CHAPTER 7

Investments and Receivables

OVERVIEW OF EXERCISES, PROBLEMS, AND CASES
Estimated
Time in
Learning Outcomes Exercises Minutes Level
1. Show that you understand the accounting and disclosure 1 15 Mod
of various types of investments companies make. 2 10 Easy
15* 5 Easy

2. Show that you understand how to account for accounts 3 10 Mod

receivable, including bad debts. 4 25 Mod
15* 5 Easy

3. Explain how information about sales and receivables can 5 20 Mod

be combined to evaluate how efficient a company is in
collecting its receivables.

4. Show that you understand how to account for 6 15 Mod

interest-bearing notes receivable.

5. Explain various techniques that companies use to accelerate 7 20 Mod

the inflow of cash from sales.

6. Explain the effects of transactions involving liquid assets 8 5 Easy

on the statement of cash flows. 9 5 Mod
15* 5 Easy

7. Show that you understand the accounting for and disclosure of 10 10 Mod
investments in the stocks and bonds of other companies. 11 10 Mod
(Appendix) 12 30 Mod
13 30 Mod
14 30 Mod

*Exercise, problem, or case covers two or more learning outcomes

Level = Difficulty levels: Easy; Moderate (Mod); Difficult (Diff)

7-1
7-2 FINANCIAL ACCOUNTING SOLUTIONS MANUAL

Problems Estimated
and Time in
Learning Outcomes Alternates Minutes Level
1. Show that you understand the accounting and disclosure
of various types of investments companies make.

2. Show that you understand how to account for accounts 1 30 Mod

receivable, including bad debts. 2 15 Mod
8* 20 Mod

3. Explain how information about sales and receivables 3 30 Mod

can be combined to evaluate how efficient a company
is in collecting its receivables.

4. Show that you understand how to account for 5 45 Diff

interest-bearing notes receivable. 6 25 Mod
7 20 Mod
8* 20 Mod

5. Explain various techniques that companies use to accelerate 4 15 Mod

the inflow of cash from sales.

6. Explain the effects of transactions involving liquid assets 5 25 Mod

on the statement of cash flows.

7. Show that you understand the accounting for and 6 30 Mod

disclosure of investments in the stocks and bonds 7 30 Mod
of other companies. (Appendix)

*Exercise, problem, or case covers two or more learning outcomes

Level = Difficulty levels: Easy; Moderate (Mod); Difficult (Diff)
 CHAPTER 7 • INVESTMENTS AND RECEIVABLES 7-3

Estimated
Time in
Learning Outcomes Cases Minutes Level
1. Show that you understand the accounting and disclosure 2* 25 Mod
of various types of investments companies make. 3* 25 Mod

2. Show that you understand how to account for accounts 1 30 Mod

receivable, including bad debts. 3* 25 Mod

3. Explain how information about sales and receivables

can be combined to evaluate how efficient a company
is in collecting its receivables.

4. Show that you understand how to account for

interest-bearing notes receivable.

5. Explain various techniques that companies use to accelerate 4 25 Mod

the inflow of cash from sales.

6. Explain the effects of transactions involving liquid assets 2* 25 Mod

on the statement of cash flows. 7 30 Mod

7. Show that you understand the accounting for and disclosure 5 25 Mod
of investments in the stocks and bonds of other companies.
(Appendix)

*Exercise, problem, or case covers two or more learning outcomes

Level = Difficulty levels: Easy; Moderate (Mod); Difficult (Diff)
7-4 FINANCIAL ACCOUNTING SOLUTIONS MANUAL

QUESTIONS

1. The first CD should be classified as a cash equivalent because it has an original

maturity of three months or less. The second CD is classified as a short-term
investment. It is a current asset because it will be converted into cash within the next
year, even though its original maturity of more than three months disqualifies it from
classification as a cash equivalent.
2. The allowance method of accounting for bad debts tries to match one of the costs
associated with granting credit, i.e. uncollectible accounts, with the revenue of the
period. Under the matching principle, an estimate of bad debts is made on the basis
of either the sales of the period or the accounts receivable at the end of the period,
and an expense is recognized.
3. When bad debts expense is estimated by using the percentage of accounts
receivable approach, the balance already in the allowance account must be
considered. For example, if the estimate of the accounts receivable that will prove to
be uncollectible is $20,000 and the allowance account has a balance of $3,000
before adjustment, only $17,000 has to be added to it. Under the percentage of net
credit sales approach, however, the emphasis is on the debit to bad debts expense.
The balance in the allowance account before adjustment is ignored.
4. An aging schedule is a refinement of the percentage of accounts receivable
approach to estimating bad debts. The accountant categorizes the various
receivables by the length of time they are outstanding. The estimate of the percent
uncollectible increases as the age of the accounts go up.
5. A note receivable arises from a written promise by someone to pay a specific
amount of money in the future with interest. An account receivable arises from
granting a customer an open line of credit and does not normally include interest.
6. When a note receivable is discounted with recourse, it means that if the customer
fails to pay the bank the total amount due on the maturity date, the company that
sold the note to the bank is liable to the bank for the full amount. Therefore, during
the time a discounted note is outstanding, the seller of the note is contingently liable.
Accounting standards do not require the seller to recognize the contingency as a
liability, but a note is required to alert the statement reader of the uncertainty.
7. Shares of common stock could be classified as either trading or available-for-sale
securities. The intent of the company determines the proper classification. If Stanzel
purchases the IBM shares with the intent of selling them in the near term, they
should be classified as trading securities. Otherwise, the shares should be classified
as available-for-sale securities.
8. The accounting requirements for trading securities and available-for-sale securities
are similar. The primary difference is in the treatment of unrealized gains and losses
from changes in the market value of the securities. For trading securities, the gains
and losses are reported on the income statement in the period when they occur. For
 CHAPTER 7 • INVESTMENTS AND RECEIVABLES 7-5

available-for-sale securities, the fluctuations in value are reported as a separate

component of stockholders’ equity rather than on the income statement. The
different treatment is justified on the grounds that the inclusion in income of
fluctuations in value of securities that will not necessarily be sold in the near future
(available-for-sale securities) could lead to unnecessary volatility in reported
earnings.
9. Fluctuations in the value of trading securities are reported as gains and losses on
the income statement. These gains and losses are considered unrealized, however,
because the securities have not been sold.

EXERCISES

LO 1 EXERCISE 7-1 CERTIFICATE OF DEPOSIT

2007
May 31 Short-Term Investments: CD 50,000
Cash 50,000
To record purchase of 120-day 9% CD.
Assets = Liabilities + Owners’ Equity
+50,000
–50,000
June 30 Interest Receivable 375
Interest Revenue 375
To record interest earned: $50,000 × 9% × 30/360.
Assets = Liabilities + Owners’ Equity
+375 +375
Sept. 28 Cash 51,500
Interest Receivable 375
Interest Revenue 1,125
Short-Term Investments 50,000
To record redemption of $50,000 CD:
$50,000 × 9% × 90/360 = $1,125.
Assets = Liabilities + Owners’ Equity
+51,500 +1,125
–375
–50,000
7-6 FINANCIAL ACCOUNTING SOLUTIONS MANUAL

LO 1 EXERCISE 7-2 CLASSIFICATION OF CASH EQUIVALENTS AND INVESTMENTS ON

A BALANCE SHEET

1. STI 6. STI
2. STI 7. STI
3. STI 8. LTI
4. CE 9. STI
5. LTI 10. CE

LO 2 EXERCISE 7-3 COMPARISON OF THE DIRECT WRITE-OFF AND ALLOWANCE

METHODS OF ACCOUNTING FOR BAD DEBTS

Net income under each of the two alternatives is as follows:

Direct write-off method: $145,000 – $10,500 = $134,500
Allowance method: $145,000 – (2% × $650,000) = $145,000 – $13,000 = $132,000

Conclusion: The direct write-off method would result in a lesser amount of expense
and therefore in a higher net income. However, under current accounting standards, if
bad debts are material in amount, the allowance method must be used. In addition, it is
not acceptable for a company to choose accounting methods on the basis of their
effects on net income.

LO 2 EXERCISE 7-4 ALLOWANCE METHOD OF ACCOUNTING FOR BAD DEBTS—

COMPARISON OF THE TWO APPROACHES

1. a. Based on 2% of net credit sales:

2007
Dec. 31 Bad Debts Expense 16,680
Allowance for Doubtful Accounts 16,680
To record estimated bad debts:
2% × $834,000.
Assets = Liabilities + Owners’ Equity
–16,680 –16,680
 CHAPTER 7 • INVESTMENTS AND RECEIVABLES 7-7

b. Based on 6% of year-end accounts receivable:

2007
Dec. 31 Bad Debts Expense 16,606
Allowance for Doubtful Accounts 16,606
To record estimated bad debts:
Need balance of 6% of $320,100 $19,206 (cr)
Balance before adjustment is 2,600 (cr)
Amount of entry must be $16,606 (cr)
Assets = Liabilities + Owners’ Equity
–16,606 –16,606

2. a. No change.
b. 2007
Dec. 31 Bad Debts Expense 21,806
Allowance for Doubtful Accounts 21,806
To record estimated bad debts:
Need balance of 6% of $320,100 $19,206 (cr)
Balance before adjustment is (2,600) (dr)
Amount of entry must be $21,806 (cr)
Assets = Liabilities + Owners’ Equity
–21,806 –21,806

LO 3 EXERCISE 7-5 ACCOUNTS RECEIVABLE TURNOVER FOR GENERAL MILLS

1. Accounts receivable turnover:

Net credit sales/Average accounts receivable
= $11,070/[($980 + $1,010)/2]
= $11,070/$995 = 11.13 times
2. Average collection period (assuming 360 days in a year):
Number of days in a year/turnover
= 360/11.13 = 32 days to collect an account receivable
3. Types of customers General Mills might have:
• Grocery wholesalers
• Grocery chains
• Institutional food services
Whether or not an average of 32 days to collect an account is reasonable depends
on several factors. For example, how does this compare with other companies in the
same industry as General Mills? How does it compare with prior years? What are
General Mills’ credit terms? If its credit terms are 2/10, net 30, an average collection
7-8 FINANCIAL ACCOUNTING SOLUTIONS MANUAL

period of 32 days may be reasonable, but not if the credit terms are net 10, for
example.

LO 4 EXERCISE 7-6 NOTES RECEIVABLE

1. Rozelle Company is the maker; Dougherty Corporation is the payee.

2. The maturity date is March 1, 2008.
3. 2007
Sept. 1 Notes Receivable 45,000
Accounts Receivable 45,000
To record receipt of six-month, 7% promissory
note in exchange for open account.
Assets = Liabilities + Owners’ Equity
+45,000
–45,000
Dec. 31 Interest Receivable 1,050
Interest Revenue 1,050
To record interest earned: $45,000 × 7% × 4/12.
Assets = Liabilities + Owners’ Equity
+1,050 +1,050

2008
Mar. 1 Cash 46,575
Interest Receivable 1,050
Interest Revenue 525
Notes Receivable 45,000
To record collection of promissory note:
$45,000 × 7% × 2/12.
Assets = Liabilities + Owners’ Equity
+46,575 +525
–1,050
–45,000
 CHAPTER 7 • INVESTMENTS AND RECEIVABLES 7-9

LO 5 EXERCISE 7-7 CREDIT CARD SALES

June 12 Cash 2,430

Accounts Receivable—American Express 3,500
Sales Revenue 5,930
To record weekly cash and credit sales.
Assets = Liabilities + Owners’ Equity
+2,430 +5,930
+3,500
June 15 Cash 3,360
Collection Fee Expense 140
Accounts Receivable—American Express 3,500
To record weekly drafts from credit card company.
Assets = Liabilities + Owners’ Equity
+3,360 –140
–3,500
The collection fee charged by American Express is $140/$3,500 = 4%.

LO 6 EXERCISE 7-8 IMPACT OF TRANSACTIONS INVOLVING RECEIVABLES ON

STATEMENT OF CASH FLOWS

Increase in accounts receivable—Deducted from net income

Decrease in accounts receivable—Added to net income
Increase in notes receivable—Deducted from net income
Decrease in notes receivable—Added to net income

LO 6 EXERCISE 7-9 CASH COLLECTIONS—DIRECT METHOD

Cash collections to be reported in the operating activities section of Emily Enterprises’

2007 statement of cash flows (direct method):

Accounts receivable, December 31, 2006 $ 224,600

Plus sales during 2007 2,250,000
Less cash collections during 2007 (X)
Accounts receivable, December 31, 2007 $ 205,700
$224,600 + $2,250,000 – X = $205,700
X = $2,268,900
7-10 FINANCIAL ACCOUNTING SOLUTIONS MANUAL

LO 7 EXERCISE 7-10 CLASSIFICATION OF INVESTMENTS (Appendix)

1. T 4. S
2. E 5. AS
3. AS

LO 7 EXERCISE 7-11 CLASSIFICATION OF INVESTMENTS (Appendix)

1. AS 4. T
2. HM 5. AS
3. T

LO 7 EXERCISE 7-12 PURCHASE AND SALE OF BONDS (Appendix)

1. Journal entries
2007
Jan. 1 Investment in Northern Lights Bonds 100,000
Cash 100,000
To record purchase of Northern Lights
bonds at 100.
Assets = Liabilities + Owners’ Equity
+100,000
–100,000
June 30 Cash 4,000
Interest Income 4,000
To record interest income on Northern
Lights bonds: $100,000 × 8% × 6/12.
Assets = Liabilities + Owners’ Equity
+4,000 +4,000
Dec. 31 Cash 4,000
Interest Income 4,000
To record interest income on Northern
Lights bonds.
Assets = Liabilities + Owners’ Equity
+4,000 +4,000
 CHAPTER 7 • INVESTMENTS AND RECEIVABLES 7-11

2008
Jan. 1 Cash 102,000
Investment in Northern Lights Bonds 100,000
Gain on Sale of Bonds 2,000
To record sale of Northern Lights
bonds at 102.
Assets = Liabilities + Owners’ Equity
+102,000 +2,000
–100,000

2. Starship was able to sell the bonds for more than the bonds will pay when they
mature because the bonds carry a higher periodic interest than the market rate of
interest that was in effect at the time of the sale.

LO 7 EXERCISE 7-13 INVESTMENT IN STOCK (Appendix)

1. Chicago should classify its investment in Denver stock as trading securities because
it plans to hold the stock for a short time and profit from an increase in its market
price.
2. Journal entries:
2007
Dec. 1 Investment in Denver Preferred Stock (BS) 40,000
Cash (BS) 40,000
To record purchase of trading securities
for cash.
Assets = Liabilities + Owners’ Equity
+40,000
–40,000
Dec. 20 Dividends Receivable (BS) 1,000
Dividend Income (IS) 1,000
To record receivable for $1 per share
dividend declared on investment on
1,000 shares of Denver preferred stock.
Assets = Liabilities + Owners’ Equity
+1,000 +1,000
7-12 FINANCIAL ACCOUNTING SOLUTIONS MANUAL

Dec. 31 Investment in Denver Preferred Stock (BS) 2,000

Unrealized Gain—Trading Securities (IS) 2,000
To adjust trading securities to fair value:
Fair value: 1,000 shares × $42
per share $42,000
Cost: 1,000 shares × $40 per
share 40,000
Unrealized gain $ 2,000
Assets = Liabilities + Owners’ Equity
+2,000 +2,000

2008
Jan. 15 Cash (BS) 1,000
Dividends Receivable (BS) 1,000
To record receipt of dividend.
Assets = Liabilities + Owners’ Equity
+1,000
–1,000
Feb. 12 Cash (BS) 45,000
Investment in Denver Preferred
Stock (BS) (book value) 42,000
Gain on Sale of Stock (IS) 3,000
To record sale of stock at a gain:
1,000 × $45 = $45,000.
Assets = Liabilities + Owners’ Equity
+45,000 +3,000
–42,000

3. Chicago should classify its investment on its December 31 balance sheet as a

current asset.

LO 7 EXERCISE 7-14 INVESTMENT IN STOCK (Appendix)

1. Cubs should classify its investment in Sox stock as available-for-sale because it

plans to hold the stock indefinitely rather than as a part of its active trading portfolio.
Only bonds can qualify as held-to-maturity securities.
 CHAPTER 7 • INVESTMENTS AND RECEIVABLES 7-13

2. Journal entries:
2007
Aug. 15 Investment in Sox Common Stock (BS) 76,000
Cash (BS) 76,000
To record purchase of available-for-sale
securities for cash: 5,000 shares × $15
per share + $1,000 fees.
Assets = Liabilities + Owners’ Equity
+76,000
–76,000
Dec. 31 Unrealized Gain/Loss—Available-for-
Sale Securities (BS) 11,000
Investment in Sox Common
Stock (BS) 11,000
To adjust available-for-sale securities
to fair value:
Cost $76,000
Fair value: 5,000 shares × $13 65,000
Unrealized loss $11,000
Assets = Liabilities + Owners’ Equity
–11,000 –11,000

2008
July 8 Cash (BS) 50,000*
Loss on Sale of Stock (IS) 26,000**
Investment in Sox Common Stock (BS) 65,000***
Unrealized Gain/Loss—Available-for-
Sale Securities (BS) 11,000
To record sale of stock at a loss.
*5,000 × $10
**76,000 – 50,000
***76,000 – 11,000
Assets = Liabilities + Owners’ Equity
+50,000 –26,000
–65,000 +11,000

3. Cubs should classify its investment on its December 31 balance sheet according to
its intent at that point in time. The exercise indicates that Cubs plans to hold the
stock indefinitely. Thus, the stock should probably be classified as a noncurrent
asset at December 31, even though Cubs does sell the stock in the following year.
7-14 FINANCIAL ACCOUNTING SOLUTIONS MANUAL

MULTI-CONCEPT EXERCISE

LO 1,2,6 EXERCISE 7-15 IMPACT OF TRANSACTIONS INVOLVING CASH, SECURITIES,

AND RECEIVABLES ON STATEMENT OF CASH FLOWS

Purchase of cash equivalents—N

Redemption of cash equivalents—N
Purchase of investments—I
Sale of investments—I
Write-off of customer account (under the allowance method)—N

PROBLEMS

LO 2 PROBLEM 7-1 ALLOWANCE METHOD FOR ACCOUNTING FOR BAD DEBTS

1. Accounts Receivable 840,000

Cash 210,000
Sales Revenue 1,050,000
To record sales for year: $1,050,000 × 80% = $840,000
credit sales.
Assets = Liabilities + Owners’ Equity
+840,000 +1,050,000
+210,000
Cash 670,000
Accounts Receivable 670,000
To record collection of customer accounts.
Assets = Liabilities + Owners’ Equity
+670,000
–670,000
Allowance for Doubtful Accounts 4,000
Accounts Receivable 4,000
To record write-off of accounts receivable.
Assets = Liabilities + Owners’ Equity
+4,000
–4,000
 CHAPTER 7 • INVESTMENTS AND RECEIVABLES 7-15

2.a. Bad Debt Expense 25,200

Allowance for Doubtful Accounts 25,200
To record estimated bad debt expense:
$840,000 × 3%.
Assets = Liabilities + Owners’ Equity
–25,200 –25,200

2.b. Bad Debt Expense 20,010

Allowance for Doubtful Accounts 20,010
To record estimated bad debt expense:
Accounts receivable at Dec. 31, 2007
($140,000 + $840,000 – $670,000 – $4,000) $306,000

Allowance balance needed ($306,000 × 0.06) $18,360 (cr)

Balance before adjustment:
Beginning balance $2,350 (cr)
Write-off 4,000 (dr)
1,650 (dr)
Amount of entry must be $20,010 (cr)
Assets = Liabilities + Owners’ Equity
–20,010 –20,010

3.a. The net realizable value of accounts receivable on December 31, 2007, is
$282,450:
Accounts receivable, Dec. 31 (from Part 2.b.) $306,000
Less: Allowance for doubtful accounts, Dec. 31
($2,350 – $4,000 + $25,200) 23,550
Net realizable value, December 31 $282,450

3.b. The net realizable value of accounts receivable on December 31, 2007, is
$287,640:
Accounts receivable, Dec. 31 (from Part 2.b.) $306,000
Less: Allowance for doubtful accounts, Dec. 31
($2,350 – $4,000 + $20,010) 18,360
Net realizable value, December 31 $287,640

4. The recognition of bad debt expense reduces the net realizable value by the amount
recorded in bad debt expense and the allowance for doubtful accounts. The write-
off of accounts has no effect on the net realizable value.
7-16 FINANCIAL ACCOUNTING SOLUTIONS MANUAL

LO 2 PROBLEM 7-2 AGING SCHEDULE TO ACCOUNT FOR BAD DEBTS

1. Estimated Estimated
Percent Amount
Category Amount Uncollectible Uncollectible
Current $200,000 5% $10,000
Past due:
Less than one month 45,000 20% 9,000
One to two months 25,000 40% 10,000
Over two months 10,000 60% 6,000
Totals $280,000 $35,000

2. Journal entry:
2007
Dec. 31 Bad Debts Expense 22,700
Allowance for Doubtful Accounts 22,700
To record estimated bad debts:
$35,000 less $12,300 currently in
allowance account.
Assets = Liabilities + Owners’ Equity
–22,700 –22,700

3. Partial balance sheet at December 31, 2007:

Current Assets
Accounts receivable $280,000
Less: Allowance for doubtful accounts (35,000)
Net accounts receivable $245,000

LO 3 PROBLEM 7-3 ACCOUNTS RECEIVABLE TURNOVER FOR WHIRLPOOL AND

MAYTAG

1. Accounts receivable turnover ratios:

Whirlpool:
$13,220/[($2,032 + $1,913)/2] = $13,220/$1,972.5 = 6.70 times
Maytag:
$4,721,538/[($629,901 + $596,832)/2] = $4,721,538/$613,366.5 = 7.70 times
 CHAPTER 7 • INVESTMENTS AND RECEIVABLES 7-17

2. Average collection period:

Whirlpool:
360/6.70 = 53.73 days
Maytag:
360/7.70 = 46.75 days
An average collection period of 54 days, or almost two months, appears to be
reasonable. However, Maytag’s average collection period of about 47 days is even
better.
3. Maytag’s accounts receivable turnover ratio is slightly higher than Whirlpool’s: 7.70
versus 6.70. It takes Maytag an average of 46.75 days to collect its receivables;
Whirlpool requires an average of 53.73 days.
It would be especially helpful to measure these statistics, accounts receivable
turnover ratio and average collection period, with the same measures for prior years.
It would also be helpful to compare these measures with the industry averages.

LO 5 PROBLEM 7-4 CREDIT CARD SALES

1. Net selling price $1.00

Cost of goods sold 0.75
Gross margin $0.25

The owner must net $1 per gallon on the selling price. The amount per gallon he
would have to charge credit card customers is
X – 0.02X = 1.00
0.98X = 1.00
X = $1.02 per gallon
(It is worth noting that not all gas companies charge a higher price for credit card
purchases.)

2. If his normal charge is $1.02 to credit card customers, he can offer a $0.02 discount
to cash customers and still maintain his gross margin.
7-18 FINANCIAL ACCOUNTING SOLUTIONS MANUAL

LO 6 PROBLEM 7-5 EFFECTS OF CHANGES IN RECEIVABLE BALANCES ON

STATEMENT OF CASH FLOWS

1. Statement of cash flows:

STEGNER INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2007
Net income $ 130,000
Adjustments to reconcile net income to net cash
used by operating activities:
Increase in accounts receivable $(140,000)*
Decrease in notes receivable 5,000** (135,000)
Cash flows from operating activities $ (5,000)
Cash, December 31, 2006 110,000
Cash, December 31, 2007 $ 105,000
*$223,000 – $83,000
**$100,000 – $95,000

2. Memorandum to the president:

TO: Owner of Stegner, Inc.
FROM: Student’s name
DATE: January XX, 2008
SUBJECT: Cash Flows
You recently expressed concern about the decrease in the company’s cash
balance in spite of the profitable year that was reported on this year’s income
statement. My thoughts and a copy of the company’s 2007 statement of cash flows
follow.
Although net income on an accrual basis was $130,000, the company’s cash
balance declined by $5,000 during the year for two reasons. Most importantly,
accounts receivable increased by $140,000 during the year from $83,000 to
$223,000; we did not collect amounts due from our customers as sales were made.
This drain on cash was partially offset by a $5,000 decrease in notes receivable
during the year, from $100,000 to $95,000.
We can better manage our cash flow by increasing our collection efforts.
 CHAPTER 7 • INVESTMENTS AND RECEIVABLES 7-19

LO 7 PROBLEM 7-6 INVESTMENTS IN BONDS AND STOCK (Appendix)

1. Journal entries:
2007
July 1 Investment in Gallatin Bonds 10,000
Cash 10,000
To record purchase of 6%, Gallatin bonds.
Assets = Liabilities + Owners’ Equity
+10,000
–10,000
Oct. 23 Investment in Eagle Rock Stock 12,000
Cash 12,000
To record purchase of 600 shares of
common stock at $20 per share.
Assets = Liabilities + Owners’ Equity
+12,000
–12,000
Nov. 21 Investment in Montana Stock 6,000
Cash 6,000
To record purchase of 200 shares of
preferred stock at $30 per share.
Assets = Liabilities + Owners’ Equity
+6,000
–6,000
Dec. 10 Cash 1,300
Dividend Income 1,300
To record receipt of dividends on
trading securities:
Eagle Rock—600 × $1.50 $ 900
Montana—200 × $2.00 400
$1,300
Assets = Liabilities + Owners’ Equity
+1,300 +1,300
7-20 FINANCIAL ACCOUNTING SOLUTIONS MANUAL

Dec. 28 Cash 10,000*

Investment in Eagle Rock Stock 8,000**
Gain on Sale of Stock 2,000
To record sale of 400 shares of Eagle
Rock stock.
*$400 × $25
**$400 × $20
Assets = Liabilities + Owners’ Equity
+10,000 +2,000
–8,000
Dec. 31 Cash (10,000 × 6% × 1/2 year) 300
Interest Income 300
To record receipt of interest:
$10,000 × 6% × 6/12.
Assets = Liabilities + Owners’ Equity
+300 +300
Dec. 31 Investment in Eagle Rock Stock 1,800
Investment in Montana Stock 800
Unrealized Gain—Trading Securities 1,000
To adjust trading securities to fair value:
Total Total Fair Value Gain
Security Cost at 12/31/07 (Loss)
Eagle Rock $ 4,000 $ 5,800 $1,800
(200* × $20) (200 × $29)
Montana 6,000 5,200 (800)
(200 × $30) (200 × $26)
$ 10,000 $ 11,000 $1,000
*600 original purchase less 400 sold on December 28
Assets = Liabilities + Owners’ Equity
+1,800 +1,000
–800

2. Partial balance sheet at December 31, 2007:

Current assets:
Investment in trading securities, at fair value $11,000
Long-term assets:
Investment in bonds $10,000
 CHAPTER 7 • INVESTMENTS AND RECEIVABLES 7-21

3. Items on the 2007 income statement:

Dividend income $1,300
Interest income 300
Gain on sale of stock 2,000
Unrealized gain on trading securities 1,000

LO 7 PROBLEM 7-7 INVESTMENTS IN STOCK (Appendix)

1. Journal entries:
2007
Jan. 15 Investment in Sears Stock 10,500
Cash 10,500
To record purchase of 200 shares of
stock at $50 per share, plus $500 in
commissions.
Assets = Liabilities + Owners’ Equity
+10,500
–10,500
May 23 Cash 400
Dividend Income 400
To record receipt of dividends of $2 per
share on 200 shares of Sears stock.
Assets = Liabilities + Owners’ Equity
+400 +400
June 1 Investment in Ford Stock 7,700
Cash 7,700
To record purchase of 100 shares of
stock at $74 per share, plus $300 in
commissions.
Assets = Liabilities + Owners’ Equity
+7,700
–7,700
Oct. 20 Cash 8,000
Loss on Sale of Stock 2,500
Investment in Sears Stock 10,500
To record sale of Sears stock:
(200 shares × $42) – $400 = $8,000.
Assets = Liabilities + Owners’ Equity
+8,000 –2,500
–10,500
7-22 FINANCIAL ACCOUNTING SOLUTIONS MANUAL

Dec. 15 Dividends Receivable 150

Dividend Income 150
To record notification of the declaration
of $1.50 per share dividend on 100 shares
of Ford stock.
Assets = Liabilities + Owners’ Equity
+150 +150
Dec. 31 Investment in Ford Stock 800
Unrealized Gain/Loss: Available-
for-Sale Securities 800
To adjust Ford stock to fair value.
Total Cost Total Fair Value Gain (Loss)
$7,700 $8,500 $800
(100 × $85)
Assets = Liabilities + Owners’ Equity
+800 +800

2. Total income from investments during 2007:

Dividend income on Sears stock $ 400
Loss on sale of Sears stock (2,500)
Dividend income on Ford stock 150
Total income (loss) $(1,950)
Note: The unrealized gain from the increase in market value of the Ford stock is not
recognized in income but rather as an adjustment to stockholders’ equity because
the securities are classified as available-for-sale.

3. If Atlas categorizes its securities as trading securities, an additional $800 of income

would be recognized in 2007, resulting in a net loss from the investments of $1,950
– $800, or $1,150. Increases and decreases in the value of trading securities are
recognized on the income statement but not those of available-for-sale securities.

MULTI-CONCEPT PROBLEM

LO 2,4 PROBLEM 7-8 ACCOUNTS AND NOTES RECEIVABLE

1. Journal entries:

2007
May 15 Accounts Receivable, C. Brown 5,000
Sales Revenue 5,000
To record sale on credit; terms net 30.
Assets = Liabilities + Owners’ Equity
+5,000 +5,000
 CHAPTER 7 • INVESTMENTS AND RECEIVABLES 7-23

Aug. 10 Allowance for Doubtful Accounts 5,000

Accounts Receivable—C. Brown 5,000
To write off uncollectible account.
Assets = Liabilities + Owners’ Equity
+5,000
–5,000
Dec. 1 Accounts Receivable—C. Brown 5,000
Allowance for Doubtful Accounts 5,000
To restore account previously written off.
Assets = Liabilities + Owners’ Equity
+5,000
–5,000
Dec. 1 Cash 1,000
Notes Receivable 4,000
Accounts Receivable—C. Brown 5,000
To record partial collection on open account
and receipt of two-month 9% note for the balance.
Assets = Liabilities + Owners’ Equity
+1,000
+4,000
–5,000
Dec. 31 Interest Receivable 30
Interest Revenue 30
To accrue interest earned:
$4,000 × 9% × 1/12.
Assets = Liabilities + Owners’ Equity
+30 +30

2008
Jan. 31 Cash 4,060
Interest Receivable 30
Interest Revenue 30
Notes Receivable 4,000
To record collection of note and interest.
Assets = Liabilities + Owners’ Equity
+4,060 +30
–30
–4,000

2. Brown is interested in reestablishing a good credit standing with its supplier, Linus,
and for this reason has sent the check and signed a note for the balance.
7-24 FINANCIAL ACCOUNTING SOLUTIONS MANUAL

ALTERNATE PROBLEMS

LO 2 PROBLEM 7-1A ALLOWANCE METHOD FOR ACCOUNTING FOR BAD DEBTS

1. Accounts Receivable 630,000

Cash 157,500
Sales Revenue 787,500
To record sales for year: $787,500 × 80% = $630,000
credit sales.
Assets = Liabilities + Owners’ Equity
+630,000 +787,500
+157,500
Cash 502,500
Accounts Receivable 502,500
To record collection of customer accounts.
Assets = Liabilities + Owners’ Equity
+502,500
–502,500
Allowance for Doubtful Accounts 3,000
Accounts Receivable 3,000
To record write-off of accounts receivable.
Assets = Liabilities + Owners’ Equity
+3,000
–3,000

2.a. Bad Debt Expense 18,900

Allowance for Doubtful Accounts 18,900
To record estimated bad debt expense.
$630,000 X 3%.
Assets = Liabilities + Owners’ Equity
–18,900 –18,900
 CHAPTER 7 • INVESTMENTS AND RECEIVABLES 7-25

2.b. Bad Debt Expense 14,820

Allowance for Doubtful Accounts 14,820
To record estimated bad debt expense:
Accounts receivable at Dec. 31, 2007
($105,000 + $630,000 – $502,500 – $3,000) $229,500
× 0.06
Allowance balance needed $ 13,770 (cr)
Balance before adjustment:
Beginning balance $1,950 (cr)
Write-off 3,000 (dr)
1,050 (dr)
Amount of entry must be $ 14,820 (cr)
Assets = Liabilities + Owners’ Equity
–14,820 –14,820

3.a. The net realizable value of accounts receivable on December 31, 2007, is
$211,650.
Accounts receivable, Dec. 31 (from Part 2.b.) $229,500
Less: allowance for doubtful accounts, Dec. 31
($1,950 – $3,000 + $18,900) 17,850
Net realizable value, December 31 $211,650

3.b. The net realizable value of accounts receivable on December 31, 2007, is
$215,730.
Accounts receivable, Dec. 31 (from Part 2.b.) $229,500
Less: allowance for doubtful accounts, Dec. 31
($1,950 – $3,000 + $14,820) 13,770
Net realizable value, December 31 $215,730

4. The recognition of bad debt expense reduces the net realizable value by the amount
recorded in bad debt expense and the allowance for doubtful accounts. The write-
off of accounts has no effect on the net realizable value.

LO 2 PROBLEM 7-2A AGING SCHEDULE TO ACCOUNT FOR BAD DEBTS

1. Estimated Estimated
Percent Amount
Category Amount Uncollectible Uncollectible
Current $200,000 10% $20,000
Past due:
Less than one month 60,300 25% 15,075
One to two months 35,000 35% 12,250
Over two months 45,000 75% 33,750
Totals $340,300 $81,075
7-26 FINANCIAL ACCOUNTING SOLUTIONS MANUAL

2. The controller is primarily responsible for the accuracy of the records, rather than the
collection process. Thus, the controller’s main concern should be with the adequacy
of the balance in the allowance account. The amount of the allowance should
probably be increased, given the relatively large amount which is likely to be
uncollectible.
3. Partial balance sheet at December 31, 2007:
Current Assets
Accounts receivable $340,300
Less: Allowance for doubtful accounts 81,075
Net accounts receivable $259,225

LO 3 PROBLEM 7-3A ACCOUNTS RECEIVABLE TURNOVER FOR BEST BUY AND

CIRCUIT CITY

1. Accounts receivable turnover ratios:

Best Buy Co. Inc.:
$24,547/[($343 + $312)/2] = $24,547/$327.5 = 74.95 times
Circuit City Stores, Inc.:
$9,745,445/[($154,039 + $140,385)/2] = $9,745,445/$147,212 = 66.20 times
2. Average collection period:
Best Buy:
360/74.95 = 4.80 days
Circuit City:
360/66.20 = 5.44 days
Average collection periods of 5 days appear very reasonable considering the nature
of the business.
3. Best Buy’s accounts receivable turnover ratio is higher than Circuit City’s: 74.95
versus 66.20. However, for both it takes only about five days to collect their
receivables.
It would be helpful to measure these statistics—accounts receivable turnover
ratio and average collection period—with the same measures for prior years. It
would also be helpful to compare these measures with the industry averages.
 CHAPTER 7 • INVESTMENTS AND RECEIVABLES 7-27

LO 5 PROBLEM 7-4A CREDIT CARD SALES

1. Cost of credit card operation per outlet:

Equipment/phone line $ 800
Sales fee:
Credit sales: $800,000 × 5% $40,000
× Fee × 0.015 600
Total cost $1,400

Conclusion: To cover the cost of the new equipment in the first year, new sales
would need to net $1,400 per outlet.
2. The company should also consider competition in its decision on the use of credit
cards. It may in fact suffer a loss of sales if its competitors start offering credit to
customers and it does not. The company may find that customer goodwill is
increased by the offer to use a credit card.

LO 6 PROBLEM 7-5A EFFECTS OF CHANGES IN RECEIVABLE BALANCES ON

STATEMENT OF CASH FLOWS

1. Statement of cash flows:

ST. CHARLES ANTIQUE MARKET

STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2007
Net loss $(6,000)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Decrease in accounts receivable 47,000*
Increase in notes receivable (7,800)**
Cash flows from operating activities $33,200
Cash, December 31, 2006 3,100
Cash, December 31, 2007 $36,300
*$126,000 – $79,000
**$104,800 – $112,600
7-28 FINANCIAL ACCOUNTING SOLUTIONS MANUAL

2. Memorandum to the president:

TO: Owner of St. Charles Antique Market
FROM: Student’s name
DATE: January XX, 2008
SUBJECT: Cash Flows
You recently questioned the increase in the company’s cash balance in light of
this year’s net loss. My thoughts and a copy of the company’s 2007 statement of
cash flows follow.
St. Charles Antique Market was able to generate a significant amount of cash
from operations even though the company incurred an accrual basis net loss during
2007 of $6,000. Most importantly, the amount of accounts receivable decreased by
$47,000 during the year from $126,000 to $79,000; collections of accounts
receivable generated cash for the company. This cash flow was partially offset by a
$7,800 increase in notes receivable during the year, from $104,800 to $112,600.

LO 7 PROBLEM 7-6A INVESTMENTS IN BONDS AND STOCK (Appendix)

1. Journal entries:
2007
July 1 Investment in Maine Bonds 10,000
Cash 10,000
To record purchase of 8% Maine bonds.
Assets = Liabilities + Owners’ Equity
+10,000
–10,000
Oct. 23 Investment in Virginia Stock 15,000
Cash 15,000
To record purchase of 1,000 shares
of common stock at $15 per share.
Assets = Liabilities + Owners’ Equity
+15,000
–15,000
 CHAPTER 7 • INVESTMENTS AND RECEIVABLES 7-29

Nov. 21 Investment in Carolina Stock 4,800

Cash 4,800
To record purchase of 600 shares of
preferred stock at $8 per share.
Assets = Liabilities + Owners’ Equity
+4,800
–4,800
Dec. 10 Cash 1,100
Dividend Income 1,100
To record receipt of dividends on trading
securities:
Virginia—1,000 × $0.50 = $ 500
Carolina—600 × $1.00 = 600
$1,100
Assets = Liabilities + Owners’ Equity
+1,100 +1,100
Dec. 28 Cash 13,300*
Investment in Virginia Stock 10,500**
Gain on Sale of Stock 2,800
To record sale of 700 shares of Virginia
stock.
*700 × $19
**700 × $15
Assets = Liabilities + Owners’ Equity
+13,300 +2,800
–10,500
Dec. 31 Cash 400*
Interest Income 400
To record receipt of interest on bonds.
*$10,000 × 8% × 1/2 year
**($10,700 – $10,000)/3.5 years × 1/2 year
Assets = Liabilities + Owners’ Equity
+400 +400
7-30 FINANCIAL ACCOUNTING SOLUTIONS MANUAL

Dec. 31 Investment in Virginia Stock 1,500

Investment in Carolina Stock 1,800
Unrealized Gain—Trading Securities 3,300
To adjust trading securities to fair value:
Total Total Fair Value Gain
Security Cost at 12/31/07 (Loss)
Virginia $ 4,500 $ 6,000 $1,500
(300* × $15) (300 × $20)
Carolina 4,800 6,600 1,800
(600 × $8) (600 × $11)
$ 9,300 $ 12,600 $3,300
*1,000 original purchase less 700 sold on December 28.
Assets = Liabilities + Owners’ Equity
+1,500 +3,300
+1,800

2. Partial balance sheet at December 31, 2007:

Current assets:
Investment in trading securities, at fair value $12,600
Long-term assets:
Investment in bonds $10,000

3. Items on the 2007 income statement:

Dividend income $1,100
Interest income 400
Gain on sale of stock 2,800
Unrealized gain on trading securities 3,300

LO 7 PROBLEM 7-7A INVESTMENTS IN STOCK (Appendix)

1. Journal entries:
2007
Jan. 15 Investment in IBM Stock 13,250
Cash 13,250
To record purchase of 100 shares of
stock at $130 per share, plus $250 in
commissions.
Assets = Liabilities + Owners’ Equity
+13,250
–13,250
 CHAPTER 7 • INVESTMENTS AND RECEIVABLES 7-31

May 23 Cash 100

Dividend Income 100
To record receipt of dividends of $1 per
share on 100 shares of IBM stock.
Assets = Liabilities + Owners’ Equity
+100 +100
June 1 Investment in GM Stock 12,300
Cash 12,300
To record purchase of 200 shares of
stock at $60 per share, plus $300 in
commissions.
Assets = Liabilities + Owners’ Equity
+12,300
–12,300
Oct. 20 Cash 13,600
Investment in IBM Stock 13,250
Gain on Sale of Stock 350
To record sale of IBM stock:
(100 shares × $140) – $400.
Assets = Liabilities + Owners’ Equity
+13,600 +350
–13,250
Dec. 15 Dividends Receivable 150
Dividend Income 150
To record notification of the declaration
of $0.75 per share dividend on 200 shares
of GM stock.
Assets = Liabilities + Owners’ Equity
+150 +150
Dec. 31 Unrealized Gain/Loss—Available-for-
Sale Securities 3,300
Investment in GM Stock 3,300
To adjust GM stock to fair value:
Total Cost Total Fair Value Gain (Loss)
$12,300 $9,000 $(3,300)
(200 × $45)
Assets = Liabilities + Owners’ Equity
–3,300 –3,300
7-32 FINANCIAL ACCOUNTING SOLUTIONS MANUAL

2. Total income from investments during 2007:

Dividend income on IBM stock $100
Gain on sale of IBM stock 350
Dividend income on GM stock 150
Total income $600
Note: The unrealized loss from the decrease in market value of the GM stock is not
recognized in income but rather as an adjustment to stockholders’ equity because
the securities are classified as available-for-sale.
3. If Trendy categorizes its securities as trading securities, a loss of $3,300 would be
recognized in 2007, resulting in a net loss from the investments of $3,300 – $1,100,
or $2,200. Increases and decreases in the value of trading securities are recognized
on the income statement, but not those of available-for-sale securities.

ALTERNATE MULTI-CONCEPT PROBLEM

LO 2,4 PROBLEM 7-8A ACCOUNTS AND NOTES RECEIVABLE

1. Journal entries:
2007
July 31 Accounts Receivable—P.D. Cat 6,000
Sales Revenue 6,000
To record sale on credit; terms net 30.
Assets = Liabilities + Owners’ Equity
+6,000 +6,000
Dec. 24 Allowance for Doubtful Accounts 6,000
Accounts Receivable—P.D. Cat 6,000
To write off uncollectible account.
Assets = Liabilities + Owners’ Equity
+6,000
–6,000
2008
Jan. 15 Accounts Receivable—P.D. Cat 6,000
Allowance for Doubtful Accounts 6,000
To restore account previously written off.
Assets = Liabilities + Owners’ Equity
+6,000
–6,000
 CHAPTER 7 • INVESTMENTS AND RECEIVABLES 7-33

Jan. 15 Cash 1,500

Notes Receivable 4,500
Accounts Receivable—P.D. Cat 6,000
To record partial collection on open
account and receipt of two-month 8%
note for the balance.
Assets = Liabilities + Owners’ Equity
+1,500
+4,500
–6,000
Mar. 15 Cash 4,560
Interest Revenue 60
Notes Receivable 4,500
To record collection of note and interest:
$4,500 × 8% × 2/12.
Assets = Liabilities + Owners’ Equity
+4,560 +60
–4,500

2. P.D. Cat is interested in reestablishing a good credit standing with its supplier,
Tweety, and for this reason has sent the check and signed a note for the balance.

DECISION CASES

READING AND INTERPRETING FINANCIAL STATEMENTS

LO 2 DECISION CASE 7-1 READING APPLE’S BALANCE SHEET AND NOTES TO THE
STATEMENTS

1. The balance in the Allowance for Doubtful Accounts is $47 million at the end of 2004
and $49 million at the end of 2003.
2. The net realizable value of accounts receivable at the end of 2004 was $774 million,
and at the end of 2003, $766 million.
3. The amount of bad debts expense is represented by the line on the table titled
“Charged to costs and expenses.” This amount is $3 million for 2004 and $4 million
for 2003.
4. The amount of accounts receivable written off is represented by the line on the table
titled “Deductions.” This amount is $5 million for 2004 and $6 million for 2003.
7-34 FINANCIAL ACCOUNTING SOLUTIONS MANUAL

5. The reduction in the amounts of accounts written off in the last two years could be
due to a number of factors. The company may have tightened its credit policies and
thus is not experiencing as many bad debts as in the past. The reduction may also
be the result of an increased effort to collect outstanding receivables. It is worth
noting that there has been a similar decrease in the amounts charged to costs and
expenses in the last two years.

LO 1,6 DECISION CASE 7-2 READING APPLE COMPUTER’S STATEMENT OF CASH

FLOWS

1. Apple spent $3,270 million to purchase short-term investments in 2004. This was
$622 million more than Apple spent on investments in 2003 but $874 million less
than was spent in 2002.
2. Apple received $1,141 million from investments that matured in 2004. This was
$1,305 million less than it received in 2003 and $1,705 less than in 2002.
3. Bonds mature, but stocks have no maturity date. Therefore, if a company holds
bonds until their maturity date, they will receive proceeds on that date. Bonds can
be sold on a date before they mature as well. Because stocks do not have a maturity
date, any proceeds are received on the date they are sold.

MAKING FINANCIAL DECISIONS

LO 1,2 DECISION CASE 7-3 LIQUIDITY

TO: The President of FNB of Verona Heights

FROM: Joe Smith, Loan Officer
DATE: X/X/XX
SUBJECT: Loan proposals

I have reviewed the loan proposals recently submitted by Oak and Maple and would
like to summarize for you my findings. Because of limited resources available for short-
term loans, my recommendation is that we make a six-month $10 million loan to Maple
only.
The total current asset positions of the two companies are identical. Each has $33
million in current assets. However, the composition of the current assets differs
considerably between the two companies. On the surface, Oak may appear to be
stronger because it has twice the amount of cash on hand that Maple does. However,
cash is essentially a non-earning asset, and I am skeptical as to why Oak feels it
necessary to maintain that much cash on hand, and consequently, why it feels as if it
needs to borrow an additional $10 million.
 CHAPTER 7 • INVESTMENTS AND RECEIVABLES 7-35

The accounts receivable for Maple is significantly larger than that for Oak. Assuming
that the estimates of bad debts are reasonably reliable, Oak has a bigger problem with
uncollectibles than does Maple. Oak has an allowance that is 1/15, or 6.67% of
accounts receivable, while Maple’s percentage is only 1/23, or 4.35%.
In summary, I feel that Maple is a better candidate at the present time for a loan. I
recommend that we make a six-month $10 million loan to Maple at the current market
rate of interest. Please call if you need any further details in connection with these two
loan requests.

ETHICAL DECISION MAKING

LO 5 DECISION CASE 7-4 NOTES RECEIVABLE

1. The entry to record the sale of the property violates two principles: the revenue
recognition principle and the historical cost principle. Revenue is recognized at the
appropriate time, when a sale takes place, but for the wrong amount. The fair value
of the property, $7.5 million, should be used as a measure of the amount of revenue
to be recognized, rather than the face value of the note.

2. TO: Vice-president
FROM: Student’s name
DATE: 12/31/XX
SUBJECT: Land sale

This is in response to your suggestion about the proper accounting for the recent
sale of our 100-acre tract for the new shopping center. I have considered your
recommendation that we recognize revenue in the amount of $10 million, which is
equivalent to the $2 million installments on the note over each of the next five years.
Please understand my interest in maximizing profits to our shareholders
whenever possible. The suggested treatment for this sale, however, is a clear
violation of generally accepted accounting principles. The reason for the violation is
straightforward: $10 million is not the value of the asset we sacrificed in exchange
for the five-year note. The property was recently appraised at a fair market value of
$7.5 million. The difference between the $10 million in face value of the note and the
$7.5 million fair value of the property represents the interest we will earn over the
next five years as we collect on the note. We will, in fact, recognize this difference of
$2.5 million as income, but only over the life of the note, and as interest income
rather than sales revenue. For now the amount of revenue we should recognize is
$7.5 million.
Please call me at any time if you would like to discuss this matter further.
7-36 FINANCIAL ACCOUNTING SOLUTIONS MANUAL

LO 7 DECISION CASE 7-5 FAIR MARKET VALUES FOR INVESTMENTS (Appendix)

1. Net income under two different assumptions:

(a) Stock is classified as a trading security:
Net income before adjustment $ 400,000
Unrealized loss (250,000)*
Net income $ 150,000
*10,000 shares × ($100 – $75).
(b) Stock is classified as an available-for-sale security:
Net income $400,000
(Any unrealized gains or losses on available-for-sale securities are reported as a
component of stockholders’ equity and are not reported on the income
statement.)
2. The proper classification of the Clean Air stock is a matter of judgment. Given the
circumstances, however, it seems most appropriate to classify the stock as trading
securities. The case indicates that Kennedy regularly holds stocks of various
companies in a trading securities portfolio. There is nothing in the case to suggest
that the objective in holding the Clean Air stock is any different.
3. The treasurer’s advice presents the controller with a clear ethical dilemma. Should
the proper classification of an investment for financial reporting purposes be
dictated, or at least influenced, by the effect of the classification on net income? The
treasurer is accurate in stating that regardless of this decision, the stock will be
reported on the balance sheet at fair value. Accounting standards, however, call for
the recognition of a loss on the income statement for declines in value of trading
securities. If the controller is not able to differentiate the Clean Air stock from the
other securities in the company’s trading securities portfolio, he or she should
demand that the stock be classified as a trading security.

REAL WORLD PRACTICE 7.1

According to Apple’s balance sheet, accounts receivable increased by $774 – $766 or

$8 million during 2004. Accounts receivable make up $774/$7,055, or 11%, of the total
current assets at the end of 2004.

REAL WORLD PRACTICE 7.2

The amount of accounts receivable before deducting the balance in the allowance
account is $774 + $47, or $821, million at the end of 2004. This amount at the end of
2003 is $766 + $49, or $815 million. The gross amount of accounts receivable
 CHAPTER 7 • INVESTMENTS AND RECEIVABLES 7-37

increased during 2004 by $821 – $815, or $6 million. The allowance account decreased
during 2004 by $47 – $49, or $2 million. Changes in the allowance during the year are a
result of adding additional amounts to it for the estimated bad debts and removing from
the account write offs of customers’ accounts.