Solution manual financial accounting 8th by harrison CH05

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Chapter 5
Short-Term Investments & Receivables
Short Exercises
(5 min.) S 5-1
1. Trading investments are reported at their current market
value.
2. 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.
(10 min.)
BALANCE SHEET
Current assets:
Short-term trading investments, at
market value.
INCOME STATEMENT
Other revenue and gains (losses):
Unrealized gain on
investment………………
_____

S 5-2

$98,000

$11,000*

*$98,000 − $87,000 = $11,000

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Short-Term Investments & Receivables

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(10 min.)
Unrealized Loss on Investment ($103,000 − $96,000) 7,000
Short-Term Investment……………………………
Adjusted investment to market value.

S 5-3
7,000

BALANCE SHEET
Current assets:
Short-term trading investment, at market value

$96,000

INCOME STATEMENT
Other revenue (loss):
Unrealized (loss) on investment………………

$(7,000)

(5 min.)

S 5-4

Perry, 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 receivable as
uncollectible.

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Chapter 5

Short-Term Investments & Receivables


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(5-10 min.)

S 5-5

MEMORANDUM
DATE:
TO:

Zach Peters

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.

Chapter 5

Short-Term Investments & Receivables

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S 5-6

(5 min.)
1. Uncollectible-Account Expense ($312,000 ×
.04)…..
Allowance for Uncollectible

Accounts………..
2. Balance sheet
Accounts
receivable……………………………...
Less Allowance for uncollectible
accounts….
Accounts receivable,
net………………………..

12,480
12,480

$38,000
(12,480)
$25,520

(5-10 min.)
1 Accounts
. Receivable……………………………………
Sales
Revenue…………………………………….

1,000,000

2 Cash…………………………………………………
. ……..
Accounts
Receivable…………………………….

870,000

1,000,00
0

870,000

3 Allowance for Uncollectible
. Accounts……………….
Accounts
Receivable……………………………..

12,000

4 Uncollectible-Account Expense ($1,000,000 ×
. .04)..
Allowance for Uncollectible
Accounts………..

40,000

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Chapter 5

S 5-7

12,000

Short-Term Investments & Receivables

40,000


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(10 min.)

S 5-8

1.
Accounts Receivable
Beg. bal.
38,000
Net credit sales 1,000,000 Collections
Write-offs
End. bal.
156,000

870,000
12,000

Amount customers
owe the company
2.
Allowance for Uncollectible Accounts
Beg. bal.
Write-offs
12,000 Allowance for
Uncollectible accounts
End. bal.

12,480
40,000
40,480

Amount the
company
expects not
to collect
3.
Accounts receivable, net
($156,000 − $40,480)………………

Chapter 5

$115,520

Short-Term Investments & Receivables

349


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(5-10 min.)

S 5-9

(a) Accounts Receivable……………………….. 175,000
Sales Revenue………………………….

175,000
(b) Cash……………………………………………. 128,000
Accounts Receivable………………….
128,000
(c) Allowance for Uncollectible Accounts…..
Accounts Receivable………………….

2,800

(d) Uncollectible-Account Expense…………..
Allowance for Uncollectible
Accounts……………………………….

650

2,800

650

Allowance for Uncollectible Accounts
Beg. bal.
4,000
Write-offs
2,800 Uncollectible –
account exp.
X = 650
End. bal.
1,850

350

Chapter 5

Short-Term Investments & Receivables


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(10 min.)

S 5-10

1. and 2.
Accounts Receivable
Beg. bal.
97,000
Net credit sales
698,000 Collections
Write-offs
End. bal.
65,000

722,000
8,000

Allowance for Uncollectible Accounts
Beg. bal.
5,000
Write-offs
8,000 Uncollectible –

account expense 14,000
End. bal.
11,000

3.
BALANCE SHEET
Accounts receivable………………………
Less Allowance for uncollectible
accounts
Accounts receivable, net…………………

Chapter 5

$65,000
(11,000)
$54,000

Short-Term Investments & Receivables

351


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(10 min.)

S 5-11

1. True
2. The net amount of receivables — the amount the company

expects to collect — is more interesting because the
company will probably collect this amount in cash.
3. Accounts receivable……………………. $XXX
Less Allowance for uncollectibles……
(X)
Accounts receivable, net………………. $ XX
4. False. The direct write-off method overstates assets because
it fails to show the amount of the receivables the company
actually expects to collect.
5. California Bank has interest receivable and interest revenue.
Sacramento Company has interest payable and interest
expense.
Interest for one month ($200,000 × .08 × 1/12)…...$1,333.33
6. California Bank:
Accrual of interest

352

Assets = Liabilities + Equity
0

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Short-Term Investments & Receivables


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(5-10 min.)

S 5-12

a. May

6 Note Receivable — S. Peters……. 130,000
Cash……………………………
130,000

b. Nov.

6 Cash…………………………………. 135,850
Note Receivable — S. Peters
130,000
Interest Revenue
($130,000 × .09 × 6/12)…
5,850

(10 min.)

S 5-13

1.

Interest for:
2010
($170,000 × .07 × 8/12)………………. $7,933.33
2011
($170,000 × .07)………………………. 11,900.00
2012
($170,000 × .07 × 4/12)………………. 3,966.67

2.

BCDE Bank has a note receivable and interest revenue.
Carl Abbott has a note payable and interest expense.

3.

Payoff at November 30, 2010:
Principal……………………………………… $170,000.00
Interest ($170,000 × .07 × 7/12)…………...
6,941.67
Total…………………………………………... $176,941.67

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(10 min.)

S 5-14

2010
a. Aug.31 Note Receivable — N. Thompson…… 2,000.00
Cash…………………………………

2,000.00
To loan money.
2011
b. June30 Interest Receivable
($2,000 × .10 × 10/12)……………………..

166.67

Interest Revenue…………………..
To accrue interest revenue.

166.67

2011
c. Aug.31 Cash ($2,000 + $200)…………………… 2,200.00
Interest Receivable……………….
166.67
Interest Revenue
($2,000 × .10 × 2/12)…………….
33.33
Note Receivable…………………..
2,000.00
To collect on note receivable.

354

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Short-Term Investments & Receivables

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(5-10 min.)

S 5-15

a. BALANCE SHEET
June 30, 2011
Current assets:
Note receivable………………………….
Interest receivable………………………

$2,000.00
166.67

b. INCOME STATEMENT
Year ended June 30, 2011
Revenues:
Interest revenue…………………………

$ 166.67

c. BALANCE SHEET
June 30, 2012
Nothing to report because the note was
collected on August 31, 2011.
d. INCOME STATEMENT
Year ended June 30, 2012
Revenues:

Interest revenue…………………………

Chapter 5

$ 33.33

Short-Term Investments & Receivables

355


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(10 min.)

S 5-16

Req. 1
2011

Acid-test
ratio

=

Cash + Short-term investments
+ Net current receivables
Total current liabilities

=

$9,700 + $17,000
+ $76,900
$99,000

=

1.05

The company’s acid-test ratio compares favorably to the
industry average of 0.97.

Req. 2
One day’s sales

=

$802,000
365

= $2,197.26

Average net
Days’ sales in average
accounts receivable
($76,900 + $70,900) / 2
accounts receivable =
=
One day’s sales
$2,197.26

= 34 days

The company’s days’-sales-in-receivables ratio (34) is okay
relative to the 30-day period of the credit terms.

356

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Short-Term Investments & Receivables


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(10-15 min.)

1. Classifications
Unearned revenues……
Allowance for
doubtful accounts..
Other expenses…………
Accounts receivable…...
Accounts payable………
Service revenue…………
Other assets……………..
Property, plant, and
equipment………….
Operating expense……..
Cash………………………
Notes payable………......

Income Statement Balance Sheet
Debit
Credit
Debit
Credit
Balance Balance Balance Balance
X
X
X
X
X
X
X
X
X
X
X

2. Service revenue………………………………………
Operating expense…………………………………..
Other expenses……………………………………….
Net loss………………………………………………...

3.

S 5-17

Thousands
$ 23,653

(11,610)
(12,559)
$ (516)

Quick ratio = ($289 + $4,467 - $309)/($2,255 + $607) = 1.55

Norbert’s liquidity position is very good.
The company has $1.55 in quick assets to pay off each dollar of
current liabilities.

Chapter 5

Short-Term Investments & Receivables

357


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Exercises
Group A
(10-15 min.)

E 5-18A

1. This is a trading investment because Northern Corporation
intends to sell the stock within a short time.

2. Dec.
15

Short-Term Investment (800 × $54)…..

43,200

Cash……………………………………….
Purchased investment.
Dec.
31

43,200

Short-Term Investment
[(800 × $66) − $43,200]…………………..
Unrealized Gain on Investment………
Adjusted investment to market value.

9,600

3. BALANCE SHEET
Current assets:
Short-term investment, at market value…………

9,600

$52,800

INCOME STATEMENT
Other revenue and gains:
Unrealized gain on investment……………………… $ 9,600

358

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Short-Term Investments & Receivables


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(10-20 min.)

E 5-19A

INCOME STATEMENT
Other revenue (loss):
Dividend revenue………………………………… $ 400
Unrealized (loss) on investment ($95,000 −
(3,000)
$92,000).

BALANCE SHEET
Current assets:
Short-term investments, at market value……

(15-30 min.)

Cash
97,000 21,600
486*

Bal35,670

Short-Term
Investment
21,600
5,400
27,000

Unrealized Gain
On Investment

$92,000

E 5-20A

Dividend
Revenue
486*

Gain on Sale
Of Investment
5,400

8,670

_____
*600 shares × $.81 = $486

(15-20 min.)
Chapter 5

E 5-21A

Short-Term Investments & Receivables

359


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Journal
DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

2010
Dec. 31
Year-end entry:
Doubtful-Account Expense
($900,000 × .03)…………………
Allowance for Doubtful
Accounts
BALANCE SHEET
Current assets:
Accounts receivable, net of allowance
for doubtful accounts of

1
$27,900 ………….
_____
1
$900 + $27,000 = $27,900
2
$88,000 − $27,900 = $60,100

360

Chapter 5

27,000
27,000

$60,1002

Short-Term Investments & Receivables


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(15 min.)

E 5-22A

Req. 1

Journal
DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

Oct.

Accounts Receivable……………………... 161,000
Sales Revenue……………………
161,000

Oct.

Cash………………………………………….. 137,000
Accounts Receivable………………
137,000

Oct.

Allowance for Uncollectible Accounts…
Accounts Receivable………………

Oct.

Uncollectible-Account Expense
($161,000 × .04)……………………………..
Allowance for Uncollectible
Accounts

2,300
2,300

6,440
6,440

Req. 2
Accounts Receivable
30,000
137,000
161,000
2,300
Bal
51,700

Allowance for
Uncollectible Accounts
2,000
2,300
6,440
6,140

Net accounts receivable = $45,560 ($51,700 − $6,140)
Hilly Mountain Party Planners expects to collect the net
receivable amount.

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Req. 3
BALANCE SHEET
Current assets:
Accounts receivable, net of allowance for
uncollectible accounts of $6,140…………

362

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$45,560

Short-Term Investments & Receivables


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(10-15 min.)

E 5-23A

Req. 1

Journal

DATE

Oct.

ACCOUNT TITLES AND EXPLANATION

DEBIT

Uncollectible-Account Expense…..
Accounts Receivable…………

2,300

CREDIT

2,300

Req. 2
Net accounts receivable would be $51,700, the balance in
Accounts Receivable, computed as follows:

Beg. bal.
Cr. sales
End. bal.

Accounts Receivable
30,000
161,000 Collections
Write-offs
51,700

137,000
2,300

Hilly Mountain Party Planners does not expect to collect the full
$51,700 because some credit customers are likely not to pay
their accounts.

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(15-30 min.)

E 5-24A

Req. 1
The credit balance at December 31 in Allowance for Doubtful
Accounts should be $16,880.

($80,000 × .006) + ($60,000 × .040) + ($40,000 × .05) + ($30,000 ×
.40) = $16,880. The current balance is $13,500. Thus, the
balance of the allowance account is too low.

Req. 2

Journal
DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

Doubtful-Account Expense……………..
Allowance for Doubtful Accounts

3,380

CREDIT

3,380

Allowance for Doubtful Accounts
13,500
3,380
Bal.
16,880

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Req. 3
BALANCE SHEET
Current assets:
Cash…………………………………
$
XX
…….
Short-term
XX
investments……………….
Accounts receivable, net of
allowance
for doubtful accounts of
193,120*
$16,880……..
_____
*Another way to report accounts receivable is
Accounts
$210,000
receivable……………………
Less Allowance for doubtful
(16,880)
193,120
accounts…

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365


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(15-20 min.)

E 5-25A

March Accounts Receivable…………………….
Service Revenue……………………
Recorded revenue on account.

7,000

March Bad-Debt Expense ($7,000 × .01)………
Allowance for Bad Debts…………
Recorded expense for the year.

70

March Allowance for Bad Debts ($34 + $112)..
Accounts Receivable………………
Wrote off uncollectible receivables.

146

366

Chapter 5

7,000

70

Short-Term Investments & Receivables

146


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(10-15 min.)

E 5-26A

Journal
DATE

ACCOUNT TITLES AND EXPLANATION

Sept. 1 Note Receivable — Carroll Fadal…..
Cash……………………………….
Nov.

6 Note Receivable — Turf Masters.…….
Service Revenue…………………
16 Note Receivable — Voleron, Inc.……
Accounts Receivable - Voleron

Inc.

30 Interest Receivable……………………..
Interest Revenue………………….
_____

DEBIT

CREDIT

15,000
15,000
12,000
12,000
4,000
4,000

450*
450

($15,000 × .10 × 90/365) + ($12,000 × .08 × 24/365) + ($4,000 × .11 × 14/365) = $450
$370**
$17**

$63**

Aegean Realty earned interest revenue of $696 this year.
** Rounded to nearest dollar.

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(15 min.)
2010

E 5-27A
2011

BALANCE SHEET
Current assets:
Note receivable………………………… $125,000 $ —
Interest receivable ($125,000 × .12 ×
11,250
—
9/12)
INCOME STATEMENT
Interest revenue…………………………….
_____
*$125,000 × .12 × 3/12 = $3,750

368

Chapter 5

11,250 3,750*

Short-Term Investments & Receivables


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(10-15 min.)

(a) Acid-test
ratio

=

=

=
=

E 5-28A

Short-term Net current
Cash + investments + receivables
Total current liabilities
$3,000 + $20,000 + $55,000
$19,000 + $103,000
$78,000
$122,000
0.64

An acid-test ratio of 0.64 is fairly weak.

(b) One day's
sales

=

Sales revenue
365

=

$730,000
365

= $2,000

Days’ sales
Average net
in average
accounts receivable
($55,000 + $69,000) / 2
=
=
receivables
One day’s sales
$2,000
= 31 days
31 days’ sales in average receivables is good relative to credit
terms of net 30 days.

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369