ACCT1101 – Introduction to Financial Accounting

Chapter 6

Assignment questions - suggested answers

(M13-6, M13-7, E6-3, E6-18, E6-21, E6-24, P6-3, P6-7)

M13–6.
Total Assets – Noncurrent Assets = Current Assets
$1,400,000 - $480,000 = Current Assets
Current Assets = $920,000
Current Ratio = Current Assets ÷ Current Liabilities
3.5 = $920,000 ÷ Current Liabilities
Current Liabilities = $262,857

M13–7.

Current Ratio = Current Assets

Current Liabilities

Quick Ratio = Quick Assets

Current Liabilities

Purely by definition, the quick ratio must always be less than or equal to the current
ratio. We know that a mistake has been made in this case because the quick ratio
is greater than the current ratio and that is not possible.

E6–3.
Sales revenue ($5,500 + $400 + $9,000) .................................. $14,900
Less: Sales returns and allowances (1/10 x $9,000 from D) ....... 900
Less: Sales discounts (9/10 x $9,000 from D x 3%) .................... 243
Less: Credit card discounts ($400 from C x 2%) ....................... 8
Net sales .............................................................................. $13,749

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ACCT1101 – Introduction to Financial Accounting
Chapter 6

E6–18.
(Amounts in thousands)

Req. 1 Allowance for Doubtful Accounts

117 Beg. balance
Write-offs 52 88 Bad debt exp.
153 End. balance
Beg. Balance + Bad debt exp. – Write-offs = End. Balance
Beg. Balance + Bad debt exp. – End. Balance = Write-offs
117 + 88 – 153 = 52
Bad debt expense increases (is credited to) the allowance. Since we are given
the beginning and ending balances in the allowance, we can solve for write-offs,
which decrease (are debited to) the allowance.

Req. 2 Accounts Receivable (Gross)

Beg. balance* 11,455 52 Write-offs
Net sales 60,420 58,081 Cash collections
End. balance ** 13,742
* 11,338 + 117
** 13,589 + 153
Beg. balance + Net sales – Write-offs – Cash collections = End. Balance
Beg. balance + Net sales – Write-offs – End. Balance = Cash collections
11,455 + 60,420 – 52 – 13,742 = 58,081
Accounts receivable gross is increased by recording credit sales and decreased
by recording cash collections and write-offs of bad debts. Thus, we can solve for
cash collections as the missing value.

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ACCT1101 – Introduction to Financial Accounting
Chapter 6

E6–21.

Req. 1

Dec. 31
Allowance for doubtful accounts (–XA, +A) ............... 1,700
Accounts receivable (J. Doe) (–A) .................. 1,700
To write off an account receivable determined to
be uncollectible.

Dec. 31
Bad debt expense (+E, –SE) .................................... 1,125
Allowance for doubtful accounts (+XA, –A) .... 1,125
Adjusting entry--estimated loss on uncollectible
accounts; based on credit sales ($75,000 x 1.5%
= $1,125).

Req. 2

Income statement:
Operating expenses:
Bad debt expense ......................................................... $1,125

Balance sheet:
Current assets
Accounts receivable ($16,000 + $75,000
- $60,000 - $1,700) ...................................... $29,300
Less: Allowance for doubtful accounts
($900 - $1,700 + $1,125) ............................. 325 $28,975

Req. 3

The 1.5% rate on credit sales may be too low because it resulted in bad debt expense only
two-thirds the amount of receivables written off ($1,700) during the year. However, if the
uncollectible account receivable written off during the current year is not indicative of
average uncollectibles written off over a period of time, the 1.5% rate may be appropriate.
There is not sufficient historical data to make a definitive decision.

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ACCT1101 – Introduction to Financial Accounting
Chapter 6

E6–24.

Req. 1
(Dollar amounts in thousands)

Receivables turnover = Net Sales = $60,319,000 = 8.123 times

Average Net Trade $7,425,500*
Accounts Receivable

Average days sales = 365 = 365 = 44.93 days

in receivables Receivables Turnover 8.123

* ($7,252,000 + $7,599,000) ÷ 2

Req. 2

The receivables turnover ratio reflects how many times average trade receivables were
recorded and collected during the period. The average days sales in receivables
indicates the average time it takes a customer to pay its account. For the current year
presented, FedEx’s accounts receivable turned over approximately 8.1 times per year;
thus, its customers took about 45 days to pay, on average.

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ACCT1101 – Introduction to Financial Accounting
Chapter 6

P6–3.
Req. 1
Aging Analysis of Accounts Receivable
(b) Up to One (c) More Than
Total (a) Not Yet Year Past One Year
Customer Receivables Due Due Past Due
B. Brown………….. $ 6,200 $6,200
D. Donalds……….. 7,000 $ 7,000
N. Napier…………. 7,000 $ 7,000
S. Strothers……… 24,500 4,000 20,500
T. Thomas………... 4,000 4,000
Totals…………… $48,700 $15,000 $27,500 $6,200

Req. 2
Aging Schedule--Estimated Amounts Uncollectible
Estimated Estimated
Amount of Uncollectible Amount
Age Receivables Percentage Uncollectible
a. Not yet due…………………… $15,000 3% $ 450
b. Up to one year past due……. 27,500 9% 2,475
c. Over one year past due…….. 6,200 28% 1,736
Estimated ending balance in 4,661
Allowance for Doubtful Accounts
Balance before adjustment 920
Bad Debt Expense for the year $3,741

Req. 3
Bad debt expense (+E, –SE) .......................................... 3,741
Allowance for doubtful accounts (+XA, –A) ........... 3,741

Req. 4

Income statement:
Selling, general, and administrative expenses
Bad debt expense ........................................................... $3,741

Balance sheet:
Current Assets:
Accounts receivable ........................................................ $48,700
Less: Allowance for doubtful accounts ........................... 4,661
Accounts receivable (net) ............................................... $44,039

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ACCT1101 – Introduction to Financial Accounting
Chapter 6

P6–7. (Supplement)

Req. 1

(a) Cash (+A) .................................................................. 235,000

Sales revenue (+R, +SE) ................................ 235,000
Cash sales for current year.

Cost of goods sold ……………………………………. 141,000

Inventory ……………………………………….. 141,000
Cost of sales recorded @$300.

(b) Accounts receivable (R. Smith) (+A) ......................... 11,500

Sales revenue (+R, +SE) ................................ 11,500
Credit sale, $11,500.

Cost of goods sold ……………………………………. 6,900

Inventory ……………………………………….. 6,900
Cost of sales recorded @$300.

(c) Accounts receivable (K. Miller) (+A) .......................... 26,500

Sales revenue (+R, +SE) ................................ 26,500
Credit sale, $26,500.

Cost of goods sold ……………………………………. 15,900

Inventory ……………………………………….. 15,900
Cost of sales recorded @$300.

(d) Sales returns and allowances (+XR, –R, –SE).......... 500

Accounts receivable (R. Smith) (–A) .............. 500
Sale return, 1 unit @ $500.

Inventory ………………………………………..………. 300

Cost of goods sold …………………………….. 300
Returned Inventory recorded @$300.

(Remarks: The question did not state whether the returned goods were resalable
or damaged. Therefore, if we assume the returned good is resalable, inventory
should be added back and reduce the COGS.)

(e) Accounts receivable (B. Sears) (+A) ......................... 24,000

Sales revenue (+R, +SE) ................................ 24,000
Credit sale, $24,000.

Cost of goods sold ……………………………………. 14,400

Inventory ……………………………………….. 14,400
Cost of sales recorded @$300.
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ACCT1101 – Introduction to Financial Accounting
Chapter 6

(f) Cash (+A) .................................................................. 10,780

Sales discounts (+XR, –R, –SE) ............................... 220
Accounts receivable (R. Smith) (–A) .............. 11,000
Paid account in full within discount period,
($11,500 - $500) x (1 - .02) = $10,780.

(g) Cash (+A) .................................................................. 98,000

Sales discounts (+XR, –R, –SE) ............................... 2,000
Accounts receivable (prior year) (–A) ............. 100,000
Collected receivables of prior year, all within
discount periods, $98,000 ÷ .98 = $100,000.

(h) Cash (+A) .................................................................. 25,970

Sales discounts (+XR, –R, –SE) ............................... 530
Accounts receivable (K. Miller) (–A) ............... 26,500
Collected receivable within the discount period
$26,500 x .98 = $25,970.

(i) Accounts receivable (R. Roy) (+A) ............................ 19,000

Sales revenue (+R, +SE) ................................ 19,000
Credit sale, $19,000.

Cost of goods sold ……………………………………. 11,400

Inventory ……………………………………….. 11,400
Cost of sales recorded @$300.

(j) Sales returns and allowances (+XR, –R, –SE).......... 3,500

Cash (–A) ....................................................... 3,430
Sales discounts (–XR, +R, +SE) .................... 70
Sales return, 7 units @ $500 less sales discounts taken
= $3,500 x .98.

(k) Cash (+A) .................................................................. 6,000

Accounts receivable (–A) ................................ 6,000
Collected receivable of prior year, after the discount
period.

(l) Allowance for doubtful accounts (–XA, +A) ............... 3,000

Accounts receivable (prior year account) (–A) 3,000
Wrote off uncollectible account from prior year.

(m) Bad debt expense (+E, –SE) ..................................... 1,155

Allowance for doubtful accounts (+XA, –A) .... 1,155
To adjust for estimated bad debt expense
Credit sales ($11,500 + $26,500 + $24,000 + $19,000)... $81,000
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ACCT1101 – Introduction to Financial Accounting
Chapter 6
Less: Sales returns ($500 + $3,500) .............................. 4,000
Net sales revenue............................................................ 77,000
Estimated bad debt rate .................................................. x 1.5%
Bad debt expense ................................................... $ 1,155
.

Req. 2

Income statement:
Sales revenue ($235,000 + $11,500 + $26,500
+ $24,000 + $19,000) ...................................... $316,000
Less: Sales returns and
allowances ($3,500 + $500) ............... 4,000
Sales discounts ($220 + $2,000
+ $530 – $70) ..................................... 2,680
Net sales revenue .............................................................. $309,320
Selling, general, and administrative expenses
Bad debt expense ............................................................ 1,155