(FA) 2 Multi-Step - Essay Practice Problem Solutions v2

Multi-Step/Essay Practice Problem Solutions Unit 2
Revenues Ch 6. MC: 1, 2. Q: 1. ME: 14, 15, 24, 25. E: 27, 28, 31, 33, 40. P: 47. C: 48.
Legend: MC = Multiple Choice. Q = Questions. ME = Mini Exercises. E = Exercises.
P = Problems. C =Cases
MC 1: Which of the following best describes the condition(s) that must be present for the recognition of
revenue from a contract with a customer?
a. Cash payment must have been received from the customer.
b. All of the performance obligations must be fulfilled.
c. One of the contract's performance obligations must be fulfilled.
d. There must be no uncertainty about the amount to be received from the customer.
MC 2. When multiple products or services are bundled and sold for one price, the revenue should be
a. recognized when the bundle of products or services is sold.
b. allocated among the distinct performance obligations and recognized as each of these is
fulfilled.
c. deferred until all elements of the bundle are delivered to the customer.
d. recognized when the customer pays cash for the bundle of products or services.
Q6-1. Revenue should be the amount of consideration that a firm expects to receive for the
performance obligations to the customer that it fulfilled during the period. The revenue rules
describe a five-step process. First, the contract (i.e., agreement) with the customer must be
identified. Then the firm’s distinct performance obligations under the contract must be
determined. Next, the amount of consideration the firm expects to receive must be estimated.
If there are multiple performance obligations, then the consideration must be allocated to them
based on their stand-alone selling prices. These steps are completed at the commencement of
the contract with the customer. Then, as the firm fulfills a performance obligation, it should
recognize as revenue the amount that was allocated to the performance obligation.
For retailers, like Abercrombie & Fitch, revenue is generally earned when title to the
merchandise passes to the buyer (e.g., when the buyer takes possession of the merchandise),
because returns can be estimated. For companies operating under long-term contracts, the
performance obligation (e.g., to construct an office building) is usually fulfilled over the period
of construction. Many such companies use the amount of cost incurred as a measure of the
fulfillment of the performance obligation. See the examples of The Gap and Fluor in the
chapter.
1
Solutions taken from Solution Manual, Chapter 6, Financial Accounting, 6th Edition, Cambridge Business Publishers, 2020
ME6-14. (20 minutes)
Company Revenue recognition

GAP When merchandise is given to the customer and returns can be estimated (or
the right of return period has expired).
Merck When merchandise is transferred to the customer and returns can be

estimated (or the right of return period has expired). The company will also
establish a reserve and recognize expense relating to uncollectible accounts
receivable at the time the sale is recorded.
Deere When merchandise is transferred to the customer and the right of return
period, if any, has expired. The company will also establish a reserve and
recognize expense for uncollectible accounts receivable and anticipated
warranty costs at the time the sale is recorded.
Bank of America Interest is earned by the passage of time. Each period, Bank of America
accrues income on each of its loans and establishes a receivable on its balance
sheet.
Johnson Controls Revenue is recognized under long-term contracts under the cost-to-cost
method as a measure of the fulfillment of performance obligation over time.
2
The Unlimited can only recognize revenues once they have transferred the products to the customer and
the amount of returns can be estimated with sufficient accuracy. Assuming that happens at the time of
sale, it must estimate the proportion of product that is likely to be returned and deduct that amount from
gross sales for the period. In this case, it would report $4.9 million in net revenue (98% of $5 million) for
the period. If The Unlimited does not have sufficient experience to estimate returns, then one would
question whether there is a substantive contract with the customer, and it should wait to recognize
revenue until the right of return period has elapsed.
a.
Fiscal Year Revenue Revenue Growth
2018 $48,000
2019 55,000 14.6%
2020 62,000 12.7%
2021 62,000 0.0%
b.
Unearned Revenue Customer Purchases = Revenue Growth in
Fiscal Liability + Change in Unearned Revenue Customer
Year Revenue (end of year) Liability Purchases
2018 $48,000 $20,000
2019 55,000 24,000 55,000 + 4,000 = 59,000
2020 62,000 26,000 62,000 + 2,000 = 64,000 8.5%
2021 62,000 25,000 62,000 - 1,000 = 61,000 -4.7%
c. In both fiscal year 2020 and 2021, the growth in customer purchases is lower than the growth in
reported revenues. The practice of deferring revenue recognition implies that reported revenues in a
given period are the result of customer purchases over many periods, resulting in a smoothing of
revenues. In the case of Finn Publishing, revenues in any given year are the result of newsstand and
bookstore purchases during that year, plus part of the subscriptions from that year, plus part of the
subscriptions from the previous year. That means that growth in annual revenues is a composite of
growth in customer purchases over an even longer period of time.
For 2020 and 2021, Finn’s growth in revenues exceeds the growth in customer purchases because the
revenues are still reflecting growth from prior periods. Purchases are a “leading indicator” of
revenues, and thus, calculating customer purchase behavior can be useful in forecasting future
revenue and identifying changes in customers’ attitudes about a company’s current offerings.
3
This question is based on an actual situation, in which the accounting rules were influencing the product
decisions. The rules for revenue deferral when there are multiple deliverables (i.e., multiple performance
obligations) deterred the company from providing enhancements and upgrades that were available. If
Commtech’s customers (the wireless companies) had been willing to pay for the upgrades to their
customers’ phones, that would have been allowed. (It’s not clear what the wireless companies’ incentives
would be, because they may want to encourage users to purchase new phones – with a new service
contract – rather than improving their existing phones.)
The question can generate a discussion about whether accounting should drive decisions. Whether it
should or not, it does, so the question should evolve into what top management should do about this type
of situation. Does the situation described in the problem require some managerial action, or not. Is the
company foregoing sales because of its accounting? Within Commtech, the finance staff was skeptical of
marketing’s predictions that the upgrades and enhancements would increase the sales of existing phone
models. If the upgrades and enhancements are delivered, Commtech will have to change its accounting for
revenue, with a resulting decrease in near-term profitability. How might the company communicate that
change in a way that the investing public will understand as a net benefit to the company?
E6-27. (20 minutes)
Company Revenue Recognition

a. L Brands When merchandise is given to the customer and returns can be estimated (or
the right of return period has expired).
b. Boeing Corporation Revenue is recognized under long-term government contracts under the cost-
to-cost (percentage-of-completion) method.
c. SUPERVALU When merchandise is given to the customer and cash is received.
d. Real estate When title to a house is transferred to the buyers.

developer
e. Wells Fargo Interest is earned by the passage of time. Each period, Wells Fargo accrues
income on each of its loans and establishes an account receivable on its
balance sheet.
f. Harley-Davidson When title to the motorcycles is transferred to the buyer. Harley will also set
up a reserve for anticipated warranty costs and recognize the expected
warranty cost expense when it recognizes the sales revenue.
g. Gannett Co. When the publications are sent to subscribers.
4
E6-28. (15 minutes)
April 6 DR Cash (+A) $40,000

CR Contract liability (+L) $40,000
May 31 DR Contract liability (-L) $40,000

DR Accounts receivable (+A) $50,000
DR Contract asset (+A) $30,000
CR Revenue (+R, +SE) $120,000
June 15 DR Cash (+A) $50,000

CR Accounts receivable (-A) $50,000
July 15 DR Accounts receivable (+A) $110,000

CR Contract asset (-A) $30,000
CR Revenue (+R, +SE) $80,000
July 31 DR Cash (+A) $110,000

CR Accounts receivable (-A) $110,000
On May 31, Haskins is entitled to payment of $50,000, but it has earned revenue of $120,000. That is, it
expects to receive consideration of $120,000 for the 120 units that it has delivered to Skaife. The contract
asset represents consideration that Haskins has earned, but which is contingent on future events (i.e.,
delivery of the remaining 80 units).
5
E6-31. (15 minutes)
a. Multiple element arrangements are sales transactions in which two or more performance obligations
(deliverables) are “bundled” together and sold for one price. The revenue should be recognized on
each performance obligation as it is fulfilled. This involves first assigning a portion of the sales
revenue to each performance obligation and then recognizing each portion of the revenue only when
that obligation has been fulfilled. i.e., delivered to the customer.
b. The total revenue for the “bundle” is $200. However the Fire, if sold alone sells for $110 and the
Amazon Prime membership sells for $120, which brings the total “value” to $230. Thus, the Fire
tablet represents 47.83% of the total value of the bundle ($110/$230). Amazon should recognize
$95.65 at the time of the sale (47.83% of the $200 sale price) and defer the remaining $104.35. Over
the remainder of the quarter, Amazon would recognize one-fourth of this amount as revenue from the
Amazon Prime membership.
c.
Balance Sheet Income Statement
Cash Noncash Liabilitie Contrib Earned Net
Transaction + = + + Revenues - Expenses =
Asset Assets s Capital Capital Income
To record bundled +200 + = +104.35 + + +95.65 +95.62 - = +95.65
sale transaction on Unearned
Retained Sales
July 1 revenue
earnings revenue
To recognize Prime -$26.09 +$26.09 +$26.09 +$26.09

revenue at end of
Unearned Retained Sales
quarter
revenue earnings revenue
Cash (+A) 200.00

Sales revenue (+R, +SE) 95.65
Unearned revenue (+L) 104.35
Unearned revenue (-L) 26.09

Sales revenue (+R, +SE) 26.09
6
E6-33. (15 minutes)
a. There is not yet a contract with the customer that meets the company’s normal business practice,” so
revenue would not be recognized.
b. The performance obligation – to deliver customized units to the customer – has not yet been fulfilled.
The product has been shipped, but not to the customer and not with the specified customizations that
are required by the customer.
c. The company could recognize revenue using the expected amount of “consideration” that it will
receive from the customer. (Prior to ASC 606, the revenue could not be recognized because the price
is not yet fixed or determinable.)
a. The distributor does not have the means to pay for the items delivered, so collectability cannot be
reasonably assured (until the distributor sells the product to an end customer). Again, there would be
a question as to whether a contract exists with the distributor.
E6-40. (20 minutes)
a. Just like for-profit organizations, not-for-profit organizations cannot recognize revenue until it has
been earned. In the case of The Metropolitan Opera, it cannot recognize the ticket revenue until the
performances occur. (The Metropolitan Opera does not issue quarterly reports, so we cannot observe
how much of the revenue has been earned part way through its fiscal year.)
b. This entry is simplified by the fact the fiscal year-end is after the end of the current season and by
assuming that all of The Metropolitan Opera’s deferred revenue relates to the following season (and
none to any years after the following season).
To record revenue for the fiscal year 2017 season:
Deferred revenue (-L) 46,609

Cash or Accounts receivable (+A) 41,905
Revenues (+R, +NA) 88,514
(As a not-for-profit, The Metropolitan Opera does not have shareholders’ equity, but rather “net
assets.” Therefore, the recognition of revenue increases net assets (NA) on the balance sheet.)
To record advance purchases for the fiscal year 2018 season:

Cash or Accounts receivable (+A) 42,649
Deferred revenue (+L) 42,649
c. The Metropolitan Opera usually operates close to seating capacity. And, in a typical year, more than
one-half of its seats are sold before the season. The quantity of unsold seats will affect The
Metropolitan Opera’s marketing efforts for subscribers who have not yet renewed, outreach to new
potential subscribers and promotions for individual tickets which go on sale shortly before the season.
Those efforts can be scaled up or down depending on the experience with advance sales.
7
P6-47. (25 minutes)
a. The deferred net revenue liability goes up when customers purchase game software from TTWO, and
it goes down when TTWO recognized revenue for the post-sale service. So, TTWO must have
recognized more in revenue than it sold during the quarter. This phenomenon could be due to a
seasonality effect. For example, TTWO’s revenues are greatest in the last calendar quarter.
b. Purchases equal revenues plus the change in the deferred net revenue liability. Therefore, the first
quarter purchases were $387,982 thousand + ($466,429 thousand - $566,141 = $288,270 thousand.
Purchases were less than revenue recognized in the income statement. Changes in the deferred net
revenue liability provide a leading indicator of the company’s revenues. One must be careful, though,
to account for seasonality in purchases.
C6-48. (40 minutes)
a.
Cash or Accounts receivable (+A) 80
Sales revenue (+R, +SE) 80
Cost of sales (+E, -SE) 40

Inventory (-A) 40
b.
Payable to restaurant merchant (+L) 40
The revenue recognized differs between parts a and b because in part a, Groupon is acting as a
principal in the transaction. In part b, Groupon is acting as an agent for the restaurant, and its
revenue is limited to its commission.
c. In this case, Groupon must account for “variable consideration.” There is a 90% chance that Groupon
will earn $40 in revenue and a 10% chance that it will earn $80 in revenue. Therefore, its expected
revenue is $44 = 0.9*40 + 0.1*80. The payable to the merchant is $36 = 0.9*40 + 0.1*0.

Payable to restaurant merchant (+L) 36
8
Receivables Ch 6. MC: 5-6. Q: 7, 9-11. ME: 18-23, 26. E: 34, 35, 37. P: 45.
Legend: MC = Multiple Choice. Q = Questions. ME = Mini Exercises. E = Exercises. P =
Problems. C =Cases
MC5. If bad debts expense is determined by estimating uncollectible accounts receivable, the entry to
record the write-off of a specific uncollectible account would decrease
a. allowance for uncollectible accounts.
b. net income.
c. net book value of accounts receivable.
d. bad debts expense.
MC 6. If management intentionally underestimates bad debts expense, then net income is

a. overstated and assets are understated.
b. understated and assets are overstated.
c. understated and assets are understated.
d. overstated and assets are overstated.
Q6-7. Estimates are necessary in order to accurately measure and report income on a timely basis.
For example, in order to record periodic depreciation of long-lived assets, one must estimate
the useful life of the asset. Estimates allow accountants to match revenues and expenses
incurred in different periods. For example, accountants estimate warranty costs so that the
warranty expense is matched against the corresponding sales revenue. If the accounting
process waited until no estimates were necessary, there would be a significant delay in the
reporting of financial results.
Q6-9. Bad debts expense is recorded in the income statement when the allowance for uncollectible
accounts is increased. If a company overestimates the allowance account, net income will be
understated on the income statement and accounts receivable (net of the allowance account)
will be underestimated on the balance sheet. In future periods, such a company will not need to
add as much to its allowance account since it is already overestimated from that prior period
(or, it can reverse the existing excess allowance balance). As a result, future net income will be
higher.
On the other hand, if a company underestimates its allowance account, then current net income
will be overstated. In future periods, however, net income will be understated as the company
must add to the allowance account and report higher bad debts expense.
Q6-10. There are several possible explanations for a decrease in the allowance account. First, after an
aging of accounts receivable, Wallace Company may have determined that a smaller percentage
of its receivables are past due. Wallace Company may have changed its credit policy such that it
is attracting lower-risk customers than in the past. Second, experience may have indicated that
the percentages used to estimate uncollectibles was too high in previous years. By correcting
the estimated percentage of defaults, the estimated uncollectibles would end up lower than in
past years. Third, Wallace Company may be managing earnings. By lowering estimated
uncollectibles, the company can increase current earnings, but may end up reporting a loss in a
future year when write-offs exceed the balance in the allowance account.
Q6-11. Minimizing uncollectible accounts is not necessarily the best objective for managing accounts
receivable. That objective could be accomplished by not offering to sell to customers on credit.
The purpose of offering credit to customers is to increase sales and profits. Losses from
uncollectible accounts are a cost of doing business. As long as the benefit (greater contribution
to profits due to increased sales) exceeds the cost (increased losses due to uncollectibles) then a
higher-risk credit policy which increases the amount of uncollectible accounts would be a more
profitable policy.
9
a. To bring the allowance to the desired balance of $2,100, the company will need to increase the
allowance account by $1,600, resulting in bad debts expense of that same amount.
b. The net amount of Accounts Receivable is calculated as follows: $98,000 − $2,100

= $95,900.
c.
- Allowance for Doubtful Accounts + Bad Debts Expense (E) -
(XA) +
500 Balance (a) 1,600
1,600 (a)
2,100 Balance Balance 1,600
a. Credit losses are incurred in the process of generating sales revenue. Specific losses may not be known
until many months after the sale. A company sets up an allowance for uncollectible accounts to place
the expense of uncollectible accounts in the same accounting period as the sale and to report accounts
receivable at its estimated realizable value at the end of the accounting period.
b. The balance sheet presentation shows the gross amount of accounts receivable, the allowance amount,
and the difference between the two, the estimated net realizable value. The balance sheet, thus,
reports the net amount that we expect to collect. That is the amount that is the most relevant to
financial statement users.
c. The rule for expense recognition is that expenses are recognized when assets are diminished (or
liabilities increased) as a result of earning revenue or supporting operations, even if there is no
immediate decrease in cash. This dictates the use of the allowance method. Recognition of expense
only upon the write-off of the account would delay the reporting of our knowledge that losses are
likely and, thereby, reduce the informativeness of the income statement. Accountants believe that
providing more timely information justifies the use of estimates that may not be as precise as we
would like.
10
a.
($ millions) 2018 2017
Accounts receivable (net) ...................................................... $421.4 $450.2
Allowance for returns and uncollectible accounts ............... 222.2 214.4
Gross accounts receivable ..................................................... $643.6 $664.6
Percentage of uncollectible accounts to gross accounts
receivable ............................................................................ 3.1% 1.7%
($19.7/$643.6 ) ($11.6/$664.6)
b. In general, an increase in the allowance for uncollectible accounts as a percentage of gross accounts
receivable may indicate that the quality of the accounts receivable has declined, perhaps because the
economy has declined, the company is selling to a less creditworthy class of customers, or the
company’s management of accounts receivable is less effective. Ralph Lauren’s three biggest
wholesale customers accounted for 19% of sales in 2018 and 29% of receivables at the end of March
2018. The declining fortunes of traditional retailers may account for the increase in the allowance for
uncollectibles. It may also indicate, however, that the receivables were under-reserved (e.g.,
allowance account was too low in 2017). This would result in lower reported profits in 2018 because
past profits were too high. It is also possible that credit quality has not changed and that the amount
recorded in prior years is correct, but that management has incentives to record less income in 2018.
c. $6,182.3/[($421.4+$450.2)/2] = 14.19 times

365/14.19 = 25.73 days
11
Bad debts expense of $2,400 ($120,000 × 0.02) would cause the allowance for uncollectibles to increase
by the same amount. If the allowance increased by only $2,100 for the period, Sloan Company must have
written off accounts totaling $300. In computing accounts receivable, sales revenue increased the
account by $120,000, and the write-offs would decrease it by $300. If there was a net increase of $15,000
for the period, Sloan Company must have collected $104,700 in cash. ($104,700 = $120,000 - $300 -
$15,000.)
a.
Accounts Receivable Turnover Average Collection Period
Procter & $66,832/ [($4,686 +$4,594)/2] 365 / 14.4 = 25.3 days
Gamble
= 14.4 times
Colgate- $15,454 / [($1,480+$1,411)/2] 365 / 10.7 = 34.1 days

Palmolive
= 10.7 times
b. P&G turns its accounts receivable faster than Colgate-Palmolive. Receivable turns typically evolve to
an equilibrium level for each industry that arises from the general business models used by industry
competitors. Differences can arise due to variations in the product mix of competitors, the types of
customers they sell to, their willingness to offer discounts for early payment, and their relative
strength vis-à-vis the companies or individuals owing them money.
Also, the size of the firm may affect the ability of a company to exert bargaining power over major
suppliers or customers. For instance, both of these companies sell a significant amount of their
product to Walmart. P&G is a sizable company, and may have greater bargaining power over Walmart
than does the smaller Colgate-Palmolive.
One other possibility is that the difference is due to the companies’ differing fiscal year-ends. If the
receivable balance is not constant during the year due to some seasonality, then the receivable
turnover ratio will depend on the choice of fiscal year.
12
a.
i. Accounts receivable (+A) ……………………………………… 3,200,000
Sales revenue (+R, +SE) …………………………..…… 3,200,000
ii. Bad debts expense (+E, -SE) ………………………………… 42,000

Allowance for uncollectible accounts (+XA, -A)……. 42,000
iii. Allowance for uncollectible accounts (-XA, +A) ………. 39,000

Accounts receivable (-A) ………………………………….. 39,000
iv. Accounts receivable (+A) ……………………………………… 12,000

Allowance for uncollectible accounts (+XA, -A) 12,000
v. Cash (+A) …..……………………………………………………… 12,000

Accounts receivable (-A) ………………………………… 12,000
The recovered receivable is reinstated, so that its payment may be properly recorded.
b. Besides the $12,000 in recovery, the collections from customers can be summarized in the following
entry:
vi. Cash (+A) 2,926,000

Accounts receivable (-A) 2,926,000
(This amount includes payment of the recovered receivable for $12,000. The allowance increases by
$15,000 over the period, so the fact that net receivables increased by $220,000 means that gross
receivables must have increased by $235,000. That fact allows us to “back out” the cash received.)
13
c.
+
Cash (A) - - Sales Revenue (R) +
(v) 12,000 3,200,000 (i)
(vi) 2,926,000
2,938,000
+ Accounts Receivable (A) - + Bad Debts Expense (E) -
(i) 3,200,000 (ii) 42,000
(iv) 12,000 39,000 (iii)
12,000 (v)
2,926,000 (vi)
235,000
- Allowance for Uncollectibles (XA) +
42,000 (ii)
(iii) 39,000
12,000 (iv)
15,000
d.
Balance Sheet Income Statement
Noncas
Transact Cash h Contra Liabil- Contrib. Earned Revenue Expens Net
ion Asset + Assets - Assets = ities + Capital + Capital s - es = Income
i. Sales on +3,200,0 - = +3,200,00 +3,200,00 - = +3,200,0
account. 00 0 0 00
Accounts Retained Sales
Receivab Earnings Revenue
le
ii. Bad - +42,000 = -42,000 - +42,000 = -42,000
debts Allowance for Retained Bad
expense. Uncollectible Earnings Debts
Accounts Expense
iii. Write- -39,000 - -39,000 = - =
off of Accounts Allowance for
uncollect Receivab Uncollectible
ible le Accounts
accounts
.
iv. +12,000 - +12,000 - =
Rei Accounts Allowance for
nstate Receivab Uncollectible
account le Accounts
previousl
y written
off.
v. Collect +12,000 -12,000 - - =
reinstate Cash Accounts
d Receivab
account. le
vi. Collect +2,926,00 - - = - =
cash on 0 2,926,00
sales. Cash 0
Accounts
Receivab
le
14
ME6-26 (20 minutes)
a. Verdi Co. would report stable sales because extending sales to lower credit quality customers
broadens the customer pool and thus Verdi Co. can sell the same number of computers year over year.
b. Verdi Co. should have disclosed that is was selling to higher credit risk customers. At a minimum,
Verdi Co. should have estimated a larger expected bad debts expense related to these customers. (If
the credit quality was so poor, Verdi Co. may even consider not reporting the revenue on the grounds
that the agreement with the customer lacked commercial substance).
c. In future periods when it is revealed that customers cannot pay for the computers, Verdi Co. will have
to write off the related accounts receivable. If these bad debts were not reserved for early via the bad
debts expense and allowance for doubtful accounts, then Verdi Co. will have to record bad debts
expense when the debt goes bad. This will result in an expense in a year different than the reported
revenue and will suppress future earnings, potentially significantly.
E6-34. (20 minutes)
a. Prior to the aging of accounts, the balance in the Allowance for Uncollectible Accounts would be a
credit of $520 (the opening balance of $4,350 less the amounts written off of $3,830).
2019 bad debts expense computation

$250,000 × 0.5% = $1,250
$ 90,000 × 1% = 900
20,000 × 2% = 400
11,000 × 5% = 550
6,000 × 10% = 600
4,000 × 25% = 1,000
4,700
Less: Unused balance before adjustment 520

Bad debts expense for 2019 $4,180
b. Accounts receivable, net = $381,000 - $4,700 = $376,300
Reported in the balance sheet as follows:

Accounts receivable, net of $4,700 in allowances ............................................................... $376,300
c.
+ Bad Debts Expense (E) - - Allowance for Uncollectible Accounts
(XA) +
(a) 4,180 4,350 Balance
Write-offs 3,830
4,180 (a)
4,700 Balance
d. If the write-offs had been $1000 higher, so too would be the bad debt expense. And, if the write-offs
had been $1000 lower, the bad debt expense would have been $1000 lower. The aging of accounts
determines the end-of-period balance sheet value, which is combined with the beginning-of-period
value and the write-offs during the period to determine the bad debt expense. Any difference between
the bad debt expectations and the actual bad debt experience is corrected in this process.
15
E6-35. (25 minutes)
a. Allowance for doubtful accounts (-XA) 2.6

Accounts receivable (-A) 2.6
Provision for doubtful accounts (+E,-SE) 2.5

Allowance for doubtful accounts (+XA) 2.5
The provision for doubtful accounts (bad debts expense) has the effect of decreasing Steelcase’s
reported income by $2.5 million for the year. The write-off of $2.6 million of uncollectible accounts
has no direct effect on income.
b.
2018 2017
Accounts receivable, net 300.3 307.6
Allowance for doubtful accounts 11.1 11.2
Gross receivables (net plus allowance) $311.4 $318.8
Allowance as a % of gross receivables 3.56% 3.51%
c. $3,055.5 / [($300.3 + $307.6) / 2] = 10.1 times.
d. $3,055.5 + ($28.2 - $15.9) – ($300.3 - $307.6) – $2.5 = $3,072.6.
E6-37. (20 minutes)
a. Aging schedule at December 31, 2016

Current $304,000 × 1% = $ 3,040
0–60 days past due 44,000 × 5% = 2,200
61–180 days past due 18,000 × 15% = 2,700
Over 180 days past due 9,000 × 40% = 3,600
Amount required 11,540
Balance of allowance 4,200
Provision $ 7,340 = 2019 bad debts expense
b. Current Assets
Accounts receivable $375,000
Less: Allowance for uncollectible accounts 11,540
$363,460
c.
+ Bad Debts Expense (E) - - Allowance for Uncollectible Accounts
(XA) +
(a) 7,340 4,200 Balance
7,340 (a)
11,540 Balance
16
P6-45. (40 minutes)
($ millions)
a. Net receivables as of December 31, 2017 were $1,128,610 thousand.
b.
($ thousands)
Bad debts expense (+E, -SE) 17,568
Allowance for doubtful accounts (+XA) 17,568
Allowance for doubtful accounts (-XA) 13,566

Accounts receivable (-A) 13,566
+ Bad Debts Expense (E) - - Allowance for Doubtful Accounts (XA) +

17,568 21,376 Balance
13,566 17,568
25,378 Balance
+ Accounts Receivable (A) -

Balance 1,136,593
13,566
The $350 thousand recovery of a written-off account would be accounted for in the following way:
Accounts receivable (+A) 350

Allowance for doubtful accounts (+XA) 350
Cash (+A) 350

Accounts receivable (-A) 350
The first entry reestablishes the customer’s account, and the second entry recognizes the cash
payment that discharges that account.
c. Allowance for doubtful accounts to gross accounts receivables are:
2.2% ($25,378/$1,153,988) in fiscal 2017

1.9% ($21,376/$1,136,593) in fiscal 2016
d. The 2017 receivables turnover rate is $4,881,951 / [($1,128,610 + $1,115,217)/2] = 4.35.
In 2016, the ART was $5,456,650/[($1,115,217 + $1,145,099)/2] = 4.83.
The Average Collection Period (ACP) is 365/4.35 = 83.9 days in 2017 and 365/4.83 = 75.6 days in
2016.
e. The increase in the allowance as a percentage of receivables and the slowdown in collections both
indicate that Mattel is having a little more trouble in collecting from its customers. It’s possible that
this change is due to the retail sector’s financial difficulties (e.g., the bankruptcy of Toys R Us). Or,
Mattel’s decline in sales may mean that its products are less important to its distribution channel, and
therefore less of a priority for payment. More generally, it’s also possible that the changes reflect a
general decline in economic conditions or a relaxing of Mattel’s credit policies, including collection
practices.
17

(FA) 2 Multi-Step - Essay Practice Problem Solutions v2

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Multi-Step/Essay Practice Problem Solutions Unit 2

Company Revenue recognition

Merck When merchandise is transferred to the customer and returns can be

ME6-24. (20 minutes)

E6-27. (20 minutes)

Company Revenue Recognition

c. SUPERVALU When merchandise is given to the customer and cash is received.

d. Real estate When title to a house is transferred to the buyers.

g. Gannett Co. When the publications are sent to subscribers.

April 6 DR Cash (+A) $40,000

May 31 DR Contract liability (-L) $40,000

June 15 DR Cash (+A) $50,000

July 15 DR Accounts receivable (+A) $110,000

July 31 DR Cash (+A) $110,000

To recognize Prime -$26.09 +$26.09 +$26.09 +$26.09

Cash (+A) 200.00

Unearned revenue (-L) 26.09

E6-40. (20 minutes)

To record revenue for the fiscal year 2017 season:

Deferred revenue (-L) 46,609

To record advance purchases for the fiscal year 2018 season:

C6-48. (40 minutes)

Cost of sales (+E, -SE) 40

Cash or Accounts receivable (+A) 80

MC 6. If management intentionally underestimates bad debts expense, then net income is

b. The net amount of Accounts Receivable is calculated as follows: $98,000 − $2,100

ME6-19. (15 minutes)

c. $6,182.3/[($421.4+$450.2)/2] = 14.19 times

ME6-22. (20 minutes)

Colgate- $15,454 / [($1,480+$1,411)/2] 365 / 10.7 = 34.1 days

ii. Bad debts expense (+E, -SE) ………………………………… 42,000

iii. Allowance for uncollectible accounts (-XA, +A) ………. 39,000

iv. Accounts receivable (+A) ……………………………………… 12,000

v. Cash (+A) …..……………………………………………………… 12,000

vi. Cash (+A) 2,926,000

E6-34. (20 minutes)

2019 bad debts expense computation

Less: Unused balance before adjustment 520

b. Accounts receivable, net = $381,000 - $4,700 = $376,300

Reported in the balance sheet as follows:

a. Allowance for doubtful accounts (-XA) 2.6

Provision for doubtful accounts (+E,-SE) 2.5

Gross receivables (net plus allowance) $311.4 $318.8

Allowance as a % of gross receivables 3.56% 3.51%

c. $3,055.5 / [($300.3 + $307.6) / 2] = 10.1 times.

d. $3,055.5 + ($28.2 - $15.9) – ($300.3 - $307.6) – $2.5 = $3,072.6.

E6-37. (20 minutes)

a. Aging schedule at December 31, 2016

a. Net receivables as of December 31, 2017 were $1,128,610 thousand.

Allowance for doubtful accounts (-XA) 13,566

+ Bad Debts Expense (E) - - Allowance for Doubtful Accounts (XA) +

+ Accounts Receivable (A) -

Accounts receivable (+A) 350

Cash (+A) 350

c. Allowance for doubtful accounts to gross accounts receivables are:

2.2% ($25,378/$1,153,988) in fiscal 2017

d. The 2017 receivables turnover rate is $4,881,951 / [($1,128,610 + $1,115,217)/2] = 4.35.

In 2016, the ART was $5,456,650/[($1,115,217 + $1,145,099)/2] = 4.83.

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