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S8-8 Applying the allowance method (aging-of-receivables) to account for uncollectibles
Learning Objective 3
Surf and Sun had the following balances at December 31, 2018, before the year-end adjustments:
The aging of accounts receivable yields the following data:
Requirements
1. Journalize Surf and Sun’s entry to record bad debts expense for 2018 using the
aging-of-receivables method.
2. Prepare a T-account to compute the ending balance of Allowance for Bad Debts.
SOLUTION
Requirement 1
S8-9 Computing interest amounts on notes receivable
Learning Objective 4
A table of notes receivable for 2018 follows:
Principal Interest Rate Interest Period During
2018
Note 1 $ 30,000 6% 6 months
Note 2 12,000 10% 270 days
Note 3 14,000 14% 75 days
Note 4 100,000 7% 10 months
For each of the notes receivable, compute the amount of interest revenue earned during 2018.
Round to the nearest dollar.
SOLUTION
S8-10 Accounting for a note receivable
Learning Objective 4
On June 6, Lakeland Bank & Trust lent $80,000 to Stephan Stow on a 30-day, 9% note.
Requirements
1. Journalize for Lakeland the lending of the money on June 6.
2. Journalize the collection of the principal and interest at maturity. Specify the date. Round to
the nearest dollar.
SOLUTION
Requirement 1
S8-10, cont.
Requirement 2
S8-11 Accruing interest revenue and recording collection of a note
Learning Objective 4
On December 1, Kyle Corporation accepted a 60-day, 9%, $12,000 note receivable from J.
Michael in exchange for his account receivable.
Requirements
1. Journalize the transaction on December 1.
2. Journalize the adjusting entry needed on December 31 to accrue interest revenue. Round to
the nearest dollar.
3. Journalize the collection of the principal and interest at maturity. Specify the date. Round to
the nearest dollar.
SOLUTION
Requirement 1
S8-12 Recording a dishonored note receivable
Learning Objective 4
cKale Corporation has a three-month, $18,000, 9% note receivable from L. Peters that was
signed on June 1, 2018. Peters defaults on the loan on September 1.
Journalize the entry for McKale to record the default of the loan
SOLUTION
S8-13 Using the acid-test ratio, accounts receivable turnover ratio, and days’ sales in
receivables to evaluate a company
Learning Objective 5
Silver Clothiers reported the following selected items at April 30, 2018 (last year’s—2017—
amounts also given as needed):
Accounts Payable $ 328,000 Accounts Receivable,
net:
Cash 573,720 April 30, 2018 $ 11,000
Merchandise Inventory: April 30, 2017 165,000
April 30, 2018 250,000 Cost of Goods Sold 1,200,000
April 30, 2017 210,000 Short-term Investments 148,000
Net Credit Sales
Revenue
3,212,000 Other Current Assets 100,000
Long-term Assets 350,000 Other Current
Liabilities
188,000
Long-term Liabilities 130,000
Compute Silver’s (a) acid-test ratio, (b) accounts receivable turnover ratio, and (c) days’ sales in
receivables for the year ending April 30, 2018. Evaluate each ratio value as strong or weak.
Silver sells on terms of net 30. (Round days’ sales in receivables to a whole number.)
SOLUTION
Exercises
E8-14 Defining common receivables terms
Learning Objective 1
Match the terms with their correct definition.
Terms Definitions
1.Accounts receivable
2.Other receivables
3.Debtor
4.Notes receivable
5.Maturity date
6.Creditor
a.The party to a credit transaction who takes on an
obligation/payable.
b.The party who receives a receivable and will collect cash
in the future.
c. A written promise to pay a specified amount of money at
a particular future date.
d.The date when the note receivable is due.
e. A miscellaneous category that includes any other type of
receivable where there is a right to receive cash in the
future.
f. The right to receive cash in the future from customers for
goods sold or for services performed.
SOLUTION
E8-15 Identifying and correcting internal control weakness
Learning Objective 1
Suppose The Right Rig Dealership is opening a regional office in Omaha. Cary Regal, the office
manager, is designing the internal control system. Regal proposes the following procedures for
credit checks on new customers, sales on account, cash collections, and write-offs of
uncollectible receivables:
• The credit department runs a credit check on all customers who apply for credit. When an
account proves uncollectible, the credit department authorizes the write-off of the
accounts receivable.
• Cash receipts come into the credit department, which separates the cash received from the
customer remittance slips. The credit department lists all cash receipts by customer name
and amount of cash received.
• The cash goes to the treasurer for deposit in the bank. The remittance slips go to the
accounting department for posting to customer accounts.
• The controller compares the daily deposit slip to the total amount posted to customer
accounts. Both amounts must agree.
Recall the components of internal control. Identify the internal control weakness in this situation,
and propose a way to correct it.
SOLUTION
E8-16 Recording credit sales and collections
Learning Objective 1
3. $695
Steller Corporation had the following transactions in June:
Jun.
1
Sold merchandise inventory on account to Carter Company, $1,575.
6 Sold merchandise inventory for cash, $550.
12 Received cash from Carter Company in full settlement of its accounts receivable.
20 Sold merchandise inventory on account to Iris Company, $765.
22 Sold merchandise inventory on account to Driver Company, $230.
28 Received cash from Iris Company in partial settlement of its accounts receivable,
$300.
Requirements
1. Journalize the transactions. Ignore Cost of Goods Sold. Omit explanations.
2. Post the transactions to the general ledger and the accounts receivable subsidiary ledger.
Assume all beginning balances are $0.
3. Verify the ending balance in the control Accounts Receivable equals the sum of the balances
in the subsidiary ledger.
Requirement 1
E8-17 Journalizing transactions using the direct write-off method
Learning Objectives 1, 2
On June 1, 2018, Best Performance Cell Phones sold $21,000 of merchandise to Anthony
Trucking Company on account. Anthony fell on hard times and on July 15 paid only $5,000
of the account receivable. After repeated attempts to collect, Best Performance finally wrote
off its accounts receivable from Anthony on September 5. Six months later, March 5, 2019,
Best Performance received Anthony’s check for $16,000 with a note apologizing for the late
payment.
Requirements
1. Journalize the transactions for Best Performance Cell Phones using the direct write-off
method. Ignore Cost of Goods Sold.
2. What are some limitations that Best Performance will encounter when using the direct
write-off method?
Use the following information to answer Exercises E8-18 and E8-19.
At January 1, 2018, Hilltop Flagpoles had Accounts Receivable of $28,000, and Allowance
for Bad Debts had a credit balance of $3,000. During the year, Hilltop Flagpoles recorded
the following:
a. Sales of $185,000 ($164,000 on account; $21,000 for cash). Ignore Cost of Goods Sold.
b. Collections on account, $135,000.
c. Write-offs of uncollectible receivables, $2,300.
SOLUTION
Requirement 1
Requirement 2
