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Problem 7-5A (75 minutes)
Part 1
2014
Dec. 16
Notes Receivable—D. Todd ................................
10,800
Accounts Receivable—D. Todd ...................
10,800
To record note received on account.
31
Interest Receivable ..............................................
36
Interest Revenue ...........................................
36
To record interest earned
[$10,800 x .08 x 15/360 = $36].
2015
Feb. 14
Cash ......................................................................
10,944
Interest Revenue* ..........................................
108
Interest Receivable ........................................
36
Notes Receivable—D. Todd ..........................
10,800
To record cash received on note with interest.
*[$10,800 x 0.08 x 45/360 = $108]
Mar. 2
Notes Receivable—Midnight Co ........................
6,100
Accounts Receivable—Midnight Co. ...........
6,100
To record note received on account.
17
Notes Receivable—A. Privet ..............................
2,400
Accounts Receivable—A. Privet
2,400
To record note received on account.
Apr. 16
Accounts Receivable—A. Privet ........................
2,414
Interest Revenue ...........................................
14
Notes Receivable—A. Privet ........................
2,400
To record receivable for dishonored
note plus interest [$2,400 x .07 x 30/360= $14].
May 31
Accounts Receivable—Midnight Co. .................
6,222
Interest Revenue* ..........................................
122
Notes Receivable—Midnight Co ..................
6,100
To record receivable for dishonored note
*[$6,100 x 0.08 x 90/360 = $122]
Problem 7-5A (Concluded)
July 16
Cash ......................................................................
6,286
Interest Revenue* ..........................................
64
Accounts Receivable—Midnight Co. ...........
6,222
To record cash received on account
plus additional interest.
*[$6,222 x .08 x 46/360= $64 (rounded)]
Aug. 7
Notes Receivable—Mulan ...................................
7,450
Accounts Receivable—Mulan ......................
7,450
To record note received on account.
Sept. 3
Notes Receivable—N. Carson ............................
2,100
Accounts Receivable—N. Carson................
2,100
To record note received on account.
Nov. 2
Cash ......................................................................
2,135
Interest Revenue* ..........................................
35
Notes Receivable—N. Carson ......................
2,100
To record cash received on note plus interest
*($2,100 x .10 x 60/360 = $35).
5
Cash ......................................................................
7,636
Interest Revenue* ..........................................
186
Notes Receivable—Mulan .............................
7,450
To record cash received on note plus
Interest. *($7,450 x .10 x 90/360 = $186)
Dec. 1
Allowance for Doubtful Accounts ......................
2,414
Accounts Receivable—A. Privet ..................
2,414
To record write-off of account.
Part 2
Analysis Component: When a business pledges its receivables as security
for a loan and the loan is still outstanding at period-end, the business must
disclose this information in notes to its financial statements. This is a
requirement because the business has committed a portion of its assets to
cover a specific portion of its liabilities, which means that if the business
Problem 7-1B (30 minutes)
Aug. 4
Accounts Receivable—M. Carpenter........................
3,700
Sales .......................................................................
3,700
To record sales on credit.
Cost of Goods Sold ............................................................
2,000
Merchandise Inventory ................................................
2,000
To record cost of sales.
10
Cash ..............................................................................
5,044
Credit Card Expense* .................................................
156
Sales .......................................................................
5,200
To record credit card sales less fee. *($5,200 x .03)
Cost of Goods Sold ............................................................
2,800
Merchandise Inventory ................................................
2,800
To record cost of sales.
11
Accounts Receivable—Aztec ....................................
1,225
Credit card expense* ..................................................
25
Sales .......................................................................
1,250
To record credit card sales less fee. *($1,250 x .02)
Cost of Goods Sold ............................................................
900
Merchandise Inventory ................................................
900
To record cost of sales.
14
Cash ..............................................................................
3,626
Sales Discounts* .........................................................
74
Accounts Receivable—M. Carpenter .................
3,700
To record cash received less discount.*($3,700 x .02)
15
Accounts Receivable—Aztec ....................................
3,175
Credit Card Expense*(rounded to nearest dollar) ......
65
Sales.........................................................................
3,240
To record credit card sales less fee. *($3,240 x .02)
Cost of Goods Sold ............................................................
1,758
Merchandise Inventory ................................................
1,758
To record cost of sales.
18
No journal entry required.
22
Allowance for Doubtful Accounts .............................
498
Accounts Receivable—Craw Co. ........................
498
To write off account due.
25
Cash ..............................................................................
4,400
Accounts Receivable—Aztec ..............................
4,400
To record cash rec’d from credit card co. ($1,225+$3,175)
Problem 7-2B (35 minutes)
Part 1
a. Expense is 2.5% of credit sales
Dec. 31
Bad Debts Expense..............................................
33,550
Allowance for Doubtful Accounts ................
33,550
To record estimated bad debts
[$1,342,000 x .025].
Dec. 31
Bad Debts Expense............................................
35,505
Allowance for Doubtful Accts. ....................
35,505
To record estimated bad debts
[($1,025,000 + $1,342,000) x .015].
Problem 7-3B (35 minutes)
Part 1
Calculation of the estimated balance of the allowance
Not due:
$396,400 x .020 =
$ 7,928
1 to 30:
277,800 x .040 =
11,112
31 to 60:
48,000 x .085 =
4,080
61 to 90:
6,600 x .390 =
2,574
Over 90:
2,800 x .820 =
2,296
$27,990
Part 2
Dec. 31
Bad Debts Expense...........................................
31,390
Allowance for Doubtful Accounts .............
31,390
To record estimated bad debts.*
* Unadjusted balance ..........................
$ 3,400 debit
Estimated balance ............................
27,990 credit
Required adjustment ........................
$31,390 credit
Part 3
Writing off the account receivable in 2016 will not directly affect Year 2016
net income. The entry to write off an account involves a debit to Allowance
for Doubtful Accounts and a credit to Accounts Receivable, both of which
are balance sheet accounts. Net income is affected only by the annual
recognition of the estimated bad debts expense, which is journalized as an
adjusting entry. Net income for Year 2015 (the year of the original sale)
included an estimated expense for write-offs such as this one.
Problem 7-4B (35 minutes)
2014
a.
Accounts Receivable .........................................
685,350
Sales ..............................................................
685,350
To record sales on account.
Cost of Goods Sold ......................................................
500,000
Merchandise Inventory ..........................................
500,000
To record cost of sales.
b.
Cash .....................................................................
482,300
Accounts Receivable ...................................
482,300
To record cash received on account.
c.
Allowance for Doubtful Accounts .....................
9,350
Accounts Receivable ...................................
9,350
To record write-off of accounts.
d.
Bad Debts Expense ............................................
11,287
Allowance for Doubtful Accounts...............
11,287
To record estimated bad debts.*
*Beginning receivables .....................
$ 0
Credit sales ......................................
685,350
Collections .......................................
(482,300)
Write-offs ..........................................
(9,350)
Ending receivables ..........................
193,700
Percent uncollectible .......................
x 1.0%
Required ending allowance .............
1,937**
Cr.
Unadjusted balance .........................
9,350
Dr.
Adjustment to the allowance ...........
$ 11,287
Cr.
** Rounded to nearest dollar
Problem 7-4B (Concluded)
2015
e.
Accounts Receivable ..........................................
870,220
Sales ...............................................................
870,220
To record sales on account.
Cost of Goods Sold ......................................................
650,000
Merchandise Inventory ..........................................
650,000
To record cost of sales.
f.
Cash ......................................................................
990,800
Accounts Receivable ....................................
990,800
To record cash received on account.
g.
Allowance for Doubtful Accounts ......................
11,090
Accounts Receivable ....................................
11,090
To record write-off of accounts.
h.
Bad Debts Expense .............................................
9,773
Allowance for Doubtful Accounts................
9,773
To record estimated bad debts.*
*Beginning receivables ...........................
$ 193,670
Credit sales ............................................
870,220
Collections .............................................
(990,800)
Write-offs ................................................
(11,090)
Ending receivables ................................
62,000
Percent uncollectible .............................
x 1.0%
Required ending allowance ...................
620
Cr.
Unadjusted balance
Beginning (credit) ................................
$ 1,937
Write-offs (debit) ................................
11,090
9,153
Dr.
Adjustment to the allowance .................
$ 9,773
Cr.
Problem 7-5B (75 minutes)
Part 1
2014
Nov. 1
Notes Receivable—S. Julian ................................
4,800
Accounts Receivable—S. Julian ......................
4,800
To record note received on account.
Dec. 31
Interest Receivable ..................................................
64
Interest Revenue ...............................................
64
To record interest earned [$4,800 x .08 x 60/360].
2015
Jan. 30
Cash ..........................................................................
4,896
Interest Revenue* ..............................................
32
Interest Receivable ............................................
64
Notes Receivable—S. Julian ............................
4,800
To record cash received on note with interest.
*[$4,800 x .08 x 30/360]
Feb. 28
Notes Receivable—King Co ...................................
12,600
Accounts Receivable—King Co. ......................
12,600
To record note received on account.
Mar. 1
Notes Receivable—M. Shelley ...............................
6,200
Accounts Receivable—M. Shelley ...................
6,200
To record note received on account.
30
Accounts Receivable—King Co .............................
12,684
Interest Revenue ...............................................
84
Notes Receivable—King Co .............................
12,600
To record receivable for dishonored note
plus interest [$12,600 x .08 x 30/360].
Apr. 30
Cash ..........................................................................
6,324
Interest Revenue ...............................................
124
Notes Receivable—M. Shelley .........................
6,200
To record cash received on note plus interest
($6,200 x .12 x 60/360 = $124).
Problem 7-5B (Concluded)
June 15
Notes Receivable—R. Solon ................................
2,000
Accounts Receivable—R. Solon .....................
2,000
To record note received on account.
June 21
Notes Receivable—J. Felton ................................
9,500
Accounts Receivable—J. Felton ....................
9,500
To record note received on account.
Aug. 14
Cash ........................................................................
2,034
Interest Revenue* ............................................
34
Notes Receivable—R. Solon ..........................
2,000
To record cash received on note plus interest.
*[$2,000 x .08 x 72/360] rounded to nearest dollar
Sept. 19
Cash ........................................................................
9,690
Interest Revenue* ............................................
190
Notes Receivable—J. Felton ..........................
9,500
To record cash received on note plus interest.
*[$9,500 x .08 x 90/360] rounded to nearest dollar
Nov. 30
Allowance for Doubtful Accounts ........................
12,684
Accounts Receivable—King Co .....................
12,684
To record write-off of accounts.
Part 2
Analysis Component: When a business pledges its receivables as security
for a loan and the loan is still outstanding at period-end, the business must
disclose this information in notes to its financial statements. This is a
requirement because the business has committed a portion of its assets to
cover a specific portion of its liabilities, which means that if the business
dishonors its obligations under the loan, the creditor can claim the amount
of receivables identified in the pledge as collateral to cover the loan. This
arrangement must be disclosed to satisfy the full-disclosure principle.
