74. In year 1, Southern Construction agrees to construct a school building for $12,000,000, receiving payments
for the work of $6,000,000 in both year 1 and year 2. Southern estimates that the costs will be $4,000,000 in
Year 1 and $6,000,000 in Year 2. If Southern uses the percentage-of-completion method (based on total costs),
what amount of profit is recognized in each year of the contract?
Year 1 Year 2
75. In year 1, Northern Construction agrees to build a fire station that will be completed in year 2. Construction
starts in year 1. The station will have costs of $2,000,000 in year 1 and $2,000,000 in year 2. Northern receives
payment for the station of $5,000,000 in advance, in year 1. If Northern uses the completed contract method,
what net profit is recognized by Northern in each year?
Year 1 Year 2
76. The allowance method does not involve
77. (CMA adapted, Dec 92 #18) The mining industry frequently recognizes revenue using the completion of
production method. This method is acceptable under the revenue recognition principle because
Sales prices are Assets are Production cost
reasonably readily can be readily
assured realizable determined
78. Recognizing income after the time of sale is
79. When using the allowance method
80. The allowance method overcomes shortcomings of the direct write-off method because it
81. Stuart Manufacturing sells an old machine to KSS Corp. which is having financial difficulty. Stuart agrees
to accept payment over 3 years. The adjusted basis of the machine to the seller is $5,000 and the buyer is
expected to make payments of $2,000 per year for 3 years. What amount of net profit is recognized by the seller
in year 3 if the seller uses the installment method? (Assume that the buyer makes the payments.)
82. Ulrich Co. sells an asset to a buyer for a total sales price of $6,000 with a payment schedule of $2,000 in
year 1, $2,000 in year 2, and $2,000 in year 3. The cost of the asset is $5,000. Under the cost-recovery-first
method, what amount of net profit is recognized in year 3?
83. Cowden Properties
Cowden Properties sold a condominium to Ms. Roberts for $90,000. Cowden originally acquired the condo at a
cost of $40,000 and made improvements to the unit totaling $20,000. The contract for sale required Ms. Roberts
to pay the $90,000 as follows:
Year 1 – $ 5,000
Year 2 – $10,000
Year 3 – $30,000
Year 4 – $45,000
Refer to the Cowden Properties example. If Cowden uses the installment method, how much cost is recognized
as expense in year 3?
84. Cowden Properties
Cowden Properties sold a condominium to Ms. Roberts for $90,000. Cowden originally acquired the condo at a
cost of $40,000 and made improvements to the unit totaling $20,000. The contract for sale required Ms. Roberts
to pay the $90,000 as follows:
Year 1 – $ 5,000
Year 2 – $10,000
Year 3 – $30,000
Year 4 – $45,000
Refer to the Cowden Properties example. Under the installment method, how much net profit would Cowden
recognize in year 1?
85. Cowden Properties
Cowden Properties sold a condominium to Ms. Roberts for $90,000. Cowden originally acquired the condo at a
cost of $40,000 and made improvements to the unit totaling $20,000. The contract for sale required Ms. Roberts
to pay the $90,000 as follows:
Year 1 – $ 5,000
Year 2 – $10,000
Year 3 – $30,000
Year 4 – $45,000
Refer to the Cowden Properties example. If Cowden uses the cost-recovery-first method, how much profit is
recognized in year 4?
86. The allowance method is used by a firm
87. The seller of merchandise often offers a reduction from the invoice price for prompt payment, this is called
a
88. The allowance method for uncollectibles is used by a firm
89. In estimating the amount of uncollectible accounts the accountant (1) estimates the amount of outstanding
accounts receivable that the firm does not expect to collect and (2) adjusts the balance in the Allowance for
Uncollectible Accounts so that, after the entry to recognize estimated uncollectibles, the balance in the account
will equal the amount that the firm does not expect to collect. The name of this procedure is/(are).
90. Which of the following is/are true?
91. In estimating the amount of uncollectible accounts the accountant (1) estimates the amount of uncollectible
accounts that will likely occur over time in connection with sales of each period and (2) makes an entry debiting
Bad Debt expense and crediting Allowance for Uncollectible Accounts. The name of this procedure is/are the
92. Which of the following is/are true?
93. In estimating the amount of uncollectible accounts the accountant (1) estimates the amount of uncollectible
accounts that will likely occur over time in connection with sales of each period and (2) makes an entry debiting
Bad Debt expense and crediting Allowance for Uncollectible Accounts. The name of this procedure is/are the
94. A debit balance in the allowance account may exist before recognizing estimated uncollectibles for the
period because
95. Sellers of merchandise offer sales discount or cash discounts in order to
96. U.S. GAAP does not allow sellers of merchandise to recognize revenue from sales when the customers have
the right to return goods.
97. Firms that reduce the price charged to a customer after the firm has delivered the goods and the customer
has found them to be unsatisfactory or damaged issue a
98. Firms that are temporarily short of cash and unable to borrow from usual sources can convert accounts
receivable into cash by
99. Firms that are temporarily short of cash and unable to borrow from usual sources can convert accounts
receivable into cash by selling accounts receivable to a bank or financing company. This is called
100. Firms that are temporarily short of cash and unable to borrow from usual sources can convert accounts
receivable into cash by
101. Firms that are temporarily short of cash and unable to borrow from usual sources can convert accounts
receivable into cash by selling accounts receivable to a bank or financing company. This is called
102. When firms that are temporarily short of cash and unable to borrow from usual sources convert accounts
receivable into cash by pledging the accounts receivable, they disclose this information
103. When a firm’s construction activities meet the criteria for revenue recognition as construction progresses,
the firm usually recognizes revenue during the construction period using the
104. The percentage-of-completion method
105. The percentage-of-completion method
106. U.S. GAAP requires that the completed contract method be used
107. The method of revenue recognition where the seller collects parts of the selling price in cash and at the
same time recognizes as expenses each period the same portion of the cost of goods or services sold as the
portion of total revenues recognized is called the
108. The method of revenue recognition where the seller has substantial uncertainty about the amount of cash it
will collect and matches the costs of generating revenues dollar for dollar with cash receipts until the seller
recovers all such costs is called the
109. Briefly explain the difference between a sales allowance and a sales discount.
110. Elway Company ages its accounts receivable to estimate bad debts for financial statement purposes.
President Elway is at a meeting with creditors and needs to know his total accounts receivable balance.
111. List three ways a firm may convert accounts receivable into cash and briefly describe the features of each
option.
112. At the end of Year 2, the unadjusted trial balance of Alaska Company includes $1,500,000 of outstanding
accounts receivable and an Allowance for Uncollectible Accounts of $14,600. Total sales for the year are
$22,200,000 and 85% of the sales were on account. The company estimates that 1.8% of credit sales are
uncollectible and no entries have been made during the year to reflect these uncollectibles. Prepare the adjusting
entry for the allowance for uncollectible accounts.
Bad Debt Expense
339,660
Allowance for Uncollectible Accounts
339,660
113. Sullivan Co.’s accounts receivable show the following balances by age:
Balance
$600,000
175,000
70,000
10,000
The credit balance in the allowance for uncollectible accounts is $2,500. Sullivan Co. uses the following
percentages to compute the estimated amounts of receivables that will eventually prove uncollectible: 0-30
days, 0.7%; 31-60 days, 1.2%; 61-120 days, 11%; and more than 120 days, 65%.
Required:
Prepare the adjusting journal entry.
Bad Debt Expense
18,000
Allowance for Uncollectible Accounts
18,000
114. Prepare journal entries for the following transactions:
a.
On November 1, Year 1, Kuhner Co. received a $1,000 note receivable with a 90-day maturity and a
12% interest rate in exchange for an outstanding account receivable of the same face amount.
b.
Assume Kuhner Co. closes its books on a monthly basis. Prepare any adjusting journal entries
necessary at November 30, Year 1.
c.
Prepare any adjusting journal entries necessary at December 31, Year 1.
a.
Note Receivable
1,000
Accounts Receivable
1,000
b.
Interest Receivable
10
Interest Revenue
10
c.
Interest Receivable
10
Interest Revenue
10
115. Prepare entries to record the following transactions using the direct write-off method for uncollectibles.
a.
The firm assumes that approximately 1% of total sales on account will prove uncollectible. Sales for
Year 1 are $1,000,000. All sales are on account.
b.
On July 7, Year 2, it is determined that an account of $2,000 will not be collected.
c.
On August 14, Year 2, it is determined that an account of $3,000 will not be collected.
d.
On December 31, Year 2, the company estimates that 2% of total credit sales of $2,000,000 will be
uncollectible.
e.
On February 1, Year 3, it is determined that accounts of $6,000 will not be collected.
f.
On March 2, Year 3, $1,000 is collected on an account that had previously been written off as
uncollectible in (e). It is determined that the account was originally written off in error.
Direct
Write-
Off
a.
no entry
b.
Bad Debt Expense
2,000
Accounts Receivable
2,000
c.
Bad Debt Expense
3,000
Accounts Receivable
3,000
d.
no entry
e.
Bad Debt Expense
6,000
Accounts Receivable
6,000
f.
Accounts Receivable
1,000
Bad Debt Expense
1,000
Cash
1,000
Accounts Receivable
1,000
116. Prepare entries to record the following transactions using the allowance method for uncollectible accounts.
a.
The firm assumes that approximately 1% of total sales on account will prove uncollectible. Sales for
Year 1 are $1,000,000. All sales are on account.
b.
On July 7, Year 2, it is determined that an account of $2,000 will not be collected.
c.
On August 14, Year 2, it is determined that an account of $3,000 will not be collected.
d.
On December 31, Year 2, the company estimates that 2% of total credit sales of $2,000,000 will be
uncollectible.
e.
On February 1, Year 3, it is determined that accounts of $6,000 will not be collected.
f.
On March 2, Year 3, $1,000 is collected on an account that had previously been written off as
uncollectible in (e). It is determined that the account was originally written off in error.
Allow
ance
metho
d
a.
Bad Debt Expense
10,000
Allowance for Uncollectible Accounts
10,000
b.
Allowance for Uncollectible Accounts
2,000
Accounts Receivable
2,000
c.
Allowance for Uncollectible Accounts
3,000
Accounts Receivable
3,000
d.
Bad Debt Expense
40,000
Allowance for Uncollectible Accounts
40,000
e.
Allowance for Uncollectible Accounts
6,000
Accounts Receivable
6,000
f.
Accounts Receivable
1,000
Allowance for Uncollectible Accounts
1,000
Cash
1,000
Accounts Receivable
1,000
117. The schedule that follows shows trial balances for Galbraith Company at the end of Year 1 and Year 2.
Note that the two trial balances shown for Year 1 are the Adjusted, Preclosing Trial Balance (after making all
adjusting entries) and the final Post-Closing Trial Balance, from which the firm constructs the balance sheet.
The trial balance shown for the end of Year 2 is taken before adjusting entries of any kind, although the firm has
periodically written off specific customers’ Accounts Receivable during the year as those customers’ accounts
become obviously uncollectible.
Galbraith Company closes its books annually and makes all of its sales on account. At the end of Year 2, the
management of Galbraith Company, along with the independent auditor, analyzes the currently outstanding
Accounts Receivable. The aging schedule classifies accounts as “not yet due,” “overdue less than 30 days,”
“overdue 30 days or more.” Galbraith Company estimates that one-half of one percent of current accounts will
become uncollectible, 5 percent of accounts overdue less than 30 days will become uncollectible, and 40
percent of accounts overdue 30 days or more will become uncollectible. From this aging of accounts receivable,
the firm estimated that it will not collect $30,000 of the accounts. The auditor will use this information in
making adjusting entries for Year 2.
Required:
See the requirements below. If there is insufficient information for a given question, state just that.
a.
What was the dollar amount of Accounts Receivable written off during Year 2 as obviously
uncollectible?
b.
What was the total amount of cash collected from customers during Year 2?
c.
What is the dollar amount of net Accounts Receivable shown on the balance sheet at the end of Year
1?
d.
What is the dollar amount of the Bad Debt Expense for Year 2?
e.
What is the dollar amount of the net Accounts Receivable shown on the balance sheet for the end of
Year 2?
Galbraith Company
Trial Balances
End of Year 1
End of Year 2
Adjusted
Preclosing
Post-Closing
Unadjusted
Trial
Balance
Dr.
Cr.
Dr.
Cr.
Dr.
Cr.
Accts Receivable
$ 300,000
$ 300,000
$ 360,000
Allow. for Uncollect. Accts
$ 18,000
$ 18,000
84,000
Sales
4,800,000
$6,000,000
Bad Debt Exp.
100,800
All other accts
5,599,200
1,182,000
960,000
1,242,000
6,156,000
600,000
Totals
$6,000,000
$6,000,000
$1,260,000
$1,260,000
$6,600,000
$6,600,000
a.
$84,000 + $18,000 = $102,000
b.
$300,000 + $6,000,000 – $102,000 – X = $360,000
X = $5,838,000
c.
$300,000 – $18,000 = $282,000
d.
$84,000 + $30,000 = $114,000
e.
$360,000 – $30,000 = $330,000
118. The sales, all on account, of Pins Company in Year 6, its first year of operations, were $700,000.
Collections totaled $500,000. On December 31, Year 6, Pins Company estimated that 2 percent of all sales
would probably be uncollectible. On that date, Pins Company wrote off specific accounts in the amount of
$8,000.
Pins Company’s unadjusted trial balance (after all nonadjusting entries were made and after all write-offs of
specific accounts receivable identified during Year 7 as being uncollectible) on December 31, Year 7, includes
the following accounts and balances:
Accounts Receivable (Dr.)
$300,000
Allowance for Uncollectible Accounts (Dr.)
10,000
Sales (Cr.)
800,000
On December 31, Year 7, Pins Company carried out an aging of its accounts receivable balances and estimated
that the Year 7 ending balance of accounts receivable contained $9,000 of probable uncollectibles. It made
adjusting entries appropriate for this estimate. Some of the $800,000 sales during Year 7 were for cash and
some were on account; the omission is purposeful.
Required:
a.
What was the balance in the Accounts Receivable account at the end of Year 6? Give the amount and
whether debit or credit.
b.
What was the balance in the Allowance for Uncollectible Accounts account at the end of Year 6? Give
the amount and whether debit or credit.
c.
What was bad debt expense for Year 7?
d.
What was the amount of specific accounts receivable written off as being uncollectible during Year 7?
e.
What were total cash collections in Year 7 from customers (for cash sales and collections from
customers who had purchased on account in either Year 6 or Year 7)?
f.
What was the net balance of accounts receivable included in the balance sheet asset total for December
31, Year 7?
a.
192,000 Dr. = 700,000 – 500,000 – 8,000
b.
6,000 Cr. = (.02 ´ 700,000) – 8,000
c.
19,000 = 10,000 + 9,000
d.
16,000 = 6,000 + 10,000
e.
676,000 = 192,000 + 800,000 – 16,000 – 300,000
f.
291,000 = 300,000 – 9,000
119. The sales, all on account, of Bobbin Company in Year 5, its first year of operations, were $700,000.
Collections totaled $500,000. On December 31, Year 5, Bobbin Company estimated that 2 percent of all sales
would probably be uncollectible. On that date, Bobbin Company wrote off specific accounts in the amount of
$6,000.
Bobbin Company’s unadjusted trial balance (after all nonadjusting entries were made and after all write-offs of
specific accounts receivable identified during Year 6 as being uncollectible) on December 31, Year 6, includes
the following accounts and balances:
Accounts Receivable (Dr.)
$300,000
Allowance for Uncollectible Accounts (Dr.)
10,000
Sales (Cr.)
800,000
On December 31, Year 6, Bobbin Company carried out an aging of its accounts receivable balances and
estimated that the Year 6 ending balance of accounts receivable contained $9,000 of probable uncollectibles. It
made adjusting entries appropriate for this estimate. Some of the $800,000 sales during Year 6 were for cash
and some were on account; the omission of the amount is purposeful.
Required:
a.
What was the balance in the Accounts Receivable account at the end of Year 5? Give the amount and
whether debit or credit.
b.
What was the balance in the Allowance for Uncollectible Accounts account at the end of Year 5?
Give the amount and whether debit or credit.
c.
What was bad debt expense [or, the amount of the Revenue Contra for Uncollectibles] for Year 6?
d.
What was the amount of specific accounts receivable written off as being uncollectible during Year 6?
e.
What were total cash collections in Year 6 from customers (for cash sales and collections from
customers who had purchased on account in either Year 5 or Year 6)?
f.
What was the net balance of accounts receivable included in the balance sheet asset total for
December 31, Year 6?
g.
Consider the account, Allowance for Uncollectible Accounts. Is that account best fully labeled as an
Asset account, an Asset Contra account, an Asset Adjunct account, or an Asset Control account?
h.
Assume the following facts, independent of the assumptions in the preceding questions. Bobbin can
estimate with reasonable precision each of the following: uncollectible accounts on sales, estimated
future warranty costs for product warranties offered along with its products, and estimated returns by
customers who exercise the option to return goods for a full refund. For which of the following, if
any, may Bobbin use an allowance method in measuring periodic income: uncollectible accounts,
product warranties, and returns? Indicate none, all, or the specific methods.
a.
194,000 Dr. = 700,000 – 500,000 – 6,000
b.
8,000 Cr. = (.02 ´ 700,000) – 6,000
c.
19,000 = 10,000 + 9,000
d.
18,000 = 8,000 + 10,000
e.
676,000 = 194,000 + 800,000 – 18,000 – 300,000
f.
291,000 = 300,000 – 9,000
g.
Asset contra
h.
All
120. Using the information in the following tables, determine the amount of revenue and expense reported in
years 1-4 and the totals reported for all 4 years under both the percentage-of-completion method and the
installment method.
Cash
Costs
Year
Collected
Incurred
1
$ 0
$ 500,000
2
600,000
1,000,000
3
1,200,000
300,000
4
600,000
200,000
Total
$2,400,000
$2,000,000
PERCENTAGE
OF
COMPLETION
INSTALLMENT
SALES
Year
Revenue
Expense
Revenue
Expense
1
A
B
K
L
2
C
D
M
N
3
E
F
O
P
4
G
H
Q
R
Total
I
J
S
T
PERCENTAGE OF
COMPLETION
INSTALLMENT
SALES
Year
Revenue
Expense
Revenue
Expense
1
$ 600,000
$ 500,000
$ 0
$ 0
2
1,200,000
1,000,000
600,000
500,000
3
360,000
300,000
1,200,000
1,000,000
4
240,000
200,000
600,000
500,000
Total
$2,400,000
$2,000,000
$2,400,000
$2,000,000