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Chapter 7: 3E (page 365)

Jim Carrie Company shows a balance of \(181,140 in the Accounts Receivable account on December 31, 2017. The balance consists of the following.

Installment accounts due in 2018

\)23,000

Installment accounts due after 2018

34,000

Overpayment to vendors

2,640

Due from regular customers, of which $40,000 represents account pledge as security for a bank loan

79,000

Advances to employees

1,500

Advance to the subsidiary company (due in 2018)

81,000

Instructions

Illustrate how the information above should be shown on the balance sheet of Jim Carrie Company on December 31, 2017.

Short Answer

Expert verified

Item

Representation

Installment accounts due in 2018

Receivables

Installment accounts due after 2018

Receivables

Overpayment to vendors

Receivables

Due from regular customers, of which $40,000 represents account pledge as security for a bank loan

Receivables

Advances to employees

Receivables

Advance to the subsidiary company (due in 2018)

Investment

Step by step solution

01

Definition of Subsidiary Company

The company managed and controlled by another company or parent company is known as a subsidiary company. Such relation arises between two companies because of mergers and acquisitions.

02

Representation in the balance sheet

Particular

Amount $

Amount $

Receivables

Customer accounts

79,000

Installment accounts due in 2018

23,000

Installment accounts due after 2018

34,000

Vendors

2,640

Employees

1,500

Total receivables

140,140

Investment

Advance to subsidiary company

81,000

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Most popular questions from this chapter

Under IFRS:

(a) the entry to record estimated uncollected accounts is the same as GAAP.

(b) loans and receivables should only be tested for impairment as a group.

(c) it is always acceptable to use the direct write-off method.

(d) all financial instruments are recorded at fair value.

What is the normal procedure for handling the collection of accounts receivable previously written off using the direct write-off method? The allowance method?

Part 1: On July 1, 2017, Wallace Company, a calendar-year company, sold special-order merchandise on credit and received in return an interest-bearing note receivable from the customer. Wallace Company will receive interest at the prevailing rate for a note of this type. Both the principal and interest are due in one lump sum on June 30, 2018.

Instructions

When should Wallace Company report interest revenue from the note receivable? Discuss the rationale for your answer.

Part 2: On December 31, 2017, Wallace Company had significant amounts of accounts receivable as a result of credit sales to its customers. Wallace uses the allowance method based on credit sales to estimate bad debts. Past experience indicates a reliable estimate of uncollectible accounts can be developed based on an aging analysis of receivable balances. This pattern is expected to continue.

Instructions

(a) Discuss the rationale for using the allowance method based on the balance in the trade receivables accounts.

(b) How should Wallace Company report the allowance for doubtful accounts on its balance sheet at December 31, 2017? Also, describe the alternatives, if any, for presentation of bad debt expense in Wallace Company’s 2017 income statement.

Kraft Enterprises owns the following assets at December 31, 2017.

Cash in bank – saving account

68,000

Checking account balance

17,000

Cash on hand

9,300

Post-dated Checks

750

Cash refunded due from IRS

31,400

Certificate of deposits (180-days)

90,000

What amount should be reported as cash?

(Bad-Debt Reporting) The chief accountant for Dickinson Corporation provides you with the following list of accounts receivable written off in the current year.

Date

Customer

Amount \(

March 31

E.L Masters Company

\)7,800

June 30

Stephen Crane Associates

6,700

September 30

Amy Lowell’s Dress Shop

7,000

December 31

R. Frost. Inc

9,830

Dickinson follows the policy of debiting Bad Debt Expense as accounts are written off. The chief accountant maintains that this procedure is appropriate for financial statement purposes because the Internal Revenue Service will not accept other methods for recognizing bad debts.

All of Dickinson’s sales are on a 30-day credit basis. Sales for the current year total \(2,200,000. The balance in Accounts Receivable at year-end is \)77,000 and an analysis of customer risk and charge-off experience indicates that 12% of receivables will be uncollectible (assume a zero balance in the allowance).

Instructions

(a) Do you agree or disagree with Dickinson’s policy concerning recognition of bad debt expense? Why or why not?

(b) By what amount would net income differ if bad debt expense was computed using the percentage-of-receivables approach?
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