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

Cowden Properties sold a condominium to Ms.Roberts for $90,000.Cowden originally acquired the condo at a cost of $40,000 and made improvements to the unit totaling $20,000.The contract for sale required Ms.Roberts to pay the $90,000 as follows: Year 1 - $ 5,000 Year 2 - $10,000 Year 3 - $30,000 Year 4 - $45,000 Refer to the Cowden Properties example.If Cowden uses the cost-recovery-first method, how much profit is recognized in year 4?

Operating risks

When a firm decides that a particular customer account is uncollectible, it removes that account by debiting the Allowance for Uncollectibles and crediting Accounts Receivable, Gross.This process is called writing off the account.

The firm may transfer the accounts receivable to a legally separate entity that issues debt securities to investors. Which of the following is/are true?

In estimating the amount of uncollectible accounts the accountant (1) estimates the amount of outstanding accounts receivable that the firm does not expect to collect and (2) adjusts the balance in the Allowance for Uncollectible Accounts so that, after the entry to recognize estimated uncollectibles, the balance in the account will equal the amount that the firm does not expect to collect.The name of this procedure is/are:

A firm that transfers its receivables in exchange for cash can

The percentage-of-completion method

Sales returns affect net cash collections when a customer has the right to return a product for a refund, and the firm can reasonably estimate the amount of returns at the time of sale, U.S.GAAP and IFRS

The percentage-of-completion method

The allowance method for uncollectibles is used by a firm

The sales, all on account, of Marla Company in Year 6, its first year of operations, were $700,000.Collections totaled $500,000.On December 31, Year 6, Marla Company estimated that 2 percent of all sales would probably be uncollectible.On that date, Marla Company wrote off specific accounts in the amount of $8,000. Marla Company's unadjusted trial balance (after all nonadjusting entries were made and after all write-offs of specific accounts receivable identified during Year 7 as being uncollectible) on December 31, Year 7, 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 7, Marla Company carried out an aging of its accounts receivable balances and estimated that the Year 7 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 7 were for cash and some were on account; the omission is purposeful. Required: a. What was the balance in the Accounts Receivable account at the end of Year 6? 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 6? Give the amount and whether debit or credit. c. What was bad debt expense for Year 7? d. What was the amount of specific accounts receivable written off as being uncollectible during Year 7? e. What were total cash collections in Year 7 from customers (for cash sales and collections from customers who had purchased on account in either Year 6 or Year 7)? f. What was the net balance of accounts receivable included in the balance sheet asset total for December 31, Year 7?

U.S.GAAP requires that the completed contract method be used

Cowden Properties sold a condominium to Ms.Roberts for $90,000.Cowden originally acquired the condo at a cost of $40,000 and made improvements to the unit totaling $20,000.The contract for sale required Ms.Roberts to pay the $90,000 as follows: Year 1 - $ 5,000 Year 2 - $10,000 Year 3 - $30,000 Year 4 - $45,000 Refer to the Cowden Properties example.If Cowden uses the installment method, how much cost is recognized as expense in year 3?

Bealls Department Store reports in millions of dollars on its balance sheet for year-end Year 6 and Year 5 as follows: Year 6 Year 5 Credit Card Receivables \ 27,371 \ 24,932 Less: Allowance for Uncollectibles (821) (808) It reports charge-offs [synonym for write-offs] of accounts receivable during Year 6 of 4.5 percent of its average gross receivables of $26,000 million and that Bad Debt Expense is 3.5 percent of credit card sales.What were Bealls' credit card sales for Year 6?

U.S.GAAP permits firms to use the installment method or the cost recovery method only when receivables is/are collectible over an extended period and the seller has no reasonable basis for estimating the amount of cash that it will collect.

The cost recovery method

Rogers Manufacturing sells an old machine to KSS Corp.which is having financial difficulty.Rogers agrees to accept payment over 3 years.The adjusted basis of the machine to the seller is $5,000 and the buyer is expected to make payments of $2,000 per year for 3 years.What amount of net profit is recognized by the seller in year 3 if the seller uses the installment method? (Assume that the buyer makes the payments.)

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. When should Fassino's recognize revenue from selling the tires plus mounting, alignment, and rotation services?

Sales discounts and allowances include:

Accrual accounting requires frequent, ongoing changes in estimates.Which of the following is/are true?