Chapter 6

Solutions

EXERCISE 6.1

  1. Cash $600,000
  2. Cash equivalent $22,000
  3. Cash advance received from customer of $2,670 should be included as a debit to cash and a credit to a liability account
  4. Cash advance of $5,000 to company executive should be reported as a receivable
  5. Refundable deposit of $13,000 to developer should be reported as a receivable or a prepaid expense
  6. Cash restricted for future plant expansion of $545,000 should be reported as restricted cash in noncurrent assets
  7. The certificate of deposit of $575,000 matures in nine months so it should be re- ported as a temporary investment
  8. The utility deposit of $500 should be identified as a receivable or prepaid expense from the utility company
  9. The cash advance to subsidiary of $100,000 should be reported as a receivable
  10. The post-dated cheque of $30,000 should be reported as a payment of receivable when the post-date occurs; until the post-date, the $30,000 is classified as a receivable
  11. Details of the $115,000 cash restriction are to be separately disclosed in the balance sheet with further disclosures in the notes to the financial statements indicating the type of arrangement and amounts
  12. Cash $13,000
  13. Postage stamps on hand are reported as part of supplies or prepaid expenses
  14. Cash $520,000
  15. Cash held in a bond sinking fund is restricted; since the bonds are noncurrent, the restricted cash is also reported as noncurrent
  16. Cash $1,200
  17. Cash $13,000
  18. Cash equivalent $75,400
  19. The NSF cheque of $8,000 should be reported as a receivable

EXERCISE 6.2

  1. (Partial SFP):

    Current assets

    Cash and cash equivalent[1]

    Cash Restricted cash balance

    Non-current assets

    Cash restricted for retirement of long-term debt

    Current liabilities

    Bank indebtedness[2]

     

    $3,385,750

    175,000

     

    2,000,000

     

    150,000

    For Cash and cash equivalent:

    Commercial savings account
    – First Royal Bank ($575,000 − 175,000)

    Commercial chequing account
    – First Royal Bank

    Money market fund
    – Commercial Bank of British Columbia

    Petty cash

    Cash floats (5 × $250)

    60-day treasury bill

    Currency and coin on hand

    Cash reported on December 31, 2020
    balance sheet as current asset

    $400,000

    450,000

    2,500,000

    1,500

    1,250

    18,000

    15,000

    $3,385,750

  2. Other items classified as follows:
    1. The minimum balance at First Royal Bank of $175,000 is reported separately as a restricted cash balance as a current asset cash balance. In addition, a description of the details of the arrangement should be disclosed in the notes.
    2. The post-dated cheque for $25,000 is for a payment on accounts receivable and should not be recognized until the cheque is deposited on January 18. It will be held in a secure location until then.
    3. The post-dated cheque for $1,800 is for unearned revenue and will not be recorded as unearned revenue until the cheque can be deposited on January. It will be held in a secure location until then. Revenue will be recorded and unearned revenue offset when legal title to the goods passes to the customer on January 20.
    4. Travel advances for $15,000 are to be reported as prepaid travel.
    5. The $2,300 amount paid to the employee is to be reported as a receivable from the employee. It will be offset when collected from salary in January.
    6. The treasury bill for $50,000 should be classified as a temporary investment (current asset). It cannot be reported as a cash equivalent because the original maturity exceeds 90 days.
    7. Commercial paper should be reported as temporary investments (current as- set).
    8. Investments in shares should be classified with trading securities (current as- set) at their fair value of $4,060 ($4.06 × 1,000 shares).

EXERCISE 6.3

Partial classified balance sheet:

Current assets
Accounts receivable
Customer Accounts (of which accounts in the amount of $30,000 have been pledged as security for a bank loan) $275,000
Other[3] ($2,500 + $6,000) 8,500 $283,500
Non-current Assets
Accounts Receivable
Advance to related company[4] 30,000
Instalment accounts receivable due after December 31, 2021 50,000

EXERCISE 6.4

a.

General Journal. Date July 1: Accounts receivable 120,000 under debit. Freight-out (operating expense) 3,200 under debit. Cost of goods sold 60,000 under debit. Sales revenue 120,000 under credit. Inventory 60,000 under credit. Cash 3,200 under credit. Date July 5: Sales returns and allowances 9,000 under debit. Accounts receivable (3 x $3,000) 9,000 under credit. Date July 10: Cash 109,890 under debit. Sales discounts 1,110 under debit. Accounts receivable For sales discounts: (($120,000 - 9,000) x 1%) 111,000 under credit. Date July 14: Merchandise inventory 79,000 under debit. Accounts payable ($1,500 x 50 + 4,000) 79,000 under credit. Date July 17: Accounts receivable 224,000 under debit. Cost of goods sold 112,000 under debit. Inventory 112,000 under credit. Sales revenue 224,000 under credit. Date July 26: Cash 110,320 under debit. Sales discounts 1,680 under debit. Accounts receivable FOr sales discounts: ($224,000 x 1.5% x 50%) for Accounts receivable: ($224,000 x 50%) 112,000 under credit. Date Aug 30: Cash 112,000 under debit. Accounts receivable 112,000 under credit.

b. The implied interest rate on accounts receivable paid to Busy Beaver from Heintoch within the 15-day discount period = 1% ÷ [(30 − 15) ÷ 365] = 24.33%. This means that Heintoch would be using funds from the bank at a lower rate of 8% to save 24.33% interest on early payment of amounts owing to Busy Beaver. It is worthwhile to take advantage of the early payment discount terms in this case.

c. General journal. Date July 1: Accounts receivable 118,800 under debit. Freight-out (operating expense) 3,200 under debit. Cost of goods sold 60,000 under debit. Sales revenue 118,800 under credit. Inventory 60,000 under credit. Cash FOr accounts receivable and sales revenue $120,000 x 99% 3,200 under credit. Date July5: Refund liability 8,910 under debit. Accounts receivable ($9,000 x 99%) 8m910 under credit. Date July 10: Cash 190,890 under debit. Accounts receivable ($118,000 - 8,910) 109,890 under credit. Date July 14: Merchandise inventory 79,000 under debit. Accounts payable ($1,500 x 50 + 4,000) 79,000 under credit. Date July 17: Accounts receivable 220,640 under debit. Cost of goods sold 112,000 under debit. Inventory 112,000 under credit. Sales revenue For accounts receivable and sales revenue $224,000 x 98.5% 220,640 under credit. Date July 26: Cash 110,320 under debit. Accounts receivable 110,320 under credit. Date Aug 30: Sales revenue 29,910 under debit, Refund liability ($23,000 - 8,910 - 44,000) 29,910 under credit.

EXERCISE 6.5

a.

Calculation of cost of goods sold:

Opening inventory

Merchandise purchased

Less: Ending inventory

Cost of goods sold

Sales on account ($410,000 × 1.35)

Less collections deposited in bank

Uncollected balance

Balance per ledger

Unaccounted for shortage

 

$35,000

600,000

225,000

$410,000

553,500

420,000

133,500

85,000

$48,500

b. Accounts receivable balance per ledger of $85,000 is less than estimated accounts receivable of $133,500, suggesting that some accounts receivable collections may have been received but not actually deposited to the company’s bank account.

Controls to help prevent theft include proper segregation of duties among the person initially in receipt of the cheque, the person depositing it, and the person recording the collection. Customers should be encouraged to pay by cheque so an audit trail is maintained. A timely completion of the monthly bank reconciliation would help detect if any cash was recorded as collected, but not actually deposited to the company’s bank account.

EXERCISE 6.6

  1. General journal. Bad debt expense 11,340 under debit. AFDA (($225,000 x 4%) + 2,340) 11,340 under credit. Bad debt expense 8,995 under debit. AFDA (141,000 x 1% + 53,500 x 3% + 10,500 x 8% + 20,000 x 14%) = 6,655 + 2,340) 8,995 under credit. Bad debt expense 2,160 under debit. AFDA (($225,000 x 2%) - 2,340) 2,160 under credit.
  2. An unadjusted debit balance in the AFDA at year-end is usually the result of write- offs during the year exceeding the total AFDA opening credit balance. The purpose of the AFDA is to ensure that the net accounts receivable is valued at net realizable value on the balance sheet.

EXERCISE 6.7

  1. Balance, January 1, 2020

    Bad debt expense accrual (1% × ($16,000,000 × 0.75))

     

    Uncollectible receivables written off

    Balance, December 31, 2020, before adjustment

    Allowance adjustment

    Balance, December 31, 2020

    $575,000

    120,000

    695,000

    (40,000)

    655,000

    155,000

    $500,000

    General journal. Allowance for doubtful accounts 155,000 under debit. Bad debt expense 155,000 under credit.

  2. (Partial classified balance sheet as at December 31)

    Current assets

    Accounts receivable

    Less allowance for doubtful accounts

    Net accounts receivable

     

    $50,950,000

    500,000

    50,450,000

    The net accounts receivable balance is intended to measure the net realizable value of the accounts receivable at December 31.

  3. The direct write-off approach is not in compliance with GAAP unless the amount of the write-off is immaterial. Direct write-off does not match (bad debt) expense with revenues of the period, nor does it result in receivables being stated at estimated net realizable value on the balance sheet.

EXERCISE 6.8

  1. General Journal. Date May 1 2020: Notes receivable under debit 228,676 Services revenue under credit 228,676 PV = (0 PMT, 8 I/Y, 5 N, 336000 FV) Date Dec 31 2020 Notes receivable under debit 12,196 Interest income under credit 12,196 ($228,676 × 8% × 8 ÷ 12) Date Dec 31 2021 Notes receivable under debit 19,270 Interest income under credit 19,270 ([$228,676 + 12,196] × 8%) Date Dec 31 2022 Notes receivable under debit 20,811 Interest income under credit 20,811 ([$228,676 + 12,196 + 19,270] × 8%) Date Dec 31 2023 Notes receivable under debit 22,476 Interest income under credit 22,476 ([$228,676+12,196+19,270+20,811]×8%) Date Dec 31 2024 Notes receivable under debit 24,274 Interest income under credit 24,274 ([$228,676 + 12,196 + 19,270 + 20,811 + 22,476] × 8%) Date May 1 2025 Cash under debit 336,000 Notes receivable (can be netted together into one amount for $327,703 credit) under debit 8,297 Notes receivable (can be netted together into one amount for $327,703 credit) under credit 336,000 Interest income (rounded so that the carrying value was equal to $336,000 at maturity)under credit 8,297 Interest = ([$228,676 + 12,196 + 19,270 + 20,811 + 22,476 + 24,274] × 8%) × 4 ÷ 12 (rounded)
  2. Using a financial calculator input the following variables:

    Interest = ± 228,676 PV, 0 PMT, 5 N, 336,000 FV

    = 7.99 or 8% rounded

  3. (Partial balance sheet):

    Non-current assets

    Notes receivable, no-interest-bearing, due May 1, 2025

     

    $260,142*

    *$228,676 + 12,196 + 19,270

    Unamortized discount as at December 31, 2021, is $336,000 − 260,142 = 75,858. As at December 31, 2024, the note would be classified as a current asset on the SFP because the maturity date of May 1, 2025, is within the next fiscal year.

  4. The fair value of the services provided can be used to value and record the transaction, instead of fair value of the note received.

EXERCISE 6.9

a.

Scenario i: General journal. Date: July 1 Note receivable 120,000 under debit. Accounts receivable 120,000 under credit. Date Dec 31: Interest receivable 3,000 under debit. Interest income ($120,000 x 5% x 6 months) 3,000 under credit.

Scenario ii: General Journal. Date July 1: Note receivable 105,000 under debit. Accounts receivable 105,000 under credit. Dec 31 Note receivable 2,635 under debit. Interest income ($105,000 x 5% x 6 / 12) 2,625 under creditScenario iii: General journal. Date July 1: Note receivable 104,545 under debit. Accounts receivable PV=(1N, 10 I/Y, 115000 FV) 104,545 under credit. Date December 31: Note receivable 5,227 under debit. Interest income ($104,545 x 10% x 6 months) 5,227 under credit.

b.

Calculate interest from January 1 to July 1

General journal. Date July 1: Note receivable 5,228 under debit. Interest income ($104,545 + $5,227 - $115,000) 5,228 under credit.

Calculate the loss form impairment: General Journal. Date July 1: Cash 86,250 under debit. Loss on impairment of notes receivable 33,750 under debit. Note receivable 115,000 under credit. For Cash (115,000 x 75%)

EXERCISE 6.10

  1. PV = (0 PMT, 4 N, 7.5 I/Y, 18,000 FV) = $13, 478 Fair value of equipment (present value of note) $13,478, Carrying amount 12,600, Gain on sale of equipment $878. General Journal. Date: Jan 1. Notes receivable 13,478 under debit. Accumulated depreciation - equipment 65,400 under debit. Equipment 78,000 under credit. Gain on sale of equipment 878 under credit. For Accum. dep.: ($78,000 - $12,600)
    General Journal. Date Dec 31: Note receivable 1,011 under debit. Interest revenue 1,011 under creit. First year interest ($13,478 x 7.5%). Cash 18,000 under debit. Note receivable 18,000 under credit. Collection at maturity.
  2.   Since Harrison uses ASPE, either straight-line or the effective interest method can be used for recognizing interest income. Below is the calculation using the straight- line method. Interest income for $1,131 for each of the next four consecutive years will be recorded.General journal. Date Dec 31. Notes receivable 1,131 under debit. Interest income 1,131 under credit. First year interest: ($18,000 − 13,478 = $4,522 ÷ 4 yrs = 1,131)

EXERCISE 6.11

  1. General journal. Cash 472,000 under debit. Finance expense 28,000 under debit. Notes payable 500,000 under credit. For a (800,000 x 3.5%) Cash 750,000 under debit. accounts receivable 750,000 under credit. For b. Notes payable 500,000 under debit. Interest expense 9,375 under debit. Cash 509,375 under credit. For c. ($500,000 x 7.5% x 3 / 12)
  2. To be recorded as a sale under IFRS, both of the following conditions must be met:
    1. The transferred assets risks and rewards of ownership have been transferred to the transferee. This is evidenced by transferring the rights to receive the cash flows from the receivables. Where the transferor continues to receive the cash flows, there must be a contractual obligation to pay these cash flows to the transferee without material delay.
    2. The transferee has obtained the right to pledge or to sell the transferred assets to an unrelated party (concept of control)

    To be recorded as a sale under ASPE, the control over the receivables has been surrendered as evidenced by all of the following three conditions being met:

    1. The transferred assets have been isolated from the transferor.
    2. The transferee has obtained the right to pledge or to sell the transferred assets.
    3. The transferor does not maintain effective control of the transferred assets through a repurchase agreement.
  3. Management would likely prefer the receivables transfer transaction to be treated as a sale and derecognized from the accounts rather than a secured borrowing because the company would not have to record and report the additional debt in the SFP.

EXERCISE 6.12

General Journal. Cash 1,500,000 under debit. Loss on sale of receivables 200,000 under debit. Accounts receivable 1,450,000 under credit. Recourse liability 250,000. For Loss on sale: ($250,000 − $50,000)

EXERCISE 6.13

  1. General Journal. Date Feb 1 2020. Cash ($800,000 × (100% − 2.5% + 4%)) 748,000 under debit. Due from Factor ($800,000 × 4%) 32,000 under debit. Loss on sale of receivables 30,000 under debit. Recourse liability 10,000 under credit. Accounts receivable 800,000 under credit.
  2. Factoring the accounts receivable will improve the accounts receivable turnover ratio immediately after recording the entry on February 1 because the average accounts receivable amount in the denominator will decrease, making the ratio larger.For example, if sales were $3.2M and accounts receivable before the sale was $1.8M, the turnover ratio would be 1.78 (3.2M ÷ 1.8M) compared to 3.2 (3.2M ÷ 1M). If the calculation is made at the December 31 fiscal year-end, the balances of sales and average accounts receivable would no longer be affected by this transaction, and the accounts receivable turnover ratio would not be affected. This is because time has passed and many of the accounts would have been collected by year-end, had the company not sold them to a factor.

EXERCISE 6.14

  1. i. Land in exchange for a note:General journal. Notes receivable 387,531 under debit. Land 250,000 under credit. Gain on sale of land 137,531 under credit.

    PV = (0 PMT, 3 N, 11 I/Y, 530,000 FV) = $387,531

            ii. Services in exchange for a note:

    General journal. Notes receivable 330,778 under debit. Serice revenue 330,778 under credit.

    PV = (15,000 PMT, 6 N, 11 I/Y, 500,000 FV) = $330, 778

            iii. Partial settlement of account in exchange for a note:

    General journal. Notes receivable 43,257 under debit. Accounts receivable 43,257 under credit.

    PV = (12,000 PMT, 5 N , 12 I/Y, 0 FV) = $43, 357

  2. Instalment Note Receivable Effective Interest Method. Carrying amount of note $43,257. Oct 1-Dec 31. Interest (@12%) 1,298 ($43,257 × 12% × 3 ÷ 12). Jan 1-Oct 1: payment 12,000. interest 3,893 ($43,257 × 12% × 9 ÷ 12) amoritization 6,809. Carrying amount 36,448 ($6,809 reduction in principal).Oct 1 – Dec 31 Interest 1,094 Jan 1 - Oct 1 payment 12,000, interest 3,280, amortization 7,626, carrying amount 36,448. Oct 1 – Dec 31 Interest 865 Jan 1 - Oct 1 payment 12,000, interest 2,594, amortization 8,541, carrying amount 28,822. Oct 1 – Dec 31 Interest 609 Jan 1 - Oct 1 payment 12,000, interest 1,825, amortization 9,555, carrying amount 20,281. Oct 1 – Dec 31 Interest 322 Jan 1 - Oct 1 payment 12,000, interest 964, amortization 10,715, carrying amount 10,715. Note - some rounding differeneces will occur when caluclating interest. General journal. Dec 31. Interest receivable 1,298 under debit (from above). Interest income 1,298 under credit. Oct 1: Cash 12,000 under debit. Note receivable 6,809 (See schedule above for the reduction in the principal amount after the first payment was made for $12,000.) under credit. Interest income 3,893 under credit. Interest receivable 1,298 under credit.
  3. From the perspective of Brew It Again, an instalment note reduces the risk of non- collection when compared to a non-interest-bearing note. In the case of the non- interest-bearing note, the full amount is due at the maturity of the note. The instalment note provides a regular reduction of the principal balance in every payment received annually. This is demonstrated in the effective interest table illustrated above for the instalment note.

EXERCISE 6.15

  1. Accounts Receivable Turnover = Net Credit Sales ÷ Average Trade Receivables (net)

    (Using credit sales) = $1,022,020 ÷ (($123,000 + $281,760) ÷ 2) = 5.05 times or about 72 days

    Note that the write-off of $12,500 does not affect net accounts receivable. The average receivable is therefore about 72 days old (365 ÷ 5.05).

  2. Credit sales are a better measure in the calculation of accounts receivable turnover ratio since cash sales do not affect accounts receivable balances. On this basis, Corvid Company’s accounts receivable turnover ratio has declined from the previous year. The average number of days to collect the accounts was 62 days (365 ÷ 5.85) compared to 72 days for 2020. This could be an unfavorable trend for future liquidity, if customers continue to pay slowly. Corvid may want to consider offering discounts for early payments of accounts or tighten their credit policy.

    It should be noted that credit sales are not always available when performing analysis and calculating the accounts receivables turnover ratio. When not available, the figure of net sales should be used. As long as the calculation is done consistently between years, or between businesses, the comparison will remain relevant.

EXERCISE 6.16

  1. Jersey Shores:General journal. Cash 1,143,750 under credit. Due from factor 62,500 under debit. Loss on sale of receivables 43,750 under debit. Accounts receivable 1,250,000 under credit.For Due from factor: ($1,250,000 × 5%), for Loss on sale: ($1,250,000 × 3.5%)Fast factors:General journal. Accounts receivable 1,250,000 under debit,. Due to customer 62,500 under credit. financing revenue 43,750 under credit. Cash 1,142,750 under credit. For Due to customer: ($1,250,000 × 5%), for Financing revenue: ($1,250,000 × 3.5%)
  2. Jersey Shores:General journal. Cash 1,143,750 under debit. due from factor 62,500 under debit. loss on sale of receivables 51,150 under debit. Accounts receivable 1,250,000 under credit. recourse liability 7,400.For Loss on sale: ($43,750 + $7,400)

EXERCISE 6.17

General journal. July 11. Cash ($400,000 × 95%) 380,000 under debit. Loss on sale of receivables ($400,000 × 95% − $14,000 − $12,000 = $354,000 − $400,000 carrying value of accounts receivable = $46,000) 46,000 under debit. Recourse liability 12,000 under credit. accrued liabilities 14,00 under credit. accounts receivable 400,000 under credit.

Exercise 6.18

1. Percent of credit sales

Account Name

Debit

Credit
Bad Debt Expense 31,270
Allowance for Doubtful Accounts 31,270
($2,659,000 × 98%) × 1.20%

2. Percent of accounts receivable

Account Name

    

Debit

Credit
Bad Debt Expense 26,211
Allowance for Doubtful Accounts 26,211
($745,600 × 5.20%) = $38,771 required balance in afda
Required balance 38,771
Current balance (credit) 12,560 assume credit if not stated
Entry needed 26,211

Exercise 6.19

London Corp
Bank Reconciliation
at May 31, Y6
Balance per books $9,370 May deposit 5,000
April deposits 1,540
Add: collection of note 1,000 TRUE May deposit 3,460
per books 5,810
Deduct:
NSF Cheque 335 May cheques 4,000
May Service Charge 25 360 April o/s cheques 2,000
Reconciled Balance $10,010 TRUE May cheques 2,000
per books 3,100
Balance per bank $8,760
Add: Deposits in Transit 2,350 difference
Deduct: Outstanding cheques 1,100
Reconciled Balance $10,010

Exercise 6.20

Present value of the note receivable

PV $27,945.15
Rate 5%
Nper 3
Pymt 0
FV -$32,350
Type 0

Journal entries

1/1/Y3

Account Name

Debit

Credit
Notes Receivable 27,945
Sales 27,945
12/31/Y3

Account Name

Debit

Credit
Notes Receivable 1,397
Interest Revenue 1,397
$27,945 × 5%
12/31/Y4

Account Name

Debit

Credit
Notes Receivable 1,467
Interest Revenue 1,467
($27,945 + $1,397) × 5%
12/31/Y5

Account Name

Debit

Credit
Notes Receivable 1,540
Interest Revenue 1,540
($27,945 + $1,397 + $1,467) × 5%
12/31/Y5

Account Name

Debit

Credit
Cash 32,350
Notes Receivable 32,350

Exercise 6.21

1. Journal entries

1/22/Y4 Allowance for Doubtful Accounts 23,650
Accounts Receivable 23,650
write off Slide Corp.
2/15/Y4 Accounts Receivable 12,000
Allowance for Doubtful Accounts 12,000
reinstate the amount to be received from Slide Corp. ($60,000 x 0.20)
when cash is received, another entry will be required - to record receipt of cash.

2. Net Realizable Value

 

Before

After
Accounts Receivable $3,004,150 $2,992,500
Allowance for Doubtful Accounts 98,560 86,910
Net realizable value $2,905,590 $2,905,590

Exercise 6.22

1. Without recourse (Oxford)

Cash 1,130,304
Due from factor (1) 134,560
Loss on disposal of accounts receivable (2) 80,736
Accounts Receivable 1,345,600
(1) $1,345,600 × 10%
(2) $1,345,600 × 6%

2. With recourse (Oxford)

Cash 1,130,304
Due from factor (1) 134,560
Loss on disposal of accounts receivable (2) 93,036
Recourse Liability 12,300
Accounts Receivable 1,345,600
(1) $1,345,600 × 10%
(2) ($1,345,600 × 6%) +$12,300

  1. The treasury bill for $18,000 is to be classified as a cash equivalent because the original maturity is less than 90 days. ↵
  2. The bank overdraft at the Lemon Bank for $150,000 is to be reported separately as a current liability because there are no other accounts at Lemon Bank available for offset. ↵
  3. These items could be separately classified, if considered material. ↵
  4. This classification assumes that these receivables are not collectible in the near term based on the fact that they were advanced in 2015 and remain outstanding. ↵

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