S8-1 Ensuring internal control over the collection of receivables
Consider internal control over receivables collections. What job must be withheld from
a company’s credit department in order to safeguard its cash? If the credit department
does perform this job, what can a credit department employee do to hurt the company?
A: internal control is used to safeguard its cash, Employee fraud
S8-2 Recording credit card and debit card sales
Restaurants do a large volume of business by credit and debit cards. Suppose Summer,
Sand, and Castles Resort restaurant had these transactions on January 28, 2016:
National Express credit card sales $ 10,800
ValueCard debit card sales 10,000
Requirements
1. Suppose Summer, Sand, and Castles Resort’s processor charges a 2% fee and
deposits sales net of the fee. Journalize these sales transactions for the restaurant.
2. Suppose Summer, Sand, and Castles Resort’s processor charges a 2% fee and depos-
its sales using the gross method. Journalize these sales transactions for the restaurant.
S8-3 Applying the direct write-off method to account for uncollectibles
Susan Knoll is an attorney in Los Angeles. Knoll uses the direct write-off method to
account for uncollectible receivables.
At January 31, 2016, Knoll’s accounts receivable totaled $18,000. During February,
she earned revenue of $21,000 on account and collected $23,000 on account. She also
wrote off uncollectible receivables of $1,050 on February 29, 2016.
Requirements
1. Use the direct write-off method to journalize Knoll’s write-off of the uncollectible
receivables.
2. What is Knoll’s balance of Accounts Receivable at February 29, 2016?
S8-4 Collecting a receivable previously written off—direct write-off method
Gate City Cycles had trouble collecting its account receivable from Shawna Brown.
On June 19, 2016, Gate City finally wrote off Brown’s $700 account receivable. On
December 31, Brown sent a $700 check to Gate City.
Journalize the entries required for Gate City Cycles, assuming Gate City uses the
direct write-off method.
S8-6 Applying the allowance method (percent-of-sales) to account for
uncollectibles
During its first year of operations, Signature Lamp Company earned net credit sales of
$314,000. Industry experience suggests that bad debts will amount to 4% of net credit
sales. At December 31, 2016, accounts receivable total $45,000. The company uses
the allowance method to account for uncollectibles.
Requirements
1. Journalize Signature’s Bad Debts Expense using the percent-of-sales method.
2. Show how to report accounts receivable on the balance sheet at December 31, 2016.
S8-8 Applying the allowance method (aging-of-receivables) to account for
uncollectibles
World Class Work Shoes had the following balances at December 31, 2016, before the
year-end adjustments:
78,000Accounts Receivable
1,060Allowance for Bad Debts
The aging of accounts receivable yields the following data:
Accounts Receivable
Estimated percent uncollectible 0–60 Days
$ 73,000
? 2% Over 60 Days
$ 5,000
? 24% Total Receivables
$ 78,000Age of Accounts Receivable
Requirements
1. Journalize World Class’s entry to record bad debts expense for 2016 using the
aging-of-receivables method.
2. Prepare a T-account to compute the ending balance of Allowance for Bad Debts.
S8-13 Using the acid-test ratio, accounts receivable turnover ratio, and days’ sales
in receivables to evaluate a company
Gold Clothiers reported the following selected items at September 30, 2016 (last
year’s—2015—amounts also given as needed):
Accounts Payable $ 331,000 Accounts Receivable, net:
Cash 302,900 September 30, 2016 $ 303,000
Merchandise Inventory: September 30, 2015 152,000
September 30, 2016 230,000 Cost of Goods Sold 1,150,000
September 30, 2015 190,000 Short-term Investments 151,000
Net Credit Sales Revenue 3,321,500 Other Current Assets 70,000
Long-term Assets 450,000 Other Current Liabilities 191,000
Long-term Liabilities 100,000
Compute Gold’s (a) acid-test ratio, (b) accounts receivable turnover ratio, and (c) days’
sales in receivables for 2016. Evaluate each ratio value as strong or weak. Gold sells on
terms of net 30. (Round days’ sales in receivables to a whole number.)
