BUS312A/612A

Financial Reporting I

Homework 10.8.2014

Receivables

Chapter 7

E7-3 (Financial Statement Presentation of Receivables) Jim Carrie Company

shows a balance of $181,140 in the Accounts Receivable account on December 31,

2013. The balance consists of the following.

How would the information above be shown on Jim Carrie’s balance sheet on December 31,

2013?

Installment accounts due in 2014 $23,000

Installment accounts due after 2014 34,000

Overpayments to creditors 2,640

Due from regular customers, of which $40,000 represents

accounts pledged as security for a bank loan 79,000

Advances to employees 1,500

Advance to subsidiary company (due in 2015) 81,000 .

Case 7-1:

(a) Deficiencies of direct write-off method?

(b) Two allowance methods, and justification for each:

(c) How should Simms account for the collection of the specific

accounts previously written off as uncollectible?

P7-3 (Bad Debt Reporting-Aging) Manilow Corporation operates in an industry with

high rates of bad debts. Before any year-end adjustments, the Accounts Receivable

account was $555,000 and Allowance for Doubtful Accounts had a credit balance of

$40,000. The year-end balance reported in the balance sheet for the Allowance

account will be based on the aging schedule shown here:

a. What is the appropriate balance for Allowance for Doubtful Accounts at year-end?

b. Show how accounts receivable would be presented on the balance sheet.

c. What is the dollar effect of the year-end bad debt adjustment on the before-tax income?

Days Account Outstanding Amount Probability of Collection

Less than 16 days $300,000 .98

Between 16-30 days $100,000 .90

Between 31-45 days $ 80,000 .85

Between 46-60 days $ 40,000 .80

Between 61-75 days $ 20,000 .55

Over 75 days $ 15,000 .00

Balance Sheet Presentation

Classification

Valuation accounts contra to receivables

Disclose

– Assignment or pledging

– Loss contingencies

– Significant credit risk

Net Sales in Financial

Statements• Eli Lilly:

• NIKE

Accounts Receivables in the Financial Statements

• Income Statement – Bad Debts Expense is typically included in Selling Expense, which

is often combined with General and Administrative Expense (SG&A)

• Balance Sheet – Accounts Receivable may be shown in any one of the following ways:

WALMART:

NIKE Balance Sheet and footnote:

WALMART footnote:

Eli Lilly footnote:

Excerpt from Coca Cola’s 2011 10-K is a typical footnote disclosure of the

activity in the Allowance for Doubtful Accounts:

Coca Cola Balance Sheet disclosures for 2011 and 2010:

• Cash Flow Statement (Indirect Method) – may be shown as an adjustment to net

income for the change in Accounts Receivable, Net, such as with Eli Lilly below:

Or as a separate adjustment for the Provision for Bad Debts and the

remaining change in Accounts Receivable:

Disposition

Sale or Factoring

– without recourse

– with recourse

Factoring Example

On 5/1, Dexter, Inc. factored $800,000 of A/R with Quick Finance without recourse. Under the arrangement,

Dexter was to handle disputes concerning service, and Quick Finance was to make the collections, handle

the sales discounts, and absorb the credit losses. Quick Finance assessed a 6% finance charge and

retained 2% to cover sales discounts.

1. Dexter’s JE on May 1?

2. Quick Finance’s JE on May 1?

3. If Dexter factors the $800,000 of A/R with Quick Finance with recourse, and the recourse provision has a

fair value of $14,000, what is Dexter’s JE on May 1?

.

E7-12 Presented below is information related to James Garfield Corp.

July 1 Garfield sold Harding merchandise having a sales price of $80,000 at 2/10,

net/60. Garfield records its sales and receivable net.

5 Accounts receivable of $9,000 (gross) are factored with Jackson Credit Corp.

Without recourse at a finance charge of 9%. Cash is received for the proceeds;

collections are handled by the finance company. (all past the discount period).

9 Specific accounts receivable of $9,000 (gross) are pledged to Landon Credit

Corp. as security for a loan of $6,000 at a finance charge of 6% of the amount of

the loan. The finance company will make the collections. (All past the discount

period).

Dec. 29 Harding notifies Garfield that it is bankrupt and will pay only 10%.

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