Chapter Seven Questions
1. Define the term accounts receivable.
Accounts receivable are promises made by customers
to pay for services or products they obtained from companies.
2. What are the main sources of resources for retail or merchandising companies? Give two examples of merchandising companies.
The main sources of resources for retail or merchandising
companies are the prices they charge customers for products the customers buy.
Examples of merchandising companies include Wal-Mart, J. C. Penney, Sears
Roebuck, and The Gap.
3. What are the main sources of resources for manufacturing companies? Give two examples of manufacturing companies.
The main sources of resources for manufacturing
companies are the prices they charge customers for products the customers buy.
Examples of mamufacturing companies include Ford, General Motors, Gillette, and
Raytheon.
4. What is the name of the account in which service companies record revenues?
Fees revenue.
5. What is the name of the account in which merchandising companies and manufacturing companies record revenues?
Sales.
6. Why do merchandising companies allow customers to return products?
Merchandising companies allow customers to return
products in order to encourage them to shop at the companies. If customers are
allowed to return products, they may be more willing to shop at the companies
because their risk of buying unsatifactory products is reduced. Unsatisfactory
products can be returned by the customers.
7. What is the name of the account in which the sales prices of returned products are recorded?
Sales returns and allowances.
8. What is a sales allowance and why do merchandising companies grant them to customers?
A sales allowance is a price reduction granted to
customers in order to encourage them to keep items with which they are not
completely satisfied. For example, a customer who purchased for $10 a product
that was slightly damaged could be offered a $2 sales allowance to keep the
product. If the product is returned by the customer, the company may have a
difficult time selling it because it is damaged.
9. What is the name of the account in which the sales allowances are recorded?
Sales returns and allowances.
10. Define the term net sales.
Net sales is the dollar amount of the sales prices
of products sold to customers and kept by them. Net sales is calculated as
follows: sales - sales returns and allowances = net sales.
11. What is the most important use of accounts receivable?
The most important use of accounts receivable is to
collect cash from customers.
12. Why do companies pledge their accounts receivable?
Companies pledge their accounts receivable to
financial institutions as collateral for loans. Pledging accounts receivable is
one way companies can receive cash for their accounts receivable before
customers actually pay the amounts they owe.
13. What does it mean when a company factors its accounts receivable?
When a company factors its accounts receivable, it
sells them to a financial institution. Factoring accounts receivable is another
way companies can receive cash for their accounts receivable before customers
actually pay the amounts they owe.
14. Define the term uncollectible accounts expense.
Uncollectible accounts expense is the cost of
selling to customers who do not pay their bills. It is the dollar amount of new
accounts receivable a company expects will never be collected.
15. Describe the contents of an accounts receivable subsidiary ledger.
The accounts receivable subsidiary ledger contains
the detailed record of each credit customer. The information includes the date
and amount of each credit sale, the date and amount of each cash collection,
and the balance owed by each customer. The total dollar amounts of all customer
records in the accounts receivable subsidiary ledger equals the accounts
receivable balance in the general ledger.
16. List two uses of an accounts receivable subsidiary ledger.
One use of the accounts receivable subsidiary ledger
is to determine the dollar amount to bill each customer. The information is
used to prepare statements of account to send to customers, reminding them of
the dollar amounts they owe. A second use of the accounts receivable subsidiary
ledger is in evaluating current customers who request additional services or
products.
17. Define the term contra asset account and give an example of one.
A contra asset is an asset with a credit balance.
Since assets normally have debit balances (remember, assets increase with
debits), an asset with a credit balance is contrary to most assets. Thus, the
term contra asset. An example of a contra asset is the allowance for
uncollectible accounts.
Chapter Seven Exercises
Exercise 7.1: Analyzing Potential Customers
Since it was founded 15 years ago, the Blair Corporation has not offered any credit to customers, but has sold its products for cash. For the last five years, the Blair Corporation sales averaged $60,000 per year. Its cost of goods sold was approximately 40% of sales, its operating expenses were 35% of sales, and its income taxes expense averaged 35% of income before taxes. The Blair Corporation is considering expanding sales by $20,000 per year by selling on credit. The company predicts that its cost and expense percentages will remain the same, but only 95% of the credit sales will be able to be collected.
1. Determine the company's expected total sales for the coming year.
Total sales = $60,000 (cash sales) + $20,000 (credit
sales) = $80,000
2. Determine the company's expected cost of goods sold for the coming year.
Cost of goods sold = total sales x 40%
Cost of goods sold = $80,000 x .40 = $32,000
3. Determine the company's expected gross profit.
Gross profit = sales - cost of goods sold
Gross profit = $80,000 - $32,000 = $48,000
4. Determine the company's expected uncollectible accounts expense.
Since 95% of credit sales are expected to be collected, uncollectible accounts expense = 5% of credit sales (100% - 95% = 5%).
Uncollectible accounts expense = $20,000 x .05 =
$1,000
5. Determine the company's expected total operating expenses (including its
uncollectible accounts expense).
Total operating expenses = (sales x 35%) + uncollectible accounts expense
Total operating expenses = ($80,000 x .35) + $1,000
Total operating expenses = $28,000 + $1,000 =
$29,000
6. Determine the company's expected income before taxes.
|
Sales |
$80,000 |
|
Cost of goods sold |
32,000 |
|
Gross margin |
$48,000 |
|
Operating expenses |
29,000 |
|
Income before taxes |
$19,000 |
7. Determine the company's expected income taxes expense.
Income taxes expense = income before taxes x 35%
Income taxes expense = $19,000 x .35 = $6,650
8. Determine the company's expected net income.
|
Sales |
$80,000 |
|
Cost of goods sold |
$32,000 |
|
Gross margin |
$48,000 |
|
Operating expenses |
29,000 |
|
Income before taxes |
$19,000 |
|
Income taxes expense |
6,650 |
|
Net income |
$12,350 |
9. Determine the dollar amount by which the company's net income is expected to
increase through the $20,000 credit sales.
|
Sales (credit only) |
$20,000 |
|
Cost of goods sold (40% of sales) |
$8,000 |
|
Gross margin |
$12,000 |
|
Operating expenses ((35% of sales) + $1,000) |
8,000 |
|
Income before taxes |
$4,000 |
|
Income taxes expense (35% of income before taxes) |
1,400 |
|
Net income from $20,000 credit sales |
$2,600 |
Exercise 7.2: Accounts Receivable Subsidiary Ledger
The Vincent Corporation maintains an accounts receivable subsidiary ledger
from which the following information was obtained.
|
Customer: Shah |
Customer Number: 6785 |
|||
|
Date |
Description |
Debits |
Credits |
Balance |
|
8/1 |
Balance |
|
|
$3,233.04 |
|
8/12 |
Sales invoice 710 |
$1,358.92 |
|
4,591.96 |
|
8/24 |
Payment received |
|
$2,500.00 |
2,091.96 |
During September, the Vincent Corporation engaged in the following transactions with Shah. September 7, credit sales of $945.78 (invoice number 985), September 15, cash received $1,500, and September 27, credit sales of $1,322.84 (invoice number 1049).
1. Update customer Shah's account in the Vincent Corporation's accounts
receivable subsidiary ledger.
|
Customer: Shah |
Customer Number: 6785 |
|||
|
Date |
Description |
Debits |
Credits |
Balance |
|
8/1 |
Balance |
|
|
$3,233.04 |
|
8/12 |
Sales invoice 710 |
$1,358.92 |
|
4,591.96 |
|
8/24 |
Payment received |
|
$2,500.00 |
2,091.96 |
|
9/7 |
Sales invoice 985 |
$945.78 |
|
3,037.74 |
|
9/15 |
Payment received |
|
$1,500.00 |
1,537.74 |
|
9/27 |
Sales invoice 1049 |
$1,322.84 |
|
2,860.58 |
2. If on September 30, the Vincent Corporation were to send statements of
account to its customers requesting payment of the dollar amounts owed to the
Vincent Corporation, determine the dollar amount that Shah would be requested
to pay.
$2,860.58, the dollar amount Shah owes the Vincent
Corporation.
Exercise 7.3: Uncollectible Accounts Expense
The Hovanasian Corporation uses the percentage of sales method to estimate
its uncollectible accounts expense. An analysis of its accounts receivable
revealed the following.
|
Year |
Credit Sales |
Accounts Receivable
|
|
5 |
$2,400,000 |
$108,000 |
|
4 |
2,250,000 |
87,750 |
|
3 |
2,100,000 |
88,200 |
|
2 |
2,000,000 |
80,000 |
|
1 |
1,950,000 |
74,750 |
1. Determine the percentage of credit sales that the Hovanasian was unable to
collect over the 5-year time period.
5-year total accounts receivable judged
uncollectible / 5-year total credit sales = $438,700 / $10,700,000 = .041 = 4.1%.
2. Using the percentage calculated in part 1, determine the uncollectible
accounts expense the company's would record in year 6 if credit sales are
$2,700,000.
$2,700,000 x .041 = $110,700.
3. Prepare the journal entry to record the company's year 6 uncollectible
accounts expense. Before you prepare the journal entry, determine the
transaction's effects on the company's resources and sources of resources.
|
Total |
= |
Sources of |
+ |
Sources of |
+ |
Sources of |
|
Assets |
= |
Liabilities |
+ |
Stockholders' Equity |
||
|
- $110,700 |
= |
|
|
|
|
- $110,700 |
|
Date |
Description |
Post. |
Debits |
Credits |
|
Dec. 31 |
Uncollectible Accounts Expense |
|
110,700 |
|
|
|
Allowance for Uncollectible Accounts |
|
|
110,700 |
|
|
Uncollectible Accts. Rec. |
|
|
|
Exercise 7.4: Accounts Receivable Transactions
Prepare the journal entries required to record the following May transactions of the Khakeo Corporation. Before you prepare the journal entry, determine the transaction's effects on the company's resources and sources of resources.
May 15: Cash sales for the first half of May totalled $365,000.
|
Total |
= |
Sources of |
+ |
Sources of |
+ |
Sources of |
|
Assets |
= |
Liabilities |
+ |
Stockholders' Equity |
||
|
+ $365,000 |
= |
|
|
|
|
+ $365,000 |
|
Date |
Description |
Post. |
Debits |
Credits |
|
May 15 |
Cash |
|
365,000 |
|
|
|
Sales |
|
|
365,000 |
|
|
May 1-15 cash sales |
|
|
|
May 15: Credit sales for the first half of May totalled $290,000.
|
Total |
= |
Sources of |
+ |
Sources of |
+ |
Sources of |
|
Assets |
= |
Liabilities |
+ |
Stockholders' Equity |
||
|
+ $290,000 |
= |
|
|
|
|
+ $290,000 |
|
Date |
Description |
Post. |
Debits |
Credits |
|
May 15 |
Accounts Receivable |
|
290,000 |
|
|
|
Sales |
|
|
290,000 |
|
|
May 1-15 credit sales |
|
|
|
May 15: $185,000 cash was received from customers who purchased products from
the company prior to May 16.
|
Total |
= |
Sources of |
+ |
Sources of |
+ |
Sources of |
|
Assets |
= |
Liabilities |
+ |
Stockholders' Equity |
||
|
+ $185,000 |
|
|
|
|
|
|
|
Date |
Description |
Post. |
Debits |
Credits |
|
May 15 |
Cash |
|
185,000 |
|
|
|
Accounts Receivable |
|
|
185,000 |
|
|
Accounts Receivable Collection |
|
|
|
May 15: Credit customers returned for credit products sold to them for $4,000.
|
Total |
= |
Sources of |
+ |
Sources of |
+ |
Sources of |
|
Assets |
= |
Liabilities |
+ |
Stockholders' Equity |
||
|
- $4,000 |
= |
|
|
|
|
- $4,000 |
|
Date |
Description |
Post. |
Debits |
Credits |
|
May 15 |
Sales Returns and Allowances |
|
4,000 |
|
|
|
Accounts Receivable |
|
|
4,000 |
|
|
May 1-15 sales returns |
|
|
|
May 20: R. Kaberle paid the company $1,800 for products sold to him two years
ago. The company had considered the receivable to be uncollectible and had
eliminated it last year.
|
Total |
= |
Sources of |
+ |
Sources of |
+ |
Sources of |
|
Assets |
= |
Liabilities |
+ |
Stockholders' Equity |
||
|
+ $1,800 +
$1,800 |
|
|
|
|
|
|
|
Date |
Description |
Post. |
Debits |
Credits |
|
May 20 |
Accounts Receivable |
|
1,800 |
|
|
|
Allowance for Uncollectible Accounts |
|
|
1,800 |
|
|
R. Kaberle Rec. Correction |
|
|
|
|
|
|
|
|
|
|
20 |
Cash |
|
1,800 |
|
|
|
Accounts Receivable |
|
|
1,800 |
|
|
Collection from R. Kaberle |
|
|
|
May 31: Cash sales for the second half of May totalled $390,000.
|
Total |
= |
Sources of |
+ |
Sources of |
+ |
Sources of |
|
Assets |
= |
Liabilities |
+ |
Stockholders' Equity |
||
|
+ $390,000 |
= |
|
|
|
|
+ $390,000 |
|
Date |
Description |
Post. |
Debits |
Credits |
|
May 31 |
Cash |
|
390,000 |
|
|
|
Sales |
|
|
390,000 |
|
|
May 16-31 cash sales |
|
|
|
May 31: Credit sales for the second half of May totalled $310,000.
|
Total |
= |
Sources of |
+ |
Sources of |
+ |
Sources of |
|
Assets |
= |
Liabilities |
+ |
Stockholders' Equity |
||
|
+ $310,000 |
= |
|
|
|
|
+ $310,000 |
|
Date |
Description |
Post. |
Debits |
Credits |
|
May 31 |
Accounts Receivable |
|
310,000 |
|
|
|
Sales |
|
|
310,000 |
|
|
May 16-31 credit sales |
|
|
|
May 31: $205,000 cash was received from customers who purchased products from
the company prior to May 31.
|
Total |
= |
Sources of |
+ |
Sources of |
+ |
Sources of |
|
Assets |
= |
Liabilities |
+ |
Stockholders' Equity |
||
|
+ $205,000 |
|
|
|
|
|
|
|
Date |
Description |
Post. |
Debits |
Credits |
|
May 31 |
Cash |
|
205,000 |
|
|
|
Accounts Receivable |
|
|
205,000 |
|
|
Accounts Receivable Collection |
|
|
|
May 31: Credit customers returned for credit products sold to them for $6,000.
|
Total |
= |
Sources of |
+ |
Sources of |
+ |
Sources of |
|
Assets |
= |
Liabilities |
+ |
Stockholders' Equity |
||
|
- $6,000 |
= |
|
|
|
|
- $6,000 |
|
Date |
Description |
Post. |
Debits |
Credits |
|
May 31 |
Sales Returns and Allowances |
|
6,000 |
|
|
|
Accounts Receivable |
|
|
6,000 |
|
|
May 16-31 sales returns |
|
|
|
May 31: The company estimates the 4% of total credit sales will be
uncollectible.
Since the company's May credit sales totalled
$600,000 ($290,000 + $310,000), its uncollectible accounts expense would be
$24,000 ($600,000 x .04).
|
Total |
= |
Sources of |
+ |
Sources of |
+ |
Sources of |
|
Assets |
= |
Liabilities |
+ |
Stockholders' Equity |
||
|
- $24,000 |
= |
|
|
|
|
- $24,000 |
|
Date |
Description |
Post. |
Debits |
Credits |
|
May 31 |
Uncollectible Accounts Expense |
|
24,000 |
|
|
|
Allowance for Uncollectible Accounts |
|
|
24,000 |
|
|
Uncollectible Accounts Receivable |
|
|
|
Exercise 7.5: Balance Sheet Reporting of Accounts Receivable
The following information was obtained from the El-Halaby Corporation's March 31 post-closing trial balance: accounts payable = $38,000, accounts receivable = $42,500, allowance for uncollectible accounts = $3,500, bonds payable, 4-years = $44,000, buildings = $87,000, cash = $8,000, common stock = $68,000, equipment = $29,000, income taxes payable = $6,000, merchandise inventory = $29,000, land = $6,000, prepaid insurance = $3,000, prepaid rent = $2,000, retained earnings = $57,000, trucks = $12,000, and wages payable = $2,000.
1. Prepare the current assets section of the El-Halaby Corporation's March
31 balance sheet.
|
Current Assets |
|
|
|
Cash |
|
$8,000 |
|
Accounts Receivable |
$42,500 |
|
|
Allowance for Uncollectible Accounts |
$3,500 |
$39,000 |
|
Merchandise Inventory |
|
$29,000 |
|
Prepaid Insurance |
|
$3,000 |
|
Prepaid Rent |
|
$2,000 |
|
Total Current Assets |
|
$81,000 |
2. Determine the total dollar amount of March 31 statements of account that the
company would send to its customers.
The company would send statements of account to all
customers who owe the company. Thus, it would send statements of account for
$42,500, the total accounts receivable on March 31.
3. Determine the dollar amount of cash that the company expects to eventually
collect from those customers who owed the company as of March 31.
The company's $3,500 allowance for uncollectible
accounts suggests the company expects not to collect $3,500 of its
$42,500 accounts receivable. Thus, the company expects to collect $39,000 cash
from its customers ($42,500 - $3,500).