Essay and Computational Questions
[QUESTION]
86. For the month of December 2018, the records of Seal Corporation show the following
information:
Cash received on accounts receivable
$57,000
Cash sales
47,000
Accounts receivable, December 1, 2018
70,000
Accounts receivable, December 31, 2018
65,000
Accounts receivable written off as uncollectible
2,500
Sales returns & allowances
1,850
Required:
Determine the net sales for the month of December 2018.
$54,500
47,000
101,500
87. The following information relates to Kay Company’s accounts receivable for 2018.
Accounts receivable 1/1/18
$425,000
Credit sales for 2018
3,265,000
Sales returns during 2018
29,000
Accounts written off during 2018
18,500
Collections from customers during 2018
3,348,000
Estimated future sales returns at 12/31/18
40,000
Estimated uncollectible accounts at 12/31/18
90,000
Required:
a. Determine the amount should Kay report as gross accounts receivable at December 31, 2018.
b. Determine the amount should Kay report as net accounts receivable at December 31, 2018.
during 2018
Collections from
customers during 2018
Ending balance
b.
Gross accounts receivable at 12/31/18
$294,500
= Net accounts receivable
88. Foal Company’s had the following account balances at December 31, 2018, with regard to
accounts receivable:
Accounts receivable (net)
2,000,000
Allowance for uncollectibles
250,000
Required:
Foal has elected to report its receivables using the fair value option. At December 31, 2018, the
pricing in the active market for receivables is 90% of face value. Prepare the adjustment required
at December 31, 2018.
89. On December 31, 2018, Zale Company had an unadjusted debit balance of $1,000 in its
allowance for uncollectible accounts. An analysis of Zale’s trade accounts receivable at that date
revealed the following:
Age
Amount
% Estimated
Uncollectible
0-30 days
$125,000
2%
31-60 days
34,000
5%
61-90 days
8,500
20%
Over 90 days
4,700
50%
Required:
a. Determine the amount Zale should report as allowance for uncollectible accounts in its
December 31, 2018 balance sheet.
b. Prepare any necessary adjusting entry at December 31, 2018 related to this analysis.
90. On December 31, 2018, the close of its third year of operations, the Runner Company had
receivables of $350,000, which were net of the related allowance for doubtful accounts. During
2018, the company had additions to bad debt provision of $50,000 and wrote off, as
uncollectible, accounts receivable of $22,000. Runner had a balance in its allowance for
uncollectible accounts at December 31, 2017 of $8,100.
Required:
Determine the amount that Runner should report on its balance sheet at December 31, 2018,as
accounts receivable, before the allowance for uncollectible accounts.
91. The following information is available for the Bench Company:
Credit sales during 2018
$463,500
Allowance for uncollectible accounts at December 31, 2017
3,800
Accounts receivable written off during 2018
6,400
During 2018, Bench estimated that its bad debt provision should be 1% of all credit sales and
made the appropriate monthly adjusting entries. As a result of a review and aging of accounts
receivable in early January 2019, it has been determined that an allowance for uncollectible
accounts of $3,200 is needed at December 31, 2018.
Required:
Prepare the journal entry that Bench should make after the aging is completed.
$1,165
$3,800
Beginning balance
4,635
Provision for bad debts (1% of sales)
Accounts written off
$6,400
Additional provision for bad debts
$3,200
Ending Balance (desired)
92. Playworld, Inc. sells playground equipment to schools and municipalities. Invoices are
mailed at the end of each month for all goods shipped during that month; credit terms are net 30
days. Sales and accounts receivable data for 2016, 2017, and 2018 were as follows:
2016
2017
2018
Sales
$2,560,975
$2,663,414
$2,903,121
Year-end receivables
$328,330
$342,120
$396,859
Required:
a. Calculate the growth rates in sales and receivables during 2017 and 2018.
b. Do your calculations indicate any potential problems with Playworld’s receivables? If so,
suggest a possible explanation for your findings.
2016
2017
2018
Sales
$2,560,975
$2,663,414
$2,903,121
Year-end receivables
$328,330
$342,120
$396,859
Sales growth rate
Receivables growth rate
93. The Pond Company sold some machinery for $500,000 to the Vista Company on January 1,
2018. Vista executed an installment sales contract with Pond at an interest rate of 10%. The
contract required payments of $114,804 annually over six years, with the first payment due on
December 31, 2018.
Required:
Prepare an amortization schedule for the first two scheduled payments that shows (a) what
portion of each payment will be included in interest income, and (b) the loan balance after each
payment is made.
94. On December 31, 2018, Benton Company sold equipment to Cleveland, Inc., accepting a
$400,000 non-interest bearing note receivable in exchange for the equipment. The note is due on
December 31, 2021. Cleveland, Inc. normally pays 10% for its borrowed funds. The equipment
is carried in Benton’s perpetual inventory records at 50% of its cash selling price. The present
value of $1 to be received n periods in the future = 1 ÷ (1 + r) n where r is the rate of interest per
period.
Required:
a. Prepare Benton’s journal entries to record the sale on December 31, 2018.
b. Prepare Benton’s journal entry on December 31, 2019 necessitated by this transaction.
c. Determine the carrying value of this note on Benton’s December 31, 2019 balance sheet.
95. In January of 2018, Perez Company sold equipment to Gomez in exchange for a note that
called for three equal annual principal payments of $100,000 plus annual interest payments of
$4,000. Because the market rate of interest for companies with Gomez’ credit standing was 6%
at the time of the sale, Perez recorded the note at its present value of $277,993. After receiving
the first payment, Perez learns that the market rate of interest on loans of this type has fallen to
5%. Assume that there is an active market for these types of notes. The present value of $1 to be
received n periods in the future = 1 ÷ (1 + r) n where r is the rate of interest per period.
Required:
a. Prepare the journal entry for Perez to adjust the carrying value of the note to its fair value.
b. Determine the carrying value of this note on Perez Company’s December 31, 2018 balance
sheet.
96. On February 1, 2018, Singer, Inc. received a $100,000, nine-month, 10% interest-bearing
note from a customer. The note was discounted on April 1, 2018 at Second National Bank at
12%.
Required:
a. Compute the amount of cash received by Singer from the bank
b. Prepare the journal entry to record the discounting of the note.
97. Packwood, Inc. sells $250,000 of its accounts receivable to M&B Finance with recourse.
M&B charges a fee of 2% and withholds 8% of the face amount of the receivables to cover
possible uncollectible accounts and sales returns. Packwood estimates the fair value of the
recourse obligation is equal to the $13,500 allowance for uncollectibles associated with these
accounts.
Required:
a. Prepare the journal entry Packwood, Inc. would make to record the factoring.
b. Prepare Packwood’s journal entry to record any subsequent cash received from M&B if M&B
collects all the receivables except for $6,500 due to a sales return and $12,000 resulting from a
bad debt.
98. When selling receivables with recourse, what is the required disclosure, assuming the
amounts are material? Explain the importance of this point.
99. On December 31, 2018, Barbie Bank securitized $3,000,000 of notes receivable using a
securitization entity it had established. The cash received from the securitization entity was
exactly $3,000,000, so Barbie recognized no gain or loss on the transaction. Barbie Bank has the
following account balances at December 31, 2018 before the securitization was recorded:
Assets
Notes receivable
$5,000,000
All other assets
15,000,000
Total assets
$20,000,000
Liabilities and equity
Liabilities
$14,000,000
Equity
6,000,000
Total liabilities and equity
$20,000,000
Net income for the year ended December 31, 2018
$1,600,000
Required:
a. Compute Barbie Bank’s return-on-assets ratio and debt-to-equity ratio after completing this
transaction assuming the transaction was viewed as a sale under U.S. GAAP.
b. Compute Barbie Bank’s return-on-assets ratio and debt-to-equity ratio after completing this
transaction assuming the transaction was viewed as a collateralized borrowing under U.S.
GAAP.
100. Jensen Homes purchased $160,000 of scaffolding from Lewisburg Builders Supply on
January 2, 2017. Jensen paid $30,000 in cash and signed a three-year 10% note for the remaining
$130,000 of the purchase price. The note specifies that payments of $26,000 plus interest be
made each year on the anniversary date of the loan. Jensen made the required January 2, 2017
payment, but was unable to make the second payment on January 2, 2018 because of a downturn
in the construction industry. At January 2, 2018, Jensen owed Lewisburg Builders Supply
$104,000 plus $10,400 interest that had been accrued by both companies on December 31, 2017.
Rather than write off the note, Lewisburg Builders Supply agreed to restructure the loan as
follows: one payment of $95,000 on January 2, 2019 would satisfy the restructured note. The
present value of $1 to be received n periods in the future = 1 ÷ (1 + r) n where r is the rate of
interest per period.
Required:
Prepare the journal entries made by each company on January 2, 2018 to record the restructuring
of the note.