Answer for Chapter7 Receivables.doc

CHAPTER 7 ReceivablesKEY TERMaverage cost method The method of inventory costing that is based upon the assumption that costs should be charged against revenue by using the weighted average unit cost of the items sold. first-in, first-out (FIFO) method The method of inventory costing based on the assumption that the costs of merchandise sold should be charged against revenue in the order in which the costs were incurred. gross profit method A method of estimating inventory cost that is based on the relationship of gross profit to sales. inventory turnover The relationship between the volume of goods sold and inventory, computed by dividing the cost of goods sold by the average inventory. last-in, first-out (LIFO) method A method of inventory costing based on the assumption that the most recent merchandise inventory costs should be charged against revenue. lower-of-cost-or-market (LCM) method A method of valuing inventory that reports the inventory at the lower of its cost or current market value (replacement cost). net realizable value The estimated selling price of an item of inventory less any direct costs of disposal, such as sales commissions. number of days sales in inventory The relationship between the volume of sales and inventory, computed by dividing the inventory at the end of the year by the average daily cost of goods sold. physical inventory A detailed listing of merchandise on hand. retail inventory method A method of estimating inventory cost that is based on the relationship of gross profit to sales. KEY POINT 1. Journalize the entries for the allowance method of accounting for uncollectibles, and estimate uncollectible receivables based on sales and on an analysis of receivables.A year-end adjusting entry provides for (1) the reduction of the value of the receivables to the amount of cash expected to be realized from them in the future and (2) the allocation to the current period of the expected expense resulting from such reduction. The adjusting entry debits Uncollectible Accounts Expense and credits Allowance for Doubtful Accounts. When an account is believed to be uncollectible, it is written off against the allowance account. When the estimate of uncollectibles is based on the amount of sales for the fiscal period, the adjusting entry is made without regard to the balance of the allowance account. When the estimate of uncollectibles is based on the amount and the age of the receivable accounts at the end of the period, the adjusting entry is recorded so that the balance of the allowance account will equal the estimated uncollectibles at the end of the period. The allowance account, which will have a credit balance after the adjusting entry has been posted, is a contra asset account. The uncollectible accounts expense is generally reported on the income statement as an administrative expense. 2. Describe the nature and characteristics of promissory notes.A note is a written promise to pay a sum of money on demand or at a definite time. Characteristics of notes that affect how they are recorded and reported include the due date, interest rate, and maturity value. The basic formula for computing interest on a note is: Principal X Rate X Time = Interest. The due date is the date a note is to be paid, and the period of time between the issuance date and the due date is normally stated in either days or months. The maturity value of a note is the sum of the face amount and the interest. 3. Journalize the entries for notes receivable transactions.A note received in settlement of an account receivable is recorded as a debit to Notes Receivable and a credit to Accounts Receivable. When a note matures, Cash is debited, Notes Receivable is credited, and Interest Revenue is credited. If the maker of a note fails to pay the debt on the due date, the note is said to be dishonored. When a note is dishonored, the maturity value of the note is debited to an accounts receivable account, while the face value is credited to Notes Receivable and Interest Revenue is credited for the difference. 4. Compute and interpret the accounts receivable turnover and the number of days sales in receivables.The accounts receivable turnover is net sales divided by average accounts receivable. It measures how frequently accounts receivable are being converted into cash. The number of days sales in receivables is the end-of-year accounts receivable divided by the average daily sales. It measures the length of time the accounts receivable have been outstanding. EXERCISEMonarch Map Companys balance sheet at December 31, 2007, reported following:Accounts receivable$60,000Allowance for uncollectible accounts 2,000Requirements1. How much of the receivable did Monarch expect to collect? Stated differently what was the net realizable value of these receivables?2. Journalize, without explanations, 2008 entries for Monarch:a. Total estimated Uncollectible-Account Expense was $2,400 for the firm.Three quarters of the year, based on the percent-of-sales method.b. Write-offs of accounts receivable totaled $2,700.c. December 31, 2008, aging of receivable indicates that #2,200 of the receivables is uncollectible.Prepare a T-account for Allowance for Uncollectible Accounts, as follows: Allowance for Uncollectible Accounts2008 Write-offs ?Dec.31, 2007 Bal. 2,0002008 Expense ?Bal. before Adj.Dec.31, 2008 Adj. ?Dec. 31, 2008 Bal. 2,200Post all three transactions to the allowance account.3. Report Monarchs receivable and related allowance on the December 31, 2008, balance sheet. Accounts receivable total $63,000.What is the net realizable value of receivables at December 31, 2008?How much is uncollectible-account expense for 2008?SOLUTION1.Requirement 1Net realizable value of receivables($60,000-$2,000) $58,000Requirement 2(a)Uncollectible-Account Expense 2,400 Allowance for Uncollectible Accounts 2,400(b)Allowance for Uncollectible Accounts 2,700 Accounts Receivable 2,700(c)Uncollectible-Account Expense($2,200-$1,700) 500 Allowance for Uncollectible Accounts 500Allowance for Uncollectible Accounts2008 Write-offs 2,700Dec.31, 2007 Bal. 2,0002008 Expense 2,400Bal. before Adj. 1,700Dec.31, 2008 Adj. 500Dec. 31, 2008 Bal. 2,200Requirement 3Accounts receivable $63,000Less: Allowance for uncollectible accounts (2,200)Accounts receivable, net $60,800Uncollectible-account expense for 2008($2400+$500$ 2,9002.Suppose First Fidelity Bank engaged in the following transactions:2007Apr. 1 Loaned out $8,000 to Bland Co. Received a six-month,10% note.Oct. 1 Collected the Bland note at maturity.Dec. 1 Loaned $6,000 to Flores, Inc. , on a 180-day, 12% note.Dec. 31 Accrued interest revenue on the Flores note.2008May 30 Collected the Flores note at maturity.First Fidelitys acc