Financial Accounting 9th Edition Harrison Solutions Manual 1

Financial Accounting, 9e (Harrison/Horngren/Thomas)
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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.) S 5-2
BALANCE SHEET
Current assets:
Short-term trading investment, at market value… $96,000
Chapter 5 Short Term Investments and Receivables 5-1

INCOME STATEMENT
Other revenue and gains (losses):
Unrealized gain on investment…………………….. $11,000*
_____
*$96,000 − $85,000 = $11,000
5-2 Financial Accounting 9/e Solutions Manual

(10 min.) S 5-3
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
Unrealized Loss on Investment 9,000

($109,000 − $100,000)..... ...............................
Short-Term Trading Investment……….. 9,000
Adjusted investment to market value.
BALANCE SHEET
Current assets:
Short-term trading investment, at market value $100,000
INCOME STATEMENT
Other revenues and gains (losses):
Unrealized (loss) on investment……………… $(9,000)
(5 min.) S 5-4
Peel, 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.
(5 min.) S 5-5
No sales revenue should be reported because the goods were sold FOB
destination, and revenue is not recorded until the goods are received.

(5 min.) S 5-6
2/10, n/30 means that Sports R Us will get a 2% discount if they pay the
invoice in 10 days; otherwise, the full amount is due within 30 days.
Sports R Us will only have to pay $123,480 ($126,000 × .98), resulting in a
potential savings of $2,520. Assuming the invoice is dated December
23, 2012, Sports R Us needs to pay Big Sky by January 2, 2013, in order
to receive the discount.
(5 min.) S 5-7
Journal
Sales Returns and Allowances..…………….. 5,000
Accounts Receivable………………………. 5,000

(5-10 min.) S 5-8
MEMORANDUM
DATE:
TO: Zeke Pitt
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.
(5 min.) S 5-9
1. Uncollectible-Account Expense ($361,000 × .02)….. 7,220

Allowance for Uncollectible Accounts…………… 7,220
2. Balance sheet
Accounts receivable……………………………... $35,000
Less: Allowance for uncollectible accounts… (7,220)
Accounts receivable, net………………………… $27,780

(5-10 min.) S 5-10
1. Accounts Receivable................................................ 1,030,000

Sales Revenue ..................................................... 1,030,000
2. Cash .......................................................................... 895,000

Accounts Receivable .......................................... 895,000
3. Allowance for Uncollectible Accounts .................... 15,000

Accounts Receivable .......................................... 15,000
4. Uncollectible-Account Expense ($1,030,000 × .02). 20,600

Allowance for Uncollectible Accounts............... 20,600
(10 min.) S 5-11

1.
Accounts Receivable
Beg. bal. 35,000
Net credit sales 1,030,000 Collections 895,000
Write-offs 15,000
End. bal. 155,000
Amount customers owe the company
2.
Allowance for Uncollectible Accounts
Beg. bal. 7,220
Write-offs 15,000 Uncollectible-account
expense 20,600
End. bal. 12,820
Amount the company

expects not to collect
3.
Accounts receivable, net
($155,000 − $12,820)……………… $142,180

(5-10 min.) S 5-12
(a) Accounts Receivable ................................... 183,000
Sales Revenue ......................................... 183,000
(b) Cash .............................................................. 133,000

Accounts Receivable .............................. 133,000
(c) Allowance for Uncollectible Accounts ........ 2,500

Accounts Receivable .............................. 2,500
(d) Uncollectible-Account Expense .................. 2,290

Allowance for Uncollectible
Accounts ............................................. 2,290

Beg. bal. 2,000
Write-offs 2,500 Uncollectible –
account exp. X = 2,290
End. bal. 1,790
(10 min.) S 5-13

1. and 2.
Accounts Receivable
Beg. bal. 101,000
Net credit sales 696,000 Collections 718,000
Write-offs 13,000
End. bal. 66,000

Beg. bal. 9,000
Write-offs 13,000 Uncollectible –
account expense 11,000
End. bal. 7,000
3.
BALANCE SHEET
Accounts receivable……………………… $66,000
Less Allowance for uncollectible accounts (7,000)
Accounts receivable, net………………… $59,000
(10 min.) S 5-14
1. True
2. False. Credit terms are usually stated in this form: 2/10 n/30.
3. 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.
4. Sales revenue $XXX

Less: Sales returns and allowances (X)
Less: Sales discounts (X)
= Net sales revenue $ XX
5. Accounts receivable……………………. $XXX

Less: Allowance for uncollectibles…… (X)
Accounts receivable, net………………. $ XX
6. False. The direct write-off method overstates assets because it fails

to show the amount of the receivables the company actually expects
to collect.
7. Carolina Bank has interest receivable and interest revenue.

Sumter Company has interest payable and interest expense.
Interest for one month ($150,000 × .06 × 1/12)…...... $750
8. Carolina Bank: Assets = Liabilities + Equity

Accrual of interest 0
Sumter Company: Assets = Liabilities + Equity

Interest expense 0
9. False. Credit card sales are usually recorded as a cash sale with a
credit card discount expense.
10. False. Since factoring receivables can be expensive, companies that

have a strong liquidity will usually choose a less expensive form of
financing.

(5-10 min.) S 5-15
a. Feb 10 Note Receivable — S. Summers .... 150,000

Cash ............................................ 150,000
b. May 10 Cash…………………………………… 153,000

Note Receivable — S.Summers 150,000
Interest Revenue ........................
($150,000 × .08 × 3/12)… 3,000
(10 min.) S 5-16
1. Interest for:
2012 ($220,000 × .08 × 7/12)………………. $10,267
2013 ($220,000 × .08)………………………. 17,600
2014 ($220,000 × .08 × 5/12)………………. 7,333
2. TMRN Bank has a note receivable and interest revenue.
Bob Morrison has a note payable and interest expense.
3. Payoff at November 30, 2012:

Principal……………………………………… $220,000
Interest ($220,000 × .08 × 6/12)…………... 8,800
Total…………………………………………... $228,800

(10 min.) S 5-17
Journal
2012
a. Aug. 31 Note Receivable — N. Totten…………. 5,000
Cash……………………………………. 5,000
To loan money.
2013
b. June 30 Interest Receivable
($5,000 × .07 × 10/12)………………….. 292
Interest Revenue…………………….. 292
To accrue interest revenue.
2013
c. Aug. 31 Cash ($5,000 + $350)……………………. 5,350
Interest Receivable………………… 292
Interest Revenue
($5,000 × .07 × 2/12)……………… 58
Note Receivable………………………. 5,000
To collect on note receivable.

(5-10 min.) S 5-18
a. BALANCE SHEET
June 30, 2013
Current assets:
Note receivable…………………………. $5,000
Interest receivable……………………… 292
b. INCOME STATEMENT
Year ended June 30, 2013
Revenues:
Interest revenue………………………… $ 292
c. BALANCE SHEET
June 30, 2014
Nothing to report because the note was
collected on August 31, 2013.
d. INCOME STATEMENT
Year ended June 30, 2014
Revenues:
Interest revenue………………………… $ 58

(10 min.) S 5-19
Req. 1
Cash + Short-term investments $9,600 + $14,500

Acid-test + Net current receivables + $74,800
= =
ratio Total current liabilities $101,000
= .98
The company’s acid-test ratio compares favorably to the industry

average of 0.95.
Req. 2
$803,000
One day’s sales = = $2,200
365
Average net
Days’ sales in average
accounts receivable ($74,800 + $71,800) / 2
accounts receivable = =
One day’s sales $2,200
= 33 days
The company’s days’-sales-in-receivables ratio (33) is worse than the 30-

day period of the credit terms.

(10-15 min.) S 5-20
Income Statement Balance Sheet

Debit Credit Debit Credit
1. Classifications Balance Balance Balance Balance
Unearned revenues ............ X

Allowance for
doubtful accounts .......... X
Other expenses .................. X
Accounts receivable .......... X
Accounts payable............... X
Service revenue .................. X
Other assets ....................... X
Property, plant, and
Equipment ...................... X
Operating expense ............. X
Cash .................................... X
Notes payable ..................... X
Thousands
2. Service revenue……………………………………… $ 23,650
Operating expense…………………………………... (11,650)
Other expenses………………………………………. (12,560)
Net loss………………………………………………... $ (560)
3. Quick ratio = ($290 + $4,460 - $300)/($2,225 + $600) = 1.58
Farmore’s liquidity position is very good.

The company has $1.58 in quick assets to pay off each dollar of current
liabilities.

Exercises
(10-15 min.) E 5-21A
1. This is a trading investment because Eastern Corporation

intends to sell the stock within a short time.
2. Dec 15 Short-Term Investment (1,000 × $57) .... 57,000

Cash ................................................... 57,000
Purchased investment.
Dec 31 Short-Term Investment

[(1,000 × $58) − $57,000] ......................... 1,000
Unrealized Gain on Investment ........ 1,000
3. BALANCE SHEET (partial)

Current assets:
Short-term investment, at market value ................... $58,000
INCOME STATEMENT (partial)

Other revenue and gains:
Unrealized gain on investment .................................. $ 1,000

(15-30 min.) E 5-22A
Cash Short-Term Investment Dividend Revenue

98,000 38,700 38,700 648*
648* 11,700 50,400
54,300
Unrealized Gain Gain on Sale

On Investment Of Investment
11,700 3,900
_____
*900 shares × $.72 = $648

(15-20 min.) E 5-23A
Req. 1
Journal
July 2 Accounts Receivable .................................... 800
Sales Revenue .......................................... 800
July 10 Accounts Receivable .................................... 1,500

Sales Revenue .......................................... 1,500
July 12 Cash ($800 - $16)… ....................................... 784

Sales Discounts ($800 × 2%). ....................... 16
Accounts Receivable ............................... 800
July 15 Sales Returns and Allowances .................... 500

Accounts Receivable ............................... 500
July 20 Cash ($1,000 - $20) ........................................ 980

Sales Discounts ($1,000 × 2%) ..................... 20
Accounts Receivable ($1,500 - $500) ...... 1,000
Req. 2
Sales revenue ($1,500 + $800) $2,300

Less: Sales returns and allowances - 500
Sales discounts ($20 + $16) - 36
Net sales revenue $1,764

(15-20 min) E5-24A
Journal
2012
Dec. 31 Doubtful-Account Expense
($600,000 × .01)………………………… 6,000
Allowance for Doubtful Accounts.. 6,000
BALANCE SHEET
Current assets:
Accounts receivable, net of allowance
for doubtful accounts of $6,8401…………. $84,1602
_____
1
$840 + $6,000 = $6,840
$91,000 − $6,840 = $84,160
2

(15 min.) E 5-25A
Req. 1
Journal
Dec. Accounts Receivable……………………........... 159,000
Sales Revenue………………………………… 159,000
Dec. Cash………………………………………………… 130,000

Accounts Receivable………………………… 130,000
Dec. Allowance for Uncollectible Accounts………. 2,700

Accounts Receivable………………………… 2,700
Dec. Uncollectible-Account Expense

($159,000 × .01)…………………………………… 1,590
Allowance for Uncollectible Accounts…… 1,590
Req. 2
Allowance for
Accounts Receivable Uncollectible Accounts
34,000 130,000 3,000
159,000 2,700 2,700 1,590
Bal. 60,300 Bal. 1,890
Net accounts receivable = $58,410 ($60,300 − $1,890)

High Peaks Party Planners expects to collect the net receivable amount.
Req. 3
BALANCE SHEET (Partial)

Current assets:
Accounts receivable $60,300
Less: Allowance for uncollectible accounts (1,890)
Accounts receivable, net $58,410
IINCOME STATEMENT (Partial)

Net sales $159,000
(10-15 min.) E 5-26A
Req. 1
Journal
Dec. Uncollectible-Account Expense….. 2,700

Accounts Receivable……………. 2,700
Req. 2
Net accounts receivable would be $60,300, the balance in Accounts

Receivable, computed as follows:
Accounts Receivable
Beg. bal. 34,000
Cr. sales 159,000 Collections 130,000
Write-offs 2,700
End. bal. 60,300
High Peaks Party Planners does not expect to collect the full $60,300
because some credit customers are likely not to pay their accounts.

(15-30 min.) E 5-27A
Req. 1
The credit balance at December 31 in Allowance for Doubtful Accounts
should be $14,450. The current balance is $11,600. Thus, the balance of
the allowance account is too low.
1-30 31-60 61-90 Over 90 Total

days days days days balance
$70,000 $50,000 $40,000 $20,000
Est. % uncollectible x .005 x .02 x .08 x .50
Bal. in Allow. for Doubtful
Accounts should be $350 $1,000 $3,200 $10,000 $14,550
Current balance (11,600)
Amount needed in adj. entry $2,950
Req. 2
Journal
Dec 31 Doubtful-Account Expense………………….. 2,950
Allowance for Doubtful Accounts…… 2,950
Allowance for Doubtful Accounts

11,600
2,950
Bal. 14,550

Req. 3
BALANCE SHEET
Current assets:
Cash…………………………………………… $ XX
Short-term investments……………………. XX
for doubtful accounts of $14,550….. 165,450*
Or
*Another way to report accounts receivable is
Accounts receivable………………………… $180,000
Less: Allowance for doubtful accounts….. (14,550) $165,450

(15-20 min.) E 5-28A
May Accounts Receivable…………………….. 7,050

Service Revenue………………………. 7,050
Recorded revenue on account.
May Bad-Debt Expense ($7,050 × .03)……… 212

Allowance for Bad Debts……………. 212
Recorded expense for the year.
May Allowance for Bad Debts ($33 + $113)... 146

Accounts Receivable…………………. 146
Wrote off uncollectible receivables.

(10-15 min.) E 5-29A
Journal
Aug. 1 Note Receivable — Candace Smith…….. 10,000

Cash…………………………………… 10,000
Oct. 6 Note Receivable — Putt Pro………..……. 15,000

Service Revenue…………………….. 15,000
16 Note Receivable — Veron, Inc.………….. 2,000

Accounts Receivable – Veron, Inc.. 2,000
31 Interest Receivable………………………… 246*

Interest Revenue……………………. 246
_____
*($10,000 × .07 × 91/365) + ($15,000 × .06 × 25/365) + ($2,000 × .11 × 15/365)
$175** + $62** + $9** = $246
** Rounded to nearest dollar.
Arabian Realty earned interest revenue of $246 this year.

(15 min.) E 5-30A
2012 2013
BALANCE SHEET
Current assets:
Note receivable………………………….. $90,000 $ —
Interest receivable
($90,000 × .09 × 8/12)………………. 5,400 —
INCOME STATEMENT
Interest revenue……………………………… 5,400 2,700*
_____
*$90,000 × .09 × 4/12 = $2,700

(10-15 min.) E 5-31A
Req. 1
Quick Marketable Net current

(a) (acid-test) Cash + securities + receivables
=
ratio Total current liabilities
$6,000 + $22,000 + $56,000

=
$15,000 + $107,000
$84,000
=
$122,000
= 0.69
A quick (acid-test) ratio of 0.69 is fairly weak.
(b) One day's Sales revenue $728,000

= = = $1,995
sales 365 365
Days’ sales Average net

in average accounts receivable ($56,000 + $70,000) / 2
= =
receivables One day’s sales $1,995
= 32 days
32 days’ sales in average receivables is within an acceptable range

relative to credit terms of net 30 days.
Req. 2
Algonquin could speed up cash flows from receivables by offering

discounts for early payments or increasing penalties for late payments.

(10-15 min.) E 5-32A
Req. 1
Average collection period: Millions of dollars
$570,000
365
Days’ sales in average receivables ($3,810 + $4,310) / 2

= = 3 days
(average collection period) $1,562
Req. 2
Creative Co., Inc’s collection period is short because Creative Co. sells
mainly for cash and on credit cards and bank cards. The company’s
receivables are very low.

(10-15 min.) E 5-33B
1. This is a trading investment because Summer Corporation

intends to sell the stock within a short time.
2. Dec. 15 Short-Term Investment (700 × $59)…….. 41,300

Cash………………………………………. 41,300
Dec. 31 Short-Term Investment

[(700 × $59) − $43,400]……………………. 2,100
Unrealized Gain on Investment……… 2,100
3. BALANCE SHEET (Partial)

Current assets:
Short-term investment, at market value………… $43,400
INCOME STATEMENT (Partial)

Other revenue and gains:
Unrealized gain on investment…………………… $ 2,100

(10-20 min.) E 5-34B
Cash Short-Term Investment Dividend Revenue

96,000 24,500 24,500 686*
686* 2,100 26,600
27,200
Unrealized Gain Gain on Sale

On Investment Of Investment
2,100 600
_____
*700 shares × $.98 = $468

(15-20 min.) E 5-35B
Req. 1
Journal
Nov 8 Accounts Receivable…………………….......... 500
Sales Revenue……………………………….. 500
Nov 15 Accounts Receivable…………………….......... 1,200

Sales Revenue……………………………….. 1,200
Nov 16 Sales Returns and Allowances………………. 500

Accounts Receivable……………………. 500
Nov 18 Cash ($500 - $10)……….……………………….. 490

Sales Discounts ($500 × 2%).....……………… 10
Accounts Receivable…………………….. 500
Nov 25 Cash ($700 - $14).…….…………………………. 686

Sales Discounts ($700 × 2%).....………….…... 14
Accounts Receivable ($1,200 - $500)…….. 700
Req. 2
Sales revenue ($500 + $1,200) $1,700

Less: Sales returns and allowances - 500
Sales discounts ($10 + $14) - 24
Net sales revenue $1,176

(15-20 min.) E 5-36B
Journal
2012
Dec. 31 Doubtful-Account Expense
($700,000 × .02)…………………………. 14,000
Allowance for Doubtful Accounts…. 14,000
BALANCE SHEET
Current assets:
for doubtful accounts of $14,8101………… $74,1902
_____
1
$810 + $14,000 = $14,810
$89,000 − $14,810 = $74,190
2

(15 min.) E 5-37B
Req. 1
Journal
Oct Accounts Receivable ...................................... 163,000
Sales Revenue ........................................... 163,000
Oct Cash................................................................. 127,000

Accounts Receivable ................................. 127,000
Oct Allowance for Uncollectible Accounts .......... 2,400

Accounts Receivable ................................. 2,400
Oct Uncollectible-Account Expense

($163,000 × .03) ............................................... 4,890
Allowance for Uncollectible Accounts ..... 4,890
Req. 2
Allowance for
28,000 127,000 3,000
163,000 4,300 2,400 4,890
Bal. 61,600 5,490
Net accounts receivable = $56,110 ($61,600 − $5,490)

Premier Party Planners expects to collect the net receivable amount.
Req. 3
BALANCE SHEET (Partial)

Current assets:
Accounts receivable ........................................ $61,600
Less: Allowance for uncollectible accounts (5,490)
Accounts receivable, net .......................................... $56,110
IINCOME STATEMENT (Partial)

Net sales $163,000
(10-15 min.) E 5-38B
Req. 1
Journal
Oct. Uncollectible-Account Expense…... 2,400

Accounts Receivable……………. 2,400
Req. 2
Net accounts receivable would be $61,600, the balance in Accounts

Receivable, computed as follows:
Accounts Receivable
Beg. bal. 28,000
Cr. sales 163,000 Collections 127,000
Write-offs 2,400
End. bal. 61,600
Premier Party Planners does not expect to collect the full $61,600
because some credit customers are likely not to pay their accounts.

(15-30 min.) E 5-39B
Req. 1
The credit balance at December 31 in Allowance for Doubtful Accounts

should be $10,050. The current balance is $8,000. Thus, the balance of
the allowance account is too low.
1-30 31-60 61-90 Over 90 Total

$50,000 $40,000 $30,000 $10,000
Amount needed in adj. entry $2,050
Req. 2
Journal
Dec 31 Doubtful-Account Expense…………………… 2,050

Allowance for Doubtful Accounts……….. 2,050

8,000
2,050
Bal. 10,050

(continued) E 5-39B
Req. 3
BALANCE SHEET
Current assets:
Cash…………………………………………… $ XX
Short-term investments……………………. XX
for doubtful accounts of $10,050……. 119,950*
Or
Accounts receivable………………………… $130,000

Less: Allowance for doubtful accounts…. (10,050) 119,950
(15-20 min.) E 5-40B
Journal
May Accounts Receivable ................................. 7,100

Service Revenue… ............................... 7,100
Recorded revenue on account.
May Bad-Debt Expense ($7,100 × .04) ............... 284

Allowance for Bad Debts… .................. 284
Recorded expense for the month.
May Allowance for Bad Debts ($31 + $111) ...... 142

Accounts Receivable............................ 142
Wrote off uncollectible receivables.

(10-15 min.) E 5-41B
Journal
May 1 Note Receivable — Carl Fajar .................. 19,000

Cash ...................................................... 19,000
July 6 Note Receivable — Fairway Masters. ...... 13,000

Service Revenue .................................. 13,000
16 Note Receivable — Weston, Inc ............... 5,000

Accounts Receivable – Weston, Inc. .. 5,000
31 Interest Receivable ................................... 495*

Interest Revenue .................................. 495
_____
*($19,000 × .08 × 91/365) + ($13,000 × .10 × 25/365) + ($5,000 × .13 × 15/365) = $495**
$379** + $89** + $27**
** Rounded to nearest dollar.
Coral Realty earned interest revenue of $495 this year.

(15 min.) E 5-42B
2012 2013
BALANCE SHEET
Current assets:
Note receivable……………………………….. $75,000 $ —
Interest receivable
($75,000 × .11 × 4/12)…………………….. 2,750 —
INCOME STATEMENT
Interest revenue…………………………………. 2,750 5,500*
_____
*$75,000 × .11 × 8/12 = $5,500

(10-15 min.) E 5-43B
Req. 1
Short-term Net current

(a) Acid-test Cash + investments + receivables
=
ratio Total current liabilities
$2,000 + $24,000 + $57,000

=
$18,000 + $104,000
$83,000
=
$122,000
= 0.68
An acid-test ratio of 0.68 is fairly weak.
(b) One day's Sales revenue $731,000

= = = $2,003
sales 365 365
Days’ sales Average net

in average accounts receivable ($57,000 + $71,000) / 2
= =
receivables One day’s sales $2,003
= 32 days
32 days’ sales in average receivables is good relative to credit terms of

net 30 days.
Req. 2
Seminole could speed up cash flows from receivables by offering

discounts for early payments or increasing penalties for late payments.

(10-15 min.) E 5-44B
Req. 1
Average collection period: Millions of dollars
$570,500
365
Days’ sales in average receivables ($3,870 + $4,210) / 2

= = 3 days
(average collection period) $1,563
Req. 2
Unique Co., Inc’s collection period is short because Unique Co. sells
mainly for cash and on credit cards and bank cards. The company’s
receivables are very low.

Quiz
Q5-45 d
Q5-46 a
Q5-47 b
Q5-48 b [($170,000 × .02) + ($41,000 × .08) + ($9,000 × .20) −
$3,000 = $5,480]
Q5-49 $211,520 ($220,000 − $8,480 = $211,520)

Q5-50 d ($100,000 × .02 = $2,000)
Q5-51 a ($3,000 + $2,000 = $5,000)
Q5-52 $3,000 ($5,000 − $2,000 = $3,000)
Q5-53 b ($30,000 × .11 × 5/12 = $1,375)
Q5-54 b
Q5-55 a ($30,000 × .11 × 6/12 = $1,650)
Q5-56 a
Q5-57 Cash ……………………………... 31,650
Note Receivable……… 30,000
Interest Receivable….. 1,375
Interest Revenue…….. 275
Q5-58 b
Q5-59 a [($90,000 + $114,000) / 2] ÷ ($1,095,000 / 365 days) =
34 days]
Q5-60 c

Problems
(20-30 min.) P 5-61A

Reqs. 1 and 2
Cash Short-Term Investment

19,000 10,400* 10,400* 1,300+
286** 9,100
Dividend Revenue Unrealized Loss on Investment

286** 1,300+
_____
*1,300 × $8 = $10,400
**1,300 × $.22 = $286
+
$10,400 − (1,300 × $7) = $1,300
Req. 2
Journal
2012
Nov. 16 Short-Term Investment ................................. 10,400
Cash (1,300 × $8)… ................................... 10,400
Dec. 16 Cash (1,300 × $0.22) ...................................... 286

Dividend Revenue ..................................... 286
Received cash dividend.
31 Unrealized Loss on Investment ................... 1,300

Short-Term Investment
[$10,400 − (1,300 × $7)] ............................. 1,300
Adjusted investment to fair value.

(continued) P 5-61A
Req. 3
BALANCE SHEET
Current assets:
Short-term investment, at market value
(1,300 × $7)……………………………………… $9,100
Req. 4
INCOME STATEMENT
Other revenue and (expense):
Dividend revenue………………………………… $ 286
Unrealized gain (loss) on investment………… (1,300)
Req. 5
Journal
2013
Jan. 14 Cash… ............................................................ 9,850
Short-Term Investment ............................. 9,100
Gain on Sale of Investment ...................... 750
Sold investment at a gain.

(10-15 min.) P 5-62A
MEMORANDUM
DATE: _________________
TO: Management of Lance Products, Inc.
FROM: Student Name
RE: Evaluation of internal control over cash receipts from

customers
By opening the mail, the accountant has direct access to cash. This
creates an internal control weakness because the accountant also posts
credits to customer accounts. She can steal a cash receipt from a
customer and write off the customer account as uncollectible. The theft
is hard to detect because the customer’s account gets zeroed out, and
the company does not pursue collection.
To correct this internal control weakness, the accountant should be

denied access to cash. Someone else in the organization should open
the mail and separate cash receipts from the accompanying remittance
slips. The cash should be deposited in the bank immediately, and only
the remittance slips should go to the accountant.

(15-20 min.) P 5-63A
(All amounts in millions)

Reqs. 1 and 3
Accounts Receivable Allowance for Uncollectible Accts

3,430 30,880 160
32,480 1,340 1,340 1,299
3,690 119
Req. 2
Journal
a. Accounts Receivable ......................... 32,480

Service Revenue ........................... 32,480
b. Cash .................................................... 30,880

Accounts Receivable .................... 30,880
c. Uncollectible-Account Expense ........ 1,299

Allowance for Uncollectible
Accounts ($32,480 × .04) ....... 1,299
d. Allowance for Uncollectible Accts .... 1,340

Accounts Receivable .................... 1,340
Req. 4
These balances agree with the actual Quick Mail amounts.
Req. 5
INCOME STATEMENT
Service revenue ............................. $32,480
Uncollectible-account expense .... 1,299

(25-35 min.) P 5-64A
Req. 1
Journal
Nov. 30 Allowance for Doubtful Accounts ................... 2,000

Accounts Receivable — Cheap Carpets ...... 1,600
Accounts Receivable — Retired Antiques .. 400
Dec. 31 Doubtful-Account Expense ............................. 4,888

Allowance for Doubtful Accounts ............ 4,888*
_____
1-30 31-60 61-90 Over 90 Total
$139,000 $53,000 $20,000 $19,000
Amount needed in adj. entry $4,888*
Req. 2

Nov. 30 Write-offs 2,000 Sept. 30 Balance 8,100
Dec. 31 Adjusting 4,888
Dec. 31 Balance 10,988

(continued) P 5-64A
Req. 3
Up-To-Date Communications
Comparative Balance Sheets (Partial)
December 31, 2013 and December 31, 2012
2013 2012
Accounts receivable……………………............. $231,000 $211,000
Less: Allowance for doubtful accounts……… (10,988) (4,700)
Accounts receivable, net……………………….. $220,012 $206,300

(20-25 min.) P 5-65A
Req. 1
Cash ($59,000 − $18,000)…………………………... $ 41,000

Short-term trading investments, at market
value………………………………………………… 13,000
Accounts receivable………………………………… $37,000
Less: Allowance for uncollectible accts.…….. (9,700) 27,300
Inventory………………………………………………. 60,000
Prepaid expenses……………………………………. 17,000
Total current assets……………………………… $158,300
Accounts payable…………………………………… $ 61,000

Other current liabilities…………………………….. 36,000
Total current liabilities…………………………... $ 97,000
Req. 2
As reported Corrected
Current $200,000 $158,300

= = 2.06 = 1.63
ratio $97,000 $97,000
Quick $59,000 + $27,000 $41,000 + $13,000

(acid-test) + $37,000 + $27,300
= = 1.27 = 0.84
ratio $97,000 $97,000

(continued) P 5-65A
Req. 3
Net income, as reported…………………………. $90,000

Less: Unrealized loss on trading investments
($27,000 − $13,000)……………………............ (14,000)
Less: Correction for conversion to the
allowance method —
Correct uncollectible-account expense
($590,000 × .03)……….............................. $17,700
Uncollectible-account expense as reported
using the direct write-off method………. 8,000 (9,700)
Net income, as corrected……………………….. $66,300

(20-30 min.) P 5-66A
Journal
2012
Oct. 31 Note Receivable — Bob’s Foods ................. 36,000
Sales Revenue........................................... 36,000
Dec. 31 Interest Receivable

($36,000 × .06 × 2/12) ..................................... 360
Interest Revenue ....................................... 360
2013
Jan. 31 Cash ............................................................... 36,540
Note Receivable — Bob’s Foods ............. 36,000
Interest Receivable ................................... 360
Interest Revenue
($36,000 × .06 × 1/12) .......................... 180
Feb. 18 Note Receivable — Dutton Market .............. 6,800

Accounts Receivable —
Dutton Market ......................................... 6,800
19 Cash ............................................................... 6,600

Financing Expense ....................................... 200
Note Receivable — Dutton Market .......... 6,800
Nov. 11 Note Receivable — Sauble Provisions ........ 15,400

Cash ........................................................... 15,400
Dec. 31 Interest Receivable ....................................... 206

Interest Revenue
($15,400 × .0975 × 50/365) .................. 206

(continued) P 5-66A
Req. 2
December 31,
BALANCE SHEET 2013 2012
Current assets:
Note receivable………………………… $15,400 $36,000
Interest receivable…………………….. 206 360

(15-25 min.) P 5-67A
Req. 1
Dollar amounts in millions

2013 2012
a. Current Total current assets $920 $820

= = = 1.56 = 1.30
ratio Total current liabilities $590 $630
Cash + Short-term
investments
b. Quick + Net current receivables $80+$135+$270 $60+$155+$260
(acid-test) = =
= .82 = 0.75
c. One Net sales $5,850 $5,110

day’s = = = $16.03 = $14.00
sales 365 365 365
Days’ sales Average net receivables ($270+$260)/2 ($260+$230)/2

in average = =
receivables One day’s sales $16.03 $14.00
= 17 days = 18 days

(continued) P 5-67A
Req. 2
MEMORANDUM
DATE: _________________
TO: Top management of True Beauty Pools
FROM: Student Name
RE: Changes in ratio values from 2012 to 2013
The current ratio improved from 1.30 to 1.56. The quick (acid-test) ratio
increased from 0.75 to .82. Days’ sales in receivables decreased from 18
days to 17 days.
All three ratio values improved during the current year. This is a
favorable trend because it shows that the company is finding it easier to
pay bills and collect receivables.
Req. 3
True Beauty Pools can improve cash flows from receivables by either
offering a discount for early payment and/or emphasizing credit cards
for sales.

(20-30 min.) P 5-68B
Reqs. 1 and 2
Cash Short-Term Investment

21,000 13,200* 13,200* 2,400+
552** 10,800
Unrealized Loss
Dividend Revenue on Investment
552** 2,400+
_____
*1,200 × $11 = $13,200
**1,200 × $.46 = $552
+
$13,200 − $10,800 = $2,400 unrealized loss
Req. 2
Journal
2012
Nov. 17 Short-Term Investment ................................ 13,200
Cash (1,200 × $11) .................................. 13,200
Dec. 19 Cash (1,200 × $0.46) ..................................... 552

Dividend Revenue .................................. 552
Received cash dividend.
31 Unrealized Loss on Investment .................. 2,400

Short-Term Investment
($13,200 − $10,800).................................. 2,400

(continued) P 5-68B
Req. 3
BALANCE SHEET
Current assets:
Short-term investment, at market value
(1,200 × $9)………………………….……….. $ 10,800
Req. 4
INCOME STATEMENT
Other revenue and gain:
Dividend revenue…………………………………… $ 552
Other expenses and loss:
Unrealized gain (loss) on investment…………… (2,400)
Req. 5
Journal
2013
Jan. 11 Cash……………………………………………. 11,928
Gain on Sale of Investment…………… 1,128
Short-Term Investment………………... 10,800
Sold investment at a gain.

(10-15 min.) P 5-69B
MEMORANDUM
DATE: _________________
TO: Company Employees
FROM: Luke Hill, President
RE: Procedures to ensure that all cash receipts are deposited in

the bank and that each day’s total cash receipts are posted to
accounts receivable.
1. Someone other than the accountant opens the mail. This person
separates customer checks from the accompanying remittance slips.
2. An employee with no access to the accounting records deposits the

cash in the bank immediately.
3. The remittance slips go to the accountant, who uses them for posting
credits to the customer accounts. The accountant adds up the total of
the credits for the day.
4. A third person, such as the manager or the president, compares the

amount of the bank deposit to the total of the customer credits posted
by the accountant. This gives some assurance that the day’s cash
receipts went into the bank and that the same amount was posted to
customer accounts.
5. Someone other than the accountant should prepare the bank

reconciliation.

(15-20 min.) P 5-70B
(All amounts in millions)
Reqs. 1 and 3
Accounts Receivable Allowance for Uncollectible Acct

3,436 30,563 159
32,484 1,662 1,662 1,624
3,695 121
Req. 2
Journal
a. Accounts Receivable ................................. .32,484

Service Revenue .................................... 32,484
b. Cash ............................................................ .30,563

Accounts Receivable ............................. 30,563
c. Uncollectible-Account Expense ................. 1,624

Allowance for Uncollectible Accts
($32,484 × .05) ........................................ 1,624
d. Allowance for Uncollectible Accts ............. 1,662

Accounts Receivable ............................. 1,662
Req. 4
These balances agree with the Ship Fast Corp. amounts.
Req. 5
INCOME STATEMENT
Service revenue……………………… $32,484
Uncollectible-account expense…… 1,624

(25-35 min.) P 5-71B
Req. 1
Journal
Nov. 30 Allowance for Doubtful Accounts ................... 2,000

Accounts Receivable — Brown Carpets ... 1,500
Accounts Receivable — Rare Antiques .... 500
Dec. 31 Doubtful-Account Expense ............................. 7,235

Allowance for Doubtful Accounts .............. 7,235*
_____
1-30 31-60 61-90 Over 90 Total
$135,000 $40,000 $14,000 $41,000
Amount needed in adj. entry $7,235*
Req. 2

Nov. 30 Write-offs 2,000 Sept. 30 Balance 8,300
Dec. 31 Adjusting 7,235
Dec. 31 Balance 13,535

(continued) P 5-71B
Req. 3
Media Communications
Comparative Balance Sheets (Partial)
December 31, 2013 and December 31, 2012
2013 2012
Accounts receivable…………………………. $230,000 $212,000
Less: Allowance for doubtful accounts….. (13,535) (4,300)
Accounts receivable, net……………………. $216,465 $207,700

(20-25 min.) P 5-72B
Req. 1
Cash ($50,000 − $19,000)…………………………... $ 31,000

Short-term trading investments,
at market value…………………………………… 12,000
Accounts receivable………………………………… $41,000
Less: Allowance for uncollectibles…………… (12,400) 28,600
Inventory……………………………………………… 57,000
Prepaid expenses…………………………………… 16,000
Total current assets……………………………... $144,600
Total current liabilities………………………….. $100,000
Req. 2
As reported Corrected
Current $184,000 $144,600

= = 1.84 = 1.45
ratio $100,000 $100,000
Quick $50,000 + $20,000 $31,000 + $12,000 +

(acid-test) = + $41,000 = 1.11 $28,600 = 0.72
ratio $100,000 $100,000

(continued) P 5-72B
Req. 3
Net income, as reported…………………………. $94,000

Less: Unrealized loss on trading securities
($20,000 − $12,000)……………………............ (8,000)
Less: Correction for conversion to the
allowance method —
Correct uncollectible-account expense
($630,000 × .03)……….…………………… $18,900
Uncollectible-account expense as reported
using the direct write-off method………. 6,500 (12,400)
Net income, as corrected………………………... $73,600

(20-30 min.) P 5-73B
Req. 1
Journal
2012
Oct. 31 Note Receivable — Basic Foods .................. 38,000
Service Revenue ...................................... 38,000
Dec. 31 Interest Receivable ($38,000 × .05 × 2/12) .... 317

Interest Revenue ...................................... 317
2013
Jan. 31 Cash ............................................................... 38,475
Note Receivable — Basic Foods............. 38,000
Interest Receivable .................................. 317
Interest Revenue ($38,000 × .05 × 1/12) .. 158
Feb. 18 Note Receivable — Daphne’s Market ........... 7,400

Accounts Receivable — Daphne’s
Market................................................. 7,400
19 Cash ............................................................... 7,200

Financing Expense ........................................ 200
Note Receivable — Daphne’s Market …… 7,400
Nov. 11 Note Receivable — Sincere Provisions ....... 15,800

Cash .......................................................... 15,800
Dec. 31 Interest Receivable........................................ 195

Interest Revenue ($15,800 × .09 × 50/365). 195

(continued) P 5-73B
Req. 2
December 31
BALANCE SHEET 2013 2012
Current assets:
Note receivable………………………… $15,800 $38,000
Interest receivable…………………….. 195 317

(30-40 min.) P 5-74B
Req. 1
Dollar amounts in millions

2013 2012
a. Current Total current assets $930 $850

= = = 1.69 = 1.39
Cash + Short-term
investments
b. Quick + Net current receivables $90+$130+$290 $70+$165+$260
(acid-test) = =
= 0.93 = 0.81
c. One Net sales $5,860 $5,120

day’s = = = $16.05 = $14.03
sales 365 365 365
Days’ sales Average net receivables ($290+$260)/2 ($260+$250)/2

in average = =
receivables One day’s sales $16.05 $14.03
= 17 days = 18 days

(continued) P 5-74B
Req. 2
MEMORANDUM
DATE: _________________
TO: Top management of Lakeland Pools, Inc.
FROM: Student Name
RE: Changes in ratio values from 2012 to 2013
The current ratio improved from 1.39 to 1.69. The quick (acid-test) ratio
increased from 0.81 to 0.93. Days’ sales in receivables improved from 18
days to 17 days.
All three ratio values improved during the current year. This is a
favorable trend because it indicates that the company is finding it easier
to pay its bills.
Req. 3
Lakeland Pools can improve cash flow from receivables by offering a

discount for early payment and/or emphasize credit cards for sales.

Challenge Exercises and Problem
(15-20 min.) E 5-75
Actual without Expected with

Bank Cards Bank Cards
Sales revenue ……………………....... $500,000 $550,000*
Cost of goods sold…………………….. $250,000 $275,000**
Uncollectible-account expense………. 12,000 —
Bank-card discount expense…………. — 9,000***
Other expenses…………………………. 165,000 157,000****
Total expenses………………………….. 427,000 441,000
Net income………………………………. $ 73,000 $109,000
Decision: Accept bank cards because of the expected increase in net

income.
_____
*$500,000 × 1.10 = $550,000
**$250,000 × 1.10 = $275,000
***$550,000 − $250,000 = $300,000 × .03 = $9,000
The switch to bank cards should produce bankcard discount expense
on only the portion of sales that are made on bank cards.
****$165,000 − $8,000 = $157,000

(15-20 min.) E 5-76
T-accounts are helpful, as follows (in millions):

Beg. bal. 67
(a) Write-offs 4 Expense 8
End. bal. 71
Gross Accounts Receivable

Beg. bal. ($2,269 + $67) 2,336
Total revenue 26,667 Write-offs 4
Collections 26,346 (b)
End. bal. ($2,582 + $71) 2,653

(15-20 min.) P 5-77
Req. 1
Beginning balance $ 930

+ Uncollectible account expense c 200
- Write-offs 130
= Ending balance $1,000
Allowance for
Beg. Bal 9,430 930 Beg. Bal
Cr. sales16,500 900 Returns Write-offs 130 200 cUncoll. Acct.
130 Write-offs exp.
234 aDiscounts
15,366 bCollections
End. Bal 9,300 1,000 End. Bal
Req. 2
Beginning balance $ 9,430

+ Credit sales 16,500
- Returns 900
- Write-offs 130
a
- Discounts ($15,600 x 75% x 2%) 234
$15,600
b
- Collections 15,366
= Ending balance $ 9,300

Decision Cases
(20-25 min.) Decision Case 1
Clearview Cablevision
Summary Income Statement
Year Ended December 31, 2012
Service revenue……………………………………… $940,000
Total expenses, excluding bad debt..…………… (670,000)
Bad-debt expense ($940,000 × .05)………………. (47,000)
Net income……………………………………………. $223,000
Conclusion: The business was profitable during 2012.
Computation:
Accounts Receivable
Dec. 31, 2011 Balance 110,000
2012 Revenues 940,000 2012 Collections 840,000
2012 Write-offs 30,000
Dec. 31, 2012 Balance 180,000

(15-20 min.) Decision Case 2
The trend of sales is increasing.
(Dollars in thousands)
2013 2012
Days’
($115* + $96*) / 2 ($96* + $85*) / 2
sales in =
$1,475 / 365 days $1,001 / 365 days
receivables
= 26 days = 33 days
_____
*Net accounts receivable
Days’ sales in receivables decreased nicely during 2013.
Cash collections from customers for 2013 and 2012:

2013 2012
Beginning net accounts receivable $ 96 $ 85

+ Sales revenue 1,475 1,001
− Ending net accounts receivable (115) (96)
= Estimated cash collections $1,456 $ 990
Collections from customers increased dramatically during 2013.
Based on the improving trends of sales and collections from customers,

and the drop in days’ sales in receivables, we would lend $500,000 to
Dean Young Beauty Aids.

Ethical Issue
(20-30 minutes)
Req. 1
The ethical issue in this case is whether it is acceptable to “smooth” earnings
by way of judgmental positive or negative changes to uncollectible accounts
expense that understate or overstate the amount, based on what management
decides they want net income to be. What should be the determining factors
in making the judgments for this computation?
Req. 2 and Req. 3

The stakeholders to this decision are Sunnyvale Loan Company, its officers
and directors, its shareholders, Sunnyvale’s banker, securities analysts, and
the equity and credit markets.
Economic analysis: The stock and credit markets don’t like surprises. The
markets usually reward steadily performing and upward-trending earnings
with increasing share prices and good credit ratings, but only if these trends
are real and not “engineered” by management. Burnham’s reasoning is
faulty.
The income overstatements may offset the income understatements in some

periods, but there is no guarantee that this will always occur. The accounting
literature is full of instances where misstatements of income have dulled
people’s perceptions of the truth and resulted in tragic losses of resources
and reputations. An article in The Wall Street Journal concluded with this
statement, “The danger with spin artistry in accounting is that the spinner
may believe the spin.” While manipulations such as this might have a
temporarily positive impact, in the long run, creditors and analysts will catch
on that the company is manipulating earnings, and the markets will react in a
harshly negative way toward Sunnyvale, hurting all parties concerned.

(continued) Ethical Issue
Legal analysis: As explained in chapter 4, material and intentional

manipulations of earnings are known as fraudulent financial reporting, and are
illegal. Such dealings will eventually result in adverse legal and regulatory
consequences for the company, as well as its officers and directors.
Ethical analysis: Sunnyvale Loan Company’s practice of smoothing income is

unethical because the owner deliberately underestimates Uncollectible-
Account Expense in some periods and overstates the expense in other
periods. Burnham’s purpose is to manipulate income. This is lying, which
violates the rights of all other stakeholders in favor of temporary enrichment
for a few. Rather than manipulating the accounting information, Burnham
should be using accounting information to represent the business truthfully to
her bank lender. We can be sure the bank as well as securities analysts expect
truthful financial statements from Sunnyvale Loan Company.
Req. 4
Uncollectible accounts expense and the allowance for uncollectible accounts
should be based on a truthful and accurate projection of how much a
company truly expects to collect over the next operating cycle, rather than
figuring out what a company wants net income to be and adjusting the
expense and allowance accordingly.
While Student responses may vary to this question, this represents the main
message.

Focus on Financials: Amazon.com, Inc.
(30-40 min.)
Req. 1
a. According to Note 1, the “Marketable Securities” account includes
short- to intermediate-term fixed income securities and AAA-rated
money market funds.
b. According to Note 1, the company invests its excess cash in these
accounts. This is done in order to earn a return on excess cash
balances.
c. The balance in Marketable Securities increased by 71% from $2,922
million in 2009 to $4,985 million in 2010. This shows that the
company is accumulating cash. This could be for a variety of
reasons, including the possibility of a large capital investment.
d. According to Note 1, these marketable securities are recorded at
fair value with unrealized gains and losses included in other
comprehensive income.
e. Note 2 shows that, during 2010, the company had $22 million of
unrealized gains and $1 million of realized losses on marketable
securities. Overall, the market value of the portfolio increased
during the year.
Req. 2
Amazon recognizes revenue from product sales or services rendered
when the following four criteria are met:
 Persuasive evidence of an arrangement exists,
 Delivery has occurred or services have been rendered,
 The selling price is fixed or determinable, and
 Collectability is reasonably assured.
(continued)Amazon.com
Req. 3
“Net” means “net of allowance for doubtful accounts.” “Other” likely
means “Other current assets,” which are apparently immaterial in
comparison with total current assets and total assets, and are therefore
not discussed separately.
Req. 4
According to Note 1, “ Accounts Receivable, Net, and Other” include
vendor receivables ($763 million) and customer receivables ($561
million).
Req. 5
According to Note 1, the allowance for doubtful customer and vendor
accounts receivable is $72 million in 2010.
Req. 6
2010 2009
Current ratio: (Dollar amounts in millions)
Total current assets $13,747 $9,797

= = 1.33 = 1.33
Total current liabilities $10,372 $7,364
Quick ratio:
Quick assets = $10,349 $7,354
= 1.00 = 1.00
Total current liabilities $10,372 $7,364
Working capital:
Current assets – Current liabilities = ($13,747-$10,372) ($9,797-$7,364)
= $3,375 = $2,433

(continued)Amazon.com
As of the end of 2010, Amazon.Com, Inc.’s the current ratio and quick
ratio were approximately the same as in 2009 indicating that liquidity
was also relatively unchanged. However, working capital, the difference
between its current assets and current liabilities, actually widened.
Overall, a current ratio of 1.33 and a quick ratio of 1.00 implies that
Amazon.com can cover its current liabilities with its current assets.
Industry averages for these ratios would be helpful in evaluating these
ratios.

Focus on Analysis: RadioShack Corp.
(20 min.)
Req. 1
According to Note 2, RadioShack Corp.’s revenue primarily comes from
the sale of products and services to consumers. Additionally, revenue
is recognized net of estimates for refunds and returns when the
following criteria are met:
 persuasive evidence of an arrangement exists,
 delivery has occurred or services have been rendered,
 the sales price is fixed or determinable, and
 collectability is reasonably assured
Req. 2
In Note 2, the company alludes to the fact that their accounts receivables
are primarily the result of dealer receivables. These receivables are due
from the dealer’s of RadioShack’s products who have purchased the
products on account.
Allowing sales on account allows RadioShack customers to purchase

from RadioShack more easily. Sales most likely would decrease if
RadioShack did not sell on credit.
The average payment term for these receivables, according to Note 2, is

approximately 45 days.

(continued) RadioShack
Req. 3
a. Net Sales $4,472.8

= = $12.25
365 365
b. Avg. Accts Rec. ($377.5 + $322.5)/2

= 28.6 days
Sales per day $12.25
c. The average payment period is 45 days whereas the average days’

sales to collection for AR is only 28.6 days. So, the company performed
better than its normal payment terms for its credit customers.
Req. 4
Current ratio:
2010 2009
(Dollar amounts in millions)
Total current assets $1,778.7 $2,015.7

= = 1.96 = 3.08
Total current liabilities $908.1 $654.5
Quick ratio:
Quick assets = $946.9 $1,230.7
= 1.04 = 1.88
Total current liabilities $908.12 $654.5
Working capital:
Current assets – Current liabilities = ($1,778.7- $908.1) ($2,015.7- $654.5)
= $870.6 = $1,361.2

(continued) RadioShack
The current ratio, quick ratio, and working capital has fallen
significantly from 2009 to 2010. Thus, the company’s liquidity has fallen
from 2009 to 2010. However, the current ratio and quick ratio are still
significantly above 1 meaning that the company still has the ability to
cover its current liabilities.
Some information that would be very helpful in evaluating these ratios

would be industry averages for these ratios. This would allow for
benchmarking RadioShack, Corp. to the industry.

Group Project
Student responses will vary.

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Short-Term Investments & Receivables

1. Trading investments are reported at their current market value.

2. A trading investment is always a current asset because the investor

(10 min.) S 5-2

Chapter 5 Short Term Investments and Receivables 5-1

5-2 Financial Accounting 9/e Solutions Manual

Unrealized Loss on Investment 9,000

Chapter 5 Short Term Investments and Receivables 5-3

5-4 Financial Accounting 9/e Solutions Manual

TO: Zeke Pitt

FROM: Student Name

RE: Essential element of internal control over collection from

Separation of duties is the essential element in a system to ensure that

Student responses may vary.

1. Uncollectible-Account Expense ($361,000 × .02)….. 7,220

Chapter 5 Short Term Investments and Receivables 5-5

1. Accounts Receivable................................................ 1,030,000

2. Cash .......................................................................... 895,000

3. Allowance for Uncollectible Accounts .................... 15,000

4. Uncollectible-Account Expense ($1,030,000 × .02). 20,600

(10 min.) S 5-11

Amount customers owe the company

Amount the company

5-6 Financial Accounting 9/e Solutions Manual

(b) Cash .............................................................. 133,000

(c) Allowance for Uncollectible Accounts ........ 2,500

(d) Uncollectible-Account Expense .................. 2,290

Allowance for Uncollectible Accounts

(10 min.) S 5-13

Allowance for Uncollectible Accounts

3. The net amount of receivables — the amount the company expects to

4. Sales revenue $XXX

5. Accounts receivable……………………. $XXX

6. False. The direct write-off method overstates assets because it fails

7. Carolina Bank has interest receivable and interest revenue.

8. Carolina Bank: Assets = Liabilities + Equity

Sumter Company: Assets = Liabilities + Equity

10. False. Since factoring receivables can be expensive, companies that

5-8 Financial Accounting 9/e Solutions Manual

a. Feb 10 Note Receivable — S. Summers .... 150,000

b. May 10 Cash…………………………………… 153,000

(10 min.) S 5-16

2. TMRN Bank has a note receivable and interest revenue.

Bob Morrison has a note payable and interest expense.

3. Payoff at November 30, 2012:

Chapter 5 Short Term Investments and Receivables 5-9

5-10 Financial Accounting 9/e Solutions Manual

Chapter 5 Short Term Investments and Receivables 5-11

Cash + Short-term investments $9,600 + $14,500

The company’s acid-test ratio compares favorably to the industry

The company’s days’-sales-in-receivables ratio (33) is worse than the 30-

5-12 Financial Accounting 9/e Solutions Manual

Income Statement Balance Sheet

Unearned revenues ............ X

3. Quick ratio = ($290 + $4,460 - $300)/($2,225 + $600) = 1.58

Farmore’s liquidity position is very good.

Chapter 5 Short Term Investments and Receivables 5-13

(10-15 min.) E 5-21A

1. This is a trading investment because Eastern Corporation

2. Dec 15 Short-Term Investment (1,000 × $57) .... 57,000

Dec 31 Short-Term Investment

3. BALANCE SHEET (partial)