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P8-39B Accounting for notes receivable and accruing interest
Learning Objective 4
1. Note 2 Maturity Value $20,430
Logan Realty loaned money and received the following notes during 2018.
Note Date Principal Amount Interest Rate Term
(1) Oct. 1 $ 16,000 7% 1 year
(2) Jun. 30 18,000 18% 9 months
(3) Sep. 19 12,000 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
P8-40B Accounting for notes receivable, dishonored notes, and accrued interest revenue
Learning Objective 4
March 6, 2019 Interest Revenue $128
Consider the following transactions for TLC Company.
2018
Dec.
6
Received a $8,000, 90-day, 9% note in settlement of an overdue
accounts receivable from Forest Music.
31 Made an adjusting entry to accrue interest on the Forest Music note.
31 Made a closing entry for interest revenue.
2019
Mar.
6
Collected the maturity value of the Forest Music note.
Jun.
30
Loaned $14,000 cash to Washington Music, receiving a six-month,
12% note.
Oct. 2 Received a $1,000, 60-day, 12% note for a sale to ZZZ Music. Ignore
Cost of Goods Sold.
Dec.
1
ZZZ Music dishonored its note at maturity.
1 Wrote off the receivable associated with ZZZ Music. (Use the
allowance method.)
30 Collected the maturity value of the Washington Music note.
Journalize all transactions for TLC Company. Round all amounts to the nearest dollar.
SOLUTION
P8-41B Using ratio data to evaluate a company’s financial position
Learning Objective 5
1. Days’ sales in receivables (2018) 18 days
The comparative financial statements of Newton Cosmetic Supply for 2018, 2017, and 2016
include the data shown here:
2018 2017 2016
Balance sheet—partial
Current Assets:
Cash $ 80,000 $ 50,000 $ 30,000
Short-term investment 150,000 170,000 125,000
Accounts Receivable, Net 310,000 260,000 220,000
Merchandise Inventory 360,000 335,000 330,000
Prepaid Expenses 50,000 30,000 35,000
Total Current Assets 950,000 845,000 740,000
Total Current Liabilities 530,000 630,000 670,000
Income statement—
partial
Net Sales (all on account) 5,850,000 5,110,000 425,000
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
Using Excel
P8-42 Using Excel for Aging Accounts Receivable
Download an Excel template for this problem online in MyAccountingLab or at
The Lake Lucerne Company uses the allowance method of estimating bad debts expense. An
aging schedule is prepared in order to calculate the balance in the allowance account. The
percentage uncollectible is calculated as follows:
1–30 Days 1%
31–60 Days 2%
61–90 Days 5%
91–365 Days 50%
After 365 days, the account is written off.
Requirements
1. Calculate the number of days each receivable is outstanding.
2. Complete the Schedule of Accounts Receivable.
3. Journalize the adjusting entry for Bad Debts Expense.
SOLUTION
Continuing Problem
P8-43 Accounting for uncollectible accounts using the allowance method
This problem continues the Canyon Canoe Company situation from Chapter 7. Canyon
Canoe Company has experienced rapid growth in its first few months of operations and has
had a significant increase in customers renting canoes and purchasing T-shirts. Many of
these customers are asking for credit terms. Amber and Zack Wilson, stockholders and
company managers, have decided it is time to review their business transactions and update
some of their business practices. Their first step is to make decisions about handling
accounts receivable.
So far, year to date credit sales have been $15,500. A review of outstanding receivables
resulted in the following aging schedule:
Requirements
1. The company wants to use the allowance method to estimate bad debts. Determine the
estimated bad debts expense under the following methods at June 30, 2019. Assume a
zero beginning balance for Allowance for Bad Debts. Round to the nearest dollar.
a. Percent-of-sales method, assuming 4.5% of credit sales will not be collected.
b. Percent-of-receivables method, assuming 22.5% of receivables will not be collected.
c. Aging-of-receivables method, assuming 5% of invoices 1–30 days will not be
collected, 20% of invoices 31–60 days, 40% of invoices 61–90 days, and 75% of
invoices over 90 days.
2. Journalize the entry at June 30, 2019, to adjust for bad debts expense using the
percent-of-sales method.
3. Journalize the entry at June 30, 2019, to record the write-off of the Early Start Daycare
invoice.
4. At June 30, 2019, open T-accounts for Accounts Receivable and Allowance for Bad
Debts before Requirements 2 and 3. Post entries from Requirements 2 and 3 to those
accounts. Assume a zero beginning balance for Allowance for Bad Debts.
5. Show how Canyon Canoe Company will report net accounts receivable on the balance
sheet on June 30, 2019.
SOLUTION
Requirement 1
P8-43, cont.
Requirements 2 and 3
Requirement 4
