Chapter 05 - Receivables and Sales

PROBLEMS: SET C Calculate the amount of revenue to recognize (LO5-1) P5-1C Assume the following scenarios. Scenario 1. During 2015, Makers Consulting provides services of $100,000. The company receives an initial payment of $75,000 with the balance to be received the following year. Scenario 2. People-R-Us typically charges $75 for a one-year subscription. On January 1, 2015, Georgette, age 72, purchases a one-year subscription to the magazine and receives a 20% senior citizen discount. Scenario 3. During 2015, Waste Control provides services on account for $15,000. The customer pays for those services in 2016. Scenario 4. During 2015, Tasty Foods sells grocery items to one of its customers for $125,000 on account. Cash collections on those sales are $80,000 in 2015 and $30,000 in 2016. The remaining $15,000 is written off as uncollectible in 2016. Required: For each scenario, calculate the amount of revenue to be recognized in 2015. Record transactions related to credit sales and contra revenues (LO5-1, 5-2) P5-2C Recovery Experts (RE) specializes in data recovery from crashed hard drives. The price charged varies based on the extent of damage and the amount of data being recovered. RE offers a 10% discount to students and faculty at educational institutions. Consider the following transactions during the month of June. June 10 Lukes hard drive crashes and he sends it to RE. June 12 After initial evaluation, RE e-mails Luke to let him know that full data recovery will cost $1,600. June 13 Luke informs RE that he would like them to recover the data and that he is a student at USC, qualifying him for a 10% educational discount and reducing the cost by $160 (= $1,600 x 10%). June 16 RE performs the work and claims to be successful in recovering all data. RE asks Luke to pay within 30 days of todays date, offering a 5% discount for payment within 10 days. June 19 When Luke receives the hard drive, he notices that RE did not successfully recover all data. Approximately 25% of the data has not been recovered and he informs RE. June 20 RE reduces the amount Luke owes by 25%. June 30 Luke pays the amount owed. Required: 1. Record the necessary transactions(s) for Recovery Experts on each date. 2. Calculate net revenues. 3. Show how net revenues would be presented in the income statement. 4. Calculate net revenues if Luke had paid his bill on June 25.
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Record transactions related to accounts receivable (LO5-3, 5-5)

P5-3C The following events occur for Wortham Landscape Design during 2015 and 2016, its first two years of operations. February 2, 2015 July 23, 2015 December 31, 2015 April 12, 2016 June 28, 2016 Provide services to customers on account for $26,000. Receive $20,000 from customers on account. Estimate that 10% of uncollected accounts will not be received. Provide services to customers on account for $40,000. Receive $5,000 from customers for services provided in 2015.

September 13, 2016 Write off the remaining amounts owed from services provided in 2015. October 5, 2016 December 31, 2016 Receive $35,000 from customers for services provided in 2016. Estimate that 10% of uncollected accounts will not be received.

Required: 1. Record transactions for each date. 2. Post transactions to the following accounts: Cash, Accounts Receivable, and Allowance for Uncollectible Accounts. 3. Calculate the net realizable value of accounts receivable at the end of 2015 and 2016. Record transactions related to uncollectible accounts (LO5-4, 5-5) P5-4C Gable Incorporated provides legal services. During 2015, the company provides services of $500,000 on account. Of this amount, $70,000 remains uncollected at the end of the year. An aging schedule as of December 31, 2015, is provided below. Amount Receivable $40,000 15,000 9,000 6,000 $70,000 Estimated Percent Uncollectible 5% 10% 20% 40%

Age Group Not yet due 030 days past due 3160 days past due More than 60 days past due Total

Required: 1. Calculate the allowance for uncollectible accounts. 2. Record the December 31, 2015, adjustment, assuming the balance of Allowance for Uncollectible Accounts before adjustment is $500 (debit).
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3. On April 3, 2016, a customers account balance of $600 is written off as uncollectible. Record the write-off. 4. On July 17, 2016, the customer, whose account was written off in Requirement 3, unexpectedly pays $200 of the amount but does not expect to pay any additional amounts. Record the cash collection. Compare the direct write-off method to the allowance method (LO5-3, 5-6) P5-5C Power Corporation engages in the manufacture and sale of equipment related to alternative sources of energy. During the past year, operating revenues remained relatively flat compared to the prior year but management notices a big increase in accounts receivable. The increase in receivables is largely due to the recent economic slowdown in the commodities market. Many of the companys customers are having financial difficulty, lengthening the period of time it takes to collect on account. Below are year-end amounts. Age Group Two years ago Last year Current year Operating Revenue $2,300,000 3,100,000 3,000,000 Accounts Receivable $80,000 100,000 350,000 Average Age 13 days 11 days 27 days Accounts Written Off $10,000 15,000 0

Peter, the CEO of Power, notices that accounts written off over the past three years have been minimal and therefore suggests that no allowance for uncollectible accounts be established in the current year. Any account proving uncollectible can be charged to next years financial statements (the direct writeoff method). Required: 1. Do you agree with Peters reasoning? Explain. 2. Suppose that other companies in these industries have had similar increasing trends in accounts receivable aging. These companies also had very successful collections in the past but now estimate uncollectible accounts to be 30% because of the significant downturn in the industries. If Power uses the allowance method estimated at 30% of accounts receivable, what should be the balance of the allowance for uncollectible accounts at the end of the current year? 3. Based on your answer in Requirement 2, for what amount will total assets and expenses be misstated in the current year if Power uses the direct writeoff method? Ignore tax effects. Using estimates of uncollectible accounts to understate income (LO5-3) P5-6C Tatsuo is the CEO of Ginjo Gallery. At the end of the year, the companys accountant provides Tatsuo with the following information, before any adjusting entries. Accounts receivable Estimated percentage uncollectible Allowance for uncollectible accounts Operating income
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$1,000,000 5% $10,000 (credit) $240,000

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Tatsuo has significant stock ownership in the company and therefore would like to keep the stock price high. Analysts on Wall Street expect the company to have operating income of $170,000. The fact that actual operating income is well-above this amount will make investors happy and help maintain a high stock price. Meeting analysts expectations will also help Tatsuo keep his job. Required: 1. Record the adjustment for uncollectible accounts using the accountants estimate of 5% of accounts receivable. 2. After the adjustment is recorded in Requirement 1, what is the revised amount of operating income? Will Ginjo Gallery still meet analysts expectations? 3. Tatsuo instructs the accountant to instead record $70,000 as bad debt expense so that operating income will exactly meet analysts expectations. By how much would total assets and operating income be misstated if the accountant records this amount? 4. Why would Wanda be motivated to manage operating income in this way? Underestimating future uncollectible accounts (LO5-3, 5-5) P5-7C By the end of its first year of operations, Gallen Corporation has credit sales of $580,000 and accounts receivable of $200,000. Given its the first year of operations, Gallens management is unsure how much allowance for uncollectible accounts it should establish. One of the companys competitors, which has been in the same industry for an extended period, estimates uncollectible accounts to be 3% of ending accounts receivable, so Gallen decides to use that same amount. However, actual write-offs in the following year were 10% of the $200,000 ( = $20,000). Gallens inexperience in the industry led to making sales to high credit risk customers. Required: 1. Record the adjustment for uncollectible accounts at the end of the first year of operations using the 3% estimate of accounts receivable. 2. By the end of the second year, Gallen has the benefit of hindsight to know that estimates of uncollectible accounts in the first year were too low. By how much did Gallen underestimate uncollectible accounts in the first year? How did this underestimation affect the reported amounts of total assets and expenses at the end of the first year? Ignore tax effects. 3. Should Gallen prepare new financial statements for the first year of operations to show the correct amount of uncollectible accounts? Explain. Record long-term notes receivable and interest revenue (LO5-8) P5-8C On June 1, 2015, Demer Consulting provides services to a customer for $150,000. To pay for the services, the customer signs a three-year, 12% note. The face amount is due at the end of the third year, while annual interest is due each June 1. Required: 1. Record the acceptance of the note on June 1, 2015. 2. Record the interest collected on June 1 for 2016 and 2017, and the adjustment for interest revenue on December 31, 2015, 2016, and 2017.
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3. Record the cash collection on June 1, 2018.

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