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MGCR 211 Solution to Assignment 3 - Fall 2012.doc

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Department
Management Core
Course
MGCR 211
Professor
Kimberly Ryan
Semester
Fall

Description
MGCR 211: Solution to Assignment 3 Fall 2012 AP7-1 Case A Revenue should not be recognized until the seller delivers the good or service to the purchaser. The seller has not yet manufactured the equipment let alone delivered it. The commitment by the purchaser is not accompanied by payment therefore no cash has been received. Had cash been received from the purchaser, it should have been recorded as deferred revenue. Case B Revenue should not be recognized unless the seller is reasonably confident that the purchaser will pay in full. It is clear that many members who sign up do not pay for their membership. The 10-day delay is known as a “cooling off period” and must be provided by law, although the time period can be shorter than 10 days. The company can take a somewhat aggressive approach and recognize a percentage of revenue when members sign, or a more conservative approach and defer the recognition of revenue until the cancellation period has expired. Once the cancellation period has ended, Scenic Trails Inc. can remain somewhat aggressive and recognize the full amount of the membership fee as revenue or it can be more conservative. The more conservative approach would be to use either a percentage of revenue or a percentage of trade receivables to create an allowance for those who will fail to pay the full membership fee during the six-month payment period. The company should use its experience to choose the appropriate method and the appropriate percentage that would present fairly the results of its operations to users. Case C Educational Toys’ current practice could be based on its experience whereby few distributors return unsold merchandise and therefore the amount is immaterial. If the returns are considered as a material amount, then Educational Toys is essentially recognizing the products delivered to its distributors as if they were sold. In substance, these products can still be considered inventory for Educational Toys that is located at its distributors’ warehouses or showrooms. This practice, commonly known as “channeling”, does not conform to GAAP. In essence the toys are being sold on consignment and there is little to guide us to understanding how probable it is that Educational Toys will receive full payment. An improved approach is for Educational Toys to establish an allowance for sales returns. Another alternative would be for Educational Toys to not recognize revenue at all until its distributors have made the sales. Although the correct treatment is a matter of judgement, it is clear from the facts of this case that there is only a very narrow set of circumstances under which Educational Toys’ current practice would be acceptable under current financial reporting standards. AP7–5 Req. 1 Aging Analysis of Trade receivables (a) (b) (c) (d) Up to 6 to More Than Total Not Yet 6 Months 12 Months One Year Customer Receivable Due Past Due Past Due Past Due R. Aouad ……….. $ 2,000 $2,000 C. Chronis 6,000 $6,000 ……….. D. McClain . 4,000 $ 4,000 ………. T. Skibinski ……… 14,500 $ 4,500 10,000 H. Wu ………..…... 13,000 13,000 Totals…………… $39,500 $17,500 $14,000 $2,000 $6,000 Percent 100% 44.3% 35.4% 5.1% 15.2% ………… Req. 2 Estimated Amounts Uncollectible Amount of Estimated Estimated Age Receivable Loss Rate Uncollectibl e a. Not yet $17,500 1% $ 175 due…………………… b. Up to 6 months past 14,000 5% 700 due...…. c. 6 to 12 months past due. 2,000 20% 400 …. d. More than one year past 6,000 50% 3,000 due Total………………………. $39,500 $4,275 . Req. 3 Bad debt expense (+E →-SE) ....................5,825..... Allowance for doubtful accounts (−XA →+A) .. 5,825 To adjust for estimated bad debt loss: Balance needed in the allowance account $4,275 Cr Balance currently in the account........ 1,550 Dr Adjustment needed, i.e., increase.......$5,825 Cr Req. 4 Income statement: Operating expenses: Bad debt expense.......................................$5,825.... Statement of financial position: Current assets: Trade receivables................................................. $39,500 Less: Allowance for doubtful accounts................. 4,275 Carrying value................................................$35,225 AP7–9 Req. 1 Dear Ms. Kostas, This memo addresses your inquiry about the difference between the balance of the Cash in Bank account in the company’s records and the balance shown on the bank statement. The balance in the company’s Cash account is based on the transactions that affected this account during the month of June. Similarly, the balance of cash shown on the bank statement reflects the transactions that the bank recorded in the company’s bank account. It is normal that the balances of these two accounts be different because some of the cash transactions that affect the company’s bank account may not have been recorded by the bank as at June 30. For example, an overnight deposit of $1,000 in the bank account on June 30 will not be recorded by the bank until July 1
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