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

The method that recognizes losses from uncollectible accounts in the period when a firm decides that specific customers' accounts are uncollectible is called the

Firms that reduce the price charged to a customerafter the firm has delivered the goods and the customer has found them to be unsatisfactory or damaged issue a sales allowance.

Using the information in the following tables, determine the amount of revenue and expense reported in years 1-4 and the totals reported for all 4 years under both the percentage-of-completion method and the installment method. Cash Costs Year Collected Incurred 1 \ 10 \ 500,000 2 600,000 1,000,000 3 1,200,000 300,000 4 600.000 200.000 Total \2 ,400,000 \2 ,000,000 PERCENTAGE OF COMPLETION INSTALLMENT SALES Year Revenue Expense Revenue Expense 1 A B K L 2 3 4

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. (Use the Healthy Lawn information to answer this question.) The aggregate effect of these entries during 2013 is as follows:

Realization is the presumption that a firm will remain in operation long enough to carry out its current plans, and in the normal course of its operations, realize changes in the fair values of its assets either by using those assets or selling them.

The sales, all on account, of Clayton Company in Year 5, its first year of operations, were $700,000.Collections totaled $500,000.On December 31, Year 5, Clayton Company estimated that 2 percent of all sales would probably be uncollectible.On that date, Clayton Company wrote off specific accounts in the amount of $6,000. Clayton Company's unadjusted trial balance (after all nonadjusting entries were made and after all write-offs of specific accounts receivable identified during Year 6 as being uncollectible) on December 31, Year 6, includes the following accounts and balances: Accounts Receivable (Dr.) \ 300,000 Allowance for Uncollectible Accounts (Dr.) 10,000 Sales (Cr.) 800,000 On December 31, Year 6, Clayton Company carried out an aging of its accounts receivable balances and estimated that the Year 6 ending balance of accounts receivable contained $9,000 of probable uncollectibles.It made adjusting entries appropriate for this estimate.Some of the $800,000 sales during Year 6 were for cash and some were on account; the omission of the amount is purposeful. Required: a. What was the balance in the Accounts Receivable account at the end of Year 5? Give the amount and whether debit or credit. b. What was the balance in the Allowance for Uncollectible Accounts account at the end of Year 5? Give the amount and whether debit or credit. c. What was bad debt expense [or, the amount of the Revenue Contra for Uncollectibles] for Year 6? d. What was the amount of specific accounts receivable written off as being uncollectible during Year 6? e. What were total cash collections in Year 6 from customers (for cash sales and collections from customers who had purchased on account in either Year 5 or Year 6)? f. What was the net balance of accounts receivable included in the balance sheet asset total for December 31, Year 6? g. Consider the account, Allowance for Uncollectible Accounts. Is that account best fully labeled as an Asset account, an Asset Contra account, an Asset Adjunct account, or an Asset Control account? h. Assume the following facts, independent of the assumptions in the preceding questions. Bobbin can estimate with reasonable precision each of the following: uncollectible accounts on sales, estimated future warranty costs for product warranties offered along with its products, and estimated returns by customers who exercise the option to return goods for a full refund. For which of the following, if any, may Bobbin use an allowance method in measuring periodic income: uncollectible accounts, product warranties, and returns? Indicate none, all, or the specific methods.

Chambliss Company started business on January 1, Year 7.It recognizes revenue and expense at the time of sale for financial reporting and uses the installment method for income tax reporting.Under the installment method, the firm recognizes revenue when it receives cash, and matches expenses with revenues based on the average cost of goods sold to sales percentage for the year in which the firm made the sale.The income tax rate is 30%.Data for Year 7 and Year 8 as reported to shareholders, appear below: Year 7 Year 8 Net sales on account \ 2,400,000 \ 3,000,000 Cash collections of Year 7 sales 1,620,000 480,000 Cash collections of Year 8 sales - 2,040,000 Cost of merchandise sold 1,440,000 1,920,000 All other (period) expenses 240,000 360,000 Required: a. Compute the amount of net income after taxes for financial reporting for Year 7 and Year 8. b. Compute the amount of taxable income for Year 7 and Year 8.

The schedule that follows shows trial balances for Twain Company at the end of Year 1 and Year 2.Note that the two trial balances shown for Year 1 are the Adjusted, Preclosing Trial Balance (after making all adjusting entries) and the final Post-Closing Trial Balance, from which the firm constructs the balance sheet.The trial balance shown for the end of Year 2 is taken before adjusting entries of any kind, although the firm has periodically written off specific customers' Accounts Receivable during the year as those customers' accounts become obviously uncollectible. Twain Company closes its books annually and makes all of its sales on account.At the end of Year 2, the management of Twain Company, along with the independent auditor, analyzes the currently outstanding Accounts Receivable.The aging schedule classifies accounts as "not yet due," "overdue less than 30 days," "overdue 30 days or more." Twain Company estimates that one-half of one percent of current accounts will become uncollectible, 5 percent of accounts overdue less than 30 days will become uncollectible, and 40 percent of accounts overdue 30 days or more will become uncollectible.From this aging of accounts receivable, the firm estimated that it will not collect $30,000 of the accounts.The auditor will use this information in making adjusting entries for Year 2. Required: See the requirements below.If there is insufficient information for a given question, state just that. a. What was the dollar amount of Accounts Receivable written off during Year 2 as obviously uncollectible? b. What was the total amount of cash collected from customers during Year 2? c. What is the dollar amount of net Accounts Receivable shown on the balance sheet at the end of Year 1? d. What is the dollar amount of the Bad Debt Expense for Year 2? e. What is the dollar amount of the net Accounts Receivable shown on the balance sheet for the end of Year 2? Twain Company Trial Balances End of Year 1 End of Year 2 Adjusted Post-Closing Unadjusted Preclosing Trial Balance Dr. Cr. Dr. Cr. Dr. Cr. Accts Receivable \ 300,000 \ 300,000 \ 360,000 Allow. for Uncollect. Accts \ 18,000 \ 18,000 84,000 Sales 4,800,000 \6 ,000,000 Bad Debt Exp. 100,800 All other accts 5,599,200 1,182,000 960,000 1,242,000 6,156,000 600,000 Totals \ 6,000,000 \ 6,000,000 \ 1,260,000 \ 1,260,000 \ 6,600,000 \ 6,600,000

List three ways a firm may convert accounts receivable into cash and briefly describe the features of each option.

Fassino Wholesale Corporation ("Fassino's") operates discount retail stores.To shop in a Fassino's store, customers must pay a nonrefundable, annual membership fee in advance, using either cash or an American Express card.A customer purchases an annual membership from Fassino's for $120, a 20-pack of paper towels for $10.99, and four new tires for $480.The tire purchase includes mounting and aligning by a Fassino's tire technician at the time of initial installation and alignment and tire rotation services for three years afterward.The customer pays with an American Express card. Using the Fassino's Wholesale Corporation example, when should Fassino's recognize the $120 membership fee as revenue?

The allowance method overcomes shortcomings of the direct write-off method because it

When a firm's construction activities meet the criteria for revenue recognition as construction progresses, the firm usually recognizes revenue during the construction period using the

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 cost-recovery-first method is:

Prepare entries to record the following transactions using the allowance method for uncollectible accounts. a. The firm assumes that approximately 1% of total sales on account will prove uncollectible. Sales for Year 1 are $1,000,000. All sales are on account. b. On July 7, Year 2, it is determined that an account of $2,000 will not be collected. c. On August 14, Year 2, it is determined that an account of $3,000 will not be collected. d. On December 31, Year 2, the company estimates that 2% of total credit sales of $2,000,000 will be uncollectible. e. On February 1, Year 3, it is determined that accounts of $6,000 will not be collected. f. On March 2, Year 3, $1,000 is collected on an account that had previously been written off as uncollectible in (e). It is determined that the account was originally written off in error.

Firms extending credit to customers should

When a firm decides that a particular customer account is uncollectible, it removes that account by debiting the _____ and crediting _____ This process is called writing off the account.

Which of the following is true regarding the U.S.Internal Revenue Service?

Darling Company ages its accounts receivable to estimate bad debts for financial statement purposes.President Darling is at a meeting with creditors and needs to know his total accounts receivable balance.Unfortunately, Darling picked up the wrong computer report and has, instead, a summary printout of the company's estimated bad debts as follows: Age of Receivable Bad Debt \% wncollectible 0-30 days \ 1,750 0.5\% 31-60 days 1,500 1.5\% 61-120 days 4,000 8.0\% more than 120 days 17,500 70.0\% Calculate the accounts receivable balance based on Darling's bad debt summary.

The financial statements contain information for analyzing the collectibility of accounts receivable and the adequacy of the expense for uncollectible accounts.Typical ratios used for this analysis include the accounts receivable turnover ratio, days receivables outstanding, and write-off percentage.

Which of the following is/are true?