Chapter 8 Demonstration Problems Receivables Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall8-1

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall

Chapter 8

Demonstration Problems

Receivables

8-1

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 8-2

At January 1, 2014,Silver Line Inc. had Accounts Receivable of $50,000 and Allowance for Bad Debts had a credit balance of $5,000. During the year, Silver Line recorded the following:

E8-17D

a. Sales of $200,000 ($170,000 on account; $30,000 for cash).

b. Collections on account, $130,000.

c. Write-offs of uncollectible receivables, $4,000

Requirements

1. Journalize Silver Line's transactions that occurred during 2014. The company uses the allowance method.

2. Post Silver Line's transactions to the Accounts Receivable and Allowance for Bad Debts T-accounts.

3. Journalize Silver Line's adjustment to record bad debts expense assuming Silver Line estimates bad debts as 1% of credit sales. Post the adjustment to the appropriate.

4. Show how Silver Line will report net accounts receivable on its December 31, 2014 balance sheet.


a. Sales of $200,000 ($170,000 on account; $30,000 for cash).

E8-17D—Req.1

Date Accounts and Explanation Debit Credit

2014

a. Accounts Receivable 170,000

Cash 30,000

Sales Revenue 200,000


b. Collections on account, $130,000.

E8-17D—Req.1


2014

b. Cash 130,000

Accounts Receivables 130,000


c. Write-offs of uncollectible receivables, $4,000.

E8-17D—Req.1


2014

c. Allowance for Bad Debts 4,000

Accounts Receivables 4,000


E8-17D—Req.2

Accounts Receivable

Jan. 1, 2014, Bal. 50,000 130,000 Collections

Net credit sales 170,000 4,000 Write-offs

Unadj. Bal . 86,000

Dec. 31, 2014, Bal. 86,000

Allowance for Bad Debts

5,000 Jan. 1, 2014, Bal.

Write-offs 4,000

1,000 Unadj. Bal.


To record bad debts expense assuming Silver Line estimates bad debts as 1% of credit sales.

E8-17D—Req.3


2014

Dec.31 Bad Debts Expense 1,700

Allowance for Bad Debts 1,700

1% × 170,000 = 1,700


E8-17D—Req.3

Allowance for Bad Debts

5,000 Jan. 1, 2014, Bal.

Write-offs 4,000

1,0001,700

Unadj. Bal.Adj.

2,700 Jan. 1, 2014, Bal.

Bad Debts Expense

Jan. 1, 2014, Bal. 0

Adj. 1,700

Dec. 31, 2014, Bal. 1,700


E8-17D—Req.4

SILVER LINE INC.Balance Sheet−Partial

December 31, 2014Assets

Current Assets: Accounts Receivable $86,000

Less: Allowance for Bad Debts (2,700) $83,300

Accounts Receivables $86,000Allowance for Bad Debts 2,700


New Trend Time House reports the following:

E8-21D

2013

May. 4 Recorded credit card sales of $107,000, net of processor fee of 3%.

Sept. 1 Loaned $17,000 to Morrison, an executive with the company, on a one-year, 15% note.

Dec. 31 Accrued interest revenue on the Morrison note.

2014

Sept. 1 Collected the maturity value of the Morrison note.

Journalize all entries required for New Trend Time House.


May. 4 Recorded credit card sales of $200,000, net of processor fee of 3%.

E8-21D


2013

May. 4 Cash 192,000

Credit Card Expense ($200,000 × 0.04) 8,000

Sales Revenue 200,000

Record sales for the month.


Sept. 1 Loaned $30,000 to Morrison, an executive with the company, on a one-year, 17% note.

E8-21D


2013

Sept. 1 Notes Receivable—Morrison 30,000

Cash 30,000

Recorded loan to employee.


Dec. 31 Accrued interest revenue on the Morrison note.

E8-21D


2013

Dec. 31 Interest Receivable 1,700

Interest Revenue 1,700

($30,000 × 0.17 x 4/12)

Accrued interest earned on Morrison note.


Sept. 1 Collected the maturity value of the Morrison note.

E8-21D


2014

Sept. 1 Cash ($30,000 + $3,400 + $1,700) 35,100

Interest Receivable 1,700

Interest Revenue ($30,000 × 0.17× 8/12) 3,400

Notes Receivable—Morrison 30,000

Collected note and interest from Morrison.


Comfort Furniture reported the following amounts in its 2014 financial statements. The 2013 figures are given for comparison.

E8-25D

2014 2013Current Assets: Cash $15,000 $20,000 Short-term Investments 40,000 18,000 Accounts Receivable $70,000 $80,000

Less: Allowance for Bad Debts

(7,000)

63,000 (8,000) 72,000 Merchandise Inventory 250,000 230,000 Prepaid Insurance 8,000 8,000Total Current Assets $376,000 $348,000 Total Current Liabilities $230,000 $200,000 Net Sales (all on account) $820,000 $780,000


E8-25D

Requirements

1. Calculate Comfort’s acid-test ratio for 2014. (Round to two decimals.) Determine whether Comfort’s acid-test ratio improved or deteriorated from 2013 to 2014. How does Comfort’s acid-test ratio compare with the industry average of 0.60?

2. Calculate Comfort’s accounts receivable turnover ratio. (Round to two decimals.) How does Comfort’s ratio compare to the industry average receivable turnover of 10?

3. Calculate the days’ sales in receivables for 2014. (Round to the nearest day.) How do the results compare with Comfort’s credit terms of net 30?


P8-25D—Req.1

Acid-test ratio﴾2014﴿

═ Cash + Short-term investments + Net current receivables Total current liabilities

═ ($15,000 + $40,000 + $63,000)($230,000)

═ $118,000$230,000

═ 0.51*

*rounded

2014Cash $15,000 Short-term investments 40,000 Accounts Receivable 70,000 Allowance for Bad Debts 7,000 Total Current Liabilities 230,000


P8-25D—Req.1



═ ($20,000 + $18,000 + $72,000)($200,000)

═ $110,000$200,000

═ 0.55

2014 2013Cash $15,000 $20,000 Short-term investments 40,000 18,000 Accounts Receivable 70,000 80,000 Allowance for Bad Debts 7,000 8,000 Total Current Liabilities 230,000 200,000


P8-25D—Req.1



═ ($20,000 + $18,000 + $72,000)($200,000)

═ $110,000$200,000

═ 0.55

The acid-test ratio has deteriorated from 0.55 in 2013 to 0.51 in 2014. The company’s acid-test ratio is a little worse than the industry average of 0.60.

2014 2013Cash $15,000 $20,000 Short-term investments 40,000 18,000 Accounts Receivable 70,000 80,000 Allowance for Bad Debts 7,000 8,000 Total Current Liabilities 230,000 200,000


P8-25D—Req.2

Accounts Receivable Turnover Ratio

═ Net credit salesAverage net accounts receivables

═ $820,000$67,500

═ 12.15

Net Sales (all on account) $820,000 Accounts Receivable-2014 70,000 Accounts Receivable-2013 80,000 Allowance for Bad Debts-2014 7,000 Allowance for Bad Debts-2013 8,000


P8-25D—Req.2



═ $820,000$67,500

═ 12.15

The company’s accounts receivable turnover ratio is better than the industry average of 10.



P8-25D—Req.2



═ $820,000$67,500

═ 12.15


Days’ Sales in Receivables ═ 365 daysAccounts receivable turnover ratio

═ 365 days12.15

═ 30 days


P8-25D—Req.2


Days’ Sales in Receivables ═ 365 daysAccounts receivable turnover ratio

═ 365 days12.15

═ 30 days

Comfort’s days’ sales in receivables calculation is same as the company’s net 30-day credit period.

End of Chapter 8

8-24Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall

Documents

Chapter 8 Demonstration Problems Receivables Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall8-1