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7-6
ANSWERS TO QUESTIONS - CHAPTER 7
1. Accounts receivable are the expected future receipts when a
company permits its customers to buy now and pay later. The
2. The net realizable value is the amount expected to be collected
3. Allowance for Doubtful Accounts is a contra asset account.
4. Estimating uncollectible accounts expense improves the accuracy
of financial statements by (1) reporting expected realizable value
5. When using the allowance method, uncollectible accounts
expense is matched with current revenues. A company does not
6. The most common format for reporting accounts receivable on
the balance sheet is gross receivables less the allowance for
7. The practice of reestablishing a previously written off account,
then recording its collection as a payment on account, reflects a
7-7
8. Factors for use in estimating uncollectible accounts include:
(1) the percentage of uncollectible accounts from years past.
9. Recognizing uncollectible accounts expense reduces net accounts
10. A write-off of an uncollectible account when the allowance
method is used has no effect on the accounting equation because
expense).
11. The recovery of an uncollectible account when the allowance
method is used does not affect the income statement. Only
12. The advantage of using the allowance method is that it improves
13. If the company is an established business, it will examine its
credit history; that is, the actual write-offs for the previous year as
14. The percent of receivables is a more accurate measure because it
7-8
currently been outstanding. Those receivables that have been
15. When using an aging schedule for estimating uncollectible
accounts, accounts receivable is divided into categories based on
16. The allowance method is a method of accounting for bad debts
where bad debts are estimated and expensed in the same period
17. The direct write-off method is not GAAP, but is allowed if the
18. A promissory note is a legal document that sets forth credit terms
19. a. Maker: The borrower or debtor.
b. Payee: The person to whom the note is made
payable.
c. Principal: The amount of money loaned by the payee
20. Interest is computed as:
7-9
Principal X annual interest rate X time outstanding
21. Accrued interest is interest that has been earned but not yet
7-10
22. The adjusting entry for accrued interest is generally only recorded
23. Big Corp. would report interest revenue of $360 for 2016
computed as follows:
24. When Big Corp. collects the $12,720, $12,000 will be reported as
25. It is generally beneficial to accept major credit cards because the
business then avoids the risk of bad debts as well as the cost of
26. The acceptance of major credit cards enables a business to avoid
the cost of uncollectible accounts and the clerical costs of
27. Accounts
Receivable = Sales
28. Average Days
7-11
This ratio tells the user how many days on average it takes a
29. No, accounting terminology is not standard even in English-
speaking countries. In the U.K. sales are called “turnover,”
30. The operating cycle is the length of time it takes to convert
7-12
EXERCISE 7-1A
Event
Assets
=
Liab.
+
Equity
Rev.
–
Exp.
=
Net Inc.
Cash Flows
1.
−
=
NA
+
−
NA
−
+
=
−
NA
2.
+/−
=
NA
+
NA
NA
−
NA
=
NA
NA
3.
+
=
NA
+
+
+
−
NA
=
+
NA
4.
+/−
=
NA
+
NA
NA
−
NA
=
NA
+ OA
7-13
EXERCISE 7-2A a.
Holmes Cleaning Service
General Journal
Date
Account Titles
Debit
Credit
2016
1.
Accounts Receivable
84,000
Service Revenue
84,000
2.
Cash
76,000
Accounts Receivable
76,000
3.
Salaries Expense
28,500
Cash
28,500
4.
Uncollectible Accounts Expense
1,650
Allowance for Doubtful Accounts
1,650
b.
Holmes Cleaning Service
T-Accounts
Assets
=
Liabilities
+
Stockholders’ Equity
Cash
Service Revenue
2016
2016
2.
76,000
3.
28,500
1.
84,000
Bal.
47,500
Bal.
84,000
Accounts Receivable
Salaries Expense
2016
2016
1.
84,000
2.
76,000
3.
28,500
Bal.
8,000
Bal.
28,500
Allow. for Doubt. Accts.
Uncoll. Accts. Expense
2016
2016
4.
1,650
4.
1,650
Bal.
1,650
Bal.
1,650
EXERCISE 7-2A (cont.)
c.
Holmes Cleaning Service
Income Statement
For the Year Ended December 31, 2016
Service Revenue
$84,000
Operating Expenses
Salaries Expense
$28,500
Uncollectible Accounts Expense
1,650
Total Operating Expenses
(30,150)
Net Income
$53,850
7-15
EXERCISE 7-2A c. (cont.)
Holmes Cleaning Service
Statement of Cash Flows
For the Year Ended December 31, 2016
Cash Flows From Operating Activities:
Inflow from Customers
$76,000
Outflow for Expenses
(28,500)
Net Cash Flow from Operating Activities
$47,500
Cash Flows From Investing Activities
-0-
Cash Flows From Financing Activities
-0-
Net Change in Cash
47,500
Plus: Beginning Cash Balance
-0-
Ending Cash Balance
$47,500
EXERCISE 7-3A
a. Analyze the Accounts Receivable account:
Accounts Receivable
Beginning Balance
$ 2,800
Plus: Revenue on Account
14,000
Less: Write-off
(150)
Less: Ending Balance
(3,600)
Collections of Accounts Rec.
$13,050
7-17
EXERCISE 7-4A
a. and c.
Rosie Dry Cleaning
T-Accounts
Assets
=
Liabilities
+
Stockholders’ Equity
Cash
Retained Earnings
2016
2016
2.
39,000
cl
450
cl
45,000
Bal.
39,000
Bal.
44,550
2017
3.
61,000
Service Revenue
Bal.
100,000
2016
cl
45,000
1.
45,000
Accounts Receivable
Bal.
-0-
2016
2017
1.
45,000
2.
39,000
2.
62,000
Bal.
6,000
Bal.
62,000
2017
2.
62,000
1.
300
Uncoll. Accts. Expense
3.
61,000
2016
Bal.
6,700
3.
450
cl
450
Bal.
-0-
Allow. For Doubt. Accts.
2017
2016
4.
620
3.
4501
Bal.
620
Bal.
450
2017
1.
300
4.
6202
Bal.
770
1$45,000 x 1% = $450
7-18
EXERCISE 7-4A (cont.)
(2) Net Cash Flow from Operating Activities: $39,000
(3) Balance of Accounts Receivable, 12/31/2016: $6,000
(4) Net Realizable Value of Accounts Receivable, 12/31/2016:
(2) Net Cash Flow from Operating Activities: $61,000
(3) Balance of Accounts Receivable, 12/31/2017: $6,700
(4) Net Realizable Value of Accounts Receivable, 12/31/2017:
7-19
EXERCISE 7-5A
a.
Event
Assets
=
Liab.
+
Stk. Equity
Rev.
–
Exp.
=
Net Inc.
Cash Flows
Ret. Earn.
1.
+
NA
+
+
NA
+
NA
2.
+/−
NA
NA
NA
NA
NA
+ OA
3.
+/−
NA
NA
NA
NA
NA
NA
4.
−
NA
−
NA
+
−
NA
b.
Grover, Inc.
General Journal
Event
Account Title
Debit
Credit
1.
Accounts Receivable
92,000
Service Revenue
92,000
2.
Cash
78,000
Accounts Receivable
78,000
3.
Allowance for Doubtful Accts.
720
Accounts Receivable
720
4.
Uncollectible Accounts Expense
920
Allowance for Doubtful Accts.
920
7-20
EXERCISE 7-6A
1. Uncollectible accounts written off: $2,100
3. Services on account: 215,000
4. Collections of accounts receivable: 218,000
5. Uncollectible Accounts Expense (215,000 x 2%): 4,300
Renue Spa
General Journal
Event
Account Title
Debit
Credit
2016
1.
Allowance for Doubtful Accounts
2,100
Accounts Receivable
2,100
2a.
Accounts Receivable
500
Allowance for Doubtful Accounts
500
2b.
Cash
500
Accounts Receivable
500
3.
Accounts Receivable
215,000
Service Revenue
215,000
4.
Cash
218,000
Accounts Receivable
218,000
5.
Uncollectible Accounts Expense
4,300
Allowance for Doubtful Accounts
4,300
7-21
EXERCISE 7-6A a. (cont.)
Selected T-Accounts:
Cash (partial)
Allowance for Doubt Acct.
Sales Revenue
2016
12/31/15
2016
2b. 500
Bal. 3,750
3. 215,000
4. 218,000
2016
1. 2,100
2a. 500
Accounts Receivable
5. 4,300
Uncoll. Accts. Expense
12/31/15
Bal. 6,450
2016
Bal. 61,000
5. 4,300
2016
2a. 500
1. 2,100
3. 215,000
2b. 500
4. 218,000
Bal. 55,900
b. (1) Allowance for Doubtful Accounts, 12/31/16: $ 6,450
7-22
EXERCISE 7-7A
a.
Vulcan Service Co.
General Journal
Date
Account Titles
Debit
Credit
2016
1.
Accounts Receivable
91,000
Service Revenue
91,000
2.
Cash
72,000
Accounts Receivable
72,000
3.
Salaries Expense
36,000
Cash
36,000
4.
Uncollectible Accounts Expense1
2,193
Allowance for Doubtful Accounts
2,193
1
Number of days
Past Due
Amount
Percent Likely to
be Uncollectible
Allowance Balance
Current
$7,800
.01
$ 78
0-30
4,500
.05
225
31-60
2,000
.10
200
61-90
2,200
.20
440
Over 90 days
2,500
.50
1,250
Total
$2,193
7-23
EXERCISE 7-7A a. (cont.)
Vulcan Service Co.
T-Accounts – 2016
Assets
=
Liabilities
+
Stockholders’ Equity
Cash
Service Revenue
2.
72,000
3.
36,000
1.
91,000
Bal.
36,000
Bal.
91,000
Accounts Receivable
Salaries Expense
1.
91,000
2.
72,000
3.
36,000
Bal.
19,000
Bal.
36,000
Allow. For Doubt. Accts.
Uncoll. Accts. Expense
4.
2,193
4.
2,193
Bal.
2,193
Bal.
2,193
b.
Vulcan Service Co.
Income Statement
For the Year Ended December 31, 2016
Service Revenue
$91,000
Operating Expenses
Salaries Expense
$36,000
Uncollectible Accounts Expense
2,193
Total Operating Expenses
(38,193)
Net Income
$52,807
c. Net Realizable Value:
Accounts Receivable $19,000
Less, Allowance for Doubtful Accounts (2,193)
Net Realizable Value $16,807
7-24
EXERCISE 7-8A
a.
Leach, Inc.
General Journal
Date
Account Titles
Debit
Credit
2016
1.
Cash
10,000
Common Stock
10,000
2.
Accounts Receivable
78,000
Service Revenue
78,000
3.
Cash
36,000
Service Revenue
36,000
4.
Cash
69,000
Accounts Receivable
69,000
5.
Salaries Expense
38,000
Cash
38,000
6.
Uncollectible Accounts Expense1
450
Allowance for Doubtful Accounts
450
7. cl
Service Revenue
114,000
Retained Earnings
114,000
8. cl
Retained Earnings
38,450
Uncollectible Accounts Exp.
450
Salaries Expense
38,000
7-25
EXERCISE 7-8A a. (cont.)
Leach, Inc. T-Accounts
Assets
=
Liabilities
+
Stockholders’ Equity
Common Stock
2016
Cash
1. 10,000
2016
Bal.
10,000
1. 10,000
3.
36,000
5.
38,000
Retained Earnings
4.
69,000
2016
Bal.
77,000
7. cl
38,450
6 cl.
114,000
Bal.
75,550
Service Revenue
Accounts Receivable
2016
2016
1.
78,000
1.
78,000
3.
69,000
2.
36,000
Bal.
9,000
Bal.
114,000
6. cl
114,000
Allow. For Doubt. Accts.
Bal.
-0-
2016
5.
450
Salaries Expense
Bal.
450
2016
4.
38,000
Bal.
38,000
7. cl
38,000
Bal.
-0-
Uncoll. Accts. Expense
2016
5.
450
Bal.
450
7. cl
450
Bal.
-0-
