Accounting for Receivables Answer Key Part 7

8 - 62 Solution 247 (5 min.) (a) Beginning accounts receivable................................... Net credit sales.......................................................... Cash collections......................................................... Accounts written off.................................................... Ending accounts receivable....................................... (b) €1,200,000/[(€115,000 + €285,000)/2] = 6 (c) 365/6 = 60.8 days € 115,000 1,200,000 (1,000,000) (30,000) € 285,000 COMPLETION STATEMENTS 248. Accounts receivable, which are also referred to as ______________ receivables, are amounts owed by customers on account. Ans: N/A 249. The three primary accounting problems associated with accounts receivable are (1) ______________, (2) _______________, and (3) ______________ of accounts receivable. Ans: N/A 250. In order to encourage prompt payment of a trade receivable, companies often offer ______________ to customers. Ans: N/A 251. When credit sales are made, _________________ Expense is considered a normal and necessary risk of doing business on a credit basis. Ans: N/A 252. The two methods of accounting for uncollectible accounts are the ____________ method and the ______________ method. Ans: N/A 253. Allowance for Doubtful Accounts is a _____________ account which is ______________ from Accounts Receivable on the statement of financial position. Ans: N/A 254. When the allowance method is used to account for uncollectible accounts, ______________ is credited when an account is determined to be uncollectible. Ans: N/A 8 - 63 255. The net amount expected to be collected in cash from receivables is the_____________ Ans: N/A 256. The _________________ basis of estimating uncollectibles normally results in the best approximation of _______________ value and therefore emphasizes statement of financial position relationships. Ans: N/A 257. Sales resulting from the use of Visa and MasterCard are considered ______________ by the retailer. Ans: N/A 258. A finance company or bank that purchases receivables from businesses is known as a ______________. Ans: N/A 259. A 75-day note receivable dated June 10 would mature on ______________. Ans: N/A 260. Collection of a note receivable will result in a credit to ______________ for the face value of the note and a credit to ______________. Ans: N/A 261. A note which is not paid on the maturity date is said to be ______________. Ans: N/A Answers to Completion Statements 248. 249. 250. 251. 252. 253. 254. trade recognizing, valuing, disposing cash discounts Bad Debt allowance, direct write-off contra asset, deducted Accounts Receivable 255. 256. 257. 258. 259. 260. 261. Cash (net) realizable value percentage of receivables, cash realizable cash sales factor August 24 Notes Receivable, Interest Revenue dishonored 8 - 64 MATCHING 262. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E. Aging of receivables Direct write-off method Promissory note Trade receivables Maker F. G. H. I. J. Percentage of receivables basis Factoring Dishonored note Average collection period Credit card sales ______ 1. A written promise to pay a specified amount on demand or at a definite time. ______ 2. Sales that involve the customer, the retailer, and the credit card issuer. ______ 3. The party in a promissory note who is making the promise to pay. ______ 4. Amounts owed by customers from the sale of goods and services. ______ 5. A note which is not paid in full at maturity. ______ 6. Analysis of customer account balances by length of time they have been unpaid. ______ 7. Emphasizes expected cash realizable value of accounts receivable. ______ 8. Generally not acceptable for financial reporting purposes. ______ 9. The amount of time that a receivable is outstanding. ______ 10. Sale of accounts receivable to a factor. Ans: N/A Answers to Matching 1. 2. 3. 4. 5. C J E D H 6. 7. 8. 9. 10. A F B I G SHORT-ANSWER ESSAY QUESTIONS S-A E 263 Your roommate is uncertain about the advantages of a promissory note. Compare the advantages of a note receivable with those of an account receivable. Ans: N/A Solution 263 A promissory note gives the holder a stronger legal claim than one on an accounts receivable. As a result, it is easier to sell to another party. Promissory notes are negotiable instruments, which means they can be transferred to another party by endorsement. The holder of a promissory note also can earn interest. 8 - 65 S-A E 264 Your friend Stan has opened an office supply store. He will extend open credit to local businesses and is concerned about potential bad debts. What can Stan do to reduce potential bad debts? Ans: N/A Solution 264 1. Establish a reasonable policy for extending credit. The company needs to consider the risks of having either a ‘too tight’ or ‘too loose’ credit policy. Potential credit customers should be screened appropriately. 2. The company should decide upon the required payment period and communicate it to customers and employees. This period should be in line with the ones established by competitors. Also, employees should enforce the collection period but yet exercise judgment in unusual circumstances. 3. The company should evaluate the relationship among sales, accounts receivable, and cash collections to monitor trends and watch for potential problems. 4. The company should prepare an accounts receivable aging schedule on a regular basis. The collection department should follow up on past due accounts in a timely and professional manner. There should be a clear company policy regarding collection efforts and when to write off accounts. S-A E 265 Banks that issue credit cards generally charge retailers a fee of 2 to 4% of the amount of sale. List reasons why companies are willing to pay these fees. Ans: N/A Solution 265 1. The use of bank credit cards increases sales. Many people want to use credit cards to make purchases. If a company does not offer this service, customers will buy from a competitor that does offer the services. 2. Bad debts are absorbed by the credit card company. 3. The company receives its cash (less the fees) immediately. 4. The company does not have to hire employees to approve credit and make collections for these sales. S-A E 266 An article recently appeared in the Wall Street Journal indicating that companies are selling their receivables at a record rate. Why are companies selling their receivables? Ans: N/A Solution 266 The reasons companies are selling their receivables are: (1) Receivables may be sold because they may be the only reasonable source of cash. 8 - 66 (2) Billing and collection are often time-consuming and costly. It is often easier for a retailer to sell the receivables to another party with expertise in billing and collection matters. S-A E 267 Customer purchases using credit cards are a significant source of revenue for many retailers. From the standpoint of a retailer, briefly discuss some advantages and disadvantages of a retail store having its own credit card as opposed to accepting one of the national credit cards (e.g., Visa, MasterCard). Ans: N/A Solution 267 The advantages of a retail store using its own credit card are the avoidance of a 2 to 6 percent charge by the national credit card and the ability to issue credit to the customers of its choice. In addition, with its own credit card operation the retailer earns the interest on the unpaid balances. The disadvantages of a retail store using its own credit card are the risk of nonpayment (bad debts), the delay in receiving cash from the sales (cash is collected immediately from the national credit card company), and the costs of record keeping and managing (approving credit and collection) its own credit operation. S-A E 268 (Ethics) Pierce Books, a small book publishing company, wrote off the debt of The Learning Center, and the Academy of Basic Education, both small private schools, after it determined that the schools were facing serious financial difficulty. No notice of the action was sent to the schools; Pierce Books simply stopped sending bills. Nearly a year later, The Learning Center was given a large endowment and a government grant. The resulting publicity brought the school to the attention of Pierce Books, which immediately reinstated the account, and sent a new bill to the school, including interest for the entire time the debt was outstanding. No further action was taken regarding the Academy of Basic Education, which was still operational. Required: Did Pierce Books act ethically in reinstating the debt of one client, and not the other? Explain. Ans: N/A Solution 268 Yes, it is ethical to reinstate the debt of The Learning Center, especially since there was no evidence given that The Learning Center attempted to negotiate a reduction or elimination of the debt, or even that it was aware that the debt had been written off by Pierce Books. Pierce Books' discovery that one bad debt may be collectible places the company under no obligation to attempt to collect any or all of its other bad debts, so it need not have reinstated the other account receivable. The addition of interest to the debt is another question. Whether the interest would be collectible depends upon the laws of the country, and whether the addition of interest was specified as a possibility when the debt was incurred. It is questionable whether Pierce Books can collect also because they apparently did not include interest in earlier bills sent to these clients, and because they stopped sending bills for some period of time. 8 - 67 Note that this solution is different from the case in which a debt is written off because of a bankruptcy. Had The Learning Center become bankrupt, Pierce Books could not have legally reinstated the debt, even if The Learning Center became solvent at some time in the future. S-A E 269 (Communication) Morrison Company received a letter from Mary Furman, a customer. Mary had purchased $425 worth of clothing from Morrison on credit. She has made two payments of $50 each. She has missed the last two payments, and has received a collection letter from Morrison. Her total debt presently, with interest and late fees, is $351.13. Mary sent a letter to Morrison in which she asked for her debt to be forgiven. She said she had heard that companies make allowances for accounts they are doubtful about collecting, and that Morrison certainly should have been doubtful about her—that as a college student she had changed her major three times. She also said that she could not enjoy a high quality of life when making such high payments, but that she didn't want to be embarrassed by bill collectors, either. She especially didn't want her parents to find out that she had not paid her debts. Having Morrison write off her account seemed to her the best solution in the circumstances. She added that the clothes she bought at Morrison were among the best she had ever owned, and that she "told everybody" that Morrison was definitely the best place to get clothes. 8 - 68 S-A E 269 (Cont.) Required: You are the accounting manager for Morrison. Write a short letter to Mary explaining why her debt cannot be written off. Ans: N/A Solution 269 (letterhead) (Date) Ms. Mary Furman 123 College View Apartments, #717 Lakeland University Lakeland, Michigan 60771 Dear Ms. Furman: Thank you for your recent letter explaining your delay in paying your account. We appreciated hearing about your satisfaction with Morrison clothing, and we're glad you tell your friends about us. As you know, your account is becoming seriously past due. Presently, the total charges, including late payment penalties and interest (detailed on the attached billing form) is $351.13. Your account cannot be simply "forgiven" as you request in your letter. Our "Allowance for Doubtful Accounts" does not mean that we have certain customers whose debts we are willing to cancel readily. When Morrison extends credit to anyone, it is our expression of confidence in that person's ability and willingness to pay. In other words, we aren't "doubtful" about any of our customers. The allowance account is simply our recognition that a few customers, though very willing to pay, may become unable to do so because of circumstances beyond their control. If we detect some problem that may indicate a present or future unwillingness to pay, we do not extend credit. To do so would not be fair to Morrison or to the customer. We were sure about your ability and willingness to pay when we granted you credit. We were very pleased to receive your first two payments right on time. Won't you reconsider, and send your next payment today? If you need to renegotiate the size of the payments, you may contact Betty in the Credit Department to discuss the matter. I look forward to receiving your payment. Sincerely, Jill Gates Accounting Manager 8 - 69 GAAP QUESTIONS 1. Under GAAP, receivables are reported on the balance sheet at a. replacement cost. b. historical cost. c. amortized cost adjusted for estimated loss allowances. d. amortized cost. Ans: C 2. In recording a factoring transaction a. IFRS allows partial derecognition. b. IFRS and GAAP allow partial derecognition. c. GAAP focuses on loss of control and risks and rewards. d. IFRS focuses on loss of control. Ans: A 3. Under GAAP a. all financial instruments are recorded at fair value. b. it is always acceptable to use the direct write-off method. c. receivables should only be tested for impairment as a group. d. the entry to record estimated uncollected accounts is the same as IFRS. Ans: D 4. Which of the following statements is true? a. The FASB and IASB would like to reduce the reliance on fair value accounting for financial instruments in the future. b. The fair value option allows, but does not require, that some types of financial instruments be recorded at fair value. c. The fair value option requires that some types of financial instruments be recorded at amortized cost. d. The fair value option requires that some types of financial instruments be recorded at fair value. Ans: B