Chapter 5 - Receivables and Sales

Chapter 5
Receivables and Sales

REVIEW QUESTIONS
Question 5-1 (LO 5-1)
When recording a credit sale, we debit Accounts Receivable. Accounts receivable are reported as
assets in the balance sheet.

Question 5-2 (LO 5-1)

Trade receivables are amounts receivable from customers due to credit sales. Nontrade
receivables are receivables from those other than customers and include tax refund claims, interest
receivable, and loans by the company to other entities including stockholders and employees.

Question 5-3 (LO 5-2)

Trade discounts represent a reduction in the listed price of a product or service. A sales discount
represents a reduction, not in the selling price of a product or service, but in the amount to be paid by
a credit customer if paid within a specified period of time. Sales discounts are reported as contra
revenues in the income statement.

Question 5-4 (LO 5-2)

Sales returns and allowances are contra revenue accounts and therefore have normal debit
balances. Sales returns occur when a customer returns a product. Sales allowances occur when the
seller reduces the customer’s balance owed or provides at least a partial refund because of some
deficiency in the company’s product or service. Sales returns and allowances are reported as contra
revenues in the income statement.

Question 5-5 (LO 5-2)

An example of recognizing revenue at one point would be selling a car. An example of
recognizing revenue over a period would be providing an annual magazine subscription.

Question 5-6 (LO 5-3)

Companies should account for uncollectible accounts receivable using the allowance method.
Under this method, a company estimates future bad debts and records those estimates as an expense
and contra asset in the current period.

Question 5-7 (LO 5-3)

The two purposes include reducing accounts receivable to the amount expected to be collected
and reporting expenses (bad debts) typically in the same period as the revenue (credit sales) they
helped generate.

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Solutions Manual, Chapter 5 5-1
 Answers to Review Questions (continued)

Question 5-8 (LO 5-3)

Allowing for uncollectible accounts involves recording a contra asset for the amount of
receivables expected not to be collected. This contra account (Allowance for Uncollectible
Accounts) is reported with Accounts Receivable in the balance sheet. The difference is net accounts
receivable, which equals the net amount of cash expected to be collected.

Question 5-9 (LO 5-3)

The two financial statement effects of establishing an allowance for uncollectible accounts are:
(1) reducing assets and (2) increasing expenses (or reducing net income and ultimately retained
earnings).

Question 5-10 (LO 5-3)

The amount expected to be collected means that there is a possibility that not all accounts
receivable will be collected and the balance sheet should not overstate assets without recognition of
this possibility. Thus, accounts receivable are presented at a net amount which is equal to total
accounts receivable minus the allowance for uncollectible accounts.

Question 5-11 (LO 5-4)

The write-off of an account as uncollectible includes a debit to the Allowance for Uncollectible
Accounts and a credit to Accounts Receivable for the amount being written off. The write-off has no
effect on total assets or net income at the time of the write-off.

Question 5-12 (LO 5-4)

A debit balance in the Allowance for Uncollectible Accounts before adjusting entries could
occur if actual bad debts written off in the current year exceed the previous year’s ending balance of
Allowance for Uncollectible Accounts.

Question 5-13 (LO 5-4)

A credit balance occurs in Allowance for Uncollectible Accounts before adjustment when actual
bad debts in the current year are less than the previous year’s ending balance of the account, which
reflected an estimate of the amount of accounts receivable not expected to be collected.

Question 5-14 (LO 5-5)

The age of accounts receivable refers to how far past due accounts are. The older the account, the
less likely it is to be collected. The aging method estimates uncollectible accounts receivable by
associating a percentage probability of uncollectibility to each account and multiplying that percentage
by the account balance to determine the estimated uncollectible amount.

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5-2 Financial Accounting, 6e
 Chapter 5 - Receivables and Sales

Answers to Review Questions (continued)

Question 5-15 (LO 5-5)

The year-end adjustment to the Allowance for Uncollectible Accounts normally includes a debit
to Bad Debt Expense and a credit to the Allowance for Uncollectible Accounts. The amount of the
adjustment is the amount needed to adjust the allowance for uncollectible accounts to its estimated
ending balance when using the aging method or the percentage of receivables method. If the
allowance account has a credit balance before adjustment, the amount of the adjustment is the year-
end estimate of uncollectible accounts minus the existing credit balance. If the allowance account
has a debit balance before adjustment, the amount of the adjustment is the year-end estimate of
uncollectible accounts plus the existing debit balance.

Question 5-16 (LO 5-6)

The allowance method requires companies to estimate future bad debts and to reflect those
estimates in the current period as a balance in an allowance for uncollectible accounts as a contra
account to Accounts Receivable. The amount required to adjust the allowance account is offset to
Bad Debt Expense. The direct write-off method makes no attempt to estimate future bad debts.
Instead, the reduction in accounts receivable and increase in expense associated with bad debts is
recorded only when the bad debt actually occurs. Only the allowance method is allowed by financial
accounting rules.

Question 5-17 (LO 5-7)

One common difference is that notes receivable require the borrower to pay interest. Also, notes
receivable typically arise not from sales to customers, but from loans to other entities including
affiliated companies, loans to stockholders and employees, and occasionally the sale of merchandise,
other assets, or services.

Question 5-18 (LO 5-7)

Face value – amount of the note.
Annual interest rate – the interest charged by the lender to the borrower stated on an annual
(twelve month) basis.
Fraction of the year – the proportion of the year that the note is outstanding.

Question 5-19 (LO 5-7)

Face Annual Fraction of
Interest = x x
value interest rate the year
$90 = $2,000 x 6% x 9/12

Question 5-20 (LO 5-7)

Recording interest earned but not yet received includes a debit to Interest Receivable and a credit
to Interest Revenue. The amount is calculated as the face value of the note times the annual interest
rate times the fraction of the year the note is outstanding.

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Solutions Manual, Chapter 5 5-3
 Question 5-21 (LO 5-8)

Answers to Review Questions (continued)

The receivables turnover ratio equals net credit sales divided by average accounts receivable.
The ratio shows the number of times during a year that the average accounts receivable balance is
collected (or “turns over”). Typically, a higher ratio is a good indicator of a company’s effectiveness
in managing receivables.

Question 5-22 (LO 5-8)

The average collection period equals 365 days divided by the receivables turnover ratio. The
ratio shows the approximate number of days the average accounts receivable balance is outstanding.
Typically, a lower number is a good indicator of a company’s effectiveness in managing receivables.

Question 5-23 (LO 5-8)

A company can attempt to boost sales, and thereby increase its value, by allowing customers to
purchase products and services on account. Some customers may be unwilling or unable to purchase
products and services in the current period if immediate cash payment is required. However, failure
to recognize high-risk customers or to have a reliable collection policy can result in uncollectible
accounts and lost resources, thereby lowering the value of a company. Having enough cash is
important to running any business. The more quickly a company can collect on receivables, the more
quickly it can use that cash to generate even more cash by reinvesting in the business and generating
additional sales.

Question 5-24 (LO 5-9)

The percentage of receivables method is commonly used in practice. Financial accounting rules
require accounts receivable to be stated at the amount expected to be collected, and this is better
accomplished through the percentage of receivables method. The percentage of credit sales method
focuses on matching current period bad debt expense with current period credit sales, that is, the
matching principle.

Question 5-25 (LO 5-9)

The percentage of receivables method estimates future bad debts based on a balance sheet
account – Accounts Receivable. The percentage of credit sales method estimates future bad debts
based on an income statement account – Credit Sales. The current emphasis on better measurement
of assets (balance sheet focus) outweighs the emphasis on better measurement of net income
(income statement focus). This is why the percentage of receivables method (balance sheet method)
is the preferable method, while the percentage of credit sales method (income statement method) is
allowed only if amounts do not differ significantly from estimates using the percentage of
receivables method.

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5-4 Financial Accounting, 6e
 Chapter 5 - Receivables and Sales

BRIEF EXERCISES
Brief Exercise 5-1 (LO 5-2)
Debit Credit
Accounts Receivable 3,080
Service Revenue 3,080
(Provide services of $3,500 on account with 12% trade
discount)
Accounts Receivable 700
Service Revenue 700
(Provide services on account)

Brief Exercise 5-2 (LO 5-1, 5-2)

(a) February 3 Debit Credit
Accounts Receivable 25,000
Service Revenue 25,000
(Provide services of $25,000 on account)
(b) February 9
Cash 24,500
Sales Discounts 500
Accounts Receivable 25,000
(Receive cash on account less a 2% sales discount)
(Sales discount = $25,000 × 2%)

Brief Exercise 5-3 (LO 5-2)

Total sales $750,000
Less:
Sales returns ($50 + $6) (56,000)
Sales allowances ($30 + $4) (34,000)
Sales discounts ($20 + $2) (22,000)
Net sales $638,000

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Solutions Manual, Chapter 5 5-5
 Brief Exercise 5-4 (LO 5-3)
Debit Credit
Bad Debt Expense 2,000
Allowance for Uncollectible Accounts 2,000
(Estimate future bad debts)
($20,000 x 10% = $2,000)

Brief Exercise 5-5 (LO 5-4)

Debit Credit
Allowance for Uncollectible Accounts 17,000
Accounts Receivable 17,000
(Write off uncollectible accounts)

Allowance for uncollectible accounts = $15,000 (beginning) − $17,000 (write-off)

= −$2,000 or $2,000 debit

Brief Exercise 5-6 (LO 5-4)

September 9 Debit Credit
Accounts Receivable 7,000
Allowance for Uncollectible Accounts 7,000
(Re-establish portion of account previously
written off)
Cash 7,000
Accounts Receivable 7,000
(Cash collection on account)

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5-6 Financial Accounting, 6e
 Chapter 5 - Receivables and Sales

Brief Exercise 5-7 (LO 5-5)

Debit Credit
Bad Debt Expense 2,400
Allowance for Uncollectible Accounts 2,400
(Estimate future bad debts)
($25,000 x 12% − $600 = $2,400)

Brief Exercise 5-8 (LO 5-5)

Debit Credit
Bad Debt Expense 3,600
Allowance for Uncollectible Accounts 3,600
(Estimate future bad debts)
($25,000 x 12% + $600 = $3,600)
The amount in BE5-8 is greater because the balance of Allowance for Uncollectible
Accounts before adjustment is a debit (or negative). This means that actual bad debts
in the current year have been greater than expected, and the year-end adjustment
accounts for the additional bad news.

Brief Exercise 5-9 (LO 5-5)

Debit Credit
Bad Debt Expense 12,000
Allowance for Uncollectible Accounts 12,000
(Estimate future bad debts)
($15,000 − $3,000 = $12,000)

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Solutions Manual, Chapter 5 5-7
 Brief Exercise 5-10 (LO 5-5)
Debit Credit
Bad Debt Expense 18,000
Allowance for Uncollectible Accounts 18,000
(Estimate future bad debts)
($15,000 + $3,000 = $18,000)
The amount in BE5-10 is greater because the balance of Allowance for Uncollectible
Accounts before adjustment is a debit (or negative). This means that actual bad debts
in the current year have been greater than expected, and the year-end adjustment
accounts for the additional bad news.

Brief Exercise 5-11 (LO 5-5)

Estimated Estimated
Amount Percent Amount
Age Group Receivable Uncollectible Uncollectible
Not yet due $40,000 5% $2,000
1-30 days past due 11,000 20% 2,200
More than 30 days past due 5,000 30% 1,500
Total $56,000 $5,700

Brief Exercise 5-12 (LO 5-5)

Estimated Estimated
Amount Percent Amount
Age Group Receivable Uncollectible Uncollectible
Not yet due $25,000 4% $1,000
1-60 days past due 10,000 25% 2,500
More than 60 days past due 5,000 50% 2,500
Total $40,000 $6,000

Debit Credit
Bad Debt Expense 5,000
Allowance for Uncollectible Accounts 5,000
(Estimate future bad debts)
($6,000 − $1,000 = $5,000)
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5-8 Financial Accounting, 6e
 Chapter 5 - Receivables and Sales

Brief Exercise 5-13 (LO 5-6)

March 14, 2025 Debit Credit
Bad Debt Expense 2,000
Accounts Receivable 2,000
(Write off customer’s account using the direct
write-off method)

Brief Exercise 5-14 (LO 5-6)

December 31, 2024 Debit Credit
No entry necessary

During 2025 Debit Credit

Bad Debt Expense 3,000
Accounts Receivable 3,000
(Write off customers’ accounts using the direct
write-off method)

Brief Exercise 5-15 (LO 5-6)

If Brady uses the direct write-off method, then no adjustment is recorded at the end of
2024 to estimate future bad debts. Instead, if Brady uses the allowance method, the
following adjustment would be recorded at the end of 2024:

December 31, 2024 Debit Credit

Bad Debt Expense 9,000
Allowance for Uncollectible Accounts 9,000
(Estimate future bad debts)

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Solutions Manual, Chapter 5 5-9
 Brief Exercise 5-16 (LO 5-7)
Face Annual Fraction of
Value interest rate the year Interest
$11,000 6% 4 months $220
$30,000 5% 12 months $1,500
$35,000 7% 6 months $1,225
$17,500 8% 6 months $700

Brief Exercise 5-17 (LO 5-7)

Interest Revenue

2024: $40,000 x 9% x 3/12 = $900

2025: $40,000 x 9% x 9/12 = $2,700

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5-10 Financial Accounting, 6e
 Chapter 5 - Receivables and Sales

Brief Exercise 5-18 (LO 5-7)

(a)

October 1, 2024 Debit Credit

Notes Receivable 40,000
Cash 40,000
(Lend cash to employee and accept note)

(b)

December 31, 2024 Debit Credit

Interest Receivable 900
Interest Revenue 900
(Adjust interest receivable)
(Interest revenue = $40,000 × 9% × 3/12)

(c)

October 1, 2025 Debit Credit

Cash 43,600
Notes Receivable 40,000
Interest Receivable 900
Interest Revenue 2,700
(Receive cash on note receivable and interest)
(Interest revenue = $40,000 × 9% × 9/12)

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Solutions Manual, Chapter 5 5-11
 Brief Exercise 5-19 (LO 5-9)
Debit Credit
Bad Debt Expense 4,050
Allowance for Uncollectible Accounts 4,050
(Estimate future bad debts)
($135,000 x 3% = $4,050)

Brief Exercise 5-20 (LO 5-9)

Debit Credit
Bad Debt Expense 4,050
Allowance for Uncollectible Accounts 4,050
(Estimate future bad debts)
($135,000 x 3% = $4,050)

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5-12 Financial Accounting, 6e
 Chapter 5 - Receivables and Sales

Brief Exercise 5-21 (LO 5-1, 5-2, 5-3, 5-5, 5-6, 5-7)
1. c
2. e
3. a
4. h
5. b
6. d
7. g
8. f
9. i

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Solutions Manual, Chapter 5 5-13
 Brief Exercise 5-22 (LO 5-1, 5-2)
(a)
Income
Statement: Revenues − Expenses = Net Income
+25,000 +25,000
Service Revenue
↓
Balance
Sheet: Assets = Liabilities + Stockholders’ Equity
+25,000 +25,000
Accounts Receivable

(b)
Income
Statement: Revenues − Expenses = Net Income
−500 −500
Sales Discount↑
↓
Balance
Sheet: Assets = Liabilities + Stockholders’ Equity
+24,500 −500
Cash
−25,000
Accounts Receivable

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5-14 Financial Accounting, 6e
 Chapter 5 - Receivables and Sales

Brief Exercise 5-23 (LO 5-3)

Income
Statement: Revenues − Expenses = Net Income
+2,000 −2,000
Bad Debt Expense
↓
Balance
Sheet: Assets = Liabilities + Stockholders’ Equity
−2,000 −2,000
Allowance for
Uncollectible Accounts↑

Brief Exercise 5-24 (LO 5-4)

Income
Statement: Revenues − Expenses = Net Income

Balance
Sheet: Assets = Liabilities + Stockholders’ Equity
+17,000
Allowance for
Uncollectible Accounts↓
−17,000
Accounts Receivable

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Solutions Manual, Chapter 5 5-15
 Brief Exercise 5-25 (LO 5-4)
Income
Statement: Revenues − Expenses = Net Income

Balance
Sheet: Assets = Liabilities + Stockholders’ Equity
+7,000
Cash
−7,000
Allowance for
Uncollectible Accounts↑

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5-16 Financial Accounting, 6e
 Chapter 5 - Receivables and Sales

Brief Exercise 5-26 (LO 5-7)

(a)
Income
Statement: Revenues − Expenses = Net Income

Balance
Sheet: Assets = Liabilities + Stockholders’ Equity
+40,000
Notes Receivable
−40,000
Cash
(b)
Income
Statement: Revenues − Expenses = Net Income
+900 +900
Interest Revenue
↓
Balance
Sheet: Assets = Liabilities + Stockholders’ Equity
+900 +900
Interest Receivable
(c)
Income
Statement: Revenues − Expenses = Net Income
+2,700 +2,700
Interest Revenue
↓
Balance
Sheet: Assets = Liabilities + Stockholders’ Equity
+43,600 +2,700
Cash
−40,000
Notes Receivable
−900
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Solutions Manual, Chapter 5 5-17
 Interest Receivable

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5-18 Financial Accounting, 6e
 Chapter 5 - Receivables and Sales

EXERCISES
Exercise 5-1 (LO 5-1)

May 7 Debit Credit

Accounts Receivable 4,000
Service Revenue 4,000
(Provide services on account)

May 13
Cash 4,000
Accounts Receivable 4,000
(Collect cash on account)

Exercise 5-2 (LO 5-2)

May 1 Debit Credit
Cash 270
Service Revenue 270
(Provide services of $300 with a 10% trade discount)

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Solutions Manual, Chapter 5 5-19
 Exercise 5-3 (LO 5-1, 5-2)

March 12 Debit Credit

Accounts Receivable 11,000
Service Revenue 11,000
(Provide services on account)

March 20
Cash 10,780
Sales Discounts 220
Accounts Receivable 11,000
(Receive cash on account less a 2% sales discount)
(Sales discount = $11,000 x 2%)

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5-20 Financial Accounting, 6e
 Chapter 5 - Receivables and Sales

Exercise 5-4 (LO 5-1, 5-2)

March 12 Debit Credit
Accounts Receivable 11,000
Service Revenue 11,000
(Provide services on account)

March 31
Cash 11,000
Accounts Receivable 11,000
(Receive cash on account)

Exercise 5-5 (LO 5-1, 5-2)

March 12 Debit Credit
Service Expense 11,000
Accounts Payable 11,000
(Receive services on account)

March 31
Accounts Payable 11,000
Cash 11,000
(Pay cash on account)

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Solutions Manual, Chapter 5 5-21
 Exercise 5-6 (LO 5-1, 5-2)
Requirement 1
April 25 Debit Credit
Accounts Receivable 3,500
Service Revenue 3,500
(Provide services on account)

Requirement 2
April 27 Debit Credit
Sales Allowances 600
Accounts Receivable 600
(Record sales allowance for credit sale)

Requirement 3
April 30 Debit Credit
Cash 2,900
Accounts Receivable 2,900
(Collect cash on account less sales allowance)

Requirement 4
Service revenue $3,500
Less: Sales allowances (600)
Net sales $2,900

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5-22 Financial Accounting, 6e
 Chapter 5 - Receivables and Sales

Exercise 5-7 (LO 5-3, 5-4)

Requirement 1
December 31, 2024 Debit Credit
Bad Debt Expense 12,500
Allowance for Uncollectible Accounts 12,500
(Estimate future bad debts)
($12,500 = $50,000 x 25%)

Requirement 2
During 2025 Debit Credit
Allowance for Uncollectible Accounts 10,000
Accounts Receivable 10,000
(Write off uncollectible accounts)

Allowance for Uncollectible Accounts

Beginning balance in 2025 $12,500 credit
Less: Write-offs during 2025 (10,000) debit
Ending balance in 2025 (before adjustment) $ 2,500 credit

Requirement 3
During 2025 Debit Credit
Allowance for Uncollectible Accounts 15,000
Accounts Receivable 15,000
(Write off uncollectible accounts)

Allowance for Uncollectible Accounts

Beginning balance in 2025 $12,500 credit
Less: Write-offs during 2025 (15,000) debit
Ending balance in 2025 (before adjustment) $ 2,500 debit*
* A debit balance in Allowance for Uncollectible Accounts indicates the account
currently has a negative balance.

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Solutions Manual, Chapter 5 5-23
 Exercise 5-8 (LO 5-5)
Requirement 1
December 31, 2024 Debit Credit
Bad Debt Expense 7,900
Allowance for Uncollectible Accounts 7,900
(Estimate future bad debts)
($7,900 = $60,000 x 15% − $1,100)

Requirement 2
Bad debt expense $7,900
Allowance for uncollectible accounts $9,000*
*$9,000 = $7,900 credit adjustment + $1,100 credit balance before adjustment

Requirement 3
Total accounts receivable $ 60,000
Less: Allowance for uncollectible accounts (9,000)
Net accounts receivable $ 51,000

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5-24 Financial Accounting, 6e
 Chapter 5 - Receivables and Sales

Exercise 5-9 (LO 5-5)

Requirement 1
December 31, 2024 Debit Credit
Bad Debt Expense 28,100
Allowance for Uncollectible Accounts 28,100
(Estimate future bad debts)
[$28,100 =( $130,000 x 20%) + $2,100]

Requirement 2
Bad debt expense $28,100
Allowance for uncollectible accounts $26,000*
*$26,000 = $28,100 credit adjustment − $2,100 debit balance before adjustment

Requirement 3
Total accounts receivable $130,000
Less: Allowance for uncollectible accounts (26,000)
Net accounts receivable $104,000

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Solutions Manual, Chapter 5 5-25
 Exercise 5-10 (LO 5-5)
Requirement 1
Estimated Estimated
Amount Percent Amount
Age Group Receivable Uncollectible Uncollectible
Not yet due $50,000 15% $ 7,500
0-30 days past due 11,000 20% 2,200
31-90 days past due 8,000 45% 3,600
More than 90 days past due 1,000 85% 850
Total $70,000 $14,150

Requirement 2
December 31, 2024 Debit Credit
Bad Debt Expense 12,750
Allowance for Uncollectible Accounts 12,750
(Estimate future bad debts)
($12,750 = $14,150 − $1,400)

Requirement 3
Total accounts receivable $ 70,000
Less: Allowance for uncollectible accounts (14,150)
Net accounts receivable $ 55,850

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5-26 Financial Accounting, 6e
 Chapter 5 - Receivables and Sales

Exercise 5-11 (LO 5-5)

Requirement 1
Estimated Estimated
Amount Percent Amount
Age Group Receivable Uncollectible Uncollectible
Not yet due $ 60,000 4% $ 2,400
0-60 days past due 26,000 20% 5,200
61-120 days past due 16,000 30% 4,800
More than 120 days past due 8,000 85% 6,800
Total $110,000 $19,200

Requirement 2
December 31, 2024 Debit Credit
Bad Debt Expense 23,200
Allowance for Uncollectible Accounts 23,200
(Estimate future bad debts)
($23,200 = $19,200 + $4,000)

Requirement 3
Total accounts receivable $110,000
Less: Allowance for uncollectible accounts (19,200)
Net accounts receivable $ 90,800

Exercise 5-12 (LO 5-3, 5-4, 5-5)

Credit sales Stockholders’
transaction cycle Assets Liabilities equity Revenues Expenses
1. Provide services on
I NE I I NE
account
2. Estimate uncollectible
D NE D NE I
accounts
3. Write off accounts as
NE NE NE NE NE
uncollectible
4. Collect on account
NE NE NE NE NE
previously written off
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Solutions Manual, Chapter 5 5-27
 Exercise 5-13 (LO 5-6)
Requirement 1
1. Debit Credit
Accounts Receivable 190,000
Service Revenue 190,000
(Provide service on account)
2.
Cash 185,000
Accounts Receivable 185,000
(Collect cash on account)
3.
Bad Debt Expense 4,650
Allowance for Uncollectible Accounts 4,650
(Estimate future bad debts)
($4,650 = $31,000 x 15%)
4.
Allowance for Uncollectible Accounts 3,000
Accounts Receivable 3,000
(Write off actual bad debts)

Requirement 2
1. Debit Credit
Accounts Receivable 190,000
Service Revenue 190,000
(Provide services on account)
2.
Cash 185,000
Accounts Receivable 185,000
(Collect cash on account)
3.
No entry
4.
Bad Debt Expense 3,000
Accounts Receivable 3,000
(Write off actual bad debts)
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5-28 Financial Accounting, 6e
 Chapter 5 - Receivables and Sales

Exercise 5-13 (concluded)

Requirement 3
Allowance Direct Write-off
Bad Debt Expense Method Method
2024: $4,650 $0
2025: $0 $3,000

Under the allowance method, we record bad debt expense in the period we estimate
the bad debts (2024). In 2024, $4,650 would be recorded for bad debt expense under
the allowance method only. Under the direct write-off method, we record bad debts
when they actually occur (2025). In 2025, $3,000 would be recorded for bad debt
expense under the direct write-off method only. The difference in expense amounts
between years relates to the fact that bad debt estimates in 2024 did not prove to be
the actual amount occurring in 2025.

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Solutions Manual, Chapter 5 5-29
 Exercise 5-14 (LO 5-7)
1. April 1, 2024 Debit Credit
Notes Receivable 7,000
Service Revenue 7,000
(Provide services and accept note)

2. June 1, 2024
Notes Receivable 11,000
Cash 11,000
(Lend cash to vendor and accept note)
3. November 1,
2024
Notes Receivable 6,000
Accounts Receivable 6,000
(Cancel accounts receivable and accept note)

Exercise 5-15 (LO 5-7)

March 1 Debit Credit
Notes Receivable 11,000
Service Revenue 11,000
(Provide legal services and accept note)
September 1
Cash 11,495
Notes Receivable 11,000
Interest Revenue 495
(Receive cash on note receivable and interest)
(Interest revenue = $11,000 x 9% x 6/12)

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5-30 Financial Accounting, 6e
 Chapter 5 - Receivables and Sales

Exercise 5-16 (LO 5-7)

March 1 Debit Credit
Legal Fees Expense 11,000
Notes Payable 11,000
(Receive legal services and sign note)
September 1
Notes Payable 11,000
Interest Expense 495
Cash 11,495
(Pay cash on note payable and interest)
(Interest expense = $11,000 x 9% x 6/12)

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© 2022 McGraw Hill Education
Solutions Manual, Chapter 5 5-31
 Exercise 5-17 (LO 5-7)
Requirement 1

April 1, 2024 Debit Credit

Notes Receivable 600,000
Cash 600,000
(Lend cash to supplier and accept note)

Requirement 2

December 31, 2024 Debit Credit

Interest Receivable 49,500
Interest Revenue 49,500
(Adjust interest receivable)
(Interest revenue = $600,000 x 11% x 9/12)

Requirement 3

April 1, 2025 Debit Credit

Cash 666,000
Notes Receivable 600,000
Interest Receivable 49,500
Interest Revenue 16,500
(Receive cash on note receivable and interest)
(Interest revenue = $600,000 x 11% x 3/12)

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5-32 Financial Accounting, 6e
 Chapter 5 - Receivables and Sales

Exercise 5-18 (LO 5-8)

WalCo TarMart CostGet

Receivables Net sales $322,427 $67,878 $68,963

turnover = Average ($1,815 + ($6,166 + ($629 +
ratio accounts $2,762) /2 $6,694) /2 $665) /2
receivable
= 140.9 times 10.6 times 106.6 times

Average 365 365 365 365

collection =
Receivables 140.9 10.6 106.6
period
turnover ratio
= 2.6 days 34.4 days 3.4 days

Of these three companies, WalCo appears to be collecting cash most efficiently from
sales.

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Solutions Manual, Chapter 5 5-33
 Exercise 5-19 (LO 5-9)
Requirement 1
December 31, 2024 Debit Credit
Bad Debt Expense 5,500
Allowance for Uncollectible Accounts 5,500
(Estimate future bad debts)
[$5,500 = ($55,000 x 12%) − $1,100]

Requirement 2
December 31, 2024 Debit Credit
Bad Debt Expense 7,800
Allowance for Uncollectible Accounts 7,800
(Estimate future bad debts)
($7,800 = $260,000 x 3%)

Requirement 3
Percentage of Percentage of
receivables credit sales
method method
Total assets −$5,500 −$7,800
Net income −$5,500 −$7,800

In this example, the amount of the adjustment is greater under the percentage of credit
sales approach. This means that both assets and net income will be lower in 2024
under this approach.

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5-34 Financial Accounting, 6e
 Chapter 5 - Receivables and Sales

Exercise 5-20 (LO 5-9)

Requirement 1
December 31, 2024 Debit Credit
Bad Debt Expense 7,700
Allowance for Uncollectible Accounts 7,700
(Estimate future bad debts)
($7,700 = $55,000 x 12% + $1,100)

Requirement 2
December 31, 2024 Debit Credit
Bad Debt Expense 7,800
Allowance for Uncollectible Accounts 7,800
(Estimate future bad debts)
($7,800 = $260,000 x 3%)

Requirement 3
Percentage of Percentage of
receivables credit sales
method method
Total assets −$7,700 −$7,800
Net income −$7,700 −$7,800

In this example, the amount of the adjustment is greater under the percentage of credit
sales approach. This means that both assets and net income will be lower in 2024
under this approach.

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Solutions Manual, Chapter 5 5-35
 Exercise 5-21 (LO 5-1, 5-4, 5-5, 5-7, 5-9)
Requirement 1
January 2 Debit Credit
Cash 35,100
Service Revenue 35,100
(Provide services for cash)
January 6 Debit Credit
Accounts Receivable 72,400
Service Revenue 72,400
(Provide services on account)
January 15 Debit Credit
Allowance for Uncollectible Accounts 1,000
Accounts Receivable 1,000
(Write off uncollectible accounts)
January 20 Debit Credit
Salaries Expense 31,400
Cash 31,400
(Pay for salaries)
January 22 Debit Credit
Cash 70,000
Accounts Receivable 70,000
(Receive cash on account)
January 25 Debit Credit
Accounts Payable 5,500
Cash 5,500
(Pay cash on account)
January 30 Debit Credit
Utilities Expense 13,700
Cash 13,700
(Pay for utilities)

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5-36 Financial Accounting, 6e
 Chapter 5 - Receivables and Sales

Exercise 5-21 (continued)

Requirement 2
(a) January 31 Debit Credit
Bad Debt Expense 1,100
Allowance for Uncollectible Accounts 1,100
(Adjust uncollectible accounts)
($1,100 = ($5,000×20%)+($10,000a×5%)−$400b)
a
$10,000 =$13,600+$72,400−$70,000−$1,000−$5,000
b
$400 = $1,400−$1,000
(b) January 31 Debit Credit
Supplies Expense 1,800
Supplies 1,800
(Adjust supplies)
($1,800 = $2,500−$700)
(c) January 31 Debit Credit
Interest Receivable 100
Interest Revenue 100
(Adjust interest revenue)
($100 = $20,000×6%×1/12)
(d) January 31 Debit Credit
Salaries Expense 33,500
Salaries Payable 33,500
(Adjust salaries payable)

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Solutions Manual, Chapter 5 5-37
 Exercise 5-21 (continued)
Requirement 3

3D Family Fireworks
Adjusted Trial Balance
January 31, 2024
Accounts Debit Credit
Cash $ 78,400
Accounts Receivable 15,000
Interest Receivable 100
Supplies 700
Notes Receivable 20,000
Land 77,000
Allowance for Uncollectible Accounts $ 1,500
Accounts Payable 1,700
Salaries Payable 33,500
Common Stock 96,000
Retained Earnings 32,400
Service Revenue 107,500
Interest Revenue 100
Supplies Expense 1,800
Salaries Expense 64,900
Utilities Expense 13,700
Bad Debt Expense 1,100
Totals $272,700 $272,700

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5-38 Financial Accounting, 6e
 Chapter 5 - Receivables and Sales

Exercise 5-21 (continued)

Requirement 3 (continued)

Ending Beginning balance in bold, entries during

Accounts Balance January in blue, and adjusting entries in red.
Cash 78,400 = 23,900+35,100+70,000−31,400−5,500−13,700
Accounts Receivable 15,000 = 13,600+72,400−1,000−70,000
Interest Receivable 100 = 100
Supplies 700 = 2,500−1,800
Notes Receivable 20,000 = 20,000
Land 77,000 = 77,000
Allowance for Uncollectible 1,500 = 1,400−1,000+1,100
Accounts
Accounts Payable 1,700 = 7,200−5,500
Salaries Payable 33,500 = 33,500
Common Stock 96,000 = 96,000
Retained Earnings 32,400 = 32,400
Service Revenue 107,500 = 35,100+72,400
Interest Revenue 100 = 100
Supplies Expense 1,800 = 1,800
Salaries Expense 64,900 = 31,400+33,500
Utilities Expense 13,700 = 13,700
Bad Debt Expense 1,100 = 1,100

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Solutions Manual, Chapter 5 5-39
 Exercise 5-21 (continued)
Requirement 4
3D Family Fireworks
Income Statement
For the period ended January 31, 2024
Revenues:
Service revenue $107,500
Interest revenue 100
Total revenues 107,600
Expenses:
Supplies expense 1,800
Salaries expense 64,900
Utilities expense 13,700
Bad debt expense 1,100
Total expenses 81,500
Net income $ 26,100

Requirement 5
3D Family Fireworks
Balance Sheet
January 31, 2024
Assets Liabilities
Cash $ 78,400 Accounts payable $ 1,700
Accounts receivable $15,000 Salaries payable 33,500
Less: Allowance (1,500) 13,500 Total current liabilities 35,200
Interest receivable 100
Supplies 700
Total current assets 92,700 Stockholders’ Equity
Common stock 96,000
Notes receivable 20,000 Retained earnings 58,500 *
Land 77,000 Total stockholders’ equity 154,500
Total liabilities and
Total assets $189,700 stockholders’ equity $189,700

* Retained earnings = Beginning retained earnings + Net income − Dividends

= $32,400 + $26,100 − $0
= $58,500

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5-40 Financial Accounting, 6e
 Chapter 5 - Receivables and Sales

Exercise 5-21 (concluded)

Requirement 6
January 31, 2024 Debit Credit
Service Revenue 107,500
Interest Revenue 100
Retained Earnings 107,600
(Close revenue accounts)

Retained Earnings 81,500

Supplies expense 1,800
Salaries expense 64,900
Utilities expense 13,700
Bad debt expense 1,100
(Close expense accounts)

Requirement 7
(a) The receivables turnover ratio is:
Receivables Net credit sales $72,400
Turnover = Average accounts = = 5.1
($13,600 + $15,000) / 2
Ratio receivable
A ratio of 5.1 suggests that credit sales are about five times the average balance of
accounts receivable. Companies allow customers to purchase goods and services on
account to boost revenues, but these credit sales also create a risk of the customer not
paying, so a higher receivables turnover ratio typically is preferred. Compared to the
industry average receivables turnover ratio of 4.2., 3D Family Fireworks is collecting
cash more efficiently from customers on credit sales.

(b) The ratio at the end of January is:

Allowance for Uncollectible

$1,500
Accounts = = 10%
Accounts receivable $15,000

In comparison, the ratio at the beginning of January was 10.3% (= $1,400 / $13,600).
The allowance is lower in relation to accounts receivable at the end of the month
indicating the company expects an improvement in cash collections from customers
on credit sales.
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Solutions Manual, Chapter 5 5-41
 Exercise 5-22 (LO 5-1, 5-2, 5-4, 5-5, 5-7)
Requirement 1
1. Debit Credit
Accounts Receivable 7,000
Service Revenue 7,000
(Provide services on account)
2. Debit Credit
Cash 4,900
Sales Discounts 100
Accounts Receivable 5,000
(Receive cash on account with sales discount)
($100 = $5,000 × 2%)
3. Debit Credit
Allowance for Uncollectible Accounts 1,500
Accounts Receivable 1,500
(Write off uncollectible accounts)

Requirement 2
(a) December 31 Debit Credit
Bad Debt Expense 3,500
Allowance for Uncollectible Accounts 3,500
(Adjust uncollectible accounts)
($3,500 = [($41,500+$7,000−$5,000−$1,500)×10%]−$700a
a
$2,200 −$1,500
(c) December 31 Debit Credit
Interest Receivable 200
Interest Revenue 200
(Adjust interest receivable)
($200 = $10,000×8%×3/12)

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5-42 Financial Accounting, 6e
 Chapter 5 - Receivables and Sales

Exercise 5-22 (continued)

Requirement 3

Pop’s Fireworks
Adjusted Trial Balance
December 31, 2024
Accounts Debit Credit
Cash $ 26,100
Accounts Receivable 42,000
Allowance for Uncollectible Accounts $ 4,200
Interest Receivable 200
Supplies 6,700
Notes Receivable 10,000
Land 85,000
Accounts Payable 12,300
Common Stock 106,000
Retained Earnings 29,900
Service Revenue 131,800
Sales Discounts 100
Interest Revenue 200
Salaries Expense 70,900
Utilities Expense 24,200
Supplies Expense 15,700
Bad Debt Expense 3,500
Totals $284,400 $284,400

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© 2022 McGraw Hill Education
Solutions Manual, Chapter 5 5-43
 Exercise 5-22 (continued)
Requirement 3 (continued)

Ending Given balance in bold, entries

Accounts Balance during the year in blue, and
adjusting entries in red.
Cash 26,100 = 21,200+4,900
Accounts Receivable 42,000 = 41,500+7,000−5,000−1,500
Allowance for Uncollectible Accounts 4,200 = 2,200−1,500+3,500
Interest Receivable 200 = 200
Supplies 6,700 = 6,700
Notes Receivable 10,000 = 10,000
Land 85,000 = 85,000
Accounts Payable 12,300 = 12,300
Common Stock 106,000 = 106,000
Retained Earnings 29,900 = 29,900
Service Revenue 131,800 = 124,800+7,000
Sales Discounts 100 = 100
Interest Revenue 200 = 200
Salaries Expense 70,900 = 70,900
Utilities Expense 24,200 = 24,200
Supplies Expense 15,700 = 15,700
Bad Debt Expense 3,500 = 3,500

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5-44 Financial Accounting, 6e
 Chapter 5 - Receivables and Sales

Exercise 5-22 (continued)

Requirement 4
Pop’s Fireworks
Income Statement
For the year ended December 31, 2024
Revenues:
Service revenue $131,800
Sales Discounts (100)
Interest revenue 200
Net revenues 131,900
Expenses:
Salaries Expense 70,900
Utilities Expense 24,200
Supplies Expense 15,700
Bad debt expense 3,500
Total expenses 114,300
Net income $ 17,600

Requirement 5
Pop’s Fireworks
Balance Sheet
December 31, 2024
Assets Liabilities
Cash $ 26,100 Accounts payable $ 12,300
Accounts receivable $42,000
Less: Allowance (4,200) 37,800 Total current liabilities 12,300
Interest receivable 200
Supplies 6,700
Total current assets 70,800 Stockholders’ Equity
Common stock 106,000
Notes receivable 10,000 Retained earnings 47,500 *
Land 85,000 Total stockholders’ equity 153,500
Total liabilities and
Total assets $165,800 stockholders’ equity $165,800

* Retained earnings = Beginning retained earnings + Net income − Dividends

= $29,900 + $17,600 − $0
= $45,700
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© 2022 McGraw Hill Education
Solutions Manual, Chapter 5 5-45
 Exercise 5-22 (concluded)
Requirement 6
January 31, 2024 Debit Credit
Service Revenue 131,800
Interest Revenue 200
Sales Discounts 100
Retained Earnings 131,900
(Close revenue accounts)

Retained Earnings 114,300

Salaries Expense 70,900
Utilities Expense 24,200
Supplies Expense 15,700
Bad debt expense 3,500
(Close expense accounts)

Requirement 7
(a) Bad Debt Expense = $3,500

(b) Allowance for Uncollectible Accounts = $4,200

(c) Accounts Receivable $42,000

Allowance for Uncollectible 4,200
Amount expected to be collected $37,800

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5-46 Financial Accounting, 6e
 Chapter 5 - Receivables and Sales

PROBLEMS: SET A
Problem 5-1A (LO 5-1)
Revenue recognized in 2024
Scenario 1: $11,000
Scenario 2: $1,200 (= $1,600 x 75%)
Scenario 3: $450,000
Scenario 4: $35,000

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Solutions Manual, Chapter 5 5-47
 Problem 5-2A (LO 5-1, 5-2)
Requirement 1
May 2 Debit Credit
No entry
May 7
Accounts Receivable 1,200
Tour Revenue 1,200
(Provide guided tour on account)
May 9
No entry
May 15
Sales Allowances 360
Accounts Receivable 360
(Sales allowance for services on account)
(Sales allowance = $1,200 x 30%)
May 20
Cash 789.60
Sales Discounts 50.40
Accounts Receivable 840.00
(Receive cash on account)
(Sales discount = $840 x 6%)

Requirement 2

Outdoor Expo
Partial Income Statement

Total tour revenues $1,200.00

Less: Sales allowances (360.00)
Sales discounts (50.40)
Net tour revenues $789.60

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5-48 Financial Accounting, 6e
 Chapter 5 - Receivables and Sales

Problem 5-3A (LO 5-3, 5-4, 5-5)

Requirement 1
June 12, 2024 Debit Credit
Accounts Receivable 41,000
Service Revenue 41,000
(Provide services on account)
September 17, 2024
Cash 25,000
Accounts Receivable 25,000
(Receive cash on account)
December 31, 2024
Bad Debt Expense 7,200
Allowance for Uncollectible Accounts 7,200
(Estimate future bad debts)
($16,000 x 45% = $7,200)
March 4, 2025
Accounts Receivable 56,000
Service Revenue 56,000
(Provide services on account)
May 20, 2025
Cash 10,000
Accounts Receivable 10,000
(Receive cash on account)
July 2, 2025
Allowance for Uncollectible Accounts 6,000
Accounts Receivable 6,000
(Write off actual bad debts)
October 19, 2025
Cash 45,000
Accounts Receivable 45,000
(Receive cash on account)
December 31, 2025
Bad Debt Expense 3,750
Allowance for Uncollectible Accounts 3,750
(Estimate future bad debts)
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Solutions Manual, Chapter 5 5-49
 [($11,000 x 45%) − $1,200 = $3,750]

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5-50 Financial Accounting, 6e
 Chapter 5 - Receivables and Sales

Problem 5-3A (concluded)

Requirement 2
Cash Accounts Receivable
25,000 41,000 25,000
Dec. 31, 2024 25,000 Dec. 31, 2024 16,000
10,000 56,000 10,000
45,000 6,000
Dec. 31, 2025 80,000 45,000
Dec. 31, 2025 11,000

Allow. for Uncol. Accts.

7,200 Dec. 31, 2024

6,000 3,750
4,950 Dec. 31, 2025

Requirement 3
2024 2025
Total accounts receivable $16,000 $11,000
Less: Allowance for uncollectible accounts 7,200 4,950
Net accounts receivable $ 8,800 $ 6,050

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Solutions Manual, Chapter 5 5-51
 Problem 5-4A (LO 5-4, 5-5)
Requirement 1
Estimated Estimated
Amount percent amount
Age group receivable uncollectible uncollectible
Not yet due $40,000 4% $ 1,600
0-90 days past due 16,000 20% 3,200
91-180 days past due 11,000 25% 2,750
More than 180 days past due 13,000 80% 10,400
Total $80,000 $17,950

Requirement 2
December 31, 2024 Debit Credit
Bad Debt Expense 12,950
Allowance for Uncollectible Accounts 12,950
(Estimate future bad debts)
($17,950 − $5,000 = $12,950)

Requirement 3
July 19, 2025
Allowance for Uncollectible Accounts 8,000
Accounts Receivable 8,000
(Write off actual bad debts)

Requirement 4
September 30, 2025
Accounts Receivable 8,000
Allowance for Uncollectible Accounts 8,000
(Re-establish account previously written off)
September 30, 2025
Cash 8,000
Accounts Receivable 8,000
(Receive cash on account)

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5-52 Financial Accounting, 6e
 Chapter 5 - Receivables and Sales

Problem 5-5A (LO 5-3, 5-6)

Requirement 1
Arnold should not use the direct write-off method. Even if no accounts are known to
be uncollectible at the time, Arnold should estimate future bad debts and record those
estimates as an expense (Bad Debt Expense) and reduction in total assets (Allowance
for Uncollectible Accounts) in the current year.

Requirement 2
Allowance for Uncollectible Accounts = $170,000 x 70% = $119,000.

Requirement 3
If Arnold uses the direct write-off method, total assets will be overstated and total
expenses will be understated by $119,000.

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Solutions Manual, Chapter 5 5-53
 Problem 5-6A (LO 5-5)
Requirement 1
Debit Credit
Bad Debt Expense 59,000
Allowance for Uncollectible Accounts 59,000
(Estimate future bad debts)
[($1,100,000 x 9%) − $40,000 = $59,000]

Requirement 2
Revised operating income = $260,000 − $59,000 (bad debt expense)
= $201,000

Willie will not get his bonus because the revised operating income of $201,000 is less
than the $210,000 bonus level.

Requirement 3
Debit Credit
Bad Debt Expense 26,000
Allowance for Uncollectible Accounts 26,000
(Estimate future bad debts)
[($1,100,000 x 6%) − $40,000 = $26,000]

Revised operating income = $260,000 − $26,000 (bad debt expense)

= $234,000

Willie will get his bonus because the revised operating income of $234,000 is greater
than the $210,000 bonus level.

Requirement 4
Using 6% instead of 9% to estimate future bad debts causes total assets to be
overstated and operating income to be overstated by $33,000 (= $234,000 −
$201,000).

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5-54 Financial Accounting, 6e
 Chapter 5 - Receivables and Sales

Problem 5-7A (LO 5-3, 5-4)

Requirement 1
December 31, 2024 Debit Credit
Bad Debt Expense 455,000
Allowance for Uncollectible Accounts 455,000
(Estimate future bad debts)
($1,300,000 x 35% = $455,000)

Requirement 2
Because actual bad debts in 2025 were only $300,000 when the company estimated
bad debts to be $455,000, total assets will be understated and total expenses will be
overstated by $155,000 (= $455,000 − $300,000) in 2024.

Requirement 3
Humanity International should not prepare new financial statements for 2024. The fact
that actual bad debts in 2025 turned out to be different than the amount estimated at
the end of 2024 does not constitute a reason for re-issuing prior financial statements.
Estimation error is an issue inherent in financial reporting.

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Solutions Manual, Chapter 5 5-55
 Problem 5-8A (LO 5-7)
Requirement 1

December 1, 2024 Debit Credit

Notes Receivable 90,000
Service Revenue 90,000
(Provide services in exchange for a note)

Requirement 2
December 31, 2024 Debit Credit
Interest Receivable (2024) 750
Interest Revenue 750
(Adjust interest receivable)
(Interest revenue = $90,000 x 10% x 1/12)
December 1, 2025
Cash 9,000
Interest Receivable (2024) 750
Interest Revenue 8,250
(Receive annual interest)
(Interest revenue = $90,000 x 10% x 11/12)
December 31, 2025
Interest Receivable (2025) 750
Interest Revenue 750
(Adjust interest receivable)
(Interest revenue = $90,000 x 10% x 1/12)

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5-56 Financial Accounting, 6e
 Chapter 5 - Receivables and Sales

Problem 5-8A (concluded)

December 1, 2026
Cash 9,000
Interest Receivable (2025) 750
Interest Revenue 8,250
(Receive annual interest)
(Interest revenue = $90,000 x 10% x 11/12)
December 31, 2026
Interest Receivable (2026) 750
Interest Revenue 750
(Adjust interest receivable)
(Interest revenue = $90,000 x 10% x 1/12)

Requirement 3
December 1, 2027 Debit Credit
Cash 99,000
Notes Receivable 90,000
Interest Receivable (2026) 750
Interest Revenue 8,250
(Receive cash on note and annual interest)
(Interest revenue = $90,000 x 10% x 11/12)

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Solutions Manual, Chapter 5 5-57
 Problem 5-9A (LO 5-8)
Requirement 1
Walmart Target
Receivables Net sales $443,854 $68,466
turnover =
Average accounts ($5,089 + $5,937) / 2 ($6,153 + $5,927) / 2
ratio
receivable
= 80.5 times 11.3 times

Average 365 365 365

collection =
Receivables 80.5 11.3
period
turnover ratio
= 4.5 days 32.3 days

Walmart has a higher receivables turnover ratio and a lower average collection period,
which means it collects cash more quickly from its customers. The receivables
turnover ratio and average collection period for Tenet Healthcare in the most recent
year reported in the text are 6.9 times and 52.9 days. The receivables turnover ratio
and average collection period for CVS Health in the most recent year reported in the
text are 13.8 times and 26.4 days. Companies in the healthcare industry will usually
have a lower receivables turnover ratio because the amounts to be received are larger
and customers are more often not able to pay in a timely manner.

Requirement 2
Including cash sales in the numerator of the receivables turnover ratio is the same as
suggesting that receivables turnover instantly (in other words, the average collection
period is zero). Therefore, companies and industries that are more likely to have cash
sales will show a higher receivables turnover ratio and lower average collection period
compared to a company or industry with similar net sales that consist of a higher
proportion of credit sales. The receivables turnover ratio remains useful for
understanding how quickly a company generates cash from its customers, but the ratio
will naturally vary with industry characteristics. Therefore, to determine the efficiency
of management in collecting receivables, it is better to compare ratios among firms in
the same industry.

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5-58 Financial Accounting, 6e
 Chapter 5 - Receivables and Sales

PROBLEMS: SET B
Problem 5-1B (LO 5-1)
Revenue recognized in 2024
Scenario 1: $900,000
Scenario 2: $68 (= $80 x 85%)
Scenario 3: $30,000
Scenario 4: $260,000

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Solutions Manual, Chapter 5 5-59
 Problem 5-2B (LO 5-1, 5-2)
Requirement 1
June 10 Debit Credit
No entry
June 12
No entry

June 13
No entry

June 16
Accounts Receivable 2,700
Service Revenue 2,700
(Provide services of $3,000 on account
with a 10% discount)
June 19
No entry

June 20
Sales Allowances 810
Accounts Receivable 810
(Sales allowance for services on account)
June 30
Cash 1,890
Accounts Receivable 1,890
(Receive cash on account)

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5-60 Financial Accounting, 6e
 Chapter 5 - Receivables and Sales

Problem 5-2B (concluded)

Requirement 2
Data Recovery Services
Partial Income Statement

Total service revenues $2,700

Less: Sales allowances (810)
Net service revenues $1,890

Requirement 3
June 25
Cash 1,852.20
Sales Discounts 37.80
Accounts Receivable 1,890.00
(Receive cash on account with 2%
sales discount)
(Sales discount = 1,890 x 2%)

Total Service Revenues $2,700.00

Less: Sales Allowances 810.00
Sales Discounts 37.80
Net Service Revenues $1,852.20

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Solutions Manual, Chapter 5 5-61
 Problem 5-3B (LO 5-3, 5-4, 5-5)
Requirement 1
February 2, 2024 Debit Credit
Accounts Receivable 38,000
Service Revenue 38,000
(Provide services on account)
July 23, 2024
Cash 27,000
Accounts Receivable 27,000
(Receive cash on account)
December 31, 2024
Bad Debt Expense 2,750
Allowance for Uncollectible Accounts 2,750
(Estimate future bad debts)
($11,000 x 25% = $2,750)
April 12, 2025
Accounts Receivable 51,000
Service Revenue 51,000
(Provide services on account)
June 28, 2025
Cash 6,000
Accounts Receivable 6,000
(Receive cash on account)
September 13, 2025
Allowance for Uncollectible Accounts 5,000
Accounts Receivable 5,000
(Write off actual bad debts)
October 5, 2025
Cash 45,000
Accounts Receivable 45,000
(Receive cash on account)
December 31, 2025
Bad Debt Expense 3,750
Allowance for Uncollectible Accounts 3,750
(Estimate future bad debts)
[($6,000 x 25%) + $2,250 = $3,750]
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5-62 Financial Accounting, 6e
 Chapter 5 - Receivables and Sales

Problem 5-3B (concluded)

Requirement 2
Cash Accounts Receivable
27,000 38,000 27,000
Dec. 31, 2024 27,000 Dec. 31, 2024 11,000
6,000 51,000 6,000
45,000 5,000
Dec. 31, 2025 78,000 45,000
Dec. 31, 2025 6,000

Allow. for Uncoll. Accts.

2,750 Dec. 31, 2024

5,000 3,750
1,500 Dec. 31, 2025

Requirement 3
2024 2025
Total accounts receivable $11,000 $6,000
Less: Allowance for uncollectible accounts 2,750 1,500
Net accounts receivable $ 8,250 $4,500

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© 2022 McGraw Hill Education
Solutions Manual, Chapter 5 5-63
 Problem 5-4B (LO 5-4, 5-5)
Requirement 1
Estimated Estimated
Amount percent amount
Age group receivable uncollectible uncollectible
Not yet due $40,000 3% $1,200
0-30 days past due 11,000 4% 440
31-60 days past due 8,000 11% 880
More than 60 days past due 1,000 25% 250
Total $60,000 $2,770

Requirement 2
December 31, 2024 Debit Credit
Bad Debt Expense 3,170
Allowance for Uncollectible Accounts 3,170
(Estimate future bad debts)
($2,770 + $400 = $3,170)

Requirement 3
April 3, 2025
Allowance for Uncollectible Accounts 500
Accounts Receivable 500
(Write off actual bad debts)

Requirement 4
July 17, 2025
Accounts Receivable 100
Allowance for Uncollectible Accounts 100
(Re-establish portion of account previously
written off)
July 17, 2025
Cash 100
Accounts Receivable 100
(Receive cash on account)
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5-64 Financial Accounting, 6e
 Chapter 5 - Receivables and Sales

Problem 5-5B (LO 5-3, 5-6)

Requirement 1
Letni should not use the direct write-off method. Even if no accounts are known to be
uncollectible at the time, Paul should estimate future bad debts and record those
estimates as an expense (Bad Debt Expense) and reduction in total assets (Allowance
for Uncollectible Accounts) in the current year.

Requirement 2
Allowance for Uncollectible Accounts = $330,000 x 25% = $82,500.

Requirement 3
If Letni uses the direct write-off method, total assets will be overstated and total
expenses will be understated by $82,500.

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permitted without the prior written consent of McGraw Hill Education.
© 2022 McGraw Hill Education
Solutions Manual, Chapter 5 5-65
 Problem 5-6B (LO 5-5)
Requirement 1
Debit Credit
Bad Debt Expense 330,000
Allowance for Uncollectible Accounts 330,000
(Estimate future bad debts)
($11,000,000 x 4% − $110,000 = $330,000)

Requirement 2
Revised operating income = $2,900,000 − $330,000 (bad debt expense)
= $2,570,000

Outlet Flooring will meet analysts’ expectations because the revised operating income
of $2,570,000 is greater than the $2,200,000 expectations.

Requirement 3
Revised operating income = $2,900,000 − $700,000 (bad debt expense)
= $2,200,000

If Outlet Flooring records bad debt expense for $700,000 instead of $330,000, assets
will be understated and operating income will be understated by $370,000.

Requirement 4
By managing operating income downward, Wanda is “saving” reported income for the
future. If bad debt expense is overestimated this year, then it can be understated next
year. Understating bad debt expense next year will overstate operating income in that
year.

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5-66 Financial Accounting, 6e
 Chapter 5 - Receivables and Sales

Problem 5-7B (LO 5-3, 5-4)

Requirement 1
Debit Credit
Bad Debt Expense 7,000
Allowance for Uncollectible Accounts 7,000
(Estimate future bad debts)
($350,000 x 2% = $7,000)

Requirement 2
Previts underestimated uncollectible accounts by $80,500. Actual bad debts in the
second year were $87,500 and the company estimated bad debts to be only $7,000.
Because of this, total assets will be overstated and total expenses will be understated
by $80,500 in the first year.

Requirement 3
Previts should not prepare new financial statements for the first year. The fact that
actual bad debts in the second year turned out to be different than the amount
estimated at the end of the first year does not constitute a reason for re-issuing prior
financial statements. Estimation error is an issue inherent in financial reporting.

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permitted without the prior written consent of McGraw Hill Education.
© 2022 McGraw Hill Education
Solutions Manual, Chapter 5 5-67
 Problem 5-8B (LO 5-7)
Requirement 1

April 15, 2024 Debit Credit

Notes Receivable 110,000
Service Revenue 110,000
(Provide services and accept note)

Requirement 2
December 31, 2024 Debit Credit
Interest Receivable (2024) 9,350
Interest Revenue 9,350
(Adjust interest receivable)
(Interest revenue = $110,000 x 12% x 8.5/12)
April 15, 2025
Cash 13,200
Interest Receivable (2024) 9,350
Interest Revenue 3,850
(Receive annual interest)
(Interest revenue = $110,000 x 12% x 3.5/12)
December 31, 2025
Interest Receivable (2025) 9,350
Interest Revenue 9,350
(Adjust interest receivable)
(Interest revenue = $110,000 x 12% x 8.5/12)

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5-68 Financial Accounting, 6e
 Chapter 5 - Receivables and Sales

Problem 5-8B (concluded)

April 15, 2026
Cash 13,200
Interest Receivable (2025) 9,350
Interest Revenue 3,850
(Receive annual interest)
(Interest revenue = $110,000 x 12% x 3.5/12)
December 31, 2026
Interest Receivable (2026) 9,350
Interest Revenue 9,350
(Adjust interest receivable)
(Interest revenue = $110,000 x 12% x 8.5/12)

Requirement 3
April 15, 2027 Debit Credit
Cash 123,200
Notes Receivable 110,000
Interest Receivable (2026) 9,350
Interest Revenue 3,850
(Receive cash on note and annual interest)
(Interest revenue = $110,000 x 12% x 3.5/12)

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permitted without the prior written consent of McGraw Hill Education.
© 2022 McGraw Hill Education
Solutions Manual, Chapter 5 5-69
 Problem 5-9B (LO 5-8)
Requirement 1
Sun Health Group Select Medical
Receivables Net sales $1,930 $2,240
turnover =
Average accounts ($215 + $202) / 2 ($414 + $353) / 2
ratio
receivable
= 9.3 times 5.8 times

Average 365 365 365

collection =
Receivables 9.3 5.8
period
turnover ratio
= 39.2 days 62.9 days

Compared to Select Medical, Sun Health has a higher receivables turnover ratio and a
lower average collection period, which means it collects cash more quickly from its
customers. The receivables turnover ratio and average collection period for Tenet
Healthcare in the most recent year reported in the text are 6.9 times and 52.9 days.
The receivables turnover ratio and average collection period for CVS Health in the
most recent year reported in the text are 13.8 times and 26.4 days. CVS Health has the
most favorable (highest) receivables turnover ratio of the four companies.

Requirement 2
The receivables turnover ratio and average collection period provide an indication of
management’s ability to collect cash from customers in a timely manner. A high
receivables ratio suggests that managers are selling to customers that have the ability
to pay their accounts in a timely manner. The more quickly a company can collect its
receivables, the more quickly it can use that cash to generate even more cash by
reinvesting in the business and generating additional sales. Factors that could affect
the receivables turnover ratio would be managers failing to recognize the financial
situation of lower-quality customers, being too aggressive in selling to customers on
account, or encountering weak business conditions in the industry which would affect
all companies.

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permitted without the prior written consent of McGraw Hill Education.
5-70 Financial Accounting, 6e