20 Minutes, Medium
Nov
1
30,000
Accounts Receivable (Sampson Co.)
30,000
Dec
31
600
Interest Revenue
600
Aug.
1
32,700
Notes Receivable
30,000
Interest Revenue
2,100
Interest Receivable
600
b.
Aug.
1
32,700
Notes Receivable
30,000
Interest Receivable
600
Interest Revenue
2,100
c.
Accounts Receivable (Sampson Co.)
Assuming that note was defaulted.
defaulted note.
There are two reasons why the company adopts this policy: (1) The interest earned on the
note compensates the company for delaying the collection of cash beyond the standard due
PROBLEM 7.6B
a.
General Journal
MIDTOWN DISTRIBUTION
account receivable due today.
Notes Receivable
Accepted a 9-month, 12% note in settlement of an
Interest Receivable
To accrue interest for two months (November
was earned in current year).
20 Minutes, Medium
a.
Dec 31 125
2
,
350 962
Cash 3
,
437
,
c.
31 360
Interest Revenue 360
d.
e.
Bank Reconciliation
Office Su
pp
lies
PROBLEM 7.7B
General Journal
DATA MANAGEMENT, INC
.
Bank Service Char
g
es
Accounts Receivable
In the prior period the company had established what it thought to be a reasonable credit
balance in the Allowance for Doubtful Accounts. Throughout the current period, as
receivables were written-off, the Allowance for Doubtful Accounts was debited and
Accounts Receivable at Net Realizable Value
Notes and Interest Receivable
Interest Receivable
To record accrued interest revenue on notes
receivable
(
$72,000 x 6% x 1/12
)
.
(
$900,000 – $860,000
)
. $9,000 debit balance
p
rior
to the ad
j
ustment. $49,000 ad
j
ustment re
q
uired
(
$40,000 – $9,000
)
.
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
,
40 Minutes, Strong
a.
General
Bank Statement
Ledger Balance
Balance
112,000
$
104,100
$
16,800
(12,400)
(100)
(2,500)
(900)
108,500
$
108,500
$
100
2,500
900
Cash
3,500
Money market accounts
150,000
$
High-grade, 60-day, commercial paper
5,000
Total cash equivalents
155,000
$
Total cash (from part a)
108,500
Cash and cash equivalents at 12/31/15
263,500
$
135
Interest Revenue
135
PROBLEM 7.8B
NSF check returned (Needham Company)
CIAVARELLA CORPORATION
Bank service charge
Preadjustment balances, 12/31/15
Outstanding Checks
Deposits in Transit
Accounts Receivable (Needham Company)
Computer Equipment
Error correction check #550
Bank Service Charge
The necessary entry to update the general
ledger is as follows:
Adjusted cash balance, 12/31/15
d.
540,000
$
(14,000)
(5,252,500)
6,480,000
2,500
1,756,000
$
12,000
$
(14,000)
64,800
62,800
1,693,200
$
e.
263,500
$
245,000
18,000
135
1,693,200
2,219,835
$
Cash and cash equivalents (part b.)
Marketable securities (at FMV, not cost)
Notes receivable (from Ritter Industries)
Interest receivable (part c.)
PROBLEM 7.8B
Accounts receivable written off during 2015
CIAVARELLA CORPORATION
Accounts receivable balance January 1, 2015
(continued)
Collections on account during 2015
Credit sales made during 20115
Reinstating Needham Company’s account
December 31, 2015
at December 31, 2015
Net realizable value of accounts receivable
Allowance for doubtful accounts balance
f.
December 31, 2015
January 1, 2015
1,756,000
$
540,000
$
62,800
12,000
1,693,200
$
528,000
$
6,480,000
$
5.83
times
62.61
days
PROBLEM 7.8B
Allowance for doubtful accounts (part d.)
CIAVARELLA CORPORATION
Accounts receivable (part d.)
(concluded)
Net realizable value
(sales ÷ average accounts receivable)
Accounts receivable turnover
Ciavarella Corporation is slightly worse
than the industry average.
If the industry average is 60 days,
a.
CASE 7.1
ACCOUNTING PRINCIPLES
20 Minutes, Medium
This practice violates the matching principle. The expense relating to uncollectible accounts
is not recorded until long after the related sales revenue has been recognized. The distortion
40 Minutes, Strong
a.
b.
c.
CASE 7.2
ROCK, INC.
It is logical and predictable that the Double Zero policy—which calls for no down payment
and allows customers 12 months to pay—will cause an increase in sales. It also is predictable
that implementation of the Double Zero plan will cause cash receipts from customers to
recognition of uncollectible accounts expense to future periods. Therefore, the bookkeeper’s
measurement of net income in the latest month ignores entirely what may be a major expense
associated with sales of Double Zero accounts.
The uncollectible accounts expense has dropped to zero only because the company uses the
direct write-off method and the Double Zero plan has just begun. It is too early for specific
larger dollar amount of accounts receivable and the nature of these accounts.
The reduction in cash receipts should be temporary. Under the old 30-day account plan, the
company was collecting approximately all of its sales within 30 days, and cash collections
were approximately equal to monthly sales. With the Double Zero accounts, however, only
Education.
d.
e.
CASE 7.2
ROCK, INC.
(
concluded
)
The Double Zero receivables generate no revenue after the date of sale. Hence, they represent
resources that are “tied up” for up to 12 months without earning any return. As the company
Several means exist for a company to turn its accounts receivable into cash more quickly
than the normal turnover period. One approach is to offer credit customers cash discounts to
40 Minutes, Strong
a. 1.
2.
3.
4.
5.
6.
(1)
the users of its financial statements.
There is certainly nothing improper or unethical about offering customers a discount for
prompt payment, but an interesting accounting issue arises. A 10% discount is quite
Note to instructor: Few companies encounter bad debts of anywhere near 10% of
receivables. Therefore, the allowance for sales discounts might well be the larger of the
two allowances.
The need for an allowance for doubtful accounts is not based upon whether these
accounts are officially “overdue,” but whether they are collectible. The grace period is
CASE 7.3
ETHICS, FRAUD & CORPORATE GOVERNANC
E
WINDOW DRESSING
Inventory is not a financial asset. Generally accepted accounting principles call for
Combining all forms of cash, cash equivalents, and compensating balances under a single
caption is quite acceptable. In fact, it is common practice. But unused lines of credit are
balance sheet.
Having officers repay their loans at year-end only to renew them several days later is a
sham transaction. Its only purpose is to deceive the users of the financial statements. It
It is appropriate to report marketable securities at their current market value. Thus,
This situation poses two questions: (1) The valuation of inventory in conformity with
generally accepted accounting principles, and (2) whether Affections can depart from
generally accepted accounting principles in its reporting to creditors.
7.
b.
CASE 7.3
WINDOW DRESSING (continued)
Although these funds might actually be included in both year-end bank statements, they
are not really available to the company in both bank accounts. Thus, this check should be
included as an outstanding check in the year-end bank reconciliation of the account upon
There is nothing unethical about holding the meeting. Taking legitimate steps to “put the
company’s best foot forward” is both an ethical and widespread practice. In fact, any
Unless they clearly are told otherwise, users of financial statements reasonably may
assume that financial statements are based upon GAAP. If Affections departs from
GAAP and shows its inventory at current sales value, it must take appropriate steps to
make the users of the statements fully aware of this departure from GAAP.
inflated bank balances, then withdraws the funds from both banks and runs.
No time estimate, Medium
This assignment is based upon financial information that is continually updated. Thus, we are
unable to provide the same responses as students.
Note to instructor: It is important that students be guided to discover the wide range of cash
equivalent investment vehicles available to businesses, and the variation in the interest rates they
yield. It is also important that they consider the potential financial impact of selecting a cash
BANKRATE.COM
CASE 7.4
INTERNET