Exam 8: Revenue Recognition, Receivables, and Advances From Customers

Firms that are temporarily short of cash and unable to borrow from usual sources can convert accounts receivable into cash by selling accounts receivable to a bank or financing company.This is called

The sales, all on account, of Hendricks Company in Year 1, its first year of operations, were $800,000.Collections totaled $600,000.On December 31, Year 1, Hendricks Company estimated that 3 percent of all sales would probably be uncollectible.On that date, specific accounts in the amount of $18,000 were written off. Hendricks Company's unadjusted trial balance (after all nonadjusting entries were made and after all write-offs of specific accounts receivable identified during Year 2 as being uncollectible) on December 31, Year 2, includes the following accounts and balances: Accounts Receivable 500,000 Allowance for Uncollectibles 16,000 Other Debits 1,484,000 Sales 900,000 Other Credits 1,100,000 On December 31, Year 2, Hendricks Company carried out an aging of its accounts receivable balances and estimated that the Year 2 ending balance of accounts receivable contained $26,000 of probable uncollectibles.It made adjusting entries appropriate for this estimate.Some of the $900,000 sales during Year 2 were for cash and some were on account; these data purposefully omit the amounts. Required: a. What was the balance in the Accounts Receivable account at the end of Year 1? Give the amount and whether debit or credit. b. What was the balance in the Allowance for Uncollectible Accounts at the end of Year 1? Give the amount and whether debit or credit. c. What was bad debt expense (Revenue Contra for Uncollectibles) for Year 2? d. What was the amount of specific accounts receivable written off as being uncollectible during Year 2? e. What were total cash collections in Year 2 from customers (for cash sales and collections from customers who had purchased on account in either Year 1 or Year 2)? f. What was the net balance of accounts receivable included in the balance sheet asset total for December 31, Year 2?

Healthy Lawn Maintenance Company started a lawn services business on January 1, 2013. It sends invoices to its customers for lawn maintenance services at the end of each month, and expects the customer to pay within 30 days. During 2013, Healthy Lawn Maintenance billed its customers a total of $2,000,000 for services rendered during the year. It made journal entries at the end of each month. The 2013 year-end balance in Accounts Receivable, Gross, for Healthy Lawn Maintenance is $1,085,000 An aging of these accounts receivable shows that the estimated uncollectible amount is $24,200. Before aging the accounts, the Allowance for Uncollectibles has a debit balance of $15,000 from writing off actual accounts during 2013. Healthy Lawn Maintenance would record the following adjusting entry at the end of 2013 to obtain a credit balance in the Allowance for Uncollectibles of $24,200:

Discuss how accounts receivable can be analyzed.

Assume that a firm uses the accrual basis of accounting.For each of the following independent cases, indicate the amount of revenue the firm recognizes for the month of August. a. Collects $2,000 in July for merchandise to be delivered in August. b. Collects $1,200 in May for subscriptions that will be delivered during the next twelve months (beginning in May). c. Collects $800 in August for merchandise sold and delivered in July. d. Collects $2,400 interest on a 6-month certificate of deposit, which matures on August 15th. e. Sells $3,000 of merchandise on account in August. The firm allows a 2% discount for payment prior to 30 days and customers take the discount.

Rock Aerospace Company signed a contract on April 1, Year 4, to build a satellite for $28,000,000.Estimated costs for the contract are: Year 4 \ 5,600,000 Year 5 \ 11,200,000 Year 6 \ 5,600,000 $\text { Assume that actual costs incurred coincide with expectations. Cash collections of the contract price are as follows: }$ Year 4 \ 4,200,000 Year 5 \ 7,000,000 Year 6 \ 16,800,000 Refer to the Rock Aerospace Company example.Income from the contract for Year 5 under the percentage-of-completion method is:

Which section includes income derived from a firm's primary business activities as well as from activities peripherally related to operations? (The firm expects these sources of earnings to continue.)

Notes receivable is the amount owed to a seller by customers who have purchased goods and services on credit.

Prepare journal entries for the following transactions: a. On November 1, Year 1, Slotkin Co. received a $1,000 note receivable with a 90-day maturity and a 12% interest rate in exchange for an outstanding account receivable of the same face amount. b. Assume Slotkin Co. closes its books on a monthly basis. Prepare any adjusting journal entries necessary at November 30, Year 1. c. Prepare any adjusting journal entries necessary at December 31, Year 1.

At the start of 20x4, Colonial Designs' Allowance for Uncollectibles balance is €120,000.During 20x4, Colonial Designs' credit sales were €5,000,000; of this amount, it expected 2% will become uncollectible.During 20x4, Colonial Designs wrote off €70,000 of accounts receivable.At the end of 20x4, Colonial Designs estimates, based on an aging of accounts, that the ending balance in the Allowance for Uncollectibles should be €130,000.

Firms that are temporarily short of cash and unable to borrow from usual sources can convert accounts receivable into cash by

A construction firm enters a long-term contract to build a bridge.The expected and actual cash receipts and disbursements for the project are as follows: Period Receipts Expenditures 1 \ 1,000 \ 4,000 2 2,000 2,000 3 3,000 1,000 4 4,000 1,000 Required: What is the income before taxes during each of the following periods under each of the specified methods of revenue recognition? Period Method a. 1 Completed Contract b. 4 Completed Contract c. 1 Percentage of Completion d. 4 Percentage of Completion e. 1 Installment Method f. 4 Installment Method g. 1 Cost Recovery First h. 4 Cost Recovery First

Which of the following is/are not a shortcoming of the direct write-off method?

If an event or transaction leads to the recognition of revenue, firms match the consumption of any assets (the expense), in time, with the revenue recognized.

Both U.S.GAAP and IFRS do not require the allowance method for uncollectible accounts, which involves estimating the amount of uncollectible accounts receivable associated with each accounting period's credit sales.

Breaker Co.'s accounts receivable show the following balances by age: Age of Recenable Balance 0-30 days \ 600,000 31-60 days 175,000 61-120 days 70,000 more than 120 days 10,000 The credit balance in the allowance for uncollectible accounts is $2,500.Breaker Co.uses the following percentages to compute the estimated amounts of receivables that will eventually prove uncollectible: 0-30 days, 0.7%; 31-60 days, 1.2%; 61-120 days, 11%; and more than 120 days, 65%. Required: Prepare the adjusting journal entry.

Briefly explain the difference between a sales allowance and a sales discount.

A debit balance in the Allowance for Uncollectibles appears on the balance sheet.

The percentage-of-completion method provides information about the seller's performance during the contract period; in contrast, the completed contract method reports all profit only when seller completes the contract.

An accounting issue for accounts receivable is the timing of recognition of the reduction in income caused by the uncollectibility of some accounts.With regard to timing, both U.S.GAAP and IFRS require that a seller recognize an expense for estimated uncollectible accounts receivable in the _____.