Chapter 5
Short-Term Investments and Receivables Short Exercises
(5 min.) S 5-1 1. A trading investment is always a current asset because the
investor intends to sell the trading investment in the very near future — days, weeks, or only a few months. A current asset is to be sold within one year or within the company’s operating cycle if longer than a year.
2. Trading investments are reported at their current market
value.
(10 min.) S 5-2 BALANCE SHEET
Current assets:
Short-term trading investments, at market value... $84,000 INCOME STATEMENT
Other revenue and gains (losses):
Unrealized gain on investment…………………….... $ 4,000* _____
*$84,000 ? $80,000 = $4,000
(10 min.) S 5-3 Unrealized Loss on Investment ($104,000 ? $98,000) 6,000 Short-Term Investment……………………………….. 6,000 Adjusted investment to market value.
BALANCE SHEET
Current assets:
Short-term trading investment, at market value………$98,000 INCOME STATEMENT
Other revenue (loss):
Unrealized (loss) on investment…………………………$ (6,000)
(5 min.) S 5-4 Roose, the accountant, should not handle the company’s cash. With cash-handling duties, the accountant can steal cash and hide the theft by writing off a customer’s account receiva ble as uncollectible.
(5 min.) S 5-5 1. Uncollectible-Account Expense ($900,000 × .02)….. 18,000
Allowance for Uncollectible Accounts……………18,000 2. Balance sheet
Accounts receivable…………………………………$80,000
Less Allowance for uncolle ctible accounts…….. (18,000)
Accounts receivable, net……………………………$62,000
(5-10 min.) S 5-6 1. Accounts Receivable……………………………………1,000,000
Sales Revenue……………………………………….. 1,000,000 2. Cash……………………………………………………….. 880,000
Accounts Receivable……………………………….. 880,000 3. Allowance for Uncollectible Accounts………………. 16,000
Accounts Receivable………………………………... 16,000 4. Uncollectible-Account Expense ($1,000,000 × .015). 15,000
Allowance for Uncollectible Accounts……………15,000
(10 min.) S 5-7 1.
Amount customers
owe the company
2.
Amount the
company
expects not
to collect
3.
Accounts receivable, net
($184,000 ? $17,000)………………………$167,000
(5-10 min.) S 5-8 (a) Accounts Receivable………………………..400,000
Sales Revenue…………………………….400,000 (b) Cash…………………………………………….410,000
Accounts Receivable…………………….410,000 (c) Allowance for Uncollectible Accounts…..7,000
Accounts Receivable…………………….7,000 (d) Uncollectible-Account Expense…………..9,000
Allowance for Uncollectible Accounts.. 9,000
= 9,000
(10 min.) S 5-9 1. and 2.
3.
BALANCE SHEET
Accounts receivable…………………………….$53,000
Less Allowance for uncollectible accounts… (10,000)
Accounts receivable, net……………………….$43,000
(5-10 min.) S 5-10 a. Mar. 6 Note Receivable — D. Mann…….100,000
Cash………………………………100,000 b. Sept. 6 Cash…………………………………104,000
Note Receivable — D. Mann….100,000
Interest Revenue
($100,000 × .08 × 6/12)……...4,000
(10 min.) S 5-11 1. Interest for:
20X7 ($100,000 × .09 ×8/12)……………….$6,000
20X8 ($100,000 ×.09)……………………….9,000
20X9 ($100,000 × .09 ×4/12)……………….3,000
2. Centennial Credit Union has a note receivable and interest
revenue.
Heather Hutchison has a note payable and interest expense.
3. Payoff at October 30, 20X7:
Principal………………………………………….$100,000
Interest ($100,000 × .09 × 6/12)………………. 4,500
Total……………………………………………….$104,500
(10 min.) S 5-12
20X5
a. May 31 Note Receivable —N. Thomas…………..6,000
Cash………………………………….…….6,000 To loan money.
20X5
b. Dec. 31 Interest Receivable ($6,000 × .09 × 7/12) (315)
Interest Revenue (315)
To accrue interest revenue.
20X6
c. May 31 Cash ($6,000 + $540)……………………….6,540
Interest Receivable (315)
Interest Revenue ($6,000 × .09 × 5/12). 225
Note Receivable…………………………6,000 To collect on note receivable.
(5-10 min.) S 5-13 a. BALANCE SHEET
December 31, 20X5
Current assets:
No te receivable…………………………………… $6,000
Interest receivable (315)
b. INCOME STATEMENT
Year ended December 31, 20X5
Revenues:
Interest revenue……………………………….….$ 315 c. BALANCE SHEET
December 31, 20X6
Nothing to report because the note was
collected on May 31, 20X6.
d. INCOME STATEMENT
Year ended December 31, 20X6
Revenues:
Interest revenue……………………………….….$ 225
(10 min.) S 5-14 Req. 1
20X6
Cash + Short-term investments $9,000 + $15,000
Acid-test
ratio = + Net current receivables
=
+ $73,000 Total current liabilities $101,000
= 0.96
The company’s acid-test ratio compares favorably to the industry average of 0.95.
Req. 2
One day’s sales= $803,000
= $2,200 365
Days’ sales in average accounts receivable
Average net
=
accounts receivable
=
($73,000 + $68,000) / 2
= 32 days
The company’s days’-sales-in-receivables ratio (32) is okay relative to the 30-day period of the credit terms.
(10-15 min.) S 5-15
Income Statement Balance Sheet
Debit Credit Debit Credit 1. Classifications Balance Balance Balance Balance
Unearned revenues….X
Allowance for
doubtful accounts... X Other expenses………X
Accounts receivable…X
Accounts payable……X
Service revenue………X
Other assets…………..X
Property, plant, and
equipment…………..X
Operating expense…..X
Cash…………………….X
Notes payable………...X
Thousands 2. Service revenue………………………………………$ 8,613
Operating expense………………………………….. (1,620) Other expenses………………………………………. (2,569) Net income…………………………………………….$ 4,424
3. Current ratio = $239 + $817 ? $109
= 1.60 $207 + $385
Exercises
(10-15 min.) E 5-16 1. This is a trading investment because Merrill Lynch
intends to sell the stock within a short time.
2. Dec. 15 Short-Term Investment (1,000 × $55)….. 55,000
Cash……………………………………….55,000 Purchased investment.
Dec. 31 Short-Term Investment
[(1,000 × $63) ? $55,000]…………………..8,000
Unrealized Gain on Investment………8,000 Adjusted investment to market value.
3. BALANCE SHEET
Current assets:
Short-term investment, at market value…………………$63,000 INCOME STATEMENT
Other revenue and gains:
Unrealized gain on investment……………………………$ 8,000
(10-20 min.) E 5-17 INCOME STATEMENT
Other revenue (loss):
Dividen d revenue………………………………………. $ 500 Unrealized (loss) on investment ($98,000 ? $91,000).(7,000) BALANCE SHEET
Current assets:
Short-term investments, at market value………….. $91,000
(15-30 min.) E 5-18
Short-Term Dividend
Unrealized Loss Gain on Sale
*1,000 shares × $.85 = $850
(5-10 min.) E 5-19 MEMORANDUM
DATE:
TO: Shawn Dugan
FROM: Student Name
RE: Essential element of internal control over collection from customers
Separation of duties is the essential element in a system to ensure that cash received by mail from customers is properly handled and accounted for. It is very important to separate cash-handling duties from accounting duties. Otherwise, an employee can steal a cash receipt from a customer and cover the theft by writing off the customer account as uncollectible.
Student responses may vary.
(15-20 min.) E 5-20
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT 20X8
Dec. 31
Year-end entry:
Doubtful-Account Expense
($800,000 × .01)………………………..8,000
Allowance for Doubtful Accounts. 8,000 BALANCE SHEET
Current assets:
Accounts receivable, net of allowance
for doubtful accounts of $10,0001………….$91,0002 _____
1$2,000 + $8,000 = $10,000
2$101,000 ? $10,000 = $91,000
(15 min.) E 5-21 Req. 1
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT Oct. Accounts Receivable……………………...100,000
Sales Revenue…………………………..100,000
Oct. Cash…………………………………………..94,000
Accounts Receivable…………………...94,000 Oct. Allowance for Uncollectible Accounts…1,700
Accounts Receiva ble…………………...1,700
Oct. Uncollectible-Account Expense
($100,000 ×.02)……………………………..2,000
Allowance for Uncollectible Accounts 2,000
Req. 2
Allowance for
Net accounts receivable = $41,000 ($44,300 ? $3,300)
Google expects to collect the net receivable amount.
Req. 3
BALANCE SHEET
Current assets:
Accounts receivable, net of allowance for
uncollectible accounts of $3,300…………………$41,000
(10-15 min.) E 5-22 Req. 1
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT Oct. Uncollectible-Account Expense…..1,700
Accounts Receivable……………..1,700
Req. 2
Net accounts receivable would be $44,300, the balance in Accounts Receivable, computed as follows:
Google does not expect to collect the full $44,300 because some credit customers are likely not to pay their accounts.
(15-30 min.) E 5-23 Req. 1
The credit balance at December 31 in Allowance for Doubtful Accounts should be $10,150.
($110,000 × .005) + ($60,000 × .010) + ($50,000 × .06) + ($15,000 ×.40) = $10,150. The current balance is $7,400. Thus, the balance of the allowance account is too low.
Req. 2
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT Doubtful-Account Expense……………..2,750
Allowance for Doubtful Accounts….2,750
Req. 3
BALANCE SHEET
Current assets:
Cash…………………………………………..$ XX Short-term investments…………………...XX Accounts receivable, net of allowance
for doubtful accounts of $10,150……..224,850* _____
*Another way to report accounts receivable is
Accounts receivable……………………….$235,000
Less Allowance for doubtful accounts… (10,150) 224,850
(15-20 min.) E 5-24 March Accounts Receivable……………………. 7,500
Service R evenue………………………. 7,500 Recorded revenue on account.
March Bad-Debt Expense ($7,500 ×.02) (150)
Allowance for Bad Debts (150)
Recorded expense for the year.
March Allowance for Bad Debts ($33 + $115).. 148
Accounts Recei vable (148)
Wrote off uncollectible receivables.