978-1337276337 Test Bank Chapter 7 Part 6

Chapter 7

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Interest Revenue 900

220. Bagel Inc. reported net income of $105,000 for the year ended December 31, 2017. The following items were

included on Bagel’s balance sheets at December 31, 2017 and 2016:

1. Prepare Bagel’s 2017 statement of cash flows.

2. Draft a brief memo to the owner to explain why cash decreased during a profitable year.

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2. Memorandum to the president:

TO: Owner of Bagel Inc.

FROM: Student’s name

DATE: January XX, 2018

SUBJECT: Cash Flows

221. Hawthorne Industries’ comparative balance sheets included accounts receivable of $221,400 at December 31, 2016,

and $205,900 at December 31, 2017. Sales reported on Hawthorne’s 2017 income statement amounted to $2,550,000.

What amount of cash collections will Hawthorne will report in the Operating Activities category of its 2017 statement of

cash flows assuming that the direct method is used? Show your calculations.

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222. Analyze the adjustments needed for the following transactions involving notes payable for Marcus Company, whose

fiscal year ends September 30. Round all numbers to the nearest penny.

Sept. 10 Received cash for a 60-day, 12%, $10,000 note payable. Interest is in addition to the face value.

30 Made end-of-year adjusting entry to accrue interest expense for the note.

Nov. 9 Paid amount due on the note plus interest.

133.33

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223. Assume that on December 13, 2017, Royal Company sells a computer to Savco Corp. at an invoice price of $25,000.

Because Savco is short of cash, it gives Royal a 90-day, 12% promissory note. (Assume a 360-day year for interest

calculations.)

Required

1) What is the total amount of interest that will be due on the maturity date?

2) What adjustments will Royal make to record receipt of the note?

3) If Royal has a December 31 year-end, what adjusting journal entry is needed to record interest due but not yet

received?

4) How much interest will Royal earn in 2017?

5) On what day will the note mature?

6) What adjustments will Royal record on the maturity date?

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226. Write a short paragraph explaining the following:

1. When bad debts are estimated, why is the balance in Allowance for Doubtful Accounts considered when the percentage

2. When estimating bad debts on the basis of a percentage of accounts receivable, what is the advantage of using an aging

schedule?

2. An aging schedule is a refinement of the percentage of accounts receivable approach to estimating bad debts. The

accountant categorizes the various receivables by the length of time they are outstanding. The estimate of the percent

227. What is the purpose of an accounts receivable subsidiary ledger?

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228. What is the purpose of an aging schedule?

229. Earl’s Company reported its accounts receivable turnover ratio at 10 times. Its credit terms are 2/10, n/20. What does

this ratio tell you about Earl’s Company?

230. Explain the distinction between a note receivable and an account receivable.

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231. Identify two methods of accelerating cash from sales.

232. Why does the discounting of a note receivable with recourse result in a contingent liability? Should the liability be

reported on the balance sheet? Explain.

233. Corrigan Corp. purchased 1,000 shares of Microsoft common stock. What will determine whether the shares are

classified as current assets or noncurrent assets?

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234. Why are increases in accounts receivable reported as an adjustment to net income in the Operating Activities section

of a statement of cash flows?

235. Evanston Inc. started the year with $35,000 in accounts receivable and ended the year with $50,000 in the account.

Describe how information regarding the company’s accounts receivable should be reflected on its statement of cash flows,

assuming use of the indirect method.