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

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall8-2 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 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.

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall8-3 a. Sales of $200,000 ($170,000 on account; $30,000 for cash). E8-17D—Req.1 DateAccounts and ExplanationDebitCredit 2014 a. Accounts Receivable170,000 Cash30,000 Sales Revenue 200,000

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall8-4 b. Collections on account, $130,000. E8-17D—Req.1 DateAccounts and ExplanationDebitCredit 2014 b. Cash130,000 Accounts Receivables 130,000

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall8-5 c. Write-offs of uncollectible receivables, $4,000. E8-17D—Req.1 DateAccounts and ExplanationDebitCredit 2014 c. Allowance for Bad Debts4,000 Accounts Receivables 4,000

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall8-6 E8-17D—Req.2 Accounts Receivable Jan. 1, 2014, Bal.50,000130,000Collections Net credit sales170,0004,000Write-offs Unadj. Bal.86,000 Dec. 31, 2014, Bal.86,000 Allowance for Bad Debts 5,000Jan. 1, 2014, Bal. Write-offs4,000 1,000Unadj. Bal.

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall8-7 To record bad debts expense assuming Silver Line estimates bad debts as 1% of credit sales. E8-17D—Req.3 DateAccounts and ExplanationDebitCredit 2014 Dec.31 Bad Debts Expense1,700 Allowance for Bad Debts 1,700 1% × 170,000 = 1,700

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall8-8 E8-17D—Req.3 Allowance for Bad Debts 5,000Jan. 1, 2014, Bal. Write-offs4,000 1,000 1,700 Unadj. Bal. Adj. 2,700Jan. 1, 2014, Bal. Bad Debts Expense Jan. 1, 2014, Bal.0 Adj.1,700 Dec. 31, 2014, Bal.1,700

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall8-9 E8-17D—Req.4 SILVER LINE INC. Balance Sheet−Partial December 31, 2014 Assets Current Assets: Accounts Receivable $86,000 Less: Allowance for Bad Debts(2,700)$83,300 Accounts Receivables$86,000 Allowance for Bad Debts2,700

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall8-10 New Trend Time House reports the following: E8-21D 2013 May.4Recorded 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.31Accrued interest revenue on the Morrison note Sept.1Collected the maturity value of the Morrison note. Journalize all entries required for New Trend Time House.

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall8-11 May. 4 Recorded credit card sales of $200,000, net of processor fee of 3%. E8-21D DateAccounts and ExplanationDebitCredit 2013 May. 4 Cash192,000 Credit Card Expense ($200,000 × 0.04)8,000 Sales Revenue 200,000 Record sales for the month.

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall8-12 Sept. 1 Loaned $30,000 to Morrison, an executive with the company, on a one-year, 17% note. E8-21D DateAccounts and ExplanationDebitCredit 2013 Sept. 1 Notes Receivable—Morrison30,000 Cash 30,000 Recorded loan to employee.

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall8-13 Dec. 31 Accrued interest revenue on the Morrison note. E8-21D DateAccounts and ExplanationDebitCredit 2013 Dec. 31 Interest Receivable1,700 Interest Revenue 1,700 ($30,000 × 0.17 x 4/12) Accrued interest earned on Morrison note.

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall8-14 Sept. 1 Collected the maturity value of the Morrison note. E8-21D DateAccounts and ExplanationDebitCredit 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.

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 8-15 Comfort Furniture reported the following amounts in its 2014 financial statements. The 2013 figures are given for comparison. E8-25D Current Assets: Cash $15,000$20,000 Short-term Investments40,00018,000 Accounts Receivable$70,000 $80,000 Less: Allowance for Bad Debts(7,000)63,000(8,000)72,000 Merchandise Inventory250,000230,000 Prepaid Insurance8,000 Total Current Assets $376,000 $348,000 Total Current Liabilities $230,000 $200,000 Net Sales (all on account) $820,000 $780,000

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall8-16 E8-25D Requirements 1. Calculate Comfort’s acid-test ratio for (Round to two decimals.) Determine whether Comfort’s acid-test ratio improved or deteriorated from 2013 to 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 (Round to the nearest day.) How do the results compare with Comfort’s credit terms of net 30?

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall8-17 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 2014 Cash $15,000 Short-term investments 40,000 Accounts Receivable 70,000 Allowance for Bad Debts 7,000 Total Current Liabilities 230,000

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall8-18 P8-25D—Req.1 Acid-test ratio ﴾2013﴿ ═ Cash + Short-term investments + Net current receivables Total current liabilities ═($20,000 + $18,000 + $72,000) ($200,000) ═$110,000 $200,000 ═ Cash $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

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall8-19 P8-25D—Req.1 Acid-test ratio ﴾2013﴿ ═ Cash + Short-term investments + Net current receivables Total current liabilities ═($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 The company’s acid-test ratio is a little worse than the industry average of Cash $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

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall8-20 P8-25D—Req.2 Accounts Receivable Turnover Ratio ═ Net credit sales Average net accounts receivables ═$820,000 $67,500 ═12.15 Net Sales (all on account) $820,000 Accounts Receivable ,000 Accounts Receivable ,000 Allowance for Bad Debts ,000 Allowance for Bad Debts ,000

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall8-21 P8-25D—Req.2 Accounts Receivable Turnover Ratio ═ Net credit sales Average net accounts receivables ═$820,000 $67,500 ═12.15 The company’s accounts receivable turnover ratio is better than the industry average of 10. Net Sales (all on account) $820,000 Accounts Receivable ,000 Accounts Receivable ,000 Allowance for Bad Debts ,000 Allowance for Bad Debts ,000

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall8-22 P8-25D—Req.2 Accounts Receivable Turnover Ratio ═ Net credit sales Average net accounts receivables ═$820,000 $67,500 ═12.15 Net Sales (all on account) $820,000 Accounts Receivable ,000 Accounts Receivable ,000 Allowance for Bad Debts ,000 Allowance for Bad Debts ,000 Days’ Sales in Receivables═365 days Accounts receivable turnover ratio ═365 days ═30 days

Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall8-23 P8-25D—Req.2 Net Sales (all on account) $820,000 Accounts Receivable ,000 Accounts Receivable ,000 Allowance for Bad Debts ,000 Allowance for Bad Debts ,000 Days’ Sales in Receivables═365 days Accounts receivable turnover ratio ═365 days ═30 days Comfort’s days’ sales in receivables calculation is same as the company’s net 30-day credit period.

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