Chapter 7 Solutions

 

Chapter 7 Reporting and Analyzing Receivables QUESTIONS 1.

Whe When n custo customer mers s use credi creditt cards, cards, the selling selling companie companies s can avoid having having to directl directly y evaluate evaluate the credit standing of their customers. They also avoid the risk of bad debts and often are paid cash from the credit card company more quickly than if customers were granted credit directly. Moreover, they hope to increase sales, and net income, from the added convenience to buyers.

2.

Rev Revenu enues es and expenses expenses usual usually ly are not matched matched under under the direct direct write write-of -offf method method because because the revenues recorded from the uncollectible uncollectible accounts accounts often appear on the income statement of one period while the bad debts expenses of those revenues appear on the income statement of a later period when the account(s) is known to be uncollectible.

3.

The The ac acco coun unti ting ng co const nstra raint int of mater materia ialit lity y sugge suggest sts s that that the the req requir uirem ement ents s of ac acco coun unti ting ng standards can be ignored if their effect on the financial statements is unimportant to their  users’ business decisions.

4.

Wri Writin ting g off a bad debt debt against against the Allowa Allowance nce account account does does not reduce reduce the estimate estimated d realizabl realizable e value of a company’s company’s accounts receivable because the write-off reduces the balances of  both Accounts Receivable and the Allowance Allowance for Doubtful Accounts by by equal amounts. This means the difference between them (called estimated realizable value) remains the same.

5.

The The ad adjus juste ted d bala balanc nces es of Ba Bad d De Debt bts s Expe Expens nse e an and d Allow Allowan ance ce for Doub Doubtf tful ul Acco Accoun unts ts are virtual virt ually ly never never equal equal because because the expens expense e amount amount reflect reflects s only only the events events of the current current period, and the allowance is the accumulated result of events over a number of prior periods. The only way that they could be equal would be if write-offs during the prior period exactly equaled the beginning balance of the Allowance account.

6.

Creditors Creditors prefer prefer notes notes re receivabl ceivable e to account accounts s receivable receivable because because the notes notes can be more more easily easily convert con verted ed into into cash cash before before they are due by discoun discounting ting (or selling selling)) them to a financ financial ial institution. instit ution. Also, a note represents represents a clear written acknowledgme acknowledgment nt by the debtor of both the debt and its amount and terms.

7.

Res Resear earch ch In Motio Motion n lists its accoun accounts ts recei receivab vable le as “Account “Accounts s receiv receivabl able, e, net” on its balance balance sheet. Accounts receivable at February 27, 2010, is net of of a $2 million allowance.

8.

Appl Apple e uses uses the allo allowa wanc nce e meth method od to ac acco coun untt for doub doubtf tful ul acc accoun ounts ts as ev evid iden ence ced d by the receiva rec eivable bles s being being reduced reduced by an allowa allowance nce on the balance balance sheet. sheet. The realizab realizable le value of  accounts receivable as of September 26, 2009, is its net amount of $3,361 million.

9.

Palm’s Palm’s gr gross oss accoun accounts ts rece receivab ivable le at May 31, 2009, 2009, is ($ thousand thousands) s) $66,452 $66,452 + $350 = $66,802. $66,802. Palm believes that the percent of accounts receivable that are uncollectible is $350/$66,802 = 0.5% (rounded). 10. Nok Nokia ia titles its accounts accounts receivabl receivable e as “Account “Accounts s receiva receivable ble,, net of allowan allowance ce for doubtf doubtful ul accounts.” It believes the percent of accounts receivable that are uncollectible is 4.7% (rounded from EUR 391/(EUR 7,981 + EUR 391)).

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QUICK STUDIES Quick Study 7-1 (15 mi minutes) nutes) 1.

Cash

9,500

Cred Cr edit it Card ard Ex Expe pens nse e.. .... .... .... .... .... .... .... .... .... .... .... ..... ..... ..... ...... ...... ...... ...... ...... ..... .. Sales.....................................................................

500 50 0

10,000

To record credit card sales less fees.

Cost Co st of Go Good ods s So Sold ld... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ....... ........ ........ ........ ...... .. Merchandise Inventory........................................

7, 7,50 500 0 7,500

To record cost of sales.

2.

Accounts Re Receivable—Credit C Ca ard C Co os........ ....... ...... ...... Cre redi ditt Car ard d Ex Expe pens nse e.... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... Sales.....................................................................

2,880 120 12 0 3,000

To record credit card sales less fees.

Cost Co st of Go Good ods s So Sold ld... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ....... ........ ........ ........ ...... .. Merchandise Inventory........................................

1, 1,50 500 0 1,500

To record cost of sales.

7 days later  Cash Accounts Receivable—Credit Card Cos............

2,880 2,880

To record cash receipts.

Quick Study 7-2 (15 mi minutes) nutes) 1. Oct. Oc t. 3 31 1 Al Allo lowa wanc nce e fo forr Do Doub ubtf tful ul A Acc ccou ount nts s... ..... ..... ...... ...... ...... ...... ...... ..... Accounts Receivable—C. Schaub..................

1, 1,00 000 0 1,000

To write off account.

2. Dec. De c. 9 Acc Accoun ounts ts Re Recei ceiva vable ble—C. —C. Sch Schaub aub*....................... Allowance for Doubtful Accounts...................

200 200

To reinstate a written off account. *If there is a strong belief that the remaining $800 will be paid soon, then the full $1,000 balance can be reinstated.

9 Ca Cash sh.. .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ..... ..... Accounts Receivable—C. Schaub..................

200 200

200

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To record payment on a receivable.

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Quick Study 7-3 (15 minutes) 1. Dec. 3 31 1 Bad D De ebts E Ex xpe pen nse se.. .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... Allowance for Doubtful Accounts...............

835 835

To record estimate of uncollectibl uncollectibles es [($89,000 x 1.5%) - $500 credit].

2.

($89,000 x 1.5%) + $200 debit = $1,535

Quick Study 7-4 (15 mi minutes) nutes) Dec. 31 Bad D De ebt bts s Ex Expe pen nse se.. .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... Allowance for Doubtful Accounts...............

2, 2,70 700 0 2,700

To record estimate of uncollectibl uncollectibles es ($270,000 x 1%).

Quick Study 7-5 (15 minutes) 1. Maturi Maturity ty date iis s Octob October er 31 31,, which iis s compu computed ted as ffollow ollows: s: Days in Au Days Augu gust st.. .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ..... ...... ...... ..... ..... ...... ...... ...... ...... ...... ..... .. Minu Mi nus s th the e da date te of th the e no note te.. .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... Days remaining in August................................................ Add days in September.................................................... Add days in October to equal 90 days (October 31). . . . . . Period of th the note in d da ays................................................ 2. Au Aug. g. 2

No Note tes sR Rec ece eiva ivabl ble e—T —T.. M Me enk nke e.. .... .... .... .... .... .... .... .... .... .... .... .... .... .... Accounts Receivable—T. Menke.......................

31 2 29 30 31 90 5,5 ,500 00 5,500

To record receipt of note on account.

Quick Study 7-6 (10 minutes) Oct. Oc t. 31

Ca Cash sh.. .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ..... ..... ..... ...... ...... ...... ...... ...... ...... ..... ..... ..... Notes R Re eceivable—T. M Me enke....................... Interest Revenue..........................................

5, 5,66 665 5 5,500 165

To record cash received on note plus interest ($5,500 x 12% x 90/360). ©McGraw-Hill Companies, 2013 136 

Financial Accounting, 6th Edition

 

Quick Study 7-7 (15 mi minutes) nutes) Dec. 31

Interest Receivable...................................... ...... ....... Interest Revenue................................................

40 40

To record the year-end adjustment for  interest earned ($8,000 x 6% x 30/360).

Jan. Ja n. 15

Maturity date Ca Cash sh.. .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ..... ..... ..... ...... ...... ...... ...... ...... ...... ..... ..... ..... Interest Receivable...................................... Interest Revenue.......................................... Notes Receivable.........................................

8, 8,06 060 0 40 20 8,000

To record cash received on note plus interest.

Quick Study 7-8 (10 minutes) May Ma y 1 Ca Cash sh.. .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Factoring Fee Expense nse*.... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Accounts Receivable...................................

970 30 1,000

To record sale of receivable. *($1,000 x 0.03)

Quick Study 7-9 (10 minutes) May Ma y 1 Ba Bad d De Debt bts s Ex Expe pens nse e.... ...... .... .... .... .... .... .... .... .... .... ..... ...... ...... ...... ...... ..... ..... ...... ... Accounts Receivable—P. Carroll...................

1, 1,00 000 0 1,000

To write off an account.

Quick Study 7-10 (10 minutes) May Ma y 30 Acc cco oun untts Re Rece ceiv iva abl ble e—P —P.. Ca Carr rrol oll. l... .... .... .... .... .... .... .... .... .... .... .... .. Bad Debts Expense.........................................

1, 1,00 000 0 1,000

To reinstate an account previously written off.

May Ma y 30 Ca Cash sh.. .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ..... ..... Accounts Receivable— P. Carroll..................  

1, 1,00 000 0 1,000

To record cash received on account.

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Quick Study 7-11 (10 minutes) Accounts receivable turnover =

Net sales Average accounts receivable $754,200

 

($152,900 + $133,700) / 2 =

5.3 times

Interpretation: An ac accou counts nts re recei ceiva vable ble tur turnov nover er of 5.3 impl implie ies s that the company’s average accounts receivable balance is converted into cash 5.3 times per year. The 5.3 turnover is 29% lower than the average turno turnover ver of  7.5 for its competitors. The company needs to identify the caus cause e of this poor  performance and rectify the situation to at least compete at the average level.

Quick Study 77-12 12 (10 min minutes) utes) a. Bo Both th U.S. U.S. GA GAAP AP an and d IF IFRS RS ha have ve simi simila larr asse assett crit criter eria ia that that ap appl ply y to recognition of receivables. Further, receivables that arise from revenuegenerating activities are subject to broadly similar criteria for U.S. GAAP and IFR IFRS. S. Spe Specif cifica ically lly,, bot both h ref refer er to the rea realiz lizati ation on pri princi nciple ple and an earnin ear nings gs pro proces cess. s. How Howeve ever, r, whi while le the these se cri criter teria ia are bro broadl adly y sim simila ilar, r, diffe differe renc nces es do ex exis ist, t, an and d th they ey aris arise e ma main inly ly from from in indu dust stry ry-s -spe peci cific fic guidance under U.S. GAAP, which is very limited under IFRS. b. Bo Both th U.S. .S. GA GAAP AP an and d IF IFRS RS requ requir ire e rece receiv ivab able les s to be repo report rted ed ne nett of  estimated uncollectibles. Further, both systems require that the expense for es esti tima mate ted d un unco coll llec ecti tibl bles es be reco record rded ed in the the sa same me pe peri riod od wh when en revenues from those receivables are recorded. This means that in the case ca se of ac acco coun unts ts rece receiv ivab able le,, bo both th U. U.S. S. GA GAAP AP and and IF IFRS RS requ requir ire e the the allowance method for uncollectibles (unless immaterial).

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EXERCISES Exercise 7-1 (20 minutes) Apr. 8 Cash Credi reditt Car ard d Ex Expe pens nse* e*.. .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Sales.............................................................

8,832 368 368

Cost Co st o off Go Good ods s So Sold ld.. .... .... .... ..... ...... ...... ..... ..... ...... ...... ...... ...... ...... ...... ..... .... Merchandise IIn nventory................................

6, 6,80 800 0

9,200

To record credit card sales less 4% fee. *($9,200 x .04)

6,800

To record cost of sales.

12 Accounts R Re eceivabl ble e—Continen nental B Ba ank.. ..... ...... ... Credi reditt Car ard d Ex Expe pens nse* e*.. .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Sales...............................................................

5,265 135 5,400

To record credit card sales less 2.5% fee. *($5,400 x .025)

Cost Co st o off Go Good ods s So Sold ld.. .... .... .... ..... ...... ...... ..... ..... ...... ...... ...... ...... ...... ...... ..... .... Merchandise IIn nventory................................

3, 3,50 500 0 3,500

To record cost of sales.

20 Ca Cash sh.. .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ..... ...... ..... ..... ...... ... Accounts Receivable—Continental Bank. . . . .

5, 5,26 265 5 5,265

To record cash received on credit sales less fees.

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Exercise 7-2 (25 minutes) Part 1

GENERAL LEDGER

Accounts Receivable Nov. 5 4,417 Nov. 21 189 10 1,250 13 733 30 2,606 Bal. 8,817

Sales Nov. 5 10 13 30

4,417 1,250 733 2,606

Sales Returns and Allowances Nov. 21 189

ACCOUNTS RECEIVABLE LEDGER Surf Shop Nov. 5 4,417 30 2,606 Bal. 7,023

Yum Enterprises Nov. 10 1,250

Nov. 13

Bal.

Matt Albin 733 Nov. 21

189

544

Part 2 

Sami Company Schedule of Accounts Receivable November 30, 2011 Surf Shop Surf Shop... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ....... ....... ....... ........ ........ ........ ...... Yum Yu m En Ente terp rpri rise ses s.. .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ..... ...... ...... ...... ..... .. Matt Ma tt Al Albi bin. n.... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ....... ........ ........ ........ ...... Tota To tal. l.... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ..... ..

$7,0 $7,023 23 1, 1,25 250 0 544 544 $8,8 $8,817 17

Comparison: The total of the Schedule of Accounts Comparison: Accounts Receivable ($8 ($8,817) ,817) is proved with the balance of the Accounts Receivable controlling T-account from Part 1 ($8,817).

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Exercise 7-3 (20 minutes) June Ju ne 11 Ba Bad d De Debt bts s Ex Expe pens nse e.... ...... .... .... .... .... .... .... .... .... .... ..... ...... ...... ...... ...... ..... ..... ...... ... Accounts Receivable—Chaffey Co................

9, 9,00 000 0 9,000

To write off an account.

Jun une e 29 29 Acc cco oun untts R Re ece ceiv iva abl ble e—C —Ch haff ffe ey C Co. o... .... .... .... .... .... .... .... .... .... .... Bad Debts Expense.........................................

9,00 9,000 0

June Ju ne 29 Ca Cash sh.. .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ..... ..... Accounts Receivable—Chaffey Co................

9, 9,00 000 0

9,000

To reinstate an account previously written off.

 

9,000

To record cash received on account.

Exercise 7-4 (20 minutes) Dec. De c. 31 Ba Bad d De Debt bts s Ex Expe pens nse e.... ...... .... .... .... .... ..... ...... ...... ..... ..... ...... ...... ...... ...... ...... ...... ..... Allowance for Doubtful Accounts...................

4, 4,37 375 5 4,375

To record estimated bad debts expense (.005 x $875,000).

Feb. 1 Allo llowanc nce e for Doubtful Accounts.. .... .... .... .... .... .... .... .... .... .... .... .. Accounts Receivable—P. Coble.....................

420 420

To write off an account.

June 5 Accounts Receivabl ble e—P. Cobl ble e... .... .... .... .... .... .... .... .... .... .... .... .... ..   Allowance for Doubtful Accounts...................

420 420

To reinstate an account.

June 5 Cas ash h.... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Accounts Receivable—P. Coble.....................  

420 420 420

To record cash received on account.

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Exercise 7-5 (15 minutes) a. Dec. De c. 31 Ba Bad d De Debt bts s Ex Expe pens nse e*.. .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Allowance for Doubtful Accounts..................

1,2 ,205 05 1,205

To record estimated bad debts expense. Unadjusted balance ................................ ................ ................................. ...................................... ..................... Estimated balance ($53,000 x .04) ................................ ................ ................................. ...................................... ..................... Required adjustment ................................ ................ ................................. ...................................... .....................

*

= $ 915 credit =

2,120 credit

= $1,205 credit

b. Dec. De c. 31 Ba Bad d De Debt bts s Ex Expe pens nse e**.... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ..... ..... Allowance for Doubtful Accounts..................

3, 3,45 452 2 3,452

To record estimated bad debts expense. = $ 1,332 debit Unadjusted balance .................................................................... Estimated balance ($53,000 x .04) = 2,120 credit .................................................................... Required adjustment = $3,452 credit ....................................................................

**

Exercise 7-6 (30 minutes) a. Computation of the estimated balance of the allowance for uncollectibles: Not due: 1 to 30: 31 to 60: 61 to 90:

$132,000 x 0.01 = 30,000 x 0.02 = 12,000 x 0.04 = 6,000 x 0.07 =

Over 90:

10,000 x 0.12 =

$ 1,320 600 480 420 1,200 $ 4 4,,020 credit

b. Dec ec.. 3 31 1 Ba Bad d De Debt bts sE Exp xpe ens nse e.... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Allowance for Doubtful Accounts..............

3, 3,4 420 3,420

* 

To record estimated bad debts. *

Unadju Unad just sted ed bala balanc nce. e... .... .... .... .... .... .... .... .... .... .... .... ..... ..... Esti Estima mate ted d bala balanc nce. e... .... .... .... .... .... .... .... ..... ...... ..... ..... ...... ... Requ Re quir ired ed adju adjust stme ment nt.. .... .... .... .... .... .... ..... ...... ...... ...... .....

$ 600 600 cred credit it 4, 4,02 020 0 cred credit it $3,4 $3,420 20 cre credi ditt

c. Dec ec.. 3 31 1 Ba Bad dADe Debt snE Exp nse .... ..u .... .... .... llobts wa cxpe e feons r Deo b tf.... u.... l .... A.... c.... c.... o.... u.... n.... t.... s.... ...... ...... ...... ...... ...... ......

4, 4,42 420 0

4,420

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To record estimated bad debts.*  *

Unadju Unad just sted ed bala balanc nce. e... .... .... .... .... .... .... .... .... .... .... .... ..... ..... Esti Estima mate ted d bala balanc nce. e... .... .... .... .... .... .... .... ..... ...... ..... ..... ...... ... Requ Re quir ired ed adju adjust stme ment nt.. .... .... .... .... .... .... ..... ...... ...... ...... .....

$ 400 400 debi debitt 4, 4,02 020 0 cred credit it $4,4 $4,420 20 cre credi ditt

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Exercise 7-7 (25 minutes) a. Computation of the estimated balance of the allowance for uncollectibles: $190,000 x 0.035 =

$6,650 credit

b. Dec ec.. 3 31 1 Ba Bad d De Debt bts sE Exp xpe ens nse e.... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Allowance for Doubtful Accounts..............

6, 6,35 350 0 6,350

* 

To record estimated bad debts. *

Una nad djust justed ed ba bala lanc nce. e... .... .... .... .... .... .... .... .... .... .... .... .... .... Esti Estima mate ted d bala balanc nce. e... .... .... .... .... .... ..... ..... ..... ...... ..... ..... .....

$ 300 300 cred credit it 6, 6,65 650 0 cred credit it

Requ Re quir ired ed adju adjust stme ment nt.. .... .... .... ..... ...... ...... ...... ..... ..... .....

$6,3 $6,350 50 cred credit it

c. Dec ec.. 3 31 1 Ba Bad d De Debt bts sE Exp xpe ens nse e.... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Allowance for Doubtful Accounts..............

6, 6,8 850 6,850

* 

To record estimated bad debts. *

Unadju Unad just sted ed bala balanc nce. e... .... .... .... .... .... .... .... .... ..... ..... ..... ..... Esti Estima mate ted d bala balanc nce. e... .... .... .... .... .... ..... ..... ..... ...... ..... ..... .....

$

200 200 debi debitt 6, 6,65 650 0 cred credit it

Requ Re quir ired ed adju adjust stme ment nt.. .... .... .... ..... ...... ...... ...... ..... ..... .....

$6,8 $6,850 50 cred credit it

Exercise 7-8 (20 minutes) Feb. 1

Allo llowa wanc nce e fo forr Dou oubt btfu full Acco coun untts.. .... .... .... .... .... .... .... .... .... .... .... .. Accounts Receivable—Oxford Co.................. Accounts Receivable—Brookes Co...............

1, 1,90 900 0 400 1,500

To write off specific accounts.

June 5

Accounts Receivable—Oxford.... ...... ....... ...... ...... ....... ...... .... .... ....   Allowance for Doubtful Accounts...................

400 400

To reinstate an account.

June 5

Cas ash h.... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Accounts Receivable—Oxford........................  

400 400

To record cash received on account.

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Financial Accounting, 6th Edition

 

Exercise 7-9 (25 minutes) a. Expense is 1.5% of credit sales Dec. De c. 31 Ba Bad d De Debt bts s Ex Expe pens nse e...... ......... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ....... ...... .. Allowance for Doubtful Accounts................

13,50 13,500 0 13,500

To record estimated bad debts [$900,000 x .015].

b. Expense is 0.5% of total sales Dec. De c. 31 Ba Bad d De Debt bts s Ex Expe pens nse e...... ......... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ....... ...... .. Allowance for Doubtful Accounts................

10,5 10,500 00 10,500

To record estimated bad debts [($900,000 + $1,200,000) x .005].

c. Allowance is 6% of accounts receivable Dec. De c. 31 Ba Bad d De Debt bts s Ex Expe pens nse e...... ......... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ....... ...... .. Allowance for Doubtful Accounts................

14,7 14,700 00 14,700

* 

To record estimated bad debts. *

Unadjus Una djusted ted balanc balance... e....... ......... .......... ......... ......... ............... ............

$ 3,000 3,000 debit debit..

Esti Estima mated ted bala balanc nce e ($19 ($195, 5,000 000 x 6%) 6%)....... ............ .....

11,70 11,700 0 cred credit it

Require Req uired d adj adjust ustmen ment.. t....... .......... .......... .............. .................. .........

$14,70 $14,700 0 credit credit

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Exercise 7-10 (20 minutes) July Ju ly 4 Ac Acco coun unts ts Re Rece ceiv ivab able le.. .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ..... ...... ... Sales............................................................

6, 6,29 295 5 6,295

To record sales on credit.

Cost Co st o off Go Good ods s So Sold ld.. .... .... .... .... .... .... .... .... ..... ...... ...... ...... ..... ..... ...... ...... ..... Merchandise IIn nventory...............................

4, 4,00 000 0 4,000

To record cost of sales.

9 Ca Cash sh... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ....... .... Fact Fa cto oring ring Fee Fee Ex Expe pens nse e*.. .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... Accounts Receivable..................................

17,2 17,280 80 720 720 18,000

To record sale of receivable. *($18,000 x .04)

17 Ca Cash sh.. .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ..... ... Accounts Receivable..................................

3, 3,43 436 6 3,436

To record cash received on account.

27 Ca Cash sh... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ....... .... Notes P Pa ayable.............................................

10,0 10,000 00 10,000

To record cash from a loan. Note to Financial Statements:  Accounts receivabl receivable e in th the e amoun amountt of $ $13,000 13,000 are pled pledged ged as security  for a $10,000 note payable to Center Bank.

Exercise 7-11 (15 minutes) Nov No v. 1 No Note tes s Re Rec ceiv eivable— ble—M. M. Al Alle len n.... ...... .... .... .... .... .... .... .... .... .... .... .... .... Accounts Receivable—M. Allen.................

5, 5,0 000 5,000

To record receipt of note on account.

Dec. 3 31 1 Interest R Re eceivable............................ ...... ....... ...... ...... ..... Interest Revenue.........................................

50 50

To record interest earned  [$5,000 x .06 x 60/360].

Apr. Ap r. 30 Ca Cash sh.. .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ..... ... Notes Receivable—M. Allen....................... Interest R Re evenue......................................... Interest Receivable.....................................

5, 5,15 150 0 5,000 100 50

To record cash received on note plus interest earned [$5,000 x .06 x 120/360]. ©McGraw-Hill Companies, 2013 146 

Financial Accounting, 6th Edition

 

Exercise 7-12 (20 minutes) Mar. Ma r. 2 21 1 No Note tes s Re Rec ceiv eivable— ble—S. S. He Hern rna and ndez ez.. .... .... .... .... .... .... .... .... .... .. Accounts Receivable—S. Hernandez........

3, 3,1 100 3,100

To record receipt of note on account.

Sept. ept. 17 Ac Acc cou ount nts s Rec ece eivab ivable le—S —S.. He Herrna nan nde dez z.. .... .... .... .... .... .... .. Interest R Re evenue......................................... Notes Receivable—S. H He ernandez..............

3, 3,2 255 155 3,100

To record note dishonored plus interest  earned [$3,100 x .10 x 180/360 = $155].

Dec. 31 Allowance for Doubt btfu full Accounts.. .... .... .... .... .... .... .... .... .... Accounts Receivable—S. Hernandez........

3,255 3,255

To write off an account.

Exercise 7-13 (10 minutes) 2010 Dec. De c. 1 13 3 No Note tes s Re Rece ceiv iva able— ble—L. L. C Cla lark rk... ...... ...... ...... ...... ...... ...... ..... ..... ...... ... Accounts R Re eceivable—L. Cl Clark.................

10,0 10,000 00 10,000

To record receipt of note on account.

31 Interest Receivable............................ ....... ...... ...... ...... ..... Interest Revenue.........................................

40 40

To record interest earned  [$10,000 x .08 x 18/360].

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Exercise 7-14 (15 minutes) 2011 Jan. Ja n. 27 Ca Cash sh... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ....... .... Interest Revenue ........................................ Interest Receivable..................................... Notes Receivable—L. Clark.......................

10,1 10,100 00 60 40 10,000

To record cash received on note plus interest. [$10,000 x .08 x (45-18)/360= $60] 

Mar. Ma r. 3 No Note tes s Re Rec ceiv eivable— ble—S Sha hand ndii Co. o... .... .... .... .... .... .... .... .... .... .... .... .. Accounts Receivable-Shandi Co...............

4, 4,0 000 4,000

To record receipt of note on account.

17 No Note tes s Re Rec ceiv eivable— ble—J J. To Torr rre es.... ...... .... .... .... .... .... .... .... .... .... .... .... Accounts Receivable—J. Torres...............

2, 2,00 000 0 2,000

To record receipt of note on account.

Apr pr.. 16 16 Ac Acc cou ount nts s Rec Rece eivab ivable le—J —J.. T Tor orrres.. .... .... .... .... .... .... .... .... .... .... Interest Revenue......................................... Notes Receivable—J. T To orres.....................

2,01 2,015 5 15 2,000

To record receivable for dishonored  note plus interest [$2,000 x .09 x 30/360].

May Ma y 1 Al Allo lowa wanc nce e fo forr Doub ubttfu full Acc cco oun untts.. .... .... .... .... .... .... .... .... .... Accounts Receivable—J. Torres...............

2, 2,01 015 5 2,015

To write off account.

June Ju ne 1 Ca Cash sh.. .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ..... ... Interest R Re evenue......................................... Notes Receivable—Shandi Co...................

4, 4,10 100 0 100 4,000

To record cash received on note with interest [$4,000 x .10 x 90/360].

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Exercise 7-15 (15 minutes)  Year 2010 acco accounts unts rece receivabl ivable e tu turnove rnover: r: $236,000 ($20,700 + $17,400)/2

= 12.4 times

 Year 2011 acco accounts unts rece receivabl ivable e tur turnove nover: r: $305,000 ($22,900 + $20,700)/2

= 14.0 times

 Analysis: Waseem Company turned over its accounts receivable 1.6 (14.0 – 12.4)  Analysis ti time mes s mo more re in 20 2011 11 th than an in 20 2010 10.. Th This is ma may y indi indica cate te that that the the co comp mpan any y ha has s tightened tighten ed its credit policy or has improved its colle collection ction efforts. Also, relativ relative e to competitors (turnover of 11), Waseem is performing better than average.

Exercise 7-16 (25 minutes) a. Expense is 0.4% of total revenues Dec. De c. 31 Ba Bad d De Debt bts s Ex Expe pens nse e...... ......... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ....... ...... .. Allowance for Doubtful Accounts................

40,0 40,001 01 40,001

To record estimated bad debts [10,000,369 x 0.004].

b. Allowance is 2.1% of trad trade e receivables Dec. De c. 31 Ba Bad d De Debt bts s Ex Expe pens nse e...... ......... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ....... ...... .. Allowance for Doubtful Accounts................

35,77 35,775 5 35,775

* 

To record estimated bad debts. *

Unad Un adjus juste ted d balanc balance. e.... ...... ...... ...... ...... ...... ...... ...... ...... ....... ........ ......

10,00 10,000 0 credit credit

Esti Estima mated ted bala balanc nce e (2, (2,17 179, 9,76 764 4 x 0.021 0.021). ).... ....... ....

45,77 45,775 5 cre credit dit

Re Requ quir ired ed adjus adjustm tment ent... ...... ...... ...... ...... ...... ....... ........ ........ ........ ......

35,77 35,775 5 credit credit

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PROBLEM SET A Problem 7-1A (30 minutes) June 4 Accounts Receivable—A. Cianci..... .......... ...... .... .... .... .... .... ....... ... Sales.................................................................

750 750

To record sales on credit.

Cost o off G Go oods Sold.... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... Merchandise Inventory......................................

500 500

To record cost of sales.

5 Cas ash. h... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Credit card expense* se*.. .... .... .... ...... .... ...... .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .. Sales.................................................................

5, 5,7 723 177 5,900

To record record credit credit card sales less fee. *($5,900 x .03)

Cost Co st o off Go Goo ods S Sol old. d... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Merchandise Inventory......................................

3,2 ,20 00 3,200

To record cost of sales.

6 Account nts s Receiv iva able le—A —Ac cces ess s.. .... .... ........ .......... ...... .... .... .... .... .... .... Credit card expense*........................ ...... .... .... .... ........ ...... .... .... .... .. Sales.................................................................

4, 4,7 704 96 4,800

To record record credit credit card sales less fee. *($4,800 x .02)

Cost Co st o off Go Goo ods S Sol old. d... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Merchandise Inventory......................................

2, 2,80 800 0 2,800

To record cost of sales.

8 Account nts s Receiv iva able le—A —Ac cces ess s.. .... .... ........ .......... ...... .... .... .... .... .... .... Credit card expense*........................ ...... .... .... .... ........ ...... .... .... .... ..

3, 3,1 136 64

les....credit ....dit .....card ........sales ........less .......fee. ........*($3,200 .............x...02) . . .. .. ToSrecord ra ecord cre Cost Co st o off Go Goo ods S Sol old. d... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Merchandise Inventory......................................

3,200 1, 1,90 900 0 1,900

To record cost of sales.

10 No jour journal nal en entry try req requi uired red..

13 Allowance for Doubtful Accounts................... ...... ....... ... Accounts Receivable—N. Wells......................

329 329

  To write off account due.

17 Ca Cash sh.. .... .... .... .... .... .... .... .... .... Ac c.... o u n.... ts.... R.... e.... c.... e.... iv a.... b l.... e.... — A.... c.... c.... e.... s.... s.... ...... ...... ...... ...... ...... ...... ...... ..... ...... ...... ...... .... ..

7,840 ,840

7,840

To record cash received from credit card co. ©McGraw-Hill Companies, 2013 150 

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18 Cash sh.. .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Sales Disc iscounts* ts*.... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Accounts Receivable—A. Cianci......................

735 15 750

To record cash received received less less discount. discount. *($750 x .02)

Problem 7-2A (35 minutes) a2010 . Accounts Receivable.... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Sales...........................................................

1,803,750 1,803,750

To record sales on account.

Cost Co st of Goo Goods ds So Sold ld... ...... ...... ...... ...... ...... ...... ...... ....... ........ ....... ....... ...... .. Merchandise Inventory..............................

1, 1,47 475, 5,00 000 0 1,475,000

To record cost of sales.

b.

Allowance for Doubtful Accounts.................. Accounts Receivable................................

20,300 20,300

To write off accounts.

c.

Cash.................................... ...... ...... ....... ....... ..... ...... ....... ...... ...... Accounts R Re eceivable................................

789,200 789,200

To record cash received on account.

d.

Bad D De ebts E Ex xpense......................................... Allowance for Doubtful Accounts ...........

35,214 35,214

* 

To record estimated bad debts. *

 

Begin inni nin ng rece ceiv ivab able les. s... .... .... .... .... .... .... .... .... .... .. Cr Cred edit it sa sale les. s... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ..... ..... Col olle lect ctio ions ns.. .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ..

$ 0 1, 1,80 803, 3,75 750 0 (789 (789,2 ,200 00))

Write Wr ite-of -offs fs.. .... .... .... .... .... .... ..... ...... ...... ...... ...... ...... .... E nd in ing g rec re c e.... iv iva a.... b.... le les. s... .... .... .......... .. .... ... ... .... ... ... .... .... .... ... Perc Pe rcen entt unco uncolle llect ctib ible le.. .... .... ..... ...... ...... ...... ...... ..... .. Required ending allowance. e...... .... .... ...... .... Unad Un adju juste sted d bala balanc nce.. e..... ...... ...... ...... ...... ...... ...... ..... .. Adju Ad justm stmen entt to the the al allo lowa wanc nce.. e.... .... ..... ..... ..

(2 0,30 300 0) 9(20, 94 ,250 25 0 x 1. 1.5% 5% 14, 14,914* 14** 20 20,3 ,300 00 $ 35 35,2 ,214 14

Cr. Dr. Dr. Cr. Cr.

** rounded to nearest dollar 

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Problem 7-2A (Concluded) 2011 e. Acco coun unts ts Re Rece ceiv iva able ble.. .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Sales...............................................................

1, 1,82 825, 5,70 700 0 1,825,700

To record sales on account.

Cost Co st o off Go Good ods s So Sold ld... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ....... ........ ...... Merchandise Inventory.................................

1, 1,45 450, 0,00 000 0 1,450,000

To record cost of sales.

f.

Allowance fo for D Do oubtful A Ac ccounts...................... Accounts Receivable....................................

28,800 28,800

To record write-off of accounts.

g.

Cas ash h.... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ..... ...... ...... ...... ...... ..... ..... ..... Accounts Receivable....................................

1, 1,30 304, 4,80 800 0 1,304,800

To record cash received on account.

h.

Bad Debts Expense......................................... ....... Allowance for Doubtful Accounts................

36,181 36,181

* 

  To record estimated bad debts. *

Beginning receivables.................... Credit sales..................................... Collections...................................... Write-offs......................................... Ending receivables......................... Percent uncollectible...................... Required ending allowance.. ... . . . . . . Unadjusted balance Beginn Beg inning ing (Cr (Cr.). .).... ...... ...... ...... ...... ...... ...... ....... ........ .... Writ ite e-of -offs (Dr (Dr.).. .).... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Adjustment to the allowance. ... . . . . .

 

$ 994,250 1,825,700 (1,304,800) (28,800) 1,486,350 x 1.5% 22,295** Cr. $14,91 $14,914 4 28, 8,80 800 0 $

13 13,,88 886 6 36,181

Dr. Cr.

** rounded to nearest dollar  

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Problem 7-3A (35 minutes) Part 1

a. Expense is 2% of credit sales: Dec ec.. 31 Ba Bad d De Debt bts s Exp xpe ens nse e.... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Allowance for Doubtful Accounts.. .. . . .

70, 70,68 680 0 70,680

To record estimated bad debts [$3,534,000 x .02].

b. Expense is 1% of total sales: Dec ec.. 31 Ba Bad d De Debt bts s Exp xpe ens nse e.... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Allowance for Doubtful Accounts.. .. . . .

53, 3,37 378 8 53,378

To record estimated bad debts [($1,803,750 + $3,534,000) x .01].

c. Allowance is 5% of accounts receivable: Dec ec.. 31 Ba Bad d De Debt bts s Exp xpe ens nse e.... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Allowance for Doubtful Accounts.. .. . . .

69, 69,255 255 69,255

* 

To record estimated bad debts. *

Unadjusted Unad justed balance......................... balance.............................. ..... $15,750 $15,750 debit Estimated Estima ted balance balance (($1,070, $1,070,100 100 x 5%)...

53,505 credit

Required Requi red adjustm adjustment....... ent....................... ...................... ...... $69,255 $69,255 credit credit

Part 2  

Current assets: Accoun Acc ounts ts rrec eceiv eivabl able.. e...... ............ ................ ................. ................ ....... Less Le ss allo allowa wanc nce e fo forr do doub ubtf tful ul ac acco coun unts ts......... .........

$1,070 $1,070,10 ,100 0 (54, (54,93 930) 0)** $1 $1,0 ,015 15,1 ,170 70

Or: Acc Accoun ounts ts rece receiva ivable ble (net (net o off $54, $54,930 930** uncollectible accounts)...............................

$1,015,170

* Ad Adjus justm tment ent to the the al allo lowa wanc nce.. e...... ........ ........ ...... .. $7 $70, 0,680 680 cr cred edit it Unadjus Una djusted ted allowan allowance ce balanc balance... e......... .......... .... 15,750 15,750 debit debit Adjuste Adj usted d balanc balance... e........... ................. ................... .............. .... $54,93 $54,930 0 credit credit

Part 3 

Current assets: Accoun Acc ounts ts rrec eceiv eivabl able.. e...... ............ ................ ................. ................ ....... Less Le ss allo allowa wanc nce e fo forr do doub ubtf tful ul ac acct cts. s..... ........ ........ ....... ...

$1,070 $1,070,10 ,100 0 (5 (53, 3,50 505) 5)** ** $1 $1,0 ,016 16,5 ,595 95

Or: Acc Accoun ounts ts rrec eceiv eivabl able e (ne (nett of $5 $53,5 3,505 05** ** uncollectible accounts)...............................

$1,016,595

** See computations in Part 1c.

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Problem 7-4A (35 minutes) Part 1

Calculation of the estimated balance of the allowance for uncollectibles Not due:

$730,000 x .0125 =

$ 9,125

1 to 30:

354,000 x .0200 =

7,080

31 to 60:

76,000 x .0650 =

4,940

61 to 90:

48,000 x .3275 =

15,720

Over 90:

12,000 x .6800 =

8,160 $45 $4 5,025 Credit

Part 2 

Dec. De c. 31 Ba Bad dADe Debt snEx Expe .... .. .... .... .... llobts wa cepens fonse r Deo u b tf.... u.... l .... A.... c..... c...... o...... un...... ts...... ........ ......... ........ ....... ...

31,6 31,625 25

31,625

* 

To record estimated bad debts. *

Unadjusted Unadju sted b bala alance nce.... ......... ......... ......... .......... ........... ...... Estima Est imated ted bal balanc ance... e....... ......... .......... ............... .............. ....

$13,40 $13,400 0 credit credit 45, 45,025 025 credit credit

Requir Req uired ed adju adjustm stment ent..... .......... .......... ............... ............ ..

$31,625 $31,625 credit credit

Part 3

Writing off the account receivable in 2012 will not directly affect year 2012 net income. The entry to write o off ff an account involv involves es a debit to Allowa Allowance nce for and a credit to Accounts Receivable, both of annu which are Doubtful balance Accounts balance she sheet et acco account unts. s. Net inco income me is affe affecte cted d only by the annual al recognition of the estimated bad debts expense, which is journalized as an adjust adj usting ing ent entry. ry. Ne Nett inc income ome for Yea Yearr 2011 (the year of the ori origin ginal al sale sale)) included an estimated expense for write-offs such as this one.

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Problem 7-5A (75 minutes) Part 1 2010 Dec. De c. 16 No Note tes s Re Rece ceiv iva able— ble—T. T. Du Duke ke.. .... .... .... .... .... .... .... .... .... .... ..... ...... ...... ... Accounts Receivable—T. Duke...................

9, 9,60 600 0 9,600

To record note received on account.

31 Interest Receivable...................... ...... ...... ...... ....... ...... ...... ...... Interest R Re evenue..........................................

36 36

To record interest earned  [$9,600 x .09 x 15/360].

2011 Feb. Fe b. 14 Ca Cash sh.. .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ..... ...... ..... ..... ...... ... Interest Revenue.......................................... Interest Receivable...................................... Notes Receivable—T. Duke.........................

9, 9,74 744 4 108 36 9,600

To record cash received on note with interest.

Mar ar.. 2 Note otes Re Rec ceiva eivabl ble— e—M Mar are e Co Co.. .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Accounts Receivable—Mare Co.................

4, 4,12 120 0 4,120

To record note received on account.

17 Note otes Re Rec ceiva eivabl ble— e—J J. Ha Hala laam am.. .... .... .... .... .... .... .... .... .... .... .... .... .... Accounts Receivable—J. Halaam...............

2, 2,40 400 0 2,400

To record note received on account.

Apr pr.. 16 Acc cco oun untts Re Rece ceiv iva abl ble e—J —J.. Ha Hallaa aam m.. .... .... .... .... .... .... .... .... .... .... Interest R Re evenue.......................................... Notes R Re eceivable—J. H Ha alaam.....................

2, 2,41 414 4 14 2,400

To record receivable for dishonored  note plus interest [$2,400 x .07 x 30/360].

June Ju ne 2 Acc Accoun ounts ts Re Recei ceiva vable ble—Ma —Mare re Co. Co.......... ...................... ............. Interest R Re evenue.......................................... Notes Receivable—Mare Co........................

4,202*

82 4,120

To record receivable for dishonored note [$4,120 + ($4,120 x .08 x 90/360)] = $4,120 + $82.40 = $4,202.40  * Rounded to nearest dollar 

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Problem 7-5A (Concluded) July Ju ly 17 Ca Cash sh.. .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ..... ..... .. Interest Revenue......................................... Accounts Receivable—Mare Co................

4, 4,24 245 5 43 4,202

To record cash received on account   plus additional additional interest  [$4,202 x .08 x 46/360 = $43 (rounded)].

Aug. 7 Notes Receivable—Birch and Byer.. .... .... .... .... .... .... .... .... Accounts Receivable—Birch and Byer.......

5,440 5,440

To record note received on account.

Sept Se pt.. 3 Note otes Rec Receiva eivabl ble— e—Y Yor ork k.... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Accounts Receivable—York......................

2, 2,08 080 0 2,080

To record note received on account.

Nov. No v. 2 Ca Cash sh.. .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ..... ..... .. Interest Revenue......................................... Notes Receivable—York.............................

2, 2,11 115 5 35 2,080

To record cash received on note plus interest  ($2,080 x .10 x 60/360 = $35 rounded).

5 Ca Cash sh.. .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ..... ..... .. Interest Revenue......................................... Notes Receivable—Birch and Byer...........

5, 5,57 576 6 136 5,440

To record cash received on note plus interest ($5,440 x .10 x 90/360 = $136).

Dec. 1 Allo llowance nce for Doubtful Accounts.. .... .... .... .... .... .... .... .... .... Accounts Receivable—J. Halaam.............. To record write-off of account.

2,414 2,414

Part 2   Analysis Component : When a business ple pledges dges its re receivables ceivables as security for a loan and the loan is still outstanding at period-end, the business must disclo dis close se this infor informa matio tion n in notes to its fina financi ncial al state stateme ments nts.. Thi This s is a requirement because the business has committed a portion of its assets to cover a specific portion of its liabilities, which means that if the business dishonors its obligations under the loan, the creditor can claim the amount

of receivables receivables id identifi entified ed in the pledge asthe collat collateral eral to coverprinciple. the loa loan. n. This arrangement must be disclosed to satisfy full-disclosure ©McGraw-Hill Companies, 2013 Solutions Manual, Chapter 7 

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