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CHAPTER 7
Receivables and Investments
OVERVIEW OF EXERCISES, PROBLEMS, AND CASES
Estimated
Time in
Learning Objectives Exercises Minutes Level
Module 1
1. Explain how to account for accounts receivable, 1 10 Mod
including bad debts. 2 25 Mod
3 15 Diff
4 15 Mod
19* 5 Easy
2. Explain how information about sales and receivables 5 20 Mod

can be combined to evaluate how efficient a company 6 10 Diff
is in collecting its receivables.
Module 2
3. Explain how to account for interest-bearing 7 15 Mod
notes receivable. 8 10 Mod
4. Explain various techniques that companies use to accelerate 9 20 Mod

the inflow of cash from sales.
Module 3
5. Explain the accounting for and disclosure of various types 10 15 Mod
of investments that companies make. 11 10 Easy
12 30 Mod
13 30 Mod
14 30 Mod
15 10 Mod
19* 5 Easy
Module 4
6. Explain the effects of transactions involving liquid assets 16 5 Easy
on the statement of cash flows. 17 10 Mod
18 5 Mod
19* 5 Easy
*Exercise, problem, or case covers two or more learning objectives

Level = Difficulty levels: Easy; Moderate (Mod); Difficult (Diff)
7-1
© 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
7-2 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
Problems Estimated
and Time in
Learning Objectives Alternates Minutes Level
Module 1
including bad debts. 2 15 Mod
8* 20 Mod

can be combined to evaluate how efficient a company
Module 2
3. Explain how to account for interest-bearing 8* 20 Mod
notes receivable.

Module 3
5. Explain the accounting for and disclosure of various types 5 25 Mod
of investments that companies make. 6 20 Mod
Module 4
6. Explain the effects of transactions involving liquid assets 7 45 Diff
on the statement of cash flows.

CHAPTER 7 • RECEIVABLES AND INVESTMENTS 7-3
Estimated
Time in
Learning Objectives Cases Minutes Level
Module 1
including bad debts. 2* 25 Mod
4* 25 Mod

can be combined to evaluate how efficient a company
Module 2
3. Explain how to account for interest-bearing
notes receivable.

Module 3
5. Explain the accounting for and disclosure of various types 4* 25 Mod
of investments that companies make.
Module 4
6. Explain the effects of transactions involving liquid assets 2* 25 Mod
on the statement of cash flows.

EXERCISES
LO 1 EXERCISE 7-1 COMPARISON OF THE DIRECT WRITE-OFF AND ALLOWANCE

METHODS OF ACCOUNTING FOR BAD DEBTS
Net income under each of the two alternatives is as follows:

Direct write-off method: $145,000 – $10,500 = $134,500
Allowance method: $145,000 – (2% × $650,000) = $145,000 – $13,000 = $132,000
Conclusion: The direct write-off method would result in a lesser amount of expense and
therefore in a higher net income. However, under current accounting standards, if bad
debts are material in amount, the allowance method must be used. In addition, it is not
acceptable for a company to choose accounting methods on the basis of their effects on
net income.
LO 1 EXERCISE 7-2 ALLOWANCE METHOD OF ACCOUNTING FOR BAD DEBTS—

COMPARISON OF THE TWO APPROACHES
1. a. Based on 2% of net credit sales:
Journal 2016
Entry Dec. 31 Bad Debts Expense ............................... 16,680
Analysis Allowance for Doubtful Accounts ...... 16,680
To record estimated bad debts:
2% × $834,000.
Balance Sheet Income Statement

STOCKHOLDERS’ NET
ASSETS = LIABILITIES + EQUITY REVENUES – EXPENSES = INCOME
Allowance for (16,680) Bad Debts (16,680)
Doubtful Expense 16,680
Accounts*
(16,680)
*The Allowance for Doubtful Accounts account has increased. It is shown as a decrease in the equation above because it is a contra
account and causes total assets to decrease.
EXERCISE 7-2 (Concluded)
b. Based on 6% of year-end accounts receivable:
Journal 2016
Need balance of 6% of $320,100 $19,206 (Cr.)
Balance before adjustment is 2,600 (Cr.)
Amount of entry must be $16,606 (Cr.)
STOCKHOLDERS’ NET
Accounts*
(16,606)
2. a. No change.
b.
Journal 2016
Need balance of 6% of $320,100 $19,206 (Cr.)
Balance before adjustment is (2,600) (Dr.)
STOCKHOLDERS’ NET
Accounts*
(21,806)
LO 1 EXERCISE 7-3 WORKING BACKWARD: ALLOWANCE FOR DOUBTFUL

ACCOUNTS
1. The gross amount of beginning accounts receivable is the net amount of $48,000
plus the allowance for doubtful accounts of $3,000 = $51,000. The ending amount is
$54,000 plus $5,000 = $59,000. The cash collected during the year can be found by
analyzing the Accounts Receivable account:
Accounts Receivable
Beg. Bal. 51,000 4,000 Write-offs of uncollect
ible accounts
Sales on credit 80,000 X (cash collections)*
End. Bal. 59,000
*X = $51,000 + $80,000 – $4,000 – $59,000
= $68,000
2. The amount of bad debts expense can be found by analyzing the Allowance for
Doubtful Accounts account:
Allowance for Doubtful Accounts

3,000 Beg. Bal.
Write-offs of uncollect- X (bad debts expense)*
ible accounts 4,000
5,000 End. Bal.
*X = $5,000 + $4,000 – $3,000
= $6,000
LO 1 EXERCISE 7-4 USING AN AGING SCHEDULE TO ACCOUNT FOR BAD DEBTS
1. Estimated Percent Amount

Category Amount Uncollectible Uncollectible
Current $500,000 10% $ 50,000
Past due:
Less than one month 200,000 30 60,000
More than one month 100,000 75 75,000
Totals $800,000 $185,000
2. Journal entry:
Journal End of Year

Entry Bad Debts Expense ............................... 165,000
$185,000 less $20,000 currently
in allowance account.

STOCKHOLDERS’ NET
Accounts*
(165,000)
LO 2 EXERCISE 7-5 ACCOUNTS RECEIVABLE TURNOVER FOR NIKE
1. Accounts receivable turnover:

Revenues/Average Accounts Receivable = $27,799/[($3,434 + $3,117)/2]
= $27,799/$3,275.5
= 8.49 times
2. Average collection period (assuming 360 days in a year):

Number of Days in a Year/Turnover = 360/8.49
= 42 days to collect an account receivable
3. Included in the types of customers Nike has:

• Running shoe stores
• Sporting goods chains
• Department store chains
Whether or not an average of 42 days to collect an account is reasonable depends
on several factors. For example, how does this compare with other companies in
the same industry as Nike? How does it compare with prior years? What are Nike’s
credit terms? For example, if its credit terms are 2/10, n/30, an average collection
period of 42 days is beyond the 30 days allowed.
LO 2 EXERCISE 7-6 WORKING BACKWARD: ACCOUNTS RECEIVABLE TURNOVER
If it takes the company 30 days to collect its accounts receivable, the accounts receiva-
ble turnover ratio is 360/30 = 12 times per year. The accounts receivable turnover ratio
is:
Sales/Average Accounts Receivable = 12 times

$150,000/Average Accounts Receivable = 12 times
Average Accounts Receivable = $150,000/12 = $12,500

If the beginning accounts receivable is $10,500, the ending accounts receivable must
be $14,500 to result in an average of $12,500.
LO 3 EXERCISE 7-7 NOTES RECEIVABLE
1. Rozelle Company is the maker. Has a liability (Notes Payable) and incurs an ex-
pense (Interest Expense)
Dougherty Corp. is the payee. Has an asset (Notes Receivable) and earns revenue
(Interest Revenue)
2. The maturity date is March 1, 2017.
3.
Journal 2016
Entry Sept. 1 Notes Receivable ................................... 45,000
Analysis Accounts Receivable ........................ 45,000
To record receipt of six-month,
7% promissory note in exchange
for open account.

STOCKHOLDERS’ NET
Notes
Receivable
45,000
Accounts
Receivable
(45,000)
Journal 2016
Entry Dec. 31 Interest Receivable ................................ 1,050
Analysis Interest Revenue .............................. 1,050
To record interest at year-end:
$45,000 × 7% × 4/12.

STOCKHOLDERS’ NET
Interest 1,050 Interest Rev- 1,050
Receivable enue 1,050
1,050
Journal 2017
Entry Mar. 1 Cash ...................................................... 46,575
Analysis Interest Receivable ........................... 1,050
Interest Revenue .............................. 525
Notes Receivable ............................. 45,000
To record collection of promissory note:
$45,000 × 7% × 2/12.

STOCKHOLDERS’ NET
Cash 46,575 525 Interest Rev- 525
Interest enue 525
Receivable
(1,050)
Notes
Receivable
(45,000)
LO 3 EXERCISE 7-8 WORKING BACKWARD: NOTES RECEIVABLE
1. The interest rate on the note is the monthly interest of ($200 × 12 months)/$24,000 =
10%.
2.
Journal 2017
Entry Jan. 31 Cash....................................................... 24,400
Analysis Notes Receivable.............................. 24,000
Interest Receivable ........................... 200
To record collection of note.

STOCKHOLDERS’ NET
Cash 24,400 200 Interest 200
Notes Revenue 200
Receivable
(24,000)
Interest
Receivable
(200)
LO 4 EXERCISE 7-9 CREDIT CARD SALES
Journal June 12 Cash............................................................. 2,430

Entry Accounts Receivable—American Express ... 3,500
Analysis Sales Revenue ....................................... 5,930
To record weekly cash and credit sales.

STOCKHOLDERS’ NET
Cash 2,430 5,930 Sales Rev- 5,930
Accounts Re- enue 5,930
ceivable—
American
Express
3,500
Journal June 15 Cash............................................................. 3,360

Entry Collection Fee Expense ............................... 140
Analysis Accounts Receivable—American Express 3,500
To record weekly receipts from credit card company.

STOCKHOLDERS’ NET
Cash 3,360 (140) Collection Fee (140)
Accounts Re- Expense 140
ceivable—
American
Express
(3,500)
The collection fee charged by American Express is $140/$3,500 = 4%.
LO 5 EXERCISE 7-10 CERTIFICATE OF DEPOSIT
Journal 2016
Entry May 31 Short-Term Investments: CD ................. 50,000
Analysis Cash ................................................. 50,000
To record purchase of 120-day, 9% CD.

STOCKHOLDERS’ NET
Short-Term
Invest-
ments:
CD 50,000
Cash
(50,000)
Journal 2016
Entry June 30 Interest Receivable ...................................... 375
Analysis Interest Revenue .................................... 375
To record interest: $50,000 × 9% × 30/360.

STOCKHOLDERS’ NET
Interest Re- 375 Interest Rev- 375
ceivable 375 enue 375
Journal 2016
Entry Sept. 28 Cash....................................................... 51,500
Analysis Interest Receivable ........................... 375
Interest Revenue .............................. 1,125
Short-Term Investments: CD ............ 50,000
To record redemption of $50,000 CD:
$50,000 × 9% × 90/360 = $1,125.

STOCKHOLDERS’ NET
Cash 51,500 1,125 Interest Rev- 1,125
Interest Re- enue 1,125
ceivable
(375)
Short-Term
Invest-
ments: CD
(50,000)
LO 5 EXERCISE 7-11 CLASSIFICATION OF CASH EQUIVALENTS AND INVESTMENTS

ON A BALANCE SHEET
1. STI 6. STI
2. STI 7. STI
3. STI 8. LTI
4. CE 9. STI
5. LTI 10. CE
LO 5 EXERCISE 7-12 PURCHASE AND SALE OF BONDS
1. Journal entries:
Journal 2016
Entry Jan. 1 Investment in Northern Lights Bonds ..... 100,000
Analysis Cash ................................................. 100,000
To record purchase of Northern Lights
bonds at 100.

STOCKHOLDERS’ NET
Investment in
Northern
Lights
Bonds
100,000
Cash
(100,000)
Journal 2016
Entry June 30 Cash............................................................. 4,000
Analysis Interest Revenue .................................... 4,000
To record interest on Northern Lights
bonds: $100,000 × 8% × 6/12.

STOCKHOLDERS’ NET
enue 4,000
Journal 2016
Entry Dec. 31 Cash............................................................. 4,000
Analysis Interest Revenue .................................... 4,000
To record interest on Northern Lights bonds.

STOCKHOLDERS’ NET
enue 4,000
Journal 2017
Entry Jan. 1 Cash....................................................... 102,000
Analysis Investment in Northern Lights Bonds 100,000
Gain on Sale of Bonds ...................... 2,000
To record sale of Northern Lights bonds at 102.

STOCKHOLDERS’ NET
Cash 2,000 Gain on Sale of 2,000
102,000 Bonds 2,000
Investment in
Northern
Lights
Bonds
(100,000)
2. Starship was able to sell the bonds for more than the bonds will pay when they
mature because the bonds carry a higher periodic interest than the market rate of
interest that was in effect at the time of the sale.
LO 5 EXERCISE 7-13 INVESTMENT IN STOCK
Journal 2016
Entry Oct. 1 Investment in Denver Preferred Stock ... 41,000
Analysis Cash ................................................. 41,000
To record purchase of stock for cash:
($1,000 × $40) + $1,000.

STOCKHOLDERS’ NET
Investment in
Denver
Preferred
Stock
41,000
Cash
(41,000)
Journal 2016
Entry Oct. 20 Cash....................................................... 1,000
Analysis Dividend Income ............................... 1,000
To record $1-per-share dividend
declared on investment in 1,000
shares of Denver preferred stock.

STOCKHOLDERS’ NET
Cash 1,000 1,000 Dividend In- 1,000
come 1,000
Journal 2016
Entry Nov. 5 Cash............................................................. 45,000
Analysis Investment in Denver Preferred Stock .... 41,000
Gain on Sale of Stock ............................. 4,000
To record sale of stock at a gain.

STOCKHOLDERS’ NET
Cash 45,000 4,000 Gain on Sale 4,000
Investment in of Stock
Denver Pre- 4,000
ferred Stock
(41,000)
LO 5 EXERCISE 7-14 INVESTMENT IN STOCK
Journal 2016
Entry Aug. 15 Investment in Sox Common Stock ......... 76,000
Analysis Cash ................................................. 76,000
To record purchase of 5,000 shares of
stock for $15 per share + $1,000 in fees.

STOCKHOLDERS’ NET
Investment
in Sox Com-
mon Stock
76,000
Cash
(76,000)
Journal 2016
Entry Oct. 20 Cash....................................................... 50,000*
Analysis Loss on Sale of Stock ............................ 26,000**
Investment in Sox Common Stock .... 76,000
To record sale of stock at a loss.
*5,000 × $10
**$76,000 – $50,000

STOCKHOLDERS’ NET
Cash 50,000 (26,000) Loss on Sale of (26,000)
Investment in Stock 26,000
Sox Com-
mon Stock
(76,000)
LO 5 EXERCISE 7-15 WORKING BACKWARD: INVESTMENT IN STOCK
If Durango paid $25 per share to buy the 2,000 shares of ABC stock, and another $500
in commissions, the total purchase price was ($25 × 2,000) + $500 = $50,500. Since
Durango incurred a loss of $4,500 when it sold the shares, the cash received on the
sale was $50,500 – $4,500 = $46,000.
LO 6 EXERCISE 7-16 IMPACT OF TRANSACTIONS INVOLVING RECEIVABLES ON

STATEMENT OF CASH FLOWS
Increase in accounts receivable—Deducted from net income

Decrease in accounts receivable—Added to net income
Increase in notes receivable—Deducted from net income
Decrease in notes receivable—Added to net income
LO 6 EXERCISE 7-17 WORKING BACKWARD: ACCOUNTS RECEIVABLE AND THE

Because the change in the Accounts Receivable account during the period of $2,000
was added on the statement of cash flows, this means the company collected $2,000
more during the period than the amount sold. Sales on account were $24,500. There-
fore, the company collected $24,500 + $2,000 = $26,500.
LO 6 EXERCISE 7-18 CASH COLLECTIONS—DIRECT METHOD
Cash collections to be reported in the Operating Activities section of Emily Enterprises’

2016 statement of cash flows (direct method):
Accounts receivable, December 31, 2015 $ 224,600
Sales during 2016 2,250,000
Cash collections during 2016 (X)
Accounts receivable, December 31, 2016 $ 205,700
$224,600 + $2,250,000 – X = $205,700
X = $2,268,900
MULTI-CONCEPT EXERCISE
LO 1,5,6 EXERCISE 7-19 IMPACT OF TRANSACTIONS INVOLVING CASH, INVEST-

MENTS, AND RECEIVABLES ON STATEMENT OF CASH FLOWS
Purchase of cash equivalents—N
Redemption of cash equivalents—N
Purchase of investments—I
Sale of investments—I
Write-off of customer account (under the allowance method)—N
PROBLEMS
LO 1 PROBLEM 7-1 ALLOWANCE METHOD FOR ACCOUNTING FOR BAD DEBTS
1.
Journal Accounts Receivable .......................................... 840,000*

Entry Cash ................................................................... 210,000
Analysis Sales Revenue ............................................. 1,050,000
To record sales for year: $1,050,000 × 80%
= $840,000* credit sales.
STOCKHOLDERS’ NET
Cash 1,050,000 Sales 1,050,000
210,000 Revenue
Accounts 1,050,000
Receivable
840,000
Journal Cash ................................................................... 670,000

Entry Accounts Receivable .................................... 670,000
Analysis To record collection of customer accounts.
STOCKHOLDERS’ NET
Cash
670,000
Accounts
Receivable
(670,000)
Journal Allowance for Doubtful Accounts ........................ 4,000

Entry Accounts Receivable .................................... 4,000
Analysis To record write-off of accounts receivable.
STOCKHOLDERS’ NET
Allowance for
Doubtful
Accounts*
4,000
Accounts
Receivable
(4,000)
*The Allowance for Doubtful Accounts account has decreased. It is shown as an increase in the equation above because it is a contra
account and causes total assets to increase.
PROBLEM 7-1 (Continued)
2. a.
Journal Bad Debts Expense ............................................ 25,200

Entry Allowance for Doubtful Accounts .................. 25,200
Analysis To record estimated bad debts expense:
$840,000 × 3%.

STOCKHOLDERS’ NET
Accounts*
(25,200)
b.
Journal Bad Debts Expense ............................................ 20,010

Entry Allowance for Doubtful Accounts .................. 20,010
Accounts receivable at December 31, 2016
($140,000 + $840,000 – $670,000 – $4,000 = $306,000).
Allowance balance needed ($306,000 × 0.06) $18,360 (Cr.)
Balance before adjustment:
Beginning balance $2,350 (Cr.)
Write-off 4,000 (Dr.)
1,650 (Dr.)
STOCKHOLDERS’ NET
Accounts*
(20,010)
PROBLEM 7-1 (Concluded)
3. a. The net realizable value of accounts receivable on December 31, 2016, is

$282,450:
Accounts receivable, December 31 [from part (2b)] .......................... $306,000
Allowance for doubtful accounts, December 31
($2,350 – $4,000 + $25,200) .................................................. 23,550
Net realizable value, December 31.................................................... $282,450
b. The net realizable value of accounts receivable on December 31, 2016, is
$287,640:
Accounts receivable, December 31 [from part (2b)] .......................... $306,000
($2,350 – $4,000 + $20,010) .................................................. 18,360
Net realizable value, December 31.................................................... $287,640
4. The recognition of bad debts expense reduces the net realizable value by the
amount recorded in bad debts expense and the allowance for doubtful accounts.
The write-off of accounts has no effect on the net realizable value.
LO 1 PROBLEM 7-2 USING AN AGING SCHEDULE TO ACCOUNT FOR BAD DEBTS
1. Estimated Estimated
Percent Amount
Current $200,000 5% $10,000
Past due:
One to two months 25,000 40 10,000
Over two months 1,000 60 600
Totals $271,000 $29,600
2. Journal entry:
Journal 2016
$29,600 less $12,300 currently in
allowance account.

STOCKHOLDERS’ NET
Accounts*
(17,300)
3. Partial balance sheet at December 31, 2016:

Current Assets
Accounts receivable .......................................................... $271,000
Allowance for doubtful accounts ....................................... 29,600
Net accounts receivable.................................................... $241,400
LO 2 PROBLEM 7-3 MAKING BUSINESS DECISIONS: ANALYZING THE COCA-COLA

COMPANY’S ACCOUNTS RECEIVABLE TURNOVER RATIO
Part A. Ratio Analysis Model
1. Formulate the Question:

How many times a year does The Coca-Cola Company turn over its accounts
receivable?
2. Gather the Information from the Financial Statements:

• Net credit sales: From the income statement
• Average accounts receivable: From the balance sheet at the end of the two most
recent years
3. Calculate the Ratio:

Accounts Receivable Turnover Ratio = Net Credit Sales*
Average Accounts Receivable
*Assuming all sales are on credit; Coca-Cola reports “Net operating revenues.”
Coca-Cola: (in millions of dollars for the year ended December 31, 2013):
Accounts Receivable Turnover Ratio = $46,854 = 9.7 times
$4,816*
*Average Accounts Receivable = ($4,873 + $4,759)/2 = $4,816
4. Compare the Ratio with Other Ratios:
Accounts Receivable Turnover Ratio

The Coca-Cola Company PepsiCo
Year Ended Year Ended Year Ended Year Ended
December 31, 2013 December 31, 2012 December 28, 2013 December 29, 2012
9.7 times 9.9 times 9.5 times 9.4 times
Calculations:
Coca-Cola:
For the year ended December 31, 2012:
$48,017/[($4,759 + $4,920)/2] = $48,017/$4,839.5 = 9.9 times
PepsiCo:
$66,415/[($6,954 + $7,041)/2] = $66,415/$6,997.5 = 9.5 times
$65,492/[($7,041 + $6,912)/2] = $65,492/$6,976.5 = 9.4 times
5. Interpret the Ratios:

Coca-Cola turned over its accounts receivable 9.7 times during 2013. This means
that, on average, the company collects its receivables every 37 days (360 days/9.7).
Coca-Cola’s turnover is very similar in 2012. Its turnover rates are very similar to
those for its competitor, PepsiCo. It would also be helpful to compare Coca-Cola’s
turnover with the industry average.
Part B. Business Decision Model

After considering all relevant information, should I loan money to The Coca-Cola
Company?
2. Gather Information from the Financial Statements and Other Sources:

The information will come from a variety of sources, not limited to but including:
a. The balance sheet provides information about liquidity.
b. The income statement provides information about profitability.
c. The statement of cash flows reports on the company’s cash inflows and outflows.
d. The outlook for the beverage industry, including consumer trends, foreign mar-
kets, labor issues, and other factors.
e. The outlook for the economy in general.
f. Alternative uses for the money.
3. Analyze the Information Gathered:

The information gathered in (2) above must be analyzed. Among the relevant ques-
tions that must be answered are the following:
a. Refer to part (5) of the Ratio Analysis Model for a comparison of the turnover
ratios for Coca-Cola and its competitor, PepsiCo, over the last two years. Which
company turns over its receivables more often?
b. What has been the trend in profits over recent years? Has the company been
able to increase revenues and at the same time control its costs?
c. How much cash has the company spent in recent years to retire existing debt?
What other significant cash outflows have been made?
d. What is the company’s share of the beverage market? Is this likely to increase in
the future?
e. What is the outlook for growth in international markets?
f. Is inflation projected to increase during this time? Are labor costs likely to
increase?
g. If the loan is not made to The Coca-Cola Company, what other uses do you have
for the money?
4. Make the Decision:

Taking into account all of the various sources of information, decide either to loan
money to The Coca-Cola Company or find an alternative use for the money.
5. Monitor Your Decision:

If you decide to make the loan, you will need to monitor it periodically. During the
time the loan is outstanding, you will want to assess the company’s continuing prof-
itability as well as other factors you considered before making the loan.
LO 4 PROBLEM 7-4 CREDIT CARD SALES
1. Gross margin $0.99

Cost of goods sold 2.00
Net selling price $2.99
The owner must net $2.99 per gallon on the selling price. The amount per gallon he
would have to charge credit card customers is
X – 0.02X = 2.99
0.98X = 2.99
X = $3.05 per gallon
(It is worth noting that not all gas companies charge a higher price for credit card
purchases.)
2. If his normal charge is $3.05 to credit card customers, he can offer a $0.06 discount
to cash customers and still maintain his gross margin.
LO 5 PROBLEM 7-5 INVESTMENTS IN BONDS AND STOCK
Journal 2016
Entry July 1 Investment in Gallatin Bonds ................. 10,000
Analysis Cash ................................................. 10,000
To record purchase of 6%, Gallatin bonds.

STOCKHOLDERS’ NET
Investment in
Gallatin
Bonds
10,000
Cash
(10,000)
Journal 2016
Entry Oct. 23 Investment in Eagle Rock Stock................... 12,000
Analysis Cash ....................................................... 12,000
To record purchase of 600 shares of
common stock at $20 per share.

STOCKHOLDERS’ NET
Investment in
Eagle Rock
Stock
12,000
Cash
(12,000)
Journal 2016
Entry Nov. 21 Investment in Montana Stock ................. 6,000
Analysis Cash ................................................. 6,000
preferred stock at $30 per share.

STOCKHOLDERS’ NET
Investment in
Montana
Stock
6,000
Cash (6,000)
Journal 2016
Entry Dec. 10 Cash............................................................. 1,300
Analysis Dividend Income ..................................... 1,300
To record receipt of dividends on securities:
Eagle Rock—600 × $1.50 $ 900
Montana—200 × $2.00 400
$1,300

STOCKHOLDERS’ NET
Cash 1,300 1,300 Dividend 1,300
Income 1,300
Journal 2016
Entry Dec. 28 Cash............................................................. 10,000*
Analysis Investment in Eagle Rock Stock ............. 8,000**
To record sale of 400 shares of Eagle Rock
stock.
*$400 × $25
**$400 × $20

STOCKHOLDERS’ NET
Cash 10,000 2,000 Gain on Sale 2,000
Eagle Rock 2,000
Stock
(8,000)
Journal 2016
Entry Dec. 31 Cash....................................................... 300
Analysis Interest Revenue .............................. 300
To record receipt of interest:
$10,000 × 6% × 6/12.

STOCKHOLDERS’ NET
Cash 300 300 Interest Rev- 300
enue 300
LO 5 PROBLEM 7-6 INVESTMENTS IN STOCK
Journal 2016
Entry Jan. 15 Investment in Bassett Stock ................... 10,500
Analysis Cash ................................................. 10,500
stock at $50 per share, plus $500 in
commissions.

STOCKHOLDERS’ NET
Investment in
Bassett
Stock
10,500
Cash
(10,500)
Journal 2016
Entry May 23 Cash............................................................. 400
Analysis Dividend Income ..................................... 400
To record receipt of dividends of $2 per
share on 200 shares of Bassett stock.

STOCKHOLDERS’ NET
Cash 400 400 Dividend 400
Income 400
Journal 2016
Entry June 1 Investment in Boxer Stock ..................... 7,700
Analysis Cash ................................................. 7,700
To record purchase of 100 shares of stock
at $74 per share, plus $300 in commissions.

STOCKHOLDERS’ NET
Investment in
Boxer Stock
7,700
Cash (7,700)
Journal 2016
Entry Oct. 20 Cash............................................................. 8,000
Analysis Loss on Sale of Stock .................................. 2,500
Investment in Bassett Stock.................... 10,500
To record sale of Bassett stock:
(200 shares × $42) – $400 = $8,000.

STOCKHOLDERS’ NET
Cash 8,000 (2,500) Loss on Sale of (2,500)
Investment in Stock 2,500
Bassett
Stock
(10,500)
Journal 2016
Entry Dec. 15 Dividend Receivable .................................... 150
To record notification of the declaration
of $1.50-per-share dividend on 100 shares
of Boxer stock.

STOCKHOLDERS’ NET
Dividend Re- 150 Dividend 150
ceivable Income 150
150
LO 6 PROBLEM 7-7 EFFECTS OF CHANGES IN RECEIVABLE BALANCES ON

1. Statement of cash flows:

STEGNER INC.
FOR THE YEAR ENDED DECEMBER 31, 2016
Net income ................................................................... $ 130,000
Adjustments to reconcile net income to net cash
used by operating activities:
Increase in accounts receivable ............................. $(140,000)*
Decrease in notes receivable ................................. 5,000** (135,000)
Cash flows from operating activities............................. $ (5,000)
Cash, December 31, 2015 ........................................... 110,000
Cash, December 31, 2016 ........................................... $ 105,000
*$223,000 – $83,000
**$100,000 – $95,000
2. Memorandum to the president:

TO: Owner of Stegner, Inc.
FROM: Student’s name
DATE: January XX, 2017
SUBJECT: Cash Flows
You recently expressed concern about the decrease in the company’s cash balance
in spite of the profitable year that was reported on this year’s income statement. My
thoughts and a copy of the company’s 2016 statement of cash flows follow.
Although net income on an accrual basis was $130,000, the company’s cash
balance declined by $5,000 during the year for two reasons. Most importantly,
accounts receivable increased by $140,000 during the year from $83,000 to
$223,000; we did not collect amounts due from our customers as sales were made.
This drain on cash was partially offset by a $5,000 decrease in notes receivable
during the year, from $100,000 to $95,000.
We can better manage our cash flow by increasing our collection efforts.
MULTI-CONCEPT PROBLEM
LO 1,3 PROBLEM 7-8 ACCOUNTS AND NOTES RECEIVABLE
1. Journal entries:
Journal 2016
Entry May 15 Accounts Receivable—M. Baxter ........... 5,000
Analysis Sales Revenue ................................. 5,000
To record sale on credit; terms n/30.

STOCKHOLDERS’ NET
Accounts Re- 5,000 Sales Rev- 5,000
ceivable— enue 5,000
M. Baxter
5,000
Journal 2016
Entry Aug. 10 Allowance for Doubtful Accounts............ 5,000
Analysis Accounts Receivable—M. Baxter ..... 5,000
To write off uncollectible account.

STOCKHOLDERS’ NET
Allowance for
Doubtful
Accounts*
5,000
Accounts Re-
ceivable—
M. Baxter
(5,000)
Journal 2016
Entry Dec. 1 Accounts Receivable—M. Baxter ........... 5,000
To restore account previously written off.

STOCKHOLDERS’ NET
Accounts Re-
ceivable—
M. Baxter
5,000
Allowance for
Doubtful
Accounts*
(5,000)
Journal 2016
Entry Dec. 1 Cash............................................................. 1,000
Analysis Notes Receivable ......................................... 4,000
Accounts Receivable—M. Baxter ........... 5,000
To record partial collection on open account
and receipt of two-month, 9% note for the
balance.

STOCKHOLDERS’ NET
Cash 1,000
Notes Receiv-
able 4,000
Accounts Re-
ceivable—
M. Baxter
(5,000)
Journal 2016
Entry Dec. 31 Interest Receivable ...................................... 30
To accrue interest: $4,000 × 9% × 1/12.

STOCKHOLDERS’ NET
Interest Re- 30 Interest 30
ceivable 30 Revenue 30
Journal 2017
Entry Jan. 31 Cash....................................................... 4,060
Analysis Interest Receivable ........................... 30
Notes Receivable.............................. 4,000
To record collection of note and interest.

STOCKHOLDERS’ NET
Cash 4,060 30 Interest 30
Interest Re- Revenue 30
ceivable (30)
Notes Re-
ceivable
(4,000)
2. Baxter is interested in reestablishing a good credit standing with its supplier, Lenox,
and for this reason has sent the check and signed a note for the balance.
ALTERNATE PROBLEMS
LO 1 PROBLEM 7-1A ALLOWANCE METHOD FOR ACCOUNTING FOR BAD DEBTS
1.
Journal Accounts Receivable ............................................ 630,000

Entry Cash ..................................................................... 157,500
Analysis Sales Revenue ............................................... 787,500
To record sales for year: $787,500 × 80% =
$630,000 credit sales.
STOCKHOLDERS’ NET
Cash 787,500 Sales 787,500
157,500 Revenue
Accounts 787,500
Receivable
630,000
Journal Cash ..................................................................... 502,500

Entry Accounts Receivable ...................................... 502,500
Analysis To record collection of customer accounts.
STOCKHOLDERS’ NET
Cash
502,500
Accounts
Receivable
(502,500)
Journal Allowance for Doubtful Accounts .......................... 3,000

Entry Accounts Receivable ...................................... 3,000
Analysis To record write-off of accounts receivable.
STOCKHOLDERS’ NET
Allowance for
Doubtful
Accounts*
3,000
Accounts
Receivable
(3,000)
PROBLEM 7-1A (Continued)
2. a.
Journal Bad Debts Expense .............................................. 18,900

Entry Allowance for Doubtful Accounts .................... 18,900
$630,000 × 3%.

STOCKHOLDERS’ NET
Accounts*
(18,900)
b.
Journal Bad Debts Expense .............................................. 14,820

Entry Allowance for Doubtful Accounts .................... 14,820
Accounts receivable at December 31, 2016
($105,000 + $630,000 – $502,500 – $3,000) = $229,500
× 0.06
Allowance balance needed $ 13,770 (Cr.)
Balance before adjustment:
Beginning balance $1,950 (Cr.)
Write-off 3,000 (Dr.)
1,050 (Dr.)
Amount of entry must be $ 14,820 (Cr.)

STOCKHOLDERS’ NET
Accounts*
(14,820)
3. a. The net realizable value of accounts receivable on December 31, 2016, is $211,650:
Accounts receivable, December 31 [from part (2b)] $229,500
($1,950 – $3,000 + $18,900) 17,850
Net realizable value, December 31 $211,650
PROBLEM 7-1A (Concluded)
b. The net realizable value of accounts receivable on December 31, 2016, is

$215,730:
Accounts receivable, December 31 [from part (2b)] $229,500
($1,950 – $3,000 + $14,820) 13,770
Net realizable value, December 31 $215,730
4. The recognition of bad debts expense reduces the net realizable value by the
amount recorded in bad debts expense and the allowance for doubtful accounts.
The write-off of accounts has no effect on the net realizable value.
LO 1 PROBLEM 7-2A USING AN AGING SCHEDULE TO ACCOUNT FOR BAD DEBTS
1. Estimated Estimated
Percent Amount
Current $200,000 10% $20,000
Past due:
One to two months 35,000 35 12,250
Over two months 45,000 75 33,750
Totals $340,300 $81,075
2. The controller is primarily responsible for the accuracy of the records, rather than the
collection process. Thus, the controller’s main concern should be with the adequacy
of the balance in the allowance account. The amount of the allowance should proba-
bly be increased, given the relatively large amount which is likely to be uncollectible.
3. Partial balance sheet at December 31, 2016:

Current Assets
Accounts receivable $340,300
Allowance for doubtful accounts 81,075
Net accounts receivable $259,225
LO 2 PROBLEM 7-3A MAKING BUSINESS DECISIONS: ANALYZING THE HERSHEY

COMPANY’S ACCOUNTS RECEIVABLE TURNOVER
Part A. Ratio Analysis Model

How many times a year does The Hershey Company turn over its accounts receivable?
2. Gather the Information from the Financial Statements:

• Net credit sales: From the income statement
• Average accounts receivable: From the balance sheet at the end of the two most
recent years
3. Calculate the Ratio:

Accounts Receivable Turnover Ratio = Net Credit Sales*
Average Accounts Receivable
*Assuming all sales are on credit.
Hershey (in thousands of dollars for the year ended December 31, 2013):
Accounts Receivable Turnover Ratio = $7,146,079 = 15.2 times
$469,647.5*
*Average Accounts Receivable = ($477,912 + $461,383)/2 = $469,647.5
4. Compare the Ratio with Other Ratios:

Accounts Receivable Turnover Ratio
Hershey Tootsie Roll
Year Ended Year Ended Year Ended Year Ended
December 31, 2013 December 31, 2012 December 31, 2013 December 31, 2012
15.2 times 15.4 times 13.0 times 13.0 times
Calculations:
Hershey:
$6,644,252/[($461,383 + $399,499)/2] = $6,644,252/$430,441 = 15.4 times
Tootsie Roll:
($539,627/[($40,721 + $42,108)/2] = $539,627/$41,414.5 = 13.0 times
$545,985/[($42,108 + $41,895)/2] = $545,985/$42,001.5 = 13.0 times
5. Interpret the Ratios:

Hershey turned over its accounts receivable 15.2 times during 2013, very similar to
the rate in the prior year. This means that, on average, the company collects its re-
ceivables every 24 days (360 days/15.2). Its turnover rates are slightly higher than
for its competitor, Tootsie Roll. It would also be helpful to compare Hershey’s turn-
over with the industry average.
Part B. Business Decision Model

After considering all relevant information, should I loan money to The Hershey
Company?
2. Gather Information from the Financial Statements and Other Sources:

The information will come from a variety of sources, not limited to but including:
a. The balance sheet provides information about liquidity.
b. The income statement provides information about profitability.
c. The statement of cash flows reports on the company’s cash inflows and outflows.
d. The outlook for the confectionary industry, including consumer trends, foreign
markets, labor issues, and other factors.
e. The outlook for the economy in general.
f. Alternative uses for the money.
3. Analyze the Information Gathered:

The information gathered in (2) above must be analyzed. Among the relevant ques-
tions that must be answered are the following:
a. Refer to part (5) of the Ratio Analysis Model for a comparison of the turnover
ratios for Hershey and its competitor, Tootsie Roll, over the last two years. Which
company turns over its receivables more often?
b. What has been the trend in profits over recent years? Has the company been
able to increase revenues and at the same time control its costs?
c. How much cash has the company spent in recent years to retire existing debt?
What other significant cash outflows have been made?
d. What is the company’s share of the confectionary market? Is this likely to
increase in the future?
e. What is the outlook for growth in international markets?
f. Is inflation projected to increase during this time? Are labor costs likely to
increase?
g. If the loan is not made to The Hershey Company, what other uses do you have
for the money?
4. Make the Decision:

Taking into account all of the various sources of information, decide either to loan
money to The Hershey Company or find an alternative use for the money.
5. Monitor Your Decision:

If you decide to make the loan, you will need to monitor it periodically. During the
time the loan is outstanding, you will want to assess the company’s continuing prof-
itability as well as other factors you considered before making the loan.
LO 4 PROBLEM 7-4A CREDIT CARD SALES
1. Cost of credit card operation per outlet:

Equipment/phone line ....................................................... $ 800
Sales fee:
Credit sales: $800,000 × 5% ....................................... $40,000
× Fee ........................................................................... × 0.015 600
Total cost .......................................................................... $1,400
Conclusion: To cover the cost of the new equipment in the first year, new sales
would need to net $1,400 per outlet.
2. The company should also consider competition in its decision on the use of credit
cards. It may in fact suffer a loss of sales if its competitors start offering credit to cus-
tomers and it does not. The company may find that customer goodwill is increased
by the offer to use a credit card.
LO 5 PROBLEM 7-5A INVESTMENTS IN BONDS AND STOCK
Journal 2016
Entry July 1 Investment in Maine Bonds .................... 10,000
Analysis Cash ................................................. 10,000
To record purchase of 8% Maine bonds.

STOCKHOLDERS’ NET
Investment in
Maine
Bonds
10,000
Cash
(10,000)
Journal 2016
Entry Oct. 23 Investment in Virginia Stock ......................... 15,000
Analysis Cash ....................................................... 15,000
To record purchase of 1,000 shares
of common stock at $15 per share.

STOCKHOLDERS’ NET
Investment in
Virginia
Stock
15,000
Cash
(15,000)
Journal 2016
Entry Nov. 21 Investment in Carolina Stock ....................... 4,800
Analysis Cash ....................................................... 4,800
preferred stock at $8 per share.

STOCKHOLDERS’ NET
Investment in
Carolina
Stock 4,800
Cash (4,800)
Journal 2016
Entry Dec. 10 Cash....................................................... 1,100
Analysis Dividend Income ............................... 1,100
To record receipt of dividends:
Virginia—1,000 × $0.50 = $ 500
Carolina—600 × $1.00 = 600
$1,100

STOCKHOLDERS’ NET
Cash 1,100 1,100 Dividend In- 1,100
come 1,100
Journal 2016
Entry Dec. 28 Cash............................................................. 13,300*
Analysis Investment in Virginia Stock.................... 10,500**
To record sale of 700 shares of Virginia stock.
*700 × $19
**700 × $15

STOCKHOLDERS’ NET
Cash 13,300 2,800 Gain on Sale 2,800
Virginia 2,800
Stock
(10,500)
Journal 2016
Entry Dec. 31 Cash............................................................. 400
To record receipt of interest on bonds:
$10,000 × 8% × 1/2 year.

STOCKHOLDERS’ NET
Cash 400 400 Interest Rev- 400
enue 400
LO 5 PROBLEM 7-6A INVESTMENTS IN STOCK
Journal 2016
Entry Jan. 15 Investment in BMI Stock ........................ 13,250
Analysis Cash ................................................. 13,250
stock at $130 per share, plus $250
in commissions.

STOCKHOLDERS’ NET
Investment in
BMI Stock
13,250
Cash
(13,250)
Journal 2016
Entry May 23 Cash............................................................. 100
To record receipt of dividends of $1 per
share on 100 shares of BMI stock.

STOCKHOLDERS’ NET
Cash 100 100 Dividend In- 100
come 100
Journal 2016
Entry June 1 Investment in MG Stock ............................... 12,300
Analysis Cash ....................................................... 12,300
stock at $60 per share, plus $300 in
commissions.

STOCKHOLDERS’ NET
Investment in
MG Stock
12,300
Cash
(12,300)
Journal 2016
Entry Oct. 20 Cash ................................................................ 13,600
Analysis Investment in BMI Stock ......................... 13,250
Gain on Sale of Stock ............................. 350
To record sale of BMI stock:
(100 shares × $140) – $400.

STOCKHOLDERS’ NET
Cash 13,600 350 Gain on Sale 350
Investment in of Stock 350
BMI Stock
(13,250)
Journal 2016
Entry Dec. 15 Dividend Receivable .................................... 150
To record notification of the declaration
of $0.75-per-share dividend on 200 shares
of MG stock.

STOCKHOLDERS’ NET
Dividend 150 Dividend In- 150
Receiv- come 150
able 150
LO 6 PROBLEM 7-7A EFFECTS OF CHANGES IN RECEIVABLE BALANCES ON

1. Statement of cash flows:

ST. CHARLES ANTIQUE MARKET
FOR THE YEAR ENDED DECEMBER 31, 2016
Net loss ........................................................................................................ $ (6,000)
Adjustments to reconcile net loss to net cash provided by operating activities:
Decrease in accounts receivable ............................................................ 47,000*
Increase in notes receivable ................................................................... (7,800)**
Cash flows from operating activities ............................................................. $33,200
Cash, December 31, 2015 ........................................................................... 3,100
Cash, December 31, 2016 ........................................................................... $36,300
*$126,000 – $79,000
**$104,800 – $112,600
2. Memorandum to the president:

TO: Owner of St. Charles Antique Market
FROM: Student’s name
DATE: January XX, 2017
SUBJECT: Cash Flows
You recently questioned the increase in the company’s cash balance in light of this
year’s net loss. My thoughts and a copy of the company’s 2016 statement of cash
flows follow.
St. Charles Antique Market was able to generate a significant amount of cash
from operations even though the company incurred an accrual-basis net loss during
2016 of $6,000. Most importantly, the amount of accounts receivable decreased
by $47,000 during the year from $126,000 to $79,000; collections of accounts
receivable generated cash for the company. This cash flow was partially offset by a
$7,800 increase in notes receivable during the year, from $104,800 to $112,600.
ALTERNATE MULTI-CONCEPT PROBLEM
LO 1,3 PROBLEM 7-8A ACCOUNTS AND NOTES RECEIVABLE
1. Journal entries:
Journal 2016
Entry July 31 Accounts Receivable—P. Paxton........... 6,000
Analysis Sales Revenue ................................. 6,000
To record sale on credit; terms n/30.

STOCKHOLDERS’ NET
Accounts Re- 6,000 Sales Rev- 6,000
ceivable— enue 6,000
P. Paxton
6,000
Journal 2016
Entry Dec. 24 Allowance for Doubtful Accounts.................. 6,000
Analysis Accounts Receivable—P. Paxton ........... 6,000
To write off uncollectible account.

STOCKHOLDERS’ NET
Allowance for
Doubtful
Accounts*
6,000
Accounts Re-
ceivable—
P. Paxton
(6,000)
Journal 2017
Entry Jan. 15 Accounts Receivable—P. Paxton........... 6,000
To restore account previously written off.

STOCKHOLDERS’ NET
Allowance for
Doubtful
Accounts*
(6,000)
Accounts Re-
ceivable—
P. Paxton
6,000
Journal 2017
Entry Jan. 15 Cash............................................................. 1,500
Analysis Notes Receivable ......................................... 4,500
Accounts Receivable—P. Paxton ........... 6,000
To record partial collection on open
account and receipt of two-month, 8%
note for the balance.

STOCKHOLDERS’ NET
Cash 1,500
Notes Re-
ceivable
4,500
Accounts Re-
ceivable—
P. Paxton
(6,000)
Journal 2017
Entry Mar. 15 Cash....................................................... 4,560
Analysis Interest Revenue .............................. 60
Notes Receivable.............................. 4,500
To record collection of note and interest:
$4,500 × 8% × 2/12.

STOCKHOLDERS’ NET
Cash 4,560 60 Interest Rev- 60
Notes Re- enue 60
ceivable
(4,500)
2. Paxton is interested in reestablishing a good credit standing with its supplier,

Tuscon, and for this reason has sent the check and signed a note for the balance.
DECISION CASES
READING AND INTERPRETING FINANCIAL STATEMENTS
LO 1 DECISION CASE 7-1 READING 3M COMPANY’S BALANCE SHEET:

ACCOUNTS RECEIVABLE
1. The balance in Allowance for Doubtful Accounts is $104 million at the end of 2013
and $105 million at the end of 2012.
2. The net realizable value of receivables at the end of 2013 was $4,253 million, and at
the end of 2012, $4,061 million.
3. Increases in the allowance account result from the adjustment to estimate bad debts
for the period. Decreases in the allowance account result from the write-off of uncol-
lectible accounts, i.e., bad debts, during the period. A net decrease in the account
for the period is an indication that the amount of estimated bad debts was less than
the write-offs.
LO 1,6 DECISION CASE 7-2 READING APPLE INC.’S STATEMENT OF CASH FLOWS
1. Apple spent $217,128 million to purchase marketable securities in 2014. This was
$68,639 million more than Apple spent on marketable securities in 2013 and
$65,896 million more than it spent on marketable securities in 2012.
2. Apple received $18,810 million from marketable securities that matured in 2014.
This was $1,507 million less than it received in 2013 and $5,775 million more than in
2012.
3. Bonds mature, but stocks have no maturity date. Therefore, if a company holds
bonds until their maturity date, it will receive proceeds on that date. Bonds can be
sold on a date before they mature as well. Because stocks do not have a maturity
date, any proceeds are received on the date they are sold.
LO 2 DECISION CASE 7-3 COMPARING TWO COMPANIES IN THE SAME INDUSTRY:

UNDER ARMOUR AND COLUMBIA SPORTSWEAR
1. Accounts receivable turnover ratios:

Under Armour:
$2,332,051/[($209,952 + $175,524)/2] = $2,332,051/$192,738 = 12.10 times
Columbia Sportswear:
$1,684,996/[($306,878 + $334,324)/2] = $1,684,996/$320,601 = 5.26 times
2. Average collection period:

Under Armour:
360/12.10 = 30 days
Columbia Sportswear:
360/5.26 = 68 days
3. Under Armour’s accounts receivable turnover ratio is higher than Columbia

Sportswear’s: 12.10 versus 5.26. The average collection period for Under Armour is
about one month and for Columbia Sportswear is just over two months. It would be
helpful to measure these statistics—accounts receivable turnover ratio and average
collection period—with the same measures for prior years. It would also be helpful to
compare these measures with the industry averages.
MAKING FINANCIAL DECISIONS
LO 1,5 DECISION CASE 7-4 LIQUIDITY
TO: The President of FNB of Verona Heights

FROM: Joe Smith, Loan Officer
DATE: X/X/XX
SUBJECT: Loan proposals
I have reviewed the loan proposals recently submitted by Oak and Maple and would
like to summarize for you my findings. Because of limited resources available for
short-term loans, my recommendation is that we make a six-month, $10 million loan to
Maple only.
The total current asset positions of the two companies are identical. Each has $33
million in current assets. However, the composition of the current assets differs
considerably between the two companies. On the surface, Oak may appear to be
stronger because it has twice the amount of cash on hand that Maple does. However,
cash is essentially a nonearning asset, and I am skeptical as to why Oak feels it
necessary to maintain that much cash on hand, and consequently, why it feels as if it
needs to borrow an additional $10 million.
The accounts receivable for Maple is significantly larger than that for Oak. Assuming
that the estimates of bad debts are reasonably reliable, Oak has a bigger problem with
uncollectibles than does Maple. Oak has an allowance that is 1/15, or 6.67% of ac-
counts receivable, while Maple’s percentage is only 1/23, or 4.35%.
In summary, I believe that Maple is a better candidate at the present time for a loan.
I recommend that we make a six-month, $10 million loan to Maple at the current market
rate of interest. Please call if you need any further details in connection with these two
loan requests.
ETHICAL DECISION MAKING
LO 4 DECISION CASE 7-5 NOTES RECEIVABLE
1. Recognize an ethical dilemma:

The entry to record the sale of the property violates two principles: the revenue
recognition principle and the historical cost principle. Revenue is recognized at the
appropriate time, when a sale takes place, but for the wrong amount. The fair value
of the property, $7.5 million, should be used as a measure of the amount of revenue
to be recognized, rather than the face value of the note. The ethical dilemma you
face as controller is whether or not to go along with the vice president and record the
sale at an inflated amount.
2. Analyze the key elements in the situation:

a. The vice president may benefit and the users of the statements may be harmed.
b. The vice president would benefit if his performance is partially based on the
amount of revenue earned by his group. Management, stockholders, and credi-
tors could be harmed if they rely on financial statements that inflate the amount
of revenue.
c. The rights of users of the statements to access accurate financial statements
may be violated.
d. The interests of the vice president are in conflict with those of the users of the
statements.
e. Your responsibility as controller is to present reliable financial statements.
3. List alternatives and evaluate the impact of each on those affected:

Your options are to go along with the vice president and record a sale for $10 million
or to insist that the sale be recorded at the market value of the land of $7.5 million. If
you do not insist on recording the sale at the lower amount, users will not have the
reliable information they need to make decisions, since the amount of revenue will
be overstated.
4. Select the best alternative:

The best alternative is to insist that the sale be recorded at $7.5 million. Even though
you are interested in maximizing profits to shareholders whenever possible, the sug-
gested treatment for this sale is a clear violation of generally accepted accounting
principles. The reason for the violation is straightforward: $10 million is not the value
of the asset sacrificed in exchange for the five-year note. The property was recently
appraised at a fair market value of $7.5 million. The difference between the $10 mil-
lion in face value of the note and the $7.5 million fair value of the property represents
the interest to be recognized over the next five years as the note is collected. The
company will, in fact, recognize this difference of $2.5 million as income, but only
over the life of the note, and as interest income rather than sales revenue. For now,
the amount of revenue to be recognized is $7.5 million.
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Title: Industrial and commercial South America
Author: Annie S. Peck
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*** START OF THE PROJECT GUTENBERG EBOOK INDUSTRIAL

AND COMMERCIAL SOUTH AMERICA ***
INDUSTRIAL AND
COMMERCIAL
SOUTH AMERICA
SOUTH AMERICA
INDUSTRIAL AND
COMMERCIAL
SOUTH AMERICA
BY
ANNIE S. PECK, A.M., F.R.G.S.
AUTHOR OF
“A SEARCH FOR THE APEX OF AMERICA,” “THE SOUTH AMERICAN TOUR, A
DESCRIPTIVE GUIDE,” etc.
New York
E. P. DUTTON & COMPANY
681 Fifth Avenue
Copyright, 1922
By E. P. DUTTON & COMPANY
All Rights Reserved
Printed in the United States of America

FOREWORD
“Industrial and Commercial South America” has been prepared, as
was the descriptive guide, “The South American Tour,” with the
desire to aid in promoting acquaintance with South America and, as
a natural sequence, friendship and trade.
As far as possible the facts have been gleaned from publications
of the various Governments, in a few cases from those of our own,
from high officials of many large companies, and from a few
authoritative works. While I can hardly hope that despite all care and
effort I have made no slip anywhere, I devoutly trust that no errors
will be discovered of such magnitude as I have often noted in my
reading of important publications and that any here detected will
receive lenient criticism.
The vast amount of labor involved in the collection of data and the
effort made to attain accuracy has been such that no time remained
for rhetorical embellishment unless with delayed publication.
Great pains have been taken with spelling and accents, the correct
use of the latter discovered with difficulty, as they are altogether
omitted in many works and in others by no means to be depended
upon. Yet they are most important for correct pronunciation.
In this text the spelling of some names varies by intention because
the two spellings are frequent and authorized, and should therefore
be familiar. Thus Marowijne is the Dutch and Maroni the English
name for the same river. So Suriname is spelled with and without the
e.
South American names ending in either s or z are found, the z
common in older publications. The s is a more recent style, taking
the place of z even in the middle of a word. Thus Huaráz is also
written Huarás and even Cuzco, Cusco. But I drew the line there, as
Cuzco is too well established in English to make the new and uglier
form desirable.
My spelling of Chilian is consistent throughout. Formerly so
spelled by all, Chile being earlier written Chili, when the Spanish
form of the name was here adopted many imagined that the
adjective should be changed also. For this no reason appears, but
the contrary. The accepted ending for adjectives of this nature is ian,
unless euphony demands a different, as Venezuelan. Where the
ending ean is correctly employed as in Andean and European, also
Caribbean, which unhappily is often mispronounced, the e is long
and receives the accent. This would be proper in Chilean as the e in
Chileno receives the accent; but as a change in our pronunciation is
unlikely, it is better to drop the final vowel and add the suffix ian as is
done in many other cases; thus Italy, Italian.
The frequent writing of maté in English is absolutely wrong. It is
never so printed in Spanish, though naturally in French; but to copy
their form for a Spanish word is absurd. The word of course has two
syllables, but is accented on the first; not on the last as the written
accent would imply.
Iguassú in Spanish is spelled Iguazú, but the Portuguese form has
the right, because it is a Brazilian river, nowhere flowing in Argentina,
and for a short distance only on the boundary. The Brazilian spelling
should therefore be followed by us, and it has the advantage that it is
more apt to be correctly pronounced.
Persons not undertaking the study of Spanish should at least learn
the simple rules of pronunciation; the vowels having the ordinary
continental sounds, the consonants in the main like our own, though
in the middle of a word b is generally pronounced like v, d like th in
this and ll like ly. The rules for accent are easily remembered, names
ending in a vowel being accented on the penult, those in a
consonant, except s, z, and n, on the ultima, unless otherwise
indicated by an accent.
The heedlessness of many Americans on such matters is
notorious and inexcusable. Knowing the correct pronunciation they
continue to mispronounce even an easy word. A notable illustration
is Panamá, which many former residents of the Canal Zone and
others here persist in calling the ugly Pánama instead of the correct
and agreeable Panamá. Although in English the accent is not
generally used on this word or on Colón, Panamá is repeated
throughout the book to emphasize the correct pronunciation.
It is hoped that other accents given will in general be found
correct. It may however be said on Brazilian authority that the
accents on Brazilian names are less important than in Spanish.
A considerable divergence in the date of statistics may be noted,
for which there are several reasons. In some cases pre-war figures,
in others figures for 1917 or 1918, seem to afford a fairer valuation;
or they might be the only ones available. Some figures (often in the
nearest round number) are given as late as 1921, but to bring all at
the same time up to the moment was quite impossible. Great
difficulty has been experienced in choosing between conflicting
statements and figures. In one case three sets of figures of areas
were presented by the same person, before I finally secured the
most accurate.
My grateful appreciation is due and my hearty thanks are here

expressed to all who in any degree have helped by supplying or
verifying data of whatever nature. Officials of the various countries
and of many large companies evinced kindly interest in the work and
gave freely of their time, few being too busy to afford information.
The names are too numerous to mention, but I trust that all will feel
assured that their courtesy was recognized and that the
remembrance will be cherished.
CONTENTS
CHAPTER PAGE
Introduction xv
I. South America as a Whole 1
THE NORTH COAST
II. Colombia: Area, History, Government, 7
Population, Etc.
III. Colombia: Physical Characteristics 14
IV. Colombia: The Capital, the States and 20
Territories, Chief Cities
V. Colombia: Ports and Transportation 30
VI. Colombia: Resources and Industries 40
VII. Venezuela: Area, History, Government, 53
Population, Etc.
VIII. Venezuela: Physical Characteristics 59
IX. Venezuela: Capital, States, Territories, 63
Chief Cities
X. Venezuela: Ports and Transportation 77
XI. Venezuela: Resources and Industries 86
XII. Guiana as a Whole: British Guiana 100
XIII. Dutch and French Guiana 109
THE WEST COAST
XIV. Ecuador: Area, History, Government, 114
Population, Etc.
XV. Ecuador: Physical Characteristics 121
XVI. Ecuador: Capital, Provinces, Chief 130
Cities
XVII. Ecuador: Ports and Interior 135
Transportation
XVIII. Ecuador: Resources and Industries 141
XIX. Peru: Area, History, Government, 148
Population, Etc.
XX. Peru: Physical Characteristics 156
XXI. Peru: Capital, Departments, Chief Cities 162
XXII. Peru: Ports and Interior 174
Transportation
XXIII. Peru: Resources and Industries 185
XXIV. Bolivia: Area, History, Government, 205
Population, Physical Characteristics
XXV. Bolivia: Capital, Departments, Chief 214
Cities
XXVI. Bolivia: Ports and Transportation 221
XXVII. Bolivia: Resources and Industries 229
XXVIII. Chile: Area, History, Government, 245
Population, Etc.
XXIX. Chile: Physical Characteristics 250
XXX. Chile: Capital, Individual Provinces, 254
Cities
XXXI. Chile: Ports and Transportation 261
XXXII. Chile: Resources and Industries 270
THE EAST COAST
XXXIII. Argentina: Area, History, Government, 280
Population, Etc.
XXXIV. Argentina: Physical Characteristics 287
XXXV. Argentina: The Capital, Individual 291
Provinces and Territories
XXXVI. Argentina: Seaports and Interior 301
Transportation
XXXVII. Argentina: Resources and Industries 315
XXXVIII. Paraguay: Area, History, Government, 332
Population, Etc.
XXXIX. Paraguay: Physical Characteristics 338
XL. Paraguay: The Capital and Other Cities 341
XLI. Paraguay: Resources and Industries 345
XLII. Uruguay: Area, History, Government, 354
Population, Physical Characteristics
XLIII. Uruguay: Capital, Departments, Chief 360
Cities, Ports
XLIV. Uruguay: Transportation, Resources 366
and Industries
XLV. Brazil: Area, History, Government, 372
Population, Etc.
XLVI. Brazil: Physical Characteristics 379
XLVII. Brazil: The Capital, Individual States, 390
Cities
XLVIII. Brazil: Transportation—Ocean, River 406
and Railway
XLIX. Brazil: Resources and Industries 414
L. Brazil: Other Industries 424
LI. South American Trade 434
LII. Life in South America 454
Appendix I. Postal Regulations, etc. 459
Appendix II. Leading Banks of South 462
America
Appendix III. Steamship Lines to South 467
America
Appendix IV. Publications 477
LIST OF MAPS
FACING
PAGE
South America Frontispiece
Colombia 10
Colombia, Venezuela, Guiana, Ecuador, 64
North Brazil
Ecuador, Peru, Bolivia, Southwest Brazil 152
Chile, Argentina, Paraguay, Uruguay 254
Eastern Argentina, Uruguay 308
Eastern Brazil 390
Environs of Sao Paulo and Rio de Janeiro 408
INTRODUCTION
Our recently awakened interest in foreign trade and in world affairs
renders imperatively necessary a more accurate knowledge of other
countries and a more intimate acquaintance with their peoples.
Engaged in settling the various sections of our own country and in
developing its manifold resources, we were too long self sufficient in
thought and narrow in our activities. Yet years ago a few far-sighted
statesmen like James G. Blaine realized that a broader field of action
would soon become essential to our continued prosperity. A few
manufacturers supplemented their domestic business with a
modicum of foreign trade. A few men of affairs devoted their
energies exclusively to the field of foreign commerce.
The Spanish War, first inspiring many with the idea that the United
States had become a world power with interests beyond its
boundaries, served to arouse in others a disposition to have a share
in foreign trade. Following a gradual increase in the early years of
this century, a sudden expansion of our commerce occurred a few
months subsequent to the outbreak of the Great War. A scarcity of
shipping prevented its attaining the proportions which might
otherwise have been realized. Now that this obstacle is removed and
the exactions of war service are over, adequate preparations should
be made for the conduct of our developing commercial relations,
especially with our Sister Continent at the south.
The supposition that those individuals who are directly engaged in
foreign commerce are alone benefited thereby has unfortunately
been widespread. Under our democratic form of government it is
particularly essential that all should understand the advantages of
foreign trade for the welfare of the entire nation, that this may not be
hampered by the narrow views of local-thinking politicians, jealous of
the prosperity of other individuals or sections, or by persons who
concern themselves merely with the question of wages for a few or
with other special matters; and thus that our commerce may be
fostered by our Government according to the custom of other
nations, with no purpose of bitter rivalry or unfriendly greed, but with
the natural and proper desire of a great nation to share in the mutual
benefits accruing to all countries where suitable and honorable
foreign trade is developed, as in the case of individuals who buy and
sell in the home market.
Some knowledge of other countries and peoples, of causes
contributing to their present condition, and of their prospects for
future development, while giving intelligent interest to trade and of
service in making plans for permanent rather than transitory gain, is
desirable for all who care to rise above ignorant narrow-minded
provincialism, to be better prepared for civic and political duties, and
to enjoy a broader outlook upon the entire world.
The most superficial observer cannot fail to perceive the enormous

advantages which have arisen from division of labor among
individuals and nations. The personal barter of primitive days was
soon superseded by a medium of exchange, fixed locally though
varying in different regions. There followed the transport from one
city to another and from distant lands of the various products, natural
or manufactured, of those cities and countries. As many things grow
only in certain parts of the world, others we know are manufactured
only in certain districts. That in the distant future the time may come
when the entire habitable globe will be occupied, each portion
produce what is best adapted to its environment, and the fruits of the
whole earth be enjoyed by all its inhabitants, is from the physical
point of view the ideal to which we may look forward, a goal for the
attainment of which every nation may fittingly contribute.
Few are the portions of the earth where it is impossible for man to
dwell, providing for his wants from his immediate surroundings. Each
section not altogether barren produces such food and requisites for
clothing as are essential to sustain life in that locality. The only
considerable portion of the globe which is uninhabited, the Antarctic
continent, seems likely so to continue, as it appears not merely the
most unattractive spot in the world but devoid of the barest
necessities for existence.
The North Polar regions, however, support a few people who live
upon the products of the country and who probably would not survive
if they adopted the customs of civilization as we regard them, though
the use of a few articles which have been carried there may slightly
ameliorate their hard existence.
The denizens of the tropical forest, who also have adapted
themselves to their surroundings, being able to live with little labor,
generally pursue an easy life, since necessity and ambition for
improvement are lacking.
In other quarters of the globe where labor is necessary to sustain
life but where its results may be a bare existence, comfort, or luxury,
man has continually struggled for improvement, braving danger and
suffering, and toiling long hours for the future good of himself or his
children. Thus has the world made progress.
Here in the United States we might live in comfort with the
products of our broad lands only; yet we do not desire to seclude
ourselves within a Chinese Wall. We would enjoy the fruits of the
whole earth, not by imperialistic conquest, but through friendly
acquaintance, the sharing of ideas, and the exchange of products.
Some things we produce in such abundance that we have a
superfluity to barter for others things which we produce not at all or
not in sufficient quantities. In the past we have had more trade with
Europe than with other continents. In various lines of manufactures
and of artistic goods we are still unable to compete. While east and
west trade will no doubt continue indefinitely, for natural products it
would seem that the chief exchange should be north and south, a
difference in latitude causing variety in climates, and a diversity in
productions both animal and vegetable. With our expansion of
shipping facilities following the conclusion of the War, we may hope
for a continuing increase of movement from north to south on this
hemisphere, making for friendship and political harmony as well as
for material advantage.

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Financial Accounting The Impact on

Decision Makers 10th Edition Porter

Financial Accounting The Impact on Decision Makers 10th

Financial Accounting The Impact on Decision Makers 8th

Financial Accounting The Impact on Decision Makers 9th

Financial Accounting The Impact on Decision Makers 9th

Using Financial Accounting Information The Alternative

Financial Management for Decision Makers Canadian 2nd

Using Financial Accounting Information The Alternative

Using Financial Accounting Information The Alternative

2. Explain how information about sales and receivables 5 20 Mod

4. Explain various techniques that companies use to accelerate 9 20 Mod

*Exercise, problem, or case covers two or more learning objectives

2. Explain how information about sales and receivables 3 30 Mod

4. Explain various techniques that companies use to accelerate 4 15 Mod

*Exercise, problem, or case covers two or more learning objectives

2. Explain how information about sales and receivables 3 25 Mod

4. Explain various techniques that companies use to accelerate 5 25 Mod

*Exercise, problem, or case covers two or more learning objectives

LO 1 EXERCISE 7-1 COMPARISON OF THE DIRECT WRITE-OFF AND ALLOWANCE

Net income under each of the two alternatives is as follows:

LO 1 EXERCISE 7-2 ALLOWANCE METHOD OF ACCOUNTING FOR BAD DEBTS—

1. a. Based on 2% of net credit sales:

Balance Sheet Income Statement

EXERCISE 7-2 (Concluded)

b. Based on 6% of year-end accounts receivable:

LO 1 EXERCISE 7-3 WORKING BACKWARD: ALLOWANCE FOR DOUBTFUL

Allowance for Doubtful Accounts

LO 1 EXERCISE 7-4 USING AN AGING SCHEDULE TO ACCOUNT FOR BAD DEBTS

1. Estimated Percent Amount

Journal End of Year

Balance Sheet Income Statement

LO 2 EXERCISE 7-5 ACCOUNTS RECEIVABLE TURNOVER FOR NIKE

1. Accounts receivable turnover:

2. Average collection period (assuming 360 days in a year):

EXERCISE 7-5 (Concluded)

3. Included in the types of customers Nike has:

LO 2 EXERCISE 7-6 WORKING BACKWARD: ACCOUNTS RECEIVABLE TURNOVER

Sales/Average Accounts Receivable = 12 times

Average Accounts Receivable = $150,000/12 = $12,500

LO 3 EXERCISE 7-7 NOTES RECEIVABLE

2. The maturity date is March 1, 2017.

EXERCISE 7-7 (Concluded)

Balance Sheet Income Statement

Balance Sheet Income Statement

Balance Sheet Income Statement

LO 3 EXERCISE 7-8 WORKING BACKWARD: NOTES RECEIVABLE

Balance Sheet Income Statement

LO 4 EXERCISE 7-9 CREDIT CARD SALES

Journal June 12 Cash............................................................. 2,430

Balance Sheet Income Statement

EXERCISE 7-9 (Concluded)

Journal June 15 Cash............................................................. 3,360

Balance Sheet Income Statement

The collection fee charged by American Express is $140/$3,500 = 4%.

LO 5 EXERCISE 7-10 CERTIFICATE OF DEPOSIT

Balance Sheet Income Statement

Balance Sheet Income Statement

EXERCISE 7-10 (Concluded)

Balance Sheet Income Statement

LO 5 EXERCISE 7-11 CLASSIFICATION OF CASH EQUIVALENTS AND INVESTMENTS

LO 5 EXERCISE 7-12 PURCHASE AND SALE OF BONDS

Balance Sheet Income Statement