7-12
Demonstration Problem 7-3 Solution, part a. 2015 T-accounts
Ledger T-Accounts
Cash
Common Stock
4,200 (2)
10,000 (4)
Retained Earnings
Notes Rec.
cl. 4,200
Bal. 10,000
Revenue
7,300
(3)
7550
cl
250
(4)
Int. Rec.
Operating Expenses
(2) 4,200
Demonstration Problem 7-3 Solution, part b. Horizontal Financial
Statements Model, 2015
Worksheet Edmonds
FFAC9e Ch 7 IM.xls
7-13
Demonstration Problem 7-3 Solution, part a. 2016 T-accounts
Ledger T-Accounts
Cash
Common Stock
6,400 (3)
Retained Earnings
Bal.
Note Rec.
cl 6,400
10,000 (1b)
Bal.
Revenue
Bal. 0
250 (1a)
cl
9,750
9,500 (2)
Int. Rec.
Operating Expense
(3) 6,400
500 (1c)
Demonstration Problem 7-3 Solution, part b. Horizontal Financial
Statements Model, 2016
Worksheet Edmonds
FFAC9e Ch 7 IM.xls
7-14
Demonstration Problem 7-1 Workpaper, part a. T-accounts, 2015
Ledger T-Accounts
Cash
Liabilities
Retained Earnings
Bal. 3,000
3,940Bal.
Accounts Receivable
Services Revenue
Bal. 1,000
Allow. for Doubt. Accts.
Bad Debts Expense
60 Bal.
Demonstration Problem 7-1 Workpaper, part b. Horizontal Financial State-
ments Model, 2015
Event
Assets
=
Liab.
+
Equity
Rev.
–
Exp.
=
Net Inc.
Cash Flow
No.
Cash
+
Accts. Rec.
+
(Allow.)
=
Ret. Earn.
Beg. bal.
0
+
0
+
0
=
0
+
0
0
–
0
=
0
0
1.
+
+
=
+
–
=
2.
+
+
=
+
–
=
3.
+
+
=
+
–
=
Totals
3,000
+
1,000
+
(60)
=
0
+
3,940
4,000
–
60
=
3,940
3,000 NC
7-15
Demonstration Problem 7-1 Workpaper, part a. T-accounts, 2016
Ledger T-Accounts
Cash
Liabilities
Retained Earnings
Bal. 3,000
3,940Bal.
10,375
Bal. 8,405
Accounts Receivable
Services Revenue
Bal. 1,000
Bal. 2,060
Allow. for Doubt. Accts.
Bad Debts Expense
60 Bal.
90 Bal.
Demonstration Problem 7-1 Workpaper, part b. Statements Model, 2016
Event
Assets
=
Liab.
+
Equity
Rev.
–
Exp.
=
Net Inc.
Cash Flow
No.
Cash
+
Accts. Rec.
+
(Allow.)
=
Ret. Earn.
Beg. bal.
3,000
+
1,000
+
(60)
=
0
+
3,940
0
–
0
=
0
0
1.
+
+
=
+
–
=
2.
+
+
=
+
–
=
3.
+
+
=
+
–
=
4.
+
+
=
+
–
=
5.
+
+
=
+
–
=
6.
+
+
=
+
–
=
Totals
8,405
+
2,060
+
(90)
=
0
+
10,375
6,500
–
65
=
6,435
5,405 NC
7-16
Demonstration Problem 7-2 Workpaper, part a. T-accounts
Ledger T-Accounts
Cash
Retained Earnings
Bal. 7,600
7,600 Bal.
Accounts Receivable
Services Revenue
Credit Card Expense
Demonstration Problem 7-2 Workpaper, part b. Horizontal Finan-
cial Statements Model
Event
Assets
=
Liab.
+
Equity
Rev.
–
Exp.
=
Net Inc.
Cash Flow
No.
Cash
+
Accts. Rec.
=
W. Pay
Ret. Earn.
Beg. bal.
0
+
0
=
0
+
0
0
–
0
=
0
0
1.
+
=
+
–
=
2.
+
=
+
–
=
Totals
7,200
+
0
=
1,200
+
6,000
8,000
–
2,000
=
6,000
7,200 NC
7-17
Demonstration Problem 7-3 Workpaper, part a. 2015 T-accounts
Ledger T-Accounts
Cash
Common Stock
Retained Earnings
Notes Rec.
Bal. 10,000
Revenue
Int. Rec.
Operating Expense
Demonstration Problem 7-3 Workpaper, part b. Statements Model, 2015
Worksheet Edmonds
FFAC9e Ch 7 IM.xls
7-18
Demonstration Problem 7-3 Workpaper, part a. 2016 T-accounts
Ledger T-Accounts
Cash
Common Stock
Retained Earnings
Bal.
Note Rec.
Bal.
Revenue
Bal. 0
Int. Rec.
Operating Expense
Demonstration Problem 7-3 Workpaper, part b. Statements Model, 2016
Worksheet Edmonds
FFAC9e Ch 7 IM.xls
7-19
Quiz Questions for Chapter 7
Use the following information to answer the next three questions. Ellis Company started the year with a
$4,600 balance in accounts receivable and a $150 balance in the allowance for doubtful accounts. The company
had credit sales of $12,000, collections on accounts receivable of $13,000, and wrote off uncollectible accounts
of $200 during the year. The company believes that 2 percent of its credit sales will be uncollectible.
1. The balance in the accounts receivable account at the end of the year would be
a. $3,600.
b. $3,400.
c. $3,250.
d. $4,360.
2. The amount of uncollectible accounts expense appearing on the year’s income statement would be
a. $532.
b. $332.
c. $240.
d. $440.
3. The net realizable value of receivables at the end of the year would be
a. $3,210.
b. $3,350.
c. $3,250.
d. $3,410.
4. Under the allowance method, recording the write-off of an uncollectible account will have what effect on
the accounting equation?
a. Total assets decrease and equity decreases.
b. Total assets remain unchanged.
c. Total assets increase and equity decreases.
d. Liabilities increase and equity decreases.
5. ABC Company accepts a credit card in payment for $1,500 of services performed for a customer. The
credit card company charges a 4 percent service fee. Recording the transaction on ABC’s records will
a. increase assets by $1,440.
b. increase expenses by $60.
c. increase revenue by $1,500.
d. All of the above.
6. Under the direct write-off method, the write-off of a $500 uncollectible account will
a. decrease assets by $500 and decrease liabilities by $500.
b. decrease assets by $500 and increase uncollectible accounts expense by $500.
c. have no effect on total assets.
d. decrease assets by $500 and increase equity by $500.
7-20
The following information pertains to the next three questions. On April 1, 2015, Needy Company issued a
$5,000 note to Money Company. The note had a 12 percent interest rate and was to be repaid, with interest, on
April 1, 2016.
7. The amount of investment that Money Company recorded on April 1, 2015, was
a. $4,250.
b. $4,400.
c. $5,000.
d. $5,500.
8. The total amount of interest receivable that Money Company recorded on December 31, 2015, would be
a. $0.
b. $600.
c. $300.
d. $450.
9. Assuming no other similar transactions, the total amount of interest revenue that Money Company recorded
in 2016 would be
a. $1,200.
b. $150.
c. $0.
d. $600.
10. EFG Company uses the allowance method to account for bad debts. The company wrote off an uncollecti-
ble account receivable. Which of the following reflects how the write–off affects EFG’s financial state-
ments?
Assets
=
Liab.
+
Equity
Rev.
–
Exp.
=
Net Inc.
Cash Flow
a.
+ –
NA
NA
NA
NA
NA
NA
b.
+ –
NA
NA
NA
+
–
NA
c.
–
NA
Ä
NA
+
–
– OA
d.
+
+
NA
NA
NA
NA
– OA
7-21
Quiz Answers
Question
Answer
1
B
2
C
3
A
4
B
5
D
6
B
7
C
8
D
9
B
10
A
Copyright © McGraw-Hill Education. Permission required for reproduction or display.
7-22
Summary Outline of a Lesson Plan for Chapter 7
I. Use multicycle Demonstration Problem 7-1 to illustrate how bad debts affect fi-
nancial statements over two cycles.
A. The first cycle illustrates recording bad debts expense and establishing an allow-
ance for doubtful accounts.
B. The second cycle illustrates accounting for the write-off of uncollectible accounts,
the recovery of an account receivable previously written off, and recognizing bad
debts expense.
II. Use Demonstration Problem 7-2 to introduce accounting for credit card sales.
III. Use Demonstration Problem 7-3 to introduce accounting for notes receivable.
The problem covers two cycles. The note has a one-year term. Date of issue is dur-
ing the first cycle and date of payment occurs in the second cycle, requiring the stu-
dent to understand how to record interest receivable.
IV. Time considerations and homework assignments. Plan to spend approximately
two hours of class time on this chapter. Most of the time will be spent coving bad
debts, since students seem to struggle with this concept – especially where the allow-
ance method is used. Homework assignments may include Exercises 7-14 A or B and
7-6 A or B for bad debts, 7-11 A or B for notes receivable and 7-14 A or B for credit
card sales. Exercise 7-15 A or B is a great comprehensive assignment, covering con-
cepts from chapters 1 – 7.