CH 6 Classpack With Solutions

Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash
CHAPTER 6
REPORTING AND INTERPRETING
SALES REVENUE, RECEIVABLES, AND CASH
Chapter Take-Aways
6-1 Analyze the impact of credit card sales, sales discounts, and sales returns on the amounts
reported as net sales.
Both credit card discounts and sales or cash discounts can be recorded either as contra-revenues or
as expenses. When recorded as contra-revenues, they reduce net sales. Sales returns and
allowances, which should always be treated as a contra-revenue, also reduce net sales.
6-2 Estimate, report, and evaluate the effects of uncollectible accounts receivable (bad debts) on
financial statements.
When receivables are material, companies must employ the allowance method to account for
uncollectibles. These are the steps in the process:
a. The end-of-period adjusting entry to record bad debt expense estimates.
b. Writing off specific accounts determined to be uncollectible during the period.
The adjusting entry reduces net income as well as net accounts receivable. The write-off affects
neither.
6-3 Analyze and interpret the receivables turnover ratio and the effects of accounts receivable on
cash flows.
a. Receivable turnover ratio—This ratio measures the effectiveness of credit-granting and
collection activities. It reflects how many times average trade receivables were recorded and
collected during the period. Analysts and creditors watch this ratio because a sudden decline in it
may mean that a company is extending payment deadlines in an attempt to prop up lagging sales
or is recording sales that later will be returned by customers.
b. Effects on cash flows—When a net decrease in accounts receivable for the period occurs, cash
collected from customers is always more than revenue, and cash flows from operations
increases. When a net increase in accounts receivable occurs, cash collected from customers is
always less than revenue. Thus, cash flows from operations decline.
6-4 Report, control, and safeguard cash.
Cash is the most liquid of all assets, flowing continually into and out of a business. As a result, a
number of critical control procedures, including the reconciliation of bank accounts, should be
applied. Also, management of cash may be critically important to decision makers who must have
cash available to meet current needs yet must avoid excess amounts of idle cash that produce no
revenue.
6-1
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Key Ratio
Receivables turnover ratio measures the effectiveness of credit-granting and collection activities. It is
computed as follows:
Receivables Turnover = Net Sales  Average Net Trade Accounts Receivable
Finding Financial Information
BALANCE SHEET INCOME STATEMENT

Under Current Assets Revenues
Accounts receivable (net of allowance for Net sales (sales revenue less discounts and
doubtful accounts) sales returns and allowances)
Expenses
Selling expenses (including bad debt
expense)
STATEMENT OF CASH FLOWS NOTES

Under Operating Activities (indirect Under Summary of Significant Accounting
method) Policies
Net income Revenue recognition policy
+ decreases in accounts receivable (net) Under a Separate Note on Form 10-K
 increases in accounts receivable (net) Bad debt expense and write-offs of bad debts
6-2
HANDOUT 6 – 1
ACCOUNTS RECEIVABLE JOURNAL ENTRIES
Prepare journal entries to record the following transactions:
(1) On December 15, Year 1, the company recorded $150,000 sales on credit.
Dec. 15
Ensure the equation still balances and debits = credits

Assets = Liabilities + Stockholders’ Equity
(2) On December 31, Year 1, the company estimated bad debt expenses of $15,000.
Dec. 31

(3) On January 12, Year 2, the company collected $100,000 worth of accounts receivable.
Jan. 12

6-3
HANDOUT 6 – 1, CONTINUED
(4) After many collection attempts, on June 15, Year 2, the company determined that it would not collect
$10,000 in accounts receivables from Pendant Publishing. It decided to write-off this account.
Jun. 15

(5) On July 16, Year 2, Pendant Publishing called to say that they have had financial problems but can
afford to pay $7,000 to settle their $10,000 debt in full. The company agreed to these terms, and
reversed $7,000 of the prior write-off. It received a $7,000 check from Pendant the next day.
Jul. 16
Jul. 16

Post the above entries to the following T-accounts:
+ Accounts Receivable (A) – - Allowance for Doubtful Accounts (xA) +
6-4
HANDOUT 6 – 1 SOLUTION
ACCOUNTS RECEIVABLE JOURNAL ENTRIES

Prepare journal entries to record the following transactions:
(1) On December 15, Year 1, the company recorded $150,000 sales on credit.
Dec. 15 Accounts Receivable (+A) 150,000

Sales (+R, +SE) 150,000

Accounts +150,000 Sales +150,000
Receivable
(2) On December 31, Year 1, the company estimated bad debt expenses of $15,000.
Dec. 31 Bad Debt Expense (+E, –SE) 15,000

Allowance for Doubtful Accounts (+xA, –A) 15,000

Allowance –15,000 Bad Debt –15,000
for Expense
Doubtful
Accounts
(3) On January 12, Year 2, the company collected $100,000 worth of accounts receivable.
Jan. 12 Cash (+A) 100,000

Accounts Receivable (–A) 100,000

Cash +100,000
Accounts –100,000
Receivable
6-5
HANDOUT 6 – 1 SOLUTION, CONTINUED
(4) After many collection attempts, on June 15, Year 2, the company determined that it would not collect
$10,000 in accounts receivables from Pendant Publishing. It decided to write-off this account.
Jun. 15 Allowance for Doubtful Accounts (–xA, +A) 10,000


Allowance +10,000
for
Doubtful
Accounts
Accounts –10,000
Receivable
(5) On July 16, Year 2, Pendant Publishing called to say that they have had financial problems but can
afford to pay $7,000 to settle their $10,000 debt in full. The company agreed to these terms, and
reversed $7,000 of the prior write-off. It received a $7,000 check from Pendant the next day.
Jul. 16 Accounts Receivable (+A) 7,000

Jul. 16 Cash (+A) 7,000


Accounts +7,000
Receivable
Allowance –7,000
for
Doubtful
Accounts
Cash +7,000
Accounts –7,000
Receivable
Post the above entries to the following T-accounts:
+ Accounts Receivable (A) – – Allowance for Doubtful Accounts (xA) +

Dec. 15 150,000 15,000 Dec. 31
100,000 Jan. 12 Jun. 15 10,000
10,000 Jun. 15 7,000 Jul. 16
Jul. 16 7,000 7,000 Jul. 16 12,000 End. Bal.
End. Bal. 40,000
6-6
HANDOUT 6 – 2
ESTIMATION AND RECORDING OF UNCOLLECTIBLE ACCOUNTS –

PERCENTAGE OF CREDIT SALES RECEIVABLE METHOD
Part 1 – Vandalia reported $300,000 in sales during Year 2. The company’s allowance for doubtful
accounts has an unadjusted credit balance of $12,000 at December 31, Year 2. Based on prior experience,
management estimates that 2.5% of sales will result in bad debts. Prepare the required adjusting journal
entry.
Dec. 31

+ Bad Debt Expense (E) – - Allowance for Doubtful Accounts (xA) +
Part 2 – Assume instead that the company’s allowance for doubtful accounts has an unadjusted debit
balance of $400. Prepare the required adjusting journal entry.
Dec. 31

6-7

PERCENTAGE OF CREDIT SALES RECEIVABLE METHOD
accounts has an unadjusted credit balance of $12,000 at December 31, Year 2. Based on prior experience,
management estimates that 2.5% of sales will result in bad debts. Prepare the required adjusting journal
entry.


for Expense
Doubtful
Accounts

12,000 Beg. Bal.
Dec. 31 7,500 7,500 Dec. 31
End. Bal. 7,500 19,500 End. Bal.


for Expense
Doubtful
Accounts

Beg. Bal. 400
Dec. 31 7,500 7,500 Dec. 31
End. Bal. 7,500 7,100 End. Bal.
6-8
HANDOUT 6 – 3

AGING OF ACCOUNTS RECEIVABLE METHOD
accounts has an unadjusted credit balance of $12,000 at December 31, Year 2. At that time, Vandalia’s
accountant prepared the following Aging of Accounts Receivable:
Number of days unpaid

Customer Total
0-30 30-60 60-90 Over 90
Alpha Sales $ 700 $ 700
Gamma Manufacturing Co. 11,900 $ 11,900
Delta Shipping Corp. 2,200 $ 2,200
Epsilon Industries 6,000 $ 6,000
Theta Manufacturing 1,800 1,800
Zeta Industries 600 600
Other customers 136,800 88,100 26,900 9,800 12,000
Totals $160,000 $100,000 $30,000 $12,000 $18,000
Based on prior experience, Vandalia’s accountant estimates the probable bad debt loss rates for each
category to be as follows: 0-30 days old, 4%; 30-60 days old, 10%; 60-90 days old, 20%; and over 90
days old, 40%. The company’s Allowance for Doubtful Accounts has an unadjusted credit balance of
$12,000. Prepare the required adjusting journal entry.
Dec. 31

+ Bad Debt Expense (E) – – Allowance for Doubtful Accounts (xA) +
6-9
HANDOUT 6 – 3, CONTINUED
Dec. 31

6-10

AGING OF ACCOUNTS RECEIVABLE METHOD
accounts has an unadjusted credit balance of $12,000 at December 31, Year 2. At that time, Vandalia’s
accountant prepared the following Aging of Accounts Receivable:
Number of days unpaid

Customer Total
0-30 30-60 60-90 Over 90
Alpha Sales $ 700 $ 700
Gamma Manufacturing Co. 11,900 $ 11,900
Delta Shipping Corp. 2,200 $ 2,200
Epsilon Industries 6,000 $ 6,000
Theta Manufacturing 1,800 1,800
Zeta Industries 600 600
Other customers 136,800 88,100 26,900 9,800 12,000
Totals $160,000 $100,000 $30,000 $12,000 $18,000
x Probable bad debt loss rates x 4% x 10% x 20% x 40%
Subtotals by aging category $ 4,000 $ 3,000 $ 2,400 $ 7,200
Estimated ending balance in Allowance for
Doubtful Accounts $ 16,600
Less: Balance in Allowance for Doubtful
Accounts before adjustment 12,000
Bad Debt Expense for the year $ 4,600
Based on prior experience, Vandalia’s accountant estimates the probable bad debt loss rates for each
category to be as follows: 0-30 days old, 4%; 30-60 days old, 10%; 60-90 days old, 20%; and over 90
days old, 40%. The company’s Allowance for Doubtful Accounts has an unadjusted credit balance of
$12,000. Prepare the required adjusting journal entry.


for Expense
Doubtful
Accounts

12,000 Beg. Bal.
Dec. 31 4,600 4,600 Dec. 31
End. Bal. 4,600 16,600 End. Bal.
6-11
HANDOUT 6 – 3 SOLUTION, CONTINUED
Part 2 – Assume instead that the company’s allowance for doubtful accounts has an unadjusted debit balance
of $400. Prepare the required adjusting journal entry.
Calculation:
Estimated ending balance in Allowance for Doubtful Accounts $ 16,600
Plus debit balance in Allowance for Doubtful Accounts before adjustment 400
Bad Debt Expense for the year $17,000


for Expense
Doubtful
Accounts

Beg. Bal. 400
Dec. 31 17,000 17,000 Dec. 31
End. Bal. 17,000 16,600 End. Bal.
6-12
HANDOUT 6 – 4
BANK RECONCILIATION
Information from the records and bank statement and of Matrix, Inc. as of July 31 is set forth below
Cash balance per bank, July 31 $9,610

Cash balance per general ledger, July 31 7,430
Outstanding checks at July 31 2,417
Check mailed to the bank for deposit that had not reached the bank by July 31 500
NSF check (from a customer for a payment on account) returned by bank 281
July interest earned per bank statement 30
Check no. 781 for supplies expense cleared the bank for $240, but was erroneously
recorded in the books at $268.
Deposit by Acme Company erroneously credited by the bank to our account 486
Part A
Prepare the bank reconciliation for Matrix, Inc.
Matrix, Inc.
Bank Reconciliation
July 31
6-13
HANDOUT 6 – 4, continued
Part B
Prepare any journal entries that should be made as a result of the bank reconciliation.
Date Accounts Debit Credit
6-14
BANK RECONCILIATION
Information from the records and bank statement and of Matrix, Inc. as of July 31, Year 1, is set forth
below
Cash balance per bank, July 31 $9,610

Cash balance per general ledger, July 31 7,430
Outstanding checks at July 31 2,417
Check mailed to the bank for deposit that had not reached the bank by July 31 500
July interest earned per bank statement 30
Check no. 781 for supplies expense cleared the bank for $240, but was erroneously
recorded in the books at $268.
Deposit by Acme Company erroneously credited by the bank to our account 486
Part A
Prepare the bank reconciliation for Matrix, Inc.
Matrix, Inc.
Bank Reconciliation
July 31
Bank Statement Books

Ending cash balance per bank statement $9,610 Ending cash balance per books $7,430
Additions: Additions:
Deposit in transit 500 Interest 30
Deductions: Recording error check 781 28
Bank error (486) Deductions:
Outstanding checks (2,417) NSF check (281)
Up-to-date ending cash balance $7,207 Adjusted Balance, July 31 $7,207
Part B

July 31 Cash (+A) 30
Interest Revenue (+R, +SE) 30
July 31 Cash (+A) 28

Accounts Payable (+L) 28
July 31 Accounts Receivable (+A) 281

Cash (–A) 281
6-15
HANDOUT 6 – 5
BANK RECONCILIATION
Prepare the bank reconciliation for Donna’s Day Care using the following information:
Cash balance per bank, June 30 $5,586

Cash balance per general ledger, June 30 5,055
Outstanding checks, June 30 1,816
Deposit in transit, June30 750
June interest earned per bank statement 15
Check no. 800 in payment of accounts payable cleared the bank for $1,100, but was
erroneously recorded in the books at $$800
Deposit in amount of $6,000, recorded properly on books, erroneously credited on bank
statement as $5,800
Part A
Prepare the bank reconciliation for Donna’s Day Care.
Donna’s Day Care

Bank Reconciliation
June 30
6-16
HANDOUT 6 – 5, continued
Part B
6-17
BANK RECONCILIATION
Prepare the bank reconciliation for Donna’s Day Care using the following information:
Cash balance per bank, June 30 $5,586

Cash balance per general ledger, June 30 5,055
Outstanding checks, June 30 1,816
Deposit in transit, June 30 750
June interest earned per bank statement 15
Check no. 800 in payment of accounts payable cleared the bank for $1,100, but was
erroneously recorded in the books at $$800
Deposit in amount of $6,000, recorded properly on books, erroneously credited on bank
statement as $5,800.
Part A
Prepare the bank reconciliation for Donna’s Day Care.
Donna’s Day Care

Bank Reconciliation
June 30
Bank Statement Books

Ending cash balance per bank statement $5,586 Ending cash balance per books $5,055
Additions: Additions:
Deposit in Transit 750 Interest 15
Deductions: Deductions:
Bank error (200) Recording error check 800 (300)
Outstanding checks (1,816) NSF check (450)
Up-to-date ending cash balance $4,320 Adjusted Balance, July 31 $4,320
Part B

June 30 Cash (+A) 15
Interest Revenue (+R, +SE) 15
June 30 Accounts Payable (–L) 300

Cash (–A) 300
June 30 Accounts Receivable (+A) 450

Cash (–A) 450
6-18
HANDOUT 6 – 6
SALES JOURNAL ENTRIES
On March 3, Gooddeal.com sold merchandise for $2,500, terms 2/10 n/30. Prepare the journal entry.
Debit and credit the accounts affected
Mar. 3

The customer paid for the merchandise on March 6, taking advantage of the permitted discount. Prepare
the journal entry.
Mar. 6

On March 8, the customer returned $1,250 (or one-half) of the merchandise that was purchased back on
March 3. Prepare the journal entry.
Mar. 8

6-19
SALES JOURNAL ENTRIES
On March 3, Gooddeal.com sold merchandise for $2,500, terms 2/10 n/30. Prepare the journal entry.

Mar. 3 Accounts Receivable (+A) 2,500
Sales (+R, +SE) 2,500

Acct Rec. +2,500 Sales +2,500
The customer paid for the merchandise on March 6, taking advantage of the permitted discount. Prepare
the journal entry.

Mar. 6 Cash (+A) [2,500 x 98%] 2,450
Sales Discounts (+XR, –SE) [2,500 x 2%] 50

Cash +2,450 Sales Disc. –50
Acct Rec. –2,500
On March 8, the customer returned $1,250 (or one-half) of the merchandise that was purchased back on
March 3. Prepare the journal entry.

Mar. 8 Sales Returns and Allowances (+XR, –SE) 1,250
Cash (–A) [2,500 x 50%] 1,250

Cash –1,250 Sales Returns –1,250
&Allowances
6-20

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

Finding Financial Information

BALANCE SHEET INCOME STATEMENT

STATEMENT OF CASH FLOWS NOTES

ACCOUNTS RECEIVABLE JOURNAL ENTRIES

Prepare journal entries to record the following transactions:

Ensure the equation still balances and debits = credits

Ensure the equation still balances and debits = credits

Ensure the equation still balances and debits = credits

Ensure the equation still balances and debits = credits

Ensure the equation still balances and debits = credits

Post the above entries to the following T-accounts:

+ Accounts Receivable (A) – - Allowance for Doubtful Accounts (xA) +

ACCOUNTS RECEIVABLE JOURNAL ENTRIES

Dec. 15 Accounts Receivable (+A) 150,000

Ensure the equation still balances and debits = credits

Dec. 31 Bad Debt Expense (+E, –SE) 15,000

Ensure the equation still balances and debits = credits

Jan. 12 Cash (+A) 100,000

Ensure the equation still balances and debits = credits

HANDOUT 6 – 1 SOLUTION, CONTINUED

Jun. 15 Allowance for Doubtful Accounts (–xA, +A) 10,000

Ensure the equation still balances and debits = credits

Jul. 16 Accounts Receivable (+A) 7,000

Jul. 16 Cash (+A) 7,000

Ensure the equation still balances and debits = credits

Post the above entries to the following T-accounts:

+ Accounts Receivable (A) – – Allowance for Doubtful Accounts (xA) +

ESTIMATION AND RECORDING OF UNCOLLECTIBLE ACCOUNTS –

Ensure the equation still balances and debits = credits

+ Bad Debt Expense (E) – - Allowance for Doubtful Accounts (xA) +

Ensure the equation still balances and debits = credits

+ Bad Debt Expense (E) – - Allowance for Doubtful Accounts (xA) +

ESTIMATION AND RECORDING OF UNCOLLECTIBLE ACCOUNTS –

Dec. 31 Bad Debt Expense (+E, –SE) 7,500

Ensure the equation still balances and debits = credits

+ Bad Debt Expense (E) – - Allowance for Doubtful Accounts (xA) +

Dec. 31 Bad Debt Expense (+E, –SE) 7,500

Ensure the equation still balances and debits = credits

+ Bad Debt Expense (E) – - Allowance for Doubtful Accounts (xA) +

ESTIMATION AND RECORDING OF UNCOLLECTIBLE ACCOUNTS –

Number of days unpaid

Ensure the equation still balances and debits = credits

+ Bad Debt Expense (E) – – Allowance for Doubtful Accounts (xA) +

Ensure the equation still balances and debits = credits

+ Bad Debt Expense (E) – – Allowance for Doubtful Accounts (xA) +

ESTIMATION AND RECORDING OF UNCOLLECTIBLE ACCOUNTS –

Number of days unpaid

Dec. 31 Bad Debt Expense (+E, –SE) 4,600

Ensure the equation still balances and debits = credits

+ Bad Debt Expense (E) – – Allowance for Doubtful Accounts (xA) +

HANDOUT 6 – 3 SOLUTION, CONTINUED

Dec. 31 Bad Debt Expense (+E, –SE) 17,000

Ensure the equation still balances and debits = credits

+ Bad Debt Expense (E) – – Allowance for Doubtful Accounts (xA) +

Cash balance per bank, July 31 $9,610

Date Accounts Debit Credit

Cash balance per bank, July 31 $9,610

Bank Statement Books