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Chapter 7: Question 8 (page 362)
What are the basic problems that occur in the valuation of accounts receivable?
A business entity faces difficulties relating to face value determination, probability of collection, and determination of outstanding period while valuing accounts receivable.
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On July 1, 2017, Moresan Company sold special-order merchandise on credit and received in return an interest-bearing note receivable from the customer. Moresan 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.
On September 1, 2017, Moresan sold special-order merchandise on credit and received in return a zero-interest-bearing note receivable from the customer. The prevailing rate of interest for a note of this type is determinable. The note receivable is due in one lump sum on August 31, 2019.
Moresan also has significant amounts of trade accounts receivable as a result of credit sales to its customers. On October 1, 2017, some trade accounts receivable were assigned to Indigo Finance Company on a non-notification (Moresan handles collections) basis for an advance of 75% of their amount at an interest charge of 8% on the balance outstanding.
On November 1, 2017, other trade accounts receivable were sold without recourse. The factor withheld 5% of the trade accounts receivable factored as protection against sales returns and allowances and charged a finance charge of 3%.
Instructions
How should Moresan account for the trade accounts receivable factored on November 1, 2017? Why?
Arness Woodcrafters sells \(250,000 of receivables to Commercial Factors, Inc. on a with recourse basis. Commercial assesses a finance charge of 5% and retains an amount equal to 4% of accounts receivable. Arness estimates the fair value of the recourse liability to be \)8,000. Prepare the journal entry for Arness to record the sale.
(Bank Reconciliation and Adjusting Entries) Angela Lansbury Company deposits all receipts and makes all payments by check. The following information is available from the cash records.
June 30 Bank Reconciliation Statement | |
Balance per bank | \(7,000 |
Add: Deposit in transit | 1,540 |
Less: Outstanding checks | (2,000) |
Balance per books | \)6,540 |
Month of July Results | ||
Per Bank | Per Books | |
Balance July 31 | \(8,650 | \)9,250 |
July Deposits | 5,000 | 5,810 |
July Checks | 4,000 | 3,100 |
July note collected (not included in July deposits) | 1,000 | - |
July bank service charge | 15 | - |
July NSF check from a customer, returned by the bank (recorded by bank as a charge) | 335 | - |
Instructions
(a) Prepare a bank reconciliation going from balance per bank and balance per book to correct cash balance.
(b) Prepare the general journal entry or entries to correct the Cash account.
Answer
(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?
Because of calamitous earthquake losses, Bernstein Company, one of your client’s oldest and largest customers, suddenly and unexpectedly became bankrupt. Approximately 30% of your client’s total sales have been made to Bernstein Company during each of the past several years. The amount due from Bernstein Company— none of which is collectible—equals 22% of total accounts receivable, an amount that is considerably in excess of what was determined to be an adequate provision for doubtful accounts at the close of the preceding year. How would your client record the write-off of the Bernstein Company receivable if it is using the allowance method of accounting for bad debts? Justify your suggested treatment.
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