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Chapter 7 Cash and Receivables
160. The Fitzgerald Company maintains a checking account at the Bank of the North. The bank
provides a bank statement along with canceled checks on the last day of each month. The
October 31, 2016, bank statement included the following information:
Balance, October 1, 2016 $ 32,690
Deposits 86,000
Checks processed (75,200)
Service charges (350)
NSF checks (1,600)
Monthly loan payment deducted
directly by bank from account
(includes $400 in interest) (3,400)
Balance, October 31, 2016 $ 38,140
The company’s general ledger cash (checking) account had a balance of $42,544 at the end of
October. Deposits outstanding totaled $4,224, and all checks written by the company were
processed by the bank except for those totaling $5,620. In addition, a check for $500 for the
purchase of office furniture was incorrectly recorded by the company as a $50 disbursement.
The bank correctly processed the check during October.
Required:
1. Prepare a bank reconciliation for the month of October.
2. Prepare the necessary journal entries at the end of October to adjust the general ledger
cash account.
Answer:
Chapter 7 Cash and Receivables
161. The petty cash fund of Western Glass Company contained the following items on November
30, 2016:
Currency and coins $ 23
Receipts for the following expenditures:
Delivery charges $42
Office supplies 50
Restaurant receipt for entertaining a customer 110 202
An I.O.U. from an employee 25
Total $250
The petty cash fund was established on November 1, 2016, with a transfer of $250 from cash
to the petty cash account.
Required:
Prepare the journal entries to establish the petty cash account and to replenish the fund at the
end of November.
Chapter 7 Cash and Receivables
162. Guido Properties owes First State Bank $60 million under a 7% note with two years remaining
to maturity. Due to financial difficulties of Guido, the previous year's interest ($4.2 million)
was not received. The bank agrees to settle the note receivable and accrued interest receivable
in exchange for land having a fair value of $44 million.
Required: Compute the loss on troubled debt restructuring that the bank would record.
Chapter 7 Cash and Receivables
Essay
Instructions:
The following answers point out the key phrases that should appear in students' answers. They are not
intended to be examples of complete student responses. It might be helpful to provide detailed
instructions to students on how brief or in-depth you want their answers to be.
163. Define what it is meant by internal control.
164. Describe some key elements of an internal control system for cash.
165. Cash is the most liquid of all assets but is not always reported under current assets. Explain
this statement.
Chapter 7 Cash and Receivables
166. Although the net method is theoretically more sound, most companies use the gross method of
accounting for cash discounts related to sales on account. Explain this statement.
167. Briefly explain the accounting treatment for estimated sales returns at the end of an accounting
period for which accounts receivable remain outstanding..
168. Briefly explain the accounting treatment for estimated sales returns at the end of an accounting
period for which cash has already been collected from customers.
Chapter 7 Cash and Receivables
169. Briefly explain why the direct write-off of uncollectible accounts is not permitted by GAAP if
bad debts are material.
170. Last year, Simpson Company had a receivables turnover ratio of 12. Homer, Simpson's
president, was delighted when the ratio went to 18 for this year. This year, Simpson's long-
standing credit terms of net 30 were changed to net 10. Should Homer be happy? Explain.
171. You have recently been hired as the assistant controller for Clayton, Inc., a large, publicly held
manufacturing company. Your immediate superior is the controller who, in turn, is responsible
to the chief financial officer. The controller has assigned the task of preparing the year-end
adjusting entry for bad debts to you. The allowance for uncollectibles accounts has a credit
balance of $86,000 before the year-end adjustment. Your analysis indicates that an appropriate
balance for the allowance account is $210,000. After showing your analysis to the controller,
she tells you to adjust the allowance account to $310,000. Tactfully, you ask the controller for
Chapter 7 Cash and Receivables
an explanation for the amount and she tells you, “We are having a really good year. Let’s
bump up the allowance.”
Required:
Discuss the ethical dilemma you face. Consider your options and responsibilities along with
the possible consequences of any action you might take.
Chapter 7 Cash and Receivables
172. Briefly compare and contrast the two approaches to estimating bad debt expense. In your
answer, indicate which approach, if either, is superior.
173. Companies can have accounts receivable from ordinary trade customers and from related
parties (e.g., directors, employees or large shareholders). How does U.S. GAAP differ from
IFRS in its requirements regarding separate disclosure of trade receivables and related-party
receivables? Why might separate disclosure of related party receivables be useful?
Chapter 7 Cash and Receivables
Use the following to answer questions 163 and 164:
The following note disclosure appeared in a recent annual report of Halliburton:
Our receivables are generally not collateralized. Included in notes and accounts receivable are notes
with varying interest rates totaling $12 million at December 31. At December 31, 39% of our
consolidated receivables related to our United States government contracts, primarily for projects in
the Middle East.
174. Explain the reason that Halliburton indicates that its receivables include notes with varying
interest rates totaling $12 million at December 31. What significance does this have to the
reader?
175. Explain the reason that Halliburton indicates that its receivables are generally not
collateralized. What significance does this have to the reader?
176. Explain the transactions that typically would affect the discount on notes receivable account.
Chapter 7 Cash and Receivables
177. A company's investment in receivables is affected by several related variables. Give an
example of this interrelationship.
178. Explain how a company could manipulate cash flow from operations by changing the extent to
which it factors accounts receivable and treats those factoring arrangements as sales of
receivables.
Chapter 7 Cash and Receivables
179. Explain briefly how IFRS and U.S. GAAP differ in determining whether a transfer of an
accounts receivable qualifies as a sale.
