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P8-30A Accounting for uncollectible accounts using the allowance method
(percent-of-sales) and reporting receivables on the balance sheet
Learning Objectives 1, 3
2. Net AR $119,800
Delta Watches completed the following selected transactions during 2018 and 2019:
2018
Dec. 31 Estimated that bad debts expense for the year was 2% of credit sales of
$450,000 and recorded that amount as expense. The company uses the
allowance method.
31 Made the closing entry for bad debts expense.
2019
Jan. 17 Sold merchandise inventory to Mack Smith, $400, on account. Ignore Cost
of Goods Sold.
Jun. 29 Wrote off Mack Smith’s account as uncollectible after repeated efforts to
collect from him.
Aug. 6 Received $400 from Mack Smith, along with a letter apologizing for being
so late. Reinstated Smith’s account in full and recorded the cash receipt.
Dec. 31 Made a compound entry to write off the following accounts as
uncollectible: Cam Carter, $1,400; Mike Venture, $1,200; and Russell
Reeves, $400.
31 Estimated that bad debts expense for the year was 2% on credit sales of
$510,000 and recorded the expense.
31 Made the closing entry for bad debts expense.
Requirements
1. Open T-accounts for Allowance for Bad Debts and Bad Debts Expense, assuming the
accounts begin with a zero balance. Record the transactions in the general journal (omit
explanations), and post to the two T-accounts.
2. Assume the December 31, 2019, balance of Accounts Receivable is $136,000. Show how net
accounts receivable would be reported on the balance sheet at that date.
SOLUTION
Requirement 1
P8-30A, cont.
Requirement 1, cont.
P8-31A Accounting for uncollectible accounts (aging-of-receivables method), notes
receivable, and accrued interest revenue
Learning Objectives 1, 3, 4
Dec. 31, 2018 Interest Receivable $1,640
Sleepy Recliner Chairs completed the following selected transactions:
2018
Jul. 1 Sold merchandise inventory to Stan-Mart, receiving a $41,000, nine-month,
8% note. Ignore Cost of Goods Sold.
Oct. 31 Recorded cash sales for the period of $24,000. Ignore Cost of Goods Sold.
Dec. 31 Made an adjusting entry to accrue interest on the Stan-Mart note.
31 Made an adjusting entry to record bad debts expense based on an aging of
accounts receivable. The aging schedule shows that $13,800 of accounts
receivable will not be collected. Prior to this adjustment, the credit balance
in Allowance for Bad Debts is $11,800.
2019
Apr. 1 Collected the maturity value of the Stan-Mart note.
Jun. 23 Sold merchandise inventory to Appeal, Corp., receiving a 60-day, 6% note
for $7,000. Ignore Cost of Goods Sold.
Aug.
22
Appeal, Corp. dishonored its note at maturity; the business converted the
maturity value of the note to an account receivable.
Nov. 16 Loaned $17,000 cash to Crosby, Inc., receiving a 90-day, 16% note.
Dec. 5 Collected in full on account from Appeal, Corp.
31 Accrued the interest on the Crosby, Inc. note.
Record the transactions in the journal of Sleepy Recliner Chairs. Explanations are not required.
(Round to the nearest dollar.)
SOLUTION
P8-32A Accounting for notes receivable and accruing interest
Learning Objective 4
1. Note 3 Dec. 18, 2018
Carley Realty loaned money and received the following notes during 2018.
Note Date Principal
Amount
Interest
Rate
Term
(1) Apr. 1 $ 6,000 7% 1 year
(2) Sep. 30 12,000 6% 6
months
(3) Sep. 19 18,000 8% 90 days
Requirements
1. Determine the maturity date and maturity value of each note.
2. Journalize the entries to establish each Note Receivable and to record collection of principal
and interest at maturity. Include a single adjusting entry on December 31, 2018, the fiscal
year-end, to record accrued interest revenue on any applicable note. Explanations are not
required. Round to the nearest dollar.
SOLUTION
Requirement 1
P8-33A Accounting for notes receivable, dishonored notes, and accrued interest revenue
Learning Objective 4
Dec. 31, 2018 Income Summary CR $74
Consider the following transactions for CC Publishing.
2018
Dec.
6
Received a $18,000, 90-day, 6% note in settlement of an overdue
accounts receivable from Go Go Publishing.
31 Made an adjusting entry to accrue interest on the Go Go Publishing
note.
31 Made a closing entry for interest revenue.
2019
Mar.
6
Collected the maturity value of the Go Go Publishing note.
Jun.
30
Loaned $11,000 cash to Lincoln Music, receiving a six-month, 20%
note.
Oct. 2 Received a $2,400, 60-day, 20% note for a sale to Tusk Music. Ignore
Cost of Goods Sold.
Dec.
1
Tusk Music dishonored its note at maturity.
1 Wrote off the receivable associated with Tusk Music. (Use the
allowance method.)
30 Collected the maturity value of the Lincoln Music note.
Journalize all transactions for CC Publishing. Round all amounts to the nearest dollar.
SOLUTION
P8-34A Using ratio data to evaluate a company’s financial position
Learning Objective 5
1. Acid-test ratio (2018) 0.88
The comparative financial statements of Norfolk Cosmetic Supply for 2018, 2017, and 2016
include the data shown here:
2018 2017 2016
Balance sheet—partial
Current Assets:
Cash
Short-term investments
Accounts Receivable, Net
Merchandise Inventory
Prepaid Expenses
Total Current Assets
Total Current Liabilities
Income statement—partial
Net Sales (all on account)
$ 70,000
140,000
280,000
355,000
70,000
915,000
560,000
5,890,000
$ 60,000
170,000
240,000
330,000
35,000
835,000
630,000
5,130,000
$ 50,000
120,000
260,000
310,000
35,000
775,000
640,000
4,210,000
Requirements
1. Compute these ratios for 2018 and 2017:
a. Acid-test ratio (Round to two decimals.)
b. Accounts receivable turnover (Round to two decimals.)
c. Days’ sales in receivables (Round to the nearest whole day.)
2. Considering each ratio individually, which ratios improved from 2017 to 2018 and which
ratios deteriorated? Is the trend favorable or unfavorable for the company?
SOLUTION
Requirement 1
Requirement 2
