory could have been an astute business decision. The uncollected Accounts Receivables are troublesome.
1. The Quick Ratio --------. The main difference between the Current Ratio and the Quick Ratio is -9.49-------“inventory” in the Quick Ratio.
1. The Days Cash on Hand
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data relate to Preston Company as of December 31, 20XX:
Building $40,000 Accounts receivable $24,000
Cash 21,000 Loan payable 30,000
J. Preston, Capital 65,000 Land 21,000
Accounts payable ?
**Prepare a balance sheet as of December 31, 20XX. (See Exhibit 1.1 and 1.4)
Preston Company | |
Balance Sheet | |
December 31, 20XX | |
| | |
Assets | | Liabilities |