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Burnley, Understanding Financial Accounting, Second Canadian Edition
CHAPTER 6
Cash and Accounts Receivable
Learning Objectives
1. Explain why cash and accounts receivable are of significance to users.
2. Describe the valuation methods for cash.
3. Explain the main principles of internal control and their limitations.
4. Explain the purpose of bank reconciliations, including their preparation
and the treatment of related adjustments.
5. Explain why companies sell on account and identify the additional costs
that result from this decision.
6. Describe the valuation methods for accounts receivable.
7. Explain the allowance method of accounting for bad debts.
8. Identify the two methods of estimating bad debts under the allowance
method and describe the circumstances for using each method.
9. Explain the direct writeoff method of accounting for bad debts and when
it is acceptable to use it.
10. Explain alternative ways in which companies shorten their cash-to-cash
cycle.
11. Explain the concept of liquidity. Calculate the current ratio, quick ratio,
accounts receivable turnover ratio, and average collection period ratio
and assess the results.
__________________________________________________________________________________________________
Solutions Manual 6-1 Chapter 6
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Summary of Questions by Learning Objectives and Bloom’s Taxonomy
Item LO BT Item LO BT Item LO BT Item LO BT Item LO BT
Discussion Questions
1. 3 C 6. 3 C 11. 4 C 16. 8 C 21. 11 AN

2. 3 C 7. 3 C 12. 5 C 17. 9 C 22. 11 AN
3. 3 C 8. 3 C 13. D C 18. 7,9 C 23. 11 AN
4. 3 C 9. 3 C 14. 7 C 19. 7 C 24. 11 AN
5. 3 C 10. 4 C 15. 6 AP 20. 10 C
Application Problems
1. 4 AP 4. 4 AP 7. 6 AN 10. 6,1 E 13. 6 AP

0
2. 4 AP 5. 6 AP 8. 6 AP 11. 7,8, AP 14. 11 AN
9
3. 4 AP 6. 6 AP 9. 6 AP 12. 7 AP 15. 11 AN
User Perspective Problems
1. 3 E 3. 3,4 C 5. 5 C 7. 8 E 9. 7 E
2. 4 C 4. 3,4 C 6. 10 AN 8. 7 E 10. 11 AN
Work in Process
1. 3 C 2. 5 C 3. 11 AN
Reading and Interpreting Published Financial Statements
1. 5 C 3. 11 AN 4. 11 AN 5. 11 AN 6. 11 AN
2. 11 AN
Cases
1. 3 C 2. 3,4 E 3. 10,1 AN 4. 5,7 E 5. 3 E

1
__________________________________________________________________________________________________
Legend: The following abbreviations will appear throughout the solutions

manual file.
LO Learning objective
BT Bloom's Taxonomy
K Knowledge
C Comprehension
AP Application
AN Analysis
S Synthesis
E Evaluation
Difficulty: Level of difficulty
E Easy
M Medium
H Hard
Time: Estimated time to complete in minutes
AACSB Association to Advance Collegiate Schools of Business
Communication Communication
Ethics Ethics
Analytic Analytic
Tech. Technology
Diversity Diversity
Reflec. Thinking Reflective Thinking
CPA CM CPA Canada Competency Map
Ethics Professional and Ethical Behaviour
PS and DM Problem-Solving and Decision-Making
Comm. Communication
Self-Mgt. Self-Management
__________________________________________________________________________________________________
Team & Lead Teamwork and Leadership

Reporting Financial Reporting
Stat. & Gov. Strategy and Governance
Mgt. Accounting Management Accounting
Audit Audit and Assurance
Finance Finance
Tax Taxation
__________________________________________________________________________________________________
SOLUTIONS TO DISCUSSION QUESTIONS
DQ6-1 Management is responsible for safeguarding the assets of a

company. It establishes policies and procedures to help protect and
manage assets like cash, inventory, supplies, buildings, and equipment.
These policies and procedures form part of a company’s internal control
system. Internal controls are particularly important for cash, to ensure
that cash is not lost or stolen, and to ensure cash balances are properly
managed. If stolen, cash cannot usually be traced back to the specific
company from which it was taken. If a company has too little cash, this
can lead to operational difficulties, or at worst, bankruptcy. Having too
much cash is also not a good management practice since cash is an
asset that usually earns little return (bank deposit interest rate).
An effective control system should include the following measures:

1. Physical controls to guard against theft. For cash, these may
include locks, safes, and frequent deposits.
2. Specific individuals should be assigned certain responsibilities over
the handling and recording of cash.
3. Separation of duties so that one person is not responsible for too
many tasks. If an employee’s responsibilities are too broad, they
may be able to commit a theft and cover up its occurrence. With
respect to cash, separation of duties would have one employee
receiving cash, another authorized to sign cheques, and a third
responsible for recording transactions in the accounting records. In
addition, cheques may require more than one signature.
4. The adherence to company policies should be scrutinized and
monitored. When assigning tasks, the work performed by some
employees may serve as verification of work or tasks performed
earlier by another employee. The verification may also be
performed by someone outside of the organization.
5. Effective use of documentation ensures that all transactions are
recorded on a timely basis, only authorized transactions are
recorded, and employees are properly trained to reduce errors in
cash management.
LO 3 BT: C Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001, cpa-t004 CM: Reporting and Audit
__________________________________________________________________________________________________
DQ6-2 The tone established at the top tends to permeate the

organization. If the board places a strong emphasis on internal controls,
then senior management will too. If senior management places a strong
emphasis on internal controls, then other employees in the organization
will as well.
LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
DQ6-3 An internal control system includes (1) physical controls (locks,

alarms, cash registers); (2) assignment of responsibilities (making one
person responsible for each task); (3) separation of duties (separation
of transaction authorization, recording, and asset custody); (4)
independent verification (either internal or external); and (5)
documentation (receipts, invoices, and so on). Students may pick any
three of these.
In the case of a coffee shop, regular bank deposits should be made
and any cash on hand should be securely stored in cash registers and
safes. Each cashier should be responsible for their own cash drawer.
At the end of their shift, they must ensure that the cash in the register
is equal to the sales rung up on the cash register. This makes it easy
to determine who is responsible should any cash shortages occur. The
store manager may double check the cash counts made by the store
cashiers to ensure that they are accurate and complete.
For a coffee shop, one person should make cash sales and another
person should reconcile them to the totals provided by the cash
register. Yet a third person should make the bank deposit, and finally
a fourth person should be responsible for bank reconciliations. The
cash register tape would provide documentation for the amount of
sales recorded and cash received.
__________________________________________________________________________________________________

person responsible for each task); (3) separation of duties (separation of
transaction authorization, recording, and asset custody); (4) independent
verification (either internal or external); and (5) documentation (receipts,
invoices, and so on). Students may pick any three of these.
In the case of a grocery store, managers should be responsible for
issuing refunds or credits. The cashiers should need management
authorization to approve any refunds or price overrides to ensure they
are legitimate and not the cashier pocketing the cash received from the
customer and then recording a return on the sale or price change.
Cashiers should be responsible for their own cash drawer. At the end of
their shift, they must ensure that the cash, debit, and credit sales in the
register are equal to the total sales rung up on the cash register. The
manager then double checks the cash counts and reconciliation prepared
by the cashiers to ensure accuracy and completeness. The cash register
tape or total reading would provide documentation for the amount of
revenue earned and cash received.
When receiving merchandise for resale, one person should count and
verify what items have been received on pre-numbered receiving slips.
Another person should compare what was received to what was ordered
to ensure everything ordered was received.

person responsible for each task); (3) separation of duties (separation of
transaction authorization, recording, and asset custody); (4) independent
verification (either internal or external); and (5) documentation (receipts,
invoices, and so on). Students may pick any three of these.
__________________________________________________________________________________________________
DQ6-5 (Continued)
In the case of a campus bookstore, books are carefully placed on labelled
shelves and perpetual inventory control software is used to record all
purchases, returns and sales. Through this software, up-to-date records
are maintained. Turnstiles may be used at the entrance and exit to the
bookstore to count the number of persons entering, and to keep track of
the people who are leaving. At busy times (i.e. the beginning of the
semester, Christmas, etc.), security guards may be posted at the
entrance and exit of the bookstore to ensure that all purchases are
recorded. The guards will also ensure that the bookstore’s policy of not
allowing back packs in the store is followed.
At the campus bookstore, one person is authorized to order the books
from publishers, another employee receives and counts them when they
are delivered, with another employee records the purchase in the
perpetual inventory system.
In the case of a campus bookstore, each cashier is responsible for their
own cash drawer or uses pass codes when a till is shared with another
cashier. At the end of their shift, they must ensure that the cash in the
register is equal to the sales rung up on the cash register, under their
code. This makes it easy to determine who is responsible should any
cash shortages occur.
Collections of sales are recorded through cash registers as they occur.
The register tape is used to reconcile sales rung up with cash, debit, and
credit card slips.
DQ6-6 Documentation – use of pre-numbered cheques/stamping “paid”

on invoices / recording the cheque number and initials of which clerk
processed the invoice.
Independent verification – having the accounts payable manager prepare
a summary of cheques and following up on any missing cheques.
__________________________________________________________________________________________________
DQ6-7 Documentation – receiving documents are signed by technician

who received the computer(s) and sent to the accounts payable
department. The accounts payable clerk matches the receiving report to
the invoice before preparing the cheque.
Separation of duties – IT department orders the computers and the

accounts payable department pays for them. Custody of assets always
needs to be separate from access to the accounting records.
DQ6-8 Cost/benefit – management will only establish controls when the

benefits that result from implementing the control exceed the cost of
having the control in place.
Human error – an error in the design of internal controls may impact their
effectiveness. Many controls rely on human judgement, so poor training
or carelessness can impact their effectiveness.
Collusion – if two or more employees work together they can circumvent
existing controls related to separation of duties.
Management override – if management can override controls, they may
be circumvented even if working effectively.
LO 3 BT: C Difficulty: H Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
DQ6-9 Separation of duties, as small organization have a limited number

of staff. As a result, it may be necessary to have duties which would
ideally be carried out by different employees performed by one employee.
This means that review and reconciliation by the business owner takes
on added significance.
DQ6-10 The purpose of a bank reconciliation is to ensure that any

differences between the accounting records for cash and the bank
records are identified and explained and any necessary adjustments are
recorded to update the cash account in the accounting records. It is
related to the independent verification principle for internal control.
Ensuring the accuracy of the cash account minimizes the risk of
fraudulent cash transactions being reflected in a company’s accounts.
The procedure may also detect unauthorized disbursements of cash.
__________________________________________________________________________________________________
DQ6-11 Differences between the cash balance per a company’s general

ledger and the closing balance on its monthly bank statement arise
because of timing differences between when the business and the
bank record transactions or errors. Examples include:
• Cheques written by the company that have not yet cleared the
bank
• Deposits made by the company that have not yet been
recorded by the bank
• Transactions conducted by the bank that have not yet been
recorded by the company such as bank service charges
• Recording errors made by either the company or the bank
LO 4 BT: C Difficulty: E Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
DQ6-12 When companies make sales on account, they may incur

additional costs such as:
• Staff costs related to credit-granting. This includes assessing the
credit history of customers seeking credit.
• Staff costs related to follow-up and account collection. This
includes the cost of sending statements to customers and
following up with customers who do not pay by the due dates.
• Bad debts expenses related to accounts that become
uncollectible.
DQ6-13 Normal terms with credit sales allow customers at least 30 days
to pay their account. With credit card sales, cash is typically collected
within one to two days, depending on the bank or credit card company.
The credit card company becomes responsible for collecting the
accounts and for any bad debts that may arise. Credit card companies
charge a service fee that is normally 1 to 5% of sales. If this is lower
than a company’s normal bad debts expense, and it allows the
company to receive cash quicker, then this is money well spent. Credit
card companies also assume the responsibility for authorizing or
granting credit to card holders. This alleviates the companies who
accept payment with these cards from having to undertake these
activities, reducing their administrative expenses. From a marketing
standpoint, allowing credit card sales will lead to increases in sales.
__________________________________________________________________________________________________
DQ6-14 Credit sales grant customers delayed payment terms. The

customer receives the goods or services, and agrees to pay at a later
date. Some customers may eventually default, and their account
become uncollectible. If the company waits until they discover this
default and the direct writeoff method is used, the writeoff occurs in a
subsequent accounting period so the cost of this bad debt would not
be recorded in the same accounting period as that of the sale. Sales
revenue would be recorded in one period, and the expense of the bad
debt would be recorded in another period. The allowance for doubtful
accounts method enables a company to record the potential cost of bad
debts in the same period as sales, even though the company does not
know which customers will default in subsequent accounting periods.
This allows better matching of expenses with the related revenues.
DQ6-15 Allowance for Doubtful Accounts is a contra account to Accounts

Receivable. It reduces the aggregate amount of the accounts
receivable by the anticipated effects of uncollectible accounts. The
allowance for doubtful accounts has a normal credit balance because
its purpose is to show that the debit balance amount in the accounts
receivable will not be fully collected. The net amount of these two
accounts is reported on the statement of financial position and
corresponds to the net realizable value of the accounts receivable.
Periodically, a company will estimate its potential bad debts based either
on the amount of its credit sales or its accounts receivable balance. At
that time, the bad debts expense account is debited and the allowance
for doubtful accounts is credited for the estimated amount.
Subsequently, when a specific account becomes uncollectible,
accounts receivable is credited and the allowance for doubtful accounts
is debited.
LO 6 BT: AP Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
__________________________________________________________________________________________________
DQ6-16 The two methods of estimating uncollectible accounts are:

Percentage of sales method:
The bad debts expense for the period is estimated by multiplying the
credit sales for the period by an appropriate percentage. The
percentage is usually determined based on the company’s collection
history and current economic conditions.
Aging of accounts receivable method:

Management estimates a percentage relationship between the amount
of receivables and the expected write off of uncollectible accounts.
These estimated percentage is based on historical experience,
economic conditions or industry averages. Bad debts expense is
quantified as the difference between the amount expected to be
uncollectable, which is the required ending balance, and the existing
unadjusted balance in the allowance for doubtful accounts account.
DQ6-17 The direct writeoff method recognizes bad debts expense (loss)
in the period in which the receivable is determined to be unrecoverable
and removed from the accounts receivable records, not necessarily in
the period in which the original credit sale was made. The allowance
method estimates and records the estimated bad debts expense in the
accounting reporting period of the original sale.
DQ6-18 The allowance method means that the estimated bad debts
expense is recorded in the period in which it is incurred. This is
consistent with the requirements of accrual accounting. The direct
writeoff method can be used if the results of applying it are not materially
different from the results of applying the allowance method. This may
be the case if credit sales and bad debts are very small and infrequent.
LO 7,9 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
__________________________________________________________________________________________________
DQ6-19 The allowance for doubtful accounts normally has a credit

balance, which represents the expected future bad debts. This balance
is based on estimates. When an actual account is written off, the
allowance account is debited. If more accounts are written off during a
period than had been expected, the allowance will end with a temporary
debit balance. A debit balance would mean that the estimate made for
bad debts expense of the prior period was understated.
DQ6-20 Company may shorten their cash-to-cash cycle by accepting

credit cards rather than offering credit directly to customers, by offering
sales discounts to encourage early payment, and by selling (factoring)
their accounts receivable to a financial institution. Student may pick any
two of these methods.
DQ6-21 Two ratios that measure liquidity are the current ratio and the
quick ratio. Both compare current assets to current liabilities, with the
current ratio comparing total current assets and the quick ratio
comparing total current assets less inventories and prepaid expenses.
Both provide information on the ability of the company to pay its current
liabilities, with the quick ratio providing more conservative information.
The quick ratio will be lower than the current ratio because the quick
ratio does not include inventory or prepaid accounts.
LO 11 BT: AN Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001, cpa-t1005

CM: Reporting and Finance
DQ6-22 A company with a high current ratio may not be as liquid as the
ratio seems to indicate depending on the mix of its current assets. If the
company has vey low cash and accounts receivable it may have a
liquidity issue if their current asset is mainly inventory that is not fast
moving (i.e. takes up to a year to sell).

__________________________________________________________________________________________________
DQ6-23 The accounts receivable turnover ratio measures the “turnover” of

the accounts receivable in a year. This measures the average number
of times the total accounts receivable has been collected in full during
the year. This ratio provides a measure of the efficiency of the collection
of the accounts receivable.
The average collection period ratio converts the accounts receivable

turnover ratio into the average number of days that it takes a company
to collect its receivables from its customers.

DQ6-24 Generally high accounts receivable turnover ratios are better than
low ratios because they indicate that accounts are being collected
faster, and that the cash-to-cash cycle is shorter.
LO 11 BT: AN Difficulty: E Time: 5 min. AACSB: Analytic CPA: cpa-t001, cpa-t1005

__________________________________________________________________________________________________
SOLUTIONS TO APPLICATION PROBLEMS

AP 6-1A a.
JB Games Ltd.
Bank Reconciliation
As of May 31
Balance per bank statement $12,200 Balance per accounting records $ 8,600
Add: deposits in transit 1,650 Add: EFT receipts 2,100

Correction of cheque # 791 90
Less: outstanding cheques (4,235) Less: Bank service charges (55)
NSF cheque (1,120)
Reconciled balance $ 9,615 Reconciled balance $ 9,615
b. The reconciled balance of $9,615 will be the cash balance reported

on the statement of financial position.
c. Journal entries:
Cash 2,100
Accounts Receivable 2,100
Cash 90
Advertising Expense 90
Bank Charges Expense 55

Cash 55

Cash 1,120
LO 4 BT: AP Difficulty: M Time: 25 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
__________________________________________________________________________________________________
AP 6-2A a. Infinity Emporium Company

Bank Reconciliation
As of August 31
Balance per bank statement $ 66,744 Balance per accounting records $ 71,952
Add: Outstanding deposit 12,240 Add: EFT receipt 3,600
Less: Outstanding cheques (4,560) Less: Service charges 24

NSF cheque 204
Bank loan interest 130
Bank loan payment ($900 770
-$130) (1,128)
b. At August 31, the company has cash available of $74,424, although the
actual cash in the bank account is $66,744.
c. Because the outstanding deposit in transit had not been recorded by

the bank, and exceeded the amount of outstanding cheques, the
balance reported on the bank statement was lower than the adjusted
balance.
Similarly, because the collection of the note receivable by the bank had
not been recorded by the company, the balance reported in the
accounting records was too low and the adjusted balance was higher.
__________________________________________________________________________________________________
AP 6-2A (Continued)
d. Bank Charges Expense 24

Cash 24
Cash 3,600
Accounts Receivable 204

Cash 204
Bank Loan Payable 770

Interest Expense 130
Cash 900
AP6-3A
Spark Images Ltd.
Bank Reconciliation
As of February 29, 2020
Balance per bank statement $ 22,300 Balance per accounting records $ 18,200
Add: deposits in transit 1,300 Add: EFT receipt 2,180

Correction of insurance 270
cheque
Less: outstanding cheques (4,800) Less: Bank service charges (90)
NSF cheque (1,760)
b. The reconciled balance of $18,800 will be the cash balance reported

on the statement of financial position.
__________________________________________________________________________________________________
AP 6-3A (Continued)
c. Journal entries:
Cash 2,180
Cash 270
Insurance Expense ($850 - $580) 270

Cash 90

Cash 1,760
AP6-4A
a. Not included in the bank reconciliation because both the company and the
bank have recorded the transaction
b. Deducted from cash account (G/L) balance
c. Deducted from cash account (G/L) balance
d. Added to cash account (G/L) balance
e. Deducted from bank balance
f. Deducted from cash account (G/L) balance
g. Added to the cash account (G/L) balance
h. Not included in the bank reconciliation because both

the company and the bank have recorded the transactions
i. Added to bank balance
__________________________________________________________________________________________________
AP 6-4A (Continued)
j. Not included in bank reconciliation because both the company and the
bank have recorded the transaction
k. Deducted from cash account (G/L) balance
LO 4 BT: AP Difficulty: H Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
AP6-5A
a. 2020
Cash 210,000
Sales 940,000
Cash 652,000
Allowance for Doubtful Accounts 12,800
Cash 5,100
Bad Debt Expense ($730,000 x 3%) 21,900
__________________________________________________________________________________________________
AP 6-5A (Continued)
b. Mills Manufacturing Ltd.

Statements of Financial Position (Partial)
As at December 31, 2020
Accounts Receivable* $255,200
Less: Allowance for Doubtful Accounts** (23,600)
Net receivables $231,600
*Accounts receivable = $190,000 + $730,000 – $652,000 – $12,800 + $5,100

– $5,100 = $255,200
**AFDA = $9,400 – $12,800 + $5,100 + $21,900 = $23,600
Accounts Receivable
190,000
730,000 652,000
12,800
5,100
5,100
255,200
Allowance for Doubtful Accounts

9,400
12,800
5,100
21,900
23,600
c. Bad Debt Expense = $21,900
__________________________________________________________________________________________________
__________________________________________________________________________________________________
AP6-6A a. Journal Entries
2019

Sales Revenue 200,000
(credit sales for year: $50,000 ÷ 0.25 = $200,000)
Cash ($200,000 x .75) 150,000

Bad Debts Expense ($200,000 x 1.5%) 3,000

2020

(credit sales for year)
Cash* 247,500
*($250,000 x 80%) + ($50,000 x 95%) = $247,500

(write off accounts judged uncollectible)

Cash 1,500
(Record subsequent collection of
accounts that were previously written off)
Bad Debts Expense ($250,000 x 1%) 2,500

__________________________________________________________________________________________________
AP6-6A (Continued)
b. Accounts receivable, December 31, 2020 $ 48,700

Less: Allowance for doubtful accounts (3,200)
Accounts receivable, net $ 45,500
Accounts Receivable Allowance for Doubtful Accounts

50,000 3,000
3,800 3,800
250,000
247,500
1,500 1,500
1,500 2,500
48,700 3,200
45,500
__________________________________________________________________________________________________
AP6-7A
a. Bad Debts Expense ($34,840 – $9,000) 25,840
Allowance for D/A

9,000
25,840
34,840
b. 2020
Mar. 1 Allowance for Doubtful Accounts 800

Sept. 1 Accounts Receivable 800

Allowance for Doubtful Accounts 800
Cash 800
c.
Dec. 31 Bad Debts Expense ($33,500 + $1,000) 34,500
Allowance for D/A

1,000
34,500
33,500
LO 6 BT: AN Difficulty: M Time:25 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
__________________________________________________________________________________________________
AP6-8A
1.
1) Accounts Receivable 8,448,000

Cash 2,112,000
Sales Revenue 10,560,000
2) Cash 7,284,000
Accounts Receivable 7,284,000
3) Allowance for Doubtful Accounts 78,000

4) Accounts Receivable 8,100

Cash 8,100
2. Accounts Receivable Allowance for Doubtful Accounts

1,193,400 7,284,000 78,000 81,648
8,448,000 78,000 8,100
8,100 8,100
2,279,400 11,748
3. Bad Debts Expense ($93,000 – $11,748) 81,252

Allowance for D/A

11,748
81,252
93,000
4. Accounts Receivable $2,279,400

Less: Allowance for
Doubtful Accounts 93,000 $2,186,400
LO 6 BT: AP Difficulty: M Time:35 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
__________________________________________________________________________________________________
AP6-9A a. and b.

900,000 4,900,000 70,000 55,000
5,800,000 70,000 6,000
6,000 6,000
1,730,000 9,000
The ending balance in accounts receivable as at December 31, 2020

was $1,730,000. The allowance for doubtful accounts unadjusted
balance as at December 31, 2020 was a debit of $9,000.
c. Bad Debts Expense $80,000 + $9,000 = $89,000
Allowance for D/A

9,000
89,000
80,000
__________________________________________________________________________________________________
AP6-10A a.
Aged days: <31 days $150,000 x 4% = $ 6,000
Aged days: 31-45 days $ 50,000 x 7% = $ 3,500
Aged days: 46-90 days $ 75,000 x 10% = $ 7,500
Aged days: >90 days $100,000 x 25% = $25,000
$42,000
Allowance for D/A
19,000
23,000
42,000
Bad Debts Expense ($42,000 – $19,000) 23,000
b. I would reject this recommendation as it would further delay the receipt

of cash for the company, and it is unlikely that their suppliers will all
agree to extend the company's credit by another 30 days. In addition,
it appears that there is a significant spike in the amount of uncollectible
receivables as they get past 90 days old, which will be only 30 days
past their proposed due date, thus likely increasing the amount of
uncollectable accounts. The expected increased sales may be
counteracted by an increased amount of uncollectible accounts, thus
perhaps reducing the company's net income, rather than increasing it.
Another consideration that should be looked at before making the
decision is investigating the credit terms granted by the companies’
competitors.
c. The company should consider attempting to collect their receivables

more aggressively between 31-90 days, since it appears that the
receivables that are not yet collected after 90 days show a significant
increase in the proportion that is uncollectible.
Another possible solution to speed up the collection of the accounts

receivable is to offer sales discounts to some of its customers.
__________________________________________________________________________________________________
AP6-10A (Continued)
c. (Continued)
The company could also look at other steps, such as reducing credit
sales by requiring customers seeking credit to pay with credit cards.
The company could also look at factoring its older receivables. While
there will be a significant discount, it may be less than the 25% loss
the company is currently expecting to experience as bad debts.
LO 6,10 BT: E Difficulty: H Time:30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
__________________________________________________________________________________________________
AP6-11A
a. i. $3,000,000 x 2% = $60,000
ii. $3,000,000 x 2% = $60,000
When using the percentage of credit sales method, bad debts

expense is determined without reference to any existing balance in
the allowance for doubtful accounts. Note that the adjusted balance
of the allowance for doubtful accounts must be a credit balance.
b. i. $40,000 – $5,000 = $35,000
ii. $40,000 + $5,000 = $45,000
When using the aging of accounts receivable method to determine

bad debts expense, an adjustment is made for any existing balance
in the allowance for doubtful accounts.
c. $60,000 This is the value of the accounts that were written off
during the year.
d. Accrual accounting requires companies to recognize expenses in the

period in which they are incurred. Bad debts expense is a function
of selling on account and is incurred in the period in which the credit
sales take place. The allowance method does this by recognizing the
bad debts expense in the period in which the sale occurs and
providing an allowance for future writeoffs. Thus, it provides a better
measure of periodic income than the direct writeoff method.
Also, under the allowance method, the accounts receivable are

presented on the statement of financial position at a realistic amount
(their net carrying amount), representing the amount that is actually
expected to be collectible. By contrast, the direct writeoff method
simply reports the receivables at their gross amount, and therefore
overstates their value.
LO 7,8,9 BT: AP Difficulty: H Time:30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
__________________________________________________________________________________________________
AP6-12A
1. Statement of Income No effect
Statement of Financial Position No effect
Statement of Cash Flows No effect

Statement of Financial Position Increase in cash $16,000
Increase in allowance for
doubtful accounts $16,000
Statement of Cash Flows Increase in cash $16,000
3. Statement of Income Decrease in Income before

taxes of $43,000
Statement of Financial Position Decrease in Assets $43,000
AP6-13A
Net Loss $(89,200)
Less : Bad Debt Expense (48,300)
Adjusted Net Loss $(137,500)
Note : The writeoff of the accounts receivable of $36,100 and recovery

of accounts receivable of $8,900 have no impact on net income (loss).
__________________________________________________________________________________________________
AP6-14A
a.
Current ratio = Current Assets
Current Liabilities
= $40,000 + $130,000 + $18,000 + $390,000 + $35,000

$85,000 + $37,000 + $45,000 + $10,000 + $90,000
= $613,000
$267,000
= 2.3
Quick ratio = Current Assets – Inventory – Prepaid Expenses

Current Liabilities
= $613,000 – $390,000 – $35,000

$267,000
= 0.7
b. The company has exceeded its target of 2.2 for the current ratio, but did
not meet its target of 0.9 for the quick ratio. In fact, the quick ratio is
worse this year than last, having dropped from 0.8 last year to 0.7 for
the current year.
c. The company could improve its current position by reducing its

substantial investment in inventory (i.e. reducing inventory levels,
carrying a smaller range of products, etc.). Reducing the inventory level
would free up some cash and thus enable the company to reduce its
short-term liabilities, which would improve its current ratio somewhat and
dramatically improve its quick ratio. The risk associated with reducing
the amount of inventory that the company carries is that there may be a
negative effect on sales due to stock outs.

__________________________________________________________________________________________________
AP6-15A
a.
2020

Current Liabilities
Current assets = $50,000+ $170,000 + $480,000 + $11,000= $711,000

Current liabilities = $230,000 + $46,000 + $23,000 = $299,000
Current ratio = $711,000 / $299,000 = 2.4

Current Liabilities
Quick assets = $711,000 – $480,000 – $11,000 = $220,000

Current liabilities = 230,000 + 46,000 + 23,000 = 299,000
Quick ratio = $220,000 / $299,000 = 0.74
2019
Current Liabilities
Current assets = $79,000 + $120,000 + $280,000 + $5,000 = $484,000

Current ratio = $484,000 / $185,000 = 2.6

Current Liabilities
__________________________________________________________________________________________________
AP6-15A (Continued)
Quick assets = $484,000 – $280,000 – $5,000 = $199,000

Quick ratio = $199,000 / $185,000 = 1.08
Both the current and quick ratios have worsened since 2019. Moksh’s
current ratio only weakened slightly and remains healthy. The change
in the company’s quick ratio is a concern as it has declined from 1.08 to
0.74, meaning that the company only has $0.74 in quick assets for every
$1 in current liabilities. The main reason for the decline in this ratio is
the significant increase in the company’s accounts payable, likely
caused by the large increase in inventory.
b. Moksh’s current ratio is fine, however it’s quick ratio is too low. In the
short term, perhaps they could have a sale. This would convert
inventory into quick assets, (cash or accounts receivable and improve
the quick ratio.
Reducing its current liabilities would also improve the quick ratio. For
example, the company could reduce its accounts payable by carrying
less inventory (assuming most inventory is purchased on account), or it
could refinance some of its current liabilities into long-term liabilities.
c. 2020
A/R Turnover = $860,000 = 5.06 times
$170,000
Average Collection = 365 = 72.1 days

Period 5.06
2019
A/R Turnover = $740,000 = 6.17 times
$120,000

Period 6.17
__________________________________________________________________________________________________
AP6-15A (Continued)
The company’s A/R turnover ratio has worsened in 2020 as the

company has one fewer turnovers of its inventory during the year. The
average collection period increased by 12.9 days, moving from 59.2
days to 72.1 days. This is not a positive change.
d. If Moksh’s normal credit terms are net 30 days, the company has been
doing a poor job in relation to its collections. In both 2019 and 2020, the
company’s average collection period was almost double the net 30 day
term.

AP6-1B a.
Comet Company
Bank Reconciliation
As of April 30, 2020
Balance per bank statement $ 7,582 Balance per general ledger $ 4,643
Add: outstanding deposit 1,531 Add: Collection of accounts 1,015

receivable
Less: outstanding cheques (*) (3,120) Less: Service charges (25)
bank deposit error (360)
(3,480)
* ($1,250 + $520 + $1,350) = $3,120
b. Comet Company should report $ 5,633 as the cash balance.
c. Bank Charges Expense 25

Cash 25
Cash 1,015
__________________________________________________________________________________________________
__________________________________________________________________________________________________
AP6-2B a.
Catalina Holdings Ltd.
Bank Reconciliation
As of October 31, 2020
Balance per bank statement $ 26,936.89 Balance per cheque book $ 21,260.16
Add: deposit in transit 12,314.10 Add: interest paid by bank 19.99

Correction of cheque 270.00
error
EFT receipt 3,110.25
Less: outstanding cheques (*) (15,808.17) Less: NSF cheque (1,125.58)

Bank services (92.00)
Reconciled balance $ 23,442.82 Reconciled balance $ 23,442.82
* ($10,505.10 + $5,303.07 = $15,808.17)
b. At October 31, CHL has $23,442.82 available.
c. Journal entries:
Cash 19.99
Interest Revenue 19.99
Cash 270.00
Utilities Expense ($960 - $690) 270.00
Cash 3,110.25
Accounts Receivable 3,110.25
Accounts Receivable 1,125.58

Cash 1,125.58
Bank Charges Expense 92.00

Cash 92.00
__________________________________________________________________________________________________
AP6-3B
Montgomery Manufacturing Ltd.

Bank Reconciliation
As of October 31, 2020
Balance per bank statement $ 8,900 Balance per accounting $ 9,485

records
Add: deposit in transit 750
Less: outstanding cheques (1,450) Less: Bank service (40)

charges
NSF cheque (820)
EFT payment (245)
Error correction on (180)
cheque #1872
b. The cash reported on the Statement of Financial Position at October 31,

should be $8,200.
c. Journal entries:

Cash 40

Cash 820
Insurance Expense 245

Cash 245
Utilities Expense ($755 - $575) 180

Cash 180
__________________________________________________________________________________________________
AP6-4B
a. Deducted from the cash account (G/L) balance
b. Not included in the bank reconciliation because both the company and the
bank have recorded the transactions
c. Deducted from the bank balance
d. Added to the cash account (G/L) balance
e. Not included in the bank reconciliation because both the company and
the bank have recorded the transactions
f. Added to the bank balance
g. Deducted from the cash account (G/L) balance
h. Deducted from the cash account (G/L) balance
i. Deducted from the cash account (G/L) balance
LO 4 BT: AP Difficulty: H Time: 25 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
__________________________________________________________________________________________________
AP6-5B a. Accounts Receivable 820,000

Cash 780,000


Allowance for Doubtful Accounts 850
Cash 850

Allowance for doubtful accounts 8,200
b. Accounts receivable, December 31, 2020 $154,000

($120,000+$820,000–$780,000–$6,000+$850–$850)
Less: Allowance for doubtful accounts
($4,200 – $6,000 + $850 + $8,200) (7,250)
Accounts receivable, net $146,750
Accounts Receivable Allowance for D/A

120,000 4,200
820,000 6,000
780,000 850
6,000 8,200
850
850
154,000 7,250
146,750
c.Bad debts expense for year appearing in the statement of income for the
year ended Dec. 31, 2020: $8,200.
__________________________________________________________________________________________________
AP6-6B a. Journal Entries
2019

(credit sales for year: $136,000 ÷ .20 = $680,000)
Cash ($680,000 x 80%) 544,000


2020

(credit sales for year)
Cash* 843,200
*($952,000 x 75%) + ($136,000 x 95%) = $843,200

(write off accounts judged uncollectible)

Cash 3,200
(Record subsequent collection of
accounts that were previously written off)
__________________________________________________________________________________________________
AP6-6B (Continued)
Bad Debts Expense ($952,000 x 2.5%) 23,800

b. Accounts receivable, December 31, 2020 $225,000

Less: Allowance for doubtful accounts (20,800)
Accounts Receivable Allowance for D/A

680,000 13,600
544,000 19,800
952,000
843,200 3,200
19,800 23,800
3,200 3,200
225,000 20,800
204,200
c. Bad Debts Expense of $8,200 would appear on the statement of

income for the year ended December 31, 2020.
AP6-7B
6,230
17,760
23,990
a. 2019
Dec. 31 Bad Debt Expense 17,760
b. 2020
Apr. 17 Allowance for Doubtful Accounts 1,450
__________________________________________________________________________________________________
AP6-7B (Continued)
Sept. 1 Accounts Receivable 1,450

Cash 1,450
c.
4,520
33,140
28,620
Dec. 31 Bad Debt Expense 33,140

LO 6 BT: AN Difficulty: M Time:25 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
AP6-8B 1.
1) Accounts Receivable 21,086,000
Cash 5,272,000
2) Cash 19,923,000
3) Allowance for Doubtful Accounts 102,200

4) Accounts Receivable 21,300

Cash 21,300
__________________________________________________________________________________________________
AP6-8B (Continued)
2. Accounts Receivable Allowance for Doubtful Accounts

2,978,000 19,923,000 102,200 95,312
21,086,000 102,200 21,300
21,300 21,300
4,038,800 14,412
3. Bad Debts Expense ($129,300 – $14,412) 114,888

Allowance for D/A

14,412
114,888
129,300
4. Accounts Receivable $4,038,800

Less: Allowance for
Doubtful Accounts 129,300 $3,909,500
AP6-9B a. and b.

2,800,000 16,700,000 193,000 102,000
17,400,000 193,000 39,000
39,000 39,000
3,307,000 52,000
The ending balance in accounts receivable as at December 31, 2020

was $3,307,000. The allowance for doubtful accounts unadjusted
balance as at December 31, 2020 was a debit of $52,000.
__________________________________________________________________________________________________
AP6-9B a. and b (Continued)

c. Bad Debts Expense $52,000 + $210,000 = $262,000
Allowance for D/A

52,000
262,000
210,000
AP6-10B a.
Aged days: <45 days $724,000 x 2% = $ 14,480
Aged days: 45-90 days $685,000 x 6% = $ 41,100
Aged days: 90-120 days $197,000 x 15% = $ 29,550
Aged days: >120 days $109,000 x 30% = $ 32,700
$117,830
Allowance for D/A
37,250
80,580
117,830
Bad Debts Expense ($117,830 – $37,250) 80,580

b. Without recourse means that the finance company assumes the risk
should the account receivable become uncollectible. If they are unable
to collect any of the accounts receivable, they will not get the cash. If,
on the other hand, you factored the accounts receivable with recourse
the finance company would be able to transfer any uncollectible
accounts back to you in exchange for cash, and since they had not
assumed the risk, they will provide a higher purchase price.
c. The company should consider attempting to collect their receivables

more aggressively between 45-120 days, since it appears that the
receivables that are not yet collected after 120 days show a significant
increase in the proportion that is uncollectible.
Another possible solution to speed up the collection of the accounts

receivable is to offer sales discounts to some of its customers that are
currently slow in paying their account.
__________________________________________________________________________________________________
AP6-10B (Continued)
The company could also look at other steps, such as reducing credit
sales by requiring customers seeking credit to pay with credit cards.
The company could ask the factor to accept receivables older than
120 days. While there will be a significant discount charged by the
factor, it may be less than the 30% loss the company is currently
expecting to experience as bad debts.
LO 6,10 BT: E Difficulty: H Time:30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
AP6-11B
a. i. $34,000 + $6,000 = $40,000
ii. $450,000 – $34,000 = $416,000
b. i. $34,000 – $6,000 = $28,000

ii. $450,000 – $34,000 = $416,000
c. i. $35,000 ($3,500,000 x 1%)

ii. $450,000 – ($35,000 - $6,000) = $421,000
d. i $35,000
ii. $450,000 – ($35,000 + $6,000) = $409,000
e. $17,500 Bade debt expense is equal to the amount of accounts

that were written off during the year.
f. $450,000 (no allowance for doubtful accounts)
g. Accrual accounting requires companies to recognize expenses in

the period in which they are incurred. Bad debts expense is a
function of selling on account and is incurred in the period in which
the credit sales take place. The allowance method does this, by
recognizing bad debts expense in the period in which the sale occurs
and providing an allowance for future writeoffs. This provides a
better measure of periodic income than the alternative which is the
direct writeoff method.
__________________________________________________________________________________________________
AP6-11B (Continued)
Also, under the allowance method the accounts receivable are

presented on the statement of financial position at a realistic amount
(their net carrying amount), representing the amount that is actually
expected to be collectible. By contrast, the direct writeoff method
simply reports the receivables at their gross amount, and therefore
overstates their value.
LO 7,8,9 BT: AP Difficulty: H Time:30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
AP6-12B
Statement of Financial Position Increase in cash $27,400
Increase in allowance for
doubtful accounts $27,400
Statement of Cash Flows Increase in cash $27,400

Statement of Financial Position No effect
3. Statement of Income Decrease in Income before

taxes of $52,900
Statement of Financial Position Decrease in Assets $52,900
LO 7 BT: AP Difficulty: H Time:20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
AP6-13B
Net Income $256,500
Less : Bad Debt Expense (61,700)
Adjusted Net Income $194,800
Note : The writeoff of the accounts receivable of $16,900 and the

recovery of a accounts receivable of $12,200 have no impact to net
income.
__________________________________________________________________________________________________
AP6-14B
a.
Current Liabilities
= $32,600 + $396,200 + $715,800 + $17,100

$602,300 + $32,800 + $62,300 + $96,600
= $1,161,700
$ 794,000
= 1.46

Current Liabilities
= $1,161,700 – $715,800 – $17,100 = $428,800

$794,000 $794,000
= 0.54
b. The company has met the minimum current ratio requirement under
the bank loan covenant but has failed to reach the quick ratio covenant.
If the company does not meet its covenants the bank could call the
loan (demand the company repay the balance of the loan back right
away).
c. The quick ratio would be adjusted for as follows:
$428,800 + $100,000 (loan added to cash)

$794,000
= 0.67
A loan would increase the assets in the numerator of the quick ratio and
allow the company to meet its target of 0.65. The bank would not be
able to call the loan as the company would not be breaking the debt
covenant.
__________________________________________________________________________________________________
AP6-14B (Continued)
d. Management could improve its current position by reducing its

substantial investment in inventory (i.e. reducing inventory levels,
carrying a smaller range of products, etc.). Reducing the inventory
level would free up some cash and thus enable the company to reduce
its short-term liabilities, which would improve its current ratio
somewhat and dramatically improve its quick ratio. The risk associated
with reducing the amount of inventory is that there may be a negative
effect on sales due to stock outs.

AP6-15B
a.
2020

Current Liabilities
Current assets = $32,800 + $274,200 + $628,900 + $18,200 = $954,100

Current liabilities= $439,400 + $29,700 + $22,500 + $67,200 = $558,800
Current ratio = $954,100 / $558,800 = 1.71

Current Liabilities
Quick assets = $954,100 – $628,900 – $18,200 = $307,000

Current liabilities = $439,400+ $29,700 + $22,500 + $67,200 = $558,800
Quick ratio = $307,000 / $558,800 = 0.55
__________________________________________________________________________________________________
AP6-15B (Continued)
2019
Current Liabilities
Current assets = $99,500+$205,600 + $475,600 + $16,100 = $796,800

Current liabilities= $308,200 + $31,700 + $18,000 + $51,900 = $409,800
Current ratio = $796,800 / $409,800 = 1.94

Current Liabilities
Quick assets = $796,800 – $475,600 – $16,100 = $305,100

Current liabilities = $308,200 + $31,700 + $18,000 + $51,900= $409,800
Quick ratio = $305,100/ $409,800 = 0.74
Both the current and quick ratios have worsened since 2019.
b. The change in the company’s quick ratio is a concern as it has declined

from 0.74 in 2019 to 0.55 in 2020, meaning that the company only has
$0.55 in quick assets for every $1 in current liabilities. The main reason
for the decline in this ratio is the significant increase in the company’s
accounts payable, likely caused by the large increase in inventory even
though sales are declining.
Sindarius’s current ratio is fine, however it’s quick ratio is too low. In
the short term, perhaps they could have a sale. This would convert
inventory into quick assets, (cash or accounts receivable and improve
the quick ratio.
Reducing its current liabilities would also improve the quick ratio. For
example, the company could reduce its accounts payable by carrying
less inventory (assuming most inventory is purchased on account), or it
could refinance some of its current liabilities into long-term liabilities.
__________________________________________________________________________________________________
AP6-15B (Continued)
c. 2020
A/R Turnover = $1,950,000 = 7.11 times
$274,200

Period 7.11
2019
A/R Turnover = $1,990,000 = 9.68 times
$205,600

Period 9.68
The company’s A/R turnover and corresponding average collection

period ratios have worsened in 2020. The average collection period
increased by 13.6 days, moving from 37.7 days to 51.3 days. This is not
a positive change, particularly when combined with declining sales.
d. If Sindarius’s normal credit terms are net 45 days, the company has
been doing a poor job in relation to its collections for 2020 as it is taking
more than 45 days to collect accounts receivable. In 2019, however,
Sindarius’s collection period was less than 45 days meaning they were
doing a good job in collecting receivables

__________________________________________________________________________________________________
USER PERSPECTIVE SOLUTIONS
UP6-1a. The board could communicate with all the organization’s staff and
volunteers the importance of internal controls. The board could also ask
management to report to the board on the effectiveness of the internal
control system to encourage management to make internal controls a
focus.
b. Donations could be recorded on duplicate pre-numbered donation slips
to ensure all have been recorded. Assign a person to collect and another
person to deposit all cash donations (these people should not have
access to the accounting records). Have a policy that all donations must
be issued a donation receipt. Someone could reconcile the total cash
deposits with the total receipted donations to ensure that all donated
cash is deposited in the organization’s bank account.
LO 3 BT: E Difficulty: M Time:15 min. AACSB: Communication CPA: cpa-t001, cpa-t004

CM: Reporting and Audit
UP6-2 Your bank balance may not be complete. It will not include
deposits in transit or cheques that you have written that have not yet
cleared the bank. The bank may have made errors that would not be
corrected if you did not do a reconciliation and there may be bank
charges or amounts collected that you may be unaware of. Basing your
business decisions solely on the balance in the bank account could
cause you to overdraw your account due to outstanding cheques or
preauthorized payments, and puts you at risk of incurring additional bank
fees and upsetting the suppliers you paid.
LO 4 BT: C Difficulty: M Time:15 min. AACSB: None CPA: cpa-t001 CM: Reporting
UP6-3 Bank reconciliations are important for the management of cash

because they keep the company up-to-date in terms of recording all
transactions that affect its cash balance. In doing so, the company can
assess its need for cash, or perhaps plan short-term investments to earn
a return on excess cash. Bank reconciliations are also a good internal
control over cash because their basic function is to reconcile
independent records of the same bank account and possibly detect
undeposited cash receipts or unauthorized payments
LO 3,4 BT: C Difficulty: M Time:15 min. AACSB: None CPA: cpa-t001 CM: Reporting
__________________________________________________________________________________________________
UP6-4
a. It is important to review the bank reconciliation each month because there
is no segregation of duties for the billing, collecting, depositing, and
reconciling of cash. Fraudulent or unauthorized transactions or errors
could be recorded that you would not be aware of.
b. When reviewing the bank reconciliation, you should be watching for any
suspicious transactions, particularly withdrawals that you do not recognize
or that you did not authorize. You should pay attention to any adjustments
recorded on the bank reconciliation, and consider the validity of the
adjustments. This could include looking at the bank statement, asking for
deposit slips/receipts in support of outstanding deposits, reviewing the
dates and payees for outstanding cheques, etc.
LO 3,4 BT: C Difficulty: H Time:20 min. AACSB: None CPA: cpa-t001 CM: Reporting
UP6-5 If you are providing your customers with a 60-day term you are
forgoing cash for the time it takes to collect the account. Theoretically, if
the cash were collected sooner, it could be invested and interest revenue
earned. However, cash is typically used to manage operations and not
used to invest in interest bearing instruments so it is not foregoing interest
revenue. But, it could delay paying of liabilities or purchasing more
inventory as the cash is unavailable until collected.
LO 5 BT: C Difficulty: M Time:15 min. AACSB Analytic CPA: cpa-t001, cpa-t005

UP6-6 You could require that outstanding accounts receivable balances

from US customers be paid before new shipments are (i.e. do not extend
further credit to US companies and change terms to COD – cash on
delivery). You could also shorten the credit terms for US companies so
they are required to pay sooner and follow-up with them promptly if they
aren’t paying in time. Finally, offering cash discounts could speed up
collections.
LO 10 BT: AN Difficulty: H Time:15 min. AACSB: Communication CPA: cpa-t001 CM: Reporting
__________________________________________________________________________________________________
UP6-7
a. The CFO could also have used the percentage of aging of accounts
receivable method to determine the bad debt expense.
b. She is correct in saying it is more efficient to use percentage of credit sales
as it is less costly and timely to prepare than aging of accounts receivable
method. Percentage of credit sales may not be as accurate as the
percentage of aging method.
c. Percentage of credit sales is an acceptable method. It is typically used for
quarterly statements to be efficient but it is recommended that for year end,
percentage of aging accounts receivable is used as it is more accurate.
Percentage of credit sales is also used for companies that do not have
significant amounts of account receivable.
LO 8 BT: E Difficulty: M Time:15 min. AACSB: Communication CPA: cpa-t001 CM: Reporting
UP6-8 A compensation plan that rewards managers for achieving a

certain level of reported net income has the potential to influence
management’s assessment of the collectability of its accounts
receivable. For example, if management determines that the year-end
balance of accounts receivable is collectible in full, then no bad debts
expense would be recorded and the reported net income will be higher
as a result. Managers who receive bonuses based on net income may
be motivated to understate uncollectible portion of accounts receivable.
LO 7 BT: E Difficulty: M Time:15 min. AACSB: Ethics and Analytic CPA: cpa-t001, cpa-t004
CM: Reporting and Audit
UP6-9
1. a. Event #1 would have resulted in an increase in sales revenues on
the statement of income and a corresponding increase in the balance
of accounts receivable in statement of financial position.

Event #2 would have resulted in offsetting effects on the statement of

financial position, with a decrease in the balance of accounts
receivable and an increase in the balance of cash.
__________________________________________________________________________________________________
UP6-9 (Continued)
Cash 2,250,000
Event #3 would have had no net effect on the statement of financial

position as accounts receivable and the allowance for doubtful
accounts, its contra account, would decrease by the same amount.
There would be no impact on the statement of income.

Event #4 would have resulted in an increase in bad debts expense on

the statement of income and a corresponding decrease in the balance
of net accounts receivable in statement of financial position.
Bad Debts Expense ($2,300,000 x 2%) 46,000

b. Statement of Financial Position, December 31, 2020
Accounts receivable1 $262,000

Allowance for doubtful accounts2 (26,000)
1
$250,000 + $2,300,000 – $2,250,000 – $38,000 = $262,000
2
$18,000 + $46,000 – $38,000 = $26,000

250,000 18,000
2,300,000 2,250,000 38,000
38,000 46,000
262,000 26,000
__________________________________________________________________________________________________
UP6-9 (Continued)
c. The only information available to evaluate the adequacy of Ontario’s

allowance for doubtful accounts at December 31, 2020 is the value of the
receivables written off during 2021, the ending balance in receivables,
and prior year-end information. In this case, bad debts expense of
$46,000 was recorded and, as of December 31, 2020, $38,000 of
accounts have been written off. It would be very useful to analyze the
remaining balance in accounts receivable to arrive at an estimate of the
additional amount that is uncollectible. An allowance of $26,000 remains
at December 31, 2020, while $18,000 remained at December 31, 2019.
Based on the accounts receivable balance at those related points in time,
the allowance as a percentage of accounts receivable was 7.2% (2019)
and 9.9% (2020), representing approximately a 2.7% increase in the
allowance percentage. It appears that the amounts of bad debts expense
and allowance for doubtful accounts might be adequate based on the
available information. Further analysis might reveal adjustment
(additional charge) is appropriate.
LO 7 BT: E Difficulty: H Time:40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
__________________________________________________________________________________________________
UP6-10
a.
2020 2019 2018
Allowance for doubtful
accounts $128.9 $121.9 $118.0
Total accounts receivable
(gross) $1,598.7 $1,352.5 $1,162.8
% considered uncollectible 8.06% 9.01% 10.15%
b.
Bad debts expense $312.4 $271.5 $267.0
Sales revenue $12,661.8 $11,367.8 $10,420.0
Bad debts expense as a %
of sales 2.47% 2.39% 2.56%
c.
From parts (a) and (b), we can see that the portion of Lowrate’s
receivables that are considered uncollectible has declined and that bad
debts expense as a percentage of sales also declined. If we quantify
the receivable written off as a percentage of sales we see:
2020 2019 2018

Accounts written off ÷ sales 2.41% 2.35% 2.85%
These changes are positive, in spite of the modest increase in

percentage in 2020. However, if we are trying to determine if the
company’s collection of receivables has improved between 2018 and
2020, we can see that between 2018 and 2020, sales increased by
21.5% while accounts receivable have grown by 40.7%. This implies
that the company’s collection of its accounts receivable has
deteriorated during the period but that fewer of these receivables have
ended up being written off (i.e. while they are slower to collect, they are
ultimately collecting a greater percentage than in the past).
__________________________________________________________________________________________________
UP6-10 (Continued)
d.
2020
A/R Turnover = Credit Sales / average Accounts Receivable
= $12,661.8 / [($1,469.8 + $1,230.6) / 2] = 9.4 times
Average collection period = A/R Turnover / 365

= 365 / 9.4 = 38.8 days
2019
A/R Turnover = Credit Sales / average Accounts Receivable
= $11,367.8 / [($1,230.6 + $1,044.8) / 2] = 10.0 times
Average collection period = A/R Turnover/365

= 365 / 10.0 = 36.5 days
The average collection period has lengthened by 2.3 days in 2020,

which means that it has gotten worse in 2020.
LO 11 BT: AN Difficulty: M Time:40 min. AACSB Analytic CPA: cpa-t001, cpa-t005

__________________________________________________________________________________________________
WORK IN PROGRESS PROBLEM
WIP6-1 The accounts receivable control account just keeps track of the
dollar amount of accounts receivable outstanding, the accounts
receivable subledger is used to manage the details of each customer.
The subledger will have the details of all the accounts receivable
transactions for each individual customer.
The total of all account balances in the subledger must agree to the
balance in the Accounts Receivable control account. A regular
(monthly) accounts receivable reconciliation should be done to ensure
that the posting process is accurate.
LO3 BT: C Difficulty: M Time:20 min. AACSB: Communication CPA: cpa-t001 CM: Reporting
WIP6-2 1. Visa, Mastercard and other credit card companies are

responsible for collecting the money and deciding to grant credit to the
customer on behalf of the merchant. The credit card company will pay
the merchant for the amount charged on their credit cards (less a
percentage fee for the service). The credit card company will pay the
company almost immediately which shortens the cash to cash cycle.
2. Accepting credit cards eliminates the need for the company to approve
and monitor customer credit. If the credit card fees are less than the
company’s credit approval and manufacturing costs, then the company
will save money.
3. Accepting credit cards may increase overall sales as the credit card
company may grant credit to customers that the company would not
have.
LO5 BT: C Difficulty: M Time:20 min. AACSB: Communication CPA: cpa-t001 CM: Reporting
__________________________________________________________________________________________________
WIP6-3 Accounts Receivable Turnover will vary from year to year,

company to company and industry to industry so there needs to be
more information provided to compare the turnover ratio to (a prior year
or another company or an industry standard). The expected
performance of the turnover ratio is determined by the terms of
collection given to customers by the merchant. Sales discounts will also
affect this ratio. With a 4.2 Accounts Receivable Turnover, the
merchant is only collecting its Accounts Receivable approximately 4.2
times each year or it is taking, on average, 87 days (365/4.2) to collect
accounts receivable. If the company has payment terms of less than
87 days, they are not doing a good job of collecting their Accounts
Receivable.
LO11 BT: AN Difficulty: H Time:20 min. AACSB: Communication CPA: cpa-t001, cpa-t005
__________________________________________________________________________________________________
READING AND INTERPRETING

PUBLISHED FINANCIAL STATEMENTS SOLUTIONS
RI6-1 The fact that there is a high degree of concentration of accounts

receivable in this situation would not increase the credit risk of this
company, since almost all its receivables are attributed to provincial
government liquor authorities. The remainder of deliveries are made
with cash on delivery and therefore do not generate accounts
receivable. This means that the chance of collecting all its outstanding
accounts receivable is excellent. Thus, the credit risk is very low to
almost zero for this company.
LO11 BT: AN Difficulty: H Time:20 min. AACSB: Communication CPA: cpa-t001, cpa-t005
RI6-2 a.
2016 2015
Current 92.2% 90.1%
31-60 days 3.1% 4.2%
61-90 days 1.4% 1.7%
Over 91 days 3.3% 4.0%
The age mix of Tree Island improved slightly in 2016 from 2015.
Current accounts receivable has increased and the remaining
categories have all decreased meaning more accounts are collected
within the payment terms.
b. 2016: $259/ $24,722 = 1.05%

2015: $189/$27,683 = 0.68%
The percentage of uncollectible accounts receivable has increased

from 2015 to 2016 which is unfavourable because more accounts are
considered uncollectible and we expect to have more writeoffs.
c. Accounts receivable turnover rate:

2016 $231,253 / $24,463 = 9.45 times
2015 $231,266 / $27,494 = 8.41 times
Accounts receivable turnover is favourable, Tree Island is turning over

their accounts receivable faster in 2016 than 2015.
__________________________________________________________________________________________________
RI6-2 (Continued)
d. Average collection period:

2016 365/9.45 = 38.6 days
2015 365/8.41 = 43.4 days
Both collection periods are within 30 to 90 days and the collection
time has improved by 4.8 days in 2016. As they are closer to 30
days it would appear that Tree Island has more accounts receivable
with 30-day terms than 90-day terms.
LO11 BT: AN Difficulty: M Time:25 min. AACSB: Analytic CPA: cpa-t001, cpa-t005
RI6-3 a.
Total accounts receivable has increased by $86,000,000 (or 11.5%)
and the allowance has increased by $14,000,000 (or 60.8%). As a
percentage of accounts receivable in 2016, the allowance is 4%
while in 2015 it was 3%. The collectability of accounts receivable has
gotten worse. The amount being written off also increased in 2016
by $5,000,000.
b. 2016 2015
Not past due 0% 0%
Past due 1-30 days 0% 0%
Past due 31-90 days 2.3% 1.9%
Past due 91-120 days 78.3% 20.0%
Past due greater than 120 days 78.1% 87.0%
There has not been a significant change in the allowance for
accounts that are past due 31-90 days. There has been a significant
increase in the allowance for accounts past due 91-120 days, while
there has been a slight decrease related to accounts past due for
more than 120 days. The allowance for accounts past due greater
than 120 days represents 78.1% of the accounts in 2016 and was
87.0% in 2015. This show that Finning expects to collect very few of
these accounts.
c. The bad debts expense for 2016 was $33,000,000 as reported in the
schedule of movement in the allowance for doubtful accounts
schedule.
LO11 BT: AN Difficulty: M Time:30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
__________________________________________________________________________________________________
RI6-4
a. i. Current ratio:
2016: $354,388 / $139,893 = 2.53
2015: $352,871 / $153,647 = 2.30
ii. Quick ratio:

2016: ($354,388 - $252,118 - $3,340) / $139,893 = 0.71
2015: ($352,871 - $261,771 - $2,051) / $153,647 = 0.58
iii. Accounts receivable turnover rate:

2016 $956,016 / $75,190 = 12.7 times
2015 $1,001,507 / $76,335 = 13.1 times
iv. Average collection period:

2016 365/12.7 = 28.7 days
2015 365/13.1 = 27.9 days
b. Both the current ratio and quick ratios are trending upward and have
improved. Both ratios demonstrate strong liquidity.
However, High Liner is collecting its accounts receivable in a slightly

less efficient manner in 2016 as compared to 2015. It took 28 days to
collect in 2015 and almost 29 days to collect in 2016.
__________________________________________________________________________________________________
RI6-5
a. i. Current ratio
2017 : $2,380.5 / $1,193.4 = 1.99

2016 : $2,175.8 / $1,356.8 = 1.60
ii. Quick ratio
2017: ($2,380.5 - $79.3 - $1,172.5) / $1,193.4

= 0.95
2016: ($2,175.8 - $92.2 - $1,077.1) / $1,356.8
= 0.74
iii. A/R Turnover
2017: $11,162.6 / $863.3 = 12.9 times

2016: $10,991.5 / $837.5 = 13.1 times
iv. Average Collection Period
2017: 365 /12.9 = 28.3 days

2016: 365 /13.1 = 27.9 days
b. The current ratio increased from 2016 to 2017, as did the quick ratio,
to remain strong. The main increase is due to no current portion of
long-term debt being due in 2017 versus $244,900,000 due in 2016.
The accounts receivable turnover and average collection period ratios

have stayed almost the same with both years just under 30 days to
collect. The increase in the amount of accounts receivable of $25.7
million (3% from 2016) is in line with the increase in revenues of $171.1
million (1.6% from 2016).
RI 6-6 Answers to this question will depend on the company selected.

__________________________________________________________________________________________________
CASE SOLUTIONS
C6-1 Versa Tools Inc.
Memorandum
To: Arthur Henderson

Re: Internal controls and cash balances
Arthur,
Protection and control of cash is key to the success of any business. Because
of its very nature, cash is particularly susceptible to theft and internal controls
must therefore be established to protect and manage a company’s cash
balances. After having reviewed the operations of Versa Tools Inc. I have
identified several weaknesses in internal controls related to cash that should
be corrected.
i. Currently, you employ only one person in the accounting department,

which does not allow for a proper separation of duties. When one person
is responsible for receiving cash, recording cash receipts and
disbursements, and depositing cash in the bank, there is an increased
possibility that fraud could occur. Where possible, you should try to
separate these duties so that a different employee is responsible for
receiving the cash, recording the accounting transactions, and depositing
the cash in the bank. With different employees performing these duties,
collusion (i.e. two of more employees working together to circumvent
internal controls) would have to occur among employees for a theft to be
perpetrated. I realize that due to the size of your business a proper
segregation of duties may be impossible. As a compensating control, I
recommend that management continue to review all cash transactions on
a regular basis.
__________________________________________________________________________________________________
C6-1 (Continued)
ii. Currently, cash is not being deposited on a regular basis and is easily
accessible by anyone in the main office area. You should ensure that cash
is physically protected. This would include depositing cash receipts on a
daily basis and keeping any cash that is maintained on the premises in a
locked till or safe.
iii. All cash receipts should be documented (i.e. pre-numbered paper receipts
issued), so that they can be tracked until recorded.
iv. The current accountant has no formal training and is not entering
transactions into the computer system on a regular basis. This increases
the chance that mistakes and omissions will occur. In a strong system of
internal control, management should establish an effective record keeping
system that includes ensuring that all employees are properly trained and
educated about the system.
v. A bank reconciliation ensures that the company’s accounting records

agree with the bank statement. Due to the lack of controls in other areas,
the preparation of monthly bank reconciliations is essential for Versa Tools.
The bank reconciliation should be performed by someone other than the
person responsible for the record keeping function, and should be
reviewed regularly by management.
Arthur, you should review the bank reconciliation to ensure that the
information reflected in it is accurate (i.e. that deposit slips/receipts are
available for each outstanding deposit, and that the general ledger cash
balance agrees with the bank statement balance, etc.) and that all
payments made from the bank account have been properly authorized and
supported by verifiable business transactions.
Implementing these controls will greatly improve the ability of Versa Tools to
protect its cash balances. With proper controls in place, you should have more
time to concentrate on expanding the business.
LO3 BT: C Difficulty: H Time:40 min. AACSB: Communication CPA: cpa-t001 CM: Reporting
__________________________________________________________________________________________________
C6-2 a.
Balance per bank statement $18,380.00
Add: Outstanding deposit /
Undeposited receipts ?*
Less: Outstanding cheques

$(241.75)
(258.25)
(190.71)
(226.80)
(165.28) (1,082.79)
Unadjusted cash balance $17,297.21
Balance per accounting records $21,892.72

Add: Collection of note receivable 300.00
22,192.72
Less: Bank service charges (50.00)
Corrected cash balance $22,142.72
* The amount of the outstanding deposit or undeposited receipts

required to make the bank reconciliation balance would be:
= $22,142.72 - $17,297.21 = $4,845.51
If Rob deposited $3,845.31, then the amount of cash he stole would

be:
= $4,845.51 - $3,845.51 = $1,000
a. Rob did not include two outstanding cheques, for $241.75 + $258.25, in
the reconciliation. The combined effect of these two omissions was $500.
__________________________________________________________________________________________________
C6-2 (Continued)
In addition, Rob treated the collection of the note receivable of $300
and the service charges of $50 as adjustments to the bank statement
balance, when they should have been adjustments to the company’s
cash balance. The net total for these items was $250. However,
because they were included in the wrong portion of the reconciliation
(i.e., as adjustments to the bank’s balance, rather than to the
company’s balance) this resulted in an error of twice that amount, or
$500.
b. To prevent this type of occurrence, the company:
• Should segregate the duties concerning the collection and
disbursements of cash
• Ensure that pre-numbered receipts are issued for all cash
received by the company and that all receipts are matched to
the journal entries recording the cash receipt
• Have the bank reconciliation reviewed by the general manager,
with the general manager verifying all outstanding deposits to
deposit slips/receipts and tracing all outstanding cheques to see
if they cleared the bank within the first 10 days of next month.
Any cheques that did not clear should be followed up.
LO3,4 BT: E Difficulty: H Time:50 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
__________________________________________________________________________________________________
C6-3 Sanjay Supplies Limited
Calculations:
2020 2019 2018
Current Ratio $3,880 / $980 = 4.0 $2,820 / $710 = 4.0 $2,370 / $690 =
3.4
Quick Ratio ($3,880 – $1,730) / ($2,820 – $1,250) / ($2,370 – $940)
$980 = 2.2 710 = 2.2 / 690 = 2.1
A/R Turnover $17,100 / [($1,510 $16,300 / [($1,180 +

+ $2,130) / 2] = 9.4 $1,510) / 2] = 12.1
Average 365 / 9.4 = 38.8 365 / 12.1 = 30.2

Collection days days
Period
Sales Growth %: 4.9% from 2019 to 2020

28.3% from 2018 to 2019
Discussion:
Sanjay’s sales have increased dramatically over the past two years (i.e.
28.3% from 2018 to 2019 and 4.9% from 2019 to 2020). The company’s
current (4.0) and quick (2.2) ratios are also good and have either improved
or remained constant. However, its cash and cash equivalents have
steadily decreased, from $250 ($210 + $40) in 2018 to $20 in 2020. The
main reasons for this are the large increases in accounts receivable and
inventories, coupled with decreased accounts payable.
The accounts receivable turnover has decreased, from 12.1 times in 2019
to 9.4 times in 2020. This might indicate that Sanjay is either increasing
its sales by granting easier credit or is experiencing serious problems in
collections. Accounts receivable increased by 80.5% during the three-
year period, while sales on credit increased by only 34.6%. Sanjay
management should review this situation and take corrective action. The
company’s average collection period also increased significantly between
2019 and 2020. It takes Sanjay an average of an additional 8.6 days to
collect from its customers, which lengthens the company’s cash-to-cash
cycle and consequently necessitates the increase in short term bank loan.
__________________________________________________________________________________________________
Management should also determine why inventories are increasing so

rapidly. Inventories increased by more than 84.0% over a two-year period,
while sales on credit increased by only 34.6%. By reducing inventory
levels, Sanjay could reduce its storage and handling costs, and the
financing costs of having cash tied up in inventory. However, the cost
savings from reduced inventory levels must be weighed against the risk of
lost sales if customer demand cannot be met, and potential lost savings if
Sanjay does not take advantage of bulk purchase discounts, or does not
purchase in advance of supplier price increases.
It should also be noted that accounts payable decreased during the three-
year period. This is unusual, during a period when sales and inventories
have increased, and should also be investigated.
LO10,11 BT: AN Difficulty: M Time:45 min. AACSB: Analytic CPA: cpa-t001, cpa-t005
__________________________________________________________________________________________________
C6-4 Heritage Mill Works

a. The company’s estimated bad debts expense using the percentage of
credit sales method would be in the following range:
Low end = $3,450,000 x 90% x 2% = $62,100

High end = $3,450,000 x 90% x 4% = $124,200
During the current year, the company wrote off accounts representing
2.36% of credit sales (i.e. $73,400 / $3,105,000 = 2.36%), which is within
the range of historic writeoff percentages experienced. Since the industry
is strong and houses are selling, it is reasonable to assume that the
percentage of bad debts will continue to be within the historical range and
should likely be at the lower end of the historical range. Therefore, based
on the writeoff experience of the current year, I would recommend that we
use an estimate of 2.5%.
Note: students can use any number here, but they must adequately support
their choice.
b. If a company’s credit policy is too restrictive, it risks losing sales by not
granting credit to good customers. Customers may purchase lumber from
other suppliers who will grant them credit. However, if credit is granted too
easily, the company risks incurring a high level of uncollectible accounts.
It is this trade-off between losing sales and incurring large bad debts that
must be considered in determining an appropriate credit policy.
c. Utilizing notes receivable may be appropriate as they generate interest
revenue. Also, a signed note is stronger evidence of the debt than is an
accounts receivable. It is also advantageous for the contractors as they
have more time to pay their bills. But, it would slow down the cash-to-cash
cycle.
d. Other steps Heritage Mills could consider taking to reduce the risk of non-
collection could include:
• Using less liberal credit terms
• Consider receiving a deposit prior to delivery of merchandise
inventory, or make deliveries cash on delivery for customers
__________________________________________________________________________________________________
C6-4 (Continued)
deemed to be higher risk, or for which the business does not have
considerable history.
• Undertake credit checks to ensure that the customers are capable
of meeting their obligations
• Consider using a collection agency.
• Set up control procedures that customers that exceed their credit
limit are not shipped any goods until their account is paid.
LO5,7 BT: E Difficulty: H Time: 45 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
__________________________________________________________________________________________________
C6-5
a.
Internal Control Considerations Application to MegaMax Theatre
Assignment of responsibility Only the cashiers are authorized to sell

tickets. Only the manager and cashiers can
handle cash. Only the manager has access
to unlocked rolls of tickets.
Documentation The tickets are pre-numbered. Cash count
sheets are prepared and initialed. Deposit
slips are prepared. Copies are used for
verification and recording.
Separation of duties The duties of receiving cash and admitting
customers are separately assigned, to the
cashier and the doorperson. The manager
maintains custody of the cash, while the
accountant records receipt of the cash.
Physical controls A safe is used to hold cash during the day.

Cash is deposited at the end of each day.
Locked machines are used to hold and
issue the tickets.
Independent verification. Cash counts are made by the manager at
the end of each shift. Daily comparisons of
the number of tickets sold and the cash,
debit and credit card receipts received are
made by the controller.
__________________________________________________________________________________________________
C6-5 (Continued)
b.Weaknesses in the internal control system that could enable a cashier

and/or doorperson and cashier to misappropriate cash include:
There is no mention of the torn ticket stubs (which are supposed to be

dropped into a locked box) being checked. These should at the very
least be subject to periodic spot-checks against the number of people
in the theatre and the amount of cash collected.
Discrepancies between the amount received by each cashier and the

number of tickets issued are not discussed with the cashiers until their
next shift. This may make it very difficult to determine the reasons
behind the discrepancies and how they should be resolved.
Possible abuses by cashiers and doorpersons include:
i. The cashier and doorperson could agree to let friends into the
theatre without purchasing tickets, in exchange for "under the
table" payments.
ii. Instead of tearing the tickets in half, the doorperson could return
the tickets to the cashier who could resell them, and the two
could divide the extra cash.
iii. The cashier could issue less expensive tickets than what the
customers paid for, and arrange with the doorperson to admit
the customers. The difference between the value of the tickets
issued and the cash received could later be divided between the
cashier and the doorperson.
LO5,7 BT: E Difficulty: H Time: 45 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
__________________________________________________________________________________________________
Legal Notice
Copyright
Copyright © 2018 by John Wiley & Sons Canada, Ltd. or related companies.
All rights reserved.
The data contained in these files are protected by copyright. This manual is
furnished under licence and may be used only in accordance with the terms
of such licence.
The material provided herein may not be downloaded, reproduced, stored in

a retrieval system, modified, made available on a network, used to create
derivative works, or transmitted in any form or by any means, electronic,
mechanical, photocopying, recording, scanning, or otherwise without the prior
written permission of John Wiley & Sons Canada, Ltd.
MMXIV xii F1
__________________________________________________________________________________________________
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She said, "Jim, why did you look at Chris that way?"
In answer, Harker crossed to the table near the window and his
fingers sought out the tri-dim of dead Eva, its bright colors losing
some of their sharpness now after nine years. "I was trying to picture
him as a teen-age girl," he said heavily. "Eva would have been fifteen
soon."
Her only outward reaction was a momentary twitch of the lower lip.
"You haven't thought of her for a long time."
"I know. I try not to think of her. But I thought of her today. I was
thinking that she didn't have to be dead, Lois."
"Of course not, dear. But it happened, and there was no help for it."
He shook his head. Replacing Eva's picture, he picked up instead a
tiny bit of bric-a-brac, a kaleidoscopic crystal in whose depths were
swirling streaks of red and gold and dark black. He shook it; the color-
patterns changed. "I mean," he said carefully, "that Eva might have
been saved, even after the accident."
"They tried to revive her. The pulmotor—"
"No. Lois, I had a—a person visit me this morning. A certain Dr. Lurie,
from a certain research laboratory in New Jersey. He claims they've
developed a technique for bringing the dead back to life, and he
wants me to handle promotion and legal aspects. For a fat fee, may I
add."
She frowned uncertainly. "Reviving the dead? What kind of crazy joke
is that?"
"I don't know. But I'm not treating it as a joke; not until I've seen the
evidence, anyway. I made an appointment to go out to Jersey and
visit their lab on Friday."
"And you'll take the job, if they've really hit on something?"
Harker nodded. "Sure I'll take it. It's risky, of course, and there's sure
to be a lot of public clamor in both directions—"
"And haven't we had enough of that? Weren't you satisfied when you
tried to reform the state government, and wound up being read out of
the party? Jim, do you have to be Quixote all the time?"
Her words had barbs. Harker thought bleakly that being able always
to see both sides of a question, as he could, was a devil-granted gift.
Wearily he said, "All right. I tried to do something I thought was right,
and I got my head chopped off as a result. Well, here's my second
chance—maybe. For all I know they're a bunch of lunatics over there.
I owe it to myself and to the world to find out—and to help them, if I
can."
He pointed at the tri-dim of Eva. "Suppose that happened now—Eva,
I mean. Wouldn't you want to save her? Or," he said, making his
words deliberately harsh, "suppose Paul dies. Wouldn't you want to
be able to call him back from—from wherever he had gone?"
For a moment there was silence.
"Well? Wouldn't you?"
Lois shrugged, turning her hands palm outward. "Jim, I don't know. I
just honestly don't know."
CHAPTER III
At three minutes past two on Friday afternoon Harker's secretary
buzzed him to let him know Dr. Lurie had arrived. Harker felt
momentary apprehension. Cautious, even a little conservative by
nature, he felt uneasy about paying a visit to a laboratory of—for all
he knew—mad scientists.
He turned on an amiable grin when Lurie arrived. The scientist looked
less gawky than before, more sure of himself; he wore what seemed
to be the same rumpled clothing.
"The car's downstairs," Lurie said.
Harker left word at the front desk that he was leaving for the day,
telling the girl to refer all calls to one of the other partners in the firm.
He followed Lurie into the gravshaft.
The car idled in the temporary-parking area outside—a long, low,
thrumming '33 turbo-job, sleekly black and coming with a $9,000
price-tag at the least. There were three men inside. Lurie touched a
knob; the back door peeled back, and he and Harker got in. Harker
looked around.
They were looking at him, too. Minutely.
The man at the wheel was a fleshy, hearty-looking fellow in his late
fifties, who swiveled in a full circle to peer unabashedly at Harker.
Next to him was a thin, pale, intense young man with affectedly thick
glasses (no reason why he couldn't wear contacts instead, Harker
thought), and sitting at the far side in back was the third, a coolly self-
possessed individual in unobtrusive black clothes.
The fleshy man at the wheel said, "How do you do, Governor Harker.
I'm Cal Mitchison—no scientist I, heh-heh! I'm public-liaison man for
Beller Labs."
Harker smiled relatively courteously.
Mitchison said, "Man next to me is Dr. David Klaus, one of Beller's
bright young men. Specialty is enzyme research."
"H-h-hello," Klaus said with difficulty. Harker smiled in reply.
"And to your left is Dr. Martin Raymond. Mart's the Director of Beller
Labs," Mitchison said.
"Pleased to meet you," said Raymond. His voice was deep, well-
modulated, even. Harker sensed that this was a man of tremendous
inner strength and purpose. Raymond was a type Harker had seen
before, and respected: the quietly intense sort that remained in the
background, accumulating intensity like a tightening mainspring,
capable of displaying any amount of energy or drive when it was
needed.
"And you already know Ben Lurie, of course," Mitchison said. "So we
might as well get on our way."
The trip took a little over an hour, with Mitchison making a crosstown
hop via the 125th Street overpass, then ducking downtown to 110th
Street and taking the Cathedral Avenue rivertube across the Hudson
into New Jersey. The village of Litchfield turned out to be one of those
Jersey towns of a thousand souls or so that look just like every other
small Jersey town: a railroad siding, a block or two of shopping
center, bank, post office, then a string of old split-levels rambling
away from the highway in every direction.
Mitchison, handling his big car with an almost sensuous delight,
drove on through the main part of town, into the open country again,
and about a mile and a half past the heart of the village suddenly
turned up a small road prominently labeled Private: Keep Out.
Trespassers Will Be Prosecuted.
The road wound inward through a thick stand of close-packed spruce
for more than a thousand feet, at which point a road-block became
evident. Two apparently armed men stood guard at either side of the
road.
Mitchison opened the doors and the five occupants of the car got out.
Harker took a deep breath. The air out here was sweet and pure, and
not with the mechanical purity of Manhattan's strained and filtered
atmosphere. He liked the feel of fresh air against his nostrils and
throat.
Lurie said to the guards, "This is Mr. James Harker. We've brought
him here to visit the labs."
"Right."
The guard who had grunted assent took a red button from his pocket
and jammed it against Harker's lapel. It adhered. "That's your security
tag. Keep it visible at all times or we can't answer for the
consequences."
"What if it falls off?"
"It won't."
Harker and his companions followed around the road-block while
Mitchison took the car somewhere to be parked. Harker saw three
large buildings, all of them very old, and several smaller cabins
behind them, at the very edge of the encroaching forest.
"Those are the dormitories for the researchers," Lurie said, pointing to
the cabins. "The big building over here is the administrative wing, and
the other two are lab buildings."
Harker nodded. It was an impressive set-up. The group turned into
the administrative building.
It was every bit as old-fashioned on the inside as outside. The lighting
was, of all things, by incandescent bulbs; the air-conditioners were
noisily evident, and the windows did not have opaquing controls.
Harker followed the other three into a small, untidy, book-lined room
—and, suddenly, he realized that Dr. Raymond was taking charge.
"This is my office," Raymond said. "Won't you be seated?"
Harker sat. He reached for his cigarettes and Raymond interjected
immediately, "Sorry, but no smoking is permitted anywhere on the
laboratory grounds."
"Of course."
Raymond sat back. Klaus and Lurie flanked him. In a quiet, terribly
sane voice, Raymond said, "I think Dr. Lurie has explained the
essentials of our situation."
"All I know is that you claim to have perfected a process for restoring
the dead to life, and that you want me to act as legal adviser and
public spokesman. Is that right?"
"Indeed. The fee will be $600 per week for as long as your services
will be required."
"For which you'll insist on my full-time participation, I expect."
"We have confidence in your ability, Mr. Harker. You may apportion
your time as you see fit."
Harker nodded slowly. "On the surface, I don't see any objections. But
naturally I'll expect a thorough demonstration of what you've achieved
so far, if I'm to take on any kind of work for you."
Levelly Raymond said, "We would hardly think of employing you
unless we could take you into our fullest confidence. Come with me."
He opened an inner door and stepped through; Harker walked around
the desk to follow him, with Klaus and Lurie bringing up the rear.
They now were in a large room with the faint iodoform odor Harker
associated with hospitals; it was brightly, almost starkly lit, and Harker
saw two lab tables, one empty, one occupied by a dog, both
surrounded by looming complex mechanical devices. A bearded,
grave-looking young man in the white garb of a surgeon stood by the
dog-laden table.
"Are we ready, Dr. Raymond?"
Raymond nodded. To Harker he said, "This is Dr. Vogel. One of our
surgeons. He will anesthetize the dog you see and kill it."
Harker moistened his lips nervously. He knew better than to protest,
but the idea of casually killing animals in the name of science touched
off a host of involuntary repugnance-reactions in him.
He watched stonily as Vogel fitted a mask over the dog's face—it was
a big, shaggy animal of indeterminate breed—and attached
instruments to its body.
"We're recording heartbeat and respiration," Raymond murmured.
"The anesthetic will gradually overcome the dog. In case you're
concerned, the animal feels no pain in any part of this experiment."
Some moments passed; finally Vogel peered at his dials, nodded,
and pronounced the dog in full narcosis. Harker fought against the
inner tension that gripped him.
"Dr. Vogel will now bring death to the dog," Raymond said.
With practiced, efficient motions the surgeon slit the animal's blood
vessels, inserted tubes, adjusted clamps. An assistant glided forward
from the corner of the room to help. Harker found a strange
fascination in watching the life-blood drain from the dog into dangling
containers. The needle registering the heartbeat sank inexorably
toward zero; respiration dropped away. At last Vogel looked up and
nodded.
"The dog is dead," he declared. "The blood has been drained away.
This pump will ensure oxygenation of the blood during the period of
the animal's death. We will now proceed to the next table—"
Where, Harker saw, another dog had been placed while his attention
had been riveted on the death scene. This dog lay in a slumped furry
heap that grotesquely reminded Harker of Eva as she had looked
when they pulled her from the sea. His throat felt terribly dry.
"This animal," Vogel said stiffly, "underwent the killing treatment nine
hours and thirteen minutes ago. Its blood has been stored during that
time. Now—"
Spellbound, Harker watched the surgeon's busy hands as he and the
assistant fastened tubes to the dead animal's body and lowered a
complicated instrument into place. "We are now restoring blood to the
dead animal. When the indicator gauge reads satisfactorily, injection
of adrenalin and other hormones will restore 'life' to the animal. The
blood is being pumped back at the same rate and rhythm that the
animal's own heart uses."
"In some cases," Raymond remarked, "we've restored animals dead
nearly thirty-six hours."
Harker nodded. He was forcing himself to a realization of the gulf that
lay between these calmly efficient men and himself. Yet they needed
him and he needed them; neither type of mind was complete in itself.
The resuscitation of the second dog took fifteen minutes. At length
Vogel nodded, withdrew the reviving apparatus. The heartbeat
indicator was fluttering; respiration was beginning. The dog's eyes
opened wearily. It wagged its tail feebly and almost comically.
Lurie remarked, "For the next several hours the dog will show signs of
having undergone a serious operation—which it has. In a day or two
it'll be as good as new—once the stitches have healed, of course. In
Lab Building Two we can show you dozens of dogs that have been
through the killing process and were returned to life, happy, hearty—"
"This dog," Raymond said calmly, "is the son of a dog we temporarily
'killed' two years ago. The period of death doesn't seem to interfere
with later mating or with any other life-process."
While they spoke, Vogel was repeating the process of revivification
on the dog that had been killed twenty minutes before. This time
Harker watched with less revulsion as life returned to the animal.
In a dry voice he said, "Your experiments—are—well, impressive."
Raymond shook his head. "On the contrary. We've merely repeated
work that was first carried out more than eighty years ago. These
techniques are far from new. But our application of them to—"
"Yes," Harker said weakly. "To human life. That's—that's the clincher,
I'd say."
Harker realized that Raymond was staring at him coldly, appraisingly,
as if trying to read his mind before proceeding to the next
demonstration. Harker felt his face reddening under the scrutiny.
"We're lucky enough to be able to—ah—clinch things," Raymond
said.
"With a human being?"
Raymond nodded. "You understand that getting human specimens for
research has been our gravest problem. I'll have to ask you not to
voice any of the questions that may arise in your mind now."
Harker nodded. He could recognize a security blanket when it was
lowered.
Raymond turned and said in a mortuary voice, "Bring in Mr. Doe."
Two attendants entered, carrying a sheet-shrouded form on a
stretcher. They deposited the figure on the vacant lab table that had
held the second dog. Harker saw that it was a man, in his late sixties,
bald, dead.
"Mr. Doe has been dead for eleven hours and thirteen minutes,"
Raymond said. "He died of syncope during an abdominal operation.
Would you care to examine the body?"
"I'll accept the evidence on faith, thanks."
"As you will. Dr. Vogel, you can begin."
While Vogel worked over the cadaver, Raymond went on, "The
process is essentially compounded out of techniques used for
decades with varying success—that is, a combination of pulmotor
respiration, artificial heart massage, hormone injection, and
electrochemical stimulation. The last two are the keys to the process:
you can massage a heart for days and keep it pumping blood, but
that isn't restoration of life."
"Not unless the heart can continue on its own when you remove the
artificial stimulus?"
"Exactly. We've done careful hormone research here, with some of
the best men in the nation. A hormone, you know, is a kind of
chemical messenger. We've synthesized the hormones that tell the
body it's alive. Of course, the electrochemical stimulation is important:
the brain's activity is essentially electrical in nature, you know. And so
we devised techniques which—"
"Ready, Dr. Raymond."
Harker compelled himself to watch. Needles plunged into the dead
man's skin; electrodes fastened to the scalp discharged suddenly. It
was weird, vaguely terrifying, laden with burdensome implications for
the future. All that seemed missing was the eery blue glow that
characterized the evil experiments of stereotyped mad scientists.
He told himself that these men were not mad. He told himself that
what they were doing was a natural outgrowth of the scientific
techniques of the past century, that it was no more terrifying to restore
life than it was to preserve it with antibiotics or serums. But he sensed
a conflict within himself: he knew that if he accepted this assignment,
he could embrace the idea intellectually but that somewhere in the
moist jungle-areas of his subconscious mind he would feel disturbed
and repelled.
"Watch the needles," Raymond whispered. "Heartbeat's beginning
now. Respiration. The electro-encephalograph is recording brain
currents again."
"The test, of course, is whether these things continue after your
machinery is shut off, isn't it?" Harker asked.
"Of course."
Time edged by. Harker's over-strained attention wandered; he took in
the barren peeling walls of the lab, the dingy window through which
late-afternoon light streamed. He had heard somewhere that the old-
fashioned incandescent bulbs emitted a 60-cycle hum, and he tried
unsuccessfully to hear it. Sweat-blotches stippled his shirt.
"Now!" Vogel said. He threw a master lever. The equipment whined
faintly and cut off.
The heartbeat recorder and the respiration indicator showed a
momentary lapse, then returned to their previous level. The EEG tape
continued recording.
Harker's eyes widened slightly. A slow smile appeared on Raymond's
face; behind him, Harker could hear Lurie cracking his knuckles
nervously, and bespectacled Dr. Klaus tensely grinding his molars
together.
"I guess we did it," Vogel said.
The dead man's arms moved slowly. His eyelids fluttered, but the
anesthetic ensured continued unconsciousness. His lips parted—and
the soft groan that came forth was, for Harker, the clincher he had
been half-hoping would not be forthcoming.
The man groaned again. Harker felt suddenly weary, and turned his
head away.
CHAPTER IV
Harker's shock reaction was violent, instinctive, and brief. He
quivered uncontrollably, put his hands to his face, and started to lose
his balance. Raymond was right there; he caught him, held him
upright for a moment, and released him. Harker wobbled and grinned
shamefacedly.
"That's strong stuff," he said.
"I've got stronger stuff in my office. Come on."
He and the lab director returned to the adjoining room. Raymond
closed the door and clicked it; Lurie and Klaus remained in the lab.
Raymond reached into his bookcase, pushed a thick black-bound
volume to one side, and withdrew a half-empty bottle of Scotch. He
poured a double shot for Harker, a single for himself, and replaced
the bottle.
"Drink up. Straight."
Harker swallowed the liquor in two frantic gulps. He gasped, grinned
again, and shakily set down the glass. "God. I'm roasting in my own
sweat."
"It isn't a pleasant sight the first time, I guess. I wish I could share
some of your emotional reaction, but I'm blocked out. My dad was a
biochemist, specialty life-research. He had me cutting up frogs when I
was three. I'm numb to any such reactions by now."
"Don't let that trouble you," Harker said. He shivered. "I could live very
happily without seeing another demonstration of your technique, you
know."
Raymond chuckled. "Does that mean you're convinced we aren't
quacks?"
Harker shrugged. "What you have is heap big medicine. I wonder if
I've got the voltage needed to handle the job you want me to do."
"You wouldn't be here if we didn't think so."
"I was fourth on the list," Harker said. "Lurie told me."
"You were my personal choice. I was outvoted. But I knew you'd
accept and the other three would turn us down without even coming
out here to investigate."
"I haven't said I've accepted," Harker pointed out.
"Well? Do you?"
Harker was silent for a moment, his mind returning to the impact of
the scene he had just witnessed. There was still plenty he had to
know, of course: the corporate set-up of this lab, including knowledge
of the powers that had "outvoted" the director; the financial resources
behind him; the possible bugs in the technique.
A dozen implications unfolded. His mind was already at work
planning the campaign. He was thinking of people to see, wires to
pull, angles to check.
"I guess I accept," he said quietly.
Raymond smiled and reached into his desk. He handed Harker a
check drawn on a Manhattan bank for $2,400, payable to James
Harker, and signed Simeon Barchet, Treasurer.
"What's this?"
"That's four weeks salary, in advance. Barchet's the trustee who
administers the Beller Fund. I had him write the check yesterday. I
was pretty confident you'd join us, you see."
Harker spent a quietly tense weekend at home with his family. He told
Lois about the assignment, of course; he never kept things from her,
even the most unpleasant. She was dubious, but willing to rely on his
judgment.
He worked off some of his physical tension by playing ball in the
backyard with his sons. Chris, entering adolescence, was developing
an athlete's grace; seven-year-old Paul did not yet have the
coordination needed for catching and throwing a baseball, but he
gave it a good try.
On Sunday the four of them drove upstate to a picnic ground, ate out,
even went for a brief swim though it was really too early in the season
for that. Harker splashed and laughed with his sons, but there was an
essential somberness about him that Lois quietly pointed out.
"I know," he admitted. "I'm thinking."
"About the Beller Labs business?"
He nodded. "I keep finding new angles in it. I try to guess what the
reaction of the organized churches will be, and what political capital
will be made. More likely than not the parties will take opposite
stands. Somebody will dig up the fact that I used to be a National
Liberal bigwig, and that'll enter into the situation. After a while it'll
become so confused by side-issues that—" He stopped. "I don't
sound very enthusiastic about this job, do I?"
"No," Lois said. "You don't."
"I guess I really haven't made up my mind where I stand," he said.
"There are too many tangential things I don't know about yet."
"Like what?"
Harker shook his head. "I'm trying not to think about them. This is my
day off, remember?"
On Monday he polished off his routine work early, by half-past-ten,

and stepped out of his office. He walked down the beige corridor to
the door inscribed William F. Kelly and knocked sharply.
"Bill? Me, Jim."
"Come on in, boy."
Kelly was sitting back of an impeccably clear mahogany desk, looking
well-barbered, well-manicured, well-fed. He was the senior partner of
the law firm that now called itself Kelly, Harker, Portobello, and Klein.
In his late fifties, ruddy-faced, quick-witted, Kelly was by religion a
loyal Catholic and by politics a determined maverick.
He said, "How's the ex-Governor this morning?"
Harker grinned. Kelly was the one man who could not offend him with
those words. "A washed-up has-been, as usual. Bill, I've got a big
offer to do some work for a Jersey outfit. I think it's going to tie me up
for the next few months. I thought I'd let you know."
Kelly blinked, then grinned, showing even white teeth. "Full-time?"
"Pretty near."
"How about your pending cases?"
Harker said, "I'm keeping the Bryant case. Fuller and Heidell will have
to be handed over to someone else, I'm afraid."
"I guess you know what you're doing, Jim. Who's the big client?"
"Hush-hush. Nice pay, though."
"Can't even tell old Bill, eh? Well, I know better than to pry. But how
come you're telling me all this, anyway? I don't give a damn what
work you take on, Jim. You're a free agent here."
Calmly Harker said, "I thought I'd let you know because the account's
a controversial one. I want you to realize that I'm doing it on my own
hook and not as a member of K.H.P. & K. When and if the boomerang
comes around and hits me in the face, I don't want you and Mike and
Phil to get black eyes too."
Dead seriousness replaced the amiable grin on Kelly's pink face.
"Have I ever backed off a hot item, Jim?"
"You might back off this one."
Kelly leaned forward and turned on all his considerable personal
charm. "Look here, son, I'm a decade older than you are and a
damned sight cagier. Maybe you better talk this thing out with me. If
you're free for lunch—"
"I'm not," Harker said doggedly. "Bill, let's drop the whole thing. I
know what I'm getting into and I didn't come here for advice. Okay?"
Kelly began to chuckle. "You said the same damn thing the night you
were elected Governor. Remember, when you started telling me
about how you were going to turn the whole State machine upside-
down? I warned you, and I warn you again, but you don't learn. The
only thing that got turned upside-down was you."
"So I'm a fool. But at least I'm a dedicated fool."
"That's the worst kind," Kelly drawled amiably. As Harker started to
leave the older man's office Kelly added, "Good luck, anyway, on
whatever you're getting your fool feet tangled up in."
"Thanks, Bill. Sorry I have to be so tight-mouthed."
On his way back to his office he passed the reception-desk; Joan
looked up at him and said, "Oh, Mr. Harker—call just came in for you.
Mr. Jonathan Bryant's on the phone. He's waiting."
"Switch it into my office," Harker told her. His brows contracted.
Jonathan? What does that particular vulture want?
Harker cut round the desks in the outer office and let himself into his
sanctum. He activated the phone. There was the usual three-second
circuit-lag, and then the gray haze of electronic "noise" gave way to
the fishbelly face of Jonathan Bryant.
"Hello, Harker," he said abruptly. "Just thought I'd call you up to let
you know that I've obtained a stay of the hearing on my father's will.
It's being pushed up from the 16th to the 23rd."
Harker scowled. "I don't have any official notice of that fact yet."
"It's on its way via court messenger. Just thought I'd let you know
about it."
"Go ahead," Harker said. "Gloat all you want, if it gives you pleasure.
Your father's will is unbreakable, and you know it damn well. All this
stalling—"
"Legal delay," Jonathan corrected.
"All this stalling is just a waste of everybody's time. Sure, I know
you're hoping the old man will die before the hearing, but I assure you
that can't influence the outcome. If you're that anxious to collect, stop
obtaining postponements and just pull the old man's feeding-plugs
out. It'll save a lot of heartache for all of us, him included."
"Harker, you lousy politico, you should have been debarred twenty
years ago."
"The word you want to use is disbarred," Harker said coldly.
"Suppose you get off my line and stop bothering me now? I'd call you
a filthy jackal except that I'm too busy for slander suits just now, even
suits that I'd win."
Angrily he snapped off contact and the screen blanked. Nuisance, he
thought, referring both to Jonathan and to the postponement of the
hearing. He didn't seriously believe that the Bryant heirs were going
to upset the old man's will, and the quicker he got the case off his
personal docket the faster he would be free for full-time work on the
Beller Labs account.
He took a doodlepad from his desk and scrawled three names on it:
Winstead.
Thurman.
Msgnr. Carteret.
Leo Winstead was the man who had succeeded him in the
Governor's mansion in Albany—a steady, reliable National-Liberal
party-line man, flexible and open in his views but loyal to the good old
machine. He would be one of the first men Harker would have to see;
Winstead would give him the probable Nat-Lib party line on the
resurrection gimmick, and he could be trusted to keep things to
himself until given the official release.
Clyde Thurman was New York's senior Senator, a formidable old ogre
of a man with incalculable influence in Washington. Harker had been
a Thurman protege, fifteen years ago; publicly old Clyde had soured
on Harker since his futile attempt at political independence, but
Harker had no idea where the old man stood privately. If he could win
Thurman over to his side, Senate approval of revivification legislation
was a good bet. The Nat-Libs controlled 53 seats in the 123rd
Congress; the American-Conservatives held only 45, with the other
two seats held down by self-proclaimed Independents. In the House,
it was even better: 297 to 223, with 20 Independents of variable
predictability.
Harker's third key man was Monseigneur Carteret. The Father was a
highly-respected member of New York's Catholic hierarchy, shrewd
and liberal in his beliefs, and already (at the age of 38) considered a
likely candidate for an Archepiscopacy and beyond that the red hat.
Harker had met Father Carteret through Kelly. While he was no
Catholic himself, nor currently a member of any other organized
group, Harker had struck up a close friendship with the priest. He
could rely on Carteret to give him an accurate and confidential
appraisal of the possible Church reaction to announcement of a
successful technique for resuscitating the dead.
Harker ripped the sheet off the doodlepad and pocketed it. He hung
poised over his desk, deep in thought, his active mind already
picturing the interviews he might be having with these people.
After a moment he reached for his phone and punched out the
coordinates of Father Carteret's private number. Might as well begin
with him, Harker thought.
A pleasantly monkish face appeared on the screen after several
rings. "Yes? May I help you?"
"I'd like to speak to Father Carteret, please. My name is James
Harker."
"Pardon, Mr. Harker. Father Carteret is in conference with Bishop
O'Loughlin. Would you care to have him call you when he's free?"
"When will that be?"
"A half hour, I'd say. Is your matter urgent?"
"Reasonably. Tell the Monseigneur I'd like to make an appointment to
see him some time today or tomorrow, and ask him to call me at my
office."
"Does he have your number?"
"I think so. But you'd better take it anyway, just to make sure. MON-4-
38162."
He blanked the screen, waited a moment, and dialed the number
Raymond had given him to use when calling the laboratory. The pale,
goggle-eyed face of David Klaus appeared on the screen.
"I'd like to talk to Raymond."
"Dr. Raymond's busy in the hormone lab," Klaus said sharply. "Try
again in an hour or so."
Harker frowned impatiently; he had taken an immediate dislike to this
jittery little enzyme researcher. He said, "You tell Raymond—"
"Just a minute," a new voice said. There was confusion on the screen
for an instant; then Klaus' face disappeared and the precise, tranquil
features of Martin Raymond took their place.
"I thought you were busy in the hormone lab," Harker said. "Klaus told
me so."
Raymond laughed without much humor behind it. "Klaus is frequently
inaccurate, Mr. Harker. What's on your mind?"
"Thought I'd let you know that I'm getting down to immediate
operation. I'm lining up interviews with key people for today and
tomorrow as a preliminary investigation of your legal situation."
"Good. By the way—Mitchison's prepared some publicity handouts on
the process. He wants you to okay them before we send them to the
papers."
Harker repressed a strangled cough. "Okay them? Listen, Mart, that's
exactly why I called. My first official instruction is that the present
wrap of ultra-security is to continue unabated until I'm ready to lift it.
Tell that to Mitchison and tell him in spades."
Raymond smiled evenly. "Of course—Jim. All secrecy wraps on until
you give the word. I'll let Mitchison know."
"Good. I'll be out at the lab sometime between here and Wednesday
to find out some further information. I'll keep in touch whenever I
can."

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Summary of Questions by Learning Objectives and Bloom’s Taxonomy

Item LO BT Item LO BT Item LO BT Item LO BT Item LO BT

1. 3 C 6. 3 C 11. 4 C 16. 8 C 21. 11 AN

1. 4 AP 4. 4 AP 7. 6 AN 10. 6,1 E 13. 6 AP

User Perspective Problems

Reading and Interpreting Published Financial Statements

1. 3 C 2. 3,4 E 3. 10,1 AN 4. 5,7 E 5. 3 E

Legend: The following abbreviations will appear throughout the solutions

Team & Lead Teamwork and Leadership

SOLUTIONS TO DISCUSSION QUESTIONS

DQ6-1 Management is responsible for safeguarding the assets of a

An effective control system should include the following measures:

DQ6-2 The tone established at the top tends to permeate the

DQ6-3 An internal control system includes (1) physical controls (locks,

DQ6-4 An internal control system includes (1) physical controls (locks,

DQ6-5 An internal control system includes (1) physical controls (locks,

DQ6-6 Documentation – use of pre-numbered cheques/stamping “paid”

DQ6-7 Documentation – receiving documents are signed by technician

Separation of duties – IT department orders the computers and the

DQ6-8 Cost/benefit – management will only establish controls when the

DQ6-9 Separation of duties, as small organization have a limited number

DQ6-10 The purpose of a bank reconciliation is to ensure that any

DQ6-11 Differences between the cash balance per a company’s general

DQ6-12 When companies make sales on account, they may incur

DQ6-14 Credit sales grant customers delayed payment terms. The

DQ6-15 Allowance for Doubtful Accounts is a contra account to Accounts

DQ6-16 The two methods of estimating uncollectible accounts are:

Aging of accounts receivable method:

DQ6-19 The allowance for doubtful accounts normally has a credit

DQ6-20 Company may shorten their cash-to-cash cycle by accepting

LO 11 BT: AN Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001, cpa-t1005

LO 11 BT: AN Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001, cpa-t1005

DQ6-23 The accounts receivable turnover ratio measures the “turnover” of

The average collection period ratio converts the accounts receivable

LO 11 BT: AN Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001, cpa-t1005

LO 11 BT: AN Difficulty: E Time: 5 min. AACSB: Analytic CPA: cpa-t001, cpa-t1005

SOLUTIONS TO APPLICATION PROBLEMS

Add: deposits in transit 1,650 Add: EFT receipts 2,100

Reconciled balance $ 9,615 Reconciled balance $ 9,615

b. The reconciled balance of $9,615 will be the cash balance reported

Bank Charges Expense 55

Accounts Receivable 1,120

AP 6-2A a. Infinity Emporium Company

Add: Outstanding deposit 12,240 Add: EFT receipt 3,600

Less: Outstanding cheques (4,560) Less: Service charges 24

Reconciled balance $ 74,424 Reconciled balance $ 74,424

c. Because the outstanding deposit in transit had not been recorded by

d. Bank Charges Expense 24