E5.11.
c.
(continued)
The write-off will not have any effect on 2016 net income, because the write-off
E5.12.
Allowance for Bad Debts
Bad debt write-offs 1/1/16 balance ………………………. $ 9,720
(during the year)………….. $23,900 Bad debt expense …………………. ? .
12/31/16 balance ………………… $10,480
Adjustment required………………. ? .
12/31/16 balance, as
adjusted …………………………….. $23,200
a.
Solution approach: The bad debt expense recognized during the year can be determined
by comparing the bad debt write-offs during the year to the change in the balance of the
b.
Bad debt expense adjustment = $23,200 – $10,480 = $12,720
Balance Sheet Income Statement .
Assets = Liabilities + Stockholders’ Equity Net income = Revenues – Expenses
Allowance Bad Debts
E5.13.
a.
2% * $680,000,000 * 90% = $12,240,000, or $12.24 million.
b.
By paying within 10 days instead of 30 days, the customers are “investing” funds for 20
E5.14.
a.
3. 360 days / 80 day loan = 4.5 loan periods within a year * 1% discount = 4.5% ROI
Solution approach: The percentage discounts offered are for short-term loans of
15 days (30 -15), 50 days (60 -10), and 80 days (90 -10), respectively. Assuming the use
of a 360-day year, calculate the number of 15-day, 50-day, and 80-days periods within a
year, then multiply these factors by the percentage discounts offered.
E5.15.
a.
| 7.5 months | 2.5 months |
5/15/16 12/31/16 3/15/17
(date of note) (year-end) (maturity date)
Interest earned = $9,000 * 12.8% * 7.5/12 = $720
Balance Sheet Income Statement .
Assets = Liabilities + Stockholders’ Equity Net income = Revenues – Expenses
Interest Interest
b.
Solution approach: What accounts are affected, and how are they affected? Cash is
being received for note principal and 10 month’s interest. Notes receivable is reduced
because the note is being paid off. Interest receivable accrued at 12/31/16 is being
collected. Interest revenue for 2.5 months from 1/1/17 to 3/15/17 has been earned.
Balance Sheet Income Statement .
Assets = Liabilities + Stockholders’ Equity Net income = Revenues – Expenses
Cash Interest
+9,960 Revenue
Dr. Cash ($9,000 + ($9,000 * 12.8% * 10/12)) …………………………. 9,960
E5.16.
a.
Interest earned = $277,500 principal * 5.2% rate * one-year time = $14,430
Balance Sheet Income Statement .
Assets = Liabilities + Stockholders’ Equity Net income = Revenues – Expenses
Interest Interest
Receivable Revenue
+14,430 +14,430
b.
Interest Receivable
1/1/16 balance ………………….…….. $ ? Interest collected ….…….. $ ?
Interest accrued ………………..…….. 14,430
12/31/16 balance …………………….. $ ?
Solution approach: Because the ending balance is $3,500 more than the beginning
E5.17.
a.
Under LIFO, the cost of the most recent purchases are released to cost of goods sold. If the
purchase cost of inventory items is changing, the selling price of these same items is likely
E5.18.
a.
ROI = Net income / Average assets
FIFO LIFO
Net income ………………………………………………………. $ 1,500,000 $1,200,000
/ Average assets………………………………………………… 10,000,000 9,700,000
= ROI ……………………………………………………………… 15% 12.4%
b.
FIFO LIFO
Net income ……………………………………………………….. $ 1,800,000 $ 1,900,000
/ Average assets…………………………………………………. 12,000,000 11,800,000
= ROI ………………………………………………………………. 15% 16.1%
recent, lowest costs, are treated as cost of goods sold). If a liquidation occurs, the ending
inventory amount will also be lowered in that year, as compared to FIFO. Thus, net
E5.19.
a.
Balance Sheet Income Statement .
Assets = Liabilities + Stockholders’ Equity Net income = Revenues – Expenses
Prepaid
Insurance
b.
Balance Sheet Income Statement .
Assets = Liabilities + Stockholders’ Equity Net income = Revenues – Expenses
Prepaid Insurance
Insurance Expense
-500 -500
Each month-end:
E5.19.
c.
The prepaid amount is $7,000 for 14 months of coverage. Only $6,000 of this amount is
a current asset, because of the one-year time frame for current assets. Thus, $1,000 of the
prepaid amount is technically a noncurrent asset.
(continued)
At December 31, 2016, 10 months of insurance coverage has been used, and 2 months
remains unused (prepaid). Thus, 2/12 of the original premium of $6,000, or $1,000, is
E5.20.
a.
Balance Sheet Income Statement .
Assets = Liabilities + Stockholders’ Equity Net income = Revenues – Expenses
Prepaid Rent
November 1, 2016
b.
Balance Sheet Income Statement .
Assets = Liabilities + Stockholders’ Equity Net income = Revenues – Expenses
Prepaid Rent
Rent Expense
-12,600 -12,600
c.
At December 31, 2016, two months of prepaid rent have expired, and four months remain
unexpired. Thus, 4/6 of the original premium of $75,600, or $50,400, is prepaid rent and
will be shown on the December 31, 2016 balance sheet as a current asset.
d.
months) of the prepaid amount is technically a non-current asset.
At a rate of $12,600 per month, the 18-month rent prepayment would have been
E5.21.
b.
d.
e.
Current Current Stockholders’ Net
Assets Liabilities Equity Income
Determined that the Allowance Allowance for Bad Debts
for Bad Debts balance should be Bad Debts Expense
-60
Received $50 cash for interest Cash
-50
Purchased five units of a new Inventory Accounts
item of inventory on account at +350 Payable
a cost of $70 each. +350
E5.22.
b.
Current Current Stockholders’ Net
Assets Liabilities Equity Income
Determined that the Allowance Allowance Bad Debts
for Bad Debts balance should be for Bad Debts Expense
decreased by $9,600 because +9,600 +9,600
E5.22.
(continued)
d.
e.
Current Current Stockholders’ Net
Assets Liabilities Equity Income
Received cash from a customer Cash
in full payment of an account +1,470
receivable of $1,500 that was paid Accounts
within the 2% discount period. Receivable
-1,500
Allowance for
Cash Discounts
+30
Purchased eight units of a new Inventory Accounts
E5.23.
c.
e.
g.
Current Current Stockholders’ Net
-1,400 -1,400
Wrote off an overdue account Accounts Receivable
receivable of $1,040. -1,040
-2,400
Accrued $96 of interest earned on Interest Interest
-96
Recorded $8,000 of sales, 70% Cash Sales
of which were on account. +2,400 +8,000
E5.24.
b.
f.
i.
Current Current Stockholders’ Net
Assets Liabilities Equity Income
Paid $11,200 in cash as an advance Cash
rent payment for a short-term lease -11,200
(in d above) should have been -360 Payable
recorded for only $3,260. -360
Purchased 12 units of inventory at Inventory
a cost of $160 each, and then eight +3,328
more units of the same inventory Cash *
except that the company uses the -2,448 Goods Sold
FIFO cost flow assumption. Record (12 @ $160, -2,448
only the cost of goods sold. 3 @ $176)
Assume the same facts (in g above) Inventory Cost of
except that the company uses the -2,496 Goods Sold
P5.25.
Solution approach: Set up a bank reconciliation in the usual format, enter the known
information, and then work backwards to solve for the beginning balances in the
company’s Cash account and on the bank statement (these are referred to as the
“Indicated balance” amounts in Exhibit 5-2 in the text).
Indicated balance (per bank) .. $ ? Indicated balance (per books) . $ ?
P5.26.
Indicated balance (per bank) .. $ ? Indicated balance (per books) . $ ?
P5.27.
Allowance for Bad Debts
a.
Bad debt write-offs 12/31/16 balance ……………….. 35,800
(during the year). . . . . . . . 23,600 Bad debt expense ………………. ?